6.
Analytical estimation of depreciation by the auditor is
ACCOUNTING 502
QUIZ 2 – MIDTERM
SET A
(for exclusive use by the School of Accountancy, Saint Louis
University, 2600 Baguio City, Philippines)
GENERAL INSTRUCTIONS:
You are allowed to have three (3) 10-column or 12-column
worksheets ONLY. Write on the upper leftmost portion of each
worksheet “Page 1”, “Page 2”, and “Page 3” for pagination.
Erasures, superimpositions, or any form of alterations on the
pagination will INVALIDATE your quiz. Use blue or black ink
only.
Multiple Choice
INSTRUCTIONS: Write your answers on the DATE COLUMN
of Page 1 ONLY. Use the numbering on the left most portion of
the column. Answers for multiple choice written on either Page
2 or Page 3 will not be considered. Erasures,
superimpositions, or any form of alterations will invalidate
your answers. Solutions for the multiple-choice problems are
not required. (2 points each)
1. Property, plant and equipment is typically judged to be
one of the accounts least susceptible to fraud because
A. The amounts recorded on the balance sheet for most
companies are immaterial
B. The inherent risk is usually low
C. The depreciated values are always smaller than cost
D. Internal control is inherently effective regarding this
amount
2. Which one of the following procedures would provide the
best evidence about the original cost of a piece of
equipment?
A. Fixed asset schedule
B. Purchase invoice
C. Receiving report
D. Inquiry of the purchasing agent
3. Determining that proper amounts of depreciation are
expensed provides assurance about management’s
assertions of valuation and
A. Presentation and disclosure
B. Rights and obligations
C. Completeness
D. Existence and occurrence
4. The auditor may conclude that depreciation charges are
insufficient by noting:
A. Insured values greatly in excess of book values
B. Large numbers of fully depreciated assets
C. Continuous trade-in of relatively new assets
D. Excessive recurring losses on assets retired
5. Which of the following procedures would least likely lead
the auditor to detect unrecorded fixed asset disposals?
A. Examine insurance policies
B. Review repairs and maintenance expense
C. Review property tax files
D. Scan invoices for fixed asset additions
an important audit because it does which of the
following?
A. It yields statistical precision in sampling
B. It signals which additions will be vouched
C. It gives the auditor an indication of the impaired
balances existing in financial statements
D. It is a good starting point for determining additional
procedures
7. When few property and equipment transactions occur
during the year, the continuing auditor usually obtains
an understanding of internal control and performs
A. Test of controls
B. Analytical procedures to verify current year
additions to property and equipment
C. A thorough examination of the balances at the
beginning of the year
D. Extensive tests of current year property and
equipment transactions
8. Which of the following combinations of procedures is an
auditor most likely to perform to obtain evidence about
fixed asset addition?
A. Inspecting documents and physically examining
assets
B. Recomputing calculations and obtaining written
management representations
C. Observing operating activities and comparing
balances to prior period balances
D. Confirming ownership and corroborating
transactions through inquiries of client personnel
9. If an auditor tours a production facility, which of the
misstatements or questionable practices is most likely
to be detected by the audit procedures specified?
A. Depreciation expense on fully depreciated
machinery has been recognized
B. Overhead has been overapplied
C. Necessary facility maintenance has not been
performed
D. Insurance coverage on the facility has lapsed
10. In testing for unrecorded retirements of equipment, an
auditor is most likely to
A. Select items of equipment from the accounting
records and then locate them during the plant tour
B. Compare depreciation journal entries with similar
prior year entries in search of fully depreciated
equipment
C. Inspect items of equipment observed during the
plant tour and then trace them to the equipment
subsidiary ledger
D. Scan the general journal for unusual equipment
additions and excessive debits to repairs and
maintenance expense
11. The auditor is least likely to learn of retirements of
equipment through which of the following?
A. Review of the purchase return and allowance
account
B. Review of depreciation
C. Analysis of the debits to the accumulated
depreciation account
D. Review of insurance policy
1|Page
ACCOUNTING 502 – QUIZ # 2 (MIDTERM) 2
April 1, 2019

12. The auditor selects a sample of asset disposals and ❖ Equipment CZ4225 was purchased on April 30 for
examines the sales documentation evidencing disposal P1,800,000. The entity paid P300,000 as down
of the equipment and recomputes gain or loss on the payment; the remaining shall be paid in three (3) equal
disposal. This audit steps primarily tests which of the annual instalments starting on April 30, 2018. The
following assertions for the equipment account? entity issued a 9% interest-bearing note for the balance.
A. Existence and occurrence The said equipment can be sold for P10,000 at the end
B. Rights assertion of its 5-year useful life. The entity used straight-line
C. Presentation assertion method in depreciating Equipment CZ4225.
D. Valuation assertion
❖ Equipment ZG2184 was purchased on account for
13. Additions to equipment are sometimes understated. P2,400,000 on December 30. The term is 2/15, n/30;
Which of the following accounts would be reviewed by however, due to tight cash, the entity was not able to
the auditor to gain reasonable assurance that additions pay the balance on time for the 2% discount. The
are not understated? estimated useful life of the equipment is 20 years. The
A. Accounts payable said equipment has no residual value.
B. Depreciation expense
C. Gain on disposal of equipment 16. How much is the total cost of the three (3) pieces of
D. Repair and maintenance expense equipment?
A. 8,224,700
14. In violation of company policy, Coats Company B. 8,238,600
erroneously capitalized the cost of painting its C. 8,254,700
warehouse. An auditor would most likely detect this D. 8,257,000
when
A. Discussing capitalization policies with Coats 17. How much is the depreciation expense for the period?
Controller A. 643,327
B. Examining maintenance expense accounts B. 972,303
C. Observing that the warehouse had been painted C. 974,412
D. Examining construction work orders that support D. 983,018
items capitalized during the year
18. How much expense related to the transactions stated
15. The most significant audit step in substantiating above shall be recognized for 2017?
additions to the equipment account balance is A. 1,064,412
A. Comparison to prior year’s acquisitions B. 1,065,524
B. Review of transactions near the end of the reporting C. 1,109,412
period for proper period cutoff D. 1,110,524
C. Calculation of ratio of depreciation expense to gross
office equipment cost Use the following information to answer 19 – 21:
D. Examination of vendor’s invoices and receiving Your audit client issued a 5-year, 10%, promissory note to
reports for current year’s acquisitions purchase an equipment. The note with a face value of
P5,000,000, was issued on January 1, 2017, however, the
Use the following information to answer 16 – 18: cash price of the equipment is P4,639,400. The effective
LGR Corporation purchased three (3) pieces of equipment yield rate for this amount is 12%. The estimated useful life
during 2017. A summary is presented below: of the equipment is 8 years with no residual value. The entity
prepared the following entries for 2017 and 2018:
❖ Equipment AA1001 was purchased on January 3 for
P4,000,000. The freight charges related to the delivery Jan. 1, 2017 Equipment 5,000,000
of the said piece of equipment total to P50,000. The cost Note Payable 5,000,000
incurred for installing the item was P10,000, and an
additional cost of P15,000 for testing the equipment was Dec. 31, 2017 Interest Expense 500,000
also paid. Proceeds from the initial testing of the Cash 500,000
equipment was P2,300. The estimated selling price of
Equipment AA1001 at the end of its 10-year useful life Depreciation Expense 625,000
is P40,000, and the estimated cost to dismantle is Accum. Depreciation 625,000
P30,000 (prevailing rate is 8%; present value of
dismantling cost is P13,900). The expected total units Dec. 31, 2018 Interest Expense 500,000
that can be produced by the said equipment during its Cash 500,000
life is 18,000 units, and the total number of units
produced for 2017 is 2,800. The entity used SYD in Depreciation Expense 625,000
depreciating Equipment AA1001. Accum. Depreciation 625,000

2|Page
ACCOUNTING 502 – QUIZ # 2 (MIDTERM) 3
April 1, 2019

19. What is the correct carrying value of the equipment as 24. What is the carrying value of the note as of December
of December 31, 2018? 31, 2016?
A. 3,479,550 A. 3,852,360
B. 3,750,000 B. 3,870,180
C. 4,059,475 C. 3,976,120
D. 5,000,000 D. 4,000,000

20. What is the correct carrying value of the notes payable 25. The net income for 2016 is:
as of December 31, 2018? A. 104,820 overstated
A. 4,639,400 B. 129,820 overstated
B. 4,696,128 C. 170,180 understated
C. 4,759,663 D. 25,000 understated
D. 5,000,000
Use the following information to answer 26 – 30:
21. If the books are already closed on December 31, 2018, Welders Corporation engaged you for the first time to audit
the retained earnings account is: their financial statements as of and for the period ended
A. 30,113 overstated December 31, 2017. In auditing their PPE, you were able to
B. 30,113 understated obtain the balance of their Building account. One of the
C. 500,000 overstated items under the building account has a cost of P50,000,000,
D. 63,395 overstated and a related accumulated depreciation of P7,500,000.
Based from your investigation, you were able to gather the
Use the following information to answer 22 – 25: following information:
You were engaged to audit the financial statements of
Justice Company as of and for the period ended December ❖ Welders decided to construct a new building for their
31, 2016. Based from your examination, you were able to operations and started the construction on January 2,
discover a transaction which took place on April 1, 2016 2014. The entity finished the construction on December
involving a sale of one of the buildings of the entity for a 31, 2014 and occupied the building on January 1, 2015.
note. The entry made by your client as of the date of sale is:
❖ Before the construction, the entity obtained a loan on
Notes receivable 4,000,000 January 1, 2014 specifically to finance the construction
Accum. depreciation - building 1,300,000 of the building. The face value of the loan is
Building 5,000,000 P20,000,000, with an interest rate of 10%. The loan is
Gain on disposal of building 300,000 due on December 31, 2018.

Further examination revealed the following information: ❖ On December 31, 2013, the entity had outstanding
❖ The building was acquired by Justice on January 2, loans for general purposes. The loans are as follows:
2003, for a total cost of P5,000,000, with an estimated - A P30,000,000 loan from PI Bank; 11% interest rate;
useful life is 50 years. maturity date is December 31, 2017
❖ The face value of the note is P4,000,000, with 10% - P15,000,000 loan from PN Bank; 8.5% interest rate;
interest rate and maturity date on March 31, 2021. The maturity date is December 31, 2020
effective rate on the date of disposal of building is 11%.
Interest is collected every March 31. ❖ The schedule of payments made by the entity during the
❖ An entry was prepared by your client on December 31, construction are as follows:
2016 debiting Interest Receivable and crediting Interest
Income, both for P300,000. January 2 9,000,000
March 31 8,700,000
Note: round-off present value factors to four decimal places June 30 4,300,000
(i.e. x.xxxx) July 31 24,000,000
December 31 4,000,000
22. What is the correct gain on disposal of building?
A. 152,360 ❖ The building has no residual value and the company
B. 177,360 uses straight-line method of depreciating assets.
C. 252,360
D. 325,000 Note: Round-off any rates to two decimal places (xx.xx%)

23. What is the correct interest income for 2016? 26. How much is the capitalizable borrowing cost?
A. 300,000 A. 2,000,000
B. 317,820 B. 2,780,548
C. 400,000 C. 2,814,548
D. 423,760 D. 4,575,000

3|Page
ACCOUNTING 502 – QUIZ # 2 (MIDTERM) 4
April 1, 2019

27. What is the correct cost of the building? 1. Compute for the carrying value of Office Furniture at the
A. 52,000,000 end 2016
B. 52,780,548 2. Compute for the total depreciation for 2016 relating to
C. 52,814,548 the problem as a whole
D. 54,575,000
Use the following information to answer 3 – 4:
28. What is the correct depreciation expense for 2017? On January 1, 2015, Selfie Corporation acquired two assets
A. 2,600,000 within the same class of PPE. Information on these assets is
B. 2,639,027 as follows:
C. 2,640,727 Cost Useful Life
D. 2,728,750 Machine A 300,000 5 years
Machine B 180,000 3 years
29. What is the correct carrying value of the building as of
December 31, 2017? The machines are expected to generate benefits evenly over
A. 42,082,918 their useful lives. This class of PPE is measured using the
B. 42,155,697 revaluation model. At December 31, 2015, information
C. 44,863,465 about the assets is as follows:
D. 45,342,118
Fair Value Useful Life
30. Provided that the nominal accounts have already been Machine A 252,000 4 years
closed by the end of 2017, the December 31, 2017 Machine B 114,000 2 years
retained earnings is
A. 2,363,465 overstated On July 1, 2016, machine B was sold for P87,000 cash. On
B. 2,363,465 understated the same day, Selfie acquired machine C for P240,000 cash.
C. 2,645,442 overstated Machine C has an expected useful life of four (4) years. At
D. 2,645,442 understated December 31, 2016, information on the machines is as
follows:
Fair Value Useful Life
Problem Solving Machine A 168,000 3 years
INSTRUCTIONS: Write a SUMMARY OF ANSWERS on the Machine C 205,500 1.5 years
long problems on the first few rows of Page 1 ONLY. Erasures
on the Summary of Answers will INVALIDATE ALL OF YOUR 3. The gain (loss) that should be recognized on the sale of
ANSWERS on the long problems. In case you do not have any machine B on July 1, 2016 is
answer on any item, write “NO ANSWER”. Leaving any item
on the Summary of Answers blank will INVALIDATE ALL OF 4. The amount of revaluation loss to be reported on Selfie’s
YOUR ANSWERS on the long problems. Answers in the income statement for 2016 is
Summary of Answers should have a corresponding solution
in good accounting form to be given credit. Also, any answers Use the following information to answer 5 – 8:
in the Summary of Answers without any corresponding Gems Reid Corporation, a company organized late 2011,
solutions, or with a solution that does not match with the said engaged you to audit their financial statements as of and for
answer, will not be given credit. Double-rule and encircle your the period ended December 31, 2017.
final answers on your solutions. Answers that are not double-
ruled or encircled, or both, will be considered as no solution. Your audit client obtained an 11%, P20,000,000 loan from
Erasures are allowed, as long as they are done correctly and The Main Bank on October 1, 2012. The loan is for general
neatly. (5 points each) purposes and will mature on September 30, 2018. Another
loan, an 8.5% P30,000,000 loan from The Other Bank, was
Use the following information to answer 1 – 2: obtained on January 1, 2014, for normal operations and
On March 1, 2016, the Company exchanged a machine for other financing requirements. The loan from The Other Bank
office furniture that had a fair value of P125,000 at the date is due on December 31, 2017.
of exchange. Additionally, the Company received P18,000
cash. The fair value of the machinery at the date of exchange By the end of 2016, the entity decided to construct another
was P135,000. The machinery has an original cost of building (Building B) for expansion of their operations. Gems
P430,000 and book value of 317,250 with useful life of 10 Reid obtained a 10% P15,000,000 loan from The Good Bank
years, purchased last Jan. 1, 2012. The office furniture specifically for the construction. The loan is due on
originally cost P360,000 and to the date of exchange, had December 31, 2019.
been depreciated by P241,000 in the previous owner’s
books. The Company estimated the office furniture’s useful The entity started the construction of their new building on
life and residual value at 8 years and P5,400, respectively. January 2, 2017, and it was completed on December 30,
2017. Gems Reid occupied the said building on January 3,
2018.

4|Page
ACCOUNTING 502 – QUIZ # 2 (MIDTERM) 5
April 1, 2019

The schedule of cash payments for the construction is as capitalized the equipment at P5,150,000 (purchase price
follows: plus installation costs), and ignored the implications of
Date Amount the dismantling costs. Gems Reid used the straight-line
Jan. 2 7,600,000 method for Equipment B.
Feb. 1 4,900,000
Apr. 30 10,000,000 ❖ Machine A was purchased on July 1, 2017 for cash,
Jul. 1 8,400,000 P850,000. The entity incurred additional P15,000 for
Aug. 1 6,900,000 testing the machine, which was expensed by the entity.
Nov. 30 3,500,000 The estimated useful life of this machine is 5 years, and
Dec. 31 700,000 the residual value is P65,000. The entity used SYD in
depreciating Machine A.
The entity capitalized Building B at P42,000,000, equal to
the total amount paid for the construction. The estimated ❖ Your client properly observed the application of their
useful life of the building is 25 years, and it has no residual depreciation policies.
value.
5. What is the correct carrying value of the PPE on
Other transactions related to their other PPE accounts are December 31, 2016?
as follows:
6. How much is the correct depreciation expense for 2017?
❖ The entity bought a land and building on January 2,
2012 for a lump-sum amount, P80,000,000. The fair 7. How much total expense related to all transactions
market value of the land on that date is P35,000,000, stated above shall be recognized in 2017?
however, the fair value of the building on that date
cannot be determined. The entity incurred additional 8. Provided that the books are already closed by the end of
P1,500,000 to remodel and renovate the building. The 2017, the retained earnings as of December 31, 2017 is
estimated useful life of the building is 30 years, with no understated (overstated) by?
residual value, and the building is depreciated using the
straight-line method. The entity capitalized the fair
market value of the land to the Land account, and the ~~~End of Quiz 2~~~
remaining amount is capitalized to Building A account.
Gems Reid treated the remodeling and renovation costs
as expense.

❖ On March 31, 2012, the entity purchased an equipment

(Equipment A) on account, for P7,000,000. If the entity
pays within 90 days, a 5% discount will be extended by
the supplier. However, due to tight cash, the entity was
not able to avail of the discount and paid after three (3)
months. Installation costs total to P100,000, and the
cost for testing the equipment total to P85,000. Proceeds
from the initial run of the equipment is P25,000. The
entity capitalized the equipment at P7,185,000, which
includes the purchase price, the installation costs, and
the cost of testing. The proceeds from the initial testing
was recorded as income. The residual value of the
machine, after its estimated useful life of 10 years, is
P110,000. The entity used straight-line method for
Equipment A.

❖ A P5,000,000 equipment (Equipment B) was purchased

on January 2, 2015. The entity paid P1,000,000 cash
and issued a promissory note for the remaining balance,
to be paid in four (4) equal annual instalments starting
December 31, 2015, and every December 31 thereafter.
The interest rate on the note is 12%. Installation costs
for the equipment total to P150,000. The estimated
useful life of the equipment is 8 years, after which, the
entity is expected to incur P50,000 for dismantling the
said equipment. The present value of the dismantling
cost is P20,200 (computed using the prevailing rate of
12%). The equipment has no residual value. The entity

5|Page