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PRACTICAL ACCOUNTING 1 – REVIEW
PROPERTY, PLANT & EQUIPMENT
PROF. U.C. VALLADOLID
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
1.
The following items relate to the acquisition of a new machine by Kris Corporation in 2020:
Invoice price of machinery
Cash discount not taken
Freight on new machine
Cost of removing the old machine
Loss on disposal of the old machine
Gratuity paid to operator of the old machine who
was laid off
Installation cost of new machine
Repair cost of new machine damaged in the
process of installation
Testing costs before machine was put into regular
operation
Salary of engineer for the duration of the trial run
Operating cost during first month of regular use
Cash allowance granted because the new machine
proved to be of inferior quality
P2,000,000
40,000
10,000
12,000
150,000
70,000
60,000
8,000
15,000
40,000
250,000
100,000
How much should be recognized as cost of the new machine?
a. P1,985,000
c. P1,930,000
b. P1,993,000
d. P2,025,000
2. Joshtin Company incurred the following costs at the beginning of the current year:
Cost of land
10,000,000
Cost of building
11,500,000
Remodeling and repairs prior to occupancy
600,000
Escrow fee
300,000
Property tax for period prior to acquisition
150,000
Real estate commission
70,000
What is the cost of the building?
a.)12,378,140
b.)12,260,000
c.)12,620,000
d.)12,100,000
3. Alden Company provided the following information about property, plant and equipment at year-end:
Plant assets acquired from Aldub Company
Repairs made on building prior to occupancy
Special tax assessment
Construction of platform for machinery
Remodeling of office space in building
Purchase of new machinery
Total property, plant and equipment
7,500,000
200,000
30,000
70,000
400,000
800,000
9,000,000
In exchange for the plant assets of Aldub Company, Alden Company issued 50,000 shares with P100 par
value.
On the date of purchase, the share had quoted price of P150 and the plant assets had the following fair
value:
Land
Building
Machinery
500,000
4,000,000
1,500,000
2
What is the cost of land, building and machinery respectively?
1. Cost of Land
a) 250,000
b) 530,000
c) 459,000
d) 350,000
2. Cost of Building
a) 4,500,000
b) 4,600,000
c) 4,620,000
d) 4,250,000
3. Cost of Machinery
a) 2,120,000
b) 2,370,000
c) 2,477,000
d) 2,465,000
4. Patrick Company incurred the following costs during the current year in relation to property, plant and
equipment:
Cash paid for purchase of land
Mortgage assumed on the land purchased, including
interest accrued
Realtor commission
Legal fees, realty taxes and documentation expenses
Amount paid to relocate persons squatting on the property
Cost of tearing down an old building on the land to
make room for construction of new building
Salvage value of the old building demolished
Cost of fencing the property
Amount paid to contractor for the building constructed
Building permit fee
Excavation
Architect Fee
Interest that would have been earned had the money used
during the period of construction been invested
Invoice cost of machine acquired
Freight, unloading and delivery charges
Custom duties and other charges
Allowances and hotel accommodation, paid to foreign
technicians during installation and test run of machine
1. What amount should be capitalized as cost of land?
a. 5,450,000
c. 5,440,000
b. 5,590,000
d. 5,550,000
2. What amount should be capitalized as cost of building?
a. 5,000,000
c. 5,235,000
b. 5,085,000
d. 4,885,000
3. What amount should be capitalized as cost of machine?
a. 3,060,000
c.3,140,000
b. 3,200,000
d.3,000,000
3,500,000
1,400,000
500,000
40,000
150,000
350,000
50,000
110,000
4,500,000
40,000
45,000
200,000
150,000
2,500,000
60,000
140,000
500,000
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5. Coco Company incurred the following expenditures related to the construction of a new home office:
Cost of Land, which included usable old apartment
building with fair value of P200,000
3,000,000
Legal fees, including fee for title search
20,000
Payment of land mortgage and related interest due
at time of sale
60,000
Payment of delinquent property taxes
15,000
Cost of razing the apartment building
45,000
Grading and drainage on land site
20,000
Architect fee on new building
250,000
Payment to building contractor
7,000,000
Interest cost on specific borrowing during construction
200,000
Payment of medical bills of employees accidentally
injured while inspecting building construction
30,000
Cost of paving driveway and parking lot
70,000
Cost of trees, shrubs, and other landscaping
65,000
Cost of installing light in parking lot
8,000
Premium for insurance on building during construction
22,000
Cost of open house party to celebrate opening of building
80,000
1. What is the cost of land?
a. 2,720,000
b. 2,915,000
c. 3,205,000
d. 2,950,000
2. What is the cost of building?
a. 7,517,000
b. 7,537,000
c. 7,495,000
d. 7,525,000
3. What is the cost of land improvement?
a. 200,000
b. 203,000
c. 143,000
d. 0
6. John Company is constructing a building. Construction began on January 1 and was completed on
December 31. Expenditures were 2,400,000 on March 1, 1,980,000 on June 1, and 3,000,000 on
December 31. John Company borrowed 1,200,000 on January 1 on a 5-year, 12% note to help
finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year,
2,400,000 note payable and an 11%, 4-year, 4,500,000 note payable.
1.
What are the weighted-average accumulated expenditures?
a. 4,380,000
b. 3,155,000
c. 7,380,000
d. 3,690,000
2.
What is the weighted-average interest rate used for interest capitalization purposes?
a. 11%
b. 10.85%
c. 10.5%
d. 10.65%
3.
What is the avoidable interest for John Company?
a. 144,000
b. 463,808
c. 164,281
d. 352,208
4.
What is the actual interest for John Company?
a. 879,000
b. 891,000
c. 735,000
d. 352,208
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5.
What amount of interest should be charged to expense?
a. 382,792
b. 735,000
c. 526,792
d. 415,192
7. Two independent companies, Hager Co. and Shaw Co., are in the home building business. Each owns a
tract of land held for development, but each would prefer to build on the other's land. They agree to
exchange their land. An appraiser was hired, and from her report and the companies' records, the following
information was obtained:
Hager's Land Shaw's Land
Cost and book value
192,000
120,000
Fair value based upon appraisal
220,000
210,000
The exchange was made, and based on the difference in appraised fair values, Shaw paid 10,000 to
Hager. The exchange has commercial substance.
1.
For financial reporting purposes, Hager should recognize a gain on this exchange of
a. 0.
b. 28,000.
c. 10,000.
d. 90,000.
2.
The new land should be recorded on Hager's books at
a. 210,000.
b. 192,000.
c. 240,000.
d. 168,000.
3.
The new land should be recorded on Shaw's books at
a. 120,000.
b. 220,000.
c. 150,000.
d. 210,000.
8. Gabrielle Inc. and Lucci Company have an exchange with no commercial substance. The asset given up
by Gabrielle has a book value of 120,000 and a fair value of 135,000. The asset given up by Lucci has a
book value of 220,000 and a fair value of 200,000. Boot of 65,000 is received by Lucci.
1.
What amount should Gabrielle record for the asset received?
a. 110,000
b. 135,000
c. 185,000
d. 200,000
2.
The journal entry made by Lucci to record the exchange will include
a. a debit to Gain on Exchange for 20,000.
b. a debit to Cash for 65,000.
c. a credit to Equipment for 200,000.
d. a debit to Loss Exchange for 20,000.
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9. On January 2, 2020, Rapid Delivery Company traded in an old delivery truck for a newer model. Data
relative to the old and new trucks follow:
Old Truck
Original cost
24,000
Accumulated depreciation as of January 2, 2020
16,000
Average published retail value
7,000
New Truck
List price
40,000
Cash price without trade-in
36,000
Cash paid with trade-in
30,000
What should be the cost of the new truck for financial accounting purposes?
a. 30,000.
b. 36,000.
c. 38,000.
d. 40,000.
10. Lee Company received an HK 1,800,000 subsidy from the government to purchase manufacturing
equipment on January, 2, 2020. The equipment has a cost of HK 3,000,000, a useful life a six years,
and no salvage value. Lee depreciates the equipment on a straight-line basis.
1.
If Lee chooses to account for the grant as deferred revenue, the grant revenue recognized will be:
a. Zero in the first year of the grant's life.
b. HK 300,000 per year for the years 2020-2023.
c. HK 500,000 per year for the years 2020-2023.
d. HK1,800,000 in 2020.
2.
If Lee chooses to account for the grant as deferred revenue, the amount of depreciation expense
recorded in 2020 will be:
a. HK 0.
b. HK 200,000.
c. HK 300,000.
d. HK500,000.
3.
If Lee chooses to account for the grant as an adjustment to the asset, the amount of depreciation
expense recorded in 2020 will be:
a. HK 0.
b. HK 200,000.
c. HK 300,000.
d. HK500,000.
4.
If Lee chooses to account for the grant as an adjustment to the asset, the book value of the asset
on the 2019 statement of financial position will be:
a. HK 800,000.
b. HK 1,200,000.
c. HK 2,800,000.
d. HK2,400,000.
5.
Whether Lee chooses to account for the grant as deferred revenue or as an adjustment to the
asset, the combined impact of deferred grant revenue recognition and/ or depreciation expense
recorded per year will be:
a. decrease to net income of HK 200,000.
b. decrease to net income of HK 300,000.
c. increase to net income of HK 500,000.
d. increase to net income of HK 100,000.
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11. On March 31, year 4, Winn Company traded in an old machine having a carrying amount of 16,800, and
paid a cash difference of 6,000 for a new machine having a total cash price of 20,500. The cash flows
from the new machine are expected to be significantly different than the cash flows from the old
machine. On March 31, year 4, what amount of loss should Winn recognize on this exchange?
a. 0
b. 2,300
c. 3,700
d. 6,000
12. On January 2, year 4, Lem Corp. bought machinery under a contract that required a down payment of
10,000, plus twenty-four monthly payments of 5,000 each, for total cash payments of 130,000. The cash
equivalent price of the machinery was 110,000. The machinery has an estimated useful life of ten years
and estimated salvage value of 5,000. Lem uses straight-line depreciation. In its year 4 income
statement, what amount should Lem report as depreciation for this machinery?
a. 10,500
b. 11,000
c. 12,500
d. 13,000
13. On January 2, year 1, Union Co. purchased a machine for 264,000 and depreciated it by the straight-line
method using an estimated useful life of eight years with no salvage value. On January 2, year 4, Union
determined that the machine had a useful life of six years from the date of acquisition and will have a
salvage value of 24,000. An accounting change was made in year 4 to reflect the additional data. The
accumulated depreciation for this machine should have a balance at December 31, year 4, of
a. 176,000
b. 160,000
c. 154,000
d. 146,000
14. During year 4, King Company made the following expenditures relating to its plant building:
Continuing and frequent repairs 40,000 Repainted the plant building 10,000 Major improvements to the
electrical wiring system 32,000 Partial replacement of roof tiles 14,000 How much should be charged to
repair and maintenance expense in year 4?
a. 96,000
b. 82,000
c. 64,000
d. 54,000
15. On June 18, year 4, Dell Printing Co. incurred the following costs for one of its printing presses:
Purchase of collating and stapling attachment 84,000 Installation of attachment 36,000 Replacement
parts for overhaul of press 26,000 Labor and overhead in connection with overhaul 14,000 The overhaul
resulted in a significant increase in production. Neither the attachment nor the overhaul increased the
estimated useful life of the press. What amount of the above costs should be capitalized?
a. 0
b. 84,000
c. 120,000
d. 160,000
16. Orton Corporation, which has a calendar year accounting period, purchased a new machine for 40,000
on April 1, 2015. At that time Orton expected to use the machine for nine years and then sell it for 4,000.
The machine was sold for 22,000 on Sept. 30, 2020. Assuming straight-line depreciation, no depreciation
in the year of acquisition, and a full year of depreciation in the year of retirement, the gain to be recognized
at the time of sale would be
a. 4,000.
b. 3,000.
c. 2,000.
d. 0.
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17. On January 1, 2020, the Accumulated Depreciation—Machinery account of a particular company showed
a balance f 370,000. At the end of 2020, after the adjusting entries were posted, it showed a balance of
395,000. During 2020, one of the machines which cost 125,000 was sold for 60,500 cash. This resulted
in a loss of 4,000. Assuming that no other assets were disposed of during the year, how much was
depreciation expense for 2020?
a. 85,500
b. 93,500
c. 25,000
d. 60,500
18. Archer Company purchased equipment in January of 2010 for 90,000. The equipment was being
depreciated on the straight-line method over an estimated useful life of 20 years, with no residual value.
At the beginning of 2020, when the equipment had been in use for 10 years, the company paid 15,000 to
overhaul the equipment. As a result of this improvement, the company estimated that the useful life of the
equipment would be extended an additional 5 years. What should be the depreciation expense recorded
for this equipment in 2020?
a. 3,000
b. 4,000
c. 4,500
d. 5,500
19. On January 1, 2019, Fredrichs Inc. purchased equipment with a cost of 3,060,000, a useful life of 12 years
and no salvage value. The company uses straight-line depreciation. At December 31, 2019, the company
determines that impairment indicators are present. The fair value less cost to sell the asset is estimated
to be 2,600,000. The asset’s value-in-use is estimated to be 2,365,000. There is no change in the asset’s
useful life or salvage value
1.
The 2019 income statement will report Loss on Impairment of
a. 0.
b. 205,000.
c. 440,000.
d. 460,000.
2.
The 2020 (second year) income statement will report depreciation expense for the equipment of
a. 216,667.
b. 236,364.
c. 255,000.
d. 260,000.
20. On January 2, 2019, Q. Tong Inc. purchased equipment with a cost of HK10,440,000, a useful life of 10
years and no salvage value. The company uses straight-line depreciation. At December 31, 2019 and
December 31, 2020, the company determines that impairment indicators are present. The following
information is available for impairment testing at each year end:
12/31/2019
12/31/2020
Fair value less costs to sell
HK9,315,000
Hk8,850,000
Value-in-use
HK9,350,000
HK8,915,000
There is no change in the asset’s useful life or salvage value. The 2020 income statement will report
a. no Impairment Loss or Recovery of Impairment Loss.
b. Impairment Loss of HK435,000.
c. Recovery of Impairment Loss of HK40,889.
d. Recovery of Impairment Loss of HK603,889.
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21. Percy Resources Company acquired a tract of land containing an extractable mineral resource. Percy is
required by its purchase contract to restore the land to a condition suitable for recreational use after it has
extracted the mineral resource. Geological surveys estimate that the recoverable reserves will be
2,000,000 tons, and that the land will have a value of 1,200,000 after restoration. Relevant cost information
follows:
Land
Estimated restoration costs
9,000,000
1,800,000
If Percy maintains no inventories of extracted material, what should be the charge to depletion expense
per ton of extracted material?
a. 3.90
b. 4.50
c. 4.80
d. 5.40
22. In March, 2020, Maley Mines Co. purchased a coal mine for 6,000,000. Removable coal is estimated at
1,500,000 tons. Maley is required to restore the land at an estimated cost of 720,000, and the land should
have a value of 630,000. The company incurred 1,500,000 of development costs preparing the mine for
production. During 2020, 450,000 tons were removed and 300,000 tons were sold. The total amount of
depletion that Maley should record for 2020 is
a. 1,374,000.
b. 1,518,000.
c. 2,061,000.
d. 2,277,000.
23. Istandul Enterprise constructed a building at a cost of 24,000,000. Average accumulated expenditures
were 17,000,000, actual interest was 2,120,000, and avoidable interest was 1,600,000. If the salvage
value is 4,600,000, and the useful life is 30 years, depreciation expense for the first full year using the
straight-line method is
a. 700,000.
b. 717,733.
c. 800,000.
d. 870,667.
24. On December 1, Miser Corporation exchanged 2,000 shares of its 25 par value ordinary shares held in
treasury for a parcel of land to be held for a future plant site. The treasury shares were acquired by Miser
at a cost of 40 per share, and on the exchange date the ordinary shares of Miser had a fair value of 50
per share. Miser received 6,000 for selling scrap when an existing building on the property was removed
from the site. Based on these facts, the land should be capitalized at
a. 74,000.
b. 80,000.
c. 94,000.
d. 100,000.
25. Storm Corporation purchased a new machine on October 31, 2020. A 1,200 down payment was made
and three monthly installments of 3,600 each are to be made beginning on November 30, 2020. The cash
price would have been 11,600. Storm paid no installation charges under the monthly payment plan but a
200 installation charge would have been incurred with a cash purchase. The amount to be capitalized as
the cost of the machine on October 31, 2020 would be
a. 12,200.
b. 12,000.
c. 11,800.
d. 11,600.
26. Horner Company buys a delivery van with a list price of 30,000. The dealer grants a 15% reduction in list
price and an additional 2% cash discount on the net price if payment is made in 30 days. Sales taxes
amount to 400 and the company paid an extra 300 to have a special horn installed. What should be the
recorded cost of the van?
a. 24,990.
b. 25,645.
c. 25,690.
d. 25,390.
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27. On June 1, 2020, Gold Mining Corp. acquired the rights to a coal mine containing an estimated reserves
of 2,000,000 tons of coal. The company estimated that 25,000 tons of coal would be extracted and sold
each month. Cost allocable to coal was P7,000,000.
Also on June 1, 2020, the company purchased an equipment to be used in the production, costing
P190,000 which has an estimated useful life of 10 years. The equipment was expected to become
obsolete after all the coal deposits had been extracted from the mine and only P10,000 selling price of the
equipment could be expected. Production was in full blast since June 2, 2020.
Based on the above data, answer the following:
1. What would be the depletion expense for the year ended December 31, 2020?
a. P1,050,000
c. P306,250
b. P 525,000
d. P612,500
2. What would be the depreciation expense on the new equipment for the year ended December 31,
2020?
a. P18,000
c. P15,750
b. P 9,000
d. P16,625
28. On December 31, 2019, the statement of financial position of Dundas Company showed the following
property and equipment after charging depreciation:
Building
Accumulated depreciation
P3,000,000
(1,000,000)
P2,000,000
Equipment
Accumulated depreciation
1,200,000
(400,000)
800,000
The company has adopted the revaluation model for the valuation of property and equipment. This has
resulted in the recognition in prior periods of an asset revaluation surplus for the building of P150,000. On
December 31, 2019, an independent valuation assessed the fair value of the building to be P1,600,000
and the equipment to be P900,000.
The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as of
December 31, 2019.
Based on the above information, determine the following: (Ignore deferred tax consequence)
1. Revaluation surplus as of December 31, 2019, after recording the revaluation
a. P250,000
c. P100,000
b. P150,000
d. P
0
2. Amount to be recognized in 2019 profit or loss related to the revaluation of property and equipment
a. P400,000
c. P250,000
b. P300,000
d. P150,000
3. Total depreciation in 2020
a. P289,000
b. P625,000
c. P100,000
d. P420,000
4. Carrying amount of property and equipment as of December 31, 2020
a. P2,500,000
c. P2,080,000
b. P2,400,000
d. P2,211,000
5. Revaluation surplus as of December 31, 2020
a. P100,000
c. P144,000
b. P 75,000
d. P
0