PROPERTY, PLANT AND EQUIPMENT

FA1 PAF3033

TRUE-FALSE STATEMENTS

1. All plant assets (fixed assets) must be depreciated for accounting purposes.

FALSE

2. When purchasing land, the costs for clearing, draining, filling, and grading should be
charged to a Land Improvements account.

FALSE

3. When purchasing delivery equipment, sales taxes and motor vehicle licenses should
be charged to Delivery Equipment.

FALSE

4. Land improvements are generally charged to the Land account.

FALSE

5. Once cost is established for a plant asset, it becomes the basis of accounting for the
asset unless the asset appreciates in value, in which case, market value becomes the basis
for accountability.

FALSE

6. The book value of a plant asset is always equal to its fair market value.

FALSE

7. Recording depreciation on plant assets affects the balance sheet and the income
statement.

TRUE

8. The depreciable cost of a plant asset is its original cost minus obsolescence.

FALSE

9. Recording depreciation each period is an application of the matching principle.

TRUE
10. The Accumulated Depreciation account represents a cash fund available to replace
plant assets.

FALSE

1. The cost of a purchased building includes all of the following except

a. closing costs.
b. real estate broker's commission.
c. remodeling costs.
d. All of these are included.

2. A company purchased land for RM90,000 cash. Real estate brokers' commission was
RM5,000 and RM7,000 was spent for demolishing an old building on the land before
construction of a new building could start. Under the cost principle, the cost of land would
be recorded at

a. RM97,000.
b. RM90,000.
c. RM95,000.
d. RM102,000.

3. Fanny Klinik Bhd purchases land for RM130,000 cash. The clinic assumes RM1,500 in
property taxes due on the land. The title and attorney fees totaled RM1,000. The clinic has
the land graded for RM2,200. What amount does Fanny Klinik Bhd record as the cost for the
land?

a. RM132,200
b. RM130,000
c. RM134,700
d. RM132,500

4. Pahang Santuary Bhd acquires land for RM86,000 cash. Additional costs are as follows:

Removal of shed RM 300

Filling and grading 1,500

Salvage value of lumber of shed 120

Broker commission 1,130

Paving of parking lot 10,000

Closing costs 560

a. RM86,000.
b. RM87,690.
c. RM89,610.
d. RM89,370.

5. Purnama Hospital installs a new parking lot. The paving cost RM30,000 and the lights to
illuminate the new parking area cost RM15,000. Which of the following statements is true
with respect to these additions?

a. RM30,000 should be debited to the Land account.

6. Land improvements should be depreciated over the useful life of the

a. land.
b. buildings on the land.
c. land or land improvements, whichever is longer.
d. land improvements.

7. Gunawan Bhd is building a new plant that will take three years to construct. The
construction will be financed in part by funds borrowed during the construction period.
There are significant architect fees, excavation fees, and building permit fees. Which of the
following statements is true?

a. Excavation fees are capitalized but building permit fees are not.
b. Architect fees are capitalized but building permit fees are not.
c. Interest is capitalized during the construction as part of the cost of the building.
d. The capitalized cost is equal to the contract price to build the plant less any
interest on borrowed funds.

8. A company purchases a remote site building for computer operations. The building will
be suitable for operations after some expenditures. The wiring must be replaced to
computer specifications. The roof is leaky and must be replaced. All rooms must be
repainted and recarpeted and there will also be some plumbing work done. Which of the
following statements is true?

a. The cost of the building will not include the repainting and recarpeting costs.
b. The cost of the building will include the cost of replacing the roof.
c. The cost of the building is the purchase price of the building, while the additional
expenditures are all capitalized as Building Improvements.
d. The wiring is part of the computer costs, not the building cost.

9. Carmila Bhd purchases a new delivery truck for RM45,000. The sales taxes are RM3,000.
The logo of the company is painted on the side of the truck for RM1,200. The truck license is
 RM120. The truck undergoes safety testing for RM220. What does Carmila Bhd record as the
cost of the new truck?

a. RM49,540
b. RM49,420
c. RM48,000
d. RM47,420

Use the following information for questions 10–12.

Banana Bhd. bought equipment on January 1, 2016. The equipment cost RM90,000 and
had an expected salvage value of RM15,000. The life of the equipment was estimated to be
6 years.

10. The depreciable cost of the equipment is

11. The depreciation expense using the straight-line method of depreciation is

12. The book value of the equipment at the beginning of the third year would be
a. RM90,000.
b. RM75,000.
c. RM65,000.
d. RM25,000.

QUESTION 1

Karisma Sdn Bhd purchased land adjacent to its plant to improve access for trucks
making deliveries. Expenditures incurred in purchasing the land were as follows:
purchase price, RM50,000; broker’s fees, RM6,000; title search and other fees,
RM5,000; demolition of an old building on the property, RM5,700; grading, RM1,200;
digging foundation for the road, RM3,000; laying and paving driveway, RM25,000;
lighting RM7,500; signs, RM1,500.

Required:
List the items and amounts that should be included in the Land account.
Land RM50000

Broker Fees RM6000

Title Search RM5000

Demolition of an old building RM5700

Grading RM1200

Laying and paving RM25000

Lighting RM7500

Signs RM1500

Digging foundation RM3000

Total RM100400

QUESTION 2

Erri Faziri Bhd purchased a delivery truck for RM35,000 on January 1, 2016. The
truck was assigned an estimated useful life of 5 years and has a residual value of
RM10,000. Compute depreciation expense using the double-declining-balance
method for the years 2016 and 2017.

Depreciation expense for the years 2016

RM35000-RM10000
5
= RM5000
Depreciation expense for the years 2017
RM5000 X 2 = RM10000

QUESTION 3

Pari-Pari Bhd purchased a truck for RM57,000. The company expected the truck to
last four years or 100,000 miles, with an estimated residual value of RM6,000 at the
end of that time. During the second year the truck was driven 27,000 miles. Compute
the depreciation for the second year under each of the methods below and place
your answers in the blanks provided.
 1. Units-of-activity

(RM57000 - RM6000)/100000 miles = RM0.51 per miles

Depreciation expenses for the second year

RM0.51 X 27000 miles = RM13770

2. Double-declining-balance
1st year : (RM57000- RM6000)/4 = RM12750
2nd year : RM12750 X 2 = RM25500

QUESTION 4

Rora Enterprises sold equipment on January 1, 2016 for RM5,000. The equipment
had cost RM24,000. The balance in Accumulated Depreciation at January 1 is
RM20,000.

Required:

What entry would Rora make to record the sale of the equipment?

Date Account Debit Credit

2016

Jan 1 Cash 5000

Accumulated Depreciation 20000

Gain on disposal 1000

Equipment cost 24000

Question 5

Perkhidmatan Penerbitan Cathy uses the straight-line method of depreciation. Cathy Bhd
fiscal year end is December 31. The following transactions and events occurred during the
first three years.
2017 July 1 Purchased a computer from the BHL Bhd for RM2,300 cash plus sales tax
of RM150, and shipping costs of RM50.

Nov. 3 Incurred ordinary repairs on computer of RM140.

Dec. 31 Recorded 2017 depreciation on the basis of a four year life and estimated
salvage value of RM500.

2018 Dec. 31 Recorded 2018 depreciation.

2019 Jan. 1 Paid RM400 for an upgrade of the computer. This expenditure is expected
to increase the operating efficiency and capacity of the computer.

Required:

Prepare Journal entries for the above transactions.

Date Account Debit Credit

2017

July 1 Equipment 2300

Sales Tax 150

Shipping cost 50

Cash 2500

Nov 3 Repair on equipment 140

Cash 140

Dec 31 Depreciation 250

Accumulated depreciation 250

2018

Dec 31 Depreciat