Chapter11 - Answer PDF

CHAPTER
SUBSTANTIVE TESTS OF
11 PROPERTY, PLANT AND
EQUIPMENT
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ascertain whether old equipment was traded in or superseded by the new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.
11-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
(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.
Substantive Tests of Property, Plant and Equipment 11-3
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
Cost P400,000
Less: Accumulated depreciation 144,000
Carrying value 12.31.05 P256,000
256,000 50,000
Depreciation in 2006 = = P25,750
8
2. Change in estimate--prospective adjustment:
a. No correcting entry
Depreciation base P450,000
Original life = = = 9 years
Annual depreciation P50,000
Remaining life = (9-5) years + 1 year = 5 years
Book value Residual value P250,000 P50,000
Depreciation = = = P40,000 per year
Remaining life 5
3. Error--prior period adjustment:

a. Retained Earnings 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
2006 correct depreciation (P200,000 P80,000) x (2 x 20%) = P48,000
11-8. Jamboree Trucking Company
Requirement (1)
Accumulated depreciation on the trucks, January 1, 2003
Annual Years Accumulated

Truck Cost Life Depreciation Owned Depreciation
1 P120,000 5 P24,000 3 P 72,000
2 104,000 5 20,800 2 52,000
3 128,000 5 25,600 1 25,600
4 150,000 5 30,000 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
Loss 26,000
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:
Truck 2003 2004 2005 2006

1 P12,000
2 P20,800 P20,800 P10,400
3 P25,600
4 P30,000 P30,000 P15,000
5 P18,920 P18,920 P18,920 (P94,600 5 = P18,920)
6 P12,000 P24,000 (P120,000 5 = P24,000)
Total P88,400 P69,720 P56,320 P42,920
Depreciation (88,400) (54,360) (41,460) (28,560)

Under (over)
statement P15,360 P14,860 P14,360
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
Trucks (P110,000 + P102,200 P128,000
P140,500) 276,300
11-9. 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.

Building P39,000 60%
Machinery 26,000 40%
P65,000 100%
Machinery is valued at 40% x P60,000 = P24,000

Building is valued at 60% x P60,000 = P36,000
AJE (1) Machinery 24,000
Building 36,000
Property, Plant, and Equipment 60,000
(2) Machinery 280

Building 420
Property, Plant, and Equipment 700
The legal fees are allocated in the
same proportion as the original
purchase.
(3) Retained Earnings 2,400

To correct the insurance paid in
2005 that was incorrectly recorded
in the asset account.
(4) Property, Plant, and Equipment 6,310

Accumulated Depreciation: Building 1,821
Accumulated Depreciation: Machinery 3,035
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: Machinery (P24,280
8); and to correct the amount
recorded as depreciation expense by
a credit to Retained Earnings.
(5) Retained Earnings 2,000

To correct the 2006 repairs that were
incorrectly recorded in the asset
account.
(6) Building 10,000

To properly classify the 2006
addition to the building.

Depreciation: Building [P1,821 +
(P10,000 19)] (this assumes the
addition has the same life as the
building); to credit the correct
Depreciation: Machinery (P24,280
8); and to correct the amount
recorded as depreciation expense by
a credit to Retained Earnings.
(8) Repairs Expense 3,000

To expense the repairs for 2007,
before the books are closed.
(9) Insurance Expense 1,400

Prepaid Insurance 1,400
To correctly classify the 2007
insurance payment, before the books
are closed.
(10) Machinery 7,000

To correctly classify the machinery
purchased in 2007.
(11) Loss on Disposal of Machinery 100

Property, Plant, and Equipment 500
Accumulated Depreciation: Machinery 200
Machinery 800
To correctly record the disposal of
the machinery in 2007; the machine
is 2 years old and so has P200
related accumulated depreciation.
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 costs 3,000

Fixed assets 3,000
(2) Discount on bonds payable 5,650

Interest expense 350
Fixed assets 6,000
(3) Land 500,000

Fixed assets 500,000

Fixed assets 5,000
(5) Land 4,000

Fixed assets 4,000
(6) Land 7,000

Fixed assets 7,000
(7) Interest expense 30,000

Fixed assets 30,000
(8) Salaries expense 50,000

Fixed assets 50,000

Fixed assets 40,000
(10) Taxes and licenses 7,000

Fixed assets 7,000
(11) Building 2,000,000

Fixed assets 2,000,000
11-11. Aerospace Company
Requirement (1)
Machinery (cost)
Raw materials used P13,600
Labor 9,800
Installation cost 1,400
Materials used in trial runs 600
Factory overhead (incremental) 2,900
Total P28,300
Less: Cash discount on materials 400
Net P27,900
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, 12/31/06 P 2,000
Requirement (2) Adjusting Journal Entries - 12/31/06
(1) Loss on disposition of machinery 70

Machinery 70
(2) Profit on construction 6,900

Machinery 6,900
(3) Machine tools 2,250

Machinery 2,250
(4) Machinery 3,462
Depreciation expense 2,532
Accumulated depreciation - machinery 930
(5) Purchase discount 400

Machinery 400
(6) Machinery 2,900

Factory overhead control 2,900
(7) Tools expense 250

Machine tools 250
11-12. XYZ Manufacturing Company
Adjusting Journal Entries - 12/31/06

AJE (1) Retained Earnings 1,200.00
Machinery 1,200.00
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 Earnings 160.00

Machinery 160.00
To take up cash discount on
machinery purchased on 6/30/03.
(3) Machinery (new) 2,620.00

Allowance for depreciation 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 depreciation 2,640.00

Machinery 2,025.00
Retained earnings 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) 2,375
Gain P 615
(5) Allowance for depreciation 3,800.00

Machinery 3,200.00
Gain on sale of machinery 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 800
Gain P 600
(6) Machinery 19,900.60

To set up clients depreciation
provisions from 2002 to 2006
erroneously credited to the
Machinery acct. (Schedule A).
(7) Depreciation expense 2,190.90

Retained earnings 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 9/30/02 P 6,200.00
Machine acquired on 6/30/03 7,840.00
Machine acquired on 6/30/04 7,620.00
Total P21,660.00
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 9/30/02 P 5,270.00
- Machine acquired on 6/30/03 5,488.00
- Machine acquired on 6/30/04 3,810.00
Total P14,568.00
Supporting Analysis:
Schedule A Machinery Account per Ledger
Date Particulars Dr Cr Balance

1/1/02 Purchase P 5,240.00
4,000.00
4,400.00 P13,640.00
9/30/02 Purchase on installment
Payments from Sept. to Dec. 2,400.00 16,040.00
10/10/02 Freight and installation 200.00 16,240.00
12/31/02 Depreciation (20%) P 3,248.00 12,992.00
2003 Installment payments for acquisition

on 9/30/02 4,800.00 17,792.00
6/30/03 Purchase 8,000.00 25,792.00
12/31/03 Depreciation (20%) 5,158.40 20,633.60
6/30/04 Acquisition - old machine traded in 5,000.00 25,633.60
12/31/04 Depreciation (20%) 5,126.72 20,506.88
1/1/05 Sale 2,375.00 18,131.88
12/31/05 Depreciation (20%) 3,626.38 14,505.50
10/1/06 Sale 800.00 13,705.50
12/30/06 Depreciation (20%) 2,741.10 10,964.40
Schedule B Depreciation Schedule
Date
Acquired Cost 2002 2003 2004 2005 2006
1/1/02 P 5,240 P 1,048.00 P1,048.00 P 524.00 P 0.00 P 0.00
4,000 800.00 800.00 800.00 800.00 600.00
4,400 880.00 880.00 880.00 0.00 0.00
9/30/02 6,200 310.00 1,240.00 1,240.00 1,240.00 1,240.00
6/30/03 7,840 0.00 784.00 1,568.00 1,568.00 1,568.00
6/30/04 7,620 0.00 0.00 762.00 1,524.00 1,524.00
Total correct
depreciation provision P 3,038.00 P4,752.00 P 5,774.00 P5,132.00 P4,932.00
Provision by client 3,248.00 5,158.40 5,126.72 3,626,38 2,741.10
(Over) Underprovision P (210.00) P (406.40) P 647.28 P1,505.62 P2,190.90
11-13. Sunlight Service Center
Audit Adjustment No. 1 was determined as follows:
Clients Entry Correct Entry

(1) To record disposal of delivery truck:
Cash 2,000 Cash 2,000
Trucks 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 Cash 8,000
Trucks 8,000 Accum. Depr. 15,000
Gain/Loss on Disp. 2,000
Trucks 25,000
(3) To record 2006 depreciation:

Depr. Expense 95,000 Depr. Expense 101,250
Accum. Depr. 95,000 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 each 20,000
Fourteen service trucks @ 5,000 each 70,000
Total P101,250
Audit 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
Final Final
Balances Balances Gain (loss)
Description 12/31/01 Additions Disposals 12/31/02 on Disposals
Assets:
Delivery Trucks P150,000 P 60,000 P51,000 P160,000 P 2,000 *
Service Trucks P375,000 P 27,500 P25,000 P377,500 (P2,000) (A)
P525,000 & P 87,500 P76,000 P537,500 P 0
F F F F
12/31/06: Ledger balance P602,500 (A)
AJE No. 1 P 65,000 Cost P25,000
12/31/06: Audited balances P537,500 Accum. Depr:
WP G 2003 2,500 (1/2 yr.)
2004 5,000
2005 5,000
2006 2,500 (1/2 yr.)
Accumulated Depreciation: 15,000
Delivery Trucks P 95,000 P 26,000 (B) P 50,000 P 71,000
Service Trucks P225,000 P 75,250 (C) 15,000 (A) P285,250 Book Value P10,000
P320,000 & P101,250 P 65,000 P356,250 Sales Price 8,000 *
Loss P 2,000
F F F F
12/31/06: Ledger balances P 95,000 P415,000
AJE No. 1 P 6,250 P 58,750 (B)
P101,250 P356,250 2 x 10,000 20,000
1 x 6,000 6,000 (1/2 yr.)
Evaluated depreciation policy and estimated lives for reasonableness. No exception: WP G P 26,000
AJE No. 1
Depreciation expense - trucks P 6,250 14 x 5,000 70,000
Accum. depreciation - trucks 58,750 1 x 2,500 2,500 (1/2 yr.)
Trucks P65,000 1 x 2,750 2,750 (1/2 yr.)
P 75,250
& Traced to last years working trial balance F Footed 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 2007
Balance at January 1, 2007 P 100,000

Land site number 621:
Acquisition cost P1,000,000
Commission to real estate agent 60,000
Clearing costs P15,000
Less: Amounts recovered (5,000) 10,000
Total land site number 621 1,070,000
Land site number 622:

Acquisition cost P 300,000
Demolition cost of building 30,000
Total land site number 622 330,000
Balance at December 31, 2007 P1,500,000
Tatty Company
Analysis of Buildings Account
for 2007
Balance at January 1, 2007 P800,000

Cost of new building constructed on
land site number 622:
Construction costs P150,000
Excavation fees 11,000
Architectural design fees 8,000
Building permit fee 1,000 170,000
Balance at December 31, 2007 P970,000
Tatty Company
Analysis of Leasehold Improvements Account
for 2007

Electrical work 35,000
Construction of extension to current
work area (P80,000 x ) 40,000
Office space 65,000
Tatty Company
Analysis of Machinery and Equipment Account
for 2007

Cost of new machines acquired:
Invoice price P75,000
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) Land 175,000 a

Ordinary Shares, P10 par 70,000
Additional Paid-in Capital 105,000
a
P25 x 7,000
Cash 500,000
Notes Payable 500,000
Building 700,000
Cash 700,000
(2) Machine 430,000
Machine 500,000
Cash 60,000
Gain on exchange 5,000
(3) Cash 800,000

Sales Revenue 800,000
Cost of Goods Sold 350,000

Inventory 350,000
Accounts Payable 400,000

Cash 400,000
Inventory 480,000
Accounts Payable 480,000
(4) Dividends Distributed (or Retained Earnings) 92,500

Cash 92,500 a
a
37,000 x P2.50
ADJUSTMENTS AT END OF 2006:
Interest Expense 18,000

Building 42,000 b
Interest Payable 60,000 a
a
P500,000 x 12%
b
[(P0 + P700,000) 2] x 12%
Depreciation Expense - Machinery 75,000 a

Accumulated Depreciation 75,000 a
a
(P430,000 P55,000) 5
Rent Expense 60,000

Prepaid Rent 60,000
Income Tax Expense 90,600 a

Income Taxes Payable 90,600
a
See income statement
FINANCIAL STATEMENTS FOR 2006:
NIKKO COMPANY
Income Statement
For Year Ended December 31, 2006
Sales revenue P800,000

Less: Expenses
Cost of goods sold P350,000
Interest expense 18,000
Depreciation expense 75,000
Rent expense 60,000 (503,000)
Operating income P297,000
Gain on exchange of machinery 5,000
Income before income taxes P302,000
Income tax expense (30%) 90,600
Net income P211,400
Earnings per share (37,000 shares) P 5.71
NIKKO COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2006
Beginning retained earnings P200,000

Add: Net income 211,400
P411,400
Less: Dividends (92,500)
Ending retained earnings P318,900
NIKKO COMPANY
Balance Sheet
December 31, 2006
Assets
a
Cash P 587,500
b
Inventory 580,000
Land 175,000
Building 742,000
Machine P430,000
Less: Accumulated depreciation (75,000) 355,000
Total Assets P2,439,500
Liabilities and Equities
c
Accounts payable P 480,000
Notes payable 500,000
Interest payable 60,000
Income taxes payable 90,600
Total Liabilities P1,130,600
d
Ordinary shares, P10 par P 370,000
e
Additional paid-in capital 620,000
Retained earnings 318,900
Total Shareholders Equity P1,308,900
Total Liabilities and Shareholders Equity P2,439,500
a
P540,000 + P500,000 P700,000 P60,000 + P800,000 P400,000 P92,500
= P587,500
b
P450,000 P350,000 + P480,000 = P580,000
c
P400,000 P400,000 + P480,000 = P480,000
d
P300,000 + P70,000 = P370,000
e
P515,000 + P105,000 = P620,000
11-16. Apple Company
Requirement 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
a
Cost Residual Value
Depletion rate =
Life in tons
= P2,000,000 (P100,000 P200,000)

700,000
P2,100,000
=
700,000
= P3.00 per ton

b
Cost Residual Value
Depreciation rate =
Life in tons
P150,000 P10,000
=
700,000
= 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
a
New depletion rate = 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
= P3.84 per ton
b Book value Residual Value

New depreciation rate =
Remaining Life
= [P150,000 (60,000 x P0.20)] P10,000

500,000
= P128,000
500,000
= P0.256 per ton
11-17.
January 1, 2001
Equipment 5,000,000
Cash 5,000,000
December 31, 2001
December 31, 2002
January 1, 2003
Equipment 625,000
Revaluation Surplus 500,000
December 31, 2003

December 31, 2004

December 31, 2005

January 1, 2006
1) Revaluation surplus 312,500
Accumulated depreciation 312,500
Equipment 625,000
2) Impairment loss / Depreciation expense 500,000

or
Revaluation surplus 312,500
Impairment loss / Depreciation expense 500,000
Equipment 625,000
11-18. Sweetie Company
Requirement (a)
December 31, 2006

Loss on Impairment / Depreciation................................................................
3,200,000
Accumulated DepreciationEquipment ................................ 3,200,000
Cost P9,000,000
Accumulated depreciation 1,000,000
Carrying amount 8,000,000
Fair value 4,800,000
Loss in impairment P3,200,000
Requirement (b)
December 31, 2007

Depreciation Expense................................................................................................
1,200,000
Accumulated DepreciationEquipment ................................ 1,200,000
New carrying amount P4,800,000

Useful life 4 years
Depreciation per year P1,200,000
Requirement (c)
Carrying value, 12.31.07 had impairment not been recognized on 12.31.06
Cost P9,000,000
Accumulated depreciation
(P1,000,000 + P2,000,000) 3,000,000
Net carrying value, 12.31.07 P6,000,000
Fair value, 12.31.07 P5,100,000

Carrying value, 12.31.07 3,600,000
Recovery of impairment loss P1,500,000
Entry will be:
Accumulated depreciation 1,500,000
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, 2007
Acquisition cost P600,000

Real estate brokers commission 36,000
Legal fees 6,000
Title guarantee insurance 18,000
Cost of razing existing building 75,000
Balance, September 30, 2007 P735,000
Requirement (2)
BOBBY CORPORATION
Capitalized Cost of Office Building
As of September 30, 2007
Contract cost P3,000,000

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) 241,500
Total capitalized cost, September 30, 2007 P3,453,500
Requirement (3)
BOBBY CORPORATION
Computation of Depreciation of Office Building
Using 150% Declining Balance Method
For the Year Ended December 31, 2007
Capitalized cost P3,453,500

150% declining balance rate
(100% 40 years = 2.5% x 1.5) x 3.75%
Annual depreciation P 129,506
Depreciation October 1 to December 31, 2007
(P129,506 x 3/12) P 32,377

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CHAPTER

11-6. Kris Corporation

3. Error--prior period adjustment:

11-8. Jamboree Trucking Company

Accumulated depreciation on the trucks, January 1, 2003

Annual Years Accumulated

Note: This schedule is used to help determine the accumulated depreciation

Correcting entry #1:

Correcting entry #2:

Correcting entry #3:

Truck 2003 2004 2005 2006

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

Effect of errors on earnings (all reductions)

Correcting entry #4:

Accumulated Depreciation: Trucks (P84,000 +

11-9. AFH Company

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

Machinery is valued at 40% x P60,000 = P24,000

(2) Machinery 280

(3) Retained Earnings 2,400

(4) Property, Plant, and Equipment 6,310

(5) Retained Earnings 2,000

(6) Building 10,000

(7) Property, Plant, and Equipment 6,879

(8) Repairs Expense 3,000

(9) Insurance Expense 1,400

(10) Machinery 7,000

(11) Loss on Disposal of Machinery 100

11-10. Briggs, Inc.

Adjusting Journal Entries - 12/31/06

(1) Organization costs 3,000

(2) Discount on bonds payable 5,650

(3) Land 500,000

(4) Organization costs 5,000

(5) Land 4,000

(6) Land 7,000

(7) Interest expense 30,000

(8) Salaries expense 50,000

(9) Organization costs 40,000

(10) Taxes and licenses 7,000

(11) Building 2,000,000

11-11. Aerospace Company

Accumulated depreciation - 12/31/06

Machine Tools (cost) P 2,250

Requirement (2) Adjusting Journal Entries - 12/31/06

(1) Loss on disposition of machinery 70

(2) Profit on construction 6,900

(3) Machine tools 2,250

(5) Purchase discount 400

(6) Machinery 2,900

(7) Tools expense 250

11-12. XYZ Manufacturing Company

Adjusting Journal Entries - 12/31/06

(2) Retained Earnings 160.00

(3) Machinery (new) 2,620.00

(4) Allowance for depreciation 2,640.00

(5) Allowance for depreciation 3,800.00

(6) Machinery 19,900.60

(7) Depreciation expense 2,190.90

XYZ Manufacturing Corporation

Balance per ledger (Schedule A) P10,964.40

XYZ Manufacturing Corporation

Balance per ledger P 0.00