CPA REVIEW SCHOOL OF THE PHILIPPINES AP 9303-2

Manila
AUDITING PROBLEMS CPA Review

AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

PROBLEM NO. 1

Shown below are the Machinery and Equipment and Delivery Equipment accounts of the ARIEL
COMPANY. One-half year’s depreciation is charged in the year of acquisition and/or disposition
for these assets. The client uses the straight-line method of depreciation.

The following transactions occurred during 2022:

a) A 2022 Isuzu Truck was purchased for P1,200,000 in June. In the same month, a 2016
Fuso Truck was sold for P150,000. The truck was purchased in April 2018 at a cost of
P630,000.

b) In June, a drill press was purchased for P33,000. Freight-in was P3,000. A drill press which
had been purchased by the client in March 2018 for P30,000 was sold in June at a gain of
P7,000.

c) One milling machine was purchased in July at a cost of P225,000. Installation cost which
was paid by the client and charged to Miscellaneous Expenses amounted to P10,500.

d) While analyzing the Miscellaneous Income account, your assistant found that the proceeds
of P1,500 from the sale of an electric welding machine had been credited to this account.
The machine, acquired in March 2017 had a cost of P12,000. The machine was sold in
September 2022.

Machinery and Equipment

01/01/22 Bal. 450,000 June CR 30,000
June DR 36,000
July DR 225,000

Accumulated Depreciation – Machinery and Equipment

(10% annual rate)
01/01/21 Bal. 207,000

Delivery Equipment
01/01/22 Bal. 2,850,000 June 7 CR 150,000
June 3 DR 1,200,000

Accumulated Depreciation – Delivery Equipment

(20% annual rate)
01/01/22 Bal. 1,650,000

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CPAR - MANILA AP 9303-2 – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

Based on the preceding information, determine the following:

1. Proceeds from sale of drill press in June 2022

A. P7,000 B. P 0 C. P11,000 D. P25,000

2. Machinery and Equipment account balance at December 31, 2022

A. P676,500 B. P669,000 C. P679,500 D. P1,879,500

3. Total depreciation expense for the year ended December 31, 2022
A. P683,475 B. P882,150 C. P484,800 D. P682,800

4. Carrying value of machinery and equipment at December 31, 2022

A. P428,025 B. P416,025 C. P434,025 D. P422,025

5. Accumulated Depreciation – Delivery Equipment at December 31, 2022

A. P1,773,000 B. P2,277,000 C. P1,836,000 D. P1,647,000

PROBLEM NO. 2

You obtain the following information pertaining to MAKAHIYA Co.’s property, plant, and
equipment for 2022 in connection with your audit of the company’s financial statements.

Audited balances at December 31, 2021:

Debit Credit
Land P 3,750,000
Buildings 30,000,000
Accumulated depreciation – Buildings P 6,577,500
Machinery and equipment 22,500,000
Accumulated depreciation –
Machinery and equipment 6,250,000
Delivery equipment 2,875,000
Accumulated depreciation –
Delivery equipment 2,115,000

Depreciation Data:
Depreciation Method Useful Life
Buildings 150% declining balance 25 years
Machinery and equipment Straight-line 10 years
Delivery equipment Sum-of-the-years’-digits 4 years
Leasehold improvements Straight-line -

Transactions during 2022 and other information are as follows:

a. On January 2, 2022, MAKAHIYA purchased a new truck for P500,000 cash and traded-in a 2-
year-old truck with a cost of P450,000 and a book value of P135,000. The new truck has a
cash price of P600,000; the market value of the old truck is not known.
b. On April 1, 2022, a machine purchased for P575,000 on April 1, 2017 was destroyed by fire.
MAKAHIYA recovered P387,500 from its insurance co.
c. On May 1, 2022, cost of P4,200,000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on
December 31, 2028.
d. On July 1, 2022, machinery and equipment were purchased at a total invoice cost of
P7,000,000; additional cost of P125,000 for freight and P625,000 for installation were
incurred.
e. MAKAHIYA determined that the delivery equipment comprising the P2,875,000 balance at
January 1, 2022, would have been depreciated at a total amount of P450,000 for the year
ended December 31, 2022.

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CPAR - MANILA AP 9303-2 – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

The salvage values of the depreciable assets are immaterial. The policy of the MAKAHIYA Co. is
to compute depreciation to the nearest month.

Questions:

Based on the above and the result of your audit, answer the following:

1. How much is the Accumulated depreciation – Buildings as of Dec. 31, 2022? P7,982,850

2. How much is the Accumulated depreciation – Machinery and equipment as of Dec. 31, 2022?
P8,556,875
3. How much is the Accumulated depreciation – Delivery equipment as of Dec. 31, 2022?
P2,400,000
4. How much is the Accumulated depreciation – Leasehold improvements as of Dec. 31, 2022?
P420,000
5. How much is the net gain (loss) from disposal of assets for the year ended Dec. 31, 2022?
P65,000

PROBLEM NO. 3

On January 1, 2021, INTIRIS Corporation contracted with Maga Construction Company to

construct a building for P40,000,000 on land that INTIRIS purchased several years ago. The
contract provides that INTIRIS is to make five payments in 2021, with the last payment scheduled
for the date of completion. The building was completed on December 31, 2021.

INTIRIS made the following payments during 2021:

January 1 P 4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000
Total P40,000,000

INTIRIS had the following debt outstanding at December 31, 2021:

a) A 12%, 4-year note dated January 1, 2021, with interest compounded

quarterly. Both principal and interest are payable on December 31, 2024.
This loan relates specifically to the building project. P17,000,000

b) A 10%, 10-year note dated December 31, 2017, with simple interest;
interest payable annually on December 31 12,000,000

c) A 12%, 5-year note dated December 31, 2018, with simple interest;
interest payable annually on December 31 14,000,000

Questions:

1. Determine the amount of average expenditures applicable to general borrowings.

A. P1,000,000 B. P1,100,000 C. P1,200,000 D. P1,300,000

2. Determine the capitalizable borrowing cost.

A. P2,133,670 B. P2,277,710 C. P2,735,960 D. P5,013,670

3. Determine the total cost of the building on December 31, 2021.

A. P42,133,670 B. P42,277,710 C. P42,735,960 D. P45,013,670

4. What amount of interest should be recognized as expense for 2021?

A. P2,133,670 B. P2,277,710 C. P2,735,960 D. P5,013,670
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CPAR - MANILA AP 9303-2 – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

PROBLEM NO. 4

CAR MINA Co. has acquired a tract of mineral land for P50,000,000. CAR MINA estimates that
the acquired property will yield 150,000 tons of ore with sufficient mineral content to make mining
and processing profitable. It further estimates that 7,500 tons of ore will be mined the first and
last year and 15,000 tons every year in between. (Assume 11 years of mining operations.) The
land will have a residual value of P1,550,000.

CAR MINA builds necessary structures and sheds on the site at a total cost of P12,000,000. The
company estimates that these structures can be used for 15 years but, because they must be
dismantled if they are to be moved, they have no residual value. CAR MINA does not intend to
use the buildings elsewhere.

Mining machinery installed at the mine was purchased secondhand at a total cost of P3,600,000.
The machinery cost the former owner P9,000,000 and was 50% depreciated when purchased.
CAR MINA estimates that about half of this machinery will still be useful when the present mineral
resources have been exhausted but that dismantling and removal costs will just about offset its
value at that time. The company does not intend to use the machinery elsewhere. The remaining
machinery will last until about one-half the present estimated mineral ore has been removed and
will then be worthless. Cost is to be allocated equally between these two classes of machinery.

Questions:

1. What are the estimated depletion and depreciation charges for the 5th year?
Depletion Depreciation
A. P2,422,500 P1,740,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

2. What are the estimated depletion and depreciation charges for the 6th year?
Depletion Depreciation
A. P2,422,500 P1,560,000
B. P2,422,500 P1,740,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

3. What are the estimated depletion and depreciation charges for the 7th year?
Depletion Depreciation
A. P2,422,500 P1,380,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,380,000
D. P4,845,000 P1,560,000

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CPAR - MANILA AP 9303-2 – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

PROBLEM NO. 5

Select the best answer for each of the following:

1. 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.

2. When few property and equipment transactions occur during the year, the continuing
auditor usually obtains an 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.

3. Which of the following combinations of procedures is an auditor most likely to perform to

obtain evidence about fixed asset additions?
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.

4. 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.

5. Determining that proper amounts of depreciation are expensed provides assurance about
management’s assertions of valuation and allocation and
A. Presentation and disclosure C. Rights and obligations
B. Completeness D. Existence

END OF 9303-2

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