Page 1 of 3

REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

LAND, BUILDING AND MACHINERY

1. During 2005 Magdiwang Company had the following transactions pertaining to its new
office building:
Purchase price of land 1,500,000
Legal fees for contract to purchase land 50,000
Architect’s fees 200,000
Demolition of old building on site 150,000
Sale of scrap from old building 20,000
Construction cost of new building (fully completed) 9,000,000
In Magdiwang’s December 31, 2005 balance sheet, what amounts should be reported
as the cost of land and building?
Land Building
a. 1,500,000 9,380,000
b. 1,680,000 9,200,000
c. 1,550,000 9,330,000
d. 1,550,000 9,200,000

2. On January 1, 2005, Tagaytay Company purchased a tract of land with an old building
which was razed shortly after acquisition. The costs incurred in connection with the
acquisition were:
Purchase price 5,000,000
Agent commission 250,000
Legal fees for the purchase contract 100,000
Guarantee insurance 10,000
Cost of razing the old building 200,000
Salvage value of old building materials 50,000
Property taxes for 2004 and 2005 (equally each year) 300,000
Option paid for an alternative land which was not acquired 30,000
Cost of relocating squatters 20,000
The cost of the land should be
a. 5,680,000
b. 5,660,000
c. 5,830,000
d. 5,530,000

3. Tanza Company entered into a P10,000,000 fixed contract with Philstress Company on
January 1, 2005 for the construction of a new building. On January 1, 2005, Tanza
obtained a loan of P10,000,000 at an interest rate of 12% to finance specifically the
construction. Availments from the loan may be made quarterly at unequal amounts.
Total interest incurred for 2005 was P900,000. Prior to their disbursement, the
proceeds from the loan were temporarily invested and earned interest income of
P50,000. The building was completed on December 31, 2005. Additional costs
incurred during the construction were P200,000 for plans, specifications and blueprint,
and P350,000 for architectural design and supervision.

Tanza Company follows the alternative treatment of capitalizing borrowing cost. The
cost of the building should be
a. 11,400,000
b. 11,450,000
c. 10,000,000
d. 10,550,000
 Page 2 of 3

4. Maragondon Company had the following borrowings during 2005. The borrowings were
made for general purposes but the proceeds were used in part to finance the construction of a
new building:
Principal Interest
12% bank loan 10,000,000 1,200,000
15% long-term loan 20,000,000 3,000,000
The construction began on January 1, 2005 and was completed on December 31,
2005. Expenditures on the building were made as follows:
January 1 8,000,000
June 30 8,000,000
December 31 4,000,000
Following the alternative treatment, the capitalizable borrowing cost should be
a. 1,680,000
b. 4,200,000
c. 1,400,000
d. 1,620,000

5. On January 1, 2005, Kawit Company borrowed P6,000,000 at an interest rate of 10%

specifically for the construction of its new building. Interest earned from the temporary
investment of the proceeds the loan prior to their disbursement amounted to P75,000. Kawit
also had the following other loans in 2005 which were borrowed for general purposes. The
proceeds of these loans were used in part for the construction of the building:
Principal Interest
10% bank loan 4,500,000 450,000
12% long-term loan 6,000,000 720,000
The construction began on January 1, 2005 and the building was completed on
December 31, 2005. Expenditures on the building were made as follows:
January 2 1,500,000
April 1 3,750,000
July 1 4,500,000
September 30 3,750,000
December 31 1,500,000
15,000,000
The amount of capitalizable borrowing cost is
a. 1,350,000
b. 690,000
c. 525,000
d. 165,000

6. During 2005 Dasmariñas Company installed a production assembly line to manufacture

furniture. In 2005 Dasmariñas purchased a new machine and rearranged the assembly
line to install this machine. The rearrangement did not increase the estimated useful
life of the assembly line but it did result in significantly more efficient production. The
following expenditures were incurred in connection with this project:
Machine 5,000,000
Labor to install new machine 400,000
Parts added in rearranging the assembly line to provide future benefits 2,000,000
Labor and overhead to rearrange the assembly line 600,000
What amount of the above expenditures should be capitalized in 2005?
a. 8,000,000
b. 5,400,000
c. 7,400,000
d. 2,600,000
 Page 3 of 3

7. On January 1, 2005, Carmona Company received a grant of P50 million from the
British government in order to defray safety and environmental costs within the area
where the enterprise is located. The safety and environmental costs are expected to
be incurred over four years, respectively, P4 million, P8 million, P12 million and P16
million.
How much income from the government grant should be recognized in 2005?
a. 50,000,000
b. 12,500,000
c. 5,000,000
d. 0

8. On January 1, 2004, Indang Company received a grant of P50 million from the US
government for the construction of a laboratory and research facility with an estimated
cost of P60 million and useful life of 25 years. The facility was completed in early 2005.
Indang Company should include in its 2005 income statement an income from the
government at
a. 50,000,000
b. 2,000,000
c. 2,400,000
d. 0

9. On January 1, 2005, Corregidor Company is granted a large tract of land in the

Cordillera region by the Philippine government. The fair value of the land is P10 million.
Corregidor Company is required by the grant to construct chemical research facility and
employ only personnel residing in the Cordillera region. The estimated cost of the
facility is P50 million with useful life of 20 years. Corregidor Company should recognize
in 2005 an income from government grant at
a. 10,000,000
b. 2,500,000
c. 500,000
d. 0

- end -