Chapter 16

Property, Plant and Equipment (Part 2)

PROBLEM 1: TRUE OR FALSE

1. TRUE 6. FALSE
2. TRUE 7. FALSE
3. TRUE 8. TRUE
4. FALSE 9. FALSE
5. TRUE 10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. D
2. A
3. A
4. D
5. C
6. C

7. Solution:
The cost of the machine is computed as follows:
Purchase price 480,000
Commission 20,000
Freight 22,000
Installation and testing 18,000
Total 540,000

Requirement (a): Straight-line method

Cost 540,000
Residual value (40,000)
Depreciable amount 500,000
Divide by: 10
Annual depreciation 50,000

Cost 540,000
Depreciation - 20x1 (50,000)
Carrying amount - 12/31/x1 490,000
Depreciation - 20x2 (50,000)
Carrying amount - 12/31/x2 440,000

1
Requirement (b): SYD method
SYD denominator = Life x [(Life + 1) ÷ 2] = 10 x (11 ÷ 2) = 55

Depreciation – 20x1 = 500,000 x 10/55 = 90,909

Depreciation – 20x2 = 500,000 x 9/55 = 81,818

Cost 540,000
Depreciation - 20x1 (90,909)
Carrying amount - 12/31/x1 449,091
Depreciation - 20x2 (81,818)
Carrying amount - 12/31/x2 367,273

Requirement (c): Double-declining balance method

DDB rate = 2/Life = 2/10 = 20%

Cost 540,000
(108,000
Depreciation - 20x1 (540,000 x 20%) )
Carrying amount - 12/31/x1 432,000
Depreciation - 20x2 (432,000 x 20%) (86,400)
Carrying amount - 12/31/x2 345,600

Requirement (d): Units of production method

Depreciation – 20x1 = 500,000 x 8,000/100,000 = 40,000

Depreciation – 20x2 = 500,000 x 10,000/100,000 = 50,000

540,00
Cost 0
(40,000
Depreciation - 20x1 )
Carrying amount - 12/31/x1 500,000
(50,000
Depreciation - 20x2 )
Carrying amount - 12/31/x2 450,000

8. Solution:
Useful life = 20 years
Remaining lease term as of 12.31.x8 = (10 + 4 renewal) = 14
Shorter = 14 years

2
Depreciation 12.31.x9 = (480,000 ÷ 14) = 34,286

9. Solution:
Carrying amt. on 1.1.20x8 = (7.2M x 7/10) = 5,040,000
SYD denominator = 7 x [(7+1) / 2] = 28
Depreciation 20x8 = 5,040,000 x 7/28 = 1,260,000

10. Solutions:

Requirement (a):
Equipment (new part) 800,000
Cash 800,000
to record the cost of the replacement part

Accumulated depreciation (500K x 7/10) 350,000

Loss on replacement 150,000
Equipment (old part) 500,000
to derecognize the cost of the part replaced

Requirement (b):
Equipment (new part) 800,000
Cash 800,000
to record the cost of the replacement part

Accumulated depreciation (800K x 7/10) 560,000

Loss on replacement 240,000
Equipment (old part) 800,000
to derecognize the cost of the part replaced

11. B

12. Solution:
The revaluation surplus is computed as follows:
Fair value 42,000,000
(30,000,000
Less: Carrying amount (₱35M – ₱5M)
)
Revaluation surplus - gross of tax 12,000,000
(3,600,000
Less: Deferred tax (12M x 30%) )
Revaluation surplus - net of tax 8,400,000

13. Solution:
The revaluation surplus is computed as follows:
Step 1: Replacement cost = 40,000,000

Step 2:
Total economic life = Effective life + Remaining economic life
3
Total economic life = (8 + 24) = 32

Percentage depreciation = Effective life ÷ Total economic life

Percentage depreciation = 8 ÷ 32 = 25%

Depreciation = Percentage depreciation x Replacement cost

Depreciation = (25% x ₱40,000,000) = ₱10,000,000

Step 3:
Fair value = Replacement cost - Depreciation

Fair value = (₱40,000,000 – ₱10,000,000) = ₱30,000,000

The revaluation surplus is computed as follows:

Fair value 30,000,000
(22,000,000
Less: Carrying amount (₱28M – ₱6M)
)
Revaluation surplus - gross of tax 8,000,000
(2,400,000
Less: Deferred tax (8M x 30%) )
Revaluation surplus - net of tax 5,600,000

Requirement (a): Proportional method

Building (40M – 28M) 12,000,000
Accumulated depreciation (10M – 6M) 4,000,000
Deferred tax liability 2,400,000
Revaluation surplus 5,600,000

Requirement (b): Elimination method

Accumulated depreciation 6,000,000
Building (squeeze) 2,000,000
Deferred tax liability 2,400,000
Revaluation surplus 5,600,000

14. C

15. Solutions:
Requirement (a): 12/31/x4
Depreciation expense (12,000,000 ÷ 25) 480,000
Accumulated depreciation 480,000

Requirement (b): 1/1/x6

The revaluation surplus is computed as follows:

4
Fair value 15,000,000
Less: Carrying amount (₱12M x 20/25) (9,600,000)
Revaluation surplus 5,400,000

The change in carrying amount is determined as follows:

  Historical Cost Fair value % change
Building 12,000,000
Accum. dep’n. (12M x
(2,400,000)
5/25)
15,000,00
Carrying amount 9,600,000 156.25%*
0
* (15,000,000 ÷ 9,600,000) = 156.25%

The accounts are proportionately adjusted as follows:

Historical % Revalued
 
Cost change amounts
Building 12,000,000 156.25% 18,750,000
Accum. depreciation (2,400,000) 156.25% (3,750,000)
Carrying amount 9,600,000 15,000,000

Building (18.75M – 12M) 6,750,000

Accumulated depreciation (3.75M – 2.4M) 1,350,000
Revaluation surplus 5,400,000

Requirement (c): 12/31/x6

The revised annual depreciation is computed as follows:
Fair value on revaluation date 15,000,000
Divide by: Remaining useful life 15 years
Revised annual depreciation 1,000,000

Depreciation expense 1,000,000

Accumulated depreciation 1,000,000

The transfer of the revaluation surplus within equity is recorded as

follows:

Revaluation surplus (5,400,000 ÷ 15) 360,000

Retained earnings 360,000

Requirement (d): 1/1/2011

Cash (12M – 600K) 11,400,000
Accum. dep’n. [3.750M + (15M x 5/15)] 8,750,000
Building 18,750,000
Gain on sale 1,400,000
5
Revaluation surplus (5.4M x 10/15) 3,600,000
Retained earnings 3,600,000

PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a): Straight-line method

20x1
Depreciation = (1.2M – 100K) ÷ 20 = 55,000
Carrying amount = 1.2M – 55K = 1,145,000

20x2
Depreciation = 55,000
Carrying amount = 1.2M – 55K – 55K = 1,090,000

Requirement (b): SYD

SYD rate = 210

20x1
Depreciation = (1.2M – 100K) x 20/210 = 104,762
Carrying amount = 1.2M – 104,762 = 1,095,238

20x2
Depreciation = (1.2M – 100K) x 19/210 = 99,523
Carrying amount = 1.2M – 104,762 – 99,523 = 995,715

Requirement (c): Double declining balance

DDB rate = 2/20 = 10%

20x1
Depreciation = 1.2M x 10% = 120,000
Carrying amount = 1.2M – 120,000 = 1,080,000

20x2
Depreciation = 1.080M x 10% = 108,000
Carrying amount = 1.2M – 120,000 – 108,000 = 972,000
Requirement (d): Units of production
20x1
Depreciation = (1.2M – 100K) x 40,000/1M = 44,000
Carrying amount = 1.2M – 44,000 = 1,156,000

20x2
Depreciation = (1.2M – 100K) x 50,000/1M = 55,000

6
Carrying amount = 1.2M – 44,000 – 55,000 = 1,101,000

2. Solution:
200,000 x 50/70 = 142,857 – 80,000 = 62,857

3. Solutions:
Requirement (a):
The revaluation surplus, gross of tax, is computed as follows:
(34,000,000 x 30/40) – (20M – 7.2M) = 12,700,000

Case #1: Proportional method

Building (34M – 20M) 14,000,000
Accumulated depreciation (34M x 10/40) – 7.2M 1,300,000
Deferred tax liability (12.7M x 30%) 3,810,000
Revaluation surplus (12.7M x 70%) 8,890,000

Case #2: Elimination method

Accumulated depreciation 7,200,000
Building (squeeze) 5,500,000
Deferred tax liability (12.7M x 30%) 3,810,000
Revaluation surplus (12.7M x 70%) 8,890,000

Requirement (b):
(34,000,000 x 30/40) ÷ 30 = 850,000

7
PROBLEM 4: CLASSROOM ACTIVITY
Solutions:

Requirement (a):

Aug. 1, 20x1
Building 2,916,619.26
Cash 2,916,619.26
to record the down payment for the contracted construction of a building

*Alternatively, a “Building under construction,” “Building in progress” or similar

account may be used. If this account is used, it shall be closed to the
“Building” account when the construction is complete. Regardless of the
account used, the construction must be disclosed in the notes.

Aug. 22, 20x1

Building 22,000.00
Cash 22,000.00
to record the payment for the building permit

*The cost of building permit is capitalized because it is a cost necessary for

the entity to enjoy the economic benefits of the asset, i.e., it is illegal to
construct a building without a permit.

Oct. 1, 20x1
Building 1,166,647.70
Cash 1,166,647.70
to record the payment for the first progress billing

Dec. 22, 20x1

Building 3,111,060.54
Cash 3,111,060.54
to record the payment for the second progress billing

Dec. 22, 20x1

Donations expense 13,000.00
Cash 13,000.00
to record donation for Christmas party of construction workers

Feb. 27, 20x2

Building 1,458,309.63
Cash 1,458,309.63
to record the payment for the third progress billing

8
Apr. 30, 20x2
Building 1,069,427.06
Cash 1,069,427.06
to record the payment for the final progress billing

June 30, 20x2

Building 12,000.00
Cash 12,000.00
to record the cost of occupancy permit

The cost of occupancy permit is also capitalized for a reason similar to the
building permit, i.e., it is illegal to occupy a building without a permit.

July 18, 20x2

Taxes and licenses 18,000.00
Cash 18,000.00
to record the tax on the building

Taxes are generally expensed. The only exception is when the taxes have
accrued before an existing building is purchased and the payment thereof is
assumed by the buyer.

July 24, 20x2

Relocation expense 230,000.00
Cash 230,000.00
to record the relocation costs as expense

July 31, 20x2

Depreciation expense – Bldg. 32,520.21
Accumulated depreciation – Bldg. 32,520.21
to record the monthly depreciation expense of the building

9
The depreciation charge is computed as follows:

2,916,619.2
Down payment 6
Building permit - Aug. 22, 20x1 22,000.00
1,166,647.7
1st progress billing - Oct. 1, 20x1 0
3,111,060.5
2nd progress billing - Dec. 22, 20x1 4
1,458,309.6
3rd progress billing - Feb. 27, 20x2 3
Occupancy permit - June 30, 20x2 12,000.00
Final progress billing including payment for 1,069,427.0
retentions 6
9,756,064.1
Total cost of building 9
Divide by: 25
Annual depreciation 390,242.57
Divide by: 12
Monthly depreciation 32,520.21

Depreciation begins when the asset is available for use, and not when it is
actually used. The receipt of the occupancy permit on June 30, 20x2 signifies
that the building is available for use starting on this date. In practice, taxes on
the building start to accrue also from the date of the occupancy permit.

Aug. 1, 20x2
Opening costs 50,000.00
Cash 50,000.00
to record the opening costs as expense

Opening costs and other start-up costs are expensed.

Aug. 31, 20x2

Depreciation expense – Bldg. 32,520.21
Accumulated depreciation – Bldg. 32,520.21
to record the monthly depreciation expense of the building

Sept. 30, 20x2

Depreciation expense – Bldg. 32,520.21
Accumulated depreciation – Bldg. 32,520.21
to record the monthly depreciation expense of the building

10
Oct. 31, 20x2
Depreciation expense – Bldg. 32,520.21
Accumulated depreciation – Bldg. 32,520.21
to record the monthly depreciation expense of the building

Nov. 30, 20x2

Depreciation expense – Bldg. 32,520.21
Accumulated depreciation – Bldg. 32,520.21
to record the monthly depreciation expense of the building

Dec. 31, 20x2

Depreciation expense – Bldg. 32,520.21
Accumulated depreciation – Bldg. 32,520.21
to record the monthly depreciation expense of the building

Requirement (b):

  20x1 20x2

Building 7,216,327.50 9,756,064.19

Accumulated depreciation - (195,121.26)

Carrying amount - Dec. 31 7,216,327.50 9,560,942.93

PROBLEM 5: MULTIPLE CHOICE - THEORY

1
D 6. D D
. 11. 16. D
2
C 7. C A
. 12. 17. A
3
A 8. C B
. 13. 18. D
4
A 9. C D
. 14. 19. A
5 10
B C A
. . 15. 20. A

11
12
PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. A (110,000 – 5,000) ÷ 10 = 10,500

2. C
SYD denominator = Life x [(Life + 1) / 2] = 5 x [(5+1) / 2] = 15
Depreciation – 20x3 = [(50,000 + 100,000) – 15,000] x 4/15 = 36,000

3. C
Solution:
SYD denominator = Life x [(Life + 1) / 2] = 4 x [(4+1) / 2] = 10
Historical cost 20,000
(2,000
Estimated residual value )
Depreciable amount 18,000

7,20
Depreciation - 20x1 (18,000 x 4/10) 0
5,40
Depreciation - 20x2 (18,000 x 3/10) 0
3,60
Depreciation - 20x2 (18,000 x 2/10) 0
16,20
Accumulated depreciation - 12/31/20x3 0

Historical cost 20,000

(16,200
Accumulated depreciation - 12/31/20x3 )
Carrying amount - 12/31/20x3 3,800

4. A
Solution:
150% declining balance rate = 1.5/Life = 1.5/5 = 30%
60,00
Depreciation - 20x1 (200,000 x 30%) 0
42,00
Depreciation - 20x2 (200,000 - 60,000) x 30% 0
102,00
Accumulated depreciation - 12/31/x2 0

5. C
Solution:
Double declining balance rate = 2/Life = 2/10 = 20%

The full-year depreciation charges are computed as follows:

Year 1 (100,000 x 20%) 20,000

13
Year 2 [(100,000 - 20,000) x 20%] 16,000

The depreciation expense in 20x2 is computed as follows:

Jan. 1 to June 30, 20x2 (20,000 x 6/12) 10,000
July 1 to Dec. 31, 20x2 (16,000 x 6/12) 8,000
Depreciation - 20x2 18,000

6. B
Solutions:
Double declining balance rate = 2/Life = 2/5 = 40%
Historical cost, 1/1/20x1 50,000
(20,000
Depreciation - 20x1 (50,000 x 40%) )
(12,000
Depreciation - 20x2 (50,000 - 20,000) x 40% )
Carrying amount - 12/31/x2 18,000
Divide by remaining useful life 3
Depreciation - 20x3 6,000

20,00
Depreciation - 20x1 (50,000 x 40%) 0
12,00
Depreciation - 20x2 (50,000 - 20,000) x 40% 0
6,00
Depreciation - 20x3 0
38,00
Accumulated depreciation - 12/31/x3 0

7. C (600,000 – 60,000) x 30,000 units /200,000 units = 81,000

8. B
Composite life = Depreciable cost ÷ Annual depreciation

Annual
Total Residual Depreciabl Usefu
Machin depreciatio
cost value e amt. l life
e n
275,00
A 25,000 250,000 20
0 12,500
100,00
B 10,000 90,000 15
0 6,000
C 20,000 - 20,000 5 4,000
360,000 22,500

14
(360,000 ÷ 22,500) = 16

9. A
Solution:
Using trial and error, let us first determine what depreciation method
Rago Co. uses.

First trial: SYD Method

SYD denominator = Life x [(Life + 1) / 2] = 5 x [(5+1) / 2] = 15
30,00
Depreciation - 20x1 (110K - 20K) x 5/15 0
24,00
Depreciation - 20x2 (110K - 20K) x 4/15 0
18,00
Depreciation - 20x3 (110K - 20K) x 3/15 0
72,00
Accumulated depreciation - 12/31/x3 0

Notice that the computed accumulated depreciation above is equal to

the accumulated depreciation given in the problem. Therefore, Rago
Co. uses the SYD Method. We will use this method to compute for
the depreciation in 20x4.

12,00
Depreciation - 20x4 (110K - 20K) x 2/15 0

10. D
264,00
Historical cost 0
Original estimated useful life 8
33,00
Original depreciation per year 0

Historical cost 264,000

Accumulated depreciation - 1/1/x3 (33,000 x 3 (99,000
yrs.) )
Carrying amount - 1/1/x3 165,000
(24,000
Revised residual value )
Revised depreciable amount 141,000
Divide by: Revised useful life (6 yrs. - 3 yrs.) 3
Depreciation - 20x3 47,000

Accumulated depreciation - 1/1/x3 (33,000 x 3 99,00

yrs.) 0
15
 47,00
Depreciation - 20x3 0
146,00
Accumulated depreciation - 12/31/x3 0

11. C (8,000 x 3/4) = 6,000 carrying amount after one year ÷ 4-year
revised useful life = 1,500

12. B
Accumulated depreciation
370,00
  0 12/31/x2
25,00 55,00 Depreciation -
Disposal (squeeze) 0 0 20x3
400,00
12/31/x2 0  

13. C [12,000,000 – (10,000,000 – 4,000,000)] x 70% = 4,200,000

14. A (12M x 10/15) – (10M – 4M) = 2,000,000 x 70% = 1,400,000

15. A
Solution:
Building:
Fair value – building (12M x 30/40) 9,000,000
Less: Carrying amount (8M x 15/25) (4,800,000)
Revaluation surplus - gross of tax 4,200,000
(1,260,000
Less: Deferred tax (4.2M x 30%) )
Revaluation surplus - net of tax 2,940,000

Patio:
Fair value – patio (4.2M x 15/25) 2,520,000
Less: Carrying amount (3M x 10/20) (1,500,000)
Revaluation surplus - gross of tax 1,020,000
Less: Deferred tax (1.02M x 30%) (306,000)
Revaluation surplus - net of tax 714,000

Total revaluation surplus (2,940,000 + 714,000) = 3,654,000

16