Problem 4
On Jan 1 2020, Irene Mfg. Co. began construction of a building to be used as its office headquarters. The
building was completed on June 30, 2026.
Expenditures on the project were as follows
1/1/ 2,500,000
3/31 3,000,000
6/30 4,000,000
10/31 3,000,000
1/31/2021 1,500,000
3/31/2021 2,500,000
5/31/2021 3,000,000
On Jan 3, 2021 the company obtained a 5 million construction loan with a 10% interest rate. The loan
was outstanding all of 2020 and 2021. The company’s other interest-bearing debts included a long-term
note of P 25 million with an 8% interest rate, and a mortgage of 15 million on another building with an
interest rate of 6%. Both debts were outstanding during all of 2020 and 2021. The company’s fiscal year
end is December 31.
a. Capitalizable interest in 2020
b. Capitalizable interest in 2021
c. Interest Expense in 2020
d. Interest Expense in 2021
e. Total cost of the building including interest capitalized in 2020 and 2021
Problem 5
Information pertaining to Irene Corporation’s property, plant and equipment for 2021 is presented
below:
Account balances at Jan 1, 2021
Debit Credit
Land 150,000
Building 1,200,000
Accum depn 263,100
Machinery and Equipment 900,000
Accum depn 250,000
Automotive equipment 115,000
Accum depn 84,600
Depreciation methods used and useful life
Building – 150% declining balance; 25 years
Machinery and equipment – SL; 10 years
Automotive equipment – SYD; 4 years
The salvage value of the assets is immaterial. Dep’n is computed to the nearest month.
Transactions during 2021 and other information”
a. On Jan 1, 2021, Irene purchased a new car for 10,000 cash and trade in of a two year old car
with a cost of 9,000 and a book value of 2,700. The new car has a cash price of 12,000; market
value of trade ins is not known.
b. On April 1 2021, a machine purchased for 23,000 on April 1 2016 was destroyed by fire. Irene
recovered 15,500 from its insurance company.
c. On July 1, 2021 machinery and equipment were purchased at a total invoice cost of 280,000;
additional costs of 5,000 for freight and 25,000 for installation were incurred.
d. Irene determined that the automotive equipment comprising the 115,000 balance at Jan 1, 2021
would have been depreciated at a total amount of 18,000 for the year ended December 31,
2021/
Compute for:
a. Depreciation expense for 2021 – Building
= ₱ 56,214
Book Value 1/1/2021 (P1,200,000-PP263,100) 936,900
Multiplied by: Declining rate (1/25x150%) 6%
Depreciation for the year 56,214
b. Depreciation expense for 2021 – Machinery and equipment
= ₱ 103,775
Balance 1/1/2021 900,000
Less: machine destroyed by fire 23,000
877,000
Divided by: 10 years 87,700
Dep’n of the machine destroyed by fire:
(P23,000/10x3/12) 575
Dep’n of the machine purchase for the year:
(P310,000/10x6/12) 15,500
Total depreciation 103,775
c. Depreciation expense for 2021 – Automotive equipment
= ₱ 24,000
Depreciation on P115,000 balance, 1/1/2021 9,000
Less: depreciation on car traded in
(P9,000x2/10) 1,800
Adjusted depreciation on the beg. Bal. 14,400
Dep’n on the 1/2/2021 purchase:
(P12,000x4/10) 9,600
Total depreciation expense 24,000
d. Accumulated Depreciation as of Dec 31, 2021 – Building
= ₱ 319,314
Book Value 1/1/2021 (P1,200,000-PP263,100) 936,900
Multiplied by: Declining rate (1/25x150%) 6%
Depreciation for the year 56,214
Add: Accumulated depreciation 1/1/2021 263,100
Accumulated Depreciation- 12/31/2021 319,314
e. Accumulated Depreciation as of Dec 31, 2021 – Machinery and equipment
= ₱ 342,275
Balance 1/1/2021 900,000
Less: machine destroyed by fire 23,000
877,000
Divided by: 10 years 87,700
Dep’n of the machine destroyed by fire:
(P23,000/10x3/12) 575
Dep’n of the machine purchase for the year:
(P310,000/10x6/12) 15,500
Total depreciation 103,775
Add: accumulated depreciation, 1/1/2021 250,000
Less: accumulated depreciation- destroyed by fire (11,500)
Accumulated depreciation- 12/31/2021 342,275
f. Accumulated Depreciation as of Dec 31, 2021 – Automotive equipment
= ₱ 96,000
Depreciation on P115,000 balance, 1/1/2021 9,000
Less: depreciation on car traded in
(P9,000x2/10) 1,800
Adjusted depreciation on the beg. Bal. 14,400
Dep’n on the 1/2/2021 purchase:
(P12,000x4/10) 9,600
Total depreciation expense 24,000
Add: accum. Depreciation, 1/1/2021 84,600
Less: accum. Dep’n- traded equipment (12,600)
Accumulated Depreciation, 12/31/2021 96,000
Problem 6
Irene Factory started operations in 2020. Irene manufactures both towels 60% of the production are
“ABC” which sell for 500 per dozen and 40% are “XYZ” which sell for 250 per dozen. During 2020, 6,000
dozens were produced at an average cost of 360 per dozen. The inventory at the end of the year was as
follows:
220 dozens “ABC” @ 360 79,200
300 dozens “XYZ” @ 360 108,000
Using relative sales value method, which management considers as a more equitable basis of cost
distribution.
a. How much of the total cost should be allocated to Class ABC
= ₱ 1, 620, 000
b. How much of the total cost should be allocated to Class XYZ
= ₱ 540, 000
Total Cost of production (6, 000 dozens x P360) 2, 160, 000
Total sales price:
ABC (6, 000 x 60% = 3, 600 x P500) 1, 800, 000
XYZ (6, 000 x 40% = 2, 400 x P250) 600,000 2, 400,000
Cost Ratio 90%
ABC (P1, 800, 000 x 90%) 1, 620, 000
XYZ (P600, 000 x 90%) 540, 000
c. How much is the value of inventory as of December 31, 2020
= ₱ 166,500
ABC (220x P500 x 90%) 99, 000
XYZ (300x P250 x 90%) 67, 500
Inventory, 12/ 31 / 20 166, 500
d. How much is the cost of sales for the year 2020
= ₱ 1,993,500
Total cost of production (6, 000 dozens x P360) 2, 160, 000
Less inventory, 12/31/2020 166, 500
Cost of Sales 1, 993, 500
e. How much is the gross profit for the year 2020
= ₱ 221,500
Sales of ABC [(3, 600 – 220) x P500] 1,690, 000
Sales of XYZ [(2, 400 – 300) x P250] 525, 000
Total Sales 2,215, 000
Less cost of sales 1,993, 500
Gross profit 221, 500
