Practical Accounting Problems - PPE PDF

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TOPIC 4 –PROPERTY, PLANT AND EQUIPMENT ACCOUNTINGPROBLEM NO. 1 – Cost of land, land improvements and buildingAliaga Corporation was incorporated on January 2, 2010. The following items relate to the Aliaga’s property and equipment transactions:Cost of land, which included an old apartment building a...

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TOPIC 4 –PROPERTY, PLANT AND EQUIPMENT ACCOUNTING PROBLEM NO. 1 – Cost of land, land improvements and building Aliaga Corporation was incorporated on January 2, 20 10. The following items relate to the Aliaga’s property and equipment transactions: Cost of land, which included an old apartment building appraised at P300,000 Apartment building mortgage assumed, including related interest due at the time of purchase Deliquent property taxes assumed by Aliaga Payments to tenants to vacate the apartment building Cost of razing the apartment building Proceeds from sale of salvaged materials Architects fee for new building Building permit for new construction Fee for title search Survey before construction of new building Excavation before construction of new building Payment to building contractor Assessment by city for drainage project Cost of grading and leveling Temporary quarters for construction crew Temporary building to house tools and materials Cost of changes during construction to make new building more energy efficient Interest cost on specific borrowing incurred during construction Payment of medical bills of employees accidentally injured while inspecting building construction Cost of paving driveway and parking lot Cost of installing lights in parking lot Premium for insurance on building during construction Cost of open house party to celebrate opening of new building Cost of windows broken by vandals distracted by the celebration

303

P3,000,000 80,000 30,000 20,000 40,000 10,000 60,000 40,000 25,000 20,000 100,000 10,000,000 15,000 50,000 80,000 50,000 90,000 360,000 18,000 60,000 12,000 30,000 50,000 12,000

4 - Property, Plant and Equipment Practical Accounting Problems

QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Cost of Land a. P2,980,000 b. P3,270,000

c. P3,185,000 d. P3,205,000

2. Cost of Building a. P10,810,000 b. P10,895,000

c. P10,875,000 d. P11,110,000

3. Cost of Land Improvements a. P12,000 b. P72,000

c. P122,000 d. P 0

4. Amount that should be expensed when incurred a. P 80,000 c. P62,000 b. P110,000 d. P50,000 5. Total depreciable property and equipment a. P11,182,000 c. P10,947,500 b. P10,967,000 d. P10,882,000

Answers: 1) B; 2) A; 3) B; 4) A, 5) D Suggested Solution: PAS 16 par. 6 defines “ Property, plant and equipment” as tangible items that are: i. held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and ii. expected to be used during more than one period. Par. 15 and 16 further state that an item of property, plant and equipment that qualifies for recognition of an asset shall be measured at its cost. The cost of an item of property, plant and equipment comprises: a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

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4 - Property, Plant and Equipment Practical Accounting Problems

b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Question No. 1 Cost of land Apartment building mortgage assumed, including related interest due at the time of purchase Deliquent property taxes assumed by Aliaga Payments to tenants to vacate the apartment building Cost of razing the apartment building Proceeds from sale of salvaged materials Fee for title search Survey before construction of new building Assessment by city for drainage project Cost of grading and leveling Total cost of Land

P3,000,000 80,000 30,000 20,000 40,000 (10,000) 25,000 20,000 15,000 50,000 P3,270,000

Question No. 2 Architects fee for new building Building permit for new construction Excavation before construction of new building Payment to building contractor Temporary quarters for construction crew Temporary building to house tools and materials Cost of changes during construction to make new building more energy efficient Interest cost on specific borrowing incurred during construction Premium for insurance on building during construction Total cost of Building

305

P60,000 40,000 100,000 10,000,000 80,000 50,000 90,000 360,000 30,000 P10,810,000

4 - Property, Plant and Equipment Practical Accounting Problems

Question No. 3 Cost of paving driveway and parking lot Cost of installing lights in parking lot Total cost of Land Improvements

P60,000 12,000 P72,000

Question No. 4 Payment of medical bills of employees Cost of open house party Cost of windows broken by vandals Total cost amount that should be expensed

P18,000 50,000 12,000 P80,000

Question No. 5 Building (see no. 2) Land improvements (see no. 3) Total depreciable PPE

P10,810,000 72,000 P10,882,000

PROBLEM NO. 2 – Cost of machinery The following items relate to the acquisition of a new machine by Bongabon Corporation in 20 10: Invoice price of machinery Cash discount not taken Freight on new machine Cost of removing the old machine Loss on disposal of the old machine Gratuity paid to operator of the old machine who was laid off Installation cost of new machine Repair cost of new machine damaged in the process of installation Testing costs before machine was put into regular operation Salary of engineer for the duration of the trial run Operating cost during first month of regular use Cash allowance granted because the new machine proved to be of inferior quality

306

P2,000,000 40,000 10,000 12,000 150,000 70,000 60,000 8,000 15,000 40,000 250,000 100,000

4 - Property, Plant and Equipment Practical Accounting Problems

QUESTION: How much should be recognized as cost of the new machine? a. P1,985,000 c. P1,930,000 b. P1,993,000 d. P2,025,000

Answer: A Suggested Solution: Invoice price of machinery Cash discount not taken Freight on new machine Installation cost of new machine Testing costs Salary of engineer for the duration of the trial run Cash allowance Cost of the new machine

P2,000,000 (40,000) 10,000 60,000 15,000 40,000 (100,000) P1,985,000

PROBLEM NO. 3 – Cost of various property, plant and equipment The property, plant and equipment section of Zaragoza Corporation’s statement of financial position at December 31, 2009 included the following items: Land Land improvements Buildings Machinery and equipment

P2,100,000 560,000 3,600,000 6,600,000

During 2010 the following data were available to you upon your analysis of the accounts: Cash paid on purchase of land Mortgage assumed on the land bought, including interest at 16% Realtor’s commission Legal fees, realty taxes and documentation expenses Amount paid to relocate persons squatting on the property Cost of tearing down an old building on the land 307

P10,000,000 16,000,000 1,200,000 200,000 400,000 300,000

4 - Property, Plant and Equipment Practical Accounting Problems

Amount recovered from the salvage of the building demolished Cost of fencing the property Amount paid to a contractor for the building erected Building permit fees Excavation expenses Architect’s fee Interest that would have been earned had the money used during the period of construction been invested in the money market Invoice cost of machinery acquired Freight, unloading, and delivery charges Customs duties and other charges Allowances, hotel accommodations, etc., paid to foreign technicians during installation and test run of machines Royalty payment on machines purchased (based on units produced and sold)

200,000 440,000 8,000,000 50,000 250,000 100,000

600,000 8,000,000 240,000 560,000

1,600,000 480,000

QUESTIONS: Based on the above and the result of your audit, compute for the following as of December 31, 2010: 1. Land a. P30,000,000 b. P14,000,000

c. P29,900,000 d. P29,600,000

2. Land improvements a. P1,300,000 b. P1,000,000

c. P1,250,000 d. P 560,000

3. Building a. P12,300,000 b. P11,750,000

c. P12,000,000 d. P11,700,000

4. Machinery and equipment a. P14,840,000 b. P16,440,000

c. P15,400,000 d. P17,000,000

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4 - Property, Plant and Equipment Practical Accounting Problems

Answers: 1) A; 2) B; 3) C; 4) D Suggested Solution: Question No. 1 Land, 12/31/09 Cash paid on purchase of land Mortgage assumed on the land bought, including interest at 16% Realtor’s commission Legal fees, realty taxes and documentation expenses Amount paid to relocate persons squatting on the property Cost of tearing down an old building on the land Amount recovered from the salvage of the building demolished Land, 12/31/10

P 2,100,000 10,000,000 16,000,000 1,200,000 200,000 400,000 300,000 ( 200,000) P30,000,000

Question No. 2 Land improvements, 12/31/09 Cost of fencing the property Land improvements, 12/31/10

P 560,000 440,000 P1,000,000

Question No. 3 Buildings, 12/31/09 Amount paid to a contractor for the building erected Building permit fees Excavation expenses Architect’s fee Buildings, 12/31/10

P3,600,000 8,000,000 50,000 250,000 100,000 P1,200,000

Question No. 4 Machinery and equipment, 12/31/09 Invoice cost of machinery acquired Freight, unloading, and delivery charges Customs duties and other charges Allowances, hotel accommodations, etc. paid to foreign technicians Machinery and equipment, 12/31/10

309

P 6,600,000 8,000,000 240,000 560,000 1,600,000 P17,000,000

4 - Property, Plant and Equipment Practical Accounting Problems

PROBLEM NO. 4 – Acquisitions of property, plant and equipment In connection with your audit of Cuyapo Company’s financial statements for the year 2010, you noted the following transactions affecting the property and equipment items of the company: Jan. 1

Purchased real property for P5,026,000, which included a charge of P146,000 representing property tax for 20 10 that had been prepaid by the vendor; 20% of the purchase price is deemed applicable to land and the balance to buildings. A mortgage of P3,000,000 was assumed by Cuyapo on the purchase. Cash was paid for the balance.

Jan. 15

Previous owners had failed to take care of normal maintenance and repair requirements on the buildings, necessitating current reconditioning at a cost of P236,800.

Feb. 15

Demolished garages in the rear of the building, P36,000 being recovered on the lumber salvage. The company proceeded to construct a warehouse. The cost of such warehouse was P540,800, which was P90,000 less than the average bids made on the construction by independent contractors. Upon completion of construction, city inspectors ordered extensive modifications to the building as a result of failure on the part of the company to comply with building safety code. Such modifications, which could have been avoided, cost P76,800.

Mar. 1

The company exchanged its own shares with a fair value of P320,000 (par P24,000) for a patent and a new equipment. The equipment has a fair value of P200,000.

Apr.

1

The new machinery for the new building arrived. In addition, a new franchise was acquired from the manufacturer of the machinery. Payment was made by issuing bonds with a face value of P400,000 and by paying cash of P144,000. The value of the franchise is set at P160,000, while the machine’s fair value is P360,000.

May

1

The company contracted for parking lots and waiting sheds at a cost P360,000 and P76,800, respectively. The work was completed and paid for on June 1.

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4 - Property, Plant and Equipment Practical Accounting Problems

Dec. 31

The business was closed to permit taking the y ear-end inventory. During this time, required redecorating and repairs were completed at a cost of P60,000.

QUESTIONS: Based on the above and the result of your audit, determine the cost of the following: 1. Land a. P 940,000 b. P1,005,200

c. P 976,000 d. P1,052,800

2. Buildings a. P4,645,600 b. P5,005,600

c. P4,762,400 d. P4,681,600

3. Machinery and equipment a. P360,000 b. P560,000

c. P576,615 d. P659,692

4. Land improvements a. P360,000 b. P 76,800

c. P436,800 d. P 0

5. Total property, plant and equipment a. P6,764,400 c. P6,718,092 b. P6,731,200 d. P6,618,400

Answers: 1) C; 2) A; 3) B; 4) C, 5) D Suggested Solution: Question No. 1 Total contract price Less property taxes for 20 10 Adjusted cost of land and building Percentage applicable to land Cost of Land

311

P5,026,000 146,000 4,880,000 20% P 976,000

4 - Property, Plant and Equipment Practical Accounting Problems

Question No. 2 Cost allocated to building (P4,880,000 x 80%) Reconditioning costs prior to use Salvage proceeds from demolition of garages Construction cost of warehouse Cost of Buildings

P3,904,000 236,800 (36,000) 540,800 P4,645,600

Notes: 1) The savings on construction of P90,000 should be ignored. 2) The modification costs of P76,800 and the redecorating and repair costs of P60,000 should be expensed. Question No. 3 Fair value of equipment acquired on Mar. 1 Fair value of machine acquired on Apr. 1 Cost of Machinery and equipment

P200,000 360,000 P560,000

Question No. 4 Parking lots Waiting sheds Cost of Land improvements

P360,000 76,800 P436,800

Question No. 5 Land (see no. 1) Buildings (see no. 2) Machinery and equipment (see no. 3) Land improvements (see no. 4) Total cost of property, plant and equipment

P 976,000 4,645,600 560,000 436,800 P6,618,400

PROBLEM NO. 5 – Acquisition errors - land and building San Leonardo Manufacturing Co. was incorporated on 1/2/10 but was unable to begin manufacturing activities until 8/1/10 because new factory facilities were not completed until that date. The Land and Building account at 12/31/10 per the books was as follows: Date 1/31/10 2/28/10

Particulars Land and dilapidated building Cost of removing building 312

Amount P1,000,000 25,000

4 - Property, Plant and Equipment Practical Accounting Problems

Date 4/1/10 5/1/10 5/1/10 5/1/10 8/1/10 8/1/10 12/31/10

Particulars Legal fees Fire insurance premium payment Special tax assessment for streets Partial payment of new building construction Final payment on building construction General expenses Asset write-up

Amount 30,000 36,000 27,500 900,000 900,000 150,000 375,000 P3,443,500

Additional information: 1. To acquire the land and building on 1/31/10, the company paid P500,000 cash and 5,000 ordinary shares (par value = P100/share) which is very actively traded and had a market value per share of P210. 2. When the old building was removed, San Leonardo paid Demolition Co. P25,000, but also received P10,000 from the sale of salvaged material. 3. Legal fees covered the following: Cost of organization Examination of title covering purchase of land Legal work in connection with the building construction Total

P10,000 12,500 7,500 P30,000

4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2010. 5. General expenses covered the following for the period 1/2/10 to 8/1/10. President's salary Plant superintendent covering supervision of new building Total

313

P100,000 50,000 P150,000

4 - Property, Plant and Equipment Practical Accounting Problems

6. Because of the rising land costs, the president was sure that the land was worth at least P375,000 more than what it cost the company. QUESTIONS: Based on the above and the result of your audit, compute for the adjusted balance of following as of December 31, 20 10: 1. Land a. P1,055,000 b. P1,605,000

c. P1,105,000 d. P1,577,500

2. Building a. P1,860,500 b. P1,888,000

c. P1,810,500 d. P1,857,500

Answers: 1) B; 2) A Suggested Solution: Question No. 1 Cost of land and dilapidated building [P500,000 + (5,000 x P210)] Demolition cost Proceeds from salvage materials Legal fees – title examination Special tax assessment Land, 12/31/10

P1,550,000 25,000 ( 10,000) 12,500 27,500 P1,605,000

Question No. 2 Legal fees – construction of building Partial payment Final payment Fire insurance during construction (P36,000 x 3/36) Plant superintendent’s salary Building, 12/31/10

314

P

7,500 900,000 900,000 3,000 50,000 P1,860,500

4 - Property, Plant and Equipment Practical Accounting Problems

PROBLEM NO. 6 – Acquisition errors – land, building and machinery You noted during your audit of the Carranglan Company that the company carried out a number of transactions involving the acquisition of several assets. All expenditures were recorded in the following single asset account, identified as Property and equipment: Property and equipment Acquisition price of land and building Options taken out on several pieces of property List price of machinery purchased Freight on machinery purchased Repair to machinery resulting from damage during shipment Cost of removing old machinery Driveways and sidewalks Building remodeling Utilities paid since acquisition of building

P 960,000 16,000 318,400 5,000 1,480 4,800 102,000 400,000 20,800 P1,828,480

Based on property tax assessments, which are believed to fairly represent the relative values involved, the building is worth twice as much as the land. The machinery was subject to a 2% cash discount, which was taken and credited to Purchases Discounts. Of the two options, P6,000 is related to the building and land purchased and P10,000 related to those not purchased. The old machinery was sold at book value. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balance of the following: 1. Land a. P644,000 b. P322,000

c. P326,000 d. P424,000

2. Building a. P 644,000 b. P1,040,000

c. P1,044,000 d. P 722,000

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3. Machinery a. P317,032 b. P318,512

c. P323,400 d. P321,832

Answers: 1) B; 2) C; 3) A Suggested Solution: Questions No. 1 and 2 Land Allocation of acquisition price: Land (P960,000 x 1/3) Building (960,000 x 2/3) Option paid on property acquired: Land (6,000 x 1/3) Building (6,000 x 2/3) Cost of building remodelling Adjusted balance

Building

P320,000 P 640,000 2,000

P322,000

4,000 400,000 P1,044,000

Question No. 3 Net purchase price of machinery (P318,400 x .98) Freight on machinery purchased Adjusted balance

P312,032 5,000 P317,032

PROBLEM NO. 7 – Land and building; Borrowing cost On January 1, 2009, Cabiao Corporation purchased a tract of land (site number 101) with a building for P1,800,000. Additionally, Cabiao paid a real state broker’s commission of P108,000, legal fees of P18,000 and title guarantee insurance of P54,000. The closing statement indicated that the land value was P1,500,000 and the building value was P300,000. Shortly after acquisition, the building was razed at a cost of P225,000. Cabiao...