AUDIT PROGRAM
FOR PROPERTY, PLANT, AND EQUIPMENT
The following are PPE acquisitions for selected companies:
1. FRENCH HORN COMPANY acquired land , buildings, and equipment from a
financially distressed company, Bankcrupt Corp., for a lump sum price of
P2,800,000. On the acquisition date, Bankcrupts assets had the following book
and fair values:
Land
Buildings
Equipment
Book
Values
Fair
P 800,000
1,000,000
1,200,000
P 600,000
1,400,000
1,200,000
Values
French horn 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
Buildings
Equipment
Cash
600,000
1,000,000
1,200,000
2,800,000
2. TRUMPET, 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
Cash
Note payable
Interest payable
530,000
200,000
300,000
30,000
3. TUBA 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
Cash
Purchase discount
800,000
784,000
16,000
4. FLUTE CORP. constructed a building at a total cost of P45,000,000. The building
could have been purchased for P43,000,000. The companys 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 1
SAXOPHONE COMPANY acquires a new manufacturing equipment on January 1, 2009, 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, 2009. The equipment has a cash price equivalent of P2,370,000.
Saxophones financial year-end is December 31.
1. What is the acquisition cost of the equipment?
A. P3, 404, 160
C. P2, 370, 000
B. P2, 804, 160
D. P3, 104, 160
2. The amount to be recognized on January 1, 2009, as discount on note payable is
A. P1, 034, 160
C. P827, 160
B. P310, 416
D. P 0
3. The amount of interest expense to be recognized in 2009 is
A. P 0
C. P310, 416
B. P 188, 898
D. P207, 000
4. The amount of interest expense to be recognized in 2010 is
A. P310, 416
C. P207,000
B. P188, 898
D. P 0
5. The carrying value of the note payable at December 31, 2010, is
A. P1, 689, 858
C. P1, 312, 062
B. P1, 888, 980
D. P1, 700, 082
PROBLEM 2
OBOE CORP. acquired land and an old building in exchange for P3,000,000 cash and
500,000 ordinary shares with a par value of P15 per share. The companys stock was
selling for P40 per share when the acquisition was made. Oboe incurred the following costs
in connection with the acquisition:
Legal fees to complete the transaction
P 150, 000
Property tax for previous year
850, 000
Cost to demolish the old building
325, 000
Salvage value of demolished building
(194, 000)
1. What is the total cost of the building purchased by Oboe Corp.?
A. P 0
C. P 23, 131, 000
B. P 23, 000, 000
D. P 11, 631, 000
2. What is the total cost of the land acquired by Oboe Corp.?
A. P11, 631, 000
C. P1, 000, 000
B. P24, 131, 000
D. P 23, 869, 000
PROBLEM 3
Various equipment used by BASSOON CO. in its operations are either purchased from
dealers or self-constructed. The following items for two different types of equipment were
recorded during the calendar year 2010.
Manufacturing equipment (self-constructed):
000
000
000
Materials and purchased parts at gross invoice price
(Bassoon failed to take the 2% cash discount)
Imputed interest on funds used during construction
(stock financing)
Labor costs
Overhead costs (fixed-P40,000; variable-P60,000)
Gain on self-construction
Installation cost
P450,
36,
185, 000
100,
74, 000
8, 600
Store equipment (purchased):
Cash paid for equipment
P175, 000
Freight and insurance cost while in transit
3, 500
Cost of moving equipment into place at store
1, 200
Wage cost for technicians to test equipment
7, 000
Insurance premium paid during first year of operation
on this equipment
5, 200
Special plumbing fixtures required for this equipment
Repair cost incurred in first year of operations related
to this equipment
8, 200
1, 450
1. What is the total cost of the self-constructed equipment?
A. P674, 600
C. P734, 600
B. P770, 600
D. P743, 600
2. What is the total cost of the store equipment purchased?
A. P200, 000
C. P191, 400
B. P193, 700
D. P194, 900
PROBLEM 4
CELLO CORP. has been experiencing a significant increase in customers demand for its
product. To expand its production capacity, cello decided to purchase equipment from
Pede Utang Company on January 2, 2009. Cello issues a P2, 400, 000 5-year, noninterest-
bearing note to Pede utang for the new equipment when the prevailing market rate of
interest for obligations of this nature is 12%. The company will pay off the note in five
P480, 000 installments due at the end of each year over the life of the note. Cellos
financialyeaend is December 31. The appropriate present value factor of an ordinary
annuity of 1 at 12% for 5 periods is 3.60478.
1. What is the cost of the new equipment?
A. P2,112 ,000
C. P1,730,794
B. P1,457,931
D. P2,400,000
2. What amount of interest expense should be reported on Cellos income statement
for the year ended December 31, 2010?
A. P174,951
C. P230, 400
B. P207, 635
D. P288,000
3. What is the carrying value of the note at December 31, 2011?
A. P1,440,000
C. P1, 480,932
B. P811,226
D. P1,152,880
