The following were discovered during your audit of Blue Company’s financial statements for the year

ended December 31, 2022:

a. On December 24, 2022, Blue purchased an office equipment for P400,000, terms 2/5, n/15. No
entry was made on the date of purchase. The same was paid on December 31, 2022 and the
accountant debited Office Equipment and credited cash for P400,000.
b. Machine C, with a cash price of P128,000, was purchased on January 2, 2022. The company paid
P20,000 down and P10,000 for 12 months. The last payment was made on December 30, 2022.
Straight line depreciation, based on a five-year useful life and no salvage value, was recorded at
P28,000 for the year. Freight of P4,000 on machine C was debited to the Freight in account.
c. Machine P with a cash selling price of P360,000 was acquired on April 1, 2022, in exchange for
P400,000 face amount of bonds payable selling at 90, and maturing on April 1, 2032. The
accountant recorded the acquisition by a debit to Machinery and a credit to Bonds Payable for
P400,000. Straight line depreciation was recorded based on a five-year economic life and
amounted to P54,000 for nine months. In the computation of depreciation, residual value of
P40,000 was used.

d. Machine A was acquired on January 22, 2022, in exchange for past due accounts receivable of
P140,000, on which an allowance of 20% was established at the end of 2021. The current fair
value of the machine on January 22 was estimated at P110,000. The machine was recorded by a
debit to Machinery and a credit to Accounts Receivable for P140,000. No depreciation was
recorded on Machine A, because it was not installed and never used in operations. On February 2,
2022, Machine A was exchanged for 1,000 shares of the company’s outstanding capital stock with
market price of P105 per share. The Treasury Stock account was debited for P140,000 with the
corresponding credit to Machinery.

e. On December 29, 2022, the company exchanged 10,000 shares of Emong, Inc. ordinary shares,
which Blue was holding as an investment, for an equipment from De Leon Corporation. The
ordinary shares of Emong, Inc., which had been purchased by Blue for P45 per share, had a quoted
market value of P50 per share on the date of exchange. The equipment had a market value of
P470,000. The transaction was recorded by a debit to Equipment and a credit to Investment in
Emong, Inc.-ordinary for P450,000.

f. On December 30, 2022, Machine M with a carrying amount of P120,000 (cost P400,000) was
exchanged for a similar asset with a fair value of P150,000. In addition, Blue paid P20,000 to
acquire the new machine. The exchange, which lacks commercial substance, was recorded by a
debit to Machinery and a credit to cash for P20,000.
 g. Machine E was recorded at P102,000, which included the carrying amount of P22,000
for an old machine accepted as a trade in, and cash of P80,000. The cash price of Machine S was
P90,000, and the trade in allowance was P10,000. This transaction took place on December 31,
2022.

h. Ms. Cabrera, the company’s president, donated land and building appraised at P200,000
and P400,000, respectively, to the company to be used as plant site. The company began
operating the plant on September 30, 2022. The building is estimated to have a useful life of 25
years. Since no money was involved, no journal entry was made for the above transaction.

i. On July 1, 2021, the national government granted a parcel of land located in Baguio City to Blue.
On the date of grant, the land had a fair value of P2,000,000. The grant required Blue to construct
a cold storage building on the site. Blue finished the construction of the building, which has an
estimated useful life of 25 years, on January 2, 2022. Blue appropriately recorded the cost of the
building of P4,000,000 (which include direct materials, direct labor, and indirect cost and
incremental overhead) but failed to provide depreciation in 2022. Unaware of the accounting
procedures for government grants, the company did not reflect the grant on its books.

CORRECTING ENTRIES ON PPE ACCOUNTS

The following were discovered during your audit of Blue Company’s financial statements for the year
ended December 31, 2022:
a. On December 24, 2022, Blue purchased an office equipment for P400,000, terms 2/5,
n/15. No entry was made on the date of purchase. The same was paid on December 31, 2022 and
the accountant debited Office Equipment and credited cash for P400,000.
ENTRY MADE SHOULD BE ENTRY AJE
a. Office equip 400 Office equip 392 Purchase disc. Lost 8
Cash Purchase disc. Lost 8 Office equip 8
400
Cash
400
b. Machine C, with a cash price of P128,000, was purchased on January 2, 2022. The
company paid P20,000 down and P10,000 for 12 months. The last payment was made on
December 30, 2022. Straight line depreciation, based on a five-year useful life and no salvage
value, was recorded at P28,000 for the year. Freight of P4,000 on machine C was debited to the
Freight in account.
Machinery 140 Machinery 128 Interest exp 12
Cash Interest exp 12 Machinery 12
140
(28,000 depn x 5) Cash 140

Freight in 4 Machinery 4 Machinery 4

Cash Cash 4 Freight in 4
4
 Depreciation exp 28 Depn Exp 26.4 Accum. Depn 1.6
A/Depn A/depn Depn Exp
28 26.4 1.6

c. Machine P with a cash selling price of P360,000 was acquired on April 1, 2022, in
exchange for P400,000 face amount of bonds payable selling at 90, and maturing on April 1, 2032.
The accountant recorded the acquisition by a debit to Machinery and a credit to Bonds Payable for
P400,000. Straight line depreciation was recorded based on a five-year economic life and
amounted to P54,000 for nine months. In the computation of depreciation, residual value of
P40,000 was used.

Machinery 400 Machinery 360 Disc on BP 40

Bonds payable Disc. On BP 40 Machinery 40
400
Bonds payable
400

Depn exp 54 Depn exp 48 Accum Dep 6

A/Depn A/Depn Depn Exp 6
54 48
(400-40)/5 x 9/12
Interest exp 3 Interest exp 3
Disc on BP Disc on BP
3 3
(40,000/10 X 9/12)

d. Machine A was acquired on January 22, 2022, in exchange for past due accounts
receivable of P140,000, on which an allowance of 20% was established at the end of 2021. The
current fair value of the machine on January 22 was estimated at P110,000. The machine was
recorded by a debit to Machinery and a credit to Accounts Receivable for P140,000. No
depreciation was recorded on Machine A, because it was not installed and never used in
operations. On February 2, 2022, Machine A was exchanged for 1,000 shares of the company’s
outstanding capital stock with market price of P105 per share. The Treasury Stock account was
debited for P140,000 with the corresponding credit to Machinery.

Machinery 140 Machinery 110 Allow for DA 28

A/R Allowance for DA 28 Loss on exchange 2
140
Loss on exchange 2 Machinery 30
A/R
140

TS 140 TS 110 Machinery 30

Machinery 140 Machinery TS 30
110
 e. On December 29, 2022, the company exchanged 10,000 shares of Emong, Inc. ordinary
shares, which Blue was holding as an investment, for an equipment from De Leon Corporation.
The ordinary shares of Emong, Inc., which had been purchased by Blue for P45 per share, had a
quoted market value of P50 per share on the date of exchange. The equipment had a market
value of P470,000. The transaction was recorded by a debit to Equipment and a credit to
Investment in Emong, Inc.-ordinary for P450,000.
Equipment 450 Equipment 500 Equipment 50
Investment in Tyler 450 Investment in Tyler Gain on exchange
450 50
Gain on exchange
50

f. On December 30, 2022, Machine M with a carrying amount of P120,000 (cost P400,000) was
exchanged for a similar asset with a fair value of P150,000. In addition, Blue paid P20,000 to
acquire the new machine. The exchange, which lacks commercial substance, was recorded by a
debit to Machinery and a credit to cash for P20,000.

Machinery 20 Machinery-new 140 Machinery-new 120

Cash A/Depn 280 A/Depn 280
20
Machinery-old Machinery-old
400 400
Cash
20

g. Machine E was recorded at P102,000, which included the carrying amount of P22,000
for an old machine accepted as a trade in, and cash of P80,000. The cash price of Machine S was
P90,000, and the trade in allowance was P10,000. This transaction took place on December 31,
2022.

Machinery-new 102 Machinery-new 90 Loss on trade in 12

Cash Loss on trade in 12 Machinery-new 12
80
Machinery-old Cash 80
22
Machinery-old 22

h. Ms. Cabrera, the company’s president, donated land and building appraised at P200,000
and P400,000, respectively, to the company to be used as plant site. The company began
operating the plant on September 30, 2022. The building is estimated to have a useful life of 25
years. Since no money was involved, no journal entry was made for the above transaction.

None Land 200 Land 200

Building 400 Building 400
Donated capital 600 Donated capital 600
 Depreciation exp 4 Depreciation exp 4
Accum Depn 4 Accum Depn 4
(400/25) * 3/12 (400/25) * 3/12

i. On July 1, 2021, the national government granted a parcel of land located in Baguio City to Blue.
On the date of grant, the land had a fair value of P2,000,000. The grant required Blue to construct
a cold storage building on the site. Blue finished the construction of the building, which has an
estimated useful life of 25 years, on January 2, 2022. Blue appropriately recorded the cost of the
building of P4,000,000 (which include direct materials, direct labor, and indirect cost and
incremental overhead) but failed to provide depreciation in 2022. Unaware of the accounting
procedures for government grants, the company did not reflect the grant on its books.

Building 4M Land 2M Land 2M

Cash 4M Deferred income 2M Deferred income 2M

Building 4m
Cash 4m

Depn exp 160 Depn exp 160

A/Depn 160 A/Depn
160

Deferred income 80 Deferred income 80

Income from govt grant 80 Income from govt grant
80

Required:
As Blue’s external auditor, you are required to prepare any necessary adjusting journal entries as of
December 31, 2022.

Acquisition and Disposition of Equipment

You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year
ended December 31, 2022. You gathered the following information pertaining to the
company’s Equipment and Accumulated Depreciation accounts.

EQUIPMENT__________________________
1.1.22 Balance P 446,000 9.1.22 No. 6 sold P 9,000
6.1.22 No. 12 36,000 12.31.22 Balance 474,000
9.1.22 Dismantling
of No. 6 1,000 ______
P 483,000 P 483,000

ACCUMULATED DEPRECIATION – EQUIPMENT

12.31.22 Balance P 271,400 1.1.22 Balance P 224,000
______ 12.31.22 2022 Dep’n 47,400
 P 271,400 P 271,400

The following are the details of the entries above:

1. The company depreciates equipment at 10% per year. The oldest equipment owned is
seven years old as of December 31, 2022.

2. The following adjusted balances appeared on your last year’s working papers:

Equipment P 446,000
Accumulated depreciation 224,000
3. Machine No. 6 was purchased on March 1, 2015 at a cost of P30,000 and was sold on
September 1, 2022, 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.

Questions
1. The gain/(loss) on sale of Machine 6 is:
a. P 1,000 b. P 500 c. P (1,000) d. P (500)

2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2022 is:

a. P 446,000 b. P 452,000 c. P 454,500 d. P 475,500

3. The Depreciation expense – Equipment of TRIUMPH CORPORATION at December 31,

2022 is:
a. P 45,200 b. P 45,450 c. P 46,525 d. P 53,525

4. The entry to correct the sale of Machine 6 is:

a. Loss on sale of equipment 1,000
Accumulated depreciation 21,000
Equipment 22,000
b. Accumulated depreciation 22,500
Equipment 22,000
Gain on sale 500
c. Accumulated depreciation 21,500
loss on sale of equipment 500
Equipment 22,000
d. Accumulated depreciation 23,000
Equipment 22,000
Gain on sale of equipment 1,000

5. The Depreciation Expense at December 31, 2022 is:

a. Overstated by P6,125 c. Understated by P1,950
b. Understated by P6,125 d. Overstated by P1,950