UNIVERSAL COLLEGES OF PARAÑAQUE INC.

8273 Dr. A. Santos Avenue, Sucat, Parañaque City

Tel. No: 8204276/ Telefax: 8298615

NAME: _______________ DATE:_____

COURSE/YEAR:_________

APPLIED AUDITING
PROPERTY PLANT AND EQUIPMENT/INTANGIBLE ASSETS

ANSWER KEY

PROBLEM 1 PROBLEM 2 PROBLEM 3 PROBLEM 4 PROBLEM 5 PROBLEM 6

1. 1. 1. 1. 1. 1.

2. 2. 2. 2. 2. 2.

3. 3. 3. 3. 3. 3.

4. 4. 4. 4. 4. 4.

5. 5. 5. 5. 5. 5.

PROBLEM 1:
DEBBY CORP., a manufacturer of computer parts, has been experiencing growth
in the demand for its products over the last several years. This prompted the
company to obtain additional manufacturing, facility. A real estate firm
located an available factory near Debby's production facility, and Debby
agreed to purchase the factory and used machinery from Que Company on October
1, 2013. Renovations were necessary to convert the factory for Debby's
manufacturing use.

The terms of the agreement required Debby to pay Que P1,500,000 when
renovations started on January 1, 2014, with the balance to be paid as
renovations were completed. The overall purchase price for the factory and
machinery was P12,000,000. The building renovations were contracted to
Malibay Construction Company at P3,000,000. The payments made, as
renovations progressed during 2014, are shown below.

The factory was placed in service on January 1, 2015.

Que Malibay
January 1 P 1,500,000
April 1 2,700,000 P 900,000
October 1 3,300,000 900,000
December 31 4,500,000 1,200,000
P12,000,000 P3,000,000

On January 1, 2014, Debby obtained a 2-year, P3 million loan with a 12%

interest rate to finance the renovation of the acquired factory. This is
Debby's only outstanding loan during 2014.
 UNIVERSAL COLLEGES OF PARAÑAQUE INC.
8273 Dr. A. Santos Avenue, Sucat, Parañaque City
Tel. No: 8204276/ Telefax: 8298615

Debby's policy regarding purchases of this nature is to use the appraisal

value of the land for book purposes and prorate the balance of the purchase
price over the remaining items. The building had originally cost Que
P9,000,000 and had a net book value of P1,500,000, while the machinery
originally cost P3,750,000 and had a net book value of P1,200,000 on the date
of sale. The land was recorded on Que's books at P1,200,000.

The following values were determined based on appraisal conducted by

independent appraisers at the time of acquisition.

Land P8,700,000
Building 3,150,000
Machinery 1,350,000
Gin G. Neer, Debby's chief engineer estimated that the renovated plant would
be used for 15 years, with an estimated residual value of P900,000. Neer
estimated that the productive machinery would have a remaining useful life of
5 years and residual value of P90,000. Debby's depreciation policy is to
apply the 200% declining balance method for machinery and the 150% declining
balance method for the plant. One-half year's depreciation is taken in the
year the plant is placed in service and one-half year is allowed when the
property is disposed of or retired.

Determine the amounts to be recorded on the books of Debby Corp. as of

December 31, 2014, for each of the following properties.

1. Land
A. P7,800,000
B. P9,060,000
C. P8,700,000
D. P10,909,000

2. Building
A. P5,670,000
B. P5,760,000
C. P5,607,000
D. P6,570,000

3. Machinery
A. P1,227,300
B. P1,098,000
C. P909,000
D. P990,000

4. Calculate the 2015 depreciation expense for Building

A. P238,500
B. P311,180
C. P283,500
D. P265,500

5. Calculate the 2015 depreciation expense for Machinery

A. P180,000
B. P198,000
C. P219,600
D. P227,460
 UNIVERSAL COLLEGES OF PARAÑAQUE INC.
8273 Dr. A. Santos Avenue, Sucat, Parañaque City
Tel. No: 8204276/ Telefax: 8298615

PROBLEM 2:

On December 31, 2005, Siniloan Corporation acquired the following three

intangible assets:
 A trademark for P450,000. The trademark has 7 years remaining legal life.
It is anticipated that the trademark will be renewed in the future,
indefinitely, without problem.
 Goodwill for P2,250,000. The goodwill is associated with Siniloan’s Laguna
Manufacturing reporting unit.

 A customer list for P330,000. By contract, Siniloan has exclusive use of

the list for 5 years. Because of market conditions, it is expected that the
list will have economic value for just 3 years.

On December 31, 2006, before any adjusting entries for the year were made, the
following information was assembled about each of the intangible assets:

a) Because of a decline in the economy, the trademark is now expected to generate

cash flows of just P15,000 per year. The useful life of trademark still
extends beyond the foreseeable horizon.

b) The cash flows expected to be generated by the Laguna Manufacturing reporting

unit is P375,000 per year for the next 22 years. Book values and fair values
of the assets and liabilities of the Laguna Manufacturing reporting unit are
as follows:

Book values Fair

values

Identifiable assets P4,050,000 P4,500,000

Goodwill 2,250,000 ?

Liabilities 2,700,000 2,700,000

c) The cash flows expected to be generated by the customer list are P180,000
in 2007 and P120,000 in 2008.

QUESTIONS:

Based on the above and the result of your audit, determine the following:
(Assume that the appropriate discount rate for all items is 6%. Round off
present value factors to 4 decimal places):

1. Total amortization for the year 2006

a. P110,000 c. P212,273

b. P174,285 d. P130,285
 UNIVERSAL COLLEGES OF PARAÑAQUE INC.
8273 Dr. A. Santos Avenue, Sucat, Parañaque City
Tel. No: 8204276/ Telefax: 8298615

2. Impairment loss for the year 2006

a. P135,714 c. P200,000

b. P269,376 d. P 0

3. Carrying amount of Trademark as of December 31, 2006

a. P450,000 c. P385,715

b. P250,000 d. P180,624

4. Carrying amount of Goodwill as of December 31, 2006

a. P2,250,000 c. P2,147,727

b. P2,137,500 d. P2,193,750

5. Carrying amount of Customer list as of December 31, 2006

a. P330,000 c. P220,000

b. P264,000 d. P 0

PROBLEM 3:

The property, plant and equipment section of Tom Corporation’s balance sheet at
December 31, 2005 included the following items:

Land P 600,000

Land improvements 280,000

Buildings 2,200,000

Machinery and equipment 1,920,000

The following transactions occurred during 2006:

a) A tract of land was acquired for P300,000. As of December 31, the company
has not determined its future use.

b) A plant facility consisting of land and building was acquired from Net
Company in exchange for 40,000 shares of Tom’s common stock. On the date
of acquisition, Tom’s stock had a closing market price of P37 per share on
the Philippine Stock Exchange. The plant facility was carried on Net’s
books at P220,000 for land and P640,000 for the building on the date of
exchange. Current appraised values for land and building, respectively,
are P460,000 and P1,380,000.
 UNIVERSAL COLLEGES OF PARAÑAQUE INC.
8273 Dr. A. Santos Avenue, Sucat, Parañaque City
Tel. No: 8204276/ Telefax: 8298615

c) On May 1, 2006, items of machinery and equipment were purchased at a total

cost of P896,000, inclusive of 12% VAT. Additional costs of P26,000 for
freight and P52,000 for installation were incurred.

d) Expenditures totaling P190,000 were made for new parking lots, streets and
sidewalks at the corporation’s various plant locations. These expenditures
had an estimated life of 15 years.

e) A machine costing P160,000 on January 1, 1998, was scrapped on June 30,

2006. Double-declining-balance depreciation has been recorded on the basis
of a 10-year useful life.

f) A machine was sold for P40,000 on July 1, 2006. Original cost of the
machine was P88,000 on January 1, 2003, and it was depreciated on a
straight-line basis over an estimated useful life of 7 years and a salvage
value of P4,000.
QUESTIONS:

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

1. Adjusted balance of Land as of December 31, 2006

a. P 970,000 c. P1,060,000

b. P1,270,000 d. P1,460,000

2. Adjusted balance of Buildings as of December 31, 2006

a. P3,580,000 c. P3,500,000

b. P2,200,000 d. P3,310,000

3. Adjusted balance of Machinery and Equipment as of December 31, 2006

a. P2,646,000 c. P2,550,000

b. P2,472,000 d. P2,710,000

4. Loss on scrapping of machine on June 30, 2006

a. P21,475 c. P24,160

b. P26,845 d. P 0

5. Loss on sale of machine on July 1, 2006

a. P 6,000 c. P4,000

b. P18,000 d. P 0

PROBLEM NO. 4

In 2001, Dagumboy Corporation acquired a silver mine in Benguet. Because the

mine is located deep in the Benguet mountains, Dagumboy was able to acquire the
mine for the low price of P50,000. In 2002, Dagumboy constructed a road to the
silver mine costing P5,000,000. Improvements to the mine made in 2002 cost
P750,000. Because of the improvements to the mine and the surrounding land, it
is estimated that the mine can be sold for P600,000 when the mining activities
are complete.
 UNIVERSAL COLLEGES OF PARAÑAQUE INC.
8273 Dr. A. Santos Avenue, Sucat, Parañaque City
Tel. No: 8204276/ Telefax: 8298615

During 2003, five buildings were constructed near the mine site to house the
mine workers and their families. The total cost of the five buildings was
P1,500,000. Estimated residual value is P250,000. In 2001, geologists
estimated 4 million tons of silver ore could be removed from the mine for
refining. During 2004, the first year of operations, only 5,000 tons of silver
ore were removed from the mine. However, in 2005, workers mined 1 million tons
of silver. During that same year, geologists discovered that the mine contained
3 million tons of silver ore in addition to the original 4 million tons.
Improvements of P275,000 were made to the mine early in 2005 to facilitate the
removal of the additional silver. Early in 2005, an additional building was
constructed at a cost of P225,000 to house the additional workers needed to
excavate the added silver. This building is not expected to have any residual
value.

In 2006, 2.5 million tons of silver were mined and costs of P1,100,000 were
incurred at the beginning of the year for improvements to the mine.

QUESTIONS:

Based on the above and the result of your audit, determine the following:
(Round off depletion and depreciation rates to two decimal places)
1. Depletion for 2004
a. P6,300 c. P6,500

b. P7,250 d. P5,550

2. Depletion for 2005

a. P1,300,000 c. P1,820,000

b. P 780,000 d. P 870,000

3. Depreciation for 2005

a. P250,000 c. P490,000

b. P180,000 d. P210,000

4. Depletion for 2006

a. P1,950,000 c. P2,150,000

b. P2,425,000 d. P2,275,000

5. Depreciation for 2006

a. P 525,000 c. P625,000

b. P1,225,000 d. P450,000
 UNIVERSAL COLLEGES OF PARAÑAQUE INC.
8273 Dr. A. Santos Avenue, Sucat, Parañaque City
Tel. No: 8204276/ Telefax: 8298615

PROBLEM 5
The Las Vegas Inc. acquired several small companies at the end of 2014 and,
based on the acquisitions, reported the following intangibles in its December
31, 2014 balance sheet:
Patent P600,000
Copyright 1,200,000
Tradename 1,050,000
Computer software 300,000
Franchise 480,000
Goodwill 2,700,000
Additional information:
A The patent which had a remaining legal life of 15 years, was purchased from
FAC for P600,000, The company estimates that the patent will be useful in
generating the company cash flows over ajten year period. The patent was
carried in FAC's accounting records at a net book value of P800,000 when it
sold the same to Las Vegas.
B The company was able to generate approximately P1.5M in 2015 from
distribution of the copyright protected materials. Moreover, the company
estimates that P3.5M will be further generated from the copyrighted
materials.
C The company expects to use the tradename for the foreseeable future.
D The accountant knows that the computer software is used in the company's 240
sales offices. The company has replaced the software in its 100 offices
in 2015 and expects to replace the software in 80 more offices in 2016
and the remainder in 2017.
E The franchise was purchased from JC Company. In addition, 5% of revenue from
the franchise must be paid to JC. Revenue from the franchise for 2015 was
P2.5M. Las Vegas Inc. estimates that the useful life of the franchise to be
10 years and takes a full years amortization in the year of purchase.
F The company incurred research and development cost in 2015 as follows:
Materials P42,000
Equipment, 4 year useful life 100,000
Personnel 189,000
Indirect costs 102,000

The company estimates that these costs will be recouped by December 31, 2018.
The materials and equipment purchased have no alternative use.

Using the above information, ascertain the following item:

1. What is the amortization expense on the Patent and the Copyright combined in
2015?
a. 574,286 c. 420,000
b. 554,286 d. 400,000

2. How much is the total expense related to the franchise and computer software
combined, in 2015?
a. 298,000 c. 250,000
b. 273,000 d. 173,000

3. What is the total research and development expense in 2015?

a. 433,000 c. 333,000
b. 358,000 d. 291,000
 UNIVERSAL COLLEGES OF PARAÑAQUE INC.
8273 Dr. A. Santos Avenue, Sucat, Parañaque City
Tel. No: 8204276/ Telefax: 8298615

4. What is the total intangibles as of December 31, 2015?

a. 5,609,000 c. 5,737,000
b. 5,757,000 d. 5,582,714

5. Circumstances which make it impracticable to apply the necessary audit

procedures
a. Does not have to be addressed in the standard audit report provided this
is agreed upon
b. Requires changes in the audit report
c. Will not permit the auditor to issue any audit report
d. Requires that the financial statements items not examined be included in
management’s representation letter.

PROBLEM 6:
At the beginning of 2014, Karuma Technology, Inc. acquired the Roland
Corporation for P350 million. In addition to cash, receivables, and inventory,
the following allocations were made:
Plant and equipment (depreciable assets)P120 million
Purchased technology 60 million
The plant and equipment are depreciated over an 8-year useful life on a straight-
line basis. There is no estimated residual value. The purchased technology is
estimated to have a 6-year life, no residual value, and is amortized using the
straight-line method.
At the end of 2016, a change in business climate indicated to management that
the operational assets of Roland Corporation might be impaired. The following
amounts have been determined:

Plant and equipment:

Undiscounted sum of future cash flowsP65 million
Fair value 50 million

Purchased technology:
Undiscounted sum of future cash flowsP15 million
Fair value 10 million
Requirements:

1. What is the book value (before any impairment) of plant and equipment at the
end of 2016?
a. 50 million c. 45 million
b. 65 million d. 75 million

2. What is the book value (before any impairment) of the purchased technology at
the end of 2016?
a. 30 million c. 15 million
b. 60 million d. 10 million

3. What is the amount of impairment loss to be recorded, if any, for plant and
equipment?
a. 10 million c. 0
b. 15 million d. 25 million
 UNIVERSAL COLLEGES OF PARAÑAQUE INC.
8273 Dr. A. Santos Avenue, Sucat, Parañaque City
Tel. No: 8204276/ Telefax: 8298615

4. What is the amount of impairment loss to be recorded, if any, for the purchased
technology?
a. 15 million c. 20 million
b. 5 million d. 0

5.Assets may suffer an impairment in value for a variety of reasons, but not
likely as a result of:
a. A corporate restructuring.
b. Slumping demand for uncompetitive products.
c. Significant increases in market share.
d. Obsolescence.

GOD BLESS