Audit of PPE

Practice Problem

PROBLEM 3
On January 1, 2019, DELILAH MFG Co. began construction of a building to be used as its office headquarters. The building
was completed on June 30 2020.
Expenditures on the project were as follows:
January 3, 2019 P 2,500,000
March 31, 2019 3,000,000
June 30, 2019 4,000,000
October 31, 2019 3,000,000
January 31, 2020 1,500,000
March 31, 2020 2,500,000
May 31, 2020 3,000,000

On January 3, 2019, the company obtained a P5 million construction loan with a 10% interest rate. The loan was outstanding
all of 2019 and 2020. The company’s other interest-bearing debts included a long-term note of P25 million with an 8%
interest rate, and a mortgage of P15 million on another building with an interest rate of 6%. Both debts were outstanding
during all of 2019 and 2020. The company’s fiscal year-end is December 31.
1. What is the amount of capitalizable interest in 2019?
A. 3,400,000 B. 1,043,750 C. 663,125 D. 500,000

2. What is the amount of capitalizable interest in 2020?

A. 630,625 B. 654,663 C. 361,707 D. 799,663

3. What amount of interest should be expensed in 2019?

A. 2,736,875 B. 2,356,250 C. 2,900,000 D. 0

4. What amount of interest should be expensed in 2020?

A. 2,769,375 B. 3,038,293 C. 2,600,337 D. 2,745,337

5. What is the total cost of the building (including the interest capitalized in 2019 and 2020)?
A. 24,600,000 B. 20,817,788 C. 20,905,457 D. 20,630,625

PROBLEM 4
On January 1, 2015, KAZOO COMPANY acquired a factory equipment at a cost of P150,000. The equipment is being
depreciated using the straight-line method over its projected useful life of 10 years. On December 31, 2016, a determination
was made that the asset’s recoverable amount was only P96,000. Assume that this was properly computed and that
recognition of the impairment was warranted. On December 31, 2017, the asset’s recoverable amount was determined to be
P111,000 and management believes that the impairment loss previously recognized should be reversed. You have been asked
to assist the company’s accountant in the application of PAS 36, the standard on impairment of assets.
1. What amount of impairment loss should be recognized on December 31, 2016?
A. 54,000 B. 9,000 C. 24,000 D. 0

2. What is the asset’s carrying value on December 31, 2017?

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

3. What would have been the asset’s carrying amount at December 31, 2017, had the impairment not been recognized in
2016?
 A. 105,000 B. 84,000 C. 96,000 D. 86,400

4. What amount of impairment recovery should be reported in the 2017 income statement?
A. 27,000 B. 0 C. 6,000 D. 21,000

PROBLEM 5
In 2012, GREEN CORPORATION acquired a silver mine in Benguet. Because the mine is located deep in the Benguet
mountains, Green was able to acquire the mine for the low price of P50,000.
In 2013, Green constructed a road to the silver mine costing P5,000,000. Improvements to the mine made in 2013 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 2014, five buildings were constructed near the mine site to house the mine workers and their families. The total cost
of five buildings was P1,500,000. Estimated residual value is P250,000. In 2012, geologists estimated 4 million tons of silver
ore could be removed from the mine for refining.
During 2015, the first year of operations, only 5,000 tons of silver ore were removed from the mine. However, in 2016,
workers mined 1 million tons of silver. During that same year, geologists discovered that the mine contained 3 million tons of
silver ore in addition to the original 4 million tons. Improvements of P275,000 were made to the mine early in 2016 to
facilitate the removal of the additional silver.
Early in 2016, an additional building was constructed at a cost of P225,000 to house the additional workers needed to
excavate the added silver. This building is not expected to have any residual value.
In 2017, 2.5 million tons of silver 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)
1. Depletion for 2015
A. 6,300
B. 6,500
C. 7,250
D. 5,550

2. Depletion for 2016

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

3. Depreciation for 2016

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

4. Depletion for 2017

A. 1,950,000
B. 2.150,000
C. 2,425,000
D. 2,275,000

5. Depreciation for 2017

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