AE 121 Property, Plant and Equipment

1. Paula Company had the following property acquisitions during the current year:
➢ Acquired a tract of land and building in exchange for 50,000 ordinary shares of P100 par value with a market price
of P120 per share on the date of acquisition. The last property tax bill indicated an assessed value of P1,200,000
for the land and P2,800,000 for the building. However, the land has a fair value of P2,000,000 and the building has
a fair value of P3,500,000.
➢ Received land from a major shareholder as an inducement to locate the plant in the city. No payment was required
but the entity paid P50,000 for legal expenses for land transfer. The land is fairly valued at P1,000,000.
➢ Acquired a welding machine with an invoice price of P3,000,000 subject to a cash discount of 10% which was not
taken. The entity incurred cost of P50,000 in removing the old welding machine prior to the installation of the
new one. Welding supplies were acquired at a cost of P150,000.
What is the total increase in property, plant and equipment as a result of the acquisitions?
A. 9,200,000
B. 9,250,000
C. 9,700,000
D. 9,450,000

2. Kervin Company acquired three items of machinery as follows:

➢ During 2015, the entity purchased a machine for P500,000 down and four monthly installments of P1,250,000.
The cash price of the machine was P4,700,000
➢ On January 1, 2015, the entity purchased a machine for P2,000,000 in exchange for a noninterest bearing note
requiring four payments of P500,000. The first payment was made on January 1, 2015. The rate of interest for this
note at the date of issuance was 10%. The present value of an ordinary annuity of 1 at 10% is 3.17 for four periods.
The present value of an annuity of 1 in advance at 10% is 3.49 for four periods.
➢ On January 1, 2015, the entity acquired a machine by issuing a four-year, non-interest bearing note for P2,000,000.
The note is due on January 1, 2019. The entity has a 10% interest for this type of note. The present value of 1 at
10% for 4 years is 0.68.
What is the total cost of the three machines?
A. 7,645,000
B. 7,805,000
C. 8,505,000
D. 8,605,000

3. Jowee Company exchanged an old machine, costing P3,000,000 and 50% depreciated, for a used machine and paid a
cash difference of P500,000. The fair value of the old machine was determined to be P1,800,000. What amount should
be recorded as cost of the machine received in exchange?
A. 1,800,000
B. 2,300,000
C. 1,300,000
D. 2,000,000

4. On January 1, 2015, Annibelle Company received a grant of P9,000,000 from the foreign government in order to defray
safety and environmental costs within the area where the entity is located. The safety and environmental costs are
expected to be incurred over three years, respectively, P1,000,000, P2,000,000 and P3,000,000. What income from
the government grant should be recognized in 2015?
A. 9,000,000
B. 1,500,000
C. 3,000,000
D. 4,500,000

5. Karlene Company and Erika Company are fuel oil distributers. To facilitate the delivery of oil to customers, the two
entities exchanged ownership of barrels of oil without physically moving the oil. Karlene paid Erika P1,500,000 to
compensate for a difference in the grade of oil. It was reliably determined that the configuration of the cash flows of
the asset received does not differ from the configuration of the cash flows of the asset transferred. On the date of
exchange, the oil inventory of Karlene has a carrying amount of P5,000,000 and fair value of P7,000,000. The oil
inventory of Erika has a carrying amount of P6,000,000 and fair value of P8,500,000. What amount should Karlene
record as cost of the oil inventory receive in exchange?
A. 4,500,000
B. 6,500,000
C. 7,000,000
D. 8,500,000
6. Keshia Company purchased a machine for P3,000,000 on January 1, 2015. The entity received a government grant of
P500,000 in respect to this asset. The policy is to depreciate the asset over five years on a straight line basis and to
treat the grant as deferred income. On January 1, 2017, the grant became fully repayable because of noncompliance
with conditions. What is the loss on repayment of grant in 2017?
A. 500,000
B. 300,000
C. 200,000
D. 100,000

7. Natalie Company purchased a machine for P6,600,000 on January 1, 2015 and received a government grant of
P600,000 towards the capital cost. The policy is to treat the grant as a reduction in the cost of the asset. The machine
is to be depreciated on a straight line basis over ten years with a residual value of P500,000. On January 1, 2017, the
grant became fully repayable because of noncompliance with conditions.
1. What is the depreciation for 2015?
A. 610,000
B. 600,000
C. 660,000
D. 550,000

2. What is the depreciation for 2017?

A. 610,000
B. 600,000
C. 780,000
D. 730,000

8. On January 1, 2015, Bryan Company received from the government a P5,000,000 three-year, zero-interest loan
evidenced by a promissory note. The prevailing rate of interest for a loan of this type is 10%. The present value of 1 at
10% for three periods is 0.751.
1. What is included in the journal entry to record the loan and grant?
A. Debit discount on note payable, P1,245,000
B. Credit note payable, P5,000,000
C. Credit deferred grant income , P1,245,000
D. All of these are included in the journal entry

2. What is the grant income for 2015?

A. 1,245,000
B. 415,000
C. 375,500
D. Zero

9. Roberto Company purchased a P4,000,000 tract of land as an investment property. The entity razed an old building
on the property.
Demolition of old building 200,000
Proceeds from sale of salvaged materials 20,000
Legal fees for purchase contract and recording ownership 150,000
Title guarantee insurance 50,000
Payment of property taxes in arrears 100,000
Option paid for an alternative land not acquired 30,000
Special assessment for city improvements 120,000
What is the cost of the land?
A. 4,600,000
B. 4,420,000
C. 4,480,000
D. 4,500,000

10. Theresa Company purchased for P4,500,000 a tract of land as a factory site. An old building was demolished and
construction began on the new building.
Cost of demolishing old building 300,000
Title insurance and legal fees to purchase land 200,000
Architect fee 950,000
New building construction cost 8,000,000
Survey before construction 50,000
Building permit or payment to city hall for approval of building construction 150,000
Excavation before new construction 200,000
 Liability insurance during construction 100,000
New fence surrounding the factory 100,000
Driveways, parking bays and safety lighting 550,000
Cost of trees, shrubs and other landscaping 250,000
What is the cost of the new building?
A. 9,700,000
B. 9,750,000
C. 9,800,000
D. 9,750,000

11. During 2015, Romart Company constructed a new building at a cost of P30,000,000. The expenditures for the building,
which was finished late in 2015, were incurred evenly during the year. The entity had the following loans outstanding
on December 31, 2015:
➢ 10% note to finance specifically construction of the building dated January 1, 2015, P10,000,000 and unpaid on
December 31, 2015. Investments were made on the proceeds from the loan and income of P100,000 was realized
in 2015.
➢ 12% 20-year bonds payable issued at face value on April 30, 2014, P30,000,000
➢ 8% five-year note payable, dated March 1, 2014, P10,000,000
What amount of interest is capitalized as cost of the new building?
A. 1,550,000
B. 1,450,000
C. 1,400,000
D. 1,500,000

12. Alvin Company acquired a machine and incurred the following costs:
Cash paid for machine, including VAT of P96,000 896,000
Cost of transporting machine 30,000
Cost of installation 50,000
Cost of testing machine 40,000
Cost of safety rails and platform surrounding machine 60,000
Cost of water device to keep machine cool 80,000
Cost of adjustment to machine to make it operate more efficiently 75,000
Cost of repairing damage during installation 45,000
Cost of spare parts to cover breakdowns 155,000
Estimated dismantling cost to be incurred as required by contract 65,000
Insurance cost for the current year 15,000
Cost of training personnel who will use the machine 25,000
What total amount should be capitalized as cost of the machine?
A. 1,400,000
B. 1,296,000
C. 1,200,000
D. 1,160,000

13. Marie Company had a 10% P3,000,000 specific construction loan and 12% P25,000,000 general loan outstanding
during 2015 and 2016.
The entity began the self-construction of a building on January 1, 2015 and was completed on December 31, 2016.
The following expenditures were made during 2015 and 2016:
January 1, 2015 4,000,000
April 1, 2015 5,000,000
December 1, 2015 3,000,000
March 1, 2016 6,000,000
1. What amount of interest is capitalized as cost of the building in 2015?
A. 3,300,000
B. 1,380,000
C. 900,000
D. 880,000

2. What is the cost of the building to date December 31, 2015?

A. 12,900,000
B. 15,300,000
C. 13,380,000
D. 12,880,000
 3. What is the cost of the building on December 31, 2016?
A. 18,000,000
B. 20,988,000
C. 19,980,000
D. 20,100,000

4. What amount of interest expense should be reported in 2016?

A. 3,000,000
B. 3,300,000
C. 1,212,000
D. 912,000

5. What is the cost of the building, assuming the building was completed on June 30, 2016?
A. 18,000,000
B. 19,884,000
C. 20,868,000
D. 19,377,000

14. Jayanne Co. acquired an equipment for P4,200,000 in 2012. The policy is straight line depreciation, full depreciation
in the year of acquisition and no depreciation in the year of disposal. The useful life is five years with residual value of
P200,000. On July 1, 2015, the equipment was sold for P2,500,000. What is the gain on disposal in 2015?
A. 700,000
B. 820,000
C. 500,000
D. 400,000

15. Genel Company provided the following schedule of machinery:

Total Cost Residual Value Useful Life
Machine A 5,500,000 500,000 20
Machine B 2,000,000 200,000 15
Machine C 400,000 5
What is the composite life of these assets?
A. 13.3
B. 16.0
C. 18.0
D. 19.8

16. Jamela Company used the composite method of depreciation based on a 25% composite rate. On January 1, 2015,
the total cost of equipment was P5,000,000 with total residual value of P600,000 and accumulated depreciation of
P3,000,000. In January 2015, the entity purchased an equipment for P2,500,000 with no residual value. On December
31, 2015, the entity sold an equipment costing P1,000,000 for P350,000. The said equipment was acquired on January
1, 2013 with residual value of P200,000. What amount of depreciation should be recognized in 2015?
A. 1,625,000
B. 1,875,000
C. 1,525,000
D. 1,000,000

17. On September 20, 2015, Shamille Company purchased machinery for P7,600,000. Residual value was estimated to be
P400,000. The machinery is depreciated over eight years using the sum of the years’ digits method. Depreciation is
computed on the basis of the nearest fullest month. What amount should be recorded as depreciation for 2016?
A. 1,450,000
B. 1,600,000
C. 1,550,000
D. 1,400,000

18. Lina Company purchased equipment on January 1, 2015 for P5,000,000. The equipment had a useful life of five years
and residual value of P600,000. The policy is to depreciate five-year assets using the double declining balance method
for the first 2 years and then switch to straight line. What amount should be reported as accumulated depreciation
on December 31, 2017?
A. 3,000,000
B. 3,800,000
C. 3,920,000
D. 3,600,000
19. Ariel Company purchased a boring machine on January 1, 2015 for P8,100,000. The useful life of the machine is
estimated at three years with a residual value of P600,000. During the useful life, the expected units of production
from the machine are 10,000 units for 2015, 9,000 units for 2016 and 6,000 units for 2017. What is the depreciation
expense for 2016 using the most appropriate depreciation method?
A. 2,700,000
B. 3,000,000
C. 2,500,000
D. 2,916,000

20. On January 1, 2015, Annie Company purchased a mineral mine for P26,400,000 with removable ore estimated at
1,200,000 tons. After it has all the ore, the entity will be required by law to restore the land to its original condition at
an estimated cost of P2,200,000. The present value of the estimated restoration cost is P1,800,000. The property can
be sold afterwards for P3,000,000. During 2014, the entity incurred P2,000,000 exploration cost and P1,600,000
development cost preparing the mine for production. The entity removed 80,000 tons of ore and sold 60,000 tons of
ore in 2015. What amount of depletion should be included in the cost of sales for 2015?
A. 1,920,000
B. 1,440,000
C. 1,500,000
D. 1,590,000

21. On July 1, 2015, Trisha Company purchased the rights to a mine for P13,200,000, of which P1,200,000 was allocable
to the land. Estimated reserves were 1,500,000 tons. The entity expects to extract and sell 25,000 tons per month.
The entity purchased mining equipment on July 1, 2015 for P9,500,000. The mining equipment had a useful life of 8
years. However, after all the resource is removed, the equipment will be of no use and will be sold for P500,000.
1. What is the depletion for 2015?
A. 2,400,000
B. 1,200,000
C. 2,640,000
D. 1,320,000

2. What is the depreciation for 2015?

A. 1,800,000
B. 1,125,000
C. 900,000
D. 562,500

22. Rona Company provided the following balances on December 31, 2015:
Wasting asset, at cost 40,000,000
Accumulated depletion 15,000,000
Capital liquidated 5,000,000
Retained earnings 10,000,000
Depletion based on 100,000 units extracted at P30 per unit 3,000,000
Inventory of resource deposit (20,000 units) 2,000,000
What is the maximum dividend that can be declared on December 31, 2015?
A. 19,600,000
B. 19,400,000
C. 25,000,000
D. 20,000,000

23. Nickolai Company acquired a building on January 1, 2012 at a cost of P20,000,000. The building had a useful life of six
years and residual value of P2,000,000. The building was revalued on January 1, 2015 and the revaluation revealed
replacement cost of P30,000,000, residual value of P4,000,000 and revised useful life of 8 years from the date of
acquisition. The income tax rate is 30%. What is the revaluation surplus on December 31, 2015?
A. 6,000,000
B. 4,200,000
C. 2,800,000
D. 3,360,000

24. On January 1, 2015, Alma Company showed land with carrying amount of P10,000,000 and building with cost of
P60,000,000 and accumulated depreciation of P18,000,000. The land and building were revalued on the same date
and revealed the fair value of land at P15,000,000 and the building at P70,000,000. The original useful life of the
building is 20 years and depreciation is computed on the straight line. The income tax rate is 30%. What is the
revaluation surplus on December 31, 2015?
A. 33,000,000
 B. 23,100,000
C. 21,450,000
D. 21,700,000

25. On December 31, 2015, Joshua Company had an equipment with cost of P9,000,000 and accumulated depreciation of
P3,000,000. Due to obsolescence and physical damage, the equipment was found to be impaired. On the same date,
the entity determined that the equipment had a fair value less disposal cost of P4,500,000, discounted net cash inflows
of P4,000,000 and undiscounted net cash inflows of P5,000,000. What amount should be reported as impairment loss
for 2015?
A. 1,500,000
B. 2,000,000
C. 1,000,000
D. Zero

26. Ermon Company determined that its electronics division is a cash generating unit. The entity calculated the value in
use of the division at P8,000,000. The carrying amounts of the assets are: Building - P5,000,000; Equipment -
P3,000,000; and Inventory - P2,000,000. The entity also determined that the fair value less cost of disposal of the
building is P4,500,000. What is the impairment loss to be allocated to the equipment?
A. 1,000,000
B. 900,000
C. 600,000
D. 400,000

27. On December 31, 2015, Marizor Company believed that the assets of a cash generating unit are impaired based on an
analysis of economic indicators. The assets and liabilities of the cash generating unit at carrying amount on December
31, 2015 are:
Cash 4,000,000
Accounts receivable 6,000,000
Allowance for doubtful accounts 1,000,000
Inventory 7,000,000
Property, plant and equipment 22,000,000
Accumulated depreciation 4,000,000
Goodwill 3,000,000
Accounts payable 2,000,000
Loans payable 1,000,000
The entity determined that the value in use of the cash generating unit is P28,000,000. The accounts receivable are
considered collectible, except those considered doubtful. The carrying amount of the inventory is lower than fair value
less cost of disposal. What is the impairment loss to be allocated to property, plant and equipment?
A. 3,600,000
B. 6,000,000
C. 3,000,000
D. 1,800,000

28. On January 1, 2015, Roxanne Company purchased equipment with cost of P10,000,000, useful life of 10 years and no
residual value. The entity used straight line depreciation. On December 31, 2015 and December 31, 2016, the entity
determined that impairment indicators are present. There is no change in useful life or residual value. The following
information is available for impairment testing at each year-end:
December 31, 2015 December 31, 2016
Fair value less cost of disposal 8,100,000 8,400,000
Value in use 8,550,000 8,200,000
1. What is the impairment loss for 2015?
A. 900,000 C. 600,000
B. 450,000 D. Zero

2. What is the gain on reversal of impairment for 2016?

A. 400,000 C. 600,000
B. 800,000 D. Zero

3. What is the depreciation for 2017?

A. 1,000,000 C. 1,025,000
B. 1,050,000 D. 950,000