Flexible Learning A.Y.

2021-20222
DISTANCE EDUCATION COURSE GUIDE USING OBTL DESIGN v1

PRACTICE PROBLEMS SET #5

DEPRECIATION

PROBLEM #1
AA Company purchased a machine at a cost of P635,000 on March 10,2019. It was estimated
that the machine would have a residual value of P35,000. Statistics relating to the machine over
its estimated useful life were:
Estimated useful life:
Years 5
Service hours 60,000
Production output 150,000

Actual operations for 2019, 2020 and 2021:

Service hours Unit produced
2019 14,000 34,000
2020 13,000 32,000
2021 10,000 25,000
REQUIRED:
1. Compute for the depreciation per service hour.
2. Compute for the depreciation per unit produced.
3. Compute for the depreciation expense for the year 2019 and 2020 using:
a. Straight line method
b. SYD (Sum of the years’ digits)
c. Service hours
d. Units of production
4. Compute for the carrying amount of the machine as of December 31, 2019 and December
31, 2020 using:
a. Straight line method
b. SYD
c. Service hours
d. Units of production
5. For the following questions, use the straight line method of depreciation:
a. Assuming that the machine was sold on October 1, 2020 for P510,000,
i. How much is the carrying amount of the machine as of October 1, 2020?
ii. How much is the gain/loss on sale? Specify your answer.
b. Assuming that on January 1, 2021, the company decided to change the depreciation
method to units of production:
i. How much is the depreciation expense for 2021?
ii. How much is the carrying amount of the machine as of December 31, 2021?
c. Assuming that on March 10, 2021, the company discovered that the useful life of the
machine was 10 years from the date of purchase:
i. How much is the depreciation expense for 2021?
ii. How much is the carrying amount of the machine as of December 31, 2021?
d. Assuming that on March 10, 2021, the company incurred costs which extended the
life of the machine for another 2 years:
i. How much is the depreciation expense for 2021?
ii. How much is the carrying amount of the machine as of December 31, 2021?
e. Assuming that on March 10, 2021, the company incurred costs which extended the
life of the machine to 6 years:
i. How much is the depreciation expense for 2021?
ii. How much is the carrying amount of the machine as of December 31, 2021?

PROBLEM #2
BB Company’s depreciation policy on machinery and equipment is as follows:
• A full year’s depreciation is taken in the year of an asset’s acquisition.
• NO depreciation is taken in the year of an asset’s disposition.
• The estimated useful life is five years.
• The straight-line method is used.
On June 30,2019, BB Company sold for P2,300,000 a machine acquired in 2016 for
P4,200,000. The estimated residual value was P600,000.
REQUIRED:
1. What is the carrying amount of the machine as of June 30, 2019?
2. What amount of gain or loss on disposal should BB Company record in 2019? Specify
your answer.

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DISTANCE EDUCATION COURSE GUIDE USING OBTL DESIGN v1

PROBLEM #3
CC Company used a hand tool in the manufacturing activities. On January 1, 2019, there are
800 of such tools on hand at cost of P200 each. Acquisition and retirement during 2019 and
2020 are:
Retirement and Estimated
Acquisition and Retirement value of tools
Cost proceeds at year-end
2019 400 @ P300 300 @ P50 200,000
2020 900 @ P400 700 @ P70 350,000
Retirement may be assumed to be on first-in, first-out basis.
REQUIRED: Compute for the carrying amount of the tools as of December 31, 2019 and 2020
under the following methods:
a) Retirement
b) Replacement
c) Inventory

DEPLETION

PROBLEM #4
DD Company was engaged in the rock and gravel business. The following transactions relate to
the acquisition and development of an extensive gravel pit:
2019
Cost of acquisition and development 960,000
Estimated output 2,400,000 tons
Production 1,000,000 tons
2020
Additional development cost 490,000
Production 600,000 tons
2021
Additional development cost 500,000
New estimate of remaining output 2,500,000 tons
Production 700,000 tons
REQUIRED:
1. Compute for the carrying amount of the asset for the year ending 2019, 2020, and 2021.
2. Compute for the depletion expense for the year ending 2019, 2020, and 2021.

PROBLEM #5
EE Company acquired a silver mine in Easter Mindanao in 2016. Because the mine is located
deep in the Mindanao frontier, EE Company was able to acquire the mine for the low price of
P50,000. In 2017, the company constructed a road to the silver mine costing P5,000,000.
Improvements and other development costs made in 2017 cost P750,000. Because of the
improvements to the mine and to the surrounding land, it is estimated that the mine can be sold
for P600,000 when mining activities are complete. During 2017, five buildings were constructed
near the mine site to house the mine workers and their families. The total cost of the five
buildings was P2,000,000. Estimated residual value is P200,000. In 2019, geologists estimated
that 4,000,000 tons of silver ore could be removed from the mine for refining. During 2019, the
first year of operations, only 500,000 tons of silver ore were removed from the mine. However,
in 2020, workers mined 1,000,000 tons of silver. During that same year, geologists discovered
that the min contained 3,000,000 tons of silver ore in addition to the original 4,000,000 tons.
Development costs of P1,300,000 were made to the mine early in 2020 to facilitate the removal
of the additional silver. Early in 2020, an additional building was constructed at a cost of
P375,000 to house the additional workers needed to excavate the added silver. This building is
not expected to have any residual value.

REQUIRED:
1. Compute for the depletion expense for the year ending 2019 and 2020.
2. Compute for the depreciation expense for the year ending 2019 and 2020.
3. Assuming that on 2021, the company decided to shutdown its mining operations.
a. Compute for the carrying amount of the wasting asset as of December 31, 2021.
b. Compute for the depreciation expense of the buildings for the year 2021,
assuming that the useful lives of the buildings are 5 years and 2 years,
respectively.

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DISTANCE EDUCATION COURSE GUIDE USING OBTL DESIGN v1

REVALUATION

PROBLEM #6
FF Company provided the following data pertaining to a machinery on the date of revaluation:
Cost Replacement
cost
Machinery 4,500,000 7,200,000
Accumulated 900,000
depreciation
Age of asset 3 years
REQUIRED:
1. Appreciation or revaluation increase
2. Carrying amount
3. Depreciated replacement cost
4. Revaluation surplus
5. Original useful life of the asset
6. Prepare journal entry to record the revaluation.
7. Prepare journal entry to record the annual depreciation subsequent to revaluation.
8. Prepare journal entry to record the piecemeal realization of the revaluation surplus.

PROBLEM #7
GG Company provided the following data on the date of revaluation:
Building, at original cost 5,000,000
Building, at fair value 6,000,000
Accumulated depreciation – cost (40-year life and 10 1,250,000
years expired)
REQUIRED: Under the “proportional approach” and “elimination approach”, prepare journal
entries for the current year.

PROBLEM #8
On January 1, 2019, HH Company reported the following account balances pertaining to
property, plant, and equipment:
Land 2,000,000
Building 15,000,000
Accumulated depreciation 3,750,000
Machinery 3,000,000
Accumulated depreciation 1,500,000
Assets have been carried at cost since their acquisition. All assets were acquired on January 1,
2009. The straight-line method is used. On January 1, 2019, the entity decided to revalue the
property, plant, and equipment. On such date, competent appraisers submitted the following:
Replacement
cost
Land 5,000,000
Building 25,000,000
Machinery 5,000,000
REQUIRED:
1. What is the revaluation surplus on January 1, 2019?
2. What is the depreciation for the current year?
3. What is the revaluation surplus on December 31, 2019?

IMPAIRMENT

PROBLEM #9
JJ Company determined that due to obsolescence, an equipment with an original cost of
P4,500,000 and accumulated depreciation on January 1, 2019 of P2,100,000 had suffered a
permanent impairment and as a result should have a recoverable amount of only P1,500,000 as
of the beginning of the year. In addition, the remaining useful life of the equipment was reduced
form 8 to 3 years.
REQUIRED:
1. Prepare journal entry to record the impairment on January 1, 2019.
2. Prepare journal entry to record the depreciation for 2019.
3. Determine the carrying amount of the equipment on December 31, 2019.

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DISTANCE EDUCATION COURSE GUIDE USING OBTL DESIGN v1

PROBLEM #10
KK Company has one division that performs machinery operations on parts that are sold to
contractors. A group of machines had an aggregate cost and accumulated depreciation on
January 1, 2019 as follows:
Machinery 90,000,000
Accumulated depreciation 25,000,000
The machines have an average remaining useful life of 4 years and it has been determined that
this group of machines constitutes a cash generating unit. The fair value less cost of disposal of
this group of machines in an active market is determined to be P48,000,000. Based on
supportable and reasonable assumptions, the financial forecast for this group of machines
reveals the following cash inflows and cash outflows for the next four years:
Cash Cash
inflows outflows
2019 30,000,000 12,000,000
2020 32,500,000 17,500,000
2021 27,500,000 12,500,000
2022 16,000,000 4,000,000

It is believed that a discount rate of 8% is reflective of time value of money. The table of present
value shows that the present value of 1 at 8% is as follows:
Period Present
value of 1
1 0.930
2 0.857
3 0.794
4 0.735
REQUIRED:
1. Determine the value in use.
2. Determine the recoverable amount.
3. Prepare journal entry to record the impairment loss, if any.
4. Prepare journal entry to record the depreciation for the current year.

PROBLEM #11
LL Company reported an impairment loss of P2,000,000 in the income statement for the year
ended December 31, 2019. This loss was related to long-lived assets acquired on January 1,
2018 with cost of P10,000,000, useful life of 10 years and no residual value. On December 31,
2019, the entity reported the long-lived assets at P6,000,000 which is the fair value less cost of
disposal on such date. On December 31, 2020, the entity determined that the fair value less
cost of disposal of the impaired long-lived assets had increased to P7,500,000. The straight line
depreciation is recorded for the impaired assets.
REQUIRED: Prepare journal entry to record the following:
1. Depreciation for 2018
2. Depreciation for 2019
3. Impairment loss for the year ended December 31, 2019
4. Depreciation for 2020
5. Gain on reversal of impairment in 2020

PROBLEM #12
MM Company has four cash generating units. One CGU has been experiencing significant
losses in prior years. Thus, it becomes necessary to determine an impairment for the cash
generating unit. The assets of the CGU at carrying amount at the current year-end are:
Cash 10,000,000
Accounts receivable 20,000,000
Inventory 30,000,000
Property, plant, and equipment, net 50,000,000
Goodwill 5,000,000
It is reliably determined that the value in use of the CGU at the current year-end is
P100,000,000.
REQUIRED:
1. Determine the impairment loss of the CGU.
2. Prepare journal entry to record the impairment loss.

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