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BA 451W Auditing

Practice Problem 13-37


You are engaged in the audit of the financial statements of Holman Corporation for the year
ended December 31, 20X6. The accompanying analyses of the Property, Plant, and Equipment
and related accumulated depreciation accounts have been prepared by the chief accountant of the
client. You have traced the beginning balances to your prior years audit working papers.
HOLMAN CORPORATION
Analysis of Property, Plant, and Equipment
And Related Accumulated Depreciation Accounts
Year Ended December 31, 20X6
Final
12/31/X5
$422,500
120,000
385,000
$927,500

Assets
Additions
$ 5,000
17,500
40,400
$62,900

Final
12/31/X5
$ 60,000
173,250
$233,250
*Depreciation expense for the year.

Accum. Depr.
Additions*
$ 5,150
39,220
$44,370

Description
Land
Buildings
Machinery and Equipment

Description
Buildings
Machinery and Equipment

Assets
Retirements
$26,000
$26,000
Accum. Depr.
Retirements

Per Ledger
12/31/X6
$427,500
137,50
399,400
$964,400
Per Ledger
12/31/X6
$ 65,150
212,470
$277,620

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 companys policy is to take on half-years depreciation on all asset
additions and disposals during the year.
Your audit revealed the following information:
1.

On April 1, the company entered into a 10-year leave contract for a die casting machine,
with annual rentals of $5,000 payable in advance very April 1. The lease is cancelable by
either party (60 days 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 $40,400, the present value at the date of the lease, and
$2,020 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 construction bid
received was $17,500, the amount recorded in the Buildings account. Company personnel

constructed the addition at a cost of $16,000 (materials, $7,500; labor, $5,500; and
overhead, $3,000)
3.

On August 18, $5,000 was paid for paving and fencing a portion of land owned by the
company and used as a parking 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 20X2 for $48,000.
The chief accountant recorded depreciation expense of $3,500 on this machine 20X6.

5.

Harbor City donated land and a building appraised at $100,000 and $400,000, respectively,
to Holman 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.

Required
Prepare the adjusting journal entries that you would propose at December 31, 20X6, to adjust the
accounts for the above transactions. Disregard income tax implications. The accounts have not
been closed. Computations should be rounded to the nearest dollar. Use a separate adjusting
journal entry for each of the above five paragraphs.