Since 1977

AUDITING PROBLEMS OCAMPO/SOLIMAN/OCAMPO

AP.2902 - Audit of Property, Plant and Equipment OCTOBER 2020

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 Rights and obligations: Property, plant and equipment are
owned by the entity
1. Physically inspect the assets for a sample of property,
plant and equipment recorded in the plant ledger. 7. Determine whether liens or mortgages have been
placed on property, plant and equipment by examining
2. Physically inspect the assets and examine supporting bank confirmations and reading minutes of the board
documentation for additions to property, plant and of directors’ meetings.
equipment.
Valuation and allocation: Property, plant and equipment
3. Verify that existing retirements and disposals are are valued in accordance with GAAP
recorded and properly valued.
8. Verify accuracy of recorded property, plant and
equipment.
Completeness: All property, plant and equipment are
recorded 9. Verify depreciation.

4. Perform analytical procedures.

Presentation and disclosure: Property, plant and
5. Analyze repairs and maintenance for expenditures that equipment are classified and disclosed in accordance with
should have been capitalized. GAAP

6. Examine lease and loan agreements to identify any 10. Review financial statements and perform analytical
liabilities that should be recorded. procedures to determine whether accounts are
classified and disclosed in the financial statements in
accordance with GAAP.

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EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 1 Payment for external driveways, parking

bays and safety lighting 540,000
White Company commenced operations on 1 July 2019.
Payment for safety inspection on building 30,000
During the following year, the company acquired a tract of
Payment for equipment 640,000
land, demolished the building on the land and built a new
Payment of freight and insurance costs on
factory. Equipment was acquired for the factory and, in
delivery of equipment 56,000
March 2020, the plant was ready to commence operation.
Payment of installation costs on equipment 120,000
Payment for safety equipment surrounding
During this period, the following inflows and outflows
equipment 110,000
occurred:
Payment for removal of safety fence 20,000
While searching for a suitable block of land, Payment for new fence surrounding the
White Company placed an option to buy factory 80,000
with three real estate agents at a cost of Payment for advertisements in the local
P1,000 each. One of these blocks of paper about the forthcoming factory and
land was later acquired. its benefits to the local community 5,000
Payment of option fees P 3,000 Payment for opening ceremony 60,000
Receipt of loan from bank 4,000,000
Payment to settlement agent for title QUESTIONS:
search, stamp duties and settlement
Determine the cost of the following:
fees 100,000
Payment for property taxes in arrears on 1. Land
building and land 50,000 a. P1,151,000 c. P1,693,000
Payment for land 1,000,000 b. P1,153,000 d. P1,773,000
Payment for demolition of current building
2. Land improvements
on land 120,000
a. P674,000 c. P540,000
Proceeds from sale of material from old
b. P620,000 d. Nil
building 55,000
Payment to architect 230,000 3. Building
Payment to council for approval of building a. P3,519,000 c. P2,899,000
construction 120,000 b. P3,439,000 d. P2,845,000
Payment for safety fence around
construction site 34,000 4. Equipment
Payment to construction contractor for a. P926,000 c. P816,000
factory building 2,400,000 b. P870,000 d. P760,000

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 Balance P 500,000 09/01 Sale of machine
No. 3 P 10,000
06/01 Machine No. 23 150,000 12/31 Balance 644,000
09/01 Dismantling of
Machine No. 3 4,000 .
P 654,000 P 654,000

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

Your examination disclosed the following information: d. Machine No. 3, which was purchased on March 1,
2016, at a cost of P80,000, was sold on September 1,
a. The following adjusted balances appeared on
2020 for P10,000 cash.
December 31, 2019 working papers:
Machinery – P500,000; Accumulated Depreciation – e. Included in charges to Repairs and Maintenance
P 280,000. account was an invoice for installation of Machine No.
23, in the amount of P35,000.
b. The company has depreciated all items of machinery at
10% per annum. The oldest item owned is seven
QUESTIONS:
years old as of December 31, 2020.
Based on the information presented above and the result
c. It is the company’s policy to take full year’s
of your audit, answer the following:
depreciation in the year of acquisition and none in the
year of disposition. 1. How much is the loss on the sale of Machine no. 3?
a. P38,000 c. P42,000
b. P37,333 d. P 0

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EXCEL PROFESSIONAL SERVICES, INC.

2. The adjusting entry to correct the entry made in PROBLEM NO. 3

recording sale of Machine no. 3 will include a debit to
In the audit of the books of Yellow Corporation for the
a. Loss on sale of machinery P42,000
year 2020, the following items and information appeared
b. Accumulated depreciation P32,000
in the Production Machine account of the client:
c. Both a and b
d. No adjusting entry is necessary. Date Particulars Debit Credit
01/01 Balance–Machine 1, 2,
3. How much is the adjusted balance of the Machinery
3, and 4 at P180,000 P 720,000
account as of December 31, 2020?
each
a. P644,000 c. P605,000
02/28 Machine 5 396,000
b. P296,500 d. P609,000
Machine 1 P 6,000
4. How much is the total depreciation expense on 09/01 Machine 6 192,000
machinery for 2020? 12/01 Machine 7 432,000
a. P64,400 c. P50,000
b. P60,500 d. P58,125 The Accumulated Depreciation account contained no
entries for the year 2020. The balance on January 1, 2020
5. How much is the balance of the Accumulated
per your audit, was as follows:
Depreciation account as of December 31, 2020?
a. P308,500 c. P344,000 Machine 1 P168,750
b. P301,458 d. P340,500 Machine 2 78,750
Machine 3 67,500
6. Property, plant and equipment is typically judged to be Machine 4 45,000
one of the accounts least susceptible to fraud because
a. The amounts recorded on the balance sheet for Based on your further inquiry and verification, you noted
most companies are immaterial. the following:
b. The depreciated values are always smaller than 1. Machine 5 was purchased for cash; it replaced Machine
cost. 1, which was sold on this date for P6,000.
c. Internal control is inherently effective regarding 2. Machine 2 was destroyed by the thickness of engine oil
this account. used leading to explosion on December 1, 2020.
d. The inherent risk is usually low. Machine 7 was to replace Machine 2.
7. When few property and equipment transactions occur 3. Machine 3 was traded in for Machine 6 at an allowance
during the year the continuing auditor usually obtains of P24,000; the difference was paid in cash and
an understanding of internal control and performs charged to Production Machine account.
a. Tests of controls 4. Depreciation rate is recognized at 25% per annum.
b. Analytical procedures to verify current year
additions to property and equipment QUESTIONS:
c. A thorough examination of the balances at the Based on the above and the result of your audit, answer
beginning of the year. the following:
d. Extensive tests of current year property and
equipment transactions. 1. The adjusting entry to correct the entry made on the
sale of Machine 1 will include a
8. Which of the following combinations of procedures is a. Debit to Accumulated Depreciation P176,250
an auditor most likely to perform to obtain evidence b. Debit to Cash P6,000
about fixed asset addition? c. Credit to Production Machine P180,000
a. Inspecting documents and physically examining d. Credit to Gain on Sale of Machine P5,250
assets.
b. Recomputing calculations and obtaining written 2. The adjusting entry to correct the entry made on the
management representations. destruction of Machine 2 will include a
c. Observing operating activities and comparing a. Debit to Accumulated Depreciation P120,000
balances to prior period balances. b. Debit to Loss on Destruction of Machine P101,250
d. Confirming ownership and corroborating c. Credit to Production Machine P101,250
transactions through inquiries of client personnel. d. Credit to Cash P432,000

9. Additions to equipment are sometimes understated. 3. The adjusting entry to correct the entry made on
Which of the following accounts would be reviewed by trade-in of Machine 3 will include a
the auditor to gain reasonable assurance that additions a. Debit to Accumulated Depreciation P67,500
are not understated? b. Debit to Loss on Exchange P58,500
a. Accounts payable c. Credit to Production Machine P67,500
b. Depreciation expense d. Credit to Cash P192,000
c. Gain on disposal of equipment 4. The total depreciation for the year ended December
d. Repairs and maintenance expense 31, 2020 is
10. In violation of policy, Coat Company erroneously a. P237,000 c. P233,250
capitalized the cost of painting its warehouse. An b. P232,500 d. P236,250
auditor would most likely detect this when 5. The carrying amount of production machine as of
a. Discussing capitalization policies with controller. December 31, 2020 is
b. Examining maintenance expense accounts. a. P1,024,500 c. P1,069,500
c. Observing that the warehouse had been painted. b. P1,029,000 d. P 990,750
d. Examining construction work orders that support
items capitalized during the year.

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EXCEL PROFESSIONAL SERVICES, INC.

SOLUTION GUIDE (Questions 4 and 5): 8. In testing for unrecorded retirements of equipment, an
auditor is most likely to
12/31/20 a. Select items of equipment from the accounting
No Remarks Cost Acc. Dep. 2020 Dep. records and then locate them during the plant tour.
1 b. Compare depreciation journal entries with similar
2 prior-year entries in search of fully depreciated
3 equipment.
4 c. Inspect items of equipment observed during the
5 plant tour and then trace them to the equipment
6 subsidiary ledger.
7 d. Scan the general journal for unusual equipment
additions and excessive debits to repairs and
maintenance expense.
6. Determining that proper amounts of depreciation are 9. A weakness in internal control over recording of
expensed provides assurance about management’s acquisitions of equipment may cause an auditor to
assertions of valuation and a. Select certain items of equipment from the
a. Presentation and disclosure. c. Completeness. accounting records and locate them in the plant.
b. Rights and obligations. d. Existence. b. Inspect certain items of equipment in the plant
and trace those items to the accounting records.
c. Review the subsidiary ledger to ascertain whether
7. The auditor may conclude that depreciation charges depreciation was taken on each item of
are insufficient by noting equipment during the year.
a. Insured values greatly in excess of book values. d. Trace additions to the “other assets” account to
b. Large numbers of fully depreciated assets. search for equipment that is still on hand but no
c. Continuous trade-in of relatively new assets. longer being used.
d. Excessive recurring losses on assets retired.
10. The auditor is least likely to learn of retirements of
equipment through which of the following?
a. Review of the purchase return and allowance
account.
b. Review of depreciation.
c. Analysis of the debits to the accumulated
depreciation account.
d. Review of insurance policy.

PROBLEM NO. 4
Survive, Inc.’s property, plant and equipment at December 31, 2019:
P R T C
Original cost P175,000 P255,000 P400,000 P400,000
Year Purchased 2014 2015 2016 2018
Useful life 10 years 75,000 hours 15 years 10 years
Salvage value P15,500 P15,000 P25,000 P25,000
Depreciation method SYD Activity Straight-line Double-declining
balance
Note: In the year an asset is purchased, Survive, Inc. does not record any depreciation expense on the asset.
In the year an asset is retired or traded in, Survive, Inc. takes full year depreciation on the asset.

The following transactions occurred during 2020: 1. How much is the gain or loss on sale of Asset P?
1. On May 5, Asset P was sold for P65,000 cash. a. P20,500 gain c. P32,100 gain
2. Asset R was used for 10,500 hours during 2020. b. P20,500 loss d. P32,100 loss
Accumulated usage as of December 31, 2019 is 40,800
2. How much is the depreciation of Asset T for 2020?
hours.
a. P32,500 c. P30,000
3. On December 31, before computing depreciation
b. P42,858 d. P46,428
expense on Asset T, the management of Survive, Inc.
determined that the useful life remaining from January 3. How much is the total depreciation expense for 2020?
1, 2020 is only 10 years. a. P166,600 c. P161,200
4. On December 31, it was discovered that a plant asset b. P177,498 d. P164,100
purchased in 2019 had been expensed completely in
that year. This asset costs P110,000 and has useful 4. How much is the adjusted cost of property, plant and
life of 10 years and no salvage value. Management equipment as of December 31, 2020?
has decided to use the double-declining balance for a. P1,340,000 c. P1,230,000
this asset, which can be referred to as “Asset I.” b. P1,055,000 d. P1,165,000
5. How much is the carrying amount of property, plant
QUESTIONS: and equipment as of December 31, 2020?
Based on the above and the result of your audit, answer a. P435,160 c. P763,440
the following: (Disregard tax implications) b. P729,840 d. P860,400

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EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 5 1. The carrying amount of the new warehouse as of

December 31, 2020 is
The draft balance sheet of Four Corporation as of
a. P1,000,000 c. P950,000
December 31, 2020 reported the net property, plant and
b. P 869,250 d. P987,500
equipment at P6,270,000. Details of the amount follow:
Land at cost P1,000,000 2. The adjusting entry to correct the entry made on the
Building at cost P4,000,000 disposal of plant will include a
Less accumulated a. Debit to Depreciation P33,750
depreciation at 12/31/19 ( 800,000) 3,200,000 b. Debit to Accumulated depreciation P630,000
Plant at cost 5,200,000 c. Credit to Gain on sale of plant P63,750
Less accumulated d. All of these
depreciation at 12/31/19 (3,130,000) 2,070,000 3. The carrying amount of plant as of December 31, 2020
P6,270,000 is
a. P1,350,000 c. P1,282,500
The following matters are relevant b. P1,375,310 d. P1,710,000
(a) The company policy for all depreciation is that a full 4. The total depreciation for the year ended December
year’s charge is made in the year of acquisition or 31, 2020 is
completion and none in the year of disposal. a. P736,250 c. P380,000
(b) Included in the sales revenue is P300,000 being the b. P735,750 d. P740,000
sales proceeds of an item of plant that was sold on 5. The revaluation surplus as of December 31, 2020 is
June 30, 2020. The plant had originally cost P900,000 a. P1,720,000 c. P1,800,000
and had been depreciated by P630,000 as of b. P1,710,000 d. P 960,000
December 31, 2019. Other than recording the
proceeds in sales and cash, no other accounting
entries for the disposal of the plant have been made. PROBLEM NO. 6
All plant is depreciated at 25% per annum on the
reducing balance basis. On January 2, 2018, Calamba Company purchased land for
P450,000, from which it is estimated that 400,000 tons of
(c) On September 30, 2020, the company completed the ore could be extracted. It estimates that it will cost
construction of a new warehouse. The construction P80,000 to restore the land, after which it could be sold for
was achieved using the company’s own resources as P30,000.
follows:
Purchased materials P150,000 During 2018, the company mined 80,000 tons and sold
Direct labor 800,000 50,000 tons. During 2019, the company mined 100,000
Supervision 65,000 tons and sold 120,000 tons. At the beginning of 2020, the
Design and planning costs 20,000 company spent an additional P100,000, which increased
Included in the above figures are P10,000 for materials the reserves by 60,000 tons. In 2020, the company mined
and P25,000 for labor costs that were effectively lost 140,000 tons and sold 130,000 tons. The company uses a
due to the foundations being too close to a neighboring FIFO cost flow assumption.
property. All the above costs are included in cost of
sales. The building was brought into immediate use QUESTIONS:
upon completion and has an estimated useful life of 20 Based on the above and the result of your audit, answer
years (straight-line depreciation). the following: (Round depletion rate to two decimal places)

(d) At the beginning of the current year, the company had 1. The depletion for 2019 is
an open market basis valuation of its properties a. P125,000 c. P107,200
(excluding the newly constructed warehouse). Land b. P134,000 d. P 80,000
was valued at P1.2 million and the property at P4.8 2. The depletion for 2020 is
million. The directors wish these values to be a. P175,000 c. P145,600
incorporated into the financial statements. The b. P114,800 d. P187,600
properties had an estimated remaining life of 20 years
at the date of the valuation (straight-line depreciation 3. The carrying amount of the natural resources as of
is used). The company makes a transfer to retained December 31, 2020 is
earnings in respect of the excess depreciation on a. P290,200 c. P317,400
revalued assets. b. P259,400 d. P217,400
4. The depletion included in cost of sales for the year
(e) Depreciation for the year 2020 has not yet been
ended December 31, 2020 is
accounted for the in the draft financial statements.
a. P173,300 c. P168,350
b. P137,300 d. P110,900
QUESTIONS:
5. Which method might an auditor utilize in testing
Based on the above and the result of your audit, answer
depletion expense?
the following:
a. Estimating the useful life of the natural resource.
b. Observation of the physical count.
c. Obtaining management representation.
d. Using analytical procedures.

- now do the DIY drill -

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EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

PROBLEM NO. 1
PROBLEM NO. 2
The following information pertain to Teal Company’s
delivery trucks: You obtain the following information pertaining to Red
Co.’s property, plant, and equipment for 2020 in
DELIVERY EQUIPMENT
connection with your audit of the company’s financial
Date Particulars Debit Credit
statements.
01/01/18 Trucks 1,2,3, and
4 P3,200,000 Audited balances at December 31, 2019:
03/15/19 Replacement of Debit Credit
Truck 3 tires 25,000 Land P3,750,000
07/01/19 Truck 5 800,000 Buildings 30,000,000
07/10/19 Reconditioning of Accumulated depreciation
Truck 4, which – buildings P6,577,500
was damaged in a Machinery and equipment 22,500,000
collision 35,000 Accumulated depreciation
09/01/19 Insurance – Machinery and
recovery on Truck Equipment 6,250,000
4 accident P33,000 Delivery Equipment 2,875,000
10/01/19 Sale of Truck 2 600,000 Accumulated Depreciation
04/01/20 Truck 6 1,000,000 150,000 – Delivery Equipment 2,115,000
05/02/20 Repainting of
Depreciation Data:
Truck 4 27,000
Depreciation
06/30/20 Truck 7 720,000
Method Useful Life
Buildings 150% declining 25 years
ACCUMULATED DEPRECIATION-DELIVERY EQUIPMENT
balance
Date Particulars Debit Credit
Machinery and
12/31/18 Depreciation expense P300,000
Equipment Straight-line 10 years
12/31/19 Depreciation expense 300,000
Delivery Equipment SYD 4 years
12/31/20 Depreciation expense 300,000
Leasehold
a. On July 1, 2019, Truck 3 was traded in for a new truck, Improvements Straight-line -
Truck 5, costing P850,000; the selling party allowed a
Transactions during 2020 and other information are as
P50,000 trade in value for the old truck.
follows:
b. On April 1, 2020, Truck 6 was purchased for a. On January 2, 2020, Red purchased a new truck for
P1,000,000; truck 1 and cash of P850,000 being given P500,000 cash and traded-in a 2-year-old truck with a
for the new truck. cost of P450,000 and a book value of P135,000. The
new truck has a cash price of P600,000; the market
c. The depreciation rate is 20% by unit basis.
value of the old truck is not known.
d. Unit cost of trucks 1 to 4 is at P800,000 each. b. On April 1, 2020 a machine purchased for P575,000 on
April 1, 2015 was destroyed by fire. Red recovered
QUESTIONS: P387,500 from its insurance company.
c. On May 1, 2020, cost of P4,200,000 were incurred to
Based on the above and the result of your audit, answer improve leased office premises. The leasehold
the following: improvements have a useful life of 8 years. The
1. How much is the net loss on disposal of trucks in related lease terminates on December 31, 2026.
2019? d. On July 1, 2020, machinery and equipment were
a. P510,000 c. P590,000 purchased at a total invoice cost of P7,000,000;
b. P430,000 d. P230,000 additional cost of P125,000 for freight and P625,000
for installation were incurred.
2. What is the loss on trade-in of Truck 1? e. Red determined that the delivery equipment
a. P410,000 c. P250,000 comprising the P2,875,000 balance at January 1,
b. P290,000 d. P150,000 2020, would have been depreciated at a total amount
3. What is the adjusted balance of the Delivery of P450,000 for the year ended December 31, 2020.
Equipment account as of December 31, 2020? The salvage values of the depreciable assets are
a. P4,170,000 c. P3,170,000 immaterial. The policy of the Red Co. is to compute
b. P2,650,000 d. P3,370,000 depreciation to the nearest month.
4. The 2020 depreciation expense is understated by:
a. P372,000 c. P 92,000 QUESTIONS:
b. P252,000 d. P292,000 Based on the above and the result of your audit, answer
5. Which of the following procedures would least likely the following:
lead the auditor to detect unrecorded fixed asset 6. How much is the Accumulated depreciation – Buildings
disposals? as of December 31, 2020?
a. Examine insurance policies. a. P7,777,500 c. P8,377,500
b. Review repairs and maintenance expense. b. P7,982,850 d. P7,103,700
c. Review property tax files.
d. Scan invoices for fixed asset additions. 7. How much is the Accumulated depreciation –
Machinery and Equipment as of December 31, 2020?
a. P8,844,375 c. P8,614,375
b. P8,830,000 d. P8,556,875

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EXCEL PROFESSIONAL SERVICES, INC.

8. How much is the Accumulated depreciation – Delivery QUESTIONS:

Equipment as of December 31, 2020?
11. Recorded depletion expense was
a. P2,715,000 c. P2,490,000
a. Overstated by P180,000
b. P2,400,000 d. P2,805,000
b. Understated by P180,000
9. How much is the Accumulated depreciation – c. Overstated by P270,000
Leasehold Improvements as of December 31, 2020? d. Understated by P270,000
a. P420,000 c. P525,000
12. Recorded depreciation expense was
b. P350,000 d. P630,000
a. Overstated by P20,000
10. How much is the net gain (loss) from disposal of assets b. Understated by P20,000
for the year ended December 31, 2020? c. Overstated by P40,000
a. P100,000 c. P65,000 d. Understated by P40,000
b. (P35,000) d. (P65,000)
13. The audited carrying value of the machinery as of
December 31, 2020 is
a. P1,140,000 c. P1,120,000
PROBLEM NO. 3
b. P1,080,000 d. P1,280,000
On an audit engagement for 2020, you handled the audit
14. The audited carrying value of the copper ore (wasting
of fixed assets of Mongol Copper Mines. This mining
asset) as of December 31,2020 is
company bought the exploration rights of Haven Mineral
a. P9,720,000 c. P9,810,000
Exploration on June 30, 2020 for P14,580,000. Of this
b. P9,210,000 d. P9,180,000
purchase price, P9,720,000 was allocated to copper ore
which had remaining reserves estimated at 1,620,000 15. The appropriate depreciation method that should be
tons. Mongol Copper Mines expects to extract 15,000 tons used for the machineries is
of ore a month with an estimated selling price of P50 per a. Straight-line method
ton. Production started immediately after some new b. Units of production method
machineries costing P1,200,000 were bought on June 30, c. Double-declining balance
2020. These new machineries had an estimated useful life d. Composite life
of 15 years with a scrap value of 10% of cost after the ore
estimate has been extracted from the property, at which
time the machineries will be useless.

Among the operating expenses of Mongol Copper Mines at

December 31, 2020 were:
Depletion expense P810,000
Depreciation, machineries 80,000  - end of AP.2902 - 

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