CLASSROOM EXERCISES ON PPE AND DEPRECIATION

Journalize the following acquisition of PPE.

1. With asset retirement obligation. Assume that an item of equipment is purchased in cash by Agusan
Corporation at a purchase price of P800,000 plus 12% VAT. Agusan Corporation is a VAT – registered
company. Freight costs incurred by the company amounted to P15,000. The asset is expected to be
dismantled at a cost of P100,000 at the end of its 5 year useful life. The average borrowing rate of the
company at the date of acquisition of the equipment is 10%.

2. Lump sum purchase. Assume that Davao Company acquires land, building and several pieces of
machinery and paid for a lump sum price of P15 million. At the time of acquisition, appraised values of the
land, building and machinery are P8,000,000, P6,000,000 and P3,000,000, respectively.

3. On account. A machinery is purchased for P300,000 Terms 3/10, n/30

4. On installment basis. Assume that equipment is acquired at a cash price of P 870,000. The terms are
P150,000 down and the balance payable in 3 equal annual installments. A note is issued for the balance of
P900,000. The installment price of the equipment is P1,050,000.

5. On installment basis, cash price not given. On January 1, 2019, Jacob Company purchased a machine
on terms, P100,000 down payment, balance in four annual payments of P150,000. The first payment is due
on December 31, 2019. The fair value of the machine is not clearly determinable on the date of acquisition.
Prevailing interest rate for this type of loan is 10%.

6. Issuance of equity securities. Assume a piece of land is acquired by issuing 30,000 shares of ordinary
share with a par value of P100. At the time of acquisition, the fair value of the land is determined to be P3.2
million and the share is quoted at P130 per share.

7. Exchange. Lanao and Basilan exchanged property assets. The following information is available:

Books of Lanao Books of Basilan

Office Equipment Office Equipment
Cost P100,000 Cost P124,000
Acc. depreciation 48,000 Acc. depreciation 96,000
Fair market value 72,000 Fair market value 72,000

Assume (a) with commercial substance; (b) with no commercial substance.

8. Exchange. Iligan and Negros exchanged property assets. The following information is available:

Books of Zamboanga Books of Sulu

Office Equipment Office Furniture
Cost P100,000 Cost P124,000
Acc. depreciation 40,000 Acc. depreciation 62,000
Fair market value 60,000 Fair market value 72,000
Cash paid 12,000 Cash received 12,000

Assume with (a) with commercial substance;

(b) with no commercial substance.

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 9. Trade-in. Cotabato Company traded an old fork lift equipment with a dealer for a newer model. The
following information is available:

Old fork lift

Cost P 1,050,000
Accumulated depreciation 750,000
Carrying value 300,000
Fair value 262,500
Trade in value 450,000

New fork lift

List price P1,500,000
Trade in value of old fork lift 450,000
Cash payment P1,050,000

Assume that the company uses:

a. fair value method
b. trade in value method

10. Government grant. Surigao Company receives a grant of P10,000,000 from the Canadian government
for the construction of a food processing plant for the indigent people of Sitio Diwalwal. The estimated cost
of P12,000,000 and a useful life of 15 years.

11. Donation. Equipment was donated by a shareholder to Sultan Kudarat Company. An independent
appraisal of the equipment place the fair value at P450,000 and the residual value at P45,000. Attorney’s
fees and other legal expenses amounted to P15,000.

12. Subsequent expenditures – replacement. Assume that a factory having a useful life of 25 years is
constructed at a total cost of P5 million. After 10 years, the wooden floor is replaced with concrete floor
costing P600,000. Records reveal that P400,000 is an accurate estimate of the original cost of the wooden
floor.

DEPRECIATION

1. Variable Charge Method. Bohol Company purchased machinery for P500,000 on July 1, 2019. It is
estimated that it will have a useful life of 10 years, residual value of P20,000, production of 200,000 units
and working hours of 50,000.

Bohol Company used the machinery for 3,000 hours in 2019 and 5,000 hours in 2020. The machinery
produced 18,000 units in 2019 and 22,000 units in 2020.

Compute the depreciation for 2019 and 2020 using each method given below:
a. working hours
b. output method

2. Accelerated Method. Bacolod Company purchased a machine at a cost of P600,000 on January 1, 2019. It
was estimated that the machine would have a net residual value of P60,000. Its estimated useful life is 5
years.

Prepare a depreciation table for each of the following methods:

a. Sum of the year’s digits
b. Double declining balance

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3. Composite Method. Tacloban Company owned a power plant which consisted of the following, all
acquired on January 1, 2019

Residual Useful Life

Asset Cost Value in years
Power Plant P 6,100,000 P100,000 20
Machinery 2,550,000 50,000 5
Equipment 1,030,000 30,000 10

Required:
a. Compute the composite rate
b. Compute the composite life
c. Prepare the journal entry to record the depreciation for 2019 following the composite method.
d. Prepare the journal entry to record the retirement of the machinery at the end of the of the fifth
year assuming the proceeds from retirement amount to P40,000.
e. Following the composite method, prepare the journal entry to record depreciation for the sixth
year.

4. Group Method. Cebu Company acquired 20 machines on January 1, 2017 for P900,000. The machines
have an average life of five years. A group method of depreciation is used to allocate the service potential
of the machines to revenue. Machines are retired from service as follows:

Machines retired
End of Year and sold
2020 4
2021 14
2022 2

Prepare necessary journal entries from Jan, 1, 2017 to Dec. 31, 2022.

5. Change in Accounting Estimate. On January 1, 2019, Dumaguete Corp. purchased machinery for
P5,000,000. The machinery is depreciated using the double declining balance method over a period of 8
years. On January 1, 2022, Dumaguete changed its depreciation method to straight line method.

Required:
a. Compute the depreciation expense for 2019.
b. Compute the depreciation expense for 2022.

June 2019