MACHINERY: Capital and Revenue Cash proceeds from sale of the old machine 100,000

replaced
Expenditure
General overhaul and repairs to recondition 330,000
Source: Intermediate Accounting 1 by Valix (2021 ed) machine prior to use
Cost of spare parts to cover breakdowns 200,000
PROBLEM 27-1 Cost of installation 180,000
Cost of testing machine prior to use 150,000
Wisdom Company is installing a new equipment at the production Cost of hauling machine from vendor to entity 40,000
facility and incurred the following costs: premises
Cost of repairing damage to machine caused 50,000
Cost of equipment per supplier’s invoice 2,500,000 when machine was dropped during installation
Initial delivery and handling cost 200,000 Repairs incurred during the first year of operations 200,000
Cost of sire preparation 600,000 Safety device added to the machine 300,000
Consultants used for advice on the acquisition of 700,000 Cost of training workers to operate the machine 250,000
equipment
Interest charges paid to supplier for deferred credit 200,000 What total amount should be capitalized as cost of the second hand
Estimated dismantling cost to be incurred as 300,000
machine?
required by contract
Operating loss before commercial production 400,000 A 5,500,000
B 5,750,000
What total amount should be recognized as cost of the equipment? C 5,000,000
D 5,200,000
A 4,300,000
B 4,000,000
C 4,200,000 PROBLEM 27-4
D 4,500,000
Negros Company acquired a new machinery.

PROBLEM 27-2 Invoice price of the machinery 1,400,000

Cash discount available but not taken on purchase 20,000
Siargao Company acquired a machine and incurred the following Freight paid on the new machinery 40,000
costs: Cost of removing the old machinery 15,000
Installation cost of the new machinery 50,000
Cash paid for machine, including VAT of P96,000 896,000 Testing cost before the machinery was put into 30,000
Cost of transporting machine 30,000 regular operation including P10,000 in wages of
Labor cost of installation by expert fitter 50,000 the regular machinery operator
Labor cost of testing machine 40,000 Loss on premature retirement of the old machinery 5,000
Insurance cost for the current year 15,000 Estimated cost of manufacturing similar machinery 1,300,000
Cost of training for personnel who will use the 25,000 including overhead
machine
Cost of safety rails and platform surrounding 60,000 What amount should be capitalized as cost of new machinery?
machine
Cost of water device to keep machine cool 80,000 A 1,500,000
Cost of adjustment to machine to make it operate 75,000 B 1,490,000
more efficiently C 1,300,000
Estimated dismantling cost to be incurred as 65,000 D 1,520,000
required by contract

What total amount should be capitalized as cost of the machine? PROBLEM 27-5

A 1,135,000 Newcombe Company uses many kinds of machines in operations.

B 1,231,000 The entity acquires some machines from others and constructs some
C 1,200,000 machines itself. The following information pertains to a machine
D 1,150,000 constructed by the entity:

Cost of material to construct 700,000

PROBLEM 27-3 Labor cost 430,000
Allocated overhead cost 220,000
During the current year, Christian Company purchased a second- Allocated interest cost of financing machine 100,000
hand machine at a price of P5,000,000. Cost of installation 120,000
Insurance for one year 20,000
A cash payment of P1,000,000 was made and a two-year,
Profit caved by self-construction 150,000
noninterest bearing note was issued for the balance of P4,000,000 Safety inspection cost prior to use. 40,000
Recent transactions involving similar machinery indicate that the
used machine has a fair value of P4,500,000. A new machine would What total amount should be capitalized as cost of the machine?
cost P6,500,000. A 1,610,000
B 1,510,000
The following costs were incurred during the year:
C 1,630,000
D 1,460,000

PROBLEM 27-6
Cost of removing old machine that is replaced 350,000
Karla Company acquired a new processing machine at the beginning During the current year, Bell Company incurred the following costs
of the current year. for a printing press:

Invoice cost -terms 5/10, n/30 1,600,000 Purchase of collating and stapling attachment 840,000
Cost of transportation 50,000 Installation of attachment 360,000
Cost of installation 50,000 Replacement parts for overhaul of press 260,000
Payment for strengthening the floor to support the 150,000 Labor and overhead in connection with overhaul 140,000
weight of the new machine
The overhaul resulted in a significant increase in production. Neither
The chief engineer spent two-thirds of his time during trial run of the the attachment nor the overhaul increased the estimated useful life of
new machine. The monthly salary is P60,000. the press.
During the year, the entity was granted a cash allowance of What total amount of the expenditures should be capitalized?
P100,000 by the supplier because the machine proved to be of less
than standard performance capability. A 1,600,000
B 1,200,000
The operator of the old machine who was laid off due to the C 840,000
acquisition of the new machine was paid a gratuity of P30,000. D 0

What amount should be capitalized cost of the new machine?

PROBLEM 27-10
A 1,560,000
B 1,640,000 Prudent Company incurred the following expenditures:
C 1,710,000
D 1,590,000 Painting partitions in a large room recently divided into 50,000
four sections
Labor cost of tearing down a wall to permit extension 200,000
PROBLEM 27-7 of an assembly line
Major replacement of the motor of the machine. This 500,000
During the current year, King Company made the following replacement was anticipated when the machine
expenditures relating to the plant building: was purchased.
Dust filters in the interior of the factory were replaced. 800,000
Continuing and frequent repairs 400,000 The new filters are expected to reduce employee
Repainting of the plant building 100,000 health hazards.
Major improvements to the electrical wiring system 300,000
Partial replacement of roof tiles 150,000 What total amount of expenditures should be capitalized?
What total amount should be charged to repair and maintenance A 1,550,000
expense in the current year? B 1,350,000
C 1,300,000
A 950,000 D 1,100,000
B 800,000
C 650,000
D 550,000 PROBLEM 27-11

Rona Company provided the following charges to the repair and

PROBLEM 27-8 maintenance account:

During the current year, Yvo Company installed a production Service contract on office equipment 100,000
assembly line to manufacture furniture. Initial design fee for proposed extension of office 150,000
building
In the current year, the entity purchased a new machine and New condenser for central air conditioning unit 10,000
improved the assembly line to install the machine. Purchase of executive chairs and desks 200,000
Purchase of storm windows and screens and their 500,000
The improvement did not increase the estimated useful life of the installation on all office windows
assembly line, but it did result in a significant increase in production. Sealing of roof leaks in production area 80,000
Replacement of door to production area 50,000
The following expenditures were incurred in connection with the Installation of automatic door-opening system 200,000
project: Overhead crane for assembly department to speed up 350,000
Machine 750,000 production
Labor to install machine 140,000 Replacement of broken gear on machine 60,000
Parts added in improving the assembly line to provide 400,000
future benefits What total amount of expenditures should be capitalized?
Labor and overhead to improve the assembly line 180,000 A 1,400,000
B 1,200,000
What total amount of the expenditures should be capitalized? C 1,500,000
A 1,470,000 D 1,410,000
B 1,070,000
C 890,000
D 750,000

PROBLEM 27-9
PROBLEM 27-12 6. Machinery has a useful life of 10 year and was used for
production beginning September 1, 2021.
Fox Company made the following expenditures:
Required:
Renovation of a group of machines to secure 500,000
significant increase in production over the a. Determine the cost of the machinery.
remaining five-year useful life b. Prepare journal entries to adjust the machinery account on
Continuing, frequent, and low cost repairs 350,000 December 31, 2021.
Replacement of a broken gear on a machine 50,000

What amount should be charged to repair and maintenance

expense? PROBLEM 27-15

A 350,000 Showroom Company used straight line depreciation. On January 1,

B 400,000 2021, the entity purchased a new machine for P5,000,000 cash. The
C 850,000 useful life of the machine was 10 years with a P500,000 residual
D 900,000 value.

On January 1, 2023, the entity decided that the original estimate of

PROBLEM 27-13 useful life should be reduced by two years. The residual value did not
change.
On July 1, Rudd Company had a delivery van which was destroyed
in an accident. On that date, the carrying amount of the can was On January 1, 2024, the entity added an automatic guide and safety
P500,000. shield to the machine at a cost of P300,000 cash.

On July 15, the entity received and recorded a P140,000 invoice for a This addition did not change the useful life and residual value but it
new engine installed in the van in May, and another P100,000 resulted in significant increase in production.
invoice for various repairs.
Required:
In August, the entity received P700,000 under an insurance policy on
Prepare journal entries to record purchase of machine on January 1,
the van, which it plans to use to replace the van.
2021, depreciation for 2021, depreciation for 2023, cost of addition
What amount should be reported as gain on disposal of the van in on January 1, 2024, and depreciation for 2024.
the income statement?
A 200,000
B 700,000 PROBLEM 27-16
C 60,000 Mundane Company purchased for cash a new building on January 1,
D 0
2021 for P10,500,000. The building had an estimated useful life of 50
years and residual value of P500,000. Depreciation was computed
PROBLEM 27-14 on a straight line basis.

On December 31, 2021, Scarce Company showed the following On January 1, 2023, the entity replaced the old roof with a
account for machinery that it has assembled for own use. permanent tile roof costing P3,000,000.

Machinery The cost of the old roof was P2,500,000. The new roof did nor
Cost of dismantling 20,000 Cash proceeds from 14,000 change the residual value but was considered a betterment.
old machine sale of old machine
Raw materials used 600,000 Depreciation for 2021 128,600 Required:
10% of P1,286,000
Labor in construction 400,000 Prepare journal entries to record the following:
Cost of installation 60,000
1. Purchase of the building on January 1, 2021.
Materials spoiled in 30,000
trial run 2. Depreciation for 2021.
Profit on construction 100,000 3. Replacement of the old roof on January 1, 2023.
Purchase of machine 90,000 4. Depreciation for 2023.
tools

An analysis of the details in the account disclosed the following:

1. The old machine, which was removed in the installation of the

new one had been fully depreciated.
2. The discount received on the payment of materials used in
construction totaled P40,000 and this was reported in the
purchase discount account.
3. The factory overhead account shows a balance of P2,500,000 for
the year ended December 21, 2021. This balance exceeds
normal overhead on plant activities by P150,000 and is
attributable to machine construction.
4. A profit was recognized on construction for the difference
between cost incurred and the price at which the machine could
have been purchased.
5. Machine tools have a useful life of 3 years.
PROBLEM 27-17

In auditing the records of Toronto Company for the year ended 4. Which of the following would ordinarily be treated as a revenue
December 31, 2021, the following data are discovered: expenditure rather than a capital expenditure?

1. Machine A listed at P4,500,000 was acquired on April 1, 2021 in A Cost of servicing and overhaul to restore or maintain the
exchange for P5,000,000 face value bonds maturing on April 1, originally assessed standard of performance
2031. The accountant recorded the acquisition by a debit to B The replacement of a major component of building
C An addition to an existing building
machinery and a credit to bonds payable for P5,000,000. The
D Cost of improvement that is expected to provide discernible
bonds are unquoted. Straight line depreciation was recorded future benefit
based on a five year life and amounted to P600,000 for 9 months.
2. Machine B listed at P3,200,000 was purchased on January 1, 5. Which cost should not be capitalized?
2021. The entity paid P500,000 down and P250,000 per month
for 12 months. The last payment was made on December 30, A Replacement of roof of building every 15 years
2021. Straight line depreciation based on a five-year life and no B Cost of site preparation
residual value was recorded at P700,000 for the year. Freight of C Installation and assembly cost
P150,000 on Machine B was charged to freight in account. D Replacement of small spare parts annually
3. Machine C was recorded at P3,000,000 which included the
carrying amount of P540,000 of a machine accepted as a trade 6. Which expenditure may properly be capitalized?
in. The list price of Machine C was P2,610,000 and the trade in A Expenditure for massive advertising campaign
allowance was P150,000. This transaction took place on B Insurance on plant during construction
December 22, 2021. C Research and development related to a long-term asset
4. Machine D was acquired on January 10, 2021 in exchange for a giving the entity a competitive market advantage
past due account receivable of P4,200,000 on which an D Title search and other legal cost related to a piece of
allowance of 20% was established at the end of prior year. The property which was not acquired.
fair value of the machine on January 10 was estimated at
P3,300,000. The machine was recorded by a debit to machinery 7. Which of the following subsequent expenditures should be
and a credit to accounts receivable for P4,200,000. No expensed immediately?
depreciation was recorded on Machine D because it was never
installed for use. In March, the machine was exchanged for A Expenditure made to increase the efficiency or effectiveness
of an existing asset
30,000 shares of the entity having a market value of P120 per
B Expenditure made to extend the useful life of an existing
share. The treasury shares account was debited for P4,200,000, asset
the carrying amount of Machine D. C Expenditure made to maintain an existing asset in operating
condition
Required:
D Expenditure made to add new asset
Prepare adjusting entries on December 31, 2021.
8. An expenditure made in connection with a machine being used
by an entity should be
PROBLEM 27-18 A Expensed if it merely extends the useful life but does not
improve the quality.
1. The term betterment means B Expensed if it merely improves the quality but does not
A An expenditure made for new facilities which increase extend the useful life
capacity C Capitalized if it maintains the machine in normal operating
B An expenditure made to restore capacity after abandonment conditions
or retirement D Capitalized if it increases the quantity of units produced by
C An expenditure made to improve existing facilities by the machine.
increasing capacity
D An expenditure made to help insure continuity of service
capacity.

2. Which type of expenditure occurs when an entity installs a higher

capacity boiler to heat the plant?
A Rearrangement
B Ordinary repair and maintenance
C Addition
D Betterment

3. An improvement made to a machine which increased the fair

value and production capacity without extending the useful life of
the machine should be
A Expensed immediately
B Debited to accumulated depreciation
C Capitalized in the machine account
D Allocated between accumulated depreciation and the
machine account