AUDITING PROBLEMS

PROBLEM NO. 1
(Intermediate Accounting 17
th
Edition – Stice)
The TOY COMPANY completed the following transactions during 2012:
Mar. 1 Purchased real property for P8,297,000, including a charge for P297,000
representing property tax for March 1 – June 30 which was prepaid by the vendor.
Of the purchase price, 25% is deemed applicable to land and the remaining 75% to
buildings. The Toy Company assumed a mortgage of P4,600,000 on the purchase
and paid cash for the balance.
30 The building acquired necessitates current reconditioning at a cost of P342,000
because previous owners had failed to take care of normal maintenance and repair
requirements on it.
May 15 Garages in the rear of the building were demolished. The Toy Company recovered
P66,000 on the lumber salvage. It then proceeded to construct a warehouse at
P1,013,000, which was almost exactly the same as bids made by construction
companies. Upon completion of construction, city inspectors ordered extensive
modifications to the warehouse as a result of failure on the part of
2. What are the estimated depletion and depreciation charges for the 5
th
year?
Depletion Depreciation
A. P1,305,000 P378,000
B. P2,610,000 P234,000
C. P2,610,000 P378,000
D. P1,305,000 P234,000
3. What are the estimated depletion and depreciation charges for the 6
th
year?
Depletion Depreciation
A. P2,610,000 P378,000
B. P1,305,000 P288,000
C. P1,305,000 P189,000
D. P2,610,000 P288,000
4. What are the estimated depletion and depreciation charges for the 11
th
year?
Depletion Depreciation
A. P1,305,000 P99,000
B. P1,305,000 P189,000
C. P2,610,000 P99,000
D. P2,610,000 P234,000
5. What are the depletion and depreciation charges for the first year assuming actual
production of 5,000 tons of mineral ore? (Nothing occurred during the year to cause the
company engineers to change their estimates of either the mineral resources or the life of
the structures and equipment.)
Depletion Depreciation
A. P1,087,500 P157,500
B. P1,305,000 P99,000
C. P1,305,000 P189,000
D. P1,087,500 P82,500
PROBLEM NO. 6
(INTERMEDIATE ACCOUNTING-IFRS - KIESO)
DEBBY CORP., a manufacturer of computer parts, has been experiencing growth in the
demand for its products over the last several years. This prompted the company to obtain
additional manufacturing facility. A real estate firm located an available factory near Debby’s
production facility, and Debby agreed to purchase the factory and used machinery from Que
Company on October 1, 2011. Renovations were necessary to convert the factory for Debby’s
manufacturing use.
The terms of the agreement required Debby to pay Que P1,500,000 when renovations started
on January 1, 2012, with the balance to be paid as renovations were completed. The overall
purchase price for the factory and machinery was P12,000,000. The building renovations were
contracted to Malibay Construction Company at P3,000,000. The payments made, as
renovations progressed during 2012, are shown below. The factory was placed in service on
January 1, 2013.
Que Malibay
January 1 P 1,500,000
April 1 2,700,000 P 900,000
October 1 3,300,000 900,000
December 31 4,500,000 1,200,000
P12,000,000 P3,000,000
On January 1, 2012, Debby obtained a 2-year, P3 million loan with a 12% interest rate to
finance the renovation of the acquired factory. This is Debby’s only outstanding loan during
2012.
Debby’s policy regarding purchases of this nature is to use the appraisal value of the land for
book purposes and prorate the balance of the purchase price over the remaining items. The
Page 6 of 23 Pages

building had originally cost Que P9,000,000 and had a net book value of P1,500,000, while the
machinery originally cost P3,750,000 and had a net book value of P1,200,000 on the date of
sale. The land was recorded on Que’s books at P1,200,000.
The following values were determined based on appraisal conducted by independent appraisers
at the time of acquisition.
Land P8,700,000
Building 3,150,000
Machinery 1,350,000
Gin G. Neer, Debby’s chief engineer estimated that the renovated plant would be used for 15
years, with an estimated residual value of P900,000. Neer estimated that the productive
machinery would have a remaining useful life of 5 years and residual value of P90,000.
Debby’s depreciation policy is to apply the 200% declining balance method for machinery and
the 150% declining balance method for the plant. One-half year’s depreciation is taken in the
year the plant is placed in service and one-half year is allowed when the property is disposed of
or retired.
Determine the amounts to be recorded on the books of Debby Corp. as of December 31, 2012,
for each of the following properties.
1. Land
A. P7,909,000 B. P8,700,000 C. P9,060,000 D. P10,909,000
2. Building
A. P5,670,000 B. P6,223,600 C. P3,223,600 D. P5,310,000
3. Machinery
A. P1,227,300 B. P1,098,000 C. P1,335,300 D. P990,000
Calculate the 2013 depreciation expense for each of the following properties.
4. Building
A. P238,500 B. P311,180 C. P283,500 D. P265,500
5. Machinery
A. P180,000 B. P198,000 C. P219,600 D. P227,460