Practice Problems

PROPERTY, PLANT AND EQUIPMENT
(Continuation of SUBSEQUENT MEASUREMENT)
PAS 16 permits two accounting models:
1. COST MODEL. The asset is carried at cost less accumulated depreciation and impairment.
Historical Cost xx
Less: Accumulated depreciation xx
Less: Impairment Loss xx
Carrying Amount xx
2. REVALUATION MODEL. The asset is carried at a revalued amount, being its fair value at
the date of revaluation less subsequent depreciation, provided that fair value can be
measured reliably.
Fair Value xx
Less: Accumulated depreciation xx
Less: Impairment Loss xx
Revalued Amount xx
COST MODEL
METHODS OF DEPRECIATION
1. Straight-line
2. Service hours
3. Production-output
4. Sum-of-the-years
5. Double declining method
6. Composite method and Group method
7. Retirement method
8. Replacement method
9. Inventory method
10. Revenue method
PRACTICE PROBLEMS
1. Orton Corporation, which has a calendar year accounting period, purchased a new machine
for P60,000 on April 1, 2008. At that time Orton expected to use the machine for nine years
and then sell it for P6,000. The machine was sold for P33,000 on Sept. 30, 2013. Assuming
straight-line depreciation, no depreciation in the year of acquisition, and a full year of
depreciation in the year of retirement, the gain to be recognized at the time of sale would be
_____________.
2. Engels Company purchased a depreciable asset for P800,000. The estimated salvage value is
P40,000, and the estimated useful life is 10,000 hours. Engels used the asset for 1,100 hours
in the current year. The activity method will be used for depreciation. What is the
depreciation expense on this asset? __________
3. Solar Products purchased a machine for P39,000 on July 1, 2012. The company intends to
depreciate it over 4 years using the double-declining balance method. Salvage value is
P3,000. Depreciation for 2012 is ____________
Depreciation for 2013 is ____________
4. On January 1, 2012, Graham Company purchased a new machine for P2,800,000. The new
machine has an estimated useful life of nine years and the salvage value was estimated to be
P100,000. Depreciation was computed on the sum-of-the-years'-digits method. What
amount should be shown in Graham's balance sheet at December 31, 2013, net of
accumulated depreciation, for this machine? ____________
A schedule of machinery owned by Mallon Co. is presented below:

Estimated Estimated
Total Cost Salvage Value Life in Years
Machine A P260,000 P20,000 12 20,000
Machine C 390,000 30,000 10 36,000
Machine M 195,000 15,000 6 30,000
Mallon computes depreciation by the composite method.
5. The composite rate of depreciation (in percent) for these assets is _________
The composite life (in years) for these assets is _________
PROBLEM 1 Improvements and Replacements

Gates Co. purchased machinery on January 2, 2007, for P660,000. The straight-line method
is used and useful life is estimated to be 10 years, with a P60,000 salvage value.
a. At the beginning of 2013 Gates spent P144,000 to overhaul the machinery. After
the overhaul, Gates estimated that the useful life would be extended 4 years (14 years
total), and the salvage value would be P30,000. How much is the carrying amount of
the machinery at the beginning of the year? __________
b. At the beginning of 2013 Gates spent P144,000 to overhaul the machinery. After the
overhaul, Gates operating costs is significantly reduced. How much is the carrying
amount of the machinery at the beginning of the year? __________
✔
PROBLEM 2 Change in useful life and residual value (prospective)
Gates Co. purchased machinery on January 2, 2007, for P660,000. The straight-line
method is used and useful life is estimated to be 10 years, with a P60,000 salvage value. At
the beginning of 2013 Gates spent P144,000 to overhaul the machinery. After the overhaul,
Gates estimated that the useful life would be extended 4 years (14 years total), and the
salvage value would be P30,000. The depreciation expense for 2013 should be ________
PROBLEM 3 Change in depreciation method (prospective)
Fanestil Corporation purchased a depreciable asset for P630,000 on January 1, 2010.

The estimated salvage value is P63,000, and the estimated total useful life is 9 years. The
straight-line method is used for depreciation. In 2013, Fanestill changed its estimated useful
life from 9 to 7 years with a salvage value of P105,000 and double declining method will be
used. What is 2013 depreciation expense?
REVALUATION MODEL
✔ Once selected, the revaluation policy applies to an entire class of property, plant and equipment.
✔ Revaluations must be made regularly to ensure that the carrying value is not materially different
from fair value.
✔ After initial recognition, the revalued amount is fair value less subsequent depreciation and
impairment losses.
✔ When an asset is revalued, any increase in carrying amount is reported as revaluation surplus as
other components of equity.
Fair value may be based on:

1. Appraised value
Appraised value xx
Less: Carrying amount xx
Revaluation surplus xx
2. Depreciated replacement value
Replacement Cost xx
Less: Carrying Amount xx
Revaluation surplus xx
PROBLEM 4
On January 1, 2004, Loyal Company purchased an equipment for P8, 000,000. The equipment is
depreciated using straight line method based on a useful life of 8 years with no residual value.
Compute the revaluation surplus
a. On December 31, 2007, after 4 years, the equipment was assessed by an external assessor at
an appraised value of 5,200,000 with no change in residual value.
b. On January 1, 2007, after 3 years, the equipment was revalued at a replacement cost of
12,000,000 with no change in residual value.
Depreciated Replacement Cost 7,500,000 [12M-(12M/8x3yrs)]
Less: Carrying Amount 5,000,000
Revaluation surplus 2,500,000
Replacement cost 12,000,000

Observed Accum. Depreciation 4,500,000 (12M/8x3yrs)
Depreciated RC 7,500,000
Cost 8,000,000
AD 3,000,000 (8*3/8)
CA 5,000,000
Proportional method of recording revaluation:
COST MODEL REVALUATION

MODEL
Historical Cost 8,000,000 Replacement Cost 12,000,000
Accum. depreciation 3,000,000 Accum. depreciation 4,500,000
Carrying amount 5,000,000 Revalued amount 7,500,000
Elimination method of recording revaluation:
COST MODEL REVALUATION

MODEL
Historical Cost 8,000,000 Replacement Cost 8,000,000
Accum. depreciation 3,000,000 Accum. depreciation 500,000
Carrying amount 5,000,000 Revalued amount 7,500,000
Additional requirement:
REPLACEMENT COST METHOD.
On June 30, 2007, the equipment was sold for 10,000,000.
a. How much is depreciation expense for year 2007?
b. Journalize the sale of equipment.
a. What is the effect of the June 30, 2007 transactions to the retained earnings?
(750,000) Depreciation expense, debit to RE
3,250,000 Gain on sale, credit to RE
2,500,000 Revaluation surplus, credit to RE
5,000,000 Net effect to Retained Earnings

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PROPERTY, PLANT AND EQUIPMENT

(Continuation of SUBSEQUENT MEASUREMENT)

PAS 16 permits two accounting models:

A schedule of machinery owned by Mallon Co. is presented below:

Mallon computes depreciation by the composite method.

PROBLEM 1 Improvements and Replacements

PROBLEM 3 Change in depreciation method (prospective)

Fanestil Corporation purchased a depreciable asset for P630,000 on January 1, 2010.

Fair value may be based on:

2. Depreciated replacement value

Compute the revaluation surplus

Replacement cost 12,000,000

Proportional method of recording revaluation:

COST MODEL REVALUATION

Elimination method of recording revaluation:

COST MODEL REVALUATION

b. Journalize the sale of equipment.

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