PROBLEM 1: TRUE OR FALSE ue De 10. The initial cost of PPE includes only the original purchase price or equivalent value. Any taxes, freight, installation, and other expenditures related to the acquisition of assets should be expensed as incurred. Brokers’ commissions, legal fees, and escrow fees are included in the acquisition cost of land. Generally, expenditures to repair, recondition, or improve a used asset before it is placed in service should be recorded as part of the asset's acquisition cost. Land held for a currently undecided future use or speculation should be reported in the Property, plant, and equipment section of the statement of financial position. Special assessments by local governments for streets, sidewalks, lighting, and sewers that will be maintained by the government are included in the land account. PPE acquired by issuing securities are always recognized at the fair value of the securities issued. When the cost of self-construction of an asset is less than the cost to acquire it through purchase or construction by outsiders, the difference is reported as gain from self- constructed assets. Charges directly related to construction of an asset may be charged in full to the cost of the asset or allocated in part to normal operations. When the cost of a self-constructed asset is greater than the cost to acquire it from outside sources, the difference is recognized as loss if there is evidence indicating that the cost is materially excessive because of construction inefficiencies or failures.PROBLEM 2: FOR CLASSROOM DISCUSSION Property, Plant and Equipment 1. Which of the following is not a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for resale c. Acquired for use d. Yields services over a number of years (Adapted) 2. ABC Co. has the following assets as of year-end. * Land held for capital appreciation 3,600,000 * Manufacturing equipment purchased under installment basis : 3,000,000 * Patents 400,000 Land used in business 5,000,000 Land held for resale 2,200,000 Building owned, used as warehouse 1,500,000 ‘« Servicing equipment - used in building maintenance; estimated to have a 20-year useful life 3,000,000 * Small tools and minor spare parts used in equipment maintenance, with average useful life of one year 200,000 « Safety and environmental equipment - required for ISO and DENR accreditation 450,000 Requirement: How much would be classified as property, plant and equipment in the Company's year-end balance sheet? Initial measurement 3. Bruce Dickenson, Inc. acquired an item of PPE at the beginning of the year. The invoice price is P2,500,000 subject to a prompt discount of 3% which was not taken. Necessary installation costs amounted to P50,000. Legislation requires that Bruce decommission the asset at the end of the asset's useful life of 10 years. Decommission costs amount to 200,000. The rate current as of acquisition date is 12%. Requirement: How much is the initial cost of the PPE?4. On December 30, 2008, Gate Company purchased a machine from Orade Corporation in exchange for a noninterest bearing, note requiring eight payments of P200,000. The first payment was made on December 30, 2008, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Requirement: How much is the cost of the machine? (Adapted) 5. Coffee Company carried out a number of transactions involving the acquisition of several assets. All expenditures were recorded in the following single asset account identified as "Property, plant, and equipment.” Acquisition price of land and building 7,200,000 Options taken out on several pieces of property 240,000 List price of machinery purchased 1,500,000 Freight on machinery purchased 50,000 Repair to machinery resulting from damage during shipment 10,000 Cost of removing old machinery (recognized as liability) 20,000 Driveways and sidewalks 200,000 Building remodeling 500,000 Utilities paid since acquisition of building 30,000 The fair value of the building is twice as much as the land. The machinery was subject to a 2% cash discount, which was taken and credited to purchase discounts. Of the two options, P180,000 related to the building and land purchased and P60,000 related to those not purchased. The old machinery was sold at carrying amount. Requirements: Compute for the following: a. Cost of the land b. Cost of the building c. Cost of the new machinery (Adapted)