11 - substantive tests of property, plant and equipment

11-14 Solutions Manual to Accompany Applied Auditing, 2006 EditionSubstantive Tests of Property, Plant and Equipment 11-15

11-1.Factors which facilitate the auditors verification of plant and equipment but are not applicable to audit work on current assets include the following:

(a)High peso amount of individual items. A relatively few transactions may support a large balance sheet amount.

(b)Usually little change in property accounts year to year. Land, buildings, and equipment often remain unchanged for many years; hence there is little accounting activity to verify. In contrast, such current assets as accounts receivable and inventory may have a complete turnover several times a year.

(c)Minor effect on net income from cutoff errors. Cutoff errors in recording transactions in plant and equipment are much less likely to have a material effect on net income than are errors in the cutoff of transactions for purchase and sale of merchandise. For example, a cutoff error which causes a P30,000 year-end sales transaction to be recorded a day prior to shipment may cause a P30,000 overstatement of the current years pretax income.

11-2.The auditors must question the service lives adopted by the client for plant assets. To do otherwise would be to fail in the collection of sufficient competent evidence for the clients depreciation policies and procedures.

11-3.The principal objective of the auditors in analyzing a Maintenance and Repairs expense account is to disclose any capital expenditures which were erroneously recorded as expense.

11-4.Documentary evidence usually available in the clients office to substantiate legal ownership of property, plant, and equipment includes deeds, policies of title insurance or abstract of title and an attorneys opinion as to title, property tax bills, insurance policies, purchase contracts, purchase orders, invoices, and paid checks. The auditors may also secure written representations from the client as to ownership of these assets.

11-5.The auditors employ the following substantive tests to detect unrecorded retirements of property, plant, and equipment:

(a)If major additions of plant and equipment have been made during the year, ascertain whether old equipment was traded in or superseded by the new units.

(b)Analyze the Miscellaneous Revenue account to locate any cash proceeds from sale of plant assets.

(c)If any of the companys products have been discounted during the year, investigate the disposition of plant facilities formerly used in manufacturing such products.

(d)Inquire of executives and supervisors whether any plant assets have been retired during the year.

(e)Examine retirement work orders or other source documents for authorization by the appropriate official or committee.

(f)Investigate any reduction of insurance coverage to see whether this was caused by retirement of plant assets.

11-6.Kris Corporation

(a)This is the first audit of Kris Corporation by Ian and Ronna. Moreover, the company has not been audited by other public accountants during the two previous years of operation. Under these circumstances, the auditors must investigate fully transactions relating to plant and equipment during the two prior years of the companys existence, as well as the records of the year under audit. The adequacy of internal control over plant acquisitions and disposals would be an important part of this review. Since Kris is a relatively new company, this study of prior years transactions can be completed within reasonable time limits.

The review of prior years transactions relating to plant and equipment would include analysis of the Repairs and Maintenance expense account and should bring to light the erroneous treatment of plant acquisitions as revenue expenditures during Years 1 and 2.

If Ian and Ronna did not investigate the property transactions of the two prior years and the internal controls in force, there would be no satisfactory support for the balances of the property accounts at the end of Year 3, or for the depreciation expense of the year under audit. Remember that one of the auditors basic objectives for plant and equipment is to determine that the property accounts (including the amounts carried forward from prior years) are fairly stated.

(b)Both the income statement and the balance sheet prepared at the end of Year 3 would be affected by the errors made in Years 1 and 2. In the balance sheet, the plant and equipment and also the total assets would be understated by the undepreciated cost of the assets which were improperly expensed. Current liabilities and total liabilities would be understated by the additional income taxes applicable to the understatement of prior periods net income due to the accounting errors. The retained earnings and total shareholders equity would be understated by the difference between the understatement of total assets and the understatement of total liabilities. In the Kris income statement, depreciation expense would be understated, income taxes expense overstated, and net income overstated.

11-7.Sparrow Company

1.Change in depreciation method is considered change in accounting estimate --cumulative effect adjustment:

a.No correcting entry

b.Depreciation Expense 25,750

Accumulated Depreciation: Machine

25,750

To record depreciation for 2006.

Previous depreciation amount

2004 P400,000 x (2 x 10%) P 80,000

2005 (P400,000 - P80,000) x (2 x 10%) = 64,000 P144,000

CostP400,000

Less:Accumulated depreciation 144,000

Carrying value 12.31.05P256,000

Depreciation in 2006 = =P25,750

2.Change in estimate--prospective adjustment:

a.No correcting entry



40,000


Original life=

Remaining life=(9-5) years + 1 year = 5 years

Depreciation =

3.Error--prior period adjustment:

a.Retained Earnings 8,000


8,000

Prior period adjustment for error

(P80,000 - P72,000).

Previous depreciation - erroneously calculated (P200,000 P20,000) x

(2 x 20%) = P72,000

Correct depreciation (P200,000) x (2 x 20%) = P80,000



48,000


2006 correct depreciation (P200,000 P80,000) x (2 x 20%) = P48,00011-8.Jamboree Trucking Company

Requirement (1)

Accumulated depreciation on the trucks, January 1, 2003TruckCostLifeAnnual

DepreciationYears

OwnedAccumulated

Depreciation

1P120,0005P24,0003P 72,000

2 104,000520,8002 52,000

3128,000525,600125,600

4 150,000530,000 15,000

P164,600

Note:This schedule is used to help determine the accumulated depreciation to date for each correcting entry. Also see correct depreciation schedule later in solution.

July 1, 2003

Correct entry:

Cash 10,000

Accumulated Depreciation: Trucks

[P72,000 + (P24,000 x )] 84,000

Loss26,000

Trucks

120,000

Entry made:

Cash 10,000

Trucks

10,000

Correcting entry #1:

Accumulated Depreciation: Trucks 84,000

Retained Earnings 26,000

Trucks

110,000

January 1, 2004

Correct entry:

Accumulated Depreciation:

Trucks (P25,600 + P25,600) 51,200

Trucks (new) 120,000

Cash

17,800

Trucks (old)

128,000

Gain on exchange

25,400

Entry made:

Trucks 17,800

Cash

17,800


Trucks (new)102,200


Trucks (old)

128,000

Retained earnings

25,400

July 1, 2005

Correct entry:

Accumulated Depreciation: Trucks

(P15,000 + P30,000 + P30,000 + P15,000) 90,000

Cash 10,000

RE on disposition of trucks 50,000

Trucks

150,000

Entry made:

Cash 10,000

Miscellaneous Revenue

500

Trucks

9,500




Trucks

140,500

Correct depreciation:

Truck2003200420052006

1P12,000

2P20,800P20,800P10,400

3P25,600

4P30,000P30,000P15,000

5P18,920P18,920P18,920(P94,600 ( 5 = P18,920)

6

P12,000P24,000(P120,000 ( 5 = P24,000)

TotalP88,400P69,720P56,320P42,920

Depreciation(88,400)(54,360)(41,460)(28,560)

Under (over) statement

P15,360P14,860P14,360

Effect of errors on earnings (all reductions)

2003 P26,000

2004 P15,360

2005 P50,500 + P14,860 = P65,360

2006 P14,360



Depreciation Expense 14,360

Accumulated Depreciation

44,580

Requirement (2)

Compound AJE:

Accumulated Depreciation: Trucks (P84,000 +

P51,200 + P90,000 P44,580) 180,620

Retained Earnings (P26,000 P25,400 + P50,500

+ P30,220)81,320

Depreciation Expense14,360

Trucks (P110,000 + P102,200 P128,000

P140,500)

276,30011-9.AFH Company

Note: This question requires knowledge that corrections of errors in prior years are recorded to Retained Earnings.

Adjusting entries at December 31, 2007, to correct the books. The building and machinery should be recorded in separate accounts. Ignore effect on income taxes.

Purchase price of P60,000 is a lump-sum purchase.

BuildingP39,000 60%

Machinery 26,000 40%

P65,000100%

Machinery is valued at 40%xP60,000=P24,000

Building is valued at 60%xP60,000=P36,000

AJE (1)Machinery

Building 24,000

36,000

Property, Plant, and Equipment60,000

(2)Machinery

Building 280

420

Property, Plant, and Equipment700

The legal fees are allocated in the same proportion as the original purchase.

(3)Retained Earnings2,400


To correct the insurance paid in 2005 that was incorrectly recorded in the asset account.

(4)Property, Plant, and Equipment6,310

Accumulated Depreciation: Building

Accumulated Depreciation: Machinery

Retained Earnings1,821

3,035

1,454

To remove the depreciation of P6,310 incorrectly credited to Property, Plant, and Equipment in 2005; to credit the correct depreciation to Accumulated Depreciation: Building (P36,420 ( 20); to credit the correct depreciation to Accumulated Depreciation: Machinery (P24,280 ( 8); and to correct the amount recorded as depreciation expense by a credit to Retained Earnings.

(5)Retained Earnings2,000


To correct the 2006 repairs that were incorrectly recorded in the asset account.

(6)Building10,000


To properly classify the 2006 addition to the building.




Retained Earnings2,347

3,035

1,497

To remove the depreciation of P6,879 incorrectly credited to Property, Plant, and Equipment in 2006; to credit the correct depreciation to Accumulated Depreciation: Building [P1,821 + (P10,000 ( 19)] (this assumes the addition has the same life as the building); to credit the correct depreciation to Accumulated Depreciation: Machinery (P24,280 ( 8); and to correct the amount recorded as depreciation expense by a credit to Retained Earnings.

(8)Repairs Expense3,000


To expense the repairs for 2007, before the books are closed.

(9)Insurance Expense

Prepaid Insurance1,400

1,400


To correctly classify the 2007 insurance payment, before the books are closed.

(10)Machinery7,000


To correctly classify the machinery purchased in 2007.

(11)Loss on Disposal of Machinery

Property, Plant, and Equipment

Accumulated Depreciation: Machinery100

500

200

Machinery800

To correctly record the disposal of the machinery in 2007; the machine is 2 years old and so has P200 related accumulated depreciation.





3,810

1,264

To remove the depreciation of P7,421 incorrectly credited to Property, Plant, and Equipment in 2004; to credit the correct depreciation to Accumulated Depreciation: Building; to credit the correct depreciation to Accumulated Depreciation: Machinery [(P24,280 + P7,000 - P800) ( 8]; and to correct the depreciation expense before the books are closed.

11-10. Briggs, Inc.

Adjusting Journal Entries - 12/31/06(1)Organization costs3,000

Fixed assets3,000

(2)Discount on bonds payable

Interest expense5,650

350

Fixed assets6,000

(3)Land500,000

Fixed assets500,000

(4)Organization costs5,000

Fixed assets5,000

(5)Land4,000

Fixed assets4,000

(6)Land7,000

Fixed assets7,000

(7)Interest expense30,000

Fixed assets30,000

(8)Salaries expense50,000

Fixed assets50,000

(9)Organization costs40,000

Fixed assets40,000

(10)Taxes and licenses7,000

Fixed assets7,000

(11)Building 2,000,000

Fixed assets2,000,000

11-11.Aerospace Company

Requirement (1)

Machinery (cost)

Raw materials usedP13,600

Labor9,800

Installation cost1,400

Materials used in trial runs600

Factory overhead (incremental) 2,900

TotalP28,300

Less: Cash discount on materials 400

NetP27,900

Accumulated depreciation - 12/31/06

(P27,900 x 10% x 4/12)P 930

Machine Tools (cost)P 2,250

Less: Amortization for 2006 (4/36 x 2,250) 250

Balance, 12/31/06P 2,000

Requirement (2) Adjusting Journal Entries - 12/31/06(1)Loss on disposition of machinery70

Machinery70

(2)Profit on construction6,900

Machinery6,900

(3)Machine tools2,250

Machinery2,250

(4)Machinery3,462

Depreciation expense

Accumulated depreciation - machinery2,532

930

(5)Purchase discount400

Machinery400

(6)Machinery2,900

Factory overhead control2,900

(7)Tools expense250

Machine tools250

11-12.XYZ Manufacturing CompanyAdjusting Journal Entries - 12/31/06AJE (1)Retained Earnings1,200.00

Machinery1,200.00

To correct error in recording purchase of machine on installment basis.

List Price P6,000

Add: Installation charges 200

Total P6,200

Total installments paid

& installation 7,400

Financing charges P1,200

(2)Retained Earnings160.00

Machinery160.00

To take up cash discount on machinery purchased on 6/30/03.

(3)Machinery (new)

Allowance for depreciation2,620.00

2,620.00

Machinery (old)5,240.00

To write off machinery traded in for a new one.

Cost of new machine:

Cash payment P5,000

NBV of old machine 2,620

Total P7,620

(4)Allowance for depreciation2,640.00

Machinery

Retained earnings2,025.00

615.00

To correct the recording of sale of machinery on 1/1/05.

Cost P4,400

Less: Acc. Depr. 2,640

NBV 1,760

Proceeds (2,500 - 125) 2,375Gain P 615

(5)Allowance for depreciation3,800.00

Machinery

Gain on sale of machinery3,200.00

600.00

To correct the recording of sale of machinery on 10/1/06.

Cost P4,000

Less: Acc. Depr. 3,800

NBV 200

Proceeds 800Gain P 600

(6)Machinery19,900.60


To set up clients depreciation provisions from 2002 to 2006 erroneously credited to the Machinery acct. (Schedule A).

(7)Depreciation expense

Retained earnings2,190.90

1,536.50


To correct error in depreciation provisions of client (Schedule B).

XYZ Manufacturing Corporation

Machinery

12/31/06

Balance per ledger (Schedule A) P10,964.40

Add (Deduct) Adjustments

AJE (1)( 1,200.00)

(2)( 160.00)

(3) 2,620.00

(4)( 5,240.00)

(5)( 2,025.00)

(6)( 3,200.00)

19,900.60

Net P10,695.60

Balance as adjusted P21,660.00

Composition:

Machine acquired on 9/30/02P 6,200.00

Machine acquired on 6/30/037,840.00

Machine acquired on 6/30/04 7,620.00

TotalP21,660.00

XYZ Manufacturing Corporation

Allowance for Depreciation

12/31/06

Balance per ledger P 0.00

Add (Deduct) Adjustments

AJE (3)( 2,620.00)

(4)( 2,640.00)

(5)( 3,800.00)

(6)19,900.60

(7) 3,727.40

Balance as adjusted P14,568.00

Composition:

A D - Machine acquired on 9/30/02P 5,270.00

- Machine acquired on 6/30/035,488.00

- Machine acquired on 6/30/04 3,810.00

TotalP14,568.00

Supporting Analysis:

Schedule A Machinery Account per Ledger

DateParticularsDrCrBalance

1/1/02PurchaseP 5,240.00

4,000.00

4,400.00P13,640.00

9/30/02Purchase on installment

Payments from Sept. to Dec.2,400.0016,040.00

10/10/02Freight and installation200.0016,240.00

12/31/02Depreciation (20%)P 3,248.0012,992.00

2003Installment payments for acquisition on 9/30/024,800.0017,792.00

6/30/03Purchase8,000.0025,792.00

12/31/03Depreciation (20%)5,158.4020,633.60

6/30/04Acquisition - old machine traded in5,000.0025,633.60

12/31/04Depreciation (20%)5,126.7220,506.88

1/1/05Sale2,375.0018,131.88

12/31/05Depreciation (20%)3,626.3814,505.50

10/1/06Sale800.0013,705.50

12/30/06Depreciation (20%)2,741.1010,964.40

Schedule B Depreciation Schedule

DateAcquiredCost2 0 0 22 0 0 32 0 0 42 0 0 52 0 0 6

1/1/02P 5,240

4,000

4,400P 1,048.00

800.00

880.00P1,048.00

800.00

880.00P 524.00

800.00

880.00P 0.00

800.00

0.00P 0.00

600.00

0.00

9/30/026,200310.001,240.001,240.001,240.001,240.00

6/30/037,8400.00784.001,568.001,568.001,568.00

6/30/04 7,620 0.00 0.00 762.00 1,524.00 1,524.00

Total correct

depreciation provisionP 3,038.00P4,752.00P 5,774.00P5,132.00P4,932.00

Provision by client 3,248.00 5,158.40 5,126.72 3,626,38 2,741.10

(Over) UnderprovisionP (210.00)P (406.40)P 647.28P1,505.62P2,190.90

11-13.Sunlight Service Center

Audit Adjustment No. 1 was determined as follows:

Clients EntryCorrect Entry

(1)To record disposal of delivery truck:

Cash 2,000

Trucks

2,000Cash

2,000

Accum. Depr. 50,000

Trucks

50,000

Gain/Loss on Disp.

2,000

(2)To record disposal of service truck:

Cash

8,000

Trucks

8,000

Cash 8,000

Accum. Depr. 15,000

Gain/Loss on Disp. 2,000

Trucks

25,000

(3)To record 2006 depreciation:

Depr. Expense95,000

Accum. Depr.

95,000Depr. Expense101,250

Accum. Depr.

101,250

Correct amount of depreciation determined as follows:

Disposal of service truck (1/2 year) P 2,500

Purchase of delivery truck (1/2 year) 6,000

Purchase of service truck (1/2 year) 2,750

Two delivery truck @ 10,000 each20,000

Fourteen service trucks @ 5,000 each 70,000

Total P101,250Audit Adjustment as shown below:

Accumulated Depreciation - Trucks

58,750

Depreciation Expense - Trucks

6,250

Trucks

65,000

b.The audit objectives for examining the asset and related accumulated depreciation accounts are:

(1)Existence or occurrence: To establish the physical presence of the assets and the validity of the purchase and sale transactions.

(2)Rights and obligations: To ascertain that Sunlight owns the trucks.

(3)Valuation or allocation: To determine that the company has properly recorded the acquisitions and disposals, and that depreciation has been properly calculated for 2006.

(4)Presentation and disclosure: To resolve that all trucks are used in the companys operations; that fully-depreciated trucks are removed from the books if no longer in use; that trucks and accumulated depreciation are reflected as operating assets; and that depreciation expense is reflected as an operating expense.

Auditing procedures appropriate in meeting the above objectives are the following:

(1)Existence or occurrence, valuation or allocation, and ownership: Trace to last years audit workpapers and examine titles for trucks purchased prior to 2006 (to determine that trucks are still owned by the client; examine titles and invoices for trucks purchased in 2006; examine remittance advices, journal entries and bank statement credits for 2006 disposals; and recompute depreciation expense and gain/loss on disposals.

(2)Presentation and disclosure: Examine subsidiary ledger for fully depreciated assets and inquire as to whether in use. Reclassify as necessary.

11-13.Sunlight Service Center (CONTINUED. . . . Requirements a and c)SUNLIGHT SERVICE CENTER

TRUCKS

December 31, 2006

DescriptionFinal

Balances

12/31/01AdditionsDisposals Final

Balances

12/31/02Gain (loss)

on Disposals

Assets:

Delivery TrucksP150,000P 60,000(P50,000P160,000P 2,000*

Service TrucksP375,000P 27,500(P25,000P377,500(P2,000)(A)

P525,000&P 87,500P76,000P537,500P 0

FFFF

12/31/06: Ledger balanceP602,500(A)

AJE No. 1P 65,000CostP25,000

12/31/06: Audited balancesP537,500Accum. Depr:

WP G2003 2,500(1/2 yr.)

2004 5,000

2005 5,000

2006 2,500(1/2 yr.)

Accumulated Depreciation: 15,000

Delivery TrucksP 95,000P 26,000(B)P 50,000P 71,000

Service TrucksP225,000P 75,250(C) 15,000(A)P285,250Book ValueP10,000

P320,000&P101,250P 65,000P356,250Sales Price 8,000*

LossP 2,000

FFFF

12/31/06: Ledger balancesP 95,000P415,000

AJE No. 1P 6,250P 58,750(B)

P101,250P356,250 2 x 10,00020,000

1 x 6,000 6,000(1/2 yr.)

Evaluated depreciation policy and estimated lives for reasonableness. No exception:WP GP 26,000

AJE No. 1

Depreciation expense - trucksP 6,25014 x 5,00070,000

Accum. depreciation - trucks58,750 1 x 2,5002,500(1/2 yr.)

TrucksP65,000 1 x 2,750 2,750(1/2 yr.)

P 75,250

&Traced to last years working trial balance

FFooted and crossfooted

*Traced to remittance advice and cash receipts

(Examined invoices and titles

11-14.Tatty Companys

Requirement (1)

Tatty Company

Analysis of Land Account

for 2007Balance at January 1, 2007P 100,000

Land site number 621:

Acquisition costP1,000,000

Commission to real estate agent60,000

Clearing costsP15,000

Less: Amounts recovered (5,000) 10,000

Total land site number 6211,070,000

Land site number 622:

Acquisition costP 300,000

Demolition cost of building 30,000

Total land site number 622 330,000

Balance at December 31, 2007P1,500,000

Tatty Company

Analysis of Buildings Account

for 2007Balance at January 1, 2007P800,000

Cost of new building constructed on land site number 622:

Construction costsP150,000

Excavation fees11,000

Architectural design fees8,000

Building permit fee 1,000 170,000

Balance at December 31, 2007P970,000

Tatty Company

Analysis of Leasehold Improvements Account


Electrical work35,000

Construction of extension to current

work area (P80,000 x )40,000

Office space 65,000


Tatty Company

Analysis of Machinery and Equipment Account


Cost of new machines acquired:

Invoice priceP75,000

Freight costs 2,000

Unloading charges 1,500 78,500


Requirement (2)

Items in the fact situation which were not used to determine the answer to Requirement 1 above, and where, or if, these items should be included in Tattys financial statements are as follows:

a.Land site number 623, which was acquired for P600,000, should be included in Tattys balance sheet as land held for resale.

b.Painting of ceilings for P10,000 should be included as a normal operating expense in Tattys income statement.

c.Royalty payments of P13,000 should be included as a normal operating expense in Tattys income statement.

11-15.Nikko Company

Note to Instructor: This problem includes material from previous chapters.

Journal entries during 2006:

(1)Land175,000a

Ordinary Shares, P10 par70,000

Additional Paid-in Capital105,000

a P25 x 7,000

Cash500,000

Notes Payable500,000

Building 700,000

Cash700,000

(2)Machine430,000

Accumulated Depreciation135,000

Machine500,000

Cash60,000

Gain on exchange5,000

(3)Cash800,000

Sales Revenue800,000

Cost of Goods Sold350,000

Inventory350,000

Accounts Payable400,000

Cash400,000

Inventory480,000

Accounts Payable480,000

(4)Dividends Distributed (or Retained Earnings)92,500

Cash92,500a

a 37,000 x P2.50

Adjustments at End of 2006:

Interest Expense18,000

Building42,000b

Interest Payable60,000a

a P500,000 x 12%

b [(P0 + P700,000) ( 2] x 12%

Depreciation Expense - Machinery75,000a

Accumulated Depreciation75,000a

a (P430,000 P55,000) ( 5

Rent Expense60,000

Prepaid Rent60,000

Income Tax Expense90,600a

Income Taxes Payable90,600

a See income statement

Financial Statements for 2006:

NIKKO COMPANY

Income Statement

For Year Ended December 31, 2006Sales revenueP800,000

Less: Expenses

Cost of goods soldP350,000

Interest expense18,000

Depreciation expense75,000

Rent expense 60,000 (503,000)

Operating incomeP297,000

Gain on exchange of machinery 5,000

Income before income taxesP302,000

Income tax expense (30%)

90,600

Net incomeP211,400

Earnings per share (37,000 shares)P 5.71

NIKKO COMPANY

Statement of Retained Earnings

For Year Ended December 31, 2006Beginning retained earningsP200,000

Add:Net income 211,400

P411,400

Less:Dividends (92,500)

Ending retained earningsP318,900

NIKKO COMPANY

Balance Sheet

December 31, 2006Assets

CashP 587,500a

Inventory580,000b

Land175,000

Building742,000

MachineP430,000

Less: Accumulated depreciation (75,000) 355,000

Total AssetsP2,439,500

Liabilities and Equities

Accounts payableP 480,000c

Notes payable500,000

Interest payable60,000

Income taxes payable 90,600

Total LiabilitiesP1,130,600

Ordinary shares, P10 parP 370,000d

Additional paid-in capital620,000e

Retained earnings 318,900

Total Shareholders EquityP1,308,900

Total Liabilities and Shareholders EquityP2,439,500

aP540,000 + P500,000 P700,000 P60,000 + P800,000 P400,000 P92,500 = P587,500bP450,000 P350,000 + P480,000 = P580,000cP400,000 P400,000 + P480,000 = P480,000dP300,000 + P70,000 = P370,000eP515,000 + P105,000 = P620,00011-16.Apple CompanyRequirement 1

Total expenses, 2005=Units sold x (Depletion + Depreciation

+ Production costs)

=(6 x 9,000) x (P3.00a + P0.20b + P8.00)

=54,000 x P11.20

=P604,800

aDepletion rate=

=

=

=P3.00 per ton

bDepreciation rate=

=

=P0.20 per ton

Requirement 2

Cost of inventory, 12/31/2005=6 x (10,000 9,000) x P11.20

=P67,200

Requirement 3

Total expenses, 2006=Units sold x (Depletion + Depreciation

+ Production costs)

=(6 x P11.20) + [(12 x 10,000) 6,000] x

(P3.84a + P0.256b + P8.00)

=P67,200 x P1,378,944

=P1,446,144

aNew depletion rate=

=

=

=

=P3.84 per ton

bNew depreciation rate=

=

=

=P0.256 per ton

11-17.January 1, 2001

Equipment5,000,000

Cash

5,000,000

December 31, 2001



500,000

December 31, 2002



500,000

January 1, 2003

Equipment625,000


125,000

Revaluation Surplus

500,000

December 31, 2003



562,500

Revaluation Surplus62,500

Retained Earnings

62,500

December 31, 2004



562,500


Retained Earnings

62,500

December 31, 2005



562,500


Retained Earnings

62,500

January 1, 2006

1)Revaluation surplus312,500

Accumulated depreciation312,500

Equipment

625,000

2)Impairment loss / Depreciation expense500,000

Accumulated depreciation

500,000

or

Revaluation surplus312,500

Impairment loss / Depreciation expense500,000


187,500

Equipment

625,00011-18.Sweetie Company

Requirement (a)

December 31, 2006

Loss on Impairment / Depreciation

3,200,000

Accumulated DepreciationEquipment

3,200,000

CostP9,000,000

Accumulated depreciation 1,000,000

Carrying amount8,000,000

Fair value 4,800,000

Loss in impairmentP3,200,000

Requirement (b)

December 31, 2007

Depreciation Expense

1,200,000

Accumulated DepreciationEquipment

1,200,000

New carrying amountP4,800,000

Useful life 4 years

Depreciation per yearP1,200,000

Requirement (c)

Carrying value, 12.31.07 had impairment not been recognized on 12.31.06

CostP9,000,000


(P1,000,000 + P2,000,000) 3,000,000

Net carrying value, 12.31.07P6,000,000

Fair value, 12.31.07P5,100,000

Carrying value, 12.31.07 3,600,000

Recovery of impairment lossP1,500,000

Entry will be:

Accumulated depreciation1,500,000

Depreciation expense or

Gain on recovery of previously

recognized impairment

1,500,000

11-19.Bobby Corporation

Requirement (1)

BOBBY CORPORATION

Land Account (Site Number 501)

As of September 30, 2007Acquisition cost P600,000

Real estate brokers commission 36,000

Legal fees 6,000

Title guarantee insurance 18,000

Cost of razing existing building 75,000Balance, September 30, 2007 P735,000

Requirement (2)

BOBBY CORPORATION

Capitalized Cost of Office Building

As of September 30, 2007Contract costP3,000,000

Plan, specifications, and blueprints 12,000

Architects fees for design and supervision 95,000

Capitalized interest--2006 (P900,000 x 14% x 10/12) 105,000

Capitalized interest--2007 (P2,300,000 x 14% x 9/12) 241,500Total capitalized cost, September 30, 2007P3,453,500

Requirement (3)

BOBBY CORPORATION

Computation of Depreciation of Office Building

Using 150% Declining Balance Method

For the Year Ended December 31, 2007Capitalized costP3,453,500

150% declining balance rate

(100% ( 40 years = 2.5% x 1.5)x 3.75%Annual depreciationP 129,506Depreciation October 1 to December 31, 2007

(P129,506 x 3/12)P 32,377CHAPTER

SUBSTANTIVE TESTS OF PROPERTY, PLANT AND EQUIPMENT

11

256,000 50,000

8

P450,000

P50,000

Depreciation base

Annual depreciation

= 9 years

=

= P40,000 per year

P250,000 P50,000

5

=

Book value Residual value

Remaining life

Cost Residual Value

Life in tons

P2,000,000 ( (P100,000 P200,000)

700,000

P2,100,000

700,000

Cost Residual Value

Life in tons

P150,000 P10,000

700,000

Book value Residual Value

Remaining Life

[P2,000,000 ( (60,000 x P3.00)] (P100,000 P200,000)]

500,000

P1,820,000 + P100,000

500,000

P1,920,000

500,000

Book value Residual Value

Remaining Life

[P150,000 ( (60,000 x P0.20)] P10,000

500,000

P128,000

500,000

11 - substantive tests of property, plant and equipment

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