POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY AND LAW

AUDITING PROBLEMS
QUIZ NO. 5PROPERTY, PLANT & EQUIPMENT
MINUTES

R.S.PADERES
Time Limit: 90

INSTRUCTION: Select the correct answer for each of the following questions. Mark only
one answer for each item by encircling the letter of your choice. No credits will be given
to test papers with no supporting solutions.
PROBLEM 1
The property, plant and equipment section of Bad trip Corporations statement of
financial position at December 31, 2009 included the following items:
Land
Land improvements
Buildings
Machinery and equipment

P2,100,000
560,000
3,600,000
6,600,000

During 2010, the following data were available to you upon your analysis of the accounts:
Cash paid on purchase of land
Mortgage assumed on the land bought, including interest at 16%
Realtors commission
Legal fees, realty taxes and documentation expenses
200,000
Amount paid to relocate persons squatting on the property
400,000
Cost of tearing down an old building on the land
300,000
Amount recovered from the salvage of the building demolished
200,000
Cost of fencing the property
Amount paid to a contractor for the building erected
8,000,000
Building permit fees
Excavation expenses
Architects fee
Interest that would have been earned had the money used during the
period of construction been invested in the money market
Invoice cost of machinery acquired
Freight, unloading and delivery charges
240,000
Customs duties and other charges
Allowances, hotel accommodations, etc, paid to foreign technicians
during the installation and test run of machines
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P10,000,000
16,000,000
1,200,000

440,000
50,000
250,000
100,000
600,000
8,000,000
560,000

1,600,000
Royalty payment of machines purchased (based on units produced and sold)
480,000
REQUIRED: Based on the above and the result of your audit, determine the following:
1. Land
a.
P30,000,000
b.
P14,000,000

c. P29,900,000
d. P29,600,000

2. Land improvements
a. P1,300,000
b. P1,000,000
a.
b.

c. P1,250,000
d. P560,000

3. Building
P12,300,000
P11,750,000

c. P12,000,000
d. P11,700,000

4. Machinery and equipment

a. P14,840,000
b. P16,440,000

c. P18,400,000
d. P17,000,000

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a.
b.
c.
d.

5. An auditor is verifying a companys ownership of equipment. What is the best

evidence of ownership?
An interview with the equipment custodian verifying company ownership.
The presence of the equipment on the companys statement of financial position.
The current years depreciation expense journal entry.
A canceled check written to acquire the equipment.

PROBLEM 2
In connection with your audit of Good Trip Companys financial statements for the year
2010, you noted the following transactions affecting the property and equipment items of
the company:
Jan. 1
Purchased real property for P5,026,000, which included a charged P
146,000
representing property tax for 2010 that had been prepaid
by the vendor; 20% of the
purchase price is deemed applicable to land
and the building to buildings. A mortgage
P3,000,000 was assumed by
Good Trip on the purchase. Cash was paid for the
balance.
Jan. 15

Previous owners had failed to take care of normal maintenance and

repair requirements on the buildings, necessitating current
reconditioning at a cost of P236,800.

Feb. 15

Demolished garages in the rear of the building, P36,000 being

recovered on the lumber salvage. The Company proceeded to
construct a warehouse. The cost of such warehouse was P540,800
which was P90,000 less than the average bids made on the
construction by independent contractors. Upon completion of
construction, city inspectors ordered extensive modifications to the
building as a result of failure on the part of the company to comply
with building safety code. Such modifications, which could have been
avoided, cost P76,800.
The Company exchanged its own shares with a fair value of P320,000
(par P24,000) for a patent and a new equipment. The equipment has
a fair value of P200,000.

Apr. 1

The new machinery for the new building arrived. In addition, a new
franchise was acquired from the manufacturer of the machinery.
Payment was made by issuing bonds with a face value of P400,000
and by paying cash of P144,000. The value of the franchise is set at
P160,000, while the machines fair value is P360,000.

May 1

The Company contracted for parking lots and waiting sheds at a cost
of P360,000 and P76,800, respectively. The work was completed and
paid for on June 1.

Dec. 31

The business was closed for the year-end inventory stock-taking.

During this time, required redecorating and repairs were completed at
a cost of P60,000.
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REQUIRED: Based on the above and the result of your audit, determine the following:
a.
b.

6. Land
P940,000
P1,005,200

c. P976,000
d. P1,052,800

7. Buildings
a. P4,645,600
b. P5,005,600
8. Machinery and equipment
a.
P360,000
b.
P560,000
9. Land improvements
a. P360,000
b. P76,800
10.Total property, plant and equipment
a. P6,764,400
b. P6,731,200
PROBLEM 3

c. P4,762,400
d. P4,681,600
c. P576,615
d. P659,692
c. P436,800
d. P0
c. P6,718,092
d. P6,618,400

On November 15, 2010, Abar Corporation acquired Rapids, a Company that operates a
scenic railway along the coast of a popular tourist area. The summarized statement of
financial position at fair values of Rapids on July 1, 2010, reflecting the terms of
acquisition was:
Goodwill
Operating license
Property-train stations and land
Rail track and coaches
Steam engines (2)
Purchase consideration

P 200,000
1,200,000
300,000
300,000
1,000,000
P3,000,000

The operating license is for ten years. It has recently been renewed by the transport
authority and is stated at the cost of its renewal. The carrying amounts of the property
and rail track and coaches are based on their estimated replacement cost. The engines
are valued at their net selling price.
On December 1, 2010, the boiler of one of the steam engines exploded, completely
destroying the whole engine. Fortunately, no one was injured but the engine was beyond
repair. Due to its age, a replacement could not be obtained. Because of the reduced
passenger capacity, the estimated value in use of the business after the accident was
assessed at P2 million.
Passenger numbers after the accident were below expectations even after allowing for
the reduced capacity. A market research report concluded that tourists were not using
the railway because of the fear of a similar accident occurring to the remaining engine.
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In the light of this, the value in use of the business was reassessed on December 31,
2010 at P1.8 million. On this date, Abar received an offer of P900,000 in respect of the
transferable operating license.
REQUIRED: Based on the above and the result of your audit, compute the carrying
amount of the following as of December 31, 2010 after recognizing the impairment loss, if
any:
a.
b.

11.Goodwill
P120,000
P166,667

c. P200,000
d. P0

12.Operating license
a. 900,000
b. P866,667

c. P771,429
d. P720,000

13.Property- train stations and land

a.
P200,000
b.
P192,857

c. P216,667
d. P168,750

14.Rail track and coaches

a. P200,000
b. P216,667

c. P168,750
d. P192,857

15.Steam engines
a. P562,500
b. P642,857

c. P500,000
d. P600,000

PROBLEM 4
One of the cash generating units of POTPOT Company is associated with the manufacture
of wine barrels. At December 31, 2011, POTPOT 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, 2011 were:
Buildings
P4,200,000
Accumulated depreciation- buildings*
(1,800,000)
Factory machinery
2,200,000
Accumulated depreciation- machinery**
(400,000)
Goodwill
150,000
Inventory
800,000
Receivables
400,000
Allowance for doubtful accounts
(50,000)
Cash
200,000
Accounts payable
300,000
Loans
200,000
* Depreciated at P600,000 per annum
** Depreciated at P450,000 per annum
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POTPOT 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 2012, POTPOT 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, 2012
was sold by the end of the year. At December 31, 2012, POTPOT Company, due to a
return in the market to the use of the traditional barrels for wines and 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, POTPOT recognized a reversal
of the impairment loss.
REQUIRED: Based on the above and the result of your audit, determine the following:
16.What amount of impairment loss on December 31, 2011 should be allocated to
inventory?
a.
P56,000
c. P32,000
b.
P28,829
d. P0
17.What is the Factory Machinerys net carrying amount (after allocation of
impairment loss) on December 31, 2011?
a.
P1,735,135
c. P1,800,000
b.
P1,674,000
d. P1,728,000
18.What amount of reversal of impairment loss should be recognized on December
31, 2012?
a.
P300,000
c. P168,000
b.
P268,000
d. P200,000
19.Assume that the recoverable amount at December 31, 2012 was P200,000 greater
than the carrying amount of the cash generating unit. What is the net carrying
amount of the Buildings after recognition of the impairment recovery?
a.
P1,313,219
c. P1,800,000
b.
P1,768,781
d. P1,750,000
20.Assume that the recoverable amount at December 31, 2012 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.
P1,332,000
c. P1,228,000
b.
P1,313,219
d. P1,324,000
PROBLEM 5
On December 31, 2011, the statement of financial position of Tinic Company showed the
following property and equipment after charging depreciation:
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Building
Accumulated depreciation

P3,000,000
(1,000,000)

Equipment
Accumulated depreciation

P1,200,000
(400,000)

P2,000,000
800,000

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, 2011, 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, 2009.

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REQUIRED: Based on the above and the result of your audit, determine the following:
(ignore deferred tax consequences)
a.
b.

21.Revaluation surplus as of December 31, 2011 after recording the revaluation

P250,000
c. P100,000
P150,000
d. P0

22.Amount to be recognized in 2011 profit or loss related to the revaluation of

property and equipment
a.
P400,000
c. P250,000
b.
P300,000
d. P150,000
a.
b.

23.Total depreciation in 2012

P289,000
P625,000

c. P100,000
d. P420,000

24.Carrying amount of property and equipment as of December 31, 2012

a.
P2,500,000
c. P2,080,000
b.
P2,400,000
d. P2,211,000
a.
b.

25.Revaluation surplus as of December 31, 2012

P100,000
c. P144,000
P75,000
d. P0

PROBLEM 6
REQUIRED: Select the best answer for each of the following:
26.A weakness in internal accounting control over recording retirements of
equipment may cause the auditor to
a. Trade additions to the other assets account to search for equipment that is
still on hand but no longer being used.
b. Inspect certain items of equipment in the plant and trace those items in the
accounting records.
c. Select certain items of equipment from the accounting records and locate
them in the plant.
d. Review the subsidiary ledger to ascertain whether depreciation was taken on
each item of equipment during the year.
27.In auditing plant assets and accumulated depreciation for proper valuation, the
auditor should do all except the following:
a. Physically inspect major plant assets additions.
b. Recalculate depreciation expense on a test basis.
c. Vouch repairs and maintenance expense on a test basis.
d. Vouch major additions by reference to underlying documentation.
28.To test the accuracy of the current years depreciation charges, an auditor should
rely most heavily on
a. Comparison of depreciation schedule detail with schedules supporting the
income tax return.
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b. Recomputation of depreciation for a sample of plant assets.

c. Tracing of totals from the depreciation schedule to properly approved journal
entries and ledger postings.
d. Vouching of the current years fixed acquisitions.
29.The audit procedure of analyzing the repairs and maintenance accounts is
primarily designed to provide evidence in support of the audit proposition that all
a. Capital expenditures have been authorized.
b. Expenditures for fixed assets have been recorded in the proper period.
c. Expenditures for fixed assets have been capitalized.
d. Non-capitalizable expenditures have been properly expensed.
30.What management assertion is violated if the clients statement of financial
position includes equipment that was leased under an operating lease?
a. Existence or occurrence.
b. Rights and obligations.
c. Completeness.
d. Classification.

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