Solutions – Chapter 7 NON-CURRENT OPERATING ASSETS MULTIPLE CHOICE - THEORIES 1. B 2. B 3. A 4. B 5. D 6. A 7. A 8. C 9. D 10. A Problem 1 (Pine Company) Correct cost Recorded Cost Difference Land 25.8M x 8.4/28 P7,740,000 P7,000,000 P 740,000 Building 25.8M x 14/28 12,900,000 9,000,000 3,900,000 Equipment 25.8M x 5.6/28 5,160,000 4,000,000 1,160,000 Adjusting Entries: 1. Land 740,000 Building 3,900,000 Equipment 1,160,000 Other Operating Expenses 5,000,000 Salaries and Commission Expense 800,000 2. Depreciation Expense – Building 130,000 Depreciation Expense – Equipment 77,333 Accumulated Depreciation – Building 116,667 Accumulated Depreciation – Equipment 77,333 5% x 3,900,000 x 8/1 2 = P130,000 10% x 1,160,000 x 8/12 = 77,333 Problem 2 (Gay Company) Discount on Notes Payable (5% x 850,000) 42,500 Equipment 42,500 Problem 3 Lakeside Company a. Machinery Machinery Tools Raw materials used in construction P176,000 – 4,000 P172,000 Labor 50,000 Cost of installation 10,000 Materials spoiled in trial runs 5,000 Incremental overhead due to machine construction 25,000 Decommissioning cost 40,000 x .56447 22,579 Purchase of machine tools P15,000 Correct Cost P284,579 P15,000 b. Adjusting entries: Machinery 1,579 Loss on Disposal of Old Machine 3,000 Purchase Discounts 4,000 Profit on Construction 24,000 Machinery Tools 15,000 Accumulated Depreciation – Machinery (old) 120,000 Factory Overhead Control 25,000 Provision for Machine Dismantling 22,579 Machinery (old) 120,000
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1. B 2. B 3. A 4. B 5. D 6. A 7. A 8. C 9. D 10. A
Problem 1 (Pine Company)
Correct cost Recorded Cost Difference Land 25.8M x 8.4/28 P7,740,000 P7,000,000 P 740,000 Building 25.8M x 14/28 12,900,000 9,000,000 3,900,000 Equipment 25.8M x 5.6/28 5,160,000 4,000,000 1,160,000 Adjusting Entries: 1. Land 740,000 Building 3,900,000 Equipment 1,160,000 Other Operating Expenses 5,000,000 Salaries and Commission Expense 800,000 2. Depreciation Expense – Building 130,000
Depreciation Expense – Equipment 77,333 Accumulated Depreciation – Building 116,667 Accumulated Depreciation – Equipment 77,333 5% x 3,900,000 x 8/1 2 = P130,000 10% x 1,160,000 x 8/12 = 77,333 Problem 2 (Gay Company)
Discount on Notes Payable (5% x 850,000) 42,500 Equipment 42,500 Problem 3 Lakeside Company
a. Machinery Machinery Tools Raw materials used in construction P176,000 – 4,000 P172,000 Labor 50,000 Cost of installation 10,000 Materials spoiled in trial runs 5,000 Incremental overhead due to machine construction 25,000 Decommissioning cost 40,000 x .56447 22,579 Purchase of machine tools P15,000 Correct Cost P284,579 P15,000 b. Adjusting entries: Machinery 1,579 Loss on Disposal of Old Machine 3,000 Purchase Discounts 4,000 Profit on Construction 24,000 Machinery Tools 15,000 Accumulated Depreciation – Machinery (old) 120,000 Factory Overhead Control 25,000 Provision for Machine Dismantling 22,579 Machinery (old) 120,000
Land Building Others Organization Fees P50,000 Org’n Exp. Land site and old building P8,150,000 Corporate organization costs 30,000 Org’n Exp Title clearance fees 25,000 Cost of razing old building 220,000 Sale of scrap ( 25,000) Salaries 300,000 Salaries Exp Stock bonus to corporate promoters 100,000 Org’n Exp. (or –
APIC) Real estate tax 25,000 Taxes Expense Cost of construction P18,000,000 Total correct cost P8,370,000 P18,000,000
Adjusting Entries Land 8,370,000 Building 18,000,000 Organization Expenses 180,000 Taxes Expense 25,000 Miscellaneous Revenues 25,000 Administrative Salaries 300,000 Land, Buildings and Equipment 26,900,000
Problem 5 Electro Corporation
Correct cost: Down payment P50,000 PV of future payments P100,000 x 3.6048 360,480 Total cost P410,480 Correct Depreciation 410,480 / 15 x ½ P13,683 Adjusting Entries: Discount on Notes Payable (500,000 – 360,480) 139,520 Machine 139,520 Interest Expense 36,048 Discount on Notes Payable 36,048 360,480 x 12% x 10/12 Accumulated Depreciation 4,650 Depreciation Expense 4,650 13,683 – 18,333
Accumulated Depreciation – Machine (40,000/10 x 5) 20,000 Loss on Replacement of Machine Parts 20,000 Machinery 40,000 Machinery 50,000 Repairs Expense 50,000 Accumulated Depreciation 7,000 Depreciation Expense 7,000 Cost P200,000 Removed part ( 40,000) Replacement 50,000 Revised gross cost P210,000 Accumulated depreciation, 12/31/11 200,000/10 x 5 100,000 Removed accumulated depreciation ( 20,000) (80,000)
Carrying value after overhaul P130,000
2012 depreciation 130000/(10-5+5) P 13,000 Recorded depreciaition 20,000 Adjustment P 7,000 Problem 7 Silver Company
Equipment Accumulated Depreciation Balance, 1/01/12 P 50,000 P 28,000 6/01/12 Purchase of Machine 14 P15,000 + 3,500 18,500 09/01/12 Sold Machine 8 ( 8,000) 8,000 x 10% x 4 ( 3,200) Depreciation for 2012 60,500 x 10% ___ __ 6,050 Balances, December 31, 2012 P60,500 P 30,850 Adjusting Entries: Accumulated Depreciation 3,200 Loss on Sale of Equipment 4,200 Equipment 8,000 – (1,000 - 400) 7,400 Net proceeds P1,000 – 400 P 600 Carrying value P8,000 – 3,200 4,800 Loss on sale P4,200 Equipment 3,500 Repairs and Maintenance 3,500
Accumulated Depreciation – Equipment 390 Depreciation Expense – Equipment 390 6,440 – 6,050 Problem 8 Conquer Company
Equipment Accumulated Depreciation January 1 Balances P 223,000 P 44,000 May 1 Acquisition P60,000 + P4,000 64,000 Oct. 1 Sale (20,000) 20,000 x 10% x 2 ( 4,000) Dec. 31 Depreciation (223,000 – 20,000) x 10% P20,300 20,000 x 10% x ½ 1,000 64,000 x 10% x ½ 3,200 ___ 24,500 December 31, 2010 Balances P267,000 P 64,500 Adjusting Entries Equipment 4,000 Operating Expenses 4,000 Loss on Sale of Equipment 4,000 Accumulated Depreciation 4,000 Equipment 8,000 Accumulated Depreciation 200 Depreciation Expense 200 24,700 – 24,500
Problem 9 Berol Giant Corporation
Audit Adjusting Entries Rent Expense (50,000 x 9/12) 375,000 Prepaid Rent 125,000 Finance Lease Liability 3,540,000 Machinery and Equipment 4,040,000 Profit on Construction 150,000 Building 150,000 Land Improvement 500,000 Land 500,000
Accumulated Depreciation – Machinery and Equipment 2,880,000 Gain on Sale of Machinery 680,000 Machinery and Equipment 4,800,000 – 2,600,000 2,200,000 Cost P4,800,000 Accumulated depreciation 480,000/10 x 6 2,880,000 Carrying value P1,920,000 Proceeds 2,600,000 Gain on Sale of M and E P 680,000
Land 6,000,000 Building 24,000,000 Unearned Income from Government Grant 30,000,000 Depreciation Expense – Building 511,667 Accumulated Depreciation – Building 511,667 Correct depreciation Old P12,000,000/ 25 P480,000 Improvement 1,600,000/12 x ½ 66,667 Donated 24,000,000/25 x ½ 480,000 Correct depreciation P1,026,667 Per client 515,000 Adjustment P 511,667 Unearned Income from Government Grant 600,000 Income from Government Grant 600,000 30,000,000/25 x ½ Accumulated Depreciation – Machinery and Equipment 312,000 Depreciation Expense – Machinery and Equipment 312,000 Correct depreciation – Machinery and Equipment (38,500,000 – 4,800,000)/10 = P3,370,000 4,800,000 / 10 x ½ 240,000 Total P3,610,000 Per client 3,922,000 Adjustment P 312,000 Depreciation Expense – Land Improvements 25,000 Accumulated Depreciation – Land Improvements 25,000 500,000 / 10 x ½ = 25,000 b. Adjusted balances: 1. Land P48,250,000 2. Land Improvements 500,000 3. Accumulated Depreciation – Land Improvements 25,000 4. Buildings 37,600,000 5. Accumulated Depreciation – Buildings 7,026,667 6. Machinery and Equipment 33,700,000 7. Accumulated Depreciation – Machinery and Equipment 18,055,000 8. Unearned Income from Government Grant 29,400,000 9. Depreciation Expense – Land Improvements 25,000 10. Depreciation Expense – Buildings 1,026,667 11. Depreciation Expense – Machinery and Equipment 3,610,000 12. Amortized Income from Government Grant 600,000
A. Building Method – 150% declining balance Depreciation rate = 1.5/25 = 6% Old (P12,000,000 – P2,654,000) x 6% P560,760 New P12,800,000 x 6% 768,000 2012 Depreciation – Building P1,328,760 B. Machinery and Equipment Method – straight-line Useful life – 10 years Old including scrapped in December P7,750,000/10 P775,000 New P290,000/10 x 6/12 14,500 2012 Depreciation – Machinery P789,500 C. Automobiles and Trucks Method - 150% declining balance Depreciation rate = 1.5/5 = 30% Old (not sold) (P13,200,000 – P8,620,000) = P4,580,000 P4,580,000 – (P810,000 + 235,200) x 30% P1,060,440 Sold 235,200 New P650,000 x 30% x 4/12 65,000 2012 Depreciation – Automobiles and Trucks P1,360,640 D. Leasehold Improvements Method – straight line Useful life – 8 years Lease term : original 6 years upon completion of the improvement Remaining useful life = 8 – 3 = 5 years Remaining lease term = 6 – 3 + 4 = 7 years 2012 Depreciation: (P2,210,000 – 1,105,000) / 5 = P 221,000 E. Land Improvements Method – straight-line Useful life – 12 years 2012 Depreciation: P1,920,000 / 12 x 9/12 P 120,000
b. Adjusted Balances: 1. Land P16,200,000 2. Land Improvements 1,920,000 3. Accumulated Depreciation – Land Improvements 120,000 4. Building 24,800,000 5. Accumulated Depreciation – Buildings 3,892,760 6. Machinery and Equipment 7,870,000 7. Accumulated Depreciation – Machinery and Equipment 2,611,250 8. Automobiles and Trucks 5,258,750 9. Accumulated Depreciation – Automobiles and Trucks 3,059,360 10. Leasehold Improvements 2,210,000 11. Accumulated Depreciation – Leasehold Improvements 1,326,000
a. Depreciation Expense – Machine A 15,750 Accumulated Depreciation 15,750 Cost P105,000 Acc. Depreciation 1/1/12 105,000 / 12 x 3 ( 26,250) Carrying amount 1/1/12 P 78,750 78,750 / 5 = P 15,750 b. Depreciation Expense – Machine B 40,000 Accumulated Depreciation – Machine B 40,000 P240,000 / 6 = P 40,000 Impairment Loss 15,000 Accumulated Depreciation – Machine B 15,000 Carrying value 12/31/12 P240,000 x 3.5/6 P140,000 Recoverable amount 125,000 Impairment loss P 15,000 c. Depreciation Expense – Building A 590,625 Accumulated Depreciation – Building A 590,625 Carrying value 1/1/12 P6,300,000 x 15/20 = P4,725,000 2012 Depreciation = P4,725,000 x 15/120 = P 590,625 d. Retained Earnings 175,000 Accumulated Depreciation – Building B 175,000 Carrying value 12/31/11 P5,250,000 x 7/10 = P3,675,000 Recoverable amount 3,500,000 Impairment loss in 2011 P 175,000 Depreciation Expense – Building B 500,000 Accumulated Depreciation – Building B 500,000 3,500,000 / 7 = P 500,000 Accumulated Depreciation – Building B 100,000 Gain - Recovery of Previous Impairment 100,000 Carrying value, 12/31/12 3,500,000 – 500,000 = P3,000,000 Recoverable amount 3,100,000 Increase in value P 100,000 Limit on recovery 175,000 x 6/7 P 150,000
e. Depreciation Expense – Building 300,000
Accumulated Depreciation – Building 300,000 12,000,000 / 20 x 6/12
Investment Property – Land 8,000,000 Investment Property – Building 12,000,000 Accumulated Depreciation – Building (PPE) (12M/20 x 4.5)2,700,000 Land 6,500,000 Building 12,000,000 Revaluation Surplus 4,200,000 Investment Property – Land 500,000 Investment Property – Building 400,000 Fair Value Gain on Investment Property 900,000
Problem 12 Gotham Company
As of December 31, 2011 Based on Cost Based on
Revalued Amt. Balance of Revaluation Surplus
Land P15,000,000 P20,000,000 P5,000,000 Building, net of accumulated depreciation
14,000,000
20,000,000
6,000,000
(a) Depreciation expense on the building for the year 2012: P20,000,000 / 20 years = P1,000,000 (b) Revaluation surplus transferred to Retained Earnings = P6,000,000 / 20 = P300,000 (c) Balance of revaluation surplus at December 31, 2012 statement of financial position =
Based on Previous Revaluation
Based on New Revalued Amt.
Difference
Land P20,000,000 P22,000,000 P2,000,000 Building, net of accumulated depreciation
19,000,000
21,850,000
2,850,000
Balance of Revaluation Surplus at December 31, 2012 statement of financial position: 12/31/11 Balance Realized in 2012 New Revaluation 12/31/12 Final
Pertaining to land P5,000,000 ---------- P2,000,000 P7,000,000 Pertaining to building 6,000,000 (300,000) 2,850,000 8,550,000 Total P11,000,000 P(300,000) P4,850,000 P15,550,000
Adjusting Entries Franchise 420,000 Prepaid Rent 280,000 Retained Earnings 160,000 Patents 740,000 Research and Development Expense (400,000+1,600,000) 2,000,000 Goodwill 2,784,000 Formula (or Patent) 350,000 Legal Fees 126,500 Intangible Assets 6,860,500 Retained Earnings (3/24 x 280,000) 35,000 Rent Expense (1/2 x 280,000) 140,000 Prepaid Rent 175,000 Retained Earnings (6/60 x 420,000) 42,000 Amortization Expense – Franchise 84,000 Accumulated Amortization – Franchise 126,000
Amortization Expense – Patents 61,667
Accumulated Amortization – Patents 61,667 740,000 /10 x 10/12
Problem 14 (Mandy Moore Corporation) Adjusting Entries Research and Development Expense 940,000 Patents 75,000 Rent Expense (91,000 x 5/7) 65,000 Prepaid Rent (91,000 – 65,000) 26,000 General and Administrative Expense / Share Premium * 36,000 Discount on Bonds Payable 84,000 Advertising and Promotions Expenses 207,000 Other Operating Expenses 241,000 Share Premium – Ordinary Share 250,000 Intangible Assets 1,424,000 * If there is no share premium from the same transaction/ If share premium results from the same transaction.
Problem 17 Genuine Company (1) Audit Adjusting Entries
Patents 200,000 Accumulated Amortization – Patents 200,000 Professional Fees and Other Legal Expenses 120,000 Patents 120,000 Amortization of Patents 100,000 Accumulated Amortization – Patents 100,000 Impairment Loss – Patents 169,288 Accumulated Amortization – Patents 169,288 Carrying value before impairment P700,000 Value in use = 140,000 x 3.7908 = 530,712 Impairment loss P169,288
Professional Fees and Other Legal Expenses 70,000 Trademarks 70,000 Amortization of Trademarks (150,000/3) 50,000 Accumulated Amortization – Trademarks 50,000 Discount on Notes Payable 166,020 Franchise 166,020 Face value of the note P800,000 Present value when issued 200,000 x 3.1699 633,980 Initial discount P166,020
(a) Gross cost of patents ……………………………………………………………………….P1,000,000 (b) Carrying value of patents, December 31, 2011…………………………………….. 800,000 (c) Amortization of patents for 2012………………………………………………………. 100,000 (d) Impairment loss on patents – 2012…………………………………………………… 169,288 (e) Amortization of patents for the year 2013 = 530,712/5 ……………………….. 106,142 (f) Total expenses relating to the Trademark = 70,000 + 50,000……………… 120,000 (g) Correct cost of the franchise……………………………………………………………… 833,980 (h) Discount on notes payable, 12/31/12 = 166,020 – 113,136…………………… 52,884 (i) Interest expense for 2012 relating to the Notes Payable………………………. 49,738 (j) Carrying value of the Franchise, 12,31,12 (833,980 – 166,796)……………… 667,184 (k) Initial cost of goodwill 285,000 ÷ 19/20 ………………………………………… 300,000 (l) Net adjustment to Retained Earnings, 1/1/12……………………………………… 71,796 dr.
1. B 21. B 2. A 22. C 3. C 23. D 4. A 24. D 5. C 25. A 6. C 26. B 7. B 27. A 8. C 28. D 9. D 29. B 10. B 30. C 11. D 31. C 12. D 32. C 13. C 33. B 14. C 34. A 15. B 35. B 16. C 36. C 17. B 37. C 18. C 38. B 19. C 39. B 20. B 40. D 41. A 42. C 43. D 44. C Supporting computations: 1. B P300,000/10 x 7/12 = P17,500 (300,000 x 6/10) + 36,000 x 5/12 8 11,250 Depreciation expense for 2012 P 28,750 2. A Carrying value as of August 1, 2012 P180,000 Overhaul costs 36,000 Depreciation – Aug. 1 – Dec. 31, 2012 ( 11,250)
- January 1 – June 30, 2013 216,000 / 8 x 6/12 ( 13,500)
Carrying value, June 30, 2013 P191,250 Proceeds from sale 185,000 Loss from sale P 6,250 3. C Correct depletion for 2012
P4,860,000 / 1,620,000 x (15,000 tons x 6 months) = P270,000 Recorded depletion 405,000 Overstatement in depletion P135,000
4. A Estimated useful life in years = 15 years Estimated mining period = 1,620,000 / 15,000 = 108 months or 9 years Use unit of output method, since mining period is shorter than life in years Correct depreciation = (P600,000 x 90%) / 1,620,000 x 90,000 tons P 30,000 Recorded depreciation 40,000 Overstatement in depreciation P 10,000
5. C Remaining machines at December 31, 2010 = Machines 2 and 4 only Cost allocated to Machine 2 P1,200,000 x 500,000/1,500,000 P 400,000 Accumulated Depreciation of Machines 2 and 4 Machine 2 400,000 x 5/10 = P200,000 Machine 4 500,000 / 10 x 6/12 = 25,000 Total P225,000
6. C Land Building Cash paid P 800,000 FV of shares issued 8,000 x 107 856,000 Cost of removal of old buildings 98,000 Examination of title 13,000 Legal work for construction contract P 18,600 Insurance premium during period of construction 22,800 x 2/24 1,900 Special tax assessment 40,000 Superintendent’s salary 42,000 Construction costs (600,000 + 400,000 + 400,000) ________ 1,400,000 Correct cost P1,807,000 P 1,462,500 7. B Correct cost of building P1,462,500 8. C Depreciation for 2012 = P1,462,500 / 50 x 6/12 P 14,625 9 through 12 Audit Adjusting Entries: Buildings and Equipment 10,000 Accumulated Depreciation – Buildings and Equipment 30,000 Gain on Exchange of Buildings and Equipment 10,000 Buildings and Equipment 50,000 Buildings and Equipment 10,000 Accumulated Depreciation – Buildings and Equipment 60,000 Buildings and Equipment 70,000 Buildings and Equipment 240,000 Loss on Exchange of Buildings and Equipment 80,000 Buildings and Equipment 320,000 9. D Net decrease in cost of buildings and equipment P180,000 10. B Net decrease in accumulated depreciation P 90,000 11. D Cost assigned to equipment received P20,000 carrying value + cash paid of P10,000 = P 30,000 12. D Net gain on exchange (see audit adjustments) P830,000 13. C Land as Property, Plant and Equipment P8,000,000 + 4,000,000 + 7,000,000 = P19,000,000
14. C Building as Property, Plant and Equipment P12,000,000 + P16,000,000 = P28,000,000 15. B Depreciation Expense – Investment Property (P8,000,000 / 20) x ½ = P 200,000 16. C Equipment P24,000,000 – 800,000 = P23,200,000 17. B Accumulated Depreciation – Equipment P8,000,000 – 320,000 = P 7,680,000 18. C Investment Property
Land of P6,000,000 + Building, P7,800,000 = P13,800,000
19. C 7,500,000 + 8,500,000 = P16,000,000
20. B Carrying value Cost P800,000 Accumulated depreciation (P320,000 – P20,000) 300,000 Carrying value P500,000
Fair value less cost to sell (520,000 – 50,000) P 470,000 Hence, the assets held for sale shall be measured at the lower amt. P470,000 21. B Impairment loss 500,000 – 470,000 = P 30,000
29. C Accumulated Depreciation – Vehicles 12/31/2009 P 1,965,600 12/31/2010 Depreciation for 2010 On beg. Bal. not sold (4,680,000 – 1965,600) x 40% = P 1,085,760 New = 1,620,000 x 40% x 6/12 324,000 1,409,760 P3,375,360
30. C Depreciation Expense – Machinery (2010) Machine 1 ( P4,300,000 – 250,000) / 5 x 8/12 = P 540,000 Machine 2 (4,800,000 – 300,000) / 6 = 750,000 Machine 3 (5,920,000 – 400,000 ) / 5 = 1,104,000 Total depreciation expense, machinery for 2010 P2,394,000
31. C Gain or loss on vehicle sold on May 25, 2011 Cost of vehicle sold P2,340,000 Accumulated depreciation 12/31/2009 P982,800 2010 depreciation 1,085,800 / 2 = 542,900 2011 depreciation 814,300 x 40% x 5/12 135,700 1,661,400 Carrying value P 678,600 Selling price 660,000 Loss on sale P 18,600
32. C Accum. Depreciation – Building, Dec. 31, 2011 12/31/2009 P2,861,400 2010 and 2011 depreciation 903,600 x 2 years 1,807,200 Accumulated depreciation, building 12/31/2011 P4,668,600
33. B Depreciation Expense – Machine 2 (2012) Cost of Machine 2 P4,800,000 Accumulated depreciation – 12/31/2011 (4,800,000 – 300,000) / x 59 months/ 72 months = 3,687,500 Carrying value 12/31/11 P1,112,500 Overhaul cost 1,200,000 Carrying value after overhaul P2,312,500 Depreciation expense – 2012 (P2,312,500 – 500,000) / 4 = P453,125
34. A Carrying value of land, December 31, 2012 P8,100,000
35. B Accumulated Depreciation – Land Improvements, Dec. 31, 2010 (550,000/10) x 1.5 = P 82,500
36. C (100,000 X 98%) + 5,000 = P103,000
37. C Carrying value = 180,000 – 180,000 x 10% x 7.5 P 45,000 Selling price 54,000 Gain on sale P 9,000
38. B 2012 Depreciation
(500,000 – 180,000) x 10% = P 32,000 180,000 x 10% x 9/12 = 13,500 103,000 x 10% x 9/12 = 7,725 Total P 53,225
1. D 375,250 – 84,200 = 291,050 2. A 546,750 – 226,000 – 900 = 319,850 3. A 4. D 6 years which is 12 – 6; shorter than 10 – 6 + 6 5. B see audit adjustments Answer
6. Petty cash fund 4,646
7. Cash in bank 3,471,200
8. Trading securities, at cost 650,000
9. Trading securities, at market 793,600
10. Unrealized gain or loss on trading securities 143,600 gain
11. Accounts receivable 4,614,200
12. Allowance for doubtful accounts 352,284
13. Other Receivables – current 30,600
14. Merchandise inventory 2,693,200
15. Prepaid expenses 60,920
16. Land 5,960,000
17. Equipment 934,600
18. Accumulated Depreciation – Equipment 691,825
19. Net book value of leasehold improvements 193,333