Jethro S.

Cortado 4/14/22

BSA 1B MTH/4:00 – 5:30

Activity1: Problems:
Problem 1: (source: Problem 24-4, Peach: Intermediate Accounting 1 by Valix)

At the beginning of the current year, Peach Company purchased a machine for P 7,000,000 and received
a government grant of P 1,000,000 toward the capital cost.

The machine is to be depreciated on a straight line basis over 5 years and estimated to have a residual
value of P 500,000 at the end of this period.

REQUIRED: Prepare the entries for the current year assuming the grant is accounted for as:
a) Deferred income
b) Deduction from the asset
Date
Date Particulars
Particulars PR
PR Debit
Debit Credit
Credit
Machinery
Machinery P
P 7,000,000
7,000,000
Cash
Cash P
P 7,000,000
7,000,000
Cash
Cash 1,000,000
1,000,000
Deferred
Machinerygrant income 1,000,000
1,000,000
Depreciation
Depreciation 1,300,000
1,100,000
Acc.
Acc. Dep.
Dep. (7,000,000
(6,000,000 –– 500,000/5)
500,000/5) 1,300,000
1,100,000
Deferred grant income
Acc. Dep. (1,000,000/5)
Problem 2: (source: Problem 24-8, Preposterous: Intermediate Accounting 1 by Valix)

Preposterous Company received a government grant of P 2,000,000 related to a factory building that it
purchased in January 1, 2020 from an industrialist identified by the government.

If the entity did not purchase the building which was located in the slums of the city, it would have been
repossessed by the government agency.

The entity purchased the building for P 12,000,000. The useful life of the building is 5 years with no
residual value.

On January 1, 2021, the entire amount of the government grant become repayable by reason of
noncompliance with conditions attached to the grant.

REQUIRED: Prepare journal entries assuming the government grant is accounted for using:
1. Deferred income approach
2. Deduction from Asset approach

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 Jethro S. Cortado 4/14/22

BSA 1B MTH/4:00 – 5:30

Date Particulars PR Debit Credit

Date
2020 Particulars PR Debit Credit
Jan 1 Building
2020 P 12,000,000
Cash
Jan 1 Building P 12,000,000 P 12,000,000
Cash P 12,000,000
Cash 2,000,000
Deferred grant income
Cash 2,000,000 2,000,000
Building 2,000,000
Dec 31 Depreciation 2,400,000
Acc. Dep. (12,000,000/5)
Dec 31 Depreciation 2,000,000 2,400,000
Acc. Dep. (10,000,000/5) 2,000,000
Deferred grant income 400,000
2021 Acc. Dep. (2,000,000/5) 400,000
Jan 1 Building 2,000,000
2021 Cash 2,000,000
Jan 1 Deferred grant income 1,600,000
Loss on gov. grant
Dec 31 Depreciation 400,000
2,800,000
CashDep.
Acc. 2,000,000
2,800,000

Dec 31 Depreciation 2,400,000

Acc. Dep. 2,400,000
Problem 3: (source: Problem 25-1, Sulo Company : Intermediate Accounting 1 by Valix)

Sulo Company had the following borrowings during 2020. The borrowings were made for general
purposes but the proceeds were used to finance the construction of a new building.

Principal Interest

12% bank loan 3,000,000 360,000

14% long-term loan 5,000,000 700,000

The construction began on January 1, 2020 and was completed on December 31, 2020.
Expenditures on the building were P 2,000,000 on January 1, P 2,000,000 on June 30 and P 1,000,000
on December 31.
Required: Compute the cost of the building.

Date Expense Fractio Ave.

n

Jan 1 2,000,00 12/12 2,000,000

0

June 30 2,000,00 6/12 1,000,000

0

Dec 31 1,000,00
0

5,000,00 3,000,000
0

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 Jethro S. Cortado 4/14/22

BSA 1B MTH/4:00 – 5:30

Ave. capitalization rate (1,060,000/8,000,000) 13.25%

Building exp. 5,000,000

Interest (3,000,000 x 13.25%) 397,500

Total building cost P 5,397,500

Activity 2: Multiple Choice Problems

Problem 1: (source: Problem 24-9, Goddess: Intermediate Accounting 1 by Valix)

On January 1, 2020, Goddess Company purchased a plating machine for P 5,400,000. The entity
received a government grant of P 400,000 toward the asset cost.

The machine is to be depreciated on a 20% reducing balance basis over 10 years with residual value of
P 200,000.

The accounting policy is to treat the government grant as reduction in the cost of the asset.

What is the carrying amount of the machine on December 31, 2021?

Acquisition cost (5,400,000 – 400,000) P 5,000,000

Acc. Dep. 2020 (5,000,000 x 20%) 1,000,000

2021 (5,000,000 – 1,000,0000) x 20% 800,000

(1,800,000)

Carrying Amount P 3,200,000

a) P 4,000,000 b) P 4,040,000 c) 3,456,000 c) 3,200,000

Problem 2: (source: Problem 24-10, Patriotic: Intermediate Accounting 1 by Valix)

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 Jethro S. Cortado 4/14/22

BSA 1B MTH/4:00 – 5:30

Patriotic Company purchased a machine for P 6,600,000 on January 1, 2020 and received a government
grant of P 600,000 toward the asset cost.

The accounting policy is to treat the government grant as reduction in the cost of the asset.

The machine is to be depreciated on a 20% reducing a straight line basis over 10 years with residual
value of P 500,000.

On January 1, 2022, the grant become fully repayable because of noncompliance with conditions.

Machine P 6,600,000

Grant 600,000

6,000,000

2020: Depreciation (6,000,000-500,000)/10 P 550,000

2020: Depreciation P 550,000

Add. Dep. (600,000/10x3) 180,000

2022: Depreciation P 730,000

Q1: What is the depreciation for 2020?

a) P 610,000 b) P 600,000 c) 660,000 d) 550,000

Q2: What is the depreciation for 2022?

a) 610,000 b) 600,000 c) 780,000 d) 730,000

Problem 3: (source: Problem 25-7, Marauder Company: Intermediate Accounting 1 by Valix)

Marauder Company borrowed P 15,000,000 at 12% to finance in part the construction of a new building
on January 1, 2020 and in part for general purposes.
The loan is to repaid commencing the month following completion of the building.

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 Jethro S. Cortado 4/14/22

BSA 1B MTH/4:00 – 5:30

Expenditures for the completed structure totaled P 10,000,000 during the year ended December 31,
2020. These expenditures were incurred evenly throughout the year.

The entity earned interest of P 200,000 for the year on the unexpended portion of the loan.

Expenditures P 10,000,000

Divided by: 2

5,000,000

Multiplied by Interest: 12%

P 600,000

Loan P 15,000,000

Interest 12%

Interest expense P 1,800,000

Q1: what amount if interest is capitalized on December 31, 2020?

a) P 1,200,000 b) P 1,000,000 c) P 600,000 d) 400,000

Q2: What is the interest expense for 2020?

a) 1,800,000 b) 1,200,000 c) 1,600,000 d) 1,000,000

End

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