HOMEWORK ON PROPERTY, PLANT AND EQUIPMENT

PROBLEM 1

Isaiah Co. purchased a plot of land for P6,000,000 as a plant site. There was a small office building on the plot,
appraised at P1,800,000 which the entity will continue with some modification and renovation. The entity decided to
construct a factory building and incurred the following costs:
Materials, supplies and construction overhead 8,000,000
Excavation 200,000
Labor on construction 5,000,000
Cost remodeling office building 700,000
Legal cost of conveying land 80,000
Imputed interest on entity’s own money used during construction 240,000
Cash discounts on materials purchased, not taken 120,000
Supervision by management 140,000
Compensation insurance premium for workers 80,000
Clerical and other expenses related to construction 60,000
Paving of streets and sidewalks 80,000
Plans and specifications 280,000
Payment for claim for injuries not covered by insurance 50,000
Legal cost of injury claim 30,000
Saving on construction 400,000

1. What is the initial cost of the land?

2. What is the initial cost of the office building?
3. What is the initial cost of the factory building?

PROBLEM 2

Hezekiah Corp. incurred the following costs during the current year in relation to property, plant and equipment:
Cash paid for the purchase of land (none was allocated to old building) 10,000,000
Mortgage assumed on the land purchased 2,000,000
Realtor’s commission 600,000
Legal fees, realty taxes and documentation expenses 100,000
Amount paid to relocate persons squatting on the property 200,000
Cost of tearing down an old building on the land 400,000
Amount recovered from the salvage of the old building demolished 300,000
Cost of fencing the property 420,000
Amount paid to the contractor for the building constructed 10,000,000
Building permit fee 100,000
Excavation 100,000
Architect fee 400,000
Interest that would have been earned had the money used during the period of
construction been invested in the money market 300,000
Invoice cost of machine acquired, terms 3/10, n/30 6,000,000
Freight, unloading and delivery charges for machine acquired 120,000
Custom duties and other charges 280,000
Allowances and hotel accommodation, paid to foreign technicians during
installation and test run of machine 500,000
Royalty payment on machines purchased (based on units produced and sold) 240,000

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1. What amount should be capitalized as the cost of the land?
2. What amount should be capitalized as the cost of land improvements?
3. What amount should be capitalized as the cost of the building?
4. What amount should be capitalized as the cost of the machine?

PROBLEM 3

Josiah Inc. uses many kinds of machines in its operations. The following information relates to a machine that was
acquired at the beginning of 2023:
Cash paid for machine, including 12% VAT 2,240,000
Cost of transporting machine 60,000
Labor cost of installation by expert fitter 100,000
Labor cost of testing machine 80,000
Insurance cost for the current year 30,000
Cost of training for personnel who will use the machine 50,000
Cost of safety rails and platform surrounding the machine 120,000
Cost of water device necessary to keep machine cool 160,000
Estimated dismantling cost to be incurred as required by contract 250,000

The dismantling cost is to be incurred at the end of the machine’s 8-year useful life. Josiah’s usual borrowing cost is
8%.

1. What is the total cost of the machine?

2. How much is the accretion expense on the fourth year?
3. Suppose the machine was dismantled at a total cost of P250,000, prepare the journal entry to record the
settlement of the asset retirement obligation.
4. Suppose the machine was dismantled at a total cost of P200,000, prepare the journal entry to record the
settlement of the asset retirement obligation.

PROBLEM 4

Abraham Co. acquires a new manufacturing equipment on Jan. 1, 2023, on instalment basis. The deferred payment
contract provides for a down payment of P500,000 and an 8-year note for P3,104,160. The note is to be paid in 8
equal annual instalments of P388,020, which already includes the interest of 10%. The payments are to be made on
Dec. 31 of each year, beginning Dec. 31, 2023. The equipment has a cash price equivalent of P2,800,000. Abraham’s
financial yearend is Dec. 31.

What is the initial cost of the equipment?

PROBLEM 5

Adam Corp. is contemplating to exchange a machine used in its operations. Adam received the following offers from
interested companies:

a. Jacob Co. offered to exchange a similar machine plus P345,000 cash.

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b. Isaac Corp. offered to exchange a similar machine.
c. David Inc. offered to exchange a similar machine, but wanted P120,000 in addition to Adam’s machine.

In addition, Adam inquired from Nathan Co., a dealer in machines. Adam is to pay P1,395,000 cash plus the trade in
of its old machine in order to acquire a new unit.

Presented below are the machine’s cost, accumulated depreciation, and fair value:

Adam Jacob Isaac David Nathan

Cost 2,400,000 1,800,000 2,205,000 2,400,000 1,950,000
Acc. Depreciation 750,000 675,000 1,065,000 1,125,000 -
Fair value 1,380,000 1,035,000 1,380,000 1,500,000 2,775,000

For each of the above exchange situations, prepare the journal entries to record the exchange on the books of each
company. Assume that all exchange situations have commercial substance.