SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

General Luna Road, Baguio City Philippines 2600

Telefax No.: (074) 442-3071 Website: www.ubaguio.edu E-mail Address: ub@ubaguio.edu

REVIEW HANDOUTS AND MATERIALS

SCHOOL
SEMESTER  FIRST SEMESTER YEAR  2019-2020
SUBJECT FINANCIAL ACCOUNTING AND REPORTING (PROBLEMS) 
HANDOUT # INTEGA 1-006
TOPIC NON-FINANCIAL ASSETS

Inventories
Theories

1. Which of the following items should be included in a company’s inventory at the balance sheet date?
a. Goods in transit which were purchased FOB destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at the customer’s convenience.
d. Goods in transit which were purchased FOB shipping point.

2. Which statement is incorrect with respect to inventories under PAS No. 2?

a. Inventories should be measured at the lower of cost and net realizable value.
b. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their
present location and condition.
c. The cost of inventories of a service provider consists primarily of labor and other costs of personnel directly engaged in providing the service,
including supervising personnel and attributable overhead.
d. The costs of conversion of inventories include costs directly related to the units of production such as direct labor, and a systematic allocation of
variable production overhead.

3. The inventories of a service provider may simply be described as

a. Work in progress c. Unbilled receivables
b. Billed receivables d. Deferred costs

4. The cost of purchase of inventory does not include

a. Purchase price
b. Import duties and taxes
c. Freight, handling and other cost directly attributable to acquisition
d. Trade discount, rebate and other similar item

5. The cost of inventories that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned
by using
a. LIFO b. FIFO c. Average method d. Specific identification

6. Which costs may be capitalized as cost of inventories?

a. Normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
b. Storage costs
c. Selling costs
d. Foreign exchange differences which arises directly on the recent acquisition of inventories invoiced in a foreign currency.

7. Net realizable value is

a. Current replacement cost
b. Estimated selling price
c. Estimated selling price less estimated cost to complete
d. Estimated selling price less estimated cost to complete and estimated cost to sell

8. The cost of inventories in applying the valuation at lower of cost or net realizable value should be assigned by using
a. FIFO only c. Average method only
b. LIFO only d. Either FIFO or average method

9. Reporting inventory at the LCM is a departure from the accounting principle of

a. Historical cost b. Conservatism c. Consistency d. Full disclosure

10. Which statement is not valid in relation to the LCM rule for inventories?
I. Inventories are usually written down to net realizable value on an item by item basis.
II. It is appropriate to write down inventories based on a classification of inventory, for example, finished goods or all inventories in a
particular industry or geographical segment.
a. I only b. II only c. Both I and II d. Neither I nor II

11. The original cost of an inventory item is below both replacement cost and net realizable value. The net realizable value less normal profit margin is
below the original cost. Under LCM method, the inventory item should be valued at
a. Replacement cost
b. Net realizable value
c. Net realizable value less normal profit margin

Page 1 of 34
 d. Original cost

12. When agricultural crops have been harvested or mineral ores have been extracted and a sale is assured under a forward contract or government
guarantee, such inventories are measured at
a. Net realizable value c. Standard cost
b. Cost d. Relative sales price

13. The cost of inventories may not be recoverable under all of the following conditions, except
a. The estimated costs of completion or the estimated costs to be incurred to make the sale have increased.
b. The inventories have become wholly or partially obsolete.
c. The inventories are damaged
d. The selling prices of the inventories have increased.
14. Which of the following is not an acceptable basis for valuation of inventories in published financial statements?
a. Historical cost
b. Standard cost
c. Prime cost
d. Current selling price less cost to complete and cost to sell

15. Theoretically, freight and warehousing costs incurred in the transfer of consigned goods from the consignor to the consignee should be considered
a. An expense by the consignor c. Inventoriable by the consignor
b. An expense by the consignee d. Inventoriable by the consignee

16. Goods on consignment should be included in the inventory of

a. The consignor but not the consignee c. Both the consignor and the consignee
b. The consignee but not the consignor d. Neither the consignor nor the consignee

17. All of the following costs should be charged against revenue in the period, except
a. Manufacturing overhead costs for a product manufactured and sold in the same accounting period.
b. Costs which will not benefit any future period.
c. Costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
d. Costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.

18. The use of a discounts lost account implies that the recorded cost of a purchased inventory item is its
a. Invoice price
b. Invoice price plus the purchase discount lost
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whatever taken or not

19. The use of purchase discounts account implies that the recorded cost of a purchased inventory item is its
a. Invoice price
b. Invoice price plus any purchase discount lost
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether taken or not
20. Theoretically, cash discounts permitted on purchased raw materials should be
a. Added to other income, whether taken or not
b. Added to other income, only if taken
c. Deducted from inventory, whether taken or not
d. Deducted from inventory, only if taken

21. When a portion of inventories has been pledged as security on a loan

a. The value of the portion pledged should be subtracted from the debt
b. An equal amount of retained earnings should be appropriated
c. The fact should be disclosed but the amount of current assets should not be affected
d. The cost of the pledged inventory should be transferred from current to noncurrent asset

22. If a material amount of inventory has been ordered through a formal purchase contract at balance sheet date for future delivery at firm prices
a. This fact must be disclosed
b. Disclosure is required only if prices have declined since the date of the order
c. Disclosure is required only if prices have since risen substantially.
d. An appropriation of retained earnings is necessary.

23. The credit balance that arises when a net loss in a purchase commitment is recognized should be
a. Presented as a current liability
b. Subtracted from ending inventory
c. Presented as an appropriation of retained earnings
d. Presented in the income statement

24. When using a perpetual inventory system

I. No purchases account is used.
II. A cost of goods sold account is used.
III. Two entries are required to record a sale.
a. I and II only b. II only c. II and III only d. I, II and III

25. Which one of the following inventory costing method lends itself most to manipulation of reported net income among periods.
a. LIFO perpetual b. FIFO perpetual c. LIFO periodic d. FIFO periodic

26. During periods of arising prices, when the FIFO inventory cost flow method is used, a perpetual inventory system would
a. Not be permitted
b. Result in a higher ending inventory than a periodic system inventory system
c. Result in the same ending inventory as a periodic system
d. Result in a lower ending inventory than a periodic inventory system

27. Generally, which inventory costing method approximates most closely the current cost for each of the following:
Cost of goods sold Ending inventory
a. LIFO FIFO
b. LIFO LIFO
c. FIFO FIFO
d. FIFO LIFO

Page 2 of 34
28. To produce an inventory valuation which approximates the lower of average cost or market using the conservative retail inventory method, the
computation of the ratio of cost to retail should
a. Include markups but not markdowns c. Include markups and markdowns
b. Ignore both markups and markdowns d. Include markdowns but not markups

29. The gross margin method of estimating ending inventory may be used for all of the following except
a. Internal as well as external interim reports
b. Internal as well as external year-end reports
c. Estimate of inventory destroyed by fire or other casualty
d. Rough test of the validity of an inventory cost determined under either periodic or perpetual system.

30. The gross profit method of inventory valuation is invalid when

a. A portion of the inventory is destroyed.
b. There is substantial increase in inventory during the year.
c. There is no beginning inventory because it is the first year of operation.
d. The gross profit percentage applicable to goods in the ending inventory is different from the percentage applicable to goods sold during the
period.

Problems

1. Cagayan Company included the following items under inventories:

Materials P 1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventories 60,000
Advertising catalogs and shipping boxes 150,000
Finished goods in factory 2,000,000
Finished goods in company-owned retails store, including 50% profit on cost
750,000
Finished goods in hands on consignees including 40% profit on sales 400,000
Finished goods in transit to customers, shipped FOB destination, at cost
250,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit shipped FOB shipping point, excluding freight of P30,000
330,000
Goods held on consignment, at sales price, cost P150,000 200,000

How much is the correct amount of inventories?

a. P5,610,000 c. P5,375,000
b. P5,500,000 d. P5,450,000

2. The Abulug Manufacturing Company reviewed its year-end inventory and found the following items:
(a) A packing case containing a product costing P100,000 was standing in the shipping room when the physical inventory was
taken. It was not included in the inventory because it was marked “Hold for shipping instructions.” The customer’s order was dated
December 18, but the case was shipped and the costumer billed on January 10, 20x2.
(b) Merchandise costing P600,000 was received on December 28, 20x1, and the invoice was recorded. The invoice was in the
hands of the purchasing agent; it was marked “On consignment”.
(c) Merchandise received on January 6, 20x2, costing P700,000 was entered in purchase register on January 7. The invoice
showed shipment was made FOB shipping point on December 31, 20x1. Because it was not on hand during the inventory count, it was not
included.
(d) A special machine costing P200,000, fabricated to order for a particular customer, was finished in the shipping room on
December 30. The customer was billed for P300,000 on that date and the machine was excluded from inventory although it was shipped
January 4, 20x2.
(e) Merchandise costing P200,000 was received on January 6, 20x2, and the related purchase invoice was recorded January 5.
The invoice showed the shipment was made on December 29,20x1, FOB destination.
(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took possession of the
goods on that date. The merchandise was included in inventory because Abulug still holds legal title. Historical experience suggests that full
payment on installment sale is received approximately 99% of the time.
(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in the inventory because the
sale was accompanied by a purchase agreement requiring Abulug to buy back the inventory in February 20x2.

How much of these items should be included in the inventory balance at December 31, 20x1?
a. P1,300,000 c. P1,650,000
b. P 800,000 d. P1,050,000

3. The Alcala Company counted its ending inventory on December 31. None of the following items were included when the total amount of the
company’s ending inventory was computed:

 P150,000 in goods located in Alcala’s warehouse that are on consignment from another company.
 P200,000 in goods that were sold by Alcala and shipped on December 30 and were in transit on December 31; the goods
were received by the customer on January 2. Terms were FOB Destination.
 P300,000 in goods were purchased by Alcala and shipped on December 30 and were in transit on December 31; the goods
were received by Alcala on January 2. Terms were FOB shipping point.
 P400,000 in goods were sold by Alcala and shipped on December 30 and were in transit on December 31; the goods were
received by the customer on January 2. Terms were FOB shipping point.

The company’s reported inventory (before any corrections) was P2,000,000. What is the correct amount of the company’s inventory on December 31?
a. P2,550,000 c. P2,500,000
b. P1,950,000 d. P2,700,000

4. Aparri Company included the following items in its inventory on December 31, 20x1:

Merchandise out on consignment, at sales price,

including 25% markup on cost P 4,000,000

Page 3 of 34
 Goods purchased in transit, FOB destination 2,000,000
Goods held on consignment by Aparri Company 1,000,000

By what amount should the inventory at December 31, 20x1 be reduced?

a. P3,800,000 c. P1,800,000
b. P2,000,000 d. P1,000,000

5. Allapacan Company had the following consignment transactions during 20x1:

Inventory shipped on consignment to Benguet Company, consignee P600,000

Freight paid by Allapacan 50,000
Inventory received on consignment from Ifugao, consignor 800,000
Freight paid by Ifugao 50,000

No sales of consigned goods were made through December 31, 20x1. In its December 31, 20x1 balance sheet, Allapacan should include consigned
inventory of
a. P600,000 c. P 650,000
b. P700,000 d. P1,500,000

6. On June 1, 20x1 Amulung Company sold merchandise with a list price of P5,000,000 to ABC. Amulung allowed trade discounts of 20% and 10%.
Credit terms were 5/10, n/30 and the sale was made FOB shipping point. Amulung prepaid P200,000 of delivery cost for ABC as an accommodation.
On June 11, 20x1, Amulung received from ABC full remittance of
a. P3,420,000 c. P3,600,000
b. P3,620,000 d. P3,800,000

7. Baggao Company’s accounts payable balance at December 31, 20x1 was P8,000,000 before considering the following data:

 Goods shipped to Baggao FOB shipping point on December 15, 20x1 were lost in transit. The invoice cost of P500,000
was not recorded by Baggao. On January 15, 20x2, Baggao filed a P500,000 claim against the common carrier.

 On December 30, 20x1, a vendor authorized Baggao to return for full credit goods shipped and billed at P200,000 on
December 15, 20x1. The returned goods were shipped by Baggao on December 31, 20x1. A P200,000 credit memo was received and recorded
on January 5, 20x2.

What should Baggao report as accounts payable on December 31, 20x1?

a. P8,300,000 c. P7,800,000
b. P8,500,000 d. P7,500,000

8. Ballesteros Company began operations late in 20x0. For the first quarter ended March 31, 20x1, Ballesteros made available the following information:

Total merchandise purchased through March 15, recorded at net P4,900,000

Merchandise inventory at December 31, 20x0, at selling price 1,500,000

All merchandise was acquired on credit and no payments have been made on accounts payable since the inception of the company. All merchandise is
marked to sell at 50% above invoice cost before time discounts of 2/10, n/30. No sales were made in 20x1.

How much cash is required to eliminate the current balance in accounts payable?
a. P6,000,000 c. P6,400,000
b. P5,900,000 d. P5,750,000

9. Calayan Company has determined its December 31, 20x1 inventory on a FIFO basis at P9,500,000. Information pertaining to that inventory follows:

Estimated selling price P 14,000,000

Estimated cost to complete and cost of disposal 5,000,000
Normal profit margin 2,000,000
Current replacement cost 8,000,000

Calayan records losses that result from applying the lower of cost or market rule. At December 31, 20x1, Calayan should report inventory at
a. P9,500,000 c. P9,000,000
b. P8,000,000 d. P7,000,000

10. Claveria Company installs replacement siding, windows, and louvered glass doors for family homes. At December 31, 20x1, the balance of raw
materials inventory account was P502,000, and the allowance for inventory writedown was P33,000. The inventory cost and market data at December
31, 20x1, are as follows:

Cost Replacement Cost Sales Price Net Realizable Normal

value Profit
Aluminum siding
89,000 86,000 91,500 87,000 5,000
Mahogany siding 94,000 92,000 93,000 85,000 7,000
Louvered glass door 125,000 135,000 129,000 111,000 10,000
Glass windows 194,000 114,000 205,000 197,000 20,000
Total 502,000 427,000 518,500 480,000 32,000

The correct balance of the raw materials inventory after any allowance for write down is
a. P427,000 c. P480,000
b. P486,500 d. P477,000

Page 4 of 34
11. Enrile Company had 180,000 units of Product A on hand at January 1, 20x1 costing P20 each. Purchases of product A during the month of January
were as follows:

Units Unit cost

January 5 160,000 30
15 200,000 40
31 140,000 50

A physical count on January 31, 20x1 shows 200,000 units of product A on hand. The inventory on January 31, should be

FIFO LIFO
a. P9,400,000 P4,200,000
b. P4,200,000 P9,400,000
c. P9,400,000 P5,800,000
d. P4,200,000 P7,000,000

12. Gonzaga Company uses the weighted average method to determine the cost of its inventory. Gonzaga recorded the following information pertaining to
its inventory:

Units Units cost Total cost

Balance 1/1 160,000 60 9,600,000
Sold on 1/15 140,000
Purchased on 1/31 80,000 90 7,200,000

What amount of inventory should Gonzaga report in its January 31, 20x1 balance sheet?
Perpetual Periodic
a. P8,400,000 P7,000,000
b. P7,000,000 P8,400,000
c. P8,400,000 P7,500,000
d. P7,000,000 P7,500,000

13. Lasam Company sells one product, which it purchases from various suppliers. The trial balance at December 31, 20x1, included the following
accounts:

Sales (100,000 units at P150) P15,000,000

Sales discount 1,000,000
Purchases 9,300,000
Purchase discount 400,000
Freight in 100,000
Freight out 200,000

The inventory purchases during 20x1 were as follows:

Units Unit cost Total cost

Beginning inventory, January 1 20,000 P60 P 1,200,000
Purchases, quarter ended March 31 30,000 65 1,950,000
Purchases, quarter ended June 30 40,000 70 2,800,000
Purchases, quarter ended Sept. 30 50,000 75 3,750,000
Purchases, quarter ended Dec. 31 10,000 80 800,000
150,000 P10,500,000

Lasam’s accounting policy is to report inventory in its financial statements at the lower of cost or market, applied to total inventory. Cost is determined
under the first-in, first-out method.

Lasam has determined that, at December 31, 20x1, the replacement cost of its inventory was P70 per unit and the net realizable value was P72 per unit.
The normal profit margin is P10 per unit.

What should Lasam report as cost of goods sold for the year 20x1?
a. P6,400,000 c. P6,700,000
b. P6,600,000 d. P7,100,000

14. The following quarterly cost data have been accumulated for Pamplona Mfg. Inc.

Raw materials – beginning inventory (Jan. 1, 20x1) 10,000 units @P6.00

Purchases 8,500 units @P7.00
11,000 units @P7.50
Transferred 21,500 units of raw materials to work in process:

Work in process – beginning inventory (Jan. 1, 20x1) 5,600 units @P13.50

Direct labor P250,000
Manufacturing over head P325,000
Work in process – ending inventory (Mar. 31, 20x1) 4,200 units @P13.75

If Pamplona uses the FIFO method for valuing raw materials inventories, compute for the cost of goods manufactured for the quarter ended Mar. 31
20x1
a. P699,150 c. P734,850
b. P717,000 d. P746,850

15. Total debits and total credits in selected accounts of Piat Company, after closing entries were posted on December 31, 20x1 are given below.

Debits Credits
Materials P 600,000 P 200,000
Goods in process 500,000 300,000
Material purchases 2,500,000 2,500,000
Purchase discounts 100,000 100,000
Transportation in 200,000 200,000

Page 5 of 34
 Direct labor 3,000,000 3,000,000
Manufacturing overhead 1,500,000 1,500,000
Finished goods 700,000 400,000

Cost of goods sold was

a. P7,100,000 c. P6,900,000
b. P7,000,000 d. P7,400,000

16. On August 30, 20x1, Sta. Ana Company purchased a tract of land for P12,000,000. Sta. Ana incurred additional cost of P3,000,000 during the
remainder of 20x1 in preparing the land for sale. The tract was subdivided into residential lots as follows:

Lot class Number of lots Sales price per lot

A 100 240,000
B 100 160,000
C 200 100,000

Using the relative sales value method, what amount of cost should be allocated to Class C lots?
a. P6,000,000 c. P7,500,000
b. P5,000,000 d. P4,000,000

17. On November 17, 20x1, Solana Airways entered in to a commitment to purchase 3,000 barrels of aviation fuel for P9,000,000 on March 23, 20x2.
Solana entered into this purchase commitment to protect itself against the volatility in the aviation fuel market. By December 31, 20x1, the purchase
price of aviation fuel had fallen to P2,200 per barrel. However, by March 23, 20x2, when Solana took delivery of the 3,000 barrels, the price of
aviation fuel had risen to P2,500 per barrel. How much should be recognized as loss on purchase commitment on December 31, 20x1?
a. P1,500,000 c. P2,400,000
b. P 900,000 d. P 0

Problems Part 2

1. Benguet Company’s accounting records indicated the following for 20x2:

Inventory, January 1 P 6,000,000

Purchases 20,000,000
Sales 30,000,000

A physical inventory taken on December 31, 20x2 resulted in an ending inventory of P4,500,000. The gross profit on sales remained constant at 30%
in recent years. Benguet suspects some inventory may have been taken by a new employee. At December 31, 20x2 what is the estimated cost of
missing inventory?
a. P5,000,000 c. P500,000
b. P4,500,000 d. P 0

2. The Atok Corporation was organized on January 1, 20x1. On December 31, 20x2, the corporation lost most of its inventory in a warehouse fire just
before the year-end count of inventory was to take place. Data from the records disclosed the following:

20x1 20x2
Beginning inventory, January 1 P 0 P1,020,000
Purchases 4,300,000 3,460,000
Purchases returns and allowances 230,600 323,000
Sales 3,940,000 4,180,000
Sales returns and allowances 80,000 100,000

On January 1, 20x2, the Corporation’s pricing policy was changed so that the gross profit rate would be three percentage points higher than the one
earned in 20x1.

Salvaged undamaged merchandise was marked to sell at P120,000 while damaged merchandise was marked to sell at P80,000 had an estimated
realizable value of P18,000.

How much is the inventory loss due to fire?

a. P918,200 c. P856,200
b. P947,000 d. P824,600

3. The work-in-process inventory of Bakun Company were completely destroyed by fire on June 1, 20x2. You were able to establish physical inventory
figures as follows:

January 1, 20x2 June 1, 20x2

Raw materials P 60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000

Sales from January 1 to May 31, were P546,750. Purchases of raw materials were P200,000 and freight on purchases, P30,000. Direct labor during
the period was P160,000. It was agreed with insurance adjusters than an average gross profit rate of 35% based on cost be used and that direct labor
cost was 160% of factory overhead.

The work in process inventory destroyed as computed by the adjuster

a. P314,612 c. P185,000
b. P366,000 d. P265,000

4. Mankayan Company uses the first-in, first-out retail method of inventory valuation. The following information is available:

Cost Retail
Beginning inventory P 2,500,000 4,000,000
Purchases 13,500,000 16,000,000
Net markups 3,000,000
Net markdowns 1,000,000

Page 6 of 34
 Sales 15,000,000

What would be the estimated cost of the ending inventory?

a. P7,000,000 c. P5,110,000
b. P5,250,000 d. P4,750,000

5. Tublay uses the retail inventory method to approximate the lower of average cost or market. The following information is available for the current
year:

Cost Retail
Beginning inventory P 1,300,000 P 2,600,000
Purchases 18,000,000 29,200,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 600,000
Net markups 600,000
Net markdowns 2,000,000
Sales 24,400,000
Sales discounts 200,000
Employee discounts 600,000

What should be reported as the estimated cost of inventory at the end of the current year?
a. P3,120,000 c. P3,000,000
b. P3,200,000 d. P3,840,000

6. Trinidad Company uses the average cost retail method to estimate its inventory. Data relating to the inventory at December 31, 20x2 are:

Cost Retail
Inventory, January 1 P 2,000,000 P3,000,000
Purchases 10,600,000 14,000,000
Net markups 1,600,000
Net markdowns 600,000
Sales 12,000,000
Estimated normal shoplifting losses 400,000
Estimated normal shrinkage is 5% of sales

Trinidad’s cost of goods sold for the year ended December 31, 20x0 is
a. P9,100,000 c. P8,400,000
b. P8,680,000 d. P7,700,000

PROPERTY, PLANT AND EQUIPMENT BASICS

Theories

1. An item of property, plant and equipment should be recognized as an asset when

I. It is probable that future economic benefits associated with the asset will flow to the enterprise.
II. The cost of the asset to the enterprise can be measured reliably.
a. Both I and II b. Neither I nor II c. I only d. II only

2. Which is not an essential characteristic of property, plant and equipment?

a. The property, plant and equipment are subject to depreciation.
b. The property plant and equipment are tangible assets.
c. The property, plant and equipment are used in production or supply of goods and services, for rental and administrative purposes.
d. The property, plant and equipment are expected to be used over a period of more than one year.

3. The depreciable amount of an item of property, plant and equipment is the

a. Cost of the asset, or other amount substituted for cost in the financial statements, less its residual value.
b. Net amount which the enterprise expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal.
c. Amount of cash or cash equivalent paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or
construction.
d. Amount at which an asset is recognized in the balance sheet after deducting any accumulated depreciation and accumulated impairment losses
thereon.

4. The cost of an item of property, plant and equipment includes all of the following, except
a. Trade discount and rebates
b. Purchase price
c. Import duties and nonrefundable purchase taxes
d. Directly attributable costs of bringing the asset to working condition for its intended use.

5. Directly attributable costs of bringing the asset to working condition for its intended use include all, except
a. Initial operating losses incurred prior to an asset achieving planned performance
b. Cost of site preparation
c. Delivery, handling and installation costs
d. Estimated cost of dismantling and removing the asset and restoring the site, to the extent that it is recognized as a provision

6. Examples of costs that are expensed rather than recognized as an element of cost of property, plant and equipment include all of the following, except
a. Cost of employee benefits arising directly from the construction on acquisition of an item of
property, plant and equipment.

Page 7 of 34
 b. Cost of opening a new facility
c. Cost of introducing a new product or service, including cost of advertising and promotion.
d. Cost of relocating or reorganizing part or all of an entity’s operations.

7. Which is correct concerning measurement of property, plant and equipment?

I. An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of
property, plant and equipment.
II. The cost model means that property, plant and equipment are carried at cost less any accumulated depreciation and any accumulated
impairment loss.
III. The revaluation model means that property, plant and equipment are carried at revalued amount, being the fair value at date of revaluation
less any accumulated depreciation and subsequent accumulated impairment loss.
a. I, II and III b. I only c. II and III only d. II only

8. The cost of an item of property, plant and equipment acquired in exchange for a nonmonetary asset or a combination of monetary and nonmonetary
asset is measured at
a. Fair value of asset given plus cash payment
b. Fair value of asset received plus cash payment
c. Book value of asset given plus cash payment
d. Book value of asset received plus cash payment

9. Which statement is incorrect regarding initial measurement of PPE?

a. PPE should be initially recorded at cost, which includes all costs necessary to bring the asset to working condition for its intended use.
b. If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognized or imputed.
c. If an asset is acquired in exchange for another asset the cost will be measured at the fair value.
d. If an asset acquired in exchange for another asset is not measured at fair value, its cost is measured at the carrying amount of the asset received.

10. If the exchange transaction lacks commercial substance, the acquired item of property, plant and equipment is measured at
a. Fair value of asset given plus cash payment
b. Fair value of asset received plus cash payment
c. Carrying amount of asset given plus cash payment
d. Carrying amount of asset received plus cash payment

11. When payment for an item of property, plant and equipment is deferred beyond normal credit terms, its cost is the
a. Cash price equivalent c. Invoice price
b. Installment price d. List price

12. If an asset is acquired on credit or by installment, the difference between the total payments and cash price, if any, should be
a. Considered interest expense of the current year
b. Included as part of the asset cost
c. Amortized as interest expense over the life of the asset
d. Amortized as interest expense over the credit period
13. Which is incorrect concerning self-constructed asset?
a. The cost of self-constructed asset is determined using the same principles as for an acquired asset.
b. Any internal profits from construction are eliminated in arriving at the cost of self- constructed asset.
c. The cost of abnormal amounts of wasted material, labor or other resources incurred in the production of a self- constructed asset is included in the
cost of asset.
d. The cost of normal amounts of wasted material, labor or other resources incurred in the production of a self-constructed asset is included in the
cost of the asset.

14. As to land, capitalizable incidental costs include all, except

a. Attorney’s fees for establishing clean title
b. Special assessments for local improvement which benefits the property
c. Cost of relocation or reconstruction of property belonging to others in order to acquire possession
d. Expenditures for sidewalks, pavements, parking lot and driveways

15. Improvements which result to increased future economic benefits include all, except
a. Modification of an item of property to extend its useful life or increase its capacity.
b. Upgrade of machine parts to improve quality of output
c. Adoption of a new production process leading to large reduction in operating cost
d. Expenditure on repair or maintenance of property, plant and equipment, such as cost of servicing or overhauling plant and equipment.

16. Which is incorrect concerning the concept of the depreciation?

a. The depreciable amount of an item of property, plant and equipment should be allocated on a systematic basis over its useful life.
b. The depreciation method should not reflect the pattern in which the asset’s economic benefits are consumed by the enterprise.
c. The depreciation charge for each period should be recognized as an expense, unless it is included in the carrying amount of another asset.
d. The estimation of the useful life of an item of property, plant and equipment is a matter of judgment based on experience of the enterprise with
similar assets.

17. Which is incorrect concerning the residual value of an item of property, plant and equipment?
a. The depreciable amount of an asset is determined after deducting the residual value of the asset.
b. In practice, the residual value of an asset is often insignificant and therefore is immaterial in the calculation of the depreciable amount.
c. The residual value of an asset may increase to an amount equal or greater than the asset’s carrying amount.
d. The residual value of an asset shall be reviewed at least at each financial year-end and if expectation differs from previous estimate, the change
shall be accounted for as a change in accounting policy.

18. The useful life of an item of property, plant and equipment is

I. The period of time over which an asset is expected to be used by the enterprise.
II. The number of production or similar units expected to be obtained from the asset by the enterprise.
a. I only b. II only c. Both I and II d. Neither I nor II

19. Which statement is true concerning depreciation?

I. When a change in depreciation method is necessary to reflect the new pattern of economic benefits the change should be accounted for as a
change in accounting estimate and the depreciation charge for the current and future periods should be adjusted.
II. The useful life of an item of property, plant and equipment should be reviewed periodically and if expectations are significantly different
from previous estimates, the depreciation for the current and future periods should be adjusted.

Page 8 of 34
 a. I only b. II only c. Both I and II d. Neither I nor II

20. All of the following factors are considered in determining the useful life of an asset, except
a. Expected usage of the asset by the enterprise
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value

21. The sum of units method of depreciation results in

a. Constant charge over the useful life of the asset
b. Decreasing charge over the useful life of the asset
c. Increasing charge over the useful life of the asset
d. Charge based on the expected use or output of the asset

22. The cost of fully depreciated asset remaining in service and the related accumulated depreciation
a. Should be removed from the accounts and excluded from property, plant and equipment
b. Should not be removed from the accounts and therefore included in property, plant and equipment with disclosure
c. Should not be removed from the accounts and therefore included in property, plant and equipment without disclosure
d. Should be adjusted to conform with new estimated useful life

23. Enterprises are encouraged to disclose all of the following amounts, except
a. Gross carrying amount of fully depreciated property that is still in use.
b. Carrying amount of property, plant and equipment retired from active use and held for disposal.
c. Fair value of property, plant and equipment when the fair value is not materially different from the carrying amount.
d. Carrying amount of temporarily idle property, plant and equipment.

33. An item of property, plant and equipment that is retired from active use and held for disposal is carried at
a. Net realizable value
b. Carrying amount
c. Carrying amount or net realizable value, whichever is higher
d. Carrying amount or net realizable value, whichever is lower

34. Gain or loss from disposal of an item of property, plant and equipment is equal to the difference between
a. Fair value of the asset on balance sheet date and its carrying amount
b. Net realizable value on balance sheet date and its carrying amount
c. Net proceeds from disposal and the cost of the asset
d. Net proceeds from disposal and the carrying amount of the asset

35. Which statement is incorrect concerning revaluation of property, plant and equipment?
a. When an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs should
be revalued.
b. The basis of revaluation is fair value which is usually the market value determined by appraisal undertaken by professional qualified valuers, or
depreciated replacement cost, in the absence of evidence of market value.
c. Items of property, plant and equipment that experience significant and volatile movements in fair value should be revalued annually.
d. Frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant movements in fair value and instead,
revaluation every five to ten years may be sufficient.

36. Which statement is incorrect concerning revaluation of property, plant and equipment?
a. When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of revaluation is restated proportionately
with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation should equal its revalued
amount, or eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset.
b. Any revaluation increase should be credited to equity as revaluation surplus.
c. The revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realized.
d. Any revaluation decrease should be debited to revaluation loss, a contra equity account.

37. When the revaluation surplus is realized because of the use of the asset by the enterprise or disposal of the asset, it may be transferred directly to
a. Income c. Deferred income
b. Donated capital d. Retained earnings

Problems

1. Antonio Company purchased equipment. Related to the purchase are the following items:
List Price 1,000,000.00
Import Duties 50,000.00
Other Transaction Taxes 25,000.00
Broker's Commission 10,000.00
Freight 5,000.00
Insurance while in transit 1,600.00
Installation and Assembly 3,500.00
Testing Cost 1,800.00
Legal Fees for Title Transfer 7,500.00

Additional Information:
 The list price is gross of 12% VAT. When the purchase was made, the seller gave 10% and 5% trade discount as well as 2% prompt
payment discount. Antonio Company was able to avail of the trade discount but forfeited in the prompt payment discount.
 Because Antonio Company was initially not certain as to whether it will buy this equipment, it initially paid the seller 20,000 option money.
Based on the agreement, if the sale was pushed through, the said amount shall be deducted from the total amount to be paid.
 To prepare the factory for the new equipment, Antonio Company incurred 14,000 in clearing the site and fixing the mount of the equipment.

Page 9 of 34
  While testing the equipment, the company incidentally produced samples that may be sold for 600.
 The equipment operator underwent training at a cost of 6,000.
 After all preparations are made, the company finally started to mass produce inventory and incurred 18,000 for the grand opening.

How much is the capitalizable cost of the equipment? 865,895

2. Basilio Company purchased a cash generating unit from Crispin Company by paying 600,000 cash and issuing a 1,200,000 noninterest-bearing note
payable in 4 equal annual payments. The imputed rate on this type of note is 14%. below is the detail of the fair values of the components of the CGU:
Land 500,000.00
Building 650,000.00
Equipment 390,000.00

At what amount shall each component of the CGU be capitalized? 1,474,114

Land- 478608 Bldg. - 622,191 Eqmt. - 373,315

Use the following information to answer the next 5 questions:

Du30 Company transacted with De5 Company. In the said transaction De5 Company will be transferring its machinery to Du30 Company. The said
machinery has carrying amount of 850,000 and fair value of 920,000.

3. Assuming Du30 Company will be exchanging its equipment plus 200,000 cash for the machinery and its equipment has carrying amount of 900,000
and fair value of 780,000, at what amount will Du30 Company recognize the machinery considering that the exchange has commercial substance?
980,000

4. Assuming Du30 Company will be exchanging its equipment plus 200,000 cash for the machinery and its equipment has carrying amount of 900,000
and fair value of 780,000, at what amount will Du30 Company recognize the machinery considering that the exchange has no commercial substance?
1,100,000

5. Du30 will be issuing its 1,000,000 bonds currently traded at 97 to acquire the machinery. How much is the capitalizable cost of the machinery?
970,000

6. Du30 will issue 10,000 shares of its P50 par value ordinary shares currently traded in the stock market at 95 per share to acquire the machinery. How
much is the capitalizable cost of the machinery? 950,000

7. Du30 received the machinery as a donation. De5 Company is a shareholder of Du30. How much is the capitalizable cost of the machinery? 920,000

8. Electrode Company purchased land and building for a lump sum price of 5,000,000. An independent appraiser assessed that the total cost must be
allocated at a ratio of 8:2 for land and building, respectively. Immediately after purchase, the existing building was demolished to make way for the
construction of a new building. The summary of costs incurred are provided below:
Legal cost of conveying land 40,000
Special assessment 20,000
Survey costs 60,000
Demolition Cost 90,000
Scrap sale from demolition 20,000
Materials, labor, and overhead costs 22,000,000
Cash discounts on materials purchased not taken 120,000
Clerical and other expenses related to construction 56,000
Excavation costs 400,000
Architectural fees and building permit 240,000
Supervision by management on construction 48,000
Insurance premiums paid for workers 520,000
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 inefficiencies 560,000
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

How much is the capitalized cost of the land and new building?
Land- 4, 120, 000
Old bldg. - 0
New bldg. - 23,214,000
9. FokemonGo Company purchased land and building for a total cost of 800,000. Assessment of the building showed that the building is unusable
although its scrap can be sold for 20,000. The company razed the building at a cost of 80,000. How much cost is capitalized to the land and the
building, respectively?
Land- 860,000
Bldg. - 0

Page 10 of 34
10. Gohan Co. acquired an oil rig for 400,000,000. Installation and other necessary costs in bringing the equipment to its intended condition for use totaled
80,000,000. Gohan Company is required by law to dismantle the equipment and restore the site where it is installed after 20 years. The estimated
decommissioning and restoration costs are 40,000,000. The imputed rate of interest is 12%. How much is the initial cost of the equipment?

484, 146, 671

11. Halimuyak Company purchased a new service vehicle with fair value of 900,000 by paying 600,000 and trading their old service vehicle whose cost is
1,000,000 and accumulated depreciation is 850,000. At what amount will the new service vehicle be recorded?

900,000
Gain - 150,000
600+150-900

12. Ianmher Company purchased equipment by issuing a note amounting to 1,000,000 due in 2 years. The equipment is normally sold at 930,000 under a
30-day credit period and receives a 30,000 discount if paid in cash. The equipment is expected to be sold at 100,000 after its 10-year life. The
equipment has a normal production capacity of 10,000,000 units throughout its life and the manufacturer’s manual stated that it will take 36,000
machine hours before any major repairs will be needed. The equipment was able to produce 1,200,000 units, 1,120,000 units, 1,000,000 units and
880,000 units for first four years. At normal production, every machine hour produces 300 units.

Compute for the depreciation expense, accumulated depreciation and book value of the asset under:
a. Straight line depreciation 80,000
b. SYD method 754,546
c. Double Declining Balance Method 780,000
d. Machine Hours 811,111
e. Units of Production Method 804,000

13. Jamaica Company acquired equipment for 600,000. The asset has 15 years useful life with no residual value. The company depreciates similar items
using SYD. Four years after purchase, the company decided to change the depreciation method to double declining balance method. At this point, the
asset’s useful life was revised to 10 years from the date of original purchase and residual value was changed to 50,000. How much should the
depreciation be for the current year? 110,000

14. Killian Jornet Company bought a facility that cost him 10,000,000 five years ago. Currently, the asset has accumulated depreciation amounting to
2,375,000 based on straight line depreciation. At the beginning of the 6 th year, the company’s evaluated that the sound value of the asset should be
15,000,000 while all other features did not change. Under the revaluation method, compute for the revaluation surplus and depreciation expense at the
end of the 6th year. revaluation surplus - 883,333 depreciation exp- 980,000

15. Killian Jornet Company bought a facility that cost him 10,000,000 five years ago. Currently, the asset has accumulated depreciation amounting to
2,375,000 based on straight line depreciation. At the beginning of the 6th year, the company’s evaluated that the replacement cost of the asset should be
15,000,000 while all other features did not change. Under the revaluation method, compute for the revaluation surplus and depreciation expense at the
end of the 6th year. 5% residual value
revaluation surplus- 3,500, 000
Depreciation exp. - 10875/15 = 725000

16. Lovandero Company made improvements to leased property amounting to 3,000,000 exactly at the beginning of the 3 rd year of a 10 year lease contract
and the leasehold improvement will last for at least 15 years. The improvement has estimated residual value equal to 10% of the original cost. The
lease contract can be renewed for another 10 years and the company is certain that it will exercise the renewal option. Compute for the depreciation
expense at the end of the 3rd year.
probable- 18 years stay 15 yearsus ignore RV
3, 000,000 / 15 =200,000

PROPERTY, PLAND AND EQUIPMENT (WITH PAS 20, 23 AND 36)

Government Grant Theories

1. IAS 20 deals with:

a. Tax benefits provided to a firm in relation to Government Grants.
b. Government participation in the ownership of firms.
c. Disclosure of government grants.

2. Government assistance includes:

a. Indirect help, such as improving local infrastructure.
b. Direct action to provide economic benefits to qualifying firms.
c. Imposing import tariffs.

3. Government grants are defined as:

a. A transfer of resources to qualifying firms.
b. Transactions with the government in the normal course of trade.
c. Provision of guarantees by the government.

4. A qualifying firm it may receive grants related to the assets from the government, when it:
a. Buys long-term assets.
b. Builds long-term assets.
c. Acquires long-term assets.
d. Buys, builds, or acquires long-term assets.

Page 11 of 34
5. Government grants may be given in more than one form. They may be given as:
A. Grants related to assets.
B. Grants related to income.
C. Forgivable loans.
a. A only
b. b and c only
c. a, b and c

6. Fair Value of an asset is defined as that value for which:

a. An asset is acquired from a related party.
b. An asset is sold between willing independent traders.
c. A liability is extinguished between willing independent traders.
d. a and b
e. b and c
f. a, b and c

7. Which of the following may be categorized as purposes of government assistance? Tick all that apply.
a. Boosting capital by investing in specified assets.
b. Reduce unemployment by subsidizing jobs and training.
c. Try to promote economic activity in specific regions
d. a and b
e. b and c
f. a, b and c

8. The impact of government assistance on financial statements is which of the following:

a. Financial statements must ignore all assistance.
b. Financial statements must show only 10% of total assistance.
c. Financial Statements must be able to reflect the receipt of government assistance.

9. The recognition of government grants should only be made if:

a. It is likely that the firm will comply with the qualifying conditions.
b. The grants will be received.
c. The grants will never be repaid under any circumstances.
d. a and b
e. b and c
f. a, b and c

10. On the notification that a firm will receive a grant:

a. An account receivable will be set up, but the grant will be recorded on a cash basis.
b. Do nothing until the cash arrives.
c. An account receivable will be set up, and the grant will be recorded on an accruals basis.

11. If a firm does not comply with the conditions of a government loan, then this may result in the need:
a. To repay the loan.
b. To record a contingent liability in the future.
c. To account for the loan on a cash basis only.
d. a and b
e. b and c
f. a, b and c

12. If the grants are intended to compensate certain costs, then they should be:
a. Only entered in the books when those costs are incurred.
b. Recognized as income over the periods when the related costs are incurred.
c. Ignored.

13. If grants relate to depreciable assets:

a. They should not be recognized at all since the asset will have no value eventually.
b. Credited immediately to Other income.
c. Recognized as income in the periods in which the depreciation is charged.

14. Where there is a combination of assistance:

a. 1.It may be necessary to split the grant into parts, and recognize the income of the parts on different bases.
b. 2. If the cash is received together, treat it as one grant, otherwise split the grant into parts.
c. 3. Account for the grants by location.

15. When a grant is given for immediate financial support, or as compensation for costs already incurred:
a. One half is to be recognized in the current period while the other half is to be recognized in the next period.
b. It should be capitalized, as there are no matching costs.
c. It should be recognized in the period it becomes receivable.

16. The capital approach and the income approach are two forms of accounting treatment that may be applied to grants. These should be applied:
a. Before deciding how much of each grant should be recognized in each period.
b. After deciding how much of each grant should be recognized in each period.
c. Only if the grant is received in cash.

Page 12 of 34
17. Both the capital approach and the income approach give differing accounting treatments to a grant. However, a point of similarity between the two
approaches is to:
a. Credit the amount of the grant to shareholders’ funds.
b. Show only the portion of the grant relating to the period.
c. Take the grant to the income statement.

18. When the grant is in the form of land, or other non-monetary assets, then it should:
a. Be entered in the books at fair value, matched by the grant.
b. Not be entered in the books at fair value, since it is a gift.
c. Be entered in the books at fair value, matched by a contingent liability.

19. A grant can be shown as a deferred income on a balance sheet, and then:
a. Shown as sundry expense, over the periods matching the asset’s life.
b. Recognized as income, over the periods matching the asset’s life.
c. Amortized directly to equity, over the periods matching the asset’s life.

20. An alternate treatment, with respect to presentation of grants related to assets, may be that they are shown as:
a. An addition to the carrying amount of the asset.
b. Goodwill.
c. A deduction from the carrying amount of the asset.

21. If part, or all, of a grant becomes repayable to the government then:

a. The firm should use that amount to set up a subsidiary.
b. The repayment should first be shown as an expense.
c. The repayment should first be matched against any remaining deferred income relating to the grant.

Government Grants Problems

Use the following information to answer the next four questions:

On January 1, 20x1, HALIMAW Co. received cash of ₱16,000,000 from a local government to be used in constructing a building. The construction was
completed on December 31, 20x1 for a total cost of ₱40,000,000. The building will be depreciated over 20 years.

1. If HALIMAW 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?

2. If HALIMAW 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?

3. If HALIMAW Co. uses the gross presentation of government grants, how much is the carrying amount of the building on December 31, 20x1?

4. If HALIMAW Co. uses the net presentation of government grants, how much is the carrying amount of the building on December 31, 20x1?

Use the following information for the next four questions:

On January 1, 20x1, ASTIG Co. received cash of ₱16,000,000 from a local government to be used to defray safety and other hazard-related costs over a
five-year period. It was estimated that such costs will total ₱32,000,000 over the next five years. In 20x1 and 20x2, actual costs of safety and other hazard-
related costs amounted to ₱4,000,000 and ₱4,800,000, respectively.

5. If ASTIG 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?

6. If ASTIG 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?

7. If ASTIG Co. uses the gross presentation of government grants, how much safety expense is recognized in 20x1?

8. If ASTIG Co. uses the net presentation of government grants, how much is safety expense is recognized in 20x1?

9. On January 1, 20x1, SUGO Co. received land from the government with the condition that a factory building should be constructed on it. The fair
value of the land was estimated at ₱20,000,000. The construction of the factory building was completed on January 1, 20x2 for a total cost of
₱80,000,000. The building will be depreciated using SYD over a useful life of 10 years. The estimated residual value is ₱8,000,000. HALIMAW 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, 20x2?

10. On January 1, 20x1, various properties of CHUCK Co. were destroyed due to flood. It was estimated that the cost of the destroyed properties amounted
to ₱60,000,000. On July 1, 20x1, CHUCK received ₱8,000,000 from the government as a financial aid. CHUCK Co. estimates that it would take about
5 years before it can recover from the loss.
How much is the income from government grant recognized in 20x1?

11. On January 1, 20x1, because of an exemplary accomplishment that brought international recognition to the community, the government waived the
repayment of NIKE 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?

12. On January 1, 20x1, CHRIS Co. was granted by the government a 3-year, zero-interest loan of ₱4,000,000 payable on December 31, 20x3. Prevailing
interest rate for this type of loan is 10%. How much is the income from government grant recognized in 20x1?

13. On January 1, 20x1, CENA Co. received cash of ₱16,000,000 from the government to be used to defray safety and other hazard-related costs over a
five-year period. It was estimated that such costs will accumulate to ₱32,000,000 over the next five years. In 20x1 and 20x2, actual costs of safety and
other hazard-related costs amounted to ₱4,000,000 and ₱4,800,000, respectively. On January 1, 20x3, the government demanded repayment of the
₱16,000,000 given as grant in 20x1. How much is the loss on repayment of government grant recognized in 20x3?

14. On January 1, 20x1, HUNTER Co. received cash of ₱16,000,000 from the government to be used in constructing a building. The construction was
completed on December 31, 20x1 for a total cost of ₱40,000,000. The building is depreciated over 20 years. On January 1, 20x4, the government
demanded 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?

Page 13 of 34
Borrowing Cost Theories

1. Borrowing costs can be capitalized:

a. Always
b. Never
c. Sometimes

2. Interest on Bank overdrafts, short term and long term borrowings are the only items included in borrowing costs.
a. True
b. False

3. A Qualifying assets includes

a. Inventories converted for sale in a short time
b. Assets ready for sale, or use when acquired
c. Maturing whisky

4. Renting out an upgraded office building that you have purchased is an example of an investment property. This is an example of an asset that does not
qualify.
a. True
b. False

5. Borrowing costs should be recognized as an expense and written off in the period they are incurred.
a. Only if the asset qualifies
b. When using pooled funds.
c. If the borrowing costs relate to current fast-moving inventory.

6. The basis for treating Borrowing costs should be:

a. Cash basis only
b. Accruals basis only
c. Mixture of 1&2

7. Borrowings can only be capitalized when it is likely that they will generate future economic benefits
a. True
b. False

8. Other borrowing costs, those which cannot be capitalized, should be recognized as an expense and written off in the period of incurrence.
a. True
b. False

9. Investment income generated from loans taken in order to finance a qualifying asset should be:
a. Deducted from borrowing costs
b. Added to borrowing costs
c. Shown as Investment income in the Income Statement

10. The amount of borrowing costs capitalized will always exceed the total borrowing costs incurred in that period.
a. True
b. False

11. The general pool of funds used to complement borrowings for a qualifying asset may relate just to the subsidiary. If this is the case, then use the
weighted average cost relating just to the borrowings of the subsidiary.
a. True
b. False

12. The recoverable amount of an asset is defined as:

a. The asset’s resale value.
b. Its value to the firm as it is stored away in the warehouse.
c. Its value to the firm for internal use.
d. a and b only
e. a and c only

13. When capitalizing borrowing costs there is a risk that the cost of an asset may be inflated above its recoverable amount. Any excess of borrowing
costs, above the recoverable amount should be:
a. Ignored
b. Written off
c. Treated as an income

14. Capitalization is only started when:

a. Costs are being incurred for the asset
b. Borrowing costs are being incurred
c. Action is being taken to prepare the asset for use of sale
d. a and b only
e. a, b and c
f. b and c only

15. The total cost of a qualifying asset is increased by any progress payments received or any government grants
a. True
b. False

16. Capitalization is also allowed on assets being held, with no present activity, for future development.

Page 14 of 34
 a. True
b. False

17. Capitalization is suspended if the delays in the development of an asset are

a. Temporary
b. Permanent
c. Both of a & b above
d. Neither of a & b above

18. Capitalization is suspended if active development of an asset is suspended for an extended period of time.
a. True
b. False

19. When the building of a qualifying asset is being completed in many parts and each part can be used independently of other parts, which are still being
built, then:
a. Capitalization should be applied on the eventual complete asset.
b. Capitalization should be applied for each part separately
c. Neither of 1 or 2.

Borrowing Cost Problems

1. You are building a bridge costing P200 million. P120 million is financed from a long-term loan costing 8%.
The remaining P80 million comes from a pool of loans. 35% of the pooled loans cost 10%. 65% of the pooled loans cost 12%. Using this information find
the cost of borrowings for the first year, the average borrowing rate of the project and the weighted average of the pool of loans.

2. The recoverable amount of a machine may be defined as its value to the firm for internal use or its resale value.
The Recoverable Amount of a machine = P120.000. It is a qualifying asset. Its average carrying cost for the period = P114.000. P20.000 of the borrowing
costs for the period relate to this machine. What then is the amount that can be capitalized and how much must be written off?

3. Suppose you are building a new office complex to house a government ministry. Costs, so far, total P300 million.
The Central government has provided a cash grant of P30 million, and you have received progress payments of P210 million. Interest capitalized in year 1
was P6 million. What is your base cost going to be?

The construction is completed at the end of year 1. Depreciation is started in year 2. The capitalization rate will apply to the base cost (carrying amount)
formed in year 2. Depreciation = P9 million in year 2.

The carrying amount will be reduced by depreciation and increased by the borrowing costs previously applied. Following from this, fill in the table given
below.

Cost of asset at Year 1 end =

Plus interest capitalized in Year 1 =
Minus depreciation charged in Year 2 =
Carrying amount for Year 2 =

4. Vin Diesel Company borrowed P16,000,000 to finance the construction of its building on July 1, 20x1. The loan shall be repaid commencing the
month following completion of the building. Expenditures for the partially completed structure totaled P9,600,000 during the year-ended June 30,
20x2. Assume that these expenditures were incurred evenly throughout the year. Vin Diesel Company earned interest of P320,000 for the year on the
unexpended portion of the loan and annual interest rate is 3%. What amount of interest shall be capitalized to the building?

5. Bilbo Baggins Company started construction on a building on January 1 of the current year and completed construction on December 31 of the same
year. The company had only two interest-bearing notes outstanding during the year, and both of these notes were outstanding for all 12 months of the
year. The following information is available:
Average accumulated expenditures 2,500,000
Ending balance of construction in progress
before capitalization of interest 3,600,000
6% note incurred specifically for the project 1,500,000
9% long term note 5,000,000

How much is the capitalizable interest?

6. On January 1, 20x1, AAA Co. borrowed ₱20 million to finance the construction of a new building. Interest is payable on the loan at 8%. Stage
payments were due throughout the construction period and therefore excess funds were invested during that period. By the end of the project on
December 31, 20x1, investment income of ₱600,000 had been earned. How much is the capitalizable borrowing cost?

7. On January 1, 20x1, BBB 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

The construction of the qualifying asset was started on immediately and expenditures incurred on the qualifying asset were as follows:
Jan. 1 ₱19,200,000
Mar. 31 8,800,000
July 30 14,000,000
October 1 21,600,000
December 31 1,200,000

How much is the capitalizable borrowing cost?

8. On January 1, 20x1, CCC 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

Page 15 of 34
14% bank loan (3-year) 72,000,000
16% note payable (5-year) 88,000,000

The construction started on January 1 and was completed on December 20x1. The total cost of construction was ₱72,000,000 which was incurred evenly
during the year. How much is the capitalizable borrowing cost?

9. On January 1, 20x1, DDD Co. contracted for the construction of a building for ₱80,000,000 on a land that it had previously purchased. The building
was completed on December 20x1. The following payments were made to the contractor:
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

The following represents the borrowings of DDD Co. as of December 31, 20x1.
 10%, ₱28,000,000, 4-year note dated January 1, 20x1 with simple interest payable annually, specifically borrowed to finance the construction
project. Interest income earned on the temporary investment of the proceeds is ₱480,000.
 12.5%, ₱40,000,000, 10-year note dated January 1, 20x1 with interest payable annually
 10%, ₱60,000,000, 10-year note dated December 31, 19x9 with interest payable annually

How much is the capitalizable borrowing cost?

10. EEE Co. started construction of a new office building on January 1, 20x1. Funds borrowed specifically for the construction the building is ₱8,000,000
accruing interest at 10% annually. However, a part of the borrowing is used for other business requirements during the year. Investment income earned
on temporary investments of proceeds from the borrowing amounted to ₱48,000 which was received in cash on September 1, 20x1. Expenditures on
the building amounted ₱7,200,000 which was incurred evenly during the year. How much is the capitalizable borrowing cost?

11. FFF Co. started construction of a qualifying asset for GGG, Inc. on January 1, 20x1. The following were expenditures incurred on the construction.
Date Expenditures
January 1, 20x1 4,000,000
May 1, 20x1 1,800,000
December 1, 20x1 2,880,000

 Included in the January 1, 20x1 expenditures is cost of materials purchased on account for ₱400,000. The account was settled on July 1, 20x1.
 Included in the May 1, 20x1 expenditures is ₱40,000 cost of materials obtained in exchange for old equipment.

Progress billings during the year are as follows:

Date of billing Amount billed Date billings were collected
April 1, 20x1 800,000 June 1, 20x1
September 1, 20x1 2,400,000 November 1, 20x1

 Payments on billings are subject to 10% withholding by GGG, Inc.

 FFF Co. determined the capitalization rate to be 10%.

How much is the capitalizable borrowing cost?

Use the following information for the next four questions:

HHH Co. started construction of a qualifying asset for III, 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

HHH Co. determined the capitalization rate to be 10%. The construction of the qualifying asset was substantially completed on September 30, 20x3.

12. How much is the capitalizable borrowing cost in 20x1?

13. How much is the capitalizable borrowing cost in 20x2?

14. How much is the capitalizable borrowing cost in 20x3?

15. How much is the total cost of the constructed qualifying asset on September 30, 20x3?

Impairment and Revaluation Theories

1. Which statement is incorrect concerning revaluation of property, plant and equipment?

a. When an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs
should be revalued.
b. The basis of revaluation is fair value which is usually the market value determined by appraisal undertaken by professional qualified
valuers, or depreciated replacement cost, in the absence of evidence of market value.
c. Items of property, plant and equipment that experience significant and volatile movements in fair value should be revalued annually.
d. Frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant movements in fair value and
instead, revaluation every five to ten years may be sufficient.

Page 16 of 34
2. Which statement is incorrect concerning revaluation of property, plant and equipment?
a. When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of revaluation is restated
proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation should
equal its revalued amount, or eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount
of the asset.
b. Any revaluation increase should be credited to equity as revaluation surplus.
c. The revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realized.
d. Any revaluation decrease should be debited to revaluation loss, a contra equity account.

3. When the revaluation surplus is realized because of the use of the asset by the enterprise or disposal of the asset, it may be transferred directly to
a. Income c. Deferred income
b. Donated capital d. Retained earnings

4. An asset is impaired when

a. Its recoverable amount exceeds its carrying amount.
b. Its carrying amount exceeds its recoverable amount.
c. Its fair value less costs to sell is less than its value in use.
d. Its net selling price is less than its value in use.

5. Recoverable amount is
a. The amount at which an asset is recognized in the balance sheet after deducting accumulated depreciation and accumulated impairment
losses.
b. The higher of an asset's fair value less costs to sell and its value in use.
c. The amount obtainable from the sale of an asset in a bargained transaction between knowledgeable, willing parties.
d. The discounted present value of estimated future cash flows.

6. Which statement is incorrect in determining recoverable amount?

a. If the carrying amount is less than fair value less costs to sell or value in use, it is not necessary to calculate the other amount.
b. If fair value less costs to sell cannot be determined, then recoverable amount is value in use.
c. For assets to be disposed of, recoverable amount is fair value less costs to sell.
d. None of the above.

7. Fair value less cost to sell is

I. The amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties less cost of disposal.
II. The present value of future cash flows expected to be derived from an asset.
a. I only b. II only c. Both I and II d. Neither I nor II

8. Which statement is incorrect regarding fair value less costs to sell?

a. If there is a binding sale agreement, use the price under that agreement less costs of disposal.
b. If there is an active market for that type of asset, use market price less costs of disposal.
c. If there is no active market, use the best estimate of the asset's selling price less costs of disposal.
d. Costs of disposal are the direct added costs including existing costs and overhead.

9. The following are external indicators of impairment, except

a. Market value declines.
b. Negative changes in technology, markets, economy, or laws.
c. Increases in market interest rates.
d. Worse economic performance than expected.

10. Which statement is incorrect concerning the reversal of an impairment loss?

a. The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the
impairment had not been recognized.
b. Reversal of an impairment loss is recognized as income in the income statement.
c. Adjust depreciation for future periods.
d. Reversal of an impairment loss for goodwill is recognized as income in the income statement.

11. IAS 36 applies to which of the following assets?

a. Inventories.
b. Financial assets.
c. Assets held for sale.
d. Property, plant, and equipment.

12. Value-in-use is
a. The market value.
b. The discounted present value of future cash flows arising from use of the asset and from its disposal.
c. The higher of an asset’s fair value less cost to sell and its market value.
d. The amount at which the asset is recognized in the balance sheet.

13. If the fair value less costs to sell cannot be determined

a. The asset is not impaired.
b. The recoverable amount is the value-in-use.
c. The net realizable value is used.
d. The carrying value of the asset remains the same.

14. If assets are to be disposed of

a. The recoverable amount is the fair value less costs to sell.
b. The recoverable amount is the value-in-use.
c. The asset is not impaired.
d. The recoverable amount is the carrying value.

15. Estimates of future cash flows normally would cover projections over a maximum of
a. Five years.
b. Ten years.
c. Fifteen years.

Page 17 of 34
 d. Twenty years.

16. Which of the following is the best evidence of an asset’s fair value less costs to sell?
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. The carrying value of the asset.

17. 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.
c. Cash flows from the sale of assets produced by the asset.
d. Cash outflows on the maintenance of the asset.

18. When deciding on the discount rate that should be used, which factors should not be taken into account?
a. The time value of money.
b. Risks that relate to the asset for which future cash flow estimates have not been adjusted.
c. Risks specific to the asset for which future cash flow estimates have been adjusted.
d. Pretax rates.

19. An impairment loss that relates to an asset that has been revalued should be recognized in
a. Profit or loss.
b. Revaluation reserve that relates to the revalued asset.
c. Opening retained profits.
d. Any reserve in equity.

20. A cash-generating unit is

a. The smallest business segment.
b. Any grouping of assets that generates cash flows.
c. Any group of an asset that is reported separately to management.
d. The smallest group of assets that generates independent cash flows from continuing use.

21. Goodwill should be tested for impairment

a. If there is an indication of impairment.
b. Annually.
c. Every five years.
d. On the acquisition of a subsidiary.

22. 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.

23. 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.

24. When allocating an impairment loss, such a loss should reduce the carrying amount of which asset first?
a. Property, plant, and equipment.
b. Intangible assets.
c. Goodwill.
d. Current assets.

25. Which of the following impairment losses should never be reversed?

a. Loss on property, plant, and equipment.
b. Loss on goodwill.
c. Loss on a business segment.
d. Loss on inventory.

Revaluation and Impairment Problems

1. Lian Company acquired a building on January 1, 20x1 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, 20x5 and the revaluation revealed replacement cost of P80,000,000, residual value of P2,000,000
and revised life of 12 years. What is the revaluation surplus on December 31, 20x5?
a. 30,000,000
b. 26,250,000
c. 16,800,000
d. 14,700,000

2. On January 1, 20x5, the historical balances of the land and building of Lipa Company are:

Cost Accumulated depreciation

Land 50,000,000
Building 300,000,000 90,000,000

The land and building were appraised on same date and the revaluation revealed the following:

Sound value
Land 80,000,000
Building 350,000,000

Page 18 of 34
 There were no additions or disposals during 20x5. Depreciation is computed on the straight line. The estimated life of the building is 20 years. The
depreciation of the building for the year ended December 31, 20x5 should be
a. 25,000,000
b. 10,000,000
c. 15,000,000
d. 17,500,000

Use the following information for the next three items

Capiz Company has the following information on January 1, 20x5 relating to its land and building.

Land 20,000,000
Building 450,000,000
Accumulated depreciation 75,000,000

There were no additions or disposals during 20x5. Depreciation is computed using straight line over 15 years for building. On June 30, 2005, the land and
building were revalued as follows:

Replacement cost Sound value

Land 35,000,000 35,000,000
Building 600,000,000 480,000,000

3. What is the depreciation of the building for 20x5?

a. 30,000,000
b. 35,000,000
c. 40,000,000
d. 32,000,000

4. What is the revaluation surplus on June 30, 20x5?

a. 135,000,000
b. 125,000,000
c. 120,000,000
d. 160,000,000

5. What is the revaluation surplus on December 31, 20X5?

a. 125,000,000
b. 130,000,000
c. 123,750,000
d. 115,000,000

6. During December 20x5, Talisay Company determined that there had been a significant decrease in market value of its equipment. At December 31,
20x5, Talisay compiled the following information concerning the equipment:

Original cost 20,000,000

Accumulated depreciation 12,000,000
Expected undiscounted net future cash inflows from the
continued use and eventual disposal 7,000,000
Expected discounted net future cash inflows from the
continued use and eventual disposal 5,000,000
Fair value less cost to sell 6,500,000

What is the impairment loss that should be reported in the 20x5 income statement?
a. 1,000,000
b. 2,000,000
c. 1,500,000
d. 0

7. Tanauan Company has one division that performs machining operations on parts that are sold to contractors. A group of machines have an aggregate
cost and accumulated depreciation on December 31, 2005 as follows:

Machinery 90,000,000
Accumulated depreciation 30,000,000

The machines have an average remaining life of 4 years and it has been determined that this group of machinery constitutes a cash generating unit. The
fair value less cost to sell of this group of machines in an active market is determined to be P45,000,000. Based on supportable and reasonable
assumptions, the financial forecast for this group of machines reveals the following cash inflows and cash outflows for the next four years:

Cash inflows Cash outflows

20x6 30,000,000 12,000,000
20x7 32,000,000 17,000,000
20x8 26,000,000 14,000,000
20x9 16,000,000 6,000,000

It is believed that a discount rate of 8% is reflective of time value of money. The table of present value shows that the present value of 1 at 8% is as
follows:

Period Present value of 1

1 .93
2 .86
3 .79
4 .74

Page 19 of 34
 Tanauan Company should recognize an impairment loss in 20x5 at
a. 13,480,000
b. 15,000,000
c. 5,000,000
d. 0

8. Odiongan Company acquired a machine for P6,400,000 on August 31, 20x2. The machine has a 5-year life, a P1,000,000 salvage value, and was
depreciated using the straight line method. On May 31, 20x5, a test for recoverability reveals that the expected net future undiscounted cash inflows
related to the continued use and eventual disposal of the machine total P3,000,000. The machine’s fair value on May 31, 20x5 is P2,700,000 with no
residual value. Assuming a loss on impairment is recognized on May 31, 20x5, what is Odiongan’s depreciation for June 20x5?
a. 127,040
b. 100,000
c. 111,110
d. 45,000

9. Lobo Company reported an impairment loss of P4,000,000 in its income statement for the year 20x4. This loss was related to an item of property,
plant and equipment which was acquired on January 1, 20x3 with cost of P25,000,000, useful life of 10 years and no residual value. On December 31,
20x4 balance sheet, Lobo reported this asset at P16,000,000 which is the fair value on such date. On December 31, 20x5, Lobo determined that the fair
value of its impaired asset had increased to P19,000,000. The straight line method is used in recording depreciation of this asset. What amount of gain
on impairment recovery should Lobo report in its 20x5 income statement?
a. 5,000,000
b. 3,500,000
c. 1,500,000
d. 0

10. On January 1, 20x2, Jennifer Company opted to change its accounting policy of PPE from the cost method to the revaluation method. At that date, its
only property has book value of P6,000,000, accumulated depreciation of P4,000,000 and is already 4 years old. On the same date, the property has a
replacement cost of P12,000,000 and is estimated to have a remaining useful life of 8 years and salvage value of P500,000 at the end of its life. Using
the information given, determine the following:
a. Journal entry upon revaluation
b. Depreciation expense on December 31, 20x2

PPE Cost Replacement Appreciation

Property 10,000,000 12,000,000 2,000,000
RV 500,000 500,000 -
DA 9,500,000 11,500,000 2,000,000
AD 4,000,000 4,600,000 600,000
Remaining DA 5,500,000 6,900,000 1,400,000

11. A cash generating unit of Palugi Company provided the following data regarding its assets:
Asset Carrying Value Recoverable Amount
Land 1,500,000 2,000,000
Building 5,400,000 4,000,000
Equipment 1,750,000 ?
Furniture 1,250,000 ?
Other PPE 500,000 ?
Goodwill 1,000,000 ?
Total 11,400,000 8,500,000

Using the information above (use two decimal places):

a. How much is the total impairment loss for the CGU? 3,400,000
b. What will be the new carrying value of each item of the CGU?
o Building
o Equipment
o Furniture
o Other

INTANGIBLE ASSETS
Theories

1. An entity shall choose either the cost model or revaluation model as its accounting policy in measuring intangible asset. Which statement is correct?
I. The cost model means that an intangible asset shall be carried at cost less any accumulated amortization and any accumulated impairment
loss.
II. The revaluation model means that an intangible asset shall be carried at revalued amount less any subsequent accumulated amortization and
any subsequent accumulated impairment loss.
a. I only c. II only
b. Both I and II d. Neither I nor II

2. Which is not within the definition of an intangible asset?

a. Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
b. Identifiable nonmonetary asset without physical substance.
c. A resource controlled by an enterprise as a result of past events.
d. A resource from which future economic benefits are expected to flow to the enterprise.

3. Which is incorrect concerning the recognition and measurement of an intangible asset?

a. If an intangible asset is acquired separately, the cost comprises its purchase price, including import duties and taxes and any directly
attributable expenditure of preparing the asset for its intended use.
b. If an intangible asset is acquired in a business combination that is an acquisition, the cost is based on its fair value at the date of acquisition.

Page 20 of 34
 c. If an intangible asset is acquired free of charge or by way of government grant, the cost is equal to its fair value.
d. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal to the total payments over the credit period.

4. The appropriate method of amortizing intangible asset is best described by which of the following?
a. The straight line method, unless the pattern in which the asset’s economic benefits are consumed by the enterprise can be determined
reliably.
b. The double declining balance in all circumstances
c. Management can make a subjective amount of periodic amortization without regard to any particular method
d. The straight line method in all circumstances

5. The best definition of useful life of an intangible asset is

a. The legal life of the intangible.
b. The period over which management believes the intangible asset will contribute to the revenue-producing process.
c. Twenty years.
d. The period over which the cost of the asset can be deducted for income tax purposes.

6. Which of the following factors should not be considered in estimating the useful life of intangible asset?
a. Legal, regulatory or contractual provision
b. Expected action by competitors or potential competitors
c. Residual value
d. Typical product life cycle of the asset

7. It is the systematic allocation of the cost of an intangible asset less any residual value as an expense over the asset’s useful life?
a. Depreciation c. Depletion
b. Realization d. Amortization

8. The residual value of an intangible asset should be presumed zero, unless

I. There is a commitment by a third party to purchase the asset at the end of its useful life.
II. There is an active market for the asset and residual value can be determined by reference to that market and it is probable that such market
will exist at the end of the asset’s useful life.
a. Both I and II c. Neither I nor II
b. II only d. I only

9. Which one of the following is not a component of the cost of internally generated intangible asset?
a. Cost of materials and services used or consumed in generating the intangible asset.
b. Cost of employee benefits arising from the generation of the intangible asset.
c. Fees to register a legal right
d. Expenditure on training staff to operate the asset.

10. Which statement is incorrect concerning internally generated intangible asset?

a. To assess whether an internally generated intangible asset meets the criteria for recognition, an enterprise classifies the generation of the
asset into a research phase and a development phase.
b. The cost of an internally generated asset comprises all directly attributable costs necessary to create, produce and prepare the asset for its
intended use.
c. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance should not be recognized as
intangible assets.
d. Internally generated goodwill may be recognized as an intangible asset.

11. The following expenditures should be expensed when incurred, except

a. Advance payment for delivery of goods or rendering of services
b. Relocation costs
c. Advertising and promotion costs
d. Organization and other start up costs

12. A lessee incurred costs to construct office space in a leased warehouse. The estimated useful life of the office is 10 years. The remaining term of the
nonrenewable lease is 15 years. The cost should be
a. Capitalized as leasehold improvement and depreciated over 15 years.
b. Capitalized as leasehold improvement and depreciated over 10 years.
c. Capitalized as leasehold improvement and expensed in the year in which the lease expires
d. Expensed as incurred

13. Research is
I. Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
II. Application of research finding or other knowledge to a plan or design for the production of new or substantially improved material, device,
product, process, system or service, prior to the commencement of commercial production or use.
a. I only c. II only
b. Both I and II d. Neither I nor II

14. If a company constructs a laboratory building to be used as a research and development facility, the cost of the laboratory building is matched against
earnings as
a. Research and development expense in the period of construction
b. Depreciation deducted as part of research and development cost
c. Depreciation or immediate writeoff depending on company policy
d. An expense at such time as productive research has been obtained from the facility

15. A research and development activity for which the cost should be expensed as incurred is
a. Engineering follow-through in early phase of commercial production
b. Design, construction, and testing of preproduction prototypes and models
c. Trouble shooting in connection with breakdowns during commercial production
d. Periodic design changes to existing products

16. On January 1, 2005, Haze Company had capitalized costs for a new computer software product with an economic life of five years. Sales for 2005
were 30 percent of expected total sales of the software and the pattern of future sales can be measured reliably. At December 31, 2005, the software
had a net realizable value equal to 90 percent of the capitalized cost. What percentage of the original capitalized cost should be reported as the net
amount on the December 31, 2005 balance sheet?
a. 70% c. 72%
b. 80% d. 90%

Page 21 of 34
17. The proper accounting for the costs incurred in creating computer software products is to
a. Capitalize all costs until the software is sold.
b. Charge research and development expense when incurred until technological feasibility has been established for the product.
c. Charge research and development expense only if the computer software has alternative future use.
d. Capitalize all costs as incurred until a detailed program design or working model is created.

18. Which statement is correct regarding the proper accounting treatment for internal-use software costs?
I. Preliminary costs should be capitalized as incurred.
II. Application and development costs should be capitalized as incurred.
a. a. I only c. II only
b. c. Both I and II d. Neither I and II

19. Which of the following statements is incorrect regarding internal – use software?
a. The application and development costs of internal-use software should be amortized on the straight line basis unless another systematic and
rational basis is more appropriate.
b. Internal-use software is considered to be software that is marketed as a separate product or as part of a product or process.
c. The costs of testing and installing computer hardware should be capitalized as incurred.
d. The costs of training and application maintenance should expensed as incurred.

20. Which following statements is correct regarding the treatment of start-up activities related to the opening of the new facility?
I. Cost of raising capital should be expensed as incurred.
II. Costs of acquiring or constructing long-lived assets and getting them ready for their intended use should be expensed as incurred.
a. I only c. II only
b. Both I and II d. Neither I nor II

21. Operating losses incurred during the start up years of a new business should be
a. Accounted for and reported like the operating losses of any other business
b. Written off directly against retained earnings
c. Capitalized as a deferred charge and amortized over 5 years.
d. Capitalized as an intangible asset and amortized over 5 years.

22. Which of the following is not a method of computing goodwill?

a. Capitalize excess earnings.
b. Discount the excess earnings for a limited number of years.
c. Capitalize total average earnings and subtract the fair value of net assets.
d. All of these are methods of computing goodwill.

23. Identifiable intangible assets include all of the following, except

a. Computer software c. Franchise
b. Trademark d. Goodwill

24. In accordance with the new international accounting standard, which statement is correct?
I. Intangible assets with finite life are amortized over their useful life.
II. Intangible assets with indefinite life are not amortized but tested for impairment at least annually.
a. I only c. II only
b. Both I and II d. Neither I nor II

Problems

1. Maine Company incurred P900,000 of research and development cost to

develop a product for which a patent was granted on January 2, 20x1. Legal fees and other costs associated with the registration of the patent totaled
P200,000. On July 31, 20x1, Maine paid P400,000 for legal fees in a successful defense of the patent. The total amount capitalized for this patent
through July 31, 20x1 should be
a. 1,500,000
b. 1,100,000
c. 600,000
d. 200,000

2. Alden Company acquired three patents in January 20x1. The patents have
different lives as indicated in the following schedule:

Cost Remaining useful life Remaining legal life

Patent A 2,000,000 10 8
Patent B 3,000,000 5 10
Patent C 6,000,000 Indefinite 15

Patent C is believed to be uniquely useful as long as the company retains the right to use it. In June 20x1, the company successfully defended its right
to Patent B. Legal fees of P800,000 were incurred in this action. The company’s policy is to amortize intangible assets by the straight-line method to
the nearest half year. The company reports on a calendar-year basis. The amount of amortization that should be recognized for 20x1 is
a. 1,330,000
b. 1,250,000
c. 2,050,000
d. 950,000

3. Hearty Company purchased a patent on January 1, 20x8, for P3,570,000. The

patent was being amortized over its remaining legal life of 15 years expiring on January 1, 2023. During 2011 Hearty determined that the economic
benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet as patent,
net of accumulated amortization, at December 31, 2011?
a. 2,618,000
b. 2,520,000
c. 2,448,000
d. 2,142,000

5. On January 2, 2008, Maine Company purchased a patent for a new consumer product for P3,000,000. At the time of purchase, the patent was valid for
15 years. However, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 2011, the
product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should
Maine charge against income during 2011, assuming amortization is recorded at the end of such year?
a. 1,800,000
b. 2,400,000

Page 22 of 34
 c. 2,100,000
d. 300,000

6. On January 1, 20x1, Uno Company bought a patent from MaiDen Company for P6,000,000. Uno retained an independent consultant who estimated the
patent’s life to be indefinite. Its carrying amount in MaiDen’s accounting records was P4,000,000. In Uno’s December 31, 20x1 balance sheet, what
amount should be reported as patent?
a. 6,000,000
b. 5,700,000
c. 3,800,000
d. 3,600,000

7. On January 1, 20x1, Dos Company signed an agreement to operate as a franchise of Bay Company for an initial franchise fee of P30,000,000. Of this
amount, P10,000,000 was paid when the agreement was signed and the balance is payable in equal annual payment of P5,000,000 beginning December
31, 20x1. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Dos’s credit rating
indicates that it can borrow money at 12% for a loan of this type. Information on present value factors at 12% for 4 period is:
Present value of 1 0.64
Present value of an ordinary annuity of 1 3.04

How much is the cost of the franchise?

a. 30,000,000
b. 15,200,000
c. 25,200,000
d. 21,600,000

8. Celine Company engaged your services to compute the goodwill in the purchase of Margaux Company which provided the following:

Net income Net assets

20x8 1,400,000 6,000,000
20x9 1,600,000 8,000,000
2x10 2,000,000 8,800,000
2x11 2,200,000 9,200,000

It is agreed that goodwill is measured by capitalizing excess earnings at 25% with normal return on average net assets at 15%. How much is the
purchase price for Margaux Company?
a. 11,600,000
b. 10,400,000
c. 11,200,000
d. 11,000,000

9. Lebron Company is negotiating to acquire Dwyane Company. Lebron manufactures and sells wood burning stoves and Dwyane Company produces
parts that are required to manufacture stoves. Dwyane enjoys an exceptional reputation and Lebron management believes it can continue Dwyane’s
level of income and satisfy its own need for parts. Under the contemplated arrangement, Lebron will negotiate for the acquisition of the net assets of
Dwyane Company. The recorded amounts and current values of the assets and liabilities of Dwyane are:

Assets Liabilities
Recorded amounts 20,000,000 8,000,000
Current values 25,000,000 5,000,000

Dwyane’s earnings for the past 5 years averaged P5,000,000. This is believed to be the reasonable estimate of future income. The level of income
normally experienced by enterprises similar to Dwyane is 15%. Lebron and Dwyane agreed to capitalize average excess earnings at 25% in estimating
the value of goodwill. How much should Lebron pay in acquiring Dwyane?
a. 20,000,000
b. 28,000,000
c. 32,000,000
d. 20,500,000

10. The owners of Miami Company are planning to sell the business to new interests. The cumulative net earnings for the past 5 years was P9,000,000
including casualty loss of P500,000. The current value of net assets of Miami Company was P20,000,000. Goodwill is determined by capitalizing
average earnings at 8%. What is the amount of goodwill?
a. 1,900,000
b. 1,700,000
c. 3,750,000
d. 1,250,000

11. On January 1, 20x1, Maroon 5 purchased Topaz Company at a cost that resulted in recognition of goodwill of P5,000,000 having an expected benefit
period of 10 years. During January of 20x1, Maroon 5 spent an additional P2,000,000 on expenditures designed to maintain goodwill. Due to these
expenditures, at December 31, 20x1, Maroon 5 estimated that the benefit period of goodwill was indefinite. In its December 31, 20x1 balance sheet,
what amount should Maroon 5 report as goodwill?
a. 5,000,000
b. 7,000,000
c. 4,750,000
d. 4,500,000

12. The Script Company has been experiencing significant losses in prior years. On December 31, 20x1, the assets and liabilities are:

Cash 10,000,000
Accounts receivable 20,000,000
Inventory 30,000,000
Property, plant and equipment 50,000,000
Goodwill 5,000,000
Liabilities 40,000,000

On December 31, 20x1, the fair value of the net assets of The Script is P62,000,000. How much is the impairment loss applicable to goodwill?
a. 13,000,000
b. 8,000,000
c. 5,000,000
d. 0

Page 23 of 34
13. Luzon Company purchased Jolo Company for P100,000,000. The net assets of Jolo Company on the date of acquisition amounted to P80,000,000.
Thus, there is a goodwill of P20,000,000. Jolo Company has three segments, each of which is considered a cash generating unit. The goodwill is
allocated respectively to segments One, Two and Three, P5,000,000, P6,000,000 and P9,000,000.

On December 31, 20x1, Segment One suffered significant losses and its recoverable amount is P30,000,000. On December 31, 20x1, the carrying
amounts are as follows:

Segment One 28,000,000

Segment Two 50,000,000
Segment Three 67,000,000
Goodwill 20,000,000

In its 20x1 income statement, Luzon Company should report impairment loss at
a. 3,000,000
b. 5,000,000
c. 2,000,000
d. 1,000,000

14. On January 1, 20x9, Chris August Company signed a 12-year lease for a building. Chris August has an option to renew the lease for an additional 8-
year period on or before January 1, 2x13. During January 2x11, Chris August made substantial improvements to the building. The cost of the
improvements was P3,600,000, with an estimated useful life of 15 years. At December 31, 2x11, Chris August intended to exercise the renewal option.
Chris August has taken a full year’s amortization on this improvement. In the December 31, 2x11, balance sheet, the carrying amount of this leasehold
improvement should be
a. 3,240,000
b. 3,360,000
c. 3,400,000
d. 3,300,000

15. On January 1, 20x9, Puntavedra Company signed an eigth-year lease for office space. Puntavedra has the option to renew the lease for an additional
six-year period on or before January 1, 2x15. During January 2x11, Puntavedra incurred the following costs.

General improvements to the leased premises with useful 5,400,000

life of 10 years
Office furniture and equipment with useful life of 8 years 2,400,000
Moveable assembly line equipment with useful life of 5 years 1,800,000

At December 31, 2x11, Puntavedra’s intention as to the exercise of the renewal option is uncertain. A full depreciation of leasehold improvement is
taken for year 2011. In Puntavedra’s December 31, 2x11 balance sheet, accumulated depreciation of leasehold improvement should be
a. 1,200,000
b. 1,300,000
c. 540,000
d. 900,000

16. Adam Sandler Company begins construction of a new facility. Following are some of the costs incurred in conjunction with the startup activities of the
new facility:

Production equipment 1,500,000

Travel costs of salaried employees 400,000
License fees 50,000
Training of local employees for production and maintenance operations 1,300,000
Advertising costs 100,000

What portion of the organizational costs will be expensed?

a. 1,700,000
b. 1,850,000
c. 3,350,000
d. 1,300,000

17. JVB Company incurred research and development costs in 20x1 as follows:

Equipment acquired for use in various R&D projects 6,000,000

Depreciation on the above equipment 1,200,000
Materials used 3,000,000
Compensation costs of personnel 4,000,000
Outside consulting fees 1,500,000
Indirect costs appropriately allocated 1,300,000

The 20x1 total research and development expense should be

a. 11,000,000
b. 15,800,000
c. 9,700,000
d. 9,800,000

18. JCG Company incurred the following costs during 20x1:

Design of tools, jigs, molds and dies involving new technology 2,500,000
Modification of the formulation of a process 3,200,000
Trouble shooting in connection of breakdowns during commercial production
2,000,000
Adaptation of an existing capability to a particular customer’s need as part of a continuing commercial activity
2,200,000

In its 20x1 income statement, JMB should report research and development expense of
a. 2,500,000
b. 3,200,000
c. 4,700,000
d. 5,700,000

Page 24 of 34
19. Heat Company provided the following information relevant to the research and development expenditures for the year 20x1:

Current period depreciation on the building housing R and D activities 1,500,000

Cost of market research study 1,000,000
Current period depreciation on a machine used in R and D activities 500,000
Salary of R and D director 1,200,000
Salary of Vice-President who spends ¼ of his time overseeing
R and D activities 2,400,000
Pension costs for salary of R and D director 50,000
Pension costs for salary of Vice-President 100,000

The R and D expense for the current period should be

a. 3,875,000
b. 4,875,000
c. 5,750,000
d. 3,800,000

20. JMB Company made the following expenditures relating to Product X:

* Legal costs to file a patent on Product X. Production of the finished product would not have been undertaken 500,000
without the patent.
* Special equipment to be used solely for development of Product X. The equipment has no other use and has an 4,000,000
estimated useful life of four years.
* Labor and material costs incurred in producing a prototype model 3,000,000
* Cost of testing the prototype 2,000,000

What is the total amount of costs that will be expensed when incurred?
a. 9,000,000
b. 9,500,000
c. 6,000,000
d. 5,000,000

21. On January 1, 20x1, Abra Company had capitalized cost of P10,000,000 for a new computer software product with an economic life of 4 years. Sales
for 20x1 for the software product amounted to P4,000,000. The total sales of the software over its economic life are expected to be P20,000,000. In its
20x1 income statement, Abra should record amortization of computer software at
a. 2,500,000
b. 5,000,000
c. 2,000,000
d. 0

22. During 20x1, GSP Company incurred costs to develop and produce a routine, low-risk computer software product as follows:

Completion of detail program design 1,500,000

Cost incurred for coding and testing to establish technological feasibility 500,000
Other coding costs after establishment of technological feasibility 2,500,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product masters for training materials 3,000,000
Duplication of computer software and training materials from
product master 4,000,000
Packaging product 1,000,000

1. In the December 31, 20x1 balance sheet, what amount should be capitalized as software cost subject to amortization?
a. 7,500,000
b. 4,500,000
c. 9,500,000
d. 8,000,000

2. In the December 31, 20x1 balance sheet, what amount should be reported as inventory?
a. 5,000,000
b. 7,000,000
c. 4,000,000
d. 6,500,000

INVESTMENT PROPERTY
Theories

1. Fair value is the amount for which an asset:

a. Could be exchanged by related parties.
b. Would realize as scrap value.
c. Could be exchanged by knowledgeable, independent parties.

2. Investment property can be:

a. Land.
b. A building.
c. Part of a building.
d. Both land and building.
e. All of these.

3. Investment property can be held by:

1. The owner.
2. A lessor, under a finance lease.

Page 25 of 34
 3. A lessee, under a finance lease.
a. 1 & 2.
b. 1& 3.
c. All.

4. Owner-occupied property:
a. Can be treated as investment property.
b. Cannot be treated as investment property.
c. Can sometimes be treated as investment property.

5. A property that is held by a lessee, under an operating lease, may be held as an investment property, but only if:
a. It is a hotel.
b. The lessee uses the fair value model.
c. The operating lease exceeds 20 years.

6. If property held under an operating lease is classified as investment property:

a. All property held under operating leases are classified as investment properties.
b. All investment property will be accounted for using the fair value model.
c. Depreciation will no longer be charged.

7. Which of the following are examples of investment properties:

(1) Land held for long-term capital appreciation.
(2) Land held for an undetermined future use. The land is regarded as held for capital appreciation.
(3) A building owned by the undertaking (or held by the undertaking under a finance lease) and leased out, via one, or more, operating leases.
(4) A building that is vacant, but is held to be leased out via one, or more, operating leases.
(5) Property held for sale in the ordinary course of business.
(6) Property being built on behalf of third parties.
(7) Owner-occupied property.
(8) Property that is being built for use as investment property.
(9) Existing investment property that is being redeveloped for continued use as investment property.
(10) Property that is leased to another undertaking, under a finance lease.

a. 1-10.
b. 1-7.
c. 1-4.
d. 1-4 + 9.
e. 1-7 +10.

8. If a property is partly an investment property, and partly owner-occupied, the firm should account for the property:
a. As investment property.
b. As owner-occupied.
c. Each portion should be accounted for separately.

9. If a firm provides significant ancillary services to tenants in its property:

a. It may have to be classified as owner-occupied, rather than an investment property.
b. It may have to be classified as investment property, rather than as owner-occupied.
c. The service fees should be capitalized.

10. A parent company leases a property to its subsidiary.

It may be classified as an investment property in the:
a. Subsidiary’s accounts.
b. Consolidated accounts.
c. Parent company’s individual financial statements.

11. Repairs and maintenance costs are normally:

a. Capitalized.
b. Expensed in the income statement as incurred.
c. Recorded as deferred expenses.

12. If the costs of a major repair (for example, replacement of walls) are capitalised:
a. They must be shown as a separate asset.
b. Any remaining costs of a previous inspection must be written off.
c. The board of directors must be notified immediately.

13. Elements of cost of an investment are:

i. Its purchase price
ii. Legal costs.
iii. Property transfers taxes.
iv. Overheads of the property department relating to the purchase of the asset.
a. i-iv
b. i-iii
c. i-ii
d. I

14. The following costs:

(i) start-up costs (unless they are necessary to bring the property to the condition necessary for it to be capable of operating in the manner intended by
management).
(ii) operating losses incurred before the investment property achieves the planned level of occupancy.
(iii) abnormal amounts of wasted material, labour or other resources incurred in constructing or developing the property.
should be accounted for as:
a. Extraordinary items.
b. (Capitalized as) fixed assets.

Page 26 of 34
 c. Expenses.

15. If payment for an investment property is deferred beyond normal credit terms, any additional payment above the cash cost of the asset will be
accounted for as:
a. Cost of fixed asset.
b. Borrowing cost.
c. Repairs and maintenance.

16. The cost of a property interest held under a lease should be valued at:
a. Fair value.
b. The present value of the minimum lease payments.
c. The higher of a & b.
d. The lower of a & b.

17. If one or more assets are exchanged for a new asset, the new asset is valued at:
a. Replacement cost.
b. Fair value.
c. Residual value.

18. In the case of an exchange of assets, if the acquired asset cannot be valued:
a. The cost of the asset given up is used.
b. The residual value is used.
c. The asset cannot be capitalized.

19. An undertaking can choose either the cost model or the revaluation model, as its accounting policy for investment property. It must apply the chosen
model to:
a. All fixed assets.
b. All investment property.
c. Major assets.

20. A gain arising from a change in the fair value of investment property should be recorded:
a. In the revaluation reserve.
b. As an extraordinary item.
c. In the income statement.

21. Fair value includes:

a. Special financial arrangements.
b. Transaction costs incurred in the sale.
c. Both a & b.
d. Neither a nor b.

22. Fair value includes:

a. additional value derived from the creation of a portfolio of properties in different locations;
b. synergies between investment property and other assets;
c. legal rights, or legal restrictions, that are specific only to the current owner; and
d. tax benefits, or tax burdens, that are specific to the current owner.
e. All of a-d.
f. None of a-d.

23. Value in use includes:

a. Additional value derived from the creation of a portfolio of properties in different locations;
b. Synergies between investment property and other assets;
c. Legal rights, or legal restrictions, that are specific only to the current owner; and
d. Tax benefits, or tax burdens, that are specific to the current owner.
e. All of a-d.
f. None of a-d.

24. Fair value accounts for future capital expenditure that will improve the property:
a. By discounting it to present value.
b. By noting it as a contingent liability.
c. By not reflecting it.

25. Using the cost model, the asset in accounted for at:
a. Cost.
b. Cost less accumulated depreciation.
c. Cost less accumulated depreciation and any impairment losses.

26. Transfers to, or from, investment property is made only when there is a change in use, evidenced by:
a. Start of owner-occupation - transfer from investment property to owner-occupied property;
b. Start of development with a view to sale, - transfer from investment property to inventories;
c. End of owner-occupation, - transfer from owner-occupied property to investment property;
d. Start of an operating lease to another party, - transfer from inventories to investment property;
e. End of construction or development, - transfer from property in the course of construction, or development, to investment property.
f. Any of a-e.
g. None of a-e.

27. When an undertaking decides to dispose of an investment property without development:

a. It is transferred to inventory.
b. It continues to treat the property as an investment property.
c. It is reclassified as owner-occupied.

Page 27 of 34
28. If an undertaking begins to redevelop an existing investment property for continued use as investment property:
a. It is transferred to inventory.
b. It continues to treat the property as an investment property.
c. It is reclassified as owner-occupied.

29. When an undertaking uses the cost model, transfers between investment property, owner-occupied property and inventories:
a. Do not change the carrying amount of the property transferred.
b. Should be revalued at the date of transfer.
c. Are prohibited.

30. For a transfer from investment property, carried at fair value, to owner-occupied property or inventories, the property’s cost for subsequent accounting
is:
a. Its original cost.
b. Its fair value, at the date of change in use.
c. Its original cost, less accumulated depreciation.

31. For a transfer from inventories to investment property that will be carried at fair value, any difference between the fair value of the property at that date
and its previous carrying amount is:
a. Recognized in income statement.
b. Discounted to present value.
c. Noted it as a contingent liability.
d. Written off over the life of the asset.

32. When an undertaking completes the construction, or development, of a self-built investment property that will be carried at fair value, any difference
between the fair value of the property at that date, and its previous carrying amount:
a. Recognized in income statement.
b. Discounted to present value.
c. Noted it as a contingent liability.
d. Written off over the life of the asset.

33. Compensation from third parties for items impaired, lost or sequestrated should be recorded as income:
a. When the item is lost.
b. When the compensation is receivable.
c. When the cash is received.

34. The carrying amount of an item is derecognized (written out of the balance sheet):
a. On disposal.
b. On entering into a finance lease.
c. Either.

35. A gain on the sale of an asset should be recorded as:

a. A capital gain in equity.
b. A gain in the income statement.
c. Revenue.

36. The gain, or loss, arising on the sale of an asset is:

a. The cash proceeds.
b. The net proceeds minus the carrying value of the asset.
c. The net proceeds minus the residual value of the asset.

Problems

1. Rosemarie Company and its subsidiaries provided the following properties owned by the group.

Land held by Rosemarie for undetermined future use 1,000,000

Vacant building owned by Rosemarie to be leased out under an Operating lease 2,000,000
Property held by Rosemarie for use in production 4,000,000
Property held by a subsidiary of Rosemarie, a real estate firm, in the
Ordinary course of its business 3,000,000
Building owned by subsidiary of Rosemarie and for which the subsidiary
Provides security and maintenance services to the lessees 2,500,000
Land leased by Rosemarie to a subsidiary under an operating lease 1,500,000
Equipment leased by Rosemarie to an unrelated party under an operating lease 500,000
Building under construction by Rosemarie for use as investment Property 3,500,000

In the consolidated statement of financial position of Rosemarie Company and its subsidiaries, what total amount should be shown as investment property?

2. Analiza Company purchased an investment property on January 1, 2007 at a cost of P2,200,000. The property had a useful life of 40 years and at
December 31, 2009 had a fair value of P3,000,000. On January 1, 2010 the property was sold for net proceeds of P2,900,000. Analiza Company uses
the cost model to account for investment properties.

What is the gain or loss to be recognized in profit or loss for the year ended December 31, 2010 regarding the disposal of the property.

3. Nova Company owns three properties which are classified as investment properties. Details of the properties are as follows:

Initial Cost FV at 12/31/09 FV at 12/31/10

Property 1 2,700,000 3,200,000 3,500,000
Property 2 3,450,000 3,000,000 2,800,000

Page 28 of 34
 Property 3 3,300,000 3,900,000 3,400,000

Each property was acquired in 2005 with a useful life of 50 years. The entity’s accounting policy is to use the fair value model for investment properties.

What is the gain or loss to be recognized in profit or loss for the year ended December 31, 2010?

4. Racquel Company has a single investment property which had an original cost of P5,800,000 on January 1, 2007. At December 31, 2009, the fair value
was P6,000,000 and at December 31, 2010 the fair value was P5,900,000. On acquisition, the property had a useful life of 40 years.

What should be the expense recognized in Raquel’s profit or loss for the year ended December 31, 2010 under the fair value model and the cost model,
respectively?

5. Jane Company is a leasee of two properties. Below is the detail of the said properties:
I. Property 1: Leased under a finance lease agreement. The property was recognized in the books at 4,000,000. The property was leased for
two purposes. One fourth of the property shall be used as administrative and office space while the other portion shall be used for rental
purposes.
II. Property 2: Leased under an operating lease agreement. The property is being subleased to other entities. Jane recorded this property as an
asset at P2,800,000 and will be applying the cost model for subsequent measurement.

How much will be recognized as investment property, ignoring effects of depreciation?

6. Alcatraz Company owns two properties held for rental purposes. Below is the detail of such properties:
I. Property 1: Carried in the books at P5 million. Half is being rented out by subsidiaries while half is rented out by unrelated parties. All lease
contracts are classified as operating lease.
II. Property 2: A hotel building carried in the books at P7 million. Rooms are rented out as accommodation to guests who pay for room
accommodation, complete meals and other in-house amenities.

How much will be recognized as investment property, ignoring effects of depreciation?

7. Botswana Company constructed a building and incurred the following costs:

I. Materials, labor and overhead 8,000,000
II. Professional and legal fees 250,000
III. Start-up cost to test facilities installed in the building 80,000
IV. Other wastages, half are expected based on the nature
of the construction 100,000
V. Initial operating losses 30,000

The property will be 20% owner occupied, 60% rented out to outsiders and the remaining leased out by subsidiaries of Botswana? At what amount will
the Investment property be initially recognized in the books of Botswana Company?

8. Calabarzon Company purchased a building to be classified as investment property for a total consideration of P6 million by paying P1.5 million down
payment and the balance payable in 3 equal annual installments starting on the date of purchase. The prevailing interest on this type of liability is 12%.
Calabarzon incurred 30,000 for broker’s fee and 45,000 for the transfer of the legal title. At what amount will the property be initially carried in the
books of Calabarzon?

9. On January 1, 2014, Davao Shrimp Company leased a property from RamBAu Company under a finance lease agreement. The property shall be
treated by Davao as an investment property. At the date of transaction, RamBau provided a contract that Davao shall pay annual rent of 900,000 for 10
years starting on December 31, 2014. Davao paid RamBau 300,000 cash as a premium to win the bid over the property. The prevailing market rate is
10%. At what amount shall the investment property be initially recognized?

10. On March 31, 2014, Ecuador Company purchased equipment amounting to 500,000 and building amounting to 3,500,000, both intended for rental
purposes. At the end of the year, the equipment has a fair value of 460,000 while the building is estimated to have a market value of 3,700,000.
Estimated transaction cost to sell the equipment and building at year-end is 50,000 and 130,000, respectively. At what amount will the investment
property be carried at year-end assuming the fair value model is used?

11. Florida Incorporated has an investment property that is carried at tis fair value on October 31, 2014 for 850,000. On the same date, the entity decided to
reclassify such as a PPE. Florida’s PPE are all measured using the cost model. If the investment property was treated as a PPE from the date it was
acquired and measured using the cost model, it would have a carrying value of 800,000. At what amount will the investment property be recognized as
PPE on the date of reclassification?

12. Gotham City Company has investment property carried at 400,000 and has fair value of 450,000. On the same date, Gotham decided to reclassify it as
inventory. The investment properties of the entity are measured using the cost model. At what amount will the investment property be recognized as
inventory at the date of reclassification?

Page 29 of 34
AGRICULTURE
Theories

1. IAS 41 should be applied to account for the following when they relate to agricultural activity:
(i) Biological assets.
(ii) Agricultural produce at the point of harvest.
(iii) Certain government grants.
(iv) Land related to agricultural activity.
(v) Intangible assets related to agricultural activity.
a. i
b. i-ii
c. i-iii
d. i-iv
e. i-v

2. IAS 41 is applied to agricultural produce:

a. Before the harvest.
b. Only at the point of harvest.
c. After the harvest.
d. Before, during and after the harvest.

3. Which of the following are accounted for by IAS 41?

PRODUCT Yes No
Yarn    
Lumber    
Carpet    
Sheep    
Trees in a plantation forest    
Wool    
Logs    
Thread    
Clothing    
Sugar    
Harvested cane    
Milk    
Plants    
Dairy cattle    
Cotton    
Cheese    
Sausages    
Cured hams    
Carcass    
Leaf    
Grapes    
Picked fruit    
Tea    
Cured tobacco    
Wine    
Processed fruit    
Pigs    
Bushes    
Vines    
Fruit trees    

4. Agricultural activity is the management of the biological transformation of biological assets:

(I) For sale.
(II) Into agricultural produce.
(III) Into additional biological assets.
a. i
b. i-ii
c. i-iii
d. i-iv

Page 30 of 34
 e. i-v

5. Agricultural activity covers a diverse range of activities; for example:

(i) Raising livestock.
(ii) Forestry.
(iii) Annual or perennial cropping.
(iv) Cultivating orchards and plantations.
(v) Floriculture, and aquaculture (including fish farming).
(vi) Food processing.
a. i
b. i-ii
c. i-iii
d. i-iv
e. i-v
f. i-vi

6. An active market is a market where all the following conditions exist:

(i) The items traded within the market are homogeneous.
(ii) Willing buyers, and sellers, can normally be found at any time.
(iii) Prices are available to the public.
(iv) The market trades every day.
a. i
b. i-ii
c. i-iii
d. i-iv

7. An undertaking should record a biological asset, or agricultural produce, only when:

(i) The undertaking controls the asset, as a result of past events.
(ii) Future benefits, associated with the asset, will flow to the undertaking.
(iii) The fair value, or cost, of the asset can be measured reliably.
a. i
b. i-ii
c. i-iii

8. Point-of-sale costs include:

(i) Commissions to brokers and dealers.
(ii) Levies by regulatory agencies.
(iii) Levies by commodity exchanges.
(iv) Transfer taxes and duties.
(v) Transport, and other costs, necessary to transport assets to a market.
a. i
b. i-ii
c. i-iii
d. i-iv
e. i-v

9. An onerous contract will generate:

a. A profit.
b. A breakeven.
c. A loss.
10. In determining fair value, if an active market does not exist use:
(i) The most recent market transaction price, provided that there has not been a significant change in circumstances between the date of that
transaction, and the balance sheet date.
(ii) Market prices for similar assets, with adjustment to reflect differences; and
(iii) Sector benchmarks.
(iv) Contract prices.
a. i
b. i-ii
c. i-iii
d. i-iv

11. The information sources may suggest different conclusions as to the fair value of a biological asset, or agricultural produce. Use:
a. The most reliable estimate.
b. The lowest figure
c. The average figure.

12. Market-determined prices may not be available for a biological asset in its present condition. In these circumstances, use:
a. Contract price.
b. The present value of expected net cash flows from the asset, discounted at a current market, pre-tax rate in determining fair value.
c. The present value of expected net cash flows from the asset, discounted at a current market, post-tax rate in determining fair value.

13. The definition of the present condition of a biological asset:

a. Excludes any increases in value from additional biological transformation, and future activities of the undertaking.
b. Includes any increases in value from additional biological transformation, and future activities of the undertaking.
c. Includes any increases in value from additional biological transformation, and excludes future activities of the undertaking.

14. In calculating fair value of a biological asset, include:

(i) Cash flows for financing the assets.
(ii) Taxation.
(iii) Replanting costs after the harvest.

Page 31 of 34
 a. i
b. i-ii
c. i-iii
d. None of these.

15. The cost of a biological asset may sometimes approximate fair value, particularly when:
(i) Little biological transformation has taken place since initial cost incurrence.
(ii) The impact of the biological transformation on price is not expected to be material.
(iii) There is no active market.
a. i
b. i-ii
c. i-iii
d. None of these.

16. A gain (or loss) arising on initial recognition of a biological asset at ‘fair value less estimated point-of-sale costs’ and from a change in ‘fair value less
estimated point-of-sale costs’ of a biological asset should be:
a. Included in net profit, for the period in which it arises.
b. Capitalized into inventory.
c. Capitalized into equity.

17. A gain (or loss) may arise on initial recognition of a biological asset:
(i) Because estimated point-of-sale costs are deducted in determining ‘fair value less estimated point-of-sale costs’ of a biological asset.
(ii) When a calf is born.
(iii) As a result of harvesting.
a. i
b. i-ii
c. i-iii
d. None of these.

18. When you have previously measured a biological asset at its ‘fair value less estimated point-of-sale costs’, and no new fair value can be determined,
you:
a. Continue to measure the biological asset at its ‘fair value less estimated point-of-sale costs’ until disposal.
b. Measure it at its ‘fair value less estimated point-of-sale costs’.
c. Measure it at the present value of expected net cash flows from the asset, discounted at a current market, post-tax rate.

19. An unconditional grant related to a biological asset measured at its ‘fair value less estimated point-of-sale costs’ should be recorded as income:
a. Only when cash is received.
b. Only when the grant becomes receivable.
c. Only when the goods are sold.

20. If a grant related to a biological asset measured at its ‘fair value less estimated point-of-sale costs’ is conditional, including where a grant requires an
undertaking not to engage in specified agricultural activity, an undertaking should record the grant as income only:
a. Only when cash is received.
b. Only when the grant becomes receivable.
c. When the conditions attaching to the grant are met.

Problems

Clothing 85,530.00 Tea 94,615.00

Cotton plants 32,264.00 Harvested cotton 92,016.00
Cured Ham 35,317.00 Sugar 55,809.00
Dairy cattle 52,808.00 Milk 57,399.00
Fruit trees 43,454.00 Picked fruit 91,544.00
Grape vines 63,529.00 Picked grapes 10,423.00
Logs 81,623.00 Yarn 40,948.00
Lumber 24,928.00 Carpet 49,163.00
Maize Plants 33,391.00 Wheat Plants 90,656.00
Oil palms 83,796.00 Picked fruit 68,586.00
Palm oil 46,223.00 Wine 86,645.00
Pigs 72,617.00 Carcass 12,773.00
Rubber products 82,401.00 Processed fruit 80,899.00
Rubber trees 71,332.00 Harvested latex 40,458.00
Sausages 56,146.00 Cheese 63,506.00
Sheep 64,041.00 Wool 16,199.00
Sugarcane 15,135.00 Harvested cane 24,235.00

Page 32 of 34
 Tea bushes 63,845.00 Picked leaves 55,260.00
Thread 42,107.00 Cured tobacco 20,245.00
Tobacco plants 34,996.00 Picked leaves 99,110.00
Trees in a timber plantation 40,975.00 Felled trees 35,848.00

17. How much is the total biological assets?

18. How much is the total bearer plants?
19. How much is the total agricultural produce?
20. How much is included in inventory?

21. The following information are made available by Robin Farms, of its dairy livestock:
Carrying amount, January 1, 2012 450,000
FV less cost to sell of livestock purchased
during the period 250,000
Increase in the fair value less estimated cost
to sell attributed to physical changes 220,000
Increase in the fair value less estimated cost
to sell attributed to price changes 64,000
Total selling price less cost to sell of livestock
sold during the period 290,000

At what amount should the biological assets be carried on the statement of financial position at December 31, 2012?
a. 1,274,000
b. 764,000
c. 694,000
d. 630,000

22. Using the same information in the previous item, what amount shall be included in gross income of Robin Farms as a result of the transactions on its
dairy livestock?
a. 64,000
b. 220,000
c. 284,000
d. 290,000

Use the following information to answer the next four questions:

Twenty 2-year old cattle were held at January 1, 2012. Five 2-year old cattle were purchased on January 2, 2012 for P12,000 each and 5 calves were born on
January 2, 2012. No cows or calves were disposed during the period. Per unit fair values less cost to sell were as follows:
January 1, 2012
2-year old cattle 12,000
Newborn cattle 4,000
December 31, 2012
2-year old cattle 13,000
3-year old cattle 15,000
1-year old cattle 7,000
Newborn cattle 5,000

23. The company records separately the increase in fair value less cost to sell due to physical and price changes. How much shall be taken to profit or loss
as a gain arising from change in fair value due to physical change?
a. 30,000
b. 60,000
c. 80,000
d. 110,000

24. How much shall be taken to profit or loss as a gain arising from changes in fair value due to price change?
a. 30,000
b. 60,000
c. 90,000
d. 110,000

25. What amount shall be presented in the statement of financial position on December 31, 2012 under the caption Biological Assets?
a. 320,000
b. 350,000
c. 390,000
d. 410,000

26. Assume that ten 3-year old cattle were sold realizing net proceeds of P15,000 on each cattle, how much gross income shall be reported on the
company’s profit or loss for the year ended December 31, 2012?
a. 80,000
b. 110,000
c. 150,000
d. 260,000

27. The following information pertains to Nestle Company’s biological assets at December 31, 2012:
Price of the assets in an active market 5,000,000
Estimated brokers’ commissions 50,000

Page 33 of 34
 Transport and other costs expected to be
incurred to bring the asset to the market 40,000
Selling price in a binding sale agreement 5,100,000

At what amount should the biological assets be presented on the statement of financial position?
a. 4,910,000
b. 4,950,000
c. 5,000,000
d. 5,050,000

28. Be-Mig Farms Company is engaged in raising dairy livestock. Information regarding its dairy activities is found below:
Carrying value at January 1, 2012 10,000,000
FV less cost to sell of biological asset purchased 4,000,000
Gain arising from price changes 800,000
Gain arising from physical change 1,500,000
Decrease due to sales 2,000,000
Decrease due to harvest 500,000

What is the carrying amount of Be-Mig’s biological assets on December 31, 2012 statement of financial position?
a. 13,800,000
b. 14,300,000
c. 15,800,000
d. 16,300,000

***end of handouts***

Page 34 of 34