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Chapter 28PROPERTY, PLANT AND EQUIPMENTProblem 28-1 (AICPA Adapted) At the beginning of the current year, Town Company purchased for P5,400,000, including appraiser’s fee of P50,000, a warehouse building and the land on which it is located. The following data were available concerning the property: ...

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Chapter 28 PROPERTY, PLANT AND EQUIPMENT Problem 28-1 (AICPA Adapted) At the beginning of the current year, Town Company purchased for P5,400,000, including appraiser’s fee of P50,000, a warehouse building and the land on which it is located. The following data were available concerning the property: Current Seller’s Apprased value original cost Land 2,000,000 1,400,000 Warehouse building 3,000,000 2,800,000 5,000,000 4,200,000 What is the initial measurement of the land? a. 2,140,000 b. 1,800,000 c. 2,000,000 d. 2,160,000 Solution 28-1 Answer d Cost of land (2/5 x 5,400,000)

2,160,000

When a group of assets is acquired for a limp sum price, the total cost should be allocated to the individual assets based on their relative fair value or appraised value.

Problem 28-2 (AICPA Adapted) On August 1, 2010, Bamco Company purchased a new machine on a deferred payment basis. A down payment of P100, 000 was made and 4 monthly installments of P250, 000 each are to be made beginning on September 1, 2010. The cash equivalent price of the machine was P950,000. Bamco incurred and paid installation costs amounting to P30,000. What is the amount to be capitalized as cost of the machine? a. 950, 000 b. 980, 000 c. 1,100,000 d. 1,130,000 Solution 28-2 Answer b Cash price Installation cost Total cost

950, 000 30, 000 980, 000

PAS 16 provides that when payment for an item of property, plant, an equipment is deferred beyond normal credit terms, its cost is the cash price equivalent plus any directly attributable costs of bringing the asset to working condition for its intended use, such as cost of site preparation, initial delivery and handling cost, and installation cost.

Problem 28-3 (AICPA Adapted) Josey Company entered into a contract to acquire a new machine for is factory. The machine, which had a cash price of P2, 000,000 was paid as follows:

Down payment Note payable in 3 equal annual installments 20,000 ordinary shares with a par value of P25 and fair value of P40 per share

400, 000 1,200,000 800, 000 2,400,000

Prior to the machine’s use, installation cost of P50, 000 was incurred. The machine has an estimated residual value of P100, 000. What is the initial cost of the machine? a. 2, 000, 000 b. 2, 400, 000 c. 2, 050, 000 d. 2, 450, 000 Solution 28-3 Answer c Cash price Installation costs Total cost

2, 000, 000 50, 000 2, 050, 000

Problem 28-4 (ACP) Anxious Company acquired two items of machinery as follows:  On December 31, 2010, 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, 2011, 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, 2010, Anxious Company acquired used machinery by issuing the seller a two – year, non interest-bearing note for P3,000,000. In recent borrowing, Anxious 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 28-4 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 of an ordinary annuity of 1” is used in computing the present value of first note payable because the note is payable by installment. The “present value factor of 1” is used in computing the present value of the second note payable because the note is payable lump sum after 2 years.

Problem 28-5 (AICPA Adapted) On December 31, 2010, Bart Company purchased a machine in exchange for a noninterest – bearing note requiring eight payments of P200, 000. The first payment was made on December 31, 2010, and the others are due annually on December 31. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: Present value of an ordinary annuity of 1 at 11% For 8 periods Present value of an annuity of 1 in advance at 11% For 8 periods

5.146 5.712

On December 31, 2010, 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 Solution 28-5 Answer d Present value of future payments (200,000 x 5.712)

1,142,400

The “PV of an annuity of 1 in advance” is used because the machine was purchased on December 31, 2010 and the first payment was made on December 31, 2010.

Problem 28-6 (IAA) Lax Company recently acquired two items of equipment. The transactions are described as follows:  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 to a 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 28-6 Answer a First equipment: Invoice price Discount taken – 5% Freight and insurance Installation cost Second equipment Invoice price Discount not taken – 10% Total cost

3,000,000 ( 150,000) 50,000 200,000 2,000,000 ( 200,000)

3,100,000

1,800,000 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.

Problem 28-7 (AICPA Adapted) Precious Company had the following property acquisitions during the current year:  Acquired a tract of land with an existing building in exchange for P50,000 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 and P600,000 for the building. Shortly after acquisition the building was razed at cost of P100,000 in anticipation of a new building construction in the current year.  Received land from a major shareholder as an inducement to locate a plant in the city. No payment was required but Precious paid P50,000 for legal expenses for land transfer. The land is fairly valued at P1,000,000. What is the total increase in land as result of the acquisitions? a. 7,000,000 b. 6,100,000 c. 7,150,000 d. 7,100,000 Solution 28-7 Answer d First land: Fair value of shared issued (50,000 x 120) Cost of razing the old building Second land Total cost

6,000,000 100,000

6,100,000 1,000,000 7,100,000

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. Accordingly, the cost of the first land is measured by the fair value of the shares because the land has no known market value.

Contributions received from shareholders should be recorded at fair value with the credit going to donated capital. However, the legal expenses for the transfer of the donated property should not be capitalized but deducted from donated capital. Problem 28-8 (IAA) Dawson Company has received a donation of land from a rich local philanthropist. The land originally had a cost of P1,000,000. On the date of the donation, the land had a market value of P1,500,000 and an assessed value of P1,200,000. How much income should be recognized from the donation? a. 1,500,000 b. 1,200,000 c. 1,000,000 d. 0 Solution 28-8 Answer a Capital gifts or grants from nonshareholders shall be recorded as income at their fair value when they are received or receivable. Problem 28-9 (IAA) Jazz Company purchased land with a current market value of P2,400,000. The carrying amount of the land was P1,305,000. In exchange for the land, Jazz issued 20,000 ordinary shares with par value of P100 and market value of P140 per share. The shares are traded in an established stock exchange. What amount should Jazz record as cost of the land? a. 1,305,000 b. 2,000,000 c. 2,400,000 d. 2,800,000

Solution 28-9 Answer c Current market value of land

2,400,000

Problem 28-10 (IAA) Figaro Company acquired land and paid in full by issuing P600,000 of its 10 percent bonds payable and 40,000 ordinary shares with par value of P10. The share was selling at P19 and the bonds were trading at 102. What amount should Figaro record as cost of the land? a. 988,000 b. 1,000,000 c. 1,372,000 d. 1,387,200 Solution 28-10 Answer c Fair value of bonds payable (600,000 x 102) Fair value of shares (40,000 x 19) Total cost of land

612,000 760,000 1,372,000

Problem 28 – 11 (AICPA Adapted) On September 1, 2010 Ron Company issued 100,000 treasury shares with P25 par value for a parcel of land to be held for a future plant site. The treasury shares were acquired by Ron at a cost of P30 per share. Ron’s share had a fair market value of P40 on September 1, 2010. Ron received P50,000 from the sale of scrap when an existing structure on the site was razed. At what amount should the land be initially measured? a. 4,000,000 b. 3,950,000 c. 3,000,000 d. 2,500,000

Solution 28 – 11 Answer b Fair value of treasury shares (100,000 x P40) Scrap value of existing structure Cost of land

4,000,000 ( 50,000) 3,950,000

The market value of the treasury shares is used because the land has no known fair value. Problem 28 – 12 (PHILCPA Adapted) Fairmont Company, a public entity, issued 5,000 ordinary shares with P1,000 par value for a building. The following information relates to the exchange: Carrying amount of building Face value of insurance policy for building Current quoted price of share

17,500,000 20,000,000 4,400

What is the initial cost of the building? a. 5,000,000 b. 17,000,000 c. 22,000,000 d. 20,000,000 Solution 28 – 12 Answer c Fair value of shares issued (5,000 x 4,400)

22,000,000

Problem 28 – 13 (AICPA Adapted) In October of the current year, Ewing Company exchanges 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. what is the cost of the machine acquired in the exchange on the books of Ewing Company?

a. b. c. d.

860,000 700,000 760,000 540,000

Solution 28 – 13 Answer a Fair value of old machine Cash payment Cost of new machine

700,000 160,000 860,000

PAS 16 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, unless the exchange transaction lacks commercial substance or the fair value of either the asset given up or asset received is not reliably measurable. Problem 28 – 14 (AICPA Adapted) Caine Motor Sales exchanged a car from its inventory for a computer to be used as a long-term asset. The following information relates to this exchange: Carrying amount of the car List selling price of the car Fair value of the computer Cash difference paid by Caine

600,000 900,000 860,000 100,000

What amount of gain should Caine recognize on the exchange? a. 260,000 b. 160,000 c. 200,000 d. 0

Solution 28 – 14 Answer b Fair value of computer Less: Cash paid by Caine Fair value of car – asset given Less: Carrying amount of car Gain on exchange

860,000 100,000 760,000 600,000 160,000

Problem 28 – 15 (AICPA Adapted) At the beginning of the current year, Bell Company exchanged an old machine, with a book value of P390,000 and a fair value of P350,000, and paid P100,000 cash for another used machine having a list price of P500,000. At what amount should the machine acquired in the exchange be recorded on the books of Bell? a. 450,000 b. 460,000 c. 490,000 d. 500,000 Solution 28 – 15 Answer a Fair value of old machine Cash payment Cost of new machine

350,000 100,000 450,000

Problem 28 – 16 (AICPA Adapted) Eagle Company owns a tract of land that it purchased in 2007 for P2,000,000. The land is held as a future plant site and has a fair value of P2,800,000 on July 1, 2010. Hall Company also owns a tract of land held as a future plant site. Hall paid P3,600,000 for the land in 2009 and the land has a fair value of P3,800,000 on July 1,2010. On this date, Eagle exchanged its land and paid P1,000,000 cash for the land owned by Hall. The exchange had commercial substance. At what amount should Eagle record the land acquired in the exchange?

a. b. c. d.

2,800,000 3,000,000 3,200,000 3,800,000

Solution 28 – 16 Answer d Fair value of land given – Eagle Cash paid by Eagle Total cost

2,800,000 1,000,000 3,800,000

Problem 28 – 17 (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 a fair 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 Beam record as cost of the inventory received in exchange? a. 2,000,000 b. 2,100,000 c. 2,200,000 d. 2,300,000 Solution 28 – 17 Answer c Fair value of inventory given Add: Cash payment Total Cost of inventory received

2,100,000 100,000 2,200,000

Problem 28 – 18 (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 market value of the oil were as follows: Yola Company Zaro Company Cost 1,000,000 1,400,000 Market Value 1,200,000 1,500,000 1. What amount should Yola Company record as cost of the oil inventory received in exchange? a. b. c. d.

1,000,000 1,200,000 1,300,000 1,500,000

2. What amount should Zaro Company record as cost of the oil inventory received in exchange? a. b. c. d.

1,400,000 1,500,000 1,100,000 1,200,000

Solution 28 – 18 Question 1 Answer c Cost of oil inventory given Add: Cash payment Total cost of oil inventory received

1,000,000 300,000 1,300,000

Question 2 Answer c Cost of oil inventory given Less: Cash received Cost of oil inventory received

1,400,000 300,000 1,100,000

The Exchange transaction is measured at the carrying amount of the asset given up adjusted by the cash involved if the exchange lacks commercial substance. The exchange transaction lacks commercial substance if the cash flows from the new asset are not significantly different from the cash flows of the old asset. Problem 28 – 19 (AICPA Adapted) Amiable Company exchanged a truck with a carrying amount of P1,200,000 and a fair value of P2,000,000 for a truck and P200,000 cash. The cash flows from the new truck are not expected to be significantly different from the cash flows of the old truck. The fair value of the truck received was P1,800,000. At what amount should Amiable record the truck received in the exchange? a. 2,000,000 b. 1,400,000 c. 1,000,000 d. 1,800,000 Solution 28 – 19 Answer c Carrying amount of truck given Cash received Cost of new truck

1,200,000 ( 200,000) 1,000,000

The exchange transaction lacks commercial substance because the cash flows of the new asset are not significantly different from the cash flows of the old asset. Accordingly, the asset received is measured at the carrying amount of the asset given minus the cash received.

Problem 28 – 20 (AICPA Adapted) At the beginning of the current year, Winn Company traded in an old machine having a carrying amount of P1,680,000 and paid a cash difference of P600,000 for a new machine having a cash price of P2,050,000. What amount of loss should Winn recognize on the exchange? a. 600,000 b. 230,000 c. 370,000 d. 0 Solution 28 – 20 Answer b Cash price of new machine Less: Cash payment Fair value of old machine Less: Carrying amount Loss on exchange

2,050,000 600,000 1,450,000 1,680,000 ( 230,000)

Problem 28 – 21 (CGAC) Prince Company and Albert Company, two unrelated entities, agreed to exchange tractor trailers. Information relating to these assets is as follows: Prince Albert Original acquisition cost 1,500,000 800,000 Accumulated depreciation 700,000 720,000 Fair value on date of exchange 900,000 150,000 In accordance with the agreement, Albert will pay P750,000 in cash to Prince which is the difference in fair value.

1. What amount should Prince Company record as cost of the asset received in exchange? a. 150,000 b. 750,000 c. 950,000 d. 650,000 2. What amount should Albert Company record as cost of the asset received in exchange? a. 900,000 b. 830,000 c. 150,000 d. 230,000 Solution 28 – 21 Question 1 Answer a Fair value of Prince (recipient) Less: Cash received Cost of new asset received in exchange

900,000 750,000 150,000

Question 2 Answer a Fair value of Albert (payor) Add: Cash Payment Cost of new asset received in exchange

150,000 750,000 900,000

Problem 28 – 22 (AICPA Adapted) On January 1, 2010, Wilbur Company traded in an old machine for a newer model. Data relative to the old and new machines follow: Old machine Original cost Accumulated depreciation on January 1, 2010 Average published retail value

800,000 600,000 170,000

New machine List price Cash price without trade Cash paid with trade in

1,000,000 900,000 780,000

What should be the cost of the new machine acquired in the exchange? a. 900,000 b. 950,000 c. 980,000 d. 1,000,000 Solution 28 – 22 Answer a Since the old machine has no available fair value, the new machine received in exchange is recorded at its cash price without trade in of P900,000. The average published retail value of the old machine is not necessarily its fair value. Moreover, the loss on exchange is computed as follows: Cash price without trade in Less: Cash price with trade in Trade in value of old machine Less: Carrying amount Loss on exchange

900,000 780,000 120,000 200,000 ( 80,000)

Problem 28 -23 (IAA) Jilmar Company acquired a delivery truck, making payment of P2,680,000 analyzed as follows: Price of truck 2,500,000 Charge for extra equipment 50,000 Value added tax – recoverable 300,000 Insurance for one year 120,000 Motor vehicle registration 10,000 Total 2,980,000 Trade in value of old truck ( 300,000) Cash paid 2,680,000 The cost of the old truck was P1,500,000 with carrynig amount of P200,000 and fair value of P50,000. What is the cost of the new truck acquired in the exchange? a. 2,300,000 b. 2,680,000 c. 2,250,000 d. 2,550,000 Solution 28 -23 Answer a Cash paid Value – added tax Insurance Motor vehicle registration Capitalizable cash payment Fair value of old truck Cost of new truck

2,680,000 ( 300,000) ( 120,000) ( 10,000) 2,250,000 50,000 2,300,000

Problem 28 -24 (PHILCPA Adapted) Taiwan Company fabricated equipment for its office use ta the entity's plant during the c...