Auditing and Assurance: Concept and Applications 3

Lecture 1 – Sample Problems

Problem 1
Paula Company had the following property acquisitions during the current year:
*Acquired a tract of land and building in exchange for 50,000 ordinary shares of P100 par value
with a market price of P120 per share on the date of acquisition. The last property tax bill indicated
assessed value of P1, 200, 000 for the land and P2, 800, 000 for the building. However, the land has a fair
value of P2, 000, 000 and the building has a fair value of P3, 500, 000.
*Received land from a major shareholder as an inducement to locate a plant in the city. No
payment was required but the entity paid P50, 000 for legal expenses for land transfer. The land is fairly
valued at P1, 000, 000.
*Acquired a welding machine with an invoice price of P3, 000, 000 subject to a cash discount of
10% which was not taken. The entity incurred cost of P50, 000 in removing the old welding machine prior
to the installation of the new one. Welding supplies were acquired at a cost of P150, 000.
 What is the total increase in property, plant and equipment as a result of the acquisitions?
a. 9, 200, 000 b. 9, 250, 000 c. 9, 700, 000 d. 9, 450, 000

Problem 2
Kervin Company acquired three items of machinery as follows:
*During 2014, the entity purchased a machine for P500, 000 down and four monthly installments
of P1, 250, 000. The cash price of the machine was P4, 700, 000.
*On January 1, 2014, the entity purchased a machine for P2, 000, 000 in exchange for a
noninterest bearing note requiring four payments of P500, 000. The first payment was made on January 1,
2014. The rate of interest for this note at date of issuance was 10%. The present value of an ordinary
annuity of 1 at 10% is 3.17 for four periods. The present value of an annuity of 1 in advance at 10% is 3.49
for four periods.
*On January 1, 2014, the entity acquired a machine by issuing a four-year, noninterest bearing
note for P2, 000, 000. The note is due on January 1, 2018. The entity has a 10% interest for this type of
note. The present value of 1 at 10% for 4 years is 0. 68.
 What is the total cost of the three machines?
a. 7, 645, 000 b. 7, 805, 000 c. 8, 505, 000 d. 8, 605, 000

Problem 3
Jowee Company exchanged an old machine, costing P3, 000, 000 and 50% depreciated, for a used
machine and paid a cash difference of P500, 000. The fair value of the old machine was determined to be
P1, 800, 000.
 What amount should be recorded as cost of the machine received in exchange?
a. 1, 800, 000 b. 2, 300, 000 c. 1, 300, 000 d. 2, 000, 000

Problem 4
On January 1, 2014, AAnnibelle Company received a grant of P9, 000, 000 fom the foreign government in
order to defray safety and environmental costs within the area where the entity is located. The safety and
environmental costs are expected to be incurred over three years, respectively, P1, 000, 000, P2, 000, 000
and p3, 000, 000.
 What income from the government grant should be recognized in 2014?
a. 9, 000, 000 b. 1, 500, 000 c. 3, 000, 000 d. 4, 500, 000