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Discussion Audit of PPE Problems
Discussion Audit of PPE Problems
On January 1, 2003, the Prince Gabriel Manufacturing Company began construction of a building to be used as
its office headquarters. The building was completed on June 30, 2004.
On January 3, 2003, the company obtained a P2 million construction loan with a 10% interest rate. The loan
was outstanding all of 2003 and 2004. The company’s other interest-bearing debt included a long-term note
of ₱5,000,000 with an 8% interest rate, and a mortgage of ₱3,000,000 on another building with an interest
rate of 6%. Both debts were outstanding during all of 2003 and 2004. The company’s fiscal year end is
December 31.
Questions:
Problem II
You are engaged to examine the financial statement of the Rabago Manufacturing Corporation for the year
ended December 31, 2004. The following schedules for property, plant, and equipment and the related
accumulated depreciation accounts have been prepared by your client. The opening balances agree with your
prior year’s audit working papers.
Accumulated
Depreciation
Buildings ₱ 1,200,000 ₱ 103,000 ₱ 1,303,000
Machinery/Equip 546,500 313,600 860,100
Sub-total ₱ 1,746,200 ₱ 416,600 ₱ 2,163,100
Further investigation revealed the following:
All equipment is depreciated on the straight-line basis (with no salvage value) based on the following
estimated lives: Building – 25 years, all other items 10 years.
The company entered into a 10-year lease contract for a derrick machine with annual rental of
₱100,000, payable in advance every April 1. The parties to the contract stipulated that a 30-day
written notice is required to cancel the lease. Estimated useful life is 10 years. The derrick was
recorded under machinery and equipment at ₱808,000 and ₱60,000 applicable to the machine was
included in the depreciation expense during the year.
The company finished construction of a new building wing in June 30. The useful life of the main
building was not prolonged. The lowest construction bid was ₱350,000 which was the amount
recorded. Company personnel constructed the building at a total cost of ₱330,000.
₱100,000 was paid for the construction of a parking lot which was completed on July 1, 2004. The
expenditure was charged to land.
The ₱520,000 equipment under retirement column represent cash received on October 1, 2004 for a
machinery bought in October 1, 2000 for ₱960,000. The bookkeeper recorded depreciation expense
of ₱72,000 on this machine in 2004.
Mr. Rabago, the company’s president donated land and building appraised at ₱200,000 and ₱400,000
respectively to the company to be used as plant site. The company began operating the plant on
September 30, 2004. Since no money was involved, the bookkeeper did not make any entry for the
above transaction.
Questions:
Problem III
The following data pertain to Umay Corporation’s property, plant and equipment for 2014.
DEBIT CREDIT
Land ₱ 7,500,000
Buildings 30,000,000
Accumulated depreciation-
6,577,500
Buildings
Machinery and equipment 22,500,000
Accumulated depreciation-
6,250,000
Machinery and equipment
Delivery equipment 5,750,000
Accumulated depreciation-
4,230,000
Delivery equipment
Depreciation data:
On January 2, 2014, Umay purchased a new truck for ₱1,000,000 cash and trade-in of a 2 year-old
truck with a cost of ₱900,000 and a book value of ₱270,000. The new truck has a cash price of
₱1,200,000; the market value of trade-in is not known.
On April 1, 2014, a machine purchased for ₱575,000 on April 1, 2009, was stolen. Umay recovered
₱387,500 from its insurance company.
On May 1, 2014, costs of ₱8,400,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. The related lease terminates on December 31, 2020.
On July 1, 2014, machinery and equipment were purchased at a total invoice cost of ₱7,000,000;
additional costs of ₱125,000 for freight and ₱625,000 for installation were incurred.
Umay determined that the delivery equipment comprising the ₱5,750,000 balance at January 1, 2014,
would have been depreciated at a total amount of ₱900,000 for the year ended December 31, 2014.
The salvage values of the depreciable assets are immaterial. The policy of Umay Corporation is to compute
depreciation to the nearest month.
Questions: