Problem 5-29

Different Depreciation Methods

Your audit of LYRE COMPANY's property, plant, and equipment disclosed the following data at December 31,
2018.
ASSET
I E R I
Original cost P70, 000 P102, 000 P160, 000 P160, 000
Year purchased 2013 2014 2015 2017
Useful life 10 years 15,000 hours 15 years 10 years
Salvage value P 6,200 P6, 000 P10, 000 P10, 000
Depreciation Method Sum-of-year’s-digits Working hours Straight-line Double declining balance
Accumulated depreciation P46, 400 P70, 400 P30, 000 P32, 000

You noted that the client's policy on depreciation is that no depreciation is recorded in the year an asset is purchased,
and full year depreciation is provided in the year an asset is disposed of.

The following transactions occurred during 2019:

1. On May 5, Asset J was sold for P26, OOO cash. The company's bookkeeper recorded this retirement in the
following manner in the cash receipts journal:
Cash 26,000
Asset J 26,000
2. On December 31, it was determined that Asset E had been-used 2,100 hours during 2019.
3. On December 31, before computing depreciation expense on Asset R, the management of Lyre decided the useful
life remaining from January 1, 2019, was 10 years.
4. On December 31, it was discovered that a plant asset purchased in 2018 had been expensed completely in the
year. This asset costs P44, 000 and has a useful life of 10 years and no salvage value. Management has decided to
use the double-declining balance method for this asset, which can be referred to as "Asset C”.
1. The 2019 depreciation expense on Asset J is
A. P6,960 C. P6,364
B. P18,229 D. P5,800
2. The gain to be reported on the sale of Asset J, is
A. P8,200 C. P8,764
B. P9,360 D. PO
3. The 2019 depreciation expense on Asset E is
A. P17,600 C. P13,440
B, P19,440 D. P14,280
4. The 2019 depreciation expense on Asset R is
A. P17,143 C. P13,OOO
B. P12,OOO D.P5,455
5. The total depreciation expense in 2019 on the above-mentioned PPE items is
A. P65,640 C. P66,800
B. P63,880 D, P66,640
6. Prepare the necessary adjusting journal entries for the year 2019, including the appropriate depreciation expense
on the above-mentioned items.

Solution 5-29
1. 2019 Depreciation expense – Asset 3.
Cost P70,000
Less: Salvage Value 6,200
Depreciation Cost 63,800
SYD (10x10+1/2) x 5/55
Depreciation P5,800
Answer: D
2. Cost of Asset J P70,000
Less: Accumulated depreciation (46,400 + 58,800) 52,000
Book Value 17,800
Proceeds from sale 26,000
Gain on sale P8,200
Answer: A

3. 2019 Depreciation expense – Asset E

(P102,000-6,000 = 96,000*2,100/15,000) 13,440
Answer: C

4. 2019 Depreciation expense:

Cost P160,OOO
Less: Accumulated depreciation, Jan. 1, 2019 30,000
Book value, Jan. 1, 2019 130,000
Less: Salvage value 10,000
Remaining depreciable cost, Jan. 1, 2019 120,000
Revised remaining life + 10 yrs
Revised annual depreciation P12,000
Answer: B

5. 2019 Depredation expense:

Asset J P 5,800
Asset E 13,440
Asset R 12,000
Asset I
Cost P160,000
Accumulated Depreciation 32,000
Book value, Jan. 1, 2019 128,000
DDB rate (1/10*2) x20% 25,600
Asset C
Cost P44,000
DDB rate (1/10*2) x20% 8,800
Total P65,640
Answer: A

6.
ADJUSTING JOURNAL ENTRIES
December 31, 2019
1. Depreciation expense – Asset J 5,800 A
Accumulated depreciation - Asset J 5,800

2. Accumulated depreciation - Asset J 52,200

Asset J 44,000
Gain on sale of Asset J 8,200

3. Depreciation expense — Asset E 13,440

Accumulated Depreciation — Asset E 13,440
4. Depreciation expense — Asset R 12,000
Accumulated depreciation — Asset R 12,000
5, Asset C 44,000
Retained earnings 44,000
6. Depreciation expense - Asset C 8,800
Accumulated — Asset C 8,800
7. Depreciation expense Asset I 25,600
Accumulated depreciation — Asset 25,600

Problem 5-30
PPE Acquisition and Depreciation
The following data pertain to UKULELE CORPORATION's property, plant, and equipment for 2018,
Audited balances at December 31, 2017
Debit Credit
Land P7,500,000
Buildings 30,000,000
Accumulated depreciation - Buildings 6,577,500
Machinery and equipment 22,500,000
Accumulated depreciation –
Machinery and equipment 5,750,000
Accumulated depreciation –
Delivery equipment 4,230,000

Depreciation data:
Depreciation Method Useful Life
Buildings 150% declining-balance 25 years
Machinery and Equipment Straight-line 10 years
Delivery Equipment Sum-of-the years'-digits 4 years
Leasehold Improvements Straight-line 4 years

Transactions during 2018 and other information are as follows:

a) On January 2, 2018, Ukulele purchased as new truck for cash and trade-in of a 2-year-old truck with a cost of
P900, 000 and a book value of P270, 000. The new truck has a cash price of 1,200,000; the market value of the
trade-in is not known.
b) On April 1, 2018, a machine purchased for P575, 000 on April 1, 2013, was stolen. Ukulele recovered P387, 500
from its insurance company.
c) On. May 1, 2018, costs of were incurred to improve leased office premises. The leasehold improvements have
useful life of 8 years. The related lease terminates on December 31, 2024.
d) On July 1, 2018, machinery and equipment were purchased at a total invoice cost of P7,000,000; additional costs
of P125,000for freight and P625,000 for installation were incurred.
e) Ukulele determined that the delivery equipment comprising the balance at January I, 2018, would have been
depreciated at a total amount of P900,000 for the year ended December 31, 2018.

The salvage values of the depreciable assets are immaterial. The policy of Ukelele Corporation is to compute
depreciation to the nearest month.

Based on the preceding information, compute the following:

1. Depreciation expense for 2018 on Buildings
A. P1,405,350 C.1,200,000
B. B, P929,700 D.1,800,000
2. Depreciation expense for 2018 on Machinery and equipment
A.2, 637, 500 C.2, 651,875
B.2, 981,875 D.2, 594,375
3. Depreciation expense for 2018 on Delivery equipment
A.1,100,000 C.1,380,000
B.1,200,000 D.1,020,000
4, Depreciation expense for 2018 on Leasehold improvement
A. P700,000 C. P840,000
B.1,050,000 D. P933,433
5. Accumulated depreciation - Buildings, December 31, 2018
A. P7,507,200 C. 7,777,500
B.7,982,850 D.8,377,500
6. Accumulated depreciation - Machinery and equipment, December 31, 2018
A.P8,644,375 C.8,600,000
B. 8,556,875 D.8,844,375
7. Accumulated depreciation - Delivery equipment, December 31, 2018
A.5,430,000 C.4,710,000
B.4,620,000 D.4,800,000
8. Gain (loss) on trade in of truck on January 2, 2018
A.(200,000) C.(70,000)
B. P200,OOO D. P70,OOO

Solution 5-30
1. Book value, Jan. 1, 2018
(30,000 – 6,577,500) P23,422,500
150% declining balance rate (1/25*150%) x 6%
Depreciation expense for 2018 P1,405,530
Answer: A

2. 2018 DEPRECIATION EXPENSE ON MACHINERY & EQUIPMENT

Machinery and Equipment Jan. 1, 2018 22,500,000
Less: Machine stolen 575,000
Balance 21,925,000
Depreciation rate x10% 2,195,500
Machine stolen (P575, 000 x 10% x 6/12) 14,375
Machine purchased July 1 (7,750,000x10%x6/12) 387,500
Depreciation for 2018 2,594,375
Answer: D

3. 2018 DEPRECIATION EXPENSE ON DELIVERY EQUIPMENT:

Depreciation on Jan. 1, 2018, balance P900,000
Less: Depreciation on truck traded in,
Jan. 1, 2018 (900,000*2/10) 180,000 720,000
Depreciation on truck purchased
Jan. 2, 2018 (1,200,000*4/10) 480,000
Depreciation for 2018 1,200,00
*SYD = 4 (4+1/2) = 10
Answer: B

4. DEPRECIATION EXPENSE ON LEASEHOLD IMPROVEMENTS

Cost of leasehold improvements 8,400,000
Depreciation May 1, 2018 — Dec, 31, 2018 /80months
Depreciation per month 105,000
Depreciation, May 1, 2018 - Dec. 31, 2018
(P105,000 x 8 months) 804,000
Answer: C

5. ACCUMULATED DEPRECIATION – BUILDINGS:

Balance, Jan. 1, 2018 6,577,500
Add: Depreciation for 2018 (see no. 1) 1,405,350
Balance, December 31, 2018 7,982,580
Answer: B
6. ACCUMULATED DEPRECIATION – MACHINERY & EQUIPMENT:
Balance, Jan. 1, 2018 6,250,000
Depreciation for 2018 (see no. 2) 2,594,375
Machine Stolen (575,000/10*5) (287,500)
Balance, Dec. 31, 2018 8,556,875
Answer: B

7. ACCUMULATED DEPRECIATION – DELIVERY EQUIPMENT:

Balance, Jan. 1, 2018 4,320,000
Depreciation for 2018 (see no. 3) 1,200,000
Truck traded in
(P900,000 cost - 270,000 book value) (630,000) (630,000)
Balance, Dec. 31, 2018 4,800,000
Answer: D

8. LOSS ON TRADE IN OF TRUCK ON JANUARY 2, 2018:

Trade in value (1,200,000 – 1,000,000) P200,000
Book value 270 000
Loss on trade in (70,000)
Answer: C

Problem 5-31

SNARE DRUM COMPANY buys a machine for P228,600 oh January 1, 2015. The maintenance costs for the years
2015 - 2018 are as follows:

Year Cost
2015 P13, 500
2016 10,800
2017 65,700*
2018 18,900
* includes P54, 900 for cost of a new motor installed in December 2017.

Snare Drum recorded the cost of the machine frame in one account at a cost of P176,400 and the motor was
recorded in a second account at a cost of P52,200.' Straight-line method of depreciation is used with a useful life of
10 years for the frame and 4 years for the motor. Residual values are immaterial and thus ignored in the computation
of depreciation charges.

1. What is the total machine-related expense in 2015?

A. P44,190 C. P70,650
B. P30,690 D. P36,630

2. What amount of loss should be recognized on the replacement of motor in 2018?

A. 10,800 C. P26,100
B. P13,050 D. PO

3. What is the depreciation expense in 2017?

A. 81,365 C. P30,690
B. P17,640 D. P44,415
4. What is the total machine-related expenses in 2017?
A. 54,540 C.89,775
B. P41,490 D.42,165
5. What is the total machine-related expense in 2018?
A. 42,030 C. 52,965
B.31, 365 D. 50,265

Solution 5-31

1. Depreciation Expense - frame (Р17б,400/10) Р17,640

Depreciation Expense - motor (Р52,200/4) 13,050
Maintenance expense 13,500
Total expense in 2015 44,190
Answer: А

2, Cost of motor Р52,200

Less: Accumulated depreciation (Р52,2О0 х 3/4) 39,150
Book Value/ Loss on Replacement 13,050
Answer: В

3. Depreciation expense — frame (P176,400/10) P17,640

Depreciation expense - motor (P52,200/4) 13,050
Total depreciation expense in 2017 30,690
Answer: C

4. Depreciation expense (see no. 3) 20,690

Loss on replacement of motor (see no. 2) 13,050
Maintenance expense (P65,700 - P54,900) 10,800
Total expenses in 2017 P54,540
Answer: A

5. Depreciation expense — frame (P176, 400/10) P17,640

Depreciation expense — motor (P54,900/4) 13,725
Maintenance expense 18,900
Total expenses in 2018 50,265
Answer: D

Problem 5-32

BUGLE COMPANY's property, plant, and equipment and related accumulated depreciation accounts had the
following balances at December 31, 2017:
Class of PPE Cost Accumulated Depreciation
Land 3,900,000
Buildings 36,000,000 7,962,000
Machinery and equipment 23,250,000 5,886,000
Transportation equipment 3,960,000 2,586,000
Leasehold improvements 6,630,000 3,315,000

Class of PPE Depreciation method Useful life

Land Straight-line 12 years
Buildings 150% declining balance 25 years
Machinery and equipment Straight-line 12 years
Transportation equipment 150% declining balance 5 years
Leasehold improvements Straight-line 8 years

Bugle computes depreciation to the nearest month. The salvage values of the depreciable assets are considered
immaterial.
Transactions during 2018 and other information are described below:
a) On January 5, 2018, a plant facility consisting of land and a building was purchased from Torotot Company for Of
this amount, 20% was allocated to land.

b) On April 3, 2018, new parking lots, streets, and sidewalks at the purchased plant facility were completed at a
total cost of P5,760,000. These expenditures had an estimated useful life of 12 years.

c) The leasehold improvements were completed on December 31, 2014, and had an estimated useful life of 8
years. The related lease, which would have terminated on December 31, 2020, was renewable for an additional 4-
year term. On April 30, 2018, Bugle exercised the renewal option.

d) On July 1, 2018, machinery and equipment were purchased at a total invoice cost of Additional costs of
P300,000 for delivery and P900,OOO for installation were incurred.

e) On August 31, 2018, Bugle purchased a new automobile for P450,000,

f) On September 29, 2018, a truck with a cost of P720,000 and a carrying amount of P243,000 on the date of sale
was sold for P345,OOO. Depreciation for the 9months ended September 30, 2018, was P70,560.

g) On December 22, 2018, a machine with a cost of P510,000 carrying amount of P89,250 at date of disposition
was scrapped without cash recovery.

Based on the preceding Information, calculate the 2018 depreciation expense on each of the following classes of
PPE.
1. Land improvements
A. P480,000 C. 320,000
B. P360,000 D. 120,000

2. Buildings
A. 2,546,280 C. 2,762,280
B. 3,024,000 D. P120,000

3. Machinery and equipment

A. 2,325,000 C. 1,597,500
B. 3,195,000 D. 2,760,000

4. Transportation equipment
A. P363,132 C. P433,692
B. P454,860 D. P527,760

5. Leasehold improvements
A. P828,750 C. P663,000
B. P552,500 D. 1,326,000

SOLUTION 5-32

1. 2018 DEPRECIATION EXPENSE - LAND IMPROVEMENTS:

(P5 – 760,000/12 years x 9*12)
*April 1 – December 31 360,000
Answer: B
2. 2018 DEPRECIATION EXPENSE BUILDINGS:
Book value, Jan. 1, 2018 (36,000,000 -7,962, 000) 28,038,000
Building acquired Jan. 5, 2018 (18,000,000 * 80%) 14,400,000
Total 42,438,000
150% declining balance rate (1/25 x 150%) x 6%
Depreciation 2,546,280
Answer: A

3. DEPRECIATION EXPENSE - MACHINERY AND EOUIPMENT

Machinery and equipment, Jan. 1, 2018 (23,250,000/10 years) 2,325,000
Purchased July 1, 2018 (8,700,000/10*6/12) 435,000
Total 2,760,000
Answer: D

4. 2018 DEPRECIATION EXPENSE - TRANSPORTATION EQUIPMENT:

Book value, Jan. 1, 2018 (3,960,000 – 2,586,000) 1,374,000
Less: Book value on Jan. 1, 2018,
of truck sold September 29, 2018
(243,000 + P70, 560) 313,560 313,560
Amount subject to depreciation 1,060,440
150% declining balance rate (1/5x 150%) x30% P318,132
Truck sold sept. 29, 2018 70,560 70,560
Automobile purchased Aug. 31, 2018
(P450,000 x 30%x4/12) 45,000
Total P433,692
Answer: C

5. 2018 DEPRECIATION EXPENSE – LEASEHOLD IMPROVEMENTS:

Book value, Jan. 1. 2018 (6,630,000 – 3,315,000) 3,315,000
Useful life of leasehold improvements (8-3) / 5years
Depreciation 663,000
Answer: C

The useful life of leasehold improvements is used because it is shorter than the extended tease term of 6 years (2
years remaining lease term + 4 years renewal option exercised).

Problem 5-33
Different and Error Correction

The Delivery trucks account of your client, ALPHORN COMPANY, had a balance of P2,820,000 on January 1,
2016, which included the following:

Truck No. Acquisition Date Cost

1 January 1, 2013 P 540,000
2 July 1, 2013 660,000
3 January 1, 2015 900,000
4 July 1, 2015 720,000
P 2,820.000

The Accumulated depreciation – Delivery trucks account had a balance of P906,000 on January 1, 2016. This
amount represents depreciation on the four trucks from the respective dates of acquisition, based on a 5 – year life,
no salvage value, No charges had been against this accounts before January 1, 2016.
Transaction completed during the period January 1, 2016, through December 31, 2019, and the entries made to
record them were as follows:

July, 2016
Truck No. 2 was traded for a larger one (Truck No. 5), the agreed price of which was P1,020,000. Alphorn paid the
dealer P500, 000 cash on the transaction. The entry was:

Delivery trucks 500,000

Cash 500,000

CHAPTER 5 AUDIT OF PROPERTY, PLANT AND EQUIPMET 477

January 1, 2017
Truck No. 1 was sold for P110,000. The entry was:
Cash 110,000
Delivery trucks 110,000

July 1, 2018
A new truck (No. 6) was purchased for P1,080,000 cash and was debited at that amount to the Delivery trucks
account. (Assume Truck No. 2 was not retired.)

July 1, 2018
Truck No. 4 was severely damaged in an accident and was sold as junk for P21, 000 cash. Alphorn received P75,
000 from the insurance company. The entry made by the accountant was:

Cash 96,000
Sales 21,000
Delivery trucks 75,000

Entries for depreciation had been made at the end of each financial year as follows:

Year Depreciation Expense

2016 P609,000
2017 633,000
2018 733,500
2019 834,000

1. What amount of gain (loss) should have been recognized on the trade in of truck No. 3 on July 1, 2016?
A. P(130,000) C. P(110,000)
B. P230, 000 D. P 0

2. Alphorn’s net income for 2016 was overstated (understand) by

A. P77,000 C. P(33,000)
B. P110,000 D. P33,000

3. The gain (loss) on the sales of Truck No. 1 on January, was

A. P110,000 C. P(108,000)
B. P2,000 D. P(2,000)

4. Alphorn’s net income for 2017 was understand by

A. P155, 000 C. P2,000
B. P153,000 D. P151,000
 5. What amount of loss should have been recognized on the sale of Truck No. 4 on July 1,2018
A. P267, 000 C. P288,000
B. P153, 000 D. P213,000

6. Alphorn’s net income for 2018 was overstated (understated) by

A. P213, 000 C. P(283,500)
B. P(70,500) D. P(213,000)

7. What amount of deprecation should have been recorded in 2019?

A. P414,000 C. P420,000
B. P552,000 D. P834,000

SOLUTION 5 – 33

1. Trade in value (P1,020,000 – P500, 000) P520,000

Book value of Truck No. 3: P900,000
Cost
Less: Accumulated depreciation,
Jan. 1, 2015 – July 1, 2016
(P900,000/5 x 1 ½ years) 270,000 (630,000)
Loss on trade in P(110,000)
Answer: C

2. Depreciation per client P609,000

Correct depreciation:
Trunk No. 1 (P540, 000/5) P108,000
Trunk No. 2 (P660,000/5) 132,00

Truck No. 3 (P900,00/5 x ½) 90,000

Truck No. 4 (P720,000/5) 114,000
Truck No. 5 (P1,020,000/5 x ½) 102,000 576,000
Overstatement of depreciation –
net income understand (33,000)
Unrecorded loss on trade in – net income overstated 100,000
Net overstatement of 2016 net income P77,000
Answer: A

3. Net proceeds P110,000

Book value of Truck No. 1:
Cost P540,000
Less: Accumulated depreciation,
Jan. 1, 2013 – Jan. 1, 2017
(P540,000/5 x 4) 432,000 (108,000)
Gain on sale P2,000
Answer: B
 4. Depreciation per client P633,000
Correct depreciation:
Truck No. 2 (P660,000/5) P132, 000
Truck No. 4 (720,000/5) P144,000
Truck No. 5 (1,020,000/5) 204,000 480,000
Overstatement of depreciation –
net income understand 153,000
Unrecorded loss on trade in – net income overstated 2,000
Net overstatement of 2016 net income P155,000
Answer: A

5. Net proceeds
Book value of Truck No. 4
Cost P720,000
Less: Accumulated depreciation,
July 1, 2015 – July 1, 2018
(P720,000/5 x 3) 432,000 (288,000)
Loss on sales P(267,000)
Answer: A

6. Depreciation per client P733,500

Correct depreciation:
Truck No. 2 (P660,000/5 x ½) P 66, 000
Truck No. 4 (720,000/5 x ½) 72,000
Truck No. 5 (1,020,000/5) 204,000
Truck No. 6 (1,080,000/5 x ½ ) 108,000 450,000
Overstatement of depreciation –
net income understand 283,500
Unrecorded loss on trade in – net income overstated 267,000
Unrecorded gain on insurance recovery – net income
understated (75,000)
Erroneous credit to sales – net income overstated 21,000
Net understatement of 2018 net income P(70,500)
Answer: B

7. 2019 Depreciation expense:

Truck No. 5 (P1, 020,000/5) P204,000
Truck No. 6 (P1,080,000/5) 216,000
Total
Answer: C

Problem 5-34

Acquisition and Depreciation of Various PPE Items

BAGPIPE MANUFACTURING COMPANY began operations on October 1, 2016. The company's accountant has
started to gather pertinent information about each of the company’s property, plant, and equipment as shown below.
When he was about to prepare a schedule of PPE and depreciation, he was assigned to maintain the books of the
company s foreign operations. You have been asked to assist in the preparation of this schedule. In addition to
ascertaining that the summarized data below are correct, you have accumulated the following information from the
company's records and personnel.
a) Bagpipe computes depreciation from the first of the month of acquisition to the first of the month of
disposition,
b) Land A and Building A were purchased from Pobre Company. Bagpipe paid P 12,300,000 for the land and
building together. At e time of acquisition, the land had a fair value of P 1,350,000 and the building had a
fair value of P 12,150,000.
c) Land B was acquired on October 3, 2016, in exchange for 37,500 ordinary shares of Bagpipe. On the
acquisition date, Land B had a fair value of P 1,365,000 and the company's P5 par value ordinary shares
had a fair value of P35 per share.
d) Construction of Building B on the newly acquired land began on October 1, 2017. By September 30, 2018,
Bagpipe had paid of the estimated total construction costs of It is estimated that the building will be
completed and occupied by July 2019.
e) Certain equipment was donated to the corporation by the national government. An independent. appraisal
of the equipment when donated placed the fair market value at P450,000 and the salvage value at P45,000.
f) Machinery A's total cost of includes installation cost of P9,000 and normal repairs and maintenance of
P223,500. Salvage value is estimated at P90,000. It was sold on February 1, 2018, for P1,600,000
g) On October 1, 2017, Machinery B was acquired with a down payment of P86,100 and the remaining
payments to be made in 11 annual installments of P90,000 each, beginning October 1, 201 i. The prevailing
interest rate was 8%. The following data were abstracted from present value tables (rounded):

10 years 11 years 15 years

Present value of 1 at 8% 0.463 0.429 0.315
Present value of an ordinary
annuity of 1 at 8% 6.710 7.139 8.559

Land A:
Acquisition date: October 1, 2016

Building A
Acquisition date: October 1, 2016
Salvage value: P600,000
Depreciation method: Straight-line
Depreciation expense:
Year ended Sept. 30,2017 P261,750

Land B
Acquisition date: October 3, 2016

Building B
Acquisition date: Under construction
Cost: P4,800,000 to date
Depreciation method: Straight-line
Salvage value: P0
Estimated life: 30 years
Depreciation expense:
Year ended Sept. 30, 20157 P0

Donated equipment
Acquisition date: October 2, 2016
Salvage value: P45,000
Depreciation method: 150% declining balance
Estimated life: 10 years

Machinery A
Acquisition date: October 2, 2016
Salvage value: P90,000
Estimated life: 8 years
Depreciation method: Sum-of-the years'-digits (SYD)

Machinery B
Acquisition date: October 1, 2017
Salvage value: P0
Depreciation method: Straight-line
Estimated life: 20 years

1. What is the cost of Land A?

A. P1, 350,000 C. P11,070,000
B. P12,150,000 D. P1,230,000
2. What is the cost of Building A?
A. P1, 350,000 C. P11,070,000
B. P12,150,000 D.P1,2030,000
3. What is the estimated useful life of Building A?
A. 42 years C. 44 years
B. 40 years D. 46 years
4. What is the depreciation expense on Building A for the year ended September 30, 2018?
A. P261,750 C. P523,500
B. P288,750 D. P577,500
5. What is the cost of Land B?
A. P1,552,500 C. P1,365,000
B. P427,500 D. P1,125,000
6. What is the depreciation expense on Building B for the year ended September 30, 2018?

A. P120,000 C. P288,750
B. P168,750 D. P 0

7. At What amount should the donated equipment be measured and recognized?

A. P450,000 C. P495,000
B. P405,000 D. P 0
8. What is the depreciation expense on the donated equipment for the year ended September 30, 2017?
A. P 0 C. P60,750
B. P74,250 D. P67,500
9. What is the depreciation expense on the donated equipment for the year ended September 30, 2018?
A. P60,750 C. P57,375
B. P51,638 D. P67,500

10. What is the cost of Machinery A?

A. P2,473,500 C. P2,160,000
B. P2,250,000 D. P2,151,000
11. What is the depreciation expense on Machinery A for the year ended September 30, 2017?
A. P500, 000 C. P480,000
B. P529,667 D. P478,000
12. What is the depreciation expense on Machinery A for the year ended September 30, 2018?
A. P140,000 C. P130,926
B. P113,426 D, P175,000
13. What amount of gain (loss) should be recognized on the sale of Machinery A on February 1, 2018?
A. P 0 C.P5,000
B. P60,000S D.P(30,000)
14. What is the cost of Machinery B?
A. P728,610 C. P780,000
B. P73 D. P685,272
15. What is the depreciation expense on Machinery B for the year ended September 30, 2018?
A. P36, 430 C. P36,584
B. P39, 000 D.P34,274
SOLUTUION 5 – 34

1. Allocation of lump sum price in proportion to fair value:

Land A (135/1,350 x P12,300,000) P1,230,000
Building A (1,215/1,350 x P12,300,000) 11,070,000
Total P12,300,000
Answer: D
2. Cost of Building A (see no. 1) P11,070,000
Answer: C
3. Cost of building A P11,070,000
Less: Salvage value 600,000
Depreciable cost 10,470,000
Annual depreciation ÷ 261,750
Estimated life 40 years
Answer: B
4. Depreciation expense on Building A for the year ended September 30, 2018 P261,750
Answer: A
5. Cost of Land B (its fair value on acquisition date) Pl,365,000
Answer: C
6. Because Building B is not yet available for its intended use as of 30, 2018, no depreciation should be
provided.
Answer: D
7. Donated equipment, at fair value P450.000
Answer: A
8. Depreciation – Donated equipment, for the year ended September 30, 2017:
Cost P450,000
150% declining balance rate (1/10 x 150%) x15%
Depreciation expense P57,375
Answer: D
9. Depreciation expense - Donated equipment, for the year ended September 30, 2018:
Book value, Oct. 1, 2017 (P450,OOO - P67,500)
P382,500
150% declining balance rate (1/10 x 150%) x15%
Depreciation expense
P57.375
Answer: C
10. Total cost as recorded
P2,473,500
Less: Normal repairs and maintenance
223,500
Correct cost of Machinery A
P2,250,000
Answer: B
11. Depreciation expense — Machinery A, for the year ended September 30, 2017:
(P2,250,000 – P90,000 = P2,160,000 x 8/36
P480,000
Answer: C
12. Depreciation expense - Machinery A, for the year 30, 2018:
(P2,2160,000 x 3/36 x 4/12)
P140,000
Answer: A
13. Cost of Machinery A
P2,250,000
Less: Accumulated depreciation, October 2016 – January 2018 (P480,000 + P140,00)
620,000
 Book value, February 1, 2018
1,630,000
Proceeds from sale
1,600,000
Loss on sale
P(30.000)
Answer: D
14. Down payment
P86,100 First installment payment on Oct. 1, 2017
90,000 Present value of succeeding 10 installment payments (P90,000 x 6.710)
603,900 Total cost of Machinery B
P780,000
Answer: C
15. Depreciation expense - Machinery B, for the year ended September 30, 2018
P39,000
(P780,000/20 years)
Answer: B

Problem 5-35

You are engaged to audit the financial statements of CORNET COMPANY for the year ended December 31, 2018.
You gathered the following information pertaining to the company’s equipment and accumulated depreciation
accounts.
EQUIPMENT

1.1.18 Balance P446, 000 9.1.18 No. 6 sold P 9,000

6.1.18 Not 12 36,000 12.31.18 Balance 474,000
9.1.18 Dismantling
of No. 6 1,000
P483,000 P483,000

ACCUMULATED DEPRECIATION - EQUIPMENT

12.31.18 Balance P271,400 1.1.18 Balance P 224,000

12.31.18 2018
Depreciation 47.400
P271,400 P271,400

The followings are the details of the entries above:

1. The company depreciates equipment at 10 percent per annum. The oldest equipment owned is seven years old as
of December 31, 2018. 2
2. The following adjusted balances appeared on your last years working papers:
Equipment P446,000
Accumulated depreciation 224,000
3. Machine No. 6 was purchased on March 1, 2011 at a cost of P30,000 and was sold on September 1, 2018, for
P9,000.
4. Included in charges to the repairs expense account was an invoice covering installation of Machine No. 12 in the
amount of P2, 500.
5. It is the company's practice to take a full year's depreciation in the year of acquisition and none in the year of
disposition.

1. What is the gain (loss) on the sale of Machine No. 6?

A. P (4,000) C. P (1,000)
B. P8, 000 D. 0

2. What is the equipment account balance on December 31, 2018?

A. P454, 500 C. P475, 500
B. P452, 000 D. P484, 500

3, What is the total depreciation expense on equipment for the year ended December 31, 2018?
A. P44, 600 C, P51, 450
B. P45, 846 D. P45, 450

4. What adjusting entry should be prepared in connection with the sale of Machine No. 6 on September 1, 2018?
A. Loss on sale of equipment 1,000
Accumulated depreciation 21,000
Equipment 22,000

B. Loss on sale of equipment 4,000

Accumulated depreciation 18,000
Equipment 22,000
C. Accumulated depreciation 21,000
Equipment 21,000
D. Accumulated depreciation 30.000
Equipment 22,000
Gain on sale of equipment 8,000

5. What adjusting entry should be prepared on' December 31, 2018, to correct the amount of depreciation recorded
on company books?
A. Accumulated depreciation 1,950
Depreciation expense 1,950
B. Accumulated depreciation 2,800
Depreciation expense 2,800
C. Accumulated depreciation 1,554
Depreciation expense 1,554
D. Accumulated depreciation 4,050
Depreciation expense 4,050

Solution 5 – 35

1. Net proceeds (9,000 – 1,000) P8,000

Book value of Machine No. 6:
Cost P30,000
Less: Accumulated depreciation
(30,000 x 10% x 7) 21,000 (9,000)
Los on sale of Machine No. 6 P(1,000)
Answer: C

2. Equipment:
Balance Jan. 1, 2018 P446,000
Machine No. 12 purchased June 1, 2018
(P36,000 + 25,000) 38,500
Machine No. 6 sold Sept. 1, 2018 (30,000)
Balance, December 31, 2018 P454,500
Answer: A
3. Depreciation expense on the equipment for 2018:
(P454, 500 x 10%) P45,450
Answer: D

4. Sale of Machine No. 6 on September 1, 2018:

Entries Made:
Equipment 1,000
Cash
To record the dismantling cost 1,000
Cash 9,000
Equipment
To record the sale of Machine No. 6 9,000
Correct entry:
Cash (9,000 – 1,000) 8,000
Accumulated Depreciation 21,000
Loss on sale of equipment 1,000
Equipment 30,000

Adjusting Journal Entry:

Accumulated Depreciation 21,000
Loss on sale of equipment 1,000
Equipment 22,000
Answer: A

5. Depreciation Recorded P47, 400

Correct depreciation (see no. 3) 45,450
Overstatement of depreciation P1, 950

Adjusting Journal Entry:

Accumulated Depreciation 1,950
Depreciation expense 1,950
Answer: A
Problem 5-36

HORNPIPE COMPANY has a long-standing policy of acquiring company equipment by leasing. On

January 1, 2017, the company entered into lease for a new machine. The lease contract provides that
annual payments will be made for 5 years; the payments are to be made in advance on December 31 of
each year. At the end of the 5-year period, Hornpipe may purchase the machine. The estimated economic
life of the machine is 12 years. Hornpipe uses the calendar year for reporting purposes and depreciates its
other equipment using the straight-line method.

In addition, the following information about the lease is also available:

Anual lease payments P165, 000

Purchase option price P75, 000
Estimated fair market value of the machine after S years 1,125,000
Interest rate implicit in the lease 10%
Date of first lease payment January 1, 2017

The following data are abstracted from the present value tables:
Present value of 1 for 5 periods 10% 0.62092
Present value of an annuity due for 5 periods at 10% 4.16986
Present value of an ordinary annuity for 5 periods at 10% 3.79079
1. What is the amount to be capitalized as an asset for the lease of the machine?
A. P672,049 C. P734,596
B. P837,232 D. P763,027

2. What is the amount of interest expense to be recognized for the year ended December 31, 2018?
A. P46,156 C. P34,271
B. P56,960 D. P103,116

3. How much depreciation should be provided on the leased equipment for the year ended December 31,
2017?
A. P63,586 C. P146i920
B. P56,004 D. P61,216

4. What is the entry to record the lease payment on December 31, 2017?
A. Lease liability 108,040
Interest expense 56,960
Cash 165,000
B. Lease liability 118,844
Interest expense 46,156
Cash 165,000
C. Lease liability 165,000
Cash 165,000
D. Lease liability 130,728
Interest expense 34,272

Assume the purchase option is exercised at the end of the lease. The actual fair market value of the
machine at the end of the lease is P288,000. On the date the purchase option is exercised, the
undiscounted sum of future cash flows expected from the machine is 375,000.

5. What is the entry to record the exercise of the option?

A. Lease liability 68,181
Interest expense 6,819
Cash 75,000
B. Equipment 68,181
Interest expense 6,819
Cash 75,000
C. Equipment 75,000
Cash 75,000
D. Lease liability 75,000
Cash 75,000

6. What is the amount of impairment loss that should be recognized by Hornpipe?

A. P90,000 C, P53,514
B. P143,514 D. P 0

Solution 5 – 36

1. Present value of lease payments (P165,000 x 4.16986) P688,027

Present value of purchase option price (P75,000 x 0.62092) 46,569
Cost of leased machine 734,596
Answer: C

2. SCHEDULE OF LEASE PAYMENTS AND INTEREST ACCRUALS

Date Payment Interest expense Principal Lease Liability
01.01.17 Initial balance 734,596
01.01.17 P165,000 165,000 569,596
12.31.17 165,000 56,960 108,040 461,556
12.31.18 165,000 46,156 118,844 342,712
12.31.19 165,000 34,271 130,729 211,983
12.31.20 165,000 21,198 143,802 68,181
12.31.21 75,000 6,819* 68,181 * 0
*Rounded

Interest expense for 2018 (see amortization schedule) P46, 156

Answer: A

3. Depreciation expense for 2018 (P734,596/12* years) P61,216

* Because of the bargain purchase option, the depreciation period should be the useful life of the asset.
Answer: D

4. Entry to record the second lease payment on December 31, 2017:

Lease Liability 108,040
Interest Expense 56,960
Cash 165,000
Answer: A

5. Entry to record purchase of the machine:

Lease Liability 68,181
Interest Expense 6,819
Cash 75,000
Answer: A

6. Fair value of equipment

Carrying amount: 285,000
Cost 734,596
Less: Accumulated Depreciation
(734,596/12x5) 306,082 428,514
Impairment loss 143,514
Answer: B

The fact that the undiscounted sum of future cash flows expected from the machine is lower than the
machine’s carrying amount indicates impairment in value of the asset. However, PAS 36: Impairment of
Assets provides that the impairment loss to be recognized is the excess of the asset’s carrying amount
over its recoverable amount. The asset’s recoverable amount is the higher between its fair value less costs
to sell and its value in use. Value in use is the present value of the future cash flow expected to be derived
from the asset.
Problem 5 – 37

It has been the policy of VIBRAHARP COMPANY to acquire equipment by leasing. On January 1, 2017,
Vibraharp entered into a lease with Lessor Company for a new delivery truck that had a selling price of
P1, 060,000. The lease contract provides that annual payments of P210, 000 will be made for 6 years.
Vibraharp made the first lease payment on January I, 2017, and subsequent payments are made on
December 31 of each year. Vibraharp guarantees a residual value of P183, 560 at the end of the lease
term. After considering the guaranteed residual value, the rate implicit in the lease is determined to be
12%. Vibraharp has an incremental borrowing rate of 15%. The economic life of the truck is 9 years.
Vibraharp depreciates its other equipment using straight-line method and uses the calendar year for
financial reporting purposes.

The present value tables show the following data:

12% 15%
Present value of 1 for 6 periods 0.50663 0.43233
Present value of an ordinary annuity for 6 periods 4.11141 3.78448
Present value of an annuity due for 6 periods 4.60478 4,35216

1. What is the cost of the leased of the delivery truck?

A. 993,312 C. 956,393
B. 1,060,000 D. 874,100

2. What is the depreciation expense to be recognized by Vibraharp for the year ended December 31, 2017?
A. P146,073 C. P97,382
B. P176,667 D. P134,959

3. What is the lease liability on December 31, 2020?

A. P163,893 C. P169,940
B. P485,565 D. 333,833

4. What is the carrying amount of the leased delivery truck on December 31, 2021?
A. P730,365 C. P183,560
B. 1,060,000 D. P329,635

5. What is the total amount of expenses that should be shown on Vibraharp 's income statement for the year ended
December 31, 2022, in connection with this lease? (Assume that Lessor Company sell the truck for P116,000 at the
end of the 6-year period to a third party.)
A. P233,302 C. P19,667
B. P146,075 D. P165,742

Solution 5 – 37

1. Present value of lease (210,000 x 4.60478) P 967,003

Present value of guaranteed residual value (P183, 560 x 0.50663) 92,997
Cost of leased delivery truck 1,060,000
Answer: B

2. Depreciation expense on leased truck for 2017:

Cost 1,060,000
Less: Residual Value 183,560
Depreciable Cost 876,440
 Lease Term / 6 years
Annual Depreciation P146,073
Answer: A

PAS 17 states that "if there is no reasonable certainty that the lessee will obtain ownership by the end of
the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life."

Because neither the transfer of ownership nor bargain purchase option is satisfied, the depreciation period
is the lease term, being shorter than the asset's economic life.

3. SCHEDULE OF LEASE PAYMENTS AND INTEREST ACCRUALS

Date Payment Interest Expense Principal Lease Liability
01.01.17 P1,060,000
01.01.17 P210,000 850,000
12.31.17 210,000 P102,000 P108,000 742,000
12.31.18 210,000 89,040 120,960 621,040
12.31.19 210,000 74,525 135,475 485,565
12.31.20 210,000 58,268 151,732 333,833
12.31.21 210,000 40,060 169,940 163,893
12.31.22 183,560 19,667 163,893 0

Lease liability, Dc 31, 2020 (see amortization schedule) P333,893

Answer: D

4. Cost of leased truck (see no. 1) 1,060,000

Less: Accumulated depreciation,
Jan.1, 2017 - Dec. 31, 2021 (P146,073 x 5) 730,365
Book value, Dec. 31, 2021 329,635
Answer: D

5. Depreciation expense
(P329,635 BV on Dec. 31, 2021 - P183,560 salvage value) P146, 075
Interest expense (see amortization schedule) 19,667
Loss on leased equipment:
Residual value P183, 560
Less: Realizable value of truck at the end of the lease tem 116.000 67,560
Total lease-related expenses P233, 302
Answer: A

Problem 5 – 38

In 2016 TIMPANI TRUCKING COMPANY entered into a long-term lease contract for newly
constructed truck terminals and storage facilities, The buildings were constructed to the company’s
specifications on land owned by the company. Timpani took possession of the leased properties on
January 1, 2017. On January 1, 2017 and 2018, the company made cash payments of P3, 144,000.

Although the leased properties have a composite life of 40 years, the non cancellable lease runs for 20
years from January 1, 2017, with a bargain purchase option available upon expiration of the lease.
The 20-year lease is effective for the period January 1, 2017, through December 31, 2036. Advance rental
payments of are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance
rental payments of P960, 000 are due on January 1 for each of the last 10 years of the lease. The company
has an option to purchase all of these leased facilities for PI on December 31, 2036. Also, the lease
contract stipulates that Timpani should make annual payments to the lessor of P375,000 for property
taxes and P69,000 for insurance. The rate implicit in the lease is 6%. The company depreciates its other
depreciable assets using the straight line method and uses the calendar year for financial reporting
purposes.

Selected present value factors are as follows:

Period For an Ordinary Annuity of 1 at 6% For 1 at 6%
1 0.943396 0.943396
2 1.833393 0.889996
8 6.209794 0.627412
9 6.801692 0.591898
10 7.360087 0.558395
19 11.158117 0.330513
20 11.469921 0.311805

1. What is the total cost of the leased facilities?

A. 28,554,192 C. P23, 817,677
B. 25,246,737 D. 26,937,917

Assume that the present value of the minimum lease payments is on January 1, 2017.

2. What is the amount of interest expense to be shown on Timpani's income statement for the year ended
December 31 2019?
A. 1,350,000 C. 1,183,140
B. 2,452,140 D. 1,269,000

3. The total lease-related expenses for the year ended December 31,2020, should be
A. 1,722,128 C. 2,257,140
B. 2,796,128 D. 2,166,128

SOLUTION 5-38

1. Present value of first 10 Payments:

Payments made on Jan, 1, 2017 2,700,000
Present value of succeeding 9 payments
(2,700,000 x 6.801692) 18,364,568 21,064,568
Present value of last 10 payments:
First payment P 960,000
Present value of succeeding payments
(P960,000 x 6.801692) 6,529,624
Present value of last 10 payments at Jan. 1, 2027 7,489,624
Present value of 1 for 10 periods x 0.558395 4,182,169
Cost of leased facilities P25,246,737
Answer: B
2. AMORTIZATION SCHEDULE (PARTIAL)
Date Payment Executory cost Internet Expense Principal Lease Liability
01.01.17 25,200,000
01.01017 P444 000 444,000 2,700,000 22,500,000
01.01.18 3,144,000 444,000 1,350,000 1,350,000 21,150,000
01.01.19 3,144,000 4441000 1,269,000 1,431,000 19,719,000
01.01.20 3,144,000 4448000 1,183,140 1,516,860 18,202,140
01.01.21 3,144,000 444,000 1,092,128 1,607,872 16,594,268

Interest expense for 2019 amortization

(See amortization schedule) P1,183,140
Answer: C

3. Interest expense 1,092,128

Executory costs 444,000
Depreciation expense (25,200,000/40* years) 630,000
Total lease-related expenses for 2020 2,166,128
Answer: D

*Because the lease has a bargain purchase option, the leased asset is depreciated over its economic life.