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Auditing-problem-audit-of-ppe compress

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CHAPTER 7 – Audit of Property,

Plant, & Equipment

Problem 1 The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer

machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery account).

Company policy on depreciation which you accept, provides an annual rate of 10% without salvage value. A full year’s depreciation is charged in the year of acquisition and none in the year of disposition.

Question 1 The adjusted balance of the Machinery account at December 31, 2006 is: a. P 290,000 b. P 370,000 c. P 260,000 d. P 300,

2 The correct depreciation expense for the machinery for the year ended December 31, 2006 is: a. P 37,000 b. P 29,000 c. P 30,000 d. P 26,

Solution OE: Cash 20, Machinery 20, CE: Cash 20, Accumulated dep’n. 30, Machinery 40, Gain on sale 10, Adj: Accumulated dep’n 30, Machinery 20, Gain on sale 10,

OE: Machinery 90, Cash 90, CE: Machinery 100, Accumulated dep’n 22, Loss on sale 18, Machinery 50, Cash 90, Adj: Machinery 10, Accumulated dep’n 22, Loss on sale 18, Machinery 50,

1 A P350,000 – P20,000 + P10,000 -P50,
2 B P290,000 x 10%

Problem 2 The Land account was debited for P300,000 on March 31, 2006 for an adjoining piece of land which was acquired in exchange for 15,000 shares of Rizal Corporation’s own stock with a par value of P10. At the time of the exchange, the shares were selling at P24. Transfer and legal fees of P20,000 were paid and charged to Professional Fees.

  1. The adjusting entry required is: DEBIT CREDIT a. Land 140,000 Prem. on cap. stock 140, b. Land 160,000 Capital stock 150, Cash 10, c. Land 80,000 Professional fees 20, Prem. on cap. stock 60, d. None of these

  2. On the Land acquired in No. 6, real estate taxes of P20,000 were paid in December, 2006, including P5,000 for the first quarter of the year. (Ignore penalty for delayed payment). Land account was debited for the taxes paid.

The adjusting entry is: DEBIT CREDIT a. Taxes 15,000 Land 15, b. Taxes 5,000 Land 5, c. Land 5,000 Cash 20, Taxes 15, d. None of these

Solution

  1. C OE: Land 300, Common Stock 150, APIC 150, Professional fees 20, Cash 20, CE: Land 380, Common stock 150, Cash 20, APIC 210, Adj: Land 80, APIC 60, Professional fees 20,
  2. A OE: Land 20, Cash 20, CE: Land 5, Taxes 15, Cash 20, Adj: Taxes 15, Land 15,

Problem 3 Two independent companies, KAYA and MUYAN, are in the home building business. Each owns a tract of land for development, but each company would prefer to build on the other’s land. Accordingly, they agreed to exchange their land. An appraiser was hired and from the report and the companies records, the following information was obtained:

KAYA Co.’s Land MUYAN Co.’s Land Cost (same as book value) P 800,000 P 500, Market value, per appraisal 1,000,000 900,

  1. The adjusted depletion at year-end amounted to: a. P 270,000 b. P 315,000 c. P 495,000 d. P 540,

  2. The adjusted depreciation at year-end amounted to: a. P 20,000 b. P 30,000 c. P 50,000 d. P 60,

Solution P4,860,000/1,620,000 x 15,00o tons x 6 months = P270, P600,000 – P60,000/9 years * x 6/12 = P30, *1,620,000 tons/180,000 = 9 years

  1. C P405,000 - (4,860,000/1,620,000 x 90,000 units) = P135,000 overstated
  2. A P40,000 - (600,000 - 60,000)/1,620,000 x 90,000 = P10,000 overstated
  3. A
  4. B

Problem 5 In connection with your examination of the financial statements of the Maraat Corporation for the year 2007, the company presented to you the Property, Plant and Equipment section of its balance sheet as of December 31, 2006, which consists of the following:

Land P 400, Buildings 3,200, Leasehold improvements 2,000, Machinery and equipment 2,800,

The following transactions occurred during 2007:

  1. Land site number 5 was acquired for P4,000,000. Additionally, to acquire the land, Maraat Corporation paid a P240,000 commission to a real estate agent. Costs of P60,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for P20,000.

  2. The second tract of land (site number 6) with a building was acquired for P1,200,000. The closing statement indicated that the land value was P800,000 and the building value was P400,000. Shortly after acquisition, the building was demolished at a cost of P120,000. The new building was constructed for P600,000 plus the following costs:

Excavation fees P 44, Architectural design fees 32, Building permit fees 4, Imputed interest on funds used during construction 24,

The building was completed and occupied on September 1, 2007.

  1. The third tract of land (site number 7) was acquired for P2,400,000 and was put on the market for resale.

  2. Extensive work was done to a building occupied by Maraat Corporation under a lease agreement. The total cost of the work was P500,000, which consisted of the following:

Particular Amount Useful life Painting of ceilings P 40,000 one year Electrical work 140,000 Ten years Construction of extension to current working area 320,000 Thirty years

The lessor paid one-half of the costs incurred in connection with the extension to the current working area.

  1. A group of new machines was purchased under a royalty agreement which provides for payment of royalties based on units of production for the machines. The invoice price of the machines was P300,000, freight costs were P8,000, unloading charges were P6,000, and royalty payments for 2007 were P52,000.

Question

  1. Land at year-end is a. P 5,480,000 b. P 5,900,000 c. P 6,000,000 d. P 8,400,

  2. Buildings at year-end is a. P 3,800,000 b. P 3,880,000 c. P 4,200,000 d. P 4,280,

  3. Leasehold improvements at year-end is a. P 2,300,000 b. P 2,560,000 c. P 2,600,000 d. P 2,720,

  4. Machinery and equipment at year-end is a. P 3,100,000 b. P 3,108,000 c. P 3,114,000 d. P 3,166,

Solution

  1. Land 4,300, Cash 4,300, Cash 20, Land 20,

  2. Land 1,320, Cash 1,320, Building 680, Cash 680,

  3. Land - investment 2,400, Cash 2,400,

  4. Operating expenses 40, Leasehold improvements 300, Cash 340,

  5. Machinery 314, Royalty expenses 52, Cash 366, Answer:

  6. C 2. B 3. A 4. C

  7. The carrying amount of property, plant, and equipment as of December 31, 2006 is: a. P 1,290,547 b. P 1,578,545 c. P 1,587,497 d. P 1,617,

Solution Entries: Machinery and equipment 369, Cash 369, Automobile and trucks 25, Cash 25, Cash 23, Accumulated depreciation 24, Automobile and trucks 48, Gain on sale 250 Accumulated deprecation - 12/31/02 18, Depreciation - 9 mos. (P30,000 x 30% x 9/12) 6, Total 24,

Cash 4, Accumulated depreciation 14, Machinery and equipment 17, Gain on sale 1, Depreciation 221, Accumulated depreciation - mach. 156, Accumulated depreciation - auto. 28, Accumulated depreciation - improv. 36,

Machinery and equipment - P1,380,000/10 years = P 138, P 369,000/10 years x 6/12 = 18,450 P 156, Leasehold improvement - P432,000/12 years = 36, Automobile and trucks - CV of unsold item P 65,680 x 30% = 19, Sold item - 30,000 x 30% x 9/12 = 6, Current purchase P25,000 x 30% x 4/12= 2,500 28, Answer:

  1. B 2. D 3. B 4. C 5. B

Problem 7 Information pertaining to Highland Corporation’s property, plant and equipment for 2005 is presented below:

Account balances at January 1, 2005: Debit Credit Land P 150, Buildings 1,200, Accumulated depreciation – Buildings P263, Machinery and equipment 900, Accumulated depreciation – Machinery and equipment 250, Automotive equipment 115, Accumulated depreciation – Automotive equipment 84,

Depreciation data: Depreciation method Useful life

Buildings 150% declining-balance 25 years Machinery and equipment Straight-line 10 years Automotive equipment Sum-of-the-years’-digits 4 years Leasehold improvements Straight-line -

The salvage values of the depreciable assets are immaterial. Depreciation is computed to the nearest month.

Transactions during 2005 and other information are as follows:

a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2- year-old car with a cost of P18,000 and book value of P5,400. The new car has a cash price of P24,000; the market value of the trade-in is not known.

b. On April 1, 2005, a machine purchased for P23,000 on April 1, 2000, was destroyed by fire, Highland recovered P15,500 from its insurance company.

c. On May 1, 2005, costs of P168,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2011.

d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of P280,000; additional costs of P5,000 for freight and P25,000 for installation were incurred.

e. Highland determined that the automotive equipment comprising the P115,000 balance at January 1, 2005, would have been depreciated at a total amount of P18,000 for the year ended December 31,2005.

Questions Based on the information above, answer the following questions:

  1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2005 is: a. P 1,180,000 b. P 1,187,000 c. P 1,202,500 d. P 1,210,

  2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2005 is: a. P 139,000 b. P 121,000 c. P 115,000 d. P 109,

  3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2005 is: a. P 72,000 b. P 263,100 c. P 335,100 d. P 319,

  4. The adjusted balance of Accumulated Depreciation of Machinery and Equipment at December 31, 2005 is: a. P 330,775 b. P 342,275 c. P 351,475 d. P 353,

  5. The adjusted balance of Accumulated Depreciation of Automotive Equipment at December 31, 2005 is: a. P 90,600 b. P 96,000 c. P 103,200 d. P 108,

  6. The adjusted balance of Accumulated Depreciation of Leasehold Improvements at December 31, 2005 is: a. P 0 b. P 14,000 c. P 14,700 d. P 16,

  7. The total adjusted balance of Accumulated Depreciation of Property and Equipment at December 31, 2005 is: a. P 534,375 b. P 698,475 c. P 774,389 d. P 804,

Problem 8 The schedule of Gerasmo Company’s property and equipment prepared by the client follows:

PLANT ASSETS Land P 320, Building 540, Machinery and Equipment 180, Total 1,040,

ACCUMULATED DEPRECIATION

Building P 81, Machinery and Equipment 54, Total P 135,

Further examination revealed the following:

  1. All property and equipment were acquired on January 2, 2003.
  2. Assets are depreciated using the straight-line method. The building and equipment are expected to benefit the company for 20 years and 10 years respectively. Salvage values of the assets are negligible.
  3. An equipment with an original cost of P40,000 was sold on December 30, 2005 for P32,000. The proceeds were credited to other operating income account.
  4. In 2005, The company recognized an appreciation in value of land and building as determined by the Company’s engineers. The appraisal was recorded as follows:

Debit Credit Land 70, Building 60, Accum. depreciation 6, Revaluation increment 124, Questions

  1. Property and equipment at year-end is: a. P 753,000 b. P 870,000 c. P 910,000 d. P 990,

  2. Accumulated depreciation at year-end is: a. P 114,000 b. P 117,000 c. P 123,000 d. P 135,

Solution OE: Cash 32, Other ope. income 32, CE: Cash 32, Accumulated dep’n 12, Property & equip. 40, Other ope. income 4, Adj: Accum. dep’n 12, Other ope. income 28, Property & equip. 40,

Adj: Revaluation increment 124, Accumulated dep’n 6, Property & equipment 130,

Per book depreciation - bldg 75, Per audit depreciation - bldg 72,000 (540,000-60,000/20 x 3 yrs) Adjustment 3,

Adj: Accum. Depreciation 3, Operating expenses 3, Answer:

  1. B 2. A

Problem 9 The following information pertains to Marlisa Company’s delivery trucks:

Date Particulars Debit Credit 1/1/04 Trucks 1, 2, 3, & 4 3,200, 3/15/05 Replacement of truck 3 tires 25, 7/1/05 Truck 5 800, 7/10/05 Reconditioning of truck 4, which was damaged in a collision 35, 9/1/05 Insurance recovery on truck 4 accident 33, 10/1/05 Sale of truck 2 600, 4/1/06 Truck 6 1,000,000 150, 5/2/06 Repainting of truck 4 27, 6/30/06 Truck 7 720, 12/1/06 Cash received on lease of truck 7 22,

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Date Particulars Debit Credit 12/31/04 Depreciation expense 300, 12/31/05 Depreciation expense 300, 12/31/06 Depreciation expense 300,

a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the

selling party allowed a P50,000 trade in value for the old truck.

b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850, being given for the new truck.

c. The depreciation rate is 20% by unit basis.

d. Unit cost of Trucks 1 to 4 is at P800,000 each.

Questions

  1. What is the loss on trade-in of truck 3? a. P 50,000 b. P 430,000 c. P 510,000 d. P 560,

  2. The correct cost of truck 5 is a. P 560,000 b. P 610,000 c. P 800,000 d. P 850,

  3. The book value of truck 5 at December 31, 2006 is a. P 850,000 b. P 595,000 c. P 560,000 d. P 510,

  4. What is the loss in trade-in of Truck 1?

a. P 150,000 b. P 250,000 c. P 290,000 d. P 410,

  1. The correct cost of truck 6 is a. P 590,000 b. P 800,000 c. P 850,000 d. P 1,000,
  2. The carrying value of Truck 6 at December 31, 2006 is

Truck 7 (P720,000 x 20% x 6/12) 72,000 720, Depreciation per audit 592,000 3,370, Depreciation per records 300, Understatement 292, 10. D 11. B

Problem 10 Information pertaining to SAILADIN CORPORATION’s property, plant and equipment for 2006 is presented below.

Account balances at January 1, 2006 Debit Credit Land 6,000, Buildings 48,000, Accumulated depreciation – bldg. 10,524, Machinery and equipment 36,000, Accumulated depreciation – mach. & equip. 10,000, Automotive equipment 4,600, Accumulated depreciation – auto. Equip. 3,384,

Depreciation data: Depreciation method Useful life

Buildings 150% declining-balance 25 years Machinery and equipment Straight-line 10 years Automotive equipment Sum-of-the-years-digits 4 years Leasehold improvements Straight-line -

The salvage values of the depreciable assets are immaterial. Depreciation is computed to the nearest month.

Transactions during 2006 and other information are as follows:

(a) On January 2, 2006, Sailadin Corporation purchased a new car for P800,000 cash and trade-in of a 2-year car with a cost of P720,000 and a book value of P216,000. The new car has a cash price of P960,000; the market value of the trade-in is not know.

(b) On April 1, 2006, a machine purchased for P920,000 on April 1, 2001, was destroyed by fire. Sailadin Corporation recovered P620,000 from its insurance company.

(c) On May 1, 2006, costs of P6,720,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2012.

(d) On July 1, 2006, machinery and equipment were purchased at a total invoice cost of P11,200,000; additional costs of P200,000 for freight and P1,000,000 for installation were incurred.

(e) Sailadin Corporation determined that the automotive equipment comprising the

P4,600,000 balance at January 1, 2006, would have been depreciated at a total amount of P720,000 for the year ended December 31, 2006.

Questions

  1. What is the depreciation on building for 2006? a. P 2,998,080 b. P 2,880,000 c. P 2,248,560 d. P 1,499,

  2. What is the book value of the building at December 31, 2006? a. P 35,976,960 b. P 35,227,440 c. P 34,596,000 d. P 34,477,

  3. What is the depreciation on machinery and equipment for 2006? a. P 4,220,000 b. P 4,197,000 c. P 4,151,000 d. P 4,128,

  4. What is the gain on machine destroyed by fire? a. P 620,000 b. P 460,000 c. P 300,000 d. P 160,

  5. What is the balance of the Accumulated Depreciation – Machinery and Equipment at December 31, 2006? a. P 13,777,000 b. P 13,760,000 c. P 13,691,000 d. P 13,231,

  6. What is the depreciation on automotive equipment for 2006? a. P 1,104,000 b. P 960,000 c. P 816,000 d. P 720,

  7. What is the gain (loss) on car traded-in? a. P 240,000 b. P (240,000) c. P 56,000 d. P (56,000)

  8. What is the book value of automotive equipment at December 31, 2006? a. P 1,720,000 b. P 1,144,000 c. P 1,000,000 d. P 712,

  9. What is the depreciation on leasehold improvements for 2006? a. P 756,000 b. P 672,000 c. P 630,000 d. P 560,

  10. What is the book value of leasehold improvements at December 31, 2006? a. P 6,160,000 b. P 6,090,000 c. P 6,048,000 d. P 5,964,

Solution

  1. C Book Value, 1/1/06 (P48,000,000 - P10,524,000) P 37,476, 150% declining-balance rate (1/25 x 150%) x 6% Depreciation on building P 2,248,

  2. B Cost of building P 48,000, Less: Accumulated depreciation (P10,524,000 + P 2,248,560) 12,772, Book value of building, 12/31/06 P 35,227,

  3. C Balance, 1/106 P 36,000, Less: Machine destroyed by fire 920, Balance P 35,080, Depreciation 10% 3,508, Machine destroyed by fire (P920,000 x 10% x 3/12) 23, Purchased 7/1/06 (P12,400,000 x 10% x 6/12) 620, Total depreciation on machinery and equipment 4,151,

  4. D Insurance recovery 620, Less: Book value of machine destroyed (Cost 920,000 - Accum. dep’n (P 920,000 x 10% x 5) 460, Gain on recovery from insurance company 160,

  5. C Balance, 1/1/06 10,000, Add: depreciation for 2006 4,151,

  6. Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on September 1, 2006, for P9,000.

  7. Included in charges to the Repairs Expense account was an invoice covering installation of Machine No. 12 in the amount of P2,500.

  8. It is the company’s practice to take a full year’s depreciation in the year of acquisition and none in the year of disposition.

Questions

  1. The gain/(loss) on sale of Machine 6 is: a. P 1,000 b. P 500 c. P (1,000) d. P (500)

  2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2006 is: a. P 446,000 b. P 452,000 c. P 454,500 d. P 475,

  3. The Depreciation expense – Equipment of TRIUMPH CORPORATION at December 31, 2006 is: a. P 45,200 b. P 45,450 c. P 46,525 d. P 53,

  4. The entry to correct the sale of Machine 6 is: a. Loss on sale of equipment 1, Accumulated depreciation 21, Equipment 22, b. Accumulated depreciation 22, Equipment 22, Gain on sale 500 c. Accumulated depreciation 21, loss on sale of equipment 500 Equipment 22, d. Accumulated depreciation 23, Equipment 22, Gain on sale of equipment 1,

  5. The Depreciation Expense at December 31, 2006 is: a. Overstated by P6,125 c. Understated by P1, b. Understated by P6,125 d. Overstated by P1,

Solution OE: Cash 9, Equipment 1, Equipment 9, Cash 1, CE: Cash 9, Accum. dep’n 21, Loss on sale 1, Equipment 30, Cash 1,

Adj: Accum. dep’n 21, Loss on sale 1, Equipment 22,

Adj: Equipment 2, Repairs expense 2,

Adj: Accum. dep’n 1, Depreciation 1, Answer: 1. C 2. C 3. B 4. A 5. D

Problem 12 Information pertaining to Eddie Vic Corporation’s property, plant and equipment for 2005 is presented below:

Account balances at January 1, 2005 Debit Credit Land P 1,500, Building 12,000, Accum. depreciation-building P 2,631, Machinery and equipment 9,000, Accum. depreciation-Mach. and Eqpt 2,500, Automotive Equipment 1,150, Accum. depreciation-Automotive Eqpt 846,

Depreciation method and useful life

Building – 150% declining balance; 25 years Machinery and equipment – Straight-line; 10 years Automotive equipment – Sum-of-the-years’-digits; 4 years The salvage value of the depreciable assets is immaterial Depreciation is computed to the nearest month.

Transactions during 2005 and other information:

On January 2, 2005, Eddie Vic purchased a new car for P350,000 cash and trade-in of a 2- year old car with a cost of P490,000 and a book value of P147,000. The new car has a cash price of P520,000; the market value of the trade-in is not known.

On April 1, 2005, a machine purchased for P230,000 on April 1, 2000, was destroyed by fire. Eddie Vic recovered P155,000 from its insurance company.

On July 1, 2005, machinery and equipment were purchased at a total invoice cost of P2,800,000; additional costs of P50,000 for freight and P250,000 for installation were incurred.

Eddie Vic determined that the automotive equipment comprising the P1,150,000 balance at January 1, 2005, would have been depreciated at a total amount of P180,000 for the year ended December 31, 2005.

Questions

  1. Depreciation expense for building at December 31, 2005 is: a. P 749,520 b. P 720,000 c. P 682,150 d. P 562,

  2. Depreciation expense for machinery and equipment at December 31, 2005 is: a. P 1,049,250 b. P 1,037,750 c. P 1,032,000 d. P 877,

  3. Depreciation expense for Automobile equipment at December 31, 2005 is: a. P 388,000 b. P 312,000 c. P 290,000 d. P 180,

Gain or Loss from Disposal of Assets For the Year Ended December 31, 2005 Gain on machine destroyed by fire Insurance recovery P155, Book value of machine destroyed (P230,000 - (5 x 10% x P230,000) 115,000 P40, Gain on car traded in on new car purchase Book value of car traded in P147, Trade-in allowed (P520,000 - P350,000) 170,000 23, Total gain on asset disposals for 2005 P63,

Property, Plant and Equipment December 31, 2005 COST ACCUMULATED DEPRECIATION

BOOK VALUE

Land P 1,500,000 ------ P1,500, Building 12,000,000 3,193,140 8,806, Machinery and Equipment 11,870,000 3,422,750 8,447, Automotive equipment 1,180,000 793,000 387, Totals P26,550,000 P7,408,890 P19,141, Answer:

  1. D 2. B 3. C 4. D 5. A
  2. D 7. A 8. A 9. C 10. D

Problem 13 RUANN Service Center is wholly owned subsidiary of RUANN Stores. The company’s function is to deliver furniture and appliances sold by the parent and to service electronics and appliances, also sold by the parent company. RUANN Stores, the parent, operates twelve retail outlets in a large metropolitan area. The service center uses three delivery trucks and fifteen service vehicles for delivering goods and for making service calls related to large appliances and electronic equipment. For small appliances and electronics, customers typically bring these to the service center for repair.

At January 1, 2006, RUANN Service center reported audited balances of P525,000 and P320,000 for “Trucks” and “Accumulated Depreciation – Trucks,” respectively. The vehicles consisted of  Three delivery trucks costing P50,000 each; and  Fifteen service trucks costing P25,000 each.

Accumulated depreciation was

 Delivery trucks, P95,000; and  Service trucks, P225,

The company depreciates all trucks on a straight-line basis, using a five- year life and zero salvage value. One-half year’s depreciation is taken in the year of acquisition and in the year of disposal.

During 2006, the following transactions and journal entries were completed by the company:

2/2/06: Sold one delivery truck for P2,000. the truck was fully depreciated at 12/31/07. Cash P2, Trucks P2,

3/1/06: Bought one delivery truck for P60,000. Trucks P60, Cash P60,

3/15/06: Sold one service truck for P8,000. This truck was purchased 6/15/03 for P25,000 and the accumulated depreciation, according to RUANN’s subsidiary ledger, at the date of sale was P12, Cash P8, Trucks P8,

7/25/06: Bought one service truck for P27,500. Truck P27, Cash P27,

12/31/06: Recorded depreciation for 2006: Two delivery trucks @ P10,000 each = P20, Fifteen service trucks @ P5,000 each = 75, Total P95,

Depreciation Expense – Trucks P95, Accumulated depreciation P95,

Questions

  1. The adjusted balance of Delivery Truck at December 31, 2006 is: a. P 537,500 b. P 217,500 c. P 210,000 d. P 160,

  2. The adjusted balance of Service Truck at December 31, 2006 is: a. P 537,500 b. P 402,500 c. P 377,500 d. P 217,

  3. The Accumulated Depreciation – Delivery Truck at December 31, 2006 is: a. P 86,000 b. P 76,000 c. P 75,000 d. P 65,

  4. The Accumulated Depreciation – Service Truck at December 31, 2006 is: a. P 300,000 b. P 285,250 c. P 285,000 d. P 284,

  5. The Carrying Value of Delivery Truck at December 31, 2006 is: a. P 461,500 b. P 145,000 c. P 142,500 d. P 74,

  6. The Carrying Value of Service Truck at December 31, 2006 is: a. P 237,500 b. P 117,500 c. P 92,250 d. P 67,

  7. The Gain/Loss on Disposal of Trucks at December 31, 2006 is: a. P 10,000 b. P 8,000 c. P 2,000 d. P 0

  8. The Depreciation Expense of Trucks at December 31, 2006 is: a. P 106,250 b. P 101,250 c. P 98,750 d. P 95,

Solution 2/2/06 OE: Cash 2, Delivery truck 2, CE: Cash 2, AD - Del. truck 40, Loss on sale 8, Delivery truck 50, Adj: AD - del. truck 40, Loss on sale 8, Delivery truck 48, 3/15/06 OE: Cash 8, Service truck 8,

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Auditing-problem-audit-of-ppe compress

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CHAPTER 7 – Audit of Property,
Plant, & Equipment
Problem 1
The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing
P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds
was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing
P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer
machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer
machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery
account).
Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full year’s depreciation is charged in the year of acquisition and none in
the year of disposition.
Question
1 The adjusted balance of the Machinery account at December 31, 2006 is:
a. P 290,000 b. P 370,000 c. P 260,000 d. P 300,000
2 The correct depreciation expense for the machinery for the year ended December 31,
2006 is:
a. P 37,000 c. P 30,000 d. P 26,000
b. P 29,000
Solution
OE: Cash 20,000
Machinery 20,000
CE: Cash 20,000
Accumulated dep’n. 30,000
Machinery 40,000
Gain on sale 10,000
Adj: Accumulated dep’n 30,000
Machinery 20,000
Gain on sale 10,000
---------------------------------------------
OE: Machinery 90,000
Cash 90,000
CE: Machinery 100,000
Accumulated dep’n 22,000
Loss on sale 18,000
Machinery 50,000
Cash 90,000
Adj: Machinery 10,000
Accumulated dep’n 22,000
Loss on sale 18,000
Machinery 50,000
---------------------------------------------
1 A P350,000 – P20,000 + P10,000 -P50,000
2 B P290,000 x 10%
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