PPE2-sample - Debi Comia PDF

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Property, Plant and Equi Equipment pment (Part 2)

Depreciation methods Use the following information for the next four cases: Fact pattern On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of ₱400,000. Straight line method Case #1: Use the straight-line method for the next two questions. 1. How much is the depreciation expense in the 2nd year? a. 100,000 b. 80,000 c. 200,000 d. 160,000 2.

How much is the accumulated depreciation on December 31, 20x2? a. 100,000 b. 80,000 c. 200,000 d. 160,000

Sum Sum--of of-the-the-the-years’ years’ digits (SYD) method Case #2: Use the sum-of-the-years’ digits (SYD) method for the next two questions. 3. How much is the depreciation expense in the 2nd year? a. 120,000 b. 96,000 c. 128,000 d. 224,000 4.

How much is the accumulated depreciation on December 31, 20x2? a. 120,000 b. 96,000 c. 128,000 d. 224,000

Double declining balance method Case #3: Use the double declining balance method for the next two questions. 5. How much is the depreciation expense in the 2nd year? a. 120,000 b. 100,000 c. 128,000 d. 224,000 6.

How much is the accumulated depreciation on December 31, 20x2? a. 120,000 b. 96,000 c. 160,000 d. 300,000

Units of production method (Activity method or Variabl Variable-charge e-charge method) Case #4: Use the units of production method for the next two questions: The equipment has an expected total output of 160,000 units and an expected total input of 40,000 hours. Information on actual operations is presented below: Year 20x1 20x2 20x3 20x4

Units produced

Manufacturing hours

60,000 30,000 45,000 25,000

16,000 8,000 12,000 4,000

160,000

40,000

7.

If SIMPLETON Co. uses the output method, how much is the depreciation expense in the 2nd year? a. 128,000 b. 96,000 c. 60,000 d. 64,000

8.

If SIMPLETON Co. uses the output method, how much is the accumulated depreciation on December 31, 20x2? a. 120,000 b. 180,000 c. 192,000 d. 256,000

9.

If SIMPLETON Co. uses the input method, how much is the depreciation expense in the 2nd year? a. 64,000 b. 96,000 c. 60,000 d. 64,000

10. If SIMPLETON Co. uses the input method, how much is the accumulated depreciation on December 31, 20x2? a. 120,000 b. 210,000 c. 192,000 d. 256,000

SOLUTIONS: B (400,000 – 80,000) ÷ 4 = 80,000 D (80,000 x 2) = 160,000 B Solution: SYD denominator = Life x [(Life + 1) ÷ 2] = 4 x [(4 + 1) ÷ 2] = 10 Depreciation – 2nd yr. = (400,000 – 80,000) x 3/10 = 96,000 D (400,000 – 80,000) x [(4+3)/10] = 320,000 x 7/10 = 224,000 B Solution: Double declining balance rate = 2/Life = 2/4 = 50% (400,000 x 50% x 50%) = 100,000 D Solution: Depreciation - 20x1 (400K x 50%) Depreciation - 20x2 (400K - 200K) x 50% Accumulated depreciation - Dec. 31, 20x2

200,000 100,000 300,000

C (400,000 – 80,000) x 30,000 / 160,000 = 60,000 B (400,000 – 80,000) x [(60,000 + 30,000) / 160,000] = 180,000 A (400,000 – 80,000) x 8,000 / 40,000 = 64,000 C (400,000 – 80,000) x [(16,000 + 8,000) / 40,000] = 192,000 Partial year depreciation Use the following information for the next three questions: DEPLORABLE BAD Co. acquired a machine on September 21, 20x1 for a total cost of ₱160,000. The machine was estimated to have a useful life of 4 years and a salvage value of ₱10,000. 11. How much is the depreciation expense in 20x2 under the straight-line method? a. 37,500 b. 93,750 c. 36,400 d. 35,000 12. How much is the depreciation expense in 20x2 under the sum-of-years’ digits method? a. 45,000 b. 11,250 c. 56,250 d. 57,250 13. How much is the depreciation expense in 20x2 under the double declining balance method? a. 70,000 b. 60,000 c. 10,000 d. 0

Solutions: Depreciation for each full year of the asset’s life is calculated as follows: Year Straight line SYD 1 (150K* / 4) = 37,500 4/10 x 150K* = 60,000 2 37,500 3/10 x 150K = 45,000 3 37,500 2/10 x 150K = 30,000 4 37,500 1/10 x 150K = 15,000

Double declining balance 50% x 160,000 = 80,000 50% x 80,000 = 40,000 50% x 40,000 = 20,000 50% x 20,000 = 10,000

* (₱160,000 - ₱10,000) = ₱150,000 Since the first full year of the asset’s life does not coincide with the entity’s accounting period, the amounts shown above are prorated as follows: Double declining balance Year Straight line SYD 20x2 37,500 60,000 x 9/12 = 45,000 80,000 x 9/12 = 60,000 45,000 x 3/12 = 11,250 40,000 x 3/12 = 10,000 37,500 56,250 70,000

*Since the asset was acquired on September 21, 20x1 (last half of the month), it is treated as if it has been acquired on October 1, 20x1.

Composite method Use the following information for the next four questions: On January 1, 20x1, DEVIOUS CROOKED Co. purchased the following: Cost Residual value Useful life Machine tools 80,000 4,000 3 years Meters costing 64,000 2,000 5 years Returnable containers 6 years 14. What is the composite life? a. 5.40 b. 5

c. 4.50

120,000

d. 4.71

15. What is the composite rate? a. 21.87% b. 22.21%c. 95.45% d. 4.50% 16. How much is the depreciation expense in 20x1? a. 57,733 b. 56,000 c. 58,667 d. 59,8774 Solution: Cost

Residual value

Depre-ciable amt.

Useful life

Annual depreciation

Machine tools

80,000

4,000

76,000

3

25,333

Meters costing Returnable containers Totals

64,000

2,000

62,000

5

12,400

120,000

-

120,000

6

20,000

264,000

258,000

57,733

Composite life = Depreciable amt. ÷ Annual depreciation (258,000 ÷ 57,773) = 4.5 (rounded-off) (Refer to solution above) Composite rate = Annual depreciation ÷ Total cost = (57,733 ÷ 264,000) = 21.87% Retirement and Replacement methods Use the following information for the next two questions: The small tools account of ATROCIOUS CRUEL Co. has a balance of ₱600,000 as of January 1, 20x1. Movements in this account during the year are as follows:

Cost of newly acquired small tools Cost of old small tools retired Proceeds from sale of old small tools

Feb.

April

Sept.

Nov.

40,000

-

120,000

88,000

24,000

48,000

-

72,000

-

4,000

2,000

3,200

17. Assuming ATROCIOUS Co. uses the retirement method, how much is the depreciation expense in 20x1? a. 134,800 b. 166,800 c. 144,000 d. 118,800 18. Assuming ATROCIOUS Co. uses the replacement method, how much is the depreciation expense in 20x1? a. 134,800 b. 166,800 c. 144,000 d. 118,800

Solution: for 17 Cost of old small tools Retired

Feb.

April

Sept.

Nov.

24,000

48,000

-

72,000

Total depreciation 144,000

Proceeds from sale

(2,000)

(3,200)

-

(4,000)

(9,200)

Totals

22,000

44,800

-

68,000

134,800

Feb. 40,000

April -

Sept. N/A

48,000

-

(2,000)

(3,200)

-

(4,000)

(9,200)

38,000

44,800

-

84,000

166,800

Solution for 18 Cost of newly acquired small tools Cost of old small tools retired Proceeds from sale of old small tools Totals

Nov. 88,000

Total depreciation 128,000 48,000

Inventory method 19. The small tools account of AUGUST MAJESTIC Co. has a balance of ₱600,000 as of January 1, 20x1. Acquisitions of small tools during the period totaled ₱240,000 and proceeds from sale of small tools retired and/or replaced totaled ₱100,000. The annual asset count on December 31, 20x1 revealed a balance of small tools of ₱440,000. How much is the depreciation expense under the inventory method? a. 400,000 b. 300,000 c. 240,000 d. 140,000 Solution: Jan. 1, 20x1 bal. Additions

Small tools 600,000 100,000 240,000 300,000 440,000

Proceeds from retired/replaced tools Depreciation for 20x1 (squeeze) Dec. 31, 20x1 bal.

Change in depreciation method (from SYD to DDB) 20. On January 1, 20x1, KNAVE RASCAL Co. acquired machinery for a total cost of ₱80,000,000. The machinery is depreciated using the SYD method over a period of 10 years. On January 1, 20x4, KNAVE Co. changed its depreciation method to double declining balance method. How much is the depreciation expense in 20x4? a. 40,727,272 b. 11,635,782 c. 12,556,780 d. 13,556,702 Solution: ➢ SYD denominator = 10 x [(10+1)/2)] = 55 ➢ Accumulated depreciation on 1/1/x4 = 80M x [(10 + 9 + 8)/55] = 39,272,727 ➢ Carrying amt. on 1/1/x4 = 80M – 39,272,727 = 40,727,273 ➢ Double declining balance rate = 2/7 = 28.57% ➢ Dep’n. – 20x4 = 40,727,273 x 28.57% = 11,635,782 Change in useful life and residual value 21. On January 1, 20x1, SMUTTY OBSCENE Co. acquired machinery for a total cost of ₱80,000,000 and estimated residual value of ₱8,000,000. The machinery is depreciated using the straight line method over a period of 10 years. On January 1, 20x4, SMUTTY Co. revised the total useful life of the asset to 15 years from acquisition date and the residual value to ₱10,400,000. How much is the depreciation expense in 20x4? a. 4,000,000 b. 3,899,567 c. 4,010,250 d. 4,129,335

Solution: ➢ Carrying amt. on 1/1/x4 = (80M – 8M) x 7/10 + 8M = 58,400,000 ➢ Dep’n. – 20x4 = (58.4M – 10.4M) ÷ (15yrs. – 3yrs.) = 4,000,000 Methods of recording revaluation surplus – Replacement cost Use the following information for the next three questions: On December 31, 20x1, the building of SUBTERFUGE DECEPTION Co. with a historical cost of ₱80,000,000, accumulated depreciation of ₱20,000,000, and an estimated useful life of 20 years has been estimated to have a replacement cost of ₱140,000,000. Income tax rate is 30%. 22. How much is the revaluation surplus? a. 31,500,000 b. 36,778,750

c. 45,000,000

d. 60,000,000

23. Assuming SUBTERFUGE Co. uses the proportional method, the entry to record the revaluation includes: a. a debit to accumulated depreciation for ₱15,000,000 b. a debit to accumulated depreciation for ₱20,000,000 c. a debit to building for ₱25,000,000 d. a debit to building for ₱60,000,000 24. Assuming SUBTERFUGE Co. uses the elimination method, the entry to record the revaluation includes: a. a credit to accumulated depreciation for ₱20,000,000 b. a debit to building for ₱25,000,000 c. a debit to accumulated depreciation for ₱15,000,000 d. a debit to deferred tax for ₱13,500,000 Solution: The depreciated replacement cost is computed as follows: Replacement cost Less: Observed depreciation Depreciated replacement cost

140,000,000 (35,000,000)a 105,000,000

a Where:

Observed = Replacement cost depreciation 35,000,000 = 140,000,000 x (20,000,000/80,000,000)

X

Accumulated depreciation Historical cost

The revaluation surplus is computed as follows: Depreciated replacement cost Carrying amount (80,000,000 – 20,000,000) Revaluation surplus – gross of tax

105,000,000 (60,000,000) 45,000,000

The revaluation surplus gross of tax is allocated as follows: 31,500,000

Revaluation surplus after tax (45,000,000 x 70%a)

13,500,000

Deferred tax liability (45,000,000 x 30%) a (70% = 100% - 30% tax rate) Answer :D Solution: The movements in the accounts are determined as follows: Historical Cost Building 80,000,000 Accum. depreciation (20,000,000) CA/ DRC/ RSb 60,000,000 b Carrying amount/ Depreciated replacement cost/ Revaluation surplus The entry under the proportional method is as follows: Dec. 31, Building (see table) Accumulated depreciation (see table) 20x1 Revaluation surplus Deferred tax liability Answer: B Solution: The entry under the elimination method is as follows: Dec. 31, Accumulated depreciation Building (balancing figure) 20x1 Revaluation surplus Deferred tax liability Methods of recording revaluation – Appraised value Use the following information for the next two questions:

Replacement cost 140,000,000 (35,000,000) 105,000,000

Increase 60,000,000 (15,000,000) 45,000,000

60,000,000 15,000,000 31,500,000 13,500,000

20,000,000 25,000,000 31,500,000 13,500,000

On December 31, 20x1, the building of ABC Co. with a historical cost of ₱320,000,000, accumulated depreciation of ₱160,000,000, and an estimated useful life of 20 years has been assessed by an external valuer to have an appraised value of ₱200,000,000. Income tax rate is 30% 25. The entry under the proportional method to record the revaluation includes a. a debit to accumulated depreciation for ₱40,000,000 b. a credit to accumulated depreciation for ₱20,000,000 c. a debit to building for ₱80,000,000 d. a credit to building for ₱80,000,000 26. The entry under the proportional method to record the revaluation includes a. a debit to accumulated depreciation for ₱40,000,000 b. a debit to accumulated depreciation for ₱20,000,000 c. a debit to building for ₱80,000,000 d. a credit to building for ₱80,000,000 Answer : C Solution: The revaluation surplus is computed as follows: Appraised value Carrying amount (320M – 160M) Revaluation surplus – gross of tax Less: Deferred tax liability (40M x 30%) Revaluation surplus after tax

200,000,000 (160,000,000) 40,000,000 (12,000,000) 28,000,000

The change in carrying amount is determined as follows: Appraised value Divide by: Carrying amount (320M – 160M) Change in carrying amount

200,000,000 160,000,000 125%

The gross carrying amount after the revaluation is restated as follows: Gross carrying amount before revaluation Multiply by: Change in carrying amount Gross carrying amount after revaluation

320,000,000 125% 400,000,000

The accumulated depreciation after the revaluation is computed as follows: Gross carrying amount after revaluation Accumulated depreciation after revaluation (squeeze) Carrying amount after revaluation (Appraised value) The changes in the accounts are determined as follows: Before revaluation Building 320,000,000 Accumulated depreciation (160,000,000) 160,000,000 Carrying amount The entry under the proportional method is as follows: Dec. 31, Building Accumulated depreciation 20x1 Deferred tax liability Revaluation surplus Answer: A Solution: The entry under the elimination method is as follows: Dec. 31, Accumulated depreciation 20x1 Deferred tax liability Revaluation surplus The carrying amount after the revaluation is reconciled as follows: Building (original balance)

400,000,000 (200,000,000) 200,000,000

After revaluation 400,000,000 (200,000,000) 200,000,000

Increase 80,000,000 (40,000,000) 40,000,000

80,000,000 40,000,000 12,000,000 28,000,000

40,000,000 12,000,000 28,000,000

80,000,000

Accumulated depreciation (40M - 10M debit in entry) Carrying amount after revaluation (Appraised value)

(30,000,000) 50,000,000

Revaluation: Change in useful life Use the following information for the next two questions: On January 1, 20x1, the building of PRODIGIOUS EXTRAORDINARY Co. with a historical cost of ₱80,000,000 purchased 5 years ago with an estimated useful life of 20 years has been estimated to have a replacement cost of ₱140,000,000. The building is estimated to have a remaining useful life of 25 years as of January 1, 20x1. Depreciation is computed using the straight line method. Income tax rate is 30%. 27. How much is the revaluation surplus? a. 31,500,000 b. 45,000,000

c. 37,500,000

d. 36,788,366

28. How much is the depreciation expense in 20x1? a. 2,940,000 b. 4,200,000 c. 3,200,000

d. 3,333,976

Answer :A Solution: The depreciated replacement cost is computed as follows: Replacement cost Less: Observed depreciation Depreciated replacement cost

140,000,000 (35,000,000)a 105,000,000

a Where:

Observed depreciation ➢ ➢

=

Replacement cost

Accumulated depreciation Historical cost

X

Accumulated depreciation = (80,000,000 x 5/20) = 20,000,000 Observed depreciation = 140M x (20,000,000/ 80,000,000) = 35,000,000

The revaluation surplus is computed as follows: Depreciated replacement cost Carrying amount (80,000,000 – 20,000,000) Revaluation surplus before tax

105,000,000 (60,000,000) 45,000,000

Revaluation surplus after tax (45,000,000 x 70%b)

31,500,000

Answer : B Solution: The depreciation subsequent to date of revaluation is computed as follows: Revalued amount (depreciated replacement cost) Divide by: Revised remaining useful life Revised annual depreciation expense

105,000,000 25 4,200,000

Revaluation: Change in residual value and useful life Use the following information for the next two questions: On December 31, 20x1, the building of COLLOQUY CONVERSATION Co. was revalued. Information on revaluation date is shown below: Cost Replacement cost Building 72,000,000 144,000,000 Accumulated depreciation 16,000,000 Residual value 8,000,000 16,000,000 Remaining useful life 10 years 12 years 29. How much is the revaluation surplus? a. 45,000,000 b. 31,500,000

c. 36,788,366

30. How much is the depreciation expense in 20x2? a. 3,333,976 b. 4,200,000 c. 7,619,048

d. 51,428,571

d. 8,990,344

Answer : D Solution: The observed depreciation is computed as follows: Observed depreciation

=

Depreciable amt. of replacement cost

Where: Replacement cost Residual value Depreciable amt. of replacement cost

Observed depreciation

=

144,000,000 (16,000,000) 128,000,000

128,000,000

X

Accumulated depreciation Depreciable amount

Historical cost Residual value Depreciable amount

X

72,000,000 (16,000,000) 56,000,000 16,000,000 (given) 56,000,000

Observed depreciation = 36,571,429 The depreciated replacement cost is computed as follows: Replacement cost Less: Observed depreciation Depreciated replacement cost The revaluation surplus is computed as follows: Depreciated replacement cost Carrying amount (72,000,000 – 16,000,000) Revaluation surplus

Answer : C Solution: Depreciation subsequent to date of revaluation is computed as follows: Revalued amount (depreciated replacement cost) New residual value Depreciable amount Divide by: Revised remaining useful life Revised annual depreciation expense

144,000,000 (36,571,429) 107,428,571

107,428,571 (56,000,000) 51,428,571

107,428,571 (16,000,000) 91,428,571 12 7,619,048

PPE Part 2 EXERCISE 1: 1. Depreciation of noncurrent operating assets is an accounting process for the purpose of a. reporting declining asset values on the balance sheet. b. allocating asset costs over the periods benefitted by use of the assets. c. accounting for costs to reflect the change in general price levels. d. setting aside funds to replace assets when their economic usefulness expires. 2. Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues? a. Partial recognition b. Immediate re...