Professional Documents
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Problem 4
Problem 4
Problem 4
LEI CORP, borrowed P1,000,000 from BBBank Inc. specifically to finance the construction of its building.
The proceeds from the borrowing were received on January 2, 2017 and were supported by a 5 year,
12% note payable. The construction commenced on July 1, 2017 and was substantially completed by
November 30, 2017. The unused proceeds from the loan were reinvested on a monthly basis all
throughout the year to earn 5% annual interest. The following were used the proceeds of the loan
(assume at the beginning of each months)
July P100,000
August 150,000
September 300,000
October 200,000
November 150,000
Requirements:
1. How much is the capitalizable borrowing cost?
2. What is the total interest expense to be recognized for 2017?
Problem 5
Wendy Corp. contracted Peter Inc. on January 1, 2017 to construct building for P80,000,000 on land
Wendy Corp. purchased a couple of years back. The contract provides that Wendy Corp. is to make five
payments in 2017, with the last payment to be made upon completion. The building was completed on
December 31, 2017.
Problem 7
At December 31, 2016 Kelly Corp.’s noncurrent operating asset and accumulated depreciation accounts
had balances as follows:
Depreciation is computed to the nearest month and the residual value of the depreciable assets are
considered immaterial.
Problem 8
Bunny Corporation purchased a manufacturing plant building on January 2008, for P5.2M. The building
has been depreciated using the straight-line method with 30 year useful life and a 10% residual value.
Bunny’s manufacturing operations has experienced downturn for the past two years because of loss of
significant portion of the market because the competitor has introduced a more superior product that
the company’s.
On December 31, 2017, Bonbon estimates that the building has a remaining useful life of 15 years, and
that the net cash flows from the use of the building will be P200,000 per year with no charge in the
estimated salvage value. The fair value less cost to sell of the asset was set at P1,560,000.
Requirements:
1. What is the carrying value of the asset on December 31, 2017 before impairment loss testing?
2. What is the value in use of the asset on December 31, 2017?
3. What is the recoverable value on December 31, 2017?
4. What is the impairment loss to be recognized in 2017?
5. What is the depreciation expense related to the asset in 2018?
Problem 9
Lina Company acquired a machine on January 1, 2015, at a cost of P1,200,000. It was expected to have a
useful economic life of 10 years. Lina uses the straight-line method in depreciating its machinery and
equipment and reports on a calendar year basis.
On December 31, 2017 the machine was appraised having a gross replacement cost of P1,500,000. Lina
uses the revaluation model in valuing this class of property, plant, and equipment after its initial
recognition.
Requirements:
1. How much is the depreciation expense in 2018?
2. How much is the balance of the revaluation surplus account on December 31, 2018 assuming
that the company uses the “Piecemeal basis” of transferring the revaluation surplus to retained
earnings?
3. What is the carrying value of the machine on December 31, 2018?
4. Assuming that the machinery was sold on December 31, 2019 at P800,000, what is the gain or
loss to be recognized in the profit or loss for 2019 and how much in revaluation surplus should
be transferred as a “lump-sum to retained earnings”?
5. Assuming that the fair market value of the equipment is P1.5M on December 31, 2017, what is
the carrying value of the revaluation surplus on December 31, 2018 under “Piecemeal basis” of
transferring the revaluation surplus to retained earnings?
Problem 10
On December 31, 2015 Pepi Corp. subjected to impairment test a building which was a company’s
factory site. Because of the expected decline the demand for the company’s product, the company
deemed it necessary to test the said building for possible impairment loss. Data pertinent to the building
on this date were as follows:
On December 31, 2017, the company decided to convert the building for rentals. As a result the asset is
now found to have a recoverable amount of P15,000,000.
Requirements:
1. How much loss on impairment is recognized in 2015?
2. How much is the depreciation expense recognized in 2016?
3. How much gain on recovery is recognized in 2017 income statement?
4. How much is the depreciation expense recognized in 2018 under the cost of valuing the
property?
Problem 11
On November 15, 2017, Abby Corporation acquired Railey, a company that operates a scenic railway
along the cost of the popular tourist area. The summarized statement of financial position at fair values
of Railey on July 1, 2017, reflecting the terms of acquisition was:
Goodwill P200,000
Operating license 1,200,000
Property-train stations and land 300,000
Rail track and coaches 300,000
Steam engine (2) 1,0000,000
Purchase consideration P3,000,000
The operating license is for ten years. It has recently been renewed by the transport authority and is
stated at the cost of its renewal. The carrying amounts of the property and rail track and coaches are
based on their estimated replacement cost. The engines are valued at their net selling price.
On December 1, 2017, the boiler of one of the steam engines exploded, completely destroying the
whole engine. Fortunately no one was injured, but the engine was beyond repair. Due to its age, a
replacement could not be obtained. Because of the reduced passenger capacity, the estimated value in
use of the business after the accident was assessed at P2 million.
Passenger numbers after the accident were below expectations even after allowing the for the reduced
capacity. A market research report concluded that tourist were not using the railway because of the fear
of similar accident occurring to the remaining engine. In the light of this, the value in use of the business
was re-assessed on December 31, 2017 at P1.8 million. On this date Abby received an offer of P900,000
in respect of the transferable operating license.
Questions:
Based on above and the result of your audit, compute the carrying amount of the following as of
December 31, 2017 after recognizing the impairment loss, if any:
1. Goodwill
2. Operating license
3. Property-train stations and land
4. Rail track and coaches
5. Steam Engines
Problem 12
Your audit of Coco Company’s property plant and equipment account disclosed the following data as of
December 31, 2017:
Machinery Original cost Date of Useful life Salvage value Depreciation
purchase method
Aye P700,000 2011 10 years P62,000 SYD
Bee 1,020,000 2012 15,000 hours 60,000 Working hours
See 1,600,000 2014 15 years 100,000 Straight-line
Dee 1,600,000 2015 10 years 100,000 Double-declining
You have noted that the client’s policy in depreciating asset is to take no depreciation on the year of
purchase and full year’s depreciation on the year of disposal.
A. On May 5, Machinery Aye was sold for P260,000 cash. The company’s bookkeeper recorded
this retirement in the following manner in the cash receipt journal:
Cash 260,000
Machinery 260,000
B. On December 31, 2017, it was ascertained that Machinery Bee had been used for a
cumulative number of hours of 13,000 hours, 2,100 of which was utilized in 2017. Starting
2014, however, the management revised its estimate of the total useful life of Machinery
Bee from 15,000 hours to 18,000 hours with the salvage value being revised to P36,000.
C. On December 31, 2017, before computing for depreciation expense on Asset See, the
management decided that the asset’s remaining useful life in 10 years from January 1, 2017.
D. On December 31, 2017, it was discovered that the plant asset purchased in 2016 has been
charged to repairs expense in 2016. The asset costs P440,000 and had a useful life of 10
years with no salvage value. Management has decided to use double declining balance
method for this asset and was referred to as