ILLUSTRATIVE EXAMPLES

Property, Plant and Equipment (PPE)

1. Pinnacle Company purchased a land for P2,000,000. Immediately after the purchase, Pinnacle started
construction of a new building on the land. Pinnacle incurred the following additional costs:

Legal cost of acquiring land P10,000

Special assessment 5,000
Survey costs 15,000
Materials, labor and overhead costs 5,500,000
Cash discounts on materials purchased not taken 30,000
Clerical and other expenses related to construction 14,000
Excavation costs 100,000
Architectural fees and building permit 60,000
Supervision by management on construction 12,000
Insurance premiums paid for workers 130,000
Payment for claim for injuries not covered by insurance 45,000
Savings on construction 200,000
Cost of changes to plans and specifications due to inefficiencies 140,000
Paving of streets and sidewalks 10,000
Income earned on a vacant space rented as parking
lot during construction 9,000

Requirement: Compute for the cost of the following items of PPE:

a. Land
b. Building
c. Land improvement

2. Mr. Accounting Company is installing a new equipment at the production facility and incurred the
following costs:

Cost of equipment per supplier’s invoice P2,500,000

Initial delivery and handling cost 200,000
Cost of site preparation 600,000
Consultants used for advice on the acquisition of equipment 700,000
Interest charges paid to supplier for deferred credit 200,000
Estimated dismantling cost to be incurred as required by contract 300,000
Operating loss before commercial production 400,000

Requirement: Compute for the total amount that should be capitalized as cost of the equipment.
3. ABC Company acquired a machine and incurred the following costs:

Cash paid for machine, including VAT of P96,000 P896,000

Cost of transporting machine 30,000
Labor cost of installation by expert fitter 50,000
Labor cost of testing machine 40,000
Insurance cost for the current year 15,000
Cost of training for personnel who will use the machine 25,000
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
Estimated dismantling cost to be incurred as required by contract 65,000

Requirement: Compute for the total amount that should be capitalized as cost of the machinery.

4. [Acquisition on account] CPA Company acquired an equipment for P112,000 on account with a credit
term of 2/15, n/30. Any discount is computed based on the purchase price. The purchase price is
inclusive of 12% value-added tax (VAT). Additional costs incurred include P10,000 cost of training
staff who will be operating the equipment and P15,000 cost of relocating the equipment to a new
location after it was installed in the location originally intended by management.

Requirements:
a. Compute the initial cost of the equipment.
b. Prepare the journal entries if payment is made within the discount period.
c. Prepare the journal entries if payment is made beyond the discount period.

5. [Deferred Settlement – with cash price equivalent] On January 1, 2025, BSA Company purchased an
equipment with an installment price of P130,000 and a cash price equivalent of P100,000 by paying
P10,000 downpayment and issuing a one-year noninterest-bearing note of P120,000 payable in equal
semi-annual installments on July 1 and December 31, 2025.

Requirements:
a. Compute the initial cost of the equipment.
b. Prepare the journal entry upon purchase.

6. [Deferred Settlement – no cash price equivalent] On January 1, 2025, ABC Company purchased
equipment with an installment price of P130,000 by paying P10,000 downpayment and issuing a
three-year noninterest-bearing note of P120,000 payable in three equal annual installments starting
December 31, 2025. The prevailing rate for the note as of January 1, 2025 is 12%. The PV aof ordinary
annuity for 3 periods at 12% is 2.4018.

Requirements:
a. Compute the initial cost of the equipment.
b. Prepare the journal entries of the above transactions.
7. [Exchange with fair value of asset given up] ABC Company exchanged equipment with XYZ
Corporation. Pertinent data are shown below:
ABC XYZ
Equipment P1,000,000 P2,000,000
Accumulated depreciation 200,000 800,000
Fair value 950,000 1,150,000
Cash paid by ABC to XYZ 150,000 150,000

The exchange transaction has a commercial substance.

Requirements:
a. Provide the journal entries in the books of ABC and XYZ to record the exchange transaction.
b. Using the same information, except that ABC cannot determine the fair value of the equipment
given up but is aware that the equipment received from XYZ has a fair value of P1,150,000.

8. [Exchange with no commercial substance] ABC Company exchanged equipment with XYZ
Corporation. Pertinent data are shown below:

ABC XYZ
Equipment P1,000,000 P2,000,000
Accumulated depreciation 200,000 800,000
Fair value 950,000 1,100,000
Cash paid by ABC to XYZ 150,000 150,000

The exchange transaction lacks commercial substance.

Requirement: Provide the journal entries in the books of ABC and XYZ Corporation to record the
exchange transaction.

9. [Acquisition through trade-in] ABC Company traded in an old equipment for a new model. Pertinent
data are as follows:

Old equipment:
Cost P50,000
Accumulated depreciation 20,000
Fair value 20,000

New equipment:
List price 95,000
Cash price without trade in 70,000
Cash price with trade in 55,000

Requirement: Provide the journal entry to record the acquisition of the new equipment.
10. [Acquisition through issuance of shares] Pinnacle Company acquired land with fair value of
P1,000,000 by issuing 10,000 shares with par value of P10 per share and quoted price of P90 per
share.

Requirements:
a. Provide the journal entry to record the acquisition.
b. Provide the journal entry assuming that the fair value of the land is indeterminable.

11. [Acquisition through issuance of bonds payable] On January 1, 2025, Pinnacle Company acquired
land with fair value of P950,000 by issuing a 3-year, 10%, P1,000,000 bonds. Principal is due on
January 1, 2026 but interest is due at each year-end. The prevailing market rate of interest for a
similar instrument on January 1, 2025 is 12%. The present value of the future cash flows from the
bonds discounted at 12% is P951,963.

Requirements:
a. Provide the journal entry to record the acquisition.
b. Provide the journal entry assuming that the fair value of the asset received is indeterminable.

12. [Acquisition by donation] ABC Company received donation of equipment from XYZ Corporation, an
unrelated corporation. The equipment has a fair value of P1,000,000. Necessary costs incurred by
ABC to bring the asset to its intended condition for use amounted to P10,000.

Requirements:
a. Provide the journal entry to record the receipt of the donation.
b. Provide the journal entry to record the receipt of the donation, assuming the donor is a
shareholder of ABC.
13. [Straight line method – SL] On January 1, 2025, Pinnacle Company acquired equipment with an
estimated useful life of 4 years and a residual value of P20,000 for a total purchase cost of P100,000.
Pinnacle uses the straight line method of depreciation.

Requirement: Compute for the annual depreciation expense and provide the journal entry for 2025.

14. [Sum-of-the-years’ digits – SYD] On January 1, 2025, CPA Company acquired equipment with an
estimated useful life of 4 years and a residual value of P20,000 for a total purchase cost of P100,000.
CPA uses the SYD method of depreciation.

Requirement: Compute for the annual depreciation expense, accumulated depreciation and carrying
amount.

15. [Declining balance – DB] On January 1, 2025, Mr. Accounting Company acquired equipment with an
estimated life of 5 years with a residual value of P20,000 for a total purchase cost of P100,000.

Requirement: Compute for the annual depreciation expense, accumulated depreciation and carrying
amount using:
1. Double declining balance method
2. 150% declining balance method

16. [Units of production method] On January 1, 2025, BSA Company acquired a factory equipment with
an estimated residual value of P20,000 for a total purchase cost of P100,000. The equipment has an
expected total output of 160,000 units and an expected total input of 40,000 hours.

Information on actual operations is presented below:

Year Units produced Manufacturing hours

2025 60,000 16,000
2026 30,000 8,000
2027 45,000 12,000
2028 25,000 4,000
Total 160,000 40,000

Requirement: Compute for the depreciation using:

a. Output method
b. Input method
17. [Leasehold improvements] On January 1, 2025, ABC Company signed a ten-year lease for office
space. ABC has the option to renew the lease for an additional 5-year period on or before January 1,
2034.

During the first half of January 2026, ABC incurred the following costs:
• P900,000 for general improvements to the leased premises with an estimated useful life of ten
years
• P100,000 for office furniture and equipment with an estimated useful life of ten years
• P200,000 for movable assembly line equipment with useful life of 5 years

At the time the leasehold improvements were finished, ABC is uncertain as to the exercise of the
renewal option.

Requirements:
1. Compute for the depreciation expense.
2. Compute for the depreciation expense, assuming that ABC is certain that it will exercise the
renewal option.

18. [Change in depreciation method] On January 1, 2025, ABC Company acquired machinery for a total
cost of P20,000,000. The machinery was depreciated using the double declining balance method over
a period of 10 years. On January 1, 2028, ABC Company changed its depreciation method to the
straight line method.

Requirement: Compute for the depreciation expense in 2028 and provide the journal entry.