826 R. Papa St.

Sampaloc, Manila
Philippine School of Business Administration
CPA REVIEW

PRACTICAL ACCOUNTING 1 Gutierrez/Ocampo

HAND OUT NO. 05-42 May 2006

PROPERTY, PLANT, AND EQUIPMENT

PROBLEM 1

Asset acquisition.
Meek Inc. plans to acquire an additional machine on January 1, 2004 to meet the
growing demand for its product. O’Hara Company offers to provide the machine to
Meek using either of the options listed below (each option gives Meek exactly the
same machine and gives O’Hara Company approximately the same net present value
cash equivalent at 10%).

Option 1 — Cash purchase P900,000.

Option 2 — Installment purchase requiring 15 annual payments of P118,326
due December 31 each year.

The expected economic life of this machine to Meek is 15 years. Salvage value at that
time is estimated to be P60,000. Straight-line depreciation is used. Interest expense
under Option 2 is computed using the effective interest method.

Instructions
Based upon current generally accepted accounting principles, state how, if at all, the
book value of the machine and the obligation should appear on the December 31,
2004 balance sheet of Meek Inc., for each option. Present your answer on an answer
sheet in the following format. If an item should not appear in the balance sheet, write
"not shown" opposite the option.
Assets Liabilities
Account Name Amount Account Name Amount
Option 1

Option 2

PROBLEM 2

Capitalizing acquisition costs.

Potts Manufacturing Co. was incorporated on 1/2/04 but was unable to begin
manufacturing activities until 8/1/04 because new factory facilities were not completed
until that date. The Land and Building account at 12/31/04 per the books was as
follows:

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Date Item Amount

1/31/04 Land and dilapidated building P200,000
2/28/04 Cost of removing building 5,000
4/1/04 Legal fees 6,000
5/1/04 Fire insurance premium payment 7,200
5/1/04 Special tax assessment for streets 5,500
5/1/04 Partial payment of new building construction 180,000
8/1/04 Final payment on building construction 180,000
8/1/04 General expenses 30,000
12/31/04 Asset write-up 75,000
P688,700
Additional information:
1. To acquire the land and building on 1/31/04, the company paid P100,000 cash and
1,000 shares of its common stock (par value = P100/share) which is very actively
traded and had a market value per share of P210.
2. When the old building was removed, Potts paid Kwik Demolition Co. P5,000, but
also received P2,000 from the sale of salvaged material.
3. Legal fees covered the following:
Cost of organization P2,000
Examination of title covering purchase of land 2,500
Legal work in connection with the building construction 1,500
P6,000
4. The fire insurance premium covered premiums for a three-year term beginning
May 1, 2004.
5. General expenses covered the following for the period 1/2/04 to 8/1/04.
President's salary P20,000
Plant superintendent covering supervision of new building 10,000
P30,000
6. Because of the rising land costs, the president was sure that the land
was worth at least P75,000 more than what it cost the company.

Instructions
Determine the proper balances as of 12/31/04 for a separate land account and a
separate building account. Use separate T-accounts (one for land and one for
building) labeling all the relevant amounts and disclosing all computations.

PROBLEM 3

Capitalization of interest.
Early in 2004, Logan Corporation engaged Reese, Inc. to design and construct a
complete modernization of Logan's manufacturing facility. Construction was begun on
June 1, 2004 and was completed on December 31, 2004. Logan made the following
payments to Reese, Inc. during 2004:
Date Payment
June 1, 2004 P2,400,000
August 31, 2004 3,600,000
December 31, 2004 3,000,000

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In order to help finance the construction, Logan issued the following during 2004:
1. P2,000,000 of 10-year, 9% bonds payable, issued at par on May 31, 2004, with
interest payable annually on May 31.
2. 1,000,000 shares of no-par common stock, issued at P10 per share on October 1,
2004.
In addition to the 9% bonds payable, the only debt outstanding during 2004 was a
P500,000, 12% note payable dated January 1, 2000 and due January 1, 2010, with
interest payable annually on January 1.

Instructions
Compute the amounts of each of the following (show computations):
1. Weighted-average accumulated expenditures qualifying for capitalization of
interest cost.
2. Avoidable interest incurred during 2004.
3. Total amount of interest cost to be capitalized during 2004.

PROBLEM 4

Nonmonetary exchanges.
Elton Corporation follows a policy of a 10% depreciation charge per year on all
machinery and a 5% depreciation charge per year on buildings.

The following transactions occurred in 2004:

March 31, 2004— Negotiations which began in 2003 were completed and a
warehouse purchased 1/1/95 (depreciation has been properly
charged through December 31, 2003) at a cost of P2,400,000 with a
fair market value of P1,500,000 was exchanged for a second
warehouse which also had a fair market value of P1,500,000. Both
parcels of land on which the warehouses were located were equal in
value, and had a fair value equal to book value.

June 30, 2004— Machinery with a cost of P180,000 and accumulated depreciation
through January 1 of P135,000 was exchanged with P110,000 cash
for a parcel of land with a fair market value of P170,000.

Instructions
Prepare all appropriate journal entries for Elton Corporation for the above dates.

PROBLEM 5

Nonmonetary exchange with cash payment.

Rolen Co. exchanged Building 24 which has an appraised value of P2,400,000, a cost
of P3,795,000, and accumulated depreciation of P1,800,000 for Building M belonging
to Mock Co. Building M has an appraised value of P2,256,000, a cost of P4,515,000,
and accumulated depreciation of P2,376,000. The correct amount of cash was also
paid. Assume depreciation has already been updated.

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Instructions
Prepare the entries on both companies' books assuming the buildings are similar
assets. Show a check of the amount recorded for Building M on Rolen's books.
(Round to the nearest peso.)

MULTIPLE CHOICE PROBLEMS

1. Osage County owned an idle parcel of real estate consisting of land and a
factory building. Osage gave title to this realty to Norris Co. as an incentive for
Norris to establish manufacturing operations in the County. Norris paid nothing
for this realty, which had a fair market value of P250,000 at the date of the
grant. Norris should record this nonmonetary transaction as a
a. memo entry only.
b. credit to Contribution Revenue for P250,000.
c. credit to extraordinary income for P250,000.
d. credit to Donated Capital for P250,000.
b
2. On September 10, 2004, Flint Co. incurred the following costs for one of its
printing presses:
Purchase of stapling attachment P110,000
Installation of attachment 10,000
Replacement parts for renovation of press 36,000
Labor and overhead in connection with renovation of press 14,000
Neither the attachment nor the renovation increased the estimated useful life of
the press. However, the renovation resulted in significantly increased
productivity. What amount of the costs should be capitalized?
a. P0.
b. P134,000.
c. P156,000.
d. P170,000.
d
3. On January 2, 2004, Pine Corp. replaced its boiler with a more efficient one. The
following information was available on that date:
Purchase price of new boiler P120,000
Carrying amount of old boiler 5,000
Fair value of old boiler 3,000
Installation cost of new boiler 10,000
The old boiler was sold for P3,000. What amount should Pine capitalize as the
cost of the new boiler?
a. P130,000.
b. P122,000.
c. P125,000.
d. P120,000.
a
4. On December 1, 2004, Neely Co. purchased a tract of land as a factory site for
P700,000. The old building on the property was razed, and salvaged materials
resulting from demolition were sold. Additional costs incurred and salvage
proceeds realized during December 2004 were as follows:
Cost to raze old building P25,000
Legal fees for purchase contract and to record ownership 5,000
Title guarantee insurance 8,000
Proceeds from sale of salvaged materials 4,000

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In Neely's December 31, 2004 balance sheet, what amount should be reported
as land?
a. P713,000.
b. P721,000.
c. P734,000.
d. P738,000.
c
5. BAKAL Company acquired a welding machine with an invoice price of
P3,000,000 subject to a cash discount of 5% which was not taken. BAKAL
incurred freight and insurance during shipment of P50,000 and testing and
installation cost of P200,000. BAKAL also incurred cost of P20,000 in
removing the old welding machine prior to the installation of the new one.
Welding supplies were acquired at a cost of P100,000. The VAT on the
acquisition is P300,000. The cost of the new welding machine should be
a. 3,100,000
b. 3,250,000
c. 3,220,000
d. 3,400,000
a

6. BIG BROTHER Company acquired two items of machinery as follows:

 On December 30, 2005, BIG BROTHER Company purchased a

machine in exchange for a noninterest bearing note requiring three
payments of P1,000,000. The first payment was made on December
30, 2005, and the others are due annually on December 30. 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 1.69 for
two periods and 2.40 for three periods. The new machine was
damaged during its installation and the repair cost amounted to
P50,000.

 On January 1, 2005, BIG BROTHER Company acquired used

machinery by issuing to the seller a three-year, noninterest-bearing
note for P3,000,000. In recent borrowing, BIG BROTHER has paid a
12% interest for this type of note. The present value of 1 at 12% for
3 years is 0.71.

What is the total cost of the machinery?

a. 4,820,000
b. 4,530,000
c. 4,580,000
d. 4,870,000
a
7. In December 2005, SHOWEE Company exchanged an old machine, with a
cost P6,000,000 and 50% depreciated, for a dissimilar used machine and paid
a cash difference of P1,500,000. The fair value of the old machine was
determined to be P2,000,000. SHOWEE should record the machine at

a. 6,000,000
b. 2,000,000
c. 3,500,000
d. 3,000,000

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Use the following information for questions 8 through 10.

Two independent companies, Nance Co. and Olso Co., are in the home building
business. Each owns a tract of land held for development, but each would prefer to
build on the other's land. They agree to exchange their land. An appraiser was hired,
and from her report and the companies' records, the following information was
obtained:
Nance's Land Oslo's Land
Cost and book value P 96,000 P 60,000
Fair value based upon appraisal 120,000 105,000

The exchange was made, and based on the difference in appraised fair values, Oslo
paid cash to Nance.

8. For financial reporting purposes, Nance should recognize a pre-tax gain on this
exchange of
a. P0.
b. P3,000.
c. P15,000.
d. P24,000.
b
9. The new land should be recorded on Nance's books at
a. P84,000.
b. P96,000.
c. P105,000.
d. P120,000.
a
10. The new land should be recorded on Oslo's books at
a. P60,000.
b. P75,000.
c. P105,000.
d. P120,000.
b
11. On December 1, Young Corporation exchanged 5,000 shares of its P25 par
value common stock held in treasury for a parcel of land to be held for a future
plant site. The treasury shares were acquired by Young at a cost of P40 per
share, and on the exchange date the common shares of Young had a fair
market value of P50 per share. Young received P9,000 for selling scrap when
an existing building on the property was removed from the site. Based on
these facts, the land should be capitalized at
a. P191,000.
b. P200,000.
c. P241,000.
d. P250,000.
c
Use the following information for questions 12 and 13.

Reiley Co. purchased land as a factory site for P1,000,000. Reiley paid P40,000 to
tear down two buildings on the land. Salvage was sold for P5,400. Legal fees of
P3,480 were paid for title investigation and making the purchase. Architect's fees were
P41,200. Title insurance cost P2,400, and liability insurance during construction cost
P2,600. Excavation cost P10,440. The contractor was paid P2,400,000. An
assessment made by the city for pavement was P6,400. Interest costs during
construction were P170,000.

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12. The cost of the land that should be recorded by Reiley Co. is
a. P1,040,480.
b. P1,046,880.
c. P1,049,880.
d. P1,056,280.

b
13. The cost of the building that should be recorded by Reiley Co. is
a. P2,613,800.
b. P2,614,840.
c. P2,623,200.
d. P2,624,240.

d
14. On March 1, Carr Co. began construction of a small building. Payments of
P150,000 were made monthly for three months beginning March 1. The
building was completed and ready for occupancy on June 1. In determining the
amount of interest cost to be capitalized, the weighted-average accumulated
expenditures are
a. P37,500.
b. P75,000.
c. P150,000.
d. P300,000.
b
15. During 2004, Bell Corporation constructed assets costing P750,000. The
weighted-average accumulated expenditures on these assets during 2004 was
P450,000. To help pay for construction, P330,000 was borrowed at 10% on
January 1, 2004, and funds not needed for construction were temporarily
invested in short-term securities, yielding P7,000 in interest revenue. Other
than the construction funds borrowed, the only other debt outstanding during
the year was a P375,000, 10-year, 9% note payable dated January 1, 1998.
What is the amount of interest that should be capitalized by Bell during 2004?
a. P45,000.
b. P22,500.
c. P43,800.
d. P36,800.
c
16. Taylor Company buys a lift truck with a list price of P40,000. The dealer grants
a 15% reduction in list price and an additional 2% cash discount on the net
price if payment is made in 30 days. Sales taxes amount to P500 and the
company paid an extra P400 to have a special horn installed. What should be
the recorded cost of the truck?
a. P33,320.
b. P34,160.
c. P34,220.
d. P33,820.
c
17. On April 1, Smiley Corporation purchased for P1,020,000 a tract of land on
which was located a warehouse and office building. The following data were
collected concerning the property:
Current Assessed Valuation Vendor’s Original Cost
Land P 400,000 P250,000
Warehouse 240,000 150,000
Office building 560,000 300,000

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What are the appropriate amounts that Smiley should record for the land,
warehouse, and office building, respectively?
a. Land, P250,000; warehouse, P150,000; office building, P300,000.
b. Land, P400,000; warehouse, P240,000; office building, P560,000.
c. Land, P364,286; warehouse, P218,571; office building, P437,143.
d. Land, P340,000; warehouse, P204,000; office building, P476,000.

18. On August 1, 2004, Witten Corporation purchased a new machine on a deferred

payment basis. A down payment of P6,000 was made and 4 annual installments
of P9,000 each are to be made beginning on September 1, 2004. The cash
equivalent price of the machine was P38,000. Due to an employee strike, Witten
could not install the machine immediately, and thus incurred P500 of storage
costs. Costs of installation (excluding the storage costs) amounted to P1,200.
The amount to be capitalized as the cost of the machine is
a. P38,000.
b. P39,200.
c. P39,700.
d. P42,000.
b
19. Garner Company exchanged 600 shares of Eller Company common stock, which
Garner was holding as an investment, for equipment from West Company. The
Eller Company common stock, which had been purchased by Garner for P50
per share, had a quoted market value of P58 per share at the date of
exchange. The equipment had a recorded amount on West's books of P32,000.
What journal entry should Garner make to record this exchange?
a. Equipment .................................................................... 30,000
Investment in Eller Co. Common Stock ............... 30,000
b. Equipment .................................................................... 32,000
Investment in Eller Co. Common Stock ............... 30,000
Gain on Disposal of Investment ........................... 2,000
c. Equipment .................................................................... 32,000
Loss on Disposal of Investment ................................... 2,800
Investment in Eller Co. Common Stock ............... 34,800
d. Equipment .................................................................... 34,800
Investment in Eller Co. Common Stock ............... 30,000
d Gain on Disposal of Investment ........................... 4,800
20. On January 2, 2004, Kwik Delivery Company traded in an old delivery truck for
a newer model. Data relative to the old and new trucks follow:
Old Truck
Original cost P27,000
Accumulated depreciation as of January 2, 2004 18,000
Average published retail value 8,000

New Truck
List price P45,000
Cash price without trade-in 40,500
Cash paid with trade-in 33,000
What should be the cost of the new truck for financial accounting purposes?
a. P33,000.
b. P40,500.
c. P42,000.
d. P45,000.

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PROPERTY, PLANT AND EQUIPMENT

HO- P1-05-42

SOLUTIONS

Solution
PROBLEM 1
Assets Liabilities
Account Name Amount Account Name
Amount
Option 1 Machinery P900,000 "not shown"
Accum. Depr. 56,000

Option 2 Machinery P900,000 Notes Payable—

Accum. Depr. 56,000 Current P 31,158
Notes Payable—
Long-term 840,516
Computations:
At January 1, 2004, the note payable is P900,000.
At December 31, 2004, after the first payment of P118,326 has been made (P90,000 interest)
P871,674 principal remains, of which P840,516 is long-term and P31,158 is current [P118,326
– (10% × P871,674)].

Note: P118,326 × 7.60608 (Table 6-4) = P900,000, the present value of the obligation on
January 1, 2004.

Solution
PROBLEM 2
Land
Land and old building
(P100,000 plus P210,000) 310,000
Removal of old building
(P5,000 – P2,000) 3,000
Legal fees 2,500
Special assessment 5,500
Balance 321,000

Building
Legal Fees 1,500
Partial payment 180,000
Insurance (3 months) 600
Final payment 180,000
Superintendent's salary 10,000
Balance 372,100

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Solution
PROBLEM 3
1. Weighted-Average
Capitalization Accumulated
Date Expenditures Period Expenditures
June 1 P2,400,000 7/12 P1,400,000
August 31 3,600,000 4/12 1,200,000
December 31 3,000,000 0 0
P2,600,000

2. Weighted-Average
Accumulated Appropriate Avoidable
Expenditures Interest Rate Interest
P2,000,000 .09 P180,000
600,000 .12 72,000
P2,600,000 P252,000

3. Actual interest incurred during 2004:

9% bonds payable, P2,000,000 × .09 × 7/12 P105,000
12% note payable, P500,000 × .12 60,000
P165,000

The interest cost to be capitalized is P165,000 (the lesser of the P252,000 avoidable interest
and the P165,000 actual interest cost).

Solution PROBLEM 4
3/31/04 Depreciation Expense ........................................................ 30,000
Accumulated Depreciation—Warehouse ............ 30,000
(P2,400,000 × 5% × 1/4)

Warehouse ........................................................................ 1,290,000

Accumulated Depreciation—Warehouse ........................... 1,110,000
Warehouse ........................................................... 2,400,000
(P2,400,000 × 5% × 9 1/4 = P1,110,000)

6/30/04 Depreciation Expense ........................................................ 9,000

Accumulated Depreciation—Machinery ............ 9,000
(P180,000 × 10% × 1/2)

Land .................................................................................. 170,000

Accumulated Depreciation—Machinery ........................... 144,000
Gain on Exchange ............................................... 24,000
Machinery ........................................................... 180,000
Cash ..................................................................... 110,000
[P60,000 – (P180,000 – P144,000)] = P24,000

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Solution PROBLEM 5
Rolen Co.:
Cost P3,795,000
Accumulated depreciation 1,800,000
Book value 1,995,000
Fair value 2,400,000
Gain P 405,000

Gain recognized (144/2,400 × P405,000) P24,300

Accumulated Depreciation .................................................... 1,800,000

Building M ............................................................................ 1,875,300
Cash .................................................................................... 144,000
Building 24 ................................................................ 3,795,000
Gain on Disposal ....................................................... 24,300

Check: Fair value P2,256,000

Deferred gain (380,700)
Basis for Building M P1,875,300

Mock Co.:
Cost P4,515,000
Accumulated Depreciation 2,376,000
Book value 2,139,000
Fair value 2,256,000
Gain P 117,000

Accumulated Depreciation .................................................... 2,376,000

Building 24 ............................................................................ 2,283,000
Building M ................................................................ 4,515,000
Cash ........................................................................... 144,000

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