On January 1, 2019, GUTZY Corporation purchased a tract of land (site number 101) with a dilapidated building for P1,800,000. Additionally, GUTZY paid a real state broker’s commission of P108,000, legal fees of P18,000, and title guarantee insurance of P54,000. The closing statement indicated that the land value was P1,500,000 and the building salvage value was P300,000. Shortly after the acquisition, the building was razed at a cost of P225,000. GUTZY entered into a P9,000,000 fixed-price contract with GIBA Builders, Inc. on March 1, 2019 for the construction of an office building on the land site 101. The building was completed and occupied on September 30, 2020. Additional construction costs were incurred as follows: Plans, specifications, and blueprints P 36,000 Architect’s fees for design and supervision 285,000 The building is estimated to have a forty-year life from the date of completion and will be depreciated using the 150%-declining-balance method. To finance the construction cost, GUTZY borrowed P9,000,000 on March 1, 2019. The loan is payable in ten annual installments of P900,000 plus interest at the rate of 14%. GUTZY used part of the loan proceeds for working capital requirements. GUTZY’s average amounts of accumulated building construction expenditures were as follows: For the period March 1 to December 31, 2019 P2,700,000 For the period January 1 to September 31, 2020 6,900,000 GUTZY is using the allowed alternative treatment for borrowing cost. Based on the above and the result of your audit, determine the following: B. Cost of office building
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On January 1, 2019, GUTZY Corporation purchased a tract of land (site number 101) with a dilapidated building for P1,800,000. Additionally, GUTZY paid a real state broker’s commission of P108,000, legal fees of P18,000, and title guarantee insurance of P54,000. The closing statement indicated that the land value was P1,500,000 and the building salvage value was P300,000. Shortly after the acquisition, the building was razed at a cost of P225,000.
GUTZY entered into a P9,000,000 fixed-price contract with GIBA Builders, Inc. on March 1, 2019 for the construction of an office building on the land site 101. The building was completed and occupied on September 30, 2020. Additional construction costs were incurred as follows:
Plans, specifications, and blueprints P 36,000
Architect’s fees for design and supervision 285,000
The building is estimated to have a forty-year life from the date of completion and will be
To finance the construction cost, GUTZY borrowed P9,000,000 on March 1, 2019. The loan is payable in ten annual installments of P900,000 plus interest at the rate of 14%. GUTZY used part of the loan proceeds for
For the period March 1 to December 31, 2019 P2,700,000
For the period January 1 to September 31, 2020 6,900,000
GUTZY is using the allowed alternative treatment for borrowing cost.
Based on the above and the result of your audit, determine the following:
B. Cost of office building
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