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2 pages Week-13-14-PPE- Answers
Marketing (MRK111)
University of Shendi
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3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
Big Picture
Week 13 - 14: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
a. Understand the internal control objectives of property, plant and equipment. b. Substantiate the balances of the property, plant and equipment.
Audit of Property, Plant and Equipment
Big Picture in Focus:
ULO A: Understand the internal control objectives of property, plant and equipment
ULO B: Substantiate the balances of the property, plant and equipment.
Metalanguage Metalanguage is the essential term relevant to the topic. This is the operational definition to establish a common frame of reference on how to use the term.
Essential Knowledge Essential knowledge is a detailed discussion of the topic or concept.
Audit Objectives in the Examination of Property, Plant, & Equipment
- Property, plant and equipment recorded in the accounts exist and are owned or leased under capital lease by the company.
- All additions to and disposals of property, plant and equipment have been properly authorized and accurately recorded.
- No material items were charged to expense that should have been capitalized.
- The cost or other basis of initially recording property, plant and equipment is appropriate.
- Appropriate methods of depreciation have been properly applied on a basis consistent with the previous year, to all items of property, plant and equipment that should be depreciated.
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- The carrying value of property, plant and equipment is appropriate in periods subsequent to acquisition, considering such factors as utilization, geographical location, laws and regulations, and technological changes.
- Property, plant and equipment pledged as collateral are identified and disclosed, along with other necessary disclosures.
Internal Controls over Property, Plant and Equipment
A subsidiary ledger consisting of a separate record for each unit of property. An adequate ledger of property, plant and equipment facilitates the auditor’s work in analyzing additions and retirements, in verifying the depreciation provision and maintenance expenses, and in comparing authorizations with actual expenditures.
A system of authorizations requiring advance executive approval of all plant and equipment acquisitions, whether by purchase, lease, or construction.
An authoritative written statement of company policy distinguishing between capital and revenue expenditures. A minimum peso amount ordinarily will be established for capitalization; an expenditures of lesser amount an automatically are classified as charges against current revenue.
A policy requiring all purchases of property, plant and equipment to be handled through the purchasing department and subjected to standard routines for receiving, inspection and payment.
Periodic physical inventories, designed to verify the existence, location, and condition of all property listed in the accounts and to disclose the existence of any unrecorded units.
A system of retirement procedures, including serially numbered retirement work order, stating reasons for retirement and bearing appropriate approvals. Audit Working Papers for PPE
Summary Analysis for Property, Plant & Equipment
The key audit working paper for PPE is a summary analysis. This working paper follows the approach of emphasizing changes during the year under audit. The working paper shows the beginning balances for the various types of plant assets. Next, the working paper shows the additions and disposals during the year. These are the transactions upon which the auditor’s attention will be focused. A final column shows the ending balances that must equal the beginning balances plus the additions and minus the disposals.
- Summary Analysis for Accumulated Depreciation (similar to the one described above)
- Analyses of the Year’s Additions and Retirements
- Analyses of Repairs and Maintenance Expense
- Tests of Depreciation
Accounting Standards for PPE (PAS 16)
Acquisition of Fixed Assets, through:
Cash Basis – All outlays required to purchase the asset and place it in service, including cost of installation and making it ready for use, should be capitalized. The capitalizable costs include the invoice price (less discounts), plus other costs incidental in acquiring the property such as insurance during transit, freight, duties, ownership searching, ownership registration, installation, and break-in costs. All available discounts, whether taken or not, should be deducted from the invoice cost. Discounts not taken should be recorded as discounts lost and reported as other expense.
Credit or Installment – The cost of the asset purchased on credit is either:
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
a. Its cash equivalent price, or b. The Present Value of the future cash payments required by the debt security or agreement discounted at the current rate of interest.
This specifies that a fixed asset acquired on credit should be recorded at its cash equivalent price, excluding all interest and financing charges on the debt. Interest and other finance charges should be debited to Interest Expense when incurred, and not treated as part of the asset cost.
Issuance of Capital stock (PFRS 2) – The cost of assets acquired through issuance of capital stock or bonds payable shall be recorded as follows, in order of priority: a. Fair market value of the property received. OR b. Fair market value of the capital stock.
Issuance of Company’s Own Debt Security (PAS 16) – The cost of assets acquired shall be recorded as follows: a. Fair market value of the debt security issued. OR b. Fair market value of the property received.
Exchange of Assets (non-monetary exchange) – With Commercial Substance: (Gain or loss on exchange is fully recognized) a. Fair value of Asset Given + CASH if payor ( - CASH if recipient) OR b. Fair value of Asset Received (ignore CASH)
Without Commercial Substance: (Gain or loss on exchange is not recognized) a. Cost or book value of the Property Given
If there is cash involved in the transaction, add cash to the asset if the company is the payor and deduct if the company is the recipient.
Trade in (monetary exchange) – The new asset is recorded at the following in order of priority: 1. Fair value of asset given plus cash payment 2. Trade in value of asset given plus cash payment (in effect this is the fair value of the asset received)
Donation from shareholders (PFRS 2)
Contributions, including stock of an enterprise, received from shareholders should be recorded at Fair Value of the items received, with the credit to share premium - donated capital if significant. Direct expenses incurred in connection with the donation should be charged to the donated capital account.
Donation from other than shareholders (PAS 20)
Government Grants (subsidies, subventions, or premiums) – defines “as assistance by government in the form of transfer or resources to an enterprise in return for part or future compliance with certain conditions relating to the operating activities of the enterprise”.
This will be recognized at Fair Value when there is reasonable assurance that the enterprise will comply with the conditions attaching to them and the grants will be received. The company will debit Cash or Assets and credit Deferred income – government grants. The deferred income – government grants will be recognized as income over the periods necessary to match them with the related cost which they are intended to compensate, on a systematic basis.
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EXCEPTION: If the grant becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support for the enterprise with NO further related cost be recognized as income of the period in which it becomes receivable.
Basket Purchase – Acquisition cost is allocated to the various assets based on the relative fair values of the assets.
Case in Point 1 At December 31, 2015, certain accounts included in the property, plant, and equipment section of the Lord Edmar Company’s statement of financial position had the following balances: Land 3,000, Building 24,000, Leasehold improvements 3, Machinery and equipment 1,400,
During 2016, the following transactions occurred:
Land site number 0531 was acquired for P2,000,000. Additionally, to acquire the land Lord Edmar Company paid a P60,000 commission to a real estate agent. Costs of P15,000 were incurred to clear the land for the intended use but not to make room for the construction of a new building. During the course of clearing the land, timber and gravel were recovered and sold for P5,000.
A second tract of land (site number 0532) with a building was acquired from another entity in exchange for 100, Lord Edmar ordinary shares. On the acquisition date, the shares had a closing market price of P45 on a stock exchange. Current appraised values for the land and building, respectively, are P1,200,000 and P2,400,000. Shortly after acquisition, the building was demolished at a cost of P30,000 to make a room for the construction of new building. New building was constructed for P10,500,000 plus the following costs:
Excavation fees 110, Architectural design fees 380, Building permit fee 10, Imputed interest on funds used during construction 60,
The building was completed and occupied on September 30, 2016.
A third tract of land (site number 0533) was acquired for P6,000,000 and was classified as held for sale.
Extensive work was done to a building occupied by Lord Edmar under a lease agreement that expires on December 31, 2023. The total cost of the work was P1,250,000, which consisted of the following: Painting of ceilings P100,000 estimated useful life is one year Electrical work 350,000 estimated useful life of ten years Construction of extension to current working area 800,000 estimated useful life is 30 years
The lessor paid one-half of the costs incurred in connection with the extension to the current working area.
During December 2016, costs of P650,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2018, and is not expected to be renewed.
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The amount of borrowing costs depends on whether funds were borrowed specifically for the project in question or whether a pool of borrowed funds was deployed for a variety of projects, some of which may be subject to the interest capitalization rule.
Basis in Determining the Amount of Capilatized Borrowing Costs
“To the extend that funds are borrowed specifically... the amount of borrowing costs eligible for capitalization... should be determined as the actual borrowing costs incurred... during the period less any investment income on the temporary investment of those borrowings.” PAS 23, par. 15)
“To the extend that funds are borrowed generally... the amount of borrowing costs eligible for capitalization should be determined by applying a capitalization rate to the expenditures on that asset. The capitalization rate should be weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowing made specifically for the purpose of obtaining a qualifying asset... The amount of borrowing costs capitalized during a period should not exceed that amount of borrowing costs incurred during that period. (PAS 23, par. 17)
PROCEDURES IN DETERMINING THE CAPITALIZATION AMOUNT
The following steps are pertinent to the calculation of the amount of capitalized interest:
Determine actual interest cost for the construction period.
Compute average accumulated expenditures. This is the weighted average of accumulated expenditures during the construction period.
Compute the interest potentially capitalizable. This is determined by applying the appropriate interest rate to the average accumulated expenditures amount. Two methods are allowed: a. Specific Method. Apply the interest rate of specific constructions debt to the average accumulated expenditures. If the average accumulated expenditures exceed the principal amount of the specific debt, the weighted average interest rate on all other interest-bearing debt is applied to the excess. b. Weighted-Average Method. The weighted rate on all interest-bearing debt is applied to the average accumulated expenditures.
Capitalize the lesser of actual interest cost and interest potentially capitalizable.
Case in Point 2 ELVIE Company decided to construct its own warehouse. For 2009, expenditures for the building totaled P500,000. Assume that P100,000 was paid on January 2, 2009, and the remaining amount of P400,000 was paid evenly throughout the year. A 10% note directly related to the project (specific borrowing) was issued on January 2, 2009, with face value of P200,000. Debt not directly related (general borrowing) included a P500,000 long-term note at 12%, and another note of P200,000 at 8%, both were issued in 2002.
Required: Determine the amount of capitalized interest in 2009 using the (1) specific method, and (2) the weighted- average method.
Solution: 1. The Specific Method a. Step 1. Compute actual interest cost: 10% Note: P200,000 x 10% P 20,
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
12% Note: P500,000 x 12% 60, 8%Note: P200,000 x 8% 17, Actual interest cost P 97, b. Step 2. Compute average accumulated expenditures (AAE) P100,000 x 1/1 P100, P400,000 x Ω 200, AAE P300, c. Step 3. Compute interest potentially capitalizable: On specific borrowing: P200,000 x 10% P 20, On general borrowing: (P100,000 x 11%)** 11, Interest Potentially Capitalizable P 31, d. Step 4. Determine capitalizes interest: Interest Potentially Capitalizable P 31, Actual interest cost 97, Capitalized interest – the lesser P 31, ** Average Accumulated Expenditures financed by general debt = Average Accumulated Expenditures – Specific borrowing = P300,000 – P200,000 = P100,
Weighted-average interest rate of general ledger = Interest expense of general debts/Principal of general debt = (P500,000 x 12% + P200,000 x 8%) / (P500,000 + P200,000) = P77,000 / P P700,000 = 11%
- The weighted-average method a. Step 1 and 2: Same as the specific method. b. Step 3: Compute interest potentially capitalized (IPC): IPC = P300,000 x (P97,000 / P900,000)***P 32, c. Step 4: Determine capitalized interest: Interest Potentially Capitalizable P 32, Actual interest cost 97, Capitalized interest – the lesser 32,
*** P97,000 and P900,000 are the total interest expense and total debt, respectively, as indicated in Step 1.
REVALUATION AND IMPAIRMENT OF FIXED ASSETS
Basis for Revaluation
The revalued amount of PPE is based on the following:
Fair Value – this is the amount at which an asset could be exchange between knowledgeable, willing parties in an arm’s length transaction. Fair value is market value determined by appraisal by professionally qualified valuers.
Depreciated replacement cost – If no evidence of market value, they are valued at their depreciated replacement cost or sound value.
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Two Approach in Recording Revaluation
- Proportional Approach – The accumulated depreciation at the date of revaluation is restated proportionately with change in the gross carrying amount of the asset so that the carrying value of the after revaluation equals the revalued amount. This is the preferred approached.
PPE (Appreciation) xxx Accum. Depreciation (Appreciation) xxx Revaluation surplus (sound value – book value) xxx
- Elimination Approach – The accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset.
Accumulated depreciation (cost) xxx Machinery xxx
Machinery (revalued amount) xxx Revaluation surplus xxx
Note: Revaluation surplus will be transferred to the retained earnings when the surplus is realized (e., retirement or disposal of assets). If the asset is depreciable, part of the surplus is being realized as the asset is used.
Other Issues
When an item of property, plant, and equipment is revalued, the entire class of property, plant, and equipment to which that asset belongs should be revalued.
Frequency: When the fair value of a revaluated asset differs materially from its carrying amount. If there is no significant and volatile movement in the fair value of the assets, every 3 to 5 years may be sufficient.
If the revaluation reveals a change in life of the property, the revalued property should de depreciation over the remaining revised life of the property.
If the revaluation changes the residual value of the property, the historical (book) residual value is ignored and the residual value of the revalued property will be used for purposes of determining the depreciable amount of the cost and the replacement cost.
Revaluation Adjustment
Reversal of a revaluation increase
When an asset’s carrying amount is increase due to revaluation and subsequently decreased as a result of re- evaluation, the decrease should be recognized as an expense.
However, a revaluation decrease should be charged directly against any revaluation surplus to the extent that the decrease is a reversal of a previous revaluation and the balance should be charged to expense.
Reversal of a revaluation decrease
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Any reversal of an impairment loss on a revalued asset shall be treated as a revaluation increase, meaning, credited to income to the extent that it reverses a previous revaluation decrease, and any excess credited directly to revaluation surplus.
Sale of Revalued Asset
When a revalued asset is sold, all accounts relating thereto should be closed in order to determine properly the gain or loss on the sale. The difference between the sales price and the net carrying value is recognized as gain or loss on the sale.
Impairment of Assets (under Historical Cost Asset)
Impairment is a fall in the market value of an asset so that is “recoverable amount” is now less than its carrying value in the balance sheet.
3 Accounting issues to consider in Impairment of Assets
- Indication of possible impairment
- Measurement of the recoverable amount
- Recognition of impairment loss
Indication of Impairment
External sources - market value declines - negative changes in technology, markets, economy, or laws - increases in market interest rates - company stock price is below book value
Internal sources - obsolescence or physical damage - asset is part of a restructuring or held for disposal - worse economic performance than expected
Measurement of the Recoverable Amount
Recoverable amount is the higher of an assets fair value less cost to sell (sometimes called net selling price) and its value in use.
Value in use – the discounted present value of estimated future cash flows expected to arise from: - the continuing use of an assets, and from - its disposal at the end of its useful life
Recognition of Impairment Loss
If the recoverable amount of an asset is less than its carrying amount, an impairment loss has occurred.
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
Philippine Accounting Standard (PAS) 20 – Accounting for Government Grants and Disclosure of Government Assistance
Philippine Accounting Standard (PAS) 23 – Borrowing Costs
Let’s Check
Property, Plant and Equipment
Which of the following is used to obtain evidence that the client’s equipment accounts are not understated? a. Analyzing repairs and maintenance expense accounts. b. Vouching purchases of plant and equipment. c. Recomputing depreciation expense. d. Analyzing the miscellaneous revenue account.
Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? a. Accumulated depreciation. b. Insurance expense. c. Property, plant, and equipment. d. Purchase returns and allowances.
Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts? a. The estimated remaining useful lives of plant assets were revised upward. b. Plant assets were retired during the year. c. The prior year’s depreciation expense was erroneously understated. d. Overhead allocations were revised at year-end.
In testing for unrecorded retirements of equipment, an auditor most likely would a. Select items of equipment from the accounting records and then locate them during the plant tour. b. Compare depreciation journal entries with similar prior year entries in search of fully depreciated equipment. c. Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger. d. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense.
An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. b. Expenditures for property and equipment have been recorded in the proper period. c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense. d. Expenditures for property and equipment have not been charged to expense.
The auditor is most likely to seek information from the plant manager with respect to the a. Adequacy of the provision for uncollectible accounts. b. Appropriateness of physical inventory observation procedures. c. Existence of obsolete machinery.
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d. Deferral of procurement of certain necessary insurance coverage.
Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the related a. Deed. b. Canceled checks. c. Closing statement. d. Interest expense.
In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management’s assertions of Existence or occurrence Presentation and disclosure a. Yes Yes b. Yes No c. No Yes d. No No
In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the a. Effectiveness of the internal control structure. b. Extent of property abandoned during the year. c. Adequacy of replacement funds. d. Reasonableness of the depreciation.
In violation of company policy, Ian Company erroneously capitalized the cost of painting its warehouse. The auditor examining Ian’s financial statements would most likely detect this when a. Discussing the capitalization policies with Ian’s controller. b. Examining maintenance expense accounts. c. Observing, during the physical inventory observation, that the warehouse has been painted. d. Examining the construction work orders supporting items capitalized.
Let’s Analyze
Property, plant and equipment
Problem 1 At December 31, 2016, PRINCESS CORP.’s noncurrent operating asset and accumulated depreciation accounts had balances as follows:
Land Building Machinery and equipment Delivery equipment Leasehold improvements
Cost P 390, 3,600, 2,325, 396, 663,
Accum. Depn
796, 588, 258, 331,
Depn Method
150% declining Straight line 150% declining Straight line
Life
25 years 10 5 8
Depreciation is computed to the nearest month and the residual values of the depreciable assets are considered immaterial.
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The following transactions occurred in 2017:
a. On January 6, a facility which included a land and a building structure was acquired from Wayde Corp. for P1,800,000. The land had a market value of P860,000.
b. On April 6, the constructions of parking lots, streets and sidewalks were completed at the acquired facility. The company incurred a total cost of P576,000 on this project. These expenditures had an estimated useful life of 12 years and are depreciable using the straight line method.
c. The leasehold improvements were completed on December 31, 2013, and had an estimated useful of 8 years. The related lease, which would have expired on December 31, 2019, was renewable for an additional 5-year term. On February 28, 2017 the company exercised the renewal option.
d. On July 1, machinery and equipment were purchased at a total invoice cost of P750,000. Additional cost of P30,000 and 90,000 for installation were incurred.
e. On August 30, Princess purchased a new truck for P45,000.
f. On September 30, a truck with a cost of P72,000 and a carrying value of P24,000 on the date of sale was sold for P34,500. Depreciation for the 9-month ended September 30, 2017 was P7,056.
g. On December 20, a machine with a cost of P51,000 and a carrying amount of P8,925 at date of disposition was scrapped without cash recovered.
Questions: Compute the depreciation expense for the following:
Building: a. 168,228 b. 302,400 c. 339,504 d. 254,
Machinery and equipment: a. 319,500 b. 276,000 c. 260,700 d. 232,
Leasehold improvement: a. 47,358 b. 66,300 c. 82,875 d. 110,
Delivery equipment: a. 31,812 b. 43,369 c. 45,720 d. 52,
SOLUTION:
Depreciation of Old Buildings (3,600,000-796,200)*6% 168, Depreciation of New Building (1,800,000-360,000)*6% 86, Depreciation expense – BUILDINGS 254,628 1. d Depreciation of Old Machinery (2,324,000/10) 232, Depreciation of New Machinery (870,000/10)*6/12 43, Depreciation expense – MACHINERY AND EQUIPMENT 276,000 2. b
Leasehold improvement carrying value (12/31/2006) 331, Divide by: Remaining useful life (shorter than the remaining extended lease term) 5 Depreciation expense - LEASEHOLD IMPROVEMENT 66,300 3. b
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Delivery equipment: Book value, Jan. 1, 2007 137, Book value of delivery equipment sold on September 30 (31,556) Balance subject to depreciation 106, Multiply by 150% declining rate (1/5)150% 30% Depreciation on the remaining Delivery Equipment 31, Depn equipment purchased on Aug 30 (45,00030%)*4/12 4, Depn on truck sold on September 30 7,056_ Total depreciation expense – DELIVERY EQUIPMENT 43,
Problem 2 Dela Cruz Company purchased land and building, demolished the existing building, and immediately constructed a new building. All of this occurred in the first eight months of 2018. In evaluating the company’s Building account at year-end, you find the following amounts make up the P954,800 balance:
Jan. 5 Purchase price of land and building P175, 15 Demolition cost of old building, net of P10,000 salvage 54, Sept. 1 Cost of new building 630, 1 Insurance on new building 12, 5 Display fixture in new building 62, Dec. 31 Interest expense on new building 21, P954,
Upon further analysis, you discover the following explanation for these amounts:
P175,000 – The land was appraised at P150,000 and the existing building, P50,000. A combined purchase price of P175,000 was negotiated because the seller was anxious to sell the property as soon as possible.
P 54,000 – The company negotiated a price of P64,000 for demolition of the old building, with the contractor retaining all salvage materials. The latter were estimated to be worth P10,000.
P630,000 – This represents the contract price for the new building, which was placed into service on September 1. No interest was paid directly or indirectly related to this building prior to September 1.
P 12,000 – Insurance was taken out on the building and its contents at P12,000 for twelve-month period.
P 62,800 – Display fixtures, which are separate from the building itself, were installed.
P 21,000 – A loan was taken out when the building was placed into service cover the P630,000 contract price. Interest was calculated at P630,000 at the effective 10% interest rate for four months, or P21,000.
Questions:
The correct balance of Land at year-end is: a. P 239,000 b. P 229,000 c. P 195,250 d. P 185,
The correct balance of Building at year-end is: a. P 694,750 b. P 673,750 c. P 651,000 d. P 630,
Problem 3 You audit of Hands to Heaven Corporation for the year 2014 disclosed the following property dispositions:
Cost Acc. Dep. Proceeds Fair value Mode
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a. P240,000 b. P264,000 c. P266,667 d. P288,
- What is the correct depreciation expense on automotive equipment for 2018? a. P333,332 b. P347,617 c. P285,713 d. P380,
Problem 5 Vanessa Company, whose accounting year ends on December 31, provides delivery services for packages to be taken between the city and the airport.
On January 1, 2017, the company acquired a delivery van from Glenn Trucks. The company paid cash of P3,060, to Glenn, which included registration fees of P60,000. Insurance costs for the first year amounted to P72,000. The truck is expected to have a useful life of five years. At the end of its useful life, the asset is expected to be sold for P1,440,000, which costs relating to the sale amounting to P24,000.
On January 1, 2018, Vanessa’s management decided to add another vehicle, a flat-top, to the fleet. This vehicle was acquired from a liquidation auction at a cash price of P1,800,000. The vehicle needed some repairs for the elimination of rust (cost P138,000) and the replacement of all tires (cost P37,200). The company believed it would use the flat-top for another two years and then sell it. Expected selling price was P900,000, with selling costs estimated to be P24,000.
On January 1, 2018, a radio communication system was installed in both vehicles at a cost per vehicle of P18,000. This was not expected to have any material effect on the future selling price of either vehicle.
Insurance costs for 2018 were P72,000 for the first vehicle and P54,000 for the newly acquired vehicle.
On January 1, 2019, the flat-top that had been acquired at auction broke down. The company thought about acquiring a new vehicle to replace this one but, after considering the costs, decided to repair the flat-top instead. The vehicle was given a major overhaul at a cost of P390,000. Although this was a major expense, management believed that the company would keep the vehicle for another two years. The estimated selling price in three years’ time is P720,000, with selling costs estimated at P18,000. Insurance costs for 2019 were the same as for the previous year.
Questions:
On January 1, 2017, Vanessa should record the delivery van at a. P3,000,000 b. P3,060,000 c. P3,132,000 d. P3,156,
What is the total cost of the flat-top vehicle? a. P1,800,000 b. P1,837,200 c. P1,938,000 d. P1,993,
What is the depreciation expense for 2017? a. P312,000 b. P316,800 c. P328,800 d. P343,
What is the depreciation expense for 2018? a. P873,600 b. P879,000 c. P879,900 d. P901,
What is the depreciation expense for 2019? a. P637,500 b. P691,000 c. P695,500 d. P879,
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
Solution: Cash paid 3,060, Less: Vehicle registration fee 60, Cost of delivery van 3,000,
Cash price 1,800, Repairs for the elimination of rust 138, Replacement of all tires 37, Cost of communication equip. 18, Cost of flat-top 1,993,
Cost of delivery van 3,000, Less: Residual value (1,440,000 – 24,000) 1,416, Depreciation cost 1,584, Useful life 5 years Depreciation – 2017 316,
2018 depreciation: Delivery van - Remaining depreciation cost – 1/1/2018 (1,584,000 – 316,800) 1,267, Add: cost of communication system 18, Total 1,285,200 / 4 yrs = 321,
Flat-to – Total Cost 1,993, Less: Salvage value (900,000 – 24,000) 876, Depreciable cost 1,117,200 / 2 yrs = 558,
Total Depreciation – 2018 879,
2019 depreciation: Delivery van – same as previous year 321,
Flat-top – Book value – 1/1/2019 (1,993,200 – 558,600) 1,434, Major overhaul 390, Total 1,824, Less: Salvage value (720,000 – 18,000) 702, Remaining depreciable cost 1,122,600 / 3 yrs 374,
Total depreciation – 2019 695,
Problem 6 Mary Joy Company constructs its own buildings. In 2019, 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 2020:
Accumulated in 2019, including capitalized interest 18,228, March 1 7,000, September 1 4,000,
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December 31 5,000, Total 34,228,
Mary Joy has the following outstanding loans at December 31, 2020:
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, 8% note issued prior to construction of new building; term, 5 years 10,000,
Questions:
The capitalization rate is a. 8,67% b. 10% c. 12% d. 8%
The average accumulated expenditures in 2020 is a. P 25,811,834 b. P 24,166,667c. P 34,228,500 d. P 25,395,
The amount of avoidable interest for 2020 is a. P 3,656,500 b. P 2,500,000 c. P 2,739,517 d. P 2,534,
The amount of capitalizable interest in 2020 is a. P 2,500,000 b. P 2,534,761 c. P 2,739,517 d. P 1,200,
The total cost of the new building is a. P 35,500,000 b. P 36,728,500c. P 36,763,261 d. P 27,895,
Problem 7 Tessie Company decided to construct its own warehouse. For 2019, expenditures for the building totaled P500,000. Assume that P100,000 was paid on January 2, 2019, and the remaining amount of P400,000 was paid evenly throughout the year. A 10% note directly related to the project was issued on January 2, 2019, with a face value of P200,000. Debt not directly related included a P500,000 long-term note at 12% and another note of P200, at 8%, both were issued in 2008.
Questions:
The total cost of the warehouse (construction in progress) at December 31, 2019 is a. P 531,000 b. P 520,000 c. P 331,000 d. P 320,
Assuming that on 2020, the total expenditures for the building totaled P300,000 which was incurred evenly throughout the year. The construction is completed on 2020. The total cost of the warehouse at December 31, 2020 is a. P 917,000 b. P 903,910 c. P 699,500 d. P 603,
Let’s Analyze
Revaluation and Impairment
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
Problem 1 Jasmine Company has the following information on January 1, 2018 relating to its land and building:
Land 50,000, Building 500,000, Accumulated depreciation – building 200,000,
There were no additions or disposals during 2018. Depreciation is computed using SLM over 10 years for building. On January 1, 2018 the land and building were revalued as follows:
Sound Value Land 65,000, Building 480,000,
Required:
- Prepare the necessary journal entry to record the revaluation of the land and building and the depreciation and amortization of revaluation surplus at December 31, 2018.
- Assume after 4 years from the revaluation, the land decreased its fair value to P40,000,000. Prepare the journal entry to record the reversal of a revaluation increase.
- Assume after 3 years from the revaluation, the buildings fair value is determined to be P105,000,000. Prepare the journal entry to record the reversal of a revaluation increase.
- Use data in number 3. Assume that after 1 year of impairment, the fair value of the building is P120,000,000. Prepare the necessary journal entry in the reversal of the revaluation decrease.
- Use the date in number 4. Assume that subsequently the building was sold at P130,000,000.
Problem 2 On December 31, 2016, the balance sheet of Timo Company showed the following property and equipment after charging depreciation:
Building 3,000, Accumulated depreciation 1,000,000 2,000,
Equipment 1,200, Accumulated depreciation 400,000 800,
The company has adopted the revaluation model for the valuation of property and equipment. This has resulted in the recognition in prior periods of an asset revaluation surplus for the building of P150,000. On December 31, 2016, an independent valuer assessed the fair value of the building to be P1,600,000 and the equipment to be P900,000.
The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as of December 31, 2016.
Questions:
Revaluation surplus as of December 31, 2016, after recording the revaluation a. P 250,000 b. P 150,000 c. P 100,000 d. P 0
Amount to be recognized in 2016 profit or loss related to the revaluation of property and equipment
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
What is the revaluation surplus on June 30, 2020? a. 920,000,000 b. 355,000,000 c. 345,000,000 d. 327,500,
What is the total depreciation for 2020? a. 55,000,000 b. 66,750,000 c. 72,500,000 d. 90,000,
What is the revaluation surplus on December 31, 2020? a. 355,000,000 b. 345,000,000 c. 337,500,000 d. 327,500,
What is the impairment loss on December 31, 2021? a. 160,000,000 b. 100,000,000 c. 60,000,000 d. 0
What is the revaluation surplus on December 31, 2021? a. 312,500,000 b. 212,500,000 c. 141,875,000 d. 96,250,
Gain on sale on December 31, 2021 is: a. 71,250,000 b. 123,750,000 c. (13,750,000) d. 60,000,
HC FMV Bldg 300 M 500 M (45 M) (75 M) 85% 255 M 425 M 170 M
Mach 400 M 650 M (120 M) (195 M) 280 M 455 M 175 M
Land 30 M 40 M 10 M Total Revaluation Surplus 355 M
Depreciation: Bldg 1/1 - 6/30 7 M 6/30 - 12/31 12 M 425 M / 17 x 6/ Mach 1/1 - 6/30 20 M 6/30 - 12/31 32 M 455 M/ 7 x 6/ Total 72 M
Revaluation Surplus Unamortized 355 M Amortization: Bldg - 170 M / 17 x 6/12 (5 M) Mach - 175 M/7 x 6/12 (12 M Balance 337. 5M
June 30: Bldg fmv - before fmv - now 500 M (100 M) 80% 400 M 300 M 100 M (100 M) Rev. Surplus 0 Impairment Loss
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
Revaluation Surplus – 2011 Beg. Bal 337 M Amortization: Machinery 25. M Machinery disposed 68 M Bldg 100 M Bldg - remaining 1 M Balance 141 M
Cash 250 M AD 146 M Machinery 325 M Gain on sale 71 M
Rev. Surplus 68 M Ret. Earnings 68 M
Problem 6 Mary Grace Company has two cash generating units. On December 31, 2020, the assets of one cash generating unit at carrying amount are:
Inventory 200, Accounts receivable 300, Plant and equipment 6,000, Accumulated depreciation 2,600, Patent 850, Goodwill 100,
The accounts receivable are regarded as collectible and the inventory’s fair value less cost to sell is equal to the carrying amount. The patent has fair value less cost to sell of P750,000.
On December 31, 2020, Mary Grace Company undertook impairment testing of the cash generating unit and determined the value in use of the unit at P4,050,000.
Questions:
What is the impairment loss of the cash generating unit on December 31, 2020? a. 800,000 b. 700,000 c. 600,000 d. 0
What is the amount of inventory on December 31, 2020? a. P 153,850 b. 167,010 c. 180,000 d. 200,
What is the amount of Accounts Receivable on December 31, 2020? a. 300,000 b. 250,520 c. 256,700 d. 253,
What is the amount of Patents on December 31, 2020? a. 850,000 b. 750,000 c. 709,800 d. 727,
What is the amount of Plant and Equipment, net at December 31, 2020?
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
a. 3,400,000 b. 2,909,280 c. 2,839,180 d. 2,800,
Recoverable Cost 4,050, Carrying Value 4,850, Impairment Loss (800,000) Goodwill 100, IL allocated to other assets (700,000)
Impairment loss 800, Goodwill 100, Patent 100, Plant and Equipment 600,
Problem 7 One of the cash generating units of Normelita Company is that associated with the manufacture of wine barrels. At December 31, 2020, Normelita Company believed, based on an analysis of economic indicators, that the assets of the unit were impaired. The carrying amounts of the assets and liabilities of the unit at December 31, 2020 were:
Buildings 4,200, Accum. Depreciation – bldg * 1,800, Factory machinery 2,200, Accum. Depreciation – factory mach ** 400, Goodwill 150, Inventory 800, Receivables 400, Allowance for doubtful accounts 50, Cash 200, Accounts payable 300, Loans 200,
- Depreciated at P600,000 per annum ** Depreciated at P450,000 per annum
Normelita Company determined the value in use of the unit to be P5,350,000. The receivables were considered to be collectible, except those considered doubtful.
During the year 2021, Normelita Company increased the depreciation charge on building to P650,000 per annum, and to P500,000 per annum for factory machinery. The inventory on hand at January 1, 2021 was sold by the end of the year. At December 31, 2021, Normelita Company, due to a return in the market to the use of the traditional barrels for wines and an increase in wine production, assessed the recoverable amount of the cash generating unit to be P300,000 greater than the carrying amount of the unit. As a result, Normelita Company recognized a reversal of the impairment loss.
Questions:
- What amount of the impairment loss on December 31, 2020 should be allocated to inventory? a. P 0 b. P 28,829 c. P 32,000 d. P 56,
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
What is the Factory Machinery’s net carrying amount (after allocation of impairment loss) on December 31, 2020? a. P 1,674,000 b. P 1,728,000 c. P 1,735,135 d. P 1,800,
What amount of reversal of impairment loss should be recognized on December 31, 2021? a. P 168,000 b. P 200,000 c. P 268,000 d. P 300,
Assume that the recoverable amount at December 31, 2021 was P200,000 greater than the carrying amount of the cash generating unit. What is the net carrying amount of the buildings after recognizing of the impairment recovery? a. P 1,313,219 b. P 1,750,000 c. P 1,768,781 d. P 1,800,
Assume that the recoverable amount at December 31, 2021 was P200,000 greater than the carrying amount of the cash generating unit and that the recoverable amount of the buildings was P1,750,000. What is the net carrying amount of the Factory Machinery after the recognition of the impairment recovery? a. P 1,228,000 b. P 1,313,219 c. P 1,324,000 d. P 1,332,
Carrying amount of assets 5,700, Value in use 5,350, Impairment loss 350, Goodwill 150, Impairment loss to be allocated 200,
Allo. of Loss Carrying Value Building 2,400,000 96,000 2,304, Machinery 1,800,000 72,000 1,728, Inventory 800,000 32,000 768, 5,000,
Pre-impairment book value Cost AD Building 4,200,000 2,400,000 = 1,800, Factory Mach 2,200,000 850,000 = 1,350,000 3,150,
Book value per book Cost AD Building 4,200,000 2,546,000 = 1,654, Factory Mach 2,200,000 972,000 = 1,228,000 2,882, Reversal of Impairment 268,
Allo. of excess Carrying Amount Q4 - Building 1,654,000 114,781 1,768, Mach 1,228,000 85,219 1,313, 200,
Q5 - Reversal of impairment loss 200, Allo. To building (1,750,000 – 1,654,000) 96, Amount allocated to machinery 104,
Factory machinery 2,200, Less: Accum. Depreciation and Impairment loss 868, Carrying value 1,332,
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
Realized Income (6M/30M x 60M) 12,000,000 48,000, Loss 2,000,
Entry: Deferred Income 48,000, Loss on repayment of grant 2,000, Cash 60,000,
Problem 6 On January 2, 2007, Wink Corporation received a grant of P20,000,000 to build and run a power plant in an economically backward area. The secondary condition attached to the grant is that the entity should directly distribute the necessary needed power to the area at the rate is much lower than the prevailing power rate in other advance areas. The power plant is to be depreciated using the straight-line method over a period of 10 years.
The power plant was completed at the end of year 2007 at a cost of P50,000,000 and started producing and distributing power to the backward area at rate which is at par that of the prevailing rates in other advance areas.
On June 30, 2009, the national government demanded P15,000,000 from Wink Corporation for the repayment of the grant due to the nonfulfillment of the conditions. Wink paid the national government on July 1, 2009.
Questions:
- What is the carrying value of the power plant as of July 1, 2009 immediately after the repayment was made assuming at the time of initial recognition the grant received was recognized as a deferred income? a. P25,500,000 b. P42,500,000 c. P45,000,000 d. P50,000,
Cost of Power Plant 50,000, Accum. depreciation (7,500,000) Carrying value 42,500,
- What is the carrying value of the power plant as of July 1, 2009 immediately after the repayment was made assuming at the time of initial recognition the grant received was recognized as a reduction of the related asset? a. P25,500,000 b. P42,500,000 c. P45,000,000 d. P50,000,
Repayment 15,000, Less: Deferred Income Bal. Deferred Income 20,000, Realized Income 3,000,000 17,000, Gain 2,000,
Cost of power plant (50M – 20M) 30,000, Accum. Depreciation 4,500, Carrying value 25,500,
- What total amount of income should Wink Corporation recognized in 2009 related to grant? a. none b. P2,000,000 c. P3,000,000 d. P4,000,
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
In a Nutshell
Matador Corporation, a manufacturer of steel products, began operation on October 1, 2013. The accounting department of Matador has started the fixed-asset and depreciation presented below.
MATADOR CORPORATION Fixed Asset and Depreciation Schedule For Fiscal Years Ended September 30, 2014, and September 30, 2015
Depreciation Est. Expense Year Acquisition Depreciation Life in Ended Sept. 30 Assets Date Cost Salvage Method Years 2014 2015 Land A 10/1/2013? N/A N/A N/A N/A N/A Building A 10/1/2013? P40,000 straight-line? P17,450? Land B 10/1/2013? N/A N/A N/A N/A N/A Building B Under P320,000 straight-line 30? Const. to date Donated 10/2/2013? 3,000 150% 10?? Equipment declining bal. Machine A 10/2/2013? 6,000 SYD 8?? Machine B 10/2/2014? straight-line 20 -? N/A – Not applicable
You have been asked to assist in completing this scheduled. In addition, in ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel:
a. Land A and Building A were acquired from a predecessor corporation. Matador paid P820,000 for the land and building together. At the time of acquisition, the land had an appraised value of P90,000 and the building had an appraised value of P810,000.
b. Land B was acquired on October 2, 2013, in exchange for P2,500 newly issued shares of Matador’s common stock. At the date of acquisition, the stock had a par value of P5 per share and a fair value of P30 per share. During October 2013, Matador paid P16,000 to demolish an existing building on this land so I could construct new building.
c. Construction of building B on the newly acquired land began on October 1, 2014. by September 30, 2015, Matador has paid P320,000 of the estimated total construction costs of P450,000. It is estimated that the building will be completed and occupied by July 2016.
d. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair market value at P30,000 and the salvage value at P3,000.
e. Machinery A’s total cost of P164,900 includes installation expense of P600 and normal repairs and maintenance of P14,900. Salvage value is estimated at P6,000. Machinery A was sold on February 1, 2015.
f. On October 1, 2014, Machinery B was acquired with a down payment of P5,740 and the remaining payments to be made in 11 annual installments of p6,000 each beginning October 1, 2014. The prevailing interest rate was 8%. The following data were abstracted from the present-value tables (rounded):
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
Present value of P1 at 8% for 11 years 0. Present value of an ordinary annuity of P1 at 8% for 11 years 7. Present value of annual annuity due of P1 at 8% for 11 years 7.
Questions:
Based on the above and the result of your audit, answer the following:
The cost of Building A is a. P82,000 b. P738,000 c. P820,000 d. P 0
The cost of Land B is a. P91,000 b. P75,000 c. P28,500 d. P 0
The cost of Machine B is a. P46,260 b. P48,574 c. P48,722 d. P52,
The total depreciation expense for the year ended September 30, 2015 is a. P33,037 b. P51,875 c. P33,208 d,
Which of the following audit procedure is most appropriate to determine whether recorded properly and equipment represent assets that actually exist at the balance sheet date? a. Perform cutoff tests to verify that property and equipment additions are recorded in the proper period. b. Examine deeds and title insurance certificates. c. Review the provision for depreciation expense and determine that depreciable lives and methods used in the current year are consistent with those used in the prior year. d. Physically examine all major property and equipment additions.
Solution:
Question no. 21 – b
Cost of building A (P820,000 x 810/900) 738,
Question no. 22 – a
Fair value of common stock (2,500 x P30) 75, Demolition costs 16, Cost of Land B 91,
Question no. 23 – d
Down payment 5, Add present value of installment payments (6,000 x 7) 46, Cost of Machine B 52,
Question no. 24 – c
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305-0645 Local 137
Building A (same in 2004 since it is straight-line depreciation) 17, Building B (under construction) - Donated equipment (25,500* x 1/10 x 1) 3, Machine A [(P150,000 – P6,000) x 7/30 x 4/12] 9, Machine B (P52,000/20) 2, Total depreciation expense 33,
*P30,000 – (P30,000 x 1/10 x 1)
Q&A LIST
Do you have any questions for clarification?
Questions/Issues Answers
KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.
Additions Elimination Approach Proportional Approach
Audit Objectives of Property, Plant
and Equipment Exchange of Assets
Reinstallation and
Rearrangements
Borrowing Costs
Gain on Reversal of
Impairment
Replacement and
Betterments
Capitalization Rate Government Grants Revaluation and Impairment
Cash Basis Impairment Loss Revaluation Surplus
Cash Generating Unit
Internal Control of Property,
Plant and Equipment Specific Borrowing Costs
Credit or Installment
Issuance of Company's Own
Securities Trade-in of Assets
Donation from Other Than
Shareholders Maintenance and Repairs Weighted Borrowing Costs
Donation from Shareholders Post-Acquisition Expenditure
Working Papers for Property,
Plant and Equipment
Course Schedule
2 pages Week-13-14-PPE- Answers
Course: Marketing (MRK111)
University: University of Shendi
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