MACHINERY AND CAPITL EXPENDITURES

Problem 31-1

Negros Company acquired new machinery. The following data are available:

List price of the machinery 1,400,000

Cash discount available but not taken on purchase 20,000
Freight paid on the new machinery 40,000
Cost of removing of the old machinery 15,000
Installation cost of the new machinery 50,000
Testing cost before the machinery was put into
regular operation (including P10, 000 in wages
of the regular machinery operator) 30,000
Loss on premature retirement of the old machinery 5,000
Estimated cost of maturing similar machinery
in the entity’s own plant, including overhead 1,300,000

The amount should be capitalized as cost of the machinery?

a. 1,500,000
b. 1,490,000
c. 1,515,000
d. 1,520,000

Solution 31-1 answer a

List price 1,400,000

Cash discount (20,000)
Freight 40,000
Installation cost 50,000
Testing cost 30,000
Total cost 1,500,000

The cost of removing the old machinery is treated as outright expense.

Problem 31-2
On October 1, 2010, Shaw Company purchased a machine for P 1,260,000 that was placed in
service on November 30, 2010. Shaw incurred additional costs of this machine as follows:

Shipping 30,000
Installation 40,000
Testing 50,000

In Shaw’s December 31,2010 statement of financial position, what amount be reported as

machinery?

a. 1,260,000
b. 1,290,000
c. 1,330,000
d. 1,380,000
e.

Solution 31-2 answer d

All cost are capitalizable.

Problem 31-3
Charry Company is purchasing a second-hand polishing machine. The entity will incur the
following costs:
Agreed price to be paid to vendor 8,000,000
Dismantling the machine at its current location 400,000
Transportation to Charry’s factory 350,000
Machine refurbishment costs prior to reinstallation 175,000
Reinstallation 125,000

What is the cost of second-hand machine?

a. 8,875,000
b. 9,050,000
c. 8,125,000
d. 8,000,000

Solution 31-3 answer b

All cost are capitalizable.

Problem 31-4
Basilan Company uses many kinds of machine in its operations. The following information
relates to a machine that was acquired at the beginning of current year.

Cash paid for machine, including VAT of 96,000 896,000

Cost of transporting machine 30,000
Labor cost of installation by expert fitter 50,000
Labor cost of testing machine 40,000
Insurance cost for the current year 15,000
Cost of training for personnel who will use the machine 25,000
Cost of safety rails and platforms surrounding the machine 60,000
Cost of water device to keep the machine cool 80,000
Cost of adjustment to make it operate more
efficiently 75,000
Estimated dismantling cost to be incurred as required
by contract 65,000
How much should be capitalized as cost of the machine?

a. 1,135,000
b. 1,231,000
c. 1,200,000
d. 1,150,000

Solution 31-4 answer c

Cash paid (896,000-96,000) 800,000

Cost of transporting machines 30,000
Installation cost 50,000
Testing cost 40,000
Safety rails and platforms 60,000
Water device 80,000
Cost of adjustment 75,000
Estimated dismantling cost 65,000
Total cost of machine 1,200,000

Note that the estimated dismantling cost is capitalized because the entity has a present obligation
as required by contract. In the absence of present obligation, the estimated dismantling cost is not
capitalized.

PROBLEM 31-5
Wisdom Company is installing new equipment at its production facility and incurred the
following costs:
Cost of equipment per supplier’s invoice 2,500,000
Initial delivery and handling cost 200,000
Cost of site preparation 600,000
Consultant’s used for advice on acquisition of equipment 700,000
Interest charges paid to suppliers foe deferred credit 200,000
Estimated dismantling cost to be incurred as
required by the contract 300,000
Operating losses before commercial production 400,000

How much should be capitalized as cost of the equipment?

a. 4,300,000
b. 4,000,000
c. 4,200,000
d. 4,500,000

Solution 31-5 answer a

Cost of equipment 2,500,000
Initial delivery and handling cost 200,000
Cost of site preparation 600,000
Consultant used for advice 700,000
Estimated dismantling cost 300,000
Total cost 4,300,000

The interest charge is not capitalized because the equipment is ready for the intended use when
acquired.

The estimated dismantling cost is capitalized because it is required by the contract.

Problem 31-6
Newcombe Company use may kinds of machine in operations. The entity acquires some machine
from others and constructs some machines itself. The following information pertains to the
machine constructed by Newcombe:

Cost of material to construct 700,000

Labor cost 430,000
Allocated overhead-electricity 220,000
Allocated interest cost of financing machine 100,000
Cost of installation 120,000
Insurance for one year 20,000
Profit saved by self-construction 150,000
Safety inspection cost prior to use 40,000

How much should be capitalized as cost of the machine?

a. 1,610,000
b. 1,510,000
c. 1,630,000
d. 1,460,000

Solution 31-6 answer a

Cost of material 700,000
Labor cost 430,000
Allocated overhead costs 220,000
Allocated interest cost 100,000
Cost of installation 120,000
Safety inspection cost 40,000
Total cost 1,610,000
The insurance for one year is an expense.
The saving on construction is ignored.

31-7
Karla Company acquired a new processing machine on June 30,2010.
Details of the acquisition were:

Invoice costs 1,600,000

Cost of transportation to the entity’s factory 50,000
Cost of installation:
Labor paid 35,000
Materials used 15,000
Payment for strengthening the floor to support the
weight of the new machine 80,000

The terms of acquisition include a 3% discount if payment is made in 10 days. the entity
paid on July 21,2010. The entity paid on July. The entity’s chief engineer spent two-
thirds of his time during trial run of the new machine. The monthly salary is P60, 000.

On August 1, 2010, the entity requested an allowance for the supplier because the
machine proved to be less than standard performance capability. The supplier granted
cash allowance of 100,000. The cost of removing the old machine before the new
machine was acquired amounted to P10, 000. The operator of the old machine who was
laid off due to the acquisition of the new machine was paid a gratuity of P 30,000.

What is the correct cost of the new machine?

a. 1,592,000
b. 1,622,000
c. 1,640,000
d. 1,552,000
Solution 31-8 answer a

Invoice cost 1,600,000

Cash discount ( 3% x 1,600,000) (48,000)
Transportation 50,000
Installation (35,000+15,000) 50,000
Trial run (60,000 x 2/3) 40,000
Cash allowance (100,000)
Cost of new machine
31-8
Karla Company acquired a new processing machine on June 30,2010.
Details of the acquisition were:

Invoice costs 1,600,000

Cost of transportation to the entity’s factory 50,000
Cost of installation:
Labor paid 35,000
Materials used 15,000
Payment for strengthening the floor to support the
weight of the new machine 80,000

The terms of acquisition include a 3% discount if payment is made in 10 days. the entity
paid on July 21,2010. The entity paid on July. The entity’s chief engineer spent two-
thirds of his time during trial run of the new machine. The monthly salary is P60, 000.

On August 1, 2010, the entity requested an allowance for the supplier because the
machine proved to be less than standard performance capability. The supplier granted
cash allowance of 100,000. The cost of removing the old machine before the new
machine was acquired amounted to P10, 000. The operator of the old machine who was
laid off due to the acquisition of the new machine was paid a gratuity of P 30,000.
What is the correct cost of the new machine?

e. 1,592,000
f. 1,622,000
g. 1,640,000
h. 1,552,000

Solution 31-8 answer a

Invoice cost 1,600,000

Cash discount ( 3% x 1,600,000) (48,000)
Transportation 50,000
Installation (35,000+15,000) 50,000
Trial run (60,000 x 2/3) 40,000
Cash allowance (100,000)
Cost of new machine 1,592,000

Problem 31-12
During the current year, King Company made the following expenditures relating to its plant
building:

Continuing and frequent repairs 400,000

Repainted the plant building 100,000
Major improvement to the electrical wiring system 300,000
Partial replacement of roof tiles 140,000

How much should be charged to repair and maintenance expense in the current year?

a. 960,000
b. 820,000
c. 640,000
 d. 540,000

Solution 31-12 answer c

Continuing and frequent repairs 400,000
Repainted the plant building 100,000
Partial replacement of roof tiles 140,000
Total repair and maintenance expense 640,000

Problem 31-13
During the current year, Fox Company made the following expenditures relating to the plant
machinery and equipment:

 Renovations of a group of machines at a cost of their remaining P 500,000 to

secure greater efficiency in production over the remaining five-year useful lives.
The project was completed on December 31.
 Continuing, frequent, and low cost repairs at a cost of P350, 000.
 A broken gear on machine was replaced at a cost of P50, 000.

What total amount should be charged to repair and maintenance expense in the current year?

a. 350,000
b. 400,000
c. 850,000
d. 900,000

Solution 31-13 answer b

Continuing frequent and low cost repairs 350,000

Replacement of broken gear of a machine 50,000
Total repair and maintenance expense 400,000
Problem 31-14

The following expenditures were incurred by Taylor Company:

Painting partitions in a large room recently divided into

four sections 50,000
Labor cost of tearing down a wall to permit extension of
an assembly line 200,000
Major replacement of the motor of the machine. This
Replacement was anticipated when the
Machine was purchased 500,000
Cost of grading land prior to construction 600,000
Dust filters in the interior of the factory wee replaced.
The new filters are expected to reduce employee
healths hazards and thus reduce wage and fringe
benefit costs. 800,000

How much of the expenditures should be capitalized?

a. 2,150,000
b. 1,950,000
c. 1900,000
d. 1,400,000

Solution 31-14
Painting partitions 50,000
Major replacement of motor 500,000
Cost of grading land 600,000
Dust filters 800,000
Total capital expenditures 1,950,000

Problem 31-15
The controller of Rona Company provided the following charges to the ” repair and maintenance
account”.

Service contract on office equipment 100,000

Initial design fee for proposed extension of office building 150,000
New condenser for central air conditioning unit 10,000
Purchase of executive chairs and desks 200,000
Purchase of storm windows and screens and their
Their installation on all office windows 500,000
Sealing of roof leaks in production area 50,000
Installation of automatic door-opening system 200,000
Overhead crane for assembly department to set up production 350,000
Replacement of broken gear on machine 60,000

What total amount of expenditures should be capitalized?

a. 1,400,000
b. 1,200,000
c. 1,500,000
d. 1,410,000

Solution 31-15 answer a

Initial design fee 150,000

Purchase of executive chairs and desks 200,000
Storm windows 500,000
Installation of automatic door 200,000
Overhead crane 350,000
Total capital expenditures 1,400,000
Problem 31-16
On July 1, 2010, one of Rudd Company’s delivery van was destroyed in an accident. On that
date, the van’s carrying amount was 500,000. On July 15, 2010, Rudd received and recorded a
P140, 000 invoice for a new engine installed in the van in May, and another P100, 000 invoice
for various repairs. In August, Rudd received P700, 000 under its insurance policy on the van,
which it plan to use to replace the van.

What amount should Rudd report as gain on disposal of the van in its income statement?

a. 200,000
b. 700,000
c. 60,000
d. 0

Solution 31-16 answer c

Carrying amount, July 1 500,000

Add: cost of a new engine installed in May
But recorded only in July 15 140,000
Adjusted carrying amount 640,000

Proceeds of insurance policy 700,000

Less: Adjusted carrying amount 640,000
Gain on disposal 60,000

Problem 31-17

On June 30, 2010, a fire in Pine Company’s plant caused a total loss to a production machine.
The machine was depreciated at P200, 000annually and had a carrying amount of P1, 600,000 at
December 31, 2009. On that date of the fire, the fair value of the machine was P2, 200,000, and
Pine received insurance proceeds of 2,000,000 in October 2010.

The income statement for the year ended December 31,2010, what amount should be recognized
as gain on disposition?

a. 500,000
b. 700,000
c. 400,000
d. 600,000

Solution 31-17 answer a

Carrying amount, December 31, 2009 1,600,000

Less: depreciation from January 1 to
June 30, 2010 (200,000x 6/12) 100,000
Carrying amount, June 30, 2010 1,500,000

Problem 31-18
On December 31, 2010, a building owned by pink Company was totally destroyed by fire. The
building had fire insurance coverage up to P5, 000,000. Other pertinent information as of
December 31,2010 as follows:

Building, carrying amount 5,200,000

Building, fair value 5,500,000
Removal and clean up cost 100,000

During January 2011, before the 2010 financial statement were issued, pink received insurance
proceeds of P5,000,000.

On what amount should Pink base the determination its loss on involuntary conversion?
 a. 5,200,000
b. 5,300,000
c. 5,500,000
d. 5,600,000

Solution 31-18

Carrying amount 5,200,000

Removal and clean-up cost 100,000
Total carrying amount 5,300,000

Problem 31-19

The city government condemned Cory Company’s parcel of real estate. Cory will receive
7,500,000 for his property, which has a carrying amount of P5, 750,000. Cory incurred the
following cost as a result of condemnation?

Appraisal fee to support a P7, 500,000 value 25,000

Attorney fee for the closing with the city government 35,000
Attorney fee to review contract to acquire
replacement property 30,000
Title insurance on replacement property 40,000

What amount should Cory use to determine t he gain on the condemnation?

a. 5,810,000
b. 5,820,000
 c. 5,840,000
d. 5,880,000

Solution 31-19

Carrying amount 5,750,000

Appraisal fee 25,000
Attorney fee for closing with the city government 35,000
Total carrying amount 5,810,000

The attorney fee to review contract to acquire replacement property and the title insurance on
replacement property should be capitalized as cost of the new replacement property.