PROBLEM A.The building and Accumulated Depreciation accounts of Michael Co. contain the following entries during: 2016 Jan. 1 Jan. 2 June
Dec. 31
Building Item Balance Building received as a government grant Cash paid for the exchange of office building No. 2 for office building No.3 (exchanged with commercial substance) Balance
Debit 2000000 1500000
400000 3,900,000
Date 2016 December 31,2013 December 31,2014 December 31,2015
Accumulated Depreciation Item Depreciation Depreciation Depreciation
Debit
Credit
3,900,000 3,900,000
Credit
200,000 200,000 200,000
Additional information: The beginning balance of the building represents the amount paid when it acquired the two building (Office building No. 1 and Office building No. 2) used as its head office on January 1,2013. The allocated cost its building was P1,000,000 each. The estimated useful life of the building is 10 years. On January 1,2016, major improvements on the office building No. 1 amounting to P245,000 were incorrectly charged to repairs and maintenance expense. A building which had a fair value of P1,400,000 was accepted from the city government as a donation on January 2,2016. The building that was estimated to be useful for another 10 years was to be used as a factory site as a condition on the grant. Legal fees incurred in relation to the donation was at P50,000 and was charged to 2016 operating expenses. Another P100,000 was incurred to remodel and renovate the building prior to use. This amount was also charged to repairs expense. The fair value of the office building No.3 is P1,200,000. The remaining useful life of office building No. 3 is 4 years. Questions: Based on the above and the result of your audit, you are to provide the answers to the following: 1. The correct cost of the factory building acquired on January 2,2016 2. The gain or loss on exchange on June 30 3. The total depreciation expense in 2016 4. The income from government grant in 2016 5. The Carrying value of the office building No. 1 as of December 31,2016.
PROBLEM B
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JUDY SANTOS Company’s property, plant and equipment and accumulated depreciation balances at January 1, 2017 are: Cost Accumulated Depreciation Land 550,000 Building 6,000,000 4,427,136 Machinery 3,000,000 1,500,000 Furniture and fixtures 1,500,000 800,000 Depreciation method and useful life: Building double declining balance, 10 years, salvage value is P1,300,000. Machinery Straight line, 20 years, no salvage value. Furniture and Sum-of-the-years’ Sum-of-the-years’ digits method, 5 years, no salvage Fixtures Value (all are purchased on April 1, 2015). Depreciation is computed to the nearest month. a. At the beginning of 2017, the company paid P600,000 to overhaul the machine. As a result of this major overhaul, the company estimated that the useful life of the machine would be extended an additional five years. b. On January 6,2017, JUDY SANTOS completed its self-construction of a building on its own land. Direct costs of construction were P2,220,000. Construction of the building required 15,000 direct labor hours. The construction department has an overhead allocation system for outside jobs based on an activity denominator of 100,000 direct labor hours, budgeted fixed costs of P2,500,000, and budgeted variable cost of P27 per direct labor hour. hou r. c. On April 1, 2017, the company changes its method of depreciation from sum-ofthe-years’ the-years’ digits method to straight-line straight-line method of a furniture and fixture that was acquired for P300,000 without change c hange in its original useful life. d. On July 1, 2017, machinery was purchased at a total invoice cost of P356,000. Additional costs of P23,000 to rectify damage on delivery and P18,000 for concrete embedding of machinery were incurred. A wall had to be demolished to enable a large machine to be moved into the plant. The wall demolition cost P7,000, and rebuilding of the wall cost P19,000. e. On November 4, 2017, JUDY SANTOS purchased a tract of land definitely as a future plant site for P700,000. Questions: Based on the above and the result of your audit, determine the following as of December 31, 2017: 1. Depreciation expense of the furniture and fixture for the year. 2. Accumulated depreciation of the furniture and fixture. 3. Land, as part of property, plant and equipment 4. The total cost of the new building 5. Depreciation of building 6. The total adjusted cost of the machinery
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PROBLEM C Benjo Lopez Co. is a manufacturer and retailer of electronic equipment and owns a number of properties from which it operates. Benjo Lopez Co. is preparing its draft financial statements for the years ended 30 June 2017 and the following brought forward information has been collected in readiness for the preparation of information in relation of non-current assets.
As at 30 June 2016 Land Property Furniture and fittings Intangible- brand
Cost P1,500,000 3,400,000 360,000 290,000
Accum. Depreciation/ Amortization P1,360,000 126,000 101,500
Depreciation/ Amortization method n/a 4%pa straight line 20%pa straight line 10 years life
a) On 1 January 2016 Benjo Lopez Co acquired a piece of land (included above) on which it planned to build a new retail unit. Benjo Lopez Co built the new retail property during the year ended 30 June 2017 and opened it on 30 June 2017 having incurred the following costs during the year: Site preparation costs P 90,000 Construction costs 1,200,000 General overheads 30,000 Staff relocation costs 10,500 Professional fees 7,800 Launch event 5,200 P1,343,500 b) on July 2016 fixtures and fittings which had cost P32,000 on 1 July 2014 were sold for cash, generating a profit on disposal of P1,200. On 1 April 2017 Benjo Lopez Co acquired new fixtures and fittings for P78,000. c) On 1 July 2016 Benjo Lopez Co carried out a review of its depreciation methods. As part of this review, it was decided that a 15% pa reducing balance policy for fixtures and fittings would now be more appropriate. d) During the current year Benjo Lopez Co incurred P96,000 of research and development costs on an electronic integrated kitchen appliance. Costs were incurred evenly between 1 September 2016 and 28 February 2017 and on 31 October 2016 the new integrated appliance was judged to be economically viable. The appliance was launched on 1 April 2017 and has been selling well. Benjo Lopez Co expects to be able to sell it for four years. Questions: Based on the above and the result of your audit, you are to provide the answers to the following: 1. How much is the total carrying amount of the property as of 30 June 2017? 2. How much is the total carrying amount of the fixtures and fittings as of 30 June
