PPE Handouts

NEW ERA UNIVERSITY COLLEGE OF BUSINESS & ACCOUNTANCY AUDITING PROBLEMS

AUDIT OF PROPERTY, PLANT & EQUIPMENT PROBLEMS

AP 005 RSPADERES

INSTRUCTION: ANSWER THE FOLLOWING QUESTIONS PROBLEM 1 In April 5, 2012, ABS Corporation acquired a land and an old building in exchange for P4,800,000 cash and 50,000 shares of its own ordinary shares with a par value of P30 per share. The Company’s ordinary shares were selling at P95 per share when the acquisition was made. The transaction was recorded by the company as: Land (assessed value) Building (assessed value) Cash Ordinary shares Share premium

5,500,000 4,500,000 4,800,000 1,500,000 3,700,000

Moreover, the Company incurred the following costs in relation to the acquisition: Legal fees to complete the transaction Property taxes for three calendar years including the current year Payments to tenants of old building Cost of demolishing the old building Salvage proceeds from the demolition

400,000 1,800,000 300,000 660,000 60,000

All additional costs were charged to operation during the year including the allocated value of the building which was charged to a loss on the retirement of the asset. The salvage proceeds from the demolition was credited to other income

REQUIRED: 1) What is the correct cost of the land? 2) What is the correct cost of the building? 3) What is the net adjustment to the share premium account?

PROBLEM 2 China Manufacturing Company had several transactions during 2011 and 2012 concerning plant assets. Several of these transactions are described below, followed by the entry or entries made by the Company’s accountant Rspaderes2013

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Equipment. Several used items were acquired on February 1, 2011, by issuing a P100,000 noninterest bearing note. The note is due one year from the date of issuance. No market value of the note or the equipment is available. China’s most recent borrowing rate was 8% February 1, 2011

Equipment Notes payable

December 31, 2011

Depreciation expense Accumulated depreciation equipt

100,000 100,000 10,000 10,000

Buildings. A building was acquired on June 1, 2011 by issuing 100,000 shares of the Company’s P5 par value common stock. The common stock is not widely traded, therefore no market price is availabl. The building was appraised on the transaction date at P650,000. June 1, 2011

Building Common stock

Dec 31, 2011

Depreciation expense Accumulated depreciaton- building

500,000 500,000 20,000 20,000

Inventory/ Fixtures. Inventory and displayed fixtures were acquired for P125,000 cash on April 1, 2012 from a competitor who was liquidating her business. The estimated value of the inventory was P85,000 and the value of the fixtures was P55,000. April 1, 2012

Inventory Display fixtures Cash Gain on acquisition

85,000 55,000 125,000 15,000

Land. Land was donated to China by the city of Davao in September 2012 as an inducement to build a facility there. Plans call for construction at an undetermined future date. The land was appraised at P48,000. NO entry was made. Machinery. Machinery was acquired an exchange for similar equipment on October 12 and were appraised at P45,000 on the date of exchange. China received machinery valued at P40,000 and P5,000 in cash in the transaction. October 12, 2011

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Machinery Cash Accum. Depreciation- machinery Machinery Gain on exchange of machinery

40,000 5,000 16,000 52,500 8,500

Depreciation expense 4,000 Accumulated depreciation- machinery 4,000 Page 2 of 12

Additional information China uses straight line depreciation, applied to all assets as follows: - A full year-depreciation taken in the year of acquisition and no depreciation taken on the year of disposal - Estimated life: 25 years for buildings; 10 years on all other assets (no salvage values are assumed)

REQUIRED: 1) Depreciation expense 2) Land 3) Depreciable fixed assets/ Carrying value

PROBLEM 3 Korea Corporation’s schedule of depreciable assets at December 31, 2011 was as follows: ASSET A B C

COST 100,000 55,000 70,000

ACCUM. DEPR 64,000 36,000 33,600

ACQUISITION YEAR SALVAGE VALUE 2010 20,000 2009 10,000 2009 14,000

Korea takes a full year’s depreciation expense in the year of an asset’s acquisition and no depreciation in the year of an asset’s disposition. The estimated useful life of each depreciable asset is five years. REQUIRED 1) Korea depreciates asset A using the double-declining balance method. How much depreciation expense should Korea record in 2012 for asset A? 2) Using the same depreciation method as used in 2009, 2010, 2011, how much depreciation expense should Korea record in 2012 for asset B? 3) Korea depreciates asset C using the straight-line method. On June 30, 2012, Korea sold asset C for 28,000 cash. How much gain or loss should Korea record in 2012 on the disposal of asset C?

PROBLEM 4 The Japan Company purchased an ELF truck on January 2, 2005 for P500,000. The truck was being depreciated on a straight-line method over an estimated useful life of 10 years with no salvage value. At the beginning of 2012, the Company paid 125,000 to overhaul the truck. As a result of the improvement, the company estimated that the useful life of the truck would extend to an additional five years. Rspaderes2013

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REQUIRED. 1) What should be the depreciation expense recorded for this machine in 2012? 2) How much is the accumulated depreciation as of December 31, 2012.

PROBLEM 5 Russia, a manufacturer of steel products, began operations in October 1, 2009. The accounting department of Russia has started the fixed asset and depreciation schedule presented below. You have been asked to assist in completing the schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the Company’s records and personnel: - Depreciation is computed from the first of the month of acquisition to the first of the month of disposition - Land A and Building A were acquired from a predecessor corporation. Russia paid P8,200,000 for the land and building together. At the time of acquisition, the land had an appraised value of P900,000 and the building had an appraised value of P8,100,000. - Land B was acquired on October 2, 2010, in exchange for 2,500 newly issued shares of Russia’s common stock. At the date of acquisition, the stock had a par value of P50 per share. Also on that date, the land had a fair value of P750,000. During October 2010, Russia Paid P160,000 to demolish the existing building on this land so it could construct a new building. - Construction of Building B on the newly acquired land began on October 1, 2011. By September 30, 2012,Russia had paid P3,200,000 of the estimated total construction cost of P4,500,000. It is estimated that the building will be completed and occupied by July 2013. - Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair market value of P300,000 and the salvage value at P30,000. - Machinery A’s total cost of P1,649,000 includes installation expnse of P6,000 and normal repairs and maintenance of P149,000. Salvage value is estimated at P60,000. Machinery A was sold on February 1, 2012.

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Acquisition date

Assets Land A Building A Land B Building B Donated equipment Machinery A

10/1/2010 10/1/2010 10/2/2010 Under construction 10/2/2012

Depreciation expense for the year ended 2011 2012 N/A N/A 174,500 N/A N/A

Salvag e value

Depreciatio n method

Estimated life in years

? ? ? 3,200,00 0 to date

N/A 400,000 N/A

N/A Straight line N/A

N/A ? N/A

Straight line

30

?

30,000

150% DB

10

?

?

?

60,000

SYD

8

?

?

Cost

10/2/2010

?

REQUIRED: 1) Cost of Land A 2) Cost of Building A 3) Estimated life in years of Building A 4) Depreciation expense – Building A, for the year ended September 30, 2012 5) Cost of Land B 6) Depreciation expense – Building B, for the year ended September 30, 2012 7) Cost of donated equipment 8) Depreciation expense- Donated equipment, for the year ended September 30, 2012 9) Depreciation expense- Machinery A, for the year ended September 30, 2012\

PROBLEM 6 Six situations are given below concerning a plant asset currently used in operations CASE

Carrying value

Value in Use

FMV less cost to sell

1 2 3 4 5 6

120,000 135,000 150,000 180,000 210,000 225,000

180,000 195,000 180,000 120,000 165,000 195,000

135,000 120,000 255,000 90,000 195,000 255,000

REQUIRED: Which among these, if any, would require the recognition of impairment loss and determine the amount of loss?

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PROBLEM 7 Lex Corporation is testing group of assets that comprise one cash generating unit for possible impairment. The assets acquired in January 1, 2005 have an original aggregate cost of P609,000 purchased 3 years ago and depreciated using the straight-line method at a total life of eight years with a residual value of P49,000. The following are the facts about the future expected cash inflows and outflows at December Year 2008 2009 2010 2011 2012

Revenues 225,000 240,000 195,000 130,000 80,000

Costs excluding depreciation 84,000 126,000 165,000 115,000 70,000

The net selling price of this cash generating unit is calculated at P253,500. The prevailing after tax discount rate is 12% while the prevailing pre-tax discount rate is 10% REQUIRED: 1) What is the carrying value of the machines before impairment test? 2) What is the value in use of the machines? 3) What is the recoverable value of the machine? 4) How much is the impairment loss to be recognized? 5) IF fair value less cost to sell is P300,000, what is the recoverable amount? 6) Based on number 5, what is the impairment loss?

PROBLEM 8 On December 31, 2009, SEM Company subjected to impairment test a piece of equipment. Data pertinent to the equipment as of December 31, 2009 follow: Original cost Adjusted accumulated depreciation Selling price Estimated cost to make the sale Value in use Remaining useful life Method of depreciation

P2,400,000 600,000 1,400,000 200,000 1,100,000 6 years Straight line

On December 31, 2011, the asset is found to have a recoverable amount of P1,300,000 REQUIRED 1) How much is the loss on impairment in 2009? 2) How much is the depreciation expense recognized in 2010? Rspaderes2013

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3) How much gain in recovery is recognized in 2011? 4) How much is the depreciation expense recognized in 2012 under the cost model? 5) How much is the depreciation expense recognized in 2012 under the revaluation model?

PROBLEM 9 Your audit of Agimat Corporation for the year 2012 disclosed the following property dispositions:

Land Building Warehouse Machine Delivery truck

Cost 4,800,000 1,800,000 8,400,000 960,000 1,200,000

Acc. Dep. 1,320,000 384,000 570,000

Proceeds 3,720,000 288,000 8,880,000 108,000 564,000

Fair value 3,720,000 8,880,000 864,000 564,000

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 P6,000,000, 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 the building. Warehouse On July 4, the warehouse was destroyed by fire. The warehouse was purchased on January 2, 2006. On December 12, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of P7,200,000/ Machine On December 15, the machine was exchange for a machine having a fair value of P756,000 and cash of P108,000 was received. Delivery truck On November 13, the delivery truck was sold to a used car dealer. REQUIRED: Compute for the following: 1) Land 2) Building 3) Warehouse 4) Machine 5) Delivery truck

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PROBLEM 10 MIL Company whose financial year end is December 31, purchased new manufacturing equipment on April 1, 2004. The equipment has a special component that requires replacement before the end of the equipment’s useful life. This equipment was initially recognized in two accounts: one is for the main unit and the other for the special component. MIL uses the straight line method of depreciation for all of its manufacturing equipment. Depreciation is recorded to the nearest month, residual values being disregarded. On April 1, 2010, the special component is removed from the main unit and is replaced with a similar component. This component is expecte3d to have a residual value of approximately 25% of cost at the end of the main unit’s useful life. Because of its materiality, the residual value will be considered in calculating depreciation. Specific information about the equipment is as follows: Main Unit Purchase price in 2014 Residual value Estimated useful life

P187,200 13,200 10 years

Component 1 Purchase price in 2014 Residual value Estimated useful life

P30,000 750 6 years

Component 2 Purchase price

P45,750

REQUIRED: Compute for the depreciation charge for the year 1) 2004 2) 2010 3) 2011

PROBLEM 11 On January 1, 2008, EBJ Corporation acquired a factory equipment at a cost of P450,000. The equipment is being depreciated using the straight line method over its projected useful life of 10 years with P50,000 salvage value. On December 31, 2009, ad determination was made that the future net cash flows expected from continued use of the asset shall be P40,000 per year. The asset also had a fair value less cost to sell of P220,000 on the same date. You ascertained that this was properly computed and that recognition of impairment was warranted. (The prevailing interest rate is 10%)

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On December 31, 2011, the assets, replacement cost was determined to be P550,000 with a total life of 12 years from the date of the acquisition. You also ascertained that this valuation is reasonable in the circumstance. You have been asked to assist the company’s accountant in the application of PAS 36, the standard on the impairment of assets REQUIRED: 1) What is the recoverable value of the asset on December 31, 2009? 2) How much impairment loss should be recognized on December 31, 2009? 3) What is the asset’s carrying amount on December 31, 2011, before valuation? 4) How much impairment recovery should be reported in the 2011 income statement? 5) What is the depreciation expense in 2012, under cost method? 6) What is the depreciation expense in 2012, under the revaluation method? 7) What is the balance of any revaluation surplus at the end of 2012, under piecemeal realization? PROBLEM 12 Australia company purchased a machine under a deferred payment contract on December 31, 2009. Under the terms of the contract, Australia is required to make three annual payments of P140,000 each beginning December 31, 2010. The appropriate interest rate is 8%. What is the purchase price of the machine?

PROBLEM 13 A plant asset has a cost of P24,000, a salvage value of P6,000 and a three year life. If depreciation in the third year amounted to P3,000, what depreciation method was used?

PROBLEM 14 Various equipment used by RAM Co. in its operations are either purchased from dealers or selfconstructed. The following items for two different types of equipment were recorded during the calendar year 2012. Manufacturing equipment (self constructed) Materials and purchased parts at gross invoice price (RAM Failed to take the 2% cash discount) Imputed interest on funds used during contruction (stock financing) Labor costs Overhead costs (fixed – P30,000, variable- P45,000) Gain on self construction Installation cost

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P300,000 21,000 285,000 75,000 45,000 6,600

Store Equipment Cash paid for equipment Freight and insurance cost while in transit Cost of moving equipment into place at store Wage cost for technicians to test equipment Insurance premium paid during first year of operation on this equipment Special plumbing furnitures required for this equipment Repair cost incurred in first year of operations related to this equipment

P105,000 2,000 3,100 4,000 1,500 8,000 1,300

REQUIRED: 1) WhAt is the total cost of the self-constructed equipment? 2) What is the total cost of the store equipment purchased?

PROBLEM 15 On January 2, 2011 Wedding Corporation acquired a tract of land with a building erected on it for P1,200,000. In addition, Wedding paid a real estate broker’s commission of P72,000, legal fees of P12,2000 and a title guarantee insurance of P36,000. The closing statement indicated that the land value was P1,000,000. Shortly after the acquisition, the building was razed at a cost of P130,000. Wedding entered into a P6,000,000 fixed-price contract with TD contractors, inc. on March 2, 2011 for the construction of an office building on the land purchased. The building was completed and occupied on September 30, 2012. Additional costs were incurred as follows: Plans, specifications and blueprints Excavation costs Architects’ fees for design and supervision

P24,000 20,000 190,000

The company estimates that the building will have a 40-year useful life from the date of completion and decides to use the 150% declining balance depreciation method. To finance the construction cost, Wedding borrowed P6,000,000 on March 2, 2011. The loan is payable in 10 annual installments of P600,000 plus interest at the rate of 14%. The contractor’s average amount of accumulated building construction expenditures were as follows: For the period March 2 to December 31, 2011 For the period January 1 to September 30, 2012

1,800,000 4,600,000

REQUIRED: 1) What is the correct value of the land? 2) How much is the total capitalized borrowing cost? 3) What is the correct depreciation expense on the building in 2012? 4) What is the carrying value of the building as of December 31, 2012?

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PROBLEM 16 On January 1, 2009, EMDL corporation contracted with RNB Construction Company to construct a building for P40,000,000 on land that EMDL purchased several years ago. The contract provides that EMDL is to make five payments in 2009, with the last payment scheduled for the date of completion. Th building was completed on December 31, 2009. EMDL made the following payments during 2009: 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 P40,000,000

EMDL had the following debt outstanding at December 31, 2009: a. A12%, 4-year note dated January 1, 2009 with interest compounded quarterly. Both principal and interest are payable on December 31, 2012.This loan relates specifically to the building project

P17,000,000

b. A 10% 10-year note dated December 31, 2005, with simple interest; interest payable annually on December 31

12,000,000

c. A 12%, 5-year note dated December 31, 2007, with simple interest, payable annually on December 31

14,000,000

REQUIRED: 1) The amount of the interest to be capitalized during 2009 2) The amount of the interest that would be expensed for 2009

PROBLEM 17 RAM Corporation purchased a machinery on January 1, 2007 for P5,000,000. The same had an expected useful life of 5 years. Straight line depreciation is in place for similar items. On January 1, 2008, the asset is appraised as having a sound value of P4,500,000. On January 1, 2010, the asset is appraised at a sound value of P750,000. REQUIRED: 1) How much was credited to the revaluation surplus as a result of the revaluation in 2008? 2) What is the correct depreciation to be recognized in 2008? 3) How much loss on impairment should be recognized on January 1, 2010?

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