UL COA

ACC412/415: AUDIT OF PPE

INSTRUCTIONS: ANSWER THE FOLLOWING PROBLEMS AND SUBMIT IN THE GOOGLE

CLASSROOM. SUBMIT NO LATER THAN 5:00 PM TODAY

Problem 1
During 2018 and 2019, Sawyer Corporation experienced several transactions involving plant assets. A
number of errors were made in recording some of these transactions. For each item listed below, indicate
the effect of the error (if any) in the blanks provided by using the following codes:
O = Overstate; U = Understate; NE = No Effect

If no error was made, write NE in each of the four columns.

2018 2019
Book Book
Value of Value of
Plant 2018 Plant 2019
Assets at Net Assets at Net
Transaction 12/31/18 Income 12/31/19 Income

1. The cost of installing a new computer system U O U U

in 2018 was not recorded in 2018. It was
charged to expense in 2019.

2. In 2019 clerical workers were trained to use

the new computer system at a cost of NE NE O O
P15,000, which was erroneously capitalized.
The cost is to be written off over the expected
life of the new computer system.

3. A major overhaul of factory machinery in

2018, which extended its useful life by 5
years, was charged to accumulated NE NE NE NE
depreciation in 2018.

4. Interest cost qualifying for capitalization in U U U O

2018 was charged to interest expense in
2018.
U U U NE
5. In 2018 land was bought for an employee
parking lot. The P2,000 title search fee was
charged to expense in 2018.
NE NE NE NE
6. The cost of moving several manufacturing
facilities from metropolitan locations to
suburban areas in 2018 was capitalized. The
cost was written off over a 10-year period
beginning in 2018.
UL COA
ACC412/415: AUDIT OF PPE

Problem 2
Consider each of the items below. Place the proper letter in the blank space provided to indicate the nature
of the account or accounts to be debited when recording each transaction using the preferred accounting
treatment. Prepayments should be recorded in balance sheet accounts. Disregard income tax
considerations unless instructed otherwise.

a. asset(s) only
b. accumulated depreciation only
c. expense only
d. asset(s) and expense
e. some other account or combination of accounts

A 1. A motor in one of North Company’s trucks was overhauled at a cost of P600. It is expected that
this will extend the life of the truck for two years.

_A or C2. Machinery which had originally cost P130,000 was rearranged at a cost of P450, including
installation, in order to improve production.

A_3. Orlando Company recently purchased land and two buildings for a total cost of P35,000, and
entered the purchase on the books. The P1,200 cost of razing the smaller building, which has
an appraisal value of P6,200, is recorded.

__ E4. Jantzen Company traded its old machine with a net book value of P3,000 plus cash of P7,000
for a new one which had a fair value of P9,000.

_ A 5. Jim Parra and Mary Lawson, maintenance repair workers, spent five days in unloading and
setting up a new P6,000 precision machine in the plant. The wages earned in this five-day
period, P480, are recorded.

__ A6. On June 1, the Milton Hotel installed a sprinkler system throughout the building at a cost of
P13,000. As a result the insurance rate was decreased by 40%.

__ A7. An improvement, which extended the life but not the usefulness of the asset, cost P6,000.

__ A8. The attic of the administration building was finished at a cost of P3,000 to provide an additional
office.

__ E9. In March, the Lyon Theatre bought projection equipment on the installment basis. The contract
price was P23,610, payable P5,610 down, and P2,250 a month for the next eight months. The
cash price for this equipment was P22,530.

__ D10. Lambert Company recorded the first year’s interest on 6% P100,000 ten-year bonds sold a
year ago at 94. The bonds were sold in order to finance the construction of a hydroelectric
UL COA
ACC412/415: AUDIT OF PPE

plant. Six months after the sale of the bonds, the construction of the hydroelectric plant was
completed and operations were begun. (Only cash interest, and not discount amortization, is to
be considered.)

Problem 3
Gibbs Manufacturing Co. was incorporated on 1/2/2019 but was unable to begin manufacturing activities
until 8/1/2019 because new factory facilities were not completed until that date. The Land and Building
account at 12/31/2019 per the books was as follows:
Date Item Amount
1/31/19 Land and dilapidated building P200,000
2/28/19 Cost of removing building 4,000
4/1/19 Legal fees 6,000
5/1/19 Fire insurance premium payment 5,400
5/1/19 Special tax assessment for streets 4,500
5/1/19 Partial payment of new building construction 150,000
8/1/19 Final payment on building construction 150,000
8/1/19 General expenses 30,000
12/31/19 Asset write-up 75,000
P624,900
Additional information
1. To acquire the land and building on 1/31/2019, the company paid P100,000 cash and 1,000 ordinary
shares of its (par value = P100/share) which is very actively traded and had a market value per share
of P170.
2. When the old building was removed, Gibbs paid Kwik Demolition Co. P4,000, but also received P1,500
from the sale of salvaged material.
3. Legal fees covered the following:
Cost of organization P2,500
Examination of title covering purchase of land 2,000
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, 2019.
5. General expenses covered the following for the period 1/2/19 to 8/1/19.
President's salary P20,000
Plant superintendent covering supervision of new building 10,000
P30,000
6. Because of the rising land costs, the president was sure that the land was worth at least P75,000 more
than what it cost the company.
Instructions
Determine the proper balances as of 12/31/2019 for a separate land account and a separate building
account. Use separate T-accounts (one for land and one for building) labeling all the relevant amounts and
disclosing all computations.
UL COA
ACC412/415: AUDIT OF PPE

Cost of

dilapidated building = 100,000 + (1,000* P170) = 270,000

BUILDING

Legal fees – construction of building P1,500

   
150,00
Partial payment
0  
150,00
Final payment
0  
Fire insurance during construction (5,400*
450
3/36)  

Plant superintendent’s salary 10,000

   
Building, P311,9
12/31/2019 50