JONAS, PRINCESS G.

3BSA1

Problem 1
You are engaged to audit the financial statements of CORNET Company for the year ended
December 31, 2019. You gathered the following information pertaining to the company’s
equipment and accumulated depreciation accounts.

EQUIPMENT
1.1.19 Balance P446,000 9.1.19 No. 6 sold P 9,000
6.1.19 No. 12 36,000 12.31.19 Balance 474,000
9.1.19 Dismantling
of No. 6 1,000 ________
P483,000 P483,000

ACCUMULATED DEPRECIATION - EQUIPMENT

12.31.19 Balance P271,400 1.1.19 Balance P224,000
12.31.19 2019
_________ depreciation 47,400
P271,400 P271,400

The following are the details of the entries above:

1. The company depreciates equipment at 10 percent per annum. The oldest equipment
owned is seven years old as of December 31, 2019.

2. The following adjusted balances appeared on your last year’s working papers:
Equipment P446,000
Accumulated depreciation 224,000

3. Machine No. 6 was purchased on March 1, 2012 at a cost of P30,000 and was sold on
September 1, 2019, for P9,000.

4. Included in charges to the repairs expense account was an invoice covering installation
of Machine No. 12 in the amount of P2,500.

5. It is the company’s practice to take a full year’s depreciation in the year of acquisition
and none in the year of disposition.

Based on the preceding information, answer the following:

1. What is the gain (loss) on the sale of Machine No. 6?
A. (P4,000) B. P8,000 C. (P1,000) D. P 0

Net Proceeds 8,000

Book Value
Cost 30,000
Less: Accumulated Depreciation 21,000 (9,000)
Loss on Sale (1,000)

2. What is the equipment account balance on December 31, 2019?

A. P454,500 B. P452,000 C. P475,500 D. P484,500

Balance, Beginning 446,000

Machine No.12 38,500
Machine No.6 (30,000)
Balance, End 454,500

3. What is the total depreciation expense on equipment for the year ended December 31,
2019?
A. P44,600 B. P45,846 C. P51,450 D. P45,450

Depreciation Expense (454,500*10%) 45,450

4. What adjusting entries should be prepared in connection with sale of Machine No. 6 on
September 1, 2019?
A. Loss on sale of equipment 1,000
Accumulated depreciation 21,000
Equipment 22,000
B. Loss on sale of equipment 4,000
Accumulated depreciation 18,000
Equipment 22,000

C. Accumulated depreciation 21,000

Equipment 21,000
D. Accumulated depreciation 30,000
Equipment 22,000
Gain on sale of equipment 8,000

5. What adjusting entry should be prepared on December 31, 2019, to correct the amount
of depreciation recorded on company books?
A. Accumulated depreciation 1,950
 Depreciation expense 1,950
B. Accumulated depreciation 2,800
Depreciation expense 2,800
C. Accumulated depreciation 1,554
Depreciation expense 1,554
D. Depreciation expense 4,050
Accumulated depreciation 4,050

Problem 2
JARAN CO. started operations on September 1, 2013. Jaran’s accounts at December 31,
2016 included the following balances:

Machinery (at cost) P 910,000

Accumulated depreciation – machinery 482,000
Vehicles (at cost; purchased November 31, 2015) 468,000
Accumulated depreciation – vehicles 196,560
Land (at cost; purchased October 25, 2013) 810,000
Building (at cost; purchased October 25, 2013) 1,857,200
Accumulated depreciation – building 286,140

Details of machines owned at December 31 2016 are as follows:

Machine Purchase Date Cost Useful Life Residual Value

1 October 7, 2013 P430,000 5 years P25,000
2 February 4, 2014 P480,000 6 years 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, 2017:

2017
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.

2018
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, 2015 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.

2019
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, 2015 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, 2017, as it had been so badly damaged
in a traffic accident that it was not worthwhile repairing it.

Dec. 31 Recorded depreciation.

1. What should be the depreciation expense for the vehicles for 2017?
A. P140,976 B. P138,976 C. P139,666 D. P140,286

Depreciation Expense for the vehicles for 2017

Vehicle purchased November 2015
Depreciation Expense 2017 (271,440*40%) 108,576
Vehicle purchased June 2017
Purchase Price 152,000
Repainting Cost 6,550
Repair Cost 3,450
Carrying Value 162,000
Depreciation Expense (162,000*40%*6/12) 32,400
140,976

2. What should be the depreciation expense for the machinery for 2017?
A. P242,733 B. P235,000 C. P239,400 D. P266,400

Machine 1 [(430,000-25,000)/5*8/12] 54,000

Machine 2 [(480,000-30,000)/6] 75,000
Machine 3 [(592,000-40,000)/5] 110,400
Depreciation Expense 239,400

3. What should be the balance of the Accumulated depreciation – Office furniture

account at December 31, 2018?
A. P19,933 B. P18,267 C. P19,833 D. P58,083

Depreciation Expense 2017 [(115,000-5,400)/8*4/12] 4,567

Depreciation Expense 2018 [(115,000-5,400)/8] 13,700
Accumulated Depreciation 18,267

4. What should be the depreciation expense for the machinery for 2019?
A. P277,708 B. P197,400 C. P221,400 D. P205,400

Cost of Machine 600,000

Less: Accumulated Depreciation [(480,000-30,000)/6*59/12] 368,750
Carrying Value 231,250
Revised Residual Value (50,000)
New Depreciable Cost 181,250

Machine 2 (181,250/ (25/12) 87,000

Machine 3 (592,000-40000/5) 110,400
Depreciation Expense 197,400
 5. What should be the total depreciation expense for 2019?
A. P394,060 B. P418,060 C. P409,612 D. P403,832

Machine 197,400
Trade-in Vehicle
(135,720*60%*60%*40%*6/12
Old ) 9,772
New (270,000*40%*6/12) 54,000
Scrapped (129,600*60%*40%*9/12) 23,328 87,100
Land (55,000/10) 5,500
Building (1,857,200-50,000)/20 90,360
Office Furniture (115000-5400)/8 13,700
Depreciation Expense 394,060

Problem 3
One of the cash generating units of POTPOT COMPANY is that associated with the
manufacture of wine barrels. At December 31, 2019, Potpot 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, 2019 were:

Buildings P4,200,000
Accumulated depreciation – buildings * (1,800,000)
Factory machinery 2,200,000
Accumulated depreciation – machinery ** (400,000)
Goodwill 150,000
Inventory 800,000
Receivables 400,000
Allowance for doubtful accounts (50,000)
Cash 200,000
Accounts payable 300,000
Loans 200,000
* Depreciated at P600,000 per annum
** Depreciated at P450,000 per annum

POTPOT determined the value in use of the unit to be P5,350,000. The receivables were
considered to be collectible, except those considered doubtful.

During the year 2020, POTPOT increased the depreciation charge on building to P650,000
per annum, and to P500,000 per annum for factory machinery. The inventory on hand at
January 1, 2020 was sold by the end of the year. At December 31, 2020, POTPOT 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
P300,000 greater than the carrying amount of the unit. As a result, POTPOT recognized a
reversal of the impairment loss.

1. What amount of impairment loss on December 31, 2019 should be allocated to

Inventory?
A. P56,000 B. P28,829 C. P32,000 D. P 0

2. What is the Factory Machinery’s net carrying amount (after allocation of impairment
loss) on December 31, 2019?
A. P1,735,135 B. P1,674,000 C. P1,800,000 D. P1,728,000

Carrying Amount before Impairment 1,800,000

Allocated Loss 72,000
Carrying Amount after Impairment 1,728,000

3. What amount of reversal of impairment loss should be recognized on December 31,

2020?
A. P300,000 B. P268,000 C. P168,000 D. P200,000

Carrying Amount Proportion Allocation for Loss Net Carrying Amount

Building 2,400,000 12/21 114,286 2,285,714
Machinery 1,800,000 9/21 85,714 1,714,286
4,200,000 200,000

Building 4,200,000 Machinery 2,200,000

Less: Less:
Accumulated Depreciation 1,800,000 Accumulated Depreciation 400,000
Allocation for Loss 114,286 Allocation for Loss 85,714
Depreciation Charge 650,000 Depreciation Charge 500,000
1,635,714 1,214,286

Building 4,200,000 Machinery 2,200,000

Less: Less:
Accumulated Depreciation 1,800,000 Accumulated Depreciation 400,000
Depreciated per Annum 600,000 Depreciated per Annum 450,000
1,800,000 1,350,000

Building 1,800,000 Machinery 1,350,000

 1,635,714 1,214,286
164,286 135,714

Building 164,286
Machinery 135,714

Reversal of Impairment Loss 300,000

Allocation for
Carrying Amount Proportion Loss Net Carrying Amount
Building 1,635,714 12/21 114,286 1,750,000
Machinery 1,214,286 9/21 85,714 1,300,000
2,850,000 200,000

4. Assume that the recoverable amount at December 31, 2020 was P200,000 greater
than the carrying amount of the cash generating unit. What is the net carrying
amount of the Buildings after recognition of the impairment recovery?
A. P1,313,219 B. P1,768,781 C. P1,800,000 D. P1,750,000

5. Assume that the recoverable amount at December 31, 2020 was P200,000 greater
than the carrying amount of the cash generating unit and that the recoverable amount
of the Buildings was P1,750,000. What is the net carrying amount of the Factory
Machinery after the recognition of the impairment recovery?
A. P1,332,000 B. P1,313,219 C. P1,228,000 D. P1,324,000