 Mildred Company borrowed 5,200,000 on a 10% note

payable to finance a new warehouse which the entity is

constructing for own use. The only other debt of the
entity is a 7,800,000, 12% mortgage payable on an
office building. At the end of the current year, average
accumulated expenditures on the new warehouse
totalled 6,175,000.
 What amount of interest should be capitalized for the
current year?
 520,000 b. 617,500 c. 637,000
d. 679,250
Answer
 Solve: 5200,000*.10 =520,000
 6175000-5200000=975,000*.12=117,000
637,000

 On January 1, 2017, Sheena Company borrowed 2,800,000
at an interest rate of 12% specifically for the construction of
a new building.
 The actual interest cost on this specific borrowing was
336,000 but interest of 14,000 was earned from the
temporary investment of the borrowing proceeds.
 Sheena company also had the following other loans in 2017
for general purposes but the proceeds were used in part for
the construction of the building.
 Principal Interest
 10% bank loan 4,200,000 420,000
 12% long term loan 7,000,000 840,000
 The construction began on January 1, 2017 and was
completed on December 31, 2017. The expenditures on the
construction were 2,800,000 on Jan. 1, 1,400,000 on March
31 and 4,200,000 on Sept.30.
Answer
 Required: Compute the cost of the new building.
 336,000-14000= 322,000
 2800*12 =33,600,000
 1,400,000*9 =12,600,000
 4200,000*3 =12600,000
 58,800,000/12=4900,000-
2800,000=2100,000*.1125=236,250
1,260,000/11,200,000=.1125
 = 2,800,000+1,400,000+4,200,000+ 322,000+
236,250=8,958,250
 Milott Company had the following borrowings during
2017. The borrowings were made for general purposes
but the proceeds were used to finance the construction
of a new building.
 Principal Interest
 12% bank loan 3,900,000 468,000
 14% long term loan 6,500,000 910,000
 The construction began on January 1, 2017 and was
completed on Dec. 31, 2017. Expenditures on the
building were 2600,000 on June 30 and 1,300,000 on
December 31.
Answer
 Compute the cost of the building.
 1378000/10,400,000 = 13.25 * 1300,000
= 172,250
 2600*6 = 15,600,000/12 = 1300,000
 1300* =0
 Answer= 172,250+2600,000+1300,000=4,072,250
 Jewelry Company had the following outstanding loans during
2017 and 2018.
 Specific construction loan 3,600,000 10%
 General loan 30,000,000 12%
 The entity began the self-construction of a new building on
January 1, 2017 and the building was completed on June 30, 2018.
The following expenditures were made:

 January 1, 2017 4,800,000
 April 1, 2017 6,000,000
 December 1, 2017 3,600,000
 March 1, 2018 7,200,000

 Required: Compute for the cost of the building on December 31,
2017 and on June 30, 2018.
cost of the building on December
31, 2017
 December 31, 2017 = 14400,000+
1,080,000=15,480,000
 4800*12 = 57600,000
 6000*9 = 54,000,000 SB
3600,000*.10 =360,000
 3600*1 = 3600,000
 115,200,000 /12
= 9600,000
- 3600,000
=6000,000*.12 = 720,000
 1,080,000
Compute for the cost of the
building on June 30, 2018
 June 30, 2018 =
15480,000+7,200,000+1,180,800=23,860,800
 15,480,000*6/6 =15,4800,000
 7200,000*4/6 = 4800,000
 20,280,000less

3600,000=16,680,000*.12=2,001,600*6/12=1000,800
 SBC .10
*3600,000*6/12 = 180,000

1180,800
 Macy company had the following loans outstanding for the
entire year 2017.
 Specific construction loan 2,000,000
10%
 General Loan 40,000,000 12%
 The entity began the self construction of a building on
January 1, 2017 and the building was completed on Dec.31,
2017. The following expenditures were made during the
current year.
 January 1 2,000,000
 July 1 4,000,000
 November 1 6,000,000
 Total 12,000,000
 Required: Compute the cost the new building.
Answer
 2000*12 = 24,000,000
 4,000*6 = 24,000,000
 6000*2 = 12,000,00 =
60,000,000/12=5,000,000
(2000,000)
=3,000,000*.12=360,000+200,000
= 560,000
+12,000,000
= 12,560,000

Intangible Assets Answer key
Let’s Check (ULO a&b)
Answer the following adapted problems:

1. An intangible asset is defined as a non monetary asset without physical substance. (True or
False) True
2. All of the following should be capitalized as cost of trademark.
a. Cost of successful litigation of the trademark
b. Registration with Intellectual property code
c. Design cost
d. Legal fee
Answer: False
3. When an entity develops a trademark, the costs directly related to securing it should generally
be capitalized. All of the following costs associated with a trademark should be capitalized. (True
or False)
a. Attorney fees c. Research and development fees
b. Consulting fees d. Design costs
4. A trademark is an example of which general category of intangible asset? Market Related
5. When a patent is amortized, the credit is usually made to the patent account. True
6. When an entity successfully defended a patent from infringement by a competitor, the cost of
successful litigation should be charged to patent and amortized over the remaining useful life of
the patent. False
7. It refers any creation or product of the human mind or intellect such as an invention, original
design, practical application of a good idea, trademark, literary or artistic works. Intellectual
Proprty

8. When normal earnings exceed future earnings, it is an indication of an unidentifiable intangible

asset. False

9. A franchise is a market based type of intangible whereby there are two parties in a franchise
agreement, the franchisee and the franchisor. (True or False)

10. On January 1, year 1, Leslie Company purchased a patent with a 5,200,000 and a useful life
of 10 years. On December 31, year 2, determined that impairment indicators were present. The
fair value less cost of disposal of the patent was estimated to be 3,600,000. The value in use is
estimated to be 3,800,000. What amount should be reported as impairment loss for year 1?

Answer: 5,200,000/10=520,000*2=1,040,000-5,200,000=4,160,000-3,800,000=360,000IL
11. Young Company purchased for cash at 50 per share all 150,000 ordinary shares outstanding
of another entity. The statement of financial position of the acquiree on the date of acquisition
showed net assets with a carrying amount of 6,000,000. The fair value of property, plant and
equipment on same date was 800,000 in excess of carrying amount. What amount should be
recorded as goodwill on the date purchase?
Answer: 50*150,000=7,500,000-6,800,000=700,000
12. At year end, Vans Company showed the following account balances:
Patent 500,000
Deposit with advertising agency used to promote goodwill 400,000
Bond sinking fund 1,000,000
Excess of cost over fair value of identifiable net assets of acquired subsidiary 4,000,000
Trademark 900,000
What total amount should be reported as intangible assets? 5,400,000

Let’s Analyze (ULO c)

Answer the following adapted problems:

On January 1, year 1, Suzette Company signed a franchise agreement for a period of 20 years
for an initial fee of 6,000,000.
On the same date, the entity paid 2,000,000 which is not refundable and agreed to pay the
balance in four equal annual payments of 1,000,000 at each year end.
No future services are required are required of the franchisor. The entity can borrow at 14% for
a loan of this type.
Present value of 1 at 14% for 4 periods 0.59
Future amount of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91

The agreement further provides that the franchisee shall pay a periodic fee of 5% based on the
annual gross sales. During the current year, Suzette Company realized gross sales of 25,000,000

Prepare the journal entries for two years in connection with the franchise on the books of the
franchisee.

Required: Determine the initial measurement of the franchise and prepare the entries for the
company for the first two years.
Answer:
Franchise 4,910,000 Initial measurement
Discount on N/P 1,090,000
Cash 2,000,000
Note payable 4,000,000

2.91*1,000,000=2,910,000+2,000,000=4,910,000
2,910,000-4,000,000=1,090,000

Cash 25,000,000
 Sales 25,000,000

Franchise fee expense 1,250,000

Cash 1,250,000

Amortization of Franchise 245,500 4,910,000/20

Franchise 245,500

Interest Expense 407,400

Discount on N/P 407,400

2,910,000*.14=407,400

YEAR 2

Amortization of Franchise 245,500

Franchise 245,500

Interest expense 324,436

Discount on N/P 324,436

2,910,000-592,600=2,317,400*.14=324,436

= 1,000,000-407,400=592,600

2,910,000

1,000,000 407,400 592,600 2,317,400

1,000,000 324,436 675,564 1,641,836

1,000,000

1,000,000
Research And Development
Let’s Check (ULO d)
In each item below, put a checkmark if it is a research and development expense.
Equipment acquired for use in various research __________
Depreciation on the equipment _____Yes_____
Materials used ________YES__
Compensation costs of personnel _______YES___
Outside consulting fees _____Yes_____
Indirect costs appropriately allocated ____YES______
Modification to the formulation of a chemical product ____YES______
Trouble-shooting in connection with breakdowns during
Commercial production __________
Design of tools, jigs, molds and dies involving new technology _____YES_____
Seasonal or other periodic design changes to existing products __________
Laboratory research aimed at discovery of new technology ____YES______

Let’s Analyze (ULO e)

Answer the following adapted problems:

1. During the current year, Dangerous company incurred the following costs:
Research and development services performed by another
entity for Dangerous 300,000
Design, construction and testing of preproduction prototype
And model 400,000
Testing in search for new product or process alternative 350,000
What total amount should be reported as research and development expense in the current year?
Answer: 1,050,000
2. Milby company incurred the following research and development costs during the current
year:
Equipment purchased for current and future projects 150,000
Equipment purchased for current project only 300,000
Research and development salaries of current project 600,000
Legal fees to obtain patent 75,000
Material and labor costs for prototype product 900,000

The equipment has a five-year useful life and is depreciated using the straight line method.
What total amount should be recognized as research and development expense for current year?
Answer: 300,000+900,000 + 600,000 + 150,000/5= 1,830,000
3. Squarepants company made the following expenditures relating to product Y.
Legal costs to file a patent on Product Y. Production of the finished
Product would not have been undertaken without the patent 75,000
Special equipment to be used solely for the development of Product Y
The equipment has no other use and has an estimated useful life of 4 yrs 450,000
Labor and materials costs incurred in producing a prototype 1,500,000
 Cost of testing the prototype 600,000
What total amount should be expensed when incurred?
Answer: 450,000+ 1,500,000 + 600,000 =2,550,000
aaa
Answer key

Theories 12 points

Second Exam in 211 Problems 28 points 1-3 impairment

4-6 Revaluation

7-9 Depreciation

10-12 Wasting asset

13-14 GG

Theories

1. When the revaluation surplus is realized because of the use of the asset or disposal of the asset,
it may be transferred directly to
a. Retained earnings
b. Income
c. Share capital
d. Share premium
2. Seaside company applied revaluation accounting to plant asset with carrying amount of
4,000,000 on January 1, 2017, useful life of 4 years and no residual value. Depreciation is
calculated on the straight line basis.

On December 31, 2017, independent appraisers determined that the asset has a fair value of
3,750,000.
What is included in the journal entry to record depreciation for 2017?
a. Debit accumulated depreciation 1,000,000.
b. Debit depreciation 250,000
c. Credit accumulated depreciation 250,000
d. Debit depreciation 1,000,000
3. What is the revalued amount of property, plant and equipment?
a. Fair value
b. Depreciated replacement cost
c. Replacement Cost
d. Fair value and depreciated replacement cost

4. What is the recoverable amount of an asset?

a. Fair value less cost of disposal
b. Value in use
c. Fair value less cost of disposal or value in use, whichever is higher.
d. Fair value less cost of disposal or value in use, whichever is lower.
5. An impairment loss is the amount by which
a. The carrying amount of an asset exceeds recoverable amount.
b. The carrying amount of an asset exceeds value in use
c. The carrying amount of an asset exceeds the fair value less cost of disposal
 d. The recoverable amount of an asset exceeds carrying amount.
6. The reversal of an impairment loss on a revalued asset shall be credited to income equal to the
amount of impairment loss previously recognized and the remainder to revaluation surplus.
a. True
b. False

7. The most common method of computing depletion is

a. Percentage of depletion method
b. Decreasing charge method
c. Straight line
d. Production method
8. Depreciation of equipment used in mining operations is based on the useful life of the
equipment or the useful life of the wasting asset, whichever is shorter. If the useful life of the
equipment is shorter, the output method is used.
a. True
b. False
9. Depletion expense
a. Is usually part of cost of goods sold.
b. Includes tangible equipment cost in the depletable cost
c. Excludes intangible development cost from the depletable cost.
d. Exclude restoration cost from the depletable cost.
10. All of the following factors are considered in determining the useful life of an asset, except
a. Expected usage of the asset
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value
11. A method which excludes residual value from the base for the depreciation calculation is
a. Straight line
b. Sum of year’s digit
c. Double declining balance
d. Output method
12. Which of the following must be known when using the Sum of year’s digit method?
a. Acquisition cost
b. Useful life
c. Both a and b
d. None of a and b

Problems

1. At year end, Bullheaded Company determined that there had been a significant decrease in
market value of an equipment and compiled the following information:
Original cost of equipment 5,000,000
Accumulated depreciation 3,000,000
Expected undiscounted net future cash inflows related to the
Continued use of the equipment 1,750,000
 Fair value less cost of disposal of equipment 1,250,000

What amount of impairment loss should be recognized for the current year?
a. 3,250,000
b. 3,750,000
c. 750,000
d. 250,000
= 5,000,000-3,000,000=2,000,000-1,250,000 = 750,000
Note: Future cash inflows undiscounted

2. Bronze Company operates a production line which is treated as a cash generating unit. At year
end, the carrying amounts of the noncurrent assets of the cash generating unit are:
Goodwill 1,100,000
Plant and machinery 2,200,000

At year end, the recoverable amount of the production line is estimated at 2,700,000.
What are the revised carrying amounts of the goodwill and plant and machinery, respectively?
a. 500,000 and 2,200,000
b. 900,000 and 1,800,000
c. 1,100,000 and 1,600,000
d. 800,000 and 1,900,000
= 3,300,000-2,700,000=600,000 IL

1,100,000-600,000=500,000 Plant and Machinery 2,200,000

3. Unison Company has various cash generating units. One cash generating unit has the following
carrying amount of assets at year end:
Cash 600,000
Inventory 1,400,000
Land 2,500,000
Plant and equipment 9,000,000
Accumulated depreciation 1,500,000
Goodwill 1,000,000

The management determined the value in use of the cash generating unit at 8,500,000.

The fair value less cost of disposal for the inventory was greater than the carrying amount.
Required: Prepare journal entry to recognize the impairment loss.
Answer: IL 4,500,000
Goodwill 1,000,000
Land 875,000
Accumua. Dep 2,625,000

8,500,000-13,000,000=4,500,000 – 1,000,000 to goodwill=3,500,000*2.5/10=875,000

 3,500,000*7500/10000=2,625,000

4. At the beginning of the current year, Peace company provided the following account balances
relating to real properties:
Land 1 3,000,000
Land 2 5,000,000
Land 3 7,000,000

On same date, the entity revalued land at fair value.

The fair values on this date of Land 1, 2 and 3 are 3,500,000, 6,000,000 and 9,000,000,
respectively.

At the current year end, Land 2 was sold for 7,500,000.

What is the revaluation surplus at the beginning and at the end of the current year?
Answer: 3,500,000 and 2,500,000
15,000,000-18,500,000=3,500,000 RS at the beginning

Cash 7,500,000
Land 6,000,000
Gain on sale 1,500,000

RS 1,000,000
RE 1,000,000

RS 3,500,000-1,000,000=2,500,000 RS at the end answer

5. Seaside company applied revaluation accounting to plant asset with carrying amount of
4,000,000 on January 1, 2017, useful life of 4 years and no residual value. Depreciation is
calculated on the straight line basis.

On December 31, 2017, independent appraisers determined that the asset has a fair value of
3,750,000.

What is the amount of revaluation surplus credited in the journal entry to record the revaluation
on December 31, 2017. Answer: 750,000
4,000,000/4=1,000,000
4,000,000 5,000,000 1,000,000
(1,000,000) (1,250,000) (250,000)
3,000,000 3,750,000/.75 750,000
 6. Lavender Company provided the following data related to a machinery on the date of
revaluation:
Cost Replacement Cost

Machinery 9,000,000 15,000,000

Accumulated depreciation 3,600,000

Life in years 25 years

What is the journal entry to record the first piecemeal realization of the revaluation surplus?

Answer: Revaluation surplus 240,000

Retained earnings 240,000

9,000,000/25= 360,000 therefore =3,600,000/360,000=10 years

15,000,000/25*10= 6,000 000 AD on RC

9,000,000 15,000,000 6,000,000

(3,600,000) (6,000,000) 2,400,000

5,400,000 9,000,000 3,600,000/15= 240,000

7. Rigorous Company purchased a machine on July 1, 2017 for 6,000,000. The machine has an
estimated useful life of five years and residual value of 800,000. The machine is being
depreciated by the 150% declining balance method.

What amount should be recorded as depreciation expense on the machine for 2018?

Answer: 1,530,000

1/5=20%*1.5=30%*6,000,000*6/12=900,000-6,000,000=5,100,000*.30=1,530,000

8. Ambitious Company showed the following schedule of depreciable assets on January 1, 2017.
Asset Cost Accumulated Acquisition Residual
Depreciation
A 4,000,000 2,560,000 2015 400,000
B 2,000,000 1,440,000 2014 200,000
C 2,800,000 1,344,000 2014 560,000

The useful life of each asset is 5 years. The entity takes a full depreciation in the year of
acquisition and No depreciation in the year of disposition.

Asset C was sold for 1,700,000 on June 30, 2017.

Asset C was depreciated using the straight line method.
 What is the gain on sale of Asset C?
Answer: 244,000

=2800,000-1,344,000=1,456,000-1,700,000=244,000 gain

9. On January 1, 2015, Mogul company acquired equipment to be used in the manufacturing

operations. The equipment has an estimated useful life of 10 years and an estimated residual
value of 50,000.

The depreciation applicable to this equipment was 240,000 for 2017 computed under the sum
of year’s digit method.

What was the acquisition cost of the equipment?

Answer: 1,700,000 2015 10/55
2016 9/55
2017 8/55 * X =240,000
240,000=8/55(X)
240,000=8/55X
240,000*55/8=X
X=1,650,000

1,650,000 + 50,000 RV= 1,700,000 Acquisition cost

10. 40-15 On July 1, 2017, Lethargic Company, a calendar year entity, purchased the rights to a mine.
The total purchase price was 14,000,000 of which 2,000,000 was allocable to the land.

Estimated reserves were 1,500,000 tons. The entity expects to extract and sell 25,000 tons per month.

The entity purchased new equipment on July 1, 2017. The equipment was purchased for 8,000,000 and
had a useful life of 8 years.

However, after all the resource is removed, the equipment will be of no use and will be sold for 500,000.

What is the depletion for 2017?

a. 1,200,000
b. 2,400,000
c. 1,950,000
d. 1,400,000

14,000,000-2,000,000=12,000,000/1,500,000=8*25,000*6=1,200,000
11. 40-18 In 2017, Newshen company paid 1,000,000 to purchase land containing total estimated
160,000 tons of extractable mineral deposits. The estimated value of the property after the mineral has
been removed is 200,000.

Extraction activities began in 2017, and by the end of the year, 20,000 tons had been recovered and sold.

In 2018, geological studies indicated that the total mineral deposits had been underestimated by 25,000
tons.

During2018, 30,000 tons were extracted and 28,000 tons were sold.

What is the depletion rate per ton in 2018?

a. 4.24
b. 4.32
c. 4.85
d. 5.19

=1,000,000-200,000=800,000/160,000=5*20,000=100,000-800,000=700,000/165,000=4.24

160,000+25,000-20,000=165,000

12. 40-16 At the beginning of the current year, Nili company purchased a coal mine for 30,000,000.
Removable coal is estimated at 1,500,000 tons.

The entity is required to restore the land at an estimated cost of 3,600,000. The land is estimated to have
a value of 3,150,000 after restoration.

The entity incurred 7,500,000 of development cost preparing the mine for production. During the current
year, 450,000 tons were removed and 300,000 tons were sold.

What total amount of depletion should be recorded for the current year?

a. 11,385,000
b. 10,305,000
c. 3,870,000
d. 7,590,000

30,000,000+3,600,000-3,150,000+7,500,000=37,950,000/1500,000=25.3*450,000=11,385,000

13. Queen Company purchased a varnishing machine for P3,000,000 on

January 1, 2017. The entity received a government grant of P500,000 in
respect of this asset. The accounting policy is to depreciate the asset
over 4 years on a straight line basis and to treat the grant as deferred
income. What amount of income from the government grant is
recognized in 2017? Answer: 125,000
500,000/4=125,000

14. On January 1, 2017, Humble company received a government grant

of 60,000,000 to compensate for costs to be incurred in planting trees
over a period of 5 years. The entity will incur such costs at 2,000,000
for 2017, 4,000,000 for 2018, 6,000,000 for 2019, 8,000,000 for 2020,
and 10,000,000 for 2021. What amount of income from the
government grant is recognized for 2017? Answer: 4,000,000

60,000,000 * 2,000,000/30,000,000= 4,000,000