ACT 20-AP 04 PPE

AUDIT OF PROPERTY PLANT AND EQUIPMENT J. VILLENA, CPA PROBLEM 1 The property, plant and equipment section of Rolex Corporation’s balance sheet at December 31, 2014 included the following items: Land Land improvements Building

P 2,500,000 560,000 3,600,000

Machinery and equipment

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% Realtor’s 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 Architect’s 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

AUDIT OF PROPERTY PLANT AND EQUIPMENT J. VILLENA, CPA June 1

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 machine’s 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.

P

2. Land A. P 2,074,250 2,509,000

B. P 2,000,000

C. P 2,583,250

D.

P

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 Janna’s 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. Page 2 of 7

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AUDIT OF PROPERTY PLANT AND EQUIPMENT J. VILLENA, CPA 4. Depreciation rate is recognized at 25% per annum. Questions: 1. What is the adjusting entry to correct the entry made on the sale of Machine 1 will include a? A. Debit to Accumulated Depreciation P 176,250 B. Debit to Cash P 6,000 C. Credit to Production Machine P 180,000 D. Credit to Gain on Sale of Machine P 5,250 E. All of the above 2. What is the adjusting entry to correct the entry made on the destruction of Machine 2 will include a? A. Credit to Cash P432,000 B. Credit to Production Machine P101,250 C. Debit to Accumulated Depreciation P120,000 D. Debit to Loss on Destruction of Machine P101,250 E. All of the above 3. What is the adjusting entry to correct the entry made on the trade-in of Machine 3 will include a? A. Debit to Accumulated Depreciation P67,500 B. Debit to Loss on Exchange P58,500 C. Credit to Production Machine P67,500 D. Credit to Cash P192,000 E. None of the above 4. The total depreciation for the year ended December 31, 2016 is A. P 237,000 C. P 236,250 B. P 232,500 D. P 233,250 5. What is the carrying amount of production machine as of December 31, 2016 is A. P 1,024,500 C. P 1,069,500 B. P 1,029,000 D. P 990,750 PROBLEM 4 Shown below are the Machinery and Equipment and Delivery Equipment accounts of the JAPX COMPANY. One-half year’s depreciation is charged in the year of acquisition and/or disposition for these assets. The client uses the SLM of depreciation. The following transactions occurred during 2016: a. A 2016 Toyota Truck was purchased for P1,200,000 in June. In the same month, a 2010 Fuso Truck was sold for P150,000. The truck was purchased in April 2012, at a cost of P630,000. b. In June, a drill press was purchased for P33,000. Freight-in was P3,000. A drill press which had been purchased by the client in March 2012 for P30,000 was sold in June at a gain of P7,000. c. One milling machine was purchased in July at a cost of P225,000. Installation Cost which was paid by the client and charged to Miscellaneous Expenses amounted at P10,500. d. While analyzing the Miscellaneous Income account, your assistant found that the proceeds of P1,500 from the sale of an electric welding machine had been credited to this account. The machine, acquired in March 2011 had a cost of P12,000. The machine was sold in September 2016.

Machinery and Equipment Page 3 of 7

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AUDIT OF PROPERTY PLANT AND EQUIPMENT J. VILLENA, CPA 01/01/16 Bal. 450,000 June VR 36,000 July VR 225,000

June

CR

30,000

Accumulated Depreciation-Machinery and Equipment (10% Annual Rate) 01/01/16 Bal. 207,000 Delivery Equipment 01/01/16 Bal. 2,850,000 June 3 VR 1,200,000

June

CR

150,000

Accumulated Depreciation- Delivery Equipment (20% Annual Rate) 01/01/16 Bal. 1,650,000 Based on the preceding information, determine the following: 1. Proceeds from sale of drill press in June 2016 A. P 7,000 B. P 0 C. P 11,000

D. P25,000

2. Machinery and Equipment account balance at December 31, 2016 A. P 676,500 B. P 669,000 C. P679,500 D. P 1,879,500 3. Total depreciation expense for the year ended December 31, 2016 A. P683,475 B. P 882,150 C. P484,800 D. P682,800 4. Carrying Value of Machinery and Equipment at December 31, 2016 A. P 428,025 B. P 434,025 C. P 416,025 D. P 422,025 5. Accumulated depreciation- Delivery Equipment at December 31, 2016 A. P 1,773,000 B. P 2,277,000 C. P 1,836,000 1,647,000

D. P

PROBLEM 5 (BORROWING COST) On January 1, 2015, CPA MFG. CO. began construction of a building to be used as its office headquarters. The building was completed on June 30, 2016. Expenditures on the project were as follows: January 3, 2015 March 31, 2015 June30, 2015 October 31, 2015 January 31, 2016 March 31, 2016 May 31, 2016

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 company’s 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 company’s 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 Page 4 of 7

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AUDIT OF PROPERTY PLANT AND EQUIPMENT J. VILLENA, CPA 3. What amount of interest should be expensed in 2015? A. P 2,736,875 C. P 2,900,000 B. P 2,356,250 D. P 0 4. What amount of interest should be expensed in 2016? A. P 2,769,375 C. P 2,600,337 B. P 3,038, 293 D. P 2,745,337 5. What is the total cost of building (including the interest capitalized in 2015 and 2016)? A. P 24,600,000 C. P 20,905,457 B. P 20,817,788 D. P 20,630,625 PROBLEM 6 WALANG FOREVER (WF) CO. has acquired a tract of mineral land for P 50 million. WF estimates that the acquired property will yield 150,000 tons of ore with sufficient mineral content to make mining and processing profitable. It further estimates that 7,500 tons of ore will be mined the first and last year and 15,000 tons every year in between. (Assume 11 years of mining operations.) The land will have a residual value of P 1,550,000. WF builds necessary structures and sheds on the site at a total cost of P12,000,000. The company estimates that these structures can be used for 15 years but, because they must be dismantled if they are to be moved, they have no residual value. WF does not intend to use the building elsewhere. Mining machinery installed at the mine was purchased secondhand at a total cost of P3,600,000. The machinery cost the former owner P9,000,000 and was 50% depreciated when purchased. WF estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and then will be worthless. Cost is to be allocated equally between these two classes of machinery. Questions: 1. What are the estimated depletion and depreciation charges for the 1st year? Depletion Depreciation A. P 4,845,000 P 870,000 B. P 4,845,000 P 780,000 C. P 2,422,500 P 870,000 D. P 2,422,500 P 780,000 2. What are the estimated depletion and depreciation charges for the 5th year? Depletion Depreciation A. P 4,845,000 P 1,740,000 B. P 4,845,000 P 1,560,000 C. P 2,422,500 P 1,740,000 D. P 2,422,500 P 1,560,000 3. What are the estimated depletion and depreciation charges for the 6th year? Depletion Depreciation A. P 4,845,000 P 1,740,000 B. P 4,845,000 P 1,560,000 C. P 2,422,500 P 1,740,000 D. P 2,422,500 P 1,560,000

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 Page 5 of 7

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AUDIT OF PROPERTY PLANT AND EQUIPMENT J. VILLENA, CPA D.

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 management’s 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 Single’s 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. Page 6 of 7

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AUDIT OF PROPERTY PLANT AND EQUIPMENT J. VILLENA, CPA 9. 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 c. Depreciation expense b. Gain on disposal of equipment

d.

Repair and maintenance expense

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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