Problem 5-29
Different Depreciation Methods
Your audit of LYRE COMPANY's property, plant, and equipment disclosed the following data at December 31,
2018.
ASSET
I
E
R
I
Original cost
P70, 000
P102, 000
P160, 000
P160, 000
Year purchased
2013
2014
2015
2017
Useful life
10 years
15,000 hours
15 years
10 years
Salvage value
P 6,200
P6, 000
P10, 000
P10, 000
Depreciation Method
Sum-of-year’s-digits Working hours
Straight-line Double declining balance
Accumulated depreciation
P46, 400
P70, 400
P30, 000
P32, 000
You noted that the client's policy on depreciation is that no depreciation is recorded in the year an asset is purchased,
and full year depreciation is provided in the year an asset is disposed of.
The following transactions occurred during 2019:
1. On May 5, Asset J was sold for P26, OOO cash. The company's bookkeeper recorded this retirement in the
following manner in the cash receipts journal:
Cash 26,000
Asset J 26,000
2. On December 31, it was determined that Asset E had been-used 2,100 hours during 2019.
3. On December 31, before computing depreciation expense on Asset R, the management of Lyre decided the useful
life remaining from January 1, 2019, was 10 years.
4. On December 31, it was discovered that a plant asset purchased in 2018 had been expensed completely in the
year. This asset costs P44, 000 and has a useful life of 10 years and no salvage value. Management has decided to
use the double-declining balance method for this asset, which can be referred to as "Asset C”.
1. The 2019 depreciation expense on Asset J is
A. P6,960
C. P6,364
B. P18,229
D. P5,800
2. The gain to be reported on the sale of Asset J, is
A. P8,200
C. P8,764
B. P9,360
D. PO
3. The 2019 depreciation expense on Asset E is
A. P17,600
C. P13,440
B, P19,440
D. P14,280
4. The 2019 depreciation expense on Asset R is
A. P17,143
C. P13,OOO
B. P12,OOO
D.P5,455
5. The total depreciation expense in 2019 on the above-mentioned PPE items is
A. P65,640
C. P66,800
B. P63,880
D, P66,640
6. Prepare the necessary adjusting journal entries for the year 2019, including the appropriate depreciation expense
on the above-mentioned items.
Solution 5-29
1. 2019 Depreciation expense – Asset 3.
Cost
Less: Salvage Value
Depreciation Cost
SYD (10x10+1/2)
Depreciation
Answer: D
P70,000
6,200
63,800
x 5/55
P5,800
2. Cost of Asset J
Less: Accumulated depreciation (46,400 + 58,800)
Book Value
Proceeds from sale
Gain on sale
Answer: A
P70,000
52,000
17,800
26,000
P8,200
3. 2019 Depreciation expense – Asset E
(P102,000-6,000 = 96,000*2,100/15,000)
Answer: C
13,440
4. 2019 Depreciation expense:
Cost
Less: Accumulated depreciation, Jan. 1, 2019
Book value, Jan. 1, 2019
Less: Salvage value
Remaining depreciable cost, Jan. 1, 2019
Revised remaining life
Revised annual depreciation
Answer: B
P160,OOO
30,000
130,000
10,000
120,000
+ 10 yrs
P12,000
5. 2019 Depredation expense:
Asset J
Asset E
Asset R
Asset I
Cost
Accumulated Depreciation
Book value, Jan. 1, 2019
DDB rate (1/10*2)
Asset C
Cost
DDB rate (1/10*2)
Total
Answer: A
6.
ADJUSTING JOURNAL ENTRIES
December 31, 2019
1. Depreciation expense – Asset J 5,800 A
Accumulated depreciation - Asset J 5,800
2. Accumulated depreciation - Asset J 52,200
Asset J
44,000
Gain on sale of Asset J
8,200
3. Depreciation expense — Asset E 13,440
Accumulated Depreciation — Asset E 13,440
4. Depreciation expense — Asset R 12,000
Accumulated depreciation — Asset R 12,000
5, Asset C 44,000
Retained earnings 44,000
6. Depreciation expense - Asset C 8,800
Accumulated — Asset C 8,800
P 5,800
13,440
12,000
P160,000
32,000
128,000
x20%
P44,000
x20%
25,600
8,800
P65,640
7. Depreciation expense Asset I 25,600
Accumulated depreciation — Asset 25,600
Problem 5-30
PPE Acquisition and Depreciation
The following data pertain to UKULELE CORPORATION's property, plant, and equipment for 2018,
Audited balances at December 31, 2017
Debit
Credit
Land
P7,500,000
Buildings
30,000,000
Accumulated depreciation - Buildings
6,577,500
Machinery and equipment
22,500,000
Accumulated depreciation –
Machinery and equipment
5,750,000
Accumulated depreciation –
Delivery equipment
4,230,000
Depreciation data:
Buildings
Machinery and Equipment
Delivery Equipment
Leasehold Improvements
Depreciation Method
150% declining-balance
Straight-line
Sum-of-the years'-digits
Straight-line
Useful Life
25 years
10 years
4 years
4 years
Transactions during 2018 and other information are as follows:
a) On January 2, 2018, Ukulele purchased as new truck for cash and trade-in of a 2-year-old truck with a cost of
P900, 000 and a book value of P270, 000. The new truck has a cash price of 1,200,000; the market value of the
trade-in is not known.
b) On April 1, 2018, a machine purchased for P575, 000 on April 1, 2013, was stolen. Ukulele recovered P387, 500
from its insurance company.
c) On. May 1, 2018, costs of were incurred to improve leased office premises. The leasehold improvements have
useful life of 8 years. The related lease terminates on December 31, 2024.
d) On July 1, 2018, machinery and equipment were purchased at a total invoice cost of P7,000,000; additional costs
of P125,000for freight and P625,000 for installation were incurred.
e) Ukulele determined that the delivery equipment comprising the balance at January I, 2018, would have been
depreciated at a total amount of P900,000 for the year ended December 31, 2018.
The salvage values of the depreciable assets are immaterial. The policy of Ukelele Corporation is to compute
depreciation to the nearest month.
Based on the preceding information, compute the following:
1. Depreciation expense for 2018 on Buildings
A. P1,405,350
C.1,200,000
B. B, P929,700
D.1,800,000
2. Depreciation expense for 2018 on Machinery and equipment
A.2, 637, 500
C.2, 651,875
B.2, 981,875
D.2, 594,375
3. Depreciation expense for 2018 on Delivery equipment
A.1,100,000
C.1,380,000
B.1,200,000
D.1,020,000
4, Depreciation expense for 2018 on Leasehold improvement
A. P700,000
C. P840,000
B.1,050,000
D. P933,433
5. Accumulated depreciation - Buildings, December 31, 2018
A. P7,507,200
C. 7,777,500
B.7,982,850
D.8,377,500
6. Accumulated depreciation - Machinery and equipment, December 31, 2018
A.P8,644,375
C.8,600,000
B. 8,556,875
D.8,844,375
7. Accumulated depreciation - Delivery equipment, December 31, 2018
A.5,430,000
C.4,710,000
B.4,620,000
D.4,800,000
8. Gain (loss) on trade in of truck on January 2, 2018
A.(200,000)
C.(70,000)
B. P200,OOO
D. P70,OOO
Solution 5-30
1. Book value, Jan. 1, 2018
(30,000 – 6,577,500)
150% declining balance rate (1/25*150%)
Depreciation expense for 2018
Answer: A
P23,422,500
x 6%
P1,405,530
2. 2018 DEPRECIATION EXPENSE ON MACHINERY & EQUIPMENT
Machinery and Equipment Jan. 1, 2018
22,500,000
Less: Machine stolen
575,000
Balance
21,925,000
Depreciation rate
x10%
2,195,500
Machine stolen (P575, 000 x 10% x 6/12)
14,375
Machine purchased July 1 (7,750,000x10%x6/12)
387,500
Depreciation for 2018
2,594,375
Answer: D
3. 2018 DEPRECIATION EXPENSE ON DELIVERY EQUIPMENT:
Depreciation on Jan. 1, 2018, balance
P900,000
Less: Depreciation on truck traded in,
Jan. 1, 2018 (900,000*2/10)
180,000
720,000
Depreciation on truck purchased
Jan. 2, 2018 (1,200,000*4/10)
480,000
Depreciation for 2018
1,200,00
*SYD = 4 (4+1/2) = 10
Answer: B
4. DEPRECIATION EXPENSE ON LEASEHOLD IMPROVEMENTS
Cost of leasehold improvements
8,400,000
Depreciation May 1, 2018 — Dec, 31, 2018
/80months
Depreciation per month
105,000
Depreciation, May 1, 2018 - Dec. 31, 2018
(P105,000 x 8 months)
804,000
Answer: C
5. ACCUMULATED DEPRECIATION – BUILDINGS:
Balance, Jan. 1, 2018
6,577,500
Add: Depreciation for 2018 (see no. 1)
1,405,350
Balance, December 31, 2018
7,982,580
Answer: B
6. ACCUMULATED DEPRECIATION – MACHINERY & EQUIPMENT:
Balance, Jan. 1, 2018
6,250,000
Depreciation for 2018 (see no. 2) 2,594,375
Machine Stolen (575,000/10*5)
(287,500)
Balance, Dec. 31, 2018
8,556,875
Answer: B
7. ACCUMULATED DEPRECIATION – DELIVERY EQUIPMENT:
Balance, Jan. 1, 2018
4,320,000
Depreciation for 2018 (see no. 3)
1,200,000
Truck traded in
(P900,000 cost - 270,000 book value) (630,000)
(630,000)
Balance, Dec. 31, 2018
4,800,000
Answer: D
8. LOSS ON TRADE IN OF TRUCK ON JANUARY 2, 2018:
Trade in value (1,200,000 – 1,000,000)
P200,000
Book value
270 000
Loss on trade in
(70,000)
Answer: C
Problem 5-31
SNARE DRUM COMPANY buys a machine for P228,600 oh January 1, 2015. The maintenance costs for the years
2015 - 2018 are as follows:
Year
Cost
2015
P13, 500
2016
10,800
2017
65,700*
2018
18,900
* includes P54, 900 for cost of a new motor installed in December 2017.
Snare Drum recorded the cost of the machine frame in one account at a cost of P176,400 and the motor was
recorded in a second account at a cost of P52,200.' Straight-line method of depreciation is used with a useful life of
10 years for the frame and 4 years for the motor. Residual values are immaterial and thus ignored in the computation
of depreciation charges.
1. What is the total machine-related expense in 2015?
A. P44,190
C. P70,650
B. P30,690
D. P36,630
2. What amount of loss should be recognized on the replacement of motor in 2018?
A. 10,800
C. P26,100
B. P13,050
D. PO
3. What is the depreciation expense in 2017?
A. 81,365
C. P30,690
B. P17,640
D. P44,415
4. What is the total machine-related expenses in 2017?
A. 54,540
C.89,775
B. P41,490
D.42,165
5. What is the total machine-related expense in 2018?
A. 42,030
C. 52,965
B.31, 365
D. 50,265
Solution 5-31
1.
Depreciation Expense - frame (Р17б,400/10)
Depreciation Expense - motor (Р52,200/4)
Maintenance expense
Total expense in 2015
Answer: А
Р17,640
13,050
13,500
44,190
2,
Cost of motor
Less: Accumulated depreciation (Р52,2О0 х 3/4)
Book Value/ Loss on Replacement
Answer: В
Р52,200
39,150
13,050
Depreciation expense — frame (P176,400/10)
Depreciation expense - motor (P52,200/4)
Total depreciation expense in 2017
Answer: C
P17,640
13,050
30,690
3.
4.
Depreciation expense (see no. 3)
Loss on replacement of motor (see no. 2)
Maintenance expense (P65,700 - P54,900)
Total expenses in 2017
Answer: A
Depreciation expense — frame (P176, 400/10)
Depreciation expense — motor (P54,900/4)
Maintenance expense
Total expenses in 2018
Answer: D
5.
20,690
13,050
10,800
P54,540
P17,640
13,725
18,900
50,265
Problem 5-32
BUGLE COMPANY's property, plant, and equipment and related accumulated depreciation accounts had the
following balances at December 31, 2017:
Class of PPE
Cost
Accumulated Depreciation
Land
3,900,000
Buildings
36,000,000
7,962,000
Machinery and equipment
23,250,000
5,886,000
Transportation equipment
3,960,000
2,586,000
Leasehold improvements
6,630,000
3,315,000
Class of PPE
Land
Buildings
Machinery and equipment
Transportation equipment
Leasehold improvements
Depreciation method
Straight-line
150% declining balance
Straight-line
150% declining balance
Straight-line
Useful life
12 years
25 years
12 years
5 years
8 years
Bugle computes depreciation to the nearest month. The salvage values of the depreciable assets are considered
immaterial.
Transactions during 2018 and other information are described below:
a) On January 5, 2018, a plant facility consisting of land and a building was purchased from Torotot Company for Of
this amount, 20% was allocated to land.
b) On April 3, 2018, new parking lots, streets, and sidewalks at the purchased plant facility were completed at a
total cost of P5,760,000. These expenditures had an estimated useful life of 12 years.
c) The leasehold improvements were completed on December 31, 2014, and had an estimated useful life of 8
years. The related lease, which would have terminated on December 31, 2020, was renewable for an additional 4year term. On April 30, 2018, Bugle exercised the renewal option.
d) On July 1, 2018, machinery and equipment were purchased at a total invoice cost of Additional costs of
P300,000 for delivery and P900,OOO for installation were incurred.
e) On August 31, 2018, Bugle purchased a new automobile for P450,000,
f) On September 29, 2018, a truck with a cost of P720,000 and a carrying amount of P243,000 on the date of sale
was sold for P345,OOO. Depreciation for the 9months ended September 30, 2018, was P70,560.
g) On December 22, 2018, a machine with a cost of P510,000 carrying amount of P89,250 at date of disposition
was scrapped without cash recovery.
Based on the preceding Information, calculate the 2018 depreciation expense on each of the following classes of
PPE.
1. Land improvements
A. P480,000
C. 320,000
B. P360,000
D. 120,000
2. Buildings
A. 2,546,280
B. 3,024,000
C. 2,762,280
D. P120,000
3. Machinery and equipment
A. 2,325,000
C. 1,597,500
B. 3,195,000
D. 2,760,000
4. Transportation equipment
A. P363,132
C. P433,692
B. P454,860
D. P527,760
5. Leasehold improvements
A. P828,750
C. P663,000
B. P552,500
D. 1,326,000
SOLUTION 5-32
1. 2018 DEPRECIATION EXPENSE - LAND IMPROVEMENTS:
(P5 – 760,000/12 years x 9*12)
*April 1 – December 31
360,000
Answer: B
2. 2018 DEPRECIATION EXPENSE BUILDINGS:
Book value, Jan. 1, 2018 (36,000,000 -7,962, 000)
Building acquired Jan. 5, 2018 (18,000,000 * 80%)
Total
150% declining balance rate (1/25 x 150%)
Depreciation
Answer: A
28,038,000
14,400,000
42,438,000
x 6%
2,546,280
3. DEPRECIATION EXPENSE - MACHINERY AND EOUIPMENT
Machinery and equipment, Jan. 1, 2018 (23,250,000/10 years)
Purchased July 1, 2018 (8,700,000/10*6/12)
Total
Answer: D
4. 2018 DEPRECIATION EXPENSE - TRANSPORTATION EQUIPMENT:
Book value, Jan. 1, 2018 (3,960,000 – 2,586,000)
Less: Book value on Jan. 1, 2018,
of truck sold September 29, 2018
(243,000 + P70, 560) 313,560
Amount subject to depreciation
150% declining balance rate (1/5x 150%)
Truck sold sept. 29, 2018 70,560
Automobile purchased Aug. 31, 2018
(P450,000 x 30%x4/12)
Total
Answer: C
5. 2018 DEPRECIATION EXPENSE – LEASEHOLD IMPROVEMENTS:
Book value, Jan. 1. 2018 (6,630,000 – 3,315,000)
Useful life of leasehold improvements (8-3)
Depreciation
Answer: C
2,325,000
435,000
2,760,000
1,374,000
313,560
1,060,440
x30%
P318,132
70,560
45,000
P433,692
3,315,000
/ 5years
663,000
The useful life of leasehold improvements is used because it is shorter than the extended tease term of 6 years (2
years remaining lease term + 4 years renewal option exercised).
Problem 5-33
Different and Error Correction
The Delivery trucks account of your client, ALPHORN COMPANY, had a balance of P2,820,000 on January 1,
2016, which included the following:
Truck No.
1
2
3
4
Acquisition Date
January 1, 2013
July 1, 2013
January 1, 2015
July 1, 2015
Cost
P 540,000
660,000
900,000
720,000
P 2,820.000
The Accumulated depreciation – Delivery trucks account had a balance of P906,000 on January 1, 2016. This
amount represents depreciation on the four trucks from the respective dates of acquisition, based on a 5 – year life,
no salvage value, No charges had been against this accounts before January 1, 2016.
Transaction completed during the period January 1, 2016, through December 31, 2019, and the entries made to
record them were as follows:
July, 2016
Truck No. 2 was traded for a larger one (Truck No. 5), the agreed price of which was P1,020,000. Alphorn paid the
dealer P500, 000 cash on the transaction. The entry was:
Delivery trucks
Cash
500,000
500,000
CHAPTER 5 AUDIT OF PROPERTY, PLANT AND EQUIPMET
January 1, 2017
Truck No. 1 was sold for P110,000. The entry was:
Cash
110,000
Delivery trucks
477
110,000
July 1, 2018
A new truck (No. 6) was purchased for P1,080,000 cash and was debited at that amount to the Delivery trucks
account.
(Assume Truck No. 2 was not retired.)
July 1, 2018
Truck No. 4 was severely damaged in an accident and was sold as junk for P21, 000 cash. Alphorn received P75,
000 from the insurance company. The entry made by the accountant was:
Cash
96,000
Sales
Delivery trucks
21,000
75,000
Entries for depreciation had been made at the end of each financial year as follows:
Year
2016
2017
2018
2019
Depreciation Expense
P609,000
633,000
733,500
834,000
1.
What amount of gain (loss) should have been recognized on the trade in of truck No. 3 on July 1, 2016?
A. P(130,000)
C.
P(110,000)
B. P230, 000
D.
P 0
2.
Alphorn’s net income for 2016 was overstated (understand) by
A. P77,000
C.
P(33,000)
B. P110,000
D.
P33,000
3.
The gain (loss) on the sales of Truck No. 1 on January, was
A. P110,000
C. P(108,000)
B. P2,000
D. P(2,000)
4.
Alphorn’s net income for 2017 was understand by
A. P155, 000
C. P2,000
B. P153,000
D. P151,000
5.
What amount of loss should have been recognized on the sale of Truck No. 4 on July 1,2018
A. P267, 000
C. P288,000
B. P153, 000
D. P213,000
6.
Alphorn’s net income for 2018 was overstated (understated) by
A. P213, 000
C. P(283,500)
B. P(70,500)
D. P(213,000)
7.
What amount of deprecation should have been recorded in 2019?
A. P414,000
C. P420,000
B. P552,000
D. P834,000
SOLUTION 5 – 33
1.
2.
Trade in value (P1,020,000 – P500, 000)
Book value of Truck No. 3:
Cost
Less: Accumulated depreciation,
Jan. 1, 2015 – July 1, 2016
(P900,000/5 x 1 ½ years)
Loss on trade in
Answer: C
270,000
Depreciation per client
Correct depreciation:
Trunk No. 1 (P540, 000/5)
Trunk No. 2 (P660,000/5)
Truck No. 3 (P900,00/5 x ½)
Truck No. 4 (P720,000/5)
Truck No. 5 (P1,020,000/5 x ½)
Overstatement of depreciation –
net income understand
Unrecorded loss on trade in – net income overstated
Net overstatement of 2016 net income
Answer: A
3.
P520,000
P900,000
Net proceeds
Book value of Truck No. 1:
Cost
Less: Accumulated depreciation,
Jan. 1, 2013 – Jan. 1, 2017
(P540,000/5 x 4)
Gain on sale
Answer: B
(630,000)
P(110,000)
P609,000
P108,000
132,00
90,000
114,000
102,000
576,000
(33,000)
100,000
P77,000
P110,000
P540,000
432,000
(108,000)
P2,000
4.
Depreciation per client
Correct depreciation:
Truck No. 2 (P660,000/5)
P132, 000
Truck No. 4 (720,000/5)
P144,000
Truck No. 5 (1,020,000/5)
204,000
Overstatement of depreciation –
net income understand
Unrecorded loss on trade in – net income overstated
Net overstatement of 2016 net income
Answer: A
5.
6.
7.
Net proceeds
Book value of Truck No. 4
Cost
Less: Accumulated depreciation,
July 1, 2015 – July 1, 2018
(P720,000/5 x 3)
Loss on sales
Answer: A
P633,000
480,000
153,000
2,000
P155,000
P720,000
432,000
(288,000)
P(267,000)
Depreciation per client
Correct depreciation:
Truck No. 2 (P660,000/5 x ½)
P 66, 000
Truck No. 4 (720,000/5 x ½)
72,000
Truck No. 5 (1,020,000/5)
204,000
Truck No. 6 (1,080,000/5 x ½ )
108,000
Overstatement of depreciation –
net income understand
Unrecorded loss on trade in – net income overstated
Unrecorded gain on insurance recovery – net income
understated
Erroneous credit to sales – net income overstated
Net understatement of 2018 net income
Answer: B
P733,500
2019 Depreciation expense:
Truck No. 5 (P1, 020,000/5)
Truck No. 6 (P1,080,000/5)
Total
Answer: C
450,000
283,500
267,000
(75,000)
21,000
P(70,500)
P204,000
216,000
Problem 5-34
Acquisition and Depreciation of Various PPE Items
BAGPIPE MANUFACTURING COMPANY began operations on October 1, 2016. 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 to 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)
Bagpipe 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 Pobre Company. Bagpipe paid P 12,300,000 for the land and
building together. At e time of acquisition, the land had a fair value of P 1,350,000 and the building had a
fair value of P 12,150,000.
c) Land B was acquired on October 3, 2016, in exchange for 37,500 ordinary shares of Bagpipe. On the
acquisition date, Land B had a fair value of P 1,365,000 and the company's P5 par value ordinary shares
had a fair value of P35 per share.
d) Construction of Building B on the newly acquired land began on October 1, 2017. By September 30, 2018,
Bagpipe had paid of the estimated total construction costs of It is estimated that the building will be
completed and occupied by July 2019.
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 cost of 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, 2018, for P1,600,000
g) On October 1, 2017, 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 1, 201 i. The prevailing
interest rate was 8%. The following data were abstracted from present value tables (rounded):
Present value of 1 at 8%
Present value of an ordinary
annuity of 1 at 8%
10 years
0.463
11 years
0.429
15 years
0.315
6.710
7.139
8.559
Land A:
Acquisition date: October 1, 2016
Building A
Acquisition date:
Salvage value:
Depreciation method:
Depreciation expense:
Year ended Sept. 30,2017
Land B
Acquisition date:
Building B
Acquisition date:
Cost:
Depreciation method:
Salvage value:
Estimated life:
Depreciation expense:
Year ended Sept. 30, 20157
Donated equipment
Acquisition date:
Salvage value:
Depreciation method:
Estimated life:
Machinery A
Acquisition date:
Salvage value:
Estimated life:
October 1, 2016
P600,000
Straight-line
P261,750
October 3, 2016
Under construction
P4,800,000 to date
Straight-line
P0
30 years
P0
October 2, 2016
P45,000
150% declining balance
10 years
October 2, 2016
P90,000
8 years
Depreciation method:
Sum-of-the years'-digits (SYD)
Machinery B
Acquisition date:
Salvage value:
Depreciation method:
Estimated life:
October 1, 2017
P0
Straight-line
20 years
1.
2.
3.
4.
5.
6.
What is the cost of Land A?
A. P1, 350,000
C. P11,070,000
B. P12,150,000
D. P1,230,000
What is the cost of Building A?
A. P1, 350,000
C. P11,070,000
B. P12,150,000
D.P1,2030,000
What is the estimated useful life of Building A?
A. 42 years
C. 44 years
B. 40 years
D. 46 years
What is the depreciation expense on Building A for the year ended September 30, 2018?
A. P261,750
C. P523,500
B. P288,750
D. P577,500
What is the cost of Land B?
A. P1,552,500
C. P1,365,000
B. P427,500
D. P1,125,000
What is the depreciation expense on Building B for the year ended September 30, 2018?
A. P120,000
B. P168,750
7.
8.
9.
C. P288,750
D. P 0
At What amount should the donated equipment be measured and recognized?
A. P450,000
C. P495,000
B. P405,000
D. P 0
What is the depreciation expense on the donated equipment for the year ended September 30, 2017?
A. P 0
C. P60,750
B. P74,250
D. P67,500
What is the depreciation expense on the donated equipment for the year ended September 30, 2018?
A. P60,750
C. P57,375
B. P51,638
D. P67,500
10. What is the cost of Machinery A?
A. P2,473,500
C. P2,160,000
B. P2,250,000
D. P2,151,000
11. What is the depreciation expense on Machinery A for the year ended September 30, 2017?
A. P500, 000
C. P480,000
B. P529,667
D. P478,000
12. What is the depreciation expense on Machinery A for the year ended September 30, 2018?
A. P140,000
C. P130,926
B. P113,426
D, P175,000
13. What amount of gain (loss) should be recognized on the sale of Machinery A on February 1, 2018?
A. P 0
C.P5,000
B. P60,000S
D.P(30,000)
14. What is the cost of Machinery B?
A. P728,610
C. P780,000
B. P73
D. P685,272
15. What is the depreciation expense on Machinery B for the year ended September 30, 2018?
A. P36, 430
C. P36,584
B. P39, 000
D.P34,274
SOLUTUION 5 – 34
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Allocation of lump sum price in proportion to fair value:
Land A (135/1,350 x P12,300,000)
P1,230,000
Building A (1,215/1,350 x P12,300,000)
11,070,000
Total
P12,300,000
Answer: D
Cost of Building A (see no. 1)
P11,070,000
Answer: C
Cost of building A
P11,070,000
Less: Salvage value
600,000
Depreciable cost
10,470,000
Annual depreciation
÷ 261,750
Estimated life
40 years
Answer: B
Depreciation expense on Building A for the year ended September 30, 2018
P261,750
Answer: A
Cost of Land B (its fair value on acquisition date)
Pl,365,000
Answer: C
Because Building B is not yet available for its intended use as of 30, 2018, no depreciation should be
provided.
Answer: D
Donated equipment, at fair value
P450.000
Answer: A
Depreciation – Donated equipment, for the year ended September 30, 2017:
Cost
P450,000
150% declining balance rate (1/10 x 150%)
x15%
Depreciation expense
P57,375
Answer: D
Depreciation expense - Donated equipment, for the year ended September 30, 2018:
Book value, Oct. 1, 2017 (P450,OOO - P67,500)
P382,500
150% declining balance rate (1/10 x 150%)
x15%
Depreciation expense
P57.375
Answer: C
Total cost as recorded
P2,473,500
Less: Normal repairs and maintenance
223,500
Correct cost of Machinery A
P2,250,000
Answer: B
Depreciation expense — Machinery A, for the year ended September 30, 2017:
(P2,250,000 – P90,000 = P2,160,000 x 8/36
P480,000
Answer: C
Depreciation expense - Machinery A, for the year 30, 2018:
(P2,2160,000 x 3/36 x 4/12)
P140,000
Answer: A
Cost of Machinery A
P2,250,000
Less: Accumulated depreciation, October 2016 – January 2018 (P480,000 + P140,00)
620,000
Book value, February 1, 2018
1,630,000
Proceeds from sale
1,600,000
Loss on sale
P(30.000)
Answer: D
14. Down payment
P86,100 First installment payment on Oct. 1, 2017
90,000 Present value of succeeding 10 installment payments (P90,000 x 6.710)
603,900 Total cost of Machinery B
P780,000
Answer: C
15. Depreciation expense - Machinery B, for the year ended September 30, 2018
P39,000
(P780,000/20 years)
Answer: B
Problem 5-35
You are engaged to audit the financial statements of CORNET COMPANY for the year ended December 31, 2018.
You gathered the following information pertaining to the company’s equipment and accumulated depreciation
accounts.
EQUIPMENT
1.1.18
6.1.18
9.1.18
Balance
Not 12
Dismantling
of No. 6
P446, 000
36,000
9.1.18
12.31.18
No. 6 sold
Balance
1,000
P483,000
P 9,000
474,000
P483,000
ACCUMULATED DEPRECIATION - EQUIPMENT
12.31.18 Balance
P271,400
1.1.18
Balance
12.31.18 2018
Depreciation
P271,400
P 224,000
47.400
P271,400
The followings are the details of the entries above:
1. The company depreciates equipment at 10 percent per annum. The oldest equipment owned is seven years old as
of December 31, 2018. 2
2. The following adjusted balances appeared on your last years working papers:
Equipment
P446,000
Accumulated depreciation
224,000
3. Machine No. 6 was purchased on March 1, 2011 at a cost of P30,000 and was sold on September 1, 2018, for
P9,000.
4. Included in charges to the repairs expense account was an invoice covering installation of Machine No. 12 in the
amount of P2, 500.
5. It is the company's practice to take a full year's depreciation in the year of acquisition and none in the year of
disposition.
1. What is the gain (loss) on the sale of Machine No. 6?
A. P (4,000)
B. P8, 000
C. P (1,000)
D. 0
2. What is the equipment account balance on December 31, 2018?
A. P454, 500
C. P475, 500
B. P452, 000
D. P484, 500
3, What is the total depreciation expense on equipment for the year ended December 31, 2018?
A. P44, 600
C, P51, 450
B. P45, 846
D. P45, 450
4. What adjusting entry should be prepared in connection with the sale of Machine No. 6 on September 1, 2018?
A. Loss on sale of equipment
1,000
Accumulated depreciation
21,000
Equipment
22,000
B. Loss on sale of equipment
4,000
Accumulated depreciation
18,000
Equipment
22,000
C. Accumulated depreciation
21,000
Equipment
21,000
D. Accumulated depreciation
30.000
Equipment
22,000
Gain on sale of equipment
8,000
5. What adjusting entry should be prepared on' December 31, 2018, to correct the amount of depreciation recorded
on company books?
A. Accumulated depreciation 1,950
Depreciation expense 1,950
B. Accumulated depreciation 2,800
Depreciation expense 2,800
C. Accumulated depreciation 1,554
Depreciation expense 1,554
D. Accumulated depreciation 4,050
Depreciation expense 4,050
Solution 5 – 35
1. Net proceeds (9,000 – 1,000)
Book value of Machine No. 6:
Cost
Less: Accumulated depreciation
(30,000 x 10% x 7)
Los on sale of Machine No. 6
Answer: C
P8,000
P30,000
21,000
2. Equipment:
Balance Jan. 1, 2018
Machine No. 12 purchased June 1, 2018
(P36,000 + 25,000)
Machine No. 6 sold Sept. 1, 2018
Balance, December 31, 2018
Answer: A
(9,000)
P(1,000)
P446,000
38,500
(30,000)
P454,500
3. Depreciation expense on the equipment for 2018:
(P454, 500 x 10%)
P45,450
Answer: D
4. Sale of Machine No. 6 on September 1, 2018:
Entries Made:
Equipment
1,000
Cash
To record the dismantling cost
Cash
Equipment
To record the sale of Machine No. 6
Correct entry:
Cash (9,000 – 1,000)
8,000
Accumulated Depreciation
21,000
Loss on sale of equipment
1,000
Equipment
30,000
Adjusting Journal Entry:
Accumulated Depreciation
Loss on sale of equipment
Equipment
Answer: A
1,000
9,000
9,000
21,000
1,000
22,000
5. Depreciation Recorded
P47, 400
Correct depreciation (see no. 3) 45,450
Overstatement of depreciation
P1, 950
Adjusting Journal Entry:
Accumulated Depreciation
Depreciation expense
Answer: A
1,950
1,950
Problem 5-36
HORNPIPE COMPANY has a long-standing policy of acquiring company equipment by leasing. On
January 1, 2017, the company entered into lease for a new machine. The lease contract provides that
annual payments will be made for 5 years; the payments are to be made in advance on December 31 of
each year. At the end of the 5-year period, Hornpipe may purchase the machine. The estimated economic
life of the machine is 12 years. Hornpipe uses the calendar year for reporting purposes and depreciates its
other equipment using the straight-line method.
In addition, the following information about the lease is also available:
Anual lease payments
Purchase option price
Estimated fair market value of the machine after S years
Interest rate implicit in the lease
Date of first lease payment
P165, 000
P75, 000
1,125,000
10%
January 1, 2017
The following data are abstracted from the present value tables:
Present value of 1 for 5 periods 10%
Present value of an annuity due for 5 periods at 10%
Present value of an ordinary annuity for 5 periods at 10%
0.62092
4.16986
3.79079
1. What is the amount to be capitalized as an asset for the lease of the machine?
A. P672,049 C. P734,596
B. P837,232
D. P763,027
2. What is the amount of interest expense to be recognized for the year ended December 31, 2018?
A. P46,156
C. P34,271
B. P56,960
D. P103,116
3. How much depreciation should be provided on the leased equipment for the year ended December 31,
2017?
A. P63,586
C. P146i920
B. P56,004
D. P61,216
4. What is the entry to record the lease payment on December 31, 2017?
A. Lease liability 108,040
Interest expense 56,960
Cash 165,000
B. Lease liability 118,844
Interest expense 46,156
Cash
165,000
C. Lease liability 165,000
Cash 165,000
D. Lease liability 130,728
Interest expense 34,272
Assume the purchase option is exercised at the end of the lease. The actual fair market value of the
machine at the end of the lease is P288,000. On the date the purchase option is exercised, the
undiscounted sum of future cash flows expected from the machine is 375,000.
5. What is the entry to record the exercise of the option?
A. Lease liability 68,181
Interest expense 6,819
Cash 75,000
B. Equipment 68,181
Interest expense 6,819
Cash 75,000
C. Equipment 75,000
Cash 75,000
D. Lease liability 75,000
Cash 75,000
6. What is the amount of impairment loss that should be recognized by Hornpipe?
A. P90,000
C, P53,514
B. P143,514
D. P 0
Solution 5 – 36
1. Present value of lease payments (P165,000 x 4.16986)
Present value of purchase option price (P75,000 x 0.62092)
Cost of leased machine
P688,027
46,569
734,596
Answer: C
2. SCHEDULE OF LEASE PAYMENTS AND INTEREST ACCRUALS
Date
Payment
Interest expense
Principal
01.01.17
Initial balance
01.01.17
P165,000
165,000
12.31.17
165,000
56,960
108,040
12.31.18
165,000
46,156
118,844
12.31.19
165,000
34,271
130,729
12.31.20
165,000
21,198
143,802
12.31.21
75,000
6,819*
68,181 *
*Rounded
Interest expense for 2018 (see amortization schedule)
Answer: A
Lease Liability
734,596
569,596
461,556
342,712
211,983
68,181
0
P46, 156
3. Depreciation expense for 2018 (P734,596/12* years)
P61,216
* Because of the bargain purchase option, the depreciation period should be the useful life of the asset.
Answer: D
4. Entry to record the second lease payment on December 31, 2017:
Lease Liability
108,040
Interest Expense
56,960
Cash
165,000
Answer: A
5. Entry to record purchase of the machine:
Lease Liability
68,181
Interest Expense
6,819
Cash
75,000
Answer: A
6. Fair value of equipment
Carrying amount:
Cost
Less: Accumulated Depreciation
(734,596/12x5)
Impairment loss
Answer: B
285,000
734,596
306,082
428,514
143,514
The fact that the undiscounted sum of future cash flows expected from the machine is lower than the
machine’s carrying amount indicates impairment in value of the asset. However, PAS 36: Impairment of
Assets provides that the impairment loss to be recognized is the excess of the asset’s carrying amount
over its recoverable amount. The asset’s recoverable amount is the higher between its fair value less costs
to sell and its value in use. Value in use is the present value of the future cash flow expected to be derived
from the asset.
Problem 5 – 37
It has been the policy of VIBRAHARP COMPANY to acquire equipment by leasing. On January 1, 2017,
Vibraharp entered into a lease with Lessor Company for a new delivery truck that had a selling price of
P1, 060,000. The lease contract provides that annual payments of P210, 000 will be made for 6 years.
Vibraharp made the first lease payment on January I, 2017, and subsequent payments are made on
December 31 of each year. Vibraharp guarantees a residual value of P183, 560 at the end of the lease
term. After considering the guaranteed residual value, the rate implicit in the lease is determined to be
12%. Vibraharp has an incremental borrowing rate of 15%. The economic life of the truck is 9 years.
Vibraharp depreciates its other equipment using straight-line method and uses the calendar year for
financial reporting purposes.
The present value tables show the following data:
Present value of 1 for 6 periods
Present value of an ordinary annuity for 6 periods
Present value of an annuity due for 6 periods
12%
0.50663
4.11141
4.60478
15%
0.43233
3.78448
4,35216
1. What is the cost of the leased of the delivery truck?
A. 993,312
C. 956,393
B. 1,060,000
D. 874,100
2. What is the depreciation expense to be recognized by Vibraharp for the year ended December 31, 2017?
A. P146,073
C. P97,382
B. P176,667
D. P134,959
3. What is the lease liability on December 31, 2020?
A. P163,893
C. P169,940
B. P485,565
D. 333,833
4. What is the carrying amount of the leased delivery truck on December 31, 2021?
A. P730,365
C. P183,560
B. 1,060,000
D. P329,635
5. What is the total amount of expenses that should be shown on Vibraharp 's income statement for the year ended
December 31, 2022, in connection with this lease? (Assume that Lessor Company sell the truck for P116,000 at the
end of the 6-year period to a third party.)
A. P233,302
C. P19,667
B. P146,075
D. P165,742
Solution 5 – 37
1. Present value of lease (210,000 x 4.60478)
Present value of guaranteed residual value (P183, 560 x 0.50663)
Cost of leased delivery truck
Answer: B
2. Depreciation expense on leased truck for 2017:
Cost
1,060,000
Less: Residual Value 183,560
Depreciable Cost
876,440
P 967,003
92,997
1,060,000
Lease Term
Annual Depreciation
Answer: A
/ 6 years
P146,073
PAS 17 states that "if there is no reasonable certainty that the lessee will obtain ownership by the end of
the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life."
Because neither the transfer of ownership nor bargain purchase option is satisfied, the depreciation period
is the lease term, being shorter than the asset's economic life.
3. SCHEDULE OF LEASE PAYMENTS AND INTEREST ACCRUALS
Date
Payment
Interest Expense
Principal
Lease Liability
01.01.17
P1,060,000
01.01.17
P210,000
850,000
12.31.17
210,000
P102,000
P108,000
742,000
12.31.18
210,000
89,040
120,960
621,040
12.31.19
210,000
74,525
135,475
485,565
12.31.20
210,000
58,268
151,732
333,833
12.31.21
210,000
40,060
169,940
163,893
12.31.22
183,560
19,667
163,893
0
Lease liability, Dc 31, 2020 (see amortization schedule)
Answer: D
4. Cost of leased truck (see no. 1)
Less: Accumulated depreciation,
Jan.1, 2017 - Dec. 31, 2021 (P146,073 x 5)
Book value, Dec. 31, 2021
Answer: D
P333,893
1,060,000
730,365
329,635
5. Depreciation expense
(P329,635 BV on Dec. 31, 2021 - P183,560 salvage value)
Interest expense (see amortization schedule)
Loss on leased equipment:
Residual value
Less: Realizable value of truck at the end of the lease tem
Total lease-related expenses
Answer: A
P146, 075
19,667
P183, 560
116.000
67,560
P233, 302
Problem 5 – 38
In 2016 TIMPANI TRUCKING COMPANY entered into a long-term lease contract for newly
constructed truck terminals and storage facilities, The buildings were constructed to the company’s
specifications on land owned by the company. Timpani took possession of the leased properties on
January 1, 2017. On January 1, 2017 and 2018, the company made cash payments of P3, 144,000.
Although the leased properties have a composite life of 40 years, the non cancellable lease runs for 20
years from January 1, 2017, with a bargain purchase option available upon expiration of the lease.
The 20-year lease is effective for the period January 1, 2017, through December 31, 2036. Advance rental
payments of are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance
rental payments of P960, 000 are due on January 1 for each of the last 10 years of the lease. The company
has an option to purchase all of these leased facilities for PI on December 31, 2036. Also, the lease
contract stipulates that Timpani should make annual payments to the lessor of P375,000 for property
taxes and P69,000 for insurance. The rate implicit in the lease is 6%. The company depreciates its other
depreciable assets using the straight line method and uses the calendar year for financial reporting
purposes.
Selected present value factors are as follows:
Period
For an Ordinary Annuity of 1 at 6%
1
0.943396
2
1.833393
8
6.209794
9
6.801692
10
7.360087
19
11.158117
20
11.469921
For 1 at 6%
0.943396
0.889996
0.627412
0.591898
0.558395
0.330513
0.311805
1. What is the total cost of the leased facilities?
A. 28,554,192 C. P23, 817,677
B. 25,246,737 D. 26,937,917
Assume that the present value of the minimum lease payments is on January 1, 2017.
2. What is the amount of interest expense to be shown on Timpani's income statement for the year ended
December 31 2019?
A. 1,350,000 C. 1,183,140
B. 2,452,140 D. 1,269,000
3. The total lease-related expenses for the year ended December 31,2020, should be
A. 1,722,128 C. 2,257,140
B. 2,796,128 D. 2,166,128
SOLUTION 5-38
1. Present value of first 10 Payments:
Payments made on Jan, 1, 2017
Present value of succeeding 9 payments
(2,700,000 x 6.801692)
Present value of last 10 payments:
First payment
Present value of succeeding payments
(P960,000 x 6.801692)
Present value of last 10 payments at Jan. 1, 2027
Present value of 1 for 10 periods
Cost of leased facilities
Answer: B
2,700,000
18,364,568
21,064,568
P 960,000
6,529,624
7,489,624
x 0.558395
4,182,169
P25,246,737
2. AMORTIZATION SCHEDULE (PARTIAL)
Date
Payment
Executory cost
01.01.17
01.01017
P444 000
444,000
01.01.18
3,144,000
444,000
01.01.19
3,144,000
4441000
01.01.20
3,144,000
4448000
01.01.21
3,144,000
444,000
Internet Expense
Principal
1,350,000
1,269,000
1,183,140
1,092,128
2,700,000
1,350,000
1,431,000
1,516,860
1,607,872
Lease Liability
25,200,000
22,500,000
21,150,000
19,719,000
18,202,140
16,594,268
Interest expense for 2019 amortization
(See amortization schedule)
P1,183,140
Answer: C
3. Interest expense
Executory costs
Depreciation expense (25,200,000/40* years)
Total lease-related expenses for 2020
Answer: D
1,092,128
444,000
630,000
2,166,128
*Because the lease has a bargain purchase option, the leased asset is depreciated over its economic life.