PAMANTASAN NG CABUYAO MH

Auditing Problems AP-05 Property, Plant and Equipment

PROPERTY, PLANT AND EQUIPMENT

Problem 1: The Maligalig Corporation had the following items recorded in its “Property and Equipment”
account as at December 31, 2011:

Cash paid to purchase a land with a dilapidated building at the beginning of the P 660,000
year
Mortgage assumed on the land purchased 240,000
Commission paid to real estate agent 150,000
Attorney’s fee in connection with the acquisition 75,000
Cost of razing the old structure 120,000
Grading, levelling and landscaping costs (permanent improvement) 50, 000
Special assessment by for public improvement 25,000
Interest on loan for construction of a new building (based on average costs 81, 000
incurred)
Building construction labor costs 800, 000
Building construction materials 672, 000
Cost of temporary fencing the property during the construction 28, 000

Cost of permanent fencing 86, 000

Architect’s fees 112, 500
Cost of paving driveway and parking lot 70, 000
Excavation expenses, including a P90, 000 cost of excavation equipment 135, 000
Fixed overhead charged to the building 300, 000
Cost of temporary quarters for construction crew 150, 000
Cost of temporary building to house tools and materials 90, 000
Insurance on building during construction 31, 500
Profit on construction, as the difference between the appraised value of the asset 360, 000
after construction and actual costs incurred
Payments made to construction workers injured during the construction not 90, 000
covered by insurance
Payment to tenants of the old building to vacate the premises 90, 000
Modification of building ordered by building inspectors 225, 000

Property taxes on land covering the period 2008-2011 240, 000

Interest that would have been earned had the money used during the period of 150, 000
construction been invested in the money market
Invoice cost of machinery acquired 381, 000
Freight, unloading, and delivery charges 22, 500
Allowances, hotel accommodation etc. paid to foreign technicians during 20, 000
installation and test run of machines
Royalty payment on machines purchased ( based on units produced and sold) 75, 000

Items Credited to the account:

Salvage proceeds from demolished building 15, 000
Proceeds from sale of the excavation equipment 30, 000
Proceeds from sale of produce of the machinery test runs 3, 500
In addition, you discovered that compensation for the worker’s injury was necessary because it was not
covered by the insurance policy purchased by the company. Accident insurance that would have covered the
same would have cost P 20, 000. The modifications ordered by the building inspectors resulted from poor
planning by the company.

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Auditing Problems AP-05 Property, Plant and Equipment

REQUIRED: Based on the above and the result of your audit, what are the correct cost of the following
individual Property, Plant and Equipment accounts:

A B C D
1. Land 1, 575, 000 1, 500, 000 1, 440, 000 1, 350, 000
2. Building 2, 535, 000 2, 490, 000 2, 400, 000 2, 370, 000
3. Land Improvements 268, 500 232, 500 156, 000 120, 000
4. Machinery and equipment 381, 000 397, 500 420, 000 423, 500
5. Total depreciable PPE 3, 184, 500 3, 120, 000 2, 976, 000 2, 946, 000
6. Amt. That should be expensed as
incurred during the current year 75, 000 150, 000 300, 000 450, 000

PROBLEM 2: Based on the following independent cases pertinent to the different modes of acquiring
property, plant and equipment. Identify the proper adjusting journal entry/ies and answer the additional
requirements:

A. On January 3, XYZ Company purchased specialized factory equipment at a purchase price of P1M
plus 12% value added tax. The company incurred P30, 000 in freight and P70, 000 installation cost.
The company expects that it will incur dismantling cost amounting to P133, 815 at the end of the
equipment’s 5-year useful life. The prevailing market interest rate during the transaction date was 6%.
The present value factor of P1 at 6% for 5 periods is at 0.7473
The present value factor of P1 ordinary annuity for 5 periods is at 4.2124

1. How much should the equipment be initially recognized?

a. 1, 000, 000 b. 1, 100, 000 c. 1, 200, 000 d. 1, 220, 000

2. Assuming an estimated useful life of 5 years and a 10% salvage value, what is the depreciation
expense for the first year under the straight-line method?
a. 216, 000 b. 219, 600 c. 240, 000 d. 244, 000

B. On April 1, 2011, XYZ Corporation purchased for P2, 700, 000 a tract of land, a warehouse and an
office building. The following data were collected regarding the property:
Appraised Values Vendor’s Book Value
Land P875, 000 P 700, 000
Warehouse 375, 000 400, 000
Office Building 1, 000, 000 975, 000

1. What are the appropriate amounts that XYZ should record for the land, warehouse and office
building, respectively?
a. 700, 000; 400, 000 and 900, 000 c. 945, 000; 540, 000 and 1, 215, 000
b. 875, 000; 375, 000 and 1, 000, 00 d. 1, 050, 000; 450, 000 and 1, 200, 000

2. Assuming an estimated useful life of 10 years for the warehouse and the office building and an
estimated salvage value of 10%, what is the depreciation expense of the warehouse and office
building in 2011 under the sum-of-years-digits method?
a. 81, 818 and 218, 182 c. 73, 636 and 196, 364
b. 61, 364 and 290, 909 d. 55, 227 and 147, 273
C. On April 3, XYZ Co. purchased and installed several furniture and fixtures items from a local
furniture manufacturer and dealer under the term 5/10, n/30. The amount was paid on April 23 and
was recorded as:

4/23 Furniture and fixtures 2, 500, 000

Cash 2, 500, 000

In addition, the company incurred freight and installation costs amounting to P10, 000 and P15, 000,
respectively.

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Auditing Problems AP-05 Property, Plant and Equipment

1. How much should the furniture and fixtures be initially recognized?

a. 2, 375, 000 b. 2, 400, 000 c. 2, 500, 000 d. 2, 525, 000
2. Assuming an estimated useful life of 5 years and a 10% salvage value, what is the depreciation
expense for the first year under the double-declining balance method?
a. 960, 000 b. 720, 000 c. 864, 000 d. 648, 000

D. On May 1, the XYZ Co. purchased factory machinery having an instalment price of P5, 000, 000 and
a list price of P4, 500, 000. The company made a P1, 000, 000 down payment and issued a 4-year, 4
million non-interest bearing note payable P1M every May 1 starting next year. The prevailing interest
rate for similar note is at 6 %.
The present value factor of P1 at 6% for 4 periods is at 0.7921
The present value factor of P1 at 6% ordinary annuity for 4 periods is at 3.4651

1. How much should the factory machinery be initially recognized?

a. 3, 465, 100 b. 4, 465, 100 c. 4, 500, 000 d. 5, 000, 000
2. Assuming an estimated useful life of 5 years with a 10% salvage value based on cost, what is the
depreciation expense for the first year under the 150% declining balance method?
a. 1, 350, 000 b. 1, 339, 530 c. 900, 000 d. 893, 020

E. On June 1, XYZ Co. acquired a real property by issuing 35, 360 shares of its P100 par value ordinary
shares. A share was selling on the same date at P125. A mortgage of P4, 000, 000 was assumed by
XYZ Co. on the purchase. Moreover, the company paid P180, 000 real property taxes of prior years.
Twenty percent of the purchase price should be allocated to the land and the balance to the building.

In order to make proper use of the building XYZ Co. incurred remodelling costs in the amount of
P900, 000. This however necessitated the demolition of a portion of the building, which resulted in
recovery of salvage material sold for P30, 000.

Cost of the company’s parking lot totalled P320, 000; while repairs in the main hall were incurred at
P45, 000 prior to its use.

1. The correct cost of the land should be

a. 1, 664, 000 b. 1, 720, 000 c. 2, 040, 000 d. 2, 400, 000
2. The correct cost of the building should be
a. 6, 330, 000 b. 7, 795, 000 c. 7, 750, 000 d. 7, 570, 000

F. XYZ Co. owns a tract of land which it purchased in 2008 for P1, 000, 000. The land is held as a
future plant site and has a fair market value of P1, 500, 000 on July 1, 2011. Mall Company also owns
a tract of land held as a future plant site. Mall paid P1, 800, 000 for the land in 2005 and the land has
a fair market value of P2, 000, 000 on July 1, 2011. On this date XYZ exchanged its land and paid
P500, 000 cash for the land owned by Mall. The expected cash flows from the asset received differ
from the cash flows expected from the asset transferred and the difference is significant relative to
the fair value of the land given up.

1. How much should the property be initially recognized in the books of XYZ?
a. 500, 000 b. 1, 500, 000 c. 2, 000, 000 d. 2, 500, 000
2. How much is XYZ’s gain or loss from the transaction?
a. None b. 500, 000 c. 1, 000, 000 d. 2, 000, 000
3. Assuming that the cash flows expected from the assets exchanged are not materially different, how
much should the property be initially recognized in the books of XYZ?
a. 500, 000 b. 1, 500, 000 c. 2, 000, 000 d. 2, 500, 000

G. On July, 1 2011, XYZ traded in an old machine with a book value of P10, 000 for a similar new
machine having a cash price of P32, 000, and paid a cash difference of P19, 000. XYZ recorded the
new machine at the cash payment made.

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Auditing Problems AP-05 Property, Plant and Equipment

1. How much should the property be initially recognized?

a. 32, 000 b. 29, 000 c. 22, 000 d. 19, 000

2. How much is the gain or loss from the trade in transaction?

a. None b. 3, 000 c. 7, 000 d. 10, 000

H. On July 1, 2011, the XYZ Co. accepted several office equipment from a stockholder which originally
costing the stockholder P2, 000, 000. On the same date, the items had aggregate market value
totalling to P1, 500, 000. The company incurred P100, 000 for professional fees and transfer taxes
related to the transaction. The amount was charged to other expenses.

1. How much should the equipment be initially recognized?

a. 0 b. 1, 500, 000 c. 1, 600, 000 d. 2, 000, 000

2. The entries to record the donation involves a net credit to:

a. Donated capital at 2, 000, 000 c. Donated capital at 1, 400, 000
b. Donated capital at 1, 500, 000 d. Gain from grants at 1, 500, 000

I. On August 1, 2011, the national government granted XYZ Co. a parcel of land located in Batangas.
On the date of the grant, the land had a fair value of P2, 000, 000. The company paid for
documentation expenses and legal fees to execute the grant amounting to P200, 000. The grant
required the company to construct a cold storage building on the site, which was completed by the
end of October under a P4, 000, 000 fixed price contract with ABC Constructions. The fair market
value of the building which had an estimated useful life of 10 years, upon finishing the construction
was ascertained to be P4, 500, 000.

1. How much should the land and facility, respectively, be initially recognized?
a. 0 and 4, 000, 000 c. 0 and 4, 500, 000
b. 2, 200, 000 and 4, 000, 000 d. 2, 000, 000 and 4, 500, 000

2. The entry to record the donation involves a credit to:

a. Donated capital at 2, 000, 000 c. Deferred gain from gov’t grant at 2M
b. Gain from gov’t grant at 2, 000, 000 d. Deferred gain from gov’t grant at 1.8M

3. How should the corresponding balance sheet accounts pertaining to the above transactions be
presented as of December 31, 2011?
a. Land, P2, 200, 000; Facility, P3, 933, 333; Deferred gain from gov’t grant, P1, 966, 667
b. Land, P2, 000, 000; Facility, P3, 933, 333; Deferred gain from gov’t grant, P2, 000, 000
c. Land, P2, 000, 000; Facility, P4, 000, 000; Deferred gain from gov’t grant, P2, 000, 000
d. Land, P2, 200, 000; Facility, P3, 833, 333; Deferred gain from gov’t grant, P1, 916, 667

PROBLEM 3: Bond Company constructs its own buildings. In 2010, a total of P1, 228, 500 interest was
included as part of the cost of a new building just being completed.

The following is a summary of construction expenditures in 2011:

Accumulated in 2010, including capitalized interest P18, 228, 500
March 1 7, 000, 000
September 1 4, 000, 000
December 31 5, 000, 000
Bond has the following outstanding loans at December 31, 2011:
12% note related directly to new building:
Term, 5 years from beginning of construction P10, 000, 000
General Borrowings:
10% note issued prior to construction of new building;
Term, 10 years 5, 000, 000
8% note issued prior to construction of new building;
Term, 5 years 10, 000, 000
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Auditing Problems AP-05 Property, Plant and Equipment

1. How much is the total capitalizable borrowing cost under PAS 23?
a. 2, 534, 761 b. 2, 500, 000 c. 1, 334, 761 d. 1, 200, 000
2. How much interest expense should be reported in 2011 income statement?
a. 0 b. 34, 761 c. 1, 300, 000 d. 1, 334, 761
3. What is the total cost of the new building as of December 31, 2011?
a. 36, 763, 261 b. 36, 728, 500 c. 35, 500, 000 d. 27, 895, 167

PROBLEM 4: Information pertaining to Randa Corporation’s property, plant and equipment for 2011 is
presented below:

Account balances at January 1, 2011

Debit Credit
Land P 150, 000
Building 1, 200, 000
Accumulated depreciation 263, 100
Machinery and equipment 900, 000
Accumulated depreciation 250, 000
Automotive equipment 115, 000
Accumulated depreciation 84, 600
Depreciation methods used and useful life
Building – 150% declining balance; 25 years
Machinery and equipment – Straight-line; 10 years
Automotive equipment – Sum-of-year’s-digits; 4 years

The salvage value of the assets is immaterial. Depreciation is computed to the nearest month.

Transactions during 2011 and other information:

On January 1, 2011, Randa purchased a new car for P10, 000 cash and trade-in of a two-year-old car with a
cost of P9, 000and a book value of P2, 700. The new car has a cash price of P12, 000; market value of trade
in is not known.

On April 1, 2011, a machine purchased for P23, 000 on April 1, 2006, was destroyed by fire. Randa recovered
P15, 500 from its insurance company.

On July 1, 2011 machinery and equipment were purchased at a total invoice cost of P280, 000; additional
costs of P5, 000 for freight and P25, 000 for installation were incurred.

Randa determined that the automotive equipment comprising the P115, 000 balance at January 1, 2011 would
have been depreciated at a total amount of P18, 000 for the year ended December 31, 2011.

1. What is the correct depreciation expense for 2011 for the following PPE items:
A B C D
a. Building 96, 000 72, 000 74, 952 56, 214
b. Machinery and equipment 103, 775 103, 200 88, 275 87, 700
c. Automotive equipment 16, 200 21, 000 28, 200 30, 000

2. What is the correct accumulated depreciation as of December 31, 2011 for the following PPE items:
A B C D
a. Building 359, 100 335, 100 338, 052 319, 314
b. Machinery and equipment 353, 775 342, 275 338, 275 337, 700
c. Automotive equipment 100, 800 105, 600 99, 300 114,
600

3. How much is the gain or loss on the trade-in transaction on January 1?

a. 0 b. 700 gain c. 700 loss d. 2, 700 loss
4. What is the carrying value of PPE as of 2011?

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Auditing Problems AP-05 Property, Plant and Equipment

PROBLEM 5: The CAULIFLOWER CORP. started business on January 1, 2007, by purchasing three
equipment having the following costs:
Equipment A P 157, 200
Equipment B 120, 000
Equipment C 132, 000
Since that date of purchase, the company has charged depreciation at 20% on the balance of the asset account
at the end of each year. The amount of depreciation computed on each year has been credited directly to the
asset account. Moreover, all purchases since the inception of the operations have been debited to the
equipment account. Cash proceeds from the disposal of equipment were credited to the same account.

All the equipment were estimated to have a useful life of 5 years and were supposed to be depreciated under
the straight-line method.

Your first time audit of the equipment account revealed the following information:

 On September 30, 2007, an equipment (Equipment D) with a cash price of P180, 000 was purchased
on an instalment basis. The installment contract called for a 12 monthly payment of P18, 000. The
monthly payment on the installment contract beginning September 30, 2007 has been debited to the
equipment account. Freight and installation charges amounting to P6, 000 were paid and charged to
the equipment account on October of the same year.
 On June 30, 2008, another equipment (Equipment E) was purchased for P240, 000, 2/10, n/30. The
amount was paid on July 15, 2008. The equipment account was debited for the amount paid on the
same date.
 On June 30, 2009, Equipment A was traded for a more superior equipment (Equipment F) having a
cash price of P279, 000. An allowance amounting to P129, 000 was received on the old equipment
with the balance being paid in cash. The company recorded the trade-in by merely crediting the
equipment account for the cash payment.
 On January 1, 2010, the Equipment C was sold for P75, 000. The company incurred crating cost on
the machinery amounting to P3, 750. The equipment account was credited for the net cash received
from the disposal.
 On October 1, 2011, Equipment B was sold for P24, 000. The amount received was credited to the
equipment account.

Requirements: Based on the results of your audit answer the following:

1. What is the carrying value of Equipment as of December 31, 2011?
a. 237, 960 b. 241, 268 c. 275, 160 d. 285, 000
2. What is the gain on the sale of Equipment C?
a. 48, 600 b. 44, 850 c. 22, 200 d. 18, 450
3. What is the gain on the trade-in of Equipment F?
a. 129, 000 b. 71, 400 c. 50, 400 d. 0
4. What is the correct depreciation expense to be reported in 2011?
a. 140, 040 b. 146, 040 c. 158, 040 d. 164, 040

PROBLEM 6: You are auditing the financial statements of Benguet Mining Corporation for the year ended
December 31, 20111. You noted that the company purchased for P10, 400, 000 mining property estimated to
contain 8, 000, 000 tons of ore on January 1, 2010. The residual value of the property was estimated at P800,
000.

Building used in mine operations costs P2, 400, 000 and has estimated life of fifteen years with no residual
value. Mine machinery costs P1, 600, 000 with an estimated residual value P320, 000 after the physical life of
4 years.

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Auditing Problems AP-05 Property, Plant and Equipment

Following is the summary of the company’s operations for the first year and second years of operations.
2011 2012
Tons mined 800, 000 tons 500, 000 tons
Tons sold 720, 000 tons 440, 000 tons
Unit selling price per ton P4.40 P4.40
Direct Labor 640, 000 400, 000
Miscellaneous mining overhead 128, 000 90, 000
Operating Expenses except Depreciation 576, 000 375, 000

The company estimates an average annual production of 800, 000 tons.

Inventories are valued on a first-out basis. Depreciation on the building is to be allocated as follows: 20% to
operating expenses, 80% to production. Depreciation on machinery is entirely chargeable to production.

Total dividends paid in 2010 amounted to P500, 000. Dividends are yet to be declared in 2011.

Based on the above and the result of your audit, answer the following:
1. How much is the total depletion in 2011?
a. 528, 000 b. 600, 000 c. 864, 000 d. 960, 000
2. Total inventoriable depreciation for 2011?
a. 320, 000 b. 440, 000 c. 492, 800 d. 512, 000
3. How much is the Inventory as of December 31, 2011?
a. 111, 600 b. 128, 000 c. 392, 000 d. 422,000
4. How much is the cost of sales for the year ended December 31, 2011?
a. 2, 016, 000 b. 2, 031, 600 c. 2, 059, 200 d. 2, 114, 000
5. How much is the net income in 2011?
a. 184, 600 b. 214, 600 c. 512, 400 d. 560, 000
6. How much is the maximum amount that may be declared as dividend at the end of 2011?
a. 1, 589, 000 b. 2, 089, 000 c. 2, 481, 000 d. 3, 481, 000

PROBLEM 7: Powter Company acquired a machine on January 1, 2009, at a cost of P120, 000. It was
expected to have a useful economic life of 10 years. Powter uses the straight-line method in depreciating its
machinery and equipment and reports on a calendar year basis. On December 31, 2011, the machine was
appraised as having a gross replacement cost of P150, 000. Powter applies the revaluation model in valuing
this class of property, plant, and equipment after its initial recognition.

1. How much should be credited to revaluation surplus on December 31, 2011>

a. 30, 000 b. 105, 000 c. 21, 000 d. 9, 000

2. What is the balance of the revaluation surplus account on December 31, 2012 assuming that
piecemeal realization of revaluation surplus is in order?
a. 30, 000 b. 21, 000 c. 18, 000 d. 15, 000

PROBLEM 8: On January 1, 2006, Brent Corporation purchased a factory for P1, 800, 000 and machinery
for P10, 000, 000. It is depreciating the factory over 30 years and the machinery over 20 years, both by the
straight-line method to zero residual values. Late in 2011, because of technological changes in the industry
and reduced selling prices of its products, the company believes that its asset(s) may be impaired and will have
a remaining useful life of 8 years. The cash flows from the factory and machinery are not separable, and are
independent of the company’s other activities. The company estimates that the asset will produce cash
inflows of P4, 000, 000 and will incur cash outflows of P2, 950, 000 each year for the next 8 years.
Furthermore, the factory and machinery can be sold at P5, 250, 000 after incurring broker’s fees,
commissions and other charges amounting to P250, 000. The company’s discount rate is 12%.

The present value P1 at 12% for 8 periods is at 0.4039

The present value of an ordinary annuity of P1 at 12% for 8 periods is at 4. 9676

1. How much are the carrying values of the assets on the date of the impairment?
A B C D
Factory 1, 440, 000 1, 350, 000 1, 260, 000 1, 500, 000
Machinery 7, 000, 000 7, 500, 000 8, 000, 000 8, 333, 333

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Auditing Problems AP-05 Property, Plant and Equipment

2. What is the value in use of the assets?

a. 5, 250, 000 b. 5, 215, 980 c. 14, 654, 420 d. 19, 870, 400
3. How much is the loss from impairment to be recognized?
a. 3, 224, 020 b. 3, 634, 020 c. 4, 044, 020 d. 4, 617, 353
4. What is the carrying value of the factory after the impairment loss recognition?
a. 550, 070 b. 2, 673, 950 c. 889, 930 d. 4, 326, 050

PROBLEM 9: Margot Corporation has one of its many departments that performs machining operations on
parts that are sold to contractors. A group of machines have an original aggregate cost at P609, 000
purchased 3 years ago, and depreciated using the straight line method at a total life of eight years at a residual
value of 49, 000. It has been determined that this group of machinery constitutes a cash generating unit for
purpose of applying PAS 36. Upon analysis, the following facts about future expected cash inflows and
outflows become apparent based on the diminishing costs that will be incurred to generate output from the
machines.
Year Revenues Costs, excluding depreciation
2005 P225, 000 84, 000
2006 240, 000 126, 000
2007 195, 000 165, 000
2008 130, 000 115, 000
2009 80, 000 70, 000

The fair value less cost to sell of the machinery in the cash-generating unit is determined by reference to use
machinery quotation sheets obtained from a prominent dealer. After deducting disposition costs, the fair
market value less cost to sell is calculated at P250, 000. The prevailing after-tax discount rate is 12% while the
prevailing pre-tax discount rate is 10%.

Required:
1. What is the carrying value of the machines before impairment test?
2. What is the value in use of the machines?
3. What is the recoverable value of the machines?
4. How much is the impairment loss to be recognized?
5. If fair value less cost to sell is P300, 000, what is the recoverable amount?
6. Based on number 5, what is the impairment loss?

PROBLEM 10: On December 31, 2009, Karlo subjected to impairment test a piece of equipment. Data
pertinent to the equipment as of December 31, 2009 follow:
Original Cost P2, 400, 000
Adjusted Accumulated depreciation 600, 000
Selling price 1, 400, 000
Estimated cost to make the sale 200, 000
Value in use 1, 100, 000
Remaining useful life 6 years
Method of depreciation Straight line

On December 31, 2011, the asset is found to have a recoverable amount of P1, 300, 000.

1. How much loss on impairment is recognized in 2009?

a. 400, 000 b. 500, 000 c. 600, 000 d. 700, 000
2. How much is the depreciation expense recognized in 2010?
a. 200, 000 b. 216, 667 c. 300, 000 d. 333, 333
3. How much gain on recovery is recognized in 2011?
a. 500, 000 b. 400, 000 c. 300, 000 d. 200, 000
4. How much is the depreciation expense recognized in 2012 under the cost model?
a. 325, 000 b. 300, 000 c. 250, 000 d. 200, 000
5. How much is the depreciation expense recognized in 2012 under the revaluation model?
a. 325, 000 b. 300, 000 c. 250, 000 d. 200, 000

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Auditing Problems AP-05 Property, Plant and Equipment

PROBLEM 11: RAMP CORP. purchased a machinery on January 1, 2009 for P5, 000, 000. The same had an
expected useful life of 8 years. Straight-line depreciation method is in place for similar items. On January 1,
2011, the asset is appraised as having a sound value of P4, 500, 000. On January 1, 2014, the asset has a
recoverable value of P1, 375, 000.

1. How much is credited to the revaluation surplus as a result of the revaluation in 2011?
a. 1, 500, 000 b. 1, 250, 000 c. 1, 000, 000 d. 750, 000

2. What is the correct depreciation to be recognized in 2011?

a. 750, 000 b. 1, 000, 000 c. 1, 250, 000 d. 1, 500, 000

3. How much is the loss on impairment should be recognized on January 1, 2014?

a. 750, 000 b. 500, 000 c. 250, 000 d. 0

PROBLEM 12:
1. The audit procedure of analyzing the repairs and maintenance accounts is designed primarily to
provide evidence in support of the audit proposition that all
a. Expenditures for fixed assets have been recorded in the proper period.
b. Capital Expenditures have been properly authorized.
c. Noncaptalizable expenditures have been properly expensed.
d. Expenditures for fixed assets have been capitalized.

2. When an entity has few property and equipment transactions during the year, the continuing auditor
usually carries out
a. A complete review of the related internal controls and performs test of the controls on
which the entity relies.
b. A complete review of the related internal controls and performs analytical review tests to
verify current-year additions to property and equipment.
c. A preliminary review of the related internal controls and performs a thorough examination
of the balances at the beginning of the year.
d. A preliminary review of the related internal controls and performs extensive tests of current-
year property and equipment transactions.
3. An auditor may conclude that depreciation charges are insufficient if he or she notes
a. Large amounts of fully depreciated assets.
b. Continuous trade-ins of relatively new assets.
c. Excessive recurring losses on retired assets.
d. Insured values greatly in excess of book values.

4. In violation of company policy, Lilac Company erroneously capitalized the cost of painting its
warehouse. The auditor examining Lilac’s financial statements would e most likely to detect this
when
a. Discussing capitalization policies with Lilac’s controller.
b. Examining maintenance expense accounts.
c. Noting, while observing the physical inventory being taken, that the warehouse had been
painted.
d. Examining the construction work orders supporting items capitalized during the year.

5. Equipment acquisitions that are misclassified as maintenance expense most likely would be detected
by an internal control that provides for
a. Segregation of duties of employees in the accounts payable department.
b. Independent verification of invoices for disbursements recorded as equipment acquisitions.
c. Investigation of variances within a formal budgeting system.
d. Authorization by the board of directors of significant equipment acquisitions.

6. Analysis of which account is least likely to reveal evidence relating to recorded retirement of
equipment?
a. Accumulated depreciation.
b. Insurance expense.
c. Property, plant and equipment.
d. Purchase returns and allowances.

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PAMANTASAN NG CABUYAO MH
Auditing Problems AP-05 Property, Plant and Equipment

7. Which of the following explanations most likely would satisfy an auditor who questions management
about significant debits to the accumulated depreciation accounts?
a. The estimated remaining useful lives of plant assets were revised upward.
b. Plant assets were retired during the year.
c. The prior year’s depreciation expense was erroneously understated.
d. Overhead allocations were revised at year-end.

8. In testing for unrecorded retirements of equipment, an auditor most likely would:

a. Select items of equipment from accounting records and then locate them during the plant
tour.
b. Compare depreciation journal entries with similar prior year entries and search of fully
depreciated equipment.
c. Inspect items of equipment observed during the plant tour and then trace them to the
equipment subsidiary ledger.
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance accounts.

9. The auditor is most likely to seek information from the plant manager with respect to the:
a. Adequacy of the provision for uncollectible accounts.
b. Appropriateness of physical inventory observation procedures.
c. Existence of obsolete machinery.
d. Deferral of procurement of certain necessary insurance coverage.

Page 10 of 10 AP-05