PROBLEM 1

Aliaga Corporation was incorporated on January 2, 2006. The following items relate to the Aliagas
property and equipment transactions:

Cost of land, which included an old apartment building appraised

P3,000,000
at P300,000
Apartment building mortgage assumed, including related interest
80,000
due at the time of purchase
Deliquent property taxes assumed by the Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
Proceeds from sale of salvaged materials 10,000
Architects fee for new building 60,000
Building permit for new construction 40,000
Fee for title search 25,000
Survey before construction of new building 20,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Assessment by city for drainage project 15,000
Cost of grading and leveling 50,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new building more
90,000
energy efficient
Interest cost on specific borrowing incurred during construction 360,000
Payment of medical bills of employees accidentally injured while
18,000
inspecting building construction
Cost of paving driveway and parking lot 60,000
Cost of installing lights in parking lot 12,000
Premium for insurance on building during construction 30,000
Cost of open house party to celebrate opening of new building 50,000
Cost of windows broken by vandals distracted by the celebration 12,000

Based on the above and the result of your audit, determine the following:
1. Cost of Land
2. Cost of Building
3. Cost of Land Improvements
4. Amount that should be expensed when incurred
5. Total depreciable property and equipment

PROBLEM 2
Your new audit client, Guimba Company, prepared the trial balance below as of December 31, 2006. The
company started its operations on January 1, 2005. Your examination resulted in the necessity of applying
the adjusting entries indicated in the additional data below.
 Guimba Company
TRIAL BALANCE
December 31, 2006
Debits Credits
Cash P510,000
Accounts receivable net 600,000
Inventories, December 31, 2005 669,000
Land 660,000
Buildings 990,000
Accumulated depreciation, building P19,800
Machinery 444,000
Accumulated depreciation, machinery 45,000
Sinking fund assets 75,000
Bond discount 75,000
Treasury stock, common 105,000
Accounts payable 567,000
Accrued bond interest 11,250
First mortgage, 6% sinking fund bonds 679,500
Common stock 1,500,000
Premium on common stock 150,000
Stock donation 180,000
Retained earnings, December 31, 2005 222,450
Net sales 2,625,000
Purchases 850,500
Salaries and wages 507,000
Factory operating expenses 364,500
Administrative expenses 105,000
Bond interest 45,000
P6,000,000 P6,000,000

Additional data are as follows:

1. The 1,500,000 common stock was issued at a 10 percent premium to the owners of the land and
buildings on December 31, 2004, the date of organization. Stock with a par value of 180,000 was
donated back by the vendors. The following entry was made:
Treasury stock P180,000
Stock donation P180,000

The stock was donated because the proceeds from its subsequent sale were to be considered as
an allowance on the purchase price of land and buildings in proportion to their values as first
recorded. The treasury stock was sold in 2006 for P75,000, which was credited to Treasury Stock.

2. On December 31, 2006, a machine costing P15,000 when the business started was removed. The
machine had been depreciated at 10 percent during the first year. The only entry made was one
crediting the Machinery account with its sales price of P6,000.
 3. Depreciation is to be provided on the straight-line basis, as follows: buildings, 2 percent of cost;
machinery, 10 percent of cost. Ignore salvage values.

Based on the above and the result of your audit, you are to provide the answers to the following:
1. The correct balance of Land account as of December 31, 2006 is
2. The adjusted carrying value of Building as of December 31. 2006 is
3. The adjusted carrying value of Machinery as of December 31, 2006 is
4. The adjusted depreciation expense for 2006 is
5. How much is the gain or loss on sale of machinery on December 31, 2006?

PROBLEM 3
Norie Companys property, plant and equipment and accumulated depreciation balance at December 31,
2005 are:
Accumulated
Cost Depreciation
Machinery and equipment P 1,380,000 P 367,500
Automobiles and trucks 210,000 114,320
Leasehold improvements 432,000 108,000

Additional information:

Depreciation methods and useful lives:

Machinery and equipment straight line; 10 years
Automobiles and trucks 150% declining balance; 5 years, all acquired after 2000.
Leasehold improvements straight line
Depreciation is computed to the nearest month.

Salvage values are immaterial except for automobiles and trucks, which have an estimated salvage values
equal to 10% of cost.

Other additional information:

Norie Company entered into a 12-year operating lease starting January 1, 2003. The leasehold
improvements were completed on December 31, 2002 and the facility was occupied on January
1, 2003.
On July 1, 2006, machinery and equipment were purchased at a total invoice cost of P325,000.
Installation cost of P44,000 was incurred.
On August 30, 2006, Norie Company purchased new automobile for P25,000.
On September 30, 2006, a truck with a cost of P48,000 and a carrying amount of P30,000 on
December 31, 2005 was sold for P23,500.
On December 30, 2006, a machine with a cost of P17,000, a carrying value of P2,975 on date of
disposition, was sold for P4,000.

Questions
 1. The gain on sale of truck on September 30, 2006 is:
2. The gain on sale of machinery on December 30, 2006 is:
3. The adjusted balance of the property, plant, and equipment as of December 31, 2006 is:
4. The total depreciation expense to be reported on the income statement for the year ended
December 31, 2006 is:
5. The carrying amount of property, plant, and equipment as of December 31, 2006 is:

PROBLEM 4
You are engaged in the examination of the financial statements of PATIENCE CORPORATION for the year
ended December 31, 2005. The chief accountant of the client has prepared the accompanying analyses of
the Property, Plant, and Equipment and related accumulated depreciation accounts. You have traced the
beginning balances to your prior years audit working papers.
All plant assets are depreciated on the straight-line basis (no residual value taken into consideration)
based on the following estimated service lives: building, 25 years, and all other items, 10 years. The
companys policy is to take one-half years depreciation on all assets additions and disposals during the
year.
PATIENCE CORPORATION
Analysis of Property, Plant, and Equipment, and Related Accumulated Depreciation Accounts
Year Ended December 31, 2005

Description Final 12/31/04 Assets Additions Assets Per ledger

Retirements 12/31/05
Land P 4,225,000 P 500,000 P0 P 4,725,000
Buildings 1,200,000 475,000 0 1,675,000
Machinery & 3,850,000 404,000 260,000 3,994,000
Equipment
P 9,275,000 P 1,379,000 P 260,000 P 10,394,000
Description Final 12/31/04 Assets Additions Assets Per ledger
Retirements 12/31/05
Buildings P 600,000 P 51,500 P 651,500
Machinery & 1,732,500 392,200 2,124,700
Equipment
P 2,332,500 P 443,700 P 2,776,200

Your examination revealed the following information:

1. On April 1, the company entered into a 10-year lease contract for a die-casting machine, with
annual rentals of P50,000 payable in advance every April 1. The lease is cancelable by either party
(60 days written notice is required), and there is no option to renew the lease or buy the
equipment at the end of the lease. The estimated service life of the machine is 10-years with no
residual value. The company recorded the die casting machine in the Machinery and Equipment
account at P404,000, the present value at the 26 date of the lease, and P20,200 applicable to the
machine has been included in depreciation expense for the year.
 2. The company completed the construction of a wing on the plant building on June 30. The service
life of the building was not extended by this addition. The lowest constructions bid received was
P475,000, the amount recorded in the Building account. Company personnel constructed the
addition at a cost of P460,000 (materials, P175,000; labor, P155,000; and overhead, P130,000).

3. On August 18, P500,000 was paid for paving and fencing a portion of land owned by the company
and used as a packing lot for employees. The expenditure was charged to the Land account.

4. The amount shown in the Machinery and Equipment asset retirement column represents cash
received on September 5 upon disposal of a machine purchased in July, 1998 for P480,000. The
chief accountant recorded depreciation expense of P35,000 on this machine in 2005.

5. Davao City government donated land and building appraised at P1,000,000 and P4,000,000,
respectively, to PATIENCE CORPORATION for a plant. On September 1, the company began
operating the plant. Since no costs were involved, the chief accountant made no entry for the
above transaction.

Questions
1. Land balance at December 31, 2005 is:
2. Building balance at December 31, 2005 is:
3. Machinery and Equipment balance at December 31, 2005 is:
4. Accumulated Depreciation Building at December 31, 2005 is
5. Accumulated Depreciation Machinery and Equipment at December 31, 2005 is
6. Depreciation Expense Building at December 31, 2005 is
7. Depreciation Expense Machinery and Equipment at December 31, 2005 is
8. Depreciation Expense Land Improvements at December 31, 2005 is
9. Net Book Value of Building at December 31, 2005 is:
10. Net Book Value of Machinery and Equipment at December 31, 2005 is:

PROBLEM 5
Information pertaining to Highland Corporations property, plant and equipment for 2005 is presented
below:

Account balances at January 1, 2005:

Debit Credit
Land P 150,000
Buildings 1,200,000
Accumulated depreciation Buildings P263,100
Machinery and equipment 900,000
Accumulated depreciation Machinery and equipment 250,000
Automotive equipment 115,000
Accumulated depreciation Automotive equipment 84,600
Depreciation data:
Depreciation method Useful life
Buildings 150% declining-balance 25 years
Machinery and equipment Straight-line 10 years
Automotive equipment Sum-of-the-years-digits 4 years
Leasehold improvements Straight-line -

The salvage values of the depreciable assets are immaterial. Depreciation is computed to the nearest
month.
Transactions during 2005 and other information are as follows:
a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2- year-old
car with a cost of P18,000 and book value of P5,400. The new car has a cash price of P24,000; the
market value of the trade-in is not known.
b. On April 1, 2005, a machine purchased for P23,000 on April 1, 2000, was destroyed by fire,
Highland recovered P15,500 from its insurance company.
c. On May 1, 2005, costs of P168,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. The related lease terminates on December 31, 2011.
d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of P280,000;
additional costs of P5,000 for freight and P25,000 for installation were incurred.
e. Highland determined that the automotive equipment comprising the P115,000 balance at January
1, 2005, would have been depreciated at a total amount of P18,000 for the year ended December
31,2005.

Based on the information above, answer the following questions:

1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2005 is:
2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2005 is:
3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2005 is:
4. The adjusted balance of Accumulated Depreciation of Machinery and Equipment at December
31, 2005 is:
5. The adjusted balance of Accumulated Depreciation of Automotive Equipment at December
31, 2005 is:
6. The adjusted balance of Accumulated Depreciation of Leasehold Improvements at December
31, 2005 is:
7. The total adjusted balance of Accumulated Depreciation of Property and Equipment at
December 31, 2005 is:
8. The total gain(loss) from disposal of assets at December 31, 2005 is:
9. The adjusted book value of Building at December 31, 2005 is:
10. The adjusted book value of Leasehold Improvement at December 31, 2005 is:

PROBLEM 6
Two independent companies, KAYA and MUYAN, are in the home building business. Each owns a tract of
land for development, but each company would prefer to build on the others land. Accordingly, they
agreed to exchange their land. An appraiser was hired and from the report and the companies records,
the following information was obtained:
 KAYA Co.s Land MUYAN Co.s Land
Cost (same as book value) P 800,000 P 500,000
Market value, per appraisal 1,000,000 900,000

The exchange of land was made and based on the difference in appraised values, MUYAN Company paid
P100,000 cash to KAYA Company.

Questions
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the exchange
in the amount of:
3. After the exchange, KAYA Company record its newly acquired land at:
4. After the exchange, MUYAN Company record its newly acquired land at:

PROBLEM 7
Information pertaining to Eddie Vic Corporations property, plant and equipment for 2005 is presented
below:
Account balances at January 1, 2005
Debit Credit
Land P 1,500,000
Building 12,000,000
Accum. depreciation-building P 2,631,000
Machinery and equipment 9,000,000
Accum. depreciation-Mach. and Eqpt 2,500,000
Automotive Equipment 1,150,000
Accum. depreciation-Automotive Eqpt 846,000

Depreciation method and useful life

Building 150% declining balance; 25 years
Machinery and equipment Straight-line; 10 years
Automotive equipment Sum-of-the-years-digits; 4 years
The salvage value of the depreciable assets is immaterial
Depreciation is computed to the nearest month.

Transactions during 2005 and other information:

On January 2, 2005, Eddie Vic purchased a new car for P350,000 cash and trade-in of a 2- year old car with
a cost of P490,000 and a book value of P147,000. The new car has a cash price of P520,000; the market
value of the trade-in is not known.

On April 1, 2005, a machine purchased for P230,000 on April 1, 2000, was destroyed by fire. Eddie Vic
recovered P155,000 from its insurance company.
On July 1, 2005, machinery and equipment were purchased at a total invoice cost of P2,800,000; additional
costs of P50,000 for freight and P250,000 for installation were incurred.

Eddie Vic determined that the automotive equipment comprising the P1,150,000 balance at January 1,
2005, would have been depreciated at a total amount of P180,000 for the year ended December 31, 2005.

Questions
1. Depreciation expense for building at December 31, 2005 is:
2. Depreciation expense for machinery and equipment at December 31, 2005 is:
3. Depreciation expense for Automobile equipment at December 31, 2005 is:
4. Total depreciation expense for 2005 is:
5. Total gain on asset disposal for 2005 is:
6. Total accumulated depreciation of building at December 31, 2005 is:
7. Total book value of property, plant, and equipment at December 31, 2005 is:
8. The property, plant and equipment at December 31, 2005 is:
9. The total cost of property, plant and equipment at December 31, 2005 is:
10. Total accumulated depreciation of property, plant, and equipment at December 31, 2005 is:

PROBLEM 8
The following data relate on the Plant Assets account of Licab, Inc. at December 31, 2005:
Plant Assets
L A R E
Original cost P87,500 P127,500 P200,000 P200,000
Year Purchased 2000 2001 2002 2004
Useful life 10 years 37,500 hours 15 years 10 years
Salvage value P7,750 P7,500 P12,500 P12,500
Depreciation method SYD Activity Straight-line Double declining
balance

Note:
In the year an asset is purchased, Licab, Inc. does not record any depreciation expense on the asset.
In the year an asset is retired or traded in, Licab, Inc. takes a full year depreciation on the asset.

The following transaction occurred during 2006:

a. On May 5, Asset L was sold for P32,500 cash.
b. On December 31, it was determined that asset A had been used 5,250 hours during 2006.
c. On December 31, before computing depreciation expense on Asset R, the management of Licab, Inc.
decided the useful life remaining from 1/1/06 was 10 years.
d. On December 31, it was discovered that a plant asset purchased in 2005 had been expensed
completely in that year. This asset costs P55,000 and has useful life of 10 years and no salvage value.
Management has decided to use the double-declining balance for this asset, which can be referred
to as Asset S.

Based on the above and the result of your audit, answer the following: (Disregard tax implications)
1. How much is the gain or loss on sale of Asset L?
2. How much is the depreciation of Asset R for 2006?
3. The adjusting entry to correct the error of failure to capitalize Asset S would include
4. How much is the adjusted balance of Plant Assets as of December 31, 2006?
5. How much is the total depreciation expense for 2006?