College of Accounting Education

3/F F. Facundo Hall, B & E Bldg.

Matina, Davao City Philippines
Phone No.: (082) 305-0645

SUBSTANTIVE TEST FOR PROPERTY, PLANT, AND EQUIPMENT

Property, Plant, and Equipment (PP&E)

a. Special audit considerations for PP&E
(1) Accounting considerations. Many PP&E acquisitions involve trades of used assets. PAS 16
points that most nonmonetary exchanges of these assets are recorded using the fair value of the
asset exchanged. Assets constructed by a company for its own use should be recorded at the cost of
direct material, direct labor, and applicable overhead. Recall that interest may be capitalized. PP&E
should be tested for impairment when facts and circumstances indicate that the asset’s value may
be impaired.

(2) Overall approach. The reasonableness of the entire account balance should be audited in detail
for a client that has not previously been audited. When a predecessor auditor exists, the successor
will normally review that auditor’s workpapers.
For a continuing audit client, the audit of PP&E consists largely of an analysis of the year’s
acquisitions and disposals (an input and output approach). Subsequent to the first year, the
account’s slow rate of turn over generally permits effective auditing of the account in less time than
accounts of comparable size.

(3) Relationship with repairs and maintenance. A number of CPA questions address this area.
A PP&E acquisition may improperly be recorded in the repair and maintenance expense account.
Therefore, an analysis of repairs and maintenance may detect understatements of PP&E.
Alternatively, an analysis of PP&E may disclose repairs and maintenance that have improperly been
capitalized, thereby resulting in overstatements of PP&E. Expenditures that make the asset more
productive or extend its useful life should be capitalized in the asset account (betterment) or as a
debit to accumulated depreciation (life extension).

(4) Unrecorded retirements . Disposals may occur due to retirements or thefts of PP&E items.
Simple retirements of equipment are often difficult to detect since no journal entry may have been
recorded to reflect the event. Unrecorded or improperly recorded retirements (and thefts) may be
discovered through examination of changes in insurance policies, consideration of the purpose of
recorded acquisition, examination of property tax files, discussions, observation, or through an
examination of debits to accumulated depreciation and of credits to miscellaneous revenue
accounts. Inquiry of the plant manager may disclose unrecorded retirements and/or obsolete
equipment.

b. Typical substantive audit procedures for PP&E

(1) Review disclosures for compliance with generally accepted accounting principles.
(2) Inquire of management concerning any liens and restrictions on PP&E. PP&E may be pledged as
security on a loan agreement. Such restrictions are disclosed in the notes to the fi nancial
statements.
(3) Review loan agreements for liens and restrictions on PP&E and verify that appropriate disclosure
is provided.
(4) Inspect major acquisitions of PP&E to verify their existence.
(5) Vouch additions and retirements to PP&E to verify their existence, accuracy, and the client’s
rights to them. Typically large PP&E transactions support will include original documents such as
contracts, deeds, construction work orders, invoices, and authorization by the directors. This
procedure will also help to identify transactions that should be expensed rather than capitalized.
(6) Review any leases for proper accounting to determine whether the related PP&E assets should
be capitalized.
(7) Perform search for unrecorded retirements and for obsolete equipment. See Section C.5.a.
above.
(8) Review minutes of the board of directors (and shareholders) to verify that additions have been
properly approved.
(9) Perform analytical procedures to test the reasonableness (existence, completeness, and
valuation) of PP&E. Typical analytical procedures involve a
(a) comparison of total cost of PP&E divided by cost of goods sold,
 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

(b) comparison of repairs and maintenance on a monthly and annual basis, and
(c) comparison of acquisitions and retirements for the current year with prior years.
(10) Obtain or prepare an analysis of repairs and maintenance expense and vouch transactions to
discover items that should have been capitalized.
(11) Foot PP&E summary schedules to verify clerical accuracy.
(12) Reconcile summary PP&E schedules to the general ledger to verify clerical accuracy.
(13) Recalculate depreciation to establish proper valuation of PP&E. In addition, the existence of
recurring losses on retired assets may indicate that depreciation charges are generally insufficient.
(14) Consider any conditions that indicate that assets may be impaired to determine that the assets
are properly valued. Indications of possible impairment include discontinuance of a business
segment or type of product, excessive capacity, loss of major customers, etc.

Problem 1

1. Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud
because
A. The amounts recorded on the balance sheet for most companies are immaterial.
B. The inherent risk is usually low.
C. The depreciated values are always smaller than cost.
D. Internal control is inherently effective regarding this account.

2. Which is the best audit procedure to obtain evidence to support the legal ownership of real property?
A. Examination of corporate minutes and board resolutions with regard to approvals to acquire real
property.
B. Examination of closing documents, deeds and ownership documents registered and on file at the
register of deeds.
C. Discussion with corporate legal counsel concerning the acquisition of a specific piece of property.
D. Confirmation with the title company that handled the escrow account and disbursement of proceeds
for the closing of the property.

3. When few property and equipment transactions occur during the year the continuing auditor usually
obtains and understanding of internal control and performs
A. Tests of controls
B. Analytical procedures to verify current year additions to property and equipment
C. A thorough examination of the balances at the beginning of the year.
D. Extensive tests of current year property and equipment transactions.

4. Which of the following combinations of procedures is an auditor most likely to perform to obtain
evidence about fixed asset addition?
A. Inspecting documents and physically examining assets.
B. Recomputing calculations and obtaining written management representations.
C. Observing operating activities and comparing balances to prior period balances.
D. Confirming ownership and corroborating transactions through inquiries of client personnel.

5. If an auditor tours a production facility, which of the misstatements or questionable practices is most
likely to be detected by the audit procedures specified?
A. Depreciation expense on fully depreciated machinery has been recognized.
B. Overhead has been overapplied.
C. Necessary facility maintenance has not been performed.
D. Insurance coverage on the facility has lapsed.

6. In testing for unrecorded retirements of equipment, an auditor is most likely to

A. Select items of equipment from the accounting records and then locate them during the plant tour.
B. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated
equipment.
C. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger.
D. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense.
 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

7. Determining that proper amounts of depreciation are expensed provides assurance about management’s
assertions of valuation and
A. Presentation and disclosure. c. Rights and obligations.
B. Completeness. d. Existence or occurrence.

8. The auditor may conclude that depreciation charges are insufficient by noting
A. Insured values greatly in excess of book values.
B. Large numbers of fully depreciated assets.
C. Continuous trade-in of relatively new assets.
D. Excessive recurring losses on assets retired.

9. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the
audit assertion that all
A. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
B. Expenditures for property and equipment have been recorded in the proper period.
C. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
D. Expenditures for property and equipment have not been charged expense.

10. In violation of company policy, Coatsen Company erroneously capitalized the cost of painting its
warehouse. An auditor would most likely detect this when
A. Discussing capitalization policies with Coatsen's controller.
B. Examining maintenance expense accounts.
C. Observing that the warehouse had been painted.
D. Examining construction work orders that support items capitalized during the year.

11. Additions to equipment are sometimes understated. Which of the following accounts would be reviewed
by the auditor to gain reasonable assurance that additions are not understated?
A. Accounts payable C. Depreciation expense
B. Gain on disposal of equipment D. Repair and maintenance expense

12. When an auditor interviews the plant manager, he will most likely seek from the plant manager
information regarding
A. Appropriateness of physical inventory observation procedures.
B. Existence of obsolete machinery.
C. Deferral of procurement of certain necessary insurance coverage.
D. Adequacy of the provision for uncollectible accounts.

13. The auditor is least likely to learn of retirements of equipment through which of the following?
A. Review of the purchase return and allowance account.
B. Review of depreciation.
C. Analysis of the debits to the accumulated depreciation account.
D. Review of insurance policy riders.

14. An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the
following is most likely?
A. The estimated remaining useful lives of equipment were increased.
B. Plant assets were retired during the year.
C. The prior year's deprecation expense was erroneously understated.
D. Overhead allocations were revised at year-end.

15. In testing for unrecorded retirements of equipment, an auditor might.

A. Select items of equipment from the accounting records and then attempt to locate them during the
plant tour.
B. Compare depreciation expense with the prior year's depreciation expense.
C. Trace equipment items observed during the plant tour to the equipment subsidiary ledger.
D. Scan the general journal for unusual equipment retirements.

16. A plant manager would be most likely to provide information on which of the following?
A. Adequacy of the provision for uncollectible accounts.
B. Appropriateness of physical inventory valuation techniques.
C. Existence of obsolete inventory.
D. Deferral of certain purchases of office supplies.
 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

17. Which of the following would be least likely to address control over the initiation and execution of
equipment transactions?
A. Requests for major repairs are approved by a higher level than the department initiating the request.
B. Prenumbered purchase orders are used for equipment and periodically accounted for.
C. Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids.
D. Procedures exist to restrict access to equipment.

18. When there are numerous property and equipment transactions during the year, an auditor who plans
to assess control risk at a low level usually performs:
A. Tests of controls and extensive tests of property and equipment balances at the end of the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.

19. Which of the following best describes the auditors' approach to the audit of the ending balance of
property, plant and equipment for a continuing nonpublic client?
A. Direct audit of the ending balance.
B. Agreement of the beginning balance to prior year's working papers and audit of significant changes in
the accounts.
C. Audit of changes in the accounts since inception of the company.
D. Audit of selected purchases and retirements for the last few years.

20. Which of the following is not a control that should be established for purchases of equipment?
A. Establishing a budget for capital acquisitions.
B. Requiring that the department in need of the equipment order the equipment.
C. Requiring that the receiving department receive the equipment.
D. Establishing an accounting policy regarding the minimum dollar amount of purchase that will be
considered for capitalization.

21. Which of the following is not one of the auditors' objectives in auditing depreciation?
A. Establishing the reasonableness of the client's replacement policy.
B. Establishing that the methods used are appropriate.
C. Establishing that the methods are consistently applied.
D. Establishing the reasonableness of depreciation computations.

22. Which of the following is the best evidence of continuous ownership of property?
A. Examination of the deed.
B. Examination of rent receipts from lessees of the property.
C. Examination of the title policy.
D. Examination of canceled check in payment for the property.

23. Which of the following best describes the auditors' typical observation of plant and equipment?
A. The auditors observe a physical inventory of plant and equipment, annually.
B. The auditors observe all additions to plant and equipment made during the year.
C. The auditors observe all major plant and equipment items in the clients' accounts each year.
D. The auditors observe major additions to plant and equipment made during the year.

24. Which of the following is used to obtain evidence that the client's equipment accounts are not
understated?
A. Analyzing repairs and maintenance expense accounts.
B. Vouching purchases of plant and equipment.
C. Recomputing depreciation expense.
D. Analyzing the miscellaneous revenue account.

25. Which of the following is not a test primarily used to test property, plant and equipment accounts for
overstatement?
A. Investigation of reductions in insurance coverage.
B. Review of property tax bills.
C. Examination of retirement work orders prepared during the year.
D. Vouching retirements of plant and equipment.

26. A continuing audit client's property, plant and equipment and accounts receivable accounts have
approximately the same year-end balance. In this circumstance, when compared to property, plant and
equipment one would normally expect the audit of accounts receivable to require:
A. More audit time.
 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

B. Less audit time.

C. Approximately the same amount of audit time.
D. Similar confirmation procedures.

27. When comparing an initial audit with a subsequent year audit for a particular client, the scope of audit
procedures for which of the following accounts would be expected to decrease the most?
A. Accounts receivable.
B. Cash.
C. Marketable securities.
D. Property, plant and equipment.

28. When performing an audit of the property, plant and equipment accounts, an auditor should expect
which of the following to be most likely to indicate a departure from generally accepted accounting
principles?
A. Repairs have been capitalized to repair equipment that had broken down.
B. Interest has been capitalized for self-constructed assets.
C. Assets have been acquired from affiliated corporations with the related transactions recorded and
described in the financial statements.
D. The cost of freight-in on an acquisition has been capitalized.

29. In testing for unrecorded retirements of equipment, an auditor most likely would
A. Select items of equipment from the accounting records and then locate them during the plant tour.
B. Compare depreciation journal entries with similar prior year entries in search of fully depreciated
equipment.
C. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger.
D. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense.

30. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the
audit assertion that all
A. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
B. Expenditures for property and equipment have been recorded in the proper period.
C. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
D. Expenditures for property and equipment have not been charged to expense.

PROBLEM 2

The property, plant and equipment section of White Corporation’s balance sheet at December 31, 2016
included the following items:

Land P 2,500,000
Land improvements 560,000
Building 3,600,000
Machinery and equipment 6,600,000

During 2017 the following data were available to you upon your analysis of the accounts:

Cash paid on purchase of land P10,000,000

Mortgage 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 persons squatting on the property 400,000
Cost of tearing down an old building on the land 300,000
Amount recovered from the salvage of the building demolished 600,000
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
Architect’s fee 100,000
Interest that would have been earned had the money used during the period of construction
600,000
been invested in the money market
Invoice cost of machinery acquired 8,000,000
Freight, unloading, and delivery charges 240,000
Customs duties and other charges 560,000
Allowances, hotel accommodations, etc., paid to foreign technicians during instillation and
1,600,000
test run of machines
Royalty payment on machines purchased (based on units produced and sold) 480,000
 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

REQUIRED:
Based on the above and the result of your audit, compute for the following as of December 31, 2017:
1. Land
2. Land improvements
3. Building
4. Machinery and equipment
5. Total depreciable property, plant and equipment

PROBLEM 3

The following were discovered during your audit of Black Company’s financial statements for the year
ended December 31, 2017:

a. On December 24, 2017, Black purchased an office equipment for P400,000, terms 2/5, n/15. No
entry was made on the date of purchase. The same was paid on December 31, 2017 and the
accountant debited Office Equipment and credited cash for P400,000.

b. Machine C, with a cash price of P128,000, was purchased on January 2, 2017. The company paid
P20,000 down and P10,000 for 12 months. The last payment was made on December 30, 2017.
Straight line depreciation, based on a five-year useful life and no salvage value, was recorded at
P28,000 for the year. Freight of P4,000 on machine C was debited to the Freight in account.

c. Machine P with a cash selling price of P360,000 was acquired on April 1, 2017, in exchange for
P400,000 face amount of bonds payable selling at 94, and maturing on April 1, 2015. The
accountant recorded the acquisition by a debit to Machinery and a credit to Bonds Payable for
P400,000. Straight line depreciation was recorded based on a five-year economic life and
amounted to P54,000 for nine months. In the computation of depreciation, residual value of
P40,000 was used.

d. Machine A was acquired on January 22, 2017, in exchange for past due accounts receivable of
P140,000, on which an allowance of 20% was established at the end of 2016. The current fair value
of the machine on January 22 was estimated at P110,000. The machine was recorded by a debit to
Machinery and a credit to Accounts Receivable for P140,000. No depreciation was recorded on
Machine A, because it was not installed and never used in operations. On February 2, 2017,
Machine A was exchanged for 1,000 shares of the company’s outstanding capital stock with market
price of P105 per share. The Treasury Stock account was debited for P140,000 with the
corresponding credit to Machinery.

e. On December 29, 2017, the company exchanged 10,000 shares of Emong, Inc. common stock,
which Black was holding as an investment, for an equipment from De Leon Corporation. The
common stock of Emong, Inc., which had been purchased by Black for P45 per share, had a quoted
market value of P50 per share on the date of exchange. The equipment had a market value of
P470,000. The transaction was recorded by a debit to Equipment and a credit to Investment in
Emong, Inc.-Common for P450,000.

f. On December 30, 2017, Machine M with a carrying amount of P120,000 (cost P400,000) was
exchanged for a similar asset with a fair value of P150,000. In addition, Black paid P20,000 to
acquire the new machine. The exchange, which lacks commercial substance, was recorded by a
debit to Machinery and a credit to cash for P20,000.

g. Machine E was recorded at P102,000, which included the carrying amount of P22,000 for an old
machine accepted as a trade in, and cash of P80,000. The cash price of Machine S was P90,000,
and the trade in allowance was P10,000. This transaction took place on December 31, 2017.

h. Ms. Beauty, 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, 2017. The building is estimated to have a useful life of 25 years. Since no
money was involved, no journal entry was made for the above transaction.

i. On July 1, 2016, the national government granted a parcel of land located in Baliuag, Bulacan to
Black. On the date of grant, the land had a fair value of P2,000,000. The grant required Black to
construct a cold storage building on the site. Black finished the construction of the building, which
has an estimated useful life of 25 years, on January 2, 2017. Black appropriately recorded the cost
of the building of P4,000,000 (which include direct materials, direct labor, and indirect cost and
 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

incremental overhead) but failed to provide depreciation in 2017. Unaware of the accounting
procedures for government grants, the company did not reflect the grant on its books.

REQUIRED:

As Black’s external auditor, you are required to prepare any necessary adjusting journal entries as of
December 31, 2017.

PROBLEM 4

The Blue Corporation was incorporated on January 2, 2017, but was unable to begin manufacturing
activities until July 1, 2017 because the new factory facilities were not completed until that date.

The “Land and Building” account at December 31, 2017 follows:

Date Particulars Amount

Jan. 31 Land and building P 1,098,000
Feb. 28 Cost of removal of old building 60,000
May 02 Partial payment on new construction 700,000
02 Legal fees paid 15,000
June 01 Second payment on new construction 600,000
July 01 Fire insurance premium – 1 year 26,000
01 Final payment on new construction 200,000
Dec. 31 Asset write-up 500,000
P 3,199,000
Dec. 31 Depreciation – 2017, at 1% of account balance 31,990
P 3,167,010

You were able to gather the following during your audit:

a. To acquire land and building, the company paid P98,000 cash and 10,000 shares of its 9%
cumulative preferred shares, P100 par value per share. The shares were then selling at P120.
b. Legal fees covered the following:

Cost of incorporation P 9,500

Examination of title covering purchase of the land 4,000
Legal work in connection with construction contract 1,500
P 15,000
c. Because of a general increase in construction costs after entering into the building contract, the
board of directors increased the value of the building by P500,000, believing such increase is
justified to reflect current market value at the time the building was completed. Retained earnings
was credited for this amount.
d. Estimated useful life of the building is 25 years.

REQUIRED:

1. Prepare the necessary adjusting journal entries as of December 31, 2017.

2. Determine the adjusted balances of the following as of December 31, 2017:
a. Land and building
b. Land
c. Carrying value of building
d. Organization cost, net (presented under Noncurrent Assets)

PROBLEM 5

In the audit of the books of Green Company for the year 2017, the following items and information
appeared in the Production Machines account of the auditee:
Date Particulars Debit Credit
2017
Jan. 01 Balance–Machines 1, 2, 3, and 4 at P90,000 each P 360,000
Aug 31 Machine 5 198,000
Machine 1 P 3,000
 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

Date Particulars Debit Credit

Sept 30 Machine 6 96,000
Dec 01 Machines 7 and 8 at P216,000 each 432,000
Dec 01 Machine 2 21,000
P1,086,000 P1,086,000

The Accumulated Depreciation account contained no entries for the year 2017. The balance on January 1,
2017 per your audit, was as follows:

Machine 1 P 84,375
Machine 2 39,375
Machine 3 33,750
Machine 4 22,500
Total P 180,000

Based on your further inquiry and verification, you noted the following:

1) Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this date for P3,000.
2) Machine 2 was destroyed by the thickness of engine oil used leading to explosion on December 1,
2017. Insurance of P21,000 was recovered. Machine 7 was to replace Machine 2.
3) Machine 3 was traded in for Machine 6 at an allowance of P12,000; the difference was paid in cash
and charged to Production Machine account.
4) Depreciation rate is recognized at 25% per annum.

REQUIRED:

Determine the adjusted balance of the Production Machine as of December 31, 2017 and Depreciation
Expense for the year 2017.

PROBLEM 6

You obtain the following information pertaining to Red Co.’s property, plant, and equipment for 2017 in
connection with your audit of the company’s financial statements.

Audited balances at December 31, 2016:

Debit Credit
Land P 3,750,000
Buildings 30,000,000
Accumulated depreciation – buildings P 6,577,500
Machinery and equipment 22,500,000
Accumulated depreciation –
Machinery and Equipment 6,250,000
Delivery Equipment 2,875,000
Accumulated Depreciation –
Delivery Equipment 2,115,000

Depreciation Data:
Depreciation Method Useful Life
Buildings 150% declining – balance 25 years
Machinery and Equipment Straight-line 10 years
Delivery Equipment Sum-of-the-years’-digits 4 years
Leasehold Improvements Straight-line -

Transaction during 2017 and other information are as follows:

a. On January 2, 2017, Red purchased a new truck for P500,000 cash and traded-in a 2-year-old truck
with a cost of P450,000 and a book value of P135,000. The new truck has a cash price of
P600,000; the market value of the old truck is not known.

b. On April 1, 2017, a machine purchased for P575,000 on April 1, 2000 was destroyed by fire. Red
recovered P387,500 from its insurance company.

c. On May 1, 2017, cost of P4,200,000 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.
 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

d. On July 1, 2017, machinery and equipment were purchased at a total invoice cost of P7,000,000;
additional cost of P125,000 for freight and P625,000 for installation were incurred.

e. Red determined that the delivery equipment comprising the P2,875,000 balance at January 1, 2017,
would have been depreciated at a total amount of P450,000 for the year ended December 31, 2017.

The salvage values of the depreciable assets are immaterial. The policy of the Red Co. is to compute
depreciation to the nearest month.

QUESTIONS:

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

1. How much is the Accumulated depreciation – Buildings as of December 31, 2017?

2. How much is the Accumulated depreciation – Machinery and Equipment as of December 31, 2017?
3. How much is the Accumulated depreciation – Delivery Equipment as of December 31, 2017?
4. How much is the Accumulated depreciation – Leasehold Improvements as of December 31, 2017?
5. How much is the net gain (loss) from disposal of assets for the year ended December 31, 2017?

PROBLEM 7

On January 1, 2014, SAMSON MFG. CO. began construction of a building to be used as its office
headquarters. The building was completed on June 30, 2015.

Expenditures on the project were as follows:

January 3, 2014 P2,500,000

March 31, 2014 3,000,000
June 30, 2014 4,000,000
October 31, 2014 3,000,000
January 31, 2015 1,500,000
March 31, 2015 2,500,000
May 31, 2015 3,000,000

On January 3, 2014, the company obtained a P5 million construction loan with a 10% interest rate. The
loan was outstanding all of 2014 and 2015. The company’s other interest-bearing debts included a long-
term note of P25 million with an 8% interest rate, and a mortgage of P15 million on another building with an
interest rate of 6%. Both debts were outstanding during all of 2014 and 2015. The company’s fiscal year-
end is December 31.

1. What is the amount of capitalizable interest in 2014?

2. What is the amount of capitalizable interest in 2015?
3. What amount of interest should be expensed in 2014?
4. What amount of interest should be expensed in 2015?
5. What is the total cost of the building (including the interest capitalized in 2014 and 2015)?

“I learned that courage was

not the absence of fear, but the triumph over it.
The brave man is not he who does not feel afraid,
but he who conquers that fear.”—Nelson Mandela