INTERMEDIATE ACCOUNTING 1

PPE

PROBLEM 1 EXPLANATION
Bamco Company purchased a new machine on a deferred payment basis. A downpayment of P100,000 was made and 4 monthly installments of P250,000 are to be made at
the end of each month. The cash equivalent price of the machine was P950,000. The entity incurred and paid installation costs amounting to P30,000.
1. What amount should be capitalized as cost of the machine?
Solution:
Cash price 950,000.00
Installation cost 30,000.00 Directly attributable costs shall be added as part of cost of Machine

980,000.00
PROBLEM 2
On December 31, 2021, Bart Company purchased a machine in exchange for a noninterest bearing note requiring eight payments of P200,000. The first payment was made on
December 31, 2021 and the others are due annually every December 31. At the date of issuance, the prevailing rate of interest for this type of note was 11%.
PV of an ordinary annuity of 1 at 11% for 8 periods 5.146
PV of an annuity of 1 in advance at 11% for 8 periods 5.712
2. What amount should be recorded as initial cost of the machine?
Solution:
Present value of future payments (200,000*5.712) 1,142,400.00

PROBLEM 3
Lax Company recently acquired two items of equipment.
* Acquired a press at an invoice price of P3,000,000 subject to a 5% cash discount which was taken. Costs of freight and insurance during shipment were P50,000 and
installation cost amounted to P200,000.
* Acquired a welding machine at an invoice price of P2,000,000 subject to a 10% cash discount which was not taken. Additional welding supplies were acquired at a cost of
P100,000.
3. What total amount should be recognized as increase in the equipment account as a result of the transactions?
Solution:
First equipment (press)
Invoice price 3,000,000.00
Discount taken (5%) - 150,000.00 Cash discoun, trade discounts and rebates (taken or not) shall be deducted
from cost of equipment
Freight and insurance 50,000.00 directly attributable costs shall form part of the cost of equipment
Installation cost 200,000.00 3,100,000.00 directly attributable costs shall form part of the cost of equipment
Second equipment (welding machine)
Invoice price 2,000,000.00
Discount not taken 10% - 200,000.00 1,800,000.00
Total Cost 4,900,000.00

PROBLEM 4
Holiday company purchased a high speed industrial centrifuge at a cost of P840,000. Shipping cost amounted to P50,000. Foundation work to house the centrifuge cost P80,000. An
additional waterline had to be run to the equipment at cost of P40,000. Labor and testing cost totaled P60,000. Materials used up in testing cost P30,000.
4. What amount should be capitalized as cost of the equipment?
Solution:
Industrial Centrifuge Cost 840,000.00
 Shipping cost 50,000.00
Centriguge cost 80,000.00
Waterline 40,000.00
Labor and testing cost 60,000.00
Materials used up in testing 30,000.00
Total Cost of Equipment 1,100,000.00

PROBLEM 5
During the current year, JMP Company exchanged an old packing machine, which cost P1,200,000 and was 50% depreciated, for another used machine and paid a cash difference
of P160,000. The fair value of the old packaging machine was determined to be P700,000.
5. What amount should be reported as cost of the machine acquired in the exchange?
Solution:
Fair value of old machine (Asset given up) 700,000.00 If problem is silent, assume the transaction to be "with a commercial
substance"
Cash payment 160,000.00
Cost ot new machine 860,000.00
6. What amount should be reported as gain on exchange?
Solution:
Fair value of old machine (Asset given up) 700,000.00
Carrying amount of old machine (50% of 1,200,000) - 600,000.00 multiply the cost by the depreciation rate since machine is already 50%
depreciated
Gain on exchange 100,000.00

PROBLEM 6
During the current year, Beam Company paid P100,000 cash and traded inventory, which had a carrying amount of P2,000,000 and a fair value of P2,100,000, for other inventory in the
same line of business with fair value of P2,200,000. The exchange has commercial substance.
7. What amount should be recorded as cost of the inventory received in exchange?
Solution:
Fair value of inventory given 2,100,000.00 Fair Value should be used: The exchange has commercial substance

Cash payment 100,000.00

Total cost of inventory received 2,200,000.00

PROBLEM 7
Yola company and Zaro company are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of P1200 barrels of oil without
physically moving the oil. Yola paid Zaro 300,000 to compensate for a difference in the grade of oil. It is reliably determined that exchange lacks commercial substance. On the
date of exchange, cost and fair value of the oil of Yola Company were P1,000,000 and P1,200,000, respectively.
8. What amount should Yola company record as cost of the oil inventory received in exchange?
Solution:
Cost of oil inventory given 1,000,000.00 Carrying amount should be used since the transaction lacks commercial
substance
Cash payment 300,000.00
Total Cost of inventory received 1,300,000.00

PROBLEM 8
 At the beginning of the current year, Lem Company bought machinery under a contract that required a down payment of P100,000, plus 24 monthly payments of P50,000 each, for
total cash payments of P1,300,000. The cash price of the Machinery was P1,100,000. The Machinery has a useful life of 10 years and residual value of P50,000. The entity used
straight line depreciation.
9. What amount should be reported as depreciation expense for the current year?
Solution:
Cost of machinery 1,100,000.00
Residual value - 50,000.00
Depreciable amount 1,050,000.00
Divided by: Useful life 10.00
Depreciation expense 105,000.00
10. How much is the accummulated depreciation at the end of the current year?
Solution:
Accumulated Depreciation 105,000.00 Since the machine is acquired at the beginning of the year, depreciation
expense for the first year should also be the accumulated depreciation for
that year
11. What is the carrying amount of the machine at the end of the current year?
Solution:
Cost of machinery 1,100,000.00
Accumulated Depreciation - 105,000.00
Carrying amount 995,000.00

PROBLEM 9
Marian Company purchased an asset with a useful life of 10 years at the beginning of the current year for P6,500,000. At year-end, the amount the entity would receive from the
disposal of the asset if it was already of the age and in the condition expected at the end of the useful life was estimated at P700,000. Inclusive of inflation, the actual amount
expected to be received on disposal was estimated at P900,000.
12. What amount should be recorded as depreciation for the current year?
Solution:
Cost of asset 6,500,000.00
Residual value - 700,000.00 Residual amount should be the amount the entity would receive from the
disposal of the asset
Depreciable amount 5,800,000.00
Divided by: Useful life 10.00
Depreciation Expense 580,000.00

PROBLEM 10
Canada company purchased a machine at an invoice price of P4,500,000 with terms 2/10, n/30. The entity paid the required amount for the machine beyond the discount period.
The entity paid P80,000 for delivery of the machine and P310,000 for installation and testing. The machine was ready for use on January 1, 2021. It was estimated that the machine
would have a useful life of 5 years and a residual value of P800,000. Engineering estimate indicated that the useful life in productive units was P200,000. Units actually produced
during the first two years were 30,000 in 2021. and 48,0000 in 2022. The entity decided to use the output method of depreciation.
13. What amount should be reported as accumulated depreciation of the machine on December 31, 2022?
Solution:
Invoice price 4,500,000.00
Cash discount (2% * 4,500,000) - 90,000.00
Delivery Cost 80,000.00
Installation and testing 310,000.00
 Total Cost 4,800,000.00
Residual Value - 800,000.00
Depreciable amount 4,000,000.00

Rate per unit (4,000,000/200,000) 20.00

Depreciation 2021 (30,000 * 20) 600,000.00
Depreciation 2022 (48,000 * 20) 960,000.00
Accumulated Depreciation on December 31, 2022? 1,560,000.00

PROBLEM 11
Frey company purchased a machine for P4,500,000 on January 1, 2021. The machine has an estimated useful life of four years and a residual value of P500,000. The machine is
being depreciated using the sum of the years' digits method.
14. What amount should be reported as accumulated depreciation on December 31, 2022?
Solution:
SYD Rate = (4+1)/2*4 10.00

Acquisition cost 4,500,000.00

Depreciation 2021 (4/10 * 4,500,000) 1,800,000.00

Depreciation 2022 (3/10 * 4,500,000) 1,350,000.00
Accumulated Depreciation 2022 3,150,000.00

15. What is the carrying amount of the machine on December 31, 2022?
Solution:
Cost 4,500,000.00
Accumulated Depreciation - 3,150,000.00
Carrying Amount Decembe 31, 2022 1,350,000.00

Reference: Practical Financial Accounting by Conrado T. Valix and Chistian Aris M. Valix