Act 20-Ap 04 Ppe
Act 20-Ap 04 Ppe
Act 20-Ap 04 Ppe
EQUIPMENT
J. VILLENA, CPA
PROBLEM 1
The property, plant and equipment section of Rolex Corporations balance sheet at December 31,
2014 included the following items:
Land
Land improvements
Building
P 2,500,000
560,000
3,600,000
6,600,000
During 2015 the following data were available to you upon your analysis of the accounts:
Cash paid on purchase of land
Mortgage assumed on the land bought, including interest at 16%
Realtors commission
Legal fees, realty taxes and documentation expenses
Amount paid to relocate persons squatting on the property
Cost of tearing down an old building on the land
Amount recovered from the salvage of the building demolished
Cost of fencing the property
Amount paid to a contractor for the building erected
Building permit fees
Excavation expenses
Architects fee
Interest that would have been earned had the money used during
the period of construction been invested in the money market
Invoice cost of machinery acquired
Freight, unloading, and delivery charges
Customs duties and other charges
Allowances, hotel accommodations, etc., paid to foreign
technicians during instillation and test run of machines
Royalty payment on machines purchased (based on units
produced and sold)
P10,000,000
16,000,000
1,200,000
200,000
400,000
300,000
600,000
440,000
8,000,000
50,000
250,000
100,000
600,000
8,000,000
240,000
560,000
1,600,000
480,000
REQUIRED:
Based on the above and the result of your audit, compute for the following as of December 31,
2015:
1. Land
2. Land improvements
3. Building
4. Machinery and equipment
5. Total depreciable property, plant and equipment
PROBLEM 2
The CYRUS COMPANY completed the following transactions during 2016:
March 1
30
May 15
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Purchased real property for P 8,297,000 including a charge for P297,000 representing
property tax for March 1- June 30 which was prepaid by the vendor. Of the purchase
price, 25% is deemed applicable to land and the remaining 75% to buildings. The
Cyrus Company assumed a mortgage of P4,600,000 on the purchase and paid cash
for the balance.
The building acquired necessitates current reconditioning at a cost of P342,000
Because the previous owns had failed to take care of normal maintenance and repair
requirements on it.
Garages in the rear of the building were demolished. The Cyrus Company recovered
P66,000 on the lumber salvage. It then proceeded to construct a warehouse at
P1,013,000, which was almost exactly the same as bids made by construction
companies. Upon completion of construction, city inspectors ordered extensive
modifications to the warehouse as a result of failure on the part of the company to
comply with building safety code. Such modifications, which could have been avoided
cost P124,000.
04-04
The company exchanged its own ordinary share capital with a market value of
P 640,000 (par, P40,000) for a patent and new toy-making machine. The
machine has a market value of P310,000.
July 1
The new machinery for the new building arrived. In addition to the machinery, a new
franchise was acquired from the manufacturer of the machinery to produce toy
robots. Payment was made by issuing the company owns shares (par P1,000,000).
The value of the franchise is set at P500,000, while the machines fair value is
P610,000.
Nov 20
The company contracted for parking lots and landscaping at a cost of P420,000 and
P89,000 respectively. The work was completed and paid for on November 20.
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 P64,000.
After considering the preceding transactions, compute the year-end balances of the following:
1. Buildings
A. P 7,289,000
7,635,750
B. P 7,511,750
C. P 7,413,000
D.
2. Land
A. P 2,074,250
2,509,000
B. P 2,000,000
C. P 2,583,250
D.
3. Machinery
A. P 1,070,000
B. P 770,000
C. P931,000
D. 920,000
4. Share Premium
A. P 10,000
B. P 500,000
C. P 710,000
D. P600,000
5. Intangibles
A. P 830,000
B. P 500,000
C. P330,000
D. 840,000
PROBLEM 3
In the audit of the books of Jannas Corporation for the year 2016 the following items and
information appeared in the Production Machine account of the client:
Date
01/01
02/28
09/01
12/01
Particulars
Balance- Machine 1, 2, 3, and 4
Machine 5
Machine 1
Machine 6
Machine 7
Debit
P 720,000
P 396,000
Credit
P 6,000
P 192,000
P 432,000
The accumulated depreciation account contained no entries for the year 2014. The balance on
January 1, 2016per your audit, was as follows:
Machine
Machine
Machine
Machine
1
2
3
4
P168,750
P 78,750
P 67,500
P 45,000
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 P
6,000.
2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on
December 1, 2016. Machine 7 was to replaced Machine 2.
3. Machine 3 was traded in for Machine 6 at an allowance of P 24,000 the difference was paid
in cash and charged to Production Machine Account.
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04-04
04-04
June
CR
30,000
June
CR
150,000
D. P25,000
D. P
P 2,500,000
3,000,000
4,000,000
3,000,000
1,500,000
2,500,000
3,000,000
On January 3, 2015, the company obtained a P5 million construction loan with a 10% interest rate.
The loan was outstanding all of 2015 and 2016. The companys 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 2015 and
2016. The companys fiscal year-end is December 31.
1. What is the amount of capitalizable interest in 2015?
A. P 3,400,000
C. P663,125
B. P 1,043,000
D. P 500,000
2. What is the amount of capitalizable interest in 2016?
A. P 630,625
C. P 361,707
B. P 654,663
D. P 799,663
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4. What are the estimated depletion and depreciation charges for the 7th year?
Depletion
Depreciation
A.
P 4,845,000
P 1,560,000
B.
P 2,422,500
P 1,560,000
C.
P 2,422,500
P 1,380,000
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P 4,845,000
P 1,380,000
5. What are the estimated depletion and depreciation charges for the 11TH year?
Depletion
Depreciation
A.
P 4,845,000
P 1,380,000
B.
P 4,845,000
P 690,000
C.
P 2,422,500
P 1,380,000
D.
P 2,422,500
P 690,000
PROBLEM 6
1. 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.
2. Which of the following is not likely a motive for management to manipulate the timing and
amount of impaired asset write-downs?
a. Steady increases in earnings per share over the past 5 years.
b. Income smoothing.
c. A "big bath."
d. An abnormally unprofitable year.
3. 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 over-applied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
4. 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.
5. Determining that proper amounts of depreciation are expensed provides assurance about
managements assertions of valuation and
a. Presentation and disclosure.
c. Rights and obligations.
b. Completeness.
d.
Existence or occurrence.
6. 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.
7. 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.
8. In violation of company policy, SINGLE Company erroneously capitalized the cost of painting
its warehouse. An auditor would most likely detect this when
a. Discussing capitalization policies with Singles 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.
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d.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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. Re-computing 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.
-END of 0404-
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