FAR EASTERN UNIVERSITY - MAKATI

FINANCIAL ACCOUNTING AND REPORTING R. R. OCAMPO

P1.2304-Property, Plant and Equipment –
Acquisition and Subsequent Expenditures 2nd SEM 2017-2018

DISCUSSION PROBLEMS
1. Property, plant and equipment are 6. Extra Corporation is installing a new plant at its
a. Identifiable non-monetary assets without physical production facility. It has incurred these costs:
substance. Purchase price of plant P2,500,000
b. Properties held to earn rentals or for capital Initial delivery and handling costs 200,000
appreciation or both.
Cost of site preparation 600,000
c. Assets held for sale in the ordinary course of
Consultants used for advice on the
business.
acquisition of the plant 700,000
d. Tangible items that are held for use in the
production or supply of goods or services, for rental Estimated dismantling costs to be
to others, or for administrative purposes; and are incurred after 7 years 300,000
expected to be used during more than one period. Operating losses before commercial
production 400,000
2. The cost of an item of property, plant and equipment The total costs that can be capitalized in accordance
comprises: with PAS 16 is
I. Its purchase price, including import duties and non- a. P4,900,000 c. P4,300,000
refundable purchase taxes, after deducting
b. P4,500,000 d. P3,600,000
trade discounts and rebates.
II. Any costs directly attributable to bringing the asset
to the location and condition necessary for it to be
7. Cabiao Company purchased a new printing machine on
capable of operating in the manner intended by
December 2, 2017 at an invoice price of P4,000,000
management.
with terms 2/10, n/30. On December 10, 2017, Cabiao
III. The initial estimate of the costs of dismantling and
paid the required amount for the machine. The
removing the item and restoring the site on which
installation costs were P50,000 and the employees
it is located, the obligation for which an entity
received training on how to use the machine, at a cost
incurs either when the item is acquired or as a
of P20,000. Before using the machine to print
consequence of having used the item during a
customers’ orders, a test was undertaken and the
particular period for purposes other than to
paper and ink cost P5,000. What amount should be
produce inventories during that period.
capitalized as cost of the machine?
a. I, II, and III a. P4,075,000 c. P3,975,000
b. I and II only b. P3,995,000 d. P3,970,000
c. I and III only
d. I only
8. Seller Co. sold a used asset to Buyer Co. for P800,000,
3. Costs directly attributable to bringing the asset to the accepting a five-year 6% note for the entire amount.
location and condition necessary for it to be capable of Buyer's incremental borrowing rate was 14%. The
operating in the manner intended by management annual payment of principal and interest on the note
exclude was to be P189,930. The asset could have been sold at
a. Costs of employee benefits arising directly from the an established cash price of P651,460. The present
construction or acquisition of the item of property, value of an ordinary annuity of P1 at 8% for five
plant and equipment. periods is 3.99. The asset should be capitalized on
b. Costs of site preparation. buyer's books at
c. Initial delivery and handling costs a. P949,650 c. P757,820
d. Administration and other general overhead costs. b. P800,000 d. P651,460

4. Costs directly attributable to bringing the asset to the

location and condition necessary for it to be capable of
operating in the manner intended by management LECTURE NOTES:
exclude
a. Installation and assembly costs. Installment/Deferred payment
b. Costs of testing whether the asset is functioning
properly. Interest bearing:
c. Professional fees. Realistic/Market rate = Face value
d. Costs of opening a new facility. Unrealistic/Below market rate:
1) Cash price
5. Costs of an item of property, plant and equipment 2) Present value of payments
include
Non-Interest bearing:
a. Costs of introducing a new product or service.
1) Cash price
b. Costs of advertising and promotional activities.
2) Present value of payments
c. Costs of conducting business in a new location or
with a new class of customer.
d. Professional fees.

Page 1 of 3 P1.2304

This study source was downloaded by 100000858429965 from CourseHero.com on 12-03-2022 01:39:51 GMT -06:00

https://www.coursehero.com/file/25897934/P12304-PPE-Acquisition-and-subsequent-expendituresdoc/
FEU-MAKATI

9. The cost of an item of property, plant and equipment is LECTURE NOTES:

the cash price equivalent at the recognition date. If
payment is deferred beyond normal credit terms, the Exchange – No Boot
difference between the cash price equivalent and the With commercial substance
total payment is recognized as 1) FV of asset given up (AGU)
a. Interest over the period of credit unless such 2) FV of asset received
interest is capitalized in accordance with PAS 23. 3) Carrying amount of asset given up
b. Part of the carrying amount of the asset.
c. Either as interest over the period of credit or as Gain (loss) = FV of asset given – CA of asset given
part of the carrying amount of the asset depending
on the entities accounting policy. No commercial substance
d. Interest at the recognition date. Carrying amount of asset given up
No gain or loss on exchange
10. Imus Company acquired two items of machinery as Exchange – With Boot
follows:
On January 1, 2017, Imus Company acquired used With commercial substance
machinery by issuing to the seller a three-year, Payor = FV of AGU + cash paid = FV of AR
12% interest note for P3,000,000.
On December 30, 2017, Imus Company purchased a Recipient = FV of AGU - cash received = FV of AR
machine in exchange for a noninterest bearing
note requiring three payments of P1,000,000. The No commercial substance
first payment was made on December 30, 2017, Payor = CA of AGU + cash paid
and the others are due annually on December 30.
The prevailing rate of interest for this type of note Recipient = CA of AGU – cash received
at date of issuance was 12%. The present value of
an ordinary annuity of 1 at 12% is 1.69 for two
periods and 2.40 for three periods. Use the following information for the next two questions.
What is the total cost of the machinery? Payor Inc. and Recipient Co. have an exchange with no
a. P4,820,000 c. P5,690,000 commercial substance. The asset given up by Payor Inc.
b. P5,400,000 d. P6,000,000 has a book value of P12,000 and a fair value of P15,000.
The asset given up by Recipient Co. has a book value of
P20,000 and a fair value of P19,000. Boot of P4,000 is
11. Cavite Company acquired land and building by issuing received by Recipient Co.
60,000, P100 par value, ordinary shares. On the date of 14. Payor Inc. should record the asset received at
acquisition, the shares had a fair value of P150 per a. P15,000 c. P19,000
share and the land and building had fair value of b. P16,000 d. P20,000
P2,000,000 and P6,000,000 respectively.
15. Recipient Co. should record the asset received at
During the year, Cavite also received land from a
a. P15,000 c. P19,000
shareholder to facilitate the construction of a plant in
b. P16,000 d. P20,000
the city. Cavite paid P100,000 for the land transfer. The
land’s fair value is P1,500,000.
As a result of these acquisitions, Cavite Company’s 16. A used delivery truck was traded in for a new truck.
equity had a net increase of Information relating to the trucks follows:
a. P10,500,000 c. P9,400,000 Used truck:
b. P 9,500,000 d. P7,400,000 Cost P1,600,000
Accumulated depreciation 1,200,000
Estimated current fair value 320,000
Use the following information for the next two questions. New truck:
Company A had a machine with a carrying amount of List price 2,000,000
P450,000. Company B had a delivery vehicle with a Cash price without trade-in 1,900,000
carrying amount of P300,000. Companies A and B Cash price with trade-in 1,560,000
exchanged the machine and vehicle, and Company B paid
The amount that should be capitalized as the cost of
an additional P90,000 cash as part of the exchange.
the new truck is
Assume that the fair value of the delivery vehicle is
a. P1,560,000 c. P1,880,000
P420,000. The exchange has commercial substance.
b. P1,900,000 d. P1,960,000
12. How much gain or loss should be recorded by Company
A?
a. P30,000 loss c. P120,000 loss 17. The Royal Furniture Mfg. Co. fabricated furniture and
b. P60,000 gain d. P120,000 gain fixtures for its office use in the company’s plant during
2017. The following data were taken from the
13. How much gain or loss should be recorded by Company company’s records:
B? Materials Direct Labor
a. P30,000 loss c. P120,000 loss Finished goods P100,800 P151,200
b. P60,000 gain d. P120,000 gain Office furniture & fixtures 67,200 50,500

Page 2 of 3 P1.2304
This study source was downloaded by 100000858429965 from CourseHero.com on 12-03-2022 01:39:51 GMT -06:00

https://www.coursehero.com/file/25897934/P12304-PPE-Acquisition-and-subsequent-expendituresdoc/
 FEU-MAKATI

Factory overhead amounted to P134,000. Normal The cost of the land that should be recorded by Reiley
production of finished goods results to 420 units. Due Co. is
to the fabrication of office furniture and fixtures, a. P1,040,480 c. P1,046,880
finished goods produced totaled 294 units only in b. P1,032,480 d. P1,038,880
2017. The assets are to be charged with the overhead
which would have been apportioned to the 126 units
which were not produced. Use the following information for the next two questions.
What is the total cost of office furniture and fixtures? Hawks Corporation’s Property, Plant and Equipment section of
a. P117,600 c. P175,029 its statement of financial position as of December 31,
b. P157,900 d. P251,600 2016 included the following:
Land P 400,000
Buildings 3,200,000
18. Lenny Corporation purchased for P690,000 a tract of
land on which a warehouse and office building were
The following transactions occurred during 2017:
located. The following data were collected concerning
the property: • Land site number 102 was acquired for P4,000,000.
Current Assessed Vendor's Additionally, to acquire the land the entity paid a
Valuation Original Cost P240,000 commission to a real estate agent. Costs of
Land P280,000 P180,000 P60,000 were incurred to clear the land. During the
Warehouse 320,000 315,000 course of clearing the land, timber and gravel were
Office Building 200,000 129,000 recovered and sold for P20,000.
P800,000 P624,000 • A second tract of land (site number 103) with a
building was acquired for P1,200,000. Based on reliable
Determine the appropriate amount that Lenny should information at the time of acquisition, fair value of land
charge to land. is P800,000 and the building P400,000. Shortly after
a. P690,000 c. P241,500 acquisition, the building was demolished at a cost of
b. P280,000 d. P199,000 P120,000. A new building was constructed for
P1,600,000 plus the following costs:
Excavation fees P 44,000
LECTURE NOTES: Architectural design fees 32,000
Land Acquired with Building Building permit fee 4,000
The building was completed and occupied on
Before PIC Q&A No. 2012-2 September 1, 2017.
• A third tract of land (site number 104) was acquired for
Old building demolished RIGHT AWAY: P2,400,000. The entity is undecided regarding its
• Total cost charged to Land including demolition costs future use.
Old building USED INITIALLY before demolition: QUESTIONS:
• Total cost allocated to land and building pro rata based
on fair values Determine the balance of the following as of December 31,
• Demolition of old building accounted for as 2017 in accordance with PIC Q&A 2012-02:
derecognition (ie the difference between the proceeds
and carrying amount recognized as gain or loss) 20. Land
• Demolition costs are included in computing gain or loss a. P5,600,000 c. P6,000,000
on derecognition b. P5,480,000 d. P7,880,000

In accordance with PIC Q&A No. 2012-2 21. Buildings

a. P5,400,000 c. P5,000,000
• Total cost allocated to land and building pro rata based b. P5,280,000 d. P4,880,000
on fair values REGARDLESS of intention
• Allocated cost or CA of old building generally recognized 22. Dasmariñas Company has a production assembly line
in profit or loss as loss on derecognition to manufacture furniture. In 2017 Dasmariñas
• Exception, old building demolished right away and the purchased a new machine and rearranged the
new building is inventory assembly line to install this machine. The
• Demolition costs are preferably included in the cost of rearrangement did not increase the estimated useful
the NEW building life of the assembly line but it did result in significantly
more efficient production. The following expenditures
19. Reiley Co. purchased land as a factory site for were incurred in connection with this project:
P1,000,000. Reiley paid P40,000 to tear down two
buildings on the land. Salvage was sold for P5,400. Machine P5,000,000
Legal fees of P3,480 were paid for title investigation Labor to install new machine 400,000
and making the purchase. Income of P8,000 was Parts added in rearranging the
earned through using the land as a car park before assembly line to provide future
construction started. Architect's fees were P41,200. benefits 2,000,000
Title insurance cost P2,400, and liability insurance Labor and overhead to rearrange the
during construction cost P2,600. Excavation cost assembly line 600,000
P10,440. The contractor was paid P2,400,000. An What amount of the above expenditures should be
assessment made by the city for pavement was capitalized in 2017?
P6,400. Interest costs during construction were
a. P8,000,000 c. P5,400,000
P170,000.
b. P7,400,000 d. P2,600,000

- end of P1.2304 -

Page 3 of 3 P1.2304
This study source was downloaded by 100000858429965 from CourseHero.com on 12-03-2022 01:39:51 GMT -06:00

https://www.coursehero.com/file/25897934/P12304-PPE-Acquisition-and-subsequent-expendituresdoc/

Powered by TCPDF (www.tcpdf.org)