Chapter 17

'
PROPERTY. PLANT a EQUIPMENT
Acquisition & Subsequent Costs

Historical Cost of Property. Plant And Equipment

cm m- is the cash price (net of trade discounts and rebates) and 0t :
incidental costs incurred in connection with its ambition plus necessary
costs incurred to bring the asset to its present location and condition and to
the asset for its intended use.
prepare

on amount subject to cash discbunt - is the purchase pnce (net of trade

discounts and rebates). net of the cash discount whether taken or not and
other incidental costs incurred in connection with its acquisition plus
necessary costs incurred to bring 'the asset to its present location and
condition and to prepare the asset for its intended use.

Went (but with a cash pnce)- is the cash price and other maidental
costs incurred in connection with its acquisition plus necessary costs
incurredto bring the assetto its present and conditionand to
prepare asset for its intended use. location
the
Q «

By a detbnad installment plan (without a cash pnce) «- 18 the present

'
discounted value of all future payments. _ .

Issuance afDebt 0! Equity securities - is the fair market value of the asset
received or securities issued whichever 18clearly determinable.

~thefair market
substance
withcommercial
Exchange valueoftheasset
received or asset surrendered whichever is clearly determinable. Gain 0:
' '
loss is recognized in their entirety. .

Mange mtbout commercial substance - the asset received 13 initially

measured at carrying value. Gain or loss is not recognized.

Motion - the asset received is initially measured at its fan market value
with a coiresponding credit to Additional Paid In Capital/Shaxe Premium.

1: 114.133 9 - . a_-:action =:Comm «3. 1:11:11: 1 eWhea:

e. The cash flows of the asset received differ from the cash flows of the
asset transferred and the difference 18significant relative to the fair value
of the asset exchanged.
~316- Ciapur 17

b. The entity specific value of the portion of the entity' 8 operations affected
by the transaction changes as a result of the exchange is significant
relative to the fair value of the asset exchanged. W
value is the present value of the cash flows an entity expects to arise
from the continuing use of an asset and from its disposal at the end of its
useful life.

Examples of Directly Attributable Costs

a. Cost of employee benefits arising directly from construction or
acquisition of the item of PPE
Costs of site preparation

99-9?
Initial delivery and handling costs
Installation and assembly costs
Costs of testing whether the asset is functioning properly, after
deducting the net proceeds from selling any items produced while
bringing the asset to that location and condition (such as samples
produced when testing the equipment)
f. Professional fees

Exam les of ~sts that are not co: : of an item of PPE

a. Cost of opening a new facility
b. Cost of introducing a new product or service (including cost of
advertising and promotional activities)
c. , Cost of conducting business in a new location or with a new class of
customer (including costs of staff training)
d. Administrative and other general overhead costs

Subsequent Costs - the costs of the day to day servicing of an item of

property, plant and equipment are recognized in the profit or loss as they are
incurred. Costs of day-to-day are primarily the costs of labor and other
consumables. and may include the cost of small pans. The purpose of these
expenditures is often described as repairs egg maintenange" (PAS 16).

Parts of some PPE may require replacement at regular intervals. Items of

PPE may also be acquired to make a less frequently recurring replacements
or to make a non-recurring replacements. Such items of PPE is recognized
'
(when it is probable that future economic benefit associated with the item of
PPE will flow to the entity and the cost of the item can be measured reliably)
but the carrying amount of those parts that are replaced is dereoognized
(PAS 16).

9 ant t R 'tion:
Cost Model - after recognition as an asset, an item of PPE shall be carried at
its cost less any accumulated depreciation and any impairment loss.
 Marty. Plimt«Ewe Acqum'nbn Com - 317-
«3mm:

-
Kamluaa'aa Model after recognition as an asset. an item of PPE whose fair
game can be measured reliably shall be carried at a revelued amount, being
its fair value at the date of revaluation less any subsequent accumulated
depreciation and any subsequent impairment losses. Revaluation shan be
made with sufficient regularity to ensure that the carrying amount does not
. differ materially from that which would be determined using fair value at
balance sheet date.

Problem 17 .. 1: (Acquisition-Cash Basis) '

The Knight Company imported an equipment at a peso equivalent to
191330.000;. The company has to payadditional cost of importing the asset
such as P10.000 import duties and P15,000 non-refundable purchase taxes.
Costs of bringing and preparing the asset for its intended use include P2,000
transportation cost, P3,000 installation and P1.000 testing and trial run costs.

How much isthe initial cost of the new machine? '

'
a) P330000 ' 'c) P346000
b) P336.000 x . d) P361,000

Answer: * D . _ .
Purchase price (peso equivalent) P330000
Import duties . : \ ~ H 10,000
Non-refundable taxes . 1- - ,
~ f 15,000
Transportation cost
' . t . . 2,000
Installation cost w \ 3,000
' » ,' .
Testing and trial run cost '____1_,_0_00_
'
Cost of the new machine ', . .
'.. . M

PAS 16, pan 16, states that the cost of an item of property, plant and equipment
comprises its purchase priceincludzhg import duties and nan-temndable purchase
taxes, after deducting trade discounts and rebates; any cost directly atmbutable to
bnhgzng the asset to the location and condition necessary {or 1': to be capable of
operating in the manner intended by management.

Preblem 17 - 2: (AcquisitionOn account)

Light Company has recently purchased a computer system for its office. The
following information was gathered in relation to the acquisition of the unit;

List price . P152000

Trade discount and rebates taken 56.000
Installation and assembly cost . 3.200
Initial delivery and handling cost 6.400
Purchasediscount 2%
istheacquisition
cost
ofthenew
computer?
Wha;
a) 94.080 0)
b) P103.68O
P105,680
d) P160600
 *318.
Cfapur 17

Anem- B .
ListPrice 9152.000
Less:Tradediscount m ,
Invoice price 1 96,000
Less: Cash discount (2% of P96.000) ._..L229
Net P 94,080
Add: An incidental and necessary coats to bring
and prepare the asset for its intended use.
Initial delivery and handling costs. P 6.400
'
Installation and assembly cost .1299. ___Q,§QQ
Total cost of the new asset ~ m
'
The cost afar: item afpmperty, plant and equment ie the cash pdce eqw'velem on
recognition date. Yhe cash price equivalent ofan asset acquired on account subject
to dxzs'countifpeyment is made mm the discount period is equal to its invaiee mae
less the discount on the invoice amount taken. Implicit in the transecuon that when
the dzlecount is not taken because the entity did not settle the invoice amount within
~ the discount
period, the discount' 16' construed as time value afmoney factor" and 1:
eauswdered as a cost of delayed payment and should never be a part a! the east cf
assetacquired
at the timeof acquisition.we costaf delay be zwognxzed
outright as an expense (discount lost) - ., should

Problem
17-3:(AcquisitienDewrred
Basis)
On August 1, 2008, Bright 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 August 1, 2008.
The terms of the agreement is not considered normal. The cash equivalent
price of the machine was P950.000. Bright incurred end paid installation
costsamountingto P30,000. . I s
_

How
much
should
becapitalized ofthemachine? A,
ascost
a) 9950.000 : c) P1.100000.
'
b) P980,000 , d) P1.130,000

Ahewet: B ~
'
Cashprice .. 99503000
Installation cost M
Cost of the new asset w *
1

PAS 16. par. 23 states that cost of an item efpmpetty. plant and eqwpment ieithe
cash plies equivalent at the recognition date. preyment is deferred beyond name!
credit toms, the djebtehee between the cash price equivalent and the total payment
is mcagm'zedes intetest over the period ofaredit tmlese such interest is recognized in'
the earning amount of the item in eccatdance with the allowed alternative treatment
[hPASZZ
 W L WW xicqmsinbn costs - 319-
W} MSW

Basisw/ a CashPrice)
problem17-43(AcquisitiOn-Insta11ment
On August 1, 2008, Flight new Corporation a machine on a
purchased
deferred payment basis. A dowmpayment of P200000 was made and 4
annual installments of P600,000 each are to be made beginmng on
september 1. 2008. Terms of the contract are not normal in the industry
where the same types of assets are being traded. Due to an employee strike,
Flight could not install the machine immediately, thus, incurred P3,000 of
storage costs. Cost of installation (excluding the storage cests) amounted to
920.000: The cash price of the machine was P2,300,000.

am} muchshouldbecapitalized
ascostofthemachine?
3) P2300000 °c) 192,323,000
- .
1,) 132,320,000 \ d) P2,600,000

Answen \ B - "
'
Cash price . , P2,300,000
Instanation cost 20,009
new asset. . 3 '" '
Costof 223203200

. Problem 17 5: (AcquisitionDeferred Basis)

Mighty, Inc. purchased a machine under a deferred payment contract on
December 31, 2007. Under the terms of .the contract, Mighty is required to
make eight annual payments of P490,000 each beginning December 31. 2008.
The applicable interest rate is 8%.
Q

priceofthemachine?
WhatIsthepurchase
a) P4,862, 165 . . 0) P3, 920,000
b) P3,041,150 . ', (1) P2,815,834
'
Answer: D
Cost of new asset (P490, 000 x 5. 7466) = M

Ifan asset is acquired an a deferred payment terms, it should be measmed a In

cash price but if the cash price is not explicitly stated. the deferred payment
should be reduced to present value through the application of the Mrs
discount rate. Since the present value hater of the hnplz'cit rate a! 8% a not
given. it can be computed that the use ofPIesent Value {amulet

PIOblem 1'7 6: (AcquisitionDeferred Basis)

. Night Company bought a new machine and agreed to pay fat it in equal
annual installments of P500,000 at the end of the next hve years.

Assume that the present value of a prevailing interest rate at 15% for five
periods is 3.35. The future amount of an ordinary annuity of 1 at 15% for five
periods is 6.74: The present value of 1 at 15% for hve periods is 0.5.
 - 320 - '
aqua
M

How much should Night record as the cost of the machine?

a) P1.250,000 c) P2.500,000
b) P1.675.000 d) P3.370.000
'
Answer: 3
Annual installment P 500,000
x Present value of annuity of 15% for 5 periods 3.35
'
Cost of the new asset (machme) - W

17 7: (AcquisitionBy
Problem TradeIn)
On March 31 2008 Mr. Right Enterprises traded in an old machine having a
carrying amount of P1.600.000 and paid a cash difference of P600 000 for a
new machine having a total cash price _of P2,"000.000. o

On March 31 2008." what amount of loss should Mr. Right recognize on this
exchange?
a) None _ 9).P400.000
-
V

b) P200000 _ d) P600,000
I '
Answer: 8
Trade-in value
value/fair (P2. 000P600
000, .000) P1,400,000
Carryingvalue . M
Loss W

lithe casbpdce isPZOOQOOOand onIyP600,000 mspaid. then, the old assetis burly
valued at P1, 400,000. Incidentally the cost of the new assetds the cash price of
£2,000,000.

Problem17- 8: (Acqmsition-Share
BasedPayment)
On October 1. 2008. Jet Corporation issued 10,000 shares of the P25 par
treasury ordinary share for a parcel of land to be held for a future plant site.
The treasury shares were acquired by Jet at a cost of P30 per share. Jet's
ordinary share had -a fair market value of P40 per share on October 1 2008
Jet received P50.000 from the sale of scrap when an existing structure on the
site was razed. ,

At what amount should the land he carried?

'
a) P250000 . _ , c) P350000
12) P300000 . , d) P400.000
t 3' O
W C - 1a
Market value of share (10,000 x P40) P400900
Less: Salvage value m
Cost of new asset(land) w
 mm, mm «£3.46stCost:
JCthzbn - 321-
aim
$119858
[fan asset 129acquired thru a share-baeedpayment, the cast of shall be the
market value of the asset received The fair value of the 8559i mowed is 0119:;
measured by the fair value of the shares tuned

ypmceede ham the sale of salvaged matedal of; newly acquired auet shouldhe
Any
ga'justed/deducted ham the hu'tiel cost of the new asset

-
problem 17 9: (AcquisitionBy Exchange)
In June 2008, Plane Company exchanged an old packaging machine, which
pad 3 cost of P1,200,000 and was 50% depreciated. {01'8 non-monetary asset.
The market value of the old packaging machine was determined to be
??OOtOOO.

Whatisthecostofthe.newasset
'
acquired?
a) P600000 . 0) 9700.000
1)) P660,000 d) P860,000

Answer: 6'
h' an item of Property, Plant and Equmeht acquired in exchange for 8
125'
monetary asset or a combination ofmonetazy and hommmvetaty asset, the
cost of the asset received is measured at its fair market value unless the
exchange transaction lacks the necessaty commercial substance. Any
amount of gain or Jose is recognized it: its entirety (PAS 16').

2 I QJJALJ IL !!-;L_-;.-' age I br » ¬111LJ am} :1 L131 a» W :1.

0 222a cash flows of the asset received (life! ham the cash Hows of the
asset transferred and the dzh'ezehce
119
significantIrelativeto the fair
value of the asset exchanged a

0 Me ehhty epeahc value .of the portion of the entity's operations

metedhy the transaction changes as a result of the exchange and the
eigwfcaht relative toythe fair value of the asset exchanged
change 125'
Ena'ty-epea'ia value 125'the 19193th value of the cash tlows an entity
We to arise hem the coha'mahg use of an asset and ham its
disposal at the end afite ueehz] me.
'
Problem 17 10: {Acqulsl tion-By Exchange)
In October 2008, Ship Company: exchanged a used packaging machine
Raving a book value of P240, 000 for a new machine and paid a cash
'iffetenoe of P30, 000. The market value of the used packaging machine was
aternn'ned to be P280. 000.

M}; In its income statement for the year ended December 31. 2008.
v much gain should Ship recognize on this exchange, assuming the
range is considered with commercial substance?
Vane '
c) P30,000
10,000 d) P40,000
 322 -
CEaptcr 17

Answer: D
Market value of asset given up P280.000
Book value of asset given up .ZAQQQQ
Gain on exchange 2.42.999

Question 2. On the date of exchange, what amount should Ship Company

recognize as the cost of the asset received, assuming the exchange is
considered not lacking in commercial substance?
a) P200000 0) P280,000
\b) . P250,000 \ d) P310,000

Answer D , . .
Qgst of the new egg is; ' '
Market value of asset given « P280,000
' '
Cashpaid I ., '1 ___3_Q_LQ_QQ
Market value of asset received . M /
Problem
1711:(Acquisition-By
Exchange)
Star Company owns a tract of land which it purchased in 2005 for P3 000. 000.
The land is held as future plant site and has a fair market value of P4, 800 000
on March 1, 2008. Struck Company also owns a tract of land held as future
plant site. Struck paid P4,200,000 for the land in 2004 and the land has a fair
market value of P6,000,000 on March 1. 2008. On this date, Star exchanged
its land and paid P1, 200,000 cash for the land owned by Struck. As'a result
of this transaction, entity' 9 specific value was not affected by the above
. exchange. the
_

should
' Howmuch
.Questiogi Starrecord
theiandacquired
in the
exchange? , . , g .
' '
a) P4,200,000 , L \ a) P5,400. 000
b) P4,800,000_- \ f d) P6,ooo,-ooo
- ¥
Answer: A : _ , . .
Book valueofland . _'f ' \ P3.000,000 \ ,
Cash paid given 1.209.909
Cost of land acquired - .W

.Si'me the exchange tramaation IaCks the necessary commends! substance. the asset
received should be valued at its canying value.

W What
amount Sta:Company
ofgainshould onthe
recognize
exchange?
a) None , c) P120,000
1» 930.000 _ d) P180000 .
 {Phatd5Wt: 6631;63:thCam
chquisition - 323-
W

Answer: A
What! the exchange lacks the necessary commercial substance. gain 01'loss
an exchange is not recognized (PAS 16) 0

problem 17- 12: (Achsition-By Exchange)

Teen Company exchanged a delivery van and P50 000 cash for a newer van
owned by Quest Corporation The following data relate to the values of the
vans on the date of exchange:

' ' -
Teen ._ P300,000 P450.000
Quest , 400,000 500.000
' ) '
. .
Immediately after the exchange. Teen Company determined that the cash
, . flows of van received differ from the cash flows of the van transferred.
the

W What is the cost of the new asset acquired as basis for recoding
in the books of Teen Company?
a) ' P300v000 ! , -\ i
- y, ., .C) P450,000
n
1)) 9400.000, ,- . 2 (rd) P500000

Anewm: ' D, , ~. i, . .
, ,
-. ' '
Cash paid _ .'P 50,000
Fairvalueof the vantransferred . *1 $50,000
, Fair value of assetreceived ' , aM
,

hi the asset receiveddimertom the cash 17mmof the asset

When the cash £00173
transferred, the exchange has the necessary commercial substance theretbm, the
'
asset received is measured at its fair market value. .

W What amount
sheuld Teen as
reporta on
gain the
of
exchange
vans? , ~ \_ ~
_ ' .'
a) None 3' . c) P 10,000.
b) P7,000 . j '. d) P150,000

Answen7 D, . ~. . -
Fair value of van transferred P450,000
Carrying value of van transferred 390.999
Gain on exchange .. . '
. M

Problem 17 - 13: (Acquisition-By Exchange)

On March 1, 2008, Extreme Company exchanged an old machine having a
cost of P450,000 and accumulated depreciation of P100000 for another
machine having a fair market value of P300,000. Extreme Company has to
pay P72,000 to even-up the trade. Immediately after the exchange. Extreme
Company determined that the cash flows of the machine received differ from
the cash flows of the machine transferred.
 ' 324
C5¢p¢or
,7
- What is
the cost of the new machine in the books of Extreme?
a) 9280.000 0) 9440.000
b5 P300.000 (1) 9600.000

Answer? B
If an item «Property, Plantand qudpmeat 15acquired in mbaage to, .
monetazy asset or a combmatiou ofmonetary and non-monetaty asset, the
cost of the asset received is measured at its fair market value unless an
exchange transam'oh lacks the necessazy commercial substance.
amount 0! gain or loss is recognized in its entirety. An exchaag.
transaction has the necessary commercial swstance when the cash 00w.
of the non-casb asset received We: kam the cash now: of the naa-caah
asset transferred (PAS 16).

W What amountof lossshouldthe companyrecognizeon the

exchange? , \ /
' '
a) None . c) P122,000
b) 950,000 . n
d) P150,000

Market value of asset received . ' , .' , . _ P300.000

'
Cash paid . .5 , LEM
- Market value of non-cash - - ' =
transferred P228,000
Carryingvalueofnon-cash
transferred
(P450, P100.000) W
Losson exchange ._ . .- 000 . W

planthadequment'acqm'red
a!10::ananitemofptopattn
Gui}: 10!
by exchange
nan-manetaty at a combination of monetary and nonemonetaty asset having the
12mm aammarah! substance 113recognized in its enurety (PAS 16').

17- 14: (Acquiéition-By

Problem Exchahge)
On July 1, 2008, Challenger Corporation exchanged its non-monetary asse
(equipment) with another non-monetary asset. The following data were
made available:

'
Equipment . P4.400.000
' -
Accumulated Depreciation 2.000.000
Fair value of equipment 3.000.000
Cash received on exchange , 900.000

assetswere not the same,

the cashflowsofthenonomonetary would
what
the cost of the non-monetaryasset received?
) pl. 500,000 . a) P2. 100 000
S)171,680,000 d)P3.000.000
 32}-
Www¢WW¢WCM

. 6'
Market value of non-monetary asset (gqulptnonz)given P3.000,ooo
Less: Cash received W
Market value of the non-monatary nag recanted W
- 15:
Problem 17 (Acquisition-By Exchange)
During 2008. Rising Sun Company paid P700.000 and Whanged an
equjpment which has a carrying amount 92,000,000 and a fan value of
92,100,000 for another equipment in the same line 0 business With 3 V811
of Pz.800.000-

If the exchange has the necessary commercial substance.

W Rim
Sun Company should record the new inventory received at
- '
a) P1.700.000 c) 92,100,000
1,) P2.000.000 _ d) p2,eoo,ooo

Ansmr: D . I .
Fair value of asset given P2300900
Add: Cash paid , M
Cost of new inventory W
'
In ant t '29 1' .-
Fair value '
_ I . P2,100,000
Less: Carrying value '. . M
Gain . M

guesgign 2: If the exchange lacks the necessarycommercia!substance.

Rising Sun Company should record the inventory at:
' .
a) P2,000.000 ' ' c) P2,800,000
b) P2.7oo,ooo . d) 122300.000
'
Ansmn B .

Carrying value of inventory transferred P2,000,000

Cash paid --__'_7QQ._QQQ
Cost of inventory received . ~
w

If an item ofproperty, plant and equipment acquired by exchange that is hchng in

necessaty commercial substance, the cost ofsuch asset is determined at the carrying
value ofthe asset waived or can'ying value afasset(s) given. _

Problem 17 - 16: (AcquisitionBy Exchange)

On December 31, 2008, Canary Company traded equipment with an original
cost of P400.000 and accumulated depreciation of P160.000 for another
equipment. - In addition. Canary received P20,000 cash in connection with
this exchange. The exchange transaction lacks the necessarycommercial
substance.
 326-
CW 17

W: Whatistheamount
ofgainshould recognize
Canary a:amumnQ
)9 fair valueof assetreceivedis P240.000?
3) None c) P40,000
5) p20.000 d) peo,000
W A .
When the exchange ttansaction lacks the necessary commerciq,
substance, the cost ofan item ofprapezty, plant and aqw'pment 15 recorded
at cost: 2219cast is detenmned at the cannhg value ofnon-monetary asset
received .or transferred whichever is clearly determinable. Gain 19
3Q;
recogmzed f .

W: What is the amount of loss should Canary recognize assuming

1% fair value of aSsetreceived is P200,000? _
. '
a) none c) P40.000
b) 1320.000 .d) P60,000

Fair value of non-monetary asset received P200900

Cash received . , ' . ' -' . _, 20,0319,
, '
Fair value of non-monetary given up, P220,000
.(
Carrying value of non-monetary asset given up 240,000.
Impainnent loss to be recogniZed , . w

Problem17- 17: (AcquisitionByDonation): .

Snow White Corporation, an investor of Wolf Company, owned an idle parcel
of real estate consisting of land and a factory building. Snow White gave
title to this realty to Wolf Company as an incentive for Wolf 1:0 establish
manufacturing operations in the area. Wolf paid nothing for this realty which
had a fair market value of P2,00_0,000at the date of the grant.

How shouldWolfrecordthis non-monetarytransactibh?

a) Memo entry only. . .
13) Credit to accumulated profits and losses for P2,000.000.
a) Credit to unearned revenue for P2,000,000. .
d) Credit to equity reserve for P2,000,000. '

Answer D .
"0190 an item of property, plant and equment is received through
donahon or discovery,there is no cost that can be used as a hasis {0!
measurement. 272913may be some ewendztures incurred incidental to
acqwls'ition but these costs are generally less than the real value of the
donated asset. Hence, property, plant and equipment acqzured through
donation should be appraised and recorded at its M.

Ma donatedassetis recognizedand measuredat fair market value and

" also at the {air
With a credit
corresponding to the account
equity reserve
 WM¢W Wgwcau ~327-

value of the asset. However, if the donor is not in any way related to the
don, the account Equity Rm would not be aPPIOpn'ate to used,
instead a mvenue account at a [jammyaccount wouldbe used.
17 - 18: (Cost of Self-Consuucted Asset)
problem has constructed its own special equipment t0 produce a
gamer Company
newly developed product. A bid to construct the equipment b? an outside
incuned
company was received for P1.200.000. The actual costs by Reader
the equipment were as follows:
to construct

Direct material P320,000

Direct labor 200.000

It is estimated thatincremental overhead costs for construction amount to

140% of direct labor costs. In addition, fixed costs (exclusive of interest) of
p700.000 were incurred during the construction period and allocated to
. production on the basis of total pxime costs (direct labor plus direct material).
The prime costs incurred to build the new equipment amounted to 35% of the
total prime costs incurred for the period. The company follows the policy of
. capitalizing all possible costs on self-construction projects.

To assist in financing the construction of the equipment. a P500.000. 10%

loan was acquired at the beginning of the 6-month construction period. The
company carries no other debt except for trade accounts payable. For
simplicity. assume that all construction expenditures took place exactly
midway through the project. that is. all expenditures took place with 3
months remaining in the construction period.

What is the cost to be assigned to the new equipment?

a) P 800,000 c) P1,045.000
1,) 91.020. (1) 91,070,000

Answer: D

Direct matedal P 320900

Direct labor 200'000
Venable overhead (P200.000X 1-40) 280'000
Fixed overhead (P700.000x
0.35) .355-999
Total costs exclusive of interest
P1945900
Interestchargescapitalized - ' .
Totalcostof eelfconstructed . 4m.
equipment W
,Imetm x10%x3/12 =25.125 .
year
mm. m: 1.040.000
m 0 mterest
paid: x10%
500.000 =25.000
x6/12
 .328. 17
Chapter

Problem 17 - 19: (Borrowing CoetSpecIEc Borrowings)

On January 2. 2008. Milestone Company was granted a loan of P2.000.000 at
an interest rate of 1096 specitically to hnance the construction of its new
building. Aveilments from the loan were made quarterly in equal amounts.
Total borrowing costs amounted to P125000. Prior to their disbursements.
the proceeds of the loan were temporarily placed in a special savings
account and earned interest income amounting to P20,000. The building was
completed on December 31, 2008.

Using the alternative treatment, how much should Milestone Company

capitalize as borrowing costs?
a) P105. 000 c) P195,000
b) P125000 . d) P200,000

Answer: A -
Actual borrowing costs -
P125900
'
Less: Interest on temporary placement JQQQQ ,
'
Borrowing costs to be capitalized gm

Ihe W for harrowing cost of a quahjang asset is charged

outright to amuse. However, once the enterprise has adapted the
alternative treatment as its accounting policy, interest costs shall be added
'
to the why value ofag quelifyzhg assets (PAS 23).

Capitahzatioh afhertomng cost should commence when:

(a) Emehditwe far the asset is being incurred.
(b) Borrowing costs are being matured.
(c) Construction is in progress,

Capitahzation of honouring costs should cease when the asset is

substantially complete. If all that is left are minor modihcations, such as
decoration or routine administrative work, then the asset is considered to be
substantially complete.

Capitalization of harrowing costs should be suspended during extended

periods in which active development is interrupted unless that period is
necessary part of the process for the production of the asset. However,
capitahzetzon of borrowing costs should not be suspended when there is
,
anly a temporary delay that is caused by certain expected and anticipated
reasons such as while an asset is going ready for its intended use.

1 When are
takenapeahcally
bohemnga toacquire, orpmduce
construct
e quahbqhg asset, the honomhg costs that relate to that particular
quahmhg asset are readily identihable, which means it is easy to
quantity the harrowing costs that would need to he capitahlzed by using
the pmceae o! ehmihah'on, that is, capitalizzhg the 1:0ng costs that
 mat a equipment:xcqndsiu'm ~329-
Wm} «1:51.63th Costs

Wouldhave been avoidedhad the expenditureon the qualifying 8859:

not been made.

2' When made bormwed specm'celly to finance a quehhnng asset are not
uwized immediately and instead the idle funds are invested temporarily
gnu] nequired, the honouring costs that are capitalized should be
reduced by any investment income resulting #0127 the theStment of idle
Made.

3, If borrowing and wading are organized centrally or genetally, a

weighted average capitahlzation rate may he applied to 19 eXpenditutee
on the qualifying asset.

problem 17 - 20: (Borrowing Cost-Specific Borrowings)

.Visage started constructing a building for its own use in JanuafY 2008.
During 2008. Visage incurred interest of P75,000 related to the building
construction. and P30.000 on other borrowings. On the same year. the
company incurred P60,000 interest computed on the weighted-average
amount of accumulated expenditures for the building.

How much interest cost. should Visage capitalize under the alternative
treatment? _ .
a) P30,000 . c) P 75,000
b) P60,000 d) P105,000

Answer: B
Ihe borrowing cost that may be capitalized under the altemative
treatment is based on the weighted average amount of accumulated
emehdjtures. 2711'sweighted average accumulated expenditures concept
avmdahle interest concept, which h'hu'ts the lower of the actual
' applies the
interest cost incurred during the period of avoidable interests. Avoidable
mterest is the interest cost hzcwred during the period that theoretically
could have been avoided if amenditure of the asset had not been made.

Problem 17 - 21: (Borrowing CostSpecihc Borrowings)

Faith, Inc. has a fiscal year ending April 30. On May 1, 2007, Faith borrowed
P10,000,000 at 15% to finance construction of its own building. Repayments
of the loan are to commence on the month following completioh of the
building. During the year ended, April 30. 2008, expenditures for the
partially completed structure totaled P6.000.000. These expenditures were
incurred evenly throughout the year. Interest earned on the unexpended
portion of the loan amount to P400900 for the year.

How much should be shown as capitalized interest on Faith's financial

statements at Aptil 30, 2008 under the alternative treatment?
a) None _ c) P 450,000
b) 550.000 d) P1.100.00
r1 \*
~330-
Cliaptcr17

Answer: C .
Average expenditures (P6,000,000 -:-2) 133,000,000
x Interestcapitalization rate 15%
Interest that may be capitalized under
an alternative treatment , W

No amount ofborromng cost shall be capitalized that 15 identified to the construction

of a quakiwhg asset using the benchmark treatment. However, the amount to be
capitalized in accordance with the altemative treatment is detemnhed by applying
the mterest rate to the average amount of accumulated expenditures for the assets
dwzhg the period or weighted average of interest rates on a]! debt: outstandmg
during the period. 2713amount of mterest determined is not reduced or in any way
met by interest income eamed during the conétmction pen'od.

17 22: (BorrowingCostGeneralBorrowings)
Problem .
\The following transactions pertain to the general borrowings made during
2008 by Victory Company in connection with the construction of the
companysnew warehouse: , . . . _ , <

- , ,
Principal gonowing nggg
3% bank loan P2,400,000 -' a \ P192,000 -
6%short-termnote 1,600,000 ' . _' _ -- 96,000 _g
8%long-termnote - ~
_ 2,000,000 160 000
P

onJanuary
started
Theconstruction 1,2008andthewarehouse
was
completed on December 31, 2008. Expenditures on the warehouse were as
follows: . \ , .
I
0

~_ I.

Januaryl P 400.000 ' , SeptemberSO: 91,000,000

' .
March31 1,000,000 ' December31- ., 400,000.
- '
June30 1,,200000 ~ .,

Usingthe alternative
treatment,how muchis capitalizableborrowing
cost of Victory Company? the
a) None c) P298,600
b) P149,400 , '. d) P448000
'
Answer: 8 .
Total borrowing costs (192,000 + 96,000 +160,000) P 448.000
+ Total borrowings (2,400,000 + 1,600,000 +2,000.000) W
Average capitalization rate .

W . - Moe. Peso
129.19 mm W m
01/01 P 400,000 x 12 . P4300000
04/01 1.000.000 x 9 , 9.000.000
07/01 1.200.000 x . 6 7,200,0m
 -331 ~01

10/01
12/31 1'°°°'°°° x 3 3,000,000
400I 000 .0.
x o

Averageexpenditure 225.999.9529
1324.000
000+ 12 . 2.2mm
Cost0f borrong
'
tobecapxtalized
-
.
:1:pg000.000x 7.47%- 214.2409

(1:10
$$$72 (A 31011.0th
Basis)
Thefollowin
9
220%8
Moses
Corp, itsboiler
replaced one
efficient
withamore
infonnation
Was onthatdate:
available
Purchase
priceofnewboiler
Carrying amountof old boilerP600.000
Fair value of old boiler ' 50 000
Installation 20000
costofnew 16,000
boiler
The boiler
old wassold
ferP20,
000.
l

Whatamount3110qu
Mosescapitalize
asthecostofthenewboiler?
a) P600000 '~ .. - - c)P620,000
_ '-\ ,
'12} P610000 . . _. d) P636 000
. '
n. _
3 "
,' "B J- .'
, Plnchaseprice ' P600000
/' Installationcost 3: ' '16000
'Cost of_new b01191 .
..
{k-

- 2219replacementcost of the boilerwith e 'mareehic'iant boileris bettermentas it is

/ the substitution afa better assetfor an existingasset. Costsassociatedwith the old
belle!donot afect thecost ofthenewbeiler.

Pr0blem17- 2:4 (CostofLand) \

Perfect
Company landonAp111
acquired 1 2008
onwhich
anewbmldmg
W111
be 1mmed1ately constructed. The costs related to the acqmsmon mclude

Cashpayment. '
.'~ , -- ' , 2.000.000
Broker' 3 fee " - ' 50.000
1Optionpaid for the land acquired . 20,000
'
Optionpaid foran land
alternative notacquired~ 10.000
Delinquent property taxes for 2007 assumed and paxd 30,000
Property taxes for 2008, Which will be paid on or before
31.2008 60,000
Deceniber
oftheland?
istheprope1cost
What - -
a) P1,125,000 . . . ,- c) P2,160,000 \
- : _ ,
.10) 92,115,000 _ d) 92,170,000
1
 , P29003
W a 00"
Cash pmd
and
Incidental necessan' peacog
.

20.03o
fee
Brokers
psi 30,0
Option taxe (
pr
Delinquent Year
i0rya)
from 1
January
w .W5 Q;
current
for
Tax x3/12)
(P60.000
toApril
vaulred
17
Problem ofof
cost
Total
1 and
land
Land 2 '
008
early
(Acmlisitlon
25' abuilding costs
The
. the
related
to )
Building
Anlber'acquired
Companyinclude:
,
acquisition
_ ' P7,000.000
300,000
price
"
Acquisition , . , , 500,000
35:31:: acquired
building
the
on end on
P100,ooothe
TheoptionsincludeP2 . The
acquuedV
not . .
00,000
repairs
,
mcluderenovation
which was
buildingofoffice new
and pnor
to
space partltlons
the occupancyof the
remodeling
of bililding?
the - ' l,
' 'l
What the
is cost
proper - \ _0) P7700900 'J-
P7,300,000, X 1d)
a)P7,500,000 ' P7,800,000
b) I ' 1 . '
Answer: . 6' ; .'-: , 197,000 000
Purchase
price ,
_' . '' 200.000 '
Optiens for
paid
' -
acquired
building . ~ . 500 000 \ x
Repair?
Costofthenew .
asset ''
i7729 I' ' '
costs
ofrepairsare neeassay In the prepara'
U011 - . use
mtended
mtzts
therefore,
and .
COHEJdeIed'as an ad di a1
tion cost
ofthe ho;
5:1::sstet
56'acquired.
'
'~ . . '
9': ' are separable assets
Landandbw'ldin
areacawed
and39 1hr separately 3V6
whenthey together. With some exceptijzfzusntfgg
. . as quam'es and. sites
used
' '
,
for W
have a111111
tod
s an unlimit
land
' .
he
his andtherefore
is notdepreciat
Bwldmgs 118611111113
- mfgzszd
01'
9 9 -
depecabe 59m A" 9"
1'17
thevalueof theIandon
1'12 thch abuildin
. amaunt
ofthedepreciable Oitbe
building,
(pAS
9'98!) wear
thedetermin
1:22:me
, I
.
\ ,
 Wehutifqtm - ent- ... .
. -333_
.AMQSWWW
oblem 17- 26: (Acquis .
' 2008.
IDtuxing Torch Land
C.?ompani;1
to):
act andBuilding)
19 following
newofficebunding: transactionspertainingto its

puIChase price-Land
Legal fees for contracts P 420 '000
fee
Architect's
to Duranland
Demolitionof old bUildingon Site
~ 162.23%
. Saleof scrapfrom old ' 35.000
C0 won(mtOfnew bunding
hm?! (fully
21.000
Completed) 2.450.000
At what
Torch December
amounts should the Cost0fland beshown
andcostofbuilding in
31, 2008 b 3131109 sheet?
Lag _
\ Buildin
a) P420000P2.520 000
b) P434,000 P2.520.000'
'
c) P448000 P2.506.000
:d) 2455.000 . P2.534,000

( Answer: - C
3 0
. ? L_Aan- .B_\_1_31___dinn
Purchase price p - .
':, j 19420000.
Legal fees ,, A
' 14,000
Architectsfee ; .. -p 56.000
' ' j _
Demolition cost - " 5 - - - '
4 35.000
r Construction cost of new building 2,450,000
Sale of scrap L_ZJJQQQJ .
Total

174 27:-(Acquisition
Probletn ofLandandBuilding)
,
On May 9, 2008, Lamb Company purchased for P6, 000 000 a warehouse
building and the land on. which it is located. The following data were
available concerning the property:

\I ., W W
Land , 132,200,000 P1300. 000
.Warehouse/Building . M9929 .. _ 3.000.000
, Total , . mm _. W
At Whatamountshouldthelandberegarded?
a) P1300000 . c) P2250000
b) 132,200,000 ' - ~ d) P2.400.000
_
S
 ~334 v

mm D 1mm
mumlain!
Land P2.2oo.ooo 40%
WarehouseW
W 1mm
Total .
P6.000.000
Total purchase price
ofland
xRatio -
Costallocatedto Land Wvm
whentwo(2)armom are
assetsacqw'mdatabasket
pdce ".total (cost)
bemeen
beallocated
should basedonmeltmarketvalue
assets
those face
b88212:
.

Problem17- 28: (Acquisitionof Land w/ an old Building)

On December31. 2008, Noah Company purchased a P4.000,000 tract of land
for a factory site. Noah razed an old building on the property and sold the
materialsit salvaged from the demolition. Noah incurred addmonal costs - (

andrealized
salvaged
proceeds 2008as follows: .
dgnngDecember, I

" '.
r

Paymentsto tenantsto vacate the premises J. P200900

' *- '~' '
Demolitionofold building \ . a .. 100.000
Legalmesfor purchase
contract and recordinganership '
' 50.000
Titleguaranteeinsurance .
Proceedsfromsaleof salvagedmaterias" , ' ' , 30,000
10,000 ,
InitsDecembér
31,2008
balance '
reported?
éi
Shea; {Nhathmount
35mmthe land he
;' .
. 3.;
- 2, P4350900 '.. ' ,1: '.I '0)134.380.0007
d 3x I A

3 P4370000 , , r \
.j d) 94,390,000 3:
PIHChaseprice [.3 3.1 _1: 1'.\-. (:~/' (
\."_1
Paymentsmtenants
" | ~. " , x .
Demohtion
cost ofoldbuilding, .' ' ..?}g§80.000
J 1 OOOO'
Lagajfees , \,' 100,000. c :
Titleguaramee , . . '* » 50:000' x ,
prOGeeds , x '
Costofland - ~ -- \ 30,000 \
000
£4.!§7QIQQ_
Problem17_zg . .
plant Co111me (Acqmsm'on ofLand d . .
The l acqluted
landandb Bmldmm
and was . 11de forP5500900
O
 9°r coat
0f
at 13 the pro
thehad
a)92'305'000 I financial
account:
9 ma?
b; 192325.000 o) p2.455.ooo
d) P2.476,000
Axum A
purchase price
Unpaid tax assumed 96.600.000
Total cost m
x market value ratio-land P5,750,000
Allocated cost of land ___zszm
Add: Incidental coat of land- P2300000
Costof land \ . sum ._.__.5..9__00
24w
option an alternative land
and . .'
buddmg 0 acquiredbecharged
should :0W

- 30.(Purchase
&Self~Constructed
30$sz17
a 011me 1301111
purchases
Assets)
_ and constructsequipmentfox use in its
The fOHOWing '
items for two differenttypesof mm
operation; em.wen
random
11;
.recorded orderduring
thecalendar
year2008' / ..
' \
. x,

: \
,
, Purchases .

Cash paidfor equipment, includingVAT of P10,000 p110,000

Frelght 8t msurance cost while in transit . , 2,000
Cost of moving equipment into place at factory 3.100
Wage cost for techniqians .to test equipment ' ' 4.000
Insurance'premium paid during 1"t year of operation
'
on this equipment . , 1500
Special plumbing fixtures required for new equipment 8,000
Repair cost incurred in 1" year of operationrelatedto
'
thisequipment ' . .. 1.300
'
1'

Material& purchasedparts(gross 0
00 132009003wa
- take2%cash discount). ' . P200900
CODSWWOD
imputedintereston'fundsusedduring
.' (stock ,'
financing) ' \. 133%
Laborcosts 50000 .
costs
Overhead vanable-P30.000)
(fixed-PZ0.000;
' ,
30.000
Profitonselfconstruction 4400
equipment
Costof installing
'-
 Wm 012:de ..
gum
Smog: com ~335~
DerCost
at is the pm
ofthe[mu
132305.000
3111 0! finanm '7
b} P2325900 0)p3.4a%°.333m°
d) P2.476,000
mm A
purchase price
Unpaid tax assumgd 96500000
Total cost m
x market value Iatio-land P5350900
Allocated cost of land .4513:
Add: Incidental coat of land. P2300000
Costof land \ . 9? ..___5.Q__00
w

Building Innovation is dir 90W. G!If}! b E!I'

. use and associated
t pr Pi h
Intended. thel9@r
1should
becapitazg 258:8:
.2321 IOfII I .nu
: c e8selfc°ns°ted A339)
snagginggn
both_ and
pufchases constructs forusein its
equipment
. 19h:
operations e OllowmgItemsfor two different
typesof equipment
were
.recorded 11;random order duringthe calendaryear 2008:
'
, Purchas'es 3. 0 .
Cashpaidfor equipment,includingVATof910,000 9110.000
8:
Freight cost while in
Insurance transit , . 2.000
Cost of moving equipment into place at factory 3.100
'
Wage cost for technicians Ito test equipment 4,000
Insurance'premium paid during 1t year of operation
'
on this equipment . _ . 1.500
Specialplumbing fixturesrequiredfor newequipment 8.000
Repaircostincurred in 1" yearof operationrelatedto
' . -
thisequipment- 0,300

Material&purchased cost
parts(gross P200,000; to
faded
' take2%cash discount). , 000
P200.
used
_ COHStmcuon
dunng
'Imputed on'funds
interest 14000
.' ;' 190900
5riaming)
L(asgock
or cos 8
.
\.
-P30.000)
. vanable 50.000
Overhead costs
(hxed-FZQDOO, 30,000
,
Prom on self-constructxon 4.400
equipment
Costofinstalling
'r
 ~336- . asapur17

What is the total cost of each equipment Shadow Company should report?
Wm: mm
a) P120.600 P454.400
b) P122.100 P440.400
c) P123.400 . P410.400
d) P111100 P440400 ,

Amman D

Cash paid excluding VAT P100.000

Freight & Insurance 2.000
Cost of moving the equipment 3.100
Cost of testing 4.000
Special plumbing fixtures _ ____§.QQQ
Total cost of equipment . . m
- - -
ans 9
'
Materials (P200. 000 x 98%) P196.000
' . \
'Labor cost . 190.000
'' '
Overhead cost ., - . 50.000
Installation cost . . , ~ _ 4.4%
Total cost of constructed asset ~ - EAAQéQ -

Problem 17- 31: (Acquisition of Land & Building)

- On January1. 2008.MinisterCorporation a tract of land (site
purchased.
number 123) with a building for P6 .000000. ?Additionally. Minister paid real .
estate broker's commission of P150000. legal ,fees of P60.000. and a title.
, guarantee insurance of P18. 000. The closing statement indicated that the
- land value was P5. 000. 000 and the
building value was P1.000..000 Shortly
~after the wasrazedat a costofP75,000.
acquisition. huilding
'
Minister intoa P3.000,
entered 000ked-pricecontract
withPrimeBuilders.
1Inc. on March 1, 2008 for the construction of an office building on land site

' number 123. The building was completed and occupied on September 30.
2009.Additionalconstruction were incurred as follows:
c0sts
Plans.
specifications
andblueprints ,P120.000
Architects' fees for design and supervision ............................. ~
250.000

The building is estimated to have a fortyyear life from date of completion

and will be depreciated using the 150%-declim'ng-balance method.

theconstruction
Tofinance cost.Minister onMarch1,
borrowed93,000,000
2008. I'he loan is payablein ten annual installments of P300.000 plus interest
at the rate of 14%. Ministers average amounts of accumulated building
expenditureswere asfollows:
construction
l
 '
~336- . 05W 17

What is the total cost of each equipment Shadow Company should xepoxt?
121mm mm
a) P120600 P454.400
b) P122.100 P440400
c) P123.400 , P410400
d) 9117.100 P440400 ,

Answer: D

Cash paid excluding VAT P100, 000

height 8: Insurance 2, 000
Cost of moving the equipment ' 3,100
Cost of testing 4.000
Special plumbing fixtures , M
Total cost of equipment _ Q1492

Materials 000x '

(P200,
98%) '
. ' P196,000
Labor cost . . 1 190.000
,'
Overhead cost 3 I. . _ ' 50,000
Installation cost . _ . '~ _ 4,400
Total cost of constructedasset- ~ BAAQQQQ-

Problem 17- 31: (Acquisition of Land & Building)

- On Minister a tract of land
January 1. 2008 Corporation purchased (site
number 123) with a building for P6.000. 000. Additionally. Minister paid real .
'estate brokers commission of P150000, legal fees of P60.000. and a title-
, guarantee insurance of 1318.000, The closing statement indicated that the
- - land value was P5 000, 000 and the building value was P1,000.000. Shortly
- after the wasrazedat a costofP75,000. '
acquisitton. hullding
' contract
withPrime
intoaP3.000.
entered
Minister 000tixed-price Builders.
of an officebuildingon land site
Inc. on March1, 2008for the construction
number 123. The building was completed and occupied on September -
30.
2009. Additionalconstruction were incurredas follows:
costs
Plans,
specifications
andblueprints '..L..
.....................P120000
Architects' fees for design and supervision ............................. '
250,000

The building is estimated to have a forty-year life from date of completion

and will be depreciated using the 150%-declining-balance method

To hnance the construction cost. Minister borrowed P3.000.000 on March 1,

2008. The loan is payable in ten annual installments of P300,000 plus interest
at the rate of 14%. Minister'saverageamountsof accumulatedbuilding
constructionexpenditureswere asfollows:
 me¢£qmmrgq 45146: Cost: 437'
'
F the
1
F: the3:33:3:331: toDecember 31, 2008 P 900.000
31? 1 to September 30. 2009
2,300,000
Q. i89 We!
gj g; 1:
Cost
of
the
land
account?
muegegoopogvnat
'
1))P6.210.000
3))gggggggg
Answer D
Acquisition Cost
Real Estate Tax P6.000.000
'
Legal fees 150,000
'
Title Guarantee 60,000
.
Cost of RazingOld 18.000
Cost of Land Building 75 009
20001000 '
My; If borrowing cost is
capxtahzed cost of the office adde
a) p3,250.000 building?
0 mm
I
33123312233
Answer D .
Contract Price . -
.
andblueprint} 1
Plans,specification , P3,(1)00,000
ArchitectFees - ' « .
Borrowing Cost (P 900,000x 14%x 10/12) ' - ~ '
2:30.38
, (P2,300.000x 14%x 105,000
Cost
ofBuilding
« -. ' 9/12)h
' / Q4 :5
M
Question3: ; What is the amountof dépreciation
to be recogmzed
December31, 2009? . . _ r 01,1
a) £18,372 , . . . 0) 1332.377]
- w - ,
b) P30.377 . d) P34.842
' ~
Answer:- D , .
Cost (P3,716,500 x 3.75% x 3/12) =
M

-:-40years
Straightlinerate10090 = m
150% Declining rate 2.5% x 1.5 . ==- *
_ §.7§

Depreciation of an asset beam: when the asset is available [or use. For an asset
being constructed depreciation should commence when it is completed

Problem 17 - 32: (Acquisition of a Machine) .

During 2008. Joker Company installed a production assembly ,line to
nanufacture furniture. In 2008. Joker purchased a new machine and
eazranged the assembly line to install this machine. The rearrangement did
 r338-
03%» ,,
theeettxnetod
crease lifeofthe0111ny line,but.it
useful
not in
- -'
1:11 this
with
gexemton project: wing
mama The follo
re eftioientproduction.
88:1;
did
. to
$311155? :1,
chine 160
toinstall
razor machine the . toprovidg
hne
assembly 28:%
added
parts inrearranglng
future benefits 80,000
Laborandoverhead theassembly
torearrange line 36,000
shouldbe capitalizedm 20087
Whatamountoftheaboveexpenditures
a) P150.000 0) 13214900
1:) P178000_ d) P294000
D . . _ .
Answer? '
Machine . P150,000
. '
Installation 1, 28,000
Pans - ~ \ -1 -
30,000
Labor & overhead . ' , , .
H §§ m9 .
Total \ . 'l- . .
. W ,,

Zhecostof thenewassetwhich
includetheongz'nal price and coats
purchaee
necessary to prepare the asset into a workable. condition (installation cost) are
capitahlzed The costs ofteazrahgz'ng the assembly line (parts and labor cost) should
also be capitahzed szhce they are necessary to prepare the asset for its intended use.

Problem 17 - 33: (Cost Subsequent to Acquisition)

Bernie Company made the following expenditures relating to its plant assets
during 2008:
J
ofrooftiles. . ...- f
Partialreplacement .i . ' P @300
Major improvementt0 the electricalwiring system --* . 196.000
'
Continuing and frequent repair . \ 120.000

As a resultof the improxiemeht.

to the electricalwiring systemfuture
economic benefit will flow to the enterprise. .r

How much should be charged to repairs and maintenance expense in 2008?

- .
a) P120,000 c) P162,000 , ,
p) P138,000 d) 9253.000 \~
' v-
Mm: C ,
Partialreplacement P 42,000
Continuing andfrequent
repair , 429.999 ,
expense
8:maintenance
Repairs m
 (Phat«ZW Wazsmqumcom '339-
W

aft)» dayto dayserwcmg Plantandeqllipmant

7? cast
- gain the pram or loss
as
ofanitemafpropeny.
1729costs of the day to
are
they are matured, day are
thecostofw
andmayInclude
thecostaflaborandotherconsumable
My _ of these dencribed 88 mm
m
"purpose
(PAS 16'). Omaadltma 1', man and
mw
1" of same mperty, plant and mm: may mqulra replacementat mam
Items afprcgmm plant and equipmentmay 8150be aqquirodto makea
171W
p53 tmently recunmg replacements or ta make a non-mma replacements.
and equipment m [acogm'zed (when at is probable mag
51ml:items afgtopatttv, plant
emaomw benefit associated mm the item of propel? P18! and meent
W
the entity and the cost of the item can be measured 1181717)but the
n11 jaw to
amount of those parts replaced 1'sdemognized (PAS 16').
W
"
problem17 341 (Cost Subsequentto Acquisition)
M9 3003. Maine Company made the. following expendituresrelating to
plant,machinery end equipment:
Continuing andiowcostrepairs'
frequent P 36.000
Special long-terril protection devices were attached
to ten machines . 190.000
, A broken gear on a machine was replaced - 2,000

The devices used to the machines are separatelyidentifiableitems of

pIOperty, plant and equipment, These items of property plant and
' -
equipment will last for 5 years. . ¥ .
' Howmuch torepairs
becharged
should in2008?
andmaintenance
- . c) P126,000
a) P36,000 ' _ -(x d)
b) P38.000 . .
P128,000)_
.
'
Answer: ' B .
Continuing frequent and low costrepairs -
P36.000
Broken gear on a machine was replaced 2,g0_0
Repairs and maintenance

Problem17- 35: (CostSubsequent

to Acquisition)
The following expenditures relating to the plant building were made by
Sydney Company during the year ended December 31. 2008:

oftheoldshingle
Replacement roofwithafireproof
tileroof P296000
Repainted the plant building 20.000
Major investments to the electrical wiring system 70,000

Howmuchshould becapitalized
in2008?
970,000. . . . .' c) P296,000
2))990,000
. . d) P366000
 340.

Replacement of old shingle r00

to eleCtlica,l
Ma)ormvestments
Total cost to be' capitalized ~-__

Repaintzhgan old building does110

\
j

..

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 Chapter 18

PROPERTY. PLANT 8t EQUIPIWENT

Depreciation 8: Disposal
' tion - is thesystematic allocation of the deptedable want of an
useful life.
5399:over its
an asset begins when it is available for use.
Depreciation of
of an asset ceases when the asset is derecognized. Therefore,
Depreciation
depreciation does not cease when the asset becomes idle 0 retired from
active use and held for disposal unless the asset is fully depreciated.
gowevet. under the usage methods of depreciation. the depreciation can be
zero while there is no production.

Theresidue;valueandthe hsefullife of anassetshallbe reviewedat leastat

eachfinancml year-end and, if expectations differ from previous estimates.
the Change(s) shall be accounted for as a change in an accounting estimate.

The depreciation amount of an asset is" determined after deductipg its

residual value. In practice the residual value of an asset is often
insignificant and therefore immaterial in the calculation of the depteciable
amount. . .

The residual value of an asset may increase to an amount equal to or greater -

than the carrying value of the- asset. If . it does, the assets depreciation
charge is zero unless and until its residualvalue subsequently decreases to
-
an amount below the assets carrying amount.

, The depreciation method applied to an asset shall be reviewed at least at '

. each financial yearend, if there has been a significant change in the
expected pattern of consumption of the future economicbenefits embodied
in the asset. the method shall be changedto reflect the changedpattern.
Such a change shall be accounted for as a change in accounting estimate in
-
, accordance with PAS 8

'
Derecognition: .
The carrying amount of an item of property. plant and equipment shall be
derecognized: (a) on disposal or (b) when no future economic benefits are
expected from its use or disposal.

The gain or loss arising from the derecognition of an item of property. plant
and equipment shall be included in profit or loss when it is derecognized
 '
-342- c/iapter 18

(unless PAS 17 require. otherwise on a sale and leaseback). The gain is

being deferred.

Problem 181: (DepreciationStraight Line)

On January 1. 2008. Peace Corporation bought machinexy under a contract
that required a down-payment of P500130. plus 24 monthly payments of
925.000 each. for total cash payments of P650000. The cash equivalent price
of the machinery was P650 000. The machinery has an estimated. useful life
of 10 years and estimated salvage value of P25. 000. Peace uses the straight-
line method of depreciation.

How much should Peace report in its 2008 income statement as depreciation
for the machinery? .
'
11) P52.500 c) P62,500
b) P55.000 d) P65,000 .

Answer: A - -
' '
Cost of the asset (cash price) P550,000
''
Less: Estimatedsalvagevalue . 25.0119
Depreciablecost . \ '2 - , \ P525,000 3
... '
+Estimatedusefullife '_ . 1 e s
'
Annualdepreciation
_ \ . . - .. ,' L5;_____50_Q_
182:(Depreciation-Straight
Problem Line)
011 January 1, 2008, Shaw Company purchased a machine for P504, 000 that
was placed in service on March 1 2008. Additional costs incurred to bring
the asset to its location and prepare for its intended use were: shipping.
P4,000; installation, P4,000; and testing, P2,000. The estimated useful life of
the asset was 10 years and has an estimated salvage value of P34, 000.

Whatamount shouldbe recognized

of depreciation for the year ended
December31, 2008? \ 1 . -.
a) P40,000' . '
c) P44,000
b) P42,000 . .- , .. d) P48,000 j
I
Answer:. - A. '
~ '
Purchaseprice - P504.000 '
Add: Incidental& necessarycosts:
Shipping - . _ P4000
' 4.000
TIDBtallation
eating 1 '
2 999 19,990
Total cost P514,000
Less:Estimatedsalvagevalue 34.099
Depreciable cost _ P480000
~:~
Esumatedusefullife . .- L11. 61
. Annualdepreciation ', 'quQQ
 WW¢WW¢W -343-

= 2319:9992
Depreciation for 2008 (from 03/01 to 12/31) P48.000 x 10/12

Under the straightline method, the depreciation la allocated evenly based on

depreciable cost over the estimated economic life of the asset

PAS 16, paragraph 55 states that depreciation ofan asset begins when It 1: available
12)! use, Le. when it is in the location and condition necessaty {or it to be capable of
oparaa'ng in the manner intended by management.

Problem 183: (DepreciationStraight Line)

On January 2, 2007. Protein Company purchased a'transportetion equipment
costing P2,400,000. The new asset has an estimeted useful life of 8 years
with no salvage value. Protein Company depreciates this type of asset using
the straight-line method. On Januaxy 2, 2009, Protein determined that the
machine had a useful life of 6 years from the date of acquisition with no
salvage value.

usefullifeoftheasset.whatis the
AsA resultof the changein the estimated
carrying value of the transportation equipment as of December 31. 2009?
' -
a) P1,200,000 , _. c) 131500.000
* *
b) P1.350.000 d) P1.800,000
' J ' ' ' I ' m
Answer:, B - . . .
Cost . . « f P2,400,000
' Less: Accumulated depreciation . - ' - _. . .
' ~ - - ' ' ' .
x
2007 8: 2008 (P2.400.000 2/8) ' 609,000
'_ Book value as of date of change.-January 2 2009
I
P1.800,000
-: Remaining new life , _ _
life - 6 years -
New ' 1 ..
_ Expired life (date of change) 219113 m
. . .. ~ MSQQQQ
Depreciationfor 2009
. Bookvalue,January 1, 2009 ~ . . p1.eoo.ooo.
Less: Depreciation2009 - M
value
Carrying 31.2009 -
asofDecember m
Problem 184: (DepreciationStraight Line)
011 January 2. 2008, Jose Corp. bought machinery under a contract that
required a down payment of P100000. plus 24 monthly payments of P50.000
each. fpr total cash payments of P1,300.000. The cash equivalent price of the
. machinery was P1 100 000. The machinery has an estimated useful life of 10
years and estimated salvage value of P50 H000 Jose uses straight-line
depreciation; 1
How much should Jose report in its 2008 income statement as depreciation
for the machinery?
'
a) P105 000 . 1 1
b)P110909
~. ' (1))
c P

P1133000
000 1
 ~ . .
\3/4_ 0 - .
.. .054?»eg
Wat: -
A
fast (cashprice) P1 100000
falvage value L.B' QM
Pepreciable cost . P1.060,000
;- Estimated useful life _...._._J,Q
pepreciation,2008 gaggggg

Problem 18-5: (DepreciationComposite Method)

of equipment owned by Vitamm Company' 18 presented
A schedule below:

'
Total Lita
Estimated Estimated
99:: 52mm 1812%:
Equipment - 1 P825.000 20
975.000
Equipment -2 300,000 15
' 30,000
Equipment - 3 60,000 0 -o- . 5

Vitamin
Company
computes
depreciation method.I
onthestraight-line
'
Based on the information presented. what is the composite life of the assets?
a) 13.3 years . . ' .c),18.0 years
b) 16.0 years . .z d) 19.8 years
" 1
Answer: B
' - I '
Salvage Depreciable Annual
9919 w ; 3.1.1122~ . 9m . . L_Lfg 2.9.911.
-' = 450.000 + 20 =
Eqpt 1 825.000 75,000 37,500
- - = 270,000 .,_ 15
Eth 2 300,000 1.30.000 = 13,000
EQPt-3 M ' = M"+ "5 = m
Tomi W 105.ooo LQQQQQQ . . 51.599
,-

Depreciable cost _ . P1.080,000

+ Annual depreciation -. . ,___§_z§gg
Compositelife ~- , ',W _- , _m
. Composite - thebomposita
ahagroup asset! J
relatesto groupsof dissimilar
with vamhg useml lives. 22m group method mlatas to similar assets. Botll
depma'ate a group ofaasets based on weighted average aftheir 1139M lime:

0 Depreciation on the entiregmupof assetsas zfthey won

is computed
one.

I; Because depreahubh applies to the entire group of assets, them am ha

, My depreciated assets, regardless of their age.
I; When a component asset of the group is disposed ot, no gain or Ioas"13
1900de regaldless of the amount maeived. Ibo cost of the use!
disposed aiminus the proceed: on disposal. the dlfarence is the amount
pfaocumulateddepreciation to be written 0&3. _
\
 -345-
WW¢WWdW

Problem 186: (DepreciationSum of the Years Digit Method)

Calories Company purchased an equipment for P540.000 on January 2. 2007.
The equipment has an estimated salvage value of P60.000 and an estimated
useful life of 5 years. The equipment is being depreciated using the sum-ofv
yearSdigit method.

What is the carrying value 0f the equipment on December 31, 2008?

a) P156 000 c) P380, 000
b) 9252 .000 _ d) P412,000

Answer: _ B
, , . .
l! E I' . L r D
2007 5/ 15 x P480,000 . == P160.000
2008 4/15 x 480,000 = 128.000
2009 3/15 .x 480.000 = 96.000
2010 2/15 3< , 430,000 = 64,000
'
2011 1/15 x m = M
' ' '
Cost 9540.000
Less: Accumulated I'
depreciation
'
2007 , . P160000
_ 2008 . '
12§,QOO , m
Carrying value, December 31, 2008 -. M

Sum-otlyears-digit is an accelerated depreciation method that results in a large

amount of depreciation in early years of assets usefw life. 2719 asset is dammed
until the book value (cost less accumulated depreciation) is equal to the estimated
salvage value. Depreciation shall be based on degradable cost (:29. cost 1995
estimated salvage value). 2719estimated useful life (converted into faction) shall be
used in computing the yearly depreciation. as follows:

' ' '

Acquisition cost ' _P540,000
Less: Estimated salvage value - . M
Depreciable cost . 00
E_§Q.Q__4

Sum-of-years-digit .
(estimateduseful life-5 years) = 1 + 2 + 3 + 4 + 5 .
/ = 15
0 the numerator 119the years mahing in asset Me; and
0 the denomzhatanb the sum ofall the years in asset useml M9.
'
>

For longer estimated useful life, this formula may he applied:

= mm
W11
= 1§2
 b346- CW 16

Problem 18-7: (Depreciation-Sum of the Years Digit Method)

On May 1. 2007, Nonfat Company purchased a new machinery for P2 .700 000
The machineryhas an estimated useful life of 7 years and depreciation 1%
computedusingthe sum-ofoyeaze'digit
method. Estimated salvage Value
Of
the machine is P180000.

What is the total accumulated depreciation on December 31, 2008?

a) P900,000 , . c) P 990,000
b) P960000 d) 131,170,000

Acquisition cost ' P2,700,000

Less: Estimated salvage value .' 180.0%:
Depreciable cqst . - - W

Sum-ofyeaxs'-digit == 7 (7 + 11
. ' -. 2

f
=' §§- . s
. f
\

05/01/07 to 04/30/08 = 7/28 x P2,520,000 = P630, 000

05/01/08 to 12/31/08 = 6/28 x P2,520,000 x 8/12 = ___3_§Q,_QQQ
Total depreciation . .. , M
accumulated
Problem
188:(DepreciationSum
oftheYears
DigitMethod)
.On January 2, 2007, Phosphorous Company acquired equipment to be used
in its manufacturing operations. The equipment has an estimated useful life
of 10 years and an estimated salvage value of P50, 000. The depreciation
applicableto this equipmentwas P240,000 for 2009 computed under the
sum~of~years'-digit method.
I

What was the acquisition'costof the equipment?

3) P1,650,000 c) P2,400,000
10) 91,700,000 '
.. , d) P2,450.ooo
' - .
Answer: B
+ 8/55')
cost(PZ40,000
Depredable P1550900
' : w
Add:Estimated
salvage'value
cost
Acquisition - W
' =--W= 65
\sum-of-vears'mgn
2
I
3years:'
forthefirst
katio
2007 10/55.
2008 9/55
 Wamgcw -347.
WWGW

problem189: (Depmciauon-Sum of the Yam Digit Method)

011 October 1. 2007. PCU Company purchased machinery for 91,900,000.
salvage value was estimated to be 9100.000. The machmery will be
depmciaued over eight years using the sum-ofyears'-digita method.

is computedonthe baéisofthe nearestfull month,howmuch

1:depreciation
shouldPCU record depreciation expense for 2008 on this machinery?
3) P350000 | c) P387500
D) P362.500 N . d) P400.903
. '
Answer: 0 . 1
-
Acquisition cost P1,900,000
Less: Estimated salvage value 1.0.9.092
Depreciable cost . ' .
. x 21.800300

Sum of years = Lifg (11E + 1) ~

= a (8 + 1)
z . ,
\
::.W - '
. _3_§
' '
_' ,
1"yeardepréciétion \,.
(10/01/07 00 09/30/08) .- . = P1,800,000x 8/36 = 2000000
2" year depreciation ~ -- '. .
(10/01/08t009/30/09) . = P1,800,000>g7/36=P350

for2008
Depteciafion 1toDecembér
(Jgnuari 31)
x . '
, . From 1 year (P400000 9/12) '
P300000
« From 2l year (P350,000 x 3/12) '
'' , __81§9_Q
~ ' .
Total depreciation for 2008 Lam

Ptoblem 18-10: (DepmciationDouble Declining Balance Method)

On January 2, 2007, Iron Company purchased factory equipment for
P4.000.000. Estimated salvage value was P160000. Estimated useful life 0!
the equipment is 10 years and will be depreciated using the double-
declining balance method. 1

What is the amount of depreciation to be recognized in year 2008?

a) P384. . C) P640,000
~
b) P614.400 d) P768.000
-V '
' W C
Straight line rate (100%4-life or 100%+ 10 yeaxs) 1934
rate (10%x 2) -
Double-declining -
m
gemdepreciation x 20%)
(P4,000.000
wasdepreciatipn - P800.000 m
(P4000000 x 20%) M
 h-348' CW 18

Doubladm Min method11alto an accelerated method that gives similm

maul: af depmatian (higher depreciation in the early years of asset life) to those
0:126!dear ., . balancemethod. A percentage(mung), 200%,that is why it is calleq
doublo-doclmmgbalance or 008) of the straight-une rate is multiplied by the 3557a;
value ab year. 219 use: 1: also ddpreclated until the book value is equal to
book
W Water! salvage value of the asset. Under the daublo-declmmg method, IQ
0W value is J'gnomd.

hoblem 1811: (Depreciation-Double Declining Balance Method)

Dreamer Company purchased on October 1. 2007 an equipment for P800900
The equipment had an estimated useful life of 8 years. The
estimated
salvage value was estimated at P50,000 at the end of its useful life. Thg
equipmerit is being depreciated using the double-declining balance method.

What is the amount of depreciation to be charged against 2008 income?

a) P140.625 . c) P175.781
h) P175.000 d) P187500
'
W D .
= 100% :- 8 years =
5traight-line rate- 12.5%
'
poubledeclining rate;= 12.5% x 2 = 25%

2007 depreciation (P800.000 x 25% x 3/12) ' P 50 000

2008 depreciation . (P800,000- P50.000 x 25%) ' ' w

Problem 1812: -(Depreciation-Double Declining Balance Method)

On March 1. 2007. Hopeful Company bought an equipment costing
P1,200.000. Hopefuls depreciation policy is to depreciate long-lived assets
using the doubIe-declim'ng balance method. The equipment has an
estimated useful life of 10 years with a minimum amount of salvage value at
the end of its useful life.

{rahie
isthecarrying
Whék 31.2009?
asofDeéémber
0ftheaéset
-' . . c) P640000
a) 9430.000 - ~, "
b) fs14,ooo d) P768.000

MM 0 ~ . \
rate:
. DaMedechning -.-10x2 = 29%;
100%
. ~ --
De eciationin-
x10/12)
2A7(P1.zoo,000xzo% P3333?
.
~ x20%)
P200.000
'200.000
ZA8(P1 .
2 9<¢°°°°°hooonO%) m - 2000.290
deprecmtlog
. Tot accumulated
131300.000
A / 009t
\sitibn .
reci0tion ___§§Q.9.QQ-
2007 LQiQ-Q-QQ
31.
 mmmnwwa Wmamw ~349-

DecliningBalanceMethod)
1813: (Depreciation-Double
ymblem and
33mmCompanypurchasedmachinerythat was installed readyforuse
value was nmated
00January2. 2007 at a total cost of P960900. SalvagO
The machinery will be depreciatedeve: five years usingthe
5 13160000.
balance method.
double-declining
shouldbe recordedas depreciationexpenseon this machineryfor
Im much
2008?
33 year '
a) P100900 . -c) 132130.400
39)P191000 -. d) P384900
Answer C
'
. 92mm
2007 P960,000 x 40%* 2999999
2003 P960900 - P384,000 x 4096 22.331.29.52
linerate
Straight = + 5'=,2919
1 . 100%
= 20% x 2 = 29.99"
Double-declining pate
- Problem
18-14: (Depreciation150% Declining Balance Method)
Wishful Company purchased a machine for P600000 on January 2, 2007. The
machine has an estimated useful life of 5 years and a salvage value of
. P60,000. Depreciation was computed by the 150%-declining balance method.

betheaccumulated
Hewmuchshould Balance
depreciation atDecember
31.
2003? « x
' x
a) P216.000 c) P294.000
19) P275900. ., f . . d).P306,000

Answer: D . - - -
'
Straightline rate .= 100%-:-5 years= 29%
150%-declimng rate . = 20%x 150% -= 30%

x 30%)
in2007(P600.000
Depreciation P180900
Depreciationin 2008(P600,000- P180000x 30%) t M
Total accumulateddepreciation mg

Problem 18-15: (Depreciation - Change in Method)

Faithful Company purchased an equipment on January 2, 2007 for
- The
P3,000,000. equipment had an estimated useful life of 5 years. The
companys policy is to depreciate the asset using the 200%-declining balance
in 'the first two years of the assets life and then switch to the straight-line
'
method for the remaining useful life of the asset.
I \

Q
 350- 31,2009?
88O December
f
dc?mutton 000
What.
isthetotalaccumultd 0)
P1.800.000 13223523000
P' d)
2)) P2,280.000
Answar: B 293-6
linerate
Straight 100%+5years
9 m
200%
""
x'
20%
20096-declimng rate P1 u200 I000
000 x 40%)
Depreciation in2007 (P3900000 _.p1,200.000 P1920000
Depr90:8t'Ionin 2008(P3.000[ 2:392?)sz
D606mb . asof
Total accumulated dePrecitation
_ 5trai ght-linemethOd-
Add: Depreciation 5mg
in2009 3000.000
Cost . . .
Less:Accumulated
K - 20 O
deprecaztag?
31'
(asofDecember P1,080.000
' ' - - 60 000
Book value
' 3 ears _
.
usefulhfe
~:Remaining ember 31,2009 225%
Totalaccumulated as
depfeCiation-of Dec
,.
8! Methods)
Problem 1816} (DepreciationRetugment Replacement of P3.000,ooo0n
. Meralco has' a balance in the electnc meters account
as follows;
2007,
January 1, 2007,Meralcoinst alled new meters
During
~ ' " .
' ' ' ' M .Agggst', Novgmber
'
Costofnewmeters 1e(1_ ~
mstal P500,000 P800. 000 , P400
.000
~
Cost of old meters replaced . .-. _ . \
360.000 300,000
Proceedsfrom saleof old meters 40,000 - .- V 30,000

Using the retirement and replacement methods, what is the amount of

- - _
depreciation that should be recognized in year 2007?
Retirement Method Egglacgment Method
.a) £590,000 ' -. P' 830,000
b) P590,000 , . =P1.630,000
c) P660,000
,g" , ,
. P 660.000 I
d) " ~ " |
.P660,000 '\P 900,000 s,
A '.
Answer: , A '~ 'l' ..
' 'I
method:
Eggreggeng .'
. Onginalcostofassets I ~
retired(P360,000
+ P300000)
Less: Salvage value of assets ' P660000
-
Depreciation \retued +
(P40'000P30000).M
' '
Re placemen Method: '. - .
Replacement cost ofnewassets (P500
Less: Salvage value of
assets
000+ P400
000
Depreciation (P40000
repla0§d + P30.000)70.5200
 ' -351.
WMIWWGZW

was no retirement or replacement of gum in the month of Augig, only an

7218
acquisition afnew asset, therefore, no depreciation b! that particular month.
am- admin! aunt can 1: kept In the book: and the coat of
the amt 1': mused nub method In comatlmu mad [or anon such a:
placing
uwtypaiea, small tools, etc. which la numerous and Inc Jan: live: and low am: can

W~ asset
cost
1:expenaed
the
when I:toured.
use:
pmblem 1817: (Depreciation - Inventory Method)
Merciful Company uses the inventory method to account for numerous small
tools. The balance of the tools account on January 1' 2008 was 9364.000,
The following transactions occurred with respect to the small tools dunng
2008:

Purchases during the year, P156. 000; sale of used tools at salvage
value in December, P10. 400; Inventory of small tools on December 31.
P390.000 -
2008.
' Whatistheamount fortheyear2008?
oftoolsdepreciation
' .
"a) P119600 . , 6) P156.000
b) P130.000 . x , d) P166.400
v 4
' ' '
Answer: A . .'
- Beginning balance .- '. P364000
Add: Acquisition of tools during the year 156.000 P520.000
Less: Ending balance P390.000
Cost of tools disposed-of 3 _., ' P130000
'
Proceeds of salvaged tools .1 , _ - 10.400
Depreciation ' _ . @5339

Problem 1818: (Disposal by Sale)

The Joyful Company purchased a machine on November 1. 1999 for P296000.
At the time of acquisition. the machinewas estimated to have a useful life of
ten years and estimated salvage value of P8 000. Joyful has recorded
monthly depreciation using the straight-line method. 011 July 1. 2008. the
machine was sold for P26. 000

Whatshould
bethelossrecognized
fromthesaleofthemachine?
a) P 8000: ' c) P20400
'
b) P10.000 , d) P26.000
'
Answer: c
Selling price
Less:Bookvalue . . PZG'OOO
Cm
Accum.
Dep:1(P288 P296000
onsale
Loss x1047120)
'000 ..249.600 £100
M
3)!

r' 18

mm
. 19.5! M9133; DA!
stposal date 2008 7 1
Acquisition date 1293 .11 1
Age of the asset 8 a o
'
x No. of months in a year i3 ' __9§
Age (Accum. Depn.) 4525'

depmcmtion1'5equal to the ratio of the age of the eeeet overhe

7719accumulated
estimated useml life multiplied by depreciehle cost.

ofanitem
Depreciation plantandequipment
ofproperm When
begins theasset
1.
available hr use. Depreciation ceases when the aeeet ie derecogmzed. Dept
of an item ofpropetty,plant and equipment does not cease When the asset become,
idle or retired 1?)!use and held for disposal Mass the asset 129My depreciated
However, under the usage method ofdeprecxation the depreciation can be zero WM],
there is no production .

is derecogmzedwhen the assetis chlqposed

plantandequipment
Anitemofptopezty,
of Viasale,permanentmthdza' we! or retirement, tully damaged and no longer usable
and as a result ofexahang'e '

The lossonderecognition
gaina_r plantandequipment
ofahitemofpmpezty, shallba
included in the prom 0110.93. The gain or loss on detecognitioh is the diference afthe
net disposal proceeds and the canyz'ng' value of the item of pzvpezty, plant and
equmth disposed of.

Problem 1819:(Disposal by Sale) ,

On December 31, 2008, Purple Company sold a building, receiving as
consideration a P4.000 000 non-interest bearing note due 111three years. The
building costs P3.800.000 and the accumulated depreciation was P1.600.000
at the date of sale. The prevailing rate of interest for a note of this type was
12%. The presentvalue'of P1 for three periods at 12% is 0.71.

InitsDecember gainorlossshould
howmuch
31,2008, Purplereportonthe
derecognition of its asset? '
a) P200,000
gain . c) P 960.000loss
b) P540.000
gain . ,d) P1,800.000gain

Answer: 3
price(P4000000x 0.71)
Selling P2.840.000
Book value: '
Cost -
P3.800.000
Accumulateddepreciation 4.529.999 1mm
Gainonsale . M

Magain0:10.98
mm theWhat: afanitem«prom plantand
aqw'pmentshallbedeterminedas the Weave between the net diepoealpmaema
#anzandthecazmhgamountoftheitem.
m_mnmueratianzeceivahleontbd
 Wmnuzmmu Wtioanun-pouf ~353-

disposalof an item ofproperty, plant and equipment is recognized initially at its fair
hr the item is defemd, the consideration received is recomed
value- payment
cash price equivalent. The Menace between the nominal amount of
initially at the
and the cash price mvuent is recognized as interest revenue
$119consideration
71 72). The cash price equivalent of the above sale ofan asset 1':
(PAS 16, par:valueand.
the present (dlscaunted value) of the note mceivable.

problem 1820: (Disposal by Sale)

on July 1. 2008. Vi016t Corporation. a calendar year 00111me. received a
condemnation award of P3,000.000 as compensation for the forced sale of a
on company Property that stood in the path Of a new highway,
plant located
on this date, the plant building had a depreciated cost of P1500000 and the
land cost was P500000. On October 1, 2008, Violet purchased a parcel of
land for a new plant side at a cost of P1,250,000.

Ignoring income taxeS. how much gain should Violet report in its December
31, 3008 income statement?
31) None ' c') P 750,000
D) . P250,000 . ~ d)
. 21,000,000
'
Answer D ' , 0 '. '
Proceeds from a forced sale P3,000,000
Less: Book value-assets condemned:
'
Building P1,500.000
~ '" _ '
Land . _ 500,000 2,000,000
Gain on condemnation of prOperty _ W

/ '
Problem 18-21: (Disposal by Sale)
The following data are available from the books of Red Corporation:
'-
. . 4. \ ._ 1 . . _ Machineg ' ' Eggm ment .
( Costof acquisition P560000 P140000
0Estimated salvage value - 20.000
60,000
'
Date of acquisition 0 January 1, 2005 July 1, 2005
Estimated life -_ >'
, 10 years ' '5
years

whilethe
wae sold for P400,000
On October1, 2008,abovemachinery
equipment could no longer be used on March 31, 2008 and the company
received P50,000 from the insurers in full settlement of the claim.

What is the amount of net gain or loss on the disposal of the above assets?
P 3.500 ' -
a) c) P24.000
h) P23.500 _ d) P27,500
I I
Answer. A
Gain on sale of machinery
.
Less. Loss on
.
' P27 .500
_ msposal of equlpment
Net gain _- 24,000

' Ml
 -
354 ..
' 2008 10 01
M a]
Selling
price P400900
Slagkw"
ufe 3 g; 2%
Book
value ..187.6009
(560.000 $556 oxpifad 2.6 xJz
Gainon saleof machine"! 55

P560y000 '' '

c°3 '
60 ,
' ' ..
Salvagevalue p5oo,OOO
ofasset .'
Depreciable cost 12
xAge
ofasset/hfe 2%. _
Accumulated depreciation

- . 2008 1
Co.-, P50'000
Insurance
Proceedgrgom on
d18p9:;:£995 91 Q1
30
Book
value - 66,000)
(140,000' 2 08 00° :51);dMe
Loss . _ :4
--""QP ' x _1_Z23.;
.. ' a . . . 32 + 1 =m

. - . ' " 0-
Cost .. , P140033-
value
_Salvage ' ' -' ' P1203003 Ir ; _. . . ' .
._ZQLQ_
Depreciablecost" , -
ofasset , - .' - ,~
-xAgeofasset/h'fe ' -, . JQLQQ
,
I
. , P 6§.OQO , . .
\Accumulateddepreciation

Problem 13-22.- (DisposalThru Accident) 0,:1 .- ' ,

On June 30, 2008, a fire in Grey Company's plant caused a total loss to a
production machine. . The machine was being depreciated at P20,000
annually and had a carrying amoth Of P160,000 at December 31, 2007. On
the date of the fire, the fair value of the.machine Was P220900, and Grey
received insuranceproceeds of P200000 in October 2008. * a

' . I ' w

N " - '. -
c)P4O000
gain~
:3 nggoo
loss
. , \ 1 d) P50.000gain
. .
Answer: D "
Proceeds from insurance -
Book value on June V P200.000
30, 2003; _.
Book __
vglueon December31' 2007 -
Deprecxationfox5 months P160.000 ' \'
1.2008to June30, -
Gang. zoos).
._ . _ _ . +3990 ._1_¬_>.o_._
 . t: ownn-uimdqxpaml -355*
W ¢ 5

lem 1823: (Disposalby Sale)

5114 . .
9depreciation
33: Company' on
policy equipment
machinery 13as
fonows.
an9 ' acquisition
a A fullyears depreciationis takenin the yearOf8
0 Nodepreciatmnis taken in the yearof an asset disposition.
a The estimated useful life is five years.
0 The straight-line method is used.

030mm30.2008,Maroonsoldfor 9230.000
3 machineacquired
in 200510:
0,000. The accumulated depreciation for this machine was P216000 at
December31. 2007. and the original estimated salvage value was P60,000.

How much gain or (loss) on the disposal should Maroon record m 2008?
3) P14.000 gain '
. c) P26,000 gain
1;) P26.00010$s . . t d) P34.0001088

Selling Price , l - .
-
. ' 9230.000
Book value: . - -
Cost -
P420,000
. Accumulated depreciation as of 12/31/07 _21_6,._QQ_Q M
Gain . . w

1824:(Disposa1-Thru
PIleem Accident)
On July 1, 2008, one of White Company 3 delivery vans was destroyed in an
accident. On these dates, the van' s carrying value was P250, 000. On July
. 15. 2008, White received and recorded P70,000 invoice for a new engine
installed in the van in May 2008 and another P50, 000 invoice for various
repairs. In August,Wh1'te received P350,000 under its insurance policy on
the van,which it plansto useto thevan.
replace
ofthevanin its
WhatamountshouldWhitereportasgain(loss)ondisposal
2008 income statement?
a) None , c) P 30,000
b) (P20,000) .d) P100000
' *
Answer: 01
Proceeds from insurance _ - P350.000
policy
Less: Carrying value of delivery van. 07/01/08 P250.000
Unrecorded new engine installed 1n May __2_Q.QQQ 33.9990
Gain on disposal of delivery van m

1219 various repairs of 1350.000 betbre the accident should be recorded as revenue
expenditure, since the repairs do not increase the originally assessed standard of the
asset, the repaim are merely part ofmamtenance to keep the asset in good working
condition
 Clique,
18
'
~356-

overa 6
depreciated
valueestima
a salvage third how
year, much
for
issold att he and of Ehe WOW
asset
Ifthe on P;14,000
sale 00010
P204,
betheloss/gain ' \ 6) less
000
a) P12000gain '. , d) p276
,b) P60,000 lose , ,
H I. fI P114m
swan. A ' I'
selling price ,7 1 .' v 1) w.
Book value:~ . 5 . .
P390000
». 102
0oo '
C0
Accum. X 12/15,, .
__
I
geaooo ; .
1 ' i}! I 4 m
-Gain ,
(P360999
Deprecianon.
' i
A
1
.' 14': Z \/ a4 ' 1,:
1111~ ' mama:9 i; 1:
1:
1 5,1 :1 ,1
'2 ; 41.12expixedf . 9
3J ''1 . «y x
4
3
\ -' « 2".1 Vii .< '1.
14* "
.4 -.",.i

5j .- 1' 1:
5 .U Sremannng { .5;(x
18-26:
Problem Retuement)
(DisposaJThrd ,
OnMarch
312008, a machine
derecognized
Yellow. usedin manufacturing
parts; Themachinewas acquiredon May 1, 2005. Straighth'ne
designer
depreciationmethodwas used. The asset had an estimated salvage value of
P20.000 and a five-year life; On December_ 31, 2007, the balance in the
accumulated isP330000.The
depreciation was and
scrapped the
company did not' rece1ve
machine
a single consideration

How
much
would
betheloss
onderecognition?
. ,1 ., 1
a) P250,000 '. . ,. '. c) P277,812 ~
* '
b) 1:270000 :. , .. _ d)fP300,000 ~

Accumulateddepreciation
on12/31/07 '"12p1330-000. 1
+Age ofthe ' ' '00 1
asset(from
05/01/05to 12/31/07 1
Monthly .
depreciation ) 9W . .
xLifeofthe asset P 10,312.50.
£ ,1" . ;
L
Depreciablecost . :1, ; W
" " 1
Salvage value ". , P618,750.00
Cost of asset 1, 9 I
' £0,000 00
AcCumulated deprecmuonfrom. .\ .'P63.8,750.001
'3 '
. to retirement(P618
,750x35/60)
acquisition '
_' :
onderecontion
Loss . . g '
: 36093800 2.
. '
. .. M'__ .
.
. '6
. v

. ,
.
_ .
 Mmuiw WW¢WI -357.

problem1847: (Accumulated Depreciation)

BushCompanyuses the straight line method of depreciationfor its property,
ofthefollowing;
plantandequipment.
which statedat cost.consisted

WW
Land P 200.000 P 200.000
mamas . 1.550.000 1.560.000
Mamryumpmem 95.992999 9.299999
' P7.320.000 P6.960,000
Less: Accum. Depreciation
' 9 900 999 mm
3° 1 am am
Bush's depreciation expense for 2008 and 2007 were P440.000 and P400000
respectively \ .

What amount should be debited to accumulated depreciation during 2008

due to property. plant and equipment derecognition?
a) P 80.000 . . . 0) 9200.000
b) P160000 ; , (1)£320,000
C - '
Answer:
Accumulated depreciation,December31. P2360000
Add: Depreciation. 2008 ,
' 2007 , .
, ' _4_49m9
Total P3.400,000
Less: Accumulated depreciation, December 31. 2008 m
Debit to Accumulated depreciation for asset disposed gm

Problem 1828: (DisposalThru Accident)

On December 31, 2008. a building owned by Kennedy Corporation was
destroyed by fire. Kennedy paid P20.000 for removal and clean up costs 'l'ha
building had a book value of P300,000 and a fair value of P350000 on
December 31. 2008.

What amount should Kennedy use to determine the gain 0! loss on this
conversion? - - \
involuntary ,
a) 00,000 0) P350,000
b) P320.000 - d) P370900

Answer .8
Book value . -
P300 00°
Add: Removal cost . _g9_,9_9_0_
Amount to determine gain or loss on involuntary conversion m