PROBLEM 1

INCANDESCENCE COMPANY began operations on October 1, 2010. The company’s accountant has started to gather
pertinent information about each of the company’s property, plant and equipment as shown below. When he was
about the prepare a schedule of PPE and depreciation, he was assigned to maintain the books of the company’s
foreign operations. You have been asked to assist in the preparation of this schedule. In addition to ascertaining that
the summarized data below are correct, you have accumulated the following information from the company’s
records and personnel.

a) INCANDESCENCE computes depreciation from the first of the month of acquisition to the first of the month
of disposition.

b) Land A and Building A were purchased from Milag Company. INCANDESCENCE paid P12,300,000 for the
land and building together. At the time of acquisition, the land had a fair value of P1,350,000 and the
building had a fair value of P12,150,000.

c) Land B was acquired on October 3, 2010, in exchange for 37,500 ordinary shares of INCANDESCENCE. On
the acquisition sate, Land B had a fair value of P1,125,000 and the company’s P5 par value ordinary shares
had a fair value of P35 per share. INCANDESCENCE paid P240,000 to demolish an old building on this land
for the construction of a new building.

d) Construction of building B on the newly acquired land began on October 1, 2011. By September 30, 2012,
INCANDESCENCE had paid P4,800,000 of the estimated total construction costs of P6,750,000. It is
estimated that the building will be completed and occupied by July 2013.

e) Certain equipment was donated to the corporation by the national government. An independent appraisal
of the equipment when donated placed the fair market value at P450,000 and the salvage value at P45,000.

f) Machinery A’s total coat of P2,473,500 includes installation cost of P9,000 and normal repairs and
maintenance of P223,500. Salvage value is estimated at P90,000. It was sold on February 1, 2012, for
P1,600,000.

g) On October 1, 211, Machinery B was acquired with a down payment of P86,100 and the remaining
payments to be made in 11 annual installments of P90,000 each, beginning October q, 2011. The prevailing
interest rate was 8%. The following data were abstracted from present value tables (rounded):

10 years 11 years 15 years

Present value of 1 at 8% 0.463 0.429 0.315
Present value of an ordinary
Annuity of 1 at 8% 6.710 7.139 8.559

Land A
Acquisition date: October 1, 2010

Building A
Acquisition date: October 1, 2010
Salvage value: P600,000
Depreciation method: Straight-line
Depreciation expense:
Year ended Sept. 30, 2011 P261,750

Land B
Acquisition date: October 3, 2010
Building B
Acquisition date: Under construction
Cost: P4,800,000 to date
Depreciation method: Straight-line
Salvage value: P0
Estimated life: 30 years
Depreciation expense:
Year ended Sept. 30, 2011 P0

Donated equipment
Acquisition date: October 2, 2010
Salvage value: P45,000
Depreciation method: 150% declining balance
Estimated: 10 years

Machinery A
Acquisition date: October 2, 2010
Salvage value: P90,000
Estimated life: 8 years
Depreciation method: Sum-of-the year’s-digits (SYD)

Machinery B
Acquisition date: October 1, 2011
Salvage value: P0
Depreciation method: Straight-line
Estimated life: 20 years

1. What is the cost of Land A?

2. What is the cost of Building A?

3. What is the estimated useful life of Building A?

4. What is the depreciation expense on Building A for the year ended September 30, 2012?

5. What is the cost of Land B?

6. What is the depreciation expense on Building B for the year ended September 30, 2012?

7. At what amount should the donated equipment be measured and recognized?

8. What is the depreciation expense in the donated equipment for the year ended September 30. 2011?

9. What is the depreciation expense on the donated equipment for the year ended September 30, 2012?

10. What the cost of Machinery A?

11. What is the depreciation expense on Machinery A for the year ended September 30, 2011?

12. What is the depreciation expense on Machinery A for the year ended September 30, 2011?
 13. What amount of gain (loss) should be recognized on the sale of Machinery A in February 1, 2012/

14. What is the cost of the Machinery B?

15. What is the depreciation expense on Machinery B for the year ended September 30, 2012?

PROBLEM 2
VIBO PLACE, INC. completed the following transactions during 2012:

Jan. 1 Purchased real property for P18,847,500, which included a charge of P547,500 representing property tax
for the current year that had been prepaid by the vendor. Of the total purchase price, 20% is determined
to be applicable to land and the balance to buildings. A mortgage of P11,250,000 was assumed by Vibo
Place on the purchase. Cash was paid for the balance.

Feb. 5 Vibo Place expended P888,000 to recondition the building because previous owners had neglected the
normal maintenance and repair requirements on the building.

May 20 The garage in the rear of the building was demolished, P135,000 being recovered on the salvage
materials. Vibo Place immediately constructed a warehouse. The cost of such construction was
P2,028,000, which was not materially different from the bids made on the construction by independent
contractors. Upon completion of the construction, city inspectors discovered that Vibo Place failed to
comply with the building safety code and thus ordered the company to make extensive modifications to
the warehouse. The cost of such modifications, which could have been avoided, was P288,000.

June 1 The company acquired a new machine in exchange for its own ordinary shares with a market value of
P600,000 (par P90,000). The new machine has a market value of P750,000.

July 1 Another machine was acquired by Vibo Place. Payment was made by issuing bonds with a face value of
P1,500,000 and by paying cash of P540,000. The machine’s fair value is P1,950,000.

Nov. 20 On September 1, the company engaged an independent contractor for parking lots and landscaping at a
cost of P1,638,000. The work was completed and paid for on November 20.

Dec. 31 Because the company’s financial year-end is December 31, the business was closed to permit taking the
year-end inventory. On this same date, required redecorating ad repairs were completed at a cost of
P225,000.

Required:
1. The transactions completed during 2012 should result in a net increase in the Buildings account of

2. The total additions to Machinery should be

PROBLEM 3
ACQUAINTANCE MANUFACTURING COMPANY’s accounts at December 31, 2011, included the following balances:

Machinery (at cost) P273,000

 Accumulated depreciation – machinery 144,600
Vehicles (at cost; purchased November 21, 2010) 140,400
Accumulated depreciation – vehicles 58,968
Land (at cost; purchased October 25, 2008) 243,000
Building (at cost; purchased October 25, 2008) 557,160
Accumulated depreciation – building 85,842

Details of machines owned at December 31, 2011 are as follows:

Machine Purchase Date Cost Useful Life Residual Value

1 Oct. 7, 2008 P129,000 5 years P7,500
2 Feb. 4, 2009 144,000 6 years 9,000

Additional information:
• Acquaintance calculates depreciation to the nearest month and uses straight-line depreciation for all
depreciable assets except vehicles, which are depreciated on the diminishing balance at 40% per annum.
• Acquaintance’s financial year-end is December 31.
• The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which cost
P70,200.
• On acquiring the land and building, Acquaintance estimated the building’s useful life and residual value at
20 years and P15,000, respectively.

The following transactions occurred from January 1, 2012:

2012
Jan. 3 Bought a new machine (machine 3) for a cash price of P171,000. Freight charges of P1,326 and
installation costs of P5,274 were paid in cash. The useful life and residual value were estimated at five
years and P12,000, respectively.
June 22 Bought a second-hand vehicle for P45,600 cash. Repainting costs of P1,965 and four new tires costing
P1,035 were paid for in cash.
Aug. 28 Exchanged machine 1 for office furniture that had a fair value of P37,500 at the date of exchange. The
fair value of machine 1 at the date of exchange was P34,500. The office furniture originally cost
P108,000 and, to the date of exchange, had been depreciated by P72,300 in the previous owner’s
books. Acquaintance estimated the office furniture’s useful life and residual value at eight years and
P1,620, respectively.
Dec. 31 Recorded depreciation.

2013
April 30 Paid for repairs and maintenance on the machinery amounting to P2,784.
May 25 Sold one of the vehicles bought on November 21, 2010, for P19,800 cash.
June 26 Installed a fence around the property at cost of P16,500. The fence has an estimated useful life of 10
years and zero residual value. (Debit the cost to a Land Improvements asset account.)
Dec. 31 Recorded depreciation.

2014
Jan. 5 Overhauled machine 2 at cost of P36,000, after which Acquaintance estimated its remaining life at one
additional year and revised its residual value to P15,000.
 June 20 Traded in the remaining vehicle bought on November 21, 2010, for a new vehicle. A trade-in allowance
of P11,100 was received and P69,900 was paid in cash.
Oct. 4 Scrapped the vehicle bought on June 22, 2012, as it had been so badly damaged in a traffic accident
that it was not worthwhile repairing it.
Dec. 31 Recorded depreciation.

1. Machine 3, purchased on January 3, 2012, should be recorded at

2. The secondhand vehicle purchased on June 22, 2012, should be recorded at

3. The office furniture acquired on August 28, 2012, should be recorded at

4. The gain to be recognized on the exchange of machine 1 for office furniture on August 28, 2012, should be

5. The total depreciation for 2012 is

6. The gain (loss) to be recognized on the sale of vehicle on May 25, 2013, is

7. The total depreciation expense for 2013, is

8. After the overhaul, machine 2’s revised annual depreciation is

9. What is the cost of the new vehicle acquired on June 20, 2014?

10. The total depreciation expense for 2014 is