373998104- Chapter-7-Caselette-Audit-of-Property, Plant, and Equipment PDF

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CHAPTER 7 – Audit of Property,Plant, & EquipmentProblem 1 The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing P40,000 with accumulated depreciation of P30,000 was sold for P20,...

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CHAPTER 7 – Audit of Property, Plant, & Equipment Problem 1 The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery account). Company policy on depreciation which you accept, provides an annual rate of 10% without salvage value. A full year’s depreciation is charged in the year of acquisition and none in the year of disposition. Question 1 The adjusted balance of the Machinery account at December 31, 2006 is: a. P 290,000 b. P 370,000 c. P 260,000 d. P 300,000 2

The correct depreciation expense for the machinery for the year ended December 31, 2006 is: a. P 37,000 c. P 30,000 d. P 26,000 b. P 29,000

Solution OE: Cash 20,000 Machinery 20,000 CE: Cash 20,000 Accumulated dep’n. 30,000 Machinery 40,000 Gain on sale 10,000 Adj: Accumulated dep’n 30,000 Machinery 20,000 Gain on sale 10,000 --------------------------------------------OE: Machinery 90,000 Cash 90,000 CE: Machinery 100,000 Accumulated dep’n 22,000 Loss on sale 18,000 Machinery 50,000 Cash 90,000 Adj: Machinery 10,000 Accumulated dep’n 22,000 Loss on sale 18,000 Machinery 50,000 --------------------------------------------1 A P350,000 – P20,000 + P10,000 -P50,000 2 B P290,000 x 10%

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Problem 2 The Land account was debited for P300,000 on March 31, 2006 for an adjoining piece of land which was acquired in exchange for 15,000 shares of Rizal Corporation’s own stock with a par value of P10. At the time of the exchange, the shares were selling at P24. Transfer and legal fees of P20,000 were paid and charged to Professional Fees. 1. The adjusting entry required is: DEBIT a. Land 140,000 b. Land 160,000 c. Land

80,000

CREDIT Prem. on cap. stock Capital stock Cash Professional fees Prem. on cap. stock

140,000 150,000 10,000 20,000 60,000

d. None of these 2. On the Land acquired in No. 6, real estate taxes of P20,000 were paid in December, 2006, including P5,000 for the first quarter of the year. (Ignore penalty for delayed payment). Land account was debited for the taxes paid. The adjusting entry is: DEBIT a. Taxes 15,000 b. Taxes 5,000 c. Land 5,000 Taxes 15,000 d. None of these Solution 1. C OE: Land Common Stock APIC Professional fees Cash CE: Land Common stock Cash APIC Adj: Land APIC Professional fees 2. A OE: Land Cash CE: Land Taxes Cash Adj: Taxes Land

CREDIT Land Land Cash

15,000 5,000 20,000

300,000 150,000 150,000 20,000 20,000 380,000 150,000 20,000 210,000 80,000 60,000 20,000 20,000 20,000 5,000 15,000 20,000 15,000 15,000

Problem 3 Two independent companies, KAYA and MUYAN, are in the home building business. Each owns a tract of land for development, but each company would prefer to build on the other’s land. Accordingly, they agreed to exchange their land. An appraiser was hired and from the report and the companies records, the following information was obtained:

Cost (same as book value) Market value, per appraisal

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KAYA Co.’s Land P 800,000 1,000,000

MUYAN Co.’s Land P 500,000 900,000

The exchange of land was made and based on the difference in appraised values, MUYAN Company paid P100,000 cash to KAYA Company. Question 1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the exchange in the amount of: a. P 20,000 b. P 60,000 c. P 100,000 d. P 200,000 2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the exchange in the amount of: a. P 0 b. P 100,000 c. P 300,000 d. P 400,000 3. After the exchange, KAYA Company record its newly acquired land at: d. P 900,000 a. P 700,000 b. P 720,000 c. P 800,000 4. After the exchange, MUYAN Company record its newly acquired land at: a. P 1,000,000 b. P 900,000 c. P 600,000 d. P 500,000 Solution Muyan Land Cash Land Gain 1 2. 3. 4.

Kaya 1,000,000 100,000 500,000 400,000

Cash Land

100,000 900,000 Land Gain on sale

800,000 200,000

D D D A

Problem 4 On an audit engagement for 2007, you handled the audit of fixed assets of Esmedina Copper Mines. This mining company bought the exploration rights of Maharishi Exploration on June 30, 2007 for P7,290,000. Of this purchase price, P4,860,000 was allocated to copper ore which had remaining reserves estimated at 1,620,000 tons. Esmedina Copper Mines expects to extract 15,000 tons of ore a month with an estimated selling price of P50 per ton. Production started immediately after some new machines costing P600,000 was bought on June 30, 2007. These new machineries had an estimated useful life of 15 years with a scrap value of 10% of cost after the ore estimated has been extracted from the property, at which time the machineries will already be useless. Among the operating expenses of Esmedina Copper Mines at December 31, 2007 were: Depletion expense Depreciation of machineries

P 405,000 40,000

Questions 1. Recorded depletion expense was a. Overstated by P90,000 b. Understated by P90,000

c. Overstated by P135,000 d. Understated by P135,000

2. Recorded depreciation expense was a. Overstated by P10,000 b. Understated by P10,000

c. Overstated by P20,000 d. Understated by P20,000

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3. The adjusted depletion at year-end amounted to: b. P 315,000 c. P 495,000 a. P 270,000

d. P 540,000

4. The adjusted depreciation at year-end amounted to: a. P 20,000 b. P 30,000 c. P 50,000

d. P 60,000

Solution P4,860,000/1,620,000 x 15,00o tons x 6 months = P270,000 P600,000 – P60,000/9 years * x 6/12 = P30,000 *1,620,000 tons/180,000 = 9 years 1. C P405,000 - (4,860,000/1,620,000 x 90,000 units) = P135,000 overstated 2. A P40,000 - (600,000 - 60,000)/1,620,000 x 90,000 = P10,000 overstated 3. A 4. B

Problem 5 In connection with your examination of the financial statements of the Maraat Corporation for the year 2007, the company presented to you the Property, Plant and Equipment section of its balance sheet as of December 31, 2006, which consists of the following: Land Buildings Leasehold improvements Machinery and equipment

P

400,000 3,200,000 2,000,000 2,800,000

The following transactions occurred during 2007: 1. Land site number 5 was acquired for P4,000,000. Additionally, to acquire the land, Maraat Corporation paid a P240,000 commission to a real estate agent. Costs of P60,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for P20,000. 2. The second tract of land (site number 6) with a building was acquired for P1,200,000. The closing statement indicated that the land value was P800,000 and the building value was P400,000. Shortly after acquisition, the building was demolished at a cost of P120,000. The new building was constructed for P600,000 plus the following costs: Excavation fees Architectural design fees Building permit fees Imputed interest on funds used during construction

P 44,000 32,000 4,000 24,000

The building was completed and occupied on September 1, 2007. 3. The third tract of land (site number 7) was acquired for P2,400,000 and was put on the market for resale.

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4. Extensive work was done to a building occupied by Maraat Corporation under a lease agreement. The total cost of the work was P500,000, which consisted of the following: Particular Painting of ceilings Electrical work Construction of extension to current working area

Amount P 40,000 140,000 320,000

Useful life one year Ten years Thirty years

The lessor paid one-half of the costs incurred in connection with the extension to the current working area. 5. A group of new machines was purchased under a royalty agreement which provides for payment of royalties based on units of production for the machines. The invoice price of the machines was P300,000, freight costs were P8,000, unloading charges were P6,000, and royalty payments for 2007 were P52,000. Question 1. Land at year-end is a. P 5,480,000

b. P 5,900,000

c. P 6,000,000

d. P 8,400,000

2. Buildings at year-end is a. P 3,800,000 b. P 3,880,000

c. P 4,200,000

d. P 4,280,000

3. Leasehold improvements at year-end is a. P 2,300,000 b. P 2,560,000

c. P 2,600,000

d. P 2,720,000

4. Machinery and equipment at year-end is a. P 3,100,000 b. P 3,108,000

c. P 3,114,000

d. P 3,166,000

Solution 1. Land 4,300,000 Cash Cash 20,000 Land 2. Land 1,320,000 Cash Building 680,000 Cash 3. Land - investment 2,400,000 Cash 4. Operating expenses 40,000 Leasehold improvements 300,000 Cash 5. Machinery 314,000 Royalty expenses 52,000 Cash Answer: 1. C 2. B 3. A 4. C

4,300,000 20,000 1,320,000 680,000 2,400,000

340,000

366,000

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Problem 6 Norie Company’s property, plant and equipment and accumulated depreciation balance at December 31, 2005 are: Accumulated Cost Depreciation Machinery and equipment P 1,380,000 P 367,500 Automobiles and trucks 210,000 114,320 Leasehold improvements 432,000 108,000 Additional information: Depreciation methods and useful lives: Machinery and equipment – straight line; 10 years Automobiles and trucks – 150% declining balance; 5 years, all acquired after 2000. Leasehold improvements – straight line Depreciation is computed to the nearest month. Salvage values are immaterial except for automobiles and trucks, which have an estimated salvage values equal to 10% of cost. Other additional information: -

Norie Company entered into a 12-year operating lease starting January 1, 2003. The leasehold improvements were completed on December 31, 2002 and the facility was occupied on January 1, 2003.

-

On July 1, 2006, machinery and equipment were purchased at a total invoice cost of P325,000. Installation cost of P44,000 was incurred.

-

On August 30, 2006, Norie Company purchased new automobile for P25,000.

-

On September 30, 2006, a truck with a cost of P48,000 and a carrying amount of P30,000 on December 31, 2005 was sold for P23,500.

-

On December 30, 2006, a machine with a cost of P17,000, a carrying value of P2,975 on date of disposition, was sold for P4,000.

Questions 1. The gain on sale of truck on September 30, 2006 is: a. P 0 b. P 250 c. P 2,680

d. P 6,500

2. The gain on sale of machinery on December 30, 2006 is: a. P 0 b. P 13,000 c. P 2,725

d. P 1,025

3. The adjusted balance of the property, plant, and equipment as of December 31, 2006 is: a. P 1,813,000 b. P 2,351,000 c. P 2,387,000 d. P 2,388,500 4. The total depreciation expense to be reported on the income statement for the year ended December 31, 2006 is: c. P 221,404 a. P 138,000 b. P 185,402 d. P 245,065

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5. The carrying amount of property, plant, and equipment as of December 31, 2006 is: a. P 1,290,547 b. P 1,578,545 c. P 1,587,497 d. P 1,617,322 Solution Entries: Machinery and equipment 369,000 Cash Automobile and trucks 25,000 Cash Cash 23,500 Accumulated depreciation 24,750 Automobile and trucks Gain on sale Accumulated deprecation - 12/31/02 Depreciation - 9 mos. (P30,000 x 30% x 9/12) Total Cash Accumulated depreciation Machinery and equipment Gain on sale Depreciation Accumulated depreciation Accumulated depreciation Accumulated depreciation

369,000 25,000

48,000 250 18,000 6,750 24,750

4,000 14,025 17,000 1,025 221,404 - mach. - auto. - improv.

156,450 28,954 36,000

Machinery and equipment - P1,380,000/10 years = P 138,000 P 369,000/10 years x 6/12 = 18,450 Leasehold improvement - P432,000/12 years = Automobile and trucks - CV of unsold item P 65,680 x 30% = 19,704 Sold item - 30,000 x 30% x 9/12 = 6,750 Current purchase P25,000 x 30% x 4/12= 2,500 Answer: 1. B 2. D 3. B 4. C 5. B

P 156,450 36,000

28,954

Problem 7 Information pertaining to Highland Corporation’s property, plant and equipment for 2005 is presented below: Account balances at January 1, 2005: Debit Land P 150,000 Buildings 1,200,000 Accumulated depreciation – Buildings Machinery and equipment 900,000 Accumulated depreciation – Machinery and equipment Automotive equipment 115,000 Accumulated depreciation – Automotive equipment

Credit

P263,100 250,000 84,600

Depreciation data:

Buildings Machinery and equipment Automotive equipment Leasehold improvements

Depreciation method

Useful life

150% declining-balance Straight-line Sum-of-the-years’-digits Straight-line

25 years 10 years 4 years -

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The salvage values of the depreciable assets are immaterial. Depreciation is computed to the nearest month. Transactions during 2005 and other information are as follows: a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2year-old car with a cost of P18,000 and book value of P5,400. The new car has a cash price of P24,000; the market value of the trade-in is not known. b. On April 1, 2005, a machine purchased for P23,000 on April 1, 2000, was destroyed by fire, Highland recovered P15,500 from its insurance company. c. On May 1, 2005, costs of P168,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2011. d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of P280,000; additional costs of P5,000 for freight and P25,000 for installation were incurred. e. Highland determined that the automotive equipment comprising the P115,000 balance at January 1, 2005, would have been depreciated at a total amount of P18,000 for the year ended December 31,2005. Questions Based on the information above, answer the following questions: 1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2005 is: a. P 1,180,000 c. P 1,202,500 d. P 1,210,000 b. P 1,187,000 2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2005 is: b. P 121,000 a. P 139,000 c. P 115,000 d. P 109,000 3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2005 is: a. P 72,000 b. P 263,100 c. P 335,100 d. P 319,314 4. The adjusted balance of Accumulated Depreciation of Machinery and Equipment at December 31, 2005 is: a. P 330,775 c. P 351,475 d. P 353,775 b. P 342,275 5. The adjusted balance of Accumulated Depreciation of Automotive Equipment at December 31, 2005 is: b. P 96,000 a. P 90,600 c. P 103,200 d. P 108,600 6. The adjusted balance of Accumulated Depreciation of Leasehold Improvements at December 31, 2005 is: a. P 0 b. P 14,000 c. P 14,700 d. P 16,800 7. The total adjusted balance of Accumulated Depreciation of Property and Equipment at December 31, 2005 is: a. P 534,375 b. P 698,475 d. P 804,475 c. P 774,389

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8. The total gain(loss) from disposal of assets at December 31, 2005 is: a. P 5,400 b. P 4,000 d. P 1,400 c. P 2,600 9. The adjusted book value of Building at December 31, 2005 is: c. P 880,686 a. P 1,128,000 b. P 936,900

d. P 864,900

10. The adjusted book value of Leasehold Improvement at December 31, 2005 is: d. P 151,200 a. P 168,000 b. P 154,000 c. P 153,300 Solution Entries: a. Automobile Equipment 24,000 (cash paid, P20,000 plus P4,000 trade-in allow.) Accum. Depreciation 12,600 Loss on trade-in 1,400 Automobile Equipment 18,000 Cash 20,000 * Trade in allowance is the difference between the cash price and the purchase price of the equipment. b. Cash 15,500 Accum. Depreciation 11,500 Machinery and equipment 23,000 Gain on asset disposal 4,000 c. Leasehold improvements 168,000 Cash 168,000 d. Machinery and equipment 310,000 Cash 310,000 Computation of the Depreciation Expense and Accumulated Depreciation: Building:

Book value 1/1/05 (P1,200,000 - P263,100) X declining rate (1/25 x 150%) Depreciation for the year Plus; Accum. Depreciation - 1/1/05 Accum. Depreciation - 12/31/05

Machinery and Equipment:

Balance - 1/1/05 Less: machine destroyed by fire Divided by Dep’n of the Machine destroyed by fire: (P23,000/10 x 3/12) Dep’n of the machine purchase for the year: (P310,000/10 x 6/12) Total Depreciation Plus: Accum. Dep’n - 1/1/05 Less: Accum. Dep’n - destroyed by fire Accum. Depreciation - 12/31/05

Automotive Equipment:

P936,900 6% . P 56,214 263,100 P319,314

P900,000 23,000 P877,000 10 yrs.

575 15,500 P103,775 250,000 ( 11,500) P342,275

Depreciation on P115,000 balance, 1/1/05 Less: Depreciation on car traded in (P18,000 x 2/10) Adjusted depreciation on the beg. Bal. Dep’n on the 1/2/05 Purchase: (P24,000 x 4/10) Total Depreciation expense Plus: Accum. Depreciation - 1/1/05 Less: Accum. Dep’n - traded equipment Accumulated depreciation - 12/31/05

P 18,000 3,600 P 14,400 9,600 P 24,000 84,600 ( 12,600) P 96,000

Leasehold Improvements: P168,000/80 months x 8 mos. for 2005 ANSWER:

1. B 6. D

2. B 7. C

3. D 8. C

P 87,700

P 16,800 4. B 9. C

5. B 10. D

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Problem 8 The schedule of Gerasmo Company’s property and equipment prepared by the client follows: PLANT ASSETS Land Building Machinery and Equipment Total ACCUMULATED DEPRECIATION Building Machinery and Equipment Total

P

320,000 540,000 180,000 1,040,000

P

81,000 54,000 135,000

P

Further examination revealed the following: 1. All property and equipment were acquired on January 2, 2003. 2. Assets are depreciated using the straight-line method. The building and equipment are expected to benefit the company for 20 years and 10 years respectively. Salvage values of the assets are negligible. 3. An equipment with an original cost of P40,000 was sold on December 30, 2005 for P32,000. The proceeds were credited to other operating income account. 4. In 2005, The company recognized an appreciation in value of land and building as determined by the Company’s engineers. The appraisal was recorded as follows:

Land Building Accum. depreciation Revaluation increment

Debit 70,000 60,000

Credit

6,000 124,000

Questions 1. Property and equipment at year-end is: a. P 753,000 b. P 870,000

c. P 910,000

d. P 990,000

2. Accumulated depreciation at year-end is: b. P 117,000 a. P 114,000

c. P 123,000

d. P 135,000

Solution OE: Cash 32,000 Other ope. income 32,000 CE: Cash 32,000 Accumulated dep’n 12,000 Property & equip. 40,000 Other ope. income 4,000 Adj: Accum. dep’n 12,000 Other ope. income 28,000 Property & equip. 40,000 ----------------------------------------------Adj: Revaluation increment 124,000 Accumulated dep’n 6,000 Property & equipment 130,000 ----------------------------------------------Per book depreciation - bldg 75,000 Per audit depreciation - bldg 72,000 (540,000-60,000/20 x 3 yrs) Adjustment 3,000

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Adj: Accum. Depreciation Operating expenses Answer: 1. B 2. A

3,000 3,000

Problem 9 The following information pertains to Marlisa Company’s de...