You were assigned to audit the Property, plant and equipment account of your continuing audit client Lolita Corp. for the period ended December 31, 2021. The PPE file in the permanent working paper and in the prior year working paper included the following schedule: All assets were acquired at the inception of operations at the beginning of 2019 and are being depreciated through the following policies: Office Building – Double-declining balance over 20 years (10% salvage value based on cost) Factory Building – SYD over 15 years (10% salvage value based on cost) Office Equipment – Straight-line method over 8 years (no salvage value) Factory Machineries – SYD over 10 years (10% salvage value based on cost) Transactions for 2021 were as follows: An new elevator system costing P800,000 was installed on the company’s Office Building and was completed in early January. On March 31, the company traded a new factory machinery with a cash price of P6M for one of its old Factory Machinery with an original cost of P4M. The trade-in value agreed upon on the old machinery was at P2.2M. The company paid the difference in cash. On September 1, a piece of office equipment was sold for P2M. The office equipment had an original cost of P3.2M. On October 31, a replacement office equipment was acquired on installment basis. A P500,000 down-payment was made plus a P3M note payable in three equal installments starting October 31, 2022. The interest rate appropriate for this transaction was ascertained at 10%. Installation and commissioning cost were incurred at P65,890. Estimated decommissioning cost upon retirement was also estimated at P101,302. a. What is the correct initial cost of the replacement equipment acquired on October 31? b.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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You were assigned to audit the Property, plant and equipment account of your continuing audit client Lolita Corp. for the period ended December 31, 2021. The PPE file in the permanent working paper and in the prior year working paper included the following schedule:

All assets were acquired at the inception of operations at the beginning of 2019 and are being depreciated through the following policies:

Office Building – Double-declining balance over 20 years (10% salvage value based on cost)

Factory Building – SYD over 15 years (10% salvage value based on cost)

Office Equipment – Straight-line method over 8 years (no salvage value)

Factory Machineries – SYD over 10 years (10% salvage value based on cost)

Transactions for 2021 were as follows:

An new elevator system costing P800,000 was installed on the company’s Office Building and was completed in early January.
On March 31, the company traded a new factory machinery with a cash price of P6M for one of its old Factory Machinery with an original cost of P4M. The trade-in value agreed upon on the old machinery was at P2.2M. The company paid the difference in cash.
On September 1, a piece of office equipment was sold for P2M. The office equipment had an original cost of P3.2M. On October 31, a replacement office equipment was acquired on installment basis. A P500,000 down-payment was made plus a P3M note payable in three equal installments starting October 31, 2022. The interest rate appropriate for this transaction was ascertained at 10%. Installation and commissioning cost were incurred at P65,890. Estimated decommissioning cost upon retirement was also estimated at P101,302.

a. What is the correct initial cost of the replacement equipment acquired on October 31?
b.

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