Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

FAR OCAMPO/OCAMPO
FAR.3406-Property, Plant and Equipment – Depreciation and Derecognition MAY 2023

DISCUSSION PROBLEMS
1. What is depreciation? Use the following information for the next three questions.
a. The systematic allocation of the depreciable
An entity has a machine with the following details:
amount of an asset over its useful life.
b. The cost of an asset, or other amount substituted Cost P1,750,000
for cost, less its residual value. Residual value P155,000
c. The removal of a previously recognized asset from Useful life 10 years
an entity’s statement of financial position. Expected units of production 100,000
d. Price that would be received to sell an asset in an Age - current year 6 years
orderly transaction between market participants at Units produced - current year 8,000
the measurement date.
Compute depreciation for the current year using the
2. Depreciation of an asset begins appropriate method.
a. When it is available for use.
b. When it is actually used. 7. The machine’s service potential declines with use.
c. When it is retired from active use. a. P175,000 c. P140,000
d. When it is derecognized. b. P159,500 d. P127,600

3. Depreciation of an asset ceases 8. Sum-of-the-years’ digits method

a. At the date that the asset is derecognized. a. P174,000 c. P145,000
b. At the date that the asset is classified as held for b. P159,000 d. P116,000
sale in accordance with PFRS 5
c. At the earlier of a or b. 9. 200% declining-balance method
d. At the later of or b. a. P114,688 c. P91,750
b. P104,530 d. P83,624
4. Depreciation is not recognized if
a. The fair value of the asset exceeds its carrying
amount. 10. Holdaway, Inc., a small furniture manufacturer,
b. The asset becomes idle. purchased the following assets at the end of the year.
c. The asset is retired from active use. Asset # Cost R.V. D.A. Life
d. The asset’s residual value exceeds its carrying
1 P24,000 P5,000 P19,000 5 years
amount.
2 900 130 770 7 years
5. The Seoul Corp. purchased an office equipment with a 3 320 - 320 8 years
useful life of 10 years on June 1 of the current year for 4 9,000 500 8,500 5 years
P4,500,000. P34,220 P5,630 P28,590
At its year end of Dec. 31, the amount the entity would The group depreciation rate is
receive from the disposal of the asset if it was already of a. 16.51% c. 19.76%
the age and in the condition expected at the end of its b. 15.61% d. 17.96%
useful life was estimated at P300,000. Inclusive of
inflation the actual amount expected to be received on SOLUTION GUIDE:
disposal was estimated at P500,000.
What should be the depreciation charge for the current
year ended Dec. 31?
a. P420,000 c. P233,333
b. P245,000 d. P210,000

6. The depreciation method used shall reflect the pattern

in which the asset’s future economic benefits are
expected to be consumed by the entity. Which
statement is incorrect regarding depreciation methods?
a. Straight-line depreciation results in a constant
charge over the useful life if the asset’s residual
value does not change.
b. The diminishing balance method results in a
decreasing charge over the useful life.
c. The units of production method results in a charge
based on the expected use or output.
d. A depreciation method that is based on revenue
that is generated by an activity that includes the
use of an asset is appropriate.
11. Takatak, Inc., uses the group depreciation method for
its furniture account. The depreciation rate used for
furniture is 21%. The balance in the furniture account
on Jan. 1 of the current year was P125,000, and the
balance in Accumulated Depreciation - Furniture was
P61,000. The following purchases and dispositions of
furniture occurred during the year (assume that all
purchases and disposals occurred at the beginning of
the year).

Page 1 of 3 www.teamprtc.com.ph FAR.3406

TEAM PRTC

15. As of Jan. 1, 2023, Seniors decided to change the

Assets Sold
method of computing depreciation on its sole piece of
Assets Purchased Cost Selling Price equipment from the sum-of-the-years' digits method
P35,000 P27,000 P8,000 to the straight-line method. The equipment, acquired
in Jan. 2020 for P520,000, had an estimated life of five
The carrying amount of furniture at Dec. 31 is
years and a residual value of P20,000. The amount of
a. P71,070 c. P63,070
the depreciation expense for 2023 is
b. P64,750 d. P44,070
a. P100,000 c. P50,000
b. P 60,000 d. P42,000
12. Kuya Corp. uses hand tools in its manufacturing
activities. On Jan. 1 of the current year, there are 800
16. Useful life of Property, Plant and Equipment is:
of such tools on hand at a cost of P200 each.
a. The period over which an asset is expected to be
Acquisition and retirement during the year are:
available for use by an entity.
Estimated value b. The number of production or similar units expected
Acquisition Retirement at year end to be obtained from the asset by an entity.
400 @ P300 300 @ P50 P200,000 c. Either a or b.
d. Neither a nor b.
Assuming that retirements are on a first-in, first-out
basis, which of the following statements is true?
17. Which of the following factors are considered in
a. The depreciation using the retirement method is
determining the useful life of an asset?
P60,000.
I. Expected usage of the asset
b. The depreciation using the replacement method is
II. Expected physical wear and tear
P90,000.
III. Technical or commercial obsolescence
c. The depreciation using the inventory method is
IV. Legal or similar limits on the use of the asset
P75,000.
d. The retirement method yields the lowest amount of a. I, II, III and IV
depreciation compared to replacement and b. I, II and III only
inventory methods. c. I, II and IV only
d. I and II only
SOLUTION GUIDE:
18. An entity has an asset with an economic life of 16
years. It is the entity’s policy to sell similar assets after
being used for 12 years. What is the useful life of the
asset?
a. 16 years
b. 14 years
c. 12 years
d. 10 years

19. On Jan. 1, 2021, Paete Corp. signed a 12-year lease

for a building. Paete has an option to renew the lease
for an additional 8-year period on or before Jan. 1,
2025. During Jan. 2023, Paete made substantial
improvements to the building. The cost of the
improvements was P3,600,000, with an estimated
useful life of 15 years. At Dec. 31, 2023, Paete
13. Pantabangan Corp. takes a full year’s depreciation in
intended to exercise the renewal option. Paete has
the year of an asset’s acquisition and no depreciation
taken a full year’s depreciation on this improvement.
in the year of disposition. Data relating to one
What should be the depreciation charge for the year
depreciable asset acquired two years ago, with residual
ended Dec. 31, 2023?
value of P900,000 and estimated useful life of 8 years,
a. P360,000 c. P240,000
at the beginning of the current year are:
b. P300,000 d. P200,000
Cost P9,900,000
Accumulated depreciation 3,750,000
20. Which statement is incorrect regarding derecognition
Using the same depreciation method in the last two of property, plant and equipment?
years, how much depreciation should Pantabangan a. Derecognition is the removal of a previously
record in the current year for this asset?
recognized asset from an entity’s statement of
a. P1,125,000 c. P1,650,000
financial position.
b. P1,250,000 d. P1,500,000
b. An asset should be removed from the statement of
financial position on disposal or when it is
withdrawn from use and no future economic
14. The residual value, the useful life of an asset and the
benefits are expected from its disposal.
depreciation method applied to an asset shall be c. The gain or loss on disposal is the difference
reviewed
between the net disposal proceeds and the
a. At least at each financial year-end.
carrying amount and should be recognized in profit
b. At least every two years.
or loss.
c. At least every three years.
d. Gains on disposal of property, plant and equipment
d. Only if there is an indication they may have
may be classified as revenue.
changed since the most recent annual reporting
date.

Page 2 of 3 www.teamprtc.com.ph FAR.3406

TEAM PRTC

21. Entity A acquired an asset that had a cost of P130,000. 27. Bugis Corp. acquired a machine on Jan. 1, 2015.
The asset is being depreciated over a 5-year period Details of the machine at Dec. 31, 2022 are given
using the sum-of-the-years’ digit method. It has a below:
salvage value estimated at P10,000. The loss/gain if Depreciation
the asset is sold for P38,000 at the end of the third Component Cost basis
year is Engine P170,000,000 Useful life of
a. P4,000 gain c. P68,000 loss 40,000 hours
b. P20,000 loss d. P92,000 loss Outer casings 510,000,000 25 years
straight line
Other 12 years
Use the following information for the next three questions. components 255,000,000 straight line
Riles Truckers, Inc. acquired a heavy road transporter on P935,000,000
Jan. 1, 2017 at a cost of P10 million. The estimated useful During the year 2023, the following events took place:
life is 10 years. On Jan. 1, 2023, the powertrain requires a) Engine, which had run for 30,000 hours till date
replacement, as further maintenance is uneconomical due developed serious snags. It was replaced by a
to the off-road time required. The remainder of the vehicle better engine with a cost of P238 million and
is perfectly roadworthy and is expected to last for the next estimated life of 50,000 hours. The new engine
four years. The cost of the new powertrain is P4.5 million. was used for 5,000 hours during the year.
b) Polishing and painting was done to the outer
22. Assuming that the original cost of the powertrain is P3 casings at a cost of P1.3 million.
million, the total depreciation expense in 2023 is c) Other components were upgraded at a cost of
a. P2,200,000 c. P1,150,000 P102 million. The remaining life of the other
b. P1,825,000 d. P1,450,000 components is 5 years.

23. If an entity recognizes in the carrying amount of an Compute the total depreciation for the year 2023,
item of property, plant and equipment the cost of a assume that all the work mentioned above was
replacement for part of the item, then it derecognizes completed at the beginning of 2023.
the carrying amount of the replaced part a. P85,850,000 c. P90,950,000
a. If the replaced part had been depreciated b. P81,676,470 d. P81,600,000
separately.
b. If the asset is depreciated using components
depreciation. 28. Which of the following depreciation charge for the
c. If it is practicable for an entity to determine the period shall be recognized in profit or loss?
carrying amount of the replaced part. a. Depreciation of head office building.
d. Regardless of whether the replaced part had been b. Depreciation of manufacturing plant and
depreciated separately. equipment.
c. Depreciation of property, plant and equipment
24. Assuming that the original cost of the powertrain is not used for development of an intangible asset.
separately identifiable and the appropriate discount d. None of these.
rate is 5% (the present value of 1 at 5% for 6 years is
0.7462), the total depreciation expense in 2023 is 29. How is depreciation recognized in profit or loss
a. P1,000,000 c. P2,934,362 reported in the statement presenting profit or loss?
b. P2,500,000 d. P1,789,210 a. As a separate line item
b. As part of cost of goods sold
25. When an entity allocates depreciation to the separate c. As part of operating expenses
parts of an asset and each part is accounted for d. Any of these
separately, the entity is using which of the following
approaches to depreciation? 30. In relation to depreciation, an entity’s financial
a. Periodic depreciation statements shall disclose
b. Segment depreciation I. The depreciation methods used
c. Replacement cost depreciation II. The useful lives or the depreciation rates used
d. Components depreciation III. A reconciliation of the carrying amount at the
beginning and end of the period showing
26. Which statement is incorrect regarding ‘components depreciation
depreciation’? IV. Whether depreciation during the period is
a. Each part of an item of property, plant and recognized in profit or loss or as a part of the cost
equipment with a cost that is significant in relation of other assets
to the total cost of the item shall be depreciated V. Accumulated depreciation at the end of the
separately. period.
b. An entity allocates the amount initially recognized
in respect of an item of property, plant and a. I, II, III IV and V c. I, II and III only
equipment to its significant parts and depreciates b. I, II, III and IV only d. I, II and IV only
separately each such part.
c. It may be appropriate to depreciate separately the
airframe and engines of an aircraft. J - end of FAR.3406 - J
d. An entity shall not depreciate separately the parts
of an item that do not have a cost that is
significant in relation to the total cost of the item.

Page 3 of 3 www.teamprtc.com.ph FAR.3406