OPERTY, PLANT AND EQUIPMENT

8. Urban Corporation bought a piece of land and self constructed a

warehouse during 2021. The following related costs were charged
to property, plant and equipment account:

Land purchase P12,000,000

Demolition of old building 300,000
Legal fees for land acquisition 150,000
Building permit 80,000
Interest on loan for construction 270,000
Building construction costs 15,000,000
Landscaping costs 3,500,000
Equipment purchased for use in excavation 800,000
Fixed overhead allocated to building construction 100,000
Compensation for injury to construction worker
(No insurance was carried) 140,000
Profit recognized on construction 1,200,000
Modifications to new building per instruction
by city building inspectors 240,000

The following were credited to the account:

Sale of salvage from the demolished old building 70,000

Sale of excavation equipment 640,000

The modifications to the new building per instruction by the building

inspectors resulted from poor planning by the company.

Required:
Determine the separate costs of land, land improvements,
and building. Apply the principles of Philippine Interpretations
Committee.
9. On December 1, 2021, Day Company purchased a P4,000,000 tract
of land to be used as a factory site. Day razed the old building on the
property and sold the materials it salvaged from the demolition.
Day incurred additional costs and realized proceeds from salvaged
materials as follows:

Payments to tenants to vacate premises P200,000

Architectural design fees 250,000
Demolition cost of old building 100,000
Legal fees for purchase contract and recording
ownership 150,000
Delinquent property taxes on land 50,000
Proceeds from sale of salvaged materials 20,000

Required:
Applying the interpretations of PIC, what is the correct cost of
the land?

10. Property, plant and equipment section of the statement of financial

position of Yu Corporation at December 31, 2020 included the
following:

Land P7,000,000
Land improvements 500,000
Building 9,000,000
Machinery and equipment 980,000

During 2021, the following data were furnished to you for your
analysis of the property, plant and equipment account:
Cash paid on purchase of land P 4,500,000
Mortgage assumed on the land bought
including interest at 10% 5,000,000
Legal fees, realty taxes and documentation expenses 50,000
Payment to squatters on the property to vacate
the premises 100,000
An old building on the land was shortly torn
down at a cost of 120,000
Proceeds from the sale of salvaged materials
from the building demolished 150,000
Cost of fencing the property 500,000
Payment to contractor for a building erected 12,000,000
Building permit fees 20,000
Excavation expenses 50,000
Architect fees 150,000
It was estimated that if the money used during the
period of construction were placed in the money
market, interest that would have been earned is 150,000
Invoice cost of machines acquired 2,000,000
Freight, unloading and delivery charges 60,000
Customs duties and other charges 140,000
Allowances, hotel accomodations paid to foreign
technicians during installation and test runs
of machines 400,000
Royalty payment on machines purchased based
on units produced and sold 180,000

Required:
Show detailed computations of the costs of land,
land improvements, buildings, and machinery and equipment
at December 31, 2021. Apply the interpretations of the PIC.
11. On January 1, 2021, Metro Company started the construction of its
new building. The company follows the policy f capitalizing alllowable
interest costs. Construction costs were incurred as follows:

January 1 P1,400,000
March 31 1,000,000
July 1 1,200,000
September 30 1,000,000
December 31 400,000

The building was completed on December 31, 2021.

a. On January 1, 2021, the company obtained a loan for P4,000,00

at an interest rate of 10%, specifically for the construction of the
building. Prior to their disbursement, the proceeds of the loan
were temporarily invested and earned interest income amounting
to P125,000.

How much is the capitalized interest?

b. The company obtained a loan for P5,000,000 at an interest rate

of 10%, specifically for the construction of the building.
Availments from the loan were made at the beginning of each
quarter in equal amounts. Prior to their disbursements, the
proceeds of the loan were temporarily invested and earned
interest income amounting to P40,000.

What is the total cost of the building construction?

c. On January 1, 2021, Metro Company borrowed P1,800,00 at an

interest rate of 10%, specifically for the construction of its new
building. Interest earned from the temporary investment of the
proceeds of the loan prior to their disbursement amounted to
P10,000. Metro Company also had other loans in 2021 which
 were borrowed for general purposes. The proceeds of these
loans were used in part for the construction of the building.

10%, 2-year note P1,600,000

12%, 5-year note 2,000,000

How much is the capitalized interest?

d. Metro Company had the following general borrowings during

2021 which were used to finance the construction of the
company's new building.

10% bank loan P2,800,000

10% short-term note 1,600,000
12% long-term note 2,000,000

How much should be recorded as interest expense for the year

2021?

12. On December 31, 2020, Lim Company borrowed P30,000,000 and

issued a 12%, 3-year note to finance the construction of a new
building. During 2021, the company made the following expenditures
related to this building:

January 1 P 3,600,000
June 1 6,000,000
July 1 15,000,000
December 1 15,000,000

The construction was completed on December 31, 2021.

Other debts outstanding and other information follow:

10-year, 13% bonds, dated December 31, 2019,
interest payable annually P40,000,000
6-year, 10% note, dated December 31, 2020,
interest payable annually 16,000,000
Interest revenue earned in 2021 from temporary
investments of the specific borrowing 249,000

Required:
a. Determine the amount of interest to be capitalized in 2021.
b. If the specific borrowing amounted to P12,000,000 only,
(instead of P30,000,000, how much is the capitalized interest
in 2021?
 ANSWERS
8. Urban Corporation

Land

Land Purchase 12,000,000

Demolition of old building
(70,000 salvaged)
Legal fees for Land Acquisition 150,000
Building Permit Fees
Interest on Loan for Construction
Building Construction Costs
Landscaping Costs
Equipment Purchased of Use in Excavation
(800,000-640,000)
Fixed Overhead Allocated to Building Construction
Total Costs 12,150,000

9. Day Company
Purchase Price of Land 4,000,000
Legal fees for Purchase Contract and Recording Ownership 150,000
Delinquent Property Taxes on Land 50,000
Total 4,200,000

10. Yu Corporation

Land

Balances, December 31, 2020 7,000,000

Cash Paid on Purchase of Land 4,500,000

Mortgage assumed on the Land bought

including interest at 10% 5,000,000

Legal Fees, Realty taxes and Documentation Expenses 50,000

Payment to Squatters
Razing Costs of Old Building
Salvage Value from Building Demolition
Cost of Fencing the Property
 Paid to a Contractor for Building Erected
Building Permit Fee
Excavation Expenses
Architect Fees
Invoice Cost of Machines Acquired
Freight, Unloading and Delivery charges
Custom Duties and Other Charges
Allowances, hotel accomodations paid to technicians
during installation and test runs of machines
Balances, December 31, 2021 16,550,000

11. Metro Company

a. Loan (4,000,000 x 10%) 400,000
Less: Interest Income Earned on Temporary Investment
of Loan -125,000
Capitalized Interest 275,000

b. Loan (1,250,000x10%) 125,000

Loan (1,250,000x10%x9/12) 93,750
Loan (1,250,000x10%x6/12) 62,500
Loan (1,250,000x10%x3/12) 31,250
Total Interest 312,500
Less: Interest Income Earned on Temporary Investment 40,000
Capitalized Interest 272,500
Total Construction Costs 5,000,000
Total Cost of Building 5,272,500

c. Computation of Average Accumulated Expenditures:

1,400,000 x 12/12 1,400,000
1,000,000 x 9/12 750,000
1,200,000 x 6/12 600,000
1,000,000 x 3/12 250,000
400,000 x 0/12 0
Avergae Accumulated Expenditures 3,000,000
Computation of Weighted Average Interest Rate:
(10% x 1,600,000) + (12% x 2,000,000)
11.11%
 11.11%
1,600,000 + 2,000,000

Interest of Specific Borrowing:

1,800,000 x 10% 180,000
Less: Interest Earned 10,000

Interest on General Borrowing:

3,000,000 - 1,800,000 = 1,200,000
1,200,000 x 11.11%
Capitalized Interest

d. Loan (2,800,000 x 10%) 280,000

Loan (1,600,000 x 10%) 160,000
Loan (2,000,000 x 12%) 240,000
Total Interest on Loans 680,000
Less: Capitalized Interest (680/6,400 x 3,000,000) 318,750
Interest Expense for 2021 361,250

12. Lim Company

3,600,000 x 12/12 3,600,000
6,000,000 x 7/12 3,500,000
15,000,000 x 6/12 7,500,000
15,000,000 x 1/12 1,250,000
Average Accumulated Expenditures 15,850,000

a. Interest on Specific Borrowing (30,000,000 x 12%) 3,600,000

Less: Interest Revenue Earned from Temporary
Investments of Specific Borrowing 249,000
Capitalized Interest 3,351,000

b. Interest on Specific Borrowing (12,000,000 x 12%) 1,440,000

Less: Interest Revenue Earned from Temporary
Investments of Specific Borrowing 249,000
Capitalized Interest 1,191,000

Interest on General Borrowings 467,390

15,850,000-12,000,000=3,850,000
3,850,000 x 12.14%
6,800,000 / 56,000,000 = 12.14%

Capitalized Interest 1,658,390

 Land
Building
Improvements

230,000

80,000
270,000
15,000,000
3,500,000

160,000
100,000
3,500,000 15,840,000

Land Machinery &

Building
Improvements Equipment
500,000 9,000,000 980,000

100,000
120,000
-150,000
500,000
 12,000,000
20,000
50,000
150,000
2,000,000
60,000
140,000

400,000

1,000,000 21,290,000 3,580,000

170,000

133,320
303,320