Chapter 16

Property, Plant and Equipment (Part 2)

PROBLEM 1: TRUE OR FALSE

1. TRUE 6. FALSE
2. TRUE 7. FALSE
3. TRUE 8. TRUE
4. FALSE 9. FALSE
5. TRUE 10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. D
2. A
3. A
4. D
5. C
6. C

7. Solution:
The cost of the machine is computed as follows:
Purchase price 480,000
Commission 20,000
Freight 22,000
Installation and testing 18,000
Total 540,000

Requirement (a): Straight-line method

Cost 540,000
Residual value (40,000)
Depreciable amount 500,000
Divide by: 10
Annual depreciation 50,000

Cost 540,000
Depreciation - 20x1 (50,000)
Carrying amount - 12/31/x1 490,000
Depreciation - 20x2 (50,000)
Carrying amount - 12/31/x2 440,000

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Requirement (b): SYD method
SYD denominator = Life x [(Life + 1) ÷ 2] = 10 x (11 ÷ 2) = 55

Depreciation – 20x1 = 500,000 x 10/55 = 90,909

Depreciation – 20x2 = 500,000 x 9/55 = 81,818

Cost 540,000
Depreciation - 20x1 (90,909)
Carrying amount - 12/31/x1 449,091
Depreciation - 20x2 (81,818)
Carrying amount - 12/31/x2 367,273

Requirement (c): Double-declining balance method

DDB rate = 2/Life = 2/10 = 20%

Cost 540,000
(108,00
Depreciation - 20x1 (540,000 x 20%) 0)
Carrying amount - 12/31/x1 432,000
(86,400
Depreciation - 20x2 (432,000 x 20%) )
Carrying amount - 12/31/x2 345,600

Requirement (d): Units of production method

Depreciation – 20x1 = 500,000 x 8,000/100,000 = 40,000

Depreciation – 20x2 = 500,000 x 10,000/100,000 = 50,000

540,00
Cost 0
(40,000
Depreciation - 20x1 )
Carrying amount - 12/31/x1 500,000
(50,000
Depreciation - 20x2 )
Carrying amount - 12/31/x2 450,000

8. Solution:
Useful life = 20 years
Remaining lease term as of 12.31.x8 = (10 + 4 renewal) = 14

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Shorter = 14 years

Depreciation 12.31.x9 = (480,000 ÷ 14) = 34,286

9. Solution:
Carrying amt. on 1.1.20x8 = (7.2M x 7/10) = 5,040,000
SYD denominator = 7 x [(7+1) / 2] = 28
Depreciation 20x8 = 5,040,000 x 7/28 = 1,260,000

10. Solutions:

Requirement (a):
Accumulated depreciation (500K x 3/10) 150,000
Loss on replacement 350,000
Equipment (old part) 500,000
to derecognize the cost of the part replaced

Equipment (new part) 800,000

Cash 800,000
to record the cost of the replacement part

Requirement (b):
Accumulated depreciation (800K x 3/10) 240,000
Loss on replacement 560,000
Equipment (old part) 800,000
to derecognize the cost of the part replaced

Equipment (new part) 800,000

Cash 800,000
to record the cost of the replacement part

11. B

12. Solution:

Fair value 42,000,000

(30,000,000
Less: Carrying amount (₱35M – ₱5M)
)
Revaluation surplus - gross of tax 12,000,000
(3,600,000
Less: Deferred tax (12M x 30%) )
Revaluation surplus - net of tax 8,400,000

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13. Solution:

Replacement cost 40,000,000

Less: Depreciation (40M x 8/32*) (10,000,000)
Fair value 30,000,000
Carrying amount (28M – 6M) (22,000,000)
Revaluation surplus – gross of tax 8,000,000
Less: Deferred tax (8M x 30%) (2,400,000)
Revaluation surplus – net of tax 5,600,000

* 8 yrs. effective life + 24 yrs. remaining life = 32 total economic life

Requirement (a): Proportional method

Building (40M – 28M) 12,000,000
Accumulated depreciation (10M – 6M) 4,000,000
Deferred tax liability 2,400,000
Revaluation surplus 5,600,000

Requirement (b): Elimination method

Accumulated depreciation 6,000,000
Building (squeeze) 2,000,000
Deferred tax liability 2,400,000
Revaluation surplus 5,600,000

14. C

15. Solutions:
Requirement (a): 12/31/x4
Depreciation expense (12,000,000 ÷ 25) 480,000
Accumulated depreciation 480,000

Requirement (b): 1/1/x6

Fair value 15,000,000

Less: Carrying amount (₱12M x 20/25) (9,600,000)
Revaluation surplus 5,400,000

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The change in carrying amount is determined as follows:
  Historical Cost Fair value % change
Building 12,000,000
Accum. dep’n. (12M x
(2,400,000)
5/25)
15,000,00
Carrying amount 9,600,000 156.25%*
0
* (15,000,000 ÷ 9,600,000) = 156.25%

The accounts are proportionately adjusted as follows:

Historical % Revalued
 
Cost change amounts
Building 12,000,000 156.25% 18,750,000
Accum. depreciation (2,400,000) 156.25% (3,750,000)
Carrying amount 9,600,000 15,000,000

Building (18.75M – 12M) 6,750,000

Accumulated depreciation (3.75M – 2.4M) 1,350,000
Revaluation surplus 5,400,000

Requirement (c): 12/31/x6

The revised annual depreciation is computed as follows:

Fair value on revaluation date 15,000,000

Divide by: Remaining useful life 15 years
Revised annual depreciation 1,000,000

Depreciation expense 1,000,000

Accumulated depreciation 1,000,000

The transfer of the revaluation surplus within equity is recorded as

follows:

Revaluation surplus (5,400,000 ÷ 15) 360,000

Retained earnings 360,000

Requirement (d): 1/1/2011

Cash (12M – 600K) 11,400,000
Accum. dep’n. [3.750M + (1M x 5 yrs.)] 8,750,000
Building 18,750,000
Gain on sale 1,400,000

Revaluation surplus [5.4M – (360K x 5 yrs.)] 3,600,000

Retained earnings 3,600,000

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PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. A (110,000 – 5,000) ÷ 10 = 10,500

2. C
SYD denominator = Life x [(Life + 1) / 2] = 5 x [(5+1) / 2] = 15
Depreciation – 20x3 = [(50,000 + 100,000) – 15,000] x 4/15 = 36,000

3. C
Solution:
SYD denominator = Life x [(Life + 1) / 2] = 4 x [(4+1) / 2] = 10
Historical cost 20,000
(2,000
Estimated residual value )
Depreciable amount 18,000

7,20
Depreciation - 20x1 (18,000 x 4/10) 0
5,40
Depreciation - 20x2 (18,000 x 3/10) 0
3,60
Depreciation - 20x2 (18,000 x 2/10) 0
16,20
Accumulated depreciation - 12/31/20x3 0

Historical cost 20,000

(16,200
Accumulated depreciation - 12/31/20x3 )
Carrying amount - 12/31/20x3 3,800

4. A
Solution:
150% declining balance rate = 1.5/Life = 1.5/5 = 30%
60,00
Depreciation - 20x1 (200,000 x 30%) 0
42,00
Depreciation - 20x2 (200,000 - 60,000) x 30% 0

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 102,00
Accumulated depreciation - 12/31/x2 0

5. C
Solution:
Double declining balance rate = 2/Life = 2/10 = 20%

The full-year depreciation charges are computed as follows:

Year 1 (100,000 x 20%) 20,000
Year 2 [(100,000 - 20,000) x 20%] 16,000

The depreciation expense in 20x2 is computed as follows:

Jan. 1 to June 30, 20x2 (20,000 x 6/12) 10,000
July 1 to Dec. 31, 20x2 (16,000 x 6/12) 8,000
Depreciation - 20x2 18,000

6. B
Solutions:
Double declining balance rate = 2/Life = 2/5 = 40%
Historical cost, 1/1/20x1 50,000
(20,000
Depreciation - 20x1 (50,000 x 40%) )
(12,000
Depreciation - 20x2 (50,000 - 20,000) x 40% )
Carrying amount - 12/31/x2 18,000
Divide by remaining useful life 3
Depreciation - 20x3 6,000

20,00
Depreciation - 20x1 (50,000 x 40%) 0
12,00
Depreciation - 20x2 (50,000 - 20,000) x 40% 0
6,00
Depreciation - 20x3 0
38,00
Accumulated depreciation - 12/31/x3 0

7. C (600,000 – 60,000) x 30,000 units /200,000 units = 81,000

8. B
Composite life = Depreciable cost ÷ Annual depreciation

Machin Total Residual Depreciabl Usefu Annual

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 depreciatio
cost value e amt. l life
e n
275,00
A 25,000 250,000 20
0 12,500
100,00
B 10,000 90,000 15
0 6,000
C 20,000 - 20,000 5 4,000
360,000 22,500

(360,000 ÷ 22,500) = 16

9. A
Solution:
Using trial and error, let us first determine what depreciation method
Rago Co. uses.

First trial: SYD Method

SYD denominator = Life x [(Life + 1) / 2] = 5 x [(5+1) / 2] = 15
30,00
Depreciation - 20x1 (110K - 20K) x 5/15 0
24,00
Depreciation - 20x2 (110K - 20K) x 4/15 0
18,00
Depreciation - 20x3 (110K - 20K) x 3/15 0
72,00
Accumulated depreciation - 12/31/x3 0

Notice that the computed accumulated depreciation above is equal to

the accumulated depreciation given in the problem. Therefore, Rago
Co. uses the SYD Method. We will use this method to compute for
the depreciation in 20x4.

12,00
Depreciation - 20x4 (110K - 20K) x 2/15 0

10. D
264,00
Historical cost 0
Original estimated useful life 8
33,00
Original depreciation per year 0

Historical cost 264,000

Accumulated depreciation - 1/1/x3 (33,000 x 3 (99,000

8
yrs.) )
Carrying amount - 1/1/x3 165,000
(24,000
Revised residual value )
Revised depreciable amount 141,000
Divide by: Revised useful life (6 yrs. - 3 yrs.) 3
Depreciation - 20x3 47,000

Accumulated depreciation - 1/1/x3 (33,000 x 3 99,00

yrs.) 0
47,00
Depreciation - 20x3 0
146,00
Accumulated depreciation - 12/31/x3 0

11. C (8,000 x 3/4) = 6,000 carrying amount after one year ÷ 4-year
revised useful life = 1,500

12. B
Accumulated depreciation
370,00
  0 12/31/x2
25,00 55,00 Depreciation -
Disposal (squeeze) 0 0 20x3
400,00
12/31/x2 0  

13. C [12,000,000 – (10,000,000 – 4,000,000)] x 70% = 4,200,000

14. A (12M x 10/15) – (10M – 4M) = 2,000,000 x 70% = 1,400,000

15. A
Solution:

Building:

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Replacement cost 12,000,000
Less: Depreciation (12M x 10/40*) (3,000,000)
Fair value 9,000,000
Carrying amount [8M - (8M x 15**/25)] (3,200,000)
Revaluation surplus – gross of tax 5,800,000
Multiply by: 70%
Revaluation surplus – net of tax 4,060,000

* 10 yrs. effective life + 30 yrs. remaining life = 40 total economic life

**Actual life

Patio:

Replacement cost 4,200,000

Less: Depreciation (4.2M x 10/25*) (1,680,000)
Fair value 2,520,000
Carrying amount [3M – (3M x 10**/20)] (1,500,000)
Revaluation surplus – gross of tax 1,020,000
Multiply by: 70%
Revaluation surplus – net of tax 714,000

* 10 yrs. effective life + 15 yrs. remaining life = 25 total economic life

**Actual life

Total Revaluation Surplus, net of tax: (4.06M + 714K) = 4,774,000

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