ACCOUNTING 102

Land, Building and Machinery

SUMMARY QUIZ

THEORIES.

1. The cost of an item of property, plant and equipment comprises:

I. Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and
rebates.
II. Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating
in the manner intended by management.
III. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the
obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during
a particular period for purposes other than to produce inventories during that period.

a. I, II and III
b. I and II only
c. I and III only
d. I only

2. Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the
manner intended by management exclude
a. Costs of employee benefits arising directly from the construction or acquisition of the item of property, plant and
equipment
b. Costs of site preparation
c. Initial delivery and handling costs
d. Administration and other general overhead costs

3. Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the
manner intended by management exclude
a. Installation and assembly costs
b. Costs of testing whether the asset is functioning properly
c. Professional fees
d. Costs of opening a new facility

4. Costs of an item of property, plant and equipment include

a. Costs of introducing a new product or service
b. Costs of advertising and promotional activities
c. Costs of conducting business in a new location or with a new class of customer
d. Professional fees

5. Which is NOT chargeable to the Land account?

a. Cost of survey by engineers
b. Expenditure for fence, water system, sidewalk and pavement
c. Broker’s commission an fees for registration and title transfer
d. Attorney’s fee and any other expenditures for establishing clean title

6. The cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
b. assumption of any liens or mortgages on the property.

7. Which is NOT chargeable to the Land account?

a. Cost of option of land not acquired
b. Payments to tenants to induce them to vacate the premises
c. Buyer-assumed mortgages and encumbrances like property taxes
d. Special assessments for local improvements which benefit the property

8. Fences and parking lots are reported on the balance sheet as

a. current assets.
b. land improvements.
c. land.
d. property and equipment.

9. The single cost of acquiring land and usable building shall be allocated to the
a. Land only
b. Building only
c. Land and building, using assessed values
d. Land and building, using relative values

10. The single cost of acquiring land and unusable old building with no fair value shall be allocated to the
a. Land only
b. Building only
c. Land and building, using assessed values
d. Land and building, using relative fair values

11. The cost of demolishing an unwanted building purchased as part of a parcel of land on which a new building is intended to be
constructed shall be charged to
a. Profit or loss
b. Land account
c. Old building account

1
 d. New building account

12. Which is NOT chargeable to the Machinery and Equipment account?

a. Freight and installation costs
b. Repair cost incurred when equipment is damaged in the process of installation
c. Testing costs of the equipment or facilities before they are ready for productive use
d. Material, labor and other expenditures incurred in placing the equipment ready for use

PROBLEMS.

1. EXTRA Corporation is installing a new plant at its production facility. It has incurred these costs:
Purchase price of plant P2,500,000
Initial delivery and handling costs 200,000
Costs of site preparation 600,000
Consultants used for advice on the acquisition of the plant 700,000
Estimated dismantling costs to be incurred after 7 years 300,000
Operating losses before commercial production 400,000

The total costs that can be capitalized in accordance with PAS 16 is

a. P4,900,000
b. P4,500,000
c. P4,300,000
d. P3,600,000

2. Perfect Company acquired land on April 1, 2018 on which a new building will be immediately constructed. The ocsts related to
the acquisition include:

Cash payment 2,000,000

Broker’s fee 50,000
Option paid for the land acquired 20,000
Option paid for an alternative land not acquired 10,000
Delinquent property taxes fro 2017 assumed and paid 30,000
Property taxes for 2018, which will be paid on or before
December 31, 2018 60,000

What is the proper cost of the land?

a. P1,125,000
b. P2,115,000
c. P2,160,000
d. P2,170,000

3. Reiley Co. purchased land as a factory site for P1,000,000. Reiley paid P40,000 to tear down two buildings on the land.
Salvage was sold for P5,400. Legal fees of P3,480 were paid for title investigation and making the purchase. Income of P8,000
was earned through using the land as a car park before construction started. Architect’s fees were P41,200, Title insurance
cost P2,400 and liability insurance during construction cost P2,600. Excavation cost P10,440. The contractor was paid
P2,400,000. An assessment was made by the city for pavement was P6,400. Interest costs during construction were
P170,000.

The cost of the land should be recorded by Reiley Co. is

a. P1,040,480
b. P1,032,480
c. P1,046,880
d. P1,038,880

1,012,280

Use the following information for the next two questions.

Hawks Corporation’s Property, Plant and Equipment section of its statement of financial position as of December 31, 2016 included
the following:
Land P400,000
Buildings 3,200,000

The following transactions occurred during 2017:

 Land site number 102 was acquired for P4,000,000. Additionally to acquire the land the entity paid a P240,000 commission to
a real estate agent. Costs of P60,000 were incurred to clear the land. During the course of clearing the land, timber and gravel
were recovered and sold for P20,000.

 A second tract of land (site number 103) with a bulding was acquired for P1,200,000. Based on reliable information at the time
of acquisition, fair value of land is P800,000 and the building P400,000. Shortly after acquisition, the building was demolished
at a cost of P120,000. A new building was constructed for P1,600,000 plus the following costs:
Excavation fees P44,000
Architectural design fees 32,000
Building permit fee 4,000

The building was completed and occupies on September 1, 2017.

 A third tract of land (site number 104) was acquired for P2,400,000. The entity is undecided regarding its future use.

Determine the balance of the following as of December 31, 2017 in accordance with PIC Q&A 2012-02:

4. Land
a. P5,600,000
b. P5,480,000

2
 c. P6,000,000
d. P7,880,000

5. Buildings
a. P5,400,000
b. P5,280,000
c. P5,000,000
d. P4,880,000

Cleveland Ltd. acquired real estate for the construction of a building and other facilities. Operating equipment was also purchased
and installed. The company’s accountant, who was not sure how to record some of the transactions, opened a Property ledger
account and recorded debits and (credits) to this account as follows:
Cost of land purchased as a building site P170,000
Architect’s fee for design of new building 23,000
Paid for the demolition of an old building on the building site purchased above 28,000
Paid land tax on the real estate purchased as a building site 1,700
Paid excavation costs for the new building 15,000
Made the first payment to the building contractor 250,000
Paid for equipment to be installed in the new building 148,000
Received from sale of salvaged materials from demolishing the old building (6,800)
Made final payment to the building contractor 350,000
Paid interest on building loan during construction 22,000
Paid freight on equipment purchased 1,900
Paid installation costs of equipment 4,200
Paid for repair of equipment damaged during installation 2,700
Property ledger account balance P1,009,700

6. Land
a. P191,900
b. P163,200
c. P207,900
d. P192,900
170,000

7. Land improvements
a. P8,200
b. P15,000
c. P6,800
d. P0

8. Building
a. P694,000
b. P660,000
c. P653,200
d. P666,800
681,200

9. Expenses (excluding depreciation)

a. P6,800
b. P22,000
c. P4,400
d. P2,700

10. Dasmarinas Company has a production assembly line to manufacture furniture. In 2018 Dasmarinas purchased a new
machine and rearranged the assembly line to install this machine. The rearrangement did not increase the estimated useful
life of the assembly line but it did result in significantly more efficient production. The following expenditures were incurred in
connection with this project:
Machine P5,000,000
Labor to install new machine 400,000
Parts added in rearranging the assembly line to provide future 2,000,000
benefits
Labor and overhead to rearrange the assembly line 600,000

What amount of the above expenditures should be capitalized in 2018?

a. P8,000,000
b. P7,400,000
c. P5,400,000
d. P2,600,000

11. Cabiao Company purchased a new printing machine on December 2, 2018 at an invoice price of P4,000,000 with terms 2/10,
n/30. On December 10, 2018, Cabiao paid the required amount for the machine. The installation costs were P50,000 and the
employees received training on how to use the machine, at a cost of P20,000. Before using the machine to print the customers’
orders, a test was undertaken and the paper and ink cost P5,000. What amount should be capitalized as cost of the machine?
a. P4,075,000
b. P3,995,000
c. P3,975,000
d. P3,970,000

12. New Caste Ltd uses many kinds of machines in its operations. It constructs some of these machines itself and acquires others
form the manufacturers. The following information relates to machine A that it has recorded during the current year.
Cash paid for equipment, including VAT of P9,600 P89,600
Cost of transporting machine – insurance and transport 3,000
Labor costs of installation by expert fitter 5,000
Labor costs of testing equipment 4,000
Insurance costs for current year 1,500

3
 Costs of training for personnel who will use the machine 2,500
Costs of safety rails and platforms surrounding machine 6,000
Costs of water devices to keep machine cool 8,000
Costs of adjustments to machine to make it operate more efficiently 7,500

Determine the amount at which machine A should be recorded in the records of Newcastle Ltd.
a. P105,500
b. P116,000
c. P113,500
d. P121,500

13. Sunflower Company acquired some new equipment. The following data have been made available to you:
List price of the equipment P14,000
Cash discount available but not taken on purchase 200
Freight paid on the new equipment 250
Cost of removing the old equipment 170
Installation costs of the new equipment 430
Testing costs before the equipment was put to regular operation
(including P120 in wages of the regular equipment operator) 295
Loss on premature retirement of the old equipment 120
Estimated cost of manufacturing similar equipment in the
company’s own plant, including overhead 13,800

What amount should be capitalized as the cost of the new equipment?

a. P14,775
b. P28,865
c. P14,975
d. P15,065

MANDOLIN CORP. uses different kinds of machines in its manufacturing process. It constructs some of these machines itself and
acquires others from the manufacturers. The following information relates to two machines that it has recorded in 2018.

Machine A (purchased)
Cash paid for equipments P250,000
Cost of transporting machine – insurance and transport 9,000
Labor cost of installation by expert fitter 15,000
Labor cost of testing equipment 12,500
Insurance cost for 2018 4,500
Cost of training for personnel who will use the machine 7,500
Cost of safety rails and platforms surrounding machine 18,000
Cost of water devices to keep machine cool 24,000
Cost of adjustments to machine during 2018 to make it operate 22,500
more efficiently

Machine B (self – Constructed)

Cost of material to construct machine P210,000
Labor cost to construct machine 129,000
Allocated overhead cost – electricity, factory space, etc. 66,000
Allocated interest cost of financing machine 30,000
Cost of installation 36,000
Profit saved by self-construction 45,000
Safety inspection cost prior to use 12,000

14. What is the cost of machine A?

a. P380,500
b. P328,000
c. P358,000
d. P350,500
351,000

15. What is the cost of machine B?

a. P471,000
b. P483,000
c. P417,000
d. P438,000

STAR COMPANY commenced operations on January 1, 2017. During the following year, the company acquired a tract of land,
demolished the building on the land and built a new factory. Equipment was acquired for the factory and, in September 2018, the
plant was ready to commence operation. A gala opening was held on September 18, with the City Mayor opening the factory. The
first items were ready for sale on September 25.

During this period, the following cash inflow and outflows occurred.
 While searching for a suitable block of land, Star placed an option to buy with
three real estate agents at a cost of P1,000 each.
Payment for option fees P3,000
 Receipt of loan from bank 3,000,000
 Payment to settlement agent for title search, stamp duties, and settlement 100,000
fees
 Payment of delinquent property taxes assumed by Star Company 50,000
 Payment for land 1,000,000
 Payment for demolition of old building 120,000
 Payment from sale of material from old building 55,000

4
  Payment to architect 230,000
 Payment to City Hall for approval of building construction 120,000
 Payment for safety fence around construction site 34,000
 Payment to construction contractor for factory building 2,400,000
 Payment for external driveways, parking bays and safety lighting 540,000
 Payment of interest on construction loan 400,000
 Payment for safety inspection on building 30,000
 Payment for equipment 640,000
 Payment of freight and insurance costs on delivery of equipment 56,000
 Payment of installation cost on equipment 120,000
 Payment for safety equipment surrounding equipment 110,000
 Payment for removal of safety fence 20,000
 Payment for new fence surrounding the factory 80,000
 Payment for advertisements in the newspaper about the forthcoming factory
and its benefits to the community 5,000
 Payment for opening ceremony 60,000
 Payment to adjust equipment to more efficient operating levels subsequent to
initial operation 33,000

16. What is the cost of the land

a. P1,101,000
b. P1,151,000
c. P1,216,000
d. P1,218,000
17. What is the cost of the building
a. P3,279,000
b. P3,284,000
c. P3,200,000
d. P3,234,000
3,299,000
18. What is the cost of the land improvements
a. P114,000
b. P134,000
c. P620,000
d. P654,000
19. What is the cost of the equipment

a. P849,000
b. P903,000
c. P959,000
d. P1,359,000
20. The amount to be reported as expenses (excluding depreciation) in Star’s income statement is
a. P60,000
b. P65,000
c. P100,000
d. P67,000