Professional Documents
Culture Documents
Chapter 7 - Ppe
Chapter 7 - Ppe
Problem 1
The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing
P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds
was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing
P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer
machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer
machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery
account).
Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full year’s depreciation is charged in the year of acquisition and none in
Question
1 The adjusted balance of the Machinery account at December 31, 2006 is:
a. P 290,000
b. P 370,000
c. P 260,000
d. P 300,000
The correct depreciation expense for the machinery for the year ended December 31,
2006 is:
a. P 37,000
b. P 29,000
c. P 30,000
d. P 26,000
Solution
OE: Cash
20,000
Machinery
20,000
CE: Cash
20,000
Machinery
40,000
Gain on sale
10,000
Machinery
20,000
Gain on sale
10,000
--------------------------------------------OE: Machinery
90,000
Cash
90,000
CE: Machinery
100,000
Loss on sale
18,000
Machinery
50,000
Cash
90,000
Adj: Machinery
10,000
Accumulated dep’n
22,000
Loss on sale
18,000
Machinery
50,000
--------------------------------------------1
P290,000 x 10%
1
Problem 2
The Land account was debited for P300,000 on March 31, 2006 for an adjoining piece of
land which was acquired in exchange for 15,000 shares of Rizal Corporation’s own stock
with a par value of P10. At the time of the exchange, the shares were selling at P24.
Transfer and legal fees of P20,000 were paid and charged to Professional Fees.
DEBIT
a. Land
140,000
b. Land
160,000
c. Land
80,000
CREDIT
Capital stock
Cash
Professional fees
140,000
150,000
10,000
20,000
60,000
d. None of these
2. On the Land acquired in No. 6, real estate taxes of P20,000 were paid in December,
2006, including P5,000 for the first quarter of the year. (Ignore penalty for delayed
DEBIT
a. Taxes
15,000
b. Taxes
5,000
c. Land
5,000
Taxes
15,000
d. None of these
Solution
1. C
OE: Land
Common Stock
APIC
Professional fees
Cash
CE: Land
Common stock
Cash
APIC
Adj: Land
APIC
Professional fees
2. A
OE: Land
Cash
CE: Land
Taxes
Cash
Adj: Taxes
Land
300,000
150,000
20,000
380,000
150,000
80,000
20,000
20,000
5,000
15,000
15,000
CREDIT
Land
Land
Cash
15,000
5,000
20,000
150,000
20,000
20,000
210,000
60,000
20,000
20,000
15,000
Problem 3
Two independent companies, KAYA and MUYAN, are in the home building business. Each
owns a tract of land for development, but each company would prefer to build on the other’s
land. Accordingly, they agreed to exchange their land. An appraiser was hired and from
the report and the companies records, the following information was obtained:
P 800,000
1,000,000
P 500,000
900,000
The exchange of land was made and based on the difference in appraised values, MUYAN
Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
a. P 20,000
b. P 60,000
c. P 100,000
d. P 200,000
2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
a. P 0
b. P 100,000
c. P 300,000
d. P 400,000
3. After the exchange, KAYA Company record its newly acquired land at:
a. P 700,000
b. P 720,000
c. P 800,000
d. P 900,000
4. After the exchange, MUYAN Company record its newly acquired land at:
a. P 1,000,000
b. P 900,000
c. P 600,000
d. P 500,000
Solution
Muyan
Land
1
2.
3.
4.
Cash
Land
Gain
Kaya
1,000,000
100,000
500,000
400,000
Cash
Land
100,000
900,000
Land
Gain on sale
800,000
200,000
D
D
Problem 4
On an audit engagement for 2007, you handled the audit of fixed assets of Esmedina
Copper Mines. This mining company bought the exploration rights of Maharishi Exploration
on June 30, 2007 for P7,290,000. Of this purchase price, P4,860,000 was allocated to
copper ore which had remaining reserves estimated at 1,620,000 tons. Esmedina Copper
Mines expects to extract 15,000 tons of ore a month with an estimated selling price of P50
per ton. Production started immediately after some new machines costing P600,000 was
bought on June 30, 2007. These new machineries had an estimated useful life of 15 years
with a scrap value of 10% of cost after the ore estimated has been extracted from the
Among the operating expenses of Esmedina Copper Mines at December 31, 2007 were:
Depletion expense
Depreciation of machineries
P 405,000
40,000
Questions
a. Overstated by P90,000
b. Understated by P90,000
c. Overstated by P135,000
d. Understated by P135,000
b. Understated by P10,000
c. Overstated by P20,000
d. Understated by P20,000
3
3. The adjusted depletion at year-end amounted to:
a. P 270,000
b. P 315,000
c. P 495,000
d. P 540,000
a. P 20,000
b. P 30,000
c. P 50,000
d. P 60,000
Solution
1.
2.
3.
4.
B
Problem 5
In connection with your examination of the financial statements of the Maraat Corporation
for the year 2007, the company presented to you the Property, Plant and Equipment section
of its balance sheet as of December 31, 2006, which consists of the following:
Land
Buildings
Leasehold improvements
400,000
3,200,000
2,000,000
2,800,000
1. Land site number 5 was acquired for P4,000,000. Additionally, to acquire the land,
P60,000 were incurred to clear the land. During the course of clearing the land, timber
2. The second tract of land (site number 6) with a building was acquired for P1,200,000.
The closing statement indicated that the land value was P800,000 and the building value
was P400,000. Shortly after acquisition, the building was demolished at a cost of
P120,000. The new building was constructed for P600,000 plus the following costs:
Excavation fees
32,000
4,000
24,000
3. The third tract of land (site number 7) was acquired for P2,400,000 and was put on the
4
4. Extensive work was done to a building occupied by Maraat Corporation under a lease
agreement. The total cost of the work was P500,000, which consisted of the following:
Particular
Painting of ceilings
Electrical work
working area
Amount
P 40,000
140,000
320,000
Useful life
one year
Ten years
Thirty years
The lessor paid one-half of the costs incurred in connection with the extension to the
5. 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,
Question
1. Land at year-end is
a. P 5,480,000
b. P 5,900,000
c. P 6,000,000
d. P 8,400,000
2. Buildings at year-end is
a. P 3,800,000
b. P 3,880,000
c. P 4,200,000
d. P 4,280,000
a. P 2,300,000
b. P 2,560,000
c. P 2,600,000
d. P 2,720,000
a. P 3,100,000
b. P 3,108,000
c. P 3,114,000
d. P 3,166,000
Solution
1. Land
4,300,000
Cash
Cash
20,000
Land
2. Land
1,320,000
Cash
Building
680,000
Cash
3. Land - investment
2,400,000
Cash
4. Operating expenses
40,000
Cash
5. Machinery
314,000
Royalty expenses
52,000
Cash
Answer:
1. C
2. B
3. A
4. C
4,300,000
20,000
1,320,000
680,000
2,400,000
340,000
366,000
5
Problem 6
Norie Company’s property, plant and equipment and accumulated depreciation balance at
Accumulated
Cost
Depreciation
P 1,380,000
P 367,500
210,000
114,320
Leasehold improvements
432,000
108,000
Additional information:
Automobiles and trucks – 150% declining balance; 5 years, all acquired after 2000.
Salvage values are immaterial except for automobiles and trucks, which have an estimated
Norie Company entered into a 12-year operating lease starting January 1, 2003. The
leasehold improvements were completed on December 31, 2002 and the facility was
On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
On August 30, 2006, Norie Company purchased new automobile for P25,000.
On September 30, 2006, a truck with a cost of P48,000 and a carrying amount of
On December 30, 2006, a machine with a cost of P17,000, a carrying value of P2,975 on
Questions
a. P 0
b. P 250
c. P 2,680
d. P 6,500
b. P 13,000
c. P 2,725
d. P 1,025
3. The adjusted balance of the property, plant, and equipment as of December 31, 2006 is:
a. P 1,813,000
b. P 2,351,000
c. P 2,387,000
d. P 2,388,500
4. The total depreciation expense to be reported on the income statement for the year
a. P 138,000
b. P 185,402
c. P 221,404
d. P 245,065
6
5. The carrying amount of property, plant, and equipment as of December 31, 2006 is:
a. P 1,290,547
b. P 1,578,545
c. P 1,587,497
d. P 1,617,322
Solution
Entries:
369,000
Cash
25,000
Cash
Cash
23,500
Gain on sale
Total
Cash
Accumulated depreciation
Gain on sale
Depreciation
Accumulated depreciation
Accumulated depreciation
Accumulated depreciation
4,000
14,025
369,000
25,000
48,000
250
18,000
6,750
24,750
17,000
1,025
221,404
- mach.
- auto.
- improv.
156,450
28,954
36,000
=P
=
Leasehold improvement - P432,000/12 years
Answer:
1. B
2. D
3. B
4. C
138,000
18,450
19,704
6,750
2,500
P 156,450
36,000
28,954
5. B
Problem 7
Information pertaining to Highland Corporation’s property, plant and equipment for 2005 is
presented below:
Debit
Land
P 150,000
Buildings
1,200,000
900,000
Automotive equipment
115,000
Credit
P263,100
250,000
84,600
Depreciation data:
Buildings
Automotive equipment
Leasehold improvements
Depreciation method
Useful life
150% declining-balance
Straight-line
Sum-of-the-years’-digits
Straight-line
25 years
10 years
4 years
7
The salvage values of the depreciable assets are immaterial. Depreciation is computed to
a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2year-old car
with a cost of P18,000 and book value of P5,400. The new car has a cash
b. On April 1, 2005, a machine purchased for P23,000 on April 1, 2000, was destroyed by
c. On May 1, 2005, costs of P168,000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on
d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P280,000; additional costs of P5,000 for freight and P25,000 for installation were
incurred.
e. Highland determined that the automotive equipment comprising the P115,000 balance
at January 1, 2005, would have been depreciated at a total amount of P18,000 for the
Questions
1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2005 is:
a. P 1,180,000
b. P 1,187,000
c. P 1,202,500
d. P 1,210,000
2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2005 is:
a. P 139,000
b. P 121,000
c. P 115,000
d. P 109,000
3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2005 is:
a. P 72,000
b. P 263,100
c. P 335,100
d. P 319,314
a. P 330,775
b. P 342,275
c. P 351,475
d. P 353,775
a. P 90,600
b. P 96,000
c. P 103,200
d. P 108,600
a. P 0
b. P 14,000
c. P 14,700
d. P 16,800
a. P 534,375
b. P 698,475
c. P 774,389
d. P 804,475
8
8. The total gain(loss) from disposal of assets at December 31, 2005 is:
a. P 5,400
b. P 4,000
c. P 2,600
d. P 1,400
a. P 1,128,000
b. P 936,900
c. P 880,686
d. P 864,900
10. The adjusted book value of Leasehold Improvement at December 31, 2005 is:
a. P 168,000
b. P 154,000
c. P 153,300
d. P 151,200
Solution
Entries:
a. Automobile Equipment
24,000
Accum. Depreciation
12,600
Loss on trade-in
1,400
Automobile Equipment
18,000
Cash
20,000
* Trade in allowance is the difference between the cash price and the purchase
b. Cash
15,500
Accum. Depreciation
11,500
23,000
4,000
c. Leasehold improvements
168,000
Cash
168,000
310,000
Cash
310,000
Building:
Divided by
(P23,000/10 x 3/12)
(P310,000/10 x 6/12)
Total Depreciation
Automotive Equipment:
P936,900
6% .
P 56,214
263,100
P319,314
P900,000
23,000
P877,000
10 yrs.
575
15,500
P103,775
250,000
( 11,500)
P342,275
(P18,000 x 2/10)
(P24,000 x 4/10)
P 18,000
3,600
P 14,400
9,600
P 24,000
84,600
( 12,600)
P 96,000
ANSWER:
1. B
6. D
2. B
7. C
3. D
8. C
P 87,700
P 16,800
4. B
9. C
5. B
10. D
9
Problem 8
The schedule of Gerasmo Company’s property and equipment prepared by the client
follows:
PLANT ASSETS
Land
Building
Total
ACCUMULATED DEPRECIATION
Building
Total
320,000
540,000
180,000
1,040,000
81,000
54,000
135,000
2. Assets are depreciated using the straight-line method. The building and equipment are
expected to benefit the company for 20 years and 10 years respectively. Salvage values
3. An equipment with an original cost of P40,000 was sold on December 30, 2005 for
Land
Building
Accum. depreciation
Revaluation increment
Debit
70,000
60,000
Credit
6,000
124,000
Questions
a. P 753,000
b. P 870,000
c. P 910,000
d. P 990,000
2. Accumulated depreciation at year-end is:
a. P 114,000
b. P 117,000
c. P 123,000
d. P 135,000
Solution
OE: Cash
32,000
32,000
CE: Cash
32,000
Accumulated dep’n
12,000
40,000
4,000
12,000
28,000
40,000
Accumulated dep’n
6,000
130,000
75,000
Adjustment
3,000
10
Adj: Accum. Depreciation
Operating expenses
Answer:
1. B
2. A
3,000
3,000
Problem 9
Date
1/1/04
3/15/05
7/1/05
7/10/05
9/1/05
10/1/05
4/1/06
5/2/06
6/30/06
12/1/06
Particulars
Trucks 1, 2, 3, & 4
Truck 5
Sale of truck 2
Truck 6
Repainting of truck 4
Truck 7
Debit
3,200,000
25,000
800,000
Credit
35,000
1,000,000
27,000
720,000
33,000
600,000
150,000
22,000
Date
12/31/04
12/31/05
12/31/06
Particulars
Depreciation expense
Depreciation expense
Depreciation expense
Debit
Credit
300,000
300,000
300,000
a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the
selling party allowed a P50,000 trade in value for the old truck.
b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000
Questions
a. P 50,000
b. P 430,000
c. P 510,000
d. P 560,000
2. The correct cost of truck 5 is
a. P 560,000
b. P 610,000
c. P 800,000
d. P 850,000
a. P 850,000
b. P 595,000
c. P 560,000
d. P 510,000
a. P 150,000
b. P 250,000
c. P 290,000
d. P 410,000
a. P 590,000
b. P 800,000
c. P
d. P 1,000,000
850,000
11
6. The carrying value of Truck 6 at December 31, 2006 is
a. P 501,500
b. P 680,000
c. P 850,000
d. P 1,100,000
a. P 80,000
b. P 331,600
c. P 495,000
d. P 496,200
a. P 320,000
b. P 331,600
c. P 495,000
d. P 496,200
a. P 92,000
b. P 252,000
c. P 292,000
d. P 372,000
10. The cost of repainting truck 4 should have been charged to:
b. Retained earnings
c. Accumulated depreciation
11. Which of the following controls would most likely allow for a reduction in the scope of the
a. Review and approval of the periodic property depreciation entry by a supervisor who
b. Comparison of property account balances for the current year with the current year
c. Review of the miscellaneous revenue account for salvage credits and scrap sales of
Solution
1. C
Cost of truck 3
800,000
240,000
560,000
Trade-in allowance
50,000
Loss on trade-in
510,000
2. D
3. B (P850,000-(P850,000x20%x1.5)
4. B
Cost of truck 1
Trade-in allowance
Loss on trade-in
5. D
7. A
Cost of truck 2
Selling price
Gain on sale
9. C
40,000
Truck 2
Truck 3
160,000
800,000
170,000
850,000
12
800,000
360,000
440,000
150,000
290,000
800,000
280,000
520,000
600,000
80,000
Truck 6 (P1,000,000 x 20% x 9/12)
Understatement
10. D
11. B
150,000
72,000
592,000
300,000
292,000
1,000,000
720,000
3,370,000
Problem 10
Debit
Land
6,000,000
Buildings
48,000,000
Automotive equipment
4,600,000
Credit
10,524,000
10,000,000
3,384,000
Depreciation data:
Buildings
Automotive equipment
Leasehold improvements
Depreciation method
Useful life
150% declining-balance
Straight-line
Sum-of-the-years-digits
Straight-line
25 years
10 years
4 years
-
The salvage values of the depreciable assets are immaterial. Depreciation is computed to
(a) On January 2, 2006, Sailadin Corporation purchased a new car for P800,000 cash and
trade-in of a 2-year car with a cost of P720,000 and a book value of P216,000. The new
car has a cash price of P960,000; the market value of the trade-in is not know.
(b) On April 1, 2006, a machine purchased for P920,000 on April 1, 2001, was destroyed by
(c) On May 1, 2006, costs of P6,720,000 were incurred to improve leased office premises.
The leasehold improvements have a useful life of 8 years. The related lease terminates
(d) On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P11,200,000; additional costs of P200,000 for freight and P1,000,000 for installation
were incurred.
(e) Sailadin Corporation determined that the automotive equipment comprising the
P4,600,000 balance at January 1, 2006, would have been depreciated at a total amount
13
Questions
a. P 2,998,080
b. P 2,880,000
c. P 2,248,560
d. P 1,499,040
a. P 35,976,960
b. P 35,227,440
c. P 34,596,000
d. P 34,477,920
a. P 4,220,000
b. P 4,197,000
c. P 4,151,000
d. P 4,128,000
a. P 620,000
b. P 460,000
c. P 300,000
d. P 160,000
5. What is the balance of the Accumulated Depreciation – Machinery and Equipment at
a. P 13,777,000
b. P 13,760,000
c. P 13,691,000
d. P 13,231,000
a. P 1,104,000
b. P 960,000
c. P 816,000
d. P 720,000
a. P 240,000
b. P (240,000)
d. P (56,000)
c. P 56,000
a. P 1,720,000
b. P 1,144,000
c. P 1,000,000
d. P 712,000
a. P 756,000
b. P 672,000
c. P 630,000
d. P 560,000
10. What is the book value of leasehold improvements at December 31, 2006?
a. P 6,160,000
b. P 6,090,000
c. P 6,048,000
d. P 5,964,000
Solution
1. C
P 37,476,000
x 6%
Depreciation on building
P 2,248,560
2. B
Cost of building
P 48,000,000
12,772,560
P 35,227,440
3. C
Balance, 1/106
P 36,000,000
920,000
Balance
P 35,080,000
Depreciation
10%
3,508,000
23,000
620,000
4,151,000
4. D
Insurance recovery
620,000
460,000
160,000
5. C
Balance, 1/1/06
10,000,000
4,151,000
14
Total
14,151,000
(P920,000 x 10% x 5)
460,000
13,691,000
6. B
720,000
144,000 576,000
384,000
960,000
7. C
216,000
160,000
Loss on trade-in
56,000
8. C
(720,000)
4,840,000
960,000
( 504,000)
3,840,000
1,000,000
9. B
6,720,000
80 mos
84,000
672,000
10. C
6,720,000
672,000
6,048,000
Problem 11
You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year
ended December 31, 2006. You gathered the following information pertaining to the
1.1.06 Balance
6.1.06 No. 12
9.1.03 Dismantling
of No. 6
1,000
P 483,000
9,000
474,000
______
P 483,000
Balance
P 224,000
47,400
P 271,400
P 271,400
1. The company depreciates equipment at 10% per year. The oldest equipment owned is
Equipment
Accumulated depreciation
P 446,000
224,000
15
3. Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on
4. Included in charges to the Repairs Expense account was an invoice covering installation
5. It is the company’s practice to take a full year’s depreciation in the year of acquisition
Questions
a. P 1,000
b. P 500
c. P (1,000)
d. P (500)
a. P 446,000
b. P 452,000
c. P 454,500
d. P 475,500
2006 is:
a. P 45,200
b. P 45,450
c. P 46,525
d. P 53,525
1,000
Accumulated depreciation 21,000
Equipment
22,000
Equipment
22,000
Gain on sale
500
500
Equipment
22,000
Equipment
22,000
1,000
a. Overstated by P6,125
c. Understated by P1,950
b. Understated by P6,125
d. Overstated by P1,950
Solution
OE:
Cash
9,000
Equipment
1,000
Equipment
Cash
CE:
Cash
9,000
Accum. dep’n
21,000
Loss on sale
1,000
Equipment
Cash
------------------------------------------Adj:
Accum. dep’n
21,000
Loss on sale
1,000
Equipment
------------------------------------------Adj:
Equipment
2,500
Repairs expense
16
9,000
1,000
30,000
1,000
22,000
2,500
------------------------------------------Adj:
Accum. dep’n
1,950
Depreciation
Answer: 1. C
2. C
1,950
3. B
4. A
5. D
Problem 12
Information pertaining to Eddie Vic Corporation’s property, plant and equipment for 2005 is
presented below:
Debit
Land
P 1,500,000
Building
12,000,000
Accum. depreciation-building
9,000,000
Automotive Equipment
1,150,000
Accum. depreciation-Automotive Eqpt
Credit
P 2,631,000
2,500,000
846,000
On January 2, 2005, Eddie Vic purchased a new car for P350,000 cash and trade-in of a 2year old car
with a cost of P490,000 and a book value of P147,000. The new car has a cash
On April 1, 2005, a machine purchased for P230,000 on April 1, 2000, was destroyed by
On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P2,800,000; additional costs of P50,000 for freight and P250,000 for installation were
incurred.
Eddie Vic determined that the automotive equipment comprising the P1,150,000 balance at
January 1, 2005, would have been depreciated at a total amount of P180,000 for the year
Questions
a. P 749,520
b. P 720,000
c. P 682,150
d. P 562,140
2. Depreciation expense for machinery and equipment at December 31, 2005 is:
a. P 1,049,250
b. P 1,037,750
c. P 1,032,000
d. P 877,000
a. P 388,000
b. P 312,000
c. P 290,000
d. P 180,000
17
4. Total depreciation expense for 2005 is:
a. P 2,047,750
b. P 2,009,900
c. P 1,978,770
d. P 1,889,890
a. P 63,000
b. P 40,000
c. P 23,000
d. P 17,000
a. P 3,380,520
b. P 3,351,000
c. P 3,313,150
d. P 3,193,140
7. Total book value of property, plant, and equipment at December 31, 2005 is:
a. P 19,141,110
b. P 19,021,100
c. P 18,983,250
d. P 18,953,730
a. P 19,141,110
b. P 19,021,100
c. P 18,983,250
d. P 18,953,730
9. The total cost of property, plant and equipment at December 31, 2005 is:
a. P 26,670,010
b. P 26,579,520
c. P 26,550,000
d. P 26,459,510
10. Total accumulated depreciation of property, plant, and equipment at December 31, 2005
is:
a. P 7,648,910
b. P 7,596,270
c. P 7,506,300
d. P 7,408,890
Solution
Building
Mach.&
Equipment
Balance, 1.1.05
P2,631,000
P2,500,000
562,140
1,037,750
P3,193,140
P3,537,750
(5 x 10% x P230,000)
115,000
_________
_________
Balance, 12.31.05
P3,193,140
P3,422,750
Auto. Eqpt.
P846,000
290,000
P1,136,000
P5,977,000
1,889,890
P7,866,890
343,000
P 793,000
458,000
P7,408,890
SCHEDULE OF DEPRECIATION EXPENSE For the Year Ended December 31, 2005
Building
P9,369,000
150% declining balance rate (100% / 25) x 1.5
x 6%
Depreciation
Automotive Equipment
18
Total
P8,770,000
x 10%
P562,140
877,000
5,750
155,000
P1,037,750
P180,000
(98,000)
82,000
208,000
290,000
P1,889,890
Gain or Loss from Disposal of Assets For the Year Ended December 31, 2005
Insurance recovery
P155,000
115,000
P147,000
170,000
COST
Land
Building
Automotive equipment
Totals
Answer:
1. D
2. B
6. D
7. A
P 1,500,000
12,000,000
11,870,000
1,180,000
P26,550,000
3. C
8. A
ACCUMULATED
DEPRECIATION
4. D
9. C
P40,000
23,000
P63,000
BOOK VALUE
-----3,193,140
3,422,750
793,000
P7,408,890
P1,500,000
8,806,860
8,447,250
387,000
P19,141,110
5. A
10. D
Problem 13
RUANN Service Center is wholly owned subsidiary of RUANN Stores. The company’s function
is to deliver furniture and appliances sold by the parent and to service electronics and
appliances, also sold by the parent company. RUANN Stores, the parent, operates twelve
retail outlets in a large metropolitan area. The service center uses three delivery trucks and
fifteen service vehicles for delivering goods and for making service calls related to large
appliances and electronic equipment. For small appliances and electronics, customers
At January 1, 2006, RUANN Service center reported audited balances of P525,000 and
P320,000 for “Trucks” and “Accumulated Depreciation – Trucks,” respectively. The vehicles
consisted of
The company depreciates all trucks on a straight-line basis, using a five- year life and zero
salvage value. One-half year’s depreciation is taken in the year of acquisition and in the
year of disposal.
During 2006, the following transactions and journal entries were completed by the
company:
2/2/06:
Sold one delivery truck for P2,000. the truck was fully depreciated at
12/31/07.
Cash
P2,000
Trucks
P2,000
3/1/06:
Trucks
P60,000
Cash
P60,000
19
3/15/06:
Sold one service truck for P8,000. This truck was purchased 6/15/03 for
Cash
P8,000
Trucks
P8,000
7/25/06:
Truck
P27,500
Cash
P27,500
Total
P20,000
75,000
P95,000
12/31/06:
Depreciation Expense – Trucks
Accumulated depreciation
P95,000
P95,000
Questions
a. P 537,500
b. P 217,500
c. P 210,000
d. P 160,000
a. P 537,500
b. P 402,500
c. P 377,500
d. P 217,500
a. P 86,000
b. P 76,000
c. P 75,000
d. P 65,000
a. P 300,000
b. P 285,250
c. P 285,000
d. P 284,750
a. P 461,500
b. P 145,000
c. P 142,500
d. P 74,000
a. P 237,500
b. P 117,500
c. P 92,250
d. P 67,250
a. P 10,000
b. P 8,000
c. P 2,000
d. P 0
a. P 106,250
b. P 101,250
c. P 98,750
d. P 95,000
Solution
2/2/06
3/15/06
20
OE: Cash
2,000
Delivery truck
2,000
CE: Cash
2,000
AD - Del. truck
40,000
Delivery truck
50,000
40,000
Delivery truck
48,000
OE: Cash
8,000
Service truck
8,000
12/31/06
CE: Cash
8,000
AD - ser. truck
15,000
Loss on sale
2,000
Service truck
25,000
15,000
Service truck
17,000
Depreciation
11,250
AD - del. truck
11,000
AD - service truck
250
Del. truck
Per book
95,000
20,000
Per audit
106,250
31,000
Adjustment
11,250
11,000
Disposed truck
Undisposed truck
(2 x P10,000)
(P60,000/5 x 1/2)
Total
Answer:
1. D
6. C
5,000
20,000
6,000
______
31,000
Disposed truck
Undisposed truck
(14 x P5,000)
(P27,500/5 x 1/2)
Total
2. C
7. A
3. A
8. A
Serv. truck
75,000
75,250
250
2,500
70,000
2,750
______
75,250
4. B
5. D
Problem 14
You are engaged in the examination of the financial statements of the PAUL COMPANY and
are auditing the Machinery and Equipment Account and the related depreciation accounts
for the year ended December 31, 2005. Your permanent file contains the following
schedules:
Year
Balance
2004
________
12.31.03
Retirements
1991-1994
P 800,000
P 210,000
1995
40,000
1996
1997
1998
390,000
1999
2000
530,000
2001
2002
420,000
2004
________
_________
P 2,180,000
P 210,000
2004
Additions
Balance
12.31.04
P 590,000
40,000
390,000
530,000
P 570,000
P 570,000
420,000
570,000
P 2,540,000
21
ACCUMULATED DEPRECIATION
Year
Balance
2004
________
12.31.03
Retirements
1991-1994
P 784,000
P 210,000
1995
34,000
1996
1997
1998
214,500
1999
2000
185,500
2001
2002
63,000
2003
2004
________
_________
P 1,281,000
P 210,000
2004
Additions
P 16,000
4,000
Balance
12.31.04
P 590,000
38,000
39,000
253,500
53,000
238,500
42,000
105,000
28,500
P 182,500
28,500
P 1,253,500
Date
2005
Jan. 1
Mar. 1
May 1
June 1
June 1
Aug. 1
Nov. 1
Nov. 1
Dec. 1
Item
Balance forwarded
Burnham grinder
Air compressor
Power lawnmower
Rockwood saw
Baking oven
Baking oven
Debit
Credit
P 2,540,000
120,000
750,000
60,000
32,000
15,000
450,000
280,000
32,500
P 4,264,500
_________
P 4,264,500
__________
15,000
4,249,500
P 4,264,500
a. The company uses a ten-year life for all machinery and equipment for depreciation
purposes.
Six month’s
depreciation is recorded in the year of acquisition or retirement. For 2005, the company
b. The Burnham grinder was purchased for cash from a firm in financial distress. The chief
engineer and a used machinery dealer agreed that the practically new machine was
c. For production reasons, the new air compressor was installed in a small building that
was erected in 2005 to house the machine and will also be used for general storage.
The cost of the building, which has a 25-year life, was P500,000 and is included in the
d. The power lawnmower was delivered to the house of the company president for personal
use.
22
e. On June 1, the battery in a battery powered lift truck was accidentally damaged beyond
repair. The damaged battery was included at a price of P60,000 in the P420,000 cost of
the lift truck purchased on July 1, 2002. The company decided to rent a replacement
battery rather than buy a new battery. The P32,000 expenditure is the annual rental for
the battery paid in advance, net of a P4,000 allowance for the scrap value of the
f.
The Rockwood saw sold on August 1 had been purchased on August 1, 2001, for
longer needed and advertised it for sale for P180,000, after determining from a used
machinery dealer that its market value. The casting machine had been purchased for
h. The company elected to exercise the option under a lease-purchase agreement to buy
the electric spot welder. The welder had been installed on February 1, 2005, at a
i.
payment was made and the balance will be paid in monthly installment over a three year
period. The December 1 payment included interest charges of P12,500. Legal title to
the oven will not pass to the company until the payments are completed.
Questions
1. The entry to record the adjustment of depreciation expense at December 31, 2005 is:
a. Depreciation expense
19,500
Accumulated depreciation
19,500
b. Depreciation expense
37,250
Accumulated depreciation
37,250
c. Accumulated deprecation
19,500
Depreciation expense
19,500
d. Accumulated depreciation
37,250
Depreciation expense
37,250
a. P 260,500
b. P 262,500
c. P 280,000
d. P 342,500
3. The entry to record the adjustment in “item c” at December 31, 2005 is:
a. Building
500,000
500,000
Building
750,000
c. Machinery and equipment 500,000
Building
500,000
d. No adjustment
a. P 38,000
b. P 70,000
c. P 93,000
d. P 108,000
5. The total rental expense in item “h” at December 31, 2005 is:
a. P 45,000
b. P 90,000
c. P 125,000
d. none
23
6. The total interest expense at December 31, 2005 is:
a. P 10,000
b. P 12,500
c. P 25,000
d. P 50,000
7. The total accumulated depreciation of the machinery and equipment at December 31,
2005 is:
a. P 773,000
b. P 791,000
c. P 816,000
d. P 855,000
8. The accumulated depreciation of the machinery and equipment at December 31, 2005 is
overstated by:
a. P 480,500
b. P 462,500
c. P 437,500
d. P 398,500
9.
The Total Machinery and Equipment (gross) at December 31, 2005 is:
a. P 3,740,000
b. P 2,310,500
c. P 2,030,500
d. P 1,940,500
10. The net book value of Machinery and Equipment at December 31, 2005 is:
a. P 1,518,000
b. P 1,494,500
c. P 1,503,000
d. P 2,924,000
Solution
a.
Accumulated Depreciation
Depreciation Expense
1998
: 390,000 x 10%
2000
2002
2004
: 570,000 x 10%
2005
Amount recorded
Overstatement
19,500
P2,000
39,000
28,000
39,000
57,000
95,500
b.
No AJE necessary
c.
Buildings
d.
60,000
e. 1
Accumulated Depreciation
Book value
Trade in value
Loss
18,000
42,000
e.2
500,000
P60,000
18,000
P42,000
4,000
P38,000
21,000
15,000
f.
Accumulated Depreciation
Machinery & Equipment
150,000
g.
Accumulated depreciation
180,000
250,000
70,000
24
19,500
P260,500
280,000
P 19,500
500,000
60,000
60,000
32,000
4,000
135,000
15,000
500,000
BV ( P500,000 x 5/10)
Loss
P250,000
180,000
P70,000
h.
i.
Interest expense
Answer:
1. C
6. B
2. A
7. C
3. A
8. C
90,000
687,500
12,500
4. D
9. A
90,000
700,000
5. D
10. D
Problem 15
You are engaged in the examination of the financial statements of PATIENCE CORPORATION
for the year ended December 31, 2005. The chief accountant of the client has prepared the
accompanying analyses of the Property, Plant, and Equipment and related accumulated
depreciation accounts. You have traced the beginning balances to your prior year’s audit
working papers.
All plant assets are depreciated on the straight-line basis (no residual value taken into
consideration) based on the following estimated service lives: building, 25 years, and all
other items, 10 years. The company’s policy is to take one-half year’s depreciation on all
PATIENCE CORPORATION
Land
Buildings
Description
Buildings
Final
12/31/04
P 4,225,000
1,200,000
3,850,000
P 9,275,000
Assets
Additions
P 500,000
475,000
404,000
P 1,379,000
Assets
Retirements
260,000
P 260,000
Per ledger
12/31/05
P 4,725,000
1,675,000
3,994,000
P 10,394,000
Final
12/31/04
P 600,000
1,732,500
P 2,332,500
Assets
Additions
P 51,500
392,200
P 443,700
Assets
Retirements
Per ledger
12/31/05
P 651,500
2,124,700
P 2,776,200
Your examination revealed the following information:
1. On April 1, the company entered into a 10-year lease contract for a die-casting machine,
with annual rentals of P50,000 payable in advance every April 1. The lease is cancelable
by either party (60 day’s written notice is required), and there is no option to renew the
lease or buy the equipment at the end of the lease. The estimated service life of the
machine is 10-years with no residual value. The company recorded the die casting
machine in the Machinery and Equipment account at P404,000, the present value at the
25
date of the lease, and P20,200 applicable to the machine has been included in
2. The company completed the construction of a wing on the plant building on June 30.
The service life of the building was not extended by this addition.
The lowest
constructions bid received was P475,000, the amount recorded in the Building account.
3. On August 18, P500,000 was paid for paving and fencing a portion of land owned by the
company and used as a packing lot for employees. The expenditure was charged to the
Land account.
4. The amount shown in the Machinery and Equipment asset retirement column represents
cash received on September 5 upon disposal of a machine purchased in July, 1998 for
machine in 2005.
5. Davao City government donated land and building appraised at P1,000,000 and
company began operating the plant. Since no costs were involved, the chief accountant
Questions
a. P 5,725,000
b. P 5,225,000
c. P 4,725,000
d. P 4,225,000
a. P 5,690,000
b. P 5,675,000
c. P 5,660,000
d. P 5,645,000
3. PATIENCE CORPORAITON’s Machinery and Equipment balance at December 31, 2005 is:
a. P 4,090,000
b. P 3,590,000
c. P 3,370,000
d. P 3,110,000
is:
a. P 766,000
b. P 747,000
c. P 737,500
d. P 651,500
a. P 1,819,900
b. P 1,788,700
c. P 1,757,500
d. P 1,752,700
a. P 227,000
b. P 211,500
c. P 147,000
d. P 137,500
a. P 372,000
b. P 361,000
c. P 337,000
d. P 276,000
8. PATIENCE CORPORATION’s Depreciation Expense – Land Improvements at December
a. P 50,000
b. P 25,000
c. P 18,750
d. P 0
26
9. PATIENCE CORPORATION’s Net Book Value of Building at December 31, 2005 is:
a. P 5,023,500
b. P 4,924,000
c. P 4,913,000
d. P 4,907,500
10. PATIENCE CORPORATION’s Net Book Value of Machinery and Equipment at December
a. P 2,332,500
b. P 1,770,100
c. P 1,612,500
d. P 1,357,300
Solution
(1)
(2)
37,500
12,500
354,000
Profit on Construction
15,000
15,000
(3)
Land Improvements
Land
500,000
(4)
336,000
(5)
Land
Building
(6)
(7)
(8)
Answer:
1. B
6. C
1,000,000
4,000,000
Depreciation Expense
1,200,000 x 4%
460,000 / 12 years x ½
4,000,000 x 4% x ½
Amount recorded
Adjustment to be made
95,667
P48,000
19,167
80,000
Depreciation Expense
480,000 x 10% x ½
Amount recorded
Adjustment to be made
31,200
P337,000
24,000
Depreciation Expense
2. C
7. B
3. C
8. B
404,000
4. B
9. C
25,000
500,000
220,000
116,000
5,000,000
95,667
P147,167
51,500
P95,667
31,200
P361,000
392,200
(P31,200)
25,000
5. C
10. C
27
Problem 16
You are engaged to examine the financial statement of the Rabago Manufacturing
Corporation for the year ended December 31, 2004. The following schedules for property,
plant, and equipment and the related accumulated depreciation accounts have been
prepared by your client. The opening balances agree with your prior year’s audit working
papers.
COST
Final
Per Books
12/31/03
Additions
Retirements
12/31/04
Land
450,000 P 100,000
550,000
Buildings
2,400,000
350,000
2,750,000
Machinery/Equip 2,770,000
808,000
520,000
3,526,000
P 5,620,000 P1,258,000
P 520,000
P 6,826,000
ACCUMULATED DEPRECIATION
Final
12/31/03
Buildings
P 1,200,000
Machinery/Equip
546,500
P 1,746,200
Additions
P 103,000
313,600
P 416,600
Retirements
Per Books
12/31/04
P 1,303,000
860,100
P 2,163,100
a. All equipment is depreciated on the straight-line basis (with no salvage value) based on
the following estimated lives: Building – 25 years, all other items 10 years.
b. The company entered into a 10-year lease contract for a derrick machine with annual
rental of P100,000, payable in advance every April 1. The parties to the contract
stipulated that a 30-day written notice is required to cancel the lease. Estimated useful
life is 10 years. The derrick was recorded under machinery and equipment at P808,000
and P60,000 applicable to the machine was included in the depreciation expense during
the year.
c. The company finished construction of a new building wing in June 30. The useful life of
the main building was not prolonged. The lowest construction bid was P350,000 which
was the amount recorded. Company personnel constructed the building at a total cost
of P330,000.
d. P100,000 was paid for the construction of a parking lot which was completed on July 1,
e. The P520,000 equipment under retirement column represent cash received on October
1, 2004 for a machinery bought in October 1, 2000 for P960,000. The bookkeeper
f.
28
Mr. Rabago, the company’s president donated land and building appraised at P200,000
and P400,000 respectively to the company to be used as plant site. The company began
operating the plant on September 30, 2004. Since no money was involved, the
bookkeeper did not make any entry for the above transaction.
Questions
a. P 0
b. P 25,000
c. P 75,000
d. P 100,000
a. P 0
b. P 25,000
c. P 75,000
d. P 100,000
a. 25 years
b. 11 years
d. 13 years
c. 12 years
a. P 1,447,000
b. P 1,816,250
c. P 1,820,250
d. P 1,827,400
5. The value of the land account for balance sheet presentation as of December 31, 2004
is:
a. P 450,000
b. P 545,000
c. P 650,000
d. P 750,000
a. P 0
b. P 30,000
c. P 56,000
d. P 152,000
Solution
1. C
2. B
3. C
4. B
Accumulated depreciation
(1,296,000)
1,104,000
Building wing
330,000
Accumulated depreciation
(P330,000/12 x 6/12)
( 13,750)
316,250
Building - donation
400,000
Accumulated depreciation
(P400,000/25 x 3/12)
4,000)
396,000
1,816,250
5. C
450,000
Land - donation
200,000
650,000
6. C
960,000
Accumulated depreciation
(P960,000/10 x 4)
384,000
Book value
576,000
520,000
Loss on sale
56,000
29
Problem 17
On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of
Land
Leasehold improvements
Equipment
P 100,000
190,000
450,000
P 740,000
The land was acquired on October 1, 2003, at a cost of P500,000. Crame Corporation made
a cash downpayment of P100,000 and signed a 18% mortgage note payable in four equal
annual installments of P100,000. The first interest and principal payment is due on October
In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which
You ascertained that due to obsolescence, computer equipment with an original cost of
permanent impairment in value and, as a result, should have a carrying value of only
P40,000 at the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 4 to 2 years. No entry has yet been made in the books. For
2003, the company recorded depreciation of P16,000 for the said equipment.
At present, Crame Corporation’s office and warehouse are located in a rented building. The
rental contract was signed on July 1, 2003 and has a term of five (5) years renewable for
another five (5) years. On October 1, 2003, Crame Corporation spent P190,000 to install
walls and fixtures. The leasehold improvements have a useful life of five years. No
amortization has been booked as of December 31, 2003.
Questions
a. P 528,000
b. P 510,000
c. P 500,000
d. P 410,000
2. The carrying value of leasehold improvements as of December 31, 2003 amounted to:
a. P 190,000
b. P 183,000
c. P 180,500
d. P 180,000
a. P 38,000
b. P 24,000
c. P 14,000
d. P 13,500
a. P 30,000
b. P 28,000
c. P 24,000
Solution
1. B
Total
2. C
Land improvement
Carrying value
3. C
30
500,000
10,000
510,000
190,000
180,000
10,000
20,000
d. P 20,000
4.
Understatement of depreciation
Loss on impairment
30,000
16,000
14,000
64,000
40,000
24,000
Problem 18
to lease a storage building from GRACE COMPANY. The following information pertains to
2003.
c. The building has an estimated economic life of 12 years, with an unguaranteed residual
value of P100,000. BLESSING COMPANY depreciates similar buildings on the straightline method.
d. The lease is nonrevnewable. At the termination of the lease, the building reverts to the
lessor.
e. BLESSING COMPANY’s incremental borrowing rate is 12% per year. The lessor’s implicit
rate is not known by BLESSING COMPANY.
f.
The yearly rental payment includes P24,705.10 of executory costs related to taxes on
the property.
The following present value factors are for 10 periods at 12% annual interest rate:
Present value of 1
Questions
a. P 744,705.10
b. P 720,000.00
6.32825
5.65022
0.32197
c. P 695,294.90
d. P 0
a. P 0
b. P 4,400,000
c. P 4,207,747.65
d. P 3,928,569.15
3. The interest expense at December 31, 2003 is:
a. P 0
b. P 414,476.98
c. P 444,564,61
d. P 528,000.00
a. P 0
b. P 420,774.76
c. P 440,000.00
d. P 471,268.00
a. P 3,520,000.00
b. P 3,786,972.89 c. P 3,979,225.24
d. P 3,960,000.00
31
Solution
1. C
Annual payment
720,000.00
24,705.10
695,294.90
2. B
3. C
Min. Annual
Payment__
Interest expense
Carrying Value
4,400,000.00
1/1/03
695,294.90
3,704,705.10
12/1/03
695,294.90
444,564.61
3,453,974.81
12/1/04
695,294.90
414,476.98
3,173,156.89
4. C
Cost
P 4,400,000
Accumulated depreciation
880,000
P 3,520,000
Problem 19
building to be used as its office headquarters. The building was completed on June 30,
2004.
January 3, 2003
P 500,000
600,000
800,000
600,000
300,000
500,000
600,000
On January 3, 2003, the company obtained a P2 million construction loan with a 10%
interest rate. The loan was outstanding all of 2003 and 2004. The company’s other
interest-bearing debt included a long-term note of P5,000,000 with an 8% interest rate, and
a mortgage of P3,000,000 on another building with an interest rate of 6%. Both debts were
outstanding during all of 2003 and 2004. The company’s fiscal year end is December 31.
Questions
a. P 113,100
b. P 145,000
c. P 150,000
d. P 200,000
a. P 145,132
b. P 159,632
c. P 290,263
d. P 319,263
a. P 3,535,132
b. P 4,190,131
c. P 4,480,263
d. P 4,535,263
4. The total interest expense at the end of December 31, 2003 is:
a. P 780,000
b. P 635,000
c. P 630,000
d. P 560,000
5. The total interest expense at the end of December 31, 2004 is:
a. P 460,737
b. P 489,737
c. P 620,368
d. P 634,868
32
Solution
1. B
Jan. 3
500,000 x 12/12 =
March 31
600,000 x 9/12 =
June 30
800,000 x 6/12 =
Oct 31
600,000 x 2/12 =
2. A
Beg bal.
2,500,000 x 6/6 =
145,000 x 6/6 =
Jan. 31
300,000 x 5/6 =
Mar 31
500,000 x 3/6 =
May 31
600,000 x 1/6 =
500,000
450,000
400,000
100,000
2,500,000
145,000
250,000
250,000
100,000
AAE
3,245,000 AAE
Specific borrowing
- P2,000,000 x 10%
x 6/12
General borrowing
Interest to be capitalized
3.
4.
5.
= 100,000
= 45,132
of P580,000)
5,000,000 x 8% = P 400,000
3,000,000 x 6% = 180,000
- P 3,900,000
Interest capitalized
290,132
- P 4,190,132
P 3,000,000 x 6%
P 3,000,000 x 6%
=
200,000
400,000
180,000
(145,000)
635,000
200,000
400,000
180,000
(145,132)
634,868
Problem 20
In connection with your audit of Bing-Bong Corporation, you noted that on January 2, 2002,
the corporation purchased a building site for its proposed research and development
laboratory at a cost of P2,400,000. Construction of the building was started in 2002. The
building was completed on December 31, 2003, at a cost of P11,200,000 and was placed in
service on January 1, 2004. The estimated useful life of the building for depreciation
purposes was 20 years; the straight-line method of depreciation was to be employed and
Management estimates that about 50% of the projects of the research and development
group will result in long-term benefits to the corporation. The remaining projects either
benefit the current period or are abandoned before completion. A summary of the number
of projects and the direct costs incurred in conjunction with the research and development
activities for 2004 appears below.
33
Completed projects with
long-term benefits
indeterminate
No. of
Projects
Salaries and
employees benefits
Other expenses
(excluding dep’n.)
60
3,600,000
2,000,000
40
2,600,000
600,000
20
1,600,000
480,000
Upon the recommendation of the research and development group, Bing-Bong Corporation
acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was
Questions
a. P 3,600,000
b. P 3,200,000
c. P 2,880,000
d. P 2,640,000
a. P 5,320,000
b. P 10,640,000
c. P 10,080,000
d. P 0
a. P 1,200,000
b. P 2,400,000
c. P 2,160,000
d. P 0
4. Research and development expense for 2004 is:
a. P 5,280,000
b. P 10,880,000
c. P 11,440,000
d. P 11,760,000
Solution
1. D
Cost of patent
Amortization – 2003
Amortization – 2004
2. B
Cost of building
Depreciation – 2004
3. B
4. C
Other expenses
Depreciation
34
- P 3,200,000
240,000
320,000
- P 2,640,000
- P 11,200,000
560,000
- P 10,640,000
– P 2,400,000
- P 7,800,000
- 3,080,000
560,000
- P11,440,000