Philippine School of Business Administration

Manila

Auditing and Assurance Concepts and Applications 2 BLD 2nd Semester 2020-2021

Audit of Property, Plant and Equipment

Summary of Accounting Principles for Property, Plant and Equipment

PPE- ACQUISITION AND SUBSEQUENT DISBURSEMENT

Nature of Property, Plant and Equipment

Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or administrative
purposes; and
(b) are expected to be used during more than one period.

Recognition
Items of property, plant, and equipment should be recognized as assets when it is probable
that: • the future economic benefits associated with the asset will flow to the enterprise;
and • the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred.
These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and
costs incurred subsequently to add to, replace part of, or service it.

Initial Measurement
Property, plant, and equipment should be initially recorded at cost.

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire
an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset
when initially recognized in accordance with the specific requirements of other PFRSs.

The cost of an item of property, plant and equipment comprises:

a. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates.
b. any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management.
c. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs either when the item is acquired or as a consequence
of having used the item during a particular period for purposes other than to produce inventories during
that period.

Examples of directly attributable costs:

a. costs of employee benefits (as defined in PAS 19 Employee Benefits) arising directly from the
construction or acquisition of the item of property, plant and equipment;
b. costs of site preparation;
c. initial delivery and handling costs;
d. installation and assembly costs;
e. costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling
any items produced while bringing the asset to that location and condition (such as samples produced
when testing equipment); and
f. professional fees.

Examples of costs that are not costs of an item of property, plant and equipment
are: a. costs of opening a new facility;
b. costs of introducing a new product or service (including costs of advertising and promotional activities);
c. costs of conducting business in a new location or with a new class of customer (including costs of staff
training); and

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Audit of Property, Pant and Equipment
d. administration and other general overhead costs.

PPE acquisitions - Determination of purchase price

Cash
Amount paid

On account/Installment/Deferred payment
Measurements that use the cash price or its equivalent
Acquired though short term credit - Net of cash discounts whether taken or not

Acquired through long term financing - Present value of the deferred payment or the installments

Issuance of own securities

Issuance of Shares Issuance of Bonds

1 FV of Asset FV of Bonds
FV of Shares FV of Asset
2 Par value of Shares Face value of Bonds
3

Exchange
Exchange Transaction Exchange Transaction with NO
with difference in Cash difference in Cash Flows
Flows

1 FV of Asset Given CV of Asset Given

FV of Asset Received -
2 CV of Asset Given -
3

Gain/Loss FV of Asset Given – CV of No gain/loss

Asset Given

Donation
Fair value of asset received

Government grant
Fair value of asset received

Self-construction
DM + DL + Overhead
If appropriate, plus borrowing costs

PPE – DEPRECIATION AND DERECOGNITION

Definition of Terms:
Depreciation - systematic allocation of the depreciable amount of an asset over its useful life. Depreciable
amount – cost of an asset, or other amount substituted for cost, less its residual value. Residual value of an
asset – estimated amount that an entity would currently obtain from disposal of the asset, after deducting
estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its
useful life.

Useful life:
• The period over which an asset is expected to be available for use by an entity; or • The number
 of production or similar units expected to be obtained from the asset by an entity.

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost
of the item shall be depreciated separately.

The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if
expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate
under PAS 8.

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Audit of Property, Pant and Equipment
The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed
by the enterprise.

The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits
has changed, the depreciation method should be changed prospectively as a change in estimate under PAS 8.

Depreciation should be charged to income statement, unless it is included in the carrying amount of another
asset.

Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is
idle.

DEPRECIATION METHODS

Uniform / Equal
Straight line
• Depreciable amount / useful life; or
• Depreciable amount x Depreciation rate
Depreciation rate = 1 / useful life

Group / Composite
• Cost x Depreciation rate
Depreciation rate = Annual depreciation / Total cost

Units of Production
Output / Production
• Output x Depreciation rate
Depreciation rate = Depreciable amount / Total estimated output

Working hours
• Hours used x Depreciation rate
Depreciation rate = Depreciable amount / Total estimated hours

Accelerated / Diminishing
Sum of the years digits (SYD)
• Depreciable amount x Fraction
Sum of years digit = [(life+1) / 2] x life

Declining
• Previous carrying amount x Depreciation rate
150% = (1 / useful life) x 1.5
200% = (1 / useful life) x 2

Other methods
Retirement
Cost of assets retired – Proceeds from retirement

Replacement
Replacement cost of assets retired – Proceeds from retirement

Inventory
Recorded balance of assets – Value at period end

Derecognition (Retirements and Disposals)

An asset should be removed from the balance sheet on disposal or when withdrawn from use and no future
economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the
proceeds and the carrying amount and should be recognized in the income statement.

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Audit of Property, Pant and Equipment
Substantive Test of Property, Plant and Equipment(PPE)
When auditing property, plant and equipment, the principal objective for the
substantive tests is to determine the following:
EXISTENCE All PPE on the statement of financial position (including assets leased
under finance lease) exist.

COMPLETENESS All PPE owned or leased under finance lease by the entity at the reporting
date is included on the statement of financial position.

VALUATION PPE is carried at the appropriate amount taking into account the requirements
AND of PAS 16 PPE and PAS 36 Impairment of Assets.
ALLOCATION

RIGHTS AND The entity owns, or has a legal right to, all the PPE on the statement of
OBLIGATIONS financial position at the reporting date.

PRESENTATION PPE and related accounts are properly classified, described and disclosed in the
AND FS, including notes in accordance with PFRS.
DISCLOSURE

Audit of PPE
The auditor's primary substantive procedures for PPE will typically include
the following:

1. Obtaining a summary analysis of changes in property owned and reconcile with

ledgers 2. Vouching for additions and disposals (including retirements) of PPE during the
year 3. Physical inspection of major acquisition of PPE during the year
4. Examining proof of ownership of PPE
5. Analyzing lease, repair and maintenance expense accounts
6. Testing for the accuracy and reasonableness for provision on depreciation or
depletion 7. Investigating current and potential impairments of PPE
8. Performing analytical procedures to check for reasonableness of PPE and related
expense reported in the FS.
9. Evaluating financial statement presentation and disclosures for an item of PPE including
its related revenue and expense.
 MULTIPLE CHOICE QUESTIONS
THEORY

1. Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud because
a. The amounts recorded on the balance sheet for most companies are immaterial.
b. The inherent risk is usually low.
- Susceptibility due to theft
- Susceptibility due to volume of transactions
-susceptibility due to complexity
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this account.

2. Which is the best audit procedure to obtain evidence to support the legal ownership of real property?
a. Examination of corporate minutes and board resolutions with regard to approvals to acquire real property.
b. Examination of closing documents, deeds and ownership documents registered and on file at the register of
deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a specific piece of property. d.
Confirmation with the title company that handled the escrow account and disbursement of proceeds for the
closing of the property.

3. When few property and equipment transactions occur during the year the continuing auditor usually obtains
and understanding of internal control and performs
a. Tests of controls
b. Analytical procedures to verify current year additions to property and equipment
c. A thorough examination of the balances at the beginning of the year.
d. Extensive tests of current year property and equipment transactions.

4. Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence
about fixed asset addition? existence

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Audit of Property, Pant and Equipment
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirming ownership and corroborating transactions through inquiries of client personnel.

5. If an auditor tours a production facility, which of the misstatements or questionable practices is most likely to
be detected by the audit procedures specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.

***6. In testing for unrecorded retirements of equipment, an auditor is most likely to

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. (completeness )
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance
expense.

7. Determining that proper amounts of depreciation are expensed provides assurance about management’s
assertions of valuation and
a. Presentation and disclosure.
b. Rights and obligations.
c. Completeness.
d. Existence or occurrence.

8. 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 expense.

Repairs and maintenance expense PPE - Capitalized

Erroneous R@M Exp, should be Erroneous Capitalized, should be
capitalized R@M Exp.

9. In violation of company policy, Coatsen Company erroneously capitalized the cost of painting its warehouse.
An auditor would most likely detect this when
a. Discussing capitalization policies with Coatsen's controller.
b. Examining maintenance expense accounts.
c. Observing that the warehouse had been painted.
d. Examining construction work orders that support items capitalized during the year.

10. Additions to equipment are sometimes understated. Which of the following accounts would be reviewed by
the auditor to gain reasonable assurance that additions are not understated?
a. Accounts payable
b. Depreciation expense
c. Gain on disposal of equipment
d. Repair and maintenance expense

11. When an auditor interviews the plant manager, he will most likely seek from the plant manager information
regarding
a. Appropriateness of physical inventory observation procedures.
b. Existence of obsolete machinery.
c. Deferral of procurement of certain necessary insurance coverage.
d. Adequacy of the provision for uncollectible accounts.

12. The auditor is least likely to learn of retirements of equipment through which of the following?
a. Review of the purchase return and allowance account.
b. Review of depreciation.
c. Analysis of the debits to the accumulated depreciation account.
d. Review of insurance policy riders.

13. A weakness in internal accounting control over recording retirements of equipment may cause the auditor to
= overstated *existence

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Audit of Property, Pant and Equipment
a. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being
used.
b. Inspect certain items of equipment in the plant and trace those items to the accounting records. c. Select
certain items of equipment from the accounting records and locate them in the plant. d. Review the subsidiary
ledger to ascertain whether depreciation was taken on each item of equipment during the year.

14. The most significant audit step in substantiating additions to the office furniture account balance is
a. Comparison to prior year's acquisitions.
b. Examination of vendors' invoices and receiving reports for current year's acquisitions.
c. Review of transactions near the balance sheet date for proper period cutoff.
d. Calculation of ratio of depreciation expense to gross office equipment cost.

15. An auditor is verifying the existence of newly acquired fixed assets recorded in the accounting records.
Which of the following is the best evidence to help achieve this objective?
a. Oral evidence obtained by discussions with operating management.
b. Documentary support obtained by vouching entries to subsidiary records and invoices.
c. Documentary support obtained by reviewing titles and tax returns.
d. Physical examination of a sample of newly recorded fixed assets.

16. In auditing plant assets and accumulated depreciation for proper valuation, the auditor should do all except
the following:
a. Physically inspect major plant assets additions.
b. Recalculate depreciation expense on a test basis.
c. Vouch repairs and maintenance expense on a test basis.
d. Vouch major additions by reference to underlying documentation.

17. To verify the proper value of costs charged to real property records for improvements to the property, the
best source of evidence would be:
a. A letter signed by the real property manager asserting the propriety of costs incurred.
b. Original invoices supporting entries into the accounting records.
c. A comparison of billed amounts to contract estimates.
d. Inspection by the auditor of real property improvements.

18. To test the accuracy of the current year's depreciation charges, an auditor should rely most heavily on
a. Comparison of depreciation schedule detail with schedules supporting the income tax return.

b. Re-computation of depreciation for a sample of plant assets.

c. Tracing of totals from the depreciation schedule to properly approved journal entries and ledger postings.
d. Vouching of the current year's fixed asset acquisitions.

19. The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide
evidence in support of the audit proposition that all
a. Capital expenditures have been properly authorized.
b. Expenditures for fixed assets have been recorded in the proper period.
c. Expenditures for fixed assets have been capitalized.
d. Non-capitalizable expenditures have been properly expensed.

20. Assets may suffer an impairment in value for a variety of reasons, but not likely as a result of:
a. A corporate restructuring.
b. Slumping demand for uncompetitive products.
c. Significant increases in market share.
d. Obsolescence.

PRACTICAL QUESTIONS

Problem 1
De Leon Company had the following property acquisitions during the current year:
I. Acquired a tract of land in exchange for 50,000 ordinary shares of P100 par value with a market price
of P150 per share on the date of acquisition. The last property tax bill indicated assessed value of
P4,000,000 for the land. However, the land has a fair value of P6,000,000.
- Land = 6,000,000

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Audit of Property, Pant and Equipment
II. Received land as donation from a major shareholder as an inducement to locate a plant in the city.
No payment was required but the entity paid P50,000 for legal expenses for land transfer. The land
is fairly valued at P1,000,000.
- Land 1,000,000
Share Premium-Donated Capital 1,000,000
Share Premium – Donated Capital 50,000
Cash 50,000

III. Acquired a machine with an invoice price of P3,000,000 subject to a cash discount of 10% which
was not taken. The entity incurred cost of P50,000 in removing the old welding machine prior to
the installation of the new one.

- Machinery = 3,000,000x90% = 2,700,000

IV. During the early part of current year, the entity purchased a machine for P500,000 down and
four monthly installments of P1,250,000. The cash price of the machine was P4,700,000.
 - Machinery = 4,700,000
Interest Exp = 800,000

Machinery 4,700,000
**Disc on NP 800,000
Cash 500,000
Notes Payable 5,000,000

Interest Exp. 800,000

Disc. on NP 800,000

V. At the beginning of the current year, the entity purchased a machine for P2,000,000 in exchange for a
noninterest bearing note requiring four payments of P500,000. The first payment was made at the end
of current year. The rate of interest for this note at date of issuance was 10%. The present value of an
ordinary annuity of 1 at 10% is 3.17 for four periods. The present value of an annuity of 1 in advance at
10% is 3.49 for four periods.

VI. At the beginning of the current year, the entity acquired a machine by issuing a four-year noninterest
bearing note for P2,000,000. The entity has a 10% interest for this type of note. The present value of 1
at 10% for 4 years is 0.68.

VII. During the year, the entity exchanged an old machine, costing P3,000,000 and 50% depreciated, for a used
machine and paid a cash difference of P500,000. The fair value of the old machine was determined to
be P1,800,000.

1. What is the total cost of land acquired?

2. What is the total cost of machinery acquired?
3. What amount of interest expense should be reported for the current year as a result of machinery
acquisition?
4. As a result of the donation in II, equity had a net increase of how much? 950,000

Problem 2
ABC Company purchased a tract of land as an investment property.
The entity razed an old building on the property.

Purchase price of land and an old building 4,000,000 Fair value of old building 300,000 Special
assessment for city improvements 120,000 Option paid for an alternative land not acquired 30,000
Payment of property taxes in arrears on land 100,000 Title guarantee insurance 50,000 Legal fees for
purchase contract and recording ownership 150,000 Demolition of old building 200,000 Proceeds
from sale of salvaged materials 20,000

What is the cost of the land?

Problem 3
Stephanie Company purchased a tract of land as a factory site.
An old building was demolished and construction began on the new building.
Purchase price of land and an old building 4,500,000 Fair value of old building 250,000 Cost of trees,
shrubs and other landscaping 300,000 Driveways, parking bays and safety lighting 550,000 New fence
surrounding the new building 100,000 Liability insurance during construction 100,000 Excavation
before new construction 200,000 Building permit or payment to city hall for approval of building
construction 150,000 Survey before construction 100,000

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Audit of Property, Pant and Equipment
New building construction cost 8,000,000 Architect fee 950,000 Title insurance and legal fees to
purchase land 200,000 Cost of demolishing old building 300,000

1. What is the cost of land improvements?

2. What is the cost of the Land?
 3. What is the cost of the new building?

Problem 4
Keebie Company acquired a machine and incurred the following costs:

Cash paid for machine, including VAT of 96,000 896,000 Cost of training personnel who will use the
machine 25,000 Insurance cost for the current year 15,000 Estimated dismantling cost to be
incurred as required by contract 65,000 Cost of spare parts to cover breakdowns 155,000 Cost of
repairing damage during installation 45,000 Cost of adjustment to machine to make it operate more
efficiently 75,000 Cost of water device to keep machine cool 80,000 Cost of safety rails and platform
surrounding machine 60,000 Cost of testing machine 40,000 Cost of installation 50,000 Cost of
transporting machine 30,000

What total amount should be capitalized as cost of the machine?

Problem 5
You were engaged in making your second annual examination of Pawn Company. The Machinery and
Accumulated Depreciation accounts are shown below:

Machinery
01/01/20 Balance P 500,000 09/01/20 Sale of machine
No. 3 P 10,000
06/01/20 Machine No. 23 150,000 12/31/20 Balance 644,000 09/01/20 Dismantling of
Machine No. 3 4,000 . P 654,000 P 654,000

Accumulated Depreciation
12/31/20 Balance P 344,400 01/01/20 Balance P 280,000 . 12/31/20 Depreciation 64,400
P 344,400 P 344,400

Your examination disclosed the following information:

a. The company has depreciated all items of equipment at 10% per annum. The oldest item owned is seven
years old as of December 31, 2020.

b. The following adjusted balances appeared on December 31, 2019 working papers: Equipment – P500,000;
Accumulated Depreciation – P 280,000.

c. Machine No. 3, which was purchased on March 1, 2016, at a cost of P80,000, was sold on September 1, 2020
for P10,000 cash.

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Audit of Property, Pant and Equipment
d. Included in charges to Repairs and Maintenance account was an invoice for installation of Machine No. 23, in
the amount of P35,000.

e. It is the company’s policy to take full year’s depreciation in the year of acquisition and none in the year of
disposition.

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

1. How much is the loss on the sale of Machine no. 3?

2. How much is the adjusted balance of the Machinery account as of December 31, 2020? 3.
How much is the total depreciation expense on machinery for 2020?
4. How much is the balance of the Accumulated Depreciation account as of December 31, 2020?

Problem 6
On January 1, 2019, Knight Corporation purchased a tract of land (site number 101) with a building for
P1,800,000. Additionally, Knight paid a real state broker’s commission of P108,000, legal fees of P18,000 and
title guarantee insurance of P54,000. The relative fair market value indicated that the land was P1,500,000 and
the building was P300,000. Shortly after acquisition, the building was razed at a cost of P225,000.

Knight entered into a P9,000,000 fixed-price contract with Cabanatuan Builders, Inc. on March 1, 2019 for the
construction of an office building on the land site 101. The building was completed and occupied on September
30, 2020. Additional construction costs were incurred as follows:
Plans, specifications and blueprints P 36,000
Architect’s fees for design and supervision 285,000

The building is estimated to have a forty-year life from date of completion and will be depreciated using the
150%-declining-balance method.

To finance the construction cost, Knight borrowed P9,000,000 on March 1, 2019. The loan is payable in ten
annual installments of P900,000 plus interest at the rate of 14%. Knight used part of the loan proceeds for
working capital requirements. Knight’s average amounts of accumulated building construction expenditures
were as follows:
For the period March 1 to December 31, 2019 P2,700,000
For the period January 1 to September 30, 2020 6,900,000

Based on the above and the result of your audit, determine the following:
1. Cost of land site number 101
2. Cost of office building
3. Depreciation of office building for 2020

Problem 7
You noted during your audit of the Bishop Company that the company carried out a number of transactions
involving the acquisition of several assets. All expenditures were recorded in the following single asset account,
identified as Property and equipment:

Property and equipment

Acquisition price of land and building P 960,000 Options taken out on several pieces of property
16,000 List price of machinery purchased 318,400 Freight on machinery purchased 5,000 Repair to
machinery resulting from damage during shipment 1,480 Cost of removing old machinery 4,800
Driveways and sidewalks 102,000 Building remodeling 400,000 Utilities paid since acquisition of
building 20,800 P1,828,480

Based on property tax assessments, which are believed to fairly represent the relative values involved, the
building is worth twice as much as the land. The machinery was subject to a 2% cash discount, which was taken
and credited to Purchases Discounts. Of the two options, P6,000 is related to the building and land purchased
and P10,000 related to those not purchased. The old machinery was sold at book value.

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

Auditing by: Bee Jay L. De Leon, CPA Page 9

Audit of Property, Pant and Equipment
1. Land
2. Building
3. Machinery

Problem 8
In connection with your audit of Queen Company’s financial statements for the year 2020, you noted the
following transactions affecting the property and equipment items of the company:

Jan. 1 Purchased real property for P5,026,000, which included a charge of P146,000
representing property tax for 2020 that had been prepaid by the vendor; 20% of the
purchase price is deemed applicable to land and the balance to buildings. A mortgage
of P3,000,000 was assumed by Queen on the purchase. Cash was paid for the balance.

Jan. 15 Previous owners had failed to take care of normal maintenance and repair requirements
on the buildings, necessitating current reconditioning at a cost of P236,800.

Feb. 15 Demolished garages in the rear of the building, P36,000 being recovered on the lumber
salvage. The company proceeded to construct a warehouse. The cost of such
 warehouse was P540,800, which was P90,000 less than the average bids made on the
construction by independent contractors. Upon completion of construction, city
inspectors ordered extensive modifications to the building as a result of failure on the
part of the company to comply with building safety code. Such modifications, which
could have been avoided, cost P76,800.

Mar. 1 The company exchanged its own stock with a fair value of P320,000 (par P24,000) for a
patent and a new equipment. The equipment has a fair value of P200,000.

Apr. 1 The new machinery for the new building arrived. In addition, a new franchise was
acquired from the manufacturer of the machinery. Payment was made by issuing bonds with a
face value of P400,000 and by paying cash of P144,000. The value of the
franchise is set at P160,000, while the machine’s fair value is P360,000.

May 1 The company contracted for parking lots and waiting sheds at a cost P360,000 and
P76,800, respectively. The work was completed and paid for on June 1.

Dec. 31 The business was closed to permit taking the year-end inventory. During this time,
required redecorating and repairs were completed at a cost of P60,000.

Based on the above and the result of your audit, determine the cost of the following:
1. Land
2. Buildings
3. Machinery and equipment
4. Land improvements
5. Total property, plant and equipment

Problem 9
Rook Company’s property, plant and equipment and accumulated depreciation balances at December 31,
2019 are:
Cost Accumulated Depreciation
Machinery and equipment P1,380,000 P 367,500
Automobiles and trucks 210,000 114,326
Leasehold improvements 432,000 108,000

Additional information follows:

Depreciation methods and useful lives:
Machinery and equipment – straight line; 10 years.
Automobiles and trucks – 150% declining balance; 5 years, all acquired after 2015.
Leasehold improvements – straight line

Depreciation is computed to the nearest month.

Salvage values are immaterial except for automobiles and trucks which have estimated salvage values equal to
15% of cost.

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Audit of Property, Pant and Equipment

Other additional information:

a. Rook entered into a 12-year operating lease starting January 1, 2017. The leasehold improvements were
completed on December 31, 2016 and the facility was occupied on January 1, 2017.

b. On July 1, 2020, machinery and equipment were purchased at a total invoice cost of P325,000. Installation
cost of P44,000 was incurred.

c. On August 30, 2020, Rook purchased new automobile for P25,000.

d. On September 30, 2020, a truck with a cost of P48,000 and a carrying amount of P30,000 on December 31,
2019 was sold for P23,500.

e. On December 20, 2020, a machine with a cost of P17,000, a carrying amount of P2,975 on date of disposition,
was sold for P4,000.
Based on the above and the result of your audit, answer the following:
1. The gain on sale of truck on September 30 is
2. The gain on sale of machinery on December 20, 2020 is
3. The adjusted balance of the property, plant and equipment as of December 31, 2020 is
4. The total depreciation expense for the year ended December 31, 2020 is
5. The carrying amount of the property, plant and equipment as of December 31, 2020 is

Problem 10
You obtain the following information pertaining to Earth Co.’s property, plant, and equipment for 2020 in
connection with your audit of the company’s financial statements.

Audited balances at December 31, 2019:

Debit Credit
Land Machinery and Equipment P 3,750,000 30,000,000
Buildings Delivery Equipment
Accumulated depreciation – buildings Accumulated Depreciation – 22,500,000 2,875,000
Machinery and equipment Delivery Equipment
Accumulated depreciation –
Depreciation Data: P 6,577,500 6,250,000 2,115,000

Depreciation Method Useful Life

Buildings Equipment line
Machinery and Equipment Delivery Leasehold Improvements Sum-of-the-years’-digits Straight-line
150% declining – balance Straight- 25 years 10 years 4 years -

Transaction during 2020 and other information are as follows:

a. On January 2, 2020, Earth purchased a new truck for P500,000 cash and traded-in a 2-year-old truck with a
cost of P450,000 and a book value of P135,000. The new truck has a cash price of P600,000; the market
value of the old truck is not known.

b. On April 1, 2020, a machine purchased for P575,000 on April 1, 2015 was destroyed by fire. Earth recovered
P387,500 from its insurance company.

c. On May 1, 2020, cost of P4,200,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. The related lease terminates on December 31, 2026.

d. On July 1, 2020, machinery and equipment were purchased at a total invoice cost of P7,000,000; additional
cost of P125,000 for freight and P625,000 for installation were incurred.

e. Earth determined that the delivery equipment comprising the P2,875,000 balance at January 1, 2020, would
have been depreciated at a total amount of P450,000 for the year ended December 31, 2020.

Auditing by: Bee Jay L. De Leon, CPA Page 11

Audit of Property, Pant and Equipment

The salvage values of the depreciable assets are immaterial. The policy of the Earth Co. is to compute
depreciation to the nearest month.

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

1. How much is the Accumulated depreciation – Buildings as of December 31, 2020? 2. How much is the
Accumulated depreciation – Machinery and Equipment as of December 31, 2020? 3. How much is the
Accumulated depreciation – Delivery Equipment as of December 31, 2020? 4. How much is the
Accumulated depreciation – Leasehold Improvements as of December 31, 2020? 5. How much is the net
gain (loss) from disposal of assets for the year ended December 31, 2020?

Problem 11
The following data relate on the Plant Assets account of Mars, Inc. at December 31, 2019:

Plant Assets
PUSO
Original cost P87,500 P127,500 P200,000 P200,000 Year Purchased 2014 2015 2016 2018 Useful
 life 10 years 37,500 hours 15 years 10 years Salvage value P7,750 P7,500 P12,500 P12,500
Depreciation method SYD Activity Straight-line Double declining
balance

Note: In the year an asset is purchased, Mars, Inc. does not record any depreciation expense on the asset. In the
year an asset is retired or traded in, Mars, Inc. takes a full year depreciation on the asset.

The following transaction occurred during 2020:

(a) On May 5, Asset P was sold for P32,500 cash.
(b) On December 31, it was determined that asset U had been used 5,250 hours during 2020. (c) On December
31, before computing depreciation expense on Asset S, the management of Mars, Inc. decided the useful life
remaining from 1/1/20 was 10 years.
(d) On December 31, it was discovered that a plant asset purchased in 2019 had been expensed completely in
that year. This asset costs P55,000 and has useful life of 10 years and no salvage value. Management has
decided to use the double-declining balance for this asset, which can be referred to as “Asset Q.”

Based on the above and the result of your audit, answer the following: (Disregard tax implications)
1. How much is the gain or loss on sale of Asset P?
2. How much is the depreciation of Asset S for 2020?
3. The adjusting entry to correct the error of failure to capitalize Asset Q would include a debit/credit to
Retained Earnings of
4. How much is the adjusted balance of Plant Assets as of December 31, 2020?
5. How much is the total depreciation expense for 2020?

“A lot of us would like to move mountains. But few of us are willing to practice on small hills”
-Anonymous

Auditing by: Bee Jay L. De Leon, CPA Page 12