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CHAPTER 7 – Audit of Property, DEBIT

Plant, & Equipment CREDIT


a. Land 140,000 Prem. on cap.
Problem 1 stock 140,000
The trial balance of Aguilar Enterprises on December 31, 2006 b. Land 160,000 Capital stock
shows P350,000 as the unaudited balance of the Machinery 150,000
account. On April 1, 2006, a Jucuzzi machine costing P40,000 Cash
with accumulated depreciation of P30,000 was sold for 10,000
P20,000, which proceeds was credited to the Machinery c. Land 80,000 Professional fees
account. On June 30, 2006, a Goulds machine, costing 20,000
P50,000 and with accumulated depreciation of P22,000 was Prem.
traded in for a new Pioneer machine with an invoice price of on cap. stock 60,000
P100,000. The cash paid of P90,000 for the Pioneer machine d. None of these
(P100,000 less trade-in allowance of P10,000 was debited to
the Machinery account). 2. On the Land acquired in No. 6, real estate taxes of
P20,000 were paid in December, 2006, including P5,000
Company policy on depreciation which you accept, provides for the first quarter of the year. (Ignore penalty for
an annual rate of 10% without salvage value. A full year’s delayed payment). Land account was debited for the
depreciation is charged in the year of acquisition and none in taxes paid.
the year of disposition.
The adjusting entry is:
Question DEBIT
1 The adjusted balance of the Machinery account at CREDIT
December 31, 2006 is: a. Taxes 15,000 Land
a. P 290,000 b. P 370,000 15,000
c. P 260,000 d. P 300,000 b. Taxes 5,000 Land
5,000
2 The correct depreciation expense for the machinery for c. Land 5,000 Cash
the year ended December 31, 2006 is: 20,000
a. P 37,000 b. P 29,000 c. P Taxes 15,000
30,000 d. P 26,000 d. None of these

Solution Solution
OE: Cash 20,000 1. C OE: Land 300,000
Machinery 20,000 Common Stock 150,000
CE: Cash 20,000 APIC 150,000
Accumulated dep’n. 30,000 Professional fees 20,000
Machinery 40,000 Cash 20,000
Gain on sale 10,000 CE: Land 380,000
Adj: Accumulated dep’n 30,000 Common stock 150,000
Machinery 20,000 Cash 20,000
Gain on sale 10,000 APIC 210,000
--------------------------------------------- Adj: Land 80,000
OE: Machinery 90,000 APIC 60,000
Cash 90,000 Professional fees 20,000
CE: Machinery 100,000 2. A OE: Land 20,000
Accumulated dep’n 22,000 Cash 20,000
Loss on sale 18,000 CE: Land 5,000
Machinery 50,000 Taxes 15,000
Cash 90,000 Cash 20,000
Adj: Machinery 10,000 Adj: Taxes 15,000
Accumulated dep’n 22,000 Land 15,000
Loss on sale 18,000
Machinery 50,000 Problem 3
--------------------------------------------- Two independent companies, KAYA and MUYAN, are in the
1 A P350,000 – P20,000 + P10,000 -P50,000 home building business. Each owns a tract of land for
2 B P290,000 x 10% development, but each company would prefer to build on the
other’s land. Accordingly, they agreed to exchange their land.
An appraiser was hired and from the report and the companies
records, the following information was obtained:

KAYA Co.’s
Land MUYAN Co.’s Land
Problem 2 Cost (same as book value) P 800,000
The Land account was debited for P300,000 on March 31, P 500,000
2006 for an adjoining piece of land which was acquired in Market value, per appraisal 1,000,000
exchange for 15,000 shares of Rizal Corporation’s own stock 900,000
with a par value of P10. At the time of the exchange, the The exchange of land was made and based on the difference in
shares were selling at P24. Transfer and legal fees of P20,000 appraised values, MUYAN Company paid P100,000 cash to
were paid and charged to Professional Fees. KAYA Company.

1. The adjusting entry required is: Question

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1. For financial reporting purposes, KAYA Company would b. Understated by P10,000 d.
recognize a pretax gain on the exchange in the amount of: Understated by P20,000
a. P 20,000 b. P 60,000 c. P
100,000 d. P 200,000 3. The adjusted depletion at year-end amounted to:
a. P 270,000 b. P 315,000
2. For financial reporting purposes, MUYAN Company c. P 495,000 d. P 540,000
recognize a pretax gain on the exchange in the amount of:
a. P 0 b. P 100,000 4. The adjusted depreciation at year-end amounted to:
c. P 300,000 d. P 400,000 a. P 20,000 b. P 30,000 c. P
50,000 d. P 60,000
3. After the exchange, KAYA Company record its newly
acquired land at: Solution
a. P 700,000 b. P 720,000 P4,860,000/1,620,000 x 15,00o tons x 6 months = P270,000
c. P 800,000 d. P 900,000 P600,000 – P60,000/9 years * x 6/12 = P30,000
*1,620,000 tons/180,000 = 9 years
4. After the exchange, MUYAN Company record its newly 1. C P405,000 - (4,860,000/1,620,000 x 90,000 units) = P13
acquired land at: 2. A P40,000 - (600,000 - 60,000)/1,620,000 x 90,000 = P10
a. P 1,000,000 b. P 900,000 c. P 3. A
600,000 d. P 500,000 4. B

Solution
Muyan Kaya Problem 5
In connection with your examination of the financial
Land 1,000,000 Cash statements of the Maraat Corporation for the year 2007, the
100,000 company presented to you the Property, Plant and Equipment
Cash 100,000 Land section of its balance sheet as of December 31, 2006, which
900,000 consists of the following:
Land 500,000 Land
800,000 Land
Gain 400,000 Gain on P 400,000
sale 200,000 Buildings
3,200,000
1 D Leasehold improvements
2. D 2,000,000
3. D Machinery and equipment
4. A 2,800,000

Problem 4 The following transactions occurred during 2007:


On an audit engagement for 2007, you handled the audit of
fixed assets of Esmedina Copper Mines. This mining 1. Land site number 5 was acquired for P4,000,000.
company bought the exploration rights of Maharishi Additionally, to acquire the land, Maraat Corporation paid
Exploration on June 30, 2007 for P7,290,000. Of this a P240,000 commission to a real estate agent. Costs of
purchase price, P4,860,000 was allocated to copper ore which P60,000 were incurred to clear the land. During the
had remaining reserves estimated at 1,620,000 tons. Esmedina course of clearing the land, timber and gravel were
Copper Mines expects to extract 15,000 tons of ore a month recovered and sold for P20,000.
with an estimated selling price of P50 per ton. Production
started immediately after some new machines costing 2. The second tract of land (site number 6) with a building
P600,000 was bought on June 30, 2007. These new was acquired for P1,200,000. The closing statement
machineries had an estimated useful life of 15 years with a indicated that the land value was P800,000 and the
scrap value of 10% of cost after the ore estimated has been building value was P400,000. Shortly after acquisition,
extracted from the property, at which time the machineries the building was demolished at a cost of P120,000. The
will already be useless. new building was constructed for P600,000 plus the
following costs:
Among the operating expenses of Esmedina Copper Mines at
December 31, 2007 were: Excavation fees
P 44,000
Depletion expense Architectural design fees
P 405,000 32,000
Depreciation of machineries Building permit fees
40,000 4,000
Imputed interest on funds used during construction
Questions 24,000
1. Recorded depletion expense was
a. Overstated by P90,000 c. The building was completed and occupied on September
Overstated by P135,000 1, 2007.
b. Understated by P90,000 d.
Understated by P135,000 3. The third tract of land (site number 7) was acquired for
P2,400,000 and was put on the market for resale.
2. Recorded depreciation expense was
a. Overstated by P10,000 c.
Overstated by P20,000

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4. Extensive work was done to a building occupied by
Maraat Corporation under a lease agreement. The total
cost of the work was P500,000, which consisted of the
following:
Problem 6
Particular Norie Company’s property, plant and equipment and
Amount Useful life accumulated depreciation balance at December 31, 2005 are:
Painting of ceilings P 40,000
one year Accumulated
Electrical work
140,000 Ten years Cost Depreciation
Construction of extension to current Machinery and equipment P 1,380,000
working area P 367,500
320,000 Thirty years Automobiles and trucks 210,000
114,320
The lessor paid one-half of the costs incurred in Leasehold improvements 432,000
connection with the extension to the current working area. 108,000

5. A group of new machines was purchased under a royalty Additional information:


agreement which provides for payment of royalties based
on units of production for the machines. The invoice Depreciation methods and useful lives:
price of the machines was P300,000, freight costs were
P8,000, unloading charges were P6,000, and royalty Machinery and equipment – straight line; 10 years
payments for 2007 were P52,000. Automobiles and trucks – 150% declining balance; 5
years, all acquired after 2000.
Question Leasehold improvements – straight line
1. Land at year-end is
a. P 5,480,000 b. P 5,900,000 c. P Depreciation is computed to the nearest month.
6,000,000 d. P 8,400,000
Salvage values are immaterial except for automobiles and
2. Buildings at year-end is trucks, which have an estimated salvage values equal to 10%
a. P 3,800,000 b. P 3,880,000 c. P of cost.
4,200,000 d. P 4,280,000
Other additional information:
3. Leasehold improvements at year-end is
a. P 2,300,000 b. P 2,560,000 c. P - Norie Company entered into a 12-year operating lease
2,600,000 d. P 2,720,000 starting January 1, 2003. The leasehold improvements
were completed on December 31, 2002 and the facility
4. Machinery and equipment at year-end is was occupied on January 1, 2003.
a. P 3,100,000 b. P 3,108,000 c. P
3,114,000 d. P 3,166,000 - On July 1, 2006, machinery and equipment were
purchased at a total invoice cost of P325,000. Installation
Solution cost of P44,000 was incurred.
1. Land 4,300,000
Cash - On August 30, 2006, Norie Company purchased new
4,300,000 automobile for P25,000.
Cash 20,000
Land - On September 30, 2006, a truck with a cost of P48,000
20,000 and a carrying amount of P30,000 on December 31, 2005
2. Land 1,320,000 was sold for P23,500.
Cash
1,320,000 - On December 30, 2006, a machine with a cost of P17,000,
Building 680,000 a carrying value of P2,975 on date of disposition, was
Cash sold for P4,000.
680,000
3. Land - investment 2,400,000 Questions
Cash
2,400,000 1. The gain on sale of truck on September 30, 2006 is:
4. Operating expenses 40,000 a. P 0 b. P 250 c. P
Leasehold improvements 300,000 2,680 d. P 6,500
Cash
340,000 2. The gain on sale of machinery on December 30, 2006 is:
5. Machinery 314,000 a. P 0 b. P 13,000
Royalty expenses 52,000 c. P 2,725 d. P 1,025
Cash
366,000 3. The adjusted balance of the property, plant, and
Answer: equipment as of December 31, 2006 is:
1. C 2. B 3. A 4. C a. P 1,813,000 b. P 2,351,000 c. P
2,387,000 d. P 2,388,500

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4. The total depreciation expense to be reported on the Accumulated depreciation – Automotive equipment
income statement for the year ended December 31, 2006 84,600
is:
a. P 138,000 b. P 185,402 Depreciation data:
c. P 221,404 d. P 245,065 Depreciation
5. The carrying amount of property, plant, and equipment as method Useful life
of December 31, 2006 is:
a. P 1,290,547 b. P 1,578,545 c. P Buildings 150% declining-
1,587,497 d. P 1,617,322 balance 25 years
Machinery and equipment Straight-line
Solution 10 years
Entries: Automotive equipment Sum-of-the-years’-digits
Machinery and equipment 369,000 4 years
Cash 369,000 Leasehold improvements Straight-line
Automobile and trucks 25,000 -
Cash 25,000
Cash 23,500 The salvage values of the depreciable assets are immaterial.
Accumulated depreciation 24,750 Depreciation is computed to the nearest month.
Automobile and trucks 48,000
Gain on sale 250 Transactions during 2005 and other information are as
Accumulated deprecation - 12/31/02 follows:
18,000
Depreciation - 9 mos. (P30,000 x 30% x 9/12) a. On January 2, 2005, Highland purchased a new car for
6,750 P20,000 cash and trade-in of a 2-year-old car with a cost
Total of P18,000 and book value of P5,400. The new car has a
24,750 cash price of P24,000; the market value of the trade-in is
not known.
Cash 4,000
Accumulated depreciation 14,025 b. On April 1, 2005, a machine purchased for P23,000 on
Machinery and equipment 17,000 April 1, 2000, was destroyed by fire, Highland recovered
Gain on sale 1,025 P15,500 from its insurance company.
Depreciation 221,404
Accumulated depreciation - mach. 156,450 c. On May 1, 2005, costs of P168,000 were incurred to
Accumulated depreciation - auto. 28,954 improve leased office premises. The leasehold
Accumulated depreciation - improv. 36,000 improvements have a useful life of 8 years. The related
lease terminates on December 31, 2011.
Machinery and equipment - P1,380,000/10 years
= P 138,000 d. On July 1, 2005, machinery and equipment were
P 369,000/10 years x 6/12 purchased at a total invoice cost of P280,000; additional
= 18,450 P 156,450 costs of P5,000 for freight and P25,000 for installation
Leasehold improvement - P432,000/12 years = were incurred.
36,000
Automobile and trucks - CV of unsold item P 65,680 x 30% e. Highland determined that the automotive equipment
= 19,704 comprising the P115,000 balance at January 1, 2005,
Sold item - 30,000 x 30% x 9/12 would have been depreciated at a total amount of P18,000
= 6,750 for the year ended December 31,2005.
Current purchase P25,000 x 30% x
4/12= 2,500 28,954 Questions
Answer: Based on the information above, answer the following
1. B 2. D 3. B 4. C questions:
5. B
1. The adjusted balance of Machinery and Equipment (at
cost) at December 31, 2005 is:
Problem 7 a. P 1,180,000 b. P 1,187,000 c. P
Information pertaining to Highland Corporation’s property, 1,202,500 d. P 1,210,000
plant and equipment for 2005 is presented below:
2. The adjusted balance of Automotive Equipment (at cost) at
Account balances at January 1, 2005: December 31, 2005 is:
a. P 139,000 b. P 121,000
Debit Credit c. P 115,000 d. P 109,000
Land
P 150,000 3. The adjusted balance of Accumulated Depreciation of
Buildings Building at December 31, 2005 is:
1,200,000 a. P 72,000 b. P 263,100
Accumulated depreciation – Buildings c. P 335,100 d. P 319,314
P263,100
Machinery and equipment 4. The adjusted balance of Accumulated Depreciation of
900,000 Machinery and Equipment at December 31, 2005 is:
Accumulated depreciation – Machinery and equipment a. P 330,775 b. P 342,275
250,000 c. P 351,475 d. P 353,775
Automotive equipment
115,000
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5. The adjusted balance of Accumulated Depreciation of Machinery and Equipment: Balance - 1/1/05
Automotive Equipment at December 31, 2005 is: P900,000
a. P 90,600 b. P 96,000 c. P Less: machine destroyed
103,200 d. P 108,600 by fire 23,000

6. The adjusted balance of Accumulated Depreciation of P877,000


Leasehold Improvements at December 31, 2005 is: Divided by
a. P 0 b. P 14,000 10 yrs. P 87,700
c. P 14,700 d. P 16,800 Dep’n of the Machine
destroyed by fire:
7. The total adjusted balance of Accumulated Depreciation (P23,000/10 x 3/12)
of Property and Equipment at December 31, 2005 is: 575
a. P 534,375 b. P 698,475 Dep’n of the machine
c. P 774,389 d. P 804,475 purchase for the year:
(P310,000/10 x 6/12)
15,500
8. The total gain(loss) from disposal of assets at December Total Depreciation
31, 2005 is: P103,775
a. P 5,400 b. P 4,000 c. P Plus: Accum. Dep’n -
2,600 d. P 1,400 1/1/05 250,000
Less: Accum. Dep’n -
9. The adjusted book value of Building at December 31, destroyed by fire ( 11,500)
2005 is: Accum. Depreciation -
a. P 1,128,000 b. P 936,900 12/31/05 P342,275
c. P 880,686 d. P 864,900
Automotive Equipment: Depreciation on P115,000
10. The adjusted book value of Leasehold Improvement at balance, 1/1/05 P 18,000
December 31, 2005 is: Less: Depreciation on car
a. P 168,000 b. P 154,000 traded in
c. P 153,300 d. P 151,200 (P18,000 x 2/10)
3,600
Solution Adjusted depreciation on
Entries: the beg. Bal. P 14,400
a. Automobile Equipment 24,000 Dep’n on the 1/2/05
(cash paid, P20,000 plus P4,000 trade-in allow.) Purchase:
Accum. Depreciation 12,600 (P24,000 x 4/10)
Loss on trade-in 1,400 9,600
Automobile Equipment Total Depreciation
18,000 expense P 24,000
Cash Plus: Accum.
20,000 Depreciation - 1/1/05 84,600
* Trade in allowance is the difference between the cash Less: Accum. Dep’n -
price and the purchase traded equipment ( 12,600)
price of the equipment. Accumulated depreciation
b. Cash 15,500 - 12/31/05 P 96,000
Accum. Depreciation 11,500
Machinery and equipment Leasehold Improvements: P168,000/80 months x 8 mos. for
23,000 2005 P 16,800
Gain on asset disposal
4,000 ANSWER: 1. B 2. B 3. D
c. Leasehold improvements 168,000 4. B 5. B
Cash 6. D 7. C 8. C
168,000 9. C 10. D
d. Machinery and equipment 310,000 Problem 8
Cash The schedule of Gerasmo Company’s property and equipment
310,000 prepared by the client follows:

Computation of the Depreciation Expense and Accumulated PLANT ASSETS


Depreciation: Land
P 320,000
Building: Book value Building
1/1/05 (P1,200,000 - P263,100) - P936,900 540,000
X declining rate (1/25 x Machinery and Equipment
150%) 6% . 180,000
Depreciation for the year Total
P 56,214 1,040,000
Plus; Accum.
Depreciation - 1/1/05 263,100 ACCUMULATED DEPRECIATION
Accum. Depreciation - Building P
12/31/05 P319,314 81,000
Machinery and Equipment
54,000

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Total 7/1/05 Truck 5
P 135,000 800,000
7/10/05 Reconditioning of truck 4, which was
Further examination revealed the following: damaged in a collision
35,000
1. All property and equipment were acquired on January 2, 9/1/05 Insurance recovery on truck 4
2003. accident 33,000
2. Assets are depreciated using the straight-line method. 10/1/05 Sale of truck 2
The building and equipment are expected to benefit the 600,000
company for 20 years and 10 years respectively. Salvage 4/1/06 Truck 6
values of the assets are negligible. 1,000,000 150,000
3. An equipment with an original cost of P40,000 was sold 5/2/06 Repainting of truck 4
on December 30, 2005 for P32,000. The proceeds were 27,000
credited to other operating income account. 6/30/06 Truck 7
4. In 2005, The company recognized an appreciation in 720,000
value of land and building as determined by the 12/1/06 Cash received on lease of truck 7
Company’s engineers. The appraisal was recorded as 22,000
follows:
ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Debit Credit Date Particulars


Land Debit Credit
70,000 12/31/04Depreciation expense
Building 60,000 300,000
Accum. depreciation 12/31/05Depreciation expense
6,000 300,000
Revaluation increment 12/31/06Depreciation expense
124,000 300,000
Questions
1. Property and equipment at year-end is: a. On July 1, 2005, Truck 3 was traded-in for a new truck.
a. P 753,000 b. P 870,000 Truck 5, costing P850,000; the selling party allowed a
c. P 910,000 d. P 990,000 P50,000 trade in value for the old truck.

2. Accumulated depreciation at year-end is: b. On April 1, 2006, Truck 6 was purchased for P1,000,000;
a. P 114,000 b. P 117,000 Truck 1 and cash of P850,000 being given for the new
c. P 123,000 d. P 135,000 truck.

Solution c. The depreciation rate is 20% by unit basis.


OE: Cash 32,000
Other ope. income 32,000 d. Unit cost of Trucks 1 to 4 is at P800,000 each.
CE: Cash 32,000
Accumulated dep’n 12,000 Questions
Property & equip. 40,000 1. What is the loss on trade-in of truck 3?
Other ope. income 4,000 a. P 50,000 b. P 430,000
Adj: Accum. dep’n 12,000 c. P 510,000 d. P 560,000
Other ope. income 28,000
Property & equip. 40,000 2. The correct cost of truck 5 is
----------------------------------------------- a. P 560,000 b. P 610,000
Adj: Revaluation increment 124,000 c. P 800,000 d. P 850,000
Accumulated dep’n 6,000
Property & equipment 130,000 3. The book value of truck 5 at December 31, 2006 is
----------------------------------------------- a. P 850,000 b. P 595,000
Per book depreciation - bldg 75,000 c. P 560,000 d. P 510,000
Per audit depreciation - bldg 72,000 (540,000-
60,000/20 x 3 yrs) 4. What is the loss in trade-in of Truck 1?
Adjustment 3,000 a. P 150,000 b. P 250,000 c. P
290,000 d. P 410,000
Adj: Accum. Depreciation 3,000
Operating expenses 3,000 5. The correct cost of truck 6 is
Answer: a. P 590,000 b. P 800,000
1. B 2. A c. P 850,000 d. P 1,000,000
6. The carrying value of Truck 6 at December 31, 2006 is
Problem 9 a. P 501,500 b. P 680,000
The following information pertains to Marlisa Company’s c. P 850,000 d. P 1,100,000
delivery trucks:
7. The gain (loss) on sale of truck 2 is
Date Particulars a. P 80,000 b. P 331,600
Debit Credit c. P 495,000 d. P 496,200
1/1/04 Trucks 1, 2, 3, & 4
3,200,000 8. The book value of truck 4 at December 31, 2006 is
3/15/05 Replacement of truck 3 tires a. P 320,000 b. P 331,600
25,000 c. P 495,000 d. P 496,200

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Truck 3 -
9. The 2000 depreciation expense is understated by -
a. P 92,000 b. P 252,000 Truck 4 (P800,000 x 20%) 160,000
c. P 292,000 d. P 372,000 800,000
Truck 5 (P850,000 x 20%) 170,000
10. The cost of repainting truck 4 should have been charged 850,000
to: Truck 6 (P1,000,000 x 20% x 9/12) 150,000
a. Claims receivable - insurance company 1,000,000
b. Retained earnings Truck 7 (P720,000 x 20% x 6/12) 72,000
c. Accumulated depreciation 720,000
d. Repairs and maintenance Depreciation per audit
592,000 3,370,000
11. Which of the following controls would most likely allow Depreciation per records 300,000
for a reduction in the scope of the auditor’s tests of Understatement 292,000
depreciation expense? 10. D
a. Review and approval of the periodic property 11. B
depreciation entry by a supervisor who does not
actively participate in its preparation.
b. Comparison of property account balances for the Problem 10
current year with the current year budget and prior- Information pertaining to SAILADIN CORPORATION’s
year actual balance. property, plant and equipment for 2006 is presented below.
c. Review of the miscellaneous revenue account for
salvage credits and scrap sales of partially Account balances at January 1, 2006
depreciated property.
d. Authorization of payment of vendors’ invoices by a Debit Credit
designated employee who is independent of the Land
property receiving functions. 6,000,000
Buildings
Solution 48,000,000
1. C Accumulated depreciation – bldg.
Cost of truck 3 10,524,000
800,000 Machinery and equipment
Accumulated depreciation (P800,000 x 20% x 1.5) 36,000,000
240,000 Accumulated depreciation – mach. & equip.
Net book value 10,000,000
560,000 Automotive equipment
Trade-in allowance 4,600,000
50,000 Accumulated depreciation – auto. Equip.
Loss on trade-in 3,384,000
510,000
2. D Depreciation data:
3. B (P850,000-(P850,000x20%x1.5) Depreciation
4. B method Useful life
Cost of truck 1
800,000 Buildings 150% declining-
Less: Accumulated depreciation (P800,000 x 20% / 12 balance 25 years
mos. x 27 mos.) 360,000 Machinery and equipment Straight-line
Net book value 10 years
440,000 Automotive equipment Sum-of-the-years-digits
Trade-in allowance 4 years
150,000 Leasehold improvements Straight-line
Loss on trade-in -
290,000
5. D The salvage values of the depreciable assets are immaterial.
6. C [P1,000,000 - (1,000,000 x 20% x 9/12)] Depreciation is computed to the nearest month.
7. A
Cost of truck 2 Transactions during 2006 and other information are as
800,000 follows:
Accumulated depreciation (P800,000 x 20% / 12 mos. x
21 mos.) 280,000 (a) On January 2, 2006, Sailadin Corporation purchased
Net book value a new car for P800,000 cash and trade-in of a 2-year car
520,000 with a cost of P720,000 and a book value of P216,000.
Selling price The new car has a cash price of P960,000; the market
600,000 value of the trade-in is not know.
Gain on sale
80,000 (b) On April 1, 2006, a machine purchased for P920,000
8. A ([P800,000 - (P800,000 x 20% x 3)] on April 1, 2001, was destroyed by fire. Sailadin
9. C Corporation recovered P620,000 from its insurance
Truck 1 (P800,000 x 20% 3/12) 40,000 company.
-
Truck 2 - (c) On May 1, 2006, costs of P6,720,000 were incurred
- to improve leased office premises. The leasehold

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improvements have a useful life of 8 years. The related Less: Accumulated depreciation (P10,524,000 + P
lease terminates on December 31, 2012. 2,248,560) 12,772,560
Book value of building, 12/31/06
(d) On July 1, 2006, machinery and equipment were P 35,227,440
purchased at a total invoice cost of P11,200,000; 3. C
additional costs of P200,000 for freight and P1,000,000 Balance, 1/106
for installation were incurred. P 36,000,000
Less: Machine destroyed by fire
(e) Sailadin Corporation determined that the automotive 920,000
equipment comprising the P4,600,000 balance at January Balance
1, 2006, would have been depreciated at a total amount of P 35,080,000
P720,000 for the year ended December 31, 2006. Depreciation
10%
Questions
1. What is the depreciation on building for 2006? 3,508,000
a. P 2,998,080 b. P 2,880,000 c. P Machine destroyed by fire (P920,000 x 10% x 3/12)
2,248,560 d. P 1,499,040 23,000
Purchased 7/1/06 (P12,400,000 x 10% x 6/12)
2. What is the book value of the building at December 31, 620,000
2006? Total depreciation on machinery and equipment
a. P 35,976,960 b. P 35,227,440 c. P 4,151,000
34,596,000 d. P 34,477,920 4. D
Insurance recovery
3. What is the depreciation on machinery and equipment for 620,000
2006? Less: Book value of machine destroyed
a. P 4,220,000 b. P 4,197,000 c. P (Cost 920,000 - Accum. dep’n (P 920,000 x 10% x 5)
4,151,000 d. P 4,128,000 460,000
Gain on recovery from insurance company
4. What is the gain on machine destroyed by fire? 160,000
a. P 620,000 b. P 460,000 5. C
c. P 300,000 d. P 160,000 Balance, 1/1/06
10,000,000
5. What is the balance of the Accumulated Depreciation – Add: depreciation for 2006
Machinery and Equipment at December 31, 2006? 4,151,000
a. P 13,777,000 b. P 13,760,000 c. P Total
13,691,000 d. P 13,231,000 14,151,000
Less: Machinery destroyed by fire (P920,000 x 10% x
6. What is the depreciation on automotive equipment for 5) 460,000
2006? Accumulated depreciation - machinery and equip.
a. P 1,104,000 b. P 960,000 c. P 13,691,000
816,000 d. P 720,000 6. B
Depreciation on P4,600,000 balance on 1/1/06 (given)
7. What is the gain (loss) on car traded-in? 720,000
a. P 240,000 b. P (240,000) c. P Less: Depreciation on car traded-in, 1/1/06 (P720,000 x
56,000 d. P (56,000) 2/10) 144,000 576,000
Car purchased, 1/2/06 (P960,000 x 4/10)
8. What is the book value of automotive equipment at 384,000
December 31, 2006? Total depreciation on automotive equipment for 2006
a. P 1,720,000 b. P 1,144,000 c. P 960,000
1,000,000 d. P 712,000 7. C
Book value of car traded-in (given)
9. What is the depreciation on leasehold improvements for 216,000
2006? Less: Trade-in allowance (P960,000 - P800,000)
a. P 756,000 b. P 672,000 160,000
c. P 630,000 d. P 560,000 Loss on trade-in
56,000
10. What is the book value of leasehold improvements at 8. C
December 31, 2006? Cost of the machinery and equipment: Balance, 1/1/06
a. P 6,160,000 b. P 6,090,000 c. P 4,600,000
6,048,000 d. P 5,964,000 Car purchased, 1/2/06 960,000 Car traded in
(720,000) 4,840,000
Solution Accumulated depreciation: Balance, 1/1/06
1. C 3,384,000
Book Value, 1/1/06 (P48,000,000 - P10,524,000) Depreciation for 2006
P 37,476,000 960,000
150% declining-balance rate (1/25 x 150%) Car traded in (P720,000 - P216,000)
x 6% ( 504,000) 3,840,000
Depreciation on building Book value of automotive equipment, 12/31/06
P 2,248,560 1,000,000
2. B 9. B
Cost of building Cost of leasehold improvements
P 48,000,000 6,720,000

8
Divide by term of lease, 5/1/06 - 12/31/2012 80 2. The Equipment balance of TRIUMPH CORPORATION
mos at December 31, 2006 is:
Depreciation per month a. P 446,000 b. P 452,000
84,000 c. P 454,500 d. P 475,500
Depreciation, 5/1 - 12/31 (P84,000 x 8 mos)
672,000 3. The Depreciation expense – Equipment of TRIUMPH
10. C CORPORATION at December 31, 2006 is:
Cost of leasehold improvements a. P 45,200 b. P 45,450 c. P
6,720,000 46,525 d. P 53,525
Less: Accumulated depreciation (see No. 9)
672,000 4. The entry to correct the sale of Machine 6 is:
Book value, 12/31/06 a. Loss on sale of equipment 1,000
6,048,000 Accumulated depreciation 21,000
Equipment 22,000
Problem 11 b. Accumulated depreciation 22,500
You are engaged to audit the financial statements of Equipment 22,000
TRIUMPH CORPORATION for the year ended December 31, Gain on sale 500
2006. You gathered the following information pertaining to c. Accumulated depreciation 21,500
the company’s Equipment and Accumulated Depreciation loss on sale of equipment 500
accounts. Equipment 22,000
d. Accumulated depreciation 23,000
EQUIPMENT Equipment 22,000
1.1.06 Balance P 446,000 9.1.06 No. 6 Gain on sale of equipment 1,000
sold P 9,000
6.1.06 No. 12 36,000 12.31.06 5. The Depreciation Expense at December 31, 2006 is:
Balance 474,000 a. Overstated by P6,125 c.
9.1.3 Dismantling Understated by P1,950
of No. 6 1,000 b. Understated by P6,125 d.
Overstated by P1,950
______
P 483,000
P Solution
483,000 OE: Cash 9,000
Equipment 1,000
Equipment 9,000
ACCUMULATED DEPRECIATION – EQUIPMENT Cash 1,000
12.31.06 Balance P 271,400 1.1.06 CE: Cash 9,000
Balance P 224,000 Accum. dep’n 21,000
______ Loss on sale 1,000
12.31.06 2006 Dep’n 47,400 Equipment 30,000
P 271,400 Cash 1,000
P 271,400 -------------------------------------------
Adj: Accum. dep’n 21,000
Loss on sale 1,000
The following are the details of the entries above: Equipment 22,000
-------------------------------------------
1. The company depreciates equipment at 10% per year. Adj: Equipment 2,500
The oldest equipment owned is seven years old as of Repairs expense 2,500
December 31, 2006. -------------------------------------------
Adj: Accum. dep’n 1,950
2. The following adjusted balances appeared on your Depreciation 1,950
last year’s working papers: Answer: 1. C 2. C 3. B
4. A 5. D
Equipment P 446,000
Accumulated depreciation 224,000
3. Machine No. 6 was purchased on March 1, 1999 at a Problem 12
cost of P30,000 and was sold on September 1, 2006, for Information pertaining to Eddie Vic Corporation’s property,
P9,000. plant and equipment for 2005 is presented below:

4. Included in charges to the Repairs Expense account Account balances at January 1, 2005
was an invoice covering installation of Machine No. 12 in Debit
the amount of P2,500. Credit
Land P
5. It is the company’s practice to take a full year’s 1,500,000
depreciation in the year of acquisition and none in the Building 12,000,000
year of disposition. Accum. depreciation-building
P 2,631,000
Questions Machinery and equipment 9,000,000
1. The gain/(loss) on sale of Machine 6 is: Accum. depreciation-Mach. and Eqpt
a. P 1,000 b. P 500 c. P (1,000) 2,500,000
d. P (500) Automotive Equipment 1,150,000

9
Accum. depreciation-Automotive Eqpt 9. The total cost of property, plant and equipment at
846,000 December 31, 2005 is:
a. P 26,670,010 b. P 26,579,520 c. P
Depreciation method and useful life 26,550,000 d. P 26,459,510

Building – 150% declining balance; 25 years 10. Total accumulated depreciation of property, plant, and
Machinery and equipment – Straight-line; 10 years equipment at December 31, 2005 is:
Automotive equipment – Sum-of-the-years’-digits; 4 a. P 7,648,910 b. P 7,596,270 c. P
years 7,506,300 d. P 7,408,890
The salvage value of the depreciable assets is
immaterial Solution
Depreciation is computed to the nearest month.
Schedule of Accumulated Depreciation December 31, 2005
Transactions during 2005 and other information: Building Mach.&
Equipment
On January 2, 2005, Eddie Vic purchased a new car for Balance, 1.1.05 P2,631,000 P2,500,0
P350,000 cash and trade-in of a 2-year old car with a cost of Add depreciation for 2005 562,140 1,037,7
P490,000 and a book value of P147,000. The new car has a P3,193,140 P3,537,7
cash price of P520,000; the market value of the trade-in is not Deduct acc. depr. related to
known. Mach, destroyed by fire
(5 x 10% x P230,000) 115,0
On April 1, 2005, a machine purchased for P230,000 on April Car traded in (490,000 - 147,000) _________ _______
1, 2000, was destroyed by fire. Eddie Vic recovered P155,000 Balance, 12.31.05 P3,193,140 P3,422,7
from its insurance company.

On July 1, 2005, machinery and equipment were purchased at SCHEDULE OF DEPRECIATION EXPENSE For the Year Ended De
a total invoice cost of P2,800,000; additional costs of P50,000 Building
for freight and P250,000 for installation were incurred. Book value , 1/1/05 (P12,000,000 - P2,631,000)
150% declining balance rate (100% / 25) x 1.5
Eddie Vic determined that the automotive equipment Total depreciation on building
comprising the P1,150,000 balance at January 1, 2005, would
have been depreciated at a total amount of P180,000 for the Machinery and Equipment
year ended December 31, 2005. Balance, 1.1.05 less machine destroyed by fire
Depreciation
Questions Depr. on Machine destroyed by fire, 4.1.05
1. Depreciation expense for building at December 31, 2005 (P230,000 x 10% x 3/12)
is: Depr. on machine purchased on 7.1.05
a. P 749,520 b. P 720,000 (P3,100,000 x 10% x 6/12)
c. P 682,150 d. P 562,140 Total depreciation on mach. and equipment

2. Depreciation expense for machinery and equipment at Automotive Equipment


December 31, 2005 is: Depreciation on P1,115,000 bal. on 1.1.05
a. P 1,049,250 b. P 1,037,750 c. P Deduct depr. on car traded in , 1.2.05
1,032,000 d. P 877,000 (SYD 3rd year 2/10 x P490,000)
Depr. on car purchased , 1.2.05 (P520,000 x 4/10)
3. Depreciation expense for Automobile equipment at Total depreciation on automotive equipment
December 31, 2005 is: Total depreciation expense for 2005
a. P 388,000 b. P 312,000
c. P 290,000 d. P 180,000
4. Total depreciation expense for 2005 is: Gain or Loss from Disposal of Assets For the Year Ended December 31
a. P 2,047,750 b. P 2,009,900 c. P Gain on machine destroyed by fire
1,978,770 d. P 1,889,890 Insurance recovery
Book value of machine destroyed
5. Total gain on asset disposal for 2005 is: (P230,000 - (5 x 10% x P230,000)
a. P 63,000 b. P 40,000 c. P Gain on car traded in on new car purchase
23,000 d. P 17,000 Book value of car traded in
Trade-in allowed (P520,000 - P350,000)
6. Total accumulated depreciation of building at December Total gain on asset disposals for 2005
31, 2005 is:
a. P 3,380,520 b. P 3,351,000 c. P
3,313,150 d. P 3,193,140 Property, Plant and Equipment December 31, 2005
COST ACCUM
7. Total book value of property, plant, and equipment at DEPRE
December 31, 2005 is: Land P 1,500,000
a. P 19,141,110 b. P 19,021,100 c. P Building 12,000,000
18,983,250 d. P 18,953,730 Machinery and Equipment 11,870,000
Automotive equipment 1,180,000
8. The property, plant and equipment at December 31, 2005 Totals P26,550,000
is: Answer:
a. P 19,141,110 b. P 19,021,100 c. P 1. D 2. B 3. C 4. D
18,983,250 d. P 18,953,730 5. A

10
6. D 7. A 8. A 9. C Accumulated depreciation
10. D P95,000

Problem 13 Questions
RUANN Service Center is wholly owned subsidiary of 1. The adjusted balance of Delivery Truck at December 31,
RUANN Stores. The company’s function is to deliver 2006 is:
furniture and appliances sold by the parent and to service a. P 537,500 b. P 217,500
electronics and appliances, also sold by the parent company. c. P 210,000 d. P 160,000
RUANN Stores, the parent, operates twelve retail outlets in a
large metropolitan area. The service center uses three delivery 2. The adjusted balance of Service Truck at December 31,
trucks and fifteen service vehicles for delivering goods and for 2006 is:
making service calls related to large appliances and electronic a. P 537,500 b. P 402,500
equipment. For small appliances and electronics, customers c. P 377,500 d. P 217,500
typically bring these to the service center for repair.
3. The Accumulated Depreciation – Delivery Truck at
At January 1, 2006, RUANN Service center reported audited December 31, 2006 is:
balances of P525,000 and P320,000 for “Trucks” and a. P 86,000 b. P 76,000 c. P
“Accumulated Depreciation – Trucks,” respectively. The 75,000 d. P 65,000
vehicles consisted of
 Three delivery trucks costing P50,000 each; 4. The Accumulated Depreciation – Service Truck at
and December 31, 2006 is:
 Fifteen service trucks costing P25,000 each. a. P 300,000 b. P 285,250
c. P 285,000 d. P 284,750
Accumulated depreciation was
 Delivery trucks, P95,000; and 5. The Carrying Value of Delivery Truck at December 31,
 Service trucks, P225,000 2006 is:
a. P 461,500 b. P 145,000
The company depreciates all trucks on a straight-line basis, c. P 142,500 d. P 74,000
using a five- year life and zero salvage value. One-half year’s
depreciation is taken in the year of acquisition and in the year 6. The Carrying Value of Service Truck at December 31,
of disposal. 2006 is:
a. P 237,500 b. P 117,500
During 2006, the following transactions and journal entries c. P 92,250 d. P 67,250
were completed by the company:
7. The Gain/Loss on Disposal of Trucks at December 31,
2/2/06: Sold one delivery truck for P2,000. the truck 2006 is:
was fully depreciated at 12/31/07. a. P 10,000 b. P 8,000 c. P
Cash 2,000 d. P 0
P2,000
Trucks 8. The Depreciation Expense of Trucks at December 31,
P2,000 2006 is:
a. P 106,250 b. P 101,250
3/1/06: Bought one delivery truck for P60,000. c. P 98,750 d. P 95,000
Trucks P60,000
Cash Solution
P60,000 2/2/06 OE: Cash 2,000
3/15/06: Sold one service truck for P8,000. This truck Delivery truck 2,000
was purchased 6/15/03 for P25,000 and the CE: Cash 2,000
accumulated depreciation, according to AD - Del. truck 40,000
RUANN’s subsidiary ledger, at the date of Loss on sale 8,000
sale was P12,500 Delivery truck 50,000
Cash Adj: AD - del. truck 40,000
P8,000 Loss on sale 8,000
Trucks Delivery truck 48,000
P8,000 3/15/06 OE: Cash 8,000
Service truck 8,000
7/25/06: Bought one service truck for P27,500. CE: Cash 8,000
Truck AD - ser. truck 15,000
P27,500 Loss on sale 2,000
Cash Service truck 25,000
P27,500 Adj: AD - serv. truck 15,000
Loss on sale 2,000
12/31/06: Recorded depreciation for 2006: Service truck 17,000
Two delivery trucks @ P10,000 each 12/31/06Depreciation 11,250
= P20,000 AD - del. truck 11,000
Fifteen service trucks @ P5,000 each AD - service truck 250
= 75,000 Del. truck
Total Serv. truck
P95,000 Per book 95,000
20,000 75,000
Depreciation Expense – Trucks P95,000 Per audit 106,250 31,000
75,250

11
Adjustment 11,250 11,000 ________ 12.31.03Retirements
250 Additions 12.31.04
1991-1994 P 784,000 P 210,000
Depreciation - Delivery truck P 16,000 P 590,000
Disposed truck 1995 34,000
5,000 4,000 38,000
Undisposed truck 1996
20,000 1997
(2 x P10,000) 1998 214,500
Purchased during the year 39,000 253,500
6,000 1999
(P60,000/5 x 1/2) 2000 185,500
______ 53,000 238,500
Total 2001
31,000 2002 63,000
42,000 105,000
Depreciation - service truck 2003
Disposed truck 2004 ________ _________
2,500 28,500 28,500
Undisposed truck P 1,281,000 P 210,000 P 182,500
70,000 P 1,253,500
(14 x P5,000)
Purchased during the year A transcript of the Machinery and Equipment account for 2005
2,750 follows:
(P27,500/5 x 1/2)
______ MACHINERY AND EQUIPMENT
Total
75,250 Date Item Debit
Answer: Credit
1. D 2. C 3. A 4. B 2005
5. D Jan. 1 Balance forwarded P
6. C 7. A 8. A 2,540,000
Mar. 1 Burnham grinder 120,000
May 1 Air compressor 750,000
Problem 14 June 1 Power lawnmower
You are engaged in the examination of the financial statements 60,000
of the PAUL COMPANY and are auditing the Machinery and June 1 Lift truck battery 32,000
Equipment Account and the related depreciation accounts for Aug. 1 Rockwood saw
the year ended December 31, 2005. Your permanent file 15,000
contains the following schedules: Nov. 1 Electric spot welder
450,000
MACHINERY AND EQUIPMENT Nov. 1 Baking oven
Year Balance 2004 2004 280,000
Balance Dec. 1 Baking oven
________ 12.31.03Retirements 32,500 __________
Additions 12.31.04 P
1991-1994 P 800,000 P 210,000 4,264,500 P 15,000
P 590,000
1995 40,000 _________ 4,249,500
40,000 P
1996 4,264,500 P 4,264,500
1997
1998 390,000 Your examination reveals the following information:
390,000
1999 a. The company uses a ten-year life for all machinery
2000 530,000 and equipment for depreciation purposes. Depreciation is
530,000 computed by the straight-line method. Six month’s
2001 depreciation is recorded in the year of acquisition or
2002 420,000 retirement. For 2005, the company recorded depreciation
420,000 of P280,000 on machinery and equipment.
2004 ________ _________
P 570,000 570,000 b. The Burnham grinder was purchased for cash from a
P 2,180,000 P 210,000 P firm in financial distress. The chief engineer and a used
570,000 P 2,540,000 machinery dealer agreed that the practically new machine
was worth P180,000 in the open market.

c. For production reasons, the new air compressor was


installed in a small building that was erected in 2005 to
ACCUMULATED DEPRECIATION house the machine and will also be used for general
Year Balance 2004 2004 storage. The cost of the building, which has a 25-year
Balance life, was P500,000 and is included in the P750,000
voucher for the air compressor.
12
5. The total rental expense in item “h” at December 31, 2005
d. The power lawnmower was delivered to the house of is:
the company president for personal use. a. P 45,000 b. P 90,000 c. P
e. On June 1, the battery in a battery powered lift truck 125,000 d. none
was accidentally damaged beyond repair. The damaged
battery was included at a price of P60,000 in the P420,000 6. The total interest expense at December 31, 2005 is:
cost of the lift truck purchased on July 1, 2002. The a. P 10,000 b. P 12,500 c. P
company decided to rent a replacement battery rather than 25,000 d. P 50,000
buy a new battery. The P32,000 expenditure is the annual
rental for the battery paid in advance, net of a P4,000 7. The total accumulated depreciation of the machinery and
allowance for the scrap value of the damaged battery that equipment at December 31, 2005 is:
was returned to the battery company. a. P 773,000 b. P 791,000
c. P 816,000 d. P 855,000
f. The Rockwood saw sold on August 1 had been
purchased on August 1, 2001, for P150,000. The saw was 8. The accumulated depreciation of the machinery and
in use until it was sold. equipment at December 31, 2005 is overstated by:
a. P 480,500 b. P 462,500
g. On September 1, the company determined that a c. P 437,500 d. P 398,500
production casting machine was no longer needed and
advertised it for sale for P180,000, after determining from 9. The Total Machinery and Equipment (gross) at December
a used machinery dealer that its market value. The 31, 2005 is:
casting machine had been purchased for P500,000 on a. P 3,740,000 b. P 2,310,500 c. P
September 1, 2000. 2,030,500 d. P 1,940,500

h. The company elected to exercise the option under a 10. The net book value of Machinery and Equipment at
lease-purchase agreement to buy the electric spot welder. December 31, 2005 is:
The welder had been installed on February 1, 2005, at a a. P 1,518,000 b. P 1,494,500 c. P
monthly rental of P10,000. 1,503,000 d. P 2,924,000

i. On November 1, a baking oven was purchased for Solution


P1,000,000. A P280,000 down payment was made and
the balance will be paid in monthly installment over a a. Accumulated Depreciation
three year period. The December 1 payment included Depreciation Expense
interest charges of P12,500. Legal title to the oven will
not pass to the company until the payments are Correct depreciation expense for 2005
completed. 1995 acquisition : 40,000 x 10% x ½
1998 “ : 390,000 x 10%
Questions 2000 “ : (500,000 x 10% x ½) + (30,000 x 10%)
1. The entry to record the adjustment of depreciation 2002 “ : (60,000 x 10% x ½) + (360,000 x 10%)
expense at December 31, 2005 is: 2004 “ : 570,000 x 10%
a. Depreciation expense 19,500 2005 “ : (120,000 + 250,000 + 540,000 + 1M) x 10%
Accumulated depreciation 19,500 Amount recorded
Overstatement
b. Depreciation expense 37,250
Accumulated depreciation 37,250 b. No AJE necessary

c. Accumulated deprecation 19,500 c. Buildings


Depreciation expense 19,500 Machinery & Equipment
d. Accumulated depreciation 37,250
Depreciation expense 37,250 d. Receivable from Officers
Machinery & Equipment
2. Depreciation Expense at December 31, 2005 is:
a. P 260,500 b. P 262,500 c. P e. 1 Accumulated Depreciation
280,000 d. P 342,500 Loss on Disposal of Assets
Machinery & Equipment
3. The entry to record the adjustment in “item c” at Cost
December 31, 2005 is: Less acc. Depreciation (60,000 x 10% x 3)
a. Building 500,000 Book value
Machinery and equipment 500,000 Trade in value
Loss
b. Machinery and equipment.750,000
Building e.2 Equipment rental expense (7/12)
750,000 Prepaid equipment rental
c. Machinery and equipment 500,000 Machinery & Equipment
Building 500,000 Loss on Disposal of Assets
d. No adjustment
f. Accumulated Depreciation
4. The total Loss on disposal of equipment at December 31, Machinery & Equipment
2005 is: Gain on Disposal of Assets
a. P 38,000 b. P 70,000 c. P
93,000 d. P 108,000 g. Other Assets - Mach. Held for sale
Accumulated depreciation

13
Loss on Disposal of Assets constructions bid received was P475,000, the amount
Machinery & Equipment recorded in the Building account. Company personnel
BV ( P500,000 x 5/10) constructed the addition at a cost of P460,000 (materials,
Estimated selling price P175,000; labor, P155,000; and overhead, P130,000).
Loss
3. On August 18, P500,000 was paid for paving and
fencing a portion of land owned by the company and used
h. Machinery & Equipment as a packing lot for employees. The expenditure was
Equipment Rental Expense charged to the Land account.
Rental for the period Feb. 1 to October 31.
4. The amount shown in the Machinery and Equipment
i. Machinery & Equipment asset retirement column represents cash received on
Interest expense September 5 upon disposal of a machine purchased in
Equipment contract payable July, 1998 for P480,000. The chief accountant recorded
Answer: depreciation expense of P35,000 on this machine in 2005.
1. C 2. A 3. A 4. D
5. D 5. Davao City government donated land and building
6. B 7. C 8. C 9. A appraised at P1,000,000 and P4,000,000, respectively, to
10. D PATIENCE CORPORATION for a plant. On September
1, the company began operating the plant. Since no costs
Problem 15 were involved, the chief accountant made no entry for the
You are engaged in the examination of the financial statements above transaction.
of PATIENCE CORPORATION for the year ended December
31, 2005. The chief accountant of the client has prepared the Questions
accompanying analyses of the Property, Plant, and Equipment 1. PATIENCE CORPORATION’s Land balance at
and related accumulated depreciation accounts. You have December 31, 2005 is:
traced the beginning balances to your prior year’s audit a. P 5,725,000 b. P 5,225,000 c. P
working papers. 4,725,000 d. P 4,225,000

All plant assets are depreciated on the straight-line basis (no 2. PATIENCE CORPORATION’s Building balance at
residual value taken into consideration) based on the following December 31, 2005 is:
estimated service lives: building, 25 years, and all other items, a. P 5,690,000 b. P 5,675,000 c. P
10 years. The company’s policy is to take one-half year’s 5,660,000 d. P 5,645,000
depreciation on all assets additions and disposals during the
year. 3. PATIENCE CORPORAITON’s Machinery and
Equipment balance at December 31, 2005 is:
PATIENCE CORPORATION a. P 4,090,000 b. P 3,590,000 c. P
Analysis of Property, Plant, and Equipment, and 3,370,000 d. P 3,110,000
Related Accumulated Depreciation Accounts
Year Ended December 31, 2005 4. PATIENCE CORPORATION’s Accumulated
Depreciation – Building at December 31, 2005 is:
Description Final Assets a. P 766,000 b. P 747,000
12/31/04 Additions c. P 737,500 d. P 651,500
Land P 4,225,000 P 500,000
Buildings 1,200,000 475,000 5. PATIENCE CORPORATION’s Accumulated
Machinery & Equipment 3,850,000 404,000 Depreciation – Machinery and Equipment at December
P 9,275,000 P 1,379,000 31, 2005 is:
a. P 1,819,900 b. P 1,788,700 c. P
Description Final Assets 1,757,500 d. P 1,752,700
12/31/04 Additions
Buildings P 600,000 P 51,500 6. PATIENCE CORPORATION’s Depreciation Expense –
Machinery & Equipment 1,732,500 392,200 Building at December 31, 2005 is:
a. P 227,000 b. P 211,500
P 2,332,500 P 443,700
c. P 147,000 d. P 137,500
Your examination revealed the following information:
7. PATIENCE CORPORATION’s Depreciation Expense –
Machinery and Equipment at December 31, 2005 is:
1. On April 1, the company entered into a 10-year lease
a. P 372,000 b. P 361,000
contract for a die-casting machine, with annual rentals of
c. P 337,000 d. P 276,000
P50,000 payable in advance every April 1. The lease is
cancelable by either party (60 day’s written notice is
8. PATIENCE CORPORATION’s Depreciation
required), and there is no option to renew the lease or buy
Expense – Land Improvements at December 31, 2005 is:
the equipment at the end of the lease. The estimated
a. P 50,000 b. P 25,000 c. P
service life of the machine is 10-years with no residual
18,750 d. P 0
value. The company recorded the die casting machine in
the Machinery and Equipment account at P404,000, the
present value at the date of the lease, and P20,200
9. PATIENCE CORPORATION’s Net Book Value of
applicable to the machine has been included in
Building at December 31, 2005 is:
depreciation expense for the year.
a. P 5,023,500 b. P 4,924,000 c. P
4,913,000 d. P 4,907,500
2. The company completed the construction of a wing
on the plant building on June 30. The service life of the
building was not extended by this addition. The lowest
14
10. PATIENCE CORPORATION’s Net Book Value of Year Ended December 31, 2004
Machinery and Equipment at December 31, 2005 is: COST
a. P 2,332,500 b. P 1,770,100 c. P Final
1,612,500 d. P 1,357,300 Per Books
12/31/03Additions
Solution Retirements 12/31/04
Land P 450,000 P 100,000 P
Adjusting Journal Entries as of December 31, 2005 P 550,000
(1) Equipment Rental Expense (P50,000 x 9/12) Buildings 2,400,000 350,000
Prepaid Equipment Rental 2,750,000
Obligations under Capital Lease Machinery/Equip 2,770,000 808,000
Machinery and Equipment 520,000 3,526,000
P 5,620,000 P1,258,000 P
(2) Profit on Construction 520,000 P 6,826,000
Buildings ( 475,000 - 460,000)
ACCUMULATED DEPRECIATION
(3) Land Improvements Final
Land Per Books
12/31/03Additions
(4) Accumulated Depreciation - Mach. & Eqpt. Retirements 12/31/04
Machinery & Equipment
Gain on sale of machinery Buildings P 1,200,000 P 103,000
P260,000 - (480,000 x 3/10) = P116,000 gain P 1,303,000
Machinery/Equip 546,500 313,600
(5) Land 860,100
Building P 1,746,200 P 416,600
Gain from Donation P 2,163,100

(6) Depreciation Expense Further investigation revealed the following:


Accumulated Depreciation - Buildings
Depreciation Expense for 2005 a. All equipment is depreciated on the straight-line basis
1,200,000 x 4% (with no salvage value) based on the following estimated
460,000 / 12 years x ½ lives: Building – 25 years, all other items 10 years.
4,000,000 x 4% x ½
Amount recorded b. The company entered into a 10-year lease contract for a
Adjustment to be made derrick machine with annual rental of P100,000, payable
in advance every April 1. The parties to the contract
(7) Accumulated Depreciation - Mach. & Equipment stipulated that a 30-day written notice is required to
Depreciation Expense cancel the lease. Estimated useful life is 10 years. The
Depreciation expense for 2005 derrick was recorded under machinery and equipment at
(3,850,000 - 480,000) x 10% P808,000 and P60,000 applicable to the machine was
480,000 x 10% x ½ included in the depreciation expense during the year.
Amount recorded
Adjustment to be made c. The company finished construction of a new building
wing in June 30. The useful life of the main building was
(8) Depreciation Expense not prolonged. The lowest construction bid was P350,000
Accumulated Depreciation - Land Improvements which was the amount recorded. Company personnel
(P500,000 x 10% x 6/12) constructed the building at a total cost of P330,000.
Answer:
1. B 2. C 3. C 4. B d. P100,000 was paid for the construction of a parking lot
5. C which was completed on July 1, 2004. The expenditure
6. C 7. B 8. B 9. C was charged to land.
10. C
e. The P520,000 equipment under retirement column
represent cash received on October 1, 2004 for a
machinery bought in October 1, 2000 for P960,000. The
bookkeeper recorded depreciation expense of P72,000 on
this machine in 2004.

f. Mr. Rabago, the company’s president donated land and


building appraised at P200,000 and P400,000 respectively
to the company to be used as plant site. The company
Problem 16 began operating the plant on September 30, 2004. Since
You are engaged to examine the financial statement of the no money was involved, the bookkeeper did not make any
Rabago Manufacturing Corporation for the year ended entry for the above transaction.
December 31, 2004. The following schedules for property,
plant, and equipment and the related accumulated depreciation Questions
accounts have been prepared by your client. The opening 1. The balance of rent expense as of December 31, 2004 is:
balances agree with your prior year’s audit working papers. a. P 0 b. P 25,000
Rabago Manufacturing Corporation c. P 75,000 d. P 100,000
Analysis of Property, Plant, and Equipment and
Related Accumulated Depreciation Accounts 2. The balance of prepaid rent as of December 31, 2004 is:

15
a. P0 b. P 25,000 Total per WBS P 740,000
c. P 75,000 d. P 100,000
The land was acquired on October 1, 2003, at a cost of
3. The life of the building wing is P500,000. Crame Corporation made a cash downpayment of
a. 25 years b. 11 years c. 12 P100,000 and signed a 18% mortgage note payable in four
years d. 13 years equal annual installments of P100,000. The first interest and
principal payment is due on October 1, 2004. No interest has
4. The carrying value of the building as of December 31, been accrued as of December 31, 2003.
2004 is
a. P 1,447,000 b. P 1,816,250 c. P In October 1, 2003, a lawyer was engaged to title the property
1,820,250 d. P 1,827,400 at a fee of P10,000 which was charged to operating expenses.

5. The value of the land account for balance sheet You ascertained that due to obsolescence, computer equipment
presentation as of December 31, 2004 is: with an original cost of P80,000 and accumulated depreciation
a. P 450,000 b. P 545,000 of P16,000 at January 1, 2003 had suffered a permanent
c. P 650,000 d. P 750,000 impairment in value and, as a result, should have a carrying
value of only P40,000 at the beginning of the year. In
6. The loss on the disposal of the machinery sold for addition, the remaining useful life of the equipment was
P520,000 is reduced from 4 to 2 years. No entry has yet been made in the
a. P 0 b. P 30,000 books. For 2003, the company recorded depreciation of
c. P 56,000 d. P 152,000 P16,000 for the said equipment.

Solution At present, Crame Corporation’s office and warehouse are


1. C located in a rented building. The rental contract was signed on
The lease is considered as operating lease since it is July 1, 2003 and has a term of five (5) years renewable for
cancelable. another five (5) years. On October 1, 2003, Crame
Equipment rental expense - P100,000 x 9/12 = P P75,000 Corporation spent P190,000 to install walls and fixtures. The
2. B leasehold improvements have a useful life of five years. No
Prepaid rental expense - P100,000 x 3/12 = P 25,000 amortization has been booked as of December 31, 2003.
3. C
Age of the building as of December 31, 2003 Questions
P1,200,000/P2,400,000 = 50% x 25 years = 12.5 1. The adjusted cost of land amounted to:
years a. P 528,000 b. P 510,000
Expired life for the current year = .5 year c. P 500,000 d. P 410,000
Remaining life of the building wing = 12.5 - .5 = 12 years
4. B 2. The carrying value of leasehold improvements as of
Building per schedule 2,400,000 December 31, 2003 amounted to:
Accumulated depreciation (1,296,000) a. P 190,000 b. P 183,000
1,104,000 c. P 180,500 d. P 180,000
Building wing 330,000
Accumulated depreciation 3. Audit adjustments will increase
(P330,000/12 x 6/12) ( 13,750) depreciation/amortization expense by:
316,250 a. P 38,000 b. P 24,000 c. P
Building - donation 400,000 14,000 d. P 13,500
Accumulated depreciation
(P400,000/25 x 3/12) ( 4,000) 4. Loss due to impairment in value amounted to:
396,000 a. P 30,000 b. P 28,000 c. P
Total carrying value 24,000 d. P 20,000
1,816,250
5. C Solution
Land per schedule 450,000 1. B
Land - donation 200,000 Cost of the land 500,000
650,000 Add: tilting cost 10,000
6. C Total 510,000
Cost of the machine sold 960,000 2. C
Accumulated depreciation Land improvement 190,000
(P960,000/10 x 4) 384,000 Less: Accumulated depreciation 10,000
Book value 576,000 (P190,000/57 mos. x 3 mos.)
Proceeds from sale 520,000 Carrying value 180,000
Loss on sale 56,000 3. C
Depreciation - leasehold improvement 10,000
Depreciation - Equipment (P40,000/2) 20,000
Total per audit 30,000
Total per book 16,000
Problem 17 Understatement of depreciation 14,000
On an audit engagement for calendar year 2003, you handled
the audit of Fixed Assets of Crame Corporation. Plant assets 4. C
consists of: Net book value 64,000
Less: CV after impairment 40,000
Land P 100,000 Loss on impairment 24,000
Leasehold improvements 190,000
Equipment 450,000 Problem 18
16
On January 1, 2003, BLESSING COMPANY signs a 10-year Payment__ Interest expense
noncancelable lease agreement to lease a storage building Carrying Value
from GRACE COMPANY. The following information
pertains to this lease agreement: 4,400,000.00
1/1/03 695,294.90 -
a. The agreement requires equal rental payments of 3,704,705.10
P720,000 beginning on January 1, 2003. 12/1/03 695,294.90 444,564.61
3,453,974.81
b. The fair value of the building on January 1, 2003, is 12/1/04 695,294.90 414,476.98
P4,400,000. 3,173,156.89
4. C P4,400,000/10 years = P 440,000
c. The building has an estimated economic life of 12 5. A
years, with an unguaranteed residual value of P100,000. Cost P
BLESSING COMPANY depreciates similar buildings on 4,400,000
the straight-line method. Accumulated depreciation 880,000
Net book value P 3,520,000
d. The lease is nonrevnewable. At the termination of
the lease, the building reverts to the lessor.
Problem 19
e. BLESSING COMPANY’s incremental borrowing On January 1, 2003, the Prince Gabriel Manufacturing
rate is 12% per year. The lessor’s implicit rate is not Company began construction of a building to be used as its
known by BLESSING COMPANY. office headquarters. The building was completed on June 30,
2004.
f. The yearly rental payment includes P24,705.10 of
executory costs related to taxes on the property. Expenditures on the project were as follows:

The following present value factors are for 10 periods at 12% January 3, 2003 P 500,000
annual interest rate: March 31, 2003 600,000
June 30, 2003
Present value of an annuity due of 1 800,000
6.32825 October 31, 2003 600,000
Present value of an ordinary annuity of 1 January 31, 2004 300,000
5.65022 March 31, 2004 500,000
Present value of 1 May 31, 2004
0.32197 600,000

Questions On January 3, 2003, the company obtained a P2 million


1. The minimum annual lease payment is: construction loan with a 10% interest rate. The loan was
a. P 744,705.10 b. P 720,000.00 c. P outstanding all of 2003 and 2004. The company’s other
695,294.90 d. P 0 interest-bearing debt included a long-term note of P5,000,000
with an 8% interest rate, and a mortgage of P3,000,000 on
2. The present value of minimum lease payments is: another building with an interest rate of 6%. Both debts were
a. P 0 b. P 4,400,000 c. P outstanding during all of 2003 and 2004. The company’s
4,207,747.65 d. P 3,928,569.15 fiscal year end is December 31.

3. The interest expense at December 31, 2003 is: Questions


a. P 0 b. P 414,476.98 c. P 1. The interest capitalized at the end of
444,564,61 d. P 528,000.00 December 31, 2003 is:
a. P 113,100 b. P 145,000
4. The depreciation expense at December 31, 2003 is: c. P 150,000 d. P 200,000
a. P 0 b. P 420,774.76 c. P
440,000.00 d. P 471,268.00 2. The interest capitalized at the end of
December 31, 2004 is:
5. The Book Value of Leased Building at December 31, a. P 145,132 b. P 159,632
2004 is: c. P 290,263 d. P 319,263
a. P 3,520,000.00 b. P 3,786,972.89 c. P
3,979,225.24 d. P 3,960,000.00 3. The total cost of the Building at
December 31, 2004 is:
a. P 3,535,132 b. P 4,190,131 c. P
Solution 4,480,263 d. P 4,535,263
1. C
Annual payment 4. The total interest expense at the end of
720,000.00 December 31, 2003 is:
Less: Executory costs a. P 780,000 b. P 635,000
24,705.10 c. P 630,000 d. P 560,000
Minimum annual lease payment
695,294.90 5. The total interest expense at the end of
2. B Present value of minimum lease payment - December 31, 2004 is:
P695,294.90 x 6.32825 = P 4,400,000 a. P 460,737 b. P 489,737
3. C c. P 620,368 d. P 634,868
Min. Annual Solution
1. B

17
Jan. 3 500,000 x 12/12 = 500,000 benefit the current period or are abandoned before completion.
March 31 600,000 x 9/12 = 450,000 A summary of the number of projects and the direct costs
June 30 800,000 x 6/12 = 400,000 AAE incurred in conjunction with the research and development
Oct 31 600,000 x 2/12 = 100,000 activities for 2004 appears below.
1,450,000 x 10% = P145,000 (Lower than the actual
cost of P580,000)
2. A
Beg bal. 2,500,000 x 6/6 = 2,500,000
145,000 x 6/6 = 145,000
Jan. 31 300,000 x 5/6 = 250,000 No. of
Mar 31 500,000 x 3/6 = 250,000 Salaries and Other expenses
May 31 600,000 x 1/6 = 100,000 Projects
3,245,000 AAE employees benefits (excluding dep’n.)
Completed projects with
Specific borrowing - P2,000,000 x 10% long-term benefits 60
x 6/12 = 100,000 3,600,000 2,000,000
General borrowing - 1,245,000 x 7.25% x Abandoned projects that
6/12 = 45,132 benefit the current year 40
Interest to be capitalized 2,600,000 600,000
145,132 (Lower than the actual cost Projects in process – results
indeterminate 20
of P580,000) 1,600,000 480,000
Average rate (general)
5,000,000 x 8% = P 400,000 Upon the recommendation of the research and development
3,000,000 x 6% = 180,000 group, Bing-Bong Corporation acquired a patent for
580,000 / 8,000,000 = manufacturing rights at a cost of P3,200,000. The patent was
7.25% acquired on March 31, 2003, and has an economic life of 10
3. B years.
Total cost in the construction - P 3,900,000
Interest capitalized - 290,132 Questions
Total cost – building - P 4,190,132 1. Carrying value of the patent as of December
4. B 31, 2004 is:
Interest expense – 2003 a. P 3,600,000 b. P 3,200,000 c. P
Specific borrowing P 2,000,000 x 10% = 2,880,000 d. P 2,640,000
200,000
General borrowing P 5,000,000 x 8% = 2. Carrying value of the building as of
400,000 December 31, 2004 is:
P 3,000,000 x 6% = a. P 5,320,000 b. P 10,640,000 c. P
180,000 10,080,000 d. P 0
Less: Interest capitalized =
(145,000) 3. Carrying value of the land as of December
Total interest expense – 2003 = 31, 2004 is:
635,000 a. P 1,200,000 b. P 2,400,000 c. P
5. D 2,160,000 d. P 0
Interest expense – 2004
Specific borrowing P 2,000,000 x 10% = 4. Research and development expense for 2004
200,000 is:
General borrowing P 5,000,000 x 8% = a. P 5,280,000 b. P 10,880,000 c. P
400,000 11,440,000 d. P 11,760,000
P 3,000,000 x 6% =
180,000 Solution
Less: Interest capitalized = 1. D
(145,132) Cost of patent - P 3,200,000
Total interest expense – 2003 = Amortization – 2003 - 240,000
634,868 Amortization – 2004 - 320,000
Net carrying value - P 2,640,000
2. B
Problem 20 Cost of building - P 11,200,000
In connection with your audit of Bing-Bong Corporation, you Depreciation – 2004 - 560,000
noted that on January 2, 2002, the corporation purchased a Net carrying value - P 10,640,000
building site for its proposed research and development 3. B cost of the land – P 2,400,000
laboratory at a cost of P2,400,000. Construction of the 4. C
building was started in 2002. The building was completed on Salaries and benefits - P 7,800,000
December 31, 2003, at a cost of P11,200,000 and was placed Other expenses - 3,080,000
in service on January 1, 2004. The estimated useful life of the Depreciation - 560,000
building for depreciation purposes was 20 years; the straight- Total R and D Cost - P11,440,000
line method of depreciation was to be employed and there was
no estimated salvage value.

Management estimates that about 50% of the projects of the


research and development group will result in long-term
benefits to the corporation. The remaining projects either
18