CHAPTER 7 – Audit of Property, Plant, & Equipment

Problem 1The 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.

Question1 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

SolutionOE: Cash 20,000

Machinery 20,000CE: Cash 20,000 Accumulated dep’n. 30,000

Machinery 40,000Gain on sale 10,000

Adj: Accumulated dep’n 30,000 Machinery 20,000

Gain on sale 10,000---------------------------------------------OE: Machinery 90,000

Cash 90,000CE: Machinery 100,000 Accumulated dep’n 22,000 Loss on sale 18,000

Machinery 50,000Cash 90,000

Adj: Machinery 10,000 Accumulated dep’n 22,000 Loss on sale 18,000

Machinery 50,000---------------------------------------------

1 A P350,000 – P20,000 + P10,000 -P50,000 2 B P290,000 x 10%

Problem 2

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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 140,000b. Land 160,000 Capital stock 150,000

Cash 10,000c. Land 80,000 Professional fees 20,000

Prem. on cap. stock 60,000d. 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 15,000b. Taxes 5,000Land 5,000c. Land 5,000Cash 20,000

Taxes 15,000d. None of these

Solution1. C OE: Land 300,000

Common Stock 150,000APIC 150,000

Professional fees 20,000Cash 20,000

CE: Land 380,000 Common stock 150,000

Cash 20,000APIC 210,000

Adj: Land 80,000APIC 60,000Professional fees 20,000

2. A OE: Land 20,000Cash 20,000

CE: Land 5,000 Taxes 15,000

Cash 20,000Adj: Taxes 15,000

Land 15,000

Problem 3Two 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 LandCost (same as book value) P 800,000 P 500,000Market value, per appraisal 1,000,000 900,000The exchange of land was made and based on the difference in appraised values, MUYAN Company paid P100,000 cash to KAYA Company.

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Question1. 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

Solution Muyan Kaya

Land 1,000,000 Cash 100,000Cash 100,000 Land 900,000 Land 500,000 Land 800,000Gain 400,000 Gain on sale 200,000

1 D2. D 3. D4. A

Problem 4On 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 405,000Depreciation of machineries 40,000

Questions1. Recorded depletion expense was

a. Overstated by P90,000 c. Overstated by P135,000b. Understated by P90,000 d. Understated by P135,000

2. Recorded depreciation expense wasa. Overstated by P10,000 c. Overstated by P20,000b. 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

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SolutionP4,860,000/1,620,000 x 15,00o tons x 6 months = P270,000P600,000 – P60,000/9 years * x 6/12 = P30,000*1,620,000 tons/180,000 = 9 years1. C P405,000 - (4,860,000/1,620,000 x 90,000 units) = P135,000 overstated2. A P40,000 - (600,000 - 60,000)/1,620,000 x 90,000 = P10,000 overstated3. A4. B

Problem 5In 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 400,000Buildings 3,200,000Leasehold improvements 2,000,000Machinery 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 44,000Architectural design fees 32,000Building permit fees 4,000Imputed 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.

4. 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 lifePainting of ceilings P 40,000 one yearElectrical work 140,000 Ten yearsConstruction of extension to current working area 320,000 Thirty years

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

5. 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.

Question1. 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 isa. 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 isa. 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 isa. P 3,100,000 b. P 3,108,000 c. P 3,114,000 d. P 3,166,000

Solution1. Land 4,300,000

Cash 4,300,000Cash 20,000

Land 20,0002. Land 1,320,000

Cash 1,320,000Building 680,000

Cash 680,0003. Land - investment 2,400,000

Cash 2,400,0004. Operating expenses 40,000

Leasehold improvements 300,000Cash 340,000

5. Machinery 314,000Royalty expenses 52,000

Cash 366,000Answer:1. C 2. B 3. A 4. C

Problem 6Norie 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 367,500Automobiles and trucks 210,000 114,320Leasehold improvements 432,000 108,000

Additional information:

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Depreciation methods and useful lives:

Machinery and equipment – straight line; 10 yearsAutomobiles 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

SolutionEntries:Machinery and equipment 369,000

Cash 369,000Automobile and trucks 25,000

Cash 25,000Cash 23,500Accumulated depreciation 24,750

Automobile and trucks 48,000Gain on sale 250

Accumulated deprecation - 12/31/02 18,000Depreciation - 9 mos. (P30,000 x 30% x 9/12) 6,750Total 24,750

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Cash 4,000Accumulated depreciation 14,025

Machinery and equipment 17,000Gain on sale 1,025

Depreciation 221,404Accumulated depreciation - mach. 156,450Accumulated depreciation - auto. 28,954Accumulated depreciation - improv. 36,000

Machinery and equipment - P1,380,000/10 years = P 138,000 P 369,000/10 years x 6/12 = 18,450 P 156,450

Leasehold improvement - P432,000/12 years = 36,000Automobile and trucks - CV of unsold item P 65,680 x 30% = 19,704

Sold item - 30,000 x 30% x 9/12 = 6,750 Current purchase P25,000 x 30% x 4/12= 2,500 28,954

Answer:1. B 2. D 3. B 4. C 5. B

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

Account balances at January 1, 2005: Debit Credit

Land P 150,000Buildings 1,200,000Accumulated depreciation – Buildings P263,100Machinery and equipment 900,000Accumulated depreciation – Machinery and equipment 250,000Automotive equipment 115,000Accumulated depreciation – Automotive equipment 84,600

Depreciation data: Depreciation method Useful life

Buildings 150% declining-balance 25 yearsMachinery and equipment Straight-line 10 yearsAutomotive equipment Sum-of-the-years’-digits 4 yearsLeasehold 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.

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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.

QuestionsBased 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

SolutionEntries:a. Automobile Equipment 24,000

(cash paid, P20,000 plus P4,000 trade-in allow.)Accum. Depreciation 12,600Loss on trade-in 1,400

Automobile Equipment 18,000Cash 20,000

* Trade in allowance is the difference between the cash price and the purchase price of the equipment.b. Cash 15,500

Accum. Depreciation 11,500

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Machinery and equipment 23,000Gain on asset disposal 4,000

c. Leasehold improvements 168,000Cash 168,000

d. Machinery and equipment 310,000Cash 310,000

Computation of the Depreciation Expense and Accumulated Depreciation:

Building: Book value 1/1/05 (P1,200,000 - P263,100) - P936,900X declining rate (1/25 x 150%) 6% .Depreciation for the year P 56,214Plus; Accum. Depreciation - 1/1/05 263,100Accum. Depreciation - 12/31/05 P319,314

Machinery and Equipment:Balance - 1/1/05 P900,000Less: machine destroyed by fire 23,000

P877,000Divided by 10 yrs. P 87,700Dep’n of the Machine destroyed by fire:(P23,000/10 x 3/12) 575Dep’n of the machine purchase for the year:(P310,000/10 x 6/12) 15,500Total Depreciation P103,775Plus: Accum. Dep’n - 1/1/05 250,000Less: Accum. Dep’n - destroyed by fire ( 11,500)Accum. Depreciation - 12/31/05 P342,275

Automotive Equipment: Depreciation on P115,000 balance, 1/1/05 P 18,000Less: Depreciation on car traded in (P18,000 x 2/10) 3,600Adjusted depreciation on the beg. Bal. P 14,400Dep’n on the 1/2/05 Purchase:(P24,000 x 4/10) 9,600Total Depreciation expense P 24,000Plus: Accum. Depreciation - 1/1/05 84,600Less: Accum. Dep’n - traded equipment ( 12,600)Accumulated depreciation - 12/31/05 P 96,000

Leasehold Improvements: P168,000/80 months x 8 mos. for 2005 P 16,800

ANSWER: 1. B 2. B 3. D 4. B 5. B6. D 7. C 8. C 9. C 10. D

Problem 8The schedule of Gerasmo Company’s property and equipment prepared by the client follows:

PLANT ASSETSLand P 320,000Building 540,000Machinery and Equipment 180,000Total 1,040,000

ACCUMULATED DEPRECIATIONBuilding P 81,000Machinery and Equipment 54,000Total 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.

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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 CreditLand 70,000Building 60,000Accum. depreciation 6,000Revaluation increment 124,000

Questions1. 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

SolutionOE: Cash 32,000

Other ope. income 32,000CE: Cash 32,000 Accumulated dep’n 12,000

Property & equip. 40,000Other ope. income 4,000

Adj: Accum. dep’n 12,000 Other ope. income 28,000

Property & equip. 40,000-----------------------------------------------Adj: Revaluation increment 124,000 Accumulated dep’n 6,000

Property & equipment 130,000-----------------------------------------------Per book depreciation - bldg 75,000Per audit depreciation - bldg 72,000 (540,000-60,000/20 x 3 yrs)Adjustment 3,000

Adj: Accum. Depreciation 3,000Operating expenses 3,000

Answer:1. B 2. A

Problem 9The following information pertains to Marlisa Company’s delivery trucks:

Date Particulars Debit Credit1/1/04 Trucks 1, 2, 3, & 4 3,200,0003/15/05 Replacement of truck 3 tires 25,0007/1/05 Truck 5 800,0007/10/05 Reconditioning of truck 4, which was

damaged in a collision 35,0009/1/05 Insurance recovery on truck 4 accident 33,00010/1/05 Sale of truck 2 600,0004/1/06 Truck 6 1,000,000 150,0005/2/06 Repainting of truck 4 27,0006/30/06 Truck 7 720,00012/1/06 Cash received on lease of truck 7 22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Date Particulars Debit Credit

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12/31/04 Depreciation expense 300,00012/31/05 Depreciation expense 300,00012/31/06 Depreciation expense 300,000

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.

Questions1. 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 isa. P 560,000 b. P 610,000 c. P 800,000 d. P 850,000

3. The book value of truck 5 at December 31, 2006 isa. P 850,000 b. P 595,000 c. P 560,000 d. P 510,000

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 isa. P 590,000 b. P 800,000 c. P 850,000 d. P 1,000,000

6. The carrying value of Truck 6 at December 31, 2006 isa. 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 isa. 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 isa. P 320,000 b. P 331,600 c. P 495,000 d. P 496,200

9. The 2000 depreciation expense is understated bya. 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 companyb. Retained earningsc. Accumulated depreciationd. 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.

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d. Authorization of payment of vendors’ invoices by a designated employee who is independent of the property receiving functions.

Solution1. C

Cost of truck 3 800,000 Accumulated depreciation (P800,000 x 20% x 1.5) 240,000 Net book value 560,000 Trade-in allowance 50,000 Loss on trade-in 510,0002. D3. B (P850,000-(P850,000x20%x1.5)4. B Cost of truck 1 800,000 Less: Accumulated depreciation (P800,000 x 20% / 12 mos. x 27 mos.) 360,000

Net book value 440,000Trade-in allowance 150,000Loss on trade-in 290,000

5. D6. C [P1,000,000 - (1,000,000 x 20% x 9/12)]7. A

Cost of truck 2 800,000Accumulated depreciation (P800,000 x 20% / 12 mos. x 21 mos.) 280,000Net book value 520,000Selling price 600,000Gain on sale 80,000

8. A ([P800,000 - (P800,000 x 20% x 3)]9. C

Truck 1 (P800,000 x 20% 3/12) 40,000 -Truck 2 - -Truck 3 - -Truck 4 (P800,000 x 20%) 160,000 800,000Truck 5 (P850,000 x 20%) 170,000 850,000Truck 6 (P1,000,000 x 20% x 9/12) 150,000 1,000,000Truck 7 (P720,000 x 20% x 6/12) 72,000 720,000Depreciation per audit 592,000 3,370,000Depreciation per records 300,000Understatement 292,000

10. D11. B

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

Account balances at January 1, 2006 Debit Credit

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

Depreciation data: Depreciation method Useful life

Buildings 150% declining-balance 25 yearsMachinery and equipment Straight-line 10 yearsAutomotive equipment Sum-of-the-years-digits 4 yearsLeasehold improvements Straight-line -

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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.

Questions1. 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?

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a. P 6,160,000 b. P 6,090,000 c. P 6,048,000 d. P 5,964,000

Solution1. C

Book Value, 1/1/06 (P48,000,000 - P10,524,000) P 37,476,000 150% declining-balance rate (1/25 x 150%) x 6% Depreciation on building P 2,248,560

2. BCost of building P 48,000,000 Less: Accumulated depreciation (P10,524,000 + P 2,248,560) 12,772,560 Book value of building, 12/31/06 P 35,227,440

3. CBalance, 1/106 P 36,000,000 Less: Machine destroyed by fire 920,000 Balance P 35,080,000 Depreciation 10% 3,508,000 Machine destroyed by fire (P920,000 x 10% x 3/12) 23,000 Purchased 7/1/06 (P12,400,000 x 10% x 6/12) 620,000 Total depreciation on machinery and equipment 4,151,000

4. DInsurance recovery 620,000 Less: Book value of machine destroyed

(Cost 920,000 - Accum. dep’n (P 920,000 x 10% x 5) 460,000 Gain on recovery from insurance company 160,000

5. CBalance, 1/1/06 10,000,000 Add: depreciation for 2006 4,151,000 Total 14,151,000 Less: Machinery destroyed by fire (P920,000 x 10% x 5) 460,000 Accumulated depreciation - machinery and equip. 13,691,000

6. BDepreciation on P4,600,000 balance on 1/1/06 (given) 720,000 Less: Depreciation on car traded-in, 1/1/06 (P720,000 x 2/10) 144,000 576,000 Car purchased, 1/2/06 (P960,000 x 4/10) 384,000 Total depreciation on automotive equipment for 2006 960,000

7. CBook value of car traded-in (given) 216,000 Less: Trade-in allowance (P960,000 - P800,000) 160,000 Loss on trade-in 56,000

8. CCost of the machinery and equipment: Balance, 1/1/06 4,600,000 Car purchased, 1/2/06 960,000 Car traded in (720,000) 4,840,000 Accumulated depreciation: Balance, 1/1/06 3,384,000 Depreciation for 2006 960,000 Car traded in (P720,000 - P216,000) ( 504,000) 3,840,000 Book value of automotive equipment, 12/31/06 1,000,000

9. BCost of leasehold improvements 6,720,000 Divide by term of lease, 5/1/06 - 12/31/2012 80 mos Depreciation per month 84,000 Depreciation, 5/1 - 12/31 (P84,000 x 8 mos) 672,000

10. C Cost of leasehold improvements 6,720,000 Less: Accumulated depreciation (see No. 9) 672,000 Book value, 12/31/06 6,048,000

Problem 11You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year ended December 31, 2006. You gathered the following information pertaining to the company’s Equipment and Accumulated Depreciation accounts.

EQUIPMENT1.1.06 Balance P 446,000 9.1.06 No. 6 sold P 9,0006.1.06 No. 12 36,000 12.31.06 Balance 474,0009.1.03 Dismantling

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of No. 6 1,000 ______ P 483,000 P 483,000

ACCUMULATED DEPRECIATION – EQUIPMENT12.31.06 Balance P 271,400 1.1.06 Balance P 224,000

______ 12.31.06 2006 Dep’n 47,400 P 271,400 P 271,400

The following are the details of the entries above:

1. The company depreciates equipment at 10% per year. The oldest equipment owned is seven years old as of December 31, 2006.

2. The following adjusted balances appeared on your last year’s working papers:

Equipment P 446,000Accumulated depreciation 224,000

3. Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on September 1, 2006, for P9,000.

4. Included in charges to the Repairs Expense account was an invoice covering installation of Machine No. 12 in the amount of P2,500.

5. It is the company’s practice to take a full year’s depreciation in the year of acquisition and none in the year of disposition.

Questions1. The gain/(loss) on sale of Machine 6 is:

a. P 1,000 b. P 500 c. P (1,000) d. P (500)

2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2006 is:a. P 446,000 b. P 452,000 c. P 454,500 d. P 475,500

3. The Depreciation expense – Equipment of TRIUMPH CORPORATION at December 31, 2006 is:a. P 45,200 b. P 45,450 c. P 46,525 d. P 53,525

4. The entry to correct the sale of Machine 6 is:a. Loss on sale of equipment 1,000

Accumulated depreciation 21,000Equipment 22,000

b. Accumulated depreciation 22,500Equipment 22,000Gain on sale 500

c. Accumulated depreciation 21,500loss on sale of equipment 500

Equipment 22,000d. Accumulated depreciation 23,000

Equipment 22,000Gain on sale of equipment 1,000

5. The Depreciation Expense at December 31, 2006 is:a. Overstated by P6,125 c. Understated by P1,950

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b. Understated by P6,125 d. Overstated by P1,950

SolutionOE: Cash 9,000

Equipment 1,000 Equipment 9,000 Cash 1,000

CE: Cash 9,000 Accum. dep’n 21,000 Loss on sale 1,000

Equipment 30,000 Cash 1,000

-------------------------------------------Adj: Accum. dep’n 21,000

Loss on sale 1,000 Equipment 22,000

-------------------------------------------Adj: Equipment 2,500

Repairs expense 2,500 -------------------------------------------Adj: Accum. dep’n 1,950

Depreciation 1,950 Answer: 1. C 2. C 3. B 4. A 5. D

Problem 12Information pertaining to Eddie Vic Corporation’s property, plant and equipment for 2005 is presented below:

Account balances at January 1, 2005 Debit Credit

Land P 1,500,000Building 12,000,000Accum. depreciation-building P 2,631,000Machinery and equipment 9,000,000Accum. depreciation-Mach. and Eqpt 2,500,000Automotive Equipment 1,150,000Accum. depreciation-Automotive Eqpt 846,000

Depreciation method and useful life

Building – 150% declining balance; 25 yearsMachinery and equipment – Straight-line; 10 yearsAutomotive equipment – Sum-of-the-years’-digits; 4 yearsThe salvage value of the depreciable assets is immaterialDepreciation is computed to the nearest month.

Transactions during 2005 and other information:

On January 2, 2005, Eddie Vic purchased a new car for P350,000 cash and trade-in of a 2-year old car with a cost of P490,000 and a book value of P147,000. The new car has a cash price of P520,000; the market value of the trade-in is not known.

On April 1, 2005, a machine purchased for P230,000 on April 1, 2000, was destroyed by fire. Eddie Vic recovered P155,000 from its insurance company.

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On July 1, 2005, machinery and equipment were purchased at a total invoice cost of P2,800,000; additional costs of P50,000 for freight and P250,000 for installation were incurred.

Eddie Vic determined that the automotive equipment comprising the P1,150,000 balance at January 1, 2005, would have been depreciated at a total amount of P180,000 for the year ended December 31, 2005.

Questions1. Depreciation expense for building at December 31, 2005 is:

a. P 749,520 b. P 720,000 c. P 682,150 d. P 562,140

2. Depreciation expense for machinery and equipment at December 31, 2005 is:a. P 1,049,250 b. P 1,037,750 c. P 1,032,000 d. P 877,000

3. Depreciation expense for Automobile equipment at December 31, 2005 is:a. P 388,000 b. P 312,000 c. P 290,000 d. P 180,000

4. Total depreciation expense for 2005 is:a. P 2,047,750 b. P 2,009,900 c. P 1,978,770 d. P 1,889,890

5. Total gain on asset disposal for 2005 is:a. P 63,000 b. P 40,000 c. P 23,000 d. P 17,000

6. Total accumulated depreciation of building at December 31, 2005 is:a. P 3,380,520 b. P 3,351,000 c. P 3,313,150 d. P 3,193,140

7. Total book value of property, plant, and equipment at December 31, 2005 is:a. P 19,141,110 b. P 19,021,100 c. P 18,983,250 d. P 18,953,730

8. The property, plant and equipment at December 31, 2005 is:a. P 19,141,110 b. P 19,021,100 c. P 18,983,250 d. P 18,953,730

9. The total cost of property, plant and equipment at December 31, 2005 is:a. P 26,670,010 b. P 26,579,520 c. P 26,550,000 d. P 26,459,510

10. Total accumulated depreciation of property, plant, and equipment at December 31, 2005 is:a. P 7,648,910 b. P 7,596,270 c. P 7,506,300 d. P 7,408,890

Solution

Schedule of Accumulated Depreciation December 31, 2005Building Mach.&

EquipmentAuto. Eqpt. Total

Balance, 1.1.05 P2,631,000 P2,500,000 P846,000 P5,977,000Add depreciation for 2005 562,140 1,037,750 290,000 1,889,890

P3,193,140 P3,537,750 P1,136,000 P7,866,890Deduct acc. depr. related to Mach, destroyed by fire (5 x 10% x P230,000) 115,000 Car traded in (490,000 - 147,000) _________ _________ 343,000 458,000 Balance, 12.31.05 P3,193,140 P3,422,750 P 793,000 P7,408,890

SCHEDULE OF DEPRECIATION EXPENSE For the Year Ended December 31, 2005Building

Book value , 1/1/05 (P12,000,000 - P2,631,000) P9,369,000150% declining balance rate (100% / 25) x 1.5 x 6% Total depreciation on building P562,140

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Machinery and EquipmentBalance, 1.1.05 less machine destroyed by fire P8,770,000Depreciation x 10% 877,000Depr. on Machine destroyed by fire, 4.1.05 (P230,000 x 10% x 3/12) 5,750Depr. on machine purchased on 7.1.05 (P3,100,000 x 10% x 6/12) 155,000 Total depreciation on mach. and equipment P1,037,750

Automotive EquipmentDepreciation on P1,115,000 bal. on 1.1.05 P180,000Deduct depr. on car traded in , 1.2.05 (SYD 3rd year 2/10 x P490,000) (98,000) 82,000Depr. on car purchased , 1.2.05 (P520,000 x 4/10) 208,000 Total depreciation on automotive equipment 290,000

Total depreciation expense for 2005 P1,889,890

Gain or Loss from Disposal of Assets For the Year Ended December 31, 2005Gain on machine destroyed by fire

Insurance recovery P155,000Book value of machine destroyed (P230,000 - (5 x 10% x P230,000) 115,000 P40,000

Gain on car traded in on new car purchaseBook value of car traded in P147,000Trade-in allowed (P520,000 - P350,000) 170,000 23,000

Total gain on asset disposals for 2005 P63,000

Property, Plant and Equipment December 31, 2005 COST ACCUMULATED

DEPRECIATION BOOK VALUE

Land P 1,500,000 ------ P1,500,000Building 12,000,000 3,193,140 8,806,860Machinery and Equipment 11,870,000 3,422,750 8,447,250Automotive equipment 1,180,000 793,000 387,000 Totals P26,550,000 P7,408,890 P19,141,110Answer:1. D 2. B 3. C 4. D 5. A6. D 7. A 8. A 9. C 10. D

Problem 13RUANN Service Center is wholly owned subsidiary of RUANN Stores. The company’s function is to deliver furniture and appliances sold by the parent and to service electronics and appliances, also sold by the parent company. RUANN Stores, the parent, operates twelve retail outlets in a large metropolitan area. The service center uses three delivery trucks and fifteen service vehicles for delivering goods and for making service calls related to large appliances and electronic equipment. For small appliances and electronics, customers typically bring these to the service center for repair.

At January 1, 2006, RUANN Service center reported audited balances of P525,000 and P320,000 for “Trucks” and “Accumulated Depreciation – Trucks,” respectively. The vehicles consisted of

Three delivery trucks costing P50,000 each; and Fifteen service trucks costing P25,000 each.

Accumulated depreciation was Delivery trucks, P95,000; and Service trucks, P225,000

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The company depreciates all trucks on a straight-line basis, using a five- year life and zero salvage value. One-half year’s depreciation is taken in the year of acquisition and in the year of disposal.

During 2006, the following transactions and journal entries were completed by the company:

2/2/06: Sold one delivery truck for P2,000. the truck was fully depreciated at 12/31/07.

Cash P2,000Trucks P2,000

3/1/06: Bought one delivery truck for P60,000.Trucks P60,000

Cash P60,0003/15/06: Sold one service truck for P8,000. This truck was purchased 6/15/03 for

P25,000 and the accumulated depreciation, according to RUANN’s subsidiary ledger, at the date of sale was P12,500

Cash P8,000Trucks P8,000

7/25/06: Bought one service truck for P27,500.Truck P27,500

Cash P27,500

12/31/06: Recorded depreciation for 2006:Two delivery trucks @ P10,000 each = P20,000Fifteen service trucks @ P5,000 each = 75,000Total P95,000

Depreciation Expense – Trucks P95,000Accumulated depreciation P95,000

Questions1. The adjusted balance of Delivery Truck at December 31, 2006 is:

a. P 537,500 b. P 217,500 c. P 210,000 d. P 160,000

2. The adjusted balance of Service Truck at December 31, 2006 is:a. P 537,500 b. P 402,500 c. P 377,500 d. P 217,500

3. The Accumulated Depreciation – Delivery Truck at December 31, 2006 is:a. P 86,000 b. P 76,000 c. P 75,000 d. P 65,000

4. The Accumulated Depreciation – Service Truck at December 31, 2006 is:a. P 300,000 b. P 285,250 c. P 285,000 d. P 284,750

5. The Carrying Value of Delivery Truck at December 31, 2006 is:a. P 461,500 b. P 145,000 c. P 142,500 d. P 74,000

6. The Carrying Value of Service Truck at December 31, 2006 is:a. P 237,500 b. P 117,500 c. P 92,250 d. P 67,250

7. The Gain/Loss on Disposal of Trucks at December 31, 2006 is:a. P 10,000 b. P 8,000 c. P 2,000 d. P 0

8. The Depreciation Expense of Trucks at December 31, 2006 is:

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a. P 106,250 b. P 101,250 c. P 98,750 d. P 95,000

Solution2/2/06 OE: Cash 2,000

Delivery truck 2,000CE: Cash 2,000 AD - Del. truck 40,000 Loss on sale 8,000

Delivery truck 50,000Adj: AD - del. truck 40,000 Loss on sale 8,000

Delivery truck 48,0003/15/06 OE: Cash 8,000

Service truck 8,000CE: Cash 8,000 AD - ser. truck 15,000 Loss on sale 2,000

Service truck 25,000Adj: AD - serv. truck 15,000 Loss on sale 2,000

Service truck 17,00012/31/06Depreciation 11,250

AD - del. truck 11,000 AD - service truck 250

Del. truck Serv. truckPer book 95,000 20,000 75,000Per audit 106,250 31,000 75,250Adjustment 11,250 11,000 250

Depreciation - Delivery truckDisposed truck 5,000Undisposed truck 20,000 (2 x P10,000)Purchased during the year 6,000 (P60,000/5 x 1/2) ______Total 31,000

Depreciation - service truckDisposed truck 2,500Undisposed truck 70,000 (14 x P5,000)Purchased during the year 2,750 (P27,500/5 x 1/2) ______Total 75,250

Answer:1. D 2. C 3. A 4. B 5. D6. C 7. A 8. A

Problem 14You are engaged in the examination of the financial statements of the PAUL COMPANY and are auditing the Machinery and Equipment Account and the related depreciation accounts for the year ended December 31, 2005. Your permanent file contains the following schedules:

MACHINERY AND EQUIPMENTYear Balance 2004 2004 Balance ________ 12.31.03 Retirements Additions 12.31.041991-1994 P 800,000 P 210,000 P 590,0001995 40,000 40,000199619971998 390,000 390,0001999

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2000 530,000 530,00020012002 420,000 420,0002004 ________ _________ P 570,000 570,000

P 2,180,000 P 210,000 P 570,000 P 2,540,000

ACCUMULATED DEPRECIATIONYear Balance 2004 2004 Balance ________ 12.31.03 Retirements Additions 12.31.041991-1994 P 784,000 P 210,000 P 16,000 P 590,0001995 34,000 4,000 38,000199619971998 214,500 39,000 253,50019992000 185,500 53,000 238,50020012002 63,000 42,000 105,00020032004 ________ _________ 28,500 28,500

P 1,281,000 P 210,000 P 182,500 P 1,253,500

A transcript of the Machinery and Equipment account for 2005 follows:

MACHINERY AND EQUIPMENT

Date Item Debit Credit2005Jan. 1 Balance forwarded P 2,540,000Mar. 1 Burnham grinder 120,000May 1 Air compressor 750,000June 1 Power lawnmower 60,000June 1 Lift truck battery 32,000Aug. 1 Rockwood saw 15,000Nov. 1 Electric spot welder 450,000Nov. 1 Baking oven 280,000Dec. 1 Baking oven 32,500 __________

P 4,264,500 P 15,000 _________ 4,249,500P 4,264,500 P 4,264,500

Your examination reveals the following information:

a. The company uses a ten-year life for all machinery and equipment for depreciation purposes. Depreciation is computed by the straight-line method. Six month’s depreciation is recorded in the year of acquisition or retirement. For 2005, the company recorded depreciation of P280,000 on machinery and equipment.

b. The Burnham grinder was purchased for cash from a firm in financial distress. The chief engineer and a used machinery dealer agreed that the practically new machine was worth P180,000 in the open market.

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c. For production reasons, the new air compressor was installed in a small building that was erected in 2005 to house the machine and will also be used for general storage. The cost of the building, which has a 25-year life, was P500,000 and is included in the P750,000 voucher for the air compressor.

d. The power lawnmower was delivered to the house of the company president for personal use.

e. On June 1, the battery in a battery powered lift truck was accidentally damaged beyond repair. The damaged battery was included at a price of P60,000 in the P420,000 cost of the lift truck purchased on July 1, 2002. The company decided to rent a replacement battery rather than buy a new battery. The P32,000 expenditure is the annual rental for the battery paid in advance, net of a P4,000 allowance for the scrap value of the damaged battery that was returned to the battery company.

f. The Rockwood saw sold on August 1 had been purchased on August 1, 2001, for P150,000. The saw was in use until it was sold.

g. On September 1, the company determined that a production casting machine was no longer needed and advertised it for sale for P180,000, after determining from a used machinery dealer that its market value. The casting machine had been purchased for P500,000 on September 1, 2000.

h. The company elected to exercise the option under a lease-purchase agreement to buy the electric spot welder. The welder had been installed on February 1, 2005, at a monthly rental of P10,000.

i. On November 1, a baking oven was purchased for P1,000,000. A P280,000 down payment was made and the balance will be paid in monthly installment over a three year period. The December 1 payment included interest charges of P12,500. Legal title to the oven will not pass to the company until the payments are completed.

Questions1. The entry to record the adjustment of depreciation expense at December 31, 2005 is:

a. Depreciation expense 19,500 Accumulated depreciation 19,500

b. Depreciation expense 37,250 Accumulated depreciation 37,250

c. Accumulated deprecation 19,500Depreciation expense 19,500

d. Accumulated depreciation 37,250Depreciation expense 37,250

2. Depreciation Expense at December 31, 2005 is:a. P 260,500 b. P 262,500 c. P 280,000 d. P 342,500

3. The entry to record the adjustment in “item c” at December 31, 2005 is:a. Building 500,000

Machinery and equipment 500,000b. Machinery and equipment. 750,000

Building 750,000c. Machinery and equipment 500,000

Building 500,000d. No adjustment

4. The total Loss on disposal of equipment at December 31, 2005 is:

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a. P 38,000 b. P 70,000 c. P 93,000 d. P 108,000

5. The total rental expense in item “h” at December 31, 2005 is:a. P 45,000 b. P 90,000 c. P 125,000 d. none

6. The total interest expense at December 31, 2005 is:a. P 10,000 b. P 12,500 c. P 25,000 d. P 50,000

7. The total accumulated depreciation of the machinery and equipment at December 31, 2005 is:a. P 773,000 b. P 791,000 c. P 816,000 d. P 855,000

8. The accumulated depreciation of the machinery and equipment at December 31, 2005 is overstated by:a. P 480,500 b. P 462,500 c. P 437,500 d. P 398,500

9. The Total Machinery and Equipment (gross) at December 31, 2005 is:a. P 3,740,000 b. P 2,310,500 c. P 2,030,500 d. P 1,940,500

10. The net book value of Machinery and Equipment at December 31, 2005 is:a. P 1,518,000 b. P 1,494,500 c. P 1,503,000 d. P 2,924,000

Solution

a. Accumulated Depreciation 19,500 Depreciation Expense 19,500

Correct depreciation expense for 20051995 acquisition : 40,000 x 10% x ½ P2,0001998 “ : 390,000 x 10% 39,0002000 “ : (500,000 x 10% x ½) + (30,000 x 10%) 28,0002002 “ : (60,000 x 10% x ½) + (360,000 x 10%) 39,0002004 “ : 570,000 x 10% 57,0002005 “ : (120,000 + 250,000 + 540,000 + 1M) x 10% x ½ 95,500 P260,500Amount recorded 280,000 Overstatement P 19,500

b. No AJE necessary

c. Buildings 500,000 Machinery & Equipment 500,000

d. Receivable from Officers 60,000 Machinery & Equipment 60,000

e. 1 Accumulated Depreciation 18,000Loss on Disposal of Assets 42,000 Machinery & Equipment 60,000Cost P60,000Less acc. Depreciation (60,000 x 10% x 3) 18,000 Book value P42,000Trade in value 4,000 Loss P38,000

e.2 Equipment rental expense (7/12) 21,000Prepaid equipment rental 15,000 Machinery & Equipment 32,000 Loss on Disposal of Assets 4,000

f. Accumulated Depreciation 150,000 Machinery & Equipment 135,000 Gain on Disposal of Assets 15,000

g. Other Assets - Mach. Held for sale 180,000

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Accumulated depreciation 250,000Loss on Disposal of Assets 70,000 Machinery & Equipment 500,000BV ( P500,000 x 5/10) P250,000Estimated selling price 180,000Loss P70,000

h. Machinery & Equipment 90,000 Equipment Rental Expense 90,000Rental for the period Feb. 1 to October 31.

i. Machinery & Equipment 687,500Interest expense 12,500 Equipment contract payable 700,000

Answer:1. C 2. A 3. A 4. D 5. D6. B 7. C 8. C 9. A 10. D

Problem 15You are engaged in the examination of the financial statements of PATIENCE CORPORATION for the year ended December 31, 2005. The chief accountant of the client has prepared the accompanying analyses of the Property, Plant, and Equipment and related accumulated depreciation accounts. You have traced the beginning balances to your prior year’s audit working papers.

All plant assets are depreciated on the straight-line basis (no residual value taken into consideration) based on the following estimated service lives: building, 25 years, and all other items, 10 years. The company’s policy is to take one-half year’s depreciation on all assets additions and disposals during the year.

PATIENCE CORPORATIONAnalysis of Property, Plant, and Equipment, and

Related Accumulated Depreciation AccountsYear Ended December 31, 2005

Description Final12/31/04

AssetsAdditions

AssetsRetirements

Per ledger12/31/05

Land P 4,225,000 P 500,000 P 0 P 4,725,000Buildings 1,200,000 475,000 0 1,675,000Machinery & Equipment 3,850,000 404,000 260,000 3,994,000

P 9,275,000 P 1,379,000 P 260,000 P 10,394,000

Description Final12/31/04

AssetsAdditions

AssetsRetirements

Per ledger12/31/05

Buildings P 600,000 P 51,500 P 651,500Machinery & Equipment 1,732,500 392,200 2,124,700

P 2,332,500 P 443,700 P 2,776,200

Your examination revealed the following information:

1. On April 1, the company entered into a 10-year lease contract for a die-casting machine, with annual rentals of P50,000 payable in advance every April 1. The lease is cancelable by either party (60 day’s written notice is required), and there is no option to renew the lease or buy the equipment at the end of the lease. The estimated service life of the machine is 10-years with no residual value. The company recorded the die casting machine in the Machinery and Equipment account at P404,000, the present value at the

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date of the lease, and P20,200 applicable to the machine has been included in depreciation expense for the year.

2. The company completed the construction of a wing on the plant building on June 30. The service life of the building was not extended by this addition. The lowest constructions bid received was P475,000, the amount recorded in the Building account. Company personnel constructed the addition at a cost of P460,000 (materials, P175,000; labor, P155,000; and overhead, P130,000).

3. On August 18, P500,000 was paid for paving and fencing a portion of land owned by the company and used as a packing lot for employees. The expenditure was charged to the Land account.

4. The amount shown in the Machinery and Equipment asset retirement column represents cash received on September 5 upon disposal of a machine purchased in July, 1998 for P480,000. The chief accountant recorded depreciation expense of P35,000 on this machine in 2005.

5. Davao City government donated land and building appraised at P1,000,000 and P4,000,000, respectively, to PATIENCE CORPORATION for a plant. On September 1, the company began operating the plant. Since no costs were involved, the chief accountant made no entry for the above transaction.

Questions1. PATIENCE CORPORATION’s Land balance at December 31, 2005 is:

a. P 5,725,000 b. P 5,225,000 c. P 4,725,000 d. P 4,225,000

2. PATIENCE CORPORATION’s Building balance at December 31, 2005 is:a. P 5,690,000 b. P 5,675,000 c. P 5,660,000 d. P 5,645,000

3. PATIENCE CORPORAITON’s Machinery and Equipment balance at December 31, 2005 is:a. P 4,090,000 b. P 3,590,000 c. P 3,370,000 d. P 3,110,000

4. PATIENCE CORPORATION’s Accumulated Depreciation – Building at December 31, 2005 is:a. P 766,000 b. P 747,000 c. P 737,500 d. P 651,500

5. PATIENCE CORPORATION’s Accumulated Depreciation – Machinery and Equipment at December 31, 2005 is:a. P 1,819,900 b. P 1,788,700 c. P 1,757,500 d. P 1,752,700

6. PATIENCE CORPORATION’s Depreciation Expense – Building at December 31, 2005 is:a. P 227,000 b. P 211,500 c. P 147,000 d. P 137,500

7. PATIENCE CORPORATION’s Depreciation Expense – Machinery and Equipment at December 31, 2005 is:a. P 372,000 b. P 361,000 c. P 337,000 d. P 276,000

8. PATIENCE CORPORATION’s Depreciation Expense – Land Improvements at December 31, 2005 is:a. P 50,000 b. P 25,000 c. P 18,750 d. P 0

9. PATIENCE CORPORATION’s Net Book Value of Building at December 31, 2005 is:a. P 5,023,500 b. P 4,924,000 c. P 4,913,000 d. P 4,907,500

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10. PATIENCE CORPORATION’s Net Book Value of Machinery and Equipment at December 31, 2005 is:a. P 2,332,500 b. P 1,770,100 c. P 1,612,500 d. P 1,357,300

Solution

Adjusting Journal Entries as of December 31, 2005(1) Equipment Rental Expense (P50,000 x 9/12) 37,500

Prepaid Equipment Rental 12,500Obligations under Capital Lease 354,000 Machinery and Equipment 404,000

(2) Profit on Construction 15,000 Buildings ( 475,000 - 460,000) 15,000

(3) Land Improvements 500,000 Land 500,000

(4) Accumulated Depreciation - Mach. & Eqpt. 336,000 Machinery & Equipment 220,000 Gain on sale of machinery 116,000 P260,000 - (480,000 x 3/10) = P116,000 gain

(5) Land 1,000,000Building 4,000,000 Gain from Donation 5,000,000

(6) Depreciation Expense 95,667 Accumulated Depreciation - Buildings 95,667Depreciation Expense for 2005

1,200,000 x 4% P48,000460,000 / 12 years x ½ 19,1674,000,000 x 4% x ½ 80,000 P147,167

Amount recorded 51,500Adjustment to be made P95,667

(7) Accumulated Depreciation - Mach. & Equipment 31,200 Depreciation Expense 31,200Depreciation expense for 2005

(3,850,000 - 480,000) x 10% P337,000480,000 x 10% x ½ 24,000 P361,000

Amount recorded 392,200Adjustment to be made (P31,200)

(8) Depreciation Expense 25,000 Accumulated Depreciation - Land Improvements 25,000 (P500,000 x 10% x 6/12)

Answer:1. B 2. C 3. C 4. B 5. C6. C 7. B 8. B 9. C 10. C

Problem 16You are engaged to examine the financial statement of the Rabago Manufacturing Corporation for the year ended December 31, 2004. The following schedules for property, plant, and equipment and the related accumulated depreciation accounts have been

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prepared by your client. The opening balances agree with your prior year’s audit working papers.

Rabago Manufacturing CorporationAnalysis of Property, Plant, and Equipment and

Related Accumulated Depreciation AccountsYear Ended December 31, 2004

COST Final Per Books

12/31/03 Additions Retirements 12/31/04Land P 450,000 P 100,000 P P 550,000Buildings 2,400,000 350,000 2,750,000Machinery/Equip 2,770,000 808,000 520,000 3,526,000

P 5,620,000 P1,258,000 P 520,000 P 6,826,000

ACCUMULATED DEPRECIATION Final Per Books

12/31/03 Additions Retirements 12/31/04

Buildings P 1,200,000 P 103,000 P 1,303,000Machinery/Equip 546,500 313,600 860,100

P 1,746,200 P 416,600 P 2,163,100

Further investigation revealed the following:

a. All equipment is depreciated on the straight-line basis (with no salvage value) based on the following estimated lives: Building – 25 years, all other items 10 years.

b. The company entered into a 10-year lease contract for a derrick machine with annual rental of P100,000, payable in advance every April 1. The parties to the contract stipulated that a 30-day written notice is required to cancel the lease. Estimated useful life is 10 years. The derrick was recorded under machinery and equipment at P808,000 and P60,000 applicable to the machine was included in the depreciation expense during the year.

c. The company finished construction of a new building wing in June 30. The useful life of the main building was not prolonged. The lowest construction bid was P350,000 which was the amount recorded. Company personnel constructed the building at a total cost of P330,000.

d. P100,000 was paid for the construction of a parking lot which was completed on July 1, 2004. The expenditure was charged to land.

e. The P520,000 equipment under retirement column represent cash received on October 1, 2004 for a machinery bought in October 1, 2000 for P960,000. The bookkeeper recorded depreciation expense of P72,000 on this machine in 2004.

f. Mr. Rabago, the company’s president donated land and building appraised at P200,000 and P400,000 respectively to the company to be used as plant site. The company began operating the plant on September 30, 2004. Since no money was involved, the bookkeeper did not make any entry for the above transaction.

Questions1. The balance of rent expense as of December 31, 2004 is:

a. P 0 b. P 25,000 c. P 75,000 d. P 100,000

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2. The balance of prepaid rent as of December 31, 2004 is:a. P 0 b. P 25,000 c. P 75,000 d. P 100,000

3. The life of the building wing isa. 25 years b. 11 years c. 12 years d. 13 years

4. The carrying value of the building as of December 31, 2004 isa. P 1,447,000 b. P 1,816,250 c. P 1,820,250 d. P 1,827,400

5. The value of the land account for balance sheet presentation as of December 31, 2004 is:a. P 450,000 b. P 545,000 c. P 650,000 d. P 750,000

6. The loss on the disposal of the machinery sold for P520,000 isa. P 0 b. P 30,000 c. P 56,000 d. P 152,000

Solution1. C

The lease is considered as operating lease since it is cancelable.Equipment rental expense - P100,000 x 9/12 = P P75,000

2. BPrepaid rental expense - P100,000 x 3/12 = P 25,000

3. CAge of the building as of December 31, 2003

P1,200,000/P2,400,000 = 50% x 25 years = 12.5 yearsExpired life for the current year = .5 yearRemaining life of the building wing = 12.5 - .5 = 12 years

4. BBuilding per schedule 2,400,000Accumulated depreciation (1,296,000) 1,104,000Building wing 330,000Accumulated depreciation(P330,000/12 x 6/12) ( 13,750) 316,250Building - donation 400,000Accumulated depreciation(P400,000/25 x 3/12) ( 4,000) 396,000Total carrying value 1,816,250

5. CLand per schedule 450,000Land - donation 200,000

650,0006. C

Cost of the machine sold 960,000Accumulated depreciation(P960,000/10 x 4) 384,000Book value 576,000Proceeds from sale 520,000Loss on sale 56,000

Problem 17On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of Crame Corporation. Plant assets consists of:

Land P 100,000Leasehold improvements 190,000Equipment 450,000Total per WBS P 740,000

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The land was acquired on October 1, 2003, at a cost of P500,000. Crame Corporation made a cash downpayment of P100,000 and signed a 18% mortgage note payable in four equal annual installments of P100,000. The first interest and principal payment is due on October 1, 2004. No interest has been accrued as of December 31, 2003.

In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which was charged to operating expenses.

You ascertained that due to obsolescence, computer equipment with an original cost of P80,000 and accumulated depreciation of P16,000 at January 1, 2003 had suffered a permanent impairment in value and, as a result, should have a carrying value of only P40,000 at the beginning of the year. In addition, the remaining useful life of the equipment was reduced from 4 to 2 years. No entry has yet been made in the books. For 2003, the company recorded depreciation of P16,000 for the said equipment.

At present, Crame Corporation’s office and warehouse are located in a rented building. The rental contract was signed on July 1, 2003 and has a term of five (5) years renewable for another five (5) years. On October 1, 2003, Crame Corporation spent P190,000 to install walls and fixtures. The leasehold improvements have a useful life of five years. No amortization has been booked as of December 31, 2003.

Questions1. The adjusted cost of land amounted to:

a. P 528,000 b. P 510,000 c. P 500,000 d. P 410,000

2. The carrying value of leasehold improvements as of December 31, 2003 amounted to:a. P 190,000 b. P 183,000 c. P 180,500 d. P 180,000

3. Audit adjustments will increase depreciation/amortization expense by:a. P 38,000 b. P 24,000 c. P 14,000 d. P 13,500

4. Loss due to impairment in value amounted to:a. P 30,000 b. P 28,000 c. P 24,000 d. P 20,000

Solution1. B

Cost of the land 500,000Add: tilting cost 10,000Total 510,000

2. CLand improvement 190,000Less: Accumulated depreciation 10,000 (P190,000/57 mos. x 3 mos.)Carrying value 180,000

3. CDepreciation - leasehold improvement 10,000Depreciation - Equipment (P40,000/2) 20,000Total per audit 30,000Total per book 16,000Understatement of depreciation 14,000

4. CNet book value 64,000Less: CV after impairment 40,000Loss on impairment 24,000

Problem 18On January 1, 2003, BLESSING COMPANY signs a 10-year noncancelable lease agreement to lease a storage building from GRACE COMPANY. The following information pertains to this lease agreement:

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a. The agreement requires equal rental payments of P720,000 beginning on January 1, 2003.

b. The fair value of the building on January 1, 2003, is P4,400,000.

c. The building has an estimated economic life of 12 years, with an unguaranteed residual value of P100,000. BLESSING COMPANY depreciates similar buildings on the straight-line method.

d. The lease is nonrevnewable. At the termination of the lease, the building reverts to the lessor.

e. BLESSING COMPANY’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by BLESSING COMPANY.

f. The yearly rental payment includes P24,705.10 of executory costs related to taxes on the property.

The following present value factors are for 10 periods at 12% annual interest rate:

Present value of an annuity due of 1 6.32825Present value of an ordinary annuity of 1 5.65022Present value of 1 0.32197

Questions1. The minimum annual lease payment is:

a. P 744,705.10 b. P 720,000.00 c. P 695,294.90 d. P 0

2. The present value of minimum lease payments is:a. P 0 b. P 4,400,000 c. P 4,207,747.65 d. P 3,928,569.15

3. The interest expense at December 31, 2003 is:a. P 0 b. P 414,476.98 c. P 444,564,61 d. P 528,000.00

4. The depreciation expense at December 31, 2003 is:a. P 0 b. P 420,774.76 c. P 440,000.00 d. P 471,268.00

5. The Book Value of Leased Building at December 31, 2004 is:a. P 3,520,000.00 b. P 3,786,972.89 c. P 3,979,225.24 d. P 3,960,000.00

Solution1. C

Annual payment 720,000.00Less: Executory costs 24,705.10Minimum annual lease payment 695,294.90

2. B Present value of minimum lease payment - P695,294.90 x 6.32825 = P 4,400,0003. C

Min. Annual Payment__ Interest expense Carrying Value 4,400,000.00

1/1/03 695,294.90 - 3,704,705.1012/1/03 695,294.90 444,564.61 3,453,974.8112/1/04 695,294.90 414,476.98 3,173,156.89

4. C P4,400,000/10 years = P 440,0005. A Cost P 4,400,000

Accumulated depreciation 880,000Net book value P 3,520,000

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Problem 19On January 1, 2003, the Prince Gabriel Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on June 30, 2004.

Expenditures on the project were as follows:

January 3, 2003 P 500,000March 31, 2003 600,000June 30, 2003 800,000October 31, 2003 600,000January 31, 2004 300,000March 31, 2004 500,000May 31, 2004 600,000

On January 3, 2003, the company obtained a P2 million construction loan with a 10% interest rate. The loan was outstanding all of 2003 and 2004. The company’s other interest-bearing debt included a long-term note of P5,000,000 with an 8% interest rate, and a mortgage of P3,000,000 on another building with an interest rate of 6%. Both debts were outstanding during all of 2003 and 2004. The company’s fiscal year end is December 31.

Questions1. The interest capitalized at the end of December 31, 2003 is:

a. P 113,100 b. P 145,000 c. P 150,000 d. P 200,000

2. The interest capitalized at the end of December 31, 2004 is:a. P 145,132 b. P 159,632 c. P 290,263 d. P 319,263

3. The total cost of the Building at December 31, 2004 is:a. P 3,535,132 b. P 4,190,131 c. P 4,480,263 d. P 4,535,263

4. The total interest expense at the end of December 31, 2003 is:a. P 780,000 b. P 635,000 c. P 630,000 d. P 560,000

5. The total interest expense at the end of December 31, 2004 is:a. P 460,737 b. P 489,737 c. P 620,368 d. P 634,868

Solution1. B

Jan. 3 500,000 x 12/12 = 500,000March 31 600,000 x 9/12 = 450,000June 30 800,000 x 6/12 = 400,000 AAEOct 31 600,000 x 2/12 = 100,000 1,450,000 x 10% = P145,000 (Lower than the actual cost of P580,000)

2. ABeg bal. 2,500,000 x 6/6 = 2,500,000

145,000 x 6/6 = 145,000Jan. 31 300,000 x 5/6 = 250,000Mar 31 500,000 x 3/6 = 250,000May 31 600,000 x 1/6 = 100,000 3,245,000 AAE

Specific borrowing - P2,000,000 x 10% x 6/12 = 100,000General borrowing - 1,245,000 x 7.25% x 6/12 = 45,132Interest to be capitalized 145,132 (Lower than the actual cost

of P580,000)Average rate (general)

5,000,000 x 8% = P 400,0003,000,000 x 6% = 180,000

580,000 / 8,000,000 = 7.25%

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3. BTotal cost in the construction - P 3,900,000Interest capitalized - 290,132Total cost – building - P 4,190,132

4. BInterest expense – 2003

Specific borrowing P 2,000,000 x 10% = 200,000General borrowing P 5,000,000 x 8% = 400,000

P 3,000,000 x 6% = 180,000Less: Interest capitalized = (145,000)

Total interest expense – 2003 = 635,0005. D

Interest expense – 2004Specific borrowing P 2,000,000 x 10% = 200,000General borrowing P 5,000,000 x 8% = 400,000

P 3,000,000 x 6% = 180,000Less: Interest capitalized = (145,132)

Total interest expense – 2003 = 634,868

Problem 20In connection with your audit of Bing-Bong Corporation, you noted that on January 2, 2002, the corporation purchased a building site for its proposed research and development laboratory at a cost of P2,400,000. Construction of the building was started in 2002. The building was completed on December 31, 2003, at a cost of P11,200,000 and was placed in service on January 1, 2004. The estimated useful life of the building for depreciation purposes was 20 years; the straight-line method of depreciation was to be employed and there was no estimated salvage value.

Management estimates that about 50% of the projects of the research and development group will result in long-term benefits to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2004 appears below.

No. of Salaries and Other expenses Projects employees benefits (excluding dep’n.)

Completed projects with long-term benefits 60 3,600,000 2,000,000Abandoned projects that benefit the current year 40 2,600,000 600,000Projects in process – results indeterminate 20 1,600,000 480,000

Upon the recommendation of the research and development group, Bing-Bong Corporation acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was acquired on March 31, 2003, and has an economic life of 10 years.

Questions1. Carrying value of the patent as of December 31, 2004 is:

a. P 3,600,000 b. P 3,200,000 c. P 2,880,000 d. P 2,640,000

2. Carrying value of the building as of December 31, 2004 is:a. P 5,320,000 b. P 10,640,000 c. P 10,080,000 d. P 0

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3. Carrying value of the land as of December 31, 2004 is:a. P 1,200,000 b. P 2,400,000 c. P 2,160,000 d. P 0

4. Research and development expense for 2004 is:a. P 5,280,000 b. P 10,880,000 c. P 11,440,000 d. P 11,760,000

Solution1. D

Cost of patent - P 3,200,000Amortization – 2003 - 240,000Amortization – 2004 - 320,000Net carrying value - P 2,640,000

2. BCost of building - P 11,200,000Depreciation – 2004 - 560,000Net carrying value - P 10,640,000

3. B cost of the land – P 2,400,0004. C

Salaries and benefits - P 7,800,000Other expenses - 3,080,000Depreciation - 560,000Total R and D Cost - P11,440,000

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