Name: Khyla A.

Diviagracia BSA III AUDIT ON PPE

CONCEPT MAP

AUDIT PROCEDURES ON PPE

Completeness Existence Valuation Rights and obligations

Review the client’s depreciation

Reconcile and compare the PPE Select a sample of items in PPE method to evaluate whether it is in Select a sample of PPE items in the
register with the general ledger register accordance with the applicable register
accounting standards

Examine the useful life of PPE to

Select a sample of PPE items that
physically exist
Perform physical inspection on the
selected items
evaluate whether the client’s
estimate is reasonable, e.g. by
comparing with industry standard.
Professional judgment is required
and very important here.
Examine the title documents or title
deeds of the selected items to
ensure they really belong to the
client

Trace the selected items to the PPE Perform recalculation on the

register depreciation of PPE

Compare the result of recalculation

to the client’s figures.

FOCUSED LISTING
 PROPERTY PLANT AND EQUIPMENT (PPE): TUL
T- Tangible Assets
U-used in Business
L-Long-term assets

 Recognition
- PROBABLE future economic benefits
- cost of item is MEASURED REALIABLE.

 INITIAL MEASUREMENT
- COST= CASH PRICE EQUIVALENT @ Acquisition date and
if deferred beyond normal credit terms, CASH PRICE EQUIVALENT-total payment =
interest over the credit period of time

 Property- or land do not depreciate

 Plant (Building)- if used in Business Operation.
 Equipment - if used in Business Operation.

METHODS OF DEPRECIATION

 BASED ON TIME (function of time)

1. Straight-line method
- Recognized evenly over the useful life of assets.

Initial cost of equipment xx Or residual value / estimated useful life

Residual Value xx = depreciation
Depreciable xx
divided by: estimated useful life xx
Annual depreciation xx

 Accelerated depreciation method (decreasing-charge method)

- The early years of useful life the higher the depreciation and lower at the latter years

2. SUM-OF-THE-YEAR’S DIGIT METHOD (SY)

Depreciation = depreciable amount X SYD RATE

SYD rate= REMAINING USEFUL LIFE

SUM OF DIGITS IN THE LIFE OF ASSETS

LIFE+1
SYD DENOMINATOR = Life X
2
 3. DOUBLE DECLINING METHOD
- Residual value is ignored initially
- Depreciation ceased if the CA is equal to its residual value

Depreciation = Historical cost X Double declining rate

2
Double declining rate=
Life
A variation of the double declining is the 150 % declining balance method.

1.5
150 % Double declining =
Life

 BASED ON ACTUAL PHYSICAL USE (function of usage)

4. UNITS OF PRODUCTION
 UNITS OF PRODUCRION METHOD -Depreciation relates to the estimated production
capability of an assets and is expressed in a rate per unit of output or per hour of input.
- No depreciation is recognized of the asset is not used.
A. Output method (based on units0

DEPRECIATION
= Depreciation rate x units of output
DEPRECIATION RATE= DEPRECIABLE AMOUNT /Estimated total units of outputs

B. Input method (based on hours)

DEPRECIATION= Depreciation rate x hours of production

DEPRECIATION RATE= DEPRECIABLE AMOUNT /Estimated total hours of inputs

Revaluation Model
FV @ the date of revaluation less any subsequent accum. Depre and accum. Imparment loss
 HIGHEST and Best use( PLF)
a. Physical characteristic of the non-financial assets
b. Legal restrictions on the use of non-financial assets
c. Financial feasibility- weather the use of assets generates adequate income or cash flows.

 FV HIERARCHY
    ·       FV HIERARCHY          
LEVEL
1 Observable qouted price for identitcal assets or liablity in the active markets Most reliable
LEVEL
2 Other than observable qouted price in level 1 for identitcal assets or liablity
  either directly or through corraboration with observable data  
LEVEL
3 Unobservable inputs             Least reliable

 VALUATION TECHNIQUES(MCI)
- MAXIMIZE the use of relevant observable inputs and minimizes unobservable inputs.
1. MARKET APPROACH
- uses prices and other relevant info generated by market transactions involving similar
assets, liabilities or group of assets and liabilities.
o FACTORS
▪ Location
▪ Features of location
▪ Size of property
▪ Physical features
▪ Legal restrictions on the use of the property
2. COST APPROACH
- Based on the amount currently needed to replace the assets (current replacement cost)
o Steps
▪ Estimate the replacement cost of the bldg.

▪ Estimate the depreciation taking into consideration the bldg.’s physical

deterioration, functional obsolescence and location obsolescence .

Depreciation= Percentage depreciation x Replacement Cost

Percentage Depreciation= Effective Life / Total Economic Life

Total economic life= Effective Life + Remaining Economic Life

▪ Estimate the FV of the Building

FV= Replacement Cost – Depreciation

3. INCOME APPROACH
- Based on the amount of the income that the property can be potentially generate.

METHOD OF RECORDING REVALUATION

 CA GREATER THAN FV= Revaluation surplus
1. PROPORTIONAL METHOD
- GROSS CA is adjusted consistent with the revaluation of CA of asset.

2. ELIMINATION METHOD
- Accumulated depreciation is eliminated against the gross CA of assets.

IMPAIRMENT
FA is greater than the CA of assets

PROBLEM SOLVING

PROBLEM 1
 ANSWER :1.) B 2.) C 3.) D
Solution:
Step 1: Read the question first. Reading question will give you a hint and idea what to do
first. It is about the cost of the PPE. Be sure you now what to include and he difference between
the land and land improvements.

Step 2: identify the items that are related to computing the cost of assets respectively and
compute it separately.

STEP 3: Compute the items to get the total cost of land, bldg. and land improvements.

LAND
Purchase of land 7,892,000
Land survey 104,000
Fees for search of land title 12,000
Special Assessment for street project 40,000
TOTAL COST OF LAND 8,048,000
 LAND IMPROVEMENTS
Cost of parking lots adjoining bldg. 800,000
Cost of shrubs, trees, and other landscaping 660,000
TOTAL COST OF LAND IMPROVEMENTS 1,460,000

BUILDING
Building permit
fee 70,000
Temporary quarters for construction crews 215,000
Cost to demolish old bldg.. 940,000
Excavation of basement 200,000
Cost of Construction 58,000,000
TOTAL COST OF BUILDING 59,425,000

PROBLEM 2:
Answers:
1. C
 2. A
3. D

Solution:
Step 1: Read the question first. Reading question will give you a hint and idea what to do
first. You need to know the standard regarding expense in the Intangible assets such as PPE.
Organization cost are expensed as incurred.
Step 2: Identify the items needed for answering the question. Take note of the consideration in
measuring the cost of new building an be familiar of the JE
Step 3: Compute. For question 2, you have to compute first the cost of bldg. added by cost
directly attributed to land.
1.

ORGANIZATION EXPENSE
Organization fees 60,000
Corporation organization cost 90,000
Stock promotion bonus( 50 x 6k shares) 300,000
TOTAL ORGANIZATION EXPENSE 450,000

2. TOTAL COST OF LAND

Land site and old bldg. 945,000

Title of clearance fee(land site) 55,200
TOTAL COST OF LAND 1,000,200
Journal entry
Land 1,000,200
Cash 1,000,200

3. Construction cost 5,250,000

Add: Demolition of old building 60,000
Less: Scrap value -36,000
TOTAL COST OF NEW BUILDING 5,274,000

PRINCIPLE

Definition
The financial accounting term property, plant and equipment disclosures refer to the minimum information
companies must divulge on their financial statements.  Disclosure requirements fall into four categories:  cost,
accumulated depreciation, service lives, depreciation methods, capitalization thresholds, and restrictions.

Explanation
The basis used by companies in the valuation of property, plant and equipment appearing on the asset section of the
balance sheet is typically historical cost.  Property, plant and equipment not being used in production, but held for
investment purposes, such as land and buildings, should be categorized as such.
Depreciation is used to account for the lowering of an asset's value as its usefulness is consumed over time.  The
contra asset account, accumulated depreciation allows the reader of a financial statement to understand how much
expense has flowed to the income statement from the balance sheet.  By displaying both the historical cost of assets
as well as the total accumulated depreciation, the reader of a financial statement can also understand the remaining
net plant, whereby:
Net Plant = Historical Cost - Accumulated Depreciation
In addition to the above property, plant and equipment information, FASB No. 6, requires companies to disclose the
following for each major class of assets:  book value, estimated useful lives, the method(s) of depreciation used, and
capitalization threshold(s).
Finally, companies must disclose any restrictions on the use or convertibility of these assets.

NOURISH YOUR SOUL

Most of us are dreaming to be financially stable or in other word to be rich. If I am given a

chance to having a rich life, I would rather spend it by investing it to property. Land is the only assets
that does not depreciates. It only appreciates the value. When you buy a land today, you can sell it in a
higher value in the future. Furthermore, this land also will be used for farming that fruits and
vegetables are . Not only that but I would like to spend for a house to have a better place to live. Yet,
giving to the charity or church ministry is the best ways to spend your riches. In lining yourself in the
will of in ways of spending your riches is the best internal control. If God is with you, the devil will flee
from you. You need to submit to God everything. Money is riches. Do not love the money because it
only will ruin your life. Better keep your eyes focused to God and your life is in the right path.