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VII-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

PROBLEM NO.1-Cost of land, land improvements and building

Aliaga Corporation was incorporated on January 2, 2007. The following items relate to the
Aliaga’s property and equipment transactions.

Cost of land, which included an old apartment building


appraised at ₱ 300,000 ₱ 3,000,000

Apartment building mortage assumed, including related


interest due at the time of purchase 80,000

Deliquent propert taxes assumed by Aliaga 30,000

Payments to tenants to vacate the apartment building 20,000

Cost of razing the apartment building 40,000

Proceeds of sale of salvaged materials 10,000

Architects fee for new building 60,000

Building permit for new construction 40,000

Fee for title search 25,000

Survey before construction for new building 20,000

Excavation before construction of new building 100,000

Payment to building contractor 10,000,000

Assessment by city for drainage project 15,000

Cost of grading and levelling 50,000

Temporary quarters for construction crew 80,000

Temporary building to house tools and materials 50,000


Cost of changes during construction to make new
building more energy efficient 90,000

Interest cost on specific borrowing incurred during construction 360,000


Payment of medical bills of employees accidentally injured
while inspecting building construction 18,000

Cost of paying driveway and parking lot 60,000

Cost of installing lights in parking lot 12,000

Premium for insurance on building during construction 30,000


Cost of open house party to celebrate opening
of new building 50,000

Cost of windows broken by vandals distracted by the


celebration 12,000

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Cost of land

a. ₱ 2,980,000
b. ₱ 3,270,000
c. ₱ 3,185,000
d. ₱ 3,205,000

2. Cost of building

a. ₱ 10,810,000
b. ₱ 10,895,000
c. ₱ 10,875,000
d. ₱ 11,110,000

3. Cost of land improvements

a. ₱ 12,000
b. ₱ 72,000
c. ₱ 122,000
d. ₱ 0

4. Amount that should be expensed when incurred

a. ₱ 80,000
b. ₱ 110,000
c. ₱ 62,000
d. ₱ 50,000

5. Total depreciable property and equipment

a. ₱ 11,182,000
b. ₱ 10,967,000
c. ₱ 10,947,500
d. ₱ 10,882,000

PROBLEM NO.2- Cost of machinery

The following items relate to the acquisition of a new machine by Bongabon Corporation in
2007:

Invoice price of machinery ₱ 2,000,000

Cash discount not taken 40,000


Freight on new machine 10,000

Cost of removing the old machine 12,000

Loss on disposal of old machine 150,000

Gratuity paid to operator of old machine who


was laid off 70,000

Installation cost of new machine 60,000

Repair cost of new machine damaged in the


process of installation 8,000

Testing cost before machine was put into regular operation 15,000

Salaries of the engineer for the duration of the trial run 40,000

Operating cost during first month of regular use 250,000

Cash allowance granted because the new machine


proved to be of inferior quality 100,000

QUESTION:

How much should be recognized as cost of the new machine?

a. ₱ 1,985,000
b. ₱ 1,993,000
c. ₱ 1,930,000
d. ₱ 2,025,000

PROBLEM NO. 3- Cost of various property, plant and equipment

The property, plant and equipment section of Zaragoza Corporation’s balance sheet at
December 31, 2006 included the following items:

Land ₱2,100,000
Land improvements 560,000
Buildings 3,600,000
Machinery and equipment 6,600,000

During 2007 the following data wereavailable to you upon your analysis of accounts:

Cash paid on purchase of land ₱10,000,000


Mortage assumed on the land bought, including
interest at 16% 16,000,000
Realtor’s commission 1,200,000
Legal fees, realty taxes and documentation expenses 200,000
Amount paid to relocate person squatting on property 400,000
Cost tearing down an old building on the land 300,000
Amount recovered from the salvage of
the building demolished 200,000
Cost of fencing the property 440,000
Amount paid to a contractor for the building erected 8,000,000
Building permit fees 50,000
Excavation expenses 250,000
Architects fees 100,000
Interest that would have been earned had the
money used during the period of construction
been invested in the money market 600,000
Invoice cost of machinery acquired 8,000,000
Freight, unloading and delivery charges 240,000
Customs duties and other charges 560,000
Allowances, hotel accomodations, etc., paid
foreign technicians during installation and test
run of machines 1,600,000
Royalty payment on machines purchased (based
on units produced and sold) 480,000

QUESTIONS:

Based on the above and the result of your audit, compute for the following as of December
31, 2007:

1. Land

a. ₱ 30,000,000
b. ₱ 14,000,000
c. ₱ 29,900,000
d. ₱ 29,600,000

2. Land improvements

a. ₱ 1,300,000
b. ₱ 1,000,000
c. ₱ 1,250,000
d. ₱ 560,000

3. Building

a. ₱ 12,300,000
b. ₱ 11,750,000
c. ₱ 12,000,000
d. ₱ 11,700,000

4. Machinery and equipment

a. ₱ 14,840,000
b. ₱ 16,440,000
c. ₱ 15,400,000
d. ₱ 17,000,000
PROBLEM NO.4-Acquisition of property, land and equipment.

In connection with your audit of Cuyapo Company’s financial statements for the year 2007,
you noted the following transactions affecting the property and equipment items of the
following:

Jan 1 Purchased real property for ₱5,026,000, which included a charge of ₱146,000
representing property tax for 2007 that had been prepaid by the vendor; 20%
of the purchase price is deemed applicable to land and the balance to
buildings. A mortage of ₱ 3,000,000 was assumed by Cuyapo on the
purchase. Cash was paid for the balance.

Jan. 15 Previous owner had failed to take care of normal maintenance and
repair requirements on the buildings, necessitating current reconditioning at a
cost of ₱236,800.

Feb. 15 Demolished garages in the rear of the building, ₱36,000 being recovered on
the lumber salvage. The company proceed to construct a warehouse. The cost
of such warehouse was ₱ 540,800, which wa ₱ 90,000 less than the average
bids made on the construction by independent contractors. Upon completion
of construction, city inspectors orderes extensive modofication to the building
as a result of failure on the part of the company with building safety code.
Such modifications, which could have been avoided, cost ₱ 76,800.

Mar. 1 The company exchanged its own stock with a fair value of ₱ 320,000
(par ₱24,000) for a patent nd a new equipment. The equipment has a fair
value of ₱ 200,000.

Apr. 1 The new machinery for the new building arrived. In addition, a new franchise
was acquired from the manufacturer of the machinery. Payment was made
by issuing bonds with a face value of ₱ 400,000 and by paying cash of
₱144,000. The value of the franchise is set at ₱160,000, while the machine’s
fair value is ₱ 200,000.

May 1 The company contracted for parking lots and waiting sheds at a cost
₱360,000 and ₱76,800, respectively. The work was completed and paid for
on June 1.

Dec 31 The business was closed to permit taking the year-end inventory. During this
time, required redecorating and repairs were completed at a cost of ₱60,000.

QUESTIONS:

Based on the above and the result of your audit, determine the cost of the following.

1. Land

a. ₱ 940,000
b. ₱ 1,005,200
c. ₱ 976,000
d. ₱ 1,052,000
2. Buildings

a. ₱ 4,645,000
b. ₱ 5,005,600
c. ₱ 4,762,000
d. ₱ 4,681,600

3. Machinery and Equipment

a. ₱ 360,000
b. ₱ 560,000
c. ₱ 576,615
d. ₱ 659,692

4. Land improvements

a. ₱ 360,000
b. ₱ 76,800
c. ₱ 436,800
d. ₱ 0

5. Total property, palnt and equipment

a. ₱ 6,764,400
b. ₱ 6,731,200
c. ₱ 6,718,092
d. ₱ 6,618,400

PROBLEM NO. 5- Acquisition errors, land and building

San Leonardo Manufacturing Co. was incorporated on 1/2/07 but was unable to begin
manufacturing activities until 8/1/076 because new factory facilities were not completed
until that date. The Land and Building account at 12/31/07 per the books was as follows:

Date Particulars Amount

1/31/07 Land and dilapidated building ₱ 1,000,000


2/28/07 Cost of removing building 25,000
4/01/07 Legal fees 30,000
5/01/07 Fire insurance premium payment 36,000
5/01/07 Special tax assessment for streets 27,500
5/01/07 Partial payment of new building construction 900,000
8/01/07 Final payment on building construction 900,000
8/01/07 General expenses 150,000
12/31/07 Asset write-up 375,000
₱ 3,443,500
QUESTIONS:

Based on the above and the result of your audit, compute for the adjusted balance of
following as of December 31, 2007:

1. Land

a. ₱1,055,000
b. ₱1,605,000
c. ₱1,105,000
d. ₱1,577,500

2. Building

a. ₱1,860,500
b. ₱1,888,000
c. ₱1,810,500
d. ₱1,857,500

PROBLEM NO.6-Acquisition errors-land, building and machinery

You noted during your audit of the Carranglan Company that the company carried out a
number of transactions involving the acquisition of several assets. All expenditure were
recorded in the following single asset account, identified as Property and Equipment:

Property and Equipment


Acquisition price of land and building ₱ 960,000
Option taken out on several pieces of property 16,000
List price of machinery purchased 318,400
Freight on machinery purchased 5,000
Repair to machinery resulting from the damage during shipment 1,480
Cost of removing old machinery 4,800
Driveways and sidewalks 102,000
Building remodeling 400,000
Utilities paid since acquisition of building 20,000
₱ 1,828,480
1. Land

a. ₱644,000
b. ₱322,000
c. ₱326,000
d. ₱424,000

2. Building

a. ₱ 644,000
b. ₱1,040,000
c. ₱1,044,000
d. ₱ 722,000
3. Machinery

a. ₱317,032
b. ₱318,512
c. ₱323,400
d. ₱321,832

PROBLEM NO.7-Land and building: Borrowing cost

On January 1, 2006, Cabiao Corporation purchased a tract of land (site number 101) with a
building for ₱1,800,000. Additionally, Cabiao paid a real state broker’s commission of
₱ 108,000, legal fees of ₱ 18,000 and guarantee insurance of ₱ 54,000. the closing
statement indicated that the land value was ₱1,500,000 and the bilding value was ₱
300,000. Shortly after acquisition, the building was razed at a cost of ₱ 225,000.

Cabiao entered into a ₱9,000,000 fixed price contract with Cabanatuan Builders, Inc. on
March 1, 2006 for the construction of an office building on land site 101. The building was
completed and occupied obn September 30, 2007. Additional construction costs were
incurred as follows:

Plans, specifications and blueprints ₱ 36,000


Architect’s fees for design and supervision 285,000

The building is estimated to have a forty-year life from date of completion and will be
depreciated using the 150%-declining-balance method.

To finance the construction cost, Cabiao borrowed ₱9,000,000 on March 1, 2006. The loan
is payable in ten annual installments of ₱900,000 plus interest at the rate of 14%. Cabiao
used part of the loan proceeds for working capital requirements. Cabiao’s average amounts
of accumulated building construction expenditures were as follows:

For the period March 1 to December 31,2006 ₱ 2,700,000


For the period January 1 to September 31, 2007 6,900,000

Cabiao is using the allowed alternative treatment for borrowing cost.

QUESTIONS:

Based on the above and theresult of your audit, determine the following:

1. Cost of land site number 101


a. ₱1,905,000
b. ₱1,800,000
c. ₱2,205,000
d. ₱2,151,000

2. Cost of office building


a. ₱10,581,000
b. ₱10,360,500
c. ₱10,329,000
d. ₱10,960,000

3. Depreciation of office building for 2007


a. ₱ 96,800
b. ₱ 97,130
c. ₱ 102,800
d. ₱ 99,000

PROBLEM NO.8- Government grants

Provide below are independent situations involving government grants. You are required to
provide the answer to each requirement.

1. Nueva Ecija Inc. received a grant of ₱30 million to compensate it for costs it incurred in
planting trees over a period of five years. Nueva Ecija Inc. will incur costs in this manner:
Year 1- ₱1 million; Year-2- ₱2 million; Year 3- ₱3 million; Year 4- ₱4 million; Year 5- ₱5
million. How much should be recognized as income from government grant at the end of
year 1?
a. ₱30 million
b. ₱ 6 million
c. ₱ 2 million
d. ₱ 1 million

2. On January 1, 2006, Nueva Ecija Company received a grant of ₱75 million from the
Japanese government for the construction of the laboratory and research facility with an
estimated cost of ₱90 million and useful life of 25 years.The facility completed early in 2007.
The amount to be recognized in Nueva Ecija’s 2007 profit or loss as income from
government grant is a. ₱75,000,000

b. ₱ 3,600,000
c. ₱ 3,000,000
d. ₱ 0

3. Nueva Ecija Inc. was granted 2,500 acres of land in a village located near slums outside
the city limits, by a local government authority. The condition attached to this grant was
that Nuva Ecija Inc. should clean up this land and roads by employing laborers from which
land is located. The government has fixed the minimum wage payable to the workers.
The entire operation will take three years and is estimated to cost ₱50 million. This amount
will be spent in this way: ₱10 million each in the first and second years and ₱30 million in
third. The fair value of this land is currently ₱60 million. How much should be recognized as
income government grant at the end of the first year?
a. ₱10,000,000
b. ₱12,000,000
c. ₱20,000,000
d. ₱ 0

4. Nueva Ecija Inc. received a consolidated grant of ₱60 million. Three forths of the grant is
to be utilized to purchase a college building for the students from underdeveloped or
developing countries. The balance of the grant is for subsidizing the tuition costs of those
students for four years from the date of the grant.

The college building, which cost ₱50 million, will be depreciated using the straight line
method over 10 years. Assuming that the tuition subsidy will be offered evenly over the
period of 4 years, the amount that should be recognized as income at the end of year 1 is
a. ₱6.0 million
b. ₱5.0 million
c. ₱8.25 million
d. ₱8.75 million

PROBLEM NO.9 – Disposals of property, plant and equipment

Your audit of Llanera Corporation for the year 2007 disclosed the following property
disposition:

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 a consideration for the forced sale of
the company’s 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 ₱6,000,000, 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 represents the net proceeds from demolition
of building.

Warehouse

On July 4, the warehouse was destroy by fire. The warehouse was purchased on January 2,
2001. On December 12, the insurance proceeds and other funds were used to purchase a
replacement warehouse at a cost of ₱7,200,000

Machine

On December 15, the machine was exchanged for a machine having a fair value of
₱756,000 and cash of ₱108,000 was received.

Delivery Trucks

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

QUESTIONS:
Based on the above and the result of your audit, compute the gain or loss to be recognized
for each of the following dispositions:

1. Land

a. ₱3,720,000 gain
b. ₱1,080,000 loss
c. ₱4,800,000 loss
d. ₱ 0

2. Building
a. ₱ 432,000 gain
b. ₱2,232,000 loss
c. ₱1,368,000 loss
d. ₱ 0

3. Warehouse
a. ₱1,800,000 gain
b. ₱ 480,000 gain
c. ₱5,400,000 loss
d. ₱ 0

4. Machine
a. ₱ 36,000 gain
b. ₱ 27,000 gain
c. ₱288,000 gain
d. ₱ 0

5. Delivery Truck
a. ₱636,000 loss
b. ₱636,000 gain
c. ₱ 66,000 loss
d. ₱ 66,000 gain

PROBLEM NO.10- Depreciation methods

The following data relate on the Plant Asset account of Licab, Inc. at December 31, 2006:

Plant Assets
L A R E
Original Cost ₱87,500 ₱127,500 ₱200,000 ₱200,000
Year Purchased 2001 2002 2003 2005
Useful life 10 years 37,500 hours 15 years 10 years
Salvage value ₱7,750 ₱7,750 ₱12,500 ₱12,500
Depreciation SYD Activity straight line Doble-
method declining balance

Note: In the year asset was purchased, Licab, Inc. takes a full year depreciation on the
asset.
In theyear an asset is retired on traded in, Licab, Inc. takes a full year depreciation
on the asset.

The following transaction occurred during 2007:


(a) On May 5, Asset L was sold for ₱32,500 cash.

(b) On December 31, it was determined that asset A had been used ₱5,250 hours during
2007.

(c) On December 31, before computing depreciation expense on Asset R, the management
of Licab, Inc. decided the useful life remaining from 1/1/07 was 10 years.

(d) On December 31, it was discovered that a plant asset purchased in 2006 had been
expensed completely in that year. This asset cost ₱55,000 and has useful life of 10 years
and no salvage value. Management has decided to use the double-declining balance for this
asset, which can be referred to as “Asset S”.

Questions:

Based on the above and the result of your audit, answer the following (Disregard tax
implications)

1. How much is the gain or loss on sale of Asset L?


a. ₱10,250 loss
b. ₱10,250 gain
c. ₱16,050 gain
d. ₱16,050 loss

2. What is the depreciation of Asset R for 2007?


a. ₱15,000
b. ₱21,429
c. ₱16,250
d. ₱23,214

3. The adjusting entry to correct the error of failure to capitalized Asset S would include the
debit/credit to Retained Earnings of
a. ₱55,000 debit
b. ₱55,000 credit
c. ₱44,000 credit
d. ₱ 0

4. How much is the adjusted balance of Plant Assets as of December 31, 2007?
a. ₱670,000
b. ₱527,500
c. ₱615,000
d. ₱582,500

5. How much is the total depreciation expense for 2007?


a. ₱83,300
b. ₱88,479
c. ₱82,050
d. ₱80,600
PROBLEM NO.11- Components depreciation

On January 1, 2007, Peneranda Airlines acquired a new aeroplane for a total cost of ₱30
million. A breakdown of the costs to build the aeroplane was given by the manufacturers:

Aircraft body ₱ 9,000,000


Engines (2) 12,000,000
Fitting out of aircraft:
Seats 3,000,000
Carpets 150,000
Electrical equipment-passenger seats 600,000
-cockpit 4,500,000
Food preparation 750,000

All costs include installation and labor costs associated with the relevant part.

It is expected that the aircraft will be kept for ten years and then sold. The main value of
the aircraft at that stage is the body and engines. The expected selling price is ₱6.3 million,
with the body and the engines proportionate value.

Costs in relation to the aircraft over the next ten years are expected to be as follows:

Aircraft body- The body requires inspections every two years for cracks, wear and tear, a
cost of ₱30,000.

Engines-Each engine has an expected life of four years before being sold scrap.
It is expected that the engines will be replaced in 2011 for ₱13.5 million and again in
2015 for ₱18 million. These are expected to incur annual maintenance cost of
₱900,000. The manufacturer has informed Penaranda Airlines that a new prototype
engine with an extra 10% capacity should be in a market in 2013, and that existing
engines could be upgraded at a cost of ₱3 million.

Fittings- Seats are replaced every three years. Expected replacement coat are ₱3.6 million
in 2010 and ₱4.5 million in 2016. The repair of torn seats and faulty mechanism is
expected to cost ₱300,000 per annum. Carpets are replaced every five years. They
will be replaced in 2012 at an expected cost of ₱195,000, but will not be replaced
before the aircraft is sold in 2017. Cleaning cost for annum amount to ₱30,000. The
electrical equipment (such as the TV) for each seat has annual repair cost of
₱45,000. It is expected that, with the improvement in technology, the equipment will
be totally replaced in 2013 by substantially better equipment at a cost of
₱1,050,000. The electrical equipment in the cockpit is tested frequently at an
expected annual cost of ₱750,000. Major upgrades to the equipment are expected
every two years at expected costs of ₱750,000 (in 2009), ₱900,000 (in 2011),
₱1,035,000 (in 2013) and ₱1,230,000 (in2015). The upgrade will take into effect the
expected changes in technology.

Food Preparation equipment- This incurs annuals costs for repair and maintenance of
₱60,000. The equipment is expected to be totally replaced in 2013.
QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The annual depreciation expense for Aircraft body is


a. ₱630,000
b. ₱270,000
c. ₱900,000
d. ₱711,000

2. The annual depreciation expense for engines is


a. ₱1,200,000
b. ₱2,100,000
c. ₱3,000,000
d. ₱ 840,000

3. The annual depreciation expense for Fittings is


a. ₱ 825,000
b. ₱3,380,000
c. ₱1,565,000
d. ₱1,580,000

4. The annual depreciation expense for Food Preparation Equipment is


a. ₱ 75,000
b. ₱150,000
c. ₱125,000
d. ₱187,500

PROBLEM NO.12- Comprehensive

Gabaldon Company’s property, plant and equipment and accumulated depreciation balances
at December 31, 2006 are:

Cost Acc. Depreciation


Machinery and equipment ₱ 1,380,000 ₱ 367,500
Automobiles and trucks 210,000 114,000
Leasehold improvements 432,000 108,000

Depreciation policy:

a. Depreciation methods and useful lives:


 Machinery and equipment- straight line; 10 years
 Automobiles and trucks- 150% declining balance; 5 years, all were acquired afer
2002
 Leasehold improvements- straight line
b. Depreciation is computed to the nearest month

c. Salvage values are immaterial except for automobiles and trucks which have estimated
salvage values equal to 15% of cost.

Additional information:
a. Gabaldon entered into a 12 year operating lease starting January 1, 2004. The leasehold
improvements were completed onDecember 1, 2003 and the facility was occupied on
January 1, 2004.

b. On July 1, 2007, machinery and equipment were purchased at a total invoice cost of ₱
325,000. Installation cost of ₱44,000 was incurred.

c. On August 30, 2007, Gabaldon purchase new automobile for ₱25,000.

d. On September 30, 2007, a truck with a cost of ₱48,000 and a carrying amount of
₱30,000 on December 31,2006 was sold for ₱23,500.

e. On December 20, 2007, a machine with a cost of ₱17,000, a carrying amount of ₱2,975
on date of disposition, was sold for ₱4,000.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The gain on sale of truck on September 30 is


a. ₱2,680
b. ₱6,500
c. ₱ 250
d. ₱ 0

2. The gain on sale of machinery on December 20,2007 is


a. ₱1,025
b. ₱2,725
c, ₱13,000
d. ₱ 0

3. The adjusted balance of the property, palnt and equipment as of December 31, 2007 is
a. ₱1,919,000
b. ₱2,388,500
c. ₱2,307,000
d. ₱2,351,000

4. The total depreciation expense for the year ended December 31, 2007 is
a. ₱185,402
b. ₱245,065
c. ₱138,000
d. ₱221,402

5. The carrying amount of the property, plant and eqipment as of December 31, 2007 is
a. ₱ 1,567,497
b. ₱ 1,290,547
c. ₱ 1,578,547
d. ₱ 1,617,322
PROBLEM NO.13- Comprehensive

Your new audit client, Guimba Company, prepared the trial balance below as of December
31, 2007. The company started its operations on January 1, 2006. Your examination
resulted in the necessity of applying the adjusting entries indicated in the additional data
below.

Guimba Company
Trial Balance
December 31, 2007

Debits Credits
Cash ₱ 510,000
Account Receivable-net 600,000
Inventories, December 31, 2006 669,000
Land 660,000
Buildings 990,000
Accumulated Depreciation, building ₱ 19,800
Machinery 444,000
Accumulated Depreciation, machinery 45,000
Sinking fund assets 75,000
Bond Discount 75,000
Treasury shares 105,000
Accounts Payable 567,000
Accrued Bond Interest 11,250
First mortgage, 6% sinking fund bonds 679,500
Share capital 1,500,000
Share premium 150,000
Donated shares 180,000
Retained earnings, December 31, 2006 222,450
Net sales 2,625,000
Purchases 850,500
Salaries and wages 507,000
Factory operating expenses 364,500
Administrative expense 105,000
Bond interest 45,000
₱ 6,000,000 ₱ 6,000,000

Additional data are as follows:

(1) The 1,500,000 share capital was issued at a 10 percent premium to the owners of the
land and buildings on December 31, 2005, the date of organization. Shares with a par value
of 180,000 were donated back by the vendors. The following entry was made:

Treasury shares 180,000


Donated shares 180,000

The shares were donated because the proceeds from its subsequent sale were to be
considered as an allowance on the allowance on the purchase price of land and buildings
proportion to their values as a first recorded. The treasury shares were sold in 2007 for
₱75,000, which was credited to treasury shares.
(2) On December 31, 2007, a machine costing ₱15,000 when the business started was
removed. The machine had been depreciated at 10% during the first year. The only entry
made was one crediting the Machinery account with its sales price of ₱6,000.

(3) Depreciation is to be provided on the straight-line basis, as follows:


building, 2% of cost; machinery, 10% of cost. Ignore salvage values.

QUESTIONS:

Based on the above and the result of your audit, you are to provide the answers to the
following:

1. The correct balance of Land account as of December 31, 2007 is


a. ₱660,000
b. ₱588,000
c. ₱630,000
d. ₱ 0
2. The adjusted carrying amount of Building as of December 31, 2007 is
a. ₱907,200
b. ₱950,400
c. ₱630,000
d. ₱ 0
3. The adjusted carrying amount of Machinery as of December 31, 2007 is
a. ₱399,000
b. ₱345,000
c. ₱354,000
d. ₱348,000
4. The adjusted depreciation expense for 2007 is
a. ₱64,800
b. ₱62,400
c. ₱63,900
d. ₱63,000
5. How much is the gain or loss on sale of machinery on December 31, 2007?
a. ₱6,000 loss
b. ₱7,500 loss
c. ₱6,000 gain
d. ₱7,500 gain

PROBLEM NO.14- Comprehensive

Jaen Corporation, a manufacture of steel products, began operation on October 1, 2005.


The accounting department of Jaen has started the fixed asset and depreciation presented
below.
JAEN CORPORATION
Fixed Asset and Depreciation Schedule
For Fiscal Years Ended September 30, 2006 and September 30, 2007

Depreciation expense year


Ended Sept. 30
Assets Date Cost Salvage Dep. Method Life 2006 2007
Land A 10/1/05 ? N/A N/A N/A N/A N/A
Bldg. A 10/1/05 ? ₱320,000 straight line ? ₱139,600 ?
Land B 10/1/05 ? N/A N/A N/A N/A N/A
Bldg. B under const. ? - Straight line 30 - ?
Donated 10/2/05 ? 24,000 150% 10 ? ?
equip. declining bal.

Mach. A 10/2/05 ? 48,000 sum of the 8 ? ?


years digits
Mach. B 10/1/06 ? - straight line 20 - ?

N/A- Not Applicable

You have been asked to assist in completing this schedule. In addition in ascertaining that
the data already on the schedule are correct, you have obtained the following information
from the company’s records and personnel:

a. Land A and Building a were acquired from a predecessor corporation Jaen paid
₱6,560,000 for the land and building together. At the time of acquisition, the land had an
appraised value of ₱720,000 and the building had an appraised value of ₱6,480,000.

b. Land B was acquired on October 2, 2005, in exchange for 20,000 ordinary shares of Jaen.
At the date of acquisition, the share had a par value of ₱5 per share and a fair value of ₱30
per share. During October 2005, Jaen paid ₱ 128,000 to demolish an existing building on
this land so it could construct new building.

c. Construction of building B on the newly acquired land began on October 1, 2006. By


September 30, 2007, Jaen has paid ₱2,560,000 of the estimated total construction cost of
₱3,600,000. It is estimated that the building will be completed and occupied by July 2008.

d. Certain equipment was donated to the corporation by a local university. An independent


appraisal of the equipment when donated placed the fair market value at ₱240,000 and the
salvage value at ₱24,000.

e. Machinery A’s total cost of ₱1,319,200 includes installation expense of ₱4,800 and normal
repairs and maintenance of ₱119,200. Salvage value is estimated at ₱48,000. Machinery A
was sold on February 1, 2007.

f. On October 1, 2006, Machinery B was acquired with a down payment of ₱45,920 and the
remaining payments to be made in 11 annual installments of ₱ 48,000 each beginning
October 1, 2006. The prevailing interest rate was 8%.
QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The cost of Building A is


a. ₱5,904,000
b. ₱6,560,000
c. ₱ 656,000
d. ₱ 0
2. The cost of Land B is
a. ₱600,000
b. ₱728,000
c. ₱228,000
d. ₱ 0
3. The cost of Machine B is
a. ₱370,080
b. ₱416,000
c. ₱388,592
d. ₱389,776
4. The total depreciation expense for the year ended September 30, 2007 is
a. ₱264,296
b. ₱415,000
c. ₱265,667
d. ₱262,608
PROBLEM NO.15-Wasting Asset

In connection with your audit of the Talavera Mining Corporation for the year ended
December 31, 2007, you noted that the company purchased for ₱10,400,000 mining
property estimated to contain 8,000,000 tons of ore. The residual value of the property is
₱800,000.

Building used in mine operations costs ₱800,000 and have estimated life to fifteen years
with no residual value. Mine machinery costs ₱1,600,000 with an estimated residual value
₱320,000 after its physical life of 4 years.

Following is the summary of the company’s operations for first year of operations.

Tons mined 800,000 tons


Tons sold 640,000 tons
Unit selling price per ton ₱4.40
Direct Labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses 576,000
(excluding depreciation)

Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be


allocated as follows: 20% to operating expenses, 80% to production. Depreciation on
machinery is chargeable to production.

QUESTIONS:

Based on the above and the result of your audit, answer the following:
(Disregard tax implications)

1. How much is the depletion for 2007?


a. ₱ 768,000
b. ₱ 192,000
c. ₱ 960,000
d. ₱1,040,000
2. Total inventoriable depreciation for 2007?
a. ₱400,000
b. ₱384,000
c. ₱362,667
d. ₱ 0
3. How much is the Inventory as of December 31, 2007?
a. ₱438,400
b. ₱425,600
c. ₱422,400
d. ₱418,133
4. How much is the cost of sales for the year ended December 31, 2007?
a. ₱1,689,600
b. ₱1,702,400
c. ₱1,753,600
d. ₱1,672,533
5. How much is the maximum amount that may be declared as dividends at the end of the
company’s first year operations?
a. ₱1,494,400
b. ₱1,302,400
c. ₱1,289,600
d. ₱1,319,467

Problem no. 16- Wasting Asset

In connection with your audit of the Talavera Mining Corporation for the year ended
December 31, 2007, you noted that the company purchased for ₱10,400,000 mining
property estimated to contain 8,000,000 tons of ore. The residual value of the property is
₱800,000.

Building used in mine operations costs ₱800,000 and have estimated life of fifteen years
with no residual value. Mine machinery costs 1,600,000 with an estimated residual value
₱320,000 after its physical life of 4 years.

Following is the summary of the company’s operations for first year of operations.

Tons mined 800,000 tons


Tons sold 640,000 tons
Unit selling price per ton ₱4.40
Direct Labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses(excluding depreciation) 576,000

Inventories are valued on a first in, first out basis. Depreciation on a building is to be
allocated as follows: 20% to operating expenses, 80% to production. Depreciation in
machinery is chargeable to production.

QUESTIONS:

Based on the above and the result of your audit, answer the following:
(Disregard tax implications)

1. How much is the depletion for 2007?


a. ₱ 768,000
b. ₱ 192,000
c. ₱ 960,000
d. ₱1,040,000
2. Total inventoriable depreciation fo 2007?
a. ₱400,000
b. ₱384,000
c. ₱362,667
d. ₱ 0
3. How much is the Inventory as of December 31, 2007?
a. ₱438,400
b. ₱425,600
c. ₱422,400
d. ₱418,133
4. How much is the cost of sales for the year ended December 31, 2007?
a. ₱1,689,600
b. ₱1,702,400
c. ₱1,753,600
d. ₱1,672,533
5. How much is the maximum amount that may be declared as dividends at the end of the
company’s first year of operations?
a. ₱1,494,400
b. ₱1,302,400
c. ₱1,289,600
d. ₱1,319,467

PROBLEM NO. 17- Revaluation of property, plant and equipment

On December 31, 2006, the balance sheet of Tinio Company showed the following property
and equipment after charging depreciation:

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