ReSA The Review Schooi of Accountancy Tel. No. 735-9807 & 734-3989 AUDITING PROBLEMS IRENEO/ESPENILLA INVESTING CYCLE/CONVERSION CYCLE F PROPERTY, PLANT AND EQUIPH4EN”, INTANGIBLES, OTHER ASSETS AUD! PROBLEM 1. The Mall Corporation had the following stems recerdes in its “Property and Equipment” account a5 at December 31, 2018) Items Debited to the account Cash paid to purchase a lang with a iiap-dated ynaing = te beginning of the year 660,000 Mortgage assumed on the land purchased 240,000 Commission paid to real estate agent 150,000 Attorney's fee in connection with the acquisition 75,000 Cost of razing the old structure 120,000 Grading, leveling and landscaping costs (permanent improvement) 50,000 Special assessment by for public improvement 25,000 Interest on loan for construction of @ new buicing {based on average costs incurred) 81,000 Building construction labor costs 800,000 Building construction materials 672,000 Cost of temporary fencing the property during “F cons:rucrion 28,000 Cost of permanent fencing 86,000 Architect's fees. 112,500 Cost of paving driveway and parking : 70,000 Excavation expenses, including a 990,000 cost of excavation equipment 135,000, Fixed overhead charged to the building 300,000 Cost of temporary quarters for construction crew 150,000 Cost of temporary building to house tools and materials 90,000 Insurance on building during construction 31,500 Profit on construction, as the difference bet wees the appraised value fof the asset after construction and actual vests mourr=g 360,000 Payments made to construction workers ijured Bing Ye ‘construction not covered by insurance 90,000 Payment to tenants of the old building to vacate the pre 90,000 Modification of building ordered by builcing inspector’ 225,000 Property taxes on land covering the period 2015 - 2018 240,000 Interest that would have been earned had the money used during the period of construction been invested in che money ark 150,000 Invoice cost of machinery acquired 381,000 Freight, unloading, and delivery charges 22,500 ‘Allowarices, hotel Accommodations etc. paid to foreign technicians during installation and test run of machine’ 20,000 royalty payment on machines purchased (base! m wives eroduced ‘and sold) 75,000 Items Credited to the accou! ‘Salvage proceeds from demolished buileing 45,000 Proceeds from sale of the excavation equipment 30,000 Proceeds from sale of produce of the machinery test ru 3500 ‘you discovered that compensation for the warker's imury was riecessary because it was not ‘policy purchased by the commany. Fzcuent :surance that would have covered the Wifications orcered by the building mspectors resulted from poo" In addition, covered by the insurance Same would have cost P20,000. The mo planning by the company REQUIRED: Based on the above and the resuit of your sustt wnst are the correct costs of the following individual Property, plant and equipment accounts: Land Building Land improvements , Machinery and equipment ‘Amount that should be expensed in 2018 PROBLEM.2; Sased on the following independent cases pertaining to diferent modes of acquiring items of property plant and equipment, answer the requirements that follow ‘a. On January 3, XYZ Company purchased @ specialize factory equipment at a purchase price of P1M plus 2% value-added tax. ‘The company incurred a P'30,Ct ( 1 fre aht anid handling costs and 70,000 Installation cost, ‘The company expects that & will incur dismantling cost amounting to P133,815 at the fend of the equipment’s 5-year useful life. The prevating market interest rate during the transaction date was 6%.ReSA: The Review Schoo! of Accountancy Page 2 of 12 The present value factor of PI at 6% for 5 periods 1s at 0.7473 The present value factor of PI ordinary annuity for 5 periods 1s at 4.2124 1, How much should the equipment be initially recognized? 1,000,000 b. 1,100,000 «. 4,200,000 4. 1,220,000 ‘Assuming an estimated usetul Ife of 5 years and a 10% Salvage value, what 1s the depreciation ‘expense for the fiest year under the straight-line method? ‘a. 216,000 b. 219,600 «240,000 4. 244,000 b. On Apnil 1, XYZ Corporation purchased for 2,700,000 a tract of land on which was located a warenouse and an office building. The following data were collected regarding the property. ‘Appraised Values Vendors Book Value Lana 7 875,000 700,000 Warehouse 375,000 400,000, Office burlaing 1,000,000 975,000, 1, What are the appropriate amounts that XYZ should record for the land, warehouse and office building, respectively? ‘2. 700,000; 400,000 and 900,000 ¢. 945,000; 540,000 and 1,215,000 'b. 875,000; 375,000 and 1,000,000 J. 1,050,000; 450,000 and 1,200,000 2. Assuming an estimated useful life of 10 years for the warehouse and the office building and an. ‘estimated salvage value of 10%, what is the depreciation expense of the warehouse and office building in the first year under the sum-of-years-digits method? 2. 81,818 and 218,182 . 73,636 and 196,364 b. 61,364 and 230,909 . $8,227 and 147,273 On Apri 3, XYZ Co, purchased and installed several furniture and fixtures stems from @ local furnture manufacturer and dealer under the terms 5/19, 1/30. The amount was pard on April 23 and was recorded as: 4/23 Furniture and fixtures 2,500,000 cash 2,500,000 In addition, the company incurred freight and installation costs amounting to P10,000 and P15,000, respectively, charged to operating expense, 1. How much should the furniture and fixtures be in'tally recognized? ’@. 2,375,000 . 2,400,000 c. 2,500,000 4. 2,525,000 ‘Assuming an estimated useful life of § years and a 10% salvage value, what is the depreciation ‘expense for the first year under the double-declining balance method? ‘@, 960,000 . 720,000 864,000 4. 648,000 d. On May 1, the XYZ Co. purchased factory machinery having an installment price of PS,000,000 and a list price of P4,500,000. The company made a P1,000,000 down payment and issued a 4-year, 4 milion Fon interest bearing note payable PIM every May i starting next year. The prevailing interest rate for similar note is at 6%, The present value factor of PI at 6% for 4 periods 1s at 0.7921 The present value factor of Pi at 6% ordinary annutty for 4 periods »s at 3.4651, 1. How much should the factory machinery be initially recognized? a. 3,465,100 b. 4,465,100 c. 4,500,000 4. 5,000,000 ‘Assuming an estimated useful ife of years with a 10% salvage value based on cost, what is the depreciation expense for the first year under the 150% declining balance method? ‘a, 1,350,000 b. 1,339,530. 900,000 d. 893,020 fe. On June 1, XYZ Co. acquired a real property by issuing 35,360 shares of its P100 par value ordinary Shares, The share were selling on the same date at °125._ A mortgage of P4,000,000 was assumed by XYZ Co, on the purchase, Moreover, the company paid P180,000 of real property taxes in the prior ears. Twenty percent of the purchase price should be allocated to the land and the balance to the building, In order to make the building suitable for the use of XYZ Co , remodeling costs had to be incurred in the ‘amount of P300,000. This however necessitated the demolition of a portion of the building, which resulted in recovery of salvage material sold for P 30,000. Parking lot cost the company a total of P320,000 while repairs in the main hall were incurred at P4S,000 prior to its use. 1. The correct cost of the land should be a. 1,664,000 b. 1,720,000 «. 2,040,000 4. 2,400,000 AUDITING PROBLEMS 400ReSA: The Review Schoo! of Accountancy Page 3 of 12 2. The correct cost of the building shouid ve 6,330,000 b. 7,795,000 ‘c. 7,750,000 4. 7,570,000 f. XYZ Co. owns a tract of land which it purchased in 2016 for P1,000,000. The land fs held as a future: plant sike and has @ fair market value of P1,500,000 on July 1, 2018. Mall Company also owns » tract of fand held as a future plant site. Mall paic P1 890,000 for the land in 2017 and the land has @ fair market Value of P2,000,000 on July 1. On this date XYZ exchanged its land and paid P500,000 cash for the land ‘Gwned by Mall. ‘The expected cash flows from the asset received differ from the cash flows expected from the asset transferred and the diffecence is significant relative to the fair value of the land given up. 1. How much should the property be invtaily recognized? ‘2. 500,000 , 1,500,000 ¢. 2,000,000 4. 2,500,000 2. How much is the gain or loss from the exchange transaction? none b. 500,000 ‘¢. 1,000,000 4. 2,000,000 3. Assuming that the cash flows expected from the assets exchanged are not materially different, how ‘much should the property be initially recognized? ‘2. 500,000 'b. 2,500,000, 2,000,000 4. 2,500,000 g. On July 1, XYZ traded in an old machine witi a book value of P10,000 for a similar new machine having & Cash price of P32,000, and pald 2 cash difference of P19,000. XYZ recorded the new machine at the cash payment made. 1. How much should the property be initially recognized? 2. 32,000 b. 29,000 . 22,000 . 19,000 2, How much is the gain or loss from the trade in transaction? a. none b. 3,000 . 7,000 4. 10,000 tn. On July 4, the XYZ Co. accepted several office equipment from a stockholder which originally costed the ‘stockholder P2,000,000. On the same date, tne items had aggregate market value totaling to: 1,500,000. The company incurrert 100,000 fur professional fees and transfer taxes related to the transaction. The amount was charged te other expenses. 1. How much should the property be initially recognized? 2.0 'b. 1,500,000 ¢. 1,600,000 4. 2,000,000 2. The entries to record the donation invoives a net credit to: ’2., donated capital at 2,000,000 ‘¢, donated capital at 1,400,000 b. donated capttal at 1,59¢,000 ‘4. gain from grants at 1,500,000 1. On August 1, the national government granti YZ Cc. a parcel of land located in Batangas. On the date GF tne grant, the land had a fair value of P2,009,000. The company paid for documentation expenses and fegal fees to execute the grant amounting «© F200,000. The grant required the company to construct a {aid storage bullding on the site, which was completed by the end of October under 2 4,000,000 fixed Grice contract with ABC Constructions. The fair market value ofthe building which had an estimated rectal life of 10 years, upon finishing the construction was ascertained to be 4,500,000. ’ 1” How much should the land and facility, respectively, be initially recognized? 0 and 4,000,000 ‘c. 0 and 4,500,000 2,200,000 and 4,000,090 1d. 2,000,000 and 4,500,000 2. The entry to record the donatinn invoives a credit to: ‘donated capital at 2,000,000 ‘c. deferred income from gov't grant at 2M . income from gov't grant at 2,000,000 4. deferred income from gov't grant at 1.86 3, "How should the corresponding balance sheet accounts pertaining to the above transactions be presented as at the end of the first year? er *Land, 2,200,000; Facility, P3,933,333; Def income from govt grant, P1,966,667 D._ Land, 2,000,000; Facility, P3,933,333; Def income from govt grant, P2,000,000 ©. Land, 2,000,000; Facility, P4,000,000; Def income from govt grant, 2,000,000 4. Land, 2,200,000; Facility, P3,833,333; Def income from gov't grant, 1,916,667 PROBLEM 3: Bond Company constructs Its own Dulldi:gs. In 2018, a total of P1,228,500 interest was included as part of the cost of a new building just being completed. “The following is a summary of construction exrencitures in 2038: ‘Accumulated in 2018, including capicalized interest 18,228,500 March 1 7,000,000 September 1 4,000,000 December 31 5,000,000 ‘AUDITING PROBLEMSReSA: The Review School of Accountancy Page 40112 ‘Bond has the following outstanding loars at December 31, 2018. 12% note related directly to new building Term, 5 years from beginning of construction 10,000,000 General borrowings: 10% note issued prior to construction of new building; term, 10 years 5,000,000 8% note issued prior to construction of new buslding; Term, 5 years, 10,000,000 1, How much is the total capitalizaple borrowing cost? a. 2,534,761 '. 2,800,000 1,334,761 4. 1,200,000 2. How much interest expense shcu'd be reported wn the 2016 income statement? a0 b. 34,761 ©. 1,300,000 4. 1,334,761 3. What is the total cost of the new building as of December 31, 2018? a, 36,763,261 b. 36,728,500 ¢. 35,500,000 4. 27,895,167 PROBLEM 4: Information pertaining to Randa Corporation's property, plant and equipment for 2006 15 presented below: Account Balances at January 1, 2018 Debit Credit Land 150,000 Building 1,200,000 ‘Accumulated depreciation 263,100 Machinery and equipment 900,000 Accumulated depreciation 250,000 ‘Automotive equipment 115,000 Accumulated depreciation 84,600 Depreciation methods used and useful fe Building - 150% declining balance; 25 years Machinery and equipment - Straight-line; 10 years Automotive equipment - Sum-of-year's-digns, 4 years The salvage value of the assets .s immaterial. Dep'n i computed to the nearest month. Transactions dunng 2018 and other inforrmation (On January 1; Randa purchased a new car for P10,000 cash and trade-in of a two-year-old car with a cost of 9,000 and a'book value of P2,700. The new car ha: a cash price of P12,000; market value of trade-in is not known (On April 1, @ machine purchased for P23,000 on April 1, 2013, was destroyed by fire, Randa recovered 15,500 from its insurance company. On July 1, machinery and equipment were purchased at a total invoice cost of P280,000; additional costs of 5,000 for freight and P25,000 for installation were incurred. Randa determined that the automotive equipment comprising the P115,000 balance at January 1, would have been depreciated at a total amount of P18,000 for the year ended December 31, 2018. 1, What is the correct depreciation expense for 2018 for the following PPE items: a 8 © a. Building ‘96,000 72,000 74,952 56,214 b. Machinery and equipment 103,775 103,200 88,275 87,700 ¢. Automotive equipment 16,200 21,000 28,200 30,000 2. What is the correct accumulated depreciation as of Dec. 31, 2018 for the ff. PPE items: A 8 ¢ > a. Building 359,100 335,100, 338,052 319,314 b. Machinery and equipment 353,775 342,275, 338,275, 337,700, ©. Automotive equipment 100,800 105,600 99,300 314/600 PROBLEMS: The Cauliflower Corp. started business on January 1, 2014, by purchasing three equipment having the following costs: Equipment A 157,200, Equipment 8 120,000 Equipment C 132,000 since that date of purchase, the company has charged deprecation at 20% on the balance ofthe asset a a ae cae ey aeerentlon paws cn eos peer hex ear creed a a eee eas parce urea tne cep ofthe operons hare een ceed ec 0 he ese oN tn proceeds tom te dposal o equprent were credeed vote seme acsount AUDITING PROBLEMS 400 )ReSA: The Review School of Accountancy Page Sof 12 All the Equipment were estimated to have a useful life of 5 years and were supposed to be depreciated under the straight-line method. ‘Your first time audit of the equipment account nevealed the following information: + On September 30, 2014, an equipment (Equipment 0) with a cash price of 160,000 was purchased ‘on an installment basis, ‘The instalment contract called for a 12 monthly payment of Pi8,000. The ‘monthly payments on the installment contract beginning September 30, 2014 has been debited to the equipment account. Freight arid installation charges amounting to P6}000 were pald and charged to the equipment account on October of the same year. + On June 30, 2015, another equipment (Equinment E) was purchased for P240,000, 2/10, 1/30. The ‘amount was paid on July 15, 20-5. The equipment account was debited for the amount pald on the same date. + On'sune 30, 2016, Equipment A was traced for a more superior equipment (Equipment F) having 2 ‘cash price of P279,000. An allowence emounting to P129,000 was received on the old equipment ‘with the balance being pad in cash. The company recorded the trade-in by merely debiting the ‘equipment account for the cash payment. + On January 1, 2017, the Equipment C was sold for P75,000. The company incurred crating costs O° the machinery amounting fo P3,750. The equipment account was credited for the net cash received from the disposal. + On October 1, 2018, Equipnient 1 was sold for 24,000. The amount received was credited to the ‘equipment account. Requirements: Based on the results of juur audi: answer the following: 1. What is the carrying value of Equipment 2s ut December 21, 2018? a. 237,960 b. 241,268 c. 275,160 4. 285,000 2, What Is the gain on the trade in of Equipment F? 2. 129,000 b. 71,400 50,400 a0 3, What is the gain on the sale of Equipment C? 2. 48,600 b. 44,850 ©. 22,200 4. 18,450 4, What is the gain on the sale of Equipment 8? 2. 18,600 . 24,850 18,000 4. 18,450 5S. What is the correct depreciation exvense to be reported in 20187 2, 140,040 b. 146,046 c. 158,040 4. 164,040 PROBLEM 6: You are audicing the financia! statements of Benguet Mining Corporation for the year ended December 31, 2018. ‘You noted that the company purchased for #2,500,00 an undeveloped mining property. The company incurred Topographical, geological, geochemical art geophysical study costs amounting to P1,800,000 in an attempt to weeelah the property's technical feasbiliy and commercial vabllty to extract minerals. The company also eee) eddtoonel P2,900,C00 in exploratory driting, trenching and sampling. Once technical feasibility has boon established the company estimated that te property contain 8,000,000 tons of ore. ‘To prepare the property for the commerdial excraction, the company incurred further development costs, Intangible development costs arnounted to P2,100,000 while tangible development costs (Building and Mine machineries) amounted to 4,000,000. The company further estimates that after the minerals has been cracked, ane company wil have to incur Pi, 100,000 (present value) insite restoration costs after which the property will have a residual value of P600,000. ‘The building costs P2,400,000 and have estimated life of fifteen years with no residual value. Mine machinery Costs Pi,600,000 with an estimated residual vaiue 220,000 after the physical life of 4 years. Following is the summary of the company's onerstions for First year and second years of operations. 2017 2018 Tons mined 500,000 tons 800,000 tons. Tons sold 440,000 tons. 720,000 tons Unit selling price per ton 4.40 4.40 Direct labor 400,000 640,000 Miscellaneous mining ovechiead ‘90,000 128,000 Operating expenses except dapreciation 375,000 576,000 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 entirely chargeable to production. The company estimates that the annual average production shall be 800,000 tons. ‘Total dividends paid in 2017 amounted to P500,000. Dividends Is yet to be declared in 2018. ‘AUDITING PROBLEMSReSA: The Review School of Accountancy Page 6 of 12 {Based on the above and the result of your audit, answer the following: 1, How much is the total depletion for 20187 528,000 'b. 600,006 . 864,000 4. 960,000 2. Total inventoriable depreciation for 26:87 ‘2. 320,000 b. 440,000 . 492,800 4. $12,000 3. How much is the Inventory as of December 31, 2018? a. 111,600 b. 128,000 . 392,000 d. 422,000 4. How much is the cost of sales for the year ended December 31, 20167 a. 2,016,000 b. 2,031,600 -<. 2,059,200 ‘4. 2,114,000 5. How much is the net income in 20187 2. 184,600 b. 214,600 ©. 512,400 4. 560,000 6. How much is the maximum amount that may be declared as dividends at the end of 20187 ‘a. 1,589,000 b. 2,089,000 c. (2,481,000 . 3,481,000 PROBLEM 7: In the course of your audit of PPE additions for the period ended December 31, 2018 of Valkerie Corp., you were provided the following schedule of property additions: Replacement of the old wooden roof with a fireproof brick roof 150,000 Repainting of the plant building 30,000 ‘Major improvements to the electrical wiring system 70,000 Rearrangement costs of a group of factory equipment to ensue greater efficency in production —120,000° Total amount capitalized "B370,000 “Comprises of moving costs amounting to P40,000 and reinstallation costs of P80,000. In addition, you also obtained the details of the current year charges to the company's Repairs and Maintenance Expense account. Date Amount. Description Jan. 3 20,000 Service contract on office equipment. May 17 81,700 Purchase of storm windows and screens and their installation on all office windows, May 23 23,480 Sealing of roof leaks in the production area uly 8 {66,900 Installation of automatic door-opening system Sept. 19 77,000 Overhead crane for the assembly department to speed up production Oct. 23 22,000 Replacement of minor parts (broken gear) on machine on the machining department 1. AS a result of your audit, how much in total should be the correct additions to: a 3 © D Building 422,080 392,080 368,600 286,900 Equipment 77,000 97,000 197,000 219,000 2. How much from the above Items should be expensed? ‘2. 95,480 b. 75,480 73,480 4. 72,000 PROBLEM 8: Powter Company acquired a machine on January 1, 2016, at a cost of P120,000. It was expected to have a useful economic life of 10 years. Powter uses the straight-line method in depreciating its fnachinery and equipment and reports on a calendar year basis. On December 31, 2018, the machine was appraised as having @ gross replacement cost of F150,000. Powter applies the revaluation model in valuing this class of property, plant, and equipment after its initial recognition. 1. How much should be credited to revaluation surplus on December 31, 20187 ‘a. 30,000 ’b. 105,000 21,000 ‘4. 9,000 2. What Is the balance of the revaluation surplus account on December 31, 2019 assuming that piecemeal realization of revaluation surplus is in order? ‘a. 30,000 b. 21,000 ¢. 18,000 4. 15,000 PROBLEM 9: On January 1, 2013, Brent Corporation purchased a factory for P1,800,000 and machinery for 10,000,000. It is depreciating the factory over 30 years and the machinery over 20 years, both by the ‘straight-line method to zero residual values. Late in 2018, because of technological changes in the industry ‘and reduced seling prices for its products, the company believes that its asset(s) may be impaired and will have a remaining useful ife of & years. ‘The cash flows from the factory and machinery are not separable, tnd are Independent of the company's other activities. The company estimates that the asset will produce ash inflows of P4,000,000 and will incur cash outfiows of P2,950,000 each year for the next 8 years. 400" ‘AUDITING PROBLEMS