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MODULE # 7 Post-test APPLIED AUDITING AUDIT OF NON-CURRENT ASSETSPROF. U. VALLADOLIDMultiple Choice Identify the choice that best completes the statement or answers the question. You noted during your audit of the Joseph Company that the company carried out a number of transactions involving the acq...

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MODULE # 7 Post-test APPLIED AUDITING AUDIT OF NON-CURRENT ASSETS PROF. U.C. VALLADOLID Multiple Choice Identify the choice that best completes the statement or answers the question. 1. You noted during your audit of the Joseph Company that the company carried out a number of transactions involving the acquisition of several assets. All expenditures were recorded in the following single asset account, identified as Property and equipment: Property and equipment Acquisition price of land and building P 960,000 Options 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 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 20,800 P1,828,480 Based on property tax assessments, which are believed to fairly represent the relative values involved, the building is worth twice as much as the land. The machinery was subject to a 2% cash discount, which was taken and credited to Purchases Discounts. Of the two options, P6,000 is related to the building and land purchased and P10,000 related to those not purchased. The old machinery was sold at book value. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balance of the following: 1. Land a. 644,000 c. 326,000 b. 322,000 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

2. In connection with your examination of the financial statements of the Angel Corporation for the year 2021, the company presented to you the Property, Plant and Equipment section of its balance sheet as of December 31, 2020 which consists of the following: Land

P 400,000

Buildings Leasehold improvements Machinery and equipment

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

The following transactions occurred during 2021: ?

Land site number 102 was acquired for 4,000,000. Additionally, to acquire the land Angel paid a 240,000 commission to a real estate agent. Costs of 60,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for 20,000.

?

A second tract of land (site number 103) with a building was acquired for 1,200,000. The closing statement indicated that the land value was 800,000 and the building value was 400,000. Shortly after acquisition, the building was demolished at a cost of 120,000. A new building was constructed for 600,000 plus the following costs: Excavation fees Architectural design fees Building permit fee 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, 2021. ?

A third tract of land (site number 104) was acquired for 2,400,000 and was put on the market for resale.

?

Extensive work was done to a building occupied by Angel under a lease agreement. The total cost of the work was 500,000, which consisted of the following: Particulars Painting of ceilings Electrical work Construction of extension to current working area

Amount

Useful life

P 40,000 140,000

One year Ten years

320,000

Thirty years

The lessor paid one-half of the costs incurred in connection with the extension to the current working area. ?

During December 2021, costs of 260,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2023, and is not expected to be renewed.

?

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 300,000, freight costs were 8,000, unloading charges were 6,000, and royalty payments for 2021 were 52,000.

QUESTIONS: Based on the above and the result of your audit, compute for the following as of December 31, 2021:

1.

2.

3.

4.

Land a. 8,400,000

b. 5,900,000

c. 5,480,000

d. 6,000,000

Buildings a. 4,280,000

b. 3,880,000

c. 3,800,000

d. 4,000,000

Leasehold improvements a. 2,720,000 b. 2,600,000

c. 2,560,000

d. 2,300,000

Machinery and equipment a. 3,100,000 b. 3,108,000

c. 3,114,000

d. 3,166,000

3. You are engaged to examine the financial statements of the Joshtin Manufacturing Corp. for the year ended December 31, 2020. The following schedules for property, plant, and equipment and related accumulated depreciation accounts have been prepared by your client. The opening balances agree with your prior year’s audit working papers. Joshtin Manufacturing Co. Analysis of Property, Plant, and Equipment and Related Accumulated Depreciation Accounts Year Ended December 31, 2020 Cost

Land Buildings Machinery & equipment

Final 12-31-2019 P450,000 2,400,000 2,770,000 P5,620,000

Additions Retirement P100,000 P350,000 808,000 520,000 P1,258,000 P520,000

Per books 12-31-2020 P550,000 2,750,000 3,526,000 P6,826,000

Accumulated Depreciation Buildings Machinery & equipment

P1,200,000 546,500 P1,746,500

P103,000 313,600 P416,600

P P -

P1,303,000 860,100 P2,163,100

Further investigation revealed the following: a.

All equipment is depreciated on the straight-line basis (with no salvage value) based on the following estimated lives: Buildings – 25 years, all other items 10 years.

b.

The company entered into a lease contract for a derrick machine with annual rental of 100,000 payable in advance every April 1. The parties to the contract stipulated that a 30day written notice is required to cancel the lease. Estimated useful life is 10 years. The derrick was recorded under machinery and equipment at 808,000 and 60,600, applicable to the machine was included in the depreciation expense during the year.

c.

The company finished construction of a new building wing in June 30. The useful life of the main building was not prolonged. The lowest construction bid was 350,000 which was the amount recorded. Company personnel constructed the building at a total cost of 330,000.

d.

100,000 was paid for the construction of a parking lot which was completed on July 1, 2020. The expenditure was charged to land.

e.

The 520,000 equipment under retirement column represent cash received on October 1, 2020 for a machinery bought on October 1, 2016 for 960,000. The bookkeeper recorded depreciation expense of 72,000 on this machine in 2020.

f.

The company’s president donated land and building appraised at 200,000 and 400,000 respectively to the company to be used as plant site. The company began operating the plant on September 30, 2020. Since no money was involved, the bookkeeper did not make any entry for the above transaction.

QUESTIONS: Based on the above and the result of your audit, answer the following: 1. The carrying amount of the buildings on December 31, 2020 is a. 1,820,250 b. 1,827,400 c. 1,816,250

d. 1,447,000

2. The carrying amount of the land on December 31, 2020 is a. 650,000 b. 750,000 c. 450,000

d. 545,000

3. The loss on the disposal of the machinery sold for 520,000 is a 0 b. 152,000 c. 80,000

d. 0

4. The carrying amount of the property, plant and equipment as of December 31, 2020 is a. 3,860,750 b. 3,755,750 c. 3,955,750 d. 3,312,900 4. You obtain the following information pertaining to Red Co.’s property, plant, and equipment for 2020 in connection with your audit of the company’s financial statements. Audited balances at December 31, 2019: Land Buildings Accumulated depreciation – buildings Machinery and equipment Accumulated depreciation – Machinery and Equipment Delivery Equipment Accumulated Depreciation – Delivery Equipment

Debit P 3,750,000 30,000,000

Credit

P 6,577,500 22,500,000 6,250,000 2,875,000 2,115,000

Depreciation Data: Buildings Machinery and Equipment

Depreciation Method 150% declining – balance Straight-line

Useful Life 25 years 10 years

Delivery Equipment Leasehold Improvements

Sum-of-the-years’-digits Straight-line

4 years -

Transaction during 2020 and other information are as follows: a.

On January 2, 2020, Red purchased a new truck for 500,000 cash and traded-in a 2-yearold truck with a cost of 450,000 and a book value of 135,000. The new truck has a cash price of 600,000; the market value of the old truck is not known.

b.

On April 1, 2020, a machine purchased for 575,000 on April 1, 2015 was destroyed by fire. Red recovered 387,500 from its insurance company.

c.

On May 1, 2020, cost of 4,200,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2026.

d.

On July 1, 2020, machinery and equipment were purchased at a total invoice cost of 7,000,000; additional cost of 125,000 for freight and 625,000 for installation were incurred.

e.

Red determined that the delivery equipment comprising the 2,875,000 balance at January 1, 2020, would have been depreciated at a total amount of 450,000 for the year ended December 31, 2020.

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, 2020? a. 7,777,500 b. 7,982,850 c. 8,377,500 d. 7,103,700

2.

How much is the Accumulated depreciation – Machinery and Equipment as of December 31, 2020? a. 8,844,375 b. 8,614,375 c. 8,830,000 d. 8,556,875

3.

How much is the Accumulated depreciation – Delivery Equipment as of December 31, 2020? a. 2,715,000 b. 2,400,000 c. 2,490,000 d. 2,805,000

4.

How much is the Accumulated depreciation – Leasehold Improvements as of December 31, 2020? a. 420,000 b. 525,000 c. 350,000 d. 630,000

5.

How much is the net gain (loss) from disposal of assets for the year ended December 31, 2020? a. 100,000 b. (35,000) c. 65,000 d. (65,000)

5. Your audit of Kimberlie Corporation for the year 2020 disclosed the following property dispositions:

Land Building Warehouse Machine Delivery truck

Cost P3,200,000 1,200,000 5,600,000 640,000 800,000

Acc. Dep. 880,000 256,000 380,000

Proceeds 2,480,000 288,000 5,920,000 72,000 376,000

Fair value 2,480,000 5,920,000 576,000 376,000

Mode Condemnation Demolition Destruction by fire Exchange Sale

Land On January 15, a condemnation award was received as 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 4,000,000, of which 30% was allocated to the building on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was accomplished during the month of August. Cash proceeds received in September represent the net proceeds from demolition of building. Warehouse On July 4, the warehouse was destroyed by fire. The warehouse was purchased on January 2, 2013. On December 12, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of 4,800,000. Machine On December 15, the machine was exchanged for a similar machine having a fair value of 504,000 and cash of 72,000 was received. Delivery Truck 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. 2,480,000 gain

b. 3,200,000 loss

c. 720,000 loss

d. 0

2. Building a. 288,000 gain

b. 912,000 loss

c. 1,488,000 loss

d. 0

3. Warehouse a. 1,200,000 gain

b. 3,600,000 loss

c. 320,000 gain

d. 0

4. Machine a. 24,000 gain

b. 192,000 gain

c. 18,000 gain

d. 0

5. Delivery truck

a. 424,000 loss 44,000 gain

b. 44,000 loss

c. 424,000 gain

d.

6. On January 1, 2020, Jerome Corporation purchased for 1,200,000, a tract of land (site number 143) with a building. Jerome paid a real estate broker’s commission of 72,000, legal fees of 12,000, and title guarantee insurance of 36,000. The closing statement indicated that the land value was 1,000,000 and the building value was 200,000. Shortly after acquisition, the building was razed at a cost of 108,000 Jerome entered into a 6,000,000 fixed-price contract with JADE Builders, Inc. on January 1, 2020 for the construction of an office building on land site number 143. The building was completed and occupied on September 1, 2021. Additional construction costs were incurred as follows: Plans, specifications, and blueprints

42,000

Architects’ fees for design and supervision

164,000

The Building is estimated to have a 40-year life from the date of completion and will be depreciated using the 150% declining method. To finance construction costs, Jerome borrowed 1,000,000 with a 12% interest on January 1, 2020. The loan was outstanding for the entire years of 2020 and 2021. The company’s other interest-bearing debts include the following (also outstanding for the entire year of 2020 and 2021) Principal

Borrowing Costs

10% bank loan

2,800,000

280,000

10% short-term note

3,200,000

320,000

12% long-term loan

2,000,000

240,000

8,000,000

840,000

Expenditures of the project were as follows: Date January 1, 2020

Expenditures 1,000,000

April 1, 2020

500,000

October 1, 2020

800,000

December 31, 2020

900,000 3,200000

January 1, 2021 May 1, 2021 September 1, 2021 Questions:

1,000,000 600,000 1,200,000...