Solution Guide For Ppe

Solution Guide
Property, Plant, and Equipment

NFCPAR-Auditing Problems
In partial fulfillment of the requirements in Auditing and Assurance Services (ACCM 451)
ANTONIO, JENNILINE N. | APOSTOL, KYRT RHOLYN S. | ARINES, PHILIP G.

ASPE, TOM ALDWIN R. | BEA, PAULENE MAE T.
AC42
Submitted to:
Marcial C. Paglinawan, DBA, CPA
September 2018
NFCPAR- Auditing Problems
Solution Guide Property, Plant, and Equipment
PROBLEM NO. 1
Capitalizable Cost of Machinery
Just Around the Corner Co. acquired a new machine. Details of the acquisition are as follows:
1. Purchase price including VAT 1,568,000
2. Cost of water device to keep machine cool 8,000
3. Cost of safety rail and platform surrounding machine 12,000
4. Installation cost, including site preparation and assembling 20,000
5. Fees paid to consultants for advice on acquisition of the machinery 13,000
6. Dismantling cost of the machine 10,000
7. Repair cost of the machine damaged while in the process of installation 5,000
8. Loss on premature retirement-old machine 18,000
9. Other non-refundable Sales tax 13,000
10. Cost of training for personnel who will use the machine 25,000
11. Cost of removing old machine 10,000
Determine the cost of Machinery.
a. ₱ 1,476,000 c. ₱ 1,422,000
b. ₱ 1,420,000 d. ₱ 1,644,000
Page 2 of 45
DESCRIPTION MACHINERY OTHERS NOTES

Purchase price including VAT 1,400,000 (1)
Cost of water device to keep machine cool 8,000 (2)
Cost of safety rail and platform surrounding machine 12,000 (2)
Installation cost, including site preparation and assembling 20,000 (2)
Fees paid to consultants for advice on acquisition of the (2)
13,000
machinery
Dismantling cost of the machine 10,000 (3)
Repair cost of the machine damaged while in the process 5,000 (4)
of installation
Loss on premature retirement-old machine 18,000 (4)
Other non-refundable Sales tax 13,000 (1)
Cost of training for personnel who will use the machine 25,000 (4)
TOTAL 1,476,000 48,000
NOTES
1. PAS 16, paragraph 16-a: The cost of an item of PPE includes its purchase price, including
import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
Since VAT is a refundable purchase tax, it is not included to the cost of the machinery.
2. PAS 16, paragraph 16-b: The cost of an item of PPE includes any cost directly attributable
to bringing the asset to the location and condition necessary for it to be capable of operating in
the manner intended by management.
3. PAS 16, paragraph 16-c: The cost of an item of PPE includes the initial estimate of the cost
of dismantling and removing the item and restoring the site on which it is located.
4. These items are not described by PAS 16, paragraph 16 “components of the cost of an item
of PPE”. Therefore, these items are not included to the cost of the machinery.
Page 3 of 45
PROBLEM NO. 2
Old building will not be demolished
On March 1, 2018, Levy Co., acquired land and building by paying ₱ 6,000,000 and assuming a
mortgage of ₱ 1,500,000. The building will be used by Levy Co. as its head office.
1. Cost of survey 50,000

2. Cost of paving parking lot adjoining building 50,000
3. Cost of option of the land not acquired 7,000
4. Broker’s fee on the properties acquired 10,000
5. Cost of relocating and reconstructing the property belonging to others
in order to acquire the property 23,000
6. Payment to real estate agent 40,000
7. Registration fees and transfer of title 13,000
8. Title insurance 15,000
9. Real Property taxes on the land accrued after acquisition 5,000
10. Cost of shrubs, trees, and other landscaping 53,000
11. Unpaid real property taxes up to the date of acquisition 14,000
12. Driveway, parking bay, and safety lighting 19,000
13. Payment for claim for injuries not covered by insurance 40,000
14. Cost of removing trees from the land 70,000
15. Salvage value of the timber recovered from the land 5,000
16. Renovation cost of the building 400,000
17. Payment of medical bills of employees accidentally injured during
building renovation 8,600
REQUIRED:
Based on the above data, determine the adjusted cost of the following:
CASE NO.1 – Assume that on the date of acquisition, the land and building have fair values of ₱
6,000,000 and ₱ 2,000,000 respectively.
1. Land
a. ₱ 7,790,600 c. ₱ 7,730,000
b. ₱ 7,560,000 d. ₱ 5,690,000
2. Old building
a. ₱ 400,000 c. ₱ 2,357,350
b. ₱ 2,296,750 d. ₱ 2,418,750
3. Land improvements
a. ₱ 60,600 c. ₱ 122,000
b. ₱ 61,400 d. ₱ 182, 600
Page 4 of 45
CASE NO.2 – Assume that on the date of acquisition, the old building has a minimal fair value.
1. Land
a. ₱ 7,790,600 c. ₱ 7,730,000
b. ₱ 7,560,000 d. ₱ 5,690,000
2. Old building
a. ₱ 400,000 c. ₱ 2,357,350
b. ₱ 2,296,750 d. ₱ 2,418,750
a. ₱ 60,600 c. ₱ 122,000
b. ₱ 61,400 d. ₱ 182, 600
CASE 1 LAND BLDG LI NOTES

*5,625,000 *1,875,000 - (1)
1. Cost of survey 50,000 (2)
2. Cost of paving parking lost adjoining building 50,000 (3)
3. Cost of option of the land not acquired - - - (4)
4. Broker’s fee on the properties acquired 7,500 2,500 (5)
5. Cost of relocating and reconstructing the property (5)
17,250 5,750
belonging to others in order to acquire the property
6. Payment to real estate agent 30,000 10,000 (5)
7. Registration fees and transfer of title 13,000 (2)
8. Title insurance 15,000 (2)
9. Real Property taxes on the land accrued after acquisition - - - (4)
10. Cost of shrubs, trees, and other landscaping 53,0000 (3)
11. Unpaid real property taxes up to the date of acquisition 10,500 3,500 (5)
12. Driveway, parking bay, and safety lighting 19,000 (3)
13. Payment for claim for injuries not covered by - - (6)
-
insurance
14. Cost of removing trees from the land 70,000 (2)
15. Salvage value of the timber recovered from the land (5,000) (7)
16. Renovation cost of the building 400,000 (2)
17. Payment of medical bills of employees accidentally (6)
- - -
injured during building renovation
TOTAL 5,833,250 2,296,750 122,000
Cost allocated to Land:
Cost allocated to Bldg:
Page 5 of 45
NOTES
1. PFRS 3, paragraph 2-b: The acquisition cost of an asset or a group of assets that does not
constitute a business shall be allocated to the individual identifiable assets and liabilities based
on their relative fair values. The PIC interpretation applies this principle in the allocation of
the cost of property to land and building.
the manner intended by management should be capitalized as part of the cost of the asset. The
example of directly attributable costs presented in PAS 16, paragraph 17 includes “costs of
site preparation.
3. Depreciable land improvements not part of the blueprint of the building shall not form part of
the cost of the building and shall rather be classified as land improvements.
4. Only the cost of the option of the land acquired shall be capitalized. On the other hand, only
unpaid real property taxes up to the date of acquisition assumed by the shall form part of the
cost of the land.
5. Since the property was acquired at a single price, the following costs shall be allocated based
on their relative fair values.
to bringing the asset to its intended location and condition. The cost of insurance is charged to
the building because it is a necessary and reasonable cost of bringing the building into
existence. However, in this instance where claims for damages are not covered by insurance,
these should be expensed outright.
7. The salvage value shall be deducted from the cost of the land because this shall be recovered
only when sold.
Page 6 of 45
CASE 2 LAND BLDG LI NOTES

7,500,000 - (1)
1. Cost of survey 50,000 (2)
2. Cost of paving parking lost adjoining building 50,000 (3)
3. Cost of option of the land not acquired - - - (4)
4. Broker’s fee on the properties acquired 10,000 (2)
5. Cost of relocating and reconstructing the property (2)
23,000
belonging to others in order to acquire the property
6. Payment to real estate agent 40,000 (2)
7. Registration fees and transfer of title 13,000 (2)
8. Title insurance 15,000 (2)
9. Real Property taxes on the land accrued after acquisition - - - (4)
10. Cost of shrubs, trees, and other landscaping 53,000 (3)
11. Unpaid real property taxes up to the date of acquisition 14,000 (2)
12. Driveway, parking bay, and safety lighting 19,000 (3)
13. Payment for claim for injuries not covered by - - (5)
-
insurance
15. Salvage value of the timber recovered from the land (5,000) (6)
16. Renovation cost of the building 400,000 (2)
17. Payment of medical bills of employees accidentally (5)
- - -
injured during building renovation
TOTAL 7,730,000 400,000 122,000
NOTES
1. Contrary to PFRS 3, paragraph 2-b, in this case, the old building has a minimal fair value
which is undeterminable as well therefore, the cost shall solely be charged to the land account.
the manner intended by management should be capitalized as part of the cost of the asset. The
example of directly attributable costs presented in PAS 16, paragraph 17 includes “costs of
site preparation.
3. Depreciable land improvements not part of the blueprint of the building shall not form part of
the cost of the building and shall rather be classified as land improvements.
4. Only the cost of the option of the land acquired shall be capitalized. On the other hand, only
unpaid real property taxes up to the date of acquisition assumed by the shall form part of the
cost of the land.
to bringing the asset to its intended location and condition. The cost of insurance is charged to
the building because it is a necessary and reasonable cost of bringing the building into
existence. However, in this instance where claims for damages are not covered by insurance,
these should be expensed outright.
6. The salvage value shall be deducted from the cost of the land because this shall be recovered
only when sold.
Page 7 of 45
PROBLEM NO. 3
Old building will not be demolished
On March 1, 2018, Levy Co. acquired land and building by paying ₱ 9,000,000 and assuming
a mortgage of ₱ 1,000,000. The old building will be demolished for the construction of a new
building.
1. Unpaid real property taxes up to the date of acquisition 14,000

2. Cost of option of the acquired property 20,000
3. Excavation cost 12,000
4. Escrow fees on the properties acquired 11,000
5. Cost of relocating and reconstructing the property belonging to others in order to
acquire the property 23,000
6. Payment to real estate agent 40,000
7. Payments to tenants of the building to induce them to vacate the premises 3,000
8. Legal fees for contract to purchase land 11,000
9. Cost of removing trees from the land 70,000
10. Building permit and licenses 60,000
11. Architect fee 50,000
12. Materials used in all construction 600,000
13. Driveway and walk to building (part of the building plan) 30,000
14. Payment for claim for injuries not covered by insurance 40,000
15. Broker’s fee on the properties acquired 10,000
16. Rental fees generated on the portion of the building being used as a parking site 23,500
17. Cost of paving parking lot adjoining building 50,000
18. Other overhead cost incurred as a result of construction 220,000
19. Service equipment and fixture made a PERMANENT part of the structure 11,000
20. Safety fence around construction site 35,000
21. Removal of safety fence 9,800
22. Demolition cost of the old building 33,000
23. Proceeds from salvage of the demolition 4,000
Page 8 of 45
REQUIRED:
Based on the above data, determine the adjusted cost of the following.
CASE NO. 1 – Assume that on the date of the acquisition, the land and building have fair values
of P 7,000,000 and P 1,000,000 respectively.
1. Land
a. ₱ 8,855,875 c. ₱ 10, 045,000
b. ₱10,202,000 d. ₱ 10,265,500
2. The allocated cost of the old building that will be charged to loss.
a. Nil c. ₱ 1,378,625
b. ₱ 1,265,125 d. ₱ 1,315,125
3. New Building
a. ₱ 1,265,125 c. ₱ 1,027,800
b. ₱ 1,077,800 d. ₱ 1,056,800
4. Land Improvements
a. ₱ 13,500 c. ₱ 63,500
b. ₱ 50,000 d. ₱ 113,500
CASE NO. 2 – Assume that on the date of acquisition, the old building is unusable and has
minimal fair value.
1. Land
a. ₱ 8,855,875 c. ₱ 10, 045,000
b. ₱ 10,202,000 d. ₱ 10,265,500
2. The allocated cost of the old building that will be charged to loss.
a. Nil c. ₱ 1,378,625
b. ₱ 1,265,125 d. ₱ 1,315,125
3. New Building
a. ₱ 1,265,125 c. ₱ 1,027,800
b. ₱ 1,077,800 d. ₱ 1,056,800
4. Land Improvements
a. ₱ 13,500 c. ₱ 63,500
b. ₱ 50,000 d. ₱ 113,500
Page 9 of 45
CASE NO.1 LAND OLD NEW LI NOTES

BLDG BLDG
8,750,000 1,250,000 - - (1)
1. Unpaid real property taxes up to the (2)
date of acquisition 12,250 1,750
2. Cost of option of the acquired property 17,500 2,500 (2)
3. Excavation cost 12,000 (3)
4. Escrow fees on the properties acquired 9,625 1,375 (2)
5. Cost of relocating and reconstructing 2,875 (2)
the property belonging to others in order 20,125
to acquire the property
6. Payment to real estate agent 35,000 5,000 (2)
7. Payments to tenants of the building to 2,625 375 (2)
induce them to vacate the premises
8. Legal fees for contract to purchase 11,000 (3)
land
10. Building permit and licenses 60,000 (3)
11. Architect fee 50,000 (3)
12. Materials used in all construction 600,000 (3)
13. Driveway and walk to building (part 30,000 (3)
of the building plan)
14. Payment for claim for injuries not (4)
covered by insurance - - - -
15. Broker’s fee on the properties 8,750 1,250 (2)
acquired
16. Rental fees generated on the portion (5)
of the building being used as a parking
site - - - -
17. Cost of paving parking lot adjoining 50,000 (6)
building
18. Other overhead cost incurred as a 220,000 (3)
result of construction
19. Service equipment and fixture made a 11,000 (3)
PERMANENT part of the structure
20. Safety fence around construction site 35,000 (3)
21. Removal of safety fence 9,800 (3)
22. Demolition cost of the old building 33,000 (3)
23. Proceeds from salvage of the (4,000) (3)
demolition
TOTAL 8,926,875 1,265,125 1.056,800 50,000
Cost allocated to Land:
Cost allocated to Bldg:
Page 10 of 45
NOTES
1. PFRS 3, paragraph 2-b: The acquisition cost of an asset or a group of assets that does not
constitute a business shall be allocated to the individual identifiable assets and liabilities based
on their relative fair values. The PIC interpretation applies this principle in the allocation of
the cost of property to land and building.
2. Since the property is acquired at a single price, the following costs shall be allocated based on
their relative fair values.
3. PAS 16, paragraph 16-b: The cost of an item of PPE includes any costs directly attributable
to bringing the asset to the location and condition necessary for its intended use by
management should be capitalized as part of the cost of the asset. The example of directly
attributable costs presented in PAS 16, paragraph 17 includes “costs of site preparation.
to bringing the asset to the location and condition. The cost of insurance is charged to the
building because it is a necessary and reasonable cost of bringing the building into existence.
however, in this instance where claims for damages are not covered by insurance, these should
be EXPENSE OUTRIGHT.
to bringing the asset to the location and condition. HOWEVER, in the this instance, rental
fees generated on the portion of the building being used as a parking site shall not form of the
cost of the building and it shall shoulder form part of rental income instead.
Page 11 of 45
CASE NO.2 LAND OLD NEW LI NOTES

BLDG BLDG
10,000,000 (1)
1. Unpaid real property taxes up to the (2)
date of acquisition 14,000
2. Cost of option of the acquired property 20,000 (2)
3. Excavation cost 12,000 (2)
4. Escrow fees on the properties acquired 11,000 (2)
5. Cost of relocating and reconstructing 23,000 (2)
the property belonging to others in order
to acquire the property
6. Payment to real estate agent 40,000 (2)
7. Payments to tenants of the building to 3,000 (2)
induce them to vacate the premises
8. Legal fees for contract to purchase 11,000 (2)
land
10. Building permit and licenses 60,000 (2)
11. Architect fee 50,000 (2)
12. Materials used in all construction 600,000 (2)
13. Driveway and walk to building (part 30,000 (2)
of the building plan)
14. Payment for claim for injuries not (2)
covered by insurance - - - -
15. Broker’s fee on the properties 10,000 (2)
acquired
16. Rental fees generated on the portion (4)
of the building being used as a parking
site - - - -
17. Cost of paving parking lot adjoining 50,000 (2)
building
18. Other overhead cost incurred as a 220,000 (2)
result of construction
19. Service equipment and fixture made a 11,000 (2)
PERMANENT part of the structure
20. Safety fence around construction site 35,000 (2)
21. Removal of safety fence 9,800 (2)
22. Demolition cost of the old building 33,000 (2)
23. Proceeds from salvage of the (4,000) (2)
demolition
TOTAL 10,202,000 NIL 1.056,800 50,000
Page 12 of 45
NOTES
1. Contrary to PFRS 3, paragraph 2-b, in this case, the old building has a minimal fair value
which is undeterminable as well therefore, the cost shall solely be charged to the land account.
2. PAS 16, paragraph 16-b: The cost of an item of PPE includes any costs directly
attributable to bringing the asset to the location and condition necessary for its
intended use by management should be capitalized as part of the cost of the asset. The
example of directly attributable costs presented in PAS 16, paragraph 17 includes
“costs of site preparation.
attributable to bringing the asset to the location and condition. The cost of insurance is
charged to the building because it is a necessary and reasonable cost of bringing the
building into existence. However, in this instance where claims for damages are not
covered by insurance, these should be expensed outright.
attributable to bringing the asset to the location and condition. However, in the this
instance, rental fees generated on the portion of the building being used as a parking
site shall not form of the cost of the building and it shall shoulder form part of rental
income instead.
5. Depreciable land improvements not part of the blueprint of the building shall not form
part of the cost of the building and shall rather be classified as land improvements.
Page 13 of 45
PROBLEM NO. 4
Land, Building and Machinery
The property, plant and equipment section of Yes the Blessings Corporation’s balance sheet at
December 31, 2007 include the following items:
Land ₱ 2,500,000
Land improvements 560,000
Building 3,600,000
Machinery and equipment 6,600,000
During 2008 the following data were available to you upon your analysis of the accounts:
Cash paid on purchase of land ₱ 10,000,000

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 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 600,000
period of 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 1,600,000
during installation and test run of machines
Royalty payment on machines purchased (based on units produced and 480,000
sold)
REQUIRED:
Based on the above and the result of your audit, compute for the following as of December 31, 2008:
1. Land
3. Building
4. Machinery and equipment
5. Total depreciable property, plant and equipment
Adjusted balances:
Page 14 of 45
1. Land
Description Amount Notes

Land, 12/31/07 2,500,000
Cash paid on purchase of land P 10,000,000 (1)
Mortgage assumed on the land bought, including interest at 16% 16,000,000 (2)
Realtor’s commission 1,200,000 (2)
Legal fees, realty taxes and documentation expenses 200,000 (1)
Amount paid to relocate persons squatting on the property 400,000 (2)
Cost of tearing down an old building on the land 300,000 (2)
Amount recovered from the salvage of the building demolished (600,000) (6)
Land, 12/31/08 P 30,000,000

Land improvements, 12/31/07 P 560,000
Cost of fencing the property 440,000 (5)
Land improvements, 12/31/08 P 1,000,000
3. Building

Building, 12/31/07 P 3,600,000
Amount paid to contractor for the building erected 8,000,000 (1)
Building permit fees 50,000 (2)
Excavation expenses 250,000 (2)
Architect’s fee 100,000 (2)
Building, 12/31/08 P 1,2000,000
4. Machinery and equipment

Machinery and equipment, 12/31/07 6,600,000
Invoice cost of machinery acquired 8,000,000 (1)
Freight, unloading and delivery charges 240,000 (20
Customs duties and other charges 560,000 (1)
Allowances, hotel accommodations, etc., paid to foreign 1,600,000 (2)
technicians during installation and test run of machines
Machinery and equipment, 12/31/08 P 17,000,000
Page 15 of 45
NOTES
1. PAS 16, paragraph 16-a: the cost of an item of PPE includes its purchase price, including
import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
2. PAS 16, paragraph 16-b: the cost of an item of PPE includes any cost directly attributable to
bringing the asset to the location and condition necessary for it to be capable of operating in
the manner intended by management.
3. PAS 16, paragraph 16-c: the cost of an item of PPE includes the initial estimate of the cost
of dismantling and removing the item and restoring the site on which it is located, the
obligation for which an entity incurs either when the item is acquired or as a consequence of
having used the item during a particular period for purposes other than to produce inventories
during that period.
4. These items are not described by PAS 16, paragraph 16 “components of the cost of an item
of PPE”. These items are not included to the cost of the machinery.
5. Cost of temporary safety fence around construction site and subsequent removal thereof is
capitalized to the cost of the building. However, construction of permanent fence after the
completion of the building is recognized as land improvement.
6. The demolition cost minus salvage value is capitalized is capitalized as cost of the building
whether the new building is accounted for as property, plant and equipment , investment
property or inventory
Page 16 of 45
PROBLEM NO. 5
Grants related to depreciable assets
On January 1, 20X1, GUATANTEE REALITY Company received a grant of ₱ 25 million from the
France government for the construction of a building that will be used as a laboratory and research facility
with an estimated cost of ₱ 30 million and useful life of 20 years. The facility was completed on January
1, 20X2.
REQUIRED:
1. How much income from the government grant should be recognized in 20X2?
a. Zero c. ₱ 1,500,000
b. ₱ 250,000 d. ₱ 1,250,000
2. Depreciation expense in 20X2 assuming gross method was used.

a. Zero c. ₱ 1,500,000
b. ₱ 250,000 d. ₱ 1,250,000
3. Depreciation expense in 20X2 assuming net method was used.

a. Zero c. ₱ 1,500,000
b. ₱ 250,000 d. ₱ 1,250,000
4. Carrying amount of the building on December 31, 20X2 assuming the gross method was used.
a. ₱ 5,000,000 c. ₱ 4,750,000
b. ₱ 30,000,000 d. ₱ 28,500,000
5. Carrying amount of the building on December 31, 20X2 assuming the net method was used.
a. ₱ 5,000,000 c. ₱ 4,750,000
b. ₱ 30,000,000 d. ₱ 28,500,000
Page 17 of 45
Solutions:
NOTES:
1. Income from Government Grant 0 (1)
2. Cost of the research facility 30,000,000

Divide by: Useful life 20 yrs.
Depreciation Expense 1,500,000 (2)

Deduct: Fair value of the land 25,000,000
Net Total 5,000,000
Divide: Useful life 20 yrs.
Depreciation expense – 20X2 250,000 (2)

Accumulated Depreciation
(30,000,000/20) (1,500,000)
Carrying Amount 28,500,000 (3)

Fair value of the land (25,000,000)
Total 5,000,000
Depreciation expense in 20X2
(30,000,000-55,000,000)/20 (250,000)
NOTES
1. PAS 20, paragraph 27: One method recognises the grant as deferred income that is
recognised in profit or loss on a systematic basis over the useful life of the asset. This explains
why no income is recognized yet during the year.
2. PAS 16, paragraph 47: Each part of an item of property, plant and equipment with a cost
that is significant in relation to the total cost of the item shall be depreciated separately. An
item of property, plant and equipment that qualifies for recognition as an asset shall be
measured at its cost.
3. PAS 16, paragraph 6: The carrying amount is the amount at which an asset is recognized in
the statement of financial position after deducting any accumulated depreciation and
accumulated impairment loss.
4. PAS 20, paragraph 27: Government grants related to assets, including non-monetary grants
at fair value, shall be presented in the statement of financial position either by setting up the
grant as deferred income or by deducting the grant in arriving at the carrying amount of the
asset.
Page 18 of 45
PROBLEM NO. 6
Grants related to nondepreciable asset
On January 1, 20X1, IT’S THE DAY I’M WAITING FOR Company received a large tract of land
in the Ifugao province by the Philippine government. The fair value of the land is ₱ 5 million. IT’S THE
DAY I’M WAITING FOR Company mandated by the grant to construct factory in the area and employ
only personnel residing in the Ifugao region. On January 1, 20X2, the factory building was finished and
the cost of the factory amounted to P20 million with useful life of 10 years.
REQUIRED:
6. How much income from the government grant should be recognized in 20X2?
a. Zero c. ₱ 5,000,000
b. ₱ 500,000 d. ₱ 4,500,000
7. Depreciation expense in 20X2 assuming gross method was used.

a. Zero c. ₱ 2,000,000
b. ₱ 500,000 d. ₱ 1,500,000
8. Depreciation expense in 20X2 assuming net method was used.

a. Zero c. ₱ 2,000,000
b. ₱ 500,000 d. ₱ 1,500,000
9. Carrying amount of the building on December 31, 20X2 assuming the gross method was used.
a. ₱ 18,000,000 c. ₱ 20,000,000
b. ₱ 13,500,000 d. ₱ 15,000,000
10. Carrying amount of the building on December 31, 20X2 assuming the net method was used.
a. ₱ 18,000,000 c. ₱ 20,000,000
b. ₱ 13,500,000 d. ₱ 15,000,000
Solutions:
NOTES:
1. Fair value of the land 5,000,000
Income from Government Grant 500,000 (1)
2. Cost of the factory of the building 20,000,000

Depreciation Expense 2,000,000 (2)
3. Cost of the factory building 20,000,000

Deduct: Fair value of the land 5,000,000
Net Total 15,000,000
Divide: Useful life 10 yrs.
Depreciation expense – 20X2 1,500,000 (2)
Page 19 of 45
4. Cost of the factory 20,000,000

Accumulated Depreciation
(20,000,000/10) (2,000,000)
5. Cost of the factory 20,000,000

Fair value of the land (5,000,000)
Total 15,000,000
Depreciation expense in 20X2
(20,000,000-5,000,000)/10 (1,500,000)
NOTES
1. PAS 20 provides that “grant related to nondepreciable asset requiring fulfillment of certain
conditions shall be recognized as income over the periods which bear the cost of meeting the
conditions.”
2. PAS 16, “Each part of an item of property, plant and equipment with a cost that is significant
in relation to the total cost of the item shall be depreciated separately. An item of property,
plant and equipment that qualifies for recognition as an asset shall be measured at its cost.”
3. PAS 16, “Carrying amount is the amount at which an asset is recognized in the statement of
financial position after deducting any accumulated depreciation and accumulated impairment
loss.”
4. PAS 20, “Government grants related to assets, including non-monetary grants at fair value,
shall be presented in the statement of financial position either by setting up the grant as
deferred income or by deducting the grant in arriving at the carrying amount of the asset.”
PAS 16, “Carrying amount is the amount at which an asset is recognized in the statement of
financial position after deducting any accumulated depreciation and accumulated impairment loss.”
Page 20 of 45
PROBLEM NO. 7
Borrowing Costs
You are engaged to audit the accounts of ABC Company. The following disbursements were made in
relation to the construction of its building which started January 1, 2015 and was completed December
31, 2015.
January 1 P 10,000,000
March 31 5,000,000
July 1 6,000,000
August 1 3,000,000
December 31 1,000,000
1. The client is not sure as to how it should treat the interest related to the above construction.
Assuming the building is a qualifying asset, the interest related to the
a. capitalized as part of the cost of the building
b. charge to expense
c. either a or b
d. neither a nor b
For each of the following independent situations, determine the amount of interest that should be part
of the cost of the building.
2. CASE NO. 1: On January 1, ABC obtained a loan for P 20,000,000 at an interest rate of 10%
specifically to finance the construction of its building. Prior to disbursements, the proceeds were
temporarily investment and earned interest income of P 100,000.
a. ₱ 2,000,000
b. ₱ 1,800,000
c. ₱ 1,900,000
d. ₱ 1,700,000
3. CASE NO. 2: ABC had the following borrowing which were partly used to finance the
construction of the company’s building:
Date obtained Term Interest Rate Amount

January 1, 2014 5 years 7.5 % P 10,000,000
January 1, 2015 2 years 12 % P 20,000,000
a. ₱ 1,890,000
b. ₱ 1,942,500
c. ₱ 1,850,000
d. ₱ 1,845,000
Page 21 of 45
4. CASE NO. 3: On January 1, ABC obtained loan for P 12,000,000 at an interest rate of 10%
specifically to finance the construction of its building. Interest earned from temporary investment
of the proceeds amounted to P 100,000. In addition, ABC had the following borrowing, part of
which was used for the construction activities:
Date obtained Term Interest Rate Amount

January 1, 2014 5 years 7.5 % P 10,000,000
January 1, 2015 2 years 12 % P 20,000,000
a. ₱ 1,792,500
b. ₱ 1,782,500
c. ₱ 1,100,000
d. ₱ 1,730,000
Solutions:
1. A. Note (1)
2. CASE NO. 1: Entity borrows funds specifically for the purpose of obtaining a qualifying asset
Notes
Actual borrowing cost (P 20,000,000 x 10%) P 2,000,000
Less: Interest income from temporary investment 100,000
Capitalizable borrowing cost P 1,900,000 (2)
3. CASE NO. 2: Entity borrows funds generally and partly uses them to purpose of obtaining
qualifying asset
Date Expenditures Months outstanding Amount

January 1 ₱ 10,000,000 12/12 ₱ 10,000,000
March 31 5,000,000 9/12 3,750,000
July 1 6,000,000 6/12 3,000,000
August 1 3,000,000 5/12 1,250,000
December 31 1,000,000 0/12 0
Average carrying amount ₱ 18,000,000
Amount of general borrowing ₱ 30,000,000

750,000
Divided by: actual borrowing cost 2,400,000 3,150,000
Capitalization rate 10.5 %
Notes
Multiply by: capitalization rate 10.5 %
Capitalizable borrowing cost ₱ 1,890,000 (3)
Page 22 of 45
4. CASE NO. 3
Date Expenditures Months outstanding Amount

January 1 ₱ 10,000,000 12/12 ₱ 10,000,000
March 31 5,000,000 9/12 3,750,000
July 1 6,000,000 6/12 3,000,000
August 1 3,000,000 5/12 1,250,000
December 31 1,000,000 0/12 0
Amount of general borrowing ₱ 30,000,000

750,000
Divided by: actual borrowing cost 2,400,000 3,150,000
Capitalization rate 10.5 %
Specific Borrowing
Actual borrowing cost ₱ 1,2000,000
Less: Interest income 100,0000 1,100,000
General Borrowing
Average expenditure 18,000,000
Less: Specific borrowing 12,000,000
Total 6,000,000
Multiply by: capitalization rate 10.5 % 630,000
Capitalizable borrowing cost ₱ 1,730,000
NOTES
1. PAS 16, paragraph 1 states that “borrowings that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost of that asset.”
2. PAS 16, paragraph 12 states that “To the extent that an entity borrows funds specifically for
the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing
costs eligible for capitalization as the actual borrowing costs incurred on that borrowing
during the period less any investment income on the temporary investments on that
borrowings.”
3. PAS 16, paragraph 14 states that “To the extent that an entity borrows funds generally and
uses them for the purpose of obtaining a qualifying asset, the entity shall determine the
amount of borrowing costs eligible for capitalisation by applying a capitalization rate to the
expenditures on that asset. The capitalisation rate shall be the weighted average of the
borrowing costs applicable to the borrowings of the entity that are outstanding during the
period, other than borrowings made specifically for the purpose of obtaining a qualifying
asset. The amount of borrowing costs that an entity capitalises during a period shall not
exceed the amount of borrowing costs it incurred during that period.”
Page 23 of 45
PROBLEM NO. 8
Land and Building
The Blue Corporation was incorporated on January 2, 2008, but was unable to begin manufacturing
activities until July 1, 2008 because the new factory facilities were not completed until that date.
The “Land and Building” account at December 31, 2008 follows:
DATE PARTICULARS AMOUNT

Jan. 31 Land and Building ₱ 1,098,000
Feb. 28 Cost of removal of old building 60,000
May 2 Partial payment of new construction 700,000
May 2 Legal fees paid 15,000
June 1 Second payment of new construction 600,000
July 1 Fire insurance premium – 1 year 26,000
July 1 Final payment on new construction 200,000
Dec. 31 Asset write-up 500,000
3,199,000
Dec. 31 Depreciation – 2008, at 1% of account balance 31,990
₱ 3,167,010
You were able to gather the following:
a. To acquire land and building, the company paid 98,000 cash and 10,000 shares of its 9%
cumulative preferred shares, 100 par value per share. The shares were then selling at 120.
b. Legal fees covered the following:
Cost of Incorporation 9,500

Examination of title covering purchase of the land 4,000
Legal work in connection with construction contract 1,500
15,000
c. Because of general increase in construction costs after entering into the building contract, the
board of directors increased the value of the building by 500,000, 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, 2008.

2. Determine the adjusted balances of the following as of December 31, 2008:
a. Land and building
b. Land
c. Carrying value of building
d. Organization expense
Page 24 of 45
Adjusting journal entries:
1. Land [(10,000 shares x 120) + 98,000] 1,298,000

Land and Building 1,098,000
Additional paid in capital 200,000
2. Building 60,000
Land and Building 60,000
3. Organization expenses 9,500

Land 4,000
Building 1,500
Land and building 15,000
4. Building 700,000
Land and Building 700,000
5. Building 600,000
6. Insurance expense (26,000 x ½) 13,000

Prepaid insurance 13,000
7. Building 200,000
8. Retained earnings 500,000

9. Land and building 31,990

Depreciation expense 760
Accumulated depreciation 31,230
Adjusted balances:
LAND
AJE no. 1 1,298,000
AJE no. 3 4,000
Adjusted balance 1,302,000
BUILDING
AJE no. 2 60,000
AJE no.3 1,500
AJE no.4 700,000
AJE no.5 600,000
AJE no.7 200,000
Adjusted balance 1,561,500
Page 25 of 45
Should be depreciation (1,561,500/25 x 6/12) 31,230

Recorded depreciation 31,990
Overstatement in depreciation expense 760
LAND AND BUILDING ACCOUNT

Unadjusted balance 3,167,010
1,098,000 AJE no.1
60,000 AJE no.2
15,000 AJE no.3
700,000 AJE no.4
600,000 AJE no.5
26,000 AJE no.6
200,000 AJE no.7
500,000 AJE no.8
31,990 AJE no.9
0 Adjusted Balance
ORGANIZATION EXPENSE
AJE no.3 9,500
Adjusted balance 9,500
NOTES
1. AJE no.1: the cost of the land should include the cash price paid and the fair value of the
shares issued.
2. AJE no.2: the cost of demolishing the old building should be capitalized to the new building
since the demolition of the old building is a direct result of the decision to construct the new
building.
3. AJE no.3: cost of incorporation is not directly attributable to the building or land, so it should
be expense. Examination of the title covering purchase of the LAND should be capitalized to
the land (legal fees and other expenditures for establishing clean title is part of the cost of
land). Legal work in connection with construction contract is part of the new building.
4. AJE no.4, 5, and 7: amount paid for the construction of new building should be capitalized to
the building.
5. AJE no.6: insurance paid is for 1 year, we only consumed half of the year, so we should
recognize the unexpired part of the insurance.
Page 26 of 45
PROBLEM NO. 9
Machinery and Depreciation
In the audit of the books of Green Company for the year 2008, the following items and information
appeared in the Production Machines account of the auditee:
Date Particulars Debit Credit

2008
Jan 01 Balance-Machines 1,2,3, and 4 at ₱ 90,000 each ₱ 360,000
Aug 31 Machine 5 198,000
Machine 1 3,000
Sept 30 Machine 6 96,000
Dec 01 Machines 7 and 8 at ₱ 216,000 each 432,000
Dec 01 Machine 2 21,000
31 Balance ___________ 1,062,000
₱ 1,086,000 ₱ 1,086,000
The Accumulated Depreciation account contained no entries for the year 2008. The balance on January
1, 2008 per your audit, was follows:
Machine 1 ₱ 84,375
Machine 2 39,375
Machine 3 33,750
Machine 4 22,500
Total ₱ 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 3,000.
2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on December 1,
2008. Insurance of ₱ 21,000 was recovered. Machine 7 was to replace Machine 2.
3. Machine 3 was traded in for Machine 6 at an allowance of ₱ 12,000; 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, 2008 and Depreciation
Expense for the year 2008.
Page 27 of 45
Add (Deduct) Adjustments:
a. Understatement in crediting machinery upon sale of old machine (1):
Cost of old machine 90,000

Amount credited 3,000
(87,000)
b. Understatement in crediting machinery (2) destroyed:
Cost of old machine 90,000

Amount credited 21,000
(69,000)
c. Understatement in recording new machine (6):
Cash price of new machine 108,000

Amount debited 96,000
12,000
d. Understatement in crediting machinery (3) traded-in:
Cost of old machine (90,000)
PRODUCTION MACHINES
Unadjusted balance 1,086,000
87,000 (a)
69,000 (b)
(c) 12,000
90,000 (d)
852,000 Adjusted Balance
Depreciation expense for the year:
NOTES
Machine 1 (90,000 x 25%) x 8/12 15,000 (3)
Machine 2 (90,000 x 25%) x 11/12 20,625
Machine 3 (90,000 x 25%) x 9/12 16,875
Machine 4 (90,000 x 25%) 22,500
Machine 5 49,500 x 8/12 16,500 (2)
Machine 6 (108,000 x 25%) x 3/12 6,750 (2)
Machine 7 (216,000 x 25%) x 1/12 4,500 (2)
Machine 8 (216,000 x 25%) x 1/12 4,500 (2)
Depreciation Expense for 2008 ₱ 107,250
Page 28 of 45
NOTES
1. PAS 16, paragraph 67: The carrying amount of an item of property, plant and equipment
shall be derecognised: (a) on disposal; or (b) when no future economic benefits are expected
from its use or disposal. This explains the adjustments done for a, b, and d.
2. PAS 16, paragraph 55: Depreciation of an asset begins when it is available for use, ie when
it is in the location and condition necessary for it to be capable of operating in the manner
intended by management.
3. PAS 16, paragraph 55 states that depreciation does not cease when the asset becomes idle or
is retired from active use unless the asset is fully depreciated. Therefore, even if the asset was
sold during the year, depreciation for the period must be recorded but only up to the date of
sale.
Page 29 of 45
PROBLEM NO. 10
Theory Questions
You obtain the following information pertaining to Red Co.’s property, plant and equipment for 2008
in connection with your audit of the company’s financial statements.
Audited balances at December 31, 2007:

Debit Credit
Land P 3,750,000
Buildings 30,000,000
Accumulated depreciation – buildings P6,577,500
Machinery and Equipment 22,500,000
Accumulated depreciation – machinery
and equipment 6,250,000
Delivery Equipment 2,875,000
Accumulated Depreciation –
Delivery equipment 2,115,000
Depreciation Data:
Depreciation Method Useful life
Buildings 150% declining-balance 25 years
Machinery and Equipment Straight line 10 years
Delivery Equipment Sum of the years digits 4 years
Leasehold Improvements Straight line -
Transaction during 2008 and other information are as follows:
a. On January 2, 2008, 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, 2008, a machine purchased for P575,000 on April 1, 2003 was destroyed by fire. Red
recovered P387,500 from its insurance company.
c. On May 1, 2008, cost of P4,200,000 were incurred to improve the leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on December
31, 2014.
d. On July 1, 2008, 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,
2008, would have been depreciated at a total amount of P450,000 for the year ended December
31, 2008.
The salvage value of the depreciable assets are immaterial. The policy of the Red Co. is to compute
depreciation to the nearest month.
Page 30 of 45
REQUIRED:
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, 2008?
a. ₱ 7,777,500 b. ₱ 7,982,850 c. ₱ 8,377,500 d. ₱ 7,103,700
2. How much is the Accumulated Depreciation – Machinery and Equipment as of December 31,
2008?
a. ₱ 8,844,375 b. ₱ 8,614,375 c. ₱ 8,830,000 d. ₱ 8,556,875
3. How much is the Accumulated Depreciation – Delivery Equipment as of December 31, 2008?
a. ₱ 2,715,000 b. ₱ 2,400,000 c. ₱ 2,490,000 d. ₱ P2,805,000
4. How much is the Accumulated Depreciation – Leasehold Improvements as of December 31,

2008?
a. ₱ 420,000 b. ₱ 525,000 c. ₱ 350,000 d. ₱ 630,000
5. How much is the net gain (loss) from disposal of assets for the year ended December 31, 2008?
a. ₱ 100,000 b. ₱ (P35,000) c. ₱ 65,000 d. ₱ (P65,000)
Solutions:
1. Accumulated Depreciation - Building

NOTES
Balance: January 1, 2008 6,577,500
Add: Depreciation for 2008 1,405,350
Balance, December 31, 2008 7,982,850 (1)
Book value, January 1, 2008 23,422,500

(30,000,000 – 6,577,500)
150% Declining Balance
( x 150%) 6%
Depreciation for 2008 1,405,350
2. Accumulated Depreciation – Machinery and Equipment

Balance, January 1, 2008 6,250,000
Machine destroyed by fire (575,000/10 x 5) (287,500)
Machinery and Equipment, January 1, 2008 22,500,000

Less: Machine destroyed by fire 575,000
Balance 21,925,000
Depreciation rate 10% 2,192,500
Machine destroyed by fire (575,000 x 10% x 3/12) 14,375
Machine purchased, July 1 (7,750,000 x 10% 6/12) 387,500
Page 31 of 45
3. Accumulated Depreciation – Delivery Equipment

Balance, January 1, 2008 2,115,000
Depreciation for 2008 600,000
Truck traded in
(450,000 cost – 135,000 book value) (315,000)
Delivery Equipment, January 1, 2008 450,000

Less: Depreciation on truck traded in,
January 1, 2008 (450,000 x *) 90,000 360,000
Depreciation on truck purchased
January 2, 2008 (600,000 x ) 240,000
Depreciation for 2008 600,000
4. Accumulated Depreciation – Leasehold Improvements
Cost of leasehold improvements 4,200,000
Depreciation period,
May 1, 2008 – December 31, 2008 ÷ 80 months
Depreciation per month 52,500
Depreciation, May 1, 2008 – December 31, 2008
(52,500 x 8 months) 420,000 (1)
5. Loss on Trade In of Truck on January 2, 2008

Trade in Value (600,000 – 500,000) 100,000
Book Value 135,000
Loss on Trade In (35,000) (2)
NOTES
1. PAS 16: Each part of an item of PPE with a cost that is significant in relation to the total cost
of an item shall be depreciated separately. The depreciation method used by the entity shall
reflect the pattern in which the future economic benefits of the asset are expected to be
consumed.
2. PAS 16: Any gain or loss from the derecognition of an item of property, plant and equipment
shall be included in profit or loss when the item is derecognized.
Page 32 of 45
PROBLEM NO. 11
Theory Questions
1. An audit has identified numerous debits to accumulated depreciation of equipment. Which of the
following is most likely?
a. The estimated remaining useful lives of equipment were increased.
b. Plant assets were retired during the year.
c. The prior year’s depreciation expense was erroneously understated.
d. Overhead allocations were revised at year-end.
ANSWER: B
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: An accounting estimate
means an approximation of the amount of an item in the absence of a precise means of measurement.
Example is the provisions to allocate the cost of fixed assets over their estimated useful lives.
2. In testing for unrecorded retirements of equipment, an auditor might,
a. Select items of equipment from the accounting records and then attempt to locate them
during the plant tour.
b. Compare depreciation expense with the prior year’s depreciation expense.
c. Trace equipment items observed during the plant tour to the equipment subsidiary
ledger.
d. Scan general journal for unusual equipment retirements.
ANSWER: A
PSA 500 (Redrafted): “The auditor shall design and perform audit procedures that are appropriate in
the circumstances for the purpose of obtaining sufficient appropriate audit evidence. 1 When designing
and performing audit procedures, the auditor shall consider the relevance and reliability of the
information to be used as audit evidence.” 2 Inspection of tangible assets consists of physical
examination of the assets.
3. A plant manager would be most likely to provide information on which of the following?
a. Adequacy of the provision for uncollectible accounts.
b. Appropriateness of physical inventory valuation techniques.
c. Existence of the obsolete inventory.
d. Deferral certain purchases of office supplies.
ANSWER: C
PSA 500: “Observation consists of looking at a process or procedure being performed by the others. It
includes observation of the counting of inventories by the entity’s personnel and observation of the
performance of control activities”
Page 33 of 45
4. Which of the following would be least likely to address control over the initiation and execution
of the equipment transactions?
a. Request for major repairs are approved by a higher level than the department initiating
the request.
b. Pre-numbered purchase orders are used for equipment and periodically accounted for.
c. Requests for purchases of equipment are reviewed for consideration for soliciting
competitive bids.
d. Procedures exist to restrict access to equipment.
ANSWER: D
PSA 315 (redrafted): Identifying and assessing the risks of material misstatement through
understanding the entity and its environment.
5. When there are numerous property and equipment transactions during the year, an auditor who
plans to assess control risk at a low level usually performs:
a. Test of controls and extensive tests of property and equipment balances at the end of
the year.
b. Analytical procedures for current year property and equipment transactions.
c. Test of controls and limited tests of current year property and equipment transactions.
d. Analytical procedures for property and equipment balances at the end of the year.
ANSWER: C
PSA 330: In order to reduce audit risk to an acceptable low level, the auditor should determine overall
responses to assessed risks at the financial statement level, and should design and perform further
audit procedures (test of controls and substantive tests) to assessed risks at the assertion level.
The auditor should perform tests of controls to obtain sufficient appropriate audit evidence that the
controls were operating effectively at relevant times during the period under audit
6. Which of the following is not a control that should be established for purchases of equipment?
a. Establishing a budget for capital acquisitions.
b. Requiring that the department in need of the equipment order the equipment.
c. Requiring that the receiving department receive the equipment.
d. Establishing an accounting policy regarding the minimum peso amount of purchase that will
be considered for capitalization.
Answer: B
Control activities are the policies and procedures that help ensure that management directives are
carried out, in purchasing equipment, it is not advisable that the one to purchase is the department in
need. This action will give opportunity to conduct fraud.
Page 34 of 45
7. Which of the following is not one of the auditors’ objectives in auditing depreciation?
a. Establishing the reasonableness of the client’s replacement policy.
b. Establishing that the methods used are appropriate.
c. Establishing that the methods are consistently applied.
d. Establishing the reasonableness of depreciation computations.
Answer: A
The auditor should test/check the calculations of depreciation and the total depreciation arrived at
should be compared with that of the preceding years to identify reasons of variation. [c&d]
The auditor should review the depreciation method applied to the asset at least at the end of each
financial year to confirm that the depreciation charge reflects the usage. [b]
8. Which of the following is the best evidence of continuous ownership of property?

a. Examination of the deed.
b. Examination of rent receipts from lessees of the property.
c. Examination of the title policy.
d. Examination of cancelled check in payment for the property.
Answer: B
If the property is leased out for rent, check rent receipts to know who gets the benefits and risks from
the property.
9. Which of the following best describes the auditors’ typical observation of plant and equipment?
a. The auditors observe a physical inventory of plant and equipment, annually.
b. The auditors observe all additions to plant and equipment made during the year.
c. The auditors observe all major plant and equipment items in the clients’ accounts each year.
d. The auditors observe major additions to plant and equipment made during the year.
Answer: D
Because of the limited resources and time an auditor has. So the auditor can’t test all the transactions
of the company. The auditor should focus his audit on things that are material to the company.
10. Which of the following is used to obtain evidence that the client’s equipment accounts are not
understated?
a. Analysing repairs and maintenance expense accounts.
b. Vouching purchases of plant and equipment.
c. Recomputing depreciation expense.
d. Analysing the miscellaneous revenue account.
Answer: A
One of the potential misstatement in PPE on account of frauds and errors is expenditures for repairs
and maintenance recorded as PPE or vice versa.
Page 35 of 45
11. Which of the following is not a test primarily used to test property, plant and equipment accounts
for overstatement?
a. Investigation of reductions in insurance coverage.
b. Review of property tax bills.
c. Examination of retirement work orders prepared during the year.
d. Vouching retirements of plant and equipment.
Answer: D
Testing for overstatement of property, plant and equipment will include vouching/identifying assets
that are currently in use and owned by the business. Vouching retirement of plant asset will not
ordinarily help in testing overstatement of property plant and equipment
12. A continuing audit client’s property, plant and equipment and accounts receivable accounts have
approximately the same year-end balance. In this circumstance, when compared to property, plant
and equipment one would normally expect the audit of accounts receivable to require:
a. More audit time.
b. Less audit time.
c. Approximately the same amount of audit time.
d. Similar confirmation procedures.
Answer: A
The audit of property, plant and equipment (PPE) would probably require less time than audit of
current assets (accounts receivable) because:
1. Transactions in property, plant and equipment are usually of substantial amount, and
relatively few transactions may account for it.
2. There is often little change in the PPE account from year to year.
3. Errors in year-end cutoff of plants assets transaction do not usually affect net income, as do
cutoff errors in inventory.
13. When performing an audit of the property, plant and equipment accounts, an auditor should
expect which of the following to be most likely to indicate a departure from generally accepted
accounting principles?
a. Repairs have been capitalized to repair equipment that had broken down.
b. Interest has been capitalized for self-constructed assets.
c. Assets have been acquired from affiliated corporations with the related transactions recorded
and described in the financial statements.
d. The cost of freight-in on an acquisition has been capitalized.
Answer: A
Extra ordinary repairs are material replacements of parts involving large sums and normally extend
the useful life. Extra ordinary repairs are capitalized. Ordinary repairs are minor replacement of parts,
involving small sums. Ordinary repair are charged to expense when incurred. B. is correct because
PAS 16 states that “Borrowing that are directly attributable to the acquisition, construction or
production of a qualifying asset form part of the cost of that asset.” D. is correct because PAS 16,
paragraph 16-b: the cost of an item of PPE includes any cost directly attributable to bringing the asset
to the location and condition necessary for it to be capable of operating in the manner intended by
management.
Page 36 of 45
14. The auditor may expect a proper debit to goodwill due to:
a. Purchase of a trademark.
b. Establishment of an extraordinary profitable product.
c. A business combination.
d. Capitalization of human resources.
Answer: D
PAS 38, paragraph 1 states that “If an item within the scope of this standard does not meet the
definition of an intangible asset, expenditure to acquire it or generate it internally is recognized as an
expense when it is incurred. However, if the item is acquired in a business combination, it forms part
of the goodwill recognized at the acquisition date.
15. Which of the following is a customary audit procedure for the verification of the legal ownership
of real property?
a. Examination of correspondence with the corporate counsel concerning acquisition matters.
b. Examination of ownership documents registered and on file at a public hall of records.
c. Examination of corporate minutes and resolutions concerning the approval to acquire
property, plant and equipment.
d. Examination of deeds and title guaranty policies on hand.
Answer: D
Examination of title documents, the deed, and any other supporting documents, such as closing
documents, will be helpful in verifying ownership. But these are not conclusive. An inspection of
public records will determine if there are any interests in the property (e.g., mortgages, judgment liens,
or claims to the title) that do not appear in the auditee’s records.
16. Which of the following best describes the independent auditors’ approach to obtaining
satisfaction concerning depreciation expense in the income statement?
a. Verify the mathematical accuracy of the amounts charged to income as a result of
depreciation expense.
b. Determine the method for computing depreciation expense and ascertain that is in accordance
with generally accepted accounting principles.
c. Reconcile the amount of depreciation expense to those amounts credited to accumulated
depreciation accounts.
d. Establish the basis for depreciable assets and verify the depreciation expense.
Answer: D
PSA 540, in conjunction with PAS 200, states that the auditor shall evaluate, based on the audit
evidence, whether the accounting estimates in the financial statements are either reasonable in the
context of the applicable financial reporting framework, or are misstated.
Page 37 of 45
17. The auditors are least likely to learn of retirements of equipment through which of the following?
a. Review of the purchase returns and allowances accounts.
b. Review of depreciation.
c. Analysis of the debits to the accumulated depreciation account.
d. Review of insurance policy riders.
Answer: A
Purchase returns and allowances deals with returns and allowances for purchases of merchandise and
not equipment. Whereas the analysis of accumulated depreciation, review of insurance policy riders
since companies would ordinarily modify insurance coverage when assets retire, and the review of the
property, plant and equipment account would definitely reveal retirements.
18. Which of the following is the most important control procedure over acquisitions of property,
plant, and equipment?
a. Establishing a written company policy distinguishing between capital and revenue
expenditures.
b. Using a budget to forecast and control acquisitions and retirements.
c. Analysing monthly variances between authorized expenditures and actual costs.
d. Requiring acquisitions to be made by user departments.
Answer: B
Among the elements of strong internal control for property, plant, and equipment, a budget to forecast
and control acquisitions and retirements of plant assets is considered to be the most essential because
it provides historical data and estimates set by the management.
19. In the examination of property, plant and equipment, the auditor tries to determine all of the
following except the:
a. Extent of the control risk.
b. Extent of property abandoned during the year.
c. Adequacy of replacement funds
d. Reasonableness of the depreciation
Answer: C
All three choices are encapsulated in the following standards: PSA 540 which pertains to the objective
of obtaining sufficient audit evidence by reviewing the reasonableness of accounting estimates and
PSA 315 which deals with the necessity for risk assessment and.
20. Property acquisitions that are misclassified as maintenance expense would most likely be detected by
an internal control system that provides for:
a. Investigation of variances within a formal budgeting system
b. Review and approval of the monthly depreciation entry by the plant supervisor.
c. Segregation of duties of employees in the accounts payable department.
d. Examination by the internal auditors of vendor invoices and cancelled checks for property
acquisitions.
Answer: A
The internal auditor, apart from stressing importance to proper classification of expenses into the
correct property, plant, and equipment account, must also ensure to prevent misclassification of
expenses like repair and maintenance into the capital assets account by adopting different procedures.
Page 38 of 45
21. When comparing an initial audit with a subsequent year audit for a particular client, the scope of
audit procedures for which of the following accounts would be expected to decrease the most?
a. Accounts receivable
b. Cash
c. Marketable securities
d. Property, plant, and equipment
Answer: D
Usually, there is little change in property accounts year to year. Land, buildings, and equipment often
remain unchanged for many years; hence there is little accounting activity to verify. In contrast, such
current assets as accounts receivable and inventory may have a complete turnover several times a
year.
22. Which of the following best describes the auditor’s approach to the audit of the ending balance of
property, plant, and equipment for a continuing nonpublic client?
a. Direct audit of the ending balance
b. Agreement of the beginning balance to prior year’s working papers and audit of significant
changes in the accounts
c. Audit of changes in the accounts since inception of the company
d. Audit if selected purchases and retirements for the last few years
Answer: B
PSA 501, A7: For non-current assets and liabilities, such as property, plant and equipment,
investments and long-term debt, some audit evidence may be obtained by examining the accounting
records and other information underlying the opening balances. In the first audit of a company for
which other independent public accountants have previously made satisfactory audits, the auditors
normally may limit their work on the beginning balances of plant and equipment to a general review
of past transactions in plant assets.
23. The most likely technique for the current year audit of goodwill which was acquired three years
ago by a continuing audit client:
a. Confirmation
b. Observation
c. Recomputation
d. Inquiry
Answer: C
PSA 540, A7: Additional examples of situations where fair value accounting estimates may
be required include Certain assets or liabilities acquired in a business combination, including goodwill
and intangible assets. Thus recalculation is deemed to be the most likely audit technique to be applied.
Page 39 of 45
24. For which of the following accounts is it most likely that most of the audit work can be performed
in advance of the balance sheet date?
a. Accounts receivable
b. Cash
c. Current marketable securities
d. Property, plant, and equipment
Answer: D
The audit of plant and equipment would probably require less time than the audit of current assets
because there is often little change in the property accounts from year to year and errors in year-end
cutoff of plant assets transactions do not usually affect net income, as do cutoff errors in inventory.
25. For which of the following ledger accounts would the auditor be most likely to analyze the details
to identify understatements of equipment acquisitions?
a. Service revenue
b. Sales
c. Repairs and maintenance expense
d. Sales salaries expense
Answer: C
In recording expenditures on property, plant, and equipment, the logical choice usually is between a
revenue expenditure and a capital expenditure. If the outlay is judged to be a revenue expenditure
(rightly or wrongly), it will probably be recorded in the Repairs and Maintenance account. If items
that should be capitalized are erroneously charged to Repairs and Maintenance, the result will be an
understatement of property, plant, and equipment.
Page 40 of 45
PROBLEM NO. 12
Wasting Assets
In 2001, Dagumboy Corporation acquired a silver mine in Benguet. Because the mine is located
deep in the Benguet mountains, Dagumboy was able to acquire the mine for the low price of ₱ 50,000. In
2002, Dagumboy constructed a road to the silver mine costing ₱ 5,000,000. Improvements to the mine
made in 2002 cost ₱ 750,000. Because of the improvements to the mine and the surrounding land, it is
estimated that the mine can be sold for ₱ 600,000 when the mining activities are complete.
During 2003, five buildings were constructed near the mine site to house the mineworkers and their
families. The total cost of the five buildings was ₱ 1,500,000. Estimated residual value is ₱ 250,000. In
2001, geologists estimated 4 million tons of silver ore could be removed from the mine for refining.
During 2004, the first year of operations, only 5,000 tons of silver ore were removed from the mine.
However, in 2005, workers mined 1 million tons of silver. During the same year, geologists discovered
that the mine contained 3 million tons of silver ore in addition to the original 4 million tons.
Improvements of ₱ 275,000 were made to the mine early in 2005 to facilitate the removal of the
additional silver. Early in 2005, an additional building was constructed at the cost of ₱ 225,000 to house
the additional workers needed to excavate the added silver. This building is not expected to have any
residual value.
REQUIRED:
Based on the above result of your audit, determine the following: (Round off depletion and depreciation
rate to two decimal places)
1. Depletion for 2004

a. ₱ 6,300 c. ₱ 6,500
b. ₱ 7,250 d. ₱ 5,550
2. Depreciation for 2004

a. ₱ 1,300,000 c. ₱ 1,820,000
b. ₱ 780,750 d. ₱ 870,750

a. ₱ 250,000 c. ₱ 490,000
b. ₱ 180,000 d. ₱ 210,000

a. ₱ 1,950,000 c. ₱ 2,150,000
b. ₱ 2,425,000 d. ₱ 2,275,000

a. ₱ 525,000 c. ₱ 625,000
b. ₱ 1,225,000 d. ₱ 450,000
Page 41 of 45
Solutions:

NOTES
Acquisition cost 50,000 (2)
Road construction 5,000,000 (3)
Improvements to the mine 750,000 (3)
Total cost 5,800,000
Estimated residual value (600,000) (4)
Depletable amount ₱ 5,200,000
Depletion rate per unit (5,200,000/4,000,000) 1.3 per ton
Units extracted during the year 5,000 tons

Rate X 1.3 per ton
Depletion ₱ 6,500 (5)

NOTES
Depletion in 2004 (6,500)
Remaining depletable amount 5,193,500
Development cost in 2005 275,000
Total depletable amount ₱ 5,468,500
Original estimate 4,000,000

Additional estimate 3,000,000
Total estimate 7,000,000 (6)
Extracted in 2004 (5,000)
Remaining estimate - January 1, 2005 6,995,000
New depletion rate per unit (5,468,500/6,995,000) 0.78 per ton
Units extracted during the year 1,000,000 tons

Rate X 0.78 per ton
Depletion ₱ 780,000

NOTES
Cost of five buildings 1,500,000
Residual value (250,000)
Additional building 275,000
Depreciation during 2004 {[(1,500,000-250,000)/4,000,000] x 5,000} (1,550)
Depreciable cost 1,523,450
Divided by total units estimated to be extracted [(4,000,000+3,000,000) - 5,000] 6,995,000
Rate 0.21 per ton

Rate X 0.21 per ton
Depreciation ₱ 210,000 (7)
Page 42 of 45

NOTES
Depletion in 2005 (780,000)
Remaining depletable amount 4,688,500
Development cost in 2005 1,100,000
Total depletable amount ₱ 5,788,500
Total estimate 6,995,000

Extracted in 2005 1,000,000
Remaining estimate – January 1, 2006 5,995,000 (6)
New depletion rate per unit (5,788,500/5,995,000) 0.97 per ton

Rate X 0.97 per ton
Depletion ₱ 2.425,000 (5)
5. Depreciation 2006
NOTES
Rate X 0.21 per ton
Depreciation ₱ 525,000 (7)
NOTES
1. There is no comprehensive standard that is applicable to the extractive or mining industry

which explains why an entity must develop its own accounting policy for the recognition of
exploration and evaluation assets. PFRS 6 permits an entity to continue to apply its previous
accounting policy provided that the resulting information is relevant and reliable.
In general, the cost of wasting asset can be divided into four categories, namely: Acquisition
cost, Exploration cost, Development cost, and Estimated Restoration cost.
2. The acquisition cost is the initial cost/purchase price of the wasting asset.
3. The road constructed is classified as an exploration cost which is incurred in an attempt to
locate the natural resources. Whereas, the improvements made to the mine form part of
development costs.
4. The estimated residual value must be deducted in order to arrive at the depletable cost.
5. The actual units extracted during the year shall be multiplied by the depletion rate to arrive at
the depletion for the year.
6. PAS 8 paragraph 36: Changes in accounting estimate must be handled currently and
prospectively which explains why the new depletion rate is utilized in the current year.
7. PAS 16 paragraph 53: The depreciable amount of an asset is determined after deducting its
residual value. In practice, the residual value of an asset is often insignificant and therefore
immaterial in the calculation of the depreciable amount.
8. PAS 16, paragraph 60: The depreciation method used shall reflect the pattern in which the
asset’s future economic benefits are expected to be consumed by the entity. Since the useful
life of the buildings was not stated, the depreciation for the year shall be computed using the
output method of depreciation.
Page 43 of 45
PROBLEM NO. 13
Cost of Wasting Asset with Estimated Restoration Cost, Depletion,
Depreciation of Movable and Immovable Equipment
On January 1, 2015, Harruel Mining Corp. acquired property containing mineral resources for
₱ 120,000,000. Total costs of exploration and intangible development costs incurred was ₱ 6,000,000.
Harruel is mandated by the Mining Act to restore the site after 4 years. Based on most reliable
measurement, the amount of restoration cost is ₱ 10,000,000 and current market-based discount rate is
12%. On the same date, Harruel acquired movable and immovable tangible equipment. The movable
tangible equipment amounted to ₱ 6,000,000 while the immovable tangible equipment costs totaled ₱
9,000,000. Geologists estimated that the total units estimated to be extracted 12,000,000. It is estimated
that 1,500,000 will be extracted each year during the useful life of the wasting asset.
The movable equipment has a useful of 6 years while the immovable equipment has an estimated
useful of 5 years. Actual units extracted in 2015 and 2016 were 1,600,000 and 1,700,00 respectively.
REQUIRED:
Based on the above data, answer the following: (Please carry over all decimal places in the computation.)
1. How much is the initial cost of the mineral deposit?

a. ₱ 132,355,181 c. ₱ 126,000,000
b. ₱ 136,000,000 d. ₱ 126,355,181
2. How much is the depletion in 2015?

a. ₱ 18,133,333 c. ₱ 16,800,000
b. ₱ 17,647,357 d. ₱ 16,847,357
3. How much is the 2015 depreciation of the movable equipment?

a. ₱ 1,000,000 c. ₱ 750,000
b. ₱ 800,000 d. ₱ 1,125,000
4. How much is the 2015 depreciation of the immovable equipment?

a. ₱ 1,800,000 c. ₱ 1,125,000
b. ₱ 1,200,000 d. ₱ 750,000
5. How much is the interest expense in 2015?

a. ₱ 762,622 c. ₱ 854,136
b. Nil d. ₱ 1,588,795
Page 44 of 45
Solutions:
NOTES
1.
Acquisition cost of the wasting assets 120,000,000
Add: Exploration and intangible development cost 6,000,000
Add: Estimated decommissioning and restoration costs 6,355,181
Initial cost 132,355,181 (1)
Estimated restoration cost P10,000,000

Multiply by: Present value of 1 for four periods 0.635518078
Present value of the restoration cost P 6,355,181
2.
Total cost of the wasting assets 132,355,181
Divide by: Estimated units to be extracted 12,000,000
Depletion per unit 11.03
Multiply by: Units extracted 1,600,000
Depletion expense – 2015 17,647,35 (1)
3.
Cost of the movable equipment 6,000,000
Divide by: Useful life 6yrs.
Depreciation – 2015 1,000,000 (2)
4.
Cost of the immovable equipment 9,000,000
Depreciation – 2015 1,800,000 (2)
5.
Date Interest Expense Present Value

01/01,2015 6,355,181
12/31/2015 762,622 7,117,802
12/31/2016 854,136 7,971,939
12/31/2017 956,633 8,928,571
12/31/2018 1,071,429 10,000,000
NOTES
1. At, present, PFRS does not address wasting assets. There is no comprehensive standard that
is applicable to the extractive or mining industry. In general, the cost of wasting assets can be
divided into four categories, namely: Acquisition Cost, Exploration Cost, Development Cost,
and Estimated Restoration Cost.
2. PAS 16, paragraph 43: Each part of an item of property, plant and equipment with a cost
that is significant in relation to the total cost of the item shall be depreciated separately.
Page 45 of 45

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Property, Plant, and Equipment

ANTONIO, JENNILINE N. | APOSTOL, KYRT RHOLYN S. | ARINES, PHILIP G.

1. Purchase price including VAT 1,568,000

2. Cost of water device to keep machine cool 8,000

3. Cost of safety rail and platform surrounding machine 12,000

4. Installation cost, including site preparation and assembling 20,000

5. Fees paid to consultants for advice on acquisition of the machinery 13,000

6. Dismantling cost of the machine 10,000

8. Loss on premature retirement-old machine 18,000

9. Other non-refundable Sales tax 13,000

11. Cost of removing old machine 10,000

Determine the cost of Machinery.

DESCRIPTION MACHINERY OTHERS NOTES

1. Cost of survey 50,000

CASE 1 LAND BLDG LI NOTES

Cost allocated to Land:

Cost allocated to Bldg:

CASE 2 LAND BLDG LI NOTES

1. Unpaid real property taxes up to the date of acquisition 14,000

CASE NO.1 LAND OLD NEW LI NOTES

Cost allocated to Land:

Cost allocated to Bldg:

CASE NO.2 LAND OLD NEW LI NOTES

Cash paid on purchase of land ₱ 10,000,000

Description Amount Notes

Description Amount Notes

Description Amount Notes

4. Machinery and equipment

Description Amount Notes

2. Depreciation expense in 20X2 assuming gross method was used.

3. Depreciation expense in 20X2 assuming net method was used.

1. Income from Government Grant 0 (1)

2. Cost of the research facility 30,000,000

3. Cost of the research facility 30,000,000

4. Cost of the research facility 30,000,000

5. Cost of the research facility 30,000,000

7. Depreciation expense in 20X2 assuming gross method was used.

8. Depreciation expense in 20X2 assuming net method was used.

2. Cost of the factory of the building 20,000,000

3. Cost of the factory building 20,000,000

4. Cost of the factory 20,000,000

5. Cost of the factory 20,000,000

Date obtained Term Interest Rate Amount

Date obtained Term Interest Rate Amount

Date Expenditures Months outstanding Amount

Amount of general borrowing ₱ 30,000,000

Date Expenditures Months outstanding Amount

Amount of general borrowing ₱ 30,000,000

The “Land and Building” account at December 31, 2008 follows:

DATE PARTICULARS AMOUNT

You were able to gather the following:

b. Legal fees covered the following:

Cost of Incorporation 9,500

d. Estimated useful life of the building is 25 years.

1. Prepare the necessary adjusting journal entries as of December 31, 2008.

Adjusting journal entries:

1. Land [(10,000 shares x 120) + 98,000] 1,298,000

3. Organization expenses 9,500

6. Insurance expense (26,000 x ½) 13,000

8. Retained earnings 500,000

9. Land and building 31,990

Should be depreciation (1,561,500/25 x 6/12) 31,230