CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) AP-7803-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

PROBLEM NO. 1

GADON, INC. incurred the following cost during the year ended December 31, 2018, in relation to property,
plant, and equipment:

Land and old building (Note 1) ₱ 4,800,000

Realtor commission 600,000
Legal fees, realty taxes and documentation expenses 100,000
Amount paid to relocate persons squatting on the property 200,000
Cost of removal of old building (Note 2) 300,000
Grading and drainage on land site 300,000
Cost of new building (Note 3) 10,000,000
Building permit fee 100,000
Excavation 100,000
Cost of paving driveway and parking lot 80,000
Cost of trees, shrubs, and other landscaping 110,000
Cost of installing lights in parking lot 10,000
Architect fee 400,000
Payment of medical bills of employees accidentally injured while inspecting building
construction 20,000
Insurance on new building (Note 4) 120,000
Interest expense on new building (Note 5) 83,333
Cost of fencing the property 220,000
Invoice cost of machine acquired 4,000,000
Freight, unloading, and delivery charges 120,000
Custom duties and other charges 280,000
Allowances and hotel accommodation paid to foreign technicians during installation and
test run of machine 800,000
Estimated dismantling cost to be incurred as required by contract 60,000
Cost of adjustment to machine to make it operate more efficiently 150,000
Fee paid to consultants for advice on the acquisition of the machine 50,000
Cost of training for personnel who will use the machine 50,000
Cost of open house party to celebrate opening of building 150,000

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

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

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

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

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

1. What is the cost of land?

A. ₱6,200,000 C. ₱4,800,000
B. ₱4,950,000 D. ₱6,000,000

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2. What is the cost of building?

A. ₱10,900,000 C. ₱11,200,000
B. ₱12,150,000 D. ₱11,300,000

3. What is the cost of land improvement?

A. ₱200,000 C. ₱430,000
B. ₱190,000 D. ₱420,000

4. What is the cost of machine?

A. ₱4,660,000 C. ₱5,400,000
B. ₱5,310,000 D. ₱5,460,000

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

PROBLEM NO. 2

TARAN CO. stated operations on September 1, 2013. TARAN’s accounts at December 31, 2016 included the
following balances:

Machinery (at cost) ₱910,000

Accumulated depreciation – machinery 482,000
Vehicles (at cost; purchased November 21, 2015) 468,000
Accumulated depreciation – vehicle 196,560
Land (at cost; purchased October 25, 2013) 810,000
Building (at cost; purchased October 25, 2013) 1,857,200
Accumulated depreciation – building 286,140

Details of machines owned at December 31, 2016 are as follows:

Machine Purchase Date Cost Useful Life Residual Value
1 October 7, 2013 ₱430,000 5 years ₱25,000
2 February 4, 2014 ₱480,000 6 years ₱30,000

Additional information:

 TARAN calculates depreciation to the nearest month and balances the records at month-end.
Recorded amounts are rounded to the nearest peso, and the reporting date is December 31.

 TARAN uses straight-line depreciation for all depreciable assets, except vehicles, which are
depreciated on the diminishing balance at 40% per annum.

 The vehicles account balance reflects the total paid for two identical delivery vehicles, each of
which cost ₱234,000.

 On acquiring the land and building, TARAN estimated the building’s useful life and residual value
at 20 years and ₱50,000, respectively.

The following transactions occurred from January 1, 2017:

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

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furniture originally cost ₱360,000 and, to the date of exchange, had been depreciated by
₱241,000 in the previous owner’s books. TARAN estimated the office furniture’s useful life
and residual value at eight years and ₱5,400, respectively.
Dec. 31 Recorded depreciation.

2018
April 30 Paid for repairs and maintenance on the machinery at a cash cost of ₱9,280.
May 25 Sold one of the vehicles bought on November 21, 2015 for ₱66,000 cash.
June 26 Installed a fence around the property at a cash cost of ₱55,000. The fence has an
estimated useful life of 10 years and zero residual value. (Debit the cost to land
improvements asset account.)
Dec. 31 Recorded depreciation.

2019
Jan. 05 Overhauled machine 2 at a cash cost of ₱120,000, after which TARAN estimated its
remaining useful life at one additional year and revised its residual value to ₱50,000.
June 20 Traded in the remaining vehicle bought on November 21, 2015 for a new vehicle. A
trade-in allowance of ₱37,000 was received and ₱233,000 was paid in cash.
Oct. 04 Scrapped the vehicle bought on June 22, 2017, as it had been so badly damaged in a
traffic accident that it was not worthwhile repairing it.
Dec. 31 Recorded depreciation.

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

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

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

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

5. What should be the total depreciation expense for 2019?

A. ₱394,060 C. ₱409,612
B. ₱418,060 D. ₱403,832

PROBLEM NO. 3

At December 31, 2017, M COMPANY’S noncurrent operating asset and accumulated depreciation
accounts had balances as follows:
Cost of Asset Accumulated Depreciation
Land ₱ 130,000
Buildings 1,200,000 ₱ 265,400
Machinery and equipment 775,000 196,200
Automobiles and trucks 132,000 86,200
Leasehold improvements 221,000 110,500

Depreciation Method Useful Life

Land improvements Straight-line 12 years
Buildings 150% declining balance 25 years
Machinery and equipment Straight-line 10 years
Automobiles and trucks 150% declining balance 5 years
Leasehold improvements Straight-line 8 years

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Depreciation is computed to the nearest month. The salvage values of the depreciable assets are
immaterial.

Transactions during 2018 and other information are as follows:

(a) On January 6, a plant facility consisting of land, and a building was acquired from A Corp. for
P600,000. Of this amount 20% was allocated to land.

(b) On April 6, 2018, new parking lots, streets, and sidewalks at the acquired plant facility were
completed at a total cost of P192,000. These expenditures had an estimated useful life of 12 years.

(c) The leasehold improvements were completed on December 31, 2014, and had an estimated
useful life of 8 years. The related lease, which would have terminated on December 31, 2020, was
renewable for an additional 4-year term. On April 29, 2018, M exercised the renewal option.

(d) On July 1, 2018, machinery and equipment were purchased at a total invoice cost of ₱250,000.
Additional costs of ₱10,000 for delivery and the ₱30,000 for installation were incurred.

(e) On August 30, 2018, M purchased a new automobile for ₱15,000.

(f) On September 30, 2018, a truck with a cost of ₱24,000 and a carrying amount of ₱8,100 on the
date of sale was sold for ₱11,500. Depreciation for the 9 months ended September 30, 2018, was
₱2,352.

(g) On December 20, 2018, a machine with a cost of ₱17,000 and a carrying amount of ₱2,975 at date
of disposition was scrapped without cash recovery.

1. What is the depreciation expense on land improvements for 2018?

A. ₱10,667 C. ₱12,000
B. ₱8,000 D. ₱16,000

2. What is the depreciation expense on building for 2018?

A. ₱84,876 C. ₱113,168
B. ₱100,800 D. ₱56,076

3. What is the carrying amount on January 1, 2018, of the truck sold on September 30, 2018?
A. ₱8,100 C. ₱5,748
B. ₱5,670 D. ₱10,452

4. What is the depreciation expense for 2018, on automobile purchased August 30, 2018?
A. ₱ 0 C. ₱1,500
B. ₱3,000 D. ₱4,500

5. What is the depreciation on automobiles and trucks for 2018?

A. ₱14,456 C. ₱17,592
B. ₱15,240 D. ₱10,604

6. What is the depreciation expense on leasehold improvements for 2018?

A. ₱15,786 C. ₱36,833
B. ₱22,100 D. ₱27,625
7. What as the total cost of the machinery and equipment acquired on July 1, 2018?
A. ₱260,000 C. ₱250,000
B. ₱280,000 D. ₱290,000

8. What is the depreciation expense on machinery and equipment for 2018?

A. ₱92,000 C. ₱77,500
B. ₱106,500 D. ₱86,900

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9. What is the book value of the machinery and equipment on December 31, 2018?
A. ₱578,800 C. ₱773,825
B. ₱575,825 D. ₱776,800

10. What is the total depreciation expense for 2018?

A. ₱219,118 C. ₱210,932
B. ₱225,432 D. ₱226,216

PROBLEM NO. 4

On January 1, 2018, MIBUROT Corporation contracted with Maga Construction Company to construct a
building for ₱40,000,000 on land that MIBUROT purchased several years ago. The contract provides that
MIBUROT is to make five payments in 2018, with the last payment scheduled for the date of completion.
The building was completed on December 31, 2018.

MIBUROT made the following payments during 2018:

January 1 ₱4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000
Total ₱40,000,000

MIBUROT had the following debt outstanding at December 31, 2018:

a) A 12%, 4-year note dated January 1, 2018, with interest compounded quarterly. Both principal
and interest are payable on December 31, 2021. This loan rates specifically to the building project.
b) A 10%, 10-year note dated December 31, 2014, with simple interest; interest payable annually on
December 31.
c) A 12%, 5-year note dated December 31, 2015, with simple interest; interest payable annually on
December 31.

1. The amount of interest to be capitalized during 2018 is

A. ₱5,012,680 C. ₱2,277,710
B. ₱2,133,680 D. ₱ 0

2. The amount of interest that would be expensed for 2018 is

A. ₱2,735,960 C. ₱2,277,720
B. ₱5,013,680 D. ₱ 0

PROBLEM NO. 5

On January 1, 2016, DISUSUKO COMPANY acquired a factory equipment at a cost of ₱150,000. The
equipment is being depreciated using the straight-line method over its projected useful life of 10 years.
On December 31, 2017, a determination was made that the asset’s recoverable amount was only ₱96,000.
Assume that this was properly computed and that recognition of the impairment was warranted. On
December 31, 2018, the asset’s recoverable amount was determined to be ₱111,000 and management
believes that the impairment loss previously recognized should be reversed. You have been asked to assist
the company’s accountant in the application of PAS 36, the standard on impairment of assets.

1. What amount of impairment loss should be recognized on December 31, 2017?

A. ₱54,000 C. ₱24,000
B. ₱90,000 D. ₱ 0

2. What is the asset’s carrying value on December 31, 2018?

A. ₱84,000 C. ₱86,400
B. ₱90,000 D. ₱96,000

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

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

PROBLEM NO. 6

In 2013, BIRDIE CORPORATION acquired a silver mine in Benguet. Because the mine is located deep in the
Benguet Mountains, BIRDIE was able to acquire the mine for the low price ₱50,000. In 2014, BIRDIE
constructed a road to the silver mine costing ₱5,000,000. Improvements to the mine made in 2014 cost
₱750,000. Because of the improvements to the mine and the surrounding land, it is estimated that the
mine can be sold for ₱600,000 when the mining activities are complete.

During 2015, five buildings were constructed near the time state to house the mine workers and their
families. The total cost of the five building was ₱1,500,000. Estimated residual value is ₱250,000. In 2013,
geologists estimated 4 million tons of silver ore could be removed from the mine for refining.

During 2016, the first year of operations, only 5,000 tons of silver ore were removed from the mine.
However, in 2017, workers mined 1 million tons of silver. During that same year, geologists discovered
that the mine contained 3 million tons of silver ore in addition to the original 4 million tons. Improvements
of ₱275,000 were made to the mine early in 2017 to facilitate the removal of the additional silver.

Early in 2017, an additional building was constructed at a cost of ₱225,000 to house the additional workers
needed to excavate the added silver. This building is not expected to have any residual value.

In 2018, 2.5 million tons of silver were mined and costs of ₱1,100,000 were incurred at the beginning of
the year for improvements to the mine.

Based on the above and the result of your audit, determine the following. (Round off depletion and
depreciation rates to two decimal places.)

1. Depletion for 2016

A. ₱6,300 C. ₱72,550
B. ₱6,500 D. ₱5,550

2. Depletion for 2017

A. ₱1,300,000 C. ₱780,000
B. ₱1,820,000 D. ₱870,000

3. Depreciation for 2017

A. ₱250,000 C. ₱180,000
B. ₱490,000 D. ₱210,000

4. Depletion for 2018

A. ₱1,950,000 C. ₱2,425,000
B. ₱2,150,000 D. ₱2,275,000

5. Depreciation for 2018

A. ₱525,000 C. ₱1,225,000
B. ₱625,000 D. ₱450,000

PROBLEM NO. 7

1. Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud
because
A. The amounts recorded on the balance sheet for most companies are immaterial.
B. The inherent risk is usually low.

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C. The depreciated values are always smaller than cost.

D. Internal control is inherently effective regarding this account.

2. Which is the best audit procedure to obtain evidence to support the legal ownership of real property?
A. Examination of corporate minutes and board resolution with regard to approvals to acquire real
property.
B. Examination of closing documents, deeds and ownership documents registered and on file at the
register of deeds.
C. Discussion with corporate legal counsel concerning the acquisition of a specific piece of property.
D. Confirmation with the title company that handled the escrow account and disbursement of
proceeds for the closing of the property.

3. When few property and equipment transactions occur during the year, the continuing auditor usually
obtains an understanding of internal control and performs
A. Tests of controls
B. Analytical procedures to verify current year additions to property and equipment.
C. A thorough examination of the balances at the beginning of the year.
D. Extensive tests of current year property and equipment transactions.

4. Which of the following combinations of procedures is an auditor most likely to perform to obtain
evidence about fixed asset additions?
A. Inspecting documents and physically examining assets.
B. Recomputing calculations and obtaining written management representations.
C. Observing operation activities and comparing balances to prior period balances.
D. Confirming ownership and corroborating transactions through inquiries of client personnel.

5. If an auditor tours a production facility, which of the misstatements or questionable practices is most
likely to be detected by the audit procedures specified?
A. Depreciation expense on fully depreciated machinery has been recognized.
B. Overhead has been over applied.
C. Necessary facility maintenance has not been performed.
D. Insurance coverage on the facility has lapsed.

6. In testing for unrecorded retirements of equipment, an auditor is most likely to

A. Select items of equipment from the accounting records & then locate them during the plant tour.
B. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated
equipment.
C. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger.
D. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense.

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

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

9. An auditor analyses repairs and maintenance accounts primarily to obtain evidence in support of the
audit assertion that all
A. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper
period.
B. Expenditures for property and equipment have been recorded in the proper period.
C. Noncapitalizable expendtures for repairs and maintenance have been properly charged to
expense.

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D. Expenditures for property and equipment have not been charged to expense.

10. In violation of company policy, Coatsen Company erroneously capitalized the cost of painting its
warehouse. An auditor would most likely detect this when
A. Discussing capitalization policies with Coatsen’s controller.
B. Examining maintenance expense accounts.
C. Observing that the warehouse had been repainted.
D. Examining construction work orders that support items capitalized during the year.

11. Additions to equipment are sometimes understated. Which of the following accounts would be
reviewed by the auditor to gain reasonable assurance that additions are not understated?
A. Accounts payable
B. Gain on disposal of equipment
C. Depreciation expense
D. Repair and maintenance expense

12. The auditor is least likely to learn of retirements of equipment through which of the following:
A. Review of the purchase returns and allowances account.
B. Review of depreciation.
C. Analysis of the debits to the accumulated depreciation account.
D. Review of insurance policy riders.

13. In the audit of property, plant, and equipment, the auditor tries to do all of the following except to
A. Obtain an understanding of internal control.
B. Determine the extent of property abandoned during the year.
C. Assess the adequacy of replacement funds.
D. Judge the reasonableness of the depreciation.

14. PPE additions should be recorded correctly as to account, amount, and period. Which of the following
environmental considerations indicates that the risk of PPE additions is high?
A. Most construction is performed in-house.
B. Gross property, plant, and equipment increased 25% during the current period.
C. Recently acquired loans preclude further plant acquisition for 2 years.
D. All material additions are required to be approved by the board of directors.

15. Which of the following questions would an auditor least likely include on an internal control
questionnaire concerning the initiation and execution of equipment transactions?
A. Are requests for major repairs approved at a higher level than the department initiating the
request?
B. Are prenumbered purchase orders used for equipment and periodically accounted for?
C. Are requests for purchases of equipment reviewed for consideration of soliciting competitive
bids?
D. Are procedures in place to monitor and properly restrict access to equipment?

--END--

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