CPA REVIEW SCHOOL OF THE PHILIPPINES AP 9603-1

Manila
AUDITING PROBLEMS CPA Review

AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

(Part 1 of 2)

PROBLEM 1 - JARAN CO.

JARAN CO. started operations on September 1, 2018. Jaran’s accounts at December 31, 2021,
included the following balances:
Machinery (at cost) P 910,000
Accumulated depreciation – machinery 482,000
Vehicles (at cost; purchased November 21, 2020) 468,000
Accumulated depreciation – vehicles 196,560
Land (at cost; purchased October 25, 2018) 810,000
Building (at cost; purchased October 25, 2018) 1,857,200
Accumulated depreciation – building 286,140

Details of machines owned at December 31 2021, are as follows:

Machine Purchase Date Cost Useful Life Residual Value
1 October 7, 2018 P430,000 5 years P25,000
2 February 4, 2019 P480,000 6 years P30,000

Additional information:

• Jaran calculates depreciation to the nearest month and balances the records at month-end.
Recorded amounts are rounded to the nearest peso, and the reporting date is December 31.

• Jaran uses straight-line depreciation for all depreciable assets except vehicles, which are
depreciated on the diminishing balance at 40% per annum.

• The vehicles account balance reflects the total paid for two identical delivery vehicles, each
of which cost P234,000.

• On acquiring the land and building, Jaran estimated the building’s useful life and residual
value at 20 years and P50,000, respectively.

The following transactions occurred from January 1, 2022:

2022
Jan. 03 Bought a new machine (machine 3) for P590,000 with 2/10, n/30 credit terms.
Payment was made on Jan. 15. Freight charges of P4,300 and installation costs of
P2,500 were paid in cash. The useful life and residual value were estimated at five
years and P30,000, respectively.

June 22 Bought a second-hand vehicle for P152,000 cash. Repainting costs of P6,550 and four
new tires costing P3,450 were paid for in cash.

Aug. 28 Exchanged machine 1 for office furniture that had a fair value of P125,000 at the date
of exchange. The fair value of machine 1 at the date of exchange was P115,000. The

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CPAR - MANILA AP 9603-1 – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

office furniture originally cost P360,000 and, to the date of exchange, had been
depreciated by P241,000 in the previous owner’s books. Jaran estimated the office
furniture’s useful life and residual value at eight years and P5,400, respectively.

Dec. 31 Recorded depreciation.

2023
April 30 Paid for repairs and maintenance on the machinery at a cash cost of P9,280.

May 25 Sold one of the vehicles bought on November 21, 2020, for P66,000 cash.

June 26 Installed a fence around the property at a cash cost of P55,000. The fence has an
estimated useful life of 10 years and zero residual value. (Debit the cost to a land
improvements asset account.)

Dec. 31 Recorded depreciation.

2024
Jan. 05 Overhauled machine 2 at a cash cost of P120,000, after which Jaran estimated its
remaining useful life at one additional year and revised its residual value to P50,000.

June 20 Traded in the remaining vehicle bought on November 21, 2020, for a new vehicle. A
trade-in allowance of P37,000 was received and P233,000 was paid in cash.

Oct. 04 Scrapped the vehicle bought on June 22, 2022, as it had been so badly damaged in a
traffic accident that it was not worthwhile repairing it.

Dec. 31 Recorded depreciation.

Questions:

1. What should be the depreciation expense for the vehicles for 2022?
A. P140,976 B. P138,976 C. P139,666 D. P140,286

2. What should be the depreciation expense for the machinery for 2022?
A. P235,600 B. P240,000 C. P242,360 D. P267,000

3. What should be the balance of the Accumulated depreciation – Office furniture account at
December 31, 2023?
A. P19,933 B. P18,267 C. P19,833 D. P58,083

4. What should be the depreciation expense for the machinery for 2024?
A. P198,000 B. P200,360 C. P206,000 D. P222,000

5. What should be the total depreciation expense for 2024?

A. P394,660 B. P397,020 C. P409,612 D. P403,832

PROBLEM 2 – LUCBAN COMPANY

Your audit of LUCBAN COMPANY’s property, plant, and equipment disclosed the following data at
December 31, 2023.

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CPAR - MANILA AP 9603-1 – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

A S S E T
W A L E
Original cost P210,000 P306,000 P480,000 P480,000
Year purchased 2018 2019 2020 2022
Useful life 10 years 15,000 hours 15 years 10 years
Salvage value P 18,600 P 18,000 P 30,000 P 30,000
Double-
Depreciation Sum-of- declining-
method years’-digits Working hours Straight-line balance
Accumulated depreciation
through 2023 P 139,200 P 211,200 P 90,000 P 96,000

You noted that the client’s policy on depreciation is that no depreciation is recorded in the year
an asset is purchased, and full year depreciation is provided in the year an asset is disposed of.

The following transactions occurred during 2024:

1. On May 5, Asset W was sold for P78,000 cash. The company’s bookkeeper recorded this
retirement in the following manner in the cash receipts journal:
Cash 78,000
Asset W 78,000

2. On December 31, it was determined that Asset A had been used 2,100 hours during 2024.

3. On December 31, before computing depreciation expense on Asset L, the management of

Lucban decided the useful life remaining from January 1, 2024, was 10 years.

4. On December 31, it was discovered that a plant asset purchased in 2023 had been expensed
completely in the year. This asset costs P132,000 and has a useful life of 10 years and no
salvage value. Management has decided to use the double-declining balance method for this
asset, which can be referred to as “Asset Y”.

1. The 2024 depreciation expense on Asset W is

A. P17,400 B. P19,092 C. P20,880 D. P54,687

2. The gain to be reported on the sale of Asset W is

A. P 0 B. P24,600 C. P26,292 D. P28,080

3. The 2024 depreciation expense on Asset A is

A. P40,320 B. P42,840 C. P52,800 D. P58,320

4. The 2024 depreciation expense on Asset L is

D. P16,365 B. P36,000 C. P39,000 A. P51,429

5. The total depreciation expense in 2024 on the above-mentioned PPE items is

A. P191,640 B. P196,920 C. P199,920 D. P200,400

PROBLEM 3 - KAZOO COMPANY

On January 1, 2022, KAZOO COMPANY acquired a factory equipment at a cost of P150,000. The
equipment is being depreciated using the straight-line method over its projected useful life of 10
years. On December 31, 2023, a determination was made that the asset’s recoverable amount
was only P96,000. Assume that this was properly computed and that recognition of the

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impairment was warranted. On December 31, 2024, the asset’s recoverable amount was
determined to be P111,000 and management believes that the impairment loss previously
recognized should be reversed.

1. What amount of impairment loss should be recognized on December 31, 2023?

A. P54,000 B. P9,000 C. P24,000 D. P 0

2. What is the asset’s carrying value on December 31, 2024?

A. P84,000 B. P90,000 C. P86,400 D. P96,000

3. What would have been the asset’s carrying amount at December 31, 2024, had the
impairment not been recognized in 2023?
A. P105,000 B. P84,000 C. P96,000 D. P86,400

4. What amount of impairment recovery should be reported in the 2024 income statement?
A. P27,000 B. P 0 C. P6,000 D. P21,000

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