AUDIT OF PROPERTY, PLANT AND EQUIPMENT

THEORIES
Select the best answer for each of the following:
1. In testing for unrecorded retirements of equipment, An auditor is most likely to
a. Select items of equipment from the accounting records and then locate them during the
plant tour.
b. Compare depreciation journal entries with similar prior-year entries in search of fully
depreciated equipment.
c. Inspect items of equipment observed during the plant tour and then trace them to the
equipment subsidiary ledger.
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense.
2. Determining that proper amounts of depreciation are expensed provides assurance about
management’s assertions of valuation and
a. Presentation and disclosure. c. Rights and obligations.
b. Completeness. d. Existence or occurrence.
3. The auditor may conclude that depreciation charges are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.
4. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the
audit assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper
period.
b. Expenditures for property and equipment have been recorded in the proper period.
c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense.
d. Expenditures for property and equipment have not been charged expense.
5. In violation of company policy, Coatsen Company erroneously capitalized the cost of painting of its
warehouse. An auditor would most likely detect this when
a. Discussing capitalization policies with Coatsen's controller.
b. Examining maintenance expense accounts.
c. Observing that the warehouse had been painted.
d. Examining construction work orders that support items capitalized during the year.
6. Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud
because
a. The amounts recorded on the balance sheet for most companies are immaterial.
b. The inherent risk is usually low.
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this account.
7. Which is the best audit procedure to obtain evidence to support the legal ownership of real property?
a. Examination of corporate minutes and board resolutions with regard to approvals to acquire
real property.
b. Examination of closing documents, deeds and ownership documents registered and on
file at the register of deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a specific piece of
property.
d. Confirmation with the title company that handled the escrow account and disbursement of
proceeds for the closing of the property.
8. When few property and equipment transactions occur during the year the continuing auditor usually
obtains and understanding of internal control and performs
a. Tests of controls
b. Analytical procedures to verify current year additions to property and equipment
c. A thorough examination of the balances at the beginning of the year.
 d. Extensive tests of current year property and equipment transactions.
9. Which of the following combinations of procedures is an auditor most likely to perform to obtain
evidence about fixed asset addition?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirming ownership and corroborating transactions through inquiries of client personnel.
10. If an auditor tours a production facility, which of the misstatements or questionable practices is most
likely to be detected by the audit procedures specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
11. Additions to equipment are sometimes understated. Which of the following accounts would be
reviewed by the auditor to gain reasonable assurance that additions are not understated?
a. Accounts payable c. Depreciation expense
b. Gain on disposal of equipment d. Repair and maintenance expense
12. When an auditor interviews the plant manager, he will most likely seek from the plant manager
information regarding
a. Appropriateness of physical inventory observation procedures.
b. Existence of obsolete machinery.
c. Deferral of procurement of certain necessary insurance coverage.
d. Adequacy of the provision for uncollectible accounts.
13. If a corporation purchases a lot and building and subsequently tears down the building and uses the
property as a parking lot, the proper accounting treatment of the cost of the building would depend on
a. the significance of the cost allocated to the building in relation to the combined cost of the lot
and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was acquired.
14. The auditor is least likely to learn of retirements of equipment through which of the following?
a. Review of the purchase return and allowance account.
b. Review of depreciation.
c. Analysis of the debits to the accumulated depreciation account.
d. Review of insurance policy riders.
15. Fences and parking lots are reported on the balance sheet as
a. current assets. b. land improvements.
c. land. d. property and equipment.

PROBLEM 1
The property, plant and equipment section of Dwite Corporation’s balance sheet at December 31, 2014
included the following items:
Land P 2,500,000 ; Land improvements 560,000 ; Building 3,600,000 ; Machinery and equipment
6,600,000:
During 2005 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
Realtor’s 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
 Architect’s 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 instillation and test run of machines 1,600,000
Royalty payment on machines purchased (based on units produced and sold) 480,000
REQUIRED:
Based on the above and the result of your audit, compute for the following as of December 31, 2015: 1.
Land; 2. Land improvements; 3. Building; 4. Machinery and equipment; 5. Total depreciable property, plant
and equipment:

PROBLEM 2
The following were discovered during your audit of Blaze Company’s financial statements for the year
ended December 31, 2015:
a. On December 24, 2015, Blaze 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, 2015 and the accountant
debited Office Equipment and credited cash for P400,000.
b. Machine C, with a cash price of P128,000, was purchased on January 2, 2015. The company paid
P20,000 down and P10,000 for 12 months. The last payment was made on December 30, 2015.
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.
c. Machine P with a cash selling price of P360,000 was acquired on April 1, 2015, in exchange for
P400,000 face amount of bonds payable selling at 94, and maturing on April 1, 2015. 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.
d. Machine A was acquired on January 22, 2015, in exchange for past due accounts receivable of
P140,000, on which an allowance of 20% was established at the end of 2014. 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, 2015, Machine
A was exchanged for 1,000 shares of the company’s 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.
e. On December 29, 2015, the company exchanged 10,000 shares of Emong, Inc. common stock, which
Blaze was holding as an investment, for an equipment from De Leon Corporation. The common stock
of Emong, Inc., which had been purchased by Blaze 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 Emong, Inc. for
P450,000.
f. On December 30, 2015, Machine M with a carrying amount of P120,000 (cost P400,000) was
exchanged for a similar asset with a fair value of P150,000. In addition, Blaze paid P20,000 to acquire
the new machine. The exchange, which lacks commercial substance, was recorded by a debit to
Machinery and a credit to cash for P20,000.
g. Machine E was recorded at P102,000, which included the carrying amount of P22,000 for an old
machine accepted as a trade in, and cash of P80,000. The cash price of Machine S was P90,000, and
the trade in allowance was P10,000. This transaction took place on December 31, 2015.
h. Ms. Beauty, the company’s president, donated land and building appraised at P200,000 and P400,000,
respectively, to the company to be used as plant site. The company began operating the plant on
September 30, 2015. The building is estimated to have a useful life of 25 years. Since no money was
involved, no journal entry was made for the above transaction.
i. On July 1, 2014, the national government granted a parcel of land located in Baliuag, Bulacan to
Blaze. On the date of grant, the land had a fair value of P2,000,000. The grant required Blaze to
 construct a cold storage building on the site. Blaze finished the construction of the building, which
has an estimated useful life of 25 years, on January 2, 2015. Blaze appropriately recorded the cost of
the building of P4,000,000 (which include direct materials, direct labor, and indirect cost and
incremental overhead) but failed to provide depreciation in 2015. Unaware of the accounting
procedures for government grants, the company did not reflect the grant on its books.

REQUIRED:
As Blaze’s external auditor, you are required to prepare any necessary adjusting journal entries as of
December 31, 2015.

PROBLEM NO. 3
The Blow Corporation was incorporated on January 2, 2015, but was unable to begin manufacturing
activities until July 1, 2015 because the new factory facilities were not completed until that date.

The “Land and Building” account at December 31, 2015 follows

Date Particulars Amount
Jan. 31 Land and building P 1,098,000
Feb. 28 Cost of removal of old building 60,000
May 02 Partial payment on new construction 700,000
02 Legal fees paid 15,000
June 01 Second payment on new construction 600,000
July 01 Fire insurance premium – 1 year 26,000
01 Final payment on new construction 200,000
Dec. 31 Asset write-up 500,000
P 3,199,000
Dec. 31 Depreciation – 2015, at 1% of account balance 31,990
P 3,167,010
You were able to gather the following during your audit:
a. To acquire land and building, the company paid P98,000 cash and 10,000 shares of its 9% cumulative
preferred shares, P100 par value per share. The shares were then selling at P120.
b. Legal fees covered the following:
Cost of incorporation P 9,500
Examination of title covering purchase of the land 4,000
Legal work in connection with construction contract 1,500
P 15,000
c. Because of a general increase in construction costs after entering into the building contract, the board
of directors increased the value of the building by P500,000, believing such increase is justified to reflect
current market value at the time the building was completed. Retained earnings was credited for this
amount.
d. Estimated useful life of the building is 25 years.
REQUIRED:
1. Prepare the necessary adjusting journal entries as of December 31, 2015.
2. Determine the adjusted balances of the following as of December 31, 2015:
a. Land and building _______________________
b. Land ________________________
c. Carrying value of building __________________________
d. Organization cost, net __________________________

PROBLEM NO. 4
In the audit of the books of Greed Company for the year 2015, the following items and information
appeared in the Production Machines account of the auditee:
 The Accumulated Depreciation account contained no entries for the year 2015. The balance on January 1,
2015 per your audit, was as follows:
Machine 1 P 84,375
Machine 2 39,375
Machine 3 33,750
Machine 4 22,500
Total P 180,000
Based on your further inquiry and verification, you noted the following:
1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this date for P3,000.
2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on December 1,
2005. Insurance of P21,000 was recovered. Machine 7 was to replace Machine 2.
3. Machine 3 was traded in for Machine 6 at an allowance of P12,000; the difference was paid in cash and
charged to Production Machine account.
4. Depreciation rate is recognized at 25% per annum.
REQUIRED:
Determine the adjusted balance of the Production Machine as of December 31, 2015 and Depreciation
Expense for the year 2015.

PROBLEM NO. 5
You obtain the following information pertaining to Read Co.’s property, plant, and equipment for 2015 in
connection with your audit of the company’s financial statements.
2014

Depreciation Data:
Depreciation Method Useful Life
Buildings 150% declining – balance 25 years
Machinery and Equipment Straight-line 10 years
Delivery Equipment Sum-of-the-years’-digits 4 years
Leasehold Improvements Straight-line -
Transaction during 2015 and other information are as follows:
a. On January 2, 2015, Read 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 P135,000. The new truck has a cash price of P600,000; the
market value of the old truck is not known.
b. On April 1, 2015, a machine purchased for P575,000 on April 1, 2010 was destroyed by fire. Read
recovered P387,500 from its insurance company.
 c. On May 1, 2015, cost of P4,200,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. The related lease terminates on December 31, 2021.
d. On July 1, 2015, machinery and equipment were purchased at a total invoice cost of P7,000,000;
additional cost of P125,000 for freight and P625,000 for installation were incurred.
e. Read determined that the delivery equipment comprising the P2,875,000 balance at January 1, 2015,
would have been depreciated at a total amount of P450,000 for the year ended December 31, 2015.

The salvage values of the depreciable assets are immaterial. The policy of the Read Co. is to compute
depreciation to the nearest month.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the Accumulated depreciation – Buildings as of December 31, 2015?
a. P7,777,500 b. P7,982,850 c. P8,377,500 d. P7,103,700
2. How much is the Accumulated depreciation – Machinery and Equipment as of December 31, 2015?
a. P8,844,375 b. P8,614,375 c. P8,830,000 d. P8,556,875
3. How much is the Accumulated depreciation – Delivery Equipment as of December 31, 2015?
a. P2,715,000 b. P2,400,000 c. P2,490,000 d. P2,805,000
4. How much is the Accumulated depreciation – Leasehold Improvements as of December 31, 2015?
a. P420,000 b. P525,000 c. P350,000 d. P630,000
5. How much is the net gain (loss) from disposal of assets for the year ended December 31, 2015?
a. P100,000 b. (P35,000) c. P65,000 d. (P65,000)