You are on page 1of 13

Mindanao State University

College of Business Administration and Accountancy


DEPARTMENT OF ACCOUNTANCY
Marawi City

AUDIT OF PROPERTY, PLANT AND EQUIPMENT


Accounting 152

PROBLEM NO.4 the Dok Manufacturing, which started operations on


September 2003, is owned by Apple Ltd. Apple Ltd’s accounts at
December 31 included the following balances:
Machinery at cost P91 000
Accumulated depreciation- machinery 48 200
Vehicles at cost; purchased 21 November 2005 46 800
Accumulated depreciation- vehicles 19 656
Land at cost; purchased 25 October 2003 81 000
Buildings at cost; purchased 25 October 2003 185 700
Accumulated depreciation- buildings 28 614

Details of the machines owned at December 31, 2006 are as


follows:
Machine Purchase Cost Useful life Residual value
date
1 10/07/2003 P43 000 5 years P2 500
2 02/04/2004 P48 000 6 years P3 000

Additional information:
 Apple Ltd. 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.
 Apple Ltd. uses the 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 P23 400.
 On acquiring the land and building, Apple Ltd estimated the
building’s useful life and residual value at 20 years and P5
000, respectively.

The following transactions occurred from 1 January 2006:


2007
January 03 Bought a new machine (machine 3) for a cash price
of P57 000. Freight charges of P442 and
installation of P1 758 were paid in cash. The
useful life and residual value were estimated at
five years and P4 000, respectively.
June 22 Bought a second-hand vehicle for P15 200 cash.
Repainting costs of P655 and four new tires costing
P345 were paid for in cash.
August 28 Exchanged machine 1 for furniture that had a fair
value of P12 500 at the date of exchange. The fair
value of machine 1 at the date of exchange was P11
500. The office furniture originally cost P36 000
and to the date of exchange, had been depreciated
by P24 100 in the previous owner’s books. Apple Ltd
estimated the office furniture’s useful life and
residual value at eight years and P540,
respectively.

Prepared by: MSB, Second Semester, AY 2012-2013 Page | 1


December 31 Recorded depreciation
2008
April 30 Paid for repairs and maintenance on the machinery
at a cash cost of P928.
May 25 Sold one of the vehicles bought on 21 November 2005
for P6 600 cash.
June 26 Installed a fence around the property at a cash
cost of P5 500. The fence has an estimated useful
life of 10 years and zero residual value.
December 31 Recorded depreciation

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

16. gain on exchange of machine 1 on August 28, 2007:


a. P1 225 c. P225
b. P 900 d. P 0

17. the total depreciation expense in 2007 is:


a. P42 131 c. P47 572
b. P47 531 d. P47 400

18. the loss on sale of vehicle on May 25, 2008:


a. P 186 c. P457
b. P1 543 d. P 0

19. the total depreciation expense in 2008 is:


a. P37 662 c. P38 744
b. P39 144 d. P39 019

20. a weakness in internal accounting control over recording


retirements of equipment may cause the auditor to:
a. inspect certain items of equipment in the plant and trace
those items to the accounting records.
b. Review the subsidiary ledger to ascertain whether
depreciation was taken on each item of equipment during the
year
c. Trace additions to the “other assets” account to search for
equipment that is still on hand but no longer being used.
d. Select certain items of equipment from the accounting records
and locate them In the plant

PROBLEM NO.4
On July 1, 2004, PAL acquired a new aeroplane for a total cost of P10
million. A breakdown of the costs to build the aeroplane was given by
the manufacturers:
Aircraft body P3 000 000
Engines(2) 4 000 000
Fitting out of aircraft
Seats 1 000 000
Carpets 50 000
Electrical equipment
Passenger seats 200 000
cockpit 1 500 000
Food preparation equipment 250 000
All costs include installation and labor costs associated with the
relevant part.

Page | 2 Prepared by: MSB


It is expected that the aircraft will be kept for ten years and then
sold. The main value of the aircraft at that stage is the body and the
engines. The expected selling price is P2.5 million, with the body and
the engines proportionate value.

Costs in relation to the aircraft over the next ten years are expected
to be as follows:

Aircraft body. This requires inspection every two years for cracks and
wear and tear, at a cost of P10 000.

Engines. Each engine has an expected life of eight years before being
sold scrap. It is expected that the engines will be replaced in 2008
for P4.5 million and again in 2012 for P6 million. These engines are
expected to incur annual maintenance cost of P300 000. The
manufacturer has informed PAL that a new prototype engine with an
extra 10% capacity should be on the market in 2010, and that existing
engines can be upgraded at a cost of p1 million.

Fittings. Seats are replaced every four years. Expected replacement


costs are P1.2 million in 2007 and P1.5 million in 2013. The repair of
torn seats and faulty mechanisms is expected to cost P100 000 per
annum. Carpets are replaced every fiv years. They will be replaced in
2009 at an expected cost of P65 000, but will not be replaced before
the aircraft is sold in 2014. Cleaning costs per annum amount to P10
000. The electrical equipment such as the TV for each seat has an
annual repair cost of P15 000. It is expected that, with the
improvements in technology, the equipment will be totally replaced in
2010 by substantially better equipment at a cost of P350 000. The
electrical equipment in the cockpit is tested frequently at an
expected annual cost of P250 000. Major upgrades to the equipment are
expected every two years at expected costs of P250 000 in 2006, P300
000 in 2008, P345 000 in 2010 and P410 000 in 2012. The upgrades will
take into effect the expected changes in technology.

Food Preparation equipment. This incurs annual cost of repair and


maintenance of P20 000. The equipment is expected to be totally
replaced in 2011.

Based on the above, answer the following:


19. How much is the annual depreciation expense of the aircraft body?
a. P210 000 c. P300 000
b. P180 000 d. P250 000

20. How much is the annual depreciation expense of the engines?


a. P1 000 000 c. P500 000
b. P 800 000 d. P400 000

21. How much is the annual depreciation expense of the fittings?


a. P526 666 c. P443 333
b. P936 666 d. P433 333

22. How much is the annual depreciation expense of the food


preparation equipment?
a. P41 667 c. P50 000
b. P35 714 d. P48 667

23. How much is the total annual repairs and maintenance cost?
a. P695 000 c. P705 000
b. P675 000 d. P950 000

PROBLEM NO.11 W Company commenced operations on July 1, 2007.


During the following year, the company acquired a tract of land,

Page | 3 Prepared by: MSB


demolished the building on the land and built a new factory.
Equipment was acquired for the factory and, in March 2008, the
plant was ready to commence operation. During this period, the
following inflows and outflows occurred:
While searching for a suitable block of land, W
Company placed an option to buy with three real estate
agents at a cost of P1 000 each. One of these blocks
of land was later acquired.
Payment of option fees P 3
000
Receipt of loan from a bank 4 000 000
Payment to settlement agent for title search, stamp
duties and settlement fees 100 000
Payment for land 1 000 000
Payment for demolition of current building 120 000
Payment of arrears in rates on building of land 50 000
Proceeds from sale of material from old building 55 000
Payment to architect 230 000
Payment for safety fence around construction site 34 000
Payment to council for approval of building 120 000
construction
Payment to construction contractor for factory 2 400 000
building
Payment of interest on loan 400 000
Payment for external driveways, parking bays and
safety lighting 540 000
Payment for equipment 640 000
Payment for safety inspection on building 30 000
Payment for fright and insurance costs on delivery of
equipment 56 000
Payment of installation costs of equipment 120 000
Payment for safety equipment surrounding equipment 110 000
Payment for removal of safety fence 20 000
Payment for new fence surrounding the factory 80 000
Payment for advertisements in the local paper about
the forthcoming factory and its benefits to the local 5 000
community
Payment to adjust equipment to more efficient
operating levels subsequent to initial operation 33 000
Payment for operating ceremony 60 000

Based on the above, answer the following:

54. How much is the land improvements?


a. P620 000 c. P 80 000
b. P540 000 d. P214 000

55. How much is the amount for building?


a. P2 834 000 c. P2 804 000
b. P2 800 000 d. P3 374 000

PROBLEM NO.5 PPE


The property, plant and equipment section of Malvar
Corporation’s Statement of Financial Position at December 31,
2009 included the following items:
Land P 600,000
Land improvements 280,000
Buildings 2,200,000

Page | 4 Prepared by: MSB


Machinery and equipment 1,920,000

The following transactions occurred during 2010:

a) A tract of land was acquired for P300,000. As of December


31, the
company has not determined its future use.

b) A plant facility consisting of land and building was


acquired from Legend Company in exchange for 40,000 ordinary
shares of Malvar. On the date of acquisition, Malvar’s share had
a closing market price of P37 per share on the Philippine Stock
Exchange. The plant facility was carried on Legend’s books at
P220,000 for land and P640,000 for the building on the date of
exchange. Current appraised values for land and building,
respectively, are P460,000 and P1,380,000.

c) On May 1, 2010, items of machinery and equipment were


purchased at a total cost of P896,000, inclusive of 12% VAT.
Additional costs of P26,000 for freight and P52,000 for
installation were incurred.

d) Expenditures totaling P190,000 were made for new parking


lots, streets and sidewalks at the corporation’s various plant
locations. These expenditures had an estimated life of 15 years.

e) A machine costing P160,000 on January 1, 2002, was scrapped


on June30, 2010. Double-dec1ining balance depreciation has been
recorded on the basis of a 1 0~vear useful life.

f) A machine was sold for P40,000 on July 1, 2010. Original


cost of the machine was P88,000 on January 1, 2007, and it was
depreciated on a straight-line basis over an estimated useful
life of 7 years and a salvage value of P4,000.

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

16. Adjusted balance of Land as of December 31, 2010


a. p 970,000 c. P1,060,000
b. P1,270,000 d. P1,460.000

17. Adjusted balance of Buildings as of December 31, 2010


a. P3,580,000 c. P3,500,000
b. P2,200,000 d. P3,3 10,000

18. Adjusted balance of Machinery and Equipment as of December


31,
2010
a. P2,646,000 c. P2,550,000
b. P2,472,000 d. P2,7 10,000

19. Loss on scrapping of machine on June 30, 2010


a. P21,475 c. P24,160
b. P26,845 d. P23 225

20. Loss on sale of machine on July 1, 2010


a. P 6,000 c. P4,000

Page | 5 Prepared by: MSB


b. P18,000 d. P 0

PROBLM NO.5 Loidi Department Stores, Inc., constructs its own


stores. Management’s policy is to include interest as part of
the cost of new store just being completed. Additional
information follows:
Total construction expenditures: P 600 000
January 2, 2008 600 000
May 1,2007 500 000
November 1, 2007 700 000
March 1, 2008 400 000
September 1, 2008 5 00 000
December 31, 2008 P3 300 000

Outstanding company debt:


Mortgage related directly to new store, interest
rate, 12%, term, 5 years from beginning of P1 000 000
construction

General liability:
Bonds issued just prior to construction of store;
interest rate, 10% for 10 years 500 000
Bonds issued just prior to construction; interest 1 000 000
rate, 8% mature in 5 years
Estimated cost of equity capital 14%
Based on the foregoing, answer the following:
21. the capitalizable borrowing cost for 2007 is:
a. P125 667 c. P120 000
b. P122 850 d. P250 000

22. the capitalizable borrowing cost for 2008 is:


a. P253 938 c. P120 000
b. P274 233 d. P250 000

23. the carrying amount of the new store as of December 31,


2008:
a. P3 672 850 c. P3 540 000
b. P3 676 788 d. P3 699 900

24. in testing plant and equipment balances, an auditor examines


new additions listed on an analysis of plant and equipment. This
procedure most likely obtains evidence concerning management’s
assertion of:
a. completeness c. existence or
occurrence
b. presentation and disclosure d. valuation and
allocation

PROBLEM NO.4 Anne Company’s property, plant and equipment; accumulated


depreciation; and amortization balances at December 31, 2009:
Cost Accumulated Depreciation
Land P 275 000 -
Buildings 2 800 000 P 672 900
Machinery and equipment 1 380 000 367 500
Automobile and trucks 210 000 114 326
Leasehold improvements 432 108 000
000
Totals P5 097 000 P1 262 726

Page | 6 Prepared by: MSB


Additional information on depreciation, amortization methods, and useful
lives follows:
Asset Depreciation method Useful life
Buildings 150% declining balance 25 years
Machinery and equipment Straight-line 10 years
Automobile and trucks 150% declining balance 5 years
(all acquired after 2007)
Leasehold improvements Straight-line

Depreciation is computed to the nearest month. Salvage values of


depreciable assets are immaterial except for automobiles and trucks which
have estimated salvage values equal to 15% of cost.

Other additional information:


a. Anne entered into a twelve-year operating lease starting January 1,
2007. The leasehold improvements were completed on December 31, 2006
and the facility was occupied on January 1, 2007.
b. On January 6, 2010, Anne completed its self-construction of a building
on its own land. Direct costs of construction were P1 095 000.
Construction of the building required 15 000 direct labor hours.
Anne’s construction department has an overhead allocation system for
outside jobs based on an activity denominator of 100 000 direct labor
hours, budgeted fixed costs of P2 500 000, and budgeted variable costs
of P27 per direct labor hour.
c. On July 1, 2010, machinery and equipment were purchased at a total
invoice cost of P325 000. Additional costs of P23 000 to rectify
damage on delivery and P18 000 for concrete embedding of machinery
were incurred. A wall had to be demolished to enable a large machine
to be moved into the plant. The wall demolition cost P7 000 and
rebuilding of the wall cost P19 000.
d. On August 30, 2010, Anne purchased a new automobile costing P25 000.
e. On September 30, 2010, a truck with a cost of P48 000 and a carrying
amount of P30 000 on December 31, 2009 was sold for P23 500.
f. On November 4, 2010, Anne purchased a tract of land for investment
purposes for P700 000. Anne thinks it might use the land as a
potential future building site.
g. On December 20, 2010, a machine with a cost of P17 000, carrying
amount of P2 975 on date of disposition, and a market value of P4 000
was given to a corporate officer in partial liquidation of a debt.

Based on the above and the result of your audit, compute for the following
as of and for the fiscal period ended December 31, 2010:
10. Carrying amount of building
a. P3 409 474 c. P3 028 774
b. P3 761 974 d. P3 381 274

11. Carrying amount of machinery and equipment


a. P1 197 375 c. P1 243 925
b. P1 180 275 d. P1 222 075

12. Carrying amount of automobiles and trucks


a. P68 472 c. P61 722
b. P59 472 d. P52 722

13. Carrying amount of property, plant and equipment


a. P5 637 371 c. P5 615 521
b. P5 608 771 d. P5 590 821

14. a weakness in internal accounting control over recording retirements


of equipment may cause the auditor to:
e. inspect certain items of equipment in the plant and trace those items
to the accounting records.
f. Review the subsidiary ledger to ascertain whether depreciation was
taken on each item of equipment during the year
g. Trace additions to the “other assets” account to search for equipment
that is still on hand but no longer being used.

Page | 7 Prepared by: MSB


h. Select certain items of equipment from the accounting records and
locate them In the plant

15. Total Depreciation


a. P460 228 c. P470 528
b. P462 678 d. P461 528

PROBLEM NO.13 In connection with your audit of the Gold Mining company for
the year ended December 31, 2010, you noted that the company purchased for
P16 640 000 mining property estimated to contain 12 800 000 tons of ore.
The residual value of the property is P1 280 000.

Building used in mine operations costs P1 280 000 and have estimated life
of fifteen years with no residual value. Mine machinery costs P2 560 000
with an estimated residual value P512 000 after its physical life of 4
years.

Following is the summary of the company’s operations for its first year:
Tons mined 1 280 000 tons
Tons sold 1 024 000 tons
Unit selling price per ton P4.40
Direct labor 1 024 000
Miscellaneous mining overhead 204 800
Operating expenses (excluding depreciation) 921 600

Inventories are valued on a first-in, first-out basis. Depreciation on the


building is to be allocated as follows: 20% to operating expenses, 80% to
production. Depreciation on machinery is chargeable to production.

Based on the above and the result of your audit, answer the following:
(ignore taxes)
49. Total inventoriable depreciation for 2010?
a. P640 000 c. P614 400
b. P641 400 d. P 0

50. How much is the maximum amount that may be declared as dividends at
the end of the company’s first year of operations?
a. P2 083 480 c. P2 391 040
b. P2 063 360 d. P2 083 840

PROBLEM NO.3 Anne Company’s property, plant and equipment;


accumulated depreciation; and amortization balances at December
31, 2007:
Cost Accumulated
Depreciation
Land P 275 000 -
Buildings 2 800 000 P 672 900
Machinery and equipment 1 380 000 367 500
Automobile and trucks 210 000 114 326
Leasehold improvements 432 108
000 000
Totals P5 097 000 P1 262 726

Additional information on depreciation, amortization methods,


and useful lives follows:
Asset Depreciation method Useful life
Buildings 150% declining balance 25 years
Machinery and equipment Straight-line 10 years
Automobile and trucks 150% declining balance 5 years
(all acquired after
2005)

Page | 8 Prepared by: MSB


Leasehold improvements Straight-line
Depreciation is computed to the nearest month. Salvage values of
depreciable assets are immaterial except for automobiles and
trucks which have estimated salvage values equal to 15% of cost.

Other additional information:


h. Anne entered into a twelve-year operating lease starting
January 1, 2005. The leasehold improvements were completed on
December 31, 2004 and the facility was occupied on January 1,
2005.
i. On January 6, 2008, Anne completed its self-construction of a
building on its own land. Direct costs of construction were
P1 095 000. Construction of the building required 15 000
direct labor hours. Anne’s construction department has an
overhead allocation system for outside jobs based on an
activity denominator of 100 000 direct labor hours, budgeted
fixed costs of P2 500 000, and budgeted variable costs of P27
per direct labor hour.
j. On July 1, 2008, machinery and equipment were purchased at a
total invoice cost of P325 000. Additional costs of P23 000
to rectify damage on delivery and P18 000 for concrete
embedding of machinery were incurred. A wall had to be
demolished to enable a large machine to be moved into the
plant. The wall demolition cost P7 000 and rebuilding of the
wall cost P19 000.
k. On August 30, 2008, Anne purchased a new automobile costing
P25 000.
l. On September 30, 2008, a truck with a cost of P48 000 and a
carrying amount of P30 000 on December 31, 2007 was sold for
P23 500.
m. On November 4, 2008, Anne purchased a tract of land for
investment purposes for P700 000. Anne thinks it might use
the land as a potential future building site.
n. On December 20, 2008, a machine with a cost of P17 000,
carrying amount of P2 975 on date of disposition, and a
market value of P4 000 was given to a corporate officer in
partial liquidation of a debt.
Based on the above and the result of your audit, compute for the
following as of and for the fiscal period ended December 31,
2008:

5. Total Depreciation
a. P460 228 c. P470 528
b. P462 678 d. P461 528

6. Carrying amount of building


a. P3 409 474 c. P3 028 774
b. P3 761 974 d. P3 381 274

7. Carrying amount of machinery and equipment


a. P1 197 375 c. P1 243 925
b. P1 180 275 d. P1 222 075

8. Carrying amount of automobiles and trucks


a. P68 472 c. P61 722
b. P59 472 d. P52 722

9. Carrying amount of property, plant and equipment

Page | 9 Prepared by: MSB


a. P5 637 371 c. P5 615 521
b. P5 608 771 d. P5 590 821

PROBLEM NO.10 W Company commenced operations on July 1, 2007.


During the following year, the company acquired a tract of land,
demolished the building on the land and built a new factory.
Equipment was acquired for the factory and, in March 2008, the
plant was ready to commence operation. During this period, the
following inflows and outflows occurred:
While searching for a suitable block of land, W
Company placed an option to buy with three real estate
agents at a cost of P1 000 each. One of these blocks
of land was later acquired.
Payment of option fees P 3
000
Receipt of loan from a bank 4 000 000
Payment to settlement agent for title search, stamp
duties and settlement fees 100 000
Payment for land 1 000 000
Payment for demolition of current building 120 000
Payment of arrears in rates on building of land 50 000
Proceeds from sale of material from old building 55 000
Payment to architect 230 000
Payment for safety fence around construction site 34 000
Payment to council for approval of building 120 000
construction
Payment to construction contractor for factory 2 400 000
building
Payment of interest on loan 400 000
Payment for driveways, parking bays and safety
lighting within the building 540 000
Payment for equipment 640 000
Payment for safety inspection on building 30 000
Payment for fright and insurance costs on delivery of
equipment 56 000
Payment of installation costs of equipment 120 000
Payment for safety equipment surrounding equipment 110 000
Payment for removal of safety fence 20 000
Payment for new fence surrounding the factory 80 000
Payment for advertisements in the local paper about
the forthcoming factory and its benefits to the local 5 000
community
Payment to adjust equipment to more efficient
operating levels subsequent to initial operation 33 000
Payment for operating ceremony 60 000
Based on the above, answer the following:
31. How much is the land improvements?
a. P620 000 c. P 80 000
b. P540 000 d. P214 000

32. How much is the amount for building?


a. P2 834 000 c. P2 804 000
b. P2 800 000 d. P3 374 000

PROBLEM NO.12 You are auditing A Company. The entity has an oil
platform in the sea. The entity has to decommission the platform
at the end of its useful life, and a provision was set up at the
commencement of the production. The carrying amount of the

Page | 10 Prepared by:


MSB
provision is P8 million. The entity has received as offer of P20
million (selling costs P1 million) for the rights to the oil
platform, which reflects the fact that owners have to
decommission it at the end of the useful life. The value in use
of the oil platform is P26 million ignoring decommissioning
cost. The current carrying amount of the oil platform is P28
million.
A Company also purchased an equipment on January 1, 2006 at
a cost of P10 000 000. This equipment was depreciated over its
useful life of ten years with a residual value of 10%. On
December 31, 2007, A determined that the recoverable amount of
the equipment was only P5 000 000 with no residual value and
appropriately recognized an impairment loss. However on December
31, 2008, the fair value had increased to P7 000 000 and the
management of A deemed to reverse the impairment that was
previously recorded.

Based on the above and the result of your audit, answer the
following:
38. How much should A recognize as impairment loss on its oil
platform?
a. P10 000 000 c. P1 000 000
b. P 2 000 000 d. P 0

39. What is the gain on impairment to be shown on A’s 208 income


statement related to its equipment?
a. P3 000 000 c. P2 500 000
b. P2 625 000 d. P2 925 000

PROBLEM NO.15 In connection with your audit of the Gold Mining


company for the year ended December 31, 2008, you noted that the
company purchased for P16 640 000 mining property estimated to
contain 12 800 000 tons of ore. The residual value of the
property is P1 280 000.

Building used in mine operations costs P1 280 000 and have


estimated life of fifteen years with no residual value. Mine
machinery costs P2 560 000 with an estimated residual value P512
000 after its physical life of 4 years.

Following is the summary of the company’s operations for its


first year:
Tons mined 1 280 000 tons
Tons sold 1 024 000 tons
Unit selling price per ton P4.40
Direct labor 1 024 000
Miscellaneous mining overhead 204 800
Operating expenses (excluding depreciation) 921 600
Inventories are valued on a first-in, first-out basis.
Depreciation on the building is to be allocated as follows: 20%
to operating expenses, 80% to production. Depreciation on
machinery is chargeable to production.

Based on he above and the result of your audit, answer the


following: (ignore taxes)
49. Total inventoriable depreciation for 2008?
a. P640 000 c. P614 400
b. P641 400 d. P 0

Page | 11 Prepared by:


MSB
50. How much is the maximum amount that may be declared as
dividends at the end of the company’s first year of operations?
a. P2 083 480 c. P2 391 040
b. P2 063 360 d. P2 083 840

PROBLEM NO.16 In connection with your audit of BB Company, you


found out that the entity is using the successful effort method
in drilling two wells. The first, a dry hole, cost P50 000. The
second cost P100 000 and had an estimated recoverable reserves
of 25 000 barrels, of which 10 000 were sold this year.
B Company also constructed a building costing P2 800 000 on the
mine property. Its estimated residual value will not benefit the
company and will be ignored for purposes of computing
depreciation. The building has an estimated life of 10 years.
The total estimated recoverable units from the mine is 500 000
tons. The company’s production for the first four years of
operation was:
First year 100 000 tons
Second year 100 000 tons
Third year Shut down; no output
Fourth year 100 000 tons
Based on your audit and the above data, answer the following:
51. What will be the total expense for the year related to the
exploration and production from B’s two wells?
a. P40 000 c. P 90 000
b. P60 000 d. P150 000

52. What is the depreciation for the fourth year?


a. P560 000 c. P210 000
b. P490 000 d. P336 000

PROBLEM NO.17 You find in you audit of Bugis Company the


following information: Bugis Company acquired a machine on
January 1, 2000. Details of the machine A at December 31, 2007
are given below:
Component Cost Depreciation basis
Engine P170 000 000 Useful life of 40 000
hours
Outer casings 510 000 000 25 years straight-
line
Other components 255 000 000 12 years straight-
line
Total P765 000 000
During the year 2008,the following events took place:
1. Engine, which had run for 30 000 hours till date developed
serious snags. It was replaced by a better engine with a cost
of P238 million and estimated life of 50 000 hours. The new
engine was used for 5 000 hours during the year.
2. Polishing and painting was done to the outer casings at a cost
of P1.3 million.
3. Other components were upgraded at a cost of P102 million. The
remaining life of the other components is five years.

On March 31, 2008, Bugis Company retired a machine used in the


manufacturing designer parts. The machine was acquired May 1,
2005. Straight-line depreciation was used. The asset had an
estimated residual value of P20 000 and a five-year life. On

Page | 12 Prepared by:


MSB
December 31, 2007, the balance in the accumulated depreciation
is P330 000. The machine was scrapped and the company did not
receive a single consideration.

Based on the above and the result of your audit, answer the
following:
53. Compute the total depreciation for the year 2008 on machine
A, assume that all the work mentioned above was completed at the
beginning of 2008.
a. P81 600 000 c. P90 950 000
b. P81 676 470 d. P86 100 000

54. The loss on retirement on the retired machine?


a. P277 812 c. P288 712
b. P270 000 d. P250 000

PROBLEM NO.18 Sunflower Company acquired some new equipment. The


following data have been made available to you in your audit:
List price of the equipment P14 000
Cash discount available but not taken on purchase 200
Freight paid on the new equipment 250
Cost of removing the old equipment 170
Installing the new equipment 430
Testing costs before the equipment was put regular
operation (including P100 in wages of the regular 295
equipment operator)
Loss on premature retirement of the old equipment 120
Estimated cost of manufacturing similar equipment in
the company’s own plant, including overhead 13 800
55. What amount should be capitalized as the cost of the new
equipment?
a. P28 865 c.P14 775
b. P14 975 d.P15 065

Page | 13 Prepared by:


MSB