Problem 3: (Notes Issuance) Taylor Swift: C. Interest Expense Over The Credit Period

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Problem 3: (Notes Issuance) Taylor Swift present value of an ordinary annuity of P 1

Company purchased machinery on at 8% for five periods is P 3.99.


December 31, 2020, paying P 80,000 down
- deferred payment
and agreeing to pay the balance in four
- interest-bearing note with unrealistic
equal installments of P 60,000 payable each
rates (the nominal and effective
December 31.
rates are not the same)
Implicit in the purchase price is an assumed - no need to compute for the fair value
interest of 12%. The following data are of the notes, since the cash price
abstrated from the present value tables: (fair value) is given.

PV factor of 1 at 12% for four periods – Cost of Aircraft = P 651,460


0.63552
Q9: When payment is deferred beyond
PV factor of annuity at 12% for four periods normal credit terms, the difference between
– 3.03735 the cash price and total payment is:

- deferred payment c. Interest Expense over the Credit Period


- no cash price provided, so find the
Problem 5: (Shares Issuance) In January
fair value of the note
2022, Utah Corporation entered into a
- non-interest bearing note (no
contract to acquire a new machine for its
nominal rate given, only effective
factory. The machine, which had a cash
rate)
price of P 2,000,000, was paid for as follows:
Cost of Acquisition 182,241
Downpayment 300,000
(60,000 x 3.03755)
5,000 ordinary shares of 1,850,000
Downpayment 80,000
Utah with an agreed-upon
Cost of Machinery P 262,241
value of P 370 per share
2,150,000
Q8: PPE purchased on long-term credit
contracts should be initially recognized at: Prior to the machine’s use, installation costs
of P 70,000 were incurred. The machine has
c. Present Value of Future Payments
an estimated useful life of 10 years and an
Problem 4: (Note Issuance) Doug Airlines estimated salvage value of P 100,000. The
sold used jet aircraft to Adele Company for straight-line method of depreciation is used.
P 800,000, accepting a five-year 6% note for
- use the cash price, since it is also
the entire amount. Adele’s incremental
considered as the fair value of the
borrowing rate was 14%. The annual
asset to be received.
payment of principal and interest on the
note was to be P 189,930. Cost of Acquisition 2,000,000
Directly Attributable Cost 70,000
The aircraft could have been sold at an
Cost of Machine P 2,070,000
estimated cash price of P 651,460. The
Q10: When a closely held corporation issues Fair Value of Old PPE 85,000
equity shares in exchange for land, the land Book Value of Old PPE (75,000)
should be recorded at the: Gain or (Loss) from Exchange P 10,000

- closely held corporation (their


shares are not for sale in public) Case 2: (without commercial substance)
- therefore, no available fair value.
Book Value of Old PPE 50,000
a. Current Market Value of the Land Cash Paid 7,000
Cost of Acquisition P 57,000
Problem 6: (Shares Issuance) Tilt Company
Gain or (Loss) from Exchange 0
acquired land from Display Company which
will be used as a plant site in exchange for
20,000 newly issued shares of Tilt’s ordinary Problem 8: (Exchange) On July 1, 2017,
shares. Banded Water Company traded in an old
machine with a carrying amount of P 10,000
At the date of acquisition, Tilt’s ordinary
for a machine having a cash price (fair
shares had a part value of P 20 per share
value) of P 32,000, and paid a cash
and a fair value of P 30 per share. The fair
difference of P 19,000.
value of the land was P 500,000 when
Cooper acquired this 2 years ago. - fair value of old PPE is not available,
but the fair value of new PPE is
Fair Value of Shares 600,000
given. (2nd priority)
(20,000 x 30)
- for gain or loss, since fair value of old
PPE is not available, assume the fair
Problem 7: (Exchange) Below is the value using the fair value of the new
information relative to an exchange of asset PPE.
by Mimi Bernan Company. The exchange
Cost of Acquisition = P 32,000
has commercial substance in Case 1 and
without commercial substance in Case 2. Fair Value of New PPE 32,000
Cash Paid (19,000)
Old Equipment
Fair Value of Old PPE (assumed) 13,000
BV FV Cash
Carrying Value of Old PPE 10,000
Paid
Case 1 75,000 85,000 15,000 Gain or (Loss) from Exchange P 3,000
Case 2 50,000 75,000 7,000
Problem 9: (Lump Sum Acquisition) On Paril
Case 1: (with commercial substance) 1, 2022, Pacific Corporation purchased for P
2,700,000 a tract of land, a warehouse, and
Fair Value of Old PPE 85,000 an office building. The following data were
Cash Paid 15,000 collected regarding the properties.
Cost of Acquisition P 100,000
Fair Value Book Value
Land 875,000 700,000
Warehouse 375,000 400,000 necessitated the demolition of a portion of
Office Bldg. 1,000,000 975,000 the building, which resulted in recovery of
Total 2,250,000 2,075,000 salvage material sold for P 30,000.

Parking lot cost the company P 320,000


Land = 2,700,000 x (875,000 ÷ 2,250,000) while repairs in the main hall were incurred
Land = P 1,050,000 at P 45,000 prior to its use.

Warehouse = 2,700,000 x (375,000 ÷ Land Building


Purchase Price 884,000 3,536,000
2,250,000)
(35,360 x 125)
20% - Land
Warehouse = P 550,000
80% - Building
Office Building = 2,700,000 x (1,000,000 ÷ Unpaid
2,250,000) Mortgage 800,000 3,200,000
(allocated)
Office Building = P 1,100,000 Unpaid Taxes
36,000 144,000
(allocated)
Remolding
Q11: Apportionment of the purchase price in Costs (net of 0 870,000
a lump-sum acquisition of various assets proceeds)
may be based on all of these, except: Parking Lot 0 0
Repairs 0 45,000
a. Book Values of the Assets to the Seller Total 1,720,000 7,795,000
b. Relative Market Value
c. Tax Assessment Values
Problem 11: (Donation) On July 1, 2017,
d. Appraised Values
Apprentice Company accepted an office
equipment from a stockholder which
Problem 10: (Lump Sum Acquisition) On originally costs P 5,000,000. On the same
June 1, Thick Company acquired a real date, the equipment had a fair market value
property by issuing 35,360 shares of its P of P 3,300,000. The company paid P 200,000
100 par value ordinary shares. The shares for registration and legal fees related to the
were selling on the same date at P 125. transaction.

A mortgage of P 4,000,000 was assumed by - cost of acquisition for donation is


Thick on the purchase. Moreover, the the fair value of PPE received.
company paid P 180,000 of real property - any costs incurred attributable to the
taxes in the prior years. 20% of the purchase donation is not capitalized.
price should be allocated to the land and the
Cost of Acquisition = P 3,300,000
balance to the building.

In order to make the building suitable for use


of Thick, remolding costs had to be incurred Q12: An entity purchased land where an old
in the amount of P 900,000. This however hotel is located with the plan to tear down
and build a new hotel on the site. Any Proceeds from
allocated cost to the old hotel is: Sale of Salvage 0 20,000
Materials
B. Written off as loss in the year the hotel is Legal Fees 150,000 0
torn down. Title Guarantee
50,000 0
- automatic if the property built is a Insurance
hotel, it is a PPE. (for use in the Property Taxes
100,000 0
(on Land)
operations)
Options (not
- if the new building is to be classified 0 0
used)
as a PPE, the costs of the old hotel is
Special
written off as loss. 120,000 0
Assessment
Total 4,120,000 520,000

Problem 12: (Lump Sum Acquisition)


Lorraine purchased a tract of land as an Building (IP) = 520,000
investment property. The entity razed the Building (not IP) = 220,000
old building on the property. The following - fair value is expensed.
information are available:

Purchase price of land Problem 13: (Construction) Secrets Inc. was


4,000,000 incorporated on January 1, 2021. The
and old building
Fair value of old building 300,000 following items related to Secrets, Inc.’s
Demolition of old building 200,000 property, plants, and equipment account:
Proceeds from sale of
20,000 Cost of land, which 6,160,000 L
salvaged materials
included an old
Legal fees for purchase
apartment building
contract and recording 150,000
- all to land (since
ownership
no fair values were
Title guarantee insurance 50,000
available)
Payment of property
100,000 Delinquent property 60,000 L
taxes in arrears on land
taxes assumed by
Option paid for an
Secrets, Inc.
alternative land not 30,000
Payments to 40,000 B
acquired
tenants to vacate
Special assessment for
120,000 the apartment
city improvements
building
Costs of razing the 80,000 B
Land Building apartment building
Purchase Price 3,700,000 300,000 Architects fees for 120,000 B
Building – at FV new building
Land - residual Building permit for 80,000 B
Demolition Cost 0 200,000 new construction
Fee for title search 50,000 L opening of new
Survey costs 40,000 L building
Excavation before 200,000 B Cost of windows 24,000 E
construction of broken by vandals
new building distracted by the
Payment to 20,000,000 B celebration
building contractor
Assessment by city 30,000 L
Land = P 6,440,000
for drainage project
Cost of grading and 100,000 L Building = P 21,740,000
leveling
Temporary quarters 160,000 B Land Improvement = P 144,000
for construction Expense = P 160,000
crew
Temporary building 100,000 B
to house tools and
Q13: The cost of land typically includes the
materials
Cost of changes 180,000 B purchase price and all the following costs
during construction except:
to make new a. improvements such as grading, filling,
building more
draining, and clearing
energy efficient
b. survey costs
Interest cost on 720,000 B
c. costs of private driveways and parking
specific borrowing
incurred during lots
construction d. assumption of any liens or mortgages on
Payment of 36,000 E the property
medical bills of
employees injured
Q14: If an entity demolishes an old building
while inspecting
and constructs a new building, any
building
construction demolition cost incurred is:
Cost of paving 120,000 LI b. Capitalized as cost of the new building
driveway and
parking lot
Cost of installing 24,000 LI
Module 2: Borrowing Costs
lights in parking lot
Premium for 60,000 B - interest capitalized (borrowing cost)
insurance on - interest expense
building during - total cost of building
construction
Cost of open house 100,000 E A. Interest Paid from Borrowings
party to celebrate
- general rule: expense
- borrowings was used to construct a i. Specific Borrowings – used solely
qualifying asset: capitalized for the construction of qualifying
- (qualifying asset) an asset that asset.
necessarily takes a substantial ii. General Borrowings – used for
period of time to get ready for its construction of qualifying asset and
intended use of sale. (matagal gawin also used for other purposes.
o ibenta)
▪ e.g., building, roads, D. Computation of Borrowing Costs
highways, expressways, i. Purely Specific Borrowing
inventories, satellites, ships,
Principal Amount of Borrowing XX
spaceships, etc.
x Interest Rate X%
▪ not qualifying assets:
Interest Incurred XX
- financial assets and
Less: Investment Income (XX)
inventories manufactured or
Borrowing Cost (specific) XX
produced over a short period (subject to month construction started)
of time
- assets ready to use or sell
when acquired Problem 1: (Specific Borrowing)
- assets routinely Principal Amount 500,000
manufactured or produced in Interest Rate 18%
large quantities on a Interest Incurred 90,000
repetitive basis (even though Investment Income (10,000)
they take a long time to be Borrowing Cost 80,000
built like houses) Months Outstanding 12/12
- assets measured at fair Borrowing Cost (specific) P 80,000
value.

B. Commencement of Capitalization Construction Cost 1,560,000


(400 + 480 + 500 + 180)
- firms prefer it to be capitalized, for
Borrowing Cost 80,000
larger profits and lesser expenses.
Total Cost of Asset P 1,640,000
- entity incurs expenditures for the
asset.
- entity incurs borrowing costs. Q1: Investment income on specific
- it undertakes activities that are borrowing for qualifying asset:
necessary to prepare the asset for its
a. Reduced the cost of the qualifying asset.
intended use. (on-going
construction)

C. Types of Borrowings
ii. Purely General Borrowings Annual Interest of All General = Ave.%
Principal Amount (general)
Weighted Average Expenditure XX
Average Interest Rate X%
(3,000,000 + 1,200,000) = 14%
Borrowing Cost from General XX
(10,000,000 + 20,000,000)

1/1 5,000,000 12/12 5,000,000


WAE = Expenditure x (Months
6/30 8,000,000 6/12 4,000,000
Outstanding ÷ Months of Construction) 12/31 2,000,000 0/12 0
Total 9,000,000

Annual Interest of All General = Ave.%


Principal Amount (general) Weighted Average Expenditure 9,000,000
Average Interest Rate x 14%
- borrowing cost from general computed Borrowing Cost (general) 1,260,000
mut not exceed the annual interest of all Interest Incurred 4,200,000
- all of the computed borrowing costs is capitalized
general borrowings.
since it is less than the total interest incurred.

Q2: It is permissible to capitalize interest on: Annual Interest (general) 4,200,000


d. Asset under construction Borrowing Cost (general) (1,260,000)
Interest Expense 2,940,000

Q3: Which of the following may not be Land Building


considered a “qualifying asset”? Purchase Price
(old bldg. = 2,700,000
b. An expensive private jet that can be
300K)
purhased from a local vendor
Agent
100,000
Commission
Legal Fees 50,000
Q4: A company constructed machinery for Guarantee
its own use. A bank loan specifically 10,000
Insurance
financed this properly both during and after Demolition
125,000
the construction. How much of the interest Cost, net
incurred should be reported as interest Cost to Vacate
5,000
expense? (land)
Construction
b. Interests incurred after the completion 15,000,000
Cost
Borrowing Cost 1,260,000
Total 2,865,000 16,385,000
Problem 2: (General Borrowings)

iii. Combined Specific and General


- know first the expenditures attributable to Annual Interest (general) 300,000
both general and specific borrowing. Borrowing Cost (general) (91,875)
Interest Expense 208,125
Weighted Average Expenditure XX
Principal (specific) (XX)
Expenditures (general) XX
Problem 4: (Two-Year Construction)
Average Interest Rate X%
Borrowing Cost from General XX Annual Interest of All General = Ave.%
Borrowing Cost from Specific XX Principal Amount (general)
Total Borrowing Cost XX
(3,000,000) = 12%
(25,000,000)
Problem 3: (Specific and General)
1/1 4,000,000 12/12 4,000,000
Principal Amount 500,000
4/1 5,000,000 9/12 3,750,000
Interest Rate 18%
12/1 3,000,000 1/12 250,000
Interest Incurred 90,000 Total 8,000,000
Investment Income (10,000)
Borrowing Cost 80,000
Months Outstanding 12/12 Weighted Average Expenditure 8,000,000
Borrowing Cost (specific) P 80,000 Principal (specific) (3,000,000)
Expenditures (general) 5,000,000
Average Interest Rate x 12%
Annual Interest of All General = Ave.% Borrowing Cost from General 600,000
Principal Amount (general) Interest Incurred 3,000,000
Borrowing Cost (general) 600,000
(120,000 + 180,000) = 18.75% Borrowing Cost from Specific 300,000
(600,000 + 1,000,000) Total Borrowing Cost 900,000
1/1 400,000 12/12 400,000 Annual Interest (general) 3,000,000
4/1 500,000 9/12 375,000 Borrowing Cost (general) (600,000)
8/1 480,000 5/12 200,000
Interest Expense 2,400,000
12/1 180,000 1/12 15,000
Total 990,000

Construction Cost 12,000,000


Weighted Average Expenditure 990,000 (4M + 5M + 3M)

Principal (specific) (500,000) Borrowing Cost 900,000


Expenditures (general) 490,000 Total Cost of Asset (Y1) P 12,900,000
Average Interest Rate x 18.75%
Borrowing Cost from General 91,875 1/1 12,900,000 12/12 12,900,000
Borrowing Cost from Specific 80,000 3/1 6,000,000 10/12 5,000,000
Total Borrowing Cost 171,875 Total 17,900,000
Weighted Average Expenditure 17,900,000
Principal (specific) (3,000,000)
Expenditures (general) 14,900,000
Average Interest Rate x 12%
Borrowing Cost from General 1,788,000
Interest Incurred 3,000,000
Borrowing Cost (general) 1,788,000
Borrowing Cost from Specific 300,000
Total Borrowing Cost 2,088,000

Construction Cost 18,900,000


(12.9M + 6M)
Borrowing Cost 2,088,000
Total Cost of Asset (Y1) P 20,988,000

Annual Interest (general) 3,000,000


Borrowing Cost (general) (1,788,000)
Interest Expense 1,212,000

Additional: What is the cost of the building,


assuming the building was completed on
June 30, 2021?

1/1 12,900,000 6/6 12,900,000


3/1 6,000,000 4/6 4,000,000
Total 16,900,000

Weighted Average Expenditure 16,900,000


Principal (specific) (3,000,000)
Expenditures (general) 13,900,000
Average Interest Rate (6/12) x 6%
Borrowing Cost from General 834,000
Interest Incurred 3,000,000
Borrowing Cost (general) 834,000
Borrowing Cost from Specific (6/12) 150,000
Total Borrowing Cost 984,000

Construction Cost 18,900,000


(12.9M + 6M)
Borrowing Cost 984,000
Total Cost of Asset (Y2) P 19,884,000

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