ACCTG 024

CHAPTER 6 – Audit of PPE

Problem 1
The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2006, 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, 2006, 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, 2006 is:
a. P 290,000 b. P 370,000 c. P 260,000 d. P 300,000

2 The correct depreciation expense for the machinery for the year ended December 31,
2006 is:
a. P 37,000 b. P 29,000 c. P 30,000 d. P 26,000

1
Problem 2
The Land account was debited for P300,000 on March 31, 2006 for an adjoining piece of
land which was acquired in exchange for 15,000 shares of Rizal 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,
2006, 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

Problem 3
Two independent companies, KAYA and MUYAN, 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:

KAYA Co.’s Land MUYAN 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, MUYAN
Company paid P100,000 cash to KAYA Company.

Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
a. P 20,000 b. P 60,000 c. P 100,000 d. P 200,000

2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
exchange in the amount of:
a. P 0 b. P 100,000 c. P 300,000 d. P 400,000

3. After the exchange, KAYA Company record its newly acquired land at:
a. P 700,000 b. P 720,000 c. P 800,000 d. P 900,000

4. After the exchange, MUYAN Company record its newly acquired land at:
a. P 1,000,000 b. P 900,000 c. P 600,000 d. P 500,000

Problem 4
On an audit engagement for 2007, you handled the audit of fixed assets of Esmedina
Copper Mines. This mining company bought the exploration rights of Maharishi Exploration
on June 30, 2007 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. Esmedina 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, 2007. 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 Esmedina Copper Mines at December 31, 2007 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:

a. P 270,000 b. P 315,000 c. P 495,000 d. P 540,000

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

a. P 20,000 b. P 30,000 c. P 50,000 d. P 60,000

Problem 5
In connection with your examination of the financial statements of the Maraat
Corporation for the year 2007, the company presented to you the Property, Plant and
Equipment section of its balance sheet as of December 31, 2006, which consists of the
following:
 Land P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 2,800,000

The following transactions occurred during 2007:

1. Land site number 5 was acquired for P4,000,000. Additionally, to acquire the land,
Maraat Corporation paid a P240,000 commission to a real estate agent. Costs of
P60,000 were incurred to clear the land. During the course of clearing the land, timber
and gravel were recovered and sold for P20,000.

2. The second tract of land (site number 6) with a building was acquired for P1,200,000.
The closing statement indicated that the land value was P800,000 and the building value
was P400,000. Shortly after acquisition, the building was demolished at a cost of
P120,000. The new building was constructed for P600,000 plus the following costs:

Excavation fees P 44,000

Architectural design fees 32,000
Building permit fees 4,000
Imputed interest on funds used during construction 24,000

The building was completed and occupied on September 1, 2007.

3. The third tract of land (site number 7) was acquired for P2,400,000 and was put on the
market for resale.

Extensive work was done to a building occupied by Maraat Corporation under a lease
agreement. The total cost of the work was P500,000, which consisted of the following:

Particular Amount Useful life

Painting of ceilings P 40,000 one year
Electrical work 140,000 Ten years
Construction of extension to current
working area 320,000 Thirty years

The lessor paid one-half of the costs incurred in connection with the extension to the
current working area.

4. A group of new machines was purchased under a royalty agreement which provides for
payment of royalties based on units of production for the machines. The invoice price of
the machines was P300,000, freight costs were P8,000, unloading charges were P6,000,
and royalty payments for 2007 were P52,000.

Question
1. Land at year-end is
a. P 5,480,000 b. P 5,900,000 c. P 6,000,000 d. P 8,400,000

2. Buildings at year-end is
a. P 3,800,000 b. P 3,880,000 c. P 4,200,000 d. P 4,280,000

3. Leasehold improvements at year-end is

a. P 2,300,000 b. P 2,560,000 c. P 2,600,000 d. P 2,720,000

4. Machinery and equipment at year-end is

a. P 3,100,000 b. P 3,108,000 c. P 3,114,000 d. P 3,166,000
5
Problem 6
Norie Company’s property, plant and equipment and accumulated depreciation balance at
December 31, 2005 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 2000.
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:

- Norie Company entered into a 12-year operating lease starting January 1, 2003. The
leasehold improvements were completed on December 31, 2002 and the facility was
occupied on January 1, 2003.

- On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P325,000. Installation cost of P44,000 was incurred.

- On August 30, 2006, Norie Company purchased new automobile for P25,000.

- On September 30, 2006, a truck with a cost of P48,000 and a carrying amount of
P30,000 on December 31, 2005 was sold for P23,500.

- On December 30, 2006, a machine with a cost of P17,000, a carrying value of P2,975 on
date of disposition, was sold for P4,000.

Questions

1. The gain on sale of truck on September 30, 2006 is:

a. P 0 b. P 250 c. P 2,680 d. P 6,500

2. The gain on sale of machinery on December 30, 2006 is:

a. P 0 b. P 13,000 c. P 2,725 d. P 1,025

3. The adjusted balance of the property, plant, and equipment as of December 31, 2006 is:
a. P 1,813,000 b. P 2,351,000 c. P 2,387,000 d. P 2,388,500

4. The total depreciation expense to be reported on the income statement for the year
ended December 31, 2006 is:
a. P 138,000 b. P 185,402 c. P 221,404 d. P 245,065
5. The carrying amount of property, plant, and equipment as of December 31, 2006 is:
a. P 1,290,547 b. P 1,578,545 c. P 1,587,497 d. P 1,617,322

Problem 7
Information pertaining to Highland Corporation’s property, plant and equipment for 2005 is
 presented below:

Account balances at January 1, 2005:

Debit Credit
Land P 150,000
Buildings 1,200,000
Accumulated depreciation – Buildings P263,100
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 2005 and other information are as follows:

a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2-
year-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, 2005, 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, 2005, 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, 2011.

d. On July 1, 2005, 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, 2005, would have been depreciated at a total amount of P18,000 for the
year ended December 31,2005.

Questions
Based on the information above, answer the following questions:

1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2005 is:
a. P 1,180,000 b. P 1,187,000 c. P 1,202,500 d. P 1,210,000

2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2005 is:
a. P 139,000 b. P 121,000 c. P 115,000 d. P 109,000

3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2005 is:
a. P 72,000 b. P 263,100 c. P 335,100 d. P 319,314

4. The adjusted balance of Accumulated Depreciation of Machinery and Equipment at

December 31, 2005 is:
 a. P 330,775 b. P 342,275 c. P 351,475 d. P 353,775

5. The adjusted balance of Accumulated Depreciation of Automotive Equipment at

December 31, 2005 is:
a. P 90,600 b. P 96,000 c. P 103,200 d. P 108,600

6. The adjusted balance of Accumulated Depreciation of Leasehold Improvements at

December 31, 2005 is:
a. P 0 b. P 14,000 c. P 14,700 d. P 16,800

7. The total adjusted balance of Accumulated Depreciation of Property and Equipment at

December 31, 2005 is:
a. P 534,375 b. P 698,475 c. P 774,389 d. P 804,475

8. The total gain(loss) from disposal of assets at December 31, 2005 is:
a. P 5,400 b. P 4,000 c. P 2,600 d. P 1,400

9. The adjusted book value of Building at December 31, 2005 is:

a. P 1,128,000 b. P 936,900 c. P 880,686 d. P 864,900

10. The adjusted book value of Leasehold Improvement at December 31, 2005 is:
a. P 168,000 b. P 154,000 c. P 153,300 d. P 151,200
Problem 8
The schedule of Gerasmo 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, 2003.

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, 2005 for
P32,000. The proceeds were credited to other operating income account.
4. In 2005, 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:
a. P 753,000 b. P 870,000 c. P 910,000 d. P 990,000

2. Accumulated depreciation at year-end is:

a. P 114,000 b. P 117,000 c. P 123,000 d. P 135,000
Problem 9
The following information pertains to Marlisa Company’s delivery trucks:

Date Particulars Debit Credit

1/1/04 Trucks 1, 2, 3, & 4 3,200,000
3/15/05 Replacement of truck 3 tires 25,000
7/1/05 Truck 5 800,000
7/10/05 Reconditioning of truck 4, which was
damaged in a collision 35,000
9/1/05 Insurance recovery on truck 4 accident 33,000
10/1/05 Sale of truck 2 600,000
4/1/06 Truck 6 1,000,000 150,000
5/2/06 Repainting of truck 4 27,000
6/30/06 Truck 7 720,000
12/1/06 Cash received on lease of truck 7 22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Date Particulars Debit Credit

12/31/04 Depreciation expense 300,00
0
12/31/05 Depreciation expense 300,00
0
12/31/06 Depreciation expense 300,00
0

a. On July 1, 2005, 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, 2006, 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?
a. P 50,000 b. P 430,000 c. P 510,000 d. P 560,000

2. The correct cost of truck 5 is

a. P 560,000 b. P 610,000 c. P 800,000 d. P 850,000

3. The book value of truck 5 at December 2006 is

31, c. P 560,000 d. P 510,000
a. P 850,000 b. P 595,000
4. What is the loss in trade-in of Truck 1?
a. P 150,000 b. P 250,000 c. P 290,000 d. P 410,000

5. The correct cost of truck 6 is

a. P 590,000 b. P 800,000 c. P 850,000 d. P 1,000,000
6. The carrying value of Truck 6 at 31, 2006 is
December

11
 a. P 501,500 b. P 680,000 c. P 850,000 d. P 1,100,000

7. The gain (loss) on sale of truck 2 is

a. P 80,000 b. P 331,600 c. P 495,000 d. P 496,200

8. The book value of truck 4 at December 31, 2006 is

a. P 320,000 b. P 331,600 c. P 495,000 d. P 496,200

9. The 2000 depreciation expense is understated by

a. P 92,000 b. P 252,000 c. P 292,000 d. P 372,000

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.

Problem 10
Information pertaining to SAILADIN CORPORATION’s property, plant and equipment for
2006 is presented below.

Account balances at January 1, 2006

Debit Credit
Land 6,000,000
Buildings 48,000,000
Accumulated depreciation – bldg. 10,524,000
Machinery and equipment 36,000,000
Accumulated depreciation – mach. & equip. 10,000,000
Automotive equipment 4,600,000
Accumulated depreciation – auto. Equip. 3,384,000

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 2006 and other information are as follows:

(a) On January 2, 2006, Sailadin Corporation purchased a new car for P800,000 cash
and trade-in of a 2-year car with a cost of P720,000 and a book value of P216,000. The
new car has a cash price of P960,000; the market value of the trade-in is not know.

(b) On April 1, 2006, a machine purchased for P920,000 on April 1, 2001, was
destroyed by fire. Sailadin Corporation recovered P620,000 from its insurance company.

(c) On May 1, 2006, costs of P6,720,000 were incurred to improve leased office
premises. The leasehold improvements have a useful life of 8 years. The related lease
terminates on December 31, 2012.

(d) On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P11,200,000; additional costs of P200,000 for freight and P1,000,000 for installation
were incurred.

(e) Sailadin Corporation determined that the automotive equipment comprising the
P4,600,000 balance at January 1, 2006, would have been depreciated at a total amount
of P720,000 for the year ended December 31, 2006.

Questions
1. What is the depreciation on building for 2006?
a. P 2,998,080 b. P 2,880,000 c. P 2,248,560 d. P 1,499,040

2. What is the book value of the building at December 31, 2006?

a. P 35,976,960 b. P 35,227,440 c. P 34,596,000 d. P 34,477,920

3. What is the depreciation on machinery and equipment for 2006?

a. P 4,220,000 b. P 4,197,000 c. P 4,151,000 d. P 4,128,000

4. What is the gain on machine destroyed by fire?

a. P 620,000 b. P 460,000 c. P 300,000 d. P 160,000

5. What is the balance of the Accumulated Depreciation – Machinery and Equipment at

December 31, 2006?
a. P 13,777,000 b. P 13,760,000 c. P 13,691,000 d. P 13,231,000

6. What is the depreciation on automotive equipment for 2006?

a. P 1,104,000 b. P 960,000 c. P 816,000 d. P 720,000

7. What is the gain (loss) on car traded-in?

a. P 240,000 b. P (240,000) c. P 56,000 d. P (56,000)

8. What is the book value of automotive equipment at December 31, 2006?

a. P 1,720,000 b. P 1,144,000 c. P 1,000,000 d. P 712,000

9. What is the depreciation on leasehold improvements for 2006?

a. P 756,000 b. P 672,000 c. P 630,000 d. P 560,000

10. What is the book value of leasehold improvements at December 31, 2006?
a. P 6,160,000 b. P 6,090,000 c. P 6,048,000 d. P 5,964,000