PROBLEM 1 (EXCHANGE)

Note: if property is acquired in an exchange and there is cash involved, the cost of the PPE is
equal to the following:
a. Fair value of the asset given plus cash payment – on the part of the payor
b. Fair value of the asset given minus cash received – on the part of the recipient
Archer Company exchanged an old equipment for a new equipment. Archer paid P200,000 to
Saber Company for the exchange. The old equipment has a cost of P1,600,000 and
accumulated depreciation of P900,000. The fair value of the old equipment is P600,000. The
transaction is an exchange with commercial substance.
1. Prepare journal entry to record the exchange

PROBLEM 2 (LAND, BUILDING, LAND IMPROVEMENTS AND MACHINERY)

Cost chargeable to land Cost chargeable to building Cost chargeable Cost chargeable to
to land machinery
improvements
 Purchase price  Purchase price  Cost of  Purchase
 Title fees  Legal fees to acquire the permanent price
 Broker fees building fence  Freight in
 Escrow fees  Unpaid taxes up to the  Cost of  Insurance
 Cost of date of acquisition sidewalks  Installation
relocation  Mortgage and interest on  Cost of  Cost of
 Mortgages and the building assumed by pavements testing and
interest assumed the buyer  Cost of trial run
by the buyer  Payments to tenants to parking  Initial
 Unpaid property induce them to vacate the lots estimate of
taxes up to the building  Cost of cost of
date of  Renovation costs to put driveways dismantling in
acquisition the building in its intended which the
 Payments to use entity has a
tenants to vacate  Demolition costs, net of present
the land salvage value obligation
 Cost of clearing,  Materials, labor and  Fees paid to
grading, leveling overhead to construct the consultants
and landfill building for the
 Cost of option to  Building permits acquisition of
buy the land (if  Architect, Superintendent, machinery
land is not Safety inspection fees  Cost of safety
acquired, cost of  Excavation costs rail
option is  Cost of temporary  Cost of water
expensed) buildings used for device to
construction keep the
 Borrowing cost on machine cool
construction
 Cost of temporary safety
fence
On July 1, 2016, Lancer Company purchased land and incurred other cost related to the
construction of a new warehouse. A summary of economic activities is listed below:

Purchase price P925,000

Title insurance 7,500
Legal fees to purchase land 5,000
Cost of razing old building on lot 42,500
Proceeds from sale of salvageable materials (6,000)
Property taxes, Jan. 1, 2016 to June 30, 2016 15,000
Cost of grading and filling building site 45,000
Cost of building construction 3,100,000
Interest on construction loan 60,000
Cost of constructing driveway 400,000
Cost of parking lot and fencing 60,000
Invoice price of the machine 1,400,000
Cash discount not taken to acquire the machine 20,000
Freight paid on the new machinery 40,000
Cost of removing old machine 15,000
Installation cost of new machinery 50,000
Testing cost before machinery is put into regular 30,000
operation
Loss on premature retirement of the old machinery 5,000

2. How much is the cost of land?

3. How much is the cost of building?
4. How much is the cost of land improvements?
5. How much is the cost of machinery?

PROBLEM 3 (BORROWING COSTS)

Note: Computation of capitalizable borrowing costs

Specific Borrowing:
Actual borrowing cost XX
Less: Investment income (XX) XX

General Borrowing:
Average expenditures XX
Less: Amount of specific borrowing (XX)
Amount of general borrowing XX
Multiply: Capitalization Rate XX XX
(Interest expense of general
borrowings/ Principal amount of
general borrowings)
Total capitalizable borrowing cost XX
On January 1, 2016, Rider Company borrowed P1,600,000 at an interest of 10% specifically for
the construction of a new building. The actual borrowing cost on this loan is P160,000 but
interest income of P20,000 was earned from temporary investments prior to disbursement.
Rider had the following loans for general purposes but were used in part for the construction of
the building.

Principal Borrowing cost

10% - Note payable 1,200,000 60,000
12% - Note payable 1,600,000 192,000

6. Compute for capitalizable borrowing costs

PROBLEM 4 (GOVERNMENT GRANT)

On January 1, 2015, Caster Company received P5,000,000 as government grant related to a
building that is purchased on the same date at a cost of P25,000,000. The useful life of the
building is 10 years with no residual value.
7. What is the carrying amount of the building on December 31, 2015?
8. What is the carrying amount of the deferred grant income on December 31, 2015?

PROBLEM 5 (DEPRECIATION)
Assassin Company acquired the following PPE during the current year of 2022:

 On February 1, Assassin acquired ICT equipment for P36,000. The useful life is 5 years.
 On April 3, Assassin acquired machinery and equipment for P500,000 and P600,000
respectively. The company estimate that the machinery can produce 200,000 units
throughout its useful life. While the equipment was estimated to have 80,000 service
hours throughout its useful life. The company produced 4,000 units and used 2,000
hours for the current year.
 On August 1, Assassin acquired furniture and fixture amounting to P72,000. The useful
life is 5 years.
 On September 1, Assassin acquired an air-conditioning unit for P24,000. The useful life
is 8 years.

The company’s depreciation policy is as follows:

ICT equipment Straight-line

Machinery Production method
Equipment Service hours method
Furniture and fixture Sum of years digit
Air-conditioning unit Double declining balance

9. Compute the depreciation expense for each class of PPE

PROBLEM 6 (COMPREHENSIVE)
Alter Ego Company has the following transactions related to PPE for the current year 2022:
I. On January 16, the Company acquired office equipment and furniture and fixtures at a
basket price of P280,000. The fair value of the office equipment and furniture and
fixtures are P80,000 and P60,000 respectively.

II. On March 20, the Company acquired land and paid the following costs:

Purchase price P1,200,000

Legal fees related to land title 150,000
Real estate broker commission 60,000
Delinquent property taxes from 2021 20,000
Cost of leveling and grading 80,000

III. On July 25, the Company finished construction of a new factory building. The Company
paid the following costs:

Materials used for construction P2,500,000

Wages of construction workers 1,800,000
Variable overhead related to construction 500,000
Fixed overhead related to construction 300,000
Demolition costs, gross 250,000
Salvage value of materials from demolition 50,000
Building permits 7,000
Excavation fees 60,000
Architect fees 25,000
Actual interest on construction loans 8,000
Profit from construction 500,000
Initial operating losses 280,000
Cost related to inaugurating the new building 15,000

IV. On August 5, the Company acquired a new machinery for the factory. The Company paid
for the following costs

Purchase price 500,000

Freight in for the purchase of machinery 15,000
Installation costs 10,000
Cost of removing old machinery 18,000
Routine repairs and maintenance 11,000

V. The Company uses straight-line method for all depreciable PPE. It is the Company’s
policy to charge one-full year of depreciation in the year of acquisition and no
 depreciation in the year of disposal. The useful life of the building is 40 years, machinery,
25 years, Others, 5 years.
1. Prepare journal entries for the acquisition of PPE
2. Prepare journal entry to recognize depreciation
3. Carrying amount of property, plant, and equipment for December 31, 2022