VII-AUDIT OF PROPERTY, PLANT AND EQUIPMENT
PROBLEM NO. 1
Aliaga Corporation was incorporated on January 2, 2010. The following items relate to the
Aliaga’s property and equipment transactions:
Cost of land, which included an old apartment building
appraised at ₱300,000
Apartment building mortgage assumed, including
related interest due at the time of purchase
Deliquent property taxes assumed by Aliaga
Payments to tenants to vacate the apartment building
Cost of razing the apartment building
Proceeds from sale of salvaged materials
Architects fee for new building
Building permit for new construction
Fee for title search
Survey before construction of new building
Excavation before construction of new building
Payment to building contractor
Assessment by city for drainage project
Cost of grading and levelling
Temporary quarters for construction crew
Temporary building to house tools and materials
Cost of changes during construction to make new
building more energy efficient
Interest cost on specific borrowing incurred during construction
Payment of medical bills of employees accidentally
injured while inspecting building construction
Cost of paving driveway and parking lot
Cost of installing lights in parking lot
Premium for insurance on building during construction
Cost of open house party to celebrate opening of new building
Cost of windows broken by vandals distracted by the celebration
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of land
a. ₱2,980,000
b. ₱3,270,000
c. ₱3,185,000
d. ₱3,205,000
2. Cost of building
a. ₱10,810,000
b. ₱10,895,000
c. ₱10,875,000
d. ₱11,110,000
3. Cost of Land Improvements
₱ 3,000,000
80,000
30,000
20,000
40,000
10,000
60,000
40,000
25,000
20,000
100,000
10,000,000
15,000
50,000
80,000
50,000
90,000
360,000
18,000
60,000
12,000
30,000
50,000
12,000
a.
b.
c.
d.
₱12,000
₱72,000
₱1222,000
₱0
4. Amount that should be expensed when incurred
a. ₱80,000
b. ₱110,000
c. ₱62,000
d. ₱50,000
5. Total depreciable property and equipment
a. ₱11,182,000
b. ₱10,967,000
c. ₱10,947,500
d. ₱10,882,000
PROBLEM NO. 2
The following items relate to the acquisition of a new machine by Bongabon Corporation in
2010:
Invoice price of machinery
Cash discount not taken
Freight on new machine
Cost of removing the old machine
Loss on disposal of the old machine
Gratuity paid to operator of the old machine who was laid off
Installation cost of new machine
Repair cost of new machine damaged in the process of installation
Testing cost before machine was put into regular operation
Salary of engineer for the duration of the trial runs
Operating cost during first month of regular use
Cash allowance granted because the new machine proved to
be of inferior quality
₱2,000,000
40,000
10,000
12,000
150,000
70,000
60,000
8,000
15,000
40,000
250,000
100,000
QUESTIONS:
How much should be recognized as cost of the new machine?
a. ₱1,985,000
b. ₱1,993,000
c. ₱1,930,000
d. ₱2,025,000
PROBLEM NO. 3
The property, plant and equipment section of Zaragosa Corporation’s statement of financial
position at December 31, 2009 included the following items:
Land
Land improvements
Buildings
Machinery and equipment
₱2,100,000
560,000
3,600,000
6,600,000
During 2010 the following data were available to you upon your analysis of the accounts:
Cash paid on purchased of the land
Mortgage assumed on the land bought, including interest at 16%
Realtor’s commission
Legal fees, realty taxes and documentation expenses
Amount paid to relocate persons squatting on the property
Cost of tearing down and old building on the land
Amount recovered from the salvage of the building demolished
Cost of fencing the property
Amount paid to a contractor for the building erected
Building permit fees
Excavation expenses
Architect’s fees
Interest that would have been earned had the money used during
the period of contraction been invested in the money market
Invoice cost of machinery acquired
Freight, unloading, and delivery charges
Customs duties and other charges
Allowances, hotel accommodations, etc., paid to foreign technicians
during installation and the test run of machines
Royalty payment on machines purchased
(based on units produced and sold)
₱10,000,000
16,000,000
1,200,000
200,000
400,000
300,000
200,000
440,000
8,000,000
50,000
250,000
100,000
600,000
8,000,000
240,000
560,000
1,600,000
480,000
QUESTIONS:
Based on the above and the result of your audit, compute for the following as of December
31, 2010:
1. Land
a. ₱30,000,000
b. ₱14,000,000
c. ₱29,900,000
d. ₱29,600,000
2. Land Improvements
a. ₱1,300,000
b. ₱1,000,000
c. ₱1,250,000
d. ₱560,000
3. Building
a. ₱12,300,000
b. ₱11,750,000
c. ₱12,000,000
d. ₱11,700,000
4. Machinery and equipment
a. ₱14,840,000
b. ₱16,440,000
c. ₱15,400,000
d. ₱17,000,000
PROBLEM NO. 4
In connection with your audit of Cuyapo Company’s financial statement for the year 2010,
you noted the following transactions affecting the property and equipment items of the
company:
Jan. 1
Purchase real property for ₱5,026,000, which included a charge of ₱146,000
presenting property tax for 2010 that had been prepaid by the vendor; 20%
of the purchase price is deemed applicable to land and the balance to
buildings. A mortgage of ₱3,000,000 was assumed by Cuyapo on the
purchase. Cash was paid for the balance.
Jan. 15
Previous owners had failed to take care of normal maintenance and repair
requirements on the buildings, necessitating current reconditioning at a cost
of ₱236,800.
Feb. 15
Demolished garage in the rear of the building, ₱36,000 being recovered on
the lumber salvage. The company proceeded to construct a warehouse. The
cost of such warehouse was ₱540,800, which was ₱90,000 less than the
average bids made on the construction by independent contractors. Upon
completion of construction, city inspectors ordered extensive modifications to
the building as a result of failure on the part of the company to comply with
building safety code. Such modifications, which could have been avoided, cost
₱76,800.
Mar. 1
The company exchanged its own shares with a fair value of ₱320,000 (par
₱24,000) for a patent and a new equipment. The new equipment has a fair
value of ₱200,000.
Apr. 1
The new machinery for the new building arrived. In addition, a new franchise
was acquired from the manufacturer of the machinery. Payment was made by
issuing bonds with a face value of ₱400,000 and by paying cash of ₱144,000.
The value of the franchise is set at ₱160,000, while the machine’s fair value is
₱360,000.
May 1
The company contracted for parking lots and waiting sheds at a cost
₱360,000 and ₱76,800, respectively. The work was completed and paid for on
June 1.
Dec. 31
The business was closed to permit taking the year-end inventory. During this
time, required relocating and repairs were completed at a cost of ₱60,000.
QUESTIONS:
Based on the above and the result of your audit, determine the cost of the following:
1. Land
a. ₱940,000
b. ₱1,005,200
c. ₱976,000
d. ₱1,052,800
2. Buildings
a. ₱4,645,600
b. ₱5,005,600
c. ₱4,762,400
d. ₱4,681,600
3. Machinery and Equipment
a. ₱360,000
b. ₱560,000
c. ₱576,615
d. ₱659,692
4. Land Improvements
a. ₱360,000
b. ₱76,800
c. ₱436,800
d. ₱0
5. Total property, plant and equipment
a. ₱6,764,400
b. ₱6,731,200
c. ₱6,718,092
d. ₱6,618,400
PROBLEM NO. 5
San Leonardo Manufacturing Co. was incorporated on 1/2/10 but was unable to begin
manufacturing activities until 8/1/10 because new factory facilities were not completed until
that date. The Land and Building account at 12/31/10 per the books was as follows:
Date
1/3110
2/28/10
4/1/10
5/1/10
5/1/10
5/1/10
8/1/10
8/1/10
12/31/10
Particulars
Land and dilapidated building
Cost of removing building
Legal fees
Fire insurance premium payment
Special tax assessment for streets
Partial payment of new building construction
Final payment on building construction
General expenses
Asset write-up
Amount
₱1,000,000
25,000
30,000
36,000
27,500
900,000
900,000
150,000
375,000
Additional information:
1. To acquire the land and building on 1/31/10, the company paid ₱500,000 cash and
5,000 ordinary shares (par value = ₱100/share) which is very actively traded and had a
market value per share of ₱210.
2. When the old building was removed, San Leonardo paid the Demolition Co. ₱25,000, but
also received ₱10,000 from the sale of salvaged material.
3. Legal fees covered the following:
Cost of organization
Examination of title covering purchase of land
Legal work in connection with the building construction
Total
₱10,000
12,500
7,500
₱30,000
4. The fire insurance premium covered premiums for a three-year term beginning May 1,
2010.
5. General expenses covered the following for the period 1/2/10 to 8/1/10,
President’s Salary
Plant superintendent covering supervision of new building
Total
₱100,000
50,000
₱150,000
6. Because of the rising land costs, the president was sure that the land was worth at least
₱375,000 more than what it cost the company.
QUESTIONS:
Based on the above and the result of your audit, compute for the adjusted balance of the
following as of December 31, 2010:
1. Land
a. ₱1,055,000
b. ₱1,605,000
c. ₱1,810,500
d. ₱1,577,500
2. Building
a. ₱1,860,500
b. ₱1,888,000
c. ₱1,810,500
d. ₱1,857,500
PROBLEM NO. 6
You noted during your audit of the Carrangian Company that the company carried out a
number of transactions involving the acquisition of several assets. All expenditures were
recorded in the following single asset account, identified as Property and Equipment:
Property and Equipment
Acquisition price of land and building
Options taken out on several pieces of property
List price of machinery purchased
Freight on machinery purchased
Repair to machinery resulting from damage during shipment
Cost of removing old machinery
Driveways and sidewalks
Building remodelling
Utilities paid since acquisition of building
₱
960,000
16,000
318,400
5,000
1,480
4,800
102,000
400,000
20,000
₱1,828,480
Based on property tax assessments, which are believed to fairly represent the relative
values involved, the building is worth twice as much as the land. The machinery was subject
to a 2% cash discount, which was taken and credited to Purchases Discounts. Of the two
options, ₱6,000 is related to the building and land purchased and ₱10,000 related to those
not purchased. The old machinery was sold at book value.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balance of the
following:
1. Land
a. ₱644,000
b. ₱322,000
c. ₱326,000
d. ₱424,000
2. Building
a. ₱544,000
b. ₱1,040,000
c. ₱1,044,000
d. ₱722,000
3. Machinery
a. ₱317,032
b. ₱318,512
c. ₱323,400
d. ₱321,832
PROBLEM NO. 7
On January 1, 2009, Cabiao Corporation purchased a tract of land (site number 101) with a
building for ₱1,800,000. Additionally, Cabiao paid a real estate broker’s commission of
₱108,000, legal fees of ₱18,000 and title guarantee insurance of ₱54,000. The closing
statement indicated that the land value was ₱1,500,000 and the building value was
₱300,000. Shortly after acquisition, the building was razed at a cost of ₱225,000.
Cabiao entered into a ₱9,000,000 fixed-price contract with Cabanatuan Builder’s Inc. on
March 1, 2009 for construction of an office building on the land site 101. The building was
completed and occupied on September 30, 2010. Additional construction costs were
incurred as follows:
Plans, specifications and blueprints
Architect’s fees for design and supervision
₱36,000
285,000
The building is estimated to have a forty-year life from date of completion and will be
depreciated using the 150%-declining-balance method.
To finance the construction cost, Cabiao borrowed ₱9,000,000 on March 1, 2009. The loan is
payable in ten annual instalments of ₱900,000 plus interest at the rate of 14%. Cabiao used
part of the loan proceeds for working capital requirements. Cabiao average amounts of
accumulated building construction expenditures were as follows:
For the period March 1 to December 31, 2009
For the period January 1 to September 31, 2010
₱2,700,000
6,900,000
Cabiao is using the allowed alternative treatment for borrowing cost.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of land site number 101
a. ₱1,905,000
b. ₱1,800,000
c. ₱2,205,000
d. ₱2,151,000
2. Cost of office building
a. ₱10,581,000
b. ₱10,360,500
c. ₱10,329,000
d. ₱10,960,500
3. Depreciation of office building for 2010
a. ₱96,800
b. ₱97,130
c. ₱102,800
d. ₱99,197
PROBLEM NO. 8
Provided below are independent situations involving government grants. you are required to
provide the answer to each requirement.
1. Nueva Ecija Inc. received a grant of ₱30 million to compensate it for costs it incurred in
planting trees over a period of five years. Nueva Ecija Inc. will incur costs in this
manner: Year 1-₱ million; Year 2-₱2 million; 2 million; Year 3-₱3 million; Year 4-₱4
million; Year 5-₱5 million. How much should be recognized as income from government
grant at the end of year 1?
a. ₱30 million
b. ₱6 million
c. ₱2 million
d. ₱1 million
2. On January 1, 2009, Nueva Ecija Company received a grant of ₱75 million from the
Japanese government for the construction of a laboratory and research facility with an
estimated cost of ₱90 million and useful life of 25 years. The facility was completed in
early 2010. The amount to be recognized in Nueva Ecija 2010 profit or loss as income
from government grant is
a. ₱75,000,000
b. ₱3,600,000
c. ₱3,000,000
d. ₱0
3. Nueva Ecija Inc. was granted 2,500 acres of land in a village, located near the slums
outside the city limits, by a local government authority. the condition attached to this
grant was that Nueva Ecija Inc. should clean up this land and lay roads by employing
laborers from the village in which the land is located. The government has fixed the
minimum wage payable to the workers. The entire operation will take three years and is
estimated to cost ₱50 million. This amount will be spent in this way: ₱10,000 million
each in the first and second years and ₱30 million in the third year. The fair value of this
land is currently ₱60 million. How much should be recognized as income from
government grant at the end of the year?
a. ₱10,000,000
b. ₱12,000,000
c. ₱20,000,000
d. ₱0
4. Nueva Ecija Inc. received a consolidated grant of ₱60 million. Three-fourths of the grant
is to be utilized to purchase a college building for students from undeveloped or
developing countries. The balance of the grant is for subsidizing the tuition costs of
those students for four years from the date of grant.
The college building, which costs ₱50 million, will be depreciated using the straight-line
method over 10 years. Assuming that the tuition subsidy will be offered evenly
over
the period of 4 years, the amount that should be recognized as income at the
end of
year 1 is
a. ₱6.0 million
b. ₱5.0 million
c. ₱8.25 million
d. ₱8.785 million
PROBLEM NO. 9
Your audit of Lianera Corporation for the year 2010 disclosed the following property
dispositions:
Land
Building
Warehouse
Machine
Delivery truck
Cost
₱4,800,000
1,800,000
8,400,000
960,000
1,200,000
Acc. Dep.
1,320,000
384,000
570,000
Proceeds
3,720,000
288,000
8,880,000
108,000
564,000
Fair value
3,720,000
8,880,000
864,000
564,000
Land
On January 15, a condemnation award was received as consideration for the forced sale of
the company’s 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 ₱6,000,000, 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 building.
Warehouse
On July 4, the warehouse was destroyed by fire. The warehouse was purchased on January
2, 2004. On December 12, the insurance proceeds and other funds were used to purchase a
replacement warehouse at a cost of ₱7,200,000.
Machine
On December 15, the machine was exchanged for a machine having a fair value of
₱756,000 and cash of ₱108,000 was received.
Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.
QUESTIONS:
Based on the above and the result of your audit, compute the gain or loss to be recognized
for each of the following dispositions:
1. Land
a. ₱3,720,000 gain
b. ₱1,080,000 loss
c. ₱4,800,000 loss
d. ₱0
2. Building
a. ₱ 432,000 gain
b. ₱2,232,000 loss
c. ₱1,368,000 loss
d. ₱0
3. Warehouse
a. ₱1,800,000 gain
b. ₱ 480,000 gain
c. ₱5,400,000 loss
d. ₱0
4. Machine
a. ₱36,000 gain
b.