PROPERTY PLANT AND EQUIPMENT – APPLIED AUDITING

EXERCISE 1

Pan Corp contracted Nat Inc. on January 1, 2014 to construct a building for P
80,000,000 on land Pan Corp purchased a couple of years back. The contract provides
that Pan Corp is to make five payments in 2014, with the last payment to be made
upon completion. The building was completed on December 31, 2014.

Pan Corp made the following payments during 2014:

January 1 P 8,000,000
April 1 19,000,000
July 31 24,400,000
October 31 27,600,000
December 31 14,000,000

Pan Corp made the following arrangements with financing companies in 2014.

• 12% P34M loan dated January 1, 2014, with the interest compounded quarterly.
Both principal and interest are payable on December 31, 2017. This loan
related specifically to the building project.
• 10% 10-year, P24M note dated December 31, 2013, with simple interest;
interest payable annually on December 31. The loan was for general financing
purposes including the partial financing of the construction.
• 12% 5-year P28M noted dated December 31, 2013 with simple interest; interest
payable annually on December 31. The loan was for general financing purposes
including the partial financing of the construction.

1. The amount of interest to be capitalized in 2014?

A. 4,856,223 C. 5,171,077
B. 4,267,300 D. 5,400,000

2. The amount of interest expense in 2014?

A. 4,856,223 C. 5,171,077
B. 4,267,300 D. 5,400,000

EXERCISE 2

Donnie Company bought a machine for P900,000 on January 1, 2012. The machine’s
useful life is 10 years; estimated residual value P0; and is depreciated using
the straight-line method.

On January 1, 2014, Donnie Company adopted the revalued model in reporting its
machinery and equipment. The machine which was acquired in 2012 was determined to
have a sound value of 960,000. Further analysis indicates that the machine’s
remaining useful life was 6 years from that date

At the end of 2016, Donnie Company conducted a recoverability test after receiving
information that there was a reduction in the performance of the machine as
reported by the operations department. Analysis of the market for a similar
machine revealed to Donnie Company that the net selling price was at P270,000.
The value in use of the machine was determined at P288,000.

1. The revaluation surplus account balance at December 31, 2014

A. 240,000 C. 200,000
B. 210,000 D. 180,000

2. Impairment loss included in the December 31, 2016 income statement is

A. 210,000 C. 192,000
B. 90,000 D. 72,000

3. If the machine’s net recoverable amount exceeds the carrying amount at

December 31, 2018, what is the maximum amount that Donnie Company may include
as gain and reported in the income statement
A. 24,000 C. 30,000
APPLIED AUDITING PART I

PROPERTY PLANT AND EQUIPMENT – APPLIED AUDITING

B. 64,000 D. 70,000

EXERCISE 3
On December 31, 2019, statement of financial position of Tinio Company showed the
following property plant and equipment after charging depreciation:
Building P3,000,000
Accumulated Dep (1,000,000) P2,000,000

Equipment P1,200,000
Accumulated Dep (400,000) 800,000

The company has adopted the revaluation model for the valuation of the property
and equipment. This has resulted in the recognition in prior periods of an asset
revaluation surplus for the building of P150,000. On December 31, 2019, an
independent valuer assessed the fair value of the building to be P1,600,000 and
the equipment to be P900,000.

The building and equipment had remaining useful lives of 25 years and 4 years,
respectively, as of December 31, 2019.

1. Revaluation surplus as of December 31, 2019, after recording the revaluation

A. 250,000 C. 100,000
B. 150,000 D. 0

2. Amount to be recognized in 2019 profit or loss related to the revaluation of

property and equipment
A. 400,000 C. 250,000
B. 300,000 D. 150,000

3. Total depreciation in 2020

A. 289,000 c. 100,000
B. 625,000 D. 420,000

4. Carrying amount of property and equipment as of December 31, 2020

A. 2,500,000 C. 2,080,00
B. 2,400,000 D. 2,211,000

5. Revaluation surplus as of December 31, 2020

A. 100,000 C. 144,000
B. 75,000 D. 0

EXERCISE 4

At the beginning of 2014, Karuma Technology, Inc. acquired the Roland Corporation
for P 350M. In addition to the cash, receivable and inventory, the following
allocations were made:

Plant and equipment (depreciable assets) P 120M

Purchased Technology P 60M

The plant and equipment are depreciated over an 8 year useful life on a straight
line basis. There is no estimated residual value. The purchased technology is
estimated to have a 6-year life, no residual value and amortized using straight
line method.

At the end of 2016,a change in business climate indicated to management that the
operational assets of Roland Corporation might be impaired. The following amounts
have been determined.

Plant and equipment:

Undiscounted sum of future cash flows P 65M
Fair Value P 50M

APPLIED AUDITING PART I

PROPERTY PLANT AND EQUIPMENT – APPLIED AUDITING
Purchased technology:
Undiscounted sum of future cash flows P 15M
Fair Value P 10M

1. Book value of plant and equipment before any adjustment at the end of 2016?
A. P 50M B. P 65M C. P 45M D. P 75M
2. Book value of the purchased technology before any adjustment at the end of
2016?
A. P 30M B. P 60M C. P 15M D. P 10M

3. What is the amount of impairment loss to be recorded, if any, for plant and
equipment?
A. P 10M B. P 15M C. P 20M D. P 25M

4. What is the amount of impairment loss to be recorded, if any, for the purchased
technology?
A. P 15M B. P 5M C. P 20M D. P 0

EXERCISE 5

ABC Corporation has several cash generating units. As of December 31, 2014, the
demand for the products produced by one of its cash generating units substantially
declined thus, the cash generating unit was considered for possible impairment.
The following were made available for the said testing:

Assets CV, 12/2014

Cash P 500,000
Receivables 1,250,000
Inventories 1,475,000
Equipment 2,725,000
Goodwill 500,000

As a result of the impairment event, the annual net cash flows from the CGU are
expected to be at P 1,252,282 for its remaining 5-year useful life. The fair value
less cost to sell of the CGU is at P 5,250,000. (Assume the prevailing rate of
interest at 8%)

1. What is the recoverable amount of the cash generating unit?

A. P 5M B. P 5.25M C. P 5.5M D. P 5.75M

2. What is the impairment loss on the cash generating unit?

A. P 1.2M B. P 1M C. P 0.7M D. P 0.95M

3. What is the carrying value of the equipment after the impairment loss
recognition?
A. P 2.725M B. P 2.527M C. P 2.375M D. P 2.525M

APPLIED AUDITING PART I