CHAPTER 53
MACHINERY AND CAPITAL EXPENDITURE
Problem 53-1 (AICPA Adapted)
Negros Company acquired anew machinery.
Invoice price of the machinery 1,400,000
Cash discount available but not taken on purchase 20,000
Freight paid on the new machinery 40,000
Cost of removing the old machinery 15,000
Installation cost of the new machinery 50,000
Testing cost before the machinery was put into
regular operation including P10,000 in wages
of the regular machinery operator 30,000
Loss on premature retirement of the old machinery 5,000
Estimated cost of manufacturing similar machinery
including overhead 1,300,000
What amount should be capitalized as cost of the new machinery?
a. 1,500,000
b. 1,490,000
ce. 1,515,000
d. 1,520,000
Solution 53-] Answer a
List price 1,400,000
Cash discount (f ara,
Freight a 000
Installation cost 50 oa0
Testing cost Se
Total cost 1,500,000
The cost of removing the old machinery is treated as outright
expense.
iscount is deducted from the cost of the machinery
h di
capiined of whether taken or not taken. Problem 53-2 (IFRS)
Basilan Company acquired a machine at the beginning of the current
year.
Cash paid for machine, including VAT of P96,000 896,000
Cost of transporting machine 30,000
Labor cost of installation by expert fitter 50,000
Labor cost of testing machine 40,000
Insurance cost for the current year 15,000
Cost of training personnel who will use the machine * 25,000
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
Estimated dismantling cost to be incurred as required
by contract 65,000
What total amount should be capitalized as cost of the machine?
a. 1,135,000
b. 1,231,000
c. 1,200,000
d. 1,150,000
Solution 53-2 Answer c
Cash paid (896,000 ~ 96,000) 800,000
Cost of transporting machine 30,000
Installation cost 50,000
Testing cost 40,000
Safety rails and platform 60,000
Water device 80,000
Cost of adjustment 75,000
Estimated dismantling cost 65,000
Total cost of machine 1,200,000
The recoverable VAT or value added tax is not capitalizable.
The cost of training personnel who will operate the machine should be
treated as expense.
Note that the estimated dismantling cost is capitalized because the entity
has a present obligation as required by contract.
In the absence of a present obligation, the estimated dismantling
cost is not capitalized. Problem 53-3 (IFRs)
Wisdom Company j
. Y installed a new equipment at: i ili
id ie the following cote quipment at the production facility
Cost of equipment Per supplier’s invoi
ps I pplier’s invoice 2,500,000
Initial delivery and handling cost ~ 200,000
Cost of site preparation 600,000
Consultants used for advice on the acquisition of equipment 700,000
Interest charges Paid to supplier for deferred credit 200,000
Estimated dismantling cost to be incurred as
required by contract 300,000
Operating losses before commercial production 400,000
What total amount should be capitalized as cost of the equipment?
a. 4,300,000
b. 4,000,000
c. 4,200,000
d. 4,500,000
Solution 53-3 Answer a
Cost of equipment 2,500,000
Initial delivery and handling cost 200,000
Cost of site preparation 600,000
Consultants used for advice ‘ 700,000
Estimated dismantling cost 300,000
Total cost . 4,300,000
The interest charge is not capitalized because the equipment is ready
for the intended use when acquired.
The estimated dismantling cost is capitalized because it is required by
contract. Problem 53-4 (IFRS)
uses many kinds of machines in operations. The
Newcombe Comy
re from others and constructs some
entity acquires some machines
machines itself.
The following information pertains to amachine constructed by the
entity:
Cost of material to construct 700,000
Labor cost 430,000
Allocated overhead cost 220,000
Allocated interest cost of financing machine 106,000
Cost of instailation 120,000
20,000
Insurance for one year
Profit saved by self-construction 150,000
Safety inspection cost prior to use 40,000
What total amount should be capitalized as cost of the machine?
a. 1,610,000
b. 1,510,000
c. 1,630,000
d. 1,460,000
Solution 53-4 Answer a
Cost of material 700,000
Labor cost 430,000
Allocated overhead cost 220,000
Allocated interest cost 100,000
Cost of installation 120,000
Safety inspection cost 40,000
a sat
Total cost 1,610,000
=
The insurance for one year is an expense.
The saving on construction is ignored. Problem 53-5 (TAA)
During the current isti
A cash Payment of P1.000,000 was made and a two-year,
noninterest bearing note was issued for the balance of P4,000,000.
Recent transactions involving similar machine indicate that the used
machine has ase o.1d hand market value of P4,500,000. Anew machine
would cost P6,500,000,
The following costs were incurred during the year:
Cost of removing old machine that is replaced 350,000
Cash proceeds from the sale of the old machine replaced —_ 100,000
pairs to recondition machine
220,000
80,000
180,000
of testing machine prior to use 150,000
Cost of hauling the machine from vendor to
company premises 40,000
Cost of repairing damage to machine caused when the
machine was dropped during installation 50,000
Repairs incurred during the first year of operation 160,000
Safety device added to the machine 300,000
What total amount should be capitalized as cost of the second hand
machine?
a. 5,890,000
b. 5,390,000
c. 5,220,000
d. 5,325,000
Solution 53-5 Answer b
Second hand market value | 4,500,000
General overhaul and repairs prior to use 220,000
Cost of installation 180,000
Cost of testing : 150,000
Cost of hauling from vendor to company premises 40,000
Safety device 300,000
Total cost of machine 5,390,000
The cost of repairing damage when the machine was during
installation should be expensed immediately because itis a cost of negligence. Problem 53-6 (PHILCPA Adapted)
ing machine.
Karla Company acquired anew. processing tee
Invoice cost ; ane
Cost of transportation 1 40,000
Cost of installation
‘The terms of the acquisition include a 5% discount aie is made
in 10 days. The entity paid beyond the discount perio.
The entity's chiefengineer spent two-thirds of his time during trial run of
the new machine. The monthly salary is P60,000.
The entity requested an allowance from the supplier because the machine
proved to be of less than standard performance capability. The supplier
granted a cash allowance of P100,000.
The cost of removing the old machine before the new machine was
installed amounted to P10,000.
The operator of the old machine who was laid off due to the acquisition
of the new machine was paid a gratuity of P30,000.
What is the initial cost of the new machine?
a. 1,650,000
b. 1,330,000
c. 1,660,000
d. 1,690,000
Solution 53-6 Answer a
Invoice cost 1,600,000
Cash discount (5% x 1,600,000) ¢ : 0,000)
Transportation 50,000
Installation 140,000
Trial run (60,000 x 2/3) 40,000
Cash allowance a 0,000)
Cost of new machine Problem 53-7 (AICPA 4. dapted)
Yvo Company j 3
furniture. In meee Production assembly line to manufacture
Year, the entity purchased a new machine
bly line to install this machine.
id not increase the estimated useful life of the
did result in Significant increase in production.
The following expenditures
and improved the assem|
The improvement
assembly line but it
were incurred in connection with this
project:
Machine 750,000
Labor to install machine 140,000
Parts added in improving the assembly line 400,000
Labar and overhead in improving the assembly line 180,000
What total amount of the expenditures shoulll be capitalized?
a. 1,470,000
b. 1,070,000
c. $90,000
d. 750,000
Solution 53-7 Answera Allexpenditures are capitalized.
Problem 53-8 (AICPA Adapted)
Bell Printing Company incurred the following costs: .
Purchase of collating and stapling attachment 840,000
360,000
Installation of attachment 360,000
ts for overhaul of press ,
Tanorapa overteal in connection with overhaul 1 40,000
ul resulted in a significant increase in production. Neither
nes ee nor the overhaul increased the estimated useful life of
e al
the press. ie
oe total amount of the costs should be capitalized?
a. 1,600,000
b. 1,200,000
c, 840,000
d. 0
All costs are capitalized.
Solution 53-8 Answer 4 Problem 53-9 (AICPA Adapted)
King Company made the following expenditures:
Continuing and frequent repairs 400,000
Repainted the plant building 100,000
Major improvements to the electrical wiring system 300,000
Partial-replacement of roof tiles 140,000
What amount should be charged to repair and maintenance expense?
a. 960,000
b. 820,000
c. 640,000
d. 540,000
Solution 53-9 Answer c
’
Continuing and frequent repairs 400,000
Repainted the plant building 100,000
Partial replacement of roof tiles 140,000
Total repair and maintenance expense 640,000
Problem 53-10 (AICPA Adapted)
Fox Company made the following expenditures:
Renovation of a group of machines to secure significant
increase in production over the remaining five-year
useful life 500,000
Continuing, frequent, and low cost repairs 350,000
Replacement of a broken gear on a machine 50,000
What amount should be charged to repair and maintenance expense?
a. 350,000
b. 400,000
c. 850,000
d, 900,000
Solution 53-10 Answer b :
Continuing, frequent and low cost repairs 350,000
Replacement of broken gear of a machine
Total repair and maintenance expense 400,000 Problem 53-11 (4A)
Rona Company provi : ;
: provided the foll ha to the “repair and
mainte: abba’ lowing charges pai
Service contract on office equipment 100,000
initial design fee for proposed extension of office building 150,000
New condenser for central air conditioning unit 10,000
Purchase of executive chairs and desks 200,000
Purchase of storm windows and screens and their
installation on all office windows 500,000
Sealing of roof leaks in production area 80,000
Replacement of door to production area 50,000
Installation of automatic door-opening system 200,000
Overhead crane for assembly depariment to speed
up production 350,000
Replacement of broken gear on machine - 60,000
What total amount of expenditures should be capitalized?
a. 1,400,000
b. 1,200,000
c. 1,500,000
d. 1,410,000
Solution 53-11 Answer a
Initial design fee 150,000
Purchase of executive chairs and desks 200,000
Storm windows 500,000
Installation of automatic door 200,000
Overhead crane __ 350,000
1,400,000
Total capital expenditures Problem 53-12 (AICPA Adapted)
had a delivery van which was destroyed
On July 1, Rudd Company :
in an accident. On that date, the carrying amount of the van was
P500,000.
On July 15, the entity received and recorded a P140,000 invoice
for anew engine installed in the van in May, and another P100,000
invoice for various repairs.
In August, the entity received P700,000 under an insurance policy
on the van, which it plans to use to replace the van.
What amount should be reported as gain on disposal of the van in
the income statement?
a. 200,000 ,
b. 700,000
ce. 60,000
d. 0
Solution 53-12 Answer c
Carrying amount, July 1 500,000
Cost of new engine 140,000
Adjusted carrying amount 40,000
=
Proceeds of insurance policy 700,000
Adjusted carrying amount (640,000)
Gain on disposal eee
—_—
=
The various repairs of P100,000 are treated as outright expense
