CHAPTER 7 Audit of Property,

Plant, & Equipment

Problem 1
The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing
P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds
was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing
P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer
machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer
machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery
account).
Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full years depreciation is charged in the year of acquisition and none in
the year of disposition.
Question
1 The adjusted balance of the Machinery account at December 31, 2006 is:
a. P 290,000
b. P 370,000
c. P 260,000
d. P 300,000
2

The correct depreciation expense for the machinery for the year ended December 31,
2006 is:
a. P 37,000
b. P 29,000
c. P 30,000
d. P 26,000

Solution
OE: Cash
20,000
Machinery
20,000
CE: Cash
20,000
Accumulated depn. 30,000
Machinery
40,000
Gain on sale
10,000
Adj: Accumulated depn 30,000
Machinery
20,000
Gain on sale
10,000
--------------------------------------------OE: Machinery
90,000
Cash
90,000
CE: Machinery
100,000
Accumulated depn 22,000
Loss on sale
18,000
Machinery
50,000
Cash
90,000
Adj: Machinery
10,000
Accumulated depn
22,000
Loss on sale
18,000
Machinery
50,000
--------------------------------------------1
A
P350,000 P20,000 + P10,000 -P50,000
2
B
P290,000 x 10%

Problem 2
The Land account was debited for P300,000 on March 31, 2006 for an adjoining piece of
land which was acquired in exchange for 15,000 shares of Rizal Corporations own stock
with a par value of P10. At the time of the exchange, the shares were selling at P24.
Transfer and legal fees of P20,000 were paid and charged to Professional Fees.
1. The adjusting entry required is:
DEBIT
a. Land
140,000
b. Land
160,000
c. Land

80,000

CREDIT
Prem. on cap. stock
Capital stock
Cash
Professional fees
Prem. on cap. stock

140,000
150,000
10,000
20,000
60,000

d. None of these
2. On the Land acquired in No. 6, real estate taxes of P20,000 were paid in December,
2006, including P5,000 for the first quarter of the year. (Ignore penalty for delayed
payment). Land account was debited for the taxes paid.
The adjusting entry is:
DEBIT
a. Taxes
15,000
b. Taxes
5,000
c. Land
5,000
Taxes
15,000
d. None of these
Solution
1. C
OE: Land
Common Stock
APIC
Professional fees
Cash
CE: Land
Common stock
Cash
APIC
Adj: Land
APIC
Professional fees
2. A
OE: Land
Cash
CE: Land
Taxes
Cash
Adj: Taxes
Land

300,000
150,000
20,000
380,000
150,000
80,000
20,000
20,000
5,000
15,000
15,000

CREDIT
Land
Land
Cash

15,000
5,000
20,000

150,000
20,000
20,000
210,000
60,000
20,000
20,000
15,000

Problem 3
Two independent companies, KAYA and MUYAN, are in the home building business. Each
owns a tract of land for development, but each company would prefer to build on the others
land. Accordingly, they agreed to exchange their land. An appraiser was hired and from
the report and the companies records, the following information was obtained:
Cost (same as book value)
Market value, per appraisal

KAYA Co.s Land

P 800,000
1,000,000

MUYAN Co.s Land

P 500,000
900,000

The exchange of land was made and based on the difference in appraised values, MUYAN
Company paid P100,000 cash to KAYA Company.
Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
a. P 20,000
b. P 60,000
c. P 100,000
d. P 200,000
2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
exchange in the amount of:
a. P 0
b. P 100,000
c. P 300,000
d. P 400,000
3. After the exchange, KAYA Company record its newly acquired land at:
a. P 700,000
b. P 720,000
c. P 800,000
d. P 900,000
4. After the exchange, MUYAN Company record its newly acquired land at:
a. P 1,000,000
b. P 900,000
c. P 600,000
d. P 500,000
Solution
Muyan
Land

1
2.
3.
4.

Cash
Land
Gain

Kaya
1,000,000
100,000
500,000
400,000

Cash
Land

100,000
900,000

Land
Gain on sale

800,000
200,000

D
D
D
A

Problem 4
On an audit engagement for 2007, you handled the audit of fixed assets of Esmedina
Copper Mines. This mining company bought the exploration rights of Maharishi Exploration
on June 30, 2007 for P7,290,000. Of this purchase price, P4,860,000 was allocated to
copper ore which had remaining reserves estimated at 1,620,000 tons. Esmedina Copper
Mines expects to extract 15,000 tons of ore a month with an estimated selling price of P50
per ton. Production started immediately after some new machines costing P600,000 was
bought on June 30, 2007. These new machineries had an estimated useful life of 15 years
with a scrap value of 10% of cost after the ore estimated has been extracted from the
property, at which time the machineries will already be useless.
Among the operating expenses of Esmedina Copper Mines at December 31, 2007 were:
Depletion expense
Depreciation of machineries

P 405,000
40,000

Questions
1. Recorded depletion expense was
a. Overstated by P90,000
b. Understated by P90,000

c. Overstated by P135,000
d. Understated by P135,000

2. Recorded depreciation expense was

a. Overstated by P10,000
b. Understated by P10,000

c. Overstated by P20,000
d. Understated by P20,000

3. The adjusted depletion at year-end amounted to:

a. P 270,000
b. P 315,000
c. P 495,000

d. P 540,000

4. The adjusted depreciation at year-end amounted to:

a. P 20,000
b. P 30,000
c. P 50,000

d. P 60,000

Solution
P4,860,000/1,620,000 x 15,00o tons x 6 months = P270,000
P600,000 P60,000/9 years * x 6/12 = P30,000
*1,620,000 tons/180,000 = 9 years
1.
C
P405,000 - (4,860,000/1,620,000 x 90,000 units) = P135,000 overstated
2.
A
P40,000 - (600,000 - 60,000)/1,620,000 x 90,000 = P10,000 overstated
3.
A
4.
B

Problem 5
In connection with your examination of the financial statements of the Maraat Corporation
for the year 2007, the company presented to you the Property, Plant and Equipment section
of its balance sheet as of December 31, 2006, which consists of the following:
Land
Buildings
Leasehold improvements
Machinery and equipment

400,000
3,200,000
2,000,000
2,800,000

The following transactions occurred during 2007:

1. Land site number 5 was acquired for P4,000,000. Additionally, to acquire the land,
Maraat Corporation paid a P240,000 commission to a real estate agent. Costs of
P60,000 were incurred to clear the land. During the course of clearing the land, timber
and gravel were recovered and sold for P20,000.
2. The second tract of land (site number 6) with a building was acquired for P1,200,000.
The closing statement indicated that the land value was P800,000 and the building value
was P400,000. Shortly after acquisition, the building was demolished at a cost of
P120,000. The new building was constructed for P600,000 plus the following costs:
Excavation fees
Architectural design fees
Building permit fees
Imputed interest on funds used during construction

P 44,000
32,000
4,000
24,000

The building was completed and occupied on September 1, 2007.

3. The third tract of land (site number 7) was acquired for P2,400,000 and was put on the
market for resale.

4. Extensive work was done to a building occupied by Maraat Corporation under a lease
agreement. The total cost of the work was P500,000, which consisted of the following:
Particular
Painting of ceilings
Electrical work
Construction of extension to current
working area

Amount
P 40,000
140,000
320,000

Useful life
one year
Ten years
Thirty years

The lessor paid one-half of the costs incurred in connection with the extension to the
current working area.
5. 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 P300,000, freight costs were P8,000, unloading charges were P6,000,
and royalty payments for 2007 were P52,000.
Question
1. Land at year-end is
a. P 5,480,000

b. P 5,900,000

c. P 6,000,000

d. P 8,400,000

2. Buildings at year-end is
a. P 3,800,000
b. P 3,880,000

c. P 4,200,000

d. P 4,280,000

3. Leasehold improvements at year-end is

a. P 2,300,000
b. P 2,560,000

c. P 2,600,000

d. P 2,720,000

4. Machinery and equipment at year-end is

a. P 3,100,000
b. P 3,108,000

c. P 3,114,000

d. P 3,166,000

Solution
1. Land
4,300,000
Cash
Cash
20,000
Land
2. Land
1,320,000
Cash
Building
680,000
Cash
3. Land - investment
2,400,000
Cash
4. Operating expenses
40,000
Leasehold improvements 300,000
Cash
5. Machinery
314,000
Royalty expenses
52,000
Cash
Answer:
1. C
2. B
3. A
4. C

4,300,000
20,000
1,320,000
680,000
2,400,000
340,000
366,000

Problem 6
Norie Companys property, plant and equipment and accumulated depreciation balance at
December 31, 2005 are:
Accumulated
Cost
Depreciation
Machinery and equipment
P 1,380,000
P 367,500
Automobiles and trucks
210,000
114,320
Leasehold improvements
432,000
108,000
Additional information:
Depreciation methods and useful lives:
Machinery and equipment straight line; 10 years
Automobiles and trucks 150% declining balance; 5 years, all acquired after 2000.
Leasehold improvements straight line
Depreciation is computed to the nearest month.
Salvage values are immaterial except for automobiles and trucks, which have an estimated
salvage values equal to 10% of cost.
Other additional information:
-

Norie Company entered into a 12-year operating lease starting January 1, 2003. The
leasehold improvements were completed on December 31, 2002 and the facility was
occupied on January 1, 2003.

On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P325,000. Installation cost of P44,000 was incurred.

On August 30, 2006, Norie Company purchased new automobile for P25,000.

On September 30, 2006, a truck with a cost of P48,000 and a carrying amount of
P30,000 on December 31, 2005 was sold for P23,500.

On December 30, 2006, a machine with a cost of P17,000, a carrying value of P2,975 on
date of disposition, was sold for P4,000.

Questions
1. The gain on sale of truck on September 30, 2006 is:
a. P 0
b. P 250
c. P 2,680

d. P 6,500

2. The gain on sale of machinery on December 30, 2006 is:

a. P 0
b. P 13,000
c. P 2,725

d. P 1,025

3. The adjusted balance of the property, plant, and equipment as of December 31, 2006 is:
a. P 1,813,000
b. P 2,351,000
c. P 2,387,000
d. P 2,388,500
4. The total depreciation expense to be reported on the income statement for the year
ended December 31, 2006 is:
a. P 138,000
b. P 185,402
c. P 221,404
d. P 245,065

5. The carrying amount of property, plant, and equipment as of December 31, 2006 is:
a. P 1,290,547
b. P 1,578,545
c. P 1,587,497
d. P 1,617,322
Solution
Entries:
Machinery and equipment
369,000
Cash
Automobile and trucks
25,000
Cash
Cash
23,500
Accumulated depreciation 24,750
Automobile and trucks
Gain on sale
Accumulated deprecation - 12/31/02
Depreciation - 9 mos. (P30,000 x 30% x 9/12)
Total
Cash
Accumulated depreciation
Machinery and equipment
Gain on sale
Depreciation
Accumulated depreciation
Accumulated depreciation
Accumulated depreciation

4,000
14,025

369,000
25,000
48,000
250

18,000
6,750
24,750

17,000
1,025

221,404
- mach.
- auto.
- improv.

156,450
28,954
36,000

Machinery and equipment - P1,380,000/10 years

=P
P 369,000/10 years x 6/12
=
Leasehold improvement - P432,000/12 years
=
Automobile and trucks - CV of unsold item P 65,680 x 30%
=
Sold item - 30,000 x 30% x 9/12 =
Current purchase P25,000 x 30% x 4/12=
Answer:
1. B
2. D
3. B
4. C

138,000
18,450
19,704
6,750
2,500

P 156,450
36,000
28,954

5. B

Problem 7
Information pertaining to Highland Corporations property, plant and equipment for 2005 is
presented below:
Account balances at January 1, 2005:
Debit
Land
P 150,000
Buildings
1,200,000
Accumulated depreciation Buildings
Machinery and equipment
900,000
Accumulated depreciation Machinery and equipment
Automotive equipment
115,000
Accumulated depreciation Automotive equipment

Credit
P263,100
250,000
84,600

Depreciation data:
Buildings
Machinery and equipment
Automotive equipment
Leasehold improvements

Depreciation method

Useful life

150% declining-balance
Straight-line
Sum-of-the-years-digits
Straight-line

25 years
10 years
4 years
-

The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.
Transactions during 2005 and other information are as follows:
a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2year-old car with a cost of P18,000 and book value of P5,400. The new car has a cash
price of P24,000; the market value of the trade-in is not known.
b. On April 1, 2005, a machine purchased for P23,000 on April 1, 2000, was destroyed by
fire, Highland recovered P15,500 from its insurance company.
c. On May 1, 2005, costs of P168,000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on
December 31, 2011.
d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P280,000; additional costs of P5,000 for freight and P25,000 for installation were
incurred.
e. Highland determined that the automotive equipment comprising the P115,000 balance
at January 1, 2005, would have been depreciated at a total amount of P18,000 for the
year ended December 31,2005.
Questions
Based on the information above, answer the following questions:
1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2005 is:
a. P 1,180,000
b. P 1,187,000
c. P 1,202,500
d. P 1,210,000
2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2005 is:
a. P 139,000
b. P 121,000
c. P 115,000
d. P 109,000
3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2005 is:
a. P 72,000
b. P 263,100
c. P 335,100
d. P 319,314
4. The adjusted balance of Accumulated Depreciation of Machinery and Equipment at
December 31, 2005 is:
a. P 330,775
b. P 342,275
c. P 351,475
d. P 353,775
5. The adjusted balance of Accumulated Depreciation of Automotive Equipment at
December 31, 2005 is:
a. P 90,600
b. P 96,000
c. P 103,200
d. P 108,600
6. The adjusted balance of Accumulated Depreciation of Leasehold Improvements at
December 31, 2005 is:
a. P 0
b. P 14,000
c. P 14,700
d. P 16,800
7. The total adjusted balance of Accumulated Depreciation of Property and Equipment at
December 31, 2005 is:
a. P 534,375
b. P 698,475
c. P 774,389
d. P 804,475

8. The total gain(loss) from disposal of assets at December 31, 2005 is:
a. P 5,400
b. P 4,000
c. P 2,600
d. P 1,400
9. The adjusted book value of Building at December 31, 2005 is:
a. P 1,128,000
b. P 936,900
c. P 880,686

d. P 864,900

10. The adjusted book value of Leasehold Improvement at December 31, 2005 is:
a. P 168,000
b. P 154,000
c. P 153,300
d. P 151,200
Solution
Entries:
a. Automobile Equipment
24,000
(cash paid, P20,000 plus P4,000 trade-in allow.)
Accum. Depreciation
12,600
Loss on trade-in
1,400
Automobile Equipment
18,000
Cash
20,000
* Trade in allowance is the difference between the cash price and the purchase
price of the equipment.
b. Cash
15,500
Accum. Depreciation
11,500
Machinery and equipment
23,000
Gain on asset disposal
4,000
c. Leasehold improvements
168,000
Cash
168,000
d. Machinery and equipment
310,000
Cash
310,000
Computation of the Depreciation Expense and Accumulated Depreciation:
Building:

Book value 1/1/05 (P1,200,000 - P263,100) X declining rate (1/25 x 150%)

Depreciation for the year
Plus; Accum. Depreciation - 1/1/05
Accum. Depreciation - 12/31/05

Machinery and Equipment:

Balance - 1/1/05
Less: machine destroyed by fire
Divided by
Depn of the Machine destroyed by fire:
(P23,000/10 x 3/12)
Depn of the machine purchase for the year:
(P310,000/10 x 6/12)
Total Depreciation
Plus: Accum. Depn - 1/1/05
Less: Accum. Depn - destroyed by fire
Accum. Depreciation - 12/31/05

Automotive Equipment:

P936,900
6% .
P 56,214
263,100
P319,314

P900,000
23,000
P877,000
10 yrs.

575
15,500
P103,775
250,000
( 11,500)
P342,275

Depreciation on P115,000 balance, 1/1/05

Less: Depreciation on car traded in
(P18,000 x 2/10)
Adjusted depreciation on the beg. Bal.
Depn on the 1/2/05 Purchase:
(P24,000 x 4/10)
Total Depreciation expense
Plus: Accum. Depreciation - 1/1/05
Less: Accum. Depn - traded equipment
Accumulated depreciation - 12/31/05

P 18,000
3,600
P 14,400
9,600
P 24,000
84,600
( 12,600)
P 96,000

Leasehold Improvements: P168,000/80 months x 8 mos. for 2005

ANSWER:

1. B
6. D

2. B
7. C

3. D
8. C

P 87,700

P 16,800
4. B
9. C

5. B
10. D

Problem 8
The schedule of Gerasmo Companys property and equipment prepared by the client
follows:
PLANT ASSETS
Land
Building
Machinery and Equipment
Total
ACCUMULATED DEPRECIATION
Building
Machinery and Equipment
Total

320,000
540,000
180,000
1,040,000

81,000
54,000
135,000

Further examination revealed the following:

1. All property and equipment were acquired on January 2, 2003.
2. Assets are depreciated using the straight-line method. The building and equipment are
expected to benefit the company for 20 years and 10 years respectively. Salvage values
of the assets are negligible.
3. An equipment with an original cost of P40,000 was sold on December 30, 2005 for
P32,000. The proceeds were credited to other operating income account.
4. In 2005, The company recognized an appreciation in value of land and building as
determined by the Companys engineers. The appraisal was recorded as follows:
Land
Building
Accum. depreciation
Revaluation increment

Debit
70,000
60,000

Credit
6,000
124,000

Questions
1. Property and equipment at year-end is:
a. P 753,000
b. P 870,000

c. P 910,000

d. P 990,000

2. Accumulated depreciation at year-end is:

a. P 114,000
b. P 117,000

c. P 123,000

d. P 135,000

Solution
OE: Cash
32,000
Other ope. income
32,000
CE: Cash
32,000
Accumulated depn
12,000
Property & equip.
40,000
Other ope. income
4,000
Adj: Accum. depn
12,000
Other ope. income
28,000
Property & equip.
40,000
----------------------------------------------Adj: Revaluation increment
124,000
Accumulated depn
6,000
Property & equipment
130,000
----------------------------------------------Per book depreciation - bldg
75,000
Per audit depreciation - bldg
72,000 (540,000-60,000/20 x 3 yrs)
Adjustment
3,000

10

Adj: Accum. Depreciation

Operating expenses
Answer:
1. B
2. A

3,000

3,000

Problem 9
The following information pertains to Marlisa Companys delivery trucks:
Date
1/1/04
3/15/05
7/1/05
7/10/05
9/1/05
10/1/05
4/1/06
5/2/06
6/30/06
12/1/06

Particulars
Trucks 1, 2, 3, & 4
Replacement of truck 3 tires
Truck 5
Reconditioning of truck 4, which was
damaged in a collision
Insurance recovery on truck 4 accident
Sale of truck 2
Truck 6
Repainting of truck 4
Truck 7
Cash received on lease of truck 7

Debit
3,200,000
25,000
800,000

Credit

35,000
1,000,000
27,000
720,000

33,000
600,000
150,000
22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Date
12/31/04
12/31/05
12/31/06

Particulars
Depreciation expense
Depreciation expense
Depreciation expense

Debit

Credit
300,000
300,000
300,000

a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the
selling party allowed a P50,000 trade in value for the old truck.
b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000
being given for the new truck.
c. The depreciation rate is 20% by unit basis.
d. Unit cost of Trucks 1 to 4 is at P800,000 each.
Questions
1. What is the loss on trade-in of truck 3?
a. P 50,000
b. P 430,000

c. P 510,000

d. P 560,000

2. The correct cost of truck 5 is

a. P 560,000
b. P 610,000

c. P 800,000

d. P 850,000

3. The book value of truck 5 at December 31, 2006 is

a. P 850,000
b. P 595,000
c. P 560,000

d. P 510,000

4. What is the loss in trade-in of Truck 1?

a. P 150,000
b. P 250,000

c. P 290,000

d. P 410,000

5. The correct cost of truck 6 is

a. P 590,000
b. P 800,000

c. P

d. P 1,000,000

850,000

11

6. The carrying value of Truck 6 at December 31, 2006 is

a. P 501,500
b. P 680,000
c. P 850,000

d. P 1,100,000

7. The gain (loss) on sale of truck 2 is

a. P 80,000
b. P 331,600

c. P 495,000

d. P 496,200

8. The book value of truck 4 at December 31, 2006 is

a. P 320,000
b. P 331,600
c. P 495,000

d. P 496,200

9. The 2000 depreciation expense is understated by

a. P 92,000
b. P 252,000
c. P 292,000

d. P 372,000

10. The cost of repainting truck 4 should have been charged to:
a. Claims receivable - insurance company
b. Retained earnings
c. Accumulated depreciation
d. Repairs and maintenance
11. Which of the following controls would most likely allow for a reduction in the scope of the
auditors tests of depreciation expense?
a. Review and approval of the periodic property depreciation entry by a supervisor who
does not actively participate in its preparation.
b. Comparison of property account balances for the current year with the current year
budget and prior-year actual balance.
c. Review of the miscellaneous revenue account for salvage credits and scrap sales of
partially depreciated property.
d. Authorization of payment of vendors invoices by a designated employee who is
independent of the property receiving functions.
Solution
1. C
Cost of truck 3
800,000
Accumulated depreciation (P800,000 x 20% x 1.5)
240,000
Net book value
560,000
Trade-in allowance
50,000
Loss on trade-in
510,000
2. D
3. B (P850,000-(P850,000x20%x1.5)
4. B
Cost of truck 1
Less: Accumulated depreciation (P800,000 x 20% / 12 mos. x 27 mos.)
Net book value
Trade-in allowance
Loss on trade-in
5. D
6. C [P1,000,000 - (1,000,000 x 20% x 9/12)]
7. A
Cost of truck 2
Accumulated depreciation (P800,000 x 20% / 12 mos. x 21 mos.)
Net book value
Selling price
Gain on sale
8. A ([P800,000 - (P800,000 x 20% x 3)]
9. C
Truck 1 (P800,000 x 20% 3/12)
40,000
Truck 2
Truck 3
Truck 4 (P800,000 x 20%)
160,000
800,000
Truck 5 (P850,000 x 20%)
170,000
850,000

12

800,000
360,000
440,000
150,000
290,000

800,000
280,000
520,000
600,000
80,000

Truck 6 (P1,000,000 x 20% x 9/12)

Truck 7 (P720,000 x 20% x 6/12)
Depreciation per audit
Depreciation per records
Understatement
10. D
11. B

150,000
72,000
592,000
300,000
292,000

1,000,000
720,000
3,370,000

Problem 10
Information pertaining to SAILADIN CORPORATIONs property, plant and equipment for
2006 is presented below.
Account balances at January 1, 2006
Debit
Land
6,000,000
Buildings
48,000,000
Accumulated depreciation bldg.
Machinery and equipment
36,000,000
Accumulated depreciation mach. & equip.
Automotive equipment
4,600,000
Accumulated depreciation auto. Equip.

Credit
10,524,000
10,000,000
3,384,000

Depreciation data:
Buildings
Machinery and equipment
Automotive equipment
Leasehold improvements

Depreciation method

Useful life

150% declining-balance
Straight-line
Sum-of-the-years-digits
Straight-line

25 years
10 years
4 years
-

The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.
Transactions during 2006 and other information are as follows:
(a) On January 2, 2006, Sailadin Corporation purchased a new car for P800,000 cash and
trade-in of a 2-year car with a cost of P720,000 and a book value of P216,000. The new
car has a cash price of P960,000; the market value of the trade-in is not know.
(b) On April 1, 2006, a machine purchased for P920,000 on April 1, 2001, was destroyed by
fire. Sailadin Corporation recovered P620,000 from its insurance company.
(c) On May 1, 2006, costs of P6,720,000 were incurred to improve leased office premises.
The leasehold improvements have a useful life of 8 years. The related lease terminates
on December 31, 2012.
(d) On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P11,200,000; additional costs of P200,000 for freight and P1,000,000 for installation
were incurred.
(e) Sailadin Corporation determined that the automotive equipment comprising the
P4,600,000 balance at January 1, 2006, would have been depreciated at a total amount
of P720,000 for the year ended December 31, 2006.

13

Questions
1. What is the depreciation on building for 2006?
a. P 2,998,080
b. P 2,880,000
c. P 2,248,560

d. P 1,499,040

2. What is the book value of the building at December 31, 2006?

a. P 35,976,960
b. P 35,227,440
c. P 34,596,000

d. P 34,477,920

3. What is the depreciation on machinery and equipment for 2006?

a. P 4,220,000
b. P 4,197,000
c. P 4,151,000

d. P 4,128,000

4. What is the gain on machine destroyed by fire?

a. P 620,000
b. P 460,000
c. P 300,000

d. P 160,000

5. What is the balance of the Accumulated Depreciation Machinery and Equipment at

December 31, 2006?
a. P 13,777,000
b. P 13,760,000
c. P 13,691,000
d. P 13,231,000
6. What is the depreciation on automotive equipment for 2006?
a. P 1,104,000
b. P 960,000
c. P 816,000

d. P 720,000

7. What is the gain (loss) on car traded-in?

a. P 240,000
b. P (240,000)

d. P (56,000)

c. P 56,000

8. What is the book value of automotive equipment at December 31, 2006?

a. P 1,720,000
b. P 1,144,000
c. P 1,000,000
d. P 712,000
9. What is the depreciation on leasehold improvements for 2006?
a. P 756,000
b. P 672,000
c. P 630,000

d. P 560,000

10. What is the book value of leasehold improvements at December 31, 2006?
a. P 6,160,000
b. P 6,090,000
c. P 6,048,000
d. P 5,964,000
Solution
1. C
Book Value, 1/1/06 (P48,000,000 - P10,524,000)
P 37,476,000
150% declining-balance rate (1/25 x 150%)
x 6%
Depreciation on building
P 2,248,560
2. B
Cost of building
P 48,000,000
Less: Accumulated depreciation (P10,524,000 + P 2,248,560)
12,772,560
Book value of building, 12/31/06
P 35,227,440
3. C
Balance, 1/106
P 36,000,000
Less: Machine destroyed by fire
920,000
Balance
P 35,080,000
Depreciation
10%
3,508,000
Machine destroyed by fire (P920,000 x 10% x 3/12)
23,000
Purchased 7/1/06 (P12,400,000 x 10% x 6/12)
620,000
Total depreciation on machinery and equipment
4,151,000
4. D
Insurance recovery
620,000
Less: Book value of machine destroyed
(Cost 920,000 - Accum. depn (P 920,000 x 10% x 5)
460,000
Gain on recovery from insurance company
160,000
5. C
Balance, 1/1/06
10,000,000
Add: depreciation for 2006
4,151,000

14

Total
14,151,000
Less: Machinery destroyed by fire
(P920,000 x 10% x 5)
460,000
Accumulated depreciation - machinery and equip.
13,691,000
6. B
Depreciation on P4,600,000 balance on 1/1/06 (given)
720,000
Less: Depreciation on car traded-in, 1/1/06 (P720,000 x 2/10)
144,000 576,000
Car purchased, 1/2/06 (P960,000 x 4/10)
384,000
Total depreciation on automotive equipment for 2006
960,000
7. C
Book value of car traded-in (given)
216,000
Less: Trade-in allowance (P960,000 - P800,000)
160,000
Loss on trade-in
56,000
8. C
Cost of the machinery and equipment: Balance, 1/1/06 4,600,000
Car purchased, 1/2/06 960,000 Car traded in
(720,000)
4,840,000
Accumulated depreciation: Balance, 1/1/06
3,384,000
Depreciation for 2006
960,000
Car traded in (P720,000 - P216,000)
( 504,000)
3,840,000
Book value of automotive equipment, 12/31/06
1,000,000
9. B
Cost of leasehold improvements
6,720,000
Divide by term of lease, 5/1/06 - 12/31/2012
80 mos
Depreciation per month
84,000
Depreciation, 5/1 - 12/31 (P84,000 x 8 mos)
672,000
10. C
Cost of leasehold improvements
6,720,000
Less: Accumulated depreciation (see No. 9)
672,000
Book value, 12/31/06
6,048,000

Problem 11
You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year
ended December 31, 2006. You gathered the following information pertaining to the
companys Equipment and Accumulated Depreciation accounts.
EQUIPMENT
1.1.06 Balance
P 446,000 9.1.06 No. 6 sold
6.1.06 No. 12
36,000 12.31.06 Balance
9.1.03 Dismantling
of No. 6
1,000
P 483,000

9,000
474,000

______
P 483,000

ACCUMULATED DEPRECIATION EQUIPMENT

12.31.06 Balance P 271,400 1.1.06
Balance
P 224,000
______ 12.31.06 2006 Depn
47,400
P 271,400
P 271,400
The following are the details of the entries above:
1. The company depreciates equipment at 10% per year. The oldest equipment owned is
seven years old as of December 31, 2006.
2. The following adjusted balances appeared on your last years working papers:
Equipment
Accumulated depreciation

P 446,000
224,000

15

3. Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on
September 1, 2006, for P9,000.
4. Included in charges to the Repairs Expense account was an invoice covering installation
of Machine No. 12 in the amount of P2,500.
5. It is the companys practice to take a full years depreciation in the year of acquisition
and none in the year of disposition.
Questions
1. The gain/(loss) on sale of Machine 6 is:
a. P 1,000
b. P 500

c. P (1,000)

d. P (500)

2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2006 is:

a. P 446,000
b. P 452,000
c. P 454,500
d. P 475,500
3. The Depreciation expense Equipment of TRIUMPH CORPORATION at December 31,
2006 is:
a. P 45,200
b. P 45,450
c. P 46,525
d. P 53,525
4. The entry to correct the sale of Machine 6 is:
a. Loss on sale of equipment
1,000
Accumulated depreciation 21,000
Equipment
22,000
b. Accumulated depreciation 22,500
Equipment
22,000
Gain on sale
500
c. Accumulated depreciation 21,500
loss on sale of equipment
500
Equipment
22,000
d. Accumulated depreciation 23,000
Equipment
22,000
Gain on sale of equipment
1,000
5. The Depreciation Expense at December 31, 2006 is:
a. Overstated by P6,125
c. Understated by P1,950
b. Understated by P6,125
d. Overstated by P1,950
Solution
OE:
Cash
9,000
Equipment
1,000
Equipment
Cash
CE:
Cash
9,000
Accum. depn
21,000
Loss on sale
1,000
Equipment
Cash
------------------------------------------Adj:
Accum. depn
21,000
Loss on sale
1,000
Equipment
------------------------------------------Adj:
Equipment
2,500
Repairs expense

16

9,000
1,000

30,000
1,000

22,000
2,500

------------------------------------------Adj:
Accum. depn
1,950
Depreciation
Answer: 1. C
2. C

1,950
3. B

4. A

5. D

Problem 12
Information pertaining to Eddie Vic Corporations property, plant and equipment for 2005 is
presented below:
Account balances at January 1, 2005
Debit
Land
P 1,500,000
Building
12,000,000
Accum. depreciation-building
Machinery and equipment
9,000,000
Accum. depreciation-Mach. and Eqpt
Automotive Equipment
1,150,000
Accum. depreciation-Automotive Eqpt

Credit
P 2,631,000
2,500,000
846,000

Depreciation method and useful life

Building 150% declining balance; 25 years
Machinery and equipment Straight-line; 10 years
Automotive equipment Sum-of-the-years-digits; 4 years
The salvage value of the depreciable assets is immaterial
Depreciation is computed to the nearest month.
Transactions during 2005 and other information:
On January 2, 2005, Eddie Vic purchased a new car for P350,000 cash and trade-in of a 2year old car with a cost of P490,000 and a book value of P147,000. The new car has a cash
price of P520,000; the market value of the trade-in is not known.
On April 1, 2005, a machine purchased for P230,000 on April 1, 2000, was destroyed by
fire. Eddie Vic recovered P155,000 from its insurance company.
On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P2,800,000; additional costs of P50,000 for freight and P250,000 for installation were
incurred.
Eddie Vic determined that the automotive equipment comprising the P1,150,000 balance at
January 1, 2005, would have been depreciated at a total amount of P180,000 for the year
ended December 31, 2005.
Questions
1. Depreciation expense for building at December 31, 2005 is:
a. P 749,520
b. P 720,000
c. P 682,150

d. P 562,140

2. Depreciation expense for machinery and equipment at December 31, 2005 is:
a. P 1,049,250
b. P 1,037,750
c. P 1,032,000
d. P 877,000
3. Depreciation expense for Automobile equipment at December 31, 2005 is:
a. P 388,000
b. P 312,000
c. P 290,000
d. P 180,000

17

4. Total depreciation expense for 2005 is:

a. P 2,047,750
b. P 2,009,900

c. P 1,978,770

d. P 1,889,890

5. Total gain on asset disposal for 2005 is:

a. P 63,000
b. P 40,000

c. P 23,000

d. P 17,000

6. Total accumulated depreciation of building at December 31, 2005 is:

a. P 3,380,520
b. P 3,351,000
c. P 3,313,150
d. P 3,193,140
7. Total book value of property, plant, and equipment at December 31, 2005 is:
a. P 19,141,110
b. P 19,021,100
c. P 18,983,250
d. P 18,953,730
8. The property, plant and equipment at December 31, 2005 is:
a. P 19,141,110
b. P 19,021,100
c. P 18,983,250

d. P 18,953,730

9. The total cost of property, plant and equipment at December 31, 2005 is:
a. P 26,670,010
b. P 26,579,520
c. P 26,550,000
d. P 26,459,510
10. Total accumulated depreciation of property, plant, and equipment at December 31, 2005
is:
a. P 7,648,910
b. P 7,596,270
c. P 7,506,300
d. P 7,408,890
Solution
Schedule of Accumulated Depreciation December 31, 2005
Building
Mach.&
Equipment
Balance, 1.1.05
P2,631,000
P2,500,000
Add depreciation for 2005
562,140
1,037,750
P3,193,140
P3,537,750
Deduct acc. depr. related to
Mach, destroyed by fire
(5 x 10% x P230,000)
115,000
Car traded in (490,000 - 147,000)
_________
_________
Balance, 12.31.05
P3,193,140
P3,422,750

Auto. Eqpt.
P846,000
290,000
P1,136,000

P5,977,000
1,889,890
P7,866,890

343,000
P 793,000

458,000
P7,408,890

SCHEDULE OF DEPRECIATION EXPENSE For the Year Ended December 31, 2005
Building
Book value , 1/1/05 (P12,000,000 - P2,631,000)
P9,369,000
150% declining balance rate (100% / 25) x 1.5
x 6%
Total depreciation on building
Machinery and Equipment
Balance, 1.1.05 less machine destroyed by fire
Depreciation
Depr. on Machine destroyed by fire, 4.1.05
(P230,000 x 10% x 3/12)
Depr. on machine purchased on 7.1.05
(P3,100,000 x 10% x 6/12)
Total depreciation on mach. and equipment
Automotive Equipment
Depreciation on P1,115,000 bal. on 1.1.05
Deduct depr. on car traded in , 1.2.05
(SYD 3rd year 2/10 x P490,000)
Depr. on car purchased , 1.2.05 (P520,000 x 4/10)
Total depreciation on automotive equipment
Total depreciation expense for 2005

18

Total

P8,770,000
x 10%

P562,140

877,000
5,750
155,000
P1,037,750

P180,000
(98,000)

82,000
208,000
290,000
P1,889,890

Gain or Loss from Disposal of Assets For the Year Ended December 31, 2005
Gain on machine destroyed by fire
Insurance recovery
P155,000
Book value of machine destroyed
(P230,000 - (5 x 10% x P230,000)
115,000
Gain on car traded in on new car purchase
Book value of car traded in
P147,000
Trade-in allowed (P520,000 - P350,000)
170,000
Total gain on asset disposals for 2005
Property, Plant and Equipment December 31, 2005
COST
Land
Building
Machinery and Equipment
Automotive equipment
Totals
Answer:
1. D
2. B
6. D
7. A

P 1,500,000
12,000,000
11,870,000
1,180,000
P26,550,000
3. C
8. A

ACCUMULATED
DEPRECIATION

4. D
9. C

P40,000
23,000
P63,000

BOOK VALUE

-----3,193,140
3,422,750
793,000
P7,408,890

P1,500,000
8,806,860
8,447,250
387,000
P19,141,110

5. A
10. D

Problem 13
RUANN Service Center is wholly owned subsidiary of RUANN Stores. The companys function
is to deliver furniture and appliances sold by the parent and to service electronics and
appliances, also sold by the parent company. RUANN Stores, the parent, operates twelve
retail outlets in a large metropolitan area. The service center uses three delivery trucks and
fifteen 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, 2006, RUANN Service center reported audited balances of P525,000 and
P320,000 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 five- year life and zero
salvage value. One-half years depreciation is taken in the year of acquisition and in the
year of disposal.
During 2006, the following transactions and journal entries were completed by the
company:
2/2/06:

Sold one delivery truck for P2,000. the truck was fully depreciated at
12/31/07.
Cash
P2,000
Trucks
P2,000

3/1/06:

Bought one delivery truck for P60,000.

Trucks
P60,000
Cash

P60,000

19

3/15/06:

Sold one service truck for P8,000. This truck was purchased 6/15/03 for
P25,000 and the accumulated depreciation, according to RUANNs subsidiary
ledger, at the date of sale was P12,500
Cash
P8,000
Trucks
P8,000

7/25/06:

Bought one service truck for P27,500.

Truck
P27,500
Cash

P27,500

Recorded depreciation for 2006:

Two delivery trucks @ P10,000 each
Fifteen service trucks @ P5,000 each
Total

P20,000
75,000
P95,000

12/31/06:

Depreciation Expense Trucks

Accumulated depreciation

=
=

P95,000
P95,000

Questions
1. The adjusted balance of Delivery Truck at December 31, 2006 is:
a. P 537,500
b. P 217,500
c. P 210,000

d. P 160,000

2. The adjusted balance of Service Truck at December 31, 2006 is:

a. P 537,500
b. P 402,500
c. P 377,500

d. P 217,500

3. The Accumulated Depreciation Delivery Truck at December 31, 2006 is:

a. P 86,000
b. P 76,000
c. P 75,000
d. P 65,000
4. The Accumulated Depreciation Service Truck at December 31, 2006 is:
a. P 300,000
b. P 285,250
c. P 285,000
d. P 284,750
5. The Carrying Value of Delivery Truck at December 31, 2006 is:
a. P 461,500
b. P 145,000
c. P 142,500

d. P 74,000

6. The Carrying Value of Service Truck at December 31, 2006 is:

a. P 237,500
b. P 117,500
c. P 92,250

d. P 67,250

7. The Gain/Loss on Disposal of Trucks at December 31, 2006 is:

a. P 10,000
b. P 8,000
c. P 2,000

d. P 0

8. The Depreciation Expense of Trucks at December 31, 2006 is:

a. P 106,250
b. P 101,250
c. P 98,750

d. P 95,000

Solution
2/2/06

3/15/06

20

OE: Cash
2,000
Delivery truck
2,000
CE: Cash
2,000
AD - Del. truck
40,000
Loss on sale 8,000
Delivery truck
50,000
Adj: AD - del. truck
40,000
Loss on sale 8,000
Delivery truck
48,000
OE: Cash
8,000
Service truck
8,000

12/31/06

CE: Cash
8,000
AD - ser. truck
15,000
Loss on sale
2,000
Service truck
25,000
Adj: AD - serv. truck
15,000
Loss on sale 2,000
Service truck
17,000
Depreciation
11,250
AD - del. truck
11,000
AD - service truck
250
Del. truck
Per book
95,000
20,000
Per audit
106,250
31,000
Adjustment
11,250
11,000
Depreciation - Delivery truck
Disposed truck
Undisposed truck
(2 x P10,000)
Purchased during the year
(P60,000/5 x 1/2)
Total

Answer:
1. D
6. C

5,000
20,000
6,000
______
31,000

Depreciation - service truck

Disposed truck
Undisposed truck
(14 x P5,000)
Purchased during the year
(P27,500/5 x 1/2)
Total
2. C
7. A

3. A
8. A

Serv. truck
75,000
75,250
250

2,500
70,000
2,750
______
75,250
4. B

5. D

Problem 14
You are engaged in the examination of the financial statements of the PAUL COMPANY and
are auditing the Machinery and Equipment Account and the related depreciation accounts
for the year ended December 31, 2005. Your permanent file contains the following
schedules:
MACHINERY AND EQUIPMENT
Year
Balance
2004
________
12.31.03
Retirements
1991-1994
P 800,000
P 210,000
1995
40,000
1996
1997
1998
390,000
1999
2000
530,000
2001
2002
420,000
2004
________
_________
P 2,180,000
P 210,000

2004
Additions

Balance
12.31.04
P 590,000
40,000
390,000
530,000

P 570,000
P 570,000

420,000
570,000
P 2,540,000

21

ACCUMULATED DEPRECIATION
Year
Balance
2004
________
12.31.03
Retirements
1991-1994
P 784,000
P 210,000
1995
34,000
1996
1997
1998
214,500
1999
2000
185,500
2001
2002
63,000
2003
2004
________
_________
P 1,281,000
P 210,000

2004
Additions
P 16,000
4,000

Balance
12.31.04
P 590,000
38,000

39,000

253,500

53,000

238,500

42,000

105,000

28,500
P 182,500

28,500
P 1,253,500

A transcript of the Machinery and Equipment account for 2005 follows:

MACHINERY AND EQUIPMENT
Date
2005
Jan. 1
Mar. 1
May 1
June 1
June 1
Aug. 1
Nov. 1
Nov. 1
Dec. 1

Item
Balance forwarded
Burnham grinder
Air compressor
Power lawnmower
Lift truck battery
Rockwood saw
Electric spot welder
Baking oven
Baking oven

Debit

Credit

P 2,540,000
120,000
750,000
60,000
32,000
15,000
450,000
280,000
32,500
P 4,264,500
_________
P 4,264,500

__________
P
15,000
4,249,500
P 4,264,500

Your examination reveals the following information:

a. The company uses a ten-year life for all machinery and equipment for depreciation
purposes.
Depreciation is computed by the straight-line method.
Six months
depreciation is recorded in the year of acquisition or retirement. For 2005, the company
recorded depreciation of P280,000 on machinery and equipment.
b. The Burnham grinder was purchased for cash from a firm in financial distress. The chief
engineer and a used machinery dealer agreed that the practically new machine was
worth P180,000 in the open market.
c. For production reasons, the new air compressor was installed in a small building that
was erected in 2005 to house the machine and will also be used for general storage.
The cost of the building, which has a 25-year life, was P500,000 and is included in the
P750,000 voucher for the air compressor.
d. The power lawnmower was delivered to the house of the company president for personal
use.

22

e. On June 1, the battery in a battery powered lift truck was accidentally damaged beyond
repair. The damaged battery was included at a price of P60,000 in the P420,000 cost of
the lift truck purchased on July 1, 2002. The company decided to rent a replacement
battery rather than buy a new battery. The P32,000 expenditure is the annual rental for
the battery paid in advance, net of a P4,000 allowance for the scrap value of the
damaged battery that was returned to the battery company.
f.

The Rockwood saw sold on August 1 had been purchased on August 1, 2001, for
P150,000. The saw was in use until it was sold.

g. On September 1, the company determined that a production casting machine was no

longer needed and advertised it for sale for P180,000, after determining from a used
machinery dealer that its market value. The casting machine had been purchased for
P500,000 on September 1, 2000.
h. The company elected to exercise the option under a lease-purchase agreement to buy
the electric spot welder. The welder had been installed on February 1, 2005, at a
monthly rental of P10,000.
i.

On November 1, a baking oven was purchased for P1,000,000. A P280,000 down

payment was made and the balance will be paid in monthly installment over a three year
period. The December 1 payment included interest charges of P12,500. Legal title to
the oven will not pass to the company until the payments are completed.

Questions
1. The entry to record the adjustment of depreciation expense at December 31, 2005 is:
a. Depreciation expense
19,500
Accumulated depreciation
19,500
b. Depreciation expense
37,250
Accumulated depreciation
37,250
c. Accumulated deprecation
19,500
Depreciation expense
19,500
d. Accumulated depreciation
37,250
Depreciation expense
37,250
2. Depreciation Expense at December 31, 2005 is:
a. P 260,500
b. P 262,500
c. P 280,000

d. P 342,500

3. The entry to record the adjustment in item c at December 31, 2005 is:
a. Building
500,000
Machinery and equipment
500,000
b. Machinery and equipment. 750,000
Building
750,000
c. Machinery and equipment 500,000
Building
500,000
d. No adjustment
4. The total Loss on disposal of equipment at December 31, 2005 is:
a. P 38,000
b. P 70,000
c. P 93,000
d. P 108,000
5. The total rental expense in item h at December 31, 2005 is:
a. P 45,000
b. P 90,000
c. P 125,000

d. none

23

6. The total interest expense at December 31, 2005 is:

a. P 10,000
b. P 12,500
c. P 25,000

d. P 50,000

7. The total accumulated depreciation of the machinery and equipment at December 31,
2005 is:
a. P 773,000
b. P 791,000
c. P 816,000
d. P 855,000
8. The accumulated depreciation of the machinery and equipment at December 31, 2005 is
overstated by:
a. P 480,500
b. P 462,500
c. P 437,500
d. P 398,500
9.

The Total Machinery and Equipment (gross) at December 31, 2005 is:
a. P 3,740,000
b. P 2,310,500
c. P 2,030,500
d. P 1,940,500

10. The net book value of Machinery and Equipment at December 31, 2005 is:
a. P 1,518,000
b. P 1,494,500
c. P 1,503,000
d. P 2,924,000
Solution
a.

Accumulated Depreciation
Depreciation Expense
Correct depreciation expense for 2005
1995 acquisition : 40,000 x 10% x
1998

: 390,000 x 10%
2000

: (500,000 x 10% x ) + (30,000 x 10%)

2002

: (60,000 x 10% x ) + (360,000 x 10%)

2004

: 570,000 x 10%
2005

: (120,000 + 250,000 + 540,000 + 1M) x 10% x

Amount recorded
Overstatement

19,500

P2,000
39,000
28,000
39,000
57,000
95,500

b.

No AJE necessary

c.

Buildings
Machinery & Equipment

d.

Receivable from Officers

Machinery & Equipment

60,000

e. 1

Accumulated Depreciation
Loss on Disposal of Assets
Machinery & Equipment
Cost
Less acc. Depreciation (60,000 x 10% x 3)
Book value
Trade in value
Loss

18,000
42,000

e.2

Equipment rental expense (7/12)

Prepaid equipment rental
Machinery & Equipment
Loss on Disposal of Assets

500,000

P60,000
18,000
P42,000
4,000
P38,000
21,000
15,000

f.

Accumulated Depreciation
Machinery & Equipment
Gain on Disposal of Assets

150,000

g.

Other Assets - Mach. Held for sale

Accumulated depreciation
Loss on Disposal of Assets
Machinery & Equipment

180,000
250,000
70,000

24

19,500

P260,500
280,000
P 19,500

500,000
60,000

60,000

32,000
4,000
135,000
15,000

500,000

BV ( P500,000 x 5/10)
Estimated selling price
Loss

P250,000
180,000
P70,000

h.

Machinery & Equipment

Equipment Rental Expense
Rental for the period Feb. 1 to October 31.

i.

Machinery & Equipment

Interest expense
Equipment contract payable

Answer:
1. C
6. B

2. A
7. C

3. A
8. C

90,000

687,500
12,500
4. D
9. A

90,000

700,000

5. D
10. D

Problem 15
You are engaged in the examination of the financial statements of PATIENCE CORPORATION
for the year ended December 31, 2005. The chief accountant of the client has prepared the
accompanying analyses of the Property, Plant, and Equipment and related accumulated
depreciation accounts. You have traced the beginning balances to your prior years audit
working papers.
All plant assets are depreciated on the straight-line basis (no residual value taken into
consideration) based on the following estimated service lives: building, 25 years, and all
other items, 10 years. The companys policy is to take one-half years depreciation on all
assets additions and disposals during the year.
PATIENCE CORPORATION
Analysis of Property, Plant, and Equipment, and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2005
Description
Land
Buildings
Machinery & Equipment

Description
Buildings
Machinery & Equipment

Final
12/31/04
P 4,225,000
1,200,000
3,850,000
P 9,275,000

Assets
Additions
P 500,000
475,000
404,000
P 1,379,000

Assets
Retirements
P
0
0
260,000
P 260,000

Per ledger
12/31/05
P 4,725,000
1,675,000
3,994,000
P 10,394,000

Final
12/31/04
P 600,000
1,732,500
P 2,332,500

Assets
Additions
P 51,500
392,200
P 443,700

Assets
Retirements

Per ledger
12/31/05
P 651,500
2,124,700
P 2,776,200

Your examination revealed the following information:

1. On April 1, the company entered into a 10-year lease contract for a die-casting machine,
with annual rentals of P50,000 payable in advance every April 1. The lease is cancelable
by either party (60 days written notice is required), and there is no option to renew the
lease or buy the equipment at the end of the lease. The estimated service life of the
machine is 10-years with no residual value. The company recorded the die casting
machine in the Machinery and Equipment account at P404,000, the present value at the

25

date of the lease, and P20,200 applicable to the machine has been included in
depreciation expense for the year.
2. The company completed the construction of a wing on the plant building on June 30.
The service life of the building was not extended by this addition.
The lowest
constructions bid received was P475,000, the amount recorded in the Building account.
Company personnel constructed the addition at a cost of P460,000 (materials,
P175,000; labor, P155,000; and overhead, P130,000).
3. On August 18, P500,000 was paid for paving and fencing a portion of land owned by the
company and used as a packing lot for employees. The expenditure was charged to the
Land account.
4. The amount shown in the Machinery and Equipment asset retirement column represents
cash received on September 5 upon disposal of a machine purchased in July, 1998 for
P480,000. The chief accountant recorded depreciation expense of P35,000 on this
machine in 2005.
5. Davao City government donated land and building appraised at P1,000,000 and
P4,000,000, respectively, to PATIENCE CORPORATION for a plant. On September 1, the
company began operating the plant. Since no costs were involved, the chief accountant
made no entry for the above transaction.
Questions
1. PATIENCE CORPORATIONs Land balance at December 31, 2005 is:
a. P 5,725,000
b. P 5,225,000
c. P 4,725,000
d. P 4,225,000
2. PATIENCE CORPORATIONs Building balance at December 31, 2005 is:
a. P 5,690,000
b. P 5,675,000
c. P 5,660,000
d. P 5,645,000
3. PATIENCE CORPORAITONs Machinery and Equipment balance at December 31, 2005 is:
a. P 4,090,000
b. P 3,590,000
c. P 3,370,000
d. P 3,110,000
4. PATIENCE CORPORATIONs Accumulated Depreciation Building at December 31, 2005
is:
a. P 766,000
b. P 747,000
c. P 737,500
d. P 651,500
5. PATIENCE CORPORATIONs Accumulated Depreciation Machinery and Equipment at
December 31, 2005 is:
a. P 1,819,900
b. P 1,788,700
c. P 1,757,500
d. P 1,752,700
6. PATIENCE CORPORATIONs Depreciation Expense Building at December 31, 2005 is:
a. P 227,000
b. P 211,500
c. P 147,000
d. P 137,500
7. PATIENCE CORPORATIONs Depreciation Expense Machinery and Equipment at
December 31, 2005 is:
a. P 372,000
b. P 361,000
c. P 337,000
d. P 276,000
8. PATIENCE CORPORATIONs Depreciation Expense Land Improvements at December
31, 2005 is:
a. P 50,000
b. P 25,000
c. P 18,750
d. P 0

26

9. PATIENCE CORPORATIONs Net Book Value of Building at December 31, 2005 is:
a. P 5,023,500
b. P 4,924,000
c. P 4,913,000
d. P 4,907,500
10. PATIENCE CORPORATIONs Net Book Value of Machinery and Equipment at December
31, 2005 is:
a. P 2,332,500
b. P 1,770,100
c. P 1,612,500
d. P 1,357,300
Solution
Adjusting Journal Entries as of December 31, 2005
(1)
Equipment Rental Expense (P50,000 x 9/12)
Prepaid Equipment Rental
Obligations under Capital Lease
Machinery and Equipment
(2)

37,500
12,500
354,000

Profit on Construction
Buildings ( 475,000 - 460,000)

15,000
15,000

(3)

Land Improvements
Land

500,000

(4)

Accumulated Depreciation - Mach. & Eqpt.

Machinery & Equipment
Gain on sale of machinery
P260,000 - (480,000 x 3/10) = P116,000 gain

336,000

(5)

Land
Building
Gain from Donation

(6)

(7)

(8)
Answer:
1. B
6. C

1,000,000
4,000,000

Depreciation Expense
Accumulated Depreciation - Buildings
Depreciation Expense for 2005
1,200,000 x 4%
460,000 / 12 years x
4,000,000 x 4% x
Amount recorded
Adjustment to be made

95,667
P48,000
19,167
80,000

Accumulated Depreciation - Mach. & Equipment

Depreciation Expense
Depreciation expense for 2005
(3,850,000 - 480,000) x 10%
480,000 x 10% x
Amount recorded
Adjustment to be made

31,200
P337,000
24,000

Depreciation Expense
Accumulated Depreciation - Land Improvements
(P500,000 x 10% x 6/12)
2. C
7. B

3. C
8. B

404,000

4. B
9. C

25,000

500,000
220,000
116,000

5,000,000
95,667

P147,167
51,500
P95,667
31,200
P361,000
392,200
(P31,200)
25,000

5. C
10. C

27

Problem 16
You are engaged to examine the financial statement of the Rabago Manufacturing
Corporation for the year ended December 31, 2004. The following schedules for property,
plant, and equipment and the related accumulated depreciation accounts have been
prepared by your client. The opening balances agree with your prior years audit working
papers.
Rabago Manufacturing Corporation
Analysis of Property, Plant, and Equipment and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2004
COST
Final
Per Books
12/31/03
Additions
Retirements
12/31/04
Land
P
450,000 P 100,000
P
P
550,000
Buildings
2,400,000
350,000
2,750,000
Machinery/Equip 2,770,000
808,000
520,000
3,526,000
P 5,620,000 P1,258,000
P 520,000
P 6,826,000
ACCUMULATED DEPRECIATION
Final
12/31/03
Buildings
P 1,200,000
Machinery/Equip
546,500
P 1,746,200

Additions
P 103,000
313,600
P 416,600

Retirements

Per Books
12/31/04
P 1,303,000
860,100
P 2,163,100

Further investigation revealed the following:

a. All equipment is depreciated on the straight-line basis (with no salvage value) based on
the following estimated lives: Building 25 years, all other items 10 years.
b. The company entered into a 10-year lease contract for a derrick machine with annual
rental of P100,000, payable in advance every April 1. The parties to the contract
stipulated that a 30-day written notice is required to cancel the lease. Estimated useful
life is 10 years. The derrick was recorded under machinery and equipment at P808,000
and P60,000 applicable to the machine was included in the depreciation expense during
the year.
c. The company finished construction of a new building wing in June 30. The useful life of
the main building was not prolonged. The lowest construction bid was P350,000 which
was the amount recorded. Company personnel constructed the building at a total cost
of P330,000.
d. P100,000 was paid for the construction of a parking lot which was completed on July 1,
2004. The expenditure was charged to land.
e. The P520,000 equipment under retirement column represent cash received on October
1, 2004 for a machinery bought in October 1, 2000 for P960,000. The bookkeeper
recorded depreciation expense of P72,000 on this machine in 2004.
f.

28

Mr. Rabago, the companys president donated land and building appraised at P200,000
and P400,000 respectively to the company to be used as plant site. The company began

operating the plant on September 30, 2004. Since no money was involved, the
bookkeeper did not make any entry for the above transaction.
Questions
1. The balance of rent expense as of December 31, 2004 is:
a. P 0
b. P 25,000
c. P 75,000

d. P 100,000

2. The balance of prepaid rent as of December 31, 2004 is:

a. P 0
b. P 25,000
c. P 75,000

d. P 100,000

3. The life of the building wing is

a. 25 years
b. 11 years

d. 13 years

c. 12 years

4. The carrying value of the building as of December 31, 2004 is

a. P 1,447,000
b. P 1,816,250
c. P 1,820,250

d. P 1,827,400

5. The value of the land account for balance sheet presentation as of December 31, 2004
is:
a. P 450,000
b. P 545,000
c. P 650,000
d. P 750,000
6. The loss on the disposal of the machinery sold for P520,000 is
a. P 0
b. P 30,000
c. P 56,000

d. P 152,000

Solution
1. C
The lease is considered as operating lease since it is cancelable.
Equipment rental expense - P100,000 x 9/12 = P P75,000
2. B
Prepaid rental expense - P100,000 x 3/12 = P 25,000
3. C
Age of the building as of December 31, 2003
P1,200,000/P2,400,000 = 50% x 25 years = 12.5 years
Expired life for the current year = .5 year
Remaining life of the building wing = 12.5 - .5 = 12 years
4. B
Building per schedule
2,400,000
Accumulated depreciation
(1,296,000)
1,104,000
Building wing
330,000
Accumulated depreciation
(P330,000/12 x 6/12)
( 13,750)
316,250
Building - donation
400,000
Accumulated depreciation
(P400,000/25 x 3/12)
(
4,000)
396,000
Total carrying value
1,816,250
5. C
Land per schedule
450,000
Land - donation
200,000
650,000
6. C
Cost of the machine sold
960,000
Accumulated depreciation
(P960,000/10 x 4)
384,000
Book value
576,000
Proceeds from sale
520,000
Loss on sale
56,000

29

Problem 17
On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of
Crame Corporation. Plant assets consists of:
Land
Leasehold improvements
Equipment
Total per WBS

P 100,000
190,000
450,000
P 740,000

The land was acquired on October 1, 2003, at a cost of P500,000. Crame Corporation made
a cash downpayment of P100,000 and signed a 18% mortgage note payable in four equal
annual installments of P100,000. The first interest and principal payment is due on October
1, 2004. No interest has been accrued as of December 31, 2003.
In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which
was charged to operating expenses.
You ascertained that due to obsolescence, computer equipment with an original cost of
P80,000 and accumulated depreciation of P16,000 at January 1, 2003 had suffered a
permanent impairment in value and, as a result, should have a carrying value of only
P40,000 at the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 4 to 2 years. No entry has yet been made in the books. For
2003, the company recorded depreciation of P16,000 for the said equipment.
At present, Crame Corporations office and warehouse are located in a rented building. The
rental contract was signed on July 1, 2003 and has a term of five (5) years renewable for
another five (5) years. On October 1, 2003, Crame Corporation spent P190,000 to install
walls and fixtures. The leasehold improvements have a useful life of five years. No
amortization has been booked as of December 31, 2003.
Questions
1. The adjusted cost of land amounted to:
a. P 528,000
b. P 510,000

c. P 500,000

d. P 410,000

2. The carrying value of leasehold improvements as of December 31, 2003 amounted to:
a. P 190,000
b. P 183,000
c. P 180,500
d. P 180,000
3. Audit adjustments will increase depreciation/amortization expense by:
a. P 38,000
b. P 24,000
c. P 14,000
d. P 13,500
4. Loss due to impairment in value amounted to:
a. P 30,000
b. P 28,000
c. P 24,000
Solution
1. B
Cost of the land
Add: tilting cost
Total
2. C
Land improvement
Less: Accumulated depreciation
Carrying value
3. C
Depreciation - leasehold improvement
Depreciation - Equipment (P40,000/2)

30

500,000
10,000
510,000
190,000
10,000 (P190,000/57 mos. x 3 mos.)
180,000
10,000
20,000

d. P 20,000

4.

Total per audit

Total per book
Understatement of depreciation
C
Net book value
Less: CV after impairment
Loss on impairment

30,000
16,000
14,000
64,000
40,000
24,000

Problem 18
On January 1, 2003, BLESSING COMPANY signs a 10-year noncancelable lease agreement
to lease a storage building from GRACE COMPANY. The following information pertains to
this lease agreement:
a. The agreement requires equal rental payments of P720,000 beginning on January 1,
2003.
b. The fair value of the building on January 1, 2003, is P4,400,000.
c. The building has an estimated economic life of 12 years, with an unguaranteed residual
value of P100,000. BLESSING COMPANY depreciates similar buildings on the straightline method.
d. The lease is nonrevnewable. At the termination of the lease, the building reverts to the
lessor.
e. BLESSING COMPANYs incremental borrowing rate is 12% per year. The lessors implicit
rate is not known by BLESSING COMPANY.
f.

The yearly rental payment includes P24,705.10 of executory costs related to taxes on
the property.

The following present value factors are for 10 periods at 12% annual interest rate:
Present value of an annuity due of 1
Present value of an ordinary annuity of 1
Present value of 1
Questions
1. The minimum annual lease payment is:
a. P 744,705.10
b. P 720,000.00

6.32825
5.65022
0.32197

c. P 695,294.90

d. P 0

2. The present value of minimum lease payments is:

a. P 0
b. P 4,400,000
c. P 4,207,747.65

d. P 3,928,569.15

3. The interest expense at December 31, 2003 is:

a. P 0
b. P 414,476.98
c. P 444,564,61

d. P 528,000.00

4. The depreciation expense at December 31, 2003 is:

a. P 0
b. P 420,774.76
c. P 440,000.00

d. P 471,268.00

5. The Book Value of Leased Building at December 31, 2004 is:

a. P 3,520,000.00
b. P 3,786,972.89 c. P 3,979,225.24

d. P 3,960,000.00

31

Solution
1. C
Annual payment
720,000.00
Less: Executory costs
24,705.10
Minimum annual lease payment
695,294.90
2. B
Present value of minimum lease payment - P695,294.90 x 6.32825 = P 4,400,000
3. C
Min. Annual
Payment__
Interest expense
Carrying Value
4,400,000.00
1/1/03
695,294.90
3,704,705.10
12/1/03
695,294.90
444,564.61
3,453,974.81
12/1/04
695,294.90
414,476.98
3,173,156.89
4. C
P4,400,000/10 years = P 440,000
5. A
Cost
P 4,400,000
Accumulated depreciation
880,000
Net book value
P 3,520,000

Problem 19
On January 1, 2003, the Prince Gabriel Manufacturing Company began construction of a
building to be used as its office headquarters. The building was completed on June 30,
2004.
Expenditures on the project were as follows:
January 3, 2003
March 31, 2003
June 30, 2003
October 31, 2003
January 31, 2004
March 31, 2004
May 31, 2004

P 500,000
600,000
800,000
600,000
300,000
500,000
600,000

On January 3, 2003, the company obtained a P2 million construction loan with a 10%
interest rate. The loan was outstanding all of 2003 and 2004. The companys other
interest-bearing debt included a long-term note of P5,000,000 with an 8% interest rate, and
a mortgage of P3,000,000 on another building with an interest rate of 6%. Both debts were
outstanding during all of 2003 and 2004. The companys fiscal year end is December 31.
Questions
1. The interest capitalized at the end of December 31, 2003 is:
a. P 113,100
b. P 145,000
c. P 150,000

d. P 200,000

2. The interest capitalized at the end of December 31, 2004 is:

a. P 145,132
b. P 159,632
c. P 290,263

d. P 319,263

3. The total cost of the Building at December 31, 2004 is:

a. P 3,535,132
b. P 4,190,131
c. P 4,480,263

d. P 4,535,263

4. The total interest expense at the end of December 31, 2003 is:
a. P 780,000
b. P 635,000
c. P 630,000

d. P 560,000

5. The total interest expense at the end of December 31, 2004 is:
a. P 460,737
b. P 489,737
c. P 620,368

d. P 634,868

32

Solution
1. B
Jan. 3
500,000 x 12/12 =
March 31
600,000 x 9/12 =
June 30
800,000 x 6/12 =
Oct 31
600,000 x 2/12 =
actual cost of P580,000)
2. A
Beg bal.
2,500,000 x 6/6 =
145,000 x 6/6 =
Jan. 31
300,000 x 5/6 =
Mar 31
500,000 x 3/6 =
May 31
600,000 x 1/6 =

500,000
450,000
400,000
100,000
2,500,000
145,000
250,000
250,000
100,000

AAE

1,450,000 x 10% = P145,000 (Lower than the

3,245,000 AAE

Specific borrowing
- P2,000,000 x 10%
x 6/12
General borrowing
- 1,245,000 x 7.25% x 6/12
Interest to be capitalized

3.

4.

5.

= 100,000
= 45,132
145,132 (Lower than the actual cost
of P580,000)

Average rate (general)

5,000,000 x 8% = P 400,000
3,000,000 x 6% = 180,000
580,000 / 8,000,000 = 7.25%

B
Total cost in the construction
- P 3,900,000
Interest capitalized
290,132
Total cost building
- P 4,190,132
B
Interest expense 2003
Specific borrowing P 2,000,000 x 10%
=
General borrowing P 5,000,000 x 8%
=
P 3,000,000 x 6%
=
Less: Interest capitalized
=
Total interest expense 2003
=
D
Interest expense 2004
Specific borrowing P 2,000,000 x 10%
=
General borrowing P 5,000,000 x 8%
=
P 3,000,000 x 6%
=
Less: Interest capitalized
=
Total interest expense 2003
=

200,000
400,000
180,000
(145,000)
635,000
200,000
400,000
180,000
(145,132)
634,868

Problem 20
In connection with your audit of Bing-Bong Corporation, you noted that on January 2, 2002,
the corporation purchased a building site for its proposed research and development
laboratory at a cost of P2,400,000. Construction of the building was started in 2002. The
building was completed on December 31, 2003, at a cost of P11,200,000 and was placed in
service on January 1, 2004. The estimated useful life of the building for depreciation
purposes was 20 years; the straight-line method of depreciation was to be employed and
there was no estimated salvage value.
Management estimates that about 50% of the projects of the research and development
group will result in long-term benefits to the corporation. The remaining projects either
benefit the current period or are abandoned before completion. A summary of the number
of projects and the direct costs incurred in conjunction with the research and development
activities for 2004 appears below.

33

Completed projects with

long-term benefits
Abandoned projects that
benefit the current year
Projects in process results
indeterminate

No. of
Projects

Salaries and
employees benefits

Other expenses
(excluding depn.)

60

3,600,000

2,000,000

40

2,600,000

600,000

20

1,600,000

480,000

Upon the recommendation of the research and development group, Bing-Bong Corporation
acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was
acquired on March 31, 2003, and has an economic life of 10 years.
Questions
1. Carrying value of the patent as of December 31, 2004 is:
a. P 3,600,000
b. P 3,200,000
c. P 2,880,000

d. P 2,640,000

2. Carrying value of the building as of December 31, 2004 is:

a. P 5,320,000
b. P 10,640,000
c. P 10,080,000

d. P 0

3. Carrying value of the land as of December 31, 2004 is:

a. P 1,200,000
b. P 2,400,000
c. P 2,160,000

d. P 0

4. Research and development expense for 2004 is:

a. P 5,280,000
b. P 10,880,000
c. P 11,440,000

d. P 11,760,000

Solution
1. D
Cost of patent
Amortization 2003
Amortization 2004
Net carrying value
2. B
Cost of building
Depreciation 2004
Net carrying value
3. B
cost of the land
4. C
Salaries and benefits
Other expenses
Depreciation
Total R and D Cost

34

- P 3,200,000
240,000
320,000
- P 2,640,000
- P 11,200,000
560,000
- P 10,640,000
P 2,400,000
- P 7,800,000
- 3,080,000
560,000
- P11,440,000