Far Eastern University

Institute of Accounts. Business and Finance

Department of Accountancy and Internal Auditing

INTERMEDIATE ACCOUNTING 1
PROPERTY, PLANT AND EQUIPMENT
DO-IT-YOURSELF (PROBLEMS)

TABLE OF CONTENTS
• Problem 2.5-1 Determine Costs of Various Property, Plant and Equipment
• Problem 2.5-2 Classification of Cost and Interest Capitalization
• Problem 2.5-3 Journal Entries for Various PPE Transactions
• Problem 2.5-4 Computation of PPE Costs from Various Acquisitions
• Problem 2.5-5 Depreciation Computation for Annual and Partial Periods - Five Methods
• Problem 2.5-6 Depletion and Depreciation - Mining
• Problem 2.5-7 Revaluations of PPE

1|Page
 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.5-1
Determine Costs of Various PPE

White Company commenced operations on 1 July 2019. During the following year, the company acquired a tract of
land, demolished the building on the land and built a new factory. Equipment was acquired for the factory and, in
March 2020, the plant was ready to commence operation. During this period, the following inflows and outflows
occurred:

While searching for a suitable block of land, White Company placed an option to buy with three real
estate agents at a cost of P 1,000 each. One of these blocks of land was later acquired.
Payment of option fees 3,000
Receipt of loan from bank 4,000,000
Payment to settlement agent for title search, stamp duties and settlement fees 100,000
Payment of arrears in rates on building and land 50,000
Payment for land 1,000,000
Payment for demolition of current building on land 120,000
Proceeds from sale of material from old building 55,000
Payment to architect 230,000
Payment to council for approval of building construction 120,000
Payment for safety fence around construction site 34,000
Payment to construction contractor for factory building 2,400,000
Payment for external driveways, parking bays and safety lighting 540,000
Payment for safety inspection on building 30,000
Payment for equipment 640,000
Payment of freight and insurance costs on delivery of equipment 56,000
Payment of installation costs on equipment 120,000
Payment for safety equipment surrounding equipment 110,000
Payment for removal of safety fence 20,000
Payment for new fence surrounding the factory 80,000
Payment for advertisements in the local paper about the forthcoming factory and its benefits to the
local community 5,000
Payment for opening ceremony 60,000
Payments to adjust equipment to more efficient operating levels subsequent to initial operation 33,000

Compute the cost of the following:

1. Land
2. Building
3. Land Improvements
4. Equipment

SOLUTION:

2|Page
 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.5-2
Classification of Cost and Interest Capitalization

(Adapted from Intermediate Accounting Textbook)

On January 1, 2020, Cabiao Corporation purchased a tract of land (site number 101) with a building for P 1,800,000.
Additionally, Cabiao paid a real state broker’s commission of P 108,000, legal fees of P 18,000 and title guarantee
insurance of P 54,000. The closing statement indicated that the land value was P 1,500,000 and the building value
was P 300,000. Shortly after acquisition, the building was razed at a cost of P 225,000.

Cabiao entered into a P 9,000,000 fixed-price contract with Cabanatuan Builders, Inc. on March 1, 2020 for the
construction of an office building on the land site 101. The building was completed and occupied on September 30,
2019. Additional construction costs were incurred as follows:

Plans, specifications and blueprints P 36,000

Architect’s fees for design and supervision 285,000

The building is estimated to have a forty-year life from date of completion and will be depreciated using the 150%-
declining-balance method.

To finance the construction cost, Cabiao borrowed P 9,000,000 on March 1, 2020. The loan is payable in ten annual
installments of P 900,000 plus interest at the rate of 14%. Cabiao used part of the loan proceeds for working capital
requirements. Cabiao’s average amounts of accumulated building construction expenditures were as follows:

For the period March 1 to December 31, 2020 P 2,700,000

For the period January 1 to September 31, 2021 6,900,000

Cabiao is using the allowed alternative treatment for borrowing cost.

Instructions:
Based on the above, determine the following:
1. Cost of land site number 101
2. Cost of office building
3. Depreciation of the office building for 2020

3|Page
 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.5-3
Journal Entries for Various PPE Acquisitions

(Adapted from Reviewer in Auditing Textbook)

Described below are transactions related to Music Company:

1. The national government gives the company a large tract of land. The condition attached to this government
grant is that Music Company is to construct a plant facility on the site to provide employment opportunities to its
residents. The fair value of the land is determined to be at P 8,000,000.

2. 150,000 ordinary shares with a par value of P 40 are issued in exchange for land and building. The fair value of
the land and building acquired are P 10,800,000 and P 37,800,000, respectively. The company’s stock is
currently selling at P 175 per share.

3. Still included in the materials, labor and overhead accounts are amounts that are properly chargeable to the
machinery account. These represent costs of a machinery constructed by Music Company during the current
year. These costs are:

Materials used 750,000

Factory supplies used 54,000
Direct labor incurred 900,000
Incremental overhead (over regular) arising from construction of
machinery (excluding factory supplies used) 162,000
Fixed overhead rate applied to regular manufacturing operations 60% of direct labor cost
Cost of similar machinery if it had been purchased an outside dealer 2,640,000

Instructions:
Prepare journal entries to record these transactions.

SOLUTION:
No Account Names Debit Credit
.
1.

2.

3.

4|Page
 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.5-4
Computation of PPE Costs from Various Acquisitions

(Adapted from Reviewer in Auditing Textbook)

Harpsicord Company has decided to expand its production capacity to meet the increased demand for its product In
line with this, the company recently made several acquisitions of property, plant and equipment. These transactions
are described below:

Acquisition 1
On June 1, 2020, Harpsicord purchased equipment from Kulintang Corporation under a deferred payment plan.
Harpsicord issued a P 2,000,000 four-year noninterest bearing note to Kulintang for the new equipment. The loan
agreement provides that Harpsicord is to pay off the note in four equal installments due at the end of each of the next
four years. On the date of the acquisition, the prevailing market rate of interest for obligations of this nature was 10%.
The following costs were incurred to complete this transaction: Freight – P 42,500; Installation – P 50,000.

The following are the appropriate factors for the time value of money at 10% rate of interest.

Future value of 1 for 4 periods 1.46

Future value of an ordinary annuity for 4 periods 4.64
Present value of 1 for 4 periods 0.68
Present value of an ordinary annuity for 4 periods 3.17

Acquisition 2
On December 1, 2020, Harpsicord purchased several assets of a small company. The lumpsum price or “basket
price” amounted to P 21,000,000 and included the assets as follows:

Book Value Fair Value

Machinery and Equipment 6,000,000 5,000,000
Land 4,000,000 8,000,000
Building 7,000,000 12,000,000
Totals 17,000,000 25,000,000

During its fiscal year May 31, 2021, Harpsicord incurred P 800,000 for interest expense in connection with the
financing of these assets.

Acquisition 3
On March 1, 2020, Harpsicord exchanged a number of used equipment plus cash for vacant land adjacent to its plant
facility. The land acquired is intended to be used for a parking lot. The equipment had a combined carrying value of P
3,500,000, as Harpsicord had recorded P 2,000,000 of accumulated depreciation against these assets. The
equipment had a fair market value of P 4,600,000 at the time of the transaction. To complete this transaction,
Harpsicord paid P 1,900,000 cash for the land.

Instruction:
For each of the three transactions described above, determined the value at which Harpsicord Company should
record the acquired assets. Use two decimal places for the present value factor.

5|Page
 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.5-5
Depreciation Computation for Annual and Partial Periods – Five Methods

(Adapted from Intermediate Accounting Textbook)

On January 1, 2018, a machine was purchased for P 450,000. The machine has as estimated residual value of P
30,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be
replaced. The company closed its books on December 31 and operates the machine as follows: 2018 – 20,000
hours; 2019 – 25,000 hours; 2020 – 15,000 hours; 2021 – 30,000 hours; 2022 – 10,000 hours.

Instructions:
1. Compute the annual depreciation charged over the machine’s life assuming a December 31 year-end for each of
the following depreciation methods.
a) Straight-line method
b) Activity period
c) Sum-of-the-years’-digits method
d) Double declining balance method
2. Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset’s life
applying each of the following methods:
a) Straight-line method
b) Sum-of-the-years’-digits method
c) Double declining balance method

6|Page
 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.5-6
Depletion and Depreciation - Mining

(Adapted from Intermediate Accounting Textbook)

Khamsah Mining Company has purchased a tract of mineral land for P 9,000,000. It is estimated that his tract of land
will yield 1,200,000 tons of ore with sufficient mineral content to make mining and processing profitable. It is further
estimated that 60,000 tons of ore will be mined the first year and last year and 120,000 tons every year in between.
(Assume 11 years of mining operations.) The land will have a residual value of P 300,000.

The company builds necessary structures and sheds on the site at a cost of P 360,000. It is estimated that these
structures can serve 15 years but, because they must be dismantled if they are to be moved, they have no residual
value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was
purchased secondhand at a cost of P 600,000. This machinery cost the former owner P 1,500,00 and was 50%
depreciated when purchased. Khamsah Mining estimates that bout one-half of this machinery will still be useful when
the present mineral resources have been exhausted but that dismantling, and removal costs will just about offset its
value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last
until about half the present estimated mineral ore has been removed and will then be worthless. Cost is to be
allocated equally between these two classes of machinery.

Instructions:
1. As chief accountant for the company, you are to prepare a schedule showing estimated depletion and
depreciation costs for each year of the expected life of the mine.

Depletion Estimated Estimated DEPRECIATION

No Base Yield/Year Depletion/yea Machinery Machinery
. (Pesos) (tons) r Building (1st Half) (2nd Half)
(Pesos)
(P 360,000) (P 300,000) (P 300,000)
Base = P Base = P

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

2. Also compute the depreciation and depletion for the first year assuming actual production of 5,000 tons. Nothing
occurred during the year to cause the company engineers to change their estimates of either the mineral
resources or the life of the structures and equipment.

3. Also compute the depreciation and depletion for the seventh year assuming actual production of 100,000 tons.
Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral
resources or the life of the structures and equipment.

7|Page
 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.5-6
Revaluations of PPE

Presented below are a number of independent situations.

Problem 2.5-6A (Fair Value Basis)

(Adapted from Intermediate Accounting Textbook)
Maroon Company provided the following data on the date of revaluation:

Building, at original cost 5,000,000

Building, at fair value 6,000,000
Accumulated depreciation - cost 6,000,000
40-year life and 10 years expired 1,250,000

Required:
1. Prepare journal entries for the current year under the proportional approach.

Account Names Debit Credit

2. Prepare journal entries for the current year under the elimination approach.

Account Names Debit Credit

8|Page
 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

Problem2.5-6B (DEPRECIATED REPLACEMENT COST BASIS - No change in life, change in RV)

(Adapted from Intermediate Accounting Textbook)
Notorious Company provided the following date related to an equipment on the date of revaluation:

Replacement
Cost Cost
Equipment 6,500,000 9,200,000
Residual Value 500,000 200,000
Useful life in years 12
Age of machinery 2
Accumulated Depreciation ?

Required:
1. Prepare journal entries for the current year.

Account Names Debit Credit

2. What is the journal entry for the sale of the equipment for P 8,000,000, one year after the revaluation?

Account Names Debit Credit

9|Page
 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

Problem 2.5-6C (DEPRECIATED REPLACEMENT COST BASIS - Change in life and residual value)
(Adapted from Intermediate Accounting Textbook)
Cherry Company acquired a building on January 1, 2017 at a cost of P 20,000,000. The building has an estimated
useful life of 6 years and residual value of P 2,000,000.

The building was revalued on January 1, 2020 and the revaluation revealed replacement cost of P 30,000,000,
residual value of P 4,000,000 and the revised useful life of 8 years.

Required:
1. Prepare journal entry to record the revaluation.

Account Names Debit Credit

2. Prepare journal entry to record annual depreciation for 2020.

Account Names Debit Credit

3. Prepare journal entry to record the piecemeal realization of the revaluation surplus.

Account Names Debit Credit

10 | P a g e