ACCTG 323
AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2
1. Ilka Manufacturing uses many kinds of machines in its operations. It constructs some of these machines
itself and acquires others from the manufacturers. The following information relates to machine A, which
has been recorded during the current year.
Cash paid for equipment, including VAT of P 9,600 89,600
Cost of transporting machine – insurance and transport 3,000
Labor costs of installation by an expert fitter 5,000
Labor costs of testing equipment 4,000
Insurance costs for the current year 1,500
Costs of training for personnel who will use the machine 2,500
Costs of safety rails and platforms surrounding machine 6,000
Costs of water devices to keep the machine cool 8,000
Costs of adjustments to the machine to make it operate more efficiently 7,500
Determine the amount at which machine A should be recorded in the records of Newcastle, Ltd.
__________________________________________________________
2. Watermelon Co., on March 1, 2024, acquired land and building by paying P6,000,000 and assuming a
mortgage of P1,500,000. The building will be used by Watermelon Co. as its head office.
Cost of survey 50,000
Cost of paving parking lot adjoining building 50,000
Cost of option of the land not acquired 7,000
Broker’s fee on the properties acquired 10,000
Cost of relocating and reconstructing the property belonging to others
in order to acquire the property 23,000
Payment to real estate agent 40,000
Registration fees and transfer of title 13,000
Title Insurance 15,000
Real Property taxes on the land accrued after acquisition 5,000
Cost of shrubs, trees, and other landscaping 53,000
Unpaid real property taxes up to the date of acquisition 14,000
Driveway, parking bay, and safety lighting 19,000
Payment for claim for injuries not covered by insurance 40,000
Cost of removing trees from the land 70,000
Salvage value of the timber recovered from the land 5,000
Renovation cost of the building 400,000
Payment of medical bills of employees accidentally injured during
building renovation 8,600
Case #1. Assume that on the date of acquisition, the land and building have fair values of P6,000,000 and
P2,000,000, respectively. Compute the cost of land, building, and land improvements.
Land =__________________ Building=________________ Land Improvements=_________________
Case #2. Assume that on the date of acquisition, the old building has a minimal fair value. Compute the cost of
land, building, and land improvements.
Land =__________________ Building=________________ Land Improvements=_________________
3. Haikyu Company is a major supplier of sports apparel. To improve delivery services to customers, the
company acquired four new trucks on July 1, 2024. Described below are the terms for acquisition for each
truck.
Truck List Price Terms
#1 P600,000 Acquired for cash payment of P556,000
#2 P800,000 Acquired for a down payment of P80,000 cash and 1-year, non-
interest-bearing note with a face amount of P720,000. There was
no established cash price for the equipment. The prevailing
interest rate for this type of note is 10%.
#3 P640,000 Acquired in exchange for a computer package that the company
carries in inventory. The computer package cost P480,000 and is
normally sold by Haikyu Company for P608,000.
#4 P560,000 Acquired by issuing 40,000 of Haikyu Company ordinary shares.
The shares have a par value per share of P10 and a market value
per share of P13.
What is the total purchase cost of the trucks purchased on July 1, 2024? ___________________________
4. ESmile Corporation constructed machinery during the year. No entry was made to remove from the
accounts for materials, labor, and overhead the following costs that are properly chargeable to the
machinery account.
Raw materials used P250,000
Factory supplies used 18,000
Direct labor cost incurred 320,000
Incremental overhead caused by construction of
machinery (excluding factory supplies used) 54,000
Fixed overhead rate applied to regular manufacturing
Operations 60% of direct labor cost
The cost of similar machinery would be P880,000 if it had been purchased from the dealer.
The cost of the machinery should be ________________________________________?
5. LordOfTheWash Laundry Co. has been experiencing a significant increase in customers’ demand for its
services. To expand its operational capacity, LordOfTheWash decided to purchase equipment from
WashMeWip Cleaning Company on January 2, 2024. LordOfTheWash issues a P2,400,000 5-year, non-
interest bearing note to WashMeWip Cleaning Company 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. LordOfTheWash’s financial
year-end is December 31. The appropriate present value factor of an ordinary annuity of 1 at 12% for 5
periods is 3.60478.
a. What is the cost of the new equipment? _____________________________
b. What amount of interest expense should be reported in LordOfTheWash’s income statement for the
year ended December 31, 2026? ___________________________________
c. What is the carrying value of the note at December 31, 2027? ___________________