Professional Documents
Culture Documents
AUD-Audit of PPE
AUD-Audit of PPE
Problem 1
The trial balance of F r e d d y Enterprises on December 31, 2016 shows P350,000 as
the unaudited balance of the Machinery account. On April 1, 2016, 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, 2016, 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 the year of disposition.
Question
1 The adjusted balance of the Machinery account at December 31, 2016 is:
a. P 290,000 b. P 370,000 c. P 260,000 d. P 300,000
2 The correct depreciation expense for the machinery for the year ended December 31,
2016 is:
a. P 37,000 b. P 29,000 c. P 30,000 d. P 26,000
Problem 2
The Land account was debited for P300,000 on March 31, 2016 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.
2. On the Land acquired in No. 6, real estate taxes of P20,000 were paid in December,
2016, including P5,000 for the first quarter of the year. (Ignore penalty for delayed
payment). Land account was debited for the taxes paid.
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:
Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
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
exchange in the amount of:
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
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
property, at which time the machineries will already be useless.
Among the operating expenses of Esmedina Copper Mines at December 31, 2007 were:
Questions
1. Recorded depletion expense was
a. Overstated by P90,000 c. Overstated by P135,000
b. Understated by P90,000 d. Understated by P135,000
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 P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 2,800,000
1. Land site number 5 was acquired for P4,000,000. Additionally, to acquire the land,
Maraat Corporation paid a P240,000 commission to a real estate agent. Costs of
P60,000 were incurred to clear the land. During the course of clearing the land, timber
and gravel were recovered and sold for P20,000.
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:
3. The third tract of land (site number 7) was acquired for P2,400,000 and was put on the
market for resale.
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:
The lessor paid one-half of the costs incurred in connection with the extension to the
current working area.
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,
Audit of Property Plant & Equipments
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
Problem 6
Norie Company’s property, plant and equipment and accumulated depreciation balance at
December 31, 2005 are:
Accumulated
Cost Depreciation
Machinery and equipment P 1,380,000 P 367,500
Automobiles and trucks 210,000 114,320
Leasehold improvements 432,000 108,000
Additional information:
Salvage values are immaterial except for automobiles and trucks, which have an estimated
salvage values equal to 10% of cost.
- 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
occupied on January 1, 2003.
- On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P325,000. Installation cost of P44,000 was incurred.
- 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
P30,000 on December 31, 2005 was sold for P23,500.
- On December 30, 2006, a machine with a cost of P17,000, a carrying value of P2,975 on
date of disposition, was sold for P4,000.
Audit of Property Plant & Equipments
Questions
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
ended December 31, 2006 is:
a. P 138,000 b. P 185,402 c. P 221,404 d. P 245,065
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
Problem 7
Information pertaining to Highland Corporation’s property, plant and equipment for 2005 is
presented below:
Depreciation data:
Depreciation method Useful life
The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.
a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2-
year-old car with a cost of P18,000 and book value of P5,400. The new car has a cash
price of P24,000; the market value of the trade-in is not known.
b. On April 1, 2005, a machine purchased for P23,000 on April 1, 2000, was destroyed by
fire, Highland recovered P15,500 from its insurance company.
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
December 31, 2011.
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
year ended December 31,2005.
Questions
Based on the information above, answer the following 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
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
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
Problem 8
The schedule of Gerasmo Company’s property and equipment prepared by the client
follows:
PLANT ASSETS
Land P 320,000
Building 540,000
Machinery and Equipment 180,000
Total 1,040,000
ACCUMULATED DEPRECIATION
Building P 81,000
Machinery and Equipment 54,000
Total P 135,000
Debit Credit
Land 70,000
Building 60,000
Accum. depreciation 6,000
Revaluation increment 124,000
Questions
1. Property and equipment at year-end is:
a. P 753,000 b. P 870,000 c. P 910,000 d. P 990,000
Problem 9
The following information pertains to Marlisa Company’s delivery trucks:
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
being given for the new truck.
Questions
1. What is the loss on trade-in of truck 3?
a. P 50,000 b. P 430,000 c. P 510,000 d. P 560,000
10. The cost of repainting truck 4 should have been charged to:
a. Claims receivable - insurance company
b. Retained earnings
c. Accumulated depreciation
d. Repairs and maintenance
11. Which of the following controls would most likely allow for a reduction in the scope of the
auditor’s tests of depreciation expense?
a. Review and approval of the periodic property depreciation entry by a supervisor who
does not actively participate in its preparation.
b. Comparison of property account balances for the current year with the current year
budget and prior-year actual balance.
c. Review of the miscellaneous revenue account for salvage credits and scrap sales of
partially depreciated property.
d. Authorization of payment of vendors’ invoices by a designated employee who is
independent of the property receiving functions.
Problem 10
Information pertaining to SAILADIN CORPORATION’s property, plant and equipment for
2006 is presented below.
Depreciation data:
Depreciation method Useful life
Audit of Property Plant & Equipments
The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.
(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
fire. Sailadin Corporation recovered P620,000 from its insurance company.
(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
on December 31, 2012.
(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
of P720,000 for the year ended December 31, 2006.
Questions
1. What is the depreciation on building for 2006?
a. P 2,998,080 b. P 2,880,000 c. P 2,248,560 d. P 1,499,040
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
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
company’s Equipment and Accumulated Depreciation accounts.
EQUIPMENT
1.1.06 Balance P 446,000 9.1.06 No. 6 sold P 9,000
6.1.06 No. 12 36,000 12.31.06 Balance 474,000
9.1.03 Dismantling
of No. 6 1,000
P 483,000 P 483,000
1. The company depreciates equipment at 10% per year. The oldest equipment owned is
seven years old as of December 31, 2006.
2. The following adjusted balances appeared on your last year’s working papers:
Equipment P 446,000
Accumulated depreciation 224,000
Audit of Property Plant & Equipments
3. Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on
September 1, 2006, for P9,000.
4. Included in charges to the Repairs Expense account was an invoice covering installation
of Machine No. 12 in the amount of P2,500.
5. It is the company’s practice to take a full year’s depreciation in the year of acquisition
and none in the year of disposition.
Questions
1. The gain/(loss) on sale of Machine 6 is:
a. P 1,000 b. P 500 c. P (1,000) d. P (500)
Problem 12
Information pertaining to Eddie Vic Corporation’s property, plant and equipment for 2005 is
presented below:
On January 2, 2005, Eddie Vic purchased a new car for P350,000 cash and trade-in of a 2-
year old car with a cost of P490,000 and a book value of P147,000. The new car has a cash
price of P520,000; the market value of the trade-in is not known.
On April 1, 2005, a machine purchased for P230,000 on April 1, 2000, was destroyed by
fire. Eddie Vic recovered P155,000 from its insurance company.
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
ended December 31, 2005.
Questions
1. Depreciation expense for building at December 31, 2005 is:
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
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
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
Audit of Property Plant & Equipments
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
typically bring these to the service center for repair.
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
Three delivery trucks costing P50,000 each; and
Fifteen service trucks costing P25,000 each.
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
Questions
1. The adjusted balance of Delivery Truck at December 31, 2006 is:
a. P 537,500 b. P 217,500 c. P 210,000 d. P 160,000
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:
ACCUMULATED DEPRECIATION
Year Balance 2004 2004 Balance
12.31.03 Retirements Additions 12.31.04
1991-1994 P 784,000 P 210,000 P 16,000 P 590,000
1995 34,000 4,000 38,000
1996
1997
1998 214,500 39,000 253,500
1999
2000 185,500 53,000 238,500
2001
2002 63,000 42,000 105,000
2003
2004 28,500 28,500
P 1,281,000 P 210,000 P 182,500 P 1,253,500
a. The company uses a ten-year life for all machinery and equipment for depreciation
purposes. Depreciation is computed by the straight-line method. Six month’s
depreciation is recorded in the year of acquisition or retirement. For 2005, the company
recorded depreciation of P280,000 on machinery and equipment.
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
worth P180,000 in the open market.
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
P750,000 voucher for the air compressor.
d. The power lawnmower was delivered to the house of the company president for personal
use.
Audit of Property Plant & Equipments
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
damaged battery that was returned to the battery company.
f. The Rockwood saw sold on August 1 had been purchased on August 1, 2001, for
P150,000. The saw was in use until it was sold.
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
monthly rental of P10,000.
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
3. The entry to record the adjustment in “item c” at December 31, 2005 is:
a. Building 500,000
Machinery and equipment 500,000
b. Machinery and equipment. 750,000
Building 750,000
c. Machinery and equipment 500,000
Building 500,000
d. No adjustment
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
Audit of Property Plant & Equipments
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
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 assets additions and disposals during the year.
PATIENCE
CORPORATION
Analysis of Property, Plant, and Equipment,
and Related Accumulated Depreciation
Accounts Year Ended December 31, 2005
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
Audit of Property Plant & Equipments
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 date of the lease, and P20,200 applicable to
the machine has been included in depreciation expense for the year.
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.
Company personnel constructed the addition at a cost of P460,000 (materials,
P175,000; labor, P155,000; and overhead, P130,000).
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
P480,000. The chief accountant recorded depreciation expense of P35,000 on this
machine in 2005.
5. Davao City government donated land and building appraised at P1,000,000 and
P4,000,000, respectively, to PATIENCE CORPORATION for a plant. On September 1, the
company began operating the plant. Since no costs were involved, the chief accountant
made no entry for the above transaction.
Questions
1. PATIENCE CORPORATION’s Land balance at December 31, 2005 is:
a. P 5,725,000 b. P 5,225,000 c. P 4,725,000 d. P 4,225,000
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
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
31, 2005 is:
a. P 2,332,500 b. P 1,770,100 c. P 1,612,500 d. P 1,357,300
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.
Rabago Manufacturing Corporation
Analysis of Property, Plant, and Equipment and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2004
COST
Final Per Books
12/31/03 Additions Retirements 12/31/04
Land P 450,000 P 100,000 P P 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 Per Books
12/31/03 Additions Retirements 12/31/04
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,
2004. The expenditure was charged to land.
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
recorded depreciation expense of P72,000 on this machine in 2004.
f. 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
1. The balance of rent expense as of December 31, 2004 is:
a. P 0 b. P 25,000 c. P 75,000 d. P 100,000
On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of
Crame Corporation. Plant assets consists of:
Land P 100,000
Leasehold improvements 190,000
Equipment 450,000
Total per WBS 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
1, 2004. No interest has been accrued as of December 31, 2003.
In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which
was charged to operating expenses.
You ascertained that due to obsolescence, computer equipment with an original cost of
P80,000 and accumulated depreciation of P16,000 at January 1, 2003 had suffered a
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
1. The adjusted cost of land amounted to:
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
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 straight-
line 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:
Questions
1. The minimum annual lease payment is:
a. P 744,705.10 b. P 720,000.00 c. P 695,294.90 d. P 0
Problem 19
On January 1, 2003, the Prince Gabriel Manufacturing Company began construction of a
building to be used as its office headquarters. The building was completed on June 30,
2004.
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
1. The interest capitalized at the end of December 31, 2003 is:
a. P 113,100 b. P 145,000 c. P 150,000 d. P 200,000
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
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
there was no estimated salvage value.
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.
No. of Salaries and Other
expenses Projects employees
Completed projects with benefits (excl uding dep’n.)
long-term benefits 60 3,600,000 2,000,000
Abandoned projects that
benefit the current year 40 2,600,000 600,000
Projects in process – results
indeterminate 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
acquired on March 31, 2003, and has an economic life of 10 years.
Questions
1. Carrying value of the patent as of December 31, 2004 is:
a. P 3,600,000 b. P 3,200,000 c. P 2,880,000 d. P 2,640,000