Activity 1: PPE

Problem 1

Two independent companies, KAYA and MUYAN, are in the home building business. Each owns
a tract of land for development, but each company would prefer to build on the other’s land.
Accordingly, they agreed to exchange their land. An appraiser was hired and from the report
and the companies records, the following information was obtained:

KAYA Co.’s Land MUYAN Co.’s Land

Cost (same as book value) P 800,000 P 500,000
Market value, per appraisal 1,000,000 900,000

The exchange of land was made and based on the difference in appraised values, MUYAN
Company paid P100,000 cash to KAYA Company.

Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
P 200,000

2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
exchange in the amount of:
P 400,000

3. After the exchange, KAYA Company record its newly acquired land at:
P 900,000

4. After the exchange, MUYAN Company record its newly acquired land at:
P 1,000,000

Solution:

Problem 1: KAYA and MUYAN

Muyan Kaya

Land 1,000,000 Cash 100,000

Cash 100,000 Land 900,000

Land 500,000 Land 800,000

Gain 400,000 Gain on sale 200,000

Problem 2

In connection with your examination of the financial statements of the Maraat Corporation
for the year 2007, the company presented to you the Property, Plant and Equipment section
of its balance sheet as of December 31, 2006, which consists of the following:
 Land P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 2,800,000

The following transactions occurred during 2007:

1. Land site number 5 was acquired for P4,000,000. Additionally, to acquire the land,
Maraat Corporation paid a P240,000 commission to a real estate agent. Costs of
P60,000 were incurred to clear the land. During the course of clearing the land, timber
and gravel were recovered and sold for P20,000.

2. The second tract of land (site number 6) with a building was acquired for
P1,200,000. The closing statement indicated that the land value was P800,000 and the
building value was P400,000. Shortly after acquisition, the building was demolished at a
cost of P120,000. The new building was constructed for P600,000 plus the following
costs:

Excavation fees P 44,000

Architectural design fees 32,000
Building permit fees 4,000
Imputed interest on funds used during construction 24,000

The building was completed and occupied on September 1, 2007.

3. The third tract of land (site number 7) was acquired for P2,400,000 and was put on
the market for resale.
4. Extensive work was done to a building occupied by Maraat Corporation under a lease
agreement. The total cost of the work was P500,000, which consisted of the following:

Particular Amount Useful life

Painting of ceilings P 40,000 one year
Electrical work 140,000 Ten years
Construction of extension to current
working area 320,000 Thirty years
 The lessor paid one-half of the costs incurred in connection with the extension to the
current working area.

5. A group of new machines was purchased under a royalty agreement which provides
for payment of royalties based on units of production for the machines. The invoice
price of the machines was P300,000, freight costs were P8,000, unloading charges were
P6,000, and royalty payments for 2007 were P52,000.

Question
1. Land at year-end is
P 6,000,000

2. Buildings at year-end is
P 3,880,000

3. Leasehold improvements at year-end is

P 2,300,000

4. Machinery and equipment at year-end is

P 3,114,000

Solution:
Solution

1. Land 4,300,000

Cash 4,300,000

Cash 20,000

Land 20,000

2. Land 1,320,000

Cash 1,320,000

Building 680,000

Cash 680,000

3. Land - investment 2,400,000

Cash 2,400,000

4. Operating expenses 40,000

Leasehold improvements 300,000

Cash 340,000

5. Machinery 314,000
 Royalty expenses 52,000

Cash 366,000

Problem 3

The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing
P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds was
credited to the Machinery account. On June 30, 2006, a Goulds machine, costing P50,000
and with accumulated depreciation of P22,000 was traded in for a new Pioneer machine with
an invoice price of P100,000. The cash paid of P90,000 for the Pioneer machine (P100,000
less trade-in allowance of P10,000 was debited to the Machinery account).

Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full year’s depreciation is charged in the year of acquisition and none in the
year of disposition.

Question
1 The adjusted balance of the Machinery account at December 31, 2006 is:
P 290,000

2 The correct depreciation expense for the machinery for the year ended December 31,
2006 is:
P 29,000

Solution

OE: Cash 20,000

Machinery 20,000

CE: Cash 20,000

Accumulated dep’n. 30,000

Machinery 40,000

Gain on sale 10,000

Adj: Accumulated dep’n 30,000

Machinery 20,000

Gain on sale 10,000

---------------------------------------------

OE: Machinery 90,000

Cash 90,000

CE: Machinery 100,000

Accumulated dep’n 22,000

Loss on sale 18,000

Machinery 50,000

Cash 90,000
Adj: Machinery 10,000

Accumulated dep’n 22,000

Loss on sale 18,000

Machinery 50,000

---------------------------------------------

1 A P350,000 – P20,000 + P10,000 -P50,000

2 B P290,000 x 10%

Problem 4

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.

1. The cost of the land that should be recorded by Wilson Co. is

P666,880.

2. The cost of the building that should be recorded by Wilson Co. is

P2,414,240.

Solution:

1. P600,000 + P60,000 – P5,400 + P3,480 + P2,400 + P6,400 = P666,880.

2. P31,200 + P2,600 + P10,440 + P2,200,000 + P170,000 = P2,414,240.

Problem 5

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?
 P115,000

Solution:

P60,000 + P55,000 = P115,000.

Problem 6

On January 2, 2010, York Corp. replaced its boiler with a more efficient one. The following information
was available on that date:

Purchase price of new boiler P150,000

Carrying amount of old boiler 10,000

Fair value of old boiler 4,000

Installation cost of new boiler 20,000

The old boiler was sold for P4,000. What amount should York capitalize as the cost of the new
boiler?

P170,000.

Solution:

P150,000 + P20,000 = P170,000.

Problem 7

On August 1, 2010, Lisa Corporation purchased a new machine on a deferred payment basis. A down
payment of P2,000 was made and 4 annual installments of P6,000 each are to be made beginning
on September 1, 2010. The cash equivalent price of the machine was P23,000. Due to an employee
strike, Lisa could not install the machine immediately, and thus incurred P300 of storage costs. Costs
of installation (excluding the storage costs) amounted to P800. The amount to be capitalized as the
cost of the machine is

P23,800.

Solution:

P23,000 + P800 = P23,800.