CHAPTER 7 – Audit of Property,

Plant, & Equipment

Problem 1
The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing
P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds
was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing
P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer
machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer
machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery
account).

Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full year’s depreciation is charged in the year of acquisition and none in
the year of disposition.

Question
1 The adjusted balance of the Machinery account at December 31, 2006 is:
a. P 290,000 b. P 370,000 c. P 260,000 d. P 300,000

2 The correct depreciation expense for the machinery for the year ended December 31,
2006 is:
a. P 37,000 b. P 29,000 c. P 30,000 d. P 26,000

Solution
OE: Cash 20,000
Machinery 20,000
CE: Cash 20,000
Accumulated dep’n. 30,000
Machinery 40,000
Gain on sale 10,000
Adj: Accumulated dep’n 30,000
Machinery 20,000
Gain on sale 10,000
---------------------------------------------
OE: Machinery 90,000
Cash 90,000
CE: Machinery 100,000
Accumulated dep’n 22,000
Loss on sale 18,000
Machinery 50,000
Cash 90,000
Adj: Machinery 10,000
Accumulated dep’n 22,000
Loss on sale 18,000
Machinery 50,000
---------------------------------------------
1 A P350,000 – P20,000 + P10,000 -P50,000
2 B P290,000 x 10%

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Problem 2
The Land account was debited for P300,000 on March 31, 2006 for an adjoining piece of
land which was acquired in exchange for 15,000 shares of Rizal Corporation’s own stock
with a par value of P10. At the time of the exchange, the shares were selling at P24.
Transfer and legal fees of P20,000 were paid and charged to Professional Fees.

1. The adjusting entry required is:

DEBIT CREDIT
a. Land 140,000 Prem. on cap. stock 140,000
b. Land 160,000 Capital stock 150,000
Cash 10,000
c. Land 80,000 Professional fees 20,000
Prem. on cap. stock 60,000
d. None of these

2. On the Land acquired in No. 6, real estate taxes of P20,000 were paid in December,
2006, including P5,000 for the first quarter of the year. (Ignore penalty for delayed
payment). Land account was debited for the taxes paid.

The adjusting entry is:

DEBIT CREDIT
a. Taxes 15,000 Land 15,000
b. Taxes 5,000 Land 5,000
c. Land 5,000 Cash 20,000
Taxes 15,000
d. None of these

Solution
1. C OE: Land 300,000
Common Stock 150,000
APIC 150,000
Professional fees 20,000
Cash 20,000
CE: Land 380,000
Common stock 150,000
Cash 20,000
APIC 210,000
Adj: Land 80,000
APIC 60,000
Professional fees 20,000
2. A OE: Land 20,000
Cash 20,000
CE: Land 5,000
Taxes 15,000
Cash 20,000
Adj: Taxes 15,000
Land 15,000

Problem 3
Two independent companies, KAYA and MUYAN, are in the home building business. Each
owns a tract of land for development, but each company would prefer to build on the other’s
land. Accordingly, they agreed to exchange their land. An appraiser was hired and from
the report and the companies records, the following information was obtained:

KAYA Co.’s Land MUYAN Co.’s Land

Cost (same as book value) P 800,000 P 500,000
Market value, per appraisal 1,000,000 900,000

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The exchange of land was made and based on the difference in appraised values, MUYAN
Company paid P100,000 cash to KAYA Company.

Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
a. P 20,000 b. P 60,000 c. P 100,000 d. P 200,000

2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
exchange in the amount of:
a. P 0 b. P 100,000 c. P 300,000 d. P 400,000

3. After the exchange, KAYA Company record its newly acquired land at:
a. P 700,000 b. P 720,000 c. P 800,000 d. P 900,000

4. After the exchange, MUYAN Company record its newly acquired land at:
a. P 1,000,000 b. P 900,000 c. P 600,000 d. P 500,000

Solution
Muyan Kaya

Land 1,000,000 Cash 100,000

Cash 100,000 Land 900,000
Land 500,000 Land 800,000
Gain 400,000 Gain on sale 200,000

1 D
2. D
3. D
4. A

Problem 4
On an audit engagement for 2007, you handled the audit of fixed assets of Esmedina
Copper Mines. This mining company bought the exploration rights of Maharishi Exploration
on June 30, 2007 for P7,290,000. Of this purchase price, P4,860,000 was allocated to
copper ore which had remaining reserves estimated at 1,620,000 tons. Esmedina Copper
Mines expects to extract 15,000 tons of ore a month with an estimated selling price of P50
per ton. Production started immediately after some new machines costing P600,000 was
bought on June 30, 2007. These new machineries had an estimated useful life of 15 years
with a scrap value of 10% of cost after the ore estimated has been extracted from the
property, at which time the machineries will already be useless.

Among the operating expenses of Esmedina Copper Mines at December 31, 2007 were:

Depletion expense P 405,000

Depreciation of machineries 40,000

Questions
1. Recorded depletion expense was
a. Overstated by P90,000 c. Overstated by P135,000
b. Understated by P90,000 d. Understated by P135,000

2. Recorded depreciation expense was

a. Overstated by P10,000 c. Overstated by P20,000
b. Understated by P10,000 d. Understated by P20,000

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3. The adjusted depletion at year-end amounted to:
a. P 270,000 b. P 315,000 c. P 495,000 d. P 540,000

4. The adjusted depreciation at year-end amounted to:

a. P 20,000 b. P 30,000 c. P 50,000 d. P 60,000

Solution
P4,860,000/1,620,000 x 15,00o tons x 6 months = P270,000
P600,000 – P60,000/9 years * x 6/12 = P30,000
*1,620,000 tons/180,000 = 9 years
1. C P405,000 - (4,860,000/1,620,000 x 90,000 units) = P135,000 overstated
2. A P40,000 - (600,000 - 60,000)/1,620,000 x 90,000 = P10,000 overstated
3. A
4. B

Problem 5
In connection with your examination of the financial statements of the Maraat Corporation
for the year 2007, the company presented to you the Property, Plant and Equipment section
of its balance sheet as of December 31, 2006, which consists of the following:

Land P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 2,800,000

The following transactions occurred during 2007:

1. Land site number 5 was acquired for P4,000,000. Additionally, to acquire the land,
Maraat Corporation paid a P240,000 commission to a real estate agent. Costs of
P60,000 were incurred to clear the land. During the course of clearing the land, timber
and gravel were recovered and sold for P20,000.

2. The second tract of land (site number 6) with a building was acquired for P1,200,000.
The closing statement indicated that the land value was P800,000 and the building value
was P400,000. Shortly after acquisition, the building was demolished at a cost of
P120,000. The new building was constructed for P600,000 plus the following costs:

Excavation fees P 44,000

Architectural design fees 32,000
Building permit fees 4,000
Imputed interest on funds used during construction 24,000

The building was completed and occupied on September 1, 2007.

3. The third tract of land (site number 7) was acquired for P2,400,000 and was put on the
market for resale.

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4. Extensive work was done to a building occupied by Maraat Corporation under a lease
agreement. The total cost of the work was P500,000, which consisted of the following:

Particular Amount Useful life

Painting of ceilings P 40,000 one year
Electrical work 140,000 Ten years
Construction of extension to current
working area 320,000 Thirty years

The lessor paid one-half of the costs incurred in connection with the extension to the
current working area.

5. A group of new machines was purchased under a royalty agreement which provides for
payment of royalties based on units of production for the machines. The invoice price of
the machines was P300,000, freight costs were P8,000, unloading charges were P6,000,
and royalty payments for 2007 were P52,000.

Question
1. Land at year-end is
a. P 5,480,000 b. P 5,900,000 c. P 6,000,000 d. P 8,400,000

2. Buildings at year-end is
a. P 3,800,000 b. P 3,880,000 c. P 4,200,000 d. P 4,280,000

3. Leasehold improvements at year-end is

a. P 2,300,000 b. P 2,560,000 c. P 2,600,000 d. P 2,720,000

4. Machinery and equipment at year-end is

a. P 3,100,000 b. P 3,108,000 c. P 3,114,000 d. P 3,166,000

Solution
1. Land 4,300,000
Cash 4,300,000
Cash 20,000
Land 20,000
2. Land 1,320,000
Cash 1,320,000
Building 680,000
Cash 680,000
3. Land - investment 2,400,000
Cash 2,400,000
4. Operating expenses 40,000
Leasehold improvements 300,000
Cash 340,000
5. Machinery 314,000
Royalty expenses 52,000
Cash 366,000
Answer:
1. C 2. B 3. A 4. C

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Problem 6
Norie Company’s property, plant and equipment and accumulated depreciation balance at
December 31, 2005 are:
Accumulated
Cost Depreciation
Machinery and equipment P 1,380,000 P 367,500
Automobiles and trucks 210,000 114,320
Leasehold improvements 432,000 108,000

Additional information:

Depreciation methods and useful lives:

Machinery and equipment – straight line; 10 years

Automobiles and trucks – 150% declining balance; 5 years, all acquired after 2000.
Leasehold improvements – straight line

Depreciation is computed to the nearest month.

Salvage values are immaterial except for automobiles and trucks, which have an estimated
salvage values equal to 10% of cost.

Other additional information:

- Norie Company entered into a 12-year operating lease starting January 1, 2003. The
leasehold improvements were completed on December 31, 2002 and the facility was
occupied on January 1, 2003.

- On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P325,000. Installation cost of P44,000 was incurred.

- On August 30, 2006, Norie Company purchased new automobile for P25,000.

- On September 30, 2006, a truck with a cost of P48,000 and a carrying amount of
P30,000 on December 31, 2005 was sold for P23,500.

- On December 30, 2006, a machine with a cost of P17,000, a carrying value of P2,975 on
date of disposition, was sold for P4,000.

Questions

1. The gain on sale of truck on September 30, 2006 is:

a. P 0 b. P 250 c. P 2,680 d. P 6,500

2. The gain on sale of machinery on December 30, 2006 is:

a. P 0 b. P 13,000 c. P 2,725 d. P 1,025

3. The adjusted balance of the property, plant, and equipment as of December 31, 2006 is:
a. P 1,813,000 b. P 2,351,000 c. P 2,387,000 d. P 2,388,500

4. The total depreciation expense to be reported on the income statement for the year
ended December 31, 2006 is:
a. P 138,000 b. P 185,402 c. P 221,404 d. P 245,065

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5. The carrying amount of property, plant, and equipment as of December 31, 2006 is:
a. P 1,290,547 b. P 1,578,545 c. P 1,587,497 d. P 1,617,322

Solution
Entries:
Machinery and equipment 369,000
Cash 369,000
Automobile and trucks 25,000
Cash 25,000
Cash 23,500
Accumulated depreciation 24,750
Automobile and trucks 48,000
Gain on sale 250
Accumulated deprecation - 12/31/02 18,000
Depreciation - 9 mos. (P30,000 x 30% x 9/12) 6,750
Total 24,750

Cash 4,000
Accumulated depreciation 14,025
Machinery and equipment 17,000
Gain on sale 1,025
Depreciation 221,404
Accumulated depreciation - mach. 156,450
Accumulated depreciation - auto. 28,954
Accumulated depreciation - improv. 36,000

Machinery and equipment - P1,380,000/10 years =P 138,000

P 369,000/10 years x 6/12 = 18,450 P 156,450
Leasehold improvement - P432,000/12 years = 36,000
Automobile and trucks - CV of unsold item P 65,680 x 30% = 19,704
Sold item - 30,000 x 30% x 9/12 = 6,750
Current purchase P25,000 x 30% x 4/12= 2,500 28,954
Answer:
1. B 2. D 3. B 4. C 5. B

Problem 7
Information pertaining to Highland Corporation’s property, plant and equipment for 2005 is
presented below:

Account balances at January 1, 2005:

Debit Credit
Land P 150,000
Buildings 1,200,000
Accumulated depreciation – Buildings P263,100
Machinery and equipment 900,000
Accumulated depreciation – Machinery and equipment 250,000
Automotive equipment 115,000
Accumulated depreciation – Automotive equipment 84,600

Depreciation data:
Depreciation method Useful life

Buildings 150% declining-balance 25 years

Machinery and equipment Straight-line 10 years
Automotive equipment Sum-of-the-years’-digits 4 years
Leasehold improvements Straight-line -

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The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.

Transactions during 2005 and other information are as follows:

a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2-
year-old car with a cost of P18,000 and book value of P5,400. The new car has a cash
price of P24,000; the market value of the trade-in is not known.

b. On April 1, 2005, a machine purchased for P23,000 on April 1, 2000, was destroyed by
fire, Highland recovered P15,500 from its insurance company.

c. On May 1, 2005, costs of P168,000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on
December 31, 2011.

d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P280,000; additional costs of P5,000 for freight and P25,000 for installation were
incurred.

e. Highland determined that the automotive equipment comprising the P115,000 balance
at January 1, 2005, would have been depreciated at a total amount of P18,000 for the
year ended December 31,2005.

Questions
Based on the information above, answer the following questions:

1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2005 is:
a. P 1,180,000 b. P 1,187,000 c. P 1,202,500 d. P 1,210,000

2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2005 is:
a. P 139,000 b. P 121,000 c. P 115,000 d. P 109,000

3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2005 is:
a. P 72,000 b. P 263,100 c. P 335,100 d. P 319,314

4. The adjusted balance of Accumulated Depreciation of Machinery and Equipment at

December 31, 2005 is:
a. P 330,775 b. P 342,275 c. P 351,475 d. P 353,775

5. The adjusted balance of Accumulated Depreciation of Automotive Equipment at

December 31, 2005 is:
a. P 90,600 b. P 96,000 c. P 103,200 d. P 108,600

6. The adjusted balance of Accumulated Depreciation of Leasehold Improvements at

December 31, 2005 is:
a. P 0 b. P 14,000 c. P 14,700 d. P 16,800

7. The total adjusted balance of Accumulated Depreciation of Property and Equipment at

December 31, 2005 is:
a. P 534,375 b. P 698,475 c. P 774,389 d. P 804,475

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8. The total gain(loss) from disposal of assets at December 31, 2005 is:
a. P 5,400 b. P 4,000 c. P 2,600 d. P 1,400

9. The adjusted book value of Building at December 31, 2005 is:

a. P 1,128,000 b. P 936,900 c. P 880,686 d. P 864,900

10. The adjusted book value of Leasehold Improvement at December 31, 2005 is:
a. P 168,000 b. P 154,000 c. P 153,300 d. P 151,200

Solution
Entries:
a. Automobile Equipment 24,000
(cash paid, P20,000 plus P4,000 trade-in allow.)
Accum. Depreciation 12,600
Loss on trade-in 1,400
Automobile Equipment 18,000
Cash 20,000
* Trade in allowance is the difference between the cash price and the purchase
price of the equipment.
b. Cash 15,500
Accum. Depreciation 11,500
Machinery and equipment 23,000
Gain on asset disposal 4,000
c. Leasehold improvements 168,000
Cash 168,000
d. Machinery and equipment 310,000
Cash 310,000

Computation of the Depreciation Expense and Accumulated Depreciation:

Building: Book value 1/1/05 (P1,200,000 - P263,100) - P936,900

X declining rate (1/25 x 150%) 6% .
Depreciation for the year P 56,214
Plus; Accum. Depreciation - 1/1/05 263,100
Accum. Depreciation - 12/31/05 P319,314

Machinery and Equipment: Balance - 1/1/05 P900,000

Less: machine destroyed by fire 23,000
P877,000
Divided by 10 yrs. P 87,700
Dep’n of the Machine destroyed by fire:
(P23,000/10 x 3/12) 575
Dep’n of the machine purchase for the year:
(P310,000/10 x 6/12) 15,500
Total Depreciation P103,775
Plus: Accum. Dep’n - 1/1/05 250,000
Less: Accum. Dep’n - destroyed by fire ( 11,500)
Accum. Depreciation - 12/31/05 P342,275

Automotive Equipment: Depreciation on P115,000 balance, 1/1/05 P 18,000

Less: Depreciation on car traded in
(P18,000 x 2/10) 3,600
Adjusted depreciation on the beg. Bal. P 14,400
Dep’n on the 1/2/05 Purchase:
(P24,000 x 4/10) 9,600
Total Depreciation expense P 24,000
Plus: Accum. Depreciation - 1/1/05 84,600
Less: Accum. Dep’n - traded equipment ( 12,600)
Accumulated depreciation - 12/31/05 P 96,000

Leasehold Improvements: P168,000/80 months x 8 mos. for 2005 P 16,800

ANSWER: 1. B 2. B 3. D 4. B 5. B
6. D 7. C 8. C 9. C 10. D

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Problem 8
The schedule of Gerasmo Company’s property and equipment prepared by the client
follows:

PLANT ASSETS
Land P 320,000
Building 540,000
Machinery and Equipment 180,000
Total 1,040,000

ACCUMULATED DEPRECIATION
Building P 81,000
Machinery and Equipment 54,000
Total P 135,000

Further examination revealed the following:

1. All property and equipment were acquired on January 2, 2003.

2. Assets are depreciated using the straight-line method. The building and equipment are
expected to benefit the company for 20 years and 10 years respectively. Salvage values
of the assets are negligible.
3. An equipment with an original cost of P40,000 was sold on December 30, 2005 for
P32,000. The proceeds were credited to other operating income account.
4. In 2005, The company recognized an appreciation in value of land and building as
determined by the Company’s engineers. The appraisal was recorded as follows:

Debit Credit
Land 70,000
Building 60,000
Accum. depreciation 6,000
Revaluation increment 124,000
Questions
1. Property and equipment at year-end is:
a. P 753,000 b. P 870,000 c. P 910,000 d. P 990,000

2. Accumulated depreciation at year-end is:

a. P 114,000 b. P 117,000 c. P 123,000 d. P 135,000

Solution
OE: Cash 32,000
Other ope. income 32,000
CE: Cash 32,000
Accumulated dep’n 12,000
Property & equip. 40,000
Other ope. income 4,000
Adj: Accum. dep’n 12,000
Other ope. income 28,000
Property & equip. 40,000
-----------------------------------------------
Adj: Revaluation increment 124,000
Accumulated dep’n 6,000
Property & equipment 130,000
-----------------------------------------------
Per book depreciation - bldg 75,000
Per audit depreciation - bldg 72,000 (540,000-60,000/20 x 3 yrs)
Adjustment 3,000

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Adj: Accum. Depreciation 3,000
Operating expenses 3,000
Answer:
1. B 2. A

Problem 9
The following information pertains to Marlisa Company’s delivery trucks:

Date Particulars Debit Credit

1/1/04 Trucks 1, 2, 3, & 4 3,200,000
3/15/05 Replacement of truck 3 tires 25,000
7/1/05 Truck 5 800,000
7/10/05 Reconditioning of truck 4, which was
damaged in a collision 35,000
9/1/05 Insurance recovery on truck 4 accident 33,000
10/1/05 Sale of truck 2 600,000
4/1/06 Truck 6 1,000,000 150,000
5/2/06 Repainting of truck 4 27,000
6/30/06 Truck 7 720,000
12/1/06 Cash received on lease of truck 7 22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Date Particulars Debit Credit

12/31/04 Depreciation expense 300,000
12/31/05 Depreciation expense 300,000
12/31/06 Depreciation expense 300,000

a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the
selling party allowed a P50,000 trade in value for the old truck.

b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000
being given for the new truck.

c. The depreciation rate is 20% by unit basis.

d. Unit cost of Trucks 1 to 4 is at P800,000 each.

Questions
1. What is the loss on trade-in of truck 3?
a. P 50,000 b. P 430,000 c. P 510,000 d. P 560,000

2. The correct cost of truck 5 is

a. P 560,000 b. P 610,000 c. P 800,000 d. P 850,000

3. The book value of truck 5 at December 31, 2006 is

a. P 850,000 b. P 595,000 c. P 560,000 d. P 510,000

4. What is the loss in trade-in of Truck 1?

a. P 150,000 b. P 250,000 c. P 290,000 d. P 410,000

5. The correct cost of truck 6 is

a. P 590,000 b. P 800,000 c. P 850,000 d. P 1,000,000
6. The carrying value of Truck 6 at December 31, 2006 is

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 a. P 501,500 b. P 680,000 c. P 850,000 d. P 1,100,000

7. The gain (loss) on sale of truck 2 is

a. P 80,000 b. P 331,600 c. P 495,000 d. P 496,200

8. The book value of truck 4 at December 31, 2006 is

a. P 320,000 b. P 331,600 c. P 495,000 d. P 496,200

9. The 2000 depreciation expense is understated by

a. P 92,000 b. P 252,000 c. P 292,000 d. P 372,000

10. The cost of repainting truck 4 should have been charged to:
a. Claims receivable - insurance company
b. Retained earnings
c. Accumulated depreciation
d. Repairs and maintenance

11. Which of the following controls would most likely allow for a reduction in the scope of the
auditor’s tests of depreciation expense?
a. Review and approval of the periodic property depreciation entry by a supervisor who
does not actively participate in its preparation.
b. Comparison of property account balances for the current year with the current year
budget and prior-year actual balance.
c. Review of the miscellaneous revenue account for salvage credits and scrap sales of
partially depreciated property.
d. Authorization of payment of vendors’ invoices by a designated employee who is
independent of the property receiving functions.

Solution
1. C
Cost of truck 3 800,000
Accumulated depreciation (P800,000 x 20% x 1.5) 240,000
Net book value 560,000
Trade-in allowance 50,000
Loss on trade-in 510,000
2. D
3. B (P850,000-(P850,000x20%x1.5)
4. B
Cost of truck 1 800,000
Less: Accumulated depreciation (P800,000 x 20% / 12 mos. x 27 mos.) 360,000
Net book value 440,000
Trade-in allowance 150,000
Loss on trade-in 290,000
5. D
6. C [P1,000,000 - (1,000,000 x 20% x 9/12)]
7. A
Cost of truck 2 800,000
Accumulated depreciation (P800,000 x 20% / 12 mos. x 21 mos.) 280,000
Net book value 520,000
Selling price 600,000
Gain on sale 80,000
8. A ([P800,000 - (P800,000 x 20% x 3)]
9. C
Truck 1 (P800,000 x 20% 3/12) 40,000 -
Truck 2 - -
Truck 3 - -
Truck 4 (P800,000 x 20%) 160,000 800,000
Truck 5 (P850,000 x 20%) 170,000 850,000
Truck 6 (P1,000,000 x 20% x 9/12) 150,000 1,000,000

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 Truck 7 (P720,000 x 20% x 6/12) 72,000 720,000
Depreciation per audit 592,000 3,370,000
Depreciation per records 300,000
Understatement 292,000
10. D
11. B

Problem 10
Information pertaining to SAILADIN CORPORATION’s property, plant and equipment for
2006 is presented below.

Account balances at January 1, 2006

Debit Credit
Land 6,000,000
Buildings 48,000,000
Accumulated depreciation – bldg. 10,524,000
Machinery and equipment 36,000,000
Accumulated depreciation – mach. & equip. 10,000,000
Automotive equipment 4,600,000
Accumulated depreciation – auto. Equip. 3,384,000

Depreciation data:
Depreciation method Useful life

Buildings 150% declining-balance 25 years

Machinery and equipment Straight-line 10 years
Automotive equipment Sum-of-the-years-digits 4 years
Leasehold improvements Straight-line -

The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.

Transactions during 2006 and other information are as follows:

(a) On January 2, 2006, Sailadin Corporation purchased a new car for P800,000 cash
and trade-in of a 2-year car with a cost of P720,000 and a book value of P216,000. The
new car has a cash price of P960,000; the market value of the trade-in is not know.

(b) On April 1, 2006, a machine purchased for P920,000 on April 1, 2001, was
destroyed by fire. Sailadin Corporation recovered P620,000 from its insurance company.

(c) On May 1, 2006, costs of P6,720,000 were incurred to improve leased office
premises. The leasehold improvements have a useful life of 8 years. The related lease
terminates on December 31, 2012.

(d) On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P11,200,000; additional costs of P200,000 for freight and P1,000,000 for installation
were incurred.

(e) Sailadin Corporation determined that the automotive equipment comprising the
P4,600,000 balance at January 1, 2006, would have been depreciated at a total amount
of P720,000 for the year ended December 31, 2006.

13
Questions
1. What is the depreciation on building for 2006?
a. P 2,998,080 b. P 2,880,000 c. P 2,248,560 d. P 1,499,040

2. What is the book value of the building at December 31, 2006?

a. P 35,976,960 b. P 35,227,440 c. P 34,596,000 d. P 34,477,920

3. What is the depreciation on machinery and equipment for 2006?

a. P 4,220,000 b. P 4,197,000 c. P 4,151,000 d. P 4,128,000

4. What is the gain on machine destroyed by fire?

a. P 620,000 b. P 460,000 c. P 300,000 d. P 160,000

5. What is the balance of the Accumulated Depreciation – Machinery and Equipment at

December 31, 2006?
a. P 13,777,000 b. P 13,760,000 c. P 13,691,000 d. P 13,231,000

6. What is the depreciation on automotive equipment for 2006?

a. P 1,104,000 b. P 960,000 c. P 816,000 d. P 720,000

7. What is the gain (loss) on car traded-in?

a. P 240,000 b. P (240,000) c. P 56,000 d. P (56,000)

8. What is the book value of automotive equipment at December 31, 2006?

a. P 1,720,000 b. P 1,144,000 c. P 1,000,000 d. P 712,000

9. What is the depreciation on leasehold improvements for 2006?

a. P 756,000 b. P 672,000 c. P 630,000 d. P 560,000

10. What is the book value of leasehold improvements at December 31, 2006?
a. P 6,160,000 b. P 6,090,000 c. P 6,048,000 d. P 5,964,000

Solution
1. C
Book Value, 1/1/06 (P48,000,000 - P10,524,000) P 37,476,000
150% declining-balance rate (1/25 x 150%) x 6%
Depreciation on building P 2,248,560
2. B
Cost of building P 48,000,000
Less: Accumulated depreciation (P10,524,000 + P 2,248,560) 12,772,560
Book value of building, 12/31/06 P 35,227,440
3. C
Balance, 1/106 P 36,000,000
Less: Machine destroyed by fire 920,000
Balance P 35,080,000
Depreciation 10%
3,508,000
Machine destroyed by fire (P920,000 x 10% x 3/12) 23,000
Purchased 7/1/06 (P12,400,000 x 10% x 6/12) 620,000
Total depreciation on machinery and equipment 4,151,000
4. D
Insurance recovery 620,000
Less: Book value of machine destroyed
(Cost 920,000 - Accum. dep’n (P 920,000 x 10% x 5) 460,000
Gain on recovery from insurance company 160,000
5. C
Balance, 1/1/06 10,000,000
Add: depreciation for 2006 4,151,000

14
 Total 14,151,000
Less: Machinery destroyed by fire (P920,000 x 10% x 5) 460,000
Accumulated depreciation - machinery and equip. 13,691,000
6. B
Depreciation on P4,600,000 balance on 1/1/06 (given) 720,000
Less: Depreciation on car traded-in, 1/1/06 (P720,000 x 2/10) 144,000 576,000
Car purchased, 1/2/06 (P960,000 x 4/10) 384,000
Total depreciation on automotive equipment for 2006 960,000
7. C
Book value of car traded-in (given) 216,000
Less: Trade-in allowance (P960,000 - P800,000) 160,000
Loss on trade-in 56,000
8. C
Cost of the machinery and equipment: Balance, 1/1/06 4,600,000
Car purchased, 1/2/06 960,000 Car traded in (720,000) 4,840,000
Accumulated depreciation: Balance, 1/1/06 3,384,000
Depreciation for 2006 960,000
Car traded in (P720,000 - P216,000) ( 504,000) 3,840,000
Book value of automotive equipment, 12/31/06 1,000,000
9. B
Cost of leasehold improvements 6,720,000
Divide by term of lease, 5/1/06 - 12/31/2012 80 mos
Depreciation per month 84,000
Depreciation, 5/1 - 12/31 (P84,000 x 8 mos) 672,000
10. C
Cost of leasehold improvements 6,720,000
Less: Accumulated depreciation (see No. 9) 672,000
Book value, 12/31/06 6,048,000

Problem 11
You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year
ended December 31, 2006. You gathered the following information pertaining to the
company’s Equipment and Accumulated Depreciation accounts.

EQUIPMENT
1.1.06 Balance P 446,000 9.1.06 No. 6 sold P 9,000
6.1.06 No. 12 36,000 12.31.06 Balance 474,000
9.1.3 Dismantling
of No. 6 1,000 ______
P 483,000 P 483,000

ACCUMULATED DEPRECIATION – EQUIPMENT

12.31.06 Balance P 271,400 1.1.06 Balance P 224,000
______ 12.31.06 2006 Dep’n 47,400
P 271,400 P 271,400

The following are the details of the entries above:

1. The company depreciates equipment at 10% per year. The oldest equipment owned
is seven years old as of December 31, 2006.

2. The following adjusted balances appeared on your last year’s working papers:

Equipment P 446,000
Accumulated depreciation 224,000

15
3. Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on
September 1, 2006, for P9,000.

4. Included in charges to the Repairs Expense account was an invoice covering

installation of Machine No. 12 in the amount of P2,500.

5. It is the company’s practice to take a full year’s depreciation in the year of

acquisition and none in the year of disposition.

Questions
1. The gain/(loss) on sale of Machine 6 is:
a. P 1,000 b. P 500 c. P (1,000) d. P (500)

2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2006 is:

a. P 446,000 b. P 452,000 c. P 454,500 d. P 475,500

3. The Depreciation expense – Equipment of TRIUMPH CORPORATION at December 31,

2006 is:
a. P 45,200 b. P 45,450 c. P 46,525 d. P 53,525

4. The entry to correct the sale of Machine 6 is:

a. Loss on sale of equipment 1,000
Accumulated depreciation 21,000
Equipment 22,000
b. Accumulated depreciation 22,500
Equipment 22,000
Gain on sale 500
c. Accumulated depreciation 21,500
loss on sale of equipment 500
Equipment 22,000
d. Accumulated depreciation 23,000
Equipment 22,000
Gain on sale of equipment 1,000

5. The Depreciation Expense at December 31, 2006 is:

a. Overstated by P6,125 c. Understated by P1,950
b. Understated by P6,125 d. Overstated by P1,950

Solution
OE: Cash 9,000
Equipment 1,000
Equipment 9,000
Cash 1,000
CE: Cash 9,000
Accum. dep’n 21,000
Loss on sale 1,000
Equipment 30,000
Cash 1,000
-------------------------------------------
Adj: Accum. dep’n 21,000
Loss on sale 1,000
Equipment 22,000
-------------------------------------------
Adj: Equipment 2,500
Repairs expense 2,500

16
-------------------------------------------
Adj: Accum. dep’n 1,950
Depreciation 1,950
Answer: 1. C 2. C 3. B 4. A 5. D

Problem 12
Information pertaining to Eddie Vic Corporation’s property, plant and equipment for 2005 is
presented below:

Account balances at January 1, 2005

Debit Credit
Land P 1,500,000
Building 12,000,000
Accum. depreciation-building P 2,631,000
Machinery and equipment 9,000,000
Accum. depreciation-Mach. and Eqpt 2,500,000
Automotive Equipment 1,150,000
Accum. depreciation-Automotive Eqpt 846,000

Depreciation method and useful life

Building – 150% declining balance; 25 years

Machinery and equipment – Straight-line; 10 years
Automotive equipment – Sum-of-the-years’-digits; 4 years
The salvage value of the depreciable assets is immaterial
Depreciation is computed to the nearest month.

Transactions during 2005 and other information:

On January 2, 2005, Eddie Vic purchased a new car for P350,000 cash and trade-in of a 2-
year old car with a cost of P490,000 and a book value of P147,000. The new car has a cash
price of P520,000; the market value of the trade-in is not known.

On April 1, 2005, a machine purchased for P230,000 on April 1, 2000, was destroyed by
fire. Eddie Vic recovered P155,000 from its insurance company.

On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P2,800,000; additional costs of P50,000 for freight and P250,000 for installation were
incurred.

Eddie Vic determined that the automotive equipment comprising the P1,150,000 balance at
January 1, 2005, would have been depreciated at a total amount of P180,000 for the year
ended December 31, 2005.

Questions
1. Depreciation expense for building at December 31, 2005 is:
a. P 749,520 b. P 720,000 c. P 682,150 d. P 562,140

2. Depreciation expense for machinery and equipment at December 31, 2005 is:
a. P 1,049,250 b. P 1,037,750 c. P 1,032,000 d. P 877,000

3. Depreciation expense for Automobile equipment at December 31, 2005 is:

a. P 388,000 b. P 312,000 c. P 290,000 d. P 180,000

17
4. Total depreciation expense for 2005 is:
a. P 2,047,750 b. P 2,009,900 c. P 1,978,770 d. P 1,889,890

5. Total gain on asset disposal for 2005 is:

a. P 63,000 b. P 40,000 c. P 23,000 d. P 17,000

6. Total accumulated depreciation of building at December 31, 2005 is:

a. P 3,380,520 b. P 3,351,000 c. P 3,313,150 d. P 3,193,140

7. Total book value of property, plant, and equipment at December 31, 2005 is:
a. P 19,141,110 b. P 19,021,100 c. P 18,983,250 d. P 18,953,730

8. The property, plant and equipment at December 31, 2005 is:

a. P 19,141,110 b. P 19,021,100 c. P 18,983,250 d. P 18,953,730

9. The total cost of property, plant and equipment at December 31, 2005 is:
a. P 26,670,010 b. P 26,579,520 c. P 26,550,000 d. P 26,459,510

10. Total accumulated depreciation of property, plant, and equipment at December 31, 2005
is:
a. P 7,648,910 b. P 7,596,270 c. P 7,506,300 d. P 7,408,890

Solution

Schedule of Accumulated Depreciation December 31, 2005

Building Mach.& Auto. Eqpt. Total
Equipment
Balance, 1.1.05 P2,631,000 P2,500,000 P846,000 P5,977,000
Add depreciation for 2005 562,140 1,037,750 290,000 1,889,890
P3,193,140 P3,537,750 P1,136,000 P7,866,890
Deduct acc. depr. related to
Mach, destroyed by fire
(5 x 10% x P230,000) 115,000
Car traded in (490,000 - 147,000) _________ _________ 343,000 458,000
Balance, 12.31.05 P3,193,140 P3,422,750 P 793,000 P7,408,890

SCHEDULE OF DEPRECIATION EXPENSE For the Year Ended December 31, 2005
Building
Book value , 1/1/05 (P12,000,000 - P2,631,000) P9,369,000
150% declining balance rate (100% / 25) x 1.5 x 6%
Total depreciation on building P562,140

Machinery and Equipment

Balance, 1.1.05 less machine destroyed by fire P8,770,000
Depreciation x 10% 877,000
Depr. on Machine destroyed by fire, 4.1.05
(P230,000 x 10% x 3/12) 5,750
Depr. on machine purchased on 7.1.05
(P3,100,000 x 10% x 6/12) 155,000
Total depreciation on mach. and equipment P1,037,750

Automotive Equipment
Depreciation on P1,115,000 bal. on 1.1.05 P180,000
Deduct depr. on car traded in , 1.2.05
(SYD 3rd year 2/10 x P490,000) (98,000) 82,000
Depr. on car purchased , 1.2.05 (P520,000 x 4/10) 208,000
Total depreciation on automotive equipment 290,000
Total depreciation expense for 2005 P1,889,890

18
Gain or Loss from Disposal of Assets For the Year Ended December 31, 2005
Gain on machine destroyed by fire
Insurance recovery P155,000
Book value of machine destroyed
(P230,000 - (5 x 10% x P230,000) 115,000 P40,000
Gain on car traded in on new car purchase
Book value of car traded in P147,000
Trade-in allowed (P520,000 - P350,000) 170,000 23,000
Total gain on asset disposals for 2005 P63,000

Property, Plant and Equipment December 31, 2005

COST ACCUMULATED BOOK VALUE
DEPRECIATION
Land P 1,500,000 ------ P1,500,000
Building 12,000,000 3,193,140 8,806,860
Machinery and Equipment 11,870,000 3,422,750 8,447,250
Automotive equipment 1,180,000 793,000 387,000
Totals P26,550,000 P7,408,890 P19,141,110
Answer:
1. D 2. B 3. C 4. D 5. A
6. D 7. A 8. A 9. C 10. D

Problem 13
RUANN Service Center is wholly owned subsidiary of RUANN Stores. The company’s function
is to deliver furniture and appliances sold by the parent and to service electronics and
appliances, also sold by the parent company. RUANN Stores, the parent, operates twelve
retail outlets in a large metropolitan area. The service center uses three delivery trucks and
fifteen service vehicles for delivering goods and for making service calls related to large
appliances and electronic equipment. For small appliances and electronics, customers
typically bring these to the service center for repair.

At January 1, 2006, RUANN Service center reported audited balances of P525,000 and
P320,000 for “Trucks” and “Accumulated Depreciation – Trucks,” respectively. The vehicles
consisted of
 Three delivery trucks costing P50,000 each; and
 Fifteen service trucks costing P25,000 each.

Accumulated depreciation was

 Delivery trucks, P95,000; and
 Service trucks, P225,000

The company depreciates all trucks on a straight-line basis, using a five- year life and zero
salvage value. One-half year’s depreciation is taken in the year of acquisition and in the
year of disposal.

During 2006, the following transactions and journal entries were completed by the
company:

2/2/06: Sold one delivery truck for P2,000. the truck was fully depreciated at
12/31/07.
Cash P2,000
Trucks P2,000

3/1/06: Bought one delivery truck for P60,000.

Trucks P60,000
Cash P60,000

19
3/15/06: Sold one service truck for P8,000. This truck was purchased 6/15/03 for
P25,000 and the accumulated depreciation, according to RUANN’s subsidiary
ledger, at the date of sale was P12,500
Cash P8,000
Trucks P8,000

7/25/06: Bought one service truck for P27,500.

Truck P27,500
Cash P27,500

12/31/06: Recorded depreciation for 2006:

Two delivery trucks @ P10,000 each = P20,000
Fifteen service trucks @ P5,000 each = 75,000
Total P95,000

Depreciation Expense – Trucks P95,000

Accumulated depreciation P95,000

Questions
1. The adjusted balance of Delivery Truck at December 31, 2006 is:
a. P 537,500 b. P 217,500 c. P 210,000 d. P 160,000

2. The adjusted balance of Service Truck at December 31, 2006 is:

a. P 537,500 b. P 402,500 c. P 377,500 d. P 217,500

3. The Accumulated Depreciation – Delivery Truck at December 31, 2006 is:

a. P 86,000 b. P 76,000 c. P 75,000 d. P 65,000

4. The Accumulated Depreciation – Service Truck at December 31, 2006 is:

a. P 300,000 b. P 285,250 c. P 285,000 d. P 284,750

5. The Carrying Value of Delivery Truck at December 31, 2006 is:

a. P 461,500 b. P 145,000 c. P 142,500 d. P 74,000

6. The Carrying Value of Service Truck at December 31, 2006 is:

a. P 237,500 b. P 117,500 c. P 92,250 d. P 67,250

7. The Gain/Loss on Disposal of Trucks at December 31, 2006 is:

a. P 10,000 b. P 8,000 c. P 2,000 d. P 0

8. The Depreciation Expense of Trucks at December 31, 2006 is:

a. P 106,250 b. P 101,250 c. P 98,750 d. P 95,000

Solution
2/2/06 OE: Cash 2,000
Delivery truck 2,000
CE: Cash 2,000
AD - Del. truck 40,000
Loss on sale 8,000
Delivery truck 50,000
Adj: AD - del. truck 40,000
Loss on sale 8,000
Delivery truck 48,000
3/15/06 OE: Cash 8,000
Service truck 8,000

20
 CE: Cash 8,000
AD - ser. truck 15,000
Loss on sale 2,000
Service truck 25,000
Adj: AD - serv. truck 15,000
Loss on sale 2,000
Service truck 17,000
12/31/06 Depreciation 11,250
AD - del. truck 11,000
AD - service truck 250
Del. truck Serv. truck
Per book 95,000 20,000 75,000
Per audit 106,250 31,000 75,250
Adjustment 11,250 11,000 250

Depreciation - Delivery truck

Disposed truck 5,000
Undisposed truck 20,000
(2 x P10,000)
Purchased during the year 6,000
(P60,000/5 x 1/2) ______
Total 31,000

Depreciation - service truck

Disposed truck 2,500
Undisposed truck 70,000
(14 x P5,000)
Purchased during the year 2,750
(P27,500/5 x 1/2) ______
Total 75,250
Answer:
1. D 2. C 3. A 4. B 5. D
6. C 7. A 8. A

Problem 14
You are engaged in the examination of the financial statements of the PAUL COMPANY and
are auditing the Machinery and Equipment Account and the related depreciation accounts
for the year ended December 31, 2005. Your permanent file contains the following
schedules:

MACHINERY AND EQUIPMENT

Year Balance 2004 2004 Balance
________ 12.31.03 Retirements Additions 12.31.04
1991-1994 P 800,000 P 210,000 P 590,000
1995 40,000 40,000
1996
1997
1998 390,000 390,000
1999
2000 530,000 530,000
2001
2002 420,000 420,000
2004 ________ _________ P 570,000 570,000
P 2,180,000 P 210,000 P 570,000 P 2,540,000

21
ACCUMULATED DEPRECIATION
Year Balance 2004 2004 Balance
________ 12.31.03 Retirements Additions 12.31.04
1991-1994 P 784,000 P 210,000 P 16,000 P 590,000
1995 34,000 4,000 38,000
1996
1997
1998 214,500 39,000 253,500
1999
2000 185,500 53,000 238,500
2001
2002 63,000 42,000 105,000
2003
2004 ________ _________ 28,500 28,500
P 1,281,000 P 210,000 P 182,500 P 1,253,500

A transcript of the Machinery and Equipment account for 2005 follows:

MACHINERY AND EQUIPMENT

Date Item Debit Credit

2005
Jan. 1 Balance forwarded P 2,540,000
Mar. 1 Burnham grinder 120,000
May 1 Air compressor 750,000
June 1 Power lawnmower 60,000
June 1 Lift truck battery 32,000
Aug. 1 Rockwood saw 15,000
Nov. 1 Electric spot welder 450,000
Nov. 1 Baking oven 280,000
Dec. 1 Baking oven 32,500 __________
P 4,264,500 P 15,000
_________ 4,249,500
P 4,264,500 P 4,264,500

Your examination reveals the following information:

a. The company uses a ten-year life for all machinery and equipment for depreciation
purposes. Depreciation is computed by the straight-line method. Six month’s
depreciation is recorded in the year of acquisition or retirement. For 2005, the company
recorded depreciation of P280,000 on machinery and equipment.

b. The Burnham grinder was purchased for cash from a firm in financial distress. The
chief engineer and a used machinery dealer agreed that the practically new machine was
worth P180,000 in the open market.

c. For production reasons, the new air compressor was installed in a small building
that was erected in 2005 to house the machine and will also be used for general storage.
The cost of the building, which has a 25-year life, was P500,000 and is included in the
P750,000 voucher for the air compressor.

d. The power lawnmower was delivered to the house of the company president for
personal use.

22
e. On June 1, the battery in a battery powered lift truck was accidentally damaged
beyond repair. The damaged battery was included at a price of P60,000 in the P420,000
cost of the lift truck purchased on July 1, 2002. The company decided to rent a
replacement battery rather than buy a new battery. The P32,000 expenditure is the
annual rental for the battery paid in advance, net of a P4,000 allowance for the scrap
value of the damaged battery that was returned to the battery company.

f. The Rockwood saw sold on August 1 had been purchased on August 1, 2001, for
P150,000. The saw was in use until it was sold.

g. On September 1, the company determined that a production casting machine was

no longer needed and advertised it for sale for P180,000, after determining from a used
machinery dealer that its market value. The casting machine had been purchased for
P500,000 on September 1, 2000.

h. The company elected to exercise the option under a lease-purchase agreement to

buy the electric spot welder. The welder had been installed on February 1, 2005, at a
monthly rental of P10,000.

i. On November 1, a baking oven was purchased for P1,000,000. A P280,000 down

payment was made and the balance will be paid in monthly installment over a three year
period. The December 1 payment included interest charges of P12,500. Legal title to
the oven will not pass to the company until the payments are completed.

Questions
1. The entry to record the adjustment of depreciation expense at December 31, 2005 is:
a. Depreciation expense 19,500
Accumulated depreciation 19,500
b. Depreciation expense 37,250
Accumulated depreciation 37,250
c. Accumulated deprecation 19,500
Depreciation expense 19,500
d. Accumulated depreciation 37,250
Depreciation expense 37,250

2. Depreciation Expense at December 31, 2005 is:

a. P 260,500 b. P 262,500 c. P 280,000 d. P 342,500

3. The entry to record the adjustment in “item c” at December 31, 2005 is:
a. Building 500,000
Machinery and equipment 500,000
b. Machinery and equipment. 750,000
Building 750,000
c. Machinery and equipment 500,000
Building 500,000
d. No adjustment

4. The total Loss on disposal of equipment at December 31, 2005 is:

a. P 38,000 b. P 70,000 c. P 93,000 d. P 108,000

5. The total rental expense in item “h” at December 31, 2005 is:
a. P 45,000 b. P 90,000 c. P 125,000 d. none

23
6. The total interest expense at December 31, 2005 is:
a. P 10,000 b. P 12,500 c. P 25,000 d. P 50,000

7. The total accumulated depreciation of the machinery and equipment at December 31,
2005 is:
a. P 773,000 b. P 791,000 c. P 816,000 d. P 855,000

8. The accumulated depreciation of the machinery and equipment at December 31, 2005 is
overstated by:
a. P 480,500 b. P 462,500 c. P 437,500 d. P 398,500

9. The Total Machinery and Equipment (gross) at December 31, 2005 is:
a. P 3,740,000 b. P 2,310,500 c. P 2,030,500 d. P 1,940,500

10. The net book value of Machinery and Equipment at December 31, 2005 is:
a. P 1,518,000 b. P 1,494,500 c. P 1,503,000 d. P 2,924,000

Solution

a. Accumulated Depreciation 19,500

Depreciation Expense 19,500

Correct depreciation expense for 2005

1995 acquisition : 40,000 x 10% x ½ P2,000
1998 “ : 390,000 x 10% 39,000
2000 “ : (500,000 x 10% x ½) + (30,000 x 10%) 28,000
2002 “ : (60,000 x 10% x ½) + (360,000 x 10%) 39,000
2004 “ : 570,000 x 10% 57,000
2005 “ : (120,000 + 250,000 + 540,000 + 1M) x 10% x ½ 95,500 P260,500
Amount recorded 280,000
Overstatement P 19,500

b. No AJE necessary

c. Buildings 500,000
Machinery & Equipment 500,000

d. Receivable from Officers 60,000

Machinery & Equipment 60,000

e. 1 Accumulated Depreciation 18,000

Loss on Disposal of Assets 42,000
Machinery & Equipment 60,000
Cost P60,000
Less acc. Depreciation (60,000 x 10% x 3) 18,000
Book value P42,000
Trade in value 4,000
Loss P38,000

e.2 Equipment rental expense (7/12) 21,000

Prepaid equipment rental 15,000
Machinery & Equipment 32,000
Loss on Disposal of Assets 4,000

f. Accumulated Depreciation 150,000

Machinery & Equipment 135,000
Gain on Disposal of Assets 15,000

g. Other Assets - Mach. Held for sale 180,000

Accumulated depreciation 250,000
Loss on Disposal of Assets 70,000
Machinery & Equipment 500,000

24
 BV ( P500,000 x 5/10) P250,000
Estimated selling price 180,000
Loss P70,000

h. Machinery & Equipment 90,000

Equipment Rental Expense 90,000
Rental for the period Feb. 1 to October 31.

i. Machinery & Equipment 687,500

Interest expense 12,500
Equipment contract payable 700,000
Answer:
1. C 2. A 3. A 4. D 5. D
6. B 7. C 8. C 9. A 10. D

Problem 15
You are engaged in the examination of the financial statements of PATIENCE CORPORATION
for the year ended December 31, 2005. The chief accountant of the client has prepared the
accompanying analyses of the Property, Plant, and Equipment and related accumulated
depreciation accounts. You have traced the beginning balances to your prior year’s audit
working papers.

All plant assets are depreciated on the straight-line basis (no residual value taken into
consideration) based on the following estimated service lives: building, 25 years, and all
other items, 10 years. The company’s policy is to take one-half year’s depreciation on all
assets additions and disposals during the year.

PATIENCE CORPORATION
Analysis of Property, Plant, and Equipment, and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2005

Description Final Assets Assets Per ledger

12/31/04 Additions Retirements 12/31/05
Land P 4,225,000 P 500,000 P 0 P 4,725,000
Buildings 1,200,000 475,000 0 1,675,000
Machinery & Equipment 3,850,000 404,000 260,000 3,994,000
P 9,275,000 P 1,379,000 P 260,000 P 10,394,000

Description Final Assets Assets Per ledger

12/31/04 Additions Retirements 12/31/05
Buildings P 600,000 P 51,500 P 651,500
Machinery & Equipment 1,732,500 392,200 2,124,700
P 2,332,500 P 443,700 P 2,776,200

Your examination revealed the following information:

1. On April 1, the company entered into a 10-year lease contract for a die-casting
machine, with annual rentals of P50,000 payable in advance every April 1. The lease is
cancelable by either party (60 day’s written notice is required), and there is no option to
renew the lease or buy the equipment at the end of the lease. The estimated service life
of the machine is 10-years with no residual value. The company recorded the die
casting machine in the Machinery and Equipment account at P404,000, the present
value at the date of the lease, and P20,200 applicable to the machine has been included
in depreciation expense for the year.

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2. The company completed the construction of a wing on the plant building on June 30.
The service life of the building was not extended by this addition. The lowest
constructions bid received was P475,000, the amount recorded in the Building account.
Company personnel constructed the addition at a cost of P460,000 (materials,
P175,000; labor, P155,000; and overhead, P130,000).

3. On August 18, P500,000 was paid for paving and fencing a portion of land owned by
the company and used as a packing lot for employees. The expenditure was charged to
the Land account.

4. The amount shown in the Machinery and Equipment asset retirement column
represents cash received on September 5 upon disposal of a machine purchased in July,
1998 for P480,000. The chief accountant recorded depreciation expense of P35,000 on
this machine in 2005.

5. Davao City government donated land and building appraised at P1,000,000 and
P4,000,000, respectively, to PATIENCE CORPORATION for a plant. On September 1, the
company began operating the plant. Since no costs were involved, the chief accountant
made no entry for the above transaction.

Questions
1. PATIENCE CORPORATION’s Land balance at December 31, 2005 is:
a. P 5,725,000 b. P 5,225,000 c. P 4,725,000 d. P 4,225,000

2. PATIENCE CORPORATION’s Building balance at December 31, 2005 is:

a. P 5,690,000 b. P 5,675,000 c. P 5,660,000 d. P 5,645,000

3. PATIENCE CORPORAITON’s Machinery and Equipment balance at December 31, 2005 is:
a. P 4,090,000 b. P 3,590,000 c. P 3,370,000 d. P 3,110,000

4. PATIENCE CORPORATION’s Accumulated Depreciation – Building at December 31, 2005

is:
a. P 766,000 b. P 747,000 c. P 737,500 d. P 651,500

5. PATIENCE CORPORATION’s Accumulated Depreciation – Machinery and Equipment at

December 31, 2005 is:
a. P 1,819,900 b. P 1,788,700 c. P 1,757,500 d. P 1,752,700

6. PATIENCE CORPORATION’s Depreciation Expense – Building at December 31, 2005 is:

a. P 227,000 b. P 211,500 c. P 147,000 d. P 137,500

7. PATIENCE CORPORATION’s Depreciation Expense – Machinery and Equipment at

December 31, 2005 is:
a. P 372,000 b. P 361,000 c. P 337,000 d. P 276,000

8. PATIENCE CORPORATION’s Depreciation Expense – Land Improvements at December

31, 2005 is:
a. P 50,000 b. P 25,000 c. P 18,750 d. P 0

9. PATIENCE CORPORATION’s Net Book Value of Building at December 31, 2005 is:
a. P 5,023,500 b. P 4,924,000 c. P 4,913,000 d. P 4,907,500

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10. PATIENCE CORPORATION’s Net Book Value of Machinery and Equipment at December
31, 2005 is:
a. P 2,332,500 b. P 1,770,100 c. P 1,612,500 d. P 1,357,300

Solution

Adjusting Journal Entries as of December 31, 2005

(1) Equipment Rental Expense (P50,000 x 9/12) 37,500
Prepaid Equipment Rental 12,500
Obligations under Capital Lease 354,000
Machinery and Equipment 404,000

(2) Profit on Construction 15,000

Buildings ( 475,000 - 460,000) 15,000

(3) Land Improvements 500,000

Land 500,000

(4) Accumulated Depreciation - Mach. & Eqpt. 336,000

Machinery & Equipment 220,000
Gain on sale of machinery 116,000
P260,000 - (480,000 x 3/10) = P116,000 gain

(5) Land 1,000,000

Building 4,000,000
Gain from Donation 5,000,000

(6) Depreciation Expense 95,667

Accumulated Depreciation - Buildings 95,667
Depreciation Expense for 2005
1,200,000 x 4% P48,000
460,000 / 12 years x ½ 19,167
4,000,000 x 4% x ½ 80,000 P147,167
Amount recorded 51,500
Adjustment to be made P95,667

(7) Accumulated Depreciation - Mach. & Equipment 31,200

Depreciation Expense 31,200
Depreciation expense for 2005
(3,850,000 - 480,000) x 10% P337,000
480,000 x 10% x ½ 24,000 P361,000
Amount recorded 392,200
Adjustment to be made (P31,200)

(8) Depreciation Expense 25,000

Accumulated Depreciation - Land Improvements 25,000
(P500,000 x 10% x 6/12)
Answer:
1. B 2. C 3. C 4. B 5. C
6. C 7. B 8. B 9. C 10. C

Problem 16

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You are engaged to examine the financial statement of the Rabago Manufacturing
Corporation for the year ended December 31, 2004. The following schedules for property,
plant, and equipment and the related accumulated depreciation accounts have been
prepared by your client. The opening balances agree with your prior year’s audit working
papers.
Rabago Manufacturing Corporation
Analysis of Property, Plant, and Equipment and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2004
COST
Final Per Books
12/31/03 Additions Retirements 12/31/04
Land P 450,000 P 100,000 P P 550,000
Buildings 2,400,000 350,000 2,750,000
Machinery/Equip 2,770,000 808,000 520,000 3,526,000
P 5,620,000 P1,258,000 P 520,000 P 6,826,000

ACCUMULATED DEPRECIATION
Final Per Books
12/31/03 Additions Retirements 12/31/04

Buildings P 1,200,000 P 103,000 P 1,303,000

Machinery/Equip 546,500 313,600 860,100
P 1,746,200 P 416,600 P 2,163,100

Further investigation revealed the following:

a. All equipment is depreciated on the straight-line basis (with no salvage value) based on
the following estimated lives: Building – 25 years, all other items 10 years.

b. The company entered into a 10-year lease contract for a derrick machine with annual
rental of P100,000, payable in advance every April 1. The parties to the contract
stipulated that a 30-day written notice is required to cancel the lease. Estimated useful
life is 10 years. The derrick was recorded under machinery and equipment at P808,000
and P60,000 applicable to the machine was included in the depreciation expense during
the year.

c. The company finished construction of a new building wing in June 30. The useful life of
the main building was not prolonged. The lowest construction bid was P350,000 which
was the amount recorded. Company personnel constructed the building at a total cost
of P330,000.

d. P100,000 was paid for the construction of a parking lot which was completed on July 1,
2004. The expenditure was charged to land.

e. The P520,000 equipment under retirement column represent cash received on October
1, 2004 for a machinery bought in October 1, 2000 for P960,000. The bookkeeper
recorded depreciation expense of P72,000 on this machine in 2004.

f. Mr. Rabago, the company’s president donated land and building appraised at P200,000
and P400,000 respectively to the company to be used as plant site. The company began
operating the plant on September 30, 2004. Since no money was involved, the
bookkeeper did not make any entry for the above transaction.

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Questions
1. The balance of rent expense as of December 31, 2004 is:
a. P 0 b. P 25,000 c. P 75,000 d. P 100,000

2. The balance of prepaid rent as of December 31, 2004 is:

a. P 0 b. P 25,000 c. P 75,000 d. P 100,000

3. The life of the building wing is

a. 25 years b. 11 years c. 12 years d. 13 years

4. The carrying value of the building as of December 31, 2004 is

a. P 1,447,000 b. P 1,816,250 c. P 1,820,250 d. P 1,827,400

5. The value of the land account for balance sheet presentation as of December 31, 2004
is:
a. P 450,000 b. P 545,000 c. P 650,000 d. P 750,000

6. The loss on the disposal of the machinery sold for P520,000 is

a. P 0 b. P 30,000 c. P 56,000 d. P 152,000
Solution
1. C
The lease is considered as operating lease since it is cancelable.
Equipment rental expense - P100,000 x 9/12 = P P75,000
2. B
Prepaid rental expense - P100,000 x 3/12 = P 25,000
3. C
Age of the building as of December 31, 2003
P1,200,000/P2,400,000 = 50% x 25 years = 12.5 years
Expired life for the current year = .5 year
Remaining life of the building wing = 12.5 - .5 = 12 years
4. B
Building per schedule 2,400,000
Accumulated depreciation (1,296,000) 1,104,000
Building wing 330,000
Accumulated depreciation
(P330,000/12 x 6/12) ( 13,750) 316,250
Building - donation 400,000
Accumulated depreciation
(P400,000/25 x 3/12) ( 4,000) 396,000
Total carrying value 1,816,250
5. C
Land per schedule 450,000
Land - donation 200,000
650,000
6. C
Cost of the machine sold 960,000
Accumulated depreciation
(P960,000/10 x 4) 384,000
Book value 576,000
Proceeds from sale 520,000
Loss on sale 56,000

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Problem 17
On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of
Crame Corporation. Plant assets consists of:

Land P 100,000
Leasehold improvements 190,000
Equipment 450,000
Total per WBS P 740,000

The land was acquired on October 1, 2003, at a cost of P500,000. Crame Corporation made
a cash downpayment of P100,000 and signed a 18% mortgage note payable in four equal
annual installments of P100,000. The first interest and principal payment is due on October
1, 2004. No interest has been accrued as of December 31, 2003.

In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which
was charged to operating expenses.

You ascertained that due to obsolescence, computer equipment with an original cost of
P80,000 and accumulated depreciation of P16,000 at January 1, 2003 had suffered a
permanent impairment in value and, as a result, should have a carrying value of only
P40,000 at the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 4 to 2 years. No entry has yet been made in the books. For
2003, the company recorded depreciation of P16,000 for the said equipment.

At present, Crame Corporation’s office and warehouse are located in a rented building. The
rental contract was signed on July 1, 2003 and has a term of five (5) years renewable for
another five (5) years. On October 1, 2003, Crame Corporation spent P190,000 to install
walls and fixtures. The leasehold improvements have a useful life of five years. No
amortization has been booked as of December 31, 2003.

Questions
1. The adjusted cost of land amounted to:
a. P 528,000 b. P 510,000 c. P 500,000 d. P 410,000

2. The carrying value of leasehold improvements as of December 31, 2003 amounted to:
a. P 190,000 b. P 183,000 c. P 180,500 d. P 180,000

3. Audit adjustments will increase depreciation/amortization expense by:

a. P 38,000 b. P 24,000 c. P 14,000 d. P 13,500

4. Loss due to impairment in value amounted to:

a. P 30,000 b. P 28,000 c. P 24,000 d. P 20,000

Solution
1. B
Cost of the land 500,000
Add: tilting cost 10,000
Total 510,000
2. C
Land improvement 190,000
Less: Accumulated depreciation 10,000 (P190,000/57 mos. x 3 mos.)
Carrying value 180,000
3. C
Depreciation - leasehold improvement 10,000
Depreciation - Equipment (P40,000/2) 20,000

30
 Total per audit 30,000
Total per book 16,000
Understatement of depreciation 14,000
4. C
Net book value 64,000
Less: CV after impairment 40,000
Loss on impairment 24,000

Problem 18
On January 1, 2003, BLESSING COMPANY signs a 10-year noncancelable lease agreement
to lease a storage building from GRACE COMPANY. The following information pertains to
this lease agreement:

a. The agreement requires equal rental payments of P720,000 beginning on January

1, 2003.

b. The fair value of the building on January 1, 2003, is P4,400,000.

c. The building has an estimated economic life of 12 years, with an unguaranteed

residual value of P100,000. BLESSING COMPANY depreciates similar buildings on the
straight-line method.

d. The lease is nonrevnewable. At the termination of the lease, the building reverts to
the lessor.

e. BLESSING COMPANY’s incremental borrowing rate is 12% per year. The lessor’s
implicit rate is not known by BLESSING COMPANY.

f. The yearly rental payment includes P24,705.10 of executory costs related to taxes
on the property.

The following present value factors are for 10 periods at 12% annual interest rate:

Present value of an annuity due of 1 6.32825

Present value of an ordinary annuity of 1 5.65022
Present value of 1 0.32197

Questions
1. The minimum annual lease payment is:
a. P 744,705.10 b. P 720,000.00 c. P 695,294.90 d. P 0

2. The present value of minimum lease payments is:

a. P 0 b. P 4,400,000 c. P 4,207,747.65 d. P 3,928,569.15

3. The interest expense at December 31, 2003 is:

a. P 0 b. P 414,476.98 c. P 444,564,61 d. P 528,000.00

4. The depreciation expense at December 31, 2003 is:

a. P 0 b. P 420,774.76 c. P 440,000.00 d. P 471,268.00

5. The Book Value of Leased Building at December 31, 2004 is:

a. P 3,520,000.00 b. P 3,786,972.89 c. P 3,979,225.24 d. P 3,960,000.00

Solution

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1. C
Annual payment 720,000.00
Less: Executory costs 24,705.10
Minimum annual lease payment 695,294.90
2. B Present value of minimum lease payment - P695,294.90 x 6.32825 = P 4,400,000
3. C
Min. Annual
Payment__ Interest expense Carrying Value
4,400,000.00
1/1/03 695,294.90 - 3,704,705.10
12/1/03 695,294.90 444,564.61 3,453,974.81
12/1/04 695,294.90 414,476.98 3,173,156.89
4. C P4,400,000/10 years = P 440,000
5. A
Cost P 4,400,000
Accumulated depreciation 880,000
Net book value P 3,520,000

Problem 19
On January 1, 2003, the Prince Gabriel Manufacturing Company began construction of a
building to be used as its office headquarters. The building was completed on June 30,
2004.

Expenditures on the project were as follows:

January 3, 2003 P 500,000

March 31, 2003 600,000
June 30, 2003 800,000
October 31, 2003 600,000
January 31, 2004 300,000
March 31, 2004 500,000
May 31, 2004 600,000

On January 3, 2003, the company obtained a P2 million construction loan with a 10%
interest rate. The loan was outstanding all of 2003 and 2004. The company’s other
interest-bearing debt included a long-term note of P5,000,000 with an 8% interest rate, and
a mortgage of P3,000,000 on another building with an interest rate of 6%. Both debts were
outstanding during all of 2003 and 2004. The company’s fiscal year end is December 31.

Questions
1. The interest capitalized at the end of December 31, 2003 is:
a. P 113,100 b. P 145,000 c. P 150,000 d. P 200,000

2. The interest capitalized at the end of December 31, 2004 is:

a. P 145,132 b. P 159,632 c. P 290,263 d. P 319,263

3. The total cost of the Building at December 31, 2004 is:

a. P 3,535,132 b. P 4,190,131 c. P 4,480,263 d. P 4,535,263

4. The total interest expense at the end of December 31, 2003 is:
a. P 780,000 b. P 635,000 c. P 630,000 d. P 560,000

5. The total interest expense at the end of December 31, 2004 is:
a. P 460,737 b. P 489,737 c. P 620,368 d. P 634,868
Solution
1. B

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 Jan. 3 500,000 x 12/12 = 500,000
March 31 600,000 x 9/12 = 450,000
June 30 800,000 x 6/12 = 400,000 AAE
Oct 31 600,000 x 2/12 = 100,000 1,450,000 x 10% = P145,000 (Lower than the
actual cost of P580,000)
2. A
Beg bal. 2,500,000 x 6/6 = 2,500,000
145,000 x 6/6 = 145,000
Jan. 31 300,000 x 5/6 = 250,000
Mar 31 500,000 x 3/6 = 250,000
May 31 600,000 x 1/6 = 100,000 3,245,000 AAE

Specific borrowing - P2,000,000 x 10% x 6/12 = 100,000

General borrowing - 1,245,000 x 7.25% x 6/12 = 45,132
Interest to be capitalized 145,132 (Lower than the actual cost
of P580,000)
Average rate (general)
5,000,000 x 8% = P 400,000
3,000,000 x 6% = 180,000
580,000 / 8,000,000 = 7.25%
3. B
Total cost in the construction - P 3,900,000
Interest capitalized - 290,132
Total cost – building - P 4,190,132
4. B
Interest expense – 2003
Specific borrowing P 2,000,000 x 10% = 200,000
General borrowing P 5,000,000 x 8% = 400,000
P 3,000,000 x 6% = 180,000
Less: Interest capitalized = (145,000)
Total interest expense – 2003 = 635,000
5. D
Interest expense – 2004
Specific borrowing P 2,000,000 x 10% = 200,000
General borrowing P 5,000,000 x 8% = 400,000
P 3,000,000 x 6% = 180,000
Less: Interest capitalized = (145,132)
Total interest expense – 2003 = 634,868

Problem 20
In connection with your audit of Bing-Bong Corporation, you noted that on January 2, 2002,
the corporation purchased a building site for its proposed research and development
laboratory at a cost of P2,400,000. Construction of the building was started in 2002. The
building was completed on December 31, 2003, at a cost of P11,200,000 and was placed in
service on January 1, 2004. The estimated useful life of the building for depreciation
purposes was 20 years; the straight-line method of depreciation was to be employed and
there was no estimated salvage value.

Management estimates that about 50% of the projects of the research and development
group will result in long-term benefits to the corporation. The remaining projects either
benefit the current period or are abandoned before completion. A summary of the number
of projects and the direct costs incurred in conjunction with the research and development
activities for 2004 appears below.

No. of Salaries and Other expenses

33
 Projects employees benefits (excluding dep’n.)
Completed projects with
long-term benefits 60 3,600,000 2,000,000
Abandoned projects that
benefit the current year 40 2,600,000 600,000
Projects in process – results
indeterminate 20 1,600,000 480,000

Upon the recommendation of the research and development group, Bing-Bong Corporation
acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was
acquired on March 31, 2003, and has an economic life of 10 years.

Questions
1. Carrying value of the patent as of December 31, 2004 is:
a. P 3,600,000 b. P 3,200,000 c. P 2,880,000 d. P 2,640,000

2. Carrying value of the building as of December 31, 2004 is:

a. P 5,320,000 b. P 10,640,000 c. P 10,080,000 d. P 0

3. Carrying value of the land as of December 31, 2004 is:

a. P 1,200,000 b. P 2,400,000 c. P 2,160,000 d. P 0

4. Research and development expense for 2004 is:

a. P 5,280,000 b. P 10,880,000 c. P 11,440,000 d. P 11,760,000

Solution
1. D
Cost of patent - P 3,200,000
Amortization – 2003 - 240,000
Amortization – 2004 - 320,000
Net carrying value - P 2,640,000
2. B
Cost of building - P 11,200,000
Depreciation – 2004 - 560,000
Net carrying value - P 10,640,000
3. B cost of the land – P 2,400,000
4. C
Salaries and benefits - P 7,800,000
Other expenses - 3,080,000
Depreciation - 560,000
Total R and D Cost - P11,440,000

34