SELF-CONSTRUCTED

PROBLEMS IN FINANCIAL
ACCOUNTING
WITH SUGGESTED
SOLUTIONS
A Partial Requirement in XACRE1

Submitted by:
Irene Arantxa Y. Tulabut

Submitted to:
Mr. Adriano M. Aguarin Jr.

October 3, 2016

Problem 1
On January 1, 2016, Specter Company bought a tract of land with a building for
P3,300,000. The company also paid real estate brokers fee of P80,000, legal fees of
P15,000, and a title guarantee insurance of P20,000.
The closing statement indicated that the value of the land was P2,500,000 and the
value of the building was 800,000. Immediately after acquisition, the building was razed
at a cost of P55,000.
Specter entered into a P1,500,000 fixed-price contract with a construction company on
September 1, 2016 for the construction of a building on the land that was bought. The
building was completed and occupied on October 1, 2017. Additional construction costs
were incurred as follows:
Plans, specifications, and blue prints
Architects fees for design and supervision

P 75,000
P 120,000

The building is estimated to have a useful life twenty years from the date of completion
and will be depreciated using straight line method.
To finance the construction cost, Specter borrowed P1,500,000 on September 1, 2016.
The loan is payable in five annual installments of P300,000 plus interest at a rate of
10%. Specters average amounts of accumulated building construction were as follows:
For the period September 1, 2016 to December 31, 2016
For the period January 1, 2017 to October 1, 2017
1.
2.
3.
4.

What is the total cost of the land account?

What is the capitalizable borrowing cost?
What is the total cost of the building?
What is the depreciation of the building for 2017?

Suggested Solution:
1.)
Acqusition cost
Real estate broker's fee
Legal fees
Title guarantee insurance
Cost of razing old building
Total cost of land
2.)
September 1, 2016 to December 31,
2016
Accumulated expenditures

P3,300,000
80,000
15,000
20,000
55,000
P3,470,000

P600,000

P600,000
P900,000

Interest rate
January 1, 2017 to October 1, 2016
Accumulated expenditures
Interest rate
Capitalizable borrowing cost
3.)
Contract price
Plans, specifications, and blueprint
Architect fee
Borrowing cost
Total cost of building
4.)
Cost of Building
Divide by useful life
Annual depreciation

Depreciation for 2017

10%
9/12 P45,000
P900,000
10%
9/12 P67,500
P112,500

P1,500,000
75,000
120,000
112500
P1,807,500

P1,807,500
20
P90,375
3/12
P22,59
3.75

Problem2
Paulsen Company is installing a new machine. The following data are available:
Invoice price
Cash discount available but not taken on purchase
Freight paid on the new machine
Handling costs
Insurance while in transit
Cost of removing old machine
Cost of installation of new machine
Testing cost before the operation of new machine
Repair cost of new machinery damaged
in the process of installation
Operating cost during first month of regular use
5. What amount should be capitalized as cost of the new machine?
6. What amount should be treated as an outright expense?

P 1,000,000
50,000
20,000
10,000
8,000
35,000
50,000
18,000
25,000
135,000

Suggested Solution:
5.)
Invoice price
Cash discount available but not taken on
purchase
Freight paid on the new machine
Handling costs
Insurance while in transit
Cost of installation of new machine
Testing cost before the operation of new
machine
Operating cost during first month of regular
use
Capitalizable cost of new machine

P1,000,000
(50,000)
20,000
10,000
8,000
50,000
18,000
135,000
P1,191,000

6.)
Cost of removing old machine
Repair cost of new machinery damaged in
the process of installation
Costs treated as an outright expense

P35,000
25,000
P60,000

Problem 3
A schedule of machinery owned by Zane Company is presented below:
Cost

Residual Value

Life in years

Machine A

P600,000

P80,000

10

Machine B

550,000

70,000

12

Machine C

785,000

65,000

15

Machine D

1,050,000

150,000

If Zane computes depreciation on the straight line method,

7. What is the total annual depreciation of the machines?
8. What is the composite life of the machines?
9. What is the composite depreciation rate of the machines?

Suggested
Solution:
7.)
Res
idua
Cost
l
Valu
e

Lif Annu
e
al
in Depre
ye ciatio
ars
n

Depre
ciable
amou
nt

Mac
hine
A
Mac
hine
B
Mac
hine
C

P60
0,00
0

P80
,00
0

P520,
000 10

P52,0
00

550,
000

70,
000

480,0
00 12

40,00
0

785,
000

65,
000

720,0
00 15

48,00
0

Mac
hine
D

1,05
0,00
0

150
,00
0

900,0
00

112,5
00

P2,9
Tota 85,0
P2,62
P252,
l
00
0,000
500
8.)
Total depreciable amount
Divide by: total annual depreciation
Composite life

P2,620,000
252,500
10.38

9.)
Total annual depreciation
Divide by: Total cost
Composite rate

P252,500
2,985,000
8.46%

Problem 4
On January 1, 2015, Pearson Company acquired an equipment to be used for its
operations. The equipment has a useful life of 8 years and a salvage value of 35,000.
The depreciation applicable to this equipment for 2018 is P300,000 computed under the
sum-of-years-digit method.
10. What was the acquisition cost of the equipment?
Suggested Solution:
Sum-of-years'-digit
=

10.)
8 (8 + 1)
2

= 36

Ratio for the year 2018

Depreciable cost (P300,000 / 6/36)
Add: salvage value
Acquisition cost

6/36
P1,800,000
35,000
P1,835,000

Problem 5
On November 1, 2015, Litt Company purchased a machine for P1,300,000 that was
placed in service on January 2, 2016. Additional costs incurred to bring the asset to its
location and prepare for its intended use were: shipping P15,000, installation P25,000,
and testing P10,000. The machine has an estimated useful life of ten years and salvage
value of P150,000.
What is the amount of depreciation that should be recognized for the year ended
December 31, 2016 assuming that the company depreciates the machine based on:
11. Straight line method?
12. Declining balance method?
13. 150% declining balance method?
14. Double declining balance method?
15. Sum of years digits method?
Suggested Solution:
11.)
Purchase price
Shipping costs
Installation costs
Testing costs
Total cost
Less: salvage value
Depreciable Amount
Divide by: estimated useful life
Depreciation
12.)
Rate
Total cost
Multiply by: rate
Depreciation
13.)
Straight line rate ( 100%/10 years)
150% declining rate (10% x 150%)
Total cost of machine
Multiply by: 150% declining rate
Depreciation

1,300,000
15,000
25,000
10,000
1,350,000
150,000
1,200,000
10
P120,000

19.7258%
P1,350,000
19.7258%
P266,298.89

10%
15%
P1,350,000
15%
P202,500

14.)
Straight line rate ( 100%/10 years)
Double declining rate (10% x 200%)

10%
20.0%

Total cost of machine

Multiply by: double declining rate
Depreciation
15.)
Sum-of-years'-digit
10 (10 + 1)
=
2
Ratio for the year 2018
Total cost
Less: salvage value
Depreciable amount
Multiply by ratio
Depreciation

1,350,000
20%
P270,000

= 55
10/55
P1,350,000
150,000
1,200,000
10/55
P218,181.81

Problem 6
During its first year of operation, Ross Company purchased a mining property for
P15,000,000. The property is estimated to contain 9,000,000 tons of coal. When the
coal has been exhausted, it is estimated that the property will be worth P2,400,000.
Building was set up at a cost P900,000 and heavy equipment was purchased for
1,300,000 with an estimated salvage value of 200,000. The life of the building is 12
years and the life of the equipment is 5 years.
Following is the summary of Rosss operation for the first year of its operations:
Tons mined
Tons sold
Unit selling price per ton
Direct Labor
Mining Overhead
Operating expenses (excluding depreciation)

940,000 tons
620,000 tons
P12.5
P1,320,000
P635,000
P886,000

Depreciation on the building is to be allocated as follows: 70% to production and 30% to

operation. Depreciation on equipment is chargeable to production.
16. How much is the depletion for the first year of operation?
17. Total inventoriable deprecation for the first year of operation?
18. How much is the ending inventory?
19. How much is the cost of sales?

20. How much is the maximum amount of dividend that Ross may declare at the end of
the first year of operations?
Suggested Solution:
16.)
Acquisition cost
Less: salvage value
Cost subject to depletion
Divide by: total estimated tons of coal
Depletion rate
Multiply by: tons mined
Depletion rate
17.)
Inventoriable Depreciation Building
Cost of building
Divide by: total estimated tons of coal
Depreciation rate
Multiply by: tons mined
Total depreciation
% chargeable to production
Inventoriable depreciation of equipment
Cost of machinery
Less: Salvage value
Depreciable amount
Divide by: useful life
Total inventoriable depreciation
18.)
Depletion
Direct Labor
Inventoriable depreciation
Mining overhead
Total production cost
Divide by number of tons mined
Cost per ton
Multiply by: Number of unsold tons
Ending inventory

P15,000,000
2,400,000
12,600,000
9,000,000
1.40
940,000
P1,316,000

P900,000
9,000,000
.10
940,000
94,000
70%
1,300,000
200,000
1,100,000
5

P1,316,000
1,320,00
285,800
635,000
3,556,800
940,000
3.78
320,000
1,210,826

65,800

220000
P285,800

19.)
Number of sold tons
Cost per ton
Cost of sales

P640,000
3.78
P2,419,200

20.)
Sales (620,000 x 12.5)
Less: cost of sales
Gross profit
Less: Operating expenses
Less: Depreciation building (94,000 x 30%)
Net income
Realized depletion (620,000 x 1.4)
Maximum amount of dividends that may be declared

P7,750,000
P2,419,200
5,330,800
886,000
28,200
857,800
868,000
P1,725,800