PROPERTY PLANT AND EQUIPMENT

Problem 5-1
Kate Bishop Inc. incurred the following expenditures in 2020:

Purchase of land with a dilapidated building at the beginning P5,600,000

of theyear (no significant value)
Land survey 208,000
Fees for search of title for land 24,000
Special assessment of the government for road projects 80,000
Property taxes from 2018 to 2020 120,000
Cost to raze the old building, see audit note a. 940,000
Payments to tenants of the old building 184,000
Building construction permit fee 140,000
Cost of excavation of the land, including an excavation 400,000
equipmentwith a cost of P100,000, see audit note b
Temporary quarters for construction workers 430,000
Permanent fencing of property after construction 320,000
Dividends that should have been earned had the money 200,000
used forconstruction been invested in the equity
instruments
Cost of construction 6,600,000
Cost of paving parking lot, driveway and sidewalks 900,000
Profit on construction, as the difference between the appraised
value of the asset after construction and actual costs 1,900,000
incurred
Damages awarded for injuries sustained in construction
where noInsurance is carried 336,000
List price of Machinery and equipment purchased 4,567,000
Trade discount not taken on the machinery and equipment 127,000
purchased
Cost of freight and handling 50,000
Cost of testing the equipment, see note c. 85,000

Additional Audit notes:

a. Salvage proceeds from materials recovered from demolition of dilapidated
building,P5,000.
b. Proceeds from sale of the excavation equipment, P20,000.
c. Proceeds from sale of produce from the testing done on the machinery and
equipmentamounted to P25,000.
d. A portion of the building site had been temporarily used by Kate Bishop Inc. to
operate a car park while the building was being constructed. A total of P650,000
was earned by Bacolodfrom his incidental activity.

1. What is the correct cost of the land?

a. 5,952,000 c. 5,992,000
b. 5,902,000 d. 5,912,000
2. What is the correct cost of land improvements, if there
are any?
a. 900,000 c. 1,220,000
b. 980,000 d. 1,300,000
3. What is the cost of the building?
a. 8,669,000 c. 8,699,000
b. 7,729,000 d. 8,489,000
4. What is the cost of machinery and equipment?
a. 4,550,000 c. 4,667,000
b. 4,677,000 d. 4,500,000
Problem 5-2
You are the senior auditor in charge for the annual audit of America Chavez Corp. for the
year ended December 31, 2020. You checked mostly the information in the financial records
for this small/medium entity and was highly satisfied.
You noticed however, that the property account consisted of land which was acquired on
January 1, 2018 together with eight identical buildings equally built on it. The initial
purchase price was P48,000,000, thirty percent of which is attributable to the land. The
eight buildings were estimated to have a 50 years as economic lives of which two of them
were used for general and administrative offices while the rest were leased out to
independent parties under operating lease arrangements.
The following costs were also incurred during acquisition:

Non-refundable transfer taxes paid to government 3,000,000

Title insurance and legal fees attributable to the acquisition 1,000,000
Actual borrowing costs 220,000
Marketing and advertisements 100,000
Office parties to celebrate new rental business 80,000
Reimbursements to previous owner of non-refundable real property 40,000
taxes forsix-month period ending June 30, 2018
During 2018, America Chavez Corp. incurred repairs and maintenance costs of
P46,000. Additionally, it paid non-refundable real property taxes of P60,000 for the year
ending June 30, 2019.
On December 31, 2018, the fair value of each building was P4.9M measured reliably
on a goingconcern basis without undue cost or effort.
Based on your audit of the property account:
1. What is the initial measurement amount of investment
property?
a. 39,000,000 c. 39,330,000
b. 36,000,000 d. 39,165,000
2. What is the initial measurement amount of the land to be categorized
as PPE?
a. 3,900,000 c. 3,933,000
b. 3,916,500 d. 3,600,000
3. What is the initial measurement amount of buildings to be categorized
as PPE?
a. 9,138,500 c. 9,100,000
b. 9,177,000 d. 8,400,000
4. What is the depreciation expense on the building for the
year 2018?
a. 168,000 c. 182,770
b. 182,000 d. 183,540
Problem 5-3
Wiccan Company constructs its own buildings. In 2019, a total of P1,228,500 interest was
included aspart of the cost of a new building just being completed.
The following is a summary of construction expenditures in 2020:
Accumulated in 2019, including capitalized interest P18,228,500
March 1 7,000,000
September 1 4,000,000
December 31 5,000,000
Wiccan has the following outstanding loans at
December 31, 2020:
12% note related directly to new building;
 Term, 5 years from beginning of construction
P10,000,000 General borrowings:
10% note issued prior to construction of new building;
term, 10 years 5,000,000
8% note issued prior to construction of new bulding;
Term, 5 years 10,000,000
1. How much is the total capitalizable borrowing cost under PAS
23?
a. 2,534,761 c. 1,334,761
b. 2,500,000 d. 1,200,000
2. How much interest expense should be reported in the 2020 income
statement?
a. 0 c. 34,761
b. 1,300,000 d. 1,334,761
3. What is the total cost of the new building as of December
31, 2020?
a. 36,763,261 c. 36,728,500
b. 35,500,000 d. 27,895,167

Problem 5-4
You are auditing the various items of Speed Corp.’s property, plant and equipment for
the periodended December 31, 2020 and discovered the following information:
A. Speed Corp. purchased a machinery (AB001) in 2010 for P6,000,000. The machine
was being depreciated a straight-line basis over an estimated useful life of 20 years
with P600,000 salvage value. At the beginning of 2020, Speed Corp. estmated that
the useful life of the machine would be extended by an additional five years with
salvage value at P300,000.
B. Another machinery (DE020) was purchased on January 1, 2018 for P6,500,000. On
the date of purchase, Speed Corp. incurred the following additional costs: Loss on
sale of an old machinery P150,000; Freight cost on the new machinery (DE020),
P50,000; Installation cost of the new machinery (DE020), P200,000, and; Testing
cost of the new machinery (DE020) prior to regular operations, P40,000. The
estimated salvage value of the machine was at P500,000 after its 20 year useful life.
On January 2020, you discovered that accessories costing P576,000 were added to
the machinery in order to reduce its operating costs. These accessories neither
prolonged the useful life of the machinery nor did it provide any additional salvage
value.
C. In early July 2020, the company purchased machinery GH033. The company paid
P1,000,000 cash down-payment and signed a P9,000,000 non-interest bearing
promissory note for the balance. The note is payable in 3 equal annual installments
starting July 1, 2021. Market rateof interest on similar debt security was at 10%. The
estimated salvage value is 10% of the original cost after its 10-year useful life. The
asset is depreciated using the double declining balance method.
D. Speed Corp. also acquired, at a total cost P18M, a piece of land with natural
resources that can be extracted. Speed is required by its purchase agreement to
restore the land to a condition suitable for recreational use after it has depleted the
resources. The estimated restoration cost was at P2M. Geological survey estimate
that the recoverable minerals will be at 7.6M tons and that the land will have a value
of P1M after the said restoration. During the current year, total minerals extracted
was at 1.2M tons, 900,000 tons of which were sold during the year.
Determine the depreciation expense of the following machineries in 2020:
1. AB001
a. 160,000 b. 200,000 c. 300,000 d. 320,000
 2. DE020
a. 314,500 b. 338,800 c. 346,500 d. 350,000
3. GH033
a. 846,056 b. 761,450 c. 1,091,411 d. 966,411
4. What is the total depletion on the wasting asset for 2020?
a. 3,000,000 b. 2,250,000 c. 3,157,895 d. 2,368,421
5. What is the depletion expense on the wasting asset for 2020?
a. 3,000,000 b. 2,250,000 c. 3,157,895 d. 2,368,421
Problem 5-5
Your audit of Yelena Company’s property plant and equipment account disclosed the
following data as of December 31, 2018:

Machinery Original Cost Date of Useful life Salvage Depreciation Method

purchase Value
Aye P700,000 2012 10 years P62,000 SYD
Bee 1,020,000 2013 15,000 hours 60,000 Working hours
See 1,600,000 2014 15 years 100,000 Straight-line
Dee 1,600,000 2016 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
ofpurchase and full year’s depreciation on the year of disposal.
The following is a summary of the transactions in 2018:

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, 2018, it was ascertained that Machinery Bee had been used for
a cumulative number of hours of 13,100 hours, 2,100 of which was utilized in 2018.
Starting 2018 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, 2018, before computing for depreciation expense on Asset See,
the management decided that the asset’s remaining useful life is 10 years from
January 1, 2018.
D. On December 31, 2018, it was discovered that the plant asset purchased in 2017
has been charged to repairs expense in 2017. 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 machinery
Eff.
Based on the information above and as a result of your audit:
1. What is the adjusted gain on sale of Machinery Aye?
a. 82,000 c. 87,640
b. 93,600 d. 58,000
2. What is the depreciation expense on asset Bee for
2018?
a. 84,000 c. 134,400
b. 100,400 d. 142,800
3. What is the depreciation expense on asset See for
2018?
a. 171,430 c. 130,000
b. 120,000 d. 54,550
 4. What is the total carrying value of the remaining machineries as of December
31, 2018?
a. 3,044,000 c. 2,788,000
b. 2,544,800 d. 2,436,000
Problem 5-6
At the beginning of 2018, Marvel Technology, Inc. acquired the Patriot Corporation for P350
million. In addition to cash, receivables, and inventory, the following allocations were made:

Plant and equipment

(depreciable assets) P120 million
Purchased technology 60 million
The plant and equipment are depreciated over an 8-year useful life on a straight-line basis.
There is no estimated residual value. The purchased technology is estimated to have a 6-year
life, no residual value,and is amortized using the straight-line method.
At the end of 2020, a change in business climate indicated to management that the
operational assetsof Patriot Corporation might be impaired. The following amounts have been
determined:

Plant and equipment:

Undiscounted sum of future cash flows P65 million
Fair value 50 million
Purchased technology:
Undiscounted sum of future cash flows P15 million
Fair value 10 million

1. What is the book value (before any impairment) of plant and equipment at the end of
2020?
a. 50 million b. 65 million c. 45 million d. 75 million
2. What is the book value (before any impairment) of the purchased technology at
the end of 2020?
a. 30 million b. 60 million c. 15 million d. 10 million
3. What is the amount of impairment loss to be recorded, if any, for plant and equipment?
a. 10 million b. 15 million c. 0 d. 25 million
4. What is the amount of impairment loss to be recorded, if any, for the purchased
technology?
a. 15 million b. 5 million c. 20 million d. 0
Problem 5-7
Skaar Corp. owns two parcels of land in Baguio. Land A was purchased in 2013 at a cost of
P10M while land B was purchased in 2014 at a cost of P12M. The lands were classified as
PPE. The lands were revalued as follows:

Year of revaluation A B
2015 P8M P16M
2017 12M 11M
2019 11M 15M

1. What amount should be recognized as other comprehensive income

for 2015?
a. 2,000,000 b. 6,000,000 c. 4,000,000 d. 0
2. What amount should be recognized in the income statement related to the pieces
of land in2017?
a. 0 b. 2,000,000 c. 1,000,000 d. 3,000,000
 3. What amount should be recognized as total/net other comprehensive income
in 2019?
a. 0 b. 2,000,000 c. 1,000,000 d. 3,000,000
Problem 5-8

How much from the above items, including goodwill, shall be recognized as intangible assets?
a. 2,394,500 b. 1,844,000 c. 2,064,500 d. 1,974,000
Problem 5-9
Kamala Khan Corporation was organized in 2017. Its accounting records include only
one account for all intangible assets. The following is a summary of the entries that
have been recorded and postedduring the years 2017 and 2018:

Intangibles

7/1/17 Franchise expiring on June 30, 2025 P252,000

10/1 Advance payment on lease expiring on October 1, 2019 168,000
12/31 Net loss for 2017 including incorporation fee, P6,000,
and
related legal fees of organizing the business, P30,000 (all
incurred in 2017) 96,000
1/2/18 Acquired patent with a useful life of 10 years 444,000
3/1 Cost of developing a secret formula 450,000
4/1 Goodwill purchased 1,670,400
7/1 Legal fees for successful defense of patent purch on 1/2 75,900
10/1 Research and development costs on a new project 960,000
Ignoring income tax effects, determine the following:

1. The unamortized patent cost at December 31, 2018:

a. 399,600 b. 470,880 c. 444,000 d. 394,980
2. The unamortized franchise cost at December 31, 2018:
a. 220,500 b. 189,000 c. 204,750 d. 236,250
3. The amount of prepayments to be reported as of December 31, 2018:
a. 147,000 b. 63,000 c. 168,000 d. 126,000
4. The adjusting entries on December 31, 2018, should include a net debit to the
retainedearnings account at:
a. 1,778,550 b. 84,000 c. 120,750 d. 132,750
5. As a result of the adjustments at December 31, 2018, the total charges against
income of 2018 should be:
a. 1,681,800 b. 1,645,800 c. 1,195,800 d. 1,682,550

Problem 5-10
The following costs were incurred by Groot Corp. during 2018:

Searching for applications of new research findings P57,000

Trouble-shooting in connection with breakdowns during commercial
production 87,000
Adaptation of an existing capability to a particular requirement or
customer’s need as a part of continuing commercial activity 39,000
Engineering follow-through in an early phase of commercial production 45,000
Radical modification of the formulation of a glassware production 78,000
Laboratory research aimed at discovery of new knowledge 204,000
Testing for evaluation of new products 72,000
Quality control during commercial production, including routine
testing of products 174,000
Materials consumed in research and development projects 177,000
Consulting fees paid to outsiders for research and projects 300,000
Personnel costs of persons involved in research and devt projects 384,000
Indirect costs reasonably allocable to research and devt projects 150,000
Materials purchased for future research and devt projects 102,000
Research and devt costs reimbursable under a contract to perform
research and devt for Rocket Corporation 1,050,000
Design, construction, and testing of preproduction prototypes and 870,000
models
Routine and on-going efforts to refine, enrich, or otherwise, improve
upon
the qualities of an existing product 750,000
TOTAL P4,539,000

What is the total amount to be classified and expensed as research and development for
2018?
a. 3,342,000 b. 2,292,000 c. 2,394,000 d. 2,220,000