DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management

Accountancy Department
2nd Semester A.Y. 2012-2013
Auditing Problem
AUDIT OF PROPERTY, PLANT and EQUIPMENT

I. Initial Measurement and Recognition of Purchased Property, Plant and Equipment (Cost Components)

Problem 1. NBA Inc. incurred the following expenditures in connection with the purchase of a new equipment:
List or Catalog Price P1,000,000
Trade Discount 200,000
Rebates 100,000
Purchase Discounts not taken 50,000
Nonrefundable import duties 150,000
Creditable value added tax 120,000
Installation and assembly cost 80,000
Professional fees of engineer who tested the equipment 30,000
Insurance while in transit 40,000
Consultant fee for purchase of equipment 20,000
Freight and handling costs 60,000
Cost of safety rail for new equipment 80,000
Unused supplies of the equipment 10,000
Supplies used to test the equipment 70,000
Insurance for the first year of operation of equipment 250,000
Removal cost of old equipment 120,000
Cost of platform for new equipment 400,000
Cost of water device to cool the equipment 500,000
Cost of introducing the new product of the company 100,000
Cost of opening the new facility 200,000
Initial operating losses of NBA Inc. 300,000
Cost of conducting a new business in a new location 400,000
Administrative and general overhead costs 200,000
Cost of relocating an entity’s operation 100,000
Initial cost of dismantling and removing the acquired equipment on
which NBA has contractual obligation on date of acquisition 50,000
Required: Based on the data above and the result of your audit, determine the following:
____________1. Initial amount to be recognized as cost of the acquired equipment
____________2. Total amount to be expensed as incurred

II. Acquisition of Property, Plant and Equipment

Problem 2. As a newly hired assurance associate of SGV & Co., you are assigned by the engagement partner to audit
the Property, Plant and Equipment acquisitions of ABS-CBN Inc for the year ended December 31,2011. The accounting
department provided you with the following transactions during 2011:
 On January 1,2011, ABS-CBN acquired a machinery at a cash price of P150,000. In addition to the cash
payment, the entity pays freight of P10,000; installation cost of P20,000; cost of trial runs of P5,000;
nonrefundable import duties of P25,000 and creditable value added tax of P18,000.
 On February 1,2011, ABS-CBN acquired land and building at a single cost of P10,000,000. At the time of
acquisition, the land has a fair value of P15,000,000 and the building, P5,000,000.
 On March 1,2011, ABS-CBN acquired an equipment at an installment price of P500,000. The terms are P100,000
down and the balance payable in four equal annual installments. The cash price of the machinery is P450,000. A
promissory note is issued for the installment balance of P400,000.
 On April 1,2011, ABS-CBN acquired a laptop at an installment price of P100,000. The terms are P20,000 down
and the balance in four equal annual installments. A promissory note is issued for the balance of P80,000. There
is no available cash price for the machinery. The applicable discount rate for this note is 10%.
 On May 1,2011, ABS-CBN acquired a delivery truck by issuing 100,000 shares with par value of P20. At the time
of acquisition, the fair value of the delivery truck is P2,500,000 and the share is quoted at P23 per share.
 On June 1,2011, ABS-CBN acquired a service car by issuing bonds payable with face value of P2,000,000. The
term of the bonds is 3 years with nominal interest rate of 10%. The interest is payable annually starting June
1,2012. At the date of issuance, the yield rate of the bonds is 12%.

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  On July 1,2011, ABS-CBN exchange its satellite with the satellite of GMA7. as follows:
ABS-CBN GMA7’s
Satellite Cost 20,000,000 30,000,000
Accumulated Depreciation 5,000,000 10,000,000
Carrying Value 15,000,000 20,000,000
Fair value 25,000,000 28,000,000
Cash paid by ABS-CBN to GMA 300,000 300,000
 On August 1,2011, ABS-CBN received a set of appliances from a stockholder as a donation. The fair value of the
property at the date of donation is P500,000. ABS-CBN paid registration fees and legal fees in connection with the
donation in the amount of P50,000. Moreover, ABS-CBN incurred installation and testing cost for the property in
the amount of P20,000.
 On September 1,2011, ABS-CBN constructed a new factory. The following costs are incurred in connection with
the construction:
o Direct cost of materials P5,000,000
o Direct cost of labors 3,000,000
o Incremental overhead identifiable to construction 2,000,000
o Cost of opening the new factory 1,000,000
o Cost of relocating the factory workers 4,000,000
o Saving on construction 1,500,000
o Income from rentals of property during construction 300,000

Required: A. Prepare the entry for the preceding transactions.

B. Determine the initial measurement or historical cost of the following:
____________1. Machinery
____________2. Land
____________3. Building
____________4. Equipment
____________5. Laptop
____________6. Delivery Truck
____________7. Service Car
____________8. New Satellite assuming the exchange has commercial substance
____________9. New Satellite assuming the exchange lacks commercial substance
____________10. Set of Appliances
____________11. New Factory

III. Government Grants

Problem 3. As a newly hired audit staff of Isla Lipana & Co., you are assigned to review the government grants received
by GMA7 Inc. from National Government. The following transactions concerning government grants for the year ended
December 31,2011 are provided by GMA7 Inc.:
 On January 1,2011, GMA7 received a grant of P30,000,000 from the national government for the purpose of
defraying safety and environmental expenses over four period. The safety and environmental expenses will be
incurred by GMA7 as follows:
2011 P1,000,000
2012 2,000,000
2013 3,000,000
2014 4,000,000
 On January 1,2011, GMA7 received a grant of P10,000,000 from USA Government for the acquisition of a new
satellite with an estimated cost of P20,000,000 and useful life of 10 years
 On January 1,2011, GMA7 received a large tract of land in Batangas from Provincial Government. The fair value
of the land is P20,000,000. The grant requires that GMA7 shall construct a satellite on the site. The cost of the
Radio Station is estimated to be P30,000,000 and the useful life is 5 years.
 On December 31,2011, GMA7 received a grant of P15,000,000 from the UK Government to compensate the
company for massive losses incurred because of typhoon Ondoy.

Required: A. Prepare the entry for the preceding government grant transactions.
B. Based on the result of your audit, determine the following:
____________1. Total Realized Income from Government Grant in 2011 assuming the deferred income approach
____________2. Total Deferred Income from Government Grant on December 31,2011 assuming the deferred income approach

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____________3. The carrying value of satellite on December 31,2011 assuming the use of deferred income approach
____________4. The carrying value of satellite on December 31,2011 assuming the deduction from asset approach

IV. Borrowing Costs

Problem 4. As a newly promoted Senior Associate of KPMG-Philippines, you are assigned to audit the capitalization of
borrowing costs of SM Development Corporation. SMDC normally constructs its owner-occupied properties. The following
transactions are obtained from the accounting records of SMDC for the year ended December 31,2011:

Specific Borrowing
On January 1,2011, SMDC obtained a loan of P10,000,000 from BDO Inc. specifically to finance the construction
of its new administrative building. The interest rate of the one-year loan is 10%. The construction started on January
1,2011 and ended on December 31,2011. Prior to the disbursement for the construction, the proceeds of the borrowing
were temporarily invested and earned interest income of P200,000.

General Borrowing
On January 1,2011, SMDC obtained several loans from China Bank Inc. The borrowings were made for general
purposes and the proceeds were partly used to finance the construction of a new factory. The following data are provided
concerning those loans:
Principal Borrowing Cost
5% Bank Loan 2,000,000 100,000
20% Short-term Note 1,000,000 200,000
10% Long-term Note 3,000,000 300,000
Total 6,000,000 600,000
The construction of the factory was started on January 1,2011 and was completed on December 31,2011.
Expenditures on the factory were made as follows:
January 1 200,000
April 30 400,000
August 1 1,000,000
September 30 2,000,000
November 1 400,000
December 31 1,000,000
Total Cost 5,000,000
Specific and General Borrowing
On January 1,2011, SMDC borrowed P2,000,000 at an interest rate of 5% specifically for the construction of a
new Department Store. The actual borrowing cost on this loan is P100,000 but interest of P30,000 was earned from the
temporary investment of the proceeds prior to their disbursement. The entity also had the following other loans during
2011 which were borrowed for general purposes but the proceeds were used in part for the construction of the department
store.
Principal Borrowing Cost
15% Bank Loan 3,000,000 450,000
20% Long-term Note 1,000,000 250,000
Total 4,000,000 700,000
The construction of the department store started on January 1,2011 and was completed on December 31,2011.
Expenditures on the construction were made as follows:
January 1 300,000
February 28 1,000,000
May 30 2,500,000
September 1 200,000
October 31 1,000,000
December 31 1,000,000
Total Cost 6,000,000
Required: Based on the result of your audit, determine the following:
____________1. Capitalizable interest on new administrative building
____________2. Initial cost of new administrative building
____________3. Capitalization rate on new factory
____________4. Average Expenditure on new factory
____________5. Avoidable Interest on new factory
____________6. Capitalizable interest on new factory
____________7. Initial cost of new factory
____________8. Capitalization rate on new department store

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____________9. Average Expenditure on new department store
____________10. Avoidable Interest on new factory
____________11. Capitalizable interest on new department store
____________12. Initial cost of new department store
V. Classification of Costs to Land, Building and Machinery

Problem 5. As a newly hired assurance associate of Deloitte Philippines, you are asked to audit the Property, Plant and
Equipment Account of Nestle Philippines Inc. The accounting department of the audit client debited the following
expenditures during 2011 to a single Property, Plant and Equipment Account:

 Purchase Price of Land with an old commercial building to be used as

site for a new factory building P20,000,000
 Safety Inspection during construction of factory building 50,000
 Purchase price of machinery 1,000,000
 Architect fee 100,000
 Cost of option on a land that is not acquired 20,000
 Unpaid taxes on the purchased land up to date of acquisition assumed by Nestle 200,000
 Cost of temporary buildings used as construction offices and materials shed 150,000
 Freight and handling cost of machinery 10,000
 Cost of survey 30,000
 Cost of temporary fence around the construction 40,000
 Cost of safety rail surrounding the machine 20,000
 Cost of excavation 60,000
 Broker’s commission 50,000
 Legal fees to establish a clean title 100,000
 Cost of clearing and demolishing the old commercial building 300,000
 Salvage value of the old commercial building which was used in the new factory 50,000
 Cost of option on acquired land 20,000
 Cost of water device to keep machine cool 10,000
 Creditable value added tax on machinery 120,000
 Purchase discounts not taken on machinery 20,000
 Nonrefundable custom duties 30,000
 Cost of permanent fence surrounding the newly constructed factory 200,000
 Sidewalks, pavements, parking lot and driveways (not part of building blueprint) 300,000
 Damaged windows during construction due to vandals 100,000
 Insurance during construction of factory 200,000
 Building permit 50,000
 Interest during construction (considered capitalizable) 80,000
 Construction cost (including salary of workers, overhead and direct materials) 10,000,000
 Payments to tenants of old commercial building to vacate the land 400,000
 Cost of grading, leveling and landfill 300,000
 Mortgages, encumbrances and interest on the land purchased assumed by Nestle 1,000,000
 Fees for transfer of title 200,000
 Insurance of machinery while in transit 10,000
 Installation and assembly cost of machinery 20,000
 Cost of dismantling the old machine to be replaced by the new machine 50,000
 Cost of testing and trial runs including used machine supplies 30,000
 Consultant fee for the acquisition of machinery 40,000
 Initial estimate of cost of dismantling the machinery for which Nestle has the present
obligation. 50,000
 Initial Operating Losses
100,000
 Cost of opening the new factory
200,000
 Cost of introducing new product produced by the
machinery 300,000
 Cost of relocating the employees
400,000
 Cost of training employees who will operate the
machine 100,000
 Administrative and general overhead
200,000

Required: Based on the result of your audit, determine the following class of Property, Plant and Equipment:

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____________1. Cost of Land
____________2. Cost of Factory Building
____________3. Cost of Machinery
____________4. Cost of Land Improvement
____________5. Total amount that should be expensed as incurred

VI. Depreciation Methods

Problem 6. As a newly hired assurance associate of Ernst & Young – Philippines, you are asked to audit the depreciation
of the newly acquired Property, Plant and Equipment of Fortune Tobacco Inc. The schedule below is provided by the
Property, Plant and Equipment Accountant of Fortune Tobacco Inc. for the year ended January 1,2011:
Class of PPE Date of Acquisition Cost Useful Life Residual Value Dep.Method
Building January 1,2002 P20,000,000 20 years P2,000,000 STL
Machinery January 1,2007 1,000,000 100,000 units 100,000 Unit Method
Delivery Truck January 1,2009 2,000,000 5 years 500,000 SYD
Equipment January 1,2010 3,000,000 3 years 600,000 200%Declining
The following data are also obtained from the different supporting documents:
 On January 1,2011, Nestle determined that the useful life of the building is 25 years from the date of
acquisition and revised the residual value to P1,000,000.
 On January 1,2011, Nestle produced 10,000 units of product using the machinery.
 On January 1,2011, Nestle changed the depreciation method of the delivery truck from SYD method to
Straight Line method and determined that the remaining life of delivery truck as of this date is 4 years. The
residual value is also revised to P50,000.
 On December 31,2011, Nestle sold the building for P1,200,000.
 On December 31,2011, a fire razed the equipment. There is a fire insurance for the equipment and Nestle
received P300,000.
Required: Based in the result of your audit, determine the following:
____________1. Depreciation expense of building for 2011
____________2. Depreciation expense of machinery for 2011
____________3. Depreciation expense of delivery truck for 2011
____________4. Depreciation expense of equipment for 2011
____________5. Gain or loss on sale of building
____________6. Gain or loss on derecognition of equipment as a result of fire
____________7. Carrying value of machinery on December 31,2011
____________8. Carrying value of delivery truck on December 31,2011
____________9. Net debit or (credit) to January 1,2011 Retained Earnings as a result of accounting changes

Problem 7. As an assurance associate of Reyes Tacandong & Co., you are asked to audit the composite method of
depreciation of RFM Inc. The schedule below is submitted by the accounting department of the audit client on January
1,2011.
Asset Cost Residual Value Useful life
Building 850,000 50,000 10 years
Machinery 230,000 30,000 4 years
Equipment 120,000 20,000 5 years

Additional data are also provided:

o On December 31,2012, RFM retired the equipment and sold for P30,000.
o On January 1,2013, RFM acquired a new equipment for P50,000.
Required: Based on the result of your audit, determine the following:
____________1. Composite life
____________2. Composite rate
____________3. Depreciation Expense for 2011
____________4. Carrying value of PPE on December 31,2011
____________5. Depreciation Expense for 2012
____________6. Carrying value of PPE on December 31,2012
____________7. Depreciation Expense for 2013

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____________8. Carrying value of PPE on December 31,2013

VII. Impairment

Problem 8. As a newly promoted manager of PWC – Philippines, you are asked to audit the impairment of one of LBC’s cash
generating units. This cash generating unit has been experiencing significant losses in prior year. There is objective indication that such
cash generating unit is impaired. On December 31,2011, the cash generating unit is tested for impairment with the following assets and
liabilities:
Cash P2,000,000
Gross Accounts Receivable 3,000,000
Allowance for bad debts - credit 500,000
Inventory 500,000
Land 1,000,000
Plant and equipment 3,500,000
Accumulated Depreciation 1,500,000
Goodwill 3,000,000
Accounts payable 2,000,000
Accrued liabilities 3,000,000
The fair value less cost to sell of the cash generating unit is P5,000,000 while the value in use of the cash generating unit is
P6,000,000.

Required: Based on the result of your audit, determine the following:

____________1. Recoverable amount of cash generating unit
____________2. Impairment loss
____________3. Share of goodwill in impairment loss
____________4. Share of cash in impairment loss
____________5. Share of Accounts receivable in impairment loss
____________6. Share of Inventory in impairment loss
____________7. Share of Land in impairment loss
____________8. Share of Plant and equipment in impairment loss

VIII. Revaluation Surplus

Problem 9. As a newly hired audit associate of SGV & Co., you are assigned to audit the revaluation of Property, Plant and Equipment
of MetroBank. The following data concerning such revaluation on January 1,2011 is provided by the accounting department:
Cost Replacement Cost
Equipment P8,500,000 P12,400,000
Residual value 500,000 400,000
Accumulated Depreciation 3,200,000
Note: The original useful life is 10 years and the revaluation shows a revised useful life of 12 years from the date of acquisition.

Required: Based on the result of your audit, determine the following:

____________1. Revaluation Surplus on January 1,2011
____________2. Depreciation Expense on 2011
____________3. Revaluation Surplus on December 31,2011

IX. Depletion
Problem 10. On January 1,2011, Philex Inc. acquired the right to use a property to explore a natural resource. Philex acquired the
property for P15,000,000. Philex incurred exploration cost of P5,000,000. The company also paid P10,000,000 development costs of
which P5,000,000 is related in drilling, sinking mine shaft and construction of wells and the balance for development and transportation
equipment with residual value of P500,000. The entity has legal obligation to restore the property in the amount of P5,000,000. The
residual value of the property at the end of mining operating is P10,000,000. All these costs are incurred on January 1,2011. The
estimated resource deposit is 1,000,000 units on the date of acquisition. The useful life of the equipment is 10 years. The following data
are provided by Philex concerning its mining operations for four years:
Year Resources Extracted Remaining Resources after Extraction
2011 200,000 800,000
2012 100,000 400,000

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 2013 - 300,000
2014 200,000 50,000

Required: Based on the result of your audit, determine the following:

____________1. Depletion on 2011
____________2. Depreciation on 2011
____________3. Depletion on 2012
____________4. Depreciation on 2012
____________5. Depletion on 2013
____________6. Depreciation on 2013
____________7. Depletion on 2014
___________8. Depreciation on 2014

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