ACCOUNTING 102 INTERMEDIATE ACCOUNTING PART 1

PPE, Government Grant, Borrowing Costs

QUIZ

1. Which of the following costs is capitalized as part of the cost of PPE?

a. Cost of conducting business in a new location
b. Cost of relocating or reorganizing an entity’s operations
c. Cost of introducing a new product or conducting business in a new location
d. Cost directly attributable to bringing the PPE to intended use, location and condition

2. Directly attributable costs of PPE include all of the following, EXCEPT:

a. Professional fees
b. Initial operating loss
c. Installation and assembly cost
d. Cost of site preparation and testing

3. At the beginning of the current year, City Company purchased for P2,700,000, including
appraiser’s fee of P25,000, a warehouse building and the land on which it is located. The
following data were available concerning the property:
Current Appraised Seller’s Original Cost
Value
Land 1,000,000 700,000
Warehouse building 1,500,000 1,400,000
2,500,000 2,100,000

a. 900,000
b. 1,000,000
c. 1,070,000
d. 1,080,000

4. On August 1, 2019, Boom Company purchased a new machine on deferred payment basis. A down
payment of P200,000 was made and 4 monthly installments of P500,000 each are to be made
beginning on September 1, 2019. The cash equivalent price of the machine was P1,900,000. Boom
incurred and paid installation costs amounting to P60,000. What is the amount to be capitalized as
cost of the machine?
a. 1,900,000
b. 1,960,000
c. 2,200,000
d. 2,260,000

5. Confident Company acquired two items of machinery as follows:

* On December 31, 2018, Confident Company purchased a machine in exchange for a noninterest
bearing note requiring ten payments of P750,000. The first payment was made on December 31,
2019, and the others are due annually on December 31. The prevailing rate of interest for this type
of note at date of issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 5.33 for
nine periods and 5.65 for ten periods.
* On December 31, 2018, Confident Company acquired used machinery by issuing the seller a two-
year, noninterest-bearing note for P4,500,000. In recent borrowing, Confident has paid a 12%
interest for this type of note. The present value of 1 at 12% for 2 years is .80 and the present value
of an ordinary annuity of 1 at 12% for 2 years is 1.69.
What is the total cost of the machinery?
a. 7,597,500
b. 7,837,500
c. 8,347,500
d. 12,352,500

1
6. Samson Company has received a donation of land from a rich local philanthropist. The land originally
had a cost of P3,000,000. On the date of the donation, the land had a market value of P4,500,000
and an assessed value of 3,600 000. What amount of income should be recognized from the
donation?
a. 0
b. 3,000,000
c. 3,600,000
d. 4,500,000

7. Alternative Company purchased land with a current market value of P3,600,000. The carrying
amount of the land was P1,957,500. In exchange for the land, Alternative used 20,000 ordinary
shares with par value if P100 and market value of P140 per share. The shares are traded in an
established stock exchange. What amount should Alternative record as cost of the land?
a. 1,957,500
b. 3,000,000
c. 3,600,000
d. 4,200,000

8. Jimini Company acquired land and paid in full issuing P1,200,000 of its 10 percent bonds payable
and 40,000 ordinary shares with par value of P10. The shares was selling at P19 and the bonds were
trading at 102. What amount should Jimini record as cost of the land?
a. 1,976,000
b. 2,000,000
c. 2,744,000
d. 2,774,400

9. In October on the current year, Erwan Company exchanged an old packing machine, which cost
P3,600,000 and was 50% depreciated, for another used machine and paid a cash difference of
P480,000. The fair value of the old packaging machine was determined to be P2,100,000. What is
the cost of the machine acquired in the exchange on the books of Erwan Company?
a. 1,620,000
b. 2,100,000
c. 2,280,000
d. 2,580,000

10. Affectionate Company exchanged a truck with a carrying amount of P600,000 and a fair value of
P1,000,000 for a truck and P100,000 cash. The cash flows from the new truck are not expected to be
significantly different from the cash flows of the old truck. The fair value of the truck received was
P900,000. At what amount should Affectionate record the truck received in the exchange?

a. 500,000
b. 700,000
c. 900,000
d. 1,000,000

11. At the beginning of the current year, Winner Company traded in an old machine having a carrying
amount of P2,520,000 and paid a cash difference of P900,000 for a new machine having a cash price
of P2,050,000. What amount of loss should Winner recognize on the exchange?
a. 0
b. 900,000
c. 345,000
d. 555,000

2
12. Caine Motor Sales exchange a car from its inventory for a computer to be used as a long term asset.
The following information relates to this exchange:

Carrying amount of the car 900,000

List selling price of the car 1,350,000
Fair value of the computer 1,290,000
Fair value of the computer 150,000

What amount of gain should Caine recognize on the exchange?

a. 0
b. 240,000
c. 300,000
d. 390,000

William Company and Harry Company, two unrelated entities, agreed to exchange tractors trailers.

Information relating to these assets is as follows:

William Harry
Original acquisition cost 3,000,000 1,600,000
Accumulated depreciation 1,400,000 1,440,000
Fair value on the date of exchange 1,800,000 300,000

In accordance with the agreement, Harry will pay P1,500,000 in cash to William which is the difference
in fair value.

13. What amount should William Company record as cost of the asset received in exchange?
a. 300,000
b. 1,300,000
c. 1,500,000
d. 1,900,000

14. What amount should Harry Company record as cost of the asset received in exchange?
a. 300,000
b. 460,000
c. 1,660,000
d. 1,800,000

15. On January 1, 2020, Wilbur Company traded in an old machine for a newer model. Data relative to
the old and new machines follow:

Old Machine
Original cost 800,000
Accumulated depreciation on January 1, 2020 600,000
Average published retail value 170,000

New Machine
List price 1,000,000
Cash price without trade in 900,000
Cash paid with trade in 780,000

What amount should be recognized as cost of the new machine acquired in the exchange?

a. 900,000
b. 950,000
c. 980,000
d. 1,000,000

3
Bren received a grant of P60 million to compensate it for costs it incurred in planting trees over a period
of five years. Bren Inc. will incur costs in this manner. Year 1 – P2 million; Year 2 – P4 million; Year 3 – P6
million; Year 4 – P 8 million; Year 5 – P10 million.

16. Based on the provisions of PAS 20, how much should be recognized as income from government
grant at the end of year 1?
a. P60 million
b. P4 million
c. P12 million
d. P2 million

17. In the case of grants related to income, which of these accounting treatments is prescribed by PAS
20?
a. Credit the grant to “general reserve” under shareholders’ equity.
b. Present the grant in the statement of comprehensive income as “other income” or as a separate
line item, or deduct it from the related expense.
c. Credit the grant to “retained earnings” on the balance sheet.
d. Credit the grant to sales or other revenue from operations in the statement of comprehensive
income.

Use the following information for the next four questions.

Nadine Company received a P1,800,000 subsidy from the government to purchase manufacturing
equipment on January 2, 2019. The equipment has a cost of P3,000,000, a useful life of six years, and no
salvage value. Nadine depreciates the equipment on a straight-line basis.

18. If Nadine chooses to account for the grant as deferred income, the grant income to be recognized in
2019 is
a. Nil
b. P300,000
c. P500,000
d. P1,800,000

19. In the case of grants related to an asset, which of these accounting treatments (balance sheet
presentation) is prescribed by PAS 20?
a. Record the grant at a nominal value in the first year and write it off in the subsequent year.
b. Either set up the grant as deferred income or deduct in arriving at the carrying amount of the
asset.
c. Record the grant at fair value in the first year and take it to income in the subsequent year.
d. Take it to the statement of comprehensive income and disclose it as an extraordinary gain.

20. If Nadine chooses to account for the grant as an adjustment to the asset, the carrying amount of the
asset on the December 31, 2019 statement of financial position is
a. P1,200,000
b. P1,000,000
c. P2,200,000
d. P2,500,000

21. Which of the following is true regarding the alternative ways to apply the income approach to
accounting of resources acquired through government grants?
a. Expenses will be higher and net income lower if the grant is recorded as deferred income.
b. Expenses will be higher and net income lower if the grant is accounted for as an adjustment to
the asset.

4
 c. Depreciation expenses will be higher if the grant is recorded as an adjustment to the asset, but
not income will be the same under the two alternatives.
d. Depreciation expense will be higher if the grant is recorded as deferred income, but net income
will be the same under the two alternatives.

Use the following information for the next three questions.

On January 1, 2018, Citimart Inc. was granted land in a village, located near the slums outside the city
limits, by a local government authority. The condition attached to this grant was that the company
should clean up this land and lay roads by employing laborers from the village in which the land is
located. The government has fixed the minimum wage payable to the workers. The entire operation will
take three years and is initially estimated to cost P160 million. The fair value of this land on the date of
grant was P240 million and is expected to increase by at least 20% annually because of the
improvements to be done by the company.

In relation to the attached condition, the company incurred costs of P80 million in 2015 and P70 million
in 2019. On December 31, 2019, the company estimated that it will incur additional cost of P30 million in
2020.

22. Non-monetary grants are measured at

a. Fair value
b. Nominal amount
c. Either a or b
d. Neither a nor b

23. How much should be recognized as income from government grant for the year ended December
31, 2018?
a. P160,000,000
b. P120,000,000
c. P80,000,000
d. P70,000,000

24. How much should be recognized as income from government grant for the year ended December
31, 2019?
a. P120,000,000
b. P150,000,000
c. P80,000,000
d. P70,000,000

25. Lively Inc. received a consolidated grant of P120 million. Three-fourths of the grant is to be utilized
to purchase a college building for students from underdeveloped or developing countries. The
balance of the grant is for subsidizing the tuition costs of those students for four years from the date
of grant.

The college building, which costs P100 million, will be depreciated using the straight-line method
over 10 years. Assuming that the tuition subsidy will be offered evenly over the period of 4 years,
the amount that should be recognized as income at the end of year 1 is
a. P12.0 million
b. P10.0 million
c. P16.5 million
d. P17.5 million

26. Puff Company is engaged in the operation of public highways and skyways in the Philippines. On
November 8, 2018, a catastrophe devastated some of the company’s operated highways and
skyways. The company suffered P5.6 billion loss due to catastrophe. On January 1, 2019, the
Philippine government decided to compensate the company for the incurred loss. The government

5
 loaned P5 billion at 5% per annum with maturity period of 5 years. The present value of cash flows
at January 1, 2019 using the current market rate for similar type of loan after considering credit risks
attached was P4.2 billion. The conditions stipulated on the loan agreement provide that the
proceeds will be used for reconstruction of the skyways and highways.
On January 1, 2019, how much should the company recognize as government grant?
a. Nil
b. P5 billion
c. P4 billion
d. P0.8 billion

27. A government grant that becomes receivable as compensation for expenses or losses incurred in a
previous period
a. Shall be recognized in profit or loss of the period in which it is received.
b. Shall be recognized in retained earnings in the period in which it becomes receivable.
c. Shall be credited directly to equity in the period in which it becomes receivable.
d. Shall be recognized in profit or loss of the period in which it becomes receivable.

28. A public limited company, Eks Dairy Products, produces milk on its farms. The company has had
problems during 2019. Contaminated milk was sold to customers. As a result, milk consumption has
gone down. The government decided to compensate farmers for potential loss in revenue from sale
of milk. This fact was published in the national press on December 1, 2019. Eks received an official
letter on December 15, 2019, stating that P1 million would be paid to it on April 3, 2020. The entity
should recognize income from government grant of
a. P1 million on December 1, 2019
b. P1 million on December 15, 2019
c. P1 million on April 3, 2020
d. Nil

29. Tiger Company received a government grant related to depreciable asset five years ago on January
1, 2015 in the amount of P2,000,000. This grant was deducted from the capital cost of asset
purchased at a total amount of P12,000,000 on the same date with a useful life of 10 years and
residual value. On January 1, 2020, the entire P2,000,000 became repayable due to lack of
compliance with the conditions attached to the grant. What is the depreciable expense to be
recognized for 2020?
a. 1,200, 000
b. 2,200,000
c. 3,000,000
d. 3,200,000

30. Tarhata Company received a government grant of P1,000,000 related to a factory building that it
bought in January 2018. The entity’s policy is to treat the grant as deferred income. Tarhata
Company acquired the building from an industrialist identified by the government. If Tarhata
Company did not purchased the building, which was located in the slums of the city, it would have
been repossessed by the government agency. Tarhata Company purchased the building for
P6,000,000. The useful life of the building is 10 years with no residual value. On January 1, 2020, the
entire amount of the government grant became repayable by reason of noncompliance with
conditions attached to the grant. What is the loss to be recognized resulting from the repayment of
the grant in 2020?
a. 200,000
b. 600,000
c. 700,000
d. 1,000,000

6
31. Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing
of funds. Borrowing cost does not include
a. Interest expenses calculated using the effective interest method as described in PAS 39.
b. Finance charges in respect of finance leases recognized in accordance with PAS 17.
c. Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs.
d. Actual or imputed cost of equity, including preferred capital not classified as a liability.

32. The borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset are
a. Those borrowing costs that would have been avoided if the expenditure on the qualifying asset
had not been made.
b. Those borrowing costs incurred during the period less any investment income on the temporary
investment of the borrowings.
c. Those borrowing costs computed by applying a capitalization rate to the expenditures on that
asset.
d. The lower of b and c.

33. Capitalization of borrowing costs should cease when substantially all of the activities necessary to
prepare the asset for its intended use or sale are complete. Which of the following indicates that
substantially all of the activities are not yet complete?
a. Routine administrative work continues.
b. Minor modifications, such as the decoration of a property to the purchaser’s or user’s
specification, are all that are outstanding.
c. Either a or b.
d. Neither a nor b.

34. On January 1, 2019, the Divine Company took out a 12% P10 million loan to finance the construction
of a building. The key dates are as follows:
January 1, 2019 – Loan interest relating to the project starts to be incurred
February 1, 2019 – Technical site planning commences
March 1, 2019 – Expenditure on the project start to be incurred
April 1, 2019 – Construction work commences
November 1, 2019 – Substantially all of the activities necessary to prepare the asset for its intended
use are complete
December 1, 2019 – Building brought into use

What amount of interest should Divine capitalize for the current year?
a. P1,000,000
b. P900,000
c. P800,000
d. P700,000

35. On January 1, 2019, Imp Company borrowed P6 million at an annual interest rate of 10% to finance
the costs of building an electricity generating plant. Construction commenced on January 1, 2019
and cost P6 million. Not all the cash borrowed was used immediately, so interest income of P80,000
was generated by temporarily investing some of the borrowed funds prior to use. The project was
completed on November 30, 2019. What is the carrying amount of the plant at November 30, 2019?
a. P6,000,000
b. P6,470,000
c. P6,520,000
d. P6,420,000

36. Which statement is incorrect regarding capitalization of ‘general’ borrowing costs?

7
 a. The entity shall determine the amount of borrowing costs eligible for capitalization by applying a
capitalization rate to the expenditures on the asset.
b. The capitalization rate shall be the weighted average of the borrowing costs applicable to the
borrowing of the entity that are outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset.
c. The amount of borrowing costs that an entity capitalizes during a period shall not exceed the
amount of borrowing costs it incurred during that period.
d. The entity shall determine the amount of borrowing costs eligible for capitalization as the actual
borrowing costs incurred during the period less any investment income on the temporary
investment of those borrowings.

37. Maragondon Company had the following borrowings during 2019. The borrowings were made for
general purposes but the proceeds were used in part to finance the construction of a new building:

Principal Interest
12% bank loan P10,000,000 P1,200,000
15% long-term loan 20,000,000 3,000,000
P30,000,000 P4,200,000

The construction began on January 1, 2019 and was completed on December 31, 2019. Expenditures
on the building were made as follows:

January 1 P8,000,000
June 30 8,000,000
December 31 4,000,000

The capitalizable borrowing cost is

a. P1,680,000
b. P1,400,000
c. P4,200,000
d. P1,620,000

38. During 2019, Grant Industries, Inc. constructed a new manufacturing facility at a cost of
P12,000,000. The weighted average accumulated expenditures for 2019 were calculated to be
P5,400,000. The company had the following debt outstanding at December 31, 2019:
 10 percent, five-year note to finance construction of the manufacturing facility dated January
1, 2019, P3,600,000.
 12 percent, 20-year bonds issued at par on April 30, 2015, P8,400,000.
 8 percent, six-year note payable, dated March 1, 2018, P1,800,000.
Determine the amount of interest to be capitalized by Grant Industries for 2019.
a. P360,000
b. P563,220
c. P557,280
d. P591,840

Use the following information for the next two questions.

Lodi Department Stores, Inc., constructs its own stores.

Additional information follows:

Total construction expenditures:

January 2, 2018 P600,000
May 1, 2018 600,000
November 1, 2018 500,000
March 1, 2019 700,000
September 1, 2019 400,000
December 31, 2019 500,000

8
 P3,300,000

Outstanding company debt:

Mortgage related directly to new store;
interest rate, 12%; term, 5 years, from
beginning of construction P1,000,000
General liability:
Bonds issued just prior to construction of P500,000
store; interest rate, 10% for 10 years
Bonds issued just prior to construction; P1,000,000
interest rate, 8%, mature in 5 years

Estimated cost of equity capital 14%

39. The capitalizable borrowing cost for 2018 is

a. P138,850
b. P127,250
c. P122,850
d. P250,000

40. The capitalizable borrowing cost for 2019 is

a. P255,330
b. P254,321
c. P253,938
d. P250,000

41. On January 1, 2019, Richmond, Inc. signed a fixed-price contract to have Builders Associates
construct a major plant facility at a cost of P4,000,000. It was estimated that it would take three
years to complete the project. Also on January 1, 2019, to finance the construction cost, Richmond
borrowed P4,000,000 payable in 10 annual installment of P400,000, plus interest at the rate of 11%.
During 2016 Richmond made deposit and progress payments totaling P1,500,000 under the
contract. The excess borrowed funds were invested in short-term securities, from which Richmond
realized investment income of P250,000. What amount should Richmond report as capitalized
interest at December 31, 2019?
a. P71,500
b. P190,000
c. P165,000
d. P440,000

42. On January 1, 2019, the Pyongyang Company took out a loan of P26 million in order to finance the
renovation of a building. The renovation work started on the same date. The loan carried interest at
10%. Work on the building was substantially complete on October 31, 2019. The loan was repaid on
December 31, 2019 and P180,000 investment income was earned in the period to October 31 on
those parts of the loan not yet used for the renovation.

According to PAS23 Borrowing Costs, what is the total amount of borrowing costs to be included in
the cost of the building?
a. P2,600,000
b. P2,420,000
c. P2,166,667
d. P1,986,667

43. Brin Company started construction of a new office building on January 1, 2018, and moved into the
finished building on July 1, 2019. Of the building’s P5,000,000 total cost, P4,000,000 was incurred in

9
 2018 evenly throughout the year. Brin’s incremental borrowing rate was 12 percent throughout
2018, and the total amount of interest incurred by Brin during 2018 was P204,000. What amount
should Brin report as capitalized interest at December 31, 2018?
a. P204,000
b. P240,000
c. P300,000
d. P480,000
44. Page Company borrowed P400,000 on a 10 percent note payable to finance a new warehouse. Page
is constructing for its own use. The only other debt on Page’s books is a P600,000, 12 percent
mortgage payable on an office building. At the end of the current year, average accumulated
expenditures on the new warehouse totaled P475,000. Page should capitalize interest for the
current year in the amount of
a. P52,250
b. P49,000
c. P47,500
d. P40,000

45. Aries Company started construction on a building on January 1 of this year and completed
construction on December 31 of the same year. Aries had only two interest 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 P250,000

Ending balance in construction in progress before
capitalization of interest 360,000
6 percent note incurred specifically for the 150,000
project
9 percent long-term note 500,000

What amount of interest should Aries capitalize for the current year?
a. P27,900
b. P22,500
c. P18,000
d. P15,000

10