Machinery Vergara

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PROBLEM 27-1

Wisdom Company is installing a new equipment at the production facility and incurred the following
costs:

Cost of equipment per supplier's invoice 2,500,000


Initial delivery and handling cost 200,000
Cost of site preparation 600,000
Consultants used for advice on the acquisition of equipment 700,000
Interest charges paid to supplier for deferred credit 200,000
Estimated dismantling cost to be incurred as required by contract 300,000
Operating loss before commercial production 400,000

1. What total amount should be capitalized as cost of the equipment?

Cost of equipment per supplier's invoice 2,500,000


Initial delivery and handling cost 200,000
Cost of site preparation 600,000
Consultants used for advice on the acquisition of equipment 700,000
Estimated dismantling cost to be incurred as required by contract 300,000
Total Cost of Equipment 4,300,000

PROBLEM 27-2

Siargao Company acquired a machine and incurred the following costs:

Cash paid for machine, including VAT of P96,000 896,000


Cost of transporting machine 30,000
Labor cost of installation by expert fitter 50,000
Labor cost of testing machine 40,000
Insurance cost for the current year 15,000
Cost of training for personnel who will use the machine 25,000
Cost of safety rails and platform surrounding machine 60,000
Cost of water device to keep machine cool 80,000
Cost of adjustment to machine to make it operate more efficiently 75,000
Estimated dismantling cost to be incurred as required by contract 65,000

1. What total amount should be capitalized as cost of the machine?

Cash paid for machine, including VAT of (P96,000) 800,000


Cost of transporting machine 30,000
Labor cost of installation by expert fitter 50,000
Labor cost of testing machine 40,000
Cost of safety rails and platform surrounding machine 60,000
Cost of water device to keep machine cool 80,000
Cost of adjustment to machine to make it operate more efficiently 75,000
Estimated dismantling cost to be incurred as required by contract 65,000
Total Cost of Machine 1,200,000
PROBLEM 27-3

Christian Company purchased a second-hand machine at a price of P5,000,000. A cash payment of


P1,000,000 was made and a two-year, noninterest bearing note was issued for the balance of
P4,000,000.

Recent transactions involving similar machinery indicate that the used machine has a fair value of
P4,500,000. A new machine would cost P6,500,000. The following costs were incurred during the year:

Cost of removing old machine that is replaced 350,000


Cash proceeds from sale of the old machine 100,000
General overhaul and repairs to recondition
machine prior to use 330,000
Cost of spare parts to cover breakdowns 200,000
Cost of installation 180,000
Cost of testing machine prior to use 150,000
Cost of hauling machine from vendor 40,000
Cost of repairing damage to machine caused
when machine was dropped during installation 50,000
Repairs incurred during first year of operations 200,000
Safety device added to the machine 300,000
Cost of training workers to operate the machine 250,000

1. What amount should be capitalized as cost of the second hand machine?

Cash Price of Machine 5,000,000


General overhaul and repairs to recondition
machine prior to use 330,000
Cost of installation 180,000
Cost of testing machine prior to use 150,000
Cost of Second Hand Machine 5,500,000

CHAPTER 27-4
Charry Company purchased a second-hand polishing machine and incurred the following costs:

Agreed purchase price 8,000,000


Dismantling the machine at the current locatoin 400,000
Transportation cost to Charry's factory 350,000
Machine refurbishment cost prior to reinstallation 175,000
Reinstallation 125,000

1. What amount should be capitalized as cost of the second-hand machine?

Agreed purchase price 8,000,000


Dismantling the machine at the current locatoin 400,000
Transportation cost to Charry's factory 350,000
Machine refurbishment cost prior to reinstallation 175,000
Reinstallation 125,000
Total Cost of the Second Hand Machine 9,050,000
CHAPTER 27-5

Negros Company acquired a new machinery:

Invoice price of the machinery 1,400,000


Cash discount available but not taken on purchase 20,000
Freight paid on the new machinery 40,000
Cost of removing the old machinery 15,000
Installation cost of the new machinery 50,000
Testing cost before the machinery was put into regular operation
including P10,000 in wages of the regular machinery operator 30,000
Loss on premature retirement of the old machinery 5,000
Estimated cost of manufacturing similar machinery
including overhead 1,300,000

1. What amount should be capitalized as cost of new machinery?

Invoice price of the machinery 1,400,000


Cash discount available but not taken on purchase (20,000)
Freight paid on the new machinery 40,000
Installation cost of the new machinery 50,000
Testing cost before the machinery was put into regular operation
including P10,000 in wages of the regular machinery operator 30,000
Total Cost of New Machinery 1,500,000

PROBLEM 27-6

Newcombe Company uses many kinds of machines in operations. The entity acquires some machines
from others and constructs some machines itself. The following information pertains to a machine
constructed by the entity:

Cost of material to construct 700,000


Labor cost 430,000
Allocated overhead cost 220,000
Allocated interest cost of financing machine 100,000
Cost of installation 120,000
Insurance for one year 20,000
Profit saved by self-construction 150,000
Safety inspection cost prior to use 40,000
Total Cost of Machine 1,610,000
PROBLEM 27-7

Crown Company acquired a new processing machine at the beginning of current year:

Invoice cost - terms 5/10, n/30 2,500,000


Cost of transportation 50,000
Cost of installation 150,000
Payment for strengthening the floor to support
the weight of the new machine 200,000

The chief engineer spent two thirds of his time during trial run of the new machine. The monthly salary
is P60,000.

During the year, the entity was granted a cash allowance of P100,000 by the supplier because the
machine proved to be of less than standard performance capability.

The cost of removing the old machine before the new machine was installed amounted to P35,000.

The operator of the old machine who was laid off due to the acquisition of the new machine was paid a
gratuity of P30,000.

1. What amount should be capitalized cost of the new machine?

Invoice cost 2,500,000


Cash discount (5% x 2,500,000) (125,000)
Transportation 50,000
Installation 150,000
Trial run (60,000 x 2/3) 40,000
Cash allowance (100,000)
Cost of New Machine 2,515,000

PROBLEM 27-8

During the current year, King Company made the following expenditures relating to the plant building:

Continuing and frequent repairs 400,000


Repainting of the plant building 100,000
Major improvements to the electrical wiring system 300,000
Partial replacement of roof tiles 150,000

1. What total amount should be charged to repair and maintenance expense in the current year?

Continuing and frequent repairs 400,000


Repainting of the plant building 100,000
Partial replacement of roof tiles 150,000
Repair and Maintenace expense 650,000
PROBLEM 27-9

During the current year, Yvo Company installed a production assembly line to manufacture furniture.

In the current year, the entity purchased a new machine and improved the assembly line to install the
machine.

The improvement did not increase the estimated useful life of the assembly line, but it did result in
significant increase in production.

The following expenditures were incurred in connection with the project:

Machine 750,000
Labor to install machine 140,000
Parts added in improving the assembly line to provide future benefits 400,000
Labor and overhead to improve the assembly line 180,000

1. What total amount of the expenditures should be capitalized?

Machine 750,000
Labor to install machine 140,000
Parts added in improving the assembly line to provide future benefits 400,000
Labor and overhead to improve the assembly line 180,000
Total Expenditures 1,470,000

PROBLEM 27-10

During the current year, Bell Company incurred the following costs for a printing press:

Purchase of collating and stapling attachment 840,000


Installation of attachment 360,000
Replacement parts for overhaul of press 260,000
Labor and overhead in connection with overhaul 140,000

The overhaul resulted in a significant increase in production.


Neither the attachment nor the overhaul increased the estimated useful life of the press.

1. What total amount of the expenditures should be capitalized?

Purchased of collating and stapling attachment 840,000


Installation of attachment 360,000
Replacement parts for overhaul of press 260,000
Labor and overhead in connection with overhaul 140,000
Total Expenditures 1,600,000
PROBLEM 27-11

Prudent Company incurred the following expenditures:

Painting partitions in a large room recently divided into


four sections 50,000
Labor cost of tearing down a wall to permit extension of
an assembly line 200,000
Major replacement of the motor of the machine
This replacement was anticipated when the machine was purchased 500,000
Dust filters in the interior of the factory were replaced
The new filters are expected to reduce employee health hazards. 800,000

1. What total amount of the expenditures should be capitalized?

Painting partitions in a large room recently divided into


four sections 50,000
Major replacement of the motor of the machine
This replacement was anticipated when the machine was purchased 500,000
Dust filters in the interior of the factory were replaced
The new filters are expected to reduce employee health hazards 800,000
Total Expenditures 1,350,000

PROBLEM 27-12

Rona Company provided the following charges to the repair and maintenance account:

Service contract on office equipment 100,000


Initial design fee for proposed extension of office building 150,000
New condenser for central air conditioning unit 10,000
Purchase of executive chairs and desks 200,000
Purchase of storm windows and screens and their
installation on all office windows 500,000
Sealing of roof leaks in production area 80,000
Replacement of door to production area 50,000
Installation of automatic door-opening system 200,000
Overhead crane for assembly department to speed
up production 350,000
Replacement of broken gear on machine 60,000

1. What total amount of expenditures should be capitalized?

Initial design fee for proposed extension of office building 150,000


Purchase of executive chairs and desks 200,000
Purchase of storm windows and screens and their
installation on all office windows 500,000
Installation of automatic door-opening system 200,000
Overhead crane for assembly department to speed
up production 350,000
Total Expenditures 1,400,000
PROBLEM 27-13

Shaw Company purchased a machine for P 1,260,000 that was placed in service at year-end. The entity
incurred additional costs for this machine.

Shipping 30,000
Installation 40,000
Testing 50,000

1. At year-end what amount should be reported as machinery?

Purchase Price 1,260,000


Shipping 30,000
Installation 40,000
Testing 50,000
Machinery 1,380,000

PROBLEM 27-14

Fox Company made the following expenditures:

Renovation of a group of machines to secure significant


increase in production over the remaining useful life 500,000
Continuing, frequent and low cost repairs 350,000
Replacement of a broken gear on a machine 50,000

1. What amount should be charged to repair and maintenance expense?

Continuing, frequent and low cost repairs 350,000


Replacement of a broken gear on a machine 50,000
Repair and Maintenance 400,000

PROBLEM 27-15

On July 1, Rudd Company had a delivery van which was destroyed in an accident. On that date, the
carrying amount of the van was P3,000,000.

On July 15, the entity received and recorded a P500,000 invoice for a new engine installed in the van in
May, and another P100,000 invoice for various repairs.

In August, the entity received P4,200,000 under an insurance policy on the van, which it plans to use to
replace the van.

1. What amount should be reported as gain on disposal of the van?

Carrying amount of the van 3,000,000


Cost of new engine 500,000
Adjusted carrying amount 3,500,000

Proceeds of insurance policy 4,200,000


Adjusted carrying amount (3,500,000)
Gain on disposal 700,000
PROBLEM 27-16

Showroom Company used straight line depreciation. On January 1, 2022, the entity purchased a new
machine for P5,000,000 cash. The useful life of the machine was 10 years with a P500,000 residual
value.

On January 1, 2024, the entity decided that the original estimate of useful life should be reduced by two
years. The residual value did not change.

On January 1, 2025, the entity added an automatic guide and safety shield to the machine at a cost of
P300,000 cash.

The addition did not change the useful life and residual value but it resulted in significant increase in
production.

1. What amount should be reported as depreciation for 2022?


a. 450,000
b. 500,000
c. 225,000
d. 250,000

2. What amount should be reported as depreciation for 2024?


a. 500,000
b. 600,000
c. 360,000
d. 450,000

3. What amount should be reported as depreciation for 2025?


a. 550,000
b. 900,000
c. 660,000
d. 760,000

5. Prepare journal entries for 2022, 2023, 2024 and 2025.

2022
Machinery 5,000,000
Cash 5,000,000
Depreciation 450,000
Accumulated Depreciation 450,000

2023
Depreciation 450,000
Accumulated Depreciation 450,000

2024
Depreciation (3,600,000 / 6) 600,000
Accumulated Depreciation 600,000

Cost 5,000,000
Accumulated Depreciation:
2022 450,000
2023 450,000 (900,000)
Carrying amount 4,100,000
Residual value 500,000
Remaining depreciable cost 3,600,000

2025
Machinery 300,000
Cash 300,000
Depreciation (3,300,000 / 5) 660,000
Accumulated Depreciation 660,000

Cost 5,300,000
Accumulated Depreciation (900,000 + 600,000) 1,500,000
Carrying amount 3,800,000
Residual value 500,000
Remaining depreciable cost 3,300,000
PROBLEM 27-17

Mundane Company purchased for cash a new building on January 1, 2022 for P10,500,000.

The building had an estimated useful life of 50 years and residual value of P500,000. Depreciation was
computed on a straight line basis.

On January 1, 2024, the entity replaced the old roof with a permanent tile roof costing P3,000,000.

The cost of the old roof was P2,500,000. The new roof did not change the residual value but was
considered a betterment.

1. What amount should be reported as depreciation for 2022?

a. 200,000
b. 210,000
c. 100,000
d. 105,000

2. What amount should be reported as depreciation for 2024?

a. 218,750
b. 212,500
c. 281,250
d. 300,000

3. What amount should be reported as loss on retirement of building in 2024?

a. 2,500,000
b. 3,000,000
c. 2,400,000
d. 2,880,000

4. Prepare journal entries for 2022, 2023 and 2024.

2022
Building 10,500,000
Cash 10,500,000
Depreciation 200,000
Accumulated Depreciation 200,000

2023
Depreciation 200,000
Accumulated Depreciation 200,000

2024
Accumulated Depreciation (2,500,000 /50 x 2) 100,000
Loss on Retirement of Building 2,400,000
Building 2,500,000

Building 3,000,000
Cash 3,000,000

Building (10,500,000 - 2,500,000 + 3,000,000) 11,000,000


Accumulated depreciation (400,000 - 100,000) (300,000)
Carrying amount 10,700,000

Annual depreciation (10,700,000 - 500,000 / 48) 212,500

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