PROPERTY, PLANT, AND EQUIPMENT
Problem 1
On December 31, 2021, Pau Company borrowed Php3,000,000 and issued a 12%, 3-year note to finance the
construction of a new building. In 2022, the company made the following expenditures related to this building:
January 1 Php 360,000 July 1 Php 1,500,000
June 1 600,000 December 1 1,500,000
Other debt outstanding and other information follow:
10-year, 13% bonds, dated December 31, 2019,
interest payable annually Php 4,000,000
6-year, 10% note, dated December 31, 2011,
interest payable annually 1,600,000
Interest revenue earned in 2022 from temporary
Investments of the specific borrowing 49,000
Required:
(a) Determine the amount of interest to be capitalized in 2022.
(b) If the specific borrowing amounted to Php1,200,000 only (instead of Php3,000,000), how much is the
capitalized interest in 2022?
Problem 2
On January 1, 2022, Pau Company Corporation constructed with White Rock Construction Company to construct a
building for Php40,000,000. The contract provides that Pau Company is to make five payments in 2022, with the last
payment scheduled at the date of completion. The building was completed on December 31, 2022.
Pau Company made the following payments during 2022:
January 1 Php 4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000
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Php 40,000,000
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Pau Company had the following debts outstanding at the end of 2022:
12%, 4-year dated January 1, 2020. This loan
relates specifically to the building project Php 17,000,000
10%, 10-year note date December 31, 2018 12,000,000
12%, 5-year note dated January 31, 2019 14,000,000
Required:
(a) What is the amount of interest capitalized in 2022?
(b) What is the total cost of the building constructed?
Problem 3
Pau Corporation constructed a machinery for its own use. The following information is given relative to the costs of
the machinery constructed and products manufactured.
Products Machinery
Manufactured Constructed
Materials used Php 4,000,000 Php 1,200,000
Direct labor incurred 1,000,000 250,000
Factory overhead Php 2,200,000
Required:
Determine the cost of machinery constructed, assuming that
(a) Product manufactured is charged with overhead at the normal rate of 150% of direct labor cost. Excess
overhead is charged to machinery constructed.
Cost of Machinery Constructed
Material used Php 1,200,000
Direct labor incurred 250,000
Overhead Cost
Total Overhead Cost Php2,200,000
Less: allocated to product
1,000,000 x150% 1,500,000
--------------------- 700,000
----------------------------
Php 2,150,000
================
(b) Overhead is allocated between production and construction activities on direct labor cost.
Material used Php 1,200,000
Direct labor incurred 250,000
Allocated overhead cost
2,200,000 x 250,000/1,250,000 440,000
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Php 1,890,000
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Problem 4
Pau Company purchased equipment on April 1, 2022 for Php800,000. The equipment has the following data:
Estimated service life - 8 yrs
- 100,000 hrs
- 900,000 units
Estimated residual value - - Php80,000
During 2022 and 2023, the company used the machine for 4,500 and 5,500 hrs, respectively, and produced 40,000
and 60,000 units, respectively.
Required:
Determine the following:
(a) Depreciation for 2022 and 2023, under each of the following methods:
1. Straight-line
2. Hours worked
3. Units of output
4. Sum-of-years’ digits
SYD rate: 8(8+1)/2= 36
2022: April to December=9mos.
8/36x720,000x 9/12 = Php120,000
==========
2023
Jan to March 2023
8/36x720,000x3/12= Php 40,000
April to Dec 2023
7/36x720,000x9/12 = 105,000
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Php 145,000
==========
2024
Jan to March 2024
7/36x720,000x3/12 = Php 35,000
April to Dec 2024
6/36x720,000x9/12= 90,000
----------------
Php 125,000
==========
5. Double declining balance
DDB rate: 1/8x2=25%
2022
Depreciation: 800,000x 25%x9/12= 150,000
2023
Depreciation: (800,000-150,000) x25%= 162,500
2024
Depreciation: (800,000-150,000-162,500) x25%=121,875
6. 150% declining balance
(b) Carrying amount of the asset at the end of 2023 under each of the above methods of depreciation.
Problem 5
De Oro Company purchased an equipment for Php340,000 at the beginning of the year. The equipment has an
expected residual value of Php20,000. The depreciation expense for the first two years of the asset use are shown
below under three alternative methods:
Year Method 1 Method 2 Method 3
1 Php 80,000 Php 128,000 Php 127,500
2 80,000 96,000 79,688
Required:
(a) Identify the three depreciation methods.
Method 1: Straight line
Yearly Depreciation: (340,000-20,0000/Php80,000= 4 yrs
Method 2: SYD
SYD rate: 4(4+1)/2= 10
: 1+2+3+4 = 10
st
1 year: 4/10 x 320,000 = 128,000
2nd year: 3/10 x 320,000 = 96,000
3rd year: 2/10x 320,000= 64,000 (b)
Method 3: 150% Declining Balance Method
Depreciation expense
DDB rate: 1/4x2 = 50%
150% DD: 1/4x1.5= 37.5%
1st yr: 340,000 x 37.5% = Php127,500
2nd yr: (340,000-127,500) x 37.5% =Php79,688
3rd yr: (340,000-127,500-79,688) x 37.5% = Php49,805 (b)
(b) Compute the expense for the 3rd year under the three methods.
Problem 6
Pau Company acquired a plant asset at the beginning of 2022. The asset has an estimated life of 5 years. The
following table shows the correct amounts of depreciation under straight-line (SL), sum-of-the-years’ digits (SYD),
and double declining balance (DDB) methods.
Date SL SYD DDB
1 Php 12,000 Php 20,000 Php 26,400
2 12,000 16,000 15,840
3 12,000 12,000 9,504
4 12,000 8,000 5,702
5 12,000 4,000 2,554
Php 60,000 Php 60,000 Php 60,000
Required:
Determine the following:
(a) Cost of the machine: Php66,000
(b) Salvage value of the machine
DDB- to prove if SV=0
DDB rate: 1/5x2= 40%
Yr 1: 60,000x 40% = 24,000
AC x 40% = 26,400
AC= 26,400/40%
= 66,000
Yr1: (66,000-26,400)x40% = Php15,840
SV: AC-Depreciable amount
: 66,000-60,000
: 6,000
SYD
SYD rate: 5(5+1)/2= 15
1st year: 60,000x 5/15= Php 20,000
(c) If the machine is sold at the end of the year 3, which method will yield the highest gain on disposal of
the asset? Method 3
Carrying value-year 3
Method 1: 66,000-36,000= 30,000
Method 2: 66,000-48,000= 18,000
Method 3: 66,000-51,744= 14,256
Problem 7
Cam Company purchased factory equipment on March 15, 2022. The equipment will be depreciated for financial
purposes over its estimated useful life, counting the year of acquisition as one-half year. The company accountant
revealed the following information regarding this asset: Purchase price-Php800,000; Residual value-Pgp80,000;
Estimated useful life-8 years.
Required:
(a) What amount should Cam Company record as depreciation expense for 2023 using double-declining
balance and sum-of-the-years’ digits method?
(b) What is the asset’s carrying (book) value at December 31, 2023 using both methods?
Problem 8
The Asiaminus Corporation received on January 1, 2019 a special type of equipment, built by the supplier to
Asiaminus’ specifications. The equipment is comprised of the following components.
Component Cost Estimated RV Estimated life
1 Php 82,000 Php 2,000 10 years
2 33,000 3,000 6 years
3 22,000 1,000 7 years
4 18,000 2,000 5 years
Component 4 was replaced on December 31, 2022, the company incurring Php20,000 on the new part. The
company realized net proceeds of Php5,000 on the sale of component 4. The new part is expected to last for 5 years
with no estimated scrap value.
Required:
Give entries for
(a) Depreciation of the equipment for the year ended 31, 2019.
(b) Sale of component 4 at December 31, 2022.
(c) Replacement of component 4.
(d) Depreciation of the equipment for the year 2022.
Problem 9
Total Company purchased an equipment for Php1,200,000 that had an estimated residual value of Php100,000 and
estimated service life of 10 years. The asset is being depreciated using the straight-line method. At the beginning of
the fifth year, the following independent situations occurred:
a. The company changes to the sum-of-the-years’ digits method.
b. It was estimated that the asset’s remaining life is 5 years.
Required:
What is the amount of depreciation expense for the fifth year under each of the independent situations above?
Assume that the estimated residual value remains the same under both situations.
Problem 10
The Chartered Company purchased an equipment costing Php32,000 on January 1, 2020. The equipment is being
depreciated using sum-of-the-years’ digits method over an estimated useful life of 5 years and a residual value of
Php2,000. On January 1, 2022, it was determined that the asset should be useful for a total of 9 years from the date
of acquisition without residual value.
Required:
What is the amount of depreciation expenses for this equipment for 2022?
Problem 11
Standard Company purchased a machine on January 1, 2018 for Php500,000. At the time, it was determined that the
machine had an estimated useful life of 10 years and an estimated residual value of Php20,000. The company used
the double-declining balance method of depreciation . On January 1, 2022, the company decided to change its
depreciation method from double-declining to straight line. The machine’s remaining useful life was estimated to be 5
years with a residual value of Php10,000.
Required:
What is the depreciation expense for the machine for the year 2022?
Date purchased-01/01/2018
Cost- Php500,000
Life-10 years
RV-Php20,000
Change depreciation method- Jan 1, 2022.
Depreciate asset from Jan 1, 2018 to Dec 31, 2021 = 4 years
Depreciate rate: 1/10x 2 = 20%
Jan 1 to Dec 31, 2018
Deprec: Php500,000 x 20% = Php100,000
Jan 1 to Dec 31, 2019
Deprec: (Php500,000-Php100,000) x 20% = Php80,000
Jan 1 to Dec 31, 2020
Deprec: (Php500,000-Php100,000-Php80,000) x 20% = PhpPhp64,000
Jan 1 to Dec 31, 2021
Deprec: (Php500,000-Php100,000-Php80,000-Php64,000) x 20% = Php51,200
January 1, 2022: Net Book Value
Cost Php 500,000
Less: Accumulated Depreciation- from
2018 to 2021 295,200
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Net Book value, Jan 1, 2022 Php 204,800
================================================
Effective January 1, 2022- change depreciation method from DDB to SL
NVB, Jan 1, 2022 Php 204,800
Less: Residual value 10,000
-----------------------------------------------------------------------------------
Depreciable amount Php 194,800
Divided by remaining life 5 years
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Yearly Depreciation Php 38,960
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Problem 12
On January 1, 2020, Kuko Trading purchased for Php240,000 a machine with a useful life of ten years and no
salvage value. The machine was depreciated by the double declining balance method and the carrying amount of the
machine was Php153,600 on December 31, 2021. Kuko changed to the straight-line method on January 1, 2022.
Kuko can justify the change.
Required:
What should be the depreciation expense on this machine for the year ended December 31, 2022?