CPA REVIEW SCHOOL OF THE PHILIPPINES AP 9303-1

Manila
AUDITING PROBLEMS CPA Review

AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

(Part 1 of 2)

PROBLEM NO. 1

MARISOL COMPANY is a major supplier of computer parts and accessories. To improve delivery
services to customers, the company acquired four new trucks on July 1, 2023. Described below
are the terms of acquisition for each truck.

Truck List Price Terms

No. 1 P600,000 Acquired for a cash payment of P556,000.
No. 2 P800,000 Acquired for a down payment of P80,000 cash and a 1-year, non-
interest-bearing note with a face amount of P720,000. There was no
established cash price for the equipment. The prevailing interest rate
for this type of note is 10%.
No. 3 P640,000 Acquired in exchange for a computer package that the company carries
in inventory. The computer package cost P480,000 and is normally
sold by Marisol Company for P608,000.
No. 4 P560,000 Acquired by issuing 40,000 of Marisol’s ordinary shares. The shares
have a par value per share of P10 and a market value per share of P13.

What is the total cost of the trucks purchased on July 1, 2023?

A. P2,418,545 C. P2,484,000
B. P2,458,545 D. P2,524,000

PROBLEM NO. 2

MARITESS COMPANY has constructed a production equipment needed for the company’s
expansion program. Maritess received a P1,500,000 bid from a reputable manufacturer for the
construction of the equipment.

The costs of direct material and direct labor incurred to construct the equipment were P960,000
and P600,000, respectively. It is estimated that incremental overhead costs for construction
amount to 140% of direct labor costs.

Fixed costs (excluding interest) of P2,100,000 were incurred during the construction period. This
amount was allocated to construction on the basis of total prime costs—the sum of direct labor
and direct material. The prime costs incurred to construct the new equipment amounted to 35%
of the total prime costs incurred for the period. The company’s policy is to capitalize all possible
costs on self-construction projects.

To assist in financing the construction of the production equipment, Maritess borrowed P1.5
million at the beginning of the 6-month construction period. The loan was for 2 years with interest
at 10%.

What is the total cost of the self-constructed equipment?

A. P3,210,000 C. P3,021,000
B. P2,610,000 D. P3,285,000

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CPAR - MANILA AP 9303-1 – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

PROBLEM NO. 3

The following are PPE acquisitions for selected companies:

1. PILANTRO COMPANY acquired land, buildings, and equipment from a financially distressed
company, Bankrupt Corp., for a lump sum price of P2,800,000. On the acquisition date,
Bankrupt’s assets had the following book and fair values:
Book Values Fair Values
Land P 800,000 P 600,000
Buildings 1,000,000 1,400,000
Equipment 1,200,000 1,200,000

Pilantro decided to take a conservative position by recording the lower of the two values for
each PPE item acquired. The following entry was made:
Land 600,000
Buildings 1,000,000
Equipment 1,200,000
Cash 2,800,000

2. TILAOK, INC. purchased factory equipment by making a P200,000 cash down payment and
signing a 3-year P300,000, 10% note payable. The acquisition was recorded as follows:
Factory equipment 530,000
Cash 200,000
Note payable 300,000
Interest payable 30,000

3. TONYO CO. purchased store equipment for P800,000, terms 2/10, n/30. The company took
the discount and made the following entry when it paid for the acquisition:
Store equipment 800,000
Cash 784,000
Purchase discount 16,000

4. PLUTO CORP. constructed a building at a total cost of P43,000,000. The building could have
been purchased for P45,000,000. The company’s controller made the following entry:
Building 45,000,000
Cash 43,000,000
Profit on construction 2,000,000

Prepare the necessary correcting entry for each acquisition.

PROBLEM NO. 4

The following information relates to PIANONO COMPANY.

a) On July 1, Pianono purchased the plant assets of Yokona Co., which had discontinued
operations. The following are the fair values of the plant assets acquired:
Land P10,500,000
Building 31,500,000
Machinery and equipment 21,000,000
Total P63,000,000
Pianono issued 550,000 shares of its P100 par value ordinary share capital in exchange for
the above plant assets. On the acquisition date, the stock had a fair value of P160 per share.

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CPAR - MANILA AP 9303-1 – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

b) Pianono expended the following amounts in cash between July 1 and December 20, the date
when the company first occupied the building:

Special assessment by city on land P 540,000

Repairs to building 3,150,000
Construction of bases for machinery and
equipment acquired 4,050,000
Driveways and parking lots 3,660,000
Remodelling of office space in building,
including new partitions and walls 4,830,000

c) On December 23, Pianono paid cash for machinery, P7,800,000, subject to a 2% cash
discount, and freight on machinery of P315,000.

Based on the preceding information, calculate the cost of each of the following PPE items:

1. Land
A. P10,540,000 C. P14,200,000
B. P14,700,000 D. P11,040,000

2. Buildings
A. P39,480,000 C. P31,500,000
B. P37,980,000 D. P30,000,000

3. Machinery and equipment

A. P32,009,000 C. P33,009,000
B. P28,959,000 D. P21,000,000

4. Land improvements
A. P4,200,000 C. P540,000
B. P3,660,000 D. P 0

5. The entry to record the purchase of Yokona’s plant assets should include a
A. Debit to Land of P22,666,667
B. Credit to Share Premium of P8,000,000
C. Credit to Ordinary Share Capital of P63,000,000
D. Debit to Machinery and Equipment of P29,333,333

PROBLEM NO. 5

PIDOL COMPANY uses a large number of machines designed to produce garments. These
machines are generally depreciated at 10% per annum on a straight-line basis. In general,
machines are estimated to have a residual value on disposal of 10% of cost. At January 1, 2023,
Pidol had a total of 73 machines, and its statement of financial position showed a total cost of
P1,260,000 and accumulated depreciation of P390,000.

During 2023, the following transactions occurred:

• On March 1, 2023, a new machine was acquired for P45,000. This machine replaced two
other machines. One of the two replaced machines was acquired on January 1, 2020, for
P24,600. It was traded in on the new machine with Pidol making a cash payment of
P26,400 on the new machine. The second replaced machine had cost P27,000 on October
1, 2020, and was sold for P21,900.

• On July 1, 2023, a machine that had cost P12,000 on January 1, 2014, was retired from
use and sold for scrap for P1,500.

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CPAR - MANILA AP 9303-1 – AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

• On July 1, 2023, a machine that had been acquired on July 1, 2020, for P21,000 was
repaired because its motor had been damaged from overheating. The motor was replaced
at a cost of P14,400. It was expected that this would extend the life of the machine by
an extra two years.

• On October 1, 2023, Pidol fitted a new form of arm to a machine used for putting special
designs onto garments. The arm cost P3,600. The machine had been acquired on
October 1, 2020, for P30,000. The arm can be used on a number of other machines when
acquired and has a 15-year life. It will not be sold when any particular machine is retired,
but retained for use on other machines.

1. What amount of gain (loss) should be recognized on the sale of the second replaced machine
on March 1, 2023?

2. What amount of gain (loss) should be recognized on the machine sold for scrap on July 1,
2023?

3. What amount of depreciation should be provided in 2023 on the machine whose motor was
replaced on July 1, 2023?

4. What amount of depreciation should be provided in 2023 on the machine arm installed on
October 1, 2023?

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