CORRECTION OF IMPROPER PROPERTY PLANT, AND EQUIPMENT (PPE) ACQUISITION ENTRIES

1. The following are PPE acquisitions for selected companies:

1. 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 asset had the following book and fair values:

Book Value Fair Value

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 lower 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

2 Trumpet, Inc. purchased factory equipment by making a P100,000 cash down payment and
signing a 3-year P1,150,000, 10% note payable. The acquisition was recorded as follows:

Factory Equipment 1,365,000

Cash 100,000
Note Payable 1,150,000
Interest Payable 115,000

3 Tuba purchased store equipment for P1,000,000, terms 2/10, n/30. The took the discount and
made the following entry when it paid for the acquisition:

Store Equipment 1,000,000

Cash 980,000
Purchase discount 20,000

4 Trombone Company recently received at no cost land from its stockholder. The land’s fair value is
P1,350,000. No entry was made to record the land because it had no cost.

5 Flute Corp. constructed a building at a cost of P30,000,000. The building could have been
purchased for P37,000,000. The company’s controller made the following entry:

Building 37,000,000
Cash 30,000,000
Profit on construction 7,000,000

Prepare the necessary correcting entry for each acquisition.

ACQUISITION OF EQUIPMENT ON A DEFERRED PAYMENT BASIS

2. Saxophone Company acquires a new manufacturing equipment on January 1, 2006, 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,
 2006. 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. P3,104,160

2 The amount to be recognized on January 1, 2006, discount on note payable is

a. P1,304,160 c. P827,160
b. P310,000 d. P0

3 The amount of interest expense to be recognized in 2006 is

a. P0 c. P310,416
b. P188,898 d. P207,000

4 The amount of interest expense to be recognized in 2007 is

a. P310,416 c. P207,000
b. P188,898 d. P0

5 The carrying value of the note payable at December 31, 2007, is

a. P1,689,000 c. P1,312,062
b. P1,888,980 d. P1,700,082

BUILDING ACQUISITION WITH BONDS AND STOCK

3. Clarinet Company engages Samson Builders, Inc. to construct its administration building at a cost of
P21,300,000. the contract provides that Samson is to accept a full payment of the contract price
Clarinet’s 10% bonds with a face value of P9,000,000 and common stock with a par value of
P3,000,000 and no established market value. Clarinet’s bonds are selling in the market at this time at
106.

1 The cost of the building is

a. P21,300,000 c. P12,000,000
b. P12,540,000 d. P18,300,000

2 The bond premium to be recognized

a. P9,300,000 c. P540,000
b. P900,000 d. P0

3 The amount to be recognized in equity is

a. P11,760,000 c. P8,760,000
b. P3,000,000 d. P0

LAND AND BUILDING ACQUISITION FOR STOCK AND CASH

4. Oboe Corp. acquired land and an old building in exchange for P2,400,000 cash and 50,000 shares of
its common stock with a par value of P15 per share. The company’s stock was selling for P450 per
share when the acquisition was made. Oboe incurred the following costs in connection with the
acquisition:

Legal fees to complete the transaction P300,000

Property tax for previous year 900,000
Cost to demolish the old building 630,000
Salvage value of demolished building (180,000)
 1 What is the total cost of the building purchased by Oboe Corp.?
a. P26,550,000 c. P24,900,000
b. P22,500,000 d. P0

2 What is the total cost of the land acquired by Oboe Corp.?

a. P22,500,000 c. P26,550,000
b. P0 d. P24,900,000

PURCHASE AND SELF-CONSTRUCTED EQUIPMENT

5. Various equipments used by Bassoon 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 2006.

Manufacturing equipment (self-constructed)

Materials and purchased parts at gross invoice price

(Bassoon failed to take the 2% cash discount) P600,000
Imputed interest on funds used during construction
(stock financing) 42,000
Labor Costs 570,000
Overhead costs (fixed-P60,000; variable-P90,000) 150,000
Gain on self-construction 90,000
Installation cost 13,200

Store equipment (purchased)

Cash paid for equipment P315,000

Freight and insurance cost while in transit 6,000
Cost of moving equipment into place at store 9,300
Wage cost of technicians to test equipment 12,000
Insurance premium paid during first year of operation on this equipment 4,500
Special plumbing fixtures required for this equipment 24,000
Repair cost incurred in first year of operations related to this equipment 3,900

1 What is the total cost of the self-constructed equipment?

a. P1,363,200 c. P1,333,200
b. P1,375,200 d. P1,321,200

2 What is the total cost of the store equipment purchased?

a. P357,000 c. P370,800
b. P366,300 d. P354,300

NON-INTEREST-BEARING NOTE ISSUED TO PURCHASE EQUIPMENT

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 from Pede Utang Company on
January 2, 2006. Cello issues a P2,400,000, 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 total cost of the new equipment?
a. P2,112,000 c. P1,730,294
b. P1,457,931 d. P2,400,000

2 What is amount of interest expense that should be reported on Cello’s income statement for the
year ended December 31, 2007?
a. P174,951 c. P230,400
b. P207,635 d. P288,000

3 What is the carrying value of the note at December 31, 2008?

a. P1,440,000 c. P1,480,932
b. P811,226 d. P1,152,880

ENTRIES FOR PPE ACQUISITIONS

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
opportunities to its residents. The fair value of the land is determined to be P4 million.

b) 150,000 shares of common stock 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. The company’s stock is currently selling at P175 per share.

c) Still included in the materials, 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 P375,000

Factory Supplies Used 27,000
Direct labor incurred 450,000
Incremental overhead (over regular) arising from construction of
Machinery (excluding factory supplies used) 81,000
Fixed overhead rate applied to regular manufacturing operations 60% of Direct labor cost
Cost of similar machinery if it had been purchased from an outside dealer 1,320,000

Prepare the journal entries to record these transactions.

ACQUISITION OF PPE ITEMS

8. The following information relates to Piano Company.

a) On July 1, Piano purchased the plant assets of Yokona Corp., which had discontinued
operations. The following are the fair values of the plant assets acquired:
Land P 10,500,000
Building 31,500,000
Machinery and Equipment 21,000,000
Total P 63,000,000

Piano issued 375,000 shares of its P100 par value common stock 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 P 540,000

Repairs to building 3,150,000
Construction of bases for machinery and equipment acquired 4,050,000
Driveways and parking lots 3,660,000
Remodeling of office space in building, including new partitions and walls 4,830,000

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.

Based on the preceding information, calculate the cost of each of the following PPE items:

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

ACQUISITION OF PPE ITEMS

9. The following items are included in the PPE section of the auditor balance sheet of Drums Corp. as of
December 31, 2006:

Land P 3,450,000
Buildings 13,350,000
Leasehold improvements 9,900,000
Machinery and equipment 13,125,000

The following transactions occurred during 2007:

1. 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.

2. 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 P570,000

Architectural design fees 165,000
Building permit fee 37,500
 Imputed interest on funds used during construction (stock financing) 127,500

The building was completed and occupied on December 30, 2007.

3. Land C acquired for P9,750,000 with the intention of selling it within 12 months from the date
of purchase.

4. During December 2007, costs of P1,335,000 were incurred to improve leased office space.
The related lease will terminate on December 31, 2009, and is not expected to be renewed.

5. A group of machines 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 machines
was P1,305,000 and royalty payments for 2007 were P262,500.

Based on the preceding information, determine the balances of the following PPE items as of
December 31, 2007:

1. Land
a. P24,210,000 c. P33,960,000
b. P23,445,000 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. P14,515,500 d. P14,430,000

DETERMINING THE COST OF SPECIFIC PPE ITEMS

10. Accordion Company incurred following expenditures in 2006:

Purchase of land P7,800,000

Land survey 104,000
Fees for research 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 premises 92,000
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
(no insurance carried) 168,000
Cost of construction 58,000,000
Cost 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 the 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. P58,485,000 c. P58,252,000
b. P58,160,000 d. P58,285,000

CORRECTING IMPROPER ENTRIES FOR A SELF-CONSTRUCTED ASSET

11. Harpsichord Inc. constructs equipment for its own use. The account below is for a manufacturing
equipment it had a assembled in 2006.

Equipment
Debit Credit
Cost of dismantling old equipment P 43,440
Cash proceeds from sale of old equipment P 36,000
Raw materials used in construction new equipment 228,000
Labor in construction of new machine 143,000
Cost of installation 33,600
Cost of testing the equipment 25,000
Materials spoiled in machine trial runs 7,200
Profit on construction 72,000

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 the 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,
2006; 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 in the proce of
which the equipment could have been purchased.
e) While testing the equipment, the 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?

a. P486,500 c. P477,500
b. P457,500 d. P482,500

2. Prepare individual Journal entries to correct the accounts as of December 31, 2006.
Assume that nominal accounts are still open.

ENTRIES FROM VARIOUS PPE TRANSACTIONS

12. Cymbals, Inc. completed the following transactions during 2006:

Jan 1 Purchased real property for P18,847,500, which include 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 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 requirements on the building.

May 20 The garage in the rear of the building was demolished, P135,000 being recovered on the salvage
materials. 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 by
independent contractors. Upon completion of the construction, inspectors discovered that
Cymbals failed to comply with the building safety code and thus ordered the company to make
extensive modification 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 common stock with a market
value of P600,000 (par P90,000). The new machine has market value of P750,000.

July 1 Another machine was acquired by Cymbals. Payment was made by issuing bonds with a face
value of P1.5 M and by paying cash of P540,000. The machine’s fair value was P1,950,000.

Nov 20 On September 1, the company engaged an independent contractor for parking 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 December 31, the business was closed to permit taking the
year-end inventory. On the same date, required redecorating and repairs were completed at a
cost of P225,000.

Ignoring depreciation, compare journal entries to record each of the preceding transactions.

CORRECTING IMPROPER PPE ENTRIES

13. Banjo Company was organized in June 2006. The your audit of the company’s books, you find he
following land, buildings, and equipment account:

LAND BUILDING AND EQUIPMENT

2006 Debit Credit
June 7 Organizations fees P 60,000
15 Land site and old building 945,000
30 Corporate organization costs 90,000
July 3 Title clearance fees 55,200
Aug 29 Cost of razing old building 60,000
Sept 1 Salaries of Banjo Company Executives 180,000
Dec 15 Stock bonus to corporate promoters, 6,000 shares
Of common stock, P50 per share market value 300,000
15 Real property tax 43,200
20 Cost of new building completed and occupied
On this date 5,250,000

Your analysis of the this account and other accounts disclosed the following additional information:

a) The building acquired on June 15, 2006, had a fair value of P105,000 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 for the period July 1 – December 31, 2006.

Prepare journal entries to correct Banjo Company’s books.

COMPUTATION OF PPE ACCOUNT BALANCES

14. The audited balance sheet of Violin Co. as of December 31, 2006 shows the following property, plant
and equipment items:

Land P5,250,000
Buildings 45,000,000
Machinery and Equipment 33,750,000
Automobiles 5,160,000
Leasehold improvements 6,480,000

Violin Co. completed the following transactions during 2007:

Jan 5 Acquired a plant facility consisting a land and a building in exchange for 75,000 shares of Violin’s
common stock. On this date, Violin’s common stock had a market price of P25 per share. The fair
values of the land are P5,625,000 and P16,875,000, respectively;

Mar 20 New parking lots, streets and sidewalks at the acquired plant facility were completed at a total
cost of P5,760,000.

July 1 Machinery and equipment were purchased at a total invoice cost of P9,750,000. Additional cost of
P300,000 for delivery and P1,500,000 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 an undetermined future use.

Dec 20 A machine with a cost of P510,000 and carrying a value of P89,250 at date of disposition was
scraped without cash recovery.

Based on the preceding information, calculate the December 31, 2007 balances of the following accounts:

1. Land
a. P10,875,000 c. P19,312,500
b. P9,937,500 d. P21,375,000

2. Land Improvements
a. P16,260,000 c. P10,500,000
b. P5,760,000 d. P0

3. Buildings
a. P59,062,500 c. P61,875,000
b. P61,125,000 d. P45,000

4. Machinery and equipment

a. P42,990,000 c. P45,210,750
b. P33,750,000 d. P44,790,000

5. Automobiles
a. P5,835,000 b. P5,160,000
 c. P4,485,000 d. P5,325,000

PPE ACQUISITIONS

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 PPE. These transactions
are described below:

Acquisition 1

On June 1, 2006, Organ purchased equipment from Dongon Company under a deferred payment plan.
Organ issued a P1,000,000 four-year, non-interest-bearing note 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 the
next four years. On 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 this 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, 2006, Organ purchased several assets of a small company whose owner was dying of
AIDS virus. The lump sum price or “basket price” amounted to P10,500,000 and included the assets listed
below:

Book Value Fair Value

Machinery and Equipment P3,000,000 P 2,500,000
Land 2,000,000 4,000,000
Building 3,500,000 6,000,000
Totals P8,500,000 P12,500,000

During its fiscal year ended May 31, 2007, Organ incurred P400,000 for the interest expense in
connection with the financing of these assets.

Acquisition 3

On March 1, 2007, 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 Equipment Land Buildings
a. P3,705,882 P2,470,588 P4,323,530
b. 3,000,000 2,000,000 3,500,000
c. 2,500,000 4,000,000 6,000,000
d. 2,100,000 3,360,000 5,040,000

3. Acquisition 3 – purchase of land

a. P2,700,000 c. P3,250,000
b. P3,700,000 d. P2,300,000

EXHANGE TRANSACTIONS

16. Carillon Company is contemplating to exchange a machine used in its operations. Carillon received
the following offers from interested companies.

1) Ayi Company offered to exchange a similar machine plus P345,000 cash.

2) Butsoy Company offered to exchange similar machine.
3) Oneng Company offered to exchange similar machine, but wanted P120,000 in addition to
Carillon’s machine.

In addition, Carillon inquired from Soraya Corp., a dealer of machines. 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:

Carillon Ayi Butsoy Oneng Soraya

Cost P2,400,000 P1,800,000 P2,205,000 P2,400,000 P1,950,000
Accum Dep 750,000 675,000 1,065,000 1,125,000 ----
Fair Value 1,380,000 1,035,000 1,380,000 1,500,000 2,275,000

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

EXCHANGE TRANSACTION

17. On July 1, 2006, Castanets, Inc. exchanged machines with Bonat Co. the following facts pertain to
these assets.

Castanet’s Assets Bondat’s Assets

Original Cost P288,000 P330,000
Accumulated Depreciation
(to date of exchange) 135,000 156,000
Fair market value at date of exchange 180,000 225,000
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 proved that this exchange transaction lacks commercial
substance.

What entry should be made on the books of each company to record the exchange?
CAPITALIZATION OF INTEREST

18. Gong Company started construction of its administration building at an estimated cost of P50,000,000
on January 1, 2006. the construction is expected to be completed by December 31, 2009. Gong has
the following debt obligations outstanding during 2006:

Construction loan - 12% interest, payable semiannually,

Issued December 31, 2005 P20,000,000
Short term loan – 10% interest payable monthly,
Principal payable at maturity on May 31, 2007 14,000,000
Long-term loan – 11% interest, payable on January 1 of each year
Principal payable on January 1, 2010 10,000,000

Assume that the weighted-average of the accumulated expenditures during 2006 was P36,000,000.
Assume further that Gong Company would opt for capitalization of borrowing costs, the allowed
alternative treatment under PAS 23: Borrowing Costs.

What amount of interest incurred in 2006 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

CAPITALIZATION OF INTEREST

19. Maracas Company constructs its own buildings. Maracas applies the allowed alternative treatment for
borrowing costs (PAS 23), i.e., the computation of the total construction costs. In 2006, a total of
P1,228,500 interest was incurred as part of the cost of a new building just being completed.

The following is a summary of construction expenditures in 2007:

Accumulated in 2006, including capitalized interest P18,228,500

March 1 7,000,000
September 1 4,000,000
December 31 5,000,000
Total P34,228,500

Maracas has the following outstanding loans at December 31, 2007:

12% note related directly to new building;

Term, 5 yrs from beginning of construction P10,000,000

General borrowings:

10% note issued prior to construction of new building; term, 10 yrs 5,000,000
8% note issued prior to construction of new building; term, 5 yrs 10,000,000

What is the total cost of the new building?

a. P36,763,261 c. P35,500,000
b. P36,728,500 d. P27,895,167

CAPITALIZATION OF INTEREST

20. On January 1, 2007, Viola Corporation contracted with Mega Construction Company to construct a
building for P40,000,000 on land that Viola purchased several years ago. The contract provides that
 Viola is to make five payments in 2007, with the last payment scheduled for the date of completion.
The building was completed on December 31, 2007.

Viola made the following payments during 2007:

January 1 P 4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000
Total P40,000,000

Viola had the following debt outstanding at December 31, 2007:

a) A 12%, 4-year note dated January 1, 2007, with interest compounded

quarterly. Both principal and interest are payable on December 31, 2010.
This loan relates specifically to the building project. P17,000,000
b) A 10%, 10-year note dated December 31, 2003, with simple interest;
Interest payable annually on December 31 12,000,000
c) A 12%, 5-year note dated December 31, 2005, with simple interest;
Interest payable annually on December 31 14,000,000

Viola adopts the allowed alternative treatment of capitalizing borrowing costs under PAS 23: Borrowing
Costs.

The following present value 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. The amount of interest to be capitalized during 2007 is

a. P5,013,680 c. P2,277,710
b. P2,133,680 d. P0

2. The amount of interest that would be expensed for 2007 is

a. P2,735,960 c. P2,277,720
b. P5,013,680 d. P0

SUBSEQUENT EXPENDITURES

21. Some parts of Xylophone Company’s factory building were replaced during 2007.

1. 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 for 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.
2. 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 benefits costs.
The original filters cost P45,000 and are one-third depreciated.
Prepare the journal entries based on the preceding information.

SEPARATE DEPRECIATION FOR EACH SIGNIFICANT PART OF AN ITEM OF PPE

22. Harp Company, whose financial year-end IS December 31, purchased a new manufacturing
equipment on April 1, 2000. The equipment has a special component that requires replacement
before the end of the equipment’s useful life. This equipment is initially recognized in two accounts:
one is for the main unit and the other one is for the special component. Harp uses the straight-line
method of depreciation for all of its manufacturing equipment. Depreciation is recorded to its nearest
month, residual values being disregarded.

On April 1, 2006, the special component is removed from the main unit and is replaced with a similar
component. This 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 the
calculation of depreciation. Specific information about this equipment is as follows:

Main unit
Purchase price in 2000 P187,200
Residual value 13,200
Estimated useful life 10 years

Component 1
Purchase price P 30,000
Residual value 750
Estimated useful life 6 years

Component 2
Purchase price P 45,750

1. What is the depreciation charge to be recognized for the year 2000?

a. P17,790 c. P16,706
b. P23,720 d. P16,800

2. What is the depreciation charge to be recognized for the year 2006?

a. P30,154 c. P28,548
b. P23,720 d. P26,404

3. What is the depreciation charge to be recognized for the year 2007?

a. P27,298 c. P18,720
b. P30,158 d. P25,798

DIFFERENT DEPRECIATION METHODS

23. Your audit of Lyre Company’s property, plant, and equipment disclosed the following data at
December 31, 2007.
A S S E T
J E R I
Original Cost P70,000 P102,000 P160,000 P160,000
Year Purchased 2001 2002 2003 2005
Useful life 10 yrs 15,000 hrs 15 yrs 10 yrs
Salvage Value P 6,200 P 6,000 P 10,000 P 10,000
Depreciation Method Sun-of-years-digit Working hours Straight line Double-declining Balance
Accum Dep through ‘06 P46,400 P70,400 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 2007:

1) 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

2) On December 31, it was determined that Asset E had been used 2,100 hours during 2007.
3) On December 31, before computing depreciation expense on Asset R, the management of
Lyre decided the useful life remaining from January 1, 2007, was 10 years.
4) On December 31, it was discovered that a plant assets purchased in 2006 had been
expensed completely in the year. This assets 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”.

Prepare the necessary adjusting journal entries for the year of 2007. Record the appropriate depreciation
expense on the above-mentioned items.

ACQUISITION AND DEPRECIATION

24. The following data pertain to Eukelele Corporation’s property, plant , and equipment for 2007

Audited balances at December 31, 2006:

Debit Credit
Land P 7,500,000
Buildings 60,000,000
Accumulated Depreciation – Buildings P13,155,000
Accumulated Depreciation – Machinery and Equipment 12,500,000
Delivery Equipment 5,750,000
Accumulated Depreciation – Delivery Equipment 4,230,000

Depreciation Data:
Depreciation Method Useful Life
Buildings 150% declining balance 25 years
Machinery and Equipment Straight-line 10 years
Delivery Equipment Sum-of-the-years’-digits 4 years
Leasehold improvements Straight-line

Transactions during 2007 and other information are as follows:

a) On January 2, 2007, Ukulele purchased a new truck for P1,000,000 cash and trade-in of a 2-
year-old truck with 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, 2007, a machine purchased for P1,150,000 on April 1, 2002, was stolen. Ukulele
recovered P775,000 from its insurance company.
c) On May 1, 2007, costs of 8,400,000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on December
31, 2013.
d) On July 1, 2007, machinery and equipment were purchased at a total invoice cost of
P14,000,000; additional costs of P250,000 for freight and P1,250,000 for installation were
incurred.
 e) Ukulele determined that the delivery equipment comprising the P5,750,000 balance at January 1,
2007, would have been depreciated at a total amount of P900,000 for the year-ended December
31, 2007.

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 2007 on Buildings
a. P3,600,000 c. P2,810,700
b. P2,400,000 d. P1,859,400

2. Depreciation expense for 2007 on Machinery and Equipment

a. P5,188,750 c. P5,275,000
b. P5,303,750 d. P5,963,750

3. Depreciation expense for 2007 on Delivery Equipment

a. P1,110,000 c. P1,380,000
b. P1,200,000 d. P1,020,000

4. Depreciation expense for 2007 on Leasehold Improvements

a. P700,000 c. P840,000
b. P1,050,000 d. P933,333

5. Accumulated Depreciation – Buildings. December 31, 2007

a. P15,965,700 c. P16,755,000
b. P15,014,400 d. P15,555,000

6. Accumulated Depreciation – Machinery and Equipment. December 31, 2007

a. P17,288,750 c. P17,200,000
b. P17,113,750 d. P17,688,750

7. Accumulated Depreciation – Delivery Equipment. December 31, 2007

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, 2007

a. (P200,000) c. (P70,000)
b. P200,000 d. P70,000

9. Gain from compensation received from the insurance company

a. P200,000 c. P575,000
b. P775,000 d. P0

10. Loss on derecognition of the stolen machinery

a. P200,000 c. P575,000
b. P775,000 d. P0

DEPRECIATION AND MAINTENANCE CHARGES OF MACHINE COMPONENTS

25. Snare Drum Company buys a machine for P76,200 on January 1, 2004. The maintenance costs for
the year 2004-2007 are as follows:
Year Cost
2004 P4,500
2005 3,600
 2006 21,900*
2007 6,300

*includes P18,300 for cost of new motor installed in December 2006.

Snare Drum recorded the cost of the machine frame in one account at a cost of P58,800 and the motor
was recorded in a second account at a cost of P17,400. 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 2004?
a. P10,230 c. P14,730
b. P12,120 d. P23,550

2. What is the total expense related to the machine in 2006?

a. P36,480 c. P13,380
b. P22,755 d. P18,180

3. What is the total expense related to the machine in 2007?

a. P10,455 c. P17,655
b. P16,755 d. P14,010

COMPUTATION OF DEPRECIATION

26. Bugle Company’s property, plant, and equipment and related accumulated depreciation accounts had
the following balances at December 31, 2006:

Class of PPE Cost Accumulated Depreciation

Land P 3,900,000
Buildings 36,000,000 P7,962,000
Machinery and Equipment 23,250,000 5,886,000
Transportation Equipment 3,960,000 2,586,000
Leasehold Improvements 6,630,000 3,315,000

Class of PPE Depreciation Method Useful Life

Land Straight Line 12 years
Buildings 150% declining balance 25 years
Machinery and Equipment straight line 10 years
Transportation Equipment 150% declining balance 5 years
Leasehold Improvements straight line 8 years

Bugle computes depreciation to the nearest month. The salvage values of the depreciable assets are
immaterial.

Transactions during 2007 and other information are described below:

a) On January 5, 2007, a plant facility consisting of land and a building was purchased from Torotot
for P18,000,000. Of this amount, 20% was allocated to land.
b) On April 3, 2007, 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, 2003, and had an estimated
useful life of 8 years. The related lease, which would have terminated on December 31, 2009,
was renewable for an additional 4-yr term. On April 30, 2007, Bugle exercised the renewal option.
d) On July 1, 2007, 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, 2007, Bugle purchased a new automobile for P450,000.
 f) On September 29, 2007, 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 30,
2007, was P70,560.
g) On December 22, 2007, 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 2007 depreciation expense on each of the following
classes of PPE.

1. Land Improvements
a. P480,000 c. P320,000
b. P360,000 d. P120,000

2. Buildings
a. P2,546,280 c. P2,752,280
b. P3,024,000 d. P1,682,280

3. Machinery and Equipment

a. P2,325,000 c. P1,597,500
b. P3,195,000 d. P2,760,000

4. Transportation Equipment
a. P363,132 c. P433,692
b. P454,860 d. P527,760

5. Leasehold Improvements
a. P828,750 c. P663,000
b. P552,500 d. P1,326,000

DEPRECIATION AND ERROR CORRECTION

27. The Delivery trucks account of your client, Alphorn Company, had a balance of P2,840,000 on
January 1, 2004 which included the following:

Truck No. Acquisition Date Cost

1 January 1, 2001 P 540,000
2 July 1, 2001 660,000
3 January 1, 2003 900,000
4 July 1, 2003 720,000
P2,820,000

The Accumulated depreciation – Delivery trucks account had a balance of P906,000 on January 1, 2004.
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, 2004.

Transactions completed during the period January 1, 2004 through December 31, 2007, and the entries
made to record them were as follows:

July 1, 2004

Truck No, 3 was traded for a larger one (Truck No. 5), the agreed price of which was P1,020,000. Alphorn
paid the dealer P450,000 cash on the transaction. The entry was:

Delivery Trucks 450,000

Cash 450,000
January 1, 2005

Truck No. 1 was sold for P105,000. The entry was:

Cash 105,000
Delivery trucks 105,000

July 1, 2006

A new truck (No. 6) was purchased for P1,080,000 cash and was debited at that amount to the Delivery
Trucks amount. (Assume Truck No. 2 was not retired)

July 1, 2006

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 96,000
Sales 21,000
Delivery Trucks 75,000

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

Year Depreciation Expense

2004 P609,000
2005 P633,000
2006 P733,500
2007 P834,000

1. What amount of gain (loss) should have been recognized on the trade in of Truck No. 3 on July 1,
2004?
a. (P60,000) c. (P180,000)
b. P390,000 d. P0

2. Alphorn’s net income for 2004 was overstated (understated) by

a. P60,000 c. (P33,000)
b. (P93,000) d. P27,000

3. The gain (loss) on the sale of Truck No. 1 on January 1, 2005, was
a. P105,000 c. (P3,000)
b. (P105,000) d. P0

4. Alphorn’s net income for 2005 was overstated (understated) by

a. P150,000 c. (P153,000)
b. P153,000 d. (P150,000)

5. What amount of loss should have been recognized on the sale of Truck No. 4 on July 1, 2006?
a. P267,000 c. P288,000
b. P192,000 d. P213,000

6. Alphorn’s net income for 2006 was overstated (understated) by

a. P213,000 c. (P283,500)
b. (P70,500) d. (P213,000)

7. What amount of depreciation should have been recorded in 2007?

a. P414,000 b. P552,000
 c. P420,000 d. P834,000

ACQUISITION AND DEPRECIATION OF VARIOUS PPE ITEMS

28. Bagpipe Manufacturing Company began operations on October 1, 2005. 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 time 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 was acquired on October 3, 2005, in exchange for 37,500 shares of Bagpipe’s common
stock. On the acquisition date, Land B had a fair value of P1,125,000 and the company’s P5 par
value common stock 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, 2006. By September
30, 2007, 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 2008.
e) Certain equipment was donated to the corporation by the national government. An independent
appraisal of the equipment when donated placed the fair market value of P450,000 at the salvage
value at P45,000.
f) Machinery A’s total cost of P2,473,500 includes installation cost of P9,000 and normal repairs
and maintenance of P223,000. Salvage value is estimated at P90,000. It was sold on February 1,
2007.
g) On October 1, 2006, 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,
2006. The prevailing interest rate was 8%. The following data were abstracted from present value
tables (rounded):
10 yrs 11 yrs 15 yrs
Present Value of 1 at 8% 0.463 0.429 0.315
Present value of an ordinary
Annuity of 1 at 8% 6.710 7.139 8.559

Land A
Acquisition Date: October 1, 2005

Building A
Acquisition Date: October 1, 2005
Salvage value: P600,000
Depreciation Method: straight-line
Depreciation expense: P261,750

Land B
Acquisition Date: October 3, 2005

Building B
Acquisition Date: under construction
Cost: P4,800,000 to date
Salvage value: 0
Depreciation Method: straight-line
Estimated life: 30 years
Depreciation expense:
Year ended September 30, 2006 P0

Donated Equipment
Acquisition Date: October 2, 2005
Salvage Value: P45,000
Depreciation method: 150% declining balance
Estimated life: 10 years

Machinery A
Acquisition Date: October 2, 2005
Salvage Value: P90,000
Depreciation method: sum-of-the-years’-digit (SYD)
Estimated life: 8 years

Machinery B
Acquisition Date: October 1, 2006
Salvage Value: 0
Depreciation method: Straight Line
Estimated life: 20 years

1. What is the cost of Land A?

a. P1,350,000 c. P11,070,000
b. P12,150,000 d. P12,300,000

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 yrs c. 44 yrs
b. 40 yrs d. 46 yrs

4. What is the depreciation expense on Building A for the year ended September 30, 2007?
a. P261,250 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 30,2007?
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,
2006?
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,
2007?
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, 2006?
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, 2007?
a. P140,000 c. P130,926
b. P113,426 d. P175,000

13. What is the cost of Machinery B?

a. P728,610 c. P780,000
b. P731,670 d. P685,434

14. What is the depreciation expense on Machinery B for the year ended September 30, 2007?
a. P36,430
b. P39,000
c. P36,584
d. P34,272

ACQUISITION AND DISPOSITION OF EQUIPMENT

29. You are engaged to audit the financial statements of Cornet Company for the year ended December
31, 2007. You gathered the following information pertaining to the company’s equipment and
accumulated depreciation accounts.

EQUIPMENT
1.1.07 Balance P446,000 9.1.07 No. 6 sold P 9,000
6.1.07 No. 12 36,000 12.31.07 Balance 474,000
9.1.07 Dismantling of No. 6 1,000
P483,000 P483,000

ACCUMULATED DEPRECIATION - EQUIPMENT

12.31.07 Balance P271,400 1.1.07 Balance P 224,000
________ 12.31.07 2007 Depreciation _47,400
P271,400 P217,400

The following are the details of the entry above:

1. The company depreciates equipment for 10% per annum. The oldest equipment owned is 7 years
old as of December 31, 2007.
2. The following adjusted balances appeared on your last year’s working papers:
Equipment P446,000
Accumulated Depreciation P224,000
3. Machine No. 6 was purchased on March 1, 2000 at a cost of P30,000 and was sold on
September 1, 2007, for P9,000.
 4. Included in charges to the repairs expense account was an invoice covering installation of
Machine No. 12 in the amount of P2,500.
5. 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. (P4,000) c. (P1,000)
b. P8,000 d. P0

2. What is the equipment account balance on December 31, 2007?

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, 2007?
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, 2007?
a. Loss on sale of equipment 1,000
Accumulated Depreciation 21,000
Equipment 22,000
b. Loss on sale of equipment 4,000
Accumulated depreciation 18,000
Equipment 22,000
c. Accumulated depreciation 21,000
Equipment 21,000
d. Accumulated depreciation 30,000
Equipment 22,000
Gain on sale of equipment 8,000

5. What adjusting entry should be prepared on December 31, 2007, to correct the amount of
depreciation recorded on company books?
a. Accumulated Depreciation 1,950
Depreciation Expense 1,950
b. Accumulated Depreciation 2,800
Depreciation Expense 2,800
c. Accumulated Depreciation 1,554
Depreciation Expense 1,554
d. Depreciation Expense 4,050
Accumulated Depreciation 4,050

EQUIPMENT ACQUIRED UNDER FINANCE LEASE (LESSEE HAS A PURCHASE OPTION)

30. Hornpipe Company has a long-standing policy of acquiring company equipment by leasing. On
January 1, 2006, 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. At
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 P165,000

Purchase option price P75,000
 Estimated fair market value of the machine after 5 years P1,125,000
Interest rate implicit in the lease 10%
Date of first lease payment January 1, 2006

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 10% 4.16986
Present value of an ordinary annuity for 5 periods at 10% 3.79079

1. What is the amount to be capitalized as an asset for the lease of the machine?
a. P672,052 c. P732,599
b. P837,232 d. P763,027

2. What is the amount of interest expense to be recognized for the year ended December 31,
2007?
a. P46,156 c. P34,272
b. P56,960 d. P103,116

3. How much depreciation should be provided on the leased equipment for the year ended
December 31, 2007?
a. P63,586 c. P146,920
b. P56,004 d. P61,217

4. What is the entry to record the lease payment on December 31, 2006?
a. Lease liability P108,040
Interest expense P56,960
Cash P165,000
b. Lease liability P118,444
Interest expense P46,156
Cash P165,000
c. Lease liability P165,000
Cash P165,000
d. Lease liability P130,728
Interest expense P34,272
Cash P165,000

5. What is the entry to record the exercise of the option?

a. Lease liability P68,168
Interest expense P6,832
Cash P75,000
b. Equipment P68,168
Interest expense P6,832
Cash P75,000
c. Equipment P75,000
Cash P75,000
d. Lease liability P75,000
Cash P75,000

6. What is the amount of impairment loss that should be recognize by Hornpipe?

a. P90,000 c. P53,516
b. P143,516 d. P0

EQUIPMENT ACQUIRED UNDER FINANCE LEASE (LESSEE GUARANTEES THE ASSET’S

RESIDUAL VALUE)
31. It has been the policy of Vibraharp Company to acquire equipment by leasing. On January 1, 2006,
VIbraharp 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. Vibraharp made the first lease payment on January 1, 2006, and subsequent payments are
made on December 31 of each year. Vibraharp 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 12%. Vibraharp has an incremental borrowing rate of 13%. The economic life of the
truck is 9 years. Vibraharp depreciates its other equipment using the straight-line method and uses
the calendar year for financial reporting purposes.

The present value tables show the following data:

12% 15%
Present value of 1 for 6 periods 0.50663 0.43233
Present value of an ordinary annuity for 6 periods 4.11141 3.78448
Present value of an annuity due for 6 periods 4.60478 4.35216

1. What is the cost of the leased delivery truck?

a. P993,312 c. P956,393
b. P1,060,000 d. P874,100

2. What is the depreciation expense to be recognized by Vibraharp for the year ended December
31, 2006?
a. P146,073 c. P97,382
b. P176,667 d. P134,959

3. What is the balance of the lease liability on December 31, 2009?

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, 2010?
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 Vibraharps’s income statement for
the year ended December 31, 2011, 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. P146,075 d. P165,742

ACCOUNTING FOR LEASED FACILITIES

32. In 2005, Timpani Trucking Company entered into a long-term lease contract for newly constructed
truck terminals and storage facilities. The buildings were constructed to the company’s specifications
on land owned by the company. Timpani took possession of the leased properties on January 1,
2006. On January 1, 2006 and 2007, the company-made cash payments of P3,144,000.

Although the leased properties have a composite life of 40 years, the noncancellable lease runs for
20 years from January 1, 2006, with a bargain purchase option available upon expiration of the lease.

The 20-year lease is effective for the period January 1, 2006, through December 31, 2005. advance
rental payments of P2,700,000 are payable to the lessor on January 1 of each of the first 10 years of
the lease term. Advance rental payments of P960,000 are due on January 1 for each of the last 1o
years of the lease. The company has an option to purchase all of these lease facilities for P1 on
December 31, 2025. 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:

For an Ordinary
Period Annuity of 1 at 6% For 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. P23,817,677
b. P25,246,737 d. P26,937,917

2. What is the amount of interest expense to be shown on Timpani’s income statement for the year
ended December 31, 2008?
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, 2009 should be
a. P1,722,128 c. P2,257,140
b. P2,796,128 d. P2,166,128

IMPAIRMENT OF ASSETS

33. Viele Company purchased a manufacturing plant building on January 1, 1998 for P2,600,000. The
building has been depreciated using the straight-line method with a 30-year useful life and 10%
residual value. Viele’s manufacturing operations have experienced significant losses for the past two
years, so Viele has decided that the manufacturing building should be evaluated for possible
impairment. On December 31, 2007, Viele 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
cost to sell of the building is P760,000.

What amount of impairment loss should be recognized in 2007?

a. P320,000 c. P973,333
b. P0 d. P1,060,000

IMPAIRMENT OF ASSETS

34. Kettledrum 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,
2006. 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 from other assets or group of assets.

Presented below are data 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 from the machines.
Cost, excluding
 Year Revenues Depreciation
2007 P2,250,000 P 840,000
2008 2,400,000 1,260,000
2009 1,950,000 1,650,000
2010 600,000 450,000
Total P7,200,000 P 4,200,000

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, 2006?

a. P1,155,000 c. P224,427
b. P930,000 d. P0

REVALUATION OF PPE

35. Bells Company acquired a machine on January 1, 2005, at a cost of P120,000. it was expected to
have a useful economic life of 10 years. Bells uses the straight-line method in depreciating its
machinery and equipment and reports on a calendar year basis. On December 31, 2007, the machine
was appraised as having a gross replacement cost of P150,000. Bell applies the revaluation model in
valuing this class of property, plant, and equipment after its recognition.

How much should be credited to revaluation surplus on December 31, 2007?

a. P30,000 c. P21,000
b. P105,000 d. P9,000

IMPAIRMENT RECOVERY

36. On January 1, 2006, Kazoo 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, 2007, a determination was made that the asset’s recoverable amount was
on P96,000. Assume that this was properly computed and that recognition of the impairment was
warranted. On December 31, 2008, 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 December 31, 2007?

a. P54,000 c. P24,000
b. P9,000 d. P0

2. What is the asset’s carrying amount on December 31, 2008?

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, 2008, had the impairment
not been recognized in 2007?
a. P105,000 c. P96,000
b. P84,000 d. P86,000

4. How much impairment recovery should be reported in the 2008 income statement of Kazoo
Company?
a. P27,000 c. P6,000
b. P0 d. P21,000

IMPAIRMENT LOSS ON EQUIPMENT CARRIED AT REVALUED AMOUNT

37. Koto, Inc. purchased a machinery on January 1, 2006, at a cost of P100,000. It is being depreciated
using the straight-line method over its projected life of 10 years. At December 31, 2006, 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, 2008, and the recoverable amount of the asset was
determined to be P68,000. At December 31, 2009, 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, 2006?
a. P0 c. P10,000
b. P12,500 d. P22,500

2. What is the revaluation surplus balance at December 31, 2008, 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 2008 is
a. P19,500 c. P17,000
b. P2,000 d. P0

DEPLETION AND DEPRECIATION

38. In 2003, Sahnai 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 2003, Sahnai spent P800,000 in development costs and P600,000 in buildings on the property.
Sahnai does not anticipate that the buildings will have any utility after the natural resources are
depleted.
b) In 2004 and 2006, P600,000 and P1,600,000, respectively, were spent for additional
developments on the mine.
c) The tonnage mined and estimated remaining tons for 2003-2007 as follows:

Year Tons Extracted Estimated Tons Remaining

2003 0 5,000,000
2004 1,500,000 3,500,000
2005 1,800,000 2,000,000
2006 1,700,000 900,000
2007 900,000 0
Based on the preceding information, calculate the depletion and depreciation for:

1. 2004
Depletion Depreciation
a. P3,600,000 P180,000
b. 3,240,000 420,000
c. 3,600,000 420,000
d. 3,240,000 180,000

2. 2005
Depletion Depreciation
a. P4,149,474 P378,000
b. 4,149,474 198,000
c. 3,978,000 198,000
d. 3,978,000 378,000

3. 2006
Depletion Depreciation
a. P2,891,308 P153,000
b. 3,944,000 153,000
c. 2,891,308 274,615
d. 3,944,000 274,615

4. 2007
Depletion Depreciation
a. P3,944,000 P153,000
b. 3,944,000 69,000
c. 2,078,000 153,000
d. 2,078,000 69,000