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 Jucuzzi machine machine costing P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds was credited to the Machinery Machinery account. account. On June 30, 2006, a Goulds machine, machine, costing costing P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer machine with an an invoice price price of P100,000. 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. value. A full year’s depreciation is charged charged in the year of acquisition and none none in the year of disposition. Question 1 The adjusted adjusted balance of the Machinery account at at December December 31, 2006 is: a. P 290,000 b. P 370,000 c. P 260,000 d. P 300,000 2
The correct correct depreciation expense for the machinery machinery for the year ended 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 Accumulated dep’n. dep’n. 30,000 Machinery 40,000 Gain on sale 10,000 Adj: Accumulated Accumulated dep’n dep’n 30,000 Machinery 20,000 Gain on sale 10,000 --------------------------------------------OE: Machinery 90,000 Cash 90,000 CE: Machinery 100,000 Accumulated Accumulated dep’n dep’n 22,000 Loss on sale 18,000 Machinery 50,000 Cash 90,000 Adj: Machinery 10,000 Accumulated dep’n 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%
1
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 value of P10. At the time of the exchange, the shares shares were selling selling at P24. Transfer and legal fees of P20,000 were paid and charged to Professional Fees. 1. The adjusting entry required is: DEBIT a. Land 140,000 b. Land 160,000 c. Land
80,000
CREDIT Prem. on cap. stock Capital stock Cash Professional fees Prem. on cap. stock
140,000 150,000 10,000 20,000 60,000
d. None of these 2. On the Land acquired in No. 6, real estate taxes of P20,000 P20,000 were paid in December, 2006, including P5,000 P5,000 for the first quarter of the year. year. (Ignore penalty for delayed delayed payment). Land account was was debited for the taxes paid. paid. The adjusting entry is: DEBIT a. Taxes 15,000 b. Taxes 5,000 c. Land 5,000 Taxes 15,000 d. None of these Solution 1. C OE: Land Common Stock APIC Professional fees Cash CE: Land Common stock Cash APIC Adj: Land APIC Professional fees 2. A OE: Land Cash CE: Land Taxes Cash Adj: Taxes Land
CREDIT Land Land Cash
15,000 5,000 20,000
300,000 150,000 150,000 20,000 20,000 380,000 150,000 20,000 210,000 80,000 60,000 20,000 20,000 20,000 5,000 15,000 20,000 15,000 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 agreed to exchange their land. An appraiser appraiser was hired hired and from the report and the companies records, the following information was obtained:
Cost (same as book value) Market value, per appraisal
2
KAYA Co.’s Land P 800,000 1,000,000
MUYAN Co.’s Land P 500,000 900,000
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 reporting purposes, KAYA C Company ompany would recognize 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, exchange, KAYA Company record record its newly acquired acquired land at: a. P 700,000 b. P 720,000 c. P 800,000 d. P 900,000 4. After the exchange, exchange, MUYAN Company record record its newly acquired acquired land at: a. P 1,000,000 b. P 900,000 c. P 600,000 d. P 500,000 Solution Muyan Land Cash Land Gain 1 2. 3. 4.
Kaya 1,000,000 100,000 500,000 400,000
Cash Land
100,000 900,000 Land Gain on sale
800,000 200,000
D D D A
Problem 4 On an audit engagement for 2007, you handled the audit of fixed assets of Esmedina Copper Mines. This mining company company bought the exploration exploration rights of Maharishi Maharishi Exploration on June 30, 2007 for for P7,290,000. Of this purchase purchase price, P4,860,000 P4,860,000 was allocated allocated to copper ore which which had remaining reserves reserves estimated at 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 some new machines costing costing P600,000 was was bought on June 30, 2007. These new machineries machineries had an an estimated useful life of 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 Depreciation of machineries
P 405,000 40,000
Questions 1. Recorded depletion expense expense was a. Overstated by P90,000 b. Understated by P90,000
c. Overstated by P135,000 d. Understated by P135,000
2. Recorded depreciation expense was a. Overstated by P10,000 b. Understated by P10,000
c. Overstated by P20,000 d. Understated by P20,000
3
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 Buildings Leasehold improvements Machinery and equipment
P
400,000 3,200,000 2,000,000 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 buil ding 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 Architectural design fees Building permit fees Imputed interest on funds used during construction
P 44,000 32,000 4,000 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.
4
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 Painting of ceilings Electrical work Construction of extension to current working area
Amount P 40,000 140,000 320,000
Useful life one year Ten years 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 Cash 20,000 Land 2. Land 1,320,000 Cash Building 680,000 Cash 3. Land - investment 2,400,000 Cash 4. Operating expenses 40,000 Leasehold improvements 300,000 Cash 5. Machinery 314,000 Royalty expenses 52,000 Cash Answer: 1. C 2. B 3. A 4. C
4,300,000 20,000 1,320,000 680,000 2,400,000
340,000
366,000
5
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
6
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 Automobile and trucks 25,000 Cash Cash 23,500 Accumulated depreciation 24,750 Automobile and trucks Gain on sale Accumulated deprecation - 12/31/02 Depreciation - 9 mos. (P30,000 x 30% x 9/12) Total Cash Accumulated depreciation Machinery and equipment Gain on sale Depreciation Accumulated depreciation Accumulated depreciation Accumulated depreciation
369,000 25,000
48,000 250 18,000 6,750 24,750
4,000 14,025 17,000 1,025 221,404 - mach. - auto. - improv.
156,450 28,954 36,000
Machinery and equipment - P1,380,000/10 years =P P 369,000/10 years x 6/12 = Leasehold improvement - P432,000/12 years = Automobile and trucks - CV of unsold item P 65,680 x 30% = Sold item - 30,000 x 30% x 9/12 = Current purchase P25,000 x 30% x 4/12= Answer: 1. B 2. D 3. B 4. C
138,000 18,450 19,704 6,750 2,500
P 156,450 36,000
28,954
5. B
Problem 7 Information pertaining to Highland Corporation’s property, plant and equipment for 2005 i s presented below: Account balances at January 1, 2005: Debit Land P 150,000 Buildings 1,200,000 Accumulated depreciation – Buildings Machinery and equipment 900,000 Accumulated depreciation – Machinery and equipment Automotive equipment 115,000 Accumulated depreciation – Automotive equipment
Credit
P263,100 250,000 84,600
Depreciation data:
Buildings Machinery and equipment Automotive equipment Leasehold improvements
Depreciation method
Useful life
150% declining-balance Straight-line Sum-of-the-years’ -digits Straight-line
25 years 10 years 4 years -
7
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 2year-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 t rade-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 i ts 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
8
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. Cash 15,500 b. 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) X declining rate (1/25 x 150%) Depreciation for the year Plus; Accum. Depreciation - 1/1/05 Accum. Depreciation - 12/31/05
Machinery and Equipment:
Balance - 1/1/05 Less: machine destroyed by fire Divided by Dep’n of the Machine destroyed by fire: (P23,000/10 x 3/12) Dep’n of the machine purchase for the year: (P310,000/10 x 6/12) Total Depreciatio n Plus: Accum. Dep’n - 1/1/05 Less: Accum. Dep’n - destroyed by fire Accum. Depreciation - 12/31/05
Automotive Equipment:
P936,900 6% . P 56,214 263,100 P319,314
P900,000 23,000 P877,000 10 yrs.
575 15,500 P103,775 250,000 ( 11,500) P342,275
Depreciation on P115,000 balance, 1/1/05 Less: Depreciation on car traded in (P18,000 x 2/10) Adjusted depreciation on the beg. Bal. Dep’n on the 1/2/05 Purchase: (P24,000 x 4/10) Total Depreciatio n expense Plus: Accum. Depreciation - 1/1/05 Less: Accum. Dep’n - traded equipment Accumulated depreciation - 12/31/05
P 18,000 3,600 P 14,400 9,600 P 24,000 84,600 ( 12,600) P 96,000
Leasehold Improvements: P168,000/80 months x 8 mos. for 2005 ANSWER:
1. B 6. D
2. B 7. C
3. D 8. C
P 87,700
P 16,800 4. B 9. C
5. B 10. D
9
Problem 8 The schedule of Gerasmo Company’s property and equipment prepared by the client follows: PLANT ASSETS Land Building Machinery and Equipment Total ACCUMULATED DEPRECIATION Building Machinery and Equipment Total
P
320,000 540,000 180,000 1,040,000
P
81,000 54,000 135,000
P
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:
Land Building Accum. depreciation Revaluation increment
Debit 70,000 60,000
Credit
6,000 124,000
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
10
Adj: Accum. Depreciation Operating expenses Answer: 1. B 2. A
3,000 3,000
Problem 9 The following information pertains to Marlisa Company’s delivery trucks: Date 1/1/04 3/15/05 7/1/05 7/10/05 9/1/05 10/1/05 4/1/06 5/2/06 6/30/06 12/1/06
Particulars Trucks 1, 2, 3, & 4 Replacement of truck 3 tires Truck 5 Reconditioning of truck 4, which was damaged in a collision Insurance recovery on truck 4 accident Sale of truck 2 Truck 6 Repainting of truck 4 Truck 7 Cash received on lease of truck 7
Debit 3,200,000 25,000 800,000
Credit
35,000
1,000,000 27,000 720,000
33,000 600,000 150,000
22,000
ACCUM. DEPRECIATION - DELIVERY EQUIPMENT Date 12/31/04 12/31/05 12/31/06
Particulars Depreciation expense Depreciation expense Depreciation expense
Debit
Credit 300,000 300,000 300,000
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
d. P 1,000,000
850,000
11
6. The carrying value of Truck 6 at December 31, 2006 is 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 Less: Accumulated depreciation (P800,000 x 20% / 12 mos. x 27 mos.) Net book value Trade-in allowance Loss on trade-in 5. D 6. C [P1,000,000 - (1,000,000 x 20% x 9/12)] 7. A Cost of truck 2 Accumulated depreciation (P800,000 x 20% / 12 mos. x 21 mos.) Net book value Selling price Gain on sale 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
12
800,000 360,000 440,000 150,000 290,000
800,000 280,000 520,000 600,000 80,000
Truck 6 (P1,000,000 x 20% x 9/12) Truck 7 (P720,000 x 20% x 6/12) Depreciation per audit Depreciation per records Understatement 10. D 11. B
150,000 72,000 592,000 300,000 292,000
1,000,000 720,000 3,370,000
Problem 10 Information pertaining to SAILADIN CORPORATION’s property, plant and equipm ent for 2006 is presented below. Account balances at January 1, 2006 Debit Land 6,000,000 Buildings 48,000,000 Accumulated depreciation – bldg. Machinery and equipment 36,000,000 Accumulated depreciation – mach. & equip. Automotive equipment 4,600,000 Accumulated depreciation – auto. Equip.
Credit
10,524,000 10,000,000 3,384,000
Depreciation data:
Buildings Machinery and equipment Automotive equipment Leasehold improvements
Depreciation method
Useful life
150% declining-balance Straight-line Sum-of-the-years-digits Straight-line
25 years 10 years 4 years -
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 t he 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, 2 006.
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)
d. P (56,000)
c. 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 6.1.06 No. 12 36,000 12.31.06 Balance 9.1.03 Dismantling of No. 6 1,000 P 483,000
P
9,000 474,000
______ 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 Accumulated depreciation
P 446,000 224,000
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 Cash CE: Cash 9,000 Accum. dep’n 21,000 Loss on sale 1,000 Equipment Cash ------------------------------------------ Adj: Accum. dep’n 21,000 Loss on sale 1,000 Equipment ------------------------------------------ Adj: Equipment 2,500 Repairs expense
16
9,000 1,000
30,000 1,000
22,000
2,500
------------------------------------------ Adj: Accum. dep’n 1,950 Depreciation Answer: 1. C 2. C
1,950 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 P 1,500,000 12,000,000
Land Building Accum. depreciation-building Machinery and equipment 9,000,000 Accum. depreciation-Mach. and Eqpt Automotive Equipment 1,150,000 Accum. depreciation-Automotive Eqpt
Credit
P 2,631,000 2,500,000 846,000
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 2year 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, 2 005 Building Mach.& Equipment Balance, 1.1.05 P2,631,000 P2,500,000 Add depreciation for 2005 562,140 1,037,750 P3,193,140 P3,537,750 Deduct acc. depr. related to Mach, destroyed by fire (5 x 10% x P230,000) 115,000 Car traded in (490,000 - 147,000) _________ _________ Balance, 12.31.05 P3,193,140 P3,422,750
Auto. Eqpt. P846,000 290,000 P1,136,000
P5,977,000 1,889,890 P7,866,890
343,000 P 793,000
458,000 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 Machinery and Equipment Balance, 1.1.05 less machine destroyed by fire Depreciation Depr. on Machine destroyed by fire, 4.1.05 (P230,000 x 10% x 3/12) Depr. on machine purchased on 7.1.05 (P3,100,000 x 10% x 6/12) Total depreciation on mach. and equipment Automotive Equipment Depreciation on P1,115,000 bal. on 1.1.05 Deduct depr. on car traded in , 1.2.05 (SYD 3rd year 2/10 x P490,000) Depr. on car purchased , 1.2.05 (P520,000 x 4/10) Total depreciation on automotive equipment Total depreciation expense for 2005
18
Total
P8,770,000 x 10%
P562,140
877,000 5,750 155,000 P1,037,750
P180,000 (98,000)
82,000 208,000 290,000 P1,889,890
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 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 Total gain on asset disposals for 2005
Property, Plant and Equipment December 31, 2005 COST Land Building Machinery and Equipment Automotive equipment Totals Answer: 1. D 2. B 6. D 7. A
ACCUMULATED DEPRECIATION
P 1,500,000 12,000,000 11,870,000 1,180,000 P26,550,000 3. C 8. A
4. D 9. C
P40,000
23,000 P63,000
BOOK VALUE
-----3,193,140 3,422,750 793,000 P7,408,890
P1,500,000 8,806,860 8,447,250 387,000 P19,141,110
5. A 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
Recorded depreciation for 2006: Two delivery trucks @ P10,000 each Fifteen service trucks @ P5,000 each Total
P20,000 75,000 P95,000
12/31/06:
Depreciation Expense – Trucks Accumulated depreciation
= =
P95,000 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
3/15/06
20
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 OE: Cash 8,000 Service truck 8,000
12/31/06
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 Depreciation 11,250 AD - del. truck 11,000 AD - service truck 250 Del. truck Per book 95,000 20,000 Per audit 106,250 31,000 Adjustment 11,250 11,000 Depreciation - Delivery truck Disposed truck Undisposed truck (2 x P10,000) Purchased during the year (P60,000/5 x 1/2) Total
5,000 20,000 6,000 ______ 31,000
Depreciation - service truck Disposed truck Undisposed truck (14 x P5,000) Purchased during the year (P27,500/5 x 1/2) Total Answer: 1. D 6. C
2. C 7. A
3. A 8. A
Serv. truck 75,000 75,250 250
2,500 70,000 2,750 ______ 75,250 4. B
5. D
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 ________ 12.31.03 Retirements 1991-1994 P 800,000 P 210,000 1995 40,000 1996 1997 1998 390,000 1999 2000 530,000 2001 2002 420,000 2004 ________ _________ P 2,180,000 P 210,000
2004 Additions
Balance 12.31.04 P 590,000 40,000
390,000 530,000
P 570,000 P 570,000
420,000 570,000 P 2,540,000
21
ACCUMULATED DEPRECIATION Year Balance 2004 ________ 12.31.03 Retirements 1991-1994 P 784,000 P 210,000 1995 34,000 1996 1997 1998 214,500 1999 2000 185,500 2001 2002 63,000 2003 2004 ________ _________ P 1,281,000 P 210,000
2004 Additions P 16,000 4,000
Balance 12.31.04 P 590,000 38,000
39,000
253,500
53,000
238,500
42,000
105,000
28,500 P 182,500
28,500 P 1,253,500
A transcript of the Machinery and Equipment account for 2005 follows: MACHINERY AND EQUIPMENT Date 2005 Jan. 1 Mar. 1 May 1 June 1 June 1 Aug. 1 Nov. 1 Nov. 1 Dec. 1
Item Balance forwarded Burnham grinder Air compressor Power lawnmower Lift truck battery Rockwood saw Electric spot welder Baking oven Baking oven
Debit
Credit
P 2,540,000 120,000 750,000 60,000 32,000 15,000 450,000 280,000 32,500 P 4,264,500 _________ P 4,264,500
__________ P 15,000 4,249,500 P 4,264,500
Your examination reveals the following i nformation: 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 i s: 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 Depreciation Expense Correct depreciation expense for 2005 1995 acquisition : 40,000 x 10% x ½ 1998 “ : 390,000 x 10% 2000 “ : (500,000 x 10% x ½) + (30,000 x 10%) 2002 “ : (60,000 x 10% x ½) + (360,000 x 10%) 2004 “ : 570,000 x 10% 2005 “ : (120,000 + 250,000 + 540,000 + 1M) x 10% x ½ Amount recorded Overstatement
b.
No AJE necessary
c.
Buildings Machinery & Equipment
d.
e. 1
e.2
f.
g.
24
19,500 19,500
P2,000 39,000 28,000 39,000 57,000 95,500
P260,500 280,000 P 19,500
500,000 500,000
Receivable from Officers Machinery & Equipment
60,000
Accumulated Depreciation Loss on Disposal of Assets Machinery & Equipment Cost Less acc. Depreciation (60,000 x 10% x 3) Book value Trade in value Loss
18,000 42,000
60,000
60,000 P60,000 18,000 P42,000 4,000 P38,000
Equipment rental expense (7/12) Prepaid equipment rental Machinery & Equipment Loss on Disposal of Assets
21,000 15,000
Accumulated Depreciation Machinery & Equipment Gain on Disposal of Assets
150,000
Other Assets - Mach. Held for sale Accumulated depreciation Loss on Disposal of Assets Machinery & Equipment
180,000 250,000 70,000
32,000 4,000
135,000 15,000
500,000
BV ( P500,000 x 5/10) Estimated selling price Loss
h.
i.
P250,000 180,000 P70,000
Machinery & Equipment Equipment Rental Expense Rental for the period Feb. 1 to October 31.
90,000 90,000
Machinery & Equipment Interest expense Equipment contract payable
Answer: 1. C 6. B
2. A 7. C
3. A 8. C
687,500 12,500 700,000 4. D 9. A
5. D 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 Land Buildings Machinery & Equipment
Description Buildings Machinery & Equipment
Final 12/31/04 P 4,225,000 1,200,000 3,850,000 P 9,275,000
Assets Additions P 500,000 475,000 404,000 P 1,379,000
Assets Retirements P 0 0 260,000 P 260,000
Per ledger 12/31/05 P 4,725,000 1,675,000 3,994,000 P 10,394,000
Final 12/31/04 P 600,000 1,732,500 P 2,332,500
Assets Additions P 51,500 392,200 P 443,700
Assets Retirements
Per ledger 12/31/05 P 651,500 2,124,700 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
25
date of the lease, and P20,200 applicable to the machine has been included in depreciation expense for the year. 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
26
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 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) Prepaid Equipment Rental Obligations under Capital Lease Machinery and Equipment (2)
(3)
(4)
(5)
(6)
(7)
(8)
Answer: 1. B 6. C
37,500 12,500 354,000 404,000
Profit on Construction Buildings ( 475,000 - 460,000)
15,000 15,000
Land Improvements Land
500,000
Accumulated Depreciation - Mach. & Eqpt. Machinery & Equipment Gain on sale of machinery P260,000 - (480,000 x 3/10) = P116,000 gain
336,000
500,000
220,000 116,000
Land Building Gain from Donation
1,000,000 4,000,000 5,000,000
Depreciation Expense Accumulated Depreciation - Buildings Depreciation Expense for 2005 1,200,000 x 4% 460,000 / 12 years x ½ 4,000,000 x 4% x ½ Amount recorded Adjustment to be made
95,667 95,667 P48,000 19,167 80,000
Accumulated Depreciatio n - Mach. & Equipment Depreciation Expense Depreciation expense for 2005 (3,850,000 - 480,000) x 10% 480,000 x 10% x ½ Amount recorded Adjustment to be made
31,200 31,200 P337,000 24,000
Depreciation Expense Accumulated Depreciation - Land Improvements (P500,000 x 10% x 6/12) 2. C 7. B
3. C 8. B
4. B 9. C
P147,167 51,500 P95,667
P361,000 392,200 (P31,200)
25,000 25,000
5. C 10. C
27
Problem 16 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 12/31/03 Buildings P 1,200,000 Machinery/Equip 546,500 P 1,746,200
Additions P 103,000 313,600 P 416,600
Retirements
Per Books 12/31/04 P 1,303,000 860,100 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.
28
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. 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
d. 13 years
c. 12 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
29
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 Leasehold improvements Equipment Total per WBS
P 100,000 190,000 450,000 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 equ ipment. 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 Solution 1. B Cost of the land Add: tilting cost Total 2. C Land improvement Less: Accumulated depreciation Carrying value 3. C Depreciation - leasehold improvement Depreciation - Equipment (P40,000/2)
30
500,000 10,000 510,000 190,000 10,000 (P190,000/57 mos. x 3 mos.) 180,000 10,000 20,000
d. P 20,000
4.
Total per audit Total per book Understatement of depreciation C Net book value Less: CV after impairment Loss on impairment
30,000 16,000 14,000 64,000 40,000 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 straightline 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 Present value of an ordinary annuity of 1 Present value of 1 Questions 1. The minimum annual lease payment is: a. P 744,705.10 b. P 720,000.00
6.32825 5.65022 0.32197
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
31
Solution 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 March 31, 2003 June 30, 2003 October 31, 2003 January 31, 2004 March 31, 2004 May 31, 2004
P 500,000 600,000 800,000 600,000 300,000 500,000 600,000
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
32
Solution 1. B Jan. 3 500,000 x 12/12 = March 31 600,000 x 9/12 = June 30 800,000 x 6/12 = Oct 31 600,000 x 2/12 = actual cost of P580,000) 2. A Beg bal. 2,500,000 x 6/6 = 145,000 x 6/6 = Jan. 31 300,000 x 5/6 = Mar 31 500,000 x 3/6 = May 31 600,000 x 1/6 =
500,000 450,000 400,000 100,000
2,500,000 145,000 250,000 250,000 100,000
AAE 1,450,000 x 10% = P145,000 (Lower than the
3,245,000 AAE
Specific borrowing - P2,000,000 x 10% x 6/12 General borrowing - 1,245,000 x 7.25% x 6/12 Interest to be capitalized
= 100,000 = 45,132 145,132 (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.
4.
5.
B Total cost in the construction - P 3,900,000 Interest capitalized 290,132 Total cost – building - P 4,190,132 B Interest expense – 2003 Specific borrowing P 2,000,000 x 10% = General borrowing P 5,000,000 x 8% = P 3,000,000 x 6% = Less: Interest capitalized = Total interest expense – 2003 = D Interest expense – 2004 Specific borrowing P 2,000,000 x 10% = General borrowing P 5,000,000 x 8% = P 3,000,000 x 6% = Less: Interest capitalized = Total interest expense – 2003 =
200,000 400,000 180,000 (145,000) 635,000
200,000 400,000 180,000 (145,132) 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.
33
