CHAPTER 7 – Audit of Property, Plant, & Equipment Problem 1 The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the unauite balance balance of the !achiner" account# $n April 1, 2006, a %ucu&&i machine machine costing P'0,000 with accumulate epreciation of P30,000 was sol for P20,000, which procees was creite creite to the !achiner" !achiner" account# account# $n %une 30, 2006, a (ouls machine, machine, costing costing P50,000 an with accumulate epreciation of P22,000 was trae in for a new Pioneer machin machine e with with an in)oic in)oice e price price of P100, P100,000 000## The The cas cash h pai pai of P*0,000 P*0,000 for the Pioneer Pioneer machin machine e +P100, +P100,000 000 less less trae traein in allow allowan ance ce of P10,00 P10,000 0 was was ebite ebite to the !ac !achin hiner" er" account-# .ompan" polic" on epreciation which "ou accept, pro)ies an annual rate of 10/ without sal)age )alue# )alue# A full "ears "ears epreciation is charge in the "ear "ear of acuisition acuisition an none in the "ear of isposition# Question 1 The auste auste balance balance of of the !achin !achiner" er" accou account nt at Decem December ber 31, 2006 is is a# P 2*0,000 b# P 340,000 c# P 260,000 # P 300,000 2
The correc correctt eprecia epreciatio tion n epense epense for the machine machiner" r" for the "ear "ear ene Decemb December er 31, 2006 is b# P 2*,000 c# P 30,000 # P 26,000 a. P 34,000
Solution OE: Cash 20,000 Machinery 20,000 CE: Cash 20,000 Accu Accumu mula late ted d dep’ dep’n. n. 30,0 30,000 00 Machinery 40,000 ain on sale !0,000 Ad": Accumulated Accumulated dep’n 30,000 Ma Machinery 20,000 ain on sale !0,000 ############################################# OE: Machinery $0,000 Cash $0,000 CE: CE: Mach Machin iner ery y !00, !00,00 000 0 Accu Accumu mula late ted d dep’ dep’n n 22,0 22,000 00 %oss on sale !&,000 Machinery '0,000 Cash $0,000 Ad": Machinery Machinery !0,000 Accu Accum mula ulated ted dep’n p’n 22,00 2,000 0 %oss on sale !&,000 Machinery '0,000 ############################################# ! A (3'0,000 ) (20,000 * (!0,000 #('0,000 2 + (2$0,000 !0-
1
Problem 2 The an account was ebite for P300,000 on !arch 31, 2006 for an aoining piece of lan which was acuire in echange for 15,000 shares of 7i&al .orporations own stoc8 with with a par )alue )alue of P10# At the time of the echang echange, e, the shares shares were sellin selling g at P2'# Transfer Transfer an legal fees of P20,000 were pai an charge to Professional 9ees# 1# The au austi sting ng entr" entr" reu reuire ire is is DE:;T a# an 1'0,000 b# an 160,000 c# an
<0,000
.7ED;T Prem# on cap# stoc8 .apital stoc8 .ash Professional fees Prem# on cap# stoc8
1'0,000 150,000 10,000 20,000 60,000
# =one of these 2# $n the an acuire acuire in =o# 6, real real estate estate taes of P20,000 P20,000 were were pai in Decemb December er,, 2006, incluing incluing P5,000 P5,000 for the first uarter uarter of the "ear# "ear# +;gnore +;gnore penalt" penalt" for ela"e pa"ment-# an account account was ebite ebite for the taes taes pai# The austing entr" is DE:;T a# Taes 15,000 b# Taes 5,000 c# an 5,000 Taes 15,000 # =one of these Solution !. C OE: %and Com Common mon toc toc/ / A(C (ro1essional 1ees Cash CE: %and Com Common mon stoc/ toc/ Cash A(C Ad": %and A(C (ro1ession (ro1essional al 1ees 1ees 2. A OE: %and Cash CE: %and a aes Cash Ad": aes %and
.7ED;T an an .ash
15,000 5,000 20,000
300,000 !'0, !'0,00 000 0 !'0,000 20,000 20,000 3&0,000 !'0, !'0,00 000 0 20,000 2!0,000 &0,000 0,000 20,000 20,000 20,000 20,000 ',000 !',000 20,000 !',000 !',000
Problem 3 Two inepenent companies, >A?A an !@?A=, are in the home builing business# Each owns a tract of lan for e)elopment, but each compan" woul prefer to buil on the others lan# Accoringl", Accoringl", the" agree agree to echange echange their lan# lan# An appraiser appraiser was was hire an from from the report an the companies recors, the following information was obtaine
.ost +same as boo8 )alue!ar8et )alue, per appraisal
2
>A?A .o#s an P <0 <00,000 1,000,000
!@?A= .o#s an P 500,000 *00,000
The echange of lan was mae an base on the ifference in appraise )alues, !@?A= .ompan" pai P100,000 cash to >A?A .ompan"# Question 1# 9or financia financiall reporting reporting purposes, purposes, >A?A .ompan .ompan" " woul recogni&e recogni&e a preta gain on the echange in the amount of a# P 20,000 b# P 60,000 c# P 100,000 # P 200,000 2# 9or 9or fina financ ncia iall repo report rtin ing g purp purpos oses es,, !@?A !@?A= = .omp .ompan an" " reco recogn gni& i&e e a pret preta a gain gain on the the echange in the amount of a# P 0 b# P 100,000 c# P 300,000 # P '00,000 3# After the the echange, echange, >A?A >A?A .ompa .ompan" n" recor recor its newl" newl" acuire acuire lan at a# P 400,000 b# P 420,000 c# P <00,000 # P *00,000 '# After the the echange, echange, !@?A= !@?A= .ompan" .ompan" recor recor its newl" newl" acuire acuire lan lan at a. P 1,000,000 b# P *00,000 c# P 600,000 # P 500,000 Solution Muyan %and Cash %and ain ! 2. 3. 4.
aya !,000,000 !00,000 '00,000 400,000
Cash %and
!00,000 $00,000 %and ain on sale
&00,000 200,000
5 5 5 A
Problem 4 $n an auit engagement for 2004, "ou hanle the auit of fie assets of Esmeina .opper !ines# This mining compan" compan" bought the eploration eploration rights of !aharishi !aharishi Eploration Eploration on %une 30, 2004 for P4,2*0,00 P4,2*0,000# 0# $f this purchase purchase price, price, P',<60,000 P',<60,000 was allocate allocate to copper ore which which ha remaining reser)es reser)es estimate estimate at 1,620,000 tons# Esmeina .opper !ines epects to etract 15,000 tons of ore a month with an estimate selling price of P50 per ton# Prouction starte starte immeiatel" after some some new machines machines costing P600,000 was bought on %une 30, 2004# These new machineries machineries ha an estimate useful useful life of 15 "ears with a scrap )alue of 10/ of cost after the ore estimate has been etracte from the propert", propert", at which time the machineries will alrea" be useless# Among the operating epenses of Esmeina .opper !ines at December 31, 2004 were Depletion epense Depreciation of machineries
P '05,000 '0,000
Questions 1# 7ecor 7ecore e eple epletio tion n epens epense e was was a# $)er $)erst stat ate e b" P*0, P*0,00 000 0 b# @nerstate b" P*0,000
c# $)erstate b" P135,000 # @n @ nerstate b" P135,000
2# 7ecore 7ecore epreciat epreciation ion epense epense was a# $)erstate b" P10,000 b# @nerstate b" P10,000
c# $)erstate b" P20,000 # @n @nerstate b" P20,000
3
3# The auste epletion at "earen amounte to a# P 240,000 b# P 315,000 c# P '*5,000
# P 5'0,000
'# The auste epreciation at "earen amounte to a# P 20,000 b# P 30,000 c# P 50,000
# P 60,000
Solution (4,&0,0006!,20,000 !',00o tons months 7 P270,000 (00,000 ) (0,0006$ years 8 6!2 7 P30,000 8!,20,000 tons6!&0,000 7 $ years !. C (40',000 # 94,&0,0006!,20,000 $0,000 units 7 (!3',000 o;erstated 2. A (40,000 # 900,000 # 0,0006!,20,000 $0,000 7 (!0,000 o;erstated 3. A 4. +
Problem 5 ;n connection with "our eamination of the financial statements of the !araat .orporation for the "ear 2004, the compan" presente to "ou the Propert", Plant an Euipment section of its balance sheet as of December 31, 2006, which consists of the following an :uilings easehol impro)ements !achiner" an euipment
P
'00,000 3,200,000 2,000,000 2,<00,000
The following transactions occurre uring 2004 1# an site number 5 was acuire for P',000,000# Aitionall", to acuire the lan, !araat .orporation pai a P2'0,000 commission to a real estate agent# .osts of P60,000 were incurre to clear the lan# During the course of clearing the lan, timber an gra)el were reco)ere an sol for P20,000# 2# The secon tract of lan +site number 6- with a builing was acuire for P1,200,000# The closing statement inicate that the lan )alue was P<00,000 an the builing )alue was P'00,000# hortl" after acuisition, the builing was emolishe at a cost of P120,000# The new builing was constructe for P600,000 plus the following costs Eca)ation fees Architectural esign fees :uiling permit fees ;mpute interest on funs use uring construction
P '',000 32,000 ',000 2',000
The builing was complete an occupie on eptember 1, 2004# 3# The thir tract of lan +site number 4- was acuire for P2,'00,000 an was put on the mar8et for resale#
4
'# Etensi)e wor8 was one to a builing occupie b" !araat .orporation uner a lease agreement# The total cost of the wor8 was P500,000, which consiste of the following Particular Painting of ceilings Electrical wor8 .onstruction of etension to current wor8ing area
Amount P '0,000 1'0,000 320,000
@seful life one "ear Ten "ears Thirt" "ears
The lessor pai onehalf of the costs incurre in connection with the etension to the current wor8ing area# 5# A group of new machines was purchase uner a ro"alt" agreement which pro)ies for pa"ment of ro"alties base on units of prouction for the machines# The in)oice price of the machines was P300,000, freight costs were P<,000, unloaing charges were P6,000, an ro"alt" pa"ments for 2004 were P52,000# Question 1# an at "earen is a# P 5,'<0,000
b# P 5,*00,000
c# P 6,000,000
# P <,'00,000
2# :uilings at "earen is a# P 3,<00,000 b# P 3,<<0,000
c# P ',200,000
# P ',2<0,000
3# easehol impro)ements at "earen is a# P 2,300,000 b# P 2,560,000
c# P 2,600,000
# P 2,420,000
'# !achiner" an euipment at "earen is b# P 3,10<,000 a. P 3,100,000
c# P 3,11',000
# P 3,166,000
Solution !. %and 4,300,000 Cash Cash 20,000 %and 2. %and !,320,000 Cash +uildin< &0,000 Cash 3. %and # in;estment 2,400,000 Cash 4. Operatin< epenses 40,000 %easehold impro;ements 300,000 Cash '. Machinery 3!4,000 =oyalty epenses '2,000 Cash Ans>er: !. C 2. + 3. A 4. C
4,300,000 20,000 !,320,000 &0,000 2,400,000
340,000
3,000
5
Problem 6 =orie .ompan"s propert", plant an euipment an accumulate epreciation balance at December 31, 2005 are Accumulate .ost Depreciation !achiner" an euipment P 1,3<0,000 P 364,500 Automobiles an truc8s 210,000 11',320 easehol impro)ements '32,000 10<,000 Aitional information Depreciation methos an useful li)es !achiner" an euipment B straight lineC 10 "ears Automobiles an truc8s B 150/ eclining balanceC 5 "ears, all acuire after 2000# easehol impro)ements B straight line Depreciation is compute to the nearest month# al)age )alues are immaterial ecept for automobiles an truc8s, which ha)e an estimate sal)age )alues eual to 10/ of cost# $ther aitional information
=orie .ompan" entere into a 12"ear operating lease starting %anuar" 1, 2003# The leasehol impro)ements were complete on December 31, 2002 an the facilit" was occupie on %anuar" 1, 2003#
$n %ul" 1, 2006, machiner" an euipment were purchase at a total in)oice cost of P325,000# ;nstallation cost of P'',000 was incurre#
$n August 30, 2006, =orie .ompan" purchase new automobile for P25,000#
$n eptember 30, 2006, a truc8 with a cost of P'<,000 an a carr"ing amount of P30,000 on December 31, 2005 was sol for P23,500#
$n December 30, 2006, a machine with a cost of P14,000, a carr"ing )alue of P2,*45 on ate of isposition, was sol for P',000#
Questions 1# The gain on sale of truc8 on eptember 30, 2006 is a# P 0 b# P 250 c# P 2,6<0
# P 6,500
2# The gain on sale of machiner" on December 30, 2006 is a# P 0 b# P 13,000 c# P 2,425
# P 1,025
3# The auste balance of the propert", plant, an euipment as of December 31, 2006 is a# P 1,<13,000 b# P 2,351,000 c# P 2,3<4,000 # P 2,3<<,500 '# The total epreciation epense to be reporte on the income statement for the "ear ene December 31, 2006 is a# P 13<,000 b# P 1<5,'02 c# P 221,'0' # P 2'5,065
6
5# The carr"ing amount of propert", plant, an euipment as of December 31, 2006 is b# P 1,54<,5'5 c# P 1,5<4,'*4 # P 1,614,322 a. P 1,2*0,5'4 Solution Entries: Machinery and e?uipment 3$,000 Cash Automo@ile and truc/s 2',000 Cash Cash 23,'00 Accumulated depreciation 24,'0 Automo@ile and truc/s ain on sale Accumulated deprecation # !263!602 5epreciation # $ mos. 9(30,000 30- $6!2 otal Cash Accumulated depreciation Machinery and e?uipment ain on sale 5epreciation Accumulated depreciation Accumulated depreciation Accumulated depreciation
3$,000 2',000
4&,000 2'0 !&,000 ,'0 24,'0
4,000 !4,02' !,000 !,02' 22!,404 # mach. # auto. # impro;.
!',4'0 2&,$'4 3,000
Machinery and e?uipment # (!,3&0,0006!0 years 7( ( 3$,0006!0 years 6!2 7 %easehold impro;ement # (432,0006!2 years 7 Automo@ile and truc/s # CB o1 unsold item ( ',&0 307 old item # 30,000 30- $6!2 7 Current purchase (2',000 30- 46!27 Ans>er: !. + 2. 5 3. + 4. C
!3&,000 !&,4'0 !$,04 ,'0 2,'00
( !',4'0 3,000
2&,$'4
'. +
Problem 7 ;nformation pertaining to ighlan .orporations propert", plant an euipment for 2005 is presente below Account balances at %anuar" 1, 2005 Debit P 150,000 1,200,000
an :uilings Accumulate epreciation B :uilings !achiner" an euipment *00,000 Accumulate epreciation B !achiner" an euipment Automoti)e euipment 115,000 Accumulate epreciation B Automoti)e euipment
Credit
P263,100 250,000 <',600
Depreciation ata
:uilings !achiner" an euipment Automoti)e euipment easehol impro)ements
Depreciation method
Useful life
150/ ecliningbalance traightline umofthe"earsigits traightline
25 "ears 10 "ears ' "ears
7
The sal)age )alues of the epreciable assets are immaterial# Depreciation is compute to the nearest month# Transactions uring 2005 an other information are as follows a# $n %anuar" 2, 2005, ighlan purchase a new car for P20,000 cash an traein of a 2 "earol car with a cost of P1<,000 an boo8 )alue of P5,'00# The new car has a cash price of P2',000C the mar8et )alue of the traein is not 8nown# b# $n April 1, 2005, a machine purchase for P23,000 on April 1, 2000, was estro"e b" fire, ighlan reco)ere P15,500 from its insurance compan"# c# $n !a" 1, 2005, costs of P16<,000 were incurre to impro)e lease office premises# The leasehol impro)ements ha)e a useful life of < "ears# The relate lease terminates on December 31, 2011# # $n %ul" 1, 2005, machiner" an euipment were purchase at a total in)oice cost of P2<0,000C aitional costs of P5,000 for freight an P25,000 for installation were incurre# e# ighlan etermine that the automoti)e euipment comprising the P115,000 balance at %anuar" 1, 2005, woul ha)e been epreciate at a total amount of P1<,000 for the "ear ene December 31,2005# Questions :ase on the information abo)e, answer the following uestions 1# The auste balance of !achiner" an Euipment +at cost- at December 31, 2005 is a# P 1,1<0,000 b# P 1,1<4,000 c# P 1,202,500 # P 1,210,000 2# The auste balance of Automoti)e Euipment +at cost- at December 31, 2005 is a# P 13*,000 b# P 121,000 c# P 115,000 # P 10*,000 3# The auste balance of Accumulate Depreciation of :uiling at December 31, 2005 is a# P 42,000 b# P 263,100 c# P 335,100 # P 31*,31' '# The auste balance of Accumulate Depreciation of !achiner" an Euipment at December 31, 2005 is a# P 330,445 b# P 3'2,245 c# P 351,'45 # P 353,445 5# The auste balance of Accumulate Depreciation of Automoti)e Euipment at December 31, 2005 is a# P *0,600 b# P *6,000 c# P 103,200 # P 10<,600 6# The auste balance of Accumulate Depreciation of easehol ;mpro)ements at December 31, 2005 is a# P 0 b# P 1',000 c# P 1',400 # P 16,<00 4# The total auste balance of Accumulate Depreciation of Propert" an Euipment at December 31, 2005 is a# P 53',345 b# P 6*<,'45 c# P 44',3<* # P <0','45
8
<# The total gain+loss- from isposal of assets at December 31, 2005 is a# P 5,'00 b# P ',000 c# P 2,600 # P 1,'00 *# The auste boo8 )alue of :uiling at December 31, 2005 is a# P 1,12<,000 b# P *36,*00 c# P <<0,6<6
# P <6',*00
10# The auste boo8 )alue of easehol ;mpro)ement at December 31, 2005 is a# P 16<,000 b# P 15',000 c# P 153,300 # P 151,200 Solution Entries: a. Automo@ile E?uipment 24,000 9cash paid, (20,000 plus (4,000 trade#in allo>. Accum. 5epreciation !2,00 %oss on trade#in !,400 Automo@ile E?uipment !&,000 Cash 20,000 8 rade in allo>ance is the di11erence @et>een the cash price and the purchase price o1 the e?uipment. b. Cash !','00 Accum. 5epreciation !!,'00 Machinery and e?uipment 23,000 ain on asset disposal 4,000 c. %easehold impro;ements !&,000 Cash !&,000 d. Machinery and e?uipment 3!0,000 Cash 3!0,000 Computation of the Depreciation Expense and Accumulated Depreciation: +uildin<:
+oo/ ;alue !6!60' 9(!,200,000 # (23,!00 # declinin< rate 9!62' !'0- 5epreciation 1or the year (lusD Accum. 5epreciation # !6!60' Accum. 5epreciation # !263!60'
Machinery and E?uipment:
+alance # !6!60' %ess: machine destroyed @y 1ire 5i;ided @y 5ep’n o1 the Machine destroyed @y 1ire: 9(23,0006!0 36!2 5ep’n o1 the machine purchase 1or the year: 9(3!0,0006!0 6!2 otal 5epreciation (lus: Accum. 5ep’n # !6!60' %ess: Accum. 5ep’n # destroyed @y 1ire Accum. 5epreciation # !263!60'
Automoti;e E?uipment:
($3,$00 - . ( ',2!4 23,!00 (3!$,3!4
($00,000 23,000 (&,000 !0 yrs.
''
!. + . 5
5epreciation on (!!',000 @alance, !6!60' %ess: 5epreciation on car traded in 9(!&,000 26!0 Ad"usted depreciation on the @e<. +al. 5ep’n on the !6260' (urchase: 9(24,000 46!0 otal 5epreciation epense (lus: Accum. 5epreciation # !6!60' %ess: Accum. 5ep’n # traded e?uipment Accumulated depreciation # !263!60'
2. + . C
3. 5 &. C
!','00 (!03,' 2'0,000 9 !!,'00 (342,2' ( !&,000 3,00 ( !4,400 $,00 ( 24,000 &4,00 9 !2,00 ( $,000
%easehold mpro;ements: (!&,0006&0 months & mos. 1or 200' AFE=:
( &,00
( !,&00 4. + $. C
'. + !0. 5
9
Problem 8 The scheule of (erasmo .ompan"s propert" an euipment prepare b" the client follows PA=T AET an :uiling !achiner" an Euipment Total A..@!@ATED DEP7E.;AT;$= :uiling !achiner" an Euipment Total
P
320,000 5'0,000 1<0,000 1,0'0,000
P
<1,000 5',000 135,000
P
9urther eamination re)eale the following 1# All propert" an euipment were acuire on %anuar" 2, 2003# 2# Assets are epreciate using the straightline metho# The builing an euipment are epecte to benefit the compan" for 20 "ears an 10 "ears respecti)el"# al)age )alues of the assets are negligible# 3# An euipment with an original cost of P'0,000 was sol on December 30, 2005 for P32,000# The procees were creite to other operating income account# '# ;n 2005, The compan" recogni&e an appreciation in )alue of lan an builing as etermine b" the .ompan"s engineers# The appraisal was recore as follows an :uiling Accum# epreciation 7e)aluation increment
Debit 40,000 60,000
.reit
6,000 12',000
Questions 1# Propert" an euipment at "earen is a# P 453,000 b# P <40,000
c# P *10,000
# P **0,000
2# Accumulate epreciation at "earen is a# P 11',000 b# P 114,000
c# P 123,000
# P 135,000
Solution OE: Cash 32,000 Other ope. income 32,000 CE: Cash 32,000 Accumulated dep’n !2,000 (roperty G e?uip. 40,000 Other ope. income 4,000 Ad": Accum. dep’n !2,000 Other ope. income 2&,000 (roperty G e?uip. 40,000 ############################################### Ad": =e;aluation increment !24,000 Accumulated dep’n ,000 (roperty G e?uipment !30,000 ############################################### (er @oo/ depreciation # @ld< ',000 (er audit depreciation # @ld< 2,000 9'40,000#0,000620 3 yrs Ad"ustment 3,000 Ad": Accum. 5epreciation
10
3,000
Operatin< epenses Ans>er: !. +
3,000
2. A
Problem 9 The following information pertains to !arlisa .ompan"s eli)er" truc8s Date 110' 31505 4105 41005 *105 10105 '106 5206 63006 12106
Particulars Truc8s 1, 2, 3, F ' 7eplacement of truc8 3 tires Truc8 5 7econitioning of truc8 ', which was amage in a collision ;nsurance reco)er" on truc8 ' accient ale of truc8 2 Truc8 6 7epainting of truc8 ' Truc8 4 .ash recei)e on lease of truc8 4
Debit 3,200,000 25,000 <00,000
.reit
35,000
1,000,000 24,000 420,000
33,000 600,000 150,000
22,000
A..@!# DEP7E.;AT;$= DE;GE7? EH@;P!E=T Date 12310' 123105 123106
Particulars Depreciation epense Depreciation epense Depreciation epense
Debit
.reit 300,000 300,000 300,000
a# $n %ul" 1, 2005, Truc8 3 was traein for a new truc8# Truc8 5, costing P<50,000C the selling part" allowe a P50,000 trae in )alue for the ol truc8# b# $n April 1, 2006, Truc8 6 was purchase for P1,000,000C Truc8 1 an cash of P<50,000 being gi)en for the new truc8# c# The epreciation rate is 20/ b" unit basis# # @nit cost of Truc8s 1 to ' is at P<00,000 each# Questions 1# Ihat is the loss on traein of truc8 3J a# P 50,000 b# P '30,000
c# P 510,000
# P 560,000
2# The correct cost of truc8 5 is a# P 560,000 b# P 610,000
c# P <00,000
# P <50,000
3# The boo8 )alue of truc8 5 at December 31, 2006 is a# P <50,000 b# P 5*5,000 c# P 560,000
# P 510,000
'# Ihat is the loss in traein of Truc8 1J a# P 150,000 b# P 250,000
# P '10,000
c# P 2*0,000
5# The correct cost of truc8 6 is a# P 5*0,000 b# P <00,000 c# P <50,000 6# The carr"ing )alue of Truc8 6 at December 31, 2006 is
# P 1,000,000
11
a# P 501,500
b# P 6<0,000
4# The gain +loss- on sale of truc8 2 is a# P <0,000 b# P 331,600
c# P
<50,000
# P 1,100,000
c# P '*5,000
# P '*6,200
<# The boo8 )alue of truc8 ' at December 31, 2006 is a# P 320,000 b# P 331,600 c# P '*5,000
# P '*6,200
*# The 2000 epreciation epense is unerstate b" a# P *2,000 b# P 252,000 c# P 2*2,000
# P 342,000
10# The cost of repainting truc8 ' shoul ha)e been charge to a# .laims recei)able insurance compan" b# 7etaine earnings c# Accumulate epreciation # 7epairs an maintenance 11# Ihich of the following controls woul most li8el" allow for a reuction in the scope of the auitors tests of epreciation epenseJ a# 7e)iew an appro)al of the perioic propert" epreciation entr" b" a super)isor who oes not acti)el" participate in its preparation# b# .omparison of propert" account balances for the current "ear with the current "ear buget an prior"ear actual balance# c# 7e)iew of the miscellaneous re)enue account for sal)age creits an scrap sales of partiall" epreciate propert"# # Authori&ation of pa"ment of )enors in)oices b" a esignate emplo"ee who is inepenent of the propert" recei)ing functions# Solution !. C Cost o1 truc/ 3 &00,000 Accumulated depreciation 9(&00,000 20- !.' 240,000 et @oo/ ;alue '0,000 rade#in allo>ance '0,000 %oss on trade#in '!0,000 2. 5 3. + 9(&'0,000#9(&'0,00020-!.' 4. + Cost o1 truc/ ! %ess: Accumul ated depreciatio n 9(&00,000 20- 6 !2 mos. 2 mos. et @oo/ ;alue rade#in allo>ance %oss on trade#in '. 5 . C H(!,000,000 # 9!,000,000 20- $6!2I . A Cost o1 truc/ 2 Accumulated depreciation 9(&00,000 20- 6 !2 mos. 2! mos. et @oo/ ;alue ellin< price ain on sale &. A 9H(&00,000 # 9(&00,000 20- 3I $. C ruc/ ! 9(&00,000 20- 36!2 40,000 # ruc/ 2 # # ruc/ 3 # # ruc/ 4 9(&00,000 20- !0,000 &00,000 ruc/ ' 9(&'0,000 20- !0,000 &'0,000 ruc/ 9(!,000,000 20- $6!2 !'0,000 !,000,000
12
&00,000 30,000 440,000 !'0,000 2$0,000
&00,000 2&0,000 '20,000 00,000 &0,000
ruc/ 9(20,000 20- 6!2 5epreciation per audit 5epreciation per records Jnderstatement !0. 5 !!. +
2,000 '$2,000 300,000 2$2,000
20,000 3,30,000
Problem 1 ;nformation pertaining to A;AD;= .$7P$7AT;$=s propert", plant an euipment for 2006 is presente below# Account balances at %anuar" 1, 2006 Debit an 6,000,000 :uilings '<,000,000 Accumulate epreciation B blg# !achiner" an euipment 36,000,000 Accumulate epreciation B mach# F euip# Automoti)e euipment ',600,000 Accumulate epreciation B auto# Euip#
.reit
10,52',000 10,000,000 3,3<',000
5epreciation data:
:uilings !achiner" an euipment Automoti)e euipment easehol impro)ements
Depreciation metho
@seful life
150/ ecliningbalance traightline umofthe"earsigits traightline
25 "ears 10 "ears ' "ears
The sal)age )alues of the epreciable assets are immaterial# Depreciation is compute to the nearest month# Transactions uring 2006 an other information are as follows +a-
$n %anuar" 2, 2006, ailain .orporation purchase a new car for P<00,000 cash an traein of a 2"ear car with a cost of P420,000 an a boo8 )alue of P216,000# The new car has a cash price of P*60,000C the mar8et )alue of the traein is not 8now#
+b-
$n April 1, 2006, a machine purchase for P*20,000 on April 1, 2001, was estro"e b" fire# ailain .orporation reco)ere P620,000 from its insurance compan"#
+c-
$n !a" 1, 2006, costs of P6,420,000 were incurre to impro)e lease office premises# The leasehol impro)ements ha)e a useful life of < "ears# The relate lease terminates on December 31, 2012#
+-
$n %ul" 1, 2006, machiner" an euipment were purchase at a total in)oice cost of P11,200,000C aitional costs of P200,000 for freight an P1,000,000 for installation were incurre#
+e-
ailain .orporation etermine that the automoti)e euipment comprising the P',600,000 balance at %anuar" 1, 2006, woul ha)e been epreciate at a total amount of P420,000 for the "ear ene December 31, 2006#
13
Questions 1# Ihat is the epreciation on builing for 2006J a# P 2,**<,0<0 b# P 2,<<0,000 c# P 2,2'<,560
# P 1,'**,0'0
2# Ihat is the boo8 )alue of the builing at December 31, 2006J a# P 35,*46,*60 b# P 35,224,''0 c# P 3',5*6,000
# P 3','44,*20
3# Ihat is the epreciation on machiner" an euipment for 2006J a# P ',220,000 b# P ',1*4,000 c# P ',151,000
# P ',12<,000
'# Ihat is the gain on machine estro"e b" fireJ a# P 620,000 b# P '60,000 c# P 300,000
# P 160,000
5# Ihat is the balance of the Accumulate Depreciation B !achiner" an Euipment at December 31, 2006J a# P 13,444,000 b# P 13,460,000 c# P 13,6*1,000 # P 13,231,000 6# Ihat is the epreciation on automoti)e euipment for 2006J a# P 1,10',000 b# P *60,000 c# P <16,000
# P 420,000
4# Ihat is the gain +loss- on car traeinJ a# P 2'0,000 b# P +2'0,000-
# P +56,000-
c# P 56,000
<# Ihat is the boo8 )alue of automoti)e euipment at December 31, 2006J a# P 1,420,000 b# P 1,1'',000 c# P 1,000,000 # P 412,000 *# Ihat is the epreciation on leasehol impro)ements for 2006J a# P 456,000 b# P 642,000 c# P 630,000
# P 560,000
10# Ihat is the boo8 )alue of leasehol impro)ements at December 31, 2006J a# P 6,160,000 b# P 6,0*0,000 c# P 6,0'<,000 # P 5,*6',000 Solution !. C +oo/ Balue, !6!60 9(4&,000,000 # (!0,'24,000 ( 3,4,000 !'0- declinin<#@alance rate 9!62' !'0- 5epreciation on @uildin< ( 2,24&,'0 2. + Cost o1 @uildin< ( 4&,000,000 %ess: Accumulated depreciation 9(!0,'24,000 * ( 2,24&,'0 !2,2,'0 +oo/ ;alue o1 @uildin<, !263!60 ( 3',22,440 3. C +alance, !6!0 ( 3,000,000 %ess: Machine destroyed @y 1ire $20,000 +alance ( 3',0&0,000 5epreciation !03,'0&,000 Machine destroyed @y 1ire 9($20,000 !0- 36!2 23,000 (urchased 6!60 9(!2,400,000 !0- 6!2 20,000 otal depreciation on machinery and e?uipment 4,!'!,000 4. 5 nsurance reco;ery 20,000 %ess: +oo/ ;alue o1 machine destroyed 9Cost $20,000 # Accum. dep’n 9( $20,000 !0- ' 40,000 ain on reco;ery 1rom insurance company !0,000 '. C +alance, !6!60 !0,000,000 Add: depreciation 1or 200 4,!'!,000
14
otal !4,!'!,000 %ess: Machinery destroyed @y 1ire 9($20,000 !0- ' 40,000 Accumulated depreciation # machinery and e?uip. !3,$!,000 . + 5epr eciation on (4,00,000 @alance on !6!60 9
ance 9($0,000 # (&00,000 !0,000 %oss on trade#in ',000 &. C Cost o1 the machinery and e?uipment: +alance, !6!60 4,00,000 Car purchased, !6260 $0,000 Car traded in 920,000 4,&40,000 Accumulated depreciation: +alance, !6!60 3,3&4,000 5epreciation 1or 200 $0,000 Car traded in 9(20,000 # (2!,000 9 '04,000 3,&40,000 +oo/ ;alue o1 automoti;e e?uipment, !263!60 !,000,000 $. + Cost o1 leasehold impro;ements ,20,000 5i;ide @y term o1 lease, '6!60 # !263!620!2 &0 mos 5epreciation per month &4,000 5epreciation, '6! # !263! 9(&4,000 & mos 2,000 !0. C Cost o1 leasehold impro;ements ,20,000 %ess: Accumulated depreciation 9see o. $ 2,000 +oo/ ;alue, !263!60 ,04&,000
Problem 11 ?ou are engage to auit the financial statements of T7;@!P .$7P$7AT;$= for the "ear ene December 31, 2006# ?ou gathere the following information pertaining to the compan"s Euipment an Accumulate Depreciation accounts# EH@;P!E=T 1#1#06 :alance P ''6,000 *#1#06 =o# 6 sol 6#1#06 =o# 12 36,000 12#31#06 :alance *#1#3 Dismantling of =o# 6 1,000 P '<3,000
P
*,000 '4',000
KKKKKK P '<3,000
A..@!@ATED DEP7E.;AT;$= B EH@;P!E=T 12#31#06 :alance P 241,'00 1#1#06 :alance P 22',000 KKKKKK 12#31#06 2006 Depn '4,'00 P 241,'00 P 241,'00
The following are the etails of the entries abo)e 1#
2#
The compan" epreciates euipment at 10/ per "ear# The olest euipment owne is se)en "ears ol as of December 31, 2006# The following auste balances appeare on "our last "ears wor8ing papers Euipment Accumulate epreciation
P ''6,000 22',000
15
3#
!achine =o# 6 was purchase on !arch 1, 1*** at a cost of P30,000 an was sol on eptember 1, 2006, for P*,000#
'#
;nclue in charges to the 7epairs Epense account was an in)oice co)ering installation of !achine =o# 12 in the amount of P2,500#
5#
;t is the compan"s practice to ta8e a full "ears epreciation in the "ear of acuisition an none in the "ear of isposition#
Questions 1# The gain+loss- on sale of !achine 6 is a# P 1,000 b# P 500
c# P +1,000-
# P +500-
2# The Euipment balance of T7;@!P .$7P$7AT;$= at December 31, 2006 is a# P ''6,000 b# P '52,000 c# P '5',500 # P '45,500 3# The Depreciation epense B Euipment of T7;@!P .$7P$7AT;$= at December 31, 2006 is a# P '5,200 b# P '5,'50 c# P '6,525 # P 53,525 '# The entr" to correct the sale of !achine 6 is a# oss on sale of euipment 1,000 Accumulate epreciation 21,000 Euipment 22,000 b# Accumulate epreciation 22,500 Euipment 22,000 (ain on sale 500 c# Accumulate epreciation 21,500 loss on sale of euipment 500 Euipment 22,000 # Accumulate epreciation 23,000 Euipment 22,000 (ain on sale of euipment 1,000 5# The Depreciation Epense at December 31, 2006 is a# $)erstate b" P6,125 c# @nerstate b" P1,*50 b# @nerstate b" P6,125 # $)erstate b" P1,*50
Solution OE: Cash $,000 E?uipment !,000 E?uipment Cash CE: Cash $,000 Accum. dep’n 2!,000 %oss on sale !,000 E?uipment Cash ########################################### Ad": Accum. dep’n 2!,000 %oss on sale !,000 E?uipment ########################################### Ad": E?uipment 2,'00 =epairs epense
16
$,000 !,000
30,000 !,000
22,000
2,'00
########################################### Ad": Accum. dep’n !,$'0 5epreciation Ans>er: !. C 2. C
!,$'0 3. +
4. A
'. 5
Problem 12 ;nformation pertaining to Eie Gic .orporations propert", plant an euipment for 2005 is presente below Account balances at %anuar" 1, 2005 Debit P 1,500,000 12,000,000
an :uiling Accum# epreciationbuiling !achiner" an euipment *,000,000 Accum# epreciation!ach# an Ept Automoti)e Euipment 1,150,000 Accum# epreciationAutomoti)e Ept
.reit
P 2,631,000 2,500,000 <'6,000
Depreciation metho an useful life :uiling B 150/ eclining balanceC 25 "ears !achiner" an euipment B traightlineC 10 "ears Automoti)e euipment B umofthe"earsigitsC ' "ears The sal)age )alue of the epreciable assets is immaterial Depreciation is compute to the nearest month# Transactions uring 2005 an other information $n %anuar" 2, 2005, Eie Gic purchase a new car for P350,000 cash an traein of a 2 "ear ol car with a cost of P'*0,000 an a boo8 )alue of P1'4,000# The new car has a cash price of P520,000C the mar8et )alue of the traein is not 8nown# $n April 1, 2005, a machine purchase for P230,000 on April 1, 2000, was estro"e b" fire# Eie Gic reco)ere P155,000 from its insurance compan"# $n %ul" 1, 2005, machiner" an euipment were purchase at a total in)oice cost of P2,<00,000C aitional costs of P50,000 for freight an P250,000 for installation were incurre# Eie Gic etermine that the automoti)e euipment comprising the P1,150,000 balance at %anuar" 1, 2005, woul ha)e been epreciate at a total amount of P1<0,000 for the "ear ene December 31, 2005# Questions 1# Depreciation epense for builing at December 31, 2005 is a# P 4'*,520 b# P 420,000 c# P 6<2,150
# P 562,1'0
2# Depreciation epense for machiner" an euipment at December 31, 2005 is a# P 1,0'*,250 b# P 1,034,450 c# P 1,032,000 # P <44,000 3# Depreciation epense for Automobile euipment at December 31, 2005 is a# P 3<<,000 b# P 312,000 c# P 2*0,000 # P 1<0,000
17
'# Total epreciation epense for 2005 is a# P 2,0'4,450 b# P 2,00*,*00
c# P 1,*4<,440
# P 1,<<*,<*0
5# Total gain on asset isposal for 2005 is a# P 63,000 b# P '0,000
c# P 23,000
# P 14,000
6# Total accumulate epreciation of builing at December 31, 2005 is a# P 3,3<0,520 b# P 3,351,000 c# P 3,313,150 # P 3,1*3,1'0 4# Total boo8 )alue of propert", plant, an euipment at December 31, 2005 is a. P 1*,1'1,110 b# P 1*,021,100 c# P 1<,*<3,250 # P 1<,*53,430 <# The propert", plant an euipment at December 31, 2005 is a# P 1*,1'1,110 b# P 1*,021,100 c# P 1<,*<3,250
# P 1<,*53,430
*# The total cost of propert", plant an euipment at December 31, 2005 is a# P 26,640,010 b# P 26,54*,520 c# P 26,550,000 # P 26,'5*,510 10# Total accumulate epreciation of propert", plant, an euipment at December 31, 2005 is a# P 4,6'<,*10 b# P 4,5*6,240 c# P 4,506,300 # P 4,'0<,<*0 Solution Schedule of Accumulated Depreciation December 3, 200! +uildin< Mach.G E?uipment +alance, !.!.0' (2,3!,000 (2,'00,000 Add depreciation 1or 200' '2,!40 !,03,'0 (3,!$3,!40 (3,'3,'0 5educt acc. depr. related to Mach, destroyed @y 1ire 9' !0- (230,000 !!',000 Car traded in 94$0,000 # !4,000 KKKKKKKKK KKKKKKKKK +alance, !2.3!.0' (3,!$3,!40 (3,422,'0
Auto. E?pt. (&4,000 2$0,000 (!,!3,000
(',$,000 !,&&$,&$0 (,&,&$0
343,000 ( $3,000
4'&,000 (,40&,&$0
SC"ED#$E %& DEP'EC(A)(%* E+PE*SE &or the ear Ended December 3, 200! +uildin< +oo/ ;alue , !6!60' 9(!2,000,000 # (2,3!,000 ($,3$,000 !'0- declinin< @alance rate 9!00- 6 2' !.' otal depreciation on @uildin< Machinery and E?uipment +alance, !.!.0' less machine destroyed @y 1ire 5epreciation 5epr. on Machine destroyed @y 1ire, 4.!.0' 9(230,000 !0- 36!2 5epr. on machine purchased on .!.0' 9(3,!00,000 !0- 6!2 otal depreciation on mach. and e?uipment Automoti;e E?uipment 5epreciation on (!,!!',000 @al. on !.!.0' 5educt depr. on car traded in , !.2.0' 9L5 3rd year 26!0 (4$0,000 5epr. on car purchased , !.2.0' 9('20,000 46!0 otal depreciation on automoti;e e?uipment otal depreciation epense 1or 200'
18
otal
(&,0,000 !0-
('2,!40
&,000 ','0 !'',000 (!,03,'0
(!&0,000 9$&,000
&2,000 20&,000 2$0,000 (!,&&$,&$0
-ain or $oss from Disposal of Assets &or the ear Ended December 3, 200! ain on machine destroyed @y 1ire nsurance reco;ery (!'',000 +oo/ ;alue o1 machine destroyed 9(230,000 # 9' !0- (230,000 !!',000 ain on car traded in on ne> car purchase +oo/ ;alue o1 car traded in (!4,000 rade#in allo>ed 9('20,000 # (3'0,000 !0,000 otal
Propert., Plant and E/uipment December 3, 200! C%S) %and +uildin< Machinery and E?uipment Automoti;e e?uipment otals Ans>er: !. 5 2. + . 5 . A
( !,'00,000 !2,000,000 !!,&0,000 !,!&0,000 (2,''0,000 3. C &. A
ACCJMJ%AE5 5E(=ECAO ###### 3,!$3,!40 3,422,'0 $3,000 (,40&,&$0
4. 5 $. C
(40,000
23,000 (3,000
+OO BA%JE (!,'00,000 &,&0,&0 &,44,2'0 3&,000 (!$,!4!,!!0
'. A !0. 5
Problem 13 7@A== er)ice .enter is wholl" owne subsiiar" of 7@A== tores# The compan"s function is to eli)er furniture an appliances sol b" the parent an to ser)ice electronics an appliances, also sol b" the parent compan"# 7@A== tores, the parent, operates twel)e retail outlets in a large metropolitan area# The ser)ice center uses three eli)er" truc8s an fifteen ser)ice )ehicles for eli)ering goos an for ma8ing ser)ice calls relate to large appliances an electronic euipment# 9or small appliances an electronics, customers t"picall" bring these to the ser)ice center for repair# At %anuar" 1, 2006, 7@A== er)ice center reporte auite balances of P525,000 an P320,000 for LTruc8sM an LAccumulate Depreciation B Truc8s,M respecti)el"# The )ehicles consiste of Three eli)er" truc8s costing P50,000 eachC an 9ifteen ser)ice truc8s costing P25,000 each# • •
Accumulate epreciation was Deli)er" truc8s, P*5,000C an er)ice truc8s, P225,000 • •
The compan" epreciates all truc8s on a straightline basis, using a fi)e "ear life an &ero sal)age )alue# $nehalf "ears epreciation is ta8en in the "ear of acuisition an in the "ear of isposal# During 2006, the following transactions an ournal entries were complete b" the compan" 2206
ol one eli)er" truc8 for P2,000# the truc8 was full" epreciate at 123104# .ash P2,000 Truc8s P2,000
3106
:ought one eli)er" truc8 for P60,000# Truc8s P60,000
19
31506
42506
123106
.ash P60,000 ol one ser)ice truc8 for P<,000# This truc8 was purchase 61503 for P25,000 an the accumulate epreciation, accoring to 7@A==s subsiiar" leger, at the ate of sale was P12,500 .ash P<,000 Truc8s P<,000 :ought one ser)ice truc8 for P24,500# Truc8 P24,500 .ash
P24,500
7ecore epreciation for 2006 Two eli)er" truc8s N P10,000 each 9ifteen ser)ice truc8s N P5,000 each Total
P20,000 45,000 P*5,000
Depreciation Epense B Truc8s Accumulate epreciation
O O
P*5,000 P*5,000
Questions 1# The auste balance of Deli)er" Truc8 at December 31, 2006 is a# P 534,500 b# P 214,500 c# P 210,000
# P 160,000
2# The auste balance of er)ice Truc8 at December 31, 2006 is a# P 534,500 b# P '02,500 c# P 344,500
# P 214,500
3# The Accumulate Depreciation B Deli)er" Truc8 at December 31, 2006 is a# P <6,000 b# P 46,000 c# P 45,000 # P 65,000 '# The Accumulate Depreciation B er)ice Truc8 at December 31, 2006 is a# P 300,000 b# P 2<5,250 c# P 2<5,000 # P 2<',450 5# The .arr"ing Galue of Deli)er" Truc8 at December 31, 2006 is a# P '61,500 b# P 1'5,000 c# P 1'2,500
# P 4',000
6# The .arr"ing Galue of er)ice Truc8 at December 31, 2006 is a# P 234,500 b# P 114,500 c# P *2,250
# P 64,250
4# The (ainoss on Disposal of Truc8s at December 31, 2006 is a# P 10,000 b# P <,000 c# P 2,000
# P 0
<# The Depreciation Epense of Truc8s at December 31, 2006 is a# P 106,250 b# P 101,250 c# P *<,450
# P *5,000
Solution 26260
36!'60
20
OE: Cash 2,000 5eli;ery truc/ 2,000 CE: Cash 2,000 A5 # 5el. truc/ 40,000 %oss on sale &,000 5eli;ery truc/ '0,000 Ad": A5 # del. truc/ 40,000 %oss on sale &,000 5eli;ery truc/ 4&,000 OE: Cash &,000
!263!60
er;ice truc/ &,000 CE: Cash &,000 A5 # ser. truc/ !',000 %oss on sale 2,000 er;ice truc/ 2',000 Ad": A5 # ser;. truc/ !',000 %oss on sale 2,000 er;ice truc/ !,000 5epreciation !!,2'0 A5 # del. truc/ !!,000 A5 # ser;ice truc/ 2'0 5el. truc/ (er @oo/ $',000 20,000 (er audit !0,2'0 3!,000 Ad"ustment !!,2'0 !!,000 5epreciation # 5eli;ery truc/ 5isposed truc/ Jndisposed truc/ 92 (!0,000 (urchased durin< the year 9(0,0006' !62 otal
',000 20,000 ,000 KKKKKK 3!,000
5epreciation # ser;ice truc/ 5isposed truc/ Jndisposed truc/ 9!4 (',000 (urchased durin< the year 9(2,'006' !62 otal Ans>er: !. 5 . C
2. C . A
3. A &. A
er;. truc/ ',000 ',2'0 2'0
2,'00 0,000 2,'0 KKKKKK ',2'0 4. +
'. 5
Problem 14 ?ou are engage in the eamination of the financial statements of the PA@ .$!PA=? an are auiting the !achiner" an Euipment Account an the relate epreciation accounts for the "ear ene December 31, 2005# ?our permanent file contains the following scheules !"C#$%&'( "%D &)U$P!&%* ?ear :alance 200' KKKKKKKK 12#31#03 7etirements 1**11**' P <00,000 P 210,000 1**5 '0,000 1**6 1**4 1**< 3*0,000 1*** 2000 530,000 2001 2002 '20,000 200' KKKKKKKK KKKKKKKKK P 2,1<0,000 P 210,000
200' Aitions
:alance 12#31#0' P 5*0,000 '0,000
3*0,000 530,000
P 540,000 P 540,000
'20,000 540,000 P 2,5'0,000
21
"CCU!U+"*&D D&P'&C$"*$,% ?ear :alance 200' KKKKKKKK 12#31#03 7etirements 1**11**' P 4<',000 P 210,000 1**5 3',000 1**6 1**4 1**< 21',500 1*** 2000 1<5,500 2001 2002 63,000 2003 200' KKKKKKKK KKKKKKKKK P 1,2<1,000 P 210,000
200' Aitions P 16,000 ',000
:alance 12#31#0' P 5*0,000 3<,000
3*,000
253,500
53,000
23<,500
'2,000
105,000
2<,500 P 1<2,500
2<,500 P 1,253,500
A transcript of the !achiner" an Euipment account for 2005 follows !A.;=E7? A=D EH@;P!E=T Date 2005 %an# 1 !ar# 1 !a" 1 %une 1 %une 1 Aug# 1 =o)# 1 =o)# 1 Dec# 1
;tem :alance forware :urnham griner Air compressor Power lawnmower ift truc8 batter" 7oc8woo saw Electric spot weler :a8ing o)en :a8ing o)en
Debit
.reit
P 2,5'0,000 120,000 450,000 60,000 32,000 15,000 '50,000 2<0,000 32,500 P ',26',500 KKKKKKKKK P ',26',500
KKKKKKKKKK P 15,000 ',2'*,500 P ',26',500
?our eamination re)eals the following information a#
The compan" uses a ten"ear life for all machiner" an euipment for epreciation purposes# Depreciation is compute b" the straightline metho# i months epreciation is recore in the "ear of acuisition or retirement# 9or 2005, the compan" recore epreciation of P2<0,000 on machiner" an euipment#
b#
The :urnham griner was purchase for cash from a firm in financial istress# The chief engineer an a use machiner" ealer agree that the practicall" new machine was worth P1<0,000 in the open mar8et#
c#
9or prouction reasons, the new air compressor was installe in a small builing that was erecte in 2005 to house the machine an will also be use for general storage# The cost of the builing, which has a 25"ear life, was P500,000 an is inclue in the P450,000 )oucher for the air compressor#
#
The power lawnmower was eli)ere to the house of the compan" presient for personal use#
22
e#
$n %une 1, the batter" in a batter" powere lift truc8 was accientall" amage be"on repair# The amage batter" was inclue at a price of P60,000 in the P'20,000 cost of the lift truc8 purchase on %ul" 1, 2002# The compan" ecie to rent a replacement batter" rather than bu" a new batter"# The P32,000 epeniture is the annual rental for the batter" pai in a)ance, net of a P',000 allowance for the scrap )alue of the amage batter" that was returne to the batter" compan"#
f#
The 7oc8woo saw sol on August 1 ha been purchase on August 1, 2001, for P150,000# The saw was in use until it was sol#
g#
$n eptember 1, the compan" etermine that a prouction casting machine was no longer neee an a)ertise it for sale for P1<0,000, after etermining from a use machiner" ealer that its mar8et )alue# The casting machine ha been purchase for P500,000 on eptember 1, 2000#
h#
The compan" electe to eercise the option uner a leasepurchase agreement to bu" the electric spot weler# The weler ha been installe on 9ebruar" 1, 2005, at a monthl" rental of P10,000#
i#
$n =o)ember 1, a ba8ing o)en was purchase for P1,000,000# A P2<0,000 own pa"ment was mae an the balance will be pai in monthl" installment o)er a three "ear perio# The December 1 pa"ment inclue interest charges of P12,500# egal title to the o)en will not pass to the compan" until the pa"ments are complete#
Questions 1# The entr" to recor the austment of epreciation epense at December 31, 2005 is a# Depreciation epense 1*,500 Accumulate epreciation 1*,500 b# Depreciation epense 34,250 Accumulate epreciation 34,250 c# Accumulate eprecation 1*,500 Depreciation epense 1*,500 # Accumulate epreciation 34,250 Depreciation epense 34,250 2# Depreciation Epense at December 31, 2005 is a# P 260,500 b# P 262,500 c# P 2<0,000
# P 3'2,500
3# The entr" to recor the austment in Litem cM at December 31, 2005 is a# :uiling 500,000 !achiner" an euipment 500,000 b# !achiner" an euipment# 450,000 :uiling 450,000 c# !achiner" an euipment 500,000 :uiling 500,000 # =o austment '# The total oss on isposal of euipment at December 31, 2005 is a# P 3<,000 b# P 40,000 c# P *3,000 # P 10<,000 5# The total rental epense in item LhM at December 31, 2005 is a# P '5,000 b# P *0,000 c# P 125,000
# none
23
6# The total interest epense at December 31, 2005 is a# P 10,000 b# P 12,500 c# P 25,000
# P 50,000
4# The total accumulate epreciation of the machiner" an euipment at December 31, 2005 is a# P 443,000 b# P 4*1,000 c# P <16,000 # P <55,000 <# The accumulate epreciation of the machiner" an euipment at December 31, 2005 is o)erstate b" a# P '<0,500 b# P '62,500 c# P '34,500 # P 3*<,500 *#
The Total !achiner" an Euipment +gross- at December 31, 2005 is a# P 3,4'0,000 b# P 2,310,500 c# P 2,030,500 # P 1,*'0,500
10# The net boo8 )alue of !achiner" an Euipment at December 31, 2005 is a# P 1,51<,000 b# P 1,'*',500 c# P 1,503,000 # P 2,*2',000 Solution a.
Accumulated 5epreciation 5epreciation Epense Correct depreciation epense 1or 200' !$$' ac?uisition : 40,000 !0- !$$& N : 3$0,000 !02000 N : 9'00,000 !0- * 930,000 !0- 2002 N : 90,000 !0- * 930,000 !0- 2004 N : '0,000 !0200' N : 9!20,000 * 2'0,000 * '40,000 * !M !0- Amount recorded O;erstatement
@.
o AE necessary
c.
+uildin
d.
e. !
e.2
1.
<.
24
!$,'00 !$,'00
(2,000 3$,000 2&,000 3$,000 ',000 $','00
(20,'00 2&0,000 ( !$,'00
'00,000 '00,000
=ecei;a@le 1rom O11icers Machinery G E?uipment
0,000
Accumulated 5epreciation %oss on 5isposal o1 Assets Machinery G E?uipment Cost %ess acc. 5epreciation 90,000 !0- 3 +oo/ ;alue rade in ;alue %oss
!&,000 42,000
0,000
0,000 (0,000 !&,000 (42,000 4,000 (3&,000
E?uipment rental epense 96!2 (repaid e?uipment rental Machinery G E?uipment %oss on 5isposal o1 Assets
2!,000 !',000
Accumulated 5epreciation Machinery G E?uipment ain on 5isposal o1 Assets
!'0,000
Other Assets # Mach. Peld 1or sale Accumulated depreciation %oss on 5isposal o1 Assets Machinery G E?uipment
!&0,000 2'0,000 0,000
32,000 4,000
!3',000 !',000
'00,000
+B 9 ('00,000 '6!0 Estimated sellin< price %oss
h.
(2'0,000 !&0,000 (0,000
Machinery G E?uipment E?uipment =ental Epense =ental 1or the period e@. ! to Octo@er 3!.
i.
$0,000 $0,000
Machinery G E?uipment nterest epense E?uipment contract paya@le
Ans>er: !. C . +
2. A . C
3. A &. C
&,'00 !2,'00 00,000 4. 5 $. A
'. 5 !0. 5
Problem 15 ?ou are engage in the eamination of the financial statements of PAT;E=.E .$7P$7AT;$= for the "ear ene December 31, 2005# The chief accountant of the client has prepare the accompan"ing anal"ses of the Propert", Plant, an Euipment an relate accumulate epreciation accounts# ?ou ha)e trace the beginning balances to "our prior "ears auit wor8ing papers# All plant assets are epreciate on the straightline basis +no resiual )alue ta8en into consieration- base on the following estimate ser)ice li)es builing, 25 "ears, an all other items, 10 "ears# The compan"s polic" is to ta8e onehalf "ears epreciation on all assets aitions an isposals uring the "ear# PAT;E=.E .$7P$7AT;$= Anal"sis of Propert", Plant, an Euipment, an 7elate Accumulate Depreciation Accounts ?ear Ene December 31, 2005 Description an :uilings !achiner" F Euipment
Description :uilings !achiner" F Euipment
9inal 12310' P ',225,000 1,200,000 3,<50,000 P *,245,000
Assets Aitions P 500,000 '45,000 '0',000 P 1,34*,000
Assets 7etirements P 0 0 260,000 P 260,000
Per leger 123105 P ',425,000 1,645,000 3,**',000 P 10,3*',000
9inal 12310' P 600,000 1,432,500 P 2,332,500
Assets Aitions P 51,500 3*2,200 P ''3,400
Assets 7etirements
Per leger 123105 P 651,500 2,12',400 P 2,446,200
?our eamination re)eale the following information 1#
$n April 1, the compan" entere into a 10"ear lease contract for a iecasting machine, with annual rentals of P50,000 pa"able in a)ance e)er" April 1# The lease is cancelable b" either part" +60 a"s written notice is reuire-, an there is no option to renew the lease or bu" the euipment at the en of the lease# The estimate ser)ice life of the machine is 10"ears with no resiual )alue# The compan" recore the ie casting machine in the !achiner" an Euipment account at P'0',000, the present
25
)alue at the ate of the lease, an P20,200 applicable to the machine has been inclue in epreciation epense for the "ear# 2#
The compan" complete the construction of a wing on the plant builing on %une 30# The ser)ice life of the builing was not etene b" this aition# The lowest constructions bi recei)e was P'45,000, the amount recore in the :uiling account# .ompan" personnel constructe the aition at a cost of P'60,000 +materials, P145,000C labor, P155,000C an o)erhea, P130,000-#
3#
$n August 1<, P500,000 was pai for pa)ing an fencing a portion of lan owne b" the compan" an use as a pac8ing lot for emplo"ees# The epeniture was charge to the an account#
'#
The amount shown in the !achiner" an Euipment asset retirement column represents cash recei)e on eptember 5 upon isposal of a machine purchase in %ul", 1**< for P'<0,000# The chief accountant recore epreciation epense of P35,000 on this machine in 2005#
5#
Da)ao .it" go)ernment onate lan an builing appraise at P1,000,000 an P',000,000, respecti)el", to PAT;E=.E .$7P$7AT;$= for a plant# $n eptember 1, the compan" began operating the plant# ince no costs were in)ol)e, the chief accountant mae no entr" for the abo)e transaction#
Questions 1# PAT;E=.E .$7P$7AT;$=s an balance at December 31, 2005 is a# P 5,425,000 b# P 5,225,000 c# P ',425,000 # P ',225,000 2# PAT;E=.E .$7P$7AT;$=s :uiling balance at December 31, 2005 is a# P 5,6*0,000 b# P 5,645,000 c# P 5,660,000 # P 5,6'5,000 3# PAT;E=.E .$7P$7A;T$=s !achiner" an Euipment balance at December 31, 2005 is a# P ',0*0,000 b# P 3,5*0,000 c# P 3,340,000 # P 3,110,000 '# PAT;E=.E .$7P$7AT;$=s Accumulate Depreciation B :uiling at December 31, 2005 is a# P 466,000 b# P 4'4,000 c# P 434,500 # P 651,500 5# PAT;E=.E .$7P$7AT;$=s Accumulate Depreciation B !achiner" an Euipment at December 31, 2005 is a# P 1,<1*,*00 b# P 1,4<<,400 c# P 1,454,500 # P 1,452,400 6# PAT;E=.E .$7P$7AT;$=s Depreciation Epense B :uiling at December 31, 2005 is a# P 224,000 b# P 211,500 c# P 1'4,000 # P 134,500 4# PAT;E=.E .$7P$7AT;$=s Depreciation Epense B !achiner" an Euipment at December 31, 2005 is a# P 342,000 b# P 361,000 c# P 334,000 # P 246,000 <#
26
PAT;E=.E .$7P$7AT;$=s Depreciation Epense B an ;mpro)ements at December 31, 2005 is a# P 50,000 b# P 25,000 c# P 1<,450 # P 0
*# PAT;E=.E .$7P$7AT;$=s =et :oo8 Galue of :uiling at December 31, 2005 is a# P 5,023,500 b# P ',*2',000 c# P ',*13,000 # P ',*04,500 10# PAT;E=.E .$7P$7AT;$=s =et :oo8 Galue of !achiner" an Euipment at December 31, 2005 is a# P 2,332,500 b# P 1,440,100 c# P 1,612,500 # P 1,354,300 Solution Adustin1 ournal Entries as of December 3, 200! 9! E?uipment =ental Epense 9('0,000 $6!2 (repaid E?uipment =ental O@li
93
94
9'
9
9
9&
Ans>er: !. + . C
3,'00 !2,'00 3'4,000 404,000
(ro1it on Construction +uildin
!',000 !',000
%and mpro;ements %and
'00,000
Accumulated 5epreciation # Mach. G E?pt. Machinery G E?uipment ain on sale o1 machinery (20,000 # 94&0,000 36!0 7 (!!,000
33,000
'00,000
220,000 !!,000
%and +uildin< ain 1rom 5onation
!,000,000 4,000,000 ',000,000
5epreciation Epense Accumulated 5epreciation # +uildin
$',
$', (4&,000 !$,! &0,000
Accumulated 5epreciation # Mach. G E?uipment 5epreciation Epense 5epreciation epense 1or 200' 93,&'0,000 # 4&0,000 !04&0,000 !0- Amount recorded Ad"ustment to @e made
3. C &. +
4. + $. C
(!4,! '!,'00 ($',
3!,200 3!,200 (33,000 24,000
5epreciation Epense Accumulated 5epreciation # %and mpro;ements 9('00,000 !0- 6!2 2. C . +
(3!,000 3$2,200 9(3!,200
2',000 2',000
'. C !0. C
27
Problem 16 ?ou are engage to eamine the financial statement of the 7abago !anufacturing .orporation for the "ear ene December 31, 200'# The following scheules for propert", plant, an euipment an the relate accumulate epreciation accounts ha)e been prepare b" "our client# The opening balances agree with "our prior "ears auit wor8ing papers# 7abago !anufacturing .orporation Anal"sis of Propert", Plant, an Euipment an 7elate Accumulate Depreciation Accounts ?ear Ene December 31, 200' .$T 9inal Per :oo8s 123103 Aitions 7etirements 12310' an P '50,000 P 100,000 P P 550,000 :uilings 2,'00,000 350,000 2,450,000 !achiner"Euip 2,440,000 <0<,000 520,000 3,526,000 P 5,620,000 P1,25<,000 P 520,000 P 6,<26,000 A..@!@ATED DEP7E.;AT;$= 9inal 123103 :uilings P 1,200,000 !achiner"Euip 5'6,500 P 1,4'6,200
Aitions P 103,000 313,600 P '16,600
7etirements
Per :oo8s 12310' P 1,303,000 <60,100 P 2,163,100
9urther in)estigation re)eale the following a# All euipment is epreciate on the straightline basis +with no sal)age )alue- base on the following estimate li)es :uiling B 25 "ears, all other items 10 "ears# b# The compan" entere into a 10"ear lease contract for a erric8 machine with annual rental of P100,000, pa"able in a)ance e)er" April 1# The parties to the contract stipulate that a 30a" written notice is reuire to cancel the lease# Estimate useful life is 10 "ears# The erric8 was recore uner machiner" an euipment at P<0<,000 an P60,000 applicable to the machine was inclue in the epreciation epense uring the "ear# c# The compan" finishe construction of a new builing wing in %une 30# The useful life of the main builing was not prolonge# The lowest construction bi was P350,000 which was the amount recore# .ompan" personnel constructe the builing at a total cost of P330,000# # P100,000 was pai for the construction of a par8ing lot which was complete on %ul" 1, 200'# The epeniture was charge to lan# e# The P520,000 euipment uner retirement column represent cash recei)e on $ctober 1, 200' for a machiner" bought in $ctober 1, 2000 for P*60,000# The boo88eeper recore epreciation epense of P42,000 on this machine in 200'# f#
28
!r# 7abago, the compan"s presient onate lan an builing appraise at P200,000 an P'00,000 respecti)el" to the compan" to be use as plant site# The compan" began
operating the plant on eptember 30, 200'# ince no mone" was in)ol)e, the boo88eeper i not ma8e an" entr" for the abo)e transaction# Questions 1# The balance of rent epense as of December 31, 200' is a# P 0 b# P 25,000 c# P 45,000
# P 100,000
2# The balance of prepai rent as of December 31, 200' is a# P 0 b# P 25,000 c# P 45,000
# P 100,000
3# The life of the builing wing is b# 11 "ears a. 25 "ears
# 13 "ears
c# 12 "ears
'# The carr"ing )alue of the builing as of December 31, 200' is a# P 1,''4,000 b# P 1,<16,250 c# P 1,<20,250
# P 1,<24,'00
5# The )alue of the lan account for balance sheet presentation as of December 31, 200' is a# P '50,000 b# P 5'5,000 c# P 650,000 # P 450,000 6# The loss on the isposal of the machiner" sol for P520,000 is b# P 30,000 c# P 56,000 a. P 0
# P 152,000
Solution !. C he lease is considered as operatin< lease since it is cancela@le. E?uipment rental epense # (!00,000 $6!2 7 ( (',000 2. + (repaid rental epense # (!00,000 36!2 7 ( 2',000 3. C Ain< 7 !2.' # .' 7 2 .ears 4. + +uildin< per schedule 2,400,000 Accumulated depreciation 9!,2$,000 !,!04,000 +uildin< >in< 330,000 Accumulated depreciation 9(330,0006!2 6!2 9 !3,'0 3!,2'0 +uildin< # donation 400,000 Accumulated depreciation 9(400,00062' 36!2 9 4,000 3$,000 otal carryin< ;alue !,&!,2'0 '. C %and per schedule 4'0,000 %and # donation 200,000 '0,000 . C Cost o1 the machine sold $0,000 Accumulated depreciation 9($0,0006!0 4 3&4,000 +oo/ ;alue ',000 (roceeds 1rom sale '20,000 %oss on sale ',000
29
Problem 17 $n an auit engagement for calenar "ear 2003, "ou hanle the auit of 9ie Assets of .rame .orporation# Plant assets consists of an easehol impro)ements Euipment Total per I:
P 100,000 1*0,000 '50,000 P 4'0,000
The lan was acuire on $ctober 1, 2003, at a cost of P500,000# .rame .orporation mae a cash ownpa"ment of P100,000 an signe a 1
c# P 500,000
# P '10,000
2# The carr"ing )alue of leasehol impro)ements as of December 31, 2003 amounte to b# P 1<3,000 c# P 1<0,500 # P 1<0,000 a. P 1*0,000 3#
Auit austments will increase epreciationamorti&ation epense b" a# P 3<,000 b# P 2',000 c# P 1',000 # P 13,500
'# oss ue to impairment in )alue amounte to a. P 30,000 b# P 2<,000 c# P 2',000 Solution !. + Cost o1 the land Add: tiltin< cost otal 2. C %and impro;ement %ess: Accumulated depreciation Carryin< ;alue 3. C 5epreciation # leasehold impro;ement 5epreciation # E?uipment 9(40,00062
30
'00,000 !0,000 '!0,000 !$0,000 !0,000 9(!$0,0006' mos. 3 mos. !&0,000 !0,000 20,000
# P 20,000
4.
otal per audit otal per @oo/ Jnderstatement o1 depreciation C et @oo/ ;alue %ess: CB a1ter impairment %oss on impairment
30,000 !,000 !4,000 4,000 40,000 24,000
Problem 18 $n %anuar" 1, 2003, :E;=( .$!PA=? signs a 10"ear noncancelable lease agreement to lease a storage builing from (7A.E .$!PA=?# The following information pertains to this lease agreement a#
b#
The agreement reuires eual rental pa"ments of P420,000 beginning on %anuar" 1, 2003# The fair )alue of the builing on %anuar" 1, 2003, is P','00,000#
c#
The builing has an estimate economic life of 12 "ears, with an unguarantee resiual )alue of P100,000# :E;=( .$!PA=? epreciates similar builings on the straightline metho#
#
The lease is nonre)newable# At the termination of the lease, the builing re)erts to the lessor#
e#
:E;=( .$!PA=?s incremental borrowing rate is 12/ per "ear# implicit rate is not 8nown b" :E;=( .$!PA=?#
f#
The "earl" rental pa"ment inclues P2',405#10 of eecutor" costs relate to taes on the propert"#
The lessors
The following present )alue factors are for 10 perios at 12/ annual interest rate Present )alue of an annuit" ue of 1 Present )alue of an orinar" annuit" of 1 Present )alue of 1 Questions 1# The minimum annual lease pa"ment is a# P 4'',405#10 b# P 420,000#00
6#32<25 5#65022 0#321*4
c# P 6*5,2*'#*0
# P 0
2# The present )alue of minimum lease pa"ments is a# P 0 b# P ','00,000 c# P ',204,4'4#65
# P 3,*2<,56*#15
3# The interest epense at December 31, 2003 is b# P '1','46#*< c# P ''',56',61 a. P 0
# P 52<,000#00
'# The epreciation epense at December 31, 2003 is a# P 0 b# P '20,44'#46 c# P ''0,000#00
# P '41,26<#00
5# The :oo8 Galue of ease :uiling at December 31, 200' is a# P 3,520,000#00 b# P 3,4<6,*42#<* c# P 3,*4*,225#2'
# P 3,*60,000#00
31
Solution !. C Annual payment 20,000.00 %ess: Eecutory costs 24,0'.!0 Minimum annual lease payment $',2$4.$0 2. + (resent ;alue o1 minimum lease payment # ($',2$4.$0 .32&2' 7 ( 4,400,000 3. C Min. Annual (aymentKK nterest epense Carryin< Balue 4,400,000.00 !6!603 $',2$4.$0 # 3,04,0'.!0 !26!603 $',2$4.$0 444,'4.! 3,4'3,$4.&! !26!604 $',2$4.$0 4!4,4.$& 3,!3,!'.&$ 4. C (4,400,0006!0 years 7 ( 440,000 '. A Cost ( 4,400,000 Accumulated depreciation &&0,000 et @oo/ ;alue ( 3,'20,000
Problem 19 $n %anuar" 1, 2003, the Prince (abriel !anufacturing .ompan" began construction of a builing to be use as its office heauarters# The builing was complete on %une 30, 200'# Epenitures on the proect were as follows %anuar" 3, 2003 !arch 31, 2003 %une 30, 2003 $ctober 31, 2003 %anuar" 31, 200' !arch 31, 200' !a" 31, 200'
P 500,000 600,000 <00,000 600,000 300,000 500,000 600,000
$n %anuar" 3, 2003, the compan" obtaine a P2 million construction loan with a 10/ interest rate# The loan was outstaning all of 2003 an 200'# The compan"s other interestbearing ebt inclue a longterm note of P5,000,000 with an
The interest capitali&e at the en of December 31, 200' is a# P 1'5,132 b# P 15*,632 c# P 2*0,263 # P 31*,263
3#
The total cost of the :uiling at December 31, 200' is a# P 3,535,132 b# P ',1*0,131 c# P ','<0,263 # P ',535,263
'#
The total interest epense at the en of December 31, 2003 is a# P 4<0,000 b# P 635,000 c# P 630,000 # P 560,000
5#
The total interest epense at the en of December 31, 200' is a. P '60,434 b# P '<*,434 c# P 620,36< # P 63',<6<
32
Solution !. + an. 3 '00,000 !26!2 7 March 3! 00,000 $6!2 7 une 30 &00,000 6!2 7 Oct 3! 00,000 26!2 7 actual cost o1 ('&0,000 2. A +e< @al. 2,'00,000 6 7 !4',000 6 7 an. 3! 300,000 '6 7 Mar 3! '00,000 36 7 May 3! 00,000 !6 7 peci1ic @orro>in< eneral @orro>in< nterest to @e capitaliRed
'00,000 4'0,000 400,000 !00,000
2,'00,000 !4',000 2'0,000 2'0,000 !00,000
AAE !,4'0,000 !0- 7 (!4',000 9%o>er than the
3,24',000 AAE
# (2,000,000 !0 6!2 # !,24',000 .2'- 6!2
7 !00,000 7 4',!32 !4',!32 9%o>er than the actual cost o1 ('&0,000
A;era
4.
'.
+ otal cost in the construction # ( 3,$00,000 nterest capitaliRed # 2$0,!32 otal cost ) @uildin< # ( 4,!$0,!32 + nterest epense ) 2003 peci1ic @orro>in< ( 2,000,000 !07 eneral @orro>in< ( ',000,000 &7 ( 3,000,000 7 %ess: nterest capitaliRed 7 otal interest epense ) 2003 7 5 nterest epense ) 2004 peci1ic @orro>in< ( 2,000,000 !07 eneral @orro>in< ( ',000,000 &7 ( 3,000,000 7 %ess: nterest capitaliRed 7 otal interest epense ) 2003 7
200,000 400,000 !&0,000 9!4',000 3',000
200,000 400,000 !&0,000 9!4',!32 34,&&
Problem 2 ;n connection with "our auit of :ing:ong .orporation, "ou note that on %anuar" 2, 2002, the corporation purchase a builing site for its propose research an e)elopment laborator" at a cost of P2,'00,000# .onstruction of the builing was starte in 2002# The builing was complete on December 31, 2003, at a cost of P11,200,000 an was place in ser)ice on %anuar" 1, 200'# The estimate useful life of the builing for epreciation purposes was 20 "earsC the straightline metho of epreciation was to be emplo"e an there was no estimate sal)age )alue# !anagement estimates that about 50/ of the proects of the research an e)elopment group will result in longterm benefits to the corporation# The remaining proects either benefit the current perio or are abanone before completion# A summar" of the number of proects an the irect costs incurre in conunction with the research an e)elopment acti)ities for 200' appears below#
33
