AUDIT OF PROPERTY,

5 PLANT & EQUIPMENT

AUDIT PROGRAM FOR PROPERTY, PLANT, AND
EQUIPMENT AND ACCUMULATED DEPRECIATION
Audit Objectives
To determine that:
a. Property, plant, and equipment represent all tangible assets owned or held under capital lease
that are used in the operation of the business, and that they are properly recorded at cost or
other basis in conformity with GAAP.
b. Charges to property for additions during the audit period are proper capital expenditure.
c. Sales, trade-ins, retirements, and other dispositions during the audit period have been properly
recorded, and that gains or losses on disposals have been recognized.
d. Accumulated depreciation are reasonable.
e. The amount invested in property can reasonably be expected to be realized or recovered.
f. Property and related accounts are properly described and classified.
h. Adequate disclosures concerning these amounts have been made in conformity with GAAP.

Audit Procedures

Examination of opening balances.

1. For a recurring engagement:
a. Trace opening balances to last year's working papers.

2. For an initial audit where the previous years were audited:

a. Vouch significant transactions to ascertain:
aa. Authorization
bb. Propriety of accounting.
cc. Accounting principles applied.
b. Obtain permission from the client to refer to the working papers of predecessor auditor.
c. Vouch documents evidencing ownership.

3. For an initial audit where the previous years were unaudited:

a. To the extent necessary to form an opinion on the accuracy of the opening balances,
vouch significant transactions to ascertain:
aa. Authorization
bb. Propriety of accounting.
cc. Accounting principles applied.
b. Vouch documents evidencing ownership.

Examination of current year's transactions.

1. Obtain or prepare schedules of the property, plant, and equipment accounts and:

a. Check footings and cross-footings.

b. Determine if the schedules are in agreement with the general ledger control accounts.
 c. Trace individual balances to the detailed records or property cards.
d. Consider physical inspection of significant items.

2. For acquisitions or debits to the asset accounts:

a. Determine authorization.
b. Vouch supporting documents evidencing ownership.
c. Ascertain propriety of accounting treatment for capitalized expenditures.

3. For disposals or credits to the asset accounts:

a. Determine authorization.
b. Ascertain propriety of accounting treatment.
c. Test the computations of the resulting gains and losses.
d. Ascertain the business reasons for unusual disposals.

4. For impaired property, plant and equipment:

a. Determine whether management has appropriately identified indications of impairment.
b. Determine that the methods and assumptions used by management in estimating
recoverable value are reasonable.
c. Ascertain if the impairment was properly recorded.

5. Examine lease contracts to determine whether leases are properly classified as finance or
operating and determine whether the proper accounting has been performed and appropriate
disclosures have been made.

6. Examine support for significant changes to repairs, maintenance and other expense accounts
to determine if they should be capitalized to property, plant, and equipment.

7. Test computations of depreciation, depletion, and amortization to determine the appropriateness

of the methods and estimated lives used. Determine if they are consistent with the methods
and lives used in prior periods.

8. Review minutes of meetings, legal documents, and other evidence for evidence of liens,
pledges, and restrictions on property, plant and equipment.

9. Search for unrecorded retirements:

a. By examination of cash receipts, tax declarations, insurance records, credits to scrap
sales, and inquiry of knowledgeable company personnel.
b. By a tour of the company plant to observe indications of equipment removals.

10. Identify properties that are:

a. Idle
b. No longer in use
c. Obsolete
and determine proper accounting recognition.

11. Reconcile payments to government for taxes and registrations with recorded assets.

12. Ascertain that fully depreciated assets still in use are not further depreciated.

13. Determine and discuss with appropriate official, the adequacy of insurance coverage, if any.

14. Determine that the property, plant and equipment that are being held for disposal are carried
at appropriate amounts.

15. Determine the propriety of financial statement presentation and adequacy of disclosures.
5 Eye Openers
1. Define property, plant and equipment.

2. Give examples of property, plant and equipment.

3. What are the elements of cost of property, plant and equipment.

4. What are the ways to acquire property, plant and equipment. Discuss
the accounting procedures of each ways.

5. Discuss the accounting procedure when an asset is acquired by:

a. Cash
b. Installment
c. On account
d. Issuance of share capital
e. Issuance of bonds payable
f. Exchange
g. Trade-in

6. Explain the accounting treatment for:

a. Land improvements
b. Special assessment
c. Real property tax

7. Define depreciation.

8. What is residual value?

9. What are the three factors of depreciation?

10. What are the common methods of depreciation? Explain each.

11. Explain the effect of change in the useful life of depreciable asset.

12. Explain the treatment of a change in depreciable method.

 5 problems
Problem 5-1
Acquisition/Self-construction of PP
On March 1, 2016, Royal company acquired the plant assets of Inacco Corporation in exchange
for 25,000 ordinary share ($100 par value), which had a fair value per share of $180 on the date
of the purchase of the property. The property had the following appraised value:

Land $ 800,000
Building 2,400,000
Machinery and Equipment 1,600,000

Below is a summary of Royal Company's cash outflow between the acquisition date and
December 29, the date when it first occupied the building:

Repairs to building
Construction of bases for machinery to be installed later
Driveways and parking lots
Remodeling of office space in building, including new partition and walls
Special assessment by the city government on land

On December 27, Royal company paid cash for machinery, $560,000 (subject to a 2% discount)
and freight on machinery of $21,000.

Required:
Compute the total cost of each of the following:
a. Land
b. Building
c. Machinery and Equipment

Problem 5-2
Correcting Entries for PP

The following are PPE acquisitions for selected companies:

1. Flash Hornet Company acquired land, buildings, and equipment from a financially distressed
company, Barnet, Corp. for a lump sum price of $2,800,000. On the acquisition date, Barloft,
Inc.'s assets had the following book and fair values:

Book Value
 Land $ 800,000 $
Buildings 1,000,000
Equipment 1,200,000

Flash Hornet Company decided to take a conservative position by recording the lower of the
two values for each PPE item acquired. The following entry was made:

Land $ 600,000
Buildings 1,000,000
Equipment 1,200,000
Cash

2. Thompson Company purchased factory equipment by making a $200,000 cash down payment
and signing a 3-year $300,000, 10% note payable. The acquisition was recorded
as follows:

Factory equipment $ 530,000

Cash
Note payable
Interest payable

3. Tuba Company purchased store equipment for $800,000, terms 2/10, n/30. The
company took the discount and made the following entry when it paid for the acquisition:

Store equipment $ 800,000

Cash
Purchase discount

4. Nuke Company recently received at of cost land from its shareholder. The land's fair
value is $1,350,000. No entry was made to record the land because it had no cost.

5. Maze Company constructed a building at a total cost of $43,000,000. The building could
have been purchased for $45,000,000. The company's controller made the following
entry:

Building $ 45,000,000
Cash
Profit on construction

Required:
Prepare the necessary correcting entry for each acquisition.

Problem 5-3
Acquisition of Equipment on a Deferred Payment Basi

Sycamore company acquires a new manufacturing equipment on January 1, 2016, on installment

basis. The deferred payment contract provides a down payment of $300,000 and an 8-year note
for $3,104,160. The note is to be paid in 8 equal annual installment payments of $388,020,
including 10% interest. The payments are to be made on December 31, of each year, beginning
December 31, 2016. The equipment has a cash price equivalent of $2,370,000. Sycamore
financial year-end is December 31.

Required:
Compute:
1. Acquisition cost of the equipment?
2. Discount to be recognized on note payable on January 1, 2016. Entry to record the acquisition.
3. Interest expense to be recognized in 2016.
4. Carrying value of the note payable at December 31, 2017.

Problem 5-4
Journal Entries for PPE Acquisition

Described below are transactions related to Golden Egg Company:

a. The national government gives the company a large tract of land. The condition attached to this
government grant is that Golden Egg company is to construct a plant facility on the site to
provide employment opportunities to its resident. The fair value of the land is determined to be
$4,000,000.

b. 150,000 ordinary shares with par value of $20 per share are issued in exchange for land and
building. The fair values of the land and building acquired are $5,400,000 and $18,900,000,
respectively. The company's stock is currently selling at $175 per share.

c. Still included in the materials, direct labor, and overhead accounts are amounts that are
properly chargeable to the machinery account. These represent costs of a machine
constructed by Golden Egg company during the year. These costs are:

Material used
Factory supplies used
Direct labor incurred
Incremental overhead (over regular) arising form construction of
machine (excluding factory supplies used)

Fixed overhead rate applied to regular manufacturing operations 60% of direct lab
Cost of similar machine if it had been purchased from outside dealer

Required:
Prepare journal entries to record the preceding transactions.

Problem 5-5
Correcting Improper PPE Entrie
Banjo Corporation was organized in June 2016. In your audit of the company's books, you find the
following land, buildings and equipment account:

LAND, BUILDINGS, AND EQUIPMENT

Debit
2016

June 7 Organization fees $ 60,000

15 Land site and building 945,000
30 Corporate organization costs 90,000
July 3 Title clearance fees 55,200
Aug. 29 Cost of razing old building 60,000
Sept. 1 Salaries of banjo Corporation executives 180,000
Dec. 15 Stock bonus to corporate promoters, 6,000 ordinary
shares, $50 per share market value 300,000
15 Real property tax 43,200
20 Cost of new building completed and occupied on this
date 5,250,000

Your analysis of this account and other accounts disclosed the following additional information:
● Banjo Corporation paid $60,000 for the demolition of the old building. It sold the scrap for
$36,000 and credited the proceeds to miscellaneous income.

● Banjo Corporation executives did not participate in the construction of the new building.

● The property tax was for the period July 1 - December 31, 2016.

Required:
Compute:
1. The amount to be reported as organization expenses in Banjo Corporation's 2016 income
statement.
2. Cost of Banjo Corporation's land.
3. Cost of the new building.

Problem 5-6
Exchange Transaction

Colton Company is contemplating to exchange a machine used in its operations. Colton Company
received the following offers from interested companies.

1. Aye Company offered to exchange a similar machine plus $345,000 cash.

2. Betsy Company offered to exchange a similar machine.

3. Omni Company offered to exchange a similar machine, but wanted $120,000 in addition to
 Colton Company machine.

In addition, Colton Company inquired from Sullivan Corp., a dealer in machines. Colton Company
is to pay $1,305,000 cash plus the trade in of its old machine in order to acquire a new unit.

Presented below are the machine's cost, accumulated depreciation, and fair value:

Colton Aye Betsy Omni

Cost $ 2,400,000 $ 1,800,000 $ 2,205,000 $ 2,400,000
Accumulated
depreciation 750,000 675,000 1,065,000 1,125,000
Fair value 1,380,000 1,035,000 1,380,000 1,500,000

Required:
For each of the above exchange situations, prepare the journal entries to record the exchange
on the books of each company. Assume that all the exchange situations have commercial
substance.

Problem 5-7
Acquisition and Disposition of Equipmen

You are engage to audit the financial statements of Chronicle Company for the year ended December
31, 2016. You gathered the following information pertaining to the company's equipment and
accumulated depreciation accounts

EQUIPMENT

1.1.16 Balance $ 446,000 9.1.16 No. 6 sold

6.1.16 No. 12 36,000 12.31.16 Balance
9.1.16 Dismantling of No. 6 1,000
$ 483,000

ACCUMULATED DEPRECIATION - EQUIPMENT

12.31.16 Balance $ 271,400 1.1.16 Balance

12.31.16 2016
Depreciation
$ 271,400

The following are the details of the entries above:

1. The company depreciates equipment at 10 percent per annum. The oldest equipment owned is
seven years old as of December 31, 2016.

2. The following adjusted balances appeared on your last year's working papers:
 Equipment $ 446,000
Accumulated depreciation 224,000

3. Machine No. 6 was purchased on March 1, 2009 at a cost of $30,000 and was sold on September
1, 2016, for $9,000.

4. Included in charges to the repairs expense account was an invoice covering installation of Machine
No. 12 in the amount of $2,500.

5. 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.

Required:
1. What is the gain (loss) on the sale of Machine No. 6?
2. What is the equipment account balance on December 31, 2016?
3. What is the total depreciation expense on equipment for the year ended December 31,
2016?
4. What adjusting entry should be prepared in connection with the sale of Machine No. 6 on
September 1, 2016?
5. What adjusting entry should be prepared on December 31, 2016, to correct the amount of
depreciation recorded on company's books?

Problem 5-8
Equipment Acquired under Finance Leas
(Lessee has a Purchase Option

Honeybee Company has a long-standing policy of acquiring company equipment by leasing. On

January 1, 2015, the company entered into a lease for new machine. The lease contracts provides
that annual payments will be made for 5 years. The payments are to be made in advance on
December 31, of each year. At the end of the 5-yearr period, Honeybee Company may purchase the'
machine. The estimated economic life of the machine is 12 years. Honeybee Company uses the
calendar year reporting purposes and depreciates its other equipment using the straight-line method.

In addition, you gathered the following information about the lease:

Annual lease payments 165,000

Purchase option price 75,000
Estimated fair market value of the machine after 5 years 1,125,000
Interest rate implicit in the lease 10%
Date of first lease payment Jan. 1, 2015

The following data are abstracted from the present value tables:
 Present value of 1 for 5 periods at 10% 0.62092
Present value of an annuity due for 5 periods at 10% 4.16986
Present value of an ordinary annuity for 5 periods at 10% 3.79079

Required:
1. Compute :
a. The amount to be capitalized as an asset for the lease of the machine.
b. The amount of interest expense to be recognized for the year ended
December 31, 2016.
c. Depreciation that should be provided on the leased equipment for the year
ended December 31, 2015.

2. Prepare journal entry to record the lease payment on December 31, 2015.

3. Assume the purchase option is exercised at the end of the lease. The actual
fair market value of the machine at the end of the lease is $285,000. On the
date the purchase option is exercised, the undiscounted sum of future cash
flows expected from the machine is $375,000, what is the journal entry
to record the exercise of the option?

4. What is the amount of impairment loss that should be recognized?

Problem 5-9
Revaluation of PP

The statement of financial position of Angelic Company on December 31, 2016, showed the following
property, plant and equipment items after recording depreciation:

Building $ 6,000,000
Accumulated depreciation (2,000,000)

Motor vehicle $ 2,400,000

Accumulated depreciation (800,000)

Angelic Company adopted the revaluation model for the valuation of its PPE. This has resulted in
the recognition in prior periods of an asset revaluation surplus for the building of $280,000. On
December 31, 2016, an independent appraiser assessed the fair value of the building to be
$3,200,000 and the vehicle to be $1,800,000. The building and the motor vehicle have remaining
useful lives of 25 years and 4 years, respectively, with zero residual value. The company uses
the straight-line depreciation method. Ignore income tax implications.

Required:
1. Prepare journal entry to record the revaluation of the building.
2. Compute for the amount of depreciation for 2016.
Problem 5-10
Different Depreciation Metho

Your audit of Lyra Company's property, plant and equipment disclosed the following data at December
31, 2017:

ASSETS
J E R

Original cost $ 70,000 $ 102,000 $ $ 160,000

Year purchased 2011 2012 2013
Useful life 10 years 15,000 hrs 15 years
Salvage value $ 6,200 $ 6,000 $ $ 10,000

Depreciation method sum-of- working straight

year's-digit hours line
Accumulated depreciation
through 2016 $ 46,400 $ 70,400 $ $ 30,000

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

The following transactions occurred during 2017:

1. On May 5, Asset Jay was sold for $26,000 cash. The company's bookkeeper recorded this
retirement in the following manner in the cash receipts journal:

Cash $ 26,000
Asset J

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

3. On December 31, before computing depreciation expense on Asset R, the management of Lyra
Company decided the useful life remaining from January 1, 2017, was 10 years.

4. On December 31, it was discovered that a plant asset in 2016 had been expensed completely
in the year. This asset costs $44,000 and has a useful life of 10 years and no savage value.
Management has decided to use the double-declining balance method for this asset, which can
be referred to as "Asset C".

Required:
Prepare the necessary adjusting journal entries for the year 2017. Record the appropriate depreciation
expense on the above mentioned items.
 onstruction of PPE
on in exchange
80 on the date

$ 210,000
270,000
244,000
322,000
36,000

a 2% discount)

ing Entries for PPE

ally distressed
on date, Barloft,

Fair Values
 600,000
1,400,000
1,200,000

he lower of the

$ 2,800,000

h down payment

$ 200,000
300,000
30,000

$ 784,000
16,000

lding could

$ 43,000,000
2,000,000

red Payment Basis

6, on installment
 an 8-year note

year, beginning

rd the acquisition.

r PPE Acquisitions

on attached to this
n the site to
determined to be

ge for land and

$18,900,000,

$ 375,000
27,000
450,000

81,000

60% of direct labor

1,320,000

proper PPE Entries

ooks, you find the

Credit

l information:

he scrap for

ion's 2016 income

hange Transactions

Colton Company

n addition to
Colton Company

Sullivan
$ 1,950,000

0
2,775,000

ecord the exchange

ave commercial

sition of Equipment

ar ended December
uipment and

$ 9,000
474,000

$ 483,000

$ 224,000

47,400
$ 271,400

uipment owned is
s sold on September

nstallation of Machine

uisition and none

December 31,

Machine No. 6 on

rect the amount of

nder Finance Lease

a Purchase Option)

by leasing. On
contracts provides
advance on
y may purchase the'
mpany uses the
traight-line method.
Revaluation of PPE

howed the following

$ 4,000,000

1,600,000

s has resulted in
280,000. On

have remaining
ompany uses
epreciation Method

ng data at December

$ 160,000
2015
10 years
$ 10,000
double-
declining-
balance

$ 32,000

ed in the year an
disposed of.

recorded this

$ 26,000

during 2017.

nagement of Lyra

nsed completely
savage value.
asset, which can

propriate depreciation
 5 problems
Problem 5-1
Acquis
On March 1, 2016, Royal company acquired the plant assets of Inacco Corporation in exchange
for 25,000 ordinary share ($100 par value), which had a fair value per share of $180 on the date
of the purchase of the property. The property had the following appraised value:

Land
Building
Machinery and Equipment

Below is a summary of Royal Company's cash outflow between the acquisition date and
December 29, the date when it first occupied the building:

Repairs to building
Construction of bases for machinery to be installed later
Driveways and parking lots
Remodeling of office space in building, including new partition and walls
Special assessment by the city government on land

On December 27, Royal company paid cash for machinery, $560,000 (subject to a 2% discount)
and freight on machinery of $21,000.

Required:
Compute the total cost of each of the following:
a. Land
Land 800,000
Special assessment by the city government on land 36,000
 Total Cost 836,000

b. Building
Building Cost $ 2,400,000
Repairs to building $ 210,000
Driveways and parking lots $ 244,000
Remodeling of office space in building, including new partition and walls $ 322,000
Total Cost $ 3,176,000

c. Machinery and Equipment

Machienery and Equipment $ 1,600,000
Construction of bases for machinery to be installed later $ 270,000
Freight on Machinery $ 21,000
Total Cost $ 1,891,000

Problem 5-2

The following are PPE acquisitions for selected companies:

1. Flash Hornet Company acquired land, buildings, and equipment from a financially distressed
company, Barnet, Corp. for a lump sum price of $2,800,000. On the acquisition date, Barloft,
Inc.'s assets had the following book and fair values:

Book Value Fair Values

Land $ 800,000 $ 600,000

Buildings 1,000,000 1,400,000
Equipment 1,200,000 1,200,000

Flash Hornet Company decided to take a conservative position by recording the lower of the
two values for each PPE item acquired. The following entry was made:

Land
 Buildings $ 600,000
Equipment 1,000,000
Cash 1,200,000

2. Thompson Company purchased factory equipment by making a $200,000 cash down payment
and signing a 3-year $300,000, 10% note payable. The acquisition was recorded
as follows:

Factory equipment $ 530,000

Cash
Note payable
Interest payable

3. Tuba Company purchased store equipment for $800,000, terms 2/10, n/30. The
company took the discount and made the following entry when it paid for the acquisition:

Store equipment $ 800,000

Cash
Purchase discount

4. Nuke Company recently received at of cost land from its shareholder. The land's fair
value is $1,350,000. No entry was made to record the land because it had no cost.

5. Maze Company constructed a building at a total cost of $43,000,000. The building could
have been purchased for $45,000,000. The company's controller made the following
entry:

Building $ 45,000,000
Cash
Profit on construction

Required:
Prepare the necessary correcting entry for each acquisition.
1. Building 1,225,000
Equipment 1,050,000
Land 525,000
Cash 2,800,000

2. Factory Equipment 500,000.00

Notes payable 300,000
Cash 200,000

3. Store Equipment 784,000

AP 784,000

4. Building 1,350,000
Deffered grand revenue 1,350,000

5. Bulding 43,000,000
Deffered grand revenue 43,000,000

Problem 5-3
Acquisition of Equipment

Sycamore company acquires a new manufacturing equipment on January 1, 2016, on installment

basis. The deferred payment contract provides a down payment of $300,000 and an 8-year note
for $3,104,160. The note is to be paid in 8 equal annual installment payments of $388,020,
including 10% interest. The payments are to be made on December 31, of each year, beginning
December 31, 2016. The equipment has a cash price equivalent of $2,370,000. Sycamore
financial year-end is December 31.

Required:
Compute:
1. Acquisition cost of the equipment?
The acquisition of The Equipment of 2,370,000
2. Discount to be recognized on note payable on January 1, 2016. Entry to record the acquisition.
Cost of Equipment 2,370,000
Down Payment (300,000)
Notes Payable 2,070,000
FV of note payable 3,104,160
Discount on Notes Payable, Jan 1, 2016 (1,034,160)

Equipment 2,370,000
Discount on Notes 1,034,160
Notes Payable 3,104,160
Cash 300,000

3. Interest expense to be recognized in 2016.

Carrying Value of Notes Payable on Jan 1,2016 2,070,000
Interest Rate 10%
Discount amortization for 2016 207,000

Interest Expense 207,000

Discount on Notes Payable 207,000

4. Carrying value of the note payable at December 31, 2017.

Notes Payable Jan 1, 2016 2,070,000
Less : Payment Dec 31, 2016 388,020
Notes Payable Dec 31, 2016 1,681,980
Less : Disc on notes pay Dec 31,2016 207,000
Carrying value 1,474,980

Problem 5-4
Journal Entries fo

Described below are transactions related to Golden Egg Company:

a. The national government gives the company a large tract of land. The condition attached to this
government grant is that Golden Egg company is to construct a plant facility on the site to
provide employment opportunities to its resident. The fair value of the land is determined to be
$4,000,000.

b. 150,000 ordinary shares with par value of $20 per share are issued in exchange for land and
building. The fair values of the land and building acquired are $5,400,000 and $18,900,000,
respectively. The company's stock is currently selling at $175 per share.

c. Still included in the materials, direct labor, and overhead accounts are amounts that are
properly chargeable to the machinery account. These represent costs of a machine
constructed by Golden Egg company during the year. These costs are:

Material used $ 375,000

Factory supplies used 27,000
Direct labor incurred 450,000
Incremental overhead (over regular) arising form construction of
machine (excluding factory supplies used) 81,000

Fixed overhead rate applied to regular manufacturing operations 60% of direct labor
Cost of similar machine if it had been purchased from outside dealer 1,320,000

Required:
Prepare journal entries to record the preceding transactions.
a. Land 4,000,000
Deffered Income
4,000,000
b. Land 5,400,000
Building 18,900,000
Ordinary shares (150.000 shares x 20 per share) 3,000,000
Share premium 21,300,000

c. Machinery 1,203,000
 Materials 375,000
Direct labor 450,000
*Factory Overhead control 378,000

*Factory overhead control :

Factory Overhead Applied (450.000 x 60%) 270,000
Incremental overhead 81,000
Factory supplies used 27,000
378,000

Problem 5-5
Correcting Im

Banjo Corporation was organized in June 2016. In your audit of the company's books, you find the
following land, buildings and equipment account:

LAND, BUILDINGS, AND EQUIPMENT

Debit
2016

June 7 Organization fees $ 60,000

15 Land site and building 945,000
30 Corporate organization costs 90,000
July 3 Title clearance fees 55,200
Aug. 29 Cost of razing old building 60,000
Sept. 1 Salaries of banjo Corporation executives 180,000
Dec. 15 Stock bonus to corporate promoters, 6,000 ordinary
shares, $50 per share market value 300,000
15 Real property tax 43,200
20 Cost of new building completed and occupied on this
date 5,250,000

Your analysis of this account and other accounts disclosed the following additional information:
 ● Banjo Corporation paid $60,000 for the demolition of the old building. It sold the scrap for
$36,000 and credited the proceeds to miscellaneous income.

● Banjo Corporation executives did not participate in the construction of the new building.

● The property tax was for the period July 1 - December 31, 2016.

Required:
Compute:
1. The amount to be reported as organization expenses in Banjo Corporation's 2016 income
statement.
Organization Fees 60,000
Corporate organization costs 90,000
Stock promotion costs ($50x6.000 ordinary shares) 300,000
Total Organization expenses 450,000

2. Cost of Banjo Corporation's land.

Land site and building 945,000
Title clearance fees 55,200
Total Cost of Banjo corps land 1,000,200

3. Cost of the new building.

Construction cost 5,250,000
Net cost of razing an old building
Cost of razing old building 60,000
Cash received from sale of scrap (36,000) 24,000
Total cost of the new building 5,274,000

Problem 5-6
Exch
Colton Company is contemplating to exchange a machine used in its operations. Colton Company
received the following offers from interested companies.

1. Aye Company offered to exchange a similar machine plus $345,000 cash.

2. Betsy Company offered to exchange a similar machine.

3. Omni Company offered to exchange a similar machine, but wanted $120,000 in addition to
Colton Company machine.

In addition, Colton Company inquired from Sullivan Corp., a dealer in machines. Colton Company
is to pay $1,305,000 cash plus the trade in of its old machine in order to acquire a new unit.

Presented below are the machine's cost, accumulated depreciation, and fair value:

Colton Aye Betsy

Cost $ 2,400,000 $ 1,800,000 $ 2,205,000

Accumulated
depreciation 750,000 675,000 1,065,000
Fair value 1,380,000 1,035,000 1,380,000

Required:
For each of the above exchange situations, prepare the journal entries to record the exchange
on the books of each company. Assume that all the exchange situations have commercial
substance.
A. Calton Company
Cash 345,000
Machinery - new ( 1,380,000 -345,000 ) 1,035,000
Accumulated depreciation 750,000
Loss on exchange ( 1,650,000 BV - 1,380,000 FV ) 270,000
Machinery -Old 2,400,000
 Aye Company
Machinery ( 1,035,000-345,000 ) 1,380,000
Accumulated depreciation 675,000
Loss on exchange ( 1,125,000 BV -1,035,000 FV ) 90,000
Cash 345,000
Machinery -old 1,800,000

B. Colton Company
Machinery - new 1,380,000
Accumulated Depreciation 750,000
Loss on excahenge ( 1,650,000 BV -1,380,000 FV ) 270,000
Machinery -Old 2,400,000

Betsy Company
Machinery - new 1.380.000 1,380,000
Accumulated Depreciation 1.065.000 1,065,000
Gain on exchange( 1,380,000 FV- 1,140,000 BV ) 240,000
Machinery -Old 2.205.000 2,205,000

C. Colton Company
Machinery - new ( 1,380,000+120.000 ) 1,500,000
Accumulated Depreciation 750,000
Loss on excahenge ( 1,650,000 BV - 1,380,00 FV ) 270,000
Machinery -Old 2,400,000
Cash 120,000

Omny Company
Cash 120,000
Machinery - new ( 1,500,000-120,000 ) 1,380,000
Accumulated Depreciation 1,125,000
Gain on exchange( 1,500,000 FV-1,275,000 BV ) 225,000
Machinery -Old 2,400,000
D. Colton Company
Machinery - new ( 1,380,000 + 1,395,000 ) 2,775,000
Accumulated Depreciation 750,000
Loss on excahenge ( 1,650,000 BV - 1,380,000 ) 270,000
Cash 1,395,000
Machinery -Old 2,400,000

Problem 5-7
Acquisition and Disposition of Equ

You are engage to audit the financial statements of Chronicle Company for the year ended December
31, 2016. You gathered the following information pertaining to the company's equipment and
accumulated depreciation accounts

EQUIPMENT

1.1.16 Balance $ 446,000 9.1.16 No. 6 sold

6.1.16 No. 12 36,000 12.31.16 Balance
9.1.16 Dismantling of No. 6 1,000
$ 483,000

ACCUMULATED DEPRECIATION - EQUIPMENT

12.31.16 Balance $ 271,400 1.1.16 Balance

12.31.16 2016

$ 271,400

The following are the details of the entries above:

1. The company depreciates equipment at 10 percent per annum. The oldest equipment owned is
seven years old as of December 31, 2016.

2. The following adjusted balances appeared on your last year's working papers:

Equipment
Accumulated depreciation

3. Machine No. 6 was purchased on March 1, 2009 at a cost of $30,000 and was sold on September
1, 2016, for $9,000.

4. Included in charges to the repairs expense account was an invoice covering installation of Machine
No. 12 in the amount of $2,500.

5. 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.

Required:
1. What is the gain (loss) on the sale of Machine No. 6?
Net proceds (9,000-1,000) 8,000
Cost 30,000
Accumulated depreciation (30.000 x10% x7 ) 21,000 9,000
Loss on sale (1,000)

2. What is the equipment account balance on December 31, 2016?

Balance Jan 1, 2016 446,000
Machine No 12. Purchased ( 36,000 + 2,500 ) 38,500
Machine No.6 sold (30,000)
Balance Dec.31 454,500

3. What is the total depreciation expense on equipment for the year ended December 31,
2016? (454,500x10%) 45,450
4. What adjusting entry should be prepared in connection with the sale of Machine No. 6 on
September 1, 2016?

5. What adjusting entry should be prepared on December 31, 2016, to correct the amount of
depreciation recorded on company's books?
Cash 9,000
Equipment 1,000
Equipment 9,000
Cash 1,000

Cash 9,000
Accum. Depreciation 21,000
Loss on sale 1,000
Equipment 30,000
Cash 1,000

Accum. Depreciation 21,000

Loss on sale 1,000
Equipment 22,000

Equipment 2,500
Repairs expense 2,500

Accum. Depreciation 1,950

Depreciation Expense 1,950

Depreciation Recorded 47,400

Correct Depreciation (45,450)
Overstatement of Depreciation 1,950

Problem 5-8
Equipment Acquired un
(Lessee has
Honeybee Company has a long-standing policy of acquiring company equipment by leasing. On
January 1, 2015, the company entered into a lease for new machine. The lease contracts provides
that annual payments will be made for 5 years. The payments are to be made in advance on
December 31, of each year. At the end of the 5-yearr period, Honeybee Company may purchase the'
machine. The estimated economic life of the machine is 12 years. Honeybee Company uses the
calendar year reporting purposes and depreciates its other equipment using the straight-line method.

In addition, you gathered the following information about the lease:

Annual lease payments 165,000

Purchase option price 75,000
Estimated fair market value of the machine after 5 years 1,125,000
Interest rate implicit in the lease 10%
Date of first lease payment Jan. 1, 2015

The following data are abstracted from the present value tables:

Present value of 1 for 5 periods at 10% 0.62092

Present value of an annuity due for 5 periods at 10% 4.16986
Present value of an ordinary annuity for 5 periods at 10% 3.79079

Required:
1. Compute :
a. The amount to be capitalized as an asset for the lease of the machine.
Present Value of lease payments (165,000 x 4.169) 688,027
Present Value of purchase option price (75,000 x 0.629) 46,569
Amount to be capitalized as an asset for the lease of the machine 734,596
b. The amount of interest expense to be recognized for the year ended
December 31, 2016.
Interest
Date Payment Expense
Principal Lease Liability

Jan1, 2015 Initial Payment 734,596

 Dec31,2015 165,000 0 165,000 569,596
Dec31,2015 165,000 56,960 108,040 461,556
Dec31,2016 165,000 46,156 118,844 342,711
Dec31,2017 165,000 34,271 130,729 211,982
Dec31,2018 165,000 21,198 143,802 68,181
Dec31,2019 75,000 6,819 68,181 0
interest Expense on Dec 31, 2016 is $ 46.156 (461,556x10%)
c. Depreciation that should be provided on the leased equipment for the year
ended December 31, 2015.
Depreciation Expense on Dec 31, 2015 is (734.596 / 12) $ 61,216.33

2. Prepare journal entry to record the lease payment on December 31, 2015.
Leases Liability 108,040 (165,000-56,960)
Interest Expense 56,960 (569,596x10%)
Cash 165,000

3. Assume the purchase option is exercised at the end of the lease. The actual
fair market value of the machine at the end of the lease is $285,000. On the
date the purchase option is exercised, the undiscounted sum of future cash
flows expected from the machine is $375,000, what is the journal entry
to record the exercise of the option?
Leases Liability 68,181 (211,982-143,802)
Interest Expense 6,819
Cash 75,000

4. What is the amount of impairment loss that should be recognized?

Fair value of equipment 285,000
Cost 734,596
Depreciation (734,596/12 x 5 ) (306,082) 428,514
Impairment Loss (143,514)

Problem 5-9
The statement of financial position of Angelic Company on December 31, 2016, showed the following
property, plant and equipment items after recording depreciation:

Building
Accumulated depreciation

Motor vehicle
Accumulated depreciation

Angelic Company adopted the revaluation model for the valuation of its PPE. This has resulted in
the recognition in prior periods of an asset revaluation surplus for the building of $280,000. On
December 31, 2016, an independent appraiser assessed the fair value of the building to be
$3,200,000 and the vehicle to be $1,800,000. The building and the motor vehicle have remaining
useful lives of 25 years and 4 years, respectively, with zero residual value. The company uses
the straight-line depreciation method. Ignore income tax implications.

Required:
1. Prepare journal entry to record the revaluation of the building.
Carrying
Amount Decrease
Value
Building 6,000,000 4,800,000 1,200,000
Accumulated Depreciation (2,000,000) 1,600,000 (400,000)
Total 4,000,000 6,400,000 800,000

Accumulated Decpre-Building 400,000

Revaluation surplus 280,000
Revaluation loss 520,000
Building 1,200,000

2. Compute for the amount of depreciation for 2016.

Buildings (3.200.000/25) 128,000
 Motor Vehicle (1.800.000/4) 450,000
Depreciation for 2016 578,000

Problem 5-10
Different D

Your audit of Lyra Company's property, plant and equipment disclosed the following data at December
31, 2017:

ASSETS
J E

Original cost $ 70,000 $ 102,000

Year purchased 2011 2012
Useful life 10 years 15,000 hrs
Salvage value $ 6,200 $ 6,000

Depreciation method sum-of- working

year's-digit hours
Accumulated depreciation
through 2016 $ 46,400 $ 70,400

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

The following transactions occurred during 2017:

1. On May 5, Asset Jay was sold for $26,000 cash. The company's bookkeeper recorded this
retirement in the following manner in the cash receipts journal:

Cash $ 26,000
Asset J $ 26,000
2. On December 31, it was determined that Asset E had been used 2,100 hours during 2017.

3. On December 31, before computing depreciation expense on Asset R, the management of Lyra
Company decided the useful life remaining from January 1, 2017, was 10 years.

4. On December 31, it was discovered that a plant asset in 2016 had been expensed completely
in the year. This asset costs $44,000 and has a useful life of 10 years and no savage value.
Management has decided to use the double-declining balance method for this asset, which can
be referred to as "Asset C".

Required:
Prepare the necessary adjusting journal entries for the year 2017. Record the appropriate depreciation
expense on the above mentioned items.
a. Depreciation expense - Asset J 5,800
Accumulated depreciation Asset J 5,800
([70,000-6,200]x5/55)

b. Accumulated Depreciation Asset J (46.400+5.800) 52,200

Asset J (70.000-26.000) 44,000
Gain on Sale of Asset * 8,200
* Proceeds 26,000
Book Value ( 70,000-52,200 ) 17,800
8,200

c. Depreciation expense Asset E 13,440

Accumulated depreciation Asset 13,440
([102,000-6,000]/15,000x2,100)

d. Asset R
cost 160,000
less accum. Depreciation 30,000
([160,000-10,000]x3/15)
carriying value 130,000
less residul value 10,000
remaining depreciable amount 120,000
 divide by remaining life 10
depreciation asset R 12,000

Depreciation expenxe Asset R 12.000 12,000

Accumulated depreciation Asset R 12,000

e. Asset C 44,000
Retained Earnings 44,000

f. Depreciation Asset C 8,800

Accumulated depreciation Asset C 8,800
(44,000x20%)

g. Depreciation Asset I 25,600

Accumulated depreciation Asset I 25,600
([160,000x80%]x20%)
Acquisition/Self-construction of PPE

$ 800,000
2,400,000
1,600,000

$ 210,000
270,000
244,000
322,000
36,000
Correcting Entries for PPE
$ 2,800,000

$ 200,000
300,000
30,000

$ 784,000
16,000

$ 43,000,000
2,000,000
cquisition of Equipment on a Deferred Payment Basis
Journal Entries for PPE Acquisitions
Correcting Improper PPE Entries

Credit
Exchange Transactions
 Omni Sullivan

$ 2,400,000 $ 1,950,000

1,125,000 0
1,500,000 2,775,000
n and Disposition of Equipment

$ 9,000
474,000

$ 483,000

$ 224,000

Depreciation 47,400
$ 271,400
$ 446,000
224,000
 (4)

(5)

Equipment Acquired under Finance Lease

(Lessee has a Purchase Option)
 Revaluation of PPE

$ 6,000,000
(2,000,000) $ 4,000,000

$ 2,400,000
(800,000) 1,600,000
 Different Depreciation Method

S
R I

$ 160,000 $ 160,000
2013 2015
15 years 10 years
$ 10,000 $ 10,000
double-
straight declining-
line balance

$ 30,000 $ 32,000