PROPERTY, PLANT AND EQUIPMENT SAMPLE PROBLEMS

Problems are based on the book Auditing - by Espenilla and Macariolla.

PROBLEM 1.
ABC Corporation incurred the following expenditures in 2020:
1 Purchase of land 15,600,000
2 Land survey 208,000
3 Fees for search of title for land 24,000
4 Building construction permit fee 140,000
5 Temporary quarters for construction workers 430,000
6 Payments to tenants of the old building 184,000
7 Cost to raze the old building 940,000
8 Excavation of the land 400,000
9 Special assessment of the government for road projects 80,000
10 Dividends that should have been earned had the money used for 200,000 Ignore
construction been invested in the equity instruments
11 Damages awarded for injuries sustained in construction where no 336,000 Expense
insurance is carried
12 Cost of construction 78,000,000
13 Cost of paving parking lot, driveway and sidewalks 1,600,000
14 Profit on construction, as the difference between the appraised value of the 1,900,000 Ignore
asset after construction and actual cost incurred
15 List price of Machinery and equipment purchased 4,567,000
16 Trade discount taken on the machinery and equipment purchased 127,000
17 Cost of freight and handling 50,000
18 Cost of testing the equipment 125,000

Additional information:
A A portion of the building site had been temporarily used by ABC Corporation to operate a Income
car park while the building was being constructed. A total of P650,000 was earned by ABC
Corporation from his incidental activity.
B Proceeds from sale of produce from the testing done on the machinery and equipment
amounted to P65,000.

Questions:
1 What is the correct cost of the land?
2 What is the correct cost of the land improvements, if there are any?
3 What is the cost of the building?
4 What is the cost of the machinery and equipment?

PROBLEM 2.
DEF Company, was organized in early July of 2020. In your audit of the company's books, you
find the following land, building and equipment account:

Land, Building and Equipment Account

July 2 Organization fees 120,000
July 2 Land site and old building 1,890,000
July 3 Option payments 250,000
July 20 Broker's fees on property acquired 110,400
July 30 Cost of remodelling the building 60,000
Aug. 29 Salaries of executives 360,000
Sept. 1 Stock bonus to corporate promoters 12,000 shares, P25 market 300,000
value per share
 Stock bonus to corporate promoters 12,000 shares, P25 market
value per share
Dec. 15 Real property taxes 240,000

Audit Notes:
a The building acquired on July 1, 2020, had a fair value of P450,000 while the land was
currently appraised at P1,800,000.
b P50,000 of the option money paid where for properties not acquired.
c The executives had no participation on the remodelling of the building.
d The property taxes were for the 2020 calendar year.

Questions:
1 How much is the correct balance of the Land account as of December 31, 2020?
2 How much is the correct balance of the Building account as of December 31, 2020?
3 The net income for 2020 should be adjusted by?

PROBLEM 3.

GHI Corporation borrowed P1,000,000 from JKL Company specifically to finance the
construction of its building. The proceeds from the borrowing was received on January 1, 2020
and were supported by a 5-year, 12% note payable. The construction commenced on July 1,
2020 and was substantially completed by November 30, 2020. The unused proceeds from the
loan were reinvested on a monthly basis all throughout the year to earn 5% annual interest.
The following were used from the proceeds of the loan (assume at the beginning of each
months).

July 100,000
August 150,000
September 300,000
October 200,000
November 150,000

Questions:
1 How much is the capitalizable borrowing cost?
2 What is the total interest expense to be recognized for 2020?

PROBLEM 4.
MNO Company started its operations at the beginning of 2020. In your audit of MNO
Corporations' financial statements, the following PPE schedule was presented to you by its
accountant.
Land 10,000,000
Building 6,500,000
Equipment 6,000,000
Furniture and Fixtures 3,500,000

Audit Notes:
a
The Company acquired the land at the beginning of the year at a total purchase price of
P10,000,000. The term of the acquisition calls for a 20% downpayment and the issuance
of a 5-year non-interest bearing note for the balance. The note is payable equally at the
end of each year starting December 31, 2020. The prevailing market rate of interest on this
date was at 10%.
 The Company acquired the land at the beginning of the year at a total purchase price of
P10,000,000. The term of the acquisition calls for a 20% downpayment and the issuance
of a 5-year non-interest bearing note for the balance. The note is payable equally at the
end of each year starting December 31, 2020. The prevailing market rate of interest on this
date was at 10%.

b
The building was constructed by PQR Constructions which cost the said construction
company a total of P6.5M. The construction started even before the commencement of
operations in 2020 and was completed in time for the Company's inception of operation at
the beginning of 2020. The agreement with the said construction company calls for the
issuance of 100,000 of MNO's own shares in exchange for the constructed building. The
prevailing fair value of the shares on this date was P70 per share.

c Three equipment were acquired during the year by the Company in separate occasion as
follows:
- Equipment A was acquired on account at the beginning of January at P2,000,000
payable three months from date of purchase. A 10% discount on the price shall be
provided if payment was made within January. Due to unavailability of cash, the Company
paid the amount due at the end of March.

- Equipment B was acquired on July 1 at a purchase price of P4,000,000. The Company

incurred duties and non-refundable taxes amounting to P250,000 which it had charged to
operations. Additional installation costs were incurred at P50,000 which were also charged
to operations. The Company expects to incur dismantling cost on the asset upon
retirement at P161,051. The prevailing rate of interests on this date was 10%.

- Equipment C, which was not recorded in the Company's books, was received from one of
its major stockholders on September 1. The equipment had a prevailing fair value on the
same date at P1,200,000. The Company incurred legal fees in processing the donation at
P100,000 which was charged to operating expense.

d Various furniture and fixtures were acquired at the beginning of the year from a single
supplier with the following terms of payments:
Cash 1,000,000
3-year non-interest bearing note 2,000,000
10,000 shares at par P50 500,000

It was ascertained that the total cash price of the various furniture and fixtures was at
P3,200,000.

e Depreciation on the assets are yet to be made by year-end. You have ascertained that the
following depreciation policies shall be appropriate in the circumstance:
Depreciation Method Useful Life
Building 150% Declining Balance 15 years
Equipment SYD 5 years
Furniture & Fixtures Straight-line 10 years

The salvage value of the asset was estimated at 10% of its initial cost.

Question:
1 Determine the 2020 depreciation expense and correct carrying values of the following
assets as of December 31, 2020:
Depreciation Expense Carrying Value
Land
 Building
Equipment A
Equipment B
Equipment C
Furniture & Fixtures

PROBLEM 5.
On December 31, 2018, STU Company subjected to impairment test a building which was the
Company's factory site. Because of the expected decline in the demand for the Company's
product, the Company deemed it necessary to test the said building for possible impairment
loss. Data pertinent to the building on this date were as follows:

Original cost 24,000,000

Accumulated depreciation as at January 1, 2018 6,000,000
Selling price 14,000,000
Estimated cost to make the sale 500,000
Value in use 14,000,000
Remaining useful life as at January 1, 2018 9 years
Method of depreciation Straight-line

On December 31, 2020, the Company decided to convert the building for rentals. As a result,
the asset is now found to have a recoverable amount of P15,000,000.

Questions:
1 How much is the loss on impairment recognized in 2018?
2 How much is the depreciation expense recognized in 2019?
3 How much is the gain on recovery recognized in the 2020 income statement?
4 How much is the depreciation expense recognized in 2021 under the cost model of valuing
the property?
5 How much is the depreciation expense recognized in 2021 under the fair market value
model of valuing the property?
PROBLEM 1 Solution.

#1 #2 #3 #4
Land Land Improvement Building Machinery and Equipment
15,600,000 1,600,000 140,000 4,567,000
208,000 430,000 (127,000)
24,000 184,000 50,000
80,000 940,000 125,000
400,000 (65,000)
78,000,000
15,912,000 1,600,000 80,094,000 4,550,000

PROBLEM 2 Solution.

#1 #2 #3
Land Building NI Adjustment
1,856,320 464,080 (120,000)
60,000 (50,000)
(360,000)
(300,000)
(120,000)

1,856,320 524,080 (950,000)

 Total cost allocable to Land and Building: 1,890,000
200,000
110,400
120,000
Total 2,320,400

PROBLEM 3 Solution.

Given:
Face Value of Loan 1,000,000
NIR = EIR 12%
Cumulative amount used:
July 100,000
August 250,000
September 550,000
October 750,000
November 900,000
Interest on temporary investments 5%

Calculation:
Actual borrowing cost from July 1 - November 30 50,000
Income from temporary investments:
July 3,750
August 3,125
September 1,875
October 1,042
November 417 (10,208)
Net capitalizable borrowing cost 39,792

Interest expense - 2020 80,208

PROBLEM 4 Solution.

LAND
Downpayment 2,000,000
PV of future cash payments
 Annual Payments 1,600,000
PV Rate 3.790786770 6,065,259
Initial Cost 8,065,259

BUILDING
Cost 7,000,000
Depreciation Method 150% Declining Balance
Total Estimated Useful Life 15 years

2020 Depreciation Expense: 700,000

Carrying Value - 12/31/2020: 6,300,000

EQUIPMENT A
Cost 1,800,000
Depreciation Method SYD
Total Estimated Useful Life 5 years

2020 Depreciation Expense: 540,000

Carrying Value - 12/31/2020: 1,260,000

EQUIPMENT B
Cost 4,000,000
250,000
50,000
0.62092132305 100,000
4,400,000

Depreciation Method SYD

Total Estimated Useful Life 5 years

2020 Depreciation Expense: 660,000

Carrying Value - 12/31/2020: 3,740,000

EQUIPMENT C
Cost 1,200,000

Depreciation Method SYD

Total Estimated Useful Life 5 years

2020 Depreciation Expense: 120,000

Carrying Value - 12/31/2020: 1,080,000

FURNITURE AND FIXTURES

Cost 3,200,000

Depreciation Method Straight-line

Total Estimated Useful Life 10 years

2020 Depreciation Expense: 288,000

Carrying Value - 12/31/2020: 2,912,000
PROBLEM 5 Solution.

Dep'n Expense 2018 2019 2020

Original Cost 2,000,000 2,000,000 2,000,000
Impaired Cost 1,750,000 1,750,000
#2

Carrying Value 12/31/2018 12/31/2019 12/31/2020

Original Cost 16,000,000 14,000,000 12,000,000
Impaired Cost 12,250,000 10,500,000

Impairment Test 12/31/2018 12/31/2020

Carrying Value 16,000,000 10,500,000
Value in Use 14,000,000
FV - CTS 13,500,000 15,000,000

Impairment Loss 2,000,000 #1

Gain on recovery 1,500,000
#1

#2
 2021
2,000,000 #4

#3