ICCT Colleges Foundation, Inc.

College of Business and Accountancy

OLPROFE06 – Auditing and Assurance; Concepts and Applications 1&2
PRE05

NAME: ________________________
STUDENT NO.: _________________
SECTION: ______________________

Directions: Give the correct answer. Show your solutions on a separate worksheet.

I. You were engaged to audit the financials of Mary Corporation. Mary is a manufacturing
corporation and uses various types of machineries in its production. Mary acquires
machineries from suppliers and at the same time, to find cost savings, constructs the
others. You were able to gather the following information relating to two machines
booked during the year.

A. Machine A (self-constructed)
a. Cost of materials P 185,320
b. Labor cost 110,200
c. Electricity consumed to construct 21,000
d. Factory space set aside for the construction 13,000
e. Installation cost 22,000
f. Savings from self -construction 31,000

B. Machine B (purchased)
a. Cash paid for the equipment P 248,120
b. Freight 6,000
c. Labor cost of the installation of expert fitter 20,000
d. Insurance cost for 2023 12,000

C. Upon investigation, you gathered the following additional information:

a. 2,000 of the insurance cost for 2023 pertains to the insurance while
transporting the purchased machine.
b. Repairs and maintenance expense contains P11,000 inspection fee
pertaining to the self-constructed machine and another P18,000 as testing
fee for the purchased equipment.
c. Part of the purchased services was a fee to a contractor who performed the
demo of the purchased machine. Total cost is P 6,500.
d. Cash paid for the purchased machine is VAT-inclusive.
e. Purchased machine require safety rails and water devices to properly
operate costing P 19,000 and P 31,000, respectively.
f. P350,000 loan was availed specifically for the construction of the machine.
Interest rate for the loan was 11% per annum and the loan is a 6-month loan.

1. What is the cost of Machine A?

 2. What is the cost of Machine B?

II. George Corporation commenced operations in 2023. During the first year, the
corporation acquired a piece of land and an old building which would require a
complete overhaul before it can be used for the company. George decided to just
demolish the building and incurred P 250,000 and build a new one. Upon your
examination of the Property, Plant and Equipment subledger, you were able to gather
the following information:

a. Cost of the real estate and the building P 4,200,000

b. Architect’s design for the new building 310,000
c. Payment for the progress billing of the contractor 3,000,000
d. Cost of equipment, inclusive of VAT 1,520,000
e. Construction of a sidewalk for employee’s safety 340,000
f. Final payment to contractors, 4,200,000
g. Proceeds from sale of salvaged materials from old bldg. (72,000)
h. Paid freight o equipment purchased 24,000
i. Installation fee for the equipment 65,000

The purchased property has unpaid real property tax amounting to P84,000. Some of
the equipment were damaged and required repair before they can be used which costed
P23,000.

3. Land should be carried at

4. Land improvement should carried at

5. Building should be recorded at

6. The machinery should be recorded at

III. Georgie, Inc. has acquired your services to perform the audit of their company. On your
review of their property, plant and equipment account, you were presented the following
transactions:
a. A new delivery truck was acquired on June 1, 2023 for P1,500,000.
b. Purchased a drill press for P39,000 on June 1, 2023. Cost to deliver the equipment
was P4,500. A similar item, purchased on July 1, 2019 for P35,000, was sold the
same day for P15,000.
c. Purchased one milling machine on August 1, 2023 at a cost P310,000. Cost to install
the machine amounted to P11,200.
d. Sold a used truck purchased on April 1, 2016 for P115,000. The cost of the truck was
P900,000.

Upon your inquiry, you were told that the company uses the straight line method of
depreciation and assigns a 5% salvage value on the cost of each equipment, Estimated
useful life for machinery and automobiles are 5 years and 10 years, respectively.

While checking the sales account, you found out the proceeds of a sale of a machine
was credited to this account for P9,000. The cost of the machine was P210,000
purchased in October 1, 2020 and sold on March 1, 2023.

7. How much is the gain/loss on the sale of the items mentioned

above?

8. Assuming there are no other PPE items, how much should be

presented as depreciation expense for the year?

9. How much is the carrying amount of delivery equipment as at

December 31, 2023?

10. What is the carrying amount of Machinery and equipment as at

December 31, 2023?

11. Prepare the adjusting entry needed.

 IV. You were presented the following lapsing schedule from Meemaw Corporation whom
you are auditing for the year:

You were informed that the Company purchased another machine, Machine E which was
purchased on November 30, 2023 for P 130,000. The company opted to use the straight line
method and assessed that the salvage value is P3,900 and that machine B was sold on the same
day for P 35,000.

12. The total depreciation expense for 2023 is

13. How much is the gain/loss on the sale of Asset B?

14. You found out that that the sale of machine B was not yet recorded
on the books, prepare the entry.

15. How much is the total carrying value of the machineries as at

December 31, 2023?

V. Sheldon Corporation purchased a building on January 1, 2015 for P 1,500,000. The

building was used as a manufacturing plant building. The building has been depreciated
using the straight line method with a 30-year useful life and 5% residual value.
Sheldon’s manufacturing operations have experienced significant losses for the past
two years so Sheldon decided that the manufacturing building should be evaluated for
possible impairment. On December 31, 2022, Sheldon estimated that the net cash
inflow from the building will be P100,000 per year, and that the fair value less cost to sell
of the building is P 730,000.

16. What amount of impairment loss should be recognized in 2022?

VI. On December 31, 2023, the asset’s recoverable was determined to be P 1,100,000 and
management believes that the impairment previously recorded should be reversed.

17. How much impairment recovery should be reported in the 2023

income statement of Sheldon Corporation?

VII. Paige Company acquired a machine on January 1, 2022, at a cost P 160,000. It was
expected to have a useful economic life of 10 years, Paige uses the straight-line method
in depreciating its machinery and equipment and reports on a calendar year basis. On
December 31, 2023, the machine was appraised as having a gross replacement cost of
P 180,000.

18. How much should be credited to revaluation surplus on December

31, 2023?

VIII. Tam Corporation acquires equipment through leasing. On January 1, 2022, Tam entered
into a lease agreement for a new delivery truck that had a selling price of P1,120,000.
The lease contract provides an annual payments of P240,000 will be made for 6 years.
Tam made the first lease payment on January 1, 2022 and subsequent payments are
made on December 31 of each year. Tam guarantees a residual value of P 192,000 at the
end of the lease term. After considering the guaranteed residual value, the rate implicit
on the lease is determined to be 11%. Tam has an incremental borrowing rate of 13%.
The economic life of the truck is 8 years. Tam depreciates its other equipment using the
straight-line method and uses calendar year for financial reporting purposes.

19. What is the cost of the right of use asset and its carrying value on
December 31, 2024?

20. What is the balance of the lease liability on December 31, 2025
and the total amount of expenses to be presented at the end of the
lease term assuming that the lessor sold the truck for P 133,000?