MIDTERM EXAMINATION

Tower Company made the following acquisitions during the year:

 Purchased for 5,400,000, including appraiser fee of P50,000, a warehouse building and
the land on which it is located.

The land had an appraised value ofP2,000,000 and the original cost of P1,400,000. The
building had an appraised value of P3,000,000 and original cost of P2,800,000.

 Purchased an office building and the land on which it is located for P7,500,000 cash and
assumed an existing P2,500,000 mortgage.

For realty tax purposes, the property is assessed at P9,600,000, 60% of which is
allocated to the building.

1. What is the total cost of land?

a. 6,160,000
b. 5,840,000
c. 6,000,000
d. 5,000,000

2. What is the total cost of building?

a. 8,760,000
b. 9,240,000
c. 9,000,000
d. 7,760,000

On August 1, 2016, Bamco Company purchased a new machine on a deferred payment

basis. A down payment of P100,000 was made and 4 monthly installments ofP250,000
each are to be made beginning on September 1, 2016.

The cash equivalent price of machine was P950,000. The entity incurred and paid
installation costs amounting to P30,000.

3. What is the amount to be capitalized as cost of the machine?

a. 950,000
b. 980,000
c. 1,100,000
d. 1,130,000
Precious Company had the following property acquisitions during the current year:

 Acquired a tract of land in exchange for 50,000 shares of Precious Company with P100
par value that had a market price of P120 per share on the date of acquisition. The last
property tax bill indicated assessed value of P2,400,000 for the land.

 Received land from a major shareholder as an inducement to locate a plant in the city.
No payment was required but the entity paid P50,000 for legal expenses for land
transfer. The land is fairly valued at P1,200,000.

4. What is the total increase in land as a result of the acquisitions?

a. 7,200,000
b. 6,000,000
c. 7,050,000
d. 6,100,000

Lax Company recently acquired two items of equipment.

 Acquired a press at an invoice price of P3,000,000 subject to a 5% cash discount which

was taken.

Costs of freight and insurance during shipment were P50,000 and installation cost
amounted to P200,000.

 Acquired a welding machine at an invoice price of P2,000,000 subject to a cash discount

which was not taken.

Additional welding supplies were acquired at a cost of P100,000.

5. What is the total increase in the equipment account as a result of the transactions?
a. 4,900,000
b. 5,000,000
c. 5,100,000
d. 5,200,000

Boyd Company purchased a P4,000,000 tract of land for a factory site. The entity razed an old
building on the property to make room for the construction of new building and sold the
materials salvaged from the demolition.

Demolition of old building 200,000

Legal fees for purchase contract and recording ownership 150,000
Title guarantee insurance 50,000
Proceeds from sale of salvaged materials 20,000

6. What is the carrying amount of the land?

a. 4,200,000
b. 4,150,000
c. 4,050,000
d. 4,400,000

During the current year, Burr Company had the following transactions pertaining to a new office
building:

Purchase price of land 600,000

Legal fees for contract to purchase land 20,000
Architect fee 80,000
Demolition of old building on site to make room
For constructing of new building 50,000
Sales of scrap from old building 30,000
Construction cost of new building fully completed 3,500,000

7. What amount should be reported as cost of land?

a. 600,000
b. 620,000
c. 640,000
d. 650,000

8. What amount should be reported as cost of building?

a. 3,520,000
b. 3,600,000
c. 3,500,000
d. 3,620,000

Matinee Company incurred the following costs in purchasing a land as a factory site:

Purchase price 2,400,000

Cost of tearing down old building 240,000
Legal fee for title investigation 15,000
Title insurance 10,000
Architect fee 125,000
Liability insurance during construction 25,000
Excavation cost 40,000
Payment to building contractor 8,800,000
Special assessment by city for public improvement 30,000
Interest cost during construction 300,000

9. What is the cost of the land?

a. 2,425,000
b. 2,455,000
c. 2,495,000
d. 2,695,000

10. What is the cost of the building?

a. 9,505,000
b. 9,490,000
c. 9,250,000
d. 9,530,000

On January 1, 2016, Manyakan Company purchased land with valuable natural ore deposits for
P10,000,000. The residual value of the land was P2,000,000. At the time of purchase, a geological
survey estimated a recoverable output of 4,000,000 tons.

Early in 2016, roads were constructed on the land to aid in the extraction and transportation of
the mined ore at a cost of P1,600,000. In 2016, 500,000 tons were mined and sold.

A new survey at the end of 2017 estimated 4, 200,000 tons of ore available for mining. In 2017,
800,000 tons were mined and sold.

11. What amount should be recognized as depletion for 2016?

a. 1,250,000
b. 1,200,000
c. 1,450,000
d. 1,000,000

12. What amount should be recognized as depletion for 2017?

a. 1,344,000
b. 1,920,000
c. 1,200,000
d. 1,600,000
In 2013, Sunflower Company acquired a silver mine in Eastern Mindanao. Because the mine is
located in the Mindanao frontier, the entity was able to acquire the mine for the low price of
P50, 000.

In 2014, the entity constructed a road to the silver mine costing P5,000,000. Improvements and
other development costs made in 2014 cost P750,000.

Because of the improvements to the mine and to the surrounding land, it is estimated that the
mine can be sold for P600,000 when mining activities are complete.

During 2015, five buildings were constructed near the mine site to house the mine workers and
their families.

The total cost of the five buildings was P2,000,000. Estimated residual value is P200,000.

Geologists estimated that 4, 000,000 tons of silver ore could be removed from the mine for
refining.

During 2016, the first year of operations, only 500,000 tons of silver ore were removed from the
mine.

However, in 2017, workers mined 1,000,000 tons of silver.

During that same year, geologists discovered that the mine contained 3,000,000 tons of silver
ore in addition to the original 4,000,000 tons.

Development costs of P1,300,000 were made to the mine early in 2017 to facilitate the removal
of the additional silver.

Early in 2017, an additional building was constructed at a cost of P375,000 to house the additional
workers needed to excavate the added silver. This building is not expected to have any residual
value.

13. What is the depletion for 2016?

a. 718,750
b. 650,000
c. 725,000
d. 643,750

14. What is the depletion for 2017?

 a. 1,300,000
b. 1,525,000
c. 900,000
d. 700,000

15. What is the depreciation of buildings for 2016?

a. 250,000
b. 225,000
c. 318,750
d. 434,750

16. What is the depreciation of buildings for 2017?

a. 300,000
b. 450,000
c. 500,000
d. 290,000

On January 1, 2016 Hamlet Company borrowed 6,000,000 at an annual interest rate of 10% to
finance specifically the cost of building an electricity generating plant construction commenced
on January 1, 2016 with a cost 6,000,000.

Not all the cash borrowed was used immediately so interest income of 80,000 was generated
by temporarily investing some of the borrowed funds prior to use. The project was completed
on November 30, 2016.

17. What is the carrying amount of the plant on November 30, 2016?

a) 6000,000
b) 6,740,000
c) 6,520,000
d) 6,550,000

On January 1, 2016 Cruise company barrowed P30,000,000 evidences by a 3 year 10% note
payable and began construction of a cruise ship. Annual payments of principal and interest in
the amount P 13,000,000 are due every December 31, 2017.
The entity used all proceeds as down payment for construction. The construction was
completed on December 31, 2017.

18. What amount should be reported as interest expense related to the note in the income
statement for 2017?
 a) 3,000,000
b) 2,000,000
c) 1,000,000
d) 0

Sun Company was constructing an asset that qualified for interest capitalization. The entity had
outstanding notes payable during the entire year of construction comprising P6,000,000 8%
interest and P 9,000,000 9% interest. None of the borrowings were specified for the
construction of the qualified asset.

19. What interest rate should be used to calculate capitalized interest on the construction?

a) 9.00%
b) 8.50%
c) 8.00%
d) 8.60%

Clay Company started construction of a new building on January 1, 2016 and moved into the
finished building on July 1, 2107. Of the 25,000,000 total cost P 20,000,000 ws incurred in 2016
evenly throughout the year. The incremental borrowing rate was 21%

20. What amount should be reported as interest expense related to the note in the income
statement for 2017?

a) 3,000,000
b) 2,000,000
c) 1,000,000
d) 0

Clay Company started construction of a new office building on January 1, 2016 and moved into
the finished building on July 1, 2017. Of the P25,000,000 total cost. P20,000,000 was incurred in
2016 evenly throughout the year. The incremental borrowing rate was 12% throughout 2016
and the total amount of interest incurred was
P1,020,000

21. What amount should be reported as capitalized interest on December 31, 2016?

a) 1,020,000
b) 1,200,000
c) 1,500,000
d) 2,400,500
On January 1, 2016, Cagayan Company took out a loan of P24,000,000 in order to finance
specially the renovation of a building. The renovation work started on the same date. The loan
carried annual interest at 10%. Work on the building was substantially complete on October 31,
2016.
The loan was repaid on December 31, 2016 and P200,000 investment income was earned in the
period to October 31 on the proceeds of the loan not yet used for renovation.

22. What is the amount of borrowing cost to be included in the cost of the building?

a) 2,400,000
b) 2,200,000
c) 2,000,000
d) 1,800,000

During 2016, Joshua Company constructed asset costing P5,000,000. The weighted average
expenditures totaled P 3,000,000. To help pay for construction, P 2,200,000 was borrowed at
10% in January 1, 2016.
Funds not needed for construction were temporarily invested I short-term securities yielding
P45,000 in interest revenue.
Other than the construction funds borrowed, the only other debt outstanding during the year
was P 2,500,000. 10-year, 9% note payable dated January 1, 2105.

23. What amount if interest should be capitalized during 2016?

a) 300,000
b) 150,000
c) 247,000
d) 472,000

24. What amount should be reported as interest expense for 2016?

a) 225,000
b) 178,000
c) 153,000
d) 0

During 2016, Elysee Company constructed a new facility at accost of P30,000,000.

The expenditures for the building, which was finished late in 2016, were incurred evenly during
the year.
The entity had the following loans outstanding on December 31, 2106:
 10% note to finance specifically the construction, dated January 1, 2106, P10,000,000.
This note is unpaid on December 31,2016.
Investments were made on the proceeds from this loan and income of P100,000 was realized in
2016.
 12% 20-year bonds issued at face amount on April 30,2015. P 30,000,000
 8% 5-year note payable, dated March 1, 2015 , P10,000,000.

25. What amount of interest of interest is capitalized as cost of the new building?

a. 1,550,000
b. 1,450,000
c. 1,400,000
d. 1,500,000

During 2016, Israel Company constructed asset costing P4,215,000. The weighted average
expenditures during 2016 amounted to P3,900,000.

The entity borrowed P2,000,000 at 7.5% on January 1,2016. Funds not needed for construction
were temporarily invested in short-term securities and earned P59,000 I interest revenue.
In addition to the construction were temporarily invested in short-term securities and earned
P59,000 in interest revenue.
In addition to the construction loan, the entity had two other notes outstanding during the
year, a P1,500,000, 10-YEAR , 10% note payable dated October 1,2015 and a P1,000,000, 8% 5-
year note payable dated November 1, 2015.

26. What amount of interest should be capitalized during 2016?

a. 324,800
b. 297,500
c. 273,000
d. 265,800

Congo Company commenced construction of a new plant on February 1, 2016. The cost of
P18,000,000 was paid in full to the contractor on February 1,2016 and was funded from existing
general borrowings. The construction was completed on September 30,2016.
The borrowings during 2016 comprised the following:
Bank A- 6% 8,000,000
Bank B-6.6% 10,000,000
Bank C-7% 30,000,000

27. What is the amount of borrowing cost that should be capitalized in relation to the plant?

a. 1,215,000
b. 810,000
 c. 911,250
d. 0

Ultimate Company, a socially responsible multinational entity, decided to construct a tunnel

that will link two sides of the village that were separated by a natural disaster years ago.
Realizing its role as a good corporate citizen, the entity has been in this village a couple of years
exploring oil and gas in the nearby offshore area. The tunnel would take two years to build and
the total capital outlay needed for the construction would not be less than P20,000,000. To
allow itself a margin of safety, the entity barrowed P25,000,000 from three sources and used
the extra P5,000,000 for working capital purposes. Financing was arranged as follows:

Bank term loan - 7% 5,000,000

Institutional borrowing -8% 10,000,000
Corporate bonds -9% 10,000,000

In the first phase of the construction of the tunnel, there were idle funds of P10,000,000 which
the entity invested for a period of six months. Income from the investment was P500,000.

28. What amount of borrowing cost should be capitalized as cost of the asset upon completion?

a. 4,100,000
b. 3,280,000
c. 3,200,000
d. 2,780,000

Hothead Company had the following loans outstanding for 2016.

Specific construction loan 1,000,000 10%
General loan 20,000,000 12%

The entity began the self construction of a building on January 1,2016 and the building was
completed on December 31,2016. The following expenditures were made during the year:
January 1 1,000,000
July 1 2,000,000
November 1 3,000,000

29. What is the cost of the new building?

a. 6,000,000
b. 6,280,000
c. 6,300,000
d. 6,250,000
Warhead Company had loans outstanding during 2016 and 2017.
Specific construction loan 2,000,000 10%
General loan 15,000,000 12%

The entity began the self-construction of a new building on January 1,2016 and the building was
completed on December 31,2017. Expenditures during 2016 and 2017 were:
January 1, 2016 1,000,000
July 1, 2016 2,000,000
November 1, 2016 3,000,000
July 1, 2016 4,000,000

30. What is the cost of the new building on December 31, 2017?
a. 10,000,000
b. 11,660,000
c. 11,700,000
d. 11,500,000

ESSAY: (10 points each)

1. Explain the methods of accounting for Government Grant.

2. Explain 2 methods of Depreciation.