Quiz 1

Conceptual Framework and Accounting Standards

I. TRUE OR FALSE

TRUE The cost of borrowing is included in the cost of self-constructed asset if it meets the
criteria under PAS 23

TRUE An entity shall begin capitalizing borrowing cost when it incurs expenditure for the asset.

FALSE Self-constructed property, plant, and equipment shall include direct cost of materials only
since only such is tangible.

FALSE The production method of depreciation assumes that depreciation is more a factor of time
rather than the function or operative capacity of the asset itself.

TRUE When the asset is derecognized from the financial statement, the depreciation for that
asset must also be stopped.

FALSE Once the residual value of an item of PPE is determined it must not be changed.

TRUE Government grant shall not be recognized on a cash basis.

FALSE Government assistance is an action by the government designed to provide benefit for the
general public.

TRUE The nature and extent of government grant recognized in the financial statement must be
disclosed.

FALSE The name of the government agency must be clearly presented in the notes to the
financial statement to ensure transparency.

TRUE Investment properties and manufacturing plant may be considered to be a qualifying

asset.

FALSE Capitalization of borrowing cost is required for a biological asset.

FALSE According to PAS 23, borrowing cost does not include finance charges related to finance
lease.

FALSE The borrowing cost that is directly attributable to acquisition of a qualifying asset may
not be capitalized since the standard gave the entity an option to capitalize or not.

TRUE PAS 23 does not require disclosing a separate statement enumerating the assets
considered as “qualifying asset”

TRUE Usually the capitalization of borrowing cost will stop when the physical construction of
asset is complete.

TRUE The actual borrowing cost must be greater than or equal to the capitalized borrowing cost.
FALSE Even if the entity is yet to incur expenditure for the asset, borrowing cost may be
capitalized.

II. IDENTIFICATION & QUESTION TYPE

Under PAS 20, Grants are:

Not recognized but only warrants disclosure in the notes to the financial statements of the entity.

Recognized immediately in the profit or loss

Recognized in profit or loss on a systematic basis over the periods in which the entity recognized
the related expense.

Credited directly to a shareholders’ equity account since it increases the asset.

How should an enterprise account for a non-monetary government grant?

Record the asset at fair market value and the grant at a nominal amount.

Record the asset and the grant at fair market value.

Record the asset and the grant at estimated amount of the management.

Record the asset at nominal value and the grant at fair market value.

Grants related to income shall be:

Recognize in equity as a reserve.

Credited to retained earnings.

Recorded in the other comprehensive income.

Recognized in the profit or loss as a separate line item.

It is an action by a government designed to provide an economic benefit to an entity and for which the
government cannot reasonably place a value.

Government Assistance

Government Benefit

Government Grant

Government Takeover

Which of the following is true under PAS 23, Borrowing cost?

Borrowing cost is an interest expense computed using the effective interest method
Investment property can be treated as qualifying asset for the purpose of capitalizing borrowing
cost.
 If the borrowing cost is directly attributable to a qualifying asset, the borrowing cost shall be
expensed immediately.
The actual borrowing cost incurred shall be capitalized if the qualifying asset is financed by
specific borrowing.
Which should not be considered a qualifying asset?
A jet that will be constructed for a span of two years.
Ferry boat that can be purchased immediately with two years financing scheme.
A toll gate that takes two years to build.
A power plant that takes three years to construct.
Under PAS 23, which of the following is not a condition for capitalization of borrowing cos as part of the
cost of a qualifying asset?
The enterprise incurs expenditures for the asset.
The enterprise incurs borrowing cost.
Construction is substantially completed, and the asset is ready for its intended use.
The enterprise undertakes activities to prepare the asset for intended use or sale.
If the present value of a note in exchange for a plant asset is less than its face value, the difference should
be:
Included in the cost of an asset.
Amortized as interest expense over the life of the note.
Amortized as interest expense over the life of the asset.
Included in the interest expense in the year of issuance.
A company purchase a land to be used as site for a construction of a building. Timbers was cut from the
building site so that construction shall begin. The proceeds from the sale of timber should be:
Classified as other income.
Netted against the cost to clear the land.
Deducted from the cost of the building.
Deducted from the cost of the land.
Which of the following may be treated as qualifying asset for the purpose of capitalized borrowing cost?
Investment property.
Financial asset recorded at fair value.
Inventory manufactured in large quantity on a repetitive basis and takes a substantial period of
time to get ready for use or sale.
Biological asset