NON-FINANCIAL ASSETS: PPE - ACQUISITION AND SUBSEQUENT EXPENDITURES

(with solutions and explanation)

1.1

• Maria 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.
• Maria 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.
• Maria 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 Maria.

1. Building.

2. Leased equipment.

3. Land received from Club on Link's books.

4. Land received from Link on Club's books.

1.2

• 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.

1.3

• 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 9. 10.

Sale of machine on 7/1/Y8 11. 12.