Exercise 6 - Borrowing Cost

Jojo Company loaned P 2,500,000 from the bank for a construction of a building during the year 2020. The construction started on January 1 and was completed on December 31. The specific loan amount did not suffice the expenditures for the building so Jojo used funds from other existing loans. The currently existing general purpose loans were: (The missing interest rate is 12%)

Notes payable, 10%, (for general purposes) P3,000,000

Notes payable, 10%, general borrowings 2,000,000

Notes payable, 12%, general borrowings 3,000,000

Expenditures for the construction in 2020 were:

January 1 P2,500,000

March 1 1,200,000

September 1 1,500,000

November 1 800,000

Round-off all computed % to nearest one percent and round off all peso figures to the nearest one peso.

Required: Compute the capitalizable borrowing cost.

Exercise 7 - Government grant

On January 1, 2018, Citimart Inc. was granted 5,000 acres of land in a village, located near the slums outside the city limits, by a local government authority. The condition attached to this grant was that the company should clean up this land and lay roads by employing labourers from the village in which the land is located. The government has fixed the minimum wage payable to the workers. The entire operation will take three years and is initially estimated to cost P160 million. The fair value of this land on the date of grant was P240 million and is expected to increase by at least 20% annually because of the improvements to be done by the company. In relation to the attached condition, the company incurred costs of P80 million in 2018 and P70 million in 2019. On December 31, 2019, the company estimated that it will incur additional cost of P30 million in 2020.

Required:

1. How much should be recognized as income from government grant for the year ended December 31, 2019?

2. Prepare the journal entries in 2020 related to the government grant.

Exercise 8 - Government grant

Lee Company received an P1,800,000 subsidy from the government to purchase manufacturing equipment on January 2, 2020. The equipment has a cost of P3,000,000, a useful life a six years, and no salvage value. Lee depreciates the equipment on a straight-line basis.

Required: Under each of the following independent cases:

1. What is the book value of the asset on December 31, 2020?

2. What is the depreciation expense for the asset in 2020?

3. Prepare journal entries in 2020

Case 1 If Lee chooses to account for the grant as deferred revenue.

Case 2 If Lee chooses to account for the grant as an adjustment to the asset.

Exercise 9 - Derecognition

On March 31, 2020, Sterne Corp. retired a machine used in manufacturing designer parts. The machine was acquired May 1, 2017. Straight-line depreciation method was used computed up to the last month before retirement. The asset had an estimated residual value of P20,000 and a fiveyear life. On December 31, 2019, the balance in the accumulated depreciation is P320,000. The machine was scrapped and the company did not receive a single consideration.

Required:

1. The loss on retirement is: (round off to the nearest peso, if needed)

2. Prepare the journal entry to record the retirement.

Exercise 10 - Derecognition

Helena acquire an asset that had a cost of P130,000. The asset is being depreciated over a 5-year period using the sum-of-the-years' digit method. It has a salvage value estimated at P10,000.

Required: The loss/gain if the asset is sold for P38,000 at the end of the third year is:

Assignment

You are the Accountant of CONJURING COMPANY. On January 1, 2020, the first day of the first year of operations, the company acquired a Machine for P225,555,000 with an estimated useful life of 30 years and an estimated residual value of P12,522,550 and is deciding whether what

method of depreciation should the company will employ for depreciating the asset.

You are tasked to prepare working papers showing schedules of computations of depreciation

and carrying amount of the Machine, that the company had acquired, under the following

methods of depreciation.

a. Straight-line method

b. Output method

c. Working hours method

d. Sum-of-the-year's digits method

e. 150% Declining balance method

f. 200% Declining balance method

Below shows the schedule of projected hours to be used and the corresponding output in units to be produced per year for the company.

Year Working hours Production

2020 96,000 400,500

2021 97,000 380,000

2022 97,500 370,000

2023 97,500 362,400

2024 97,500 320,500

2025 98,000 280,200

2026 98,500 260,600

2027 101,000 240,000

2028 105,500 200,200

2029 111,500 185,600

The company is so certain to meet the projected figure provided above.

The company is also requesting for a recommendation on what method to be used by providing a recommendation statement (in business correspondence form / letter) at the very last part of the working papers on a separate sheet.

required:

1. Prepare depreciation schedules for all methods above.
2. make a letter to management for the "recommendation statement"

State all your arguments on why you choose the depreciation method as appropriate for the item of PPE. Also state why other methods would not be appropriate if they were to be adopted.