PROPERTY, PLANT AND EQUIPMENT (ANSWER KEY)

PROMLEM SOLVING

Problem 1
Pauline Corporation was incorporated on July 1, 2017. The following items relate to
property, plant and equipment transactions:

Cost of land, which included an old building appraised at 3,000,000 Php 30,000,000
Building mortgage not assumed by Pauline Corporation, including
Related interest due at the time of purchase 800,000
Deliquent property taxes not assumed by Pauline Corporation 300,000
Payments to tenants to vacate the building 200,000
Cost of razing the building 400,000
Proceeds from sale of salvaged materials 100,000
Architect’s fee for new building 600,000
Building permit for new construction 400,000
Fee for title search 250,000
Survey before construction of new building 200,000
Excavation before construction of new building 1,000,000
Payment to contractor 100,000,000
Assessment by City Government for drainage project 150,000
Cost of grading and leveling 100,000
Cost of quarters constructions 800,000
Cost of warehouse for construction tools and materials 500,000
Cost of windows broken by vandals distracted by the celebration 120,000
Premium for insurance on building construction 300,000
Payment of medical expenses of employees accidentally injured
while inspecting the building 180,000
Interest cost on specific borrowing incurred during construction 3,600,000
Cost of installing lights in parking lot 120,000
Cost of paving driveway and parking lot 600,000

1. Cost of Land
a. Php32,000,000 c. Php31,200,000
b. Php32,300,000 d. Php31,500,000

Cost of land Php 30,000,000

Payment to tenants to vacate the building 200,000
Cost of razing the building 400,000
Proceeds from sale of salvaged materials ( 100,000)
Fee for title search 250,000
Survey before construction of new building 200,000
Assessment by City Government for drainage project 150,000
Cost grading and leveling 100,000
--------------------------
31,200,000
===============
2. Cost of Building
a. Php107,200,000 c. Php106,400,000
b. Php105,900,000 d. Php106,700,000

Architect’s fee for new building Php 600,000

Permit for building constructions 400,000
Excavation before construction of new building 1,000,000
Payment to contractor 100,000,000
Cost of quarters constructions 800,000
Cost of warehouse for construction tools and materials 500,000
Premium for insurance on building construction 300,000
Interest cost on specific borrowing incurred during
construction 3,600,000
--------------------------
 107,200,000
===============
3. Cost of Land Improvements
a. Php120,000 c. Php1,220,000
b. Php720,000 d. Php820,000

Cost of installing lights in parking lot Php 120,000

Cost of paving driveway and parking lot 600,000
--------------------------
720,000
==============
4. Total Operating Expenses
a. Php0 c. Php300,000
b. Php180,000 d. Php200,000

Cost of windows broken by vandals distracted

by the celebration Php 120,000
Payment of medical expenses of employees accidentally
Injured while inspecting the building 180,000
---------------------
Php 300,000
============
5. Total Property, Plant and Equipment
a. Php140,220,000 c. Php107,920,000
b. Php138,400,000 d. Php139,120,000

Land Php 31,200,000

Building 107,200,000
Land improvements 720,000
-------------------------
139,120,000
==============

Problem 2
The following items relate to the acquisition of a new machine by Camil Corporation in
2017:
Invoice price Php 20,000,000
Freight on new machine 100,000
Cost of removing the old machine 120,000
Gain on disposal of old machine 1,500,000
Gratuity paid to operator of the old
machine who was laid off 700,000
Installation cost of new machine 600,000
Repair cost of new machine damaged in
the process of installation 80,000
Testing costs before machine was
put into regular operation 150,000
Salary of engineer for the duration of trial run 400,000
Operating cost during first month of regular use 2,500,000
Cash allowance granted because the new
machine proved to be of inferior quality 1,000,000
1. How much should be recognized as cost of the new machine?
a. Php19,850,000 c. Php19,300,000
b. Php19,930,000 d. Php20,250,000.
Invoice price of machinery Php 20,000,000
Freight on new machine 100,000
Installation cost of new machine 600,000
Testing costs 150,000
Salary of engineer for the duration of
the trial run 400,000
Cost of allowance ( 1,000,000)
--------------------------
 20,250,000
===============
Problem 3
On January 1, 2016, Mari Company purchased a tract of land with a building for
Php18,000,000. Additionally, Camil paid a real estate broker’s commission of
Php1,080,000, legal fees of Php180,000 and title guarantee insurance of Php540,000.
The closing statement indicated that the land value was Php15,000,000 and the
building value was Php3,000,000, Shortly after acquisition, the building was razed at a
cost of Php2,250,000.

Camil entered into a Php90,000,000 fixed-price contract with Angel Builders, Inc. on
March 1, 2016 for the construction of an office building on the land. The building was
completed and occupied on September 30, 2017. Additional construction costs were
incurred as follows:
Blue prints Php 360,000
Architect’s professional fee 2,850,000

The building is estimated to have a forty-year life from date of completion and will be
depreciated using sum-of-years digit method.

1. Cost of land
a. Php19,050,000 c. Php22,050,000
b. Php18,000,000 d. Php21,510,000

Acquisition cost Php 18,000,000

Broker’s commission 1,080,000
Legal fees 180,000
Title gurantee insurance 540,000
Cost of razing existing building 2,250,000
-------------------------
22,050,000
==============

2. Cost of office building

a. Php95,415,000 c. Php92,895,000
b. Php93,210,000 d. Php99,210,000

Fixed priced contract cost Php 90,000,000

Blue prints 360,000
Architect’s fee 2,850,000
--------------------------
93,210,000
===============

3. Total Property, plant and equipment

a. Php115,260,000 c. Php114,465,000
b. Php110,895,000 d. Php120,720,000

(22,050,000 + 93,210,000 = 115,260,000)

4. Depreciation expenses for 2017.

a. Php1,136,707 c. Php1,105,893
b. Php4,438,571 d. Php1,209,878

SYD = 40(40+1)/2 =820

40/820 x 93,210,000 x 3/12 = 1,136,707

5. Total Property, Plant and Equipment to be presented in the Statement of

Financial Position(Net of Accumulated Depreciation)
a. Php114,123,293 c. Php114,123,293
b. Php109,758,293 d. Php119,583,293
 (115,260,000 – 1,136,707 = 114,123,293)

Problem 4
The following data relate on the Plant Assets account of Libag, Inc. at December 31,
2016:
K A M A
Original Cost P 875,000 P 1,275,000 P 2,000,000 P 2,000,000
Year purchased 2011 2012 2013 2015
Useful Life 10 years 37,500 hrs 15 years 10 years

Salvage value P 77,500 P 75,000 P 125,000 P 125,000

Depreciation
Method SYD Activity Straight-Line Double Declining
Balance

Company Policy:
a. In the year an asset is purchased, Libag Inc. provide full depreciation on the
asset.
b. In the an asset is retired or traded in, Libag Inc. does not record depreciation
on the asset.

The following transaction occurred during 2017:

a) On May 5, Asset K was sold for Php325,000 cash.
b) On December 31, it was determined that asset A had been used 5,250 hrs during
2017.
c) On December 31, before computing depreciation expense on Asset M, the
management of Libag Inc. decided the useful remaining from 1/1/2017 was 10
years.
d) On December 31, it was discovered that a plant asset purchased in 2017 had
been expensed completely in that year. This asset costs Php550,000 and has a
useful life of 10 years and no salvage value. Management has decided to use the
double-declining balance for this asset, which can be referred to as “Asset S”

1. How much is the gain or loss on sale of Asset K?

SYD Rate = 10(10+1)/2=55
Cost Php 875,000
---------------------
Less: Accum Deprec (2011 to 2016; 6 yrs)
2011: 10/55 x (875,000-77,500=797,500) 145,000
2012: 9/55 x 797,500 130,500
2013: 8/55 x 797,500 116,000
2014: 7/55 x 797,500 101,500
2015: 6/55 x 797,500 87,000
2016: 5/55 x 797,500 72,500
--------------------
Total Accumulated Deprec, 12/31/2016 652,500
---------------------
Carrying Value, 12/31/2016 222,500
Proceeds 325,000
---------------------
Gain on Sale Php 102,500
============
2. How much is the depreciation of Asset M?
Cost Php 2,000,000
Less: Accumulated Deprec (2013-2016=4 yrs)
(2,000,000-125,000)/15 yrs. x 4 yrs. 500,000
-----------------------
Carrying Value, 12/31/2016 1,500,000
=============
2017 Depreciation
Remaining Life : 10 yrs. – 4 yrs. = 6 yrs
 (1,500,000-125,000)/6 yrs Php 229,167
=============
3. The adjusting entry to correct the error of failure to capitalize Asset S.
Assets S 550,000
Repairs and maintenance 550,000

DDB rate : 1/10 x 2 = 20%

Depreciation expense 110,000

Accumulated depreciation 110,000

Depreciation 2017
550,000 x 20% = Php110,000
==========
4. How much is the adjusted balance of Plant assets as of December 31, 2017?
Asset A Php 1,275,000
Asset M 2,000,000
Asset A 2,000,000
Asset S 550,000
------------------------
Total Php 5,825,000
=============

5. How much is the total depreciation expense for 2017?

Asset A (1,275,000-75,000)/37,500 x 5,250) Php 168,000

Asset M 229,167
Asset A (1/10x 2= 20%)
2015: 2,000,000 x 20% = 400,000
2016: (2,000,000-400,000) x 20%=320,000
2017:(2,000,000-400,000-320,000) x 20% 256,000
Asset S 110,000
---------------------
Total Depreciation Expense Php 763,167
===========

Asset K – no depreciation for year of disposal

Problem 5

On March 1, 2016, Pau Corporation bought a new machine and made a downpayment
of Php100,000. The balance is to be paid in equal instalments of Php200,000 every
March 1 for the next five years starting March 1, 2017. The prevailing interest rate is
12%. It is the policy of Pau Corporation to provide one half year depreciation in the year
of acquisition. The estimated useful life of this machine is 15 years.

The bookkeeper prepared the following entries relating to this machine.

March 1 Machine 1,100,000

Cash 100,000
Notes payable 1,000,000

Dec 31 Depreciation expense 36,667

Accumulated depreciation 36,667

Required: Prepare adjusting entries.

Correct cost:
Down payment P100,000
PV of future payments P200,000 x 3.6048 720,960
Total cost P820,960

Correct Depreciation 820,960 / 15 x ½ P 27,365

Adjusting Entries:

Discount on Notes Payable (1,00,000 – 720,960) 279,040

Machine 279,040

Interest Expense 72,096

Discount on Notes Payable 72,096
720,960 x 12% x 10/12

Accumulated Depreciation 9,302

Depreciation Expense 9,302
27,365 – 36,667 = 9,302

Problem 6

In relation to your examination of the financial statements of Golden Company, you

found the following equipment and related accumulated depreciation.

Equipment
Debit Credit
01/01/16 Balance Php 1,500,000
06/01/16 Asset No. 15 400,000
10/01/16 Commission paid on
sale of Machine
No. 10 14,000
10/01/16 Sold Machine No. 10 140,000

Accumulated Depreciation
Debit Credit
01/01/16 Balance 600,000
12/31/16 2016 Depreciation 186,400

You obtained the following additional information:

a. Golden Company has the policy of depreciating all equipment at 10% per
annum, providing full year depreciation on assets acquired during the year and
no depreciation on assets disposed of during the year.
b. The oldest asset owned by Golden is 6 years old as of December 31, 2015.
c. You verified the January 1, 2016 balances from the December 31, 2015
statement of financial position, and you were satisfied to the correctness of the
balances.
d. Machine No. 10 , which was acquired on April 1, 2011 for Php300,000 was sold
for Php140,000 cash. Golden Company paid commission of Php14,000 on such
sale.
e. The company paid Php8,000 installation cost and freight cost of Php6,000 on
Asset No. 15. The company charged Repairs and Maintenance for the
installation cost and freight cost.

Required:

1. Establish the adjusted balances of the equipment and related accumulated

depreciation.
2. Prepare audit adjusting entries at December 31, 2016

Equipment

Unadjusted Balance, :
12/31/2016 1,774,000 :
Dec 31 Adj 14,000 : 174,000 Dec 31 Adj
------------------------------------------------------------------------------------------------------------
Adjusted Balance 1,614,000 :
=========
 Accumulated Depreciation
------------------------------------------------------------------------------------------------------------
: 786,400 Unadjusted Balance

October 1, 2016
Entry Made
Cash 140,000
Equipment 140,000

Equipment 14,000
Cash 14,000

Correct Entry
Cash (140,000-14,000) 126,000
Accumulated depreciation 150,000
Loss on sale of equipment 24,000
Equipment 300,000

Adjusting Entry
Accumulated depreciation 150,000
Loss on sale of equipment 24,000
Equipment [300,000- (140,000-14,000) 174,000

Net proceeds P140,000 – 14,000 P 126,000

Carrying value 300,000 – (300,000 x10% x5) 150,000
-------------------
Loss on sale P 24,000

June 1, 2016
Entry Made
Repairs and Maintenance 14,000
Cash 14,000
(8,000 + 6,000)

Correct Entry
Equipment 14,000
Cash 14,000

Adjusting Entry

Equipment 14,000
Repairs and Maintenance 14,000
(8,000 + 6,000 = 14,000)

Dec 31, 2016

Entry Made
Depreciation expense 186,400
Accumulated depreciation 186,400

Correct Entry
Depreciation expense 161,400
Accumulated depreciation 161,400

Adjusting Entry
Accumulated depreciation 25,000
Depreciation expense 25,000
(186,400-161,400)
Problem 7

At December 31, 2015, Mari Company’s non current operating assets and accumulated
depreciation and amortization accounts had balances as follows:

Accumulated Depreciation or
Cost of Assets Amortization
Land Php 13,000,000
Buildings 12,000,000 Php 2,654,000
Machinery and Equipment 7,750,000 1,962,000
Automobiles and Trucks 13,200,000 8,620,000
Leasehold improvements 2,210,000 1,105,000

Depreciation Method Useful Life

Buildings 150% declining balance 25 years
Machinery and Equipment Straight-Line 10 years
Automobiles and Trucks 150% declining balance 5 years
Leasehold improvements Straight Line 8 years
Land improvements Straight Line 12 years

Depreciation is computed to the nearest month. The salvage value of the depreciable
assets is considered immaterial.

Transactions during 2016 and other information are as follows:

a. On January 6, 2016, a plant facility consisting of land and building was acquired
from Alas Corporation for Php16,000,000. Of this amount, 20% was allocated to
land.
b. On April1, 2016, new parking lots , streets, and sidewalks at the acquired plant
facility were completed at a total cost of Php1,920,000. These expenditures had
an estimated useful life of 12 years.
c. The leasehold improvements were completed on December 31, 2012, and had
an estimated useful life of 8 years. The related lease, which would have
terminated on December 31, 2017 was renewable for an additional 4 year term.
On April 30, 2016 Mari Company exercised the renewal option.
d. On July 1, 2016, machinery and equipment were purchased at a total invoice
cost of Php250,000. Additional costs of Php10,000 for delivery and Php30,000
for installation were incurred.
e. On April 30, 2016, Mari Company purchased a new automobile for Php650,000.
f. On September 30, 2016, a truck with a cost of Php2,400,000 and carrying
amount of Php810,000 on the date of sale was sold for Php1,150,000.
Depreciation for 9 months ended September 30, 2016 was Php235,200.
g. On December 20, 2016, a machine with a cost of Php170,000 and a carrying
amount of Php29,750 at the date of acquisition was scrapped without cash
recovery.

Required:
1. For each Non Current Assets accounts, prepare a schedule showing depreciation
or amortization expense for the year ended December 31, 2016. Round
computations to the nearest peso.
2. Determine the adjusted balances of the of Property Plant Equipment (by Category)
as f December 31, 2016.

Schedule of Depreciation Expense

A. Building
Method – 150% declining balance
Depreciation rate = 1/25 x 1.5 =6%
Old (P12,000,000 – P2,654,000) x 6% P560,760
New (a)P16,000,000 x 80%) x 6% 768,000
2016Depreciation – Building P1,328,760
 B. Machinery and Equipment
Method – straight-line
Useful life – 10 years
Old including scrapped (g) in December
P7,750,000/10 P 775,000
New (d) P290,000/10 x 6/12 14,500
2016 Depreciation – Machinery P789,500

C. Automobiles and Trucks

Method - 150% declining balance
Depreciation rate = 1/5 x 1.5 = 30%
Old (not sold)-(f)
(P13,200,000 – P8,620,000) = P4,580,000
P4,580,000 – (P810,000 + 235,200) x 30% P 1,060,440
Sold (f) 235,200
New (e) P650,000 x 30% x 4/12 65,000
2016 Depreciation – Automobiles and Trucks P1,360,640

D. Leasehold Improvements ©
Method – straight line
Useful life – 8 years
Lease term : original 6 years upon completion of the improvement

Remaining useful life = 8 – 3 = 5 years

Remaining lease term = 6 – 3 + 4 = 7 years

2016 Depreciation: (P2,210,000 – 1,105,000) / 5 = P 221,000

E. Land Improvements (b)

Method – straight-line
Useful life – 12 years

2012 Depreciation: P1,920,000 / 12 x 9/12 P 120,000

b. Adjusted Balances:
1. Land [13,000,000 + (16,000,000 x 20%) P16,200,000
2. Land Improvements 1,920,000
3. Accumulated Depreciation – Land Improvements 120,000
4. Building [12,000,000 + (16,000,000 x 80%) 24,800,000
5. Accumulated Depreciation – Buildings (2,654,000 + 1,328,760) 3,892,760
6. Machinery and Equipment (7,750,000 + 290,000-170,000) 7,870,000
7. Accumulated Depreciation – Machinery and Equipment
1,962,000 + 789,500 – [ 170,000 – 29,750 + (170,000/10) ] 2,594,250
8. Automobiles and Trucks (13,200,000+650,000-2,400,000) 11,450,000
9. Accumulated Depreciation – Automobiles and Trucks
8,620,000 + 1,360,640 –( 2,400,000 -810,000 ) 8,390,640
10. Leasehold Improvements 2,210,000
11. Accumulated Depreciation – Leasehold Improvements 1,326,000

Problem 8

The following information relates to depreciable assets of Lacoste Electronics, Inc.

a. Equipment No. 1 cost P1,050,000 and was purchased January 1, 2011. The
straight-line method of depreciation was used. At the time of purchase, the
expected useful life was 12 years with no residual value. In 2016, It was
estimated that the total useful life of the asset would be only 10 years.
b. Equipment No. 2 costs Php2,400,000 and was purchased July 1, 2014. The
straight-line method of depreciation was used for the equipment. The equipment
was estimated to have a useful life of 6 years with no salvage value. On
December 31, 2016, the fair value less cost to sell of the machine is estimated to
be Php1,200,000, while the present value of expected cash flows from the
equipment is estimated to be Php1,250,000.
 c. Building No. 1 was purchased January 1, 2011 for Php63,000,000. The straight-
line method of depreciation was originally chosen. The building was expected to
be useful for 20 years and to have a zero residual value. In 2016, a change was
made from the straight-line depreciation to the sum of the year’s digits method.
Estimates relating to the useful life and residual value remain the same.
d. Building No. 2 was purchased January 1, 2013 for Php52,500,000. The straight-
line method of depreciation was used for the building. The building was
expected to be useful for 10 years and to have a zero residual value. On
December 31. 2015, the fair values less cost to sell of the building was estimated
to be Php35,000,000, while the value in use is estimated to be Php34,000,000.
No impairment loss was recorded during 2015. On December 31, 2016, the fair
value less cost to sell of the building was estimated to be Php30,000,000, while
the value in use is Php31,000,000.
e. Building No. 3 was located in Makati and had been previously held as owner-
occupied. Building No. 3 was completed in January 2012 at a total cost of
Php120,000,000. Its useful life had been estimated to be 20 years. On July 1,
2016, the company decided to lease the asset to two of the company’s major
suppliers under operating lease, for initial lease term of 4 years. On July 1, 2016
this building was appraised at a fair value of Php120,000,000, while the land on
which it is located had a fair value of Php80,000,000. The cost of the land was
Php65,000,000. The company has the policy of carrying its investment property
using the fair value model. The land and building are believed to have fair value
of Php85,000,000 and P124,000,000 on December 31, 2016. The company had
not prepared any entry for the change in use of property.

Depreciation, impairment loss and/or recovery of impairment loss have not yet been
recorded in 2016.

Required:

Prepare all entries for 2016 relating to the above.

Adjusting Entries

a. Depreciation Expense – Equipment No. 1 122,500

Accumulated Depreciation 122.500
Cost P1,050,000
Acc. Depreciation 1/1/16
1,050,000 / 12 x 5 ( 437,500)
Carrying amount 1/1/16 P 612,500
612,500 /(10-5) = P 122.500

b. Depreciation Expense – Equipment No. 2 400,000

Accumulated Depreciation – Equipment No. 2 400,000
P2,400,000 / 6 = P 400,000

Impairment Loss 150,000

Accumulated Depreciation – Machine Equipment No. 2 150,000
Carrying value 12/31/16
Cost P2,400,000
- Accum deprc.
P2,400,000 x 2.5/6 P1,000,000
-----------------
1,400,000
Recoverable amount 1,250,000
Impairment loss P 150,000
 c. Depreciation Expense – Building No. 1 5,906,250
Accumulated Depreciation – Building No. 1 5,906,250
Carrying value 1/1/16
Cost Php 63,000,000
Less: Accum Depreciation 15,750,000
-----------------------
47,250,000
==============

SYD = 15 (15+1)/2 = 120

2016 = 47,250,000 x 15/120 = Php 5,906,250

==============

d. Retained Earnings 1,750,000

Accumulated Depreciation – Building No. 2 1,750,000
Carrying value 12/31/15
Cost Php 52,500,000
Accum Deprec( P52,500,000/10 x 3) 15,750,000
-----------------------
Php 36,750,000
Recoverable amount 35,000,000
Impairment loss in 2015 Php 1,750,000

Depreciation Expense – Building No. 2 5,000,000

Accumulated Depreciation – Building No. 2 5,000,000
35,000,000 / 7 = P 5,000,000

Accumulated Depreciation – Building B 100,000

Gain - Recovery of Previous Impairment 100,000
Carrying value, 12/31/12
35,000,000 – 5,000,000 = P30,000,000
Recoverable amount 31,000,000
Increase in value P 1,000,000
Limit on recovery
175,000 x 6/7 P 150,000

Note : Recoverable amount = Fair Value less Cost to Sell or value in use,
whichever is higher.

e. Depreciation Expense – Building 3,000,000

Accumulated Depreciation – Building 3,000,000
120,000,000 / 20 x 6/12

Investment Property – Land 80,000,000

Investment Property – Building 120,000,000
Accumulated Depreciation – Building (PPE) 27,000,000
Land 65,000,000
Building 120,000,000
Revaluation Surplus 42,000,000

Accumulated Depreciation = Php120,000,000/20 x 4.5 years = 27,000,000

Investment Property – Land (85,000-80,000,000) 5,000,000

Investment Property – Building
(124,000,000-120,000,000) 4,000,000
Fair Value Gain on Investment Property 9,000,000
Problem 9

You found the following postings to the Intangible Assets Account of Angat Corporation,
your client:

Intangible Assets

Date Particulars Debit Credit

2016
Jan 4 Research and development costs Php 9,400,000
Jan 5 Legal cost to obtain Patent 750,000
Jan 31 Payment of 24 month rental for
office space used by Angat 2,400,000
Feb 1 Share issue costs, the share were
sold at par value 360,000
Feb 11 Premium on additional ordinary
shares issued Php 2,500,000
March 31 Excess of FV over issue price
of bonds issued (due on
March 31, 2026) 840,000
Apr 30 Promotional and advertising
expenses related to start
up of business 900,000
June 30 to Other operating expenses for
Dec 31 the first six months 2,400,000
------------------------------------------------------
- Total 17,050,000 2,500,000
------------------------------------------------------
Balance 14,550,000
==============

Required: Prepare the entry or entries to correct the account. Assume that the patent
has a useful life of 10 years. (Disregard amortization of bond discount or premium)

Adjusting Entries

Research and Development Expense 9,400,000

Patents 750,000
Rent Expense (2,40,000/24 x 11) 1,100,000
Prepaid Rent (2,400,000 – 1,100,000) 1,300,000
General and Administrative Expense / Share Premium * 360,000
Discount on Bonds Payable 840,000
Advertising and Promotions Expenses 900,000
Other Operating Expenses 2,400,000
Share Premium – Ordinary Share 2,500,000
Intangible Assets 14,550,000

* If there is no share premium from the same transaction, the account to be used is
General and Administrative expenses.

General and Administrative Expense-Amortization 75,000

Accumulated amortization-Patents 75,000
Problem 10

Mabuhay Enterprises has been in business for several years. A client-prepared trial
balance for December 31, 2016 is presented:

Before 2016, Mabuhay Enterprises prepared financial statements internally. The

company has not been audited because the ownership is held completely by one family
and is not actively sold. As of 2016, however, in anticipation of bank loans and a
possible public offering of ordinary shares, the company needs audited financial
statements prepared in conformity with Generally Accepted Accounting Principles.

As a member of the team independent auditors responsible for Mabuhay Enterprises,

you have been assigned the intangible assets. You have observed that the following
asset accounts appear on the unadjusted trial balance. Additional investigation reveals
the following:

Patent

All patents were purchased from another company when Mabuhay Enterprises began
operations on January 3, 2009. These patents are being amortized over an expected
useful life of 14 years. Improvements made to equipment covered by the patents
costing Php750,000 were debited to the account in January 2013. Amortization in
2013-2015 included amortization on the Php750,000 for the remaining life of the
relevant patent. You have determined that the Php750,000 should have been
expensed in 2013 in accordance with IAS 38 Intangible Assets. It is further determined
on December 31, 2016, that one of the patents has a remaining life of only 2 years. This
patent was originally assigned a cost of Php2,1000,000.

Franchise Agreement

A franchise agreement was signed on January 1, 2016. A Php500,000 fee was paid,
covering a five year period, at the end of which the company may renew the agreement
by paying Php500,000. A decision of renewal has not been made as of December 31,
2016. The agreement calls for an annual payment of 5% of revenue. An entry debiting
the account for Php450,000 was made at the time of the cash payment at the end of
2016.

Organizational Costs

Organization costs include the unamortized portion of amounts paid to promoters for
services rendered at the inception of the corporation. These fees have been amortized,
since inception, over an estimated 10-year life.

Goodwill. The goodwill account includes three items:

Php150,000 Legal expenses relative to incorporation. These were assigned to the

account in January, 2009

Php200,000 Excess of cost over assigned net asset values of an enterprise acquired in
early 2016, expected to be of value for an indefinite period.
Php100,000 Paid to an advertising consulting firm in early 2015 for a major advertising
effort expected to be beneficial for an indefinite period.

No amortization has been taken on any amount in the intangible assets accounts
during the year 2016
Trial Balance
Debit Credit
Cash Php 2,000,000
Accounts receivable 1,100,000
Inventory 1,200,000
Equipment 8,000,000
Accumulated depreciation-Equipment Php 2,500,000
Buildings 12,000,000
Accumulated depreciation-Buildings 4,000,000
Patents 5,500,000
Franchise agreement 950,000
Organization costs 440,000
Goodwill 450,000
Accounts payable 1,200,000
Accrued wages payable 500,000
Accrued taxes payable 600,000
Bonds payable 5,000,000
Premium on bonds payable 350,000
Preference share capital (Php100 par) 1,000,000
Ordinary share capital (Php25 par) 11,000,000
Additional paid in capital 2,200,000
Retained earnings, January 1 1,290,000
Sales 9,000,000
Cost of goods sold 4,000,000
Selling and adm expenses 3,000,000
---------------------------------------------------
Php 38,640,000 Php 38,640,000
=============================

Required:

Prepare any adjusting entries to correct the intangible asset account balance,
restating the original total cost and setting up the related accumulated amortization,
and to record the 2016 amortization.

PATENTS
Retained Earnings 525,000
Patents 525,000
750,000 x 7/10 = 525,000 (unamortized balance, it should have been
Expensed since January 2013)

Patents 4,975,000
Accumulated Amortization – Patents 4,975,000
To reinstate the gross cost of the patents and related
Accumulated Amortization
(5,500,000 – 525,000) ÷ 7/14
Total cost is therefore P9,950,000
Accumulated amortization =
9,950,000 x 7/14 = P4,975,000

Cost of Goods Sold 910,714

Accumulated Amortization – Patents 910,714
(P2,100,000 – 1,050,000) / 3 years =P 350,000
(P9,95,000 – 2,100,000) / 14 years = 560,714
2016 Amortization P 910,714

Accum Deprec = Php2,100,000/14 x 7 (2009 to2015) = Php1,050,000

FRANCHISE AGREEMENT

Entry Made (5% of Revenue)

Franchise agreement 450,000
Cash 450,000

Correct Entry
Selling and Administrative expense 450,000
Cash 450,000

Audit Adjustment

Selling and Administrative Expenses 450,000

Franchise Agreement 450,000

Amortization of Franchise Agreement (No entry made)

Selling and Administrative Expenses 100,000

Accumulated Amortization – Franchise Agreement 100,000
500,000 /5 = 10,000

ORGANIZATION COST
Retained Earnings 440,000
Organization Costs 440,000

GOODWILL
Retained Earnings (45,000 + 100,000) 145,000
Goodwill 145,000

Unamortized balance of legal expenses (150,000/10 x 3) Php 45,000

Advertising 100,000
-------------------
Php 145,000
===========

Problem 11

On an audit engagement for 2016, you handled the audit of fixed assets of Benguet
Copper Mines. This mining company bought the exploration rights of Paulex Exploration
on June 30, 2016 for Php7,290,000. Of this purchase price, Php4,860,000 was
allocated to copper ore which had remaining reserves estimated at 1,620,000 tons.
Benguet copper Mines expects to extract 15,000 tons of ore a month with an estimated
selling price of Php50 per ton. Production started immediately after some new
machines costing Php600,000 was bought on June 30, 2016. These new machineries
had an estimated useful life of 15 years with a scrap value of 10% of cost after the ore
estimated has been extracted from the property, at which time the machineries will
already be useless.

Among the operating expenses of Benguet Copper Mines at December 31, 2016 were:
Depletion expense Php 405,000
Depreciation expense 40,000

1. Recorded depletion expense was

a. Overstated by Php90,000 c. Overstated by Php135,000
b. Understated by Php90,000 d. Understated by Php135,000

Correct depletion for 2016

P4,860,000 / 1,620,000 x (15,000 tons x 6 months) = P270,000
Recorded depletion 405,000
Overstatement in depletion P135,000
 2. Recorded Depreciation Expense was
a. Overstated by Php10,000 c. Understated by Php10,000
b. Overstated by Php20,000 d. Understated by Php20,000

Estimated useful life in years = 15 years

Estimated mining period = 1,620,000 / 15,000 = 108 months or 9 years
Use unit of output method, since mining period is shorter than life in years

Correct depreciation = (P600,000 x (100%-10%= 90%) / 1,620,000

x 90,000 tons P 30,000
Recorded depreciation 40,000
Overstatement in depreciation P 10,000
MULTIPLE CHOICE QUESTIONS:

1. Plant assets may properly include

a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant site.
d. none of these.

2. Which of the following is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Long-term in nature

3. Which of these is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for use in operations
c. Long-term in nature
d. All of these are major characteristics of a plant asset.

4. Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is
located with the plan to tear down the Emporia Hotel and build a new luxury hotel on the
site. The cost of the Emporia Hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be
torn down.
b. written off as loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.

5. The cost of land does not include

a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.

6. The cost of land typically includes the purchase price and all of the following costs
except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.

7. If a corporation purchases a lot and building and subsequently tears down the building
and uses the property as a parking lot, the proper accounting treatment of the cost of the
building would depend on
a. the significance of the cost allocated to the building in relation to the combined cost
of the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was acquired.

8. The debit for a sales tax properly levied and paid on the purchase of machinery
preferably would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on income).
d. accumulated depreciation--machinery.

9. Fences and parking lots are reported on the statement of financial position as
a. current assets.
b. land improvements.
c. land.
d. property and equipment.
10. To be consistent with the historical cost principle, overhead costs incurred by an
enterprise constructing its own building should be
a. allocated on the basis of lost production.
b. eliminated completely from the cost of the asset.
c. allocated on an opportunity cost basis.
d. allocated on a pro rata basis between the asset and normal operations.

11. Which of the following costs are capitalized for self-constructed assets?
a. Materials and labor only
b. Labor and overhead only
c. Materials and overhead only
d. Materials, labor, and overhead

12. Which of the following assets do not qualify for capitalization of interest costs incurred
during construction of the assets?
a. Assets under construction for a company's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them for
their intended use.

13. Assets that qualify for interest cost capitalization include

a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.

14. When computing the amount of interest cost to be capitalized, the concept of "avoidable
interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for equity.
c. that portion of total interest cost which would not have been incurred if
expenditures for asset construction had not been made.
d. that portion of average accumulated expenditures on which no interest cost was
incurred.

15. The period of time during which interest must be capitalized ends when
a. the asset is substantially complete and ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended use have
begun.

16. Which of the following statements is true regarding capitalization of interest?

a. Interest cost capitalized in connection with the purchase of land to be used as a
building site should be debited to the land account and not to the building account.
b. The amount of interest cost capitalized during the period should not exceed
the actual interest cost incurred.
c. When excess borrowed funds not immediately needed for construction are
temporarily invested, any interest earned should be recorded as interest revenue.
d. The minimum amount of interest to be capitalized is determined by multiplying a
weighted average interest rate by the amount of average accumulated expenditures
on qualifying assets during the period.

17. Construction of a qualifying asset is started on April 1 and finished on December 1. The
fraction used to multiply an expenditure made on April 1 to find weighted-average
accumulated expenditures is
a. 8/8.
b. 8/12.
c. 9/12.
d. 11/12.

18. When funds are borrowed to pay for construction of assets that qualify for capitalization
of interest, the excess funds not needed to pay for construction may be temporarily
invested in interest-bearing securities. Interest earned on these temporary investments
should be
a. offset against interest cost incurred during construction.
 b. used to increase the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of interest to be
capitalized.
d. recognized as revenue of the period.

19. Interest cost that is capitalized should

a. be written off over the remaining term of the debt.
b. be accumulated in a separate deferred charge account and written off equally over a
40-year period.
c. not be written off until the related asset is fully depreciated or disposed of.
d. none of these.

20. Which of the following is not a condition that must be satisfied before interest
capitalization can begin on a qualifying asset?
a. Interest cost is being incurred.
b. Expenditures for the assets have been made.
c. The interest rate is equal to or greater than the company's cost of capital.
d. Activities that are necessary to get the asset ready for its intended use are in
progress.
21. Which of the following is the recommended approach to handling interest incurred in
financing the construction of property, plant and equipment?
a. Capitalize only the actual interest costs incurred during construction.
b. Charge construction with all costs of funds employed, whether identifiable or not.
c. Capitalize no interest during construction.
d. Capitalize interest costs equal to the prime interest rate times the estimated cost of
the asset being constructed.

22 . Interest revenue earned on specific borrowings for qualifying assets

a. reduces the cost of the qualifying asset.
b. reduces interest expense reported on the income statement.
c. increases equity in the period earned.
d. none of these.

23. If a government entity provides an interest free loan to a company and the company
accounts for the grant using the deferred revenue approach,
a. no interest expense will be recorded.
b. the interest element is initially recorded as Discount on Noted Payable.
c. the interest element is amortized to Deferred Grant Revenue over the term of the
loan.
d. all of these.

24. Which of the following is not true with regard to the accounting for government grants?
a. Assets may be recorded at fair value or nominal cost.
b. Companies may use either the capital or income approach to account for the
asset and the grant.
c. Companies may apply the income approach either by recording the grant as deferred
revenue or as an adjustment to the asset.
d. Both a and c.

25. The account Deferred Grant Revenue is classified as

a. a separate component of shareholders' equity.
b. a non-current liability.
c. Other income and expense.
d. Revenue.

26. When an asset acquired through government grants is recorded using the capital
approach,
a. assets and equity increase by the fair value of the asset.
b. assets and liabilities increase by the fair value of the asset.
c. assets and equity increase by the cost of the asset.
d. assets and liabilities increase by the cost of the asset.

27. Which of the following is required by IFRS?

a. Resources acquired through government grants must be recorded at cost.
b. Resources acquired through government grants must be recorded at fair value.
c. Resources acquired through government grants must be accounted for using the
capital approach.
 d. Resources acquired through government grants must be accounted for using
the income approach.

28. If the cost of the asset is recorded net of the government grant,
a. equity will likely be overstated.
b. liabilities will likely be overstated.
c. assets will likely be understated.
d. revenues will likely be understated.

29. Which of the following is true regarding the alternative ways to apply the income
approach to accounting of resources acquired through government grants?
a. expenses will be higher and net income lower if the grant is recorded as deferred
revenue.
b. expenses will be higher and net income lower if the grant is accounted for as an
adjustment to the asset.
c. depreciation expense will be higher if the grant is recorded as deferred
revenue, but net income will be the same under the two alternatives.
d. depreciation expense will be higher if the grant is recorded as an adjustment to the
asset, but net income will be the same under the two alternatives.

30. Which of the following non-monetary exchange transactions has commercial substance?
a. Exchange of assets with no difference in future cash flows.
b. Exchange of products by companies in the same line of business with no difference
in future cash flows.
c. Exchange of assets with a difference in future cash flows.
d. Exchange of an equivalent interest in similar productive assets that causes the
companies involved to remain in essentially the same economic position.

31. When cash is involved in an exchange having commercial substance.

a. gains or losses are recognized in their entirety.
b. a gain or loss is computed by comparing the fair value of the asset received with the
fair value of the asset given up.
c. only gains should be recognized.
d. only losses should be recognized.

32. The cost of a non-monetary asset acquired in exchange for another non-monetary asset
and the exchange has commercial substance is usually recorded at
a. the fair value of the asset given up, and a gain or loss is recognized.
b. the fair value of the asset given up, and a gain but not a loss may be recognized.
c. the fair value of the asset received if it is equally reliable as the fair value of the asset
given up.
d. either the fair value of the asset given up or the asset received, whichever one
results in the largest gain (smallest loss) to the company.

33. Ringler Corporation exchanges one plant asset for a similar plant asset and gives cash
in the exchange. The exchange is not expected to cause a material change in the future
cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain
will
a. be reported in the Other income and expense section of the income statement.
b. effectively reduce the amount to be recorded as the cost of the new asset.
c. effectively increase the amount to be recorded as the cost of the new asset.
d. be credited directly to the retained earnings account.

34. Plant assets purchased on long-term credit contracts should be accounted for at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.

35. When a plant asset is acquired by issuance of ordinary shares, the cost of the plant
asset is properly measured by the
a. par value of the shares.
b. stated value of the shares.
c. book value of the shares.
d. fair value of the shares.

36. When a closely held corporation issues preference shares for land, the land should be
recorded at the
 a. total par value of the shares issued.
b. total book value of the shares issued.
c. total liquidating value of the shares issued.
d. fair value of the land.

37. Accounting recognition should be given to the gain realized on a non-monetary

exchange of plant assets except when the exchange has
a. no commercial substance and additional cash is paid.
b. commercial substance and additional cash is received.
c. commercial substance and additional cash is paid.
d. All of these cause recognition of a gain.

38. For a non-monetary exchange of plant assets, accounting recognition should not be given
to
a. a loss when the exchange has no commercial substance.
b. a gain when the exchange has commercial substance.
c. a gain when the exchange has no commercial substance.
d. a loss when the exchange has commercial substance.

39. An improvement made to a machine increased its fair value and its production capacity
by 25% without extending the machine's useful life. The cost of the improvement should
be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.

40. Which of the following is a capital expenditure?

a. Payment of an account payable
b. Retirement of bonds payable
c. Payment of income taxes
d. None of these

41. Which of the following is not a capital expenditure?

a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement

42. In accounting for plant assets, which of the following outlays made subsequent to
acquisition should be fully expensed in the period the expenditure is made?
a. Expenditure made to increase the efficiency or effectiveness of an existing asset
b. Expenditure made to extend the useful life of an existing asset beyond the time
frame originally anticipated
c. Expenditure made to maintain an existing asset so that it can function in the
manner intended
d. Expenditure made to add new asset services

43. An expenditure made in connection with a machine being used by a company should be
a. expensed immediately if it merely extends the useful life but does not improve the
quality.
b. expensed immediately if it merely improves the quality but does not extend the useful
life.
c. capitalized if it maintains the machine in normal operating condition.
d. capitalized if it increases the quantity of units produced by the machine.

44. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the
sale were
a. less than current fair value.
b. greater than cost.
c. greater than book value.
d. less than book value.

45. Which of the following statements about involuntary conversions is false?

a. An involuntary conversion may result from condemnation or fire.
b. The gain or loss from an involuntary conversion is reported in other income and
expense on the income statement.
 c. The gain or loss from an involuntary conversion should not be recognized
when the company reinvests in replacement assets.
d. All of these.
46-47.Wilson Co. purchased land as a factory site for P600,000. Wilson paid P60,000 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 P31,200. Title insurance
cost P2,400, and liability insurance during construction cost P2,600. Excavation cost P10,440.
The contractor was paid P2,200,000. An assessment made by the city for pavement was
P6,400. Interest costs during construction were P170,000.

46. The cost of the land that should be recorded by Wilson Co. is ___________.
a. P660,480.
b. P666,880.
c. P669,880.
d. P676,280.

47. The cost of the building that should be recorded by Wilson Co. is
a. P2,403,800.
b. P2,404,840.
c. P2,413,200.
d. P2,414,240.

48. On February 1, 2017, Nelson Corporation purchased a parcel of land as a factory site for
P200,000. An old building on the property was demolished, and construction began on a new
building which was completed on November 1, 2017. Costs incurred during this period are listed
below:
Demolition of old building P 20,000
Architect's fees 35,000
Legal fees for title investigation and purchase contract 5,000
Construction costs 1,090,000
(Salvaged materials resulting from demolition were sold for P10,000.)
Nelson should record the cost of the land and new building, respectively, as ___________.
a. P225,000 and P1,115,000.
b. P210,000 and P1,130,000.
c. P210,000 and P1,125,000.
d. P215,000 and P1,125,000.

49. Worthington Chandler Company purchased equipment for P10,000. Tax on the purchase
was P500. Other costs incurred were freight charges of P200, repairs of P350 for damage
during installation, and installation costs of P225. What is the cost of the equipment?
a. P10,000
b. P10,500
c. P10,925
d. P11,275

50. Fogelberg Company purchased equipment for P12,000. Tax on the purchase was P600.
Other costs incurred were freight charges of P240, repairs of P420 for damage during
installation, and installation costs of P270. What is the cost of the equipment?
a. P12,000.
b. P12,600.
c. P13,110.
d. P13,530.

Use the following information for questions 51–53.

La Bianca Company purchased land for a manufacturing facility for P1,100,000. The company
paid P70,000 to tear down a building on the land. Salvage was sold for P10,500. Legal fees of
P6,500 were paid for title investigation and making the purchase. Architect's fees were P40,500.
Title insurance cost P4,500, and liability insurance during construction cost P13,500. Excavation
cost P12,000. The contractor was paid P1,357,000. A one -time assessment made by the city
for sidewalks was P7,500. La Bianca installed lighting and signage at a cost of P11,000.

51.The cost of the land that should be recorded by La Bianca is _____________.

a. P1,195,000.
b. P1,178,000.
c. P1,103,500.
d. P1,006,500.
52.The cost of the building that should be recorded by La Bianca is __________.
a. P1,505,500.
b. P1,432,000.
c. P1,423,000.
d. P1,357,500.

53.La Bianca should record land improvements of _________.

a. P-0-.
b. P11,000.
c. P18,500.
d. P23,000.

54.Istandul Enterprise constructed a building at a cost of P24,000,000. Average accumulated

expenditures were P17,000,000, actual interest was P2,120,000, and avoidable interest was
P1,600,000. If the salvage value is P4,600,000, and the useful life is 30 years, depreciation
expense for the first full year using the straight-line method is
a. P700,000.
b. P717,733.
c. P800,000.
d. P870,667.

55.During self-construction of an asset by Samuelson Company, the following were among the
costs incurred:
Fixed overhead for the year P1,000,000
Portion of P1,000,000 fixed overhead that would
be allocated to asset if it were normal production 40,000
Variable overhead attributable to self-construction 35,000
What amount of overhead should be included in the cost of the self-constructed asset?
a. P -0-
b. P35,000
c. P40,000
d. P75,000

56.During self-construction of an asset by Richardson Company, the following were among the
costs incurred:
Fixed overhead for the year P1,000,000
Portion of P1,000,000 fixed overhead that would
be allocated to asset if it were normal production 60,000
Variable overhead attributable to self-construction 55,000
What amount of overhead should be included in the cost of the self-constructed asset?
a. P -0-
b. P 55,000
c. P 60,000
d. P115,000

57.Mendenhall Corporation constructed a building at a cost of P10,000,000. Average

accumulated expenditures were P4,000,000, actual interest was P600,000, and avoidable
interest was P300,000. If the salvage value is P800,000, and the useful life is 40 years,
depreciation expense for the first full year using the straight-line method is
a. P237,500.
b. P245,000.
c. P257,500.
d. P337,500.

58.Messersmith Company is constructing a building. Construction began in 2017 and the

building was completed 12/31/17. Messersmith made payments to the construction company of
P1,000,000 on 7/1, P2,100,000 on 9/1, and P2,000,000 on 12/31. Average accumulated
expenditures were ______________.
a. P1,025,000.
b. P1,200,000.
c. P3,100,000.
d. P5,100,000.
59.Huffman Corporation constructed a building at a cost of P20,000,000. Average accumulated
expenditures were P8,000,000, actual interest was P1,200,000, and avoidable interest was
P600,000. If the salvage value is P1,600,000, and the useful life is 40 years, depreciation
expense for the first full year using the straight-line method is
a. P475,000.
b. P490,000.
c. P515,000.
d. P675,000.

60.Gutierrez Company is constructing a building. Construction began in 2017 and the building
was completed 12/31/17. Gutierrez made payments to the construction company of P1,500,000
on 7/1, P3,300,000 on 9/1, and P3,000,000 on 12/31. Average accumulated expenditures were
a. P1,575,000.
b. P1,850,000.
c. P4,800,000.
d. P7,800,000.

61.On May 1, 2017, Goodman Company began construction of a building. Expenditures of

P120,000 were incurred monthly for 5 months beginning on May 1. The building was completed
and ready for occupancy on September 1, 2017. For the purpose of determining the amount of
interest cost to be capitalized, the average accumulated expenditures on the building during
2017 were
a. P100,000.
b. P120,000.
c. P480,000.
d. P600,000.

62.During 2017, Kimmel Co. incurred average accumulated expenditures of P400,000 during
construction of assets that qualified for capitalization of interest. The only debt outstanding
during 2010 was a P500,000, 10%, 5-year note payable dated January 1, 2015. What is the
amount of interest that should be capitalized by Kimmel during 2017?
a. P0.
b. P10,000.
c. P40,000.
d. P50,000.

63.On March 1, Felt Co. began construction of a small building. Payments of P120,000 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. P30,000.
b. P60,000.
c. P120,000.
d. P240,000.

64.On March 1, Imhoff Co. began construction of a small building. Payments of P180,000 were
made monthly for four 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. P90,000.
b. P180,000.
c. P360,000.
d. P720,000.

Use the following information for questions 65 through 67.

On March 1, 2017, Newton Company purchased land for an office site by paying P540,000
cash. Newton began construction on the office building on March 1. The following expenditures
were incurred for construction:
Date Expenditures
March 1, 2017 P 360,000
April 1, 2017 504,000
May 1, 2017 900,000
June 1, 2017 1,440,000
The office was completed and ready for occupancy on July 1. To help pay for construction,
P720,000 was borrowed on March 1, 2017 on a 9%, 3-year note payable. Other than the
construction note, the only debt outstanding during 2010 was a P300,000, 12%, 6-year note
payable dated January 1, 2017.

65.The weighted-average accumulated expenditures on the construction project during 2017

were ______________.
a. P384,000.
b. P2,934,000.
c. P312,000.
d. P696,000.

66.The actual interest cost incurred during 2017 was ____________.

a. P90,000.
b. P100,800.
c. P50,400.
d. P84,000.

67.Assume the weighted-average accumulated expenditures for the construction project are
P870,000. The amount of interest cost to be capitalized during 2017 is ___________.
a. P78,300.
b. P82,800.
c. P90,000.
d. P100,800.

68. During 2017, Bass Corporation constructed assets costing P1,000,000. The weighted-
average accumulated expenditures on these assets during 2017 was P600,000. To help pay for
construction, P440,000 was borrowed at 10% on January 1, 2017, and funds not needed for
construction were temporarily invested in short-term securities, yielding P9,000 in interest
revenue. Other than the construction funds borrowed, the only other debt outstanding during the
year was a P500,000, 10-year, 9% note payable dated January 1, 2011. What is the amount of
interest that should be capitalized by Bass during 2017?
a. P60,000.
b. P30,000.
c. P58,400.
d. P94,400.

Use the following information for questions 69 through 72.

On January 2, 2017, Indian River Groves began construction of a new citrus processing plant.
The automated plant was finished and ready for use on September 30, 2018. Expenditures for
the construction were as follows:

January 2, 2017 P200,000

September 1, 2017 600,000
December 31, 2017 600,000
March 31, 2018 600,000
September 30, 2018 400,000

Indian River Groves borrowed P1,100,000 on a construction loan at 12% interest on January 2,
2017. This loan was outstanding during the construction period. The company also had
P4,000,000 in 9% bonds outstanding in 2017 and 2018.

69.What were the weighted-average accumulated expenditures for 2017?

a. P533,333
b. P500,000
c. P400,000
d. P1,000,000

70.The interest capitalized for 2017 was ____________.

a. P180,000
b. P48,000
c. P192,000
d. P60,000

71.What were the weighted-average accumulated expenditures for 2018 by the end of the
construction period?
 a. P390,000
b. P1,635,000
c. P1,986,000
d. P1,386,000

72.The interest capitalized for 2018 was _____________.

a. P124,740
b. P118,305
c. P 25,740
d. P 99,000

73.In an exchange with commercial substance, Huang Company traded equipment with a cost
of P8,200,000 and book value of P3,120,000 and gave P4,698,000 cash. The old machine had
a fair value of P2,960,000. Which of the following journal entries would Huang make to record
the exchange?

a.Equipment 7,658,000
Loss on Exchange 160,000
Accumulated Depreciation 5,080,000
Equipment 8,200,000
Cash 4,698,000
b.Equipment 8,208,000
Equipment 8,200,000
Cash 8,000
c.Accumulated Depreciation 5,080,000
Equipment 7,398,000
Equipment 8,200,000
Cash 4,698,000
d.Equipment 7,658,000
Accumulated Depreciation 542,000
Equipment 8,200,000

74. Gabrielle Inc. and Lucci Company have an exchange with no commercial substance. The
asset given up by Gabrielle has a book value of P120,000 and a fair value of P135,000. The
asset given up by Lucci has a book value of P220,000 and a fair value of P200,000. Boot of
P65,000 is received by Lucci.

What amount should Gabrielle record for the asset received?

a. P110,000
b. P135,000
c. P185,000
d. P200,000

Use the following information to answer questions 75 and 76.

Below is the information relative to an exchange of assets by Stanton Company. The exchange
lacks commercial substance.

Old Equipment
Book Value Fair Value Cash Paid
Case I P75,000 P85,000 P15,000
Case II P50,000 P45,000 P7,000

75.. Which of the following would be correct for Stanton to record in Case I?

Record Equipment at: Record a gain of (loss) of:

a. P90,000 P0
b. P100,000 P10,000
c. P75,000 P(5,000)
d. P90,000 P10,000

76. Which of the following would be correct for Stanton to record in Case II?

Record Equipment at: Record a gain of (loss) of:

a. P57,000 P5,000
b. P50,000 P2,000
c. P52,000 P(5,000)
d. P50,000 P(2,000)