AUDITING & ASSURANCE: CONCEPTS & APPLICATIONS 2

2.2 PPE
Problems:
1. Newcastle Ltd. Uses many kinds of machines in the operations. It constructs some of these
machines itself and acquires other from the manufacturers. The following information relates to
machine A that it’s has recorded during the current year.
Cash paid for equipment, including VAT of P 9,600 89,600
Cost of transporting machine – insurance and transport 3,000
Labor costs of installation by expert fitter 5,000
Labor costs of testing equipment 4,000
Insurance costs for current year 1,500
Costs of training for personnel who will use the machine 2,500
Costs of safety rails and platforms surrounding machine 6,000
Costs of water devices to keep machine cool 8,000
Costs of adjustments to machine to make it operate
More efficiently 7,500

Determine the amount at which machines A should be recorded in the records of Newcastle, Ltd.
a. P 105,500
b. P 116,000
c. P 113,500
d. P 121,500
Solution:

Cash paid for equipment (89,600 – 9,600) 80,000

Cost of transporting machine – insurance and transport 3,000
Labor costs of installation by expert fitter 5,000
Labor costs of testing equipment 4,000
Costs of safety rails and platforms surrounding machine 6,000
Costs of water devices to keep machine cool 8,000
Costs of adjustments to machine to make it operate
more efficiently 7,500
COST OF MACHINE 113, 500

2. Sunflower Company acquired some new equipment. The following data have been made
available to you:
List price of the equipment 14,000
Cash discount available but not taken on purchase 200
Freight paid on the new equipment 250
Cost of removing the old equipment 170
Installation cost of the new equipment 430
 Testing costs before the equipment was put to
Regular operation (including P120 in wages
Of the regular equipment operator) 295
Loss on premature retirement of the old equipment 120
Estimated cost of manufacturing similar equipment
In the company’s own plant, including overhead 13,800

What amount should be capitalized as the cost of the new equipment?

a. P 14,775
b. P 28,865
c. P 14,975
d. P 15,065
Solution:

List price of the equipment 14,000

Cash discount available but not taken on purchase (200)
Freight paid on the new equipment 250
Installation cost of the new equipment 430
Testing costs before the equipment 295
Was put to Regular operation (including P120 in wages
Of the regular equipment operator)
TOTAL 14 775

3. On September 1, 2016, Ron Corporation issued 10,000 shares of its P25 par treasury ordinary
shares for a parcel of land intended as a future plant site. The treasury shares were acquired by
Ron at a cost of P 30 per share. Ron’s ordinary share had a fair market value of P 40 per share on
September 1, 2016. Ron received P 50,000 from the sale of scrap when an existing structure on
the site was razed. At what amount should the land be earned?
a. P 400,000
b. P 350,000
c. P 300,000
d. P 250,000
Solution:
10,000 shares x 40 FMV = 400,000
400,000 – 50 000 sale of scrap = 350,000

4. Winn Company exchanged an old machine having a carrying amount of P 16,800 and paid a cash
difference of P6,000 for a new machine having a total cash price of P 20,500. The cash flows
from the new machine are expected to be significantly different than the cash flows from the old
machine. What amount of loss should Winn recognize on this exchange?
a. P 0
b. P 2,300
 c. P 3,700
d. P 6,000
Solution:
Asset given 16,800
Cash paid 6,000
Total 22,800 – 20,500 = 2,300

5. Parr Company traded in a used delivery truck with a carrying amount of P 54,000 for a new
delivery truck having a list price of P 160,000 and paid a cash difference to the dealer of P
75,000. The used truck has a fair value of P 60,000 on the date of the exchange. At what amount
should the new truck be recorded on Parr’s book?
a. P 160,000
b. P 135,000
c. P 129,000
d. P 106,000
Solution:
AGU 60 000
CASH PAID 75 000
COST OF NEW TRUCK 135 000

Use the following information for the next two questions:

Cleveland Ltd. acquired a real estate for the construction of a building and other facilities. Operating
equipment was also purchased and installed. The company’s accountant, who was not sure how to record
some of the transactions, opened a Property Ledger account and recorded debits and (credits) to this
account as follows:
Cost of land purchased as a building site P 170,000
Architect’s fee for design of new building 23,000
Paid for the demolition of an old building on
the building site purchased above 28,000
Paid land tax on the real estate purchased as a building site 1,700
Paid excavation costs for the new building 15,000
Made the first payment to the building contractor 250,000
Paid for equipment to be installed in the new building 148,000
Received from sale of salvaged materials from
Demolishing the old building (6,800)
Made final payment to the building contractor 350,000
Paid interest on building loan during the construction 22,000
Paid freight on equipment purchased 1,900
Paid installation costs of equipment 4,200
Paid for repair of equipment damaged during installation 2,700
Property Ledger account balance P 1,009,700

Compute the following:

 6. Land
a. P 191,900
b. P 163,200
c. P 207,900
d. P 192,900

Solution:

Cost of land purchased as a building site P 170,000

Paid for the demolition of an old building on
the building site purchased above 28,000
Paid land tax on the real estate purchased as a building site 1,700
Received from sale of salvaged materials from
demolishing the old building (6,800)
TOTAL 192 900

7. Building
a. P 694,000
b. P 660,000
c. P 653,200
d. P 666,800

Solution:

Architect’s fee for design of new building 23,000

Paid excavation costs for the new building 15,000
Made the first payment to the building contractor 250,000
Made final payment to the building contractor 350,000
Paid interest on building loan during the construction 22,000
TOTAL 660 000

2.3 ASSIGNMENT
 1. Wong Company purchased land, land improvements and building from Cola Company for P 14.4
M and from Sarsi Company furniture and equipment for P 18.6M. The total cash outlay for the
transaction amounted to P 33M. The appraised values of the asset are as follows:
Building – P 5M
Equipment – P3M
Furniture – P1M
Land – P 13.5 M
Land improvements – P 1.5M

The allocated cost of the building is:

a. P 6,875,000
b. P 6,785,000
c. P4,600,000
d. P 3,600,000
Solution: ALLOCATED COST
Building 5M 5/20 3.6M
Land 13.5M 13.5/20 9.720M
Land improvement 1.5M 1.5/20 1.080M
TOTAL 20M 14.4M

2. An old cooler with a recorded cost of P 150,000 and accumulated depreciation of P 140,000 was
sold for P 4,000. A new cooler with marked price of P 200,000 was purchased on February 10,
2019. Freight charge of P 3,000 and installation cost of P 6,000 were paid.

What is the cost of the new cooler?

a. P 200,000
b. P 204,000
c. P 209,000
d. P 210,000

Solution:
Marked price 200,000
Freight 3,000
Installation cost 6,000
Total 209,000

3. The Oh Trading Company exchanged 1,000 shares of Bon Company ordinary shares which Oh
was holding as financial assets at fair value through profit or loss (FVPL), for a piece of
equipment from Gem Company. The Bon ordinary shares, which had been purchased by Oh for P
31 per share, had a quoted market price of P34 per share at the date of exchange and P 30 per
share as of last reporting date.

How would the acquisition be recorded?

a. Equipment 30,000
Financial asset at FVPL 30,000
b. Equipment 31,000
Financial asset at FVPL 30,000
Gain on sale of securities 1,000
c. Equipment 31,000
 Loss on sale of securities 3,000
Financial asset at FVPL 34,000
d. Equipment 34,000
Financial asset at FVPL 30,000
Gain on sale of securities 4,000

4. The following expenditures were incurred by the keng, Inc. in 2019:

Cost of land P 4,500,000

Expenses of land survey 30,000
Expenses for search of land title 6,000
Building permit fee 10,000
Temporary building to house materials
and construction workers 50,000
Demolition of old building 40,000
Payments to tenants to vacate the premises
Of old building 60,000
Payments to some construction worker for
Injuries sustained (no insurance was carried) 85,000
Interest on temporary loan for construction 90,000
Cost of paving parking area adjoining building 45,000
Excavation expenses for foundation of building 150,000
Cost of construction 9,800,000

Using the interpretations of the PIC, what are the costs of the land and building,
respectively?
a. P 4,636,000 and P 10,245,000
b. P 4,461,000 and P 10,310,000
c. P 4,956,000 and P 10,185,000
d. P 4,536,000 and P 10,245,000
Solution:

Cost of Land 4,500,000

Expenses of land survey 30,000
Expenses for search of land title 6,000
TOTAL COST OF BUILDING 4,536,000

Cost of construction 9,800,000

Building permit fee 10,000
Temporary building to house materials
and construction workers 50,000
Payments to tenants to vacate the premises
Of old building 60,000
Demolition of old building 40,000
Interest on temporary loan for construction 90,000
Cost of paving parking area adjoining building 45,000
Excavation expenses for foundation of building 150,000
TOTAL COST OF BUILDING 10,245,000

5. On October 5, 2019, Bancnet Company traded its old delivery equipment with Megalink
Company’s office equipment. The following data are available:
Bancnet’s books Megalink’s books
Cost P 40,000 P 50,000
AD 30,000 38,000
FV 20,000 17,000
Cash received from Megalink 3,000
Cash paid to Bancnet 3,000

For financial reporting purposes, the cost of the office equipment and the gain to be recognized
on the books of Bancnet Company should respectively, be:
a. P 20,000 and P 10,000
b. P 7,000 and P 0
c. P 17,000 and P 10,000
d. P 10,000 and P 0

SOLUTION:

Fair value 20,000 17,000

Cash received (3,000) 3,000
Cost of new asset 17,000 20,000

6. X-ray Company traded in an old machine having a carrying amount of P 16,800 and paid a cash
difference of P 6,000 for a new machine having a total cash price of P20,500.

What amount of loss should X-ray Company recognize on this exchange?

a. P 0
b. P 2,300
c. P3,700
d. P6,000
Solution:

Asset given 16,800

Cash paid 6,000
Total 22,800 – 20,500 = 2,300

3.1 DIY
1. On January 2, 2016, Lem Corp. bought machinery under a contract that required a down payment of
P 10,000 plus twenty-four monthly payments of P 5,000 each, a total payment of P 130,000. The
cash equivalent price of the machinery was P 110,000. The machinery has an estimated useful life of
ten years and estimated residual value of P 5,000. Lem uses straight line depreciation. In its 2016
income statement, what amount should Lem report as depreciation for the machinery?
Solutions:
Machinery 110,000
Residual Value (5,000)
Total 105 000 / 10 est. years =10,500

2. Jaen Advertising Agency, Inc. reported the following on its December 31, 2016, balance sheet:

Equipment P 500,000
AD – equipment 135,000
In a footnote, Jaen indicates that it uses straight line depreciation over 10 years and estimates
salvage value as 10% of cost. What is the average rate of the equipment owned by Jaen?
Solutions:
Cost 500 000 500 000
Salvage value 10% of cost 50 000
Salvage value 50 000 450 000 / 10 years = 45 000 Dep.
Accumulated Depreciation 135,000 / 45,000 dep. = 3 years or average rate of equipment
3. Laur Company uses the composite method of depreciation and has a composite rate of 25%. During
2016, it sold assets with an original cost of P 100,000 and residual value of P 20,000 for P 80,000
and acquired P 60,000 worth of new assets with residual value of P 10,000. The original group of
assets had the following characteristics:
Total cost P 250,000
Total residual value 30,000
The above original group includes the assets sold in 2016 but not the assets purchased in 2016.
What was the depreciation in 2016?
Solutions:
Total cost 250 000
Sold assets (100 000)
Purchases 60 000
TOTAL 210 000 x 25% = 52 500
4. On the first day of its current fiscal year, Lipao Corporation purchased equipment costing P 400,000
with a salvage value of P 80,000. Depreciation expense for the year was P 160,000. If Lupao uses the
double declining balance method of depreciation, what is the estimated useful life of the asset?
Solutions:
Cost 400,000 x Rate = 160,000 depreciation
Rate = 160,000 / 400,000 = 0.4*100 = 40%
Rate = 40%/2 = 20% = 100/years
Rate = 100%/ 20%
Years = 5 years useful life

5. On January 1, 2014, Famy Company signed an eight-year lease for the office space. Famy has the
option to renew the lease for an additional six-year period on or before January 1, 2020. During
January 2016, Famy incurred the following costs:

General improvements to the leased premises with useful life of 10 years P 5,400,000
Office furniture and equipment with useful life of 8 years 2,400,000
Moveable assembly line equipment with useful life of 5 years 1,800,000

At December 31, 2016, Famy’s intention as to the exercise of the renewal option is uncertain. A
full year depreciation of leasehold improvements is taken for year 2016. In Famy’s December 31, 2016
balance sheet, accumulate depreciation of leasehold improvement should be –
Solutions:
General improvements 5,400,000 / 6 years remaining lease terms
= 900 000 depreciation

6. On January 2, 2013, Union Co., purchased a machine for P 264,000 and depreciated it by the
straight-line method using an estimated useful life of eight years with no salvage value. On January
2, 2016, Union determined that the machine had a useful life of six years from the date of acquisition
and will have a salvage value of P 24,000. An accounting change was made in 2016 to reflect the
additional data. The accumulated depreciation for this machine should have a balance at December
31, 2016 of?
Solutions:
Cost 264,000 / 8 years = 33,000 x 3 years expired = 99,000
= 264,000 – 99,000
= (carrying amount 165,000 – salvage value 24,000) / 3 years remaining useful life
= 47,000 depreciation for 2016 + 99,000 AD
= 146,000 Accumulated Depreciation

7. On July 1, 2016, New Orleans Corporation purchased equipment at a cost of P 340,000. The
equipment has an estimated salvage value of P 30,000 and is being depreciated over an estimated life
of 8 years under the double declining balance method of depreciation. The depreciation to be
recognized in 2016 is

Solution:
Rate = 100% / 8 years = 12.5 % or 200% / 8 years = 25%
12.5% x 2 = 25%
Acquisition Cost Depreciation
2016 25% x 340 000 = 85,000 X 6/12 = 42,500

8. Natividad Company purchased a tooling machine in 2016 for P 3,000,000. The machine was being
depreciated on the straight-line method over an estimated useful life of twenty years, with no salvage
value. At the beginning of 2016, when the machine had been in use for ten years, the company paid P
600,000 to overhaul the machine. As a result of this improvement, the company estimated that the
useful life of the machine would be extended an additional five years. What should be the
depreciation expense recorded for the machine in 2016?
Solutions:
(3,000,000 / 20 years x 10 remaining useful life = Carrying amount 1,500,000 + 600,0000)
= 2,100,000 / 15 years = 140,000 depreciation for 2016

9. OKC Manufacturing Company, a calendar year company, purchased a machine for P 650,000 on
January 1, 2014. At the date of purchase, OKC incurred the following additional costs:

Loss on sale of old machinery P 15,000

Freight cost 5,000
Installation cost 20,000
Testing cost prior to regular operation 4,000

The estimated salvage value of the machine was P 50,000 and OKC estimated that the machine
would have a useful life of 20 years, with depreciation being computed using the straight-line
method. In January 2016, accessories costing P 48,600 were added to the machine to reduce its
operating costs. These accessories neither prolonged the machine’s life nor did they provide any
additional salvage value. The depreciation to be recognized in 2016 is:
Solution:
Machine 650,000
Freight cost 5,000
Installation cost 20,000
Testing cost prior to regular operation 4,000
Total Cost 679,000

Cost 679,000
Residual value (50,000)
Total 629,000 / 20 years = 31,450

10. On March 31, 2016, Shooter Corp. retired a machine used in manufacturing designer parts. The
machine was acquired May 1, 2013. Straight line depreciation method was used. The asset had an
estimated residual value of P 20,000 and a five-year life. On December 31, 2016, the balance in the
accumulated depreciation is P 330,000. The machine was scrapped, and the company did not receive
a single consideration. The loss on retirement is?
Solutions:
{(X Cost – salvage value 20,000) / 60 months useful life} x 32 months from May 1, 2013-December
31, 2015 = 330,000 Accumulated Depreciation
(32x -640,000) / 60 = 330,000
32x = 19,800,000 + 640,000
32x = 20,440,000
X = 638,750
330,000 / 32 = 10,312.5 depreciation per month x 3 months
= 30,937.5 + 330,000
= 360,937.5 Accumulated dep.
Machine Cost = 638,750
Loss on retirement = 638,750 – 360,937.5
= 277 812.5