Part 1 – Long Problems

PROBLEM SOLVING: Present solution in good accounting form in the worksheet provided. If no solution is necessary,
write your answer and briefly state the supporting accounting principle you applied. Encircle your final answer and shade
the corresponding spaces in the answer sheet given.

Part I - MULTIPLE CHOICE QUESTIONS:

Chapter 25
1. Saxophone Company acquires a new manufacturing equipment on January 1, 2018, on installment basis. The deferred
payment contract provides for a down payment of P300,000 and an 8-year note for P3,104,160. The note is to be paid
in 8 equal annual installments of P388,020, including 10% interest. The payments are to be made on December 31 of
each year, beginning December 31, 2018. The equipment has a cash price equivalent of P2,370,000. Saxophone’s
financial year-end is December 31. What is the amount to be recognized on January 1, 2018, as discount on note
payable?
A. P827,160
B. P310,416
C. P1,034,160
D. Zero

2. Bassoon Co. records show the following items in relation to a self-constructed manufacturing equipment: Materials
and purchased parts at gross invoice price (Bassoon failed to take the 2% cash discount) – P450,000; Imputed interest
on funds used during construction (stock financing) – P36,000; Labor costs – P185,000; Overhead costs (fixed:
P40,000; variable: P60,000) – P100,000; Gain on self-construction – P74,000; Installation cost – P8,600. What is the
total cost of the self-constructed equipment?
A. P674,600
B. P770,600
C. P734,600
D. P743,600

3. The records of Guitar Company show the following: 150,000 ordinary shares with a par value of P20 per share are
issued in exchange for land and building. The fair values of the land and building acquired are P5,400,000 and
P18,900,000, respectively. The company’s stock is currently selling at P175. How much share premium must be
recorded as a result of the aforementioned transaction?
A. P5,400,000
B. P3,000,000
C. P21,300,000
D. P18,900,000

4. Cello Corp. has been experiencing a significant increase in customer’s demand for its product. To expand its
production capacity, Cello decided to purchase equipment form Pede Utang Co. on January 2, 2018. Cello issues a
P2,400,000 5-year, non-interest bearing note to Pede Utang for the new equipment when the prevailing market rate of
interest for obligations of this nature is 12%. The company will pay off the note in five P480,000 installments due at
the end of each year over the life of the note. Cello’s financial year-end is December 31. The appropriate present
value factor of an ordinary annuity of 1 at 12% for 5 periods is 3.60478.
Required: What is the cost of the new equipment?
A. P3,604,478
B. P480,000
C. P1,730,294
D. P2,400,000

Chapter 26

5. At the beginning of current year, La Trinidad Company received a grant of P10,000,000 from the Korean
Government for the construction of a laboratory and research facility with an estimated cost of P15,000,000 and
useful life of 5 years. The laboratory and research facility was completed and ready for the intended use at the
end of the current year. What amount of grant income should be included in the income statement for the current
year?
A. 10,000,000
B. 2,000,000
C. 1,500,000
D. 0

6. At the beginning of the current year, Baguio Company is granted a large tract of land in the Cordillera region by
the Belgian government. The fair value of the land is P40,000,000. The entity is required by the grant to
 construct chemical research facility and employ only personnel residing in the Cordillera region. The estimated
cost of the facility is P45,000,000 with useful life of 10 years. The chemical research facility was completed and
ready for the intended use at the end of the current year. What amount should be recognized as grant income for
the current year?
A. 40,000,000
B. 4,500,000
C. 4,000,000
D. 0

7. At the beginning of the current year, Tacloban Company received a grant of P6,000,000 from the American
government to compensate for massive losses incurred because of a recent tsunami. The grant was made for the
purpose of giving immediate financial support to the entity. It will take the entity two years to reconstruct the
assets destroyed by the tsunami. What amount of grant income should be recognized in the current year?
A. 6,000,000
B. 3,000,000
C. 1,500,000
D. 0

Chapter 27
8. On January 1, 2019, Calbayog Company took out a loan of P24,000,000 in order to finance specifically the
renovation of a building. The renovation work started on the same date. The loan carried annual interest at 10%.
Work on the building was substantially complete on October 31, 2019. The loan was repaid on December 31,
2019 ad P200,000 investment income was earned in the period to October on the proceeds of the loan not yet used
for the renovation. What amount of capitalizable borrowing cos should ne included in the cost of the building?
A. 2,400,000
B. 2,200,000
C. 2,000,000
D. 1,800,000

9. From #8 what amount should be reported as interest expense for 2019?

A. 800,000
B. 400,000
C. 200,000
D. 0

10. Reena Company borrowed P20,000,000 at 10% partly for general purposes and partly to finance the construction
of a building on January 1, 2019. The loan shall be repaid commencing the month following completion of the
building. Expenditures incurred evenly during the year for the completed building totaled P12,000,000 on
December 31, 2019. The entity earned interest of P200,000 for the year on the unexpended portion of the loan.
What amount of interest is capitalized on December 31, 2019?
A. 1,200,000
B. 1,000,000
C. 600,000
D. 400,000

Chapter 28

Nos. 10 and 11 are based on the following information related to Piano Company:
On July 1, Piano purchased the plant assets of Yokona Co., which had discontinued operations. The following are the fair
values of the plant assets acquired: Land – P10,500,000; Building – P31,500,000; Machinery and equipment –
P21,000,000. Piano issued 550,000 shares of its P100 par value ordinary share capital in exchange for the above plant
assets.
Piano expended the following amounts in cash between July 1 and December 20, the date when the company first
occupied the building: Special assessment by city on land – P540,000; Major repairs on building – P3,150,000;
Construction of bases for machinery and equipment acquired – P4,050,000; Driveways and parking lots (part of the
blueprint) – P3,660,000; Remodeling of office space in building, including new partitions and walls – P4,830,000.

11. How much is capitalizable to the land account?

A. P10,540,000
B. P14,700,000
C. P14,200,000
D. P11,040,000

12. How much is capitalizable to the building account?

A. P31,500,000
B. P37,980,000
C. P39,480,000
D. P43,140,000
13. At the beginning of the current year, Newman Company purchased a parcel of land as a factory site for P1,000,000.
An old building on the property was demolished to pave way for the construction of the new building which was
completed at year-end. Demolition of old building – P100,000; Architect fee – P175,000; Legal fee for title
investigation and purchase contract – P25,000; Construction cost – P5,450,000. What amount should be recorded as
the cost of the building?
A. P5,475,000
B. P5,750,000
C. P5,725,000
D. P5,450,000

14. On January 1, 2019, the records of Claiborne Company showed the following accounts and balances in its PPE
category: Land P350,000; Land Improvements – P20,000; Buildings – P900,000
During 2019, the following data were gathered from an analysis of the accounts:
Cash paid on purchase of land and old building - P1,250,000 (Value of old building is deemed insignificant); 15%
Mortgage payable assumed on purchase of property – P2,000,000; Realtor’s commission – P150,000; Legal fees,
realty taxes and documentation expenses – P25,000; Payment to persons squatting on the property to relocate them –
P50,000; An old building on the land was shortly torn down at a cost of P60,000; Recovery from the salvage of the
building demolished – P45,000; Cost of fencing the property – P55,000; Payment to contractor for a building
constructed – P1,000,000; Building permit fees – P10,000; Excavation expenses – P25,000; Architect fees – P25,000;
Interest that could have been incurred if the money used for the building construction were borrowed at the prevailing
interest fate of 12% - P120,000. What is the cost of the land?
A. P3,750,000
B. P3,775,000
C. P1,775,000
D. P1,750,000

Chapter 29

15. On July 1, Violin purchased a machine worth P21,000,000. Construction of bases for such machine acquired
amounted to P4,050,000. On December 23, Violin paid cash for machinery, P7,800,000 subject to a 2% cash discount,
and freight on machinery of P315,000. How much is the total cost of the machine to be reported in the year-end
statement of financial position?
A. P21,000,000
B. P28,959,000
C. P32,009,000
D. P33,009,000

Nos. 16-17 is based on the following data: Rona Company provided the following charges to “Repairs and Maintenance”
Account: Service contract on office equipment – P100,000; Initial design fee for proposed extension of office building –
P150,000; New condenser for central aircon – P10,000; Purchase of executive chairs and desks – P200,000; Purchase of
storm windows and screens and their installation on all office windows – P500,000; Sealing of roof leaks in production
area – P80,000; Replacement of door to production area – P50,000; Installation of automatic door-opening system –
P200,000; Overhead crane for assembly department to speed up production – P350,000; Replacement of broken gear on
machine – P60,000.

16. What total amount of expenditures should be capitalized?

A. P1,400,000
B. P1,200,000
C. P1,500,000
D. P1,410,000

17. What amount of expenditures may be expensed?

A. P240,000
B. P290,000
C. P300,000
D. P390,000

18. King Company made the following expenditures: Continuing and frequent repairs – P400,000; Repainted the plant
building – P100,000; Major improvements to the electrical wiring system – P300,000; Partial replacement of roof tiles
– P140,000; Renovation of a group of machines to secure significant increase in production over the remaining five-
year useful life – P500,000; Replacement of a broken gear on a machine – P50,000. How much is the total Repair and
Maintenance Expense.
A. P690,000
B. P290,000
C. P590,000
D. P640,000
Chapter 30
19. On March 30, 2019, Rose Company purchased a drilling machine for P8,400,000. The estimated useful life of
the machine is 10 years with no residual value. An important component of the machine is the drill housing
component that will need to be replaced in 5 years. The P2,000,000 cost of the drill housing component is
included in the P8,400,000 cost of the machine. The entity used the straight line depreciation. The fiscal year
ends on December 31. What total amount of depreciation should be recorded in 2019?
A. 630,000
B. 840,000
C. 780,000
D. 480,000

20. Berlin Company purchased a boring machine on January 1, 2019 for P8,100,000. The useful life of the machine
is estimated at 3 years with a residual value at the end of this period of P600,000. During the useful life, the
expected units of production are 12,000 units in 2019, 7,000 units in 2020 and 6,000 units in 2021. What amount
should be recorded as depreciation expense for 2020 using the appropriate depreciation method?
A. 2,100,000
B. 2,268,000
C. 3,600,000
D. 1,800,000

21. Rockwell Company takes a full year depreciation expense in the year of acquisition and no depreciation expense
in the year of disposition. Data relating to a depreciable asset on January 1, 2019:
Acquisition year 2016
Cost 1,100,000
Residual value 200,000
Accumulated depreciation 720,000
Estimated useful life 5 years
Using the same depreciation method in 2016, 2017 and 2018, what amount of depreciation should be recorded in
2019?
A. 120,000
B. 180,000
C. 220,000
D. 240,000

22. On January 1, 2019, Koblenz Company acquired an equipment with useful life of 8 years and residual value of
P300,000. The depreciation applicable to this equipment was P900,000 for 2020 using the double declining
balance method. What was the acquisition cost of the equipment?
A. 3,600,000
B. 4,500,000
C. 4,800,000
D. 5,100,000

23. On January 1, 2018, Hamburg Company purchased a machine for P2,750,000. The machine was depreciated
using the sum of the years’ digits method based on a useful life of 10 years with no residual value. On January 1,
2019, the entity changed to the straight line method of depreciation. The entity can justify the change. What is
the carrying amount of the machine on January 1, 2019?
A. 2,750,000
B. 2,250,000
C. 2,475,000
D. 1,800,000

24. From #23, what amount should be recorded as depreciation for 2019
A. 180,000
B. 220,000
C. 250,000
D. 275,000

25. Cologne Company provided the following information with respect to building.
 The building was acquired January 1, 2014 at a cost of P7,800,000 with an estimated useful life of 40
years and residual value of P200,000. Annual depreciation was computed on the straight line method.
 The building was renovated on January 1, 2016 at a cost of P760,000. This was considered as
improvement. Residual value did not change.
 On January 1, 2019, the management decided to change the total life of the building to 30 years. What
amount should be reported as depreciation of the building for 2019?
A. 292,400
B. 266,000
C. 334,400
D. 294,000
Depletion
26. Bonn Company acquired for P9,000,000 property which is believed to include mineral deposit. Geological
estimates indicate that approximately 1,000,000 tons of mineral may be extracted. It is further estimated that the
property can be sold for P2,500,000 following mineral extraction. After initial acquisition, the following costs
were incurred:
Exploration cost 3,500,000
Development cost related to drilling of wells 3,200,000
Development cost related to
Production equipment 4,600,000
The entity is legally required to restore the land to a condition appropriate for resale at a discounted amount of
P800,000. The entity extracted 50,000 tons of the mineral in the current year. What amount should be recorded
as depletion for the current year?
A. 825,000
B. 930,000
C. 700,000
D. 785,000

27. On March 31, 2019, Manila Company purchased the right to remove gravel from an old rock quarry. The gravel
is to be sold as roadbed for highway construction. The cost of the quarry was P1,640,000 with estimated salable
rock of 200,000 tons. During 2019, the entity loaded and sold 40,000 tons of rock. On January 1, 2020 the entity
estimated that 200,000 tons still remained.During 2020, the entity loaded and sold 80,000 tons. What amount
should be recorded as depletion for 2019?
A. 410,000
B. 328,000
C. 307,500
D. 246,000

28. From #27, what amount should be recorded as depletion for 2020?
A. 540,000
B. 656,000
C. 524,800
D. 557,600

29. Cebu Company paid P5,400,000 for property containing natural resource of 2,000,000 tons of ore. The present
value of the estimated cost of restoring the land after the resource is extracted is P450,000. The land will have a
value of P650,000 after it is restored for suitable use. Tunnels, bunk houses and other fixed installations are
constructed at a cost of P8,000,000 and such expenditures are charged to mine improvements. Operations began
on January 1, 2019 and resources removed totaled 600,000 tons. During 2020, a discovery was made indicating
that available resource after 2020 will total 1,875,000 tons. At the beginning of 2020, additional bunk houses
were constructed in the amount of P770,000. In 2020, only 400,000 tons were mined because of a strike. What
amount should be recorded as depletion for 2019?
A. 1,560,000
B. 1,755,000
C. 1,620,000
D. 1,425,000

30. From #29. What should be recorded as depletion for 2020?

A. 1,560,000
B. 1,040,000
C. 640,000
D. 776,000

31. From #29 data, what amount should be recorded as depreciation for 2019?
A. 2,400,000
B. 1,200,000
C. 1,000,000
D. 500,000

32. From #29 data, what amount should be recorded as depreciation for 2020?
A. 1,120,000
B. 2,400,000
C. 1,600,000
D. 1,360,000

Revaluation
33. On January 1, 2019, Reims Company reported the following information:
Building at cost 30,000,000
 Accumulated depreciation 12,000,000
The building was measured using the cost model and depreciated on a straight line basis over 10-year period. On
January 1, 2019, the management decided to change the basis of measurement from the cost model to the
revaluation model. The equipment was revalued at the fair value of P27,000,000 with no change in useful life.
The income tax rate is 30%. What is the revaluation surplus on January 1, 2019?
A. 9,000,000
B. 6,300,000
C. 4,500,000
D. 7,000,000

34. What is the revaluation surplus on December 31, 2019?

A. 6,300,000
B. 9,000,000
C. 5,250,000
D. 5,670,000

35. What amount should be reported as depreciation for 2019?

A. 4,500,000
B. 2,700,000
C. 3,000,000
D. 1,500,000

36. What is deferred tax liability on December 31, 2019?

A. 2,700,000
B. 2,250,000
C. 1,350,000
D. 2,500,000

Impairment
37. Martha Company acquired a machine for P3,200,000 on August 31, 2016. The machine had a 5-year life,
P500,000 residual value and was depreciated using the straight line method. On May 31, 2019, a test for
recoverability revealed that the expected net future undiscounted cash inflows related to the continued use and
eventual disposal of the machine amounted to P1,080,000. The fair value on some date was P1,350,000 with no
residual value. What amount of impairment loss should be recognized on May 31, 2019?
A. 635,500
B. 365,000
C. 500,000
D. 0

38. From #37, what amount should be reported as depreciation for June 2019?
A. 63,520
B. 50,000
C. 45,000
D. 31,480

39. Silver Company operates a production line which is treated as a cash generating unit for impairment review
purposes. At year-end, the carrying amounts of the noncurrent assets are as follows:
Goodwill 1,100,000
Machinery 2,200,000
The value in use of the production line is estimated at P2,700,000 at this time. What is the revised carrying
amount of goodwill after recognition of impairment?
A. 1,100,000
B. 900,000
C. 800,000
D. 500,000

40. From #39, what is the revised carrying amount of machinery after recognition of impairment?
A. 2,200,000
B. 1,800,000
C. 1,600,000
D. 1,900,000
Part – II

THEORIES: Multiple Choice. Select the best answer.

1. Which of the following statements in incorrect?

A. Donations of PPE should be recorded at the fair value of the donated asset at the time of donation.
B. When a group of assets is acquired for a lump sum price, the total cost should be allocated to the individual
assets based on their carrying amounts.
C. Property acquired in exchange for shares or other securities in the enterprise should be recorded at its fair value or
the fair value of the securities, whichever is more clearly evident.
D. When property is acquired in exchange for another asset without commercial substance, no gain nor loss is
recognized.

2. The cost of an item of PPE comprises all of the following, except

A. Purchase price
B. Import duties and non-refundable purchase taxes
C. Any cost directly attributable in bringing the asset to the location and condition for its intended use.
D. Fines paid for violation of import regulations.

3. S1: The cost of fully depreciated asset remaining in service and the related accumulated depreciation shall be removed
from the accounts.
S2: Noncurrent assets classified as held for sale are depreciated while awaiting its ultimate disposal.
A. Only S1 is correct.
B. Only S2 is correct.
C. Both statements are correct.
D. Neither of the statements is correct.

4. The following are chargeable to land except

A. Escrow fees
B. Mortgages, encumbrances and interest on such mortgages assumed by buyer
C. Unpaid taxes subsequent to date of acquisition
D. Cost of option to buy the acquired land.

5. Land held for a currently undetermined use is treated as

A. Owner-occupied property
B. Investment property
C. Inventory
D. Other noncurrent assets

6. Construction of a permanent fence after the completion of the building is recognized as

A. Land improvement
B. Land
C. Building
D. Building improvement

7. Which of the following items is charged to the cost of machinery and equipment?
A. Motor vehicle registration
B. Nonrefundable purchase tax
C. Removal cost of machinery to be retired to make room for the installation of a new one, which is not previously
recognized as a provision.
D. Value added tax

8. Which of the following expenditures may properly be capitalized?

A. Expenditure for massive advertising campaign
B. Insurance on plant during construction
C. Research and development related to a long-term asset giving the entity a competitive market advantage.
D. Title search and other legal cost related to a piece of property which was not acquired.

9. An expenditure made in connection with a machine being used by an entity should be

A. Capitalized if it increases the quantity of units produced by the machine.
B. Capitalized if it maintains the machine in normal operating condition.
C. Expensed if it merely extends the useful life but not improve the quality.
D. Expensed if it merely improves the quality but not extend the useful life.

10. S1: An asset is impaired when its recoverable amount exceeds its carrying amount.
 S2: Evidence from internal reporting that indicates that an asset may be impaired includes the existence of net cash
inflows for the asset when current period amounts are aggregated with budgeted amounts for the future.
A. Only S1 is correct.
B. Only S2 is correct.
C. Both statements are correct.
D. Neither of the statements is correct.

11. S1: For value in use computation, future cash flows include projected cash inflows from the continuing use of the
asset and projected cash outflows necessarily incurred to generate cash inflows from the continuing use of the asset
including income tax.
S2: The value in use is measured as the post-tax present value of future net cash flows expected to be derived from an
asset.
A. Only S1 is correct.
B. Only S2 is correct.
C. Both statements are correct.
D. Neither of the statements is correct.

12. S1: If the recoverable amount of an asset that has been impaired turns out to be higher than the current carrying
amount, the carrying amount of the asset shall be increased to new recoverable amount.
S2: The reversal of the impairment loss shall be recognized immediately as income in the profit or loss.
A. Only S1 is correct.
B. Only S2 is correct.
C. Both statements are correct.
D. Neither of the statements is correct.

13. S1: Cash-generating units is the biggest identifiable group of assets that generates cash inflows that are largely
dependent on the cash inflows from other assets or group of assets.
S2: An impairment loss recognized for goodwill belonging to a cash-generating unit shall not be reversed in a
subsequent period.
A. Only S1 is correct.
B. Only S2 is correct.
C. Both statements are correct.
D. Neither of the statements is correct.

14. When impairment testing a cash-generating unit, any corporate assets should be
A. Not be allocated
B. Be allocated on a reasonable and consistent basis.
C. Be separately impairment tested.
D. Be included in the head office assets or parent assets and impairment tested along with that cash-generating unit.

15. What is the allocation of an impairment loss recognized for a cash-generating unit?
A. Across the assets of the unit based on carrying amount.
B. Across the assets of the unit based on fair value.
C. First, to any goodwill, and the balance to the other assets prorata based on fair value.
D. First, to any goodwill, and the balance to the other assets prorate based on book value.

16. All of the following factors need to be considered in determining the useful life of an asset, except
A. Expected usage of the asset
B. Expected physical wear and tear
C. Technical obsolescence
D. Residual value

17. In which of the following depreciation methods is residual value not a factor in determining charge in the early
years of the asset’s life?
A. Straight line method
B. Service hours method
C. Output output method
D. Declining balance method

18. Depreciation is best described as a method of

A. Asset valuation
B. Current value allocation
C. Cost allocation
D. Useful life determination

19. For income statement purposes, depreciation is a variable expense if the depreciation method used is
A. Units of production
B. Straight line
C. Sum of the years digits
D. Declining balance method

20. Which of the following statements is the assumption on which straight line depreciation is based?
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.

21. The sum of years digit method of depreciation results in

A. Increasing depreciation expense over the useful life
B. Decreasing accumulated depreciation
C. Decreasing depreciation expense over the useful life
D. Uniform depreciation per year

22. The most common method of computing depletion is

A. Percentage of depletion method
B. Decreasing charge method
C. Straight line
D. Production or output method

23. The following are examples of exploration cost except

A. Acquisition of right to explore
B. Cost of extraction of natural resources
C. Exploratory drilling
D. Geological study

24. Depletion expense

A. Includes tangible equipment cost in the depletable amount
B. Excludes intangible development cost from the depletable amount
C. Excludes restoration cost from the depletable amount
D. Is usually part of cost of goods sold.

25. The following expenditures shall be expensed when incurred, except

A. Start up costs
B. Advertising and promotion cost
C. Cost incurred in creating a technologically feasible computer software
D. Testing in search for product or process alternative