BORROWING COST, IMPAIRMENT OF ASSET, INCOME TAX

1. PAN Jose Company borrowed 10% note payable of P4,000,000 to finance the construction of
its warehouse. The entity has outstanding debt of P6,000,000 12% loans as general
borrowing. The construction of the warehouse was completed in 6 months and the average
accumulated expenditures amounted to 4,750,000. What is the capitalizable borrowing cost?
a. 200,000
b. 237,500
c. 245,000
d. 490,000
2. Future CPAs Ltd constructed its own machine for P5,000,000. During 2021, the weighted

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accumulated expenditure on the asset was P2,500,000. The entity also borrowed P1,800,000,

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at 10% interest, funds for the construction on January 1, 2021. Portion of the borrowed funds

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were temporarily invested and earned P45,000. Other funds borrowed by the entity which are

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outstanding during the year for general purposes is a 10-year, 9% notes for P2,500,000 which
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was also dated January 1, 2021. The capitalizable borrowing cost is?
a. 250,000
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b. 243,000
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c. 198,000
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d. 135,000
3. On July 1, 2021, Chico Corporation purchased machine costing P360,000 with a useful life
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of 6 years, no residual value. The entity uses straight line method of depreciation. On
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December 31, 2023, after conducting tests for impairment, it was found that the machine’s
Fair value less cost to sell is P70,000 while its value in use is P65,000 for its remaining
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useful life. What is the impairment loss recognized on December 31, 2023?
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a. 140,000
b. 70,000
c. 50,000
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d. 20,000
4. On July 1, 2021, Chico Corporation purchased machine costing P360,000 with a useful life
of 6 years, no residual value. The entity uses straight line method of depreciation. On
December 31, 2023, after conducting tests for impairment, it was found that the machine’s

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 Fair value less cost to sell is P70,000 while its value in use is P65,000 for its remaining
useful life. What is the asset’s carrying amount at December 31, 2024?
a. 210,000
b. 140,000
c. 70,000
d. 50,000
5. On July 1, 2021, Chico Corporation purchased machine costing P360,000 with a useful life
of 6 years, no residual value. The entity uses straight line method of depreciation. On
December 31, 2023, after conducting tests for impairment, it was found that the machine’s
Fair value less cost to sell is P70,000 while its value in use is P65,000 for its remaining
useful life. How much is the new depreciation of the machine after impairment?

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a. 20,000

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b. 23,333

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c. 60,000
d. 28,000 rs e
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6. On June 30, 2021, Rita Company prepaid a P500,000 premium on annual insurance policy.
The payment for the said premium was a tax deductible expense in 2021 cash basis tax
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return. Under the accrual basis in the books, the entity recognizes an expense of P250,000 in
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2021 while the other P250,000 is for the year 2022. If the income tax rate is 30%, what
amount should be reported as deferred tax liability on December 31, 2021
a. 150,000
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b. 75,000
c. 100,000
d. 175,000
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7. Annie Company’s reported depreciations for 2021 were P2,500,000 for tax return and
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P1,000,000 in the books. The tax rate is 30%. What should be added to the deferred tax
liability on December 31, 2021?
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a. 300,000
b. 750,000
c. 450,000
d. 150,000

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 8. North Company leased its building to South Company and received annual rental payment of
P2,000,000 in advance at the lease’s commencement date on July 1, 2021. Tax income is
under cash basis while accounting income is under accrual basis. Assuming no other
permanent or temporary differences and the tax rate is 30%, the deferred tax asset at
December 31, 2021 is
a. 1,200,000
b. 300,000
c. 600,000
d. 180,000
9. All borrowing costs are required to be capitalized as cost of the asset.
a. True

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b. False

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10. The capitalization of borrowing cost is mandatory for a qualifying asset.

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a. True
b. False rs e
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11. Examples of qualifying assets are the following: Manufacturing plant, Intangible asset,
Investment property, and Inventories manufactured on a repetitive basis.
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a. True
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b. False
12. A loan which is specifically borrowed to construct a building, the total interests of such
should be capitalizable to the said building.
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a. True
b. False
13. If the borrowing is not directly attributable to a qualifying asset, the borrowing cost is
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deferred until it becomes directly attributable to any qualifying asset.

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a. True
b. False
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14. If the funds are borrowed for many use and some portion are allocated in acquiring for a
qualifying asset, the fund is classified as general borrowings.
a. True
b. False

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 15. Goodwill does not generate cash flows independently from another assets or group of assets.
a. True
b. False
16. After the recognition of an impairment loss, the depreciation for the asset should be adjusted
based on its new carrying amount or book value.
a. True
b. False
17. Any investment income from general borrowing is deducted from capitalizable borrowing
cost
a. True
b. False

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18. There is impairment when the asset’s carrying amount is higher than its recoverable amount

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a. True

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b. False
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19. The asset’s recoverable amount is the lower of its fair value less cost to sell and its value in
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use
a. True
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b. False
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20. The differences between accounting income and taxable income that do not have tax
consequences are called:
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a. Permanent differences
b. Non-temporary differences
c. Temporary differences
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d. Timing differences
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21. If during the current year, taxable profit is greater than accounting profit and the difference is
a temporary difference,
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a. A deferred tax asset is recognized at the end of the current year

b. A deferred tax asset will be recognized in future years
c. Deferred tax liability is recognized as the end of the current year
d. A deferred tax liability will be recognized in future years

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 22. Profit or income determined after applying the GAAP at a particular time is called
a. Accounting income
b. Gross income
c. Taxable income
d. Taxable revenues
23. Profit or income determined after applying the provisions of the National Internal Revenue
Code is called
a. Accounting income
b. Gross income
c. Taxable income
d. Taxable revenues

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24. Which of the following would create a deferred tax liability?

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a. Interest revenue on municipal bonds

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b. Accrual of warranty expense
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c. Excess of tax depreciation over accounting depreciation
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d. Subscriptions received in advance
25. Which of the following differences would result in future taxable amounts?
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a. Expenses and losses that are deductible after they are recognized in financial income
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b. Revenues or gains that are taxable before they are recognized in financial income
c. Expenses or losses that are deductible before they are recognized in financial income
d. Revenues or gains that are recognized in financial income but are never included in
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taxable income
26. Which of the following creates a deferred tax asset?
a. Tax depreciation exceeding book depreciation
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b. Using installment sales method for tax purposes and accrual basis for accounting
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purposes
c. Recognition of prepaid expenses
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d. Recognition of unearned revenues

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 27. An asset is being constructed for the entity’s own use which was financed with a specific
borrowing. The interest cost incurred during the construction period is
a. A part of the historical cost of acquiring the asset
b. The interest expense for the construction period
c. Recorded ad deferred charge and amortized over the borrowing item
d. All of the choices are true
28. Statement 1: The fair value of the asset is measured as the present value of future net cash
flows expected to be derived from an asset. Statement 2: Evidence of obsolescence of an
asset is an indication of impairment from external sources.
a. False, False
b. True, True

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c. False, True

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d. True, False

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29. Statement 1: Impairment loss shall be recognized immediately by reducing the asset’s
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recoverable amount to its carrying amount. Statement 2: The impairment loss is
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recognized in profit or loss and presented separately in the income statement.
a. False, True
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b. False, False
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c. True, False
d. True, True
30. Assets, whether with definite or indefinite useful life, should be tested for impairment:
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a. At least Annually
b. Anytime
c. Every two years
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d. Only when there is a manifesting indication of impairment

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