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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 companys
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
companys 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 lands 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 Companys 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 Rambos 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, Bankrupts 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. Saxophones 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 companys 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. Cellos 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 Cellos 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 companys 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 Yokonas 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 companys 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
machines 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 companys 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 companys 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 Banjos 2012 income statement is
A. P60,000
C. P450,000
B. P390,000
D. P90,000
2. Banjos 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 Violins ordinary share capital. On this date, Violins 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 Carillons 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 machines 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
ts
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. Violas 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 COMPANYs 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, Cabaras 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 years 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 Stars 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 equipments 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 units 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
companys 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 architects 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 Katanas 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 COMPANYs 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
Sons 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 buildings 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 owners books. Son estimated the
office furnitures 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 2s 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 COMPANYs 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 clients 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 companys 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 CORPORATIONs 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 COMPANYs 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. Alphorns 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. Alphorns 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. Alphorns 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 companys
accountant has started to gather pertinent information about each of the companys 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 companys 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 companys 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 companys 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 As 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 companys
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 years 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 companys practice to take full years 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
companys 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 Timpanis 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. Jesss 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 Karens 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 Bs 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 assets 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 assets 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 companys 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 assets 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 assets 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 Kotos 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.