Accounting for Property Plant and Equipment

Practice Questions

PART A: COMPONENTS OF COST

Q1:Acquisition Costs of Realty: The expenditures and receipts below are related
to land, landimprovements, and buildings acquired for use in a business enterprise.
The receipts are enclosed inparentheses.
(a) Money borrowed to pay building contractor (signed a note) …………………….
$(275,000)
(b) Payment for construction from note proceeds …………………………………………
275,000
(c) Cost of land fill and clearing ……………………………………………………………….
10,000
(d) Delinquent real estate taxes on property assumed by
purchaser………………………. 7,000
(e) Premium on 6-month insurance policy during construction ……………………………
6,000
(f) Refund of 1-month insurance premium because construction completed early
……… (1,000)
(g) Architect’s fee on building …………………………………………………………………
25,000
(h) Cost of real estate purchased as a plant site (land $200,000 and building
$50,000) …. 250,000
(i) Commission fee paid to real estate agency………………………………………………….
9,000
(j) Installation of fences around property ……………………………………………………….
4,000
(k) Cost of razing and removing building ……………………………………………………..
11,000
(l) Proceeds from salvage of demolished building ……………………………………………
(5,000)
(m) Interest paid during construction on money borrowed for construction
………………13,000
(n) Cost of parking lots and driveways …………………………………………………………
19,000
(o) Cost of trees and shrubbery planted (permanent in nature)……………………………
14,000
(p) Excavation costs for new building ………………………………………………………….
3,000
Identify each item by letter and list the items in columnar form, using the
headings shown below. All receipt amounts should be reported in
parentheses. For any amounts entered in the Other Accounts column, also
indicate the account title.
Item Land Land Improvements Buildings
Other

Q2: Acquisition Costs of Realty:Pollachek Co. purchased land as a factory site

for $450,000.
process of tearing down two old buildings on the site and constructing the factory
required 6 months. The company paid $42,000 to raze the old buildings and sold
salvaged lumber and brick for $6,300. Legal fees of $1,850 were paid for title
investigation and drawing the purchase contract. Pollachek paid $2,200 to an

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Accounting for Property Plant and Equipment
Practice Questions
engineering firm for a land survey, and $65,000 for drawing the factory plans. The
land survey had to be made before definitive plans could be drawn. Title insurance
on the property cost $1,500, and a liability insurance premium paid during
construction was $900. The contractor’s charge for construction was $2,740,000.
The company paid the contractor in two installments: $1,200,000 at the end of 3
months and $1,540,000 upon completion. Interest costs of $170,000 were incurred
to finance the construction.
Determine the cost of the land and the cost of the building as they should
be recorded on the books of Pollachek Co. Assume that the land survey
was for the building.

Q3: Acquisition Costs of Trucks:Shabbona Corporation operates a retail

computer store. To improve delivery services to customers, the company purchases
four new trucks on April 1, 2012. The terms of acquisition for each truck are
described below.
1. Truck #1 has a list price of $15,000 and is acquired for a cash payment of
$13,900.
2. Truck #2 has a list price of $20,000 and is acquired for a down payment of
$2,000 cash and a zerointerest- bearing note with a face amount of $18,000. The
note is due April 1, 2013. Shabbona would normally have to pay interest at a rate of
10% for such a borrowing, and the dealership has an incremental borrowing rate of
8%.
3. Truck #3 has a list price of $16,000. It is acquired in exchange for a computer
system that Shabbona carries in inventory. The computer system cost $12,000 and
is normally sold by Shabbona for $15,200. Shabbona uses a perpetual inventory
system.
4. Truck #4 has a list price of $14,000. It is acquired in exchange for 1,000 shares of
common stock in Shabbona Corporation. The stock has a par value per share of $10
and a market price of $13 per share.
Prepare the appropriate journal entries for the foregoing transactions for
Shabbona Corporation. (Round computations to the nearest dollar.)

Q4 : Purchase and Self-Constructed Cost of Assets Dane Co. both purchases

and constructs various equipment it uses in its operations. The following items for
two different types of equipment were recorded in random order during the
calendar year 2013.
Purchase
Cash paid for equipment, including sales tax of $5,000 …………………….. $105,000
Freight and insurance cost while in transit ………………………………………2,000
Cost of moving equipment into place at factory ………………………...............3,100
Wage cost for technicians to test equipment ……………………………………..6,000
Insurance premium paid during 1st year of operation on this equipment …….1,500
Special plumbing fixtures required for new equipment ………………………..8,000
Repair cost incurred in first year of operations related to this equipment …….1,300
Construction
Material and purchased parts (gross cost $200,000; failed to take 1% cash discount)
…$200,000
Imputed interest on funds used during construction (stock financing)………………..
14,000
Labor costs …………………………………………………………………………………….190,000
Allocated overhead costs (fixed—$20,000; variable—$30,000) ……………………………
50,000
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Accounting for Property Plant and Equipment
Practice Questions
Profit on self-construction …………………………………………………………………….
30,000
Cost of installing equipment …………………………………………………………………
4,400
Compute the total cost for each of these two pieces of equipment. If an
item is not capitalized as a cost of the equipment, indicate how it should
be reported.

Q5: Treatment of Various Costs:Allegro Supply Company, a newly formed

corporation, incurred the following expenditures related to Land, to Buildings, and to
Machinery and Equipment.
Abstract company’s fee for title search …………………………………………….………$
520
Architect’s fees…………………………………………………………………………..…… 3,170
Cash paid for land and dilapidated building thereon………………………………..…
92,000
Removal of old building ………………………………………………………….…….…$20,000
Less: Salvage ……………………………………….(5,500)…………………………….….
14,500
Interest on short-term loans during construction …………………………………………
7,400
Excavation before construction for basement ………………………………………….…
19,000
Machinery purchased (subject to 2% cash discount, which was not taken)
…………...65,000
Freight on machinery purchased ………………………………………………………...
….1,340
Storage charges on machinery, necessitated by noncompletion of
building when machinery was delivered ……………………………………………..……
2,180
New building constructed (building construction took 6 months from
date of purchase of land and old building) ………………………………………….
…..485,000
Assessment by city for drainage project……………………………………………………
1,600
Hauling charges for delivery of machinery from storage to new building………………
620
Installation of machinery ………………………………………………………………….....2,000

Determine the amounts that should be debited to Land, to Buildings, and

to Machinery and Equipment. Assume the benefits of capitalizing interest
during construction exceed the cost of implementation. Indicate how any
costs not debited to these accounts should be recorded.

Q6:Accounting for Government Grants:Violaltd imports Gas turbinesfor the

purpose of power generation in the country. The total estimated cost of the project
was as under;

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Accounting for Property Plant and Equipment
Practice Questions
Particulars Rs in ‘000’
Legal costs relating to the 800,000
The purchase of land Government has
Purchase price of the turbine 2,000,000
recently announced that
Import duties and clearing charges 1,000,000
anyone who will import
any Demurrage charges 50,000
machinery for the
Transportation 100,000
purpose of power
Installation and assembly costs 50,000
generation, the
Development costs of the facility 250,000
Site preparation cost
Government will allow a
25,000
Total Project Cost financial assistance of
25% of the cost of the
machinery, moreover, the import duties etc paid at the time of import will also be
reimbursed in full. Depreciation on turbine was 20% straight line. Calculate the
depreciation charge, and show the relevant extracts from the financial
statements in the first year under both methods.

Q7:Acquisition of Land and Building for Stock and Cash

Valdilla’s Music Store acquired land and an old building in exchange for 50,000
shares of its common stock, par $0.50, and cash of $80,000. The auditor ascertains
that the company’s stock was selling for $15 per share when the purchase was
made. The following additional costs were incurred to complete the transaction:
Legal cost to complete
transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000
Property tax for previous
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Cost of building demolition . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 21,000
Salvage value of demolished building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . (6,000)
What entry should be made to record the acquisition of the property?

Q8:Accounting for the Acquisition of an Entire Company

Stafford Company purchased Deaver Manufacturing for $1,400,000 cash on January
1. The book value and fair value of the assets of Deaver as of the date of the
acquisition follow:

Book Value Fair Value

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
20,000 $ 20,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000
190,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
260,000 320,000
Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
80,000
Property, plant, and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
750,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,070,000 $1,360,000
In addition, Deaver had liabilities totaling $500,000 at the time of the acquisition.
Deaver has no other separately identifiable intangible assets. Make the journal

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Accounting for Property Plant and Equipment
Practice Questions
entry necessary on the books of Stafford Company to record the
acquisition.

Q9: On April 30th 2005, Metro began to construct a supermarket which had an
estimated useful life of 30 years. It purchased a leasehold interest in the site for 25$
million on 1st Jan 2005. The construction of the building cost $9 million and the
fixtures and fittings cost 6$ million. The construction of the supermarket was
completed on 1st December 2005 and it was brought into use on 31 st March 2006.
Metro borrowed 40$ million on 1st Jan 2005 in order to finance this project. The loan
carried interest at 10% p.a. it was repaid on 30 th June 2006.Required: Calculate
the total amount to be included in cost of property, plant and equipment
in respect of the development at 31st Dec 2005.

Q10:Capitalized Interest: Single-Year Computation

The company had the following loans outstanding for the entire year:

Amount Interest Rate

Specific construction loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$200,000 11%
General loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,000,000 13
The company began the self-construction of a building on January 1. The following
expenditures were made during the year:
January 1 . . . . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$100,000
April 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . .
100,000
Sep 1. ……….. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
350,000
Total . . . . . . . . . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
$550,000
Construction was completed on December 31. Compute (1) the amount of
interest capitalized
during the year and (2) the recorded cost of the building at the end of the
year.(3) Journalize

Q11: Capitalized Interest: Multiple-Year Computation

Refer to Previous question. Assume that construction was not completed on
December 31 of Year 1. Also assume that the same loans were outstanding for all of
Year 2. The following expenditure was made during Year 2:
July 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$500,000
Final construction was completed on December 31 of Year 2. Compute (1) the
amount of interest capitalized during Year 2 and (2) the recorded cost of the
building at the end of Year 2.

Q12: Capitalization of Interest

Carver Department Stores, Inc., constructs its own stores. In the past, no cost has
been added to the asset value for interest on funds borrowed for construction.
Management has decided to correct its policy and desires to include interest as part
of the cost of a new store just being completed. Based on the following
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Accounting for Property Plant and Equipment
Practice Questions
information, how much interest would be added to the cost of the store (1)
in 2011 and (2) in 2012?

Total construction expenditures:

January 2, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
500,000
May 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
450,000
November 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
700,000
March 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
950,000
September 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
800,000
November 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
600,000
Total
$4,000,000

Outstanding company debt:

Mortgage related directly to new store; interest rate, 10%; term,
5 years from beginning of construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,500,000
General bond liability:
Bonds issued just prior to construction of store; interest rate,
8% for 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . $ 500,000
Bonds issued prior to construction; interest rate, 12%, mature in 5 years . . . . . . . $
800,000
Estimated cost of equity capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 14%

Q13:Capitalization of Interest:On 1 March 2010, Granite Corporation (GC)

started the construction of a new plant to meet thegrowing demand for its products.
The new plant was completed at a cost of Rs. 100 million on31 May 2011.

GC financed the cost of the project from the following sources:

(i) On 1 March 2010, a 7-year loan of Rs. 70 million was obtained specifically for
theconstruction of the plant. The loan carried mark up @ 13% per annum payable
semiannually.An arrangement fee @ 1% of the loan amount was paid to the
bank.Two installments, each comprising of repayment of principal of Rs. 5 million
with interest,were paid on 31 August 2010 and 28 February 2011.
(ii) GC also has a running finance facility of Rs. 100 million carrying mark-up @ 14%
perannum. Average utilization of this facility, prior to commencement of
construction was Rs.10 million. Any additional amount required for the project was
provided through thisfacility.
(iii) Surplus funds were used to reduce the running finance utilization or invested in
savingsaccount @ 8% per annum.
Payments made to the contractor were as follows:

Payment date Rs. in million

01 March 2010 25
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Accounting for Property Plant and Equipment
Practice Questions
31 January 2011 65
30 September 2011 10

The construction work was suspended from 1 February 2011 to 28 February 2011.
Thesuspension was caused due to delay in shipment of essential components for
the installation of the plant.
Required:
Calculate the amount of borrowing costs that may be capitalized during
the years ended 30 June2010 and 2011 in accordance with the
requirements of International Financial ReportingStandards.

Q14: (Capitalization of Interest) On December 31, 2011, Hurston Inc. borrowed

$3,000,000 at 12% payableannually to finance the construction of a new building. In
2012, the company made the followingexpenditures related to this building: March
1, $360,000; June 1, $600,000; July 1, $1,500,000; December 1,$1,200,000.
Additional information is provided as follows.
1. Other debt outstanding
10-year, 11% bond, December 31, 2005, interest payable annually $4,000,000
6-year, 10% note, dated December 31, 2009, interest payable annually $1,600,000
2. March 1, 2012, expenditure included land costs of $150,000
3. Interest revenue earned in 2012 $49,000
(a) Determine the amount of interest to be capitalized in 2012 in relation
to the construction of the building.
(b) Prepare the journal entry to record the capitalization of interest and
the recognition of interest expense, if any, at December 31, 2012.

PART B : SUBSEQUENT EXPENDITURES

Q16: Analysis of Subsequent Expenditures:The following transactions occurred

during 2013.
Assume that depreciation of 10% per year is charged on all machinery and 5% per
year on buildings, on astraight-line basis, with no estimated salvage value.
Depreciation is charged for a full year on all fixedassets acquired during the year,
and no depreciation is charged on fixed assets disposed of during the year.
Feb28. A building that cost $112,000 in 1996 is torn down to make room for a new
building. The wrecking contractorwas paid $5,100 and was permitted to keep all
materials salvaged.
Mar 31. Machinery that was purchased in 2006 for $16,000 is sold for $2,900 cash,
f.o.b. purchaser’s plant. Freightof $300 is paid on the sale of this machinery.
April 15 A gear breaks on a machine that cost $9,000 in 2008. The gear is replaced
at a cost of $3,000. Thereplacement does not extend the useful life of the machine.
May 1 A special base installed for a machine in 2007 when the machine was
purchased has to be replaced ata cost of $5,500 because of defective workmanship
on the original base. The cost of the machinery was$14,200 in 2007. The cost of the
base was $4,000, and this amount was charged to the Machinery accountin 2007.
June 30One of the buildings is repainted at a cost of $6,900. It had not been
painted since it was constructedin 2009.
Instructions: Prepare general journal entries for the transactions

Q17: Analysis of Subsequent Expenditures:Plant assets often require

expenditures subsequent toacquisition. It is important that they be accounted for

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Accounting for Property Plant and Equipment
Practice Questions
properly. Any errors will affect both the balancesheets and income statements for a
number of years.
Instructions
For each of the following items, indicate whether the expenditure should
be capitalized (C) or expensed (E)in the period incurred.
(a) __________ Improvement.
(b) __________ Replacement of a minor broken part on a machine.
(c) __________ Expenditure that increases the useful life of an existing asset.
(d) __________ Expenditure that increases the efficiency and effectiveness of a
productive asset butdoes not increase its salvage value.
(e) __________ Expenditure that increases the efficiency and effectiveness of a
productive asset andincreases the asset’s salvage value.
(f) __________ Ordinary repairs.
(g) __________ Improvement to a machine that increased its fair value and its
production capacity by30% without extending the machine’s useful life.
(h) __________ Expenditure that increases the quality of the output of the productive
asset.

PART C : DEPRECIATION

Q 18:Computing Straight-Line Depreciation

The company acquired a machine on January 1 at an original cost of $115,000. The
machine’s estimated residual value is $20,000, and its estimated life is five years.
(1) Compute the annual straight-line depreciation amount, (2) make the
journal entry necessary to record depreciation expense for the first year,
and (3) compute the machine’s book value at the end of the first year.

Q 19:Computing Double-Declining-Balance Depreciation

The company acquired a machine on January 1 at an original cost of $100,000. The
machine’s estimated residual value is $10,000, and its estimated life is four years.
The company uses double-declining-balance depreciation and switches to straight-
line in the final year of the machine’s life.
Compute (1) depreciation expense for each year of the machine’s 4-year
life and (2) book value at the end of each year of the machine’s 4-year life.

Q20 :Computing Service-Hours Depreciation

The company acquired a machine on January 1 at an original cost of $75,000. The
machine’s estimated residual value is $15,000, and its estimated life is 20,000
service hours. The actual usage of the machine was as follows: Year 1, 9,000 hours;
Year 2, 5,000 hours; Year 3, 4,000 hours; Year 4, 2,000 hours. Compute (1)
depreciation expense for each year of the machine’s life and (2) book value at the
end of each year of the machine’s life.

Q21 :Computing Productive-Output Depreciation

The company acquired a machine on January 1 at an original cost of $70,000. The
machine’s estimated residual value is $5,000, and its estimated lifetime output is
13,000 units. The actual output of the machine was as follows: Year 1, 3,000 units;
Year 2, 5,000 units; Year 3, 2,000 units; Year 4, 3,000 units.
Compute (1) depreciation expense for each year of the machine’s life and
(2) book value at the end of each year of the machine’s life.

Q22:Computing Depletion Expense

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Accounting for Property Plant and Equipment
Practice Questions
On January 1, the company purchased a mine for $100,000. At that time, it was
estimated that the mine contained 5,000 tons of ore. It is also estimated that the
mine will have a residual value of $20,000 when all of the ore is extracted. During
the year, the company extracted 900 tons of ore from the mine.
(1) Compute depletion expense for the year and (2) make the journal entry
necessary to record the depletionexpense.

Q23 :Depletion Expense

In 2007, Heslop Mining Company purchased property with natural resources for
$6,200,000.
The property was relatively close to a large city and had an expected residual value
of $500,000.
The following information relates to the use of the property:
(a) In 2007, Heslop spent $300,000 in development costs and $500,000 in buildings
on the property. Heslop does not anticipate that the buildings will have any utility
after the natural resources are depleted.
(b) In 2010, $600,000 was spent for additional developments on the mine.
(c) The tonnage mined and estimated remaining tons for years 2007–2011 are as
follows:
Year Tons Extracted
Estimated Tons Remaining
2007 . . . . . . . . . . . . . . . . . . . . . . . 200,0003,800,000
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000
2,600,000
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000
1,500,000
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
700,000
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
0
Instructions: Compute the depletion and depreciation expense for the
years 2007–2011.

Q24:Depreciation for Partial Periods

The company purchased a machine on April 1 for $100,000. The machine has an
estimated useful life of five years and an estimated salvage value of $15,000. The
company computes partial-year depreciation to the nearest whole month.
Compute the amount of depreciation expense for this year and next year
using (1) sum-of-theyears’- digits depreciation and (2) double-declining-
balance depreciation.

Q25:Computation of Depreciation Expense

Limestone Construction purchased a concrete mixer on July 15, 2011. Company
officials revealed the following information regarding this asset and its acquisition:
Purchase price
..........................................................
. . . . $210,000
Residual value
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . .
. . . . $20,000
Estimated useful life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 9 years
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Accounting for Property Plant and Equipment
Practice Questions
Estimated service hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .
. . . . . . . . . . . . . . . 50,000
Estimated production in units
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000
The concrete mixer was operated by construction crews in 2011 for a total of 6,500
hours, and it produced 49,500 yards of concrete. It is company policy to take a half-
year’s depreciation on all assets for which it used the straight-line or double-
declining-balance depreciation method in the year of purchase.
Calculate the resulting depreciation expense for 2011 under each of the
following methods, and specify which method allows the greatest
depreciation expense.
1. Double-declining-balance
2. Productive-output
3. Service-hours
4. Straight-line

Q26:Productive-Output Depreciation and Asset Retirement

Equipment was purchased at the beginning of 2009 for $100,000 with an estimated
product life of 300,000 units. The estimated salvage value was $4,000. During
2009, 2010, and 2011, the equipment produced 80,000 units, 120,000 units, and
40,000 units, respectively. The machine was damaged at the beginning of 2012, and
the equipment was scrapped with no salvage value.
1. Determine depreciation using the productive-output method for 2009,
2010, and 2011.
2. Give the entry to write off the equipment at the beginning of 2012.

Q27:Depreciation Under Different Methods

On January 1, 2008, Ron Shelley purchased a new tractor to use on his farm. The
tractor cost $100,000. Ron also had the dealer install a front-end loader on the
tractor. The cost of the front-end loader was $7,000. The shipping charges were
$600, and the cost to install the loader was $800. The estimated life of the tractor
was eight years, and the estimated service-hour life of the tractor was 12,500
hours. Ron estimated that he could sell the tractor for $15,000 at the end of eight
years or 12,500 hours. The tractor was used for 1,725 hours in 2011. A full year’s
depreciation was taken in 2008, the year of acquisition.
Instructions: Compute depreciation expense for 2011 under each of the
following methods:
1. Straight-line
2. Double-declining-balance
3. Sum-of-the-years’-digits
4. Service-hours

Q28:Depreciation of Special Components/ Complex Assets

Jackson Manufacturing acquired a new milling machine on April 1, 2006. The
machine has a special component that requires replacement before the end of the
useful life. The asset was originally recorded in two accounts, one representing the
main unit and the other for the special component. Depreciation is recorded by the
straight-line method to the nearest month, residual values being disregarded. On
April 1, 2012, the special component is scrapped and is replaced with a similar
component. This component is expected to have a residual value of approximately
25% of cost at the end of the useful life of the main unit, and because of its

SULEMAN KHAN
Accounting for Property Plant and Equipment
Practice Questions
materiality, the residual value will be considered in calculating depreciation. Specific
asset information is as follows:
Main milling machine:
Purchase price in
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$74,800
Residual value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . $6,200
Estimated useful life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 10 years
First special component:
Purchase
price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. $12,000
Residual value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . $500
Estimated useful
life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
years
Second special component:
Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . $16,500
What are the depreciation charges to be recognized for the years (1) 2006,
(2) 2012, and (3) 2013?

Q29: GLEESON ltd purchased an aircraft that has a useful life of 16 years for a
cost of $120 Million, with an immaterial residual value. It requires an overhaul after
4, 8 and 12 years. Cost of the overhaul at each of these time periods is estimated to
be $8 million. Calculate the amount of depreciation for years 1-4 and years
5-8, assuming a straight line method of depreciation.

PART D : CHANGES IN ESTIMATES

Q30:Change in Estimated Useful Life:An asset was purchased by a

manufacturing concern for 100,000$ on 1st Jan 2005 and straight line depreciation
of 20,000 p.a is being charged (5 year life with no residual value). An annual review
of the asset lives is undertaken, and for the particular asset the remaining useful life
as at 1st Jan 2007 is estimated to be eight years. What will be the depreciation
charge for the year in the financial statements of 2007

Q31:Change in Estimated Useful Life

Goff Corporation purchased a machine on January 1, 2006, for $1,500,000. At the
date of acquisition, the machine had an estimated useful life of 15 years with no
salvage value. The machine is being depreciated on a straight-line basis. On January
1, 2011, as a result of Goff’s experience with the machine, it was decided that the
machine had an estimated useful life of 10 years from the date of acquisition. What
is the amount of depreciation expense on this machine in 2011 using a
new annual depreciation charge for the remaining 10 years?

Q32:Change in Estimated Useful Life

SULEMAN KHAN
Accounting for Property Plant and Equipment
Practice Questions
Finn Corporation purchased a machine on Jan 1, 2008, for $250,000. The machine
was estimated to have a useful life of 10 years with an estimated salvage value of
$15,000. During 2011, it became apparent that the machine would become
uneconomical after December 31, 2015, and that the machine would have no scrap
value. Finn uses the straight-line method of depreciation for all machinery. What
should be the charge for depreciation in 2011 using the new estimates for
useful life and salvage value. Company uses calendar year as its
accounting period.

Q33:Change in Estimated Life

The company purchased a machine for $40,000. The machine had an estimated
residual value of $4,000 and an estimated useful life of nine years. After three full
years of experience with the machine, it was determined that its total useful life
would be only seven years instead of nine. In addition, a revised estimate of $8,000
was made for the residual value, instead of the original $4,000. Compute
depreciation expense for the fourth year. The company uses straight-line
depreciation.

Q34:Change in Estimated Units of Production

On January 1 of Year 1, the company purchased a mine for $150,000. At that time, it
was estimated that the mine contained 2,000 tons of ore. During Year 1, the
company extracted 900 tons of ore from the mine. On January 1 of Year 2, the
company spent $60,000 on mine improvements. During Year 2, the company
extracted 600 tons of ore. On December 31 of Year 2, it was estimated that the
mine contained 700 tons of ore. Compute depletion expense for (1) Year 1 and
(2) Year 2.

PART E : REVALUATIONS AND IMPAIRMENT

Q35: Recording Upward Asset Revaluations

A building has a cost of $500,000 and accumulated depreciation of $40,000. The
current value of the building is estimated to be $730,000. The company that owns
the building is based in Genovia and uses international financial reporting
standards. The company has chosen to recognize increases in the value of long-
term operating assets. Make the necessary journal entry.

Q36: Recording Upward Asset Revaluations:A company revalues its buildings

and decides to incorporate the revaluation into its financial statements

Extracts from the statement of financial position at $“000”

31/12/2007
Buildings:
Cost 1,200
Depreciation (144)
Book value 1056
The building is revalued at 1st Jan 2008 at 1,400. Its useful life is 40 years at that
date. Assume that previously depreciation was charged on a straight line basis
and that the amount of depreciation each year was 12.

Required: Show the relevant extracts from the final accounts at 31st
December 2008.
SULEMAN KHAN
Accounting for Property Plant and Equipment
Practice Questions
Q37: Derek purchased property costing 870,000$ on 1 st Jan 2004, with a useful life
of 10 years. At 31st Dec 2005 the property was revalued to 950,000, resulting in a
gain. There was no change in the useful life of the asset. Derek doesnot make a
transfer to realized profits in respect of the excess depreciation on the fixed assets
revalued. On 31st Dec 2006 the property was sold for 980,000. How the should
disposal be treated in the financial statements of the entity as at 31 st Dec
2006.

Q38: Following information relates to the equipment of Hexagon paragliding ltd:

Particulars Rs
Cost of equipment 330,000
Date of purchase 1/1/11
Useful Life 6
Revaluation on 1/1/2012
Gross replacement value 360,000
Accumulated depreciation 72,000
Fair value 288,000
Revaluation on 1/1/2013
Gross replacement value 280,000
Accumulated depreciation 106,000
Fair value 174,000
Required: Journal entries and ledger accounts for 2011, 2012 and 2013 in
accordance with the following two alternative methods of recording
revaluations, as set out in IAS 16 (paragraph 35)

a) Accumulated depreciation eliminated against Gross Carrying Amount

of assets
b) Accumulated depreciation restated proportionately with the change
in gross amount of the asset so that the carrying amount of the
asset after revaluation equals its carrying amount.

Q39: Faraday Pharmaceutical Limited (FPL) acquired a building for Rs. 200
million on July1, 2005. The following information relating to the building is available:
(i) It is being depreciated on the straight line basis, over 20 years.
(ii) FPL uses the revaluation model for subsequent measurement of its
property,plant and equipment and accounts for revaluations on the net replacement
valuemethod. The details of revaluation carried out by the independent valuers
duringthe past years are as follows:

Revaluation date Fair value

Rupees in million
July 1, 2006 230
July 1, 2007 170
July 1, 2008 180

SULEMAN KHAN
Accounting for Property Plant and Equipment
Practice Questions
(iii) FPL transfers the maximum possible amount from the revaluation surplus
toretained earnings on an annual basis.
(iv) There is no change in the useful life of the building.

Required:
Prepare the journal entries to record the above transactions from the date
of acquisitionof the building to the year ended June 30, 2009. (Ignore
deferred tax)

Q40: Scientific Pharma Limited (SPL) is a manufacturer of pharmaceutical

products. In January 2010,one of its plants suffered a major break down. It was
repaired at a cost of Rs. 1.5 million but theproduction capacity was reduced
significantly. The plant was ready for production on June 30, 2010.At that time the
company’s engineers advised that the plant could be used at a reduced level for
3years only. Net cash inflows from the plant for the next three years are budgeted
as under:
Year ending June 30, 2011 Rs. 9 million
Year ending June 30, 2012 Rs. 7 million
Year ending June 30, 2013 Rs. 5 million
Assume that cash flow would occur on the last day of each year and applicable
discount rate is 10%.Other related information is as under:
(i) The plant was imported at FOB price of US$ 800,000. The payment was made at
the time of shipment on July 1, 2000 at Rs. 52 per US$. Other charges including
installation costamounted to Rs. 7 million. Installation of the plant was completed
on December 31, 2000 andcommercial production commenced from April 1, 2001.
(ii) The company uses straight line method of deprecation. Depreciation is charged
from the month the asset is available for use upto the month prior to disposal. At
the time of purchase, the estimated useful life of the plant was estimated at 15
years whereas the salvage value was estimated at Rs. 2.0 million.
(iii) Based on the report of a professional independent valuer, the plant was
revalued on July 1,2005 at Rs. 45 million. There was however, no change in
estimated useful life of the plant.
(iv) The factory remained closed from April 1, to June 30, 2007 due to law and order
situation.
(v) The salvage value has not changed since it was first estimated at the time of
purchase.
Required: Prepare accounting entries for the year ended June 30, 2010.
Give all the necessary calculations. (Ignore taxation)

Q41: Thetrial balance of Instant Pharma at June 30th 2014 reflected the following:
Leasehold property (at cost) ………………. 240,000
Accumulated Depreciation ………………. 42,000
On July 1, 2013 the leasehold property having a useful life of 40 years was revalued
at Rs. 250,000. No adjustment in this regard has been made in the books.
Depreciation is charged on a straight line basis.
Required:
a) Adjusted carrying value of leasehold property at June 30 th2014
b) Amount of revaluation surplus

Q42: On March 1, 2007 Style Textiles imported an automatic plant for Rs. 27
million. The commissioning of the plant was completed in December 2007 with a
cost of Rs. 3 million. The commercial production commenced on January 1, 2008
SULEMAN KHAN
Accounting for Property Plant and Equipment
Practice Questions
and at that time, the economic life of the plant was estimated as 8 years.During an
exercise carried out to determine the impairment in the value of plant as on
December 31, 2009 the following estimates have been made:
• Due to lack of demand the estimated plant utilization is reduced from 80% to
70%.
• It is estimated that due to under utilization of the plant, the life of the plant
will be
increased by 2 years but an overhauling of the plant would have to be carried out at
the
end of year 2015 at a cost of Rs. 1 million.
• The applicable discount rate is 10%.
• The net annual cash flows (excluding overhauling cost) have been estimated
as under:
Years 2010 2011 2012 2013 2014 2015 2016 2017
Net Cash flows 5.0 4.0 3.5 3.2 3.0 2.5 2.3 2.0

The current selling price of a similar plant in the local market is Rs. 15 million. The
present decommissioning cost of the plant is estimated at Rs. 0.2 million.

Required: Work out the impairment (if any) in the value of the plant as on
December 31, 2009.

Q43: Recording an Impairment Loss

Della Bee Company purchased a manufacturing plant building 10 years ago for
$1,300,000. The building has been depreciated using the straight-line method with
a 30-year useful life and 10% residual value. Della Bee’s manufacturing operations
have experienced significant losses for the past two years, so Della Bee has decided
that the manufacturing building should be evaluated for possible impairment. Della
Bee estimates that the building has a remaining useful life of 15 years, that net
cash inflow from the building will be $50,000 per year, and that the fair value of the
building is $380,000.
1. Determine whether an impairment loss should be recognized.
2. If an impairment loss should be recognized, make the appropriate
journal entry.
3. How would your answer to (1) change if the fair value of the building
was $560,000?

Q44: Bridgestone communications purchased a telecommunication device for

7,500,000 Rs on 1/1/2001. They paid 1,500,000 sales tax and import duty and other
port clearing charges amounting to Rs. 2,500,000.transportation and related
handling costs were 250,000. Installation fee was 150,000. Its estimated useful life
was 5 years and residual value was 500,000. On 1st Jan 2003, an annual review of
the asset provided you with the following information:
a) The Fair Market value of the asset as of 1/1/2003 was 8,500,000 Rs.
b) The cost of disposal is expected to be 100,000
c) The asset is expected to be used for further 3 years. Expected production
value for each
of the next 3 years is 3,700,000Rs.
d) The discount rate used by the company is 14.5%.
Required: Compute Impairment loss (if any) and show its effect in the
financial statements according to the IAS-36.

SULEMAN KHAN
Accounting for Property Plant and Equipment
Practice Questions
Q45: Determining Whether a Tangible Asset Is Impaired
The cost and the accumulated depreciation for a piece of equipment are $1,500,000
and $600,000, respectively. Management is concerned that the equipment has
become impaired. Management hired several independent appraisers who agreed
that the current value of the equipment is $500,000. Management also estimates
that the equipment will generate cash inflows of $65,000 per year for the next 14
years. Is the equipment impaired? Explain.

Q46: Recording a Tangible Asset Impairment

A building has a cost of $750,000 and accumulated depreciation of $125,000. The
current value of the building is estimated to be $300,000. The building is expected
to generate net cash inflows of $20,000 per year for the next 30 years.
(1) Determine whether the building is impaired and (2) if it is impaired,
make the journal entry necessary to record the impairment loss.

Q47: Impairment
Deedle Company purchased four convenience store buildings on January 1, 2005,
for a total of $26,000,000. The buildings have been depreciated using the straight-
line method with a 20-year useful life and 5% residual value. As of January 1, 2011,
Deedle has converted the buildings into Internet Learning Centers where classes on
Internet usage will be conducted six days a week. Because of the change in the use
of the buildings, Deedle is evaluating the buildings for possible impairment. Deedle
estimates that the buildings have a remaining useful life of 10 years, that their
residual value will be zero, that net cash inflow from the buildings will total
$1,600,000 per year, and that the current fair value of the four buildings totals
$10,000,000.
1. Make the appropriate journal entry, if any, to record an impairment loss
as of 1/1/2011.
2. Compute total depreciation expense for 2011.
3. Repeat (1) and (2) assuming that the net cash inflow from the buildings
totals $2,200,000 per year. The fair value of the four buildings totals
$12,000,000.

PART F : EXCHANGE AND REPLACEMENTS

Q48:Renewals and Replacements

The company recently replaced the heating/cooling system for its building. The old
system cost $160,000, and was 80% depreciated. The new system cost $210,000,
which was paid in cash. The new system will extend the economic useful life of the
building by five years. Make the journal entry necessary to record the
removal of the old system and the installation of the new system,
assuming that the separate cost of the old system is identifiable and has
been accounted as part of the building cost.

Q49:Exchange of Assets
A building has a cost of $700,000 and accumulated depreciation of $340,000. The
building is exchanged for land. Make the necessary journal entry if (1) the
land has a market value of $400,000 and (2) the land has a market value
of $200,000.

Q50:Exchange of Assets

SULEMAN KHAN
Accounting for Property Plant and Equipment
Practice Questions
The company exchanged an asset for a similar asset. The exchange was with
another company in the same line of business. The old asset had a cost of $1,000
and accumulated depreciation of $850. The old asset had a market value of $400 on
the date of the exchange.
Make the journal entry necessary to record the exchange assuming that
(1) the company received the new machine and no cash, (2) the company
received the new machine and a “large” amount of cash of $300, and (3)
the company received the new machine and a “small” amount of cash of
$80. [Hint: In all three cases, the total market value of assets received
(cash plus new asset) is the same as the market value of the asset given
up ($400).]

Q51: Celine a manufacturing company, purchases a property for $1 million on Jan

1st 2001 for its investment potential. The land element of the cost is believed to be
400,000. And the building element has a useful life of 50 years. At 31 st Dec 2001,
local property indices suggest that the fair value of the property has risen to 1.1$
million. Show how the property would be presented in the financial
statements as at 31st Dec 2001 under

a) Cost Model
b) Revaluation Model

Q52: Farazbrothers company exchanged a number of used tucks and cash for a
vacant plot of land. The trucks have a combined book value of Rs. 126,000 ( cost
192,000 and Acc. Dep 66,000)

Faiz Ahmad a purchasing agent for FarazAhmad , who has Faraz brothers previous
dealing in the 2nd hand market that the trucks have fair market value of Rs.
147,000. In addition to trucks Faraz is also required to pay Rs. 51000. Cash for the
plot of land.Taking into account the requirement of IAS-16 calculate the
following;

a) Cost of land
b) Gain on disposal of used trucks
c) Prepare journal entry to record the aforesaid exchange transaction.

Q53: Jubilee Inc trade off its old plant and machinery for a new one. Book value of
the old machine was 16,000 (cost 24,000 and depreciation of 8,000) and a fair
value of 12,000. List price of the new model is 32,000. A trade-in allowance of
18,000 is finally agreed for the used machine.

a) Calculate cost of the new machine.

b) Compute gain/loss occurred in exchange transaction
c) Record the transaction in the books of the company.

PART G : MISCELLANOUS

Q54: Inferring Useful Lives

The information that follows is from the balance sheet of Hampton Company for
December 31, 2011, and December 31, 2010.
SULEMAN KHAN
Accounting for Property Plant and Equipment
Practice Questions
Dec. 31, 2011 Dec. 31, 2010
Equipment—cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
680,000 $ 680,000
Accumulated depreciation—equipment . . . . . . . . . . . . . . . . . . . (250,000)
(160,000)
Buildings—cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,450,000 2,450,000
Accumulated depreciation—buildings . . . . . . . . . . . . . . . . . . . .(340,000)
(230,000)
Hampton did not acquire or dispose of any buildings or equipment during 2011.
Hampton uses the straight-line method of depreciation. If residual values are
assumed to be 10% of asset cost, what is the average useful life of
Hampton’s (1) equipment and (2) buildings?

Q55: Accounting for Patents

The Rockington Co. applied for and received numerous patents at a total cost of
$31,195 at the beginning of 2006. It is assumed the patents will have economic
value for their remaining legal life of 16 years. At the beginning of 2008, the
company paid $9,350 in successfully prosecuting an attempted infringement of
these patent rights. At the beginning of 2011, $32,400 was paid to acquire patents
that could make its own patents worthless; the patents acquired have a remaining
life of 15 years but will not be used.
1. Give the entries to record the expenditures relative to patents.
2. Give the entries to record patent amortization for the years 2006, 2008,
and 2011.

Q56: Acquisition by Donation

The company has received a donation of land from a rich local philanthropist. The
land originally cost the philanthropist $48,000. On the date of the donation, it had a
market value of $111,000. Make the journal entry necessary on the books of
the company to record the receipt of the land.

SULEMAN KHAN