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Warning: TT: undefined function: 32 Module 3 PROPERTY, PLANT, AND EQUIPMENT (Loftus et. at.; Ocampo/PRTC) Harrier Co. began operations on July 1, 2019. During the following year, the company acquired a tract of land, demolished the building on the land and built a new factory. Equipment was acquired...

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Accounting Review, Part One (Acc-rev1)

De La Salle Lipa

Module 3 PROPERTY, PLANT, AND EQUIPMENT

1. (Loftus et. at.; Ocampo/PRTC) Harrier Co. began operations on July 1, 2019. During the following year, the company acquired a tract of land, demolished the building on the land and built a new factory. Equipment was acquired for the factory and, in March 2020, the factory was ready. A gala opening was held on March 18, with the local parliamentarian opening the factory. The first items were ready for sale on March 25. During this period, the following inflows and outflows occurred. a. While searching for a suitable block of land, Harrier Ltd placed an option to buy with three real estate agents at a cost of P100 each. One of these blocks of land was later acquired. b. Payment of option fees P 300 c. Receipt of loan from bank 400,000 d. Payment to settlement agent for title search, stamp duties and settlement fees 10,000 e. Payment of arrears in rates on building on land 5,000 100,000 f. Payment for land 12,000 g. Payment for demolition of current building on land 5,500 h. Proceeds from sale of material from old building 23,000 i. Payment to architect 12,000 j. Payment to council for approval of building construction 3,400 k. Payment for safety fence around construction site 240,000 l. Payment to construction contractor for factory building 54,000 m. Payment for external driveways, parking bays and safety lighting 40,000 n. Payment of interest on loan 3,000 o. Payment for safety inspection on building 64,000 p. Payment for equipment 5,600 q. Payment of freight and insurance costs on delivery of equipment 12,000 r. Payment of installation costs on equipment 11,000 s. Payment for safety fence surrounding equipment 2,000 t. Payment for removal of safety fence 8,000 u. Payment for new fence surrounding the factory 500 v. Payment for advertisements in the local paper about the forthcoming factory and its benefits to the local community 6,000 w. Payment for opening ceremony 3,300 x. Payments to adjust equipment to more efficient operating levels subsequent to initial operation Required: Using the information provided, determine what assets (land, land improvements, building, and equipment) Harrier Co. should recognize and the amounts at which they would be recorded. a. Payment of option fees Payment to settlement agent for title search, stamp duties and settlement fees Payment for land Land

P

100 10,000 100,000 P110,100

b. Payment for external driveways, parking bays and safety lighting Payment for new fence surrounding the factory Land Improvements

P 54,000 8,000 P 62,000

c. Payment of arrears in rates on building on land Payment for demolition of current building on land Proceeds from sale of material from old building

P

5,000 12,000 (5,500)

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Accounting Review, Part One (Acc-rev1) Payment to architect Payment to council for approval of building construction Payment for safety fence around construction site Payment to construction contractor for factory building Payment for safety inspection on building Payment for removal of safety fence Building d. Payment for equipment Payment of freight and insurance costs on delivery of equipment Payment of installation costs on equipment Payment for safety fence surrounding equipment Payments to adjust equipment to more efficient operating levels subsequent to initial operation Equipment *

De La Salle Lipa 23,000 12,000 3,400 240,000 3,000 2,000 P294,900 P 64,000 5,600 12,000 11,000 3,300 P 92,600

The payment of the remaining option fees, payment of interest on loan (since it was not generally or specifically used for building construction), payment for advertisements in the local paper about the forthcoming factory and its benefits to the local community, and payment for opening ceremony are considered as outright expenses. The receipt of loan from bank, on the other hand, is a cash receipt and is considered an outstanding loan receivable.

2. (Valix) Rolex Co., new formed entity, incurred the following expenditures related to land and building. Cash paid for land and dilapidated building P1,000,000 Removal of old building 50,000 15,000 Payment of tenants for vacating old problem 200,000 Architect fee for new building 30,000 Building permit for new construction 10,000 Fee for title search 20,000 Survey before construction of new building 100,000 Excavation before new construction New building constructed 6,000,000 Assessment by City for drainage project 5,000 Cost of grading, leveling and landfill 45,000 Driveways and walks to new building from street (part of building plan) 40,000 Temporary quarters for construction crew 80,000 Temporary building to house tools and materials 60,000 Cost of changes during construction to make new building more energy efficient 50,000 Cost of windows broken by Vandals 25,000 Cost of trees shrubs and other landscaping 70,000 New fence surrounding the building 200,000 Required: Compute the cost of the following: (a) Land, (b) Land Improvements, and (c) Building. a. Cash paid for land and dilapidated building Fee for title search Survey before construction of new building Assessment by City for drainage project Cost of grading, leveling and landfill Land

P1,000,000 10,000 20,000 5,000 45,000 P2,160,000

c. Cost of trees shrubs and other landscaping New fence surrounding the building

P

70,000 200,000

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Accounting Review, Part One (Acc-rev1) Land improvements c. Removal of old building Payment of tenants for vacating old problem Architect fee for new building Building permit for new construction Excavation before new construction New building constructed Driveways and walks to new building from street (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 Building *

De La Salle Lipa P 270,000 P

50,000 15,000 200,000 30,000 100,000 6,000,000 40,000 80,000 60,000 50,000 P6,625,000

The cost of windows broken by Vandals is considered as an outright expense.

3. (Loftus et at.; Kieso et al.; PRTC) Magpie Co. uses many kinds of machines in its operations. It constructs some of these machines itself and acquires others from the manufacturers. The following information relates to two machines that it has recorded in the 2020–21 period. Machine A was acquired, and Machine B was constructed by Magpie Co. itself. Machine A Cash paid for equipment, including VAT of P8,000 Costs of transporting machine — insurance and transport Labor costs of installation by expert fitter Labor costs of testing equipment Insurance costs for 2020–21 Costs of training for personnel who will use the machine Costs of safety rails and platforms surrounding machine Costs of water devices to keep machine cool Costs of adjustments to machine during 2020–21 to make it operate more efficiently

P88,000 3,000 5,000 4,000 1,500 2,500 6,000 8,000 7,500

Machine B Cost of material to construct machine, including VAT of P7000 Labor costs to construct machine Allocated overhead costs — electricity, factory space etc. Allocated interest costs of financing machine Costs of installation Insurance for 2020–21 Profit saved by self-construction Safety inspection costs prior to use

P77,000 43,000 22,000 10,000 12,000 2,000 15,000 4,000

Required: Determine the amount at which each of these machines should be recorded in the records of Magpie Co. For items not included in the cost of the machines, note how they should be accounted for. a. Cash paid for equipment (excluding VAT of P8,000) Costs of transporting machine — insurance and transport Labor costs of installation by expert fitter Labor costs of testing equipment Costs of safety rails and platforms surrounding machine Costs of water devices to keep machine cool

P 80,000 3,000 5,000 4,000 6,000 8,000

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Accounting Review, Part One (Acc-rev1)

De La Salle Lipa

Costs of adjustments to machine during 2020–21 to make it operate more efficiently 7,500 Cost of Machine A P178,500 b. Cost of material to construct machine (excluding VAT of P7,000) Labor costs to construct machine Allocated overhead costs — electricity, factory space etc. Allocated interest costs of financing machine Costs of installation Safety inspection costs prior to use Cost of Machine B *

P 70,000 43,000 22,000 10,000 12,000 4,000 P161,000

Insurance costs and costs of training for personnel who will use the machine are considered as outright expenses. VAT is ignored since it is recoverable. Profit saved by self-construction is also ignored since fixed assets are recorded at cost and any difference between the cost and the fair value is not capitalized.

4. (Valix) During the current year, Marjorie Company purchased a second hand machine at a price of P5,000,000. A cash payment of P 1,000,000 was made and a two-year, non-interest bearing note was issued for the balance of P 4,000,000. Recent transactions involving similar machine indicate that the used machine has a second hand market value of P 4,500,000. A new machine would cost of P 6,500,000. The following costs were incurred during the year. Cost of removing old machine that is replaced P350,000 Cash proceeds from the sale of the old machine replaced 100,000 Cost of hauling the machine from vendor to entity premises 40,000 General overhaul and repairs to recondition machine prior to use 220,000 Cost of installation 180,000 Cost of testing machine prior to use 150,000 Safety device added to the machine 300,000 Cost of spare parts to cover breakdowns 80,000 Costs 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 Cost of training workers to operate the machine 25,000 Required: Compute the cost of the second hand machine. Market value of the machine Cost of hauling the machine from vendor to entity premises General overhaul and repairs to recondition machine prior to use Cost of installation Cost of testing machine prior to use Safety device added to the machine Machine *

P4,500,000 40,000 220,000 180,000 150,000 300,000 P5,390,000

The cost of removing old machine that is replaced, cost of spare parts to cover breakdowns, costs of repairing damage to machine caused when the machine was dropped during installation, repairs incurred during the first year of operation, and cost of training workers to operate the machine are considered as outright expenses. They are not capitalized since they do not prolong the life of the machine nor improve its performance. The cash proceeds from the sale of the old machine replaced is also ignored in the computation of the machine cost since the transaction is a sale and not an exchange of assets.

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Accounting Review, Part One (Acc-rev1)

De La Salle Lipa

5. (Kieso et al.) Santana Company exchanged equipment used in its manufacturing operations plus P2,000 in cash for similar equipment used in the operations of Delaware Company. The following information pertains to the exchange. Santana Co. Delaware Co. Equipment (cost) P28,000 P28,000 Accumulated depreciation 19,000 10,000 Fair value of equipment 13,500 15,500 Cash given up 2,000 Required: Compute the gain or loss that should be recorded by (a) Santana Company and (b) Delaware Company. Santana Company Journal entry:

*

Equipment (P13,500 + P2,000) Accumulated depreciation Gain on exchange of equipment* Equipment Cash

15,500 19,000 4,500 28,000 2,000

Gain = Fair value of asset give up– Carrying value of equipment = P13,500– (P28,000 – P19,000) = P4,500

Delaware Company Journal entry:

*

Equipment (P15,500 + P2,000) Cash Accumulated depreciation Loss on exchange of equipment* Equipment

13,500 2,000 10,000 2,500 28,000

Loss = Fair value of asset give up– Carrying value of equipment = P15,500 – (P28,000 – P10,000) = P(2,500)

6. (IFRS; Valix) ABC Company had the following general borrowings during 2018 which were used to finance the construction of the entity’s new building: Principal Borrowing cost 10% bank loan P2,800,000 P280,000 10% short-term note 1,600,000 160,000 12% long-term loan 2,000,000 240,000 P6,400,000 P680,000 The construction began on January 1, 2018 and the building was completed on December 31, 2018. In the first phase of the construction, there were idle funds which the entity invested and earned interest income of P100,000. Expenditures on the building were made as follows: January 1 P 400,000 March 31 1,000,000 June 30 1,200,000 September 30 1,000,000 December 31 400,000 Required: Compute the capitalizable borrowing cost at December 31, 2018. Since general borrowings were used to finance the building construction, we can capitalize a portion of the borrowing cost. First, we need to compute the weighted average accumulated expenditure.

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Accounting Review, Part One (Acc-rev1)

De La Salle Lipa

One option to compute this is to multiply the actual expenditure with the weighted duration (from the time of expenditure until the balance sheet date or the date of completion of the asset, whichever comes first). Date Actual Expenditure Weighted Duration January 1 P 400,000 12/12 March 31 1,000,000 9/12 June 30 1,200,000 6/12 September 30 1,000,000 3/12 Weighted average accumulated expenditure

Weighted Average Expenditure P 400,000 750,000 600,000 250,000 P2,000,000

Another option is to multiply the accumulated expenditure with the weighted duration within the intervening period. Date Accumulated Expenditure Weighted Duration January 1 P 400,000 3/12 March 31 1,400,000 3/12 June 30 2,600,000 3/12 September 30 3,600,000 3/12 Weighted average accumulated expenditure

Weighted Average Expenditure P 100,000 350,000 650,000 900,000 P2,000,000

Since there are no specific borrowings, we will multiply the weighted average accumulated expenditure with the interest rate or the average borrowing cost.

Expenditure financed by general borrowings

Amount P2,000,000

Interest rate 10.625%**

Interest P212,500

** Average interest rate on general borrowings = Actual borrowing costs / Total principal = P680,000 / P6,400,000 = 10.625% Before we capitalize the borrowing cost of P212,500, this amount should not exceed the actual borrowing for the year. Since the actual borrowing cost is P680,000, then we can capitalize P212,500. 7. (Kieso) McPherson Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of P5,000,000 on January 1, 2018. McPherson expected to complete the building by December 31, 2018. McPherson has the following debt obligations outstanding during the construction period. Construction loan—12% interest, payable semiannually, issued December 31, 2017 P2,000,000 Short-term loan—10% interest, payable monthly, and principal payable at maturity on May 30, 2019 1,600,000 Long-term loan—11% interest, payable on January 1 of each year. Principal payable on January 1, 2022 1,000,000 Assume that McPherson completed the office and warehouse building on December 31, 2018, as planned at a total cost of P5,200,000, and the weighted-average accumulated expenditures was P3,800,000. Compute the total cost of the office and warehouse building. (Carry all computations to two decimal places.) Before proceeding with the computation, we must first separate the specific borrowing from the general borrowing and then compute the interest for the year (from the time of expenditure until the balance sheet date or the date of completion of the asset, whichever comes first)

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Accounting Review, Part One (Acc-rev1)

Loan Specific borrowing (construction loan) General borrowing Short-term loan Long-term loan Total

De La Salle Lipa

Principal P2,000,000

Interest rate 12%

Interest P240,000

1,600,000 1,000,000 P4,600,000

10% 11%

160,000 110,000 P510,000

Next, allocate the weighted average accumulated expenditure, first using the specific borrowings and then the remainder using the general borrowings

Expenditure financed by specific borrowings Expenditure financed by general borrowings Total

Expenditure P2,000,000 1,800,000 P3,800,000

Interest rate 12% 10.38%**

Interest P240,000 186,840 P426,840

** Average interest rate on general borrowings = Actual borrowing costs / Total principal = (P160,000 + P110,000) / (P1,600,000 + P1,100,000) = 10.625% 8. (Kieso et al. Adapted) Alladin Company purchased Machine #201 on April 1, 2018. The following information relating to Machine #201 was gathered at the end of May. Price P85,000 Credit terms 2/10, n/30 Freight-in costs P800 Preparation and installation costs P4,900 Labor costs during regular production operations P10,500 It is estimated that the machine will have a P5,000 residual value at the end of its service life. Its service life is estimated at 8 years; its total working hours are estimated at 42,000 and its total production is estimated at 525,000 units. During 2015, the machine was operated 6,000 hours and produced 55,000 units. During 2016, it was operated 5,500 hours and produced 48,000 units. Required: a. Compute depreciation expense on the machine for the year ending December 31, 2018 and the year ending December 31, 2019 and the accumulated depreciation at December 31, 2019, using the following methods: (1) straight-line; (2) units-of-output; (3) working hours, (4) sum-of-theyears’-digits; and (5) double-declining-balance. b. Assume that Machine #201 was sold for P60,000 on December 31, 2019, compute the gain or loss from the derecognition of the asset. 9. (Nikolai et al.) On January 1, 2018, the Emming Corporation purchased some machinery. The machinery has an estimated life of 10 years and an estimated residual value of P5,000. The depreciation on this machinery was P20,000 in 2020. Required: Compute the acquisition cost of the equipment under the following depreciation methods: (a) straight-line; (b) sum-of-the-years’-digits, and (c) double-declining-balance. 10. (Nikolai et al.) The Wilcox Company acquires four machines that have the following characteristics: Estimated Estimated Machine Cost Residual Value Service Life A P26,000 P2,000 6 years B 19,000 1,000 9 years C 30,000 5,000 5 years D 28,000 — 7 years

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Accounting Review, Part One (Acc-rev1)

De La Salle Lipa

Required: a. Compute the the first year’s depreciation, assuming that the composite method is used on a straight-line basis. b. If the company sells machine B after four years for P10,000, compute the gain or loss from the derecognition of the asset. 11. (AICPA; Valix et al.) Weir Co. uses straight-line depreciation for its property, plant, and equipment, which, stated at cost, consisted of the following: December 31, 2018 December 31, 2017 Land P 25,000 P 25,000 Buildings 195,000 195,000 Machinery and equipment 695,000 650,000 Total 915,000 870,000 Less: Accumulated depreciation 400,000 370,000 Total P515,000 P500,000 Weir’s depreciation expense for December 31, 2018 and December 31, 2017 was P55,000 and P50,000, respectively. Required: Compute the amount debited to accumulated depreciation during December 31, 2018 because of property, plant, and equipment retirements. 12. (AICPA; Valix et al.) Turtle Co. purchased equipment on January 2, 2018, for P50,000. The equipment had an estimated five-year service life. Turtle's policy for five-year assets is to use the double-declining depreciation method for the first two years of the asset's life, and th...