AUDIT OF PROPERTY, PLANT AND EQUIPMENT & INVESTMENT

PROPERTY

Problem 1

Kithara Co. commenced operations early in 2018. During its first nine months, Kithara acquired real estate for the
construction of a building and other facilities. Operating equipment was purchased and installed, and the company
began operating activities in April 2018. The company’s accountant, who was not sure how to record some of the
transactions, opened a Property, Plant and Equipment (PPE) ledger account and recorded debits and (credits) to this
account as follows:

Cost of real estate purchased as a building site (Fair value of building was nil.) P1,700,000
Paid architect’s fee for design of new building 230,000
Paid for the demotion of an old building on the building site 280,000
Paid property tax not paid by previous owner on the real estate purchased as a building site 17,000
Paid excavation costs for the new building 150,000
Made the first payment to the building contractor 2,500,000
Paid for equipment to be installed in the new building 1,480,000
Received from sale of salvaged materials from demolishing the old building (68,000)
Made final payment to the building contractor 3,500,000
Imputed interest on Kithara’s own construction fund 220,000
Paid freight on equipment purchased 19,000
Paid installation costs of equipment 42,000
Paid for repair of equipment damaged during installation 27,000

Based on the preceding information, determine the amount to be charged to each of the following:

1. Land
2. Building
3. Manufacturing equipment

Problem 2

Masalah Inc. uses a large number of machines designed to produce garments. These machines are generally
depreciated at 10% per annum on a straight-line basis. In general, machines are estimated to have a residual value
on disposal of 10% of cost. At Jan. 1, 2018, Masalah had a total of 73 machines, and its statement of financial
position showed a total cost of P1,260,000 and accumulated depreciation of P390,000.

During 2018, the following transactions occurred:

a. On Mar. 1, 2018, a new machines was acquired for P45,000. This machine replaced two other machines. One
of the two replaced machines was acquired on Jan. 1, 2015 for P24,600. It was traded in on the new machine
with Masalah making a cash payment of P26,400 on the new machine. The second replaced machine had cost
of P27,000 on Oct. 1, 2015, and was sold for 21,900.
b. On July 1, 2018, a machine that had cost P12,000 on Jan. 1, 2009, was retired from use and sold for scrap for
P1,500.
c. On July 1, 2018, a machine that had been acquired on July 1, 2015, for P21,000 was repaired because its motor
had been damaged from overheating. The motor was replaced at a cost of P14,400. It was expected that this
would extend the life of the machine by an extra two years.
d. On Oct. 1, 2018, Masalah fitted a new form of arm to a machine used for putting special designs onto garments.
The arm cost P3,600. The machine had been acquired on Oct. 1, 2013, for P30,000. The arm can be used on a
number of other machines when acquired and has a 15-year life. It will not be sold when any particular machine
is retired, but retained for use on other machines.

1. What amount of gain or loss should be recognized on the sale of second replaced machine on Mar. 1, 2018?
2. What amount of gain or loss should be recognized on the machine sold for scrap on July 1, 2018?
3. What amount of depreciation should be provided in 2018 on the machine whose motor was replaced on July 1,
2018?
4. What amount of depreciation should be provided in 2018 on the machine arm installed on Oct. 1, 2018?

Problem 3

The following data pertain to Fhadhb Co.’s PPE for 2018.

Audited balances at Dec. 31, 2017:

Debit Credit
Land 7,500,000
Buildings 30,000,000
Accumulated depreciation - Buildings 6,577,500
Machinery and equipment 22,500,000
Accumulated depreciation - Machinery and equipment 6,250,000
Delivery equipment 5,750,000
Accumulated depreciation - Delivery equipment 4,230,000

Depreciation data:

Depreciation method Useful life

Buildings 150% declining balance 25 years
Machinery and equipment Straight-line 10 years
Delivery equipment Sum-of-the-years’-digits 4 years
Leasehold improvements Straight-line

Transactions during 2018 and other information are as follows:

a. On Jan. 2, Fhadhb purchased a new truck for P1,000,000 cash and trade-in of a 2-year old truck with a cost of
P900,000 and a book value of P270,000. The new truck has a cash price of P1,200,000; the market value of the
trade-in is not known.
b. On Apr. 1, a machine purchased for P575,000 on Apr. 1, 2013, was stolen. Fhadhb recovered P387,500 from its
insurance company.
c. On May 1, 2018, costs of P8,400,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. the related lease terminates on Dec. 31, 2024.
d. On July 1, 2018, machinery and equipment were purchased at a total invoice cost of P7,000,000; additional
costs of P125,000 for freight and P625,000 for installation were incurred.
e. Fhadhb determined that the delivery equipment comprising the P5,750,000 balance at Jan. 1. 2018, would have
been depreciated at a total amount of P900,000 for the year ended Dec. 31, 2018.

The salvage values of the depreciable assets are immaterial. The policy of the company is to compute depreciation
to the nearest month.

Compute the following:

1. Depreciation expense for 2018 on buildings
2. Depreciation expense for 2018 on machinery and equipment
3. Depreciation expense for 2018 on delivery equipment
4. Depreciation expense for 2018 on leasehold improvements
5. Accumulated depreciation – buildings, Dec. 31, 2018
6. Accumulated depreciation – machinery and equipment, Dec. 31, 2018
7. Accumulated depreciation – delivery equipment, Dec. 31, 2018
8. Gain or loss on trade in of truck on Jan. 2, 2018

Problem 4

On January 1, 2018 Chronicles Airlines acquired a new airplane for a total cost of P20 million. A breakdown of the
costs to build the airplane was given by the manufacturers:

Aircraft body 7,200,000

Engines (2) 6,500,000
Fitting out of aircraft:
Seats 2,000,000
Carpets 250,000
Electrical equipment - passenger seats 800,000
- cockpit 2,500,000
Food preparation equipment 750,000

All costs include installation and labor costs associated with the relevant part.

It is expected that the aircraft will be kept ten years and then sold. The main value of the aircraft at that stage is the
body and the engines. The expected selling price is P3,500,000, with the body and the engines proportionate value.

Chronicles Airlines uses straight line depreciation. Costs in relation to the aircraft over the next ten years are
expected to be as follows:

Aircraft body – The body requires inspection every two years for cracks and wear and tear, at a cost of P20,000.

Engines – Each engine has an expected life of four years before being sold for scrap (amount negligible). It is
expected that the engines will be replaced in 2021 for P6.75 million and again in 2025 for P9 million. These
engines are expected to incur annual maintenance costs of P450,000. The manufacturer has informed Chronicles
Airlines that a new prototype engine with an extra 10% capacity should be on the market in 2021, and that existing
engines could be upgraded at a cost of P1.5 million.

Fittings

a. Seats are replaced every three years. Expected replacement costs are P2.5 million in 2020 and P2.75 million in
2023. The repair of torn seats and faulty mechanisms is expected to cost P150,000 per annum.
b. Carpets are replaced every five years. They will be replaced in 2022 at an expected cost of P300,000, but will
not be replaced before the aircraft is sold in 2024. Cleaning costs per annum amount to P20,000.
c. The electrical equipment (such as the TV) for each seat has annual repair cost of P42,500. It is expected that,
with the improvements in technology, the equipment will be totally replaced in 2024 by substantially better
equipment at a cost of P950,000.
d. The electrical equipment in the cockpit is tested frequently at an expected annual cost of P190,000. Major
upgrades to the equipment are expected every 2 years at expected costs of P450,000 (in 2020), P550,000 (in
2022), P677,500 (in 2024) and P750,000 (in 2026). The upgrades will take into effect the expected changes in
technology.

Food Preparation equipment – This incurs annuals costs for repair and maintenance of P20,000. The equipment
is expected to be totally replaced in 2024.

Determine the total expenses recognized for the 2018 financial year for the following:

1. Aircraft body
2. Engines
3. Fittings
4. Food preparation equipment

Problem 5

On January 1, 2018, Kenya Co. acquired two assets within the same class of plant and equipment. Information on
these assets is as follows:

Cost Useful life

Machine A P6,000,000 5 years
Machine B 3,600,000 3 years

The machines are expected to generate benefits evenly over their useful lives. The class of plant and equipment is
measure using the revaluation model.

At December 31, 2018, information about the assets is as follows:

Fair value Useful life

Machine A P5,040,000 4 years
Machine B 2,280,000 2 years
On July 1, 2019, Machine B was sold for P1,740,000 cash. On the same day, Kenya acquired Machine C for
P4,800,000 cash. Machine C has an expected useful life of 4 years.

At December 31, 2019, information on the machines is as follows:

Fair value Useful life

Machine A P3,360,000 3 years
Machine C 4,110,000 1.5 years

1. Determine the depreciation expense for 2018.

2. Determine the revaluation surplus at the end of 2018.
3. Compute for the gain or loss on the sale of Machine B.
4. Compute for the revaluation loss to be reported on Kenya’s profit or loss statement for the year ended
December 31, 2019.
5. Compute for the depreciation in 2019.

Problem 6

In 2016, Andorra Mining Inc. purchased property with natural resources for P12,400,000. The property was
relatively close to a large city and had an expected residual value of P3,000,000. However, P1,200,000 will have to
be spent to restore the land for use. (Hint: The restoration cost is deducted from the residual value to arrive at the
total depletable amount)

The following information relates to the use of the property:

a. In 2016, Andorra spent P800,000 in development costs and P600,000 in buildings on the property. Andorra
does not anticipate that the buildings will have any utility after the natural resources are depleted.
b. In 2017 and 2018, P600,000 and P1,600,000, respectively, were spent for additional development on the mine.
c. The tonnage mined and estimated remaining tons for years 2016 to 2020 are as follows:

Year Tons Extracted Estimated Tons Remaining

2016 0 5,000,000
2017 1,500,000 3,500,000
2018 1,800,000 2,000,000
2019 1,700,000 900,000
2020 900,000 0

Based on the preceding information, calculate the depletion and depreciation each year from 2017 to 2020.
Problem 7

Kapitannikov Co. and its subsidiaries own the following properties that are accounted for in accordance with IAS
40:

Land held by Kapitannikov for undetermined use 6,000,000

A vacant building owned by Kapitannikov and to be leased out under an
operating lease 4,000,000
Property held by a subsidiary of Kapitannikov, a real estate firm, in the
ordinary course of business 3,000,000
Property held by Kapitannikov for use in production 5,000,000
Building owned by a subsidiary of Kapitannikov and for which the subsidiary
provides security and maintenance services to the lessees 2,500,000
Land leased by Kapitannikov to a subsidiary under an operating lease 3,500,000
Property under construction for use as investment property 7,000,000
Land held for future factory site 4,500,000
Machinery leased out by Kapitannikov to an unrelated party under an
operating lease 2,000,000

What is the total investment property that should be reported in the consolidated statement of financial position of
the parent and its subsidiaries?

Problem 8

Petruescu Corp., a real estate entity, has a building with a carrying amount and cost of P40,000,000 and
P60,000,000, respectively, on December 31, 2018. The building is used as offices of the company’s administrative
staff. On December 31, 2018, Petruescu intended to rent out the building to independent third parties, and the staff
will be moved to a new building that Petruescu purchased early in 2018. On December 31, 2018, the original
building had a fair value of P70,000,000.

On December 31, 2018, Petruescu also had land that was sold in the ordinary course of business. The land had a
carrying amount of P20,000,000 and fair value of P30,000,000. On such date, Petruescu decided to hold the land
for capital appreciation. Petruescu’s policy is to carry all investment property at fair value.

1. Determine the initial cost of the building that was transferred to investment property.
2. Determine the revaluation surplus recognized by Petruescu upon the transfer of the building to investment
property.
3. Determine the initial cost of the inventory that was transferred to investment property.
4. Determine the total gain or loss recognized by Petruescu upon the transfer of the land to investment property.
Problem 9

On January 2, 2018, Klerick Co. acquired a tract of land that is to be sold in the ordinary conduct of business. The
purchase price of the property of P50,000,000 was paid in cash and total transaction costs of P500,000 related to the
acquisition of the property was also paid at a later date. The land was subdivided into 2,000 lots (200 square meters
for every lot) for an additional cost of P5,500,000. On December 31, 2018, the market value of the lot was P1,500
per square meter.

As of December 31, 2019, only 20,000 square meters are still unsold and the market value of the lost had increased
to P1,600 per square meter. On this date, Klerick decided to transfer the remaining lots into investment property
that is to be carried under the fair value model. There was no additional cost incurred on the change of intention on
the property.

1. Determine the initial cost of the land.

2. Determine the carrying amount of the land on December 31, 2019 immediately before the transfer.
3. Determine the gain recognized on the transfer.