PROBLEM 1. Lupiak Corporation wishes to exchange a machine used in its operations. Lupiak has received the following offers from other companies in the industry:

1. Daku Company offered to exchange a similar machinery plus P23,000. (The exchange has commercial substance for both parties)

2. Was-ag Company offered in exchange a similar machine (the exchange lacks commercial substance for both parties).

3. Libog Company offered to exchange a similar machine but wanted P3,000 in addition to Lupiak's machine (the exchange has commercial substance for both parties).

4. In addition, Lupiak contacted Gamo Corp a dealer in machines. To obtain a new machine, Lupiak must pay P93,000 in addition to trading its old machine.

Lupiak

Daku

Was-ag

Libog

Gamo

Machine cost

P160,000

P120,000

P152,000

P160,000

P130,000

Accum Depr

60,000

45,000

71,000

75,000

-0-

Fair Value

92,000

69,000

92,000

95,000

185,000

Instructions:

For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company.

PROBLEM 2. Karingking Company, a manufacturer of ballet shoes is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment. The following transactions were presented to the accountant for review:

Transaction 1

On June 1, 2020, Karingking Company purchased equipment from Wayang Corp. Karingking issued a P2,800,000 4-year, zero-interest-bearing note to Wayang for the new equipment. Karingking will pay off the note in four equal installments due at the end of each of the next 4 years. At the date of the transaction, the prevailing market rate of interest for obligations of this nature was 10%. Freight costs of P42,500 and installation cost of P50,000 were incurred in completing the transaction. The appropriate factors fot he time value of money at 10% rate of interest are given below:

Future value of P1 for 4 periods

1.46

Future value of an ordinary annuity for 4 periods

4.64

Present value of P1 for 4 periods

0.68

Present value of an ordinary annuity for 4 periods

3.17

Transaction 2

On December 31, 2020, Karingking Company purchased several assets at Yakayaka Shoes Inc. a small shoe manufacturer whose owner was retiring. The purchase amounted to P220,000 and included the assets listed below. Karingking engaged the services of Tanawa Appraisal In. an independent appraiser to determine the fair values of the assets which are presented below:

Yakayaka book value

Fair Value

Inventory

P60,000

P50,000

Land

40,000

80,000

Building

70,000

120,000

P170,000

P250,000

During its fiscal year ended May 31, 2021, Karingking incurred P8,000 for interest expense in connection with the financing of these assets.

Transaction 3

On March 1, 2021, Karingking Company exchanged a number of used trucks plus cash for vacant land adjacent to its plant site. (The exchange has commercial substance.) Karingking intends to use the land for a parking lot. The truck had a combined book value of P350,000, as Karingking had recorded P200,000 of accumulated depreciation against these assets. Karingking's purchasing agent who has had previous dealings in the secondhand market indicated that the trucks had a fair value of P460,000 at the time of the transaction. In addition to the trucks, Karingking Company paid P190,000 cash for the land.

Instructions:

a) For each of the three transactions described above, determine the value at which Karingking Company should record the acquired assets. Support your calculations with an explanation of the underlying rationale.

b) The books of Karingking Company show the following additional transactions for the fiscal year ended May 31, 2021:

a. Acquisition of a building for speculative purposes

b. Purchase of a 2-year insurance policy covering plant equipment

c. Purchase of the rights for the exclusive use of a process used in the manufacture of ballet shoes.

For each of these transactions, indicate whether the asset should be classified as a plant asset. If it is a plant asset, explain why it is. If it is not a plant asset, explain why not, and identify the proper classification.