INTERMEDIATE ACCOUNTING 3 (CA51016)

MOCK PRELIMINARY EXAMINATION REVIEWER SOLUTIONS

Prepared by the Mentors’ Circle Committee of the UST – Junior Philippine Institute of Accountants

I. Theories.

Multiple Choice.
1. C. Netted against the actual interest to be capitalized

2. C. 10 years
➢ After making changes in estimates, the entity must apply the revised estimate. In this
case, 10 years is the change in accounting estimate that must be applied in computing
depreciation.

3. A. Statement 1 only
➢ PAS 36, paragraph 60 - An impairment loss shall be recognized immediately in profit or
loss, unless the asset is carried at revalued amount in accordance with another Standard
(for example, in accordance with the revaluation model in IAS 16). Any impairment loss
of a revalued asset shall be treated as a revaluation decrease in accordance with that other
Standard.
➢ An impairment loss shall be recognized immediately in profit or loss, unless there is a
remaining balance of revaluation surplus.

4. A. (1) Investment property; (2) Property, plant, and equipment

➢ IAS 40 provides that in the perspective of the group as a whole, the property is owner-
occupied. Thus, it is presented as property, plant, and equipment in the consolidated
financial statements while in the individual financial statements, in the perspective of
PHUPHA COMPANY, it is presented as investment property.

5. B. Credit to revaluation loss

6. B. Statement 1 only
➢ Statement 2 is incorrect because PFRS 6 applies after the entity has obtained legal rights
to explore (is illegal it to explore for mineral resources without the authorization of the
government). It also applies before the establishment of the technical feasibility and
commercial viability of extraction of mineral resources.

7. D. Successful efforts method; full-cost method

8. C. I, IV, V, VI
➢ Transaction II: Startup cost in establishing a franchise is recognized as expense.
➢ Transaction III: The cost to create a recipe is recognized as directly attributable cost.

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 9. C. Costs incurred when the entity has produced a detailed program design.
➢ When the entity has produced a detailed program design, it is highly probable to have
established technological feasibility.

10. D. It is the excess of payment over the carrying value of the net assets.
➢ Goodwill is the excess of payment over the fair value of the net assets.

TRUE or FALSE.
11. FALSE. An investment property is subsequently measured using either the cost model or the fair
value model.

12. FALSE. A gain or loss on transfer of investment property can only be recognized if the investment
property is carried at the fair value model.

13. FALSE. Classification of Exploration and Evaluation Assets may depend on the nature of the asset.
It may be classified as EITHER Property, Plant, and Equipment OR Intangible Assets.

14. TRUE.

15. FALSE. Research and development costs that have been recognized as expense may never be
recognized as part of the cost of an asset even if subsequently, technical feasibility is established.

16. TRUE.

17. FALSE. ONLY bearer plants may be accounted for as Property, Plant, and Equipment under PAS
16.

18. FALSE. The land on which biological assets are being cultivated must be classified as PPE.

19. TRUE.

20. FALSE. It is encouraged but not required by PAS 41 for an entity to distinguish between fair
value fluctuations arising from price changes and fair value fluctuations arising from physical
changes.

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II. Problem Solving.
PROBLEM 1 – CHARMY CO.
1. ANS: 1,100,000

Cost 5,000,000
Less: Residual Value (500,000)
(5M x 10%)
Depreciable Cost 4,500,000
Divide by: Estimated Useful Life ÷ 5 years
Annual Depreciation 900,000
Multiply by: Depreciation Period x 2.5 years
(July 1, 2019 – January 1, 2022)
Accumulated Depreciation 2,250,000

Carrying Value as of Jan 1, 2022

Cost 5,000,000
Accumulated Depreciation (2,250,000)
Carrying Value - 1/1/22 2,750,000

New changes by CHARMY:

Depreciation for 2022 = 2,750,000 x 2/5 = 1,100,000

2. ANS: 1,650,000
Carrying Value as of Dec 31, 2022
Cost 2,750,000
Accumulated Depreciation (1,100,000)
Carrying Value – 12/31/22 1,650,000

PROBLEM 2 – OISHI CO.

3. ANS: 345,810

Cost 4,000,000
Less: Residual Value (200,000)
(4M x 5%)
Depreciable Cost 3,800,000
Divide by: Estimated Useful Life ÷ 20 years
Annual Depreciation 190,000
Multiply by: Depreciation Period x 7 years
(January 1, 2014 – December 31 2020)
Accumulated Depreciation 1,330,000

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 Original Cost P 4,000,000
Less: Accumulated Depreciation from 01/01/14 to 12/31/20 (1,330,000)
Carrying Value as of December 31, 2020 2,670,000
Less: Recoverable Amount
(**the higher between fair value less cost to sell and value in use) (2,324,190)
IMPAIRMENT LOSS TO BE RECOGNIZED P 345,810

Fair value less cost to sell = 2,234,500

Value in use = 2,324,190**
COSTS, PV OF PV OF NET
NET CASH
YEAR REVENUES EXC. DISCOUNT CASH
INFLOW
DEP. RATE INFLOW
2021 1,225,000 - 184,000 = 1,041,000 x 0.95 = 988,950
2022 1,240,000 - 526,000 = 714,000 x 0.91 = 649,740
2023 1,195,000 - 765,000 = 430,000 x 0.86 = 369,800
2024 880,000 - 495,000 = 385,000 x 0.82 = 315,700
TOTAL P 2,324,190**

PROBLEM 3 – GILMORE Co.

4. ANS: 162,500
Depreciation rate: 2/8 = 25%

Depreciation for 2019: 1,200,000 x 25% x 6/12 = 150,000

Depreciation for 2020: (1,200,000 – 150,000) x 25% = 262,500

Cost P 1,200,000
Less: Accumulated Depreciation
Depreciation for 2019 (150,000)
Depreciation for 2020 (262,500)
Carrying Value as of December 31, 2020 787,500

Fair Value as of December 31, 2020 P 950,000

Less: Carrying Value as of December 31, 2020 (787,500)
Revaluation Surplus, December 31, 2020 162,500

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PROBLEM 4 – OFF COMPANY
5. ANS: 12,200,000

*The initial recognition of investment property is ALWAYS at COST.

Acquisition Cost

A 300-sq.m. tract of land the company acquired on January 01, 2021 which P5,000,000
it intends to hold for capital appreciation purposes.

A 150-sq.m. tract of land the company acquired on January 01, 2021 which P2,700,000
is currently held for an undetermined future use by the company.

A building acquired on January 01, 2021, currently being rented out to a P4,500,000
different entity under an operating lease.

TOTAL INITIAL COST OF IP 12,200,000

PROBLEM 5 – FEARLESS COMPANY

6. ANS: 19,250,000
Acquisition cost (already includes directly attributable expenditures) P7,500,000
Divided by: Estimated useful life ÷ 15 years
Annual Depreciation P500,000

Depreciation for 2020 (500,000 x 6/12) P 250,000

Depreciation for 2021 (500,000 x 12/12) 500,000
Depreciation for 2022 (500,000 x 12/12) 500,000
Accumulated depreciation at December 31, 2022 P1,250,000

Acquisition cost P 7,500,000

Accumulated depreciation at December 31, 2022 (1,250,000)
Carrying value of building P 6,250,000
Other investment properties 13,000,000
Total investment properties P19,250,000

*For companies adopting the fair value model for its investment properties, if, at initial recognition, there
is clear evidence that the fair value of an investment property cannot be measured reliably on a
continuing basis, it shall account for that investment property at the cost model and all other investment
properties at the fair value model.

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PROBLEM 6 – DBK COMPANY
7. ANS: 1,600,000
Inventory to Investment Property:
Fair Value of Investment Property P 13,600,000
Carrying Amount of Inventory (12,000,000)
Gain on Reclassification taken to Profit or Loss 1,600,000
*The gain or loss on reclassification of transfers from inventory to investment property is taken to profit
or loss.

8. ANS: 3,700,000
PPE to Investment Property:
Fair Value of Investment Property P 29,500,000
Carrying Amount of Inventory (26,000,000)
Revaluation Surplus 3,500,000

Fair Value of Investment Property P 9,500,000

Carrying Amount of Inventory (9,300,000)
Revaluation Surplus 200,000

Total Revaluation Surplus = 3,500,000 + 200,000

= 3,700,000

*The gain on reclassification of transfers from PPE to investment property is recognized as revaluation
surplus and taken to other comprehensive income. The loss on reclassification of transfers from PPE to
investment property is recognized as impairment loss, unless there is a remaining balance of revaluation
surplus.

PROBLEM 7 – DIKASAYANG COMPANY

9. ANS: 6,750,000
Depreciation is based on the shorter between the useful life and the expected mining period.
• Mining Period: 8 years vs. Actual Useful Life of Equipment: 12 year
Mining Period:
Total Recoverable Tons P4,800,000
Tons per year (50,000 tons x 12 months) ÷ 600,000 tons
Mining Period 8 years
Depreciation is based on units of output method since the mining period is shorter.

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 Depreciation Expense (2019)
Cost of Equipment* P7,200,000
Divided by: Total estimated recoverable tons ÷ 4,800,000
Depreciation Rate per Ton P 1.5 per ton
Tons mined in 2019 (50,000 tons per month x 6 months**) x 300,000 tons
Depreciation Expense- 2019 P 450,000

*The cost of equipment is also the depreciable cost since there is no residual value.
**6 months (July 1, 2019 to December 31, 2019 only) – actual mineral extraction/production

Cost of Equipment P7,200,000

Accumulated Depreciation:
2019 (450,000)
Carrying value of equipment at year-end- 2019 P6,750,000

10. ANS: 2.4 per ton

Depletion Expense (2019)
Purchase Price P8,500,000
Development Costs 540,000
Restoration Cost (Discounted Amount) + 2,000,000
Depletable Cost * P11,040,000
Divided by: Total estimated recoverable tons ÷ 4,800,000
Revised Depletion Rate Per Ton P 2.3 per ton
Tons mined in 2019 (50,000 tons per month x 6 months**) x 300,000 tons
Depletion Expense - 2019 P 690,000
*Depletable Cost does not include tangible equipment costs. It is recognized and depreciated separately.
**6 months (July 1, 2019 to December 31, 2019 only) – actual mineral extraction/production

Depletion Expense (2020)

Depletion Rate Per Ton P 2.3 per ton
Tons mined in 2020 (50,000 tons per month x 12 months) x 600,000 tons
Depletion Expense - 2020 P 1,380,000

Depletion Expense (2021)

P 0 - No depletion is recognized in periods where no natural resource is extracted.

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Revised Estimated Recoverable Tons
Original Total Estimated Recoverable Tons 4,800,000
Extracted in 2019 (50,000 tons x 6 months only) (300,000)
Extracted in 2020 (50,000 tons x 12 months) (600,000)
Extracted in 2021 -
Additional Reserves (2022) 50,000
Total estimated recoverable tons - Beg. 2022 3,950,000 tons

Depletable Cost P11,040,000

Less: Depletion
2019 (P2.3 per ton x 300,000 tons) (690,000)
2020 (P2.3 x 600,000 tons) (1,380,000)
2021 (No depletion expense) -
Additional Development Costs 510,000
Revised Depletable Cost P9,480,000
Divided by: Revised estimated recoverable tons ÷ 3,950,000
Revised Depletion Rate Per Ton P 2.4 per ton

PROBLEM 8 – WIN COMPANY

11. ANS: 700,000
Development costs incurred after establishment of technical feasibility 620,000
Legal costs of registering the patent 45,000
Drawings required to be filed for the application of the patent 35,000
Capitalizable Cost of Intangible Asset 700,000

PROBLEM 9 – BRIGHT COMPANY

12. ANS: 19,975,200
Initial Cost (10,000,000 x 2.4869*) 24,869,000
*Present value factor of ordinary annuity of 10% for 3 periods.

Initial Cost of Franchise P 24,869,000

Less: Amortization
(24,869,000/15yrs useful life x 3yrs amortization period) (4,973,800)
Franchise Carrying Value, Dec. 2020** 19,895,200

Initial Cost of Customer List P 200,000

Less: Amortization
(200,000/5yrs useful life x 3yrs amortization period) (120,000)
Customer List Carrying Value, Dec. 2020*** 80,000

Franchise Carrying Value, Dec. 2020** P 19,895,200

Customer List Carrying Value, Dec. 2020*** 80,000
TOTAL P 19, 975, 200

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PROBLEM 10 – MEDUSA Co.
13. ANS: 40,000
Patent, January 1, 2021 450,000
Divide by: Estimated Useful Life ÷ 10 years
(Lower between EUL and Legal Life)
Annual Amortization 45,000

Patent, January 1, 2021 450,000

Less: Accumulated Amortization (90,000)
(45,000 x 2 years)
Carrying Amount of Patent December 31, 2022 360,000
Add: Patent acquired December 31, 2022 120,000
Total Patent, December 31, 2022 480,000
Divide by: Revised Remaining Useful Life ÷ 12 years
(8 years remaining + 4 years additional)
Amortization Expense, 2023 40,000

*The case was successfully defended by MEDUSA Co. Therefore, legal fees are treated as expense and
ignored in this computation.

PROBLEM 11 – DIMSUM TREATS Co.

14. ANS: 135,000
Trademark, December 31, 2016 385,000
Less: Recoverable Amount (250,000)
(20,000 ÷ 8%)
Impairment Loss: Expensed Recognized, 2019 135,000

*The trademark has an indefinite useful life. Therefore, it is not amortized but tested for impairment.
*To get the recoverable amount of an intangible asset with an indefinite useful life, the perpetuity formula
will be used (Cash Inflow ÷ Interest Rate). Present value factor cannot be used because there is no remaining
useful life for being indefinite.
*Legal fees are recognized as directly attributable cost of the trademark.

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PROBLEM 12 – SENKU INC.
15. ANS: 92,000,000
Intangible Asset
Legal costs to make it a legal patent 10,000,000
Materials used (45,000,000 – 1,500,000) 43,500,000
Services consumed (12,500,000 + 4,000,000) 16,500,000
Amortization from other intangible assets used for the generation 5,000,000
of the patent
Cost of employee benefits for those who contribute 13,000,000
Selling, Administrative and General Overhead 4,000,000
(6,000,000 – 2,000,000)
Total 92,000,000

PROBLEM 13 – THARN COMPANY

16. ANS: 0
Fair Value of Net Assets 17,060,000
Less: Purchase Price (15,000,000)
Gain on Bargain Purchase 2,060,000

*No goodwill is recognized because the purchase price is less than the fair value of net assets.

PROBLEM 14 – SARAWAT Company

17. ANS: 462,500
CV of Property, Plant, and Equipment 5,375,000
CV of Intangible Assets 4,625,000
Goodwill 1,000,000
Carrying Value of Assets 11,000,000

Fair Value of Assets 9,500,000

Less: Cost to Sell (500,000)
Recoverable Amount 9,000,000

*The recoverable amount is the higher between the fair value less cost to sell and value in use. Since there
is no value in use, the fair value less cost to sell will be considered as the recoverable amount.
Carrying Value of Assets 11,000,000
Less: Recoverable Value 9,000,000
Impairment Loss 2,000,000

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 Impairment Loss 2,000,000
Less: Goodwill 1,000,000
Remaining Impairment Loss 1,000,000

Impairment Loss
CV of Property, Plant, and Equipment 5,375,000 1M x 5,375,000/10M 537,500
CV of Intangible Assets 4,625,000 1M x 4,625,000/10M 462,500
Carrying Value of Remaining Assets 10,000,000 1,000,000

PROBLEM 15 – TINE Farm

18. ANS: 1,425,000

Cows and goats 1,425,000

All items left are to be classified as Property, Plant, and equipment.

PROBLEM 16 – STARDROP VALLEY Farm

19. ANS: 20,000
* Formula = Price Change x Number of animals
* Refer to the table for values.
2-years old 4,000 – 4,550 x 30 pigs = 16,500
2.5-years old 5,200 – 5,400 x 10 pigs = 2,000
Newborn 2,200 – 2,500 x 5 pigs = 1,500
TOTAL 20,000

20. ANS: 183,250

*Formula = Number of remaining animals @ N age x FVCTS at year-end
3 years old *25 x 6,650 = 166,250
0.5 years old 5 x 3,400 = 17,000
TOTAL 183,250

January 1, 2020 July 1, 2020 December 31, 2020

30 2-years old pigs 30 3-years old pigs
10 2.5 years old pigs 10 3-years old pigs
TOTAL PIGS 40 3-years old pigs
Less: Sold Pigs (15 3-years old pigs)
*25 3-years old pigs

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