Page 1 of 3 AUDIT OF PROPERTY, PLANT AND EQUIPMENT PROBLEM NO. 1 Black Bull Corporation, a manufacturer of steel products, began operation on October 1, 2003. The accounting department of Black Bull has started the fixed-asset and depreciation presented below. Black Bull Corporation Fixed Asset and Depreciation Schedule For Fiscal Years Ended September 30, 2004, and September 30, 2005 Assets Land A Building A Land B Building B Donated equipment Machine A Acquisition Date 10/1/2003 10/1/2003 10/1/2003 Under Construction 10/2/2003 Cost ? ? ? P320,000 to date ? Salvage N/A P40,000 N/A 3,000 10/2/2003 ? 6,000 Machine B 10/1/2004 N/A – Not applicable ? - Depreciation Method N/A Straight-line N/A Straight-line 150% declining balance Sum-of-theyears’-digits Straight-line Est. Life in Years Depreciation Expense Year Ended Sept. 30 N/A ? N/A 30 2004 N/A P17,450 N/A - 2005 N/A ? N/A ? 10 ? ? 8 ? ? 20 - ? You have been asked to assist in completing this schedule. In addition in ascertaining that the data already on the schedule are correct, you have obtained the following information from the Company’s records and personnel: a. Land A and Building A were acquired from a predecessor corporation. Black Bull paid P820,000 for the land and building together. At the time of acquisition, the land had an appraised value of P90,000, and the building had an appraised value of P810,000. b. Land B was acquired on October 2, 2003, in exchange for 2,500 newly issued shares of Black Bull’s common stock. At the date of acquisition, the stock had a par value of P5 per share and a fair value of P30 per share. During October 2003, Black Bull paid P16,000 to demolish an existing building on this land so it could construct new building. c. Construction of building B on the newly acquired land began on October 1, 2004. By September 30, 2005, Black Bull has paid P320,000 of the estimated total construction costs of P450,000. It is estimated that the building will be completed and occupied by July 2006. d. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair market value at P30,000 and the salvage value at P3,000. e. Machinery A’s total cost of P164,900 includes installation expense of P600 and normal repairs and maintenance of P14,900. Salvage value is estimated at P6,000. Machinery A was sold on February 1, 2005. f. On October 1, 2004, Machinery B was acquired with a down payment of P5,740 and the remaining payments to be made in 11 annual installments of P6,000 each beginning October 1, 2004. The prevailing interest rate was 8%. The following data were abstracted from the present-value tables (rounded): Present value of P1 at 8% for 11 years Present value of an ordinary annuity of P1 at 8% for 11 years Present value of an annuity due of P1 at 8% for 11 years 0.429 7.139 7.710 Page 2 of 3 QUESTIONS: Based on the above and the result of your audit, answer the following: 1. 2. 3. 4. The cost of Building A is The cost of Land B is The cost of Machine B is The total depreciation expense for the year ended September 30, 2005 is PROBLEM NO. 2 On an audit engagement for 2005 you handled the audit of fixed assets of Aero Plus Gold Mines. This mining company bought the exploration rights of Tamashi Mineral Exploration on June 30, 2005 for P29,160,000. Of this purchase price, P19,440,000 was allocated to copper which had remaining reserves estimated at P6,480,000 tons. Aero Plus Gold Mines expects to extract 60,000 tons of ore a month with an estimated selling price of P50 per ton. Production started immediately after some new machineries costing P2,400,000 were bought on June 30, 2005. These new machineries had estimated useful life of 15 years with a scrap value of 10% of cost after the ore estimate has been extracted from the property, at which time the machineries will already be useless. Among the operating expenses of Aero Plus Gold Mines at December 31, 2005 were: Depletion expense Depreciation on machineries P1,620,000 160,000 QUESTIONS: Based on the above and the result of your audit, answer the following: 1. 2. Recorded depletion expense was Recorded depreciation expense was PROBLEM NO. 3 You were engaged in making your second annual examination of Trane Company. The Machinery and Accumulated Depreciation accounts are shown below: 01/01/05 Balance 06/01/05 09/01/05 Machine No. 23 Dismantling of Machine No. 3 01/01/06 12/31/05 Balance Balance Machinery P 500,000 09/01/05 150,000 12/31/05 Sale of machine No. 3 Balance 4,000 P 654,000 P 10,000 644,000 . P 654,000 P 644,000 Accumulated Depreciation P 344,400 01/01/05 . 12/31/05 P 344,400 01/01/06 Balance Depreciation P 280,000 64,400 P 344,400 Balance P 344,400 Your examination disclosed the following information: a. The company has depreciated all items of equipment at 10% per annum. The oldest item owned is seven years old as of December 31, 2005. b. The following adjusted balances appeared on December 31, 2004 working papers: Equipment – P500,000; Accumulated Depreciation – P 280,000. Page 3 of 3 c. Machine No. 3, which was purchased on March 1, 2001, at a cost of P80,000, was sold on September 1, 2005 for P10,000 cash. d. Included in charges to Repairs and Maintenance account was an invoice for installation of Machine No. 23, in the amount of P35,000. e. It is the company’s policy to take full year’s depreciation in the year of acquisition and none in the year of disposition. QUESTIONS: Based on the information presented above and the result of your audit, answer the following: 1. 2. 3. 4. 5. How much is the loss on the sale of Machine no. 3? How much is the adjusted balance of the Machinery account as of December 31, 2005? How much is the total depreciation expense on machinery for 2005? How much is the balance of the Accumulated Depreciation account as of December 31, 2005? The adjusting entry to correct the entry made in recording sale of Machine no. 3 will include a debit to PROBLEM NO. 4 On January 1, 2004, Jeba Corporation purchased a tract of land (site number 101) with a building for P1,800,000. Additionally, Jeba Corporation paid a real state broker’s commission of P108,000, legal fees of P18,000 and title guarantee insurance of P54,000. The closing statement indicated that the land value was P1,500,000 and the building value was P300,000. Shortly after acquisition, the building was razed at a cost of P225,000. Jeba Corporation entered into a P9,000,000 fixed-price contract with Waylili Builders, Inc. on March 1, 2004 for the construction of an office building on the land site 101. The building was completed and occupied on September 30, 2005. Additional construction costs were incurred as follows: Plans, specifications and blueprints Architect’s fees for design and supervision P 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, Jeba Corporation borrowed P9,000,000 on March 1, 2004. The loan is payable in ten annual installments of P900,000 plus interest at the rate of 14%. Jeba Corporation used part of the loan proceeds for working capital requirements. Jeba Corporation’s average amounts of accumulated building construction expenditures were as follows: For the period March 1 to December 31, 2004 For the period January 1 to September 31, 2005 P2,700,000 6,900,000 Olive is using the allowed alternative treatment for borrowing cost. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. 2. 3. Cost of land site number 101 Cost of office building Depreciation of office building for 2005
