Auditing Problem 4

PROBLEM 4
The following balances have been extracted from the nominal ledger of Athena Co. at
September 30, 2016
Land at cost 400,000

Plant and machinery (Note 1)
-cost 385,000
-Accumulated depreciation at September 30, 2015 144,375
Freehold buildings (Note 2)
-valuation 1,644,000
-accumulated depreciation at September 30, 2015 192,000
The following additional information is available:

 On April 1, 2016, Athena Co. decided to sell one of its machines which had a carrying
amount of P8,200 on September 30, 2015. On April 1, 2016, the machine had a fair value of
P6,500 and met the “held for sale” criteria of PFRS 5, Non-current Assets Held for Sale and
Discontinued Operations. The machine was still held by Athena Co. at the year end, although
a buyer had been found. No adjustment to the above balances has been made in respect of
this machine. There have been no other changes to plant and machinery in the current year.
Plant and machinery is depreciated using the reducing balance method at a rate of 20% pa.
 Athena Co. carries its freehold buildings ( Property A and Property B) under the
revaluation method. The latest revaluations were on October 1, 2015 but these have
not yet been reflected in the above balances. The following information is available
with regard to these properties:
Property A Property B
Date of purchase October 1, 2006 October 1, 1995
Useful life at purchase 40 years 50 years
Cost P400,000 P1000,000
Revaluation surplus at P62,000 P456,000
September 30, 2015
Carrying amount at P372,000 P1,080,000
September 30, 2015
Valuation at October 1, P449,500 P600,000
2015
The useful lives of both properties are unchanged. Where possible, Athena Co. makes an
annual transfer between the revaluation surplus and retained earnings in accordance with best
practice.
QUESTIONS:
Based on the above data, compute the following:
1. Depreciation expense for the plant and machinery for the year ended September 30, 2016?
a. P46,805 b. P47,305 c. P48,125 d. P77,000
2. Carrying amount of the plant and machinery for the year ended September 30, 2016?
a. P185,940 b. P192,500 c. P194,140 d. P185,120
3. Carrying amount of the property A for the year ended September 30, 2016?
a. P449,500 b. P435,000 c. P372,000 d. P600,000
4. Carrying amount of the property B for the year ended September 30, 2016??
a. P480,000 b. P580,000 c. P600,000 d. P1,080,000
5. Total impairment loss to be recognized during the year ended September 30, 2016?
a. 1,700 b. P24,000 c. P24,880 d. P77,500
6. Total revaluation surplus to be closed to retained earnings during the year ended
September 30, 2016?
a. Nil b. P880 c. P3,620 d. P4,500
1. Answer: B
Carrying Amount of Plant & Machinery, 9/30/15
(385,000 – 144,375) 240,625
Carrying Amount of asset held for sale 8,200
Carrying amount of remaining Plant & Machinery 232,425
Depreciation of remaining Plant & Machinery × 20% 46,485
Carrying Amount of asset held for sale, 9/30/15 8,200

× 20%
1,640
Depreciation of remaining asset held for sale × 6/12 820
Depreciation Expense for 9/30/16 47,305
The depreciable amount of an asset shall be allocated on a systematic basis over its
useful life. (PAS 16, par 50)
Depreciation of an asset begins when it is available for use, ie when it is in the location
and condition necessary for it to be capable of operating in the manner intended by
management. Depreciation of an asset ceases at the earlier of the date that the
asset is classified as held for sale (or included in a disposal group that is
classified as held for sale) in accordance with IFRS 5 and the date that the asset
is derecognised. Therefore, depreciation does not cease when the asset
becomes idle or is retired from active use unless the asset is fully depreciated.
However, under usage methods of depreciation the depreciation charge can be
zero while there is no production. (PAS 16, par 55)
An entity shall not depreciate (or amortise) a non-current asset while it is

classified as held for sale or while it is part of a disposal group classified as held
for sale. Interest and other expenses attributable to the liabilities of a disposal
group classified as held for sale shall continue to be recognised. (PFRS 5, par
25)
2. Answer: A
Carrying amount of remaining Plant & Machinery 232,425
Less: Depreciation for 9/30/16 46,485
Carrying Amount of Plant & Machinery 9/30/16 185,940
Carrying amount is the amount at which an asset is recognised after
deducting any accumulated depreciation and accumulated impairment
losses. (PAS 16, par 6)
3. Answer: B*
Carrying Amount of A @ 10/1/15 449,500
Annual Depreciation (449,500/31 years) 14,500
Carrying Amount of A @ 9/30/16 435,000
4. Answer: B*
Carrying Amount of B @ 10/1/15 600,000
Annual Depreciation (600,000/30 years) 20,000
Carrying Amount of B @ 9/30/16 580,000
*After recognition as an asset, an item of property, plant and equipment whose
fair value can be measured reliably shall be carried at a revalued amount, being
its fair value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses. Revaluations
shall be made with sufficient regularity to ensure that the carrying amount does
not differ materially from that which would be determined using fair value at the
end of the reporting period. (PAS 16, par 31)
5. Answer: C
6. Answer: D

Auditing Problem 4

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PROBLEM 4

Land at cost 400,000

The following additional information is available:

Based on the above data, compute the following:

Carrying Amount of asset held for sale, 9/30/15 8,200

An entity shall not depreciate (or amortise) a non-current asset while it is

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