Audit Of PPE And Intangible Assets

Page 1 of 10CEBU CPAR CENTERMandaue CItyAUDITING PROBLEMSAUDIT OF PROPERTY, PLANT & EQUIPMENT AND INTANGIBLE ASSETSPROBLEM NO. 1The property, plant and equipment section of White Corporation’s balance sheet atDecember 31, 2004 included the following items:LandLand improvementsBuildingMachinery and equipmentP 2,500,000560,0003,600,0006,600,000During 2005 the following data were available to you upon your analysis of the accounts:Cash paid on purchase of landMortgage assumed on the land bought, including interest at 16%Realtor’s commissionLegal fees, realty taxes and documentation expensesAmount paid to relocate persons squatting on the propertyCost of tearing down an old building on the landAmount recovered from the salvage of the building demolishedCost of fencing the propertyAmount paid to a contractor for the building erectedBuilding permit feesExcavation expensesArchitect’s feeInterest that would have been earned had the money used duringthe period of construction been invested in the money marketInvoice cost of machinery acquiredFreight, unloading, and delivery chargesCustoms duties and other chargesAllowances, hotel accommodations, etc., paid to foreigntechnicians during instillation and test run of machinesRoyalty payment on machines purchased (based on unitsproduced and RED:Based on the above and the result of your audit, compute for the following as of December31, 2005:1. Land2. Land improvements3. Building4. Machinery and equipment5. Total depreciable property, plant and equipmentPROBLEM NO. 2The following were discovered during your audit of Black Company’s financial statementsfor the year ended December 31, 2005:a.On December 24, 2005, Black purchased an office equipment for P400,000, terms2/5, n/15. No entry was made on the date of purchase. The same was paid onDecember 31, 2005 and the accountant debited Office Equipment and credited cashfor P400,000.AP-5903

Page 2 of 10b.Machine C, with a cash price of P128,000, was purchased on January 2, 2005. Thecompany paid P20,000 down and P10,000 for 12 months. The last payment wasmade on December 30, 2005. Straight line depreciation, based on a five-year usefullife and no salvage value, was recorded at P28,000 for the year. Freight of P4,000 onmachine C was debited to the Freight in account.c.Machine P with a cash selling price of P360,000 was acquired on April 1, 2005, inexchange for P400,000 face amount of bonds payable selling at 94, and maturing onApril 1, 2015. The accountant recorded the acquisition by a debit to Machinery and acredit to Bonds Payable for P400,000. Straight line depreciation was recorded basedon a five-year economic life and amounted to P54,000 for nine months. In thecomputation of depreciation, residual value of P40,000 was used.d.Machine A was acquired on January 22, 2005, in exchange for past due accountsreceivable of P140,000, on which an allowance of 20% was established at the end of2004. The current fair value of the machine on January 22 was estimated atP110,000. The machine was recorded by a debit to Machinery and a credit toAccounts Receivable for P140,000. No depreciation was recorded on Machine A,because it was not installed and never used in operations. On February 2, 2005,Machine A was exchanged for 1,000 shares of the company’s outstanding capitalstock with market price of P105 per share. The Treasury Stock account was debitedfor P140,000 with the corresponding credit to Machinery.e.On December 29, 2005, the company exchanged 10,000 shares of Emong, Inc.common stock, which Black was holding as an investment, for an equipment from DeLeon Corporation. The common stock of Emong, Inc., which had been purchased byBlack for P45 per share, had a quoted market value of P50 per share on the date ofexchange. The equipment had a market value of P470,000. The transaction wasrecorded by a debit to Equipment and a credit to Investment in Emong, Inc.-Commonfor P450,000.f.On December 30, 2005, Machine M with a carrying amount of P120,000 (costP400,000) was exchanged for a similar asset with a fair value of P150,000. Inaddition, Black paid P20,000 to acquire the new machine. The exchange, whichlacks commercial substance, was recorded by a debit to Machinery and a credit tocash for P20,000.g.Machine E was recorded at P102,000, which included the carrying amount ofP22,000 for an old machine accepted as a trade in, and cash of P80,000. The cashprice of Machine S was P90,000, and the trade in allowance was P10,000. Thistransaction took place on December 31, 2005.h.Ms. Beauty, the company’s president, donated land and building appraised atP200,000 and P400,000, respectively, to the company to be used as plant site. Thecompany began operating the plant on September 30, 2005. The building isestimated to have a useful life of 25 years. Since no money was involved, no journalentry was made for the above transaction.i.On July 1, 2004, the national government granted a parcel of land located in Baliuag,Bulacan to Black. On the date of grant, the land had a fair value of P2,000,000. Thegrant required Black to construct a cold storage building on the site. Black finishedthe construction of the building, which has an estimated useful life of 25 years, onJanuary 2, 2005. Black appropriately recorded the cost of the building of P4,000,000(which include direct materials, direct labor, and indirect cost and incrementaloverhead) but failed to provide depreciation in 2005. Unaware of the accountingprocedures for government grants, the company did not reflect the grant on its books.AP-5903

Page 3 of 10REQUIRED:As Black’s external auditor, you are required to prepare any necessary adjusting journalentries as of December 31, 2005.PROBLEM NO. 3The Blue Corporation was incorporated on January 2, 2005, but was unable to beginmanufacturing activities until July 1, 2005 because the new factory facilities were notcompleted until that date.The “Land and Building” account at December 31, 2005 follows:DateJan. 31Feb. 28May 0202June 01July 0101Dec. 31ParticularsLand and buildingCost of removal of old buildingPartial payment on new constructionLegal fees paidSecond payment on new constructionFire insurance premium – 1 yearFinal payment on new constructionAsset write-upDec. 31Depreciation – 2005, at 1% of account balanceAmountP 0,000P 3,199,00031,990P 3,167,010You 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 its9% cumulative preferred shares, P100 par value per share. The shares were thenselling at P120.b. Legal fees covered the following:Cost of incorporationExamination of title covering purchase of the landLegal work in connection with construction contractP 9,5004,0001,500P 15,000c. Because of a general increase in construction costs after entering into the buildingcontract, 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 thebuilding 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, 2005.2. Determine the adjusted balances of the following as of December 31, 2005:a. Land and buildingb. Landc. Carrying value of buildingd. Organization cost, net (presented under Noncurrent Assets)AP-5903

Page 4 of 10PROBLEM NO. 4In the audit of the books of Green Company for the year 2005, the following items andinformation appeared in the Production Machines account of the auditee:Date2005Jan. 01Aug 31ParticularsDebitBalance–Machines 1, 2, 3, and 4 at P90,000 eachMachine 5Machine 1Machine 6Machines 7 and 8 at P216,000 eachMachine 2BalanceSept 30Dec 01Dec 0131CreditP 360,000198,000P 3,00096,000432,00021,000.1,062,000P1,086,000 P1,086,000The Accumulated Depreciation account contained no entries for the year 2005.balance on January 1, 2005 per your audit, was as follows:Machine 1Machine 2Machine 3Machine 4TotalTheP 84,37539,37533,75022,500P 180,000Based 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 thisdate for P3,000.2.Machine 2 was destroyed by the thickness of engine oil used leading to explosion onDecember 1, 2005. Insurance of P21,000 was recovered. Machine 7 was to replaceMachine 2.3.Machine 3 was traded in for Machine 6 at an allowance of P12,000; the differencewas 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, 2005 andDepreciation Expense for the year 2005.PROBLEM NO. 5You obtain the following information pertaining to Red Co.’s property, plant, andequipment for 2005 in connection with your audit of the company’s financial statements.Audited balances at December 31, 2004:LandBuildingsAccumulated depreciation – buildingsMachinery and equipmentAccumulated depreciation –Machinery and EquipmentDelivery EquipmentAccumulated Depreciation –Delivery EquipmentDebitP 3,750,00030,000,000CreditP 903

Page 5 of 10Depreciation Data:BuildingsMachinery and EquipmentDelivery EquipmentLeasehold ImprovementsDepreciation Method150% declining – ight-lineUseful Life25 years10 years4 years-Transaction during 2005 and other information are as follows:a.On January 2, 2005, Red purchased a new truck for P500,000 cash and traded-in a2-year-old truck with a cost of P450,000 and a book value of P135,000. The newtruck has a cash price of P600,000; the market value of the old truck is not known.b.On April 1, 2005, a machine purchased for P575,000 on April 1, 2000 was destroyedby fire. Red recovered P387,500 from its insurance company.c.On May 1, 2005, cost of P4,200,000 were incurred to improve leased office premises.The leasehold improvements have a useful life of 8 years. The related leaseterminates on December 31, 2011.d.On July 1, 2005, machinery and equipment were purchased at a total invoice cost ofP7,000,000; additional cost of P125,000 for freight and P625,000 for installation wereincurred.e.Red determined that the delivery equipment comprising the P2,875,000 balance atJanuary 1, 2005, would have been depreciated at a total amount of P450,000 for theyear ended December 31, 2005.The salvage values of the depreciable assets are immaterial. The policy of the Red Co. isto 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, 2005?a. P7,777,500b. P7,982,850c. P8,377,500d. P7,103,7002.How much is the Accumulated depreciation – Machinery and Equipment as ofDecember 31, 2005?a. P8,844,375b. P8,614,375c. P8,830,000d. P8,556,8753.How much is the Accumulated depreciation – Delivery Equipment as of December31, 2005?a. P2,715,000b. P2,400,000c. P2,490,000d. P2,805,0004.How much is the Accumulated depreciation – Leasehold Improvements as ofDecember 31, 2005?a. P420,000b. P525,000c. P350,000d. P630,0005.How much is the net gain (loss) from disposal of assets for the year ended December31, 2005?a. P100,000b. (P35,000)c. P65,000d. (P65,000)PROBLEM NO. 6In connection with your audit of the Josef Mining Corporation for the year ended December31, 2005, you noted that the company purchased for P10,400,000 mining propertyestimated to contain 8,000,000 tons of ore. The residual value of the property isP800,000.AP-5903