Problem 1

Robust Company purchased an investment property on January 1, 2018 at a cost of P4,000,000. The
property had a useful life of 20 years and on December 31, 2019 had a fair value of P4,800,000. On
December 31, 2019 the property was sold for net proceeds of P4,500,000. The entity used the cost model
to account for the investment property.

What is the gain to be recognized for 2019 regarding the disposal of the investment property?
A. 900,000
B. 500,000
C. 800,000
D. 700,000

Answer: A

Cost – Jan. 1, 2018 P4,000,000

Accumulated depreciation
(4,000,000/ 20 x 2) (400,000)
Carrying amount – Dec. 31, 2019 P3,600,000

Sale price P4,500,000

Carrying amount 3,600,000
Gain on disposal P900,000

Reference:

Intermediate Accounting Volume 1 2019, C. Valix, p. 566

Problem 2

On January 1, 2019, Scholastic Company acquired a building to be held as investment property in a

remote location for P5,000,000. After initial recognition, the entity measured the investment property using
the cost model because the fair value cannot be measured reliably.

On December 31, 2019, management assessed the useful life of the building at 20 years from the date of
acquisition and presumed the residual value to be nil because the fair value cannot be determined
reliably.

At year-end, the entity declined an unsolicited offer to purchase the building for P6,500,000. This is a one-
time offer that is unlikely to be repeated in the foreseeable future.

What is the carrying amount of the building on December 31, 2019?

A. 5,000,000
B. 6,500,000
C. 6,175,000
D. 4,750,000

Answer: D

Cost of the investment property P5,000,000

Accumulated depreciation (250,00
(5,000,000/ 20) 0)
Carrying amount – Dec. 31, 2019 P4,750,000
Reference:

Intermediate Accounting Volume 1 2019, C. Valix, p. 568

Problem 3

Rhino Company, a real estate entity, had a building with a carrying amount of P20,000,000 on December
31, 2019. The building was used as offices of the entity’s administrative staff.

On December 31, 2019, the entity intended to rent out the building to independent third parties. The staff
will be moved to a new building purchased early in 2019.

On December 31, 2019, the entity also had land that was held for sale in the ordinary course of business.
The land had a carrying amount of P10,000,000 and fair value of P15,000,000 on December 31, 2019.

On such date, the entity decided to hold the land for capital appreciation. The accounting policy is to carry
all investment property at fair value.

1. On December 31, 2019, what amount should be recognized in revaluation surplus as a result of
transfer of the building to investment property?
A. 20,000,000
B. 35,000,000
C. 15,000,000
D. 0

2. On December 31, 2019, what amount should be recognized in profit or loss as a result of transfer of the
land to investment property?
A. 15,000,000
B. 10,000,000
C. 5,000,000
D. 0

Question 1 Answer: C

Fair value of building P35,000,000

Carrying amount of building 20,000,000
Revaluation surplus P15,000,000

Question 2 Answer: C

Fair value of land P15,000,000

Carrying amount of land 10,000,000
Gain on reclassification P5,000,000

Reference:

Intermediate Accounting Volume 1 2019, C. Valix, p. 571

Problem 4

Chain Company has P5,000,000 life insurance policy on the president, of which Chain Company is the
beneficiary. The entity provided the following information regarding the policy for the year ended
December 31, 2019:
Cash surrender value, January 1 435,000
Cash surrender value, December 31 540,000
Annual advance premium paid January 1 200,000

During the current year, dividends of P30,000 were applied to increase the cash surrender value of the
policy.

What amount should be reported as life insurance expense for 2019?

A. 200,000
B. 125,000
C. 65,000
D. 95,000

Answer: D

Premium paid P200,000

Less: Increase in cash surrender value
(540,000 – 435,000) 105,000
Life insurance expense P95,000

Reference:

Intermediate Accounting Volume 1 2019, C. Valix, p. 574

Problem 5

During the year, Storm Company purchased a new machine. A P120,000 down payment was made and
three monthly instalments of P360,000. The cash price would have been P1,160,000.
The entity paid no installation charges under the monthly payment plan but a P20,000 installation charge
would have been incurred with a cash purchase.

What amount should be capitalized as cost of the machine?

A. 1,220,000
B. 1,200,000
C. 1,180,000
D. 1,160,000

Answer: C

Cash paid P1,160,000

Directly attributable cost 20,000
Capitalized cost of the machine P1,180,000

Reference:

Intermediate Accounting Volume 1 2019, C. Valix, p. 656

Problem 6

Grey Company acquired a machine with a cash price of P2,000,000.

Down payment
Note payable in 3 equal annual instalments
20,000 shares of Grey Company at fair value
Prior to use, installation cost of P50,000 was incurred machine has a residual value of P100,000.

What is the initial measurement of the new machine?

A. 2,000,000
B. 2,400,000
C. 2,050,000
D. 2,450,000

Answer: C

Cash price P 2,000,000

Installation cost 50,000
Total cost P 2,050,000

Reference:

Intermediate Accounting Volume 1 2019, C. Valix, p.656

Problem 7

Corner Company purchased a van with a list price of P3,000,000. The dealer granted a 15% reduction in
list price and an additional 10% cash discount on the net price if payment is made in 30 days.
Irrecoverable taxes amounted to P40,000 and the entity paid an extra P30,000 to have a special horn
installed.

What amount should be recorded as initial cost of the van?

A. 2,550,000
B. 2,335,500
C. 2,365,000
D. 2,325,000

Answer: C

List price P 3,000,000

Trade discount
(3,000,000 x 15%) 450,000
Cash discount
(3,000,000 – 450,000 x 10%) 255,000
Irrecoverable taxes 40,000
Installation cost 30,000
Total cost P 2,365,000

Reference:

Intermediate Accounting Volume 1 2019, C. Valix, p.656

Problem 8

Lax Company recently acquired two items of equipment.

 Acquired a press at an invoice price of P3,000,000 subject to a 5% cash discount which was
taken. Costs of freight and insurance during shipment were P50,000 and installation cost
amounted to P200,000.
  Acquired a welding machine at an invoice price of P2,000,000 subject to a 10% cash discount
which was not taken. Additional welding supplies were acquired at a cost of P100,000.

What is the total increase in the equipment account as a result of the transactions?
A. 4,900,000
B. 5,000,000
C. 5,100,000
D. 5,200,000

Answer: A

First equipment:
Invoice price P3,000,000
Discount taken – 5% (150,000)
Freight and insurance 50,000
Installation cost 200,000 P3,100,000
Second equipment:
Invoice price 2,000,000
Discount taken – 10% (200,000) 1,800,000
Total cost P4,900,000

Reference:

Intermediate Accounting Volume 1 2019, C. Valix, p. 658

Problem 9

At the beginning of the current year, Hallmark Company exchanged an old packaging machine, which
cost P1,200,000 and was 50% depreciated, for a used machine and paid a cash difference of P160,000.
The fair value of the old packaging machine was determined to be P700,000.

1) What is the cost of the new asset acquired?

A. 700,000
B. 860,000
C. 660,000
D. 600,000

2) What is the gain on exchange?

A. 540,000
B. 100,000
C. 60,000
D. 0

Question 1 Answer: B

Fair value of asset given P700,000

Cash payment 160,000
Total cost P860,000

Question 2 Answer: B

Fair value of asset given P700,000

Installation cost 600,000
Total cost P100,000
Reference:

Intermediate Accounting Volume 1 2019, C. Valix, p. 659

Problem 10

On June 30, 2014, Louisiana Company reported the following information:

Equipment at cost 5,000,000

Accumulated depreciation 1,500,000

The equipment was measured using the cost model and depreciated on a straight line basis over a 10-
year period. On December 31, 2014, the management decided to change the basis of measuring the
equipment from the cost model to the revaluation model.

The equipment was recorded at fair value of P4,550,000 with remaining useful life of 5 years.

Ignoring income tax, what amount should be reported as revaluation surplus on December 31, 2014?
A. 1,050,000
B. 1,300,000
C. 1,500,000
D. 2,000,000

Answer: B

Cost – June30, 2014 P5,000,000

Accumulated depreciation (1,500,000)
Carrying amount – June 30, 2014 P3,500,000
Depreciation from July 1 to December 31, 2014
(5,000,000/10 x 6/12) (250,000)
Carrying amount – December 31, 2014 P3,250,000

Fair value – December 31, 2014 P4,550,000

Carrying amount – December 31, 2014 3,250,000
Revaluation surplus – December 31, 2014 P1,300,000 Reference:

Practical Accounting Volume One 2014, C. Valix, p. 662

Problem 11

On January 1, 2009, Boston Company purchased a new building at a cost of P6,000,000. Depreciation
was computed on the straight line basis at 4% per year. On January 1, 2014, the building was revalued at
fair value of P8,000,000.

1. What is the depreciation for 2014?

A. 320,000
B. 400,000
C. 100,000
D. 240,000

2. What is the revaluation surplus on December 31, 2014?

 A. 3,072,000
B. 1,900,000
C. 3,040,000
D. 1,920,000

Question 1 Answer: B

Accumulated depreciation
(4% x 5 years expired) 20 %

List of asset 25 years

Expired (5)
Remaining life 20

Depreciation for 2014

(8,000,000/20) P400,000

Question 2 Answer: C

Fair value P8,000,000

Carrying amount 4,800,000
Revaluation surplus – January 1, 2014 P3,200,000
Realization in 2014
(3,200,000/20) 160,000
Revaluation surplus – December 31, 2014 P3,040,000

Reference:

Practical Accounting Volume One 2014, C. Valix, p. 663

Problem 12

Cynosure Company has an equipment with carrying amount of P1,600,000 on December 31, 2014 after
recording depreciation for 2014. The following information is available on December 31, 2014 relative to
the equipment:

Fair value of similar equipment 1,400,000

Discounted future cash flows 1,300,000
Undiscounted future cash flows 1,350,000

At what amount should the equipment be reported on December 31, 2014?

A. 1,600,000
B. 1,400,000
C. 1,300,000
D. 1,350,000

Answer: B

Carrying amount P1,600,000

Less: Recoverable amount equal to fair value
which is higher than value in use 1,400,000
Impairment loss P200,000
Reference:

Practical Accounting Volume One 2014, C. Valix, p.670

Problem 13

On January 1, 2011, Reed Company purchased a machine for P8,000,000 and established an annual
depreciation charge of P1,000,000 over an eight-year life. During 2014, after issuing the 2013 financial
statements, the entity concluded that the machine suffered permanent impairment of its operational value,
and P2,000,000 is a reasonable estimate of the amount expected to be recovered through use of the
machine for the period January , 2014 through December 31, 2018.

In the December 31, 2014 statement of financial position, what is the carrying amount of the machine?
A. 4,000,000
B. 1,000,000
C. 1,600,000
D. 0

Answer: C

Recoverable amount - Jan. 1, 2014 P2,000,000

Less: Depreciation for 2014 400,00
(2,000,000/ 5) 0
Carrying amount – Dec. 21, 2014 P1,600,000

Reference:

Practical Accounting Volume One 2014, C. Valix, p. 680

Problem 14

Gei Company determined that, due to obsolescence, equipment with an original cost of P9,000,000 and
accumulated depreciation on January 1, 2014, of P4,200,000 had suffered permanent impairment, and as
a result should have a carrying amount of only P3,000,000 as of the beginning of the year. In addition, the
remaining useful life of the equipment was reduced from 8 years to 3.

In the December 31, 2014 statement of financial position, what amount should be reported as
accumulated depreciation?
A. 1,000,000
B. 5,200,000
C. 6,000,000
D. 7,000,000

Answer: D

Cost P9,000,000
Accumulated depreciation – Jan. 1, 2014 4,200,000
Carrying amount – Jan. 1, 2014 P4,800,000
Expected recoverable amount 3,000,000
Impairment loss P1,800,000

Adjusted accumulated depreciation, Jan. 1, 2014 P6,000,000

(4,200,000 + 1,800,000)
Depreciation for 2014
(3,000,000/ 3) 1,000,000
Accumulated depreciation – Dec. 31, 2014 P7,000,000
Reference:

Practical Accounting Volume One 2014, C. Valix, p. 680

Problem 15

One of the cash generating units of sanmig Company is the production of liquor. On December 31, 2014,
the entity believed that the assets of the cash generating unit (CGU) are impaired based on an analysis of
economic indicators.

The assets and liabilities of the cash generating unit at carrying amount on December 31, 2014 are:

Cash 4,000,000
Account receivable 6,000,000
Allowance for doubtful accounts 1,000,000
Inventory 7,000,000
Property, plant and equipment 22,000,000
Accumulated depreciation 4,000,000
Goodwill 3,000,000
Accounts payable 2,000,000
Loans payable 1,000,000

The entity determined that the value in use of the cash generating unit is P30,000,000.

The account receivable are considered collectible, except those considered doubtful.

1. What is the impairment loss to be allocated to property, plant and equipment?

A. 4,000,000
B. 2,880,000
C. 2,400,000
D. 4,200,000

Answer: B

Cash P4,000,000
Accounts receivable – net 5,000,000
Inventory 7,000,000
Property, plant and equipment – net 18,000,000
Goodwill 3,000,000
Carrying amount of cash generating unit P37,000,000
Value in use 30,000,000
Impairment loss P7,000,000
Impairment loss allocated to goodwill 3,000,000
Remaining impairment loss P4,000,000

Carrying amount Fraction Loss

Inventory P7,000,000 7/25 P1,120,000
Property, plant and equipment 18,000,000 18/25 2,880,000
P25,000,000 P4,000,000
Reference:

Practical Accounting Volume One 2014, C. Valix, p. 690

Problem 16

Liton Company buys and sells securities expecting to earn profits on short-term differences in price.
During 2014, Liton Company purchased the following trading securities:

Fair value
Security Cost Dec. 31, 2014
A P 195,000 P 225,000
B 300,000 162,000
C 660,000 678,000

Before any adjustments related to these trading securities, Liton Company had net income of P 900,000.

1. What is Liton’s net income after making any necessary trading security adjustments?
A. 900,000
B. 810,000
C. 762,000
D. 948,000

2. What would Liton’s net income be if the fair value of security B were P285,000?
A. 867,000
B. 900,000
C. 885,000
D. 933,000

Question 1 Answer: B

Net income before trading security adjustment P900,000

Unrealized loss 90,00
(1,155,000 – 1,065,000) 0
Net income, as adjusted P810,000

Fair value
Security Cost December 31, 2014
A P195,000 P225,000
B 300,000 162,000
C 660,000 678,000
P1,155,000 P1,065,000

Question 1 Answer: D

Net income before trading P900,000

security adjustment
Unrealized loss 33,000
(1,188,000 – 1,155,000)
Net income, as adjusted P933,000
 Security Cost Fair value
December 31, 2014
A P 195,000 P225,000
B 300,000 285,000
C 660,000 678,000
P1,155,000 P1,188,000

Reference:

Auditing Problems CPA Examination Reviewer 2014, G. Roque, p. 281

Problem 17

On January 1, 2014, Rambutan Corp, purchased debt securities for cash of P765,540 to be held as
financial assets at amortized cost. The securities have a face value of P 600,000, and they mature in 15
years. The securities carry fixed interest of 10% that is receivable semiannually, on June 30 and
December 31. The prevailing market interest rate on these debt securities is 7% compounded annually.

1. The carrying value of the debt securities on December 31, 2014, at amortized cost using the effective
interest rate method is
A. 771,840
B. 759,016
C. 765,540
D. 600,000

2. The interest income to be reported for 2014 using the effective interest rate method is
A. 66,524
B. 6,534
C. 60,000
D. 53,476

Question 1 Answer: B

Carrying value, Jan. 1, 2014 P765,540

Amortization of premium, Jan. 1 – June 30:
Nominal interest (600,000 x 10% x ½) 30,000
Effective interest (765,540 x 7% x ½) (26,794) (3,206)
Carrying value, June 30, 2014 P762,334
Amortization of premium, July 1 – Dec. 31:
Nominal interest 30,000
Effective interest (762,334 x 7% x ½) (26,682) 3,318
Carrying value at amortized cost, Dec. 31, 2014 P759,016

Question 2 Answer: D

Effective interest, Jan. 1 – June 30 P26,794

Effective interest, July 1 – June 30 26,682
Interest income 2014 P53,476

Reference:
Auditing Problems CPA Examination Reviewer 2014, G. Roque, p. 302

Problem 18

CHICO Company purchased the following non-trading equity securities during 2014:

Security Cost Fair value

December 31, 2014
X P450,000 P500,000
Y 500,000 800,000

At initial recognition, Chico classified these securities as at fair value through other comprehensive
income. On July 28, 2015, Chico sold all the shares of Security Y for a total of P835,000. As of December
31, 2015, the shares of Security X had a fair value of P200,000 No other activity occurred during 2015
relation to the non-trading equity securities portfolio.

1. What amount should Chico Company report as realized gain in the 2015 income statement?
A. 35,000
B. 335,000
C. 300,000
D. 265,000

2. What is the cumulative unrealized gain (loss) to be reported in the statement of changes in equity for
2015?
A. 300,000
B. 150,000
C. (300,000)
D. (250,000)

Question 1 Answer: A

Cash proceeds P835,000

Less: Carrying value of Security Y, Dec.31, 2014 800,000
Realized gain on sale P35,000

Question 2 Answer: D

Cumulative unrealized gain, Dec. 31, 2014 P350,000

Unrealized gain related to Security Y (300,000)
Unrealized loss for 2015 – Security X (300,000)
(500,000 – 200,000)
Cumulative unrealized loss, Dec. 31, 2015 P(250,000)

Reference:

Auditing Problems CPA Examination Reviewer 2014, G. Roque, p. 303

Problem 19

Saxophone Company acquires a new manufacturing equipment on January 1, 2014, on instalment 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 instalment payments of P388,020, including 10%
interest. The payments are to be made on December 31 of each year, beginning December 31, 2014.
The equipment has a cash price equivalent of P2,370,000. Saxophone’s financial year-end is December
31.

1. What is the acquisition cost of the equipment?

A. 3,404,160
B. 2,804,160
C. 2.370,000
D. 3,104,160

2. The amount to be recognized on January 1, 2014, as discount on note payable is

A. 1,034,160
B. 310,416
C. 827,160
D. 0

Question 1 Answer: C

Acquisition cost of equipment

(cash price equivalent) P2,370,000

Question 2 Answer: A

Cost of equipment (cash price equivalent) P2,370,000

Less: Down payment 300,000
Amount assigned to note payable P2,070,000
Face value of note 3,104,160
Discount on note payable, Jan. 1, 2014 P1,034,260

Reference:

Auditing Problems CPA Examination Reviewer 2014, G. Roque, p. 350

Problem 20

ACCORDIAN Company incurred the following expenditures in 2014:

Purchased of land P7,892,000

Land survey 104,000
Fees for search of title for land 12,000
Building permit fee 70,000
Temporary quarters for construction crews 215,000
Cost to demolish old building 940,000
Excavation of basement 200,000
Special assessment for street project 40,000
Dividends 100,000
Damages awarded for injuries sustained in construction
(no insurance carried) 168,000
Cost of construction 58,000,000
Cost of paving parking lot adjoining building 800,000
Cost of shrubs, trees, and other landscaping 660,000

A portion of the building site had been temporarily used by Accordian to operate a car park while the
building was being constructed. A total of P325,000 was earned by Accordian from this incidental activity.
1. What is the cost of the land?
A. 8,896,000
B. 8,048,000
C. 9,648,000
D. 10,448,000

2. What is the cost of the land improvements?

A. 660,000
B. 1,500,000
C. 1,460,000
D. 800,000

3. What is the cost of the building?

A. 58,485,000
B. 58,160,000
C. 58,252,000
D. 59,425,000

Question 1 Answer: B
Question 2 Answer: C
Question 3 Answer: D

Land Land improvements Building

Purchased of land P7,892,000

Land survey 104,000
Fees for search of title for land 12,000
Building permit fee P70,000
Temporary quarters for construction
crews 215,000
Cost to demolish old building 940,000
Excavation of basement 200,000
Special assessment for street project 40,000
Cost of construction 58,000,000
Cost of paving parking lot adjoining
building P800,000
Cost of shrubs, trees, and other
landscaping 660,000
Totals P8,048,000 P1,460,000 P59,425,000

Reference:

Auditing Problems CPA Examination Reviewer 2014, G. Roque, p. 366

Problem 21

Sheng Company constructed a building for use by the administration section of the company. The
completion date was January 1, 2007, and the construction cost was P16,800,000. The company
expected to remain in the building for the next 20 years, at which time the building would probably have
no real salvage value and have to be demolished. It is expected that demolition costs will amount to
P300,000.

In June 2013, following a storm that wreaked vast destruction in the city, the roof of the administration
building was considered to be in porr shape so the company decided to replace it. On January 1, 2014, a
new roof was installed at a cost of P4,400,000. The new roof was of a different material to the old roof,
which was estimated to have cost only P2,800,000 in the original construction, although at the time of
construction it was thought that the roof would last for the 20 years that the company expected to use the
building. Because the company had spent the money replacing the roof, it thought that it would delay
construction of a new building, thereby extending the original life of the building from 20 years to 25 years.

1. If the roof were treated as a separate component of the building, the total depreciation expense for
2014 would be
A. 750,000
B. 681,566
C. 606,667
D. 672,000

2. If the roof were not treated as a separate component of the building, the total depreciation expense for
2014 would be
A. 1,178,462
B. 861,944
C. 851,111
D. 750,000

Question 1 Answer: A

Roof P244,444
(4,400,000/ 18 years)
Rest of the building:
Cost 14,000,000
Less: Accumulated depreciation
(14,000,000 x 7/ 20) 4,900,000
Book value, Jan. 1, 2014 9,100,000
Divide by revised remaining life
(25-7) 18 yrs 505,556
Total P750,000

Question 2 Answer: C

Book value of building, Jan. 1, 2014 P10,920,000

(16,800,000 x 13/ 20)
Add: Cost of new roof 4,400,000
Total 15,320,000
Divide by revised remaining life 18
(25 - 7) yrs
Depreciation expense for 2014 P851,111

Reference:

Auditing Problems CPA Examination Reviewer 2014, G. Roque, p. 399

Problem 22

Eagle Company owns a tract of land that it purchased for P2,000,000. The land is held as a future plant
site and has a fair value of P2,800,000 on the date of exchange.

Hall Company also owns a tract of land held as a future plant site. Hall paid P3,600,00 for the land upon
purchase and the land has a fair value of P3,800,00 on the date of exchange.

On date of exchange, Eagle exchanged its land and paid P1,000,000 cash for the land owned by Hall.
The configuration of cash flows from land acquired is expected to be significantly different from the
configuration of cash flows of the land exchanged.

At what amount should Eagle record the land acquired in the exchange?
A. 2,800,000
B. 3,000,000
C. 3,200,000
D. 3,800,000

Answer: D

Fair value P2,800,000

Cash paid 1,000,000
Land acquired in the exchange P3,800,000

Reference:

Conceptual Framework and Accounting Standards 2018, C. Valix, p. 299

Problem 23

Yola Company and Zaro Company are fuel distributors. To facilitate the delivery of oil to their customers,
Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil.
Yola paid Zaro P300,000 to compensate for a difference in the grade of oil. It is reliably determined that
the exchange lacks commercial substance.

On he date of the exchange, carrying amount and market value of the oil were:

Yola Company Zaro Company

Carrying amount 1,000,000 1,400,000
Market Value 1,200,000 1,500,000

What amount should Yola Company record as cost of the oil inventory received in exchange?
A. 1,000,000
B. 1,300,000
C. 1,200,000
D. 1,500,000

Answer: B

Carrying amount P1,000,000

Cash paid 300,000
Cost of the oil inventory received in exchange P1,300,000

Reference:

Conceptual Framework and Accounting Standards 2018, C. Valix, p. 300

Problem 24

Galore Company ventured into construction of a condominium in Makati which is rated as the largest
state-of-the-art structure.
The board of directors decided that instead of selling the condominium, the entity would hold this property
for purposes of earning rentals by letting out space to business executive in the area.

The construction of the condominium was completed and the property was placed in service on January
1, 2018.

The cost of the construction was P50,000,000. The useful life of the condominium is 25 years and the
residual value is P5,000,000.

An independent valuation expert provided the following fair value at each subsequent year-end:

December 31, 2018 55,000,000

December 31, 2019 53,000,000
December 31, 2020 60,000,000

1. Under the cost model, what amount should be reported an annual depreciation of investment property?
A. 1,800,000
B. 2,000,000
C. 2,200,000
D. 0

2. Under the fair value model, what amount should be recognized as gain from change in fair value in
2020?
A. 5,000,000
B. 3,000,000
C. 7,000,000
D. 0

Question 1 Answer: A

Cost of the construction P50,000,000

Less: Residual value 5,000,000
Divide by useful life 25 years
Depreciation expense P1,800,000

Question 2 Answer: C

Fair value - December 31, 2020 P60,000,000

Carrying amount - December 31, 2019 53,000,000
Gain from change in fair value P7,000,000

Reference:

Conceptual Framework and Accounting Standards 2018, C. Valix, p. 560

Problem 25

Eragon Company and its subsidiaries own the following properties at year-end:

Land held by Eragon for undetermined use 5,000,000

A vacant building owned by Eragon and to be
leased out under an operating lease 3,000,000
Property held by a subsidiary of Eragon, a real
estate firm, in the ordinary course of business 2,000,000
Property held by Eragon for use in production 4,000,000
Building owned by a subsidiary of Eragon and
for which the subsidiary provides security
and maintenance services to the lessees 1,500,000
Land leased by Eragon to a subsidiary under an
operating lease 2,500,000
Property under construction for use as investment
Property 6,000,000
Land held for factory site 3,500,000
Machinery leased out by Eragon to an unrelated
party under an operating lease 1,000,000

1. What is the total investment property that should be reported in the consolidated statement of financial
position of the parent and its subsidiaries?
A. 12,000,000
B. 15,500,000
C. 10,500,000
D. 9,500,000

2. What total amount should be included in property, plant and equipment in the consolidated statement
of financial position?
A. 11,000,000
B. 13,000,000
C. 10,500,000
D. 8,500,000

Question 1 Answer: B
Question 2 Answer: A

Investment property Property, plant and

equipment
Land held by Eragon for undetermined use P5,000,000
A vacant building owned by Eragon and to be
leased out under an operating lease 3,000,000
Property held by Eragon for use in production P4,000,000
Building owned by a subsidiary of Eragon and
for which the subsidiary provides security 1,500,000
Land leased by Eragon to a subsidiary under an
operating lease 2,500,000
Property under construction for use as investment
property 6,000,000
Land held for factory site 3,500,000
Machinery leased out by Eragon to an unrelated
party under an operating lease 1,000,000
Totals P15,500,000 P11,000,000

Reference:

Conceptual Framework and Accounting Standards 2018, C. Valix, p. 561

Problem 26

Bona Company purchased an investment property on January 1, 2016 for P2,200,000. The property had
a useful life of 40 years and on December 31, 2018 had a fair value of P3,000,000.
On December 31, 2018 the property was sold for net proceeds of P2,900,000. The entity used the cost
model to account for the investment property.

What is the gain or loss to be recognized for the year ended December 31, 2018 regarding the disposal of
the property?
A. 865,000 gain
B. 810,000 gain
C. 100,000 loss
D. 700,000 gain

Answer: A

Cost – Jan. 1, 2016 P2,200,000

Accumulated depreciation
(2,200,000/ 40 x 3) (165,000)
Carrying amount – Dec. 31, 2019 P2,035,000

Sale price P2,900,000

Carrying amount 2,035,000
Gain on disposal P865,000

Reference:

Conceptual Framework and Accounting Standards 2018, C. Valix, p. 562

Problem 27

Dayara Company owned three investment properties with the following details:

Initial Fair value Fair value

cost December 31, 2018 December 31, 2019

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

Property 2 3,450,000 3,050,000 2,850,000
Property 3 3,300,000 3,850,000 3,600,000

Each property was acquired three years ago with a useful life of 25 years. The accounting policy is to use
the fair value model for investment property.

What is the gain or loss to be recognized for the year ended December 31, 2020?
A. 189,000 loss
B. 150,000 loss
C. 300,000 gain
D. 450,000 loss

Answer: B

Fair value Fair value

December 31, 2018 December 31, 2019 Gain (loss)
Property 1 3,200,000 3,500,000 P300,000

Property 2 3,050,000 2,850,000 (200,000)

Property 3 3,850,000 3,600,000 (250,000)
 Net loss from P(150,000)
change in fair value

Reference:

Conceptual Framework and Accounting Standards 2018, C. Valix, p. 562

Problem 28

Baguio Company is considering the appropriate classification of the following items:

a. Land held for long-term capital appreciation P10,000,000

b. Land held for undecided future use 20,000,000
c. Building leased out under an operating lease 50,000,000
d. Building leased out under a finance lease 30,000,000
e. Vacant building held to be leased out under an
operating lease 5,000,000
f. Property held for use in the production or supply
of goods or services 4,000,000
g. Property held for administrative purposes 6,000,000
h. Property held for sale in the ordinary course of
business 1,000,000
i. Property held in the process of construction or
development for sale 2,000,000
j. Property being constructed or developed on
behalf of third parties 8,000,000
k. Property held for future use as owner-occupied
property 2,500,000
l. Property held for future development and
subsequent use as owner-occupied property 3,000,000
m. Property occupied by employees 2,400,000
n. Owner-occupied property awaiting disposal 500,000
o. Property that is being constructed or developed
for use as an investment property 7,000,000
p Existing investment property that is being
redeveloped for continuing use as investment
property 15,000,000
q. Building held for administrative purposes and
leased out under operating lease (40% is for
administrative purposes) 10,000,000
r. Building leased out under an operating lease (the
entity supplies security and maintenance
services to the lessees) 24,000,000

How much is total amount that would normally be reported as investment property?
Land held for long-term capital appreciation P10,000,000 A. 130,000,000
Land held for undecided future use 20,000,000 B. 128,000,000
Building leased out under an operating lease 50,000,000 C. 137,000,000
Vacant building held to be leased out under an D. 106,000,000
operating lease 5,000,000
Property that is being constructed or developed Answer: C
for use as an investment property 7,000,000
Existing investment property that is being
redeveloped for continuing use as investment
property 15,000,000
Building held for administrative purposes and
leased out under operating lease
(10,000,000 x 60%) 6,000,000
Building leased out under an operating lease (the
entity supplies security and maintenance
services to the lessees) 24,000,000
Total P137,000,000
Reference:

Reviewer in Auditing Problems 2010, R. Ocampo, p. 299

Problem 29

Alaminos Inc. completedthe construction of a building at the end of 2008 for a total cost of P100 million.
The building is estimated to be economically useful for 25 years. The building was constructed for the
purpose of earning rentals under operating leases. The tenants began occupying the building after its
completion. The company opted to use the fair value model to measure the building. An independent
valuation expert was used by the company to estimate the fair value of the building on an annual basis.
According to the expert the fair values of the building at the end of 2008, 2009, and 2010 were P105
million, P120 million and P118 million, respectively.

1. How much should be recognized in profit or loss in 2008 as a result of the completion of the building at
the end of 2008?
A. 20,000,000
B. 9,000,000
C. 5,000,000
D. 0

2. The depreciation expense in 2009 is

A. 4,000,000
B. 4,800,000
C. 4,200,000
D. 0

3. How much shoud be recognized in profit or loss in 2009 as a result of the fair value changes?
A. 20,000,000
B. 19,200,000
C. 15,000,000
D. 0

4. How much should be recognized in profit or loss in 2010 as a result of the fair value changes?
A. 18,000,000
B. 3,000,000
C. 2,000,000
D. 0

5. How much is the carrying amount of the shopping mall on December 31, 2010 if Alaminos used the
cost model?
 A. 100,000,000
B. 118,000,000
C. 96,600,000
D. 92,000,000

Question 1 Answer: C

Fair value - December 31, 2008 P105,000,000

Cost 100,000,000
Unrealized gain on investment property P5,000,000

Question 2 Answer: D

Investment properties carried at fair value are not depreciated since fair value changes
are already recognized in profit or loss.

Question 3 Answer: C

Fair value - December 31, 2009 P120,000,000

Fair value - December 31, 2008 105,000,000
Unrealized gain on investment property P15,000,000

Question 4 Answer: C

Fair value - December 31, 2010 P118,000,000

Fair value - December 31, 2000 120,000,000
Unrealized loss on investment property P2,000,000

Question 5 Answer: D

Cost P100,000,000
Less: Accumulated depreciation – December 31, 2010
(100,000,000 x 2/25) 8,000,000
Carrying amount – December 31, 2010 P92,000,000

Reference:

Reviewer in Auditing Problems 2010, R. Ocampo, p. 301

Problem 30

Candon, Inc. completed the construction of a building at the end of 2008 for a total cost of P20 million.
The building is estimated to be economically useful for 25 years. The building was constructed for the
purpose of earning rentals under operating leases. The tenants began occupying the building after its
completion. The company opted to use the fair value model to measure the building. An independent
valuation expert was used by the company to estimate the fair value of the building on an annual basis.
According to the expert the fair value of the building at the end of 2008, 2009, and 2010 were P22 million,
P24 million and P25 million, respectively.

The company’s business expanded in 2009. As a result, the company started to use the building in its
operations on January 1, 2010. Because of the change in use, the company reclassified the building from
investment property to property, plant and equipment.
How much is the carrying amount of the building on December 31, 2010?
A. 24,000,000
B. 23,040,000
C. 23,000,000
D. 21,120,000

Answer: C

Fair value - December 31, 2009 P24,000,000

Less: Accumulated depreciation – December 31, 2010
(24,000,000 x 1/24) 1,000,000
Carrying amount – December 31, 2010 P23,000,000

Reference:

Reviewer in Auditing Problems 2010, R. Ocampo, p. 304