(Problems) - Audit of Property, Plant, and Equipment.docx

PROBLEM 1: The following independent situations relate to the acquisition/self construct of various property, plant, and equipment items. Answer the question/s at the end of each situation 1. BRADPIT, INC. has constructed a production equipment needed for the company’s expansion program. Bradpit received a P1,500,000 bid from a reputable manufacturer for the construction of the equipment. The costs of direct material and direct labor incurred to construct the equipment were P960,000 and P600,000, respectively. It is estimated that incremental overhead costs for construction amount to 140% of direct labor costs. Fixed costs (excluding interest) of P2,100,100 were incurred during the construction period. This amount was allocated to construction on the basis of total prime costs – the sum of direct labor and direct material. The prime costs incurred to construct the new equipment amounted to 35% of the total prime costs incurred for the period. The company’s policy is to capitalize all possible costs on self construction projects. To assists in financing the construction of the production equipment, Bradpit borrowed P1.5 million at the beginning of the 6-month construction period. The loan was for 2 years with interest at 10% What is the total cost of the self-constructed equipment? A. P3,210,000 C. P3,021,000 B. P2,610,000 D. P3,285,000 2. The following transactions relate to IMPO COMPANY  The national government grants the company a large tract of land to be used as a plant site. The land’s fair value is determined to be P1,620,000.  Impo Company issued 280,000 ordinary shares (par valu, P50) in exchange for land and building. The fair value of the property is determined to be P16,200,000 with the following allocation: Land P3,600,000 Building 12,600,000 P16,200,000 Impo Company’s ordinary shares are not listed on the stock exchange, but its records show that a block of 2,000 shares was sold by a shareholder a year ago at P70 per share, and another block of 4,000 shares was sold by another shareholder 8 months ago at P63 per share. 

Impo Company constructed machinery during the year. No entry was made to remove from the accounts for material, labor, and overhead the following costs that are properly chargeable to the machinery account. Raw material used P250,000 Factory supplies used 18,000 Direct labor costs incurred 320,000 Incremental overhead caused by construction of machinery (excluding factory supplies used) 54,000 Fixed overhead rate applied to regular manufacturing operations 60% of direct labor cost The cost of similar machinery would be P880,000 if it had been purchased from a dealer.

The entries required to record these transaction should include Land Buildings Machiner y A. P5,540,00 P13,720,0 P834,000 0 00 B. P5,975,55 P15,244,4 P816,000 6 44 C. P5,757,77 P14,482,2 P780,000 8 22 D. P5,220,00 P12,600,0 P834,000 0 00 3. HAGAI COMPANY is a major supplier of computer parts and accessories. To improve delivery services to customers, the company acquired four new trucks on July 1, 2012. Described below are the terms of acquisition for each truck.

Truck No. 1 No. 2

No. 3

No. 4 What A. B.

List Price Terms P600,000 Acquired a cash payment of P556,000 P800,000 Acquired for a down payment of P80,000 cash and a 1-year, non-interestbearing note with a face amount of P720,000. There was no established cash price for the equipment. The prevailing interest rate for this type of note is 10%. P640,000 Acquired in exchange for a computer package that the company carries in inventory. The computer package cost P480,000 and is normally sold by Hagai Co. for P608,000. P560,000 Acquired by issuing 40,000 of Hagai Co.’s ordinary shares. The shares have a par value per share of P10 and a market value per share of P13. is the total cost of the trucks purchased on July 1, 2012? P2,418,545 C. P2,484,000 P2,458,545 D. P2,524,000

4. On march 11, 2012, RAMBO COMPANY acquired the plant assets of Ina Corporation in excahange for 50,000 ordinary shares (P100 par value), which had a fair value per share of P180 on the date of the purchase of the property. The property had the following appraised value: Land P1,600,000 Building P4,800,000 Machinery and equipment P3,200,000 Below is a summary of Rambo’s cash outflows between the acquisition date and December 29, the date when it first occupied the building. Repairs to building P420,000 Construction of bases for machinery to be installed later 540,000 Driveways and parking lots 488,000 Remodeling of office space in building, including new partitions and walls 644,000 Special assessment by the city government on land 72,000 On December 27, Rambo paid cash for machinery, P1,120,000 (subject to a 2% cash discount) and freight on machinery of P42,000. Compute the total cost of each of the following: A. Land B. Buildings C. Machinery and equipment PROBLEM 2: The following PPE acquisitions for selected companies: a. FRENCH HORN COMPANY acquired land, buildings, and equipment from a financially distressed company, Bankrupt Corp., for a lump sum price of P2,800,000. On the acquisition date, Bankrupt’s assets had the following book and fair values: Book Fair values values Land P800,000 P600,000 Buildings 1,000,000 1,400,000 equipment 1,200,000 1,200,000 French Horn decided to take a conservative position by recording the ower of the two values for each PPE item acquired. The following entry was made: Land 600,000 Buildings 1,000,000 Equipment 1,200,000 Cash 2,800,000 b. TRUMPET, INC. purchased factory equipment by making a P200,000 cash down payment and signing a 3-year P300,000, 10% note payable. The acquisition was recorded as follows: Factory equipment 530,000 Cash 200,000 Note payable 300,000

Interest payable

30,000

c. TUBA CO. purchased store equipment for P800,000, terms 2/10, n/30. The company took the discount and made the following entry when it paid for the acquisition: Building 45,000,000 Cash 43,000,000 Profit on construction 2,000,000 Prepare the necessary correcting entry for each acquisition. PROBLEM 3: SAXOPHONE COMPANY acquires a new manufacturing equipment on January 1, 2012, on installment basis. The deferred payment contract provides for a down payment of P300,000 and an 8-year note for P3,104,160. The note is to be paid in 8 equal annual installment payments of P388,020, including 10% interest. The payments are to be made on December 31 of each year, beginning December 31, 2012. The equipment has a cash price equivalent of P2,370,000. Saxophone’s financial year-end is December 31. 1. What is the acquisition cost of the equipment A. P3,404,160 C. P2,370,000 B. P2,804,160 D. P3,1004,160 2. The amount to be recognized on January 1, 2012, as discount on note payable is A. P1,034,160 C. P827,160 B. P310,416 D. P0 3. The amount of interest expense to be recognized in 2012 is A. P0 C. P310,416 B. P188,898 D. P207,000 4. The amount of interest expense to be recognized in 2013 is A. P310,416 C. P207,000 B. P188,898 D. P0 5. The carrying value of the note payable at December 31, 2013, is A. P1,689,858 C. P1,312,062 B. P1,888,980 D. P1,700,082 PROBLEM 4: OBOE CORP. acquired land and an old building in exchange for P3,000,000 cash and 500,000 ordinary shares with a par value of P15 per share. The company’s stock was selling for P40 per share when the acquisition was made. Oboe incurred the following costs in connection with the acquisition: Legal fees to complete the transaction Property tax for previous year Cost to demolish the old building Salvage value of demolished building

P150,000 850,000 325,000 (194,000)

1. What is the total cost of the building purchased by Oboe Corp.? A. P0 C. P23,131,000 B. P23,000,000 D. P11,631,000 2. What is the total cost of the land acquired by Oboe Corp.? A. P11,631,000 C. P1,000,000 B. P24,131,000 D. P23,869,000 PROBLEM 5: Various equipment used by BASYANG CO. in its operations are either purchased from dealers or self – constructed. The following items for two different types of equipment were recorded during the calendar year 2012. Manufacturing equipment (self-constructed): Material and purchased parts at gross invoice price (Basyang failed to take the 2% cash discount) Imputed interest on funds used during construction (stock financing) Labor costs Overhead costs (fixed - P40,000; variable – P60,000)

P450,000 36,000 185,000 100,000

Gain on self-construction Installation cost Store equipment (purchased): Cash paid for equipment Freight and insurance cost while in transit Cost of moving equipment into place at store Wage cost for technicians to test equipment Insurance premium paid during first year of operation on the equipment Special plumbing fixtures required for this equipment Repair cost incurred in first year of operations related to this equipment

74,000 8,600 P175,000 3,500 1,200 7,000 5,200 8,200 1,450

PROBLEM 6: CELLO CORP. has been experiencing a significant increase in customers’ demand for its product. To expand its production capacity, Cello decided to purchase equipment form Pede Utang on January 2, 2012. Cello issues a P2,400,00 5-year, non-interest-bearing note to Pede Utang for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five P480,000 installments due at the end of each year over the life of the note. Cello’s financial year-end is December 31. The appropriate present value factor of an ordinary annuity of 1 at 12% for 5 periods is 3.60478. 1. What is the cost of the new equipment? A. P2,112,000 C.P1,730,294 B. P1,457,931 D. P2,400,000 2. What amount of interest expense should be reported in Cello’s income statement for the year ended December 31, 2012? A. P174,951 C. P230,400 B. P207,635 D. P288,000 3. What is the carrying value of the note at December 31, 2014? A. P1,440,000 C. P1,480,932 B. P811,226 D. P1,152,880 PROBLEM 7: Described below are transactions related to GUITAR COMPANY. a. The national government gives the company a large tract of land. The condition attached to this government grant is that Guitar is to construct a plant facility on the site to provide employment opportunity to its residents. The fair value of the land is determined to be P4 million. b. 150,000 ordinary shares with a par value of P20 per share are issued in exchange for land and building. The fair values of the land and building acquired are P5,400,000 and P18,900,000, respectively. c. The company’s stock is currently selling at P175 per share. d. Still included in the material, direct labor, and overhead accounts are amounts that are properly chargeable to the machinery account. These represent costs of a machinery constructed by Guitar during the current year. These costs are: Materials used Factory supplies used Direct labor incurred Incremental overhead (over regular) arising form construction of machinery (excluding factory supplies used) Fixed overhead rate applied to regular manufacturing operations

P375,00 0 27,000 450,000

81,000 60% of direct labor cost Cost of similar machinery if it had been purchased from an outside dealer 1,320,0 00 Prepare journal entries to record these transactions. PROBLEM 8: The following information relates to PIANO COMPANY.

a. On July 1, Piano purchased the plant assets of Yokona Co., which had discontinued operations. The following are the fair values of the plant assets acquired: Land P10,500,000 Building 31,500,000 Machinery and equipment 21,000,000 TOTAL P63,000,000 Piano issued 550, shares of its P100 par value ordinary share capital in exchange for the above plant assets. On the acquisition date, the stock had a fair value of P160 per share. b. Piano expended the following amounts in cash between July 1 and December 20, the date when the company first occupied the building: Special assessment by City on land Repairs to building Construction of bases for machinery and equipment acquired Driveways and parking lots Remodeling of office space in building, including new partitions and walls

P540,000 3,150,000 4,050,000 3,660,000

c. On December 23, Piano paid cash for machinery, P7,800,000, subject to a 2% cash discount, and freight on machinery of P315,000 1. Land A. P10,540,000 C. P14,200,000 B. P14,700,000 D. P11,040,000 2. Buildings A. P39,480,000 C. P31,500,000 B. P37,980,000 D. P30,000,000 3. Machinery and equipment A. P32,009,000 C. P33,009,000 B. P28,959,000 D. P21,000,000 4. Land improvements A. P4,200,000 C. P540,000 B. P3,660,000 D. P0 5. The entry to record the purchase of Yokona’s plant assets should include a A. Debit to Land of P22,666,667 C. Credit to Ordinary Share Capital of P63,000,000 B. Credit to Share Premium of P8,000,000D. PDebit to Machinery and Equipment of P29,333,333 PROBLEM 9: The following items are included in the PPE section of the audited statement of financial position of DRUMS CORP. as of December 31, 2011: Land P3,450,00 0 Buildings 13,350,00 0 Leasehold improvements 9,900,000 Machinery and equipment 13,125,00 0 The following transactions occurred during 2012: a. Land A was acquired for P12,750,000. In connection with the acquisition, Drums paid a P765,000 commission to a real estate agent. Costs of P525,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for P195,000 b. Land B with an old building was acquired for P6,300,000. On the acquisition date, the fair value of the land was P4,500,000 and the fair value of the building was P1,800,000. The old building was demolished at a cost of P615,000 shortly after acquisition. A new building was constructed for P4,950,000 plus the following costs: Excavation fees P570,0 00 Architectural design fees 165,00 0 Building permit fee 37,500

Imputed interest on funds used during construction (stock financing)

127,50 0 The building was completed and occupied on December 30, 2012. c. Land C was acquired for P9,750,000 with the intention of selling it within 12 months from the date of purchase. d. During December 2012, costs of P1,335,000 were incurred to improve leased office spce. The related lease will terminate on December 31, 2014, and is not expected to be renewed. e. A group of machine was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machine was P1,305,000, freight costs were P49,500, installation costs were P36,000, and royalty payments for 2012 were P262,500. Based on the preceding information, determine the balances of the following PPE items as of December 31, 2012: 1. Land A. P24,210,000 C. P33,960,000 B. P23,445,000q D. P24,405,000 2. Buildings A. P19,200,000 C. P19,072,500 B. P20,872,500 D. P21,000,000 3. Leasehold improvements A. P9,900,000 C. P1,335,000 B. P0 D. P11,235,000 4. Machinery and equipment A. P14,778,000 C. P14,253,000 B. P147,515,500 D. P14,430,000 5. Land C should be reported in the company’s December 31, 2012, statement of financial position under A. PPE C. Non – current assets held for sale B. Inventories D. other non – current assets PROBLEM 10: ACCORDION COMPANY incurred the following expenditures in 2012: Purchase of land P7,800,00 0 Land survey 104,000 Fees for search of title for land 12,000 Building permit fee 70,000 Temporary quarters for construction crews 215,000 Payments to tenants of old building for vacating 92,000 premises Cost to demolish old building 940,000 Excavation of basement 200,000 Special assessment for street project 40,000 Dividends 100,000 Damages awarded for injuries sustained in construction 168,000 ( no insurance) Cost of construction 58,000,00 0 Cost of paving parking lot adjoining building 800,000 Cost of shrubs, trees, and other landscaping 660,000 A portion of the building site had been temporarily used by Accordion to operate a car park while the building was being constructed. A total of P325,000 was earned by Accordion from this incidental activity. 1. What is the cost of land A. P8,896,000 C. P9,648,000 B. P8,988,000 D. P10,448,000 2. What is the cost of the land improvements A. P660,000 C. P1,460,000 B. P1,500,000 D. P800,000

3. What is the cost of the building A. P58,458,000 B. P58,160,000

C. P58,252,000 D. P58,285,000

PROBLEM 11: HARPSICHORD, INC. constructs equipment for its own use. The account below proceeds from sale of old equipment Raw material used in construction of new equipment Labor in construction of new machine Cost of installation Cost of testing the equipment Material spoiled in machine trial runs Profit on construction

228,000 147,000 33,600 25,000 7,200 72,000

An analysis of the details in the account disclosed the following: a. The old equipment, which was removed before the installation of the new one, had been fully depreciated. b. Cash discounts received on the payments for materials used in construction totaling P9,000 were reported in the purchase discounts account c. The factory overhead account shows a balance of P876,000 for the year ended December 31, 2012; this balance exceeds normal overhead on regular plant activities by approximately P50,700 and is attributable to equipment construction d. A profit was recognized on construction for the difference between costs incurred and the price at which the equipment could have been purchased e. While testing the equipment, sample items were produced. These were sold for P5,000 which was credited to miscellaneous revenue. 1. What is the total cost of the new equipment? 2. Prepare individual journal entries to correct the accounts as of December 31, 2012. Assume that the nominal accounts are still open PROBLEM 12: CYMBALS, INC. completed the following transactions during 2012: Jan. 1 Purchased real property for P18,847,500, which included a charge of P547,500 representing property tax for the current year that had been prepaid by the vendor. Of the total purchase price, 20% is determined to be applicable to land and the balance to buildings. A mortgage of P11,250,000 was assumed by cymbals on the purchase. Cash was paid for the balance. Feb. 5

Cymbals expended P888,000 to recondition the building because previous owners had neglected the normal maintenance and repair requirement on the building

May 20

The garage in the rear of the building was demolished, P135,000 being recovered on the salvage material. Cymbals immediately constructed a warehouse. The cost of such construction was P2,028,000, which was not materially different from the bids made on the construction, city inspectors discovered that Cymbals failed to comply with the building safety code and thus ordered the company to make extensive modifications to the warehouse. The cost of such modifications, which could have been avoided, was P288,000.

June 1

The company acquired a new machine in exchange for its own ordinary shares with a market value of P600,000 (par P90,000). The new machine has a market value of P750,000

July 1

Another machine was acquired by Cymbals. Payment was made by issuing bonds with a face value of P1,500,000 and by paying cash of P540,000. The machine’s fair value is P1,950,000

Nov.

On September 1, the company engaged an independent contractor for parking

20

lots and landscaping at a cost of P1,638,000. The work was completed and paid for on November 20

Dec. 31

Because the company’s financial year-end is December 31, the business was closed to permit taking the year – end inventory. On this same date, required redecorating and repairs were completed at a cost of P225,000

1. The journal entry to record the acquisition of real property on January 1 should include a A. Debit to land of P18,847,500 C. credit to mortgage payable of P18,300,000 B. debit to buildings of P15,078,000 D. credit to Cash of P7,597,500 2. The transactions completed during 2012 should result in a net income in the Buildings Account of A. P17,709,000 C. P17,859,000 B. P17,421,000 D. P17,646,000 3. The total additions to Machinery should be A. P2,790,000 C. P2,550,000 B. P2,640,000 D. P2,700,000 4. The entry to record the acquisition of a new machine on June 1 should include a A. Debit to Machinery of P750,000 C. Credit to Share premium of P540,000 B. Credit to Ordinary Shares of P750,000 D. Debit to Machinery of P600,000 5. The entry to record the acquisition of a new machine on July 1 should include a A. Debit to Bond Discount of P90,000 C. Credit to Bonds payable of P960,000 B. Debit to Machinery of P2,040,000 D. Credit to Bond Premium of P990,000 PROBLEM 13: BANJO COMPANY was organized in June 2012. In your audit of the company’s nooks, you find the following land, buildings, and equipment account. 201 Debit Credit 2 June 7 Organization fees P60,000 1 Land site and old building 945,000 5 3 Corporate organization costs 90,000 0 July 3 Title clearance fees 55,200 Aug. 2 Cost of razing old building 60,000 9 Sept 1 Salaries of Banjo Company executives 180,000 . Dec. 1 Stock bonus to corporate promoters, 6,000 ordinary 5 shares, 300,000 P50 per share market value 1 Real property tax 43,200 5 2 Cost of new building completed and occupied on this 5,250,0 0 date 00 Your analysis of this account and other accounts disclosed the following additional information: a. The building acquired on June 15, 2012, had a fair value of P1005,000 on that date. b. Banjo paid P60,000 for the demolition of the old building. It sold the scrap for P36,000 and credited the proceeds to miscellaneous income c. Banjo executives did not participate in the construction of the new building d. The property tax was for the period July 1 – December 31, 2012’ 1. The amount to be reported as organization expenses in Banjo’s 2012 income statement is A. P60,000 C. P450,000 B. P390,000 D. P90,000 2. Banjo’s Land account should be adjusted by a A. Net Debit of P1,024,200 C. Net Debit of P1,060,200 B. Net Debit of P962,400 D. Credit of P36,000 3. The cost of the new building is

A. P5,415,000 B. P5,535,000

C. P5,355,000 D. P5,250,000

PROBLEM 14: The audited statement of financial position of VIOLIN CO. as of December 31, 2011, shows the following property, plant, and Equipment items: Land Buildings Leasehold improvements Machinery and equipment Automobiles

P1,750,00 0 15,000,00 0 2,160,000 11,250,00 0 1,720,000

Violin Co. completed the following transactions during 2012: Jan. 5 Acquired a plant facility consisting of land and a building in exchange for 750,000 5 shares of Violin’s ordinary share capital. On this date, Violin’s ordinary shares had a market price of P25 per share. The fair values of the land and building are P5,625,000 and P16,875,000, respectively Marc 20 New parking lots, streets, and sidewalks at the acquired plant facility were h completed at a total cost of P5,760,000 July 1 Machinery and equipment were purchased at a total invoice cost of P1,250,000. Additional costs of P45,000 for delivery and P98,000 for installation were incurred. Sept. 1 Violin purchased a new automobile for P675,000 Nov. 3 Violin purchased for P10,500,000, a tract of land for undetermined future use. Dec. 20 A machine with a cost of P425,000 and a carrying value of P89,250 at date of disposition was scrapped without cash recovery Based on the preceding information, calculate the December 31, 2012, balances of the following accounts: 1. Land A. P6,437,500 C. P7,375,000 B. P24,250,000 D. P17,875,000 2. Land improvement A. P12,240,000 C. P0 B. P16,260,000 D. P5,760,000 3. Buildings A. P29,062,500 C. P37,635,000 B. P31,875,000 D. P15,000,000 4. Machinery and equipment A. P12,553,750 C. P12,075,000 B. P12,218,000 D. P12,307,250 PROBLEM 15: ORGAN CORP. has decided to expand its production capacity to meet the increased demand for its product. In line with this, the company recently made several acquisitions of property, plant, and equipment. These transactions are described below: Acquisition 1 On June 1, 2012, Organ purchased equipment from Dongon Company under a deferred payment plan. Organ issued a P1,000,000 four-year non-interest-bearing not to Dongon for the new equipment. The loan agreement provides that Organ is to pay off the note in four equal installments due at the end of each of the next four years. In the date of the acquisition, the prevailing market rate of interest for obligations of this nature was 10%. The following costs were incurred to complete the transaction: Freight P21,250 Installation 25,000 The following are the appropriate factors for the time value of money at a 10% rate of interest: Future value of 1 for 4 periods 1.46 Future value of an ordinary annuity for 4 periods 4.64 Present value of 1 for 4 periods 0.68

Present value of an ordinary annuity for 4 periods

3.17

Acquisition 2 On December 1, 2012, Organ purchased several assets of a small company. The lump sum price or “basket price” amounted to P10,500,000 and included the assets listed below: Book value Fair value Machinery and P3,000,000 P2,500,000 equipment Land 2,000,000 4,000,000 Building 3,500,000 6,000,000 Totals P8,500,000 P12,500,000 During the fiscal year ended May 31, 2013, Organ incurred P400,000 for interest expense in connection with the financing of these assets. Acquisition 3 On March 1, 2012, Organ exchanged a number of used equipment plus cash for vacant land adjacent to its plant facility. The land acquired is intended to be used for a parking lot. The equipment had a combined carrying value of P1,750,000, as Organ had recorded P1,000,000 of accumulated depreciation against these assets. The equipment had a fair market value of P2,300,000 at the time of the transaction. To complete this transaction, Organ paid P950,000 cash for the land. For each of the three acquisitions described above, determine the value at which Organ Company should record the acquired assets: 1. Acquisition 1 – purchase of equipment A. P792,500 C. P1,046,250 B. P838,750 D. P1,206,250 2. Acquisition 2 – purchase of machinery and equipment, land, and buildings Machinery and Land building equipment A. P3,705,882 P2,470,588 P4,323,5 30 B. 3,000,000 2,000,000 3,500,00 0 C. 2,500,000 4,000,000 6,000,00 0 D. 2,100,000 3,360,000 5,040,00 0 PROBLEM 16: CARILLLON CAOMPANY is contemplating to exchange a machine used in its operations. Carillon received the following offers from interested companies. a. Ayi Company offered a similar machine plus P345,000 cash b. Butsoy Company offered to exchange a similar machine c. Oneng Company offered to exchange a similar machine, but wanted P120,000 in addition to Carillon’s machine. In addition, Carillon inquired from Soraya Corp., a dealer in machine Carillon is to pay P1,395,000 cash plus the trade in of its old machine in order to acquire a new unit. Presented below are the machine’s cost, accumulated depreciation, and fair value: Cost Accumulated Depreciation Fair value

Carillon P2,400,0 00 750,000

Ayi P1,800,0 00 675,000

1,380,00 0

1,035,00 0

Butsoy P2,205,0 00 1,065,00 0 1,380,00 0

Oneng P2,400,0 00 1,125,00 0 1,500,00 0

Soraya P1,950,0 00 ----2,775,00 0

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

PROBLEM 17: On July 1, 2012, CASTANETS, INC. exchanged machines with Bondat Company. The following facts pertain to these assets. Castane Bonda ts’ t’s Assets Asset Original cost P288,000 P33,00 0 Accumulated depreciation 135,000 156,00 (to date of exchange) 0 Fair market value at date of 180,000 225,00 exchange 0 Cash paid by Castanets 45,000 Cash received by Bondat 45,000 Although the fair values of the assets involved in the exchange had been reliably determined, certain cash flow calculations made by both companies provided that this exchange transaction lacks commercial substance. What entry should be made on the books of each company to record the exchange PROBLEM 18: GONG COMPANY started construction of its administration building at and estimated cost of P50,000,000 on January 1, 2012. The construction is expected to be completed be December 31, 2014. Gong has the following debt obligations outstanding furing 2012: Construction loan – 12% interest, payable semi annually, issued December 31, 2011 Short term loan – 10% interest, payable monthly, and principal payable at maturity on May 31, 2013 Long term loan – 11% interest, payable on January 1 of each year. Principal payable on January 1, 2016

P20,000,0 00 14,000,00 0 10,000,00 0

Assume that the weighted-average of the accumulated expenditures during 2012 was P36,000,000 What amount of interest incurred in 2012 would be included in the cost of the building being constructed? A. P4,900,000 C. P2,400,000 B. P4,067,200 D. P0 PROBLEM 19: MARACAS COMPANY constructs its own buildings. In 2011, a total of P1,228,500 interest was included as part of the cost of a new building just being completed. The following is a summary of construction expenditures in 2012: Accumulated in 2011, including capitalized interest March 1 September 1 December 31 Total

P18,228,5 00 7,000,000 4,000,000 5,000,0 00 P34,228,5 00

Maracas has the following outstanding loans at December 31, 2012: 12% note related directly to new building; Term, 5 years from beginning of P10,000,0

construction General borrowings: 10% note issued prior to construction of new building; term, 10 years 8% note issued prior to construction of new building; term , 5 years

00

5,000,000

10,000,00 0

1. The capitalization rate is A. 8.67% C. 12% B. 10% D. 8% 2. The average accumulated expenditures in 2012 is A. P25,811,834 C. P34,228,500 B. P24,166,667 D. P25,395,167 3. The amount of avoidable interest for 2012 is A. P3,656,500 C. P2,739,517 B. P2,500,000 D. P2,534,761 4. The amount of capitalization interest in 2012 is A. P2,500,000 C. P2,739,517 B. P2,534,761 D. P1,200,000 5. The total cost of the new building is A. P35,500,000 C. P36,763,261 B. P36,728,500 D. P27,895,167 PROBLEM 20: On January 1, 2012, VIOLA CORPORATION contracted with Mega Construction Company to construct a building for P40,000,000 on land that Viola purchased several year ago. The contract provides that Viola is to make five payments in 2012, with the last payment scheduled for the date of completion. The following was completed on December 31, 2012. Viola made the following payments during 2012: January 1 March 31 June 30 September 30 December 31 Total

P4,000,000 8,000,000 12,200,000 8,800,000 7,000,000 P40,000,0 00

Viola had the following debt outstanding at December 31, 2011: a. A 12%, 4-year note dated January 1, 2012, with P17,000,0 interest compounded quarterly. Both principal and 00 interest are payable on December 31, 2015. This loan relates specifically to the building project. b. A 10%, 10-year note dated December 31, 2008 with simple interest; interest payable annually on December 31

12,000,00 0

c. A 12%, 5-year note dated December 31, 2010, with simple interest; interest payable annually on December 31

14,000,00 0

The following present and future value factors are taken from the present and future value tables: 3% 12% Future value of 1 for: 4 periods 1.12551 1.57352 16 periods 1.60471 6.13039 Present value of 1 for; 4 periods

0.88849

0.63552

16 periods

0.62317

0.16312

1. In the computation of the avoidable interest for 2012, the appropriate capitalization rate is A. 11% C. P12% B. 11.33% D. P11.08% 2. What is the average accumulated expenditures in 2012? A. P3,333,333 C. P20,000,000 B. P18,300,000 D. P40,000,000 3. What is the total avoidable interest cost in 2012? A. P2,277,710 C. P2,280,960 B. P2,184,040 D. P2,466,070 4. What is the amount of interest that should be capitalized in 2012? A. P2,184,000 C. P5,013,670 B. P2,466,070 D. P2,277,710 5. Viola’s income statement for 2012 should include interest expense of A. P5,013,680 C. P2,277,710 B. P2,735,960 D. P0 PROBLEM 21: Some parts of BASS COMPANY’s factory building were replaced during 2012. a. The outside corrugated covering on the factory walls was removed and replaced. The job was done by a reputable construction firm and will extend the life of the building by four years. The cost of the new wall was P189,000. The cost of the old wall was determined to be P150,000. The building is 25% depreciated. b. Dust filters installed in the interior of the factory were replaced at a cost of P90,000. Management believes that the new filters will reduce health hazards and thus reduce employee benefit costs. The original filters cost P45,000 and are one-third depreciated. Prepare journal entries based on the preceding information. PROBLEM 22: CABARA COMPANY, whose accounting year ends on December 31, provides delivery services for packages to be taken between the city and the airport. On January 1, 2011, the company acquired a delivery van from Togo Trucks. The company paid a cash of P1,020,000 to Togo, which included registration fees of P20,000. Insurance costs for the first year amounted to P24,000. The truck is expected to have a useful life of five years. At the end of its useful life, the asset is expected to be sold for P480,000 with costs relating to the sale amounting to P8,000. On January 1, 2012, Cabara’s management decided to add another vehicle, a flat top, to the fleet. This vehicle was acquired from a liquidation auction at a cash price of P600,000. The vehicle needed some repairs for the elimination of rust (cot P46,000) and the replacement of all tires (cost P12,400). The company believed it would use the flat-top for another two years and then sell it. Expected selling price was P300,000 with selling costs estimated to be P8,000. On January 1, 2012, a radio communication system was installed in both vehicles at a cost per vehicle of P6,000. This was not expected to have any material effect on the future selling price of either vehicle. Insurance costs for P24,000 for the first vehicle and P18,000 for the newly acquired vehicle. On January 1, 2013, the flat-top that had been acquired at auction broke down. The company thought about acquiring a new vehicle to replace this one but, after considering the costs, decided to repair the flat-top instead. The vehicle was given a major overhaul at a cost of P130,000. Although this was a major expense, management believed that the company would keep the vehicle for another two years. The estimated selling price in the three year’s time is P240,000, with selling costs estimated at P6,000. Insurance costs for 2013 were the same as for the previous year. 1. What is the cost of the delivery van acquired on January 1, 2011? A. P1,044,000 C. P1,020,000 B. P1,052,000 D. P1,000,000 2. What is the cost of the flat-top vehicle purchased on January 1, 2012? A. P658,400 C. P612,400 B. P600,000 D. 646,000

3. What is the depreciation expense for 2012? A. P109,600 C. P144,400 B. P105,600 D. P104,000 4. What is the depreciation expense for 2013? A. P300,600 C. P293,000 B. P291,200 d. P293,300 5. What is the depreciation expense for 2013? A. P231,833 C. P212,500 B. P293,300 D. P230,333 PROBLEM 23: SHENG COMPANY constructed a building for use by the administration section of the company. The completion date was January 1, 2004, and the construction cost was P16,800,000. The company expected to remain in the building for the next 20 years, at which time the building would probably have no real salvage value and have to be demolished. It is expected that demolition costs will amount to P300,000. In June 2011, following a storm that wreaked vast destruction in the city, the roof of the administration building was considered to be in poor shape so the company decided to replace it. On January 1, 2012, a new roof was installed at a cost of P4,400,000. The new roof was of a different material to the old roof, which was estimated to have cost only P2,800,000 in the original construction, although at the time of construction it was thought that the roof would last for the 20 years that the company expected to use the building. Because the company spent the money replacing the roof, it thought that it would delay construction of a new building, thereby extending the original life of the building form 20 years to 25 years. 1. If the roof were treated as a separate component of the building the total depreciation expense for 2012 would be A. P750,000 C. P606,667 B. P681,566 D. P672,000 2. If the roof were not treated as a separate component of the building the total depreciation expense for 2012 would be A. P1,178,462 C. P851,111 B. P861,944 D. P750,000 PROBLEM 24: On January 1, 2012, TSINELAS AIRLINES acquired a new airplane for a total cost of P200 million. A breakdown of the costs to build the airplane was given by the manufacturers: Aircraft body

P60,000,0 00 80,000,00 0

Engines (2) Fittings: Seats Carpets Electrical equipment –  Cockpit

passenger seats

Equipment – food preparation

20,000,00 0 1,000,000 4,000,000 30,000,00 0 5,000,000

At costs include installation and labor costs associated with the relevant part. It is expected that the aircraft will be kept for 10 years and then sold. The main value of the aircraft at that stage is the body and the engine. The expected selling price is P42 million, with the body and engines retaining proportionate value. Costs in relation to the aircraft over the next ten years are expected to be as follows: Aircraft body This requires an annual inspection for cracks and wear and tear, at a cost of P100,000 Engines

Each engine has an expected life of four years before being sold for scrap. It is expected that the engines will be replaced in 2016 for P90 million and again in 2020 for P120 million. These engines are expected to incur annual maintenance costs of P6 million. The manufacturer has informed Chordophone Airlines that a new prototype engine with an extra 10% capacity should be on the market in 2018, and that existing engines could be upgraded at a cost of P20 million. Fittings Seats are replaced every three years. Expected replacement costs are P24 million in 2015 and P30 million in 2021. The repair of torn seats and faulty mechanisms is expected to cost P2 million per annum. Carpets are replaced every 5 years. They will be replaced in 2017 at an expected cost of P1.3 million, but will not be replaced before the aircraft is sold in 2022. Cleaning costs per annum amount to P200,000. The electrical equipment (such as the TV) for each seat has an annual repair cost of P300,000. It is expected that, with the improvements in technology, the equipment will be totally replaced in 2018 by substantially better equipment at a cost of P7 million. The electrical equipment in the cockpit is tested frequently at an expected annual cost of P5 million. Major upgrades to the equipment are expected every two years at expected costs of P5 million (in 2014), P6 million (in 2016), P6.9 million (in 2018) and P8.2 million (in 2020). The upgrades will take into effect the expected changes in technology. Equipment – Food preparation This incurs annual costs for repair and maintenance of P400,000. The equipment is expected to be totally replaced in 2018. 1. The total aircraft body-related expenses for 2012 would be A. P4,400,000 C. P2,950,000 B. P4,300,000 D. P6,100,000 2. The total engine – related expenses for 2012 would be A. P21,500,000 C. P26,000,000 B. P16,111,111 D. P20,000,000 3. The total expenses related to aircraft fittings for 2012 would be A. P18,033,334 C. P15,366,667 B. P30,033,334 D. P10,533,334 4. The total expenses related to the food preparation equipment for 2012 would be A. P1,233,333 C. P833,333 B. P1,400,000 D. P400,000 5. The total annual depreciation expense using the components approach is A. P15,800,000 C. P20,000,000 B. P34,566,667 D. P35,566,667 PROBLEM 25: MANDOLIN CORP. uses different kinds of machines in its manufacturing process. It constructs some of these machines itself and acquires others from the manufacturers. The following information relates to two machines that it has recorded in 2012. Machine A (purchased) Cash paid for equipments Cost of transporting machine – insurance and transport Labor cost of installation by expert fitter Labor cost of testing equipment Insurance cost for 2012 Cost of trading for personnel who will use the machine Cost of safety rails and platforms surrounding machine Cost of water devices to keep machine cool Cost of adjustments to machine during 2012 to make it operate more efficiently Machine B (self – Constructed) Cost of material to construct machine Labor cost to construct machine Allocated overhead cost – electricity, factory space, etc.

P250,000 9,000 15,000 12,500 4,500 7,500 18,000 24,000 22,500

P210,000 129,000 66,000

Allocated interest cost of financing machine Cost of installation Profit saved by self-construction Safety inspection cost prior to use 1. What is the cost of machine A? A. P380,500 B. P358,000 2. What is the cost of machine B? A. P471,000 B. P417,000

30,000 36,000 45,000 12,000

C. P328,000 D. P350,500 C. P483,000 D. P438,000

PROBLEM 26: STAR COMPANY commenced operations on January 1, 2011. During the following year, the company acquired a tract of land, demolished the building on the land and built a new factory. Equipment was acquired for the factory and, in September 2012, the plant was ready to commence operation. A gala opening was held on September 18, with the City Mayor opening the factory. The first items were ready for sale on September 25. During this period, the following cash inflow and outflows occurred. 

 

While searching for a suitable block of land, Star placed an option to buy with three real estate agents at a cost of P1000 each. Payment for option fees Receipt of loan from bank

 

Payment to settlement agent for title search, stamp duties, and settlement fees Payment of delinquent property taxes assumed by Star Company Payment for land

     

Payment Payment Payment Payment Payment Payment

         

for demolition of old building from sale of material from old building to architect to City Hall for approval of building construction for safety fence around construction site to construction contractor for factory building

Payment for external driveways, parking bays and safety lighting Payment of interest on construction loan Payment for safety inspection on building Payment for equipment Payment of freight and insurance costs on delivery of equipment Payment of installation cost on equipment Payment For safety equipment surrounding equipment Payment for removal of safety fence Payment for new fence surrounding the factory Payment for advertisements in the newspaper about the forthcoming factory and its benefits to the community  Payment for opening ceremony  Payment to adjust equipment to more efficient operating levels subsequent to initial operation 1. What is the cost of the land A. P1,218,000 C. P1,166,000 B. P1,216,000 D. P1,271,000 2. What is the cost of the building A. P3,279,000 C. P3,200,000 B. P3,284,000 D. P3,234,000 3. What is the cost of the land improvements A. P620,000 C. P114,000 B. P654,000 D. P134,000 4. What is the cost of the equipment

P3,000 3,000,0 00 100,000 50,000 1,000,0 00 120,000 55,000 230,000 120,000 34,000 2,400,0 00 540,000 400,000 30,000 640,000 56,000 120,000 110,000 20,000 80,000 5,000 60,000 33,000

A. P959,000 C. P903,000 B. P849,000 D. P1,359,000 5. The amount to be reported as expenses (excluding depreciation) in Star’s income statement is A. P60,000 C. P65,000 B. P100,000 D. P67,000 PROBLEM 27: FIDDLE COMPANY uses a large number of machines designed to produce garments. These machine are generally depreciated at 10% per annum on a straight-line basis. In general, machines are estimated to have a residual value on disposal of 10% of cost. At January 1, 2012, Fiddle had a total of 73 machines, and its statement of financial position showed a total cost of P1,260,000 and accumulated depreciation of P390,000 During 2012, the following transaction occurred:  On March 1, 2012, a new machine was acquired for P45,000. This machine replaced two other machines. One of the two replaced machines was acquired on January 1, 2009 for P24,600. It was traded in on the new machine with Fiddler making cash payment of P26,400 on the new machine. The second replaced machine had a cost P27,000 on October 1, 2009, and was sold for P21,900.  On July 1, 2012, a machine that had cost P12,000 on January 1, 2003, was retired from use and sold for scrap for P1,500.  On July 1, 2012, a machine that had been acquired on July 1, 2009 for P21,000 was repaired because its motor had been damaged from overhauling. The motor was replaced at a cos of P14,400. It was expected that this would extend the life of the machine by and extra two years.  On October 1, 2012, Fiddle fitted a new form of arm ro a machine used for putting special designs onto garments. The arm cost P3,600. The machine had been acquired on October 1, 20009 for P30,000. The arm can be used on a number of other machines when acquired and has a 15-year life. It will not be sold when any particular machine is retired, but retained for use on other machines. 1. What amount of gain (loss) should be recognized on the sale of the second replaced machine on march 1, 2012? A. P772 C. P(772) B. P1,425 D. P(1,425) 2. What amount of gain (loss) should be recognized on the machine sold for scrap on July 1, 2012? A. P(900) C. P900 B. P240 D. P(240) 3. What amount of depreciation should be provided in 2012 on the machine whose motor was replaced on July 1, 2012? A. P1,890 C. P2,972 B. P2,431 D. P7,634 4. What amount of depreciation should be provided in 2012 on the machine arm installed on October 1, 2012? A. P129 C. P60 B. P54 D. P0 PROBLEM 28: HARP COMPANY, whose financial year-end is December 31, purchased a new manufacturing equipment on April 1, 2005. The equipment has a special component that requires replacement before the end of the equipment’s useful life. The equipment was initially recognized in two accounts: one is for the main unit and the other for the special component. Harp uses the straight-line method of depreciation for all of its manufacturing equipment. Depreciation is recorded to the nearest month, residual values being disregarded. On April 1, 2011, the special component is removed from the main unit and is replaced with a similar component. The component is expected to have a residual value of approximately 25% of cost at the end of the main unit’s useful life. Because of its materiality, the residual value will be considered in calculating depreciation. Specific information about this equipment is as follows: Main unit Purchase price in 2005

P187,200

Residual value Estimated useful life

13,200 10 years

Component 1 Purchase price Residual value Estimated useful life

P30,000 750 6 years

Component 2 Purchase price

P45,750

1. What is the depreciation charge to be recognized for the year 2005? A. P17,790 C. P16,706 B. P23,720 D. P16,800 2. What is the depreciation charge to be recognized for the year 2011? A. P30,154 C. P28,548 B. P23,720 D. P26,404 3. What is the depreciation charge to be recognized for the year 2012? A. P27,298 C. P18,720 B. P30,158 D. P25,798 PROBLEM 29: KATANA CORP. commenced operations early in 2012. During its first nine months, Katana acquired real estate for the construction of a building and other facilities. Operating equipment was purchased and installed, and the company began operating activities in April 2012. The company’s accountant, who was not sure how to record some of the transactions, opened a Property, Plant, and Equipment (PPE) ledger account and recorded debits and (credits) to this account as follows: a. Cost of real estate purchased as a building site P1,700,00 0 b. Paid architect’s fee for design of new building 230,000 c. Paid for the demolition of an old building on the building site purchased in 1. 280,000 d. Paid property tax on the real estate purchased as a building site in 1. 17,000 e. Paid excavation costs for the new building 150,000 f. Made the first payment to the building 2,500,000 contractor g. Paid for equipment to be installed in the new 1,480,000 building h. Received from sale of salvaged material form demolishing the old building (68,000) i. Made the final payment to the building 3,500,000 contractor j. Imputed interest on Katana’s own construction 220,000 fund k. Paid freight on equipment purchased 19,000 l. Paid installation costs of equipment 41,000 m. Paid for repair of equipment damaged during 27,000 installation PPE Ledger Account Balance P10,097, 000 Based on the preceding information, determine the amount to be charged to each of the following: 1. Land A. P1,912,000 C. P2,149,000 B. P1,929,000 D. P2,011,000 2. Land improvements A. P82,000 C. P150,000 B. P68,000 D. P0 3. Building A. P6,380,000 C. P6,592,000 B. P6,600,000 D. P6,000,000 4. Manufacturing equipment

A. P1,480,000 B. P1,507,000 5. Expenses (excluding depreciation) A. P68,000 B. P44,000

C. P1,541,000 D. P1,568,000 C. P220,000 D. P27,000

PROBLEM 30: SON MANUFACTURING COMPANY’s accounts at December 31, 2011, included the following balances: Machinery ( at cost) Accumulated depreciation – machinery Vehicles (at cost; purchased November 21, 2010) Accumulated depreciation – vehicles Land (at cost; purchased October 25, 2008) Building (at cost; purchased October 25, 2008) Accumulated depreciation – building Details of machines owned at December Machi Purchase Cost ne Date 1 Oct. 7, 2008 P129,00 0 2 Fec. 4, 2009 144,000

P273,000 144,600 140,400 58,968 243,000 557,160 85,842

31, 2011 are as follows: Useful Residual Life Value 5 years P7,500 6 years

9,000

Additional information:  Son calculates depreciation to the nearest month and uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated on the diminishing balance at 40% per annum  Son’s financial year-end is December 31  The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which cost P70,200  On acquiring the land and building, Son estimated the building’s useful life and residual value at 20 years and P15,000, respectively The following transactions occurred from January 1, 2012: 2012 Jan. 3 Bought a new machine (machine 3) for a cash price of P171,000. Freight charges of P1,326 and installation costs of P5,274 were paid in cash. The useful life and residual value were estimated at five years and P12,000, respectively June 22

Bought a second-hand vehicle for P45,600 cash. Repainting costs of P1,965 and four new tires costing P1,035 were paid for in cash.

Aug. 28

Exchanged machine 1 for office furniture that had a fair value of P37,500 at the date of exchange. The fair value of machine 1 at the date of exchange was P34,500. The office furniture originally cost P108,000 and, to the date of exchange, had been depreciated by P72,300 in the previous owner’s books. Son estimated the office furniture’s useful life and residual value at eight years and P1,620, respectively.

Dec. 31

Recorded depreciation

2013 April 30 May 25

June 26

Paid for repairs and maintenance on the machinery amounting to P2,784 Sold on of the vehicles bought on November 21, 2010, for P19,800 cash Installed a fence around the property at cost of P16,500. The fence

has an estimated useful life of 10 years and zero residual value. (Debit the cost to a land Improvements asset account) Dec. 31 2014 Jan. 5

Recorded Depreciation Overhauled machine 2 at a cost of P36,000, after which Son estimated its remaining life at one additional year and revised its residual value to P15,000

June 20

Traded in the remaining vehicle bought on November 21. 2010, for a new vehicle. A trade-in allowance of P11,100 was received and P69,900 was paid in cash

Oct. 4

Scrapped the vehicle bought on June 22, 012, as it had been so badly damaged in a traffic accident that it was not worthwhile repairing it Recorded depreciation

Dec. 31

1. Machine 3, purchased on January 3, 2012, should be recorded at A. P171,000 C. P165,000 B. P177,600 D. P159,000 2. The second-hand vehicle purchased on June 22, 2012, should be recorded at A. P45,600 C. P47,565 B. P46,635 D. P48,600 3. The office equipment on August 28, 2012, should be recorded at A. P34,500 C. P35,700 B. P37,500 D. P33,825 4. The gain to be recognized on the exchange of machine 1 for office furniture on august 28, 2912, should be A. P1,875 C. P3,675 B. P0 D. P675 5. The total depreciation for 2012 is A. P142,198 C. P142,716 B. P126,391 D. P142,591 6. The gain (loss) to be recognized on the sale of vehicle on May 26, 2013, is A. P(558) C. P558 B. P(4,630) D. P4,630 7. The total depreciation expense for 2013, is A. P112,987 C. P117,434 B. P117,059 D. P116,430 8. After the overhaul, machine 2’s revised annual depreciation is A. P22,560 C. P26,100 B. P50,192 D. P33,300 9. What is the cost of the new vehicle acquired on June 20, 2014? A. P81,000 C. P58,800 B. P69,900 D. P91,398 10.The total depreciation expense for 2014 is A. P114,678 C. P118,218 B. P118,593 D. P108,288 PROBLEM 31: Your audit of LYRE COMPANY’s property, plant, and equipment disclosed the following data at December 31, 2012. Original cost Year purchased Useful life Salvage value Depreciation method Accumulated depreciation through 2011

J P70,000 2006 10 years P6,200 Sum-of-yearsdigits P46,400

ASSET E P102,000 2007 15,000 hours P6,000 Working hours

P70,400

R P160,000 2008 15 years P10,000 Straightline

I P160,000 2010 10 years P10,000 Double Declining balance

P30,000

P32,000

You noted that the client’s policy on depreciation is that no depreciation is recorded in the year an asset is purchased, and full year depreciation is provided in the year an asset is disposed of. The following transactions occurred during 2012: a. On May 5, Asset J was sold for P26,000 cash. The company’s bookkeeper recorded this retirement in the following manner in the cash receipts journal; Cash

26,000 Asset J

26,000

b. On December 31, it was determined that Asset E had been used 2,100 hours during 2012. c. On December 31, before computing depreciation expense on Asset R, the management of Lyre decided the useful life remaining form January 1, 2012, was 10 years. d. On December 31, it was discovered that a plant asset purchased in 2011 had been expensed completely in the year. This asset costs P44,000 and has a useful life of 10 years and no salvage value. Management has decided to use the double-declining balance method for this asset, which can be referred to as “Asset C”. 1. The 2012 depreciation expense on Asset J is A. P6,960 C. P6,364 B. P18,229 D. P5,800 2. The gain to be reported on the sale of Asset J is A. P8,200 C. P8,764 B. P9,360 D. P0 3. The 202 depreciation expense on Asset E is A. P17,600 C. P13,440 B. P19,440 D. P14,280 4. The 2012 depreciation expense on Asset R is A. P17,143 C. P13,000 B. P12,000 D. P5,445 5. The Total depreciation expense in 2012 on the above-mentioned PPE items is A. P65,640 C. P66,800 B. P63,880 D. P66,640 6. Prepare the necessary adjusting journal entries for the year 2012, including the appropriate depreciation expense on the above-mentioned items PROBLEM 32: The following data pertained to UKULELE CORPORATION’s property, plant, and equipment for 2012. Audited balances at December 31, 2011: Debit P7,500,0 00 30,000,0 00

Land Buildings Accumulated-depreciation – buildings

Credit

6,577,5 00

Machinery and equipment

22,500,0 00

Accumulated depreciation – Machinery and Equipment Delivery Equipment

6,250,0 00 5,750,00 0

Accumulated depreciation – Delivery Equipment

4,230,0 00

Depreciation data: Depreciation Method Buildings Machinery and Equipment

150% double-decliningbalance Straight – line

Useful Life 25 years 10

Delivery Equipment Leasehold Improvements

Sum-of-years-digits Straight – line

years 4 years ---

Transaction During 2012 and other information are as follows: a. On January 2, 2012, Ukulele purchased a new truck for P1,000,000 cash and trade-in of a 2-year-old truck wit a cost of P900,000 and a book value of P270,000. The new truck has a cash price of P1,200,000; the market value of the trade-in is not known. b. On April 1, 2012, a machine purchased for P575,000 on April 1, 2007, was stolen. Ukulele recovered P387,00 form its insurance company. c. On May 1, 2012, costs of P8,400,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related leased terminates on December 31, 2018. d. On July 1, 2012, machinery and equipment were purchased at a total invoice cost of P7,000,000; additional costs of P125,000 for freight and P625,000 for installation were incurred. e. Ukulele determined that the delivery equipment comprising the P5,750,000 balance at January 1, 2012, would have been depreciated at a total amount of P900,000 for the year ended December 31, 2012. The salvage values of the depreciable assets are immaterial. The policy of Ukulele Corporation is to compute depreciation to the nearest month. Based on the preceding information, compute the following: 1. Depreciation expense for 2012 on Buildings A. P1,4050,350 C. P1,200,000 B. P929,700 D. P1,800,000 2. Depreciation expense for 2012 on Machinery and Equipment A. P2,637,500 C. P2,654,875 B. P2,981,875 D. P2,594,375 3. Depreciation expense for 2012 on Delivery Equipment A. P1,110,000 C. P1,380,000 B. P1,200,000 D. P1,020,000 4. Depreciation expense for 2012 on Leasehold Improvements A. P700,000 C. P840,000 B. P1,050,000 D. P933,333 5. Accumulated depreciation – Buildings, December 31, 2012 A. P7,507,200 C. P7,777,500 B. P7,982,850 D. P3,377,500 6. Accumulated depreciation – Machinery and Equipment, December 31, 2012 A. P8,644,375 C. P8,600,000 B. P8,556,875 D. P8,844,375 7. Accumulated depreciation – Delivery Equipment, December 31, 2012 A. P5,430,000 C. P4,710,000 B. P4,620,000 D. P4,800,000 8. Gain (loss) on trade in of truck on January 2, 2012 A. P(200,000) C. P(70,000) B. P200,000 D. P70,000 PROBLEM 33: SNARE DRUM COMPANY buys a machine for P228,600 on January 1, 2009. The maintenance costs for the years 2009 – 2012 are as follows: Year Cost 2009 P13,500 2010 10,800 2011 65,700* 2012 18,900 * includes P54,900 for cost of a new motor installed in December 2011 Snare Drum recorded the cost of the machine frame in one account at a cost of P176,400 and the motor was recorded in a second account at a cost of P52,200. Straight – line method of depreciation is used with a useful life of 10 years for the frame and 4 years for the motor. Residual values are immaterial and thus ignored in the computation of depreciation charges. 1. What is the total expense related to the machine in 2009?

A. P44,190 C. P70,650 B. P30,690 D. P36,630 2. What amount of loss should be recognized on the replacement of motor in 2011? A. P10,800 C. P26,100 B. P13,050 D. P0 3. What is the depreciation expense in 2011? A. P31,365 C. P10,690 B. P17,640 D. P44,415 4. What is the total expense related to the machine in 2011? A. P54,540 C. P89,775 B. P41,490 D. P42,165 5. What is the total expense related to the machine in 2012? A. P42,030 C. P52,965 B. P31,365 D. P50,265 PROBLEM 34: BUGLE COMPANY’s property, plant, and equipment and related accumulated depreciation accounts had the following balances at December 31, 2011: Class of PPE Cost Accumulated Depreciation Land P3,900,000 Buildings 36,000,000 P7,962,000 Machinery and 23,250,000 5,886,000 equipment Transportation 3,960,000 2,586,000 equipment Leasehold 6,630,000 3,315,000 improvements Class of PPE Depreciation Useful Life Method Land improvements Straight-line 12 years Buildings 150% declining 25 years balance Machinery and Straight-line 10 years Equipment Transportation 150% declining 5 years Equipment balance Leasehold Straight – line 8 years improvements Bugle computes depreciation to the nearest month. The salvage values of the depreciable assets are considered immaterial. Transactions during 2012 and other information are described below: a. On January 5, 2012, a plant facility consisting of land and a building was purchased from Torotot Company for P18, 000, 000. Of this amount, 20% was allocated to land. b. On April 3, 2012, new parking lots, streets, and sidewalks at the purchased plant facility were completed at a total cost of P5,760,000. These expenditures had an estimated useful life of 12 years. c. The leasehold improvements were completed on December 31, 2008, and had an estimated useful life of 8 years. The related lease, which would have terminated on December 31, 2014, was renewable for an additional 4-year term. On April 30, 2012, Bugle exercised the renewal option. d. On July 1, 2012, machinery and equipment were purchased at a total invoice cost of P7,500,000. Additional costs of P300,000 for delivery and P900,000 for installation were incurred. e. On August 31, 2012, Bugle purchased a new automobile for P450,000 f. On September 29, 2012, a truck with a cost of P720,000 and a carrying amount of P243,000 on the date of sale was sold for P345,000. Depreciation for the 9 months ended September 31, 2012, was P70,560. g. On December 22, 2012, a machine with a cost of P510,000 and a carrying amount of P89,250 at date of disposition was scrapped without cash recovery. Based on the preceding information, calculate the 2012 depreciation expense on each of the following classes of PPE.

1. Land improvements A. P480,000 B. P360,000 2. Buildings A. P2,546,280 B. P3,024,000 3. Machinery and Equipment A. P2,325,000 B. P3,195,000 4. Transportation Equipment A. P363,132 B. P454,860 5. Leasehold Improvements A. P828,750 B. P552,500

C. P320,000 D. P120,000 C. P2,762,280 D. P1,682,280 C. P1,597,500 D. P2,760,000 C. P433,692 D. P527,760 C. P663,000 D. P1,326,000

PROBLEM 35: The Delivery Trucks account of your client, ALPHORN COMPANY, had a balance of P2,820,000 on January 1, 2009, which included the following: Truck No. Acquisition Cost Date 1 January 1, 2006 P540,000 2 July 1, 2006 660,000 3 January 1, 2008 900,000 4 July 1, 2008 720,000 P2,820,0 00 The Accumulated Depreciation – Delivery trucks account had a balance of P906,000 on January 1, 2009. This amount represents depreciation on the four trucks from the respective dates of acquisition, based on a 5-year life, no salvage value. No charges had been made against this account before January 1, 2009. Transaction completed during the period January 1, 2009, through December 31, 2012, and the entries made to record them were as follows: July 1, 2009 Truck No. 3 was traded for a larger one (TruckNo. 5), the agreed price of which was P1,020,000. Alphorn paid the dealer P500,000 cash on the transaction. The entry was: Delivery Trucks Cash

500,000 500,000

January 1, 2010 Truck No. 1 was sold for P110,000. The entry was: Cash Delivery Trucks

110,000 110,000

July 1, 2011 A new Truck (No. 6) was purchased for P1,080,000 cash and was debited at that amount to the Delivery Trucks account. (Assume Truck No. 2 was not retired.) July 1, 2011 Truck No. 4 was severely damaged in an accident and was sold as junk for P21,000 cash. Alphorn received P75,000 from the insurance company. The entry made by the accountant was: Cash Sales Delivery Trucks

96,000 21,000 75,000

Entries for depreciation had been made at the end of each financial yea as follows: Year

Depreciation

2009 2010 2011 2012

Expense P609,000 633,000 733,500 834,000

1. What amount of gain (loss) should have been recognized on the trade in of Truck No. 3 on July 1, 2009? A. P(130,000) C. P(110,000) B. P230,000 D. P0 2. Alphorn’s net income for 2009 was overstated (understated) by A. P77,000 C. P(33,000) B. P110,000 D. P33,000 3. The gain (loss) on the sale of truck No. 1 on January 1, 2010, was A. P110,000 C. P(108,000) B. P2,000 D. P(2,000) 4. Alphorn’s net income for 2010 was understated by A. P155,000 C. P2,000 B. P153,000 D. P151,000 5. What amount of loss should have been recognized on the sale of Truck No. 4 on July 1, 2011? A. P267,000 C. P288,000 B. P192,000 D. P213,000 6. Alphorn’s net income for 2011 was overstated (understated) by A. P213,000 C. P(283,500) B. P(70,500) D. P(213,000) 7. What amount of depreciation should have been recorded in 2012? A. P414,000 C. P420,000 B. P552,000 D. P834,000 PROBLEM 36: BAGPIPE MANUFACTURING COMPANY began operations on October 1, 2010. The company’s accountant has started to gather pertinent information about each of the company’s property, plant, and equipment as shown below. When he was about to prepare a schedule of PPE and depreciation, he was assigned to maintain the books of the company’s foreign operations. You have been asked to assist in the preparation of this schedule. In addition to ascertaining that the summarized data below are correct, you have accumulated the following information from the company’s records and personnel. a. Bagpipe computes depreciation from the first of the month of acquisition to the first of the month of disposition b. Land A and building A were purchased from Pobre Company. Bagpipe paid P12,300,000 for the land and building together. At the tome of acquisition, the land had a fair value of P1,350,000 and the building had a fair value of P12,150,000 c. Land B acquired on October 3, 2010, in exchange for 37,500 ordinary shares of Bagpipe. On the acquisition date, Land B had a fair value of P1,125,000 and the company’s P5 par value ordinary shares had a fair value of P35 per share. Bagpipe paid P240,000 to demolish an old building on this land for the construction of a new building. d. Construction of Building B on the newly acquired land began on October 1, 2011. By September 31, 2012, Bagpipe had paid P4,800,000 of the estimated total construction costs of P6,750,000. It is estimated that the building will be completed and occupied by July 2013. e. Certain equipment was donated to the corporation by the national government. An independent appraisal of the equipment when donated placed the fair market vakue at P450,000 and the salvage value at P45,000 f. Machine A’s total cost of P2,473,500 includes installation cost of P9,000 and normal repairs and maintenance of P223,500. Salvage value is estimated at P90,000. It was sold on February 1, 2012, for P1,600,000. g. On October 1, 2011, Machinery B was acquired with a down payment of P86,100 and the remaining payments to be made in 11 annual installments of P90,000 each, beginning October 1, 2011. The prevailing interest rate was 8%. The following data were abstracted from present value tables (rounded): 10 years 11 15 years years Present value of 1 at 8% 0.463 0.429 0.315 Present value of an 6.710 7.139 8.559 ordinary annuity of 1 at 8%

Land A Acquisition date Building A Acquisition date: Salvage value: Depreciation method: Depreciation expense: Year ended Sept. 30, 2011 Land B Acquisition date: Building B Acquisition date: Cost: Depreciation method: Salvage value: Estimated life: Depreciation expense: Year ended September 30, 2011 Donated equipment Acquisition date: Salvage value: Depreciation method: Estimated life Machinery A Acquisition date: Salvage value: Estimated life Depreciation method: Machinery B Acquisition date: Salvage value Depreciation method Estimated life

October 1, 2010

October 1, 2010 P600,000 Straight – line P261,750

October 3, 2010 Under construction P4,800,000 to date Straight – line P0 30 years

October 2, 2010 P45,000 150% declining balance 10 years

October 2, 2010 P90,000 8 years Sum-of-the-years-digits (SYD)

October 1, 2011 P0 Straight-line 20 years

1. What is the cost of Land A? A. P1,350,000 C. P11,070,000 B. P12,150,000 D. P1,230,000 2. What is the cost of Building A? A. P1,350,000 C. P11,070,000 B. P12,150,000 D. P1,230,000 3. What is the estimated useful life of Building A? A. 42 years C. 44 years B. 40 years D. 46 years 4. What is the depreciation expense on Building A for the year ended September 31, 2012? A. P261,750 C. P523,500 B. P288,750 D. P577,500 5. What is the cost of land B? A. P1,552,500 C. P1,365,000 B. P427,500 D. P1,125,000 6. What is the depreciation expense on Building B for the year ended September 30, 2012? A. P120,000 C. P288,750 B. P168,750 D. P0 7. At what amount should the donated equipment be measured and recognized? A. P450,000 C. P495,000 B. P405,000 D. P0 8. What is the depreciation expense on the donated equipment for the year ended September 30, 2011? A. P0 C. P60,750

B. P74,250 D. P67,500 9. What is the depreciation expense on the donated equipment for the year ended September 30, 2012? A. P60,750 C. P57,375 B. P51,638 D. P67,500 10.What is the cost of Machinery A? A. P2,473,500 C. P2,160,000 B. P2,250,000 D. P2,151,000 11.What is the depreciation expense on Machinery A for the year ended September 30, 2011? A. P500,000 C. P480,000 B. P529,667 D. P478,000 12.What is the depreciation expense on Machinery A for the year ended September 30, 2012? A. P140,000 C. P130,926 B. P113,426 D. P175,000 13.What amount of gain (loss) should be recognized on the sale of Machinery A on February 1, 2012? A. P0 C. P5,000 B. P60,000 D. P(30,000) 14.What is the cost of Machinery B? A. P728,610 C. P780,000 B. P731,760 D. P685,434 15.What is the depreciation expense on Machinery B for the year ended September 30, 2012? A. P36,430 C. P36,584 B. P39,000 D. P34,272 PROBLEM 37: You are engaged to audit the financial statements of CORNET COMPANY for the year ended December 31, 2012. You gathered the following information pertaining to the company’s equipment and accumulated depreciation accounts. 1/1/12

Balance

6/1/12

No. 12

9/1/12

Dismantling of No. 6

12/31/12

EQUIPMENT P446,00 9/1/12 0 36,000 12/31/1 2 1,00 0 483,00 0

N. 6 sold balanc e

ACCUMULATED DEPRECIATION - EQUIPMENT balance P271,400 1/1/12 Balance 12/31/1 2012 2 depreciation P271,40 0

P9,000 474,000

P483,00 0 P224,000 47,400 P271,40 0

The following are the details of the entries above: a. The company depreciates equipment at 10 percent per annum. The oldest equipment owned is seven years old as of December 31, 2012. b. The following adjusted balances appeared on you last year’s working papers: Equipment P446,000 Accumulated depreciation 224,000 c. Machine NO. 6 was purchased on March 1, 2005 at a cost of P30,000 and was sold on September 1, 2012, for P9,000 d. Included in charges to the repairs expense account was an invoice covering installation of Machine No. 12 in the amount of P2,500. e. It is the company’s practice to take full year’s depreciation in the year of acquisition and none in the year of disposition. 1. What is the gain (loss) on the sale of Machine No. 6? A. P(4,000) C. P(1,000) B. P8,000 D. P0 2. What is the equipment account balance on December 31, 2012? A. P454,500 C. P475,500

B. P452,000 D. P484,500 3. What is the total depreciation expense on equipment for the year ended December 31, 2012? A. P44,600 C. P51,450 B. P45,846 D. P45,450 4. What adjusting entry should be prepared in connection with the sale of Machine No. 6 on September 1, 2012? A. Loss on sale of equipment 1,000 Accumulated depreciation 21,000 Equipment 22,000 B. Loss on sale of equipment Accumulated depreciation Equipment

4,000 18,000 22,000

C. Accumulated depreciation Equipment

21,000 21,000

D. Accumulated depreciation Equipment Gain on sale of equipment

30,000 22,000 8,000

5. What adjusting entry should be prepared on December 31, 2012, to correct the amount of depreciation recorded on the company books. A. Accumulated depreciation 1,950 Depreciation expense 1,950 B. Accumulated depreciation Depreciation expense

2,800

C. Accumulated depreciation Depreciation expense

1,554

D. Accumulated depreciation Depreciation expense

4,050

2,800 1,554 4,050

PROBLEM 38: HORNY COMPANY has a long-standing policy acquiring company equipment by leasing. On January 1, 2011, the company entered into a lease for a new machine. The lease contract provides that annual payments will be made for 5 years. The payments are to be made in advance on December 31 of each year. At the end of the 5-year period, Hornpipe may purchase the machine. The estimated economic life of the machine is 12 years. Hornpipe uses the calendar year for reporting purposes and depreciates its other equipment using the straight-line method. In addition, the following information about the lease is also available: Annual lease payments Purchase option price Estimated fair market value of the machine after 4 years Interest rate implicit in the lease Date of the first lease payment

P165,000 P75,000 P1,125,000 10% January 1, 2011

The following data are abstracted from the present value tables: Present value of 1 for 5 periods at 10% 0.62092 Present value of an annuity due for 5 periods at 4.16986 10% Present value of an ordinary annuity for 5 periods 3.79079 at 10% 1. What is the amount to be capitalized as an asset for the lease of the machine? A. P672,049 C. P734,596 B. P837,232 D. P763,027

2. What is the amount of interest expense to be recognized for the year ended December 31, 2012? A. P46,156 C. P34,271 B. P56,960 D. P103,116 3. How much depreciation should be provided on the leased equipment for the year ended December 31, 2012? A. P63,586 C. P146,920 B. P56,004 D. P61,216 4. What is the entry to record the lease payment on December 31, 2011? A. Lease liability 108,040 Interest expense 56,960 Cash 165,000 B. Lease liability Interest expense Cash

118,844 46,156 165,000

C. Lease liability Cash D. Lease liability Interest expense Cash

165,000 165,000 130,728 34,272

Assume the purchase option is exercised at the end of the lease. The actual fair market value of the machine at the end of the lease is P285,000. On the date the purchase option is exercised, the undiscounted sum of future cash flows expected from the machine is P375,000. 5. What is the entry to record the exercise of the option? A. Lease liability 68,181 Interest expense 6,819 Cash 75,000 B. Equipment Interest expense Cash

68,181 6,819

C. Equipment Cash

75,000

75,000

D. Lease liability Cash

75,000 75,000 75,000

6. What is the amount of impairment loss that should be recognized by Hornpipe? A. P90,000 C. P53,514 B. P143,514 D. P0 PROBLEM 39: It has been the policy of HARP COMPANY to acquired equipment by leasing. On January 1, 2011, Harp entered into a lease with Lessor Company for a new delivery truck that had a selling price of P1,060,000. The lease contract provides that annual payments of P210,000 will be made for 6 years. Harp made the first lease payment on January 1, 2011, and subsequent payments are made on December 31 of each year. Harp guarantees a residual value of P183,560 at the end of the lease term. After considering the guaranteed residual value, the rate implicit in the lease is determined to be 23%. Harp has an incremental borrowing rate of 13%. The economic life of the truck is 9 years. Harp depreciates its other equipment using the straight-line method and uses the calendar year for financial reporting purposes. The following tables show the following data: Present value of 1 for 6 periods Present value of an ordinary annuity for 6 periods Present value of an annuity due for 6 periods 1. What is the cost of the leased delivery truck?

12% 0.50663 4.11141

15% 0.43233 3.78448

4.60478

4.35216

A. P993,312 C. P956,393 B. P1,060,000 D. P874,100 2. What is the depreciation expense to be recognized by Harp for the year ended December 31, 2011? A. P146,073 C. P97,382 B. P176,667 D. P134,959 3. What is the balance of the lease liability on December 31, 2014? A. P163,893 C. P169,940 B. P485,565 D. P333,833 4. What is the carrying amount of the leased delivery truck on December 31, 2015? A. P730,365 C. P183,560 B. P1,060,000 D. P329,635 5. What is the total amount of expenses that should be shown on Harp's income statement for the year ended December 31, 2016, in connection with this lease? ( Assume that Lessor Company sells the truck for P116,000 at the end of the 6-year period to a third party.) A. P233,302 C. P19,667 B. P146,045 D. P165,742 PROBLEM 40: In 2010 TIMPANI TRUCKING COMPANY entered into a long-term lease contract for newly constructed truck terminal and storage facilities. The buildings were constructed to the company’s specification on land owned by the company. Timpani tool possession of the leased properties on January 1, 2011. On January 1, 2011 and 2012, the company made cash payments of P3,144,000. Although the leased properties have a composite life of 40 years, the noncancelable lease runs for 20 years from January 1, 201, with a bargain purchase option available upon expiration of the lease. The 20 – year lease is effective for the period January 1, 2011, through December 31, 2030. Advance rental payments of P2,700,000 are payable to the lessor on January 1 of each year of the first 10 years of the lease term. Advance rental payments of P960,000 are due on January 1 for each of he last 10 years of the lease. The company has an option to purchase all of these facilities for P1 on December 31, 2030. Also, the lease contract stipulates that Timpani should make annual payments to the lessor of P375,000 for property taxes and P69,000 for insurance. The rate implicit in the lease is 6%. The company depreciates its other depreciable assets using the straight-line method and uses the calendar year for financial reporting purposes. Selected present value factors are as follows: Period For and Ordinary For 1 at 6% Annuity of 1 at 6% 1 0.943396 0.943396 2 1.833393 0.889996 8 6.209794 0.627412 9 6.801692 0.591898 10 7.360087 0.558395 19 11.158117 0.330513 20 11.469921 0.311805 1. What is the total cost of the leased facilities? A. P28,554,192 C. P23,817,667 B. P25,246,737 D. P26,937,917 Assume that the present value of the minimum lease payments is P25,200,000 on January 1, 2011. 2. What is the amount of interest expense to be shown on Timpani’s income statement for the year ended December 31, 20113 A. P1,350,000 C. P1,183,140 B. P2,452,140 D. P1,269,000 3. The total lease-related expenses for the year ended December 31, 2014, should be A. P1,722,128 C. P2,257,140 B. P2,796,128 D. P2,166,128 PROBLEM 41:

JESS COMPANY purchased a manufacturing plant building on January 1, 2003, for P2,600,000. The building has been depreciated using the straight-line method with a 30-year useful life and 10% residual value. Jess’s manufacturing operations have experienced significant losses for the past two years, so Jess has decided that the manufacturing building should be evaluated for possible impairment. On December 31, 2012, Jess estimates that the building has a remaining useful life of 15 years, that net cash inflow from the building will be P100,000 per year, and that the fair value less costs to sell of the building is P760,000. What amount of impairment loss should be recognized in 2012? A. P320,000 C. P973,333 B. P0 D. P1,060,000 PROBLEM 42: SHANE COMPANY has a department that performs machining operations on parts that are sold to contractors. A group of machines had an aggregate carrying amount of P3,690,000 on December 31, 2012. This group of machinery has been determined to constitute a cash generating unit for purposes of applying PAS 36, Impairment of Assets. A cash generating unit as defined in this standard is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows form other assets or groups of assets. Presented below are date about future expected cash inflows and outflows based on the diminishing productivity expected of the machinery as it ages and the increasing costs that will be incurred to generate output form the machines. Year 2013 2014 2015 2016 Totals

Revenues P2,250,000 2,400,000 1,950,000 600,000 P7,200,000

Cost, Excluding Depreciation P840,000 1,260,000 1,650,000 450,000 P4,200,000

The fair value of the machinery in this cash generating unit, net of estimated disposition costs, Is determined to amount to P2,535,000. The company discounts the future cash flows of this cash generating unit by using a 5% discount rate. The following are lifted from the present value tables: Present value of 1 at 5% for: 1 period 0.95238 2 periods 0.90703 3 periods 0.86384 4 periods 0.82270 5 periods 0.78353 How much impairment loss should be recognized at December 31, 2012? A. P1,155,000 C. P224,427 B. P930,573 D. P0 PROBLEM 43: BELLS COMPANY acquired a machine on January 1, 2010, at a cost of P120,000. It was expected to have useful economic life of 10 years. Bells uses the straight-line method in depreciation its machinery and equipment and reports on a calendar year basis. On December 31, 2012, the machine was appraised as having a gross replacement cost of P150,000. Bells applies the revaluation model in valuing this class of property, plant, and equipment after its initial recognition. How much should be credited to revaluation surplus on December 31, 2012? A. P30,000 C. P21,000 B. P105,000 D. P9,000 PROBLEM 44: On January 1, 2011, KAREN CO. acquired two assets within the same class of plant and equipment. Information on these assets is as follows: Cost Expected Useful Life

Machine A Machine B

P300,000 180,000

5 years 3 years

The machines are expected to generate benefits evenly over their useful lives. The class of plant and equipment is measured using the revaluation model. At December 31, 2011, information about the assets is as follow: Fair value Expected Useful Life Machine A P252,000 4 years Machine B 114,000 2 years On July 1, 012, machine B was sold for P87,000 cash. On the same day, Karen acquired machine c for P240,000 cash. Machine C has an expected useful life of four years. At December 31, 2012, information on the machines is as follows: Fair value Expected Useful Life Machine A P168,000 3 years Machine c 205,500 1.5 years 1. The depreciation expense for 2011 is A. P120,000 C. P165,000 B. P88,400 D. P123,000 2. Ignoring income tax, the December 31, 2011, statement of financial position of Karen should show revaluation surplus at A. P18,000 C. P6,000 B. P0 D. P12,000 3. The gain )loss) that should be recognized on the sale of Machine B on July 1, 2012, is A. P1,500 C. P30,000 B. P(27,000) D. P0 4. The amount of revaluation loss to be reported on Karen’s income statement for the year ended December 31, 2012, is A. P16,500 C. P9,000 B. P25,500 D. P4,500 5. The depreciation expense for 2010 is A. P123,000 C. P160,000 B. P121,500 D. P114,500 PROBLEM 45: In the December 31, 2011, statement of financial position of CLAP INC, the equipment was reported as follows: Equipment ( at cost) Accumulated Depreciation

P1,500,000 450,000 P1,050,000

The equipment consisted of two machines: Machine A and Machine B. Machine A had a book value of P540,000 at December 31, 2011 (cost P900,000), while Machine B was carried at P510,000 (cost, P600,000). Clap depreciates its equipment over ten-year period using the straight-line method. On June 30, 2012, Clap decided to change the basis of measuring the equipment form the cost model to the revaluation model. Machine was revalued to P540,000 with an expected useful life of six years, and Machine B was revalued to P465,000 with an expected useful life of five years. At December 31, Machine A was assessed to have a fair value of P489,000 with an expected useful life of five years, while Machine B’s fair value was P409,500 with an expected useful life of four years. 1. What amount of revaluation increase (decrease) should be recognized for Machine A on June 30, 2012? A. P45,000 C. P90,000 B. P(45,000) D. P0 2. What amount of revaluation increase (decrease) should be recognized for Machine B on June 30, 2012?

A. P(45,000) C. P(15,000) B. P15,000 D. P0 3. What amount of depreciation expense should be reported on Clap income statement for the year ended December 31, 2013? Machine A Machine B A. P60,000 P60,000 B. 90,000 76,500 C. 72,000 53,250 D. 70,500 78,000 4. What amount of revaluation increase (decrease) should be recognized for Machine A on December 31, 2013? A. P0 C. P6,000 B. P(24,000) C. P(6,000) 5. The entry to revalue Machine B on December 31, 2013, should include a debit to A. Revaluation surplus of P9,000 C. Revaluation loss of P9,000 B. Revaluation surplus of p32,250 D. Impairment loss of P32,250 PROBLEM 46: The statement of financial position of ANKING COMPANY on December 31, 2012, showed the following property, plat, and equipment items after recording depreciation: Building Accumulated Depreciation

P6,000,000 (2,000,000)

P4,000,000

Motor vehicle Accumulated depreciation

P2,400,000 (800,000)

1,600,000

Angking has adopted the revaluation model for the valuation of its PPE. This has resulted in the recognition in prior periods of an asset revaluation surplus for the building of P280,000. On December 31, 2012, An independent appraiser assessed the fair value of the building to be P3,200,000 and the vehicle to be P1,800,000. Assume that the building and the motor vehicle have remaining useful lives of 25 years and 4 years, respectively, with zero residual value. The company uses the straight-line depreciation method. Ignore income tax implications. 1. The entry to record the revaluation of the building should include a debit to Revaluation Surplus Revaluation Loss A. P800,000 P0 B. 280,000 520,000 C. 0 800,000 D. 520,000 280,000 2. What is the depreciation for 2012? A. P82,000 B. P461,200

C. P578,000 D. P560,000

PROBLEM 47: On January 1, 2011, KATSO COMPANY acquired a factory equipment at a cost of P150,000. The equipment is being depreciated using the straight-line method over its projected useful life of 10 years. On December 31, 2012, a determination was made that the asset’s recoverable amount was only P96,000. Assume that this was properly computed and that recognition of the impairment was warranted. On December 31, 2013, the asset’s recoverable amount was determined to be P111,000 and management believes that the impairment loss previously recognized should be reversed. You have been asked to assist the company’s accountant in the application of PAS 36, the standard on impairment of assets. 1. How much impairment loss should be recognized on December 31, 2012? A. P54,000 C. P24,000 B. P9,000 D. P0 2. What is the assets carrying amount on December 31, 2013? A. P84,000 C. P86,400 B. P90,000 D. P96,000

3. What would have been the asset’s carrying amount at December 31, 2013, had the impairment not been recognized in 2012? A. P105,000 C. P96,000 B. P84,000 D. P86,400 4. How much impairment recovery should be reported in the 2013 income statement of Katso Company? A. P27,000 C. P6,000 B. P0 D. P21,000 PROBLEM 48: KOTO INC. purchased machinery on January 1, 2011, at a cost of P100,000. It is being depreciated using the straight-line method over its projected useful life of 10 years. At December 31, 2011, the asset’s fair value was P112,500. Accordingly, an entry was made on that date to recognize the revaluation write-up. An impairment was detected on December 31, 2013, and the recoverable amount of the asset was determined to be P68,000. At December 31, 2014, the fair value of the asset was determined to be P73,000. 1. What amount of revaluation surplus should be credited directly to equity on December 31, 2011? A. P0 C. P10,000 B. P12,500 D. P22,500 2. What is the revaluation surplus balance at December 31, 2013, before recognition of the impairment loss? A. P17,500 C. P5,000 B. P22,500 D. P0 3. The amount of impairment loss to be reported on Koto’s income statement for the year 2013 is? A. P19,500 C. P17,000 B. P2,000 D. P0 PROBLEM 49: In 2008, DANIEL MINING COMPANY purchased property with natural resources for P12,400,000. The property was relatively close to a large city and had an expected residual value of P3,000,000. However, P1,200,000 will have to be spent to restore the land for use. The following information relates to the use of the property: a. In 2008, Daniel spent P800,000 ion development costs and P600,000 in buildings on the property. Daniel does not anticipate that the buildings will have any utility after the natural resources are depleted. b. In 2009 and 2011, P600,000 and P1,600,000, respectively, were spent for additional developments on the mine. c. The tonnage mined and estimated remaining tons for years 2008 – 2012 are as follows: year Tons Estimated tons extracted Remaining 2008 0 5,000,000 2009 1,500,000 3,500,000 2010 1,800,000 2,000,000 2011 1,700,000 900,000 2012 900,000 0 Based on the preceding information, calculate the depletion and depreciation for: 1. 2009 A. B. C. D.

Depletion P3,600,000 3,240,000 3,600,000 3,240,000

Depreciation P180,000 420,000 420,000 180,000

Depletion P4,149,474 4,149,474 3,978,000 3,978,000

Depreciation P378,000 198,000 198,000 378,000

2. 2010 A. B. C. D.

3. 2011 A. B. C. D.

Depletion P2,891,308 3,944,000 2,891,308 3,944,000

Depreciation P153,000 153,000 274,615 274,6 15

Depletion P3,944,000 P3,944,000 2,078,000 2,078,000

Depreciation P153,000 69,000 153,000 69,000

4. 2012 A. B. C. D.