Chapter 28

PROPERTY, PLANT AND EQUIPMENT

Problem 28-1 (AICPA Adapted)

At the beginning of the current year, Town Company purchased for
P5,400,000, including appraiser’s fee of P50,000, a warehouse building
and the land on which it is located. The following data were available
concerning the property:
Current Seller’s
Apprased value original cost
Land 2,000,000 1,400,000
Warehouse building 3,000,000 2,800,000
5,000,000 4,200,000

What is the initial measurement of the land?

a. 2,140,000
b. 1,800,000
c. 2,000,000
d. 2,160,000

Solution 28-1 Answer d

Cost of land (2/5 x 5,400,000) 2,160,000

When a group of assets is acquired for a limp sum price, the total cost
should be allocated to the individual assets based on their relative fair
value or appraised value.
Problem 28-2 (AICPA Adapted)
On August 1, 2010, Bamco 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
September 1, 2010. The cash equivalent price of the machine was
P950,000. Bamco incurred and paid installation costs amounting to
P30,000.

What is the amount to be capitalized as cost of the machine?

a. 950, 000
b. 980, 000
c. 1,100,000
d. 1,130,000

Solution 28-2 Answer b

Cash price 950, 000

Installation cost 30, 000
Total cost 980, 000

PAS 16 provides that when payment for an item of property, plant, an

equipment is deferred beyond normal credit terms, its cost is the cash
price equivalent plus any directly attributable costs of bringing the asset
to working condition for its intended use, such as cost of site
preparation, initial delivery and handling cost, and installation cost.

Problem 28-3 (AICPA Adapted)

Josey Company entered into a contract to acquire a new machine for is
factory. The machine, which had a cash price of P2, 000,000 was paid as
follows:
Down payment 400, 000
Note payable in 3 equal annual installments 1,200,000
20,000 ordinary shares with a par value of
P25 and fair value of P40 per share 800, 000
2,400,000

Prior to the machine’s use, installation cost of P50, 000 was incurred.
The machine has an estimated residual value of P100, 000.

What is the initial cost of the machine?

a. 2, 000, 000
b. 2, 400, 000
c. 2, 050, 000
d. 2, 450, 000

Solution 28-3 Answer c

Cash price 2, 000, 000

Installation costs 50, 000
Total cost 2, 050, 000

Problem 28-4 (ACP)

Anxious Company acquired two items of machinery as follows:

 On December 31, 2010, Anxious Company purchased a machine
in exchange for a noninterest-bearing note requiring ten payments
of P500, 000. The first payment was made on December 31, 2011,
and the others are due annually on December 31. The prevailing
rate of interest for this type of note at date of issuance was 12%.
The present value of an ordinary annuity of 1 at 12% is 5.33 for
nine periods and 5.65 for ten periods.
  On December 31, 2010, Anxious Company acquired used
machinery by issuing the seller a two – year, non interest-bearing
note for P3,000,000. In recent borrowing, Anxious has paid a 12%
interest for this type of note. The present value of 1 at 12% for 2
years is .80 and the present value of an ordinary annuity of 1 at
12% for 2 years is 1.69.

What is the total cost of the machinery?

a. 5,065,000
b. 5,225,000
c. 5,565,000
d. 8,235,000

Solution 28-4 Answer b

Present value of first note payable (500,000 x 5.65) 2,825,000

Present value of second note payable (3,000,000 x .80) 2,400,000
Total cost of machinery 5,225,000

In the absence of cash price, the cost of asset acquired by installment is

equal to the present value of the total installment payments.

The “present value factor of an ordinary annuity of 1” is used in

computing the present value of first note payable because the note is
payable by installment.

The “present value factor of 1” is used in computing the present value of

the second note payable because the note is payable lump sum after 2
years.
Problem 28-5 (AICPA Adapted)
On December 31, 2010, Bart Company purchased a machine in
exchange for a noninterest – bearing note requiring eight payments of
P200, 000. The first payment was made on December 31, 2010, and the
others are due annually on December 31. At date of issuance, the
prevailing rate of interest for this type of note was 11%. Present value
factors are as follows:

Present value of an ordinary annuity of 1 at 11%

For 8 periods 5.146
Present value of an annuity of 1 in advance at 11%
For 8 periods 5.712

On December 31, 2010, what amount should be recorded as initial cost

of the machine?
a. 1,600,000
b. 1,029,200
c. 1,400,000
d. 1,142,400

Solution 28-5 Answer d

Present value of future payments (200,000 x 5.712) 1,142,400

The “PV of an annuity of 1 in advance” is used because the machine was
purchased on December 31, 2010 and the first payment was made on
December 31, 2010.
Problem 28-6 (IAA)
Lax Company recently acquired two items of equipment. The
transactions are described as follows:

 Acquired a press at an invoice price of P3,000,000 subject to a 5%

cash discount which was taken. Costs of freight and insurance
during shipment were P50,000 and installation cost amounted to
P200,000.
 Acquired a welding machine at an invoice price of P2,000,000
subject to a 10% cash discount which was not taken. Additional
welding supplies were acquired at a cost of P100,000.

What is the total increase in the equipment account as a result of the

transactions?
a. 4,900,000
b. 5,000,000
c. 5,100,000
d. 5,200,000

Solution 28-6 Answer a

First equipment:
Invoice price 3,000,000
Discount taken – 5% ( 150,000)
Freight and insurance 50,000
Installation cost 200,000 3,100,000
Second equipment
Invoice price 2,000,000
Discount not taken – 10% ( 200,000) 1,800,000
Total cost 4,900,000

Cash discounts, whether taken or not taken, trade discounts and rebates
are deducted in arriving at the cost of property, plant and equipment.
The welding supplies on the second equipment should not be capitalized
but reported as prepaid expense.
Problem 28-7 (AICPA Adapted)
Precious Company had the following property acquisitions during the
current year:
 Acquired a tract of land with an existing building in exchange for
P50,000 shares of Precious Company with P100 par value that had
a market price of P120 per share on the date of acquisition. The
last property tax bill indicated assessed value of P2,400,000 for the
land and P600,000 for the building. Shortly after acquisition the
building was razed at cost of P100,000 in anticipation of a new
building construction in the current year.
 Received land from a major shareholder as an inducement to locate
a plant in the city. No payment was required but Precious paid
P50,000 for legal expenses for land transfer. The land is fairly
valued at P1,000,000.

What is the total increase in land as result of the acquisitions?

a. 7,000,000
b. 6,100,000
c. 7,150,000
d. 7,100,000

Solution 28-7 Answer d

First land:
Fair value of shared issued
(50,000 x 120) 6,000,000
Cost of razing the old building 100,000 6,100,000
Second land 1,000,000
Total cost 7,100,000

If shares are issued for noncash consideration, the proceeds should be

measured by the fair value of the consideration received or the fair value
of the shares issued in the absence of the fair value of the consideration
given. Accordingly, the cost of the first land is measured by the fair
value of the shares because the land has no known market value.
Contributions received from shareholders should be recorded at fair
value with the credit going to donated capital. However, the legal
expenses for the transfer of the donated property should not be
capitalized but deducted from donated capital.

Problem 28-8 (IAA)

Dawson Company has received a donation of land from a rich local
philanthropist. The land originally had a cost of P1,000,000. On the date
of the donation, the land had a market value of P1,500,000 and an
assessed value of P1,200,000. How much income should be recognized
from the donation?
a. 1,500,000
b. 1,200,000
c. 1,000,000
d. 0

Solution 28-8 Answer a

Capital gifts or grants from nonshareholders shall be recorded as

income at their fair value when they are received or receivable.

Problem 28-9 (IAA)

Jazz Company purchased land with a current market value of
P2,400,000. The carrying amount of the land was P1,305,000. In
exchange for the land, Jazz issued 20,000 ordinary shares with par value
of P100 and market value of P140 per share. The shares are traded in an
established stock exchange.

What amount should Jazz record as cost of the land?

a. 1,305,000
b. 2,000,000
c. 2,400,000
d. 2,800,000
Solution 28-9 Answer c

Current market value of land 2,400,000

Problem 28-10 (IAA)

Figaro Company acquired land and paid in full by issuing P600,000 of
its 10 percent bonds payable and 40,000 ordinary shares with par value
of P10. The share was selling at P19 and the bonds were trading at 102.
What amount should Figaro record as cost of the land?
a. 988,000
b. 1,000,000
c. 1,372,000
d. 1,387,200

Solution 28-10 Answer c

Fair value of bonds payable (600,000 x 102) 612,000

Fair value of shares (40,000 x 19) 760,000
Total cost of land 1,372,000
Problem 28 – 11 (AICPA Adapted)
On September 1, 2010 Ron Company issued 100,000 treasury shares
with P25 par value for a parcel of land to be held for a future plant site.
The treasury shares were acquired by Ron at a cost of P30 per share.
Ron’s share had a fair market value of P40 on September 1, 2010. Ron
received P50,000 from the sale of scrap when an existing structure on
the site was razed. At what amount should the land be initially
measured?
a. 4,000,000
b. 3,950,000
c. 3,000,000
d. 2,500,000
Solution 28 – 11 Answer b

Fair value of treasury shares (100,000 x P40) 4,000,000

Scrap value of existing structure ( 50,000)
Cost of land 3,950,000

The market value of the treasury shares is used because the land has no
known fair value.

Problem 28 – 12 (PHILCPA Adapted)

Fairmont Company, a public entity, issued 5,000 ordinary shares with
P1,000 par value for a building. The following information relates to the
exchange:

Carrying amount of building 17,500,000

Face value of insurance policy for building 20,000,000
Current quoted price of share 4,400

What is the initial cost of the building?

a. 5,000,000
b. 17,000,000
c. 22,000,000
d. 20,000,000

Solution 28 – 12 Answer c

Fair value of shares issued (5,000 x 4,400) 22,000,000

Problem 28 – 13 (AICPA Adapted)

In October of the current year, Ewing Company exchanges an old
packing machine, which cost P1,200,000 and was 50% depreciated, for
another used machine and paid a cash difference of P160,000. The fair
value of the old packaging machine was determined to be P700,000.
what is the cost of the machine acquired in the exchange on the books of
Ewing Company?
 a. 860,000
b. 700,000
c. 760,000
d. 540,000

Solution 28 – 13 Answer a

Fair value of old machine 700,000

Cash payment 160,000
Cost of new machine 860,000

PAS 16 provides that an item of property, plant and equipment acquired

in a nonmonetary exchange or a combination of monetary and
nonmonetary exchange is measured at fair value of the asset given up
plus cash payment, unless the exchange transaction lacks commercial
substance or the fair value of either the asset given up or asset received
is not reliably measurable.

Problem 28 – 14 (AICPA Adapted)

Caine Motor Sales exchanged a car from its inventory for a computer to
be used as a long-term asset. The following information relates to this
exchange:

Carrying amount of the car 600,000

List selling price of the car 900,000
Fair value of the computer 860,000
Cash difference paid by Caine 100,000

What amount of gain should Caine recognize on the exchange?

a. 260,000
b. 160,000
c. 200,000
d. 0
Solution 28 – 14 Answer b

Fair value of computer 860,000

Less: Cash paid by Caine 100,000
Fair value of car – asset given 760,000
Less: Carrying amount of car 600,000
Gain on exchange 160,000

Problem 28 – 15 (AICPA Adapted)

At the beginning of the current year, Bell Company exchanged an old
machine, with a book value of P390,000 and a fair value of P350,000,
and paid P100,000 cash for another used machine having a list price of
P500,000. At what amount should the machine acquired in the exchange
be recorded on the books of Bell?
a. 450,000
b. 460,000
c. 490,000
d. 500,000

Solution 28 – 15 Answer a

Fair value of old machine 350,000

Cash payment 100,000
Cost of new machine 450,000

Problem 28 – 16 (AICPA Adapted)

Eagle Company owns a tract of land that it purchased in 2007 for

P2,000,000. The land is held as a future plant site and has a fair value of
P2,800,000 on July 1, 2010. Hall Company also owns a tract of land
held as a future plant site. Hall paid P3,600,000 for the land in 2009 and
the land has a fair value of P3,800,000 on July 1,2010. On this date,
Eagle exchanged its land and paid P1,000,000 cash for the land owned
by Hall. The exchange had commercial substance. At what amount
should Eagle record the land acquired in the exchange?
 a. 2,800,000
b. 3,000,000
c. 3,200,000
d. 3,800,000

Solution 28 – 16 Answer d

Fair value of land given – Eagle 2,800,000

Cash paid by Eagle 1,000,000
Total cost 3,800,000

Problem 28 – 17 (AICPA Adapted)

During the current year, Beam company paid P100,000 cash and traded
inventory, which had a carrying amount of P2,000,000 and a fair value
of P2,100,000, for other inventory in the same line of business with a
fair value of P2,200,000. What amount should Beam record as cost of
the inventory received in exchange?
a. 2,000,000
b. 2,100,000
c. 2,200,000
d. 2,300,000

Solution 28 – 17 Answer c

Fair value of inventory given 2,100,000

Add: Cash payment 100,000
Total Cost of inventory received 2,200,000

Problem 28 – 18 (AICPA Adapted)

Yola Company and Zaro Company are fuel oil distributors. To facilitate
the delivery of oil to their customers, Yola and Zaro exchanged
ownership of 1,200 barrels of oil without physically moving the oil.
Yola paid Zaro P300,000 to compensate for a difference in the grade of
oil. It is reliably determined that the exchange lacks commercial
substance. On the date of the exchange, cost and market value of the oil
were as follows:
Yola Company Zaro Company
Cost 1,000,000 1,400,000
Market Value 1,200,000 1,500,000

1. What amount should Yola Company record as cost of the oil

inventory received in exchange?

a. 1,000,000
b. 1,200,000
c. 1,300,000
d. 1,500,000

2. What amount should Zaro Company record as cost of the oil

inventory received in exchange?

a. 1,400,000
b. 1,500,000
c. 1,100,000
d. 1,200,000

Solution 28 – 18
Question 1 Answer c

Cost of oil inventory given 1,000,000

Add: Cash payment 300,000
Total cost of oil inventory received 1,300,000

Question 2 Answer c

Cost of oil inventory given 1,400,000

Less: Cash received 300,000
Cost of oil inventory received 1,100,000
 The Exchange transaction is measured at the carrying amount of
the asset given up adjusted by the cash involved if the exchange lacks
commercial substance.
The exchange transaction lacks commercial substance if the cash
flows from the new asset are not significantly different from the cash
flows of the old asset.

Problem 28 – 19 (AICPA Adapted)

Amiable Company exchanged a truck with a carrying amount of
P1,200,000 and a fair value of P2,000,000 for a truck and P200,000
cash. The cash flows from the new truck are not expected to be
significantly different from the cash flows of the old truck. The fair
value of the truck received was P1,800,000. At what amount should
Amiable record the truck received in the exchange?
a. 2,000,000
b. 1,400,000
c. 1,000,000
d. 1,800,000

Solution 28 – 19 Answer c

Carrying amount of truck given 1,200,000

Cash received ( 200,000)
Cost of new truck 1,000,000

The exchange transaction lacks commercial substance because the

cash flows of the new asset are not significantly different from the
cash flows of the old asset. Accordingly, the asset received is measured
at the carrying amount of the asset given minus the cash received.
Problem 28 – 20 (AICPA Adapted)
At the beginning of the current year, Winn Company traded in an old
machine having a carrying amount of P1,680,000 and paid a cash
difference of P600,000 for a new machine having a cash price of
P2,050,000. What amount of loss should Winn recognize on the
exchange?
a. 600,000
b. 230,000
c. 370,000
d. 0

Solution 28 – 20 Answer b

Cash price of new machine 2,050,000

Less: Cash payment 600,000
Fair value of old machine 1,450,000
Less: Carrying amount 1,680,000
Loss on exchange ( 230,000)

Problem 28 – 21 (CGAC)
Prince Company and Albert Company, two unrelated entities, agreed to
exchange tractor trailers. Information relating to these assets is as
follows:
Prince Albert
Original acquisition cost 1,500,000 800,000
Accumulated depreciation 700,000 720,000
Fair value on date of exchange 900,000 150,000

In accordance with the agreement, Albert will pay P750,000 in cash to

Prince which is the difference in fair value.
 1. What amount should Prince Company record as cost of the asset
received in exchange?
a. 150,000
b. 750,000
c. 950,000
d. 650,000

2. What amount should Albert Company record as cost of the asset

received in exchange?
a. 900,000
b. 830,000
c. 150,000
d. 230,000

Solution 28 – 21

Question 1 Answer a
Fair value of Prince (recipient) 900,000
Less: Cash received 750,000
Cost of new asset received in exchange 150,000

Question 2 Answer a
Fair value of Albert (payor) 150,000
Add: Cash Payment 750,000
Cost of new asset received in exchange 900,000

Problem 28 – 22 (AICPA Adapted)

On January 1, 2010, Wilbur Company traded in an old machine for a
newer model. Data relative to the old and new machines follow:

Old machine
Original cost 800,000
Accumulated depreciation on January 1, 2010 600,000
Average published retail value 170,000
New machine
List price 1,000,000
Cash price without trade 900,000
Cash paid with trade in 780,000

What should be the cost of the new machine acquired in the exchange?
a. 900,000
b. 950,000
c. 980,000
d. 1,000,000

Solution 28 – 22 Answer a

Since the old machine has no available fair value, the new machine
received in exchange is recorded at its cash price without trade in of
P900,000. The average published retail value of the old machine is not
necessarily its fair value. Moreover, the loss on exchange is computed as
follows:

Cash price without trade in 900,000

Less: Cash price with trade in 780,000
Trade in value of old machine 120,000
Less: Carrying amount 200,000
Loss on exchange ( 80,000)
Problem 28 -23 (IAA)
Jilmar Company acquired a delivery truck, making payment of
P2,680,000 analyzed as follows:
Price of truck 2,500,000
Charge for extra equipment 50,000
Value added tax – recoverable 300,000
Insurance for one year 120,000
Motor vehicle registration 10,000
Total 2,980,000
Trade in value of old truck ( 300,000)
Cash paid 2,680,000

The cost of the old truck was P1,500,000 with carrynig amount of
P200,000 and fair value of P50,000.

What is the cost of the new truck acquired in the exchange?

a. 2,300,000
b. 2,680,000
c. 2,250,000
d. 2,550,000

Solution 28 -23 Answer a

Cash paid 2,680,000
Value – added tax ( 300,000)
Insurance ( 120,000)
Motor vehicle registration ( 10,000)
Capitalizable cash payment 2,250,000
Fair value of old truck 50,000
Cost of new truck 2,300,000
Problem 28 -24 (PHILCPA Adapted)
Taiwan Company fabricated equipment for its office use ta the entity's
plant during the current year. The following data were taken from the
entity's records:
Materials Direct Labor
Finished goods 1,000,000 1,500,000
Office equipment 600,000 500,000

Factory overhead amounted to P1,200,000. Normal production of

finished goods is 50,000 units. Due to the fabrication of the office
equipment, finished goods produced totaled 35,000 units only in the
current year. The office equipment is to be charged with the overhead
which would have been apportioned to the 15,000 units which were not
produced.

What is the total cost of office equipment after the apportionment of

factory overhead?
a. 1,100,000
b. 1,400,000
c. 1,460,000
d. 2,300,000

Solution 28 – 24 Answer c
Materials 600,000
Direct labor 500,000
Overhead (15,000/50,000 x 1,200,000) 360,000
Total cost of office equipment 1,460,000

In the absence of any statement, the overhead is allocated on the basis of

direct labor as follows:
Materials 600,000
Direct labor 500,000
Overhead (500,000/2,000,000 x 1,200,000) 300,000
Total cost of office equipment 1,400,000