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PROBLEM 1:The following independent situations relate to the acquisition/self construct of various property, plant, and equipment items. Answer the question/s at the end of each situation 1. BRADPIT, INC. has constructed a production equipment needed for the company’s expansion program. Bradpit rece...

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PROBLEM 1: The following independent situations relate to the acquisition/self construct of various property, plant, and equipment items. Answer the question/s at the end of each situation 1. BRADPIT, INC. has constructed a production equipment needed for the company’s expansion program. Bradpit received a P1,500,000 bid from a reputable manufacturer for the construction of the equipment. The costs of direct material and direct labor incurred to construct the equipment were P960,000 and P600,000, respectively. It is estimated that incremental overhead costs for construction amount to 140% of direct labor costs. Fixed costs (excluding interest) of P2,100,100 were incurred during the construction period. This amount was allocated to construction on the basis of total prime costs – the sum of direct labor and direct material. The prime costs incurred to construct the new equipment amounted to 35% of the total prime costs incurred for the period. The company’s policy is to capitalize all possible costs on self construction projects. To assists in financing the construction of the production equipment, Bradpit borrowed P1.5 million at the beginning of the 6-month construction period. The loan was for 2 years with interest at 10% What is the total cost of the self-constructed equipment? A. P3,210,000 C. P3,021,000 B. P2,610,000 D. P3,285,000 2. The following transactions relate to IMPO COMPANY • The national government grants the company a large tract of land to be used as a plant site. The land’s fair value is determined to be P1,620,000. • Impo Company issued 280,000 ordinary shares (par valu, P50) in exchange for land and building. The fair value of the property is determined to be P16,200,000 with the following allocation: Land P3,600,000 Building 12,600,000 P16,200,000 Impo Company’s ordinary shares are not listed on the stock exchange, but its records show that a block of 2,000 shares was sold by a shareholder a year ago at P70 per share, and another block of 4,000 shares was sold by another shareholder 8 months ago at P63 per share. •

Impo Company constructed machinery during the year. No entry was made to remove from the accounts for material, labor, and overhead the following costs that are properly chargeable to the machinery account. Raw material used P250,000 Factory supplies used 18,000 Direct labor costs incurred 320,000 Incremental overhead caused by construction of machinery (excluding factory supplies used) 54,000 Fixed overhead rate applied to regular manufacturing operations 60% of direct labor cost The cost of similar machinery would be P880,000 if it had been purchased from a dealer.

The entries required to record these transaction should include Land Buildings Machinery A. P5,540,000 P13,720,000 P834,000 B. P5,975,556 P15,244,444 P816,000 C. P5,757,778 P14,482,222 P780,000 D. P5,220,000 P12,600,000 P834,000 3. HAGAI COMPANY is a major supplier of computer parts and accessories. To improve delivery services to customers, the company acquired four new trucks on July 1, 2012. Described below are the terms of acquisition for each truck. Truck No. 1 No. 2

List Price P600,000 P800,000

No. 3

P640,000

No. 4

P560,000

Terms Acquired a cash payment of P556,000 Acquired for a down payment of P80,000 cash and a 1-year, non-interest-bearing note with a face amount of P720,000. There was no established cash price for the equipment. The prevailing interest rate for this type of note is 10%. Acquired in exchange for a computer package that the company carries in inventory. The computer package cost P480,000 and is normally sold by Hagai Co. for P608,000. Acquired by issuing 40,000 of Hagai Co.’s ordinary shares. The shares have a par value

per share of P10 and a market value per share of P13

What is the total cost of the trucks purchased on July 1, 2012? A. P2,418,545 C. P2,484,000 B. P2,458,545 D. P2,524,000 4. On march 11, 2012, RAMBO COMPANY acquired the plant assets of Ina Corporation in excahange for 50,000 ordinary shares (P100 par value), which had a fair value per share of P180 on the date of the purchase of the property. The property had the following appraised value: Land P1,600,000 Building P4,800,000 Machinery and equipment P3,200,000 Below is a summary of Rambo’s cash outflows between the acquisition date and December 29, the date when it first occupied the building. Repairs to building P420,000 Construction of bases for machinery to be installed later 540,000 Driveways and parking lots 488,000 Remodeling of office space in building, including new partitions and walls 644,000 Special assessment by the city government on land 72,000 On December 27, Rambo paid cash for machinery, P1,120,000 (subject to a 2% cash discount) and freight on machinery of P42,000. Compute the total cost of each of the following: A. Land B. Buildings C. Machinery and equipment

PROBLEM 2: The following PPE acquisitions for selected companies: a. FRENCH HORN COMPANY acquired land, buildings, and equipment from a financially distressed company, Bankrupt Corp., for a lump sum price of P2,800,000. On the acquisition date, Bankrupt’s assets had the following book and fair values: Book values Fair values Land P800,000 P600,000 Buildings 1,000,000 1,400,000 equipment 1,200,000 1,200,000 French Horn decided to take a conservative position by recording the ower of the two values for each PPE item acquired. The following entry was made: Land 600,000 Buildings 1,000,000 Equipment 1,200,000 Cash 2,800,000 b. TRUMPET, INC. purchased factory equipment by making a P200,000 cash down payment and signing a 3year P300,000, 10% note payable. The acquisition was recorded as follows: Factory equipment 530,000 Cash 200,000 Note payable 300,000 Interest payable 30,000 c. TUBA CO. purchased store equipment for P800,000, terms 2/10, n/30. The company took the discount and made the following entry when it paid for the acquisition: Building 45,000,000 Cash 43,000,000 Profit on construction 2,000,000 Prepare the necessary correcting entry for each acquisition.

PROBLEM 3: SAXOPHONE COMPANY acquires a new manufacturing equipment on January 1, 2012, on installment basis. The deferred payment contract provides for a down payment of P300,000 and an 8-year note for P3,104,160. The note is to be paid in 8 equal annual installment payments of P388,020, including 10% interest. The payments are

to be made on December 31 of each year, beginning December 31, 2012. The equipment has a cash price equivalent of P2,370,000. Saxophone’s financial year-end is December 31. 1. What is the acquisition cost of the equipment A. P3,404,160 C. P2,370,000 B. P2,804,160 D. P3,1004,160 2. The amount to be recognized on January 1, 2012, as discount on note payable is A. P1,034,160 C. P827,160 B. P310,416 D. P0 3. The amount of interest expense to be recognized in 2012 is A. P0 C. P310,416 B. P188,898 D. P207,000 4. The amount of interest expense to be recognized in 2013 is A. P310,416 C. P207,000 B. P188,898 D. P0 5. The carrying value of the note payable at December 31, 2013, is A. P1,689,858 C. P1,312,062 B. P1,888,980 D. P1,700,082

PROBLEM 4: OBOE CORP. acquired land and an old building in exchange for P3,000,000 cash and 500,000 ordinary shares with a par value of P15 per share. The company’s stock was selling for P40 per share when the acquisition was made. Oboe incurred the following costs in connection with the acquisition: Legal fees to complete the transaction Property tax for previous year Cost to demolish the old building Salvage value of demolished building

P150,000 850,000 325,000 (194,000)

1. What is the total cost of the building purchased by Oboe Corp.? A. P0 C. P23,131,000 B. P23,000,000 D. P11,631,000 2. What is the total cost of the land acquired by Oboe Corp.? A. P11,631,000 C. P1,000,000 B. P24,131,000 D. P23,869,000

PROBLEM 5: Various equipment used by BASYANG CO. in its operations are either purchased from dealers or self – constructed. The following items for two different types of equipment were recorded during the calendar year 2012. Manufacturing equipment (self-constructed): Material and purchased parts at gross invoice price (Basyang failed to take the 2% cash discount) Imputed interest on funds used during construction (stock financing) Labor costs Overhead costs (fixed - P40,000; variable – P60,000) Gain on self-construction Installation cost Store equipment (purchased): Cash paid for equipment Freight and insurance cost while in transit Cost of moving equipment into place at store Wage cost for technicians to test equipment Insurance premium paid during first year of operation on the equipment Special plumbing fixtures required for this equipment Repair cost incurred in first year of operations related to this equipment

P450,000 36,000 185,000 100,000 74,000 8,600

P175,000 3,500 1,200 7,000 5,200 8,200 1,450

PROBLEM 6: CELLO CORP. has been experiencing a significant increase in customers’ demand for its product. To expand its production capacity, Cello decided to purchase equipment form Pede Utang on January 2, 2012. Cello issues a P2,400,00 5-year, non-interest-bearing note to Pede Utang for the new equipment when the prevailing market

rate of interest for obligations of this nature is 12%. The company will pay off the note in five P480,000 installments due at the end of each year over the life of the note. Cello’s financial year-end is December 31. The appropriate present value factor of an ordinary annuity of 1 at 12% for 5 periods is 3.60478. 1. What is the cost of the new equipment? A. P2,112,000 C.P1,730,294 B. P1,457,931 D. P2,400,000 2. What amount of interest expense should be reported in Cello’s income statement for the year ended December 31, 2012? A. P174,951 C. P230,400 B. P207,635 D. P288,000 3. What is the carrying value of the note at December 31, 2014? A. P1,440,000 C. P1,480,932 B. P811,226 D. P1,152,880

PROBLEM 7: Described below are transactions related to GUITAR COMPANY. a. The national government gives the company a large tract of land. The condition attached to this government grant is that Guitar is to construct a plant facility on the site to provide employment opportunity to its residents. The fair value of the land is determined to be P4 million. b. 150,000 ordinary shares with a par value of P20 per share are issued in exchange for land and building. The fair values of the land and building acquired are P5,400,000 and P18,900,000, respectively. c. The company’s stock is currently selling at P175 per share. d. Still included in the material, direct labor, and overhead accounts are amounts that are properly chargeable to the machinery account. These represent costs of a machinery constructed by Guitar during the current year. These costs are: Materials used P375,000 Factory supplies used 27,000 Direct labor incurred 450,000 Incremental overhead (over regular) arising form construction of machinery (excluding factory supplies used) 81,000 Fixed overhead rate applied to regular manufacturing operations 60% of direct labor cost Cost of similar machinery if it had been purchased from an outside dealer 1,320,000 Prepare journal entries to record these transactions.

PROBLEM 8: The following information relates to PIANO COMPANY. a. On July 1, Piano purchased the plant assets of Yokona Co., which had discontinued operations. The following are the fair values of the plant assets acquired: Land P10,500,000 Building 31,500,000 Machinery and equipment 21,000,000 TOTAL P63,000,000 Piano issued 550, shares of its P100 par value ordinary share capital in exchange for the above plant assets. On the acquisition date, the stock had a fair value of P160 per share. b. Piano expended the following amounts in cash between July 1 and December 20, the date when the company first occupied the building: Special assessment by City on land Repairs to building Construction of bases for machinery and equipment acquired Driveways and parking lots Remodeling of office space in building, including new partitions and walls

P540,000 3,150,000 4,050,000 3,660,000

c. On December 23, Piano paid cash for machinery, P7,800,000, subject to a 2% cash discount, and freight on machinery of P315,000 1. Land A. P10,540,000 B. P14,700,000

C. P14,200,000 D. P11,040,000

2. Buildings A. P39,480,000 C. P31,500,000 B. P37,980,000 D. P30,000,000 3. Machinery and equipment A. P32,009,000 C. P33,009,000 B. P28,959,000 D. P21,000,000 4. Land improvements A. P4,200,000 C. P540,000 B. P3,660,000 D. P0 5. The entry to record the purchase of Yokona’s plant assets should include a A. Debit to Land of P22,666,667 C. Credit to Ordinary Share Capital of P63,000,000 B. Credit to Share Premium of P8,000,000 D. PDebit to Machinery and Equipment of P29,333,333

PROBLEM 9: The following items are included in the PPE section of the audited statement of financial position of DRUMS CORP. as of December 31, 2011: Land P3,450,000 Buildings 13,350,000 Leasehold improvements 9,900,000 Machinery and equipment 13,125,000 The following transactions occurred during 2012: a. Land A was acquired for P12,750,000. In connection with the acquisition, Drums paid a P765,000 commission to a real estate agent. Costs of P525,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for P195,000 b. Land B with an old building was acquired for P6,300,000. On the acquisition date, the fair value of the land was P4,500,000 and the fair value of the building was P1,800,000. The old building was demolished at a cost of P615,000 shortly after acquisition. A new building was constructed for P4,950,000 plus the following costs: Excavation fees P570,000 Architectural design fees 165,000 Building permit fee 37,500 Imputed interest on funds used during construction (stock financing) 127,500 The building was completed and occupied on December 30, 2012. c. Land C was acquired for P9,750,000 with the intention of selling it within 12 months from the date of purchase. d. During December 2012, costs of P1,335,000 were incurred to improve leased office spce. The related lease will terminate on December 31, 2014, and is not expected to be renewed. e. A group of machine was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machine was P1,305,000, freight costs were P49,500, installation costs were P36,000, and royalty payments for 2012 were P262,500. Based on the preceding information, determine the balances of the following PPE items as of December 31, 2012: 1. Land A. P24,210,000 C. P33,960,000 B. P23,445,000q D. P24,405,000 2. Buildings A. P19,200,000 C. P19,072,500 B. P20,872,500 D. P21,000,000 3. Leasehold improvements A. P9,900,000 C. P1,335,000 B. P0 D. P11,235,000 4. Machinery and equipment A. P14,778,000 C. P14,253,000 B. P147,515,500 D. P14,430,000 5. Land C should be reported in the company’s December 31, 2012, statement of financial position under A. PPE C. Non – current assets held for sale B. Inventories D. other non – current assets

PROBLEM 10: ACCORDION COMPANY incurred the following expenditures in 2012: Purchase of land

P7,800,000

Land survey Fees for search of title for land Building permit fee Temporary quarters for construction crews Payments to tenants of old building for vacating premises Cost to demolish old building Excavation of basement Special assessment for street project Dividends Damages awarded for injuries sustained in construction ( no insurance) Cost of construction Cost of paving parking lot adjoining building Cost of shrubs, trees, and other landscaping

104,000 12,000 70,000 215,000 92,000 940,000 200,000 40,000 100,000 168,000 58,000,000 800,000 660,000

A portion of the building site had been temporarily used by Accordion to operate a car park while the building was being constructed. A total of P325,000 was earned by Accordion from this incidental activity. 1. What is the cost of land A. P8,896,000 B. P8,988,000 2. What is the cost of the land improvements A. P660,000 B. P1,500,000 3. What is the cost of the building A. P58,458,000 B. P58,160,000

C. P9,648,000 D. P10,448,000 C. P1,460,000 D. P800,000 C. P58,252,000 D. P58,285,000

PROBLEM 11: HARPSICHORD, INC. constructs equipment for its own use. The account below proceeds from sale of old equipment Raw material used in construction of new equipment Labor in construction of new machine Cost of installation Cost of testing the equipment Material spoiled in machine trial runs Profit on construction

228,000 147,000 33,600 25,000 7,200 72,000

An analysis of the details in the account disclosed the following: a. The old equipment, which was removed before the installation of the new one, had been fully depreciated. b. Cash discounts received on the payments for materials used in construction totaling P9,000 were reported in the purchase discounts account c. The factory overhead account shows a balance of P876,000 for the year ended December 31, 2012; this balance exceeds normal overhead on regular plant activities by approximately P50,700 and is attributable to equipment construction d. A profit was recognized on construction for the difference between costs incurred and the price at which the equipment could have been purchased e. While testing the equipment, sample items were produced. These were sold for P5,000 which was credited to miscellaneous revenue. 1. What is the total cost of the new equipment? 2. Prepare individual journal entries to correct the accounts as of December 31, 2012. Assume that the nominal accounts are still open

PROBLEM 12: CYMBALS, INC. completed the following transactions during 2012: Jan. 1 Purchased real property for P18,847,500, which included a charge of P547,500 representing property tax for the current year that had been prepaid by the vendor. Of the total purchase price, 20% is determined to be applicable to land and the balance to buildings. A mortgage of P11,250,000 was assumed by cymbals on the purchase. Cash was paid for the balance. Feb. 5

Cymbals expended P888,000 to recondition the building because previous owners had

neglected the normal maintenance and repair requirement on the building May 20

The garage in the rear of the building was demolished, P135,000 being recovered on the salvage material. Cymbals immediately constructed a warehouse. The cost of such construction was P2,028,000, which was not materially different from the bids made on the construction, city inspectors discovered that Cymbals failed to comply with the building safety code and thus ordered the company to make extensive modifications to the warehouse. The cost of such modifications, which could have been avoided, was P288,000.

June 1

The company acquired a new machine in exchange for its own ordinary shares with a market value of P600,000 (par P90,000). The new machine has a market value of P750,000

July 1

Another machine was acquired by Cymbals. Payment was made by issuing bonds with a face value of P1,500,000 and by paying cash of P540,000. The machine’s fair value is P1,950,000

Nov. 20

On September 1, the company engaged an independent contractor for parking lots and landscaping at a cost of P1,638,000. The work was completed and paid for on November 20

Dec. 31

Because the company’s financial year-end is December 31, the business was closed to permit taking the year – end inventory. On this same date, required redecorating and repairs were completed at a cost of P225,000

1. The journal entry to record the acquisition of real property on January 1 should include a A. Debit to land of P18,847,500 C. credit to mortgage payable of P18,300,000 B. debit to buildings of P15,078,000 D. credit to Cash of P7,597,500 2. The transactions completed during 2012 should result in a net income in the Buildings Account of A....