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CHAPTER 5 PROPERTY, PLANT AND EQUIPMENT PROBLEMS

5-1.

a.

Cash price is the cost.

P215,000

b.

Downpayment Notes payable (70,000 x 3.3121) Cost of machine

P100,000 231,847 P331,847

c.

Purchase price Appraisal cost Total cost to be allocated Allocation: Land 22,150,000 x 10,000/25,000 Building 22,150,000 x 12,500/25,000 Equipment 22,150,000 x 2,500/25,000 d.

P22,000,000 150,000 P22,150,000 P 8,860,000 P 11,075,000 P 2,215,000

Cash price 1,000,000 x .90 x .98 Present value of the disposal costs 50,000 x 0.5019

P882,000 25,095 P907,09 5

Cost of equipment e.

Purchase price 154,560/1.12 Directly attributable costs 5,000 + 2,000 + 1,500 + 1,800

P138,000 10,300 P148,30 0

Total cost 5-2. (Uy Company) Land Office building Warehouse Manager’s residence 5-3.

5-4.

(49,500,000 x 21,875,000/56,250,000) (49,500,000 x 20,000,000/56,250,000) + 1,200,000 (49,500,000 x 9,375,000/56,250,000) (49,500,000 x 5,000,000/56,250,000)

19,250,000 18,800,000 8,250,000 4,400,000

(Chang Corporation) a. 720,000 x .90 b. Down payment Present value of 24 monthly installments 25,000 x 21.2434 Total

P648,000 P150,000 531,085 P681,085

(Planters Company and Producers Company)

Books of Planters Company Cash Equipment Accumulated Depreciation-Building Loss on Exchange of Building Building 1M-540,000 = 460,000; 400,000 – 460,000 = 60,000 L

50,000 350,000 540,000 60,000 1,000,000

Books of Producers Company Building Accumulated Depreciation-Equipment Cash Gain on Exchange of Equipment Equipment

400,000 320,000 50,000 70,000 600,000

600,000-320,000 = 280,000; 350,000-280,000=70,000 G

Chapter 5- Property, Plant and Equipment

5-5.

280,000 – 350,000 = 70,000 gain (Black Company and Berry Company) Books of Black Company

Equipment Accumulated Depreciation-Building Building

460,000 540,000 1,000,000 Books of Berry Company

Building Accumulated Depreciation-Equipment Equipment 5-6.

280,000 320,000 600,000

(Abatis Forwarders)

Land Accumulated Depreciation – Trucks Trucks Cash Gain on Exchange of Trucks 5-7.

10,340,000 4,400,000 `

12,800,000 340,000 1,600,000

(Business Processing, Inc.)

Equipment (new) Accumulated Depreciation Loss on Exchange of Equipment Equipment ((old) Cash (64,000 – 33,000)

55,000 16,000 8,000 48,000 31,000

5-8. King Company Tooling Machine Automobile (net) Gain on Exchange of Automobile

172,800 135,000 37,800

Princess Company Machinery (new) Accumulated Depreciation – Machinery (old) Loss on Exchange of Machinery Machinery (old) Cash 5-9.

1,200,000 340,000 190,000 850,000 880,000

(Urban Corporation)

Land purchase Demolition of old building Legal fees for land acquisition Building permit fees Interest on loan for construction Building construction costs Landscaping costs* Equipment purchased of use in excavation (800,000 – 640,000) Fixed overhead allocated to building construction

Land P12,000,000 300,000 150,000

Land Improvements

Building

P 80,000 270,000 15,000,000 P3,500,000 160,000 100,000

Salvage from the demolished oldbuilding Total costs

(70,000) P2,500,000

P350,000

P5,610,000

*Landscaping costs may be charged to the land account if there is an indication that such an expenditure is

2

Chapter 5- Property, Plant and Equipment

permanent in nature. Compensation for injury to construction worker is chargeable to loss; this expenditure could have been avoided had the company obtained insurance on its workers. If an insurance was acquired, the amount of premiums paid may be charged to the building being constructed. Profit on construction is not recognized elsewhere in the accounts. The self-constructed asset should be charged for the actual costs incurred in its completion. The cost of modifications to the new building per instruction by the building inspectors is charged to loss since this expenditure is not a necessary expense for the asset. This was incurred as a result of the company’s negligence and could have been avoided had proper planning been done.

5-10. (Day Company) Purchase price of land Payments to tenants to vacate premises Demolition of old building Legal fees for purchase contract and recording ownership Delinquent property taxes on land Proceeds from sale of salvaged materials Total 5-11

P4,000,000 200,000 100,000 150,000 50,000 (20,000) P4,480,000

(Yu Corporation)

Balances, December 31, 2012 Cash paid on purchase of land Mortgage assumed on the land bought including interest at 10% Legal fees, realty taxes and documentation expenses Payment to squatters Razing costs of old building Salvage value from building demolition Cost of fencing the property Paid to a contractor for building erected Building permit fee Excavation expenses Architect’s fees Invoice cost of machines acquired Freight, unloading and delivery charges Custom duties and other charges Allowances, hotel accommodations paid to technicians during installation and test runs of machines Balances, December 31, 2013

Land P7,000,000 4,500,000

Land Improvements P500,000

Buildings P 9,000,000

Machinery and Equipment P 980,000

5,000,000 50,000 100,000 120,000 (150,000) 500,000 12,000,000 20,000 50,000 150,000 2,000,000 60,000 140,000

P16,620,000

P1,000,000

P21,220,000

400,000 P3,580,000

The interest of P150,000 is an imputed interest and is not reported elsewhere in the financial statements. The royalty payments of machines purchased are charged to operating expense for the period. 5-12. (Metro Company) a. P5,000,000 x 10% Less interest income earned on temporary investment of loan

3

P500,000 ( 125,000)

Chapter 5- Property, Plant and Equipment

b.

c.

Capitalized interest 1,250,000 x 10% 1,250,000 x 10% x 9/12 1,250,000 x 10% x 6/12 1,250,000 x 10% x 3/12 Total interest Less interest income earned on temporary investment of loan Capitalized interest Total construction costs Total cost of building Computation of average accumulated expenditures: 1,400,000 x 12/12 1,000,000 x 9/12 1,200,000 x 5/12 1,000,000 x 3/12 400,000 x 0/12 Average accumulated expenditures Computation of weighted average interest rate: (10% x 1,600,000) + (12% x 2,000,000) 1,600,000 + 2,000,000 Interest of specific borrowing: 1,800,000 x 10% Less interest earned Interest on general borrowing: 2,900,000 – 1,800,000 = 1,100,000 1,100,000 x 11.11% Capitalized interest

d.

P375,000 P 125,000 93,750 62,500 31,250 P 312,500 40,000 P 272,500 5,000,000 P5,272,500

P1,400,000 750,000 500,000 250,000 ---------P2,900,000

11.11%

P180,000

2,800,000 x 10% 1,600,000 x 10% 2,000,000 x 12% Total interest on loans Less capitalized interest: (2,900,000 x 10.625%*) Interest expense for 2013

10,000

P170,000

122,210 P292,210 P280,000 160,000 240,000 P680,000 308,125 P371,875

* 680,000 / 6,400,000 = 10.625% 5-13. (Lim Company) 3,600,000 x 12/12 6,000,000 x 7/12 15,000,000 x 6/12 15,000,000 x 1/12 Average accumulated expenditures a.

Interest on specific borrowing (30,000,000 x 12%) Less interest revenue earned from temporary investments of specific borrowing Capitalized interest

b.

Interest on specific borrowing (12,000,000 x 12%) Less interest revenue earned from temporary investments of specific borrowing Interest on general borrowings 15,850,000 – 12M = 3,850,000; 3,850,000 x 12.14%* Capitalized interest

P3,600,000 3,500,000 7,500,000 1,250,000 P15,850,000 P 3,600,000 249,000 P 3.351,000 P 1,440,000 249,000 P 1,191,000 467,390 P 1,658,390

4

Chapter 5- Property, Plant and Equipment

** 6,800,000 ÷ 56,000,000 = 12.14%

5-14. (Alondra Corporation) (a) Average accumulated expenditures: 4,000,000 x 12/12 8,000,000 x 9/12 12,200,000 x 6/12 8,800,000 x 3/12 7,000,000 x 0/12

P 4,000,000 6,000,000 6,100,000 2,200,000 -----P18,300, 000

Average accumulated expenditures Weighted average interest rate of general borrowings: 10% x 12,000,000 + 12% x 14,000,000 = 11.08% 12,000,000 + 14,000,000 Capitalized interest Specific borrowing (12% x 17 million) General borrowings 18,200,000 – 17,000,000 = 1,200,000 1,200,000 x 11.08%

P2,040,00 0

132,960 P2,172,96 0

Total (b)

5-15.

(Pifer Corporation) (a) Materials Direct labor Overhead 2,200,000 – (150% x 1,000,000) Total (b)

5-16.

Total cost of building = Total construction cost + capitalized interest cost = P40,000,000 + P2,172,960 = P42,172,960

Materials Direct labor Overhead (2,200,000 x 250/1,250) Total

(Pioneer Development Corporation) (a) Land Cash Unearned Income from Government Grant Building Cash

P1,250,000 250,000 700,000 P 2,200,000 P1,250,000 250,000 440,000 P 1,940,000 3,000,000 50,000 2,950,000 15,000,000 15,000,000

Depreciation Expense Accumulated Depreciation (15,000,000/20 years) Unearned Income from Government Grant Income from Government Grant (2,950,000/20 years) (b)

Property, Plant and Equipment Land Less Unearned Income from Government Grant

750,000 750,000

147,500 147,500

P3,000,000 2,802,500 P 197,500

Alternatively, the unearned income from government grant may be presented as part of the entity’s

5

Chapter 5- Property, Plant and Equipment

liabilities.

5-17. (Tan Company) a. Depreciation charges for 2012 and 2013 2012 1. SL (800,000 – 80,000) / 8 = 90,000 90,000 x 9/12= 67,500 2. Hrs 720,000/100,000 hrs = 7.20/hr. worked 7.20 x 4,500 hrs = 32,400 3. Units of 720,000/900,000 units = 0.80/unit output 0.80 x 40,000 units = 32,000 4. SYD 720,000 x 8/36 x 9/12 = 120,000 5. DDB 2/8 = 25% 25% x 800,000 x 9/12=150,000 6. 150% DB 1.5/8 = 18.75% 18.75% x 800,000 x 9/12= 112,500

2013 90,000 7.20 x 5,500 hrs = 39,600 0.80 x 60,000 units = 48,000 720,000 x 7.25/36 =145,000 800,000-150,000=650,000 25% x 650,000 = 162,500 800,000-112,500=687,500 18.75% x 687,500) = 128,906

b. Carrying amount of the asset at the end of 2013 Depreciation Method Cost Accum. Depr. 1. Straight-line 800,000 157,500 2. Hours worked 800,000 72,000 3. Units of output 800,000 80,000 4. SYD 800,000 265,000 5. DDB 800,000 312,500 6. 150% declining balance 800,000 241,406 5-18. (De Oro Company) a. Method 1 Straight-line method Method 2 Sum-of-the-years digits method 320,000 ÷ 80,000 = 4 year life 320,000 x 4/10 = 128,000 320,000 x 3/10 = 96,000 Method 3 150% declining-balance method 1.5 ÷ 4 = 37.5% 37.5% x 340,000 = 127,500 37.5% x (340,000-127,500)= b.

Carrying amount 642,500 728,000 720,000 535,000 487,500 558,594

79,688

Straight line method Sum-of-the-years digits method 320,000 x 2/10 150% declining balance method 37.5% x (340,000-127,500-79,688)

P80,000 64,000 49,804

5-19. (Real Company) a. 2/5 = 40%; 26,400 ÷ 40% = 66,000 b. 12,000 x 5 years = 60,000; 66,000 – 60,000 = 6,000 c. Carrying amounts, end of year 3 Straight-line (66,000 – 36,000) Sum-of-the-years digits(66,000 – 48,000 Double-declining balance (66,000 – 52,744)

)

= P30,000 = P18,000 = P13,256

The method with the lowest carrying amount at time of sale will yield the highest amount of gain on disposal. Therefore, the double-declining balance method will provide the highest gain on disposal at the end of year 3. 5-20. (Citi Company) a. Depreciation Expense for 2013 2010: 25% x 800,000 x 1/2 2011: 25% x (800,000 – 100,000)

P100,000 175,000

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Chapter 5- Property, Plant and Equipment

2012: 25% x (800,000 – 275,000) 2013: 25% x (800,000 – 406,250) b.

5-21.

(c)

(d)

(e)

(or 800,000 x 87.5% x 75% x 75% x 25% Sales price Carrying value on November 30, 2013 Cost Less accumulated depreciation 720,000 x (3.75/8) Loss on sale

P98,437.50 P300,000 P800,000 337,500

Cash Accumulated Depreciation – Equipment (3,200 x 4) Loss on Sale of Equipment Part Equipment

462,500 P162,500

19,200 19,200

5,000 12,800 200 18,000

Equipment Cash

20,000 20,000

Depreciation Expense – Equipment Accumulated Depreciations – Equipment Depreciation Expense – Equipment Accumulated Depreciation – Equipment Components 1 – 3 = Component 4 = 20,000/5 Total depreciation for

19,200 19,200 20,000 20,000

P16,000 4,000 P20,000

(Total Company) a.

b.

c.

Cost Less accumulated depreciation (1,100,000 ÷ 10) x 4 th Carrying amount of the asset, beginning of 5 year th Revised depreciation for the 5 year 760,000-100,000 = 660,000; 660,000 x 6/21

P1,200,000 440,000 P 760,000 P 188,571

th

Revised depreciation for the 5 year (760,000 – 60,000) / 5 years

P 140,000

th

Revised depreciation for the 5 year 760,000 / 4 years

5-23. (Standard Company) Cost Less accumulated depreciation: 2009 20% x 500,000 2010 20% x 400,000 2011 20% x 320,000 2012 20% x 256,000

7

P98,437.50

(Asiaplus Corporation) (a) Depreciation Expense – Equipment Accumulated Depreciation - Equipment (82,000-2,000)/10 = P8,000 (33,000-3,000)/6 = 5,000 (22,000-1,000)/7 = 3,000 (18,000 -2,000)/5 = 3,200 Total P19,200 (b)

5-22.

131,250

P 190,000

P500,000 100,000 80,000 64,000 51,200

295,200

Chapter 5- Property, Plant and Equipment

Carrying amount, January 1, 2013 Depreciation expense for 2013 204,800 – 10,000 = 194,800; 194,800 ÷ 5 years

P204,800 P 38,960

5-24. (Carmi Company) (a)

(b)

Depreciation for 2013 January 1 to August 1 (378,000 – 35,000)/5 x 7/12 August 1 to December 31 (320,800 – 50,000) / (5 – 2) + 2 = 270,800 270,800 / 5 x 5/12 Total Cost Less: Accumulated Depreciation (378,000–35,000)/5 x 2 Carrying value, August 1, 2013 Capitalized overhaul costs Carrying value after overhaul Depreciation, August 1 – December 31, 2013 (see above) Carrying value, December 31, 2013

5-25.

P40,017

22,567 P62,584 P378,00 0 137,200 P240,800 80,000 P320,80 0 22,567 P298,233

(Chu, Inc.) P264,00 0

Accum, depreciation balance, January 1, 2013 (528,000 x 4/8) Revised depreciation expense for 2013 528,000 – 264,000 = 264,000 264,000/ 2 yrs. Accumulated depreciation balance, December 31, 2013 5-26.

132,000 P396,000

(Imaculada Company) (a) Accumulated Depreciation 137,500 Loss on Disposal of Machine Parts 112,500 Machinery To remove the carrying value of the replaced engine block. 250,000/10 years = 25,000 25,000 x 5.5 years = 137,500 Machinery Cash

250,000

320,000 320,000 To capitalize the cost of replacement.

Depreciation Expense Accumulated Depreciation To record depreciation for 2013.

82,875 82,875

January 1 – July 1, 2013 (prior to replacement) (1,000,000/10 years) x 6/12 July 1 – December 31, 2013 (after replacement) Carrying value, July 1 (1M/10) x 4.5 years 450,000 CV of old engine block (112,500) Cost of new engine block 320,000 Depreciable carrying value 657,500 Remaining life ÷ 10 yrs Revised annual depreciation 65,750 x ½ Total depreciation expense for 2013

50,000

32,875 82,875

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Chapter 5- Property, Plant and Equipment

Alternative computation: New engine block 320,000/10 = 32,000; 32,000 x 6/12 Replaced engine block 25,000 x 6/12 Remaining parts of machinery 1,000,000 – 250,000 = 750,000 (750,000/10) x 6/12 (750,000/10 years) x 4.5 = 337,500 (337,500/10 years) x 6/12 Total depreciation expense for 2013

(b)

16,000 12,500

37,500 16,875 82,875

Accumulated Depreciation 176,000 Loss on Disposal of Machine Parts 144,000 Machinery 320,000/10 years = 32,000 32,000 x 5.5 years = 176,000

320,000

Machinery Cash

320,000

Depreciation Expense Accumulated Depreciation

81,300

320,000

81,300

January 1 – July 1, 2013 (prior to replacement) (1,000,000/10 years) x 6/12 50,000 July 1 – December 31, 2013 (after replacement) Carrying value, July 1 (1M/10) x 4.5 years 450,000 CV of old engine block (144,000) Cost of new engine block 320,000 Depreciable carrying value 626,000 Remaining life ÷ 10 yrs Revised annual depreciation 62,600 x ½ 31,300 Total depreciation expense for 2013 81,300 5-27. (Remedios Company) (a) Cost of Leasehold Improvements Less Accumulated Depreciation 1,200,000/10 years = 120,000 x 4 years Lease term is 10 years; Useful life is 12 years 480,000 Shorter period is 10 years Carrying value, December 31, 2012 P 720,000 (b)

Carrying value, December 31, 2012 Revised remaining lease term is 11 years (10 – 4 + 5) Remaining useful life is 8 years (12 – 4) Shorter period is Depreciation expense for 2013

P

720,000

÷ 8 years P 90,000

5-28. (Joice Company) (a) Recoverable amount is the higher of fair value less cost to sell

9

P1,200,000

Chapter 5- Property, Plant and Equipment

and the asset’s value in use Fair value less cost to sell (450,000 – 30,000) P420,000 Value in use 100,000 x 3.7908 P379,080 12,418 20,000 x 0.6209 P391,498 (b)

(c)

Carrying value of the asset, December 31, 2013 Cost Less accumulated depreciation (810,000/9) x 4 years Recoverable amount (see a) Impairment loss

P860,000 360,000

(Island Souvenirs, Inc.) (a) Value in use (1,500,000 – 700,000) x 3.7908 Residual value (500,000 x 0.6209) Total (b)

(d)

5-30.

P500,000 420,000 P 80,000

Depreciation expense for 2013 420,000/5 years

5-29.

P420,000

P 84,000 P3,032,640 310,450 P3,343,0 90

Carrying value (9,000,000 – 1,500,000) Recoverable amount (higher between P3,200,000 and P3,343,090) Impairment loss

P7,500,000

3,343,090 P4,156,910

Revised annual depreciation (3,343,090 – 500,000) / 5 years

(Lu Company) Depreciation Expense Accumulated Depreciation To record depreciation expense for 2012 (500,000 – 50,000) / 8

P 568,618 56,250 56,250

Impairment Loss 131,250 Accumulated Depreciation 131,250 To record impairment loss. Carrying value 500,000 – (56,250 x 3 years) P331,250 Recoverable value 200,000 Impairment loss P131,250 Depreciation Expense Accumulated Depreciation To record depreciation expense for 2013. (200,000 – 20,000) / 2 years 5-31.

90,000 90,000

(Twin Head Corporation)

(a)

Depreciation expense 5,600,000 / 16 years

2011 350,000

(b)

December 31, 2013 Depreciation Expense Accumulated Depreciation

350,000

Accumulated Depreciation Recovery of Previous Impairment Recoverable amount

2012 350,000

350,000 2,100,000 2,10...