Reference no: EM132961114

The Carrier Corp. started business on January 1, 2017, by purchasing two factory equipment having the following list prices:

Equipment A P500,000

Equipment B 650,000

These equipment were acquired under credit term, 10/10, n/30. The company failed to pay within the discount period. The assets were recorded at the total amount paid.

Since that date of purchase, the company has charged depreciation at 20% on the balance of the asset account at the end of each year. The amount of depreciation computed on each year has been credited directly to the asset account. Moreover, all purchases since the inception of the operations have been debited to the equipment account. Cash proceeds from the disposal of equipment were credited to the same account.

All the Equipment were estimated to have a useful life of 5 years and were supposed to be depreciated under the straight-line method. Salvage value on all equipment is estimated at 10% of the correct initial cost.

Your first-time audit of the equipment account in 2020 revealed the following information:

• On March 31, 2018, another equipment (Equipment C) was purchased on an installment basis at total installment price of P900,000. The installment contract called for 12 monthly payments of P75,000. The equipment had a cash price of P750,000. Freight and handling charges including insurance while in transit amounting to P30,000 was incurred and charged as outright expense. The company recorded Equipment C at the total installment price.
• On June 30, 2019, another equipment (Equipment D) was purchased by paying P300,000 cash down-payment and P900,000 note payable due at P300,000 annually thereafter. Equipment D needed installation prior to its use and dismantling upon its disposal after its use. The company therefore incurred P60,000 in installation cost and is estimated to incur P69,525 in dismantling and decommissioning cost upon its retirement. The prevailing market rate of interest on this date was at 12%. The company recorded the equipment at P1.2M and charged the installation cost as outright expense.
• On September 30, 2019, Equipment E was acquired in exchange of a parcel of land located in Batangas. The equipment had a fair market value (cash price) of P920,000. The land which had a carrying value of P1.2M on the other hand had a fair market value of P1.5M. Cash amounting to P580,000 was received from the exchange. Future cash flows related to the assets exchanged are considered significant. The company recorded the equipment at the book value of the land given up net of the cash received.
• On March 30, 2020, Equipment B was traded for a more superior equipment (Equipment F) which had a cash price of P1,050,000. The company paid P900,000 in the trade-in transaction. The company recorded the trade-in by debiting the equipment account for the cash payment.
• On July 1, 2020, the Equipment C was sold for P500,000. The company incurred cost to sell on the machinery amounting to P8,000. The equipment account was credited for the net cash received from the disposal.

Requirements: Based on the results of your audit answer the following:

Problem 1. What is the gain or loss on exchange on September 30, 2019?

Problem 2. Assuming that the exchange on September 30, 2019, was considered with no commercial substance, how much should the equipment be initial recognized at and how much in gain or loss should be recognized?

Problem 3. What is the gain or loss on the trade-in on March 30, 2020?

Problem 4. What is the gain or loss on the disposal of Equipment C on July 1, 2020?

Problem 5. How much is the total depreciation expense to be reported in the statement of comprehensive income for the period ended December 31, 2020?

Problem 6. What is the total carrying value of equipment to be reported in the statement of financial position as of December 31, 2020?