PPE Part 1. Chapter 15 - rEVIEW FOR ppe PDF

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Chapter 15Property, Plant and Equipment (Part 1)PROBLEM 1: TRUE OR FALSE1. FALSE2. FALSE – cost3. TRUE4. FALSE – expensed5. FALSE – direct costs are capitalized in full and not aportion of the cost is recognized in profit or loss6. TRUE – The cost of abnormal amounts of wastedmaterial, labor, or oth...

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Page | 1

Chapter 15 Property, Plant and Equipment (Part 1) PROBLEM 1: TRUE OR FALSE 1. FALSE 2. FALSE – cost 3. TRUE 4. FALSE – expensed 5. FALSE – direct costs are capitalized in full and not a portion of the cost is recognized in profit or loss 6. TRUE – The cost of abnormal amounts of wasted material, labor, or other resources due to inefficiencies is recognized as expense. 7. FALSE – not adjusted 8. FALSE – not necessarily 9. FALSE 10. FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY 1. D 2. D 3. D 4. B – see “not assumed” 5. D 6. C 7. A 8. D 9. D 10. C

PROBLEM 3: EXERCISES 1. Solutions: Requirement (a): Purchase price (cash price equivalent) Broker’s commission

100,000 5,000

Page | 2 Import duties Non-refundable purchase taxes Transportation cost Assembling and installation costs Testing costs Net proceeds from samples generated Initial cost of equipment

Requirement (b): Dat Factory equipment e Cash

25,000 10,000 1,000 2,000 1,500 (500) 144,000 144,50 0

to record capitalizable costs of equipment Dat e

Cash Factory equipment

144,50 0

500 500

to record sale of samples generated from testing Dat e

General and administrative costs Advertising expense Cash

4,200 3,800 8,000

to record non-capitalizable costs

2. Solution: Land Lump-sum price (6M x 2.5/7.5); (6M x 5/7.5)

Land registration costs Payment to tenants to vacate premises

2,000,0 00 4,000 1,500

Buildi ng 4,000,0 00 3,000

(4.5K x 2.5/7.5); (4.5K x 5/7.5)

Option paid on the land and building

1,000

2,000

2,500

5,000

(3K x 2.5/7.5); (3K x 5/7.5)

Broker's fee on the land and building (7.5K x 2.5/7.5); (7.5K x 5/7.5)

Unpaid real estate taxes prior to acquisition assumed by Buko Co. – assessed on land Repairs and renovation costs before the building is occupied Totals

3. Solutions:

15,000

20,000

2,024, 000

4,030, 000

Page | 3 Case 1: Old building has fair value Requirement (a): Old buildi ng Lump-sum price 2,000,0 4,000,0 (6M x 2.5M/7.5M); (6M x 5M/7.5M) 00 00 Cost of razing the old building (demolition cost) Proceeds from sale of salvaged materials Legal fees in conveying title 10,000 to land 1,000 2,000 Option paid for the land and old bldg. acquired (3K x 2.5/7.5); (3K Land

New buildi ng 30,000 (7,500) -

x 2.5/7.5)

2,000

Payments to tenants to vacate premises (6K x 2.5/7.5); (6K x

4,000

5/7.5)

Materials, labor and overhead Totals

2,013, 000

Requirement (b): Lump sum purchase price Dat Land e Building - old Cash to record the purchase on a lump sum price

Demolition costs Dat Building – new e Cash

4,006, 000

2,000,0 00 4,000,0 00

4,250,0 00 4,272, 500

6,000,00 0

30,000 30,000

to record the demolition costs as cost of the new building

Salvaged materials Dat Cash e Building - new to record the proceeds from sale of salvaged materials resulting from the

7,500 7,500

Page | 4

demolition as reduction in the cost of the new building

Additional costs: Title, option and payments to tenants. Dat Land (10K + 1K + 2K) 13,000 e Building – old (2K + 4K) 6,000 Cash 19,000 to record the additional costs of legal fees in conveying title to land, option, and payments to tenants to vacate premises

Construction costs Dat Building – new e Cash

4,250,0 00

to record the construction costs of the new building

Allocated cost of old building demolished Dat Loss on derecognition of asset 4,006,0 e 00 Building - old to record the allocated cost of the demolished building as loss

4,250,0 00

4,006,0 00

Case 2: Old building has no fair value Requirement (a): Old buildi ng -

New buildi ng -

-

30,000

-

-

(7,500)

10,000

-

-

3,000

-

6,000

-

Land Lump-sum price Cost of razing the old building (demolition cost) Proceeds from sale of salvaged materials Legal fees in conveying title to land Option paid for the land and old bldg. acquired Payments to tenants to vacate premises (6K x 2.5/7.5); (6K x

6,000,0 00 -

5/7.5)

Materials, labor and overhead

-

-

4,250,0

Page | 5

6,019, 000

Totals

Requirement (b): Lump sum purchase price Dat Land e Cash

00 4,272, 500

-

6,000,0 00

6,000,00 0

to record the purchase on a lump sum price

Demolition costs Dat Building – new e Cash

30,000 30,000

to record the demolition costs as cost of the new building

Salvaged materials Dat Cash e Building - new

7,500 7,500

to record the proceeds from sale of salvaged materials resulting from the demolition as reduction in the cost of the new building

Additional costs: Title, option and payments to tenants. Dat 19,000 Land e Cash 19,000 to record the additional costs of legal fees in conveying title to land, option, and payments to tenants to vacate premises

Construction costs Dat Building – new e Cash

4,250,0 00

to record the construction costs of the new building

4,250,0 00

4. Solution: Land improvem ent 4,000,0 00 20,000 Land

Purchase price of lot Land titling cost

New buildin g -

Page | 6 Special assessment Survey costs Materials, labor & overhead Cash discounts Clerical and other costs Excavation costs Architectural & permit Supervision by mgmt. Insurance premiums Paving (not included in

10,000 30,000 -

-

-

-

11,000,0 00 (60,000) 28,000

-

20,000

200,000 120,000 24,000 260,000 -

4,060, 000

20,000

11,572,0 00

blueprint)

Totals

5. Solutions: Case 1: Solution: Major Co.

Minor, Inc.

Equipment (new) 2,180,000 (a) Accumulated Dep. 400,000 Cash 280,000 Equipment (old) 2,000,000 Gain on exchange (squeeze) 300,000

Equipment (new) 1,920,000 (a) Cash 280,000 Accumulated Dep. 1,600,000 Loss on exchange 200,000 Equipment (old) 4,000,000

(a)

Fair value of asset given up Plus cash Paid (Minus cash received) Initial cost of non-monetary asset received

Major 1,900,0 00 280,00 0 2,180,0 00

Minor 2,200,0 00 (280,00 0) 1,920,0 00

Case 2: Major Co. Equipment (new) 2,200,000 Accumulated Dep. 400,000 Cash 280,000 Equipment (old)

Minor, Inc. (b)

Page | 7 2,000,000 Gain on exchange 320,000

(squeeze)

(b)

Fair value of asset received (i.e., the FV of Minor’s equipment)

Cash paid/received Initial cost of non-monetary asset received

Min or

Major 2,200,0 00 N/A 2,200,0 00

Case 3: Major Co. Equipment (new) 1,880,000 Accumulated Dep. 400,000 Cash 280,000 Equipment (old) 2,000,000

Minor, Inc. (c)

Equipment (new) 2,120,000 (c) Cash 280,000 Accumulated Dep. 1,600,000 Equipment (old) 4,000,000

(c)

Carrying amount of asset given up Plus cash Paid (Minus cash received) Initial cost of non-monetary asset received

Major 1,600,0 00 280,00 0 1,880,0 00

Minor 2,400,0 00 (280,00 0) 2,120,0 00

6. Solutions: Case 1: Date Land Share capital (20,000 x ₱10) Share premium Case 2: Date Land (20,000 x ₱90) Share capital (20,000 x ₱10) Share premium 7. Solutions:

2,000,0 00

1,800,0 00

200,000 1,800,00 0

200,000 1,600,00 0

Page | 8 Case 1: Jan. Land 1, Discount on notes payable 20x1 Cash Notes payable

Case 2: Jan. Land (a) 1, Discount on N/P 20x1

(1.8M –

1,518,777)

Cash Notes payable

2,000,0 00 200,000

1,918,7 77 281,223

400,000 1,800,00 0

400,000 1,800,00 0

(a) {400,000 + [(1.8M ÷ 3) x PV of ordinary annuity of 1 @9%, n= 3]} = 1,918,777

Date

Cash paymen ts

Interes Amortizati t on expens e

Jan. 1, 20x1

Present value 1,518,77 7 1,055,46 7

Dec. 31, 20x1

600,000

136,690

463,310

Dec. 31, 20x2 Dec. 31, 20x3

600,000

94,992

505,008

550,459

600,000

49,541

550,459

0

Dec. 31, 20x1

Notes payable Interest expense Discount on notes payable Cash

600,000 136,690

Dec. 31, 20x2

Notes payable Interest expense Discount on notes payable Cash Notes payable Interest expense Discount on notes payable

600,000 94,992

Dec. 31, 20x3

136,69 0 600,00 0 94,992 600,00 0 600,000 49,541 49,54 1

Page | 9 Cash

600,00 0

8. Solution: Donor is a shareholder Equipt. (FV of asset received) 2M Donated capital 2M

Donor is an unrelated party Equipt. (FV of asset received) 2M Income from donation 2M

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL 1. A Solution: 5,000,00 Land used as plant site 0 Building under construction to be used as new 12,000,0 office 00 Equipment held for rental under various 1,200,00 operating leases 0 Fixtures used in rendering services 500,000 Bearer plants 100,000

Total PPE

18,800,0 00

2. D Solution: Purchase price inclusive of VAT Divide by: Purchase price exclusive of VAT Cash/ prompt discount Cost of equipment

The training and relocation costs are expensed. 3. A

224,00 0 112 % 200,00 0 (4,48 0) 195, 520

P a g e | 10 Solution: 12,000,0 00 250,0 00 20,0 00 50,0 00 280,0 00 30,0 00 (3,0 00) 12,627,0 00

Purchase price Freight Transit insurance Special foundation for the machine Assembling and installation Testing Salvaged materials from trial runs Cost of new machine

The cost of dismantling and removing old equipment prior to the installation of new equipment is recognized as expense except when the cost was previously recognized as liability (in which case, the cost is treated as settlement of the liability; the entry would be debit liability and credit cash). 4. C Solution: Land Lump-sum price [5.85M x (5/6); (1/6)]

Appraisal fee Renovation costs Plans and specs. Construction mats. Labor Excavation Structural

4,875, 000

Old bldg.

New bldg.

Othe rs

975,000 expense d* 500,000 2,900,000 11,000,000 6,500,000 1,000,000 1,200,000

P a g e | 11 works Supervision

100,000 expen sed

Injury claims Subcontracted Savings Imputed interest Allocated costs

5,000,000 ignor ed ignor ed 4,875, 000

1,475,0 00

27,700,00 0

* Appraisal fees do not normally meet the asset recognition criteria under the PFRS. It should be noted though that the Internal Revenue Service (IRS) in the U.S. requires the capitalization of appraisal fees as cost of the appraised property for taxation purposes. (source: https://keitercpa.com/wp-content/uploads/2012/02/Capitalization-RulesAcquisition-of-Real-Property.pdf)

This, however, does not mean that appraisal fees should also be capitalized as cost of PPE for financial reporting purposes. (source: https://www.tbr.edu/business/procedures-capitalizingfixed-assets)

5. A Solution: Land Lump-sum price (3.6M); (4M 3.6M)

Legal fees Demolition Survey Architectural Bldg. permit Price of new bldg. Elec. & water Real property tax Utilities

3,600,0 00 180,00 0

Old bldg.

New bldg.

Othe rs

400,000 50,000

25,000 260,000 120,000 9,000,00 0 80,000 expens ed expens ed

P a g e | 12 Wi-Fi connection Internet fees Salvaged materials Allocated costs

expens ed expens ed

3,805, 000

400,00 0

(10,000) 9,500,0 00

The allocated cost of the old building is charged as loss. 6. B (2.5M x 97%) + 50K + (200K x PV of 1 @12%, n=10) = 2,539,395 7. C Solution: Liempo: 1) Equipment received: (1,875,000 – 700,000) = 1,175,000 2) Gain (loss) on exchange: (1,875,000 – 3,500,000) = (1,625,000) Monggo: 1) Equipment received: (1,000,000 + 700,000) = 1,700,000 2) Gain (loss) on exchange: (1,000,000 – 1,200,000) = (200,000) 8. A Solution: Liempo: 1) Equipment received: (3,500,000 – 700,000) = 2,800,000 2) Gain (loss) on exchange: 0 Monggo: 1) Equipment received: (1,200,000 + 700,000) = 1,900,000 2) Gain (loss) on exchange: 0 9. A Solution:

P a g e | 13 1) Equipment received: 40,000, the fair value of the asset received 2) Gain (loss) on exchange: Date Equipment – new (FV of asset 40,000 received) 70,000 Accumulated depreciation 100,00 Equipment - old 0 Cash 8,000 Gain on exchange 2,000 (squeeze)

10. A Solution: (a) Land = 3,000,000 Land improvement = 600,000 (b) Transportation equipment (SUV): Cash purchase price, including the car accessories Vehicle registration Total cost - SUV







2,910,000 12,000 2,922,000

In practice, the cost of car accessories installed when the vehicle was purchased, and for which a single CDV was prepared for the vehicle and the car accessories, is included in cost of the vehicle. Accountants do this mainly for convenience in recording. Subsequent expenditures on car accessories are charged as expenses. Thus, the cost in (d) is charged as expense. The cost of a vehicle’s initial registration is capitalized because this is necessary for the entity to obtain the future economic benefits of the vehicle. It is illegal to use an unregistered vehicle. However, the costs of subsequent annual registrations are expensed. The insurance is recognized as expense (or initially recorded under the “Prepaid insurance” account and subsequently charged as expense).

P a g e | 14 (c) Transportation equipment (Pickup truck): Cash price equivalent Modification for off-road driving Total cost - Pickup truck



1,800,000 280,000 2,080,000

The modification is capitalized because it is necessary in bringing the vehicle to its intended use. 2,922,0 00 2,080,0 00 5,002, 000

Total cost - SUV Total cost - Pickup truck Total Transportation equipment

(d) See (b) above (e) Machine: 160,000 – cash price equivalent PROBLEM 5: CLASSROOM ACTIVITIES ACTIVITY 1 Land

1,000,000 Cash

1,000,000 to record the acquisition of land

ACTIVITY 2 Requirement (a): Purchase price, net of VAT Cost of initial registration Initial cost of transportation equipment F

1,418,650. 00 8,137.18 1,426,787 .18

The cost of initial registration is normally capitalized (in practice), based on the concept that this cost is necessary for the entity to obtain the economic benefits from the asset, i.e., it is illegal to use an unregistered vehicle. The subsequent annual costs of registration are expensed, based on the concept that

P a g e | 15

F

subsequent expenditures on assets generally only maintain the usability of the asset rather than increase it. The insurance cost is expensed over the coverage period.

Requirement (b): April 25, 20x1

Transportation equipment Input VAT Cash

1,418,650 170,238 1,588,888

to record the purchase of vehicle April 25, 20x1

Prepaid insurance (100,000 x 1/3) 33,333.33 Deferred insurance (100,000 x 2/3) 66,667.67 Cash

100,000.00

to record the insurance

F

The insurance covers a 3-year period, i.e., from April 25, 20x1 to April 25, 20x3. The portion that covers Years 2 and 3 are recorded under the “Deferred insurance” account and reported as noncurrent asset in the December 31, 20x1 financial statements.

April 25, 20x1

Transportation expense Cash

2,623.52 2,623.52

to record the purchase of diesel April 29, 20x1

Transportation equipment Cash

8,137.18 8,137.18

to record the initial registration of the vehicle with the Land Transportation Office

PROBLEM 6: FOR CLASSROOM DISCUSSION 1. Solution: Manufacturing equipment purchased on installment basis

Land used in business Building owned, used as warehouse

3,000,00 0 5,000,00 0 1,500,00 0

P a g e | 16 Servicing equipment – used in building maintenance Safety and environmental equipment Total PPE

2. Solution: Purchase price Broker’s commission Freight cost Freight insurance Installation costs Calibration and testing costs, net

3,000,00 0 450,000 12,950, 000

1,000,000 50,000 35,000 5,000 250,000 (20,000

– 2,000)

Initial cost of equipment 3. Solution: Purchase price inclusive of refundable purchase tax Refundable purchase tax Cash discount not taken Freight and installation costs (main office) Total cost of equipment

18,000 1,358,000

896,00 0 (96,000) (24,00 0) 40,000 816,0 00

The capitalization of costs ceases when the PPE is in the location and condition originally intended by management. Therefore, the ₱50,000 relocation and reinstallation costs are expensed. 4. Solution:

Lump-sum price (10M x 1/4 & 3/4)

Land titling cost Special assessment Payments to tenants (80K x 1/4 & 3/4)

Option on property

Land 2,500, 000 100,00 0 40,000 20,000 30,000

Land improvem ent

Buildi ng 7,500,0 00

60,000 90,000

P a g e | 17 acquired (120K x 1/4 & 3/4)

Building remodeling prior to occupancy Landscaping on the premises Addition of driveway and parking lot Total costs

800,00 0 240,000 80,000 2,690, 000

320,000

8,450, 000

Old buildi ng

New buildin g

5. Solutions: Case 1: The costs are allocated as follows: Land Lump-sum price [6M x (5.425/6.2) & (.775/6.2)]

Finder's fee [80K x (5.425/6.2) & (.775/6.2)]

Land registration cost Unpaid taxes prior to acqn. date Demolition cost of old building Proceeds from sale of sal. mats. Materials, labor and overhead Total costs

5,250,00 0 70,000

750,0 00 10,00 0

8,000 200,000 130,000

5,528,0 00

760,0 00

Journal entries: Lump sum purchase price Dat Land

5,250,0

(10,000) 10,000,0 00 10,120, 000

P a g e | 18 e

Building - old Cash

Finder’s fee Dat Land e Building - old Cash

00 750,000

6,000,00 0

70,000 10,000 80,000

Land registration cost & Unpaid taxes on land prior to acquisition date Dat Land (200,000 + 8,000) 208,00 e Cash 0 208,00 0 Property tax after acquisition date Dat Tax expense e Cash

Demolition costs Dat Building – new e Cash

Salvaged materials Dat Cash e Building - new Construction costs Dat Building – new e Cash

60,0...