Chapter 13

CHAPTER
13
SUBSTANTIVE TESTS OF
PROPERTY, PLANT AND
EQUIPMENT
13-1.
Factors which facilitate the auditors verification of plant and equipment but are
not applicable to audit work on current assets include the following:
(a) High peso amount of individual items. A relatively few transactions may
support a large balance sheet amount.
(b) Usually little change in property accounts year to year. Land, buildings, and
equipment often remain unchanged for many years; hence there is little
accounting activity to verify. In contrast, such current assets as accounts
receivable and inventory may have a complete turnover several times a year.
(c) Minor effect on net income from cutoff errors. Cutoff errors in recording
transactions in plant and equipment are much less likely to have a material
effect on net income than are errors in the cutoff of transactions for purchase
and sale of merchandise. For example, a cutoff error which causes a
P30,000 year-end sales transaction to be recorded a day prior to shipment
may cause a P30,000 overstatement of the current years pretax income.
13-2.
The auditors must question the service lives adopted by the client for plant assets.
To do otherwise would be to fail in the collection of sufficient competent evidence
for the clients depreciation policies and procedures.
13-3.
The principal objective of the auditors in analyzing a Maintenance and Repairs

expense account is to disclose any capital expenditures which were erroneously
recorded as expense.
13-4.
Documentary evidence usually available in the clients office to substantiate legal

ownership of property, plant, and equipment includes deeds, policies of title
insurance or abstract of title and an attorneys opinion as to title, property tax bills,
insurance policies, purchase contracts, purchase orders, invoices, and paid checks.
The auditors may also secure written representations from the client as to
ownership of these assets.
13-5.
The auditors employ the following substantive tests to detect unrecorded

retirements of property, plant, and equipment:
(a) If major additions of plant and equipment have been made during the year,
ascertain whether old equipment was traded in or superseded by the new
units.
(b) Analyze the Miscellaneous Revenue account to locate any cash proceeds
from sale of plant assets.
13-2
Applied Auditing 2014 Edition Solutions Manual

(c) If any of the companys products have been discounted during the year,
investigate the disposition of plant facilities formerly used in manufacturing
such products.
(d) Inquire of executives and supervisors whether any plant assets have been
retired during the year.
(e) Examine retirement work orders or other source documents for authorization
by the appropriate official or committee.
(f) Investigate any reduction of insurance coverage to see whether this was
caused by retirement of plant assets.
13-6.
Kris Corporation
(a) This is the first audit of Kris Corporation by Ian and Ronna. Moreover, the
company has not been audited by other public accountants during the two
previous years of operation. Under these circumstances, the auditors must
investigate fully transactions relating to plant and equipment during the two
prior years of the companys existence, as well as the records of the year
under audit. The adequacy of internal control over plant acquisitions and
disposals would be an important part of this review. Since Kris is a relatively
new company, this study of prior years transactions can be completed within
reasonable time limits.
The review of prior years transactions relating to plant and equipment would
include analysis of the Repairs and Maintenance expense account and should
bring to light the erroneous treatment of plant acquisitions as revenue
expenditures during Years 1 and 2.
If Ian and Ronna did not investigate the property transactions of the two prior
years and the internal controls in force, there would be no satisfactory support
for the balances of the property accounts at the end of Year 3, or for the
depreciation expense of the year under audit. Remember that one of the
auditors basic objectives for plant and equipment is to determine that the
property accounts (including the amounts carried forward from prior years)
are fairly stated.
(b) Both the income statement and the balance sheet prepared at the end of Year
3 would be affected by the errors made in Years 1 and 2. In the balance
sheet, the plant and equipment and also the total assets would be understated
by the undepreciated cost of the assets which were improperly expensed.
Current liabilities and total liabilities would be understated by the additional
income taxes applicable to the understatement of prior periods net income
due to the accounting errors. The retained earnings and total shareholders
equity would be understated by the difference between the understatement of
total assets and the understatement of total liabilities. In the Kris income
statement, depreciation expense would be understated, income taxes expense
overstated, and net income overstated.
Substantive Tests of Property, Plant and Equipment

13-7.
13-3
Sparrow Company
1.
Change in depreciation method is considered change in accounting estimate -cumulative effect adjustment:
a.
No correcting entry
b.
Depreciation Expense
Accumulated Depreciation: Machine
To record depreciation for 2015.
25,750
25,750
Previous depreciation amount

2013 P400,000 x (2 x 10%)
2014 (P400,000 - P80,000) x (2 x 10%) =
Cost
Less:
Accumulated depreciation
Carrying value 12.31.14
256,000 50,000
8
Change in estimate--prospective adjustment:
Depreciation in 2015 =
2.
a.
No correcting entry
b.
Original life =
Remaining life =
Depreciation =
3.
P 80,000
64,000
P144,000
P400,000
144,000
P256,000
Depreciation base
Annual depreciation
= P25,750
40,000
40,000
P450,000
P50,000
= 9 years
(9-5) years + 1 year = 5 years
P250,000 P50,000
Book value Residual value
=
= P40,000 per year
5
Remaining life
Error--prior period adjustment:

a.
Retained Earnings
Prior period adjustment for error
(P80,000 - P72,000).
8,000
8,000
Previous depreciation - erroneously calculated (P200,000 P20,000) x

(2 x 20%) = P72,000
Correct depreciation (P200,000) x (2 x 20%) = P80,000
b.
48,000
48,000
2015 correct depreciation (P200,000 P80,000) x (2 x 20%) = P48,000
13-4
13-8.
Jamboree Trucking Company

Requirement (1)
Accumulated depreciation on the trucks, January 1, 2012
Truck
1
2
3
4
Cost
P120,000
104,000
128,000
150,000
Life
5
5
5
5
Annual
Depreciation
P24,000
20,800
25,600
30,000
Years
Owned
3
2
1
Accumulated
Depreciation
P 72,000
52,000
25,600
15,000
P164,600
Note: This schedule is used to help determine the accumulated depreciation

to date for each correcting entry. Also see correct depreciation
schedule later in solution.
July 1, 2012
Correct entry:
Cash
Accumulated Depreciation: Trucks
[P72,000 + (P24,000 x )]
Loss
Trucks
10,000
84,000
26,000
120,000
Entry made:
Cash
Trucks
10,000
10,000
Correcting entry #1:

Retained Earnings
Trucks
84,000
26,000
110,000
January 1, 2013
Correct entry:
Accumulated Depreciation:
Trucks (P25,600 + P25,600)
Trucks (new)
Cash
Trucks (old)
Gain on exchange
51,200
120,000
17,800
128,000
25,400
13-5
Entry made:
Trucks
Cash
17,800
17,800

Trucks (new)
Trucks (old)
Retained earnings
102,200
51,200
128,000
25,400
July 1, 2014
Correct entry:
(P15,000 + P30,000 + P30,000 + P15,000)
Cash
RE on disposition of trucks
Trucks
90,000
10,000
50,000
150,000
Entry made:
Cash
Miscellaneous Revenue
Trucks
10,000
500
9,500

Retained Earnings
Trucks
90,000
50,500
140,500
Correct depreciation:
Truck
1
2
3
4
5
6
Total
Depreciation
Under (over)
statement
2012
P12,000
P20,800
P25,600
P30,000
P88,400
2013
P20,800
P30,000
P18,920
P69,720
2014
P10,400
P15,000
P18,920
P12,000
P56,320
2015
P18,920
P24,000
P42,920
(88,400)
(54,360)
(41,460)
(28,560)
P15,360
P14,860
P14,360
(P94,600 5 = P18,920)
(P120,000 5 = P24,000)
13-6

Effect of errors on earnings (all reductions)
2012
2013
2014
2015
P26,000
P15,360
P50,500 + P14,860 = P65,360
P14,360

Retained Earnings
Accumulated Depreciation
30,220
14,360
44,580
Requirement (2)
Compound AJE:
Accumulated Depreciation: Trucks (P84,000 +
P51,200 + P90,000 P44,580)
Retained Earnings (P26,000 P25,400 + P50,500
+ P30,220)
Trucks (P110,000 + P102,200 P128,000
P140,500)
13-9.
180,620
81,320
14,360
276,300
AFH Company
Note: This question requires knowledge that corrections of errors in prior years
are recorded to Retained Earnings.
Adjusting entries at December 31, 2016, to correct the books. The building and
machinery should be recorded in separate accounts. Ignore effect on income
taxes.
Purchase price of P60,000 is a lump-sum purchase.
Building
Machinery
Machinery is valued at 40% x P60,000

Building is valued at 60% x P60,000
P39,000
26,000
P65,000
=
=
P24,000
P36,000
60%
40%
100%

AJE (1)
(2)
(3)
(4)
(5)
(6)
Machinery
Building
Property, Plant, and Equipment
24,000
36,000
60,000
Machinery
Building
The legal fees are allocated in the
same proportion as the original
purchase.
280
420
Retained Earnings
To correct the insurance paid in
2014 that was incorrectly recorded
in the asset account.
2,400

Accumulated Depreciation: Building
Accumulated Depreciation: Machinery
Retained Earnings
To remove the depreciation of
P6,310 incorrectly credited to
Property, Plant, and Equipment in
2005; to credit the correct
depreciation
to
Accumulated
Depreciation: Building (P36,420
20);
to
credit
the
correct
depreciation
to
Accumulated
Depreciation: Machinery (P24,280
8); and to correct the amount
recorded as depreciation expense by
a credit to Retained Earnings.
6,310
Retained Earnings
To correct the 2015 repairs that were
incorrectly recorded in the asset
account.
2,000
Building
To properly classify the
addition to the building.
13-7
700
2,400
1,821
3,035
1,454
2,000
10,000
10,000
2015
13-8

(7)
(8)
(9)
(10)
(11)

Retained Earnings
depreciation
to
Accumulated
Depreciation: Building [P1,821 +
(P10,000 19)] (this assumes the
addition has the same life as the
building); to credit the correct
depreciation
to
Accumulated
Depreciation: Machinery (P24,280
8); and to correct the amount
recorded as depreciation expense by
a credit to Retained Earnings.
6,879
Repairs Expense
To expense the repairs for 2016,
before the books are closed.
3,000
Insurance Expense
Prepaid Insurance
To correctly classify the 2016
insurance payment, before the books
are closed.
1,400
1,400
Machinery
To correctly classify the machinery
purchased in 2016.
7,000
Loss on Disposal of Machinery

Machinery
To correctly record the disposal of
the machinery in 2016; the machine
is 2 years old and so has P200
related accumulated depreciation.
100
500
200
2,347
3,035
1,497
3,000
2,800
7,000
800

(12)
13-10.

depreciation
to
Accumulated
Depreciation: Building; to credit the
correct depreciation to Accumulated
Depreciation: Machinery [(P24,280
+ P7,000 - P800) 8]; and to correct
the depreciation expense before the
books are closed.
13-9
7,421
2,347
3,810
1,264
Briggs, Inc.
Adjusting Journal Entries - 12/31/15
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Organization costs
Fixed assets
3,000
Discount on bonds payable

Interest expense
Fixed assets
5,650
350
Land
Fixed assets
3,000
6,000
500,000
500,000
Organization costs
Fixed assets
5,000
Land
Fixed assets
4,000
Land
Fixed assets
7,000
Interest expense
Fixed assets
30,000
5,000
4,000
7,000
30,000
13-10

(8)
(9)
(10)
(11)
13-11.
Salaries expense
Fixed assets
50,000
Organization costs
Fixed assets
40,000
Taxes and licenses

Fixed assets
7,000
Building
Fixed assets
50,000
40,000
7,000
2,000,000
2,000,000
Aerospace Company
Requirement (1)
Machinery (cost)
Raw materials used
Labor
Installation cost
Materials used in trial runs
Factory overhead (incremental)
Total
Less: Cash discount on materials
Net
P13,600
9,800
1,400
600
2,900
P28,300
400
P27,900
Accumulated depreciation - 12/31/15

(P27,900 x 10% x 4/12)
Machine Tools (cost)

Less: Amortization for 2015 (4/36 x 2,250)
Balance, 12/31/15
P 2,250
250
P 2,000
930
Requirement (2) Adjusting Journal Entries - 12/31/15

(1)
(2)
(3)
Loss on disposition of machinery

Machinery
70
70
Profit on construction
Machinery
6,900
Machine tools
Machinery
2,250
6,900
2,250

(4)
Machinery
Depreciation expense
Accumulated depreciation - machinery
(5)
Purchase discount
Machinery
(6)
Machinery
Factory overhead control
(7)
13-12.
Tools expense
Machine tools
13-11
3,462
2,532
930
400
400
2,900
2,900
250
250
XYZ Manufacturing Company

Adjusting Journal Entries - 12/31/15
AJE (1)
(2)
(3)
Retained Earnings
Machinery
To correct error in recording
purchase
of
machine
on
installment basis.
List Price
P6,000
Add: Installation charges
200
Total
P6,200
Total installments paid
& installation
7,400
Financing charges
P1,200
1,200.00
Retained Earnings
Machinery
To take up cash discount on
machinery purchased on 6/30/03.
160.00
Machinery (new)
Allowance for depreciation
Machinery (old)
To write off machinery traded in
for a new one.
Cost of new machine:
Cash payment
P5,000
NBV of old machine
2,620
Total
P7,620
2,620.00
2,620.00
1,200.00
160.00
5,240.00
13-12

(4)
(5)
(6)
(7)

Machinery
Retained earnings
To correct the recording of sale of
machinery on 1/1/05.
Cost
P4,400
Less: Acc. Depr.
2,640
NBV
1,760
Proceeds (2,500 - 125)
2,375
Gain
P 615
2,640.00

Machinery
Gain on sale of machinery
To correct the recording of sale of
machinery on 10/1/15.
Cost
P4,000
Less: Acc. Depr.
3,800
NBV
200
Proceeds
800
Gain
P 600
3,800.00
Machinery
To set up clients depreciation
provisions from 2013 to 2015
erroneously credited to the
Machinery acct. (Schedule A).
19,900.60
Retained earnings
To correct error in depreciation
provisions of client (Schedule B).
2,190.90
1,536.50
2,025.00
615.00
3,200.00
600.00
19,900.60
3,727.40
XYZ Manufacturing Corporation

Machinery
12/31/15
Balance per ledger (Schedule A)
Add (Deduct) Adjustments
AJE (1)
(2)
(3)
(4)
P10,964.40
( 1,200.00)
( 160.00)
2,620.00
( 5,240.00)

(5)
(6)
13-13
( 2,025.00)
( 3,200.00)
19,900.60
Net
P10,695.60
Balance as adjusted
P21,660.00
Composition:
Machine acquired on 9/30/02
Total
P 6,200.00
7,840.00
7,620.00
P21,660.00
XYZ Manufacturing Corporation

Allowance for Depreciation
12/31/15
Balance per ledger
Add (Deduct) Adjustments
AJE (3)
(4)
(5)
(6)
(7)
Balance as adjusted
0.00
( 2,620.00)
( 2,640.00)
( 3,800.00)
19,900.60
3,727.40
P14,568.00
Composition:
A D - Machine acquired on 9/30/02
- Machine acquired on 6/30/03
- Machine acquired on 6/30/04
Total
P 5,270.00
5,488.00
3,810.00
P14,568.00
Supporting Analysis:
Schedule A
Machinery Account per Ledger
Date
Particulars
1/1/13
Purchase
9/30/13
Purchase on installment
Payments from Sept. to Dec.
Freight and installation
Depreciation (20%)
10/10/13
12/31/13
Dr
Cr
P 5,240.00
4,000.00
4,400.00
Balance
P13,640.00
2,400.00
200.00
P 3,248.00
16,040.00
16,240.00
12,992.00
13-14

Installment payments for acquisition
on 9/30/11
Purchase
Depreciation (20%)
Acquisition - old machine traded in
Depreciation (20%)
Sale
Depreciation (20%)
Sale
Depreciation (20%)
2012
6/30/12
12/31/12
6/30/13
12/31/13
1/1/14
12/31/14
10/1/15
12/30/15
Schedule B
Date
Acquired
1/1/11
9/30/11
6/30/12
6/30/13
5,126.72
2,375.00
3,626.38
800.00
2,741.10
17,792.00
25,792.00
20,633.60
25,633.60
20,506.88
18,131.88
14,505.50
13,705.50
10,964.40
2014
2015
5,158.40
5,000.00
Depreciation Schedule
Cost
2011
2012
2013
P 5,240
4,000
4,400
6,200
7,840
7,620
P 1,048.00
800.00
880.00
310.00
0.00
0.00
P1,048.00
800.00
880.00
1,240.00
784.00
0.00
P 524.00
800.00
880.00
1,240.00
1,568.00
762.00
Total correct
depreciation provision
Provision by client
(Over) Underprovision
13-13.
4,800.00
8,000.00
P 3,038.00 P4,752.00 P 5,774.00

3,248.00
5,158.40
5,126.72
P (210.00) P (406.40) P 647.28
0.00
800.00
0.00
1,240.00
1,568.00
1,524.00
0.00
600.00
0.00
1,240.00
1,568.00
1,524.00
P5,132.00
3,626,38
P1,505.62
P4,932.00
2,741.10
P2,190.90
Sunlight Service Center

Audit Adjustment No. 1 was determined as follows:
Clients Entry
Correct Entry
(1) To record disposal of delivery truck:

Cash
Trucks
2,000
2,000
Cash
2,000
Accum. Depr.
50,000
Trucks
50,000
Gain/Loss on Disp.
2,000
(2) To record disposal of service truck:

Cash
Trucks
8,000
8,000
Cash
Accum. Depr.
Gain/Loss on Disp.
Trucks
8,000
15,000
2,000
25,000
13-15
(3) To record 2015 depreciation:

Depr. Expense
Accum. Depr.
95,000
95,000
Depr. Expense
Accum. Depr.
101,250
101,250
Correct amount of depreciation determined as follows:

Disposal of service truck (1/2 year)
Purchase of delivery truck (1/2 year)
Purchase of service truck (1/2 year)
Two delivery truck @ 10,000 each
Fourteen service trucks @ 5,000 each
Total
P 2,500
6,000
2,750
20,000
70,000
P101,250
Audit Adjustment as shown below:

Accumulated Depreciation - Trucks
Depreciation Expense - Trucks
Trucks
b.
58,750
6,250
65,000
The audit objectives for examining the asset and related accumulated
depreciation accounts are:
(1)
Existence or occurrence: To establish the physical presence of the assets

and the validity of the purchase and sale transactions.
(2)
Rights and obligations: To ascertain that Sunlight owns the trucks.
(3)
Valuation or allocation: To determine that the company has properly

recorded the acquisitions and disposals, and that depreciation has been
properly calculated for 2015.
(4)
Presentation and disclosure: To resolve that all trucks are used in the
companys operations; that fully-depreciated trucks are removed from the
books if no longer in use; that trucks and accumulated depreciation are
reflected as operating assets; and that depreciation expense is reflected as
an operating expense.
Auditing procedures appropriate in meeting the above objectives are the

following:
(1) Existence or occurrence, valuation or allocation, and ownership: Trace to
last years audit workpapers and examine titles for trucks purchased prior to
2015 (to determine that trucks are still owned by the client; examine titles and
invoices for trucks purchased in 2015; examine remittance advices, journal
entries and bank statement credits for 2015 disposals; and recompute
depreciation expense and gain/loss on disposals.
(2) Presentation and disclosure: Examine subsidiary ledger for fully depreciated
assets and inquire as to whether in use. Reclassify as necessary.
13-16
13-13.

Sunlight Service Center (CONTINUED. . . . Requirements a and c)
SUNLIGHT SERVICE CENTER

TRUCKS
December 31, 2015
Description
Assets:
Delivery Trucks
Service Trucks
Final
Balances
12/31/10
Additions
P150,000
P375,000
P525,000 &
F
P 60,000
P 27,500
P 87,500
F
Disposals
P51,000
P25,000
P76,000
F
12/31/15: Ledger balance

AJE No. 1
12/31/15: Audited balances
Accumulated Depreciation:
Delivery Trucks
Service Trucks
P 95,000
P225,000
P320,000 &
F
12/31/15: Ledger balances

AJE No. 1
P 26,000 (B)
P 75,250 (C)
P101,250
F
P 95,000
P 6,250
P101,250
P 50,000
15,000 (A)
P 65,000
F
Final
Balances
12/31/11
P160,000
P377,500
P537,500
F
P602,500
P 65,000
P537,500
WP G
P 71,000
P285,250
P356,250
F
P415,000
P 58,750
P356,250
Evaluated depreciation policy and estimated lives for reasonableness. No exception:

AJE No. 1
Depreciation expense - trucks
P 6,250
Accum. depreciation - trucks
58,750
Trucks
P65,000
&
*
Traced to last years working trial balance

Traced to remittance advice and cash receipts
Footed and crossfooted

Examined invoices and titles
Gain (loss)
on Disposals
P 2,000
(P2,000)
P
0
*
(A)
(A)
Cost
Accum. Depr:
2012
2,500
2013
5,000
2014
5,000
2015
2,500
(1/2 yr.)
Book Value
Sales Price
Loss
P10,000
8,000
P 2,000
20,000
6,000
P 26,000
(1/2 yr.)
70,000
2,500
2,750
P 75,250
(1/2 yr.)
(1/2 yr.)
(B)
2 x 10,000
1 x 6,000
WP G
14 x 5,000
1 x 2,500
1 x 2,750
P25,000
(1/2 yr.)
15,000

13-14.
13-17
Tatty Companys
Requirement (1)
Tatty Company
Analysis of Land Account
for 2016
Balance at January 1, 2016
Land site number 621:
Acquisition cost
Commission to real estate agent
Clearing costs
Less: Amounts recovered
Total land site number 621
Land site number 622:
Acquisition cost
Demolition cost of building
Total land site number 622
Balance at December 31, 2007
P 100,000
P1,000,000
60,000
P15,000
(5,000)
10,000
1,070,000
P 300,000
30,000
330,000
P1,500,000
Tatty Company
Analysis of Buildings Account
for 2016
Cost of new building constructed on
land site number 622:
Construction costs
Excavation fees
Architectural design fees
Building permit fee
P800,000
P150,000
11,000
8,000
1,000
170,000
P970,000
Tatty Company
Analysis of Leasehold Improvements Account
for 2016
Electrical work
Construction of extension to current
work area (P80,000 x )
Office space
P500,000
35,000
40,000
65,000
P640,000
13-18

Tatty Company
Analysis of Machinery and Equipment Account
for 2016
Cost of new machines acquired:
Invoice price
Freight costs
Unloading charges
P700,000
P75,000
2,000
1,500
78,500
P778,500
Requirement (2)
Items in the fact situation which were not used to determine the answer to
Requirement 1 above, and where, or if, these items should be included in Tattys
financial statements are as follows:
13-15.
a.
Land site number 623, which was acquired for P600,000, should be included
in Tattys balance sheet as land held for resale.
b.
Painting of ceilings for P10,000 should be included as a normal operating

expense in Tattys income statement.
c.
Royalty payments of P13,000 should be included as a normal operating

expense in Tattys income statement.
Nikko Company
Note to Instructor: This problem includes material from previous chapters.
JOURNAL ENTRIES DURING 2015:
(1)
Land
Ordinary Shares, P10 par
Additional Paid-in Capital
a
175,000 a
70,000
105,000
P25 x 7,000
Cash
Notes Payable
500,000
Building
Cash
700,000
500,000
700,000

(2)
(3)
(4)
Machine
Machine
Cash
Gain on exchange
430,000
135,000
Cash
Sales Revenue
800,000
Cost of Goods Sold

Inventory
350,000
Accounts Payable
Cash
400,000
Inventory
Accounts Payable
480,000
Dividends Distributed (or Retained Earnings)

Cash
a
13-19
500,000
60,000
5,000
800,000
350,000
400,000
480,000
92,500
92,500 a
37,000 x P2.50
ADJUSTMENTS AT END OF 2015:

Interest Expense
Building
Interest Payable
a
b
60,000 a
P500,000 x 12%
[(P0 + P700,000) 2] x 12%
Depreciation Expense - Machinery

a
18,000
42,000 b
75,000 a
75,000 a
(P430,000 P55,000) 5
Rent Expense
Prepaid Rent
60,000
Income Tax Expense

Income Taxes Payable
90,600 a
See income statement
60,000
90,600
13-20

FINANCIAL STATEMENTS FOR 2015:
NIKKO COMPANY
Income Statement
For Year Ended December 31, 2015
Sales revenue
Less:
Expenses
Cost of goods sold
Interest expense
Rent expense
Operating income
Gain on exchange of machinery
Income before income taxes
Income tax expense (30%)
Net income
P800,000
P350,000
18,000
75,000
60,000
Earnings per share (37,000 shares)
(503,000)
P297,000
5,000
P302,000
90,600
P211,400
P
5.71
NIKKO COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2015
Beginning retained earnings
Add:
Net income
P200,000
211,400
P411,400
(92,500)
P318,900
Less:
Dividends
Ending retained earnings
NIKKO COMPANY
Balance Sheet
December 31, 2015
Assets
Cash
Inventory
Land
Building
Machine
Less: Accumulated depreciation
Total Assets
P 587,500
580,000
175,000
742,000
P430,000
(75,000)
355,000
P2,439,500
a
b
13-21
Liabilities and Equities
13-16.
Accounts payable
Notes payable
Interest payable
Income taxes payable
Total Liabilities
Ordinary shares, P10 par

Additional paid-in capital
Retained earnings
Total Shareholders Equity
Total Liabilities and Shareholders Equity
480,000
500,000
60,000
90,600
P1,130,600
370,000
620,000
318,900
P1,308,900
P2,439,500
P540,000 + P500,000 P700,000 P60,000 + P800,000 P400,000 P92,500

= P587,500
P450,000 P350,000 + P480,000 = P580,000
P400,000 P400,000 + P480,000 = P480,000
P300,000 + P70,000 = P370,000
P515,000 + P105,000 = P620,000
Apple Company
Requirement 1
Total expenses, 2014 = Units sold x (Depletion + Depreciation
+ Production costs)
= (6 x 9,000) x (P3.00a + P0.20b + P8.00)
= 54,000 x P11.20
= P604,800
a
Cost Residual Value

Depletion rate =
Life in tons
P2,000,000
(P100,000 P200,000)
=
700,000
P2,100,000
=
700,000
= P3.00 per ton
13-22

b
Cost Residual Value

Depreciation rate =
Life in tons
P150,000 P10,000
=
700,000
=
P0.20 per ton
Requirement 2
Cost of inventory, 12/31/2014
6 x (10,000 9,000) x P11.20
P67,200
Requirement 3
Total expenses, 2015 = Units sold x (Depletion + Depreciation
+ Production costs)
= (6 x P11.20) + [(12 x 10,000) 6,000] x
(P3.84a + P0.256b + P8.00)
= P67,200 x P1,378,944
= P1,446,144
a
Residual Value
New depletion Book
rate value
=
Remaining Life
[P2,000,000 (60,000 x P3.00)] (P100,000 P200,000)]
=
500,000
P1,820,000
+ P100,000
=
500,000
P1,920,000
=
500,000
= P3.84 per ton
Book value Residual Value

New depreciation rate =
Remaining Life
[P150,000
(60,000 x P0.20)] P10,000
=
500,000
P128,000
=
500,000
=
P0.256 per ton
13-23
13-17.
January 1, 2010
Equipment
Cash
5,000,000
5,000,000
December 31, 2010

500,000
500,000
December 31, 2011

500,000
500,000
January 1, 2012
Equipment
Revaluation Surplus
625,000
125,000
500,000
December 31, 2012

Revaluation Surplus
Retained Earnings
562,500
562,500
62,500
62,500
December 31, 2013

Revaluation Surplus
Retained Earnings
562,500
562,500
62,500
62,500
December 31, 2014

Revaluation Surplus
Retained Earnings
562,500
562,500
62,500
62,500
January 1, 2015
1) Revaluation surplus
Equipment
312,500
312,500
625,000
13-24

2) Impairment loss / Depreciation expense
500,000
500,000
or
Revaluation surplus
Impairment loss / Depreciation expense
Equipment
13-18.
312,500
500,000
187,500
625,000
Sweetie Company
Requirement (a)
December 31, 2015
Loss on Impairment / Depreciation ................................................................
3,200,000
Accumulated DepreciationEquipment ................................
3,200,000
Cost
Carrying amount
Fair value
Loss in impairment
P9,000,000
1,000,000
8,000,000
4,800,000
P3,200,000
Requirement (b)
December 31, 2016
Depreciation Expense ................................................................................................
1,200,000
Accumulated DepreciationEquipment ................................
1,200,000
New carrying amount
Useful life
Depreciation per year
P4,800,000
4 years
P1,200,000
Requirement (c)
Carrying value, 12.31.16 had impairment not been recognized on 12.31.15
Cost
(P1,000,000 + P2,000,000)
Net carrying value, 12.31.07
P9,000,000
3,000,000
P6,000,000
Fair value, 12.31.07

Carrying value, 12.31.07
Recovery of impairment loss
P5,100,000
3,600,000
P1,500,000
13-25
Entry will be:

Depreciation expense or
Gain on recovery of previously
recognized impairment
13-19.
1,500,000
1,500,000
Bobby Corporation
Requirement (1)
BOBBY CORPORATION
Land Account (Site Number 501)
As of September 30, 2016
Acquisition cost
Real estate brokers commission
Legal fees
Title guarantee insurance
Cost of razing existing building
Balance, September 30, 2007
P600,000
36,000
6,000
18,000
75,000
P735,000
Requirement (2)
BOBBY CORPORATION
Capitalized Cost of Office Building
As of September 30, 2016
Contract cost
Plan, specifications, and blueprints
Architects fees for design and supervision
Capitalized interest--2015 (P900,000 x 14% x 10/12)
Capitalized interest--2016 (P2,300,000 x 14% x 9/12)
Total capitalized cost, September 30, 2016
P3,000,000
12,000
95,000
105,000
241,500
P3,453,500
Requirement (3)
BOBBY CORPORATION
Computation of Depreciation of Office Building
Using 150% Declining Balance Method
For the Year Ended December 31, 2016
Capitalized cost
150% declining balance rate
(100% 40 years = 2.5% x 1.5)
Annual depreciation
Depreciation October 1 to December 31, 2016
(P129,506 x 3/12)
P3,453,500
x 3.75%
P 129,506
P
32,377

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Chapter 13

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CHAPTER

The principal objective of the auditors in analyzing a Maintenance and Repairs

Documentary evidence usually available in the clients office to substantiate legal

The auditors employ the following substantive tests to detect unrecorded

Applied Auditing 2014 Edition Solutions Manual

Substantive Tests of Property, Plant and Equipment

Previous depreciation amount

(9-5) years + 1 year = 5 years

Error--prior period adjustment:

Previous depreciation - erroneously calculated (P200,000 P20,000) x

2015 correct depreciation (P200,000 P80,000) x (2 x 20%) = P48,000

Applied Auditing 2014 Edition Solutions Manual

Jamboree Trucking Company

Note: This schedule is used to help determine the accumulated depreciation

Correcting entry #1:

Substantive Tests of Property, Plant and Equipment

Correcting entry #2:

Correcting entry #3:

Applied Auditing 2014 Edition Solutions Manual

Correcting entry #4:

Machinery is valued at 40% x P60,000

Substantive Tests of Property, Plant and Equipment

Property, Plant, and Equipment

Applied Auditing 2014 Edition Solutions Manual

Property, Plant, and Equipment

Loss on Disposal of Machinery

Substantive Tests of Property, Plant and Equipment

Property, Plant, and Equipment

Discount on bonds payable

Applied Auditing 2014 Edition Solutions Manual

Taxes and licenses

Accumulated depreciation - 12/31/15

Machine Tools (cost)

Requirement (2) Adjusting Journal Entries - 12/31/15

Loss on disposition of machinery

Substantive Tests of Property, Plant and Equipment

XYZ Manufacturing Company

Applied Auditing 2014 Edition Solutions Manual

Allowance for depreciation

Allowance for depreciation

XYZ Manufacturing Corporation

Substantive Tests of Property, Plant and Equipment

XYZ Manufacturing Corporation

Machinery Account per Ledger

Applied Auditing 2014 Edition Solutions Manual

P 3,038.00 P4,752.00 P 5,774.00

Sunlight Service Center

(1) To record disposal of delivery truck:

(2) To record disposal of service truck:

Substantive Tests of Property, Plant and Equipment

(3) To record 2015 depreciation:

Correct amount of depreciation determined as follows:

Audit Adjustment as shown below:

Existence or occurrence: To establish the physical presence of the assets

Rights and obligations: To ascertain that Sunlight owns the trucks.

Valuation or allocation: To determine that the company has properly

Auditing procedures appropriate in meeting the above objectives are the

Applied Auditing 2014 Edition Solutions Manual

SUNLIGHT SERVICE CENTER

12/31/15: Ledger balance

12/31/15: Ledger balances

Evaluated depreciation policy and estimated lives for reasonableness. No exception:

Traced to last years working trial balance

Footed and crossfooted