UNIT 2 DISCUSSION PROBLEMS IN INTEFAR

PROPERTY, PLANT & EQUIPMENT

1. Joshua Company acquired land, building, and equipment from a financially distressed company,
Bankrupt Corp. On the acquisition , Bankrupt Corp.’s assets had the following book and fair values :

Book Value Fair Value

Land 800,000 600,000
Building 1,000,000 1,400,000
Equipment 1,200,000 1,200,000

a. Assuming that Joshua acquired land, building, and equipment acquired for a lump-sum price of P
2,800,000.00, what are the cost of land, building, and equipment?

b. Assuming that Joshua acquired land, building, and equipment in exchange for 100,000 Bankrupt
Corp. shares that had par value of P 30 and a closing market price of P 35 on a stock exchange,
what are the cost of land, building, and equipment?

2. Dylan Company acquired four items of machinery as follows:

a. On December 31, 2019, Dylan Company purchased a machine in exchange for a noninterest
bearing note requiring ten payments of P 500,000. 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%.

b. On December 31, 2019, Dylan Company acquired used machinery by issuing the seller two-year,
noninterest-bearing note for P 3,000,000.In recent borrowing, the entity has paid a 12% interest
for this type of note.

c. On December 31, 2019, Dylan 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%.

d. On December 31, 2019, Dylan Company acquired machinery on installment basis. The deferred
payment contract provides for a down payment of P 300,000 and an 8-year note for P 3,104,
160.00. The note is to be paid in 8 equal annual installment payments of P 388, 020, including 10%
interest. The payments are to be made on December 31, of each year, beginning December 31,
2020. The machinery has a cash price equivalent of P 2, 370,000.00.

PV Factors:
@10% @11% @12%
PV of an ordinary annuity of 1 for eight periods 5.3349 5.1461 4.9676
PV of an annuity of 1 in advance for eight periods 5.8684 5.7122 5.5638
PV of an ordinary annuity of 1 for nine periods 5.7590 5.5370 5.3282
PV of an ordinary annuity of 1 for ten periods 6.1446 5.8892 5.6502
PV of 1 for two periods 0.8264 0.8116 0.7972

What is the total cost of the machinery?

3. On July 1, 2018, A exchanged machines with B Company. The following facts pertain to these assets:

A’s Asset B’s Asset

Original Cost 288,000 330,000
Accumulated Depreciation 135,000 156,000
Fair Market Value 180,000 225,000
Cash paid by A 45,000
Cash received by B 45,000

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 a. Assuming the exchange transaction proves to have commercial substance, prepare entry for
the each of the company books to record the exchange?

b. Assuming the exchange transaction proves to lack commercial substance, prepare entry for
the each of the company books to record the exchange?

4. Joshua Company purchased a machine at a cost of P 635,000.00 on January 1, 2015. It was estimated
that the machine would have a residual value of P35, 000.00. The estimated useful life is 5 years,
60,000 service hours, and 150,000 production units.

Actual Operations Service Hours Units Produced

2015 14,000 34,000
2016 13,000 32,000
2017 10,000 25,000
2018 11,000 29,000
2019 12,000 30,000

Prepare a depreciation table for the following:

a. Straight line
b. Service hours
c. Production method
d. Sum of the years’ digit
e. Double declining balance

5. Rona Company acquired the following assets on January 1, 2019:

PPE Cost Residual Value Life in Years

Machinery 310,000 10,000 5
Office Equipment 110,000 10,000 10
Building 1,600,000 100,000 15
Delivery Equipment 430,000 30,000 4

Requirement:
a. Compute the composite depreciation rate
b. Compute the composite life
c. Prepare the entry to record the depreciation for 2019

6. Happy Company owned a power plant which consisted of the following , all acquired on January 1,
2019:

Cost Residual Value Useful Life in Years

Building 6,100,000 100,000 20
Machinery 2,550,000 50,000 5
Equipment 1,030,000 30,000 10

Requirement:
a. Compute the composite rate
b. Compute the composite life
c. Prepare the journal entry to record the depreciation for 2010 following the composite
method
d. Prepare the journal entry to record the retirement of the machinery at the end of the 5th
year assuming the proceeds from retirement amount to P40, 000.
e. Following the composite method, prepare the journal entry to record the depreciation
for the 6th year.

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7. Below is a list of independent situations where an entity received a government grant.

▪ An entity received a grant of P30, 000,000 from the British government in order to defray
safety & environmental costs within the area where the entity is located. The safety and
environmental costs are expected to be incurred over four years, respectively, P2, 000,000, P4,
000,000, P6, 000,000 and P8, 000,000.

▪ An entity received a grant of P40, 000,000 from the Russian government for the construction
of laboratory and research facility with an estimated cost of P50, 000,000 and useful life of 20
years.

▪ An entity is granted a large tract of land in Cordillera by the Philippine government. The fair
value of the land is P50, 000,000. The grant requires that the entity shall construct a factory
and employ only personnel residing in the Cordillera region. The cost of the factory is P80,
000,000 with useful life of 25 years.

▪ An entity received a grant of P10, 000,000 from the American government to compensate for
massive losses incurred because of a recent super typhoon Yolanda.

Requirement: Prepare all indicated entries for the first year for each of the independent government
grants.

8. Determine if the amount is expensed, capitalized to land or capitalized to building:

Single cost of acquiring land & usable old building

Single cost of acquiring land & unusable old building
Cost of demolishing an old building to make room for
the construction of a new building
Carrying amount of an existing old building
demolished to make room for the construction of a
new building

9. In 2015, Joshua 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 2015, Joshua spent P800, 000 in development costs and P600, 000 in buildings on
the property. Joshua does not anticipate that the buildings will have any utility after
the natural resources are depleted.

b. In 2016 and 2018, 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 2015-2019 are as follows:
Year Tons Extracted Estimated Tons Remaining
2015 0 5,000,000
2016 1,500,000 3,500,000
2017 1,800,000 2,000,000
2018 1,700,000 900,000
2019 900,000 0

Based on the preceding information, calculate the depletion and depreciation for 2016,
2017, 2018 and 2019.

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10. Cherry Company acquired a building on January 1, 2016 at a cost of P 20,000,000. The building has
an estimated useful life of 6 years and residual value of P 2,000,000. The building was revalued on
January 1, 2019 and the revaluation revealed replacement cost of P 30,000,000, residual value of P
4,000,000 and revised useful life of 8 years.

Requirements:
a. Prepare journal entry to record the revaluation
b. Prepare journal entry to record annual depreciation for 2019
c. Prepare journal entry to record the piecemeal realization of the revaluation surplus

INTANGIBLE ASSETS

11. Arleen Company acquired a patent for a communication device with a remaining legal and
useful life of eight years on January 1, 2017 for P5, 400,000. On January 1, 2019, a new patent
is received for an improved version of the communication device. The new patent has a legal
and useful life of 20 years.

Requirements:
a. What is the amortization of patent in CY 2019
b. What is the carrying amount of patent on December 31, 2019?

12. Meme purchased a patent from Raymond Company for P 2,500,000 on January 1, 2018. Meme
estimated the remaining life to be 16 years. The patent was carried at Raymond’s records at a carrying
amount of P2, 000,000 when sold to Meme. On January 1, 2019, Meme estimated that the remaining
life of the patent is only 10 years.

What is the amortization of patent in CY 2019?

13. During 2019, a franchise was purchased from Reymont Company for P5, 800,000. In addition, 5% of
revenue from the franchise must be paid to Reymont. Revenue from the franchise for 2019 was P35,
000,000. The useful life of the franchise is 10 years and a full year’s amortization is taken on the year
of purchase.

What total amount of expenses should be reported in the income statement for 2019?

14. Nellie Company paid P8,000,000 to purchase the following intangible assets with fair value as
indicated:
In-process Research & Development 1,500,000
Order backlog 1,200,000
Internet Domain Name 2,400,000
Operating permit 900,000

In addition, the entity spent P2, 000,000 to run an advertising campaign to boost its image in the local
community. What amount should be recognized as cost of the in-process research and development?

15. Maina Company reported the following assets at year-end:

Financial asset held for trading 1,000,000

Prepaid insurance 50,000
Patent 2,500,000
Customer List 500,000
Copyright 500,000
Deposit with advertising agency used to promote goodwill 400,000
Bond sinking fund 1,000,000
Excess of cost over fair value of identifiable net assets
of acquired subsidiary 4,000,000
Trademark 900,000

What is the total amount to be reported as intangible asset?

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IMPAIRMENT OF ASSETS

16. Determine the Impairment Loss & New Carrying Amount

COST MODEL IS USED

CA FV – COD VIU Impairment Loss New CA
2,000,000 1,000,000 3,000,000
2,000,000 3,000,000 1,000,000
3,000,000 1,000,000 2,000,000
3,000,000 2,000,000 1,000,000

REVALUATION MODEL IS USED

Revaluation Impairment of Asset
CA Surplus - FV – COD VIU Profit/Loss Decrease of
Balance RS
2,000,000 100,000 1,000,000 3,000,000
2,000,000 400,000 3,000,000 1,000,000
3,000,000 200,000 1,000,000 2,000,000
3,000,000 400,000 2,000,000 1,000,000

17. Determine the reversal on impairment loss & the presentation of the reversal

COST MODEL IS USED

CA had no IL New RA Current CA Reversal on Impairment New Carrying
Yes/No Amount Amount
5,000,000 4,000,000 3,000,000
3,500,000 4,000,000 3,000,000
5,000,000 3,000,000 4,000,000
4,000,000 4,000,000 3,000,000
3,800,000 4,000,000 3,000,000

REVALUATION MODEL IS USED

IL previously Amount of Reversal on New

Recognized CA had no IL New RA Current CA Impairment Carrying
Profit/Loss Revaluation Amount
Surplus
300,000 7,200,000 8,000,000 7,000,000
500,000 4,300,000 6,500,000 4,000,000
400,000 3,400,000 5,000,000 3,000,000

18. On January 1, 2016, the revaluation shows the following:

Cost Replacement Cost Appreciation

Machinery 5,000,000 8,000,000 3,000,000
Accumulated Depreciation 2,000,000 3,200,000 1,200,000
(10-year life, 4 years expired)
CA/SV/RS 3,000,000 4,800,000 1,800,000

On December 31, 2018, three years after revaluation, an impairment of machinery is indicated and
the recoverable amount is P 1,050,000. On December 31, 2019, the recoverable amount of the
machinery is P 1,200,000.

Requirement: Compute the gain on reversal of impairment to be reported in the income statement
for 2019.

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19. Brandy Company has two CGU. At year-end, the carrying amount of the assets of one CGU are:

Cash 4,000,000
Accounts receivable 6,000,000
Allowance for doubtful accounts 1,000,000
Inventory 7,000,000
Property, plant and equipment 22,000,000
Accumulated depreciation 4,000,000
Goodwill 3,000,000
Accounts payable 2,000,000
Loans payable 1,000,000

The entity determined that the value in use of the CGU is P 30,000,000. The accounts receivable
are considered collectible, except those considered doubtful.

Requirement: Compute the impairment loss of:

a. Goodwill
b. Inventory
c. Property, plant and equipment

20. On December 31, 2018, Redentor Company has a CGU with the following assets at carrying amount:

Cash 600,000.00
Accounts Receivable 1,300,000.00
Inventory 730,000.00
Land 1,460,000.00
Machinery 784,000.00
Accumulated Depreciation (200,000.00)
Patent 876,000.00
Goodwill 1,000,000.00
Accounts Payable 4,000,000.00
Loans Payable 2,500,000.00

The entity determined that the value in use and fair value less cost of disposal of CGU amounted to
P 5,000,000 and P 4,500,000, respectively.
Compute the impairment loss allocated to the following assets under each independent
assumption:

Accounts Assumption 1 Assumption 2 Assumption 3

Cash
Accounts receivable-net
Inventory
Land
Machinery-net
Patent
Goodwill

Assumption 1 Assuming that accounts receivable are regarded as collectible and the inventory
has a fair value less cost of disposal which is equal to the carrying amount.
Assumption 2 Assuming that accounts receivable are 20% uncollectible
Assumption 3 Assuming that fair value less cost of disposal of inventory and machinery are P
650,000.00 and P 300,000.00, respectively.

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