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

PROBLEM NO. 2
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:

5. Land
a. P2,480,000 gain b. P3,200,000 loss c. P720,000 loss d. P0

6. Building
a. P288,000 gain b. P912,000 loss c. P1,488,000 loss d. P0

7. Warehouse
a. P1,200,000 gain b. P3,600,000 loss c. P320,000 gain d. P0

8. Machine
a. P24,000 gain b. P192,000 gain c. P18,000 gain d. P0

9. Delivery truck
a. P424,000 loss b. P44,000 loss c. P424,000 gain d. P44,000 gain

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 to Straight-line 30 - ?
Construction date -
Donated 10/2/2003 ? 3,000 150% declining 10 ? ?
equipment 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

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

11. The cost of Land B is

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

12. The cost of Machine B is

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

13. The total depreciation expense for the year ended September 30, 2005 is
a. P33,037 b. P51,875 c. P33,208 d. P32,826

PROBLEM NO. 4
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:

14. Recorded depletion expense was

a. Overstated by P360,000 c. Overstated by P540,000
b. Understated by P360,000 d. Understated by P540,000

15. Recorded depreciation expense was

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