QUIZ Audit of Non-cash Assets

DR. FILEMON C. AGUILAR MEMORIAL COLLEGE OF LAS PINAS

Applied Auditing

The next item(s) is/are based on the following

McDODO, INC. incurred the following costs during the year ended December 31, 2015, in relation to property,
plant, and equipment:

Land and old building (Note 1) P 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, McDODO, Inc. paid P3,800,000 cash and issued 10,000 preference shares with par
value of P100. On the acquisition date, the share had a closing market price of P120 on a stock exchange.
Current appraised values for the land and the usable building are P4,500,000 and Pl,500,000, respectively.

2 The company negotiated a price of P400,000 to tear down the old building to make room for construction of
new building. The contractor retains all salvageable materials estimated to be worth P100,000.

3 This represents the contract price for the new building which was placed into service on December 1, 2015.

4 A one-year insurance was taken out on the building and its contents at P120,000 effective December 1, 2015.

5 A loan was obtained when the new building was placed into service to cover the contract price. Interest was
calculated based on P10,000,000 at the effective 10% interest rate for 1 month, or P83,333.

1. What is the cost of land?

2. What is the cost of building?
3. What is the cost of land improvement?
4. What is the cost of machine?
5. How much of the above expenditures should be charged to expenses for the year ended December 31, 2015?

The next item(s) is/are based on the following

JARAN CO. started operations on September 1, 2010. Jaran's accounts at December 31, 2013 included the
following balances:
Machinery (at cost) P 910,000
Accumulated depreciation - machinery 482,000
Vehicles (at cost; purchased November 21, 2012) 468,000
Accumulated depreciation - vehicles 196,560

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 Land (at cost; purchased October 25, 2010) 810,000
Building (at cost; purchased October 25, 2010) 1,857,200
Accumulated depreciation - building 286,140

Details of machines owned at December 312013 are as follows:

Machine Purchase Date Cost Useful Life Residual
Value
1 October 7,2010 P430,000 5 years P25,000
2 February 4,2011 P480,000 6 years P30,000

Additional information:
• Jaran 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.
• Jaran 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
P234,000.
• On acquiring the land and building, Jaran estimated the building's useful life and residual value at 20 years and
P50,000, respectively.

The following transactions occurred from January 1, 2014:

2014
Jan. 03 Bought a new machine (machine 3) for a cash price of P570,000. Freight charges of P4,420 and
installation costs of P17,580 were paid in cash. The useful life and residual value were estimated at
five years and P40,000, respectively.

June 22 Bought a second-hand vehicle for P152,000 cash. Repainting costs of P6,550 and four new tires
costing P3,450 were paid for in cash.

Aug. 28 Exchanged machine 1 for office furniture that had a fair value of P125,000 at the date of exchange.
The fair value of machine 1 at the date of exchange was P115,000. The office furniture originally cost
P360,000 and, to the date of exchange, had been depreciated by P241,000 in the previous owner's
books. Jaran estimated the office furniture's useful life and residual value at eight years and P5,400,
respectively.

Dec. 31 Recorded depreciation.

2015
April 30 Paid for repairs and maintenance on the machinery at a cash cost of P9,280.

May 25 Sold one of the vehicles bought on November 21, 2012 for P66,000 cash.

June 26 Installed a fence around the property at a cash cost of P55,000. The fence has an estimated useful life
of 10 years and zero residual value. (Debit the cost to a land improvements asset account.)

Dec. 31 Recorded depreciation.

2016
Jan. 05 Overhauled machine 2 at a cash cost of P120,000, after which Jaran estimated its remaining useful life
at one additional year and revised its residual value to P50,000.

June 20 Traded in the remaining vehicle bought on November 21, 2012 for a new vehicle. A trade-in
allowance of P37,000 was received and P233,000 was paid in cash.

Oct. 04 Scrapped the vehicle bought on June 22, 2014, as it had been so badly damaged in a traffic accident
that it was not worthwhile repairing it.

Dec. 31 Recorded depreciation.

6. What should be the depreciation expense for the vehicles for 2014?
7. What should be the depreciation expense for the machinery for 2014?
8. What should be the balance of the Accumulated depreciation - Office furniture account at December 31, 2015?
9. What should be the depreciation expense for the machinery for 2016?
10. What should be the total depreciation expense for 2016?

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 The next item(s) is/are based on the following
On December 31, 2014, BAIKAL COMPANY acquired a piece of equipment from Seller Company by issuing a
P1,200,000 note, payable in full on December 31, 2018. Baikal's credit rating permits it to borrow funds from its
several lines of credit at 10%. The equipment is expected to have a 5-year life and a P150,000 salvage value.

11. What is the equipment's book value on December 31, 2016?

The next item(s) is/are based on the following

One of the cash generating units of PIPIT COMPANY is that associated with the manufacture of wine barrels. At
December 31, 2015, Pipit Company believed, based on an analysis of economic indicators, that the assets of the
unit were impaired. The carrying amounts of the assets and liabilities of the unit at December 31, 2015 were:

Buildings P4,200,000
Accumulated depreciation - buildings * (1,800,000)
Factory machinery 2,200,000
Accumulated depreciation - machinery ** (400,000)
Goodwill 150,000
Inventory 800,000
Receivables 400,000
Allowance for doubtful accounts (50,000)
Cash 200,000
Accounts payable 300,000
Loans 200,000
* Depreciated at P600,000 per annum
** Depreciated at P450,000 per annum

Pipit Company determined the value in use of the unit to be P5,350,000. The receivables were considered to be
collectible, except those considered doubtful. The inventory's recoverable value is equal to the carrying amount.
The fair value less cost of disposal of the company's buildings is P2,350,000.

During the year 2016, Pipit Company increased the depreciation charge on buildings to P650,000 per annum, and
to P500,000 per annum for factory machinery. The inventory on hand at January 1, 2016 was sold by the end of the
year. At December 31, 2016, Pipit Company, due to a return in the market to the use of the traditional barrels for
wines and an increase in wine production, assessed the recoverable amount of the cash generating unit to be
P350,000 greater than the carrying amount of the unit. As a result, Pipit Company recognized a reversal of the
impairment loss.

12. Assume that the recoverable amount at December 31,2016 was P200,000 greater than the carrying amount of the
cash generating unit. What is the net carrying amount of the Machinery after recognition of the impairment
recovery?
13. Assume that the recoverable amount at December 31, 2016 was P200,000 greater than the carrying amount of the
cash generating unit and that the recoverable amount of the Buildings was Pl,800,000. What is the net carrying
amount of the Factory Machinery after the recognition of the impairment recovery?

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

SAXOPHONE COMPANY acquires a new manufacturing equipment on January 1, 2014, on installment basis.
The deferred payment contract provides for a down payment of P300,000 and an 8-year note for P3,104,160. The
note is to be paid in 8 equal annual installment payments of P388,020, including 10% interest. The payments are to
be made on December 31 of each year, beginning December 31, 2014. The equipment has a cash price equivalent
of P2,370,000.
Saxophone's financial year-end is December 31.

14. What is the acquisition cost of the equipment?

15. The amount of interest expense to be recognized in 2015 is

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

Information for EPSON CORPORATIONS Property, Plant and Equipment for 2017 is as follows:
Account balances at January 1, 2017:
Debit Credit
Land P450,000
Building 3,600,000
Accumulated depreciation -- P789,300
Machinery and equipment 2,700,000
Accumulated depreciation -- 750,000
Automotive equipment 345,000
Accumulated depreciation -- 253,800

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 Depreciation method and useful life:
Building: 150%-declining balance; 25 years
Machinery and equipment: Straight-line; 10 years
Automotive equipment: Sum-of-the- years- digits; 4 years
Leasehold improvements: Straight-line

The residual value of the depreciation assets is immaterial. It is the company's policy to compute depreciation to
the nearest month.

Transactions during 2017 and other information were as follows:

1 On January 2, 2017, EPSON purchased a new car for P30,000 cash and a trade-in of a 2-year old car with a
cost of 27,000 and a book value of P8,100. The new car has a cash price of price of P36,000; the market value
of the trade-in is not known.

2 On April 1, 2017, a machine purchased for 69,000 on April 1, 2012 was destroyed by fire. EPSON recovered
P46,500 from its insurance company.

3 On May 1, 2017 costs of P504,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. The related lease, which terminates on December 31, 2023, is
renewable for an additional 6-year term. The decision to renew will be made in 2023 based on office space
needs at that time.

4 On July 1, 2017, machinery and equipment were purchased to a total invoice cost of P840,000; additional costs
of PI 5,000 for freight and 75,00 for installation were incurred.

5 EPSON determined that the automotive equipment comprising the P345,000 balance at January 1, 2017 would
have been depreciated at a total amount of P54,000 for the year ended December 31, 2017.

16. What is the depreciation expense on machinery and equipment for 2017?
17. What is the total depreciation expense for the year ended December 31, 2017?
18. What is the total accumulated depreciation balance on December 31, 2017?
19. What is the net gain or loss on asset disposals for 2017?
20. What is the total book value of EPSON Corporation's property, plant, and equipment at December 31, 2017?

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

In connection with your examination of the financial statements of the Hawks Corporation for the year 2015, the
company presented to you the Property, Plant and Equipment section of its statement of financial position as of
December 31, 2014 which consists of the following:

Land P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 2,800,000

The following transactions occurred during 2015:

• Land site number 102 was acquired for P4,000,000. Additionally, to acquire the land the entity paid a
P240,000 commission to a real estate agent. Costs of P60,000 were incurred to clear the land. During the
course of clearing the land, timber and gravel were recovered and sold for P20,000.
• A second tract of land (site number 103) with a building was acquired for PI,200,000. Based on reliable
information at the time of acquisition, fair value of land is P800,000 and the building P400,000. Shortly after
acquisition, the building was demolished at a cost of P120,000. A new building was constructed for
PI,600,000 plus the following costs:
Excavation fees P 44,000
Architectural design fees 32,000
Building permit fee 4,000
The building was completed and occupied on September 1, 2015.
• A third tract of land (site number 104) was acquired for P2,400,000. The entity is undecided regarding its
future use.
• Extensive work was done to a building occupied by the entity under a lease agreement. The total cost of the
work was P500,000, which consisted of the following:

Particulars Amount Useful life

Painting of ceilings P 40,000 One year
Electrical work 140,000 Ten years
Construction of extension to current working area 320,000 Thirty years
The lessor paid one-half of the costs incurred in connection with the extension to the current working area.

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 • During December 2015, costs of P260,000 were incurred to improve leased office space. The related lease will
terminate on December 31, 2017, and is not expected to be renewed.
• A group of new machines was purchased under a royalty agreement which provides for payment of royalties
based on units of production for the machines. The invoice price of the machines was P300,000, freight costs
were P8,000, unloading charges were P6,000, and royalty payments for 2015 were P52,000.

Based on the above and the result of your audit, determine the adjusted balance of the following as of December
31, 2015 in accordance with PIC Q&A 2012-02:

21. Land
22. Buildings
23. Leasehold improvements
24. Machinery and equipment

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

You requested a depreciation schedule for Delivery Trucks of Cavaliers Corporation showing the additions,
retirements, depreciation and other data affecting the income of the Company in the 4-year period 2012 to 2015,
inclusive. The Delivery Trucks account consists of the following as of January 1, 2012:
Truck No. 1 purchased Jan. 1, 2009, cost P 180,000
Truck No. 2 purchased July 1, 2009, cost 220,000
Truck No. 3 purchased Jan. 1, 2011, cost 300,000
Truck No. 4 purchased July 1, 2011, cost 240,000
P940,000

The Delivery Trucks-Accumulated Depreciation account previously adjusted to January 1, 2012, and duly entered
to the ledger, had a balance on that date of P302,000 (depreciation on the 4 trucks from respective date of
purchase, based on five-year life, no salvage value). No charges have been made against the account before
January 1, 2012.

Transactions between January 1, 2012 and December 31, 2015, and their record in the ledger were as follows:

July 1, 2012 Truck No. 3 was traded for larger one (No. 5), the agreed purchase price of which was P340,000.
Cavaliers Mfg. Co. paid the automobile dealer P150,000 cash on the transaction. The entry was
debit to Delivery Trucks and a credit to cash, P150,000.
Jan. 1, 2013 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Delivery Trucks, P35,000.

July 1, 2014 A new truck (No. 6) was acquired for P360,000 cash and was charged at that amount to Delivery
Trucks account. (Assume truck No. 2 was not retired.)
July 1, 2014 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for P7,000 cash.
Cavaliers Mfg. Co. received P25,000 from the insurance company. The entry made by the
bookkeeper was a debit to cash, P32,000, and credits to Miscellaneous Income, P7,000 and
Delivery Trucks P 25,000.

Entries for depreciation had been made for the close of each year as follows: 2012, P203,000; 2013, P211,000;
2014, P244,500; 2015, P278,000.

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

25. The 2012 profit is overstated by

26. The 2013 profit is understated by
27. The 2014 profit is understated by
28. The adjusted carrying amount of Delivery Trucks as of December 31, 2015 is

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

In 2010, Washington Corporation acquired a mine. Because the mine is located deep in the mountains, Washington
was able to acquire the mine for the low price of P50,000. In 2011, Washington constructed a road to the silver
mine costing P5,000,000. Improvements to the mine made in 2011 cost P750,000. Because of the improvements to
the mine and the surrounding land, it is estimated that the mine can be sold for P600,000 when the mining
activities are complete.

During 2012, five buildings were constructed near the mine site to house the mine workers and their families. The
total cost of the five buildings was Pl,500,000. Estimated residual value is P250,000. In 2010, geologists
estimated 4 million tons of ore could be removed from the mine for refining.

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 During 2013, the first year of operations, only 5,000 tons of ore were removed from the mine. However, in 2014,
workers mined 1 million tons of ore. During that same year, geologists discovered that the mine contained 3
million tons of ore in addition to the original 4 million tons. Improvements of P275,000 were made to the mine
early in 2014 to facilitate the removal of the additional ore. Early in 2014, an additional building was constructed
at a cost of P225,000 to house the additional workers needed to excavate the added ore. This building is not
expected to have any residual value.

In 2015, 2.5 million tons of ore were mined and costs of P1,100,000 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)

29. Depletion for 2014

30. Depreciation for 2014
31. Depletion for 2015
32. Depreciation for 2015

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

The draft balance sheet of Sugar Corporation as of December 31, 2017 reported the net property, plant and
equipment at P6,270,000. Details of the amount follow:
Land at cost P1,000,000
Building at cost P4,000,000
Less accumulated depreciation at
12/31/16 (800,000) 3,200,000
Plant at cost 5,200,000
Less accumulated depreciation at
12/31/16 (3,130,000) 2,070,000
P6,270,000

The following matters are relevant:

(a) The company policy for ail depreciation is that a full year's charge is made in the year of acquisition or
completion and none in the year of disposal.
(b) Included in the sales revenue is P300,000 being the sales proceeds of an item of plant that was sold on June 30,
2017. The plant had originally cost P900,000 and had been depreciated by P630,000 as of December 31, 2016.
Other than recording the proceeds in sales and cash, no other accounting entries for the disposal of the plant
have been made. Ail plant is depreciated at 25% per. annum on the reducing balance basis.
(c) On September 30, 2017, the company completed the construction of a new warehouse. The construction was
achieved using the company's own resources as follows:

Purchased materials P150,000

Direct labor 800,000
Supervision 65,000
Design and planning costs 20,000

Included in the above figures are P10,000 for materials and P25,000 for labor costs that were effectively lost
due to the foundations being too close to a neighboring property. All the above costs are included in cost of
sales. The building was brought into immediate use upon completion and has an estimated useful life of 20
years (straight-line depreciation).

(d) At the beginning of the current year, the company had an open market basis valuation of its properties
(excluding the newly constructed warehouse). Land was valued at P1.2 million and the property at P4.8
million. The directors wish these values to be incorporated into the financial statements. The properties had an
estimated remaining life of 20 years at the date of the valuation (straight-tine depreciation is used). The
company makes a transfer to retained earnings in respect of the excess depreciation on revalued assess.

(e) Depreciation for the year 2017 has not yet been accounted for the in the draft financial statements.

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

33. The carrying amount of the new warehouse as of December 31, 2017 is
34. The carrying amount of plant as of December 31, 2017 is
35. The total depreciation for the year ended December 31, 2017 is
36. The revaluation surplus as of December 31, 2017 is

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 THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
Marxian Company participates in a 'cap and trade' for emission rights and is allocated on January 2,
2012, free of charge, allowances of 10,000 tonnes of carbon dioxide during the calendar year 2012. The
market price of an allowance (equivalent to one tone of carbon dioxide) on January 2, 2012 is P20 giving
a fair value of P200,000. On June 30, 2012, the company has emitted 6,000 tonnes of carbon dioxide and
expects its emissions for the full year to be 12,500 tonnes. The market price for allowances has risen to
P22 per tonne. On December 31, 2012 the company has emitted 12,500 tonnes and market price of
allowances is P24 per tonne.

The company uses the fair value model to account for the allowances.

37. What amount deferred income should the company recognize on January 2, 2012?
38. What amount of realized income should the company recognize on June 30, 2012 based on the actual
tonnes of carbon dioxide emitted?
39. If the company uses the full market value approach, what amount of liability on emission should the
company recognize on June 30, 2012?

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

On January 2, 2011, Wink Corporation received a grant of P20,000,000 to build and run a power plant in
an economically backward area. The secondary condition attached to the grant is that the entity should
directly distribute the necessary needed power to the area at a rate that is much lower than the prevailing
power rate in other advance areas. The power plant is to be depreciated using the straight-line method
over a period of 10 years.

The power plant was completed at the end of year 2011 at cost of P50,000,000 and started producing and
distributing power to the backward area at rate which is at par that the prevailing rates in other advance
areas.

On July 1, 2013, the government demanded from Wink Company the repayment of the grant due to the
nonfulfillment of the conditions.

40. What is the carrying value of the power plant as of July 1, 2013, assuming at the time of initial
recognition the grant received was recognized as a reduction of the related asset?

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