BSA 2102 – Intermediate Accounting 1 & 2 LEC03B – Accounting for Property, Plant and Equipment

Problem 1
The property, plant and equipment section of Radiohead Corporation’s statement of financial position at December 31, 2018
included the following items:

Land P2,500,000
Land improvements 560,000
Building 3,600,000
Machinery and equipment 6,600,000

During 2019, the following date were available to you upon the analysis of the accounts:

Cash paid on purchase of land P10,000,000

Mortgage assumed on the land bought, including interest at 16% 16,000,000
Realtor’s commission 1,200,000
Legal fees, realty taxes and documentation expenses 200,000
Amount paid to relocate persons squatting on the property 400,000
Cost of tearing down an old building on the land 300,000
Amount recovered from the salvage of the building demolished 600,000
Cost of fencing the property 440,000
Amount paid to a contractor for the building erected 8,000,000
Building permit fees 50,000
Excavation expenses 250,000
Architect’s fee 100,000
Interest that would have been earned had the money used during the period of construction been
invested in the money market 600,000
Invoice cost of machinery acquired 8,000,000
Freight, unloading and delivery charges 240,000
Customs duties and other charges 560,000
Allowances, hotel accommodations, etc. paid to foreign technicians during installation and test run
of machines 1,600,000
Royalty payments on machines purchased (based on units produced and sold) 480,000

Required:
Determine the balances of the following:
a) Land
b) Land improvements
c) Building
d) Machinery and equipment
e) Total depreciable property, plant and equipment

Problem 2
Green Day Company acquired a machine and incurred the following costs:
Cash paid for machine, including VAT of P96,000 P896,000
Cost of transporting the machine 30,000
Labor cost of installation by expert fitter 50,000
Labor cost of testing the machine 40,000
Insurance cost for the current year 15,000
Cost of training for personnel who will use the machine 25,000
Cost of safety rails and platform surrounding the machine 60,000
Cost of water device to keep machine cool 80,000
Cost of adjustment to machine to make it operate more efficiently 75,000
Estimated dismantling cost to be incurred as required by contract 65,000

Required:
Determine the total amount that should be capitalized as cost of the machine.

Problem 3
The following transactions pertain to Incubus Company:
1) Incubus Company made the following individual cash purchases:

Land and building P6,000,000

Machinery and office equipment 1,800,000
Delivery equipment 500,000

An appraisal disclosed the following fair values:

Land P1,000,000
Building 3,000,000
Machinery 800,000
Office equipment 400,000
Delivery equipment 350,000

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BSA 2102 – Intermediate Accounting 1 & 2 LEC03B – Accounting for Property, Plant and Equipment

2) Incubus Company acquired the assets of another entity with the following fair values:

Land P1,000,000
Building 5,000,000
Machinery 2,000,000

The entity issued 60,000 shares with P100 par value in exchange. The shares had a quoted price of P150 on the date
of purchase of the property.

3) Received a parcel of land located in Davao City from a philanthropist as an inducement to locate a plant in the city. The
land has a fair value of P1,500,000.

4) The entity paid cash for machinery, P900,000 subject to 2% cash discount, and freight on machinery, P35,000.

5) The entity acquired furniture and fixtures by issuing a P400,000 two-year noninterest-bearing note. In similar
transactions, the entity has paid 12% interest. The present value of 1 at 12% for 2 years is .797, and the present value
of an annuity of 1 at 12% for 2 years is 1.69.

Required:
Prepare journal entries to record the transactions.

Problem 4
Oasis Company acquired three items of machinery:

a) On January 1, 2019, the entity purchased a machine for P500,000 down and four monthly installments of P1,250,000.
The cash price of the machine was P4,700,000.

b) On December 31, 2019, the entity purchased a machine in exchange for a noninterest bearing note requiring ten
payments of P500,000. The first payment was made on December 31, 2020, and the others are due annually on
December 31.

The prevailing rate of interest for this type of note at date of issuance was 12%. The present value of an ordinary annuity
of 1 at 12% is 5.33 for nine periods and 5.65 for ten periods.

c) On December 31, 2019, the entity acquired used machinery by issuing the seller a two-year, noninterest-bearing note
for P3,000,000. In recent borrowing, the entity has paid a 12% interest for this type of note. The present value of 1 at
12% for 2 years is .80 and the present value of an ordinary annuity of 1 at 12% for 2 years is 1.69.

Required:
Prepare journal entries for 2019, 2020 and 2021.

Problem 5
Beck Company and Train Corporation exchange equipment. Relevant information are as follows:

Beck Train
Equipment P2,000,000 P2,500,000
Accumulated depreciation 1,125,000 1,687,500
Fair value 750,000 1,000,000
Cash payment/(received) 250,000 (250,000)

Required:
Prepare journal entries related to the exchange in the books of Beck and Train assuming:
a) The exchange has commercial substance.
b) The exchange lacks commercial substance.

Problem 6
An entity traded an old equipment with a dealer for a newer model. Relevant information are as follows:
Old equipment:
Cost P1,400,000
Accumulated depreciation 1,000,000
Fair value 350,000
Trade in value 500,000

New equipment:
List price P2,000,000
Trade in value of old equipment (500,000)
Cash payment P1,500,000

Required:
Prepare journal entries related to the exchange using the following assumptions:
a) Fair value approach b) Trade in value approach

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BSA 2102 – Intermediate Accounting 1 & 2 LEC03B – Accounting for Property, Plant and Equipment

Problem 7
Foo Fighters Company provided the following information in relation to the construction of a building during the year:
Finished goods Building Total
Direct labor P4,200,000 P1,800,000 P6,000,000
Materials 3,000,000 4,000,000 3,000,000
Overhead ? ? 2,000,000

Required:
Compute the cost of finished goods and building using the following assumptions:
a) No overhead is to be assigned to the building.
b) Normal production of finished goods is 180,000 units. Because of the construction of the building, finished goods
production totaled only 135,000 units. The building is to be charged with the overhead which would have been charged
to the 45,000 units which were not produced.
c) Overhead is to be apportioned in the ratio of direct labor.

Problem 8
Plant assets often require expenditures subsequent to acquisition. It is important that they be accounted for properly. Any
errors will affect both the statements of financial position and income statements for a number of years.

Required:
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 but does not increase its
residual value.
e) ______ Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset's
residual value.
f) ______ Ordinary repairs.
g) ______ Improvement to a machine that increased its fair value and its production capacity by 30% without extending
the machine's useful life.
h) ______ Expenditure that increases the quality of the output of the productive asset.

Problem 9
Hoobastank Resources Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous
repair costs are incurred to maintain it in sound working order. The company's plant asset book value is currently P800,000,
as indicated below.

Original cost P1,200,000

Less: Accumulated depreciation 400,000
Book value P 800,000

During the current year, the following expenditures were made to the plant facility.
a) Because of increased demands for its product, the company increased its plant capacity by building a new addition at
a cost of P270,000.
b) The entire plant was repainted at a cost of P23,000.
c) The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at
a cost of P61,000. Book value of the old roof was P41,000.
d) The electrical system was updated at a cost of P12,000. The cost of the old electrical system was not known. It is
estimated that the useful life of the building will not change as a result of this updating.
e) A series of major repairs were made at a cost of P75,000 because parts of the wood structure were rotting. The cost of
the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building.
The company believes the P75,000 is representative of the parts for the wood structure at the date of purchase.

Required
Indicate how each of these transactions would be recorded in the accounting records.

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