CHAPTER 6
PLANT ASSETS and NATURAL RSOURCES
Exercise 6-1: Fill in the blanks
1. Other names for property, plant, and equipment are __________, ___________, and
___________.
2. Land differs from other plant assets in that it does not ___________.
3. Cost of PPE comprises its ___________, including import duties and non-refundable
purchase taxes after deducting trade and cash discounts.
4. For lump-sum acquisition, the cost should be allocated to each item in the basket
purchase based on relative ____________.
5. For exchange transactions with no commercial substance, gains and losses would not be
_____________.
6. Costs incurred subsequent to acquisition that improve the asset’s life are ___________;
costs that merely maintain the assets are ____________.
7. For sale of assets, if the selling price of the asset given is greater than its carrying value,
there is a ______.
8. Cost minus salvage value is called the _________________.
9. The depreciation method that does not subtract salvage value is __________________.
10. The consumption of natural resources is referred to as _____________.
Exercise 6-2: True or False - Theory
_______ 1. All property, plant, and equipment must be depreciated for accounting
purposes.
_______ 2. When purchasing land, the costs of clearing, draining, filling, and grading
should be charged to a Land Improvements account.
_______ 3. When purchasing delivery equipment, sales taxes and motor vehicle licenses
should be charged to Delivery Equipment.
_______ 4. The cost of building includes payments to tenants to induce them to vacate the
building.
_______ 5. The book value or carrying value of PPE is always equal to its fair market
value.
1
_______ 6. The depreciable cost of a plant asset is its original cost minus residual value.
_______ 7. In calculating depreciation, both plant asset cost and useful life are based on
estimates.
_______ 8. Under the double-declining-balance method, the depreciation rate used each
year remains constant.
_______ 9. Additions and improvements to a plant asset that increase the asset's operating
efficiency, productive capacity, or expected useful life are generally expensed
in the period incurred.
_______ 10. Capital expenditures are costs that increase the company’s investment in
productive facilities.
Exercise 6 -3 – True or False – Theory
______ 1. Ordinary repairs should be recognized as revenue expenditures when incurred.
______ 2. If proceeds from the sale of a plant asset exceed its book value, a loss on
disposal occurs.
______ 3. When plant assets are acquired through issuance of equity securities, the cost
of the new asset is the book value of the old asset plus par value of the equity
instrument issued.
______ 4. An exchange of plant assets has commercial substance if the future cash flows
change as a result of the exchange.
______ 5. The balances of the major classes of plant assets and accumulated depreciation
by major classes should be disclosed in the statement of financial position or
notes.
______ 6. Depletion cost per unit is computed by dividing the total cost of a nature
resource by the estimated number of units in the resource.
______ 7. Natural resources are long-lived productive assets that are extracted in
operations and are replaceable by man.
______ 8. Wasting assets include fruit-bearing trees and underground deposits of oil, gas,
and minerals.
______ 9. All the exploration and evaluation costs associated with discovering new
reserves are always written off as incurred.
______ 10. Depletion expense is reported in the income statement as an operating expense.
2
Exercise 6-4: Multiple choice - Theory
1. The category of property, plant, and equipment includes
a. deposits on machinery not yet received
b. equipment held for resale
c. land held for development by a property developer
d. equipment held for administrative purposes
2. Which of the following is not a major characteristic of property, plant, and equipment?
a. possesses physical substance
b. acquired for resale
c. acquired for use
d. yields services over a number of years
3. The cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining, and clearing costs.
b. sewers and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
4. Which one of the following items is not considered part of the cost of a machine purchased
for business use?
a. nonrefundable sales tax
b. truck license
c. freight charges
d. cost of lettering on side of machine
5. The cost of a purchased building includes all of the following except
a. closing costs
b. real estate broker's commission
c. remodeling costs
d. all of these are included
6. Land improvements should be depreciated over the useful life of the
a. land
b. buildings on the land
c. land or land improvements, whichever is longer
d. land improvements
7. The carrying value of a PPE is equal to the
a. current cost to buy the asset
b. asset's cost less accumulated depreciation
c. asset's fair value less its historical cost
d. asset's fair value less depreciation expense
3
8. The declining-balance method of depreciation produces
a. a decreasing depreciation expense each period
b. an increasing depreciation expense each period
c. a declining percentage rate each period
d. a constant amount of depreciation expense each period
9. On the statement of financial position, natural resources may be described more specifically
as all of the following except
a. oil reserves
b. mineral deposits
c. land improvements
d. timberlands.
10. The method most commonly used to compute depletion is the
a. straight-line method
b. double-declining-balance method
c. units-of-activity method
d. effective interest method
Exercise 6-5: Matching of Costs
Indicate whether each of the following expenditures should be classified as land (L), land
improvements (LI), buildings (B), equipment (E), or none of these (X).
_____ 1. Parking lots
_____ 2. Electricity used by a machine
_____ 3. Excavation costs
_____ 4. Interest on building construction loan
_____ 5. Cost of trial runs for machinery
_____ 6. Drainage costs
_____ 7. Cost to install a machine
_____ 8. Fences
_____ 9. Unpaid (past) property taxes assumed
_____10. Cost of tearing down a building when land and a building on it are purchased
Exercise 6-6: Capitalizing vs. Expensing
Consider each of the items below. Place the proper letter in the blank space provided to indicate
the nature of the account or accounts to be increased when recording each transaction using the
preferred accounting treatment. Prepayments should be recorded in the statement of financial
position accounts. Disregard income tax considerations unless instructed otherwise.
4
a. asset(s) only
b. expense only
c. asset(s) and expense
____ 1. A motor engine in one of Speedy Company trucks was overhauled at a cost of
₱60,000. It is expected that this will extend the life of the truck for two years.
____ 2. Machinery which had originally cost ₱260,000 was relocated at a cost of
P30,000, including installation, to a branch where it would be used more.
____ 3. Mabuhay Corporation recently purchased land and two buildings. The ₱72,000
cost of demolishing the smaller building, which has an appraisal value of
₱356,200, is recorded.
____ 4. Maharlika Company exchanged its old machine with a carrying amount of
₱18,000 plus cash of ₱42,000 for a new one which had a fair value of ₱54,000.
____ 5. Paul Silas and Timothy Cruz, maintenance repair workers, spent three days
unloading and setting up a new ₱40,000 precision machine in the plant. The
wages earned by them for ₱3,300 in this three-day period are recorded.
____ 6. On 1 July, the Filipino Corporation installed a water tank system at a cost of
₱130,000.
____ 7. The tires on a company truck were replaced to meet annual registration
requirements.
____ 8. A real property tax is paid for land one year after acquisition.
____ 9. Replacement of a minor broken part on factory equipment
____ 10. Improvement to a machine that increased its fair value and its production capacity
by 25% without extending its useful life.
Exercise 6-7: Acquisition Costs
1. Lander Corporation purchased land adjacent to its plant to improve access for trucks making
deliveries. Expenditures incurred in purchasing the land were as follows: purchase price,
₱5,000,000; broker’s fees, ₱60,000; title search and other fees, ₱50,000; demolition of an old
building on the property, ₱15,700; grading, ₱91,200; digging foundation for the road,
₱120,000; laying and paving driveway, ₱75,000; lighting ₱57,500; signs, ₱15,000.
List the items and amounts that should be included in the Land account.
5
2. Belle Company purchased a factory machine for ₱550,000, less 2% cash discount. The
company paid ₱7,000 for insurance premiums while the machine was in transit. The
company installed the machine at a cost of ₱46,000 and incurred testing costs of ₱16,740to
place the machine to its intended use.
Prepare a schedule showing the total acquisition cost of the factory machine
3. Angel Company acquired a tract of land on which was located an office building, and a
warehouse for a lump sum of ₱13,750,000. The following data were taken relative to these
real properties:
Appraised Value
Land P6,900,000
Office building 4,500,000
Warehouse 3,600,000
TOTAL P15,000,000
Compute the allocated cost to land, office building and warehouse.
4. Alpha Company commenced operations on January 1 of the current year. During the year,
the company incurred the following:
Taxes in arrears assumed by Alpha ₱ 100,000
Payment for land 2,000,000
Architect fee 460,000
Payment to city hall for approval of building construction 240,000
Contract price for new building 9,500,000
Service equipment made as permanent part of building 2,000,000
Safety fence around construction site 70,000
Safety inspection on new building 60,000
Removal of safety fence after completion of new building 40,000
Cost of changes to plans and specifications due to inefficiencies 220,000
New permanent fence surrounding the new building 90,000
Driveways, parking bays, and safety lighting 600,000
Saving on construction 300,000
Determine the cost of the land, building and land improvements.
Exercise 6-8: Depreciation methods.
1. On January 2, 2020, a new machine was acquired for ₱400,000. The machine has estimated
salvage value of ₱40,000 and estimated useful life of 10 years. The machine is expected to
produce a total of 800,000 units and working hours of 50,000 hours throughout its useful life.
6
The company used the machinery for 3,000 hours in 2020 and 5,000 hours in 2021. The
machinery produced 50,000 units in 2020 and 80,000 units in 2021.
Required: Compute the depreciation for 2020 and 2021 using each method given below:
a. straight-line
b. working hours
c. output method
2. On July 1, 2020, Dae Su Company purchased for ₱200,000 snow-making equipment having
an estimated useful life of 5 years with an estimated residual value of ₱20,000.
Required:
Complete the form below by determining the depreciation expense and year-end carrying
amount of equipment for the year ended June 30, 2021 and 2022 using the
1. sum-of-the-years'-digits method.
2. double-declining-balance method
Sum-of-the-Years'-Digits Method
2021 2022
Equipment ₱ 200,000 ₱ 200,000
Less: Accumulated Depreciation
Carrying Amount
Depreciation Expense for the Year
Double-declining-balance Method
2021 2022
Equipment ₱ 200,000 ₱ 200,000
Less: Accumulated Depreciation
Carrying Amount
Depreciation Expense for the Year
Exercise 6-9: Asset depreciation and disposition.
Answer each of the following questions.
1. A plant asset purchased for ₱180,000 has an estimated life of 10 years and a residual value of
₱14,000. Depreciation for the second year of use, determined by the diminishing-balance
method at twice the straight-line rate is ₱_____________.
7
2. A plant asset purchased for ₱30,000 at the beginning of the year has an estimated life of 5
years and a residual value of ₱3,000. Depreciation for the second year, determined by the
sum-of-the-years'-digits method is ₱______________.
3. An item of equipment with a cost of ₱43,000 and accumulated depreciation of ₱12,000, is
sold for ₱28,000. The gain or loss recognized on the disposal (indicate by "G" or "L" is
₱______________.
4. An item of plant asset with a cost of ₱70,000, estimated life of 5 years, and residual value of
₱10,000, is depreciated by the straight-line method. This asset is sold for ₱48,000 at the end
of the second year of use. The gain or loss on the disposal (indicate by "G" or "L") is
₱___________.
5. Oslo Corporation has a vehicle that cost ₱850,000 on October 1, 2015. This old vehicle had
an estimated life of ten years and a residual value of ₱50,000. On June 30, 2020, the old
vehicle is traded in for a new vehicle. Oslo was offered a trade-in of ₱500,000 on the old
vehicle and the cash payment was ₱90,000 to acquire the new vehicle. The straight-line
depreciation method is used. The amount of gain or loss to be recognized by Oslo
Corporation on the trade-in of the old vehicle is ₱______________
Exercise 6-10: Depletion
On January 1, 2020, Rezone Enterprises purchased natural resources for ₱12,000,000 with
residual value of P1,200,000. The company expects the resources to produce 1,200,000 units of
product.
Required:
1. What is the depletion cost per unit?
2. If the company mined and sold 20,000 units in January, what is depletion expense for the
month?
