Problem Solving

Solve the following problems and show your solution. Encircle/ Highlight the letter of the correct answer. Each question is good for three points.

Government Grant

Paula company purchased a varnishing machine for P6,000,000 on January 1, 2015.

The entity received a government grant of P540,000 in respect of this asset. The

accounting policy is to depreciate the asset over 4 years on a straight-line basis and to

treat the grant as deferred income.

1. What is the carrying amount of the machine on December 31, 2016?

a. 3,000,000

b. 4,500,000

c. 3,270,000

d. 2,730,000

2. What amount should be reported as deferred grant income on December 31,2016?

a. 540,000

b. 270,000

c. 405,000

d. 135,000

Rafael Company purchased a jewel polishing machine for P3,600,000 on January 1,

2015 and received a government grant of P500,000 toward the capital cost. The

accounting policy is to treat the grant as a reduction in the cost of the asset. The

machine is to be depreciated on a straight-line basis over 8 years and estimated to have

a residual value of P100,000 at the end of this period.

3. What is the depreciation of the machine for 2015?

a. 387,500

b. 500,000

c. 437,500

d. 375,000

4. What is the carrying amount of the asset on December 31, 2016?

a. 2,725,000

b. 2,350,000

c. 3,000,000

d. 2,250,000

Borrowing Cost

CAB Company had the following general borrowing during 2015 which were used to

finance the construction of new building

Principal Borrowing Cost

10% bank loan 2,800,000 280,000

10% short-term note 1,600,000 160,000

12% long-term loan 2,000,000 240,000

6,400,000 680,000

The construction began o January 1, 2015 and the building was completed on

December 21, 2015

In the first phase of the construction, there were idle funds which the entity invested and

earned interest income of P100,000

Expenditure on the building were made as follows:

January 1 400,000

March 31 1,000,000

June 30 1,200,000

September 30 1,000,000

December 31 400,000

5. What interest rate should be used to calculate capitalizable borrowing cost?

a. 10.625%

b. 10%

c. 12%

d. 10.67%

6. What is the amount of capitalizable borrowing cost?

a. 212,500

b. 112,500

c. 425,000

d. 150,000

Investment in Associate

On January 1,2015 Melanie Company acquired 25% of the outstanding shares of an

investment at a total cost of P 7,000,000. At the time, the carrying amount of net assets

of the investee totaled P 24,000,000.

The investee owned equipment with 5-year remaining life and with a fair value of

P2,000,000 more than carrying amount. The investee owned land with a fair value of

P1,000,000 more than carrying amount

The investee earned net income of P5,000,000 evenly during the current year. The

investee declared and paid cash dividend of P 3,000,000 to shareholders at year-end.

The fair value of the investment at year-end is P7,500,000.

7. What is the goodwill arising from the investment in associate?

a. 750,000

b. 500,000

c. 250,000

d. 0

8. What is the investment income for 2015?

a. 1,250,000

b. 1,150,000

c. 900,000

d. 650,000

9. What s the carrying amount of the investment on December 31, 2015?

a. 7,400,000

b. 7,500,000

c. 7,000,000

d. 8,150,000

Impairment of assets

An entity determined that the electronic division is a cash generating unit. The entity

calculated the value in use of the division at P8,000,000. The carrying amount of the

assets are building P5,000,000, equipment P3,000,000 and inventory P2,000,000. The

entity also determined that the fair value less cost of disposal of the building is

P4,500,000

10. What is the impairment loss on building?

a. 1,000,000

b. 500,000

c. 750,000

d. 0