Property, Plant and Equipment

1. Which of the following is used to obtain evidence that the client’s equipment accounts are not understated?
a. Analyzing repairs and maintenance expense accounts.
b. Vouching purchases of plant and equipment.
c. Recomputing depreciation expense.
d. Analyzing the miscellaneous revenue account.

2. Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment?
 a. Accumulated depreciation.
b. Insurance expense.
c. Property, plant, and equipment.
d. Purchase returns and allowances.

3. Which of the following explanations most likely would satisfy an auditor who questions management about
significant debits to the accumulated depreciation accounts?
a. The estimated remaining useful lives of plant assets were revised upward.
b. Plant assets were retired during the year.
c. The prior year’s depreciation expense was erroneously understated.
d. Overhead allocations were revised at year-end.

4. In testing for unrecorded retirements of equipment, an auditor most likely would

a. Select items of equipment from the accounting records and then locate them during the plant tour.
b. Compare depreciation journal entries with similar prior year entries in search of fully depreciated
equipment.
c. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger.
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense.

5. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit
assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
b. Expenditures for property and equipment have been recorded in the proper period.
c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
d. Expenditures for property and equipment have not been charged to expense.

6. The auditor is most likely to seek information from the plant manager with respect to the
a. Adequacy of the provision for uncollectible accounts.
b. Appropriateness of physical inventory observation procedures.
c. Existence of obsolete machinery.
d. Deferral of procurement of certain necessary insurance coverage.

7. Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the
related mortgage acquisition costs would be least likely to include an examination of the related
a. Deed.
b. Canceled checks.
c. Closing statement.
d. Interest expense.

8. In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant
and equipment. This procedure is designed to obtain evidence concerning management’s assertions of
Existence or occurrence Presentation and disclosure
a. Yes Yes
b. Yes No
c. No Yes
d. No No
9. In the examination of property, plant, and equipment, the auditor tries to determine all of the following
except the
a. Effectiveness of the internal control structure.
b. Extent of property abandoned during the year.
c. Adequacy of replacement funds.
d. Reasonableness of the depreciation.

10. In violation of company policy, Ian Company erroneously capitalized the cost of painting its warehouse. The
auditor examining Ian’s financial statements would most likely detect this when
a. Discussing the capitalization policies with Ian’s controller.
b. Examining maintenance expense accounts.
c. Observing, during the physical inventory observation, that the warehouse has been painted.
d. Examining the construction work orders supporting items capitalized.

Problem 1
At December 31, 2016, PRINCESS CORP.’s noncurrent operating asset and accumulated depreciation accounts had
balances as follows:

Cost Accum. Depn Depn Method Life

Land P 390,000
Building 3,600,000 796,200 150% declining 25 years
Machinery and equipment 2,325,000 588,600 Straight line 10
Delivery equipment 396,000 258,600 150% declining 5
Leasehold improvements 663,000 331,500 Straight line 8

Depreciation is computed to the nearest month and the residual values of the depreciable assets are considered
immaterial.

The following transactions occurred in 2017:

a. On January 6, a facility which included a land and a building structure was acquired from Wayde Corp. for
P1,800,000. The land had a market value of P860,000.

b. On April 6, the constructions of parking lots, streets and sidewalks were completed at the acquired facility.
The company incurred a total cost of P576,000 on this project. These expenditures had an estimated useful
life of 12 years and are depreciable using the straight line method.

c. The leasehold improvements were completed on December 31, 2013, and had an estimated useful of 8 years.
The related lease, which would have expired on December 31, 2019, was renewable for an additional 5-year
term. On February 28, 2017 the company exercised the renewal option.

d. On July 1, machinery and equipment were purchased at a total invoice cost of P750,000. Additional cost of
P30,000 and 90,000 for installation were incurred.
e. On August 30, Princess purchased a new truck for P45,000.

f. On September 30, a truck with a cost of P72,000 and a carrying value of P24,000 on the date of
sale was sold for P34,500. Depreciation for the 9-month ended September 30, 2017 was
P7,056.

g. On December 20, a machine with a cost of P51,000 and a carrying amount of P8,925 at date of
disposition was scrapped without cash recovered.

Questions: Compute the depreciation expense for the following:

1. Building:

2. Machinery and equipment:

3. Leasehold improvement:

4. Delivery equipment: