1.

Data related to the asset acquired by Mahogany Manufacturing Company are as follows:
a. Asset A was purchased at a list price of P10,000,000; terms 3/10,n/30. The asset invoice
was paid after the discount period. Transportation charges were P25,000; installation
costs were P10,000; and the cost of a trial runs was P10,500. Normal repairs and
maintenance for the first year was P10,000.

b. Asset B could be purchased for five annual payments of P170,000 or P800,000 in cash.
Mahogany elected to purchase Asset B under the installment plan. Other related
acquisition costs totaled P10,000.

c. On March 1, 2020, Abacus Company offered to sell land to Mahogany for P850,000, the
offer was rejected. On April 25, Mahogany issued 25,000 shares of ordinary shares in
exchange for land. The par value of the stock is P20 per share; the market value was P40
at the time of purchase. Mahogany management was confident the land would be worth
at least P900,000.
1st priority FMV of ASSET RECEIVED
2nd Priority FMV of shares issued Whichever is clearly
rd
3 Priority Par value of shares issued determinable.

d. The company purchased equipment under a deferred payment contract-P500,000 down

payment and 30 semiannual payments of P60,000 (Assume a 12% interest rate).

e. One of the majority stockholder donated a piece of land originally purchased for
P6,000,000 and with current fair market value of P7,500,000.

f. In January 1, 2020, Mahogany Company entered into a contract to acquire a new machine
for its factory. The machine, which has a cash price of P860,000 was paid for as follows:
Down payment P200,000
Notes payable (payable in four equal annual
Payment beginning 1/1/20) 480,000
2,400 shares of Mahogany Co. (P100 par preference
share with an agreed value of P125/share) 300,000

g. Assume the same information as in (f) above, but the cash price of P860,000 is not
available. Prevailing interest rate for similar obligations is 10%. Present value of an
ordinary annuity of P1 at 10% for four periods is 3.1699.

h. The Mahogany Company paid P24,000,000 to acquire land, buildings and equipment. At
the time of acquisition, the company paid P240,000 for an appraisal which revealed the
following values: Land – P8,000,000; Buildings – P10,000,000 and equipment-
P2,000,000.

Instruction: Determine the cost of the above independent acquisitions.

Problem 1

a. List price (P10,000,000 x 97%) P9,700,000

 Transportation charges 25,000
Installation costs 10,000
Trial run costs 10,500
Total costs P9,745,500
========

b. Cash price P 800,000

Other related acquisition costs 10,000
Total costs P 810,000
========

c. Ordinary shares issued 25,0000

Multiply by P 40
Total costs P1,000,000
=======

d. Down payment P 500,000

PV of semi-annual payment (P60,000 x 13.765) 825,900
Total costs P1,325,900
========

e. Donated asset should be recorded at its FMV P7,500,000

========

f. Asset acquired on a deferred payment plan should be recorded at its cash price if given. P860,000

g. Asset acquired on a deferred payment plant should be recorded at its cash price if given, if not PV of
annual payment
Down payment P200,000
PV of annual payment (P120,000 x 3.1699) 380,388
Ordinary shares issued 300,000
Total costs P880,388
======

h. Land - P 8,000,000/20,000,000 x P24,240,000= P 9,696,000

Building 10,000,000/20,000,000 x P24,240,000= 12,120,000
Equipment 2,000,000/20,000,000 x P24,240,000= 2,424,000
Total costs P20,000,000 P24,240,000
========= ========

2. On May 4, 2020 the majority stockholder purchased a tract of land as a factory site for
P12,000,000. An existing building on the property was demolished, and construction was
begun on a new factory building in July 2012. Cost data is shown below:

New building construction cost P20,000,000

Cost of demolition 400,000
Proceeds from sale of salvage materials 30,000
 Title insurance and attorney’s fees for purchase of land 150,000

Instruction: Compute the capitalized cost of (a) land, (b) completed building
Problem 2

Land Building
Purchase price of land ₱12,000,000
New building construction cost ₱20,000,000
Cost of demolition 400,000
Title insurance fees 150,000
Proceeds from salvage materials ( 30,000) . .
Total costs ₱P12,520,000 ₱20,000,000
========= =========
PIC Solution
Particulars Land Building
Purchase price of land ₱12 000 000
New building construction cost ₱20 000 000
Cost of demolition 400 000
Title insurance fees 150 000
Proceeds from salvage materials (30 000)
Total costs ₱12 150 000 ₱20 370 000

3. Renz Company acquired land, building and equipment from a bankrupt company at a lump
sum price of P6,600,000. At the time of acquisition, Renz paid, P400,000 to have the assets
appraised. The appraisal disclosed the following values: Land-P2,400,000; Building –
P1,600,000; Equipment – P1,000,000.

Instruction: Compute the cost assigned to land, building and equipment.

Problem 3

Land P2,400,000/5,000,000 x P7,000,000 = P3,360,000

Building 1,600,000/5,000,000 x 7,000,000 = 2,240,000
Equipment 1,000,000/5,000,000 x 7,000,000 = 1,400,000
P5,000,000 P7,000,000
======== ========
4. Two different companies, Keanna and Rustom, each own an asset, and they have agreed to an
exchange in which no cash involved. The following information for the two assets is
available:
 Keanna Rustom
Cost P2,000,000 P1,300,000
Accumulated depreciation 1,300,000 900,000
Fair value 800,000 800,000

Instruction: Prepare journal entries for Keanna and Rustom to record the exchange.

Problem 4
KEANNA RUSTOM
Asset (new) 800,000 (Dr) 800,000 (Dr)
Acc. Depre 1,300,000 (Dr) 900,000 (Dr)
Asset(old) 2,000,000 (Cr) 1,300,000 (Cr)
Gain 100,000 (Cr) 400,000 (Cr)

5. During 2020 and 2021 Marvick Corporation build a building for its own use. The
expenditures on the construction were as follows:

January 1, 2020 P1,100,000

May 1, 2020 480,000
July 1, 2020 640,000
September 1, 2020 360,000
February 1, 2021 540,000

The construction was completed on March 31, 2021. Marvick obtained a construction loan
from its bank for P3,200,000 on January 1, 2019. This loan had a 10% annual rate.
Marvick’s only other outstanding debt during the period January 1, 2020 to March 31,2021,
consisted of two long-term notes. This note has a principal amounts of P3,000,000 and
P6,000,000 and annual interest rate of 11% and 12% respectively.

Instructions: Compute for the average accumulated expenditures, interest to be capitalized

and total cost of the asset in 2020 and 2021.

Problem 5
2020
Average Accumulated Expenditures
P1,100,000 x 12/12 = P1,100,000
480,000 x 8/12 = 320,000
640,000 x 6/12 = 320,000
360,000 x 4/12 = 120,000
P1,860,000
========

Interest to be capitalized
Since Specific borrowing is higher than Average Accumulated Expenditures it is assumed that asset is
finance by specific borrowing. Interest to be capitalized should be the interest on specific borrowing
(P3,200,000 x 10%) = P320,000
Total cost of the asset
Actual expenditures P2,580,000
Add: Interest 320,000
Total costs P2,900,000
========

2021
Average Accumulated Expenditures
P2,900,000 x 3/3 P2,900,000
540,000 x 2/3 360,000
P3,260,000
========
Interest to be capitalized
Specific borrowings (P3,200,000 x 10%) x 3/12 P 80,000
General borrowings (P60,000 x 11.67%*) x 3/12 1,751
P 81,751
=========
 P3,000,000 x 11% = P 330,000
 6,000,000 x 12% = 720,000
P 9,000,000 P1,050,000
======== ========
P1,050,000/6,000,000 = 11.67%

Total cost of the asset

Actual expenditures P3,440,000
Interest 81,751
Total costs P 3,521,751
=========

6. On December 31, 2019, Joross Company borrowed P3,000,000 and issued a 12%, 3-year note
to finance the construction of a new building. In 2020, the company made the following
expenditures related to this building.

January 1 P 360,000
June 1 600,000
July 1 1,500,000
December 1 1,500,000
Other debt outstanding and other information follow:
10-year,13% bonds, dated December 31, 2019,
interest payable annually P4,000,000
6-year, 10% note, dated December 31, 2019
interest payable annually 1,600,000
Interest revenue earned in 2020 from temporary
investments of the specific borrowing 40,000

Instructions:
 1. Determine the amount of interest to be capitalized in 2020.
2. If the specific borrowing amounted to P1,200,000 only (instead of P3,000,000), how
much is the capitalized interest in 2020?
Problem 6
a. Average accumulated expenditures
P 360,000 x 12/12 P 360,000
600,000 x 7/12 350,000
1,500,000 x 6/12 750,000
1,500,000 x 1/12 125,000
P1,585,000
========

Specific borrowings is higher than WAE, interest to be capitalized should be the interest on specific
borrowing (P3,000,000 x 12%) – P40,000 = P320,000

b. On specific borrowings (P1,200,000 x 12%) – P40,000= P104,000

On General borrowings (P385,000 x 12.14%*) 46,750
Total P150,750
=======
* P4,000,000 x 13%= P520,000
1,600,000 x 10% = 160,000
P5,600,000 P680,000
======== =======
P680,000/5,600,000 = 12.14%

7. The company purchased an office building for P3,000,000 with estimated useful life of 10
years with no salvage value on January 1, 2020
Instructions: Compute the depreciation for year 1 and 2 under each of the following
methods:
a. straight-line method
b. sum-of-the-years’-digit-method
c. double declining balance method

Problem 7
Year 1 Year 2
a. straight-line P300,000 P300,000
b. sum-of-the-years’ digits 545,455 490,910 10/55*3M = 545 455 9/55*3M = 490 910
c. double-declining 600,000 480,000 1/10*2 *3M = 600 20% (3M-600T) = 480

8. On January 1, 2016, Canberra Company acquired an equipment for P2,160,000. The

equipment is expected to have a five year life. Straight-line depreciation is used. On January
1, 2018, the asset is appraised as having a sound value (depreciated replacement cost) of
P1,944,000. On January 1, 2020, the asset is appraised at a sound value of P324,000.

Instruction: Prepare entries to record the above transactions.

 AD @ AV = AV – SV
3/5 = CP = 3 240 – 1 944
AV = 1 944 000*5/3 = 3 240 000 = 1 296
SV = AV – AD@AV

648*5/3 = 1 080

3240/5*2 = 1 296
432 * 2 = 864
AD Adjt = 432

Transaction DR CR
Equipment 1 080 000
Accumulated depreciation 432 000
Revaluation surplus {1 944 – (2 160 *3/5)} 648 000

Problem 8

January 1, 2016
Equipment 2,160,000
Cash 2,160,000

December 31, 2016

Depreciation expense 432,000
Accumulated depreciation 432,000

December 31, 2017

Depreciation expense 432,000
Accumulated depreciation 432,000

January 1, 2018
Equipment 1,080,000
Accumulated depreciation 432,000
Revaluation surplus 648,000

At cost At appraised Difference

Equipment P2,160,000 P3,240,000 P1,080,000
Accumulated depr 864,000 1,296,000 432,000
BV/SV P1,296,000 P1,944,000 P 648,000
======== ======== ========

December 31, 2018

 Depreciation expense (3 240/5) 648,000
Accumulated depreciation 648,000

Revaluation surplus (648 – 432) 216,000

Retained earnings 216,000

December 31, 2019

Depreciation expense 648,000
Accumulated depreciation 648,000

Revaluation surplus 216,000

Retained earnings 216,000

January 1, 2020
Accumulated depreciation 1,296,000
Revaluation surplus 216,000
Impairment loss 108,000
Asset 1,620,000

At cost At appraised Difference

Equipment P3,240,000 P 1,620,000 P1,620,000
Acc. Depreciation 2,592,000 1,296,000 1,296,000
BV/SV P 648,000 P 324,000 P 324,000
======== ========= =======