SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department

ACCT 1056- Intermediate Accounting, Part 2

First Semester, SY 2023-2024

Exercises

Property, Plant and Equipment, Part 2

Make sure you have solved the following problems before attending our classroom meeting.
Please write your complete solution in your Journal of Learnings (JoL).

Depreciation Methods, Measurement of PPE, Derecognition, and Change in Accounting

Estimates

Amicable Company purchased a machine at a cost of P635,000 on April 11, 2019. It was
estimated that the machine would have a residual value of P35,000.
The estimated useful life is 5 years, 60,000 service hours and 150,000 production units.

Actual Operations Service Hours Unit Produced

2019 14,000 34,000
2020 13,000 32,000
2021 10,000 25,000
2022 11,000 29,000
2023 12,000 30,000

The entity is reporting at calendar year.

Required:
1. Compute the depreciation for each period under each of the following methods:
a. Straight-line.
b. Sum-of-the-years’ digit (SYD)
c. Double declining balance (DDB)
d. Service hours.
e. Unit of Production.

2. Compute the carrying amount of the machine on December 31, 2022 under each of the
foregoing methods.

3. Assuming the machine was sold at the end of its useful life at its estimated residual value,
give the entry to record the sale.
4. Assuming the machine was sold on September 23, 2022 at a selling price of P225,000 and
additional costs incurred on the sale amounted to P2,000 representing the commission of a
broker, give the entry to record the sale under the following method of depreciation:
a. Straight-line.
b. SYD.
c. DDB

5. Assuming the entity is properly applying the “Straight-line” method until end of 2020 when
the entity decided to change the following estimates:
a. New estimated useful life is 7 years from date of acquisition.
b. New residual value is estimated at P50,000.
c. New depreciation method to be implemented using the DDB.

Answer the following:

a. Compute the adjustment to retained earnings.
b. Depreciation in 2021.
c. Carrying amount of the asset on December 31, 2022.

Other Depreciation Methods - COMPOSITE METHOD, INVENTORY METHOD, AND

RETIREMENT AND REPLACEMENT METHOD

Composite Method

Happy Company owned a power plant which consisted of the following assets all acquired at the
beginning of current year:
Cost Residual value Useful life in years
Building 6,100,000 100,000 20
Machinery 2,550,000 50,000 5
Equipment 1,030,000 30,000 10

Required:
a. Compute the composite rate.
b. Compute the composite life.
c. Prepare journal entry to record the depreciation for the current year following the
composite method.
d. Prepare journal entry to record the retirement of the machinery at the end of the fifth
year assuming the proceeds from retirement amount to P40,000.
e. Prepare the journal entry to record the depreciation for the sixth year following the
composite method.

Inventory Method, Retirement Method, and Replacement Method

Real Company used a hand tool in the manufacturing activities. On January 1, 2019, there are
800 of such tools on hand at cost of P200 each.
Acquisition and retirement during 2019 and 2020 are:
Acquisition and Cost Retirement and retirement Estimated value of tools at
 proceeds year-end
2019 400 @ P300 300 @ P50 200,000
2020 900 @ P400 700 @ P70 350,000

Retirement may be assumed to be on a first-in, first-out basis.

Required:
Prepare journal entries for 2019 and 2020 using:
a. Retirement method
b. Replacement method
c. Inventory method

Comprehensive Problem
At the beginning of current year 2019, Obvious Company provided the following:
Cost Accumulated depreciation
Land 875,000 -
Building 7,500,000 1,644,500
Machinery and Equipment 2,250,000 635,000

Building – DDB, 25 years

Machinery and Equipment – SL, 25 years
Land Improvements – SL
Leasehold Improvements – SL
• On January 1, 2019 a plant facility consisting of land and building was acquired from
another entity in exchange for 25,000 shares of Obvious Company.

On this date, the share had a market price of P50. Current zonal values of land and
building for property tax purposes are P150,000 and P600,000, respectively.
• On March 31, 2019, new parking lot, street and sidewalk at the acquired plant facility
were completed at a total cost of P192,000. These expenditures had an estimated useful
life of 12 years.

• On April 1, 2018, the company signed a ten-year lease for office space. Obvious
Company has the option to renew the lease for an additional five-year period on or
before April 1, 2029. During the first half of April 2019, the Company incurred the
following costs:
- P900,000 for general improvements to the leased premises with an estimated useful
life of ten years.
- P100,000 for office equipment with an estimated useful life of ten years.
- P200,000 for movable assembly line equipment with useful life of 5 years.
At the time the leasehold improvement were finished, Obvious Company is uncertain as
to the exercise of the renewal option.
• On July 1, 2019, machinery and equipment were purchased at a total invoice cost of
P340,000. Additional cost of P10,000 for delivery and P50,000 for installation were
incurred.

• On December 20, 2019, a machine with a cost of P170,000 and a carrying amount of
P29, 750 at date of disposition was scrapped without cash recovery.
Determine the depreciation of the:
a. Building b. Machinery and Equipment
c. Land Improvements d. Leasehold Improvements

Accounting for Subsequent Costs and Revaluation Model

SUBSEQUENT COSTS
During the current year, Quean Company made the following expenditures. Determine whether
the item is a capital expenditure or revenue expenditure.
Capital Revenue
Expenditure Expenditure
(Capitalized (recognized
as asset) as expense
in the period
incurred)
Continuing and frequent repairs on a plant building 400,000
Repainting of the plant building 100,000
Major improvements to the electrical wiring system 300,000
of the plant building
Partial replacement of roof tiles on the plant 150,000
building
Major replacement of the motor of a machine. This 500,000
replacement was anticipated when the machine
was purchased
Dust filters in the interior of the plant building were 800,000
replaced. The new filters are expected to reduce
employee health hazards.
Service contract on office equipment 100,000
Initial design fee for proposed extension of office 150,000
building
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 500,000
installation on all office windows
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 350,000
up production
Replacement of broken gear on machine 60,000
A shatter proof glass is substituted for ordinary 300,000
glass in the plant building
Cost of relocating an equipment from its current 20,000
location
 Repair on the machinery. It is expected that this 50,000
repair will extend the useful life of the asset.

TOTAL

REVALUATION MODEL

Hilarious Company provided the following data pertaining to a machinery on January 1, 2019
Cost of Machinery 4,500,000
Original residual value 500,000
Accumulated Depreciation 2,400,000
Age of Asset 3 years

The entity revalued the machinery on December 31, 2019 and made the following changes in
estimates:
a. The revised residual value is 300,000.
b. The estimated useful life is 6 years from date of acquisition.

Required:
1. Provide the depreciation entry in 2019.
2. Assuming the replacement cost on December 31, 2019 is P6,000,000, prepare the
journal entry to record the revaluation under:
a. Proportional Approach.
b. Elimination Approach.
3. Assuming the fair value on December 31, 2019 is P1,800,000, prepare the journal entry
to record the revaluation under:
a. Proportional Approach.
b. Elimination Approach.
4. Compute the carrying amount of the machinery on December 31, 2019.
5. Provide the depreciation entry in 2020.
6. Compute the carrying amount of the machinery on December 31, 2020.
7. Provide the entry on the piecemeal realization of the revaluation surplus in 2020.
8. Assuming the machinery was sold on July 1, 2021 at P250,000, give the entry to record
the sale.