CPA REVIEW SCHOOL OF THE PHILIPPINES AP-7603 Manila AUDITING PROBLEMS CPA Review AUDIT OF PROPERTY, PLANT, AND EQUIPMENT PROBLEM NO. 1 BDM MANUFACTURING COMPANY's accounts at December 31, 2013, included the following balances: ! Machinery (at cost) P273,000 t os Accumulated depreciation - machinery 144,600 Vehicles (at cost; purchased November 21, 2012) 140,400 Accumulated depreciation ~ vehicles 1402” 58,968 Land (at cost; purchased October 25, 2010) 243,000 Building (at cost; purchased October 25, 2010) 557,160 wep Accumulated depreciation ~ building 85,842 Details of machines onned at December 31, 2013 are as follows: a5 Machine Purchase Date Cost UsefulLife Residual Value 1 Oct. 7, 2010 P 129,000 5 years P7,500 5 I 2 Feb. 4, 2011 144,000 6 years: 9,000. Additional information: * BOM calculates depreciation to the nearest month and uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated on the diminishing balance at 40% per annum. *_ BDM's financial year-end is December 31, i ! +The vehicles account balance reflects the total paid for two Identical delivery vehicles, each © Ji). ‘of which cost P70,200. ars é°s0n acquiring the land and building, GDM estimated the oullding’s useful life and residual 117054 _ value at 20 years and P15,000, respectively. s The following transactions occurred from January 1, 2014: 2014 Jan, 3 Bought a new machine (machine 3) for a cash price of P171,000. Freight charges of P1,326 and installation costs of P5,274 were paid in cash. The useful life and residual i value were estimated at five years and P12,000, respectively. 4y6u0 June22 Bought a second-hand vehicle for P45,600 cash. Repainting costs of P1,965 and four 172°) new tires costing P1,035 were paid for in cash. ~ page ‘Aug.28 Exchanged machine 1 for office furniture that had a falr value of P37,500 at the date FAS of exchange. ‘The fair value of machine 1 at the date of exchange was P34,500. The | office furniture originally cost P108,000 and, to the date of exchange, had been depreciated by P72,300 In the previous owner's books. BDM estimated the office 4 furniture’s useful life and residual value at eight years and P1,620, respectively. 1552, Page 1 of 8 PagesENT Dec. 31. Recorded depreciation. 2015 April30_ Paid for repairs and maintenance on the machinery amounting to P2,784. May 25 Sold one of the vechicles bought on Nover-ber 21, 2012, for P19,800 cash, June26_ Installed a fence around the property at cost of P16,500. The fence has an estimated useful life of 10 years and zero residual value. (Debit the cost to a Land Improvements asset account.) Dec. 31 Recorded depreciation. 2016 Jan. 5 Overhauled machine 2 at cost of P36,000, after which BDM estimated its remaining life at one additional year and revised its residual value to P15,000. June20 Traded in the remaining vehicle bought on November 21, 2012, for a new vehicle. A Oct. trade-in allowance of P11,100 was received and P69,900 was paid in cash. 4 Scrapped the vehicle bought on June 22, 2014, as it had been so badly damaged in a traffic accident that it was not worthwhile repairing it. Dec. 31 Recorded depreciation. @:. a D 2 a D 4 D & A 6 Bb 7. Cc *s. fr 9 Cc wo. .. Machine 3, purchased on January 3, 2014, shi-sid be recorded at A. P171,000 B, P177,600 C. P165,600 D. P159,000 ‘The second-hand vehicle purchased on June 22, 2014, should be recorded at ‘A, 45,600 B. P46,635 C. PA7,565 D. P48,600 ‘The office furniture acquired on August 28, 2014, should be recorded at ‘A. 34,500 B.. P37,500 C. P35,700 D. P33,825 . The gain to be recognized on the exchange of machine 1 for office furniture on August 28, 2014, should be A, P1875 B. PO C. P3,675 D. P675 ‘The total depreciation for 2014 is A, P142,198 B. P126,391 c. P142,716 D. P142,591 The gain (loss) to be recognized on the sale of vehicle on May 25, 2015, is A, P(558) B. P(4,630) C. PSB D. P4,630 .. The total depreciation expense for 2015, is A. P112,987 B. 117,059 Cc. P117,434 D. P116,430 After the overhaul, machine 2's revised annual depreciation is A. P22,560 B. P50,192 , P26,100 D. P33,300 What Is the cost of the new vehicle acquired on June 20, 2016? BP 81,000 B. P69,900 C.” P58,800 D. P91,398 The total depreciation expense for 2016 Is A. P114,678 B. P118,593 P118,218 D, P108,288 SNPRENT PROBLEM NO. 2 ‘At December 31, 2013, M COMPANY's noncurrent operating asset and accumulated depreciation accounts had balances as follows: Cost of Asset Accumulated Depreciation Land . P 130,000 Buildings 41,200,000 P 265,400 Machinery and equipment. 775,000 196,200 Ptr ‘Automobiles and trucks 132,000 26,200 45,9 Leasehold improvements 221,000 110,500 Depreciation Method Useful Life Land improvements Straight line 12 years Buildings 150% declining balance 25 years 4, Machinery and equipment Straight line 10 years ‘Automobiles and trucks 150% declining balance 5 years O41 34). Leasehold improvements Straight line 8 years Depreciation is computed to the nearest month. The salvage values of the depreciable assets are immaterial. Transactions during 2014 and other information are as follows: (@) On January 6, 2014, a plant facility consisting of land and a building was acquired from A Corp. for P600,000. Of this amount, 20% was allocated to land. Lt i a > (b) On April 6, 2014, new parking lots, streets, and sidewalks at the acquired plant factity were completed at 2 total cost of P192,000. These expenditures had an estimated useful life of 12 years. Land Lp. (©) The leasehold improvements were completed on December 31, 2010, and had an estimated useful life of @)years. The related lease, which would have terminated on December 31, 2016, was renewable for an additional 4-year term. On April 29, 2014, M exercised the renewal option! @-3°S p- MT 4et (@).On July 1, 2014, machinery and equipment were purchased at @ total invoice cost of P250,000. Additional costs of P10,000 for delivery and P30,000 for installation were * incurred. {e) On August 30, 2014, M purchased a new automobile for P15,000. () On September 30, 2014, a truck with a cost of P24,000 and a carrying amount of P8,100 on the date of sale was sold for P11,500. Depreciation for the 9 months ended September 30, 2014, was P2,352. (a) On December 20, 2014, a.machine with a cost of P17,000 and a carrying amount of P2,975 at date of disposition was scrapped without cash recovery. C4 What Is the depreciation expense on land improvements for 2014? A. P10,657 B, 8,00 CPi2, . PIG, 8, 8,000 C_P12,000 D. P16,000 2. What is the depreciation expense on building for 2014? Ay P84,876 B. P100,800 Cc. Pi13,168 |. 6,076Dm GE wv FT OO Dp G CPAR-MANILA AP7603 ~ AUDIT OF PROPERTY, PLANT, AND EQUIPMENT 3. What is the carrying amount on January 1, 2014, of the truck sold on September 30, 20147 A. PB,100 B. P5,670 C. P5748 D, P10,452 4. What is the depreciation expense for 2014 on automobile purchased August 30, 2014? A. PO B. P3,000 C, P1,500 D. P4,500 5. What is the depreciation on automobiles and trucks for 2014? 4, P4456 B.. P15,240 Pi7,592 D. Pi0,604 6. What is the depreciation expense on leasehold improvements for 2014? A, P15,786 ‘By P2,100 C. P36,833 D. P27,625 7. What is the total cost of the machinery and equipment acquired on July 1, 2014? A. P260,000 B. P280,000 C. 250,000 ‘D, P290,000 8. What is the depreciation expense on machinery and equipment for 2014? A. P92,000- B. 106,500 C. P77,500 D. P86,900 9. What is the book value of the machinery and equipment on December 31, 2014? A. P578,800 B. P575,825 © 773,825 D. P776,800 10. What is the total depreciation expense for 20142 A. P219,118 B. 225,432 C. P210,932 D. 226,216 PROBLEM NO. 3 On January i, 2014, LUMOBO Corporation contracted with Maga Construction Company to construct a building for P40,000,000 on land that Lumobo purchased several years ago. The contract provides that Lumobo is to make five payments in 2014, with the last payment scheduled for the date of completion, The building was completed on December 31, 2014. Lumobo made the folowing payments during 2014: January 1 P 4,000,000 March 31 8,000,000 June 30 12,200,000 woe ‘September 30 8,800,000 27a December 3: — 7,090,000 2 Total 087, 40,000,000 170 A Lumobo had the following debt outstanding at December 31, 2014: a) A 12%, 4-year note dated January 1, 2014, with interest compounded), quarterly. Both principal and interest are payable on December 31, 2017. This loan relates specifically to the building project. *)) pv P17,000,000 b) A 10%, 10-year note dated December 31, 2010, with simple interest; interest payable annually on December 31 12,000,000 ©) A 12%, 5-year note dated December 31, 2011, with simple interest; Interest payable annually on December 31 14,000,000 1. The amount of interest to be capitalized during 2014 Is A. P5,012,680 B. P2,133,680 Ce P2,277,710 D. POa A Cc 2. The amount of interest that would be expensed for 2014 is A. P2,735,960 B. P5,013,680 C. P2,277,720 D. PO PROBLEM NO. 4 On January 1, 2012, 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 useful life of 10 years. On December 31, 2013, 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, 2014, the asset's recoverable amount was determined to be P111,000 and management believes 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. ic 1. What amount of impairment loss should be recognized on December 31, 2013? A. 54,000 B. P9,000 C. P24,000 D. PO 2. What is the asset’s carrying value on December 31, 2014? ‘Ay 84,000 B. P90,000 C. P86,400 D. 96,000 = 3. What would have been the asset's cattying amount at December 31, 2014, had the impairment not been recognized in 20137 ‘A. P105,000 B. P84,000 €. P96,000 D. PB6,400 4. What amount of impairment recovery should be reported in the 2014 income statement? A, 27,000 B. PO ¢. P6,000 D. P21,000 PROBLEM NO. 5 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 bullds necessary structures and sheds on the site at a total cost of 12,000,000. “The company estimates that these structures can be used for 15 years but, because they must be dismantled if they are to be moved, they have no residual value. Mina Mining does not intend to use the buildings elsewhere. Boo 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 unti! 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% year? Depletion Depreciation erponac EM A 4,845,000 870,000 wat B. 4,845,000 780,000 tiie c 2,422,500 P870,000.- eve D. 2,422,500 780,000 tH he leo 10 aytb D oO a PAR - MANILA {AP7603.~ AUDIT OF PROPERTY, PLANT, AND EQUIPMENT 2. What are the estimated depletion and depreciation charges for the 5” year? Depletion Depreciation A 2,422,500 1,740,000 8 2,422,500 1,560,000 c 4,845,000 PA1,560,000 56 )6 5 dD, 4,845,000 Pt,740, 000. nk % 1 Nabe 3, What are the estimated depletion and depreciation charges for the 6” year? Depletion Depreciation A 2,422,500 1,560,000 B. 2,422,500 74,740,000 go »!51 c 4,845,000 1,560,000 <2, D. P 4,845,000 1,740,000 “4 * 7200 4, What are the estimated depletion and depreciation charges for the 7* year? Depletion Depreciation A 2,422,500 1,380,000 8. 2,422,500 P1,560,000 _-12xI G 4,845,000 P1,380,000 < Gox IG D. 4,845,000 P1,560,000 5. What are the estimated depletion anc depreciation charges for the 11% year? Depletion Depreciation A 4,845,000 P1,380,000 B. 4,845,000 690,000 6 2,422,500 1,380,000 D. 2,422,500 Peo0,000 <60) 1502 % Too PROBLEM NO. 6 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. C. The depreciated values are always smaller than cost. D. Internal control is inherently effective regarding this account. 2. Which Is the bast 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. 8, 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 an understanding of internal control and performs A, Tests of controls. B. Analytical procedures to verify current year additions to property and equipment. €, A thorough examination of the balances at the beginning of the year. D. Extensive tests of current year property and equipment transactions.BR fay GPAR-MANILA a 608 — AUDIT OF PROPERTY, PLANT, AND EQUIPMENT 4. Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence about fixed asset additions? A.-Inspecting documents and physically examining assets.~ 8, 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 @ production facility, which of the misstatements or questionable practices is most likely to be detected by the audit procedure 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. 2 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. 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 allocation and A. Presentation and disclosure C. Rights and obligations B. Completeness D. Existence 8. The auditor may conclude that depreciation charges are insufficient by noting ‘A. Insured values greatly In excess of book values. B. Large number of fully depreciated assets. C. Continuous trade-in of relatively new assets. D. Excessive recurring losses on assets retired 9. 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. Expenditures for property and equipment have been recorded in the proper period. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.- Expenditures for property and equipment have not been charged to expense. 9 OF 10. 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 repainted. D. Examining construction work orders that support items capitalized during the year. 11. 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, Gain on disposal of equipment C. Depreciation expense D. Repair and maintenance expense -CRAR - MANILA AP7603 - AUDIT OF PROPERTY, PLANT, AND EQUIPMENT. f; 12. The auditor is least likely to learn of retirements of equipment through which of the following: Review of the purchase returns and allowances account. .. Review of depreciation. . Analysis of the debits to the accumulated depreciation account. .. Review of insurance policy riders.- poge> C13. Inthe audit of property, plant, and equipment, the auditor tries to do all of the following except to ‘A. Obtain an understanding of internal control, B. Determine the extent of property abandoned during the year. C. Assess the adequacy of replacement funds.- D. Judge the reasonableness of the depreciation. A 14. PPE additions should be recorded correctly as to account, amount, and period. Which of the following environmentel considerations indicates that the risk of PPE additions is high? ‘A. Most construction is performed {n-house. B. Gross property, plant, and equipment increased 25% during the current period. . Recently acquired loans preclude further plant acquisition for 2 years. D. All material additions are required to be approved by the board of directors. 15. Which of the following questions would an auditor least likely include on an internal Control questionnaire concerning the initiation and execution of equipment transactions? A. Are requests for major repairs approved at a higher level than the department initiating the request? — ‘ B. Are prenumbered purchase orders used for equipment and periodically accounted for? C. Are requests for purchases of equipment reviewed for consideration of soliciting D, competitive bids? . Are procedures in place to monitor and properly restrict access to equipment? . ri Tigh’, a aces fe equp mod END ~