DEPRECIATION METHODS

The following data relate on the Plant Assets account of Licab, Inc. at December 31, 2019:

Plant Assets
L A R E
Original cost P87,500 P127,500 P200,000 P200,000
Year Purchased 2014 2015 2016 2018
Useful life 10 years 37,500 15 years 10 years
hours
Salvage value P7,750 P7,500 P12,500 P12,500
Depreciation SYD Activity Straight line Double
method declining
balance
Note: In the year an asset is purchased, Licab, Inc. does not record any depreciation expense on the
asset.
In the year an asset is retired or traded in, Licab, Inc takes a full year depreciation on the asset.

The following transaction occurred during 2020:

(a) On May 5, Asset L was sold for P32,500 cash.

(b) On December 31, it was determined that asset A had been used 5,250 hours during 2020.
(c) On December 31, before computing depreciation expense on Assets R, the management of Licab, Inc,
decided the useful life remaining from 1/1/20 was 10 years.
(d) On December 31, it was discovered that a plant asset purchased in 2019 had been expensed
completely in that year. This asset costs P55,000 and has useful life of 10 years and no salvage value
Management has decided to use the double-declining balance this asset, which can be referred to as
"Asset S."

QUESTIONS:
Based on the above and the result of your audit, answer the following (Disregard tax implications)

1. How much is the gain or loss on sale of Asset L?

a. P10,250 loss b. P10,250 gain c. P16,050 gain d. P16,050 loss

2. How much is the depreciation of Asset R for 2020?

a. P15,000 b. P21,429 c. P16,250 d. P23,214

3. The adjusting entry to correct the error of failure to capitalize Asset S would include a debit/credit to
Retained Earnings of
a. P55,000 d b. P55,000 c. P44,000 d. P 0

4. How much is the adjusted balance of Plant Assets as of December 31, 2020?
a. P670,000 b. P527,500 c. P615,000 d. P582,500

5. How much is the total depreciation expense for 2020?

a. P83,300 b. P88,479 c. P82,050 d. P80,600
DISPOSALS OF PROPERTY, PLANT, AND EQUIPMENT

Your audit of Llanera Corporation for the year 2010 disclosed the following property dispositions:
Cost Acc. Dep Proceeds Fair value
Land P4,800,000 3,720,000 3,720,000 3,720,000
Building 1,800,000 288,000
Warehouse 8,400,000 1,320,000 8,880,000 8,880,000
Machine 960,000 384,000 108,000 864,000
Delivery truck 1,200,000 570,000 564,000 564,000

Land
On January 15, a condemnation award was received as consideration for the forced sale of the
company's land and building, which stood in the path of new highway.

Building
On March 12. land and building were purchased at a total cost of P6,000,000, of which 30% was to the
building on the corporate books. The real estate was acquired with the intention of demolishing the
building, and this was accomplished during the month of August. Cash proceeds received in September
represent the net proceeds for demolition of building.

Warehouse
On July 4, the warehouse was destroyed by fire. The warehouse was purchased as January 2, 2004. On
December 12, the insurance proceeds and other funds were used to purchase a replacement warehouse
as a cost of P7,200,000.

Machine
On December 15 the machine was exchanged for a machine having a fair value of 756,000 and cash of
P108,000 was received.

Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.

QUESTIONS:
Based on the above and the result of your audit, compute the gain or loss is to be recognized for each of
the following dispositions:
1 Land
a. P3,120,000 gain c. P4,800,000 loss
b. 21,080,000 loss d. P 0

2 Building
a. P 432 000 gain c. P1,368,000
b. 12,032,000 loss d. P 0

3. Warehouse
4. Machine
a. P36,000 gain c. P288,000 gain
b. P27,000 gain d. P 0 5.

5. Delivery truck
a. P636,000 loss c. P66,000 loss
b. P636,000 gain d. P66,000 gain

Answers: 1) B; 2) D; 3) A; 4) C, 5) C

1. Land
Cash Received 3,720,000
Less: Cost of Land 4,800,000
Loss on condemnation of land 1,080,000

2. Building - zero

3. Warehouse
Insurance Proceeds 8,880,000
Less: CV of Warehouse 7,080,000
Gain on insurance policy settlement 1,800,000

4. Machinery
FV of old machine 864,000
Less: CV of Machine 576,000
Gain on exchange 288,000

5. Truck
Sales Proceed 564,000
Less: CV of Machine 630,000
Loss on Sale 66,000
Depletion and Depreciation

In 2014, SAHNAI MINING COMPANY purchased property with natural resources for P12,400,000. The
property was relatively close to a large city and had an expected residual value of P3,000,000. However,
P1,200,000 will have to be spent to restore the land for use.

The following information relates to the use of the property:

a) In 2014, Sahnai spent P800,000 in development costs and P600,000 in buildings on the property.
Sanhai does not anticipate that the buildings will have any utility after the natural resources are
depleted.
b) In 2015 and 2017, P600,000 and P1,600,000, respectively, were spent for additional developments on
the mine.
c) The tonnage mined and estimated remaining tons for years 2014-2018 are as follows:

Year Tons Extracted Estimated Tons Remaining

2014 0 500,000,000
2015 1,500,000 3,500,000
2016 1,800,000 2,000,000
2017 1,700,000 700,000
2018 900,000 0

Based on the preceding information, calculate the depletion and depreciation for:

Cost of Wasting Assets

Development Cost
Exploration Cost
Acquisition Cost
Restoration Cost

Depletion for 2015

Cost of the Land 12,400,000
Devt Cost 800,000
2015 Devt Cost 600,000
Total Cost 13,800,000
Less: RV, net restoration cost 1,800,000
Depletable Cost 12,000,000
Estimated Reserve 5,000,000
Depletion rate per ton 2.40
Tons extract 1,500,000
Depletion for 2015 3,600,000

Depreciation for 2015

Cost of Building 600,000
Estimated Reserve 5,000,000
Depreciation rate per ton 0.12
Tons extract 1,500,000
Depreciation for 2015 180,000
 Answers Depletion Depreciation
2,015 3,600,000.00 180,000.00
2,016 3,978,000.00 198,000.00
2,017 3,944,000.00 153,000.00
2,018 2,078,000.00 69,000.00

1. Cost Model
2. Revaluation Model

Impairment Loss = CA>RA

RA = FV less cost of disposal vs Value in Use – whichever is higher

IMPAIRMENT LOSS
Salonga Company has a machinery that is currently being reviewed for possible impairment. The asset
cost is P1,000,000 and accumulated depreciation is P300,000. Salonga determined that the machinery
has a fair value less cost to sell amounting to P500,000 and value in use of P450,000. The remaining
useful life of the asset is 6 years. Compute for its asset's impairment loss.

Carrying amount:
Cost 1,000,000
Accumulated depreciation 300,000 700,000
Recoverable amount
Fair value less cost to sell 500,000
vs. Value in use 450,000
Higher 500,000
Impairment loss 200,000