AUDITING & ASSURANCE: CONCEPTS & APPLICATIONS 2
2.2 PPE
Problems:
1. Newcastle Ltd. Uses many kinds of machines in the operations. It constructs some of these
machines itself and acquires other from the manufacturers. The following information relates to
machine A that it’s has recorded during the current year.
Cash paid for equipment, including VAT of P 9,600
89,600
Cost of transporting machine – insurance and transport
3,000
Labor costs of installation by expert fitter
5,000
Labor costs of testing equipment
4,000
Insurance costs for current year
1,500
Costs of training for personnel who will use the machine
2,500
Costs of safety rails and platforms surrounding machine
6,000
Costs of water devices to keep machine cool
8,000
Costs of adjustments to machine to make it operate
More efficiently
7,500
Determine the amount at which machines A should be recorded in the records of Newcastle, Ltd.
a.
b.
c.
d.
P 105,500
P 116,000
P 113,500
P 121,500
Solution:
Cash paid for equipment (89,600 – 9,600)
Cost of transporting machine – insurance and transport
Labor costs of installation by expert fitter
Labor costs of testing equipment
Costs of safety rails and platforms surrounding machine
Costs of water devices to keep machine cool
Costs of adjustments to machine to make it operate
more efficiently
COST OF MACHINE
80,000
3,000
5,000
4,000
6,000
8,000
7,500
113, 500
2. Sunflower Company acquired some new equipment. The following data have been made
available to you:
List price of the equipment
14,000
Cash discount available but not taken on purchase
200
Freight paid on the new equipment
250
Cost of removing the old equipment
170
Installation cost of the new equipment
430
Testing costs before the equipment was put to
Regular operation (including P120 in wages
Of the regular equipment operator)
Loss on premature retirement of the old equipment
Estimated cost of manufacturing similar equipment
In the company’s own plant, including overhead
295
120
13,800
What amount should be capitalized as the cost of the new equipment?
a. P 14,775
b. P 28,865
c. P 14,975
d. P 15,065
Solution:
List price of the equipment
14,000
Cash discount available but not taken on purchase
(200)
Freight paid on the new equipment
250
Installation cost of the new equipment
430
Testing costs before the equipment
295
Was put to Regular operation (including P120 in wages
Of the regular equipment operator)
TOTAL
14 775
3. On September 1, 2016, Ron Corporation issued 10,000 shares of its P25 par treasury ordinary
shares for a parcel of land intended as a future plant site. The treasury shares were acquired by
Ron at a cost of P 30 per share. Ron’s ordinary share had a fair market value of P 40 per share on
September 1, 2016. Ron received P 50,000 from the sale of scrap when an existing structure on
the site was razed. At what amount should the land be earned?
a. P 400,000
b. P 350,000
c. P 300,000
d. P 250,000
Solution:
10,000 shares x 40 FMV = 400,000
400,000 – 50 000 sale of scrap = 350,000
4. Winn Company exchanged an old machine having a carrying amount of P 16,800 and paid a cash
difference of P6,000 for a new machine having a total cash price of P 20,500. The cash flows
from the new machine are expected to be significantly different than the cash flows from the old
machine. What amount of loss should Winn recognize on this exchange?
a. P 0
b. P 2,300
c. P 3,700
d. P 6,000
Solution:
Asset given
Cash paid
Total
16,800
6,000
22,800 – 20,500 = 2,300
5. Parr Company traded in a used delivery truck with a carrying amount of P 54,000 for a new
delivery truck having a list price of P 160,000 and paid a cash difference to the dealer of P
75,000. The used truck has a fair value of P 60,000 on the date of the exchange. At what amount
should the new truck be recorded on Parr’s book?
a. P 160,000
b. P 135,000
c. P 129,000
d. P 106,000
Solution:
AGU
CASH PAID
COST OF NEW TRUCK
60 000
75 000
135 000
Use the following information for the next two questions:
Cleveland Ltd. acquired a real estate for the construction of a building and other facilities. Operating
equipment was also purchased and installed. The company’s accountant, who was not sure how to record
some of the transactions, opened a Property Ledger account and recorded debits and (credits) to this
account as follows:
Cost of land purchased as a building site
P 170,000
Architect’s fee for design of new building
23,000
Paid for the demolition of an old building on
the building site purchased above
28,000
Paid land tax on the real estate purchased as a building site
1,700
Paid excavation costs for the new building
15,000
Made the first payment to the building contractor
250,000
Paid for equipment to be installed in the new building
148,000
Received from sale of salvaged materials from
Demolishing the old building
(6,800)
Made final payment to the building contractor
350,000
Paid interest on building loan during the construction
22,000
Paid freight on equipment purchased
1,900
Paid installation costs of equipment
4,200
Paid for repair of equipment damaged during installation
2,700
Property Ledger account balance
P 1,009,700
Compute the following:
6. Land
a.
b.
c.
d.
P 191,900
P 163,200
P 207,900
P 192,900
Solution:
Cost of land purchased as a building site
Paid for the demolition of an old building on
the building site purchased above
Paid land tax on the real estate purchased as a building site
Received from sale of salvaged materials from
demolishing the old building
TOTAL
P 170,000
28,000
1,700
(6,800)
192 900
7. Building
a. P 694,000
b. P 660,000
c. P 653,200
d. P 666,800
Solution:
Architect’s fee for design of new building
Paid excavation costs for the new building
Made the first payment to the building contractor
Made final payment to the building contractor
Paid interest on building loan during the construction
TOTAL
2.3 ASSIGNMENT
23,000
15,000
250,000
350,000
22,000
660 000
1. Wong Company purchased land, land improvements and building from Cola Company for P 14.4
M and from Sarsi Company furniture and equipment for P 18.6M. The total cash outlay for the
transaction amounted to P 33M. The appraised values of the asset are as follows:
Building – P 5M
Equipment – P3M
Furniture – P1M
Land – P 13.5 M
Land improvements – P 1.5M
The allocated cost of the building is:
a. P 6,875,000
b. P 6,785,000
c. P4,600,000
d. P 3,600,000
Solution:
Building
5M
Land
13.5M
Land improvement
1.5M
TOTAL
20M
ALLOCATED COST
3.6M
9.720M
1.080M
14.4M
5/20
13.5/20
1.5/20
2. An old cooler with a recorded cost of P 150,000 and accumulated depreciation of P 140,000 was
sold for P 4,000. A new cooler with marked price of P 200,000 was purchased on February 10,
2019. Freight charge of P 3,000 and installation cost of P 6,000 were paid.
What is the cost of the new cooler?
a. P 200,000
b. P 204,000
c. P 209,000
d. P 210,000
Solution:
Marked price
Freight
Installation cost
Total
200,000
3,000
6,000
209,000
3. The Oh Trading Company exchanged 1,000 shares of Bon Company ordinary shares which Oh
was holding as financial assets at fair value through profit or loss (FVPL), for a piece of
equipment from Gem Company. The Bon ordinary shares, which had been purchased by Oh for P
31 per share, had a quoted market price of P34 per share at the date of exchange and P 30 per
share as of last reporting date.
How would the acquisition be recorded?
a. Equipment
Financial asset at FVPL
b. Equipment
Financial asset at FVPL
Gain on sale of securities
c. Equipment
30,000
30,000
31,000
30,000
1,000
31,000
Loss on sale of securities
Financial asset at FVPL
d. Equipment
Financial asset at FVPL
Gain on sale of securities
3,000
34,000
34,000
30,000
4,000
4. The following expenditures were incurred by the keng, Inc. in 2019:
Cost of land
Expenses of land survey
30,000
Expenses for search of land title
Building permit fee
Temporary building to house materials
and construction workers
Demolition of old building
Payments to tenants to vacate the premises
Of old building
Payments to some construction worker for
Injuries sustained (no insurance was carried)
Interest on temporary loan for construction
Cost of paving parking area adjoining building
Excavation expenses for foundation of building
Cost of construction
P 4,500,000
6,000
10,000
50,000
40,000
60,000
85,000
90,000
45,000
150,000
9,800,000
Using the interpretations of the PIC, what are the costs of the land and building,
respectively?
a. P 4,636,000 and P 10,245,000
b. P 4,461,000 and P 10,310,000
c. P 4,956,000 and P 10,185,000
d. P 4,536,000 and P 10,245,000
Solution:
Cost of Land
Expenses of land survey
Expenses for search of land title
TOTAL COST OF BUILDING
4,500,000
30,000
6,000
4,536,000
Cost of construction
Building permit fee
Temporary building to house materials
and construction workers
Payments to tenants to vacate the premises
Of old building
Demolition of old building
Interest on temporary loan for construction
Cost of paving parking area adjoining building
Excavation expenses for foundation of building
9,800,000
10,000
50,000
60,000
40,000
90,000
45,000
150,000
TOTAL COST OF BUILDING
10,245,000
5. On October 5, 2019, Bancnet Company traded its old delivery equipment with Megalink
Company’s office equipment. The following data are available:
Bancnet’s books
Megalink’s books
Cost
P 40,000
P 50,000
AD
30,000
38,000
FV
20,000
17,000
Cash received from Megalink 3,000
Cash paid to Bancnet
3,000
For financial reporting purposes, the cost of the office equipment and the gain to be recognized
on the books of Bancnet Company should respectively, be:
a. P 20,000 and P 10,000
b. P 7,000 and P 0
c. P 17,000 and P 10,000
d. P 10,000 and P 0
SOLUTION:
Fair value
Cash received
Cost of new asset
20,000
(3,000)
17,000
17,000
3,000
20,000
6. X-ray Company traded in an old machine having a carrying amount of P 16,800 and paid a cash
difference of P 6,000 for a new machine having a total cash price of P20,500.
What amount of loss should X-ray Company recognize on this exchange?
a. P 0
b. P 2,300
c. P3,700
d. P6,000
Solution:
Asset given
Cash paid
Total
3.1 DIY
16,800
6,000
22,800 – 20,500 = 2,300
1. On January 2, 2016, Lem Corp. bought machinery under a contract that required a down payment of
P 10,000 plus twenty-four monthly payments of P 5,000 each, a total payment of P 130,000. The
cash equivalent price of the machinery was P 110,000. The machinery has an estimated useful life of
ten years and estimated residual value of P 5,000. Lem uses straight line depreciation. In its 2016
income statement, what amount should Lem report as depreciation for the machinery?
Solutions:
Machinery
110,000
Residual Value
(5,000)
Total
105 000 / 10 est. years =10,500
2. Jaen Advertising Agency, Inc. reported the following on its December 31, 2016, balance sheet:
Equipment
AD – equipment
P 500,000
135,000
In a footnote, Jaen indicates that it uses straight line depreciation over 10 years and estimates
salvage value as 10% of cost. What is the average rate of the equipment owned by Jaen?
Solutions:
Cost
500 000
500 000
Salvage value
10% of cost
50 000
Salvage value
50 000
450 000 / 10 years = 45 000 Dep.
Accumulated Depreciation 135,000 / 45,000 dep. = 3 years or average rate of equipment
3. Laur Company uses the composite method of depreciation and has a composite rate of 25%. During
2016, it sold assets with an original cost of P 100,000 and residual value of P 20,000 for P 80,000
and acquired P 60,000 worth of new assets with residual value of P 10,000. The original group of
assets had the following characteristics:
Total cost
P 250,000
Total residual value
30,000
The above original group includes the assets sold in 2016 but not the assets purchased in 2016.
What was the depreciation in 2016?
Solutions:
Total cost
250 000
Sold assets
(100 000)
Purchases
60 000
TOTAL
210 000 x 25% = 52 500
4. On the first day of its current fiscal year, Lipao Corporation purchased equipment costing P 400,000
with a salvage value of P 80,000. Depreciation expense for the year was P 160,000. If Lupao uses the
double declining balance method of depreciation, what is the estimated useful life of the asset?
Solutions:
Cost 400,000 x Rate = 160,000 depreciation
Rate = 160,000 / 400,000 = 0.4*100 = 40%
Rate = 40%/2 = 20% = 100/years
Rate = 100%/ 20%
Years = 5 years useful life
5. On January 1, 2014, Famy Company signed an eight-year lease for the office space. Famy has the
option to renew the lease for an additional six-year period on or before January 1, 2020. During
January 2016, Famy incurred the following costs:
General improvements to the leased premises with useful life of 10 years P 5,400,000
Office furniture and equipment with useful life of 8 years
2,400,000
Moveable assembly line equipment with useful life of 5 years
1,800,000
At December 31, 2016, Famy’s intention as to the exercise of the renewal option is uncertain. A
full year depreciation of leasehold improvements is taken for year 2016. In Famy’s December 31, 2016
balance sheet, accumulate depreciation of leasehold improvement should be –
Solutions:
General improvements 5,400,000 / 6 years remaining lease terms
= 900 000 depreciation
6. On January 2, 2013, Union Co., purchased a machine for P 264,000 and depreciated it by the
straight-line method using an estimated useful life of eight years with no salvage value. On January
2, 2016, Union determined that the machine had a useful life of six years from the date of acquisition
and will have a salvage value of P 24,000. An accounting change was made in 2016 to reflect the
additional data. The accumulated depreciation for this machine should have a balance at December
31, 2016 of?
Solutions:
Cost 264,000 / 8 years = 33,000 x 3 years expired = 99,000
= 264,000 – 99,000
= (carrying amount 165,000 – salvage value 24,000) / 3 years remaining useful life
= 47,000 depreciation for 2016 + 99,000 AD
= 146,000 Accumulated Depreciation
7. On July 1, 2016, New Orleans Corporation purchased equipment at a cost of P 340,000. The
equipment has an estimated salvage value of P 30,000 and is being depreciated over an estimated life
of 8 years under the double declining balance method of depreciation. The depreciation to be
recognized in 2016 is
Solution:
Rate = 100% / 8 years = 12.5 %
or 200% / 8 years = 25%
12.5% x 2 = 25%
Acquisition Cost
2016
25% x 340 000
Depreciation
=
85,000 X 6/12 = 42,500
8. Natividad Company purchased a tooling machine in 2016 for P 3,000,000. The machine was being
depreciated on the straight-line method over an estimated useful life of twenty years, with no salvage
value. At the beginning of 2016, when the machine had been in use for ten years, the company paid P
600,000 to overhaul the machine. As a result of this improvement, the company estimated that the
useful life of the machine would be extended an additional five years. What should be the
depreciation expense recorded for the machine in 2016?
Solutions:
(3,000,000 / 20 years x 10 remaining useful life = Carrying amount 1,500,000 + 600,0000)
= 2,100,000 / 15 years = 140,000 depreciation for 2016
9. OKC Manufacturing Company, a calendar year company, purchased a machine for P 650,000 on
January 1, 2014. At the date of purchase, OKC incurred the following additional costs:
Loss on sale of old machinery
Freight cost
Installation cost
Testing cost prior to regular operation
P 15,000
5,000
20,000
4,000
The estimated salvage value of the machine was P 50,000 and OKC estimated that the machine
would have a useful life of 20 years, with depreciation being computed using the straight-line
method. In January 2016, accessories costing P 48,600 were added to the machine to reduce its
operating costs. These accessories neither prolonged the machine’s life nor did they provide any
additional salvage value. The depreciation to be recognized in 2016 is:
Solution:
Machine
650,000
Freight cost
5,000
Installation cost
20,000
Testing cost prior to regular operation
4,000
Total Cost
679,000
Cost
679,000
Residual value
(50,000)
Total
629,000 / 20 years = 31,450
10. On March 31, 2016, Shooter Corp. retired a machine used in manufacturing designer parts. The
machine was acquired May 1, 2013. Straight line depreciation method was used. The asset had an
estimated residual value of P 20,000 and a five-year life. On December 31, 2016, the balance in the
accumulated depreciation is P 330,000. The machine was scrapped, and the company did not receive
a single consideration. The loss on retirement is?
Solutions:
{(X Cost – salvage value 20,000) / 60 months useful life} x 32 months from May 1, 2013-December
31, 2015 = 330,000 Accumulated Depreciation
(32x -640,000) / 60 = 330,000
32x = 19,800,000 + 640,000
32x = 20,440,000
X = 638,750
330,000 / 32 = 10,312.5 depreciation per month x 3 months
= 30,937.5 + 330,000
= 360,937.5 Accumulated dep.
Machine Cost = 638,750
Loss on retirement = 638,750 – 360,937.5
= 277 812.5