1.

Interest revenue earned on specific borrowing for qualifying asset

A. Reduces the cost of the qualifying asset
B. Reduces interest expense reported in the income statement
C. Increases equity
D. Must be credited to interest income

2. Which of the following is not relevant in determining the value in use?

A. Time value of money
B. Variation in the amount and timing of cash flow
C. Expected future cash flows
D. The carrying amount of the asset

3. If an entity demolishes an old building and construct a new building, any demolition cost incurred is:
A. Capitalized as cost of the land
B. Capitalized as cost of the new building
C. Expensed immediately
D. Charged to retained earnings

4. These are assistance by the government in the form of transfers of resources to an entity in return for part
or future compliance with certain conditions relating to the operating activities of an entity.
A. Government grant
B. Government assistance
C. Government aid
D. Government appropriation

5. When a balance is carried in an “revaluation surplus” account in relation to an asset that has been
derecognized, it is applicable under PAS 16 to
A. Transfer the balance to “share capital” account.
B. Transfer the balance to retained earnings.
C. Recognize the balance in profit or loss of the period in which the asset was derecognized.
D. Transfer the balance to a provision account for future asset revaluations.

6. Under PAS 16, PPE includes all of the following, except

A. Property held for administrative purposes.
B. Property used for extraction of minerals, oil and natural gas.
C. Property used in production of supply of goods and services.
D. Biological assets related to agricultural activity and mineral rights.

7. In the case of a nonmonetary grant, which of the following accounting treatments is prescribed by PAS 20?
A. Record the asset at replacement cost and the grant at a nominal value.
B. Record the grant at a value estimated by management.
C. Record both the grant and the asset at fair value of the nonmonetary grant.
D. Record only the asset at fair value, do not recognize the fair value of the grant.
8. PAS 16 requires that revaluation surplus resulting from initial revaluation of property, plant and
equipment should be treated in one of the following ways. Which of the four options mirrors the
requirements of PAS 16?
A. Credited to retained earnings as this is unrealized gain.
B. Deducted from current assets and added to property, plant and equipment.
C. Released to the income statement an amount equal to the difference between the depreciation calculated
on historical cost vis-à-vis revalued amount.
D. Debited to the class of property, plant and equipment that is being revalued and credited to a reserve
captioned “revaluation surplus” which is presented under equity.

9. On January 1, 2018, Crater, Inc. purchased equipment having an estimated salvage value equal to 20% of its
original cost at the end of a ten-year life. The equipment was sold December 31, 2023, for 50% of its original
cost. If the equipment’s disposition resulted in a reported loss, which of the following depreciation
methods did Crater use?
A. Double-declining
B. Sum-of-years’ digit
C. Straight line
D. Composite

10. Which of the following is not a necessary characteristic for an item to be classified as property, plant and
equipment?
A. Used in operations of the business
B. Not acquired for resale
C. Have a useful life beyond one year.
D. Subject to depreciation.

11. If a corporation purchase a lot and building and subsequently tears down the building and uses the
property as a parking lot, the proper accounting treatment of the cost of the building would depend on
A. The significance of the cost allocated to the building in relation to the common cost of the lot and
building.
B. The length of time for which the building was held prior to its demolition.
C. The contemplated future use of the parking lot.
D. The intention of management for the property when he building was acquired

12. A company purchased land with a building on it and immediately tears down the building so that the land
can be used for the construction of a plant. Which of the following should not be charged to the land
account?
A. Title examination and surveying fees.
B. Payment to tenants to vacate premises of old building.
C. Property taxes accruing during the period of plant construction.
D. Costs for grading, clearing, and draining the property.

13. If the present value of a note in exchange for a plant asset is less than its face amount, the difference should
be
A. Included in the cost of the asset.
B. Amortized as interest expense over the life of the note.
C. Amortized as interest expense over the life of the asset.
D. Included in interest expense in the year of issuance.
14. The sale of an office equipment resulting in a gain indicates that the proceeds from the sale were:
A. Less than current market value
B. Greater than cost
C. Greater than book value
D. Less than book value

15. Depreciation, as generally used in accounting, is:

A. A process of asset valuation for balance sheet purposes
B. Applicable only to long-lived intangible assets
C. Used to indicate a decline in market value of a long-lived asset
D. An accounting process which allocates long-lived asset cost to accounting periods
.
16. Which method of depreciation results in decreasing charges?
A. Sum-of-the-years’ digits
B. Straight-line
C. Productive output
D. LCNRV

17. A company uses the sum-of-the-years digits method in depreciating its machine with a ten-year estimated
life. What fraction would be applied to the cost to arrive at the depreciation charge for the third year?
A. 3/10
B. 8/55
C. 1/3
D. 3/55

18. The value per appraisal computed by deducting observed depreciation from replacement cost is called:
A. Net book value
B. Appraisal value
C. Sound value
D. Replacement cost

19. A change in depreciation method should

A. be handled retroactively.
B. be handled in future periods only.
C. be handled in current and future periods.
D. result in restatement of prior period statements.

20. All of the following are true with regard to impairment testing of long-lived assets except:
A. If impairment indicators are present, the company must conduct an impairment test.
B. The impairment test compares the asset’s carrying value with the lower of its fair value less cost to sell
and its value-in-use.
C. If the recoverable amount is lower than the carrying value, an impairment loss will be reported on the
period’s income statement.
D. If either the fair value less cost to sell or the value-in-use is higher than the carrying amount, no
impairment loss will be recorded.
 PROBLEMS:

1) Carmina Company purchased a tract of land as a factory site. An old building was demolished and
construction began on the new building.

Purchased price of land and an old building 4,500,000

Fair value of old building 250,000
Cost of demolishing old building 300,000
Title insurance and legal fees to purchase land 200,000
Architect fee 950,000
New building construction cost 8,000,000
Survey before construction 100,000
Building permit or payment to city hall for approval of building construction 150,000
Excavation before new construction 200,000
Liability insurance during construction 100,000
New fence surrounding the factory 100,000
Driveways, parking bays and safety lighting 550,000
Cost of trees, shrubs and other landscaping 250,000

What is the cost of new building?

A. 9,700,000 B. 9,750,000 C. 9,800,000 D. 9,950,000

Purchased price of land and an old building 4,500,000 L

Fair value of old building 250,000 -L
Cost of demolishing old building 300,000 B
Title insurance and legal fees to purchase land 200,000 L
Architect fee 950,000 B
New building construction cost 8,000,000 B
Survey before construction 100,000 L
Building permit or payment to city hall for approval of building construction 150,000 B
Excavation before new construction 200,000 B
Liability insurance during construction 100,000 B
New fence surrounding the factory 100,000 LI
Driveways, parking bays and safety lighting 550,000 LI
Cost of trees, shrubs and other landscaping 250,000 LI

2) Explosive, Inc. acquired two units of equipment on December 31, 2021. The first equipment was purchased
in exchange for a ten-year non-interest-bearing note requiring annual payment of P1,000,000 every
December 31 starting December 31, 2022. The second equipment was acquired by issuing a two-year
P6,000,000 non-interest-bearing note. The prevailing rate for notes of these types on December 31, 2021 was
12%. What is the total cost of the two units of equipment? Present value factor round to two (2) decimal
places
A. 10,130,000 B. 10,450,000 C. 11,130,000 D. 16,470,000

PV-Note 1: P1,000,000 x 5.65 = P 5,650,000

 PV-Note 2: P6,000,000 x 0.80 = P 4,800,000
P 10,450,000

3) Tilt Company acquired land from Display Company which will be used as a plant site in exchange for
20,000 newly issued shares of Tilt’s ordinary shares. At the date of acquisition, Tilt’s ordinary shares had a
par value of P20 per share and a fair value of P30 per share. The fair value of the land was P500,000 when
Cooper acquired this 2 years ago. How much is the initial cost of the newly acquired land?
A. 400,000 B. 500,000 C. 600,000 D. 200,000

FV of shares issued: P30 x 20,000 = P600,000

4) A machine of Rye Company has a cost of P60,000, has an annual depreciation of P12,000 and has
accumulated depreciation of P30,000 on December 31, 2021. On April 1, 2022, when the machine has a fair
value of P24,000, it was exchanged for a similar machine with a fair value of P72,000 and the proper amount
of cash is paid. The loss to be recognized on exchange is:
A. 6,000 B. 3,000 C. 21,000 D. 0

BV, 4/1/22:
Cost P 60,000
A/D [30,000 + (12,000 x 3/12)] (33,000) P 27,000
FV, 4/1/22 24,000
Loss on exchange P 3,000

5) On July 1, 2017, Bonnie Bailey Incorporated accepted several office equipment from a shareholder with
original cost of P2,000,000. On the same date, the items had aggregate market value totaling to P1,500,000.
No entry has been made by Bonnie Bailey since no consideration was given up for these items. Moreover,
cost incurred to recondition the donated items amounted to P100,000 and were charged to operations
during the period.
The entries to record the donation involves a net credit to:
A. Donated capital at P2,000,000 C. Donated capital at P1,500,000
B. Donated capital at P1,400,000 D. Gain from grants at P1,500,000

Equipment 1,500,000
SP 100,000
Donated capital 1,500,000
Cash 100,000

If from a non-shareholder:

Equipment 1,600,000
Income from donations 1,500,000
Cash 100,000

6) Jake Company purchased equipment on January 1, 2025 at an invoice price of P800,000, with credit terms
5/10, n/30. Freight in costs of P25,000, testing and installation costs of P40,000 and labor costs during regular
operations of P20,000 were also incurred before the payment of the invoice on January 20, 2025. It was
expected that the machine could be used for 10 years, after which the residual value would be zero. The
entity intends to use the machine for only 8 years, however, after which it expects to be able to sell it for
 P50,000. The straight-line method is used. What is the carrying amount of this equipment on December 31,
2025?
A. 745,625 B. 728,125 C. 742,500 D. 760,500
Initial cost, 1/1/25 [(P800,000 x 95%) + P25,000 + P40,000] P 825,000
A/D, 12/31/25 (P825,000-P50,000)/8 (96,875)
BV, 12/31/25 P 728,125

7) The carrying value of company’s property and equipment was P200,000 at 1 August 2022. During the year
ended 31 July 2023, the company sold equipment for P25,000 on which it made a loss of P5,000. The
depreciation charge for the year was P20,000. What was the carrying value of property and equipment at 31
July 2023?
A. 150,000 B. 155,000 C. 160,000 D. 180,000

Proceeds from sale P 25,000

BV, 7/31/23 30,000
Loss on sale P 5,000

Property and equipment, net, 8/1/22 200,000

Acquisition -
Dep exp (20,000)
Sale (30,000)
Property and equipment, net, 7/31/23 150,000

8) On January 1, 2021, Ding Company acquired an equipment with useful life of 8 years and P390,000 residual
value. Using the double-declining balance method, the 2022 depreciation expense on this equipment was
P1,170,000. What was the book value of this equipment on December 31, 2023?
A. 3,412,500 B. 2,730,000 C. 2,242,500 D. 2,632,500

DATE DEP EXP BOOK VALUE

1/1/21 -0- ?
12/31/21 4,680,000 - 1,170,000/25%*
12/31/22 1,170,000 3,510,000
12/31/23 877,500 25% 2,632,500 ?
*DDR = (1/8) X 2 = 25%

9) Roxanne Co. purchased equipment for P500,000. The equipment had an estimated 10-year service life.
Roxanne’s policy for 10-year assets is to use the 150% declining balance depreciation method for the first
five years of the asset’s life and then switch to the straight-line depreciation method. What amount should
Roxanne report as accumulated depreciation for equipment at the end of the sixth year?
A. 300,000 B. 322,518 C. 278,147 D. 311,425

0 500,000
1 75,000 425,000
2 63,750 361,250
3 54,187.50 307,062.50 (1/10) x 150% or 15%
4 46,059.375 261,003.125
5 39,150.469 221,852.66 500,000 x 0.85 = = = = =
 6 44,370.53 Straight-line
322,517.87 SHORTCUT

10) During 2020, Road Company constructed assets costing P4,215,000. The weighted average accumulated
expenditures on these assets during 2020 totaled P3,900,000. The entity borrowed P2,000,000 at 7.5% on
January 1, 2020 to finance the construction. In addition to the construction loan, the entity had two other
notes outstanding during the year, a P1,500,000, 10-year, 10% note payable dated October 1, 2018, and a
P1,000,000, 8% note payable dated November 2, 2019. Construction was completed on October 1, 2020. What
is the total cost of the building?
A. 4,458,600 B. 4,539,000 C. 4,143,600 D. 4,539,600

Total costs excluding capitalized borrowing cost P 4,215,000

Capitalized borrowing costs:
From specific borrowing (P2M x 7.5% x 9/12) P 112,500
From general borrowing:
WA expenditures P 3,900,000
Exp. financed by S.B. (2,000,000)
Exp. financed by G.B. P 1,900,000
x Capitalization rate 9.2%*
x No. of mos. (1/1/20-10/1/20) x 9/12 131,100 243,600
Total cost P 4,458,600

*Capitalization rate:
Total annual interest – G.B. (P1.5M x 10%) + (P1M x 8%) P 230,000
Total principal 2,500,000
Capitalization rate 9.2%

11) During 2020, Grant Industries, Inc. constructed a new manufacturing facility at a cost of P12,000,000. The
weighted average accumulated expenditures for 2020 were calculated to be P5,400,000. The company had
the following debt outstanding at December 31, 2020:
• 10 percent, five-year note to finance construction of the manufacturing facility, dated January 1, 2020,
P3,600,000.
• 12 percent, 20-year bonds issued at par on April 30, 2016, P8,400,000.
• 8 percent, six-year note payable, dated March 1, 2019, P1,800,000.

Determine the amount of interest to be capitalized by Grant Industries for 2020.

A. 360,000 B. 563,220 C. 557,280 D. 591,840

From S.B.: P3.6M x 10% P 360,000

From G.B.:
WA Expenditures P 5,400,000
Exp financed by S.B. (3,600,000)
Exp financed by G.B. P 1,800,000
x Capitalization rate 11.29% 203,220
Total capitalized borrowing cost P 563,220

Total annual interest (P8.4M x 12%) + (P1.8M x 8%) P 1,152,000

 ÷ Total principal (P8.4M + P1.8M) 10,200,000
Capitalization rate 11.29%

12) On January 1, 2021, Yes Sir Company purchased equipment with cost of P10,000,000, useful life of 10 years
and no residual value. The entity used straight line depreciation. On December 31, 2021 and December 31,
2022, the entity determined that impairment indicators are present. There is no change in useful life or
residual value.

December 31, 2021 December 31, 2022

Fair value less cost of disposal 8,100,000 8,300,000
Value in use 8,550,000 8,200,000

What is the impairment loss for 2021?

A. 900,000
B. 450,000
C. 600,000
D. Zero

Book value, 12/31/21 (P10M x 9/10) P 9,000,000

Recoverable amount, 12/31/21 8,550,000
Impairment loss – 2021 P 450,000

13) On January 1, 2023, Stigman Company purchased building at a cost of P10,000,000 with a 10-year useful life
and no residual value. The entity used the straight-line depreciation method.

On January 1, 2025, the entity decided to use revaluation model and it was determined that the fair value of
the equipment on this date is P12,000,000. The income tax rate is 30%.

What is included in the entry to record the revaluation on January 1, 2025?

A. Debit accumulated depreciation P1,000,000
B. Debit deferred tax liability P1,200,000
C. Credit revaluation surplus P4,000,000
D. Credit revaluation surplus P2,800,000

BV, 1/1/25:
Cost P 10,000,000
A/D (P10M / 10 x 2) (2,000,000) P 8,000,000
Fair value 12,000,000
Revaluation surplus P 4,000,000

RS, net of tax (P4M x 70%) P 2,800,000

14) On January 1, 2021, Feista Company acquired a depreciable asset for P3,300,000 and it this same date, it
received a government grant of P300,000 which was deducted from the cost of the asset acquired. The asset
has 10-year useful life and residual value of P250,000. Feista failed to comply with the conditions of the
grant and on January 1, 2023, the grant became repayable. What is the depreciation in 2023?
A. 300,000 B. 305,000 C. 365,000 D. 390,000

Initial cost P 3,300,000

Grant (300,000)
Net cost P 3,000,000
SV (250,000)
Depreciable cost P 2,750,000
÷ Useful life 10 years
Annual depreciation P 275,000

BV, 1/1/23:
Net cost P 3,000,000
A/D (P275,000 x 2) (550,000)
Deficiency in dep (P300,000 / 10 x 2) (60,000)
BV, 1/1/23 P 2,390,000
Repayment 300,000
BV, 1/1/23 after repayment P 2,690,000
SV (250,000)
Depreciable cost P 2,440,000
÷ Remaining life 8 years
Dep exp, 2023 P 305,000
Deficiency in dep 60,000
Total dep exp, 2023 P 365,000

If a grant becomes repayable, it should be treated as a change in estimate. Where the original grant
related to income, the repayment should be applied first against any related unamortized deferred credit,
and any excess should be dealt with as an expense. Where the original grant related to an asset, the
repayment should be treated as increasing the carrying amount of the asset or reducing the deferred
income balance. The cumulative depreciation which would have been charged had the grant not been
received should be charged as an expense. [IAS 20.32]

NOTE:

This is the same problem given in the Practice Set-Problems (No. 27). I previously made a note in the Practice Set
that there is a correction with the suggested answer for this item that the answer should be P312,500, not P365,000.
And now, I am correcting my previous correction after I tried to solve again this problem and search for the specific
part of PAS 20 which gives the exact guideline for the repayment of grant related to asset initially recognized as a
reduction in cost. The correct answer for this item should be P365,000. I sincerely apologize for this mistake and will
make the appropriate adjustment in the Quiz 4.
 SUPPLY THE ANSWERS:

15) On January 1, 2021, GGG, Inc. purchased an equipment for P10,400,000. Residual value was P800,000 and
useful life was for 10 years. On December 31, 2024, the equipment’s replacement cost had increased to
P16,000,000 while its residual value was reduced to P400,000. GGG appraised the equipment and the
process resulted to the original life being revised to 12 years.

How much is the revaluation surplus recognized on December 31, 2024?

A. 3,200,000
B. 5,200,000
C. 3,360,000
D. 9,360,000
Disregard the revised life of 12 years. Consider it only in the
Sound value, 12/31/24: subsequent depreciation.
Replacement cost P 16,000,000
Assumed A/D (P16M-P0.4M)/10 x 4 (6,240,000) P 9,760,000
Book value, 12/31/24:
Cost P 10,400,000
A/D (P10.4M – P0.8M) / 10 x 4 (3,840,000) 6,560,000
Revaluation surplus P 3,200,000

16) At the current year-end, Claxon Co has undertaken impairment tests on two machines. The following
information is relevant:

Machine 1 Machine 2
Cost 450,000 250,000
Useful life 10 years 15 years
Age 4 years 3 years
Fair value 300,000 230,000
Cost of disposal 15,000 35,000
Value in use 260,000 198,000

What is the total amount of impairment loss that should be recognized in the current year profit or loss?
A. 13,000
B. 12,000
C. 2,000
D. 0

Machine 1:
Book value (P450,000 x 6/10) P 270,000 No impairment
Recoverable amount (FV less cost of disposal) 285,000 (RA > BV)
Machine 2:
Book value (P250,000 x 12/15) P 200,000
Recoverable amount (Value in use) 198,000
Impairment loss P 2,000
17) On March 30, 2021, XXL Company purchased an equipment for P4,290,000. This equipment has 5 years
estimated useful life and P390,000 salvage value. Using the sum of year’s digit method of depreciation, how
much were the charges to income from use of this machine in 2022?
A. 2,340,000 B. 2,080,000 C. 1,105,000 D. 780,000

1/1/22 to 3/31/22 (P4,290,000 – P390,000) x 5/15 x 3/12 P 325,000

4/1/22 to 12/31/22 (P4,290,000 – P390,000) x 4/15 x 9/12 780,000
Total Depreciation – 2022 P 1,105,000
18) On January 1, 2021, Hakdog Company received cash of P4,000,000 from the government to be used in
constructing a building. The construction was completed on December 31, 2021 for a total cost of
P10,000,000. The building is depreciated over 20 years with no estimated residual value. On January 1, 2024,
the government demanded repayment of the P4,000,000 grant given as grant in 2021.

What is the amount of loss on repayment of government grant to be reported in 2024 assuming the grant
was initially recognized as deferred income?
A. 3,400,000
B. 600,000
C. 400,000
D. 0
January 1, 2022 to December 31, 2023
Entry, date of repayment: 20 – 2

Deferred income (P4,000,000 x 18/20) P 3,400,000

Loss on repayment 600,000
Cash P 4,000,000

19) Camella Company acquired a machine and incurred the following:

Cash paid for machine, including VAT of P96,000 896,000

Cost of transporting 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 machine 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 as 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. 1,600,000

Cash paid for machine, excluding VAT of P96,000 P 800,000

Cost of transporting 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 machine to make it operate more efficiently 75,000
Estimated dismantling cost to be incurred as required by contract 65,000
TOTAL INITIAL COST OF MACHINE P 1,200,000

20) Lyra Company and Vera Company are fuel oil distributors. To facilitate the delivery of oil to customers, the
two entities exchanged ownership of barrels of oil without physically moving the oil. Lyra paid Vera
P1,500,000 to compensate for a difference in the grade of oil. It was reliably determined that the
configuration of the cash flows of the asset received does not differ from the configuration of the cash flows
of the asset transferred. On the date of exchange, the oil inventory of Lyra has a carrying amount of
P5,000,000 and fair value of P7,000,000. The oil inventory of Vera has a carrying amount of P6,000,000 and
fair value of P8,500,000.
No/lack of commercial substance
What amount should Lyra record as cost of the oil inventory received in exchange?
A. 4,500,000 B. 6,500,000 C. 7,000,000 D. 8,500,000

Book value of asset given up P 5,000,000

Cash payment 1,500,000
Initial cost of asset received P 6,500,000