AUDIT OF PPE (1)
AUDIT OF PROPERTY & EQUIPMENT AND RELATED DEPRECIATION
AND ACCUMULATED AND ACCUMULATED DEPRECIATION ACCOUNTS (PPE-3)
You are engaged in the examination of the financial statements of the Haven Corporation
for the year ended December 31, 2021. The accompanying analyses of the Property, Plant, and
Equipment, and related accumulated depreciation accounts, have been prepared by the chief
accountant of the client. You have traced the beginning balances to your prior year’s audit
working papers.
Haven Corporation
Analysis of Property, Plant, and Equipment, and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2021
(In P000’s)
Final Assets Per Ledger
Description 12/31/20 Additions Retirements 12/31/21
Land P422,500 P 5,000 P427,500
Buildings 120,000 17,500 137,500
Machinery and equipment 385,000 40,000 P26,000 399,400
P927,500 P62,900 P26,000 P964,400
Final Accumulated Depreciation Per Ledger
Description 12/31/20 Additions Retirements 12/31/21
Buildings P 60,000 P 5,150 P 65,150
Machinery and equipment 173,250 39,220 212,470
P223,250 P44,370 P277,620
* Depreciation expense for the year.
All plant assets are depreciated on the straight-line basis (no residual value taken into
consideration) based on the following estimated service lives: building, 25 years, and all other
items, 10 years. The company’s policy is to take one half year’s depreciation on all asset
additions and disposals during the year.
Your examination of the 2021 transactions revealed the following information:
1. On April 1, the company entered into a 10-year lease contract for a die casting machine, with
annual rentals of P5,000 payable in advance every April 1. The lease is cancellable by either
party (60 days’ written notice is required), and there is no option to renew the lease or buy the
equipment at the end of the lease. The estimated service life of the machine is 25 years with
no residual value. The company recorded the die casting machine in the Machinery and
Equipment account at P40,400, the present value at the date of lease, and P2,020 applicable
to the machine has been included in depreciation expense for the year.
2. The company completed the construction of a wing on the plant building on June 30. The
service life of the building was not extended by this addition. The lowest construction bid
received was P17,500, the amount recorded in the Buildings account. Company personnel
constructed the addition at a cost of P16,000 (materials, P7,500; labor, P5,500; and overhead,
P3,000).
3. On August 18, P5,000 was paid for paving and fencing a portion of land owned by the
company and used as a parking lot for employees. The expenditure was charged to the Land
account.
4. The amount shown in the machinery and equipment asset retirement column represents cash
received on September 5 upon disposal of a machine purchased in July 2013 for P48,000. The
chief accountant recorded depreciation expense of P3,500 on this machine in 2021.
5. Cebu City donated land and building appraised at P100,000 and P400,000, respectively, to
Haven Corporation for a plant. On September 1, the company began operating the plant.
Since no costs were involved, the chief accountant made no entry for the above transaction.
REQUIRED:
Prepare the adjusting journal entries that you would propose at December 31, 2020, to adjust the
accounts for the above transactions. Disregard income tax implications. The accounts have not
been closed. Computations should be rounded off to the nearest peso. Use a separate adjusting
journal entry for each of the above five transactions.
