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P2,500,000
560,000
3,600,000
6,600,000
During 2016 the following data were available to you upon your analysis of the accounts:
Cash paid on purchase of land
P10,000,000
Mortgage assumed on the land bought, including interest at 16%
16,000,000
Realtors commission
1,200,000
Legal fees, realty taxes and documentation expenses
200,000
Amount paid to relocate persons squatting on the property
400,000
Cost of tearing down an old building on the land
300,000
Amount recovered from the salvage of the building demolished
600,000
Cost of fencing the property
440,000
Amount paid to a contractor for the building erected
8,000,000
Building permit fees
50,000
Excavation expenses
250,000
Architects fee
100,000
Interest that would have been earned had the money used during
the period of construction been invested in the money market
600,000
Invoice cost of machinery acquired
8,000,000
Freight, unloading and delivery charges
240,000
Customs duties and other charges
560,000
Allowances, hotel accommodations, etc. paid to foreign
technicians during installation and test run of machines
1,600,000
Royalty payments on machines purchased (based on units
produced and sold)
480,000
Auditing Practice I
Workbook
Required: Based on the above and the result of your audit, compute for the following as
of December 31, 2016:
1. Land
2. Land Improvements
3. Building
4. Machinery and Equipment
5. Total depreciable property, plant and equipment
Problem 7-2 (Acquisition of PPE, Exchange and Government Grants)
The following were discovered during your audit of DEF Companys financial statements
for the year ended December 31, 2016:
1. (Cash Acquisition) On December 24, 2016, DEF purchased an office equipment for
P400,000, terms 2/5, n/15. No entry was made on the date of purchase. The same
was paid on December 31, 2016 and the accountant debited Office Equipment and
credited cash for P400,000.
2. (Installment Acquisition) Machine C, with a cash price of P128,000, was purchased
on January 2, 2016. The company paid P20,000 down and P10,000 for 12 months.
The last payment was made on December 30, 2016. Straight line depreciation,
based on a five-year useful life and no salvage value, was recorded at P28,000 for
the year. Freight of P4,000 on machine C was debited to the Freight in account.
3. (Acquisition through Issuance of Bonds Payable) Machine P with a cash selling price
of P360,000 was acquired on April 1, 2016, in exchange for P400,000 face amount of
bonds payable selling at 94, and maturing on April 1, 2026. The accountant recorded
the acquisition by a debit to Machinery and a credit to Bonds Payable for P400,000.
Straight line depreciation was recorded based on a five-year economic life and
amounted to P54,000 for nine months. In the computation of depreciation, residual
value of P40,000 was used. The effective interest rate is 1.06%.
4. (Non-cash Acquisitions) Machine A was acquired on January 22, 2016, in exchange
for past due accounts receivable of P140,000, on which an allowance of 20% was
established at the end of 2015. The current fair value of the machine on January 22
was estimated at P110,000. The machine was recorded by a debit to Machinery and
a credit to Accounts Receivable for P140,000. No depreciation was recorded on
Machine A, because it was not installed and never used in operations. On February
2, 2016, Machine A was exchanged for 1,000 shares of the companys outstanding
capital stock with market price of P105 per share. The Treasury Stock account was
debited for P140,000 with the corresponding credit to Machinery.
5. (Exchange: With Commercial Substance) On December 29, 2016, DEF Company
exchanged 10,000 shares of Eric, Inc. common stock, which the Company was
holding as an investment, for an equipment from Magcale Corporation. The common
stock of Eric, Inc., which had been purchased by DEF for P45 per share, had a
quoted market value of P50 per share on the date of exchange. The equipment had a
market value of P470,000. The transaction was recorded by a debit to Equipment
and a credit to Investment in Eric, Inc.-Common for P450,000. The exchange was
assumed to be with commercial substance.
Auditing Practice I
Workbook
Required: As DEFs external auditor, you are required to prepare any necessary
adjusting journal entries as of December 31, 2016.
Problem 7-3 Cost of Land and Building
The Blue Corporation was incorporated on January 2, 2016, but was unable to begin
manufacturing activities until July 1, 2016 because the new factory facilities were not
completed until that date.
The Land and Building account at December 31, 2016 follows:
Date
Particulars
Jan. 31
Land and building
Feb. 28
Cost of removal of old building
May 2
Partial payment on new construction
May 2
Legal fees paid
Jun. 1
Second payment on new construction
Jul. 1
Claims for damages sustained during the construction of
building
Auditing Practice I
Workbook
Amount
P1,098,000
60,000
700,000
15,000
600,000
26,000
Jul. 1
Dec. 31
Dec. 31
200,000
500,000
P3,199,000
31,990
P3,167,010
Required:
1. Prepare the necessary adjusting journal entries as of December 31, 2016.
2. Determine the adjusted balances of the following as of December 31, 2016:
a. Land
b. Carrying value of building
c. Land and building
d. Organization cost, net (presented under Noncurrent Assets)
Problem 7-4 Valuation of Property, Plant and Equipment
At the beginning of the year, Judith Companys noncurrent assets and accumulated
depreciation accounts had the following balances:
Cost
Land
Buildings
Machinery and Equipment
Delivery Equipment
Leasehold improvements
P 130,000
1,200,000
775,000
132,000
230,000
Accumulated
Depreciation
P 263,101
200,000
86,724
115,000
Useful Life
15 years
25 years
10 years
5 years
8 years
April 6
New parking spaces were completed for the new plant at a total cost of
P240,000.
April 29
Judith exercised the renewal option to extend the lease agreement for an
additional 4 years.
July 1
Aug. 30
Sept. 30
Dec. 20
Additional information:
The leasehold improvements were completed on December 31, 2012. The related lease
was to be terminated on December 31, 2018.
1.
2.
3.
4.
5.
6.
7.
8.
P4,000,000
30,000,000
6,577,531
22,500,000
6,500,000
3,000,000
2,400,000
Third Term, AY 2015-2016
Page 7-5
Depreciation Method
150% declining balance
Straight-line
Sum of the years digits
Straight-line
Useful Life
25 years
10 years
5 years
10 years
Virginia 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 P180,000. The new
truck has a cash price of P600,000. The market value of the old truck is
not known.
Apr. 1
May 1
July 1
Additional information:
Virginia determined that the delivery equipment comprising the P3,000,000 beginning
balance would have been depreciated at a total amount of P400,000 for the year.
Angelo also has a P10 million 10%, 10-year note dated January 1, 2013 with interest
payable annually on December 31 and a P15 million, 12%, 5-year note dated January 1,
2014 with interest payable annually.
600,000
5,000,000
HERPETOTOMY began construction of a building for its own use on January 1, 2015
and was completed on December 31, 2016. The following expenditures were made
during 2015 and 2016:
January 1, 2015
April 1, 2015
December 1, 2015
March 1, 2016
800,000
1,000,000
600,000
1,200,000
1. Assuming that the building was completed on December 31, 2016, how much is the
cost of the building on December 31, 2016?
2. Assuming that the building was completed on June 30, 2016, how much is the cost of
the building?
3. Assuming that the building was completed on December 31, 2016 and the specific
construction loan was also used for general purposes, how much is the cost of the
building?
Problem 7-8 Wasting Assets
In 2011, Orc Corporation acquired a gold mine in Lordaeron. Because of numerous
haunting and other supernatural reasons, Orc was able to acquire the mine for a low, low
price of P50,000. Experts estimated that 4 million tons of gold could be obtained from the
mine.
In 2012, Orc constructed a road to the mine costing P5,000,000. Improvements made to
the mine in 2011 amounted to P750,000. Because of the improvements to the mine and
the surrounding land, it is estimated that the mine can be sold for P600,000 when the
mining activities are completed.
During 2013, several townhouses were constructed near the site to house the
employees. Total cost of the townhouses was P1,500,000. Estimated residual value is
P250,000.
During 2014, the first year of operations, only 5,000 tons of gold were collected from the
mine. In 2015, the employees were able to mine 1 million tons of gold. Geologists
discovered that the mine actually contained 3 million tons more than the original
estimation. Improvements of P275,000 were made to the mine early in 2015 to facilitate
the removal of the additional gold. Furthermore, an additional townhouse was
constructed at a cost of P225,000 for the additional employees that would be hired to
obtain the additional gold. The new townhouse was not expected to have any residual
value.
Auditing Practice I
Workbook
In 2016, 2.5 million tons of gold were mined and costs of P1,100,000 were incurred at
the beginning of the year for improvements to the mine.
1.
2.
3.
4.
5.
Auditing Practice I
Workbook