lOMoARcPSD|40610297

Audit OF PPE Module

BS Accountancy (Batangas State University)

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COLLEGE OF ACCOUNTANCY
Prepared by: Mr. Gerber Mendoza

Subject: Review on Auditing Problem

Module Title: AUDIT OF PROPERTY PLANT AND EQUIPMENT

Description of the Module: This module contains a range of problem solving

regarding audit of property plant and equipment for students especially the 5 th year
BSA. The problem solving includes answered problems with individual activity to be
submitted to instructor.

Objectives:
The Students must be able to apply the following assertions of this audit
Existence: Recorded property, plant and equipment exist

1. Physically inspect the assets for a sample of property, plant and equipment recorded in
the plant ledger.
2. Physically inspect the assets and examine supporting documentation for additions to
property, plant and equipment.
3. Verify that existing retirements and disposals are recorded and properly valued.

Completeness: All property, plant and equipment are recorded

4. Perform analytical procedures.

5. Analyze repairs and maintenance for expenditures that should have been capitalized.
6. Examine lease and loan agreements to identify any liabilities that should be recorded.

Rights and obligations: Property, plant and equipment are owned by the entity

7. Determine whether liens or mortgages have been placed on property, plant and
equipment by examining bank confirmations and reading minutes of the board of
directors' meetings.

Valuation and allocation: Property, plant and equipment are valued in accordance with GAAP

8. Verify accuracy of recorded property, plant and equipment.

9. Verify depreciation.

Presentation and disclosure: Property, plant and equipment are classified and disclosed in
accordance with GAAP

10. Review financial statements and perform analytical procedures to determine whether
accounts are classified and disclosed in the financial statements in accordance with
GAAP.

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Title of the Preparatio Task Time Assessment

Lesson n Time Frame/Date of
Submission
on-line
AUDIT OF 2-3hours For Groupings: March 25, 2020 There’s a
PROPERTY Make excel corresponding
PLANT AND presentations for grades for the
EQUIPMENT the solution of individual activity
each questions

For Individual:
Answer the
individual Activity
portion of the
problem solving
located at the
end of module.
Your answer here
must be written
on yellow paper
to be submitted
using online
facilities i.e
Emails,
Messenger

AUDIT OF PROPERTY, PLANT AND EQUIPMENT

PROBLEM NO. 1

JARAN CO. started operations on September 1, 2014. Jaran's accounts at December

31, 2017, included the following balances:
Machinery (at cost) P910,000
Accumulated depreciation-machinery 482,000
Vehicles (at cost; purchased November 21, 2016) 468,000
Accumulated depreciation - vehicles 196,560
Land (at cost; purchased October 25, 2014) 810,000
Building (at cost; purchased October 25, 2014) 1,857,200
Accumulated depreciation- building 286,140
Details of machines owned at December 31 2017, are as follows:
Machine Purchase Date Cost Useful Life Residual value
1 October 7, 2014 P430,000 5 years P25,000
2 February 4, P480,000 6 years P30,000
2015

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Additional information:
 Jaran calculates depreciation to the nearest month and balances the records at
month-end.
 Recorded amounts are rounded to the nearest peso, and the reporting date is
December 31.
 Jaran uses straight-line depreciadon for all depreciable assets except vehicles,
which are depreciated on the diminishing balance at 40% per annum.
 The vehicies account balance reflects the total paid for two identical delivery
vehicles, each of which cost P234,000.
 On acquiring the land and building, Jaran estimated the building's useful life and
residual value at 20 years and P50,000, respectively
The following transactions occurred from January 1, 2018:
2018
Jan 3 Bought a new machine (machine 3) for a cash price of P570,000. Freight
charges of P4,420 and installation costs of P17,580 were paid in cash. The
useful life and residual value were estimated at five years and P40,000,
respectively.
June 22 Bought a second-hand vehicle for P152,000 cash Repainting costs of P6,550
and four new tires costing P3,450 were paid for in cash.
Aug 28 Exchanged machine 1 for office furniture that had a fair value of P125,000 at
the date of exchange. The fair value of machine 1 at the date of exchange was
P115,000. The office furniture originally cost P360,000 and, to the date of
exchange, had been depreciated by P241,000 in the previous owner's books.
Jaran estimated the office furniture's useful life and residual value at eight
years and P5,400, respectively.
Dec 31 Recorded depreciation.
2019
April 30 Paid for repairs and maintenance on the machinery at a cash cost of P9,280.
May 25 Sold one of the vehicles bought on November 21, 2016, for P66,000 cash.
June 26 Installed a fence around the property at a cash cost P55,000. The fence has an
estimated useful life of 10 years and zero residual value. (Debit the cost to a
land improvements asset account.)
Dec 31 Recorded depreciation.
2020
Jan 5 Overhauled machine 2 at a cash cost of P120,00p, after which Jaran estimated
its remaining useful life at one additional year and revised its residual value to
P50,000.
June 20 Traded in the remaining vehicle bought on November 21, 2016, for a new
vehicle. A trade-in allowance of p37,000 was received and P233,000 was paid
in cash.
Oct 4 Scrapped the vehicle bought on June 22, 2018, as it had been so badly
damaged in a traffic accident that it was not worthwhile repairing it.
Dec 31 Recorded depreciation.

Questions:

1. What should be the depreciation expense for the vehicles for 2018?
A. P140,976
B. P138,976

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C. P139,666
D. P140,286

2. What should be the depreciation expense for the machinery for 2018?
A. P242,733
B. P235,000
C. P239,400
D. P266,400

3. What should be the balance of the Accumulated depreciation - Office furniture

account at December 31, 2019?
A. P19,933
B. P18,267
C. P19,833
D. P58,083

4. What should be the depreciation expense for the machinery for 2020?
A. P277,708
B. 197,400
C. P221,400
D. P205,400

5. What should be the total depreciation expense for 2020?

A. P394.060
B. P418,060
C. P409,612
D. P403,832

PROBLEM NO. 2

SABANTE MANUFACTURİNG COMPANY had several transactions during 2017 and

2018 concerning property, plant, and equipment. Several of these transactions are
described below, followed by the entry or entries mace by the company's accountant.
EQUIPMENT
Several used items were acquired on February 1,2017, by issuing a P300,000
noninterest-bearing note. The note is due one year from the date of issuance. No
market value of the note or the equipment is available. Sabane's most recent borrowing
rate was 8%.
Feb 1, 2017 Equipment 300,000
Notes payable 300,000

Dec. 31, 2017 Depreciation expense 30,000

Accumulated depreciation - equipment 30,000
A building was acquired on June 1, 2017, issuing 300,000 shares of the company's P5
par value ordinary shares. The ordinary share is not widely traded, therefore no market
price is available. The building's fair value on the transaction date was P1,950,000.
June 1, 2017 Building 1,500,000
Ordinary Shares 1,500,000

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Dec. 31, 2017 Depreciation expense 60,000

Accumulated depreciation - building 60,000

INVENTORY/FIXTURES
Inventory and display fixtures were acquired for P375,000 cash on April 1, 2018, from a
competitor who was liquidating her business. The estimated value of the inventory was
P255,000 and the value of the fixtures was P165,000.
April 1, 2018 Inventory 255,000
Display fixtures 165,000
Cash 375,000
Gain on acquisition of inventory and fixtures 45,000
MACHINERY
On July 1, 2018, Sabante exchanged machines with Bongga Company. The following
facts pertain to these assets.
Sabante's Machines Bongga's Machines
Original cost P864,000 P990,000
Accumulated depreciation 345,600 468,000
Fair market value at date of 540,000 675,000
exchange
Cash paid by Sabante 135,000
Cash received by Bongga 135,000
Although the fair values of the assets involved in the exchange had been reliably
determined, certain cash flow calculations made by both companies proved that this
exchange transaction lacks commercial substance.
July 1, 2018 Machinery-new 135,000
Cash 135,000
Additional information:
Sabante uses straight-line depreciation, applied to all assets as follows:
1. A full year's depreciation taken in the year of acquisition and no depreciation
taken in the year of disposal.
2. Estimated life: 25 years for buildings; 10 years on all other assets. (No salvage
values are assumed.)
3. The books for 2018 have not been adjusted or closed.

Questions:

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1. The adjusting entry on December 31, 2018, to correct the 2017 equipment-related
errors is (ignore the 2018 depreciation error)
A. Interest expense 2,222
Retained Earnings 20,370
Equipment 22,592
B. Interest expense 1,851
Retained Earnings 20,370
Equipment 22,221
C. Retained Earnings 22,221
Equipment 22,221
D. Accumulated Depreciation-equipment 2,222
Interest expense 1,851
Retained Earnings 18,148
Equipment 22,221

2. The adjusting entry on December 31, 2018, to correct the 2017 building-related
errors (ignore the 2018 depreciation error)
A. Buildings 450,000
Retained earnings 18,000
Share premium 450,000
Accumulated depreciation-buildings 18,000
B. Buildings 450,000
Share premium 450,000
C. Retained earnings 18,000
Accumulated depreciation-buildings 18,000
D. No adjusting entry is necessary.

3. The adjusting entry on December 31, 2018, to correct the inventory and fixtures-
related errors is (ignore the 2018 depreciation error)
A. Inventory 27,321
Display fixtures 17,679
Gain on acquisition of inventory and fixtures 9,642
B. Gain on acquisition of inventory and fixtures 45,000
Inventory 27,321
Display fixtures 17,679
C. Retained earnings 45,000
Inventory 27,321
Display fixtures 17,679
D. Gain on acquisition of inventory and fixtures 45,000
Retained earnings 45,000

4. The adjusting entry on December 31, 2018, to correct the machinery and fixtures-
related errors is (ignore the 2018 depreciation error)
A. Machinery – new 518,400
Gain on Exchange 518,400
B. Accumulated depreciation -machinery 345,600
Loss on exchange 518,400
Machinery-old 864,000
C. Machinery-new 518,400

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Accumulated depreciation –machinery 345,600

Machinery-old 864,000
D. Machinery- new 464,600
Accumulated depreciation -machinery 345,600
Loss on exchange 54,000
Machinery- old 864,000

5. The correct depreciation expense for 2018 is

A. P229,050
B. P272,250
C. P149,497
D. P185,850

PROBLEM NO. 3

On January 1, 2018, LUMOBO Corporation contracted with Maga Construction

Company to construct building for P40,000,000 on land that Lumobo purchased several
years ago. The contract provides that Lumobo is to make five payments in 2018, with
the last payment scheduled for the date of completion. The building was completed on
December 31, 2018.
Lumobo made the following peyments during 2018:
January 1 P 4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000
Total P40,000,000
Lumobo had the following debt outstanding at Decamber 31, 2017:
a) A 12%, 4-year note dated January 1, 2018, with interest compounded quarterly.
Both principal and interest are payable on December 31, 2021. This loan relates
specifically to the building project P17,000 ,000

b) A 10%, 10-year note dated December 31, 2014, with simple interest;
interest payable annually on December 31 12,000,000

c) A 12%, 5-year note dated December 3, 2015, with simple interest;

interest payable annually on December 31 14,000,000

1. The amount of interest to be capitalized during 2018 is

A. P5,012,690
B. P2,133,60
C. P2,277,710
D. P 0

2. The amount of interest that would be expensed for 2018 is

A. P2,735,960

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B. P5,013,680
C. P2,277,720
D. P 0

PROBLEM NO.4

On January 1, 2016, KAZOO COMPANY acquired a factory equipment at a cost of

P150,000. The equipment is being depreciated using the straight-line method over its
projected useful life of 10 years. On December 31, 2017, a determination was made
that the asset's recoverable amount was only P96,000. Assume that this was properly
computed and that recognition of the impairment was warranted. On December 31,
2015, the asset's recoverable amount was determined to be P111,000 and
management believes that the impairment loss previously recognized should be
reversed. You have been asked to assist the company's accountant in the application of
PAS 36, the standard on impairment of assets.

1. What amount of impairment loss should be recognized December 31, 2017?

A. P54,000
B. P9,000
C. P24,000
D. P 0

2. What is the asset's carrying value on December 31, 2018?

A. P84,000
B. P90,000
C. P86,400
D. P96,000

3. What would have been the asset's carrying amount at December 31, 2018, had the
impairment not been recognized in 2017?
A. P105,000
B. P84,000
C. P96,000
D. P86,400

4. What amount of impairment recovery should be reported in the 2018 income

statement?
A. P27,000
B. P0
C. P6,000
D. P21,000

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PROBLEM NO. 5

In 2013, GREEN CORPORATION acquired a silver mine in Benguet. Because the mine
is located deep in the Benguet mountains, Green was able to acquire the mine for the
low price of P50,000.
In 2014, Green constructed a road to the silver mine costing P5,000,000. Improvements
to the mine made in 2014 cost 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 complete.
During 2015, five buildings were constructed near the mine site to house the mine
workers and their families. The total cost of the five buildings was P1,500,000 Estimated
residual value is
P250,000. In 2013, geologists estimated 4 million tons of silver ore could be removed
from the mine for refining.
During 2016, the first year of operations, only 5,000 tons of silver ore were removed
from the mine. However, in 2017, workers mined 1 million tons of silver. During that
same year, geologists discovered that the mine contained 3 million tons of silver ore in
addition to the original 4 million tons. Improvements of P275,000 were made to the mine
early in 2017 to facilitate the removal of the additional silver.
Early in 2017, an additional building was constructed at a cost of P225,000 to house the
workers needed to excavate the added silver. This building is not expected to have any
residual value.
In 2018, 2.5 million tons of silver were mined and costs of P1,100,000 were incurred at
beginning of the year for improvements to the mine.

Based on the above and the result of your audit, determine the following (Round off
depletion and depreciation rates to two decimal places.)

1. Depletion for 2016

A. P6,300
B. P6,500
C. P7,250
D. P5,550

2. Depletion for 2017

A. P1,300,000

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B. P1,820,000
C. P780,000
D. P870,000

3. Depreciation for 2017

A. P250,000
B. P490,000
C. P100,000
D. P210,000

4. Depletion for 2018

A. P1,950,000
B. P2,150,000
C. P2,425,000
D. P2,275,000

5. Depreciation for 2018

A. P525,000
B. P625,000
C. P1,225,000
D. P450,000

PROBLEM NO. 6

At December 31, 2017, certain accounts included in the property, plant, and equipment
section of the SPEED COMPANY's statement of financial position had the following
balances:

Land ...............................................P 3,000,000

Buildings ……………….………….....24,000,000
Leasehold improvements ………….....3,500,000
Machinery and equipment……………1,400,000

During 2018 the following transactions occurred:

Land site number 621 was acquired for P2,000,000. Additionally to acquire the land,
Speed paid a P60,000 commission to a real estate agent. Costs of P15,000 were
incurred to clear the land L2 for the intended use but not to make room for the
construction of a new building. During the course of clearing the land, timber and gravel
were recovered and sold for P5,000.

A second tract of land (site number 622) with a building was acquired from another
entity in exchange for 100,000 Speed ordinary shares. On the acquisition date, the

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shares had a closing market price of P45 on a stock exchange. Current appraised
values for the land and building respectively, are P1,200,000 and P2,400,000. Shortly
after acquisition, the building was demolished at a cost of P30,000 to make room for the
construction of new building. A new building was constructed for P10,500,000 plus the
following costs:

Excavation fees.......................................................................P110,000
Architectural design fees...........................................................380,000
Building permit fee.......................................................................10,000
Imputed interest on funds used during construction....................60,000

The building was completed and occupied on September 30, 2018.

A third truck of land (site number 623) was acquired for P6,000,000 and was classified
as held for sale.

Extensive work was done to a building occupied by Speed under a lease agreement
that expires on December 31, 2025. The total cost of of the work was P1,250,000 which
consisted of the following:

Painting of ceilings...............................P100,000 estimated useful life is

one year
Electrical work.........................................350,000 estimated useful life is
ten years
Construction of extension to current working area .......800,000 estimated useful life
is 30 years

The lessor paid one-half of the costs incurred in connection with the extension to the
current working area.

During December 2018, costs of P650,000 were incurred to improve leased office
space. The related lease will terminate on December 31, 2020 and is not expected to be
renewed.

A group of new machines was purchased under a royalty agreement which provides for
payment of royalties based on units of production for the machines. The invoice price of
the machines was P750,000, freight costs were P20,000, unloading charges were
P15,000, and royalty payments for 2018 were P130,000.

Questions:

1. What is the December 31, 2018, balance of the Land account that should be shown
as part of property, plant, and equipment in the statement of financial position?
A. P6,270,000 B. P6,470,000 C. P6,570,000 D. P12,570,000

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2. What is the total cost of buildings on December 31, 2018?

A. P35,000,000 B. P35,030,000 C. P35,040,000 D. P37,430,000

3. What is the total cost of leasehold improvements on December 31, 2018?

A. P4,250,000 B. P4,900,000 C. P5,000,000 D. P5,300,000

4. What is the total cost of machinery and equipment on December 31, 2018?
A. P2,170,000 B. P2,185,000 C. P2,315,000 D. P2,415,000

5. How much should be reported as part of expenses (excluding depreciation) in the

income statement for the year ended December 31, 2018?
A. P130,000 B. P190,000 C. P230,000 D. P290,000

PROBLEM NO. 7

The following data pertain to KUKURUKUKU CORPORATION's property, plant, and

equipment for 2018.

Audited balances at December 31, 2017:

DEBIT CREDIT
Land P 7,500,000
Buildings 30,000,000
Accumulated depreciation - Buildings 6,577,500
Machinery and equipment 22,500,000
Accumulated depreciation - Machinery and equipment 6,250,000
Delivery equipment 5,750,000
Accumulated depreciation - Delivery equipment 4,230,00
0
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 -

Transactions during 2018 and other information are as follows:

a) On January 2, 2018, KUKURUKUKU purchased a new truck for P1,000,000 cash

and trade-in of a 2-year-old truck with a cost of P900,000 and a book value of
P270,000. The new truck has a cash price of P1,200,000; the market value of the
trade-in is not known.

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b) On April 1, 2018, a machine purchased for P575,000 on April 1, 2013, was

stolen. KUKURUKUKU recovered P387,500 from its insurance company.
c) On May 1, 2018, costs of P8,400,000 were incurred to improve leased office
premises. The Leasehold Improvements have a useful life of 8 years. The related
lease terminates on December 31, 2024
d) On July 1, 2018, machinery and equipment were purchased at a total invoice
cost of P7,000,000; additional costs of P125,000 for freight and P625,000 for
installation were incurred.
e) KUKURUKUKU determined that the delivery equipment comprising the
P5,750,000 balance at January 1, 2018, would have been depreciated at a total
amount of P900,000 for the year ended December 31, 2018

The salvage values of the depreciable assets are immaterial. The policy of
KUKURUKUKU is to compute depreciation to the nearest month.

Based on the preceding information, compute the following:

1. Depreciation expense for 2018 on Buildings

A. P1,405,350 B. P929,700 C. P1,200,000 D. P1,800,000

2. Depreciation expense for 2018 on Leasehold improvements

A. P700,000 B. P1,050,000 C. P840,000 D. P933,333

3. Accumulated depreciation - Machinery and equipment, December 31, 2018

A. P8,644,375 B. 8,556,875 C. P8,600,000 D. 78,844,375

4. Accumulated depreciation - Delivery equipment, December 31, 2018

A. P5,430,000 B. P4,620,000 C. P4,710,000 D. P4,800,000

5. Gain (loss) on trade in of truck on January 2, 2018

A. (200,000) B. P200,000 C. P(70,000) D. P70,000

INDIVIDUAL ACTIVITY

PROBLEM NO. 1

MINA MINING CO. has acquired a tract of mineral land for P50,000,000. Mina Mining
estimates that the acquired property will yield 150,000 tons of ore with sufficient mineral
content to make mining and processing profitable. It further estimates that 7,500 tons of
ore will be mined the first and last year and 15,000 tons every year in between.
(Assume 11 years of mining operations.) The land will have a residual value of
P1,550,000.
Mina Mining builds necessary structures and sheds on the site at a total cost of
P12,000,000. The company estimates that these structures can be used for 15 years
but, because they must be dismantled if they are to be moved, they have no residual
value. Mina Mining does not intend to use the buildings elsewhere.
Mining machinery installed at the mine was purchased secondhand at a total cost of
P3,600,000. The machinery cost the former owner P9,000,000 and was 50%

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depreciated when purchased. Mina Mining estimates that about half of this machinery
will still be useful when the present mineral resources have been exhausted but that
dismantling and removal costs will just about offset its value at that time. The company
does not intend to use the machinery elsewhere. The remaining machinery will last until
about one-half the present estimated mineral ore has been removed and will then be
worthless. Cost is to be allocated equally between these two classes of machinery

Questions: 10 POINTS
1. What are the estimated depletion and depreciation charges for the 1st year?
2. What are the estimated depletion and depreciation charges for the 5th year?
3. What are the estimated depletion and depreciation charges for the 6th year?
4. What are the estimated depletion and depreciation charges for the 7th year?
5. What are the estimated depletion and depreciation charges for the 11th year?

PROBLEM NO. 2

The ABC Company purchased a tooling machine in 2008 for P600,000. The machine
was being depreciated on the straight-line method over an estimated useful life of 20
years with no salvage value. At the beginning of 2018, when the machine had been in
use for 10 years, ABC estimated that the useful life of the machine would be extended
an additional 5 years.

DEF Manufacturing Company, a calendar-year company, purchased a machine for

P650,000 on January 1, 2016. At the date of purchase, DEF incurred the following
additional costs:
Loss on sale of old machinery P15,000
Freight cost 5,000
Installation cost 20,000
Testing costs prior to regular operation 4,000
The estimated salvage value of the machine was P50,000, and DEF estimated that the
machine would have a useful life of 20 years, with depreciation being computed using
the straight-line method. In January 2018, accessories costing P48,600 were added to
the machine in order to reduce its operating costs. These accessories neither prolonged
the machine's life nor did they provide any additional salvage value.

Compute the amount of depreciation and depletion for 2018. 10 POINTS

1. ABC
2. DEF

PROBLEM NO. 3

In connection with your audit of IDK Company's financial following statements for the
year 2018, you noted the following transactions affecting the property and equipment
items of the company:

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

P146,000 representing property tax for 2018 that had been prepaid by the
vendor: 20% of the purchase price is deemed applicable to land and the
balance to buildings. A mortgage of P3,000,000 was assumed by IDK 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 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: 20
POINTS

1. Land

2. Buildings

3. Machinery and equipment

4. Land improvements

5. Total property, plant and equipment

PROBLEM NO. 4
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Information for PANDAY CORPORATION'S Property, Plant and Equipment for 2018 is
as follows:
Account balances at January 1, 2018:
Debit Credit
Land P450,000
Building 3,600,000
Accumulated depreciation P789,300
Machinery and equipment 2,700,000
Accumulated depreciation 750,000
Automotive equipment 345,000
Accumulated depreciation 253,800

Depreciation method and useful life:

Building: 150%-declining balance; 25 years
Machinery and equipment: Straight-line; 10 years
Automotive equipment: Sum-of-the-years-digits; 4 years
Leasehold improvements: Straight-line
The residual value of the depreciable assets is immaterial. It is the company's policy to
compute depreciation to the nearest month.

Transactions during 2018 and other information were as follows:

1) On January 2, 2018, Panday purchased a new car for P30,000 cash and a trade-
in of a 2-year old car with a cost of P27,000 and a book value of P8,100. The
new car has a cash price of P36,000; the market value of the trade-in is not
known.

2) On April 1, 2018, a machine purchased for P69,000 on April 1, 2013 was

destroyed by fire.Panday recovered P46,500 from its insurance company.

3) On May 1, 2018, costs of P504,000 were incurred to improve leased office

premises. The leasehold improvements have a useful life of 8 years. The related
lease, which terminates on December 31, 2024, is renewable for an additional 6-
year term. The decision to renew will be made in 2024 based on office space
needs at that time.

4) On July 1, 2018, machinery and equipment were purchased at a total invoice

cost of P840,000; additional costs of P15,000 for freight and P75,000 for
installation were incurred.

5) Panday determined that the automotive equipment comprising the P345,000

balance at January 1, 2018 would have been depreciated at a total amount of
P54,000 for the year ended December 31, 2018.

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Questions:

1. What is the depreciation expense on machinery and equipment for 2018?

2. What is the total depreciation expense for the year ended December 31, 2018?
3. What is the total accumulated depreciation balance on December 31, 2018?
4. What is the net gain or loss on asset disposals for 2018?
A. P12,000 net gain
B. P9,900 net gain
C. P2,100 net loss
D. P12,000 net loss

5. What is the total book value of Panday Corporation's property, plant, and
equipment at December 31, 2018?

PROBLEM NO. 5

The Delivery trucks account of your client, POPOY COMPANY, had a balance of
P8,460,000 on January 1, 2016, which included the following:

Truck No. Acquisition Date Cost

1 January 1, 2013 P 1,620,000
2 July 1, 2013 1,980,000

3 January 1, 2015 2,700,000

4 July 1, 2015 2,160,000

P28,460,000

The Accumulated depreciation - Delivery trucks account had a balance of P2,718,000

on January 1, 2016. This amount represents depreciation on the four trucks from the
respective dates of acquisition, based on a 5-year life, no salvage value. No charges
had been made against this account before January 1, 2016.

Transactions completed during the period January 1, 2016, through December 31,
2019, and the entries made to record them were as follows:

July 1, 2016
Truck No. 3 was traded for a larger one (Truck No. 5), the agreed price of which was
3,060,000. Popoy paid the dealer P1,500,000 cash on the transaction. The entry was
Delivery Trucks 1,500,000
Cash 1,500,000

January 1, 2017
Truck No. 1 was sold for P330,000. The entry was:
Cash 330,000
Delivery trucks 330,000

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July 1, 2018
A new truck (No. 6) was purchased for P3,240,000 cash and was debited at that amount
to the Delivery trucks account. (Assume Truck No. 2 was not retired)

July 1, 2018
Truck No. 4 was severely damaged in an accident and was sold as junk for P63,000
cash. Popoy received P225,000 from the insurance company. The entry made by the
accountant was
Cash 288,000
Sales 63,000
Delivery trucks 225,000

Entries for depreciation had been made at the end of each financial year as follows:
Year Depreciation Expense
2016 P1,827,000
2017 1,899,000
2018 2,200,500
2019 2,502,000

1. Popoy's net income for 2016 was overstated (understated) by

2. The gain (loss) on the sale of Truck No. 1 on January 1, 2017, was
3. Popoy's net income for 2017 was understated by
PROBLEM NO. 6

The following information pertains to VANUATU COMPANY'S depreciable assets:

1. Machine X was purchased for P150,000 on January 1, 2013. The entire cost was
expensed in the year of acquisition. The estimated useful life of this machine is
15 years with no residual value.
2. Machine Y cost P525,000 and was acquired on January 1, 2014. On the
acquisition date, the expected useful life was 12 years with no residual value.
The straight-line depreciation method was used. On January 2, 2015, was
estimated that the remaining life of the asset would be 4 years and that there
would be a P25,000 residual value.
3. A building was purchased on January 3, 2015, for P3,000,000. The building was
expected to have a useful life of 20 years with no residual value. The straight-line
depreciation method was used. On January 1, 2018, a change was made to the
sum of the years-digits method of depreciation. No change was made to the
estimated useful life and residual value of the building.

1. The adjusting entry on January 1, 2015, relative to machine X should include a

credit to
A. Accumulated depreciation of P50,000
B. Retained earnings of P100,000.
C. Machinery of P150,000
D. No adjusting entry is necessary

2. What is the carrying value of machine Y on December 31, 2017?

3. What is the depreciation expense on machine Y for 2018?
4. What is the book value of the building at December 31, 2017?

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