PROBLEMS:

Problem 1: TRUE OR FALSE

1. Land held for a currently undecided future use or for speculation should be reported in the
property, plant, equipment section of the statement of financial position.
2. According to PAS 16, an item of PPE acquired through purchase is initially recognized at fair
value.
3. Decomissioning and restoration costs are included in the costs of PPE only if the entity has a
present obligation for such costs.
4. Costs incurred after a PPE is operating in the manner originally intended by management are
capitalized.
5. Costs incurred that are directly attributable to the acquisition of a PPE may be capitalized in full
as cost of the asset or allocated in part to normal operations.
6. When the cost of a self-constructed asset is greater than the cost to aquire it from outside
sources, the difference is recognized as loss if there is a reliable evidence indicating that the cost
is materially excessive because of construction inefficiencies of failures.
7. If the fair value of the asset given up in an exchange transaction that has commercial substance
is not reliably determinable, the aset received is measured at its fair value, adjusted for any cash
received or paid in the exchange.
8. If a party in an exchange transaction recognizes gain, this presupposes a loss on the part of the
other contracting party.
9. PPE acquired by issuing securities are always recognized at the fair value of securities issued.
10. A PPE acquired from the donation is initially recognized at the fair value of the asset given up.

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. Which of the following is not a characteristic of an asset that is classified as property, plant, and
equipment?
a. It has ohysical substance.
b. It is long-term in nature.
c. It is acquired for use in business operations.
d. It is aquired for resale.
2. Which of the following is excluded from “ Property, plant, and equipment”?
a. Major spare parts and long lived stand-by equipment.
b. Building used in business.
c. Equipment held for rentals.
d. Held for sale assets.
3. The initial cost of an item of propety, plant, and eqquipment includes
a. purchased cost
b. direct cost
c. decomissioning and restoration costs
d. all of these
4. Which of the following is not capitalized as cost of land?
a. Land improvements that have indefinite useful life
 b. Unpaid taxes on the property prior to the acquisition date not assumed by the entity
c. Closing costs, such as titling and similar costs
d. Special assessment
5. Knife Co. acquires a building by paying P6M and assuming a P2M unpaid mortgage on the
building. How should Knife Co. account for the P2M unpaid mortgage?
a. Capitalize as cost of the building
b. Recognize as a liability
c. Expense outright
d. a and b
6. The lump-sum acquisition cost of land and building is not allocated to the individual assets if
a. the land and building are classified as investment property measured at cost.
b. the existing building is to be demolished right after the acquisition to make way for the
construction of a new one.
c. the land and building are classified as investment property measured at fair value.
d. the entity’s management intends not to use the existing building.
7. Income earned fronm incidental operations before an asset is put to use is
a. immediately recognized in profit or loss together with the related expense.
b. depreciated over the estimated useful life of the asset.
c. deducted from the cost of asset.
d. added to the cost of the asset.
8. The demolition costs of an old building before a new one is constructed are
a. expensed.
b. included in the cost of land.
c. included in the cost of the new building.
d. included in the cost of the new building, net of any proceeds from sale of salvaged
materials from the demolition.
9. PAS 16 states that if an exchange transaction causes a significant change in cash flows, the
transaction has commercial substance. In transaction of this type, at what amount should the
asset received?
a. Book value
b. Intristic value
c. Book value plus boot
d. Fair value
10. May Co. and Sty Co. exchanged nonmonetary assets and May paid cash to Sty in the transaction.
May stated that the exchange had commercial substance. However, the assets exchanged were
so specialized that there was not an objective basis to detrmine a fair value. In cases like this,
the standard suggest that May record the asset at
a. Estimated Fair Value
b. Book Value
c. Carrying amount of asset given up plus cash paid
d. Intrinsic Value
PROBLEM 3: EXERCISES

1. Ludwig Co. acquired a piece of factory equipment overseas on cash basis for P100,000.
Additional costs incurred include the following:
brokers commission, P5,000; import duties, P25,000; non-refundable purchase taxes,
P10,000; freight cost of transferring the equipment of Ludwig Co.’s premises, P1,000; cost of
assembling and installing the equipment, P2,000; cost of testing the equipment, P1,500;
administrative and other general overhead costs, P4,200; and advertisement and promotion
cost of the new product to be produced by the equipment, P3,800. The samples generated
from testing the equipment were sold for P500. The cost of the samples isn P700.

Requirements:

a. Compute for the initial cost of the equipment.

b. Provide the journal entries.

2. Buko Co. purchased land and building by paying P5,000,000 and assuming a mortage of
P1,000,000.The land and building have fair values of P2,500,000 and P5,000,000 ,
respectively Buko Co. will use the buildings as its new office. Buko Co. also incurred the
following costs:

Land registration costs 4,000

Payment to tenants to vacate premises 4,500

Option paid on the land and building 3,000

Option paid on similar land and building not acquired 1,500

Broker’s fee on the land and building 7,500

Unpaid real estate taxes prior to acquisition date assumed by Buko Co.

-assessed on land 15,000

Real estate taxes after April 1, 20x1 10,000

Repairs and renovation costs before the building is occupied 20,000

Repair costs after the building is occupied 25,000

3. Health Co. purchased land and building at a lump-sum price of P6,000,000. After the acquisition,
Health Co. demolished the existing building and started the construction of a new one. Health Co.
incurred P30,000 in razing the old structure.Materials salvaged from the demolition were sold for
P7,500. Heatlh incurred the following additional costs:

Legal fees in conveying title to land 10,000

Option paid for the land and old building acquired 3,000

Payments to tenants to vacate premises 6,000

Materials, labor and construction overhead incurred

in the construction of the new building 4,250,000

Case 1: The land and old building have fair values of P2,500,000 and P5,000,000, respectively.

Requirements:
a. Allocate the costs.
b. Provide the journal entries.

Case 2: The old building is unusable and has an insignifacant fair value.

Requirements:
a. Allocate the costs.
b. Provide the journal entries.

4. Moonlight Co. purchased a lot for P4,000,000. Immediately after the purchase, Moonlight started the
construction of a new building on the lot. Additional information follows:

Land titling cost 20,000

Special assessmen 10,000
Survey costs 30,000
Materials, labor, and overhead costs 11,000,000
Cash discounts on materials purchased not taken 60,000
Clerical and other costs related to construction 28,000
Excavation costs 200,000
Architectural fees and building permit 120,000
Supervision by management on construction 24,000
Insurance premiums paid for workers 260,000
Payment for workers claims for injuries not covered by insurance 90,000
Savings on construction 400,000
Cost of changes to plans and specifications due to inefficiencies 280,000
Paving of streets and sidewalks (not included in blueprint) 20,000
Income earned on a vacant space rented as parking
lot during construction 18,000
Requirement: Compute for allocated costs of: (a) land, (b) land improvement, (c) building.

5. Major Co. exchanged equipment with Minor, Inc. Pertinent data are shown below:

Major Co. Minor, Inc.

Equipment 2,000,000 4,000,000
Accumulated depreciation 400,000 1,600,000
Carrying amount 1,600,000 2,400,000
Fair vaue 1,900,000 2,200,000
Cash paid by Major Co. to Minor,Inc. 280,000 280,000

Case 1: The exchange transaction has commercial substance. Provide the journal entries in the books of
Major and Minor.

Case 2: Use the information in the fact pattern above but assume Major Co. cannot determine the fair
value of the asset given up. The exchange transaction has commercial substance. Provide the journal
entries in the books of Major Co.

Case 3: The exchange transaction has no commercial substance. Provide the entries in the books of
Major and Major.

6. Augmented Co. acquired a piece of land by issuing 20,000 shares with par value of P10 per
share and quoted price of P90 per share.

Case 1: The land has a fair value of P2,000,000. Provide the entry.

Case 2: The fair value of the land cannot be determined reliably. Provide the entry.

7. On January 1, 20x1, Diminished Co. paid cash down payment of P400,000 and issued a
noninterest bearing note of P1,800,000 in exchange for a piece of land. The note is due in three equal
annual installments every December 31.

Case 1: The land has a fair value of P2,000,000. Provide entry on initial recognition.

Case 2: The fair value of the land cannot be determined reliably. The prevailing market rate of interest
for similar debt instruments in 9% . Provide the journal entry on initial recognition and the entries for
the subsequent payments on the note.

8. Perfect Co. received an unconditional donation of a piece of equipment from Fifth, Inc. The
equipment has a fair value of P2,000,000.

Requirements: Provide the journal entry assuming:

a. Fifth, Inc. is a shareholder of Perfect Co.
b. Fifth, Inc. is an unrelated party.
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. Summer Rain Co. has the following assets:

Land sold in the ordinary course of business 1,000,000

Land used as plant site 5,000,000
Building under construction to used as new office 12,000,000
Building leased out under various operating leases 6,000,000
Land and building classified as ‘held for sale assets’ 5,000,000
Spare parts and minor tools (with average useful life of 1 yr.) 800,000
Equipment held for rental under various operating leases 1,200,000
Fixtures used in rendering services 500,000
Bearer animals 200,000
Bearer plants 100,000

How much is classified as property, plant and equipment?

a. 18,800,000 b. 24,800,000 c. 27,900,000 d. 28,200,000

2. Bach Co., a VAT –registered business, acquired a piece of equipment for P224,000 on account.
The purchase price is inclusive of 12% VAT. A P4,480 prompt payment discount is available on purchase,
but Bach Co. opted not to take it. Bach Co. also incurred P20,000 cost of training the personnel who
equipment was installed, Bach Co. incurred P30,000 in the relocation and reinstallation. The cost of the
equipment is

a. 245,520 b. 230,000 c. 204,480 d. 195,520

3. Overtime Co. acquired a new printing press machine for P12,000,000. Overtime Co. incurred
the following additional costs:

Freight 250,000
Transit insurance 20,000
Special foundation for the machine 50,000
Assembling and installation 280,000
Testing 30,000
Dismantling and removal of old printing 60,000

 Materials salvaged from the trial were sold for P3,000.

 Overtime Co.’s old printing press machine needed to be removed before the new machine was
installed. Materials (electrical wirings, steel bars, iron plates, and wood from the old platform)
salvaged from the removal of the old machine were sold for P5,000. The old printing press
machine has a secod-hand value of P1,400,000. An advertisement, costing P1,000, was placed in
a local newspaper for the sale of the old machine.
How much is capitalized as cost of the new machine?

a. 12,627,000 b. 12,630,000 c. 12,682,000 d. 12,687,000

4. Cider Co. acquired a piece of lot and an old building for P5,850,000. Cider intends to use the
vacant space adjacent to the old building as plant site but will continue to use the old building after
renovation. The professional appraiser hired by Cider Co. appraised the land at P5,000,000 and the
old building at P1,000,000. Information on costs is as follows:

Appraisal fee 150,000

Renovation costs of old building 500,000
Plans and specifications for new buiding 2,900,000
Construction materials and supplies for new building 11,000,000
Labor on construction 6,500,000
Excavation footings 1,000,000
Structural works 1,200,000
Supervision by management, including clerical works 100,000
Uninsured injury claims during construction 30,000
Subcontracted works on new building’s finishing 5,000,000
Savings on self-construction 200,000
Imputed interest on Cider Co.’s own funds used in construction 80,000

Cider Co. assessed that the appraisal does not provide future economic benefits. How much are the
allocated costs of the following assets?
Land Old building New building
a. 4,875,000 1,475,000 27,620,000
b. 5,000,000 1,500,000 27,700,000
c. 4,875,000 1,475,000 27,700,000
d. 5,000,000 1,500,000 27,780,000

5. Palawan Co acquired a piece of land to be used as plant site for P4,000,000. An old building on the
property was demolished and the construction of a new building was started. The fair value of
adjacent lots with similar size and terrain but without an old building is P3,600,000. The fair value of
the building is not readily determinable. However, Palawan Co. believes that the excess of the lump-
sum purchase price over the fair value of the land would reasonably approximate the fair value of
the old building. Palawan Co. incurred the following costs:

Legal fees on the transfer of title over the property 180,000

Demolition of the building 50,000
Survey 25,000
Architectural and consultancy fees 260,000
Building and occupancy permits 120,000
Contract price on construction of new building (completed) 9,000,000
Fees on application for electricity and water connections 80,000
Real property tax after occupancy 40,000
Utilities paid after occupancy 12,000
Wi-Fi connection (Globe broadband) 2,800
Internet fees after occupancy 16,000

Salvaged materials resulting from demolition were sold for P10,000. The costs of the land and the
new building, respectively, are:
a. 3,805,000; 9,500,000 c. 3,845,000; 9,460,000
b. 3,805,000; 9,900,000 d. 4,205,000; 9,500,000

6. Sebastian Co. acquired a piece of equipment. The invoice price was P2,500,000 subject to a
prompt discount of 3% which was not taken. Installation costs amounted to P50,000. Legislation
requires Sebastian Co. to decommision the asset at the end of the asset’s useful life of 10 years.
Sebastian Co. estimated that the decommisioning activities would cost P200,000. The appropriate
discount rate on initial recognition was 12%. How much is the initial cost of the equipment?

a. 2,550,000 b. 2,539,395 c. 2,614,395 d. 2,750,000

Use the following information for the next two questions:

Liempo Co. exchaged equipment with Monggo Co. Information on the assets exchange is as follows:
Equipment Carrying amount Fair value
-relinquished by Liempo 3,500,000 1.875,000
-relinquished by Monggo 1,200,000 1,000,000

Monngo paid Liempo an additional cash of P170,000.

7. If the exchange transaction has commercial substance, what amounts are recognized in Liempo’s
and Monggo’s books for (1) the equipment received and (2) the gain (loss) on the exchange?
Liempo’s books Monggo’s books
a. 300,000; (1,125,000) 1,175,000; (200,000)
b. 1,175,000; 0 1,700,000; 0
c. 1,175,000; (1,625,0000) 1,700,000; (200,000)
d. 2,575,000; (1,625,000) 300,000; (200,000)

8. If the exchange transaction has no commercial substance, what amounts are recognized in
Liempo’s and Monggo’s books for (1) the equipment received and (2) the gain (loss) on yhe
exchange?
Liempo’s books Monggo’s books
a. 2,800,000; 0 1,900,000; 0
b. 1,750,000; 0 1,700,000; 0
c. 4,200,000; 0 500,000; 0
d. 2,800,000; (1,125,000) 1,900,000; (200,000)
9. Rub Co. exchanged equipment with Liniment Co. Rub’s equipment has a historical cost of
P100,000 and an accumulated depreciation of P70,000. The fair value of Rub’s equipment cannot be
determined reliably. The equipment received from Liniment has a fair value of P40,000. Rub paid
Liniment P8,000. The exchange has a commercial substance. What amounts are in Rub’s books for
(1) the equipment received and (2) the gain (loss) on the exchange?

a. 40,000; 2,000 c. 48,000; (10,000)

b. 40,000; 10,000 d. 48,000; 2,000

10. Short Co. acquired the following assets during the year:
a) Lot – acquired on cash basis for P3,000,000. The lot is intended to be used as future plant
site. After the acquisition, Short Co. spent P600,000 in constructing riprap/retaining walls
and fences a the lot. These were expected to have a useful life of 20 years.
b) Sport utility vehicle (SUV) – Acquired cash basis for 2,900,000. Short Co. made additional
payments for the following:
i. Registration of vehicle with the Land Transportation Office (LTO) – P12,000
ii. One-year auto insurance – P40,000
iii. Car accessories (window tint, early warning device, matting, steering wheel cover
and rain visor) – P10,000

The car accessories were installed in the car dealership at the time the vehicle was
purchased. Thus, Short Co. prepared a single check disbursementvoucher (CDV)
amounting to P2,910,000. Separate vouchers were prepared for the registration and
insurance.
c) Pickup truck – acquired on installment basis. Short Co. made a down payment of P200,000.
The monthly installment payment over the next 60 months is P41,666.67. The down
payment was “All-In,” meaning it is inclusive of vehicle registration, insurance, and chattel
mortgage fees. The car dealership provided the essential car accessories for free. The cash
price equivalent of the pickup truck is P1,800,000.
Shortly after the purchase, the pickup truck was modified for off-road driving at a
total cost of P280,000. Short Co. intended to use the pickup truck in its field offices where
the roads are not paved.
d) Six (6) weeks after the SUV in (a) above was acquired, Short Co. had it modified for to install
some “bling-blings” and improve the SUV’s aesthetic value (i.e., to make the SUV look more
‘pogi’). The modification cost was P160,000. This, however, did not increase the “pogi
points” of the driver.
e) Machine – acquired through issuanceof Short Co.’s 1,000 shares with par value of P100 per
share. The machine has a cash price equivalent of P160,000. As Short Co. is not listed, a
‘Level Input 1’ fair value of its share is not available. Short Co.’s latest audited financial
statements reported a book value per share of P120.
 How much are capitalized for the following?
Land Land Improvement Transportation Equipment Machinery
a. 3,000,000 600,000 5,002,000 160,000
b. 3,600,000 - 5,042,000 210,000
c. 3,000,000 600,000 5,042,000 160,000
d. 3,600,000 - 4,722,000 100,000