Illustration 1: Identify the cost to be included in Land, Building and Land Improvement accounts.
Building a. Architect fee and superintendent fee.
Building b. Construction cost of building.
c. Cost allocated to old building. The old building was not used
Loss/expense (PIC 2012-02) to construct a new office building.
Building d. Cost of excavation done for construction of new building.
Building e. Cost of improvements made on the building such as replacin
Land Improvement f. Cost of landscaping, trees and shrubs.
Expense g. Cost of option for alternative land not acquired.
Land h. Cost of option for land acquired.
Land Improvement i. Cost of permanent fence built around the perimeter of the la
Building j. Cost of razing the old building to give way for construction of
Land k. Cost of razing the old building no construction was planned.
Expense l. Cost of regular repairs and replacements made on the buildin
Building m. Cost of removal of safety fences used during construction.
Land n. Cost of surveying before construction.
Building o. Cost of temporary buildings used for construction purposes.
Land p. Cost of title to land.
q. Cost to construct sidewalks, pavements, driveways and park
Building new building constructed.
r. Cost to construct sidewalks, pavements, driveways and park
Land Improvement after the construction of the building.
Building s. Demolition cost of old building acquired to give way to const
Land t. Escrow fee for the land purchased.
Land u. Payment to tenants on the acquired land to vacate the prem
Land v. Permanent improvements such as grading and levelling.
Building w. Premium on insurance during construction.
Expense x. Premium paid on property insurance of the constructed buil
Land y. Purchase price allocated to land.
Building z. Safety inspection fee on construction.
Building as deduction or
Land as deduction if no construction aa. Sale of scrap from old building demolished.
bb. Special assessment charged by the local government to lan
Land cost of public improvements.
Expense cc. Subsequent real property tax on land following the acquisiti
Building dd. Temporary fence built for construction safety.
Land as deduction ee. Timber sold from trees felled during demolition of old build
Land ff. Unpaid real property tax on land assumed by buyer.
Land gg. Mortgage on land assumed by buyer.
ovement accounts.
ld building was not used and was subsequently demolished in order
ction of new building.
building such as replacing glass wall with shatter-proof glass.
ot acquired.
d the perimeter of the land.
e way for construction of new building.
nstruction was planned.
ents made on the building.
ed during construction.
r construction purposes.
ents, driveways and parking lot that is part of the blueprint of the
ents, driveways and parking lot that are built subsequently years
g.
ired to give way to construction of new building.
d land to vacate the premises.
rading and levelling.
e of the constructed building.
local government to land owners as contribution to the
nd following the acquisition.
ction safety.
ng demolition of old building.
sumed by buyer.
Illustration 2: Identify whether each item is included in, excluded or deducted from the cost of machiner
Included a. Cash price of machinery.
Excluded b. Continuing and frequent repairs.
Included c. Cost of the dismantling and restoring the site as required by the contract.
Excluded d. Cost of training employees who will operate the machine.
Included e. Custom taxes for imported machines.
Included f. Freight paid on the new machinery.
Included g. Labor cost on installation of the new machine.
Included h. Overhaul costs that will increase productivity of the machine.
Excluded i. Property insurance on the new machinery.
Excluded j. Removal cost of the old machinery.
Excluded k. Replacement cost for broken gear on a machine as part of routine maintenance.
Included l. Safety device and parts added to the machine.
Excluded
(Deducted) m. Term discount on purchased machinery. The discount was not taken.
Included n. Testing cost incurred.
Excluded o. Value added tax on purchase on machineries.
m the cost of machinery.
e maintenance.
Change in accounting estimate
Prospective - adjust current period
Instances of change in estimate:
a) Change in useful life
b) Change in residual value
c) Change in cost
d) Change in depreciation method
Use latest carrying amount which will be subject to depreciation
Use remaining life for depreciation (Regardeless if there is a change or no change in original life.)
Problem 1
ABC Corporation acquired a factory equipment with the following information:
Acquisition date 1/1/Y1
Cost 300,000
Salvage value 70,000
Disposal cost to be paid after useful life 20,000 Net residual value = 50,000
Useful life 10 years
Depreciation method Straight line
Beginning Year 3, ABC corporation implemented changes in the depreciation calculation as follows:
Date of change 1/1/Y3
Depreciation method Double declining
Useful life from acquisition date 7 years Remaining life = 5 years
Residual value 60,000
Requirements:
Depreciation expense for Year 1 up to Year 5
Carrying amount of equipment Year 1 up to Year 5
Using straight-line method
Depreciation
Year Cost Residual value Expense
1 300,000 50,000 25,000
2 300,000 50,000 25,000
Using double declining method
Depreciation rate = 200% x (1/Life)
= 200% x (1/5) *Note: Use remaining useful life
= 40%
Previous Depreciation Depreciation
Year Carrying Amt Rate Expense
3 250,000 40% 100,000
4 150,000 40% 60,000
5 90,000 40% 30,000
Problem 2
ABC Corporation acquired a factory equipment with the following information:
Acquisition date 4/1/Y1 *For first year depreciation, 9 months on
Cost 300,000
Residual value 50,000
Useful life in years 5 years
Depreciation method Sum of years digit
Beginning Year 3, ABC corporation implemented changes in the depreciation calculation as follows:
Date of change 1/1/Y3
Depreciation method Production output
Residual value No change
Production capacity starting Year 3 10,000 units
Units produced for Year 3 3,000 units
Units produced for Year 4 4,000 units
Units produced for Year 5 3,000 units
Requirements:
Depreciation expense for Year 1 up to Year 5
Carrying amount of equipment Year 1 up to Year 5
Using SYD method
SYD = 15
Residual
Year Period Covered Cost value
1 Apr-Dec 300,000 50,000
2 Jan-Mar 300,000 50,000
2 Apr-Dec 300,000 50,000
Depreciation Carrying
Year Expense Amount
1 62,500.00 237,500
2 70,833 166,667
Using Production Output method
Deprectaion rate = (Carrying amount - Residual Value) / Production capacity
(166,667 - 50,000)/10,000 units
= 11.6667 per unit
Depreciation Depreciation
Year Units Produced Rate Expense
2
3 3,000.00 11.67 35,000
4 4,000.00 11.67 46,667
5 3,000.00 11.67 35,000
original life.)
ation as follows:
aining life = 5 years
Accumulated Carrying
Depreciation Amount
25,000 275,000
50,000 250,000
g useful life
Carrying
Amount
150,000
90,000
60,000 * The last carrying amount must be equal to the residual value
ciation, 9 months only
ation as follows:
Depreciable SYD Depreciation Accumulated Carrying
Amount Rate No. of Months Expense Depreciation Amount
250,000 5/15 9 62,500 62,500 237,500
250,000 5/15 3 20,833 83,333 216,667
250,000 4/15 9 50,000 133,333 166,667
duction capacity
Carrying
Amount
166,667
131,667 35,000.10
85,000 46666.8
50,000
