ACP323

AUDIT OF IIB AND PPE REVIEWER

THEORIES
1. Which of the following would be least likely to address control over the initiation and execution of
equipment transactions?
A. Requests for major repairs are approved by a higher level than the department initiating the request.
B. Prenumbered purchase orders are used for equipment and periodically accounted for.
C. Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids.
D. Procedures exist to restrict access to equipment.
2. When there are numerous property and equipment transactions during the year, an auditor who plans to
assess control risk at a low level usually performs:
A. Tests of controls and extensive tests of property and equipment balances at the end of the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.
3. Which of the following best describes the auditors' approach to the audit of the ending balance of property,
plant and equipment for a continuing nonpublic client?
A. Direct audit of the ending balance.
B. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the
accounts.
C. Audit of changes in the accounts since inception of the company.
D. Audit of selected purchases and retirements for the last few years.
4. Which of the following is not a control that should be established for purchases of equipment?
A. Establishing a budget for capital acquisitions.
B. Requiring that the department in need of the equipment order the equipment.
C. Requiring that the receiving department receive the equipment.
D. Establishing an accounting policy regarding the minimum dollar amount of purchase that will be
considered for capitalization.
5. Which of the following is not one of the auditors' objectives in auditing depreciation?
A. Establishing the reasonableness of the client's replacement policy.
B. Establishing that the methods used are appropriate.
C. Establishing that the methods are consistently applied.
D. Establishing the reasonableness of depreciation computations.

PROBLEM 1 (A)
Case 1
On January 1, 2018 RAMBUTAN CORP. purchased debt securities for cash of P765,540 to be held as financial
asset at amortized cost. The securities have a face value of 600,000, and they mature in 15 years. The securities
carry fixed interest of 10% that is receivable semiannually, on June 30 and December 31. The prevailing market
interest rate on these debt securities is 7% compounded semiannually.
1. The carrying value of the debt securities on December 31, 2018, at amortized cost using the effective
interest rate methos is:
2. The interest income to be reported for 2018 using the effective interest rate method is:

Case 2
SINEGUELAS COMPANY purchased 160 million of 8% bonds, dated January 1, on January 1, 2018, to be held as
financial assets at amortized cost. On the acquisition date, the market yield of bonds with similar risk and
maturity was 10%. The company paid 132 million for the price of the bonds. Interest is received semiannually on
June 30 and December 31. Due to changes in market conditions, the fair value of the bonds at December 31,
2018, was 140 million.

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 3. At what amount will Sineguelas Company report its investment in the December 31, 2018, statement of
financial position?
4. The unrealized holding gain or loss to be classified as component of other comprehensive income at
December 31, 2018, is
5. The amount of interest income to be reported in Sineguelas Company’s income statement for the year
ended December 31, 2018, is

PROBLEM 1 (B)
Case 1
On January 1, 2018 RAMBUTAN CORP. purchased debt securities for cash to be held as financial asset at
amortized cost. The securities have a face value of 600,000, and they mature in 15 years. The securities carry
fixed interest of 10% that is receivable semiannually, on June 30 and December 31. The prevailing market
interest rate on these debt securities is 8% compounded semiannually.
6. The carrying value of the debt securities on December 31, 2018, at amortized cost using the effective
interest rate methos is:
7. The interest income to be reported for 2018 using the effective interest rate method is:

Case 2
SINEGUELAS COMPANY purchased 160 million of 8% bonds, dated January 1, on January 1, 2018, to be held as
financial assets at amortized cost. On the acquisition date, the market yield of bonds with similar risk and
maturity was 10%. The company paid 132 million for the price of the bonds. Interest is received semiannually on
June 30 and December 31. Due to changes in market conditions, the fair value of the bonds at December 31,
2018, was 140 million.

8. At what amount will Sineguelas Company report its investment in the December 31, 2018, statement of
financial position?
9. The unrealized holding gain or loss to be classified as component of other comprehensive income at
December 31, 2018, is
10. The amount of interest income to be reported in Sineguelas Company’s income statement for the year
ended December 31, 2018, is

PROBLEM 2 (A)
You are engaged in the examination of the financial statements of Berol Giant Corporation for the year ended
December 31, 2022. The company’s chief accountant provided for your review the accompanying analyses of
the property, plant, and equipment and related accumulated depreciation accounts. You have traced the
beginning balances to your prior year’s audit working papers.

BEROL GIANT CORPORATION

ANALYSIS OF PROPERTY, PLANT, AND EQUIPMENT AND
RELATED ACCUMULATED DEPRECIATION ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 2022
2022
Dec. 31, 2021 Additions Retirements Dec. 31, 2022
Land P42,250,000 P500,000 -- P42,750,000
Buildings 12,000,000 1,750,000 -- 13,750,000
Machinery and Equipment 38,500,000 4,040,000 2,600,000 39,940,000

Accumulated Depreciation 2022

Dec. 31, 2021 Provisions Retirements Dec. 31, 2022
Buildings P6,000,000 P515,000 -- P6,515,000
Machinery and Equipment 17,325,000 3,922,000 -- 21,247,000

All plant assets are depreciated on the straight-line basis (no residual values taken into consideration) based on
the following estimated service lives: building, 25 years; all other items, 10 years. The company's policy is to take
one-half year depreciation on all asset additions and one-half year depreciation on disposals during the year.
Your examination revealed the following information:

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a. On April 1, the company entered into a 10-year non-cancelable lease contract for a die-casting machine,
with annual rentals of P500,000 payable in advance every April 1. There is no option to renew the lease or
buy the equipment at the end of the lease. The estimated service life of the machine is 10 years with no
residual value. The company recorded the die casting machine in the Machinery and Equipment account at
P4,040,000, the present value at the date of the lease, and P202,000 applicable to the machine has been
included in the depreciation expense for the year.
b. The company completed the construction of a wing on the plant building on June 30. The service life of the
building was not extended by this addition. The lowest construction bid received was P1,750,000, the
amount recorded in the Buildings account. Company personnel constructed the addition at a cost of
P1,600,000.
c. On August 18, P500,000 was paid for paving and fencing a portion of land owned by the company and used
as a parking lot for employees. The expenditure was charged to the Land account.
d. The amount shown in the Machinery and Equipment asset retirement column represents cash received on
September 5 upon disposal of a machine purchased in July 2015 for P4,800,000. The chief accountant
recorded depreciation expense of P350,000 on this machine in 2021.

REQUIRED:
11-15. Determine the adjusted balance of the following: Land, Buildings, Machinery and Equipment, Land
Improvement, and Accumulated Depreciation - Buildings.

PROBLEM 2 (B)
You are engaged in the examination of the financial statements of Berol Giant Corporation for the year ended
December 31, 2022. The company’s chief accountant provided for your review the accompanying analyses of
the property, plant, and equipment and related accumulated depreciation accounts. You have traced the
beginning balances to your prior year’s audit working papers.

BEROL GIANT CORPORATION

ANALYSIS OF PROPERTY, PLANT, AND EQUIPMENT AND
RELATED ACCUMULATED DEPRECIATION ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 2022
2022
Dec. 31, 2021 Additions Retirements Dec. 31, 2022
Land P42,250,000 P500,000 -- P42,750,000
Buildings 12,000,000 1,750,000 -- 13,750,000
Machinery and Equipment 38,500,000 4,040,000 2,600,000 39,940,000

Accumulated Depreciation 2022

Dec. 31, 2021 Provisions Retirements Dec. 31, 2022
Buildings P6,000,000 P515,000 -- P6,515,000
Machinery and Equipment 17,325,000 3,922,000 -- 21,247,000

All plant assets are depreciated on the straight-line basis (no residual values taken into consideration) based on
the following estimated service lives: building, 20 years; all other items, 5 years. The company's policy is to take
one year depreciation on all asset additions and none on disposals during the year. Your examination revealed
the following information:
e. On April 1, the company entered into a 10-year non-cancelable lease contract for a die-casting machine,
with annual rentals of P500,000 payable in advance every April 1. There is no option to renew the lease or
buy the equipment at the end of the lease. The estimated service life of the machine is 10 years with no
residual value. The company recorded the die casting machine in the Machinery and Equipment account at
P4,040,000, the present value at the date of the lease, and P202,000 applicable to the machine has been
included in the depreciation expense for the year.
f. The company completed the construction of a wing on the plant building on June 30. The service life of the
building was not extended by this addition. The lowest construction bid received was P1,750,000, the
amount recorded in the Buildings account. Company personnel constructed the addition at a cost of
P1,600,000.
g. On August 18, P500,000 was paid for paving and fencing a portion of land owned by the company and used
as a parking lot for employees. The expenditure was charged to the Land account.

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h. The amount shown in the Machinery and Equipment asset retirement column represents cash received on
September 5 upon disposal of a machine purchased in July 2015 for P4,800,000. The chief accountant
recorded depreciation expense of P350,000 on this machine in 2021.

REQUIRED:
11-15. Determine the adjusted balance of the following: Land, Buildings, Machinery and Equipment, Land
Improvement, and Accumulated Depreciation - Buildings.

END OF REVIEWER