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SURIGAO EDUCATION CENTER

CPA-REVIEW PROGRAM
Financial Accounting and Reporting and Auditing Problems
Material # 6 part 2- Property, Plant and Equipment, & Depletion

1. It is the present value of the cash flows an entity expects to d. Neither change in accounting estimate and change in
arise from the continuing use of an asset and from its accounting policy
disposal at the end of its useful life or expects to incur
when settling a liability. 7. According to PAS 16, Property, plant and Equipment
a. Entity-specific value c. Value in Use includes all of the following except
b. Fair value d. Discounted value a. Property used in production or supply of goods and
services
2. In relation to a non-monetary exchange, the configuration b. Property used for extraction of minerals, oil or natural
of cash flows of the assets exchanged includes which of the gas
following? c. Biological Assets related to Agricultural activity and
a. The implicit interest rate, maturity of loan and amount mineral rights
of loan. d. Property for rental purposes and administrative
b. The risk, timing and amount of cash flows of the purposes
assets.
c. The entity specific value of the asset which is equal to 8. Which of the following statements regarding revaluation of
fair value. asset is incorrect?
d. The estimated present value of the assets exchanged a. When an item of property and equipment is revalued,
accumulated depreciation is either restated
3. For purposes of revaluation, if there is no market based proportionately with the change in the carrying amount
evidence of fair value because of the specialized nature of of the assets or eliminated against the gross carrying
the item of property, plant and equipment and the item is amount of the asset and the net amount restated to the
rarely sold, the estimate of fair value is equal to revalued amount.
a. Replacement cost b. When an item of property and equipment is revalued,
b. Depreciated replacement cost the entire class of property in which the asset belongs
c. Current cost should be revalued.
d. Historical cost restated in terms of the current price c. Revaluation of assets should be done annually.
level d. The revaluation surplus included in equity may be
transferred directly to retained earnings when the
4. What is the treatment of the accumulated depreciation on surplus is realized, either upon sale, disposal as the
the date of revaluation? asset is used in the enterprise
I. Restated proportionately with the change in the gross
carrying amount of the asset so that the carrying 9. Capitalization of borrowing costs shall be suspended
amount after revaluation equals the revalued amount. a. Only during temporary periods of delay
II. Eliminated against the gross carrying amount of the b. Only during extended periods of delay in which active
asset and the net amount restated to the revalued development is delayed
amount of the amount of the asset. c. Only upon agreement by management and construction
a. I only c. II only company
b. Either I or II d. Niether I nor II d. At no instance at all, as capitalization has already
commenced
5. It is an action by a government designed to provide an
economic benefit specific to an entity or a range of entities 10. Which of the following statements concerning borrowing
qualifying under certain criteria and for which the costs is false?
government cannot reasonably place a value? a. Borrowing costs generally include interest costs, bank
a. Government Grant c. Government Takeover overdrafts, amortization of discounts or premiums
b. Government Assistance d. Subvention related to borrowings, finance charges with respect to
finance leases.
6. A government grant that becomes repayable shall be b. Borrowing costs are interest and other costs incurred by
accounted for as an enterprise in relation to borrowed funds.
a. Change in accounting estimate c. Per PAS 23, the benchmark treatment for borrowing
b. Change in accounting policy costs is to capitalize it as part of the cost of the asset to
c. Both change in accounting estimate and change in which it relates.
accounting policy d. Borrowing costs include amortization of ancillary costs
incurred in connection with the arrangement of
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borrowings, as well as exchange differences arising from to make it operate more efficiently 7,500
foreign currency borrowings to the extent the they are Machine B
regarded as an adjustment to interest cost. Cost of material to construct machine, including 12% VAT 78,400
Labor costs to construct the machine 43,000
Practical Accounting 1/ Auditing Problems Allocated overhead costs – electricity, factory space etc. 22,000
Allocated interest costs of financing machine 10,000
Problem 1 (Borrowing Cost)- On January 1, 2014, The Costs of installation 12,000
divine company took out a 12% 10,000,000 to finance the Insurance for 2011-2012 2,000
construction of a building. The key dates are as follows: Profit saved by self-construction 15,000
1/1/2014- Loan interest relating to the project starts to Safety inspection costs prior to use 4,000
be incurred. Materials spoiled in machine trial run 7,000
3/1/2014- Technical site planning commences. Proceeds from sale of units produced during
4/1/2014- Construction work commences the testing phase of the machine 2,000
11/1/2014- Substantially all of the activities necessary to 13. The adjusted cost of machine A
prepare the asset for its intended use are complete. a. 123,100 c. 113,500
12/1/2014- Building brought into use. b. 116,000 d. 125,600
11. What amount of interest should Divine capitalize for the
current year? 14. The adjusted cost of Machine B.
a. 1,000,000 c. 900,000 a. 167,400 c. 156,000
b. 800,000 d. 700,000 b. 157,400 d. 166,000

Problem 2- (Government Grants)- Puff company is engaged in Problem 4- (Impairment and Revaluation)- On January 1, 2009,
the operation of public highways and skyways in the KAZOO Company acquired factory equipment at a cost of
Philippines. On November 2, 2013, a catastrophe devastated 150,000. The equipment is being depreciated using the straight
some of the company’s operated highways and skyways. The line method over its projected useful life of 10 years. On
company suffered 5.6 billion loss due to the catastrophe. On December 31, 2010, a determination was made that the asset’s
January 1, 2014, the Philippine government decided to recoverable amount was only 96,000. Assume that this was
compensate the company for the incurred loss. The properly computed and that recognition of the impairment was
government loaned P5 billion at 5% per annum with maturity warranted. On December 31, 2011, the assets recoverable
period of 5 years. The present value of cash flows at January 1, amount was determined to be 111,000 and management
2014 using the current market rate for similar type of loan after believes that the impairment loss previously recognized should
considering credit risks attached was 4.2 billion. The conditions be reversed.
stipulated on the loan agreement provide that the proceeds will 15. What amount of impairment loss should be recognized on
be used for reconstruction of the skyways and highways. December 31, 2010?
12. On January 1, 2014, how much should the company a. 54,000 b. 9,000 c. 24,000 d. 0
recognize as government grant? 16. What is the assets carrying amount on December 31, 2011?
a. Nil c. P5 billion a. 84,000 b. 90,000 c. 86,400 d. 96,000
b. 4 billion d. 0.8 billion 17. What would have been the asset’s carrying amount at
December 31, 2011, had the impairment not been
Problem 3 (Capitalizable costs)- Ventel ltd. uses many kinds recognized in 2010?
of machines in its operations. It constructs some of these a. 105,000 b. 84,000 c. 96,000 d. 86,400
machines itself and acquires others from the manufacturers. 18. How much is the impairment recovery that should be
The following information relates to two machines that it has reported in the 2011 income statement of Kazoo
recorded in the 2011-2012 period. Machine A was acquired and Company?
machine B was constructed by the company itself: a. 27,000 b. 0 c. 6,000 d. 21,000
Machine A
Cash paid for equipment, including 12% VAT 89,600 Problem- (Revaluation)- Tycoon Corporation acquired a
Costs of transporting machine – insurance and transport 3,000 building on January 1, 2010 at a cost of P50,000,000. The
Labor costs of installation by expert fitter 5,000 building has an estimated life of 10 years and residual value of
Labor costs of testing the equipment 4,000 5,000,000. The building was revalued on January 1, 2014 and
Insurance costs for 2011-2012 1,500 the revaluation revealed replacement cost of 80,000,000,
Costs of training the personnel who will use residual value of 2,000,000 and revised total life of 12 years.
the machine 2,500 19. The carrying amount of building as of December 31, 2014 is
Costs of safety rails and platforms surrounding a. 28,250,000 c. 42,700,000
the machine 6,000 b. 48,800,000 d. 42,950,000
Costs of water devices to keep the machine cool 8,000
20. The revaluation surplus as of December 31, 2014 is
Costs of adjustments to machine during 2011-2012 a. 14,000,000 c. 15,400,000
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b. 14,700,000 d. 16,800,000 a. 5 years c. 10 years
b. 3-5 years d. 5-10 years
Short Problems- PPE
26. A government grant that becomes receivable as
21. Totoy Company accepted a 10,000, 2% interest bearing compensation for expenses or losses already incurred or
note from Bibo company on December 31, 2012, in for the purpose of giving immediate financial support to
exchange for a machine with a list price of 8,000 and a cash the entity should be recognized as income
price of 7,500. The note is payable on December 31, 2014. a. When received
In its 2012 income statement, Totoy should report the sale b. Of the period in which it becomes receivables
at c. Over five years using straight line
a. 7,500 c. 10,000 d. Over 10 years using straight line
b. 8,000 d. 10,400
27. In relation to a benefit included in the term “government
22. On April 1, 2004, Batangas Company bought machinery assistance”, which of the following statements is true?
under a contract that required a down payment of I. The provision of infrastructure in developing areas is a
P500,000 plus 24 monthly payments of P300,000 for total benefit.
payments of P7,700,000. The cash price of the machinery II. The imposition of trading constraints on competitors is
was P6,500,000. The machinery has an estimated useful a benefit
life of four years and estimated residual value of P500,000. a. I only c. II only
Batangas uses SYD method of depreciation. In its 2005 b. Both I and II d. Niether I nor II
income statement, what amount should Batangas report as
depreciation for this machinery? 28. PAS 20 (Accounting for government grants and disclosure
a. 2,400,000 c. 1,800,000 of government assistance) does not deal with
b. 1,950,000 d. 2,275,000 a. the special problems arising in accounting for
government grants in financial statements reflecting
23. On January 1, 2007, Hard Company purchased equipment the effects of changing prices or in supplementary
at a cost of 6,000,000. Depreciation was computed on the information of a similar nature.
straight line basis at 4% per year. On January 1, 2012, the b. government participation in the ownership of the
building was revalued at a fair value of 8,000,000. entity
Assuming that the income tax rate is 30%,what is the c. government grants covered by PAS 41 Agriculture
balance of the revaluation surplus on December 31, 2013? d. All of the above
a. 3,200,000 c. 2,240,000
b. 2,880,000 d. 2,016,000 29. Matrix Corp. imported a machinery to install in its new
factory premises before year end. However, due to
24. The cost of an item of property, plant and equipment circumstances beyond its control, the machinery was
comprises all of the following, except delayed by a few months and was received by year end.
a. Purchase price Matrix learned from the bank that it was being charged
b. Import Duties and non-refundable purchase taxes interest on the loan it had taken to fund the cost of plant.
c. Any cost directly attributable in bringing the asset to What is the proper treatment of freight and interest
the location and condition for its intended use. expense under PAS 16?
d. Initial estimate of the cost of dismantling and removing a. Both expenses should be capitalized
the item and restoring the site, the obligation for b. Interest may be capitalized but freight should be
which the entity does not incur when the item was expensed.
acquired c. Freight charges should be capitalized but interest
e. All of the above are capitalized as costs of Property, cannot be capitalized
Plant and Equipment d. Both expenses should be expended.
30. In relation to the financial statements, PAS 16 Property,
25. The cost of land includes all of the following, except Plant and Equipment, requires that the following
a. Commission related to acquisition disclosures be made for each class of asset:
b. Property tax after date of acquisition assumed by the I. The carrying amount at the beginning and end of the
purchaser reporting period.
c. Property tax to date of acquisition assumed by the II. Accumulated Depreciation
purchaser III. Total additions and disposals
d. Cost of survey IV. The total of impairment losses
V. Fair value at reporting date.
21. For items within a class of property, plant and equipment a. I, III and IV c. I, II, III and IV only
with insignificant changes in fair value, revaluations are b. I, II, IV, and V d. II, III, IV and V only
necessary only every
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31. PAS 23 defines qualifying assets as assets that necessarily letter on December 15, 2014,stating that 1,000,000 would be
takes a substantial period of time to get it ready for its paid to it on April 3, 2015.
intended use or sale. Which of the following is not a 35. The entity should recognize income from government grant
qualifying asset? of
a. Building that will take three years to construct a. 1 million on 12/1 c. 1 million on 12/15
b. Inventories such as wine and cigars b. 1 million on 4/3 d. Nil
c. Machinery that is purchased under a three year 36. Bianca Company purchased land for a manufacturing
instalment period facility for 1,100,000. The company paid P70,000 to tear
d. Manufacturing plant and power generation facilities down a building on the land. Salvage was sold for
10,500.Legal fees of 6,500 were paid for title investigation
32. Which of the following is not a disclosure requirement and making the purchase. Architect’s fees were 40,500.
under PAS 23? Title insurance cost 4,500 and liability insurance during
a. Accounting policy adopted for borrowing costs. construction cost 13,500. Excavation cost 12,000.The
b. Amount of borrowing costs capitalized during the contractor was paid 1,357,000. A one - time assessment
period. made by the city for sidewalks was 7,500. Bianca installed
c. Segregation of assets that are qualifying assets on the lighting and signage at a cost of 11,000. What is the total
balance sheet or as a disclosure in the footnotes to cost of the building?
financial statements. a. 1,505,500 b. 1,432,000 c. 1,423,000
d. Capitalization rate used to determine the amount of d. 1,357,500 e. 1,427,000
borrowing costs eligible for capitalization.
Problem- PPE Acquisition- Catherine Company is installing a
Problem (Borrowing Cost)- Lodi Department Stores , new equipment at its production facility and incurred the ff
Inc, constructs its own stores. Management’s policy is to costs:
include interest as part of the cost of new store just being Cost of equipment per supplier’s invoice 2,500,000
completed. Additional information are as follows: Initial delivery and handling cost 200,000
Total Construction Expenditures Cost of site preparation 600,000
January 2, 2013 600,000 Consultants used for advice on the acquisition
May 1, 2013 600,000 of equipment 700,000
November 1, 2013 500,000 Interest charges paid to supplier for deferred credit 200,000
March 1, 2014 700,000 Estimated dismantling cost to be incurred as
September 1, 2014 400,000 required contract 300,000
December 31, 2014 500,000 Operating Losses before commercial production 400,000
3,300,000 37. What amount should be capitalized as cost of the
Outstanding company debt: equipment?
 Mortgage related directly related to new store; a. 4,300,000 b. 4,000,000
interest rate, 12%, term 5 years from the beginning of b. 4,200,000 d. 4,500,000
the construction P1,000,000.
General Liability 38. Romblon Company and Looc Company are fuel oil
 Bonds issued just prior to construction of store; distributors. To facilitate the delivery of oil to customers.
interest rate,10% for 10 years, P500,000. Romblon and Looc exchanged ownership of 5,000 barrels
 Bonds issued just prior to construction; interest rate, of oil without physically moving the oil. Romblon paid Looc
8%, matures in five years, P1,000,000. P9,000,000 to compensate for a difference in the grade of
 Estimated cost of equity capital 14% oil. On the date of exchange, cost and fair value of oil
33. The capitalizable borrowing cost for 2013 is were:
a. 122,850 c. 125,667 Romblon Looc
b. 120,000 d. 250,000 Cost 45,000,000 40,000,000
34. The capitalizable borrowing cost for 2014 is Fair value 51,000,000 60,000,000
a. 253,938 c. 274,233 Romblon should record the oil inventory received in
b. 120,000 d. 250,000 exchange at
a. 45,000,000 c. 54,000,000
Problem (Government Grants)- A public limited company, b. 51,000,000 d. 60,000,000
Eks Dairy Products produces milk on its farms. The company has
had problems during 2014. Contaminated milk was sold to 39. On January 1,Year 1, an entity acquires for 100,000 a new
customers. As a result, milk consumption has gone down. The piece of machinery with an estimated useful life of 10
government decided to compensate farmers for potential loss years. The machinery has a drum that must be replaced
in revenue from sale of the milk. This fact was published in the every five years and costs P20,000 to replace. Continued
national press on December 1, 2014. Eks received an official operation of the machine requires an inspection every four
years after purchase; the inspection cost is P8,000. The
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company uses the straight line method of depreciation.
What is the depreciation expense for year 1? January 1, 2011 2 years 12% 20,000,000
a. 10,000 c. 10,800
b. 12,000 d. 13,200 a. 1,792,500 c. 1,782,500
b. 1,100,000 d. 1,730,000
Problem -You were engaged to audit the accounts of Macy
Company. The following disbursements were made in relation Problem In connection with your audit of the Josef Mining
to the construction of its building which started January 1, 2011 Corporation for the year ended December 31, 2005, you noted
and was completed December 31, 2011. that the company purchased for P10,400,000 mining property
January 1 10,000,000 estimated to contain 8,000,000 tons of ore. The residual value
March 31 5,000,000 of the property is P800,000. Building used in mine operations
July 1 6,000,000 costs P800,000 and have estimated life of fifteen years with no
August 1 3,000,000 residual value. Mine machinery costs P1,600,000 with an
December 31 1,000,000 estimated residual value P320,000 after its physical life of 4
40. The client is not sure as how it should treat the interest years.
related to the above construction. Assuming the building is Following is the summary of the company’s operations for first
a qualifying asset, interest related to the construction year of operations.
should be: Tons mined 800,000 tons
a. Capitalized as part of the cost of the building Tons sold 640,000 tons
b. Charged to expense Unit selling price per ton P4.40
c. Either a or b Direct labor 640,000
d. Niether a nor b Miscellaneous mining overhead 128,000
Operating expenses (excluding depreciation) 576,000
For each of the following independent situations, determine the Inventories are valued on a first-in, first-out basis. Depreciation
amount of interest that should be included as part of the cost of on the building is to be allocated as follows: 20% to operating
the building. expenses, 80% to production. Depreciation on machinery is
41. Case 1- On January 1, Macy obtained a loan for chargeable to production. Based on the above and the result of
20,000,000 at an interest rate of 10% specifically to finance your audit, answer the following: (Disregard tax implications)
the construction of its building. Prior to disbursements, the 44. How much is the depletion for 2005?
proceeds were temporarily invested and earned interest a. P768,000 c. P960,000
income of 100,000. b. P192,000 d. P1,040,000
a. 2,000,000 c. 1,990,000
b. 1,900,000 d. 100,000 45. Total inventoriable depreciation for 2005?
a. P400,000 c. P362,667
42. Case 2- Macy had the following borrowings which b. P384,000 d. P0
were partly used to finance the construction of the
company’s building: 46. How much is the Inventory as of December 31, 2005?
Date obtained Term Int. rate Amount a. P438,400 c. P422,400
January 1, 2010 5 years 7.5% 10,000,000 b. P425,600 d. P418,133
January 1, 2011 2 years 12% 20,000,000
a. 1,890,000 c. 1,942,500 47. How much is the cost of sales for the year ended December
b. 1,850,000 d. 1,845,000 31, 2005?
a. P1,689,600 c. P1,753,600
43. Case 3- On January 1, Macy obtained a loan for b. P1,702,400 d. P1,672,533
12,000,000 at an interest rate of 10% specifically to finance
the construction of its building. Interest earned from 48. How much is the maximum amount that may be declared
temporary investment of the proceeds amounted to as dividends at the end ofthe company’s first year of
100,000. In addition, Macy had the following borrowings, operations?
part of which was used for the construction activities: a. P1,494,400 c. P1,289,600
Date obtained Term Int. rate Amount b. P1,302,400 d. P1,319,467
January 1, 2010 5 years 7.5% 10,000,000

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Audit Problems- You are engaged to examine the financial statements of JDV Manufacturing Corporation for the year ended
December 31, 2007. The following schedules for property, plant, and equipment and related accumulated depreciation accounts
have been prepared by your client. The opening balances agree with your prior year’s audit working papers:
JDV Manufacturing Company
Analysis of Property, Plant and Equipment
Related Accumulated Depreciation Accounts
Year ended December 31, 2007

Cost
Final 12/31/2006 Additions Retirement Per Books 12/31/2007
Land P 450,000 P 100,000 P - P 550,000
Buildings 2,400,000 350,000 - 2,750,000
Machinery & Equipment 2,770,000 808,000 520,000 3,526,000
5,620,000 1,258,000 520,000 6,826,000
Accumulated Depreciation
Buildings P 1,200,000 103,000 P - 1,303,000
Machinery and Equipment 546,500 313,600 - 860,100
1,746,500 416,600 2,163,100
Further investigation revealed the following:
a. All equipment is depreciated on the straight line basis (with no salvage value) based on the following estimated lives:
Buildings – 25 years, all other items – 10 years.
b. The company entered into lease contract for a derrick machine with annual rental of 100,000 payable in advance every April 1.
The parties to the contract stipulated that a 30 day written notice is required to cancel the lease. Estimated useful life is 10
years. The derrick was recorded under machinery and equipment at 808,000 and 60,600, applicable to the machine, was
included in the depreciation expense during the year.
c. The company finished construction of a new building wing on June 30. The useful life of the main building was not prolonged.
The lowest construction bid was 350,000 which was the amount recorded. Company personnel constructed the building at a
total cost of 330,000.
d. 100,000 was paid for the construction of a parking lot which was completed on July 1, 2007. The expenditure was charged to
land.
e. The 520,000 equipment under retirement column represents cash received on October 1, 2007 for a machinery bought on
October 1, 2003 for P960,000. The bookkeeper recorded depreciation expense of P72,000 on this machine in 2007.
f. The company’s president donated land and building appraised at 200,000 and P400,000 respectively to the company to be used
as a plant site. The company began operating the plant on September 30, 2007. Since no money is involved, the bookkeeper did
not record the transaction.
49. The carrying amount of the buildings on December 31, 2007
a. 1,820,250 b. 1,827,400 c. 1,816,250 d. 1,447,000 e. 1,823,400
50. The carrying amount of the landon December 31, 2007 is
a. 650,000 b. 750,000 c. 450,000 d. 545,000
51. The loss on disposal of machinery sold for 520,000 is
a. 56,000 b. 152,000 c. 80,000 d. P0
52. The carrying amount of the property, plant and equipment as of December 31, 2007 is
a. 3,860,750 b. 3,755,750 c. 3,955,750 d. 3,312,900
53. In Auditing plant assets and accumulated Depreciation for proper valuation, the auditor should do the following, except
a. Physically inspect major plant assets acquisition
b. Recalculate depreciation expense on a test basis
c. Vouch repairs and maintenance expense on a test basis
d. Vouch major additions by reference to underlying documentation

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