Problem 1

The property, plant and equipment section of SKDJGNRUIBIDUG Corporation’s balance sheet at December 31, 2017
included the following items:
Land 2,500,000
Land improvements 560,000
Building 3,600,000
Machinery and equipment 6,600,000
During 2018 the following data were available to you upon your analysis of the accounts:
Cash paid on purchase of land P10,000,000
Mortgage assumed on the land bought, including interest at 16% 16,000,000
Realtor’s commission 1,200,000
Legal fees, realty taxes and documentation expenses 200,000
Amount paid to relocate persons squatting on the property 400,000
Cost of tearing down an old building on the land 300,000
Amount recovered from the salvage of the building demolished 600,000
Cost of fencing the property 440,000
Amount paid to a contractor for the building erected 8,000,000
Building permit fees 50,000
Excavation expenses 250,000
Architect’s fee 100,000
Interest that would have been earned had the money used during the
period of construction been invested in the money market 600,000
Invoice cost of machinery acquired 8,000,000
Freight, unloading, and delivery charges 240,000
Customs duties and other charges 560,000
Allowances, hotel accommodations, etc., paid to foreign technicians
during instillation and test run of machines 1,600,000
Royalty payment on machines purchased
(based on units produced and sold) 480,000
REQUIRED:
Based on the above and the result of your audit, compute for the following as of December 31, 2018:
1. Land 30,300,000 4. Machinery and equipment 17,000,000
2. Land improvements 1,000,000 5. Total depreciable property, plant and equipment
3. Building 11,700,000 60,000,000

Problem 2
In connection with your audit of the THVDBIRWRVNSK Mining Corporation for the year ended December 31, 2018,
you noted that the company purchased for P10,400,000 mining property estimated to contain 8,000,000 tons of
ore. The residual value of the property is P800,000.

Building used in mine operations costs P800,000 and have estimated life of fifteen years with no residual value.
Mine machinery costs P1,600,000 with an estimated residual value P320,000 after its physical life of 4 years.

Following is the summary of the company’s operations for first year of operations.
Tons mined 800,000 tons
Tons sold 640,000 tons
Unit selling price per ton P4.40
Direct labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses (excluding depreciation) 576,000
Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be allocated as follows: 20%
to operating expenses, 80% to production. Depreciation on machinery is chargeable to production.
QUESTIONS: Based on the above and the result of your audit, answer the following: (Disregard tax implications)
1. How much is the depletion for 2018?
a. P768,000 b. P960,000 c. P192,000 d. P1,040,000
2. Total inventoriable depreciation for 2018?
a. P400,000 b. P362,667 c. P384,000 d. P0
3. How much is the Inventory as of December 31, 2018?
a. P438,400 b. P422,400 c. P425,600 d. P418,133
4. How much is the cost of sales for the year ended December 31, 2018?
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 a. P1,689,600 b. P1,753,600 c. P1,702,400 d. P1,672,533
5. How much is the maximum amount that may be declared as dividends at the end of the company’s first year of
operations?
a. P1,494,400 b. P1,289,600 c. P1,302,400 d. P1,319,467

Problem 3
Information pertaining to Highland Corporation’s property, plant and equipment for 2018 is presented below:
Account balances at January 1, 2018:
Debit Credit
Land 150,000
Buildings 1,200,000
Accumulated depreciation – Buildings P263,100
Machinery and equipment 900,000
Accumulated depreciation – Machinery and equipment 250,000
Automotive equipment 115,000
Accumulated depreciation – Automotive equipment 84,600

Depreciation data:
Depreciation method Useful life
Buildings 150% declining-balance 25 years
Machinery and equipment Straight-line 10 years
Automotive equipment Sum-of-the-years’-digits 4 years
Leasehold improvements Straight-line -

The salvage values of the depreciable assets are immaterial. Depreciation is computed to the nearest month.
Transactions during 2018 and other information are as follows:
a. On January 2, 2018, Highland purchased a new car for P20,000 cash and trade-in of a 2-year-old car with
a cost of P18,000 and book value of P5,400. The new car has a cash price of P24,000; the market value of the trade-
in is not known.
b. On April 1, 2018, a machine purchased for P23,000 on April 1, 2013, was destroyed by fire, Highland
recovered P15,500 from its insurance company.
c. On May 1, 2018, costs of P168,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. The related lease terminates on December 31, 2024.
d. On July 1, 2018, machinery and equipment were purchased at a total invoice cost of P280,000; additional
costs of P5,000 for freight and P25,000 for installation were incurred.
e. Highland determined that the automotive equipment comprising the P115,000 balance at January 1,
2018, would have been depreciated at a total amount of P18,000 for the year ended December 31,2018.

Questions: Based on the information above, answer the following questions:

1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2018 is:
a. P 1,180,000 b. P 1,187,000 c. P 1,202,500 d. P 1,210,000
2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2018 is:
a. P 139,000 b. P 121,000 c. P 115,000 d. P 109,000
3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2018 is:
a. P 72,000 b. P 263,100 c. P 335,100 d. P 319,314
4. The adjusted balance of Accumulated Depreciation of Machinery and Equipment at December 31, 2018 is:
a. P 330,775 b. P 342,275 c. P 351,475 d. P 353,775
5. The adjusted balance of Accumulated Depreciation of Automotive Equipment at December 31, 2018 is:
a. P 90,600 b. P 96,000 c. P 103,200 d. P 108,600
6. The adjusted balance of Accumulated Depreciation of Leasehold Improvements at December 31, 2018 is:
a. P 0 b. P 14,000 c. P 14,700 d. P 16,800
7. The total adjusted balance of Accumulated Depreciation of Property and Equipment at December 31, 2018 is:
a. P 534,375 b. P 698,475 c. P 774,389 d. P 804,475
8. The total gain(loss) from disposal of assets at December 31, 2018 is:
a. P 5,400 b. P 4,000 c. P 2,600 d. P 1,400
9. The adjusted book value of Building at December 31, 2018 is:
a. P 1,128,000 b. P 936,900 c. P 880,686 d. P 864,900
10. The adjusted book value of Leasehold Improvement at December 31, 2018 is:
a. P 168,000 b. P 154,000 c. P 153,300 d. P 151,200

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Problem 4
On January 1, 2013, PGNJRVNSRBS acquired two assets within the same class of plant and equipment. Information
on these assets is as follows:
Cost Estimated UL
Machine A 300,000 5 years
Machine B 180,000 3 years
The machines are expected to generate benefits evenly over their useful lives. The class of plant and equipment is
measured using the revaluation model.

At December 31, 2013, information about the assets is as follows:

Fair Value Estimated UL
Machine A 252,000 4 years
Machine B 114,000 2 years
On July 1, 2014, Machine B was sold for P87,000 cash. On the same day, PGNJRVNSRBS acquired Machine C for
P240,000 cash. Machine C has an expected UL of 4 years.

At December 31, 2014, information on the machines is as follows:

Fair value Estimated UL
Machine A 168,000 3 years
Machine C 205,500 1.5 years
Questions:
1. The depreciation for 2013 is 120,000
2. Ignoring income tax, the 12/31/13 revaluation surplus in the SFP is 18,000
3. The gain or loss on sale of the machine is 1,500 gain
4. Ignoring income tax, the 12/31/14 revaluation loss on the income statement is 16,500
5. The depreciation for 2014 is 121,500

Problem 5
The following information pertains to Marlisa Company’s delivery trucks:

Date Particulars Debit Credit

1/1/04 Trucks 1, 2, 3, & 4 3,200,000
3/15/05 Replacement of truck 3 tires 25,000
7/1/05 Truck 5 800,000
7/10/05 Reconditioning of truck 4, which was
damaged in a collision 35,000
9/1/05 Insurance recovery on truck 4 accident 33,000
10/1/05 Sale of truck 2 600,000
4/1/06 Truck 6 1,000,000 150,000
5/2/06 Repainting of truck 4 27,000
6/30/06 Truck 7 720,000
12/1/06 Cash received on lease of truck 7 22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Date Particulars Debit Credit

12/31/04 Depreciation expense 300,000
12/31/05 Depreciation expense 300,000
12/31/06 Depreciation expense 300,000
a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the selling party allowed a
P50,000 trade in value for the old truck.
b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000 being given for the new
truck.
c. The depreciation rate is 20% by unit basis.
d. Unit cost of Trucks 1 to 4 is at P800,000 each.
Questions
1. What is the loss on trade-in of truck 3?
a. P 50,000 b. P 430,000 c. P 510,000 d. P 560,000
2. The correct cost of truck 5 is
a. P 560,000 b. P 610,000 c. P 800,000 d. P 850,000
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3. The book value of truck 5 at December 31, 2006 is
a. P 850,000 b. P 595,000 c. P 560,000 d. P 510,000
4. What is the loss in trade-in of Truck 1?
a. P 150,000 b. P 250,000 c. P 290,000 d. P 410,000
5. The correct cost of truck 6 is
a. P 590,000 b. P 800,000 c. P 850,000 d. P 1,000,000
6. The carrying value of Truck 6 at December 31, 2006 is
a. P 501,500 b. P 680,000 c. P 850,000 d. P 1,100,000
7. The gain (loss) on sale of truck 2 is
a. P 80,000 b. P 331,600 c. P 495,000 d. P 496,200
8. The book value of truck 4 at December 31, 2006 is
a. P 320,000 b. P 331,600 c. P 495,000 d. P 496,200
9. The 2000 depreciation expense is understated by
a. P 92,000 b. P 252,000 c. P 292,000 d. P 372,000
10. The cost of repainting truck 4 should have been charged to:
a. Claims receivable - insurance company c. Accumulated depreciation
b. Retained earnings d. Repairs and maintenance

Problem 6
You noted the following items relative to the company’s Intangible assets in connection with your audit of the
THANKYOU!!! Corporation’s financial statements for the year 2018.
Franchise
On January 1, 2018, THANKYOU!!! signed an agreement to operate as franchisee of Clear Copy Service, Inc. for an
initial franchise of P680,000. Of this amount, P200,000 was paid when the agreement was signed and the balance
was payable in four annual payments of P120,000 each, beginning January 1, 2019. The agreement provides that
the down payment is not refundable and no future services are required of the franchisor. The implicit rate for
loan of this type is 14%. The agreement also provides the 5% of the revenue from the franchise must be paid to the
franchisor annually. THANKYOU!!!’s revenue from the franchise for 2018 was P8,000,000. THANKYOU!!!
estimates the useful life of the franchise to be ten years.
Patent
On July 1, 2018, THANKYOU!!! purchased a patent from the inventor, who asked P1,100,000 for it. THANKYOU!!!
paid for the patent as follows: cash, P400,000; issuance of 10,000 shares of its own ordinary shares, par P10
(market value, P20 per share); and a note payable due at the end of three years, face amount, P500,000,
noninterest-bearing. The current interest rate for this type of financing is 12 percent. THANKYOU!!! estimates the
useful life of the patent to be ten years.
Trademark
THANKYOU!!! purchased for P1,200,000 a trademark for a very successful soft drink it markets under the name
POWER!. The trademark was determined to have an indefinite life. A competitor recently introduced a product
that is in direct competition with the POWER! product, thus suggesting the need for an impairment test. Data
gathered by the entity suggests that the useful life of the trademark is still indefinite, but the cash flows expected to
be generated by the trademark have been reduced either to P40,000 per year (with a probability of 70%) or to
P80,000 per year (with 30% probability). The appropriate risk-free interest rate is 5%. The appropriate
riskadjusted interest rate is 10%.
QUESTIONS:
1. Total expenses related to franchise in 2018
a. P503,914 c. P448,950
b. P535,200 d. P454,964
2. Carrying amount of franchise as of December 31, 2018
a. P549,644 c. P538,733
b. P494,680 d. P612,000
3. Carrying amount of patent as of December 31, 2018
a. P1,045,000 c. P860,310
b. P 955,900 d. P908,105
4. Total expenses related to the intangible assets in 2018
a. P662,759 c. P733,063
b. P711,709 d. P802,212
5. In auditing intangible assets, an auditor most likely would review or recompute amortization and determine
whether the amortization period is reasonable in support of management’s financial statement assertion of
a. Valuation. c. Completeness.
b. Existence or occurrence. d. Rights.
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Problem 7
The following independent situations relate to the audit of intangible assets. Answer the questions at the end of
each situation.

CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents certain types of air
pollution. Caboom does not manufacture or sell the products and processes it develops; it conducts research and
develops products which it patents, and then assigns the patents to manufacturers on a royalty basis. The history
of Patent No. 112170 is as follows:

Date Activity Cost

2005-2006 Research conducted to develop device P1,259,100
Jan. 2007 Design and construction of a prototype 262,800
Mar. 2007 Testing of models 126,000
Jan. 2008 Legal and other fees to process patent application; patent granted
June 2008 186,150
Nov. 2009 Engineering activity necessary to advance the design of the device
to the manufacturing stage 244,500
April 2011 Research aimed at modifying the design of the patented device 129,000
May 2015 Legal fees paid in a successful patent infringement suit against a
competitor 102,000

Caboom assumed a useful life of 17 years when it received the initial device patent. On January 1, 2013, it revised
its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the cost is
incurred prior to July 1 and no amortization for the year if the cost is incurred after June 30. Caboom’s reporting
date is December 31, 2015.
Compute the carrying value of Patent No. 112170 on each of the following dates:
1. December 31, 2008
A. P180,675 B. P186,150 C. P293,788 D. P175,200
2. December 31, 2012
A. P223,200 B. P52,560 C. P131,400 D. P122,640
3. December 31, 2015
A. P120,560 B. P78,840 C. P52,560 D. P98,550

BARTOLO COMPANY has provided information on intangible assets as follows:

 A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2014. Bartolo estimates the
remaining useful life of the patent to be 10 years. The patent was carried in Valenzuela’s accounting records at
a net book value of P4,000,000 when Valenzuela sold it to Bartolo.
 During 2015, a franchise was purchased from Delco Company for P960,000. The contract which runs for 10
years provides that 5% of revenue from the franchise must be paid to Delco. Revenue from the franchise for
2015 was P5,000,000. Bartolo takes a full year amortization in the year of purchase.
 The following research and development costs were incurred by Bartolo in 2015:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
P866,000
Bartolo estimates that these costs will be recouped by December 31, 2018. The materials and equipment
purchased have no alternative uses.
 On January 1, 2015, because of recent events in the field, Bartolo estimates that the remaining life of the patent
purchased on January 1, 2014 is only 5 years from January 1, 2015.

4. What is the total carrying value of Bartolo’s intangible assets on December 31, 2015?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500
5. As a result of the facts above, compute the total amount of charges against income for the year ended December
31, 2015?
A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000

Problem 8
Transactions during 2005 of the newly organized Pink Corporation included the following:
Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to
complete organization of the corporation.
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 15 Hired a clown to stand in front of the corporate office for 2 weeks and hound out pamphlets and
candy to create goodwill for the new enterprise. Clown cost, P10,000; pamphlets and candy, P5,000.
Apr. 1 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P 429,000
Patent application and licensing fee 63,500
Total P 492,500
It is estimated that in 6 years other companies will have developed improved
processes, making the Pink Corporation process obsolete.
May 1 Acquired both a license to use a special type of container and a distinctive trademark to
be printed on the container in exchange for 6,000 shares of Pink’s no-par common stock selling for P50
per share. The license is worth twice as much as the trademark, both of which may be used for 6 years.
July 1 Constructed a shed for P1,310,000 to house prototypes of experimental models to be developed
in future research projects.
Dec. 31 Incurred salaries for an engineer and chemist involved in product development totalling
P1,750,000 in 2005.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of patent
a. P492,500 b. P429,000 c. P63,500 d. P0
2. Cost of licenses
a. P150,000 b. P200,000 c. P100,000 d. P0
3. Cost of trademark
a. P150,000 b. P200,000 c. P100,000 d. P0
4. Carrying amount of Intangible Assets
a. P712,604 b. P2,477,604 c. P697,604 d. P0
5. Total amount resulting from the foregoing transactions that should be expensed when incurred
a. P4,100,500 b. P1,983,000 c. P1,998,000 d. P0

Problem 9
1. Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud
because
a. The amounts recorded on the balance sheet for most companies are immaterial.
b. The inherent risk is usually low.
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this account.
2. Which is the best audit procedure to obtain evidence to support the legal ownership of real property?
a. Examination of corporate minutes and board resolutions with regard to approvals to acquire real
property.
b. Examination of closing documents, deeds and ownership documents registered and on file at
the register of deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a specific piece of property.
d. Confirmation with the title company that handled the escrow account and disbursement of
proceeds for the closing of the property.
3. When few property and equipment transactions occur during the year the continuing auditor usually obtains
and understanding of internal control and performs
a. Tests of controls
b. Analytical procedures to verify current year additions to property and equipment c. A thorough
examination of the balances at the beginning of the year.
d. Extensive tests of current year property and equipment transactions.
4. Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence about
fixed asset addition?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirming ownership and corroborating transactions through inquiries of client personnel.
5. If an auditor tours a production facility, which of the misstatements or questionable practices is most likely to be
detected by the audit procedures specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
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 c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
6. In testing for unrecorded retirements of equipment, an auditor is most likely to
a. Select items of equipment from the accounting records and then locate them during the
plant tour.
b. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated
equipment.
c. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger.
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense.
7. Determining that proper amounts of depreciation are expensed provides assurance about management’s
assertions of valuation and
a. Presentation and disclosure. c. Rights and obligations.
b. Completeness. d. Existence or occurrence.
8. The auditor may conclude that depreciation charges are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.
9. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit
assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
b. Expenditures for property and equipment have been recorded in the proper period.
c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
d. Expenditures for property and equipment have not been charged expense.
10. In violation of company policy, Coatsen Company erroneously capitalized the cost of painting its warehouse.
An auditor would most likely detect this when
a. Discussing capitalization policies with Coatsen's controller.
b. Examining maintenance expense accounts.
c. Observing that the warehouse had been painted.
d. Examining construction work orders that support items capitalized during the year.
11. Additions to equipment are sometimes understated. Which of the following accounts would be reviewed by the
auditor to gain reasonable assurance that additions are not understated?
a. Accounts payable c. Depreciation expense
b. Gain on disposal of equipment d. Repair and maintenance expense
12. When an auditor interviews the plant manager, he will most likely seek from the plant manager information
regarding
a. Appropriateness of physical inventory observation procedures.
b. Existence of obsolete machinery.
c. Deferral of procurement of certain necessary insurance coverage.
d. Adequacy of the provision for uncollectible accounts.
13. The auditor is least likely to learn of retirements of equipment through which of the following?
a. Review of the purchase return and allowance account.
b. Review of depreciation.
c. Analysis of the debits to the accumulated depreciation account.
d. Review of insurance policy riders.
14. Which of the following is not likely a motive for management to manipulate the timing and amount of impaired
asset writedowns?
a. Steady increases in earnings per share over the past 5 years.
b. Income smoothing.
c. A "big bath."
d. An abnormally unprofitable year.
15. There is goodwill involved in the acquisition of a business if the purchase price paid is in excess of the
proprietorship of the business acquired.
Goodwill might be viewed as the enjoyment of a profit by a company in excess of the normal or usual return for the
industry as a whole but such goodwill is not recorded if it has not been purchased or paid for.
a. False; True. c. True; False.
b. False; False. d. True; True.

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16. In auditing intangible assets, an auditor most likely would review or recompute amortization and
determine whether the amortization period is reasonable in support of management’s financial statement
assertion of
a. Valuation. c. Completeness.
b. Existence or occurrence. d. Rights and obligations.

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