JACKSON, KERVIN REY G.

BSA-2

INTACC2- Exercise 2

EXERCISE 1 – LAND AND BUILDING COST

Paesh Company was organized in June 2020. The following transactions pertain to land and
building.
Jun. 1 Organization fees paid to the state P 300,000
30 Land and old building with fair value P2,500,000 6,000,0000
30 Corporate organization costs 500,000
July 1 Title clearance fees 100,000
Aug. 31 Cost of razing old building to make room for new building 200,000

Sept. 1 Executive salaries with no participation in construction 1,200,000

Dec. 31 Land real estate tax for 6-months ended December 31, 2020 180,000
31 Cost of new building completed and occupied on this date 16,000,000
Required:
1. What is the cost of the land?
2. What is the cost of the new building before the depreciation?
Solution:
Fractions
Fair Value of the land during the purchase P 2,500,000 25/50
Fair Value of the building during the purchase 2,500,000 25/50
Total P 5,000,000

Land Building
Land and old building at fair value P 2,500,000 P 3,500,000
Title clearance fee 100,000
Cost of razing old building to make room for new building P 200,000
Cost of new building completed and occupied in this date 16,000,000
Total P 3,600,000 P 16.200.000

EXERCISE 2 – LAND AND BUILDING COST

The following expenditures were incurred by Lyon Enterprises Co. in 2019

Purchase of land P 7,800,000

Land survey 104,000
Fees for search of title for land 12,000
JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

Building permit 70,000

Temporary quarters for old construction crews 215,000
Payment to tenants of old building for vacating the premises 92,000
Razing old building 600,000
Excavating basement 200,000
Special assessment tax for street project 45,000
Dividends 75,000
Damages awarded for injuries sustained in construction 168,000
Cost of construction 35,000,000
Cost of paving parking lot adjoining building 500,000
Cost of shrubs, trees, and other landscaping 660,000
Required:
1. Among the expenditures mentioned, determine the cost of the land.
2. Among the expenditures mentioned, determine the cost of the building.
Solution:
Land Building
Purchase of land P 7,800,000
Land Survey 104,000
Fees for search of title for land 12,000
Building permit P 70,000
Temporary quarters for old construction crews 215,000
Payment to tenants of old building for vacating the premises 92,000
Razing old building 600,000
Excavating basement 200,000
Special assessment tax for street project 45,000
Damages awarded for injuries sustained in construction 168,000
Cost of construction 35,000,000
Cost of paving parking lot adjoining building 500,000
Cost of shrubs, trees, and other landscaping 660,000
Total P 8,713,000 P 36,753,000

EXERCISE 3 – MACHINERY
Joestar Company purchased a new machine for an invoice price of P4,480,000 inclusive of vat of
P480,000. The purchase also had a purchase discount of P200,000 that Joestar was not able to
avail due to financing difficulties.

Other expenditures related to the machine were as follows:

Shipping cost 340,000
Fees of experts for installation 450,000
Refurbishing cost during installation 180,000
Trial run costs and testing costs before commencement of use 170,000
Consultation fees before purchase 120,000
JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

Safety rails and platform surrounding the machine 55,000

Cooling device installed, necessary to keep the machine running 520,000
Refurbishing costs after installation 230,000
Required:
Compute the total cost of the new machine.
Solution:
Invoice price (P4,480,000 – P480,000 – P200,000) P3,800,000
Shipping cost 340,000
Fees of expert for installation 450,000
Trial run costs and testing costs 170,000
Refurbishing cost during installation 180,000
Consultation fees before purchase 120,000
Safety rail and platform surrounding the machine 55,000
Cooling device installed to keep the machine running 520,000
Total cost of the new machine 5,635,000

EXERCISE 4 – BORROWING COST

Double Deutch Company constructed a building in 2020. Commencement of construction was on
January 31 and was completed on December 31. Double Deutch loaned from the bank specifically
to finance the said construction. The bank loan bears 11.25% interest per annum. The following
pertains to the construction:

Notes payable, 11.25%, specifically borrowed for building construction P10,000,000

Interest income from temporary investment 400,000
Loan amount spent on construction 8,600,000

Required:
How much should Double Deutch Company capitalize as borrowing cost?
Solution:

Actual borrowing costs (P10,000,000 x 11.25%) P1,125,000

Less: Interest income from temporary investment (400,000)
Capitalizable borrowing costs P725,000

EXERCISE 5 – BORROWING COST

JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

High Standard Company erected a building during the year 2020. All funds used in construction
were loaned for a generic purpose. The construction started on January 31 and was completed on
December 31. The following pertains to the construction:

General purpose loan, 10.20% P6,000,000

General purpose load, 11.80% 4,500,000
Average expenditures 6,250,000

Required:
Compute the borrowing cost capitalized. Round off all computed % to nearest one percent.

Solution:

Actual interest
General purpose loan, 10.20% P6,000,000 X 10.20% = P612,000
General purpose loan, 11.80% 4,500,000 X 11.80% = 531,000
Total P10,500,000 P1,143,000

P 1,143,000
Capitalization rate= =10.9 %
P 10,500,000

Actual borrowing costs P1,143,000

“Computed” borrowing costs (P6,250,000 x 10.9%) P681,250

LOWER amount (capitalizable borrowing costs) P681,250

Actual borrowing costs P1,143,000

“Computed” borrowing costs P681,250
Interest expense P461,750

EXERCISE 6 – BORROWING COST

Jojo Company loaned P3,600,000 from the bank for the construction of a building during the year
2020 with interest of 11%. The construction started on January 1 and was completed on December
JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

31. The specific load amount did not suffice the expenditures for the building so Jojo used funds
from other existing loans. The currently existing general-purpose loans were:

Notes payable, 10.55%, (for general purposes) P5,200,000

Notes payable, 10.75%, general borrowings 3,800,000
Notes payable, 11.90%, general borrowings 4,000,000
Expenditures for the construction in 2020 were:
January 1 P3,700,000
April 1 2,100,000
October 1 1,900,000
November 30 950,000

Required:
Compute the capitalizable borrowing cost.
(Round to the nearest one peso); for rates (nearest 1%)
Solution:

Average expenditures
January 1 3,700,000 x 12/12 P3,700,000
April 1 2,100,000 x 9/12 1,575,000
October 1 1,900,000 x 3/12 475,000
November 30 950,000 x 1/12 79,167
Total P5,829,167

Average interest
Notes payable 5,200,000 x 10.55% P548,600
Notes payable 3,800,000 x 10. 75% 408,500
Notes payable 4,000,000 x 11.90% 476,000
Total P13,000,000 P1,433,100

P 1,433,100
Capitalization rate= =11.02 %
P 13,000,000

Average expenditures P5,829,167

For specific borrowings 3,600,000 x 11% = P 396,000
For general borrowings P2,229,167
x 11.02%
“Computed” borrowing cost P245,654
Actual borrowing cost 1,433,100
JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

LOWER amount P245,654 245,754

Total capital borrowing cost P 641,654

Actual borrowing costs for general P1,433,100

“Computed” borrowing costs for general 245,654
Interest expense P1,187,446
EXERCISE 7 – GOVERNMENT GRANT
On January 1, 2018, Citimart Inc. was granted 7,000 acres of land in a village, located near the
slums outside the city limits, by a local government authority. The condition attached to this grant
was that the company should clean up this land and lay roads by employing laborers from the village
in which the land is located. The government has fixed the minimum wage payable to the workers.
The entire operation will take three years and is initially estimated to cost P320 million. The fair value
of this land on the date of grant was P480 million and is expected to increase by at least 10%
annually because of the improvements to be done by the company. In relation to the attached
condition, the company incurred costs of P90 million in 2018 and P80 million in 2019. On December
31, 2019, the company estimated that it will incur additional cost of P60 million in 2020.

Required:

1. How much should be recognized as income from government grants in 2019?

2. Prepare the journal entries in 2020 related to the government grant?

Solution:

1. First year (2018) P90,000,000

Second year (2019) 80,000,000
Third year (2020) 60,000,000
P230,000,000

First year (2018) (90,000,000/230,000,000 x P320,000,000) P125,217,391

Second year (2019) (80,000,000/230,000,000 x P320,000,000) 111,304,348
Third year (2020) (60,000,000/230,000,000 x P320,000,000) 83,478,261
P320,000,000

The fair value of the land 2019:

Land P 528,000,000
Cash P 528,000,000
JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

Cost incurred for the year 2020

Expenses
Cash P 60,000,000
P 60,000,000

Deferred grant income P 111,304,348

Grant income (80M/230M x P320M) P 111,304,348
To record the grant income in 2019
2.

The fair value of the land 2020:

Land P 580,800,000
Cash P 580,800,000

Cost incurred for the year 2020

Expenses
Cash P 60,000,000
P 60,000,000

Deferred grant income P 83,478,261

Grant income (80M/230M x P320M) P 83,478,261
To record the grant income in 2019

EXERCISE 8 – GOVERNMENT GRANT

Lee Company received a P3,600,000 subsidy from the government to purchase manufacturing
equipment on January 2, 2020. The equipment has a cost of P7,100,000, a useful life of eight years,
and a P100,000 salvage value. Lee depreciates the equipment on a straight-line basis.

Required:
JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

Under each of the following independent cases.

1. What is the book value of the asset on December 31, 2020?
2. What is the depreciation expense for the asset in 2020?
3. Prepare journal entries in 2020.
Solution:
Case 1 If Lee chooses to account for the grant as deferred revenue.
1. Book value
P7,100,000 – P3,600,000 – P875,000 = P2,625,000

2. Depreciation expense

Cost of the equipment P 7,100,000

Less: Salvage Value (P 100,000)
P 7,000,000
Divided by: Useful life / 8 years
Annual Depreciation P 875,000

Depreciation Expense P 580,800,000

Accumulated Depreciation P 580,800,000
To record depreciation

3. Journal Entries 2020

Cash P 3,600,000
Deferred Grant Income P 3,600,000
To record the receipt of the grant from the government.

Manufacturing Equipment P 7,100,000

Cash P 7,100,000
To record the purchase of the manufacturing equipment.

Depreciation Expense P 875,000

Accumulated Depreciation P 875,000
To record the depreciation

Deferred Grant Income P 473,500

Grant Income P 473,500
To record the grant income.
Case 2 If Lee chooses to account for the grant as an adjustment to the asset.
1. Book value
Net cost of the machine – Annual depreciation
P3,500,000 – P425,000 = P3,075,000
JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

2. Depreciation expense

Cost of the equipment P

7,100,000
Less: Government Grant (3,600,000)
Net Cost of the Machine P
3,500,000
Less: Salvage Value (100,000)
P
3,400,000
Divided by: Useful life / 8
years
Annual Depreciation P 425,000
Depreciation Expense P 425,000
Accumulated Depreciation P 425,000
To record depreciation for 2020
3. Journal Entries 2020

Equipment P 7,100,000
Cash P 7,100,000
To record the purchase of equipment.

Cash P 3,600,000
Equipment P 3,600,000
To record the receipt for a government grant for the machine.

Depreciation Expense P 425,000

Accumulated Depreciation P 425,000
To record the depreciation of 2020

EXERCISE 9 – DERECOGNITION
On July 30, 2020, Sterne Corp. retired a machine used in manufacturing designer parts. The
machine was acquired May 31, 2017, Straight-line depreciation method was used computed up to
the last month before retirement. The asset had an estimated residual value of P60,000 and a six-
year life. On December 31, 2019, the balance in the accumulated depreciation is P412,300. The
machine was scrapped, and the company did not receive a single consideration.

Required:
1. The loss on retirement is: (round off to the nearest peso, if needed)
2. Prepare the journal entry to record the retirement.
Solution:
JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

1. Loss on retirement

Months
2017 7
2018 12
2019 12
31

Accumulated depreciation, December 31, 2019 P412,300

Number of months from June 1, 2017, to December 31, 2019 / 31
Monthly depreciation P13,300
Number of months in a year x 12
Annual depreciation P159,600
Estimated useful life in years x 6
Depreciable amount if machine P957,600
Residual value 60,000
Cost of the machine P1,017,600
Accumulated depreciation as of December 31, 2019 (412,300)
Depreciation from January 1, 2020 (P13,300 x 7months) (93,100)
Carrying value at retirement date P512,200
Net proceeds received 0
Loss on retirement of machine P512,200

2. Journal Entry

Loss on Disposal P 512,200

Accumulated Depreciation P 505,400
Machine P 1,017,600
To record the retirement of machine
JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

EXERCISE 10 – DERECOGNITION
Helena acquired an asset that had a cost of P245,600. The asset is being depreciated over a 7-year
period using the sum-of-the-year’s digit method. It has a salvage value estimated at P15,600.
Required:
The loss/gain if the asset is sold for P55,900 at the end of the fourth year is_____.
Solution:
Original cost P245,600
Salvage value 15,600
Estimated useful life 7 years

Sum-of-the-Years’ Digit (SYD):

7+1
∑ − of −tℎe −Year s' Digits=7 2
=28

Description Depreciation Accumulated Depreciation Carrying amount

Year
Original cost P245,600
1st year P230,000x7/28 P57,500 57,500 188,100
2nd year P230,000x6/28 49,286 106,786 138,814
3rd year P230,000x5/28 41,071 147,857 97,743
4th year P230,000x4/28 32,857 180,714 64,886
5th year P230,000x3/28 24,643 205,357 40,243
6th year P230,000x2/28 16,429 221,786 23,814
7th year P230,000x1/28 8,214 P230,000 P15,600
Total P230,000
Accumulated Depreciation on 3rd year P 147,857
Depreciation on the 4th year + 32,857
Accumulated Depreciation 180,714

Disposal Proceeds P 55,900

JACKSON, KERVIN REY G. BSA-2

INTACC2- Exercise 2

Carrying Amount 64,886

Loss on Disposal P 8,986
* The loss/gain if the asset is sold for P55,900 at the end of the fourth year is P8,986.

Cash P 55,900
Accumulated Depreciation 180,714
Loss on Disposal 8,986
Equipment P 245,600
To record the sale of partially depreciated fixed asset