1. INITIAL RECOGNITION – PURCHASE ON ACCOUNT (No. 1) Assume that an equipment is purchased under the terms 2/10, n/30. The invoice price is P100,000. Upon purchase Equipment98,000 Accounts Payable98,000 IF Payment within 10 days Accounts Payable98,000 Cash98,000 IF Payment beyond 10 days Accounts Payable98,000 Discounts Lost 2,000 Cash 100,000

2. Initial Recognition – Installment Purchase (No. 2) An equipment with cash price of P479,079 is acquired by making a down payment of P100,000 and paying 5 annual installments of P100,000. The effective interest rate on the above transaction is 10%, computed as follows: PV factor = (P479,079 – 100,000) / 100,000 = 3.79079 Under line 5, in the PV table of an ordinary annuity, the applicable interest rate is 10%.

3. Initial Recognition – Installment Purchases Upon purchase Equipment 479,079 Cash(DP) 100,000 Contract Payable 379,079 First installment payment Contract Payable 62,092 Interest Expense 37,908 Cash100,000 TOTAL 100,000100,000 Second Installment Payment Contract Payable 68,301 Interest Expense 31,699 Cash 100,000 TOTAL 100,000 100,000

4. Illustration (No. 3) (Estimated Dismantling Cost) On January 1, 2007, Julia Company purchased a machine for P2,500,000 cash. The machine’s total useful life is 5 years. Julia further estimates that the machine shall be dismantled at P100,000 at the end of its useful life. The discount rate is 10%. Record the acquisition of the machine and related journal entries for 2007.

5. Journal Entries 1/1 Machine 2,562,092 Cash 2,500,000 Provision for machine disposal 62,092 12/31 Depreciation 512,418 Accumulated depreciation 512,418 ( 2,562,092 / 5 years) Accretion expense or Finance Cost 6,209 Provision for machine disposal 6,209 ( 62,092 x 10%)

6. Capitalization of Cost of Replacement - Carrying Value of Replaced Parts Known Illustrated (No. 4) A building with an estimated useful life of 20 years is constructed at a total cost of P2,500,000. After 10 years, the wooden roof is replaced with a concrete roof costing P250,000. The original cost of the wooden roof is P200,000.

7. Journal Entries To capitalize the replacement Building 250,000 Cash 250,000 To derecognize replaced roof Loss on retirement 100,000 Accum Depreciation 100,000 Building 200,000 To record subsequent annual depreciation Depreciation 140,000 Accum Depreciation 140,000 Building (2,500,000 + 250,000 – 200,000) 2,550,000 Accumulated Depreciation ( 1,250,000 – 100,000) 1,150,000 Revised Book Value 1,400,000 Remaining life in years 10 Annual depreciation 140,000

8. Capitalization of Cost of Replacement - Carrying Value of Replaced Parts Not Known Illustrated (No. 5) Assume the same data: To capitalize the replacement Building 250,000 Cash 250,000 To derecognize replaced roof Loss on retirement 125,000 Accum Depreciation 125,000 Building 250,000 To record subsequent annual depreciation Depreciation 137,500 Accum Depreciation 137,500 Building (2,500,000 + 250,000 – 250,000) 2,500,000 Accum Depreciation ( 1,250,000 – 125,000) 1,125,000 Revised Book Value 1,375,000 Remaining life in years 10 Annual depreciation 137,500

9. (No. 6) Proportional and Elimination Illustrated Assume the following data for an item of machinery Cost P8,000 Accumulated depreciation 2,000 The revalued amount (fair value at date of revaluation) is P9,000. Age of asset is 5 years, useful life is 20 years

10. Journal Entries Computation: Cost HC% Revalued Difference Life (A) (B) (A-B) Mach 8,000 100 12,000 4,000 20 AD 2,000 25 3,000 1,000 5 CA 6,000 75 9,000 3,000 15 Using Proportional Method: Machinery 4,000 Accumulated Depreciation 1,000 Revaluation Surplus (equity) 3,000 Or Using Elimination Method: Accumulated Depreciation 2,000 Machinery 2,000 Machinery 3,000 Revaluation Surplus (equity) 3,000

11. (No. 7) Reversal of Revaluation Increase & Decrease Illustrated Data: A B (est) B-A C C-A Cost Replace-Replace- ment 1/1/01 HC% 1/1/05 1/1/08 Cost 5,000 100 8,000 3,000 3,500 (1,500) AD 2,000 40 3,200 1,200 2,450 450 BV/SV 3,000 60 4,800 1,800 1,050 Total life 10 years Expired life 4 years 7 years Remaining life6 years 3 years

12. Journal Entries 1/1/05 To record revaluation (increase in replacement) Equipment 3,000 Accum Depreciation 1,200 Revaluation Surplus 1,800 12/31/05 To record depreciation Depreciation (4,800/6 yrs) 800 Accum Depreciation 800 To record piece-meal realization of gain Revaluation Surplus (1,800/6 yrs) 300 Revaluation gain 300

13. Journal Entries 12/31/06 To record depreciation: Depreciation (4,800/6 yrs) 800 Accum Depreciation 800 To record piece-meal realization of gain: Revaluation Surplus (1,800/6 yrs) 300 Revaluation gain 300 12/31/07 To record depreciation: Depreciation (4,800/6 yrs) 800 Accum Depreciation 800 To record piece-meal realization of gain: Revaluation Surplus (1,800/6 yrs) 300 Revaluation gain 300

14. Journal Entries 1/1/08 To record revaluation (decrease in replacement): Accum depreciation 3,150 Revaluation Surplus (1,800-300-300-300) 900 Revaluation Loss (balancing figure) 450 Equipment 4,500 Per Books 12/31/07 % Replacement Difference Life Eqpt. 8,000 100 3,500 (4,500) 10 AD 5,600 70 2,450 (3,150) 7 CV 2,400 30 1,050 (1,350) 3 Balance of Rev Surplus, 12/31/07 P900

15. Journal Entries 12/31/08 To record depreciation: Depreciation (1,050/3 yrs) 350 Accum depreciation 350 To record piecemeal realization: None since balance of Revaluation Surplus 1/1/08 is P -0-

16. (No. 8) Illustration (Reversal of Revaluation Decrease then Increase in Revaluation ) A BB-AC C-B Data: Cost Revalued Amount Revalued Amount 1/1/01 1/1/05 1/1/08__ Land 5,000 4,000 (1,000) 5,500 1,500 1/1/05 To record revaluation (decrease in revaluation) Revaluation Loss 1,000 Land 1,000 1/1/08 To record revaluation (increae in revaluation) Land 1,500 Gain on Revaluation 1,000 Revaluation surplus 500

17. Impairment of PPE Illustrated (No. 9) The following are the ledger balances for an item of equipment owned by the entity as of December 31, 2005:  CostP1,200,000  Accumulated depreciation 640,000  Carrying Amount 560,000 The estimated selling price of this equipment is P400,000, after incurring estimated disposal cost of P80,000. Net selling price is 320,000 (400,000-80,000) This equipment is expected to be useful for five more years, generating expected annual revenues of P120,000, incurring annual operating cost of P25,000. Value use is 95,000 (120,000 – 25,000) Use a discount rate of 10% and the present value factor of an annuity for 5 years at 10% is 3.79079.

18. Impairment Loss Illustrated Carrying valueP560,000 Recoverable amount a. Net selling price P320,000 b. Value in use 95,000 x 3.79079 360,125 360,125 Impairment Loss P199,875

19. Impairment Loss – Equipment 199,875 Accumulated Depreciation 199,875 12/31/06 Depreciation Expense 72,025 Accumulated Depreciation72,025 360,125/5 = 72,025