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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
AUDITING PROBLEMS
AUDIT OF PROPERTY, PLANT AND EQUIPMENT – QUIZZERS
PROBLEM NO. 1
You were engaged in making your second annual examination of Indigo Company. The
Machinery and Accumulated Depreciation accounts are shown below:
Machinery
01/01/05 Balance P 500,000 09/01/05 Sale of machine
No. 3 P 10,000
06/01/05 Machine No. 23 150,000 12/31/05 Balance 644,000
09/01/05 Dismantling of
Machine No. 3 4,000 .
P 654,000 P 654,000

01/01/06 Balance P 644,000

Accumulated Depreciation
12/31/05 Balance P 344,400 01/01/05 Balance P 280,000
. 12/31/05 Depreciation 64,400
P 344,400 P 344,400

01/01/06 Balance P 344,400

Your examination disclosed the following information:
a. The company has depreciated all items of equipment at 10% per annum. The oldest
item owned is seven years old as of December 31, 2005.
b. The following adjusted balances appeared on December 31, 2004 working papers:
Equipment – P500,000; Accumulated Depreciation – P 280,000.
c. Machine No. 3, which was purchased on March 1, 2001, at a cost of P80,000, was sold
on September 1, 2005 for P10,000 cash.
d. Included in charges to Repairs and Maintenance account was an invoice for installation
of Machine No. 23, in the amount of P35,000.
e. It is the company’s policy to take full year’s depreciation in the year of acquisition and
none in the year of disposition.
QUESTIONS:
Based on the information presented above and the result of your audit, answer the
following:
1. How much is the loss on the sale of Machine no. 3?
a. P38,000 b. P37,333 c. P42,000 d. 0
2. How much is the adjusted balance of the Machinery account as of December 31,
2005?
a. P644,000 b. P296,500 c. P605,000 d. P609,000
3. How much is the total depreciation expense on machinery for 2005?
a. P64,400 b. P60,500 c. P50,000 d. P58,125
4. How much is the balance of the Accumulated Depreciation account as of December
31, 2005?
a. P308,500 b. P344,000 c. P301,458 d. P340,500

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5. The adjusting entry to correct the entry made in recording sale of Machine no. 3 will
include a debit to
a. Loss on sale of machinery P42,000
b. Accumulated depreciation P32,000
c. Both a and b
d. No adjusting entry is necessary.
SUGGESTED ANSWERS: C, C, B, A, C

PROBLEM NO. 2
On January 1, 2004, Olive Corporation purchased a tract of land (site number 101) with a
building for P1,800,000. Additionally, Olive paid a real state broker’s commission of
P108,000, legal fees of P18,000 and title guarantee insurance of P54,000. The closing
statement indicated that the land value was P1,500,000 and the building value was
P300,000. Shortly after acquisition, the building was razed at a cost of P225,000.

Olive entered into a P9,000,000 fixed-price contract with Waylili Builders, Inc. on March 1,
2004 for the construction of an office building on the land site 101. The building was
completed and occupied on September 30, 2005. Additional construction costs were
incurred as follows:
Plans, specifications and blueprints P 36,000
Architect’s fees for design and supervision 285,000

The building is estimated to have a forty-year life from date of completion and will be
depreciated using the 150%-declining-balance method.

To finance the construction cost, Olive borrowed P9,000,000 on March 1, 2004. The loan
is payable in ten annual installments of P900,000 plus interest at the rate of 14%. Olive
used part of the loan proceeds for working capital requirements. Olive’s average amounts
of accumulated building construction expenditures were as follows:
For the period March 1 to December 31, 2004 P2,700,000
For the period January 1 to September 31, 2005 6,900,000

Olive is using the allowed alternative treatment for borrowing cost.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of land site number 101
a. P1,905,000 b. P2,205,000 c. P1,800,000 d. P2,151,000

2. Cost of office building

a. P10,581,000 b. P10,360,500 c. P10,329,000 d. P10,960,500

3. Depreciation of office building for 2005

a. P96,800 b. P102,800 c. P97,100 d. P99,197
SUGGESTED ANSWERS: B, B, C

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PROBLEM NO. 3
Rose Corporation, a manufacturer of steel products, began operation on October 1,
2003. The accounting department of Rose has started the fixed-asset and depreciation
presented below.
ROSE CORPORATION
Fixed Asset and Depreciation Schedule
For Fiscal Years Ended September 30, 2004, and September 30, 2005
Depreciation
Expense Year
Ended Sept. 30
Est.
Acquisition Depreciation Life in
Assets Date Cost Salvage Method Years 2004 2005
Land A 10/1/2003 ? N/A N/A N/A N/A N/A
Building A 10/1/2003 ? P40,000 Straight-line ? P17,450 ?
Land B 10/1/2003 ? N/A N/A N/A N/A N/A
Building B Under P320,000 Straight-line 30 - ?
Construction to date -
Donated 10/2/2003 ? 3,000 150% 10 ? ?
equipment declining
balance
Machine A 10/2/2003 ? 6,000 Sum-of-the- 8 ? ?
years’-digits
Machine B 10/1/2004 ? - Straight-line 20 - ?
N/A – Not applicable

You have been asked to assist in completing this schedule. In addition in ascertaining that
the data already on the schedule are correct, you have obtained the following information
from the Company’s records and personnel:

a. Land A and Building A were acquired from a predecessor corporation. Rose paid
P820,000 for the land and building together. At the time of acquisition, the land had an
appraised value of P90,000, and the building had an appraised value of P810,000.
b. Land B was acquired on October 2, 2003, in exchange for 2,500 newly issued shares
of Rose’s common stock. At the date of acquisition, the stock had a par value of P5 per
share and a fair value of P30 per share. During October 2003, Rose paid P16,000 to
demolish an existing building on this land so it could construct new building.
c. Construction of building B on the newly acquired land began on October 1, 2004. By
September 30, 2005, Rose has paid P320,000 of the estimated total construction costs
of P450,000. It is estimated that the building will be completed and occupied by July
2006.
d. Certain equipment was donated to the corporation by a local university. An
independent appraisal of the equipment when donated placed the fair market value at
P30,000 and the salvage value at P3,000.
e. Machinery A’s total cost of P164,900 includes installation expense of P600 and normal
repairs and maintenance of P14,900. Salvage value is estimated at P6,000.
Machinery A was sold on February 1, 2005.
f. On October 1, 2004, Machinery B was acquired with a down payment of P5,740 and
the remaining payments to be made in 11 annual installments of P6,000 each
beginning October 1, 2004. The prevailing interest rate was 8%. The following data
were abstracted from the present-value tables (rounded):
Present value of P1 at 8% for 11 years 0.429
Present value of an ordinary annuity of P1 at 8% for 11 years 7.139
Present value of an annuity due of P1 at 8% for 11 years 7.710

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QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The cost of Building A is
a. P82,000 b. P738,000 c. P820,000 d. P0

2. The cost of Land B is

a. P91,000 b. P75,000 c. P28,500 d. P0

3. The cost of Machine B is

a. P46,260 b. P48,574 c. P48,722 d. P52,000

4. The total depreciation expense for the year ended September 30, 2005 is
a. P33,037 b. P51,875 c. P33,208 d. P32,826
SUGGESTED ANSWERS: B, A, D, C

PROBLEM NO. 4
Your audit of Teal Corporation for the year 2005 disclosed the following property
dispositions:
Cost Acc. Dep. Proceeds Fair value Mode
Land P3,200,000 - 2,480,000 2,480,000 Condemnation
Building 1,200,000 - 288,000 - Demolition
Warehouse 5,600,000 880,000 5,920,000 5,920,000 Destruction by fire
Machine 640,000 256,000 72,000 576,000 Exchange
Delivery truck 800,000 380,000 376,000 376,000 Sale

Land
On January 15, a condemnation award was received as consideration for the forced sale
of the company’s land and building, which stood in the path of a new highway.

Building
On March 12, land and building were purchased at a total cost of P4,000,000, of which
30% was allocated to the building on the corporate books. The real estate was acquired
with the intention of demolishing the building, and this was accomplished during the month
of August. Cash proceeds received in September represent the net proceeds from
demolition of building.
Warehouse
On July 4, the warehouse was destroyed by fire. The warehouse was purchased on
January 2, 1997. On December 12, the insurance proceeds and other funds were used to
purchase a replacement warehouse at a cost of P4,800,000.
Machine
On December 15, the machine was exchanged for a similar machine having a fair value of
P504,000 and cash of P72,000 was received.
Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.

QUESTIONS:
Based on the above and the result of your audit, compute the gain or loss to be recognized
for each of the following dispositions:

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1. Land
a. P2,480,000 gain b. P3,200,000 loss c. P720,000 loss d. P0
2. Building
a. P288,000 gain b. P912,000 loss c. P1,488,000 loss d. P0
3. Warehouse
a. P1,200,000 gain b. P3,600,000 loss c. P320,000 gain d. P0
4. Machine
a. P24,000 gain b. P192,000 gain c. P18,000 gain d. P0
5. Delivery truck
a. P424,000 loss b. P44,000 loss c. P424,000 gain d. P44,000 gain
SUGGESTED ANSWERS: C, D, A, B, B

PROBLEM NO. 5
On an audit engagement for 2005 you handled the audit of fixed assets of Gold Mines.
This mining company bought the exploration rights of Tamashi Mineral Exploration on June
30, 2005 for P29,160,000. Of this purchase price, P19,440,000 was allocated to copper
which had remaining reserves estimated at P6,480,000 tons. Gold Mines expects to
extract 60,000 tons of ore a month with an estimated selling price of P50 per ton.
Production started immediately after some new machineries costing P2,400,000 were
bought on June 30, 2005. These new machineries had estimated useful life of 15 years
with a scrap value of 10% of cost after the ore estimate has been extracted from the
property, at which time the machineries will already be useless. Among the operating
expenses of Gold Mines at December 31, 2005 were:
Depletion expense P1,620,000
Depreciation on machineries 160,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. Recorded depletion expense was
a. Overstated by P360,000 c. Overstated by P540,000
b. Understated by P360,000 d. Understated by P540,000

2. Recorded depreciation expense was

a. Overstated by P40,000 c. Overstated by P80,000
b. Understated by P40,000 d. Understated by P80,000

SUGGESTED ANSWERS: C, A

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