Q06a-audit-of-non-cash-assets

QUIZ Audit of Non-cash Assets DR. FILEMON C. AGUILAR MEMORIAL COLLEGE OF LAS PINAS Applied Auditing The next item(s) is/are based on the following McDODO, INC. incurred the following costs during the year ended December 31, 2015, in relation to property, plant, and equipment: Land and old building (Note 1) P 4,800,000 Realtor commission 600,000 Legal fees, realty taxes and documentation expenses 100,000 Amount paid to relocate persons squatting on the property 200,000 Cost of removal of old building (Note 2) 300,000 Grading and drainage on land site 300,000 Cost of new building (Note 3) 10,000,000 Building permit fee 100,000 Excavation 100,000 Cost of paving driveway and parking lot 80,000 Cost of trees, shrubs, and other landscaping 110,000 Cost of installing lights in parking lot 10,000 Architect fee 400,000 Payment of medical bills of employees accidentally injured while inspecting building construction 20,000 Insurance on new building (Note 4) 120,000 Interest expense on new building (Note 5) 83,333 Cost of fencing the property 220,000 Invoice cost of machine acquired 4,000,000 Freight, unloading, and delivery charges 120,000 Custom duties and other charges 280,000 Allowances and hotel accommodation paid to foreign technicians during installation and test run of machine 800,000 Estimated dismantling cost to be incurred as required by contract 60,000 Cost of adjustment to machine to make it operate more efficiently 150,000 Fee paid to consultants for advice on the acquisition of the machine 50,000 Cost of training for personnel who will use the machine 50,000 Cost of open house party to celebrate opening of building 150,000 Audit Notes: 1

To acquire the property, McDODO, Inc. paid P3,800,000 cash and issued 10,000 preference shares with par value of P100. On the acquisition date, the share had a closing market price of P120 on a stock exchange. Current appraised values for the land and the usable building are P4,500,000 and Pl,500,000, respectively.

2

The company negotiated a price of P400,000 to tear down the old building to make room for construction of new building. The contractor retains all salvageable materials estimated to be worth P100,000.

3

This represents the contract price for the new building which was placed into service on December 1, 2015.

4

A one-year insurance was taken out on the building and its contents at P120,000 effective December 1, 2015.

5

A loan was obtained when the new building was placed into service to cover the contract price. Interest was calculated based on P10,000,000 at the effective 10% interest rate for 1 month, or P83,333.

1. What is the cost of land? 2. What is the cost of building? 3. What is the cost of land improvement? 4. What is the cost of machine? 5. How much of the above expenditures should be charged to expenses for the year ended December 31, 2015? The next item(s) is/are based on the following JARAN CO. started operations on September 1, 2010. Jaran's accounts at December 31, 2013 included the following balances: Machinery (at cost) P 910,000 Accumulated depreciation - machinery 482,000 Vehicles (at cost; purchased November 21, 2012) 468,000 Accumulated depreciation - vehicles 196,560 1|Page

Land (at cost; purchased October 25, 2010) Building (at cost; purchased October 25, 2010) Accumulated depreciation - building

810,000 1,857,200 286,140

Details of machines owned at December 312013 are as follows: Machine Purchase Date Cost Useful Life 1 2

October 7,2010 February 4,2011

P430,000 P480,000

5 years 6 years

Residual Value P25,000 P30,000

Additional information: • Jaran calculates depreciation to the nearest month and balances the records at month-end. Recorded amounts are rounded to the nearest peso, and the reporting date is December 31. • Jaran uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated on the diminishing balance at 40% per annum. • The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which cost P234,000. • On acquiring the land and building, Jaran estimated the building's useful life and residual value at 20 years and P50,000, respectively. The following transactions occurred from January 1, 2014: 2014 Jan. 03 Bought a new machine (machine 3) for a cash price of P570,000. Freight charges of P4,420 and installation costs of P17,580 were paid in cash. The useful life and residual value were estimated at five years and P40,000, respectively. June 22

Bought a second-hand vehicle for P152,000 cash. Repainting costs of P6,550 and four new tires costing P3,450 were paid for in cash.

Aug. 28

Exchanged machine 1 for office furniture that had a fair value of P125,000 at the date of exchange. The fair value of machine 1 at the date of exchange was P115,000. The office furniture originally cost P360,000 and, to the date of exchange, had been depreciated by P241,000 in the previous owner's books. Jaran estimated the office furniture's useful life and residual value at eight years and P5,400, respectively.

Dec. 31

Recorded depreciation.

2015 April 30

Paid for repairs and maintenance on the machinery at a cash cost of P9,280.

May 25

Sold one of the vehicles bought on November 21, 2012 for P66,000 cash.

June 26

Installed a fence around the property at a cash cost of P55,000. The fence has an estimated useful life of 10 years and zero residual value. (Debit the cost to a land improvements asset account.)

Dec. 31

Recorded depreciation.

2016 Jan. 05

Overhauled machine 2 at a cash cost of P120,000, after which Jaran estimated its remaining useful life at one additional year and revised its residual value to P50,000.

June 20

Traded in the remaining vehicle bought on November 21, 2012 for a new vehicle. A trade-in allowance of P37,000 was received and P233,000 was paid in cash.

Oct. 04

Scrapped the vehicle bought on June 22, 2014, as it had been so badly damaged in a traffic accident that it was not worthwhile repairing it.

Dec. 31

Recorded depreciation.

6. What should be the depreciation expense for the vehicles for 2014? 7. What should be the depreciation expense for the machinery for 2014? 8. What should be the balance of the Accumulated depreciation - Office furniture account at December 31, 2015? 9. What should be the depreciation expense for the machinery for 2016? 10. What should be the total depreciation expense for 2016?

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The next item(s) is/are based on the following On December 31, 2014, BAIKAL COMPANY acquired a piece of equipment from Seller Company by issuing a P1,200,000 note, payable in full on December 31, 2018. Baikal's credit rating permits it to borrow funds from its several lines of credit at 10%. The equipment is expected to have a 5-year life and a P150,000 salvage value. 11. What is the equipment's book value on December 31, 2016? The next item(s) is/are based on the following One of the cash generating units of PIPIT COMPANY is that associated with the manufacture of wine barrels. At December 31, 2015, Pipit Company believed, based on an analysis of economic indicators, that the assets of the unit were impaired. The carrying amounts of the assets and liabilities of the unit at December 31, 2015 were: Buildings Accumulated depreciation - buildings * Factory machinery Accumulated depreciation - machinery ** Goodwill Inventory Receivables Allowance for doubtful accounts Cash Accounts payable Loans * Depreciated at P600,000 per annum ** Depreciated at P450,000 per annum

P4,200,000 (1,800,000) 2,200,000 (400,000) 150,000 800,000 400,000 (50,000) 200,000 300,000 200,000

Pipit Company determined the value in use of the unit to be P5,350,000. The receivables were considered to be collectible, except those considered doubtful. The inventory's recoverable value is equal to the carrying amount. The fair value less cost of disposal of the company's buildings is P2,350,000. During the year 2016, Pipit Company increased the depreciation charge on buildings to P650,000 per annum, and to P500,000 per annum for factory machinery. The inventory on hand at January 1, 2016 was sold by the end of the year. At December 31, 2016, Pipit Company, due to a return in the market to the use of the traditional barrels for wines and an increase in wine production, assessed the recoverable amount of the cash generating unit to be P350,000 greater than the carrying amount of the unit. As a result, Pipit Company recognized a reversal of the impairment loss. 12. Assume that the recoverable amount at December 31,2016 was P200,000 greater than the carrying amount of the cash generating unit. What is the net carrying amount of the Machinery after recognition of the impairment recovery? 13. Assume that the recoverable amount at December 31, 2016 was P200,000 greater than the carrying amount of the cash generating unit and that the recoverable amount of the Buildings was Pl,800,000. What is the net carrying amount of the Factory Machinery after the recognition of the impairment recovery? THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING SAXOPHONE COMPANY acquires a new manufacturing equipment on January 1, 2014, on installment basis. The deferred payment contract provides for a down payment of P300,000 and an 8-year note for P3,104,160. The note is to be paid in 8 equal annual installment payments of P388,020, including 10% interest. The payments are to be made on December 31 of each year, beginning December 31, 2014. The equipment has a cash price equivalent of P2,370,000. Saxophone's financial year-end is December 31. 14. What is the acquisition cost of the equipment? 15. The amount of interest expense to be recognized in 2015 is THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING Information for EPSON CORPORATIONS Property, Plant and Equipment for 2017 is as follows: Account balances at January 1, 2017: Debit Credit Land P450,000 Building 3,600,000 Accumulated depreciation -P789,300 Machinery and equipment 2,700,000 Accumulated depreciation -750,000 Automotive equipment 345,000 Accumulated depreciation -253,800

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Depreciation method and useful life: Building: 150%-declining balance; 25 years Machinery and equipment: Straight-line; 10 years Automotive equipment: Sum-of-the- years- digits; 4 years Leasehold improvements: Straight-line The residual value of the depreciation assets is immaterial. It is the company's policy to compute depreciation to the nearest month. Transactions during 2017 and other information were as follows: 1 On January 2, 2017, EPSON purchased a new car for P30,000 cash and a trade-in of a 2-year old car with a cost of 27,000 and a book value of P8,100. The new car has a cash price of price of P36,000; the market value of the trade-in is not known. 2

On April 1, 2017, a machine purchased for 69,000 on April 1, 2012 was destroyed by fire. EPSON recovered P46,500 from its insurance company.

3

On May 1, 2017 costs of P504,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease, which terminates on December 31, 2023, is renewable for an additional 6-year term. The decision to renew will be made in 2023 based on office space needs at that time.

4

On July 1, 2017, machinery and equipment were purchased to a total invoice cost of P840,000; additional costs of PI 5,000 for freight and 75,00 for installation were incurred.

5

EPSON determined that the automotive equipment comprising the P345,000 balance at January 1, 2017 would have been depreciated at a total amount of P54,000 for the year ended December 31, 2017.

16. What is the depreciation expense on machinery and equipment for 2017? 17. What is the total depreciation expense for the year ended December 31, 2017? 18. What is the total accumulated depreciation balance on December 31, 2017? 19. What is the net gain or loss on asset disposals for 2017? 20. What is the total book value of EPSON Corporation's property, plant, and equipment at December 31, 2017? THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING In connection with your examination of the financial statements of the Hawks Corporation for the year 2015, the company presented to you the Property, Plant and Equipment section of its statement of financial position as of December 31, 2014 which consists of the following: Land Buildings Leasehold improvements Machinery and equipment

P 400,000 3,200,000 2,000,000 2,800,000

The following transactions occurred during 2015: • Land site number 102 was acquired for P4,000,000. Additionally, to acquire the land the entity paid a P240,000 commission to a real estate agent. Costs of P60,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for P20,000. • A second tract of land (site number 103) with a building was acquired for PI,200,000. Based on reliable information at the time of acquisition, fair value of land is P800,000 and the building P400,000. Shortly after acquisition, the building was demolished at a cost of P120,000. A new building was constructed for PI,600,000 plus the following costs: Excavation fees P 44,000 Architectural design fees 32,000 Building permit fee 4,000 The building was completed and occupied on September 1, 2015. • A third tract of land (site number 104) was acquired for P2,400,000. The entity is undecided regarding its future use. • Extensive work was done to a building occupied by the entity under a lease agreement. The total cost of the work was P500,000, which consisted of the following: Particulars Amount Useful life Painting of ceilings P 40,000 One year Electrical work 140,000 Ten years Construction of extension to current working area 320,000 Thirty years The lessor paid one-half of the costs incurred in connection with the extension to the current working area. 4|Page

• •

During December 2015, costs of P260,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2017, and is not expected to be renewed. A group of new machines was purchased under a royalty agreement which provides for payment of royalties based on units of production for the machines. The invoice price of the machines was P300,000, freight costs were P8,000, unloading charges were P6,000, and royalty payments for 2015 were P52,000.

Based on the above and the result of your audit, determine the adjusted balance of the following as of December 31, 2015 in accordance with PIC Q&A 2012-02: 21. Land 22. Buildings 23. Leasehold improvements 24. Machinery and equipment THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING You requested a depreciation schedule for Delivery Trucks of Cavaliers Corporation showing the additions, retirements, depreciation and other data affecting the income of the Company in the 4-year period 2012 to 2015, inclusive. The Delivery Trucks account consists of the following as of January 1, 2012: Truck No. 1 purchased Jan. 1, 2009, cost P 180,000 Truck No. 2 purchased July 1, 2009, cost 220,000 Truck No. 3 purchased Jan. 1, 2011, cost 300,000 Truck No. 4 purchased July 1, 2011, cost 240,000 P940,000 The Delivery Trucks-Accumulated Depreciation account previously adjusted to January 1, 2012, and duly entered to the ledger, had a balance on that date of P302,000 (depreciation on the 4 trucks from respective date of purchase, based on five-year life, no salvage value). No charges have been made against the account before January 1, 2012. Transactions between January 1, 2012 and December 31, 2015, and their record in the ledger were as follows: July 1, 2012 Truck No. 3 was traded for larger one (No. 5), the agreed purchase price of which was P340,000. Cavaliers Mfg. Co. paid the automobile dealer P150,000 cash on the transaction. The entry was debit to Delivery Trucks and a credit to cash, P150,000. Jan. 1, 2013 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Delivery Trucks, P35,000. July 1, 2014 A new truck (No. 6) was acquired for P360,000 cash and was charged at that amount to Delivery Trucks account. (Assume truck No. 2 was not retired.) July 1, 2014 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for P7,000 cash. Cavaliers Mfg. Co. received P25,000 from the insurance company. The entry made by the bookkeeper was a debit to cash, P32,000, and credits to Miscellaneous Income, P7,000 and Delivery Trucks P 25,000. Entries for depreciation had been made for the close of each year as follows: 2012, P203,000; 2013, P211,000; 2014, P244,500; 2015, P278,000. Based on the above and the result of your audit, determine the following: 25. The 2012 profit is overstated by 26. The 2013 profit is understated by 27. The 2014 profit is understated by 28. The adjusted carrying amount of Delivery Trucks as of December 31, 2015 is THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING In 2010, Washington Corporation acquired a mine. Because the mine is located deep in the mountains, Washington was able to acquire the mine for the low price of P50,000. In 2011, Washington constructed a road to the silver mine costing P5,000,000. Improvements to the mine made in 2011 cost P750,000. Because of the improvements to the mine and the surrounding land, it is estimated that the mine can be sold for P600,000 when the mining activities are complete. During 2012, five buildings were constructed near the mine site to house the mine workers and their families. The total cost of the five buildings was Pl,500,000. Estimated residual value is P250,000. In 2010, geologists estimated 4 million tons of ore could be removed from the mine for refining.

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During 2013, the first year of operations, only 5,000 tons of ore were removed from the mine. However, in 2014, workers mined 1 million tons of ore. During that same year, geologists discovered that the mine contained 3 million tons of ore in addition to the original 4 million tons. Improvements of P275,000 were made to the mine early in 2014 to facilitate the removal of the additional ore. Early in 2014, an additional building was constructed at a cost of P225,000 to house the additional workers needed to excavate the added ore. This building is not expected to have any residual value. In 2015, 2.5 million tons of ore were mined and costs of P1,100,000 were incurred at the beginning of the year for improvements to the mine. Based on the above and the result of your audit, determine the following: (Round off depletion and depreciation rates to two decimal places) 29. Depletion for 2014 30. Depreciation for 2014 31. Depletion for 2015 32. Depreciation for 2015 THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING The draft balance sheet of Sugar Corporation as of December 31, 2017 reported the net property, plant and equipment at P6,270,000. Details of the amount follow: Land at cost P1,000,000 Building at cost P4,000,000 Less accumulated depreciation at 12/31/16 (800,000) 3,200,000 Plant at cost 5,200,000 Less accumulated depreciation at 12/31/16 (3,130,000) 2,070,000 P6,270,000 The following matters are relevant: (a) The company policy for ail depreciation is that a full year's charge is made in the year of acquisition or completion and none in the year of disposal. (b) Included in the sales revenue is P300,000 being the sales proceeds of an item of plant that was sold on June 30, 2017. The plant had originally cost P900,000 and had been depreciated by P630,000 as of December 31, 2016. Other than recording the proceeds in sales and cash, no other accounting entries for the disposal of the plant have been made. Ail plant is depreciated at 25% per. annum on the reducing balance basis. (c) On September 30, 2017, the company completed the construction of a new warehouse. The construction was achieved using the company's own resources as follows: Purchased materials Direct labor Supervision Design and planning costs

P150,000 800,000 65,000 20,000

Included in the above figures are P10,000 for materials and P25,000 for labor costs that were effectively lost due to the foundations being too close to a neighboring property. All the above costs are included in cost of sales. The building was brought into immediate use upon completion and has an estimated useful life of 20 years (straight-line depreciation). (d) At the beginning of the current year, the company had an open market basis valuation of its properties (excluding the newly constructed warehouse). Land was valued at P1.2 million and the property at P4.8 million. The directors wish these values to be incorporated into the financial statements. The properties had an estimated remaining life of 20 years at the date of the valuation (straight-tine depreciation is used). The company makes a transfer to retained earnings in respect of the excess depreciation on revalued assess. (e) Depreciation for the year 2017 has not yet been accounted for the in the draft financial statements. Based on the above and the result of your audit, answer the following: 33. The carrying amount of the new warehouse as of December 31, 2017 is 34. The carrying amount of plant as of December 31, 2017 is 35. The total depreciation for the year ended December 31, 2017 is 36. The revaluation surplus as of December 31, 2017 is 6|Page

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING Marxian Company participates in a 'cap and trade' for emission rights and is allocated on January 2, 2012, free of charge, allowances of 10,000 tonnes of carbon dioxide during the calendar year 2012. The market price of an allowance (equivalent to one tone of carbon dioxide) on January 2, 2012 is P20 giving a fair value of P200,000. On June 30, 2012, the company has emitted 6,000 tonnes of carbon dioxide and expects its emissions for the full year to be 12,500 tonnes. The market price for allowances has risen to P22 per tonne. On December 31, 2012 the company has emitted 12,500 tonnes and market price of allowances is P24 per tonne. The company uses the fair value model to account for the allowances. 37. What amount deferred income should the company recognize on January 2, 2012? 38. What amount of realized income should the company recognize on June 30, 2012 based on the actual

tonnes of carbon dioxide emitted? 39. If the company uses the full market value approach, what amount of liability on emission should the

company recognize on June 30, 2012? THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING On January 2, 2011, Wink Corporation received a grant of P20,000,000 to build and run a power plant in an economically backward area. The secondary condition attached to the grant is that the entity should directly distribute the necessary needed power to the area at a rate that is much lower than the prevailing power rate in other advance areas. The power plant is to be depreciated using the straight-line method over a period of 10 years. The power plant was completed at the end of year 2011 at cost of P50,000,000 and started producing and distributing power to the backward area at rate which is at par that the prevailing rates in other advance areas. On July 1, 2013, the government demanded from Wink Company the repayment of the grant due to the nonfulfillment of the conditions. 40. What is the carrying value of the power plant as of July 1, 2013, assuming at the time of initial

recognition the grant received was recognized as a reduction of the related asset?

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