BA 123

PPE Assignment
I.

Gabaldon Companys property, plant and equipment and accumulated

depreciation balances at December 31, 2009 are:
Accumulated
Cost
Depreciation
Machinery and equipment
P1,380,000
P367,500
Automobiles and trucks
210,000
114,326
Leasehold improvements
432,000
108,000
Depreciation policy:
a. Depreciation methods and useful lives:
Machinery and equipment straight line; 10 years
Automobiles and trucks 150% declining balance; 5 years, all were
acquired after 2005
Leasehold improvements straight line
b. Depreciation is computed to the nearest month.
c. Salvage values are immaterial except for automobiles and trucks which have
estimated salvage values equal to 15% of cost.
Additional information:
a. Gabaldon entered into a 12-year operating lease starting January 1, 2007. The
leasehold improvements were completed on December 31, 2006 and the
facility was occupied on January 1, 2007.
b. On July 1, 2010, machinery and equipment were purchased at a total invoice
cost of P325,000. Installation cost of P44,000 was incurred.
c. On August 30, 2010, Gabaldon purchased new automobile for P25,000.
d. On September 30, 2010, a truck with a cost of P48,000 and a carrying amount
P30,000 on December 31,2009 was sold for P23,500.
e. On December 20, 2010, a machine with a cost of P17,000, a carrying amount
of P2,975 on date of disposition, was sold for P4000.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The gain on sale of truck on September 30 is
2. The gain on sale of machinery on December 20, 2010 is
3. The adjusted balance of the property, plant and equipment as of December
31, 2010 is
4. The total depreciation expense for the year ended December 31, 2010 is
5. The carrying amount of the property, plant and equipment as of December 31,
2010 is

II. HARPSICHORD, INC constructs equipment for its own use. The account below is
for a manufacturing equipment it has assembled in 2012:
Cost of dismantling old equipment
Dr. 43,440
Cost of proceeds from sale of old equipment
Cr.
36,000
Raw materials used in construction of new equipment Dr. 228,000
Labor in construction of new machine
Dr. 147,000
Cost of installation
Dr. 33,600
Cost of testing the equipment
Dr. 25,000
Materials spoiled in machine trial runs
Dr. 7,200
Profit construction
Dr. 72,000
Analysis of the details in the account disclosed the following:
a). The old equipment, which was removed before the installation of the new
one, had been fully depreciated.
b). Cash discounts received on the payments for materials used in construction
totalling P 9,000 were reported in the purchase discount account
c). The factory overhead account shows a balance of P 876,000 for the year
ended December 31, 2012; this balance exceeds normal overhead on regular
plant activities by approximately P 50,700 and is attributable to equipment
transaction.
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 P 5,000 which was credited to miscellaneous revenue.
Questions:
1. What is the total cost of the equipment?
2. Assuming nominal amounts are still open, prepare individual correcting
entries.
III. BM Company acquired the assets of a competitor in order to establish a branch
of BMs main store. BM paid P500,000 in cash and issued 10,000 ordinary
shares which had a P25 par value and a P30 market value at the date of
issuance. The market value is based on active trading of the shares in
quantities far in excess of the 10,000 shares exchanged in the acquisition. An
appraisal of the assets, used by BM to negotiate the purchase price, reveals
the following values on the transaction date:
Inventory
P200, 000
AR
100,000
Display fixtures 100,000
Building
300,000
Land
100,000
An inexperienced bookkeeper for BM recorded the acquisition as follows:
Inventory
200,000
AR
100,000
Fixed Assets 450,000
Cash
500,000
Ordinary shares
250,000
(10,000 shares @ P25)

A further analysis of Fixed Asset account reveals that the same bookkeeper
entered the following items in the account during 2012:
Debit entries
May 1
Acquisition price
May 1
Insurance on building and fixtures
P460,000
(May 1, 2012 to April 30, 2013)
Credit entries
May 1
Proceeds from sale of unneeded display fixtures
Dec 31 Depreciation for 2012
(39,625)
Balance, December 31, 2012
P420,375

P450,000
10,000

P17,500
22125

A computation accompanying depreciation figure for 2012 is as follows:

(P460,000-P17500)/ 20 years = P22,125. You have determined that the
unneeded display fixtures that were sold represent 10% of the fixtures acquired
from the competitor on May 1.
You have also learned that BM depreciates fixtures over a 10-year life by the
sum-of-the-years-digits method and assumes a salvage value of 10% of the cost
of items on hand when the depreciation calculation is made. The building is
subject to straight-line depreciation over a 20-year life. The building has an
estimated P50,000 residual value at the end of 20 years. All depreciation is
computed to the nearest full month. This information was apparently ignored by
the bookkeeper.
Instructions:
a. Prepare journal entries to correct the accounts on December 31, 2012,
assuming the books have not been closed.
b. Prepare balance sheet for PPE on December 31, 2012.
c. Determine the appropriate depreciation expense amounts for the display
fixtures and building for 2013.
IV. Sabrina Manufacturing Company had several transactions during 2011 and 2012
concerning plant assets. Several of these transactions are described below,
followed by the entries made by the companys accountant.
Equipment. Several used items were acquired on February 1, 2011, by issuing a
P 100,000 noninterest-bearing note. The note is due one year from date of
issuance. No market value of the note or the equipment is available. Sabrinas
most recent borrowing rate is 8%.
Feb, 1, 2011 Equipment
Notes Payable
Dec. 31, 2011 Depreciation expense
Acc. Dep.- Equipment

100,000
100,000
10,000
10,000

Buildings. A building was acquired on June 1, 2011 by issuing 100,000 shares of

the companys P 5 par value ordinary shares. The ordinary share is not widely
traded, therefore no market price is available. The building was appraised on the
transaction date at P 650,000.

June 1, 2011 Building

Ordinary Share
Dec, 31, 2011

500,000

Depreciation Expense
Acc. Dep.- Building

500,000
20,000
20,000

Inventory/Fixtures. Inventory and display fixtures were acquired for P 125,000

cash on April 1, 2012, from a competitor who was liquidating her business. The
estimated value of the inventory was P 85,000 and the value of the fixtures was
P 55,000.
April 1, 2012 Inventory
85,000
Display Fixtures
55,000
Cash
Gain on acquisition of Inventory & fixtures

125,000
15,000

Land. Land was donated to Sabrina by the City of Cagayan in September 2012
as an inducement to build a facility there. Plans call for construction at an
undetermined future date. The land was appraised at P 48, 500. No entry was
made.
Machinery. Machinery was acquired an exchange for similar equipment on
October 12, and were appraised at P 45,000 on the date of the exchange.
Sabrina received machinery valued at P 40,000 and P 5,000 in cash in the
transaction,
October 12, 2011

Machinery
40,000
Cash
5,000
Acc. Dep.- Machinery
16,000
Machinery
52,500
Gain on exchange of machinery 8,500

December 31, 2011

Depreciation Expense
Acc. Dep.- Machinery

4,000
4,000

Additional Information:
Sabrina uses straight line depreciation, applied to all assets as follows:
1. A full years depreciation taken in the year of acquisition and no
depreciation taken in the year of disposal.
2. Estimated life: 2.5 years for building; 10 years on all other assets. (No
salvage values are assumed)
Instructions:
For each of the items of PPE above:
a. Describe the error(s) made in recording the assets and related
depreciation, if any.
b. Prepare journal entries to correct the accounts and to properly record
depreciation for 2012. The books for 2012 have not been adjusted or
closed.
V. At December 31, 2003, Spencer Corporations noncurrent operating asset and
accumulated depreciation accounts had balances as follows:

Category
Land
Buildings
Machinery and
Equipment
Automobiles and Trucks
Leasehold
Improvements
Category
Buildings
Machinery and
Equipment
Automobiles and Trucks
Leasehold Improvements
Land Improvements

Cost of Asset

Acc.
Depreciation

P5,200,000
48,000,000
31,000,000

P10,616,000
7,848,000

5,280,000
8,840,000

3,448,000
4,420,000

Deprecation Method
150% declining balance
Straight-line

Useful Life
25 years
10 years

150% declining balance

Straight-line
Straight-line

5 years
8 years
12 years

Depreciation is computed to the nearest month. The salvage values of the

depreciable assets are immaterial.

Transactions during 2004 and other information are as follows:

1. On January 6, 2004, a plant facility consisting of land and a building was

acquired from Toby Company for P24,000,000. Of this amount, 20% was
allocated to land.
2. On April 3, 2004, new parking lots, streets and sidewalks at the acquired plant
facility were completed at a total cost of P7,680,000. These expenditures
have an estimated useful life of 12 years.
3. The leasehold improvements were completed on December 31, 2000, and
had an estimated useful life of eight years. The related lease, which would
have terminated on December 31, 2006, was renewable for an additional
four-year term. On April 28, 2004, Spencer exercised the renewal option.
4. On July 1, 2004, machinery and equipment were purchased at a total invoice
cost of P10,000,000.
Additional costs of P400,000 for delivery and
P1,200,000 for installation were incurred.
5. On August 29, 2004, Spencer purchased new automobile for P600,000.
6. On September 30, 2004, a truck with a cost of P960,000 and a carrying
amount of P324,000 on the date of sale was sold for P460,000. Depreciation
for the nine months ended September 30, 2004 was P94,080.
7. On December 21, 2004, a machine with a cost of P680,000 and a carrying
amount of P119,000 at the date of disposition was scrapped without cash
recovery.
Required:
1. For each category, prepare a schedule showing depreciation expense for the
year ended December 31, 2004. Round computations to the nearest peso.
2. Prepare lapsing schedule. (See format below)

Cost
12/31/2003 Additions
Land
Buildings
Machinery and
Equipment
Automobiles and
Trucks
Leasehold
Improvements

Buildings
Machinery and
Equipment
Automobiles and
Trucks
Leasehold
Improvements

Deductio
ns

12/31/20
04

P5,200,000
48,000,000
31,000,000
5,280,000
8,840,000
Accumulated Depreciation
12/31/2003 Additions
Deductio
ns
P10,616,000
7,848,000
3,448,000
4,420,000

12/31/20
04