Question

1. Victoria Corporation entered into the following transactions: Purchased a tract of land with existing building in exchange for 100,000 shares of Victoria with P40 par value that had a market price of P65 per share on the date of acquisition. The last property tax bill indicates assessed value of P3,890,000 for the land and P450,000 for the building. Razed the building at a cost of P275,000 to make way for a new building to be constructed later that year. What is the total increase in the Land account arising from the acquisition?

	a.	P5,275,000
	b.	P6,500,000
	c.	P6,775,000

Answer 1

The answer is C. P6,775,000

Explanation:

The cost of an item of property, plant, and equipment comprises:

·        Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

• Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
• The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

In the given question Victoria Corporation purchased the land in exchange of shares. Cost of the land is recorded at the fair value of shares issued.

Cost of the land = 100000 shares X P65 = P6,500,000

The cost of razing the existing building should be capitalized as explained above

The total increase in the Land account = Cost of purchase of Land + Cost of razing the existing building to make the Land ready for its intended use

=P6,500,000+P275,000

=P6,775,000