Gonzales, CPA, is the auditor for a manufacturing company with a balance sheet that includes the entry “Property, plant, and equipment.” Gonzales has been asked by the company’s management if audit adjustments or reclassifications are required for the following material items that have been included in or excluded from “Property, plant, and equipment”: 1. A tract of land was acquired during the year. The land is to be the future site of the entity’s new headquarters, which will be constructed next year. Commissions were paid to the real estate agent used to acquire the land, and expenditures were made to relocate the previous owner’s equipment. These commissions and expenditures were expensed and are excluded from “Property, plant, and equipment.” 2. Clearing costs were incurred to ready the land for construction. These costs were included in “Property, plant, and equipment.” 3. During the land-clearing process, timber and gravel were recovered and sold. The proceeds from the sale were recorded as other income and are excluded from “Property, plant, and equipment.” 4. A group of machines was purchased under a royalty agreement that provides royalty payments based on units of production from the machines. The costs of the machines, freight costs, unloading charges, and royalty payments were capitalized and are included in “Property, plant, and equipment.”
Required: a. Describe the general characteristics of assets, such as land, buildings, improvements, machinery, equipment, fixtures, and so on, that should normally be classified as “Property, plant, and equipment,” and identify assertions in connection with the examination of “Property, plant, and equipment.” Do not discuss specific audit procedures.
b. Indicate whether each of the items numbered 1 to 4 requires one or more audit adjustments or reclassifications, and explain why such adjustments or reclassifications are required or not required. Organize your answer as follows: