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The document contains 6 problems related to auditing of property, plant, and equipment. Problem 1 provides details of an acquisition by ABS Corporation and requires calculating the correct cost of land and building and net adjustment to share premium. Problem 2 gives various transactions of China Manufacturing Company and requires calculating depreciation expense, treatment of land, and carrying value of fixed assets. Problem 3 provides asset details for Korea Corporation and requires calculating depreciation expense for 2012. Problem 4 describes an overhaul of a truck by Japan Company and requires calculating 2012 depreciation expense and accumulated depreciation. Problem 5 includes a partial fixed asset schedule for Russia and requires completing missing details. Problem 6 describes 6 impairment situations and requires identifying any requiring impairment loss recognition
The document contains 6 problems related to auditing of property, plant, and equipment. Problem 1 provides details of an acquisition by ABS Corporation and requires calculating the correct cost of land and building and net adjustment to share premium. Problem 2 gives various transactions of China Manufacturing Company and requires calculating depreciation expense, treatment of land, and carrying value of fixed assets. Problem 3 provides asset details for Korea Corporation and requires calculating depreciation expense for 2012. Problem 4 describes an overhaul of a truck by Japan Company and requires calculating 2012 depreciation expense and accumulated depreciation. Problem 5 includes a partial fixed asset schedule for Russia and requires completing missing details. Problem 6 describes 6 impairment situations and requires identifying any requiring impairment loss recognition
The document contains 6 problems related to auditing of property, plant, and equipment. Problem 1 provides details of an acquisition by ABS Corporation and requires calculating the correct cost of land and building and net adjustment to share premium. Problem 2 gives various transactions of China Manufacturing Company and requires calculating depreciation expense, treatment of land, and carrying value of fixed assets. Problem 3 provides asset details for Korea Corporation and requires calculating depreciation expense for 2012. Problem 4 describes an overhaul of a truck by Japan Company and requires calculating 2012 depreciation expense and accumulated depreciation. Problem 5 includes a partial fixed asset schedule for Russia and requires completing missing details. Problem 6 describes 6 impairment situations and requires identifying any requiring impairment loss recognition
COLLEGE OF BUSINESS & ACCOUNTANCY AUDITING PROBLEMS
AUDIT OF PROPERTY, PLANT & EQUIPMENT AP 005 PROBLEMS RSPADERES INSTRUCTION: ANSWER THE FOLLOWING QUESTIONS PROBLEM 1 In April 5, 2012, ABS Corporation acquired a land and an old building in exchange for P4,800,000 cash and 50,000 shares of its own ordinary shares with a par value of P30 per share. The Companys ordinary shares were selling at P95 per share when the acquisition was made. The transaction was recorded by the company as: Land (assessed value) 5,500,000 Building (assessed value) 4,500,000 Cash 4,800,000 Ordinary shares 1,500,000 Share premium 3,700,000 Moreover, the Company incurred the following costs in relation to the acquisition: Legal fees to complete the transaction 400,000 Property taxes for three calendar years including the current year 1,800,000 Payments to tenants of old building 300,000 Cost of demolishing the old building 660,000 Salvage proceeds from the demolition 60,000 All additional costs were charged to operation during the year including the allocated value of the building which was charged to a loss on the retirement of the asset. The salvage proceeds from the demolition was credited to other income
REQUIRED: 1) What is the correct cost of the land? 2) What is the correct cost of the building? 3) What is the net adjustment to the share premium account?
PROBLEM 2 China Manufacturing Company had several transactions during 2011 and 2012 concerning plant assets. Several of these transactions are described below, followed by the entry or entries made by the Companys accountant Rspaderes2013 Page 2 of 12
Equipment. Several used items were acquired on February 1, 2011, by issuing a P100,000 non- interest bearing note. The note is due one year from the date of issuance. No market value of the note or the equipment is available. Chinas most recent borrowing rate was 8% February 1, 2011 Equipment 100,000 Notes payable 100,000
December 31, 2011 Depreciation expense 10,000 Accumulated depreciation equipt 10,000
Buildings. A building was acquired on June 1, 2011 by issuing 100,000 shares of the Companys P5 par value common stock. The common stock is not widely traded, therefore no market price is availabl. The building was appraised on the transaction date at P650,000. June 1, 2011 Building 500,000 Common stock 500,000
Dec 31, 2011 Depreciation expense 20,000 Accumulated depreciaton- building 20,000 Inventory/ Fixtures. Inventory and displayed fixtures were acquired for P125,000 cash on April 1, 2012 from a competitor who was liquidating her business. The estimated value of the inventory was P85,000 and the value of the fixtures was P55,000.
April 1, 2012 Inventory 85,000 Display fixtures 55,000 Cash 125,000 Gain on acquisition 15,000
Land. Land was donated to China by the city of Davao in September 2012 as an inducement to build a facility there. Plans call for construction at an undetermined future date. The land was appraised at P48,000. NO entry was made.
Machinery. Machinery was acquired an exchange for similar equipment on October 12 and were appraised at P45,000 on the date of exchange. China received machinery valued at P40,000 and P5,000 in cash in the transaction.
October 12, 2011 Machinery 40,000 Cash 5,000 Accum. Depreciation- machinery 16,000 Machinery 52,500 Gain on exchange of machinery 8,500
December 31, 2011 Depreciation expense 4,000 Accumulated depreciation- machinery 4,000 Rspaderes2013 Page 3 of 12
Additional information China uses straight line depreciation, applied to all assets as follows: - A full year-depreciation taken in the year of acquisition and no depreciation taken on the year of disposal - Estimated life: 25 years for buildings; 10 years on all other assets (no salvage values are assumed)
REQUIRED: 1) Depreciation expense 2) Land 3) Depreciable fixed assets/ Carrying value
PROBLEM 3 Korea Corporations schedule of depreciable assets at December 31, 2011 was as follows:
ASSET COST ACCUM. DEPR ACQUISITION YEAR SALVAGE VALUE A 100,000 64,000 2010 20,000 B 55,000 36,000 2009 10,000 C 70,000 33,600 2009 14,000
Korea takes a full years depreciation expense in the year of an assets acquisition and no depreciation in the year of an assets disposition. The estimated useful life of each depreciable asset is five years.
REQUIRED 1) Korea depreciates asset A using the double-declining balance method. How much depreciation expense should Korea record in 2012 for asset A?
2) Using the same depreciation method as used in 2009, 2010, 2011, how much depreciation expense should Korea record in 2012 for asset B?
3) Korea depreciates asset C using the straight-line method. On June 30, 2012, Korea sold asset C for 28,000 cash. How much gain or loss should Korea record in 2012 on the disposal of asset C?
PROBLEM 4 The Japan Company purchased an ELF truck on January 2, 2005 for P500,000. The truck was being depreciated on a straight-line method over an estimated useful life of 10 years with no salvage value. At the beginning of 2012, the Company paid 125,000 to overhaul the truck. As a result of the improvement, the company estimated that the useful life of the truck would extend to an additional five years. Rspaderes2013 Page 4 of 12
REQUIRED. 1) What should be the depreciation expense recorded for this machine in 2012? 2) How much is the accumulated depreciation as of December 31, 2012.
PROBLEM 5 Russia, a manufacturer of steel products, began operations in October 1, 2009. The accounting department of Russia has started the fixed asset and depreciation schedule presented below. You have been asked to assist in completing the schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the Companys records and personnel:
- Depreciation is computed from the first of the month of acquisition to the first of the month of disposition - Land A and Building A were acquired from a predecessor corporation. Russia paid P8,200,000 for the land and building together. At the time of acquisition, the land had an appraised value of P900,000 and the building had an appraised value of P8,100,000.
- Land B was acquired on October 2, 2010, in exchange for 2,500 newly issued shares of Russias common stock. At the date of acquisition, the stock had a par value of P50 per share. Also on that date, the land had a fair value of P750,000. During October 2010, Russia Paid P160,000 to demolish the existing building on this land so it could construct a new building. - Construction of Building B on the newly acquired land began on October 1, 2011. By September 30, 2012,Russia had paid P3,200,000 of the estimated total construction cost of P4,500,000. It is estimated that the building will be completed and occupied by July 2013. - Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair market value of P300,000 and the salvage value at P30,000. - Machinery As total cost of P1,649,000 includes installation expnse of P6,000 and normal repairs and maintenance of P149,000. Salvage value is estimated at P60,000. Machinery A was sold on February 1, 2012.
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Assets Acquisition date Cost Salvag e value Depreciatio n method Estimated life in years Depreciation expense for the year ended 2011 2012 Land A 10/1/2010 ? N/A N/A N/A N/A N/A Building A 10/1/2010 ? 400,000 Straight line ? 174,500 Land B 10/2/2010 ? N/A N/A N/A N/A N/A Building B Under construction 3,200,00 0 to date Straight line 30 ? Donated equipment 10/2/2012 ? 30,000 150% DB 10 ? ? Machinery A 10/2/2010 ? 60,000 SYD 8 ? ?
REQUIRED: 1) Cost of Land A 2) Cost of Building A 3) Estimated life in years of Building A 4) Depreciation expense Building A, for the year ended September 30, 2012 5) Cost of Land B 6) Depreciation expense Building B, for the year ended September 30, 2012 7) Cost of donated equipment 8) Depreciation expense- Donated equipment, for the year ended September 30, 2012 9) Depreciation expense- Machinery A, for the year ended September 30, 2012\
PROBLEM 6 Six situations are given below concerning a plant asset currently used in operations
CASE Carrying value Value in Use FMV less cost to sell 1 120,000 180,000 135,000 2 135,000 195,000 120,000 3 150,000 180,000 255,000 4 180,000 120,000 90,000 5 210,000 165,000 195,000 6 225,000 195,000 255,000
REQUIRED: Which among these, if any, would require the recognition of impairment loss and determine the amount of loss?
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PROBLEM 7 Lex Corporation is testing group of assets that comprise one cash generating unit for possible impairment. The assets acquired in January 1, 2005 have an original aggregate cost of P609,000 purchased 3 years ago and depreciated using the straight-line method at a total life of eight years with a residual value of P49,000. The following are the facts about the future expected cash inflows and outflows at December
The net selling price of this cash generating unit is calculated at P253,500. The prevailing after tax discount rate is 12% while the prevailing pre-tax discount rate is 10%
REQUIRED: 1) What is the carrying value of the machines before impairment test? 2) What is the value in use of the machines? 3) What is the recoverable value of the machine? 4) How much is the impairment loss to be recognized? 5) IF fair value less cost to sell is P300,000, what is the recoverable amount? 6) Based on number 5, what is the impairment loss?
PROBLEM 8 On December 31, 2009, SEM Company subjected to impairment test a piece of equipment. Data pertinent to the equipment as of December 31, 2009 follow:
Original cost P2,400,000 Adjusted accumulated depreciation 600,000 Selling price 1,400,000 Estimated cost to make the sale 200,000 Value in use 1,100,000 Remaining useful life 6 years Method of depreciation Straight line
On December 31, 2011, the asset is found to have a recoverable amount of P1,300,000
REQUIRED 1) How much is the loss on impairment in 2009? 2) How much is the depreciation expense recognized in 2010? Rspaderes2013 Page 7 of 12
3) How much gain in recovery is recognized in 2011? 4) How much is the depreciation expense recognized in 2012 under the cost model? 5) How much is the depreciation expense recognized in 2012 under the revaluation model?
PROBLEM 9 Your audit of Agimat Corporation for the year 2012 disclosed the following property dispositions:
Land On January 15, a condemnation award was received as consideration for the forced sale of the companys land and building, which stood in the path of a new highway.
Building On March 12, land and building were purchased at a total cost of P6,000,000, of which 30% was allocated to the building on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was accomplished during the month of august. Cash proceeds received in September represent the net proceeds from demolition of the building.
Warehouse On July 4, the warehouse was destroyed by fire. The warehouse was purchased on January 2, 2006. On December 12, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of P7,200,000/
Machine On December 15, the machine was exchange for a machine having a fair value of P756,000 and cash of P108,000 was received.
Delivery truck On November 13, the delivery truck was sold to a used car dealer.
REQUIRED: Compute for the following: 1) Land 2) Building 3) Warehouse 4) Machine 5) Delivery truck
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PROBLEM 10 MIL Company whose financial year end is December 31, purchased new manufacturing equipment on April 1, 2004. The equipment has a special component that requires replacement before the end of the equipments useful life. This equipment was initially recognized in two accounts: one is for the main unit and the other for the special component. MIL uses the straight line method of depreciation for all of its manufacturing equipment. Depreciation is recorded to the nearest month, residual values being disregarded.
On April 1, 2010, the special component is removed from the main unit and is replaced with a similar component. This component is expecte3d to have a residual value of approximately 25% of cost at the end of the main units useful life. Because of its materiality, the residual value will be considered in calculating depreciation. Specific information about the equipment is as follows:
Main Unit Purchase price in 2014 P187,200 Residual value 13,200 Estimated useful life 10 years
Component 1 Purchase price in 2014 P30,000 Residual value 750 Estimated useful life 6 years
Component 2 Purchase price P45,750
REQUIRED: Compute for the depreciation charge for the year 1) 2004 2) 2010 3) 2011
PROBLEM 11 On January 1, 2008, EBJ Corporation acquired a factory equipment at a cost of P450,000. The equipment is being depreciated using the straight line method over its projected useful life of 10 years with P50,000 salvage value.
On December 31, 2009, ad determination was made that the future net cash flows expected from continued use of the asset shall be P40,000 per year. The asset also had a fair value less cost to sell of P220,000 on the same date. You ascertained that this was properly computed and that recognition of impairment was warranted. (The prevailing interest rate is 10%) Rspaderes2013 Page 9 of 12
On December 31, 2011, the assets, replacement cost was determined to be P550,000 with a total life of 12 years from the date of the acquisition. You also ascertained that this valuation is reasonable in the circumstance. You have been asked to assist the companys accountant in the application of PAS 36, the standard on the impairment of assets
REQUIRED: 1) What is the recoverable value of the asset on December 31, 2009? 2) How much impairment loss should be recognized on December 31, 2009? 3) What is the assets carrying amount on December 31, 2011, before valuation? 4) How much impairment recovery should be reported in the 2011 income statement? 5) What is the depreciation expense in 2012, under cost method? 6) What is the depreciation expense in 2012, under the revaluation method? 7) What is the balance of any revaluation surplus at the end of 2012, under piecemeal realization?
PROBLEM 12 Australia company purchased a machine under a deferred payment contract on December 31, 2009. Under the terms of the contract, Australia is required to make three annual payments of P140,000 each beginning December 31, 2010. The appropriate interest rate is 8%. What is the purchase price of the machine?
PROBLEM 13 A plant asset has a cost of P24,000, a salvage value of P6,000 and a three year life. If depreciation in the third year amounted to P3,000, what depreciation method was used?
PROBLEM 14 Various equipment used by RAM Co. in its operations are either purchased from dealers or self- constructed. The following items for two different types of equipment were recorded during the calendar year 2012.
Manufacturing equipment (self constructed) Materials and purchased parts at gross invoice price (RAM Failed to take the 2% cash discount) P300,000 Imputed interest on funds used during contruction (stock financing) 21,000 Labor costs 285,000 Overhead costs (fixed P30,000, variable- P45,000) 75,000 Gain on self construction 45,000 Installation cost 6,600
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Store Equipment Cash paid for equipment P105,000 Freight and insurance cost while in transit 2,000 Cost of moving equipment into place at store 3,100 Wage cost for technicians to test equipment 4,000 Insurance premium paid during first year of operation on this equipment 1,500 Special plumbing furnitures required for this equipment 8,000 Repair cost incurred in first year of operations related to this equipment 1,300
REQUIRED: 1) WhAt is the total cost of the self-constructed equipment? 2) What is the total cost of the store equipment purchased?
PROBLEM 15 On January 2, 2011 Wedding Corporation acquired a tract of land with a building erected on it for P1,200,000. In addition, Wedding paid a real estate brokers commission of P72,000, legal fees of P12,2000 and a title guarantee insurance of P36,000. The closing statement indicated that the land value was P1,000,000. Shortly after the acquisition, the building was razed at a cost of P130,000.
Wedding entered into a P6,000,000 fixed-price contract with TD contractors, inc. on March 2, 2011 for the construction of an office building on the land purchased. The building was completed and occupied on September 30, 2012. Additional costs were incurred as follows: Plans, specifications and blueprints P24,000 Excavation costs 20,000 Architects fees for design and supervision 190,000 The company estimates that the building will have a 40-year useful life from the date of completion and decides to use the 150% declining balance depreciation method. To finance the construction cost, Wedding borrowed P6,000,000 on March 2, 2011. The loan is payable in 10 annual installments of P600,000 plus interest at the rate of 14%. The contractors average amount of accumulated building construction expenditures were as follows: For the period March 2 to December 31, 2011 1,800,000 For the period January 1 to September 30, 2012 4,600,000
REQUIRED: 1) What is the correct value of the land? 2) How much is the total capitalized borrowing cost? 3) What is the correct depreciation expense on the building in 2012? 4) What is the carrying value of the building as of December 31, 2012?
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PROBLEM 16 On January 1, 2009, EMDL corporation contracted with RNB Construction Company to construct a building for P40,000,000 on land that EMDL purchased several years ago. The contract provides that EMDL is to make five payments in 2009, with the last payment scheduled for the date of completion. Th building was completed on December 31, 2009. EMDL made the following payments during 2009:
January 1 4,000,000 March 31 8,000,000 June 30 12,200,000 September 30 8,800,000 December 31 7,000,000 Total P40,000,000 EMDL had the following debt outstanding at December 31, 2009:
a. A12%, 4-year note dated January 1, 2009 with interest compounded quarterly. Both principal and interest are payable on December 31, 2012.This loan relates specifically to the building project P17,000,000
b. A 10% 10-year note dated December 31, 2005, with simple interest; interest payable annually on December 31 12,000,000
c. A 12%, 5-year note dated December 31, 2007, with simple interest, payable annually on December 31 14,000,000
REQUIRED: 1) The amount of the interest to be capitalized during 2009 2) The amount of the interest that would be expensed for 2009
PROBLEM 17 RAM Corporation purchased a machinery on January 1, 2007 for P5,000,000. The same had an expected useful life of 5 years. Straight line depreciation is in place for similar items. On January 1, 2008, the asset is appraised as having a sound value of P4,500,000. On January 1, 2010, the asset is appraised at a sound value of P750,000. REQUIRED: 1) How much was credited to the revaluation surplus as a result of the revaluation in 2008? 2) What is the correct depreciation to be recognized in 2008? 3) How much loss on impairment should be recognized on January 1, 2010?