Practical Accounting I

Property, Plant, and Equipment

Problem I

An entity had the following property acquisitions during the current year:

 Acquired a tract of land in exchange for 50,000 ordinary shares of P100 par value with a market price
of P150 per share on the date of acquisition. The last property tax bill indicated assessed value of
P4,000,000 for the land. However, the land has a fair value of P6,000,000.
 Received land as donation from a major shareholder as an inducement to locate a plant in the city. No
payment was required but the entity paid P50,000 for legal expenses for land transfer. The land is fairly
valued at P1,000,000.
 Acquired a machine with an invoice price of P3,000,000 subject to cash discount of 10% which was not
taken. The entity incurred cost of P50,000 in removing the old welding machine prior to the installation
of the new one. Machine supplies were acquired at a cost of P150,000.

What is the total increase in property, plant, and equipment as a result of the acquisitions?

Problem II

An entity acquired the following:

 During 2019, the entity purchased a machine for P500,000 down and four monthly installments of
P1,250,000. The cash price of the machine was P4,700,000.
 On January 1, 2019, the entity purchased a machine for P2,000,000 in exchange for a noninterest bearing
note requiring four payments of P500,000. The first payment was made on December 31, 2019. The rate
of interest for this note at date of issuance was 10%. The present value of an ordinary annuity of 1 at
10% is 3.17 for four periods. The present value of an annuity of 1 in advance at 10% is 3.49 for four
periods.
 On January 1, 2019, the entity acquired a machine by issuing a four-year, noninterest bearing note for
P2,000,000. The note is due on January 1, 2023. The entity has a 10% interest for this type of note. The
present value of 1 at 10% for 4 years is 0.68.

Problem III

An entity exchanged a truck with a carrying amount of P1,200,000 and a fair value of P2,000,000 for a truck
and P200,000 cash. The fair value of the truck received was P1,800,000. The cash flows from the new truck
are not expected to be significantly different from the cash flows of the old truck.

At what amount should the truck received in the exchange be recorded?

Problem IV

An entity purchased a machine for P3,000,000 on January 1, 2019. The entity received a government grant
of P500,000 in respect of this asset. The policy is to depreciate the asset over 5 years on a straight line basis
and to treat the grant as deferred income. On January 1, 2021, the grant became fully repayable because of
noncompliance with conditions.

What is the loss on repayment of grant in 2021?

Problem V

An entity purchased a machine for P6,600,000 on January 1, 2019 and received a government grant of
P600,000 towards the capital cost. The policy is to treat the grant as a reduction in the cost of the asset. The
machine is to be depreciated on a straight line basis over 5 years with a residual value of P500,000. On
January 1, 2021, the grant became fully repayable because of noncompliance with conditions.

1. What is the depreciation for 2019?

2. What is the depreciation for 2021?
3. What is the depreciation for 2022?

Problem VI

On January 1, 2019, an entity received from the government a P5,000,000 three-year, zero-interest loan
evidenced by a promissory note. The prevailing rate of interest for a loan of this type is 10%. The present
value of 1 at 10% is .75 for three periods.

What is the grant income for 2019?

Problem VII

An entity had a 10% P3,000,000 specific construction loan and 12% P25,000,000 general loan outstanding
during 2019 and 2020.

The entity began the self-construction of a building on January 1, 2019 and was completed on December
31, 2020. The following expenditures were made during 2019 and 2020.

January 1, 2019 P4,000,000

April 1, 2019 5,000,000
December 1, 2019 3,000,000
March 1, 2020 6,000,000

1. What amount of interest is capitalized as cost of the building in 2019?

2. What is the cost of the building to date, December 31, 2019?
3. What is the cost of the building on December 31, 2020?
4. What amount of interest expense should be reported for 2020?
5. What is the cost of the building, assuming the building was completed on June 30, 2020?

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Problem VIII

An entity purchased a tract of land as an investment property. The entity razed an old building on the
property.

Purchase price of land and an old building P4,000,000

Fair value of an old building 300,000
Demolition of old building 200,000
Proceeds from sale of salvaged materials 20,000
Legal fees for purchase contract and recording ownership 150,000
Title guarantee insurance 50,000
Payment of property taxes in arrears on land 100,000
Option paid for an alternative land not acquired 30,000
Special assessment for city improvements 120,000

What is the cost of the land?

Problem IX

An entity purchased a tract of land as a factory site. An old building was demolished and construction began
on the new building.

Purchase price of land and an old building P4,500,000

Fair value of old building 250,000
Cost of demolishing old building 300,000
Title insurance and legal fees to purchase land 200,000
Architect fee 950,000
New building construction cost 8,000,000
Survey before construction 100,000
Building permit or payment to city hall for approval of building construction 150,000
Excavation before new construction 200,000
Liability insurance during construction 100,000
New fence surrounding the factory 100,000
Driveways, parking bays, and safety lighting 550,000
Cost of trees, shrubs, and other landscaping 250,000

What is the cost of the new building?

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Problem X

An entity acquired a machine and incurred the following costs:

Cash paid for machine, including VAT of P96,000 P896,000

Cost of transporting machine 30,000
Cost of installation 50,000
Cost of testing machine 40,000
Cost of safety rails and platform surrounding machine 60,000
Cost of water device to keep machine cool 80,000
Cost of adjustment to machine to make it operate more efficiently 75,000
Cost of repairing damage during installation 45,000
Cost of spare parts to cover breakdowns 155,000
Estimated dismantling cost to be incurred as required by contract 65,000
Insurance cost for the current year 15,000
Cost of training personnel who will use the machine 25,000

What total amount should be capitalized as cost of the machine?

Problem XI

An entity acquired an equipment for P4,200,000 in 2016. The policy is straight line depreciation, full
depreciation in the year of acquisition and no depreciation in the year of disposal. The useful life is five
years with residual value of P200,000. On July 1, 2019, the equipment was sold for P2,500,000.

What is the gain on disposal in 2019?

Problem XII

An entity used the composite method of depreciation based on a 25% composite rate. On January 1, 2019,
the total cost of equipment was P5,000,000 with total residual value of P600,000 and accumulated
depreciation of P3,000,000. In January 2019, the entity purchased an equipment for P2,500,000 with no
residual value. On December 31, 2019, the entity sold an equipment costing P1,000,000 for P350,000. The
said equipment was acquired on January 1, 2017 with residual value of P200,000.

What amount of depreciation should be recognized for 2019?

Problem XIII

On April 1, 2019, an entity purchased machinery for P3,300,000. The machinery has an estimated useful life
of five years with residual value of P300,000. Depreciation is computed by the sum of years’ digits method.

What is the accumulated depreciation on December 31, 2020?

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Problem XIV

An entity purchased equipment on January 1, 2019 for P5,000,000. The equipment had a useful life of 5
years and residual value of P600,000. The policy is to depreciate 5-year assets using the 200% double
declining method for the first 2 years and then switch to straight line.

What amount should be reported as accumulated depreciation on December 31, 2021?

Problem XV

An entity purchased a machine on January 1, 2019 for P8,100,000. The useful life of the machine is estimated
at three years with a residual value of P600,000. During the useful life, the expected units of production
from the machine are 10,000 units for 2019, 9,000 units for 2020, and 6,000 units for 2021.

What is the depreciation expense for 2020 using the output production method?

Problem XVI

On January 1, 2019, an entity purchased a mineral mine for P26,400,000 with removable ore estimated at
1,200,000 tons. After it has extracted all the ore, the entity will be required by law to restore the land to the
original condition at an estimated cost of P2,200,000. The present value of the estimated restoration cost is
P1,800,000. The property can be sold afterwards for P3,000,000. During 2019, the entity incurred P2,000,000
exploration cost and P1,600,000 development cost preparing the mine for production. The entity removed
80,000 tons of ore and sold 60,000 tons of ore in the current year.

What amount of depletion should be included in cost of sales for the current year?

Problem XVII

On July 1, 2019, an entity purchased the rights to a mine for P13,200,000, of which P1,200,000 was allocable
to the land. Estimated reserves were 1,500,000 tons. The entity expects to extract and sell 25,000 tons per
month. The entity purchased mining equipment on July 1, 2019 for P9,500,000. The mining equipment had
a useful life of 8 years. However, after all the resource is removed, the equipment will be of no use and will
be sold for P500,000.
1. What is the depletion for 2019?
2. What is the depreciation for 2019?

Problem XVIII

An entity provided the following balances on December 31, 2019:

Wasting asset, at cost P40,000,000
Accumulated depletion 15,000,000
Capital liquidated 5,000,000
Retained earnings 10,000,000
Depletion based on 100,000 units extracted at P30 per unit 3,000,000
Inventory of resource deposit (20,000 units) 2,000,000
What is the maximum dividend that can be declared on December 31, 2019?