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NEW ERA UNIVERSITY

COLLEGE OF BUSINESS & ACCOUNTANCY
AUDITING PROBLEMS

AUDIT OF PROPERTY, PLANT & EQUIPMENT AP 005
PROBLEMS RSPADERES
INSTRUCTION: ANSWER THE FOLLOWING QUESTIONS
PROBLEM 1
In April 5, 2012, ABS Corporation acquired a land and an old building in exchange for P4,800,000
cash and 50,000 shares of its own ordinary shares with a par value of P30 per share. The
Companys ordinary shares were selling at P95 per share when the acquisition was made. The
transaction was recorded by the company as:
Land (assessed value) 5,500,000
Building (assessed value) 4,500,000
Cash 4,800,000
Ordinary shares 1,500,000
Share premium 3,700,000
Moreover, the Company incurred the following costs in relation to the acquisition:
Legal fees to complete the transaction 400,000
Property taxes for three calendar years including
the current year 1,800,000
Payments to tenants of old building 300,000
Cost of demolishing the old building 660,000
Salvage proceeds from the demolition 60,000
All additional costs were charged to operation during the year including the allocated value of the
building which was charged to a loss on the retirement of the asset. The salvage proceeds from the
demolition was credited to other income

REQUIRED:
1) What is the correct cost of the land?
2) What is the correct cost of the building?
3) What is the net adjustment to the share premium account?


PROBLEM 2
China Manufacturing Company had several transactions during 2011 and 2012 concerning plant
assets. Several of these transactions are described below, followed by the entry or entries made by
the Companys accountant
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Equipment. Several used items were acquired on February 1, 2011, by issuing a P100,000 non-
interest bearing note. The note is due one year from the date of issuance. No market value of the
note or the equipment is available. Chinas most recent borrowing rate was 8%
February 1, 2011 Equipment 100,000
Notes payable 100,000

December 31, 2011 Depreciation expense 10,000
Accumulated depreciation equipt 10,000

Buildings. A building was acquired on June 1, 2011 by issuing 100,000 shares of the Companys
P5 par value common stock. The common stock is not widely traded, therefore no market price is
availabl. The building was appraised on the transaction date at P650,000.
June 1, 2011 Building 500,000
Common stock 500,000

Dec 31, 2011 Depreciation expense 20,000
Accumulated depreciaton- building 20,000
Inventory/ Fixtures. Inventory and displayed fixtures were acquired for P125,000 cash on April
1, 2012 from a competitor who was liquidating her business. The estimated value of the inventory
was P85,000 and the value of the fixtures was P55,000.

April 1, 2012 Inventory 85,000
Display fixtures 55,000
Cash 125,000
Gain on acquisition 15,000

Land. Land was donated to China by the city of Davao in September 2012 as an inducement to
build a facility there. Plans call for construction at an undetermined future date. The land was
appraised at P48,000. NO entry was made.

Machinery. Machinery was acquired an exchange for similar equipment on October 12 and were
appraised at P45,000 on the date of exchange. China received machinery valued at P40,000 and
P5,000 in cash in the transaction.

October 12, 2011 Machinery 40,000
Cash 5,000
Accum. Depreciation- machinery 16,000
Machinery 52,500
Gain on exchange of machinery 8,500

December 31, 2011 Depreciation expense 4,000
Accumulated depreciation- machinery 4,000
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Additional information
China uses straight line depreciation, applied to all assets as follows:
- A full year-depreciation taken in the year of acquisition and no depreciation taken on the year of
disposal
- Estimated life: 25 years for buildings; 10 years on all other assets (no salvage values are
assumed)

REQUIRED:
1) Depreciation expense
2) Land
3) Depreciable fixed assets/ Carrying value


PROBLEM 3
Korea Corporations schedule of depreciable assets at December 31, 2011 was as follows:

ASSET COST ACCUM. DEPR ACQUISITION YEAR SALVAGE VALUE
A 100,000 64,000 2010 20,000
B 55,000 36,000 2009 10,000
C 70,000 33,600 2009 14,000

Korea takes a full years depreciation expense in the year of an assets acquisition and no
depreciation in the year of an assets disposition. The estimated useful life of each depreciable
asset is five years.

REQUIRED
1) Korea depreciates asset A using the double-declining balance method. How much depreciation
expense should Korea record in 2012 for asset A?

2) Using the same depreciation method as used in 2009, 2010, 2011, how much depreciation
expense should Korea record in 2012 for asset B?

3) Korea depreciates asset C using the straight-line method. On June 30, 2012, Korea sold asset C
for 28,000 cash. How much gain or loss should Korea record in 2012 on the disposal of asset C?

PROBLEM 4
The Japan Company purchased an ELF truck on January 2, 2005 for P500,000. The truck was being
depreciated on a straight-line method over an estimated useful life of 10 years with no salvage
value. At the beginning of 2012, the Company paid 125,000 to overhaul the truck. As a result of
the improvement, the company estimated that the useful life of the truck would extend to an
additional five years.
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REQUIRED.
1) What should be the depreciation expense recorded for this machine in 2012?
2) How much is the accumulated depreciation as of December 31, 2012.

PROBLEM 5
Russia, a manufacturer of steel products, began operations in October 1, 2009. The accounting
department of Russia has started the fixed asset and depreciation schedule presented below. You
have been asked to assist in completing the schedule. In addition to ascertaining that the data
already on the schedule are correct, you have obtained the following information from the
Companys records and personnel:

- Depreciation is computed from the first of the month of acquisition to the first of the month of
disposition
- Land A and Building A were acquired from a predecessor corporation. Russia paid P8,200,000 for
the land and building together. At the time of acquisition, the land had an appraised value of
P900,000 and the building had an appraised value of P8,100,000.

- Land B was acquired on October 2, 2010, in exchange for 2,500 newly issued shares of Russias
common stock. At the date of acquisition, the stock had a par value of P50 per share. Also on that
date, the land had a fair value of P750,000. During October 2010, Russia Paid P160,000 to
demolish the existing building on this land so it could construct a new building.
- Construction of Building B on the newly acquired land began on October 1, 2011. By September
30, 2012,Russia had paid P3,200,000 of the estimated total construction cost of P4,500,000. It is
estimated that the building will be completed and occupied by July 2013.
- Certain equipment was donated to the corporation by a local university. An independent appraisal
of the equipment when donated placed the fair market value of P300,000 and the salvage value at
P30,000.
- Machinery As total cost of P1,649,000 includes installation expnse of P6,000 and normal repairs
and maintenance of P149,000. Salvage value is estimated at P60,000. Machinery A was sold on
February 1, 2012.


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Assets
Acquisition
date
Cost
Salvag
e value
Depreciatio
n method
Estimated
life in
years
Depreciation
expense for the
year ended
2011 2012
Land A 10/1/2010 ? N/A N/A N/A N/A N/A
Building A 10/1/2010 ? 400,000 Straight line ? 174,500
Land B 10/2/2010 ? N/A N/A N/A N/A N/A
Building B
Under
construction
3,200,00
0 to date
Straight line 30 ?
Donated
equipment
10/2/2012
? 30,000 150% DB 10 ? ?
Machinery A 10/2/2010 ? 60,000 SYD 8 ? ?

REQUIRED:
1) Cost of Land A
2) Cost of Building A
3) Estimated life in years of Building A
4) Depreciation expense Building A, for the year ended September 30, 2012
5) Cost of Land B
6) Depreciation expense Building B, for the year ended September 30, 2012
7) Cost of donated equipment
8) Depreciation expense- Donated equipment, for the year ended September 30, 2012
9) Depreciation expense- Machinery A, for the year ended September 30, 2012\

PROBLEM 6
Six situations are given below concerning a plant asset currently used in operations

CASE Carrying value Value in Use FMV less cost to sell
1 120,000 180,000 135,000
2 135,000 195,000 120,000
3 150,000 180,000 255,000
4 180,000 120,000 90,000
5 210,000 165,000 195,000
6 225,000 195,000 255,000

REQUIRED: Which among these, if any, would require the recognition of impairment loss and
determine the amount of loss?



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PROBLEM 7
Lex Corporation is testing group of assets that comprise one cash generating unit for possible
impairment. The assets acquired in January 1, 2005 have an original aggregate cost of P609,000
purchased 3 years ago and depreciated using the straight-line method at a total life of eight years
with a residual value of P49,000. The following are the facts about the future expected cash inflows
and outflows at December

Year Revenues Costs excluding depreciation
2008 225,000 84,000
2009 240,000 126,000
2010 195,000 165,000
2011 130,000 115,000
2012 80,000 70,000

The net selling price of this cash generating unit is calculated at P253,500. The prevailing after tax
discount rate is 12% while the prevailing pre-tax discount rate is 10%

REQUIRED:
1) What is the carrying value of the machines before impairment test?
2) What is the value in use of the machines?
3) What is the recoverable value of the machine?
4) How much is the impairment loss to be recognized?
5) IF fair value less cost to sell is P300,000, what is the recoverable amount?
6) Based on number 5, what is the impairment loss?


PROBLEM 8
On December 31, 2009, SEM Company subjected to impairment test a piece of equipment. Data
pertinent to the equipment as of December 31, 2009 follow:

Original cost P2,400,000
Adjusted accumulated depreciation 600,000
Selling price 1,400,000
Estimated cost to make the sale 200,000
Value in use 1,100,000
Remaining useful life 6 years
Method of depreciation Straight line

On December 31, 2011, the asset is found to have a recoverable amount of P1,300,000

REQUIRED
1) How much is the loss on impairment in 2009?
2) How much is the depreciation expense recognized in 2010?
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3) How much gain in recovery is recognized in 2011?
4) How much is the depreciation expense recognized in 2012 under the cost model?
5) How much is the depreciation expense recognized in 2012 under the revaluation model?


PROBLEM 9
Your audit of Agimat Corporation for the year 2012 disclosed the following property dispositions:

Cost Acc. Dep. Proceeds Fair value
Land 4,800,000 - 3,720,000 3,720,000
Building 1,800,000 - 288,000 -
Warehouse 8,400,000 1,320,000 8,880,000 8,880,000
Machine 960,000 384,000 108,000 864,000
Delivery truck 1,200,000 570,000 564,000 564,000

Land
On January 15, a condemnation award was received as consideration for the forced sale of the
companys land and building, which stood in the path of a new highway.

Building
On March 12, land and building were purchased at a total cost of P6,000,000, of which 30% was
allocated to the building on the corporate books. The real estate was acquired with the intention of
demolishing the building, and this was accomplished during the month of august. Cash proceeds
received in September represent the net proceeds from demolition of the building.

Warehouse
On July 4, the warehouse was destroyed by fire. The warehouse was purchased on January 2,
2006. On December 12, the insurance proceeds and other funds were used to purchase a
replacement warehouse at a cost of P7,200,000/

Machine
On December 15, the machine was exchange for a machine having a fair value of P756,000 and
cash of P108,000 was received.

Delivery truck
On November 13, the delivery truck was sold to a used car dealer.

REQUIRED: Compute for the following:
1) Land
2) Building
3) Warehouse
4) Machine
5) Delivery truck

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PROBLEM 10
MIL Company whose financial year end is December 31, purchased new manufacturing equipment
on April 1, 2004. The equipment has a special component that requires replacement before the end
of the equipments useful life. This equipment was initially recognized in two accounts: one is for
the main unit and the other for the special component. MIL uses the straight line method of
depreciation for all of its manufacturing equipment. Depreciation is recorded to the nearest month,
residual values being disregarded.

On April 1, 2010, the special component is removed from the main unit and is replaced with a
similar component. This component is expecte3d to have a residual value of approximately 25% of
cost at the end of the main units useful life. Because of its materiality, the residual value will be
considered in calculating depreciation. Specific information about the equipment is as follows:

Main Unit
Purchase price in 2014 P187,200
Residual value 13,200
Estimated useful life 10 years

Component 1
Purchase price in 2014 P30,000
Residual value 750
Estimated useful life 6 years

Component 2
Purchase price P45,750

REQUIRED: Compute for the depreciation charge for the year
1) 2004
2) 2010
3) 2011


PROBLEM 11
On January 1, 2008, EBJ Corporation acquired a factory equipment at a cost of P450,000. The
equipment is being depreciated using the straight line method over its projected useful life of 10
years with P50,000 salvage value.

On December 31, 2009, ad determination was made that the future net cash flows expected from
continued use of the asset shall be P40,000 per year. The asset also had a fair value less cost to
sell of P220,000 on the same date. You ascertained that this was properly computed and that
recognition of impairment was warranted. (The prevailing interest rate is 10%)
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On December 31, 2011, the assets, replacement cost was determined to be P550,000 with a total
life of 12 years from the date of the acquisition. You also ascertained that this valuation is
reasonable in the circumstance.
You have been asked to assist the companys accountant in the application of PAS 36, the standard
on the impairment of assets

REQUIRED:
1) What is the recoverable value of the asset on December 31, 2009?
2) How much impairment loss should be recognized on December 31, 2009?
3) What is the assets carrying amount on December 31, 2011, before valuation?
4) How much impairment recovery should be reported in the 2011 income statement?
5) What is the depreciation expense in 2012, under cost method?
6) What is the depreciation expense in 2012, under the revaluation method?
7) What is the balance of any revaluation surplus at the end of 2012, under piecemeal realization?

PROBLEM 12
Australia company purchased a machine under a deferred payment contract on December 31, 2009.
Under the terms of the contract, Australia is required to make three annual payments of P140,000
each beginning December 31, 2010. The appropriate interest rate is 8%. What is the purchase
price of the machine?

PROBLEM 13
A plant asset has a cost of P24,000, a salvage value of P6,000 and a three year life. If depreciation
in the third year amounted to P3,000, what depreciation method was used?

PROBLEM 14
Various equipment used by RAM Co. in its operations are either purchased from dealers or self-
constructed. The following items for two different types of equipment were recorded during the
calendar year 2012.

Manufacturing equipment (self constructed)
Materials and purchased parts at gross invoice price
(RAM Failed to take the 2% cash discount) P300,000
Imputed interest on funds used during contruction (stock financing) 21,000
Labor costs 285,000
Overhead costs (fixed P30,000, variable- P45,000) 75,000
Gain on self construction 45,000
Installation cost 6,600

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Store Equipment
Cash paid for equipment P105,000
Freight and insurance cost while in transit 2,000
Cost of moving equipment into place at store 3,100
Wage cost for technicians to test equipment 4,000
Insurance premium paid during first year of operation on this equipment 1,500
Special plumbing furnitures required for this equipment 8,000
Repair cost incurred in first year of operations related to this equipment 1,300

REQUIRED:
1) WhAt is the total cost of the self-constructed equipment?
2) What is the total cost of the store equipment purchased?

PROBLEM 15
On January 2, 2011 Wedding Corporation acquired a tract of land with a building erected on it for
P1,200,000. In addition, Wedding paid a real estate brokers commission of P72,000, legal fees of
P12,2000 and a title guarantee insurance of P36,000. The closing statement indicated that the land
value was P1,000,000. Shortly after the acquisition, the building was razed at a cost of P130,000.

Wedding entered into a P6,000,000 fixed-price contract with TD contractors, inc. on March 2, 2011
for the construction of an office building on the land purchased. The building was completed and
occupied on September 30, 2012. Additional costs were incurred as follows:
Plans, specifications and blueprints P24,000
Excavation costs 20,000
Architects fees for design and supervision 190,000
The company estimates that the building will have a 40-year useful life from the date of completion
and decides to use the 150% declining balance depreciation method.
To finance the construction cost, Wedding borrowed P6,000,000 on March 2, 2011. The loan is
payable in 10 annual installments of P600,000 plus interest at the rate of 14%. The contractors
average amount of accumulated building construction expenditures were as follows:
For the period March 2 to December 31, 2011 1,800,000
For the period January 1 to September 30, 2012 4,600,000

REQUIRED:
1) What is the correct value of the land?
2) How much is the total capitalized borrowing cost?
3) What is the correct depreciation expense on the building in 2012?
4) What is the carrying value of the building as of December 31, 2012?

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PROBLEM 16
On January 1, 2009, EMDL corporation contracted with RNB Construction Company to construct a
building for P40,000,000 on land that EMDL purchased several years ago. The contract provides
that EMDL is to make five payments in 2009, with the last payment scheduled for the date of
completion. Th building was completed on December 31, 2009. EMDL made the following
payments during 2009:

January 1 4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000
Total P40,000,000
EMDL had the following debt outstanding at December 31, 2009:

a. A12%, 4-year note dated January 1, 2009 with interest compounded
quarterly. Both principal and interest are payable on December 31,
2012.This loan relates specifically to the building project P17,000,000

b. A 10% 10-year note dated December 31, 2005, with simple
interest; interest payable annually on December 31 12,000,000

c. A 12%, 5-year note dated December 31, 2007, with simple
interest, payable annually on December 31 14,000,000

REQUIRED:
1) The amount of the interest to be capitalized during 2009
2) The amount of the interest that would be expensed for 2009

PROBLEM 17
RAM Corporation purchased a machinery on January 1, 2007 for P5,000,000. The same had an
expected useful life of 5 years. Straight line depreciation is in place for similar items. On January 1,
2008, the asset is appraised as having a sound value of P4,500,000. On January 1, 2010, the asset
is appraised at a sound value of P750,000.
REQUIRED:
1) How much was credited to the revaluation surplus as a result of the revaluation in 2008?
2) What is the correct depreciation to be recognized in 2008?
3) How much loss on impairment should be recognized on January 1, 2010?

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