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CPA REVIEW SCHOOL OF THE PHILIPPINES PHILIPPINES (CPAR)

AP-7803-AUDIT AP-7803-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

GADON, INC. incurred the following cost during the year ended December 31, 2018, in relation to property, plant, and equipment: Land and old building (Note 1) Realtor commission Legal fees, realty taxes and documentation expenses Amount paid to relocate persons squatting on the property Cost of removal of old building (Note 2) Grading and drainage on land site Cost of new building (Note 3) Building permit fee Excavation Cost of paving driveway and parking lot Cost of trees, shrubs, and other landscaping Cost of installing lights in parking lot Architect fee Payment of medical bills of employees accidentally injured while inspecting building construction Insurance on new building (Note 4) Interest expense on new building (Note 5) Cost of fencing the property Invoice cost of machine acquired Freight, unloading, and delivery charges Custom duties and other charges Allowances and hotel accommodation paid to foreign technicians during installation and test run of machine Estimated dismantling cost to be incurred as required by contract Cost of adjustment to machine to make it operate more efficiently Fee paid to consultants for advice on the acquisition of the machine Cost of training for personnel who will use the machine Cost of open house party to celebrate opening of building

₱ 4,800,000 600,000 100,000 200,000 300,000 300,000 10,000,000 100,000 100,000 80,000 110,000 10,000 400,000 20,000 120,000 83,333 220,000 4,000,000 120,000 280,000 800,000 60,000 150,000 50,000 50,000 150,000

1.

To acquire the property, GADON, Inc. paid ₱3,800,000 cash and issued 10,000 preference shares with par value value ₱100. On the acquisition date, the share had a closing market price of ₱120 on a stock exchange. Current assessed values for the land and the usable building are ₱4,500,000 and ₱1,500,000 respectively.

2.

The company negotiated a price of ₱400,000 to tear down the old building to make room for construction of new building. The contractor retains all salvageable materials estimated to be worth ₱100,000.

3.

This represents the contract price for the new building which was placed into service on December 1, 2018.

4.

A one-year insurance was taken out on the building and its contents at ₱120,000 effective December 1, 2018.

5.

A loan was obtained when the new bu ilding was placed into service to cover the contract price. Interest was calculated based on ₱10,000,000 at the effective 10% interest rate for 1 month, or ₱83,333. 1.

What is the cost of land? A. ₱6,200,000 B. ₱4,950,000

C. ₱4,800,000 D. ₱6,000,000

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)

2.

3.

4.

5.

AP-7803-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

What is the cost of building? A. ₱10,900,000 B. ₱12,150,000

C. ₱11,200,000 D. ₱11,300,000

What is the cost of land improvement? A. ₱200,000 B. ₱190,000

C. ₱430,000 D. ₱420,000

What is the cost of machine? A. ₱4,660,000 B. ₱5,310,000

C. ₱5,400,000 D. ₱5,460,000

How much of the above expenditures should be charged to exp enses for the year ended December 31, 2018? A. ₱433,333 C. ₱303,333 B. ₱463,333 D. ₱313,333

TARAN CO. stated operations on September 1, 2013. TARAN’s accounts at December 31, 2016 included the following balances: Machinery (at cost) Accumulated depreciation – machinery Vehicles (at cost; purchased November 21, 2015) Accumulated depreciation – vehicle Land (at cost; purchased October 25, 2013) Building (at cost; purchased October 25, 2013) Accumulated depreciation – building DetailsofmachinesownedatDecember31,2016areasfollows: Machine Purchase Date Cost Useful Life 1 October 7, 2013 ₱430,000 5 years 2 February 4, 2014 ₱480,000 6 years

₱910,000 482,000 468,000 196,560 810,000 1,857,200 286,140

Residual Value ₱25,000 ₱30,000

 Additional information: 

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TARAN calculates depreciation to the nearest month and balances the records at month-end. Recorded amounts are rounded to the nearest peso, and the reporting date is December 31. TARAN uses straight-line depreciation for all depreciable assets, except vehicles, which are depreciated on the diminishing balance at 40% per annum. The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which cost ₱234,000. On acquiring the land and building, TARAN estimated the building’s useful life and residual value at 20 years and ₱50,000, respectively.

The following transactions occurred from January 1, 2017: 2017 Jan. 03 Bought a new machine (machine 3) for a cash price of ₱570,000. Freight charges of ₱4,420 and installation costs of ₱17,580 were paid in cash. The useful life and residual value were estimated at five years and ₱40,000, respectively. June 22 Bought a second-hand vehicle for ₱152,000 cash. Repainting costs of ₱6,550 and four new tires costing ₱3,450 were paid for in cash. Aug. 28 Exchanged machine 1 for office furniture that had a fair value of ₱125,000 at the date of exchange. The fair value of machine 1 at the date of exchange was ₱115,000. The office

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)

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2018 April May June

30 25 26

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2019 Jan.

05

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20

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04

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AP-7803-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

furniture originally cost ₱360,000 and, to the date of exchange, had been depreciated by ₱241,000 in the previous owner’s books. TARAN estimated the office furniture’s useful life and residual value at eight years and ₱5,400, respectively. Recorded depreciation.

Paid for repairs and maintenance on the machinery at a cash cost of ₱9,280. Sold one of the vehicles bought on November 21, 2015 for ₱66,000 cash. Installed a fence around the property at a cash cost of ₱55,000. The fence has an estimated useful life of 10 years and zero residual value. (Debit the cost to land improvements asset account.) Recorded depreciation.

Overhauled machine 2 at a cash cost of ₱120,000, after which TARAN estimated its remaining useful life at one additional year and revised its residual value to ₱50,000. Traded in the remaining vehicle bought on November 21, 2015 for a new vehicle. A trade-in allowance of ₱37,000 was received and ₱233,000 was paid in cash. Scrapped the vehicle bought on June 22, 2017, as it had been so badly damaged in a traffic accident that it was not w orthwhile repairing it. Recorded depreciation.

1.

What should be the depreciation expense for the vehicles for 2017? A. ₱140,976 C. ₱139,666 B. ₱138,976 D. ₱140,286

2.

What should be the depreciation expense for the machinery for 2017? A. ₱242,733 C. ₱239,400 B. ₱235,000 D. ₱266,400

3.

What should be the balance of the Accumulated depreciation  –  office furniture account at December 31, 2018? A. ₱19,933 C. ₱19,833 B. ₱18,267 D. ₱58,083

4.

What should be the depreciation expense for the machinery for 2019? A. ₱277,708 C. ₱221,400 B. ₱197,400 D. ₱205,400

5.

What should be the total depreciation expense for 2019? A. ₱394,060 C. ₱409,612 B. ₱418,060 D. ₱403,832

PROBLEM NO. 3 At December 31, 2017, M COMPANY’S noncurrent operating asset and accumulated depreciation accounts had balances as follows: Cost of Asset Accumulated Depreciation Land ₱  130,000 Buildings 1,200,000 ₱ 265,400 Machinery and equipment 775,000 196,200 Automobiles and trucks 132,000 86,200 Leasehold improvements 221,000 110,500

Land improvements Buildings Machinery and equipment Automobiles and trucks Leasehold improvements

Depreciation Method Straight-line 150% declining balance Straight-line 150% declining balance Straight-line

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Useful Life 12 years 25 years 10 years 5 years 8 years

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)

AP-7803-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

Depreciation is computed to the nearest month. The salvage values of the depreciable assets are immaterial. Transactions during 2018 and other information are as follows: (a) On January 6, a plant facility consisting of land, and a building was acquired from A Corp. for P600,000. Of this amount 20% was allocated to land. (b) On April 6, 2018, new parking lots, streets, and sidewalks at the acquired plant facility were completed at a total cost of P192 ,000. These expenditures had an estimated useful life of 12 years. (c) The leasehold improvements were completed on December 31, 2014, and had an estimated useful life of 8 years. The related lease, which would have term inated on December 31, 2020, was renewable for an additional 4-year term. On A pril 29, 2018, M exercised the renewal option. (d) On July 1, 2018, machinery and equipment were purchased at a total invoice cost of ₱250,000. Additional costs of ₱10,000 for delivery and the ₱30,000 for installation were incurred. (e) On August 30, 2018, M purchased a new automobile for ₱15,000. (f) On September 30, 2018, a truck with a cost of ₱24,000 and a carrying amount of ₱8,100 on the date of sale was sold for ₱11,500. Depreciation for the 9 months ended September 30, 2018, was ₱2,352. (g) On December 20, 2018, a machine with a cost of ₱17,000 and a carrying amount of ₱2,975 at date of disposition was scrapped without cash recovery. 1. What is the depreciation expense on land improvements for 2018? A. ₱10,667 C. ₱12,000 B. ₱8,000 D. ₱16,000 2. What is the depreciation expense on building for 2018? A. ₱84,876 C. ₱113,168 B. ₱100,800 D. ₱56,076 3. What is the carrying amount on January 1, 2018, of the truck sold on September 30, 2018? A. ₱8,100 C. ₱5,748 B. ₱5,670 D. ₱10,452 4. What is the depreciation expense for 2018, on automobile purchased August 30, 2 018? A. ₱ 0 C. ₱1,500 B. ₱3,000 D. ₱4,500 5. What is the depreciation on automobiles and trucks for 2018? A. ₱14,456 C. ₱17,592 B. ₱15,240 D. ₱10,604 6. What is the depreciation expense on leasehold improvements for 2018? A. ₱15,786 C. ₱36,833 B. ₱22,100 D. ₱27,625 7. What as the total cost of the machinery and equipment acquired on July 1, 2018? A. ₱260,000 C. ₱250,000 B. ₱280,000 D. ₱290,000 8. What is the depreciation expense on machinery and equipment for 2018? A. ₱92,000 C. ₱77,500 B. ₱106,500 D. ₱86,900

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)

AP-7803-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

9. What is the book value of the machinery and equipment on December 31, 2018? A. ₱578,800 C. ₱773,825 B. ₱575,825 D. ₱776,800 10. What is the total depreciation expense for 2018? A. ₱219,118 B. ₱225,432

C. ₱210,932 D. ₱226,216

PROBLEM NO. 4 On January 1, 2018, MIBUROT Corporation contracte d with Maga Construction Company to construct a building for ₱40,000,000 on land that MIBUROT purchased several ye ars ago. The contract provides that MIBUROT is to make five payments in 2018, with the last payment scheduled for the date of completion. The building was completed on December 31, 2018. MIBUROT made the following payments during 2018: January 1 March 31 June 30 September 30 December 31 Total

₱4,000,000 8,000,000 12,200,000 8,800,000 7,000,000 ₱40,000,000

MIBUROT had the following debt outstanding at December 31, 2018: a) A 12%, 4-year note dated January 1, 2018, with interest compounded quarterly. Both principal and interest are payable on December 31, 2021. This loan rates specifically to the building project. b) A 10%, 10-year note dated December 31, 2 014, with simple interest; interest payable annually on December 31. c) A 12%, 5-year note dated December 31, 2015, with simple interest; interest payable annually on December 31. 1.

The amount of interest to be capitalized during 2018 is A. ₱5,012,680 C. ₱2,277,710 B. ₱2,133,680 D. ₱ 0

2.

The amount of interest that would be expe nsed for 2018 is A. ₱2,735,960 C. ₱2,277,720 B. ₱5,013,680 D. ₱ 0

PROBLEM NO. 5 On January 1, 2016, DISUSUKO COMPANY acquired a factory equipment at a cost of ₱150,000. The equipment is being depreciated using the straight-line method over its projected useful life of 10 years. On December 31, 2017, a determination was made that the asset’s recoverable amount was only ₱96,000. Assume that this was properly computed and that recognition of the impairment was warranted. On December 31, 2018, the asset’s recoverable amount was determined to be ₱111,000 and management believes that the impairment loss previously recognized should be reversed. You have been asked to assist the company’s accountant in the application of PAS 36, the standard on impairment of assets. 1.

What amount of impairment loss should be recognized on December 31, 2017? A. ₱54,000 C. ₱24,000 B. ₱90,000 D. ₱ 0

2.

What is the asset’s carrying value on December 31, 2018? A. ₱84,000 C. ₱86,400 B. ₱90,000 D. ₱96,000

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)

AP-7803-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

3.

What would have been the assets carrying amount at December 31, 2018, had the impairment not been recognized in 2017? A. ₱105,000 C. ₱96,000 B. ₱84,000 D. ₱86,400

4.

What amount of impairment recovery should be reported in the 2018 income statement? A. ₱27,000 C. ₱6,000 B. ₱ 0 D. ₱21,000

PROBLEM NO. 6 In 2013, BIRDIE CORPORATION acquired a silver mine in Benguet. Because the mine is located deep in the Benguet Mountains, BIRDIE was able to acquire the mine for the low price ₱50,000. In 2014, BIRDIE constructed a road to the silver mine costing ₱5,000,000. Improvements to the mine made in 2014 cost ₱750,000. Because of the improvements to the mine and the surrounding land, it is estimated that the mine can be sold for ₱600,000 when the mining activities are complete. During 2015, five buildings were constructed near the time state to house the mine workers and their families. The total cost of the five building was ₱1,500,000. Estimated residual value is ₱250,000. In 2013, geologists estimated 4 million tons of silver ore could be removed from the mine for refining. During 2016, the first year of operations, only 5,000 tons of silver ore were removed from the mine. However, in 2017, 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 ₱275,000 were made to the mine early in 2017 to facilitate the removal of the additional silver. Early in 2017, an additional building was constructed at a cost of ₱225,000 to house the additional workers needed to excavate the added silver. This building is not expected to have any residual value. In 2018, 2.5 million tons of silver were mined and costs of ₱1,100,000 were incurred at the beginning of the year for improvements to the mine. Based on the above and the result of your audit, determine the following. ( Round off depletion and depreciation rates to two decimal places.) 1.

2.

3.

4.

5.

Depletion for 2016 A. ₱6,300 B. ₱6,500

C. ₱72,550 D. ₱5,550

Depletion for 2017 A. ₱1,300,000 B. ₱1,820,000

C. ₱780,000 D. ₱870,000

Depreciation for 2017 A. ₱250,000 B. ₱490,000

C. ₱180,000 D. ₱210,000

Depletion for 2018 A. ₱1,950,000 B. ₱2,150,000

C. ₱2,425,000 D. ₱2,275,000

Depreciation for 2018 A. ₱525,000 B. ₱625,000

C. ₱1,225,000 D. ₱450,000

PROBLEM NO. 7 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.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)

AP-7803-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

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 resolution 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 o f 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 an 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 additions? A. Inspecting documents and physically examining assets. B. Recomputing calculations and obtaining written management representations. C. Observing operation 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 r ecognized. B. Overhead has been over applied. 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 & t hen locate them during the plant tour. B. Compare depreciation journal entries with similar prior-year e ntries 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.

7.

Determining that proper amounts of depreciation are expensed provides assurance about management’s assertions of valuation and allocation and A. Presentation and disclosure C. Rights and obligation B. Completeness D. Existence

8.

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

9.

An auditor analyses 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 recor ded in the proper period. C. Noncapitalizable expendtures for repairs and maintenance have been properly charged to expense.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)

AP-7803-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

D. Expenditures for property and equipment have not been charged to 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 repainted. 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 B. Gain on disposal of equipment C. Depreciation expense D. Repair and maintenance expense 12. The auditor is least likely to learn of retirements of equipment through which of the following: A. Review of the purchase returns and allowances account. B. Review of depreciation. C. Analysis of the debits to the accumulated depreciation account. D. Review of insurance policy riders. 13. In the audit of property, plant, and equipment, the auditor tries to do all of the following except to A. Obtain an understanding of internal control. B. Determine the extent of property abandoned during the year. C. Assess the adequacy of replacement funds. D. Judge the reasonableness of the depreciation. 14. PPE additions should be recorded correctly as to account, amount, and period. Which of the following environmental considerations indicates that the risk of PPE additions is high? A. Most construction is performed in-house. B. Gross property, plant, and equipment increased 25% during the current period. C. Recently acquired loans preclude further plant acquisition for 2 years. D. All material additions are required to be approved by the board of directors. 15. Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions? A. Are requests for major repairs approved at a higher level than the department initiating the request? B. Are prenumbered purchase orders used for e quipment and periodically accounted for? C. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids? D. Are procedures in place to mo nitor and properly restrict access to e quipment? --END--

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