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La Consolacion College Unified La Consolacion College

South Luzon

Tanauan
SEATWORK IN AUDIT OF PPE AND INTANGIBLE ASSETS

Name: Date:

Program/Major/Yr.: Score:

DIRECTION: Read and solve the following items. Write your answer on the space provided
before each number.

PROBLEM 1. The property, plant and equipment section of DMCI Homes statement of financial position
at December 31, 2016 included the following items:

Land P2,100,000
Land improvements 560,000
Buildings 3,600,000
Machinery and equipment 6,600,000

During 2017, the following data were available to you upon your analysis of the accounts:

Cash paid on purchase of land P10,000,000

Mortgage assumed on the land bought, including interest at 16% 16,000,000
Realtors commission 1,200,000
Legal fees, realty taxes and documentation expenses 200,000
Amount paid to relocate persons squatting on the property 400,000
Cost of tearing down an old building on the land 300,000
Amount recovered from the salvage of the building demolished 200,000
Cost of fencing the property 440,000
Amount paid to a contractor for the building erected 8,000,000
Building permit fees 50,000
Excavation expenses 250,000
Architects fee 100,000
Interest that would have been earned had the money used during the period of 600,000
construction been invested in the money market
Invoice cost of machinery acquired 8,000,000
Freight, unloading, and delivery charges 240,000
Customs duties and other charges 560,000
Allowances, hotel accommodations, etc., paid to foreign technicians during 1,600,000
installation and test run of machines
Royalty payment on machines purchased (based on units produced and sold) 480,000

Based on the result of your audit, compute for the following as of December 31, 2017:

___________1. Land
___________2. Land improvements
___________3. Building
___________4. Machinery and equipment

PROBLEM 2. In connection with your audit of Cuyapo Companys financial statements for the year 2017,
you noted the following transactions affecting the property and equipment items of the company:

Jan 1 Purchased real property for P5,026,000, which included a charge of P146,000
representing property tax for 2017 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

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P3,000,000 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 P236,800.
Feb 15 Demolished garages in the rear of the building, P36,000 being recovered on the lumber
salvage. The company proceeded to construct a warehouse. The cost of such warehouse
was P540,800, which was P90,000 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
P76,800.
Mar 1 The company exchanged its own shares with a fair value of P320,000 (par P24,000) for a
patent and a new equipment. The equipment has a fair value of P200,000.
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 P400,000 and by paying cash of P144,000. The value of the franchise is set at
P160,000 while the machines fair value is P360,000.
May 1 The company contracted for parking lost and waiting sheds at a cost of P360,000 and
P76,800, 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 redecorating and repairs were completed at a cost of P60,000.

Determine the following:

___________5. Land
___________6. Buildings
___________7. Machinery and equipment
___________8. Land improvements
___________9. Total property, plant and equipment

PROBLEM 3. Your audit of Llanera Corporation for the year 2017 disclosed the following property
dispositions:

Cost Acc. Dep. Proceeds Fair value

Land P4,800,000 - 3,720,000 3,720,000
Building 1,800,000 - 288,000 -
Warehouse 8,400,000 1,320,000 8,880,000 8,880,000
Machine 960,000 384,000 108,000 864,000
Delivery truck 1,200,000 570,000 564,000 564,000

Land
On January 15, a condemnation award was received as consideration for the forced sale of the
companys land and building, which stood in the path of the new highway.

Building
On March 12, land and building were purchased at a total cost of P6,000,000 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, 2011. On
December 12, the insurance proceeds and other funds were used to purchase a replacement warehouse
at a cost of 7,200,000.

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Machine
On December 15, the machine was exchanged for a machine having a fair value of P756,000 and cash of
P108,000 was received.

Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.

Compute the gain or loss to be recognized for each of the following dispositions:
__________10. Land
__________11. Building
__________12. Warehouse
__________13. Machine
__________14. Delivery truck

PROBLEM 4. On January 1, 2017, Peneranda Airlines acquired a new aeroplane for total cost of P30
million. A breakdown of the costs to build the aeroplane was given by the manufacturers:

Aircraft body P 9,000,000

Engines (2) 12,000,000
Fitting out of aircraft:
Seats 3,000,000
Carpets 150,000
Electrical equipment passenger seats 600,000
Electrical equipment cockpit 4,500,000
Food preparation equipment 750,000

All costs include installation and labor costs associated with the relevant part.

It is expected that the aircraft will be kept for ten years and then sold. The main value of the aircraft at that
stage is the body and the engines. The expected selling price is P6.3 million, with the body and the
engines proportionate value.

Costs in relation to the aircraft over the next ten years are expected to be as follows:

Aircraft body The body requires inspection every two years for cracks and wear and tear, at a cost of
P30,000.

Engines Each engine has an expected life of four years before being sold scrap. It is expected that the
engines will be replaced in 2021 for P13.5 million and again in 2025 for P18 million. These engines are
expected to incur annual maintenance costs of P900,000. The manufacturer has informed Penaranda
Airlines that a new prototype engine with an extra 10% capacity should be on the same market in 2023
and that existing engines could be upgraded at a cost of P3 million.

Fittings Seats are replaced every three years. Expected replacement costs are P3.6 million in 2020 and
P4.5 million and P4.5 million in 2026. The repair of torn seats and faulty mechanisms is expected to cost
P300,000 per annum. Carpets are replaced every five years. They will be replaced in 2022 at an
expected cost of P195,000, but will not be replaced before the aircraft is sold in 2027. Cleaning costs per
annum amount to P30,000. The electrical equipment (such as TV) for each seat has annual repair cost of
P45,000. It is expected that, with the improvements in technology, the equipment will be totally replaced in
2023 by substantially better equipment at a cost of P1,050,000. The electrical equipment in the cockpit is
tested frequently at an expected annual cost of P750,000. Major upgrades to the equipment are expected
every two years at expected costs of P750,000 (in 2019), P900,000 (in 2021), P1,035,000 (in 2023) and
P1,230,000 (in 2025). The upgrades will take into effect the expected changes in technology.

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Food preparation equipment This incurs annual costs for repair and maintenance of P60,000. The
equipment is expected to be totally replaced in 2023.

Determine the following:

___________15. The annual depreciation expense for the Aircraft body
___________16. The annual depreciation expense for the Engines
___________17. The annual depreciation expense for the Fittings
___________18. The annual depreciation expense for the Food Preparation Equipment

PROBLEM 5. Various equipment used by BASSOON CO. in its operations are either purchased from
dealers or self-constructed. The following items for two different types of equipment were recorded during
the calendar year 2017.

Manufacturing equipment (self-constructed)

Materials and purchased parts at gross invoice price (Bassoon failed P 450,000
to take the 2% cash discount)
Imputed interest on funds used during construction (stock financing) 36,000
Labor costs 185,000
Overhead costs (fixed P40,000; variable P60,000) 100,000
Gain on self-construction 74,000
Installation cost 8,600

Store equipment (purchased)

Cash paid for equipment 175,000
Freight and insurance cost while in transit 3,500
Cost of moving equipment into place at store 1,200
Wage cost for technicians to test equipment 7,000
Insurance premium paid during first year of operation on this 5,200
equipment
Special plumbing fixtures required for this equipment 8,200
Repair cost incurred in first year of operations related to this 1,450
equipment

__________19. What is total cost of the self-constructed equipment?

__________20. What is the total cost of the store equipment purchased?

PROBLEM 6. Accordion Company incurred the following expenditures in 2017:

Purchase of land P7,800,000

Land survey 104,000
Fees for search of title for land 12,000
Building permit fee 70,000
Temporary quarters for construction crews 215,000
Payments to tenants of old building for vacating 92,000
premises
Cost to demolish old building 940,000
Excavation of basement 200,000
Special assessment for street project 40,000
Dividends 100,000
Damages awarded for injuries sustained in 168,000
construction (no insurance carried)
Cost of construction 58,000,000
Cost of paving parking lot adjoining building 800,000
Cost of shrubs, trees, and other landscaping 660,000
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A portion of the building site had been temporarily used by Accordion to operate a car park while the
building was being constructed. A total of P325,000 was earned by Accordion from this incidental activity.

__________21. What is the cost of the land?

__________22. What is the cost of the land improvements?
__________23. What is the cost of the building?

PROBLEM 7. Sheng Company constructed a building for use by the administration section of the
company. The completion date was January 1, 2010, and the construction cost was P16,800,000. The
company expected to remain in the building for the next 20 years, at which time the building would
probably have no real salvage value and have to be demolished. It is expected that demolition costs will
amount to P300,000.

In June 2016, following a storm that wreaked vast destruction in the city, the roof of the administration
building was considered to be in poor shape so the company decided to replace it. On January 1,2017, a
new roof was installed at a cost of P4,400,000. The new roof was of a different material to the old roof,
which was estimated to have cost only P2,800,000 in the original construction, although at the time of
construction it was thought that the roof would last for the 20 years that the company expected to use the
building. Because the company had spent the money replcing the roof, it thought that it would delay
construction of a new building, thereby expending the original life of the building from 20 years to 25
years.

___________24. If the roof were treated as separate component of the building, the total depreciation
expense for 2017 would be
___________25. If the roof were not treated as separate component of the building, the total depreciation
expense for 2017 would be

PROBLEM 8. Cavinti Company purchased a customer list and a formula for a total cost of P2,000,000.
Cavinti uses the expected cash flow approach for estimating the fair value of these two intangibles. The
appropriate interest rate is 8%. The potential future cash flows from the two intangibles and their
associated probabilities are as follows:

Customer List
Outcome 1 20% probability of cash flows of P250,000 at the end of each year for 5 years
Outcome 2 30% probability of cash flows of P150,000 at the end of each year for 4 years
Outcome 3 50% probability of cash flows of P50,000 at the end of each year for 3 years

Formula
Outcome 1 10% probability of cash flows of P1,500,000 at the end of each year for 10 years
Outcome 2 20% probability of cash flows of P500,000 at the end of each year for 4 years
Outcome 3 70% probability of cash flows of P300,000 at the end of each year for 3 years

Determine the following:

__________26. The estimated fair value of the customer list is
__________27. The estimated fair value of the formula is
__________28. The cost to be allocated to the customer list is
__________29. The cost to be allocated to the formula is

PROBLEM 9. Mabitac Company incurred the following costs during 2017:

Quality control during commercial production, including routine testing of P 460,000

products
Laboratory research aimed at discovery of new knowledge 540,000
Engineering follow-through in an early phase of commercial production 120,000
Adaptation of existing capability to a particular requirement or customers need 110,000

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as part of continuing commercial activity
Trouble shooting in connection with breakdowns during commercial production 230,000
Searching for applications of new research findings 150,000

__________30. Compute the amount that will be classified and expensed as research and development

PROBLEM 10. Rizal Company incurred the following costs during the year ended December 31, 2017:

Design, construction and testing of preproduction prototypes and models P435,000

Routine, on-going efforts to refine, enrich, or otherwise improve upon the 375,000
qualities of an existing product
Quality control during commercial production including routine testing of 450,000
products
Laboratory research aimed at discovery of new knowledge 630,000

__________31. Compute the amount that will be classified and expensed as research and development

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