Exercises and Assignment: Property, Plant, and Equipment
Client 1: Intercontinental Works Corporation
The following account appears in the record of Intercontinental Works Corporation:
The accounts have not been closed for the year 2019.
Required:
Prepare working papers showing the correct account and prepare all necessary audit adjustments.
Straight-line depreciation at 10% per year is to be used. Ignore salvage value.
Client 2: SM Development Corporation
The company bought land and built a warehouse during 2020. It debited the following related costs to
an account titled Land and Buildings:
1|P age
Exercises and Assignment: Property, Plant, and Equipment
In addition, you discovered that compensation for the worker’s injury was necessary because it was not
covered by the insurance policy purchased by the company. Accident insurance that would have
covered the injury would have cost an additional P3,500. The modifications ordered by the building
inspectors resulted from poor planning by the company.
Required:
Prepare the adjusting entries on December 31, 2020 to properly classify the preceding items.
Client 3: Mitsubishi Motors Corporation
The following account balances were included in the statement of financial position of Mitsubishi on
December 31, 2020:
During 2021, the following transactions occurred:
1. Land was acquired for P700,000 for a future building site. Commissions of P40,000 were paid to
a real estate agent.
2. A factory and land were acquired from Kentucky Development Corporation by issuing 20,000
shares of P30 par ordinary shares. At that time, the shares were selling for P40 per share on PSE.
The independently appraised values of the land and the factory were P600,000 and P180,000,
respectively.
3. Machinery and equipment were acquired at a cost of P120,000. In addition, sales tax, freight
costs, and installation costs were P7,000, P10,000, and P16,000, respectively. During installation,
the machinery was damaged and P2,000 was spent in repairs.
4. A new parking lot was installed at a cost of P30,000.
5. A machine that had cost 200,000 on January 1, 2017 and had a book value on December 31,
2021 of P40,000 was sold on that date for P60,000.
6. Half of the land purchased in item 1 was prepared for a building site. Costs of P260,000 were
incurred to clear the land, and the timber recovered was sold P30,000. A new building was built
for P600,000 plus architect’s fees and imputed interest on equity funds used during construction
of P180,000, and P150,000, respectively.
7. Costs of P20,000 were incurred to improve some leased office space. The lease will terminate in
2023 and is not expected to be renewed.
8. A group of new machines was purchased under a royalty agreement that provides for payment
of annual royalties based on units produced. The invoice price of the machines was P30,000,
freight costs were P2,000, and royalty payments for 2021 were P12,000.
Required: Prepare journal entries to record all the preceding events. Unless otherwise stated,
assume the company makes all payments in cash.
2|P age
Exercises and Assignment: Property, Plant, and Equipment
Client 4: Royal Star Enterprises
Royal Star Enterprises is a wholly owned subsidiary of Royal Corporation. 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. Royal Corporation, the parent, operates 12 retail outlets in Laguna. The service
center uses 3 delivery trucks and 15 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, 2020, Royal Start Enterprises reported audited balances of P525,000 and P320, 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 5-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 2020, the following transactions and journal entries were completed by the company:
2/2/2020: Sold one delivery truck for P2,000. The truck was fully depreciated at 12/31/2020.
Cash
P2,000
Trucks
P2,000
3/1/2020: Bought one delivery truck for P60,000.
Trucks
Cash
P60,000
P60,000
3/15/2020: Sold one service truck for P8,000. This truck was purchased 6/15/2017 for P25,000 and the
accumulated depreciation, according to Royal’s subsidiary ledger, at the date of sale was P12,500.
Cash
P8,000
Trucks
P8,000
7/25/2020: Bought one service truck for P27,500.
Trucks
Cash
P27,500
P27,500
3|P age
Exercises and Assignment: Property, Plant, and Equipment
12/31/2020: Recorded depreciation for 2020:
•
•
2 delivery trucks @ P10,000 each
15 service trucks @ P5,000 each
Depreciation expense – Trucks
Accumulated depreciation – Trucks
P20,000
P75,000
P95,000
P95,000
Required:
a. Prepare an audit working paper analyzing these accounts:
➢ Trucks
➢ Accumulated depreciation – trucks
➢ Depreciation expense – trucks
➢ Gain/loss on disposal of trucks
Start with the audited balances at the beginning of the year. Reflect the transactions as they
should have been recorded during 2020 to arrive at audited balances at the end of the year.
Afterwards, compare these with the December 31, 2020 client balances and record necessary
audit adjustments.
b. What are the audit objectives for the purpose of this exercise? What audit procedures should
be applied in meeting these objectives?
c. Add audit legends. Explain them at the bottom of your work paper, describing the procedures
that you identified in requirement b.
4|P age
Exercises and Assignment: Property, Plant, and Equipment
Client 5: DMCI Holdings Inc.
At December 31, 2020, certain accounts included in the property, plant, and equipment section of the
DMCI Holdings Inc.’s balance sheet had the following balances:
Land
Buildings
Leasehold improvements
Machinery and equipment
P100,000
P800,000
P500,000
P700,000
During 2021, the following transactions occurred:
1. Land site number 621 was acquired for P1,000,000. Additionally, to acquire the land, DMCI paid
P60,000 commission to a real estate agent. Costs of P15,000 were incurred to clear the land.
During the course of clearing the land, timber and gravel were recovered and sold for P5,000.
2. A second tract of land (site number 622) with a building was acquired for P300,000. The closing
statement indicated that the land was P200,000 and the building value was P100,000. Shortly
after acquisition, the building was demolished at a cost of P30,000. A new building was
constructed for P150,000 plus the following costs:
➢ Excavation fees
P11,000
➢ Architectural design fees
P8,000
➢ Building permit fee
P1,000
The building was completed and occupied on September 29, 2021.
3. A third tract of land (site number 623) was acquired for P600,000 and was put on the market for
resale.
4. Extensive work was done to a building occupied by DMCI under a lease agreement that expires
on December 31, 2030. The total cost of the work, was P125,000, which consisted of the
following:
➢ Painting of the ceilings P10,000 (estimated useful life is one year)
➢ Electrical work P35,000 (estimated useful life is ten years)
➢ Construction of extension to current working area P80,000 (estimated useful life is
thirty years)
The lessor paid one-half of the costs incurred in connection with the extension to
the current working area.
5. During December 2021, costs of P65,000 were incurred to improve leased office space. The
related lease will terminate on December 31, 2023 and is not expected to be renewed.
6. 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 P75,000, freight costs were P2,000, unloading charges were P1,500, and royalty
payments for 2021were P13,000.
5|P age
Exercises and Assignment: Property, Plant, and Equipment
Required:
a. Prepare a detailed analysis of the changes in each of the following accounts for 2021:
➢ Land, Buildings, Leasehold improvements, Machinery and equipment
b. List the items in the fact situation which were not used to determine the answer to
Requirement 1, and indicate where, or if, these should be included in DMCI’s financial
statements.
Theoretical Questions:
a. The auditor’s verification of plant and equipment is facilitated by several factors not applicable
to audit work on current assets. What are these factors?
b. What is the principal objective of the auditors in analyzing a Repairs and Maintenance expense
account?
c. What documentary evidence is usually available to the auditors in the client’s office to
substantiate the legal ownership of property, plant, and equipment?
6|P age