PROPERTY, PLANT AND EQUIPMENT PROBLEMS

1. AYE Company had the following property acquisitions during the current year:
 Acquired a tract of land with an existing building in exchange for 50,000 shares of ₱100 par
value ordinary shares with a market price of ₱120 per share on the date of acquisition. The last
property tax bill assessed value of ₱2,800,000 for the land and ₱1,200,000 for the building.
However, the land has a fair value of ₱5,500,000 and the building has no determinable fair
value. Shortly after acquisition, the building was razed at a cost of ₱100,000 in anticipation of a
new building construction.
 Received land from a major shareholder as an inducement to locate a plant in the city. No
payment was required but AYE paid ₱50,000 for legal expenses for land transfer. The land is
fairly valued at ₱2,000,000.

What is the total increase in land as a result of the acquisition?

a. ₱7,600,000
b. ₱7,650,000
c. ₱7,500,000
d. ₱8,100,000

2. BHI Company acquired a welding machine with an invoice price of ₱5,000,000 subject to a cash
discount of 10% which was not taken. BHI incurred freight and insurance during shipment of ₱50,000
and testing and installation cost of ₱150,000. BHI also incurred cost of ₱20,000 in removing the old
welding machine prior to the installation of the new one. Welding supplies were acquired at a cost of
₱80,000. The cost of the new welding machine should be?
a. ₱4,700,000
b. ₱4,720,000
c. ₱4,800,000
d. ₱5,200,000

3. CEE Company acquired two items of machinery as follows:

 On January 1, 2020, CEE Company purchased a machine for ₱2,000,000 in exchange for a non-
interest bearing note requiring four payments of ₱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 the date of issuance was 12%. The PV of an ordinary annuity of
1 at 12% is 3.04 for four periods. The new machine was damaged during its installation and the
repair cost amounted to ₱30,000.
 On December 31, 2020, CEE Company acquired a used machine by issuing the seller a four-year
non-interest bearing note for ₱2,000,000. The note is due on December 31, 2024. In recent
borrowing, CEE has paid a 12% interest for this type of note. The PV of 1 at 12% for 4 years is
0.64.
What is the total cost of the two machines?
a. ₱2,800,000
b. ₱2,830,000
c. ₱4,000,000
d. ₱2,560,000
4. In December 2020, DY Company exchanged an old machine which cost ₱3,000,000 and 50%
depreciated, for a used machine and paid a cash difference of ₱500,000. The fair value of the old
machine was determined to be ₱1,800,000. DY should record the machine at?
a. ₱1,800,000
b. ₱2,300,000
c. ₱1,300,000
d. ₱2,000,000

5. On January 3, 2020, EEH Company purchased a tract of land with an old building which was razed
shortly after acquisition. The costs incurred in connection with the acquisition were:

Purchase price ₱ 3,000,000

Agent commission 100,000
Legal fees for the purchase contract 50,000
Guarantee insurance 10,000
Cost of razing the old building 150,000
Salvage value of old building materials 25,000
Property taxes for 2019 and 2020 (equally each year) 100,000
Option paid for an alternative land which was not acquired 30,000
Cost of relocating squatters 5,000

The cost of the land should be?

a. ₱3,340,000
b. ₱3,210,000
c. ₱3,285,000
d. ₱3,390,000

6. EF Corporation has decided to expand its operations and has purchased land in the city for
construction of a new manufacturing plant. The following costs were incurred in purchasing the
property and constructing the building:
Land purchase price ₱ 2,500,000
Payment of delinquent property taxes 100,000
Title search and insurance 50,000
Special assessment for city improvements on water and sewer 150,000
Building permit 30,000
Cost to destroy existing building on land (₱10,000 worth of
salvaged material used in new building) 60,000
Contract cost of new building 7,000,000
Architect fee 200,000
Sidewalk and parking lot 100,000
Fire insurance on building 40,000

The cost of the land and building should respectively be:

a. ₱2,850,000 and 7,240,000
b. ₱2,800,000 and 7,280,000
c. ₱2,700,000 and 7,240,000
d. ₱2,850,000 and 7,230,000
7. On January 3, 2020, GHEE received a grant of ₱7,500,000 from the foreign government in order to
defray safety and environmental costs within the area where the entity is located. The safety and
environment costs are expected to be incurred over three years, respectively, ₱1M, ₱2M and ₱3M.
How much income from government grant should be recognized in 2020?
a. ₱7,500,000
b. ₱2,500,000
c. ₱1,250,000
d. ₱ - 0 –

8. EYCH Company entered into an ₱8,000,000 fixed contract with a certain contractor on January 1, 2020
for the construction of a new building. On January 2, 2020, EYCH obtained a loan of ₱8,000,000 at an
interest rate of 12% to finance specifically the construction. Availments from the loan may be made
quarterly at unequal amounts. Actual interest incurred for 2020 was ₱500,000. Prior to their
disbursement, the proceeds from the loan were temporarily invested and earned interest income of
₱50,000. The building was completed on December 31, 2020. Additional costs incurred during the
construction were ₱100,000 for plans, specifications and blue print, and ₱250,000 for architectural
design and supervision. EYCH Company follows the alternative treatment of capitalizing borrowing
cost. The cost of the building should be:
a. ₱8,800,000
b. ₱8,450,000
c. ₱8,350,000
d. ₱8,850,000

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

Principal Interest
12% bank loan ₱ 10,000,000 ₱ 1,200,000
15% long-term loan 20,000,000 3,000,000

The construction began on January 2, 2020 and was completed on December 31, 2020. Expenditures
on the building were made as follows:
January 2 ₱ 5,000,000
June 30 8,000,000
December 31 2,000,000
Following the alternative treatment, the capitalizable borrowing cost should be
a. ₱1,260,000
b. ₱2,100,000
c. ₱1,050,000
d. ₱1,215,000

10. JEY Company had the following loans outstanding during the years 2019 and 2020
Specific construction loan ₱ 2,000,000 10%
General loan 15,000,000 12%
The company began the self-construction of a building on January 2, 2019 and was completed on
December 31, 2020. The following expenditures were made during 2019 and 2020:
 January 2, 2019 ₱ 2,000,000
July 1, 2019 4,000,000
November 1, 2019 3,000,000
July 1, 2020 1,000,000
Total ₱ 10,000,000

If the company uses the alternative approach for recording interest, what is the cost of the building on
December 31, 2020?
a. ₱10,000,000
b. ₱11,660,000
c. ₱11,700,000
d. ₱11,500,000