Accounting

Plant, Property and Equipment: Depreciation and Disposal Problem 18-14: (Depreciation -150% Declining Balance Method) Wishful Company purchased a machine for P600,000 on January 2,2007. The machine has an estimated useful life of five years and a salvage value of P60,000. Depreciation was computed by the 150%-declining balance method. How much should be the accumulated depreciation balance at December 31, 2008' a) P216,000 c) P294,000 b) P275,000 d) P306,000 Answer: D |Straight line rate |= |100% |÷ |5 years |= |20% | |150%-declining rate |= |20% |× |150% |= |30% | |Depreciation in 2007 (P600,000 × 30%) |P180,000 | |Depreciation in 2008 (P600,000 – P180,000 × 30%) |126,000 | |Total accumulated depreciation |P306,000 | Problem 18-15: (Depreciation – Change in Method) Faithful Company purchased an equipment on January 2,2007 for P3,000,000. The equipment had an estimated useful life of 5 years. The company’s policy is to depreciate the asset using the 200%-declining balance in the first two years of the asset’s life and then switch to the straight- line method for the remaining useful life of the asset. What is the total accumulated depreciation as of December 31, 2009' a) P1, 800,000 c) P2, 352,000 b) P2, 280,000 d) P2, 520,000 Answer: B |Straight line rate |= |100% |÷ |5 years |= |20% | |200%-declining rate |= |20% |× |200% |= |40% | Depreciation in 2007 (P3,000,000 × 40%) P1,200,000 Depreciation in 2008 ( P3,000,000 – P1,200,000 × 40%) 720,000 Total accumulated depreciation as of December 31, 2008 P P 1,920,000 Add: Depreciation in 2009 using straight-line method: Cost P3,000,000 Less: Accumulated depreciation (as of December 31, 2008) 1,920,000 Book value P 1,080,000 ÷ Remaining useful life 3 years 360,000 Total accumulated depreciation as of December 31, 2009 P 2,280,000 Problem 18-16: (Depreciation- Retirement & Replacement Methods) Meralco has a balance in the electric meters account of P3,000,000 on January 1, 2007. During 2007, Meralco installed new meters as follows: | | | |May | | |August | | |November | | | | | |Cost of new meters installed | | |P500,000 | | |P800,000 | | |P400,000 | | | | | |Cost of old meters replaced | | |360,000 | | |_ | | |300,000 | | | | | |Proceeds from sale of old meters | | |40,000 | | |_ | | |30,000 | | | | | Using the retirement and replacement methods, what is the amount of depreciation that should be recognized in year 2007' | |Retirement Method |Replacement Method | |a) |P590,000 |P830,000 | |b) |P590,000 |P1,630,000 | |c) |P660,000 |P660,000 | |d) |P660,000 |P900,000 | Answer: A |Retirement method: | | |Original cost of assets retired (P360,000 + P300,000) |P660,000 | |Less: Salvage value of assets retired (P40,000 + P30,000) |70,000 | |Depreciation |P590,000 | | | | |Replacement Method: | | |Replacement cost of new assets (P500,000 + P400,000) |P900,000 | |Less: Salvage value of assets replaced (P40,000 + P30,000) |70,000 | |Depreciation |P830,000 | There was no retirement or replacement of assets in the month of August, only an acquisition of new asset, therefore, no depreciation for that particular month. Replacement Method – original asset cost is kept in the books and the cost of replacing the asset is expensed. This method is sometimes used for assets such as utility poles, small tools, etc. which is numerous and has long lives and low unit cost. Retirement Method – asset cost is expensed when the asset is retired. Problem 18-17: (Depreciation – Inventory Method ) Merciful Company uses the inventory method to account for numerous small tools. The balance of the tools account on January 1,2008 was P364,000. The following transactions occurred with respect to the small tools during 2008: Purchases during the year, P156,000; sale of used tools at salvage value in December, P10,400; Inventory of small tools on December 31,2008, P390,000. What is the amount of tools depreciation for the year 2008' a) P119,600 c) P156,000 b) P130,000 d) P166,400 Answer: A |Beginning balance |P364,000 | | |Add: Acquisition of tools during the year |156,000 |P520,000 | |Less: Ending balance | |P390,000 | |Cost of tools disposed-of | |P130,000 | |Proceeds of salvaged tools | |10,400 | |Depreciation | |P119,600 | Problem 18-18: (Disposal by Sale) The Joyful Company purchased a machine on November 1,1999 for P296,000. At the time of acquisition, the machine was estimated to have a useful life of ten years and estimated salvage value of P8,000. Joyful has recorded monthly depreciation using the straight-line method. On July 1,2008, the machine was sold for P26,000. What should be the loss recognized from the sale of the machine' a) P 8,000 c) P20,400 b) P10,000 d) P26,000 Answer: C |Selling price | |P26,000 | |Less: Book Value | | | | Cost |P296,000 | | | Accum. Depn. (P288,000 × 104*/120) |249,600 |46,400 | |Loss on Sale | |P20,400 | | |Year |Month |Day | |Disposal date |2008 |7 |1 | |Acquisition date |1999 |11 |1 | |Age of the asset |8 |8 |0 | |× No. of months in a year |12 |96 | | |Age (Accum. Depn.) | |104* | | Age of the asset: The accumulated depreciation is equal to the ratio of the age of the asset over its estimated useful life multiplied by depreciable cost. Depreciation of an item of property, plant and equipment begins when the asset is available for use. Depreciation ceases when the asset is derecognized. Depreciation of an item of property, plant and equipment does not ceases when the asset becomes idle or retired for use and held for disposal unless the asset is fully depreciated. However, under the usage method of depreciation the depreciation can be zero while there is no production. An item of property, plant and equipment is derecognized when the asset is disposed of via sale, permanent withdrawal or retirement, fully damaged and no longer usable, and as a result of exchanged. The gain or loss on derecognition of an item of property, plant and equipment shall be include in the profit or loss. The gain or loss on derecognition is the difference of the net disposal proceeds and the carrying value of the item of property, plant and equipment disposed of. Problem 18-19: (Disposal by Sale) On December 31,2008, Purple Company sold a building, receiving as consideration a P4,000,000 non-interest bearing note due in the three years. The building costs P3,800,000 and the accumulated depreciation was P1,600,000 at the date of sale. The prevailing rate of interest for a note of this type was 12%. The present value of P1 for three periods at 12% is 0,71. In its December 31,2008, how much gain or loss should purple report on the derecognition of its asset' a) P 200,000 gain c) P 960,000 loss b) P 640,000 gain d) P1,800,000 gain Answer: B |Selling price (P4,000,000 × 0.71) | |P2,840,000 | |Book value: | | | | Cost |P3,800,000 | | | Accumulated depreciation |1,600,000 |2,200,000 | |Gain on sale | |P640,000 | The gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. The consideration receivable on the disposal of an item of property, plant and equipment is recognized initially at its fair value. If payment for the item is deferred, the consideration received is recognized initially at the cash price equivalent. The difference between the nominal amount of the consideration and the cash price equivalent is recognized as the interest revenue (PAS 16, par. 71 and 72). The cash price equivalent of the above sale of an asset is the present value (discounted value) of the note receivable.