AUDIT OF PPE

PROBLEM#1

Shown below are the Machinery and Equipment and Delivery Equipment accounts of Saint Lauren
Company. One half year’s depreciation is charged in the year of acquisition and or disposition for these
assets. The client uses the straight-line method of depreciation.

The following transactions occurred during 2023:

a. A 2023 Isuzu Truck was purchased for P1,200,000 in June. In the same month, a 2017 Fuso truck
was sold for P75,000. The truck was purchased in April 2019 at cost of P630,000.
b. In June, a drill press was purchased for P33,000. Freight in was P3,000. A drill press which had been
purchased by the client in March 2019 for P30,000 was sold in June for P24,000
c. One milling machine was purchased in July at a cost of P225,000. Installation cost which was paid
by the client and charged to Miscellaneous Expense amounted to P10,500.
d. While analyzing Miscellaneous Income account, your assistant found that the proceeds of P1,500
from the sale of an electric welding machine had been credited to this account. The machine,
acquired in March 2018 had a cost of P12,000. The machine was sold in September 2023.

Machinery & Equipment

01/01/2023- Bal 450,000 June CR 24,000

June- VR 36,000

July- VR 225,000

Accumulated Depreciation -Machinery & Equipment

01/01/2023-
Bal 207,000

Delivery Equipment
01/01/2023- Bal 2,850,000 June 7 CR 24,000
June 3- VR 1,200,000

Accumulated Depreciation-Delivery Equipment

(20% annual rate)
01/01/2023-
Bal 1,650,000
 1. The loss on sale of Fuso Truck in June 2023 is
2. The correct balance of Delivery Equipment at December 31, 2023 is
3. What is the total depreciation expense for the year ended December 31,2023?
4. What is the book value of Machinery and equipment at December 31, 2023?
5. What is the correct balance of the accumulated Depreciation- Delivery equipment on December
31,2023?

PROBLEM#2

The statement of financial position of Fendi Company on December 31, 2023, showed the following
property, plant and equipment items after recording depreciation:

• Building P6,000,000
• Accumulated Depreciation (2,000,000) 4,000,000
• Motor Vehicle P2,400,000
• Accumulated Depreciation (800,000) 1,600,000

Fendi has adopted the revaluation model for the valuation of its PPE. This has resulted in the recognition in
prior periods of an asset revaluation surplus for the building of P280,000. On December 31,2023, an
independent appraiser assessed the fair value of the building to be P3,200,000 and the vehicle to be P
1,800,000. Assume that the building and the motor vehicle have remaining useful lives of 25 years and 4
years, respectively, with zero residual value. The company uses the straight line depreciation method. Ignore
income tax implications.

6. The entry to record the revaluation surplus of the building should include a debit to
7. What is the depreciation for 2023?

PROBLEM#3

On January 1,2022, Marc Jacobs Company acquired a factory equipment at a cost of P150,000. The
equipment is being depreciated using the straight line method over its projected useful life of 10 years, On
December 31,2023 a determination was made that the asset’s recoverable amount was only P96,000.
Assume that this was properly computed and that recognition of the impairment was warranted. On
December 31,2024, the asset’s recoverable amount was determined to be P111,000 and management
believes that the impairment loss previously recognized should be reversed. You have been asked to assist
the company’s accountant in the application of PAS 36, the standard on impairment of assets.

8. How much impairment loss should be recognized on December 31,2023?

9. What is the asset’s carrying amount at December 31,2024?
10. What would have been the asset’s carrying amount at December 31,2024, had the impairment not
been recognized in 2022?
11. How much impairment recovery should be reported in the 2024 income statement of Marc Jacobs
Company?

PROBLEM#4

MARSAM COMPANY constructs its own buildings. In 2022, a total of P1,228,500 interest was included as
part of the cost of a new building just being completed.

The following is a summary of construction expenditures in 2023:

• Accumulated in 2022, including capitalized interest P18,228,500

• March 1 7,000,000
• September 1 4,000,000
• December 31 5,000,000

Marsam has the following outstanding loans at December 31,2023:

• 12% note related directly to new building; term, 5 years

From beginning of construction P10,000,000
 • General Borrowings:
10% note issued prior to construction of new building;term, 10 years 5,000,000
8% note issued prior to construction of new building;term, 5 years 10,000,000

12. The capitalization rate is

13. The average accumulated expenditures in 2023 is
14. The amount of avoidable interest for 2023 is
15. The amount of capitalizable interest in 2023 is
16. The total cost of the new building is

PROBLEM#5

Kyoto Inc. purchased a machinery on January 1,2022 at a cost of P100,000. It is being depreciated using the
straight line method over its projected useful life of 10 years. At December 31,2022, the assets fair value
was P112,500. Accordingly, an entry was made on that date to recognized the revaluation write up.

Am impairment was detected on December 31,2024, and the recoverable amount of the asset was
determined to be P68,000. At December 31,2025, the fair value of the asset was determined to be P73,000.

17. What amount of revaluation surplus should be credited directly to equity on December 31,2022?
18. What is the revaluation surplus balance at December 31,2024,before recognition of the impairment
loss?
19. The amount of impairment loss to be reported on Kyoto’s income statement for the year 2024 is

PROBLEM#6

On January1 ,2020 Cabiao Corporation purchased a tract of land (site number 101) with a building for
P1,800,000. Additionally, Cabiao paid a real estate broker's commission of P108,000, legal fees of P18,000
and title guarantee insurance of P54,000. Shortly, after acquisition, the building was razed at a cost of
P225,000.

Cabiao entered into a P9,000,000 fixed price contract with Cabanatuan builders, Inc. on March 1, 2020, for
the construction of an office building on the land site 101. The building was completed and occupied on
September 30,2021. Additional construction costs were incurred as follows:

• Plans, specifications and blueprints P36,000

• Architect fees for design and supervision 285,000

The building is estimated to have a forty years life from date of completion and will be depreciated using the
150% declining balance method

To finance the construction costs, Cabiao borrowed P9,000,000 on March 1, 2020. The loan is payable in
ten annual installments of P900,000 plus interest at the rate of 14%. Cabiao used part of the loan proceeds
for working capital requirements. Cabiao's average amounts of accumulated building construction
expenditures were as follows:

• For the period Mar 1 to Dec 31,2020 P2,700,000

• For the period Jan 1 to Sept 30,2021 6,900,000

20. Cost of land site number 101

21. Cost of office building
22. Depreciation of office building
PROBLEM#7

The following data relate to Licab's Inc property, plant & equipment at December 31,2020:

L A R E
Original cost P87,500 P127,500 P200,000 P200,000
Year
purchased 2015 2016 2017 2019
Useful 10 37500
life YEARS hours 15 years 10 years

Salvage value P7,750 P7,500 P12,500 P12,500

Double
Depreciation Straight declining
method SYD Activity line balance

Note: In the year an asset is purchased, LiCab Inc. does not record any depreciation expense on the asset

In the year an asset is retired or traded in, LCiab Inc takes a full depreciation on the asset

• On May 5, Asset L was sold for P32,500 cash

• On December 31, it was determined that asset A had been used 5,250 hours during 2021
• On December 31, before computing depreciation expense on Asset R, the management of Licab
Inc. decided the useful life remaining from Jan 1, 2021, was 10 years
• On December 31, it was discovered that a plant asset purchased in 2020 had been expensed
completely in that year. The asset costs P55000 and has useful life of 10 years and no salvage
value. Management has decided to use the double

23. How much is the gain/loss on sale of Asset L?

24. How much is the depreciation of Asset R for 2021?
25. The adjusting entry to correct the error of failure to capitalize asset S would include a debit/credit to
retained earnings
26. How much is the total depreciation expense for 2021?
27. How much is the adjusted cost of PPE as of December 31,2021?

PROBLEM#8

On June 1,2021, Natividad Mining Corp acquired the rights to a coal mine containing estimated reserves of
2,000,000 tons of coal. The company estimated 25,000 tons of coal would be extracted and sold each
month. Cost allocable to coal was P7,000,000

Also, June 1, 2021, the company purchased an equipment to be used in the production, costing P190,000
which has an estimated useful life of 10 years. The equipment was expected to become obsolete after all
the coal deposits had been extracted from the mine and only P10,000 selling price of the equipment could
be expected. Production was in full blast since June 2,2021.

28. What would be the depletion expense for the year ended December 31,2021?
29. What would be the depreciation expense on the new equipment for the year ended December
31,2021?