Audit of Property,Plant, & Equipment

Problem 1
The trial balance of Sigma Enterprises on December 31, 2016 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2016, a Jucuzzi machine costing
P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds
was credited to the Machinery account. On June 30, 2016, a Goulds machine, costing
P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer
machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer
machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery
account).

Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full year’s depreciation is charged in the year of acquisition and none in
the year of disposition.

Question
1 The adjusted balance of the Machinery account at December 31, 2016 is:
2 The correct depreciation expense for the machinery for the year ended December 31,
2016 is:

Problem 2
The Land account was debited for P300,000 on March 31, 2016 for an adjoining piece of
land which was acquired in exchange for 15,000 shares of Omega Corporation’s own stock
with a par value of P10. At the time of the exchange, the shares were selling at P24.
Transfer and legal fees of P20,000 were paid and charged to Professional Fees.

1. The adjusting entry required is:

DEBIT CREDIT
a. Land 140,000 Prem. on cap. stock 140,000
b. Land 160,000 Capital stock 150,000
Cash 10,000
c. Land 80,000 Professional fees 20,000
Prem. on cap. stock 60,000
d. None of these

2. On the Land acquired in No. 6, real estate taxes of P20,000 were paid in December,
2016, including P5,000 for the first quarter of the year. (Ignore penalty for delayed
payment). Land account was debited for the taxes paid.

The adjusting entry is:

DEBIT CREDIT
a. Taxes 15,000 Land 15,000
b. Taxes 5,000 Land 5,000
c. Land 5,000 Cash 20,000
Taxes 15,000
d. None of these

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Problem 3
Two independent companies, DELTA and EPSILON, are in the home building business. Each
owns a tract of land for development, but each company would prefer to build on the other’s
land. Accordingly, they agreed to exchange their land. An appraiser was hired and from
the report and the companies records, the following information was obtained:

DELTA Co.’s Land EPSILON Co.’s Land

Cost (same as book value) P 800,000 P 500,000
Market value, per appraisal 1,000,000 900,000
The exchange of land was made and based on the difference in appraised values, EPSILON
Company paid P100,000 cash to DELTA Company.

Question
1. For financial reporting purposes, DELTA Company would recognize a pretax gain on the
exchange in the amount of:
2. For financial reporting purposes, EPSILON Company recognize a pretax gain on the
exchange in the amount of:
3. After the exchange, DELTA Company record its newly acquired land at:
4. After the exchange, EPSILON Company record its newly acquired land at:

Problem 4
On an audit engagement for 2017, you handled the audit of fixed assets of Alpha Copper
Mines. This mining company bought the exploration rights of Vulcan Exploration on June
30, 2017 for P7,290,000. Of this purchase price, P4,860,000 was allocated to copper ore
which had remaining reserves estimated at 1,620,000 tons. Alpha Copper Mines expects to
extract 15,000 tons of ore a month with an estimated selling price of P50 per ton.
Production started immediately after some new machines costing P600,000 was bought on
June 30, 2017. These new machineries had an estimated useful life of 15 years with a
scrap value of 10% of cost after the ore estimated has been extracted from the property, at
which time the machineries will already be useless.

Among the operating expenses of Alpha Copper Mines at December 31, 2017 were:

Depletion expense P 405,000

Depreciation of machineries 40,000

Questions
1. Recorded depletion expense was
a. Overstated by P90,000 c. Overstated by P135,000
b. Understated by P90,000 d. Understated by P135,000

2. Recorded depreciation expense was

a. Overstated by P10,000 c. Overstated by P20,000
b. Understated by P10,000 d. Understated by P20,000

3. The adjusted depletion at year-end amounted to:

4. The adjusted depreciation at year-end amounted to:

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Problem 5
The schedule of Zera Company’s property and equipment prepared by the client follows:

PLANT ASSETS
Land P 320,000
Building 540,000
Machinery and Equipment 180,000
Total 1,040,000

ACCUMULATED DEPRECIATION
Building P 81,000
Machinery and Equipment 54,000
Total P 135,000

Further examination revealed the following:

1. All property and equipment were acquired on January 2, 2013.

2. Assets are depreciated using the straight-line method. The building and equipment are
expected to benefit the company for 20 years and 10 years respectively. Salvage values
of the assets are negligible.
3. An equipment with an original cost of P40,000 was sold on December 30, 2015 for
P32,000. The proceeds were credited to other operating income account.
4. In 2015, The company recognized an appreciation in value of land and building as
determined by the Company’s engineers. The appraisal was recorded as follows:

Debit Credit
Land 70,000
Building 60,000
Accum. depreciation 6,000
Revaluation increment 124,000
Questions
1. Property and equipment at year-end is:

2. Accumulated depreciation at year-end is:

Problem 6
The following information pertains to Raikiri Company’s delivery trucks:

Date Particulars Debit Credit

1/1/14 Trucks 1, 2, 3, & 4 3,200,000
3/15/15 Replacement of truck 3 tires 25,000
7/1/15 Truck 5 800,000
7/10/15 Reconditioning of truck 4, which was
damaged in a collision 35,000
9/1/15 Insurance recovery on truck 4 accident 33,000
10/1/15 Sale of truck 2 600,000
4/1/16 Truck 6 1,000,000 150,000
5/2/16 Repainting of truck 4 27,000
6/30/16 Truck 7 720,000
12/1/16 Cash received on lease of truck 7 22,000

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ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Date Particulars Debit Credit

12/31/14 Depreciation expense 300,000
12/31/15 Depreciation expense 300,000
12/31/16 Depreciation expense 300,000

a. On July 1, 2015, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the
selling party allowed a P50,000 trade in value for the old truck.

b. On April 1, 2016, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000
being given for the new truck.

c. The depreciation rate is 20% by unit basis.

d. Unit cost of Trucks 1 to 4 is at P800,000 each.

Questions
1. What is the loss on trade-in of truck 3?
2. The correct cost of truck 5 is
3. The book value of truck 5 at December 31, 2016 is
4. What is the loss in trade-in of Truck 1?
5. The correct cost of truck 6 is
6. The carrying value of Truck 6 at December 31, 2016 is
7. The gain (loss) on sale of truck 2 is
8. The book value of truck 4 at December 31, 2016 is
9. The 2016 depreciation expense is understated by
10. The cost of repainting truck 4 should have been charged to:
a. Claims receivable - insurance company
b. Retained earnings
c. Accumulated depreciation
d. Repairs and maintenance

11. Which of the following controls would most likely allow for a reduction in the scope of the
auditor’s tests of depreciation expense?
a. Review and approval of the periodic property depreciation entry by a supervisor who
does not actively participate in its preparation.
b. Comparison of property account balances for the current year with the current year
budget and prior-year actual balance.
c. Review of the miscellaneous revenue account for salvage credits and scrap sales of
partially depreciated property.
d. Authorization of payment of vendors’ invoices by a designated employee who is
independent of the property receiving functions.

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Problem 7
You are engaged to audit the financial statements of MONARCH CORPORATION for the year
ended December 31, 2016. You gathered the following information pertaining to the
company’s Equipment and Accumulated Depreciation accounts.

EQUIPMENT
1.1.16 Balance P 446,000 9.1.16 No. 6 sold P 9,000
6.1.16 No. 12 36,000 12.31.16 Balance 474,000
9.1.13Dismantling
of No. 6 1,000 ______
P 483,000 P 483,000

ACCUMULATED DEPRECIATION – EQUIPMENT

12.31.16 Balance P 271,400 1.1.16 Balance P 224,000
______ 12.31.16 2016 Dep’n 47,400
P 271,400 P 271,400

The following are the details of the entries above:

1. The company depreciates equipment at 10% per year. The oldest equipment owned is
seven years old as of December 31, 2016.

2. The following adjusted balances appeared on your last year’s working papers:

Equipment P 446,000
Accumulated depreciation 224,000
3. Machine No. 6 was purchased on March 1, 2009 at a cost of P30,000 and was sold on
September 1, 2016, for P9,000.

4. Included in charges to the Repairs Expense account was an invoice covering installation
of Machine No. 12 in the amount of P2,500.

5. It is the company’s practice to take a full year’s depreciation in the year of acquisition
and none in the year of disposition.

Questions
1. The gain/(loss) on sale of Machine 6 is:
2. The Equipment balance of MONARCH CORPORATION at December 31, 2016 is:
3. The Depreciation expense – Equipment of MONARCH CORPORATION at December 31,
2016 is:
4. The entry to correct the sale of Machine 6 is:
a. Loss on sale of equipment 1,000
Accumulated depreciation 21,000
Equipment 22,000
b. Accumulated depreciation 22,500
Equipment 22,000
Gain on sale 500
c. Accumulated depreciation 21,500
loss on sale of equipment 500
Equipment 22,000
d. Accumulated depreciation 23,000

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 Equipment 22,000
Gain on sale of equipment 1,000

5. The Depreciation Expense at December 31, 2016 is:

a. Overstated by P6,125 c. Understated by P1,950
b. Understated by P6,125 d. Overstated by P1,950

Problem 8
Information pertaining to Speedroid Corporation’s property, plant and equipment for 2015 is
presented below:

Account balances at January 1, 2015

Debit Credit
Land P 1,500,000
Building 12,000,000
Accum. depreciation-building P 2,631,000
Machinery and equipment 9,000,000
Accum. depreciation-Mach. and Eqpt 2,500,000
Automotive Equipment 1,150,000
Accum. depreciation-Automotive Eqpt 846,000

Depreciation method and useful life

Building – 150% declining balance; 25 years

Machinery and equipment – Straight-line; 10 years
Automotive equipment – Sum-of-the-years’-digits; 4 years
The salvage value of the depreciable assets is immaterial
Depreciation is computed to the nearest month.

Transactions during 2015 and other information:

On January 2, 2015, Speedroid purchased a new car for P350,000 cash and trade-in of a 2-
year old car with a cost of P490,000 and a book value of P147,000. The new car has a cash
price of P520,000; the market value of the trade-in is not known.

On April 1, 2015, a machine purchased for P230,000 on April 1, 2010, was destroyed by
fire. Speedroid recovered P155,000 from its insurance company.

On July 1, 2015, machinery and equipment were purchased at a total invoice cost of
P2,800,000; additional costs of P50,000 for freight and P250,000 for installation were
incurred.

Speedroid determined that the automotive equipment comprising the P1,150,000 balance at
January 1, 2015, would have been depreciated at a total amount of P180,000 for the year
ended December 31, 2015.

Questions
1. Depreciation expense for building at December 31, 2015 is:
2. Depreciation expense for machinery and equipment at December 31, 2015 is:
3. Depreciation expense for Automobile equipment at December 31, 2015 is:
4. Total depreciation expense for 2015 is:
5. Total gain on asset disposal for 2015 is:
6. Total accumulated depreciation of building at December 31, 2015 is:

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7. Total book value of property, plant, and equipment at December 31, 2015 is:
8. The property, plant and equipment at December 31, 2015 is:
9. The total cost of property, plant and equipment at December 31, 2015 is:
10. Total accumulated depreciation of property, plant, and equipment at December 31, 2015
is:

Problem 9
JURRAC Service Center is wholly owned subsidiary of JURRAC Stores. The company’s
function is to deliver furniture and appliances sold by the parent and to service electronics
and appliances, also sold by the parent company. JURRAC Stores, the parent, operates
twelve retail outlets in a large metropolitan area. The service center uses three delivery
trucks and fifteen service vehicles for delivering goods and for making service calls related
to large appliances and electronic equipment. For small appliances and electronics,
customers typically bring these to the service center for repair.

At January 1, 2016, JURRAC Service center reported audited balances of P525,000 and
P320,000 for “Trucks” and “Accumulated Depreciation – Trucks,” respectively. The vehicles
consisted of
• Three delivery trucks costing P50,000 each; and
• Fifteen service trucks costing P25,000 each.

Accumulated depreciation was

• Delivery trucks, P95,000; and
• Service trucks, P225,000

The company depreciates all trucks on a straight-line basis, using a five- year life and zero
salvage value. One-half year’s depreciation is taken in the year of acquisition and in the
year of disposal.

During 2016, the following transactions and journal entries were completed by the
company:

2/2/16: Sold one delivery truck for P2,000. the truck was fully depreciated at
12/31/07.
Cash P2,000
Trucks P2,000

3/1/16: Bought one delivery truck for P60,000.

Trucks P60,000
Cash P60,000
3/15/16: Sold one service truck for P8,000. This truck was purchased 6/15/13 for
P25,000 and the accumulated depreciation, according to JURRAC’s subsidiary
ledger, at the date of sale was P12,500
Cash P8,000
Trucks P8,000

7/25/16: Bought one service truck for P27,500.

Truck P27,500
Cash P27,500

12/31/16: Recorded depreciation for 2016:

Two delivery trucks @ P10,000 each = P20,000
Fifteen service trucks @ P5,000 each = 75,000

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 Total P95,000

Depreciation Expense – Trucks P95,000

Accumulated depreciation P95,000

Questions
1. The adjusted balance of Delivery Truck at December 31, 2016 is:
2. The adjusted balance of Service Truck at December 31, 2016 is:
3. The Accumulated Depreciation – Delivery Truck at December 31, 2016 is:
4. The Accumulated Depreciation – Service Truck at December 31, 2016 is:
5. The Carrying Value of Delivery Truck at December 31, 2016 is:
6. The Carrying Value of Service Truck at December 31, 2016 is:
7. The Gain/Loss on Disposal of Trucks at December 31, 2016 is:
8. The Depreciation Expense of Trucks at December 31, 2016 is:

Problem 10
On January 1, 2013, the Toon World Manufacturing Company began construction of a
building to be used as its office headquarters. The building was completed on June 30,
2014.

Expenditures on the project were as follows:

January 3, 2013 P 500,000

March 31, 2013 600,000
June 30, 2013 800,000
October 31, 2013 600,000
January 31, 2014 300,000
March 31, 2014 500,000
May 31, 2014 600,000

On January 3, 2013, the company obtained a P2 million construction loan with a 10%
interest rate. The loan was outstanding all of 2013 and 2014. The company’s other
interest-bearing debt included a long-term note of P5,000,000 with an 8% interest rate, and
a mortgage of P3,000,000 on another building with an interest rate of 6%. Both debts were
outstanding during all of 2013 and 2014. The company’s fiscal year end is December 31.

Questions
1. The interest capitalized at the end of December 31, 2013 is:
2. The interest capitalized at the end of December 31, 2014 is:
3. The total cost of the Building at December 31, 2014 is:
4. The total interest expense at the end of December 31, 2013 is:
5. The total interest expense at the end of December 31, 2014 is:

Problem 11
In connection with your audit of Bing-Bong Corporation, you noted that on January 2, 2012,
the corporation purchased a building site for its proposed research and development
laboratory at a cost of P2,400,000. Construction of the building was started in 2012. The
building was completed on December 31, 2013, at a cost of P11,200,000 and was placed in
service on January 1, 2014. The estimated useful life of the building for depreciation
purposes was 20 years; the straight-line method of depreciation was to be employed and
there was no estimated salvage value.

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Management estimates that about 50% of the projects of the research and development
group will result in long-term benefits to the corporation. The remaining projects either
benefit the current period or are abandoned before completion. A summary of the number
of projects and the direct costs incurred in conjunction with the research and development
activities for 2014 appears below.

No. of Salaries and Other expenses

Projects employees benefits (excluding dep’n.)
Completed projects with
long-term benefits 60 3,600,000 2,000,000
Abandoned projects that
benefit the current year 40 2,600,000 600,000
Projects in process – results
indeterminate 20 1,600,000 480,000

Upon the recommendation of the research and development group, Bing-Bong Corporation
acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was
acquired on March 31, 2013, and has an economic life of 10 years.

Questions
1. Carrying value of the patent as of December 31, 2014 is:
2. Carrying value of the building as of December 31, 2014 is:
3. Carrying value of the land as of December 31, 2014 is:
4. Research and development expense for 2014 is: