AUDIT OF PPE – PROBLEM DISCUSSIONS

PROBLEM 1 :
ITEM 1:
Item 1 is an industrial land acquired by issuing 10,000 ordinary shares of the company with a
par value of P20 per share. On the date of purchase, the shares are quoted at P35 per share.
In addition, the company paid for transfer and legal costs amounting to P20,000. The
company paid in advance the real property taxes for next year amounting to P30,000.
ITEM 2:
Item 2 is an office equipment acquired through deferred settlement basis. The contract price
is P200,000 but its cash price equivalent is P180,000. ITALY CORP. paid installation costs
amounting to P30,000. A safety inspection must be conducted first before the equipment is
put into use and such costs amounted to P10,000.

ITEM 3 :
Acquired press an invoice price of 3,000,000 subject to a 5% cash discount which was taken.
Cost of freight and insurance during shipment were 50,000 and installation cost amounted to
200,000.
ITEM 4:
Acquired welding machine an invoice price of 2,000,000 subject to a 10% cash discount which
was not taken. Additional welding supplies were acquired costing 100,000.
ITEM 5
Acquired land in exchange for 50,000 shares of B Company with a 100 par value and market
value of 120 per share on date of acquisition. The last property tax bill assessed value of
2,400,000.
ITEM 6
Purchase Land and paid in full by issuing 600,000php of its 10% bonds payable and 40,000
ordinary shares with par value of P10. The share was selling at P19 and the bonds were
trading at P102.

Compute the PPE to be capitalized each ITEMS.

PROBLEM NUMBER 2
Prince company and Albert company agreed to exchange tractor trailer. Information relation
to assets
 Prince Albert
Original Cost 1,500,000 800,000
Accumulated Dep’n 700,000 720,000
Fair Value on date of 900,000 150,000
exchange

In accordance with the agreement, Albert will pay 750,000 in cash to Prince which is the
difference in fair value. With commercial substance
What amount should PRINCE COMPANY record as cost of assets received in exchange ?
What amount should ALBERT COMPANY record as cost of assets received in exchange ?

PROBLEM 3
YOLA Company and ZARO company are fuel oil distributors. To Facilitate the delivery of oil
their customers, Yola and Zaro exchange ownership of 1,200 barrels of oil without physically
moving the oil. YOLA paid ZARO 300,000 to compensate. Lacks commercial substance.

YOLA Company ZARO company

COST 1,000,000 1,400,000
MARKET VALUE 1,200,000 1,500,000

What amount should YOLA record cost of oil inventory received?

What amount should ZARO record cost of oil inventory received?

PROBLEM 4
WILBUR Company, traded in an old machine for newer model. Data following.
OLD MACHINE

Original cost 800,000

Accumulated Depreciation 600,000
Average Retail Price 170,000

NEW MACHINE

List price 1,000,000

Cash price without trade in 900,000
Cash price with trade in 780,000
What amount should be recognized cost of new machine?

Loss on exchange?

PROBLEM 5
ALTITUDE COMPANY purchased land for 2,000,000 as plant site. There was a small office
building fair value of 700,000 which entity continue to use with some modification and
renovation. The entity decided to construct a factory building.

Materials and Supplies 3,000,000

Excavation 100,000
Labor for construction 2,500,000
Cost of remodeling office building 200,000
Legal cost of conveying lands 10,000
Cash discount on materials purchased 60,000
Supervision by management 70,000
Compensation insurance premiums for workers 20,000
Clerical and other expenses related to constructions 30,000
Paving and sidewalks 40,000
Plans and Specifications 140,000
Payment for claim for injuries not covered by 25,000
insurance
Legal cost of injury claim 15,000
Saving on Constructions 200,000

What is the initial cost of land?

What is the initial cost of the building?
What is initial cost of factory building?

PROBLEM 6
Facetious Company incurred the following expenditures related to constructions of new home
office :

Cost of land, which included usable old apartment building 2,000,000.00

with fair value of 200,000
Legal Fees, including fee for title search 10,000.00
Payment of land mortgage and related interest due at time of 50,000.00
sale
Payment of delinquent property taxes point of purchased 20,000.00
 Cost of razing and apartment building 30,000.00
Grading and drainage on land site 15,000.00
Architect fee on new building 200,000.00
Payment to building contractor 8,000,000.00
Interest on specific borrowings during construction 300,000.00
Payment of medical bills of the employees accidentally 10,000.00
injured while inspecting building construction
Cost of paving driveway and parking lot 40,000.00
Cost of trees, shrubs and other landscaping 55,000.00
Cost of installing light in parking lot 5,000.00
Premium for insurance on building during constructions 25,000.00
Cost of open house party to celebrate opening of building 60,000.00

What is the cost of the land?

What is the cost of the building?
What is the cost of the land improvement ?

PROBLEM 7
Warhead Company had loans outstanding during 2024 and 2025.
Specific construction loan 2,000,000 10%
General loan 15,000,000 12%

The entity began the self-construction of a new building on January 01, 2024 and the building
was completed on December 31, 2025. Expenditures during 2024 and 2025 were:

January 01, 2024 2,000,000

July 01, 2024, 4,000,000
November 01, 2024 3,000,000
July 01, 2025 1,000,000

What is the cost of the new building on December 31, 2024?

What is the cost of the new building on December 31, 2025?

PROBLEM 8
Lester Company provided the following:

Total Cost Residual Value Estimated life

Machine A 5,500,000 500,000 20
 Machine B 2,000,000 200,000 15
Machine C 400,000 5

Compute the composite life.

Compute the composite rate .

PROBLEM 9

Use the following information in answering the next TEN (10) questions:
On January 1, 2023, JAPAN CORP. acquired a factory equipment. Information about the
acquisition of such equipment is presented below:

List price P400,000

Trade discount 20%
Import duties 12,400
Recoverable taxes 10,000
Insurance paid during delivery of the 15,400
equipment
Cost of removing the old equipment 5,000
Cost of installing the new equipment 18,600

The equipment was acquired on account with a term of 2/10, n/30. The equipment is expected to
have a five-year life, with a residual value of P10,000 at the end of five years. It was also estimated
that the machine can produce up to 1,000,000 units of product over its useful life. Actual units
produced for the current year was 100,000 units.

What is the initial cost of the factory equipment?

What is the depreciation expense for the year assuming the units of production method is used?

Assuming SYD method is used, what is the carrying amount of the office equipment as of
December 31, 2024?

Assume that originally JAPAN used straight-line method in depreciating the office equipment
but decided to change it to SYD method at the beginning of 2025 with no change in residual
value and useful life. What is the depreciation expense for the year 2025?
Assume that originally JAPAN used straight-line method in depreciating the office equipment
but decided to change it to double declining balance method at the beginning of 2025. The
assets remaining useful life after the change is estimated to be 4 years. What is the
depreciation expense for the year 2025?

Assume that originally JAPAN used SYD method in depreciating the office equipment but
decided to change it to 150% declining balance method at the beginning of 2025 with no
change in residual value and useful life. What is the carrying amount of the asset as of
December 31, 2025?

Assume that originally JAPAN used SYD method in depreciating the equipment. On July 1,
2025, the company sold the equipment for P120,000. How much is the gain or loss on sale to
be recognized in profit or loss?

JAPAN’s accounting policy in depreciation is that a full charge of depreciation shall be made
for the year of acquisition and none on the year of disposal. Assume that originally JAPAN
used the straight line method in depreciating the equipment. On July 1, 2025, the company
sold the equipment for P210,000. How much is the gain or loss on sale to be recognized in
profit or loss?

Assume that originally JAPAN used straight-line method of depreciating the equipment but on
July 1, 2025 it incurred a capitalizable cost of P15,000. Based on new management estimate,
the asset has no residual value at the end of its useful life. What is the depreciation expense
for the year 2025?

-END OF PROBLEM DISCUSSION PART 1-