Assignment - Audit of Ppe1

 AUDITING  AUDITING PROBLEMS PROBLEMS

Audit of Property, Plant & Equipment 

ASSIGNMENT

PROBLEM NO. 1

Richard Company commenced operations on July 1, 2013. During the following year, the company acquired a tract of land, demolished the building on the land and built a new factory. Equipment was acquired for the factory and, in March 2014, the plant was ready to commence operation. During this period, the following inflows and outflows occurred: While searching for a suitable block of land, Richard Company placed an option to buy with three real estate agents at a cost of P1,000 each. One of these blocks of land was later acquired. Payment of option fees P 3,000 Receipt of loan from bank 4,000,000 Payment to settlement agent for title search stamp duties and settlement fees 100,000 Payment of arrears in rates on building and land 50,000 Payment for land 1,000,000 Payment for demolition of current building on land 120,000 Proceeds from sale of material from old building 55,000 Payment to architect 230,000 Payment to council for approval of building construction 120,000

Payment for safety fence around construction site Payment to construction contractor for factory building Payment for external driveways, parking bays and safety lighting Payment for safety inspection on building Payment for equipment Payment for freight and insurance costs on delivery of equipment Payment of installation costs on equipment Payment for safety equipment surrounding equipment Payment for removal of safety fence Payment for new fence surrounding the factory Payment for advertisements in the local paper about the forthcoming factory and its benefits to the local community Payment for opening ceremony Payments to adjust equipment to more efficient operating levels subsequent to initial operation

34,000 2,400,000 540,000 30,000 640,000 56,000 120,000 110,000 20,000 80,000

5,000 60,000

33,000

REQUIRED: Compute the cost of the following: 1. Land 2. Land Improvements 3. Building 4. Equipment

PROBLEM NO. 2

You were engaged in making your second annual examination of Charlyn Company. The Machinery and Accumulated Depreciation accounts are shown below:

01/01/14 06/01/14 09/01/14 01/01/15

12/31/14

Machinery P 500,000 09/01/14 Sale of Machine No. 3 150,000 12/31/14 Balance 4,000 P 654,000 P 644,000

Balance Machine No. 23 Dismantling of Machine No. 3 Balance

 Accumulated Depreciation Depreciation P 344,400 01/01/14 Balance 12/31/14 Depreciation P 344,400 01/01/15 Balance

Balance

Your examination disclosed the following information: a. The following adjusted balances appeared on December 31, 2013 working papers: Machinery – Machinery  – P500,000;  P500,000; Accumulated Depreciation – Depreciation – P280,000.  P280,000. b. The company has depreciated all items of machinery at 10% per annum. The oldest item owned is seven years old as of December 31, 2014. c. It is the company’s policy to take full year’s depreciation in the year of acquisition and none in the year of disposition. d. Machine No. 3, which was purchased on March 1, 2010, at a cost of P80,000, was sold on September 1, 2014 for P10,000 cash. 1 |

M A U R E A L

P 10,000 644,000 P 654,000

P 280,000 64,400 P 344,400 P 344,400

e. Included in charges to Repairs and Maintenance account was an invoice for installation of Machine No. 23, in the amount of P35,000. QUESTIONS: Based on the information presented above and the result of your audit, answer the following: 5.

How much is the loss on the sale of Machine No. 3? a. P 38,000 b. P 37,333 c. P 42,000 d. P 0

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SJC MAASIN / A.Y. 2014-2015

 AUDITING PROBLEMS

Audit of Property, Plant & Equipment 

ASSIGNMENT

3. 6. The adjusting entry to correct the entry made in recording sale of Machine No. 3 will include a debit to a. Loss on sale of machinery P 42,000 b.  Accumulated Depreciation P 32,000 c. Both a and b d. No adjusting entry is necessary

4.

Machine 3 was traded in for Machine 6 at an allowance of P24,000; the difference was paid in cash and charged to Production Machine account. Depreciation rate is recognized at 25% per annum.

7. How much is the adjusted balance of the Machinery account as of December 31, 2014? a. P 644,000 b. P 296,500 c. P 605,000 d. P 609,000

QUESTIONS: Based on the above and the result of your audit, answer the following: 10. The adjusting entry to correct the entry made on the sale of Machine 1 will include a a. Debit to Accumulated Depreciation P176,250 b. Debit to Cash P6,000 c. Credit to Production Machine P180,000 d. Credit to Gain on Sale of Machine P5,250

8. How much is the total depreciation expense on machinery for 2014? a. P 64,400 b. P 60,500 c. P 50,000 d. P 58,125

11. The adjusting entry to correct the entry made on the destruction of Machine 2 will include a a. Debit to Accumulated Depreciation P120,000 b. Debit to Loss on Destruction of Machine P101,250 c. Credit to Production Machine P101,250 d. Credit to Cash P432,000

9. How much is the balance of the Accumulated Depreciation account as of December 31, 2014? a. P 308,500 b. P 301,458 c. P 344,000 d. P 340,500

12. The adjusting entry to correct the entry made on 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

PROBLEM NO. 3

In the audit of the books of Queen Sheil Corporation for the year 2014, 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 at P180,000 each Machine 5 Machine 1 Machine 6 Machine 7

Debit

Credit

P 720,000 396,000 P 6,000 192,000 432,000

The Accumulated Depreciation account contained no entries for the year 2014. The balance on January 1, 2014 per your audit, was as follows: Machine 1 Machine 2 Machine 3 Machine 4

P 168,750 78,750 67,500 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 P6,000. 2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on December 1, 2014. Machine 7 was to replace Machine 2.

13. The total depreciation for the year ended December 31, 2014 is a. P 237,000 b. P 232,500 c. P 233,250 d. P 236,250 14. The carrying amount of production machine as of December 31, 2014 is a. P 1,024,500 b. P 1,029,000 c. P 1,069,500 d. P 990,750 PROBLEM NO. 4

Chaide Company’s property, plant, and equipment, accumulated depreciation, and amortization balances at December 31, 2013 are:

Land Buildings Machinery and equipment  Automobile and trucks Leasehold improvements Totals

M A U R E A L

P 672,900 367,500 114,326 108,000 P 1,262,726

 Additional information on depreciation, amortization methods, and useful lives follows:  Asset Buildings

2 |

Cost P 275,000 2,800,000 1,380,000 210,000 432,000 P 5,097,000

 Accumulated depreciation

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Depreciation Method 150% - declining bal.

Useful Life 25 years

SJC MAASIN / A.Y. 2014-2015

 AUDITING PROBLEMS

Audit of Property, Plant & Equipment  Machinery & Equipment  Automobile and trucks (all acquired after 2009) Leasehold improvements

Straight-Line 150%-declining bal.

10 years 5 years

Straight-line

Depreciation is computed to the nearest month. Salvage values of depreciable assets are immaterial except for automobiles and trucks which have estimated salvage values equal to 15% of cost. Other additional information: Chaide entered into a twelve-year operating lease starting January 1, 2011. The leasehold improvements were completed on December 31, 2010 and the facility was occupied on January 1, 2011. On January 6, 2014, Chaide completed its self-construction of a building on its own land. Direct costs of construction were P1,095,000. Construction of the building required 15,000 direct labor hours. Chaide’s construction department has an overhead allocation system for outside jobs based on an activity denominator of 100,000 direct labor hours, budgeted fixed costs of P2,500,000, and budgeted variable costs of P27 per direct labor hour. On July 1, 2014, machinery and equipment were purchased at a total invoice cost of P325,000. Additional costs of P23,000 to rectify damage on delivery and P18,000 for concrete embedding of machinery were incurred. A wall had to be demolished to enable a large machine to be moved into the plant. The wall demolition cost P7,000, and rebuilding of the wall cost P19,000. On August 30, 2014, Chaide purchased a new automobile costing P25,000. On September 30, 2014, a truck with a cost of P48,000 and a carrying amount of P30,000 on December 31, 2013 was sold for P23,500. On November 4, 2014, Chaide purchased a tract of land for investment purposes for P700,000. Chaide thinks it might use the land as a potential future building site. On December 20, 2014, a machine with a cost of P17,000, a carrying amount of P2,975 on date of disposition, and a market value of P4,000 was sold to a corporate officer.

ASSIGNMENT

18. Carrying amount of automobiles and trucks a. P 68,472 b. P 59,472 c. P 61,722 d. P 52,722 19. Carrying amount of property, plant and equipment a. P 5,637,371 b. P 5,608,771 c. P 5,615,521 d. P 5,590,821

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QUESTIONS: Based on the above and the result of your audit, compute for the following as of and for the year ended December 31, 2014: 15. Total depreciation a. P 460,228 b. P 462,678 c. P 470,528 d. P 461,528 16. Carrying amount of buildings a. P 3,409,474 b. P 3,761,974 c. P 3,028,774 d. P 3,381,274 17. Carrying amount of machinery and equipment a. P 1,197,375 b. P 1,180,275 c. P 1,243,925 d. P 1,222,075 3 |

M A U R E A L

PROBLEM NO. 5

The draft balance sheet of Mitzi Corporation as of December 31, 2014 reported the net property, plant and equipment at P6,270,000. Details of the amount follow: Land at cost P1,000,000 Building at cost P4,000,000 Less accumulated depreciation at 12/31/13 ( 800,000) 3,200,000 Plant at cost 5,200,000 Less accumulated depreciation at 12/31/13 ( 3,130,000) 2,070,000 P 6,270,000 The following matters are relevant (a) The company policy for all depreciation is that a full year’s charge is made in the year of acquisition or completion and none in the year of disposal. (b) Included in the sales revenue is P300,000 being the sales proceeds of an item of plant that was sold on June 30, 2014. The plant had originally cost P900,000 and had been depreciated by P630,000 as of December 31, 2013. Other than recording the proceeds in sales and cash, no other accounting entries for the disposal of the plant have been made. All plant is depreciated at 25% per annum on the reducing balance basis. (c) On September 30, 2014, the company completed the construction of a new warehouse. The construction was achieved using the company’s own resources as follows: Purchased materials P 150,000 Direct labor 800,000 Supervision 65,000 Design and planning costs 20,000 Included in the above figures are P10,000 for materials and P25,000 for labor costs that were effectively lost due to the foundations being too close to a neighboring property. All the above costs are included in cost of sales. The building was brought into immediate use upon completion and has an estimated useful life of 20 years (straight-line depreciation). (d)  At the beginning of the current year, the company had an open market basis valuation of its properties (excluding the newly constructed warehouse). Land was valued at P1.2 million and the property at P4.8 million. The directors wish these values to be incorporated into the financial statements.

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SJC MAASIN / A.Y. 2014-2015

 AUDITING PROBLEMS

Audit of Property, Plant & Equipment  The properties had an estimated remaining life of 20 years at the date of the valuation (straight-line depreciation is used). The company makes a transfer to retained earnings in respect of the excess depreciation on revalued assets. (e) Depreciation for the year 2014 has not yet been accounted for in the draft financial statements.

ASSIGNMENT

a. b. c. d.

P 175,000 P 114,800 P 145,600 P 187,600

QUESTIONS: Based on the above and the result of your audit, answer the following:

26. The depletion included in cost of sales for the year ended December 31, 2014 is a. P 173,300 b. P 137,300 c. P 168,350 d. P 110,900

20. The carrying amount of the new warehouse as of December 31, 2014 is a. P 1,000,000 b. P 869,250 c. P 950,000 d. P 987,500

27. The carrying amount of the natural resources as of December 31, 2014 is a. P 290,200 b. P 259,400 c. P 317,400 d. P 217,400

21. The carrying amount of plant as of December 31, 2014 is a. P 1,350,000 b. P 1,375,310 c. P 1,282,500 d. P 1,710,000 22. The total depreciation for the year ended December 31, 2014 is a. P 736,250 b. P 735,750 c. P 380,000 d. P 740,000 23. The revaluation surplus as of December 31, 2014 is a. P 1,720,000 b. P 1,710,000 c. P 1,800,000 d. P 960,000 PROBLEM NO. 6

On January 2, 2012, Calamba Company purchased land for P450,000, from which it is estimated that 400,000 tons of ore could be extracted. It estimates that it will cost P80,000 to restore the land, after which it could be sold for P30,000. During 2012, the company mined 80,000 tons and sold 50,000 tons. During 2013, the company mined P100,000 tons and sold 120,000 tons. At the beginning of 2014, the company spent an additional P100,000, which increased the reserves by 60,000 tons. In 2014, the company mined 140,000 tons and sold 130,000 tons. The company uses a FIFO cost flow assumption. QUESTIONS: Based on the above and the result of your audit, answer the following: (Round depletion rate to two decimal places) 24. The depletion for 2013 is a. P 125,000 b. P 134,000 c. P 107,200 d. P 80,000 25. The depletion for 2014 is 4 |

M A U R E A L

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SJC MAASIN / A.Y. 2014-2015