AUDIT OF PROPERTY, PLANT & EQUIPMENT

DON CARLO CAVINA SCHOOL

1st Semester SY 20-21
APPLIED AUDITING

PROBLEM NO. 1:
The following independent situations relate to the acquisition/self-construction of various
property, plant and equipment items.

1. Bradpit Inc. has constructed a production equipment needed for the company’s
expansion program. Bradpit received a P1,500,000 bid from a reputable manufacturer
for the construction of the equipment.
The costs of direct material and direct labor incurred to construct the equipment were
P960,000 and P600,000, respectively. It is estimated that incremental overhead costs
for construction amount to 140% of direct labor costs.
Fixed costs (excluding interest) of P2,100,000 were incurred during the construction
period. This amount was allocated to construction on the basis of total prime costs- the
sum of direct labor and direct material. The prime costs incurred to construct the new
equipment amounted to 35% of the total prime costs incurred for the period. The
company’s policy is to capitalize all possible costs on self-construction projects.
To assist in financing the construction of the production equipment, Bradpit borrowed
P1.5 million at the beginning of the 6-month construction period. The loan was for 2
years with interest at 10%.
What is the total costs of the self-constructed equipment?
A. P 3,210,000 C. P 3,021,000
B. P 2,610,000 D. P 3,285,000

2. The following transactions relate to Impo Company.

a. The national government grants the company a large tract of land to be used as a
plant site. The land’s fair value is determined to be P 1,620,000.
b. Impo Company issued 280,000 ordinary shares (par value, P50) in exchange for
land and building. The fair value of the property is determined to be P16,200,000
with the following allocation:
Land P 3,600,000
Building 12,600,000
Impo Company’s ordinary shares are not listed on the stock exchange, but its
records show that a block of 2,000 shares was sold by a shareholder a year ago at
P70 per share, and other block of 4,000 shares was sold by another shareholder 8
months ago at P63 per share.
c. Impo Company constructed machinery during the year. No entry was made to
remove from the accounts for materials, labor and overhead the following costs that
are properly chargeable to the machinery account.
Raw material used P 250,000
Factory supplies used 18,000
Direct labor costs incurred 320,000
Incremental overhead caused by construction of machinery 54,000
(excluding factory supplies used
Fixed overhead rate applied to regular manufacturing 60% of direct
operations labor
The cost of similar machinery would be P 880,000 if it had been purchased from a
dealer.
The entries required to record these transactions should include debits to
Land Buildings Machinery
A. P 5,540,000 P 13,720,000 P 843,000
B. 5,975,556 15,244,444 816,000
C. 5,757,778 14,482,222 780,000
D. 5,220,000 12,600,000 834,000
3. Hagai Company is a major supplier of computer parts and accessories. To improve
delivery services to customers, the company acquired four new trucks on July 1, 2018.
Described below are the terms of acquisition for each truck.
Truck List Price Terms
No. 1 P 600,000 Acquired for a cash payment of P556,000
No. 2 P 800,000 Acquired for a down payment of P80,000 cash and a 1-
year, non-interest-bearing note with a face amount of
P720,000. There was no established cash price for the

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equipment. The prevailing interest rate for this type of
the note is 10%.
No. 3 P 640,000 Acquired in exchange for a computer package that the
company carries in inventory. The computer package
cost P480,000 and is normally sold by Hagai Co. for
P608,000.
No. 4 P 560,000 Acquired by issuing 40,000 of Hagai Co.’s ordinary
shares. The shares have a par value per share of P10
and a market value per share of P13.
What is the total cost of the trucks purchased on July 1, 2018?
A. P 2,418,545 C. P 2,484,000
B. P 2,458,545 D. P 2,524,000

4. On March 11, 2018, Rambo Company acquired the plant assets of Ina Corporation in
exchange for 25,000 ordinary shares (P100 par value0, which had a fair value per share
of P180 on the date of the purchase of the property. The property had the following
appraised value:
Land P 800,000
Building 2,400,000
Machinery and Equipment 1,600,000
Below is a summary of Rambo’s cash outflows between the acquisition date and
December 29, the date when it first occupied the building.
Repairs to building P 210,000
Construction of bases for machinery to be installed later 270,000
Driveways and parking lots 244,000
Remodeling of office space in building, including new partitions and 322,000
walls
Special assessment by the city government on land 36,000
On December 27, Rambo paid cash for machinery, P560,000 9subject to a 2% cash
discount) and freight on machinery of P21,000.

Compute the total cost of each of the following:

a. Land
b. Buildings
c. Machinery and equipment

PROBLEM NO. 2:
Saxophone Company acquires a new manufacturing equipment on January 1, 2018, on
installment basis. The deferred payment contract provides for a down payment of P300,000 and
an 8-year note for P3,104,160. The note is to be paid in 8 equal annual installment payments of
P388,020, including 10% interest. The payments are to be made on December 31 of each year,
beginning December 31, 2018. The equipment has a cash price equivalent of P2,370,000.
Saxophones financial year end is December 31.
1. What is the acquisition of the equipment?
A. P 3,404,160 C. P 2,370,000
B. P 2,804,160 D. P 3,101,160
2. The amount to be recognized on January 1, 2018, as discount on note payable is
A. P 1,034,160 C. P 827,160
B. P 310,416 D. P 0
3. The amount of interest expense to be recognized in 2018 is
A. P 0 C. P 310,416
B. P 188,898 D. P 207,000
4. The amount of interest expense to be recognized in 2019 is
A. P 310,416 C. P 207,000
B. P 188,898 D. P 0
5. The carrying value of the note payable at December 31, 2019, is
A. P 1,689,858 C. P 1,312,062
B. P 1,888,980 D. P 1,700,082

PROBLEM NO. 3:
The following items are included in the PPE section of the audited financial statement of DRUMS
CORP. as of December 31, 2017:
Land P 3,450,000
Building 13,350,000

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Leasehold improvements 9,900,000
Machinery and Equipment 13,125,000
The following transactions occurred during 2018:
1. Land A was acquired for P 12,750,000. In connection with the acquisitions, Drums paid
a P765,000 commission to a real estate agent. Costs of P525,000 were incurred to clear
the land. During the course of clearing the land, timber and gravel were recovered and
sold for P195,000.
2. Land B with an old building was acquired for P7,500,000. On the acquisition date, the
fair value of the land was P4,200,000 and the fair value of the land was P4,200,000 and
the fair value of the building was P1,800,000. The old building was demolished at a cost
of P615,000 shortly after acquisition. A new building to be used as an owner-occupied
property was constructed for P4,950,000 plus the following costs:
Excavation fees P 570,000
Architectural design fees 165,000
Building permit fee 37,500
Imputed interest on funds 127,500
used during construction
The building was completed and occupied on December 30, 2018.
3. Land C was acquired for P9,750,000 with intention of selling it within 12 months from
the date of purchase.
4. During December 2018, costs of P1,335,000 were incurred to improve leased office
space. The related lease will terminate on December 31, 2020, and is not expected to
be renewed.
5. A group of machineries was purchased under a royalty agreement that provides for
payment of royalties based on units of production for the machines. The invoice price of
the machines was P1,305,000, freight costs were P49,500, installation costs were
P36,000 and royalty payments for 2018 were P262,500.
Based on the preceding information, determine the balances of the following PPE items as
of December 31, 2018:
1. Land
A. P 24,795,000 C. P 23,160,000
B. P 25,410,000 D. P 22,545,000
2. Buildings
A. P 19,815,000 C. P 21,322,500
B. P 19,687,500 D. P 21,937,500
3. Leasehold improvements
A. P 9,900,000 C. P 1,335,000
B. P 0 D. P 11,235,000
4. Machinery and equipment
A. P 14,778,000 C. P 14,253,000
B. P 14,515,500 D. P 14,430,000
5. Land C should be reported in the company's December 31, 2017, statement of financial
position under
A. PPE C. Non-current assets held for sale
B. Inventories D. Other non-current assets

PROBLEM NO. 4:
ORGAN CORP. has decided to expand its production capacity to meet the increased demand for
its product. In line with this, the company recently made several acquisitions of property, plant
and equipment. These transactions are described below:

Acquisition 1
On June 1, 2018, Organ purchased equipment form Dongon Company under a deferred
payment plan. Organ issued a P1,000,000 four-year non-interest-bearing note to Dongon for
the new equipment. The loan agreement provides that Organ is to pay off the note in four
equal installments due at the end of each of the next four years. On the date of the acquisition,
the prevailing market rate of interest for oblgations of this nature was 10%. The following costs
were incurred to complete this transaction:
Freight P 21,250
Installation 25,000
The following are the appropriate factors for the time value of money at 10% rate of interest:
Future value of 1 for 4 periods 1.46
Future value of an ordinary annuity for 4 periods 4.64
Present value of 1 for 4 periods 0.68

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Present value of an ordinary annuity for 4 periods 3.17

Acquisition 2
On December 1, 2018, Organ purchased several assets of a small company. The lump sum
price or "basket price" amounted to P10,500,000 and included the assets listed below:
Book Value Fair Value
Machinery and equipment P 3,000,000 P 2,500,000
Land 2,000,000 4,000,000
Building 3,500,000 6,000,000
Totals P 8,500,000 P 12,500,000
During its fiscal year ended May 31, 2019, Organ incurred P400,000 for interest expense in
connection with the financing of these assets.

Acquisition 3
On March 1, 2018, Organ exchanged a number of used equipment plus for vacant land adjacent
to its plant facility. The land acquired is intended to be used for parking lot. The equipment had
a combined carrying value of P1,750,000, as Organ had recorded P1,000,000 of accumulated
depreciation against these assets. The equipment had a fair market value of P2,300,000 at the
time of the transaction. To complete this transaction, Organ paid P950,000 cash for the land.

For each of the three acquisitions described above, determine the value at which Organ
Company should record the acquired assets.

1. Acquisition 1- purchase of equipment

A. P 792,500 C. P 1,046,250
B. P 838,750 D. P 1,206,250
2. Acquisition 2 - purchase of machinery and equipment, land, buildings.
Machinery and Equipment Land Buildings
A. P 3,705,882 P 2,470,588 P 4,323,530
B. 3,000,000 2,000,000 3,500,000
C. 2,500,000 4,000,000 6,000,000
D. 2,100,000 3,360,000 5,040,000
3. Acquisition 3- purchase of land.
A. P 2,700,000 C. P 3,250,000
B. P 3,700,000 D. P 2,300,000

PROBLEM NO. 5:
On January 1, 2018, Viola Corporation contracted with Mega Construction Company to
construct a building for P40,000,000 on land that Viola purchased several years ago. The
contract provides that Viola is to make five payments in 2018, with the last payment scheduled
for the date of completion. The building was completed on December 31, 2018.

Viola made the following payments during 2018:

January 1 P 4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000
Total P 40,000,000
Viola had the following debt outstanding at December 31, 2018:
a. A 12%, 4-year note dated January 1, 2018, with interest P 17,000,000
compounded quarterly. Both principal and interest payable on
December 31, 2021. This loan relates specifically to the building
project
b. A 10%, 10-year note dated December 31, 2016, with simple 12,000,000
interest; interest payable annually on December 31
c. A 12%, 5-year note dated December 31, 2017, with simple interest; 14,000,000
interest payable annually on December 31
The following present value and future value factors are taken from the present and future
value tables:
3% 12%
Future value of 1 for
4 periods 1.12551 1.57352

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16 periods 1.60471 1.63039
Present value of 1 for
4 periods 0.88849 0.63552
16 periods 0.62317 0.16312

1. In the computation of the avoidable interest for 2018, the appropriate capitalization rate
is
A. 11% C. 12%
B. 11.33% D. 11.08%
2. What is the average accumulated expenditures in 2018?
A. P 3,333,333 C. P 20,000,000
B. P 18,300,000 D. P 40,000,000
3. What is the total avoidable interest cost in 2018?
A. P 2,277,710 C. P 2,280,960
B. P 2,184,040 D. P 2,466,070
4. What is the amount of interest that should be capitalized in 2018?
A. P 2,184,040 C. P 5,013,670
B. P 2,466,070 D. P 2,277,710
5. Viola income statement for 2028 include interest expense of
A. P 5,013,680 C. P 0
B. P 2,735,960 D. P 2,277,710

PROBLEM NO. 6:
Bagpipe Manufacturing Company began operations on October 1, 2016. The company’s
accountant has started to gather pertinent information about each of the company’s property,
plant and equipment as shown below. When he was about to prepare a schedule of PPE and
depreciation, he was assigned to maintain the books of the company’s foreign operations. You
have been asked to assist on the preparation of this schedule. In addition to ascertaining that
the summarized date below or correct, you have accumulated the following information from
the company’s records and personnel.
a. Bagpipe computes depreciation from the first month of acquisition to the first of the
mountain disposition.
b. Land A and Land B, were purchased from Pobre Company. Bagpipe paid P12,300,000
for the land and building together. At the time of acquisition, the land had fair value of
P1,350,0000 and the building had a fair value of P12,150,000.
c. Land B was acquired on October 3, 2016, in exchange for 37,500 ordinary shares of
Bagpipe. On the acquisition, Land B had a fair value of P1,365,000 and the company’s
P5 par value ordinary shares had a fair value of P35 per share.
d. Construction of building B on the newly acquired lad began on October 1, 2017. By
September 30, 2018, Bagpipe had paid P4,800,000 of the estimated total construction
costs of P6,750,000. It is estimated that the building will be completed and occupied by
July 2019.
e. Certain equipment was donated to the corporation by the national government. An
independent appraisal of the equipment when donated placed the fair market value at
P450,000 and the salvage value at P45,000.
f. Machinery A’s total cost of P2,473,500 includes installation cost of P9,000 and normal
repairs and maintenance of P233,500. Salvage value is estimated at P90,000. It was
sold on February 1, 2018, for P1,600,000.
g. On October 2, 2017, Machinery B was acquired with a down payment of P86,100 and
the remaining payments to be made in 11 annual installments of P90,000 each,
beginning October 1, 2017. The prevailing interest rate was 8%. The following data
were abstracted from present value tables (rounded):
10 years 11 years 15 years
Present value of 1% at 8% 0.463 0.429 0.315
Present value of an ordinary annuity of 1% at 6.720 7.139 8.559
8%
Land A
Acquisition Date October 1, 2016
Building A
Acquisition Date October 1, 2016
Salvage value P 600,000
Depreciation method Straight-line
Depreciation expense: P 261,750
Year ended September 30, 2017

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Land B
Acquisition Date October 3, 2016
Building B
Acquisition Date Under construction
Cost P 4,800,000 to date
Salvage value P0
Depreciation method Straight-line
Estimated life 30 years
Depreciation expense: P0
Year ended September 30, 2017
Donated equipment
Acquisition Date October 2, 2016
Salvage value P 45,000
Depreciation method 150% declining balance
Estimated life 10 years
Machinery A
Acquisition Date October 2, 2016
Salvage value P 90,000
Depreciation method Sum of the years digits (SYD)
Estimated life 8 years
Machinery B
Acquisition Date October 1, 2017
Salvage value P0
Depreciation method Straight-line
Estimated life 20 years
1. What is the cost of Land A?
A. P 1,350,000 C. P 11,070,000
B. P 12,150,000 D. P 1,230,000
2. What is the cost of Building A?
A. P 1,350,000 C. P 11,070,000
B. P 12,150,000 D. P 1,230,000
3. What is the estimated useful life of Building A?
A. 42 years C. 44 years
B. 40 years D. 46 years
4. What is the depreciation expense on Building A for the year ended September 30, 2018?
A. P 261,750 C. P 523,500
B. P 288,750 D. P 577,500
5. What is the cost of Land B?
A. P 1,552,500 C. P 1,365,000
B. P 427,500 D. P 1,125,000
6. What is the depreciation expense on Building B for the year ended September 30, 2018?
A. P 120,000 C. P 288,750
B. P 168,750 D. P 0
7. At what amount should the donated equipment be measured and recognized?
A. P 450,000 C. P 495,000
B. P 405,000 D. P 0
8. What is the depreciation expense on the donated equipment for the year ended
September 30, 2017?
A. P 0 C. P 60,750
B. P 74,250 D. P 67,500
9. What is the depreciation expense on the donated equipment for the year ended
September 30, 2018?
A. P 60,750 C. P 57,375
B. P 51,638 D. P 67,500
10.What is the cost of Machinery A?
A. P 2,473,500 C. P 2,160,000
B. P 2,250,000 D. P 2,151,000
11.What is the depreciation expense on the Machinery A for the year ended September 30,
2017?
A. P 500,000 C. P 480,000
B. P 529,667 D. P 478,000
12.What is the depreciation expense on the Machinery A for the year ended September 30,
2018?
A. P 140,000 C. P 130,926

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B. P 113,426 D. P 175,000
13.What amount of gain (loss) should be recognized on the sale of Machinery A on
February 1, 2018?
A. P 0 C. P 5,000
B. P 60,000 D. P (30,000)
14.What is the cost of Machinery B?
A. P 728,610 C. P 780,000
B. P 731,670 D. P 685,434
15.What is the depreciation expense on the Machinery B for the year ended September 30,
2018?
A. P 36,430 C. P 36,584
B. P 39,000 D. P 34,272

PROBLEM NO. 7:
VIELE COMPANY purchased a manufacturing plant building on January 1, 2009 for P2,600,000.
The building has been depreciated using the straight-ling method with a 30-years useful life and
10% residual value. Viele’s manufacturing operations have experienced significant losses for the
pas two years, so Viele has decided that the manufacturing building should be evaluated for
possible impairment. On December 31. 2018 Viele estimates that the building has a remaining
useful life of 15 per years, that net cash inflow from building will be P100,000. Per years, and
that the fair value less cost to sell of the building is P760,000.

What amount of impairment loss should be recognized in 2018?

A. P 320,000 C. P 973,333
B. P 0 D. P 1,060,000

PROBLEM NO. 8:
In the December 31, 2017, statement of financial position of Clappers, Inc., the equipment was
reported as follows:
Equipment (at cost) P 1,500,000
Accumulated depreciation 450,000
P 1,050,000
The equipment consisted of two machines: Machine A and Machine B. Machine A had a book
value of P540,000 at December 31, 2017 (cost, P900,000), while Machine B was carried at
P510,000 (cost, P600,000). Clappers depreciates its equipment over a ten-year period using
straight-line method.

On June 30, 2018, Clappers decided to change the basis of measuring the equipment from the
cost model to the revaluation model. Machinery A was revalued to P540,000 with an expected
useful life of six years, and Machine B was revalued to P465,000with an expected useful life of
five years.

At December 31, 2019, Machine A was assessed to have a fair value of P489,000 with an
expected useful life of five years, while Machine B’s fair value was P409,500 with an expected
useful life of four years.
1. What amount of revaluation increase (decrease) should be recognized for Machine A on
June 30, 2018?
A. P 45,000 C. P 90,000
B. P (45,000) D. P 0
2. What amount of revaluation increase (decrease) should be recognized for Machine B on
June 30, 2018?
A. P 45,000 C. P (15,000)
B. P 15,000 D. P 0
3. What amount of depreciation expense should be reported on Clappers’ income
statement for the year ended December 31, 2019?
Machine A Machine B
A. P 60,000 P 60,000
B. 90,000 76,500
C. 72,000 53,250
D. 70,500 78,000
4. What amount of revaluation increase (decrease) should be recognized for Machine A on
December 31, 2019?
A. P 0 C. P 6,000
B. P (24,000) D. P (6,000)

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5. The entry to revalue Machine B on December 31, 2019, should include a debit to
A. Revaluation surplus of P 9,000
B. Revaluation surplus of P 32,250
C. Revaluation loss of P 9,000
D. Impairment loss of P 32,250

PROBLEM NO. 9:
On January 1, 2017, Kazoo Company acquired a factory equipment at a cost of P150,000. The
equipment is being depreciated using the straight-line method over its projected life of 10
years. On December 31, 2018, a determination was made that the asset’s recoverable amount
was only P96,000. Assume that this was properly computed and that recognition of the
impairment was warranted. On December 31, 2019, the asset’s recoverable amount was
determined to be P111,000 and management believe that the impairment loss previously
recognized should be reversed. You have been asked to assist the company’s accountant in the
application of PAS 36, the standard on impairment of assets.
1. How much impairment loss should be recognized on December 31, 2018?
A. P 54,000 C. P 24,000
B. P 9,000 D. P 0
2. What is the asset’s carrying amount on December 31, 2019?
A. P 84,000 C. P 86,400
B. P 90,000 D. P 96,000
3. What would have been the asset’s carrying amount at December 31, 2019, had the
impairment not been recognized in 2018?
A. P 105,000 C. P 96,000
B. P 84,000 D. P 86,400
4. How much impairment recovery should be reported in the 2019 income statement of
Kazoo Company?
A. P 27,000 C. P 6,000
B. P 0 D. P 21,000

PROBLEM NO. 10:

Koto, Inc. purchased a machinery on January 1, 2017, at a cost of P100,000. It is being
depreciated using the straight-line method over its projected useful life of 10 years. At
December 31, 2017, the assets fair value was P112,500. Accordingly, an entry was made on
that date to recognize the revaluation write-up.

An impairment was detected on December 31, 2019, and the recoverable amount of the asset
was determined to be P68,000. At December 31, 2020, the fair value of the asset was
determined to be P73,000.
1. What amount of revaluation surplus should be credited directly to equity on December
31, 2017?
A. P 0 C. P 10,000
B. P 12,500 D. P 22,500
2. What is the revaluation surplus balance at December 31, 2019, before recognition of the
impairment loss?
A. P 17,500 C. P 5,000
B. P 22,500 D. P 0
3. The amount of impairment loss to be reported on Koto’s income statement for the year
2019 is
A. P 19,500 C. P 17,000
B. P 2,000 D. P 0

PROBLEM NO. 11:

MINA MINING CO. has acquired a tract of mineral land for P50,000,000. Mina Mining estimates
that the acquired property will yield 150,000 tons of ore with sufficient mineral content to make
mining and processing profitable. It further estimates that 7,500 tons of ore will be mined the
first and last year and 15,000 tons every year in between. (Assume 11 years of mining
operations.) The land will have a residual value of P1,550,000.

Mina Mining builds necessary structures and sheds on the site at a total cost of P12,000,000.
The company estimates that these structures can be used for 15 years but, because they must

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be dismantled if they are to be moved, they have no residual value. Mina Mining does not
intend to use the buildings elsewhere.

Mining machinery installed at the mine was purchased secondhand at a total cost of
P3,600,000. The machinery cost the former owner P9,000,000 and was 50% depreciated when
purchased. Mina Mining estimates that about half of this machinery will still be useful when the
present mineral resources have been exhausted but that dismantling and removal costs will just
about offset its value at that time. The company does not intend to use the machinery
elsewhere. The remaining machinery will last until about one-half the present estimated
mineral ore has been removed and will then be worthless. Cost is to be allocated equally
between these two classes of machinery.

1. What are the estimated depletion and depreciation charges for the 1 st year?
Depletion Depreciation
A. P4,845,000 P870,000
B. P4,845,000 P780,000
C. P2,422,500 P870,000
D. P2,422,500 P780,000

2. What are the estimated depletion and depreciation charges for the 5 th year?
Depletion Depreciation
A. P2,422,500 P1,740,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

3. What are the estimated depletion and depreciation charges for the 6 th year?
Depletion Depreciation
A. P2,422,500 P1,560,000
B. P2,422,500 P1,740,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

4. What are the estimated depletion and depreciation charges for the 7 th year?
Depletion Depreciation
A. P2,422,500 P1,380,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,380,000
D. P4,845,000 P1,560,000

5. What are the estimated depletion and depreciation charges for the 11 th year?
Depletion Depreciation
A. P4,845,000 P1,380,000
B. P4,845,000 P690,000
C. P2,422,500 P1,380,000
D. P2,422,500 P690,000

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