CHAPTER 7 – Audit of Property, Plant, & Equipment

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 P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 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 P 44,000

Architectural design fees 32,000
Building permit fees 4,000
Imputed interest on funds used during construction 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. 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 Amount Useful life

Painting of ceilings P 40,000 one year
Electrical work 140,000 Ten years
Construction of extension to current
working area 320,000 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

Problem 6
Norie Company’s 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.1,290,547 b. P 1,578,545 c. P 1,587,497 d. P 1,617,322

Problem 7
Information pertaining to Highland Corporation’s property, plant and equipment for 2005 is presented
below:

Account balances at January 1, 2005:

Debit Credit
Land P 150,000
Buildings 1,200,000
Accumulated depreciation – Buildings P263,100
Machinery and equipment 900,000
Accumulated depreciation – Machinery and equipment 250,000
Automotive equipment 115,000
Accumulated depreciation – Automotive equipment 84,600

Depreciation data:
Depreciation method Useful life

Buildings 150% declining-balance 25 years

Machinery and equipment Straight-line 10 years
Automotive equipment Sum-of-the-years’-digits 4 years
Leasehold improvements Straight-line -

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 2-year-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

Problem 8
The schedule of Gerasmo Company’s property and equipment prepared by the client follows:

PLANT ASSETS
Land P 320,000
Building 540,000
Machinery and Equipment 180,000
Total 1,040,000

ACCUMULATED DEPRECIATION
Building P 81,000
Machinery and Equipment 54,000
Total P 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
Company’s engineers. The appraisal was recorded as follows:

Debit Credit
Land 70,000
Building 60,000
Accum. depreciation 6,000
Revaluation increment 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