AUDITING PROBLEMS

AP.0102 - Audit of Property, Plant and Equipment (PPE)

INTERNAL CONTROL MEASURES

1. Additions and dispositions of fixed assets should be properly authorized and approved by the board of directors or
executive committee or person to whom authority has been delegated.

2. A clearly defined and sound policy for differentiation of capital and revenue expenditures should be established.

3. Cost of constructed fixed assets should be controlled through work orders.

4. Fixed assets controlling account should be supported by detailed plant records.

5. Physical inspection of fixed assets should be conducted and investigated.

SUBSTANTIVE AUDIT OF PROPERTY, PLANT AND EQUIPMENT

Existence: Recorded property, plant and equipment exist

1. Physically inspect the assets for a sample of property, plant and equipment recorded in the plant ledger.

2. Physically inspect the assets and examine supporting documentation for additions to property, plant and equipment.

3. Verify that existing retirements and disposals are recorded and properly valued.

Completeness: All property, plant and equipment are recorded

4. Perform analytical procedures.

5. Analyze repairs and maintenance for expenditures that should have been capitalized.

6. Examine lease and loan agreements to identify any liabilities that should be recorded.

Rights and obligations: Property, plant and equipment are owned by the entity

7. Determine whether liens or mortgages have been placed on property, plant and equipment by examining bank
confirmations and reading minutes of the board of directors’ meetings.

Valuation and allocation: Property, plant and equipment are valued in accordance with GAAP

8. Verify accuracy of recorded property, plant and equipment.

9. Verify depreciation.

Presentation and disclosure: Property, plant and equipment are classified and disclosed in accordance with GAAP

10. Review financial statements and perform analytical procedures to determine whether accounts are classified and
disclosed in the financial statements in accordance with GAAP.

- end -

PROBLEM NO. 1 5/1/17 Fire insurance premium payment 7,200

5/1/17 Special tax assessment for streets 5,500
Black Manufacturing Co. was incorporated on 1/2/17 but
5/1/17 Partial payment of new building
was unable to begin manufacturing activities until 8/1/17
construction 180,000
because new factory facilities were not completed until
8/1/17 Final payment on building
that date. The Land and Building account at 12/31/17 per
construction 180,000
the books was as follows:
8/1/17 General expenses 30,000
12/31/17 Asset write-up 75,000
P688,700
Date Particulars Amount
1/31/17 Land and dilapidated building P200,000
2/28/17 Cost of removing building 5,000
4/1/17 Legal fees 6,000

Page 1 of 8 AP.0102
Additional information:
President's salary P20,000
1. To acquire the land and building on 1/31/17, the Plant superintendent covering supervision
company paid P100,000 cash and 1,000 ordinary of new building 10,000
shares (par value = P100/share) which is very actively P30,000
traded and had a market value per share of P210.
6. Because of the rising land costs, the president was
2. When the old building was removed, Black paid Kwik sure that the land was worth at least P75,000 more
Demolition Co. P5,000, but also received P2,000 from than what it cost the company. The company credited
the sale of salvaged material. The amount received retained earnings account.
was credited to other income. REQUIRED:

3. Legal fees covered the following: 1. Prepare the necessary adjusting journal entries to
close the Land and Building account and to set up the
Cost of organization P2,000 appropriate accounts.
Examination of title covering purchase of 2. Determine the proper balances as of 12/31/17 for a
land 2,500 separate land account and a separate building account.
Legal work in connection with the building
construction 1,500
P6,000
4. The fire insurance premium covered premiums for a
three-year term beginning May 1, 2017.

5. General expenses covered the following for the period

1/2/17 to 8/1/17.

PROBLEM NO. 2
You were engaged in making your second annual examination of Indigo Company. The Machinery and Accumulated
Depreciation accounts are shown below:
Machinery
01/01/17 Balance P 500,000 09/01/17 Sale of machine
No. 3 P 10,000
06/01/17 Machine No. 23 150,000 12/31/17 Balance 644,000
09/01/17 Dismantling of
Machine No. 3 4,000 .
P 654,000 P 654,000
01/01/18 Balance P 644,000

Accumulated Depreciation
12/31/17 Balance P 344,400 01/01/17 Balance P 280,000
. 12/31/17 Depreciation 64,400
P 344,400 P 344,400
01/01/18 Balance P 344,400

Your examination disclosed the following information: b. P37,333 d. P 0

a. The company has depreciated all items of machinery at 2. How much is the adjusted balance of the Machinery
10% per annum. The oldest item owned is seven account as of December 31, 2017?
years old as of December 31, 2017. a. P644,000 c. P605,000
b. P296,500 d. P609,000
b. The following adjusted balances appeared on
December 31, 2016 working papers: 3. How much is the total depreciation expense on
Machinery – P500,000; Accumulated Depreciation – machinery for 2017?
P 280,000. a. P64,400 c. P50,000
b. P60,500 d. P58,125
c. Machine No. 3, which was purchased on March 1,
2013, at a cost of P80,000, was sold on September 1, 4. How much is the balance of the Accumulated
2017 for P10,000 cash. Depreciation account as of December 31, 2017?
a. P308,500 c. P344,000
d. Included in charges to Repairs and Maintenance
b. P301,458 d. P340,500
account was an invoice for installation of Machine No.
23, in the amount of P35,000. 5. The adjusting entry to correct the entry made in
recording sale of Machine no. 3 will include a debit to
e. It is the company’s policy to take full year’s
a. Loss on sale of machinery P42,000
depreciation in the year of acquisition and none in the
b. Accumulated depreciation P32,000
year of disposition.
c. Both a and b
d. No adjusting entry is necessary.
QUESTIONS:
Based on the information presented above and the result
of your audit, answer the following:
1. How much is the loss on the sale of Machine no. 3?
a. P38,000 c. P42,000

Page 2 of 8 AP.0102
PROBLEM NO. 3 inclusive. The Semitrucks account consists of the following
as of January 1, 2014:
In the audit of the books of Yellow Company for the year
2017, the following items and information appeared in the Truck No. 1 purchased Jan. 1, 2011, cost P 180,000
Production Machines account of the auditee: Truck No. 2 purchased July 1, 2011, cost 220,000
Truck No. 3 purchased Jan. 1, 2013, cost 300,000
Date Particulars Debit Credit
Truck No. 4 purchased July 1, 2013, cost 240,000
2017
P 940,000
01/01 Balance–Machines 1,
2, 3, and 4 at
The Semitrucks – Accumulated Depreciation account
P90,000 each P 360,000
previously adjusted to January 1, 2014, and duly entered
08/31 Machine 5 198,000
to the ledger, had a balance on that date of P302,000
Machine 1 P 3,000
(depreciation on the 4 trucks from respective date of
09/30 Machine 6 96,000
purchase, based on five-year life, no salvage value). No
12/01 Machines 7 and 8 at
charges have been made against the account before
P216,000 each 432,000
January 1, 2014.
12/01 Machine 2 21,000
12/31 Balance . 1,062,000
Transactions between January 1, 2014 and December 31,
P1,086,000 P1,086,000
2017, and their record in the ledger were as follows:
The Accumulated Depreciation account contained no July 1, 2014 Truck No. 3 was traded for larger one (No.
entries for the year 2017. The balance on January 1, 2017 5), the agreed purchase price of which was
per your audit, was as follows: P340,000. Blue Mfg. Co. paid the
automobile dealer P150,000 cash on the
Machine 1 P 84,375
transaction. The entry was debit to
Machine 2 39,375
Semitrucks and a credit to cash, P150,000.
Machine 3 33,750
Machine 4 22,500 Jan. 1, 2015 Truck No. 1 was sold for P35,000 cash;
Total P 180,000 entry debited Cash and credited
Semitrucks, P35,000.
Based on your further inquiry and verification, you noted
the following: July 1, 2016 A new truck (No. 6) was acquired for
P360,000 cash and was charged at that
1. Machine 5 was purchased for cash; it replaced Machine amount to Semitrucks account. (Assume
1, which was sold on this date for P3,000. truck No. 2 was not retired.)
2. Machine 2 was destroyed by the thickness of engine oil July 1, 2016 Truck No. 4 was damaged in a wreck to
used leading to explosion on December 1, 2017. such an extent that it was sold as junk for
Insurance of P21,000 was recovered. Machine 7 was P7,000 cash. Blue Mfg. Co. received
to replace Machine 2. P25,000 from the insurance company. The
entry made by the bookkeeper was a debit
3. Machine 3 was traded in for Machine 6 at an allowance
to cash, P32,000, and credits to
of P12,000; the difference was paid in cash and
Miscellaneous Income, P7,000 and
charged to Production Machine account.
Semitrucks P 25,000.
4. Depreciation rate is recognized at 25% per annum.
Entries for depreciation had been made for the close of
each year as follows: 2014, P203,000; 2015, P211,000;
REQUIRED:
2016, P244,500; 2017, P278,000.
Determine the adjusted balance of the Production Machine
as of December 31, 2017 and Depreciation Expense for the QUESTIONS:
year 2017. Based on the above and the result of your audit, determine
the following: (Disregard tax implications)
SOLUTION GUIDE:
1. The carrying amount of Semitrucks as of December 31,
Adj. Bal., 2017 2017 is
No Remarks 12/31/17 DA Fraction Dep. a. P885,400 c. P284,000
1 b. P504,000 d. P354,000
2
3 2. The 2017 depreciation expense is
a. P138,000 c. P184,000
4
b. P104,000 d. P140,000
5
6 3. The 2014 profit is overstated by
7 a. P9,000 c. P20,000
8 b. P31,000 d. P 0
4. The 2015 profit is understated by
a. P16,000 c. P51,000
b. P50,000 d. P 0
PROBLEM NO. 4
5. The 2016 profit is understated by
You requested a depreciation schedule for Semitrucks of a. P23,500 c. P94,500
Blue Manufacturing Company showing the additions, b. P64,500 d. P 0
retirements, depreciation and other data affecting the
income of the Company in the 4-year period 2014 to 2017,

Page 3 of 8 AP.0102
SOLUTION GUIDE (Questions 1 & 2): SOLUTION GUIDE (Questions 3 to 5):
12/31/17 Depreciation
No Remarks Cost Acc. Dep. 2017 Dep. No Remarks 2014 2015 2016
1 1
2 2
3 3
4 4
5 5
6 6

PROBLEM NO. 5
You are engaged to examine the financial statements of the Olive Manufacturing Corp. for the year ended December
31, 2017. The following schedules for property, plant, and equipment and related accumulated depreciation accounts
have been prepared by your client. The opening balances agree with your prior year’s audit working papers.

Olive Manufacturing Co.

Analysis of Property, Plant, and Equipment and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2017
Cost
Audited Per books
12-31-16 Additions Retirement 12-31-17
Land P450,000 P100,000 P- P550,000
Buildings 2,400,000 350,000 - 2,750,000
Machinery & equipment 2,770,000 808,000 520,000 3,526,000
P5,620,000 P1,258,000 P520,000 P6,826,000
Accumulated Depreciation
Audited Per books
12-31-16 Additions Retirement 12-31-17
Buildings P1,200,000 P103,000 P - P1,303,000
Machinery & equipment 546,500 313,600 - 860,100
P1,746,500 P416,600 P - P2,163,100

Further investigation revealed the following: Since no money was involved, the bookkeeper did not
make any entry for the above transaction.
a. All equipment is depreciated on the straight-line basis
(with no salvage value) based on the following
QUESTIONS:
estimated lives: Buildings – 25 years, all other items
Based on the above and the result of your audit, answer
10 years.
the following:
b. The company entered into a lease contract for a
1. The carrying amount of the buildings on December 31,
derrick machine with annual rental of P100,000
2017 is
payable in advance every April 1. The parties to the
a. P1,820,250 c. P1,816,250
contract stipulated that a 30-day written notice is
b. P1,827,400 d. P1,447,000
required to cancel the lease. Estimated useful life is
2. The carrying amount of the land on December 31,
10 years. The derrick was recorded under machinery
2017 is
and equipment at P808,000 and P60,600, applicable to
a. P650,000 c. P750,000
the machine was included in the depreciation expense
b. P450,000 d. P545,000
during the year.
3. The carrying amount of the property, plant and
c. The company finished construction of a new building
equipment as of December 31, 2017 is
wing in June 30. The useful life of the main building
a. P3,860,750 c. P3,955,750
was not prolonged. The lowest construction bid was
b. P3,755,750 d. P3,312,900
P350,000 which was the amount recorded. Company
personnel constructed the building at a total cost of 4. The loss on the disposal of the machinery sold for
P330,000. P520,000 is
a. P56,000 c. P152,000
d. P100,000 was paid for the construction of a parking lot
b. P80,000 d. P 0
which was completed on July 1, 2017. The
expenditure was charged to land.
PROBLEM NO. 6
e. The P520,000 equipment under retirement column
The draft statement of financial position of JJ Rapids
represent cash received on October 1, 2017 for a
Corporation as of December 31, 2017 reported the net
machinery bought on October 1, 2013 for P960,000.
property, plant and equipment at P6,270,000. Details of
The bookkeeper recorded depreciation expense of
the amount follow:
P72,000 on this machine in 2017.
Land at cost P1,000,000
f. The company’s president donated land and building Building at cost P4,000,000
appraised at P200,000 and P400,000 respectively to Less accumulated
the company to be used as plant site. The company depreciation at 12/31/16 ( 800,000) 3,200,000
began operating the plant on September 30, 2017. Plant at cost 5,200,000
Less accumulated

Page 4 of 8 AP.0102
 depreciation at 12/31/16 (3,130,000) 2,070,000 separate discrete job in the accounting records. At the
P6,270,000 end of 2016, Oceanwide correctly reported P5,400,000 as
Construction in Progress on the following jobs.
The following matters are relevant
Accumulated Costs
(a) The company policy for all depreciation is that it is (including 2016
charged to cost of sales and a full year’s charge is Completion Date interest)
made in the year of acquisition or completion and none Ship (end of month) December 31, 2016
in the year of disposal. 340 October 31, 2016* P2,300,000
(b) Included in the sales revenue is P300,000 being the 341 June 30, 2017 1,150,000
sales proceeds of an item of plant that was sold on 342 September 30, 2017 1,200,000
June 30, 2017. The plant had originally cost P900,000 343 January 31, 2018 750,000
and had been depreciated by P630,000 as of
*Ship 340 was completed and ready for use in October
December 31, 2016. Other than recording the
2016 and will be placed in service May 1, 2017.
proceeds in sales and cash, no other accounting
entries for the disposal of the plant have been made. Construction costs for 2017, and the dates the
All plant is depreciated at 25% per annum on the expenditures were made, were as follows:
reducing balance basis.
Ship Date Costs
(c) On September 30, 2017, the company completed the 341 April 1, 2017 P1,200,000
construction of a new warehouse. The construction
342 May 1, 2017 1,600,000
was achieved using the company’s own resources as
follows: 343 July 1, 2017 2,200,000
Purchased materials P150,000 344 September 1, 2017 810,000
Direct labor 800,000 345 November 1, 2017 360,000
Supervision 65,000
Design and planning costs 20,000 Oceanwide had the following general liabilities at
Included in the above figures are P10,000 for materials December 31, 2017:
and P25,000 for labor costs that were effectively lost 12%, 5-year note (maturity date-2012) P2,000,000
due to the foundations being too close to a neighboring 10%, 10-year bonds (maturity date-2015) 8,000,000
property. All the above costs are included in cost of
sales. The building was brought into immediate use On January 1, 2017, Oceanwide borrowed P2,000,000
upon completion and has an estimated useful life of 20 specifically for the construction of ship 343. The loan was
years (straight-line depreciation). for 3 years with interest at 13%.
(d) At the beginning of the current year, the company had
an open market basis valuation of its properties QUESTIONS:
(excluding the newly constructed warehouse). Land
Based on the above and the result of your audit, calculate
was valued at P1.2 million and the property at P4.8
the following for the year ended December 31, 2017.
million. The directors wish these values to be
incorporated into the financial statements. The 1. Weighted-average interest rate for the general
properties had an estimated remaining life of 20 years liabilities
at the date of the valuation (straight-line depreciation a. 11.67% c. 10.83%
is used). The company makes a transfer to retained b. 11.00% d. 10.40%
earnings in respect of the excess depreciation on
revalued assets. 2. Capitalized interest on Ship No. 341
a. P91,000 c. P59,800
(e) Depreciation for the year 2017 has not yet been b. P96,250 d. P31,200
accounted for the in the draft financial statements. 3. Capitalized interest on Ship No. 342
QUESTIONS: a. P93,600 c. P172,333
Based on the above and the result of your audit, answer b. P69,333 d. P162,933
the following:
4. Capitalized interest on Ship No. 343
1. The carrying amount of the new warehouse as of a. P178,750 c. P231,000
December 31, 2017 is b. P228,150 d. P319,485
a. P1,000,000 c. P950,000
b. P 869,250 d. P987,500 5. Total interest that Oceanwide should capitalize
a. P516,403 c. P607,738
2. The carrying amount of plant as of December 31, 2017 b. P596,136 d. P632,518
is
a. P1,350,000 c. P1,282,500 PROBLEM NO. 8
b. P1,375,310 d. P1,710,000
Select the best answer for each of the following:
3. The total depreciation for the year ended December
31, 2017 is 1. Property, plant and equipment is typically judged to be
a. P736,250 c. P380,000 one of the accounts least susceptible to fraud because
b. P735,750 d. P740,000 a. The amounts recorded on the balance sheet for
most companies are immaterial.
4. The revaluation surplus as of December 31, 2017 is b. The inherent risk is usually low.
a. P1,720,000 c. P1,800,000 c. The depreciated values are always smaller than
b. P1,710,000 d. P 960,000 cost.
d. Internal control is inherently effective regarding
PROBLEM NO. 7 this account.
Oceanwide Enterprises, Inc., is involved in building and
operating cruise ships. Each ship is identified as a

Page 5 of 8 AP.0102
2. Determining that proper amounts of depreciation are
expensed provides assurance about management’s
assertions of valuation and
a. Presentation and disclosure.
b. Rights and obligations.
c. Completeness.
d. Existence or occurrence.
3. The auditor may conclude that depreciation charges
are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.
4. When few property and equipment transactions occur
during the year the continuing auditor usually obtains
and understanding of internal control and performs
a. Tests of controls
b. Analytical procedures to verify current year
additions to property and equipment
c. A thorough examination of the balances at the
beginning of the year.
d. Extensive tests of current year property and
equipment transactions.
5. Which of the following combinations of procedures is
an auditor most likely to perform to obtain evidence
about fixed asset addition?
a. Inspecting documents and physically examining
assets.
b. Recomputing calculations and obtaining written
management representations.
c. Observing operating activities and comparing
balances to prior period balances.
d. Confirming ownership and corroborating
transactions through inquiries of client personnel.
6. If an auditor tours a production facility, which of the
misstatements or questionable practices is most likely
to be detected by the audit procedures specified?
a. Depreciation expense on fully depreciated
machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been
performed.
d. Insurance coverage on the facility has lapsed.
7. In testing for unrecorded retirements of equipment, an
auditor is most likely to
a. Select items of equipment from the accounting
records and then locate them during the plant
tour.
b. Compare depreciation journal entries with similar
prior-year entries in 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 expense.
8. An auditor analyzes repairs and maintenance accounts
primarily to obtain evidence in support of the audit
assertion that all
a. Noncapitalizable expenditures for repairs and
maintenance have been recorded in the proper
period.
b. Expenditures for property and equipment have
been recorded in the proper period.
c. Noncapitalizable expenditures for repairs and
maintenance have been properly charged to
expense.
d. Expenditures for property and equipment have not
been charged expense.
9. In violation of company policy, Coatsen Company
erroneously capitalized the cost of painting its
warehouse. An auditor would most likely detect this
when
a. Discussing capitalization policies with Coatsen's
controller.
b. Examining maintenance expense accounts.
c. Observing that the warehouse had been painted.
d. Examining construction work orders that support
items capitalized during the year.
- now do the DIY drill -

DO-IT-YOURSELF (DIY) DRILL

PROBLEM NO. 1
ACCUMULATED DEPRECIATION-DELIVERY EQUIPMENT
The following information pertain to Teal Company’s
Date Particulars Debit Credit
delivery trucks:
12/31/15 Depreciation expense P300,000
DELIVERY EQUIPMENT 12/31/16 Depreciation expense 300,000
Date Particulars Debit Credit 12/31/17 Depreciation expense 300,000
01/01/15 Trucks 1,2,3, and
a. On July 1, 2016, Truck 3 was traded in for a new truck,
4 P3,200,000
Truck 5, costing P850,000; the selling party allowed a
03/15/16 Replacement of
P50,000 trade in value for the old truck.
Truck 3 tires 25,000
07/01/16 Truck 5 800,000 b. On April 1, 2017, Truck 6 was purchased for
07/10/16 Reconditioning of P1,000,000; truck 1 and cash of P850,000 being given
Truck 4, which for the new truck.
was damaged in a
c. The depreciation rate is 20% by unit basis.
collision 35,000
09/01/16 Insurance d. Unit cost of trucks 1 to 4 is at P800,000 each.
recovery on Truck
4 accident P33,000 QUESTIONS:
10/01/16 Sale of Truck 2 600,000
04/01/17 Truck 6 1,000,000 150,000 Based on the above and the result of your audit, answer
05/02/17 Repainting of the following:
Truck 4 27,000 1. How much is the net loss on disposal of trucks in
06/30/17 Truck 7 720,000 2016?

Page 6 of 8 AP.0102
 a. P510,000 c. P590,000 2017, would have been depreciated at a total amount
b. P430,000 d. P230,000 of P450,000 for the year ended December 31, 2017.
2. What is the loss on trade-in of Truck 1? The salvage values of the depreciable assets are
a. P410,000 c. P250,000 immaterial. The policy of the Red Co. is to compute
b. P290,000 d. P150,000 depreciation to the nearest month.
3. What is the adjusted balance of the Delivery
QUESTIONS:
Equipment account as of December 31, 2017?
a. P4,170,000 c. P3,170,000 Based on the above and the result of your audit, answer
b. P2,650,000 d. P3,370,000 the following:
4. The 2017 depreciation expense is understated by: 6. How much is the Accumulated depreciation – Buildings
a. P372,000 c. P 92,000 as of December 31, 2017?
b. P252,000 d. P292,000 a. P7,777,500 c. P8,377,500
5. Which of the following procedures would least likely b. P7,982,850 d. P7,103,700
lead the auditor to detect unrecorded fixed asset
7. How much is the Accumulated depreciation –
disposals?
Machinery and Equipment as of December 31, 2017?
a. Examine insurance policies.
a. P8,844,375 c. P8,614,375
b. Review repairs and maintenance expense.
b. P8,830,000 d. P8,556,875
c. Review property tax files.
d. Scan invoices for fixed asset additions. 8. How much is the Accumulated depreciation – Delivery
Equipment as of December 31, 2017?
PROBLEM NO. 2 a. P2,715,000 c. P2,490,000
b. P2,400,000 d. P2,805,000
You obtain the following information pertaining to Red
Co.’s property, plant, and equipment for 2017 in 9. How much is the Accumulated depreciation –
connection with your audit of the company’s financial Leasehold Improvements as of December 31, 2017?
statements. a. P420,000 c. P525,000
b. P350,000 d. P630,000
Audited balances at December 31, 2016:
Debit Credit 10. How much is the net gain (loss) from disposal of assets
Land P3,750,000 for the year ended December 31, 2017?
Buildings 30,000,000 a. P100,000 c. P65,000
Accumulated depreciation b. (P35,000) d. (P65,000)
– buildings P6,577,500
Machinery and equipment 22,500,000 PROBLEM NO. 3
Accumulated depreciation
– Machinery and In connection with your audit of the Gold Mining
Equipment 6,250,000 Corporation for the year ended December 31, 2017, you
Delivery Equipment 2,875,000 noted that the company purchased for P16,640,000 mining
Accumulated Depreciation property estimated to contain 12,800,000 tons of ore. The
– Delivery Equipment 2,115,000 residual value of the property is P1,280,000.

Depreciation Data: Building used in mine operations costs P1,280,000 and

Depreciation have estimated life of fifteen years with no residual value.
Method Useful Life Mine machinery costs P2,560,000 with an estimated
Buildings 150% declining 25 years residual value P512,000 after its physical life of 4 years.
balance
Machinery and Following is the summary of the company’s operations for
Equipment Straight-line 10 years first year of operations.
Delivery Equipment SYD 4 years
Tons mined 1,280,000 tons
Leasehold
Tons sold 1,024,000 tons
Improvements Straight-line -
Unit selling price per ton P4.40
Transactions during 2017 and other information are as Direct labor 1,024,000
follows: Miscellaneous mining overhead 204,800
a. On January 2, 2017, Red purchased a new truck for Operating expenses
P500,000 cash and traded-in a 2-year-old truck with a (excluding depreciation) 921,600
cost of P450,000 and a book value of P135,000. The
Inventories are valued on a first-in, first-out basis.
new truck has a cash price of P600,000; the market
Depreciation on the building is to be allocated as follows:
value of the old truck is not known.
20% to operating expenses, 80% to production.
b. On April 1, 2017, a machine purchased for P575,000
Depreciation on machinery is chargeable to production.
on April 1, 2012 was destroyed by fire. Red recovered
P387,500 from its insurance company.
QUESTIONS:
c. On May 1, 2017, cost of P4,200,000 were incurred to
improve leased office premises. The leasehold Based on the above and the result of your audit, answer
improvements have a useful life of 8 years. The the following: (Disregard tax implications)
related lease terminates on December 31, 2016.
11. How much is the depletion for 2017?
d. On July 1, 2017, machinery and equipment were
a. P1,228,800 c. P 307,200
purchased at a total invoice cost of P7,000,000;
b. P1,536,000 d. P1,664,000
additional cost of P125,000 for freight and P625,000
for installation were incurred. 12. Total inventoriable depreciation for 2017?
e. Red determined that the delivery equipment a. P640,000 c. P614,400
comprising the P2,875,000 balance at January 1, b. P580,267 d. P 0

Page 7 of 8 AP.0102
13. How much is the Inventory as of December 31, 2017?
15. How much is the maximum amount that may be
a. P701,440 c. P680,960
declared as dividends at the end of the company’s first
b. P675,840 d. P669,013
year of operations?
14. How much is the cost of sales for the year ended a. P2,391,040 c. P2,083,840
December 31, 2017? b. P2,063,360 d. P2,111,147
a. P2,703,360 c. P2,805,760  - end of AP.0102 - 
b. P2,723,840 d. P2,676,053

Page 8 of 8 AP.0102