ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 44  October 2022 CPA Licensure Examination

FARAP-4404
FINANCIAL ACCOUNTING AND REPORTING / AUDITING PRACTICE
S. IRENEO  C. UBERITA  G. MACARIOLA  C. ESPENILLA  J. BINALUYO

PROPERTY, PLANT & EQUIPMENT

Property, Plant and Equipment (PPE) – (PAS 16) are tangible assets that are;
a) Are held for use in the production or supply of goods and services, for rental to others, or for
administrative purposes; and
b) Are expected to be used during more than one accounting period.

Measurement at Initial Recognition - At Cost, the components of which are:

a) Purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates.
b) Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable
of operating in the manner intended by management; and
c) The initial estimate of the costs of dismantling and removing the item and restoring the site on which it
is located.

Purchase Price of PPE Depending on the Mode of Acquisition

a) Cash Purchase – purchase price is the amount of cash that is paid
b) Purchase on Account with Available Cash Discount – purchase price is the invoice price less cash discount
whether taken or not
c) Purchase under Deferred Payment Plan – purchase price is the cash equivalent prince
d) Acquisition by Issuance of Equity Securities – purchase price is the fair value of the PPE acquired
e) Acquisition by Donation – PPE is valued at their fair values
f) Acquisition through Non-Monetary Exchange – PPE is valued at follows:
1. Transaction with Commercial Substance:
Fair Value of the old asset Pxxx
Cash Paid xxx or
Cash Received (xxx)
Valuation of New Asset Pxxx

2. Transaction Lacking of Commercial Substance:

Carrying Value of the old asset Pxxx
Cash Paid xxx or
Cash Received (xxx)
Pxxx
Examples of Directly Attributable Costs
a. Costs of site preparation
b. Initial delivery and handling costs
c. Installation and assembly costs
d. Costs of testing whether the asset is functioning net of proceeds from the sale of any produce while
bringing the asset to the location and condition for it to function as intended

Subsequent Costs of Property Plant and Equipment-examples are replacements of parts, inspection
costs, repairs and maintenance costs. These subsequent costs are capitalized when the asset recognition
criteria are met, and the cost of the replaced part are derecognized. Below are indicators that the subsequent
costs are to be capitalized:
• An extension in asset’s estimated life;
• An increase in output capacity;
• A substantial improvement in product quality or service potential, and
• Significant reduction in previously assessed operating costs

Depreciation – is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciation Method Computation of Annual Depreciation
Straight Line (Cost – Salvage Value)/Total Economic Life in Years
Sum-of-the-Years’ Digits (Cost – Salvage Value) x Estimated Useful Life, Beg of Year
(n) (n = 1)
2
Double-Declining Balance (Cost – Accumulated Depreciation, Beg) x 2/Total Life in Years
150% Declining-Balance (Cost – Accumulated Depreciation, Beg) x 1.5/Total Life in Years

Valuation at Reporting Date – a choice of either the Cost Model or the Revaluation Model:
Cost Model- the class of PPE shall be carried at cost less accumulated depreciation any accumulated
impairment loss
Revaluation Model- the class of PPE shall be carried at revalued amount less any subsequent accumulated
depreciation and subsequent accumulated impairment losses

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PROPERTY, PLANT AND EQUIPMENT
FARAP-4404
Gain or Loss on Derecognition
This is the difference between the net disposal proceeds and the carrying amount of the asset at date of
disposal.
FINANCIAL ACCOUNTING AND REPORTING - THEORIES
1. Which among the following is not to be classified as Property, plant and equipment?
a. Property not subject to depreciation or depletion, such as land used for plant site
b. Property subject to depreciation, such as building used for administrative purposes
c. Property subject to amortization, such as franchise acquired to obtain rights
d. Property subject to depletion, such as timber, oil and mining lands

2. Which is not chargeable to LAND?

a. Attorney’s fee and any other expenditure for establishing clean title
b. Broker’s commission and fees for the title transfer
c. Cost of survey by engineers
d. Expenditure for fence, water system, sidewalk and pavement
3. The following charges are capitalizable to land account, EXCEPT
a. Payments to tenants to induce them to vacate the premises to pave the way for the
construction of a new building
b. Buyer-assumed mortgages and encumbrances like property taxes
c. Special assessments for local improvement which benefit the property
d. Costs of clearing, grading and filling

4. Donation of property, plant and equipment made by a shareholder should be recorded at fair value and a
corresponding credit
a. Income account taken to profit or loss
b. Unearned income from government grant
c. Donated capital taken to equity
d. Retained earnings unappropriated

5. For assets acquired on credit or by installment, the cost or fair value is equal to
a. Cash purchase price c. Installment price
b. Invoice price d. List price

6. The depreciation method used where the usage of the asset varies considerably from period to period and
the service life is more a function of use than passage of time
a. Straight-line method c. Sum of years’ digits method
b. Units of production method d. Declining balance method

7. A depreciation method that provides higher depreciation expense during the early years of the asset life
a. Sum of years’ digits method c. Service hours method
b. Straight-line method d. Units of production method

8. If there is a change from sum of years’ digits to straight line method

a. The accumulated depreciation is adjusted to its appropriate balance through retained
earnings based on the straight-line method
b. The accumulated depreciation is adjusted to its appropriate balance through net income
based on the straight-line method
c. The accumulated depreciation balance is not adjusted but the remaining book value is
allocated over the remaining life using the straight-line method
d. The accumulated depreciation balance is not adjusted but the remaining book value is
allocated over the original life using the straight-line method

9. Statement I: Borrowing costs incurred in acquiring, producing or constructing a qualifying asset are
capitalized as part of the qualifying asset
Statement II: A qualifying asset is an asset that necessarily takes substantial period of time to get ready
for its intended USE or SALE.
a. True, true c. False, true
b. True, false d. False, false

10. Under PAS 16, the useful life of an item of PPE should be reviewed periodically and if estimates are materially
different from previous estimates, the depreciation charges should be adjusted for the
a. Prior periods only c. Future periods only
b. Current period only d. Current and, if affected, future periods

11. If the qualifying asset is financed by GENERAL borrowings, the capitalizable borrowing cost is equal to
a. Actual borrowing costs incurred
b. Total expenditures on the asset multiplied by a capitalization rate
c. (Average expenditures on the asset multiplied by a capitalization rate or actual borrowing
costs), whichever is higher
d. (Average expenditures on the asset multiplied by a capitalization rate or actual borrowing
costs), whichever is lower

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PROPERTY, PLANT AND EQUIPMENT
FARAP-4404
12. If the non-monetary exchange transaction lacks commercial substance or the fair value of neither the asset
received nor the asset given up is not reliably measurable, its cost is measured at
a. Net realizable value c. Fair value
b. Carrying amount of the asset given up d. Future value

FINANCIAL ACCOUNTING AND REPORTING - PROBLEMS

Problem 1: On January 1, 2022, Hydrogen Company purchased several machineries that will be used in the
production of goods at a purchase price of P1,000,000. Hydrogen Company paid import duties of P10,000 and
non-refundable purchase taxes of P5,000. Hydrogen Company also incurred a P30,000 installation and assembly
cost. Hydrogen Company expects that it will incur dismantling cost amounting to P132,275 at the end of its 5-
year useful life. The prevailing market interest rate during the transaction date was 12%.

The present value factor of P1 at 12% for 5 periods is at 0.567

The present value factor of ordinary annuity at 12% for 5 periods is at 3.6048

1. How much should the Machineries be initially recognized?

a. 1,045,000 b. 1,177,275 c. 1,120,000 d. 1,521,825

Problem 2: On March 1, 2022, Helium Company purchased an equipment from a local dealer under the terms of
3/15, n/30 for P3,000,000. Helium Company paid installation costs of P14,000. In addition, Helium Company paid
advertising and promotional expense amounting to P 20,000 and incurred initial operating losses of P 12,000.
Helium Company paid the account on March 16, 2022.

2. How much is the cost of Equipment to be recorded at the date of acquisition?

a. 2,924,000 b. 3,015,000 c. 2,925,000 d. 3,014,000

Problem 3: Lithium Corporation purchased a new Machine on November 1, 2022. A P2,000 down payment was
made and two annual installments of P4,000 each are to be made beginning November 1, 2023. The machine has
no cash price equivalent but the prevailing interest rate for this type of note is 10%. The present value of P1 at
10% for 2 periods is 0.8264 while the present value of ordinary annuity at 10% for 2 periods is 1.7355.

3. The amount to be capitalized as cost of the Machine on November 1, 2022 would be

a. 10,000 c. 6,942
b. 8,942 d. 8,000

Problem 4: Bery Company acquired Land from Abe Company which will be used as a plant site in exchange for
20,000 newly issued shares of Bery’s ordinary shares. At the date of acquisition, the Bery’s ordinary shares had
a par value of P20 per share and a fair value of P30 per share. The fair value of the Land was P 500,000 when
abe Company acquired this 2 years ago.

4. How much is the initial cost of the newly acquired Land?

a. 400,000 b. 500,000 c. 600,000 d. 200,000

Problem 5: Below are the data relative to Boron’s asset that was exchanged for a new asset:

Old Equipment
Book Value Fair Value Cash Paid
With Commercial Substance 75,000 85,000 15,000
Lacking Commercial Substance 50,000 75,000 7,000

5. In the transaction that has commercial substance, Boron will record

Equipment at: Gain or (loss) of:
a. 90,000 0
b. 100,000 10,000
c. 75,000 (5,000)
d. 90,000 10,000
6. In the transaction that lacks commercial substance, Boron will record
Equipment at: Gain or (loss) of:
a. 57,000 0
b. 75,000 25,000
c. 82,000 25,000
d. 50,000 0

Problem 6: The Carbon Company self-constructed an asset for its own use. Construction started on January 1,
2022 and the asset was completed on December 31, 2022. The company had a two-year, 18% loan of P500,000,
specifically obtained to finance the asset construction. Funds not yet utilized during the construction were
temporarily invested in a short-term debt security that earned a P10,000 interest revenue for the year.
Costs incurred during the year were as follows:
January 1 – P400,000; April 1 – P500,000; August 1 – P480,000; December 1 – P180,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PROPERTY, PLANT AND EQUIPMENT
FARAP-4404
7. What is the capitalized interest added to the cost of the self-constructed asset?
a. 90,000 b. 80,000 c. 180,000 d. 170,000

8. How much is the total cost of the self-constructed asset on December 31, 2022?
a. 1,650,000 b. 1,560,000 c. 1,640,000 d. 1,070,000

Problem 7: Nitrogen Company self-constructed an asset for its own use. Construction started on January 1,2022
and the asset was completed on December 31, 2022. Nitrogen Company had a two-year, 18% loan of P500,000,
specifically obtained to finance the construction of the asset. Funds not yet utilized during the construction were
temporarily invested in a short-term debt security earning a P10,000 interest revenue for the year. The company
also had a 5-yaer, 20% general borrowing amounting to P600,000 and a 10-year, 18% P1,000,000, loan.

Costs incurred during the year were as follows:

January 1 – P400,000; April 1 – P500,000; August 1 – P480,000; December 1 – P180,000

9. How much is the total capitalized interest?

a. 155,000 c. 80,000
b. 165,000 d. 91,875

10. How much interest that should be taken to profit or loss?

a. 0 c. 300,000
b. 208,125 d. 135,000

Problem 8: Oxygen Company constructed its own factory building. The company had a P1,000,000, two-year
12% loan specifically obtained to finance the asset construction. The construction began on January 1, 2019 and
the building was completed on October 31, 2020. Expenditures on the building were made as follows:
January 1, 2019 800,000 March 1,2020 600,000
April 30, 2019 300,000 September 30,2020 400,000
November 1, 2019 600,000

Oxygen Company has the following outstanding loans:

General borrowings:

10% note issued prior to construction of new building; term, 10 years 3,000,000

15% note issued prior to construction of new building; term, 15 years 2,000,000
11. How much is the capitalized interest in 2020?
a. 235,200 c. 243,200
b. 282,240 d. 291,840

12. How much is the initial cost of the Building?

a.3,067,200 c. 3,075,200
b.3,114,240 d. 3,123,840

Problem 9: On April 1, 2021, Fluorine Company acquired an equipment worth P2,500,000 for its operations. The
equipment has an estimated useful life of 10 years with P300,000 residual value. It’s the company’s policy to
depreciate all equipment using the SYD method.

13. How much is the depreciation expense for the year 2022?
a. 300,000 c. 360,000
b. 370,000 d. 420,455
14. How much is the accumulated depreciation on December 31, 2022 assuming the method is double
declining balance method?
a. 875,000 c. 770,000
b. 800,000 d. 704,000

Problem 10: On January 1, 2019, Neon Company acquired an equipment worth P2,050,000 for its operations.
The equipment has an estimated useful life of 8 years and an estimated salvage value of P50,000. It’s the
company’s policy to depreciate all equipment using the straight-line basis. On January 1, 2021, Neon Company
revised the total useful life of the equipment to be 5 years from the date of acquisition.

15. What amount of depreciation expense should the company recognize in 2022?
a. 500,000 c. 310,000
b. 300,000 d. 516,667

Problem 11: On June 1, 2020, Sodium Mining Company purchased a mineral mine for P2,000,000 with removal
ore estimates at 1,000,000 tons. Sodium expects to extract 10,000 tons per month. The property has an
estimated value of P200,000 after the ore has been extracted. Sodium Mining Company incurred P500,000 of
development costs in preparing the property for ore extraction.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PROPERTY, PLANT AND EQUIPMENT
FARAP-4404

Sodium Mining Company also purchased a new equipment on the same date costing P1,500,000 with a useful life
of 8 years. However, after all the resources are removed, the equipment will be of no use and will be sold for
P150,000. During 2020, 60,000 tons were extracted. The company is using the straight-line method.

16. What is the amount of the 2020 depletion?

a. 150,000 c. 161,000
b. 108,000 d. 138,000

17. What is the amount of the 2020 depreciation expense?

a. 81,000 c. 98,438
b. 168,750 d. 84,375

Problem 12: On January 1, 2016, Magnesium Company purchased a machinery for P600,000, with an estimated
economic useful life of 12 years. Straight line method of depreciation was used. On December 31, 2019, it was
properly determined that the estimated fair value less cost of disposal was P235,000 while the value in use was
P240,000. On January 1, 2022, the recoverable amount of the asset was P250,000.

18. How much is the impairment loss on December 31, 2019?

a. 0 c. 165,000
b. 110,000 d. 160,000

19. How much is the maximum recoverable amount/limit on recovery on January 1, 2022?
a. 120,000 c. 180,000
b. 70,000 d. 250,000

20. How much impairment recovery should be reported on January 1, 2022?

a. 50,000 c. 120,000
b. 70,000 d. 0

21. Assuming the recoverable value on January 1, 2022 to be P330,000, how much is the recovery
from impairment and revaluation surplus, respectively, on January 1, 2022 using the cost model?
a. 120,000 & 150,000 c. 120,000 & 30,000
b. 120,000 & 0 d. 150,000 & 0

22. Assuming the recoverable value on January 1, 2022 is P330,000, how much is the recovery from
impairment and revaluation surplus, respectively, on January 1, 2022 using the revaluation
model?
a. 120,000 & 150,000 c. 120,000 & 30,000
b. 120,000 & 0 d. 150,000 & 0

Problem 13: Aluminum purchased a machinery January 1, 2019 at a cost of P1,000,000. It is being depreciated
using the straight-line method over its projected useful life of 10 years. At December 31, 2020, the asset’s fair
value was P1,200,000. Accordingly, an entry was made on that date to recognize the revaluation.

A revaluation was made again on December 31, 2022 with a the sound value of P570,000. The company has the
policy of transferring any revaluation surplus to retained earnings as the asset is being used up.

23. How much is the revaluation surplus on December 31, 2020?

a. 500,000 c. 1,200,000
b. 400,000 d. 0
24. How much is the depreciation expense for the year 2021?
a. 150,000 c. 187,500
b. 100,000 d. 80,000
25. How much is the revaluation/impairment loss for the year 2022?
a. 330,000 c. 30,000
b. 70,000 d. 0

AUDITING PRACTICE
Significant Business Process: Acquire to Retire
(Formerly Investing Cycle)

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PROPERTY, PLANT AND EQUIPMENT
FARAP-4404
PROBLEM 1: (CAPITAL VS. REVENUE EXPENDITURE)

Don Corporation started its operations at the beginning of 2021. It had the following property acquisitions and
other expenditures during the year:
1. Cash paid to purchase at the beginning of the year Real Property A, comprised of a
land with a dilapidated building P4,800,000
2. Cash paid on March 31 to purchase Real Property B comprised of a land with a
building to be demolished. The land had a fair market value of P3.5M while the
building had a fair market value of P500,000. 4,400,000
3. Cash paid to purchase on June 30 Real Property C comprised of a land with a
warehouse to be remodeled for future use (9-year useful life after remodeling). The
land had a fair value of P2.8M 3,500,000
4. Option money: Real Property A - P200,000; B – P180,000; C - 120,000; Other
properties not acquired – P100,000 600,000
5. Brokers’ and lawyer’s fees and commission on real estate properties acquired: Real
Property A – P240,000; B – 450,000; C – 360,000) 1,050,000
6. Real property taxes: P120,000 for Property A for 2020 and 2021; P160,000 for
Property B fo 2021 and P80,000 for Property C for 2021 360,000
7. Mortgage payable assumed on Real Property A 1,200,000
8. Grading, leveling and landscaping cost on Real Prop. A (Permanent Improvement) 660,000
9. Special assessment by Quezon City government on Real Property B for road
projects where the property is located 220,000
10. Special assessment by Baguio City government on Real Property C for sewerage
system in the area where the property is located 160,000
11. Cost of demolition of unwanted structures: Real Prop. A – P450,000; B – P380,000 830,000
12. Cost of remodeling the warehouse in Real Property C 560,000
13. Payment to current tenants of the real properties to vacate the premises: Real
Property B – P190,000; C – P220,000 410,000
14. Excavation cost on Real Property A, including cost of an excavation equipment with
no further use for the company P250,000. 550,000
15. Building construction costs: Real Property A – P1,860,000; B – P2,200,000 4,060,000
16. Cost of temporary structures while construction is in progress including the cost of
their removal (temporary fencing, temporary quarters for laborers, temporary
sheds for tools and materials): Real Property A – P120,000; B – P200,000 320,000
17. Cost of permanent fencing, paving driveways and parking lots, cost of constructing
flower boxes and side-walks, cost of installing lamp posts on Real Property C. 1,500,000
18. Interest on loans to finance construction of Bldg. B (incurred during the
construction period) 125,000
19. Insurance on the Building A (80% incurred during construction period, 20% after
construction period) 250,000
20. Profits on construction, as the difference between the appraised value of the assets
after construction and actual costs incurred (40% Building A; 60% Building B) 900,000
21. Payments made to construction workers injured during the construction of Building
B not covered by insurance 500,000
22. Cost of modifications to Building A ordered by City of Manila which would have been
avoided had proper construction planning been made by the management 300,000
23. Interest that would have been earned had the money used during the period of
construction been invested in the money market 1,400,000
24. List price of machineries purchased during the year (Trade and cash discounts
taken on the machineries purchased, P220,000) 2,600,000
25. Freight, handling, insurance while in-transit, installation costs on machineries 650,000
26. Test-run costs on machineries 210,000
27. Employee training costs (for them to be able to operate the machineries) 220,000
28. Periodic royalty fees on technologies used by the machineries 120,000
29. Routinary repairs and maintenance costs on machineries 80,000
Audit notes:
a. The company generated P140,000 from sales of salvaged materials from the demolition of unwanted
structures in Properties A and B. (60% Real Property A; 40% Real Property B).
b. The company sold the excavation equipment after its use for total proceeds of P80,000.
c. Proceeds from sale of products produced during the test-run of the machineries, P30,000.
d. While the Building in Property A is being constructed, the parking lot was operated temporarily as a
pay parking facility. During the construction period, P150,000 in parking fees were collected.
Requirements: Determine the correct costs of the following:
1. Land A 5. Building B
2. Land B 6. Building C
3. Land C 7. Land Improvements
4. Building A 8. Machineries

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PROPERTY, PLANT AND EQUIPMENT
FARAP-4404
PROBLEM 2: (COMPREHENSIVE: INITIAL AND BS MEASUREMENT)
Braid Corp. started business on January 1, 2019, by purchasing two equipment having the following list prices:
Equipment A P800,000
Equipment B 750,000

These equipment were acquired under credit term of 10/10, n/30. The company failed to pay within the discount
period. The assets were recorded at the total amount paid. Since the date of purchase, the company has charged
depreciation at 20% on the balance of the asset account at the end of each year. The amount of depreciation
computed on each year has been credited directly to the asset account. Moreover, all purchases since the
inception of the operations have been debited to the equipment account. Cash proceeds from the disposal of
equipment were credited to the same account.

All the Equipment were estimated to have a useful life of 5 years and were supposed to be depreciated under the
straight-line method. Salvage value on all equipment is estimated at 10% of the correct initial cost.

Your first-time audit of the equipment account in 2021 revealed the following information:
• On March 31, 2019, Equipment C was purchased on an installment basis at total installment price of
P1,080,000. The installment contract called for 12 monthly payments of P90,000. The equipment had a
cash price of P850,000. Freight and handling charges including insurance while in transit amounting to
P30,000 was incurred and charged as outright expense. The company recorded Equipment C at the total
installment price.
• On June 30, 2020, Equipment D was purchased by paying P400,000 cash down-payment and issuing
P1,200,000 note payable due at P400,000 annually thereafter. The company incurred P60,000 in
installation cost and is estimated to incur P69,202 in dismantling cost upon its retirement. The market
rate of interest on this date was at 12%. The company recorded the equipment at P1.6M and charged the
installation cost to expense.
• On September 30, 2020, Equipment E was acquired in exchange of a parcel of land located. The equipment
had a fair value of P920,000. The land had a carrying value of P1.4M and a fair market value of P1.5M.
Cash amounting to P580,000 was received from the exchange. Future cash flows related to the assets
exchanged are considered significant. The company recorded the equipment at the book value of the land
given up net of the cash received.
• On March 30, 2021, Equipment B was traded for Equipment F, which had a cash price of P1,050,000. The
company paid P500,000 in the trade-in transaction. The company recorded the trade-in by debiting the
equipment account for the cash payment.
• On July 1, 2021, Equipment C was sold for P500,000. The company incurred cost to sell on the machinery
amounting to P8,000. The equipment account was credited for the net cash received.
Requirements:
1. What is the gain or loss on exchange on September 30, 2020?
2. Assuming that the exchange on September 30, 2020, was considered with no commercial substance, how
much should the equipment be initial recognized and how much is the gain or loss should be recognized?
3. What is the gain or loss on the trade-in on March 30, 2021?
4. What is the gain or loss on the disposal of Equipment C on July 1, 2021?

5. How much is the total depreciation expense for the year ended December 31, 2021?
6. What is the total carrying value of all the equipment as of December 31, 2021?

PROBLEM 3: (COMPREHENSIVE: INITIAL AND BS MEASUREMENT)

Information pertaining to Extraction Corporation’s property, plant and equipment for 2021 is presented below:
Account Balances on January 1, 2021
Debit Credit
Land P3,000,000
Building 4,800,000
Accumulated depreciation P1,277,261
Machinery and equipment 3,200,000
Accumulated depreciation 1,200,000
Automotive equipment 2,800,000
Accumulated depreciation 2,100,000
Depreciation methods used and useful lives of the different classes are as follows:
Building – 150% declining balance; 25 years
Machinery and equipment – Straight-line; 12 years
Automotive equipment – Sum-of-year’s-digits; 8 years

The salvage values of the assets are estimated at 10% of cost. All assets were acquired at the beginning of 2016.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PROPERTY, PLANT AND EQUIPMENT
FARAP-4404
Transactions during 2021:
On January 1, the company purchased a new automotive equipment for P800,000 cash and traded-in an old
automotive equipment with an original cost of P500,000. The new car has a cash price of P900,000; market
value of trade-in is not known.

On June 30, a machine with an original cost of P500,000, was totally destroyed by fire. Extraction Corporation
recovered P200,000 from its insurance company.

On July 1, a replacement machinery and equipment were acquired in exchange of 10,000 shares of the company’s
own ordinary shares (P50 par value). The new machinery and equipment had a cash price of P550,000. Additional
costs of P5,000 for freight and P25,000 for installation were incurred.

Requirements:
1. What is the gain or loss on the trade-in on January 1?
2. How much impairment loss should be recognized from the machinery on June 30?
3. What is the correct depreciation expense for 2021 of the following PPE items:
a. Building
b. Machinery and equipment
c. Automotive equipment
4. What is the correct carrying values as of December 31, 2021 of the following PPE items:
a. Building
b. Machinery and equipment
c. Automotive equipment

PROBLEM 4: (SUBSEQUENT COST AFTER INITIAL RECOGNITION)

In the course of your audit of property, plant and equipment of Irishman Corp. for the period ended December
31, 2021, you have decided to review property additions to determine propriety of the items capitalized (existence
assertion) and the company’s repairs and maintenance expense accounts to determine whether there are
capitalizable costs which were expensed by the company (completeness assertion):
Schedule of Property Additions
Additions to Buildings:
Replacement of the old wooden roof with
a fireproof brick roof P300,000
Repainting of the plant buildings 60,000
Improvements on the building ventilation system 225,000
Routinary/continuing repairs on buildings 50,000 P635,000
Additions to Equipment:
Replacement of minor parts/gears P20,000
Replacement of retired factory equipment 500,000
Rearrangement costs of a group of factory
equipment to ensure greater efficiency in
production 120,000 740,000
Schedule of Repairs and Maintenance Expense
Major improvements to the electrical wiring system 70,000
Service contract on office equipment for periodic maintenance 40,000
Installation of elevator system in the main office building 580,000
Smoke filtering device installation on the Factory Building 129,000
Acquisition of furniture 50,000
Storm windows and screens installation 162,000
Automatic door-opening system installation 200,000
Sealing of roof leaks in the factory 25,000
Overhead crane in the assembly department 70,000
Requirements:
1. How much from the above items should be capitalized to:
a. Building
b. Equipment
c. Furniture and fixture
2. How much from the above items should be expensed?

PROBLEM 5: (COST MODEL: IMPAIRMENT LOSS)

The Kit Corp. is assessing one of its factories for impairment as of December 31, 2021 due to a competitor
launching a more superior product rivaling the product line being produced by the factory. The factory produces
one of the company’s product lines and is considered a separate cash generating unit from the rest of its other
factories. The assets in the factory included the Land (Cost: P1M); Building (Cost: P6M) and an Equipment (ABC)
(Cost: P2M) which were acquired in January of 2018 (when the product line has been launched). Another
Equipment (DEF) (Cost: P3M) was acquired in January of 2020 (when the product line was expanded). The
building had a useful life of 20 years while the equipment were estimated to have a useful life of 10 years. Assets
are being depreciated under the straight-line method to zero residual value.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PROPERTY, PLANT AND EQUIPMENT
FARAP-4404
Individual cash flows related to each asset comprising the factory cannot be ascertained thus you suggested that
the company treat the factory as a single cash generating unit for the purpose of applying PAS 36, Impairment
of assets. A cash generating unit as defined by the said standards is the smallest identifiable group of assets that
generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.

As a result of the introduction of a more superior product by the competitor, the client ascertained that the product
being currently produced by the factory can now only generate cash flows for the company for the next five years,
after which the assets in the factory can be disposed for a total of lump-sum of P1.4M. The following presents the
estimates of the said cash flows (pre-tax):

Year Revenues Expense, excluding

Depreciation
2022 P4,200,000 P1,680,000
2023 3,800,000 1,910,000
2024 3,200,000 2,050,000
2025 2,400,000 1,610,000
2026 1,300,000 800,000
The fair value of the group of assets net of estimated disposition costs was determined to be P6.5M. The prevailing
pre-tax discount rate appropriate for this analysis is 6% while post-tax discount rate is at 8%.
Requirements:
1. What is the value in use of the group of assets?
2. How much is the recoverable amount of the group of assets?
3. How much is the impairment loss?
4. Assuming that the land had a fair market value less cost to sell at P1.2M what is the carrying value of the
building after impairment loss recognition?

PROBLEM 6: (REVALUATION MODEL)

Seth Company acquired a machine on January 1, 2018, at a cost of P1,500,000. It was expected to have a useful
economic life of 10 years. The comany uses the straight-line method in depreciating its machinery and equipment
and reports on a calendar year basis.

On December 31, 2021, the machine was appraised as having a gross replacement cost of P2,700,000. Seth
applies the revaluation model in valuing this class of property, plant, and equipment after its initial recognition.

Requirements:
1. How much is the depreciation expense in 2022?
2. How much is the balance of the revaluation surplus account on December 31, 2022, assuming that the
company uses the “Piecemeal basis” of transferring the revaluation surplus to retained earnings?
3. What is the carrying value of the machine on December 31, 2022?
4. Assuming that the machinery was sold on December 31, 2023, at P1,400,000, what is the gain or loss to
be recognized in the profit or loss for 2023 and how much revaluation surplus should be transferred as a
“lump-sum” to retained earnings?
5. Assuming that the fair market value of the equipment is P2.45M on December 31, 2021, what is the
balance of the revaluation surplus on December 31, 2022, if the “Piecemeal basis” of transferring the
revaluation surplus to retained earnings is adopted?

PROBLEM 7: (IMPAIRMENT WITH SUBSEQUENT REVALUATION)

On December 31, 2021, Spencer Corp. tested its building for impairment. Data pertinent to the building on this
date were as follows:
Original cost P24,000,000
Accumulated depreciation as at January 1, 2021 6,000,000
Selling price 12,200,000
Estimated cost to make the sale 600,000
Annual net cash flows from the asset's continued use 2,249,328
Remaining useful life as at the beginning of the year 9 years
Method of depreciation Straight-line
Salvage value Negligible
Prevailing pre-tax discount rate as of 12/31/2021 10%
On December 31, 2023, the company adopted the revaluation model for its building which has fair market value
of P13.2M as of this date.
Requirements:
1. How much impairment loss is recognized in 2021?
2. How much is the depreciation expense recognized in 2022?
3. How much gain on recovery is recognized in 2023 income statement?
4. How much is the depreciation expense recognized in 2024 under the revaluation model?
5. What is the balance of the revaluation surplus as of December 31, 2024?
6. How much is the depreciation expense recognized in 2024 had the cost model been used in valuing the
property?

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PROPERTY, PLANT AND EQUIPMENT
FARAP-4404

PROBLEM 8: (REVALUATION WITH SUBSEQUENT IMPAIRMENT)

Holmes Co. purchased a building on January 1, 2018, for P6,000,000. The same had an expected useful life of
10 years. Straight-line depreciation method is used. On December 31, 2021, the asset was appraised as having
a sound value (depreciated replacement cost) of P5,400,000. On December 31, 2024, as a result of an evidence
of a possible impairment, the asset was tested for possible impairment based on its current recoverable amount
at P1,200,000 with a revised remining useful life of only two years.
Requirements:
1. How much is credited to the revaluation surplus as a result of the revaluation in 2021?
2. What is the correct depreciation to be recognized in 2022?
3. How much is the impairment loss to be recognized for the year ended December 31, 2024?
4. What is the depreciation expense in 2025?

PROBLEM 9: (RAP; INTERNAL CONTROLS, TEST OF CONTROLS, SUBSTANTIVE TESTING)

1. Which of the following is an internal control weakness related to factory equipment?

a. Checks issued in payment of purchases of equipment are not signed by the controller
b. All purchases of equipment are required to be made by the department in need of the equipment
c. Factory equipment replacements are generally made when estimated useful lives, as indicated in
depreciation schedules, have expired
d. Proceeds from sales of fully depreciated equipment are credited to other income.
2. You were assigned to audit the property, plant and equipment, intangibles and other assets account of your
client, Red Corp. Which of the following is correct regarding the usual audit direction when auditing PPE,
intangibles, and other non-current asset accounts?
a. As these account balances usually arise from routinary transaction cycle, the auditor usually would
test the internal controls first before performing substantive tests of details of account balances and
transactions, where preliminary audit risk is low.
b. As these account balances usually arise from non-routinary transaction cycle, the auditor usually
would test internal controls first before rendering substantive tests of details of account balances and
transactions, where preliminary audit risk is low.
c. As these account balances usually arise from non-routinary transaction cycle, the auditor would
usually render direct substantive testing particularly test of details of transactions.
d. As these account balances usually arise from routinary transaction cycle, the auditor usually renders
direct substantive testing particularly test of details of account balances.
3. You are auditing Red Corp. for the first time and has observed that the entity has few property and equipment
transactions during the year, as the auditor assigned to audit PPE, you should render a:
a. complete review of the related internal controls and perform test of the controls on which the entity
relies.
b. complete review of the related internal controls and perform analytical review tests to verify current-
year additions to property and equipment.
c. preliminary review of the related internal controls and perform an extensive substantive test of
opening balances and current-year property and equipment transactions.
d. preliminary review of the related internal controls and perform extensive tests of current-year
property and equipment transactions.

4. When auditing investing cycle related account balances (PPE, Intangibles and other Non-current Assets), the
auditor acknowledges that there is a higher risk of ___________, therefore shall develop an audit program
that shall focus on _______________ assertions.
a. Overstatement; Completeness and valuation
b. Overstatement; Existence, rights and valuation
c. Understatement; Completeness and valuation
d. Understatement; Existence, rights and valuation
5. When auditing current year PPE transactions, the auditor shall request a schedule of property additions for
the year and a schedule of repairs and maintenance expanse for the year. The audit procedure of analyzing
the schedule of property additions is designed primarily to provide evidence in support of the audit proposition
that _________, which is consistent with validating __________ assertion.
a. All expenditures for fixed assets have been recorded in the proper period; Completeness of PPE.
b. All capital expenditures have been properly authorized and are in fact capitalizable under PFRS;
Existence and Rights of PPE.
c. All noncapitalizable expenditures have been properly expensed; Occurrence of Repairs and
Maintenance Expense.
d. All qualified capitalizable expenditures under PFRS for fixed assets have been in fact capitalized;
Completeness of PPE.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
PROPERTY, PLANT AND EQUIPMENT
FARAP-4404
6. When auditing current year PPE transactions, the auditor shall request a schedule of property additions for
the year and a schedule of repairs and maintenance expense for the year. The audit procedure of analyzing
the repairs and maintenance accounts is designed primarily to provide evidence in support of the audit
proposition that _________, which is consistent with validating __________ assertion.
a. All expenditures for fixed assets have been recorded in the proper period; Existence & Rights of PPE.
b. All capital expenditures have been properly authorized and are in fact capitalizable under PFRS;
Existence and Rights of PPE.
c. All noncapitalizable expenditures have been properly expensed; Occurrence of Repairs and
Maintenance Expense.
d. All expenditures for fixed assets have been capitalized; Occurrence of Repairs and Maintenance
Expense.
7. In violation of company policy, Red Corp. erroneously capitalized the cost of routinary repairs and
maintenance on factory equipment. The auditor examining Red Corp.’s financial statements would be most
likely detect this when ________. This procedure is designed to audit _______ assertion on PPE.
a. Discussing capitalization policies with the company’s controller; Existence.
b. Examining maintenance expense accounts; Completeness.
c. Physical inspection of factory equipment during ocular inspection; Completeness.
d. Examining the major repairs and overhaul work orders supporting items capitalized during the
year; Existence.
8. Red Corp. misclassified an equipment replacement as repairs expense, this would most likely be detected by
an internal control that provides for:
a. Segregation of duties of employees in the accounts payable department.
b. Independent verification of invoices for disbursements recorded as equipment.
c. Authorization by the board of directors of significant acquisitions.
d. Investigation of variance within a formal capital budgeting system.
9. In testing for unrecorded retirements of equipment, an auditor most likely would ___________. This is
consistent with auditing ____________ assertion on PPE.
a. Select items of PPE from the records and then locate them during the plant tour; Existence.
b. Compare depreciation journal entries with similar prior year entries in search of fully depreciated
equipment; Completeness.
c. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger; Existence.
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance accounts; Completeness.
10. Which procedure would an auditor least likely perform in obtaining evidence about valuation of PPE?
a. Inspecting acquisition documents to support the initial cost of the asset
b. Recomputing the depreciation based on the company’s depreciation policy and ascertaining the
reasonableness of the depreciation policy used.
c. Physical inspection of PPE for possible evidence of physical obsolescence or damage.
d. Confirming ownership and corroborating transactions through inquiries with the management.
11. In testing the reasonableness of the client’s depreciation policy, which of the following will be the least likely
source of evidence?
a. Industry practice in depreciating and amortizing PPE.
b. Schedule of depreciation computation in the past years with prior years PPE roll forward analysis.
c. Subsequent events.
d. Confirming ownership and corroborating transactions through inquiries with the management.

12. In testing reasonableness of a client’s depreciation policy, an auditor may conclude that depreciation charges
maybe have been understated if he or she notes:
a. Large amounts of fully depreciated assets.
b. Continuous trade-ins of relatively new assets.
c. Excessive recurring losses on retired assets.
d. Insured values greatly in excess of book values.

13. The auditor is most likely to seek information from the plant manager with respect to the ____________, this
is relevant for auditing the _____________ assertion for PPE.
a. Adequacy of the provision for depreciation; valuation.
b. Appropriateness of physical inventory observation procedures; existence.
c. Existence of obsolete machinery; valuation.
d. Deferral of procurement of certain necessary insurance coverage; existence.

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