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CANNON BALL REVIEW PART 3I. PPE – INITIAL MEASUREMENTa) Elements of cost are purchase price , costs directly attributable to operate the asset and estimate of the costs of dismantling and removing the item and restoring the site on which it is located. b) If PPE is acquired by paying cash, the amoun...

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CANNON BALL REVIEW PART 3 I. PPE – INITIAL MEASUREMENT

a) Elements of cost are purchase price, costs directly attributable to operate the asset and estimate of the costs of dismantling and removing the item and restoring the site on which it is located. b) If PPE is acquired by paying cash, the amount paid shall be capitalized. If two or more assets are acquired at a single price, the purchase price shall be allocated by using the relative fair value method. If only one asset has a determinable FV, that asset is measured at fair value and the excess is the cost of the asset with an unknown FV. c) If PPE is acquired by issuing shares the Asset shall be measured by the order of priority: 1st FV of asset, 2nd FV of shares, 3rd Par value of stated value of shares. d) If PPE is acquired by issuing bonds payable the Asset shall be measured by the order of priority: 1st FV of bonds, 2nd FV of the asset, 3rd Face value of Bonds Payable. e) If PPE is acquired through a donation it shall be measured at the fair value of the asset. However, any cost to transfer the title is deducted from the donated capital account and not capitalized. f) If PPE is acquired by an exchange the New Asset is measured by the order of priority: 1st FV of asset given, 2nd FV of asset received and 3rd BV of asset given. However, adjustments for cash paid (plus) and cash received (minus) shall be made. g) If PPE is acquired on account that is subject to a cash discount, the amount to be capitalized is the net amount regardless whether the discount is taken or not. h) If PPE is acquired through long-term financing the amount capitalized is the cash price. If the cash price is not provided, the present value of cash flows shall be used. i) If the exchange transaction lacks commercial substance, the new asset is measured at the book value of the asset given. j) If the asset is self-constructed, the asset is measured at the total cost incurred to construct the asset meaning materials, labor and allocated overhead. Profits from savings shall not be recognized as income. Also borrowing cost from funds borrowed is required to be capitalized. Problems 1. Jacklord made the following individual cash purchases: Land and building Machinery and office equipment Delivery equipment

6,000,000 1,800,000 500,000

The question of apportioning the cost of the purchases between the assets arose. An appraisal was made which disclosed the following values: Land Building Machinery Office equipment Delivery equipment How much is the cost of the machinery purchased by Jacklord? a. 1,200,000 b. 1,800,000 c. 1,000,000 d. 800,000

1,000,000 3,000,000 800,000 400,000 350,000

PAGE 2 2. Heighten Company acquired the assets of Jorge Company, which had discontinued operations. The following values of the property are available: Land Building Machinery

Book 600,000 3,600,000 1,500,000

Fair 1,000,000 5,000,000 2,000,000

Heighten Company gave 60,000 shares of its P100 par value ordinary shares in exchange. The shares had a quoted price of P200 per share on that date of purchase of the property. How much is the cost of the building that Heighten purchased? a. 5,000,000 b. 2,000,000 c. 1,500,000 d. 1,000,000 3. Leah Company acquired a welding machine with an invoice price of P3,360,000 subject to a cash discount of 5% which was not taken. Leah incurred freight and insurance during shipment of P50,000 and testing and installation cost of P200,000. Leah also incurred cost of P20,000 in removing the old welding machine prior to the installation of the new one. Welding supplies were acquired at a cost of P100,000. The VAT on the acquisition is P360,000. What is the cost of the welding machine? a. 3,100,000 b. 3,250,000 c. 3,220,000 d. 3,400,000 4. Basil Company acquired two items of machinery as follows: ▪

On December 30, 2017, Basil Company purchased a machine in exchange for a non-interestbearing note requiring three payments of P1,000,000. The first payment was made on December 30, 2018, and the others are due annually on December 30. 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 1.69 for two periods and 2.40 for three periods. The new machine was damaged during its installation and the repair cost amounted to P50,000.

▪

On January 1, 2017, Basil Company acquired used machinery by issuing the seller a three-year, noninterest-bearing note for P4,000,000. In recent borrowing, Basil has paid a 12% interest for this type of note. The present value of 1 at 12% for 3 years is .71.

What is the total cost of the machinery? a. 4,820,000 b. 4,530,000 c. 4,580,000 d. 5,240,000 5. During 2017, Harlem Company made the following property, plant and equipment expenditures: Land and building acquired from Jameson Company Repairs made to the building Special tax assessment Remodeling of office space including new partitions and walls

9,000,000 300,000 50,000 400,000

In exchange for the land and building acquired from Jameson, Harlem issued 60,000 shares of its P100 par value ordinary shares. On the date of purchase, the stock had a market value of P150 per share and the land and building had fair value of P2,000,000 and P6,000,000 respectively. During the year, Harlem also received land from a shareholder to facilitate the construction of a plant in the city. Harlem paid P100,000 for the land transfer and charged this amount to legal expenses. The land is fairly valued at P1,500,000. What is the cost of the land and building acquired? a. 3,800,000, and 7,450,000 b. 3,550,000, and 6,700,000 c. 3,500,000, and 6,400,000 d. 3,500,000, and 6,750,000

PAGE 3 6. In December 2017, Nash Company exchanged an old machine, which cost P6,000,000 and 50% depreciated, for a used machine and paid a cash difference of P1,500,000. The fair value of the old machine was determined to be P2,000,000. What amount should Nash record the machine? a. 6,000,000 b. 2,000,000 c. 3,500,000 d. 3,000,000 7. Marian Company and Xenia Company are fuel oil distributors. To facilitate the delivery of oil to customers, Marian and Xenia exchanged ownership of 5,000 barrels of oil without physically moving the oil. Marian paid Xenia P2,000,000 to compensate for a difference in the grade of oil. It was reliably determined that the exchange lacks commercial substance because the configuration of the cash flows of the asset received does not differ from the configuration of the cash flows of the asset transferred. On the date of exchange, cost and fair value of oil were: Cost Fair value

Marian Company 45,000,000 51,000,000

Xenia Company 40,000,000 53,000,000

1. What amount should Marian Company record the oil inventory received in exchange? a. 45,000,000 b. 47,000,000 c. 51,000,000 d. 53,000,000 2. What amount should Xenia Company record the oil inventory received in exchang e? a. 40,000,000 b. 38,000,000 c. 42,000,000 d. 51,000,000 ANSWERS: A, A, A, D, B, C, B, D II. Government Grants a) Assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity. b) Grants for the purpose of specific expenses – This should be deferred and recognized as income in the same period as the relevant expense. c) Grants related to depreciable assets are usually recognized as income over the periods and in the proportions in which depreciation on those assets is charged. Either by deducting the grant from the cost of the asset or as deferred income. d) Grants related to non-depreciable assets may also require the fulfillment of certain obligations and would then be recognized as income over the periods which bear the cost of meeting the obligations. As an example, a grant of land may be conditional upon the erection of a building on the site and it may be appropriate to recognize it as income over the life of the building. e) A government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognized as income of the period in which it becomes receivable. f) Repayment of Government Grant • If a grant becomes repayable, it should be treated as a change in estimate. • If the grant is recorded as a deferred income, the repayment should be applied first against any related unamortized deferred income (the balance of the deferred income), and the difference shall be recognized as expense. • Where the original grant related to an asset, the repayment should be treated as increasing the carrying amount of the asset or reducing the deferred income balance. • The cumulative depreciation which would have been charged had the grant not been received should be charged as depreciation expense.

PAGE 4 Problems 1. On January 1, 2017 Union Company received a grant of P10,000,000 from the British government in order to defray safety and environmental costs within the area where the enterprise is located. The safety and environmental costs are expected to be incurred over four years, respectively, P1,000,000, P2,000,000, P2,000,000 and P3,000,000. How much income from the government grant should be recognized in 2017? a. 2,000,000 b. 1,000,000 c. 10,000,000 d. 1,250,000 VII. On January 1, 2017, Carroll Company received a grant of P1,000,000 from the Philippine Government for the construction of a laboratory and research facility with a total cost of P6 million and a useful life 5 years and no residual value. The facility was completed in early of 2017. Carroll Company recorded the grant as deferred revenue upon the receipt. 1. What should Carroll Company include in its 2017 income statement an income from the government grant? a. 500,000 b. 100,000 c. 200,000 d. 240,000 2. If the grant becomes repayable in full in 2019 because Carroll is not able to comply with the conditions required for the grant, what is the amount of loss to be recognized in the income statement? a. 1,000,000 b. 600,000 c. 400,000 d. 500,000 3. Assuming that Carroll Company recorded the grant as a deduction towards the capital cost of the asset, what is the depreciation expense to be recorded in 2017? a. 1,200,000 b. 1,000,000 c. 900,000 d. 800,000 ANSWERS: D, C, C, C III. LAND AND BUILDING a) If land and building is acquired at a single price and the old building is not usable, the entire cost is capitalized as land only. b) If the old building is usable, for example it has a determinable fair value. The entire purchase price is allocated between the two elements regardless whether the old building has a future use or not. c) The demolition cost of the old building shall be capitalized as cost of the new building to be constructed net of the salvage value from scrap. d) The allocated cost of the old building capitalized shall be written off as a loss if the property is classified as either PPE or Investment Property but capitalized if the property is Inventory. e) Other cost of the land shall include direct cost such as nonrecoverable taxes and title search including cost of survey, option money for land that is acquired, unpaid taxes and mortgages assumed, special assessment and cost of permanent improvements such as the cost of filling, grading, levelling and landscaping. f) Payments to tenants of existing lease contracts are now capitalized as cost of the new building. g) Temporary improvements meaning concrete structures that are subject to depreciation and may be replaced sometime in the future is capitalized as land improvement. h) This includes the cost of trees, plants and other landscaping. However, in US GAAP they are capitalized as land. But not in Philippine GAAP where it is land improvements.

PAGE 5 P1. The following expenditures were incurred by Pinky Company in 2017: Purchase of land with existing building Fair value of old building Land survey Fees for title search for title of land Building permit Temporary quarters for construction crews Payments of tenants of old building for vacating the premises Payment to demolition company to raze the old building and clean up Excavating basement Special assessment tax for street project Salvage value of materials from old building Damages awarded for injuries sustained in construction Costs of construction Cost of paving parking lot adjoining the building Cost of shrubs, trees and other landscaping 1. What is the cost of the land? a. 11,860,000 b. 11,750,000

c. 11,690,000 d. 10,760,000

2. What is the cost of the building? a. 20,700,000 b. 20,880,000

c. 20,970,000 d. 21,590,000

10,500,000 500,000 400,000 300,000 250,000 100,000 600,000 400,000 350,000 60,000 110,000 90,000 20,000,000 180,000 40,000

P2. Land and an old building was acquired from a seller by Casio Company at 4,000,000 as the new location for an expansion office south of Metro Manila. The land had a fair value of P4,050,000 and the building had a fair value of P450,000. The old building was also demolished at the end of the reporting period at a cost of P100,000. Additional cost incurred in connection with the land, applicable taxes and other cost are as follows: Title search and insurance Documentary stamp tax Transfer Tax Land registration fees Construction materials purchased in advance for construction Proceeds of scrap from old building Perimeter fencing Cost of signage and other land improvements Cost of drainage works and building plumbing Filling, leveling and landscaping 1. What is the total cost of the land? a. 4,410,000 b. 4,160,000

c. 3,800,000 d. 4,210,000

2. What is the total cost of the land improvements? a. 640,000 b. 190,000

c. 560,000 d. 490,000

200,000 70,000 25,000 15,000 2,000,000 30,000 50,000 140,000 150,000 300,000

P3. Paula Company has purchased land for construction of buildings to be held for sale in the ordinary course of business. The following costs were incurred in purchasing the property and constructing the building: Land and building purchase price Fair value of the old building on the land Payment of delinquent property taxes Title search and insurance Special assessment for city improvements water and sewer Building permit Cost to destroy existing building (P10,000 worth of salvaged material sold as scrap) Contract cost of new building Land improvements Sidewalks and parking lot

2,500,000 300,000 100,000 50,000 150,000 30,000 60,000 7,000,000 500,000 200,000

PAGE 6 The depreciated value of the old building on the books of the company from which the land was purchased was P300,000. The old building was never used by Paula. What is the cost of the land and building as inventory? a. 10,580,000 b. 9,880,000 c. 10,280,000 d. 10,430,000 P4. Razor Company, a newly formed corporation, incurred the following expenditures related to land and building: Cost of land, which included an old apartment building appraised at P500,000 Fee for title search Payment to tenants for vacating old building Payment for delinquent property taxes assumed by the purchaser Removal of apartment building Salvaged materials retained by the demolition company Cost of grading, leveling and other landscaping Architect fees on new building Payment to building contractors Interest cost on specific borrowing incurred during construction Payment of medical bills of employees accidentally injured while inspecting building construction Cost of paving driveway and parking lot Fences surrounding the property Cost of installing lights in the parking lot Premium for insurance on the building during construction Cost of open house party to celebrate opening of new building 1. What is the cost of the land? a. 3,950,000 b. 3,000,000

c. 4,000,000 d. 2,950,000

2. What is the cost of the building? a. 11,500,000 b. 10,000,000

c. 10,950,000 d. 10,990,000

3,000,000 100,000 500,000 200,000 50,000 10,000 150,000 200,000 10,000,000 500,000 180,000 40,000 20,000 50,000 250,000 60,000

P5. Jerald Company uses many kinds of machines in its operation. The company constructs some of these machines itself and acquires others from manufacturers. The following information relates to a machine that was acquired on January 1, 2017. Cash paid for machine, including VAT of P96,000 Cost of transporting machine Labor cost of installment by expert fitter Labor cost of testing machine Insurance cost for 2017 Cost of training for personnel who will use the machine Cost of safety rails and platform surrounding the machine Cost of water device to keep the machine cool Cost of adjustment to machine to make it operate more efficiently How much should be capitalized as cost of the machine? a. 1,135,000 b. 1,231,000 ANSWERS: D, D, D, B, A, D, A, A

c. 1,160,000 d. 1,150,000

896,000 30,000 50,000 40,000 15,000 25,000 60,000 80,000 75,000

PAGE 7 IV. BORROWING COST a) Interest and other costs incurred by an enterprise in connection with the borrowing of funds. Interest expense calculated using the effective interest method, finance charges in respect of finance leases, exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. b) Borrowing cost is required to be capitalized for Qualifying Assets which are assets that takes a substantial period of time to get ready for its intended use. c) If the borrowing cost is from specific borrowings, the amount of the actual interest incurred less investment income from temporary investments of excess borrowings shall be capitalized. d) If the borrowing cost is from general borrowings, the amount capitalizable is the weighted average expenditures times the average capitalization rate. However, the amount of borrowing cost to be capitalized shall not exceed the actual interest incurred. e) If it is a combination of both, the specific borrowing is deducted from the weighted average expenditures before multiplying to the capitalization rate. f) The second and succeeding periods shall include the cumulative amount capitalized including the borrowing cost from last year as part of the weighted average expenditures to be weighted at the beginning of the current year. g) If the construction is completed before yearend, the denominator to compute for the weighted average expenditures shall be the number of months of construction instead of 12 calendar months. Problems 1. Lolita Company entered into a P10,000,000 fixed contract with Constructors Company on January 1, 2017 for the construction of a new building. On January 1, 2017, Lolita obtained a loan of P10,000,000 at an interest rate of 12% to finance specifically the construction. Availment from the loan may be made quarterly at unequal amounts. Actual interest incurred for 2017 was P900,000. Prior to their disbursement, the proceeds from the loan were temporarily invested and earned interest income of P50,000. The building was completed on December 31, 2017. Additional costs incurred during the construction were P200,000 for plans, specifications and blueprint, and P350,000 for architectural design and supervision. What is the total cost of the building? a. 11,400,000 c. 10,000,000 b. 11,450,000 d. 10,550,000 2. Nada Company had the following borrowings during 2017. The borrowings were made for general purposes but the proceeds were used in part to finance the construction of a new buildi ng: 12% bank loan 15% long-term loan

Principal 10,000,000 20,000,000

Interest 1,200,000 3,000,000

The construction began on January 1, 2017 and was completed on December 31, 2017. Expenditures on the building were made as follows: January 1 June 30 December 31 What is the amount of borrowing cost to be capitalized? a. 1,680,00...