And I am

PROPERTY, PLANT AND EQUIPEMENT

( SUBSEQUENT MEASUREMENT )

PROBLEM 1
Hearsa Manufacturing Inc. purchased a new machine on January 2, 2019, that was built to perform
one function on its assembly line. Data pertaining to this machine are:

Acquisition cost P330,000

Residual value P30,000
Estimated service life:
Years 5
Service hours 250,000
Production output 300,000

Required: Using each of the following methods, compute the annual depreciation rate and charge
for the years ended December 31, 2019 and 2020:
(1) Straight-line
(2) Service hours (assume 32,000 hours for 2019 and 36,000 hours for 2020).
(3) Productive-output (assume 31,000 units for 2019 and 37,000 units for 2020).

ANS:

Cost of Asset
Less: Residual Value
Depreciable Cost

(1)
Straight-line:
2019: (P330,000 - P30,000)/5 = P60,000
2020: P60,000

(2)
Service hours: (P330,000 - P30,000)/250,000 = P1.20 per hour
depreciation rate
2019: P1.20  32,000 = P38,400
2020: P1.20  36,000 = P43,200

(3)
Productive-output: (P330,000 - P30,000)/300,000 = P1.00 per unit
depreciation rate
2019: P1.00  31,000 = P31,000
2020: P1.00  37,000 = P37,000

PROBLEM 2
On July 1, 2019, Sparks Company purchased for P2,160,000 snow-making equipment having an
estimated useful life of 5 years with an estimated salvage value of P90,000. Depreciation is taken for
the portion of the year the asset is used.

Instructions
(a) Complete the form below by determining the depreciation expense and year-end book values for
2019 and 2020 using the
1. sum-of-the-years'-digits method.
2. double-declining balance method.

(b) Assume the company had used straight-line depreciation during 2019 and 2020. During 2021,
the company determined that the equipment would be useful to the company for only one
 more year beyond 2021. Salvage value is estimated at P120,000. Compute the amount of
depreciation expense for the 2021 income statement.

(a) Sum-of-the-Years'-Digits 2019 2020

Accumulated Depreciation P 345,000 P 966,000
Book Value 1,815,000 1,194,000
Depreciation Expense 345,000 621,000

Y1 5/15 (July 1, 2019 to June 30, 2020)

Y2 4/15 (July 1, 2020 to June 30, 2021)
Y3 3/15
Y4 2/15
Y5 1/15

Depreciable Amount = 2,160,000 – 90,000 = 2,070,000

2019: (2,070,000 x 5/15) x 6/12 = 345,000

Cost 2,160,000
Less: A.D. 345,000
BV of equip. 1,815,00

2020: Jan. 1, 2020 – June 30, 2020 = 345,000

July 1, 2020 – Dec. 31, 2020 = (2,070,000 x 4/15) x 6/12 = 276,000
Depreciation expense = 345,000 + 276,000 = 621,000

Cost 2,160,000
Less: A.D. 966,000
BV of equip. 1,1194,00

Double-Declining Balance
Accumulated Depreciation P 432,000 P1,123,200
Book Value 1,728,000 1,036,800
Depreciation Expense 432,000 691,200

Double declining rate = 2/life = 2/5 = 40%

Y1 (July1, 2019 – Dec. 31, 2019) 2,160,000 x 40 % x 6/12 = 432,000

Cost 2,160,000
Less: A.D 432,000
BV of equip 1,728,000

Y2 (Jan. 1, 2020 – June 30, 2020) 864,000 x 6/12 = 432,000

(July 1, 2020 – Dec. 31, 2020) 518,400 x 6/12 =259,200
Depreciation expense (2020) = 432,000 + 259,200 = 691,200

Cost 2,160,000
Less: A.D 1,123,200
BV of equip 1,036,800

Double Declining
Y1: (July 1, 2019 – June 30, 2020) 2160,000 x 40% = 864,000
Y2: (July 1, 2020 – June 30, 2021) 1,296,000 x 40% = 518,400

(b) Cost P2,160,000

Accum. Depreciation (621,000)
Salvage (120,000)
P1,419,000 × 1/2 = P709,500, 2021 depreciation
Depreciable Amount = (2,160,000-90,000) = 2,070,000

Annual Depreciation = 2,070,000/5 = 414,000

Accum. Dep. = (414,000 x 6/12) + 414,000 = 621,000

Cost 2,160,000
Less: A.D. 621,000
BV of Equip 1,539,000
Less: SV 120,000
New D. A. 1,419,000
Divided by 2
Annual Dep. 709,500

PROBLEM 3
The following is a schedule of machinery owned by Martin Manufacturing Company.

Estimated Estimated
Total Salvage Life in
Cost Value Years
Machine A P 600,000 P110,000 20
Machine B 315,000 30,000 10
Machine C 84,000 0 15
Machine D 107,000 7,000 5
P1,106,000

Martin computes depreciation on the straight-line basis. Based on the information presented,
compute the:

(1) Composite life of these assets (in years).

(2) Composite depreciation rate.

ANS:

Salvage Depreciable Estimated Annual

Asset Cost Value Cost Life Depreciation
A P 600,000 P110,000 P490,000 20 P24,500
B 315,000 30,000 285,000 10 28,500
C 84,000 0 84,000 15 5,600
D 107,000 7,000 100,000 5 20,000
P1,106,000 P147,000 P959,000 P78,600

(1) P959,000/P78,600 = 12.20 years

(2) P78,600/P1,106,000 = 7.11%

PROBLEM 4
A truck was acquired on July 1, 2018, at a cost of P216,000. The truck had a six-year useful life and
an estimated salvage value of P24,000. The straight-line method of depreciation was used. On
January 1, 2021, the truck was overhauled at a cost of P20,000, which extended the useful life of the
truck for an additional two years beyond that originally estimated (salvage value is still estimated at
P24,000). In computing depreciation for annual adjustment purposes, expense is calculated for each
month the asset is owned.

Instructions
Prepare the appropriate entries for January 1, 2021 and December 31, 2021.
Cost P216,000
Less salvage value 24,000
Depreciable base, July 1, 2018 192,000
Less depreciation to date [(P192,000 ÷ 6) × 2 1/2] 80,000
CV, Jan. 1, 2021 (unadjusted) 112,000
Overhaul 20,000
Depreciable base, Jan. 1, 2021 (adjusted) P132,000

January 1, 2021
Accumulated Depreciation 20,000
Cash 20,000

Cost xx
Less: A.D. xx
BV xx

December 31, 2021

Depreciation Expense 24,000
Accumulated Depreciation (P132,000 ÷ 5.5 yrs) 24,000

PROBLEM 5
1. A plant asset purchased for P150,000 has an estimated life of 10 years and a residual value of
P12,000. Depreciation for the second year of use, determined by the declining-balance method
at twice the straight-line rate is P_____________.
24,0000

2. A plant asset purchased for P200,000 at the beginning of the year has an estimated life of 5 years
and a residual value of P20,000. Depreciation for the second year, determined by the sum-of-
the-years'-digits method is P______________.
48,000

3. A plant asset with a cost of P160,000 and accumulated depreciation of P45,000, is given together
with cash of P60,000 in exchange for a similar asset worth P165,000. The gain or loss recognized
on the disposal (indicate by "G" or "L") is P______________.
10,000 LOSS

Cost 160,000
Less: A.D 45,000
CV 115,000
Add: Cash paid/given 60,000
Total asset given 175,000
Asset received 165,000
LOSS 10,000

PPE (new) 165,000

Accum. Dep. 45,000
Loss on Exchange 10,000
PPE 160,000
Cash 60,000

1. A plant asset with a cost of P216,000, estimated life of 5 years, and residual value of P36,000,
is depreciated by the straight-line method. This asset is sold for P160,000 at the end of the
second year of use. The gain or loss on the disposal (indicate by "G" or "L") is
P___________.
16,000 GAIN

Depreciable amount = 216,000 – 36,000 = 180,000

Annual Depreciation = 180,00/5= 36,000

Proceeds 160,000
Less: BV of asset* 144,000
Gain on sale 16,000

Cost 216,000
Less: A.D. (36,000 x 2 years) 72,000
BV of asset 144,000

Cash 160,000
Accum. Dep. 72,000
PPE 216,000
Gain on Sale 16,000