11-1.

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 relativel few transactions ma
support a large balance sheet amount.
(b) !suall little change in propert accounts ear to ear. "and# buildings# and
equipment often remain unchanged for man ears$ hence there is little
accounting activit to verif. %n contrast# such current assets as accounts
receivable and inventor ma have a complete turnover several times a ear.
(c) &inor effect on net income from cutoff errors. 'utoff errors in recording
transactions in plant and equipment are much less likel to have a material
effect on net income than are errors in the cutoff of transactions for purchase
and sale of merchandise. For e(ample# a cutoff error which causes a
)*+#+++ ear,end sales transaction to be recorded a da prior to shipment
ma cause a )*+#+++ overstatement of the current ears preta( income.
11-2. -he auditors must question the service lives adopted b the client for plant assets.
-o do otherwise would be to fail in the collection of sufficient competent evidence
for the clients depreciation policies and procedures.
11-3. -he principal ob.ective of the auditors in anal/ing a &aintenance and 0epairs
e(pense account is to disclose an capital e(penditures which were erroneousl
recorded as e(pense.
11-4. 1ocumentar evidence usuall available in the clients office to substantiate legal
ownership of propert# plant# and equipment includes deeds# policies of title
insurance or abstract of title and an attornes opinion as to title# propert ta( bills#
insurance policies# purchase contracts# purchase orders# invoices# and paid checks.
-he auditors ma also secure written representations from the client as to
ownership of these assets.
11-5. -he auditors emplo the following substantive tests to detect unrecorded
retirements of propert# plant# and equipment:
(a) %f ma.or additions of plant and equipment have been made during the ear#
ascertain whether old equipment was traded in or superseded b the new
units.
(b) Anal/e the &iscellaneous 0evenue account to locate an cash proceeds
from sale of plant assets.
CHAPTER
11
SUBSTANTIVE TESTS OF PROPERTY,
PLANT AND EQUIPMENT
11-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
(c) %f an of the compans products have been discounted during the ear#
investigate the disposition of plant facilities formerl used in manufacturing
such products.
(d) %nquire of e(ecutives and supervisors whether an plant assets have been
retired during the ear.
(e) 2(amine retirement work orders or other source documents for authori/ation
b the appropriate official or committee.
(f) %nvestigate an reduction of insurance coverage to see whether this was
caused b retirement of plant assets.
11-6. Kris Corporation
(a) -his is the first audit of 3ris 'orporation b %an and 0onna. &oreover# the
compan has not been audited b other public accountants during the two
previous ears of operation. !nder these circumstances# the auditors must
investigate full transactions relating to plant and equipment during the two
prior ears of the compans e(istence# as well as the records of the ear
under audit. -he adequac of internal control over plant acquisitions and
disposals would be an important part of this review. 4ince 3ris is a relativel
new compan# this stud of prior ears transactions can be completed within
reasonable time limits.
-he review of prior ears transactions relating to plant and equipment would
include analsis of the 0epairs and &aintenance e(pense account and should
bring to light the erroneous treatment of plant acquisitions as revenue
e(penditures during 5ears 6 and 7.
%f %an and 0onna did not investigate the propert transactions of the two prior
ears and the internal controls in force# there would be no satisfactor support
for the balances of the propert accounts at the end of 5ear *# or for the
depreciation e(pense of the ear under audit. 0emember that one of the
auditors basic ob.ectives for plant and equipment is to determine that the
propert accounts (including the amounts carried forward from prior ears)
are fairl stated.
(b) 8oth the income statement and the balance sheet prepared at the end of 5ear *
would be affected b the errors made in 5ears 6 and 7. %n the balance sheet#
the plant and equipment and also the total assets would be understated b the
undepreciated cost of the assets which were improperl e(pensed. 'urrent
liabilities and total liabilities would be understated b the additional income
ta(es applicable to the understatement of prior periods net income due to the
accounting errors. -he retained earnings and total shareholders equit would
be understated b the difference between the understatement of total assets
and the understatement of total liabilities. %n the 3ris income statement#
depreciation e(pense would be understated# income ta(es e(pense overstated#
and net income overstated.
Substantive Tests of Property, Plant and Equipment 11-3
11-7. Sparrow Company
6. 'hange in depreciation method is considered change in accounting estimate
,,cumulative effect ad.ustment:
a. 9o correcting entr
b. 1epreciation 2(pense 7:#;:+
Accumulated 1epreciation: &achine 7:#;:+
-o record depreciation for 7++<.
)revious depreciation amount
7++= )=++#+++ ( (7 ( 6+>) ) ?+#+++
7++: ()=++#+++ , )?+#+++) ( (7 ( 6+>) @ <=#+++
)6==#+++
'ost )=++#+++
"ess: Accumulated depreciation 6==#+++
'arring value 67.*6.+: )7:<#+++
1epreciation in 7++< @ @ )7:#;:+
7. 'hange in estimate,,prospective ad.ustment:
a. 9o correcting entr
b. 1epreciation 2(pense =+#+++
Accumulated 1epreciation: &achine =+#+++
-o record depreciation for 7++<.
Ariginal life @
0emaining life @ (B,:) ears C 6 ear @ : ears
1epreciation @
*. 2rror,,prior period ad.ustment:
a. 0etained 2arnings ?#+++
Accumulated 1epreciation: &achine ?#+++
)rior period ad.ustment for error
()?+#+++ , );7#+++).
)revious depreciation , erroneousl calculated ()7++#+++ D )7+#+++) (
(7 ( 7+>) @ );7#+++
'orrect depreciation ()7++#+++) ( (7 ( 7+>) @ )?+#+++
b. 1epreciation 2(pense =?#+++
Accumulated 1epreciation: &achine =?#+++
-o record depreciation for 7++<.
7++< correct depreciation ()7++#+++ D )?+#+++) ( (7 ( 7+>) @ )=?#+++
1epreciation base
Annual depreciation
)=:+#+++
):+#+++
@ @ B ears
8ook value D 0esidual value
0emaining life
)7:+#+++ D ):+#+++
:
@ @ )=+#+++ per ear
7:<#+++ D :+#+++
?
11-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition
11-8. Jamboree Trucking Company
equirement !"#
Accumulated depreciation on the trucks# Eanuar 6# 7++*
Truc$ %ost &ife
Annual
'epreciatio
n
(ears
)*ned
Accumulate
d
'epreciatio
n
6 )67+#+++ : )7=#+++ * ) ;7#+++
7 6+=#+++ : 7+#?++ 7 F :7#+++
* 67?#+++ : 7:#<++ 6 7:#<++
= 6:+#+++ : *+#+++ F 6:#+++
)6<=#<++
9ote: -his schedule is used to help determine the accumulated depreciation
to date for each correcting entr. Also see correct depreciation
schedule later in solution.
Eul 6# 7++*
'orrect entr:
'ash 6+#+++
Accumulated 1epreciation: -rucks
G);7#+++ C ()7=#+++ ( F)H ?=#+++
"oss 7<#+++
-rucks 67+#+++
2ntr made:
'ash 6+#+++
-rucks 6+#+++
'orrecting entr I6:
Accumulated 1epreciation: -rucks ?=#+++
0etained 2arnings 7<#+++
-rucks 66+#+++
Eanuar 6# 7++=
'orrect entr:
Accumulated 1epreciation:
-rucks ()7:#<++ C )7:#<++) :6#7++
-rucks (new) 67+#+++
'ash 6;#?++
Substantive Tests of Property, Plant and Equipment 11-5
-rucks (old) 67?#+++
Jain on e(change 7:#=++
2ntr made:
-rucks 6;#?++
'ash 6;#?++
'orrecting entr I7:
-rucks (new) 6+7#7++
Accumulated 1epreciation: -rucks :6#7++
-rucks (old) 67?#+++
0etained earnings 7:#=++
Eul 6# 7++:
'orrect entr:
Accumulated 1epreciation: -rucks
()6:#+++ C )*+#+++ C )*+#+++ C )6:#+++) B+#+++
'ash 6+#+++
02 on disposition of trucks :+#+++
-rucks 6:+#+++
2ntr made:
'ash 6+#+++
&iscellaneous 0evenue :++
-rucks B#:++
'orrecting entr I*:
Accumulated 1epreciation: -rucks B+#+++
0etained 2arnings :+#:++
-rucks 6=+#:++
'orrect depreciation:
Truc$ 200+ 200, 200- 2006
6 )67#+++ D D D
7 )7+#?++ )7+#?++ )6+#=++ D
* )7:#<++ D D D
= )*+#+++ )*+#+++ )6:#+++ D
: D )6?#B7+ )6?#B7+ )6?#B7+ ()B=#<++ : @ )6?#B7+)
< D D )67#+++ )7=#+++ ()67+#+++ : @ )7=#+++)
-otal )??#=++ )<B#;7+ ):<#*7+ )=7#B7+
1epreciation (??#=++) (:=#*<+) (=6#=<+) (7?#:<+)
!nder (over)
11-6 Solutions Manual to Accompany Applied Auditing, 2006 Edition
statement D )6:#*<+ )6=#?<+ )6=#*<+
2ffect of errors on earnings (all reductions)
7++* )7<#+++
7++= )6:#*<+
7++: ):+#:++ C )6=#?<+ @ )<:#*<+
7++< )6=#*<+
'orrecting entr I=:
0etained 2arnings *+#77+
1epreciation 2(pense 6=#*<+
Accumulated 1epreciation ==#:?+
equirement !2#
'ompound AE2:
Accumulated 1epreciation: -rucks ()?=#+++ C
):6#7++ C )B+#+++ D )==#:?+) 6?+#<7+
0etained 2arnings ()7<#+++ D )7:#=++ C ):+#:++
C )*+#77+) ?6#*7+
1epreciation 2(pense 6=#*<+
-rucks ()66+#+++ C )6+7#7++ D )67?#+++
D )6=+#:++) 7;<#*++
11-9. AFH Company
.ote/ -his question requires knowledge that corrections of errors in prior ears
are recorded to 0etained 2arnings.
Ad.usting entries at 1ecember *6# 7++;# to correct the books. -he building and
machiner should be recorded in separate accounts. %gnore effect on income
ta(es.
)urchase price of )<+#+++ is a lump,sum purchase.
8uilding )*B#+++ <+>
&achiner 7<#+++ =+>
)<:#+++ 6++>
&achiner is valued at =+> ( )<+#+++ @ )7=#+++
8uilding is valued at <+> ( )<+#+++ @ )*<#+++
Substantive Tests of Property, Plant and Equipment 11-7
AE2 (6) &achiner
8uilding
7=#+++
*<#+++
)ropert# )lant# and 2quipment <+#+++
(7) &achiner
8uilding
7?+
=7+
)ropert# )lant# and 2quipment ;++
-he legal fees are allocated in the
same proportion as the original
purchase.
(*) 0etained 2arnings 7#=++
)ropert# )lant# and 2quipment 7#=++
-o correct the insurance paid in
7++: that was incorrectl recorded
in the asset account.
(=) )ropert# )lant# and 2quipment <#*6+
Accumulated 1epreciation: 8uilding
Accumulated 1epreciation: &achiner
0etained 2arnings
6#?76
*#+*:
6#=:=
-o remove the depreciation of
)<#*6+ incorrectl credited to
)ropert# )lant# and 2quipment in
7++:$ to credit the correct
depreciation to Accumulated
1epreciation: 8uilding ()*<#=7+
7+)$ to credit the correct
depreciation to Accumulated
1epreciation: &achiner ()7=#7?+
?)$ and to correct the amount
recorded as depreciation e(pense b
a credit to 0etained 2arnings.
(:) 0etained 2arnings 7#+++
)ropert# )lant# and 2quipment 7#+++
-o correct the 7++< repairs that were
incorrectl recorded in the asset
account.
(<) 8uilding 6+#+++
)ropert# )lant# and 2quipment 6+#+++
-o properl classif the 7++<
addition to the building.
11-8 Solutions Manual to Accompany Applied Auditing, 2006 Edition
(;) )ropert# )lant# and 2quipment <#?;B
Accumulated 1epreciation: 8uilding
Accumulated 1epreciation: &achiner
0etained 2arnings
7#*=;
*#+*:
6#=B;
-o remove the depreciation of
)<#?;B incorrectl credited to
)ropert# )lant# and 2quipment in
7++<$ to credit the correct
depreciation to Accumulated
1epreciation: 8uilding G)6#?76 C
()6+#+++ 6B)H (this assumes the
addition has the same life as the
building)$ to credit the correct
depreciation to Accumulated
1epreciation: &achiner ()7=#7?+
?)$ and to correct the amount
recorded as depreciation e(pense b
a credit to 0etained 2arnings.
(?) 0epairs 2(pense *#+++
)ropert# )lant# and 2quipment *#+++
-o e(pense the repairs for 7++;#
before the books are closed.
(B) %nsurance 2(pense
)repaid %nsurance
6#=++
6#=++
)ropert# )lant# and 2quipment 7#?++
-o correctl classif the 7++;
insurance pament# before the books
are closed.
(6+) &achiner ;#+++
)ropert# )lant# and 2quipment ;#+++
-o correctl classif the machiner
purchased in 7++;.
(66) "oss on 1isposal of &achiner
)ropert# )lant# and 2quipment
Accumulated 1epreciation: &achiner
6++
:++
7++
&achiner ?++
-o correctl record the disposal of
the machiner in 7++;$ the machine
is 7 ears old and so has )7++
related accumulated depreciation.
Substantive Tests of Property, Plant and Equipment 11-9
(67) )ropert# )lant# and 2quipment ;#=76
Accumulated 1epreciation: 8uilding
Accumulated 1epreciation: &achiner
1epreciation 2(pense
7#*=;
*#?6+
6#7<=
-o remove the depreciation of
);#=76 incorrectl credited to
)ropert# )lant# and 2quipment in
7++=$ to credit the correct
depreciation to Accumulated
1epreciation: 8uilding$ to credit the
correct depreciation to Accumulated
1epreciation: &achiner G()7=#7?+
C );#+++ , )?++) ?H$ and to correct
the depreciation e(pense before the
books are closed.
11-1. Briggs, Inc.
Ad.usting Eournal 2ntries , 67K*6K+<
(6) Argani/ation costs *#+++
Fi(ed assets *#+++
(7) 1iscount on bonds paable
%nterest e(pense
:#<:+
*:+
Fi(ed assets <#+++
(*) "and :++#+++
Fi(ed assets :++#+++
(=) Argani/ation costs :#+++
Fi(ed assets :#+++
(:) "and =#+++
Fi(ed assets =#+++
(<) "and ;#+++
Fi(ed assets ;#+++
(;) %nterest e(pense *+#+++
11-1 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Fi(ed assets *+#+++
(?) 4alaries e(pense :+#+++
Fi(ed assets :+#+++
(B) Argani/ation costs =+#+++
Fi(ed assets =+#+++
(6+) -a(es and licenses ;#+++
Fi(ed assets ;#+++
(66) 8uilding 7#+++#+++
Fi(ed assets 7#+++#+++
11-11. Aerospace Company
equirement !"#
Mac0inery !cost#
0aw materials used )6*#<++
"abor B#?++
%nstallation cost 6#=++
&aterials used in trial runs <++
Factor overhead (incremental) 7#B++
-otal )7?#*++
"ess: 'ash discount on materials =++
9et )7;#B++
Accumulated depreciation , 67K*6K+<
()7;#B++ ( 6+> ( =K67) ) B*+
Mac0ine Tools !cost# ) 7#7:+
"ess: Amorti/ation for 7++< (=K*< ( 7#7:+) 7:+
8alance# 67K*6K+< ) 7#+++
equirement !2# Ad.usting Eournal 2ntries , 67K*6K+<
(6) "oss on disposition of machiner ;+
&achiner ;+
(7) )rofit on construction <#B++
&achiner <#B++
Substantive Tests of Property, Plant and Equipment 11-11
(*) &achine tools 7#7:+
&achiner 7#7:+
(=) &achiner *#=<7
1epreciation e(pense
Accumulated depreciation , machiner
7#:*7
B*+
(:) )urchase discount =++
&achiner =++
(<) &achiner 7#B++
Factor overhead control 7#B++
(;) -ools e(pense 7:+
&achine tools 7:+
11-12. X! "anu#acturing Company
Ad.usting Eournal 2ntries , 67K*6K+<
AE2 (6) 0etained 2arnings 6#7++.++
&achiner 6#7++.++
-o correct error in recording
purchase of machine on
installment basis.
"ist )rice )<#+++
Add: %nstallation charges 7++
-otal )<#7++
-otal installments paid
L installation ;#=++
Financing charges )6#7++

(7) 0etained 2arnings 6<+.++
&achiner 6<+.++
-o take up cash discount on
machiner purchased on <K*+K+*.
(*) &achiner (new)
Allowance for depreciation
7#<7+.++
7#<7+.++
&achiner (old) :#7=+.++
-o write off machiner traded in
for a new one.
'ost of new machine:
'ash pament ):#+++
98M of old machine 7#<7+
-otal );#<7+
11-12 Solutions Manual to Accompany Applied Auditing, 2006 Edition
(=) Allowance for depreciation 7#<=+.++
&achiner
0etained earnings
7#+7:.++
<6:.++
-o correct the recording of sale of
machiner on 6K6K+:.
'ost )=#=++
"ess: Acc. 1epr. 7#<=+
98M 6#;<+
)roceeds (7#:++ , 67:) 7#*;:
Jain ) <6:
(:) Allowance for depreciation *#?++.++
&achiner
Jain on sale of machiner
*#7++.++
<++.++
-o correct the recording of sale of
machiner on 6+K6K+<.
'ost )=#+++
"ess: Acc. 1epr. *#?++
98M 7++
)roceeds ?++
Jain ) <++
(<) &achiner 6B#B++.<+
Allowance for depreciation 6B#B++.<+
-o set up clients depreciation
provisions from 7++7 to 7++<
erroneousl credited to the
&achiner acct. (4chedule A).
(;) 1epreciation e(pense
0etained earnings
7#6B+.B+
6#:*<.:+
Allowance for depreciation *#;7;.=+
-o correct error in depreciation
provisions of client (4chedule 8).
N5O &anufacturing 'orporation
&achiner
67K*6K+<
8alance per ledger (4chedule A) )6+#B<=.=+
Add (1educt) Ad.ustments
AE2 (6) ( 6#7++.++)
Substantive Tests of Property, Plant and Equipment 11-13
(7) ( 6<+.++)
(*) 7#<7+.++
(=) ( :#7=+.++)
(:) ( 7#+7:.++)
(<) ( *#7++.++)
6B#B++.<+
9et )6+#<B:.<+
8alance as ad.usted )76#<<+.++
'omposition:
&achine acquired on BK*+K+7 ) <#7++.++
&achine acquired on <K*+K+* ;#?=+.++
&achine acquired on <K*+K+= ;#<7+.++
-otal )76#<<+.++
N5O &anufacturing 'orporation
Allowance for 1epreciation
67K*6K+<
8alance per ledger ) +.++
Add (1educt) Ad.ustments
AE2 (*) ( 7#<7+.++)
(=) ( 7#<=+.++)
(:) ( *#?++.++)
(<) 6B#B++.<+
(;) *#;7;.=+
8alance as ad.usted )6=#:<?.++
'omposition:
A 1 , &achine acquired on BK*+K+7 ) :#7;+.++
, &achine acquired on <K*+K+* :#=??.++
, &achine acquired on <K*+K+= *#?6+.++
-otal )6=#:<?.++
Supporting Ana$ysis%
Sc0edule A Mac0inery Account per &edger
'ate Particulars 'r %r 1alance
6K6K+7 )urchase ) :#7=+.++
=#+++.++
=#=++.++ )6*#<=+.++
BK*+K+7 )urchase on installment
)aments from 4ept. to 1ec. 7#=++.++ 6<#+=+.++
11-14 Solutions Manual to Accompany Applied Auditing, 2006 Edition
6+K6+K+7 Freight and installation 7++.++ 6<#7=+.++
67K*6K+7 1epreciation (7+>) ) *#7=?.++ 67#BB7.++
200+ %nstallment paments for acquisition
on BK*+K+7 =#?++.++ 6;#;B7.++
<K*+K+* )urchase ?#+++.++ 7:#;B7.++
67K*6K+* 1epreciation (7+>) :#6:?.=+ 7+#<**.<+
<K*+K+= Acquisition , old machine traded in :#+++.++ 7:#<**.<+
67K*6K+= 1epreciation (7+>) :#67<.;7 7+#:+<.??
6K6K+: 4ale 7#*;:.++ 6?#6*6.??
67K*6K+: 1epreciation (7+>) *#<7<.*? 6=#:+:.:+
6+K6K+< 4ale ?++.++ 6*#;+:.:+
67K*+K+< 1epreciation (7+>) 7#;=6.6+ 6+#B<=.=+
Sc0edule 1 'epreciation Sc0edule
'ate
Acquired %ost 2 0 0 2 2 0 0 + 2 0 0 , 2 0 0 - 2 0 0 6
6K6K+7 ) :#7=+
=#+++
=#=++
) 6#+=?.++
?++.++
??+.++
)6#+=?.++
?++.++
??+.++
) :7=.++
?++.++
??+.++
) +.++
?++.++
+.++
) +.++
<++.++
+.++
BK*+K+7 <#7++ *6+.++ 6#7=+.++ 6#7=+.++ 6#7=+.++ 6#7=+.++
<K*+K+* ;#?=+ +.++ ;?=.++ 6#:<?.++ 6#:<?.++ 6#:<?.++
<K*+K+= ;#<7+ +.++ +.++ ;<7.++ 6#:7=.++ 6#:7=.++
-otal correct
depreciation provision ) *#+*?.++ )=#;:7.++ ) :#;;=.++ ):#6*7.++ )=#B*7.++
)rovision b client *#7=?.++ :#6:?.=+ :#67<.;7 *#<7<#*? 7#;=6.6+
(Aver) !nderprovision ) (76+.++) ) (=+<.=+) ) <=;.7? )6#:+:.<7 )7#6B+.B+
11-13. Sun$ig&t Ser'ice Center
Audit Ad.ustment 9o. 6 was determined as follows:
%lient2s Entry %orrect Entry
(6) -o record disposal of deliver truck:
'ash 7#+++
-rucks 7#+++
'ash 7#+++
Accum. 1epr. :+#+++
-rucks :+#+++
JainK"oss on 1isp. 7#+++
(7) -o record disposal of service truck:
'ash ?#+++
-rucks ?#+++
'ash ?#+++
Accum. 1epr. 6:#+++
Substantive Tests of Property, Plant and Equipment 11-15


JainK"oss on 1isp. 7#+++
-rucks 7:#+++
(*) -o record 7++< depreciation:
1epr. 2(pense B:#+++
Accum. 1epr. B:#+++
1epr. 2(pense 6+6#7:+
Accum. 1epr. 6+6#7:+
'orrect amount of depreciation determined as follows:
1isposal of service truck (6K7 ear) ) 7#:++
)urchase of deliver truck (6K7 ear) <#+++
)urchase of service truck (6K7 ear) 7#;:+
-wo deliver truck P 6+#+++ each 7+#+++
Fourteen service trucks P :#+++ each ;+#+++
-otal )6+6#7:+
Audit Ad.ustment as shown below:
Accumulated 1epreciation , -rucks :?#;:+
1epreciation 2(pense , -rucks <#7:+
-rucks <:#+++
b. -he audit ob.ectives for e(amining the asset and related accumulated
depreciation accounts are:
(6) E3istence or occurrence: -o establish the phsical presence of the assets
and the validit of the purchase and sale transactions.
(7) ig0ts and obligations: -o ascertain that 4unlight owns the trucks.
(*) 4aluation or allocation: -o determine that the compan has properl
recorded the acquisitions and disposals# and that depreciation has been
properl calculated for 7++<.
(=) Presentation and disclosure: -o resolve that all trucks are used in the
compans operations$ that full,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 e(pense is reflected as
an operating e(pense.
Auditing procedures appropriate in meeting the above ob.ectives are the
following:
(6) E3istence or occurrence, valuation or allocation, and o*ners0ip: -race to
last ears audit workpapers and e(amine titles for trucks purchased prior to
7++< (to determine that trucks are still owned b the client$ e(amine titles and
invoices for trucks purchased in 7++<$ e(amine remittance advices# .ournal
entries and bank statement credits for 7++< disposals$ and recompute
depreciation e(pense and gainKloss on disposals.
11-16 Solutions Manual to Accompany Applied Auditing, 2006 Edition
(7) Presentation and disclosure: 2(amine subsidiar ledger for full depreciated
assets and inquire as to whether in use. 0eclassif as necessar.
11-18 Solutions Manual to Accompany Applied Auditing, 2006 Edition
11-13. Sun$ig&t Ser'ice Center (C)*TI*+,-. . . . .e/uirements a an0 c1
SUNLIGHT SERVICE CENTER
TRUCKS
December 31, 2006
Description
Final
Balances
12/31/01 Additions Disposals
Final
Balances
12/31/02
Gain (loss)
on Disposals
Assets:
Delivery Truc! "1#0,000 " 60,000 "#1,000 "160,000 " 2,000 $
Service Truc! "3%#,000 " 2%,#00 "2#,000 "3%%,#00 &"2,000' &('
"#2#,000 ) " *%,#00 "%6,000 "#3%,#00 " 0
+ + + +
12,31,06- Le./er b0l01ce "602,#00 &('
(2E N34 1 " 6#,000 C3!5 "2#,000
12,31,06- (u.i5e. b0l01ce! "#3%,#00 (ccum4 De6r-
7" G 2003 2,#00 &1,2 yr4'
2008 #,000
200# #,000
2006 2,#00 &1,2 yr4'
Accumulated Depreciation: 1#,000
Delivery Truc! " 9#,000 " 26,000 &:' " #0,000 " %1,000
Service Truc! "22#,000 " %#,2#0 &C' 1#,000 &(' "2*#,2#0 :33 V0lue "10,000
"320,000 ) "101,2#0 " 6#,000 "3#6,2#0 S0le! "rice *,000 $
L3!! " 2,000
+ + + +
12,31,06- Le./er b0l01ce! " 9#,000 "81#,000
(2E N34 1 " 6,2#0 " #*,%#0 &:'
"101,2#0 "3#6,2#0 2 ; 10,000 20,000
1 ; 6,000 6,000 &1,2 yr4'
Ev0lu05e. .e6reci05i31 63licy 01. e!5im05e. live! <3r re0!310ble1e!!4 N3 e;ce65i31- 7" G " 26,000
(2E N34 1
De6reci05i31 e;6e1!e = 5ruc! " 6,2#0 18 ; #,000 %0,000
(ccum4 .e6reci05i31 = 5ruc! #*,%#0 1 ; 2,#00 2,#00 &1,2 yr4'
Truc! "6#,000 1 ; 2,%#0 2,%#0 &1,2 yr4'
" %#,2#0
) Tr0ce. 53 l0!5 ye0r>! ?3ri1/ 5ri0l b0l01ce + +335e. 01. cr3!!<335e.
$ Tr0ce. 53 remi5501ce 0.vice 01. c0!@ recei65! E;0mi1e. i1v3ice! 01. 5i5le!
Substantive Tests of Property, Plant and Equipment 11-19
11-14. Tatty Company2s
equirement !"#
-att 'ompan
Analsis of "and Account
for 7++;
8alance at Eanuar 6# 7++; ) 6++#+++
&and site number 62"/
Acquisition cost )6#+++#+++
'ommission to real estate agent <+#+++
'learing costs )6:#+++
"ess: Amounts recovered (:#+++) 6+#+++
-otal land site number <76 6#+;+#+++
&and site number 622/
Acquisition cost ) *++#+++
1emolition cost of building *+#+++
-otal land site number <77 **+#+++
8alance at 1ecember *6# 7++; )6#:++#+++
-att 'ompan
Analsis of 8uildings Account
for 7++;
8alance at Eanuar 6# 7++; )?++#+++
'ost of new building constructed on
land site number <77:
'onstruction costs )6:+#+++
2(cavation fees 66#+++
Architectural design fees ?#+++
8uilding permit fee 6#+++ 6;+#+++
8alance at 1ecember *6# 7++; )B;+#+++
-att 'ompan
Analsis of "easehold %mprovements Account
for 7++;
8alance at Eanuar 6# 7++; ):++#+++
2lectrical work *:#+++
'onstruction of e(tension to current
work area ()?+#+++ ( F) =+#+++
Affice space <:#+++
8alance at 1ecember *6# 7++; )<=+#+++
11-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
-att 'ompan
Analsis of &achiner and 2quipment Account
for 7++;
8alance at Eanuar 6# 7++; );++#+++
'ost of new machines acquired:
%nvoice price );:#+++
Freight costs 7#+++
!nloading charges 6#:++ ;?#:++
8alance at 1ecember *6# 7++; );;?#:++
equirement !2#
%tems in the fact situation which were not used to determine the answer to
0equirement 6 above# and where# or if# these items should be included in -atts
financial statements are as follows:
a. "and site number <7*# which was acquired for )<++#+++# should be included
in -atts balance sheet as land held for resale.
b. )ainting of ceilings for )6+#+++ should be included as a normal operating
e(pense in -atts income statement.
c. 0oalt paments of )6*#+++ should be included as a normal operating
e(pense in -atts income statement.
11-15. *ikko Company
.ote to 5nstructor: -his problem includes material from previous chapters.
6)7.A& E.T5ES '75.8 2006/
(6) "and 6;:#+++
a
Ardinar 4hares# )6+ par ;+#+++
Additional )aid,in 'apital 6+:#+++
a
)7: ( ;#+++
'ash :++#+++
9otes )aable :++#+++
8uilding ;++#+++
'ash ;++#+++
Substantive Tests of Property, Plant and Equipment 11-21
(7) &achine =*+#+++
Accumulated 1epreciation 6*:#+++
&achine :++#+++
'ash <+#+++
Jain on e(change :#+++
(*) 'ash ?++#+++
4ales 0evenue ?++#+++
'ost of Joods 4old *:+#+++
%nventor *:+#+++
Accounts )aable =++#+++
'ash =++#+++
%nventor =?+#+++
Accounts )aable =?+#+++
(=) 1ividends 1istributed (or 0etained 2arnings) B7#:++
'ash B7#:++
a
a
*;#+++ ( )7.:+

A'67STME.TS AT E.' )9 2006/
%nterest 2(pense 6?#+++
8uilding =7#+++
b
%nterest )aable <+#+++
a
a
):++#+++ ( 67>
b
G()+ C );++#+++) 7H ( 67>
1epreciation 2(pense , &achiner ;:#+++
a
Accumulated 1epreciation ;:#+++
a
a
()=*+#+++ D )::#+++) :
0ent 2(pense <+#+++
)repaid 0ent <+#+++
%ncome -a( 2(pense B+#<++
a
%ncome -a(es )aable B+#<++
a
4ee income statement
11-22 Solutions Manual to Accompany Applied Auditing, 2006 Edition
95.A.%5A& STATEME.TS 9) 2006/
9%33A 'A&)A95
%ncome 4tatement
For 5ear 2nded 1ecember *6# 7++<
4ales revenue )?++#+++
"ess: 2(penses
'ost of goods sold )*:+#+++
%nterest e(pense 6?#+++
1epreciation e(pense ;:#+++
0ent e(pense <+#+++ (:+*#+++)
Aperating income )7B;#+++
Jain on e(change of machiner :#+++
%ncome before income ta(es )*+7#+++
%ncome ta( e(pense (*+>) B+#<++
9et income )766#=++
2arnings per share (*;#+++ shares) ) :.;6
9%33A 'A&)A95
4tatement of 0etained 2arnings
For 5ear 2nded 1ecember *6# 7++<
8eginning retained earnings )7++#+++
Add: 9et income 766#=++
)=66#=++
"ess: 1ividends (B7#:++)
2nding retained earnings )*6?#B++
9%33A 'A&)A95
8alance 4heet
1ecember *6# 7++<
Assets
'ash ) :?;#:++
a
%nventor :?+#+++
b
"and 6;:#+++
8uilding ;=7#+++
&achine )=*+#+++
"ess: Accumulated depreciation (;:#+++) *::#+++
-otal Assets )7#=*B#:++
Substantive Tests of Property, Plant and Equipment 11-23
&iabilities and Equities
Accounts paable ) =?+#+++
c
9otes paable :++#+++
%nterest paable <+#+++
%ncome ta(es paable B+#<++
-otal "iabilities )6#6*+#<++
Ardinar shares# )6+ par ) *;+#+++
d
Additional paid,in capital <7+#+++
e
0etained earnings *6?#B++
-otal 4hareholders 2quit )6#*+?#B++
-otal "iabilities and 4hareholders 2quit )7#=*B#:++
a
):=+#+++ C ):++#+++ D );++#+++ D )<+#+++ C )?++#+++ D )=++#+++ D )B7#:++
@ ):?;#:++
b
)=:+#+++ D )*:+#+++ C )=?+#+++ @ ):?+#+++
c
)=++#+++ D )=++#+++ C )=?+#+++ @ )=?+#+++
d
)*++#+++ C );+#+++ @ )*;+#+++
e
):6:#+++ C )6+:#+++ @ )<7+#+++
11-16. App$e Company
equirement "
-otal e(penses# 7++: @ !nits sold ( (1epletion C 1epreciation
C )roduction costs)
@ (< ( B#+++) ( ()*.++
a
C )+.7+
b
C )?.++)
@ :=#+++ ( )66.7+
@ )<+=#?++
a
1epletion rate @
@
@
@ )*.++ per ton
'ost D 0esidual Malue
"ife in tons
)7#+++#+++ ()6++#+++ D )7++#+++)
;++#+++
)7#6++#+++
;++#+++
11-24 Solutions Manual to Accompany Applied Auditing, 2006 Edition
b
1epreciation rate @
@
@ )+.7+ per ton
equirement 2
'ost of inventor# 67K*6K7++: @ < ( (6+#+++ D B#+++) ( )66.7+
@ )<;#7++
equirement +
-otal e(penses# 7++< @ !nits sold ( (1epletion C 1epreciation
C )roduction costs)
@ (< ( )66.7+) C G(67 ( 6+#+++) D <#+++H (
()*.?=
a
C )+.7:<
b
C )?.++)
@ )<;#7++ ( )6#*;?#B==
@ )6#==<#6==
a
9ew depletion rate @
@
@
@
@ )*.?= per ton
b
9ew depreciation rate @
@
@
'ost D 0esidual Malue
"ife in tons
)6:+#+++ D )6+#+++
;++#+++
8ook value D 0esidual Malue
0emaining "ife
G)7#+++#+++ (<+#+++ ( )*.++)H D ()6++#+++ D )7++#+++)H
:++#+++
)6#?7+#+++ C )6++#+++
:++#+++
)6#B7+#+++
:++#+++
8ook value D 0esidual Malue
0emaining "ife
G)6:+#+++ (<+#+++ ( )+.7+)H D )6+#+++
:++#+++
)67?#+++
:++#+++
Substantive Tests of Property, Plant and Equipment 11-25
@ )+.7:< per ton
11-17.
6anuary ", 200"
2quipment :#+++#+++
'ash :#+++#+++
'ecember +", 200"
1epreciation 2(pense :++#+++
Accumulated 1epreciation :++#+++
'ecember +", 2002
1epreciation 2(pense :++#+++
Accumulated 1epreciation :++#+++
6anuary ", 200+
2quipment <7:#+++
Accumulated 1epreciation 67:#+++
0evaluation 4urplus :++#+++
'ecember +", 200+
1epreciation 2(pense :<7#:++
Accumulated 1epreciation :<7#:++
0evaluation 4urplus <7#:++
0etained 2arnings <7#:++
'ecember +", 200,
1epreciation 2(pense :<7#:++
Accumulated 1epreciation :<7#:++
0evaluation 4urplus <7#:++
0etained 2arnings <7#:++
'ecember +", 200-
1epreciation 2(pense :<7#:++
Accumulated 1epreciation :<7#:++
0evaluation 4urplus <7#:++
0etained 2arnings <7#:++
6anuary ", 2006
6) 0evaluation surplus *67#:++
11-26 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Accumulated depreciation *67#:++
2quipment <7:#+++
7) %mpairment loss K 1epreciation e(pense :++#+++
Accumulated depreciation :++#+++
or
0evaluation surplus *67#:++
%mpairment loss K 1epreciation e(pense :++#+++
Accumulated depreciation 6?;#:++
2quipment <7:#+++
11-18. Sweetie Company
equirement !a#
1ecember *6# 7++<
"oss on %mpairment K 1epreciation........................................................................................ *#7++#+++
Accumulated 1epreciationQ2quipment................................................................. *#7++#+++
'ost )B#+++#+++
Accumulated depreciation 6#+++#+++
'arring amount ?#+++#+++
Fair value =#?++#+++
"oss in impairment )*#7++#+++
equirement !b#
1ecember *6# 7++;
1epreciation 2(pense............................................................................................................ 6#7++#+++
Accumulated 1epreciationQ2quipment................................................................. 6#7++#+++
9ew carring amount )=#?++#+++
!seful life = ears
1epreciation per ear )6#7++#+++
equirement !c#
'arring value# 67.*6.+; had impairment not been recogni/ed on 67.*6.+<
'ost )B#+++#+++
Accumulated depreciation
()6#+++#+++ C )7#+++#+++) *#+++#+++
9et carring value# 67.*6.+; )<#+++#+++
Fair value# 67.*6.+; ):#6++#+++
Substantive Tests of Property, Plant and Equipment 11-27
'arring value# 67.*6.+; *#<++#+++
0ecover of impairment loss )6#:++#+++
2ntr will be:
Accumulated depreciation 6#:++#+++
1epreciation e(pense or
Jain on recover of previousl
recogni/ed impairment 6#:++#+++
11-19. Bobby Corporation
equirement !"#
8A885 'A0)A0A-%A9
"and Account (4ite 9umber :+6)
As of 4eptember *+# 7++;
Acquisition cost )<++#+++
0eal estate brokers commission *<#+++
"egal fees <#+++
-itle guarantee insurance 6?#+++
'ost of ra/ing e(isting building ;:#+++
8alance# 4eptember *+# 7++; );*:#+++
equirement !2#
8A885 'A0)A0A-%A9
'apitali/ed 'ost of Affice 8uilding
As of 4eptember *+# 7++;
'ontract cost )*#+++#+++
)lan# specifications# and blueprints 67#+++
Architects fees for design and supervision B:#+++
'apitali/ed interest,,7++< ()B++#+++ ( 6=> ( 6+K67) 6+:#+++
'apitali/ed interest,,7++; ()7#*++#+++ ( 6=> ( BK67) 7=6#:++
-otal capitali/ed cost# 4eptember *+# 7++; )*#=:*#:++
equirement !+#
8A885 'A0)A0A-%A9
'omputation of 1epreciation of Affice 8uilding
!sing 6:+> 1eclining 8alance &ethod
For the 5ear 2nded 1ecember *6# 7++;
'apitali/ed cost )*#=:*#:++
6:+> declining balance rate
(6++> =+ ears @ 7.:> ( 6.:) ( *.;:>
Annual depreciation ) 67B#:+<
11-28 Solutions Manual to Accompany Applied Auditing, 2006 Edition
1epreciation Actober 6 to 1ecember *6# 7++;
()67B#:+< ( *K67) ) *7#*;;