AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

Problem 1.

The Land account was debited for P300,000 on March 31, 2019 for an adjoining piece of land which was
acquired in exchange for 15,000 shares of Luzon 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. What is the adjusting entry required?
2. On the Land acquired in No. 6, real estate taxes of P20,000 were paid in December, 2019, including P5,000 for
the first quarter of the year. (Ignore penalty for delayed payment). Land account was debited for the taxes
paid. What is the adjusting entry required?

Problem 2.

On an audit engagement for 2020, you handled the audit of fixed assets of Benguet Copper Mines. This mining
company bought the exploration rights of Northern Exploration on June 30, 2020 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. Benguet 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, 2020. 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 Benguet Copper Mines at December 31, 2020 were:
Depletion expense P 405,000
Depreciation of machineries 40,000
1. Was the recorded depletion expense overstated or understated by how much?
2. Was the recorded depreciation expense overstated or understated by how much?

Problem 3.

Alondra Company’s property, plant and equipment and accumulated depreciation balance at December 31,
2018 are:
Accumulated
Cost Depreciation
Machinery and equipment P 1,380,000 P 367,500
Automobiles and trucks 210,000 114,320
Leasehold improvements 432,000 108,000

Additional information:

Depreciation methods and useful lives:

Machinery and equipment – straight line; 10 years
Automobiles and trucks – 150% declining balance; 5 years, all acquired after 2013.
Leasehold improvements – straight line

Depreciation is computed to the nearest month.

Salvage values are immaterial except for automobiles and trucks, which have an estimated salvage values equal to 10%
of cost.

Other additional information:

- Alondra Company entered into a 12-year operating lease starting January 1, 2016. The leasehold improvements
were completed on December 31, 2002 and the facility was occupied on January 1, 2016.
- On July 1, 2019, machinery and equipment were purchased at a total invoice cost of P325,000. Installation cost
of P44,000 was incurred.
- On August 30, 2019, Alondra Company purchased new automobile for P25,000.
- On September 30, 2019, a truck with a cost of P48,000 and a carrying amount of P30,000 on December 31, 2018
was sold for P23,500.
- On December 30, 2019, a machine with a cost of P17,000, a carrying value of P2,975 on date of disposition, was
sold for P4,000.

1. What is the gain on the sale of truck on September 30, 2019?

2. What is the gain on sale of machinery on December 30, 2019?
 AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

3. What is the adjusted balance of the property, plant, and equipment as of December 31, 2019?
4. What is the total depreciation expense to be reported on the income statement for the year ended December
31, 2019?
5. What is the carrying amount of property, plant, and equipment as of December 31, 2019?

Problem 4.

Information pertaining to Highland Corporation’s property, plant and equipment for 2018 is presented below:

Account balances at January 1, 2018:

Debit Credit
Land P 150,000
Buildings 1,200,000
Accumulated depreciation – Buildings P 263,100
Machinery and equipment 900,000
Accumulated depreciation – Machinery and equipment 250,000
Automotive equipment 115,000
Accumulated depreciation – Automotive equipment 84,600

Depreciation data:
Depreciation method Useful life
Buildings 150% declining-balance 25 years
Machinery and equipment Straight-line 10 years
Automotive equipment Sum-of-the-years’-digits 4 years
Leasehold improvements Straight-line

The salvage values of the depreciable assets are immaterial. Depreciation is computed to the nearest month.
Transactions during 2018 and other information are as follows:
a. On January 2, 2018, Highland purchased a new car for P20,000 cash and trade-in of a 2year-old car with a cost
of P18,000 and book value of P5,400. The new car has a cash price of P24,000; the market value of the trade-in
is not known.
b. On April 1, 2018, a machine purchased for P23,000 on April 1, 2000, was destroyed by fire, Highland recovered
P15,500 from its insurance company.
c. On May 1, 2018, costs of P168,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. The related lease terminates on December 31, 2024.
d. On July 1, 2018, machinery and equipment were purchased at a total invoice cost of P280,000; additional costs
of P5,000 for freight and P25,000 for installation were incurred.
e. Highland determined that the automotive equipment comprising the P115,000 balance at January 1, 2018,
would have been depreciated at a total amount of P18,000 for the year ended December 31,2018.

1. What is the adjusted balance of Machinery and Equipment (at cost) at December 31, 2018?
2. What is the adjusted balance of Automotive Equipment (at cost) at December 31, 2018?
3. What is the adjusted balance of Accumulated Depreciation of Building at December 31, 2018?
4. What is the adjusted balance of Accumulated Depreciation of Machinery and Equipment at December 31, 2018?
5. What is the adjusted balance of Accumulated Depreciation of Automotive Equipment at December 31, 2018?
6. What is the adjusted balance of Accumulated Depreciation of Leasehold Improvements at December 31, 2018?
7. What is the total adjusted balance of Accumulated Depreciation of Property and Equipment at December 31,
2018?
8. What is the total gain(loss) from disposal of assets at December 31, 2018?
9. What is the adjusted book value of Building at December 31, 2018?
10. What is the adjusted book value of Leasehold Improvement at December 31, 2018?

Problem 5.

The schedule of Alondra 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 P1,040,000
 AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

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

Further examination revealed the following:

a. All property and equipment were acquired on January 2, 2016.
b. 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.
c. An equipment with an original cost of P40,000 was sold on December 30, 2018 for P32,000. The proceeds were
credited to other operating income account.
d. In 2018, 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 P70,000
Building 60,000
Accumulated depreciation P 6,000
Revaluation increment 124,000
1. What is the carrying value of Property and equipment at year-end?
2. What is the Accumulated depreciation at year-end?