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CPA REVIEW SCHOOL OF THE PHILIPPINES M a n i l a 

AUDITING PROBLEMS 
AUDIT OF PROPERTY, PLANT & EQUIPMENT AND INTANGIBLE ASSETS 
PROBLEM NO. 1 
The property, plant and equipment section of White Corporation’s balance sheet at 
December 31, 2004 included the following items: 
Land  P  2,500,000  Land  improvements  560,000  Building  3,600,000  Machinery  and 
equipment 6,600,000 
During 2005 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  Realtor’s  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 600,000 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  Architect’s  fee  100,000 
Interest that would have been earned had the money used during 
the  period  of  construction been invested in the money market 600,000 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 instillation and test run of machines 1,600,000 Royalty payment 
on machines purchased (based on units 
produced and sold) 480,000 
REQUIRED: 
Based on the above and the result of your audit, compute for the following as of 
December 31, 2005: 1. Land 2. Land improvements 3. Building 4. Machinery and 
equipment 5. Total depreciable property, plant and equipment 
PROBLEM NO. 2 
The following were discovered during your audit of Black Company’s financial 
statements for the year ended December 31, 2005: 
a.  On  December  24,  2005,  Black  purchased  an  office  equipment  for  P400,000,  terms 
2/5,  n/15.  No  entry  was  made  on  the  date  of  purchase.  The  same  was  paid  on 
December  31,  2005  and  the accountant debited Office Equipment and credited cash for 
P400,000. 

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b.  Machine  C,  with  a  cash  price  of  P128,000,  was  purchased  on  January  2,  2005.  The 
company  paid  P20,000  down  and  P10,000  for  12  months.  The  last  payment was made 
on  December  30,  2005.  Straight  line  depreciation,  based  on  a  five-year  useful  life  and 
no  salvage  value,  was  recorded  at  P28,000  for  the  year.  Freight  of  P4,000  on machine 
C was debited to the Freight in account. 
c.  Machine  P  with  a  cash  selling  price  of  P360,000  was  acquired  on  April  1,  2005,  in 
exchange  for  P400,000  face  amount  of  bonds  payable  selling  at  94,  and  maturing  on 
April  1,  2015.  The  accountant  recorded  the  acquisition  by  a  debit  to  Machinery  and  a 
credit  to  Bonds  Payable for P400,000. Straight line depreciation was recorded based on 
a  five-year  economic  life  and  amounted  to  P54,000 for nine months. In the computation 
of depreciation, residual value of P40,000 was used. 
d.  Machine  A  was  acquired  on  January  22,  2005,  in  exchange  for  past  due  accounts 
receivable  of  P140,000,  on  which  an  allowance  of  20%  was  established  at  the  end  of 
2004.  The  current  fair  value  of  the  machine  on  January  22  was estimated at P110,000. 
The  machine was recorded by a debit to Machinery and a credit to Accounts Receivable 
for  P140,000.  No  depreciation  was recorded on Machine A, because it was not installed 
and  never  used  in  operations.  On  February  2,  2005,  Machine  A  was  exchanged  for 
1,000  shares  of  the  company’s  outstanding  capital  stock  with  market  price  of  P105  per 
share.  The  Treasury  Stock  account  was  debited  for  P140,000  with  the  corresponding 
credit to Machinery. 
e.  On  December  29,  2005,  the  company  exchanged  10,000  shares  of  Emong,  Inc. 
common  stock,  which  Black  was  holding  as  an  investment,  for  an  equipment  from  De 
Leon  Corporation.  The  common  stock  of  Emong,  Inc.,  which  had  been  purchased  by 
Black  for  P45  per  share,  had  a  quoted  market  value  of  P50  per  share  on  the  date  of 
exchange.  The  equipment  had  a  market  value  of  P470,000.  The  transaction  was 
recorded  by  a  debit  to  Equipment  and  a  credit  to  Investment  in  Emong,  Inc.-Common 
for P450,000. 
f.  On  December  30,  2005,  Machine  M  with  a  carrying  amount  of  P120,000  (cost 
P400,000)  was  exchanged  for  a  similar  asset  with  a  fair  value  of P150,000. In addition, 
Black  paid  P20,000  to  acquire  the  new  machine.  The  exchange,  which  lacks 
commercial  substance,  was  recorded  by  a  debit  to  Machinery  and  a  credit  to  cash  for 
P20,000. 
g.  Machine  E  was  recorded  at  P102,000,  which  included  the  carrying  amount  of 
P22,000  for  an  old  machine  accepted  as  a  trade  in,  and  cash  of  P80,000.  The  cash 
price  of  Machine  S  was  P90,000,  and  the  trade  in  allowance  was  P10,000.  This 
transaction took place on December 31, 2005. 
h.  Ms.  Beauty,  the  company’s  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,  2005.  The  building  is  estimated 
to  have  a  useful  life  of  25  years.  Since  no  money  was  involved,  no  journal  entry  was 
made for the above transaction. 
i.  On  July  1,  2004,  the  national  government  granted  a  parcel  of land located in Baliuag, 
Bulacan  to  Black.  On  the  date  of  grant,  the  land  had  a  fair  value  of  P2,000,000.  The 
grant  required  Black  to  construct  a  cold  storage  building  on  the  site.  Black  finished  the 
construction  of  the  building,  which  has  an  estimated  useful  life  of  25  years,  on January 
2,  2005.  Black  appropriately  recorded  the  cost  of  the  building  of  P4,000,000  (which 
include  direct  materials,  direct  labor,  and  indirect  cost  and  incremental  overhead)  but 
failed  to  provide  depreciation  in  2005.  Unaware  of  the  accounting  procedures  for 
government grants, the company did not reflect the grant on its books. 

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REQUIRED: 
As Black’s external auditor, you are required to prepare any necessary adjusting journal 
entries as of December 31, 2005. 
PROBLEM NO. 3 
The  Blue  Corporation  was  incorporated  on  January  2,  2005,  but  was  unable  to  begin 
manufacturing  activities  until  July  1,  2005  because  the  new  factory  facilities  were  not 
completed until that date. 
The “Land and Building” account at December 31, 2005 follows: 
Date Particulars Amount Jan. 31 Land and building P 1,098,000 Feb. 28 Cost of 
removal of old building 60,000 May 02 Partial payment on new construction 700,000 02 
Legal fees paid 15,000 June 01 Second payment on new construction 600,000 July 01 
Fire insurance premium – 1 year 26,000 01 Final payment on new construction 200,000 
Dec. 31 Asset write-up 500,000 P 3,199,000 Dec. 31 Depreciation – 2005, at 1% of 
account balance 31,990 P 3,167,010 
You were able to gather the following during your audit: 
a.  To  acquire  land  and  building,  the  company  paid  P98,000  cash  and  10,000 shares of 
its  9%  cumulative  preferred  shares,  P100  par  value  per  share.  The  shares  were  then 
selling at P120. 
b. Legal fees covered the following: 
Cost of incorporation P 9,500 Examination of title covering purchase of the land 4,000 
Legal work in connection with construction contract 1,500 P 15,000 
c.  Because  of  a  general  increase  in  construction  costs  after  entering  into  the  building 
contract,  the  board  of  directors  increased  the  value  of  the  building  by  P500,000, 
believing  such increase is justified to reflect current market value at the time the building 
was completed. Retained earnings was credited for this amount. 
d. Estimated useful life of the building is 25 years. 
REQUIRED: 
1. Prepare the necessary adjusting journal entries as of December 31, 2005. 
2. Determine the adjusted balances of the following as of December 31, 2005: 
a. Land and building b. Land c. Carrying value of building d. Organization cost, net 
(presented under Noncurrent Assets) 

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PROBLEM NO. 4 
In the audit of the books of Green Company for the year 2005, the following items and 
information appeared in the Production Machines account of the auditee: 
Date Particulars Debit Credit 2005 Jan. 01 Balance–Machines 1, 2, 3, and 4 at P90,000 
each P 360,000 Aug 31 Machine 5 
198,000 Machine 1 
P 3,000 Sept 30 Machine 6 96,000 Dec 01 Machines 7 and 8 at P216,000 each 
432,000 Dec 01 Machine 2 21,000 31 Balance . 1,062,000 P1,086,000 P1,086,000 
The Accumulated Depreciation account contained no entries for the year 2005. The 
balance on January 1, 2005 per your audit, was as follows: 
Machine 1 P 84,375 Machine 2 39,375 Machine 3 33,750 Machine 4 22,500 Total P 
180,000 
Based on your further inquiry and verification, you noted the following: 
1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this 
date for P3,000. 
2.  Machine  2  was  destroyed  by  the  thickness of engine oil used leading to explosion on 
December  1,  2005.  Insurance  of  P21,000  was  recovered.  Machine  7  was  to  replace 
Machine 2. 
3. Machine 3 was traded in for Machine 6 at an allowance of P12,000; the difference 
was paid in cash and charged to Production Machine account. 
4. Depreciation rate is recognized at 25% per annum. 
REQUIRED: 
Determine the adjusted balance of the Production Machine as of December 31, 2005 
and Depreciation Expense for the year 2005. 
PROBLEM NO. 5 
You obtain the following information pertaining to Red Co.’s property, plant, and 
equipment for 2005 in connection with your audit of the company’s financial statements. 
Audited balances at December 31, 2004: 
Debit Credit Land Buildings Accumulated 
depreciation – buildings Machinery and equipment Accumulated depreciation – 
Machinery and Equipment Delivery Equipment Accumulated Depreciation – 
Delivery Equipment 
AP-5903 P 3,750,000 30,000,000 
22,500,000 
2,875,000 
P 6,577,500 
6,250,000 
2,115,000 
 
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Depreciation Data: 
Depreciation Method Useful Life Buildings Machinery and 
Equipment Delivery Equipment Leasehold Improvements 
AP-5903 150% declining – balance 
Straight-line Sum-of-the-years’-digits Straight-line 
25 years 10 years 4 years - 
Transaction during 2005 and other information are as follows: 
a.  On  January  2,  2005,  Red  purchased  a  new  truck  for  P500,000  cash  and  traded-in  a 
2-year-old  truck  with  a  cost  of  P450,000  and  a  book  value  of  P135,000.  The  new  truck 
has a cash price of P600,000; the market value of the old truck is not known. 
b. On April 1, 2005, a machine purchased for P575,000 on April 1, 2000 was destroyed 
by fire. Red recovered P387,500 from its insurance company. 
c.  On  May 1, 2005, cost of P4,200,000 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 
P7,000,000;  additional  cost  of  P125,000  for  freight  and  P625,000  for  installation  were 
incurred. 
e.  Red  determined  that  the  delivery  equipment  comprising  the  P2,875,000  balance  at 
January  1,  2005,  would  have  been  depreciated  at  a  total  amount  of  P450,000  for  the 
year ended December 31, 2005. 
The salvage values of the depreciable assets are immaterial. The policy of the Red Co. 
is to compute depreciation to the nearest month. 
QUESTIONS: 
Based on the above and the result of your audit, answer the following: 
1. How much is the Accumulated depreciation – Buildings as of December 31, 2005? a. 
P7,777,500 b. P7,982,850 c. P8,377,500 d. P7,103,700 2. How much is the 
Accumulated depreciation – Machinery and Equipment as of 
December 31, 2005? a. P8,844,375 b. P8,614,375 c. P8,830,000 d. P8,556,875 3. How 
much is the Accumulated depreciation – Delivery Equipment as of December 
31, 2005? a. P2,715,000 b. P2,400,000 c. P2,490,000 d. P2,805,000 4. How much is 
the Accumulated depreciation – Leasehold Improvements as of 
December 31, 2005? a. P420,000 b. P525,000 c. P350,000 d. P630,000 5. How much 
is the net gain (loss) from disposal of assets for the year ended December 
31, 2005? a. P100,000 b. (P35,000) c. P65,000 d. (P65,000) 
PROBLEM NO. 6 
In  connection  with  your  audit  of  the  Josef  Mining  Corporation  for  the  year  ended 
December  31,  2005,  you  noted  that  the  company  purchased  for  P10,400,000  mining 
property  estimated  to  contain  8,000,000  tons  of  ore.  The  residual  value  of  the  property 
is P800,000. 
 
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Building  used  in  mine  operations  costs  P800,000  and  have  estimated  life  of  fifteen 
years  with  no  residual  value.  Mine  machinery  costs  P1,600,000  with  an  estimated 
residual value P320,000 after its physical life of 4 years. 
Following is the summary of the company’s operations for first year of operations. 
Tons  mined  800,000  tons  Tons sold 640,000 tons Unit selling price per ton P4.40 Direct 
labor  640,000  Miscellaneous  mining  overhead  128,000  Operating  expenses  (excluding 
depreciation) 576,000 
Inventories  are  valued  on  a  first-in,  first-out  basis.  Depreciation  on  the  building  is  to  be 
allocated  as  follows:  20%  to  operating  expenses,  80%  to  production.  Depreciation  on 
machinery is chargeable to production. 
QUESTIONS: Based on the above and the result of your audit, answer the following: 
(Disregard tax implications) 1. How much is the depletion for 2005? 
a. P768,000 b. P960,000 c. P192,000 d. P1,040,000 2. Total inventoriable 
depreciation for 2005? 
a. P400,000 b. P362,667 c. P384,000 d. P0 3. How much is the Inventory as of 
December 31, 2005? 
a. P438,400 b. P422,400 c. P425,600 d. P418,133 4. How much is the cost of 
sales for the year ended December 31, 2005? 
a. P1,689,600 b. P1,753,600 c. P1,702,400 d. P1,672,533 5. How much is the 
maximum amount that may be declared as dividends at the end of 
the company’s first year of operations? a. P1,494,400 b. P1,289,600 c. P1,302,400 d. 
P1,319,467 
PROBLEM NO. 7 
Transactions during 2005 of the newly organized Pink Corporation included the 
following: 
Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to 
complete organization of the corporation. 
15  Hired  a  clown  to  stand  in  front  of  the  corporate  office  for  2  weeks  and  hound  out 
pamphlets  and  candy  to  create  goodwill  for  the  new  enterprise.  Clown  cost,  P10,000; 
pamphlets and candy, P5,000. 
Apr. 1 Patented a newly developed process with costs as follows: 
Legal fees to obtain patent P 429,000 Patent application and licensing fees 63,500 Total 
P 492,500 It is estimated that in 6 years other companies will have developed improved 
 processes, making the Pink Corporation process obsolete. 
May  1  Acquired  both  a  license  to  use  a  special  type  of  container  and  a  distinctive 
trademark  to  be  printed  on  the  container  in  exchange  for  6,000  shares  of  Pink’s no-par 
common  stock  selling  for  P50  per  share.  The  license  is  worth  twice  as  much  as  the 
trademark, both of which may be used for 6 years. 

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July 1 Constructed a shed for P1,310,000 to house prototypes of experimental 

models to be developed in future research projects. 
Dec. 31 Incurred salaries for an engineer and chemist involved in product 
development totaling P1,750,000 in 2005. 
QUESTIONS: 
Based on the above and the result of your audit, determine the following: 
1. Cost of patent 
a. P492,500 b. P429,000 c. P63,500 d. P0 2. Cost of licenses 
a. P150,000 b. P200,000 c. P100,000 d. P0 3. Cost of trademark 
a. P150,000 b. P200,000 c. P100,000 d. P0 4. Carrying amount of Intangible 
Assets 
a. P712,604 b. P2,477,604 c. P697,604 d. P0 5. Total amount resulting from the 
foregoing transactions that should be expensed when 
incurred a. P4,100,500 b. P1,983,000 c. P1,998,000 d. P0 
PROBLEM NO. 8 
On December 31, 2004, Silver Corporation acquired the following three intangible 
assets: 
•  A  trademark  for  P300,000.  The  trademark  has  7  years  remaining  legal  life.  It  is 
anticipated  that  the  trademark  will  be  renewed  in  the  future,  indefinitely,  without 
problem. 
• Goodwill for P1,500,000. The goodwill is associated with Silver’s Hayo Manufacturing 
reporting unit. 
•  A  customer  list  for  P220,000.  By  contract,  Silver  has  exclusive  use  of  the  list  for  5 
years. Because of market conditions, it is expected that the list will have economic value 
for just 3 years. 
On December 31, 2005, before any adjusting entries for the year were made, the 
following information was assembled about each of the intangible assets: 
a)  Because  of  a  decline  in  the  economy,  the  trademark  is  now  expected  to  generate 
cash flows of just P10,000 per year. The useful life of trademark still extends beyond the 
foreseeable horizon. 
b)  The  cash  flows expected to be generated by the Hayo Manufacturing reporting unit is 
P250,000  per  year  for  the  next  22  years.  Book  values  and  fair values of the assets and 
liabilities of the Hayo Manufacturing reporting unit are as follows: 
Book values Fair values Identifiable assets 
P2,700,000 P3,000,000 Goodwill 1,500,000 ? Liabilities 1,800,000 1,800,000 
c) The cash flows expected to be generated by the customer list are P120,000 in 2006 
and P80,000 in 2007. 

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REQUIRED: Based on the above and the result of your audit, determine the following: 
(Assume that the appropriate discount rate for all items is 6%): 
1. Total amortization for the year 2005 
a. P73,333 b. P141,515 c. P116,190 d. P86,857 
2. Impairment loss for the year 2005 
a. P90,476 b. P133,333 c. P179,584 d. P0 
3. Carrying value of Trademark as of December 31, 2005 
a. P300,000 b. P257,143 c. P166,667 d. P120,416 
4. Carrying value of Goodwill as of December 31, 2005 
a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500 
5. Carrying value of Customer list as of December 31, 2005 
a. P220,000 b. P146,667 c. P176,000 d. P0 
PROBLEM NO. 9 
Select the best answer for each of the following: 
1. Property, plant and equipment is typically judged to be one of the accounts least 
susceptible to fraud because a. The amounts recorded on the balance sheet for most 
companies are immaterial. b. The inherent risk is usually low. c. The depreciated values 
are always smaller than cost. d. Internal control is inherently effective regarding this 
account. 
2. Which is the best audit procedure to obtain evidence to support the legal ownership 
of real property? a. Examination of corporate minutes and board resolutions with regard 
to approvals 
to acquire real property. b. Examination of closing documents, deeds and ownership 
documents registered 
and on file at the register of deeds. c. Discussion with corporate legal counsel 
concerning the acquisition of a specific 
piece of property. d. Confirmation with the title company that handled the escrow 
account and 
disbursement of proceeds for the closing of the property. 
3. When few property and equipment transactions occur during the year the continuing 
auditor usually obtains and understanding of internal control and performs a. Tests of 
controls b. Analytical procedures to verify current year additions to property and 
equipment c. A thorough examination of the balances at the beginning of the year. d. 
Extensive tests of current year property and equipment transactions. 
4. Which of the following combinations of procedures is an auditor most likely to perform 
to obtain evidence about fixed asset addition? a. Inspecting documents and physically 
examining assets. b. Recomputing calculations and obtaining written management 
representations. c. Observing operating activities and comparing balances to prior 
period balances. d. Confirming ownership and corroborating transactions through 
inquiries of client 
personnel. 

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5. If an auditor tours a production facility, which of the misstatements or questionable 

practices is most likely to be detected by the audit procedures specified? a. 
Depreciation expense on fully depreciated machinery has been recognized. b. 
Overhead has been overapplied. c. Necessary facility maintenance has not been 
performed. d. Insurance coverage on the facility has lapsed. 
6. In testing for unrecorded retirements of equipment, an auditor is most likely to 
a. Select items of equipment from the accounting records and then locate them 
during the plant tour. b. Compare depreciation journal entries with similar prior-year 
entries in search of 
fully depreciated equipment. c. Inspect items of equipment observed during the plant 
tour and then trace them to 
the equipment subsidiary ledger. d. Scan the general journal for unusual equipment 
additions and excessive debits to 
repairs and maintenance expense. 
7. Determining that proper amounts of depreciation are expensed provides assurance 
about management’s assertions of valuation and a. Presentation and disclosure. c. 
Rights and obligations. b. Completeness. d. Existence or occurrence. 
8. The auditor may conclude that depreciation charges are insufficient by noting 
a. Insured values greatly in excess of book values. b. Large numbers of fully 
depreciated assets. c. Continuous trade-in of relatively new assets. d. Excessive 
recurring losses on assets retired. 
9. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in 
support of the audit assertion that all a. Noncapitalizable expenditures for repairs and 
maintenance have been recorded in 
the proper period. b. Expenditures for property and equipment have been recorded 
in the proper 
period. c. Noncapitalizable expenditures for repairs and maintenance have been 
properly 
charged to expense. d. Expenditures for property and equipment have not been 
charged expense. 
10. In violation of company policy, Coatsen Company erroneously capitalized the cost of 
painting its warehouse. An auditor would most likely detect this when a. Discussing 
capitalization policies with Coatsen's controller. b. Examining maintenance expense 
accounts. c. Observing that the warehouse had been painted. d. Examining construction 
work orders that support items capitalized during the year. 
11. Additions to equipment are sometimes understated. Which of the following accounts 
would be reviewed by the auditor to gain reasonable assurance that additions are not 
understated? a. Accounts payable c. Depreciation expense b. Gain on disposal of 
equipment d. Repair and maintenance expense 
12. When an auditor interviews the plant manager, he will most likely seek from the 
plant 
manager information regarding a. Appropriateness of physical inventory observation 
procedures. b. Existence of obsolete machinery. c. Deferral of procurement of certain 
necessary insurance coverage. d. Adequacy of the provision for uncollectible accounts. 

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13. The auditor is least likely to learn of retirements of equipment through which of the 
following? a. Review of the purchase return and allowance account. b. Review of 
depreciation. c. Analysis of the debits to the accumulated depreciation account. d. 
Review of insurance policy riders. 
14. Which of the following is not likely a motive for management to manipulate the 
timing 
and amount of impaired asset writedowns? a. Steady increases in earnings per share 
over the past 5 years. b. Income smoothing. c. A "big bath." d. An abnormally 
unprofitable year. 
15. There is goodwill involved in the acquisition of a business if the purchase price paid 
is 
in excess of the proprietorship of the business acquired. 
Goodwill might be viewed as the enjoyment of a profit by a company in excess of the 
normal or usual return for the industry as a whole but such goodwill is not recorded if it 
has not been purchased or paid for. a. False; True. c. True; False. b. False; False. d. 
True; True. 
16. In auditing intangible assets, an auditor most likely would review or recompute 
amortization and determine whether the amortization period is reasonable in support of 
management’s financial statement assertion of a. Valuation. c. Completeness. b. 
Existence or occurrence. d. Rights and obligations. 
– End of AP-5903 – 

AP-5903