RIZAL REVIEW CENTER

FINANCIAL ACCOUNTING AND REPORTING F. Mateos

Property, Plant and Equipment October 2019

Definition and Composition

 Property, plant and equipment are tangible assets that are
o Held by an enterprise for use in the production or supply of goods or services, for rental to others,
or for administrative purposes; and
o Expected to be used during more than one period.
 Assets of this nature include
o Property ordinarily not subject to depreciation or depletion, such as land;
o Property subject to depreciation or amortization, such as land improvements, buildings, machinery,
equipment, furniture, improvements to leased facilities, bookplates, and breeding animals; and
o Property subject to depletion such as timber tracts and mineral and oil deposits.

Recognition and Measurement

 An item or property, plant and equipment should be recognized as an asset when
o It is probable that future economic benefits associated with the asset will flow to the enterprise;
and
o The cost of the asset to the enterprise can be measured reliably.
 An item of property, plant and equipment that qualifies for recognition as an asset shall be measured initially
at cost. The cost comprises:
o Purchase price, including import duties and non-refundable purchase taxes;
o Any directly attributable costs of bringing the asset to working condition for its intended use, such
as cost of site preparation, initial delivery and handling cost, installation costs, and professional fees
for architects and engineers;
o The initial estimated cost of dismantling and removing the asset and restoring the site.
 Trade discounts and rebates and deducted in arriving at the purchase price.
 Specific examples of directly attributable costs for specific assets
o Land
 Broker’s fees and commissions, legal fees, title and escrow fees
 Title insurance and unpaid property taxes assumed
 Surveying fees
 Local government special assessment taxes
 Liens, mortgages or encumbrances on the property assumed
 Costs of clearing, grading, filling or leveling
 Costs of demolishing old building acquired with the land (net of proceeds from salvaged
materials)
 Permanent landscaping costs
o Land Improvements
 Fences
 Water system
 Sidewalks and driveways
 Parking lots
 Landscaping costs that are nor permanent
o Buildings
 Broker’s fees and commissions
 Legal fees, title and escrow fees
 Reconditioning costs, alterations and improvement costs
 Building permit fees for renovation or construction
 Architect’s fees
 Payment to tenants or squatters, if the building acquired is intended to be used (not
demolished)
 Interest costs on borrowing used in self-constructed buildings
o Machinery and Various classes of equipment
 Taxes and duties on purchase
 Freight, unloading and delivery charges
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 Insurance while in transit

 Installation charges
 Costs of trial runs
o Natural Resources
 Payment for rights to explore and extract natural resources
 Exploration and development costs
 Estimated future restoration costs (at present value)

Acquisition of Multiple Assets

 Aggregate prices is allocated to individual assets based on the best available indicator of relative values of
the assets, such as market values or current appraised values. Cost directly attributable to specific assets are
not allocated but rather charged in full to such as asset

Purchase under deferred payment plan

 Cash equivalent price of the asset, or
 Present value of the future cash payments required by the debt arrangement, discounted at the prevailing
interest rate for that type of obligation.

Issuance of Securities
 The cost of an asset acquired by issuance of securities is the asset’ fair value.
 In rare cases when the fair value of the asset received cannot be reliably determined, reference is made to
the fair value of the equity instruments issued.

Acquisition under finance leases

 The cost of an asset acquired under finance leases is the present value of the minimum lease payments

Acquisition by Self-construction
 The cost of a self-constructed asset includes all cost of materials, labor and overhead directly associated with
the construction as well as interest costs on borrowings actually incurred during the construction period.
 Profit on self-construction is not allowed to be recognized in the account.
 Allocation of manufacturing overhead may be equivalent to (1) its fair share, using the same basis of
allocation for manufactured inventory or (2) the incremental amount of indirect manufacturing overhead.
 On borrowing costs, generally, borrowing costs are treated as expenses in the period incurred. However, if
the borrowing costs pertains to a borrowing that was utilized for a qualifying asset, the interest is capitalized
and forms part of the asset cost. A qualifying asset is a discrete project of an enterprise that takes substantial
period of time to get ready for sale or use.
o Specific borrowing
 The interest on specific borrowing actually incurred during the construction period is
capitalized. Any interest revenue on the temporary investments of those borrowings is
deducted,
 In case the specific borrowing amounts to more than the requirements of an entity for a
qualifying asset and excess funding were apparently used for other purposes, the
borrowing is deemed as a general borrowing.
o General borrowing
 Interest on the excess of average accumulated expenditures over the amount of the
specific borrowing, if any, is capitalizable. If there is more than one general borrowing, the
weighted average interest rate is used.
 Computation of average accumulated expenditures (AAAE).
 When construction costs are incurred evenly during the construction period, the
AAE is computed by dividing the total expenditures 2.
 When the expenditures were incurred on an uneven basis, the weighted average
of each expenditure is taken by considering the dates that they were incurred.

Acquisition by Donation
 Assets received as donation are recorded at their fair values at time of donation.
 If the donor is a shareholding, the donation is recorded by crediting an additional paid in capital account
appropriately titled.
 Is the donor is a non-governmental unit other than a shareholder, a revenue or gain is recognized at an
amount equal to the value of the donated asset.

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 If the asset is received from a government unit, the company recognized income over the periods necessary
to match with the related costs which are intended to compensate, on a systematic basis. The amount may
be credited to a deferred credit account, Unearned Income from Government Grant.

Acquisition by Exchange of Non-monetary assets

 The assets acquired by exchange of non-monetary assets is generally recorded at the fair value of the asset
received, which is equivalent to the fair value of the asset given up adjusted by the amount of any cash or
cash equivalent transferred. Any gain or loss is recognized for the full amount of difference between the fair
value and carrying value of the asset given up.
 The asset acquired, however, is recorded at the carrying amount of the asset given up if:
o The exchange transaction lacks commercial substance, or
o Both the fair value of the asset given up and the asset received are not reliably measurable.
 An exchange transaction is always assumed to be a fair value transaction unless otherwise indicated.

Expenditures subsequent to acquisition

 These are added to the carrying to the carrying amount of the asset when it is probable that future economic
benefits will flow to the enterprise and the expenditure significantly improves the condition of the asset
beyond its originally assessed standard of performance.
 All other subsequent expenditures should be recognized as expense in the period which it is incurred.
 Expenditures that result from accidents, neglect, intentional abuse, and theft are recognized as losses.
 Normal repairs and maintenance costs merely maintain or restore the value of the asset and do not improve
or increase its value; thus, they are expensed when incurred.

Depreciation
 The depreciable amount of an item of PPE should be allocated on a systematic basis over its useful life, and
recognized as expense, unless included in the carrying amount of another asset,
 The depreciation method should reflect the pattern in which the asset’s economic benefits are consumed by
the enterprise.
 Factors considered in determining the useful life of an asset include
o The expected usage of the asset by the enterprise
o The expected physical wear and tear
o Technical obsolescence
o Legal or similar limits on the use of the asset
 Depreciation methods
o Straight line method
o Sum-of-the-years’ digit method
o 150% declining balance method
o Sum-of-the-units method or productive output method
o Machine hours method
 Component depreciation. Under the components approach, each part of an item of PPE with a cost that is
significant in relation to the total cost of an item shall be depreciated separately.

Review of Useful Life and Depreciation Methods

 The useful life and depreciation method of an item of PPE should be reviewed periodically and, if
expectations are significantly different from previous estimates, the depreciation charge/methods for the
current and future periods should be adjusted. No retrospective adjustment is required in the accounts.

Measurement subsequent to initial recognition

 Cost Model. The item of PPE is carried at its cost less any accumulated depreciation and any accumulated
impairment losses.
 Revaluation Model. The item of PPE is carried at its fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment losses.

Impairment of PPE
 When an item of PPE has suffered an impairment in value, the enterprise should write down the carrying
value of such an asset to its recoverable amount. This reduction is recognized as an impairment loss in the
income statement in the period when the impairment occurs.
 The recoverable amount of an asset should be measured as the higher value of
o Asset’s net selling price; and
o The asset’s value in use (present value of estimated future net cash flows expected to arise from
the continuing use of an asset and from its disposal at the end of its useful life).

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 If the asset impaired is recorded at revalued amount, the impairment is treated as a reduction of revaluation
surplus pertaining to that asset and any excess is charged to profit or loss.
 When an asset’s value recovers after recording the initial impairment, recovery of impairment loss is taken
up as income to the extent of the impairment loss previously recorded minus the amount recovered through
lower depreciation charges. Any further increase, using the revaluation model is credited to revaluation
surplus.

Revaluation Model.
 Frequency of revaluation – revaluation is made at sufficient regularity so that the carrying amount does not
differ materially from the fair value at the end of the reporting period.
 If an asset’s carrying amount is increased as a result pf a revaluation. The increase shall be credited directly
to equity under the heading Revaluation Surplus. If however, prior to a revaluation increase, a revaluation
decrease related to the asset was recognized as an expense, the revaluation increase in recognized as an
income to the extent that it reverses the revaluation decrease related to that asset.
 When an item of PPE is revalued, any accumulated depreciation at the date of revaluation is treated in one
of the following ways:
o Restated proportionately with the change in the gross carrying amount of the asset. This is often
used when the revaluation is done by applying an index to depreciated replacement cost.
o Eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset. This is often used for buildings.
 If an asset’s carrying amount is decreased as a result of revaluation, the decrease shall be recognized in profit
or loss. If however, prior to a revaluation decrease, a revaluation increase related to the asset was recorded
as revaluation surplus, the decrease is charged to the revaluation surplus to the extent of the previously
recorded appraisal increase related to that asset.
 The revaluation surplus included in the equity may be transferred directly to retained earnings when the
asset is derecognized. The entire surplus for the asset is considered realized and therefore transferred to
retained earnings when the asset is retired or disposed.
 The revaluation surplus may also be transferred to retained earnings as the asset is being used by the entity
on a piecemeal basis. The portion is considered realized and is measured as the difference between the
depreciation based on the revalued varying amount and the depreciation based on the asset’s original cost.

Reversal of Impairment Loss

 When there is a reversal of previous impairment loss, the reversal should be recognized immediately as
income in the statement of comprehensive income and the carrying amount of the asset is increased to its
new recoverable amount. However, under the cost model, the new recoverable amount should not exceed
its carrying value as if no impairment loss has been previously recorded. Under the revaluation model, the
amount taken to profit or loss is similar to the amount recognized under the cost model. Any further increase
in the asset’s revalued amount, however, is credited to revaluation surplus.

Depletion of Natural Resources

 Similar to PPE, wasting assets are subject to depletion which requires a systematic allocation of its cost over
the period the natural resource is extracted or produced.
 The method used for depletion takes the form of the productive output method (Depletion rate = remaining
depletable cost + additional cost / revised estimated units at the beginning of the year.

Multiple Choice:

1. Which defines property, plant and equipment?

a. Tangible asset
b. Held for use in the production or supply of goods or services, for rental to others or for administrative purposes
c. Expected to be used during more than one reporting period
d. All of these define property, plant and equipment

2. The cost of an item of property, plant and equipment comprises all of the following, except
a. Purchase price
b. Import duties and nonrefundable purchase taxes
c. Cost directly attributable in bringing the asset to the location and condition for the intended use
d. Initial estimate of the cost of dismantling and removing the item and restoring the site , the obligation for which
the entity does not incur when the item was acquired

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3. Directly attribute costs in bringing asset to the location and condition for the intended use include all of the
following, except
a. Cost of employee benefits not arising directly from the acquisition of property, plant and equipment.
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation, assembly and testing cost, including professional fee.

4. Which of the following costs should be expensed immediately?

a. Cost of opening a new facility
b. Cost of introducing a new product, including advertising and production
c. Cost of conducting business in a new location, including cost of staff training
d. All of these are expensed immediately.

5. Which of the following costs should be included in the carrying amount of property, plant and equipment?
a. Cost incurred while an item capable of operating in the manner intended by management has yet to be brought
into use or is operated at less than full capacity.
b. Initial operating loss
c. Cost of relocating or reorganizing part or all of an entity’s operations
d. None of these should be included in the carrying amount of property, plant and equipment.

6. The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has
commercial substance is usually recorded at
a. The fair value of the asset given up and gain or loss is recognized.
b. The fair value of the asset given up and gain but not a loss may be recognized.
c. The fair value of the assets received if it is equally reliable as the fair value of the asset given up.
d. Either the fair value of the asset given up or the asset received whichever one results in the largest gain or
smallest loss.

7. Which of the following nonmonetary exchange transaction has commercial substance?

a. Exchange of assets with no difference in future cash flows.
b. Exchange of assets by entities in the same line of business.
c. Exchange of assets with difference in future cash flows.
d. Exchange of an equivalent interest in similar productive assets that causes the entities involved to remain in
essentially the same economic position.

8. The configuration of cash flows of the assets exchanged includes which of the following?
a. The implicit interest rate, maturity of loan and amount of loan
b. The risk, timing and amount of cash flows of the assets
c. The entity- specific value of the asset which is equal to fair value
d. The estimated present value of assets exchanged

9. If payment for an asset is deferred beyond normal credit terms, the difference between the total payment and cash
price equivalent 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

10. When a plant asset is acquired by issuance of ordinary shares, the cost is properly measured at
a. Par value of share
b. Stated value of the shares
c. Fair value of plant asset
d. Fair value of the shares

11. Which statement is true about depreciation accounting?

a. Depreciation is not a matter of valuation.
b. Depreciation is part of the matching of expense and revenue.
c. Depreciation retains funds by reducing income tax and dividend.
d. All of the statements are true.

12. Which statement is incorrect with respect to depreciation?

a. The depreciation method shall reflect the pattern in which the asset's economic benefits are consumed by
entity.

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b. Depreciation of an asset begins when it is available for use or when it is in the location and condition necessary
for the intended use.
c. Depreciation ceases at the earlier between the date the asset is classified as held for sale and the date the asset
is derecognized.
d. Depreciation is not recognized if the fair value of an asset exceeds carrying amount.

13. Which statement is true with respect to residual value?

a. Residual value is the estimated net amount currently obtainable if the asset is at the end of the useful life.
b. The residual value of an asset may increase to an amount equal to or greater than carrying amount in which case
the depreciation charge is zero.
c. The residual value of an asset shall be reviewed at least at each financial year-end and any change is accounted
for as a change in accounting estimate.
d. All of these statement are true.

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

15. What is the theoretical basis of straight line depreciation?

a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
c. Service value declines as a function of obsolescence rather than time.
d. Physical wear and tear are more important than economic obsolescence.

16. A principal objection to the straight-line method of depreciation is that it

a. Provides for the declining productivity of an aging asset.
b. Ignores variations in the rate of asset use.
c. Tends to result in a constant rate of return on a diminishing investment base.
d. Gives smaller periodic write off than decreasing charge method.

17. In which of the following is the output or activity method of depreciation most appropriate?
a. An asset's service potential declines with use.
b. An asset's service potential declines with the passage of time.
c. An asset's is subject to rapid obsolescence.
d. An asset's incurs increasing repairs with use.

18. What is the theoretical support for accelerated depreciation?

a. Assets are more efficient in early years and initially generate more revenue.
b. Expenses should be allocated in a manner that "smooth" earnings.
c. Repairs will probably increase in later periods so depreciation should decrease.
d. Accelerated depreciation provides easier replacement.

19. Use of the double declining balance method

a. Results in decreasing charge to depreciation expense.
b. Means residual value is not deducted in computing the depreciation base.
c. Means the carrying amount should not be reduced below residual value.
d. All of these characterize double declining balance method.

20. An improvement made to a machine which increased the fair value and production capacity without extending the
useful life should be
a. Expensed immediately
b. Debited to accumulated depreciation
c. Capitalized in the machine account
d. Allocated between accumulated depreciation and the machine account

21. Which of the following subsequent outlays should be expensed immediately?

a. Expenditure made to increase the efficiency or effectiveness of an existing asset
b. Expenditure made to extend the useful life of an existing asset.
c. Expenditure made to maintain an existing asset in operating condition
d. Expenditure made to add new asset

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22. An expenditure made in connections with a machine being used should be

a. Expensed immediately if it merely extends the useful life but does not improve the quality .
b. Expensed immediately if it merely improves the quality but does not extend the useful life.
c. Capitalized if it maintains the machine in normal operating condition
d. Expenditure made to add new asset

23. What valuation model should be used to measure property, plant and equipment?
a. The revaluation model or the fair value model
b. The cost model pr the revaluation model
c. The cost model or the fair value through profit or loss model
d. The cost model or the fair value model

24. When an accounting for property , plant and equipment, an entity

a. Must use the cost model for presenting the asset
b. Must elect to use the cost model or the revaluation model on any individual asset.
c. May elect to use the cost model or the revaluation model on any asset class
d. Must use the cost model for land

25. Under the revaluation model in accounting for property, plant and equipment
a. Assets must be revalued quarterly
b. Assets must be revalued annually
c. Assets must be revalued at the discretion of management
d. There are no specific rules regarding the frequency of revaluation

26. Which statement is true, when an entity chooses the revaluation model?
a. When an asset is revaluated, the entire class of property, plant and equipment to which that asset belongs must
be revalued.
b. Individual asset within a class of property, plant and equipment can be revalued.
c. Revaluation of property, plant and equipment must be made at least every three years.
d. Increase in an asset's carrying amount as a result of the first revaluation must be recognized as a component of
profit or loss.

PAS 20 -GOVERNMENT GRANTS

27. Government grant shall be recognized when there is reasonable assurance that
a. The entity will comply with the conditions of the grant
b. The grant will be received
c. The entity comply with the conditions of the grant and grant will be received.
d. The grant must have been received.

28. Grant in recognition of specific costs is recognized as income

a. Over the same period as the relevant expense on a systematic and rational basis.
b. Immediately
c. Over 5 years using straight line
d. Over 5 years using sum of digits

29. Grant related to depreciable asset is usually recognized as income

a. Immediately
b. Over the useful life of the asset using straight line
c. Over the useful life of the asset using sum of year's digits
d. Over the useful life of the asset and in proportion to the depreciation of the asset.

30. A grant that becomes receivable as compensation for losses already incurred or for the purpose of giving immediate
financial support be recognized as income
a. When received
b. Of the period in which it becomes receivable
c. Over 5 years using straight line
d. Over 10 years using straight line

31. If the cost of the asset is recorded net of the government grant
a. Equity will likely be overstated
b. Liability will likely be overstated
c. Asset will likely be understated

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d. Net income will likely be understated

32. Government assistance includes all the following, except

a. Free technical and marketing advice
b. Provision of guarantee
c. Government procurement policy that is responsible for a portion of the entity's sales.
d. Improved irrigation water system or infrastructure for the benefit of an entire local community.

33. Which disclosure is not required in relation to government grant?

a. The accounting policy adopted for government grant.
b. Unfulfilled conditions and other contingencies attaching to government assistance.
c. The name of the government agency that gave the grant
d. The nature and extent of government grant recognized and government assistance.

PAS 23 - BORROWING COSTS

34. Assets that qualify for interest capitalization include

a. Assets under construction for an entity's own use.
b. Assets that are ready for the intended use.
c. Assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest capitalization.

35. Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying
asset.
a. Interest cost is being incurred.
b. Expenditures for the assets have been made.
c. The interest rate is equal to or greater than the cost of capital.
d. Activities that are necessary to get the asset ready for the intended use are in progress.

36. Capitalization of borrowing costs

a. Shall be suspended temporary period of delay.
b. May be suspended only during extended period of delay in which active developments is deployed.
c. Should never be suspended once capitalization commences.
d. Shall be suspended only during extended period of delay in which active development is deployed.

37. The period of time during which interest must be capitalized ends when
a. The asset is substantially complete and ready for the intended use.
b. No further interest is being incurred.
c. The asset is abandoned, sold or fully depreciated.
d. The activities that are necessary to get the asset ready for the intended use have begun.

38. When computing capitalized interest cost, what is the concept of "avoidable interest" ?
a. The total interest cost actually incurred.
b. A cost of capital charge for equity.
c. The portion of total interest cost which would not have been incurred if expenditures for asset construction had
not been made.
d. That portion of average accumulated expenditures on which no interest cost was incurred.

39. Which of the following is a required disclosure regarding interest cost?

a. Total interest cost incurred for the period.
b. Total capitalized interest cost for the period
c. The capitalization rate used to determine the capitalizable interest cost
d. All of these are required disclosure regarding interest cost.

PAS 36 - IMPAIRMENT OF ASSETS

40. Long lived assets are required to be reviewed for impairment

a. At the end of reporting period, every three years
b. When the asset is fully depreciated.
c. When circumstances indicate that the carrying amount of an asset might not be recoverable.
d. At the end of reporting period, every year.

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41. If the fair value less cost of disposal 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 amount of the asset remains the same.

42. If the asset is to be disposed of

a. The recoverable amount is the fair value less cost of disposal.
b. The recoverable amount is the value in use
c. The asset is not impaired
d. The recoverable amount is the carrying amount

43. The estimates in calculating value in use include all of the following, except
a. Cash inflows from continuing use of the asset.
b. Cash outflows incurred to generate the cash inflows continuing use of the asset.
c. Net cash flows from the disposal of the asset at end of useful life.
d. Income tax payments.

44. The required disclosure for the impairment of assets include all of the following, except
a. The business segment affected
b. The amount of the impairment loss and how fair value was determined
c. The recommendation of the auditor, signed and dated as of the date discovery
d. The facts and circumstances leading to the impairment.

PFRS 6 - EXPLORATION AND EVALUATION OF MINERAL RESOURCES

45. Exploration and evaluation expenditures are incurred

a. When searching for an area that may warrant detailed exploration even though the entity has not yet obtained
the legal rights to explore a specific area.
b. When the legal rights to explore an area have been obtained but the technical feasibility and commercial viability
of extracting a mineral resource are not yet demonstrable.
c. When preparations for commercial extraction are being made.
d. In extracting mineral resource and processing the resource to make it marketable.

46. Exploration and evaluation asset be classified as either tangible or intangible asset and measured initially at cost and
subsequently at
a. The cost model
b. The revaluation model
c. Either the cost model or the revaluation model
d. The recoverable amount model

47. Which accurately describes GAAP regarding accounting for cost of drilling dry holes?
a. Only the successful effort method may be used.
b. Only the full cost method may be used.
c. Both the successful effort method and the full cost method may be used.
d. Neither the successful effort method nor the full cost method may be used.

48. Depletion expense

a. Is usually part of cost of goods sold.
b. Includes tangible equipment cost in the depletion base
c. Excludes intangible development cost from the depletion base.
d. Excludes estimated restoration cost from the depletion base.

49. Which of the following is not part of depletable amount?

a. Acquisition cost of the mineral resource deposit
b. Exploration cost
c. Tangible equipment cost associated with machinery used to extract the mineral resource
d. Intangible development cost such as drilling, tunnel and shaft

50. Which of the following is not a similarity in the treatment for depreciation and depletion?
a. The estimated life is based on economic or productive life.
b. Assets are reported in the same classification in the statement of financial position.
c. The rate may be changed upon revision of the estimated productive life.
d. Both depreciation and depletion are based on time.

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Problem 1

An entity had the following property acquisitions during the current year:

 Received land as donation from a major shareholder as an inducement to locate a plant in the city. No payment
was required but the entity paid P50,000 for legal expense for land transfer. The land is fairly valued at
P1,000,000.
 Acquired land and building in exchange for 30,000 ordinary shares with P100 per value and quoted price of P150.
The land had fair value of P2,000,000 but the fair value of the building cannot be measured.
 Purchased warehouse building and the land on which it is located for P5,400,000 including appraiser fee P50,000.
The land had a appraised value P2,000,000 and the building P3,000,000.

51. What is the total cost of land?

a. 5,160,000
b. 5,660,000
c. 5,210,000
d. 5,000,000

52. What is the total cost of building?

a. 4,240,000
b. 5,740,000
c. 5,500,000
d. 4,000,000

Problem 2

Athena Company and Anna Company are fuel oil distributors. To facilitate the delivery of oil to customers, the two
entities exchanged ownership of barrels of oil without physically moving the oil. Athena paid Anna P1,500,000 to
compensate for a difference in the grade of oil. It was reliably determined that the configuration of the cash flows of
the asset received does not differ from the configuration of the cash flows of the asset transferred.

On the date of exchange, the oil inventory of Athena has a carrying amount of P5,000,000 and fair value of P7,000,000.
The oil inventory of Anna has a carrying amount of P6,000,000 and fair value of P8,500,000.

53. What amount should Athena record as cost of the oil inventory received in exchanged?
a. 4,500,000
b. 6,500,000
c. 7,000,000
d. 8,500,000

54. What amount should Anna record as cost of oil inventory received in exchanged?
a. 4,500,000
b. 6,000,000
c. 7,500,000
d. 8,500,000

Problem 3

An entity owns a tract of land purchased for P2,000,000 and with fair value of P2,800,000 on the date of exchange.

Another entity also owns a tract of land acquired for P3,600,000 and with fair value of P3,800,000 on the date of
exchange.

On the date of exchange, the entity exchanged its land and paid P1,000,000 for land owned by the other entity.

The configuration of cash flows from the land acquired is expected to be significantly different from the configuration
of cash flows of the land exchanged.

55. At what amount should the entity record the land acquired in exchange?
a. 2,800,000
b. 3,000,000
c. 3,200,000
d. 3,800,000

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56. What amount of gain on exchange should be recognized by the entity?

a. 800,000
b. 400,000
c. 200,000
d. 0
Problem 4

An entity had the following machinery acquisitions during the year:

 Acquired a machine with an invoice price of P3,000,000 subject to a cash discount of 10% which was not taken.
The entity incurred cost of P50,000 in removing the old machine prior to the installation of the new one. Machine
supplies were acquired at a cost of P150,000.
 During the early part of current year, the entity purchased a machine for P500,000 down and four monthly
installments of P1,250,000. The cash price of the machine was P4,700,000.
 At the beginning of current year, the entity purchased a machine for P2,000,000 in exchange for noninterest
bearing note requiring four payments of P500,000. The first payment was made at the end of current year.
 The implicit rate of interest for this note at date of issuance was 10%. The present value of an ordinary annuity
of 1 at 10% is 3.7 for four periods. The present value of an annuity of 1 in advance at 10% is 3.49 for four periods.
 At the beginning of current year, the entity acquired a machine by issuing a four year, noninterest bearing note
for P2,000,000. The entity has an implicit 10% interest for this type of note. The present value of 1 at 10% for 4
years is 0.68.

57. What is the total cost of machinery acquired?

a. 10,505,000
b. 10,345,000
c. 10,045,000
d. 10,645,000

58. What amount of interest expense should be reported for the current year as a result of machinery acquisition?
a. 1,094,500
b. 1,110,500
c. 294,500
d. 800,000

Problem 5

An entity fabricated equipment for office use during the current year. The following data were taken from the
accounting records:

Materials Direct labor

Finished goods 1,000,000 1,500,000
Office equipment 600,000 500,000

Factory overhead amounted to P1,200,000. Normal production of finished goods is 50,000 units. Due to the
fabrication of the office equipment finished goods produced totaled 40,000units only in the current year. The office
equipment is to be charged with the overhead which would have been apportioned to the 10,000 units which were
not produced.

59. What is the total cost of the office equipment?

a. 1,100,000
b. 1,400,000
c. 1,340,000
d. 2,340,000

Problem 6

60. An entity purchased a machine for P3,000,000 on January 1, 2018. The entity received a government grant of
P500,000 in respect of this asset. The policy is to depreciate the asset over 5 years on a straight line basis and to
treat the grant as deferred income. On January 1, 2020, the grant became fully repayable because of
noncompliance with conditions. What is the loss on repayment of grant in 2020?
a. 500,000
b. 300,000
c. 200,000
d. 100,000

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Problem 7

An entity purchased a machine for P6,600,000 on January 1, 2018 and received a government grant of P600,000
towards the capital cost. The policy is to treat the grant as a reduction in the cost of asset. The machine is to be
depreciated on a straight line basis over 5 years with residual value of P500,000. On January 1, 2020, the grant became
fully repayable because of noncompliance with conditions.

61. What is the depreciation for 2020?

a. 1,460,000
b. 1,200,000
c. 1,220,000
d. 1,560,000

62. What is the depreciation for 2021?

a. 1,100,000
b. 1,320,000
c. 1,200,000
d. 1,220,000

Problem 8

63. On January 1, 2018, an entity received from the government a P5,000,000 three year, zero-interest loan
evidenced by a promissory note. The prevailing rate of interest for a loan of this type is 10%. The present value
of 1 at 10% is .75 for three periods. What is included in the journal entry to record the loan and grant?

a. Debit discount on note payable P1,250,000

b. Credit note payable P5,000,000
c. Credit deferred grant income P1,250,000
d. All of these are included in the journal entry

Problem 9

An entity purchased a tract of land as an investment property. The entity razed an old building on the property.
Purchase price of land and an old building 4,000,000
Fair value of old building 300,000
Demolition of old building 200,000
Proceeds from sale of salvaged materials 20,000
Legal fees for purchase contract and recording ownership 150,000
Title guarantee insurance 50,000
Payment of property taxes in arrears on land 100,000
Option paid for an alternative land not acquired 30,000
Special assessment for city improvements 120,000

64. What is the cost of the land?

a. 4,600,000
b. 4,120,000
c. 4,330,000
d. 4,300,000

Problem 10

An entity purchased a tract of land as a factory site. An old building was demolished and construction began on the
new building.

Purchase price of land and an old building 4,500,000

Fair value of old building 250,000
Cost of demolishing old building 300,000
Title insurance and legal fees to purchase land 200,000
Architect fee 950,000
New building construction cost 8,000,000
Survey before construction 100,000
Building permit or payment to city hall for approval of building construction 150,000
Excavation before new construction 200,000

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Liability insurance during construction 100,000

New fence surrounding the new building 100,000
Driveway parking bay and safety lighting 550,000
Cost of trees, shrubs and other landscaping 300,000

65. What is the cost of the land?

a. 4,550,000
b. 4,800,000
c. 4,850,000
d. 4,450,000

66. What is the cost of the new building?

a. 9,700,000
b. 9,750,000
c. 9,800,000
d. 9,950,000

67. What is the cost of land improvements?

a. 950,000
b. 650,000
c. 850,000
d. 400,000

Problem 11

An entity acquired a machine and incurred the following costs:

Cash paid for machine, including VAT of P96,000 896,000

Cost of transporting machine 30,000
Cost of installation 50,000
Cost of testing machine 40,000
Cost of safety rails and platform surrounding machine 60,000
Cost of water device to keep machine cool 80,000
Cost of adjustment to machine to make it operate more efficiently 75,000
Cost of repairing damage during installation 45,000
Cost of spare parts to cover breakdowns 155,000
Estimated dismantling cost to be incurred as required by contract 65,000
Insurance cost for the current year 15,000
Cost of training personnel who will use the machine 25,000

68. What total amount should be capitalized as cost of the machine?

a. 1,400,000
b. 1,296,000
c. 1,200,000
d. 1,160,000

Problem 12

During 2018, an entity constructed a new building at cost of P30,000,000. The expenditures for the building, which
was finished late in 2018, were incurred evenly during the year. The entity had the following loans outstanding on
December 31, 2018:

 10% note to finance specifically construction of the building, dated January 1, 2018, P10,000,000 and unpaid on
December 31,2018. Investment were made on the proceeds from the loan and income of P100,000 was realized
in 2018.
 12% 20-year bonds payable issued at face amount on April 30, 2017, P30,000,000.
 8% 5-year note payable, dated March 1, 2017, P10,000,000.

69. What amount of interest is capitalized as a cost of the new building?

a. 1,550,000
b. 1,450,000
c. 1,400,000

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d. 1,500,000

Problem 13

On July 1, 2018, an entity began construction of a plant which was completed on October 31, 2019. On July 1, 2018,
the entity obtained P7,000,000 6% construction loan. The loan was paid on December 31,2019. The only other debt
was a P15,000,000 8% long term note which was outstanding during 2018 and 2019. Expenditures on the plant were:

July 1, 2018 5,000,000 February 1, 2019 3,000,000

October 1, 2018 3,000,000 April 1, 2019 2,000,000
September 1, 2019 2,000,000
October 1, 2019 500,000

70. What amount of interest should be capitalized in 2018?

a. 210,000
b. 195,000
c. 390,000
d. 420,000

71. What amount of interest should be capitalized in 2019?

a. 1,000,000
b. 1,350,000
c. 700,000
d. 733,000

72. What is the interest expense for 2019?

a. 1,200,000
b. 1,270,000
c. 887,000
d. 537,000

Revaluation and Impairment

Problem 14

An entity acquired a building on January 1, 2015 at a cost of P20, 000,000. The building had a useful life of 6 years and
residual value of P2,000,000. The building was revalued on January 1, 2018 and the revaluation revealed replacement
cost P30,000,000, residual value of P4,000,000 and revised useful life 8 years from the date acquisition.

73. What is the pretax revaluation surplus on January 1, 2018?

a. 6,000,000
b. 8,000,000
c. 7,000,000
d. 5,000,000

74. What is the pretax revaluation surplus on December 31, 2018?

a. 6,000,000
b. 4,800,000
c. 2,800,000
d. 5,250,000

75. What is the annual depreciation for 2018?

a. 2,600,000
b. 3,400,000
c. 3,000,000
d. 1,400,000

Problem 15

On January 1, 2018, an entity showed land with carrying amount of P10,000,000 and building with cost of P60,000,000
and accumulated depreciation of P18,000,000

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The land and building were revalued on same date and revealed the fair of land at P15,000,000 and the building
at P70,000,000.

The original useful life of the building is 20 years and depreciation is computed on the straight line. The income
tax rate is 30%

76. What is the revaluation surplus on January 1, 2018?

a. 33,000,000
b. 23,100,000
c. 28,000,000
d. 19,600,000

77. What is the revaluation surplus on December 31, 2018?

a. 33,000,000
b. 21,100,000
c. 21,450,000
d. 21,700,000

78. What is the annual depreciation for 2018?

a. 5,000,000
b. 3,500,000
c. 4,500,000
d. 3,000,000

Problem 16

79. On December 31, 2018, an entity had an equipment with cost of P9,000,000 and accumulated depreciation of
P3,000,000. Due to obsolescence and physical damage, the equipment was found to be impaired. On same date,
the entity determined that the equipment had a fair value less of disposal of P4,500,000, discounted net cash
inflows of P4,000,000 and undiscounted net cash inflows of P5,000,000. What is the impairment loss for 2018?

a. 1,500,000
b. 2,000,000
c. 1,000,000
d. 0

Problem 17

An entity determined that the electronics division is a cash generating unit. The entity calculated the value in use of
the division at 8,000,000. The carrying amounts of the assets are building P5,000,000, equipment P3,000,000 and
inventory P2,000,000. The entity also determined that the fair value less cost of disposal of the building is P4,500,000.

80. What is the impairment loss on building?

a. 1,000,000
b. 500,000
c. 750,000
d. 0

81. What is the impairment loss on equipment?

a. 600,000
b. 900,000
c. 450,000
d. 0

82. What is the impairment loss on inventory?

a. 400,000
b. 600,000
c. 300,000

Problem 18

On January 1, 2018, an entity purchased equipment with cost of P10,000,000, useful life of 10 years and no residual
value. The entity used straight line depreciation. On December 31, 2018 and December 31, 2019, the entity
determined the impairment indicators are present. There is no change in useful life or residual value.

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December 31, 2018 December 31,2019

Fair value less cost of disposal 8,100,000 8,300,000
Value in use 8,550,000 8,200,000

83. What is the impairment loss for 2018?

a. 900,000
b. 450,000
c. 600,000
d. 0

84. What is the gain on reversal of impairment for 2019?

a. 400,000
b. 700,000
c. 600,000
d. 0

85. What is the depreciation for 2020?

a. 1,000,000
b. 1,050,000
c. 1,025,000
d. 950,000

Depreciation and Depletion

Problem 19

86. An entity acquired an equipment for P4,200,000 in 2015. The policy is straight line depreciation, full depreciation
in the year of acquisition and no depreciation in the year of disposal. The useful life is five years with the residual
value of P200,00. On July 1, 2018, the equipment was sold for P2,500,000. What is the gain on disposal in 2018?

a. 700,000
b. 820,000
c. 500,000
d. 400,000

Problem 20

87. An entity provided the following schedule of machinery:

Total cost Residual value Useful life

Machine A 5,500,000 500,000 20
Machine B 2,000,000 200,000 15
Machine C 400,000 5

What is the composite life of these assets?

a. 13.3
b. 16.0
c. 18.0
d. 19.8

Problem 21

88. An entity used the composite method of depreciation based on a 25% composite rate. On January 1, 2018, the
total cost of equipment was P5,000,000 with total residual value of P600,000 and accumulated depreciation of
P3,000,000. In January 2018, the entity purchased an equipment for P2,500,000 with no residual value. On
December 31, 2018, the entity sold an equipment costing P1,000,000 for P350,000. The said equipment was
acquired on January 1, 2016 with residual value of P200,000. What amount of depreciation should be recognized
for 2018?

a. 1,625,000
b. 1,875,000
c. 1,525,000
d. 1,000,000

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Problem 22

89. On April 1, 2018, an entity purchased machinery for P3,300,000. The machinery has an estimated useful life of
five years with residual value of P300,000. Depreciation is computed by the sum of the years' digits method. What
is the depreciation for 2019?

a. 850,000
b. 800,000
c. 600,000
d. 700,000

Problem 23

90. An entity purchased equipment on January 1, 2018 for P5,000,000. The equipment had a useful life of 5 years
and residual value of P600,000. The policy is to depreciate 5- year assets using the 200% double declining method
for first 2 years and then switch to straight line. What amount should be reported as accumulated depreciation
on December 31, 2020?

a. 3,000,000
b. 3,800,000
c. 3,920,000
d. 3,600,000

Problem 24

On January 1, 2018, a entity purchased a mineral mine for P26,400,000 with removable estimated at 1,200, 000 tons.
After it has extracted all the ore, the entity will be required by law to restore the land to the original condition at an
estimated cost of P2,200,000.

The present value of the estimated restoration cost P1,800,000. The property can be sold afterwards for P3,000,000.

During 2018, the entity incurred P2,000,000 exploration cost and P1,600,000 development cost preparing the mine
for production. The entity removed 80,000 tons of ore and sold 60,000 tons of ore in the current year.

91. What is the depletion for the current year?

a. 1,920,000
b. 1,440,000
c. 1,940,000
d. 1,455,000

92. What amount of depletion should be included in cost of goods sold for the current year?
a. 1,920,000
b. 1,440,000
c. 1,500,000
d. 1,590,000

Problem 25

In 2017, an entity purchased property with mineral resources for P28,000,000. The property had a residual value of
P5,000,000. However, the entity is required to restore the property to the original condition at a discounted amount
of P2,000,000.

In 2017, the entity spent P1,000,000 in development cost of P3,000,000 in building. In 2018, an amount of P4,000,000
was spent for additional development on the mine.

Production began in 2018 and the tons extracted totaled 3,000,000 in 2018 and 2,500,000 in 2019. The remaining
tons totaled 7,000,000 on December 31, 2018 and 3,500,000 on December 31, 2019

93. What is the depletion base?

a. 35,000,000
b. 30,000,000
c. 38,000,000
d. 33,000,000

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94. What amount of depletion should be recognized in 2018?

a. 7,800,000
b. 9,900,000
c. 8,400,000
d. 9,000,000

95. What amount of depletion should be reported for 2019?

a. 10,500,000
b. 12,250,000
c. 9,625,000
d. 8,750,000

96. What is the carrying amount of the mineral property on December 31, 2019?
a. 12,250,000
b. 17,250,000
c. 13,475,000
d. 18,475,000

Problem 26

On July 1, 2019, an entity purchased the rights to a mine for P20,000,000, of which P2,000,000 was allocable to the
land. Estimated reserves were 1,500,000 tons. The entity expected to extract and sell 25,000 tons per month.

The entity purchased mining equipment on July 1, 2019 for P8,000,000. The mining equipment had a useful life 8
years. However, after all the resource is removed, the equipment will be of no use and will be sold for P500,000.

97. What is the depletion base?

a. 20,000,000
b. 18,000,000
c. 29,500,000
d. 27,000,000

98. What is the depletion for 2019?

a. 3,600,000
b. 1,800,000
c. 2,500,000
d. 1,250,000

99. What is the carrying amount of the mineral property on December 31, 2019?
a. 18,200,000
b. 16,400,000
c. 16,200,000
d. 14,400,000

100. What is the depreciation for 2019?

a. 1,500,000
b. 1,000,000
c. 750,000
d. 468,750

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