Masters Technological Institute of Mindanao 2016 that had been prepaid by the vendor; 20% of the

Applied Auditing purchase price is deemed applicable to land and the balance
to building. A mortgage of P3,000,000 was assumed by
AUDIT OF PLANT, PROPERTY AND EQUIPMENT Magalang on the purchase. Cash was paid for the balance.

Problem 1 Jan . 15 Previous owners had failed to take care of normal

The Quezon Manufacturing Company was incorporated on maintenance and repair requirements on the buildings,
January 2016, but was unable to begin manufacturing necessitating current reconditioning at a cost of P236,800.
activities until activities until July 1, 2016 because new factory
facilities were not completed until that date. Feb.15 Demolished garages in the rear of the building,
P 36,000 being recovered on the lumber salvage. The
The Land and Building Account at December 31, 2016 was as company proceeded to construct a warehouse. The cost of
follows: such warehouse was P540,800, which was P90,000 less than
Date Particulars Amount the average bids made on the construction by independent
1/3 Land and Building acquisition P 1,108,000 contractors. Upon completion of construction, city inspectors
1/15 Property Taxes paid on the ordered extensive modifications to the building as a result of
real property 20,000 failure on the part of the company to comply with building
2/5 Option payments 20,000 safety code. Such modifications, which could have been
2/28 Cost of removal of old bldg 22,000 avoided, cost P76,800.
3/1 Partial payment for construction 700,000
3/1 Legal fees paid 15,000 Mar 1 The company exchanged its own shares with a fair
3/1 Insurance premium paid value of P320,000 (par P24,000) for patent and a new
(3/1/16-2/28/17) 24,000 equipment. The equipment has a fair value of P200,000.
6/1 Second payment on construction 600,000
6/30 General expenses 60,000 Apr. 1 The new machinery for the new building arrived. In
7/1 Final Payment on construction 200,000 addition, a new franchise was acquired from the
7/1 Construction gain 500,000 manufacturer of the machinery. Payment was made by
Total P 3,269,000 issuing bonds with a face value of P400,000 and by paying
12/31 Depreciation at one percent 326,900 cash of P144,000. The value of the franchise with a face value
Carrying Value P 3,236,310 of P400,000 and by paying cash of P144,000. The value of the
franchise is set at P160,000, while the machine’s fair value is
Your audit investigation revealed the following info: P360,000.
a. To acquire the Land and building, the company paid
P108,000 and 10,000 shares of its 10% preference shares May 1 The company contracted for parking lots and waiting
with par value of P100 per share. The shares where then sheds at a cost P 360,000 and P76,800, respectively. The work
selling at 120 per share. was completed and paid for on June 1.
b. The property taxes paid was for two-years covering 2015
and 2016. Dec. 1 The business was closed to permit taking the year-
c. P15,000 from the total option payments were for the end inventory. During this time, required redecorating and
property acquired while the balance were for the other real repairs were completed at a cost P60,000.
properties not acquired.
d. Legal fees covered the following: Cost of incorporation, Required: Cost
P9,500; Examination of title covering purchase of Land. 1. Land
P4,000; Legal work in connection with construction contract, 2. Buildings
P1,500. 3. Machinery and equipment
e. General expenses covered the salaries for the period from 4. Land Improvements
Jan. 1 to June 30 of the: 5. Total PPE
President P20,000
Plant superintendent while supervising the Problem 3
construction 12,000
Office staff 28,000 During 2016, the controller of the Majestic Corporation asked
f. A gain on the construction was recognized for the you to prepare correcting journal entries for the following
difference of the actual payments made to the contractor three situations:
against the fair value of the assets upon completion. 1. Machine A was purchased for P30,000 on January 1,
g. The estimated useful life of the building is 25 years. 2014. It had an estimated residual value of P5,000
and an estimated service life of 10 years. It has been
Required: depreciated under the double declining balance
1. Land method for 2 years. Now at the beginning of the
2. Building third year, Majestic has decided to change to
3. Correct depreciation expense on the building for the year straight line method.
2016. 2. Machine B was purchased for P50,000 on January 1,
2011. Straight line depreciation has been recorded
Problem #2 for 5 years, and the accumulated depreciation
account has a balance of P25,000. Te estimated
In connection with your audit of MAGALANG Company’s residual value remains at P5,000, but the service life
financial statements for the year 2016, you noted the is now estimated to be 2 years longer than
following transactions affecting the property and equipment estimated originally.
items of the company: 3. Machine C was purchased for P20,000 on January 1,
Jan 1 Purchased real property for P5,026,000 which 2015. Double declining balance depreciation has
included a charge of P146,000 representing property tax for been recorded for the year. The estimated residual
 value of the machine is P2,000 and the estimated
service life is 5 years. The computation of the
depreciation erroneously included in the estimated
residual value.
Required:
Correct Depreciation
1. Machine A
2. Machine B
3. Machine C

Problem 4
Your first audit of the Delivery Equipment account of DELTA
Corporation for the year ended December 31, 2016, discloses
the following:

DELIVERY EQUIPMENT
Date Particulars Dr Cr
1/1/14 Trucks 1,2,3 and 4 P3,200,000
3/15/15 Replacement of
Truck 3 tires 25,000
7/1/15 Truck 5 800,000
7/10/15 Reconditioning of truck 4,
which was damaged in a
collision 35,000
9/1/15 Insurance recovery on
Truck 4 accident P33,000
10/1/15 Sale of Truck 2 600,000
4/1/16 Truck 6 P1,000,000 150,000
5/2/16 Repainting of T4 27,000
6/30/16 Truck 7 720,000
12/1/16 Cash received on lease
of T7 22,000

Accumulated Depreciation
Date Particulars Dr Cr
12/31/14 Dep’n Exp P300,000
12/31/15 Dep’n Exp P300,000
12/31/16 Dep’n Exp P300,000

Additional info:
a) On July 1, 2015, Truck 3 was traded in for a new
truck , Truck 5, costing P850,000; the selling party
allowed a P50,000 trade in value.
b) On April 1, 2016, Truck 6 was purchased for
P1,000,000; Truck 1 and cash of P850,000 being
given for the new truck.
c) You are instructed by the senior in charge of the
audit to accept the depreciation rate of 20% by unit
basis.
d) Unit cost of Trucks 1 to 4 is at P800,000 each.

Required:
1. Correct cost of Truck 5?
2. Correct depreciation expense for 2015?
3. Correct depreciation expense for 2016?
4. The entry to correct the depreciation charges for the years
2014 through 2016 should include a credit to Accumulated
Depreciation of?
5. The balance of Delivery Equipment account at 12/31/16
should be?