Page | 1

Chapter 16
Property, Plant and Equipment (Part 2)

PROBLEM 1: TRUE OR FALSE

1. FALSE – PAS 16 defines depreciation as the
“systematic allocation of the depreciable amount of an
asset over its estimated useful life.”

2. FALSE – revaluation model

3. TRUE = (120K – 20K) ÷ 10 years = 10K annual

depreciation;
10K annual depreciation ÷ 100K depreciable amount
=10%

4. FALSE – 800K
5. TRUE
6. FALSE
7. TRUE
8. TRUE
9. FALSE – recognized in OCI and accumulated in equity
10. FALSE – (180K – 10K) – 200K = 30K loss

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. B
3. A
F Depreciation starts when the asset is available for
use in the manner intended by management.
F Costs incurred while an item capable of operating in
the manner intended by management has yet to be
brought into use are recognized as expenses.

4. D – see the word “not” in the problem

5. D
6. D
7. D - PAS 16 encourages the note disclosure of the
gross carrying amounts of fully depreciated assets. If
the fully depreciated assets were removed from the
 Page | 2

ledger, information on the gross carrying amounts to

be disclosed in the notes would not be readily
available.

8. B
9. D
10. D

PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a): Straight line method
1,000,
Initial cost (Historical cost) of equipment
000
(100,0
Residual value
00)
900,0
Depreciable amount
00
Divide by: Estimated useful life
4
225,0
Annual depreciation
00

 Depreciation table:
Depreciati Accumulated Carrying
Date on depreciation amount
Jan. 1, 1,000,000
20x1
Dec. 31, 225,000 775,000
20x1 225,000
Dec. 31, 225,000 450,000 550,000
20x2
Dec. 31, 225,000 675,000 325,000
20x3
Dec. 31, 225,000 900,000 100,000
20x4
900,000

 Journal entries:
Dec. 31, Depreciation expense 225,00
20x1
Accumulated 0 225,00
depreciation 0
Dec. 31, Depreciation expense 225,00
20x2
Accumulated 0 225,00
 Page | 3

depreciation 0

Requirement (b): Sum-of-the-years’ digits method

SYD denominator = Life x [(Life + 1) ÷ 2]
SYD denominator = 4 x [(4 + 1) ÷ 2] = 10

 Depreciation table:
SY Accumulat
Deprecia D ed Carryin
ble rat Depreciati depreciati g
Date amount e on on amount
1,000,0
1/1/x1
00
12/31/ 4/1 640,00
900,000 360,000 360,000
x1 0 0
12/31/ 3/1 370,00
900,000 270,000 630,000
x2 0 0
12/31/ 2/1 190,00
900,000 180,000 810,000
x3 0 0
12/31/ 1/1 100,00
900,000 90,000 900,000
x4 0 0
900,000

 Journal entries:
Dec. 31, Depreciation expense 360,00
20x1
Accumulated 0 360,00
depreciation 0
Dec. 31, Depreciation expense 270,00
20x2
Accumulated 0 270,00
depreciation 0

Requirement (c): Double declining balance method

Double declining rate = 2 ÷ Life
Double declining rate = 2 ÷ 4 = 50%

Depreciati
Year
on
20x1 (1M x 50%) 500,000
20x2 (1M – 500K) x 50% 250,000
20x3 (1M – 500K – 250K) x 50% 125,000
(1M – 500K – 250K – 125K –
20x4 100K RV) 25,000
 Page | 4

 Depreciation table:
Date Depreciati Accumulat Carrying amount
on ed
depreciatio
n
Jan. 1,
20x1 1,000,000
Dec. 31,
20x1 500,000 500,000 500,000
Dec. 31,
20x2 250,000 750,000 250,000
Dec. 31,
20x3 125,000 875,000 125,000
Dec. 31,
20x4 25,000 900,000 100,000

900,000

 Journal entries:
Dec. 31, Depreciation expense 500,00
20x1
Accumulated 0 500,00
depreciation 0
Dec. 31, Depreciation expense 250,00
20x2
Accumulated 0 250,00
depreciation 0

2. Solutions:
Requirement (a): Based on Input
Depreciation rate = Depreciable amount ÷ Estimated total
hours
Depreciation rate = 900,000 ÷ 12,000
Depreciation rate = 75 per hour of input

Dec. Depreciation expense (3,600 270,00

31, x 75) 0 270,00
20x1
Accumulated 0
depreciation
Dec. Depreciation expense (3,000 225,00
31, x 75) 0 225,00
20x2
Accumulated 0
depreciation

Requirement (a): Based on Output

Depreciation rate = Depreciable amount ÷ Estimated total
units
 Page | 5

Depreciation rate = (900,000 ÷ 720,000)

Depreciation rate = 1.25 per unit of output

Dec. Depreciation expense (240K 300,00

31, x 1.25) 0 300,00
20x1
Accumulated 0
depreciation
Dec. Depreciation expense (200K 250,00
31, x 1.25) 0 250,00
20x2
Accumulated 0
depreciation

3. Solution:
Double declining
Yr. Straight line SYD
balance
(75,000* / 4) = 4/10 x 75,000* = 50% x 80,000 =
1
18,750 30,000 40,000
3/10 x 75,000 = 50% x 40,000 =
2
18,750 22,500 20,000
2/10 x 75,000 = 50% x 20,000 =
3
18,750 15,000 10,000
1/10 x 75,000 =
4 7,500
50% x 10,000 = 5,000
18,750
* 80,000 - 5,000 = 75,000 depreciable amount

Yea Straight Double declining

SYD
r line balance
18,750 x
20x 9/12 30,000 x 9/12 = 40,000 x 9/12 =
1 = 22,500 30,000
14,062.50
20x 30,000 x 3/12 = 40,000 x 3/12 =
18,750
2 7,500 10,000
22,500 x 9/12 = 20,000 x 9/12 =
16,875 15,000
20x 22,500 x 3/12 =
18,750 20,000 x 3/12 = 5,000
3 5,625
15,000 x 9/12 =
10,000 x 9/12 = 7,500
11,250
20x 15,000 x 3/12 =
18,750 10,000 x 3/12 = 2,500
4 3,750
7,500 x 9/12 =
5,000 x 9/12 = 3,750
5,625
18,750 x
20x 3/12 7,500 x 3/12 =
5,000 x 3/12 = 1,250
5 = 1,875
4,687.50
 Page | 6

The asset is acquired on Mar. 18, 20x1 (last half of the month). Accordingly,
it is depreciated starting on Apr. 1, 20x1.

4. Solution:
Step 1: Carrying amount as at the beg. of the period of
change
 Double declining balance rate (2 ÷ Life) or (2 ÷ 20%
10 yrs.)
 Carrying amt. on Jan. 1, 20x4 (40M x 80% x 20,480,00
80% x 80%) 0

Step 2: Apply the changes

20,480,
Carrying amount on Jan. 1, 20x4
000
Residual value (2,000,000)
Depreciable amount 18,480,000
Divide by: Revised remaining useful life (12
yrs. – 3 yrs.) 9
Straight line depreciation 2,053,333

Journal entry:
Dec. 31, Depreciation expense 2,053,33
20x4
Accumulated 3 2,053,33
depreciation 3

5. Solutions:
Requirement (a):
21,000,
Replacement cost 000
(7,000,00
Less: Depreciation (21M x 20/60(a)) 0)
14,000,
Fair value 000
(5,000,00
Carrying amount (10M – 5M) 0)
Revaluation surplus – gross of tax 9,000,0
 Page | 7

00
Less: Deferred tax (9M x 30%) (2,700,000)
Revaluation surplus – net of tax 6,300,000
(a)
Total economic life = Effective life + Remaining economic life (20 + 40 =
60)

Requirement (b):

 Proportional method
Historical Replacement
Cost cost Increase
11,000,0
Building 10,000,000 21,000,000 00
Accum. (2,000,0
depreciation (5,000,000) (7,000,000) 00)
9,000,00
(a)
CA/ DRC/ RS 5,000,000 14,000,000 0
(a)
Carrying amount/ Depreciated replacement cost/ Revaluation surplus –
gross of tax

Date Building 11,000,0

Accumulated depreciation 00 2,000,0
Revaluation surplus 00
Deferred tax liability 6,300,00
0
2,700,0
00

 Elimination method
Dat Accumulated depreciation 5,000,00
e (elimination) 0
Building (balancing figure) 4,000,00 6,300,00
Revaluation surplus 0 0
Deferred tax liability 2,700,0
00

The building’s carrying amount after the revaluation is

analyzed as follows:
Proportion Eliminati
al on
Building (10M + 11M); (10M + 4M) 21,000,000 14,000,000
A/D (5M + 2M); (5M - 5M) (7,000,000) -
Carrying amount (equal to fair 14,000,00
14,000,000
value) 0
 Page | 8

Requirement (c):
Fair value 14,000,000
Residual value -
Depreciable amount 14,000,000
Divide by: 40
Revised annual depreciation 350,000

6. Solutions:
Requirement (a):
48,000,0
Fair value
00
(30,000,0
Less: Carrying amount (40M – 10M)
00)
18,000,00
Revaluation surplus - gross of tax
0
(5,400,0
Less: Deferred tax (18M x 30%) 00)
12,600,0
Revaluation surplus - net of tax
00

Requirement (b):
 Proportional method
Historical Fair
% change
Cost value
Building 40,000,000
Accum.
(10,000,000)
depreciation
48,000,0
Carrying amount 30,000,000 160%*
00
* (48,000,000 ÷ 30,000,000) = 160% increase

Historical % Revalued
Cost change amounts
Building 40,000,000 160% 64,000,000
Accum.
(10,000,000) 160% (16,000,000)
depreciation
Carrying amount 30,000,000 48,000,000

Dat Building (64M – 40M) 24,000,0

e
Accum. depreciation (16M 00 6,000,00
– 10M) 0
Deferred tax liability 5,400,00
Revaluation surplus 0
 Page | 9

12,600,0
00

Requirement (b): Elimination method

Date
Accumulated depreciation 10,000,0
(elimination) 00
Building (balancing figure) 8,000,00 5,400,0
Deferred tax liability 0 00
Revaluation surplus 12,600,0
00

The building’s carrying amount after the revaluation is

analyzed as follows:
Proportio Eliminati
nal on
48,000,00
Building (40M + 24M); (40M + 8M) 64,000,000
0
Accum. Depreciation (10M + 6M); (16,000,00
-
(10M - 10M) 0)
48,000,00 48,000,0
Carrying amount (equal to fair value)
0 00

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. D
 SLM = (1M x 95%) ÷ 10 = 95,000
 SYD denominator = {10 x [(10 + 1) ÷ 2]} = 55
SYD depreciation in 20x2 = 950,000 x 9/55 =
155,455
 DDB rate = 2 ÷ 10 = 20%
DDB depreciation in 20x2 = 1M x 80% x 20% =
160,000
 UOPM (input) depreciation in 20x2 = 950,000 x
(2,800/28,000) = 95,000
 UOPM (output) depreciation in 20x2 = 950,000 x
(9,800/84,000) = 110,833

2. C
Purchase price 480,000
Commission 20,000
 P a g e | 10

Freight 22,000
Installation and testing 18,000
Total cost 540,000
Residual value (40,000)
Depreciable amount 500,000

 SLM = 500,000 x 8/10 + 40,000 = 440,000

 SYD denominator = {10 x [(10 + 1) ÷ 2]} = 55
SYD accumulated depreciation on Dec. 31, 20x2 =
500,000 x [(10 + 9) ÷ 55] = 172,727
SYD carrying amount on Dec. 31, 20x2 = 540,000 -
172,727 = 367,273
 DDB rate = 2 ÷ 10 = 20%
DDB carrying amount on Dec. 31, 20x2 = 540M x
80% x 80% = 345,600
 UOPM (input) Accumulated depreciation on Dec. 31,
20x2 = 500,000 x [(2,000 + 2,700 ) ÷ 25,000] =
94,000
Carrying amount on Dec. 31, 20x2 = 540,000 – 94,000
= 446,000
 UOPM (output) Accumulated depreciation on Dec. 31,
20x2 = 500,000 x [(8,000 + 10,000 ) ÷ 100,000] =
90,000
Carrying amount on Dec. 31, 20x2 = 540,000 – 90,000
= 450,000

3. C
Solution:
SYD denominator = Life x [(Life + 1) / 2] = 4 x [(4+1) / 2]
= 10

Historical cost 20,000

Estimated residual value (2,000)

Depreciable amount 18,000

Depreciation - 20x1 (18,000 x 4/10) 7,200

Depreciation - 20x2 (18,000 x 3/10) 5,400

 P a g e | 11

Depreciation - 20x2 (18,000 x 2/10) 3,600

Accumulated depreciation - 12/31/20x3 16,200

Historical cost 20,000

Accumulated depreciation - 12/31/20x3 (16,200)

Carrying amount - 12/31/20x3 3,800

4. B

Yr. Straight line SYD

(100,000 – 10,000) ÷ 5 =
1 90,000 x 5/15 = 30,000
18,000
2 18,000 90,000 x 4/15 = 24,000
90,000 x 3/15 =
3 18,000
18,000
4 18,000 90,000 x 2/15 = 12,000
5 18,000 90,000 x 1/15 = 6,000

5. A (110,000 – 5,000) ÷ 10 yrs. = 10,500

6. A
Solution:
150% declining balance rate = 1.5/Life = 1.5/5 = 30%

Depreciation - 20x1 (200,000 x 30%) 60,000

Depreciation - 20x2 (200,000 - 60,000) x
30% 42,000

Accumulated depreciation - 12/31/x2 102,000

7. D
Solution:
 P a g e | 12

 Composite life = Depreciable amount ÷ Annual

depreciation
Composite life = 280,000 ÷ 70,000 = 4 years

 Composite rate = Annual depreciation ÷ Total cost

Composite rate = 70,000 ÷ 290,000 = 24.14%

 Depreciation in current year:

Total depreciable amount 280,000
Depreciable amount of old tools (8,000)
Depreciable amount of new tools 12,000
Revised depreciable amount 284,000
Divide by: Original composite life 4
Revised annual depreciation 71,000

Total cost 290,000

Cost of old tools (8,000)
Cost of new tools 12,000
Revised total cost 294,000
Multiply by: Original composite
rate 24.14%
Revised annual depreciation 70,972*
* Answer rounded-off to 71,000.

8. C
Solutions:
 Retirement method:
Cost of disposals (12,000 + 24,000 + 36,000) 72,000
Net disposal proceeds (1,000 + 1,600 + 2,000) (4,600)
Depreciation expense 67,400

 Replacement method:
Cost of additions as replacements (20,000 +
44,000) 64,000
Cost of disposals but not replaced 24,000
Proceeds from sale of old tools (1,000 + 1,600 +
2,000) (4,600)
Depreciation expense 83,400

 Inventory method:
Tools
Proceeds from asset
beg. bal. 300,000 4,600 disposals
 P a g e | 13

67,40
Additions 124,000 0 Depreciation (squeeze)
352,00 end. bal. (per physical
0 count)

9. C
 Useful life = 20 years
 Remaining lease term as of 12/31/01 = (9* + 5
renewal) = 14
* Dec. 31, 2001 completion date of improvements to Dec. 31, 2010 end
of original lease term = 9 yrs.
 Shorter = 14 years
 480,000 x 13/14 = 445,714

10. C
Solution:
Step 1: Carrying amount as at the beg. of the period of
change
 Double declining balance rate (2 ÷ Life) or (2 ÷ 10%
20 yrs.)
 Carrying amt. on Jan. 1, 20x8
(5M x 90% x 90% x 90% x 90% x 90% x 90% x 90%) 2,391,485

Step 2: Apply the changes

 Remaining life = 20 yrs. – 7 yrs. = 13 years
 SYD denominator = {13 x [(13 + 1) ÷ 2]} = 91
 Carrying amount on Jan. 1, 20x8 2,391,485
Revised residual value (200,000 – 20,000) (180,000)
Depreciable amount 2,211,485
Multiply by: 13/91
SYD depreciation in 20x8 315,926

11. D
264,
Historical cost 000

Original estimated useful life 8

33,0
Original depreciation per year 00

Historical cost 264,000

Accumulated depreciation - 1/1/x3 (33,000
 P a g e | 14

x 3 yrs.) (99,000)

Carrying amount - 1/1/x3 165,000

Revised residual value (24,000)

Revised depreciable amount 141,000

Divide by: Revised useful life (6 yrs. - 3
yrs.) 3

Depreciation - 20x3 47,000

Accumulated depreciation - 1/1/x3 (33,000 x 99,

3 yrs.) 000
47,0
Depreciation - 20x3 00
146
Accumulated depreciation - 12/31/x3 ,000

12. C
Solutions:
(1)
Jan. 1, Cash 100,000
20x7
Accumulated depreciation (1.8M x 600,000
5/15) 1,100,0
Loss on replacement (squeeze) 00 1,800,0
00
Equipment (old part)
to derecognize the old part
Jan. 1, Equipment (new part) 2,100,0
20x7
Cash 00 2,100,0
to recognize the new replacement 00
part

On derecognition, the difference between the carrying

amount of the derecognized PPE and the net disposal
proceeds, if any, is recognized as gain or loss in profit or
loss.

(2)
Jan. 1, Cash 100,000
20x7
Accumulated depreciation (2.1M x 700,000
 P a g e | 15

5/15) 1,300,0
Loss on replacement (squeeze) 00 2,100,0
00
Equipment (old part)
to derecognize the old part

Jan. 1, Equipment (new part) 2,100,0

20x7
Cash 00 2,100,0
to recognize the new replacement 00
part

13. A
Solution:
(1)
50,000,00
Replacement cost 0
(12,500,0
Less: Depreciation (50M x 8(a)/32(b)) 00)
Fair value (Depreciated replacement 37,500,00
cost) 0
(24,000,0
Less: Carrying amount (40,000,000 – 16,000,000) 00)
13,500,00
Revaluation surplus, gross of tax 0
(4,050,00
Less: Deferred tax consequence (13.5M x 30%) 0)
9,450,00
Revaluation surplus, net of tax 0

(a)
Effective life (Effective age)
(b)
Total economic life = Effective life + Remaining economic life = (8 + 24)
= 32

37,500,0
Fair value (Depreciated replacement cost)
00
Divide by: Remaining economic life 24
1,562,5
Revised annual depreciation
00

14. B
Solutions:
Replacement cost 30,000,000
 P a g e | 16

(6,750,000
Less: Depreciation (30M – 3M) x 7(a)/28 )
23,250,00
Fair value 0
(17,200,00
Carrying amount (22M – 2M) x 19/25 + 2M 0)
Revaluation surplus, gross of tax 6,050,000
(1,815,000
Less: Deferred tax consequence (6.050M x 30%) )
Revaluation surplus, net of tax –
12/31/x6 4,235,000
(a)
28 yrs. total economic life – 21 yrs. remaining economic life = 7 yrs.
effective life

(1) Carrying amount of building on 12/31/x7:

Fair value on 12/31/x6 23,250,000
(3,000,000
Revised residual value )
20,250,00
Revised depreciable amount 0
Divide by: Remaining economic life 21
Revised annual depreciation 964,286

Fair value on 12/31/x6 23,250,000

Less: Depreciation in 20x7 (964,286)
22,285,71
Carrying amount of building on 12/31/x7 4

(2) Carrying amount of revaluation surplus on 12/31/x7:

Revaluation surplus, net of tax – 12/31/x6 4,235,000
Divide by: Remaining economic life 21
Annual transfer to retained earnings 201,667

Revaluation surplus, net of tax – 12/31/x6 4,235,000

Less: Amount transferred to R/E in 20x7 (201,667)
Revaluation surplus, net of tax –
12/31/x7 4,033,333
 P a g e | 17

15. A
Solution:
 Building:
12,000,00
Replacement cost 0
(3,000,000
Less: Depreciation (12M x 10/40*) )
Fair value 9,000,000
(3,200,000
Carrying amount [8M - (8M x 15**/25)] )
Revaluation surplus – gross of tax 5,800,000
70
Multiply by: %
Revaluation surplus – net of tax
(Building) 4,060,000

* 10 yrs. effective life + 30 yrs. remaining life = 40 total economic life

**Actual life

 Patio:
Replacement cost 4,200,000
(1,680,000
Less: Depreciation (4.2M x 10/25*) )
Fair value 2,520,000
(1,500,000
Carrying amount [3M – (3M x 10**/20)] )
Revaluation surplus – gross of tax 1,020,000
70
Multiply by: %
Revaluation surplus – net of tax (Patio) 714,000

* 10 yrs. effective life + 15 yrs. remaining life = 25 total economic life

**Actual life

Total Revaluation Surplus, net of tax: (4.06M + 714K)

= 4,774,000

16. D
Solution:
 P a g e | 18

17. D
Solution:
 Changes in accounting estimates in 20x4:
Step 1: Carrying amount as at the beg. of the period of
change
 Carrying amt. on Jan. 1, 20x4 (20M – 1M) x 14,300,00
7/10 + 1M R.V. 0

Step 2: Apply the changes

 Revised estimate of remaining useful
5 years
life
 SYD denominator {5 x [(5 + 1) ÷ 2]} 15
14,300,
 Carrying amount on Jan. 1, 20x4
000
Revised residual value (800,000)
Revised depreciable amount 13,500,000

Revised depreciation table:

Depreciable SYD
Date amount rate Depreciation
12/31/x4 13,500,000 5/15 4,500,000
12/31/x5 13,500,000 4/15 3,600,000
12/31/x6 13,500,000 3/15 2,700,000
12/31/x7 13,500,000 2/15 1,800,000
12/31/x8 13,500,000 1/15 900,000S
13,500,000

 Sale on July 21, 20x6:

14,300,
Carrying amount on Jan. 1, 20x4
000
Depreciation in 20x4 (4,500,000)
Depreciation in 20x5 (3,600,000)
Depreciation from Jan. 1 to July 31, 20x6 (1,575,000)
(2.7M x 7/12)
 P a g e | 19

Carrying amount on date of sale 4,625,000

4,450,0
Net disposal proceeds (4,500,000 – 50,000)
00
(4,625,000
Carrying amount on date of sale
)
Loss on sale (175,000)

18. B
Solution:
 Gain (loss) in P/L:

15,000,
Fair value on 1/1/x6 000
Multiply by: 10/15
10,000,0
Carrying amount on 1/1/11 00

11,400,0
Net disposal proceeds (12M - .6M) 00
(10,000,0
Carrying amount on 1/1/11 00)
1,400,
Gain on sale - P/L 000

 Direct transfer within equity:

15,000,
Fair value on 1/1/x6 000
(9,600,0
Carrying amount on 1/1/x6 (12M x 20/25) 00)
5,400,0
Revaluation surplus 00

Divide by: Remaining useful life 15

360,
Annual transfer to retained earnings 000

5,400,
Revaluation surplus - 1/1/x6 000
 P a g e | 20

(1,800,0
Annual transfers (360K x 5 yrs.) 00)
3,600,
Revaluation surplus - 1/1/11 000

19. B
Accumulated depreciation
971,06
5 12/31/x1
Disposal 715, 599,0 Depreciation -
(squeeze) 998 35 20x2
854,1
12/31/x2 02

20. B
Solution:
 Cost of acquisitions:
Building
Building, 1,000,00
beginning 0
Acquisitions 2,300,0
(squeeze) 00 800,000 Disposals
2,500,00
0 Building, end

 Depreciation expense:
The journal entry to record the sale of the old building is
re-provided below:
20x2 Cash 260,00
Accumulated depreciation 0
(squeeze) 500,00
Loss on sale of building 0 800,00
Building 40,000 0

Accumulated depreciation
200,00
0 beg.
 P a g e | 21

Accumulated
depreciation of 500,00 500,00 Depreciation
building sold 0 0 expense (squeeze)
200,00
end 0

PROBLEM 5: CLASSROOM ACTIVITY

Solutions:

Requirement (a):

Aug. 1, 20x1
Building – Construction in progress 2,916,619.26
Cash
2,916,619.26
to record the down payment for the contracted
construction of a building

Aug. 22, 20x1

Building – Construction in progress 22,000.00
Cash 22,000.00
to record the payment for the building permit

The cost of building permit is capitalized because it

is necessary in bringing the asset to its intended condition,
i.e., it is illegal to construct a building without a permit.
 P a g e | 22

Oct. 1, 20x1
Building – Construction in progress 1,296,275.22
Retention payable (1,296,275.22 x 10%)
129,627.52
Cash (1,296,275.22 x 90%)
1,166,647.70
to record the payment for the first progress
billing

Dec. 22, 20x1

Building – Construction in progress 3,456,733.93
Retention payable (3,456,733.93 x 10%)
345,673.39
Cash (3,456,733.93 x 90%)
3,111,060.54
to record the payment for the second progress
billing

Dec. 22, 20x1

Charitable contributions 13,000.00
Cash 13,000.00
to record donation for Christmas party of
construction workers

Feb. 27, 20x2

Building – Construction in progress 1,620,344.03
Retention payable (1,620,344.03 x 10%)
162,034.40 Cash (1,620,344.03 x 90%)
1,458,309.63
to record the payment for the third progress
billing

Apr. 30, 20x2

Building – Construction in progress 432,091.76
Retention payable (432,091.76 x 10%)
43,209.18
Cash (432,091.76 x 90%)
388,882.58
to record the payment for the final progress
billing
 P a g e | 23

June 30, 20x2

Building – Construction in progress 12,000.00
Cash
12,000.00
to record the cost of occupancy permit

The cost of occupancy permit is capitalized because

it is necessary for the entity to enjoy the economic benefits
of the asset, i.e., it is illegal to occupy a building without a
permit.

June 30, 20x2

Retention payable* 680,544.49
Cash 680,544.49
to record the settlement of the 10% retentions on
payments for progress billings

*129,627.52 + 345,673.39 + 162,034.40 + 43,209.18 =

680,544.49

June 30, 20x2

Building (a) 9,756,064.20
Building – Construction in progress (a)
9,756,064.20
to close the “Building – Construction in
progress” to the “Building” account
(a)

Building -
Construction in progress
2,916,619.
8/1/x1 26
8/22/x1 22,000.00
1,296,275.
10/1/x1 22
3,456,733.
12/22/x1 93
1,620,344.
2/27/x2 03
4/30/x2 432,091.76
6/30/x2 12,000.00
 P a g e | 24

9,756,064.
20

July 18, 20x2

Taxes and licenses 18,000.00
Cash 18,000.00
to record the tax on the building

Taxes are generally expensed. The only exception is

when the taxes have accrued before an existing building is
purchased and the payment thereof is assumed by the
buyer.

July 24, 20x2

Relocation expense 230,000.00
Cash 230,000.00
to record the relocation costs as expense

Aug. 1, 20x2
Opening costs 50,000.00
Cash 50,000.00
to record the opening costs as expense

Opening costs and similar start-up costs are expensed.

Dec. 31, 20x2

Depreciation expense – Bldg. 195,121.29
Accumulated depreciation – Bldg. 195,121.29
to record the depreciation expense for 20x2

* 9,756,064.20 ÷ 25 yrs. = 390,242.57 annual depreciation

x 6/12 = 195,121.29

Depreciation begins when the asset is available for

use, and not when it is actually used. The receipt of the
occupancy permit on June 30, 20x2 signifies that the
building is available for use starting from this date.
In practice, taxes on the building start to accrue also
from the date of the occupancy permit.

Requirement (b):
20x1 20x2
Building
7,619,628.4 9,756,064.2
 P a g e | 25

1 0

(195,121.29
Accumulated depreciation - )

Carrying amount - Dec. 7,619,628. 9,560,942.

31 41 91
 P a g e | 26

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solutions:
Requirement (a): Straight line method
500,0
Initial cost (Historical cost) of machine
00
(50,0
Residual value (500,000 x 10%)
00)
450,
Depreciable amount
000
Divide by: Estimated useful life
4
112,
Annual depreciation
500

 Depreciation table:
Depreciati Accumulated Carrying
Date on depreciation amount
Jan. 1, 500,000
20x1
Dec. 31, 112,500 387,500
20x1 112,500
Dec. 31, 225,000 275,000
20x2 112,500
Dec. 31, 337,500 162,500
20x3 112,500
Dec. 31, 450,000 50,000
20x4 112,500
450,000

 Journal entries:
Dec. 31, Depreciation expense 112,50
20x1
Accumulated 0 112,50
depreciation 0
Dec. 31, Depreciation expense 112,50
20x2
Accumulated 0 112,50
depreciation 0

Requirement (b): Sum-of-the-years’ digits method

SYD denominator = Life x [(Life + 1) ÷ 2]
SYD denominator = 4 x [(4 + 1) ÷ 2] = 10
 Depreciation table:
Date Deprecia SY Depreciati Accumulat Carryi
ble D on ed ng
amount rat depreciati amoun
 P a g e | 27

e on t
500,00
1/1/x1
0
12/31/ 4/1 320,00
450,000 180,000 180,000
x1 0 0
12/31/ 3/1 185,00
450,000 135,000 315,000
x2 0 0
12/31/ 2/1
450,000 90,000 405,000 95,000
x3 0
12/31/ 1/1
450,000 45,000 450,000 50,000
x4 0
450,000

 Journal entries:
Dec. 31, Depreciation expense 180,00
20x1
Accumulated 0 180,00
depreciation 0
Dec. 31, Depreciation expense 135,00
20x2
Accumulated 0 135,00
depreciation 0

Requirement (c): Double declining balance method

Double declining rate = 2 ÷ Life
Double declining rate = 2 ÷ 4 = 50%

Yea Depreciati
r on
20x
1 (500,000 x 50%) 250,000
20x
2 (500,000 - 250,000) x 50% 125,000
20x
3 (500,000 - 250,000 - 125,000) x 50% 62,500
20x (500,000 - 250,000 - 125,000 – 62,500 –
4 50,000 RV) 12,500

 Depreciation table:
Date Depreciati Accumulat Carrying amount
on ed
depreciatio
n
Jan. 1,
20x1 500,000
Dec. 31, 250,000 250,000 250,000
 P a g e | 28

20x1
Dec. 31,
20x2 125,000 375,000 125,000
Dec. 31,
20x3 62,500 437,500 62,500
Dec. 31,
20x4 12,500 450,000 50,000

450,000

 Journal entries:
Dec. 31, Depreciation expense 250,00
20x1
Accumulated 0 250,00
depreciation 0
Dec. 31, Depreciation expense 125,00
20x2
Accumulated 0 125,00
depreciation 0

2. Solutions:
Requirement (a): Based on Input
Depreciation rate = Depreciable amount ÷ Estimated total
hours
Depreciation rate = 450,000 ÷ 12,000
Depreciation rate = 37.5 per hour of input

Dec. Depreciation expense (3,600 135,00

31, x 37.5) 0 135,00
20x1
Accumulated 0
depreciation
Dec. Depreciation expense (3,000 112,50
31, x 37.5) 0 112,50
20x2
Accumulated 0
depreciation

Requirement (a): Based on Output

Depreciation rate = Depreciable amount ÷ Estimated total
units
Depreciation rate = (450,000 ÷ 360,000)
Depreciation rate = 1.25 per unit of output

Dec. Depreciation expense (120K 150,00

 P a g e | 29

31, x 1.25) 0 150,00

20x1 Accumulated 0
depreciation
Dec. Depreciation expense (100K 125,00
31, x 1.25) 0 125,00
20x2
Accumulated 0
depreciation

3. Solution: (450,000 ÷ 5 yrs. remaining lease term) =

90,000

The lease renewal option is ignored because the

exercise is not reasonably certain.

4. Solution:
Step 1: Carrying amount as at the beg. of the period of
change
 Carrying amt. on Jan. 1, 20x8 (9M – 600K) x
8/15 + 600K 5,080,000

Step 2: Apply the changes

 Revised remaining useful life (20 yrs. – 7 yrs.) 13 yrs.
 SYD denominator = Life x [(Life + 1) ÷ 2] = 13 x [(13
+ 1) ÷ 2] = 91

Carrying amount on Jan. 1, 20x8 5,080,000

Less: Revised residual value (800,000)
4,280
Revised depreciable amount
,000
13/
Multiply by: SYD rate in 20x8
91
SYD depreciation in 20x8 611,429

Journal entry:
Dec. 31, Depreciation expense 611,429
20x8
Accumulated 611,429
depreciation

5. Solutions:
 P a g e | 30

Requirement (a):
Jan. 1, Accumulated
depreciation (2.5M x 1,500,0
20x7 6/10)
00
Loss on replacement (squeeze) 1,000,0 2,500,0
00 00
Equipment (old part)
to derecognize the old part
Jan. 1, Equipment (new part) 3,000,0
20x7
Cash 00 3,000,0
to recognize the new replacement 00
part

Requirement (b):
Jan. 1, Accumulated
depreciation (3M x 1,800,0
20x7 6/10)
00
Loss on replacement (squeeze) 1,200,0 3,000,0
00 00
Equipment (old part)
to derecognize the old part

Jan. 1, Equipment (new part) 3,000,0

20x7
Cash 00 3,000,0
to recognize the new replacement 00
part

6. Solutions:
Requirement (a):
25,200,0
Fair value
00
(21,000,0
Less: Carrying amount (30M – 9M)
00)
Revaluation surplus - gross of tax 4,200,000
(1,260,0
Less: Deferred tax (4.2M x 30%) 00)
2,940,00
Revaluation surplus - net of tax
0

Requirement (b):
 Proportional method
Historical Fair
% change
Cost value
Building 30,000,000
Accum. (9,000,000)
 P a g e | 31

depreciation
25,200,0
Carrying amount 21,000,000 120%*
00
* (25,200,000 ÷ 21,000,000) = 120% increase

Historical % Revalued
Cost change amounts
Building 30,000,000 120% 36,000,000
Accum.
(9,000,000) 120% (10,800,000)
depreciation
Carrying amount 21,000,000 25,200,000

Dat Building (36M – 30M) 6,000,00

e
Accum. depreciation 0 1,800,00
(10.8M – 9M) 0
Deferred tax liability 1,260,00
Revaluation surplus 0
2,940,00
0

 Elimination method
Date Accumulated depreciation 9,000,00
(elimination) 0 1,260,0
Deferred tax liability 00
Revaluation surplus 2,940,0
Building (balancing figure) 00
4,800,00
0

The building’s carrying amount after the revaluation is

analyzed as follows:
Proportio Eliminati
nal on
25,200,00
Building (30M + 6M); (30M – 4.8M) 36,000,000
0
Accum. Depreciation (9M + 1.8M); (10,800,00
-
(9M - 9M) 0)
25,200,00
Carrying amount (equal to fair value) 25,200,000
0

Requirement (c):
Fair value 25,200,000
Residual value (1,200,000)
Depreciable amount 24,000,000
Divide by: 8
 P a g e | 32

Revised annual depreciation 3,000,000

7. Solutions:
Requirement (a):
32,000,0
Replacement cost 00
(6,400,00
Less: Depreciation (32M x 5/25(a)) 0)
Fair value (Depreciated replacement 25,600,0
cost) 00
(16,320,0
Carrying amount (24M – 7.68M) 00)
9,280,0
Revaluation surplus – gross of tax 00
Less: Deferred tax (9.28M x 30%) (2,784,000)
Revaluation surplus – net of tax 6,496,000
(a)
Total economic life = Effective life + Remaining economic life (5 + 20 =
25)

Requirement (b):
 Proportional method
Historical Replacement
Cost cost Change
8,000,0
Building 24,000,000 32,000,000 00
Accum. 1,280,0
depreciation (7,680,000) (6,400,000) 00
9,280,0
(b)
CA/ DRC/ RS 16,320,000 25,600,000 00
(b)
Carrying amount/ Depreciated replacement cost/ Revaluation surplus –
gross of tax

Date Building (see table above) 8,000,00

Accumulated depreciation 0
Revaluation surplus 1,280,00 6,496,00
Deferred tax liability 0 0
2,784,0
00

 Elimination method
Dat Accumulated depreciation 7,680,00
e (elimination) 0
Building (balancing figure) 1,600,00 6,496,00
Revaluation surplus 0 0
 P a g e | 33

Deferred tax liability 2,784,0

00

The building’s carrying amount after the revaluation is

analyzed as follows:
Proportion Eliminati
al on
Building (24M + 8M); (24M + 1.6M) 32,000,000 25,600,000
A/D (7.68M - 1.28M); (7.68M -
(6,400,000) -
7.68M)
Carrying amount (equal to fair 25,600,00
25,600,000
value) 0

Requirement (c):
Fair value 25,600,000
Residual value -
Depreciable amount 25,600,000
Divide by: 20
Revised annual depreciation 1,280,000

8. Solution:
Land Building
8,000,00 16,000,00
Fair value 0 0
(6,000,0 (12,000,0
Carrying amount
00) 00)
2,000,00
Revaluation surplus
0 4,000,000
Divide by: Remaining economic
N/A 10
life
Annual transfer to retained
- 400,000
earnings

The revaluation surplus on the land remains in

equity and transferred to retained earnings only when
the land is derecognized.

9. Solution:
 Dec. 31, 20x4:
 P a g e | 34

Dec. Impairment loss 1,200,0

31,
Land 00 1,200,0
20x4
00

 Dec. 31, 20x7:

Dec. Land 3,200,0

31,
Impairment gain 00 1,200,0
20x7
Revaluation surplus 00
2,000,0
00

 Dec. 31, 20x9:

 P a g e | 35

Dec. Revaluation surplus 2,000,0

31,
Impairment loss 00
20x9
Land 100,000 2,100,0
00

10. Solution:
SYD denominator = Life x [(Life + 1) ÷ 2]
SYD denominator = 4 x [(4 + 1) ÷ 2] = 10

 Full-year depreciation charges (partial):

Depreciable SYD
Date amount rate Depreciation
Year 1 3,200,000 4/10 1,280,000
Year 2 3,200,000 3/10 960,000
Year 3 3,200,000 2/10 640,000
Year 4 3,200,000 1/10 320,000

 Depreciation table (partial):

Date Depreciation
Feb. 1 – Dec. 31,
20x1
(1.28M x 11/12) 1,173,333
Jan. 1 – Dec. 31, (1.28M x 1/12) + (960K x
20x2 11/12) 986,667
Jan. 1 – July 31,
20x3
(960K x 1/12) + (640K x 6/12) 400,000
Accumulated depreciation as of date
2,560,000
of sale

 Journal entry:
July Cash (1.8M – 40K) 1,760,0
20,
Accumulated depreciation 00
20x3
Machine 2,560,0 4,000,0
Gain on sale (squeeze) 00 00
320,00
0
 P a g e | 36

Alternative solution for gain (loss) computation:

Net disposal proceeds 1,760,000

Carrying amount on date of sale (4M -
2,560,000) (1,440,000)

Gain (loss) on sale 320,000