AUDIT OF PROPERTY, PLANT & EQUIPMENT AND INTANGIBLE ASSETS

PROBLEM NO. 1
The property, plant and equipment section of White Corporations balance sheet at
December 31, 2004 included the following items:
Land P 2,500,000
Land improvements 560,000
Building 3,600,000
Machinery and equipment 6,600,000

During 2005 the following data were available to you upon your analysis of the accounts:
Cash paid on purchase of land P10,000,000
Mortgage assumed on the land bought, including interest at 16% 16,000,000
Realtors commission 1,200,000
Legal fees, realty taxes and documentation expenses 200,000
Amount paid to relocate persons squatting on the property 400,000
Cost of tearing down an old building on the land 300,000
Amount recovered from the salvage of the building demolished 600,000
Cost of fencing the property 440,000
Amount paid to a contractor for the building erected 8,000,000
Building permit fees 50,000
Excavation expenses 250,000
Architects fee 100,000
Interest that would have been earned had the money used during
the period of construction been invested in the money market 600,000
Invoice cost of machinery acquired 8,000,000
Freight, unloading, and delivery charges 240,000
Customs duties and other charges 560,000
Allowances, hotel accommodations, etc., paid to foreign
technicians during instillation and test run of machines 1,600,000
Royalty payment on machines purchased (based on units
produced and sold) 480,000
REQUIRED:
Based on the above and the result of your audit, compute for the following as of December
31, 2005:
1. Land
2. Land improvements
3. Building
4. Machinery and equipment
5. Total depreciable property, plant and equipment

PROBLEM NO. 2
The following were discovered during your audit of Black Companys financial statements
for the year ended December 31, 2005:
a. On December 24, 2005, Black purchased an office equipment for P400,000, terms
2/5, n/15. No entry was made on the date of purchase. The same was paid on
December 31, 2005 and the accountant debited Office Equipment and credited cash
for P400,000.
b. Machine C, with a cash price of P128,000, was purchased on January 2, 2005. The company
paid P20,000 down and P10,000 for 12 months. The last payment was made on December 30,
2005. Straight line depreciation, based on a five-year useful life and no salvage value, was
recorded at P28,000 for the year. Freight of P4,000 on machine C was debited to the Freight in
account.
c. Machine P with a cash selling price of P360,000 was acquired on April 1, 2005, in exchange for
P400,000 face amount of bonds payable selling at 94, and maturing on April 1, 2015. The
accountant recorded the acquisition by a debit to Machinery and a credit to Bonds Payable for
P400,000. Straight line depreciation was recorded based on a five-year economic life and
amounted to P54,000 for nine months. In the computation of depreciation, residual value of
P40,000 was used.
d. Machine A was acquired on January 22, 2005, in exchange for past due accounts receivable of
P140,000, on which an allowance of 20% was established at the end of 2004. The current fair
value of the machine on January 22 was estimated at P110,000. The machine was recorded by
a debit to Machinery and a credit to Accounts Receivable for P140,000. No depreciation was
recorded on Machine A, because it was not installed and never used in operations. On February
2, 2005, Machine A was exchanged for 1,000 shares of the companys outstanding capital stock
with market price of P105 per share. The Treasury Stock account was debited for P140,000 with
the corresponding credit to Machinery.
e. On December 29, 2005, the company exchanged 10,000 shares of Emong, Inc. common stock,
which Black was holding as an investment, for an equipment from De Leon Corporation. The
common stock of Emong, Inc., which had been purchased by Black for P45 per share, had a
quoted market value of P50 per share on the date of exchange. The equipment had a market
value of P470,000. The transaction was recorded by a debit to Equipment and a credit to
Investment in Emong, Inc.-Common for P450,000.
f. On December 30, 2005, Machine M with a carrying amount of P120,000 (cost P400,000) was
exchanged for a similar asset with a fair value of P150,000. In addition, Black paid P20,000 to
acquire the new machine. The exchange, which lacks commercial substance, was recorded by a
debit to Machinery and a credit to cash for P20,000.

g. Machine E was recorded at P102,000, which included the carrying amount of P22,000 for an old
machine accepted as a trade in, and cash of P80,000. The cash price of Machine S was
P90,000, and the trade in allowance was P10,000. This transaction took place on December 31,
2005.

h. Ms. Beauty, the companys president, donated land and building appraised at P200,000 and
P400,000, respectively, to the company to be used as plant site. The company began operating
the plant on September 30, 2005. The building is estimated to have a useful life of 25 years.
Since no money was involved, no journal entry was made for the above transaction.

i. On July 1, 2004, the national government granted a parcel of land located in Baliuag, Bulacan to
Black. On the date of grant, the land had a fair value of P2,000,000. The grant required Black to
construct a cold storage building on the site. Black finished the construction of the building,
which has an estimated useful life of 25 years, on January 2, 2005. Black appropriately recorded
the cost of the building of P4,000,000 (which include direct materials, direct labor, and indirect
cost and incremental overhead) but failed to provide depreciation in 2005. Unaware of the
accounting procedures for government grants, the company did not reflect the grant on its
books.

REQUIRED:
As Blacks external auditor, you are required to prepare any necessary adjusting journal entries as of
December 31, 2005.

PROBLEM NO. 3
The Blue Corporation was incorporated on January 2, 2005, but was unable to begin manufacturing
activities until July 1, 2005 because the new factory facilities were not completed until that date.

The Land and Building account at December 31, 2005 follows:

Date Particulars Amount
Jan. 31 Land and building P 1,098,000
Feb. 28 Cost of removal of old building 60,000
May 02 Partial payment on new construction 700,000
02 Legal fees paid 15,000
June 01 Second payment on new construction 600,000
July 01 Fire insurance premium 1 year 26,000
01 Final payment on new construction 200,000
Dec. 31 Asset write-up 500,000
P 3,199,000
Dec. 31 Depreciation 2005, at 1% of account balance 31,990
P 3,167,010
You were able to gather the following during your audit:
a. To acquire land and building, the company paid P98,000 cash and 10,000 shares of its 9%
cumulative preferred shares, P100 par value per share. The shares were then selling at P120.

b. Legal fees covered the following:

Cost of incorporation P 9,500
Examination of title covering purchase of the land 4,000
Legal work in connection with construction contract 1,500
P 15,000

c. Because of a general increase in construction costs after entering into the building contract, the
board of directors increased the value of the building by P500,000, believing such increase is
justified to reflect current market value at the time the building was completed. Retained earnings
was credited for this amount.

d. Estimated useful life of the building is 25 years.

REQUIRED:
1. Prepare the necessary adjusting journal entries as of December 31, 2005.

2. Determine the adjusted balances of the following as of December 31, 2005:

a. Land and building
b. Land
c. Carrying value of building

PROBLEM NO. 4
In the audit of the books of Green Company for the year 2005, the following items and information
appeared in the Production Machines account of the auditee:
Date Particulars Debit Credit
2005
Jan. 01 BalanceMachines 1, 2, 3, and 4 at P90,000 each P 360,000
Aug 31 Machine 5 198,000
Machine 1 P 3,000
Sept 30 Machine 6 96,000
Dec 01 Machines 7 and 8 at P216,000 each 432,000
Dec 01 Machine 2 21,000
31 Balance . 1,062,000
P1,086,000 P1,086,000

The Accumulated Depreciation account contained no entries for the year 2005. The balance on
January 1, 2005 per your audit, was as follows:
 Machine 1 P 84,375
Machine 2 39,375
Machine 3 33,750
Machine 4 22,500
Total P 180,000

Based on your further inquiry and verification, you noted the following:
1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this date for
P3,000.
2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on December
1, 2005. Insurance of P21,000 was recovered. Machine 7 was to replace
Machine 2.

3. Machine 3 was traded in for Machine 6 at an allowance of P12,000; the difference was paid in
cash and charged to Production Machine account.
4. Depreciation rate is recognized at 25% per annum.

REQUIRED:
Determine the adjusted balance of the Production Machine as of December 31, 2005 and
Depreciation Expense for the year 2005.

PROBLEM NO. 5
You obtain the following information pertaining to Red Co.s property, plant, and equipment for 2005
in connection with your audit of the companys financial statements.

Audited balances at December 31, 2004:

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 -

Transaction during 2005 and other information are as follows:

a. On January 2, 2005, Red 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, 2005, a machine purchased for P575,000 on April 1, 2000 was destroyed by fire. Red
recovered P387,500 from its insurance company.
c. On May 1, 2005, 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, 2011.
d. On July 1, 2005, 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. Red determined that the delivery equipment comprising the P2,875,000 balance at
January 1, 2005, would have been depreciated at a total amount of P450,000 for the year ended
 December 31, 2005.

The salvage values of the depreciable assets are immaterial. The policy of the Red 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 December 31, 2005?
a. P7,777,500 b. P7,982,850 c. P8,377,500 d. P7,103,700
2. How much is the Accumulated depreciation Machinery and Equipment as of
December 31, 2005?
a. P8,844,375 b. P8,614,375 c. P8,830,000 d. P8,556,875
3. How much is the Accumulated depreciation Delivery Equipment as of December
31, 2005?
a. P2,715,000 b. P2,400,000 c. P2,490,000 d. P2,805,000
4. How much is the Accumulated depreciation Leasehold Improvements as of
December 31, 2005?
a. P420,000 b. P525,000 c. P350,000 d. P630,000
5. How much is the net gain (loss) from disposal of assets for the year ended December
31, 2005?
a. P100,000 b. (P35,000) c. P65,000 d. (P65,000)

PROBLEM NO. 6
In connection with your audit of the Josef Mining Corporation for the year ended December 31, 2005,
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.

Following is the summary of the companys 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 640,000
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.

QUESTIONS:
Based on the above and the result of your audit, answer the following: (Disregard tax implications)
1. How much is the depletion for 2005?
a. P768,000 b. P960,000 c. P192,000 d. P1,040,000
2. Total inventoriable depreciation for 2005?
a. P400,000 b. P362,667 c. P384,000 d. P0
3. How much is the Inventory as of December 31, 2005?
a. P438,400 b. P422,400 c. P425,600 d. P418,133
4. How much is the cost of sales for the year ended December 31, 2005?
a. P1,689,600 b. P1,753,600 c. P1,702,400 d. P1,672,533
5. How much is the maximum amount that may be declared as dividends at the end of the
companys first year of operations?
a. P1,494,400 b. P1,289,600 c. P1,302,400 d. P1,319,467
PROBLEM NO. 7
Transactions during 2005 of the newly organized Pink Corporation included the following:
Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to complete
organization of the corporation.
15 Hired a clown to stand in front of the corporate office for 2 weeks and hound out
pamphlets and candy to create goodwill for the new enterprise. Clown cost,
P10,000; pamphlets and candy, P5,000.
Apr. 1 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P 429,000
Patent application and licensing fees 63,500
Total P 492,500
It is estimated that in 6 years other companies will have developed improved
processes, making the Pink Corporation process obsolete.
May 1 Acquired both a license to use a special type of container and a distinctive trademark to
be printed on the container in exchange for 6,000 shares of Pinks no-par common
stock selling for P50 per share. The license is worth twice as much as the
trademark, both of which may be used for 6 years

July 1 Constructed a shed for P1,310,000 to house prototypes of experimental models to be

developed in future research projects.
Dec. 31 Incurred salaries for an engineer and chemist involved in product development totaling
P1,750,000 in 2005.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of patent
a. P492,500 b. P429,000 c. P63,500 d. P0
2. Cost of licenses
a. P150,000 b. P200,000 c. P100,000 d. P0
3. Cost of trademark
a. P150,000 b. P200,000 c. P100,000 d. P0
4. Carrying amount of Intangible Assets
a. P712,604 b. P2,477,604 c. P697,604 d. P0
5. Total amount resulting from the foregoing transactions that should be expensed when
incurred
a. P4,100,500 b. P1,983,000 c. P1,998,000 d. P0

PROBLEM NO. 8

On December 31, 2004, Silver Corporation acquired the following three intangible assets:
A trademark for P300,000. The trademark has 7 years remaining legal life. It is anticipated that the
trademark will be renewed in the future, indefinitely, without problem.
Goodwill for P1,500,000. The goodwill is associated with Silvers Hayo Manufacturing reporting
unit.
A customer list for P220,000. By contract, Silver has exclusive use of the list for 5 years. Because
of market conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2005, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a) Because of a decline in the economy, the trademark is now expected to generate cash flows of
just P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.
b) The cash flows expected to be generated by the Hayo Manufacturing reporting unit is P250,000
per year for the next 22 years. Book values and fair values of the assets and liabilities of the Hayo
Manufacturing reporting unit are as follows:
Book values Fair values
Identifiable assets P2,700,000 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000

c) The cash flows expected to be generated by the customer list are P120,000 in 2006 and P80,000
in 2007.

REQUIRED:
Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):
1. Total amortization for the year 2005
a. P73,333 b. P141,515 c. P116,190 d. P86,857
2. Impairment loss for the year 2005
a. P90,476 b. P133,333 c. P179,584 d. P0
3. Carrying value of Trademark as of December 31, 2005
a. P300,000 b. P257,143 c. P166,667 d. P120,416
4. Carrying value of Goodwill as of December 31, 2005
a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500
5. Carrying value of Customer list as of December 31, 2005
a. P220,000 b. P146,667 c. P176,000 d. P0