Beruflich Dokumente
Kultur Dokumente
INTERMEDIATE
Financial
Accounting
Part 1B
2015
ISBN 978-621-95096-1-9
Published by:
BANDOLIN ENTERPRISE
No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600, Philippines
ii
TABLE OF CONTENTS
CHAPTER 12
INVESTMENTS IN ASSOCIATES .............................................................. 1
CHAPTER 12: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).............................................................................................. 1
CHAPTER 12: THEORY OF ACCOUNTS REVIEWER........................................ 6
CHAPTER 12 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 23
CHAPTER 13
AGRICULTURE ....................................................................................... 24
CHAPTER 13: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES) 24
CHAPTER 13: THEORY OF ACCOUNTS REVIEWER...................................... 28
CHAPTER 13 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS ........ 34
CHAPTER 14
PROPERTY, PLANT AND EQUIPMENT (PART 1) ................................ 35
CHAPTER 14: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................................................ 35
CHAPTER 14: THEORY OF ACCOUNTS REVIEWER...................................... 40
CHAPTER 14 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 50
CHAPTER 15
PROPERTY, PLANT AND EQUIPMENT (PART 2) ................................ 52
CHAPTER 15: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................................................ 52
CHAPTER 15: THEORY OF ACCOUNTS REVIEWER...................................... 58
CHAPTER 15 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 79
CHAPTER 16
DEPLETION OF MINERAL RESOURCES ................................................ 80
CHAPTER 16: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................................................ 80
CHAPTER 16: THEORY OF ACCOUNTS REVIEWER...................................... 84
CHAPTER 16 – SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 91
CHAPTER 17
GOVERNMENT GRANTS ........................................................................ 92
CHAPTER 17: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES) 92
CHAPTER 17: THEORY OF ACCOUNTS REVIEWER...................................... 94
CHAPTER 17 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS102
CHAPTER 18
BORROWING COSTS ............................................................................ 103
CHAPTER 18: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).......................................................................................... 103
CHAPTER 18: THEORY OF ACCOUNTS REVIEWER.................................... 105
CHAPTER 18 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS114
CHAPTER 19
INVESTMENT PROPERTY ................................................................... 115
CHAPTER 19: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES) 115
CHAPTER 19: THEORY OF ACCOUNTS REVIEWER.................................... 120
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CHAPTER 19 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS127
CHAPTER 20
INTANGIBLE ASSETS ........................................................................... 128
CHAPTER 20: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).......................................................................................... 128
CHAPTER 20: THEORY OF ACCOUNTS REVIEWER.................................... 134
CHAPTER 20 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS155
CHAPTER 21
IMPAIRMENT OF ASSETS ................................................................... 156
CHAPTER 21: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).......................................................................................... 156
CHAPTER 21: THEORY OF ACCOUNTS REVIEWER.................................... 164
CHAPTER 21 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS170
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Chapter 12
Investments in Associates
In 20x2, PRAISE reported loss of ₱8,000,000, declared and issued 10% stock
dividends, and reported gain on property revaluation of ₱2,000,000 and loss on
exchange differences on translation of foreign operations of ₱400,000.
2. How much is the carrying amount of the investment as of December 31, 20x1?
a. 4,000,000 b. 6,240,000 c. 6,400,000 d. 6,560,000
4. How much is the net share in the other comprehensive income of the
associate in 20x2?
a. 320,000 b. (1,280,000) c. (1,280,000) d. 0
5. How much is the carrying amount of the investment as of December 31, 20x2?
a. 4,960,000 b. 4,640,000 c. 4,000,000 d. 0
6. How much is the goodwill that will be subsumed in the carrying amount of the
investment?
a. 1,400,000 b. 1,250,000 c. 1,100,000 d. 0
7. How much is the net share in the profit or loss of the associate (investment
income) in 20x1?
1
a. 1,400,000 b. 1,200,000 c. 1,000,000 d. 0
8. How much is the carrying amount of the investment as of December 31, 20x1?
a. 8,000,000 b. 8,500,000 c. 8,700,000 d. 8,900,000
10. How much is AFFICIONADO’s share in profit of associate for the year?
a. 0 b. 60,000 c. 600,000 d. 909,200
13. What if SEVERE Co. declared dividends that pay all of the dividends in arrears
on preference shares, how much is the share in profit or loss of associate?
a. 704,000 b. 800,000 c. 512,000 d. 770,000
14. What if the preference shares are non-cumulative, how much is the share in
profit or loss of associate?
a. 704,000 b. 800,000 c. 512,000 d. 770,000
15. What if the shares are redeemable preference shares and SEVERE declared
₱150,000 cash dividends on the redeemable preference shares during the
year, how much is the share in profit or loss of associate?
a. 704,000 b. 800,000 c. 512,000 d. 770,000
2
Prior to revaluation, the net assets had a book value of ₱32,000,000. The
difference between the revalued amount and carrying amount is attributable
to a building which was credited to revaluation surplus. The building has a
remaining useful life of 10 years with no residual value. It is LESSEN’s policy
to depreciate all tangible depreciable assets using the straight-line method.
At the end of 20x1, LESSEN reported a profit of ₱4,000,000 and paid cash
dividends of ₱2,400,000. At December 31, 20x1, the shares are selling at ₱400
per share.
The remaining ownership of 15% (30% x 1/2) does not give AMBULATE
significant influence over WALK. How much is the reclassification gain (loss)
on July 1, 20x2?
a. 800,000 b. (800,000) c. 2,000,000 d. 1,000,000
The remaining 20% ownership (40% x 1/2) still gives CHASTE significant
influence over PURE. How much is the reclassification gain (loss) on July 1,
20x2?
a. 800,000 b. (800,000) c. 2,000,000 d. 1,000,000
3
The remaining ownership interest of 10% (1/4 of 40%) still gives
CIRCUMSPECT significant influence over CAUTIOUS. Many of CAUTIOUS’s
board of directors are appointed by CIRCUMSPECT. How much is the
reclassification gain (loss) on July 1, 20x2?
a. 2,000,000 b. 1,500,000 c. 1,000,000 d. 0
The remaining ownership of 15% (30% x 1/2) does not give SNITCH
significant influence over PILFER. How much is the reclassification gain (loss)
recognized in profit or loss on July 1, 20x2?
a. 2,000,000 b. 1,500,000 c. 1,000,000 d. 0
On July 1, 20x2, POSTULATE Co. acquired additional 15,000 shares at ₱280 per
share resulting to an increase in ownership interest over DEMAND from the
previous 10% to 25%. The transaction did not give rise to any goodwill or
negative goodwill. In 20x2, DEMAND reported profit of ₱24,000,000, of which
₱16,000,000 were earned in the second half of the year. In addition, DEMAND
declared and paid dividends of ₱4,000,000 on December 31, 20x2. The DEMAND
shares have quoted price of ₱360 per share on December 31, 20x2.
21. How much is the carrying amount of the investment in associate on July 1,
20x2?
a. 7,000,000 b. 7,600,000 c. 6,600,000 d. 5,800,000
22. How much is the share in the profit of the associate in 20x2?
a. 4,000,000 b. 4,800,000 c. 3,200,000 d. 3,000,000
23. How much is the carrying amount of the investment in associate on December
31, 20x2?
a. 10,000,000 b. 11,400,000 c. 9,800,000 d. 8,800,000
4
reports profit of ₱4,000,000 and ₱4,800,000 on December 31, 20x1 and 20x2,
respectively.
29. Assuming the sale is an upstream sale, how much is the share in the profit of
associate in 20x1?
a. 968,000 b. 728,000 c. 785,600 d. 800,000
Downstream sale of non-depreciable asset
Use the following information for the next two questions:
LUCID Co. owns 20% of CLEAR, Inc.’s outstanding ordinary shares. On January 1,
20x1, LUCID sold land with a carrying amount of ₱400,000 to CLEAR for
₱480,000. Gain of ₱80,000 was recorded by LUCID. CLEAR reports profit of
₱4,000,000 and ₱4,800,000 on December 31, 20x1 and 20x2, respectively.
31. Assuming the sale is an upstream sale, how much is the share in the profit of
associate in 20x1?
a. 720,000 b. 784,000 c. 728,000 d. 800,000
5
Share in losses of associate
Use the following information for the next four questions:
SKEPTICAL Co. owns 20% of the ordinary shares of QUESTIONING, Inc. The
records of SKEPTICAL as of December 31, 20x1 show the following information
before any necessary year-end adjustments.
32. How much is the share in the loss of the associate in 20x1?
a. 1,120,000 b. 320,000 c. 800,000 d. 280,000
33. How much is the share in the loss of the associate in 20x2?
a. 0 b. 320,000 c. 400,000 d. 280,000
34. How much is the share in the loss of the associate in 20x3?
a. 0 b. 480,000 c. 320,000 d. 800,000
35. How much is the share in the profit of the associate in 20x4?
a. 600,000 b. 820,000 c. 1,200,000 d. 200,000
6
3. When investments in equity securities represent 20% to 50% interest in the
voting rights of the investee, which of the following standards most likely
would be applied?
a. PFRS 9 b. PAS 31 c. PFRS 3 d. PAS 28
10. It is the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control over those policies.
a. significant influenza c. significant influence
b. control d. joint control
12. It is the power to govern the financial and operating policies of an entity so as
to obtain benefits from its activities.
a. control b. joint control c. significant influence d. telekineses
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14. It is the contractually agreed sharing of control over an economic activity, and
exists only when the strategic financial and operating decisions relating to the
activity require the unanimous consent of the parties sharing control
(venturers).
a. control b. joint venture c. joint control d. wedding vow
16. PAS 28 does not require the equity method to be applied to which of the
following instance(s)?
I. When an associate is acquired and held with a view to its disposal within
twelve months of acquisition. There must be evidence that the investment
is acquired with the intention to dispose of it and that management is
actively seeking a buyer. The words ‘in the near future’ were replaced
with the words ‘within twelve months’. When such an associate is not
disposed of within twelve months it must be accounted for using the
equity method as from the date of acquisition, except in narrowly
specified circumstances under PFRS 5.
II. An investor continues to have significant influence over an associate;
however, the associate is operating under severe long-term restrictions
that significantly impair its ability to transfer funds to the investor.
III. An investor holds 10% interest in an investee; however, the interest held
gives the investor significant influence over the investee.
IV. An investor presents separate financial statement in accordance with PAS
27.
a. I and IV b. I, III, IV c. I, II, III, IV d. none
Significant influence
17. According to PAS 28 Investments in associates, which of the following
statements best describes the term 'significant influence'?
a. The holding of a significant proportion of the share capital in another
entity
b. The contractually agreed sharing of control over an economic entity
c. The power to participate in the financial and operating policy decisions of
an entity
d. The mutual sharing in the risks and benefits of a combined entity
(ACCA)
19. Which of the following may provide evidence of significant influence even if
the percentage of ownership interest is less than 20%?
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I. Representation on the board of directors or equivalent governing body of
the investee.
II. Participation in policy-making processes, including participation in
decisions about dividends or other distributions.
III. Material transactions between the investor and the investee
IV. Interchange of managerial personnel.
V. Provision of essential technical information.
a. I, II b. I, II, III c. I, II, IV d. any of these
22. When computing for its share in the associate’s profit or loss, an investor shall
use
a. its present ownership interest
b. its present ownership interest adjusted for the effect of any potential
voting rights
c. the potential voting rights percentage
d. the effective interest rate
23. According to PAS 28, significant influence is the investor’s participation in the
financial and operating policy decisions of the investee but not control of
these decisions. Which of the following may an investor be unable to exercise
significant influence?
a. participation in policy making process
b. material intercompany transactions
c. majority ownership of the investee concentrated among a small group of
shareholders who operate the investee without regard to the views of the
investor
d. technological dependency
(Adapted)
24. Under PAS 28, these refer to instruments, which if exercised, give the entity
additional voting power or reduce another party’s voting power over the
financial and operating policies of another entity.
a. share rights c. convertible securities
b. share options d. potential voting rights
25. When assessing the existence of significant influence, which of the following
shall be considered by the investor?
a. potential voting rights that are not exercisable immediately
9
b. share options giving the investor the right to purchase preference shares
of the investee
c. stock rights which are exercisable immediately but the entity’s
management does not intend to exercise.
d. potential voting rights that will be received in the following accounting
period
Equity method
27. Investments accounted for under the equity method are initially recognized at
a. cost
b. fair value
c. fair value plus direct acquisition cost
d. cost plus or minus share in profit or loss of associate
28. Which of the following does not correctly relate to the application of the
equity method?
a. the investor recognizes its proportionate share in the profit or loss, other
comprehensive income, and discontinued operations of the associate
b. dividends received are accounted for as reduction in the investment
balance
c. share dividends are not accounted for
d. the investor accounts only its proportionate share in the profit or loss of
the associate but not in other comprehensive income and discontinued
operations.
29. Under the equity method, which of the following does not decrease the
investment account?
a. share in associate’s loss
b. amortization of undervaluation of asset
c. amortization of overvaluation of asset
d. share in dividends declared by the associate
31. When computing for its share in the associate’s profit or loss, the investor
should
I. deduct one year dividends on cumulative preference shares of the
associate held by other parties and classified as equity, whether declared
or not.
II. deduct one year dividends on noncumulative preference shares of the
associate held by other parties and classified as equity, whether declared
or not.
III. deduct all dividends in arrears on cumulative preference shares of the
associate held by other parties and classified as equity, whether declared
or not.
IV. deduct dividends on noncumulative preference shares of the associate
held by other parties and classified as equity only when declared.
10
V. not deduct from profit or loss any dividends on ordinary shares before
computing for the share in the associate’s profit or loss.
a. I, IV, V b. I, IV c. II, III, V d. II, III
32. The equity method causes the balance in the investment account to
approximate:
a. original cost of the investment
b. market value of the investment
c. original cost of the investment minus any dividends declared and paid by
the other company
d. original cost of the investment plus a proportionate share of subsequent
undistributed earnings of the investee company.
(Adapted)
33. How is goodwill arising on the acquisition of an associate dealt with in the
financial statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss.
d. Goodwill is not recognized separately within the carrying amount of the
investment.
(Adapted)
34. If the excess of the acquisition cost of an investment accounted for under
equity method over the book value of net assets acquired is attributable to an
undervalued depreciable asset and an unidentifiable asset, which of the
following statements is correct
a. The carrying amount of the investment is increased by the proportionate
share in the profits earned by the investee and decreased by the
depreciation of the interest in the undervaluation and unaffected by the
separate impairment of the unidentifiable asset
b. The carrying amount of the investment is increased by the depreciation of
the interest in the undervaluation and amortization of the unidentifiable
asset
c. The carrying amount of the investment is decreased by the depreciation of
the interest in the undervaluation and decreased by the separate
impairment on the unidentifiable asset.
d. Investment income is decreased by the depreciation of the interest in the
undervaluation and amortization of the unidentifiable asset
35. The equity method is most likely not applicable to which of the following?
a. ownership interest of 2%, 2 out of 7 of the BOD of the associate is
appointed by the investor
b. ownership interest of 40%
c. ownership interest of 20% but the associate is operating under severe
long-term restrictions that significantly impair its ability to transfer funds
to the investor
d. ownership interest of 25% acquired with an exclusive view of subsequent
disposal within 12months and accounted for under PFRS 5
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d. The investor previously held only 10% interest but subsequently acquires
additional 10% interest in the associate.
37. Which of the following computations may properly result to the correct
balance of an investment in associate account at year-end?
a. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, and minus amortization of share
in undervaluation of associate’s asset
b. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, and plus amortization of share in
undervaluation of associate’s asset
c. Beginning balance of investment plus share in associate’s profit plus share
in dividends declared by associate, and minus amortization of share in
undervaluation of associate’s asset
d. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, minus amortization of share in
undervaluation of associate’s asset, and minus separate impairment loss
on goodwill included in the carrying amount of the investment
38. Which of the following computations may properly result to the correct
amount of share in associate’s profit or loss for the period?
a. Share in profit of associate minus amortization of share in the
overvaluation of associate’s asset
b. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset
c. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus share in dividends declared by
associate
d. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus separate impairment loss on
goodwill included in the carrying amount of the investment
39. Which of the following may represent the net change in the investment in
associate account during a period?
a. Share in profit of associate minus share in dividends plus increase in the
investment in associate account
b. Share in profit of associate minus share in dividends minus increase in the
investment in associate account
c. Share in profit of associate minus share in dividends
d. Share in profit of associate plus share in dividends
41. The excess of purchase cost of an investment in associate over the fair value
of the interest acquired represents
a. goodwill that should not be amortized but tested for impairment at least
annually
b. negative goodwill that should be recognized in the investor’s profit or loss
in the year of acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
12
42. The excess of the fair value of the interest acquired over the purchase cost of
an investment in associate represents
a. goodwill that should not be amortized but tested for impairment at least
annually
b. negative goodwill that should be recognized in the investor’s profit or loss
in the year of acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
43. Equity method shall cease to be applied only when the investor loses
significant influence over the associate. Which of the following is not true?
a. The loss of significant influence can occur with or without a change in the
percentage of ownership.
b. An entity loses significant influence over an investee when it loses the
power to participate in the financial and operating policy decisions of that
investee.
c. There is a presumption of loss of significant influence if the ownership
interest falls below 20%.
d. There is a presumption of loss of significant influence when the associate
is operating under severe long-term restrictions that significantly impair
its ability to transfer funds to the investor.
46. On the loss of significant influence, the investor shall do any of the following,
except
a. measure at fair value any investment retained in the former associate.
b. recognize gain or loss for the difference between the net disposal
proceeds received and the carrying amount of the investment sold
c. recognize gain or loss for the difference between the fair value of the
interest retained and the carrying amount of the previous interest held
d. account for the discontinuance of equity method retrospectively.
13
c. no adjustment to the investment account is necessary
d. the investment should be reclassified and any gain or loss on
reclassification is recognized in equity.
49. If there is any excess of the investor’s share of the net fair value of the
associate’s identifiable assets and contingent liabilities over the cost of the
investment, that is, negative goodwill, how should that excess be treated?
a. It should be included in the carrying amount of the investment.
b. It should be written off against retained earnings.
c. It should be included as income in the determination of the investor’s
share of the associate’s profit or loss for the period.
d. It should be disclosed separately as part of the investor’s equity.
(Adapted)
51. When the equity method is used to account for the investment in an associate,
the recording of the receipt of a cash distribution from the investee will result
in
a. The recognition of investment income.
b. A reduction in the investment balance.
c. An Increase in a liability account.
d. An increase in special equity account.
52. Stock dividends on common stock should be recorded at their fair market
value by the investor when the related investment is accounted for under
which of the following methods?
Cost Equity
a. Yes Yes
b. Yes No
c. No Yes
d. No No
(AICPA)
53. Which of the following statements is in accordance with the provisions of PAS
28?
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I. The income or loss on the investment in associate is computed on the net
income after tax of the associate.
II. The income or loss on the investment in associate is presented in the
statement of profit or loss and other comprehensive income after the line
item “Income Tax Expense” but before discontinued operations.
a. I b. II c. I and II d. Neither I nor II
55. Which of the following statements are in accordance with PAS 28?
I. When the associate has cumulative preference shares, the investor
computes its share in the profit or loss of the investee after deducting the
preferred dividends, only when such dividends are declared.
II. When the associate has non-cumulative preference shares, the investor
computes its share in the profit or loss of the investee after deducting the
preferred dividends, whether or not such dividends are declared
a. true, true b. true, false c. false, true d. false, false
56. Bell owns 10% of the common stock of War Co. throughout the year. War Co.
has no preferred stock outstanding. Bella’s stock gives him the right to
a. be paid 10% of the firm’s profits in cash each year
b. receive dividends equal to 10% of the par value each year
c. receive dividends equal to 10% of the total dividends paid by the
corporation for the year to common stockholders
d. keep the corporation from issuing any additional stock unless he is willing
to buy 10% of the newly issued shares
(AICPA)
15
II. Share dividends received on an investment in associate is accounted for as
deduction from the investment account.
III. Share dividends received on an investment in associate is generally not
accounted for.
a. I b. II c. I and III d. I, II and III
59. Which of the following statements correctly refers to the provisions of PAS 28
Investments in Associates?
I. If an investor acquires additional shares sufficient to give him significant
influence, a retrospective adjustment should be made on the financial
statements to recognize share in profits and losses of the investee not
previously recognized.
II. No adjustment to the investment account is made when changing from the
fair value method to the equity method.
a. I b. II c. I and II d. Neither I nor II
63. The following statements relate to equity method. Choose the incorrect
statement.
a. In accounting for investments in common stock under the equity method,
sales of stock of an investee by an investor, should be accounted for as
gains or losses equal to the difference at the time of sales between selling
price and carrying amount of the stock sold.
b. The general rule is that an investor owning 20% or more of the voting
stock of an investee is presumed to have the ability to exercise significant
interest over the investee.
16
c. Under the equity method of accounting, the investments in common stock
should be shown as a single amount, and the investor’s share of earnings
or losses from its investment should ordinarily be shown in its income
statement as a single amount including the results of discontinued
operations.
d. The equity method of recording security transactions assumes a close
economic relationship between the investor and the investee. It is used,
when influential interest exists.
(RPCPA)
64. Wrath Co. uses the equity method to account for its January 1, 2003 purchase
of Anger Inc.’s common stock. On January 1, 2003, the fair values of Anger’s
FIFO inventory and land exceeded their carrying amounts. How do these
excesses of fair values over carrying amounts affect Wrath’s reported equity
in Anger’s 2003 earnings?
Inventory excess Land excess
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
(AICPA)
65. On May 1, 20x1, Upbeat Company acquired 30% of the voting stock of Reggae
Corp. In 20x1, Reggae had net earnings of ₱100,000 and paid dividends of
₱10,000. Upbeat mistakenly measured these transactions using the cost
instead of the equity method of accounting. What effect would this have on
working capital, dividend income, and net earnings, respectively?
a. overstate, overstate, overstate
b. no effect, understate, understate
c. no effect, overstate, understate
d. understate, understate, understate
(RPCPA)
17
c. Long-term investments are classified as long-term only because they are
not readily marketable.
d. Long-term investments in equity securities are written down only when
there has been a material and apparently permanent decline in the market
value of the investment below its cost.
e. Impairment losses on investments in associates are not accounted for
under PAS 28.
68. The following statements relate to the accounting for investments in equity
instruments.
I. Whenever an investment in marketable equity securities does not qualify
for accounting using the equity method, the investor is required to
recognize as dividend income cash dividends received from the investee.
II. The cost measurement for equity investments is permitted in separate
financial statements.
III. An investor may still be able to exercise significant influence over an
investee, even if the investment is less than 20% of the voting stock of the
investee.
IV. No adjustment to the investment account is made when changing from the
equity to the fair value measurement, or vice versa.
a. I, II b. I, II, III c. I, III d. I, II, IV
69. In its financial statements, Musang, Inc. uses the cost measurement of
accounting for its 15% ownership of Kalinga Coffee Co. At December 31, 20x1,
Musang has a receivable from Kalinga Coffee. How should the receivable be
reported in Musang’s December 31, 20x1 statement of financial position?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in
Kalinga Coffee, without separate disclosure.
c. 85% of the receivable should be reported separately, with the balance
offset against Kalinga Coffee’s payable to Musang.
d. The total receivable should be offset against Kalinga Coffee’s payable to
Musang, without separate disclosure.
(AICPA)
70. When the equity method is used to account for investments in common stock,
which of the following affects the investor’s reported investment income?
Equipment amortization related to purchase Cash dividends from investee
a. Yes Yes
b. No Yes
c. No No
d. Yes No
(AICPA)
71. Google Co. received a cash dividend from a common stock investment. Should
Google report an increase in the investment account if it has classified the
stock as FVOCI or uses the equity method of accounting?
FVOCI Equity
a. No No
b. Yes Yes
c. Yes No
d. No Yes
(AICPA)
18
72. Bliss Co. uses the equity method to account for its investment in Nirvana, Inc.
common stock. How should Bliss record a 2% stock dividend received from
Nirvana?
a. As dividend revenue at Nirvana's carrying value of the stock.
b. As dividend revenue at the market value of the stock.
c. As a reduction in the total cost of Nirvana stock owned.
d. As a memorandum entry reducing the unit cost of all Nirvana stock
owned.
(AICPA)
73. Which of the following investments in an associate is not within the scope of
PAS 28 Investments in associates?
a. An associate held by a subsidiary and measured at cost
b. An associate held by a venture capital organization and measured at cost
c. An associate held by a venture capital organization and measured at fair
value with changes in fair value recognized in profit or loss
d. An associate held by a subsidiary and measured at fair value with changes
in fair value recognized in profit or loss
(ACCA)
74. Fretboard Company equity accounts for its 40% interest in Fingerboard
Company. Fingerboard's financial statements include the following:
Revenue ₱ 600,000
Cost of sales (250,000)
350,000
Operating expenses (285,000)
65,000
Tax ( 20,000)
₱ 45,000
19
(Adapted)
77. If the investor ceases to have significant influence over an associate, how
should the investment be treated?
a. It should still be treated using equity accounting.
b. It should be treated in accordance with PFRS 9.
c. The investment should be frozen at the date at which the investor ceases
to have significant influence.
d. The investment should be treated at cost.
(Adapted)
79. Profits and losses resulting from “upstream” and “downstream” transactions
between an investor and an associate are
a. recognized in the investor’s financial statements through proportionate
consolidation, meaning the investor recognizes its share in the sale and
cost of sales recorded by the associate
b. recognized in the investor’s financial statements only to the extent of
unrelated investors’ interests in the associate.
c. recognized in the investor’s financial statements only to the extent of
related investors’ interests in the associate.
d. not recognized in the investor’s financial statements
80. Under PAS 28, profits and losses resulting from ‘upstream’ and ‘downstream’
transactions between an investor and an associate
a. must be eliminated to the extent of the investor’s interest in the associate.
b. must be eliminated to the extent of the unrelated interest over the
associate
c. must be recognized in full after adjustment for the increases or decreases
in beginning inventory
d. not recognized
20
81. Under PAS 28, adjustments to share in profit or loss of an associate may differ
if the transaction is “downstream” or “upstream.” Which of the following
statements is true?
I. Jack Co. owns 20% interest in Old Man, Inc. During the year Old Man sold
magic beans to Jack. This is an upstream transaction.
II. Goldilocks Co. owns 20% interest in Papa Bear, Inc. During the year
Goldilocks purchased porridge from Papa Bear. This is a downstream
transaction.
a. true, true b. true false c. false, true d. false, false
82. Daddeh Co. owns 20% interest in Bebeh Co. During the year, Daddeh sold
inventory to Bebeh at 20% gross profit. As of year-end Bebeh still holds 100%
of the inventory. How much share in the profit from the transaction will
Daddeh recognize for the year? Assume income tax rate of 30%.
a. 14% b. 80% c. 2.8% d. none
83. Under PAS 28, it refers to the carrying amount of the investment in the
associate under the equity method together with any long-term interests that
in substance, form part of the investor’s net investment in the associates.
a. investment in associate c. interest in ownership
b. interest in the associate d. none
84. Which of the following may not be included in interest in associate when
determining the threshold in recognizing share in losses of associate?
a. investment in preference shares of associate
b. long-term, unsecured, advances to the associate
c. trade receivables from the associate
d. investment in associate
85. Losses recognized under the equity method in excess of the investor’s
investment in ordinary shares are applied to the other components of the
investor’s interest in the associate
a. in the order of their seniority
b. in the reverse order of their seniority
c. in the order of priority in liquidation
d. in no particular order
86. After the investor’s interest in the associate is reduced to zero, additional
losses are provided for, and a liability is recognized, only to the extent that the
investor has incurred
a. legal or constructive obligations
b. made payments on behalf of the associate
c. a or b
d. further losses are not recognized
21
a. Included in the carrying amount of the investment and not amortized but
tested separately for impairment at least annually.
b. Not accounted for separately; however, presented as a separate asset in
the investor’s separate financial statements.
c. Included in the carrying amount of the investment and the entire
investment in associate is tested for impairment under PAS 36.
d. Recognized as a separate asset either in the group financial statements or
in the separate financial statements but not amortized.
Others
89. Investments in associates are normally classified in the statement of financial
position as
a. current assets b. noncurrent assets c. fair value d. equity account
91. What should happen when the financial statements of an associate are not
prepared to the same date as the investor’s accounts?
a. The associate should prepare financial statements for the use of the
investor at the same date as those of the investor.
b. The financial statements of the associate prepared up to a different
accounting date will be used as normal.
c. Any major transactions between the date of the financial statements of the
investor and that of the associate should be accounted for.
d. As long as the gap is not greater than three months, there is no problem.
(Adapted)
93. The reporting dates of the investor and its associate should not differ by more
than
a. one month b. two months c. three months d. six months
94. When the accounting policies used by the investor and the associate do not
match
a. PAS 28 requires appropriate adjustments to the associate’s financial
statements to conform them to the investor’s accounting policies for
reporting like transactions and other events in similar circumstances.
b. PAS 28 does not require appropriate adjustments to the associate’s
financial statements to conform them to the investor’s accounting policies
for reporting like transactions and other events in similar circumstances
when it was not practicable to use uniform accounting policies
c. PAS 28 requires the entity to discontinue the use of the equity method
d. In no instance should the accounting policies used by the investor and the
associate be different.
22
95. When financial statements of an associate used in applying the equity method
are prepared as at the end of the reporting period that is different from that of
the investor,
a. the difference must be no greater than three months
b. the difference must be no greater than twelve months
c. the difference must be compensated by an interim financial statement
d. no difference must exist
23
Chapter 13
Agriculture
1. How much is classified as biological assets that are accounted for under PAS
41 Agriculture?
a. 2,660,000 b. 2,000,000 c. 6,000,000 d. 2,250,000
2. How much is classified as property, plant and equipment that are accounted
for under PAS 16 Property, Plant and Equipment?
a. 4,000,000 b. 4,860,000 c. 4,560,000 d. 3,650,000
Measurement
Use the following information for the next three questions:
The following information pertains to a biological asset of PETRIFY STUN Co.
Estimated selling price ₱80,000
Commissions to brokers 4,000
Transport costs 2,800
Levies by commodity exchange 1,200
Transfer taxes and duties 2,000
24
Advertising costs 800
25
No animals were sold or disposed of during the period.
How much is the total gain from the change in fair value less costs to sell during
20x1?
a. 116,800 b. 156,800 c. 113,600 d. 88,800
The combined market value of the assets is ₱2,000,000 while the market value of
the land is ₱1,280,000, 10% of which is attributable to improvements on the land.
How much is the valuation of the biological asset?
a. 592,000 b. 720,000 c. 848,000 d. 836,364
26
17. How much income from government grant is recognized in 20x6, after the 5-
year restriction has lapsed?
a. 2,000,000 b. 0 c. either a or b d. neither a nor b
18. Assuming no breach of condition, how much income from government grant
is recognized in 20x1?
a. 2,000,000 b. 400,000 c. 0 d. either a or c
19. Assuming no breach of condition, how much income from government grant
is recognized in 20x2?
a. 2,000,000 b. 400,000 c. 0 d. either a or c
20. How much is the total gain from the change in fair value less costs to sell
during 20x1?
a. 116,800 b. 156,800 c. 113,600 d. 88,800
21. How much is the gain on change in fair value less costs to sell due to price
change?
a. 22,000 b. 94,800 c. 34,800 d. 122,000
22. How much is the gain on change in fair value less costs to sell due to physical
change?
a. 22,000 b. 94,800 c. 98,400 d. 122,000
27
Change in FVLCS attributable to price change and physical change
Use the following information for the next three questions:
On January 1, 20x1, the biological assets of GENTEEL POLITE Co. consist of ten 2-
year old animals with fair value less cost to sell of ₱40,000 each for a total of
₱400,000.
23. How much is the total gain from the change in fair value less costs to sell
during 20x1?
a. 116,800 b. 156,800 c. 113,600 d. 92,800
24. How much is the gain on change in fair value less costs to sell due to price
change?
a. 22,000 c. 94,800 c. 34,800 d. 16,000
25. How much is the gain on change in fair value less costs to sell due to physical
change?
a. 22,000 c. 94,800 c. 122,000 d. 76,800
28
a. Harvest b. Death c. Decease d. Cultivation
10. Which of the following is correct regarding the applicability of PAS 41?
a. PAS 41 applies to biological assets and agricultural produce at the point of
harvest even if they do not relate to agricultural activities.
b. PAS 41 applies to unconditional government grant related to biological
assets measured at cost.
c. PAS 41 applies to land on which tree recognized as biological assets are
planted.
d. PAS 41 applies to living plants and animals only when such items relate to
agricultural activity.
11. PAS 41 applies to which of the following when they relate to agricultural
activity
I. Biological assets
II. Agricultural produce after the point of harvest
III. Agricultural produce at the point of harvest
29
IV. An unconditional government grant related to a biological asset measured
at its fair value less costs to sell
V. An unconditional government grant related to a biological asset measured
at cost land related to agricultural activity
VI. Intangible assets related to agricultural activity
a. I, II, IV b. I, III, IV c. I, II, III, IV, V d. I, II, IV, VI
12. According to PAS 41 this refers to the harvested product of the entity’s
biological assets.
a. biological produce c. agricultural produce
b. agricultural products d. biological assets
15. Agricultural activity covers a diverse range of activities which includes all of
the following except
a. processing of grapes into wine by a vintner who has grown the grapes.
b. raising livestock, forestry, and annual or perennial cropping
c. cultivating orchards and plantations
d. floriculture and aquaculture (including fish farming).
30
a. I, II, III b. III, IV c. I, III d. I, III, IV
(ACCA)
20. Regarding the choice of measurement basis used for valuing biological assets,
PAS 41
a. Sets out several ways of measuring fair value.
b. Recommends the use of historical cost.
c. Recommends the use of current cost.
d. Recommends the use of present value.
(Adapted)
21. Where the fair value of the biological asset cannot be determined reliably, the
biological asset is measured at
a. Cost.
b. Cost less accumulated depreciation.
c. Cost less accumulated depreciation and accumulated impairment losses.
d. Net realizable value.
23. Which of the following values is unlikely to be used in fair value measurement
of a biological asset?
a. Quoted price in a market.
b. The most recent market transaction price.
c. The present value of the expected net cash flows from the asset.
d. External independent valuation.
(Adapted)
24. The Plants Vs. Zombies Company owns a number of herds of cattle. Where
should changes in the fair value of a herd of cattle recognized in the financial
statements, according to PAS 41 Agriculture?
a. In profit or loss only
b. In other comprehensive income only
c. In profit or loss or other comprehensive income
d. In the statement of cash flows only
(ACCA)
25. An entity had a plantation forest that is likely to be harvested and sold in 30
years. The income should be accounted for in which of the following way?
a. No income should reported annually until first harvest and sale in 30
years
b. Income should be measured annually and reported using a fair value
approach that recognizes and measures biological growth.
c. The eventual sale proceeds should be estimated and matched to the profit
and loss account over the 30 year period.
d. The plantation forest should be valued every 5 years and the increase in
value should be shown in the statement of recognized gains and losses
(Adapted)
31
26. When agricultural produce is harvested, the harvest should be accounted for
by using PAS 2 Inventories, or another applicable PFRS. For the purpose of
that Standard, cost at the date of harvest is deemed to be
a. the fair value less cost to sell at point of harvest.
b. the historical cost of the harvest.
c. the historical cost less accumulated impairment losses.
d. market value.
27. A gain or loss arising on the initial recognition of a biological asset and from a
change in the fair value less costs to sell of a biological asset should be
included in
a. The net profit or loss for the period.
b. The statement of recognized gains and losses.
c. A separate revaluation reserve.
d. A capital reserve within equity.
(Adapted)
29. Which of the following costs are not included in costs to sell?
a. Commissions to brokers and dealers.
b. Levies by regulatory agencies.
c. Transfer taxes and duties.
d. Transport and other costs necessary to get the assets to a market.
30. In relation to PAS 41, which of the following is the least desirable choice of
income recognition?
a. Recognition of income during production
b. Recognition of income when a sale occurs
c. Recognition of income only when cash is collected
d. Recognition of income when production is completed
Government grants
31. An unconditional government grant related to a biological asset that has been
measured at fair value less cost to sell should be recognized as
a. Income when the grant becomes receivable.
b. A deferred credit when the grant becomes receivable.
c. Income when the grant application has been submitted.
d. A deferred credit when the grant has been approved.
(Adapted)
32
c. A conditional government grant related to a biological asset measured at
FVLCS, including a government grant that requires an entity not to engage
in specified agricultural activity, shall be recognized in profit or loss when
the conditions attaching to the government grant are met.
d. If the terms of a conditional grant allow part of it to be retained according
to the time that has elapsed, the entity recognizes that part in profit or loss
only upon fulfillment of the condition.
33. If the terms of a conditional government grant allow part of the grant to be
retained according to the time that has elapsed, the entity recognizes income
from grant
a. using the straight line method
b. only when the condition is fulfilled
c. in full as time passes
d. using the effective interest method
34. If a government grant is conditional on certain events, then the grant should
be recognized as
a. Income when the conditions attaching to the grant are met.
b. Income when the grant has been approved.
c. A deferred credit when the conditions attached to the government grant
are met.
d. A deferred credit when the grant is approved.
(Adapted)
Disclosures
35. Where there is a production cycle of more than one year for a biological asset,
PAS 41 encourages separate disclosure of the
a. Physical change only. c. Total change in value
b. Price change only d. a and b
37. Which of the following information should be disclosed under PAS 41?
a. Separate disclosure of the gain or loss relating to biological assets and
agricultural produce.
b. The aggregate gain or loss arising on the initial recognition of biological
assets and agricultural produce and the change in fair value less cost to
sell of biological assets.
c. The total gain or loss from biological assets, agricultural produce, and
from changes in fair value less cost to sell of biological assets.
d. There is no requirement in the Standard to disclose separately any gains
or losses.
(Adapted)
33
38. These refer to those that are to be harvested as agricultural produce or sold
as biological assets.
a. consumable biological assets c. agricultural produce
b. bearer biological assets d. biological assets
40. These biological assets are not agricultural produce but, rather, are self-
regenerating.
a. consumable biological assets c. agricultural produce
b. bearer biological assets d. biological assets
42. These are biological assets that have attained harvestable specifications (for
consumable biological assets) or are able to sustain regular harvests (for
bearer biological assets).
a. mature biological assets c. harvestable biological assets
b. immature biological assets d. completely mutated biological assets
34
Chapter 14
Property, Plant and Equipment (Part 1)
Acquisition on account
2. PRECLUDE PREVENT Co. acquired an equipment for ₱448,000 on account
with a credit term of 2/15, n/30. Any discount is computed based on the
purchase price. The purchase price is inclusive of 12% value added tax (VAT).
PRECLUDE Co. is VAT-registered and any input VAT paid is refundable
through deduction from monthly output VAT remitted to the Bureau of
Internal Revenue (BIR). Additional costs incurred include ₱40,000 cost of
training staff who will be operating the equipment and ₱60,000 cost of
relocating the equipment to a new location after it was installed in a location
originally intended by management. How much is the initial cost of the
equipment?
a. 400,000 b. 391,040 c. 491,040 d. 392,000
35
were incurred in acquiring the building and paid on January 1, 20x1. An
appropriate discount rate is 10%. How much is the initial cost of the building?
a. 368,000 b. 388,000 c. 424,634 d. 353,456
Classes of PPE
6. ABC Co. had the following assets on December 31, 20x1.
Land used as plant site 50,000
Land and building classified as held for sale 780,000
Building used as office 500,000
Building rented out under operating lease 420,000
Equipment being sold in the ordinary course of business 330,000
Office furniture 24,000
Fixtures and signage 10,000
Machinery 12,000
Automobiles (used by company officers) 350,000
Delivery trucks (used by the shipping department) 420,000
Computers 70,000
Aircraft rented out to various clients 690,000
Dairy cattle (held to produce milk that is sold to customers) 10,000
Harvested milk 3,000
Apple trees (held to bear fruits to that are sold to customers) 6,000
Harvested apples 2,000
How much is the total of assets classified as property, plant and equipment?
a. 2,132,000 b. 2,126,000 c. 2,142,000 d. 2,148,000
36
Acquisition on lump-sum price (building demolished)
Use the following information for the next four questions:
On April 1, 20x1, ABC Co. purchased land and building for a lump-sum price of
₱48,000,000. The existing building will be demolished and a new building will be
constructed.
9. The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much are the allocated costs of the land and the new
building?
Land New building
a. 16,864,000 33,780,000
b. 16,104,000 34,180,000
c. 15,980,000 36,670,000
d. 16,014,000 34,810,000
10. The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much is charged as loss on initial recognition?
a. 48,000 b. 32,000,000 c. 32,048,000 d. 0
11. The old building is unusable and has an insignificant fair value. How much are
the allocated costs of the land and the new building?
Land New building
a. 46,640,000 33,780,000
b. 46,104,000 34,180,000
c. 48,152,000 34,180,000
d. 46,140,000 34,810,000
12. The old building is unusable and has an insignificant fair value. How much is
charged as loss on initial recognition?
a. 48,000 b. 32,000,000 c. 32,048,000 d. 0
37
Payment for claim for injuries not covered by insurance 180,000
Saving on construction 800,000
Cost of changes to plans and specifications due to
560,000
Inefficiencies
Paving of streets and sidewalks (not included in
blueprint) 40,000
Income earned on a vacant space rented as parking
lot during construction 36,000
16. How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,400,000
17. How much is the initial cost of the equipment received by WEAK Co.?
a. 3,800,000 b. 4,400,000 c. 5,000,000 d. 3,400,000
38
20. How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,400,000
No commercial substance
Use the fact pattern in the preceding problem except that the exchange has no
commercial substance.
22. How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,200,000
Trade-in
Use the following information for the next two questions:
TRANSCEND EXCEED Co. traded in an old machine for a new model. Pertinent
data are as follows:
Old equipment:
Cost 200,000
Accumulated depreciation 80,000
Average published retail value 24,000
New equipment:
List price 380,000
Cash price without trade in 280,000
Cash price with trade in 220,000
24. How much is the initial cost of the equipment received by TRANSCEND Co.?
a. 244,000 b. 280,000 c. 320,000 d. 184,000
26. How much is the initial cost of the equipment received by RESILIENT Co.?
a. 400,000 b. 4,000,000 c. 3,600,000 d. 180,000
28. Use the fact pattern above except that the fair value of the land is
indeterminable. How much is the initial cost of the equipment received by
RESILIENT Co.?
a. 400,000 b. 4,000,000 c. 3,600,000 d. 180,000
39
Acquisition through issuance of bonds payable
Use the following information for the next four questions:
Fact pattern
On January 1, 20x1, LABYRINTH MAZE Co. acquired land with fair value of
₱3,800,00 by issuing a 3-year, 10%, ₱4,000,000 bonds. Principal is due on
January 1, 20x4 but interest is due at each year-end. The prevailing market rate
of interest for a similar instrument on January 1, 20x1 is 12%. The present value
of the future cash flows from the bonds discounted at 12% is ₱3,807,852.
30. How much is the initial cost of the equipment received by LABYRINTH Co.?
a. 3,800,000 b. 4,000,000 c. 3,807,852 d. 180,000
32. Use the fact pattern above except that the fair value of the land is
indeterminable. How much is the initial cost of the equipment received by
LABYRINTH Co.?
a. 3,800,000 b. 4,000,000 c. 3,807,852 d. 180,000
Acquisition by donation
Use the following information for the next two questions:
GROVEL Co. received donation of equipment from CRAWL, Inc., an unrelated
foreign corporation. The equipment has a fair value of ₱4,000,000. Necessary
costs incurred by GROVEL Co. to bring the asset to its intended condition for use
amounted to ₱40,000.
35. Assuming the donor is a shareholder of GROVEL Co., the entry to record the
receipt of the donation includes
a. a credit to share premium of ₱4,040,000
b. a credit to share premium of ₱3,960,000
c. a credit to income from donation of ₱4,040,000
d. a credit to income from donation of ₱3,960,000
40
c. equipment held for sale under PFRS 5
d. biological assets related to agricultural activity
2. The principal issues in the accounting for property, plant and equipment
include which of the following?
I. The recognition of the assets.
II. The determination of carrying amounts and the depreciation charges and
impairment losses to be recognized in relation to assets recognized.
III. The complex computation of revaluation surplus.
a. I, II b. I, III c. III d. I, II, III
Recognition principles
3. Which of the following is not a major characteristic of a plant asset?
a. Possesses physical substance c. Acquired for use
b. Acquired for resale d. Yields services over a number of years
(AICPA)
5. Property, plant & equipment has all of the following characteristics except:
a. They are intended for use in operating activities, and are not acquired for
sale in the ordinary course of business.
b. They are classified as noncurrent tangible assets
c. Their service potential normally diminishes with use.
d. They don't typically make up a large part of a corporation's operating
assets.
41
b. An entity is required to derecognize the carrying amount of a part of an
item of property, plant and equipment if that part has been replaced and
the entity has included the cost of the replacement in the carrying amount
of the item.
c. An entity cannot classify as revenue a gain it realizes on the disposal of an
item of property, plant and equipment
d. An entity is required to measure the residual value of an item of property,
plant and equipment as the amount it estimates it would receive in the
future for the asset if the asset were already of the age and in the
condition expected at the end of its useful life.
10. When the fair value of the non-monetary asset exchanged in a transaction
with commercial substance is indeterminable, the non-monetary asset
received will be valued at
a. fair value of asset given up adjusted for cash received or given
b. fair value of asset received
c. fair value of asset received adjusted for cash received or given
d. carrying amount of asset given up adjusted for cash received or given
12. Which of the following terms best describes the removal of an asset from an
entity's statement of financial position?
a. Derecognition b. Impairment c. Write-off d. Depreciation
13. If a corporation purchases a lot and building and subsequently tears down the
building and uses the property as a parking lot, the proper accounting
treatment of the cost of the building would depend on
a. the significance of the cost allocated to the building in relation to the
combined cost of the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the non-financial asset’s highest and best use determined from the
perspective of market participants, even if the entity intends a different
use or intends not to use the non-financial asset.
42
(AICPA)
14. Accounting for tangible operational assets is primarily in conformity with the:
a. historical cost principle
b. historical cost principle and reporting principle
c. matching principle and reporting principle
d. matching principle
e. matching principle and historical cost principle
(Adapted)
15. Are the following statements regarding the cost of an asset true or false,
according to PAS16 Property, plant and equipment?
(1) The cost includes cash equivalents paid to acquire an asset.
(2) The cost includes the fair value of any non-monetary consideration given
to acquire an asset.
a. False False b. False True c. True False d. True True
(ACCA)
16. The debit for a non-refundable sales tax properly levied and paid on the
purchase of machinery preferably would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on
income).
d. accumulated depreciation--machinery.
(AICPA)
17. Small tools and containers used repeatedly for more than a year are classified
on the balance sheet as
a. current assets b. fixed assets c. deferred charges d. investments
(AICPA)
18. Hotel California Corporation recently purchased Eagles Hotel and the land on
which it is located with the plan to tear down the Eagles Hotel and build a
new luxury hotel on the site. The cost of the Eagles Hotel should be
a. depreciated over the period from acquisition to the date the hotel is
scheduled to be torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
(AICPA)
19. Which of the following statements are correct per PAS16 Property, plant and
equipment?
I. Assets are depreciated even if their fair value exceeds their carrying
amount
II. Land and buildings are accounted for separately, even when acquired
together
III. A non-current asset acquired as the result of an exchange of assets is not
recognized
IV. A gain on disposal of a non-current asset is classified as revenue
a. I, II b. I, II, III c. I, II, IV d. I, II, III, IV
(ACCA)
43
b. land held for possible use as a future plant site.
c. self-constructed assets currently in use.
d. idle equipment awaiting sale
e. deposits on machinery purchased and not yet received
21. According to PAS16 Property, plant and equipment, which of the following
items should be capitalized into the cost of property, plant and equipment?
I. Cost of excess materials resulting from a purchasing error
II. Cost of testing whether the asset works correctly
III. Initial operating losses whilst demand builds up
IV. Cost of preparing the site for installation
a. I, II b. I, II, III c. II, IV d. I, II, III, IV
(ACCA)
22. Capitalizable make-ready cost related to a new machine does not include:
a. restoration costs related to the machine
b. installation costs related to the machine
c. taxes related to the machine during the make-ready period
d. depreciation on the machine during the make-ready period
(Adapted)
23. Under the principles of PAS16 Property, plant and equipment, which of the
following should be included in the cost of an item of property, plant and
equipment?
I. Initial delivery and handling costs
II. Apportioned general overhead costs
III. Costs of training staff on the new asset
IV. Installation and assembly costs
a. I, II, IV b. I, IV c. II, IV d. I, II, III, IV
(ACCA)
24. Plant assets purchased on long-term credit contracts should be accounted for
at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.
(AICPA)
25. The cost of land typically includes the purchase price and all of the following
costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost included in special
assessment
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
(AICPA)
26. Property, plant and equipment items which are subject to any provision for
depreciation or reduction in value, should be valued in the balance sheet by
adding to the actual price paid any expenses incidental to its acquisition.
Which of the following cost items might be included in such incidental
expenses and are to be capitalized as part of machinery?
Cost items
I. installation
II. cost delivery and handling
44
III. cost site preparation
IV. professional fees
Item 1 Item 2 Item 3 Item 4
a. yes yes yes yes
b. yes yes yes no
c. yes no yes no
d. no yes no no
(Adapted)
27. NBA Co. exchanged merchandise that cost ₱24,000 and normally sold for
₱36,000 for a new delivery truck with a list price of ₱40,000. The delivery
truck should be recorded on NBA's books at
a. 24,000. b. 30,000. c. 36,000. d. 40,000.
(AICPA)
32. If the land acquired has a building that should be demolished, any amount
received as salvage from the removal of the building should be:
a. credited to the building account c. credited to the land account
b. treated as income d. adjusted to prior years
33. A company purchased land with a building on it and immediately tears down
the building so that the land can be used for the construction of a plant. Which
of the following should not be charged to the land account?
a. title examination and surveying fees
b. allocation of cost of payment to tenants to vacate premises
c. property taxes accruing during the period of plant construction.
45
d. costs for grading, clearing, and draining the property.
34. Bianca Corp., a closely held corporation, acquired a used machine by issuing
15,000 shares (par value ₱1.00 per share) of its own common stock. The stock
has a market value of ₱1.40 per share based on a recent sale of 100 shares.
The machine was carried on the vendor’s books at ₱12,000, and was
determined to have a fair market value of ₱17,000. What is the amount at
which Bianca should record the machine on its books?
a. 21,000 b. 17,000 c. 15,000 d. 12,000
(RPCPA)
36. Land was purchased to be used as the site for the construction of a plant. A
building on the property was sold and removed by the buyer so that
construction on the plant could begin. The proceeds from the sale of the
building should be
a. classified as other income.
b. deducted from the cost of the building.
c. netted against the costs to clear the land and expensed as incurred.
d. netted against the costs to clear the land and amortized over the life of the
plant.
(AICPA)
38. Accounting recognition should be given to some or all of the gain realized on a
nonmonetary exchange of plant assets except where
a. the assets exchanged are similar and additional cash is paid.
b. the assets exchanged are similar and additional cash is received.
c. the assets exchanged are dissimilar and additional cash is paid.
d. the assets exchanged are dissimilar and additional cash is received.
e. the exchange transaction lacks commercial substance
(AICPA)
40. When an entity is the recipient of a donated asset from other than a
shareholder, the account credited may be a(n)
a. paid-in capital account. c. deferred revenue account.
b. income account. d. all of these.
(AICPA)
46
41. Noun Co. and Nameword Co. exchanged similar plots of land with fair values
in excess of carrying amounts in an exchange transaction that lacks
commercial substance. In addition, Noun received cash of less than 10% of the
total consideration received from Nameword to compensate for the difference
in land values. As a result of the exchange, Noun should recognize:
a. A gain equal to the difference between the fair value and the carrying
amount of the land given up.
b. A gain in an amount determined by the ratio of cash received to total
consideration.
c. A loss in an amount determined by the ratio of cash received to total
consideration.
d. Neither a gain nor a loss.
(AICPA)
42. Adverb Co. and LY Co. exchanged similar trucks with fair values in excess of
carrying amounts in an exchange with commercial substance. In addition,
Adverb paid LY to compensate for the difference in truck values. As a
consequence of the exchange, Adverb recognizes:
a. A gain equal to the difference between the fair value and carrying amount
of the truck given up.
b. A gain determined by the proportion of cash received to the total
consideration.
c. A loss determined by the proportion of cash received to the total
consideration.
d. Neither a gain nor a loss.
(AICPA)
44. E.G. Co. exchanged similar nonmonetary assets with Example Co. and no cash
was exchanged. The carrying amount of the asset surrendered by E.G.
exceeded both the fair value of the asset received and Example's carrying
amount of that asset. E.G. should: (assume exchange has commercial
substance)
a. Recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it surrendered as a loss.
b. Recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it received as a gain.
c. Recognize the difference between the carrying amount of the asset it
surrendered and the carrying amount of the asset it received as a loss.
d. Recognize no gain or loss.
(AICPA)
45. Adjective Co. and Relating 2 Company exchanged assets with equal fair values.
The retail price of the asset that Adjective gave up is less than the retail price
47
of the asset received. What gain or loss should Adjective Co. recognize on the
nonmonetary exchange?
a. A gain or loss is not recognized.
b. A gain equal to the difference between the retail prices of the asset
received and the asset foregone.
c. A gain equal to the difference between the retail price and the cost of the
asset received.
d. A gain or loss equal to the difference between the fair value and the cost of
the asset given foregone.
(AICPA)
48. Discounts given for early payment of credit purchases of operational assets
should be:
a. recorded as interest expense at purchase date.
b. capitalized as a cost of the asset acquired and subsequently allocated to
depreciation expense.
c. recorded as interest revenue at purchase date.
d. deducted from the invoice price when determining the cost of the asset
(Adapted)
50. Which of the following is least likely to be classified in property, plant and
equipment?
a. land improvements c. leasehold improvements
b. land d. idle land
51. When land and building are acquired for a lump sum price and the building is
demolished, the materials salvaged from the building that were used in the
construction of a new building should be
a. Ignored when the demolition costs, net of actual sale proceeds of salvaged
materials, are capitalized as cost of the new building.
b. Included as income from continuing operations.
c. Added to the cost of the new building.
d. Deducted from the cost of the land and added to the cost of the building
48
Pronoun Co. exceeded both the fair value of the asset received and Substitute-
4-Noun Co.’s carrying amount of the asset. Pronoun Co. should recognize the
difference between the carrying amount of the asset surrendered and
a. The fair value of the asset received as a loss
b. The fair value of the asset received as a gain
c. Pronoun Co.’s. carrying amount of the asset received, as a loss
d. Pronoun Co.’s. carrying amount of the asset received, as again
(AICPA)
53. I.E. Co. recently purchased the That-Is Hotel and the land on which it is
located. The plans are to demolish the That-Is Hotel and to build a new luxury
hotel on the site. I.E. Co. should account for the total purchase cost of the
That-Is Hotel as follows:
a. capitalize it as part of the cost of the new hotel.
b. depreciate it over the period from the acquisition until the Majestic is torn
down.
c. allocate between the land and the That-Is Hotel building, then charge the
allocated cost of the That-Is Hotel building to loss.
d. capitalized it as part of the cost of the land.
(Adapted)
54. What is the general principle of capitalizing costs to property, plant and
equipment?
a. All costs which will provide a benefit beyond one year are capitalized.
b. Only depreciable costs are capitalized.
c. All cost associated with the acquisition or construction of a plant asset are
capitalized.
d. All cost incurred to bring the asset to its intended condition and location
are capitalized.
e. All costs relevant to the acquisition and long-term maintenance of a plant
asset are capitalized.
(Adapted)
55. The amount of nonrefundable sales tax paid on the purchase of machinery (an
operational asset) should be debited to a:
a. machinery account.
b. accumulated depreciation account.
c. tax expense (which includes all taxes other than income tax) account.
d. separate deferred charge account
(Adapted)
57. Assets received in donation from other than the government should
a. be depreciated based on the market value at the time of the donation.
b. be depreciated based on their book value at the time of the donation.
49
c. should not be depreciated.
d. be expensed upon receipt.
(Adapted)
59. Which of the following should not be classified as property, plant and
equipment?
a. Building used as a factory
b. Land used in ordinary business operations
c. A truck held for resale by an automobile dealership
d. Land improvement, such as parking lots and fences
(ACCA)
61. On November 1, 2010, a company purchased a new machine that it does not
have to pay for until November 1, 2012. The total payment on November 1,
2012, will include both principal and interest. Assuming interest at a 10%
rate, the cost of the machine would be the total payment multiplied by what
time value of money concept?
a. Present value of annuity of ₱1. c. Future amount of annuity of ₱1.
b. Present value of ₱1. d. Future amount of ₱1.
(AICPA)
62. Stings Co. recently purchased an old building and the land on which it is
located. The old building will be demolished at a net cost of ₱10,000. A new
building will be built on the site. The demolition cost should be:
a. capitalized as part of the cost of the new building
b. capitalized as part of the cost of the land
c. depreciated over the remaining life of the old building
d. written off as an extraordinary loss in the year of the demolition
(Adapted)
50
9. B 19. A 29. D 39. C 49. A 59. C
10. B 20. C 30. A 40. B 50. D 60. B
51
Chapter 15
Property, Plant and Equipment (Part 2)
Depreciation methods
Use the following information for the next four cases:
Fact pattern
On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated
useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of
₱400,000.
7. If SIMPLETON Co. uses the output method, how much is the depreciation
expense in the 2nd year?
a. 128,000 b. 96,000 c. 60,000 d. 64,000
52
8. If SIMPLETON Co. uses the output method, how much is the accumulated
depreciation on December 31, 20x2?
a. 120,000 b. 180,000 c. 192,000 d. 256,000
9. If SIMPLETON Co. uses the input method, how much is the depreciation
expense in the 2nd year?
a. 64,000 b. 96,000 c. 60,000 d. 64,000
10. If SIMPLETON Co. uses the input method, how much is the accumulated
depreciation on December 31, 20x2?
a. 120,000 b. 210,000 c. 192,000 d. 256,000
12. How much is the depreciation expense in 20x2 under the straight-line
method?
a. 37,500 b. 93,750 c. 36,400 d. 35,000
13. How much is the depreciation expense in 20x2 under the sum-of-years’ digits
method?
a. 45,000 b. 11,250 c. 56,250 d. 57,250
14. How much is the depreciation expense in 20x2 under the double declining
balance method?
a. 70,000 b. 60,000 c. 10,000 d. 0
Composite method
Use the following information for the next four questions:
On January 1, 20x1, DEVIOUS CROOKED Co. purchased the following:
Cost Residual value Useful life
Machine tools 80,000 4,000 3 years
Meters costing 64,000 2,000 5 years
Returnable containers 120,000 - 6 years
53
a. 57,733 b. 56,000 c. 58,667 d. 59,8774
18. During 20x3, machine tools with original cost of ₱20,000 and residual value of
₱2,000 were sold for ₱6,000. How much is the gain (loss) on the sale?
a. (345) b. 430 c. (667) d. 0
19. Assuming ATROCIOUS Co. uses the retirement method, how much is the
depreciation expense in 20x1?
a. 134,800 b. 166,800 c. 144,000 d. 118,800
20. Assuming ATROCIOUS Co. uses the replacement method, how much is the
depreciation expense in 20x1?
a. 134,800 b. 166,800 c. 144,000 d. 118,800
Inventory method
21. The small tools account of AUGUST MAJESTIC Co. has a balance of ₱600,000
as of January 1, 20x1. Acquisitions of small tools during the period totaled
₱240,000 and proceeds from sale of small tools retired and/or replaced
totaled ₱100,000. The annual asset count on December 31, 20x1 revealed a
balance of small tools of ₱440,000. How much is the depreciation expense
under the inventory method?
a. 400,000 b. 300,000 c. 240,000 d. 140,000
Revenue method
22. On January 1, 20x1, COCKY ARROGANT Co. acquired an equipment costing
₱4,000,000. The equipment will be used to reproduce a gaming software
which is expected to be marketed for 3 years. The equipment is expected to
be used in producing products over the next two years, after which, the
equipment will be disposed of at a negligible amount.
54
Leasehold improvements
Use the following information for the next two questions:
On January 1, 20x1, DIMINUTIVE SMALL Co. signed a ten-year lease for office
space. DIMINUTIVE has the option to renew the lease for an additional five-year
period on or before January 1, 2x10. During the first half of January 20x2,
DIMINUTIVE Co. incurred the following costs:
- ₱3,600,000 for general improvements to the leased premises with an
estimated useful life of ten years.
- ₱400,000 for office furniture and equipment with an estimated useful life of
ten years.
- ₱800,000 for movable assembly line equipment with useful life of 5 years.
23. At the time the leasehold improvement were finished, DIMINUTIVE Co. is
uncertain as to the exercise of the renewal option. How much is the 20x2
depreciation expense on the leasehold improvements?
a. 400,000 b. 360,000 c. 533,333 d. 488,889
24. Assume that in DIMINUTIVE Co. is certain that it will exercise the renewal
option. How much is the 20x2 depreciation expense on the leasehold
improvements?
a. 400,000 b. 360,000 c. 480,000 d. 440,000
28. Assuming ENTREAT Co. determined that the cost of the replaced part is
₱2,000,000, how much is the loss on replacement?
55
a. 1,920,000 b. 1,200,000 c. 2,000,000 b. 0
29. Assuming it is impracticable to determine the cost of the replaced part, how
much is the loss on replacement?
a. 1,920,000 b. 1,200,000 c. 2,000,000 b. 0
34. Assuming SUBTERFUGE Co. uses the proportional method, the entry to record
the revaluation includes:
a. a debit to accumulated depreciation for ₱15,000,000
b. a debit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱25,000,000
d. a debit to building for ₱60,000,000
35. Assuming SUBTERFUGE Co. uses the elimination method, the entry to record
the revaluation includes:
a. a credit to accumulated depreciation for ₱20,000,000
b. a debit to building for ₱25,000,000
c. a debit to accumulated depreciation for ₱15,000,000
d. a debit to deferred tax for ₱13,500,000
56
Methods of recording revaluation – Appraised value
Use the following information for the next two questions:
On December 31, 20x1, the building of ABC Co. with a historical cost of
₱320,000,000, accumulated depreciation of ₱160,000,000, and an estimated
useful life of 20 years has been assessed by an external valuer to have an
appraised value of ₱200,000,000. Income tax rate is 30%
36. The entry under the proportional method to record the revaluation includes
a. a debit to accumulated depreciation for ₱40,000,000
b. a credit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱80,000,000
d. a credit to building for ₱80,000,000
37. The entry under the proportional method to record the revaluation includes
a. a debit to accumulated depreciation for ₱40,000,000
b. a debit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱80,000,000
d. a credit to building for ₱80,000,000
57
a. 42,000,000 b. 56,400,000 c. 45,000,000 d. 51,428,572
58
I. If property, plant and equipment are stated at current valuation, the
financial position and progress of an entity will be more realistically
portrayed.
II. If land and building are purchased for a lump sum price, the broker’s
commission should be apportioned between the land and the building.
III. The price paid for a plant asset is actually a prepayment of an expense.
IV. Treating a capital expenditure as an expense may overstates profit in the
year after this action was taken.
V. If a fully depreciated asset with no residual value continues to be used,
management can continue to provide for depreciation.
a. II, III, V b. I, II, III, IV c. II, III, V d. I, II, III, IV, V
4. RESTIVE UNEASY Cooperative recently replaced all the tires in two of its
trucks at a very insignificant amount. This cost should be accounted for
a. as an increase in the cost of the trucks
b. as repair and maintenance expense
c. as an intangible asset
d. as a reduction in the accumulated depreciation of the trucks
(Adapted)
6. An old building formerly occupied by ABC Company was replaced. The loss on
the retirement of the old building should
a. not be capitalized but treated as an expense
b. not be capitalized but treated as a loss
c. be capitalized and included in the cost of the land
d. be capitalized and included in the cost of the new building
59
II. Residual value is ignored when computing for depreciation in the earlier
years of an asset’s life when the depreciation method used is the double
declining balance.
III. Cost of building would include expenditures for service equipment and
fixtures made a permanent part of the structure.
IV. Cost inefficiencies on self-constructed assets whether due to temporary
idle capacity, industrial dispute or other causes, should not be included as
part of the cost of asset.
V. When used property is acquired, the actual cost in cash or equivalent is
generally the proper basis for depreciation, regardless of the previous
history of the property, unless the entity uses the revaluation method.
a. III, V b. I, II, IV c. I, II, IV, V d. I, II, III, IV, V
9. The sale of a depreciable asset resulting in a gain, indicates that the proceeds
from the sale were
a. greater than cost c. less than carrying amount
b. greater than carrying amount d. less than cost
11. In order for a cost to be capitalized (capital expenditure), the following must
be present:
a. The useful life of an asset must be increased.
b. The quantity of assets must be increased.
c. The quality of assets must be increased beyond the condition originally
intended by management.
d. Any one of these.
(AICPA)
60
12. An improvement made to a machine increased its fair value and its
production capacity by 25% above the condition originally intended by
management but without extending the machine's useful life. The cost of the
improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.
(AICPA)
15. When a plant asset is sold for less than its carrying amount
a. cash received plus accumulated depreciation plus loss on disposal equals
the original cost
b. original cost minus accumulated depreciation equals cash received minus
loss on disposal
c. carrying amount of the asset plus loss on disposal equals cash received
d. cash received plus accumulated depreciation minus loss on disposal
equals the original cost
16. The sale of a depreciable asset resulting in a loss indicates that the proceeds
from the sale were
a. less than current market value. c. greater than carrying amount.
b. greater than cost. d. less than carrying amount.
(AICPA)
17. Burnham Corp.'s forestland was condemned for use as a national park.
Compensation for the condemnation exceeded the forestland's carrying
amount. Burnham purchased similar, but larger, replacement forest land for
an amount greater than the condemnation award. As a result of the
condemnation and replacement, what is the net effect on the carrying amount
of forestland reported in Burnham 's balance sheet?
a. The amount is increased by the excess of the replacement forestland's cost
over the condemned forestland's carrying amount.
b. The amount is increased by the excess of the replacement forestland's cost
over the condemnation award.
c. The amount is increased by the excess of the condemnation award over
the condemned forestland's carrying amount.
d. No effect, because the condemned forestland's carrying amount is used as
the replacement forestland's carrying amount.
(AICPA)
18. A building suffered uninsured fire damage. The damaged portion of the
building was refurbished with higher quality materials. The cost and related
61
accumulated depreciation of the damaged portion are identifiable. To account
for these events, the owner should:
a. Reduce accumulated depreciation equal to the cost of refurbishing.
b. Record a loss in the current period equal to the sum of the cost of
refurbishing and the carrying amount of the damaged portion of the
building.
c. Capitalize the cost of refurbishing and record a loss in the current period
equal to the carrying amount of the damaged portion of the building.
d. Capitalize the cost of refurbishing by adding the cost to the carrying
amount of the building.
(AICPA)
19. Choose the correct statement about the accounting treatment for special one-
time assessments made by local governments requiring a firm to pay for
improvements including streetlights, sewers and other infrastructure.
a. They are capitalized but not depreciated
b. If probable and estimable, they are expensed when determinable
c. They are expensed as incurred
d. They are capitalized and depreciated over their useful life
(Adapted)
20. An enterprise installed an assembly line in 20x1. Four years later, ₱100,000
was spent in rearranging the line to promote efficiency. The rearrangement
but did not affect the assembly line’s useful life. Proper accounting for the cost
of the automation should be to
a. Report it as an expense
b. Establish a separate account for the ₱100,000.
c. Allocate the cost of automation between the asset and accumulated
depreciation accounts.
d. Debit to asset account.
(Adapted)
62
d. The determination of cost is conceptually consistent between operational
assets and inventory in regard to the accounting treatment of cash
discounts.
(Adapted)
23. Which of the following is not an appropriate basis for measuring the cost of
property, plant, and equipment?
a. The purchase price, freight costs, and installation costs of a productive
asset should be included in the asset’s cost.
b. Proceeds obtained in the process of readying land for its intended
purpose, such as from the sale of cleared timber, should be recognized
immediately as income.
c. The cost of improvement to equipment incurred after the equipment is
placed in the location and condition originally intended by management is
generally expensed out rightly.
d. All necessary costs incurred in the construction of a plant building, from
excavation to completion, should be considered as part of the asset’s cost
24. When a plant asset is sold for less than its carrying amount:
a. cash received plus accumulated depreciation plus gain on disposal equals
the original cost.
b. cash received plus accumulated depreciation minus loss on disposal
equals the original cost.
c. cost of the asset minus loss on disposal equals cash received.
d. original cost minus accumulated depreciation equals cash received plus
loss on disposal.
Depreciation methods
25. Depreciation
a. is an allocation of the cost of property, plant and equipment over the time
period of usefulness, in a systematic and rational manner.
b. is a process of recognizing the decreasing value of an asset over time.
c. is a cash expense.
d. expense of ₱2,000 reflects a ₱2,000 increase in liquid funds.
27. An entity acquired an asset with an estimated useful life of 20 years and a
10% residual value. At the end of the asset’s useful life, the accumulated
depreciation will be equal to the original cost of the asset under which of the
following depreciation methods?
Double-declining Sum-of-the-years’ Digits Straight-line Method
a. Yes Yes Yes
b. Yes Yes No
c. No Yes Yes
d. No No No
(Adapted)
63
29. An entity installed a new production facility and incurred a number of
expenses at the point of installation. The entity’s accountant is arguing that
most expenses do not qualify for capitalization. Included in those expenses
are initial operating losses. These should be
a. Deferred and amortized over a reasonable period of time.
b. Expensed and charged to the income statement.
c. Capitalized as part of the cost of the plant as a directly attributable cost.
d. Taken to retained earnings since it is unreasonable to present it as part of
the current year’s income statement.
(Adapted)
64
34. A depreciable asset has an estimated 15% residual value. Under which of the
following methods, properly applied, would the accumulated depreciation
equal the original cost at the end of the asset’s estimated useful life?
Straight-line Double-declining balance
a. Yes Yes
b. Yes No
c. No Yes
d. No No
(AICPA)
35. An entity operates a chain of hotels and is proposing to stop depreciating the
hotel equipment and expense the cost of replacement each year. The entity
should:
a. Not capitalize groups of assets and expense the replacement cost
b. Not capitalize groups of assets and expense them
c. Capitalize groups of assets but not depreciate them
d. Capitalize all assets with a useful life of more than one year and depreciate
them
(ACCA)
36. An entity manufactures components for the car industry and uses self-made
tools, which it continually develops. Costs of tooling are depreciated over four
years and the tools are manufactured in its one factory, where 4% of the
space is allocated to development. The factory depreciation charge should:
a. Be allocated on the basis of the value of the tools compared with the
factory output to the cost of the tooling
b. Be allocated on the basis of 1% per year for four years to the cost of the
tooling
c. Not be allocated to the cost of the tooling
d. Be allocated on the basis of 4% per annum and added to the cost of the
tooling
37. An entity has a policy of revaluing its PPE. An asset cost ₱15M on January 1,
20x8, has a useful life of 15 years and is depreciated on a straight-line basis to
a zero residual value. The value of the asset at December 31, 20x8 was
₱14.5M. At December 31, 20x9, the market value of the asset was ₱12.5M. The
accounting entry at 31 December 20x9 would be:
a. Depreciation ₱1.04M to income statement, fall in value of ₱0.5M charged
to revaluation reserve and ₱0.46M to the income statement
b. Depreciation ₱1.04M to income statement, fall in value of ₱0.96M charged
to revaluation reserve
c. Depreciation ₱1M to income statement, fall in value of ₱0.5M charged to
revaluation reserve and ₱0.5M to the income statement
d. Depreciation ₱1M to income statement, fall in value of ₱0.96M to the
income statement
(ACCA)
38. A graph is set up with "depreciation expense" on the vertical axis and "time"
on the horizontal axis. Assuming linear relationships, how would the lines for
straight-line and sum-of-the-years'-digits depreciation expense, respectively,
be drawn on this graph?
Straight-line SYD
a. Vertically Sloping down to the right.
b. Vertically Sloping up to the right.
c. Horizontally Sloping down to the right.
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d. Horizontally Sloping up to the right.
41. Under what conditions will the service hours and productive output methods
of depreciation result in the same depreciation expense for a particular year?
a. When the total estimated service hours and production in units are the
same.
b. When the ratio of actual service hours to productive output for the year is
the same as the ratio of the estimates used in their respective depreciation
rates.
c. When salvage value is zero.
d. The two methods cannot produce the same depreciation expense amount
for any given year.
(Adapted)
42. Which of the following are correctly stated regarding the accounting for
property, plant and equipment?
I. In special instances, when inflation has been a major factor, property,
plant and equipment are permitted to be revalued based on index
numbers or on an appraisal performed by an independent expert or
specialist.
II. The sum of the year’s digit method always results in larger total
depreciation than does the straight line method.
III. Composite depreciation method does not recognize gain or loss on
retirement of a single asset in the group.
IV. Depreciation is the process of periodically writing down an asset to arrive
at its fair market value.
V. Depreciation accounting automatically provides the cash required to
replace plant assets as they wear out.
a. I, II, III, V b. I, II, III c. I, III d. II, III
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c. The amount at which the asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction
d. The amount of cash or cash equivalents that could currently be obtained
by selling the asset in an orderly disposal
(ACCA)
45. Which of the following terms best describes the cost (or an amount
substituted for cost) of an asset less its residual value?
a. Revalued amount c. Recoverable amount
b. Carrying amount d. Depreciable amount
(ACCA)
47. Which of the following statements best describes the carrying amount of an
asset?
a. The cost (or an amount substituted for cost) of the asset less its residual
value
b. The amount at which the asset is recognized in the statement of financial
position after deducting any accumulated depreciation and accumulated
impairment losses
c. The higher of the asset's net selling price and its value in use
d. The fair value of the asset at the date of a revaluation less any subsequent
accumulated impairment losses
(ACCA)
48. Which of the following statements best describes the term 'depreciation'?
a. The systematic allocation of an asset's cost less residual value over its
useful life
b. The removal of an asset from an entity's statement of financial position
c. The amount by which the recoverable amount of an asset exceeds its
carrying amount
d. The amount by which the carrying amount of an asset exceeds its
recoverable amount
(ACCA)
49. Which of the following terms best describes the systematic allocation over its
useful life of the cost of an asset, or other amount substituted for cost, less its
residual value?
a. Depreciation b. Derecognition c. Impairment d. Value in use
(ACCA)
50. Which of the following terms best describes the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date?
a. Fair value b. Value in use c. Residual value d. Realizable value
(ACCA)
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a. An asset must be depreciated from the date of its purchase to the date of
sale
b. The annual depreciation charge should be constant over the life of the
asset
c. The total cost of an asset must eventually be depreciated
d. If the carrying amount of an asset is less than the residual value,
depreciation is not charged
(ACCA)
56. An asset has a nine-year useful life and is to be depreciated under the sum-of-
the-years’ digits method. The annual depreciation expense would be the same
as that under the straight line depreciation method in
a. the third year in the life of the asset
b. the fifth year of the life of the asset
c. the seventh year of the life of the asset
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d. the ninth year of the life of the asset
(Adapted)
59. The depreciation method that provides higher depreciation expense in the
early years and lower charges in the late years is
a. SYD c. units of production and hours of use method
b. straight line d. FIFO
60. Which of the following is an economic factor related to the service life of a
long-lived asset?
a. obsolescence c. decay
b. wear and tear d. casualties
63. The highest amount of depreciation will usually be recorded in the last year of
an asset’s life when using:
a. straight line b. SYD c. double-declining balance d. either b or c
64. Which of the following depreciation methods usually results in paying the
lowest taxes in the early years of an assets life?
a. SYD c. straight line
b. double declining balance d. units of production method
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III. It leads to higher taxes in later years compared to accelerated
depreciation methods.
a. I, II & III b. I & III c. II & III d. I & II
66. An asset is estimated to have a total life of 8 years. Its acquisition cost is
₱16,000 and a residual value of ₱4,000. The firm follows the double declining
method of depreciation. In the second year, the rate of depreciation for the
firm's asset is closest to
a. 25% b. 17% c. 9.5% d. 12.5%
68. An analysis of an entity's financial statements indicates that the average age
of its assets is declining. This could be due to which of the following?
I. The entity is acquiring new assets with longer depreciable lives.
II. The entity's capital expenditures are outpacing depreciation.
III. The entity is not using its assets as intensively as it should.
IV. The entity is operating in its maturity phase.
a. I & IV b. I & II c. I, II, III & IV d. III & IV
*Hint: Average age of assets can be computed using any of the following:
i. Average age: (Accumulated depreciation ÷ Depreciation expense) = x
years
ii. Relative age: (Accumulated depreciation ÷ Total cost of depreciable
assets) = % of age
iii. Average depreciable life: (Total depreciable amount ÷ Depreciation
expense) = x years
71. A machine with a 4-year estimated useful life and an estimated 15% residual
value was acquired on January 1. Would depreciation expense using the sum-
70
of-the-year's-digit method be higher or lower than depreciation expense
using the double-declining-balance-method in the first and second years?
First year Second year
a. Higher Higher
b. Higher Lower
c. Lower Higher
d. Lower Lower
(AICPA)
77. Which of the following items relevant to the depreciation of an asset can be
negative?
a. residual value c. useful life
b. depreciable amount d. carrying amount subsequent to acquisition
(AICPA)
71
79. Which is not an objection to the use of the straight-line method of
depreciation?
a. It may not satisfactorily match expense with revenue, depending on the
asset.
b. It tends to ignore obsolescence as a major source of decline in economic
value.
c. It does not recognize the investment characteristics of the ownership of
operational assets.
d. It generally results in the lowest earnings.
(Adapted)
81. A method that excludes residual value from the base for the depreciation
calculation is
a. SYD c. productive output
b. Double declining balance d. straight line
(AICPA)
83. In the years after mid-service point of a depreciable asset, which of the
following depreciation methods will result in the highest depreciation
expense?
a. Sum-of-the-years’-digits. c. 200% diminishing-balance
b. Diminishing-balance d. Straight-line
(Adapted)
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b. When partial use of the asset, during construction can be identified with
an income-producing center and the corresponding cost can be
ascertained, the related depreciation should he allocated to that operation.
c. Depreciation should not be continued on units of property, plant and
equipment that are reserved or standby, or idle either temporarily or for
an extended period.
d. When used property is acquired, the actual cost in cash or equivalent is
generally the proper basis for depreciation, regardless of the previous
history of the property
86. A plant facility has an originally estimated physical life equal to 15 years. As a
result of accelerated usage, it is now estimated that the physical life will be
reduced by 3 years. The depreciation rate applied to this facility need not be
changed if the depreciation method used is
a. SYD
b. Double declining balance
c. Units of output or hours of use method
d. Straight line method
e. The rate should be changed under all of these methods
87. A machine with a 4-year useful life and a 15% salvage value was acquired on
January 1, 20x2. The increase in accumulated depreciation for 20x3 using the
double-declining balance method would be
a. initial cost x 85% x 50% c. initial cost x 50%
b. initial cost x 85% x 50% x 50% d. initial cost x 50% x 50%
91. Which of the following methods permits total depreciation on a plant asset to
exceed depreciable cost?
a. Straight-line
b. Declining balance
c. Sum of year's digits
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d. No acceptable depreciation method
e. All acceptable methods if salvage value is not zero
(Adapted)
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b. the accountant should compute the carrying amount of an asset as if the
new depreciation method, revised useful life or revised residual value had
been used all along
c. the accountant is in for very complex accounting computations and should
consult her college instructor first before doing anything
d. there should be no changes in useful lives, depreciation methods, or
residual values because once selected or determined, they are irrevocable,
according to accountant’s standards
Revaluation model
100. An entity owns a fleet of company cars and executive vehicles, and has
other property and equipment in order to service the fleet. It decided to
revalue some of its property, plant and equipment. Which one of the following
options complies with PAS 16?
a. Revalue only those parts of the fleet that have increased in value
b. Revalue only the cars and not the executive vehicles
c. Revalue only one-half of each class of property, plant and equipment
d. Revalue an entire class of property, plant and equipment
(ACCA)
101. In case of downward revaluation of an asset, which is revalued for the first
time, the account to be debited is
a. fixed asset account c. profit or loss account
b. revaluation reserve d. general reserve
102. An entity has a policy of revaluing its PPE. An asset cost ₱5M on January 1,
20x1 and has a useful life of five years and is depreciated on a straight-line
basis to a zero residual value. The value of the asset at December 31, 20x1
was ₱3.8M. The fall in value will be accounted for as follows:
a. Depreciation ₱1M and fall in value of ₱200,000 both to the income
statement
b. Depreciation ₱1M and fall in value of ₱200,000 both to the reserves
c. Depreciation ₱1M to income statement and fall in value of ₱200,000 to the
reserves
d. Depreciation ₱1M to the income statement and fall in value of ₱200,000
ignored until there is a revaluation surplus
(ACCA)
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a. I, II, III, IV, and V c. I, III and IV only
b. I, III, IV and V only d. IV only
105. Which of the following incorrectly relate(s) to the accounting for property,
plant and equipment?
I. Sum of the years’ digits method is one of the accelerated methods of
depreciation that provides higher depreciation expense in the early years
and lower charges in the late years.
II. Mortgage or liens on property, plant and equipment need not be disclosed
in the financial statements or notes.
III. Any property, plant and equipment that is idle or abandoned and remains
in the property, plant and equipment account should be revalued if this
results in increasing their carrying values.
IV. Depreciation of appraised properties charged to operations shall be based
on the appraised values and it should be computed from the date of
appraisal.
V. An entity may be allowed to, revalue its property, plant and equipment if
their current value is substantially more than their cost provided the
company adheres to the provisions of PAS
a. I, IV and V b. I, IV c. II, III d. II, III, V
107. The value per appraisal or the value computed by deducting observed
depreciation from replacement cost is called
a. revaluation surplus c. sound value
b. appraisal value d. replacement cost
108. Internet Protocol-IP, Inc. owns a fleet of over 100 cars and 20 ships. It
operates in a capital-intensive industry and thus has significant other
property, plant, and equipment that it carries in its books. It decided to
revalue its property, plant, and equipment. The company’s accountant has
suggested the alternatives that follow. Which one of the options should
Internet Protocol-IP, Inc. select in order to be in line with the provisions of
PAS 16?
a. Revalue only one-half of each class of property, plant, and equipment, as
that method is less cumbersome and easy compared to revaluing all assets
together.
b. Revalue an entire class of property, plant, and equipment.
c. Revalue one ship at a time, as it is easier than revaluing all ships together.
d. Since assets are being revalued regularly, there is no need to depreciate.
(Adapted)
109. Under PAS 16, revaluation of property, plant and equipment to appraised
value is an acceptable alternative to historical cost provided certain
76
requirements are complied with. Which of the following is not one of the
requirements?
a. the appraisal should be made by a competent and independent specialist
once a year at each end of reporting period.
b. depreciation to be charged to operations should be based on appraised
values or its equivalent
c. the revaluation surplus should be presented in equity
d. appropriate disclosures should be made in the financial statements
(Adapted)
110. PAS 16 requires that revaluation surplus resulting from initial revaluation
of property, plant, and equipment should be treated in one of the following
ways. Which of the four options mirrors the requirements of PAS 16?
a. Credited to retained earnings as this is an unrealized gain.
b. Released to the income statement an amount equal to the difference
between the depreciation calculated on historical cost vis-à-vis revalued
amount.
c. Deducted from current assets and added to the property, plant, and
equipment.
d. Debited to the class of property, plant, and equipment that is being
revalued and credited to a reserve captioned “revaluation surplus,” which
is presented under “equity.”
(Adapted)
114. When the asset being revalued has no residual value, observed
depreciation may be computed as
a. Replacement cost minus Carrying amount
77
b. Appraised value or Depreciated replacement cost minus Carrying amount
c. Replacement cost minus Observed depreciation
d. Accumulated depreciation divided by Historical cost multiplied by
Replacement cost
115. When the asset being revalued has a residual value, observed depreciation
may be computed as
a. Replacement cost minus Carrying amount
b. Accumulated depreciation divided by Depreciable amount multiplied by
Depreciable amount of replacement cost
c. Replacement cost minus Observed depreciation
d. Accumulated depreciation divided by Historical cost multiplied by
Replacement cost
Disclosure
119. Which of the following disclosures must be made under PAS16 Property,
plant and equipment?
I. The existence and amounts of restrictions on title
II. A narrative discussion of future capital expenditure plans
III. The disposal proceeds of each major asset sold in the period
IV. The measurement bases used for determining the gross carrying amount
a. I, IV b. I, II, IV c. I, III, IV d. I, II, III, IV
(ACCA)
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d. all of these
121. All of the following are required disclosure under PAS 16, except?
a. accounting policies and estimates of useful lives and residual value
b. reconciliation of carrying amounts at the beginning and end of the year
c. commitments related to items of property, plant, and equipment
d. changes in fair values of assets measured under cost model
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Chapter 16
Depletion of Mineral Resources
Actual units quarried in 20x1 through 20x4 totaled 30,000,000 units. On January
1, 20x5, BUCOLIC Co. estimated that remaining recoverable reserves is only
25,000,000 units and after the reserves are exhausted, the land will be sold for
₱3,200,000. Costs of disposal are estimated at ₱1,200,000. Actual units quarried
in 20x5 totaled 6,000,000 units.
80
3. How much is the depletion charge in 20x5?
a. 13,284,000 b. 13,480,000 c. 13,280,000 d. 13,248,000
4. What is the carrying amount of the wasting asset on December 31, 20x5?
a. 43,852,000 b. 44,272,000 c. 42,720,00 d. 43,952,000
Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated
that 300,000 units will be extracted each year. The heavy equipment and the
drilling rig foundation have estimated useful lives of 10 years and 5 years,
respectively. Actual units extracted during 20x1 are 320,000 units.
Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated
that 300,000 units will be extracted each year. The heavy equipment and the
drilling rig foundation have estimated useful lives of 20 years and 10 years,
respectively. Actual units extracted during 20x1 are 320,000 units.
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a. 12,832,677 b. 11,988,322 c. 13,489,00 d. 12,800,000
No production in a period
Use the following information for the next two questions:
In 20x1, THRALL SLAVE Co. purchased real estate containing copper for a total
cost of ₱40,000,000. Immovable tangible equipment costs for drilling rig
foundation totaled ₱20,000,000. Estimated recoverable reserves from the mine
are 1,000,000 units. It is estimated that 100,000 units will be extracted each year;
therefore, the life of the mine in years is 10 years. The drilling rig foundation has
an estimated useful life of 15 years.
Actual units extracted from 20x1 through 20x3 totaled 340,000 units. No units
were extracted during 20x4 due to an employee strike. Extraction resumed in
20x5 and total units extracted during that year was 80,000 units.
12. How much is the depreciation charge on the immovable tangible equipment
in 20x4?
a. 980,967 b. 1,090,800 c. 1,100,000 d. 1,200,000
Liquidating dividends
14. MYNHEER MISTER Co. has the following balances in its accounts as of
December 31, 20x1:
Resource deposit – coal mine 40,000,000
Accumulated depletion 16,000,000
Ordinary share capital 80,000,000
Capital liquidated 8,000,000
Unappropriated retained earnings 20,000,000
Inventory (600,000 units) 28,000,000
Depletion rate per unit 6.00 per unit
15. How much is the initial carrying amount of the mineral deposit?
a. 24,143,840 b. 251,348,540 c. 251,764,540 d. 256,340,540
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17. How much is the interest expense in 20x2?
a. 1,361,824 b. 1,198,406 c. 1,421,266 d. 1,525,244
There is no active market for retirement obligations such as these but VERITY
has been able to develop cash flow estimates based on its prior experience in
mining-site restoration. It will take 3 years to restore the mine site when mining
operations cease in 10 years. Each estimated cash outflow reflects an annual
payment at the end of each year of the 3-year restoration period. The current
market-based rate is 12%.
VERITY made the following estimates of future cash flows for the restoration
cost:
Restoration estimated cash outflow Probability assessment
8,000,000 10%
14,000,000 15%
16,000,000 50%
16,800,000 25%
100%
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On January 1, 20x4, PRECIPITOUS Co. estimated that the restoration costs should
be ₱48,000,000 and the imputed rate of interest is 10%.
24. The entry on January 1, 20x4 to adjust Asset retirement obligation (ARO)
includes
a. debit to retained earnings for ₱7,781,664
b. debit to ARO for ₱7,781,664
c. debit to “resource deposit – quarry” for ₱7,781,664
d. credit to “resource deposit – quarry” for ₱7,781,664
3. PFRS 6
a. shall be applied by all entities adopting full PFRSs
b. shall be applied only by entities engaged in agricultural activity
c. temporarily exempts entities in applying some provisions in PAS 8
d. when adopted, shall replace PAS 16
4. It refers to the activities geared towards the search for mineral resources
after the entity has obtained legal rights to explore in a specific area
a. exploration and evaluation c. probe and investigation
b. development d. adventure and conquest
84
a. Yes, but only to the extent such expenditure is recoverable in future
periods.
b. Yes, but only to the extent the technical feasibility and commercial
viability of extracting the associated mineral resource have been
demonstrated.
c. Yes, but only to the extent required by the entity’s accounting policy for
recognizing exploration and evaluation assets.
d. No, such expenditure is always expensed in profit or loss as incurred.
(Adapted)
10. Under PFRS 6, exploration and evaluation assets shall be initially measured at
a. cost b. fair value c. amortized cost d. any of these
85
11. Which of the following correctly relates to the provisions of PFRS 6?
I. Exploration and evaluation assets shall be measured at cost, fair value, or
amortized cost, whichever is more appropriate.
II. Exploration and evaluation assets are exploration and evaluation
expenditures recognized as assets in accordance with the entity’s
accounting policy. Nothing in PFRS 6 overrides the accounting policy
developed by an entity.
III. After recognition, an entity shall apply either the cost model or the
revaluation model to the exploration and evaluation assets.
IV. After recognition, an entity shall apply either the cost model or the fair
model to the exploration and evaluation assets.
a. II, III b. I, II, III c. I, III, IV d. I, II, III, IV
12. Under PFRS 6, an entity may change its accounting policies for exploration
and evaluation expenditures
a. If the change is required or permitted under the standards
b. If the change is required or permitted under the standards and not
prohibited by a relevant regulation
c. if the change makes the financial statements more relevant and no less
reliable, or more reliable and no less relevant.
d. If the change makes the financial statements more relevant or more
reliable
13. Is an entity ever required or permitted to change its accounting policy for
exploration and evaluation expenditures?
a. Yes, entities are required to change their accounting policy for these
expenditures if the change would result in more useful information for
users of financial statements.
b. Yes, entities are free to change accounting policy for these expenditures as
long as the selected policy results in information that is relevant and
reliable.
c. Yes, but only if the change makes the financial statements more relevant
to the economic decision-making needs of users and no less reliable, or
more reliable and no less relevant to those needs.
d. No, entities would be permitted to change accounting policy only on
adoption of a new or revised Standard that replaces the existing
requirements in PFRS 6.
(Adapted)
14. According to PFRS 6, an entity shall classify exploration and evaluation assets
as
a. tangible or intangible according to the nature of the assets
b. depreciable or non-depreciable according to the nature of the assets
c. exploration and development
d. movable or immovable
86
16. These assets are physically consumed and are irreplaceable.
a. consumable c. wasting assets (natural resources)
b. bearer d. a or c
20. Which of the following facts or circumstances would not trigger a need to test
an evaluation and exploration asset for impairment?
a. The expiration - or expected expiration in the near future -of the period
for which the entity has the right to explore in the specific area, unless the
right is expected to be renewed.
b. The absence of budgeted or planned substantive expenditure on further
exploration and evaluation activities in the specific area.
c. A decision to discontinue exploration and evaluation activities in the
specific area when those activities have not led to the discovery of
commercially viable quantities of mineral resources.
d. Lack of sufficient data to determine whether the carrying amount of the
exploration and evaluation asset is likely to be recovered in full from
successful development or by sale.
(Adapted)
87
I. Movable tangible equipment costs such as heavy equipment used from
one extracting site to another are depreciated separately over their useful
life.
II. Immovable tangible equipment costs such as drilling rig foundation are
depreciated separately over their useful life or the life of the resource,
whichever is shorter.
III. If the useful life of the immovable tangible equipment is shorter than the
economic life of the mine, units-of-production method should be used to
depreciate the equipment’s cost.
IV. If the useful life of the immovable tangible equipment is longer than the
economic life of the mine, no depreciation is recognized during a period
where there are no extraction activities.
a. I, II b. III, IV c. I, II, IV d. I, II, III, IV
28. Which of the following is correct regarding the accounting for provisions for
decommissioning and restoration costs?
I. The amount of decommissioning or restoration costs to be included as
part of the cost of an asset is the fair value of the estimated liability as of
initial recognition.
II. The provision shall be the best estimate of the expenditure required to
settle the present obligation.
III. The fair value of the obligation for restoration and decommissioning cost
is recorded under “Asset retirement obligation” (ARO) with a
corresponding debit to the related asset for the same amount.
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IV. Periodic unwinding of the discount on the liability recognized for the
decommissioning or restoration cost shall be recognized in profit or loss
as a finance cost as it occurs.
V. Periodic unwinding of the discount on the liability does not affect
depletion or depreciation recognized for the period.
a. I, II, III b. I, II, IV c. I, II, III, IV d. I, II, III, IV, V
31. Which of the following incorrectly refer to accounting for property, plant and
equipment?
I. Land improvements should never be depreciated since they are attached
to the land.
II. The cost of original installation of a machine should be credited to a
machinery account.
III. Natural resources are generally recorded at cost, including the cost of
exploration and development.
IV. In calculating depletion for a period, the residual value of acquired land
containing an ore deposit should be deducted from the total purchase
price.
V. If property, plant and equipment are stated at current valuation, the
financial position and progress of an enterprise will be more realistically
portrayed. The impression that the company is more profitable than what
it really is, is avoided.
a. III, IV, V b. I, II, V c. II, III, IV, V d. I, II
32. Development costs are divided into tangible equipment and intangible
development costs. The intangible development costs are generally
considered as part of the depletion base while tangible equipment are
normally not included in the depletion base.
I. Tangible equipment that can be moved and be used from one site to
another should be depreciated over their useful life or the life of the
wasting asset whichever is shorter.
II. Tangible equipment that cannot be moved and does not have alternative
use (cannot be used from one site to another) should be depreciated over
their useful life or the life of the wasting asset whichever is shorter.
a. True, true b. True, false c. False, true d. False, false
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34. Which of the following models may be applied by entities for the
measurement after recognition of exploration and evaluation assets, in
accordance with PFRS6 Exploration for and evaluation of mineral resources?
a Cost d. Present value
b. Revaluation e. a or b
c. Realization
(ACCA)
35. Does PFRS6 Exploration for and evaluation of mineral resources apply to the
following types of expenditure?
I. The extraction and processing of mineral resources for transport to
market.
II. The commercial review of possible areas for mineral extraction before
bidding for the legal rights to explore a specific area.
a. No, no b. No, Yes c. Yes, No d. Yes, yes
36. The Strider Company is involved in the exploration for mineral resources. Its
policy is to recognize exploration assets and measure them initially at cost. It
is currently exploring a new gas field in Ruritania. The exploration license for
the new Ruritanian gas field is about to expire and Strider is now preparing to
undertake an impairment review. Strider reports its financial performance as
'Mineral Production' and 'Energy Trading' in its financial statements in
accordance with PFRS8 Operating segments. The Mineral Production segment
comprises two cash-generating units – 'oil production' and 'gas production'.
In accordance with PFRS 6 Exploration for and evaluation of mineral resources,
what is the highest level at which the impairment test can be undertaken?
a. A cash-generating unit based on the assets in the Ruritanian gas field
b. Gas production cash-generating unit
c. Oil production and gas production cash-generating units combined
d. A cash-generating unit at The Strider Company level
(ACCA)
38. Under which of the following methods is depreciation computed in the same
way as depletion is computed?
a. Straight-line c. Double-declining-balance
b. Sum-of-the-years-digits d. Productive-output
(AICPA)
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Chapter 16 – Suggested answers to theory of accounts questions
1. C 6. D 11. A 16. C 21. C 26. D 31. D 36. C
2. B 7. D 12. C 17. D 22. A 27. B 32. C 37. A
3. C 8. B 13. C 18. C 23. C 28. D 33. B 38. D
4. A 9. D 14. A 19. C 24. C 29. C 34. E
5. C 10. A 15. D 20. D 25. A 30. D 35. A
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Chapter 17
Government Grants
1. If CHIDE Co. uses the gross presentation of government grants, how much is
the carrying amount of the deferred income from the government grant on
December 31, 20x5?
a. 15,200,000 b. 12,800,000 c. 12,000,000 d. 0
2. If CHIDE Co. uses the net presentation of government grants, how much is the
carrying amount of the deferred income from the government grant on
December 31, 20x5?
a. 15,200,000 b. 12,800,000 c. 12,000,000 d. 0
3. If CHIDE Co. uses the gross presentation of government grants, how much is
the carrying amount of the building on December 31, 20x1?
a. 40,000,000 b. 24,000,000 c. 38,000,000 d. 22,800,000
4. If CHIDE Co. uses the net presentation of government grants, how much is the
carrying amount of the building on December 31, 20x1?
a. 40,000,000 b. 24,000,000 c. 38,000,000 d. 22,800,000
5. If MACABRE Co. uses the gross presentation of government grants, how much
is the carrying amount of the deferred income from the government grant on
December 31, 20x1?
a. 14,000,000 b. 12,800,000 c. 12,000,000 d. 0
6. If MACABRE Co. uses the net presentation of government grants, how much is
the carrying amount of the deferred income from the government grant on
December 31, 20x1?
a. 14,000,000 b. 12,800,000 c. 12,000,000 d. 0
7. If MACABRE Co. uses the gross presentation of government grants, how much
safety expense is recognized in 20x1?
a. 4,000,000 b. 2,400,000 c. 2,000,000 d. 0
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8. If MACABRE Co. uses the net presentation of government grants, how much is
safety expense is recognized in 20x1?
a. 4,000,000 b. 2,400,000 c. 2,000,000 d. 0
Forgivable loans
11. On January 1, 20x1, because of an exemplary accomplishment that brought
international recognition to the community, the government waived the
repayment of CONGEAL TO THICKEN Co.’s loan payable with a carrying
amount of ₱800,000 and remaining term of 4 years. How much income from
government grant is recognized in 20x1?
a. 800,000 b. 200,000 c. 400,000 d. 0
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repayment of the ₱16,000,000 grant given as grant in 20x1. How much is the
loss on repayment of government grant recognized in 20x4?
a. 2,800,000 b. 1,800,000 c. 1,600,000 d. 0
3. Under PAS 20, these are assistance by government in the form of transfers of
resources to an entity in return for past or future compliance with certain
conditions relating to the operating activities of the entity. They exclude those
which cannot reasonably have a value placed upon them and transactions
with government which cannot be distinguished from the normal trading
transactions of the entity.
a. Government assistance c. Grants related to assets
b. Government grants d. Grants related to income
5. Which of the following may not form a valid basis for the accounting for
government grants?
a. cost principle c. full disclosure
b. matching d. comparability
6. Which of the following is not specifically excluded from the purview of PAS
20?
a. Government participation in ownership of the entity.
b. Government grant covered by PAS 41.
c. Government assistance provided in the form of tax benefits.
d. Forgivable loan from the government.
(Adapted)
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7. Which of the following statements incorrectly relate to the scope of PAS 20?
a. PAS 20 shall be applied in accounting for, and in the disclosure of,
government grants and in the disclosure of other forms of government
assistance.
b. PAS 20 shall be applied in accounting for, and in the disclosure of,
government grants and other forms of government assistance.
c. PAS 20 does not deal with the special problems arising in the accounting
for government grants in financial statements reflecting the effects of
changing prices or in supplementary information of a similar nature.
d. PAS 20 does not deal with government assistance that is provided for an
entity in the form of benefits that are available in determining taxable
profit or tax loss, or are determined or limited on the basis of income tax
liability. Examples of such benefits are income tax holidays, investment tax
credits, accelerated depreciation allowances and reduced income tax
rates.
e. PAS 20 does not deal with government participation in the ownership of
the entity and government grants covered by PAS 41 Agriculture.
Recognition
8. When shall an entity recognize government grants?
a. when there is reasonable assurance that the entity will comply with the
conditions attaching to grants
b. when the grants are received
c. when there is reasonable assurance that the grants will be received
d. a and c
11. Under PAS 20, this refers to government, government agencies and similar
bodies whether local, national or international.
a. Government c. Internal Revenue Services
b. Regulatory agencies d. Securities Commission
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12. Under PAS 20, these are government grants whose primary condition is that
an entity qualifying for them should purchase, construct or otherwise acquire
long-term assets. Subsidiary conditions may also be attached restricting the
type or location of the assets or the periods during which they are to be
acquired or held.
a. Government assistance c. Grants related to assets
b. Government grants d. Grants related to income
13. Under PAS 20, these are government grants other than those related to assets.
a. Government assistance c. Grants related to assets
b. Government grants d. Grants related to income
18. A donated fixed asset received as government grant for which the fair value
has been determined should be recorded as a debit to fixed asset and a credit
to
a. retained earnings c. deferred income
b. additional paid-in capital d. other income
19. Under PAS 20, these are loans which the lender undertakes to waive
repayment of under certain prescribed conditions.
a. Non-derivative financial assets with fixed or determinable payments
b. Waivable loans
c. Agricultural loans
d. Forgivable loans
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20. A forgivable loan from government is treated as a government grant when
a. there is reasonable assurance that the entity will meet the terms for
forgiveness of the loan.
b. the loan is forgiven
c. there is reasonable assurance that the loan will not be repaid in the future
d. under no circumstance
21. The benefit of a below-market rate of interest loan from the government is
measured
a. as the fair value of the loan at date of grant
b. as the amount needed to settle the liability at maturity
c. as the difference between the initial carrying amount of the loan
determined in accordance with PFRS 9 and the proceeds received.
d. as the difference between the initial carrying amount of the loan
determined in accordance with PFRS 9 and the present value of the loan.
24. Which of the following is the least desirable accounting procedure for
government grants?
a. Government grants are recognized immediately in profit or loss if the
related costs for which the grants are intended to compensate have
already been incurred.
b. Government grants are initially deferred if the related costs for which the
grants are intended to compensate are not yet incurred.
c. Government grants are not immediately recognized in profit or loss but
rather amortized to profit or loss as the costs for which the grants are
intended to compensate are being incurred.
d. Government grants are recognized in profit or loss on a receipts basis.
25. Which of the following is not applied when accounting for government
grants?
a. matching c. cash basis accounting
b. accrual accounting d. income recognition
26. The use of cash basis of accounting to account for government grants is
permitted
a. only if no basis existed for allocating a grant to periods other than the one
in which it was received.
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b. only if there is no reasonable assurance that the entity will comply with
the conditions attached to the grant.
c. only if, at initial recognition, there is no reasonable basis that the grant
will be received
d. under no circumstance
29. Which of the following grants shall be recognized in profit or loss periodically
as the related costs are incurred?
a. An agricultural research entity is given land that belonged to the
government to set up a new laboratory and to investigate new farming
methods.
b. Free technical advice is provided by the government to help an export
entity to market its new technology in North America.
c. A local government made public improvements in the area where an
entity operates. The public improvements increased business in the area
since it became more accessible to customers. Also, the value of land in the
area increased.
d. An entity operating in an economic zone was awarded a tax holiday of 5
years in the condition that the entity should continue to operate for at
least 10 years and that it should employ only residents from the area.
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30. In relation to a benefit included in the term 'government assistance', are the
following statements true or false according to PAS20 Government grants and
government assistance?
I. The provision of infrastructure in developing areas is a benefit.
II. The imposition of trading constraints on competitors is a benefit.
a. False, False b. False, True c. True, False d. True, True
(ACCA)
31. PAS 20 shall be applied in accounting for, and in the disclosure of,
government grants and in the disclosure of other forms of government
assistance. In the case of a nonmonetary grant, which of the following
accounting treatments is prescribed by PAS 20?
a. Record the asset at replacement cost and the grant at a nominal value.
b. Record the grant at a value estimated by management.
c. Record both the grant and the asset at fair value of the nonmonetary asset.
d. Record only the asset at fair value; do not recognize the fair value of the
grant.
(Adapted)
32. An unrestricted grant received from the government to support enterprise
fund operations should be reported as
a. Contributed capital. c. Revenue
b. Income. d. Revenues and expenditures.
(AICPA)
34. ARISTOCRACY County owned an idle parcel of real estate consisting of land
and a factory building. Aristocracy gave title to this realty to ARISTOCRAT Co.
as an incentive for Aristocrat to establish manufacturing operations in the
County. Aristocrat paid nothing for this realty, which had a fair market value
of ₱250,000 at the date of the grant. Aristocrat should record this
nonmonetary transaction as a
a. memo entry only.
b. credit to deferred income for ₱250,000.
c. credit to income for ₱250,000.
d. credit to donated capital for ₱250,000.
(AICPA)
35. A plant site donated by a township to a manufacturer that plans to open a new
factory should be recorded on the manufacturer's books at
a. the nominal cost of taking title to it.
b. its market value.
c. “b” but alternatively, the entity may use “a”
d. not recorded
(AICPA)
36. An entity donated land to a municipality for a park. The acquisition cost of the
land was ₱75,000, and the revalued carrying amount at the time of the
donation was ₱200,000 as determined by a professional appraiser. If the
enterprise has adopted the allowed alternative treatment for measurement of
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property, plant, and equipment subsequent to initial recognition, the journal
entry to record the disposition of the land is
a. Land 75,000
Deferred income 75,000
b. Land 125,000
Revaluation surplus 125,000
Revaluation surplus 125,000
Income 125,000
Expense 75,000
Land 75,000
c. Expense 200,000
Revaluation surplus 125,000
Land 200,000
Retained earnings 125,000
d. Donation expense 200,000
Land 75,000
Income 125,000
Grant (a) – was paid to give financial assistance for start-up costs already
incurred.
Grant (b) – was paid to subsidize the costs of purchasing computer software over
the five-year period.
The company is almost certain to keep the facilities operational for the next five
years. The company's accounting year end is December 31. Are the following
statements concerning recognition of the income from the two government
grants true or false, according to PAS 20 Government grants and government
assistance?
(1) Income from Grant (a) should be recognized in full on receipt in 20x1.
(2) Income from Grant (b) should be recognized in full at the end of 5 years.
a. False, False b. False, True c. True, False d. True, True
(ACCA)
Presentation
38. REPUBLIC “PEOPLE ELECT” Company purchased a major new piece of
machinery for ₱10 million on January 1, 20x1. It will depreciate this
machinery on a straight line basis over its useful life of 10 years, assuming a
zero residual value. Also on January 1, 20x1 the company received a
government grant of ₱1 million to help finance this machinery.
Method 1 Method 2
Non-current asset Non-current asset
Cost 9,000,000 Cost 10,000,000
Depreciation 900,000 Depreciation 1,000,000
Carrying amount 8,100,000 Carrying amount 9,000,000
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Deferred income 900,000
39. In the case of grants related to an asset, which of these accounting treatments
(balance sheet presentation) is prescribed by PAS 20?
a. Record the grant at a nominal value in the first year and write it off in the
subsequent year.
b. Either set up the grant as deferred income or deduct it in arriving at the
carrying amount of the asset.
c. Record the grant at fair value in the first year and take it to income in the
subsequent year.
d. Take it to the income statement and disclose it as an extraordinary gain.
(Adapted)
40. In the case of grants related to income, which of these accounting treatments
is prescribed by PAS 20?
a. Credit the grant to “general reserve” under shareholders’ equity.
b. Present the grant in the income statement as “other income”’ or as a
separate line item, or deduct it from the related expense.
c. Credit the grant to “retained earnings” on the balance sheet.
d. Credit the grant to sales or other revenue from operations in the income
statement.
(Adapted)
Disclosure
43. Which of these disclosures is not required by PAS 20?
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a. The accounting policy adopted for government grants, including methods
of presentation adopted in the financial statements.
b. Unfulfilled conditions and other contingencies attaching to government
assistance.
c. The names of the government agencies that gave the grants along with the
dates of sanction of the grants by these government agencies and the
dates when cash was received in case of monetary grants.
d. The nature and extent of government grants recognized in the financial
statements and an indication of other forms of government assistance
from which the entity has directly benefited.
(Adapted)
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Chapter 18
Borrowing Costs
General borrowing
2. On January 1, 20x1, ENERVATE TO WEAKEN Company had the following
borrowings made for general purposes and a part of the proceeds was used to
finance the construction of a qualifying asset.
Principal
12% short-term note ₱ 40,000,000
14% bank loan (3-year) 72,000,000
16% note payable (5-year) 88,000,000
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Payment date Amount
January 1, 20x1 ₱ 8,000,000
March 31, 20x1 24,000,000
September 30, 20x1 40,000,000
December 31, 20x1 8,000,000
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Extended period of construction
Use the following information for the next four questions:
CONVALESCE Co. started construction of a qualifying asset for RECOVER, Inc. on
January 1, 20x1. The following were expenditures incurred on construction.
Date Expenditures
Year 20x1
January 1, 20x1 4,000,000
May 1, 20x1 1,800,000
December 1, 20x1 2,880,000
Year 20x2
January 1, 20x2 3,600,000
August 30, 20x2 1,200,000
Year 20x3
July 1, 20x3 2,400,000
10. How much is the total cost of the constructed qualifying asset on September
30, 20x3?
a. 18,957,830 b. 19,776,830 c. 13,765,380 d. 18,957,380
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that asset. Alternatively, such borrowing costs are recognized as an
expense.
9. Which of the following may not be considered a “qualifying asset” under PAS
23?
106
a. A power generation plant that normally takes two years to construct.
b. An expensive private jet that can be purchased from a local vendor.
c. A toll bridge that usually takes more than a year to build.
d. A ship that normally takes one to two years to complete.
(Adapted)
10. What type of borrowing costs is eligible for capitalization under PAS 23?
a. avoidable borrowing costs
b. non-avoidable borrowing costs
c. non-payable borrowing costs
d. either a or b
12. Borrowing costs can be capitalized as part of the asset under PAS 23 when
a. They are a qualifying asset and the entity has opted for the benchmark
treatment under PAS 23.
b. They are a qualifying asset; the entity has opted for the allowed
alternative treatment under PAS 23, but it is not probable that they will
result in future economic benefits to the entity.
c. They are a qualifying asset; the entity has opted for the allowed
alternative treatment under PAS 23, and it is probable that they will result
in future economic benefits to the entity, but the costs cannot be measured
reliably.
d. They are a qualifying asset; the entity has opted for the allowed
alternative treatment under PAS 23, and it is probable that they will result
in future economic benefits to the entity, but the costs cannot be measured
reliably.
e. The borrowing costs are directly attributable to the acquisition,
construction or production of a qualifying asset. Other borrowing costs
are recognized as expense in the period in which the entity incurs them.
(Adapted)
Recognition
13. Under PAS 23, the capitalization of borrowing costs as part of the cost of a
qualifying asset commences on the date when which of the following
conditions is met?
a. The entity incurs expenditures for the asset
b. The entity incurs borrowing costs
c. It undertakes activities that are necessary to prepare the asset for its
intended use or sale
d. all of these
14. Which of the following statements regarding the provisions of PAS 23 is not
true?
a. Borrowing costs eligible for capitalization are those that would have been
avoided if the expenditure on the qualifying asset had not been made.
b. Expenditures on a qualifying asset include only those expenditures that
have resulted in payments of cash, transfers of other assets, or the
assumption of interest-bearing liabilities.
c. Expenditures are reduced by any progress payments received and grants
received in connection with the asset.
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d. The average carrying amount of the asset during a period, excluding
borrowing costs previously capitalized, is the expenditures to which the
capitalization rate is applied in that period.
15. Which of the following costs may not be eligible for capitalization as
borrowing costs under PAS 23?
a. Interest on bonds issued to finance the construction of a qualifying asset.
b. Amortization of discounts or premiums relating to borrowings that
qualifies for capitalization.
c. Imputed cost of equity.
d. d Exchange differences arising from foreign currency borrowings to the
extent they are regarded as an adjustment to interest costs pertaining to a
qualifying asset.
(Adapted)
16. In which of the following instances is an entity not permitted under PAS 23 to
capitalize borrowing costs?
a. Prior to the start of physical construction but where technical and
administrative work are being performed.
b. During the period of actual physical construction.
c. During the period when an asset is being held but no production or
development is being made.
d. a and c
20. Under PAS 23, an entity shall cease capitalizing borrowing costs when
a. substantially all the activities necessary to prepare the qualifying asset for
its intended use or sale are complete.
b. the physical construction of the asset is complete even though routine
administrative work might still continue
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c. only minor modifications are all that are outstanding
d. any of these
22. Activities necessary in preparing a qualifying asset for its intended use or sale
encompasses more than physical construction. Which of the following is a
necessary activity which is not physical construction?
a. excavation in preparation for the construction of a structure’s foundation
b. survey of land prior to actual construction
c. obtaining permit to start construction and performing technical planning
d. preparing PERT, Gantt Chart or CPM before construction of a small public
toilet
25. The borrowing costs from specific borrowings that are eligible for
capitalization is computed as
a. Interest expense minus investment income
b. Investment income minus interest expense
c. Capitalization rate multiplied by average expenditures
d. Total borrowings minus average expenditures multiplied by capitalization
rate
26. The borrowing costs from general borrowings that are eligible for
capitalization may be computed as
a. Interest expense minus investment income
b. Investment income minus interest expense
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c. Capitalization rate multiplied by average carrying amount of qualifying
asset
d. Total borrowings minus average expenditures multiplied by capitalization
rate
27. A company is constructing an asset for its own use. Construction began in
20x1. The asset is being financed entirely with a specific new borrowing.
Construction expenditures were made in 20x1 and 20x2 at the end of each
quarter. The total amount of interest cost capitalized in 20x2 should be
determined by applying the interest rate on the specific new borrowing to the
a. total accumulated expenditures for the asset in 20x1 and 20x2.
b. average accumulated expenditures for the asset in 20x1 and 20x2.
c. average expenditures for the asset in 20x2.
d. total expenditures for the asset in 20x2.
(AICPA)
28. Which of the following assets do not qualify for capitalization of interest costs
incurred during construction of the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them
for their intended use.
(AICPA)
30. When computing the amount of interest cost to be capitalized, the concept of
"avoidable interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders' equity.
c. that portion of total interest cost which would not have been incurred if
expenditures for asset construction had not been made.
d. that portion of average accumulated expenditures on which no interest
cost was incurred.
31. The period of time during which interest must be capitalized ends when
a. the asset is substantially complete and ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended use
have begun.
(AICPA)
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c. When excess borrowed funds from general borrowings not immediately
needed for construction are temporarily invested, any interest earned
should be offset against interest cost incurred when determining the
amount of interest cost to be capitalized.
d. The minimum amount of interest to be capitalized is determined by
multiplying a weighted average interest rate by the amount of average
accumulated expenditures on qualifying assets during the period.
(AICPA)
34. When funds are borrowed to pay for construction of assets that qualify for
capitalization of interest, the excess funds not needed immediately may be
temporarily invested in interest-bearing securities. Interest earned on these
temporary investments should be
a. offset against interest cost to be capitalized
b. used to reduce the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of
interest to be capitalized.
d. recognized as revenue of the period.
(AICPA)
36. During 2002, TIER ROW Co. constructed machinery for its own use and for
sale to customers. Machines sold to customers are manufactured in large
quantities on a repetitive basis. Bank loans financed the construction of these
assets, both during and after construction were complete. How much of the
interest incurred should be reported as interest expense in the 2002 income
statement?
Interest incurred for machinery Interest incurred for machinery
constructed for own use held for sale
a. All interest incurred All interest incurred
b. All interest incurred Interest incurred after completion
c. Interest incurred after completion Interest incurred after completion
d. Interest incurred after completion All interest incurred
(Adapted)
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38. The following statements relate to the cost of self-constructed assets
I. Direct cost of materials and labor as well as indirect costs and
incremental overhead specifically identifiable and traceable to the
construction shall be capitalized.
II. Financing costs attributable to a long-term construction project that are
incurred up to the completion of construction are to be included in the
gross carrying amount of the asset to which they relate
III. Cost inefficiencies, whether due to temporary idle capacity, industrial
disputes or other causes, should be included as part of the cost of the
asset
a. True, true, true c. True, true, false
b. True, false, true d. True, false, false
39. After determining which items on the balance sheet properly comprise the
basis of interest capitalization for operational assets under construction, the
interest calculation is based on the:
a. accumulated borrowing used only for the construction.
b. accumulated expenditures on qualifying assets as of the start of the
construction period.
c. average accumulated expenditures on qualifying assets during the
construction period.
d. accumulated expenditures on qualifying assets as of the end of the
construction period.
40. The interest capitalization period for a self-constructed asset begins when
certain conditions are met. Which of the following is not one of these
conditions?
a. Activities necessary to get the asset ready for its intended use actually are
in progress.
b. Qualifying expenditures for the asset have actually been made.
c. Interest cost has actually been incurred.
d. Liabilities, such as trade payables or accruals, are incurred in connection
with the asset.
41. Which of the following costs generally would be capitalized to property, plant,
and equipment account?
a. Interest on debt incurred to purchase the item
b. Property taxes relating to periods after acquisition
c. Import duties incurred on purchase
d. Freight-out
(Adapted)
42. An entity imported machinery to install in its new factory premises before
year-end. However, due to circumstances beyond its control, the machinery
was delayed by a few months but reached the factory premises before year-
end. While this was happening, the entity learned from the bank that it was
being charged interest on the loan it had taken to fund the cost of the plant.
What is the proper treatment of freight and interest expense under PAS 16?
a. Both expenses should be capitalized.
b. Interest may be capitalized but freight should be expensed.
c. Freight charges should be capitalized but interest cannot be capitalized
under these circumstances.
d. Both expenses should be expensed.
(Adapted)
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43. A firm decides to capitalize the interest expenditure on a large, building
construction project, instead of expensing it. This ________ its debt-to-equity
ratio.
a. has an ambiguous effect on c. decreases
b. leaves unaffected d. increases
(Adapted)
44. According to PAS23 Borrowing costs, which of the following assets could be
treated as qualifying assets for the purpose of capitalizing interest costs?
I. Investment property
II. Investments in financial instruments
III. Inventory of finished goods produced over a short period of time
IV. Power generation facilities
a. I, II, III b. I, III, IV c. I, II, IV d. I, IV
(ACCA)
45. According to PAS23 Borrowing costs, which of the following statements about
the capitalization of borrowing costs as part of the cost of a qualifying asset is
true?
a. If funds come from general borrowings, the amount to be capitalized is
based on the weighted average cost of borrowing
b. Capitalization always continues until the asset is brought into use
c. Capitalization always commences as soon as expenditure of the asset is
incurred
d. Capitalization always commences as soon as interest on relevant
borrowings is being incurred
(ACCA)
46. The following events take place: An entity buys some land on December 1.
Planning permission is obtained on January 31. Payment for the land is
deferred until February 1. The entity takes out a loan to cover the cost of the
land and the construction of the building on February 1. Due to adverse
weather conditions there is a delay in starting the building work for six weeks
and work does not commence until March 15. Capitalization of borrowing
costs will start on
a. December 1 b. January 1 c. February 1 d. March 15
(ACCA)
47. If the acquisition or construction of a qualifying asset has been financed partly
through specific and partly through general borrowings, then when
computing for the borrowing costs eligible for capitalization
a. the capitalization rate shall be multiplied to the average expenditures
during the year
b. the capitalization rate shall be multiplied to the average carrying amount
of the qualifying asset financed through specific borrowings
c. the capitalization rate shall be multiplied to the average carrying amount
of the qualifying asset financed through general borrowings
d. the borrowing costs are treated as incurred on general borrowings only
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49. Which of the following is not a disclosure requirement under PAS 23?
a. Accounting policy adopted for borrowing costs.
b. Amount of borrowing costs capitalized during the period.
c. Segregation of assets that are “qualifying assets” from other assets on the
balance sheet or as a disclosure in the footnotes to the financial
statements.
d. Capitalization rate used to determine the amount of borrowing costs
eligible for capitalization.
(Adapted)
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Chapter 19
Investment Property
115
Insignificant ancillary services
5. LANGUISH TO BECOME WEAK Co. owns a building being rented out to
various tenants under operating lease. LANGUISH Co. provides security and
maintenance services. The building has a carrying amount of ₱4,000,000.
Leasing is not the primary business of LANGUISH. How much would be
classified as investment property?
a. 4,000,000 c. a or b as an accounting policy choice
b. 0 d. none of these
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its PPE. NURTURE uses the fair value model for its investment properties. The
year-end adjusting entry will include
a. 360,000 depreciation c. 200,000 unrealized gain
b. 400,000 unrealized gain d. 1,200,000 unrealized gain
10. If GENRE Co. decides to change its accounting policy from the cost model to
the fair value model, how much is the gain or loss on the change?
a. 800,000 recognized in profit or loss
b. 800,000 recognized in other comprehensive income
c. 800,000 recognized directly in equity
d. 0
11. If GENRE Co. decides to change its accounting policy from the fair value model
to the cost model, how much is the gain or loss on the change? What is the
entry to effect the change?
a. 800,000 recognized in profit or loss
b. 800,000 recognized in other comprehensive income
c. 800,000 recognized directly in equity
d. 0
On January 1, 20x1, WARY Co. decided to classify the property interest in the
operating lease as investment property. It was determined that the present value
of the minimum lease payments is ₱3,200,000 which is equal to the fair value of
the property interest on that date.
Prior to January 1, 20x1, WARY Co. uses the cost model to measure its investment
property. The carrying amounts and fair values of the other investment
properties are shown below:
Item of investment property Carrying amount – Fair value – Jan.
Jan. 1, 20x1 1, 20x1
Land ₱ 2,000,000 ₱2,400,000
Building (purchased 10 years ago) 800,000 1,200,000
₱2,800,000 ₱3,600,000
How much is the total carrying amount of the all the investment properties held
by WARY Co. on January 1, 20x1 immediately upon recognition of the property
interest as investment property?
a. 2,800,000 b. 6,000,000 c. 6,800,000 d. 3,600,000
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initial recognition and on a continuing basis. How much is the carrying
amount of the plant as of December 31, 20x1?
a. 4,000,000 b. 3,680,000 c. 3,600,000 d. none of these
118
Historical cost ₱12,000,000
Accumulated depreciation – Dec. 31, 20x1 8,000,000
Carrying amount – Dec. 31, 20x1 4,000,000
Carrying amount had no impairment loss been
recognized previously – Dec. 31, 20x1 4,800,000
Fair value – Dec. 31, 20x1 6,400,000
DISDAINFUL Co. uses the fair value model for investment property.
18. How much is recognized in profit or loss on December 31, 20x1 relating to the
transfer?
a. 2,400,000 b. 1,600,000 c. 800,000 d. 0
HEAVE Co. uses the fair value model for investment property. The transfer
resulted to
a. a loss of ₱400,000 c. increase in equity of ₱800,000
b. a loss of ₱1,200,000 d. no effect on profit or loss
22. Assuming EXPECTORATE Co. determined that the cost of the old elevator
replaced is ₱2,000,000, how much is the gain (loss) on the replacement?
a. 800,000 b. (1,200,000) c. 2,000,000 d. (1,920,000)
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23. Assuming it is impracticable to determine the cost of the old elevator
replaced, how much is the gain (loss) on the replacement?
a. 1,280,000 b. (1,200,000) c. 2,000,000 d. (1,920,000)
3. A new office building used by an insurance entity as its head office which was
purchased specifically in the center of a major city in order to exploit its
capital gains potential. The property should be accounted for under
a. PAS 20 b. PAS 16 c. PAS 40 d. PAS 11
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e. b and d
(ACCA)
11. All of the following will not qualify as investment property, except?
a. Machineries that are held for lease
b. Hotels or motels
c. An agricultural land purchased for appreciation purposes
d. Equipment purchased for an indeterminate purpose
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II. The revaluation model used for property, plant, and equipment is the
same as the fair value model used for investment property.
a. true, true b. true, false c. false, true d. false, false
13. Under PAS 40, in determining the fair value of an investment property, which
of following should not be considered?
a. contingent rent c. furniture included in rented property
b. future capital expenditure d. air-conditioning in a rental building
14. The fair value of an investment property excludes which of the following?
a. prepaid or accrued operating lease income
b. equipment made an integral part of the property
c. future costs of day-to-day servicing of the asset
d. elevator in a building that is replaced every after 10 years.
16. An entity has a factory, which due to a decline in activity, is no longer required
and is now classified as held for sale. Which of the following is correct?
a. The property may be classified as investment property if there is
commencement of development with view to sale.
b. The property should be measured using cost model or fair value model
but not both.
c. The property should still be depreciated if the property is measured under
fair value model.
d. The property is classified as held for sale and is not an investment
property.
18. A gain arising from a change in the fair value of an investment property for
which an entity has opted to use the fair value model is recognized in
a. Profit or loss for the year.
b. General reserve in the shareholders’ equity.
c. Valuation reserve in the shareholders’ equity.
d. None of the above.
(Adapted)
122
19. Which of the following terms best describes property held to earn rentals or
for capital appreciation?
a. Freehold property c. Owner-occupied property
b. Leasehold property d. Investment property
(ACCA)
20. How does the fair value model differ from the revaluation model?
a. Increases in carrying amount above a cost-based measure are recognized
in equity
b. Changes in fair value are recognized through profit or loss
c. a and b
d. neither a nor b
24. Property interest held by the lessee under an operating lease may be
classified and accounted for:
a. As investment property at fair value
b. As property, plant and equipment at cost model
c. As intangible asset at cost
d. Either a or b
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a. I only c. Whichever is lower between I and II
b. II only d. Whichever is higher between I and II
26. Regarding property interest in an operating lease, which of the following can
be classified as investment property?
a. Property interest in an operating lease that has no reliably determinable
fair value
b. Property interest in an operating lease wherein the underlying premises is
currently used by the owner for its regular operation
c. Property interest in an operating lease that is held for appreciation by the
lessee or wherein the underlying premises is held for sub-lease by the
lessee
d. Neither a, b nor c
27. Which of the following investment property will have a changed classification
in the Consolidated Financial Statements?
a. Investment properties that are intended by management to be disposed of
b. Investment properties wherein owner occupation commenced during the
period
c. Investment properties that are leased out to affiliates or subsidiaries in
the consolidated group
d. Investment properties leased out to equity method investees
(Adapted)
28. Which is correct regarding the fair value model for investment property?
a. Investment properties are initially measured as cost; subsequently, they
are measured at fair value, any fluctuations in fair value are recognized as
revaluation in equity similar to the revaluation model of property, plant
and equipment
b. Investment properties are initially measured at fair value, any subsequent
changes in fair value are recognized in profit or loss
c. Change of policy from the fair value model to the cost model is least likely
to happen
d. Investment properties are initially recognized at fair value, any
subsequent changes in fair value are recognized as revaluation in equity
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the carrying amount of the owner-occupied property and its fair value at
the time of reclassification is included in profit or loss
32. Which of the following properties fall under the definition of investment
property and therefore within the scope of PAS 40 Investment property?
I. Land held for long-term capital appreciation
II. Property occupied by an employee paying market rent
III. Property being constructed on behalf of third parties
IV. A building owned by an entity and leased out under an operating lease
a. I, II b. II, IV c. I, IV d. II, III, IV
34. The initial cost of a property interest held under a finance lease and classified
as an investment property shall be
a. the fair value of the property
b. the present value of the minimum lease payments
c. the lower of the fair value of the property and the present value of the
minimum lease payments
d. the fair value of the property or the present value of the minimum lease
payments at the option of the entity
35. Which of the following generally provides the best evidence of fair value for
an investment property?
a. Discounted cash flow projections based on reliable estimates of future
cash flows.
b. Recent prices on less active markets with adjustments to reflect changes
in economic conditions.
c. Current prices for properties of a different nature or subject to different
conditions.
d. Current prices on an active market for similar property in the same
location and condition.
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c. The use of the fair value model becomes the priority for all investment
properties
d. Either a and c
37. IRK ANNOY Co.’s investment in real property has carrying value of
₱1,000,000 under the fair value model, before adjustment. If the fair market
value at end of the year is ₱800,000, how much should be the gain or loss on
transfer if Irk would shift to cost model?
a. gain of ₱200,000 reported as other comprehensive income
b. loss of ₱200,000 reported as other loss in the income statement
c. loss of ₱200,000 reported in equity as decrease in revaluation surplus
d. none
(Adapted)
38. Which of the following does not indicate change in use of the property and
therefore precludes transfers to or from investment property classification?
a. Start of owner occupation
b. End of owner occupation
c. Start of development with a view to sale
d. Entity decides to sell an investment property without development.
40. PAS40 Investment property gives a choice between two different models as
the accounting policy to be used in relation to investment property. Which of
the following disclosures should be made when the fair value model has been
adopted?
a. Depreciation methods used
b. The amount of impairment losses recognized
c. Useful lives or depreciation rates used
d. Net gains or losses from fair value adjustments
(ACCA)
41. In case of property held under an operating lease and classified as investment
property
a. The entity has to account for the investment property under the cost
model only.
b. The entity has to use the fair value model only.
c. The entity has the choice between the cost model and the fair value model.
d. The entity needs only to disclose the fair value and can use the cost model
under PAS 38.
(Adapted)
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43. Derecognition of investment property will not be required when
a. it becomes the subject of an operating lease
b. it is sold
c. it becomes the subject of a sale and leaseback deal
d. it becomes the subject of finance lease
44. An entity has a factory that has been shut down for a year due to various
reasons, including worker unrest and strike. The entity plans to sell this
factory. It should
a. Classify the factory as investment property.
b. Classify the factory as property held for sale if all the requirements of
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations are
met.
c. Classify the factory as property, plant, and equipment under PAS 16.
d. Write off the net book value and disclose that fact in the footnotes to the
financial statements.
(Adapted)
45. Transfers from investment property to property, plant, and equipment are
appropriate
a. When there is change of use.
b. Based on the entity’s discretion.
c. Only when the entity adopts the fair value model under PAS 38.
d. The entity can never transfer property into another classification on the
balance sheet once it is classified as investment property.
(Adapted)
Disclosure
46. Which of the following is not a required disclosure involving investment
property?
a. The accounting model followed for investment property
b. Whether property interests under operating leases are classified as
investment properties
c. The depreciation method used for investment property measured under
the fair value model
d. Criteria to distinguish investment property from owner-occupied property
when there is classification difficulty
47. Which is not a disclosure under the cost model for investment property?
a. The depreciation rates used
b. The fair value of the investment property
c. The net gain or loss from fair value adjustments
d. The depreciation methods used
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Chapter 20
Intangible Assets
128
Cost of routine, seasonal, and periodic design of tools, jigs, molds
and dies 12,000
Cost of engineering follow through in an early phase of
commercial production 160,000
Cost of quality control during commercial production 60,000
Adaptation of an existing capability to a particular customer’s
need 80,000
Costs in developing software for internal use in REALM’s general
management information system (after technological feasibility
has been established) 160,000
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intended condition 20,000
Costs of introducing the new product including advertisement
costs 12,000
Assume that all conditions for capitalization of development costs are met, how
much is the cost of web site recognized as intangible asset?
a. 3,600,000 b. 1,200,000 c. 1,600,000 d. 0
130
Web site cost
10. SECRETE GIVE OFF Co. incurred the following costs in relation to the
development of its web site.
Development costs of a web site to be used externally.
Customers place orders and pay directly through the web site. 120,000
Payment to Mr. Web developer for his assistance in developing
the web site. 40,000
Cost of digital photographs of goods uploaded to the web site 20,000
Professional fee of Mr. Manny Boksingero, the product endorser 12,000,000
Fee of Mr. Freddie Croach for making Mr. Manny sweat before
the pictorial. 4,000,000
Customer list
11. On January 1, 20x1, PLUMP FULLY ROUNDED Co. purchased a customer list of
a large distributor of health products for ₱180,000. This customer database
includes name, contact information, order history, and demographic
information. PLUMP expects to benefit from the information evenly over a 3-
year period. How much is the carrying amount of the intangible on December
31, 20x1?
a. 120,000 b. 60,000 c. 180,000 d. 0
In January 20x1, BUNCH has performed substantially all the services required
under the franchise contract and CLUSTER started making balls. Annual periodic
franchise fee for 20x1 is ₱200,000.
14. How much is the total expense recognized in 20x1 related to the franchise?
a. 200,000 b. 225,360 c. 7,364 d. 447,364
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Acquired broadcasting license
15. On January 1, 20x1, KEEN SHARP Co. acquired a broadcasting license for
₱400,000 that is renewable every 10 years if KEEN provides at least an
average level of service to its customers and complies with the relevant
legislative requirements. The license may be renewed indefinitely at little cost
and has been renewed twice before the most recent acquisition. KEEN intends
to renew the license indefinitely and evidence supports its ability to do so.
Historically, there has been no compelling challenge to the license renewal.
The technology used in broadcasting is not expected to be replaced by
another technology at any time in the foreseeable future.
Purchased patent
Use the following fact pattern for the next three questions:
Fact pattern
On January 1, 20x1, SPARSE Co. purchased a patent from THINLY SPREAD, Inc.
for ₱400,000. THINLY SPREAD has held this patent for 5 years. SPARSE estimates
that the patent has a remaining useful life of 8 years.
19. How much is the carrying amount of the patent on December 31, 20x2?
a. 614,400 b. 608,000 c. 230,400 d. 228,000
20. In 20x4, VENERATE Co. started to develop a new improved patent to extend
the life of the old patent. Development costs totaled ₱800,000. How much is
the carrying amount of the patent on December 31, 20x4?
a. 204,000 b. 870,400 c. 1,272,000 d. 216,000
21. On January 1, 20x5, the new patent was completed and legal and registration
costs incurred to register the new patent amounted to ₱320,000. It was
estimated that the new patent will extend the life of the old patent by another
20 years starting January 1, 20x5. How much is the amortization expense in
20x5?
132
a. 78,200 b. 26,200 c. 346,200 d. 416,200
Computer software
25. ENTITY BEING Co. incurred the following costs in self-generating computer
software.
Completion of detailed program design ₱2,000,000
Cost incurred for coding and testing to establish technological
feasibility 1,600,000
Other coding costs after establishment of technological feasibility 4,000,000
Other testing costs after establishment of technological feasibility 3,200,000
Costs of producing product masters 2,400,000
Reproduction and duplication costs from product masters 4,800,000
Packaging costs for the reproduced software 1,200,000
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Intangible asset Fair value
Service mark ₱160,000
Order and production backlogs 120,000
In-house research and development 80,000
Masthead 120,000
4. PAS 38 states that an asset meets the identifiability criterion in the definition
of an intangible asset when it:
I. is separable, i.e., capable of being separated or divided from the entity and
sold, transferred, licensed, rented or exchanged, either individually or
together with a related contract, asset or liability
II. arises from contractual or other legal rights, regardless of whether those
rights are transferable or separable from the entity or from other rights
and obligations.
a. I b. II c. I or II d. none
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a. requires an intangible asset to be used in business
b. requires an intangible asset to provide future economic benefits through
increased revenues
c. requires an intangible asset to be identifiable to distinguish it from
goodwill.
d. requires an intangible asset to be without physical substance, whether the
asset is monetary or not.
9. Which of the following items may qualify for recognition as intangible asset?
a. Market and technical knowledge
b. Employees’ skills developed from training
c. Specific managerial or technical talent
d. Market share and customer loyalty
e. None of these
10. Future economic benefits from an intangible asset may be obtained in various
ways which include
a. restricting others from the use of the asset
b. enjoyment of legal enforceability
c. reduced operating costs
d. separability through transferable right
11. Which of the following is not true regarding control over an intangible asset?
a. An entity controls an asset if the entity has the power to obtain the future
economic benefits flowing from the underlying resource and to restrict
the access of others to those benefits.
b. The capacity of an entity to control the future economic benefits from an
intangible asset would normally stem from legal rights that are
enforceable in a court of law. In the absence of legal rights, it is more
difficult to demonstrate control.
c. Legal enforceability of a right is a necessary condition for control because
without it an entity cannot be able to control the future economic benefits
from the asset.
d. Control may be acquired from contractual rights such as rights arising
from franchises and non-competition agreements.
12. Regarding an asset that contains both intangible and tangible components,
which of the following statements is incorrect?
a. the entity uses its judgment on how to classify the asset
b. the asset is classified as property, plant and equipment if the intangible
component forms an integral part of the tangible asset
c. the entire asset is classified as property, plant and equipment if the
intangible component is necessary for the tangible asset to operate
d. the entire asset is classified as intangible asset if the tangible component is
necessary for the intangible asset to operate.
13. Which item listed below does not qualify as an intangible asset?
a. Computer software. c. Copyrights that are protected.
b. Registered patent. d. Notebook computer.
(Adapted)
135
Financial statement presentation
14. The line item intangible asset presented on the face of the statement of
financial position normally includes which of the following items?
a. goodwill
b. leasehold improvements
c. operating software costs
d. significant application software costs
e. all of these
Recognition
16. An intangible asset shall be recognized if management can demonstrate that:
I. the item meets the definition of intangible asset
II. it is probable that the expected future economic benefits will flow to the
entity
III. the cost of the asset can be measured reliably.
IV. the entity becomes a party to the contractual provisions of the intangible
asset
V. the fair value of the intangible asset can be reliably determined
a. I, II, III b. I, II, III, IV c. I, II, III, IV, V d. I, II, V
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d. trade discounts and rebates are deducted from the purchase price only
when taken
20. MYTHICAL Co. acquired an intangible asset from IMAGINARY Co. during the
year. Which of the following costs incurred by Mythical should not be
included as initial cost of the intangible asset purchased?
a. fees of Mr. Programmer in installing the software purchased
b. fees of Mr. Auditor in auditing the system prior to closing the purchase
contract
c. costs of testing the new system whether it is functioning properly
d. advertising costs for the new product that will be produced using the
newly acquired software
21. SPLICE Co. acquired an intangible asset from 2UNITE Co. during the year.
Which of the following costs should be included as initial cost of the intangible
asset purchased?
a. costs of training Mrs. Old Baket, the designated employee to operate the
newly acquired asset
b. allocation of administration and other general overhead costs
c. rebates on the invoice price not taken
d. non-refundable sales taxes paid on the purchase
22. SVELTE Co. acquired an intangible asset from SLENDER Co. during the year.
All of the following costs incurred by Svelte related to the newly acquired
asset should be expensed immediately, except
a. initial operating losses incurred while demand for the asset’s output
builds up
b. modifications to the intangible asset after it was put to the operating
condition originally intended by Svelte
c. costs incurred while the asset capable of operating in the manner
intended by management has yet to be brought into use
d. salvage proceeds from samples produced during testing
24. Which of the following provides the most reliable estimate of the fair value of
an intangible asset?
a. quoted market price in an active market
b. price in a binding sale agreement
c. present value of future cash flows
d. any of these
25. If no active market exists for an intangible asset, which of the following is
true?
I. its fair value is the amount that the entity would have paid for the asset, at
the acquisition date, in an arm’s length transaction between
knowledgeable and willing parties, on the basis of the best information
available.
II. Its fair value may be determined by discounting estimated future net cash
flows from the asset
a. True, true b. True, false c. False, true d. False, false
137
26. Intangible assets acquired by way of government grant may be initially
recognized at
a. fair value b. nominal amount c. zero d. any of these
27. During the year, ENDEAVOR Co. received an intangible asset from 2TRY Co. in
an exchange transaction with commercial substance. Which of the following
statements is true?
a. Endeavor measures the intangible asset received at the fair value of the
intangible asset given up minus cash paid
b. Endeavor recognizes gain or loss on the exchange for the difference
between the fair value of the asset received and the carrying amount of
the asset received
c. If Endeavor cannot determine the fair value of the asset received, it shall
measure the intangible asset received using the fair value of the intangible
asset given up.
d. Endeavor recognizes gain or loss on the exchange for the difference
between the fair value of the asset given up and the carrying amount of
the asset given up, regardless of whether cash is received or paid
28. During the year, ZENITH Co. received an intangible asset from HIGHEST
POINT Co. in an exchange transaction that lacks commercial substance. Which
of the following statements is incorrect?
a. Zenith should measure the asset received at the carrying amount of the
asset given up
b. Zenith should not recognize any gain or loss on the sale unless cash is paid
on the exchange
c. Zenith should measure the asset received at an amount equal to the
difference between the initial cost of the asset given up and its related
accumulated amortization
d. Zenith should not recognize any gain or loss on the sale regardless of
whether cash is received or paid.
29. To assess whether an internally generated intangible asset meets the criteria
for recognition, an entity classifies the generation of the asset into research
phase and development phase. Which of the following statements is true?
a. If an entity cannot distinguish the research phase from the development
phase, the entity treats expenditures as if they were incurred in the
development phase only.
b. Expenditures incurred in the research phase shall be recognized as
expense when incurred.
c. An intangible asset may be recognized for expenditures incurred in
research phase.
d. An in-process research and development (R&D) project acquired as part
of a business combination is expensed if a component is research.
30. Which of the following transactions may not give rise to recognition of an
intangible asset?
a. HEARTY Co. acquired SINCERE Co. in a business combination. Among the
items acquired is an R&D project composed mainly of expenditures
incurred by Sincere in research phase.
b. Expenditures incurred in development phase that meet all of the
conditions for recognition as intangible asset
c. Expenditures incurred in research phase for an invention that is highly
viable
d. Registration and legal fees for a patent filed with the IPO.
138
31. Which of the following is included in research and development expense for a
period?
a. The total cost of a building with useful life of 25 years acquired during the
year to be used in various research and development projects
b. Depreciation on a building used for research and development
c. The cost incurred during the year to ensure quality control for existing
production processes
d. The cost incurred during the year for research activities performed for
another entity.
(Adapted)
35. For some purposes, assets are classified as identifiable and unidentifiable.
Which of the following is an unidentifiable asset?
a. cash in bank c. goodwill
b. patent d. prepaid insurance
(Adapted)
37. Costs incurred by a company that developed its own goodwill internally
should be :
a. capitalized and amortized as the company profits increased.
b. capitalized and amortized over the useful life of the goodwill.
139
c. expensed when incurred as a current operating expense.
d. capitalized and amortized over a period not to exceed 40 years.
(AICPA)
38. According to PAS38 Intangible assets, the recognition criteria for an intangible
asset include which of the following conditions?
a. It must be measured at cost
b. Its cost can be measured reliably
c. It is probable that future economic benefits will arise from its use
d. It is an integral part of the business
e. b and c
(ACCA)
39. Which of the following items qualify as an intangible asset under PAS 38?
a. Advertising and promotion on the launch of a huge product.
b. College tuition fees paid to employees who decide to enroll in an executive
M.B.A. program at Harvard University while working with the company.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers to register a patent.
(Adapted)
42. What is the proper time or time period over which to match the cost of an
intangible asset with revenues if it is likely that the benefit of the asset will
last for an indefinite period?
a. Forty years
b. Fifty years
c. Immediately
d. At such time as reduction in value can be quantitatively determined.
(AICPA)
140
b. Costs of start-up activities, including organization costs, should be
capitalized and expensed only if an impairment exists.
c. Costs of start-up activities, including organization costs, should be
capitalized and amortized on a straight-line basis over the lesser of the
estimated economic life of the company, or 60 months.
d. Costs of start-up activities should be capitalized and amortized on a
straight-line basis over the lesser of the estimated economic life of the
company, or 60 months, while organization cost should be expensed as
incurred.
(AICPA)
47. Accounting for intangible assets involves the same kind of problem as
accounting for other long-lived assets, such as:
a. accounting after acquisition (amortization)
b. accounting if the values decline substantially & permanently
c. determining an initial carrying amount
d. all of these
(AICPA)
48. Improvements to leased facilities are included under property, plant and
equipment if:
Material in amount Terms extend over long period
a. no yes
b. yes no
c. no no
d. yes yes
(AICPA)
141
a. lack of physical substance
b. ownership confers some exclusive right, privilege or competitive
advantage
c. estimated life should not exceed forty years
d. provide future benefits by enhancing revenues or reducing costs
(AICPA)
52. The cost of an intangible asset includes all of the following except
a. purchase price. c. other incidental expenses.
b. legal fees. d. all of these
(AICPA)
53. Are the following statements true or false, according to PAS38 Intangible
assets?
1) The cost of an asset should include the amount of any cash or cash
equivalents paid to acquire the asset.
2) The cost of an asset should include non-cash consideration measured at
fair value.
a. False False b. False True c. True False d. True True
(ACCA)
Subsequent measurement
54. Subsequent to initial recognition, an intangible asset may be measured using
a. cost model or revaluation model c. cost model only
b. cost model or fair value model d. either a or b
142
56. Which of the following factors should not be considered in determining the
useful life of an intangible asset?
a. Legal, regulatory, or contractual provisions.
b. Expected action of competitors.
c. Provisions for renewal or extension of life.
d. Initial cost
(AICPA)
57. Which of the following is not considered in estimating the useful life of
intangible assets?
a. effects of obsolescence, demand and competition
b. the salvage value of the asset
c. the service life expectancies of individuals or groups of employees
d. expected actions of competitors
(AICPA)
58. Factors considered in determining an intangible asset’s useful life include all
of the following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life
d. the amortization method used.
(AICPA)
59. Amortization of intangible assets results primarily from the application of the:
a. matching principle c. cost principle
b. full-disclosure d. revenue principle
(Adapted)
62. Which of the following methods of cost allocation cannot be used for
intangible assets?
a. Declining balance c. Units of production
b. Revenue method d. Effective interest method
63. Which of the following methods of cost allocation can be used for intangible
assets?
a. straight line c. units-of-production
b. revenue method d. any of these
143
64. Under PAS 38, the default cost allocation method for intangible assets is?
a. revenue method c. SYD
b. straight line d. no default method
65. JOCUND Co. has an intangible asset, which it estimates will have a useful life of
10 years, while MERRY Co. has goodwill, which has an indefinite life. Which
company should report amortization in its financial statements?
JOCUND MERRY JOCUND MERRY
a. Yes Yes c. No Yes
b. Yes No d. No No
(AICPA)
66. According to PAS38 Intangible assets, which of the following criteria are
relevant in determining the useful life of an intangible asset?
a. obsolescence d. residual value
b. amortization period e. a and c
c. expected usage
(ACCA)
67. According to PAS 38, the residual value of an intangible asset is presumed
a. equal to fair value in active market
b. equal to the amount the third party wants to buy
c. equal to a conservative estimation
d. zero
69. On January 1, 20x1, an intangible asset with a thirty-five year estimated useful
life was acquired. On January 1, 20x6, a review was made of the estimated
useful life and it was determined that the intangible asset had an estimated
useful life of forty-five more years. As a result of the review
a. The original cost at January 1, 20x6 should be amortized over a fifty-year
life.
b. The original cost at January 1, 20x1 should be amortized over the
remaining thirty-year life.
c. The unamortized cost at January 1, 20x6 should be amortized over a forty-
year life.
d. The unamortized cost at January 1, 20x6 should be amortized over a
thirty-five year life.
(AICPA)
70. A brand name that was acquired separately should initially be recognized,
according to PAS38 Intangible assets, at
a. recoverable amount c. fair value
b. either cost or fair value at the choice of the acquirer d. cost
(ACCA)
144
b. Periodic payments to a company, other than the franchisor, for that
company’s franchise.
c. Legal fees paid to the franchisee’s lawyers to obtain the franchise.
d. Periodic payments to the franchisor based on the franchisee’s revenues.
(AICPA)
72. Are the following statements true or false, according to PAS38 Intangible
assets?
1) Intangible assets acquired in a business combination should only be
recognized if they have already been recognized by the entity being
acquired.
2) Intangible assets acquired in a business combination should not be
recognized separately from goodwill.
a. False False b. False True c. True False d. True True
(ACCA)
74. Which of the following factors influence(s) the Brand strength of a company?
I. Customer loyalty
II. Statutory protection
III. Brand Management by the company
a. I, II b. I c. II d. I, II, III
76. Are the following statements true or false, according to PAS38 Intangible
assets?
1) Intangible assets cannot be treated as having an indefinite useful life.
2) Intangible assets with a finite useful life should be measured at cost and
tested annually for impairment.
a. False False b. False True c. True False d. True True
(ACCA)
78. Are each of the following factors relevant, according to PAS38 Intangible
assets, in determining the annual amortization expense on an intangible
asset?
I. The cost.
II. The amortization method.
a. Not relevant, Not relevant c. Relevant, Not relevant
b. Not relevant, Relevant d. Relevant, Relevant
(ACCA)
145
a. shares held to exert influence on another entity
b. land held for speculation
c. trademarks
d. cash surrender value of life insurance
(Adapted)
80. Which of the following would not be included in research and development
expense for APATHETIC Co. for current period?
a. The portion of plant assets, devoted completely to research for
APATHETIC, which is amortized in the current period.
b. The cost of materials used in conducting research for APATHETIC during
the current period.
c. Cash paid by APATHETIC to INDIFFERENT Co. for research performed by
INDIFFERENT Co. for APATHETIC in the current period.
d. The cost of labor incurred by APATHETIC in conducting research for
UNCONCERNED Co. during the current period.
(Adapted)
81. Which of these statements about research and development expenditure are
correct?
1. If certain conditions are satisfied, research and development expenditure
must be capitalized.
2. One of the conditions to be satisfied if development expenditure is to be
capitalized is that the technical feasibility of the project is reasonably
assured.
3. If capitalized, development expenditure must be amortized over a period
not exceeding five years.
4. The amount of capitalized development expenditure for each project
should be reviewed each year. If circumstances no longer justify the
capitalization, the balance should be written off over a period not
exceeding five years.
5. Development expenditure may only be capitalized if it can be shown that
adequate resources will be available to finance the completion of the
project and all other conditions are also met.
a. 2 and 5 b. 3, 4 and 5 c. 2, 3 and 5 d. 1, 2 and 3
(Adapted)
83. Total research and development expense for CUNNING, Inc. would include
which of the following items:
I. Depreciation on CUNNING, Inc. property, plant and equipment used in
CUNNING, Inc.'s development projects
II. Amortization of CUNNING, Inc. patents used in CUNNING, Inc.'s research
III. Resources paid by CUNNING, Inc. for SLY Co.'s research efforts performed
for CUNNING, Inc. research and development projects
IV. CUNNING, Inc. cost of research performed for CLEVER Corporation's
research and development projects
146
V. CUNNING, Inc. costs of internal development efforts which culminated in a
patent granted to CUNNING, Inc.
VI. Overhead costs allocated to CUNNING Inc.’s research and development
efforts which took the place of another CUNNING, Inc. activities
VII. Costs to train CUNNING, Inc. employees to run machines used in ongoing
production. These machines had earlier been developed by CUNNING, Inc.
a. I, II, III b. I, II, III, IV, V c. I, II, III, V, VI d. all of these
(Adapted)
84. A newly set up dot-com entity has engaged you as its financial advisor. The
entity has recently completed one of its highly publicized research and
development projects and seeks your advice on the accuracy of the following
statements made by one of its stakeholders. Which one is it?
a. Costs incurred during the “research phase” can be capitalized.
b. Costs incurred during the “development phase” can be capitalized if
criteria such as technical feasibility of the project being established are
met.
c. Training costs of technicians used in research can be capitalized.
d. Designing of jigs and tools qualify as research activities.
(Adapted)
147
89. Which of the following research and development related costs should be
capitalized and amortized over current and future periods?
a. Research and development general laboratory building which can be put
to alternative uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular
research project currently in process
(AICPA)
90. Which of the following principles best describes the current method of
accounting for research and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense
(AICPA)
91. How should research and development costs be accounted for, according to
PAS 38?
a. Must be capitalized when incurred and then amortized over their
estimated useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the
materiality of the amounts involved.
d. Must be expensed in the period incurred unless development costs
incurred qualify under the recognition criteria set forth under PAS 38.
92. Which of the following costs should be excluded from research and
development expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the
manufacturing stage
(AICPA)
94. What is the proper time or time period over which to match the cost of an
intangible asset with revenues if it is likely that the benefit of the asset will
last for a determinate but very long period of time?
a. Forty years.
b. Fifty years.
c. Shorter of legal life and useful life
d. At such time as diminution in value can be quantitatively determined.
(Adapted)
148
95. How should research and development costs be accounted for according to
current standards?
a. Must be capitalized when incurred and then amortized over their
estimated useful lives.
b. Must be expensed in the period incurred unless contractually
reimbursable.
c. May be either capitalized or expensed, when incurred, depending upon
the facts
d. Must be expensed in the period incurred unless it can be clearly
demonstrated that the research expenditure will have significant future
benefits.
(AICPA)
96. The current trend in the accounting treatment for research and development
costs is to
a. Capitalize all costs as assets when incurred and amortize when revenue
are earned.
b. Treat all costs as current expenses as incurred.
c. Capitalize selectively, and predetermine the conditions that would require
capitalization as well as those that would be written off as current
expenses.
d. Accumulate all costs in a special intangible asset account until a
determination can made as to the degree of future benefits.
(AICPA)
97. Research and development costs, under prevailing practice, may be accounted
for as follows:
a. Research and development costs related to successful projects should be
capitalized; others expensed.
b. Research and development costs related to unsuccessful projects should
be capitalized; others expensed.
c. Research and development costs should be expensed as incurred.
d. Research and development costs should be allocated between successful
and unsuccessful projects.
e. Research and development costs, whether related to successful or
unsuccessful projects, should be capitalized.
(AICPA)
149
100. Are the following statements true or false, according to PAS 38 Intangible
assets?
(1) Expenditure during the research phase of a project may sometimes be
capitalized as an intangible asset.
(2) Expenditure during the development phase of a project may sometimes be
capitalized as an intangible asset.
a. False False b. False True c. True False d. True True
(ACCA)
103. According to PAS 38, which of the following is true for an acquiring
company in connection with in-process research and development held by an
acquired company at the date of acquisition?
a. The amount that has been spent on these projects is expensed, but any
value in the project in excess of the amount spent is capitalized by the
acquiring company.
b. The value of in-process research and development is capitalized because
the acquiring company has a clear vision of its value.
c. In-process research and development is still research and development
and the value is always expensed by the acquiring company.
d. The value of in-process research and development is expensed unless it
has a direct connection with a product or asset owned by the acquiring
company.
(Adapted)
150
c. The process of assigning the cost of an intangible asset to operations in a
systematic and rational manner is called amortization.
d. Goodwill may represent the excess of the cost of an acquired company
over the sum of the fair values assigned to identifiable assets acquired less
liabilities assumed.
106. Consider the following statements and state whether they are correctly
stated or not.
I. Goodwill is recorded by accountants only if it is purchased.
II. A copyright’s legal life is 30 years and it gives its owner protection against
writings and literary productions being reproduced illegally.
a. I b. II c. I and II d. neither I nor II
107. A patent purchased from another entity which had held it for 3 years
should be amortized over
a. the asset’s remaining useful life, not to exceed 37
b. any number not to exceed to 40
c. 17 years
d. the asset’s remaining useful life, not to exceed 17
(Adapted)
108. Which of the following intangible assets should be amortized over the
periods of estimated benefit?
a. research and development costs related to a successful product
b. goodwill arising from the purchase of an existing business
c. costs incurred in organizing a corporation
d. patent right purchased from an inventor
(AICPA)
109. In a case of a patent infringement suit, the suit may be either successful or
lost. The results of the legal decision are accounted for as follows:
a. if successful, debit the cost of the lawsuit to patent expense.
b. if lost, debit the cost of the lawsuit to extraordinary loss.
c. if lost, write the balance in the patent account.
d. after recognizing the results of the lawsuit as an expense, amortize the
remaining balance in the patent occur over its remaining economic life.
(Adapted)
112. Should the following fees associated with the registration of an internally
developed patent be capitalized? (Item#1) Legal fees; (Item#2) Registration
fees
151
a. No, No b. No, Yes c. Yes, No d. Yes, Yes
(AICPA)
115. Which of the following should not be capitalized as part of the cost of an
internally developed patent?
a. costs to develop the product or process to be patented
b. patent registration fees
c. legal fees incurred in successfully defending a patent infringement suit.
d. legal fees associated with registration of the patent
e. a and c
(AICPA)
116. The cost of purchasing patent rights for a product that might otherwise
have seriously competed with one of the purchaser's patented products
should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser's
product.
d. amortized over the remaining estimated life of the original patent
covering the product whose market would have been impaired by
competition from the newly patented product.
(AICPA)
152
(AICPA)
118. Plaintiff, Inc. went to court this year and successfully defended its patent
from infringement by a competitor. The cost of this defense should be
charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.
(AICPA)
124. If a franchise becomes worthless prior to the end of its estimated useful
life, the unamortized balance in the franchise account should be written off as
a(n):
a. impairment loss c. prior period adjustment
b. operating expense d. change in estimate
(Adapted)
153
126. A franchise should be classified on the balance sheet as a (n):
a. operational asset c. intangible asset
b. deferred charge d. current asset
(Adapted)
129. OUTLANDISH and STRANGE are rival firms which are similar in size and
scope of operations. OUTLANDISH has decided not to capitalize but expense
software development costs in Year 1. STRANGE on the other hand, has
decided to capitalize a similar amount of development costs, to be amortized
over 5 years. Which of the following is/are true over the next 5 years?
I. STRANGE will show higher equity than OUTLANDISH
II. The difference in STRANGE's assets and OUTLANDISH's assets will be
lower in Year 3 than in Year 2.
III. The total tax deductions due to the development costs are equal for the
two firms.
IV. After technological feasibility, all software development costs can be
capitalized under PAS 38.
a. III only b. II & III c. I & II d. I, II, III, IV
132. On January 1, 20x1, Joca purchased equipment for use in developing a new
product. Joca uses the straight-line depreciation method. The equipment
could provide benefits over a 10-year period. However, the new product
development is expected to take five years, and the equipment can be used
only for this project. Joca 's 20x1 expense equals:
a. The total cost of the equipment.
b. One-fifth of the cost of the equipment.
c. One-tenth of the cost of the equipment.
d. Zero.
154
(AICPA)
Disclosures
133. Which of the following disclosures is not required by PAS 38?
a. Useful lives of the intangible assets.
b. Reconciliation of carrying amount at the beginning and the end of the
year.
c. Contractual commitments for the acquisition of intangible assets.
d. Fair value of similar intangible assets used by its competitors.
(Adapted)
134. All of the following are required disclosures for intangible assets except
a. Whether the useful lives are indefinite or finite and, if finite, the useful
lives or the amortization rates used
b. Amortization methods used for intangible assets with finite useful lives
c. Gross carrying amount and any accumulated amortization (aggregated
with accumulated impairment losses) at the beginning and end of the
period
d. A reconciliation of the carrying amount at the beginning and end of the
period showing increases and decreases to intangible assets and related
accumulated amortization and accumulated impairment loss.
e. Net carrying amount of intangible assets. Accumulated amortization is not
required to be disclosed because periodic amortization is deducted
directly from the related asset account.
155
Chapter 21
Impairment of Assets
Costs of disposal
1. On December 31, 20x1, QUIRK ACCIDENT Co. identified that its machinery
with a carrying amount of ₱4,000,000 has been impaired. In estimating the
recoverable amount, QUIRK determined that the fair value of the asset is
₱3,200,000. The following costs were also estimated:
Transaction taxes ₱200,000
Legal costs, stamp duty, commissions, and similar fees 40,000
Costs of dismantling or removing the asset included in
provision for restoration and decommissioning cost 20,000
Termination benefits and costs associated with reducing
or reorganizing a business following the disposal of an
asset 60,000
QUIRK does not have any reason to believe that the value in use of the asset
materially exceeds fair value less costs of disposal. How much is the impairment
loss?
a. 1,120,000 b. 1,060,000 c. 1,040,000 d. 800,000
Value in use
2. On December 31, 20x1, MASSIVE HEAVY Co. identified that its building with a
carrying amount of ₱2,400,000 has been impaired. In estimating the
recoverable amount, MASSIVE has determined that the fair value less costs of
disposal of the asset is ₱1,600,000.
Additional information:
Each year’s estimated future cash flows include ₱40,000 representing cash
outflows from future restructuring not yet committed and ₱20,000
representing cash outflows on planned improvement and enhancement of the
asset.
Not included in the estimated future cash flows are costs of day-to-day
servicing of the asset amounting to ₱8,000 per year.
The discount rate is 10%.
156
estimating the recoverable amount, HEARTEN has determined that the fair
value less costs of disposal of the intangible asset is ₱1,600,000. HEARTEN
estimated that the future net cash flows expected to arise from the continuing
use of the asset is ₱400,000 per year for the remaining useful life of 5 years.
The estimate of future cash flows includes cash out flows for income taxes and
financing activities totaling ₱40,000 per year. The equipment has a residual
value of ₱80,000. The discount rate is 10%. How much is the impairment loss?
a. 628,384 b. 682,384 c. 289,334 d. 298,902
157
Carrying amount ₱520,000
Annual future cash flows from the trademark 40,000
Discount rate 10%
Reallocation of goodwill
12. EXUBERANT OVERFLOWING Co. previously allocated ₱240,000 goodwill to
CGU A. The goodwill allocated to CGU A cannot be identified or associated
with an asset group at a level lower than CGU A, except arbitrarily. During the
year, EXUBERANT Co. reorganizes its reporting structure such that CGU A is
divided and integrated into three other cash-generating units – CGU’s B, C and
D. Additional information is shown below:
158
CGU Fair values
B 800,000
C 1,600,000
D 2,400,000
4,800,000
At the end of the year, CGU D is sold for ₱2,000,000 when its carrying amount is
₱2,320,000 excluding allocated goodwill. How much is the gain (loss) on the sale?
a. (320,000) b. 440,000 c. (420,000) d. (440,000)
It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value
less costs of disposal is ₱3,200,000.
14. How much is the carrying amount of the building after the impairment
testing?
a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000
It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value
less costs of disposal is ₱2,400,000.
16. How much is the carrying amount of the building after the impairment
testing?
a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000
159
TRICE INSTANT Co. determined that one of its cash-generating units is impaired.
Information on the assets of the CGU is shown below:
Assets Carrying amount
Inventory 800,000
Investment property (at cost model) 1,600,000
Building 2,400,000
Goodwill 1,200,000
6,000,000
It was estimated that the value in use of the CGU is ₱3,200,000 and its fair
value less costs of disposal is ₱3,600,000.
The building’s fair value less costs of disposal is ₱2,040,000.
18. How much is the carrying amount of the building after the impairment
testing?
a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000
Case #1:
19. The budgets/forecasts approved by management reflect no commitment of
management to replace the machine. How much is the impairment loss?
a. 4,000,000 b. 200,000 c. 3,800,000 d. 0
Case #2:
20. The budgets/forecasts approved by management reflect a commitment of
management to replace the machine and sell it in the near future. Cash flows
from continuing use of the machine until its disposal are estimated to be
negligible. How much is the impairment loss?
a. 4,000,000 b. 200,000 c. 3,800,000 d. 0
160
6,000,000
The recoverable amount of the CGU is ₱4,000,000, representing the CGU’s value
in use. EXUBERANT Co. excluded cash flows from financial assets and recognized
liabilities when the value in use was computed
The recoverable amount of the CGU is ₱2,400,000, representing the CGU’s value
in use. INFRACTION Co. included cash flows from financial assets and recognized
liabilities when the value in use was computed
161
CGU #1 8,000,000 8,000,000
CGU #2 24,000,000 28,000,000
CGU #3 32,000,000 40,000,000
Corporate asset - Mainframe 12,000,000 N/A
76,000,000 76,000,000
INSUPERABLE Co. recently received various offers to buy the mine at around
₱3,600,000. This price reflects the fact that the buyer will assume the obligation
to restore the overburden. Disposal costs for the mine are negligible. The value in
use is ₱5,600,000 excluding decommissioning and restoration costs. The carrying
amount of the mine is ₱4,800,000.
162
On January 1, 20x9, the building was estimated to have a new recoverable
amount of ₱2,400,000 and a remaining useful life of 3 years. The building is
measured under the cost model.
The gross carrying amount of the CGU is ₱12,000, inclusive of ₱4,000 allocated
goodwill. As of January 1, 20x2, the CGU has an accumulated depreciation of
₱668.
33. How much is the reversal of impairment loss to be recognized in profit or loss
on December 31, 20x3?
a. 0 b. 1,588 c. 1,635 d. 1,545
163
Chapter 21: Theory of Accounts Reviewer
1. PAS 36 applies to which of the following assets?
a. Inventories. c. Assets held for sale.
b Financial assets. d. Property, plant, and equipment.
4. Which of the following conditions must exist in order for an impairment loss
to be recognized?
I. The carrying amount of the long-lived asset is less than its fair value.
II. The carrying amount of the long-lived asset is not recoverable.
a. I only. b. II only. c. Both I and II. d. Neither I nor II.
(Adapted)
7. When deciding upon the discount rate to be used, which factors should not be
taken into account?
a. Risks specific to the asset which future cash flow estimates have not been
adjusted
b. Corporate lending rates
c. Cost of capital
d. Risks which relate to the asset for which future cash flow estimates have
been adjusted
(ACCA)
164
9. Which impairment losses should never be reversed?
a. Loss on a cash generating unit c. Loss on leases
b. Loss on property, plant and equipment d. Loss on goodwill
(ACCA)
11. If fair value less costs of disposal is higher than value in use
a. the asset is impaired
b. the asset is not impaired
c. there is no need to compute for carrying amount
d. the recoverable amount is the fair value less costs of disposal
12. If there is no reason to believe that an asset’s value in use materially exceeds
its fair value less costs of disposal
a. the asset is not impaired
b. there is no need to compute for carrying amount
c. the recoverable amount is the value in use
d. there is no need to determine future cash flows
14. Goodwill should be tested for value impairment at which of the following
levels?
a. Each identifiable long-term asset. c. Each acquisition unit.
b. Each reporting unit. d. Entire business as a whole.
(AICPA)
15. After an impairment loss is recognized, the adjusted carrying amount of the
cash-generating unit shall be its new accounting basis. Which of the following
statements about subsequent reversal of a previously recognized impairment
loss is correct?
a. It is prohibited to reverse impairment loss on goodwill allocated to a cash-
generating unit
b. It is required when the reversal is considered permanent.
c. It must be disclosed in the notes to the financial statements.
d. It is encouraged, but not required.
(AICPA)
16. Property, plant, and equipment must be reviewed for impairment when
which of the following events occurs?
a. A significant change in the asset's estimated useful life occurs
b. The costs of constructing the asset are less than the budgeted amount
c. A current period operating loss occurs
d. Investing activities produce a negative cash flow
(Adapted)
165
17. Which of the following regarding goodwill is correct?
a. Goodwill should be amortized over a five-year period.
b. Goodwill should be amortized over its expected useful life.
c. Goodwill should be recorded and never adjusted.
d. Goodwill should be recorded and periodically evaluated for impairment.
(AICPA)
23. Which of the following is the best evidence of a fixed asset’s fair value less
costs of disposal?
a. An asset that is trading in an active market.
b. The price in a binding sale agreement.
c. Information available that determines the disposal value of the asset in an
arm’s length transaction.
d. d The carrying value of the asset.
(Adapted)
24. When calculating the estimates of future cash flows, which of the following
cash flows should not be included?
a. Cash flows from disposal.
b. Income tax payments.
166
c. Cash flows from the sale of assets produced by the asset.
d. Cash outflows on the maintenance of the asset.
(Adapted)
25. An impairment loss that relates to an asset that has been revalued upwards
should be recognized in
a. Profit or loss.
b. Revaluation surplus that relates to the revalued asset.
c. Opening retained profits.
d. Any reserve in equity.
(Adapted)
27. Where part of the cash-generating unit is disposed of, the goodwill associated
with the element disposed of
a. Shall be written off to the income statement entirely.
b. Shall not be included in the calculation of gain or loss on disposal.
c. Shall be included in the calculation of gain or loss on disposal.
d. Shall be written off against retained profits.
(Adapted)
28. When impairment testing a cash-generating unit, any corporate assets, such
as the head office business or computer equipment, should
a. Be allocated on a reasonable and consistent basis.
b. Be separately impairment tested.
c. Be included in the head office assets or parent’s assets and impairment
tested along with that cash-generating unit.
d. Not be allocated to cash-generating units.
(Adapted)
29. When allocating an impairment loss, such a loss should reduce the carrying
amount of which asset first?
a. Property, plant, and equipment. c. Goodwill.
b. Intangible assets. d. Current assets.
(Adapted)
167
c. No, the entity can perform impairment testing any time during the year
for as long as the interval between each impairment testing should not fall
below one year.
d. Yes, however, if there is any indication of impairment during the year, the
entity should not defer the testing to the end of reporting period.
32. Under PAS 36 Impairment of assets, which of the following statements best
describes 'value in use'?
a. The present value of estimated future cash flows expected to arise from
the continuing use of an asset and from its ultimate disposal
b. The amount of cash or cash equivalents that could currently be obtained
by selling an asset in an orderly disposal
c. The net amount which an entity expects to obtain for an asset at the end of
its useful life
d. The amount at which an asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction
33. Under PAS 36 Impairment of assets, which of the following terms best
describes the higher of an asset's fair value less costs of disposal and its value
in use?
a. Recoverable amount c. Depreciable amount
b. Revalued amount d. Carrying amount
34. Under PAS36 Impairment of assets, are the following statements relating to
an active market true or false?
(1) Willing buyers and sellers are usually found.
(2) Prices are available to the public.
a. False, False b. False, True c. True, False d. True, True
(ACCA)
35. Under PAS36 Impairment of assets, which of the following statements best
describes the term 'impairment loss'?
a. The removal of an asset from an entity's statement of financial position
b. The amount by which the carrying amount of an asset exceeds its
recoverable amount
c. The systematic allocation of an asset's cost less residual value over its
useful life
d. The amount by which the recoverable amount of an asset exceeds its
carrying amount
(ACCA)
36. According to PAS36 Impairment of assets, which of the following are relevant
in determining a non-current asset's 'value in use'?
I. The expected future cash flows from the asset
II. The carrying amount of the asset
III. The future annual depreciation expense in respect of the asset
IV. The time value of money
a. I, II, III b. II, III, IV c. I, IV d. I, II, IV
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II. If the individual asset generates an insignificant proportion of the cash
inflows of the entity as a whole, then the cash-generating unit should not
be identified.
a. False, False b. False, True c. True, False d. True, True
(ACCA)
38. The HAVOC DEVASTATION Co. has determined that it needs to recognize an
impairment loss on each of two non-current assets; plant and land. The
relevant amounts are as follows:
Plant Land
Original cost ₱700,000 ₱1,400,000
Previous revaluations Nil ₱ 450,000
Existing carrying amount ₱700,000 ₱1,850,000
Impairment loss to be recognized
in year ₱200,000 ₱ 300,000
40. In testing a cash generating unit (CGU) for impairment the bottom-up test
means that
a. Goodwill can be allocated to the CGU and an impairment loss has occurred
if the recoverable amount of the CGU’s less than the carrying amount, plus
the allocated goodwill.
b. Goodwill can be allocated to the CGU’s and an impairment loss occurred if
the recoverable amount of the CGU is less than its carrying amount,
excluding the allocated goodwill
c. Goodwill can be allocated to the COG and an impairment loss has occurred
if the recoverable amount of the CGU is more than the carrying amount.
d. Goodwill can be allocated to the CGU and an impairment loss has occurred
if the recoverable amount of the CGU is more than its carrying amount.
(Adapted)
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41. Select the incorrect statement regarding impairments on investment
properties.
a. Investment properties under the fair value model are not subject to
impairment
b. Impairments of investment properties under the cost model is recognized
in profit or loss
c. Compensation from third parties for investment properties that was
impaired or lost shall be recognized in profit or loss when the
compensation becomes receivable and not offset with the amount of loss
d. Reversal of impairment on investment properties under the cost model
are never reversed
42. Which of the following analysis on asset impairment is most likely to have
been made by a CPA? (where: RA = recoverable amount; FVLCS = fair value
less costs of disposal; VIN = value in use; CA = carrying amount; IL =
impairment loss)
a. if “FVLCS > CA,” then, “IL = 0”
b. if “FVLCS < VIN,” then, IL = > 0”
c. if “FVLCS > VIN,” then, “RA = FVLCS,” now, if “CA > RA,” then “IL = RA – CA”
d. if “FVLCS > VIN,” then, “RA = VIN,” now, if “CA < RA,” then “IL = RA – CA”
43. Ampersand “&” Co. determines that a printing press used in its operations has
suffered a permanent impairment in value because of technological changes.
An entry to record the impairment should
a. recognize an extraordinary loss for the period
b. include a credit to the equipment accumulated depreciation account
c. include a credit to the equipment account
d. not be made if the equipment is still being used.
(AICPA)
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