Notes On Property, Plant and Equipment

 

ACCOUNTING FOR FIXED ASSETS I.

PROP PROPER ERTY TY,, PLAN PLANT T AND AND EQUI EQUIPM PMEN ENT T

Characteristics of Property, Plant, and Equipment . (All must be present) A. Characteristics of 1. Acqui Acquired red for for use use and and not not resa resale le (pro (produc ductio tion n of of goo goods ds and and ser servic vices, es, renta rentall to others and administrative used) 2. Long Long-t -ter erm m in nat natur ure e and and sub subje ject ct to to depr deprec ecia iati tion on,, exce except pt for for lan land d ( expected to be used more than one year)

3.

Poss ossess phy phys sic ical al subst sta ance (T (Tangib gible) le)

Included as PPE are as follows:

The standard does apply to bearer plants but it does not apply to the produce on bearer plants. [IAS 16.3] which applies to annual periods beginning on or after 1 January 2016. 



 A bearer Plant is a living living plant that that is used used in the the production production or supply supply of agricultural produce, is expected to bear produce for more than one period, and, has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. The cost model in IAS 16 also applies to investment property accounted for using the cost model under IAS 40 Investment Property. [IAS 16.5]

Not Included in PPE Under IAS 16 are the following:  Assets classified classified as held for sale in accordance accordance with with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Biological assets related to agricultural activity accounted for under IAS 41 Agriculture Exploration and evaluation assets recognized in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources Mineral rights and mineral reserves such as oil, natural gas and similar nonregenerative resources. 







Acquisition and Initial Valuation of Property, Plant, and Equipment. B. Acquisition and 1. Hi Hist stor oric ical al cost cost is th the e usua usuall basi basis s fo forr valu valuat atio ion. n. This This is the cash cash or cash cash equivalent price or fair value of other consideration given of obtaining the asset and getting it ready for its intended use plus the obligation to dismantle or restoring the site. Cases of Acquisition Cash basis Lump-sum price On Account In Inst stal allm lmen entt –w/ –w/cas cash h pri price ce Inst Instal allm lmen entt – w/ w/ou outt cash cash price Issuance of Share Capital

Issuance of Debt Security

Exchang Exch ange e with with commer commercia ciall

Valuation Cash Price Equivalent. Cash Paid plus freight, handling, installation Prorate single price based on their relative fair values Invoice Price less discount , regardless whether taken or not Cash Cash pric price e Equ Equiv ival alen ent. t. In ex exces cess s of of ttot otal al amou amount nt paid paid = Int Inter eres estt Present Value of payments at implied interest rate a. b. c. a. b. c. a. b.

Fair Fair Value Value of Consi Consider derati ation on receiv received ed Fair Fair Valu Value e of Share Share Capita Capitall Par Par or Sta State ted d Value Value of Sha Share res s Fair Fair Valu Value e of Debt Debt Secur Security ity Fair Fair Valu Value e of Asset Asset Recei Received ved Face Face amoun amountt of Deb Debtt Secu Securi rity ty Fair Value Value of property property given given plus plus cash given given or less less cash received received Fair Fair Valu Value e of prop proper erty ty rece receiv ived ed plus plus cash cash give given n or le less ss cash cash

 

substance

received c. Book Value Value of property property given given plus cash given given or less cash cash received received Exchange without Book Value of property given plus cash given or less cash received Commercial Substance Trade In a. Fair Value of Asset Given up plus cash given b. Trade In Value Value of Asset given up plus plus cash cash given given Fair Value of assets received and charged to donated capital. Expenses Donation from Shareholders incurred in connection with the donation are charged to Donated Capital. Direct cost subsequesnt to donation will be capitalized Donation from shareholders Construction

Non- Fair Value when received or receivable and charged to Income (subsidies) or liability (with restrictions) Direct materials and labor, Indirect cost and incremental overhead identifiable to the construction.Savings, Internal Profit, errors and inefficiencies are not to be capitalized as part of cost

C. LAND WITH BUILDING PURCHASED AT SINGLE COST If building is usable Prorate single cost to land and building based on their relative fair values If building is unusable Single Cost will be for land only plus demolition cost less any salvage value. Old buildi building ng is demoli demolishe shed d immedi immediate ately ly to Usable cost of old building will be charged to loss. Demolition make ma ke ro room om fo forr th the e const constru ruct ctio ion n of a new new cost less any salvage value is capitalized to the new building building to be recorded as PPE or Investment property Old buildi building ng is demoli demolishe shed d immedi immediate ately ly to Usable cost of old building will be capitalized as cost of the make ma ke ro room om fo forr th the e const constru ruct ctio ion n of a new new ne new w buil buildi ding ng.. Demo Demoli liti tion on cost cost le less ss an any y sa salv lvag age e va valu lue e is building to be recorded as Inventory capitalized to the new building Old buildi building ng is demoli demolishe shed d immedi immediate ately ly to Usable cost of old building will be capitalized as cost of the prepare the land to its intended use new building. A pre revi viou ousl sly y owne owned d buil buildi ding ng wi will ll be The Carrying Value of the old building will be charged to loss. demolished to construct a new building The net demolition cost as well as cost incurred to induce tenants tenant s to vacate the place place will be capitali capitalized zed as cost of the new building D. BORROWING COST – interest and other costs that the entity incurs in connection  with borrowing of funds for the purchase, construction or production of qualifying assets. PROCEDURE IN COMPUTING BORROWING COST Assets Asset s Fi Fina nance nced d by speci specifi fic c Actu Actual al Borr Borrow owin ing g cost cost in incu curr rred ed duri during ng th the e peri period od deduct deducted ed by any any borrowing investment income for temporary placement of funds 1. Average Carrying Amount of the Asset during the period multiplied by Asse As sets ts Fina Financ nced ed by gene genera rall average capitalization rate. Investment Income will not be deducted. borrowings 2. The amount computed in no. 1 above should not exceed the actual interest incurred. Avearg Ave arge e Carryi Carrying ng Amount Amount = Previo Previous us period period actual actual cost cost plus plus int intere erest st capitalized plus Average Expenditure this period. Averag Ave rage e Capita Capitaliz lizati ation on Rate Rate = Annual Annual borrow borrowing ing cost cost / Total Total Genera Generall Borrowings 1. Compute Compute Average Average Carrying Carrying Value Value of the Asset during during the the period period Assets financed by both 2. Deduct Deduct the amount amount of specifi specific c borrowi borrowings ngs from from no. 1 above above to get specific and general borrowings the expenditures finance from general borrowings 3. The capitaliz capitalizable able borrowing borrowing costs costs = (Actual (Actual borrow borrowing ing cost incurr incurred ed plus   less investment income from specific borrowings) plus ( Expe Expend ndit itur ure e fi fina nanc nced ed by gene genera rall bor borrowi rowing ngs s x gene generral

 

capitalizable rate) Asse As sets ts fina financ nced ed by spec specif ific ic The borrowing is treated as a general borrowing, and follow the same borro bor rowi wing ngs s us used ed fo forr gener general al procedure using general borrowings. purposes Cons Co nstr truct uctio ion n peri period od is more more The average expenditures during the period shall include the previous than one year capitalized cost and considered incurred at the beginning of the year

E. SUBSEQUENT COSTS

Additions Impr Im prov ovem emen entt

Meaning Increase physical size and capacity Subs Substi titu tuti tion on fo forr a bett better er or supe superi rior or one one Replacement Replac ement for equal or lesser quality quality

Replacement

Replaced Original Cost can be identified Replace aced Origin ginal Cos Cost can’t be ident ntiified

Repairs

Restoring to good operating condition (Curative)

Maint nte enan nance Rearrangement

Keeps the asset set in good condit dition ( Preve event ntiive) Relocation and redeployment of PPE

F. DEPRECIATION METHODS Depreciation Rationale of the Method Methods Straight line This Th is is adap adaptted when when the majo majorr reason of depreciation is passage of time giving each period equal amount. Group of dissimilar assets in terms of Composite characteristics and useful life treated as a single unit

Group

Working Hours Output/Productio n

Group of similar assets in terms of characteristics and useful life treated as a single unit

Based on the usage or function of asset used. Base Ba sed d on th the e outp output ut of th the e asse assett produced

Accounting Procedure Capitalized as usual Capi Capita tali lize zed d as usua usuall a. A new one – Capitalized Capitalized b. Major Major PartsParts- Capita Capitaliz lized ed c. Mi Mino norr Par Parts ts - Exp Expen ensed sed The Carrrying Value will be charged to lo loss ss and and re repl plac acem emen entt cost cost will will be capitalized as assets Use th the e discount ounte ed replacement ent cost as substitute to the cost and charged the depreciated value to loss. Capitalized replacement cost as asset a. Extraordinary – Capitalized b. Ordi Ordina nary ry – E Exp xpens ensed ed Expense as incur urrred Expense

Formula of Computing Annual Depreciation Cost – Salvage Value or Residual Value Estimated Useful life in years

1. The composite rate (total annual depreciation / total cost ) is multiplied to the tot otal al cost ost to get get depr deprec ecia iati tion on expense 2. When When as asse sett is re reti tire red, d, Accu Accumu mula late ted d Depr De preci eciat atio ion n is debi debite ted d equal equal to th the e cost credited minus any debited proceeds. No gain, No loss 3. When hen asse assett is repl eplaced aced,, asset ssets s is debited and the corresponding payments or liabilities are credited 4. Multiply the composite rat ate e by the bala ba lanc nce e of the asse assett acco accoun unts ts fo forr succe cceeding periods to get the depreciation expense 1. Deprec Depreciat iation ion Rate Rate per per hour hour or outp output ut = Cost-Salvage / estimated use hours/output 2. Mult Multip iply ly ac actu tual al hour hours s us used ed or outp output ut produced x Depreciation rate

 

A decreasing charge method  whereby the depreciable cost is (Cost – Salvage) x Digit of the Year Sum of the Years Digit Sum of the years’ mu mult ltipl iplie ied d by decre decreas asin ing g seri series es of Method fr frac acti tion ons s wher where e th the e nume numera rato torr is equal to the digit of the year ear in consideration while the denominator is equal to the total digits of the years 1Residual Value / Co Cost) x This method cannot be used unless Rate ( 1Declining Balance ther here is a resi esidual dual val value. ue. In the diminishing book value

Double Declining

Inventory method

Retirement

Replacement

absence of residual value , we can assigned P 1 A fix ixed ed ra ratte is mult multip ipli lied ed by the declining carrying or book value. The fixed rate is equal to double the Straight line rate  rate  This Th is is gener general ally ly appl applied ied to smal smalll in inexp expen ensi sive ve it item ems. s. This This meth method od is nott sy no syst stem emat atic ic.. No cont contra ra asse assett account is maintained, maintained, deoreciation deoreciation is cred credit ited ed dire direcl cly y fr from om th the e as asse sett account No deprec depreciat iation ion is record recorded ed unless unless there is asset retired. No depreciation is recorded unless Assets are retired and replaced

Rate ( 100%/ estimated diminishing book value

life

c

Original Cost of Asset Retired – Proceeds 1. If retir retired ed and re repl place aced, d, deprec deprecia iati tion on = Replac Rep laceme ement nt cost of assets assets retire retires s – proceeds 2. If retir retired ed but not replace replaced d or orig igin inal al cost of that asset is depreciation

IAS 16 permits two accounting models:



2)

Balance per Inven enttory at year ear end – Balance per Inventory Account = Depreciation Expense

Measurement subsequent to initial recognition



x

Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30] Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably. [IAS 16.31]

The revaluation model

Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]. If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36] Revalued assets are depreciated in the same way as under the cost model (see below). If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss. [IAS 16.39]

 

 A decrease decrease arising arising as a result result of a revaluation revaluation should should be recognised recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40] When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss. [IAS 16.41] Depreciation (cost and revaluation models)

For all depreciable assets: 1. The depreciable depreciable amount (cost (cost less residual value) should should be allocated allocated on a systematic basis over the asset's useful life [IAS 16.50]. 2. The residual residual value value and the the useful useful life of an an asset should should be be reviewed reviewed at least least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51] 3. The depreciation depreciation method used should should reflect reflect the pattern pattern in which the the asset's economic benefits are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. [IAS 16.62A] Note: The clarification regarding the revenue-based depreciation method was introduced by Clarification of Acceptable Methods of Depreciation and Amortisation , which applies to annual periods beginning on or after 1 January 2016. 4. The depreciation depreciation method should be be reviewed reviewed at least least annually annually and, if the pattern pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56] Note: The guidance on expected future reductions in selling prices was introduced by Clarification of Acceptable Methods of Depreciation and Amortisation , which applies to annual periods beginning on or after 1 January 2016. 5. Depreciation Depreciation should should be charged charged to to profit or or loss, unless unless it is is included included in the carrying amount of another asset [IAS 16.48]. 6. Depreciation Depreciation begins begins when when the asset asset is available available for use and continues continues until the the asset is derecognised, even if it is idle. [IAS 16.55] Recoverability of the carrying amount Property, Plant and Equipment  requires  requires impairment testing and, if necessary, recognition for property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount  is the higher of an asset's fair value less costs to sell and its value in use.

 Any claim claim for compensatio compensation n from third third parties for impairment impairment is included included in profit or loss when the claim becomes receivable. [IAS 16.65] Derecognition (retirements and disposals)

 

 An asset asset should be removed removed from the the statement statement of financial financial position position on on disposal disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognised in profit and loss. [IAS 16.67-71] If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held for sale in the ordinary course of business. [IAS 16.68A] Disclosure 1.Information about each class of property, plant and equipment

For each class of property, plant, and equipment, disclose: [IAS 16.73]     

basis for measuring carrying amount depreciation method(s) used useful lives or depreciation rates gross carrying amount and accumulated depreciation and impairment losses reconciliation of the carrying amount at the beginning and the end of the period, showing: additions,disposals,acquisitions through business combinations,revaluation increases or decreases,impairment losses,reversals of impairment losses,depreciation,net foreign exchange differences on translation and other movements

2.Additional disclosures

The following disclosures are also required: [IAS 16.74] 

restrictions on title and items pledged as security for liabilities



expenditures to construct property, plant, and equipment during the period



contractual commitments to acquire property, plant, and equipment



compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit or loss.

IAS 16 also encourages, but does not required, a number of additional disclosures. [IAS 16.79] Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77] 

the effective date of the revaluation



whether an independent valuer was involved





for each revalued class of property, the carrying amount that would have been recognised had the assets been carried under the cost model the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders.

 

Entities with property, plant and equipment stated at revalued amounts are also required to make disclosures under IFRS 13 Fair Value Measurement .

Acquisition on cash basis LOQUACIOUS TALKATIVE Co. acquired a factory equipment overseas on cash basis for ₱400,000. Additional costs incurred include the following: commissions paid to

brokers for the purchase of the equipment, ₱20,000; import duties of ₱100,000; nonrefundable purchase taxes of ₱40,000; freight cost of transferring the equipment to LOQUACIOUS’ premises, ₱4,000; costs of assembling and installing the equipment, ₱8,000; costs of testing the equipment, ₱6,000; administration and other general overhead costs, ₱16,800; and advertisement and promotion costs of the new product to be produced by the equipment, ₱15,200. The samples generated from testing the equipment were sold at ₱2,000. How much is the initial cost of the equipment? a. 578,000 b. 594,800 c. 576,000 d. 592,800 C Solution: Purcha rchas se price ice (cash price rice equiv iva alen lent) 400,0 0,000 Commissions to brokers 20,000 Import duties 100,000 Non-refundable purchase taxes 40,000 Transportation cost 4,000  Assembling and installation  Assembling installation costs Testing costs Net proceeds from samples generated Initial cost of equipment

8,000 6,000 (2,000) 576,000

Acquisition on account PRECLUDE PREVENT Co. acquired an equipment for ₱448,000 on account with a credit term of 2/15, n/30. Any discount is computed based on the purchase price. The purchase price is inclusive of 12% value added tax (VAT). PRECLUDE Co. is VATregistered and any input VAT paid is refundable through deduction from monthly output VAT remitted to the Bureau of Internal Revenue (BIR). Additional costs incurred include ₱40,000 cost of training staff who will be operating the equipment and ₱60,000 cost of relocating the equipment to a new location after it was installed in a location originally int intended by ma managemen ment. How How muc much is is tthe he initi nitia al c cos ostt of of th the e equ quiipment ment? ? a. 400,000 b. 391,040 c. 491,040 d. 392,000

B Solution: The initial cost of the equipment is computed as follows: Purchase price inclusive of VAT Divide by: Purchase price exclusive of VAT Cash discount based on purchase price (2% x 448,000)  Cash price equivalent

448,000 112% 400,000 (8,960) 391,040

Deferred settlement – with cash price equivalent On January 1, 20x1, SQUAMOUS SCALY Co. purchased furniture with an installment price of ₱520,000 and a cash price equivalent of ₱400,000 by paying ₱40,000 down payment and issuing a one-year noninterest-bearing note of ₱120,000 payable in equal semi-annual installments on July 1 and December 31, 20x1. How much is the initial cost of the furniture? a. 520,000 b. 480,000 c. 400,000 d. 360,000 C 400,000 – the cash cash price equivalen equivalent. t.

 

Deferred settlement – no cash price equivalent On January 1, 20x1, REEDY SLENDER Co. purchased fixtures with an installment price of ₱520,000 by paying ₱40,000 down payment and issuing a three-year noninterest bearing note of ₱480,000 payable in three equal annual installments starting December 31, 20x1. The prevailing rate for the note as of January 1, 20x1 is 12%. How much is the initial cost of the fixtures?

a. 520,000 b. 480,000 c. 424,293 d. 360,000 C Solution: Cash down payment Present value of note payable: Future cash flows (480,000 ÷ 3) Mult Mu ltip iply ly by: by: PV PV of of an an o ord rdin inar ary y ann annui uity ty of ₱1 @12% @12%,, n=3 n=3 Initial cost of fixtures

40,000 160,000 2.40 2.4018 1831 31

384,293   424,293

Deferred settlement – no cash price equivalent On January 1, 20x1 ABC Co. acquired a building for ₱380,000, including ₱20,000 nonrefundable purchase taxes. The purchase agreement provided for payment to be made in full on December 31, 20x1. Legal fees of ₱8,000 were incurred in acquiring the

building and paid on January 1, 20x1. An appropriate discount rate is 10%. How much is the initial cost of the building? a. 368,000 b. 388,000 c. 424,634 d. 353,456 D Solution: Purchase price including non-refundable purchase taxes 380,000 Multiply by: PV of ₱1 @10%, n=1 (or simply divide by 110%) 0.90909 Cash price equivalent of building purchased 345,454 Legal fees 8,000 Initial cost of building 353,454

Classes of PPE  ABC Co. Co. had the following assets on on December December 31, 20x1. 20x1. Land used as plant site Land and building classified as held for sale Building used as office Building rented out under operating lease Equipment being sold in the ordinary course of business Office furniture Fixtures and signage Machinery  Automobiles  Automo biles (used (used by company company officers) officers) Delivery trucks (used by the shipping department) Computers  Aircraftt rented out  Aircraf out to various various clients clients Dairy cattle (held to produce milk that is sold to customers) Harvested milk  Apple trees trees (held (held to bear bear fruits to to that are are sold to customers) customers) Harvested apples How much is the total of assets classified as property, plant and equipment? a. 2,132,000 b. 2,126,000 c. 2,142,000 d. 2,148,000

50,000 780,000 500,000 420,000 330,000 24,000 10,000 12,000 350,000 420,000 70,000 690,000 10,000 3,000 6,000 2,000

 

 A Solution:  Land used as plant site Building used as office Office furniture Fixtures and signage Machinery  Automobiles  Automo biles (used (used by company company officers) officers) Delivery trucks (used by the shipping department)

50,000 500,000 24,000 10,000 12,000 350,000 420,000

Computers  Aircraft rented out  Aircraft out to various various clients clients  Apple trees trees (held (held to bear bear fruits to to that are are sold to customers) customers) Total property, plant and equipment

70,000 690,000 6,000 2,132,000

Acquisition on lump-sum price (building not razed) Use the following information for the next two questions: On April 1, 20x1, ESCULENT EDIBLE Co. purchased land and building by paying ₱40,000,000 and assuming a mortgage of ₱8,000,000. The land and building have appraised values of ₱20,000,000 and ₱40,000,000, respectively. The building will be used by ESCULENT Co. as its new office.  Additional  Addition al costs relating to the purchase purchase include the following: following: Lega Le gall cost cost of conv convey eyin ing g and and regi regist ster erin ing g titl title e to land land ₱32, ₱32,00 000 0 Payment to tenants to vacate premises 36,000 Option paid on the land and building 24,000

Opti Op tion on paid paid on simi simila larr land land and and buil buildi ding ng not not acqu acquir ired ed Broker's fee on the land and building Unpaid real estate taxes prior to April 1, 20x1 assumed by ESCULENT Co. – assessed on land Real estate taxes after April 1, 20x1 Repairs and renovation costs before the building is occupied Repair costs after the building is occupied How much is the cost of the land? a. 16,192,000 b. 17,292,000

c. 15,492,000

How much is the cost of the building? a. 23,4 ,42 20,0 ,00 00 b. 32,640 640,00 ,000 c. 32,240, 240,0 000

12,0 12,000 00 60,000

120,000 80,000 160,000 200,000

d. 14,592,000

d. 24,4 4,440,0 0,000

 A Solution: The total acquisition cost is determined as follows: Cash payment Mortgage assumed Total acquisition cost

40,000,000 8,000,000 48,000,000

The fractions to be used in the costs allocation are derived from the relative fair values as follows: Fair values Fractions   Land 20,000,000 20/60 Building 40,000,000 40/60   60,000,000 60

Purchase price (48M x 20/60); (48M x 40/60) Lega Le gall cost cost of conv convey eyin ing g and and regi regist ster erin ing g titl title e

Land 16,000,000 32,0 32,000 00

Building   32,000,000 -

 

  to Land Payment to tenants to vacate premises   (36K x 20/60); (36K x 40/60) Option paid on the land and building   (24K x 20/60); (24K x 40/60) Broker's fee on the land and building   (60K x 20/60); (60K x 40/60) Unpaid real estate taxes prior to April 1, 20x1 assumed – assessed on land Repairs and renovation costs before the building is occupied Totals

 

12,000 12

24,000

 

8,000 8,

16,000

20,000

40,000

120,000

-

-

160,000

16,192,000

32,240,000  

C (See solutions above)

Acquisition on lump-sum price (building demolished) Use the following information for the next four questions: On April 1, 20x1, ABC Co. purchased land and building for a lump-sum price of ₱48,000,000. The existing building will be demolished and a new building will be constructed.  Additional  Addition al costs relating to the purchase purchase include the following: following: Title guarantee 80,000 Option paid for the land and old building acquired 24,000

Payments to tenants to vacate premises 48,000 Cost of razing the old building (demolition cost) 240,000 Proceeds from sale of salvaged materials 60,000 Fair value of materials salvaged from the old building and used in the new building 120,000 Construction cost of new building (completed) 34,000,000 The land and old building have fair values of ₱20,000,000 and ₱40,000,000, respectively. How much are the allocated costs of the land and the new building? Land New building   a. 16,864,000 33,780,000 b. 16,104,000 34,180,000 c. 15,980,000 36,670,000 d. 16,014,000 34,810,000 B Solution:

Total acquisition cost (48M x 20/60); (48M x 40/60) Title guarantee Option paid for the land and old building acquired (24K x 20/60); (24K x 40/60) Payments to tenants to vacate premises (48K x 20/60); (48K x 40/60) Cost of razing the old building (demolition cost) Proceeds from sale of salvaged materials Fair value of materials salvaged

Land

Old building  

New building 

16,000,000

32,000,000

-

80,000

-

-

8,000

16,000 -

16,000

32,000

-

-

240,000

-

-

(60,000) -

 

  from the old building and used in the new building Construction cost of new building (completed) Totals

-

-

16,104,000

34,000,000

  32,048,000 

34,180,000 

The land and old building have fair values of ₱20,000,000 and ₱40,000,000, respectively. How much is charged as loss on initial recognition? a. 48,000 b. 32,000,000 c. 32,048,000 d. 0 C 32,048,000 – the allocated allocated cost cost of the old building building (see solution above).

The old building is unusable and has an insignificant fair value. How much are the allocated costs of the land and the new building?   Land New building   a. 46,640,000 33,780,000 b. 46,104,000 34,180,000 c. 48,152,000 34,180,000 d. 46,140,000 34,810,000 The old building is unusable and has an insignificant fair value. How much is charged as loss on initial recognition? a. 48,000 b. 32,000,000 c. 32,048,000 d. 0 C Solution:   Total acquisition cost Title guarantee Option paid for the land and old building acquired Payments to tenants to vacate premises Cost of razing the old building (demolition cost) Proceeds from sale of salvaged materials Fair value of materials salvaged from the old building and used in the new building Construction cost of new building (completed) Totals

Land 48,000,000 80,000

Old building -

New building -

24,000

-

-

48,000

-

-

-

-

240,000

-

-

(60,000)

-

-

-

-

-

34,000,000

48,152,000

-

34,180,000  

D No cost is allocated to the old building. Cost of self-constructed asset Use the following information for the next two questions: LOATH HATE Co. purchased a lot for ₱8,000,000. Immediately after the purchase, LOATH started construction of a new building on the lot. The following were additional costs incurred by LOATH Co. Legal cost of conveying land ₱ 40,000 Special assessment 20,000 Survey costs 60,000 Materials, labor, and overhead costs 22,000,000

 

Cash discounts on materials purchased not taken Clerical and other expenses related to construction Excavation costs  Architectural  Architec tural fees fees and building building permit permit Supervision by management on construction Insurance premiums paid for workers Payment for claim for injuries not covered by insurance Saving on construction Cost of changes to plans and specifications due to

120,000 56,000 400,000 240,000 48,000 520,000 180,000 800,000  

560,000

inefficiencies Paving of streets and sidewalks (not included in blueprint) Income earned on a vacant space rented as parking lot during construction How much is the cost of the land? a. 8,160,000 b. 8,100,000

c. 8,120,000

40,000 36,000 d. 8,060,000

How much is the cost of the building? a. 23,144,000 b. 23,184,000 c. 23,264,000

d. 23,096,000

C Solution: The costs are allocated as follows: 8,000,000 40,000 20,000 60,000

Land improvement  -

New building  -

-

-

22,000,000

-

-

(120,000)

-

-

56,000

-

-

400,000

-

-

240,000

-

-

48,000

-

-

520,000

-

40,000

-

Land 

Purchase price of lot Legal cost of conveying land Special assessment Survey costs Materials, labor, and overhead costs Cash discounts on materials purchased not taken Clerical and other expenses related to construction Excavation costs  Architectural  Architec tural fees fees and building building permit Supervision by management on construction Insurance premiums paid for workers Paving of streets and sidewalks (not included in blueprint) Totals

8,120,000

  40,000 

23,144,000 

A See solution above Cost of equipment – with decommissioning cost BAWDY INDECENT Co. acquired an oil rig for ₱400,000,000. Installation and other necessary costs in bringing the equipment to its intended condition for use totaled

₱80,000,000. BAWDY is required by law to dismantle the equipment and restore the site where it is installed after 20 years. The estimated decommissioning and restoration

 

costs are ₱40,000,000. The imputed rate of interest is 12%. How much is the initial cost of the equipment? a. 480,000,000 b. 440,000,000 c. 484,146,672 d. 404,146,672 C Solution: Purchase price 400,000,000 Direct costs 80,000,000 PV of decommissioning and restoration costs 4,146,672   (40M x 0.1036668) Cost of equipment

484,146,672  

Entry: Jan 1.    

Equipment 484,146,672 Cash 480,000,000 Decommissioning Liability 4,146,672

Dec 31. Y1  

Interest Expense ( 4,146,672 x .12) Decommissioning Liability

Dec. 31 Y2

Interest Expense

 

( 4,146,672 + 497,601) x .12 Decommissioning Liability

497,601 497,601

557,313 557,313

EXCHANGE Exchange Exchang e with with commer commercia ciall substance

NEW ASSET IS EQUAL TO: A. Fair Value Value of property property given given plus cash given given or less cash cash received received B. Fair Fair Value Value of proper property ty recei received ved C. Book Value Value of property property given given plus cash given given or less cash cash received received Gain or Loss on Exchange = Compare your own asset’s Fair Value VS. Book Value.

Exchange without New Asset = Book Value of property given plus cash given or less cash Commercial Substance received. No Gain or loss in exchange to be recognized. Trade In

New Asset = 1. Fair Fair Value Value of Asset Asset Give Given n up plus plus cash give given n 2. Trade In Value Value of Asset given up plus plus cash cash given given With fair value of asset given up Use the following information for the next four questions: Fact pattern FEEBLE Co. exchanged equipment with WEAK, Inc. Pertinent data are shown below:   FEEBLE   WEAK, Co. Inc. Equipment 4,000,000 8,000,000  Accumulated  Accumul ated depreciation depreciation 800,000 3,200,000 3,200,000 Carrying amount 3,200,000 4,800,000 3,800,000 4,400,000 Fair value Cash paid by FEEBLE Co. to   60 600,000 600,000 WEAK, Inc.

 

How much is the initial cost of the equipment received by FEEBLE Co.? a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,400,000  A 3,800,000 3,800,000 Fair value of asset given given up + 600,000 cash paid paid = 4,400,000    Equipment – New 4,400,000   Accumulated Depreciation 800,000   Equipment – Old 4,000,000   Cash 600,000   Gain on Exchange 600,000

How much is the initial cost of the equipment received by WEAK Co.? a. 3,800,000 b. 4,400,000 c. 5,000,000 d. 3,400,000  A = 4,400,000 4,400,000 Fair Fair value of asset given up - 600,000 600,000 cash received received = 3,800,000    Equipment – New 3,800,000   Cash 600,000   Loss on Exchange 400,000   Accumulated Depreciation 3,200,000   Equipment – Old 8,000,000 How much is gain (loss) on exchange recognized by FEEBLE Co.? a. (600,000) b. 600,000 c. 1,200,000 d. 0 B 3,800,000 Fair value of asset given up – 3,200,000 carrying amount of asset given up = 600,000 gain  How much is gain (loss) on exchange recognized by WEAK Co.? a. (400,000) b. 400,000 c. (1,000,000) d. 0  A 4,400,000 4,400,000 Fair value of asset given given up – 4,800,000 4,800,000 carrying carrying amount amount of asset asset given up = (400,000) loss  Fair value of asset given up is indeterminable Use the fact pattern in the preceding problem except that FEEBLE Co. cannot determine the fair value of the equipment given up but is aware that the equipment that will be received from WEAK, Inc. has a fair value of ₱4,400,000.

How much is the initial cost of the equipment received by FEEBLE Co.? a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,400,000  A 4,400,000  –  – fair value of asset received with no adjustment for cash paid   Equipment – New 4,400,000   Accumulated Depreciation 800,000   Equipment – Old 4,000,000   Cash 600,000   Gain on Exchange 600,000   How much is gain (loss) on exchange recognized by FEEBLE Co.? a. (600,000) b. 600,000 c. 1,200,000 d. 0 B Solution: Date

Equipment – new  Accumulated  Accumula ted depreciation depreciation   Cash on hand   Equipment – old Gain on exchange  

No commercial substance

4,400,000 800,000 600,000 4,000,000 600,000 

 

Use the fact pattern in the preceding problem except that the exchange has no commercial substance. How much is the initial cost of the equipment received by FEEBLE Co.? a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,200,000 C 3,200,000 carrying amount of asset given up + 600,000 cash paid = 3,800,000 

How much is gain (loss) on exchange recognized by FEEBLE Co.? a. (600,000) b. 600,000 c. 1,200,000 d. 0 D

Trade-in Use the following information for the next two questions: TRANSCEND EXCEED Co. traded in an old machine for a new model. Pertinent data are as follows: Old equipment: Cost  Accumulated  Accumula ted depreciation depreciation  Average published published retail value New equipment: List price Cash price without trade in Cash price with trade in

200,000 80,000 24,000

380,000 280,000 220,000

How much is the initial cost of the equipment received by TRANSCEND Co.? a. 244,000 b. 28 280,000 c. 320,000 d. 184,000 B 280,000 (cash price without trade in) – the Fair value of asset received because the Fair value of the asset given up is not given. How much is gain (loss) on exchange recognized by TRANSCEND Co.? a. 60,000 b. 160,000 c. (60,000) d. 0 C Solution: Date Equipment – new (cash price w/o trade in) 280,000  Accumulated depreciation  Accumulated depreciation Loss on trade in  in  (squeeze)   Equipment – old   Cash in bank

80,000 60,000  200,000 220,000

Acquisition through issuance of own equity instrument

Issuance of Share Capital

ASSET IS EQUAL TO 1. Fair Value Value of Consider Consideration ation received received (THE ASSET ASSET RECEIVE RECEIVED) D) 2. Fair Fair Value Value of of Share Share Capit Capital al Issued Issued 3. Par or or State Stated d Value Value of Shar Shares es Issued Issued

Use the following information for the next four questions: Fact pattern

RESILIENT ELASTIC Co. acquired land with fair value of ₱4,000,000 by issuing 10,000 shares with par value of ₱40 per share and quoted price of ₱360 per share. 1. P 4M

 

2. P 10,0 10,000 00 x 360 = 3,60 3,600,0 0,000 00 3. 10,0 10,000 00 x 40 = 400, 400,00 000 0 How much is the initial cost of the land received by RESILIENT Co.? a. 400,000 b. 4, 4 ,000,000 c. c . 3,600,000 d. 180,000 B 4,000,000 – the fair fair value of of the asset asset received received How much is gain (loss) on exchange recognized by RESILIENT Co.? a. 3, 3,200,000 b. 40 400,000 c. (4 (400,000) d. 0 D    

Land 4,000,000 Capital Stock ( 10,000x 40) Premium on Capital Stock

400,000 3,600,000

Use the fact pattern above except that the fair value of the land is indeterminable. How much is the initial cost of the land received by RESILIENT Co.? a. 400,000 b. 4, 4 ,000,000 c. c . 3,600,000 d. 180,000 C (10,000 x 360) = 3,600,000 – the fair fair value of of the securities securities issued issued   Land 3,600,000   Capital Stock ( 10,000x 40) 400,000   Premium on Capital Stock 3,200,000 How much is gain (loss) on exchange recognized by RESILIENT Co.? a. 3, 3,200,000 b. 40 400,000 D

c. (4 (400,000) d. 0

Acquisition through issuance of bonds payable New Asset is equal to: Issuance of Debt Security a. Fair Fair Valu Value e of Debt Debt Secur Security ity b. Fair Fair Valu Value e of Asset Asset Recei Received ved c. Face Face amoun amountt of Deb Debtt Secu Securi rity ty Use the following information for the next four questions: Fact pattern On January 1, 20x1, LABYRINTH MAZE Co. acquired land with fair value of ₱3,800,00 by issuing a 3-year, 10%, ₱4,000,000 bonds. Principal is due on January 1, 20x4 but interest is due at each year-end. The prevailing market rate of interest for a similar instrument on January 1, 20x1 is 12%. The present value of the future cash flows from

the bonds discounted at 12% is ₱3,807,852. How much is the initial cost of the land received by LABYRINTH Co.? a. 3,800 3,800,00 ,000 0 b. 4,000 4,000,00 ,000 0 c. 3,807 3,807,85 ,852 2 d. 180,0 180,000 00 C 3,807,852 – the fair fair value of Debt Security Security   Land 3,807,852   Discount on Bonds Payable 192,148   ( 4M – 3,807,852)   Bonds Payable 4,000,000 How much is gain (loss) on exchange recognized by LABYRINTH Co.? a. 192,148 b. (192,148) c. (200,000) d. 0 D Use the fact pattern above except that the fair value of the land is indeterminable. How much is the initial cost of the equipment received by LABYRINTH Co.? a. 3,800 3,800,00 ,000 0 b. 4,000 4,000,00 ,000 0 c. 3,807 3,807,85 ,852 2 d. 180,0 180,000 00

 

 A 3,800,000 – the fair fair value of of the securities securities issued issued      

Land 3,800,000 Discount on Bonds Payable 200,000 Bonds Payable 4,000,000

How much is gain (loss) on exchange recognized by LABYRINTH Co.? a. 192,148 b. (192,148) c. (200,000) d. 0 D Acquisition by donation Use the following information for the next two questions: GROVEL Co. received donation of equipment from CRAWL, Inc., an unrelated foreign corporation. The equipment has a fair value of ₱4,000,000. Necessary costs incurred by GROVEL Co. to bring the asset to its intended condition for use amounted to ₱40,000.

The entry to record the receipt of the donation includes a. a credit tto o share premium of ₱4,040,000 b. a credit to share premium of ₱3,960,000 c. a cred credit it to income income from from don donati ation on of ₱4 ₱4,04 ,040,0 0,000 00 d. a cred credit it to incom income e from from donation of ₱3,960,000    

Equipment 4,000,000 Income from Donation

   

Income from Donation Cash

4,000,000

40,000 40,000

D Since the donor is both an unrelated party and a non-government  entity,  entity, the fair value of the asset received net of the related cost incurred (4M – 40K = 3.96M ) is credited to income.  Assuming the donor donor is a sharehol shareholder der of GROVEL GROVEL Co., Co., the entry entry to record record the receipt receipt of the donation includes a. a credit tto o share premium of ₱4,040,000 b. a credit to share premium of ₱3,960,000 c. a cred credit it to income income from from don donati ation on of ₱4 ₱4,04 ,040,0 0,000 00 d. a cred credit it to incom income e from from donation of ₱3,960,000    

Equipment 4,000,000 Donated Capital (APIC) 4,000,000

   

Donated Capital Cash

40,000 40,000

B Since the donor is a shareholder , the fair value of the asset received net of the related cost incurred (4M – 40K = 3.96M ) is credited to share premium . DEPRECIATION METHODS Depreciation Rationale of the Method Formula of Computing Annual Methods Depreciation Straight line This Th is is adap adaptted when when the majo majorr Cost – Salvage Value or Residual Value reason of depreciation is passage of Estimated Useful life in years time giving each period equal amount.

 

Composite

Group

Working Hours Output/Productio n

Group of dissimilar assets in terms of characteristics and useful life treated as a single unit

Group of similar assets in terms of characteristics and useful life treated as a single unit

Based on the usage or function of asset used. Base Ba sed d on th the e outp output ut of th the e asse assett produced

5. The composite rate (total annual depreciation / total cost ) is multiplied to the tot otal al cost ost to get get depr deprec ecia iati tion on expense 6. When When as asse sett is re reti tire red, d, Accu Accumu mula late ted d Depr De preci eciat atio ion n is debi debite ted d equal equal to th the e cost credited minus any debited proceeds. No gain, No loss 7. When hen asse assett is repl eplaced aced,, asset ssets s is debited and the corresponding payments or liabilities are credited 8. Multiply the composite rat ate e by the bala ba lanc nce e of the asse assett acco accoun unts ts fo forr succe cceeding periods to get the depreciation expense 1. Deprec Depreciat iation ion Rate Rate per per hour hour or outp output ut = Cost-Salvage / estimated use hours/output 2. Mult Multip iply ly ac actu tual al hour hours s us used ed or outp output ut produced x Depreciation rate

A decreasing charge method  whereby the depreciable cost is (Cost – Salvage) x Digit of the Year Sum of the Years Digit Sum of the years’ mu mult ltipl iplie ied d by decre decreas asin ing g seri series es of Method fr frac acti tion ons s wher where e th the e nume numera rato torr is Ex. 4 years life.by the fraction to get the equal to the digit of the year ear in depreciation 1. Comput Compute e the the Sum Sum of the digit digits. s. consideration while the denominator Let n = no. of years, n (n+1) / 2 is equal to the total digits of the years 2. Prep Prepare are a frac fracti tion on:: nu nume merat rator or is the digit of the year while denominator is the sum of the digit. Start from the highest. 3. Multi Multiply ply the depreci depreciabl able e cost cost by the fraction to get the depreciation 1Residual Value / Co Cost) x This method cannot be used unless Rate ( 1Declining Balance ther here is a resi esidual dual val value. ue. In the diminishing book value. absence of residual value , we can Ex. 10 years = Yearly rate = 1/10 or 10%. assigned P 1 A fix ixed ed ra ratte is mult multip ipli lied ed by the Rate ( 100%/ estimated life x 2) c Double Declining

Inventory method

Retirement

Replacement

declining or book The fixedcarrying rate is equal to value. double the Straight line rate  rate  This Th is is gener general ally ly appl applied ied to smal smalll in inexp expen ensi sive ve it item ems. s. This This meth method od is nott sy no syst stem emat atic ic.. No cont contra ra asse assett account is maintained, maintained, deoreciation deoreciation is cred credit ited ed dire direcl cly y fr from om th the e as asse sett account No deprec depreciat iation ion is record recorded ed unless unless there is asset retired. No depreciation is recorded unless Assets are retired and replaced

diminishing value Ex. 10 years book = Yearly rate = 1/10 or 10% x 2 Balance per Inven enttory at year ear end – Balance per Inventory Account = Depreciation Expense

Original Cost of Asset Retired – Proceeds 3. If retir retired ed and re repl place aced, d, deprec deprecia iati tion on = Replac Rep laceme ement nt cost of assets assets retire retires s – proceeds 4. If retir retired ed but not replace replaced d or orig igin inal al cost of that asset is depreciation

 

Depreciation methods Use the following information for the next four cases: Fact pattern On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of ₱400,000. Straight line method Case #1: Use the straight-line method for the next two questions. How much is the depreciation expense in the 2 nd year? a. 100,000 b. 80,000 c. 200,000 d. 160,000 B (400,000 – 80,000) ÷ 4 = 80,000 annual depreciation Year Depreciation Ex Expense Accumulated Book Value Depreciation Cost Accumulated  Accumula ted 1 80,000 80,000 320,000 2 80,000 160,000 240,000 3 80,000 240,000 160,000 4 80,000 320,000 80,000

How much is the accumulated depreciation on December 31, 20x2? a. 100,000 b. 80,000 c. 200,000 d. 160,000 D (80,000 x 2) = 160,000  Sum-of-the-years’ digits (SYD) method Case #2: Use the sum-of-the-years’ digits (SYD) method for the next two questions. How much is the depreciation expense in the 2 nd year? a. 120,000 b. 96,000 c. 128,000 d. 224,000

1. Compute For the sum of the year’s digits : n=estimated life in years; n (n+1) / 2   Example : 4 years; (4 x 5) / 2 = 10 (This will be the denominator) 2. Compute the depreciation YEAR 1 2 3 4

4/10 X (400,000 – 80,000) 3/10 X (400,000 – 80,000) 2/10 X ( 400,000 – 80,000) 1/10 X (400,000 – 80,000)

Dep. Exp. Acc. Depre. Book Value 128,000 128,000 272,000 96,000 224,000 176,000 64,000 288,000 112,000 32,000 320,000 80,000 320,000

B SYD denominator = Life x [(Life + 1) ÷ 2] = 4 x [(4 + 1) ÷ 2] = 10  Depreciation – 2nd yr. = (400,000 – 80,000) x 3/10 = 96,000  How much is the accumulated depreciation on December 31, 20x2? a. 120,000 b. 96,000 c. 128,000 d. 224,000 D (400,000 – 80,000) x [(4+3)/10] = 320,000 x 7/10 = 224,000  Double declining balance method Case #3: Use the double declining balance method for the next two questions. How much is the depreciation expense in the 2 nd year? a. 120,000 b. 100,000 c. 128,000 d. 224,000

 

B On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of ₱400,000. 1. Double Declining Declining Rate (DDR)= Double the Straight Straight line line rate = 2/n Straight line rate = 1/n = estimated life In this case, the estimated life in 4 years = ¼ x 2 = 50% This DDR is multiplied by the declining book value= depreciation expense YEAR

Depreciation Expense

1

.50 ( 400,000)

200,000

2

.50 (400,000 – 200,000)

100,000

3

.50 (400,000 – 200,000 – 100,000)

50,000

Depr De prec ecia iabl ble e Cost Cost

= 400, 400,00 000 0 – 200, 200,00 000 0 – 100, 100,00 000 0

10,000

-80,000=remaining depreciable cost, 20,000/ remaining life of 2 years

(Correct)

4

.50 (400,000 – 200,000 – 100,000 -50,000)

25,000 10,000 (Correct)

Double declinin Double declining g balance balance rate = 2/Life 2/Life = 2/4 = 50% 100,000 

(400,000 x 50% x 50%) =

How much is the accumulated depreciation on December 31, 20x2? a. 120,000 b. 96,000 c. 160,000 d. 300,000 D Solution: Depreciation - 20x1 (400K x 50%) Depreciation - 20x2 (400K - 200K) x 50%  Accumulated depreciation - Dec. 31, 20x2

200,000 100,000 300,000 

Units of production method (Activity method or Variable-charge method) On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of ₱400,000. Case #4: Use the units of production method for the next two questions: The equipment has an expected total output  of  of 160,000 units and an expected total input  of  of 40,000 hours.

 

Information on actual operations is presented below: Year Unit its s prod produ uced Manufac factur turing ing hou hours 20x 1 60,000 16,000 20x 2 30,000 8,000 20x 3 45,000 12,000 20x 4 25,000 4,000   160,000 40,000 YR 1 2 3 4

OUTP OUTPUT UT - Dep Depre reci ciat atio ion n per per unit unit= = ((40 400, 0,00 000 0 -80 -80,0 ,000 00)/ )/16 160, 0,00 000 0 = 2/ un unit it Depreciation Expense = Dep/unit x of produced 60,000 x 2 30,000 x 2 45,000 x 2 25,000 x 2

Dep. Exp. 120,000 60,000 90,000 50,000 320,000

If SIMPLETON Co. uses the output method , how much is the depreciation expense in the 2nd year? a. 1C 28(400,000 ,000 b. 96x ,030,000 00 c/. 160,000 60,000 = 60,000  d. 64,000 1. – 80,000) If SIMPLETON Co. uses the output method , how much is the accumulated depreciation on December 31, 20x2? a. 120,000 b. 180,000 c. 192,000 d. 256,000 2. B (400,000 (400,000 – 80,000) x [(60,000 [(60,000 + 30,000) / 160,000] 160,000] = 180,000 

YR 1 2 3 4

INPU INPUT T - Depr Deprec ecia iati tion on per per ho hour ur= = (40 (400, 0,00 000 0 -80, -80,00 000) 0)/4 /40, 0,00 000 0 = 8/ ho hour  ur  Depreciation Expense = Dep/hour x of hours used 16,000 x 8 8,000 x 8 12,000 x 8 4,000 x 8

Depre. Expense 128,000 64,000 96,000 32,000 320,000

If SIMPLETON Co. uses the input method , how much is the depreciation expense in the 2nd year? a. 64,000 b. 96,000 c. 60,000 d. 64,000 3. A (400,0 (400,000 00 – 80,00 80,000) 0) x 8,00 8,000 0 / 40,000 40,000 = 64,000  If SIMPLETON Co. uses the input method , how much is the accumulated depreciation on December 31, 20x2? a. 120,000 b. 210,000 c. 192,000 d. 256,000 4. C (400,00 (400,000 0 – 80,000) 80,000) x [(16,00 [(16,000 0 + 8,000) 8,000) / 40,000] 40,000] = 192,000  Increasing depreciation charge under double declining balance method The following information pertains to an equipment owned by RABBLE MOB Co.:

 

Cost Useful life Double declining rate (2/ 5 year life) Residual value

800,000 5 years 40% None

How much is the depreciation in 20x5? a. 41,472 b. 103,680 c. 86,400 C

d. 0

Solution:

Depreciation = (DD rate x  Carrying amount)

Date

 Accumu-  lated  depre-  ciation

Jan. 1, 20x1

Carrying  amount 

800,000

Dec. 31, 20x1

40% x 800,000

320,000

320,000

480,000

Dec. 31, 20x2 

40% x 480,000

192,000

512,000

288,000

Dec. 31, 20x3

40% x 288,000

115,200

627,200

172,800

Dec. 31, 20x4

40% x 172,800

69,120

696,320

103,680

Dec. 31, 20x5 

40% x 103,680

41,472

737,792

62,208 

737,792 

Notice that in the table above, the carrying amount of the asset as of December 31, 20x5 is not equal to zero. It should have been zero because the asset does not have a residual value. Also, the total depreciation charge over the useful life of the asset is understated by ₱62,208 (800,000 - 737,792).

The carr The carryi ying ng amou amount nt of ₱62, ₱62,20 208 8 on Dece Decemb mber er 31, 31, 20x5 20x5 shou should ld be zeroed-out . However, if we charge the whole amount of ₱62,208 in 20x5, the total depreciation would be ₱103,680 (₱41,472 (₱41,472 + 62,208), 62,208), which is higher than the ₱69,120 depreciation in 20x4. This would result to an increasing charge rath rather er than than decreasing . Therefore, the depreciation in 20x4 and 20x5 shall be computed using the straight-line method as follows:

Carrying amount - Dec. 31, 20x3 Divide by:

172,800 2

Straight line depreciation for 20x4 and 20x5

86,400

The revised depreciation table is shown below:

 

Date Jan. 1, 20x1 Dec. 31, 20x1 Dec. 31, 20x2  Dec. 31, 20x3 Dec. 31, 20x4 Dec. 31, 20x5 

Depreciation = (DD rate x Carrying amount)

40% x 800,000 40% x 420,000 40% x 288,000 172,800 / 2 172,800 / 2

320,000 192,000 115,200 86,400  86,400  800,000 

 Accumu-  lated depre-  ciation

320,000 512,000 627,200 713,600 800,000

Carrying amount  800,000 480,000 288,000 172,800 86,400 - 

Partial year depreciation Use the following information for the next three questions: DEPLORABLE BAD Co. acquired a machine on September 21, 20x1 for a total cost of ₱160,000. The machine was estimated to have a useful life of 4 years and a salvage value of ₱10,000. Solutions: Depreciation for each full year of the asset’s life is calculated as follows:  Year Straight line SYD Double declining balance 1 (1 (150 50K K* / 4) = 37,50 ,500 4/1 4/10 x 150 150K* = 60,0 0,000 50% 50% x 160,0 0,000 = 80, 80,0 000 2  37,500 3/10 x 150K = 45,000 50% x 80,000 = 40,000 3 37,500 2/10 x 150K = 30,000 50% x 40,000 = 20,000 4 37,500 1/10 x 150K = 15,000 50% x 20,000 = 10,000

* (₱160,000 - ₱10,000) = ₱150,000  How much is the depreciation expense in 20x2 under the straight-line method? a. 37,500 b. 93,750 c. 36,400 d. 35,000  A   Annual Depreciation = (160,000 – 10,000) / 4 = 37,500 per year             

20x1 - 37,500 x 3/12 = 9,375 20x2 – 37,500 x 12/12 = 37,500 20x3 = 37,500 20x4 =37,500 20x5 – 37,500 x 9/12 = 28,125 150,000

( Oct 1 to Dec. 31) (Jan 1 to Dec 31) (Jan 1 to Dec 31) (Jan 1 to Dec 31) ( Jan 1 to Oct 1)

How much is the depreciation expense in 20x2 under the sum-of-years’ digits method? a. 45,000 b. 11,250 c. 56,250 d. 57,250 C (See solutions above) SYD – Full Year  4/10 x 150K* = 60,000 3/10 x 150K = 45,000 2/10 x 150K = 30,000 1/10 x 150K = 15,000

Year 20x1 2 20 0x x2 3 20x4

Dep Exp 15,000

60,000 x 3/12 60,000 x 9/12 + 4 45 5,,0 00 00 0x x3 9//1 12 2 + 30,000 x 3/12 30,000 x 9/12 + 15,000 x 3/12

5 46 1,,2 25 50 0 26,250

 

20x5

15,000 x 9/12

11,250 150,000

How much is the depreciation expense in 20x2 under the double declining balance method? a. 70,000 b. 60,000 c. 10,000 d. 0  A (See solutions above)

N= 4 years. Rate per year = ¼ = 25% Double the rate = 25% x 2 = 50%

Double declining balance 50% x 160,000 = 80,000 50% x 80,000 (160,000 -80,000) = 40,000 50% x 40,000 (160,000 – 80,000 – 40,000) = 20,000 50% x 20,000 (160,000 -80,000 -40,0000 -20,000)= 10,000

Year 20x1 20x2 20x3 20x4 20x5

80,000 x 3/12 80,000 x 9/12 + 40,000 x 3/12 40,000 x 9/12 + 20,000 x 3/12 20,000 x 9/12 + 10,000 x 3/12 10,000 x 9/12

Dep Exp 20,000 70,000 35,000 17,500 7,500 150,000

Since the first full year of the asset’s life does not coincide with the entity’s accounting period, the amounts shown above are prorated as follows: Double  Yea Straight declining r  line SYD balance 20x  60,000 x 9/12 = 80,000 x 9/12 = 2  37,500 45,000 60,000 45,000 x 3/12 = 40,000 x 3/12 =   11,250 10,000 37,500

56,250

70,000  

*Since the asset was acquired on September 21, 20x1 ( last half of the month), it is treated as if it has been acquired on October 1, 20x1. Composite method Use the following information for the next four questions: On January 1, 20x1, DEVIOUS CROOKED Co. purchased the following: Cost Co st Resi Residu dual al valu value e Usef Useful ul li life fe Machine tools 80,000 4,000 3 years Meters costing 64,000 2,000 5 years Returnable containers 120,000 6 years

Machine tools Meters costing

Cost 

Residual value

80,000 64,000

4,000 2,000

Depre-  ciable a6 m,0 t.00 7 62,000

 Annual depre-  Useful life 3 5

ciation 25,333 12,400

 

Returnable containers Totals

120,000 264,000

-

120,000 258,000

6

20,000 57,733

What is the composite life? a. 5.40 b. 5 c. 4.50 d. 4.71   Composite life = Depreciable amt. ÷ Annual depreciation (258,000 ÷ 57,773) = 4.5 (rounded-off) C

What is the composite rate? a. 21.87% b. 22.21% c. 95.45% d. 4.50%  A (Refer (Refer to solution solution above) above) Composite rate = Annual depreciation ÷ Total cost = (57,733 ÷ 264,000) = 21.87%  How much is the depreciation expense in 20x1? a. 57,733 b. 56,000 c. 58,667 d. 59,8774  A (Refer (Refer to solution solution above) above) Formula for depreciation Expense : Composite Rate x ( Balance of the Cost)   (.2187 x P 264,000) = 57,733

During 20x3, machine tools with original cost of ₱20,000 and residual value of ₱2,000 were sold for ₱6,000. How much is the gain (loss) on the sale? a. (345) b. 430 c. (667) d. 0 D No gain or loss is recognized when an individual asset in a group of assets being depreciated using a group depreciation method is disposed of. Entry: Cash   Accumulated Depreciation   Asset (Tools)

6,000 14,000 20,000

If in the 2nd year , Half of the Machine Tools was sold at P 30,000 and we bought P 20,000 furniture.      

   

Cash Accumulated Depreciation (80,000 x ½) -30,000 Machine Tools Furniture Cash

30,000 10,000 40,0000 20,000 20,000

How much is the depreciation expense in 20x2? Formula for depreciation Expense : Composite Rate x ( Balance of the Cost) Depreciation Expense = Balance of Cost at year end x composite rate   =(264,000 – 40,000 + 20,000) x .2187   = 53,363

 

Retirement and Replacement methods

Retirement

Replacement

Depreciation Expense No deprec depreciat iation ion is record recorded ed unless unless Original Cost of Asset Retired – Proceeds there is asset retired. 1. If retir retired ed and re repl place aced, d, deprec deprecia iati tion on = No depreciation is recorded unless Replac Rep laceme ement nt cost of assets assets retire retires s – Assets are retired and replaced proceeds 2. If retir retired ed but not replace replaced d or orig igin inal al cost of that asset is depreciation

Use the following information for the next two questions: The small tools account of ATROCIOUS CRUEL Co. has a balance of ₱600,000 as of January 1, 20x1. Movements in this account during the year are as follows:   Cost of newly acquired small tools Cost of old small tools retired Proceeds from sale of old small tools

Feb. Fe

April

Sept.

Nov.

40,000

-

120,000

88,000

24,000

48,000

-

72,000

2,000

3,200

-

4,000

 Assuming ATROCIOUS ATROCIOUS Co. uses the retirement method, how much is the depreciation expense in 20x1? a. 134,800 b. 166,800 c. 144,000 d. 118,800  A Solution: Total   Feb. Fe April Sept. N ov . depreciation Cost of old small tools 24,000 48,000 72,000 retired 144,000 Proceeds from sale (2,000) (3,200) (4,000) (9,200)  Totals 22,000 44,800 68,000   134,800 

 Assuming ATROCIOUS ATROCIOUS Co. uses the replaceme replacement nt method, how much is the depreciation expense in 20x1? a. 134,800 b. 166,800 c. 144,000 d. 118,800 B Solution: Total   Feb. Fe April Sept. Nov. depreciation Cost of newly   40,000 N/A 88,000 128,000 acquired small tools Cost of old small 48,000 48,000 tools retired Proceeds from sale (2,000) (3,200) (4,000) (9,200) of old small tools  Totals

38,000

44,800

-

84,000  

166,800 

 

Inventory method enttory at year ear end – This Th is is gener general ally ly appl applied ied to smal smalll Balance per Inven per Inventory Account = Inventory method in inexp expen ensi sive ve it item ems. s. This This meth method od is Balance nott sy no syst stem emat atic ic.. No cont contra ra asse assett Depreciation Expense account is maintained, maintained, depreciation depreciation is cred credit ited ed dire direcl cly y fr from om th the e as asse sett account

The small tools account of AUGUST MAJESTIC Co. has a balance of ₱600,000 as of January 1, 20x1. Acquisitions of small tools during the period totaled ₱240,000 and proceeds from sale of small tools retired and/or replaced totaled ₱100,000. The annual asset count on December 31, 20x1 revealed a balance of small tools of ₱440,000. How much is the depreciation expense under the inventory method? a. 400,000 b. 300,000 c. 240,000 d. 140,000 B Solution:   Small tools Jan. 1, 20x1 bal. 600,000 100,000 Proceeds from retired/replaced tools 000 Depreci eciati tio on for 20x1 (s (sq quee eez ze)  Additions  Addition s 240,000 300,000 440,000 Dec. 31, 20x1 bal. Revenue method On January 1, 20x1, COCKY ARROGANT Co. acquired an equipment costing ₱4,000,000. The equipment will be used to reproduce a gaming software which is expected to be marketed for 3 years. The equipment is expected to be used in producing products over the next two years, after which, the equipment will be disposed of at a negligible amount.

Estimated revenues from the software are as follows: Year Ye ar Est Estimat imated ed reve revenu nues es 20x  1   120,000,000 20x  2    80,000,000 20x  3   40,000,000 Tota   l  240,000,000 The actual revenue earned in 20x1 is ₱180,000,000. Depreciation expense in 20x1 is most likely equal to a. 3,000,000 b. 2,000,000 c. 2,977,667 d. 333,333 B Solution: Using straight-line method: (4M ÷ 2) PAS 16 prohibits the use of a depreciation method that is based on revenue.

Leasehold improvements Use the following information for the next two questions: On January 1, 20x1, DIMINUTIVE SMALL Co. signed a ten-year lease for office space. DIMINUTIVE has the option to renew the lease for an additional five-year period on or before January 1, 2x10. During the first half of January 20x2, DIMINUTIVE Co. incurred

the followingfor costs: ₱3,600,000 general improvements to the leased premises with an estimated useful life of ten years.

 

₱400,000 for office furniture and equipment with an estimated useful life of ten years. ₱800,000 for movable assembly line equipment with useful life of 5 years.  At the time time the leasehold leasehold improveme improvement nt were finished, DIMINUTIVE DIMINUTIVE Co. is is uncertain uncertain as to the exercise of the renewal option. How much is the 20x2 depreciation expense on the leasehold improvements? a. 400,000 b. 360,000 c. 533,333 d. 488,889 Lease term = 9 ; Life = 10; so we go for lease term.  A (3,600,000 (3,600,000 ÷ 9) 9) = 400,000   Assume that that in DIMINUTIV DIMINUTIVE E Co. is certain that that it will will exercise exercise the renewal renewal option. option. How much is the 20x2 depreciation expense on the leasehold improvements? a. 400,000 b. 360,000 c. 480,000 d. 440,000 Lease Term = 9 + 5 = 14 ; Useful Life = 10 , so the lower is life, B (3,600,000 ÷ 10) = 360,000  Change in depreciation method (from DDB to SL) 1. Compute Compute the Carryin Carrying g Value Value of the asset asset up to the time time of Change. Change. 2. Use the carrying carrying Value as as the new cost cost and apply apply the new method method or policy. policy.

On January 1, 20x1, DISCORDANT DISAGREEING Co. acquired machinery for a total cost of ₱80,000,000. The machinery is depreciated using the double declining balance method over a period of 10 years. On January 1, 20x4, DISCORDANT Co. changed its depreciation method to straight line method. How much is the depreciation expense in 20x4? a. 5,815 5,815,42 ,428 8 b. 7,3 7,314, 14,28 286 6 c. 6,581 6,581,34 ,342 2 d. 5,851, 5,851,429 429 D Solution: Double declining balance rate = 2/Life = 2/10 = 20% Carrying amt. on 1/1/x4 =( 80M x 80% x 80% x 80%) = 40,960,000  Dep’n. – 20x4 = 40,960,000 ÷ 7 = 5,851,429

Change in depreciation method (from SYD to DDB) On January 1, 20x1, KNAVE RASCAL Co. acquired machinery for a total cost of

₱80,000,000. The machinery is depreciated using the SYD method over a period of 10 years. On January 1, 20x4, KNAVE Co. changed its depreciation method to double declining balance method. How much is the depreciation expense in 20x4? a. 40,727,272 b. 11,635,782 c. 12,556,780 d. 13,556,702 B Solution: SYD denominator = 10 x [(10+1)/2)] = 55   Accumulated  Accumula ted depreciation depreciation on 1/1/x4 1/1/x4 = 80M x [(10 [(10 + 9 + 8)/55] 8)/55] = 39,272,727  Carrying amt. on 1/1/x4 = 80M – 39,272,727 = 40,727,273 Or Carrying Value = 55-10-9-8 / 55 (80M) =40,727,272 Double declining balance rate = 2/7 = 28.57% Dep’n. – 20x4 = 40,727,273 x 28.57% = 11,635,782

Change in useful life and residual value

 

On January 1, 20x1, SMUTTY OBSCENE Co. acquired machinery for a total cost of ₱80,000,000 and estimated residual value of ₱8,000,000. The machinery is depreciated using the straight line method over a period of 10 years. On January 1, 20x4, SMUTTY Co. revised the total useful life of the asset to 15 years from acquisition date and the residual value to ₱10,400,000. How much is the depreciation expense in 20x4? a. 4,000 4,000,00 ,000 0 b. 3,8 3,899, 99,56 567 7 c. 4,010 4,010,25 ,250 0 d. 4,129, 4,129,335 335  A Solution: Carrying amt. on 1/1/x4 = (80M – 8M) x 7/10 + 8M = 58,400,000 Dep’n. – 20x4 = (58.4M – 10.4M) ÷ (15yrs. – 3yrs.) = 4,000,000

I

mprovements and Replacements Use the following information for the next two questions: ENTREAT Co. acquired an aircraft from BEG, Inc. on January 1, 20x1 for a total cost of

₱24,000,000. The aircraft is estimated to have a useful life of 10 years. ENTREAT Co. uses the straight line method of depreciation. On January 1, 20x5, a major part of the equipment was replaced for a total cost of ₱3,200,000.  Assuming ENTREAT ENTREAT Co. determined determined that the cost of the the replaced replaced part is ₱2,000,000, ₱2,000,000, how much is the loss on replacement? a. 1,9 1,920 20,0 ,000 00 b. 1,2 1,200 00,0 ,000 00 c. 2,0 2,000 00,0 ,000 00 b. 0 B Solution: Jan.  Accumulated  Accumul ated depreciation depreciation (2M  x  x 4/10) 800,000 Loss on replacement  (squeeze) 1,200,000  1, 20x5    Delivery equipment - aircraft (old part) 2,000,000 to derecognize the old part that is replaced Jan. Delivery equipment - aircraft (new part) 3,200,000 1,   Cash in bank 3,200,000 20x5 

to recognize the new replacement part 

 Assuming it is impracticabl impracticable e to determine determine the cost of the the replaced replaced part, part, how much much is the loss on replacement? a. 1,9 1,920 20,0 ,000 00 b. 1,2 1,200 00,0 ,000 00 c. 2,0 2,000 00,0 ,000 00 b. 0  A Solution: Jan.  Accumulated  Accumul ated depreciation depreciation (3.2M  x  x 4/10) 1,280,000 1, Loss on replacement  (squeeze) 1,920,000  20x5    Delivery equipment - aircraft (old part) 3,200,000 to derecognize the old part that is replaced Jan. Delivery equipment - aircraft (new part) 3,200,000 1,   Cash in bank 3,200,000 20x5 to recognize the new replacement part Revaluation: Appraised value

 

On December 31, 20x1, the building of HISTRIONAL THEATRICAL Co. with a historical cost of ₱80,000,000, accumulated depreciation of ₱20,000,000, and an estimated useful life of 20 years has been assessed by an external valuer to have an appraised value of ₱100,000,000. How much is the revaluation surplus? a. 40,000,000 b. 28,000,000 c. 20,000,000 d. 10,000,000  A [100M – (80M – 20M)] 20M)] = 40,000,000 Based on Cost 80,000,000

Cost/ Replacement  Accumulated  Accumulated Depreciation/Observe d Depreciation

20,000,000 (20/80) = 25% 60,000,000 100%- 25% = 75% Book Value

     

Revaluation 133,333,333 (100,000,000 / .75) 33,333,333 (133,333,333 x .25)

Difference 53,333,333

100,000,000

40,000,000

13,333,333

Sound Value/Fair   Revaluation Value/ Appraised Surplus (Gross)

100,000,000 / .75 (60/80) = 133,333,333 133,333,333 x 5/20 (5=.25 of 20 yrs) = 33,333,333 If the tax rate is 30%

Proportionate Elimination Building 53,333,333  Accumulated Depreciatio  Accumulated Depreciation n 20,000,000 20,000,000   Accumulated Depreciation 13,333,333 Building 20,000,000   Revaluation Surplus (40M x.70) 28,000,000   Revaluation Surplus (40M x.70) 28,000,000   Deferred tax Payable (40M x .30)12,00,000   Deferred tax Payable (40M x .30)12,00,000   Depreciation from 1st year to 5th year : 80M / 20 yrs = 4,000,000 1, Depreciation on the 6 th year to 20 years.. Depreciation Expense (100,000,000 /15)   Accumulated Depreciation

6,666,667 6,666,667

Difference in Expense = 6,666,667 – 4,000,000 = 2,666,667 x .7 = 1,866,667 2, (Piecemeal Adjustment) Revaluation Surplus ( 28M /15) Deferred Tax Payable (12/15)   Retained Earnings   Income Tax Payable

1,866,667 800,000 1,866,667 800,000

Depreciated replacement cost (without residual value) On December 31, 20x1, the building of SWIMMY UNSTEADY Co. with a historical cost of ₱80,000,000, accumulated depreciation of ₱20,000,000, and an estimated useful life of 20 years has been estimated to have a replacement cost of ₱140,000,000. How much is the revaluation surplus? a. 31,500,000 b. 36,778,750 c. 45,000,000 d. 60,000,000 C Solution:  Depreciated replacement cost 105,000,000

 

 Carrying amount (80M - 20M)  Revaluation surplus

(60,000,000) 45,000,000

Replacement cost Observed depreciation (140M x 20/80)  Depreciated replacement cost

140,000,000 (35,000,000) 105,000,000

Cost/ Replacement  Accumulated  Accumul ated Depreciation/Observe d Depreciation

Based on Cost 80,000,000 20,000,000

Revaluation 140,000,000 35,000,000 (140M x 20/80)

Difference 60,000,000 15,000,000

60,000,000 Book Value

105,000,000 Sound Value

45,000,000 Revaluation Surplus

Depreciated replacement cost (with residual value) On December 31, 20x1, the building of LITHE FLEXIBLE Co. was revalued. Information on revaluation date is shown below:   Cost Building 72,000,000  Accumulated  Accumula ted depreciation depreciation 16,000,0 16,000,000 00 Residual value 8,000,000 Remaining useful life 10 years

Replacement cost   144,000,000

8,000,000 12 years

How much is the revaluation surplus? a. 45,000,000 b. 54,000,000 c. 36,000,000 d. 46,333,333 B Solution:  Accumulated  Accumula ted depreciation depreciation Depreciable amt. of Observed x = Depreciable amount (old) replacement cost depreciation Observed depreciation = 136M a x (16M ÷ 64Mb) = 34,000,000 Replac Repl acem emen entt co cost st Res Re sidua iduall valu value e Depreciable amt. of replacement cost a

144, 144,00 000, 0,00 000 0 (8,0 (8,000 00,0 ,000 00)) 136,000,000

Hi Hist stor oric ical al cost cost Resi Residu dual al valu value e  Depreciable amount b

72,0 72,000 00,0 ,000 00 (8,0 (8,000 00,0 ,000 00)) 64,000,000

 Replacement cost Less: Observed depreciation  Depreciated replacement cost

144,000,000 (34,000,000) 110,000,000

Depreciated replacement cost Less: Carrying amount (old)  Revaluation surplus

110,000,000 (56,000,000) 54,000,000

Methods of recording revaluation surplus – Replacement cost Use the following information for the next three questions: On December 31, 20x1, the building of SUBTERFUGE DECEPTION Co. with a historical cost of ₱80,000,000, accumulated depreciation of ₱20,000,000, and an

 

estimated useful life of 20 years has been estimated to have a replacement cost of ₱140,000,000. Income tax rate is 30%. How much is the revaluation surplus? a. 31,500,000 b. 36,778,750

Cost/ Replacement  Accumulated  Accumulated Depreciation/Observe d Depreciation

c. 45,000,000

Based on Cost 80,000,000 20,000,000 (20/80) = 25% 60,000,000 100%- 25% = 75% Book Value

d. 60,000,000

Revaluation 140,000,000 (100,000,000 / .75) 35,000,000 (140M x .25)

Difference 60,000,000

105,000,000

45,000,000

15,000,000

Sound Value/Fair   Revaluation Value/ Appraised Surplus (Gross)

45,000,000 x .70 = 31,500,000 Revaluation Surplus

 A Solution: The depreciated replacement cost is computed as follows: Replacement cost Less: Observed depreciation Depreciated replacement cost

140,000,000 (35,000,000)a 105,000,000

a

Where: Observed  Accumulated  Accumul ated depreciation depreciation = Replacement cost x depreciation Historical cost 35,000,000 = 140,000,000 x (20,000,000/80,000,000) The revaluation surplus is computed as follows: Depreciated replacement cost Carrying amount (80,000,000 – 20,000,000) Revaluation surplus – gross of tax

105,000,000 (60,000,000) 45,000,000

The revaluation surplus gross of tax is allocated as follows: Revaluation surplus after  tax  tax (45,000,000 x 70%a) Deferred tax liability (45,000,000 x 30%) a (70% = 100% - 30% tax rate)

31,500,000

13,500,000

 Assuming SUBTERFUGE SUBTERFUGE Co. Co. uses the the proportional proportional method, method, the the entry to to record the revaluation includes: a. debit to accumulated depreciation for ₱15,000,000 b. debit to accumulated depreciation for ₱20,000,000 c. debi debitt tto o bui build ldin ing g for for ₱25, ₱25,00 000, 0,00 000 0 d. debi debitt to to bui build ldin ing g for for ₱60, ₱60,00 000, 0,00 000 0 D Solution: The movements in the accounts are determined as follows: Historical Cost Replacement cost   Building 80,000,000 140,000,000

Increase 60,000,000

 

 Accum. depreciat depreciation ion (20,000,000) (20,000,000) (35,000,000) (35,000,000) b CA/ DRC/ RS 60,000,000 105,000,000 b Carrying amount/ Depreciated replacement cost/ Revaluation surplus The entry under the proportional method is as follows: Dec. Building (see table) 31,   Accumulated depreciation (see table) 20x1   Revaluation surplus Deferred tax liability

Cost/ Replacement  Accumulated  Accumulated Depreciation/Observe d Depreciation

Based on Cost 80,000,000 20,000,000 (20/80) = 25% 60,000,000 100%- 25% = 75% Book Value

(15,000,000) 45,000,000

60,000,000

15,000,000 31,500,000 13,500,000

Revaluation 140,000,000 (100,000,000 / .75) 35,000,000 (140M x .25)

Difference 60,000,000

105,000,000

45,000,000

15,000,000

Sound Value/Fair   Revaluation Value/ Appraised Surplus (Gross)

 Assuming SUBTERFUGE SUBTERFUGE Co. Co. uses the the elimination elimination method, method, the entry to record record the the revaluation includes: a. credit to accumulated depreciation for ₱20,000,000 ₱25,000,000 c. debit to accumulated depreciation for ₱15,000,000 ₱13,500,000 B Solution: The entry under the elimination method is as follows: Dec.  Accumula  Accumulated ted depreciation depreciation Building (balancing figure) 31, 20x1   Revaluation surplus Deferred tax liability

b. a debit to building for d. a debit to deferred tax for

20,000,000 25,000,000 31,500,000 13,500,000

Methods of recording revaluation – Appraised – Appraised value Use the following for the next twoCo. questions: On December 31,information 20x1, the building of ABC with a historical cost of ₱320,000,000, accumulated depreciation of ₱160,000,000, and an estimated useful life of 20 years has been assessed by an external value to have an appraised value of ₱200,000,000. Income tax rate is 30%

The entry under the proportional method to record the revaluation includes a. debit to accumulated depreciation for ₱40,000,000 b. credit to accumulated depreciation for ₱20,000,000 c. debi debitt tto o bui build ldin ing g for for ₱80, ₱80,00 000, 0,00 000 0 d. cred credit it to bu buil ildi ding ng for for ₱80 ₱80,0 ,000 00,0 ,000 00 C Solution: The revaluation surplus is computed as follows:  Appraised  Apprais ed value 200,000,000 200,000 ,000 Carrying amount (320M – 160M) (160,000,000) R evaluDeferred ation surtax plusliability – gros(40M s of taxx30%) Less: Revaluation surplus after tax

40,000,000 (12,000,000) 28,000,000

 

The change in carrying amount is determined as follows:  Appraised value Divide by: Carrying amount (320M – 160M) Change in carrying amount

200,000,000 160,000,000 125%

The gross carrying amount after the revaluation is restated as follows:  Gross carrying amount before revaluation 320,000,000 Multiply by: Change in carrying amount 125%  Gross carrying amount after revaluation 400,000,000 The accumulated depreciation after the revaluation is computed as follows: Gross carrying amount after revaluation 400,000,000 Accumulated depreciation after revaluation (squeeze) (200,000,000) Carrying amount after revaluation (Appraised value) 200,000,000 The changes in the accounts are determined as follows: Before After revaluation revaluation  Building 320,000,000 400,000,000  Accu Accumul mulate ated d depre deprecia ciatio tion n (160, (160,000 000,0 ,000 00)) (200, (200,00 000,0 0,000 00))  Carrying amount 160,000,000 200,000,000

Increase 80,000,000 (40,000,000) 40,000,000

The entry under the proportional method is as follows: Building 80,000,000 Dec. 31,   Accumulated depreciation 20x1   Deferred tax liability Revaluation surplus

40,000,000 12,000,000 28,000,000

The entry under the elimination method to record the revaluation includes a. debit to accumulated depreciation for ₱40,000,000 b. debit to accumulated depreciation for ₱20,000,000 c. debit to building for ₱80,000,000 d. credit to building for ₱80,000,000  A Solution: The entry under the elimination method is as follows: Dec. 31, 20x1

 Accumulated depreciation  Accumulated depreciation   Deferred tax liability   Revaluation surplus

40,000,000

The carrying amount after the revaluation is reconciled as follows: Building (original balance)  Accumulated  Accumul ated depreciation depreciation (40M - 10M 10M debit in entry) Carrying amount after revaluation (Appraised value)

12,000,000 28,000,000

80,000,000 (30,000 (30,000,000) ,000) 50,000,000

Revaluation: Change in useful life Use the following information for the next two questions: On January 1, 20x1, the building of PRODIGIOUS EXTRAORDINARY Co. with a historical cost of ₱80,000,000 purchased 5 years ago with an estimated useful life of 20 years has been estimated to have a replacement cost of ₱140,000,000. The building is estimated to have a remaining useful life of 25 years as of January 1, 20x1. Depreciation is computed using the straight line method. Income tax rate is 30%.

How much is the revaluation surplus?

 

a. 31,500,000

b. 45,000,000

c. 37,500,000

d. 36,788,366

(45,000,000 x .70) =31,500,000

Cost/ Replacement  Acc Dep/Observe Dep/Observed d Book Value / Sound Value

Book 80,000,000 20,000,000 20,000,000

Revalue 140,000,000 35,000,000 35,000,000 (140M x 20/80) 105,000,000

60,000,000

 A Solution: The depreciated replacement cost is computed as follows: Replacement cost Less: Observed depreciation Depreciated replacement cost a

Where: Observed depreciation

=

Replacement cost

x

Difference 60,000,000 15,000,000 45,000,000

140,000,000 (35,000,000)a 105,000,000

 Accumulated depreciation  Accumulated depreciation Historical cost

 Accumulated depreciation  Accumulated depreciation = (80,000,000 (80,000,000 x 5/20) 5/20) = 20,000,000 20,000,000 Observed depreciation = 140M x (20,000,000/ 80,000,000) = 35,000,000 The revaluation surplus is computed as follows: Depreciated replacement cost Carrying amount (80,000,000 – 20,000,000) Revaluation surplus before tax

105,000,000 (60,000,000)   45,000,000

Revaluation surplus after  tax  tax (45,000,000 x 70%b)

How much is the depreciation expense in 20x1? a. 2,9 2,940 40,0 ,000 00 b. 4,200,000 c. 3,200,000 B Solution:

31,500,000

d. 3,333,976

The depreciation subsequent to date of revaluation is computed as follows: Revalued amount (depreciated replacement cost) 105,000,000 Divide by: Revised remaining useful life 25 Revised annual depreciation expense 4,200,000 Entry : Depreciation Expense 4.2M   Accumulated Depreciation 4.2M Piecemeal Adjustment :   Revaluation Surplus ( 31.5M / 25)   Deferred Tax Payable (31.5M/.7 x .30)/25   Retained Earnings   Income Tax Payable

1.26M .54M 1.26M .54M

 

Revaluation: Change in residual value and useful life Use the following information for the next two questions: On December 31, 20x1, the building of COLLOQUY CONVERSATION Co. was revalued. Information on revaluation date is shown below: Cost Replacement cost    Building 72,000,000 144,000,000  Accumulated  Accumula ted depreciation depreciation 16,000,0 16,000,000 00 Residual value 8,000,000 16,000,000 Remaining useful life 10 years 12 years

How much is the revaluation surplus? a. 45,000,000 b. 31,500,000 c. 36,788,366 D Solution: The observed depreciation is computed as follows: Observed depreciation

=

Depreciable amt. of replacement cost

Where: Repla Re place ceme ment nt cost cost Residual value Depreciable amt. of replacement cost Observed = depreciation Observed depreciation =

x

d. 51,428,571

 Accumulated depreciation  Accumulated depreciation (old) Depreciable amount

144,0 144,000 00,00 ,000 0 (16,000,000)

Histor Historica icall cost cost Residual value

72,00 72,000,0 0,000 00 (16,000,000)

128,000,000

Depreciable amount

56,000,000

128,000,000

x

   

16,000,000 (given) 56,000,000

36,571,429

The depreciated replacement cost is computed as follows: Replacement cost Less: Observed depreciation Depreciated replacement cost (Sound Value)

144,000,000 (36,571,429) 107,428,571

The revaluation surplus is computed as follows: Depreciated replacement cost (Sound Value) Carrying amount (72,000,000 – 16,000,000) (Book Value) Revaluation surplus

107,428,571 (56,000,000) 51,428,571

How much is the depreciation expense in 20x2? a. 3,333,976 b. 4,200,000 c. 7,619,048 d. 8,990,344 C Solution: Depreciation subsequent to date of revaluation is computed as follows: Reva Re value lued d amou amount nt (depr (depreci eciat ated ed rep replac lacem emen entt cost)( cost)(So Soun und d Value Value)) 107,4 107,428, 28,571 571 New residual value (16,000,000) Depreciable amount 91,428,571 Divide by: Revised remaining useful life 12 Revised annual depreciation expense 7,619,048 Revaluation of non-depreciable asset On December 31, 20x1, the land of FARCICAL ABSURD Co. with a historical cost of ₱80,000,000 has been appraised at ₱140,000,000. Income tax rate applicable to profits

is 30% and the tax rate applicable to profits made on the sale of property is 6%. How much is the revaluation surplus?

 

a. 42,000,000 b. 56,400,000 c. 45,000,000 51,428,572 B (140,000,000 – 80,000,000) = 60,000,000 x 94% = 56,400,000 Entry :      

Land ( 140,000 -80,000) 60,000,000 Revaluation Surplus Deferred Tax Payable (60M x .06)

d.

56,400,000 3,600,000

Revaluation decrease representing impairment loss On December 31, 20x1, the land of ATTAINDER DISHONOR Co. with an original cost of ₱32,000,000 was appraised at ₱48,000,000. On December 20x4, the land was appraised at ₱28,000,000. How much is the impairment loss in 20x4? a. 20,000,000 b. 4,000,000 c. 2,800,000 d. 0 B Solutions: 20x1  Appraised  Apprais ed value 48,000,000 48,000, 000 Carrying amount (32,000,000) Revaluation surplus 16,000,000 20x4  Appraised  Apprais ed value Carrying amount Decrease in carrying amount

28,000,000 28,000,000 (48,000,000) (20,000,000)

The decrease in carrying amount is allocated as follows: Decrease in carrying amount Balance in revaluation surplus Excess charged to impairment loss  Entry :   Revaluation Surplus   Impairment Loss   Land

(20,000,000) 16,000,000 (4,000,000)

16,000,000 4,000,000 20,000,000

Revaluation increase representing reversal of impairment loss

On Decemberwas 31, revalued 20x1, theatland of CONJUNCTION with an original cost ₱40,000,000 ₱28,000,000. This wasUNION the firstCo. revaluation made on theof land since it was purchased 2 years ago. On December 20x4, the building was appraised at ₱48,000,000. Ignore income taxes. How much is the gain on impairment reversal in 20x4? a. 8,000,000 b. 20,000,000 c. 12,000,000 d. 0 C Solution: 12.31.20x1

Impairment loss (40-28)   Land

12,000,000

12.31.201x4 Land (48-28)   Gain on Reversal   Revaluation Surplus

20,000,000

12,000,000

12,000,000 8,000,000

 

20x1  Appraised  Apprais ed value Carrying amount Decrease in carrying amount

28,000,000 28,000,000 (40,000,000) (12,000,000)

The decrease in carrying amount is allocated as follows: Decrease in carrying amount Balance in revaluation surplus Impairment loss 

(12,000,000) (12,000,000)

20x4  Appraised  Apprais ed value Carrying amount Increase in carrying amount

48,000,000 48,000,000 (28,000,000) 20,000,000

The increase in carrying amount is allocated as follows: Increase in carrying amount Previous impairment loss ( gain on impairment reversal) Excess credited to revaluation surplus

20,000,000 12,000,000 8,000,000

Sale of item of PPE measured under cost model FORTITUDE ENDURANCE Co. purchased equipment on August 14, 20x1 for a total cost of ₱400,000. The equipment has an estimated useful life of 10 years and residual

value of ₱80,000. It is the policy of FORTITUDE Co. to provide full-year depreciation in the year of acquisition and none in the year of disposal. On May 12, 20x4, the equipment was sold for ₱120,000. Additional costs incurred on the sale amounted to ₱8,000. How much is the gain (loss) on the sale? a. (184,000) b. 184,000 c. 192,000 d. (192,000) D Solution: May Cash on hand (120K – 8K) 112,000 12,  Accumulated  Accumula ted depreciation depreciation (400k-80k)/10 (400k-80k)/10 x 3   96,000 192,000 Loss on disposal of equipment  (squeeze) 20x4 400,000   Equipment

Sale of item of PPE measured under revaluation model OBDURATE STUBBORN Co. disposed of a machinery on December 31, 20x1 for a

total net disposal proceeds of ₱6,800,000. Information of the machinery as of December  31, 20x1 is as follows: Cost at revalued amount ₱ 9,200,000  Accumulated  Accumula ted depreciation depreciation 3,200,000 3,200,000 Revalu lua atio tion surplu plus (pres resente nted in equity ity) 4,8 4,800 00,,000 How much is the gain (loss) on the sale? a. 5,600,000 b. 4,000,000 c. (800,000) d. 800,000 D Solution: Dec. Cash on hand  Accumulated depreciation  Accumulated depreciation 31,   Machinery 20x1 Gain on disposal of machinery  Additional Entry:  Additional Entry: Revaluation Surplus   Retained Earnings

4,800,000 4,800,000

6,800,000 3,200,000 9,200,000 800,000

 

II. ACCOUNTING FOR WASTING ASSETS Recognition of depletion in the financial statements Use the following information for the next two questions: In 20x1, OBSTREPEROUS Mining Corp. acquired the right to use 1,000 acres of land to mine for gold. The lease lease cost cost is ₱200,0 ₱200,000, 00,000 000,, and the rel relate ated d exp explor lorati ation on costs costs on the proper property ty amoun amounted ted to ₱40,000,000. It is the policy of OBSTREPEROUS Mining Corp. to capitalize all costs of exploration and evaluation of mineral resources. Intangible development costs for drilling, tunnels, shafts, and wells incurred before openingMining the mine amounted to ₱340,00,000. end of mine’s economic useful life, OBSTREPEROUS Corp. is required by legislationAttothe restore thethe site. Estimated restoration costs have a fair value of ₱20,000,000. OBSTREPEROUS Mining Corp. estimates that the mine will provide approximately 100,000,000 ounces of gold. Actual ounce of gold mined in 20x2 totaled 300,000 ounces. 1. How much much is the the de deple pletio tion n charge charge iin n 20x 20x2? 2? a. 1,740,000 b. 1,800,000 c. 165,000

d. 150,000

2. Ass Assumi uming ng that of the 300, 300,000 000 ounces ounces of gold extr extract acted ed in 20x2, 280 280,00 ,000 0 oun ounces ces wer were e sold and 20,000 20, 000 oun ounces ces rem remai ain n in invent inventory ory.. How muc much h dep deple letio tion n is recogn recognize ized d in the (a) sta statem tement ent of  financial position and (b) statement of profit or loss and other comprehensive income? Statem atemen entt o off ffiinanci ancial al posit sition ion Stat Statem emen entt o off pro proffit o orr llo oss a. 1,680,000 120,000 b. 116,000 1,624,000 c. 11,000 154,000 d. 120,000 1,680,000 Changes in estimates Use the following information for the next two questions: In 20x1, BUCOLIC Co. acquired land for a total cost of ₱40,000,000 to be used to quarry marble, limestone, and construction aggregates. Costs incurred to obtain legal right to explore the property amounted to ₱8,000,000. Expenditures incurred in the exploration for and evaluation of mineral resources before technical feasibility and commercial viability of extracting a mineral resource are demonstrable totaled ₱12,000,000. Intangible development costs of drilling, tunnels, shafts, and wells before the actual production totaled ₱20,000,000. BUCOLIC Co. estimates that total recoverable reserves are 100,000,000 units. Furthermore, BUCOLIC Co. expects to sell the land for ₱4,800,000 after resource is depleted. However, no buyer will pay this price unless the mine is drained, filled and leveled, a process that will cost ₱800,000. It is BUCOLIC’s policy to capitalize all exploration costs.  Actual units quarried in 20x1 through 20x4 totaled 30,000,000 units. On January 1, 20x5, BUCOLIC Co. estimated estim ated that rema remainin ining g recoverabl recoverable e reser reserves ves is only 25,000,000 25,000,000 units and after after the reserves are exhausted, the land will be sold for ₱3,200,000. Costs of disposal are estimated at ₱1,200,000. Actual units quarried in 20x5 totaled 6,000,000 units. 3. How much much is the the de deple pletio tion n charge charge iin n 20x 20x5? 5? a. 13,284,000 b. 13,480,000 c. 13,280,000

d. 13,248,000

4. What iis s the ca carryi rrying ng amount amount of the the wasting wasting as asset set on on Decem December ber 31, 20x5? a. 43,852,000 b. 44,272,000 c. 42,720,00 d. 43,952,000 5. In 20x1 20x1,, INNO INNOCU CUOU OUS S HA HARM RMLE LESS SS Co. acquir acquired ed land to be used to mine mine co coal al.. Tota Totall co cost sts s of  acquisition, exploration, and intangible development amounted to ₱40,000,000. It was estimated that total recoverable reserves is 50,000,000 units. Total units extracted from 20x1 through 20x4 totaled 30,000,000 units. In 20x5, after extracting 5,000,000 units, it was estimated that the remaining recoverable reserves is 20,000,000 units. How much is the depletion charge in 20x5? a. 3,200,000 b. 3,333,333 c. 3,266,667 d. 3,400,000 Immovable tangible equipment with shorter life Use the following information for the next three questions: In 20x1, RIBALD Co. purchased real estate containing copper for a total cost of ₱64,000,000. Exploration costs amounted to ₱4,000,000 and intangible development costs of drilling, tunnels, shafts, and wells totaled ₱16,000,000. Movable tangible equipment costs for heavy equipment totaled ₱32,000,000 and immovable tangible equipment costs for drilling rig foundation totaled ₱24,000,000.

 

Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated that 300,000 units will be extracted each year. The heavy equipment and the drilling rig foundation have estimated useful lives of 10 years and 5 years, respectively. Actual units extracted during 20x1 are 320,000 units. 6. How muc much h is the 20x1 20x1 depreciat depreciation ion on th the e immovable immovable tangib tangible le equi equipment pment? ? a. 4,800,000 b. 3,428,571 c. 4,571,429 d. 3,200,000 7. How m much uch is is the 20x1 d deplet epletion ion of of the natu natural ral rresour esource? ce? a. 12,800,000 b. 16,428,571 c. 15,229,879

d. 14,679,097

8. much the depreciati ciation on on the movable tangible e equip equipment? a. 3,How 428,5mu 71ch isb.the 3,220x1 00,00depre 0 c. th 4,e 80mova 0,000ble tangibl d. 4,5ment? 71,429   Immovable tangible equipment with longer life Use the following information for the next three questions: In 20x1, DIAPHANOUS DIAPHANOUS Co. purchased purchased real estat estate e containin containing g copper for a total cost of ₱64,000,000. ₱64,000,000. Exploration costs amounted to ₱4,000,000 and intangible development costs of drilling, tunnels, shafts, and wel wells ls tot total aled ed ₱16,00 ₱16,000,0 0,000. 00. Mov Movabl able e tangib tangible le equip equipmen mentt costs costs for hea heavy vy equipm equipment ent tot totale aled d ₱32,000,000 and immovable tangible equipment costs for drilling rig foundation totaled ₱24,000,000. Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated that 300,000 units will be extracted each year. The heavy equipment and the drilling rig foundation have estimated useful lives of 20 years and 10 years, respectively. Actual units extracted during 20x1 are 320,000 units. 9. How mu much ch is the the depreciat depreciation ion on the immovab immovable le tan tangibl gible e equipment equipment? ? a. 3,657,600 b. 3,480,000 c. 3,460,800 d. 3,260,800 10. How much iis s the depletion depletion on the natural resource? resource? a. 12,832,677

b. 11,988,322

c. 13,489,00

d. 12,800,000

11. How much iis s the depreciation depreciation on the movable tangible equipment? a. 1,573,290 b. 1,620,000 c. 1,613,890 d. 1,600,000 No production in a period Use the following information for the next two questions: In 20x1, THRALL Co. purchased real estate containing copper for a total cost of ₱40,000,000. Immovable tangible equipment costs for drilling rig foundation totaled ₱20,000,000. Estimated recoverable reserves from the mine are 1,000,000 units. It is estimated that 100,000 units will be extracted each year; therefore, the life of the mine in years is 10 years. The drilling rig foundation has an estimated useful life of 15 years.  Actual units extracted extracted from 20x1 through 20x3 totaled 340,000 units units.. No units were extracted during 20x4 due to an employee strike. Extraction resumed in 20x5 and total units extracted during that year was 80,000 units. 12. How much is th the e depreciation charge on the immovable ttangible angible equipment in in 20x4? a. 980,967 b. 1,090,800 c. 1,100,000 d. 1,200,000 13. How much is depr depreciation eciation charge on the the immovable tangi tangible ble equipment in 20x5 20x5? ? a. 1,400,000 b. 1,466,667 c. 1,500,000 d. 1,600,000 Liquidating dividends 14. MYNHEER M MISTER ISTER Co. has the following following balances in its accounts as of December December 31, 20x1: Resource deposit – coal mine 40,000,000  Accumulated depletion depletion 16,000,000 Ordinary share capital 80,000,000 Capital liquidated 8,000,000 Unappropriated retained earnings 20,000,000 Inventory (600,000 units) 28,000,000 Depletion rate per unit 6.00 per unit How much is the maximum amount that can be declared as dividends? a. 24,400,000 b. 32,400,000 c. 28,000,000 III. BORROWING COSTS Specific borrowing

d. 31,600,000

 

1. On Janua January ry 1, 20x1, 20x1, HOM HOMILY ILY Co. bor borrowed rowed ₱20 ₱20 mill million ion to finance finance the the constructi construction on of a new buildin building. g. Interest is payable on the loan at 8%. Stage payments were due throughout the construction period and therefore excess funds were invested during that period. By the end of the project on December  31, 20x1, investment income of ₱600,000 had been earned. How much is the capitalizable borrowing cost? a. 1,600,000 b. 1,000,000 c. 600,000 d. 0 General borrowing 2. On Januar January y 1, 20x1, ENE ENERVA RVATE TE Company Company had the foll following owing borrow borrowings ings mad made e for genera generall purpos purposes es and a part of the proceeds was used to finance the construction of a qualifying asset.

12% short-term note 14% bank loan (3-year) 16% note payable (5-year)

 

  Principal  ₱ 40,000,000 72,000,000 88,000,000

The construction of the qualifying asset was started on immediately and expenditures incurred on the qualifying asset were as follows: Jan. 1 ₱19,200,000 Mar. 31 8,800,000 July 30 14,000,000 October 1 21,600,000 December 31 1,200,000 How much is the capitalizable borrowing cost? a. 28,960,000 b. 7,556,423

c. 5,362,428

d. 0

General borrowing (expenditures incurred evenly) 3. On Janu January ary 1, 20x1, 20x1, MAG MAGIS ISTER TERIAL IAL Com Compan pany y had the fol follow lowing ing borrow borrowing ings s made for ge gener neral al purposes and a part of the proceeds was used to finance the construction of a qualifying asset.

12% short-term note 14% bank loan (3-year) 16% note payable (5-year)

 

  Principal  ₱ 40,000,000 72,000,000 88,000,000

The constr construct uction ion start started ed on Januar January y 1 and was compl complete eted d on Decemb December er 20x 20x1. 1. The total total cost cost of  construction was ₱72,000,000 which was incurred evenly  evenly   during the year. How much is the capitalizable borrowing cost? a. 28,960,000 b. 5,212,800 c. 5,362,428 d. 0 Specific and General borrowing 4. On Jan Janua uary ry 1, 20 20x1 x1,, OMNI OMNIPR PRES ESEN ENT T Co. Co. co cont ntra ract cted ed for the const constru ruct ctio ion n of a buil buildi ding ng for  ₱80,000,000 on a land that it had previously purchased. The building was completed on December  20x1. The following payments were made to the contractor: Payment date January 1, 20x1 March 31, 20x1 September 30, 20x1 December 31, 20x1

 

 Amount   ₱ 8,000,000 24,000,000 40,000,000 8,000 00,,000   The following represents the borrowings of OMNIPRESENT Co. as of December 31, 20x1. 10%, ₱28,000,000, 4-year note dated January 1, 20x1 with simple interest payable annually, specifically borrowed to finance the construction project. Interest income earned on the temporary investment of the proceeds is ₱480,000. 



12.5%, ₱40,000,000, 10-year note dated January 1, 20x1 with interest payable annually



10%, ₱60,000,000, 10-year note note dated December 31, 19x9 with interest payable annual annually ly

How much is the capitalizable borrowing cost? a. 13,320,000 b. 3,200,000

c. 2,867,343

Specific borrowing used for general purposes

d. 0

 

5. UBIQ UBIQUITO UITOUS US Co. started started constr constructio uction n of a new of office fice buildi building ng on January January 1, 20x 20x1. 1. Funds borrow borrowed ed specif spe cifica icall lly y for the constr construct uction ion the buildi building ng is ₱8 ₱8,00 ,000,0 0,000 00 acc accrui ruing ng int intere erest st at 10% annual annually. ly. However, a part of the borrowing is used for other business requirements during the year. Investment income earned on temporary investments of proceeds from the borrowing amounted to ₱48,000 which whi ch was rec receiv eived ed in cash cash on Se Septe ptembe mberr 1, 20x 20x1. 1. Expen Expendit diture ures s on the buildi building ng amount amounted ed ₱7,200,000 which was incurred evenly during the year. How much is the capitalizable borrowing cost? a. 358,400 b. 324,800 c. 289,600 d. 0 Limit on average expenditures 6. RETR RETRENC ENCH H Co. star started ted construct construction ion of a quali qualifyin fying g asset for CUT CUT DOWN, DOWN, Inc. on January January 1, 20x1. The following were expenditures incurred on the construction.   Date January 1, 20x1 May 1, 20x1 December 1, 20x1 



Expenditures 4,000,000 1,800,000 2,880,000

Included in the January 1, 20x1 expenditures is cost of materials purchased on account for ₱400,000. The account was settled on July 1, 20x1. Included in the May 1, 20x1 expenditures is ₱40,000 cost of materials obtained in exchange for old equipment.

Progress billings during the year are as follows: Date of billing Amount billed Date billings were collected  April 1, 20x1 September 1, 20x1

800,000 2,400,000

June 1, 20x1 November 1, 20x1



Payments on billings are subject to 10% withholding by CUT DOWN, Inc.



RETRENCH Co. determined the capitalization rate to be 10%.

How much is the capitalizable borrowing cost? a. 646,000 b. 546,000

c. 446,000

d. 0

Extended period of construction Use the following information for the next four questions: q uestions: CONVALESCE CONVALES CE Co. started construction of a qualifying asset for RECOVER, Inc. on January 1, 20x1. The following were expenditures incurred on construction.   Date Year 20x1

Expenditures

January 1, 20x1 May 1, 20x1 December 1, 20x1

4,000,000 1,800,000 2,880,000

Year 20x2  January 1, 20x2  August 30, 20x2

3,600,000 1,200,000

Year 20x3 July 1, 20x3

2,400,000

COVALESCE Co. determined the capitalization rate to be 10%. The construction of the qualifying asset was substantially completed on September 30, 20x3. 7. How m much uch is is the capit capitaliza alizable ble borrowi borrowing ng cos costt in 2 20x1? 0x1? a. 430,000

b. 445,0000

c. 544,000

8. How m much uch is is the capit capitaliza alizable ble borrowi borrowing ng cos costt in 2 20x2? 0x2? a. 1,233,400 b. 1,322,400 c. 1342,400

d. 645,000

d. 1,440,400

 

9. How m much uch is is the capit capitaliza alizable ble borrowi borrowing ng cos costt in 2 20x3? 0x3? a. 1,210,980 b. 1,233,400 c. 1,435,980

d. 1,580,980

10. How much is th the e total cost of tthe he constructed quali qualifying fying asset on Sep September tember 30, 20x3? a. 18,957,830

b. 19,776,830

c. 13,765,380

d. 18,957,380

IMPAIRMENT OF ASSETS Costs of disposal 1. On Dece Decemb mber er 31, 31, 20 20x1 x1,, QU QUIR IRK K Co Co.. id iden enti tifi fied ed th that at it its s mach machin iner ery y wi with th a ca carr rryi ying ng amou amount nt of  ₱4,000,000 has been impaired. In estimating the recoverable amount, QUIRK determined that the fair  value of the asset is ₱3,200,000. The following costs were also estimated: Transaction taxes ₱200,000 Legal costs, stamp duty, commissions, and similar fees 40,000 Costs of dismantling or removing the asset included in provision for restoration and decommissioning cost 20,000 Termination benefits and costs associated with reducing or reorganizing a business following the disposal of an asset 60,000 QUIRK does not have any reason to believe that the value in use of the asset materially exceeds fair  value less costs of disposal. How much is the impairment loss? a. 1,120,000 b. 1,060,000 c. 1,040,000 d. 800,000 Value in use 2. On Dece Decemb mber er 31 31,, 20 20x1 x1,, MASS MASSIV IVE E Co. Co. id iden enti tifi fied ed th that at it its s bu buil ildi ding ng wi with th a ca carr rryi ying ng amou amount nt of  ₱2,400,000 has been impaired. In estimating the recoverable amount, MASSIVE has determined that the fair value less costs of disposal of the asset is ₱1,600,000. In estimating the value in use, MASSIVE determi determined ned the following: Future cash in Future cash out  Year  flows flows 20x1 1,200,000 400,000 1,120,000 400,000 20x2  20x3 1,040,000 320,000  Additional information:  Additional information: Each year’s estimated future cash flows include ₱40,000 representing cash outflows from future restructuring not yet committed and ₱20,000 representing cash outflows on planned improvement and enhancement of the asset. Not inclu included ded   in the est estim imate ated d future future cash cash fl flows ows are costs of day-to day-to-da -day y servic servicing ing of the ass asset et amounting to ₱8,000 per year. The discount rate is 10%.  

 

How much is the impairment loss? a. 407,424 b. 456,773

c. 365,472

d. 412,365

Value in use – with residual value 3. On Decem December ber 31, 20x1 20x1,, HEARTEN HEARTEN Co. identi identified fied that that its intangibl intangible e asset wit with h a carrying carrying amount of  ₱2,400,000 has been impaired. In estimating the recoverable amount, HEARTEN has determined that the fair value less costs of disposal of the intangible asset is ₱1,600,000. HEARTEN estimated that the future net cash flows expected to arise from the continuing use of the asset is ₱400,000 per  year for the remaining useful life of 5 years. The estimate of future cash flows includes cash out flows for income taxes and financing activities totaling ₱40,000 per year. The equipment has a residual value of ₱80,000. The discount rate is 10%. How much is the impairment loss? a. 628,384 b. 682,384 c. 289,334 d. 298,902 Recoverable amount exceeding Carrying amount 4. On One e of OFFSH OFF SHOO OOT T Co.’ Co.’s s pl plant ant has a carr ca rryi ying ng amo amoun untt of ₱3, ₱3,20 200, 0,00 000 0 and and a va valu lue e in use of  ₱3,120,000. A recent market transaction for a similar plant involved a net selling price of ₱3,280,000. How much is the impairment loss?

 

a. 80,000

b. 160,000

c. 320,000

d. 0

Impairment loss on newly constructed asset 5. LUCR LUCRATIV ATIVE E Co. ha has s just complet completed ed construct constructing ing a new b buildi uilding. ng. Cos Costs ts incu incurred rred are are shown be below: low: Materials, labor, and overhead ₱2,800,000 Borrowing costs appropriately capitalized 320,000 Total construction costs ₱3,120,000 If the recoverable amount of the building is ₱3,000,000, how much is the impairment loss? a. 120,000 b. 200,000 c. 320,000 d. 0 Impairment loss – subsequent depreciation 6. On Janu January ary 1, 20x1 20x1,, RIGHTEO RIGHTEOUS US Co. acq acquir uired ed an equipm equipment ent for ₱2,000 ₱2,000,00 ,000. 0. The equipme equipment nt is depreciated using the straight line method over an estimated useful life of 10 years and residual value of ₱200,000. On January 1, 20x6, RIGHTEOUS Co. determined that the equipment is impaired. Fair value less costs of  disposal is ₱560,000. Projected future net cash flows from revenues produced by the equipment is ₱200,000 annually. The revised estimated useful life is 4 years and the new estimated residual value is ₱40,000. The appropriate discount rate is 10%. How much is the depreciation expense in 20x6? a. 156,732 b. 155,324 c. 155,132 d. 154,324 Impairment loss – Revaluation model 7. Infor Informati mation on on LISTLES LISTLESS S Co.’s Co.’s impai impaired red buil building ding is shown shown bel below: ow: Carrying amount 3,200,000 Revaluation surplus 320,000 Fair value less costs of disposal 2,800,000 Value in use 2,720,000 How much is the impairment loss? a. 80,000 b. 400,000 c. 320,000 d. 0 Impairment loss – Intangible asset with indefinite useful life 8. INSU INSUPER PERABLE ABLE UNSURPA UNSURPASSAB SSABLE LE Co. determined determined that its trademark trademark is impaired. impaired. INS INSUPE UPERAB RABLE LE cannot estimate reliably the trademark’s fair value less costs of disposal. However, the following information has been determined: Carrying amount  Annual future cash cash flows from tthe he trademark Discount rate How much is the impairment loss? a. 0 b. 80,000 c. 120,000

₱520,000 40,000 10% d. 400,000

Impairment loss – asset to be disposed of  9. One of MIME Co. Co.’s ’s machines machines has been impa impair ired. ed. Repair Repairs s and main mainten tenanc ance e cos costs ts on the mac machin hine e have been increasing over the past years making the machine a bottleneck in MIME’s production. At year-end, management made a decision to sell the machine as soon as a pending application for a loan is approved and a replacement machine is acquired. Information on the machine is shown below: Carrying amount ₱400,000 Fair value less costs of disposal 200,000 Value in use 240,000 How much is the impairment loss? a. 0 b. 160,000 c. 40,000 d. 200,000 Allocation of goodwill – business combination 10. At the end of 20x1, EXIGEN EXIGENCY CY Co. acquires PRE PRESSING SSING NEE NEED D Corp. for ₱40,000,000. P PRESSING RESSING NEED has manufacturing plants in three countries. Data at the end of 20x1 is shown below.   Fair Value of identifiable assets   Activities in Country #1 ₱4,000,000   Activities in Country #2 12,000,000   Activities in Country #3 16,000,000   Total fair value of identifiable assets ₱32,000,000  How much goodwill is allocated to each to the CGU in Country #3? a. 16,000,000

b. 3,000,000

c. 4,000,000

Allocation of goodwill – disposal of portion of CGU

d. 0

 

11. SOP SOAK C Co. o. has a cash-generating unit for which which goodwill of ₱240,000 w was as allocated. During the year, an operation that was part of the CGU was sold for ₱2,000,000. The relative values of the portions sold and retained cannot be determined reliably. Information on the assets included in the CGU is as follows: Carrying amount of operation sold  excluding goodwill ₱1,600,000 Carrying amount of portion not sold  excluding goodwill 4,800,000 Total carrying amount of CGU excluding excluding g  go oodwill ₱6,400,000   ₱6,400,000 How much is the gain or loss on the sale of the operation? a. 340,000 b. 400,000 c. 60,000 d. 0 Reallocation of goodwill 12. EXUBERA EXUBERANT NT Co. previously allocated ₱240,000 ₱240,000 goodwill to CGU A. The goodwill allocated to CGU CGU  A cannot be identified or associated with an asset group at a level lower than CGU A, except arbitrarily. During the year, EXUBERANT Co. reorganizes its reporting structure such that CGU A is divide div ided d and int integr egrate ated d int into o thr three ee oth other er cas cash-g h-gene enera ratin ting g uni units ts – CGU’s CGU’s B, C and D. Additi Additiona onall information is shown below: CG  U  B C D

 Fair values 800,000 1,600,000 2,400,000 4,800,000

 At the end of the year, CGU D is sold for ₱2,000,000 when its carrying amount is ₱2,320,000 excluding  allocated goodwill. How much is the gain (loss) on the sale? a. (320,000) b. 440,000 c. (420,000) d. (440,000) Impairment loss of CGU – no goodwill allocated Use the following information for the next two questions: NEGATE Co. determined that one of its cash-generating units is impaired. Information on the assets of  the CGU is shown below: Carrying   Assets amount  Inventory 800,000 Invest Inv estmen mentt proper property ty (at cost cost mod model) el) 1,600, 1,600,000 000 Building 2,400,000 4,800,000 It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value less costs of disposal is ₱3,200,000. 13. How much iis s the impairment impairment lloss? oss? a. 2,100,000 b. 1,600,000 c. 1,200,000 d. 1,000,000 14. How much is th the e carrying amount of the building aft after er the impairment impairment testing? a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000 Impairment loss of CGU – with allocated goodwill Use the following information for the next two questions: INSTIGATE Co. determined that one of its cash-generating units is impaired. Information on the assets of  the CGU is shown below: Carrying   Assets amount  Inventory 800,000 Invest Inv estmen mentt proper property ty (at cost cost mod model) el) 1,600, 1,600,000 000 Building 2,400,000 Goodwill 1,200,000 6,000,000 It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value less costs of disposal is ₱2,400,000. 15. How much iis s the impairment impairment lloss? oss? a. 4,200,000 b. 3,200,000 c. 2,400,000 d. 2,000,000 16. How much is th the e carrying amount of the building aft after er the impairment impairment testing? a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000

 

Impairment loss of CGU – Limit on allocation of impairment loss Use the following information for the next two questions: TRICE Co. determined that one of its cash-generating units is impaired. Information on the assets of the CGU is shown below: Carrying  Assets amount Inventory 800,000 Investment property (at cost model) 1,600,000 Building 2,400,000 Goodwill 1,200,000 6,000,000 It was estimated that the value in use of the CGU is ₱3,200,000 and its fair value less costs of disposal is ₱3,600,000. The building’s  building’s fair value less costs of disposal is ₱2,040,000. 17. How much iis s the impairment impairment lloss? oss? a. 4,200,000 b. 3,200,000 c. 2,400,000 d. 2,000,000 18. How much is th the e carrying amount of the building aft after er the impairment impairment testing? a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000 



Impairment of individual asset belonging to a CGU Use the following information for the next two independent cases: One of the machines of SKEWER Co. has suffered physical damage but is still work working, ing, although not as well as before it was damaged. The machine does not generate independent cash inflows. The smallest identifia ident ifiable ble group group of assets that includes the machi machine ne and gener generates ates cash inflows inflows that are largely independent of the cash inflows from other assets is the production line to which the machine belongs. Information on the machine and the production line is shown below: Carrying amount of machine ₱ 800,000 Fair Fair valu value e less less cost costs s of di disp spos osal al of ma mach chin ine e 600, 600,00 000 0 Carry arryiing amou amoun nt of pro product ductiion li lin ne 32, 32,000, 000,00 000 0 Recoverabl Recov erable e amount of productio production n line 36,000,000 36,000,000   Case #1: 19. The he   budgets/forecasts approved by management reflect no commitment no commitment of management to replace the machine. How much is the impairment loss? a. 4,000,000 b. 200,000 c. 3,800,000 d. 0 Case #2:  #2:  20. The budgets/forecasts approv approved ed by management reflect a commitment of management to replace tthe he machine and sell it in the near future. Cash flows from continuing use of the machine until its disposal are estimated to be negligible. How much is the impairment loss? a. 4,000,000 b. 200,000 c. 3,800,000 d. 0 Impairment of individual asset – with commitment for disposal 21. ASININE Co. det determined ermined that one of its cash-generating units is impaired. impaired. Information on the assets of the CGU is shown below:

 Assets Inventory Invest Inv estmen mentt proper property ty (at cost cost mod model) el) Building Goodwill

Carrying  amount  800,000 1,600, 1,600,000 000 2,400,000 1,200,000 6,000,000

The recoverable amount of the CGU was estimated at ₱5,600,000. The building’s fair value less costs of disposal is ₱1,600,000. Management is committed on selling the building. How much is the impairment loss? a. 0 b. 400,000 c. 600,000 d. 800,000 



Carrying amount of a CGU – Financial instruments excluded 22. EXUB EXUBERA ERANT NT Co. deter determined mined that its CGU has been impaired. impaired. Inform Information ation on the CGU is shown below:

 

Cash  Accounts receivable receivable Inventory Machinery – net Othe Otherr inta intang ngib ible le as asse sets ts Goodwill  Accounts payable  Accrued liabilities liabilities Total

400,000 800,000 2,000,000 4,000,000 80 800, 0,00 000 0 400,000 (1,200,000) (1,600,000) 5,600,000

The amount the CGU is ₱4,000,000, CGU’swhen valuethe in use. EXUBERANT Co. recoverable flowsoffrom financial assets andrepresenting recognized the liabilities value in use was excluded   cash computed How much is the impairment loss? a. 3,200,000 b. 3,600,000 c. 4,000,000 d. 0 Carrying amount of a CGU – including financial instruments 23. INFR INFRACTI ACTION ON Co. determi determined ned that its CGU has been impaired. impaired. Informat Information ion on the CGU is shown below: Cash  Accounts receivable receivable Inventory Machinery – net Othe Otherr inta intang ngib ible le as asse sets ts Goodwill  Accounts payable

400,000 800,000 2,000,000 4,000,000 80 800, 0,00 000 0 400,000 (1,200,000)

 Accrued liabilities liabilities Total

(1,600,000) 5,600,000

The recoverable amount of the CGU is ₱2,400,000, representing the CGU’s value in use. INFRACTION Co. included cash flows from financial assets and recognized liabilities when the value in use was computed How much is the impairment loss? a. 3,200,000 b. 3,600,000 c. 4,000,000 d. 0 Allocation of corporate asset 24. On December 31, 20x1, BAFF BAFFLE LE Co. determin determined ed that an EDP equip equipment ment,, a mainframe mainframe compu computer  ter  used as server in BAFFLE’s network, might have been impaired. There are three cash-generating units using this mainframe computer. Information on these assets is shown below:   CGU #1 CGU #2 CGU #3 Corporate asset - Mainframe   How much is the impairment loss? a. 0 b. 2,000,000

Carrying amount 8,000,000 24,000,000

Recoverable amount   8,000,000 28,000,000

32,000,000 12,000,000 76,000,000 76

40,000,000 N/A 76,000,000

c. 2,666,667

d. 3,133,333

Impairment loss – restoration and decommissioning costs 25. INSU INSUPER PERABLE ABLE Co. determined determined that its CGU (compri (comprising sing INSUPE INSUPERABL RABLE’s E’s mining operatio operations ns in a foreign country) is impaired. The laws in that foreign country require INSUPERABLE to restore the mining min ing site site at the end of the wasting wasting ass asset’ et’s s use useful ful li life. fe. INSUPE INSUPERAB RABLE LE mad made e a provis provision ion for  decommissioning and restoration costs10 years ago when it started operations. At year-end, the carrying amount of the provision p rovision is ₱2,400,000 which is equal to the present value of the obligation. INSUPER INSU PERABLE ABLE Co. recently recently received various offers to buy the mine at aroun around d ₱3,6 ₱3,600,00 00,000. 0. This price reflects the fact that the buyer will assume the obligation to restore the overburden. Disposal costs for the mine are negligible negligible.. The value in use is ₱5,6 ₱5,600,000 00,000 excluding excluding decommis decommissioni sioning ng and restorat restoration ion costs. The carrying amount of the mine is ₱4,800,000. How much is the impairment loss? a. 800,000

b. 1,600,000

c. 1,200,333

Impairment reversal – Revaluation model Use the following information for the next two questions:

d. 0

 

On January 1, 20x1, FALLACIOUS FALLACIOUS Co. acquir acquired ed a building building for ₱4,000,000. ₱4,000,000. The asset is depre depreciat ciated ed using the straight line method over an estimated useful life of 10 years. On Jan Januar uary y 1, 20x 20x6, 6, the buildin building g was estimate estimated d to hav have e a rec recove overab rable le amount amount of ₱1, ₱1,600 600,00 ,000. 0. Consequently, impairment loss was recognized on that date. There was no change in the estimated useful life. On January 1, 20x9, the building was estimated to have a new recoverable amount of ₱2,400,000 and a remaining useful life of 3 years. The building is measured under the revaluation model. 26. How much of th the e impairment reversal reversal is recognized in in profit or loss loss? ? a. 160,000 b. 1,760,000 c. 1,600,000 d. 0 27. of the impairment is recognized recognized equity? a . 16How 0,00much 0 b. 1,760,0reversal 00 c. 1,600in,0eq 00uity?

d. 0

Impairment reversal – Cost model Use the following information for the next two questions: On January 1, 20x1, RAMIFICATION RAMIFICATION Co. acquired a building for ₱4,000,0 ₱4,000,000. 00. The asset is depreciated using the straight line method over an estimated useful life of 10 years. On Jan Januar uary y 1, 20x 20x6, 6, the buildin building g was estimate estimated d to hav have e a rec recove overab rable le amount amount of ₱1, ₱1,600 600,00 ,000. 0. Consequently, impairment loss was recognized on that date. There was no change in the estimated useful life. On January 1, 20x9, the building was estimated to have a new recoverable amount of ₱2,400,000 and a remaining useful life of 3 years. The building is measured under the cost model. model . 28. How much of th the e impairment reversal reversal is recognized in in profit or loss loss? ? a. 160,000 b. 1,760,000 c. 1,600,000 d. 0 29. How much of the impairment reversal is recognized recognized in eq equity? uity? a. 160,000

b. 1,760,000

c. 1,600,000

d. 0

Non-reversal of goodwill - with Extrapolation Use the following information for the next four questions: q uestions:  After a year of of operations, STRATUM STRATUM Co. is calculating calculating the value in use of one of its its cash-generating unit on January 1, 20x2. Data is shown below. Year    Year-end  Future Cash Flows 20x2 ₱ 920 20x3 1,012 20x4 1,092 20x5 1,160 20x6 1,216 The appropriate discount rate was determined to be 15%. Projections of future cash flows should be extended up to 11 years. The long-term growth rates were determined as 3%, -2%, -6%, -15%, -25% and -67% from year 20x7 up to year 2x12. The gross carrying amount of the CGU is ₱12,000, inclusive of ₱4,000 allocated goodwill .  As As of January 1, 20x2, the CGU has an accumulated depreciation of ₱668. On December 31, 20x3, the entity estimates a revised recoverable amount of ₱7,640. 30. How much iis s the total undiscounted future future cash flow flows? s? a. 10,993 b. 5,444 c. 9,364

d. 4,987

31. How mu much ch is the the value value in use? use? a. 10,992 b. 5,444

c. 9,364

d. 4,987

32. How much iis s the impairment impairment lloss? oss? a. 5,888 b. 5,444

c. 6,345

d. 1,888

33. How much is the revers reversal al of impairm impairment ent loss to be recogniz recognized ed in profit or loss on December December 31, 20x3? a. 0 b. 1,588 c. 1,635 d. 1,545

NOTHING FOLLOWS