Audit of Property, Plant and Equipment

AUDIT OF PROPERTY, PLANT
AND EQUIPMENT
PROBLEM 1
Aliaga Corporation was incorporated on January 2, 2010. The following

items relate to the Aliaga’s property and equipment transactions:
Cost of land, which included an old apartment building P3,000,000

appraised at P300,000
Apartment building mortgage assumed, including related 80,000
interest due at the time of purchase
Deliquent property taxes assumed by Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000

Proceeds from sale of salvaged materials 10,000
Architects fee for new building 60,000
Building permit for new construction 40,000
Fee for title search 25,000
Survey before construction of new building 20,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Assessment by city for drainage project 15,000
Cost of grading and leveling 50,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new building 90,000
more energy efficient
Interest cost on specific borrowing incurred during 360,000
construction
Payment of medical bills of employees accidentally injured 18,000
while inspecting building construction
Cost of paving driveway and parking lot 60,000
Cost of installing lights in parking lot 12,000
Premium for insurance on building during 30,000
construction
Cost of open house party to celebrate opening of 50,000
new building
Cost of windows broken by vandals distracted by 12,000
the celebration
QUESTIONS:
Based on the above and the result of your audit, determine the following
1. Cost of land
a. P2,980,000 b. P3,270,000 c. P3,185,000 d. P3,205,000
..\ANSWER\PPE\P1-Q1.doc
2. Cost of buildings
a. P10,810,000 b. P10,895,000
c. P10,875,000 d. P11,110,000
3. Cost of Land Improvements

a. P12,000 b. P72,000 c. P122,000 d. P 0
4. Amount that should be expensed when incurred
a. P80,000 b. P110,000 c. P62,000 d. P50,000
5. Total depreciable property and equipment

a. P11,182,000 b. P10,967,000
c. P10,947,500 d. P10,882,000
PROBLEM 2
In connection with your audit of Cuyapo Company’s financial
statements for the year 2010, you noted the following transactions
affecting the property and equipment items of the company:
Jan.1 Purchased real property for P5,026,000, which included a charge

of P146,000 representing property tax for 2010 that had been
prepaid by the vendor; 20% of the purchase price is deemed
applicable to land the balance to buildings. A mortgage of
P3,000,000 was assumed by Cuyapo on the purchase. Cash was
paid for the balance
Jan. 15 Previous owners had failed to take care of normal maintenance
and repair requirements on the buildings, necessitating current
reconditioning at a cost of P236,800.
Feb. 15 Demolished garages in the rear of the building, P36,000 being
recovered on the lumber salvage. The company proceeded to
construct a warehouse. The cost of such warehouse was
P540,800, which was P90,000 less than the average bids made
on the construction by independent contractors.
Upon completion of construction, city inspectors ordered
extensive modifications to the building as a result of failure on
the part of the company to comply with building safety code. Such
modifications, which could have been avoided, cost P76,800.
Mar. 1 The company exchanged its own shares with a fair value of
P320,000 (par P24,000) for a patent and a new equipment. The
equipment has a fair value of P200,000.
Apr. 1 The new machinery for the new building arrived. In addition, a new
franchise was acquired from the manufacturer of the machinery.
Payment was made by issuing bonds with a face value of P400,000
and by paying cash of P144,000. The value of the franchise is set
at P160,000, while the machine’s fair value is P360,000.
May 1 The company contracted for parking lots and waiting sheds at a
cost P360,000 and P76,800, respectively. The work was completed
and paid for on June 1.
Dec. 31 The business was closed to permit taking the year-end inventory.
During this time, required redecorating and repairs were
completed at a cost of P60,000.
QUESTIONS:
Based on the above and the result of your audit, determine the cost of
the following:
1. Land
a. P940,000 b. P1,005,200 c. P976,000 d. P1,052,800
2. Buildings
a. P4,645,600 b. P5,005,600 c. P4,762,400 d. P4,681,600
3. Machinery and Equipment
a. P360,000 b. P560,000 c. P576,615 d. P659,692
4. Land improvements
a. P360,000 b. P76,800 c. P436,800 d. P 0
5. Total property, plant and equipment

a. P6,764,400 b. P6,731,200 c. P6,718,092 d. P6,618,400
PROBLEM 3
Gabaldon Company’s property, plant and equipment and accumulated

depreciation balances at December 31, 2009 are:
Cost Accumulated
Depreciation
Machinery and equipment P1,380,000 P367,500
Automobiles and trucks 210,000 114,326
Leasehold improvements 432,000 108,000
Depreciation policy:
a. Depreciation methods and useful lives:
• Machinery and equipment – straight line ; 10 years
• Automobiles and trucks – 150% declining balance ; 5 years, all were
acquired after 2005
• Leasehold improvements – straight line
b. Depreciation is computed to the nearest month.
c. Salvage values are immaterial except for automobiles and trucks
which have estimated salvage values equal to 15% of cost
Additional information:
a. Gabaldon interest into a 12-year operating lease stating January 1,

2007. The leasehold improvements were completed on December
31, 2006 and the facility was occupied on January 1, 2007
b. On July 1, 2010, machinery and equipment were purchased at a

total invoice cost of P325,000. Installation cost of P44,000 was
incurred.
c. On August 30, 2010, Gabaldon purchased new automobile for

P25,000.
d. On September 30, 2010, a truck with a cost of P48,000 and a carrying
amount of P30,000 on December 31, 2009 was sold for P23,500.
e. On December 20, 2010, a machine with a cost of P17,000, a carrying

amount of P2,975 on date of disposition, was sold for P4,000.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The gain on sale of truck on September 30 is

a. P2,680 b. P6,500 c. P250 d. P0
2. The gain on sale of machinery on December 20, 2010 is

a. P1,025 b. P2,725 c. P13,000 d. P 0
3. The adjusted balance of the property, plant and equipment as of
December 31, 2010 is
a. P1,919,000 b. 2, 388,500 c. P2,307,000 d. P2,351,000
4. The total depreciation expense for the year ended December 31, 2010
is
a. P185,402 b. P245,065 c. P138,000 d. P221,402
5. The carrying amount of the property, plant and equipment as of

December 31, 2010 is
a. P1,567,497 b. P1,290,547 c. P1,578,547 d. P1,617,322
PROBLEM 4
On June 1, 2010, Natividad Mining Corp. acquired the rights to a coal

mine containing an estimated reserves of 2,000,000 tons of coal.
The company estimated that 25,000 tons of coal would be extracted
and sold each month. Cost allocable to coal was P7,000,000.
Also on June 1, 2010, the company purchased an equipment to be used in

the production, costing P190,000 which has an estimated useful life
of 10 years. The equipment was expected to become obsolete after
the coal deposits had been extracted from the mine and only
P10,000 selling price of the equipment could be expected. Production
was in full blast since June 2, 2010.
Questions:
Based on the above and the result of your audit, answer the following:
1. What would be the depletion expense for the year ended

December 31, 2010?
a. P1,050,000 b. P525,000 c. P306,250 d. P612,500
2. What would be the depreciation expense on the new equipment for

the year ended December 31, 2010?
a. P18,000 b. P9,000 c. P15,750 d. P16,625
Problem 5
In connection with your audit of the Talavera Mining Corporation for

the year ended December 31, 2010, you noted that the compant
purchased for P10,400,000 mining property estimated to contain
8,000,000 tons of ore. The residual value of the property is
P800,000.
Building used in mine operations cost P800,000 and have estimate life
of fifteen years with no residual value. Mine machinery costs
P1,600,000 with an estimated residual value P320,000 after its
physical life of 4 years.
Following is the summary of the company’s operations for the first year
of operations.
Tons mined 800,000 tons

Tons sold 640,000 tons
Unit selling price per ton P 4.40
Direct labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses (excluding depreciation) 576,000
Inventories are valued on a first-in, first out basis. Depreciation on the

building is to be allocated as follows: 20% to operating expense, 80%
to production. Depreciation on machinery is chargeable to
production.
Questions:
Based on the above and the result of your audit, answer the following
(Disregard tax implications)
1. How much is the depletion for 2010?

a. P768,000 b. P192,000 c. P960,000 d. P1,040,000
2. Total inventoriable depreciation for 2010?

a. P400,000 b. P384,000 c. P362,667 d. P0
3. How much is the Inventory as of December 31, 2010?

a. P438,400 b. P425,600 c. P422,400 d. P418,133
4. How much is the cost of sales for the year ended December 31, 2010?
a. P1,689,600 b. P1,702,400 c. P1,753,600 d. P1,672,533
5. How much is the maximum amount that may be declared as dividends

at the end of the company’s first year of operations?
a. P1,494,400 b. P1,302,400 c. P1,289,600 d. P1,319,467
PROBLEM 6
On December 31, 2009, the statement of financial position of Tinio Company

showed the following property and equipment after charging depreciation:
Building P3,000,000
Accumulated (1,000,000) P2,000,000
Equipment 1,200,000
Accumulated depreciation ( 400,000) 800,000
The company has adopted the revaluation model for the valuation of
property and equipment. This has resulted in the recognition in prior
periods of an asset revaluation surplus for the building of P150,000. On
December 31, 2009, an independent valuer assessed the fair value of the
building to be P1,600,000 and the equipment to be P900,000.
The building and equipment had remaining useful lives of 25 years and 4
years, respectively, as of December 31, 2009.
Questions:
Based on the above and the result of your audit, determine the
following: (Ignore deferred tax consequence)
1. Revaluation surplus as of December 31, 2009, after recording the

revaluation
a. P250,000 b. P150,000 c. P100,000 d. P 0
2. Amount to be recognized in 2009 profit or loss related to the

revaluation of property and equipment
a. P400,000 b. P300,000 c. P250,000 d. P150,000
..\ANSWER\PPE\P6(Q1;Q2).doc
3. Total depreciation in 2010

a. P289,000 b. P625,000 c. P100,000 d. P420,000
4. Carrying amount of property and equipment as of December 31, 2010
a. P2,500,000 b. P2,400,00 c. P2,080,000 d. P2,211,000
5. Revaluation surplus as of December 31, 2010

a. P100,000 b. P75,000 c. P144,000 d. P 0
PROBLEM 7
On January 1, 2010, San Isidro Corporation decided to dispose of an

item of plant that is carried in its records at a cost of P900,000,
with accumulated depreciation of P160,000. Depreciation on the plant
since it was originally acquired has been charged at P10,000 per
month. The plant will continue to be operated until it is sold, at which
time the operations of the plant will be outsourced. The company
undertook all the necessary actions to be able to classify the asset as
held to for sale. It is estimated that it could sell the plant for its
fair value, P720,000, incurring P20,000 selling costs in the process.
The plant has been depreciated at an amount of P10,000 per month.
On March 31, 2010, the plant had not been sold but, due to a shortage
of this type of plant, there had been an increase in the fair value to
P770,000. On June 30, 2010, San Isidro sold the plant for P785,000,
incurring P25,000 selling costs.
Questions:
Based on the above and the result of your audit, answer the
following:
1. The impairment loss to be recognized on January 1, 2010 (date of

classification as held for sale) is
a. P40,000 b. P20,000 c. P180,000 d. P 0
2. The depreciation expense to be recognized in 2010 is

a. P60,000 b. P56,760 c. P58,380 d. P 0
3. The gain to be recognized in profit or loss as a result of increase in
the fair value of the plant is
a. P70,000 b. P50,000 c. P40,000 d. P 0
4. The gain to be recognized on sale of plant on June 30, 2010 is

a. P20,000 b. P10,000 c. P68,380 d. P45,000

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AUDIT OF PROPERTY, PLANT

Aliaga Corporation was incorporated on January 2, 2010. The following

Cost of land, which included an old apartment building P3,000,000

Cost of razing the apartment building 40,000

3. Cost of Land Improvements

5. Total depreciable property and equipment

Jan.1 Purchased real property for P5,026,000, which included a charge

5. Total property, plant and equipment

Gabaldon Company’s property, plant and equipment and accumulated

a. Gabaldon interest into a 12-year operating lease stating January 1,

b. On July 1, 2010, machinery and equipment were purchased at a

c. On August 30, 2010, Gabaldon purchased new automobile for

e. On December 20, 2010, a machine with a cost of P17,000, a carrying

1. The gain on sale of truck on September 30 is

2. The gain on sale of machinery on December 20, 2010 is

5. The carrying amount of the property, plant and equipment as of

On June 1, 2010, Natividad Mining Corp. acquired the rights to a coal

Also on June 1, 2010, the company purchased an equipment to be used in

1. What would be the depletion expense for the year ended

2. What would be the depreciation expense on the new equipment for

In connection with your audit of the Talavera Mining Corporation for

Tons mined 800,000 tons

Inventories are valued on a first-in, first out basis. Depreciation on the

1. How much is the depletion for 2010?

2. Total inventoriable depreciation for 2010?

3. How much is the Inventory as of December 31, 2010?

5. How much is the maximum amount that may be declared as dividends

On December 31, 2009, the statement of financial position of Tinio Company

1. Revaluation surplus as of December 31, 2009, after recording the

2. Amount to be recognized in 2009 profit or loss related to the

3. Total depreciation in 2010

5. Revaluation surplus as of December 31, 2010

On January 1, 2010, San Isidro Corporation decided to dispose of an

1. The impairment loss to be recognized on January 1, 2010 (date of

2. The depreciation expense to be recognized in 2010 is

4. The gain to be recognized on sale of plant on June 30, 2010 is

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