ACCOUNTING 102

DEPRECIATION, DEPLETION, REVALUATION, IMPAIRMENT

HOMEWORK

THEORIES.

1. What is depreciation?
a. The systematic allocation of the depreciable amount of an asset over its useful life.
b. The cost of an asset, or other amount substituted for cost, less its residual value.
c. The removal of a previously recognized asset from an entity’s statement of financial position.
d. Price that would be received to sell an asset in an orderly transaction between market
participants at the measurement date.

2. Depreciation of an asset begins

a. When it is available for use.
b. When it is actually used.
c. When it is retired from active use.
d. When it is derecognized.

3. Depreciation of an asset ceases

a. At the date that the asset is derecognized.
b. At the date that the asset is classified as held for sale in accordance with PFRS 5.
c. At the earlier of a or b.
d. At the later of a or b.

4. The depreciation method used shall reflect the pattern in which the asset’s future economic benefits
are expected to be consumed by the entity. Which statement is incorrect regarding depreciation
methods?
a. Straight-line depreciation results in a constant charge over the useful life if the asset’s residual
value does not change.
b. The diminishing balance method results in a decreasing charge over the useful life.
c. The units of production method results in a charge based on the expected use or output.
d. A depreciation method that is based on revenue that is generated by an activity that includes
the use of an asset is appropriate.

5. Which of the following is a realistic assumption of the straight-line method of depreciation?

a. Depreciation is a function of time rather than a function of usage.
b. The asset’s economic usefulness is the same each year.
c. The repair and maintenance expense is essentially the same each period.
d. The rate of return analysis is enhanced using the straight-line method.

6. Useful life of Property, Plant and Equipment is:

a. The period over which an asset is expected to be available for use by an entity.
b. The number of production or similar units expected to be obtained from the asset by an entity.
c. Either a or b.
d. Neither a nor b.

7. Under the revaluation model, an item of property, plant and equipment whose fair value can be
measured reliably shall be carried at a revalued amount. Revalued amount means
a. Fair value at the date of the revaluation.

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 b. Fair value at the date of the revaluation less any accumulated depreciation and any accumulated
impairment losses.
c. Fair value at the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses.
d. Cost less any accumulated depreciation and accumulated impairment losses.

8. Which statement is correct regarding the revaluation model?

a. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does
not differ materially from that which would be determined using fair value at the end of the
reporting period.
b. The frequency of revaluations depends upon the changes in fair values of the items of property,
plant and equipment being revalued.
c. If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which the asset belongs shall be revalued.
d. All of the above.

9. When an item of property, plant and equipment is revalued, any accumulated depreciation at the
date of the revaluation is
a. Restated proportionately with the change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals its revalued amount.
b. Eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset.
c. Either a or b.
d. Neither a nor b.

10. Depreciation, if applicable, is recognized under

Revaluation
Cost Model Model
a. Yes Yes
b. Yes No
c. No Yes
d. No No

PROBLEMS.

1. The Joyful Company purchased a machine on November 1, 2010 for P296,000. At the time of
acquisition, the machine was estimated to have a useful life of ten years and estimated salvage
value of P8,000. Joyful has recorded monthly depreciation using the straight-line method. On July 1,
2019, the machine was sold for P26,000. What should be the loss recognized from the sale of the
machine?
a. P8,000
b. P10,000
c. P20,400
d. P26,000

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2. Holdaway, Inc, a small furniture manufacturer, purchased the following assets at the end of the
year.
Residual Depreciable
Asset # Cost Value Amount Life
1 P24,000 P5,000 P19,000 5 years
2 900 130 770 7 years
3 320 - 320 8 years
4 9,000 500 8,500 5 years
P34,220 P5,630 P28,590
The group depreciation rate is
a. 16.51%
b. 15.61%
c. 19.76%
d. 17.96%

3. Jamela Company used the composite method of depreciation based on a 25% composite rate. On
January 1, 2019, the total cost of equipment was P5,000,000 with total residual value of P600,000
and accumulated depreciation of P3,000,000. In January 2019, the entity purchased an equipment
for P2,500,000 with no residual value. On December 31, 2019, the entity sold an equipment costing
P1,000,000 for P350,000. The said equipment was acquired on January 1, 2017 with residual value
of P200,000. What amount of depreciation should be recognized for 2019?
a. 1,625,000
b. 1,875,000
c. 1,525,000
d. 1,000,000

4. Blessing Corp. uses the sum-of-years’ digits method to depreciate equipment purchased in January
2017 for P20,000. The estimated residual value of the equipment is P2,000 and the estimated useful
life is four years. What should be the depreciation charge for the year ended December 31, 2019?
a. P6,000
b. P5,400
c. P4,000
d. P3,600

5. Dreamer Company purchased on October 1, 2018 an equipment for P800,000. The equipment had
an estimated useful life of 8 years. The estimated salvage value was estimated at P50,000 at the end
of its useful life. The equipment is being depreciated using the double-declining balance method.
What is the amount of depreciation to be charged against 2019 income?
a. P140,625
b. P175,000
c. P175,781
d. P187,500

6. Kuya Company uses hand tools in its manufacturing activities. On January 1, 2019, there are 800 of
such tools on hand at a cost of P200 each. Acquisition and retirement in the year 2019 are:
Acquisition Retirement Estimated value at year-end
400@300 300@50 P200,000
Assuming that retirements are on a first-in, first-out basis, which of the following statements is true?
a. The depreciation using the retirement method is P60,000.
b. The depreciation using the replacement method is P90,000.
c. The depreciation using the inventory method is P75,000.

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 d. The retirement method yields the lowest amount of depreciation compared to replacement and
inventory methods.

For numbers 7 and 8:

Whisper Company a mining company has incurred the following costs during the year 2019:
Vehicles and drilling rigs P2,000,000
Cost of replacing major parts of equipment used
in E&E activities 300,000
Cost of major inspection of equipment used in E&E
activities 150,000
Amount paid for the acquisition of rights to explore
(drilling rights and exploration licenses) 120,000
Topographical, geological, geochemical and
geophysical study costs 230,000
Deferred costs associated with consumables, such as
materials and fuels used, contractor payments and
employee remuneration 500,000
Depreciation on the capitalized tangible – E&E assets 245,000

7. What is the carrying value of tangible exploration and evaluation assets the company disclosed at
the end of year 2019?
a. P2,000,000
b. P2,150,000
c. P2,205,000
d. P2,450,000

8. What amount should be recognized as intangible E&E asset during 2019?

a. P350,000
b. P850,000
c. P1,095,000
d. P1,300,000

9. On January 1, 2019, Annie Company purchased a mineral mine for P26,400,000 with removable ore
estimated at 1,200,000 tons. After it has extracted all the ore, the entity will be required by law to
restore the land to its original condition at an estimated cost of P2,200,000. The present value of the
estimated restoration cost is P1,800,000. The property can be sold afterwards for P3,000,000.
During 2019, the entity incurred P2,000,000 exploration cost and P1,600,000 development cost
preparing the mine for production. The entity removed 80,000 tons of ore and sold 60,000 tons of
ore in 2019. What amount of depletion should be included in cost of sales for 2019?
a. 1,920,000
b. 1,440,000
c. 1,500,000
d. 1,590,000

For numbers 10 and 11:

On July 1, 2019, Trisha Company purchased the rights to a mine for P13,200,000, of which P1,200,000
was allocable to the land. Estimated reserves were 1,500,000 tons. The entity expects to extract and sell
25,000 tons per month. The entity purchased mining equipment on July 1, 2019 for P9,500,000. The
mining equipment had a useful life of 8 years. However, after all the resource is removed, the
equipment will be of no use and will be sold for P500,000.

10. What is the depletion for 2019?

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 a. 2,400,000
b. 1,200,000
c. 2,640,000
d. 1,320,000

11. What is the depreciation for 2019?

a. 1,800,000
b. 1,125,000
c. 900,000
d. 562,500

12. Rona Company provided the following balances on December 31, 2019:
Wasting asset, at cost 40,000,000
Accumulated depletion 15,000,000
Capital liquidated 5,000,000
Retained earnings 10,000,000
Depletion based on 100,000 units extracted at P30 per unit 3,000,000
Inventory of resource deposit (20,000 units) 2,000,000
What is the maximum dividend that can be declared on December 31, 2019?
a. 19,600,000
b. 19,400,000
c. 25,000,000
d. 20,000,000

For numbers 13 and 14:

Tycoon Corporation acquired a building on January 1, 2015 at a cost of P50,000,000. The building has an
estimated life of 10 years and residual value of P5,000,000. The building was revalued on January 1,
2019 and the revaluation revalued replacement cost of P80,000,000, residual value of P2,000,000 and
revised total life of 12 years.

13. The carrying amount of building as of December 31, 2019 is

a. P28,250,000
b. P42,700,000
c. P48,800,000
d. P42,950,000

14. The revaluation surplus as of December 31, 2019 is

a. P14.0 million
b. P15.4 million
c. P14.7 million
d. P16.8 million

15. On January 2, 2012, Beige Company has completed the construction of a building for a total cost of
P10,000,000. The building is to be depreciated on a straight-line basis over its estimated useful life
of 40 years. On January 2, 2017, Beige converted the building into a commercial establishment with
only minor renovation costs incurred. In consultation with an appraiser, the building’s fair value as
of January 1, 2017 was P11,970,000. On January 1, 2019, due to sudden change in economic
environment, Beige is evaluating possible impairment and determined that the recoverable value of
the building was P7,000,000. What is the amount of impairment loss, if any, on January 1, 2019?
a. P1,050,000
b. P1,250,000
c. P3,500,000

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 d. P4,286,000

For numbers 16 and 17:

On January 1, 2016, Excel Company purchased an asset for P1,000,000, with an estimated useful life of
10 years. Straight-line method of depreciation is to be used. On January 1, 2018, it was properly
determined that the recoverable amount of the asset is P640,000.On January 1, 2019, it was properly
computed that the recoverable amount of the asset is P740,000.

16. Under the cost model for long-lived assets, what are the amounts to be reported in the income
statement and shareholders’ equity, respectively, immediately on January 1, 2019?
a. P40,000 and P140,000
b. P120,000 and P60,000
c. P140,000 and none
d. P160,0000 and P20,000

17. Under the revaluation model for long-lived assets, what are the amounts to be reported in the profit
or loss and shareholders’ equity on January 1, 2019?
a. P140,000 and P40,000
b. P20,000 and P160,000
c. P180,000 and none
d. None and P180,000

For numbers 18 and 19:

An asset was acquired on January 1, 2015 for P800,000 and is expected to have a 5-year useful life.
Straight-line method of depreciation will be used. At January 1, 2017, the asset is appraised as having a
sound value (depreciated replacement cost) of P720,000. On January 1, 2019, the asset was again
remeasured and based on reliable estimate it has a sound value of P120,000.

18. What is the replacement cost of the asset on January 1, 2017?

a. P720,000
b. P800,000
c. P1,100,000
d. P1,200,000

19. What is the amount of impairment loss to be recognized on January 1, 2019?

a. None
b. P40,000
c. P60,000
d. P80,000

20. During the current year an entity sold a piece of equipment used in production. The equipment had
been accounted for using the revaluation method and details of the accounts and sale are presented
below:
Sales price P100,000
Equipment carrying amount (net) 90,000
Revaluation surplus 20,000
Which of the following is correct regarding recording the sale?
a. The gain that should be recorded in profit and loss is P30,000.
b. The gain that should be recorded in other comprehensive income is P10,000.
c. The gain that should be recorded in other comprehensive income is P30,000.

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 d. The gain that should be recorded in profit or loss is P10,000; the P20,000 revaluation surplus
may be transferred to retained earnings.

For numbers 21 to 24:

On January 1, 2017, KAZOO Company acquired a factory equipment at a cost of P150,000. The
equipment is being depreciated using the straight-line method over its projected useful life of 10 years.
On December 31, 2018, a determination was made that the asset’s recoverable amount was only
P96,000. Assume that this was properly computed and that recognition of the impairment was
warranted. On December 31, 2019, the asset’s recoverable amount was determined to be P111,000 and
management believes that the impairment loss previously recognized should be reversed. You have
been asked to assist the company accountant in the application of PAS 36, the standard on impairment
of assets.

21. What amount of impairment loss should be recognized on December 31, 2018?
a. P54,000
b. P9,000
c. P24,000
d. P0

22. What is the asset’s carrying value on December 31, 2019?

a. P84,000
b. P90,000
c. P86,400
d. P96,000

23. What would have been the asset’s carrying amount at December 31, 2019, had the impairment not
been recognized in 2018?
a. P105,000
b. P84,000
c. P96,000
d. P86,400

24. What amount of impairment recovery should be reported in the 2019 income statement?
a. P27,000
b. P0
c. P6,000
d. P21,000

25. On December 31, 2019, Marizor Company believed that the assets of a cash generating unit are
impaired based on an analysis of economic indicators. The assets and liabilities of the cash
generating unit at carrying amount on December 31, 2019 are:
Cash 4,000,000
Accounts receivable 6,000,000
Allowance for doubtful accounts 1,000,000
Inventory 7,000,000
Property, plant and equipment 22,000,000
Accumulated depreciation 4,000,000
Goodwill 3,000,000
Accounts payable 2,000,000
Loans payable 1,000,000
The entity determined that the value in use of the cash generating unit is P28,000,000. The accounts
receivable are considered collectible, except those considered doubtful. The carrying amount of the

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inventory is lower than fair value less cost of disposal. What is the impairment loss to be allocated to
the property, plant and equipment?
a. 3,600,000
b. 6,000,000
c. 3,000,000
d. 1,800,000