PROPERTY, PLANT AND EQUIPMENT

Acquisition On account (with discount)

• Cost of asset is invoice price less discount (whether taken or not)

Equipment was purchased for P100,000, 2/10; n/30.

• Discount when taken (gross method)

Equipment 100,000
Accounts payable 100,000

Upon payment within the discount period

Accounts payable 100,000
Equipment 2,000 (for the discount)
Cash 98,000

• Discount when not taken (net method)

Equipment 98,000
Accounts payable 98,000

Upon payment beyond the discount period

Accounts payable 98,000
Purchase discount lost 2,000
Cash 100,000

Acquisition on installment basis

• The cost is the cash price equivalent
• The excess of the installment price over the cash price is recorded as interest expense to be amortized
over the credit period

Machinery is purchased at an installment price of P350,000; terms P50,000 down balance payable in 3 equal
installments. The cash [price is P290,000; a promissory note is issued for the balance.
350,000 – 290,000 = discount on note payable 60,000

Amortization of interest payment interest expense

Year 1 300,000 100,000 3/6 x 60,000 30,000
Year 2 200,000 100,000 2/6 x 60,000 20,000
Year 3 100,000 0 1/6 x 60,000 10,000
Total 600,000 60,000

No available cash price

• Asset is recorded at an amount equal to the Present Value of all future payments using implied interest
rate

Machinery is acquired at an installment price of P700,000; terms P100,000 down balance payable in 32 equal
installments. A note is issued for P600,000; the available implied interest is 10% the present value of ordinary
annuity of 1 is 2.487

Down payment 100,000

Present value of note payable (200,000 x 2,487) 497,400
Cost of machinery 597,400
Notes payable 600,000
Interest (Discount on notes payable) 102,600

Amortization using effective interest method.

• Interest expense is computed as: 497,400 x 10%
• Interest expense is computed as: 347, 140 x 10%
Payment interest Principal Present value
Beginning balance 497,400
Year 1 200,000 49,740 150,260 347.140
Year 2 200,000 34,714 165,236 181,354
Year 3 200,000 18,146 181,354 0
Statement presentation (End of year 1)
Current liability
Notes payable 200,000 amount of note due current year
Discount on notes payable 34,714 interest due current year

Non-current liability
Notes payable 200,000
Discount on notes payable 18,146

Issuance of share capital

• Fair value of property received
• Fair value of share capital
• Par value of share capital

Land is acquired by issuing 20,000 shares with par value of P50. The fair value of the land is P1,000,000 and
the share is at P90 per share

• Is fair value of the land is used

Land 1,600,000
Share capital 1,000,000
Share premium 600,000

• If fair value of the share is used

Land (20,000 x 90) 1,800,000
Share capital 1,000,000
Share premium 800,000
• If par value of the share is used
Land 1,000,000
Share capital 1,000,000

Issuance of bonds payable

• Fair value of bonds payable
• Fair value of asset received
• Face amount of bonds

Donation
• At Fair value with credit to donated capital
• Expenses related to the donation shall be charged to the donated capital
• Subsequent expenses after donation shall be capitalized as cost of the asset

Erica Company had the following property acquisitions during the year:
1. Acquired a track of land in exchange for P50,000 ordinary shares with P100 par value and a market
price of P120 per share on the date of acquisition. The last property tax bill indicated assessed value of
P4,500,000 for the land.

2. Received land from a major stockholder as an inducement to locate the plant in the city. No payment
was required but the entity paid P50,000 for legal expenses for the land transfer. The land is fairly
valued at P1,000,000.

3. Purchased for P5,500,000 including appraiser fee of P100,000 a warehouse building and the land on
which it is located. The land had an apprised value of P2,000,000 and an original cost of P1,400,000.
The building had an appraised value of P3,000,000 and original cost of P2,500,000.

4. Purchased an office building and the land on which it is located for P7,500,000 cash and assumed an
existing P2,500,000 mortgage. For realty tax purposes, the property is assessed at P9,000,000, 60%
of which is allocated to building.
Prepare journal entries to record transactions for the current year

Credulous Company purchased equipment on January 1 uder the following terms: P200,000 down payment;
five annual payments of P100,000. The first installment note to tbe paid on December 31. The same
equipment was available at a cash price of P580,000. Give the journal entries applicable for year 1 and 2.

On January 1, 2021 Enrich Company purchased a machine under the following terms: P100,000 down
payment; Four annual payments of P200,000 and the first installment is due December 31. The fair value of
the machine is not clearly determinable on the date of acquisition. The prevailing interest for this type of
obligation is 10%. The present value factor of 10% for 4 periods are: present value of 1 is 0.683; present value
of ordinary annuity of 1 is, 3.170. Prepare journal entries for 2021 and 2022.
Anson Company had the following machinery acquisitions during the year:
1. Acquired a machine with an invoice price of P3,000,000 subject to a cash discount of 10% which was not
taken. The entity incurred a cost of P50,000 in removing the old machine prior to the installation of the new
one. Machine supplies were acquired at a cost of P150,000/

2. During the early part of the current year, 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.

3. At the beginning of the current year, the entity purchased a machine for P2,000,000 in exchange for a
noninterest bearing note requiring four payments of P500,000. The first payment was made at the end of
the current year.
The implicit rate of interest for this note at the date of issuance was 10%. The present value of an ordinary
annuity of 1 at 10% is 3.17 for four periods.
The present value of an annuity of 1 in advance at 10% is 3.49 for four months.

4. At the beginning of the current year, the entity acquired a machine by issuing a four-year, noninterest
bearing note for P2,000,000. The entity has an implicit interest rate of 10% for this type of note. The
present value of 1 at 10% for 4 years is 0.68.
Requirement: Journal entries to record the transactions.

Note:
Annuity in advance is a series of payments that are due at the beginning of each successive time period. Rent
is the classic example of an annuity in advance for a landlord because it is a sum of money paid at the
beginning of each month to cover the period to follow. An annuity in advance, a legal and accounting term, is
also called an "annuity due."

An annuity due is an annuity with payment due or made at the beginning of the payment interval. In contrast,
an ordinary annuity generates payments at the end of the period.

An ordinary annuity is an annuity in which the cash flows, or payments, occur at the end of the period. An
ordinary annuity of cash inflows of P100 per year for 5 years can be represented like this: The cash flows occur
at the end of years 1 through 5. And the first cash flow occurs at the end of year 1.

Acquisition cost
(AICPA Adapted) - Tower Company made the following acquisitions during the year. Purchased for
P5,400,000, including appraiser fee of P50,000, a warehouse building and the land on which it is located.

The land had an appraised value of P2,000,000 and original cost of P1,400,000. The building had an
appraised value of P3,000,000 and original cost of P2,800,000.

Purchased an office building and the land on which it is located for P7,500,000 cash and assumed an existing
P2,500,000 mortgage. For realty tax purposes, the property is assessed at P9,600,000, 60% of which is
allocated to the building. What is the cost of the land? Building?

(AICPA Adapted) - Bamco Company purchased a new machine on a deferred payment basis.
A down payment of P100,000 was made and 4 monthly installments of P250,000 are to be made at the end of
each month. The cash equivalent price of the machine was P950,000. The entity incurred and paid installation
costs amounting to P30,000. What is the amount to be capitalized as cost of the machine?

(AICPA Adapted) Josey Company entered into a contract to acquire a new machine which had a cash price of
P2,000,000.
Down payment 400,000
Note payable in 3 equal annual installments 1,200,000
20,000 ordinary shares with a par value of P25
and fair value of P40 per share 800,000
Prior to use, installation cost of P50,000 was incurred. The machine has an estimated residual value of
P100,000. What is the initial cost of the machine?

(IAA) Anxious Company acquired two items of machinery. On December 31, 2019, Anxious Company
purchased a machine in exchange for a noninterest bearing note requiring the 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.
On December 31, 2019, Anxious Company 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. What is the total cost of the machinery?

(AICPA Adapted) On December 31, 2019, Bart Company purchased a machine in exchange for a noninterest
bearing note requiring eight payments of P200,000. The first payment was made on December 31, 2019 and
the others are due annually on December 31. At date of issuance, the prevailing rate of interest for this type of
note was 11%. PV of an ordinary annuity of 1 at 11% for 8 periods is 5.146. PV of an annuity of 1 in advance at
11% for 8 periods is 5.712. What amount should be recorded as initial cost of the machine? What is the
discount on note payable on December 31, 2019? What amount should be reported as interest expense for
2020? What is the carrying amount of note payable on December 31, 2020?

(AICPA Adapted) Precious Company had the following property acquisitions during the current year:
Acquired a tract of land in exchange for 50,000 shares of Precious Company with P100 par value that had a
market price of P120 per share on the date of acquisition. The last property tax bill indicated assessed value of
P2,400,000 for the land.

Received land from a major shareholder as an inducement to locate a plant in the city. No payment was
required but the entity paid P50,000 for legal expenses for land transfer. The land is fairly valued at
P1,200,000. What is the total increase in land as a result of the acquisitions?

(IAA) Lax Company recently acquired two items of equipment. Acquired a press at an invoice price of
P3,000,000 subject to a 5% cash discount which was taken. Costs of freight and insurance during shipment
were P50,000 and installation cost amounted to P200,000.

Acquired a welding machine at an invoice price of P2,000,000 subject to a 10% cash discount which was not
taken. Additional welding supplies were acquired at a cost of P100,000.
What is the total increase in the equipment account as a result of the transactions?

(IAA) Grab Company purchased a ten-ton draw press at a cost of P3,600,000 with terms of 5/15, n/45.
Payment was made within the discount period.
Shipping cost was P90,000 which included P4,000 for insurance in transit. Installation cost totaled P240,000
which included P80,000 for taking out a section of a wall and rebuilding it because the press was too large for
the doorway. What is the capitalized cost of the ten-ton draw press?

(IAA) Holiday Company purchased a high speed industrial centrifuge at a cost of P840,000. Shipping cost
amounted to P50,000. Foundation work to house the centrifuge cost P80,000.
An additional water line had to be run to the equipment at cost of P40,000. Labor and testing cost totaled
P60,000. Materials used up in testing cost P30,000. What is the capitalized cost of the equipment?

(IAA) Taiwan Company fabricated equipment for office use during the current year. The following data were
taken from the accounting records:
Materials Direct labor
Finished goods 1,000,000 1,500,000
Office equipment 600,000 500,000

Factory overhead amounted to P1,200,000. Normal production of finished goods is 50,000 units. Due to the
fabrication of the office equipment, finished goods produced totaled 35,000 units only in the current year.
The office equipment is to be charged with overhead which would have been apportioned to the 15,000 units
which were not produced. What is the total cost of office equipment after the apportionment of factory
overhead?

(AICPA Adapted) During the current year, Ewing Company exchanged an old packing machine, which cost
P1,200,000 and was 50% depreciated, for another used machine and paid a cash difference of P160,000. The
fair value of the old packaging machine was determined to be P700,000. What is the cost of the machine
acquired in the exchange?
What is the gain on exchange?

(AICPA Adapted) Caine Company exchanged a car from inventory for a computer to be used as a long-term
asset. The following information relates to this exchange:
Carrying amount of the car 600,000
List selling price of the car 900,000
Fair value of the computer 860,000
Cash difference paid by Caine 100,000
What amount of gain should be recognized on the exchange?
What is the cost of the computer acquired in exchange?