CHAPTER 7

P7-01 (ECE Board, August 1975)

You are planning to sell your electronic manufacturing plant originally costing ₱250,000
when put up 15 years ago. Some equipment originally costing ₱10,000 was replaced 10
years ago with new equipment costing ₱15,000. The equipment installed 10 years ago
has now depreciated by ₱7,500. The depreciation of the remaining portion of the plant
originally installed 15 years ago is now ₱40,000. Determine the present book value of
your plant.

P7-02 (ECE Board, August 1975)

A broadcasting corporation purchased equipment worth ₱53,000 and paid ₱1,500 for
freight and delivery charge to the site. The equipment has a normal life of 10 years with
a trade-in value of ₱5,000 against the purchase of new equipment at the end of life.
(a) Determine the annual depreciation cost by the straight-line method.
(b) Determine the annual depreciation cost by the sinking fund method. Assume
interest is 6% compounded annually.

P7-03 (ECE Board, February 1976)

A machine which coasts ₱10,000 was sold as scrap after being used for 10 years. If the
scrap value was ₱500, determine the total depreciation at the end of the fifth year.

P7-04 (ECE Board, September 1982)

The cost of a certain asset is ₱3,000; its life is 6 years and scrap value is ₱500. Find the
annual rate of depreciation under constant percentage method, and construct a
depreciation table.

P7-05 (ECE Board, September 1987)

A telephone company purchased a microwave radio equipment for ₱6,000,000. Freight
and installation charges amounted to 3% of the purchased price. It the equipment is
depreciated over an eight-years period with salvage value of 5%, determine the
following:
(a) Annual depreciation charge using the straight-line method.
(b) Depreciation charge during the fifth year using the SYD method.
P7-06 (M.E. Board, September 1971)
A dump truck was bought for ₱30,000 six years ago. It will have a salvage value of
₱3,000 four years from now. It is sold now for ₱8,000. What is the sunk cost if the
depreciation method used is :
(a) Straight-line method?
(b) Sinking fund method at 6%?

P7-07 (M.E. Board, October 1981)

A television company purchased machinery for ₱100,000 on July 1,1979. It is estimated
that it will have a useful life of ten years, scrap value of ₱4,000, production of 400,000
units and working hours of 120,000. The company uses the machinery produces 36,000
units in 1979 and 44,000 units in 1980. Compute the depreciation for 1980 using each
method given below.
(a) Straight-line method
(b) Working hours
(c) Output method.

P7-08 (M.E. Board, November 1983)

On January 1, !978 the purchasing manager of a cement company bought a new
machine costing ₱140,000. Depreciation has been computed by the straight-line
method, based on an estimated useful life of 5 years and residual scrap value of
₱12,800.
On January 2, 1981 extraordinary repairs (almost equivalent to a rebuilding of the
machinery) were performed at a cost of ₱30,400. Because of the thorough going nature
of these repairs, the normal life of the machinery was extended materially, the revised
estimate of useful life was 4 years from 1981.
Determine the annual provision for depreciation for the years 1978 to 1980 and the
adjusted provision for depreciation on December 31, 1981. Assume payment in cash for
machine and the repairs.

P7-09 (M.E. Board, April 1987)

A machine shop purchased 10 years ago a milling machine for ₱60,000. A straight-line
depreciation reserve had been provided based on a 20-year life of the machine. The
owner of the machine shop desires to replace the old milling machine with a modern
unit having many advantages costing ₱100,000. It can sell the old unit for ₱20,000. How
much new capital will be required for the purchase?
P7-10 (M.E. Board, October 1988)
A tax and duty free importation of a 30-horsepower sandmill for paint manufacturing
costs ₱360,000. Bank charges, arrastre and brokerage cost ₱5,000. Foundation and
installation costs were ₱25,000. Other incidental expenses amount to ₱20,000. Salvage
value of the mill is expected to be ₱60,000 after 20 years. Find the appraisal value of
the mill using straight-line depreciation at the end of (a) 10 years, (b) 15 years.

P7-11 A trenching machine may be used to dig irrigation ditches or pipeline trenches. A
contractor purchases one for ₱400,000 and he estimated that it will be able to dig
500,000 meters during its life and he expects to receive ₱5,000 as scrap value when he
sells it. During a certain year he used the machine to dig 90,000 meters of trench.
Determine the depreciation cost for that year.

P7-12 A mining company invested ₱25,000,000 to develop an oil well which is

estimated to contain 1,000,000 barrels of oil. During certain year, 200,000 barrels were
produced from this well. Compute the depletion charge during the year.

P7-13 The total gross income of the oil company in Problem P7-12 from the 200,000
barrels of oil produced is ₱30,000,000. The taxable income after deducting all expenses
excluding depletion is ₱11,800,000. Determine the allowable depletion allowance for the
year.

P7-14 During a certain month, a mining company has a gross income of ₱6,500,000
from the production of gold. The expenses for this month excluding depletion is
₱4,200,000. If the fixed depletion rate for gold is 15% what is the depletion allowance
for this month.

P7-15 A coal mining company has owned a mine for the past five years. During this
time the following tonnage of ore has been removed each year: 25,000; 32,000; 36,000;
30,000; and 28,000 tons. The mine is estimated to contain a total of 500,000 tons of
coal. The initial cost of the mines is ₱12,000,000. If the company had a gross income
for this coal of ₱300 per ton for the last three years, (a) determine the depletion charge
for each year using the larger values for the two methods, and (b)compute the percent
of the initial cost that has been written off in the five years.
P7-16 The Carryall Trucking Company uses three delivery trucks that cost ₱100,000;
₱120,000; and ₱150,000. The estimated salvage values are ₱20,000; ₱25,000; and
₱35,000. All truck have an expected service life of 10 years. Determine group
depreciation rate and annual depreciation.

P7-17 The Rainbow Electric Company uses three production machines described
bellow.
Machine Types of Machine Fist Coast Salvage Value Life
No.1 Cutting Machine ₱30,000 ₱5,000 8
2 Drill press 22,00 4,000 6
3 Sanding machine 15,000 1,500 5

Determine (a) the composite life, (b) the composite depreciation rate, and (c) the annual
depreciation.

P7-18 The San Fernando Manufacturing Company owns four different production
machines with data tabulated below.
Machine Number First Salvage Expected
Number Owned Cost Value Life
1 8 ₱40,000 ₱12,000 12
2 6 32,000 8,000 10
3 4 18,000 4,000 10
4 4 24,000 6,000 8

One-half of the machines of each kind will be replaced after 8 years and the rest will be
sold after 12 years. Compute the total annual straight-line depreciation charges by (a)
the group depreciation method, and (b) the complete depreciation method.

P7-19 Solve Example 7-10 using the same data. However, calculate the actual annual
depreciation by assuming that the company uses a service life of 8 years for all models
and one-half of the salvage values.
CHAPTER 8

P8-01 An 8-story building was built in Manila 10 years ago costing ₱5,000,000 on a
1,000 sq.m. lot purchased for ₱1,000 a sq.m. It is expected that after 50 years a taller
building will be constructed on the site due to the need for more office and store space
in that area. To be conservative, the owner of the property expect its scrap value at the
end of 50 years to be ₱250,000. Sinking fund depreciation at 6% is used. However, due
to inflation the price of properties are expected to escalate at the rate of 4.6% a year foe
each of the 10 years. Determine the value of the property now by the
(a) Historical-cost less depreciation method, and
(b) Reproduction-cost new less depreciation method.

P8-02 If the property in Problem P8-01 is appraised now for taxation purpose at the rate
of 3.5% of the appraised value, compute the annual real estate tax to be paid by the
owners.

P8-03 A factory was built in Laguna 12 years ago at an original cost of ₱800,000 on a
4,000 sq.m. parcel of land costing ₱120 a sq.m. The plant will be fully depreciated in 25
years with no salvage value. The machinery and equipment installed 12 years ago cost
₱680,000 and are expected to last 15 years before being replaced with a scrap value of
₱50,000. Five years ago, new equipment were purchased costing ₱360,000 due to
increased demand for the product being manufactured. These will also last for 15 years
with value at that time of ₱25,000. Disregarding inflation, determine the valuation of the
property now if depreciation is by the straight-line formula for the building, and by the
Matheson formula for the equipment.

P8-04 A farmer in Guiguinto, Bulacan planted 50 mango trees on this property which
are now fruit bearing. For the mangoes produced for the next 5 years, the farmer was
offered the following by two wholesale buyers:
Buyer A offered a down payment of ₱50,000 and ₱1,000 for the produce from each tree
each year to be paid at the end of each of the 5 years.
Buyer B will not pay any down payment, but will pay ₱1,200 for the produce from each
tree each year to be paid at the beginning of each year for 5 years.

If money is worth 12% effective, which of the offers should the farmer accept?
P8-05 An author of a best-selling novel in the United States was offered two alternative
by a publisher for the right to publish her book:

The first alternative was a single lump sum payment of $2,000,000 with no further
royalties in the future, or
A royalty of 15% on the gross selling price of each book sold. The publisher expects to
sell 500,000 copies of the hard-bound edition for the first year costing $22.50 each, and
500,000 copies of the paperback edition each year for the next 3 years which sells for
$5.95 each. Payment to the author are made at the end of each of the 4 years. Assume
that no further royalty payments will be paid after 4 years.
If money is worth 8.5% to the author, which alternative should she accept? Disregard
income tax considerations.

P8-06 A copper mine in Davao expect to have a net annual income of ₱2,500,000 each
year for 10 years. Determine its value if the annual dividend rate is to be 15% payable
annually, and the sinking fund is to accumulate at 8% annually.

P8-07 A gold mine in Mountain Province has an annual output of 25,000 tons of ore. It
is expected that the ore body will be exhausted within a period of 20 years. The
management costs annually is ₱750,000 and the operating cost of the mine anf the
smelter plant is ₱120 per ton. The processed ore produces an income of ₱450 per ton.
If the annual dividend rate is 12% payable annually, and the sinking fund rate is 9%
annually, determine the valuation of the property now.

P8-08 Timber land in Palawan was purchased for ₱8,000,000 and earned an average
annual profit of ₱1,400,000 for 14 years, at the end of which time the land was sold for
₱200,000. Assuming that a sinking fund earning 7% was established to provide for
depletion, determine the investment rate.