Page | 1

Chapter 15
Property, Plant and Equipment (Part 1)

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE – cost
3. TRUE
4. FALSE – expensed
5. FALSE – direct costs are capitalized in full and not a portion of
the cost is recognized in profit or loss
6. TRUE – The cost of abnormal amounts of wasted material,
labor, or other resources due to inefficiencies is recognized as
expense.
7. FALSE – not adjusted
8. FALSE – not necessarily
9. FALSE
10. FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. D
3. D
4. B – see “not assumed”
5. D
6. C
7. A
8. D
9. D
10. C
 Page | 2

PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a):
Purchase price (cash price equivalent) 100,000
Broker’s commission 5,000
Import duties 25,000
Non-refundable purchase taxes 10,000
Transportation cost 1,000
Assembling and installation costs 2,000
Testing costs 1,500
Net proceeds from samples generated (500)
Initial cost of equipment 144,000

Requirement (b):
Date Factory equipment 144,500
Cash 144,500
to record capitalizable costs of equipment
Date Cash 500
Factory equipment 500
to record sale of samples generated from testing
Date General and administrative costs 4,200
Advertising expense 3,800
Cash 8,000
to record non-capitalizable costs

2. Solution:
Land Building
Lump-sum price (6M x 2.5/7.5); (6M x 5/7.5) 2,000,000 4,000,000
Land registration costs 4,000
Payment to tenants to vacate premises 1,500 3,000
(4.5K x 2.5/7.5); (4.5K x 5/7.5)
Option paid on the land and building 1,000 2,000
(3K x 2.5/7.5); (3K x 5/7.5)
Broker's fee on the land and building 2,500 5,000
(7.5K x 2.5/7.5); (7.5K x 5/7.5)
Unpaid real estate taxes prior to acquisition 15,000
assumed by Buko Co. – assessed on land
Repairs and renovation costs before the 20,000
building is occupied
Totals 2,024,000 4,030,000
 Page | 3

3. Solutions:
Case 1: Old building has fair value
Requirement (a):
Old New
Land
building building
Lump-sum price 2,000,000 4,000,000 -
(6M x 2.5M/7.5M); (6M x 5M/7.5M)
Cost of razing the old building - - 30,000
(demolition cost)
Proceeds from sale of salvaged - - (7,500)
materials
Legal fees in conveying title to land 10,000 - -
Option paid for the land and old 1,000 2,000
bldg. acquired (3K x 2.5/7.5); (3K x 2.5/7.5)
Payments to tenants to vacate 2,000 4,000
premises (6K x 2.5/7.5); (6K x 5/7.5)
Materials, labor and overhead - - 4,250,000
Totals 2,013,000 4,006,000 4,272,500

Requirement (b):
Lump sum purchase price
Date Land 2,000,000
Building - old 4,000,000
Cash 6,000,000
to record the purchase on a lump sum price

Demolition costs
Date Building – new 30,000
Cash 30,000
to record the demolition costs as cost of the new
building

Salvaged materials
Date Cash 7,500
Building - new 7,500
to record the proceeds from sale of salvaged
materials resulting from the demolition as reduction in
the cost of the new building
 Page | 4

Additional costs: Title, option and payments to tenants.

Date Land (10K + 1K + 2K) 13,000
Building – old (2K + 4K) 6,000
Cash 19,000
to record the additional costs of legal fees in
conveying title to land, option, and payments to tenants
to vacate premises

Construction costs
Date Building – new 4,250,00
Cash 0 4,250,00
to record the construction costs of the new 0
building

Allocated cost of old building demolished

Date Loss on derecognition of asset 4,006,00
Building - old 0 4,006,00
to record the allocated cost of the demolished 0
building as loss

Case 2: Old building has no fair value

Requirement (a):
Old New
Land
building building
Lump-sum price 6,000,000 - -
Cost of razing the old building - - 30,000
(demolition cost)
Proceeds from sale of salvaged - - (7,500)
materials
Legal fees in conveying title to land 10,000 - -
Option paid for the land and old 3,000 -
bldg. acquired
Payments to tenants to vacate 6,000 -
premises (6K x 2.5/7.5); (6K x 5/7.5)
Materials, labor and overhead - - 4,250,000
Totals 6,019,000 - 4,272,500
 Page | 5

Requirement (b):
Lump sum purchase price
Date Land 6,000,000
Cash 6,000,000
to record the purchase on a lump sum price

Demolition costs
Date Building – new 30,000
Cash 30,000
to record the demolition costs as cost of the new
building

Salvaged materials
Date Cash 7,500
Building - new 7,500
to record the proceeds from sale of salvaged
materials resulting from the demolition as reduction in
the cost of the new building

Additional costs: Title, option and payments to tenants.

Date Land 19,000
Cash 19,000
to record the additional costs of legal fees in
conveying title to land, option, and payments to tenants
to vacate premises

Construction costs
Date Building – new 4,250,00
Cash 0 4,250,00
to record the construction costs of the new 0
building

4. Solution:
Land New
Land
improvement building
Purchase price of lot 4,000,000 - -
Land titling cost 20,000 - -
Special assessment 10,000 - -
Survey costs 30,000 - -
 Page | 6

Materials, labor & overhead - - 11,000,000

Cash discounts - - (60,000)
Clerical and other costs - - 28,000
Excavation costs - - 200,000
Architectural & permit - - 120,000
Supervision by mgmt. - - 24,000
Insurance premiums - - 260,000
Paving (not included in blueprint) - 20,000 -
Totals 4,060,000 20,000 11,572,000

5. Solutions:
Case 1:
Solution:
Major Co. Minor, Inc.
Equipment (new) 2,180,000 (a) Equipment (new) 1,920,000 (a)
Accumulated Dep. 400,000 Cash 280,000
Cash 280,000 Accumulated Dep. 1,600,000
Equipment (old) 2,000,000 Loss on exchange 200,000
Gain on exchange (squeeze) 300,000 Equipment (old) 4,000,000

(a)
Major Minor
Fair value of asset given up 1,900,000 2,200,000
Plus cash Paid (Minus cash received) 280,000 (280,000)
Initial cost of non-monetary asset
received 2,180,000 1,920,000

Case 2:
Major Co. Minor, Inc.
Equipment (new) 2,200,000 (b)
Accumulated Dep. 400,000
Cash 280,000
Equipment (old) 2,000,000
Gain on exchange (squeeze) 320,000

(b)
Major Minor
Fair value of asset received
(i.e., the FV of Minor’s equipment) 2,200,000
Cash paid/received N/A
Initial cost of non-monetary asset received 2,200,000
 Page | 7

Case 3:
Major Co. Minor, Inc.
Equipment (new) 1,880,000 (c) Equipment (new) 2,120,000 (c)
Accumulated Dep. 400,000 Cash 280,000
Cash 280,000 Accumulated Dep. 1,600,000
Equipment (old) 2,000,000 Equipment (old) 4,000,000

(c)
Major Minor
Carrying amount of asset given up 1,600,000 2,400,000
Plus cash Paid (Minus cash received) 280,000 (280,000)
Initial cost of non-monetary asset
received 1,880,000 2,120,000

6. Solutions:

Case 1:
Date Land 2,000,000
Share capital (20,000 x ₱10) 200,000
Share premium 1,800,000

Case 2:
Date Land (20,000 x ₱90) 1,800,000
Share capital (20,000 x ₱10) 200,000
Share premium 1,600,000

7. Solutions:
Case 1:
Jan. 1, Land 2,000,000
20x1
Discount on notes payable 200,000
Cash 400,000
Notes payable 1,800,000

Case 2:
Jan. 1, Land (a) 1,918,777
20x1
Discount on N/P (1.8M – 1,518,777) 281,223
Cash 400,000
Notes payable 1,800,000
 Page | 8

(a)
{400,000 + [(1.8M ÷ 3) x PV of ordinary annuity of 1 @9%, n= 3]} = 1,918,777

Cash Interest Present

Date Amortization
payments expense value
Jan. 1, 20x1 1,518,777
Dec. 31, 20x1 600,000 136,690 463,310 1,055,467
Dec. 31, 20x2 600,000 94,992 505,008 550,459
Dec. 31, 20x3 600,000 49,541 550,459 0

Dec. 31, Notes payable 600,000

20x1
Interest expense 136,690
Discount on notes payable 136,690
Cash 600,000
Dec. 31, Notes payable 600,000
20x2
Interest expense 94,992
Discount on notes payable 94,992
Cash 600,000
Dec. 31, Notes payable 600,000
20x3
Interest expense 49,541
Discount on notes payable 49,541
Cash 600,000

8. Solution:
Donor is a shareholder Donor is an unrelated party
Equipt. (FV of asset received) 2M Equipt. (FV of asset received) 2M
Donated capital 2M Income from donation 2M

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. A
Solution:
Land used as plant site 5,000,000
Building under construction to be used as new office 12,000,000
Equipment held for rental under various operating leases 1,200,000
Fixtures used in rendering services 500,000
Bearer plants 100,000
 Page | 9

Total PPE 18,800,000

2. D
Solution:
Purchase price inclusive of VAT 224,000
Divide by: 112%
Purchase price exclusive of VAT 200,000
Cash/ prompt discount (4,480)
Cost of equipment 195,520

The training and relocation costs are expensed.

3. A
Solution:
Purchase price 12,000,000
Freight 250,000
Transit insurance 20,000
Special foundation for the machine 50,000
Assembling and installation 280,000
Testing 30,000

Salvaged materials from trial runs

(3,000)
Cost of new machine 12,627,000

The cost of dismantling and removing old equipment prior to the

installation of new equipment is recognized as expense except
when the cost was previously recognized as liability (in which
case, the cost is treated as settlement of the liability; the entry
would be debit liability and credit cash).

4. C
Solution:
Land Old bldg. New bldg. Others
Lump-sum price 4,875,00
[5.85M x (5/6); (1/6)] 0 975,000
Appraisal fee expensed*
 Page | 10

Renovation costs 500,000

Plans and specs. 2,900,000
Construction
mats. 11,000,000
Labor 6,500,000
Excavation 1,000,000
Structural works 1,200,000
Supervision 100,000
expense
Injury claims d
Subcontracted 5,000,000
Savings ignored
Imputed interest ignored
4,875,00
Allocated costs 0 1,475,000 27,700,000

* Appraisal fees do not normally meet the asset recognition

criteria under the PFRS. It should be noted though that the
Internal Revenue Service (IRS) in the U.S. requires the
capitalization of appraisal fees as cost of the appraised property
for taxation purposes. (source:
https://keitercpa.com/wp-content/uploads/2012/02/Capitalization-Rules-Acquisition-of-
Real-Property.pdf)
This, however, does not mean that appraisal fees should also be
capitalized as cost of PPE for financial reporting purposes. (source:
https://www.tbr.edu/business/procedures-capitalizing-fixed-assets)

5. A
Solution:
Old New
Land bldg. bldg. Others
Lump-sum price 3,600,00
(3.6M); (4M - 3.6M) 0 400,000
Legal fees 180,000
Demolition 50,000
Survey 25,000
Architectural 260,000
Bldg. permit 120,000
 Page | 11

Price of new bldg. 9,000,000

Elec. & water 80,000
Real property tax expensed
Utilities expensed
Wi-Fi connection expensed
Internet fees expensed
Salvaged
materials (10,000)
3,805,00
Allocated costs 0 400,000 9,500,000

The allocated cost of the old building is charged as loss.

6. B (2.5M x 97%) + 50K + (200K x PV of 1 @12%, n=10) =

2,539,395

7. C
Solution:
Liempo:
1) Equipment received: (1,875,000 – 700,000) = 1,175,000
2) Gain (loss) on exchange: (1,875,000 – 3,500,000) = (1,625,000)

Monggo:
1) Equipment received: (1,000,000 + 700,000) = 1,700,000
2) Gain (loss) on exchange: (1,000,000 – 1,200,000) = (200,000)

8. A
Solution:
Liempo:
1) Equipment received: (3,500,000 – 700,000) = 2,800,000
2) Gain (loss) on exchange: 0

Monggo:
1) Equipment received: (1,200,000 + 700,000) = 1,900,000
2) Gain (loss) on exchange: 0

9. A
 Page | 12

Solution:
1) Equipment received: 40,000, the fair value of the asset received
2) Gain (loss) on exchange:
Date Equipment – new (FV of asset received) 40,000
Accumulated depreciation 70,000
Equipment - old 100,000
Cash 8,000
Gain on exchange (squeeze) 2,000

10. A
Solution:

(a) Land = 3,000,000

Land improvement = 600,000

(b) Transportation equipment (SUV):

Cash purchase price, including the car accessories 2,910,000

Vehicle registration 12,000
Total cost - SUV 2,922,000

● In practice, the cost of car accessories installed when the

vehicle was purchased, and for which a single CDV was
prepared for the vehicle and the car accessories, is included in
cost of the vehicle. Accountants do this mainly for
convenience in recording. Subsequent expenditures on car
accessories are charged as expenses. Thus, the cost in (d) is
charged as expense.
● The cost of a vehicle’s initial registration is capitalized
because this is necessary for the entity to obtain the future
economic benefits of the vehicle. It is illegal to use an
unregistered vehicle. However, the costs of subsequent annual
registrations are expensed.
● The insurance is recognized as expense (or initially recorded
under the “Prepaid insurance” account and subsequently
charged as expense).
 Page | 13

(c) Transportation equipment (Pickup truck):

Cash price equivalent 1,800,000

Modification for off-road driving 280,000
Total cost - Pickup truck 2,080,000

● The modification is capitalized because it is necessary in

bringing the vehicle to its intended use.

Total cost - SUV 2,922,000

Total cost - Pickup truck 2,080,000
Total Transportation equipment 5,002,000

(d) See (b) above

(e) Machine: 160,000 – cash price equivalent

PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY 1
Land 1,000,000
Cash 1,000,000
to record the acquisition of land

ACTIVITY 2
Requirement (a):
Purchase price, net of VAT 1,418,650.00
Cost of initial registration 8,137.18
Initial cost of transportation equipment 1,426,787.18

☞ The cost of initial registration is normally capitalized (in

practice), based on the concept that this cost is necessary for
the entity to obtain the economic benefits from the asset, i.e., it
is illegal to use an unregistered vehicle. The subsequent annual
costs of registration are expensed, based on the concept that
 Page | 14

subsequent expenditures on assets generally only maintain the

usability of the asset rather than increase it.
☞ The insurance cost is expensed over the coverage period.

Requirement (b):
April 25, 20x1
Transportation equipment 1,418,650
Input VAT 170,238
Cash 1,588,888
to record the purchase of vehicle

April 25, 20x1

Prepaid insurance (100,000 x 1/3) 33,333.33
Deferred insurance (100,000 x 2/3) 66,667.67
Cash 100,000.00
to record the insurance

☞ The insurance covers a 3-year period, i.e., from April 25, 20x1
to April 25, 20x3. The portion that covers Years 2 and 3 are
recorded under the “Deferred insurance” account and
reported as noncurrent asset in the December 31, 20x1
financial statements.

April 25, 20x1

Transportation expense 2,623.52
Cash 2,623.52
to record the purchase of diesel

April 29, 20x1

Transportation equipment 8,137.18
Cash 8,137.18
to record the initial registration of the vehicle with the Land
Transportation Office

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Manufacturing equipment purchased on installment basis 3,000,000
Land used in business 5,000,000
 Page | 15

Building owned, used as warehouse 1,500,000

Servicing equipment – used in building maintenance 3,000,000
Safety and environmental equipment 450,000
Total PPE 12,950,000

2. Solution:
Purchase price 1,000,000
Broker’s commission 50,000
Freight cost 35,000
Freight insurance 5,000
Installation costs 250,000
Calibration and testing costs, net (20,000 – 2,000) 18,000
Initial cost of equipment 1,358,000

3. Solution:
Purchase price inclusive of refundable purchase tax 896,000
Refundable purchase tax (96,000)

Cash discount not taken (24,000)

Freight and installation costs (main office) 40,000
Total cost of equipment 816,000

The capitalization of costs ceases when the PPE is in the location

and condition originally intended by management. Therefore, the
₱50,000 relocation and reinstallation costs are expensed.

4. Solution:
Land
Land improvement Building
Lump-sum price 2,500,00 7,500,00
(10M x 1/4 & 3/4) 0 0
Land titling cost 100,000
Special assessment 40,000
Payments to tenants
(80K x 1/4 & 3/4) 20,000 60,000
Option on property acquired
30,000 90,000
(120K x 1/4 & 3/4)
 Page | 16

Building remodeling prior to

800,000
occupancy
Landscaping on the
240,000
premises
Addition of driveway and
80,000
parking lot
2,690,00 8,450,00
Total costs
0 320,000 0

5. Solutions:
Case 1:
The costs are allocated as follows:
Old New
Land
building building
Lump-sum price
[6M x (5.425/6.2) & (.775/6.2)] 5,250,000 750,000
Finder's fee
70,000 10,000
[80K x (5.425/6.2) & (.775/6.2)]
Land registration cost 8,000
Unpaid taxes prior to acqn. date 200,000
Demolition cost of old
130,000
building
Proceeds from sale of sal.
mats. (10,000)
Materials, labor and overhead 10,000,000
Total costs 5,528,000 760,000 10,120,000

Journal entries:

Lump sum purchase price

Date Land 5,250,000
Building - old 750,000
Cash 6,000,000
 Page | 17

Finder’s fee
Date Land 70,000
Building - old 10,000
Cash 80,000

Land registration cost & Unpaid taxes on land prior to acquisition date
Date Land (200,000 + 8,000) 208,000
Cash 208,000

Property tax after acquisition date

Date Tax expense 60,000
Cash 60,000

Demolition costs
Date Building – new 130,000
Cash 130,000

Salvaged materials
Date Cash 10,000
Building - new 10,000

Construction costs
Dat Building – new 10,000,00
e
Cash 0 10,000,00
0

Allocated cost of old building demolished

Date Loss on derecognition of asset 760,000
Building - old 760,000
to record the allocated cost of the demolished
building as loss

Case 2:
 Page | 18

The costs are allocated as follows:

Old New
Land
building building
Lump-sum price 6,000,000 -
Finder's fee 80,000 -
Land registration cost 8,000
Unpaid taxes prior to acqn. date 200,000
Demolition cost of old
130,000
building
Proceeds from sale of sal.
mats. (10,000)
Materials, labor and overhead 10,000,000
Total costs 6,288,000 - 10,120,000

Journal entries:

Lump sum purchase price and other direct costs:

Date Land 6,288,000
Cash 6,288,000

Property tax after acquisition date

Date Tax expense 60,000
Cash 60,000

Demolition costs
Date Building – new 130,000
Cash 130,000

Salvaged materials
Date Cash 10,000
Building – new 10,000

Construction costs
Dat Building – new 10,000,00
e
Cash 0 10,000,00
0
 Page | 19

6. Solution:
Purchase price 20,000,000
Direct costs 10,000,000
PV of decommissioning and restoration costs
(4M x PV of 1 @10%, n=8) 1,866,030
Cost of equipment 31,866,030

Date Equipment 31,866,030

Cash 30,000,000
Asset retirement obligation 1,866,030

7. Solution:
Land Building Other
8,000,00
Purchase price of land 0
Survey 60,000
Architectural and engineering 1,800,000
Building permit 40,000
Temporary structures 10,000
Site clearing 100,000
Excavation and backfilling 400,000
12,000,00
Construction materials and labor 0
Insurance costs 20,000
Expense
Abnormal loss on wasted resources d
Expense
Uninsured accidents d
Safety inspection & supervision 30,000
Income from incidental operations P/L
Electrical lighting & wiring works 280,000
Plumbing and sanitary works 190,000
Elevator 2,000,000
15,000,00
Finishing 0
Pavement & parking (included in design) 220,000
 Page | 20

Clerical and other misc. costs 20,000

Costs of necessary design changes 120,000
Rentals of construction equipment 290,000
Savings on self-construction Ignored
8,060,00 32,520,00
Total costs 0 0

8. Solutions:
Requirement (a): With commercial substance
Ima’s books:
Wine barrels – new (1.2M + 300K) 1,500,000
Wine barrels – old 1,000,000
Cash` 300,000
Gain on exchange 200,000

Saka’s books
Wine barrels – new (1.5M - 300K) 1,200,000
Cash 300,000
Wine barrels – old 1,400,000
Gain on exchange 100,000

Requirement (b): Without commercial substance

Ima’s books:
Wine barrels – new (1M + 300K) 1,300,000
Wine barrels – old 1,000,000
Cash` 300,000

Saka’s books
Wine barrels – new (1.4M - 300K) 1,100,000
Cash 300,000
Wine barrels – old 1,400,000

9. Solutions:
Case 1:
Date Machine (cash price equivalent) 1,400,000
Share capital (10,000 x ₱10 par) 100,000
 Page | 21

Share premium 1,300,00

0

Case 2:
Date Machine (10,000 x ₱130 FV of sh. issued) 1,300,000
Share capital (10,000 x ₱10 par) 100,000
Share premium 1,200,00
0

10. Solutions:
Case 1:
Date Machine (cash price equivalent) 1,400,000
Discount on notes payable 200,000
Note payable 1,600,00
0

Case 2:
Date Machine (PV of note*) 1,202,104
Discount on notes payable 397,896
Note payable 1,600,00
0
* 1.6M x PV of 1 @ 10%, n=3 = 1,202,104

11. Solution:

Donor is a shareholder Donor is an unrelated party

Equipment 320K Equipment 320K
Donated capital 320K Income for donation 320K