Name:_______________________________ Score:_______________________

Auditing Problems Module - Midterm

Answer the following problems. Show your computations.

Problem 1. The Maligalig Corporation had the following items recorded in it’s “Property Plant and Equipment” account as of
December 31, 2019:

Items debited to the account:

Cash paid to purchase a land with a dilapidated building at the beginning of the year P660,000

Mortgage assumed on the land purchased 240,000

Commission paid to real estate agent 150,000

Attorney’s fee in connection with the acquisition 75,000

Cost of razing the old structure 120,000

Grading, leveling and landscaping cost (permanent improvement) 50,000

Special assessment for public improvement 25,000

Interest on loan for construction of a new building (based on average cost incurred) 81,000

Building construction labor cost 800,000

Building construction materials 672,000

Cost of temporary fencing the property during construction 28,000

Cost of permanent fencing 86,000

Architect’s fees 112,500

Cost of paving driveway and parking lot 70,000

Excavation expenses, including a P90,000 cost of excavation equipment 135,000

Fixed overhead charged to the building 300,000

Cost of temporary quarters for construction crew 150,000

Cost of temporary building to house tools and materials 90,000

Insurance of building during construction 31,500

Profit on construction, as the difference between the appraisal value of the asset after

construction and the actual cost incurred 360,000

Payment made to the construction workers injured during construction not

covered by insurance 90,000

 Payment to tenants of the old building to vacate the premises 90,000

Modification of building ordered by building inspectors 225,000

Property taxes on land covering the period 2016-2019 240,000

Interest that would have been earned had the money used during construction

been invested in the money market 150,000

Invoice cost of machinery acquired 381,000

Freight, unloading and delivery charges 22,500

Allowances, hotel accommodation etc., paid to foreign technician during the installation

And test run of machines 20,000

Royalty payment on machines purchased Based on units produced and sold) 75,000

Items credited to the account:

Salvaged proceeds from the demolished building 15,000

Proceeds from sale of excavation equipment 30,000

Proceeds from the sale of produce of the machinery test run 3,500

In addition, you discovered that the compensation for the workers injury was necessary because it was not covered by the
insurance policy purchased by the company. Accident insurance that would have covered the same would have cost P20,000.
The modifications ordered by the building inspectors resulted from poor planning by the company.

Required: Based on the result of your audit, what are the correct cost of the following individual property plant and
equipment accounts:

A B C D

A.) Land 1,575,000 1,500,000 1,440,000 1,350,000

B.) Building 2,535,000 2,490,000 2,400,000 2,370,000

C.) Land improvements 268,500 232,500 156,000 120,000

D.) Machinery and Equip. 381,000 397,500 420,000 423,500

E.) Total depreciable PPE 3,184,500 3,120,000 2,976,000 2,946,000

 F.) Amt. that should be exp.

as incurred during the

Year 75,000 150,000 300,000 450,000

Problem 2. Based on the following independent cases pertaining to the different modes of acquiring items of property plant and
equipment, identify the proper adjusting journal entry/ies and answer the additional requirement that follows:

A. On January 3, XYZ Company purchased a specialized factory equipment at a purchased price of P1 million plus 12% VAT.
The company incurred a P30,000 in freight and handling cost and P70,000 installation cost. The company expects that it will
incur dismantling cost amounting to P133,815 at the end of the equipment’s 5 year useful life. The prevailing interest rate
during the transaction date was 6%.

The present value factor of P1 at 6% for 5 periods is at 0.7473

The present value factor of P1 ordinary annuity for 5 periods is at 4.2124

1. How much should the equipment be initially recognized?

A. 1,000,000 B. 1,1000,000 C. 1,200,000 D. 1,220,000

2. Assuming an estimated useful life of 5 years and 10% salvage value, what is the depreciation expense for the first year
under the straight line method?

A. 216,000 B. 219,600 C. 240,000 D. 244,000

B. On April 1, 2019, XYZ Corporation purchased for P2,700,000 a tract of land on which was located a warehouse and an office
building. The following data were collected regarding the property:

Appraised values Vendor’s book values

Land 875,000 700,000

Warehouse 375,000 400,000

Office buildings 1,000,000 975,000

 1. What is the appropriate amounts that XYZ should record for the land, warehouse and building?

A. 700,000; 400,000 and 900,000 C. 945,000; 540,000 and 1,215,000

B. 875,000; 375,000 and 1,000,000 D. 1,050,000; 450,000 and 1,200,000

2. Assuming an estimated useful life of 10 years for the warehouse and office building and an estimated salvage value of
10%, what is the depreciation expense of the warehouse and the office building in 2019 under the sum of years
digit method?

A. 81,818 and 218,182 C. 73,636 and 196,364

B. 61,364 and 290,909 D. 55,227 and 147,273

C. On April 3, XYZ company purchased and installed several furniture and fixture items from a local furniture manufacturer and
dealer under the terms 5/10, n/30. The amount was paid on April 23 and was recorded as:

4/23 Furniture and fixtures 2,500,000

Cash 2,500,000

In addition, the company incurred freight and installation costs amounting to 10,000 and 15,000, respectively.

1. How much should the furniture and fixtures be initially recognized?

A. 2,375,000 B. 2,400,000 C. 2,500,000 D. 2,525,000

2. Assuming an estimated life of 5 years and a 10 % salvage value, what is the depreciation expense for the first year
under the double declining balance method?

A. 960,000 B. 720,000 C. 864,000 D. 648,000

D. On May 1, XYZ co. Purchased factory machinery having an installment price of P5,000,000 and a list price pf P4,500,000.
The company made a down payment and issued a 4-year, 4 million non-interest bearing note payable 1 million every
May 1, starting next year. The prevailing interest rate for the similar note is at 6%.
 The present value factor of P1 at 6% for 4 periods is at 0.7921

The present value factor of P1 at 6% ordinary annuity for 4 periods is at 3.4651

1. How much should the factory machinery be initially be recognized?

A. 3,465,100 B. 4,465,100 C. 4,500,000 D. 5,000,000

2. Assuming an estimated life of five years with a ten percent salvage value based on cost, the depreciation expense for
the first year under the 150% declining balance method?

A. 1,350,000 B. 1,339,530 C. 900,000 D. 893,020

E. On June 1, XYZ Co. Acquired a real property by issuing 35,360 shares of its P100 par value ordinary shares. The share
were selling on the same date at P125. A mortgage of P4 million was assumed by XYZ on the purchase. Moreover, the
company paid P180,000 of real property taxes in the prior years. Twenty percent of the purchase price should be
allocated to the land and the balance to the building.

In order to make the building suitable for the use of XYZ co., remodeling cost had to be incurred in the amount of
P900,000. This however necessitated the demolition of a portion of the building, which resulted in recovery of the salvage
material sold for P30,000.

Parking lot cost the company a total of P320,000 while repairs in the main hall were incurred at P45,000 prior to it’s use.

1. The correct cost of the land should be:

A. 1,664,000 B. 1,720,000 C. P2,040,000 D. P2,400,000

2. The correct cost of the building should be

A. 6,330,000 B. 7,795,000 C. 7,750,000 D. 7,570,000

F. XYZ owns a tract of land which it purchased in 2008 for 1,000,000. The land is held as a future plant site and has a fair
market value of P1,500,000 on July 1, 2011. Mall Company also has a tract of land held as future plant site. Mall paid
P1,800,000 for the land in 2005 and the land has a fair market value of P2,000,000 on July 1, 2011. On this date XYZ
exchanged its land and paid P500,000 cash for the land owned by Mall. The expected cash flows from the asset received
 differ from the cash flows expected from the asset transferred and the difference is significant relative to the value given
up.

1. How much should the property by initially be recognized in the book of XYZ?

A. 500,000 B. 1,500,000 C. 2,000,000 D. 2,500,000

2. How much is the gain or loss from the exchanged transaction in the books of XYZ?

A. None B. 500,000 C. 1,000,000 D. 2,000,000

3. Assuming that cash flows expected from the assets exchanged are not materially different, how much should be the
property be recognized in the books of XYZ?

A. 500,000 B. 1,500,000 C. 2,000,000 D. 2,500,000

G. On July 1, 2011, XYZ Co. Traded an old machine with a book value of P10,000 for a similar new machine having a cash
price of P32,000, and paid the difference of P19,000. XYZ recorded the new machine and the cash payment.

1. How much should the property be initially recognized?

A. 32,000 B. 29,000 C. 22,000 D. 19,000

2. How much is the gain or loss from the trade transactions?

A. None B. 3,000 C. 7,000 D. 10,000

H. On July 1, 2011, XYZ company accepted several office equipment which originally costed the stockholder P2,000,000. On
the same date, the items had aggregate market value totaling to P1.5 million. The company incurred P100,000 for
professional fees and transfer taxes related to the transaction. The amount was charged to expense.

1. How much should the property be initially recognized?

A. 0 B. 1,500,000 C. 1,600,000 D. 2,000,000

2. The entries to record the donation involves a credit to:

 A. Donated capital at 2,000,000 C. donated capital at 1,400,000

B. Donated capital at 1,500,000 D. gain from grants 1,500,000

Source: resa materials audit prob.