Masters Technological Institute of Mindanao Problem 3

Applied Auditing
At December 31, 2010, Yountville Co.’s non-current operating
AUDIT OF PLANT, PROPERTY AND EQUIPMENT- 2 assets and accumulated depreciation accounts had balances
as follows:
Problem 1
Category Cost of Asset Accum. Dep’n
For each of the following independent situations, determine Land P5.2 M
the amount of interest that should be included as part of the Buildings P 48 M P 10,616,000
cost of the building. M and E P 31 M 7, 848,000
Automobiles
Case 1. On January 1, Macy obtained a loan for P20 million at & Trucks P 5.28 M 3, 448,000
an interest rate of 10% specifically to finance the construction Leasehold Imp P 8.84 M 4, 420,000
of its building. Prior to disbursements, the proceeds were
temporarily invested and earned interest income of Category Dep’n Method Useful Life
P100,000. Buildings 150% declining-bal 25 yrs
M and E SL 10 yrs
Case 2. Macy had the following borrowings which were partly Automobiles
used to finance the construction of the company’s building: & Trucks 150% declining-bal 5 yrs
Date Obtained Term Interest Rate Amount Leasehold Imp SL 8 yrs
1/1/10 5 yrs 7.5% 10 M Land Imp SL 12 yrs
1/1/11 2 yrs 12% 20 M
Depreciation is computed to the nearest month. The salvage
Case 3. On January 1, Macy obtained a loan for P12 million at values of the depreciable assets are immaterial.
an interest rate of 10% specifically to finance the construction
of its building. Interest earned from temporary investment of Transactions during 2011 and other information are as
the proceeds amounted to P100,000. In addition, Macy had follows:
the following borrowings, part of which was used for the 1. On January 6, 2011, a plant facility consisting of land and a
construction activities: building was acquired from LOR Corp. for P 24M. Of this
Date Obtained Term Interest Rate Amount amount, 20% was allocated to land.
1/1/10 5 yrs 7.5% 10 M 2. On April 3, 2011, new parking lots, streets, and sidewalks at
1/1/11 2 yrs 12% 20 M the acquired plant facility were completed at a total cost of
P7.68M. These expenditures had an estimated useful life of
Problem 2 12 yrs.
Pan Corp. contracted Nat Inc. on January 1, 2017 to construct 3. The leasehold improvements were completed on
a building for P80 million on land Pan Inc purchased a couple 12/31/2003, and had an estimated useful life of eight yrs. The
of years back. The contract provides that Pan Corp. is to make related lease, which would have terminated on 12/31/2009,
five payments in 2017, with the last payment to be made was renewable for an additional 4 year term. On March 28,
upon completion. The building was completed on 12/31/17. 2011, YOUNTVILLE exercised the renewal option.
4. On July 1, 2011, machinery and equipment were purchased
Pan Corp. made the following payments during 2017: at a total invoice cost of P10M. Additional cost of P400,000
January 1 P8 million for delivery and P1.2M for installation were incurred.
April 1 P19 million 5. On December 21, 2011, a machine with a cost o P680,000
July 31 P24.4 million and a carrying amount of P119,000 at date of disposition was
October 1 P27.6 million scrapped without cash recovery.
December 31 P14 million 6. On August 29, 2011, YOUNTVILLE purchased a new
automobile for 600,000.
Pan Corp made the following arrangements with financing 7. On September 30, 2011, a truck with a cost of P960,000
companies in 2017: and a carrying amount of P324,000 on the date of sale was
*12% P34million loan dated January 1, 2017 with sold for P460,000. Depreciation for nine months ended
interest compounded quarterly. Both principal and September 30, 2011, was P94,080.
interest are payable on 12/31/20. This loan is
specifically for the building project. Required: Compute the 2011 Depreciation Expense of the
following assets:
*10%, 10 year, P24milion note dated December 3, 1.Building
2016, with simple interest; interest payable annually 2. Land Improvement
on December 31. The loan was for general financing 3. Leasehold Improvement
purposes including the partial financing of the 4. Machinery and equipment
construction. 5. Automobiles and trucks

*12%, 5 year, P28million note dated December 31, Problem 4

2016, with simple interest; interest payable annually
every December 31. The loan was for general
financing purposes including the partial financing of
the construction.
Required:
1. The amount of interest to be capitalized in 2017
2. The amount of interest to be expense in 2017?
Lemon Grove, Inc. a calendar-year firm, currently uses a plant
asset in operations that originally cost of P110,000 and has a
useful life of eight years and a P10,000 residual value at the
end of its useful life. Lemon Grove uses straight-line method.
As a result of a recent law restricting the use of the product
produced by the asset, lemon Grove reviews the asset for
impairment. As of 1/1/11, the beginning of the asset’s 3rd
year of useful life, total remaining cash inflows attributable to
the asset are estimated to be P120,000, while total cash
outflows in running and maintaining the machine are
estimated to be P60,000. Based on quoted prices and the
condition of asset, lemon Grove estimates the fair value of
the asset to be P40,000. The cost to sell the asset is
approximately P5,000. Lemon Grove plans to continue to use
the asset in production, although at a much lower rate of
utilization. Assume 8% as the appropriate discount rate.

Required:
1. Compute the impairment loss to be recognized on 1/1/11.
2. Compute the depreciation expense in 2011.