Audit of Property,

Plant & Equipment


By Prof. Anita B. Catolico
 PPE

 Generally includes land, buildings, manufacturing
equipment, office equipment, delivery equipment,
furniture & fixtures, leasehold improvements, and
capitalized lease assets.
 Audit Objectives

1. Determine whether PPE physically exist. Assets
purchased or constructed are added and retirements
are removed.
2. Determine that PPE include all capitalizable costs
and capitalizable costs are not expensed.
3. Legal title or ownership rights to PPE.
4. State at cost and depreciation/depletion are
computed based on acceptable methods.
5. Properly presented in the SFP.
 Audit Procedures

1. Obtain or prepare a summary of property & equipment
transactions and analysis of the accumulated
depreciation during the year and reconcile to ledger.
2. Conduct physical inspection of major acquisitions of
property and equipment.
3. Vouch additions to property during the year.
4. Investigate disposals and retirements.
5&6. Examine legal ownership of property and equipment.
 
7. Review rental revenue from land, buildings &
equipment owned by the client and leased to others.
8. Analyze repairs and maintenance account.
9. Investigate status of property and equipment not in
current use.
10. Test client’s computation of depreciation.
11. Perform analytical procedures for PPE.
12. Evaluate FS presentation and disclosure for PPE,
depreciation and related revenue and expense accounts.
 
 KITHARA CORP. commenced operations early in
2020. During its first 9 months, Kithara acquired real
estate for the construction of a building and other
facilities. Operating equipment was purchased and
installed, and the company began operating activities
in April 2020. The company’s accountant, who was
not sure how to record some of the transactions,
opened a Property, Plant, and Equipment (PPE)
ledger account and recorded debits (credits) to this
accounts as follows.
 PPE Acquisitions

1. Cost of real estate purchased as a building site
P1,700,000
2. Paid architect’s fee for design of new building
230,000
3. Paid for the demolition of an old building on the
building site purchased in 1. 280,000
4. Paid property tax on the real estate purchase as
a building site in 1. 17,000
 
5. Paid excavation costs for a new building. 150,000
6. Made the first payment to the building contractor.
2,500,000
7. Paid for equipment to be installed in the new building.
1,480,000
8. Received from sale of salvaged materials from
demolishing the old building. (68,000)
9. Made final payment to the building contractor.
3,500,000
 
10. Imputed interest on Kithara’s own construction
fund. 220,000
11. Paid freight on equipment purchased.
19,000
12. Paid installation costs of equipment.
42,000
13. Paid for repair of equipment damage during
installation. 27,000
PPE ledger account balance P10,097,000
 
Based on the preceding information, determine the amount to be charged to each of the
following:
1. Land
A. P1,717,000 C. P2,149,000
B. P1,929,000 D. P2,011,000
2. Land Improvements
A. P82,000 C. P150,000
B. P68,000 D. P 0
3. Building
A. P6,380,000 C. P6,662,000
B. P6,592,000 D. P6,000,000
4. Manufacturing Equipment
A. P1,480,000 C. P1,541,000
B. P1,507,000 D. P1,568,000
5. Expenses (excluding depreciation)
A. P68,000 C. P220,000
B. P44,000 D. P27,000
 Computation of Depreciation

Bug Co.’s property, plant, and equipment and related
accumulated depreciation accounts had the ff. balances at Dec. 31,
2020:
CLASS OF PPE COST ACCUMULATED
DEPRECIATION
 
LAND P 3,900,000
BUILDINGS 36,000,000 P 7,962,000
MACHINERY & EQUIPMENT 23,250,000 5,886,000
TRANSPORTATION EQUIPMENT 3,960,000 2,586,000
LEASEHOLD IMPROVEMENTS 6,630,000 3,315,000
 
CLASS OF PPE
DEPRECIATION METHOD USEFUL LIFE
LANDIMPROVEMENTS STRAIGHT-LINE 12 YRS
BUILDINGS 150% DECLINING BALANCE 25 YRS
MACHINERY & EQUIPMENT STRAIGHT-LINE 10 YRS
TRANSPORTATION EQUIPMENT 150% DECLINING
BALANCE 5 YRS
LEASEHOLD IMPROVEMENTS STRAIGHT-LINE 8 YRS
 
Bug computes depreciation to the nearest month. The
salvage values of the depreciable assets are considered
immaterial.
Transactions during 2021 and other information are
described below:
On January 5, 2021, a plant facility consisting of land
and a building was purchased from Thor Co. for
P18,000,000. Of this amount, 20% was allocated to land.
 
 On April 3, 2021, new parking lots, streets, and sidewalks at the purchased plant facility
were completed at a total cost of P5,760,000. These expenditures had an estimated useful
life of 12 yrs.
 The leasehold improvements were completed on Dec. 31, 2017, and had an estimated
useful life of 8 yrs. The related lease, which would have terminated on Dec. 31, 2023, was
renewable for an additional 4-year term. On April 30, 2021, Bug exercised the renewal
option.
 On July 1, 2021, machinery and equipment were purchased at a total invoice cost of
P7,500,000. Additional costs of P300,000 for delivery and P900,000 for installation were
incurred.
 On August 31, 2021, Bug purchased a new automobile for P450,000.
 On Sept. 29, 2021, a truck with a cost of P720,000 and a carrying amount of P243,000 on
the date of sale was sold for P345,000. Depreciation for the nine months ended Sept. 30,
2021, was P70,560.
 On Dec. 22, 2021, a machine with a cost of P510,000 and a carrying amount of P89,250 at
date of disposition was scrapped without cash recovery.
 
Based on the preceding information, calculate the 2021 depreciation expense on
each of the ff. classes of PPE.

1. Land improvements
A. P480,000
B. P360,000
C. P320,000
D. P120,000
2. Buildings
A.P2,546,280
B. P3,024,000
C. P2,762,280
D. P1,682,280
 
3. Machinery and equipment
A.P2,325,000
B. P3,195,000
C. P1,597,500
D. P2,760,000
4. Transportation equipment
A. P363,132
B. P454,860
C. P433,692
D. P527,760
5. Leasehold improvements
A. P828,750
B. P552,500
C. P663,000
D. P1,326,000
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