MODULE 3: PPE Page |1

MODULE 3: PROPERTY, PLANT AND EQUIPMENT

A. Initial Recognition of Various PPE Items

On January 1, 2019, NEW YORK, Inc. had the following property, plant and equipment
(PPE) items:

Land P350,000
Land improvements 200,000
Building 900,000

During 2019, the following data were gathered from the accountant’s analysis of the
accounts:

Cash paid on purchase of land and old building

(old building has no future economic benefits) P1,250,000
15% Mortgage Payable assumed on the purchase 2,000,000
Commission paid to real estate agent 150,000
Legal fees and documentary stamp taxes for the title 25,000
Unpaid real property taxes assumed upon purchase 60,000
Annual real property taxes after acquisition 60,000
Payment to persons squatting on the old building
to vacate the premises 50,000
Demolition cost for the old building 60,000
Proceeds from the sale of scrap materials 35,000
Cost of fencing the property 55,000
Construction fee for the new building 1,000,000
Building permit fees 25,000
Excavation expenses 25,000

1. How much is the balance of land, land improvement and building accounts,
respectively, on December 31, 2019?

B. Different Modes of Acquiring PPE items (Initial Recognition)

Assume the following independent cases of PPE acquisitions:

 At the beginning of the year, a check was issued for P400,000 as payment for
a tract of land. In addition, the buyer assumed the liability for unpaid real
estate taxes from previous years amounting to P10,000, and those assessed
for the current year, P8,000.

 A company issued 14,000 ordinary shares (P50 par) with a market value of
P60 per share (based on the quoted price in the stock exchange). The land’s
fair value, as determined by independent and professional appraisers, is
P800,000.

 A company purchased a land amounting to P4,000,000 by issuing 4,000 bonds

of P1,000 each. The fair market value of the company’s bond, in reference to
an active market, is 104, while the fair value of the land is P4,200,000.

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 A company purchased land by signing a note with a seller, requiring down

payment of P100,000, payment of P120,000 one year from purchase, and
P80,000 three years from purchase. The note is non-interest bearing. There is
no available cash price for the land, but the going rate for similar notes is 10%.
Present value of 1 at 10% for 1 period is 0.91, while for 3 periods is 0.75.

2. Under each of the following independent assumptions, determine the cost

of the land to be recognized in the books.

C. Acquisition under a Basket Purchase Transaction

BOSTON, Inc. purchased the following used equipment at a special auction price of
P400,000 cash: a drill press, a lathe machine, and a heavy-duty air compressor. The
drill press and the air compressor are in good working condition; however, the lathe
machine’s engine is already affected by “wear-and-tear” and replacement of a new
engine will cost P9,000.

BOSTON determined that the selling price of the individual items in local stores are
as follows: Drill press, P84,000; Lathe machine, with an engine in good working
condition, P240,000; Air compressor, P105,000.

3. How much is the allocated cost for the individual items acquired in the
special auction?

D. Acquisition by Exchange of Non-Monetary Assets

PHILADELPHIA, Inc. has an old equipment that cost P700,000 with an accumulated
depreciation of P300,000. The equipment was traded in for a new one from a dealer
company that had a list price of P800,000; however, the new equipment can be
purchased without trade-in for P750,000 cash. PHILADELPHIA paid P450,000 cash
in the exchange.

4. How much should the new equipment be recorded on PHILADELPHIA’s

books?
5. How much is gain or loss on exchange?

E. Acquisition by Exchange of Non-Monetary Assets

CHICAGO, Inc. exchanges an old automobile with a carrying amount of P135,000

(original cost, P550,000) for a molding machine owned by UTAH, Inc. with a carrying
value of P157,000 (original cost, P240,000). The transaction is deemed to have
commercial substance.

6. Assume that no cash is involved in the transaction and the fair value of the
automobile is not readily determinable. The fair value of the molding
machine is P180,000. How much is the gain or loss on exchange on the books
of CHICAGO and UTAH, respectively?
7. Assume that the fair values of the automobile and the molding machine are
P147,000 and P152,000, respectively. In addition, CHICAGO paid P5,000 to
UTAH to complete the transaction. How much is the gain or loss on exchange
on the books of CHICAGO and UTAH, respectively?

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F. Acquisition by Donation or Government Grant

CLEVELAND, Inc. received a tract of land from LeBron James with a fair value of
P10,000,000. Assume the following independent cases:

 LeBron James is a stockholder of the corporation

 LeBron James is a non-stockholder whose donation was primarily driven by
his gratitude to the city where he grew in.
 LeBron James is the mayor of the city where CLEVELAND is located and the
donation is under the condition that CLEVELAND will construct on the land a
multi-purpose indoor arena that will be used to develop the sports program in
the city. At the end of Year 1, the indoor arena was constructed at a cost of
P8,000,000 with an expected useful life of 20 years.

8. Under Case A, how much is reported in the “Reserves” section of the

Stockholders’ Equity of CLEVELAND?
9. Under Case B, how much is reported in CLEVELAND’s profit or loss at the
year of donation?
10. Under Case C, at the end of Year 2, how much is the liability to be reported
by CLEVELAND in its Statement of Financial Position as a result of the
donation?
11. Under Case C, at the end of Year 2, how much is reported in CLEVELAND’s
profit or loss?

G. Acquisition by Self-Construction

DALLAS, Inc. is constructing a building for its own use. It capitalizes interest on an
annual basis. The following cumulative expenditures were reflected in its records
during 2019:

January 1 – P1.7M September 1 – P4.5M

March 1 – P1.95M December 1 – P5.5M

The building was completed on December 31, 2019 and it became operational in
2020. At the beginning of the construction period, DALLAS issued a 10% note for
P2,500,000 which will be used specifically to finance the construction of the building.
Prior to its disbursement, it was temporarily invested in a money market account and
earned interest income of P12,500.

12. How much is the interest cost to be capitalized for 2019?

Assume that in addition to the P2.5 million specific borrowing, DALLAS also had the
following outstanding loans throughout the year, which was used both for the
construction of the new building and for its working capital management (round off
any interest rate to two decimal places):

12% Notes Payable P1,200,000

15% Notes Payable 1,100,000

13. How much is the weighted-average expenditures for purposes of computing

the capitalizable borrowing cost?
14. How much is the total cost of the self-constructed building?

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Assume that DALLAS did not have any specific borrowing, but it had the following
outstanding loans during the year which was partly used for the construction of the
new building:

17% Notes Payable P2,500,000

14% Notes Payable 1,500,000

15. How much is the interest expense to be reported in DALLAS’ profit or loss
for 2019?

H. Subsequent Measurement of PPE

On January 1, 2019, DENVER, Inc. purchased an equipment with a cost of P275,000.

The equipment has an estimated useful life of 5 years and can be sold after that at its
scrap value of P15,000. In addition, the equipment has an estimated service life of
12,500 hours and has an estimated output of 32,000 units.

16. Under the straight-line method of depreciation, how much is asset’s

depreciation expense for 2019?
17. Under the sum-of-years’ digit method, how much is the depreciation
expense for 2020?
18. Under the double-declining method, how much is the carrying value of the
equipment on December 31, 2021?
19. Under the service hours’ method, how much is the depreciation rate per
hour?
20. Under the productive output method, assuming that the equipment
produced 5,000 units in 2019 and 7,500 units in 2020, how much is the
accumulated depreciation of the equipment on December 31, 2020?

I. Change in Depreciation Assumptions

CHARLOTTE, Inc. purchased a computer hardware on September 1, 2019 for

P500,000. The economic life and residual value are estimated to be 5 years and
P30,000, respectively. The straight-line method of depreciation was used. On January
1, 2020, due to the advances in technology, CHARLOTTE adjusted the computer’s
remaining useful life to only three years and a residual value of P10,000.

21. How much is the restatement to the opening balance of CHARLOTTE’s

retained earnings on January 1, 2020?
22. How much is the depreciation expense for 2020?

J. Subsequent expenditures on PPE items

BROOKLYN, Inc. acquired a private plane in 2014. At the time of acquisition, the cost
of jet frame was P1,500,000 and the cost of the engine is P700,000. At the end of 2019,
the engine was replaced with a new one costing P500,000. Further, the jet frame was
repainted at a cost of P100,000 and annual repairs made on the plane had a cost of
P75,000.

At the end of 2019, the accumulated depreciation of the engine is P450,000 and the
jet frame, P875,000.

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23. How much of the subsequent costs will be capitalized as part of the cost of
the private plane?
24. How much is reported to BROOKLYN’s profit or loss for 2019?

K. Revaluation of PPE

On January 1, 2014, MIAMI, Inc. acquired a building at a cost of P25 million. The
building has been depreciated using the straight line method on the basis of a 25-year
useful life, with no residual value.

On January 1, 2019, an appraisal of the building by independent and professional

appraisers reported a fair value of P20 million with an estimated useful life of P2
million and a remaining useful life of 10 years. It is the company’s policy to transfer a
portion of the revaluation surplus to retained earnings while the asset is being used
by the company.

Assume that the accumulated depreciation of the revalued asset is restated

proportionately with the change in the gross carrying value of the asset.

25. An entry to record the revaluation of the building will include a credit to
Accumulated Depreciation amounting to __________________?
26. How much is the Revaluation Surplus to be recognized on January 1, 2019?
27. How much is the depreciation expense of the building after the revaluation?
28. How much is the Revaluation Surplus on December 31, 2019?
29. Assuming that on January 1, 2020, the building was sold for P15 million, how
much is the gain or loss on the disposal of the asset?

L. Impairment of PPE

On December 31, 2019, ATLANTA, Inc. determined that there has been a significant
decline in the market value of its equipment. On that date, ATLANTA compiled the
following information pertaining to its equipment:

Original cost P10,000,000

Accumulated depreciation 4,500,000
Expected undiscounted net future cash inflows
from the continuing use and disposal of the asset 3,500,000
Expected discounted net future cash inflows
from the continuing use and disposal of the asset 3,000,000
Fair value less cost to sell 4,000,000

30. How much is the impairment loss for 2019?

M. Reversal of Impairment of PPE

On January 1, 2016, HOUSTON, Inc. acquired an equipment at a cost of P750,000. The

equipment is being depreciated using the straight-line method over its estimated
useful life of 10 years. On December 31, 2018, the asset’s recoverable amount was
only P350,000. On December 31, 2019, the asset’s recoverable amount increased to
P450,000 and HOUSTON believes that the impairment loss previously recognized
should be reversed.

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31. How much is the impairment loss in 2018?

32. How much is the equipment’s carrying value on December 31, 2019 before
recognizing the recovery of impairment loss?
33. How much is the gain from recovery of impairment in 2019?
34. If HOUSTON uses the revaluation model, how much is the revaluation
surplus arising from the increase in the recoverable amount of the
equipment?

N. Initial Recognition of Wasting Assets

OKLAHOMA, Inc. acquired a tract of land containing extractable natural gas reserves.
Under the purchase contract, OKLAHOMA is required to restore the land suitable for
commercial use once it had exhausted all the natural gas reserves. According the
geological surveys, it is estimated that 2.5 million metric tons of natural gas can be
extracted and that the extraction is estimated to be completed in five years. Relevant
data are as follows:

Cost of the land P9,000,000

Exploration and development costs 2,000,000
Estimated costs to restore the land 1,750,000
Risk-free interest rate 10%
Present value of 1 at 10% for 5 periods 0.62

35. How much is the depletion charge per metric ton of extracted material?

O. Subsequent Measurement of Wasting Assets

On January 1, 2018, MINNESOTA, Inc. purchased land with valuable mineral

resources for P22 million. At that time, the estimated recoverable output from the
mine is 4 million metric tons after which it can sold for P2 million. To facilitate the
efficient transportation of mineral resources to and from the site, MINNESOTA
constructed tunnels and pipelines with a cost of P3.5 million.

In 2018, two million metric tons were extracted. However, at the end of 2016, a new
estimate of recoverable output indicated that 2 million metric tons are still available.
During 2016, the company extracted 1 million metric tons.

36. How much is the depletion expense for 2018 and 2019, respectively?

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