AUDIT OF PROPERTY, PLANT AND EQUIPMENT

Problem I
The property plant and equipment section of Matagumpay Corporation’s statement of financial
position at December 31, 2017 included the following items:
Land, P2,800,000; Land Improvements, P40,000; Building, P3,600,00; Machinery and
Equipment, P3,920,000.
During 2018 the following data were available to you upon your analysis of the accounts:

Cash paid on purchase of land P10,000,000

Mortgage assumed on the land bought, including interest at 16% 16,000,000
Realtor’s commision 1,200,000
Legal fees, realty taxes and documentation expenses 200,000
Amount paid to relocate persons squatting on the property 400,000
Cost of tearing down an old building on the land 480,000
Amount recovered from the salvage of the building demolished 600,000
Cost of fencing the property 440,000
Amount paid to a contractor for the building constructed 8,000,000
Building permit fees 80,000
Excavation fees 200,000
Architect fees 200,000
Interest that would have been earned had the money used during the
period of construction have been invested in the money market 600,000
Invoice cost of machinery acquired 8,000,000
Freight, unloading and delivery charges 240,000
Custom duties and other charges 560,000
Allowances, hotel accommodation, etc, paid to foreign technicians during
installations and test run of machines 1,600,000
Royalty payment on machines purchased (based on units produced and
sold) 480,000

Required:
Based on the above and the result of your audit, compute for the following as of December 31, 2018:

1. Land
2. Land improvements
3. Building
4. Machinery and equipment
5. Total depreciable property and equipment

Problem II
The following were discovered during your audit of DeMaguiba Incorporated financial statements
for the year ended December 31, 2017:

a) On December 24, 2017, the company purchased office equipment for P400,000, terms
2/5, n/15. No entry was made on the date of purchase. The same was paid on December
31, 2017 and the accountant debited office equipment and credited cash P400,000.
b) Machine C, with a cash price of P128,000, was purchased on January 2, 2017. The company
paid P20,000 down and P10,000 for 12 months. The last payment was made on December
30, 2017. Straight line depreciation based on a five year useful life and no salvage value was
recorded at P28,000 for the year. Freight of P4,000 on this machine was debited to the freight
in account. Cost of safety rail and platform amounting to P10,000 and cost of cooling device,
P8,000 were all charged to repairs and maintenance expense. Moreover, estimated
dismantling cost of P15,000 based contract was ignored.

c) Machine P with a cash selling price of P360,000 was acquired on April 1, 2017, in exchange
for P400,000 face amount of bonds payable selling 94, and maturing on April 1, 2027. The
accountant recorded the acquisition by a debit to Machinery and credit to bonds payable for
P400,000. Straight line depreciation was recorded based on a five-year economic life and
amounted to P54,000 for nine months. In the computation of depreciation, residual value of
P40,000 was used.
d) Machinery A was acquired on January 21, 2017, in exchange for past due account receivable
for P140,000, on which an allowance of 20% was established at the end of 2016. The current
fair value of the machine on January 21 was estimated at P110,000. The machine was
recorded by a debit to Machinery and a credit to accounts receivable for P140,000. No
depreciation was recorded on Machine A, because it was not installed and never use in
operation. On February 2,
2017, Machine A was exchanged for 1,000 shares of the company’s outstanding shares with
market value of P105 per share. The treasury stock account was debited for 140,000 with
the corresponding credit to machinery.
e) On December 30, 2017, the company exchanged 10,000 shares of E Corp ordinary shares,
which the client company was holding as an investment, for equipment from D Company. The
ordinary share of E, which was purchased by DeMaguiba for P45 per share, had a quoted
market value of P50 per share on the date of exchange. The equipment had a market value of
P470,000. The transaction was recorded by a debit to equipment and a credit to Investment in
ordinary shares for P450,000.
f) On December 30, 2017, Machine R with the carrying amount of P120,000(cost P400,000) was
exchanged for a similar asset with a fair value of P150,000. In addition, DeMaguiba paid
P20,000 to acquire the new machine. The exchange was recorded by a debit to Machinery and
credit to cash for P20,000.
g) Machine S was recorded at P102,000, which included the carrying amount of P22,000 for an
old machine accepted as a trade in, and cash of P80,000. The cash price of Machine S was
P90,000, and the trade in allowance was P10,000. This transaction took place on December
31, 2017.
h) On December 31, 2017, the entity exchanged an equipment costing P2,000,000 with book
value of P1,300,000 and fair value of P1,500,000 with new equipment also valued at
P1,500,000. The cash flows of the asset given and cash flows of asset received do not differ
significantly. No entry was made.
i) Ms. X, the company’s president, donated land and building appraised at P200,000 and
P400,000, respectively, to be used by the company as plant site. The company began
operating the plant on September 30, 2017. The building is estimated to have a useful life of 25
years. Since no money was involved, no journal entry was made for the above transaction.
j) On July 1, 2016, the notional government granted a parcel of land. On the date of grant, the
land had a fair value of P2,000,000. The grant required the company to construct cold
 storage building on the site. The company finished the construction of the building, which has
an estimated useful life of 25 years, on January 2, 2017. The company appropriately
recorded the cost of the building for P4,000,000 (which included direct materials, direct labor
and indirect cost and incremental overhead) but failed to provide depreciation for 2017.
Unaware of the accounting procedures for government grants, the company did not reflect
the grant on its books.

Required:
As DeMaguiba’s external auditor, you are required to prepare any necessary adjusting journal entries
as of December 31, 2017.

Problem III
An entity received a grant related to factory building purchased earlier this year. The total amount of the
grant is P9,000,000. The entry acquired the building from an industrialist identified by the government
for P27,000,000. The useful life of the building is estimated to be 10 years and to be depreciated using
straight line.

Required:
Prepare the necessary journal entries for the current year assuming the government grant is
accounted for as:
a) Deferred income
b) Deduction from the cost of the asset

Problem IV
Wise Corporation was incorporated on January 2, 2017, but was unable to begin manufacturing
activities until July 1, 2017 because the new factory facilities were not completed until that date.
The “Land and Building” account at December 31, 2017 follows:

Date Particulars Amount

1/31 Land and Building P1,098,000
2/28 Cost of removal of old building 60,000
5/2 Partial payment on new construction 700,000
legal fees paid 15,000
6/1 Second payment on new construction 600,000
7/1 Fire insurance premium – one year 26,000
Final payment on new construction 200,000
12/31 Asset write-up 500,000
Total 3,199,000
12/31 Depreciation – 2017 at 1% of the account balance 31,990
3,167,010

You were able to gather the following information during your audit

a) To acquire land and building, the company paid P98,000 cash and 10,000 shares of its
9% cumulative preferred shares, P100 par value per share. The shares were then
selling at P120
b) Legal fees covered the following
a. Cost of incorporation – 9, 500
 b. Examination of title covering purchase of the land – 4,000
c. Legal work in connection with construction contract – 1,500
c) Because of general increase in construction costs after entering into the building contract,
the BOD increased the value of the building by P500,000, believing such increase was
reasonable to reflect the current market value at the time the building was completed.
Retained earnings account was credited for this amount.
d) Estimated useful life of the building is 25 years.

Required:

1. Prepare the necessary adjusting journal entries as of December 31, 2017.

2. Determine the adjusted balances of the following as of December 31, 2017
a. Land
b. Land and building
c. Carrying value of building
d. Organization expense

Problem V
In the audit of Diligent Company for the year 2017, the following items and information appeared in
the production machines account of the auditee:

Date Particulars Debit Credit

2009
1/1 Balance machines 1,2,3 and 4 at P90,000 each 360,000
8/31 Machine 5 198,000
Machine 1 3,000
9/30 Machine 6 96,000
12/1 Machine 7 and 8 at P216,000 each 432,000
Machine 2 21,000
12/31 balance 1,062,000
1,086,000 1,086,000

The accumulated depreciation account contained no entries for the year 2017. The balance on
January 1, 2017 per your audit, was as follows:

Machine 1 84,375
2 39,375
3 33,750
4 22,500
Total 180,000

Based on your further inquiry and verification, you noted the following:

1. Machine 5 was purchased for cash, it replaced machine 1, which was sold on this date for
3,000.
2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on
December 1, 2017. Insurance of P21,000 was recovered. Machine 7 was to replace
Machine 2.
 3. Machine 3 was traded in for Machine 6 at an allowance of P12,000; the difference was
paid in cash and charged to production machine account.
4. Depreciation rate is recognized 25% per annum

Required:
Determine the adjusted balance of the production machine as of December 31, 2017 and
Depreciation expense for the year 2017.

Problem VI
You obtain the following information pertaining to Intelligent Corporation’s property, plant
and equipment for 2017 in connection with your audit of the company’s financial
statements.

Audited balances at December 31, 2016:

Debit Credit
Land 3,750,000
Buildings 30,000,000
Accumulated depreciation - building 6,577,500
Machinery & Equipment 22,500,000
Accumulated depreciation – M&E 6,250,000
Delivery equipment 2,875,000
Accumulated Depreciation - DE 2,115,000

Depreciation data:

Depreciation method Useful life

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

Transaction during 2017 and other information are as follows:

a) On January 2, 2017, the company purchased a new truck for P500,000 cash and traded in
a 2-year old truck with a cost of P450,000 and a book value of P135,000. The new truck
had a cash price of P600,000; the market value of the old truck was not known.
b) On April 1, 2017, a machine purchased for P575,000 on April 1, 2012 was destroyed by fire.
The company received P385,000 from its insurance company.
c) On May 1, 2017, cost of P4,200,000 was incurred to improve leased office premises.
The leasehold improvements had a useful life of 8 years. The related lease will
terminate on December 31, 2023.
d) On July 1, 2017, machinery and equipment were purchased at a total invoice cost of
P7,000,000; additional cost of P125,000 for freight and P625,000 for installation were
incurred.
 e) The company determined that the delivery equipment comprising P2,875,000 balance at
January 1, 2017, would have been depreciated at a total amount of P450,000 for the year
ended December 31, 2017.

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

Required:
Based on the above and the result of your audit, determine the following:

1. Accumulated depreciation as of December 31, 2017 for each depreciable assets

2. Total gain or loss from disposal of assets for the year 2017

Problem VII
Masipag Company had the following outstanding loans during 2016 and 2017.

Specific construction loan 6,000,000 10%

General loan 50,000,000 12%

The company began the self-construction of a new building on January 2, 2016 and the building
was completed on June 30, 2017. The following expenditures were made in 2016 and 2017:

January 2, 2016 8,000,000

April 13 10,000,000
December 5 6,000,000
March 9 12,000,000

Records disclosed that only P600,000 each year was capitalized.

Required:
Prepare the necessary adjusting journal entries as of December 31, 2017.

Problem VIII
On January 1, 2017, an entity took out a loan of P6,000,000 at 12% in order to finance specifically
the construction of machinery. The construction started on the same date and substantially
completed on September 30, 2017. The loan was repaid on December 31, 2017. The amount of
P20,000 was earned from temporary investment of funds while not in used until September 30,2017.
The total amount of interest for one year was charged to profit or loss.

Required:
Recommend for the appropriate treatment of borrowing cost.

Problem IX
On January 2, 2012, a new building was purchased at a cost of P6,000,000. Depreciation was
computed using straight line method at 4% per year. On January 1, 2009, the building was revalued
at a fair value of P8,000,000. Examination revealed the following journal entries.

Building 2,000,000
2,000,00
Retained earnings 0

Depreciation expense 320,000

Accumulated depreciation 320,000

Required:
Prepare all the necessary journal entries (include tax implication)

Problem X
Masigasig Company acquired Machinery on January 2, 2014 for P25,000,000. It was depreciated
using straight line with useful life of 10 years. On January 2, 2017, the entity had properly tested the
asset for impairment. The machinery had a remaining life of 5 years and was expected to generate
undiscounted net cash flows of P3,750,000 per year. The fair value less cost to sell of the machinery
on January 2, 2009 was P15,000,000. Examination of the records disclosed the following journal
entries.

Impairment loss 1,250,000

Accumulated depreciation 1,250,000

Depreciation expense 3,750,000

Accumulated depreciation 3,750,000

Required:
Prepare all the necessary adjusting journal entries on December 31, 2017.

Problem XI
Marunong Company reported an impairment loss of P1,000,000 in its income statement for the year
ended December 31, 2016. This loss was related to machinery that was acquired on January 2, 2015
with cost of P5,000,000, useful life of 10 years and no residual value. On December 31, 2016, the
entity reported this asset at P3,000,000 which was the fair value on such date. On December 31, 2017,
the entity determined that the fair value of its impaired assets had increased to P3,750,000. The
straight-line depreciation was used to depreciate this asset. Records indicated the following entries for
the year 2017:

Depreciation expense 375,000

Accumulated depreciation 375,000

Machinery 1,125,000
Gain on reversal of impairment 1,125,000

Required: Prepare the necessary adjusting journal entries on December 31, 2107