DE LA SALLE LIPA College of Business, Economics, Accountancy and Management Accountancy Department nd 2 Semester A.Y. 2012201! 20 12201! Auditing "ro#lem A$D%& '( ")'"E)&Y, "*A+& and E$%"ME+& I. Initial Measurement and Recognition of Purchased Property, Plant and Equipment (Cost Components) Problem . NBA Inc. incurred incurred the following expenditures in connection with the purchase of a new equipment: List or Catalog Price P1!!!!!! "rade #iscount $!!!!! %e&ates 1!!!!! Purchase #iscounts not ta'en (!!!! Nonrefunda&le import duties 1(!!!! Credita&le )alue added tax 1$!!!! Installation and assem&l* cost +!!!! Professional fees of engineer who tested the equipment ,!!!! Insurance while in transit -!!!! Consultant fee for purchase of equipment $!!!! reight and handling costs /!!!! Cost of safet* rail for new equipment +!!!! 0nused supplies of the equipment 1!!!! upplies used to test the equipment 2!!!! Insu Insura ranc nce e for for the the firs firstt *ear *ear of oper operat atio ion n of equi equipm pmen entt $(! $(!!! !!! ! %emo)al cost of old equipment 1$!!!! Cost of platform for new equipment -!!!!! Cost of water de)ice to cool the equipment (!!!!! Cost Cost of intr introd oduc ucin ing g the the new prod produc uctt of the the comp compan an* * 1!! 1!!!! !!! ! Cost of opening the new facilit* $!!!!! Initial operating losses of NBA Inc. ,!!!!! Cost Cost of cond conduc ucti ting ng a new new &usi &usine ness ss in a new new loca locati tion on -!! -!!!! !!! ! Administrati)e Administrati)e and general o)erhead costs costs $!!!!! Cost of relocating an entit*3s operation 1!!!!! Initial cost of dismantling and remo)ing the acquired equipment on which NBA has contractual o&ligation on date of acquisition (!!!!
Required! Based on the data a&o)e and the result of *our audit determine determine the following: following: 4444444444441. Initial amount to &e recogni5ed recogni5ed as cost of the the acquired equipment 444444444444$. "otal "otal amount to &e expensed expensed as incurred II. "cquisition of Property, Plant and Equipment Problem #. As #. As a newl* hired assurance associate of 67 8 Co. *ou are assigned &* the engagement partner to audit the Propert* Plant and 9quipment acquisitions of ABCBN Inc for the *ear ended #ecem&er ,1$!11. "he accounting department pro)ided *ou with the following transactions during $!11: ;n
arch 1$!11 ABCBN ABCBN acquired an equipment at an installment price of P(!!!!!. "he terms are P1!!!!! down and the &alance pa*a&le in four equal annual installments. "he cash price of the machiner* is P-(!!!!. A promissor* note is issued for the installment &alance of P-!!!!!. ;n April 1$!11 ABCBN acquired a laptop at an installment price of P1!!!!!. "he terms are P$!!!! down and the &alance in four equal annual installments. A promissor* note is issued for the &alance of P+!!!!. "here is no a)aila&le cash price for the machiner*. "he "he applica&le discount rate for this note is 1!?. ;n >a* 1$!11 ABCBN acquired a deli)er* truc' &* issuing 1!!!!! shares with par )alue of P$!. At the time of acquisition the fair )alue of the deli)er* truc' is P$(!!!!! and the share is quoted at P$, per share. ;n
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;n A2. as follows: ABCBN 6>A23s atellite Cost $!!!!!!! ,!!!!!!! Accumulated #epreciation (!!!!!! 1!!!!!!! Carr*ing 7alue 1(!!!!!! $!!!!!!! air )alue $(!!!!!! $+!!!!!! Cash paid &* ABCBN to 6>A ,!!!!! ,!!!!! ;n August 1$!11 ABCBN recei)ed a set of appliances from a stoc'holder as a donation. "he fair )alue of the propert* at the date of donation is P(!!!!!. ABCBN paid registration fees and legal fees in connection with the donation in the amount of P(!!!!. >oreo)er ABCBN incurred installation and testing cost for the propert* in the amount of P$!!!!. ;n eptem&er 1$!11 ABCBN constructed a new factor*. "he following costs are incurred in connection with the construction: o #irect cost of materials P(!!!!!! #irect cost of la&ors ,!!!!!! o o Incremental o)erhead identifia&le to construction $!!!!!! Cost of opening the new factor* 1!!!!!! o o Cost of relocating the factor* wor'ers -!!!!!! a)ing on construction 1(!!!!! o Income from rentals of propert* during construction o ,!!!!!
Required! A. Prepare the entr* for the preceding transactions. B. #etermine the initial measurement or historical cost of the following: 4444444444441. >achiner* 444444444444$. Land 444444444444,. Building 444444444444-. 9quipment 444444444444(. Laptop 444444444444/. #eli)er* "ruc' 4444444444442. er)ice Car 444444444444+. New atellite assuming the exchange has commercial su&stance 444444444444@. New atellite assuming the exchange lac's commercial su&stance 4444444444441!. et of Appliances 44444444444411. New actor* III. $o%ernment $rants Problem &. As a newl* hired audit staff of Isla Lipana 8 Co. *ou are assigned to re)iew the go)ernment grants recei)ed &* 6>A2 Inc. from National 6o)ernment. "he following transactions concerning go)ernment grants for the *ear ended #ecem&er ,1$!11 are pro)ided &* 6>A2 Inc.: ;n A2 recei)ed a grant of P,!!!!!!! from the national go)ernment for the purpose of defra*ing safet* and en)ironmental expenses o)er four period. "he safet* and en)ironmental expenses will &e incurred &* 6>A2 as follows: $!11 P1!!!!!! $!1$ $!!!!!! $!1, ,!!!!!! $!1-!!!!!! ;n A2 recei)ed a grant of P1!!!!!!! from 0A 6o)ernment for the acquisition of a new satellite with an estimated cost of P$!!!!!!! and useful life of 1! *ears ;n A2 recei)ed a large tract of land in Batangas from Pro)incial 6o)ernment. "he fair )alue of the land is P$!!!!!!!. "he grant requires that 6>A2 shall construct a satellite on the site. "he cost of the %adio tation is estimated to &e P,!!!!!!! and the useful life is ( *ears. ;n #ecem&er ,1$!11 6>A2 recei)ed a grant of P1(!!!!!! from the 0 6o)ernment to compensate the compan* for massi)e losses incurred &ecause of t*phoon ;ndo*.
Required! A. Prepare the entr* for the preceding go)ernment grant transactions. B. Based on the result of *our audit determine the following: 4444444444441. "otal %eali5ed Income from 6o)ernment 6rant in $!11 assuming the deferred income approach 444444444444$. "otal #eferred Income from 6o)ernment 6rant on #ecem&er ,1$!11 assuming the deferred income approach
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444444444444,. "he carr*ing )alue of satellite on #ecem&er ,1$!11 assuming the use of deferred income approach 444444444444-. "he carr*ing )alue of satellite on #ecem&er ,1$!11 assuming the deduction from asset approach I'. orroing Costs Problem *. As a newl* promoted enior Associate of P>6Philippines *ou are assigned to audit the capitali5ation of &orrowing costs of > #e)elopment Corporation. >#C normall* constructs its owneroccupied properties. "he following transactions are o&tained from the accounting records of >#C for the *ear ended #ecem&er ,1$!11: +pecific orroing ;n #C o&tained a loan of P1!!!!!!! from B#; Inc. specificall* to finance the construction of its new administrati)e &uilding. "he interest rate of the one*ear loan is 1!?. "he construction started on #C o&tained se)eral loans from China Ban' Inc. "he &orrowings were made for general purposes and the proceeds were partl* used to finance the construction of a new factor*. "he following data are pro)ided concerning those loans: Principal orroing Cost (? Ban' Loan $!!!!!! 1!!!!! $!? hortterm Note 1!!!!!! $!!!!! 1!? Longterm Note ,!!!!!! ,!!!!! "otal /!!!!!! /!!!!! "he construction of the factor* was started on #C &orrowed P$!!!!!! at an interest rate of (? specificall* for the construction of a new #epartment tore. "he actual &orrowing cost on this loan is P1!!!!! &ut interest of P,!!!! was earned from the temporar* in)estment of the proceeds prior to their dis&ursement. "he entit* also had the following other loans during $!11 which were &orrowed for general purposes &ut the proceeds were used in part for the construction of the department store. Principal orroing Cost 1(? Ban' Loan ,!!!!!! -(!!!! $!? Longterm Note 1!!!!!! $(!!!! "otal -!!!!!! 2!!!!! "he construction of the department store started on a* ,! $(!!!!! eptem&er 1 $!!!!! ;cto&er ,1 1!!!!!! #ecem&er ,1 1!!!!!! "otal Cost /!!!!!! Required! Based on the result of *our audit determine the following: 4444444444441. Capitali5a&le interest on new administrati)e &uilding 444444444444$. Initial cost of new administrati)e &uilding 444444444444,. Capitali5ation rate on new factor* 444444444444-. A)erage 9xpenditure on new factor* 444444444444(. A)oida&le Interest on new factor* 444444444444/. Capitali5a&le interest on new factor* 4444444444442. Initial cost of new factor* 444444444444+. Capitali5ation rate on new department store
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444444444444@. A)erage 9xpenditure on new department store 4444444444441!. A)oida&le Interest on new factor* 44444444444411. Capitali5a&le interest on new department store 4444444444441$. Initial cost of new department store '. Classification of Costs to and, uilding and Machinery Problem -. As a newl* hired assurance associate of #eloitte Philippines *ou are as'ed to audit the Propert* Plant and 9quipment Account of Nestle Philippines Inc. "he accounting department of the audit client de&ited the following expenditures during $!11 to a single Propert* Plant and 9quipment Account: •
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Purchase Price of Land with an old commercial &uilding to &e used as site for a new factor* &uilding P$!!!!!!! afet* Inspection during construction of factor* &uilding (!!!! Purchase price of machiner* 1!!!!!! Architect fee 1!!!!! Cost of option on a land that is not acquired $!!!! 0npaid taxes on the purchased land up to date of acquisition assumed &* Nestle $!!!!! Cost of temporar* &uildings used as construction offices and materials shed 1(!!!! reight and handling cost of machiner* 1!!!! Cost of sur)e* ,!!!! Cost of temporar* fence around the construction -!!!! Cost of safet* rail surrounding the machine $!!!! Cost of exca)ation /!!!! Bro'er3s commission (!!!! Legal fees to esta&lish a clean title 1!!!!! Cost of clearing and demolishing the old commercial &uilding ,!!!!! al)age )alue of the old commercial &uilding which was used in the new factor* (!!!! Cost of option on acquired land $!!!! Cost of water de)ice to 'eep machine cool 1!!!! Credita&le )alue added tax on machiner* 1$!!!! Purchase discounts not ta'en on machiner* $!!!! Nonrefunda&le custom duties ,!!!! Cost of permanent fence surrounding the newl* constructed factor* $!!!!! idewal's pa)ements par'ing lot and dri)ewa*s not part of &uilding &lueprint ,!!!!! #amaged windows during construction due to )andals 1!!!!! Insurance during construction of factor* $!!!!! Building permit (!!!! Interest during construction considered capitali5a&le +!!!! Construction cost including salar* of wor'ers o)erhead and direct materials 1!!!!!!! Pa*ments to tenants of old commercial &uilding to )acate the land -!!!!! Cost of grading le)eling and landfill ,!!!!! >ortgages encum&rances and interest on the land purchased assumed &* Nestle 1!!!!!! ees for transfer of title $!!!!! Insurance of machiner* while in transit 1!!!! Installation and assem&l* cost of machiner* $!!!! Cost of dismantling the old machine to &e replaced &* the new machine (!!!! Cost of testing and trial runs including used machine supplies ,!!!! Consultant fee for the acquisition of machiner* -!!!! Initial estimate of cost of dismantling the machiner* for which Nestle has the present o&ligation. (!!!! Initial ;perating Losses
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1!!!!! Cost of opening the new factor* $!!!!! Cost of introducing new product produced &* the ,!!!!! Cost of relocating the emplo*ees -!!!!! Cost of training emplo*ees who will operate the 1!!!!!
Administrati)e and general o)erhead $!!!!!
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Required! Based on the result of *our audit determine the following class of Propert* Plant and 9quipment: 4444444444441. Cost of Land 444444444444$. Cost of actor* Building 444444444444,. Cost of >achiner* 444444444444-. Cost of Land Impro)ement 444444444444(. "otal amount that should &e expensed as incurred
'I. epreciation Methods Problem /. As a newl* hired assurance associate of 9rnst 8 Doung E Philippines *ou are as'ed to audit the depreciation of the newl* acquired Propert* Plant and 9quipment of ortune "o&acco Inc. "he schedule &elow is pro)ided &* the Propert* Plant and 9quipment Accountant of ortune "o&acco Inc. for the *ear ended achiner* ethod #eli)er* "ruc'
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Problem 1. As an assurance associate of %e*es "acandong 8 Co. *ou are as'ed to audit the composite method of depreciation of %> Inc. "he schedule &elow is su&mitted &* the accounting department of the audit client on achiner* $,!!!! ,!!!! - *ears 9quipment 1$!!!! $!!!! ( *ears Additional data are also pro)ided: o ;n #ecem&er ,1$!1$ %> retired the equipment and sold for P,!!!!. ;n acquired a new equipment for P(!!!!. o Required! Based on the result of *our audit determine the following: 4444444444441. Composite life 444444444444$. Composite rate 444444444444,. #epreciation 9xpense for $!11
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444444444444-. Carr*ing )alue of PP9 on #ecem&er ,1$!11 444444444444(. #epreciation 9xpense for $!1$ 444444444444/. Carr*ing )alue of PP9 on #ecem&er ,1$!1$ 4444444444442. #epreciation 9xpense for $!1, 444444444444+. Carr*ing )alue of PP9 on #ecem&er ,1$!1,
'II. Impairment Problem 2. As a newl* promoted manager of PFC E Philippines *ou are as'ed to audit the impairment of one of LBC3s cash generating units. "his cash generating unit has &een experiencing significant losses in prior *ear. "here is o&Gecti)e indication that such cash generating unit is impaired. ;n #ecem&er ,1$!11 the cash generating unit is tested for impairment with the following assets and lia&ilities: Cash P$!!!!!! 6ross Accounts %ecei)a&le ,!!!!!! Allowance for &ad de&ts credit (!!!!! In)entor* (!!!!! Land 1!!!!!! Plant and equipment ,(!!!!! Accumulated #epreciation 1(!!!!! 6oodwill ,!!!!!! Accounts pa*a&le $!!!!!! Accrued lia&ilities ,!!!!!! "he fair )alue less cost to sell of the cash generating unit is P(!!!!!! while the )alue in use of the cash generating unit is P/!!!!!!. Required! Based on the result of *our audit determine the following: 4444444444441. %eco)era&le amount of cash generating unit 444444444444$. Impairment loss 444444444444,. hare of goodwill in impairment loss 444444444444-. hare of cash in impairment loss 444444444444(. hare of Accounts recei)a&le in impairment loss 444444444444/. hare of In)entor* in impairment loss 4444444444442. hare of Land in impairment loss 444444444444+. hare of Plant and equipment in impairment loss 'III. Re%aluation +urplus Problem 3. As a newl* hired audit associate of 67 8 Co. *ou are assigned to audit the re)aluation of Propert* Plant and 9quipment of >etroBan'. "he following data concerning such re)aluation on
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estimated resource deposit is 1!!!!!! units on the date of acquisition. "he useful life of the equipment is 1! *ears. "he following data are pro)ided &* Philex concerning its mining operations for four *ears: 6ear Resources E7tracted Remaining Resources after E7traction $!11 $!!!!! +!!!!! $!1$ 1!!!!! -!!!!! $!1, ,!!!!! $!1$!!!!! (!!!! Required! Based on the result of *our audit determine the following: 4444444444441. #epletion on $!11 444444444444$. #epreciation on $!11 444444444444,. #epletion on $!1$ 444444444444-. #epreciation on $!1$ 444444444444(. #epletion on $!1, 444444444444/. #epreciation on $!1, 4444444444442. #epletion on $!1-
44444444444+. #epreciation on $!1-
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