RECOGNITION AND INITIAL MEASUREMENT OF PROPERTY, PLANT, AND EQUIPMENT

Theories

1. Property, plant, and equipment are defined as

A. Tangible assets held for sale in the ordinary course of business.
B. Tangible assets held to earn rentals or for capital appreciation.
C. Tangible assets held for use in the production or supply of goods or services of for
administrative purposes.
D. Tangible assets held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes and expected to be used during
more than one reporting period.

2. Costs directly attributable to bring the asset to the location and condition for the
intended use include all, except
A. Cost of employee benefit not arising directly from the acquisition of property, plant,
and equipment
B. Cost of site preparation
C. Initial delivery and handling cost
D. Installation and assembly cost

3. Which cost should be expensed immediately?

A. Administrative overhead
B. Initial operating loss
C. Cost of relocating or reorganizing part or all of an entity’s operation
D. All of the given choices.

4. The cost of property, plant, and equipment comprises all of the following, except
A. Purchase price
B. Import duties and nonrefundable purchase taxes
C. Any cost directly attributable in bringing the asset to the location and condition for
the intended use.
D. Initial estimate of the cost of dismantling the asset for which the entity has not
present obligation.

5. The cost of the land typically includes all of the following, except
A. Grading, filling, draining, and clearing cost
B. Special assessment for street light and drainage system
C. Private driveway and parking lot
D. Assumption of any lien on the property

6. The single cost of acquiring land and usable old building is

A. Charged to the land only
B. Charged to the building only
 C. Allocated between the land and building based on relative fair value.
D. Allocated between the land and building based on carrying amount.

7. Which of the following would ordinarily be treated as a revenue expenditure rather than
a capital expenditure?
A. Cost of servicing and overhaul to restore or maintain the originally assessed
standard of performance
B. The replacement of a major component of building
C. An addition to an existing building
D. Cost of improvement that is expected to provide discernible future benefits

8. Which of the following costs should not be capitalized?

A. Replacement of roof building every 15 years
B. Cost of site preparation
C. Installation and assembly cost
D. Replacement of small spare parts annually

9. Fence and parking lot are reported as

A. Current assets
B. Land improvements
C. Land
D. Expense

10. The carrying amount of an existing old building demolished to make room for the
construction of a new building should be
A. Accounted for as a loss
B. Capitalized as cost of the new building
C. Charged to the land
D. Charged to the new building if accounted for as inventory

Problems

11. An entity purchased a tract of land as an investment property. The entity razed an old
building on the property.
Purchase price of land and old building P4,000,000
Fair value of old building 300,000
Demolition of old building 200,000
Proceeds from sale of salvaged materials 20,000
Legal fees for purchase contract and recording ownership 150,000
Title guarantee insurance 50,000
Payment of property taxes in arrears on land 100,000
Option paid for an alternative land not acquired 30,000
Special assessment for city improvements 120,000
 What is the cost of the land?
A. 4,600,000
B. 4,120,000
C. 4,330,000
D. 4,300,000

12. An entity purchased a tract of land as a factory site. An old building was demolished and
construction began on the new building.
Purchase price of land and old building P4,500,000
Fair value of an old building 250,000
Demolition of old building 300,000
Title insurance and legal fees to purchase land 200,000
Architect fees 950,000
New building construction cost 8,000,000
Survey before construction 100,000
Building permit or payment to city hall for construction approval 150,000
Excavation before new construction 200,000
Liability insurance during construction 100,000
New fence surrounding the new building 100,000
Driveway parking bay and safety lighting 550,000
Cost of trees, shrubs, and other landscaping 300,000

What is the cost of the land?

A. 4,550,000
B. 4,800,000
C. 4,850,000
D. 4,450,000

13. An entity purchased a tract of land as a factory site. An old building was demolished and
construction began on the new building.
Purchase price of land and old building P4,500,000
Fair value of an old building 250,000
Demolition of old building 300,000
Title insurance and legal fees to purchase land 200,000
Architect fees 950,000
New building construction cost 8,000,000
Survey before construction 100,000
Building permit or payment to city hall for construction approval 150,000
Excavation before new construction 200,000
Liability insurance during construction 100,000
New fence surrounding the new building 100,000
Driveway parking bay and safety lighting 550,000
Cost of trees, shrubs, and other landscaping 300,000
 What is the cost of the new building?
A. 9,700,000
B. 9,750,000
C. 9,800,000
D. 9,950,000

14. An entity purchased a tract of land as a factory site. An old building was demolished and
construction began on the new building.
Purchase price of land and old building P4,500,000
Fair value of an old building 250,000
Demolition of old building 300,000
Title insurance and legal fees to purchase land 200,000
Architect fees 950,000
New building construction cost 8,000,000
Survey before construction 100,000
Building permit or payment to city hall for construction approval 150,000
Excavation before new construction 200,000
Liability insurance during construction 100,000
New fence surrounding the new building 100,000
Driveway parking bay and safety lighting 550,000
Cost of trees, shrubs, and other landscaping 300,000

What is the cost of land improvements?

A. 950,000
B. 650,000
C. 850,000
D. 400,000

15. An entity a machine and incurred the following costs:

Cash paid for machine, including VAT of P96,000 P896,000
Cost of transporting the machine 30,000
Cost of installation 50,000
Cost of testing machine 40,000
Cost of safety rails and platform surrounding machine 60,000
Cost of water device to keep machine cool 80,000
Cost of adjustment to make it operate more efficiently 75,000
Cost of repairing damage during installation 45,000
Cost of spare parts to cover breakdowns 155,000
Estimated dismantling cost to be incurred (required by contract) 65,000
Insurance cost for the current year 15,000
Cost of training personnel who will use the machine 25,000

What total amount should be capitalized as cost of the machine?

A. 1,400,000
B. 1,296,000
C. 1,200,000
D. 1,160,000