VII-AUDIT OF PROPERTY, PLANT AND EQUIPMENT

PROBLEM NO. 1

Aliaga Corporation was incorporated on January 2, 2010. The following items relate to the
Aliaga’s property and equipment transactions:

Cost of land, which included an old apartment building

appraised at ₱300,000 ₱ 3,000,000
Apartment building mortgage assumed, including
related interest due at the time of purchase 80,000
Deliquent property taxes assumed by Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
Proceeds from sale of salvaged materials 10,000
Architects fee for new building 60,000
Building permit for new construction 40,000
Fee for title search 25,000
Survey before construction of new building 20,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Assessment by city for drainage project 15,000
Cost of grading and levelling 50,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new
building more energy efficient 90,000
Interest cost on specific borrowing incurred during construction 360,000
Payment of medical bills of employees accidentally
injured while inspecting building construction 18,000
Cost of paving driveway and parking lot 60,000
Cost of installing lights in parking lot 12,000
Premium for insurance on building during construction 30,000
Cost of open house party to celebrate opening of new building 50,000
Cost of windows broken by vandals distracted by the celebration 12,000

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Cost of land
a. ₱2,980,000
b. ₱3,270,000
c. ₱3,185,000
d. ₱3,205,000

2. Cost of building
a. ₱10,810,000
b. ₱10,895,000
c. ₱10,875,000
d. ₱11,110,000

3. Cost of Land Improvements

 a. ₱12,000
b. ₱72,000
c. ₱1222,000
d. ₱0

4. Amount that should be expensed when incurred

a. ₱80,000
b. ₱110,000
c. ₱62,000
d. ₱50,000

5. Total depreciable property and equipment

a. ₱11,182,000
b. ₱10,967,000
c. ₱10,947,500
d. ₱10,882,000

PROBLEM NO. 2

The following items relate to the acquisition of a new machine by Bongabon Corporation in
2010:

Invoice price of machinery ₱2,000,000

Cash discount not taken 40,000
Freight on new machine 10,000
Cost of removing the old machine 12,000
Loss on disposal of the old machine 150,000
Gratuity paid to operator of the old machine who was laid off 70,000
Installation cost of new machine 60,000
Repair cost of new machine damaged in the process of installation 8,000
Testing cost before machine was put into regular operation 15,000
Salary of engineer for the duration of the trial runs 40,000
Operating cost during first month of regular use 250,000
Cash allowance granted because the new machine proved to
be of inferior quality 100,000

QUESTIONS:

How much should be recognized as cost of the new machine?

a. ₱1,985,000
b. ₱1,993,000
c. ₱1,930,000
d. ₱2,025,000

PROBLEM NO. 3

The property, plant and equipment section of Zaragosa Corporation’s statement of financial
position at December 31, 2009 included the following items:

Land ₱2,100,000
Land improvements 560,000
Buildings 3,600,000
Machinery and equipment 6,600,000
During 2010 the following data were available to you upon your analysis of the accounts:

Cash paid on purchased of the land ₱10,000,000

Mortgage assumed on the land bought, including interest at 16% 16,000,000
Realtor’s 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 and old building on the land 300,000
Amount recovered from the salvage of the building demolished 200,000
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
Architect’s fees 100,000
Interest that would have been earned had the money used during
the period of contraction 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 installation and the test run of machines 1,600,000
Royalty payment on machines purchased
(based on units produced and sold) 480,000

QUESTIONS:

Based on the above and the result of your audit, compute for the following as of December
31, 2010:

1. Land
a. ₱30,000,000
b. ₱14,000,000
c. ₱29,900,000
d. ₱29,600,000

2. Land Improvements
a. ₱1,300,000
b. ₱1,000,000
c. ₱1,250,000
d. ₱560,000

3. Building
a. ₱12,300,000
b. ₱11,750,000
c. ₱12,000,000
d. ₱11,700,000

4. Machinery and equipment

a. ₱14,840,000
b. ₱16,440,000
c. ₱15,400,000
d. ₱17,000,000
PROBLEM NO. 4

In connection with your audit of Cuyapo Company’s financial statement for the year 2010,
you noted the following transactions affecting the property and equipment items of the
company:

Jan. 1 Purchase real property for ₱5,026,000, which included a charge of ₱146,000
presenting 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 ₱3,000,000 was assumed by Cuyapo 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
of ₱236,800.

Feb. 15 Demolished garage in the rear of the building, ₱36,000 being recovered on
the lumber salvage. The company proceeded to construct a warehouse. The
cost of such warehouse was ₱540,800, which was ₱90,000 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
₱76,800.

Mar. 1 The company exchanged its own shares with a fair value of ₱320,000 (par
₱24,000) for a patent and a new equipment. The new equipment has a fair
value of ₱200,000.

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 ₱400,000 and by paying cash of ₱144,000.
The value of the franchise is set at ₱160,000, while the machine’s fair value is
₱360,000.

May 1 The company contracted for parking lots and waiting sheds at a cost
₱360,000 and ₱76,800, 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 relocating and repairs were completed at a cost of ₱60,000.

QUESTIONS:

Based on the above and the result of your audit, determine the cost of the following:

1. Land
a. ₱940,000
b. ₱1,005,200
c. ₱976,000
d. ₱1,052,800
 2. 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. ₱0

5. Total property, plant and equipment

a. ₱6,764,400
b. ₱6,731,200
c. ₱6,718,092
d. ₱6,618,400

PROBLEM NO. 5

San Leonardo Manufacturing Co. was incorporated on 1/2/10 but was unable to begin
manufacturing activities until 8/1/10 because new factory facilities were not completed until
that date. The Land and Building account at 12/31/10 per the books was as follows:

Date Particulars Amount

1/3110 Land and dilapidated building ₱1,000,000
2/28/10 Cost of removing building 25,000
4/1/10 Legal fees 30,000
5/1/10 Fire insurance premium payment 36,000
5/1/10 Special tax assessment for streets 27,500
5/1/10 Partial payment of new building construction 900,000
8/1/10 Final payment on building construction 900,000
8/1/10 General expenses 150,000
12/31/10 Asset write-up 375,000

Additional information:

1. To acquire the land and building on 1/31/10, the company paid ₱500,000 cash and
5,000 ordinary shares (par value = ₱100/share) which is very actively traded and had a
market value per share of ₱210.

2. When the old building was removed, San Leonardo paid the Demolition Co. ₱25,000, but
also received ₱10,000 from the sale of salvaged material.

3. Legal fees covered the following:

 Cost of organization ₱10,000
Examination of title covering purchase of land 12,500
Legal work in connection with the building construction 7,500
Total ₱30,000

4. The fire insurance premium covered premiums for a three-year term beginning May 1,
2010.

5. General expenses covered the following for the period 1/2/10 to 8/1/10,

President’s Salary ₱100,000

Plant superintendent covering supervision of new building 50,000
Total ₱150,000

6. Because of the rising land costs, the president was sure that the land was worth at least
₱375,000 more than what it cost the company.

QUESTIONS:

Based on the above and the result of your audit, compute for the adjusted balance of the
following as of December 31, 2010:

1. Land
a. ₱1,055,000
b. ₱1,605,000
c. ₱1,810,500
d. ₱1,577,500

2. Building
a. ₱1,860,500
b. ₱1,888,000
c. ₱1,810,500
d. ₱1,857,500

PROBLEM NO. 6

You noted during your audit of the Carrangian Company that the company carried out a
number of transactions involving the acquisition of several assets. All expenditures were
recorded in the following single asset account, identified as Property and Equipment:

Property and Equipment

Acquisition price of land and building ₱ 960,000

Options taken out on several pieces of property 16,000
List price of machinery purchased 318,400
Freight on machinery purchased 5,000
Repair to machinery resulting from damage during shipment 1,480
Cost of removing old machinery 4,800
Driveways and sidewalks 102,000
Building remodelling 400,000
Utilities paid since acquisition of building 20,000
₱1,828,480
Based on property tax assessments, which are believed to fairly represent the relative
values involved, the building is worth twice as much as the land. The machinery was subject
to a 2% cash discount, which was taken and credited to Purchases Discounts. Of the two
options, ₱6,000 is related to the building and land purchased and ₱10,000 related to those
not purchased. The old machinery was sold at book value.

QUESTIONS:

Based on the above and the result of your audit, determine the adjusted balance of the
following:

1. Land
a. ₱644,000
b. ₱322,000
c. ₱326,000
d. ₱424,000

2. Building
a. ₱544,000
b. ₱1,040,000
c. ₱1,044,000
d. ₱722,000

3. Machinery
a. ₱317,032
b. ₱318,512
c. ₱323,400
d. ₱321,832

PROBLEM NO. 7

On January 1, 2009, Cabiao Corporation purchased a tract of land (site number 101) with a
building for ₱1,800,000. Additionally, Cabiao paid a real estate broker’s commission of
₱108,000, legal fees of ₱18,000 and title guarantee insurance of ₱54,000. The closing
statement indicated that the land value was ₱1,500,000 and the building value was
₱300,000. Shortly after acquisition, the building was razed at a cost of ₱225,000.

Cabiao entered into a ₱9,000,000 fixed-price contract with Cabanatuan Builder’s Inc. on
March 1, 2009 for construction of an office building on the land site 101. The building was
completed and occupied on September 30, 2010. Additional construction costs were
incurred as follows:

Plans, specifications and blueprints ₱36,000

Architect’s fees for design and supervision 285,000

The building is estimated to have a forty-year life from date of completion and will be
depreciated using the 150%-declining-balance method.

To finance the construction cost, Cabiao borrowed ₱9,000,000 on March 1, 2009. The loan is
payable in ten annual instalments of ₱900,000 plus interest at the rate of 14%. Cabiao used
part of the loan proceeds for working capital requirements. Cabiao average amounts of
accumulated building construction expenditures were as follows:
For the period March 1 to December 31, 2009 ₱2,700,000
For the period January 1 to September 31, 2010 6,900,000

Cabiao is using the allowed alternative treatment for borrowing cost.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Cost of land site number 101

a. ₱1,905,000
b. ₱1,800,000
c. ₱2,205,000
d. ₱2,151,000

2. Cost of office building

a. ₱10,581,000
b. ₱10,360,500
c. ₱10,329,000
d. ₱10,960,500

3. Depreciation of office building for 2010

a. ₱96,800
b. ₱97,130
c. ₱102,800
d. ₱99,197

PROBLEM NO. 8

Provided below are independent situations involving government grants. you are required to
provide the answer to each requirement.

1. Nueva Ecija Inc. received a grant of ₱30 million to compensate it for costs it incurred in
planting trees over a period of five years. Nueva Ecija Inc. will incur costs in this
manner: Year 1-₱ million; Year 2-₱2 million; 2 million; Year 3-₱3 million; Year 4-₱4
million; Year 5-₱5 million. How much should be recognized as income from government
grant at the end of year 1?
a. ₱30 million
b. ₱6 million
c. ₱2 million
d. ₱1 million

2. On January 1, 2009, Nueva Ecija Company received a grant of ₱75 million from the
Japanese government for the construction of a laboratory and research facility with an
estimated cost of ₱90 million and useful life of 25 years. The facility was completed in
early 2010. The amount to be recognized in Nueva Ecija 2010 profit or loss as income
from government grant is
a. ₱75,000,000
b. ₱3,600,000
c. ₱3,000,000
d. ₱0
3. Nueva Ecija Inc. was granted 2,500 acres of land in a village, located near the slums
outside the city limits, by a local government authority. the condition attached to this
grant was that Nueva Ecija Inc. should clean up this land and lay roads by employing
laborers from the village in which the land is located. The government has fixed the
minimum wage payable to the workers. The entire operation will take three years and is
estimated to cost ₱50 million. This amount will be spent in this way: ₱10,000 million
each in the first and second years and ₱30 million in the third year. The fair value of this
land is currently ₱60 million. How much should be recognized as income from
government grant at the end of the year?
a. ₱10,000,000
b. ₱12,000,000
c. ₱20,000,000
d. ₱0

4. Nueva Ecija Inc. received a consolidated grant of ₱60 million. Three-fourths of the grant
is to be utilized to purchase a college building for students from undeveloped or
developing countries. The balance of the grant is for subsidizing the tuition costs of
those students for four years from the date of grant.

The college building, which costs ₱50 million, will be depreciated using the straight-line
method over 10 years. Assuming that the tuition subsidy will be offered evenly over
the period of 4 years, the amount that should be recognized as income at the end of
year 1 is
a. ₱6.0 million
b. ₱5.0 million
c. ₱8.25 million
d. ₱8.785 million

PROBLEM NO. 9

Your audit of Lianera Corporation for the year 2010 disclosed the following property
dispositions:

Cost Acc. Dep. Proceeds Fair value

Land ₱4,800,000 - 3,720,000 3,720,000
Building 1,800,000 - 288,000 -
Warehouse 8,400,000 1,320,000 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 ₱6,000,000, 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 ₱7,200,000.

Machine
On December 15, the machine was exchanged for a machine having a fair value of
₱756,000 and cash of ₱108,000 was received.

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

Based on the above and the result of your audit, compute the gain or loss to be recognized
for each of the following dispositions:

1. Land
a. ₱3,720,000 gain
b. ₱1,080,000 loss
c. ₱4,800,000 loss
d. ₱0

2. Building
a. ₱ 432,000 gain
b. ₱2,232,000 loss
c. ₱1,368,000 loss
d. ₱0

3. Warehouse
a. ₱1,800,000 gain
b. ₱ 480,000 gain
c. ₱5,400,000 loss
d. ₱0

4. Machine
a. ₱36,000 gain
b.