3.

1
• Lindy Co. purchased an office building and the land on which it is located by paying P800,000 cash and assuming
an existing mortgage of P200,000. The property is assessed at P960,000 for realty tax purposes, of which 60% is
allocated to the building.
• Lindy leased construction equipment under a seven-year capital lease requiring annual year-end payments of
P100,000. Link’s incremental borrowing rate is 9%, while the lessor’s implicit rate, which is not known to Link, is 8%.
Present value factors for an ordinary annuity for seven periods are 5.21 at 8% and 5.04 at 9%. Fair value of the
equipment is P515,000.
• Lindy paid P50,000 and gave a plot of undeveloped land with a carrying amount of P320,000 and a fair value of
P450,000 to Club Co. in exchange for a plot of undeveloped land with a fair value of P500,000. The land was carried
on Club’s books at P350,000. This transaction is considered to lack commercial substance; the configuration of cash
flows from the land acquired is not expected to be significantly different from the configuration of cash flows of the land
exchanged.
Calculate the following amounts to be recorded by Lindy.
1. Building.
2. Leased equipment.
3. Land received from Club on Link’s books.
4. Land received from Link on Club’s books.

SOLUTIONS
1. (P600,000) Since the land and building were purchased together, the cost of each must be allocated based on
the relative market value. The land and building were purchased together for a total cost of P1,000,000 (P800,000
cash + P200,000 mortgage assumption). For property tax purposes, the building is deemed to be 60% of the value
of the land and building. Therefore, the cost of the building should be recorded at P600,000 (P1,000,000 × 60%).
2. (P504,000) As the lease is classified as a capital lease, Link must record an asset and liability based on the
present value of the minimum lease payments. However, the leased assets cannot be recorded at an amount
greater than the fair value. To determine the minimum value of the lease payments, Link should discount the future
payments using the lesser of the lessee’s (Link’s) incremental borrowing rate (9%) or the lessor’s implicit rate if
known by the lessee. Therefore, since Link does not know the lessor’s implicit rate, Link’s rate of 9% should be
used. The recorded value would be P100,000 × 5.04 = P504,000, which is less than the fair value.
(P370,000) In recording a nonmonetary exchange, if the transaction lacks commercial substance, the asset
3.
received is recorded at the book value of the asset given up plus any boot given when gains and losses are not
recognized. The following fact pattern exists for Link:

Gain
Boot FV BV
(Loss)
Land given 50,000 450,000 320,000 130,000
Land received 500,000
Link will record the land received from Club at the book value of the land given up plus the boot given (P320,000 +
50,000 = P370,000).
An alternative method to calculate the value to record the land at is to subtract the deferred gain from the fair value
of the land received (P500,000 – 130,000 = P370,000).
4. (P315,000) On Club’s books the following situation exists:

Gain
Boot FV BV
(Loss)
Land given 500,000 350,000 150,000
Land received 50,000 450,000
 An exception to the nonrecognition of gain on similar assets exists when boot is received. The earnings process is
considered complete for the portion related to the boot received, but not complete for the portion related to the asset
received. A gain is recognized only for the portion related to the boot. The gain is computed as follows:

Boot received
× Total gain = Gain
recognized Boot received + FMV of assets received

50,000
× 150,000 = P15,000
50,000 + 450,000

The land received will be recorded at its fair value less the gain deferred.
P450,000 – (150,000 – 15,000) = P315,000
An alternative method is to record the land received at the book value of the land given less the boot received
plus the gain recognized, as follows:
P350,000 – 50,000 + 15,000 = P315,000

3.2
On January 2, year 3, White purchased a manufacturing machine for P864,000. The machine has an eight-year
estimated life and a P144,000 estimated salvage value. White expects to manufacture 1,800,000 units over the life of
the machine. During year 4, White manufactured 300,000 units.
Calculate depreciation expense on the manufacturing machine for year 4 for each method listed.
5. Straight-line.
6. Double-declining balance.
7. Sum-of-the-years’ digits.
8. Units of production.

SOLUTIONS
1. (P90,000) Under the straight-line method of depreciation, the depreciation expense would be calculated as
follows:
Cost-salvage value = P864,000 – 144,000
=P90,000 Estimated life 8

Depreciation expense would be P90,000 for all eight years, year 3–2016.
 2. (P162,000) The double-declining balance method is calculated by taking two times the straight-line rate times
the net book value at the beginning of each year, but not below the salvage value. Furthermore the salvage
value is not deducted to arrive at the depreciable base. The calculation would be as follows:

NBV Depreciation
expense
Year 3 P864,000 × (1/8 × 2) = P216,000

Year 4 (P864,000 – 216,000) × P162,000

(1/8 × 2) =

3. (P140,000) Under the sum-of-the-years’ digits method, the depreciation expense is calculated as follows:

Year 3 8 ÷ 8(8 + 1) × (P864,000) – P144,000) =P160,000

2

Year 4 (7 ÷ 36) × (P864,000 – P144,000) = P140,000

4.(P120,000) The units of production method is a type of physical usage depreciation that is based on
activity. The formula is as follows:

Current activity/output × Depreciable base = Annual depreciation

Total expected activity/output

Depreciation expense for year 4 is calculated as

follows:

300,000 units
× (P864,000 – P144,000) = P120,000
1,800,000 units
3.3
Selected accounts included in the property, plant, and equipment section of Lucado Corporation’s balance
sheet at December 31, year 3, had the following balances:
Land P400,000
Land improvements 130,000
Buildings 2,000,000
Machinery and equipment 800,000
During year 4, the following transactions occurred:
1. A tract of land was acquired for P200,000 as a potential future building site from Alison Corp.
2. A plant facility consisting of land and building was acquired from Kaufman Company in exchange for 20,000
shares of Lucado’s common stock. On the acquisition date, Lucado’s stock had a closing market price of P42
per share on a national stock exchange. The plant facility was carried on Kaufman’s books at P178,000 for
land and P520,000 for the building at the exchange date. Current appraised values for the land and the
building, respectively, are P200,000 and P800,000. The building has an expected life of forty years with a
P20,000 salvage value.
3. Items of machinery and equipment were purchased from Apex Equipment at a total cost of P400,000.
Additional costs were incurred as follows: freight and unloading, P13,000; installation, P26,000. The
equipment has a useful life of ten years with no salvage value.
4. Expenditures totaling P120,000 were made for new parking lots, street, and sidewalks at the corporation’s
various plant locations. These expenditures had an estimated useful life of fifteen years.
5. Research and development costs were P110,000 for the year.
Indicate the capitalized cost of each asset acquired during year 4, and the depreciation expense recorded
for each of the acquired items in year 4.

Capitalized Cost Depreciation expense for Year 4

Land acquired from Alison Corp.
9. 10.

Land acquired from Kaufman

11. 12.

Building acquired from Kaufman

13. 14.

Machinery and equipment

acquired from Apex Equipment 15. 16.

Land improvements
17. 18.

Research and development

19. 20.
SOLUTIONS
Depreciation/amortization
Capitalized cost expense for year 4
Land acquired from Alison Corp. P200,000 0
Land acquired from Kaufman 168,000 0
Building acquired from Kaufman 672,000 16,300
Machinery and equipment acquired from Apex 439,000 43,900
Equipment
Land improvements 120,000 8,000
Research and development 0 0

• Allocation of the land and building for purchase from Kaufman: FMV = 20,000 shares × P42 per share
= P840,000.
• Allocate based on relative fair values. Therefore, land is P840,000 × P200,000/P1,000,000 = P168,000;
Building is P840,000
× P800,000/P1,000,000 = P672,000. Land is not depreciated. Building is depreciated (P672,000 –
P20,000)/40 years =
P16,300.
• Items of machinery and equipment should capitalize all costs to get the asset in its intended and useful
place.
• Land improvements are depreciated over fifteen years. P120,000/15 years = P8,000 per year.
• Research and development costs should be expensed as incurred. They are not capitalized, and they
are not depreciated.

3.4
Selected accounts included in the property, plant, and equipment section of Lucado Corporation’s balance sheet
at December 31, year 7, had the following balances:
Land P400,000
Land improvements 130,000
Buildings 2,000,000
Machinery and equipment 800,000
During year 4, the following transactions occurred:
1. A machine costing P16,000 on January 1, year 1, was scrapped on June 30, year 8. Straight-line depreciation
had been recorded on the basis of a 10-year life with no salvage value.
2. A machine was sold for P48,000 on July 1, year 8. Original cost of the machine was P74,000 on January 1,
year 5, and it was depreciated on the straight-line basis over an estimated useful life of eight years and a
salvage value of P2,000.
Calculate the gain or loss on the disposal of each asset. Place your answer in the appropriate column.
Item Amount of gain Amount of loss

Scrapped machine on 6/30/Y8 21. 22.

Sale of machine on 7/1/Y8 23. 24.

SOLUTIONS
Amount of Amount of
Item gain loss
Scrapped machine on
6/30/Y8
Sale of machine on 7/1/Y8 P5,500 P4,000

Debit Credit
Depreciation expense 4,500
Accumulated depreciation 4,500

Cash 48,00
0
Accumulated depreciation 31,50
0
Equipment 74,000
Gain on sale of equipment 5,500