AUDIT OF PROPERTY, PLANT AND EQUIPMENT

Practice Problems

Problem no. 1

JARAN CO. started an on September 1, 2013. Jaran’s account on December 31, 2016 included
the following balances.

Machinery (at cost) P910,000

Accumulated depreciation-machinery 482,000
Vehicles (at cost purchased nov 21, 2015 468,000
Accumulated depreciation-vehicles 196,560
Land ( at cost purchases October 25,2013) 810,000
Building (at cost purchases October 25,2013) 1,857,200
Accumulated depreciation-building 286,140

Details of machines owned at December 21,2016 are as follows:

Machine Purchase Date Cost Useful Life Residual Value

1 October 7, 2013 P 430,000 5 years P 25,000
2 February 4, 2014 P 480,000 6 years P 30,000

Additional Information:
 Jaran calculates depreciation to the nearest month and balances the records at month-end.
Recorded amounts are rounded to the nearest peso, and the reporting date is December
31.
 Jaran uses straight line depreciation for all depreciable assets except vehicles, which are
depreciated on the diminishing balance at 40% per annum.
 The vehicles account balance reflects the total paid for two identical delivery vehicles,
each of which cost P234,000.
 On acquiring the land and building, Jaran estimated the building’s useful life and residual
value at 20 years and P50,000, respectively.

The following transactions occurred from January 1, 2017:

2017
Jan 0 Bought a new machine (machine 3) for a cash price of P570,000. Freight charges of
3 P4,420 and installation costs of P17,580 were paid in cash. The useful life and
residual value were estimated at five years and P40,000, respectively.

June 2 Bought a second-hand vehicles for P152,000 cash. Repainting costs of P6,550 and
2 four new tires costing P3,450 were paid for in cash.

Aug 2 Exchanged machine 1 for office furniture that had a fair value of P125,000 at the
 8 date of exchange. The fair value of machine 1 at the date of exchange was
P115,000. The office furniture originally cost P360,000 and, to the date of
exchange, had been depreciated by P241,000 in the previous owner’s books. Jaran
estimated the office furniture’s useful life and residual value at eight years and
P5,400, respectively.

Dec 3 Recorded depreciation.

1

2018
April 3 Paid for repairs and maintenance on the machinery at a cash cost of P9,280.
0
May 2 Sold one of the vehicles bought on November 21, 2015, for P66,000 cash.
5
June 2 Installed a fence around the property at a cash cost of P55,000. The fence has an
6 estimated useful life of 10 years and zero residual value. (Debit the cost to a land
improvements asset account)

2019
Jan 0 Overhauled machine 2 at a cash cost of P120,000, after which Jaran estimated its
5 remaining useful life at one additional year and revised its residual value to
P50,000.

June 2 Traded in the remaining vehicle bought on November 21, 2015, for a new vehicle.
0 A trade-in allowance of P37,000 was received and P233,000 was paid in cash.

Oct 0 Scrapped the vehicles bought on June 22, 2017, as it had been so badly damaged in
4 a traffic accident that it was not worthwhile repairing it.

Dec 3 Recorded depreciation

1

1. What should be the depreciation expense for the vehicles for 2017?

A. 140,976 B. 138,976 C. 139,666 D. 140,286

2. What should be the depreciation expense for the machinery for 2017?

A. 242,733 B. 235,000 C. 239,400 D. 266,400

3. What should be the balance of the accumulated depreciation-Office furniture account at

December 31, 2018?

A. 19,933 B. 18,267 C. 19,833 D. 58,083

4. What should be the depreciation expense for the machinery for 2019?
 A. 277,708 B. 197,400 C. 221,400 D. 205,400

5. What should be the total depreciation expense for 2019?

A. 394,060 B. 418,060 C. 409,612 D. 403,832

Problem no. 2

Your audit of LUCBAN Company’s Property, plant and Equipment disclosed the following data
at December 31, 2016.

A S S E T
W A L E
Original Cost P 210,000 P 306,000 P 480,000 P 480,000
Year Purchased 2011 2012 2013 2015
Useful Life 10 years 15,000 hours 15 years 10 years
Salvage Value P 18, 600 P 18,000 P 30,000 P 30,000
Depreciation Method Sum-of-the Working hours Straight-line Double-
-years’ Digits Declining
balance
Accumulated
Depreciation through P 139,200 P 211,200 P90,000 P 96,000
2016

You noted that the client’s policy on depreciation is that no depreciation is recorded in the year
an asset is purchased, and full year depreciation is provided in the year an asset is disposed of.

The following transactions occurred during 2017:

a) On May 5, Asset W was sold for P78,000 cash. The company’s bookkeeper recorded this
retirement in the following manner in the cash receipts journal:
Cash 78,000
Asset W 78,000

b) On December 31, it was determined that Asset A had been used 2,100 hours during 2017.

c) On December 31, before computing depreciation expense on Asset L, the management of

Lucban decided the useful life remaining from January 1, 2017, was 10 years.

d) On December 31, it was discovered that a plant asset purchased om 2016 had been
expensed completely in the year. This asset costs P132,000 and has a useful life of 10
 years and no salvage value. Management has decided to use the double-declining balance
method for this asset, which can be referred to as Asset Y.

1. The 2017 depreciation expense on Asset W is

A. 17,400 B. 19,092 C. 20,880 D. 54,687

2. The gain to be reported in the sale of Asset W is

A. 0 B. 24,600 C. 26,292 D. 28,080

3. The 2017 depreciation expense on Asset A is

A. 40,320 B. 42,840 C. 52,800 D. 58,320

4. The 2017 depreciation expense on Asset L is

A. 16,365 B. 36,000 C. 39,000 D. 51,429

5. The total depreciation expense in 2017 on the above-,mentioned PPE items is

A. 191,640 B. 196,920 C. 199,920 D. 200,400

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