Direction: Read and solve the following problems.

Write the letter of your best answer on the space provided before
each number. Erasures are not allowed and considered wrong.

Problem 1. The following independent situations describe facts concerning the ownership of various assets:

a. The ABC company purchased a tooling machine in 2000 for P600,000. The machine was being depreciated on
the straight-line method over an estimated useful life of 20 years with no salvage value. At the beginning of 2010,
when the machine had been in use for 10 years, ABC estimated that the useful life of the machine would be
extended an additional 5 years.
b. DEF manufacturing company, a calendar-year company, purchased a machine for P650,000 on January 1,2008.
At the date of purchase, DEF incurred the following additional costs:
Loss on sale of old machinery P15,000
Freight cost 5,000
Installation costs 20,000
Testing costs prior to regular operation 4,000
The estimated salvage value of the machine was P50,000 and DEF estimated that the machine would have a
useful life of 20 years, with depreciation being computed using the straight line method. In January 2010,
accessories totaling P48,600 were added to the machine in order to reduce its operating costs. These
accessories neither prolonged the machine’s life nor did they provide additional salvage value.
c. On July 1,2010, GHI Corporation purchased equipment at a cost of P680,000. The equipment has an estimated
salvage value of P60,000 and is being depreciated over an estimated life of 8 years under the double declining
balance method of depreciation. For the 6 months ended December 31,2010, GHI recorded one-half of a year’s
depreciation.
d. The JKL Company acquired a tract of land containing an extractable natural resource. JKL is required by its
purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural
resource. Geographical surveys estimate that the recoverable reserves will be 3,800,000 tons and that the land
will have a value of P500,000 after restoration. Relevant cost information follows:
Land P9,000,000
Estimated restoration costs 1,000,000
Tons mined and sold in 2010 700,000
e. In January 2010, MNO entered into a contract to acquire a new machine for its factory. The machine which had a
cash price of P200,000 was paid for as follows:
Down payment P 30,000
Notes payable in 10 equal monthly installments, including interest at 10% 150,000
500 shares of MNO ordinary share capital at a par value of P70 per share 35,000
P 215,000
The machine has an estimated useful life of 10 years. The straight line method of depreciation is used.

Required: In each case, compute the amount of depreciation or depletion for 2010:

___1. ABC
a. 84,000 b. 20,000 c. 42,000 d. 16,800
___2. DEF
a. 33,880 b. 37,640 c. 34,150 d. 31,450
___3. GHI
a. 77,500 b. 155,000 c. 170,000 d. 85,000
___4. JKL
a. 1,750,000 b. zero c. 1,842,105 d. 1,657,895
___5. MNO
a. 20,700 b. 20,500 c. 19,700 d. 20,000

Problem 3. Faber Drive Inc. provided the following information relating to the revaluation of an equipment on January
1,2010.

Cost Replacement Cost

Equipment P6,500,000 P9,200,000
Residual value 500,000 200,000
Useful life 12

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 Age of the equipment 2
Accumulated depreciation ? ?
The equipment was sold on December 31,2010 for P8,000,000.
Required: Based on the result of your audit, determine the following:

___1. Ignoring income tax, what is the revaluation surplus on January 1,2010?
a. 2,700,000 b. 2,200,000 c. 2,500,000 d. 2,000,000

___2. Depreciation for 2010

a. 530,000 b. 900,000 c. 750,000 d. 220,000

___3. Revaluation surplus on December 31,2010

a. 2,200,000 b. 2,250,000 c. 2,430,000 d. 1,980,000

___4. Gain on sale of equipment on December 31,2010

a. 1,050,000 b. 3,030,000 c. 3,230,000 d. 300,000

Problem 4. You are assigned to the audit of the account “land, building, machinery and equipment” of MCR Inc., a newly
established corporation. A summary of the ledger account appears below:
Date Explanation Amount
2006
June 4 Acquired the plant assets of Avecas Company P3,000,000
15 Major Improvement to building 100,000
30 Special tax assessment by city 15,000
Oct. 08 Construction of platform for machinery to be installed later 150,000
Nov. 05 Remodeling of office space in building, including new partitions 210,000
Dec. 06 Purchase of machinery – cash payment (gross) 200,000
Dec. 31 Balance of Land, Building, Machinery and Equipment account P3,675,000
Further verifications revealed the following information:
a. The appraised value of the property acquired from Avecas Company, which had stopped operations, were as
follows:
Land P 300,000
Building 2,000,000
Machinery and equipment 700,000
P3,000,000
In exchange for the property of Avecas company, MCR issued 25,000 shares of its P100 par value ordinary
shares. On the date of purchase, the share had a market value of P108 per share.
b. On December 6 acquisition, the company paid cash for the machinery purchase. The company is entitled to a 2%
discount which was never taken by MCR. Freight of P8,000 was likewise paid and charged to an expense
account.
Required: Based on the result of your audit, determine the following:
___1. Cost of Land as of June 5,2006
a. 250,000 b. 270,000 c. 300,000 d. 310,000
___2. Cost of Building as of June 5,2006
a. 1,667,000 b. 1,800,000 c. 2,000,000 d. 2,310,000
___3. Cost of Machinery and Equipment as of June 5,2006
a. 583,000 b. 630,000 c. 700,000 d. 1,050,000
___4. Cost of Land as of December 31,2006
a. 285,000 b. 345,000 c. 354,000 d. 445,000
___5. Cost of Building as of December 31,2006
a. 2,110,000 b. 3,210,000 c. 2,410,000 d. 2,510,000
___6. Cost of Machinery and Equipment
a. 984,000 b. 1,054,000 c. 1,154,000 d. 1,254,000

Problem 5. The following items are included in the PPE section of the audited statement of financial position of M5 Inc. as
of December 31,2009:
Land P 3,450,000
Buildings 13,350,000
Leasehold improvements 9,900,000
Machinery and equipment 13,125,000
The following transactions occurred during 2010:

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 a. Land A was acquired for P12,750,000. In connection with acquisition, M5 paid a P765,000 commission to a real
estate agent. Costs of P525,000 were incurred to clear the land. During the course of clearing the land, timber
and gravel were recovered and sold for P195,000.
b. Land B with an old building was acquired for P6,300,000. On the acquisition date, the fair value of the land was
P4,500,000 and the fair value of the building was P1,800,000. The old building was demolished at a cost of
P615,000 shortly after acquisition. A new building was constructed for P4,950,000 plus the following costs:
Excavation fees P570,000
Architectural design fees 165,000
Building permit fee 37,500
Imputed interest on funds used during construction (stock financing) 127,500
The building was completed and occupied on December 30,2010.
c. Land C was acquired for P9,750,000 with the intention of selling it within 12 months from the date of purchase.
d. During December 2010, costs of P1,335,000 were incurred to improve leased office space. The related lease will
terminate on December 31,2012 and is not expected to be renewed.
e. A group of machines was purchased under a royalty agreement that provides for payment of royalties based on
units of production for the machines. The invoice price of the machine was P1,305,000, freight costs were
P49,500, installation costs were P36,000 and royalty payments for 2010 were P262,500.

Required: Based on the result of your audit, determine the following items of PPE as of December 31,2010:
___1. Land
a. 24,210,000 b. 23,445,000 c. 33,960,000 d. 24,405,000
___2. Buildings
a. 19,200,000 b. 20,872,000 c. 19,072,500 d. 21,000,000
___3. Leasehold improvements
a. 9,900,000 b. zero c. 1,335,000 d. 11,235,000
___4. Machinery and equipment
a. 14,778,000 b. 14,515,500 c. 14,253,000 d. 14,430,000
Problem 7. The Used Inc. commenced operations on January 1,2009. During the following year, the company acquired a
tract of land, demolished the building on the land and built a new factory. Equipment was acquired for the factory and in
September 2010, the plant was ready to commence operation. A gala opening was held on September 18, with the City
Mayor opening the factory. The first items were ready for sale on September 25.
During this period, the following cash inflows and outflows occurred:
 While searching for a suitable block of land, The Used placed an option to buy with three
real estate agents at a cost of P1,000 each. Payment of option fees. P 3,000
 Receipt of loan from bank 3,000,000
 Payment to settlement agent for title search, stamp duties and settlement fees 100,000
 Payment of delinquent property taxes assumed by The Used 50,000
 Payment for land 1,000,000
 Payment for demolition of old building 120,000
 Proceeds from sale of material from old building 55,000
 Payment to architect 230,000
 Payment to cityhall for approval of building construction 120,000
 Payment for safety fence around construction site 34,000
 Payment to construction contractor for factory building 2,400,000
 Payment for external driveways, parking bays and safety lighting 540,000
 Payment of interest on construction loan 400,000
 Payment for inspection on building 30,000
 Payment for equipment 640,000
 Payment of freight and insurance costs on delivery of equipment 56,000
 Payment on installation cost on equipment 120,000
 Payment for safety equipment surrounding equipment 110,000
 Payment for removal of safety fence 20,000
 Payment for new fence surrounding the factory 80,000
 Payment for advertisements in the newspaper about the forthcoming factory and its benefits
to the community 5,000
 Payment for opening ceremony 60,000
 Payments to adjust equipment to more efficient operating levels subsequent to initial operation 33,000

Required: Based on the result of your audit, determine the following:

___1. Cost of Land
a. 1,218,000 b. 1,216,000 c. 1,166,000 d. 1,271,000

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___2. Cost of building
a. 3,279,000 b. 3,284,000 c. 3,200,000 d.3,234,000
___3. Cost of land improvements
a. 620,000 b. 654,000 c. 114,000 d. 134,000
___4. Cost of equipment
a. 959,000 b. 849,000 c. 903,000 d. 1,359,000
___5. Amount to be expensed as incurred (excluding depreciation)
a. 60,000 b. 100,000 c. 65,000 d. 67,000

Problem 8. Your audit of B182 Inc. for the year 2010 disclosed the following property dispositions:
Cost Acc. Dep. Proceeds Fair Value
Land P4,800,000 - P3,720,000 P3,720,000
Building 1,800,000 - 288,000 -
Warehouse 8,400,000 P1,320,000 8,880,000 8,880,000
Machine 960,000 384,000 108,000 864,000
Delivery truck 1,200,000 570,000 564,000 564,000

Land
On January 15, a condemnation award was received as consideration for the forced sale of the company’s land and
building, which stood in the path of a new highway.

Building
On March 12, land and building were purchased at a total cost of P6,000,000 of which 30% was allocated to the building
on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was
accomplished during the month of August. Cash proceeds received in September represent the net proceeds from
demolition of building.

Warehouse
On July 4, the warehouse was destroyed by fire. The warehouse was purchased on January 2,2004. On December 12,
the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of P7,200,000.

Machine
On December 15, the machine was exchanged for a machine having a fair value of P756,000 and cash of P108,000 was
received.

Delivery truck
On November 13, the delivery truck was sold to a used car dealer.

Required: Based on the result of your audit, determine the following:

___1. Gain or (loss) on disposal of land

a. 3,720,000 gain b. 1,080,000 loss c. 4,800,000 loss d. zero

___2. Gain or (loss) on disposal of building

a. 432,000 gain b. 2,232,000 loss c. 1,368,000 loss d. zero

___3. Gain or (loss) on disposal of warehouse

a. 1,800,000 gain b. 480,000 gain c. 5,400,000 loss d. zero

___4. Gain or (loss) on disposal of machine

a. 36,000 gain b. 27,000 gain c. 288,000 gain d. zero

___5. Gain or (loss) on disposal of delivery truck

a. 636,000 loss b. 636,000 gain c. 66,000 loss d. 66,000 gain

Problem 9. In connection with your audit of RHCP Inc. for the year ended December 31,2010, 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.

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The 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 P640,000
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.

Required: Based on the result of your audit, determine the following:

___1. Depletion for 2010
a. 768,000 b. 192,000 c. 960,000 d. 1,040,000

___2. Total inventoriable depreciation for 2010

a. 400,000 b. 384,000 c. 362,667 d. zero

___3. Inventory as of December 31,2010

a. 438,400 b. 425,600 c. 422,400 d. 418,133

___4. Cost of sales for the year ended December 31,2010

a. 1,689,600 b. 1,702,400 c. 1,753,600 d. 1,672,533

___5. Maximum amount of dividends that may be declared at the end of the company’s first year of operations
a. 1,494,400 b. 1,302,400 c. 1,289,600 d. 1,319,467
Problem 11. In connection with your audit of Click 5 Inc.’s financial statements for the year 2010, you noted the following
transactions affecting the property and equipment items of the company:

Jan. 1 – Purchased real property for P5,026,000, which included a charge of P146,000 representing property tax for 2010
that had been prepaid by the vendor; 20% of the purchase price is deemed applicable to land and the balance to
buildings. A mortgage of P3,000,000 was assumed by Click 5 on the purchase. Cash was paid for the balance.
Jan. 15 – Previous owners had failed to take care of normal maintenance and repair requirements on the buildings,
necessitating current reconditioning at a cost P236,800.
Feb. 15 – Demolished garages in the rear of the building, P36,000 being recovered on the lumber salvage. The company
proceeded to construct a warehouse. The cost of such warehouse was P540,800 which was P90,000 less than the
average bids made on the construction by independent contractors. Upon completion of construction, city inspectors
ordered extensive modifications to the building as a result of failure on the part of the company to comply with building
safety code. Such modifications, which could have been avoided, cost P76,800.
Mar. 1 – The company exchanged its own shares with a fair value of P320,000 (par P24,000) for a patent and a new
equipment. The equipment has a fair value of P200,000.
Apr. 1 – The new machinery for the new building arrived. In addition, a new franchise was acquired from the manufacturer
of the machinery. Payment was made by issuing bonds with a face value of P400,000 and by paying cash P144,000. The
value of the franchise is set at P160,000 while the machine’s fair value is P360,000.
May 1 – The company contracted for parking lots and waiting sheds at a cost of P360,000 and P76,800, respectively. The
work was completed and paid for on June 1.
Dec. 31 – The business was closed to permit taking the year-end inventory. During this time, required redecorating and
repairs were completed at a cost of P60,000.

Required: Based on the result of your audit, determine the following:

___1. Cost of Land
a. 940,000 b. 1,005,200 c. 976,000 d. 1,052,800
___2. Cost of Buildings
a. 4,645,600 b. 5,005,600 c. 4,762,400 d. 4,681,600
___3. Machinery and Equipment
a. 360,000 b. 560,000 c. 576,615 d. 659,692
___4. Land Improvements
a. 360,000 b. 76,800 c. 436,800 d. zero

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___5. Total property, plant and equipment
a. 6,764,400 b. 6,731,200 c. 6,718,092 d. 6,618,400

Problem 12. Shown below are the Machinery and Equipment and Delivery Equipment accounts of the Creed Inc. 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 2010:

a. A 2010 Isuzu truck was purchased for P1,200,000 in June. In the same month, a 2004 Fuso truck was sold for
P75,000. The truck was purchased in April 2006 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 2006 for P30,000 was sold in June for P24,000.
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 2005 had
a cost of P12,000. The machine was sold in September 2010.

Machinery and Equipment

01/01/10 Balance P450,000 June CR P24,000

June VR 36,000
July VR 225,000

Accumulated Depreciation – Machinery and Equipment (10% annual rate)

01/01/10 Balance P207,000

Delivery Equipment

01/01/10 Balance P2,850,000 June CR P75,000

June 3 VR 1,200,000

Accumulated Depreciation – Delivery Equipment (20% annual rate)

01/01/10 Balance P1,650,000

Required: Based on the result of your audit, determine the following:

___1. Loss on sale of Fuso Truck in June 2010
a. 75,000 b. 114,000 c. 51,000 d. zero
___2. Gain on sale of drill press in June 2010
a. 6,000 b. 9,000 c. 4,500 d. zero
___3. Correct balance of Machinery and Equipment at December 31,2010
a. 676,500 b. 669,000 c. 679,500 d. 1,879,500
___4. Correct balance of Delivery Equipment at December 31,2010
a. 4,176,000 b. 3,456,000 c. 4,050,000 d. 3,420,000
___5. Total depreciation expense for the year ended December 31,2010
a. 683,475 b. 882,150 c. 484,800 d. 682,800
___6. Book value of machinery and equipment at December 31,2010
a. 428,025 b. 416,025 c. 434,025 d. 422,025
___7. Correct balance of the Accumulated Depreciation Equipment on December 31,2010
a. 1,773,000 b. 2,277,000 c. 1,836,000 d. 1,647,000

Key to correction – Audit of PPE – Quiz III

1. B – C – D – A – D
2. C – B – D – D – A
3. B – C – D – A
4. B – B – B – A – A – A
5. A – C – D – B
6. B – C – A – A – D
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 7. B – D – A – A – D
8. B – D – A – C – C
9. C – B – C – A – B
10. A – B – D – D – A – C
11. C – A – B – C – D
12. C – A – C – D – A – C – A

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