PROPERTY PLANT AND EQUIPMENT

Problem 1
The Maligalig Corporation had the following items recorded in its “Property and Equipment” account as
of December 31 2011:
Items debited to the account:
Cash paid to purchase a land with a dilapidated building at the beginning of the
year 660,000.00
Mortgage assumed on the land purchased 240,000.00
Commission paid to the real estate agent 150,000.00
Attorney's fee in connection with the acquisition 75,000.00
Cost of razing the old structure 120,000.00
Grading, leveling and landscaping costs (permanent improvement) 50,000.00
Special assessment by public improvement 25,000.00
interest on loan construction of a new building (based on average costs
incurred) 81,000.00
Building construction labor cost 800,000.00
Building construction materials 672,000.00
Costs of temporary fencing the property during the construction 28,000.00
Cost of permanent fencing 86,000.00
Architect's fees 112,500.00
Cost of paving driveway and parking lot 70,000.00

Excavation expenses, including a P90,000 cost of excavation equipment 135,000.00

Fixed overhead charged to the building 300,000.00
Cost of temporary quarters for construction crew 150,000.00
Cost of temporary building to house tools and materials 90,000.00
Insurance on building during construction 31,500.00
Profit on construction, as the difference between the appraised value of the
asset after construction and actual costs incurred 360,000.00
Payments made to construction workers injured during the construction not
covered by insurance 90,000.00
Payments to tenants of the old building to vacate the premises 90,000.00
Modification of the building ordered by building inspectors 225,000.00
Property taxes on land covering the period 2008-2011 240,000.00
Interest that would have been earned had the money used during the period
of construction been invested in the money market 150,000.00
Invoice cost of machinery acquired 381,000.00
Freight, unloading, and delivery charges 22,500.00
Allowances, hotel accommodations etc paid to foreign technicians during
installation and test run of machines 20,000.00

Royalty payment on machines purchased ( based on units produced and sold) 75,000.00

Items credited to the account:

 Salvage proceeds from demolished building 15,000.00

Proceeds from sale of the excavation equipment 30,000.00

Proceeds from sale of produce of the machinery test runs 3,500.00

In addition, you discovered that compensation for the worker’s injury was necessary because it was not
covered by the insurance policy purchased by the company. Accident insurance that would have
covered the same would have cost P20,000. The modifications ordered by the building inspectors
resulted from poor planning by the company.

Required: Based on the above and the result of your audit, what are the correct cost of the following
individual Property, Plant and Equipment accounts:
A B C D
1. Land 1,575,000 1,500,000 1,380,000 1,350,000
2. Building 2,535,000 2,490,000 2,565,000 2,370,000
3. Land Improvements 268,500 232,500 156,000 120,000
4. Machinery and Equipment 381,000 397,500 420,000 423,500
5. Total Depreciable PPE 3,184,500 3,120,000 3,141,000 2,946,000
6. Amount that should have been
Expensed as incurred during
the current yr 75,000 150,000 450,000 300,000

Problem 2

Based on the following independent cases pertinent to the different modes of acquiring property plant
and equipment, identify the proper adjusting journal entry/ies and answer the additional requirements:

a. On January 3, XYZ Company purchased specialized factory equipment at a purchase price of

P1M plus 12% value-added tax. The company incurred P30,00o in freight and P70,000
installation cost. The company expects that it will incur dismantling cost amounting to P133,815
at the end of the equipment’s 5-year useful life. The prevailing market interest rate during the
transaction date was 6%.
The present value factor of P1 at 6% for 5 periods is at 0.7473
The present value factor of P1 ordinary annuity for 5 periods is at 4.2124
1. How should the equipment be initially recognized?
a. 1,000,000
b. 1,100,000
c. 1,200,000
d. 1,220,000
 2. Assuming an estimated useful life of 5 years and a 10% salvage value, what is the
depreciation expense for the first year under the straight-line method?
a. 216,000
b. 219,600
c. 240,000
d. 244,000
b. On April 1, 2011, XYZ Corporation purchased for P2,700,000 a tract of land, a warehouse and an
office building. The following data were collected regarding the property:

Appraised value Vendor’s Book value

Land 875,000 700,000
Warehouse 375,000 400,000
Office Building 1,000,000 975,000

1. What is the appropriate amounts that XYZ should record for land, warehouse amd office
building, respectively?
a. 700,000; 400,000 and 900,000
b. 875,000; 375,000 and 1,000,000
c. 945,000; 540,000 and 1,215,000
d. 1,050,000; 450,000 and 1,200,000
2. Assuming that the estimated useful life of 10 years for the warehouse and the office building
and an estimated salvage value of 10%, what is the depreciation expense of the warehouse and
office building in 2011 under the sum-of-the-years digits method?
a. 81,818 and 218,182
b. 61,364 and 290,909
c. 73,636 and 196,364
d. 55,227 and 147,273
c. On April 3, XYZ Co. purchased and installed several furniture and fixtures items from alocal
furniture manufacturer and dealer under the terms 5/10, n/30. The amount was paid on April 23
and was recorded as:
4/23 Furniture and fixtures 2,500,000
Cash 2,500,000
In addition, the company incurred freight and installation costs amounting to P10,000 and P15,000,
respectively.
1. How much the furniture and fixtures should be initially recognized?
a. 2,375,000
b. 2,400,000
c. 2,500,000
d. 2,525,000
2. Assuming an estimated useful life of 5 years and a 10% salvage value, what is the deprecjiation
expense for the first year under the double declining balance method?
a. 960,000
 b. 720,000
c. 864,000
d. 648,000
d. On May 1, the XYZ Co. purchased factory machinery having an installment price of P5,000,000
and a list price of P4,500,000. The company made a P1,000,000 down payment and issued a 4-
year, 4 million non-interest bearing note payable P1M every May 1 starting next year. The
prevailing interest rate for similar note is at 6%
The present value factor of P1 at 6% for 4 periods is at 0.7921
The present value factor of P1 at 6% ordinary annuity for 4 periods is at 3.4651
1. How much should the factory machinery be initially recognized?
a. 3,465,100
b. 4,465,100
c. 4,500,000
d. 5,000,000
2. Assuming an estimated useful life of 5 years with a 10% salvage value based on the cost,
what is the depreciation expense for the first year under the 150% declining balance
method?
a. 1,350,000
b. 1,339,530
c. 900,000
d. 893,020
e. On June 1, XYZ Co. acquired a real property by issuing 35,360 shares for its P100 par value
ordinary shares. A share was selling on the same date at P125. A mortgage of P4,000,000 was
assumed by XYZ Co. on the purchase. Moreover, the company paid P180,000 real property taxes
of prior years. Twenty percent of the purchase price should be allocated to the land and the
balance to the building.
In order to make proper use of the buikding XYZ Co., incurred remodeling costs in the amount of
P900,000. This however necessitated the demolition of the portion of the building, which
resulted in the recovery of salvage material sold for P30,000.
Cost of the company’s parking lot totaled P320,000; while repairs in the main hall were incurred
at P45,000 prior to its use.

1. The correct cost of the land should be

a. 1664,000
b. 1,720,000
c. 2,040,000
d. 2,400,000
2. The correct cost of the building should be
a. 6,330,000
b. 7,795,000
c. 7,750,000
d. 7,570,000
f. XYZ Co. owns a tract of land which it purchased in 2008 for P1,000,000. The land is held as a
future plant site and has a fair market value of P1,500,000 on July 1, 2011. Mall company also
owns a tract of land held as a future plant site. Mall paid P1,800,000 for the land in 2005 and the
land has a fair market value of P2,000,000 on July 1, 2011. On this date, XYZ exchanged its land
and paid P500,000 cash for the land owned by Mall. The expected cash flow from the asset
received differ from the cash flows expected from the asset transferred and the difference is
significant relative to the fair value of the land given up.
1. How much the property should be initially recognized in the books of XYZ?
a. 500,000
b. 1,500,000
c. 2,000,000
d. 2,500,000
2. How much is XYZ’s gain or loss from the transaction?
a. None
b. 500,000
c. 1,000,000
d. 2,000,000
3. Assuming that the cash flows expected from the assets exchanged are not materially different,
how much should the property be initially recognized in the books of XYZ?
a. 500,000
b. 1,500,000
c. 2,000,000
d. 2,500,000
g. On July 1, 2011, traded in an old machine with a book value of P10,000 for a similar new
machine having a cash price of P32,000, and paid a cash difference of P19,000. XYZ recorded the
new machine at the cash payment made.
1. How much the property should be initially recognized?
a. 32,000
b. 29,000
c. 22,000
d. 19,000
2. How much is the gain or loss from the trade in transaction?
a. None
b. 3,000
c. 7,000
d. 10,000
h. On July 1, 2011, the XYZ accepted several office equipment from a stockholder which originally
costed the stockholder P2,000,000. On the same date, the items had aggregate market value
totaling to P1,500,000. The company incurred P100,000 for professional fees and transfer taxes
related to the transaction. The amount was charged to other expenses.
1. How much the property should be initially recognized?
a. 0
 b. 1,500,000
c. 1,600,000
d. 2,000,000
2. The entries to record the donation involves a net credit to:
a. Donated capital at 2,000,000
b. Donated capital at 1,500,000
c. Donated capital at 1,400,000
d. Gain from grants at 1,500,000
i. On August 1, 2011, the national government granted XYZ Co. a parcel of land located in
Batangas. On the date of the grant, the land had a fair value of P2,000,000. The company paid
for the documentation expenses and legal fees to execute the grant amounting to P200,000. The
grant required the company to construct a cold storage building on the site, which was
completed at the end of October under a P4,000,000 fixed price contract with ABC
Constructions. The fair market value of the building which had an estimated useful life of 10
years, upon finishing the construction was ascertained to be P4,500,000.
1. How much should the land and facility, respectively, be initially recognized?
a. 0 and 4,000,000
b. 2,200,000 and 4,000,000
c. 0 and 4,500,000
d. 2,000,000 and 4,500,000
2. The entry to record the donation involves a credit to
a. Donated capital at 2,000,000
b. Gain from government grant at 2,000,000
c. Deferred gain from government grant at 2,000,000
d. Deferred gain from government grant at 1,800,000
3. How should the corresponding balance sheet accounts pertaining to he above transactions
be presented as of December 31, 2011?
a. Land, P2,200,000; Facility, P3,933,333; Deferred gain from government grant,
P1,966,667
b. Land, P2,200,000; Facility, P3,933,333; Deferred gain from government grant,
P2,000,000
c. Land, P2,200,000; Facility, P4,000,000; Deferred gain from government grant,
P2,000,000
d. Land, P2,200,000; Facility, P3,833,333; Deferred gain from government grant,
P1,966,667

Problem 3
Bond Company constructs its own buildings. In 2010, a total of P 1,228,500 interest was included as part
of the cost of a new building just being completed.
The following is a summary of construction expenditures in 2011:
Accumulated in 2010, including capitalized interest P 18,228,500
March 1 7,000,000
September 1 4,000,000
December 31 5,000,000

Bonds has the following outstanding loans at December 31, 2011:

12% note related directly to new building;
Term, 5 years from beginning of construction P 10,000,000
General borrowings:
10% note issued prior to construction of new building; term, 10 yrs 5,000,000
8% note issued prior to construction of new building; term, 5 yrs 10,000,000

1. How much is the total capitalizable borrowing cost under PAS 23?
a. 2,534,761
b. 2,500,000
c. 1,334,761
d. 1,200,000
2. How much interest expense should be reported in the 2011 income statement?
a. 0
b. 34, 761
c. 1,300,000
d. 1,334,761
3. What is the total cost of the building as of December 31, 2011?
a. 36,763,261
b. 36,728,500
c. 35,500,000
d. 27,895,167

Problem 4
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 other’s
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.

Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
a. P 20,000 b. P 60,000 c. P 100,000 d. P 200,000
2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
exchange in the amount of:
a. P 0 b. P 100,000 c. P 300,000 d. P 400,000

3. After the exchange, KAYA Company record its newly acquired land at:
a. P 700,000 b. P 720,000 c. P 800,000 d. P 900,000

4. After the exchange, MUYAN Company record its newly acquired land at:
a. P 1,000,000 b. P 900,000 c. P 600,000 d. P 500,000

Problem 5
The schedule of Gerasmo Company’s property and equipment prepared by the client
follows:

PLANT ASSETS
Land P 320,000
Building 540,000
Machinery and Equipment 180,000
Total 1,040,000

ACCUMULATED DEPRECIATION
Building P 81,000
Machinery and Equipment 54,000
Total P 135,000

Further examination revealed the following:

1. All property and equipment were acquired on January 2, 2003.

2. Assets are depreciated using the straight-line method. The building and equipment are
expected to benefit the company for 20 years and 10 years respectively. Salvage values
of the assets are negligible.
3. An equipment with an original cost of P40,000 was sold on December 30, 2005 for
P32,000. The proceeds were credited to other operating income account.
4. In 2005, The company recognized an appreciation in value of land and building as
determined by the Company’s engineers. The appraisal was recorded as follows:

Debit Credit
Land 70,000
Building 60,000
Accum. depreciation 6,000
Revaluation increment 124,000

Questions

1. Property and equipment at year-end is:

a. P 753,000 b. P 870,000 c. P 910,000 d. P 990,000

2. Accumulated depreciation at year-end is:

a. P 114,000 b. P 117,000 c. P 123,000 d. P 135,000
Problem 6
You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year
ended December 31, 2006. You gathered the following information pertaining to the
company’s Equipment and Accumulated Depreciation accounts.

EQUIPMENT
1.1.06 Balance P 446,000 9.1.06 No. 6 sold P 9,000
6.1.06 No. 12 36,000 12.31.06 Balance 474,000
9.1.3 Dismantling
of No. 6 1,000 ______
P 483,000 P 483,000

ACCUMULATED DEPRECIATION – EQUIPMENT

12.31.06 Balance P 271,400 1.1.06 Balance P 224,000
______ 12.31.06 2006 Dep’n 47,400
P 271,400 P 271,400

The following are the details of the entries above:

1. The company depreciates equipment at 10% per year. The oldest equipment owned
is seven years old as of December 31, 2006.

2. The following adjusted balances appeared on your last year’s working papers:

Equipment P 446,000
Accumulated depreciation 224,000
3. Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on
September 1, 2006, for P9,000.

4. Included in charges to the Repairs Expense account was an invoice covering

installation of Machine No. 12 in the amount of P2,500.

5. It is the company’s practice to take a full year’s depreciation in the year of

acquisition and none in the year of disposition.

Questions
1. The gain/(loss) on sale of Machine 6 is:
a. P 1,000 b. P 500 c. P (1,000) d. P (500)

2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2006 is:

a. P 446,000 b. P 452,000 c. P 454,500 d. P 475,500

3. The Depreciation expense – Equipment of TRIUMPH CORPORATION at December 31,

2006 is:
a. P 45,200 b. P 45,450 c. P 46,525 d. P 53,525

4. The entry to correct the sale of Machine 6 is:

a. Loss on sale of equipment 1,000
Accumulated depreciation 21,000
Equipment 22,000
b. Accumulated depreciation 22,500
Equipment 22,000
 Gain on sale 500
c. Accumulated depreciation 21,500
loss on sale of equipment 500
Equipment 22,000
d. Accumulated depreciation 23,000
Equipment 22,000
Gain on sale of equipment 1,000

5. The Depreciation Expense at December 31, 2006 is:

a. Overstated by P6,125 c. Understated by P1,950
b. Understated by P6,125 d. Overstated by P1,950

Problem 7
On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of
Crame Corporation. Plant assets consists of:

Land P 100,000
Leasehold improvements 190,000
Equipment 450,000
Total per WBS P 740,000

The land was acquired on October 1, 2003, at a cost of P500,000. Crame Corporation made
a cash downpayment of P100,000 and signed a 18% mortgage note payable in four equal
annual installments of P100,000. The first interest and principal payment is due on October
1, 2004. No interest has been accrued as of December 31, 2003.
In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which
was charged to operating expenses.

You ascertained that due to obsolescence, computer equipment with an original cost of
P80,000 and accumulated depreciation of P16,000 at January 1, 2003 had suffered a
permanent impairment in value and, as a result, should have a carrying value of only
P40,000 at the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 4 to 2 years. No entry has yet been made in the books. For
2003, the company recorded depreciation of P16,000 for the said equipment.

At present, Crame Corporation’s office and warehouse are located in a rented building. The
rental contract was signed on July 1, 2003 and has a term of five (5) years renewable for
another five (5) years. On October 1, 2003, Crame Corporation spent P190,000 to install
walls and fixtures. The leasehold improvements have a useful life of five years. No
amortization has been booked as of December 31, 2003.

Questions
1. The adjusted cost of land amounted to:
a. P 528,000 b. P 510,000 c. P 500,000 d. P 410,000
2. The carrying value of leasehold improvements as of December 31, 2003 amounted to:

a. P 190,000 b. P 183,000 c. P 180,500 d. P 180,000

3. Audit adjustments will increase depreciation/amortization expense by:
a. P 38,000 b. P 24,000 c. P 14,000 d. P 13,500
4. Loss due to impairment in value amounted to:

a. P 30,000 b. P 28,000 c. P 24,000 d. P 20,000

Problem 8
Powter Company acquired a machine on January 1, 2009, at a cost of P120,000. It was expected to have
a useful economic life of 10 years. Powter uses the straight-line depreciation mejthod in depreciating its
machinery and equipment and reports on a calendar year basis. On December 31, 2011, the machine
was appraised as having a gross replacement cost of P150,000. Powter applies the revaluation model in
valuing this class of property, plant and equipment after its initial recognition.
1. How much should be credited to revaluation surplus on December 31, 2011?
a. 30,000
b. 105,000
c. 21,000
d. 9,000
2. What is the balance of the revaluation surplus account on December 31, 2012 assuming that
piecemeal realization surplus is in order?
a. 30,000
b. 21,000
c. 18,000
d. 15,000

Problem 9
On January 1, 2006, Brent Corporation purchased a factory for P1,800,000 and machinery for
P10,000,000. It is depreciating the factory over 30 years and the machinery over 20 years, both by the
straight-line method to zero residual values. Late in 2011, because of technological changes in the
industry and reduced selling prices for its products, the company believes that its asset(s) may be
impaired and will have a remaining useful life of 8 years. The cash flows from the factory and machinery
are not separable, and are independent of the company’s other activities. The company estimates that
the asset will produce cash inflows of P4,000,000 and will incur cash outflows of P2,950,000 each year
for the next 8 years. Furthermore, the factory and the machinery can be sold at P5,250,000 after
incurring broker’s fees , commissions and other charges amounting to P250,000. The company’s
discount rate is 12%.

The present value of P1 at 12% for 8 periods is 0.4039

The present value of an ordinary annuity of P1 at 12% for 8 periods is at 4.9676

1. How much is the carrying values of the assets on the date of impairment?
A B C D
Factory 1,440,000 1,350,000 1,260,000 1,500,000
Machinery 7,000,000 7,500,000 8,000,000 8,333,333

2. What is the value in use of the assets?

a. 5,250,000
b. 5,215,000
c. 14,654,420
d. 19,870,400
 3. How much is the loss from impairment to be recognized?
a. 3,224,020
b. 3,634,020
c. 4,044,020
d. 4,617,353
4. What is the carrying value of the Factory after the impairment loss recognition?
a. 550,070
b. 2,673,950
c. 889,930
d. 4,326,050

INTANGIBLES
Problem 1
The following costs are generally incurred by a newly established entity:

Pre-opening cost of a business facility 250,000

Purchased recipes and secret formulas 150,000
Training, customer loyalty, and market share 140,000
Licensing, royalty, and stand still agreement 300,000
Operating and broadcasting rights 112,000
Goodwill purchased in a business combination 500,000

A license to manufacture a steroid by means of a government grant 150,000

Cost of courses taken by management in quality engineering
management 450,000
A television advertisement that will stimulate the sales in technology
industry 100,000
Imnvestment in associate 500,000
6 months lease payment in advance 300,000

Cost of equipment acquired through a finance lease 100,500

Internally developed customer's list 120,500

Cost incurred in the corporation's formation and organization 230,000

Operating losses incurred in the start-up of the business 130,000
Initial franchise fees paid 175,000
Continuing franchise fees 50,000
Internally generated goodwill 800,000
Cost of testing in search for a product alternative 125,000
Cost of purchasing a patent from an inventor 137,000
Legal cost in securing a patent 70,000
Legal costs incurred in successfulluy defending a patent 55,500
Cost of developing brands, mastheads, and publishing title 200,000
Cost of purchasing a trademark 250,000
Computer software for a computer-controlled machine that cannot
operate without the specific software 325,500
An operating system of a computer 125,000
Amount paid to a lessor for the exclusive right to rent a facility under an
operating lease agreement for a period of 10 years 100,000
Cost of improvements on a leased facility 250,000

1. How much from the above items can be recognized as intangible assets?
a. 2,394,500
b. 1,944,000
c. 2,064,500
d. 1,874,000