ACC-4

Chapter 23 Answer
Property, Plant and Equipment
PROBLEM 23-1
Erica Company had the following property acquisitions during the current year:
1.Acquired a tract of land in exchange for 50,000 ordinary shares with P100 par value and market
price of P120 per share on the date of acquisition. The last property tax bill indicated assessed
value of P4,500,000 for the land.
2. Received land from a major shareholder as an inducement to locate a plant in the city. No
payment was required but the entity paid P50,000 for legal expenses for land transfer. The land is
fairly valued at P1,000,000.
3. Purchased for P5,500,000, including appraiser fee of P100,000 a warehouse building and the
land on which it is located The land had an appraised value of P2,000,000 and original cost of
P1,400,000. The building had an appraised value of P3,000,000 and original cost of P2,500,000.
4.Purchased an office building and the land on which it is located for P7,500,000 cash and
assumed an existing P2,500,000 mortgage. For realty tax purposes, the property is assessed at
P9,600,000, 60% of which is allocated to building.

Required: Prepare journal entries to record the transactions for the current year.
 1.Land(50,000 x 120) 6,000,000
Share Capital(50,000 x 100) 5,000,000
Share Premium 1,000,000

Problem 23-1 2.Land 1,000,000

Journal Entry Donated Capital 1,000,000

Donated Capital 50,000

Cash 50,000
3. Land (2/5 x 5,500,000) 2,200,000
Building (3/5 x 5,500,000) 3,300,000
Cash 5,500,000

4. Land(40% x 10,000,000) 4,000,000

Building(60% x 10,000,000) 6,000,000
Cash 7,500,000
Mortgage Payable 2,500,000
 PROBLEM 23-2
Credulous Company purchased equipment on January 1, 2020 under the
following terms:

a. P200,000 downpayment
b. Five annual payments of P100,000, the first installment note to be paid on
December 31, 2020.

The same equipment was available at a cash price of P580,000.

Required:
Prepare journal entries for 2020 and 2021.
 2020
Jan. 1 Equipment 580,000
Discount on Notes Payable 120,000
Cash 200,000
Notes Payable 500,000
Problem 23-2
Journal Entry Dec. 31 Notes Payable
Cash
100,000
100,000

Interest Expense 40,000

Discount on Notes Payable 40,000
 2020
Dec. 31 Notes Payable 100,000
Cash 100,000

Interest Expense 32,000

Discount on Notes Payable 32,000
Notes Payable Fraction Interest
Expense
First Year 500,000 5/15 40,000
Second Year 400,000 4/15 32,000
Third Year 300,000 3/15 24,000
Fourth Year 200,000 2/15 16,000
Fifth Year 100,000 1/15 8,000
1,500,000
Problem 23-4
Anson Company had the following machinery acquisitions during the year:
1. Acquired a machine with an invoice price of P3,000,000 subject to a cash discount of 10%
which was not taken. The entity incurred cost of P50,000 in removing the old machine prior
to the installation of the new one. Machine supplies were acquired at a cost of P150,000.
2. During the early part of current year, the entity purchased a machine for P500,000 down and
four monthly installments of P1,250,000. The cash price of the machine was P4,700,000.
3. At the beginning of current year, the entity purchased a machine for P2,000,000 in exchange
for a noninterest bearing note requiring four payments of P500,000. The first payment was
made at the end of current year. The implicit rate of interest for this note at date of issuance
was 10%. The present value of an ordinary annuity of 1 at 10% is 3.17 for four periods. The
present value of an annuity of 1 in advance at 10% is 3.49 for four periods.
4. At the beginning of current year, the entity acquired a machine by issuing a four-year,
noninterest-bearing note for P2,000,000 The entity has an implicit 10% interest for the type
of note. The present value of 1 at 10% for 4 years is 0.68.
1. Acquisition (GROSS)
Machinery 3,000,000
Problem 23-4
Accounts Payable 3,000,000
Journal Entry
Payment
Accounts Payable 3,000,000
Purchase discount (3,000,000 x 10%) 300,000
Cash 3,000,000
Machinery 300,000
Loss on retirement of old machine 50,000
Spare Parts Inventory 150,000
Cash 200,000

2. Acquisition(NET)
Machinery 4,700,000
Interest Expense 800,000
Cash 500,000
 Problem 23-4
Journal Entry
3. Acquisition
Machinery (500,000 x 3.17) 1,585,000
Discount on Notes Payable 415,000
Notes Payable 2,000,000

Payment- End of the Year

Notes Payable 500,000
Cash 500,000
Interest Expense (1,585,000 x 10%) 158,500
Discount on Notes Payable 158,500
 Problem 23-4
Journal Entry

4. Acquisition
Machinery (2,000,000 x 0.68) 1,360,000
Discount on Notes Payable 640,000
Notes Payable 2,000,000

Interest
Interest Expense (10% x 1,360,000) 136,000
Discount on Notes Payable 136,000
PROBLEM 23-5
1. Nutty Company made the following individual purchases:
Land and building 6,000,000
Machinery and office equipment 1,800,000
Delivery equipment 500,000
An appraisal disclosed the following fair value:
Land 1,000,000
Building 3,000,000
Machinery 800,000
Office equipment 400,000
Delivery equipment 350,000
2. Nutty Company acquired the assets of another entity with the following fair value:
Land 1,000,000
Building 5,000,000
Problem 23-5
The entity issued 60,000 shares with P100 par value in exchange. The share had a quoted
price of P150 on the date of purchase of the property.

3. Received a parcel of land located in Davao City from a philanthropist as an inducement to

locate a plant in the city. The land has a fair value of P1,500,000.

4. The entity paid cash for machinery, P900,000 subject to 2% cash discount, and freight on
machinery, P35,000.

5. The entity acquired furniture and fixtures by issuing a P400,000 two-year noninterest-bearing
note. In similar transactions, the entity has paid 12% interest. The present value of 1 at 12% for
2 years is .797, and the present value of an annuity of 1 at 12% for 2 years is 1.69. Required:
Prepare journal entries to record the transactions.
Problem 23-5
Journal Entry #1

Land (1/4 x 6,000,000) 1,500,000

Building (3/4 x 6,000,000) 4,500,000

Machinery(8/12 x 1,800,000) 1,200,000

Office Equipment (4/12 x 1,800,000) 600,000

Delivery Equipment 500,000

Cash 8,300,000
Problem 23-5
Journal Entry #2

Land 1,000,000

Building 5,000,000

Machinery 2,000,000

Share Capital 6,000,000

Share Premium 2,000,000

Problem 23-5
Journal Entry #3
Land 1,500,000

Income from Donation 1,500,000

Problem 23-5
Journal Entry #4

Machinery (900,000 x 98%) 882,000

Freight In 35,000

Cash 917 ,000

Problem 23-5
Journal Entry #5

Furniture and Fixtures (400,000 x .797) 318,800

Discount on note payable 81,200

Note Payable 400,000

Problem 23-7
Journal Entry
(Exchange with commercial substance)

• Smile
Equipment-new 600,000
Accumulated Depreciation 2,000,000
Equipment-old 2,400,000
Cash 100,000
Gain on Exchange 100,000
• Frown
Equipment-new 500,000
Cash 100,000
Accumulated Depreciation 1,750,000
Equipment-old 2,200,000
Gain on Exchange 150,000
PROBLEM 23-8
Lecherous Company traded a used equipment for a newer model with a dealer.
Old equipment:
Original cost 1,000,000
Accumulated depreciation 600,000
Fair value - - unknown

New equipment:
List price 1,600,000
Cash price without trade in 1,400,000
Cash payment with trade in 980,000

Required: Prepare journal entry to record the exchange transaction.

 Problem 23-8
Journal Entry
Equipment – new 1,400,000
Accumulated Depreciation 600,000
Equipment – old 1,000,000
Cash 980,000
Gain in exchange 20,000
Problem 23-10 (IAA)
Gratitude Company provided the following information in relation to the construction of a
building during the year

The following assumptions are made:

1. No overhead is to be assigned to the building.
2. Normal production of finished goods is 180,000 units. Because of the construction of the
building, finished goods production totaled only 135,000 units. The building is to he charged
with the overhead which would have been charged to the 45,000 units which were not
produced.
3. Overhead is to be apportioned in the ratio of direct labor
Required:
Problem 23-10 (IAA)
1 Total Finished Goods Building

Direct labor 6,000,000 4,200,000 1,800,000

Materials 7,000,000 3,000,000 4,000,000

Overhead 2,000,000 2,000,000 -

15,000,000 9,200,000 5,800,000

Problem 23-10 (IAA)
2 Total Finished Goods Building

Direct labor 6,000,000 4,200,000 1,800,000

Materials 7,000,000 3,000,000 4,000,000

Overhead 2,000,000 -

135/180 x 2,000,000 1,500,000

45/180 x 2,000,000 500,000
15,000,000 8,700,000 6,300,000
Problem 23-10 (IAA)
3 Total Finished Goods Building

Direct labor 6,000,000 4,200,000 1,800,000

Materials 7,000,000 3,000,000 4,000,000

Overhead 2,000,000 -

42/60 x 2,000,000 1,400,000

18/60 x 2,000,000 600,000
15,000,000 8,600,000 6,400,000
PROBLEM 23-11 (IAA)
Acrophobia Company summarized the following manufacturing and construction activities for
2020:

Finished Goods Machinery

Materials 3,000,000 500,000
Direct labor 4,000,000 1,000,000

Overhead for the prior year was 75% of the direct labor cost Overhead in 2020 related to both
product manufacture and construction activities amounted to P3,600,000.

Required:
a. Calculate the cost of the machinery, assuming that manufacturing activities are to be
charged with overhead at the rate experienced in the prior year.
PROBLEM 23-11 (IAA)
Acrophobia Company summarized the following manufacturing and construction
activities for 2020:

a. Calculate the cost of the machinery, assuming that manufacturing activities are to
be charged with overhead at the rate experienced in the prior year.
Materials 500,000
Direct Labor 1,000,000
Overhead 600,000
Cost of Machinery 2,100,000

Overhead 3,600,000
Charged to finished goods(75% x 4,000,000) 3,000,000
Charged to machinery 600,000
PROBLEM 23-11 (IAA)
Acrophobia Company summarized the following manufacturing and construction
activities for 2020:

b. Calculate the cost of the machinery if manufacturing and construction activities are
to be charged with overhead at the same rate.

Materials 500,000
Direct Labor 1,000,000
Overhead (1/5x 3,600,000) 720,000
Cost of Machinery 2,200,000

Direct Labor:
Finished Goods 4,000,000(4/5)
Machinery 1,000,000(1/5)
5,000,000
 PROBLEM 23-23 Multiple choice (PAS 16)
1. Which is not a characteristic of property, plant and equipment?
a. The property, plant and equipment are tangible assets.
b. The property, plant and equipment are used in business.
c. The property, plant and equipment are expected to be used over a period of more than one year.
d. The property, plant and equipment are subject to depreciation.
2. What valuation model should an entity use to measure property, plant and equipment?
a. The revaluation model or the fair value model
b. The cost model or the revaluation model
c. The cost model or the fair value through OCI
d. The cost model or the fair value model
3. The cost of property, plant and equipment comprises all of the following, except
a. Purchase price
b. Import duties and nonrefundable purchase taxes
c. Any cost directly attributable in bringing the asset to the location and condition for the intended use d.
Initial estimate of the cost of dismantling the asset for which the entity has no present obligation.
 PROBLEM 23-23 Multiple choice (PAS 16)
4. Costs directly attributable to the asset include all, except
a. Initial operating loss
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly cost
5. Which cost should be expensed immediately?
a. Cost of opening a new facility
b. Cost of introducing a new product or service, including cost of advertising and promotional activities c.
Cost of conducting business in a new location
d. All of these are expensed immediately
 PROBLEM 23-24 Multiple choice (IAA)
1. A nonmonetary exchange is recognized at fair value of the asset exchanged unless
a. Exchange has commercial substance
b. Fair value is not determinable
c. The assets are similar in nature
d. The assets are dissimilar
2. In an exchange with commercial substance commercial
a. Gain or loss is recognized entirely.
b. Gain or loss is not recognized.
c. Only gain should be recognized.
d. Only loss should be recognized.
3. The cost of property, plant and equipment acquired in an exchange is measured at the
a. Fair value of the asset given plus cash payment.
b. Fair value of the asset received plus cash payment.
c. Carrying amount of the asset given plus cash payment.
d. Carrying amount of the asset received plus the cash payment.
 PROBLEM 23-24 Multiple choice (IAA)
4. Which exchange has commercial substance?
a. Exchange of assets with no difference in future cash flows.
b. Exchange by entities in the same line of business.
c. Exchange of assets with difference in future cash flows.
d. Exchange of assets that causes the entities to remain in essentially the same economic position.
5. For a nonmonetary exchange, the configuration of cash flows includes which of the following?
a. The implicit rate, maturity date of loan and amount of loan
b. The risk, timing and amount of cash flows of the assets
c. The entity-specific value of the asset
d. The estimated present value of the assets exchanged
 PROBLEM 23-25 Multiple choice (AICPA Adapted)
1. When property is acquired by issuing equity shares, which of the following is the best basis for establishing the
historical cost of the acquired asset?
a. Historical cost of the asset to the seller
b. Historical cost of a similar asset
c. Fair value of the asset received
d. Fair value of shares issued

2. When a plant asset is acquired by deferred payment, which condition generally does not indicate the need to
consider the imputation of interest?
a. The interest rate stated on the deferred obligation is significantly different from market interest
rate.
b. The cash price of the plant asset is significantly different from the deferred obligation.
c. The instrument representing the deferred obligation is noninterest bearing.
d. The face amount of the deferred obligation is equal to the fair value of the plant asset exchanged
 PROBLEM 23-25 Multiple choice (AICPA Adapted)
3. If the present value of a note issued in exchange for a plant asset is less than the face amount, the difference is
a. Included in the cost of the asset
b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance

4. An entity purchased a machinery that it does not have to pay until after three years. The total payment on
maturity will include both principal and interest. The cost of the machine would be the total payment multiplied by
what time value of money concept?
a. Present value of annuity of 1
b. Present value of 1
c. Future amount of annuity of 1
d. Future amount of 1