CHAPTER 46 PROPERTY, PLANT AND EQUIPMENT Acquisition cost Problem 46-1 (AICPA Adapted) Tower Company made the following acquisitions during the year: Purchased for P5,400,000, including appraiser fee of P50,000,a warehouse building and the land on which itis located. The land had an appraised value of P2,000,000 and original cost of P1,400,000. The building had an appraised value of P3,000,000 and original cost of P2,800,000. Purchased an office building and the land on which itis located for P7,500,000 cash and assumed an existing P2,500,000 mortgage, For realty tax purposes, the property is assessed at P9,600,000, 60% of which is allocated to the building. What is the total cost of land? 6,160,000 5,840,000 | 6,000,000 5,000,000 peop What is the total cost of building? a. 8,760,000 b. 9,240,000 c. 9,000,000 d. 7,760,000 537Solution 46-1 Question 1 Answer a Question 2 Answer b First isition eee Appraised value Fraction Allocated cost Land 2,000,000 2S 2,160,000 Building 3,000,000 45 3240,000 5,000,000 5400,000 Second acquisition Assessed value Fraction Allocated cost. Land = 40% 3,840,000 40% 4,000,000 Building — 60% 5,760,000 60% ° 6,000,000 9,600,000 * 10,000,000 Purchase price 7,500,000 Mortgage assumed _ 2,500,000 Total cost of second acquisition 10,000,000 Land Firstacquisition 2,160,000 Second acquisition 4,000,000 Total cost of land . 160,000 Building : First isis 3,240,000 Second acquisition 6,000,000 Total cost of building 9,240,000 When a group of assets is acquired fot a lump sum price, the total cost Should be allocated to the individual assets based on their relative fair value, appraised value orassessed value. 538Problem 46-2 (AICPA Adapted) Bamco Company purchased a new machine on a deferred payment basis. sil d ayment of P100,000 was made and 4 monthly : jndallnents Of ‘P250,000 are to be made at the end of each month. The cash equivalent price of the machine was P950,000. The entity incurred and paid installation costs amounting to P30,000, What is the amount to be capitalized as cost of the machine? c. 1,100,000 d. 1,130,000 Solution 46-2 Answer b Cash price 950,000 - Installation cost 30,000 Total cost 980,000 Anasset acquired by installment is recorded at cash price plus directl attributable cost. is 5 Bee x Problem 46-3 (AICPA Adapted) Josey Company entered into a contract to acquire a new machine which had a cash price of P2,000,000. Down payment 400,000 Note payable in 3 equal annual installments 1,200,000 20,000 ordinary shares with a par value of P25 and fair value of P40 per share 800,000 . 2,400,000 Prior to use, installation cost of P50,000 was incurred. The machine has an estimated residual value of P100,000. Whatis the initial cost of the machine? a. 2,000,000 b. 2,400,000 c. 2,050,000 d, 2,450,000 Solution 46-3 Answer c Cash price 2,000,000 cones cost : 50,000 ‘otal cost * 2,050,000 539Problem 46-4 (IAA) ; ’ Anxious Company acquired two items of machinery. * On December 31, 2019, Anxious Company purchased a machine in exchange for a noninterest bearing note requiring ten payments of P500,000. The first payment was made on December 31, 2020, and the others are due annually on December 31. The prevailing rate of interest for this type of note at date of issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 5.33 for nine periods and 5.65 for ten periods. On December 31, 2019, Anxious Company acquired used machinery by issuing the seller a two-year, noninterest-bearing note for P3,000,000. In recent borrowing, the entity has paid a 12% interest for this type of note. The present value of 1 at 12% for 2 years is .80 and the present value of an ordinary annuity of 1 at 12% for 2 years is 1.69. What is the total cost of the machinery? a. 5,065,000 b. 5,225,000 c. 5,565,000 d. 8.235,000 Solution 46-4 Answer b Present value of first note payable (500,000 x 5.65) 2,825,000 Present value of second note payable (3,000,000 x .80) 2,400,000 Total cost of machinery. 5,225,000 In the absence of cash price, the cost of asset acquired by installment is equal to the present value of the total installment payments The “present value factor ofan ordinary anmuity of 1”isused in computing the present value of first note payable because the note is payable by The “present value factor of |” isused in computing the present value of the second note payable because the note is payabie lump sum after 2 years. ‘ SAMproblem 46-5 (AICPA Adapted) On December 31, 2019, Bart Company purchased a machine in exchange for a noninterest bearing note requiring ght payments of P200,000. The first payment was made on December 31, 2019 and the others are due annually on December 31. Atdate of issuance, the Prevailing rate of interest for this type of note was 11%. PV ofan ordinary annuity of 1 at 11% for 8 periods 5.146 PV of an annuity of 1 in advance at 11% for 8 periods 5.712 1. What amount should be recorded as initial cost of the machine? a. 1,600,000 b. 1,029,200 c. 1,400,000 d. 1,142,400 2.- What is the discount on note payable on December 31, 20197 a. 657,600 b. 457,600 ¢. 570,800 da. 0 3. What amount should be reported as interest expense for 20207 a. 125,664 b. 103,664 c. 113,212 d. 176,000 4. 20202 is the carrying amount of. note waa on December 31, 200,000 846,064 742,400 742,412 aooPp 54hSolution 46-5 Question 1 Answer d Present value of future payments (200,000 x 5.712) 1,142,400 The “PV ofan annuity of | in advance” is used because the machine ‘was purchased on December 31, 2019 and the first payment was made on December 31, 2019. Question 2 Answer b Note payable (200,000 x 8) Present value of note payable Discount on note payable — December 31, 2019 Question 3 Answer b . Present value First payment on December 31, 2019 Present value of remaining payments Interest expense for 2020 (11% x 942,400) Question-4 Answer b Note payable Payment — December 31, 2019 Payment - December 31, 2020 Note payable — December 31, 2020 Discount on note payable - December 31, 2020 Carrying amount — December 31, 2020 Discount on note payable - December 31, 2019 Amortization for 2020 Discount on note payable — December 31, 2020 542 1,600,000 1,142,400 457,600 1,600,000 ( 200,000) (200,000) 1,200,000 (353,936) 846,064 457,600 (103,664) 353.936Problem 46-6 (AICPA Adapted) Precious Company had the following property acquisitions during the currentyear: | ‘ * Acquired a tract of land in exchange for 50,000 shares of Precious Company with P100 par value that had a market price of P120 per share on the date of acquisition. The last property tax bill indicated assessed value of P2,400,000 for the land. * Received land froma 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 P1,200,000. ‘What is the total increase in land asa result of the acquisitions? 7,200,000 6,000,000 7,050,000 6,100,000 . hese Solution 46-6 Answer a First land Fair value of shares (50,000 shares x 120) 6,000,000 Second land : 1 200,000 Sei Total cost 7,200,000 3200, ‘ If shares are issued for noncash consideration, the proceeds should be measured by the fair value of the consideration received or the fair value of the shares issued in the absence of the fair value of the consideration given. : The assessed vatue of the land is only for tax purpose an evidence of fair value. 4 eae l Donated asset received from shareholders should be fair value and credited to donated capital, Sere However, the legal expenses for the transfer of 7 1 ex the donated property ! should not be capitalized but deducted from donated die iit. 543: | |Problem 46-7 (IAA) Lax Company recently acquired two items of equipment. * Acquired a press at an invoice price of P3,000,000 subject to a 5% cash discount which was taken. Costs of freight and insurance during shipment were P50,000 and installation cost amounted to P200,000. * Acquired a welding machine at an invoice price of P2,000,000 subject toa 10% cash discount which was not taken. Additional welding supplies were acquired at a cost of P100,000. What is the total increase in the equipment account as'a result of the transactions? a. 4,900,000 b. 5,000,000 c. 5,100,000 d. 5,200,000 Solution 46-7 Answer a First equipment: Invoice price 3,000,000 Discount taken - 5% ( 150,600) Freight and insurance 50,000 Installation cost “200,000 3,100,000 Second equipment Invoice price 2,000,000 Discount not taken - 10% (200,000) —_ 1,800,000 Total cost i 4,900,000 Cash discounts, whether taken or not taken, trade discounts and rebates are deducted in arriving at the cost of property, plant and equipment. The welding supplies on the second equipment should not be capitalized but reported as prepaid expense. 544Problem 46-8 (IAA) , Grab Company purchased a ten-ton draw press at.a cost of 3,600,006 with terths of 5/15, n/45. Payment was made within the discount period. Shipping cost was P90,000 which included P4,000 for insurance in transit. Installation cbst totaled P240,000 which included P80,000 for taking out a section of a wall-and rebuilding it because the press was too large for the doorway. What is the capitalized-cost of the ten-ton draw press? a. 3,420,000 b. 3,670,000 c. 3,750,000 d. 3,715,200 Solution 46-8 Answer ¢ Purchase price nét of discount (3,600,000 x 95%) 3,420,000 Shipping cost 90,000 Installation cost 240,000 Total cost 3,750,000 Problem 46-9 (IAA) Holiday Company purchased a high speed industrial centrifuge ata cost of P840,000, Shipping cost amounted to P50,000. Foundation work to house the centrifuge cost P80,000. An additional water line had to be run to the equipment at cost of P40,000. Labor and testing cost totaled P60,000. Materials used up in testing cost P30,000. What is the capitalized cost of the equipment? a. 1,100,000 b. 1,060,000 ce. 1,020,000 d. 1,040,000 . Solution 46-9 Answer a All ii itali iS costs incurred are capitalized 1,100,000 545Problem 46-10 (IAA) Taiwan Company fabricated equipment for office use during the current year. The following data were taken from the accounting records: Materials Direct labor Finished goods 1,000,000 1,500,000 Office equipment 600,000 500,000 Factory overhead amounted to P1,200,000. Normal production of finished goods is 50,000 units. Due to the fabrication of the office equipment, finished goods produced totaled 35,000 units only in the current year. ‘The office equipment is to be charged with the overhead which would have been apportioned to the 15,000 units which were not produced. Whiat is the total cost of office equipment after the apportionment of factory overhead? 1,100,000 1,400,000 1,460,000 2,300,000 ae rp Soluton 46-10 Answer c. Materials 600,000 Direct labor 500.000 Overhead (15,000/50,000 x 1,200,000) 360,000 Total cost of office equipment 1,460,000 In the absence of any statement, the overhead is allocated on the basis of direct labor as follows: : Materials Direct labor Soot Overhead (500,000/2,000,009 x 1,200,000) 300,000 Total cost of office equipment 1,400,000 546Problem 46-11 (AICPA Adapted) During the current year, Ewing Company exchanged an old packing machine, which cost P1,200,000 and was 50% depreciated, for another used machine and paid.a cash difference of P160,000. The fair value of the old packaging machine was determined to be - P700,000. 1. What is the cost of the machine acquired in the exchange? a. 860,000 b. 700,000 c. 760,000 d. 540,000 2. Whatis the gain on exchange? 540,000 . 100,000 60,000 QO. BoP Solution 46-11 Question | Answer a Fair value of old machine 700,000 Cash payment 160,000 Cost of new machine 360,000 PAS 16, paragraph 24, provides that an item of property, plant and equipment acquired in a nonmonetary exchange or a combination of monetary and nonmonetary exchange is measured at fair value of the asset given up plus cash payment. Question 2 Answer b Fair value of old machine a 700, Carrying amount (50% x 1,200,000) 600, oe Gain on exchange 100,000 347Problem 46-12 (AICPA Adapted) Caine Company exchanged a car from inventory for a computer to be used as a long-term asset. The following information relates to this exchange: f Carrying amount of the car a 600,000 List selling price of the car 900,000 Fair value of the computer 860,000 Cash difference paid by Caine ‘ 100,000 1.- What amount of gain should be recognized on the exchange? a. 260,000 ” b. 160,000 s . c. 200,000 d. 0 2." Whatis the cost of the computer acquired in exchange? a. 900,000 b. 900,000 ‘c. 860,000 d. 760,000 Solution 46-12 Question I Answer b Fair value of computer ~ * 860,000 Less: Cash paid by Caine 100,000 Fair value of car - asset given 760,000 Less: Carrying amount of car 600,000 Gain on exchange 160,000 Question 2 Answer c Fair value of car given 760,000 Cash payment * 100,000 Cost of compiiter acquired in exchange 860,000 = 548Problem 46-13 (AICPA Adapted) During the current year, Beam Company paid P100,000 cash and traded inventory, which had a carrying amount of P2,000,000 and afair value of P2,100,000, for other inventory in the same line of business with a fair value of P2,200,000. What amount should be recorded as cost of the inventory received in exchange? a.” 2,000,000 b. 2,100,000 ¢. 2,200,000 d. 2,300,000 Solution 46-13 Answer c Fair value of inventory given 2,100,000 Cash payment 100,000 “Total cost of inventory received 2,200,000 Problem 46-14 (AICPA Adapted) Yola Company and Zaro Company are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil-without physically moving the oil. Yola paid Zaro P300,000 to compensate for a difference in the grade of oil. It , is reliably determined that the exchange lacks commercial substance. On the date of the exchange, cost and fair value of the oil of Yola Company were P1,000,000 and P1,200,000, respectively. What amount should Yola Company record as cost of the oil inventory received in exchange? ‘ a. 1,000,000 b. 1,200,000 ¢. 1,300,000 d. 1,500,000 Solution 46-14 Answer c * ‘Cost of oil inventory given 1,000,000 ‘Cash payment : 300,000 ‘Total cost of oil inventory received 1,300,000 The exchange transaction is measured at the carrying amount of — the asset given up adjusted by the cash involved if the euihaaee lacks commercial substance. . 549Problem 46-15 (AICPA Adapted) Amiable C changed a truck with a carrying amount of P1,200, ‘ 000 and 2 ‘fair ie of P2,000,000 for a truck and P200,000 cash. The fair value of the truck received was P 1,800,000, 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? _ . a. 2,000,000 b. 1,400,000 c. 1,000,000 d. 1,800,000 Solution 46-15 Answer c ‘Carrying amount of truck given 1,200,000 Cash received (_ 200,000) Cost of new truck i. 1,000,000 The exchange transaction lacks commercial substance because the cash flows are not significantly different. Problem 46-16 (AICPA Adapted) At the beginning of the current year, Winn Company traded in an old machine having a carrying amount of P2,000,000 and paida cash difference of P600,000 for a new machine having a cash price of 2,500,000. What amount of loss should be recognized on the exchange? a. 600,000 . b. 100,000 ec. 500,000 d. 0 Solution 46-16 Answer b Cash price of new machine 2,500,000 Less: Cash payment 600,000 Fair value of old machine 1,900,000 Less: Carrying amount of old machine 2,000,000 “Loss on exchange ( 100,000) . (. 100,00" 550Problem 46-17 (AICPA Adapted) During the current year, Wilbur Company traded in an old machine fora newer model. . Data relative to the old and new machines on the date of exchange follow: Old machine _ Original cost 800,000 Accumulated depreciation 600,000 - Average published retail value 170,000 New machine List price 1,000,000 Cash price without trade in 900,000 Cash paid with trade in _ 780,000 What amount should be recognized as cost of the new machine acquired in the exchange? a, 900,000 b. 950,000 c. 980,000 d. 970,000 Solution 46-17 Answer a Since the old machine has no available fair value, the new machine received in exchange is recorded atits cash price without trade in of ~ P900,000. ‘The average published retail value of the old machine is not necessarily its fair value. Incidentally, the loss on exchange is aes as follows: Cash price without trade in ** 900,000 Less: Cash paid with trade in . 780,000 Trade in value of old machine 120,000 Less: Carrying amount of old machine 200,000 Loss on exchange (_ 80,000) ———— 551Problem 46-18 (IAA) Jilmar Company acquired a delivery truck and made payment of P2,870,000 analyzed as follows:" Price of truck 2,500,000 Charge for extra equipment : t 150,000 Value added tax — recoverable +, 300,000 Insurance for one year 100,000 Motor vehicle registration . 20,000 Total : 3,070,000 Trade in value of old truck (200,000) Cash paid 2,870,000 The cost of the old truck was P1,500,000 with carrying amount of P400,000 and fair value of P350,000. 1. Whatis the cost of the new track acquired in the exchange? a. 2,800,000 b. 2,870,000 . 2,650,000 d. 3,000,000 2. What amount should be recognized as loss on exchange? 200,000 : 150,000 * 50,000 : . 70,000 ao gp 352Solution 46-18 Question | Answer a Price of truck Charge for extra equipment -Capitalizable cost Trade in- value : Capitalizable payment Fair value of old truck Cost of new truck Question 2 Answer c Fair value-of old truck Carrying amount of old truck Loss on exchange” Journal entry Delivery equipment —new Accumulated depreciation Loss on exchange Input tax Insurance expense ‘Taxes and licenses Delivery equipment — old Cash : 2,800,000 1,100,000 50,000 300,000 100,000 20,000 2,500,000 150,000 2,650,000 (200,000) 2,450,000 350,000 2,800,000 350,000 [00,000 50,000) 1,500,000 2,870,000CHAPTER 47 GOVERNMENT GRANT Problem 47-1 (IFRS) At the beginning of current year, Sagada Company received a grant of P25,000,000 from the American government in order to defray safety and environmental costs within the area where the entity is located. The safety and environmental costs are expected to be incurred over four years, respectively, P2,000,000, P4,000,000, P6;000,000 and P8,000,000. What amount should be recognized as grant income for the current year? a. 25,000,000 b. 2,000,000 e. 2,500,000 d. 6,250,000 Solution 47-1 Answer c . Year Costs Fraction Income First year 2,000,000 2/20 2,500,000 Second year 4,000,000 4/20 5,000,000 Third year 6,000,000 6/20 7,500,000 Fourth year 8,000,000 8/20 10,000,000 20,000, 000,000 25,000,000 PAS 20, paragraph 12, pravides that government grants are recognized as income over the periods necessary to match them with the related costs which they are intended to compensate on a systematic basis. i 554 iklProblem 47-2 (IFRS) the be; of current year, Besao Company received grant of PlO, 000, tb ome the Austra vente for ibe constriction G ofa laboratory facility with an estimated cost of P15,000,000 and weft life na 5 years, ‘The laboratory and research facility» was completed and ready for the sMisnded use atthe end of the current ‘year. What amount of grant income should be included in the income statement for the current year? a, 10,000,000 b. 2,000;000 c. 1,500,000 a. 0 Solution 47-2 Answer b Grant income (10,000,000 / 5) 2,000,000 . PAS 20, paragraph 17, provides that grants related to depreciable assets are uably recognized as income over the periods and in proportion to ihe depreciation of the related assets. Problem 47-3 (IFRS) Atthe beginning of current year, Barlig Company is granted a large tract of land in the Cordillera region by the Philippine government. iocoainal deiaalsemhissinyaciemiraireast ieee toconstruct: lo" inthe Cordillera region. ae residing ‘The estimated cost of the facility i P45,000,000 with useful fe of 10 years. The chemi facili completed and ee ee e enulreaty fore Se ley eget forthe current year? a. 40,000,000 6 4, 500, 000 c, 4,000,000 d, 0° Solution47-3 Answer c Grant income (40,000,000/ 10) . 4,000. 4,000,000 PAS 20, paragraph 18, provides that grants related to nondey ble assets taping ‘fulfillment of certain cond uaditions are einer as income o over the periods which bear the cost of meeting the conditions. 555Prowcut 47-4 (IFRS) At the beginning of current year, Exuberant Compan received a consolidated grant of P12,000,000. Three-fourths of the grant wil] be utilized to purchase a college vuilding for students from underdeveloped countries. The balance of the grant is for subsidizing the tuition costs of those students for four years from date of grant. The building was purchased in early January and is to be depreciated using the strai; line method over 10 years. The tuition costs paid amounted to P600,000 during the current year. What amount of grant income should be recognized for the current year? a. 1,200,000 b. 3,000,000 c. 1,650,000 d. 1,050,000 Solution 47-4 Answer c Grant related to asset (1 2,000,000 3/4=9,000,000/10) 900,000 Grant related to income (12,000,000 x 1/4= 3,000,000/4} __750,000° Grant income 1,650,000 Problem 47-5 (IFRS) At the beginning of current year, Sabangan Company received a grant G#P6,000,000 Lom the Bn government to compete for massive losses incurred because ofa recent tsunami. ‘The grant was made for the purpose of givjng immediate financial support to the entity. It will take the entity two years to reconstruct the assets destroyed by the tsunami. ‘What amount of grant income should be recognized in the current yeat? a. 6,000,000 b. 3,000,000 c. 1,500,000 d. 0 Solution 47-5 Answer a PAS 20, paragraph.20, provides that a government grant that becomes receivable as compensation for expenses already inci or for the purpose of giving financial support to the emmy with » related future costs is recognized as income of the period in whic it becomes receivable or when received. i " 556Problem 47-6 (IFRS) Peach Company purchased a machine for P7,000,000 on January 1, 2019 and received a government grant of P1,000,000 toward the capital cost. a The machine is to be depreciated on a straight line basis over 5 years » and estimated to have a residual value of P500,000 at the end of this period. : The accounting policy is to treat the grant as a deferred income, 1. What is the carrying amount of the asset on December 31,2020? a. 4,200,000 b. 5,700,000 c. 4,400,000 d. 3,900,000 2. What is the deferred grant income on December 31, 2020? a. 400,000 b. 800,000, c. 600,000 d. 0 Solution 47-6 Question I Answer e , Acquisition cost—January 1, 2019 7,000,000 Accumulated depreciation (7,000,000 — 500,000/5 x 2) (2,600,000) Carrying amount — December 31, 2020 4,400,000 Question 2-Answer c Government grant 1,000. Income recognized for 2019 and 2020 (1,000,000/5 x 2) (ago-tony Deferred grant income — December 31, 2020 600,000 . =Problem 47-7 (IFRS) Betty Company purchased a jewel polishing machine for P3,600,000 on January 1, 2019 and received a government grant of P500,000 toward the capital cost. : The accounting policy is to treat the grant as a reduction in the cost of the asset: } The machine is to be depreciated on a sttaight line basis over 8 years and estimated to have a residual value of P100,000 at the end of this period. : 1, Whatis the depreciation of themachine for 2019? a. 387,500 , b. 500,000 c. 437,500 d. 375,000 2. What is the carrying amount of the asset on December 31, 2020? a. 2,725,000 b. 2,350,000 c. 3,000,000 d. 2,250,000 * Solution 47-7 Question 1 Answer d Cost 3,600,000 Government grant * (500,000) Net cost 3,100,000 Residual value (100,000) Depreciable amount 3,000,000 Annual depreciation (3,000,000/8: 375,000 Question 2 Answer b Net cost — January 1, 2019 3,100,000 Accuriulated depreciation — December 31, 2020 : (375,000 x 2 years) (750,000) Carrying amount — December 31, 2020 2,350,000 553Problem 47-8 (IFRS) On January 1, 2019, Darwin Company purchased a plating machine for P5,400,000. The entity received a government grant of P400,000 toward this capital cost. The machine is to be depreciated ona 20% reducing balance ice over 10 years. The estimated residual value is P200,000. The accounting policy is to treat the government grant as a reduction in the cost of the asset. 1. What is the accumulated depreciation on December 31, 2020? a. 1,000,000 b. 1,944,000 c. 1,800,000 d. 2,000,000 2. Whatis the carrying amount of the machine on December 31, 2020? 4,000,000 4,040,000 3,456,000 3,200,000 ae Solution 47-8 . Question 1 Answer c , = Question 2 Answer d Cost 5,400,000 ‘Government grant ( 400,000) Net cost 3,000,000 Accumulated depreciation — December 31, 2020: : : 2019 (20% x 5,000,000) 1,000,000 2020 (20% x 4,000,000) 800,000 1,800,000 Carrying amount — December 31, 2020 3,200,000 559 }Problem 47-9 (IFRS) On Ji 1,2019, Easy Company received a grant of P1,500,000 re evened Soeibaniee tuition fees for a period of 5 years, On Jan 1, 2021, the entity violated certain conditions attached to the rant, gad therefore had to repay fully such grant to the government, 1. What is the grant income for 2019? a. 1,500,000 b. 600,000 c. 300,000 d. 0 2, What amount should be recognized as loss resulting from the repayment of the grant in 2021? : a. 1,500,000 b. 900,000 c. 600,000 d. 0 Solution 47-9 Question ] Answer c Grant income for 2019 (1,500,000 / 5 years) 300, : Question 2 Answer c Total grant received - 1,500,000 Income recognized in 2019 and 2020 (1,500,000/5x2) — ( 600,000) Deferred grant income — December 31, 2020 900,000 PAS 20, paragraph 32, provides that repayment of government grant shal! be accounted for as a change in accoynting estimate. The repayment of grant related to income shall be applied first to the unamortized deferred income and any balance shall be recognized in profit or loss. Deferred grant income 900,000 Loss on repayment of grant 600,000 Cash 1,500,000 560.Problem 47-10 (IFRS) Tarhata Company received a government grant of P2,000,000 related. toa factory building that it bought in January 2019, The entity's policy is to treat the grant as deferred income. The entity acquired the building from an industrialist identified by the Ifthe entity did not purchase the building, which was located in the slums of the city, it would have been repossessed by the government agency. ‘The entity purchased the building for P12,000,000. The usefull life of the building is 10 years with no residual value. On January 1,2021, the entire amount ofthe government grant became repayable by reason of noncompliance with conditions attached to the grant. : 1. Whatis the depreciation of the building for 2019? a. 1,200,000 b. 1,000,000 c. 600,000 d. $00,000 2. What amount should be recognized as grant income for 2019? 400,000 200,000 100,000 0 peop 3. What amount of loss should be recognized resulting from the repayment of the grant in 2021? 1,200,000 2,000,000 1,400,000 400,000 BOOP 561Solution 47-10 Question 1 Answer a / Depreciation of building (12,000,00/ 10 years) 1,200,000. - Question 2 Answer b Grant income for 2019 (2,000,000 / 10 years) 200,000 Journal entries for 2019 Cash 2,000,000 Deferred grant income “ 2,000,000 Deferred grant income 200,000 : Grant income : 200,000 Question 3 Answer d Total grant received 2,000,000 ‘Income recognized in 2019 and 2020 (2,000,000 / 10x 2) (_ 400,000) Deferred grant income — January 1, 2021 1,600,000 Journal entry Deferred grant income - 1,600,000 Loss on repayment of grant 400,000 Cash 2,000,000 562Problem 47-11 (IFRS) Tiger Com, received a government grant of P600,000 rel: e depreciable asset segitted ond: 1, 2019 for 6,600,000, Bis t was deducted from the cost of the asset with a useful life of 10 and residual value of P500,000. On J: 1, 2021, the grant ¢ fully repayable due to noncompliance with conditions. 1. What isthe depreciation for 2019? 2. What is the depreciation for 2021? a. 610,000 b. 780,000 c. 730,000 d. 600,000 Solution 47-11 Question | Answer ¢ Cost ’ 600,000 Grant received (500-000) . Net cost 6, Residual value ( S00 tn) Depreciable amount 5,500,000 Depreciation for 2019 (5,500,000/10)* . | w Question 2 Answer ¢ Original depreciation (5,500,000 / 10) Cumulative additional depreciation that would have 330,000 been recognized to date (600,000 / 10 x 3 years) 130,000 Total depreciation in 2021 : 730,000 PAS 20, paragraph 32, provides that repayment of grant an asset shall be recognized by increasing the ae ee the asset if the deduction from the asset approach was followed. The ‘cumulative additional depreciation that would have be recognized to date in the absence of the it shall iced in profit or loss in the current — EI orscngpieed 563Problem 47-12 (IAA) : On January 1, 2019, Batangas City agreed ta provide Probity Company with a P5,000,000 three-year, zero-interest bearing loan evidenced by promissory note. The prevailing rate of interest for a loan of this type is 10% and the * present value of 1 at 10% for three years is .75. 1. Whats included in the journal entry to record the loan and grant? Debit discount on note payable P1,250,000 Credit deferred grant income P1,250,000 Credit note payable P5,000,000 Allofthese are included inthe journalentry =. ae se 2. What amount should be recognized as interest expense for 2019? : a. 500,000 b. 375,000 c. .125,000 d. 750,000 3. What amount should be recognized as grant income for 2019? 625,000 875,000 . 500,000 375,000 Beoe 4. What is the carrying amount of the note payable on December31, . 20207 5,000,000 4,250,000 4,125,000 4,537,500 aor p 564Solution 47-12 Question I Answer d Note payable Present value (5,000,000 x .75) Discount on note payable and deferred grant income Journal entry Z Cash ; 5,000,000 Discount on note payable - 1,250,000 Note payable Deferred grant income Question 2 Answer b Interest expense (10% x 3,750,000) 375,000 Discount on note payable Question 3 Answer d Grant income for 2019 (same as interest expense) Question 4 Answer d Present value — January 1, 2019 Interest for 2019 Present value - December 31, 2019 _ Interest for 2020 (10% x 4,132,150) Present value — December 31, 2020 Another approach Note payable Discount on note payable — December 31, 2020, (1,250,000 -375,000 -412,500) Carrying amount — December 31, 2020 = # 565 5,000,000 3,750,000 1,250,000. 375,000 4,537,500 5,000,000 (462,500) 4,537,500CHAPTER 48 LAND AND BUILDING _. Basic problems Problem 48-1 (AICPA Adapted) Boyd Company purchased a P4,000,000 tract of land for a factory site. , : The entity razed an old building on the property to make room for the constructin of new building and sold the materials salvaged from the demolition. ; Demolition of old building 200,000 Legal fees for purchase contract and recording ownership 150,000 Title guarantee insurance 50,000 Proceeds from sale of salvaged materials 20,000 What amount should be capitalized as cost of the land? a. 4,200,000 b. 4,150,000 c. 4,050,000 d. 4,400,000 5 Solution 48-1 Answer a Purchase price 4,000,000 Legal fees for purchase contract 150,000 Title guarantee insurance 30,000 Carrying amount of land : 4,200,000 Under PIC Interpretation, the net cost of demolishing an old building to make room for the construction of new building is charged to the cost of the new building. Otherwise, if the land is acquired as an investment property, the net cost of demolishing an old building is charged to the cost of the land. 566” problem 48-2 (AICPA Adapted) Kay Company purchased for P4,500,000 a tract of land as a factory site. An existing building on the property was razed to pave the way for the construction of'a new factory building: Cost of razing old building Title insurance and legal fees to purchase land Architect fee , New building construction cost Paving of street and sidewalk 1.. What is the cost of the land? a. 4,700,000 b. 5,000,000 e, 4,500,000 d. 4,800,000 2. Whatis the cost of new building? a. 9,250,000 b. 9,450,000 c. 8,000,000 d. 9,150,000 Solution 48-2 Question I Answer a Purchase price Title insurance and legal fees Total cost of land \ Question 2 Answer a Cost of razing old building Architect fee New building construction cost Total cost of mew building ‘The paving of street and sidewalk is land improvement. 300,000 200,000, 950,000 8,000,000 100,000 4,500,000 - 200,000 4,700,000 300,000 950,000 8,000,000 9,250,000Problem 48-3 (AICPA’ Adapted) During the current year, Burr Company had the fblleying transactions pertaining to anew office building: Purchase price of land 600,000 Legal fees for contract to purchase land 20,000 Architect fee 80,000 Demolition of old building on site to make room for construction of new building 50,000 Sale of scrap from old building 30,000 ‘Construction cost of new building fully completed 3,500,000 1, What amount should be reported as cost of land? a. 600,000 b. 620,000 . c. 640,000 d. 650,000 2. What amount should be reported as cost of | building? a. 3,520,000 b, 3,600,000 c. 3,500,000 d. 3,620,000 Solution 48-3 Question 1 Answer bh . Purchase price of land Legal fees for contract ae Total cost of land 620,000 Question 2 Answer b Architect fee . Demolition of old building actin Sale of scrap from old building ier Construction cost t nye Total cost of building 3,600,000 568Problem 48-4 (IAA) Biliran Company incurred the following costs at the beginning of the current year: ¥ Purchase price of land . 1,000,000 Purchase price of building 4,000,000 Remodeling and repairs prior to occupancy 500,000 Escrow fee 100,000 Clearing, leveling and landfill 250,000 Property tax for period prior to acquisition 150,000 Real estate commission 300,000 What amount should be capitalized as cost of building? a. 4,500,000 b. 4,740,000 ¢. 4,800,000 d. 4,940,000 Solution 48-4 Answer d Escrow fee 100,000 Property tax. 150,000 Real estate commission 300,000 Cost to be allocated 550,000 Land 1,000,000 Building o 4,000,000 Total purchase price 5,000,000 Cost of building 4,000,000 Remodeling and repairs "500,000 Allocated cost (550,000 x 4/5) 440,000 Total cost of building 4, Cost of land 1 Clearing, leveling and landfill sent Allocated cost (550,000 x 1/5) 116 O00 Total cost of land Sgt os: ae 1,360,000 569Problem 48-5 (IAA) Atthe beginning of current year, Newman Company purchased a parce] of land as a factory site for P1,000,000. Anold building on the property was demolished to pave the Way for the construction of a new building which was completed at year-end. Demolition of old building 100,000 Architect fee 2 175,000 Legal fee for title investigation and purchase contract 25,000 Construction cost 5,450,000 1. What amount should be recorded as cost of land? a. 1,125,000 b. 1,100,000 ¢. 1,000,000 d. 1,025,000 2. What amount should be recorded as cost of building? 5,475,000. 5,750,000 5,725,000 . 5,450,000 Bese Solution 48-5 Question 1 Answerd Question 2 Answer c Land Building Purchase price of land 1,000,000 Legal fee for title investigation 25,000 Demolition of old building 100,000 Architect fee 175,000” -Construction cost ¥ 5,450,000 ree Total cost / - + 1,025,000 §,725,000 570Problem 48-6 (IAA) Matinee Company incurred the following costs in purchasing a land as afactory site: Purchase price 2,400,000 Cost of tearing down old building 240,000 Legal fee for title investigation : 15,000 Title insurance ' 10,000 Architect fee 125,000 Liability insurance during construction i 25,000 Excavation cost * . 40,000 Payment to building contractor 8,800,000 Special assessment by city for public improvement 30,000 Interest cost during construction 300,000 1. What amount should be recorded as cost of the land? a. 2,425,000 b. 2,455,000 c. 2,495,000 d. 2,695,000 2. What amount should be recorded as cost of the building? a, 9,505,000 b. 9,490,000 ec. 9,250,000 d. 9,530,000 Solution 48-6 Question] Answer b Question 2 Answer d Land Building Purchase price of land 2,400,000 Cost of tearing down old building 240,000 Legal fee for title investigation 15,000 Title insurance 10,000. Architect fee 125,000 Liability insurance diriageonsirasitcn 25,000 Excavation cost 40,000 Payment to building contractor ‘ 8,800,000 Special assessment 30,000 Interest cost during construction 300,000 Total i 2,455,000 9,530,000 S71Problem 48-7 (AICPA Adapted) At the beginning of the current year, Leonora Company. purchased _ a parcel of land as a factory site. An old building on the land was demolished and construction started onanew building that was completed at the end of current year. Purchase price of land 3,200,000 Demolition of old building 200,000 Architect fee 300,000 . Legal fee-title investigation 50,000 Construction cost 8,500,000 Imputed interest on construction cost 140,000 Landfill for building site 190,000 Clearing of trees from building site . 100,000 Timber sold 30,000 Temporary building used for construction activities 290,000 Land survey 40,000 Excavation for basement 110,000 L. What amount should be capitalized as cost of land? a. 3,550,000 b. 3,750,000 c. 3,360,000 d. 3,660,000 2. What amount should be capitalized as cost of new building? a. 9,400,000 b. 9,200,000 c. 9,590,000 d. 9,290,000 572Solution 48-7 ° Question 1 Answer a Purchase price of land . 3,200,000 Legal fee —title investigation 5 50,000 Landfill 190,000 Clearing of trees 100,000 Timber sold - ( 30,000) Land survey 40,000 Total cost of land 3,550,000 Question 2 Answer a Demolition of old building 200,000 Architect fee 300,000 Construction cost . 8,500,000 Temporary building 290,000 Excavation for basement , 110,000 Total cost of mew building 9,400,000 The imputed interest is not capitalizable, Only interest actually incurred on borrowing to finance construction should be capitalized. 573 JProblem 48-8 (IAA) Paragon Company incurred the following costs during the current Year inrelation to property, plant and equipment: Cash paid for purchase of land 2,500,000 Mortgage assumed on the land purchased, including interest accrued 1,000,000 Realtor commission 300,000 Legal fees, realty taxes and documentation expenses 50,000 Amount paid to relocate persons squatting on the property —_100,000 Cost of tearing down an old building on the land to make room for construction of new building 200,000 Salvage value of the old building demolished 50,000 Cost of fencing the property 110,000. - Amount paid to the contractor for the building constructed 5,000,000 Building permit fee 50,000 Excavation 50,000 Architect fee 200,000 Interest that would have been earned had the money used during the period of construction been invested 150,000 1. What amount should be capitalized as cost of land? a. 3,950,000 b. 4,100,000 c. 3,850,000 d. 3,800,000 . 2. What amount should be capitalized as cost of | building? a. 5,300,000 b. 5,410,000 c. 5,450,000 d. 5,560,000 574Solution 48-8 Question 1 Answer a Cash paid for land Mortgage assumed including interest accrued Commission Legal fees, realty taxes.and documentation Cost of relocating squatters Cost of land Question 2 Answer ¢ Cost of tearing down old building Salvage value of old building Amount paid to contractor Building permit fee Excavation Aichitect fee Cost of building 200,000 (50,000) 5,000,000 $0,000 50,000 200,000 5,450,000 The cost of fencing the property is classified as land improvement. The interest that would have been eamed i is an opportunity cost which is notrecorded. e715Problem 48-9 (IFRS) Isabela Company incurred the following costs during the current year: Option fee for land acquired 10,000 Option fee for land not acquired 10,000 Taxes in arrearsonland - 50,000 Paymént for land 1,000,000 Architect fee 230,000 Payment to city hall for approval of building construction 120,000 Contract price for factory building 5,000,000 Safety fence around construction site . 35,000 Safety inspection on building 30,000 Removal of safety fence after completion of building 20,000 New fence surrounding the factory 80,000 Driveway, parking bay and safety lighting 550,000 Trees, shrubs and other landscaping 200,000 1. What amount should be recorded as cost of land? 1,050,000 1,060,000 1,145,000 1,010,000 BPP 2. What amount should be recorded as cost of new building? a. 5,635,000 5,435,000 5,350,000 5,550,000 eas 3. What amount should be recorded as cost of land improvements?’ a. 750,000 ' b. 830,000 c. 630,000 d. 280,000 ‘ 576Solution 48-9 Question ] Answer b Option fee for land acquired 10,000 Taxes in arrears 50,000 Payment for land M 1,000,000 Total cost of land . 1,060,000 The option fee for land not acquired should be treated as outright expense. Question 2 Answer b Architect fee . 230,000 Payment to city hall 120,000 Contract price 5,000,000 Safety fence around construction site 35,000 Safety inspection on building 30,000 Removal of safety fence 20,000 Total cost of new building 5,435,000 Question 3 Answer b New fence surrounding property 80,000 Driveway, parking bay and safety lighting 550,000 Trees, shrubs and other landscaping * 200,000 Total cost of land improvements $30,000 577Problem 48-10 (IAA) Rolex Company incurred the following expenditures related to land and building. Cash paid for land and dilapidated building Removal of old building to make room for construction of new building Payment to tenants for vacating old building Architect fee for new building Building permit for new construction Fee for title search Survey before construction of new building Excavation before new construction New building constructed Assessment by city government for drainage project ‘Cost of grading, leveling and landfill Driveway and walk to new building from street as part of building plan Temporary quarters for construction crew Temporary building to house tools and materials Cost of changes during construction to make new building more energy efficient . Cost of windows broken by vandals 1, What amount should be recorded as cost of land? a, 1,145,000 b. 1,215,000 c. 1,130,000 d. 1,080,000 1,000,000 50,000 15,000 200,000 30,000 10,000 20,000 100,000 6,000,000 5,000 45,000 40,000 80,000 60,000 50,000 25,000 5 2. What amount should be recorded as cost ofne new building? ; 6,625,000 6,560,000 6,650,000 6,645,000 aooe £0Problem 48-10 (IAA) Rolex Company incurred the following expenditures related to land and building. Cash paid for land and dilapidated building Removal of old building to make room for construction of new building Payment to tenants for vacating old building Architect fee for new building Building permit for new construction Fee for title search Survey before construction of new building Excavation before new construction New building constructed Assessment by city government for drainage project Cost of grading, leveling and landfill Driveway and walk to new building from street as part of building plan Temporary quarters for construction crew Temporary building to house tools and materials Cost of changes during construction to make new building more energy efficient . Cost of windows broken by vandals 1. What amount should be recorded as cost of land? : * a. 1,145,000 b.' 1,215,000 c. 1,130,000 d. 1,080,000 1,000,000 50,000 15,000 200,000 30,000 10,000 20,000 100,000 6,000,000 5,000 45,000 40,000 | 80,000 60,000 50,000 25,000 y 2. What amount should be recorded as cost of new building? 6,625,000 6,560,000 6,650,000 6,645,000 BoP 578Solution 48-10 Question | Answer d Cash paid for land Fee for title search Survey before construction Assessment for drainage project Cost of grading, leveling and landfill Total cost of land The dilapidated building has no fair value. Question 2 Answer a Removal of old building Payment to tenants Architect fee Building permit Excavation New building constructed Driveway and walk to building Temporary quarters for crew Temporary building to house tools and materials Cost of construction changes Total cost of new building 1,000,000 10,000 20,000 5,000 45,000 1,080,000 50,000 15,000 200,000 30,000 100,000 6,000,000 40,000 80,000 60,000 50,000 6,625,000 The cost of windows broken by vandals should be charged to expense, 379CHAPTER 50 MACHINERY AND CAPITAL EXPENDITURE Problem 50-1 (AICPA Adapted) Negros Company acquired a new 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 fetirement 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 new machinery? a. 1,500,000 b. 1,490,000 -c. 1,515,000 d. 1,520,000 Solution 50-1 Answer a List price 1,400,000 Cash discount (20,000) Freight 40,000 Installation.cost 50,000 Testing cost 30,000 Total cost —_ 1,500,000 The cost of removing the old machinery is treated as outright expense. Any cash discount is deducted from the cost of th in regardless of whether taken or not taken. of the machinery 591Problem 50-2 (AICPA Adapted) Shaw Company purchased a machine forP 1,260,000 that was placed in service at year-end. The entity incurred additional costs for this machine. Shipping ; 30,000. Installation " 40,000 Testing ee 50,000 At year-end, what amount should be reported as machinery? a. 1,260,000" b. 1,290,000 ec. 1,330,000 d. 1,380,000 Solution 50-2 Answer d All costs are eapitalizable. Problem 50-3 (IFRS) Charry Company purchased a second-hand polishing machine and incurred the following costs: Agreed price to be paid to vendor 8,000,000 Dismantling the machine at the current location 400,000 Transportation to Charry’s factory 350,000 Machine refurbishment cost prior to réinstallation _ 175,000 Reinstallation’ 125,000 What amount should be capitalized as cost of the second-hand machine? 8,875,000 9,050,000 8,125,000 8,000,000 peop Solution 50-3 Answer b All costs are capitalizable. 592Problem 50-4 (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 ¢. 1,200,000 d. 1,150,000 Solution 50-4 Answer ¢ 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 has a present obligation as required by contract, In the absence of a present.obli cost is not capitalized. the entity gation, the estimated dismantlin, Bs 593Problem 50-5 (IFRS) Wisdom Company installed anew equipment at the production facility and incurred the following costs: Cost of equipment per supplier’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 déferred 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. 4,060,000 c. 4,200,000 d, 4,500,000 Solution 50-5 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. 594Problem 50-6 (IFRS) Newcombe Company uses many kinds ofmachinesin operations. The entity acquires some machines from others and constructs some The following information pertains to a machine 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 100,000 Cost of installation 120,000 Insurance for one year 20,000 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? , 1,610,000 1,510,000 1,630,000 1,460,000 aooe Solution 50-6 Answer a ‘ Cost of material o*= 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 Total cost , 1,610,000 The insurance for one year is an expense, ‘The saving on construction isignored, 595 . 'Problem 50-7 (IAA) During the current year, Christian Company purchased a secong Hand machine ata price of P5,000,000. 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 useq machine has a second hand market value of P4,500,000. A new machine would cost P6,500,000. The following costs were incurred during the year: Cost of removing ald machine that is replaced 350,000 Cash proceeds from the sale of the old machine replaced —‘100,000 General overhaul and repairs to recondition machine priorto use 220,000 Cost of spare parts to cover breakdowns 80,000 Cost of installation 180,000 Cost 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 30,000 " 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 e, 5,220,000 * . d, 5,325,000 Solution 50-7 Answer 6 Second hand market value 4,500,000 General overhaul and repairs prior to use 220,000 Cost of installation 130,000 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 dropped during installation should be expensed immediately because it isa cast of negligenc- ‘596— Problem 50-8 (PHILCPA Adapted) Karla Company acquired a new processing machine. Invoice cost I 1,600,000 Cost of transportation Z 50,000 Cost of installation : 140,000 The terms of theacquisition inelude a 5% discount if payment is made in 10 days. The entity paid beyond the discount period. : The entity’s chief engineer 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 amount should be recorded as cost of the new machine? a. 1,650,000 b. 1,330,000 ©. 1,660,000 4 d. 1,690,000 ’ Solution 50-8 Answer a Invoice cost Cash discount (5% x 1,600,000) Py toe Transportation . 50,000 Installation 140,000 Genen (60,000 x 2/3) t 40,000 ‘ash allowance 100,000 Cost of new machine re 1.650.000 597Problem 50-9 (AICPA Adapted) 'Yvo Company installed a production assembly line to manufacture furniture. In the current year, the entity purchased a new machine and improved the assembly line to install this machine. The improvement did not increase the estimated useful life of the assembly line but it did result in significant increase in production, ~ The following expenditures 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 Labor and overhead in improving the assembly line 180,000 ‘What total amount of the expenditures should be capitalized? a. 1,470,000 b. 1,070,000 c. 890,000 ad. 750,000 Solution 50-9 Answer a All expenditures are capitalized. Problem 50-10 (AICPA Adapted) Bell Printing Company incurred the following costs: Purchase of collating and stapling attachment 840,000 Installation of attachment 360,000 - Replacement parts for overhaul of press 260,000 Labor and overhead in connection with overhaul 140,000 The overhaul resulted ina significant increase in production. Neither is attachment nor the overhaul increased the estimated useful lifeof e press. ‘What total amount of the costs should be capitalized? a. 1,600,000 b. 1,200,000 c. 840,000 d. 0 Solution 50-10 Answer a All costs are capitalized, 598Problem 50-11 (AICPA Adapted) } _King Company made the following expenditures: Continuing and frequent repairs © : Ano Repainted the plant building a 300000 Major improvements to the electrical wiring system A m0 * Partial replacement of roof tiles 140,01 ‘What amount should be charged to repair and maintenance expense? a, 960,000 b. 820,000 c, 640,000 d, 540,000 Solution 50-11 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 50-12 (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 gearon a mathine 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 50-12 Answer b Continuing, frequent and low cost repairs. Replacement of broken gear of a machine i Total repair and maintenance expense atl 599Problem 50-13 (IAA) * Rona Company provided the following charges to the “repair and maintenance account”. 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 department 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 _e, 1,500,000 .d. 1,410,000 * Solution 50-13 Answer a Initial design fee fe 150,000 Purchase of executive chairs and desks 200,000 Storm windows $00,000 Installation of automatic door 200,000 Overhead crane 350,000 ee Total capital expenditures 1,400,000 600Problem 50-14 (AICPA Adapted) On July 1, Rudd Company had a delivery van which was destroyed 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 ofthe vanin ~ the income statement? a. 200,000 b. 700,000 c. 60,000 d. 0 Solution 50-14 Answer c Carrying amount, July 1 500,000 Cost of new engine 140,000 Adjusted carrying amount 640,000 Proceeds of insurance policy 700,000 Adjusted carrying amount " (640,000) Gain on disposal 60,000 ! The various repairs of P100,000 are treated ag outright expense, 601CHAPTER 51 BORROWING COST Problem 51-1 (IFRS) On January 1, 2019, Hamlet Company borrowed P6,000,000atan . - annual interest rate of 10% to finance specifically the cost of building anelectricity generating plant. Construction commenced on January 1, 2019 with a cost P6,000,000. Notall the cash borrowed was used immediately, so interest income of P80,000 was generated by temporarily investing some of the borrowed funds prior to use. The project was completed on November 30, 2019. Whit is the carrying amount of the plant on November 30, 2019? a. 6,000,000 b.. 6,470,000 c. 6,520,000 i “d. 6,550,000 . Solution 51-1 Answer b Construction cost ~ 6,000,000 Interest (6,000,000 x 10% x 11/12) 550,000 Interest income (80,000) Total cost of plant 6,470,000 pate PAS 23, paragraph 12, provides that if the funds are borrowed Specifically for the purpose of acquiring a qualifying asset, the amount of capitalizable borrowing cost is the actual borrowing cost incurre during the period less any investment income from the temporaly Investment of those borrowings.Problem 51-2 (IFRS) On January 1, 2019, Cagayan Company took out a loan of 24,000,000 in order to finance specifically the renovation of a building. The renovation work started on the same date. The loan carried annual interest at 10%, Work on the building was substantially complete on October 31,2019. The loan was repaid on December 31, 2019 and P200,000 investment income was earned in the period to October 31 on the proceeds of the loan not yet used for the renovation. 1. What amount of capitalizable borrowing cost should be included in the cost of the building? a. - 2,400,000 b. 2,200,000 c. 2,000,000 d. 1,800,000 2. What amount should be reported as interest expense for 20197 a. 800,000 b. 400,000 c. 200,000 ‘ d. 0 Solution 51-2 : Question I Answe? d Interest actually incurred(24,000,000 x 10% x 10/12) 2,000,000 Interest income 4 200,000) Capitalizable borrowing cost / 1,800,000 Question 2 Answer 6 Interest expense for November and December 2019 (24,000,000 x 10% x 2/12) 400,000 400,000 The interest from November | to December 31, 2019 is charged to interest expense because the buildi 31,2019. use the building was completed on October 603Problem 51-3 (AICPA Adapted) Lge Sun Company was constructing an asset that qualified for interest capitalizal fon The ‘construction began at the beginning of the current year and was completed at the end of current year. The construction cost totaled P12,000,000 and was incurred evenly during the current year. The entity had outstanding notes payable during the entire year of cnutieis comprising P6,000,000 8% interest and P9,000, ay % interest. None of the borrowings were specified for the construction of the qualified asset. 1. Whatamount of interest should be capitalized? a. 480,000 b. 516,000 c. 810,000 d. 960,000 2. Whatamount should be reported as interest expense for the current year? a. 960,000 : b. 645.000 c. 774,000 d. 0 Solution 51-3 Question 1 Answer b If the construction is financed by general borrowing, the average interest rate is multiplied by average expenditures in computing capitalizable borrowing cost. Principal Interest 8% note payable (8% x 6,000,000) 6,000,000 480,000 9% note payable (9% x 9,000,000) _ 9,000,000. 810,000 Total 15,000,000 1,290,000 Average interest fate (1,290,000/15,000,000) 8.6 Average expenditures (12,000,000 / 2) 6,000,000 Capitalizable interest (6,000,000 x 8,6%) 516,000 Question 2. Answer c Total interest incurred 1,290,000 Capitalizable interest (516,009) Interest expense for the year . 274,000 604Problem 51-4 (AICPA Adapted) i ,000,000 at 10% partly for general Motos antren ee econ ofa building on January 1, 2019. The loan shall be repaid commencing the month following completion of the building. : ; Expenditures incurred evenly during the year for the completed building totaled P12,000,000 oh December 31,2019, The entity eared interest of P200,000 for the year on the unexpended portion of the loan. What amount of interest is capitalized on December 31, 20197 a. 1,200,000 b. 1,000,000 c. 600,000 d. 400,000 Solution 51-4 Answer c | The average expenditures amount to P12,000,000 divided by 2 or P6,000,000. The interest is P6,000,000 times 10% or P600,000. ‘The investment income of P200,000 is ignored because the construction is financed by general borrowing. : Problem 51-5 (IAA) Moses Company borrowed P4,000,000 on a 10% note payable to ance a new warehouse whieh the entity is constructing for own use, The only other debt of the entity is a P6,000,000, 12% mortgage I onan offise building. At the end of the current year, average: ae expenditures on the new warehouse totaled P4,750,000. What amount should be capitalized as interest for the current year? a, 400,000 b. 475,000 ‘ ¢, 490,000 d, 522,500 Solution 51-5 Answer.c ‘ Specific borrowing (4,000,000 x 10% General borrowing = ( 730,000 x 12%) ote ’ Capitalizable interest an a “. i ‘ 490,000 . », Average expenditures applicable to | borrowi: "(4,750,000 4ess 4,000,000 specific) Borrowing isi 230,000 605Problem 51-6 (IAA) ' The third year of a construction project of Jilliane Company began with a P3,000,000 balance in construction in progress. Included in that figure is P600,000 of interest capitalized in the first two years. fut Construction expenditures during the third year were P8,000,000 which were incurred evenly throughout the entire year. The entity had P30,000,000 in interest-bearing debt outstanding in the third year at an interest rate of 9%. 1. What amount of interest for the third year is capitalized? a. 360,000 b. 630,000 c. 936,000 d. 990,000 2. What amount should be reported as interest expense for the third year? a_ 2,700,000 b. 2,070,000 c. 1,980,000 d. 1,350,000 + Solution 51-6 Quesstion | Answer b . Construction in progress — beginning of third year . 3,000,000 Average expenditures during the third year (8,000,000/2) 4,000,000 Total 7,000,000 Capitalizable interest (9% x 7,000,000) 630,000 Question 2 Answer b Interest incurred in the third year (9% x 30,00 0,000). 2,700,000 Capitalizable interest (630,000) Interest.expense for third year 2,070,000 606Problem 51-7 (IAA) Jam Company started construction on abuilding at the beginning of the current year and completed construction at year-end. ‘The entity had only two interest notes outstanding during the year and both of these notes were outstanding for all 12 months of the year. The following information is available: Average accumulated expenditures 2,500,000 Ending balance in construction in progress before . capitalization of interest e "3,600,000 6% note incurred specifically for the project 1,500,000 9% long-term note 5,000,000 What amount should be recorded as cost of the building? a. 3,780,000 _b. 2,680,000 ¢. 3,750,000 d. 3,825,000 Solution 51-7. Answer ‘a Average expenditures i 2,500,000 Specific borrowing (2,500,000) General borrowing 1,000,000 Construction in progress — actual expenditures ee | Capitalizable interest: 600,000 Specific borrowing (6% x 1,500,000) General borrowing (9% x 1,000,000) Total cost of building ~ 90,000 90,000Problem 51-8 (IAA) During 2019, Joshua Company constructed asset costing P5,000,000, The weighted average expenditures totaled P3,000,000. To.help pay for construction, P2,200,000 was borrowed at 10% on - January 1,2019. Funds not needed for construction were tem porarily invested in short-term securities yielding P45,000 in interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was a P2,500,000. 10-year, 9% note payable dated January 1, 2018. 1. What amount of interest should be capitalized during 2019? a. 300,000 b. 150,000 ¢. 247,000 d. 472,000 \ 2. What amount should be reported as interest expense for 2019? a. 225,000 b. 178,000 ce. 153,000 d. 0 . Solution 31-8 Question | Answer c Specific borrowing (2,200,000 x 10%) 220,000 Interest revenue ( 45,000) General borrowing (800,000 x 9%) 72, Capitalizable interest : 247,000 Average expenditures Specie borrowing 2 General borrowing 800,000 Question 2. Answer c Interest on general borrowing (9% x 2,500,000) 225,000 Capitalizable interest on general borrowing (72,000) Interest expense for 2019 153,000 r 608Problem 51-9 (AICPA Adapted) During 2019, Elysee Company constructed a new facility at a cost of P30,000,000. The expenditures for the building, which was finished late in 2019, were incurred evenly during the year. The sony had the following loans outstanding on December 31, 2019: ‘ + 10% note to finance specifically the construction, dated Jan 1,2019, P10,000,000. This motes unpaid on December 31, 2019. Investments were made on the ‘process from this loan and income of P100,000 was realized in 2019. * 12% 20-year bonds issued at face amount on April 30, 2018, P30,000,000. * 8% 5-year note payable, dated March 1, 2018, P10,000,000. What amount of interest is capitalized as cost of the new building? a. 1,550,000 b. 1,450,000 e. 1,400,000 d, 1,300,000 Solution 51-9 Answer b Average expenditures (30,000,000 / 2) 15,000,000 Applicable to specific borrowing (0,000,000) Applicable to general borrowing 5,000,000 Principal Interest 12% 20-year bonds payable 30,000,000. 3,600,000 8% 5-year note payable 10,000,000 800,000 Total general borrowing 40,000,000 4,400,000 Average capitalization rate (4,400,000/40,000,000) 1% Interest on specific borrowing —_(10% x 10,000,000) 1,000,000 Interest income related to specific borrowing ( 100. ‘000) Interest on genetal borrowing (11% x _ 5,000,000) 550,000 Total capitalizable interest 1,450,000 1450, 609Problem 51-10 (IAA) During 2019, Israel Company constructed asset costing P4,215,000, The weighted average expenditures during the year amounted to P3,900,000, The entity borrowed P2,000,000 at 7.5% on January 1, 2019. Funds not needed for construction were temporarily invested in ate term securities and earned P59,000 in interest revenue. In addition to the construction loan, the entity had two other notes outstanding during the year, a P1,500,000, 10-year, 10% note payable dated October 1, 2018, and a 1,000,000, 8% 5-year note payable dated November 1, 2018. What amount of interest should be capitalized during 2019? a, 324,800 b. 297,500 c. 273,000 -d. 265,800 Solution 51-10 Answer d . Specific borrowing (2, 000. ,000 x 7.. 5%) 150,000 Interest revenue related to specific borrowing ¢ 59,000) General borrowing (1,900,000 x 9.2%) y 174,800 Capitalizable interest F 7 t 265,800 Average expenditures 3,900,000 Specific borrowing 2,000,000) General borrowing 1,900,000 3 Principal” Interest 10-year 10% note payable 1,500,000 150,000 5-year 8% note payable 1,000,000 80,000 Total general borrowing 2,500,000 230,000 Average interest rate (230,000 / 2,500,000) _9,2% : : —— . 610Problem 51-11 (IFRS) Congo Company commenced construction ofa new plant on February 1,2019. The costof P18, 000,000 was paid in full to the contractor on February 1, 2019 and was funded from existing general borrowings. The construction was completed on September 30, 2019. The borrowings during 2019 comprised the following: Bank A - 6% “8,000,000 Bank B- 6.6% 10,000,000 Bank C ~ 7% 30,000,000 What amount of borrowing cost should be capiialigat inrelationto the plant? a. 1,215,000 ~ b. 810,000 cs. 911,250 d. 0 Solution 51-11 Answer b Annual interest Bank A ( 6% x 8,000,000) 480,000 Bank B (6.6% x 10,000,000) 660,000 Bank C ( 7% x 30,000,000) 2,100,000 Total . 3,240,000 Average interest rate (3,240,000/48,000,000 6.75% Capitalizable borrowing cost (18,000,000 x 6.75% x 8/12) 810,000 210.000 The construction period is 8 months from Febru: 1 September 30, 2019. ANY 1s 2019 00 Total annual interest Capitalizable borrowing cost Cane Interest expénse for 2019 2,430,000 —_— 611Problem 51-12 (IAA) Warhead Company had loans outstanding during 2019 and 2029, Specific construction loan "2,000,000 - 10%, General loan 15,000,000 12% The entity began the self-construction of a new building on January 1, 2019 and the building was completed on December 31, 2020. Expenditures during 2019 and 2020 were: January 1,2019 2,000,000 July 1, 2019 - 4,000,000 November 1, 2019 3,000,000 July 1,2020 1,000,000 i. What is the cost of the new building on December 31, 2019? a. 9,000,000 b. 9,500,000 ¢. 9,200,000 d. 9,300,000 2. What is the cost of the new building on December 31, 2020? a. 10,000,000 b. 11,660,000 : ce. 11,700,000 d. 11,500,000 3. What amount should be reported as interest expense for 2020? 3,000,000 2,040,000 1,840,000 0 Boos 612Solution 51-12 Question | Answer b (b. 3 (a Fractional {ax b) Expenditure months Amount J 1,2019 2,000,000 122 2,000,000 hy” 1,2019 4,000,000 6/12 7,000,000 : November 1, 2019 3,000,000 2/12 500,000 9,000,000 4,500,000 Average expenditures in 2019 4,500,000 Applicable 5 specific loan (2,000,000) Applicable to general loan 2,500,000 Actual expenditures in 2019 9,000,000 Capitalizable interest in 2019: Specific (2,000,000 x 139) - 200,000 eneral (2,500,000.x 12% 300.000 Total cost of new building — December 31, 2019 9,500,000 Question 2 Answer b = Fractional Expenditure months Amount January 1,2020 9,500,000 12/12 9,500,000 July ~ 1,2020 1,000,000 6/12 500,000 10,500,000 10,000,000 PAS 23, paragraph 18, provides that the average expenditures during a period shail include the borrowing costs previously capitalized Average expenditures in 2020 : Applicable to specific loan , { 008 o88, Applicable to general loan 8,000,000 : . —_— Canale iereg BG 0+ 1,000000) 1050.00 ceneral ——_{S.poeo00 4 1508 30009 Total cost of new building — December 31, 2020 5; 11,660,000 Question 3 Answer b Interest on prnera! loan (12% x 25, 000,000) © le Capitalizable interest on general loan (508.000 Interest expense for 2020 rrr Sho 613