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Chapter 15
Property, Plant and Equipment (Part 1)
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. FALSE – cost
3. TRUE
4. FALSE – expensed
5. FALSE – direct costs are capitalized in full and not a
portion of the cost is recognized in profit or loss
6. TRUE – The cost of abnormal amounts of wasted
material, labor, or other resources due to
inefficiencies is recognized as expense.
7. FALSE – not adjusted
8. FALSE – not necessarily
9. FALSE
10. FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. D
3. D
4. B – see “not assumed”
5. D
6. C
7. A
8. D
9. D
10. C

PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a):
Purchase price (cash price equivalent) 100,000
Broker’s commission 5,000
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Import duties 25,000

Non-refundable purchase taxes 10,000
Transportation cost 1,000
Assembling and installation costs 2,000
Testing costs 1,500
Net proceeds from samples generated (500)
Initial cost of equipment 144,000
Requirement (b):
Dat Factory equipment 144,50
e
Cash 0 144,50
to record capitalizable costs of 0
equipment
Dat Cash 500
e
Factory equipment 500
to record sale of samples
generated from testing
Dat General and administrative costs 4,200
e
Advertising expense 3,800
Cash 8,000
to record non-capitalizable costs

2. Solution:
Buildi
Land
ng
Lump-sum price (6M x 2.5/7.5); (6M x 2,000,0 4,000,0
5/7.5) 00 00
Land registration costs 4,000
Payment to tenants to vacate 1,500 3,000
premises
(4.5K x 2.5/7.5); (4.5K x 5/7.5)
Option paid on the land and building 1,000 2,000
(3K x 2.5/7.5); (3K x 5/7.5)
Broker's fee on the land and building 2,500 5,000
(7.5K x 2.5/7.5); (7.5K x 5/7.5)
Unpaid real estate taxes prior to 15,000
acquisition
assumed by Buko Co. – assessed on
land
Repairs and renovation costs before 20,000
the
building is occupied
2,024, 4,030,
Totals
000 000

3. Solutions:
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Case 1: Old building has fair value

Requirement (a):
Old New
Land buildi buildi
ng ng
Lump-sum price 2,000,0 4,000,0 -
(6M x 2.5M/7.5M); (6M x 5M/7.5M) 00 00
Cost of razing the old building - - 30,000
(demolition cost)
Proceeds from sale of - - (7,500)
salvaged
materials
Legal fees in conveying title 10,000 - -
to land
Option paid for the land and 1,000 2,000
old
bldg. acquired (3K x 2.5/7.5); (3K
x 2.5/7.5)
Payments to tenants to vacate 2,000 4,000
premises (6K x 2.5/7.5); (6K x
5/7.5)
Materials, labor and overhead - - 4,250,0
00
2,013, 4,006, 4,272,
Totals
000 000 500

Requirement (b):
Lump sum purchase price
Dat Land 2,000,0
e
Building - old 00
Cash 4,000,0 6,000,00
to record the purchase on a 00 0
lump sum price

Demolition costs
Dat Building – new 30,000
e
Cash 30,000
to record the demolition costs as
cost of the new building

Salvaged materials
Dat Cash 7,500
e
Building - new 7,500
to record the proceeds from sale
of salvaged materials resulting from the
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demolition as reduction in the cost of the

new building

Additional costs: Title, option and payments to tenants.

Dat Land (10K + 1K + 2K) 13,000
e
Building – old (2K + 4K) 6,000
Cash 19,000
to record the additional costs of
legal fees in conveying title to land,
option, and payments to tenants to vacate
premises

Construction costs
Dat Building – new 4,250,0
e
Cash 00 4,250,0
to record the construction 00
costs of the new building

Allocated cost of old building demolished

Dat Loss on derecognition of asset 4,006,0
e
Building - old 00 4,006,0
to record the allocated cost of 00
the demolished building as loss

Case 2: Old building has no fair value

Requirement (a):
Old New
Land buildi buildi
ng ng
Lump-sum price 6,000,0 - -
00
Cost of razing the old building - - 30,000
(demolition cost)
Proceeds from sale of - - (7,500)
salvaged
materials
Legal fees in conveying title 10,000 - -
to land
Option paid for the land and 3,000 -
old
bldg. acquired
Payments to tenants to vacate 6,000 -
premises (6K x 2.5/7.5); (6K x
5/7.5)
Materials, labor and overhead - - 4,250,0
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00
6,019, 4,272,
Totals -
000 500

Requirement (b):
Lump sum purchase price
Dat Land 6,000,0
e
Cash 00 6,000,00
to record the purchase on a 0
lump sum price

Demolition costs
Dat Building – new 30,000
e
Cash 30,000
to record the demolition costs as
cost of the new building

Salvaged materials
Dat Cash 7,500
e
Building - new 7,500
to record the proceeds from sale
of salvaged materials resulting from the
demolition as reduction in the cost of the
new building

Additional costs: Title, option and payments to tenants.

Dat Land 19,000
e
Cash 19,000
to record the additional costs of
legal fees in conveying title to land,
option, and payments to tenants to vacate
premises

Construction costs
Dat Building – new 4,250,0
e
Cash 00 4,250,0
to record the construction 00
costs of the new building

4. Solution:
Land New
Land improvem buildin
ent g
Purchase price of lot 4,000,0 - -
00
Land titling cost 20,000 - -
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Special assessment 10,000 - -

Survey costs 30,000 - -
Materials, labor & - - 11,000,0
overhead 00
Cash discounts - - (60,000)
Clerical and other - - 28,000
costs
Excavation costs - - 200,000
Architectural & permit - - 120,000
Supervision by mgmt. - - 24,000
Insurance premiums - - 260,000
Paving (not included in - 20,000 -
blueprint)
4,060, 11,572,0
Totals 20,000
000 00

5. Solutions:
Case 1:
Solution:
Major Co. Minor, Inc.
Equipment (new) 2,180,000 (a) Equipment (new) 1,920,000 (a)
Accumulated Dep. 400,000 Cash 280,000
Cash Accumulated Dep. 1,600,000
280,000 Loss on exchange 200,000
Equipment (old) Equipment (old)
2,000,000 4,000,000
Gain on exchange (squeeze)
300,000

(a)
Major Minor
1,900,0 2,200,0
Fair value of asset given up 00 00
280,00 (280,00
Plus cash Paid (Minus cash received) 0 0)
Initial cost of non-monetary asset 2,180,0 1,920,0
received 00 00

Case 2:
Major Co. Minor, Inc.
(b)
Equipment (new) 2,200,000
Accumulated Dep. 400,000
Cash
280,000
Equipment (old)
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2,000,000
Gain on exchange (squeeze)
320,000

Min
(b)
Major or
Fair value of asset received 2,200,0
(i.e., the FV of Minor’s equipment) 00
Cash paid/received N/A
Initial cost of non-monetary asset 2,200,0
received 00

Case 3:
Major Co. Minor, Inc.
(c)
Equipment (new) 1,880,000 Equipment (new) 2,120,000 (c)
Accumulated Dep. 400,000 Cash 280,000
Cash Accumulated Dep. 1,600,000
280,000 Equipment (old)
Equipment (old) 4,000,000
2,000,000

(c)
Major Minor
1,600,0 2,400,0
Carrying amount of asset given up 00 00
280,00 (280,00
Plus cash Paid (Minus cash received) 0 0)
Initial cost of non-monetary asset 1,880,0 2,120,0
received 00 00

6. Solutions:

Case 1:
Date Land 2,000,0
Share capital (20,000 00 200,000
x ₱10) 1,800,00
Share premium 0

Case 2:
Date Land (20,000 x ₱90) 1,800,0
Share capital (20,000 00 200,000
x ₱10) 1,600,00
Share premium 0

7. Solutions:
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Case 1:
Jan. Land 2,000,0
1,
Discount on notes payable 00
20x1
Cash 200,000 400,000
Notes payable 1,800,00
0

Case 2:
Jan. Land (a) 1,918,7
1,
Discount on N/P (1.8M – 77
20x1
1,518,777) 281,223 400,000
Cash 1,800,00
Notes payable 0
(a)
{400,000 + [(1.8M ÷ 3) x PV of ordinary annuity of 1 @9%, n= 3]} =
1,918,777

Interes
Cash
t Amortizati Present
Date paymen
expens on value
ts
e
1,518,77
Jan. 1, 20x1
7
Dec. 31, 1,055,46
600,000 136,690 463,310
20x1 7
Dec. 31,
20x2 600,000 94,992 505,008 550,459
Dec. 31,
20x3 600,000 49,541 550,459 0

Dec. Notes payable 600,000

31,
Interest expense 136,690
20x1
Discount on notes 136,69
payable 0
Cash 600,00
0
Dec. Notes payable 600,000
31,
Interest expense 94,992
20x2
Discount on notes 94,992
payable 600,00
Cash 0
Dec. Notes payable 600,000
31,
Interest expense 49,541
20x3
Discount on notes 49,54
payable 1
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Cash 600,00
0

8. Solution:
Donor is a shareholder Donor is an unrelated
party
Equipt. (FV of asset received) 2M Equipt. (FV of asset received)
Donated capital 2M
2M Income from donation
2M

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. A
Solution:
5,000,00
Land used as plant site
0
Building under construction to be used as new 12,000,0
office 00
Equipment held for rental under various 1,200,00
operating leases 0
Fixtures used in rendering services 500,000
Bearer plants 100,000

18,800,0
Total PPE 00

2. D
Solution:
224,00
Purchase price inclusive of VAT 0
112
Divide by: %
200,00
Purchase price exclusive of VAT 0
(4,48
Cash/ prompt discount 0)
195,
Cost of equipment 520

The training and relocation costs are expensed.

3. A
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Solution:
12,000,0
Purchase price
00
250,0
Freight
00
20,0
Transit insurance
00
50,0
Special foundation for the machine
00
280,0
Assembling and installation
00
30,0
Testing
00
(3,0
Salvaged materials from trial runs
00)
12,627,0
Cost of new machine 00

The cost of dismantling and removing old equipment

prior to the installation of new equipment is recognized
as expense except when the cost was previously
recognized as liability (in which case, the cost is treated
as settlement of the liability; the entry would be debit
liability and credit cash).

4. C
Solution:
Old New Othe
Land bldg. bldg. rs
Lump-sum
price
[5.85M x (5/6); 4,875,
(1/6)] 000 975,000
expense
Appraisal fee d*
Renovation
costs 500,000
Plans and
specs. 2,900,000
Construction
mats. 11,000,000
Labor 6,500,000
Excavation 1,000,000
Structural 1,200,000
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works
Supervision 100,000
expen
Injury claims sed
Subcontracted 5,000,000
ignor
Savings ed
Imputed ignor
interest ed
Allocated 4,875, 1,475,0 27,700,00
costs 000 00 0

* Appraisal fees do not normally meet the asset

recognition criteria under the PFRS. It should be noted
though that the Internal Revenue Service (IRS) in the
U.S. requires the capitalization of appraisal fees as cost
of the appraised property for taxation purposes. (source:
https://keitercpa.com/wp-content/uploads/2012/02/Capitalization-Rules-
Acquisition-of-Real-Property.pdf)
This, however, does not mean that appraisal fees should
also be capitalized as cost of PPE for financial reporting
purposes. (source: https://www.tbr.edu/business/procedures-capitalizing-
fixed-assets)

5. A
Solution:
Old New Othe
Land bldg. bldg. rs
Lump-sum
price
(3.6M); (4M - 3,600,0
3.6M) 00 400,000
180,00
Legal fees 0
Demolition 50,000
Survey 25,000
Architectural 260,000
Bldg. permit 120,000
Price of new 9,000,00
bldg. 0
Elec. & water 80,000
Real property expens
tax ed
expens
Utilities ed
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Wi-Fi expens
connection ed
expens
Internet fees ed
Salvaged
materials (10,000)
Allocated 3,805, 400,00 9,500,0
costs 000 0 00

The allocated cost of the old building is charged as loss.

6. B (2.5M x 97%) + 50K + (200K x PV of 1 @12%,

n=10) = 2,539,395

7. C
Solution:
Liempo:
1) Equipment received: (1,875,000 – 700,000) =
1,175,000
2) Gain (loss) on exchange: (1,875,000 – 3,500,000) =
(1,625,000)

Monggo:
1) Equipment received: (1,000,000 + 700,000) =
1,700,000
2) Gain (loss) on exchange: (1,000,000 – 1,200,000) =
(200,000)

8. A
Solution:
Liempo:
1) Equipment received: (3,500,000 – 700,000) =
2,800,000
2) Gain (loss) on exchange: 0

Monggo:
1) Equipment received: (1,200,000 + 700,000) =
1,900,000
2) Gain (loss) on exchange: 0

9. A
Solution:
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1) Equipment received: 40,000, the fair value of the

asset received
2) Gain (loss) on exchange:
Date Equipment – new (FV of asset 40,000
received) 70,000
Accumulated depreciation 100,00
Equipment - old 0
Cash 8,000
Gain on exchange 2,000
(squeeze)

10. A
Solution:

(a) Land = 3,000,000

Land improvement = 600,000

(b) Transportation equipment (SUV):

Cash purchase price, including the car

accessories 2,910,000
Vehicle registration 12,000
Total cost - SUV 2,922,000

 In practice, the cost of car accessories installed when

the vehicle was purchased, and for which a single
CDV was prepared for the vehicle and the car
accessories, is included in cost of the vehicle.
Accountants do this mainly for convenience in
recording. Subsequent expenditures on car
accessories are charged as expenses. Thus, the cost in
(d) is charged as expense.
 The cost of a vehicle’s initial registration is
capitalized because this is necessary for the entity
to obtain the future economic benefits of the vehicle.
It is illegal to use an unregistered vehicle. However,
the costs of subsequent annual registrations are
expensed.
 The insurance is recognized as expense (or initially
recorded under the “Prepaid insurance” account and
subsequently charged as expense).
 P a g e | 14

(c) Transportation equipment (Pickup truck):

Cash price equivalent 1,800,000

Modification for off-road driving 280,000
Total cost - Pickup truck 2,080,000

 The modification is capitalized because it is necessary

in bringing the vehicle to its intended use.

2,922,0
Total cost - SUV 00
2,080,0
Total cost - Pickup truck 00
5,002,
Total Transportation equipment
000

(d) See (b) above

(e) Machine: 160,000 – cash price equivalent

PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY 1
Land 1,000,000
Cash 1,000,000
to record the acquisition of land

ACTIVITY 2
Requirement (a):
1,418,650.
Purchase price, net of VAT 00
Cost of initial registration 8,137.18
Initial cost of transportation 1,426,787
equipment .18

F The cost of initial registration is normally capitalized

(in practice), based on the concept that this cost is
necessary for the entity to obtain the economic
benefits from the asset, i.e., it is illegal to use an
unregistered vehicle. The subsequent annual costs of
registration are expensed, based on the concept that
 P a g e | 15

subsequent expenditures on assets generally only

maintain the usability of the asset rather than
increase it.
F The insurance cost is expensed over the coverage
period.

Requirement (b):
April 25, 20x1
Transportation equipment 1,418,650
Input VAT 170,238
Cash 1,588,888
to record the purchase of vehicle

April 25, 20x1

Prepaid insurance (100,000 x 1/3) 33,333.33
Deferred insurance (100,000 x 2/3) 66,667.67
Cash 100,000.00
to record the insurance

F The insurance covers a 3-year period, i.e., from April

25, 20x1 to April 25, 20x3. The portion that covers
Years 2 and 3 are recorded under the “Deferred
insurance” account and reported as noncurrent asset
in the December 31, 20x1 financial statements.

April 25, 20x1

Transportation expense 2,623.52
Cash 2,623.52
to record the purchase of diesel

April 29, 20x1

Transportation equipment 8,137.18
Cash 8,137.18
to record the initial registration of the vehicle with the
Land Transportation Office

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Manufacturing equipment purchased on 3,000,00
installment basis 0
5,000,00
Land used in business
0
1,500,00
Building owned, used as warehouse
0
 P a g e | 16

Servicing equipment – used in building 3,000,00

maintenance 0
Safety and environmental equipment 450,000
12,950,
Total PPE 000

2. Solution:
Purchase price 1,000,000
Broker’s commission 50,000
Freight cost 35,000
Freight insurance 5,000
Installation costs 250,000
Calibration and testing costs, net (20,000
– 2,000) 18,000
Initial cost of equipment 1,358,000

3. Solution:
Purchase price inclusive of refundable 896,00
purchase tax 0
Refundable purchase tax (96,000)
(24,00
Cash discount not taken 0)
Freight and installation costs (main office) 40,000
816,0
Total cost of equipment 00

The capitalization of costs ceases when the PPE is in the

location and condition originally intended by
management. Therefore, the ₱50,000 relocation and
reinstallation costs are expensed.

4. Solution:
Land
improvem Buildi
Land ent ng
Lump-sum price 2,500, 7,500,0
(10M x 1/4 & 3/4) 000 00
100,00
Land titling cost 0
Special assessment 40,000
Payments to tenants
(80K x 1/4 & 3/4) 20,000 60,000
Option on property 30,000 90,000
 P a g e | 17

acquired
(120K x 1/4 & 3/4)
Building remodeling
800,00
prior to
0
occupancy
Landscaping on the
240,000
premises
Addition of driveway
and 80,000
parking lot
2,690, 8,450,
Total costs
000 320,000 000

5. Solutions:
Case 1:
The costs are allocated as follows:
Old New
Land buildi buildin
ng g
Lump-sum price
[6M x (5.425/6.2) & 5,250,00 750,0
(.775/6.2)] 0 00
Finder's fee 10,00
70,000
[80K x (5.425/6.2) & (.775/6.2)] 0
Land registration cost 8,000
Unpaid taxes prior to
200,000
acqn. date
Demolition cost of old
130,000
building
Proceeds from sale of sal.
mats. (10,000)
Materials, labor and 10,000,0
overhead 00
5,528,0 760,0 10,120,
Total costs
00 00 000

Journal entries:

Lump sum purchase price

Dat Land 5,250,0
 P a g e | 18

e Building - old 00
Cash 750,000 6,000,00
0

Finder’s fee
Dat Land 70,000
e
Building - old 10,000
Cash 80,000

Land registration cost & Unpaid taxes on land prior to

acquisition date
Dat Land (200,000 + 8,000) 208,00
e
Cash 0 208,00
0

Property tax after acquisition date

Dat Tax expense 60,000
e
Cash 60,000

Demolition costs
Dat Building – new 130,00
e
Cash 0 130,00
0

Salvaged materials
Dat Cash 10,000
e
Building - new 10,000

Construction costs
Dat Building – new 10,000,0
e
Cash 00 10,000,0
00

Allocated cost of old building demolished

Dat Loss on derecognition of asset 760,00
e
Building - old 0 760,00
to record the allocated cost of 0
the demolished building as loss

Case 2:
 P a g e | 19

The costs are allocated as follows:

Old New
Land buildi buildin
ng g
6,000,00
Lump-sum price
0 -
Finder's fee 80,000 -
Land registration cost 8,000
Unpaid taxes prior to
200,000
acqn. date
Demolition cost of old
130,000
building
Proceeds from sale of sal.
mats. (10,000)
Materials, labor and 10,000,0
overhead 00
6,288,0 10,120,
Total costs
00 - 000

Journal entries:

Lump sum purchase price and other direct costs:

Dat Land 6,288,0
e
Cash 00 6,288,00
0

Property tax after acquisition date

Dat Tax expense 60,000
e
Cash 60,000

Demolition costs
Dat Building – new 130,00
e
Cash 0 130,00
0

Salvaged materials
Dat Cash 10,000
e
Building – new 10,000

Construction costs
Dat Building – new 10,000,0
e
Cash 00 10,000,0
00
 P a g e | 20

6. Solution:
20,000,00
Purchase price
0
10,000,00
Direct costs
0
PV of decommissioning and restoration
costs 1,866,030
(4M x PV of 1 @10%, n=8)
31,866,0
Cost of equipment
30

Dat Equipment 31,866,03

e
Cash 0 30,000,00
Asset retirement 0
obligation 1,866,030

7. Solution:
Buildi
Land ng Other
8,000,0
Purchase price of land 00
Survey 60,000
Architectural and 1,800,0
engineering 00
Building permit 40,000
Temporary structures 10,000
Site clearing 100,000
Excavation and backfilling 400,000
Construction materials and 12,000,
labor 000
Insurance costs 20,000
Abnormal loss on wasted Expens
resources ed
Expens
Uninsured accidents ed
Safety inspection &
supervision 30,000
Income from incidental
operations P/L
Electrical lighting & wiring
works 280,000
 P a g e | 21

Plumbing and sanitary

works 190,000
2,000,0
Elevator 00
15,000,
Finishing 000
Pavement & parking (included in
design) 220,000
Clerical and other misc.
costs 20,000
Costs of necessary design
changes 120,000
Rentals of construction
equipment 290,000
Ignore
Savings on self-construction d
8,060, 32,520,
Total costs 000 000

8. Solutions:
Requirement (a): With commercial substance
Ima’s books:
Wine barrels – new (1.2M + 300K) 1,500,000
Wine barrels – old 1,000,000
Cash` 300,000
Gain on exchange 200,000

Saka’s books
Wine barrels – new (1.5M - 300K) 1,200,000
Cash 300,000
Wine barrels – old 1,400,000
Gain on exchange 100,000

Requirement (b): Without commercial substance

Ima’s books:
Wine barrels – new (1M + 300K) 1,300,000
Wine barrels – old 1,000,000
Cash` 300,000

Saka’s books
Wine barrels – new (1.4M - 300K) 1,100,000
Cash 300,000
Wine barrels – old 1,400,000
 P a g e | 22

9. Solutions:
Case 1:
Dat Machine (cash price equivalent) 1,400,0
e
Share capital (10,000 x ₱10 00 100,000
par) 1,300,0
Share premium 00

Case 2:
Dat Machine (10,000 x ₱130 FV of sh. 1,300,0
e issued) 00 100,000
Share capital (10,000 x ₱10 1,200,0
par)
00
Share premium

10. Solutions:
Case 1:
Dat Machine (cash price equivalent) 1,400,0
e
Discount on notes payable 00
Note payable 200,000 1,600,0
00

Case 2:
Dat Machine (PV of note*) 1,202,1
e
Discount on notes payable 04
Note payable 397,896 1,600,0
00
* 1.6M x PV of 1 @ 10%, n=3 = 1,202,104

11. Solution:

Donor is a shareholder Donor is an unrelated

party
Equipment 320K Equipment 320K
Donated capital Income for donation
320K 320K