L-NU AA-23-02-01-18

LYCEUM-NORTHWESTERN UNIVERSITY
Tapuac District, Dagupan City

COLLEGE OF BUSINESS EDUCATION

Semi Finals Examination – Accounting for Government & Non-profit Organizations

2nd Semester, A.Y. 2021-2022
Prepared by: Judy Anne T. Ramirez, CPA

Name: _______________________ Score: _________________

Student No: _______________________ Date of Examination: _________________

Multiple Choice. Choose the option of the best answer.

1. Biological assets
a. Are found only in Biotech entities.
b. Are living animals or living plants and must be disclosed as a separate line item in the statement
of financial position.
c. Must be measured at cost.
d. Do not generally have future economic benefit.

2. It is the management by an entity of the biological transformation and harvest of biological assets
for sale or for conversion int agricultural produce or into additional biological asset.
a. Agricultural activity c. Economic activity
b. Biological activity d. Development activity

3. Biological transformation results from asset changes through all of the following, except
a. Growth c. Procreation
b. Degeneration d. Production of agricultural produce

4. Agricultural activity results in which of the following type of asset?

a. Biological Asset
b. Agricultural produce
c. Biological asset and agricultural produce
d. Neither biological asset nor agricultural produce

5. Agricultural activity includes all of the following, except

a. Raising livestock c. Aquaculture
b. Perennial cropping d. Ocean fishing

6. Which statement is true about biological assets?

a. Biological assets are measured at fair value less cost of disposal.
b. When fair value cannot be determined reliably, the biological asset shall be measured at cost
less accumulated depreciation and impairment losses.
c. Where there is production cycle of more than one year for biological asset, separate disclosure
is encouraged for physical change and price change.
d. All of these statements are true about biological assets.

7. Agricultural produce is
a. The harvested product from biological asset.
b. Measured at the time of harvest at the cost of production.

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c. Measured at each reporting period at fair value less cost of disposal.

d. All of the choices are correct regarding agricultural produce.

8. Agricultural produce as it grows on bearer plant is measured at the end of each reporting period
prior to harvest at
a. Fair value
b. Fair value less cost of disposal
c. Fair value plus cost of disposal
d. Fair value less cost of disposal at the point of harvest

9. Agricultural produce harvested from bearer plant is measured at

a. Fair value
b. Fair value less cost of disposal at the point of harvest
c. Cost less cost of disposal
d. Fair value plus cost of disposal at the point of harvest

10. A bearer plant is a living plant that

a. Is used in the production or supply of agricultural produce.
b. Is used to bear produce for more than one period.
c. Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
d. Must possess all of these characteristics.

11. All of the following can be considered bearer plant, except

a. Coconut tree
b. Grape vine
c. Rubber tree
d. Tree in a forest plantation to be harvested and sold as log or lumber

12. A living plant with dual use is classified as

a. Bearer plant c. Investment property
b. Biological asset d. Inventory

13. Which statement is true in relation to bearer plant?

a. The bearer plant and the related agricultural produce are accounted as two separate assets.
b. The bearer plant is a noncurrent asset.
c. The agricultural produce is usually presented as current asset unless it takes more than one year
to mature.
d. All of these statements are true about the bearer plant.

14. According to IASB, bearer plants are accounted for as

a. Biological assets with disclosure c. Property, plant, and equipment
b. Biological assets without disclosure d. Noncurrent investment

15. Mature bearer plant is measured using

a. Cost model c. Either cost model or revaluation model
b. Revaluation model d. Either cost model or fair value model

16. According to IASB, bearer animals are accounted for as

a. Biological assets c. Investment property
b. Property, plant, and equipment d. Agricultural produce

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17. Animals related to recreational activities are accounted for under what standard?
a. IAS 41 – Agriculture c. IAS 40 – Investment property
b. IAS 16 – Property, plant and equipment d. Either IAS 41 or IAS 16

18. Generally speaking, biological assets relating to agricultural activity shall be measured using
a. Historical cost
b. Historical cost less depreciation less impairment
c. A fair value approach
d. Net realizable value

19. Which of the following is unlikely to be used in fair value measurement of biological asset?
a. Quoted market price c. Present value of expected net cash
b. Most recent market transaction price flows
d. External independent valuation

20. An entity had a plantation forest that is likely to be harvested and sold in 30 years. The income shall
be accounted for in which of the following?
a. No income shall be reported annually until first harvest and sale in 30 years.
b. Income shall be measured annually and reported using a fair value approach that recognizes and
measures biological growth.
c. The eventual sale proceeds shall be estimated and matched to the profit and loss account over
the 30-year period.
d. The plantation forest shall be valued every 5 years and the increase in value shall be recognized
as component of other comprehensive income.

21. Which statement is true regarding agricultural produce?

a. In all cases, an entity shall measure agricultural produce at fair value less cost of disposal at the
point of harvest.
b. The prevailing view is that the fair value of agricultural produce at the point of harvest can
always be measured reliably.
c. The fair value measurement of agricultural produce stops at the time of harvest.
d. All of these statements are true regarding agricultural produce.

22. Which information shall be disclosed in relation to biological asset and agricultural produce?
a. Separate disclosure of the gain or loss relating to biological asset and agricultural produce.
b. The aggregate gain or loss arising on the initial recognition of biological asset and agricultural
produce and from the change in fair value less cost of disposal of biological asset.
c. The total gain or loss from biological asset, agricultural produce, and from changes in fair value
less cost of disposal of biological asset.
d. There is no requirement in the standard to disclose separately any gain or loss.

23. A gain or loss arising on the initial recognition of a biological asset and from a change in the fair
value less cost of disposal of a biological asset shall be included in
a. The profit or loss for the period c. A revaluation reserve
b. Other comprehensive income d. Retained earnings

24. Where there is a long aging or maturation process after harvest, the accounting for such products
shall be dealt with by
a. PAS 41, Agriculture c. PAS 16, Property, plant and equipment
b. PAS 2, Inventories d. PAS 40, Investment property

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25. Land that is related to agricultural activity is measured

a. At fair value
b. In accordance with PAS 16, Property, Plant and Equipment, or PAS 40, Investment Property
c. At fair value in combination with the biological asset
d. At the resale value separate from the biological asset

26. Which of the following is considered an investment property?

a. Owner-occupied property awaiting disposal.
b. Property that is leased to another entity under a finance lease.
c. Property held for use in production or supply of goods or services or for administrative
purposes.
d. A building held by the entity under a finance lease and leased out under one or more operating
leases on a commercial basis.

27. Which of the following would not be reported as investment property?

a. Property owned by the entity and leased out under one or more operating leases.
b. Property head by the entity to be leased out under one or more operating leases.
c. Real estate held with an undetermined future use.
d. Property owned by the entity and leased out to another entity under a finance lease.

28. Which cost may properly be included in the carrying amount of an investment property?
a. Start-up costs, such as opening costs.
b. Operating losses incurred before the investment property achieves planned level of occupancy.
c. Abnormal amounts of wasted materials, labor or other resources incurred in constructing or
developing the property.
d. Accrued taxes prior to acquisition date that the entity assumes an obligation to pay.

29. Entity A, a government entity, acquires a building to be leased out under various operating leases on
commercial basis. Entity A incurs the following costs on the acquisition:
 Purchase price P10,000,000
 Legal services and transfer taxes 10,000
 Refurbishments before occupancy 30,000
 Occupancy permit fees 25,000
 Property taxes after occupancy 8,000
 Opening costs (blessing and feng shui) 500,000
The entry to initially recognize the investment property in Entity A’s books of account is
a. Dr. Investment Property, Land 10,065,000
Cr. Cash Modified Disbursement System (MDS), Regular 10,065,000
b. Dr. Investment Property, Land 10,565,000
Cr. Cash Modified Disbursement System (MDS), Regular 10,565,000
c. Dr. Investment Property, Land 10,010,000
Cr. Cash Modified Disbursement System (MDS), Regular 10,010,000
d. Dr. Investment Property, Land 10,040,000
Cr. Cash Modified Disbursement System (MDS), Regular 10,040,000

During the period, Entity A, government entity, decides to use as an office one of its building that
has previously been leased out under various operating leases on commercial basis.
Information on the investment property is as follows:
 Investment property – Building P1,000,000
 Accumulated depreciation 800,000

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30. At the date of change in use, the fair value of the investment property is P250,000. How much is the
gain (loss) on the transfer?
a. 50,000 c. 0
b. (50,000) d. A transfer is prohibited.

31. On January 1, 20x1, Entity A acquires a building to be held as investment property for a total cost of
P1,500,000. The building is estimated to have a 30-year useful life and a 5% residual value. Entity A
uses the straight-line method of depreciation. On December 31, 20x5, Entity A sells the building for
P1,300,000. How much is gain (loss) on the sale?
a. 35,700 c. 53,700
b. 37,500 d. 75,300

32. During the period, one of the buildings of Entity A, a government entity, was completely destroyed
by fire. The building has a historical cost of P1,000,000 and an accumulated depreciation of
P400,000. The building is insured for P700,000. Which of the following statements is correct?
a. Entity A reports a net gain of P300,000 from the event in its year-end financial statements.
b. Entity A reports a net gain of P100,000 from the event in its year-end financial statements.
c. Entity A recognizes a loss of P600,000 but no gain.
d. Entity A shall treat the loss event and the insurance claim as separate events.

33. Which of the following is an investment property?

a. Property held to provide a social service and which also generate cash inflows.
b. Property held for strategic purposes.
c. Property occupied by employees.
d. Property that is being constructed or developed for future use as investment property.

34. Which of the following is not an investment property?

a. Land held for long-term capital appreciation rather than for short-term sale in the ordinary
course of operations.
b. Land held for a currently undetermined future use.
c. A building owned by the entity (or held by the entity under a finance lease) and leased out
under one or more operating leases on a commercial basis.
d. Equipment held to be leased out under one or more operating leases on a commercial basis to
external parties.

35. According to GAM for NGAs, government entities shall measure an investment property as follows:
Initial Subsequent
a. Cost Cost model or Fair value Model
b. Cost Cost Model
c. Fair value Fair value Model
d. Fair value Cost Model or Fair value Model

36. Investment property acquired through donation is initially measured

a. equal to the carrying amount in the donor’s books
b. at the cost to the donor
c. at fair value on acquisition date
d. equal to the costs incurred in transferring title of the investment property to the entity

37. An entity acquires investment property in exchange for a long-term noninterest-bearing note.
Assuming all of the following are determinable with sufficient reliability but differ in amounts, which
of them is most likely to be used in the initial measurement of the investment property?

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a. cash price equivalent of the investment property

b. cash price equivalent of the note payable
c. present value of future cash flows on the note payable discounted at the current market rate
d. face amount of note which is equal to the installment price

38. Entity A acquires an investment property for P1,000,000 cash. Additional costs incurred are as
follows:
 Repairs and remodeling before occupancy, P50,000.
 Legal costs of transferring title to the property, P20,000.
 Repairs after occupancy, P15,000.
The investment property is estimated to have a remaining useful life of 10 years and a residual value
equal to 5% of initial cost. Entity A uses the straight-line method of depreciation. How much is the
carrying amount of the investment property after one year?
a. 914,850 c. 923,100
b. 968,350 d. 872,100

39. According to the GAM for NGAs, transfers to or from investment property shall be made only when
there is a
a. change in management’s intention c. change in business model
b. change in use d. change in classification

40. During the period, Entity A decides to lease out under various operating leases on commercial basis
one of its buildings that has previously been used as office building.
Information on the building is as follows:
 Historical cost P1,000,000
 Accumulated depreciation 800,000
At the date of change in use, the fair value of the building is P250,000. Which of the following is the
correct reclassification entry?
a. Dr. Investment Property, Buildings 200,000
Dr. Accumulated Depreciation – Buildings 800,000
Cr. Buildings 1,000,000
b. Dr. Investment Property, Buildings 250,000
Dr. Accumulated Depreciation – Buildings 800,000
Cr. Buildings 1,000,000
Cr. Gain on reclassification 50,000
c. Dr. Investment Property, Buildings 250,000
Dr. Accumulated Depreciation – Buildings 800,000
Cr. Buildings 1,000,000
Cr. Revaluation Surplus 50,000
d. a or c, depending on the entity’s accounting policy

41. On January 2, 2014, Denmark’s investment property has a carrying value of P3,600,000 under the
fair value model. On December 31, 2014 the property has a fair value of P3,000,000, what amount
of gain or loss should Denmark continue to recognize of Denmark would shift to cost model?
a. Gain of P600,000 reported in the other comprehensive income
b. Loss of P600,000 reported in the profit or loss
c. Loss of P600,000 reported in equity as decreases in revaluation surplus
d. Zero

42. Paramount purchases a landed property at a cost of P100,000,000. In the sale and purchase
agreement, P20,000,000 of the purchase price is attributed to the land portion. The building consists
of 10 floors of equal space. Two floors are used for administrative purposes and the balance let out
to tenants. Paramount also incurs the following costs in connection with the purchase of the

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property: Legal and agency fees, P3,000,000; Soft launching cost to market for tenants, P500,000;
Feng shui cost for re-arrangements of interiors, P300,000 and administrative expenses, P200,000. At
what amount should the investment property be initially recognized?
a. 82,400,000 c. 83,200,000
b. 82,800,000 d. 103,000,000

43. Mortal Company leases an entire shopping complex from Journal Company under a 20-year
operating lease. Under the lease agreement, Mortal would manage and take the risks of operating
the shopping complex for 20 years. It pays a yearly rental of P40,000,000 to Journal Company.
Mortal Company uses 20% of the floor area for its own operations. The rest of the floor area is sub-
leased to other tenants. Mortal Company expects rental income from the sublease to be about
P35,000,000 per year for 20 years. The borrowing costs of Mortal Company is 8% per year. The cost
of constructing the complex incurred by Journal Company is P480,000,000, transaction and other
incidental costs amount to P20,000,000. If Mortal Company elects to treat its interest in the
shopping complex as an investment property, being its interest in the underlying asset, at what
amount should the investment property be initially recognized by Mortal Company?
a. None c. 400,000,000
b. 343,640,000 d. 500,000,000

44. On January 1, 2014, Double Company which uses the fair value model, purchases an investment
property at a cost of P50,000,000. At December 31, 2014 the market value of the property is
P60,000,000. The fair market value of the property on December 31, 2015 is P55,000,000. On
January 1, 2016the property was reclassified to property, plant and equipment. At what amount
should the property, plant, and equipment be initially recorded?
a. Zero c. P55,000,000
b. P50,000,000 d. P60,000,000

45. Astra Company has a plant asset with a carrying value of P1,200,000 as of December 31, 2013. On
January 1, 2014 the company decided to convert the plant asset to investment property. The fair
value of the plant asset at date of conversion is P900,000. The conversion would not result to
a. P300,000 loss on conversion reported as other comprehensive income
b. P300,000 loss on conversion reported in the profit or loss
c. P900,000 increase in investment
d. P1,200,000 decrease in plant assets

46. Portent Company, a property developer, completed the development of 30 units of office building
for sale. Upon completion, 5 units remain unsold and classified as inventories. The cost of these
remaining units is P2,000,000 per unit while the net selling price is P2,500,000 per unit.
Management decides to hold the units as investment property by letting out to tenants. What
amount of gain or loss should Portent Company recognize on the transfer of inventories to
investment property?
a. None c. 2,000,000
b. 500,000 d. 2,500,000

On January 2, 2013, Eastern Company a medium-sized enterprise, purchased a vacant plot for
P3,000,000. Management believed that the plot would appreciate in value and that the investment
would be sold in 2015. Management annually obtains the services of a property expert, who
determined the fair value of the plot:
 December 31, 2013: P4,000,000; December 31, 2014: not determinable

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The property expert indicated that the property market has shifted significantly due to a
new proposed tax on properties. As this has resulted in a range of possible values, he was
unable to reliably determine a fair value.
47. What type of property Eastern Company should disclose on December 31, 2013?
a. An investment property with a carrying value of P3,000,000
b. An investment property with a carrying amount of P4,000,000
c. A property, plant and equipment with an initial carrying value of P3,000,000
d. A property, plant and equipment with an initial carrying value of P4,000,000

48. What type of property Eastern Company should disclose on December 31, 2014?
a. An investment property with a carrying value of P3,000,000
b. An investment property with a carrying amount of P4,000,000
c. A property, plant and equipment with an initial carrying value of P3,000,000
d. A property, plant and equipment with an initial carrying value of P4,000,000

On January 1, 2011 Grand Company purchases a property at a cost of P100,000,000. The property is
classified as a property, plant and equipment in accordance with PAS 16 and is being depreciated
over 50 years. At December 31, 2015 an impairment loss of P9,000,000 was recognized. On January
1, 2019, the property is classified as investment property carried at fair value in accordance with PAS
40. The fair value of the property is P92,000,000.

49. What amount should Grand Company disclose in the profit or loss in the SCI for the period ended
December 31, 2019?
a. None c. P1,997,333
b. P1,797,333 d. P2,120,000

50. What amount of revaluation surplus should Grand Company disclose in the statement of financial
position as of December 31, 2019?
a. None c. P5,880,000
b. P5,740,000 d. P7,800,000

51. Which of the following is not an essential characteristic of property, plant and equipment?
a. sale in the ordinary course of business. c. used in the conduct of the business.
b. estimated useful life is beyond one d. physical existence.
year.

52. Which of the following shall not be classified as property, plant and equipment?
a. equipment that is idle temporarily.
b. building under construction.
c. land acquired and put on the market for resale.
d. delivery truck acquired on installment, certificate of ownership being held by finance company.

53. Under the Philippine Interpretations Committee Q and A 2012-02, an entity that purchased land and
subsequently demolished the building on it shall treat the demolition costs as
a. added to the cost of the land.
b. added to the cost of the plant.
c. a capitalized cost that shall be amortized over the estimated time period between the tearing
down of the building and the completion of the plant.
d. expensed as incurred.

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54. A company purchased land to be used as the site for the construction of a building. Timber was cut
from the building site so that construction could begin. The proceeds from the sale of the timber
should be
a. classified as other income.
b. deducted from the cost of the land.
c. deducted from the cost of the building.
d. netted against the costs to clear the land and expensed as incurred.

55. The excess of the gross price over the cash equivalent of an asset acquired on a deferred payment
plan is treated as
a. finance cost in the period of acquisition. c. finance cost over the life of the asset.
b. part of the cost of the asset. d. finance cost over the credit term.

56. Diwa Inc. purchased certain plant assets under a deferred payment contract. The agreement was to
pay P600,000 per year for three years. The plant assets should be initially recognized at
a. present value of P600,000 annuity for three years at an imputed interest rate.
b. P600,000.
c. P600,000 plus imputed interest, based on the company’s incremental borrowing rate.
d. simple present value of P600,000 for three years at an imputed interest rate.

57. Under IAS 23 Borrowing Costs, which of the following is not a condition for capitalization of
borrowing costs as part of the cost of a qualifying asset?
a. The enterprise undertakes activities to prepare the asset for intended use or sale.
b. The construction is substantially completed and the asset is ready for intended use.
c. The enterprise incurs expenditures for the asset.
d. The enterprise incurs borrowing costs.

58. In an exchange transaction that has commercial substance, the gain or loss on exchange is
a. the difference between the fair value of asset given up and amount of cash received or paid.
b. the difference between carrying value of asset given up and carrying value of the asset received.
c. the difference between the fair value and the carrying value of the asset given up.
d. not recognized.

59. What is the best basis for determining the purchase price of an item of property, plant and
equipment acquired by issuing the entity’s ordinary share?
a. Equivalent cash price of the asset.
b. Fair value of the share issued.
c. Carrying value of the asset in the; books of the previous owner.
d. Par value of the ordinary share issued.

60. Using the cost model, how are property, plant, and equipment measured on the financial position?
a. At original cost adjusted for general price level changes
b. At replacement cost less accumulated depreciation and accumulated impairment losses
c. At acquisition cost less depreciated portion thereof and less accumulated impairment loss
d. At historical cost less salvage value

61. Which statement is the assumption on which straight-line method of depreciation is based?
a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of obsolescence rather than time.
c. Service value declines as a function of time rather than use.
d. Physical wear and tear are more important than economic obsolescence.

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62. A depreciable asset has an estimated 10% salvage value. At the end of its estimated useful life, the
accumulated depreciation would equal the original cost of the asset under which of the following
depreciation methods?
Productive output Sum-of-the-vears’ digits Double-declining balance
a. No Yes No
b. No No No
c. Yes No No
d. Yes Yes Yes

63. A method that ignores salvage value in calculating periodic depreciation expense is the
a. sum-of-the-years’ digits method. c. productive-output method.
b. double declining balance method. d. group or composite method.

64. Which of the following statements is incorrect?

a. Donations of property, plant and equipment should be recorded at fair value of the donated
asset.
b. Property acquired in exchange for shares or other securities of the enterprise should be
recorded at its fair value or the fair value of the securities, whichever is more clearly evident.
c. When property is acquired in exchange for another asset, its cost is usually determined by
reference to the fair value of the asset surrendered.
d. When a group of assets is acquired for a lump-sum price, the lump sum price should be
allocated to the individual assets based on their carrying values.

65. How are grants related to depreciable assets accounted for?

a. Recognized directly in shareholders’ equity during the year of grant.
b. Initially recorded as a deferred credit and transferred to profit or loss over the periods and in
the proportion in which depreciation expense on the asset is recognized.
c. Recognized in other comprehensive^ income and transferred to profit or loss as the asset is
depreciated.
d. Recognized in profit or loss during the year of grant.

66. Depreciation, as generally used in accounting, is

a. a process of asset valuation for purposes of the statement of financial position.
b. applicable only to long-lived intangible assets.
c. used to indicate a decline in fair value of a long-lived asset.
d. the systematic allocation of the depreciable amount of an asset over its useful life.

67. Which of the following statements is incorrect?

a. The depreciable amount of item of property, plant and equipment shall be allocated on a
systematic basis over its useful life.
b. The depreciation method used shall not reflect the pattern in which the asset’s economic
benefits are consumed by the entity.
c. The estimation of the useful life of an item of property, plant and equipment is a matter of
judgment based on the experience of the entity with similar assets.
d. The depreciation charge for each period shall be recognized as an expense unless it is included
in the carrying amount of another asset.

68. An asset’s carrying amount is the

a. amount of cash or cash equivalent paid or the fair value of the other consideration given to
acquire an asset; at the time of its acquisition or construction.

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b. amount at which an asset is recognized in the statement of financial position after deducting any
accumulated depreciation and accumulated impairment loss.
c. cost of an asset or the amount substituted for cost in the financial statements, less its residual
value.
d. net amount which the enterprise expects to obtain an asset at the end of its useful life after
deducting expected costs of disposal.

69. When testing for impairment and fair value of the asset is not reliably determinable, the recoverable
amount is
a. the discounted cash flow from the use and sale of the asset.
b. the discounted cash flow after tax from the use and sale of the asset.
c. the undiscounted cash flow from the use and sale of the asset.
d. not computed and the asset is not considered impaired.

70. Which of the following expenditures could not be appropriately recognized as exploration and
evaluation assets?
a. Expenditures related to development of mineral resources
b. Costs of exploratory drilling
c. Costs of activities in relation to evaluating the technical feasibility and commercial viability of
extracting a mineral resource
d. Costs of topographical, geochemical and geophysical studies

71. Improvements which result to increased future economic benefits include all of the following,
except
a. modification of an item to extend its useful life, including an increase in its capacity.
b. cost of servicing and overhauling to restore or maintain the originally assessed standard of
performance.
c. upgrading of machine parts to achieve a substantial improvement in the quality of output.
d. adoption of new production process enabling a substantial reduction in previously assessed
operating costs.

72. The Haw Mining Company purchased a tract of land containing mineral resource for P54,000,000.
The purchase contract contained a provision that Haw is required to restore the land suitable for
factory use after it has extracted the mineral resource. Geological surveys have indicated that
2,400,000 tons of ore could be extracted. The property has an estimated salvage value of
P6,000,000 after the ore has been extracted and the land is restored. The estimated cost of
restoration and geological survey is P7,200,000 which is the present value at date of acquisition.
Assuming that Haw does not maintain inventories of extracted ores, how much should be charged
to depletion expense per ton of extracted mineral ore?
a. P800,000 c. P0
b. P5,640,000 d. P5,445,000

73. When property is acquired by issuing equity shares, which of the following is the best basis for
establishing the historical cost of the acquired asset?
a. Historical cost of the asset to the seller c. Fair value of the asset received
b. Historical cost of a similar asset d. Fair value of shares issued

74. When a plant asset is acquired by deferred payment, which condition generally does not indicate
the need to consider the imputation of interest?
a. The interest rate stated on deferred obligation is significantly different from market interest
rate.

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b. The cash price of the plant asset is significantly different from the deferred obligation.
c. The instrument representing the deferred obligation is noninterest bearing.
d. The face amount of the deferred obligation is equal to the fair value of the plant asset
exchanged.

75. Generally accepted accounting principles require that gains be recognized when a fixed asset is:
a. traded if the asset acquired by the taxpayer is similar in use
b. sold for a loss
c. traded if the asset acquired by the taxpayer is dissimilar in use
d. traded and the book value of the old asset is greater than the trade-in allowance

76. The method of determining depreciation that yields successive reductions in the periodic
depreciation charge over the estimated life of the asset is:
a. units-of-production c. straight-line
b. declining-balance d. time-valuation

77. When the amount of use of a fixed asset varies from year to year, the method of determining
depreciation expense that best matches allocation of cost with revenue is:
a. declining-balance c. units-of-production
b. straight-line d. MACRS

78. Which one of the following is not an internal control procedure for fixed assets?
a. limiting access to computers
b. allowing the sole user of an asset to determine when it is time to dispose of it
c. requiring competitive bids for asset purchases
d. purchasing assets only from approved vendors

79. Which one of the following is not an internal control procedure for fixed assets?
a. ensuring that fixed assets are acquired at the lowest possible costs
b. training employees to properly operate fixed assets
c. tagging assets as they are acquired
d. recording assets in the subsidiary ledger only at year end

80. The accumulated depletion account is:

a. an expense account
b. an intangible asset account
c. reported on the income statement as other expense
d. reported on the balance sheet as a deduction from the cost of the mineral deposit

81. The process of transferring the cost of metal ores and other minerals removed from the earth to an
expense account is called:
a. Depletion c. Amortization
b. Deferral d. Depreciation

82. Expenditures for research and development are generally recorded as:
a. current operating expenses c. assets and amortized over 40 years
b. assets and amortized over useful life d. current assets

83. Which of the following is classified as an intangible asset on the balance sheet?
a. Goodwill c. Machinery
b. Buildings d. Land Held for Future Use

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84. The term applied to the amount of cost to transfer to expense resulting from a decline in the utility
of intangible assets is:
a. Amortization c. Depreciation
b. Depletion d. Allocation

85. Patents are reported on the balance sheet in the:

a. intangible assets section c. property, plant, and equipment section
b. current assets section d. investments section

86. Fixed assets are ordinarily presented in the balance sheet:

a. at current market values c. at cost less accumulated depreciation
b. at replacement costs d. separate section with intangible assets

87. All thing being equal except the ratio of fixed assets to long-term liabilities, a lender would prefer to
lend to a company whose ratio is:
a. 1.0 c. 3.0
b. 2.0 d. 3.5

88. Which of the following ratios provides a solvency measure that shows the margin of safety of
noteholders or bondholders and also gives an indication of the potential ability of the business to
borrow additional funds on a long-term basis?
a. ratio of net sales to assets
b. ratio of fixed assets to long-term liabilities
c. number of days' sales in receivables
d. rate earned on owners' equity

89. What is the journal entry a company would record when it purchases equipment and pays cash:
a. debit Purchases; credit Cash c. debit Notes Payable; credit Equipment
b. debit Equipment; credit Cash d. debit Equipment; credit Notes Payable

90. In a normal arms-length business transaction, long-term liabilities are often secured by:
a. fixed assets c. accounts receivable
b. signature of the chief executive officer d. bonds payable

91. An entity purchased a new machinery that it does not have to pay until after three years. The total
payment on maturity will include both principal and interest. The cost would be the total payment
multiplied by what time value of money?
a. Present value of an ordinary annuity of c. Future amount of ordinary annuity of 1
1 d. Future amount of 1
b. Present value of 1

92. A machine with a cost of $65,000 has an estimated residual value of $5,000 and an estimated life of
4 years or 18,000 hours. What is the amount of depreciation for the second full year, using the
declining-balance method at double the straight-line rate?
a. $15,000 c. $16,250
b. $30,000 d. $32,500

93. A building with a cost of $500,000, an estimated residual value of $50,000, and an estimated life of
20 years was depreciated by the straight-line method for 10 years. In the eleventh year it was

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determined that the useful life should be extended for 10 years. The residual value was to remain
the same. The depreciation expense for the current and future years is:
a. $15,000 c. $13,750
b. $11,250 d. $12,500

94. A fixed asset with a cost of $30,000 and accumulated depreciation of $27,500 is sold for $3,500.
What is the amount of the gain or loss on disposal of the fixed asset?
a. $2,500 loss c. $2,500 gain
b. $1,000 loss d. $1,000 gain

95. A fixed asset with a cost of $30,000 is traded for a similar asset priced at $40,000. Assuming
accumulated depreciation of $27,500 and a trade-in allowance of $3,000, what is the cost basis of
the new asset?
a. $40,500 c. $37,500
b. $39,500 d. $40,000

96. A fixed asset with a cost of $32,000 is traded for a similar asset priced at $42,000. Assuming
accumulated depreciation of $28,000 and a trade-in allowance of $2,000, what is the cost basis of
the new asset?
a. $44,000 c. $42,000
b. $41,000 d. $40,000

97. When a company discards machinery that is fully depreciated, this transaction would be recorded
with the following entry:
a. debit Accumulated Depreciation; credit Machinery
b. debit Machinery; credit Accumulated Depreciation
c. debit Cash; credit Accumulated Depreciation
d. debit Depreciation Expense; credit Accumulated Depreciation

98. When a company sells machinery at a price equal to its book value, this transaction would be
recorded with an entry that would include the following:
a. debit Cash and Accumulated Depreciation; credit Machinery
b. debit Machinery; credit Cash and Accumulated Depreciation
c. debit Cash and Machinery; credit Accumulated Depreciation
d. debit Cash and Depreciation Expense; credit Accumulated Depreciation

99. When a company exchanges machinery and receives a trade-in allowance greater than the book
value, this transaction would be recorded with the following entry:
a. debit Machinery and Accumulated Depreciation; credit Machinery, Cash, and Gain on Disposal
b. debit Machinery and Accumulated Depreciation; credit Machinery and Cash
c. debit Cash and Machinery; credit Accumulated Depreciation
d. debit Cash and Machinery; credit Accumulated Depreciation and Machinery

100. When a company exchanges machinery and receives a trade-in allowance less than the book
value, this transaction would be recorded with the following entry:
a. debit Machinery and Accumulated Depreciation; credit Machinery and Cash
b. debit Cash and Machinery; credit Accumulated Depreciation
c. debit Cash and Machinery; credit Accumulated Depreciation and Machinery
d. debit Machinery, Accumulated Depreciation, and Loss on Disposal; credit Machinery and Cash

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Reviewed and Checked by:

Dr. Genoveva Y. Reyes, CPA, FRIAcc

Dean, College of Business Education

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