CHAPTER 48 PROPERTY, PLANT AND EQUI PMENT Acquisition cost Problem 48-1 (AICPA Adapted) Tower Company made the following acquisitions during the year: Purchased for P5,400,000, including appraiser fee of P50,000, a warehouse building and the land on which it is located. The land had an appraised value of P2,000,900 and original cost of P1,400,000. The building had an appraised value of P3,000,000 and original cost of P2,800,000. 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 the building. . Whatis the total cost of land? a 6,160,000 b. 5,840,000 c. 6,060,000 d. 5,000,000 - What is the total cost of building? a. 8,760,000 b. 9,240,000 c. 9,000,000 d. 7,760,000Solution 48-1 Question I Answer a Question 2 Answer b First acquisition Appraised value Fraction Allocated cost Land. 2,000,000 25 2,160,000 Building 3,000,000 3/5 3,240,000 3 5,000,000 5,400,000 Second acquisition Assessed value Fraction Allocated cost Land =~ 40% 3,840,000 40% 4,000,000 Building ~ 60% 5,760,000 60% 6,000,000 9,600,000 10,000,000 Purchase pricé 7,500,000 Mortgage assumed 2,500,000 Total cost of second acquisition 10,000,000 Land ‘ First acquisition 2,160,000 Second acquisition 4,000,000 Total cost of land 6,160,000 Building First acqusisition 3,240,000 Second acquisition 6,000,000 Total cost of building 9,240,000 When a group of assets is acquired for a lump sum price, the total cost Should be allocated to the individual assets based on their relative fair Value, appraised value or assessed value.Problem 48-2 (AICPA Adapted) Bamco Company purchased a new machine on a deferred payment basis. t of P100,000 was made and 4 montily d men A stallmenhe ot P250,000 are to be made at the end of each month, a h equivalent price of the machine was P950,000. The entity incurred ‘ond paid instal lation costs amounting to P30,009 What is the amount to be capitalized as cost of the machine? a. 950,000 b. 980,000 c. 1,100,000 d. 1,130,000 Solution 48-2 Answer b Cash price 950,000 Installation cost 30,000 Total cost 980,000 Anasset acquired by installment is recorded at cash price plus directly attributable cost. Problem 48-3 (AICPA Adapted) Josey Company entered into a contract to acquire a new machine which had a cash price of P2,000,000. Down payment 400,000 Note payable in 3 equal annual installments 1,200,000 20,000 ordinary shares with a par value of . P25 and fair value of P40 per share 800,000 2,400,000 Prior to use, installation cost of P50,000 was incurred. The machine has an estimated residual value of P100,000. What is the initial cost of the machine? a. 2,000,000 b. 2,400,000 c. 2,050,000 d. 2,450,000 Solution 48-3 Answer c Cash price 2,000,000 Installation cost 50,000 Total cost 2.050.000problem 48-4 (IAA) Anxious Company acquired two items of machinery. * On December 31, 2018, Anxious Company purchased a machine in exchange for a noninterest bearing note requiring ten payments of P500,000. The first payment was made on December 31, 2019, and the others are due annually on December 31, The prevailing tate of interest for this type of note at date of issuance was 12%, The present value of an ordinary annuity of Lat 12% is 5.33 for nine periods and 5.65 for ten periods. * On December 31, 2018, Anxious Company acquired used machinery by issuing the seller a two-year, noninterest-bearing note for P3,000,000. In recent borrowing, the entity has paid a 12% interest for this type of note. The present value of 1 at 12% for 2 years is .80 and the present value of an ordinary annuity of 1 at 12% for 2 years is 1.69. What is the total cost of the machinery? a. 5,065,000 b. 5,225,000 c. 5,565,000 d. 8,235,000 Solution 48-4 Answer b Present value of first note payable (500,000 x 5.65) 2,825,000 Present value of second note payable (3,000,600 x .80) 2,400,000 Total cost of machinery 5,225,000 In the absence of cash price, the cost of asset acquired by installment is equal to the present value of the total installment payments. The “present value factor of an ordinary annuity of 1” isused in computing the present value of first note payable because the note is payable by installment. The “present value factor of 1” is used in computing the present value of the second note payable because the note is payable lump sum after 2 years. ;Problem 48-5 (AICPA Adapted) On December 31, 2018, Bart Company purchased a machine in exchange for a noninterest bearing note requiring eight payments of P200,000. The first payment was made on December 31, 2018 and the others are due annually on December 31. At date of issuance, the prevailing rate of interest for this type of note was 11%. PV of an ordinary annuity of | at 11% for 8 periods 5.146 PV of an annuity of I in advance at 11% for 8 periods 5, 1. What amount should be recorded as initial cost of the machine? a. 1,600,000 b. 1,029,200 c d. 1,400,000 1,142,400 2. What is the discount on note payable on December 31, 2018? a. 657,600 b. 457,600 c. 570,800 d. 0 3. What is the interest expense for 2019? a. 125,664 b. 103,664 c.. 113,212 d. 176,000 4. What is the carrying amount of note payable on December 31, 2019? a. 1,200,000 b. 846,064 c. 742,400 d. 742,412Solution 48-5 Question | Answer d Present value of future payments (200,000 x 5.712) 1,142,400 The “PV ofan annuity of | in advance” is used because the machine was purchased on December 31, 2018 and the first payment was made on December 31, 2018, Question 2 Answer b Note payable (200,000 x 8) Present value of note payable Discount on note payable ~ December 31, 2018 Question 3 Answer b Present value First payment on December 31, 2018 Present value of remaining payments Interest expense for 2019 (11% x 942,400) Question 4 Answer b Note payable Payment — December 31, 2018 Payment — December 31, 2019 Note payable — December 31, 2019 Discount on note payable - December 31, 2019 Carrying amount — December 31, 2019 Discount on note payable — December 31, 2018 Amortization for 2019 Discount on note payable - December 31, 2019 1,600,000 1,142,400 457,600 1,142,400 (200,000) 942,400 103,664 1,600,000 ( 200,000) (200,000) 1,200,000 (353,936) 846,064 457,600 (103,664) 353,936ted) : Problem 48-6 (AICPA Adapted) coperty aeauisiions ducing'the Precious Company had the following P current year: a 0 shares of * acquired a tract of land in exchange for eae sah Precious Company with P100 par value that ae ee eropee) of P120 per share on the date of acquis 000 for tie land. tax bill indicated assessed value of P2,4005} : * Received land from a major shareholder as an See ee locate a plant in the city. No payment was ee The ian paid P50,000 for legal expenses for land transict. fairly valued at P1,200,000. se in land as aresult of the acquisitions? What is the total increa: 7,200,000 6,000,000 7,050,000 6,100,000 pe oP Solution 48-6 Answer a First land Fair value of shares (50,000 shares x 120) 6,000,000 Second land 1,200,000 Total cost 7,200,000 Ifshares are issued for noncash consideration, the proceeds should be measured by the fair value of the consideration received or the fair value of the shares issued in the absence of the fair value of the consideration given. The assessed value of the land is only for tax purposes and not an evidence of fair value. Donated asset received from shareholders should be recorded at fair value and credited to donated capital. However, the legal expenses for the transfer of th | 4 ex] e donated property should not be capitalized but deducted from domed cainProblem 48-7 (IAA) Lax Company recently acquired two items of equipment. * Acquired a press at an invoice price of P3,000,000 subject to a 5% cash discount which was taken. Costs of freight and insurance during shipment were P50,000 and installation cost amounted to P200,000. * Acquired a welding machine at an invoice price of P2,000,000 subject to a 10% cash discount which was not taken. Additional welding supplies were acquired at a cost of P100,000. What is the total increase in the equipment account as a result of the transactions? 4,900,000 5,000,000 5,100,000 5,200,000 aoge Solution 48-7 Answer a First equipment: Invoice price 3,000,000 Discount taken - 5% (150,000) Freight and insurance 50,000 Installation cost 200,000 Second equipment Invoice price 2,000,000 Discount not taken - 10% (200,000) Total cost 3,100,000 1,800,000 4,900,000 Cash discounts, whether taken or not taken, trade discounts and Tebates are deducted in arriving at the cost of property, plant and nt, The welding supplies on the second equipment should not be “pitalized but reported as prepaid expense.Problem 48-8 (IAA) Grab Company purchased a ten-ton draw press at 4 cost of P 3,600,000 with vem of 5/15, 1/45, Payment was made within the discount period. Shipping cost was P90,000 which included 4,000 for insurance in raieit Installation cost totaled P240,000 which included P80,000 for taking outa section of a wall and rebuilding it because the press was too large for the doorway. What is the capitalized cost of the ten-ton draw press? a. 3,420,000 b. 3,670,000 c. 3,750,000 a. 3,715,200 Solution 48-8 Answer c Purchase price met of discount (3,600,000 x 95%) 3,420,000 Shipping cost 90,000 Installation cost __240,000 Total cost 3,750,000 Problem 48-9 (IAA) Holiday Company purchased a high speed industrial centrifuge at a cost of P840,000. Shipping cost amounted to P50,000. Foundation work to house the centrifuge cost P80,000. An additional water line had to be run to the equipment at cost of P40,000. Labor and testing cost totaled P60,000. Materials used up in testing cost P30.000. What is the capitalized cost of the equipment? a. 1,100,000 b. 1,060,000 c. 1,020,000 d. 1,040,000 Solution 48-9 Answer a All costs incurred are capitalizedProblem 48-10 (IAA) Taiwan Company fabricated equipment for office use during the current year. The following data were taken from the accounting records: E Materials Direct labor Finisied goods 1,000,000 1,500,000 Office equipment 600,000 300,000 Factory overhead amounted to P1,200,000. Normal production of finshed goods is 50,000 units. Due to the fabrication of the office equipraent, finished goods produced totaled 35,000 units only in the current year. The office equipment is to be charged with the overhead which would have been apportioned to the 15,000 units which were not produced. What is the total cost of office equipment after the apportionment of factory overhead? a. 1,100,000 b. 1,400,000 c. 1,460,000 d. 2,300,000 Soluton 48-10 Answer c Materials ‘ 600,000 Direct labor 500,000 Overhead (15,000/50,000 x 1 ,200,000) 360,000 Total cost of office equipment 1,460,000 In the absence of any statement, the overhead is allocated on the basis of direct labor as follows: Materials Ne Direct labor 5 bee Overhead (500,000/2,000,000 x 1,200,000) 300, Total cost of office equipment 1,400,000