TEST BANK
INTERMEDIATE
Financial
Accounting
Part 1B
2015
ZEUS VERNON B. MILLAN
ALL RIGHTS RESERVED
2015
No part of this work covered by the
copyright hereon may be reproduced
or used in any form or by any means electronic or mechanical, including
photocopying – without the written
permission of the author.
ISBN 978-621-95096-1-9
Published by:
BANDOLIN ENTERPRISE
No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600, Philippines
ii
TABLE OF CONTENTS
CHAPTER 12
INVESTMENTS IN ASSOCIATES .............................................................. 1
CHAPTER 12: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).............................................................................................. 1
CHAPTER 12: THEORY OF ACCOUNTS REVIEWER........................................ 6
CHAPTER 12 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 23
CHAPTER 13
AGRICULTURE ....................................................................................... 24
CHAPTER 13: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES)
CHAPTER 13: THEORY OF ACCOUNTS REVIEWER...................................... 28
CHAPTER 13 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS ........ 34
24
CHAPTER 14
PROPERTY, PLANT AND EQUIPMENT (PART 1) ................................ 35
CHAPTER 14: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................................................ 35
CHAPTER 14: THEORY OF ACCOUNTS REVIEWER...................................... 40
CHAPTER 14 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 50
CHAPTER 15
PROPERTY, PLANT AND EQUIPMENT (PART 2) ................................ 52
CHAPTER 15: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................................................ 52
CHAPTER 15: THEORY OF ACCOUNTS REVIEWER...................................... 58
CHAPTER 15 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 79
CHAPTER 16
DEPLETION OF MINERAL RESOURCES ................................................ 80
CHAPTER 16: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................................................ 80
CHAPTER 16: THEORY OF ACCOUNTS REVIEWER...................................... 84
CHAPTER 16 – SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 91
CHAPTER 17
GOVERNMENT GRANTS ........................................................................ 92
CHAPTER 17: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES)
CHAPTER 17: THEORY OF ACCOUNTS REVIEWER...................................... 94
CHAPTER 17 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS102
92
CHAPTER 18
BORROWING COSTS ............................................................................ 103
CHAPTER 18: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).......................................................................................... 103
CHAPTER 18: THEORY OF ACCOUNTS REVIEWER.................................... 105
CHAPTER 18 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS114
CHAPTER 19
INVESTMENT PROPERTY ................................................................... 115
CHAPTER 19: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES)
CHAPTER 19: THEORY OF ACCOUNTS REVIEWER.................................... 120
iii
115
CHAPTER 19 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS127
CHAPTER 20
INTANGIBLE ASSETS ........................................................................... 128
CHAPTER 20: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).......................................................................................... 128
CHAPTER 20: THEORY OF ACCOUNTS REVIEWER.................................... 134
CHAPTER 20 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS155
CHAPTER 21
IMPAIRMENT OF ASSETS ................................................................... 156
CHAPTER 21: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).......................................................................................... 156
CHAPTER 21: THEORY OF ACCOUNTS REVIEWER.................................... 164
CHAPTER 21 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS170
iv
Chapter 12
Investments in Associates
Chapter 12: Multiple choice – Computational (SET B) – (For classroom
instruction purposes)
Equity method – Cost equal to fair value of interest acquired
Use the following information for the next five questions:
On January 1, 20x1, ABASE Co. purchased 20,000 shares of the 100,000 total
outstanding shares of PRAISE, Inc. for ₱4,000,000. PRAISE’s assets and liabilities
approximate their fair values. In 20x1, PRAISE, Inc. reported profit of
₱12,000,000 and declared and paid cash dividends of ₱800,000.
In 20x2, PRAISE reported loss of ₱8,000,000, declared and issued 10% stock
dividends, and reported gain on property revaluation of ₱2,000,000 and loss on
exchange differences on translation of foreign operations of ₱400,000.
1. How much is the share in profit or loss of the associate in 20x1?
a. 2,240,000
b. 2,400,000
c. 160,000
d. 0
2. How much is the carrying amount of the investment as of December 31, 20x1?
a. 4,000,000
b. 6,240,000
c. 6,400,000
d. 6,560,000
3. How much is the investment income (loss on investment) to be recognized in
profit or loss in 20x2?
a. (1,280,000)
b. 400,000
c. (1,600,000)
d. 320,000
4. How much is the net share in the other comprehensive income of the
associate in 20x2?
a. 320,000
b. (1,280,000)
c. (1,280,000)
d. 0
5. How much is the carrying amount of the investment as of December 31, 20x2?
a. 4,960,000
b. 4,640,000
c. 4,000,000
d. 0
Equity method – Cost exceeds fair value of interest acquired
Use the following information for the next three questions:
On January 1, 20x1, ABET Co. purchased 25% interest in the ordinary shares of
ENCOURAGE, Inc. for ₱8,000,000. ENCOURAGE’s assets and liabilities
approximate their fair values except for inventories with carrying amount of
₱2,000,000 and fair value of ₱400,000 and depreciable asset with carrying
amount of ₱12,000,000 and fair value of ₱20,000,000. The remaining useful life of
the depreciable asset is 10 years. ENCOURAGE’s net assets has a book value of
₱20,000,000.
On December 31, 20x1, ENCOURAGE reported ₱4,800,000 profit and declared
and paid dividends of ₱2,000,000.
6. How much is the goodwill that will be subsumed in the carrying amount of the
investment?
a. 1,400,000
b. 1,250,000
c. 1,100,000
d. 0
7. How much is the net share in the profit or loss of the associate (investment
income) in 20x1?
1
a. 1,400,000
b. 1,200,000
c. 1,000,000
d. 0
8. How much is the carrying amount of the investment as of December 31, 20x1?
a. 8,000,000
b. 8,500,000
c. 8,700,000
d. 8,900,000
Equity method – Determining percentage of ownership
9. On January 1, 20x1, APPRISE Co. acquired 50,000 newly issued shares of
INFORM, Inc. at ₱40 per share. Before the acquisition, INFORM had 100,000
ordinary shares outstanding. During the year, the associate reported profit of
₱900,000. How much is the share in the associate’s profit?
a. 450,000
b. 300,000
c. 333,333
d. 0
Potential voting shares
Use the following for the next two questions:
AFFICIONADO Co. owns 15,000 shares out of the 100,000 outstanding shares of
FAN, Inc. As of year-end, AFFICIONADO holds 20,000 stock rights which enable
AFFICIONADO to acquire additional shares from FAN on a “2 rights for 1 share”
basis. The stock rights are exercisable immediately. However, management does
not intend to exercise the stock rights. FAN does not have any other stock rights
outstanding aside from those held by AFFICIONADO. FAN reports year-end profit
of ₱4,000,000 and declares cash dividends of ₱400,000. The investment has a
carrying amount of ₱1,200,000 before any year-end adjustment.
10. How much is AFFICIONADO’s share in profit of associate for the year?
a. 0
b. 60,000
c. 600,000
d. 909,200
11. How much is the carrying amount of the investment as of year-end?
a. 1,200,000
b. 1,800,000 c. 1,740,000 d. 1,849,200
Cumulative preference shares
Use the following information for the next four questions:
AUSTERE Co. owns 20% of SEVERE, Inc.’s ordinary shares. SEVERE also has an
outstanding cumulative 6% preference shares of ₱8,000,000. None of those
preference shares is held by AUSTERE. Cumulative preference share dividends
are in arrears for 3 years. SEVERE reported year-end profit of ₱4,000,000 and
declared no dividends.
12. How much is AUSTERE Co.’s share in profit or loss of associate?
a. 704,000
b. 800,000
c. 512,000
d. 770,000
13. What if SEVERE Co. declared dividends that pay all of the dividends in arrears
on preference shares, how much is the share in profit or loss of associate?
a. 704,000
b. 800,000
c. 512,000
d. 770,000
14. What if the preference shares are non-cumulative, how much is the share in
profit or loss of associate?
a. 704,000
b. 800,000
c. 512,000
d. 770,000
15. What if the shares are redeemable preference shares and SEVERE declared
₱150,000 cash dividends on the redeemable preference shares during the
year, how much is the share in profit or loss of associate?
a. 704,000
b. 800,000
c. 512,000
d. 770,000
Loss of significant influence
16. On January 1, 20x1, ALLEVIATE Co. acquired 30,000 ordinary shares for
₱12,000,000 which represents 30% interest in LESSEN Co.’s net assets. At the
time of acquisition LESSEN’s net assets are fairly revalued at ₱40,000,000.
2
Prior to revaluation, the net assets had a book value of ₱32,000,000. The
difference between the revalued amount and carrying amount is attributable
to a building which was credited to revaluation surplus. The building has a
remaining useful life of 10 years with no residual value. It is LESSEN’s policy
to depreciate all tangible depreciable assets using the straight-line method.
At the end of 20x1, LESSEN reported a profit of ₱4,000,000 and paid cash
dividends of ₱2,400,000. At December 31, 20x1, the shares are selling at ₱400
per share.
On July 1, 20x2, ALLEVIATE sold 60% of its investment in LESSEN at the
prevailing market price of ₱480 per share. LESSEN reported interim profit of
₱2,000,000 for the six months ended June 30, 20x2. On December 31, 20x2,
LESSEN reported total profit of ₱4,800,000 for the year and declared
₱4,000,000 cash dividend. The shares are quoted at ₱540 per share at yearend.
If the unsold shares were reclassified to investment in FVOCI, how much is
the total income recognized on the investment in profit or loss in 20x2?
a. 2,640,000
b. 1,632,000 c. 1,968,000 d. 2,160,000
Reclassification adjustment for other comprehensive income
17. AMBULATE Co. owns 30% of WALK, Inc.’s ordinary shares. On July 1, 20x2,
AMBULATE Co. sold half of its investment for ₱1,600,000. The adjusted
balances of the related accounts as of July 1, 20x2 immediately before the sale
are:
 Investment in associate
₱4,800,000
 Cumulative share in associate’s exchange differences
on translation of a foreign operation
2,000,000 Cr
The remaining ownership of 15% (30% x 1/2) does not give AMBULATE
significant influence over WALK. How much is the reclassification gain (loss)
on July 1, 20x2?
a. 800,000
b. (800,000) c. 2,000,000 d. 1,000,000
Partial loss of significant influence – Reclassification of OCI
18. CHASTE Co. owns 40% of PURE, Inc.’s ordinary shares. On July 1, 20x2,
CHASTE Co. sold half of its investment for ₱400,000. The adjusted balances of
the related accounts as of July 1, 20x2 immediately before the sale are:
 Investment in associate
₱4,800,000
 Cumulative share in associate’s exchange differences
on translation of a foreign operation
2,000,000 Cr
The remaining 20% ownership (40% x 1/2) still gives CHASTE significant
influence over PURE. How much is the reclassification gain (loss) on July 1,
20x2?
a. 800,000
b. (800,000)
c. 2,000,000
d. 1,000,000
Partial loss of significant influence – Reclassification of OCI
19. CIRCUMSPECT Co. owns 40% of CAUTIOUS, Inc.’s ordinary shares. On July 1,
20x2, CIRCUMSPECT Co. sold three-fourths of its investment for ₱1,000,000.
The adjusted balances of the related accounts as of July 1, 20x2 immediately
before the sale are as follows:
 Investment in associate
₱4,800,000
 Cumulative share in associate’s exchange differences
on translation of a foreign operation
2,000,000 Cr
3
The remaining ownership interest of 10% (1/4 of 40%) still gives
CIRCUMSPECT significant influence over CAUTIOUS. Many of CAUTIOUS’s
board of directors are appointed by CIRCUMSPECT. How much is the
reclassification gain (loss) on July 1, 20x2?
a. 2,000,000
b. 1,500,000 c. 1,000,000 d. 0
Transfer of other comprehensive income directly in equity
20. SNITCH Co. owns 30% of PILFER, Inc.’s ordinary shares. On July 1, 20x2,
SNITCH Co. sold half of its investment for ₱400,000. The adjusted balances of
the related accounts as of July 1, 20x2 immediately before the sale are:
 Investment in associate
₱4,800,000
 Cumulative share in associate’s unrealized gains and
losses on investments in FVOCI
2,000,000 Cr
The remaining ownership of 15% (30% x 1/2) does not give SNITCH
significant influence over PILFER. How much is the reclassification gain (loss)
recognized in profit or loss on July 1, 20x2?
a. 2,000,000
b. 1,500,000 c. 1,000,000 d. 0
Change to equity method from FVPL – “STEP ACQUISITION”
Use the following information for the next three questions:
On January 1, 20x1, POSTULATE Co. acquired 10,000 shares representing a 10%
interest in DEMAND, Inc.’s 100,000 outstanding shares for ₱3,200,000. In 20x1,
DEMAND reported profit of ₱20,000,000 and declared and paid dividends of
₱4,000,000. The investment was initially classified as investment in held for
trading securities measured at FVPL. The fair value of the shares on December
31, 20x1 is ₱340 per share. As of December 31, 20x1, the investment in held for
trading securities has a carrying amount of ₱3,400,000, equal to fair value.
On July 1, 20x2, POSTULATE Co. acquired additional 15,000 shares at ₱280 per
share resulting to an increase in ownership interest over DEMAND from the
previous 10% to 25%. The transaction did not give rise to any goodwill or
negative goodwill. In 20x2, DEMAND reported profit of ₱24,000,000, of which
₱16,000,000 were earned in the second half of the year. In addition, DEMAND
declared and paid dividends of ₱4,000,000 on December 31, 20x2. The DEMAND
shares have quoted price of ₱360 per share on December 31, 20x2.
21. How much is the carrying amount of the investment in associate on July 1,
20x2?
a. 7,000,000
b. 7,600,000 c. 6,600,000 d. 5,800,000
22. How much is the share in the profit of the associate in 20x2?
a. 4,000,000
b. 4,800,000 c. 3,200,000 d. 3,000,000
23. How much is the carrying amount of the investment in associate on December
31, 20x2?
a. 10,000,000
b. 11,400,000 c. 9,800,000 d. 8,800,000
Downstream sale of inventory
Use the following information for the next two questions:
PERPETUAL Co. owns 20% of EVERLASTING, Inc. and uses the equity method
because it has significant influence. In 20x1, PERPETUAL sells inventory to
EVERLASTING for ₱400,000 with a 60% gross profit on the transaction. The
inventory remains unsold during 20x1 and was sold by EVERLASTING to external
parties only in 20x2. PERPETUAL’s income tax rate is 30%. EVERLASTING
4
reports profit of ₱4,000,000 and ₱4,800,000 on December 31, 20x1 and 20x2,
respectively.
24. How much is the share in the profit of associate in 20x1?
a. 560,000
b. 632,000
c. 728,000 d. 800,000
25. How much is the share in the profit of associate in 20x2?
a. 1,128,000
b. 1,200,000 c. 1,032,000 d. 960,000
Upstream sale of inventory
Use the following information for the next two questions:
LISTLESS Co. owns 20% of WEAK, Inc. and uses the equity method because it has
significant influence. In 20x1, WEAK sells inventory to LISTLESS for ₱400,000
with a 60% gross profit on the transaction. The inventory remains unsold during
20x1 and was sold by LISTLESS to external parties only in 20x2. LISTLESS’s
income tax rate is 30%. WEAK reports profit of ₱4,000,000 and ₱4,800,000 on
December 31, 20x1 and 20x2, respectively.
26. How much is the share in the profit of associate in 20x1?
a. 766,400
b. 752,000
c. 785,600
d. 800,000
27. How much is the share in the profit of associate in 20x2?
a. 960,000
b. 974,400
c. 993,600
d. 1,008,000
Downstream sale of depreciable asset
Use the following information for the next two questions:
WOOZY Co. owns 20% of DIZZY, Inc.’s outstanding ordinary shares. On January 1,
20x1, WOOZY sold an equipment with a carrying amount of ₱400,000 and a
remaining useful life of 10 years to DIZZY for ₱480,000. Gain of ₱80,000 was
recorded by WOOZY. Both WOOZY and DIZZY use the straight line method of
depreciation. DIZZY reports profit of ₱4,000,000 and ₱4,800,000 on December
31, 20x1 and 20x2, respectively.
28. How much is the share in the profit of associate in 20x1?
a. 720,000
b. 728,000
c. 785,600
d. 800,000
29. Assuming the sale is an upstream sale, how much is the share in the profit of
associate in 20x1?
a. 968,000
b. 728,000
c. 785,600
d. 800,000
Downstream sale of non-depreciable asset
Use the following information for the next two questions:
LUCID Co. owns 20% of CLEAR, Inc.’s outstanding ordinary shares. On January 1,
20x1, LUCID sold land with a carrying amount of ₱400,000 to CLEAR for
₱480,000. Gain of ₱80,000 was recorded by LUCID. CLEAR reports profit of
₱4,000,000 and ₱4,800,000 on December 31, 20x1 and 20x2, respectively.
30. How much is the share in the profit of associate in 20x1?
a. 720,000
b. 784,000
c. 728,000
d. 800,000
31. Assuming the sale is an upstream sale, how much is the share in the profit of
associate in 20x1?
a. 720,000
b. 784,000
c. 728,000
d. 800,000
5
Share in losses of associate
Use the following information for the next four questions:
SKEPTICAL Co. owns 20% of the ordinary shares of QUESTIONING, Inc. The
records of SKEPTICAL as of December 31, 20x1 show the following information
before any necessary year-end adjustments.
Investment in associate
₱ 800,000
Trade accounts receivable – QUESTIONING
1,200,000
Investment in preference shares – QUESTIONING 400,000
Advances to associate – QUESTIONING
200,000
Loans receivable, secured - QUESTIONING
480,000
QUESTIONING reported losses of ₱5,600,000, ₱2,000,000 and ₱400,000 in 20x1,
20x2 and 20x3, respectively. In 20x3, SKEPTICAL incurred constructive
obligation in favor of QUESTIONING in the amount of ₱480,000 and made
₱320,000 payments on behalf of QUESTIONING. In 20x4, QUESTIONING reported
profit of ₱4,000,000.
32. How much is the share in the loss of the associate in 20x1?
a. 1,120,000
b. 320,000
c. 800,000
d. 280,000
33. How much is the share in the loss of the associate in 20x2?
a. 0
b. 320,000
c. 400,000
d. 280,000
34. How much is the share in the loss of the associate in 20x3?
a. 0
b. 480,000
c. 320,000
d. 800,000
35. How much is the share in the profit of the associate in 20x4?
a. 600,000
b. 820,000
c. 1,200,000 d. 200,000
The answers and solutions to the computational problems above
(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
Chapter 12: Theory of Accounts Reviewer
Scope and applicability
1. PAS 28 applies to which of the following?
a. investments in associates held by a venture capital organization or mutual
fund measured at fair value through profit or loss
b. a 20% investment in preference shares
c. an interest in a partnership which gives the investor significant influence
over the partnership
d. a 60% investment in ordinary shares of another entity
2. An entity shall apply PAS 28
a. to investments which give the entity significant influence over the
investee
b. to account for investments in associates in the entity’s separate financial
statements
c. even when significant influence is lost
d. any of these
6
3. When investments in equity securities represent 20% to 50% interest in the
voting rights of the investee, which of the following standards most likely
would be applied?
a. PFRS 9
b. PAS 31
c. PFRS 3
d. PAS 28
4. When equity investments results to joint control, which standard shall be
applied?
a. PFRS 9
b. PAS 31
c. PFRS 3
d. PAS 28
5. When equity investments results to control, which standard shall be applied?
a. PFRS 9
b. PAS 31
c. PFRS 3
d. PAS 28
6. In the consolidated financial statements, to which of the following financial
instruments is PFRS 9 Financial Instrument applicable?
a. investment in ordinary shares representing 51% interest
b. investment in ordinary shares representing 20% interest
c. interest in a joint venture
d. investment in preference shares representing 100% interest
7. Which of the following statements is correct?
a. According to PAS 28 Investments in Associates, a partnership cannot be an
associate.
b. Goodwill included in the carrying amount of an investment in an associate
is tested for impairment separately.
c. Only investments in ordinary shares can be classified as Investment in
Associate.
d. Only investments which give the investor voting rights can be classified as
Investment in Associate.
8. If ABC Corporation owns a controlling interest of 51% of the equity shares in
XYZ Co., ABC Corporation is a
a. Parent company to XYZ Co.
c. Subsidiary company to XYZ Co.
b. Associate company to XYZ Co.
d. Fellow subsidiary to XYZ Co.
9. It is an entity, including an unincorporated entity such as a partnership, over
which the investor has significant influence and that is neither a subsidiary
nor an interest in a joint venture.
a. association
c. joint venture
b. subsidiary
d. associate
10. It is the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control over those policies.
a. significant influenza
c. significant influence
b. control
d. joint control
11. It is an entity, including an unincorporated entity such as a partnership, that
is controlled by another entity (known as the parent).
a. subsidy b. associate
c. joint venture
d. subsidiary
12. It is the power to govern the financial and operating policies of an entity so as
to obtain benefits from its activities.
a. control
b. joint control
c. significant influence
d. telekineses
13. It is a contractual arrangement whereby two or more parties undertake an
economic activity that is subject to joint control.
a. partners
b. joint control
c. joint venture
d. marriage
7
14. It is the contractually agreed sharing of control over an economic activity, and
exists only when the strategic financial and operating decisions relating to the
activity require the unanimous consent of the parties sharing control
(venturers).
a. control b. joint venture
c. joint control
d. wedding vow
15. A controlling company having subsidiaries which activities were confined
primarily to their management is:
a. an affiliate
c. a majority interest
b. subsidiary
d. a holding company
(Adapted)
16. PAS 28 does not require the equity method to be applied to which of the
following instance(s)?
I.
When an associate is acquired and held with a view to its disposal within
twelve months of acquisition. There must be evidence that the investment
is acquired with the intention to dispose of it and that management is
actively seeking a buyer. The words ‘in the near future’ were replaced
with the words ‘within twelve months’. When such an associate is not
disposed of within twelve months it must be accounted for using the
equity method as from the date of acquisition, except in narrowly
specified circumstances under PFRS 5.
II.
An investor continues to have significant influence over an associate;
however, the associate is operating under severe long-term restrictions
that significantly impair its ability to transfer funds to the investor.
III.
An investor holds 10% interest in an investee; however, the interest held
gives the investor significant influence over the investee.
IV.
An investor presents separate financial statement in accordance with PAS
27.
a. I and IV
b. I, III, IV
c. I, II, III, IV d. none
Significant influence
17. According to PAS 28 Investments in associates, which of the following
statements best describes the term 'significant influence'?
a. The holding of a significant proportion of the share capital in another
entity
b. The contractually agreed sharing of control over an economic entity
c. The power to participate in the financial and operating policy decisions of
an entity
d. The mutual sharing in the risks and benefits of a combined entity
(ACCA)
18. Significant influence is presumed to exist
a. if an investor holds, directly or indirectly (e.g. through subsidiaries), 25%
or more of the voting power of the investee.
b. if an investor holds, directly or indirectly (e.g. through subsidiaries), 51%
or more of the voting power of the investee.
c. if an investor holds, directly or indirectly (e.g. through subsidiaries), 100%
or more of the voting power of the investee.
d. if an investor holds, directly or indirectly (e.g. through subsidiaries), 20%
or more of the voting power of the investee.
19. Which of the following may provide evidence of significant influence even if
the percentage of ownership interest is less than 20%?
8
I.
Representation on the board of directors or equivalent governing body of
the investee.
II.
Participation in policy-making processes, including participation in
decisions about dividends or other distributions.
III.
Material transactions between the investor and the investee
IV.
Interchange of managerial personnel.
V.
Provision of essential technical information.
a. I, II
b. I, II, III
c. I, II, IV
d. any of these
20. In which of the following does X have significant influence?
a. X owns 30% of the voting shares of ABC Co., the other 60% is held by Y
and all seats on the board of directors are appointed by Y.
b. X owns 30% of the preference shares of Z Co.
c. X owns 15% of the voting shares of ABC Co., all other shares are held in
very small blocks and therefore X has representatives in the board of
directors.
d. X owns 80% of Y, and Y owns 40% of Z. In Y’s separate financial
statements, the investment in Z is classified as “held for sale” in
accordance with PFRS 5.
21. In assessing whether significant influence exists, an investor shall consider
any potential voting rights held only if
a. it intends to exercise the potential voting rights
b. the potential voting rights are currently exercisable
c. a and b
d. they are not considered
22. When computing for its share in the associate’s profit or loss, an investor shall
use
a. its present ownership interest
b. its present ownership interest adjusted for the effect of any potential
voting rights
c. the potential voting rights percentage
d. the effective interest rate
23. According to PAS 28, significant influence is the investor’s participation in the
financial and operating policy decisions of the investee but not control of
these decisions. Which of the following may an investor be unable to exercise
significant influence?
a. participation in policy making process
b. material intercompany transactions
c. majority ownership of the investee concentrated among a small group of
shareholders who operate the investee without regard to the views of the
investor
d. technological dependency
(Adapted)
24. Under PAS 28, these refer to instruments, which if exercised, give the entity
additional voting power or reduce another party’s voting power over the
financial and operating policies of another entity.
a. share rights
c. convertible securities
b. share options
d. potential voting rights
25. When assessing the existence of significant influence, which of the following
shall be considered by the investor?
a. potential voting rights that are not exercisable immediately
9
b. share options giving the investor the right to purchase preference shares
of the investee
c. stock rights which are exercisable immediately but the entity’s
management does not intend to exercise.
d. potential voting rights that will be received in the following accounting
period
26. Potential voting rights include all of the following except
a. share warrants and share options c. convertible preference shares
b. redeemable preference shares
d. convertible bonds
Equity method
27. Investments accounted for under the equity method are initially recognized at
a. cost
b. fair value
c. fair value plus direct acquisition cost
d. cost plus or minus share in profit or loss of associate
28. Which of the following does not correctly relate to the application of the
equity method?
a. the investor recognizes its proportionate share in the profit or loss, other
comprehensive income, and discontinued operations of the associate
b. dividends received are accounted for as reduction in the investment
balance
c. share dividends are not accounted for
d. the investor accounts only its proportionate share in the profit or loss of
the associate but not in other comprehensive income and discontinued
operations.
29. Under the equity method, which of the following does not decrease the
investment account?
a. share in associate’s loss
b. amortization of undervaluation of asset
c. amortization of overvaluation of asset
d. share in dividends declared by the associate
30. For investments in associates, the investor shall not
a. recognize a share in the associate’s other comprehensive income
b. recognize a share in the associate’s discontinued operations
c. recognize a share in the associate’s profit or loss
d. recognize a share in the associate’s revenue, expenses and profit before
tax
31. When computing for its share in the associate’s profit or loss, the investor
should
I.
deduct one year dividends on cumulative preference shares of the
associate held by other parties and classified as equity, whether declared
or not.
II.
deduct one year dividends on noncumulative preference shares of the
associate held by other parties and classified as equity, whether declared
or not.
III.
deduct all dividends in arrears on cumulative preference shares of the
associate held by other parties and classified as equity, whether declared
or not.
IV.
deduct dividends on noncumulative preference shares of the associate
held by other parties and classified as equity only when declared.
10
V.
not deduct from profit or loss any dividends on ordinary shares before
computing for the share in the associate’s profit or loss.
a. I, IV, V
b. I, IV
c. II, III, V
d. II, III
32. The equity method causes the balance in the investment account to
approximate:
a. original cost of the investment
b. market value of the investment
c. original cost of the investment minus any dividends declared and paid by
the other company
d. original cost of the investment plus a proportionate share of subsequent
undistributed earnings of the investee company.
(Adapted)
33. How is goodwill arising on the acquisition of an associate dealt with in the
financial statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss.
d. Goodwill is not recognized separately within the carrying amount of the
investment.
(Adapted)
34. If the excess of the acquisition cost of an investment accounted for under
equity method over the book value of net assets acquired is attributable to an
undervalued depreciable asset and an unidentifiable asset, which of the
following statements is correct
a. The carrying amount of the investment is increased by the proportionate
share in the profits earned by the investee and decreased by the
depreciation of the interest in the undervaluation and unaffected by the
separate impairment of the unidentifiable asset
b. The carrying amount of the investment is increased by the depreciation of
the interest in the undervaluation and amortization of the unidentifiable
asset
c. The carrying amount of the investment is decreased by the depreciation of
the interest in the undervaluation and decreased by the separate
impairment on the unidentifiable asset.
d. Investment income is decreased by the depreciation of the interest in the
undervaluation and amortization of the unidentifiable asset
35. The equity method is most likely not applicable to which of the following?
a. ownership interest of 2%, 2 out of 7 of the BOD of the associate is
appointed by the investor
b. ownership interest of 40%
c. ownership interest of 20% but the associate is operating under severe
long-term restrictions that significantly impair its ability to transfer funds
to the investor
d. ownership interest of 25% acquired with an exclusive view of subsequent
disposal within 12months and accounted for under PFRS 5
36. The equity method should be applied in which of the following?
a. The investment is classified as held for sale under PFRS 5
b. The parent is exempted from presenting consolidated financial
statements.
c. The investor is an unlisted subsidiary whose parent allows it not to apply
equity method
11
d. The investor previously held only 10% interest but subsequently acquires
additional 10% interest in the associate.
37. Which of the following computations may properly result to the correct
balance of an investment in associate account at year-end?
a. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, and minus amortization of share
in undervaluation of associate’s asset
b. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, and plus amortization of share in
undervaluation of associate’s asset
c. Beginning balance of investment plus share in associate’s profit plus share
in dividends declared by associate, and minus amortization of share in
undervaluation of associate’s asset
d. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, minus amortization of share in
undervaluation of associate’s asset, and minus separate impairment loss
on goodwill included in the carrying amount of the investment
38. Which of the following computations may properly result to the correct
amount of share in associate’s profit or loss for the period?
a. Share in profit of associate minus amortization of share in the
overvaluation of associate’s asset
b. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset
c. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus share in dividends declared by
associate
d. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus separate impairment loss on
goodwill included in the carrying amount of the investment
39. Which of the following may represent the net change in the investment in
associate account during a period?
a. Share in profit of associate minus share in dividends plus increase in the
investment in associate account
b. Share in profit of associate minus share in dividends minus increase in the
investment in associate account
c. Share in profit of associate minus share in dividends
d. Share in profit of associate plus share in dividends
40. Dividends received from an investment in an associate,
a. if in the form of cash dividends, is credited to investment income
b. if in the form of share dividends, is debited to investment income
c. if in the form of cash dividends, is credited to investment account only if
the cash dividends are declared from pre-acquisition retained earnings.
d. if in the form of share dividends, is recorded through memo entry only
41. The excess of purchase cost of an investment in associate over the fair value
of the interest acquired represents
a. goodwill that should not be amortized but tested for impairment at least
annually
b. negative goodwill that should be recognized in the investor’s profit or loss
in the year of acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
12
42. The excess of the fair value of the interest acquired over the purchase cost of
an investment in associate represents
a. goodwill that should not be amortized but tested for impairment at least
annually
b. negative goodwill that should be recognized in the investor’s profit or loss
in the year of acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
43. Equity method shall cease to be applied only when the investor loses
significant influence over the associate. Which of the following is not true?
a. The loss of significant influence can occur with or without a change in the
percentage of ownership.
b. An entity loses significant influence over an investee when it loses the
power to participate in the financial and operating policy decisions of that
investee.
c. There is a presumption of loss of significant influence if the ownership
interest falls below 20%.
d. There is a presumption of loss of significant influence when the associate
is operating under severe long-term restrictions that significantly impair
its ability to transfer funds to the investor.
44. Significant influence may be lost in any of the following, except
a. When an associate becomes subject to the control of a government, court,
administrator or regulator.
b. The investor is precluded, as a result of a contractual agreement, from
participating in the financial and operating policy decisions of the
investee.
c. The investor sells half of its 30% interest in an associate
d. The investor sells half of its 20% interest in an associate but retains the
voting rights on the investment sold through proxy agreement
45. Significant influence may be lost in any of the following, except
a. The investor loses its right to appoint board of directors in the associate
b. The investor purchases additional 31% interest in the associate
c. The associate is operating under severe long-term restrictions that
significantly impair its ability to transfer funds to the investor.
d. The investor retains its 20% interest in the associate but grants its voting
rights to an unrelated party.
46. On the loss of significant influence, the investor shall do any of the following,
except
a. measure at fair value any investment retained in the former associate.
b. recognize gain or loss for the difference between the net disposal
proceeds received and the carrying amount of the investment sold
c. recognize gain or loss for the difference between the fair value of the
interest retained and the carrying amount of the previous interest held
d. account for the discontinuance of equity method retrospectively.
47. If an investor loses significant influence over an associate,
a. all cumulative gain or loss previously recognized in other comprehensive
income is reclassified to profit or loss.
b. any cumulative gain or loss previously recognized in other comprehensive
income is reclassified directly in equity or to profit or loss, subject to the
requirements of PAS 1.
13
c. no adjustment to the investment account is necessary
d. the investment should be reclassified and any gain or loss on
reclassification is recognized in equity.
48. If an investor’s ownership interest in an associate is reduced but significant
influence is not lost,
a. the investor should cease applying the equity method and use PFRS 9 if
ownership interest is reduced below 20% or PFRS 3 and PAS 27 if
ownership interest is increased above 50%.
b. the investor shall reclassify to profit or loss or directly in equity only a
proportionate amount of the gain or loss previously recognized in other
comprehensive income.
c. the investor continues to use the equity method and since significant
influence is not lost, no adjustment is needed
d. do nothing
49. If there is any excess of the investor’s share of the net fair value of the
associate’s identifiable assets and contingent liabilities over the cost of the
investment, that is, negative goodwill, how should that excess be treated?
a. It should be included in the carrying amount of the investment.
b. It should be written off against retained earnings.
c. It should be included as income in the determination of the investor’s
share of the associate’s profit or loss for the period.
d. It should be disclosed separately as part of the investor’s equity.
(Adapted)
50. The investor’s interest on the undervaluation of depreciable assets of the
associate is
a. amortized using the effective rate and deducted to investment income
recognized for the period
b. depreciated and deducted from the carrying amount of the investment
c. amortized using the effective rate and added to the carrying amount of the
investment and deducted to investment income
d. depreciated and deducted from the carrying amount of the investment
and investment income recognized for the period
51. When the equity method is used to account for the investment in an associate,
the recording of the receipt of a cash distribution from the investee will result
in
a. The recognition of investment income.
b. A reduction in the investment balance.
c. An Increase in a liability account.
d. An increase in special equity account.
52. Stock dividends on common stock should be recorded at their fair market
value by the investor when the related investment is accounted for under
which of the following methods?
Cost
Equity
a. Yes
Yes
b. Yes
No
c. No
Yes
d. No
No
(AICPA)
53. Which of the following statements is in accordance with the provisions of PAS
28?
14
I.
The income or loss on the investment in associate is computed on the net
income after tax of the associate.
II.
The income or loss on the investment in associate is presented in the
statement of profit or loss and other comprehensive income after the line
item “Income Tax Expense” but before discontinued operations.
a. I
b. II
c. I and II
d. Neither I nor II
54. On January 1, 20x1, Adjacent Inc. purchased 10% of Juxtaposition Co.’s
common stock. Adjacent purchased additional shares bringing its ownership
up to 40% of Juxtaposition’s common stock outstanding on August 1, 20x1.
During October 20x1, Juxtaposition declared and paid a cash dividend on all
of its outstanding common stock. Under PAS 28, how much income from the
Juxtaposition investment should Adjacent’s 20x1 income statement report?
a. 10% of Juxtaposition’s income for January 1 to July 31, 20x1, plus 40% of
Juxtaposition’s income for August 1 to December 31, 20x1.
b. 40% of Juxtaposition’s income for August 1 to December 31, 20x1 only.
c. 40% of Juxtaposition’s 20x1 income.
d. Amount equal to dividends received from Juxtaposition.
(AICPA)
55. Which of the following statements are in accordance with PAS 28?
I.
When the associate has cumulative preference shares, the investor
computes its share in the profit or loss of the investee after deducting the
preferred dividends, only when such dividends are declared.
II.
When the associate has non-cumulative preference shares, the investor
computes its share in the profit or loss of the investee after deducting the
preferred dividends, whether or not such dividends are declared
a. true, true
b. true, false
c. false, true
d. false, false
56. Bell owns 10% of the common stock of War Co. throughout the year. War Co.
has no preferred stock outstanding. Bella’s stock gives him the right to
a. be paid 10% of the firm’s profits in cash each year
b. receive dividends equal to 10% of the par value each year
c. receive dividends equal to 10% of the total dividends paid by the
corporation for the year to common stockholders
d. keep the corporation from issuing any additional stock unless he is willing
to buy 10% of the newly issued shares
(AICPA)
57. Adjustments to the carrying amount of the investment in associate may be
necessary for changes in the investor’s proportionate interest in the investee
arising from changes in the investee’s equity that have not been recognized in
the investee’s profit or loss. Which of the following may not necessitate an
adjustment to the investment in associate account?
a. Changes in revaluation surplus of associate
b. Changes in valuation of the associate’s FVOCI securities
c. Changes in the actuarial gains and losses of the associate not amortized
through the corridor approach
d. Changes in the Allowance for doubtful accounts of the associate
58. Which of the following is correct in relation to accounting for investments in
associates?
I.
Theoretically, the total market value of shares held as investment in
associate which have been subjected to a share dividend should be the
same as it was before the dividend.
15
II.
Share dividends received on an investment in associate is accounted for as
deduction from the investment account.
III.
Share dividends received on an investment in associate is generally not
accounted for.
a. I
b. II
c. I and III
d. I, II and III
59. Which of the following statements correctly refers to the provisions of PAS 28
Investments in Associates?
I.
If an investor acquires additional shares sufficient to give him significant
influence, a retrospective adjustment should be made on the financial
statements to recognize share in profits and losses of the investee not
previously recognized.
II.
No adjustment to the investment account is made when changing from the
fair value method to the equity method.
a. I
b. II
c. I and II
d. Neither I nor II
60. An investor in equity securities received cash dividends in excess of the
investor’s share of investee’s earnings subsequent to the date of the
investment. How will the investor’s investment account be affected by those
dividends for each of the following investments?
FVOCI securities
Equity method investment
a.
No effect
No effect
b.
Decrease
No effect
c.
No effect
Decrease
d.
Decrease
Decrease
(AICPA)
61. The investment in associate is reduced to zero when
a. the investment in associate is partly reclassified to FVPL
b. the share in the losses of the associate exceeds the share in the profits
c. at no instance should the investment be reduced to zero unless the
investment is derecognized through sale or other forms of disposal
d. the share in the losses of the associate exceeds the investor’s interest in
the associate
62. Consider the following statements.
I.
In applying Equity Method of accounting for investments in associates,
dividends received from the investee are considered a return of capital
and should be credited to stockholders’ equity of the investor.
II.
A subsidiary is an affiliate that is not controlled by an enterprise directly,
or indirectly, through one or more intermediaries.
State whether the foregoing statements are correct.
a. Only I is correct
c. Only II is correct
b. I and II are correct
d. Neither I nor II is correct
(RPCPA)
63. The following statements relate to equity method. Choose the incorrect
statement.
a. In accounting for investments in common stock under the equity method,
sales of stock of an investee by an investor, should be accounted for as
gains or losses equal to the difference at the time of sales between selling
price and carrying amount of the stock sold.
b. The general rule is that an investor owning 20% or more of the voting
stock of an investee is presumed to have the ability to exercise significant
interest over the investee.
16
c. Under the equity method of accounting, the investments in common stock
should be shown as a single amount, and the investor’s share of earnings
or losses from its investment should ordinarily be shown in its income
statement as a single amount including the results of discontinued
operations.
d. The equity method of recording security transactions assumes a close
economic relationship between the investor and the investee. It is used,
when influential interest exists.
(RPCPA)
64. Wrath Co. uses the equity method to account for its January 1, 2003 purchase
of Anger Inc.’s common stock. On January 1, 2003, the fair values of Anger’s
FIFO inventory and land exceeded their carrying amounts. How do these
excesses of fair values over carrying amounts affect Wrath’s reported equity
in Anger’s 2003 earnings?
Inventory excess
Land excess
a.
Decrease
Decrease
b.
Decrease
No effect
c.
Increase
Increase
d.
Increase
No effect
(AICPA)
65. On May 1, 20x1, Upbeat Company acquired 30% of the voting stock of Reggae
Corp. In 20x1, Reggae had net earnings of ₱100,000 and paid dividends of
₱10,000. Upbeat mistakenly measured these transactions using the cost
instead of the equity method of accounting. What effect would this have on
working capital, dividend income, and net earnings, respectively?
a. overstate, overstate, overstate
b. no effect, understate, understate
c. no effect, overstate, understate
d. understate, understate, understate
(RPCPA)
66. Select the incorrect statement.
a. The cost method of accounting for an investment in a subsidiary
recognizes the legal fact that the parent and subsidiary are one economic
unit.
b. The net cumulative unrealized gains and losses on investments in equity
securities classified as FVOCI and are accounted for under the cost method
are usually measured by the difference between cost and current selling
price.
c. Under the equity method of accounting for long-term investments in
equity securities, the investor's investment account is decreased by all
cash dividends received from the investee.
d. The equity method of accounting for long-term investments in equity
securities is based on the presumption that the investor owns a sufficient
number of the outstanding voting shares of another company to exercise
significant influence over the operating and financial policies of the other
company.
67. Which of the following statement is the correct statement?
a. At the acquisition date of a long-term investment, the entry would be the
same whether the investor uses PFRS 9 or the equity method under PAS
28.
b. Under PAS 27, an investment in a subsidiary is shown as an asset, while
under the equity method, it is shown as part of equity.
17
c. Long-term investments are classified as long-term only because they are
not readily marketable.
d. Long-term investments in equity securities are written down only when
there has been a material and apparently permanent decline in the market
value of the investment below its cost.
e. Impairment losses on investments in associates are not accounted for
under PAS 28.
68. The following statements relate to the accounting for investments in equity
instruments.
I.
Whenever an investment in marketable equity securities does not qualify
for accounting using the equity method, the investor is required to
recognize as dividend income cash dividends received from the investee.
II.
The cost measurement for equity investments is permitted in separate
financial statements.
III.
An investor may still be able to exercise significant influence over an
investee, even if the investment is less than 20% of the voting stock of the
investee.
IV.
No adjustment to the investment account is made when changing from the
equity to the fair value measurement, or vice versa.
a. I, II
b. I, II, III
c. I, III
d. I, II, IV
69. In its financial statements, Musang, Inc. uses the cost measurement of
accounting for its 15% ownership of Kalinga Coffee Co. At December 31, 20x1,
Musang has a receivable from Kalinga Coffee. How should the receivable be
reported in Musang’s December 31, 20x1 statement of financial position?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in
Kalinga Coffee, without separate disclosure.
c. 85% of the receivable should be reported separately, with the balance
offset against Kalinga Coffee’s payable to Musang.
d. The total receivable should be offset against Kalinga Coffee’s payable to
Musang, without separate disclosure.
(AICPA)
70. When the equity method is used to account for investments in common stock,
which of the following affects the investor’s reported investment income?
Equipment amortization related to purchase Cash dividends from investee
a.
Yes
Yes
b.
No
Yes
c.
No
No
d.
Yes
No
(AICPA)
71. Google Co. received a cash dividend from a common stock investment. Should
Google report an increase in the investment account if it has classified the
stock as FVOCI or uses the equity method of accounting?
FVOCI
Equity
a.
No
No
b.
Yes
Yes
c.
Yes
No
d.
No
Yes
(AICPA)
18
72. Bliss Co. uses the equity method to account for its investment in Nirvana, Inc.
common stock. How should Bliss record a 2% stock dividend received from
Nirvana?
a. As dividend revenue at Nirvana's carrying value of the stock.
b. As dividend revenue at the market value of the stock.
c. As a reduction in the total cost of Nirvana stock owned.
d. As a memorandum entry reducing the unit cost of all Nirvana stock
owned.
(AICPA)
73. Which of the following investments in an associate is not within the scope of
PAS 28 Investments in associates?
a. An associate held by a subsidiary and measured at cost
b. An associate held by a venture capital organization and measured at cost
c. An associate held by a venture capital organization and measured at fair
value with changes in fair value recognized in profit or loss
d. An associate held by a subsidiary and measured at fair value with changes
in fair value recognized in profit or loss
(ACCA)
74. Fretboard Company equity accounts for its 40% interest in Fingerboard
Company. Fingerboard's financial statements include the following:
Revenue
₱ 600,000
Cost of sales
(250,000)
350,000
Operating expenses
(285,000)
65,000
Tax
( 20,000)
₱ 45,000
Are the following statements true or false, according to PAS 28 Investments in
associates?
1) Fretboard's consolidated revenue should include ₱240,000 in respect of
Fingerboard.
2) Fretboard's consolidated profit before tax should include ₱26,000 in respect
of Fingerboard.
Statement (1) Statement (2)
a.
False
False
b.
False
True
c.
True
False
d.
True
True
(ACCA)
75. An investor must apply the requirements of PAS 36 in determining whether it
is necessary to recognize any impairment loss in the investment in an
associate. How is the impairment test carried out?
a. The goodwill is separated from the rest of the investment and is
impairment tested individually.
b. The entire carrying amount of the investment is tested for impairment
under PAS 36 by comparing its recoverable amount with its carrying
amount.
c. The carrying value of the investment should be compared with its market
value.
d. The recoverable amounts of all investments in associates should be
assessed together to determine whether there has been an impairment on
all investments.
19
(Adapted)
76. What accounting method should be used for an investment in an associate
where it is operating under severe long-term restrictions - for example where
the government of a company has temporary control over the associate?
a. PFRS 9 should be applied.
b. The equity method should be applied if significant influence can be
exerted.
c. The associate should be shown at cost.
d. Proportionate consolidation should be used.
(Adapted)
77. If the investor ceases to have significant influence over an associate, how
should the investment be treated?
a. It should still be treated using equity accounting.
b. It should be treated in accordance with PFRS 9.
c. The investment should be frozen at the date at which the investor ceases
to have significant influence.
d. The investment should be treated at cost.
(Adapted)
78. When significant influence is achieved from additional purchase of shares
resulting to an increase in ownership interest,
a. the change to equity method is treated retrospectively, “catch up”
adjustments shall be made in order to restate the accounts to what their
balances should be had equity method been used all along.
b. the previous investment is measured at acquisition-date fair value and any
difference between this amount and the previous carrying amount is
recognized immediately in profit or loss.
c. PAS 28 and PFRS 3 requires that the investment account be adjusted for
any share in cash dividends declared by the investee in previous periods
that were recognized as income.
d. the previous investment is measured at acquisition-date fair value and any
difference between this amount and the previous carrying amount is
recognized immediately in profit or loss or other comprehensive income,
as appropriate.
79. Profits and losses resulting from “upstream” and “downstream” transactions
between an investor and an associate are
a. recognized in the investor’s financial statements through proportionate
consolidation, meaning the investor recognizes its share in the sale and
cost of sales recorded by the associate
b. recognized in the investor’s financial statements only to the extent of
unrelated investors’ interests in the associate.
c. recognized in the investor’s financial statements only to the extent of
related investors’ interests in the associate.
d. not recognized in the investor’s financial statements
80. Under PAS 28, profits and losses resulting from ‘upstream’ and ‘downstream’
transactions between an investor and an associate
a. must be eliminated to the extent of the investor’s interest in the associate.
b. must be eliminated to the extent of the unrelated interest over the
associate
c. must be recognized in full after adjustment for the increases or decreases
in beginning inventory
d. not recognized
20
81. Under PAS 28, adjustments to share in profit or loss of an associate may differ
if the transaction is “downstream” or “upstream.” Which of the following
statements is true?
I.
Jack Co. owns 20% interest in Old Man, Inc. During the year Old Man sold
magic beans to Jack. This is an upstream transaction.
II.
Goldilocks Co. owns 20% interest in Papa Bear, Inc. During the year
Goldilocks purchased porridge from Papa Bear. This is a downstream
transaction.
a. true, true
b. true false
c. false, true
d. false, false
82. Daddeh Co. owns 20% interest in Bebeh Co. During the year, Daddeh sold
inventory to Bebeh at 20% gross profit. As of year-end Bebeh still holds 100%
of the inventory. How much share in the profit from the transaction will
Daddeh recognize for the year? Assume income tax rate of 30%.
a. 14%
b. 80%
c. 2.8%
d. none
83. Under PAS 28, it refers to the carrying amount of the investment in the
associate under the equity method together with any long-term interests that
in substance, form part of the investor’s net investment in the associates.
a. investment in associate
c. interest in ownership
b. interest in the associate
d. none
84. Which of the following may not be included in interest in associate when
determining the threshold in recognizing share in losses of associate?
a. investment in preference shares of associate
b. long-term, unsecured, advances to the associate
c. trade receivables from the associate
d. investment in associate
85. Losses recognized under the equity method in excess of the investor’s
investment in ordinary shares are applied to the other components of the
investor’s interest in the associate
a. in the order of their seniority
b. in the reverse order of their seniority
c. in the order of priority in liquidation
d. in no particular order
86. After the investor’s interest in the associate is reduced to zero, additional
losses are provided for, and a liability is recognized, only to the extent that the
investor has incurred
a. legal or constructive obligations
b. made payments on behalf of the associate
c. a or b
d. further losses are not recognized
87. If the associate subsequently reports profits, the investor resumes
recognizing its share of those profits
a. only after its share of the profits equals the share of losses not recognized
b. only after its share of the profits equals the share of losses previously
recognized
c. only if there are no outstanding legal or constructive obligation incurred
on behalf of the associate
d. a or b
88. How is goodwill arising from investments in associates accounted for?
21
a. Included in the carrying amount of the investment and not amortized but
tested separately for impairment at least annually.
b. Not accounted for separately; however, presented as a separate asset in
the investor’s separate financial statements.
c. Included in the carrying amount of the investment and the entire
investment in associate is tested for impairment under PAS 36.
d. Recognized as a separate asset either in the group financial statements or
in the separate financial statements but not amortized.
Others
89. Investments in associates are normally classified in the statement of financial
position as
a. current assets
b. noncurrent assets c. fair value d. equity account
90. The investor’s share in the associate’s revaluation surplus is
a. recognized in the investor’s equity together with the investor’s
revaluation surplus
b. recognized in the investor’s property, plant and equipment with separate
disclosure
c. recognized in the investor’s retained earnings with separate disclosure
d. not recognized
91. What should happen when the financial statements of an associate are not
prepared to the same date as the investor’s accounts?
a. The associate should prepare financial statements for the use of the
investor at the same date as those of the investor.
b. The financial statements of the associate prepared up to a different
accounting date will be used as normal.
c. Any major transactions between the date of the financial statements of the
investor and that of the associate should be accounted for.
d. As long as the gap is not greater than three months, there is no problem.
(Adapted)
92. Preparation of consolidated financial statements is primarily based on the:
a. time period assumption
d. cost/benefit constraint
b. full-disclosure principle
e. separate entity assumption
c. cost principle
(Adapted)
93. The reporting dates of the investor and its associate should not differ by more
than
a. one month
b. two months c. three months
d. six months
94. When the accounting policies used by the investor and the associate do not
match
a. PAS 28 requires appropriate adjustments to the associate’s financial
statements to conform them to the investor’s accounting policies for
reporting like transactions and other events in similar circumstances.
b. PAS 28 does not require appropriate adjustments to the associate’s
financial statements to conform them to the investor’s accounting policies
for reporting like transactions and other events in similar circumstances
when it was not practicable to use uniform accounting policies
c. PAS 28 requires the entity to discontinue the use of the equity method
d. In no instance should the accounting policies used by the investor and the
associate be different.
22
95. When financial statements of an associate used in applying the equity method
are prepared as at the end of the reporting period that is different from that of
the investor,
a. the difference must be no greater than three months
b. the difference must be no greater than twelve months
c. the difference must be compensated by an interim financial statement
d. no difference must exist
96. When an entity elects to prepare separate financial statements, it shall
account for its investment in associates
a. at cost
c. using the equity method
b. in accordance with PFRS 9
d. any of these
Chapter 12 - Suggested answers to theory of accounts questions
1. C
16. A
31. A
46. D
61. D
76. B
2. A
17. C
32. D
47. B
62. D
77. B
3. D
18. D
33. D
48. B
63. C
78. D
4. B
19. D
34. A
49. C
64. B
79. B
5. C
20. C
35. D
50. D
65. C
80. A
6. D
21. B
36. D
51. B
66. A
81. B
7. D
22. A
37. A
52. D
67. E
82. D
8. A
23. C
38. B
53. A
68. B
83. B
9. D
24. D
39. C
54. B
69. A
84. C
10. C
25. C
40. D
55. D
70. D
85. B
11. D
26. B
41. D
56. C
71. A
86. C
12. A
27. A
42. B
57. D
72. D
87. A
13. C
28. D
43. D
58. C
73. C
88. C
14. C
29. C
44. D
59. D
74. A
89. B
15. D
30. D
45. C
60. C
75. B
90. A
23
91.
92.
93.
94.
95.
96.
A
E
C
A
A
D
Chapter 13
Agriculture
Chapter 13: Multiple Choice – Computational (For classroom instruction
purposes)
Distinction between Biological asset, Agricultural produce, and Inventory
Use the following information for the next four questions:
The following information pertains to Madagascar Co.
Sheep
500,000 Wool
6,000
Rubber products
10,000 Thread
3,000
Trees in a timber plantation
95,000 Felled trees
8,000
Maize plants
40,000 Clothing
150,000
Lumber
62,000 Milk
9,000
Pigs
200,000 Carcass
7,000
Roasted peanuts
20,000 Sugar
67,000
Cotton plants
10,000 Harvested cotton
13,000
Peanut plants
5,000 Harvested peanuts
140,000
Sugarcane
25,000 Harvested cane
22,000
Tobacco plants
45,000 Picked leaves
3,000
Tea bushes
800,000 Oil palms
300,000
Dairy cattle
1,000,000 Picked grapes
2,000
Fruit trees
600,000 Picked fruit
10,000
Tea
43,000 Grape vines
2,000,000
Rubber trees
300,000 Harvested latex
10,000
Yarn
22,000 Cured tobacco
320,000
Carpet
33,000 Wine
500,000
Logs
45,000 Processed fruit
20,000
Wheat plants
60,000 Palm oil
50,000
Cheese
75,000 Bean plants
20,000
Sausages
88,000 Cured hams
92,000
1. How much is classified as biological assets that are accounted for under PAS
41 Agriculture?
a. 2,660,000
b. 2,000,000 c. 6,000,000 d. 2,250,000
2. How much is classified as property, plant and equipment that are accounted
for under PAS 16 Property, Plant and Equipment?
a. 4,000,000
b. 4,860,000 c. 4,560,000 d. 3,650,000
3. How much is classified as agricultural produce?
a. 149,000
b. 248,000
c. 290,000
d. 250,000
4. How much is classified as inventory?
a. 1,480,000
b. 1,580,000 c. 1,540,000 d. 1,880,000
Measurement
Use the following information for the next three questions:
The following information pertains to a biological asset of PETRIFY STUN Co.
Estimated selling price
₱80,000
Commissions to brokers
4,000
Transport costs
2,800
Levies by commodity exchange
1,200
Transfer taxes and duties
2,000
24
Advertising costs
800
5. How much is the fair value of the biological asset?
a. 80,000
b. 77,200
c. 70,000
d. 69,200
6. How much is the cost to sell of the biological asset?
a. 7,200
b. 10,000
c. 10,800
d. 12,000
7. How much is the valuation of the biological asset in PETRIFY’s statement of
financial position?
a. 80,000
b. 77,200
c. 70,000
d. 69,200
Access to different active markets
8. Information on a biological asset of INSTIGATE PROVOKE Co. is shown below:
Historical cost
₱40,000
Quoted price in Active Market #1
112,000
Quoted price in Active Market #2
120,000
Costs to sell in either active market
20,000
Contract price
128,000
INSTIGATE Co. is contemplating on transacting in Active Market #1, which is the
principal market for the biological asset. At what amount would the biological
asset be recognized in the year-end financial statements?
a. 92,000
b. 100,000
c. 112,000
d. 120,000
Loss on initial recognition of biological asset
9. On January 1, 20x1, SPAT QUARREL Co. acquired a biological asset at its fair
value of ₱40,000. Necessary costs incurred on the purchase totaled ₱8,000. It
was estimated that if the biological asset is to be sold currently, costs to sell
would amount to ₱2,000. How much is the loss recognized on January 1,
20x1?
a. 38,000
b. 30,000
c. 10,000
d. 0
Gain on initial recognition of biological asset
10. On August 1, 20x1, a dairy cattle of WOO COURT Co. gave birth to a calf. The
fair value less cost to sell of a newly born calf as of August 1, 20x1 is ₱20,000.
Costs incurred to induce procreation such as costs of artificial insemination,
costs of labor and cesarean birth totaled ₱12,000. How much is the gain
recognized on August 1, 20x1?
a. 8,000
b. 12,000
c. 20,000
d. 0
Gain on initial recognition of agricultural produce
11. On April 1, 20x1, HALLOWED SACRED Co. harvested ripe mangoes. The
harvested mangoes have fair value less costs to sell of ₱200,000 on April 1,
20x1. Labor costs incurred in the harvest totaled ₱20,000. The harvested
mangoes are initially recognized at
a. 20,000
b. 180,000
c. 200,000
d. 220,000
Gains or losses on changes in fair value less cost to sell
12. On January 1, 20x1, the biological assets of SUAVE POLISHED Co. consist of
ten 2 year old animals with fair value less cost to sell of ₱40,000 each for a
total of ₱400,000.
Transactions during the year include the following:
 One animal aged 2.5 years was purchased on July 1, 20X1 for ₱43,200.
 One animal was born on July 1, 20X1.
25
 No animals were sold or disposed of during the period.
Per-unit fair values less costs to sell are as follows:
Newborn animal at July 1, 20X1
₱28,000
2.5 year old animal at July 1, 20X1
43,200
Newborn animal at 31 December 20X1
28,800
0.5 year old animal at 31 December 20X1
32,000
2 year old animal at 31 December 20X1
42,000
2.5 year old animal at 31 December 20X1
44,400
3 year old animal at 31 December 20X1
48,000
How much is the total gain from the change in fair value less costs to sell during
20x1?
a. 116,800
b. 156,800
c. 113,600
d. 88,800
Biological assets attached to land
13. CANDOR FAIRNESS Co. has the following assets as of December 31, 20x1:
Land held as plantation
₱1,200,000
Trees (planted on the land referred to above)
480,000
The combined market value of the assets is ₱2,000,000 while the market value of
the land is ₱1,280,000, 10% of which is attributable to improvements on the land.
How much is the valuation of the biological asset?
a. 592,000
b. 720,000
c. 848,000 d. 836,364
Unconditional government grant
14. On January 1, 20x1, LUSTROUS BRIGHT Co. was granted by a local
government a grant of ₱400,000 to aid LUSTROUS in financing the
domestication of ostriches. The ostriches are managed to produce eggs that
are sold to the community. LUSTROUS measures its biological assets at fair
value less cost to sell. No conditions are attached to the grant. How much is
the income from government grant to be recognized in 20x1?
a. 400,000
b. 0 c. either a or b
d. neither a nor b
Conditional government grant
15. On December 1, 20x1, MARAUD PLUNDER Co. was granted by a local
government a grant of ₱400,000 to aid MARAUD in planting American
evergreen trees. This certain tree has small yellowish flowers followed by
fleshy pods with many seeds that bears cacao. Cacao beans are dried, partly
fermented, powdered ground and roasted in order to produce a raw material
for the production of chocolates. The grant becomes receivable when
MARAUD acquires a suitable site to plant the trees. As of December 31, 20x1,
MARAUDE has yet to comply with the condition. How much is the income
from government grant to be recognized in 20x1?
a. 400,000
b. 0 c. either a or b
d. neither a nor b
Conditional government grant
Use the following information for the next two questions:
In 20x1, DEADLOCK STANDSTILL Co. was granted by a local government a 3hectare land to plant “camote” (sweet potato). The land has a fair value of
₱2,000,000. The grant requires DEADLOCK to farm only within the city limits for
five years. If any of the conditions is breached, DEADLOCK is required to return
the entire grant.
16. How much income from government grant is recognized in 20x1?
a. 2,000,000
b. 0 c. either a or b
d. neither a nor b
26
17. How much income from government grant is recognized in 20x6, after the 5year restriction has lapsed?
a. 2,000,000
b. 0 c. either a or b
d. neither a nor b
Part of government grant retained due to passage of time
Use the following information for the next two questions:
On January 1, 20x1, RESTIVE UNEASY Co. was granted by a local government a
₱2,000,000 grant to aid RESTIVE Co. in planting “sayote” (chayote). The grant
requires RESTIVE to farm only within the city limits for five years. If any of the
conditions is breached, RESTIVE must return the grant taking into consideration
the portion retained based on passage of time.
18. Assuming no breach of condition, how much income from government grant
is recognized in 20x1?
a. 2,000,000
b. 400,000
c. 0
d. either a or c
19. Assuming no breach of condition, how much income from government grant
is recognized in 20x2?
a. 2,000,000
b. 400,000
c. 0
d. either a or c
Change in FVLCS attributable to price change and physical change
Use the following information for the next three questions:
On January 1, 20x1, the biological assets of SUAVE POLISHED Co. consist of ten 2
year old animals with fair value less cost to sell of ₱40,000 each for a total of
₱400,000.
Transactions during the year include the following:
 One animal aged 2.5 years was purchased on July 1, 20x1 for ₱43,200.
 One animal was born on July 1, 20x1.
 No animals were sold or disposed of during the period.
Per-unit fair values less costs to sell are as follows:
Newborn animal at July 1, 20x1
₱28,000
2.5 year old animal at July 1, 20x1
43,200
Newborn animal at 31 December 20x1
28,800
0.5 year old animal at 31 December 20x1
32,000
2 year old animal at 31 December 20x1
42,000
2.5 year old animal at 31 December 20x1
44,400
3 year old animal at 31 December 20x1
48,000
20. How much is the total gain from the change in fair value less costs to sell
during 20x1?
a. 116,800
b. 156,800
c. 113,600
d. 88,800
21. How much is the gain on change in fair value less costs to sell due to price
change?
a. 22,000
b. 94,800
c. 34,800
d. 122,000
22. How much is the gain on change in fair value less costs to sell due to physical
change?
a. 22,000
b. 94,800
c. 98,400
d. 122,000
27
Change in FVLCS attributable to price change and physical change
Use the following information for the next three questions:
On January 1, 20x1, the biological assets of GENTEEL POLITE Co. consist of ten 2year old animals with fair value less cost to sell of ₱40,000 each for a total of
₱400,000.
Transactions during the year include the following:
 One animal aged 2.5 years was purchased on July 1, 20X1 for ₱43,200.
 One animal was born on July 1, 20X1.
 Two animals from the January 1, 20x1 biological assets were sold for ₱48,000
each on Sept. 1, 20x1.
 One animal from the January 1, 20x1 biological assets died of “mad cow”
disease on November 1, 20x1.
Per-unit fair values less costs to sell are as follows:
Newborn animal at July 1, 20x1
₱28,000
2.5 year old animal at July 1, 20x1
43,200
Newborn animal at 31 December 20x1
28,800
0.5 year old animal at 31 December 20x1
32,000
2 year old animal at 31 December 20x1
42,000
2.5 year old animal at 31 December 20x1
44,400
3 year old animal at 31 December 20x1
48,000
23. How much is the total gain from the change in fair value less costs to sell
during 20x1?
a. 116,800
b. 156,800
c. 113,600
d. 92,800
24. How much is the gain on change in fair value less costs to sell due to price
change?
a. 22,000
c. 94,800
c. 34,800
d. 16,000
25. How much is the gain on change in fair value less costs to sell due to physical
change?
a. 22,000
c. 94,800
c. 122,000
d. 76,800
The answers and solutions to the computational problems above
(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
Chapter 13: Theory of Accounts Reviewer
Objective and scope
1. According to PAS 41 this refers to the management by an entity of the
biological transformation of biological assets for sale, into agricultural
produce, or into additional biological assets.
a. Agricultural activity
c. Biological transformation
b. Agricultural management
d. Biological activity
2. Agricultural activity covers a diverse range of activities. Such diverse range of
activities have common features which includes all of the following except
a. Capability to change
c. Recognition of change
b. Management of change
d. Measurement of change
3. It is the detachment of produce from a biological asset or the cessation of a
biological asset’s life processes.
28
a. Harvest
b. Death
c. Decease
d. Cultivation
4. When there is a long aging or maturation process after harvest, the
accounting for such products should be dealt with by
a. PAS 41
b. PAS 2
c. PAS 16
d. PAS 40
5. According to PAS41 Agriculture, which of the following would be classified as
a product that is the result of processing after harvest?
a. Cotton
b. Wool
c. Bananas
d. Cheese
(ACCA)
6. Which of the following items would be classified as agricultural produce,
according to PAS41 Agriculture?
a. Tree
b. Bush
c. Butter
d. Apple
(ACCA)
7. According to PAS41 Agriculture, which of the following items would be
classified as biological assets?
I.
Oranges
II.
Chickens
III.
Eggs
IV.
Trees
a. I, II
b. III, IV
c. II, IV
d. I, IV
(ACCA)
8. Are the following statements about classification according to PAS 41
Agriculture true or false?
I.
Sugar should be classified as agricultural produce.
II.
Wool should be classified as agricultural produce.
a. False, False
b. False, True c. True, False
d. True, True
(ACCA)
9. Which of the following is not dealt with by PAS 41?
a. The accounting for biological assets.
b. The initial measurement of agricultural produce harvested from the
entity’s biological assets.
c. The processing of agricultural produce after harvesting.
d. The accounting treatment of government grants received in respect of
biological assets.
(Adapted)
10. Which of the following is correct regarding the applicability of PAS 41?
a. PAS 41 applies to biological assets and agricultural produce at the point of
harvest even if they do not relate to agricultural activities.
b. PAS 41 applies to unconditional government grant related to biological
assets measured at cost.
c. PAS 41 applies to land on which tree recognized as biological assets are
planted.
d. PAS 41 applies to living plants and animals only when such items relate to
agricultural activity.
11. PAS 41 applies to which of the following when they relate to agricultural
activity
I.
Biological assets
II.
Agricultural produce after the point of harvest
III.
Agricultural produce at the point of harvest
29
IV.
V.
VI.
An unconditional government grant related to a biological asset measured
at its fair value less costs to sell
An unconditional government grant related to a biological asset measured
at cost land related to agricultural activity
Intangible assets related to agricultural activity
a. I, II, IV
b. I, III, IV
c. I, II, III, IV, V
d. I, II, IV, VI
12. According to PAS 41 this refers to the harvested product of the entity’s
biological assets.
a. biological produce
c. agricultural produce
b. agricultural products
d. biological assets
13. It is a living animal or plant
a. biological product
b. biological asset
c. agricultural product
d. mutant assets
14. It comprises the processes of growth, degeneration, production, and
procreation that cause qualitative or quantitative changes in a biological
asset.
a. agricultural activity
c. genetic mutation
b. biological activity
d. biological transformation
15. Agricultural activity covers a diverse range of activities which includes all of
the following except
a. processing of grapes into wine by a vintner who has grown the grapes.
b. raising livestock, forestry, and annual or perennial cropping
c. cultivating orchards and plantations
d. floriculture and aquaculture (including fish farming).
16. Agricultural activity may include
a. ocean fishing
c. animal hunting in the forest
b. deforestation
d. fish pond operation
Initial and subsequent measurement
17. According to PAS41 Agriculture, which of the following criteria must be
satisfied before a biological asset can be recognized in an entity's financial
statements?
I.
The entity controls the asset as a result of past events
II.
It is probable that economic benefits relating to the asset will flow to the
entity
III.
An active market for the asset exists
IV.
The asset forms a homogenous biological group
a. I, II
b. I, II, IV
c. I, II, III
d. I, II, III, IV
(ACCA)
18. Biological assets and agricultural produce are initially recognized at
a. cost
c. fair value less costs to sell
b. fair value
d. lower of cost or fair value less costs to sell
19. According to PAS41 Agriculture, which of the following expenses would be
classified as costs to sell when valuing biological assets and agricultural
produce?
I.
Commissions to brokers
II.
Transport costs
III.
Transfer taxes and duties
IV.
Advertising costs
30
a. I, II, III
(ACCA)
b. III, IV
c. I, III
d. I, III, IV
20. Regarding the choice of measurement basis used for valuing biological assets,
PAS 41
a. Sets out several ways of measuring fair value.
b. Recommends the use of historical cost.
c. Recommends the use of current cost.
d. Recommends the use of present value.
(Adapted)
21. Where the fair value of the biological asset cannot be determined reliably, the
biological asset is measured at
a. Cost.
b. Cost less accumulated depreciation.
c. Cost less accumulated depreciation and accumulated impairment losses.
d. Net realizable value.
22. Generally speaking, biological assets relating to agricultural activity should be
measured using
a. Historical cost.
b. Historical cost less depreciation less impairment.
c. A fair value approach.
d. Net realizable value.
(Adapted)
23. Which of the following values is unlikely to be used in fair value measurement
of a biological asset?
a. Quoted price in a market.
b. The most recent market transaction price.
c. The present value of the expected net cash flows from the asset.
d. External independent valuation.
(Adapted)
24. The Plants Vs. Zombies Company owns a number of herds of cattle. Where
should changes in the fair value of a herd of cattle recognized in the financial
statements, according to PAS 41 Agriculture?
a. In profit or loss only
b. In other comprehensive income only
c. In profit or loss or other comprehensive income
d. In the statement of cash flows only
(ACCA)
25. An entity had a plantation forest that is likely to be harvested and sold in 30
years. The income should be accounted for in which of the following way?
a. No income should reported annually until first harvest and sale in 30
years
b. Income should be measured annually and reported using a fair value
approach that recognizes and measures biological growth.
c. The eventual sale proceeds should be estimated and matched to the profit
and loss account over the 30 year period.
d. The plantation forest should be valued every 5 years and the increase in
value should be shown in the statement of recognized gains and losses
(Adapted)
31
26. When agricultural produce is harvested, the harvest should be accounted for
by using PAS 2 Inventories, or another applicable PFRS. For the purpose of
that Standard, cost at the date of harvest is deemed to be
a. the fair value less cost to sell at point of harvest.
b. the historical cost of the harvest.
c. the historical cost less accumulated impairment losses.
d. market value.
27. A gain or loss arising on the initial recognition of a biological asset and from a
change in the fair value less costs to sell of a biological asset should be
included in
a. The net profit or loss for the period.
b. The statement of recognized gains and losses.
c. A separate revaluation reserve.
d. A capital reserve within equity.
(Adapted)
28. Land that is related to agricultural activity is valued
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 that is being grown
on the land.
d. At the resale value separate from the biological asset has been grown on
the land.
(Adapted)
29. Which of the following costs are not included in costs to sell?
a. Commissions to brokers and dealers.
b. Levies by regulatory agencies.
c. Transfer taxes and duties.
d. Transport and other costs necessary to get the assets to a market.
30. In relation to PAS 41, which of the following is the least desirable choice of
income recognition?
a. Recognition of income during production
b. Recognition of income when a sale occurs
c. Recognition of income only when cash is collected
d. Recognition of income when production is completed
Government grants
31. An unconditional government grant related to a biological asset that has been
measured at fair value less cost to sell should be recognized as
a. Income when the grant becomes receivable.
b. A deferred credit when the grant becomes receivable.
c. Income when the grant application has been submitted.
d. A deferred credit when the grant has been approved.
(Adapted)
32. Under PAS 41, which of the following statements is untrue?
a. Contract prices are not necessarily relevant in determining fair value, and
the fair value of a biological asset or agricultural produce is not adjusted
because of the existence of a contract.
b. An unconditional government grant related to a biological asset measured
at FVLCS shall be recognized in profit or loss when, and only when, the
government grant becomes receivable.
32
c. A conditional government grant related to a biological asset measured at
FVLCS, including a government grant that requires an entity not to engage
in specified agricultural activity, shall be recognized in profit or loss when
the conditions attaching to the government grant are met.
d. If the terms of a conditional grant allow part of it to be retained according
to the time that has elapsed, the entity recognizes that part in profit or loss
only upon fulfillment of the condition.
33. If the terms of a conditional government grant allow part of the grant to be
retained according to the time that has elapsed, the entity recognizes income
from grant
a. using the straight line method
b. only when the condition is fulfilled
c. in full as time passes
d. using the effective interest method
34. If a government grant is conditional on certain events, then the grant should
be recognized as
a. Income when the conditions attaching to the grant are met.
b. Income when the grant has been approved.
c. A deferred credit when the conditions attached to the government grant
are met.
d. A deferred credit when the grant is approved.
(Adapted)
Disclosures
35. Where there is a production cycle of more than one year for a biological asset,
PAS 41 encourages separate disclosure of the
a. Physical change only.
c. Total change in value
b. Price change only
d. a and b
36. Which of the following is a required disclosure under PAS 41?
a. a quantified description of each group of biological assets, distinguishing
between consumable and bearer biological assets
b. a quantified description of each group of biological assets, distinguishing
between mature and immature biological assets
c. the amount of change in fair value less costs to sell included in profit or
loss due to physical changes and due to price changes.
d. the depreciation method used if an entity measures biological assets at
their cost less any accumulated depreciation and any accumulated
impairment losses
e. a, b and c
37. Which of the following information should be disclosed under PAS 41?
a. Separate disclosure of the gain or loss relating to biological assets and
agricultural produce.
b. The aggregate gain or loss arising on the initial recognition of biological
assets and agricultural produce and the change in fair value less cost to
sell of biological assets.
c. The total gain or loss from biological assets, agricultural produce, and
from changes in fair value less cost to sell of biological assets.
d. There is no requirement in the Standard to disclose separately any gains
or losses.
(Adapted)
33
38. These refer to those that are to be harvested as agricultural produce or sold
as biological assets.
a. consumable biological assets c. agricultural produce
b. bearer biological assets
d. biological assets
39. The following relate to consumable biological assets
I.
livestock intended for the production of meat
II.
livestock held for sale
III.
trees from which firewood is harvested while the tree remains
IV.
crops such as maize and wheat
V.
trees being grown for lumber
VI.
VI fish in farms
a. IV, V, VI
b. II, IV, V, VI
c. I, II, IV, V, VI
d. all of these
40. These biological assets are not agricultural produce but, rather, are selfregenerating.
a. consumable biological assets
c. agricultural produce
b. bearer biological assets
d. biological assets
41. The following relate to bearer biological assets
I.
livestock from which milk is produced
II.
grape vines
III.
fruit trees
IV.
trees from which firewood is harvested while the tree remains
V.
trees being grown for lumber
VI.
fish in farms
a. I, II, III, IV b. II, IV, V, VI
c. I, II, III, IV, V
d. all of these
42. These are biological assets that have attained harvestable specifications (for
consumable biological assets) or are able to sustain regular harvests (for
bearer biological assets).
a. mature biological assets
c. harvestable biological assets
b. immature biological assets d. completely mutated biological assets
Chapter 13 - Suggested answers to review theory questions
1. A
11. B
21. C
31. A
2. C
12. C
22. C
32. D
3. A
13. B
23. D
33. A
4. B
14. D
24. A
34. A
5. D
15. A
25. B
35. D
6. D
16. D
26. A
36. D
7. C
17. A
27. A
37. B
8. B
18. C
28. B
38. A
9. C
19. C
29. D
39. C
10. D
20. A
30. C
40. B
34
41. A
42. A
Chapter 14
Property, Plant and Equipment (Part 1)
Chapter 14: Multiple choice – Computational (SET B) – (For classroom
instruction purposes)
Acquisition on cash basis
1. LOQUACIOUS TALKATIVE Co. acquired a factory equipment overseas on cash
basis for ₱400,000. Additional costs incurred include the following:
commissions paid to brokers for the purchase of the equipment, ₱20,000;
import duties of ₱100,000; non-refundable purchase taxes of ₱40,000; freight
cost of transferring the equipment to LOQUACIOUS’ premises, ₱4,000; costs of
assembling and installing the equipment, ₱8,000; costs of testing the
equipment, ₱6,000; administration and other general overhead costs,
₱16,800; and advertisement and promotion costs of the new product to be
produced by the equipment, ₱15,200. The samples generated from testing the
equipment were sold at ₱2,000. How much is the initial cost of the
equipment?
a. 578,000
b. 594,800
c. 576,000
d. 592,800
Acquisition on account
2. PRECLUDE PREVENT Co. acquired an equipment for ₱448,000 on account
with a credit term of 2/15, n/30. Any discount is computed based on the
purchase price. The purchase price is inclusive of 12% value added tax (VAT).
PRECLUDE Co. is VAT-registered and any input VAT paid is refundable
through deduction from monthly output VAT remitted to the Bureau of
Internal Revenue (BIR). Additional costs incurred include ₱40,000 cost of
training staff who will be operating the equipment and ₱60,000 cost of
relocating the equipment to a new location after it was installed in a location
originally intended by management. How much is the initial cost of the
equipment?
a. 400,000
b. 391,040
c. 491,040
d. 392,000
Deferred settlement – with cash price equivalent
3. On January 1, 20x1, SQUAMOUS SCALY Co. purchased furniture with an
installment price of ₱520,000 and a cash price equivalent of ₱400,000 by
paying ₱40,000 down payment and issuing a one-year noninterest-bearing
note of ₱120,000 payable in equal semi-annual installments on July 1 and
December 31, 20x1. How much is the initial cost of the furniture?
a. 520,000
b. 480,000
c. 400,000
d. 360,000
Deferred settlement – no cash price equivalent
4. On January 1, 20x1, REEDY SLENDER Co. purchased fixtures with an
installment price of ₱520,000 by paying ₱40,000 down payment and issuing a
three-year noninterest bearing note of ₱480,000 payable in three equal
annual installments starting December 31, 20x1. The prevailing rate for the
note as of January 1, 20x1 is 12%. How much is the initial cost of the fixtures?
a. 520,000
b. 480,000
c. 424,293
d. 360,000
Deferred settlement – no cash price equivalent
5. On January 1, 20x1 ABC Co. acquired a building for ₱380,000, including
₱20,000 non-refundable purchase taxes. The purchase agreement provided
for payment to be made in full on December 31, 20x1. Legal fees of ₱8,000
35
were incurred in acquiring the building and paid on January 1, 20x1. An
appropriate discount rate is 10%. How much is the initial cost of the building?
a. 368,000
b. 388,000
c. 424,634
d. 353,456
Classes of PPE
6. ABC Co. had the following assets on December 31, 20x1.
Land used as plant site
Land and building classified as held for sale
Building used as office
Building rented out under operating lease
Equipment being sold in the ordinary course of business
Office furniture
Fixtures and signage
Machinery
Automobiles (used by company officers)
Delivery trucks (used by the shipping department)
Computers
Aircraft rented out to various clients
Dairy cattle (held to produce milk that is sold to customers)
Harvested milk
Apple trees (held to bear fruits to that are sold to customers)
Harvested apples
50,000
780,000
500,000
420,000
330,000
24,000
10,000
12,000
350,000
420,000
70,000
690,000
10,000
3,000
6,000
2,000
How much is the total of assets classified as property, plant and equipment?
a. 2,132,000
b. 2,126,000 c. 2,142,000 d. 2,148,000
Acquisition on lump-sum price (building not razed)
Use the following information for the next two questions:
On April 1, 20x1, ESCULENT EDIBLE Co. purchased land and building by paying
₱40,000,000 and assuming a mortgage of ₱8,000,000. The land and building have
appraised values of ₱20,000,000 and ₱40,000,000, respectively. The building will
be used by ESCULENT Co. as its new office.
Additional costs relating to the purchase include the following:
Legal cost of conveying and registering title to land
₱32,000
Payment to tenants to vacate premises
36,000
Option paid on the land and building
24,000
Option paid on similar land and building not acquired
12,000
Broker's fee on the land and building
60,000
Unpaid real estate taxes prior to April 1, 20x1 assumed
by ESCULENT Co. – assessed on land
120,000
Real estate taxes after April 1, 20x1
80,000
Repairs and renovation costs before the building
is occupied
160,000
Repair costs after the building is occupied
200,000
7.
How much is the cost of the land?
a. 16,192,000
b. 17,292,000 c. 15,492,000 d. 14,592,000
8.
How much is the cost of the building?
a. 23,420,000
b. 32,640,000
c. 32,240,000
36
d. 24,440,000
Acquisition on lump-sum price (building demolished)
Use the following information for the next four questions:
On April 1, 20x1, ABC Co. purchased land and building for a lump-sum price of
₱48,000,000. The existing building will be demolished and a new building will be
constructed.
Additional costs relating to the purchase include the following:
Title guarantee
Option paid for the land and old building acquired
Payments to tenants to vacate premises
Cost of razing the old building (demolition cost)
Proceeds from sale of salvaged materials
Fair value of materials salvaged from the
old building and used in the new building
Construction cost of new building (completed)
80,000
24,000
48,000
240,000
60,000
120,000
34,000,000
9.
The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much are the allocated costs of the land and the new
building?
Land
New building
a. 16,864,000
33,780,000
b. 16,104,000
34,180,000
c. 15,980,000
36,670,000
d. 16,014,000
34,810,000
10.
The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much is charged as loss on initial recognition?
a. 48,000
b. 32,000,000
c. 32,048,000
d. 0
11.
The old building is unusable and has an insignificant fair value. How much are
the allocated costs of the land and the new building?
Land
New building
a. 46,640,000
33,780,000
b. 46,104,000
34,180,000
c. 48,152,000
34,180,000
d. 46,140,000
34,810,000
12.
The old building is unusable and has an insignificant fair value. How much is
charged as loss on initial recognition?
a. 48,000
b. 32,000,000
c. 32,048,000
d. 0
Cost of self-constructed asset
Use the following information for the next two questions:
LOATH HATE Co. purchased a lot for ₱8,000,000. Immediately after the purchase,
LOATH started construction of a new building on the lot. The following were
additional costs incurred by LOATH Co.
Legal cost of conveying land
₱ 40,000
Special assessment
20,000
Survey costs
60,000
Materials, labor, and overhead costs
22,000,000
Cash discounts on materials purchased not taken
120,000
Clerical and other expenses related to construction
56,000
Excavation costs
400,000
Architectural fees and building permit
240,000
Supervision by management on construction
48,000
Insurance premiums paid for workers
520,000
37
Payment for claim for injuries not covered by insurance
Saving on construction
Cost of changes to plans and specifications due to
Inefficiencies
Paving of streets and sidewalks (not included in
blueprint)
Income earned on a vacant space rented as parking
lot during construction
13.
14.
How much is the cost of the land?
a. 8,160,000
b. 8,100,000
c. 8,120,000
How much is the cost of the building?
a. 23,144,000 b. 23,184,000
c. 23,264,000
180,000
800,000
560,000
40,000
36,000
d. 8,060,000
d. 23,096,000
Cost of equipment – with decommissioning cost
15. BAWDY INDECENT Co. acquired an oil rig for ₱400,000,000. Installation and
other necessary costs in bringing the equipment to its intended condition for
use totaled ₱80,000,000. BAWDY is required by law to dismantle the
equipment and restore the site where it is installed after 20 years. The
estimated decommissioning and restoration costs are ₱40,000,000. The
imputed rate of interest is 12%. How much is the initial cost of the
equipment?
a. 480,000,000 b. 440,000,000
c. 484,146,672
d. 404,146,672
With fair value of asset given up
Use the following information for the next four questions:
Fact pattern
FEEBLE Co. exchanged equipment with WEAK, Inc. Pertinent data are shown
below:
FEEBLE
WEAK,
Co.
Inc.
Equipment
4,000,000
8,000,000
Accumulated depreciation
800,000
3,200,000
Carrying amount
3,200,000
4,800,000
Fair value
3,800,000
4,400,000
Cash paid by FEEBLE Co. to
600,000
600,000
WEAK, Inc.
16.
How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000
b. 5,000,000 c. 3,800,000 d. 3,400,000
17.
How much is the initial cost of the equipment received by WEAK Co.?
a. 3,800,000
b. 4,400,000 c. 5,000,000 d. 3,400,000
18.
How much is gain (loss) on exchange recognized by FEEBLE Co.?
a. (600,000)
b. 600,000
c. 1,200,000 d. 0
19.
How much is gain (loss) on exchange recognized by WEAK Co.?
a. (400,000)
b. 400,000
c. (1,000,000) d. 0
Fair value of asset given up is indeterminable
Use the fact pattern in the preceding problem except that FEEBLE Co. cannot
determine the fair value of the equipment given up but is aware that the
equipment that will be received from WEAK, Inc. has a fair value of ₱4,400,000.
38
20.
How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000
b. 5,000,000 c. 3,800,000 d. 3,400,000
21.
How much is gain (loss) on exchange recognized by FEEBLE Co.?
a. (600,000)
b. 600,000
c. 1,200,000 d. 0
No commercial substance
Use the fact pattern in the preceding problem except that the exchange has no
commercial substance.
22. How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000
b. 5,000,000 c. 3,800,000 d. 3,200,000
23.
How much is gain (loss) on exchange recognized by FEEBLE Co.?
a. (600,000)
b. 600,000
c. 1,200,000 d. 0
Trade-in
Use the following information for the next two questions:
TRANSCEND EXCEED Co. traded in an old machine for a new model. Pertinent
data are as follows:
Old equipment:
Cost
Accumulated depreciation
Average published retail value
200,000
80,000
24,000
New equipment:
List price
Cash price without trade in
Cash price with trade in
380,000
280,000
220,000
24.
How much is the initial cost of the equipment received by TRANSCEND Co.?
a. 244,000
b. 280,000 c. 320,000
d. 184,000
25.
How much is gain (loss) on exchange recognized by TRANSCEND Co.?
a. 60,000
b. 160,000
c. (60,000) d. 0
Acquisition through issuance of own equity instrument
Use the following information for the next four questions:
Fact pattern
RESILIENT ELASTIC Co. acquired land with fair value of ₱4,000,000 by issuing
10,000 shares with par value of ₱40 per share and quoted price of ₱360 per
share.
26.
How much is the initial cost of the equipment received by RESILIENT Co.?
a. 400,000
b. 4,000,000 c. 3,600,000 d. 180,000
27.
How much is gain (loss) on exchange recognized by RESILIENT Co.?
a. 3,200,000
b. 400,000
c. (400,000) d. 0
28.
Use the fact pattern above except that the fair value of the land is
indeterminable. How much is the initial cost of the equipment received by
RESILIENT Co.?
a. 400,000
b. 4,000,000 c. 3,600,000 d. 180,000
29.
How much is gain (loss) on exchange recognized by RESILIENT Co.?
a. 3,200,000
b. 400,000
c. (400,000) d. 0
39
Acquisition through issuance of bonds payable
Use the following information for the next four questions:
Fact pattern
On January 1, 20x1, LABYRINTH MAZE Co. acquired land with fair value of
₱3,800,00 by issuing a 3-year, 10%, ₱4,000,000 bonds. Principal is due on
January 1, 20x4 but interest is due at each year-end. The prevailing market rate
of interest for a similar instrument on January 1, 20x1 is 12%. The present value
of the future cash flows from the bonds discounted at 12% is ₱3,807,852.
30.
How much is the initial cost of the equipment received by LABYRINTH Co.?
a. 3,800,000
b. 4,000,000 c. 3,807,852 d. 180,000
31.
How much is gain (loss) on exchange recognized by LABYRINTH Co.?
a. 192,148
b. (192,148) c. (200,000) d. 0
32.
Use the fact pattern above except that the fair value of the land is
indeterminable. How much is the initial cost of the equipment received by
LABYRINTH Co.?
a. 3,800,000
b. 4,000,000 c. 3,807,852 d. 180,000
33.
How much is gain (loss) on exchange recognized by LABYRINTH Co.?
a. 192,148
b. (192,148) c. (200,000) d. 0
Acquisition by donation
Use the following information for the next two questions:
GROVEL Co. received donation of equipment from CRAWL, Inc., an unrelated
foreign corporation. The equipment has a fair value of ₱4,000,000. Necessary
costs incurred by GROVEL Co. to bring the asset to its intended condition for use
amounted to ₱40,000.
34.
The entry to record the receipt of the donation includes
a. a credit to share premium of ₱4,040,000
b. a credit to share premium of ₱3,960,000
c. a credit to income from donation of ₱4,040,000
d. a credit to income from donation of ₱3,960,000
35.
Assuming the donor is a shareholder of GROVEL Co., the entry to record the
receipt of the donation includes
a. a credit to share premium of ₱4,040,000
b. a credit to share premium of ₱3,960,000
c. a credit to income from donation of ₱4,040,000
d. a credit to income from donation of ₱3,960,000
The answers and solutions to the computational problems above
(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
Chapter 14: Theory of Accounts Reviewer
Objective and scope
1. PAS 16 shall be applied to which of the following
a. land held for future plant site
b. building not used in normal operations but is being leased out under
operating lease
40
c. equipment held for sale under PFRS 5
d. biological assets related to agricultural activity
2. The principal issues in the accounting for property, plant and equipment
include which of the following?
I.
The recognition of the assets.
II.
The determination of carrying amounts and the depreciation charges and
impairment losses to be recognized in relation to assets recognized.
III.
The complex computation of revaluation surplus.
a. I, II
b. I, III
c. III
d. I, II, III
Recognition principles
3. Which of the following is not a major characteristic of a plant asset?
a. Possesses physical substance
c. Acquired for use
b. Acquired for resale
d. Yields services over a number of years
(AICPA)
4. Which of these is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.
(AICPA)
5. Property, plant & equipment has all of the following characteristics except:
a. They are intended for use in operating activities, and are not acquired for
sale in the ordinary course of business.
b. They are classified as noncurrent tangible assets
c. Their service potential normally diminishes with use.
d. They don't typically make up a large part of a corporation's operating
assets.
6. Which of the following statements is consistent with the provisions of PAS
16?
I.
If fair value can be measured reliably, an entity may carry all items of
property, plant and equipment of a class at a revalued amount, which is
the fair value of the items at the date of the revaluation less any
subsequent accumulated depreciation and accumulated impairment
losses.
II.
An entity is required to determine the depreciation charge separately for
each significant part of an item of property, plant and equipment.
III.
An entity is required to measure the residual value of an item of property,
plant and equipment as the amount it estimates it would receive currently
for the asset if the asset were already of the age and in the condition
expected at the end of its useful life.
IV.
An entity is required to begin depreciating an item of property, plant and
equipment when it is available for use and to continue depreciating it until
it is derecognized, even if during that period the item is idle.
a. I, II
b. I, II, IV
c. I, II, III
d. I, II, III, IV
7. Which of the following statements is inconsistent with the provisions of PAS
16?
a. An entity is required to derecognize the carrying amount of an item of
property, plant and equipment that it disposes of on the date the criteria
for the sale of goods would be met.
41
b. An entity is required to derecognize the carrying amount of a part of an
item of property, plant and equipment if that part has been replaced and
the entity has included the cost of the replacement in the carrying amount
of the item.
c. An entity cannot classify as revenue a gain it realizes on the disposal of an
item of property, plant and equipment
d. An entity is required to measure the residual value of an item of property,
plant and equipment as the amount it estimates it would receive in the
future for the asset if the asset were already of the age and in the
condition expected at the end of its useful life.
8. Accounting recognition should be given to some or all of the gain realized on a
nonmonetary exchange of plant assets except
a. when the exchange is one with no commercial substance and no cash is
involved and that no impairment losses are needed to be recognized.
b. where the assets exchanged are dissimilar and additional cash is paid
c. where the assets exchanged are dissimilar and additional cash is received
d. when the exchange is one with no commercial substance whether or not
there is cash involved and that no impairment losses are needed to be
recognized.
9. The cost of land most likely does not include
a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with unlimited useful lives.
d. special assessments.
10. When the fair value of the non-monetary asset exchanged in a transaction
with commercial substance is indeterminable, the non-monetary asset
received will be valued at
a. fair value of asset given up adjusted for cash received or given
b. fair value of asset received
c. fair value of asset received adjusted for cash received or given
d. carrying amount of asset given up adjusted for cash received or given
11. Decrease in equity arise from
a. transfers from an entity to its owners
b. investments in an entity by its owners
c. non-reciprocal transfers to an entity from other than owners
d. upward valuation of property, plant and equipment
(RPCPA)
12. Which of the following terms best describes the removal of an asset from an
entity's statement of financial position?
a. Derecognition b. Impairment
c. Write-off
d. Depreciation
13. If a corporation purchases 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
combined 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 non-financial asset’s highest and best use determined from the
perspective of market participants, even if the entity intends a different
use or intends not to use the non-financial asset.
42
(AICPA)
14. Accounting for tangible operational assets is primarily in conformity with the:
a. historical cost principle
b. historical cost principle and reporting principle
c. matching principle and reporting principle
d. matching principle
e. matching principle and historical cost principle
(Adapted)
15. Are the following statements regarding the cost of an asset true or false,
according to PAS16 Property, plant and equipment?
(1) The cost includes cash equivalents paid to acquire an asset.
(2) The cost includes the fair value of any non-monetary consideration given
to acquire an asset.
a. False False
b. False True c. True False d. True True
(ACCA)
16. The debit for a non-refundable sales tax properly levied and paid on the
purchase of machinery preferably would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on
income).
d. accumulated depreciation--machinery.
(AICPA)
17. Small tools and containers used repeatedly for more than a year are classified
on the balance sheet as
a. current assets b. fixed assets
c. deferred charges d. investments
(AICPA)
18. Hotel California Corporation recently purchased Eagles Hotel and the land on
which it is located with the plan to tear down the Eagles Hotel and build a
new luxury hotel on the site. The cost of the Eagles Hotel should be
a. depreciated over the period from acquisition to the date the hotel is
scheduled to be torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
(AICPA)
19. Which of the following statements are correct per PAS16 Property, plant and
equipment?
I.
Assets are depreciated even if their fair value exceeds their carrying
amount
II.
Land and buildings are accounted for separately, even when acquired
together
III.
A non-current asset acquired as the result of an exchange of assets is not
recognized
IV.
A gain on disposal of a non-current asset is classified as revenue
a. I, II
b. I, II, III
c. I, II, IV
d. I, II, III, IV
(ACCA)
20. Plant assets may properly include:
a. property held for investment purposes.
43
b.
c.
d.
e.
land held for possible use as a future plant site.
self-constructed assets currently in use.
idle equipment awaiting sale
deposits on machinery purchased and not yet received
21. According to PAS16 Property, plant and equipment, which of the following
items should be capitalized into the cost of property, plant and equipment?
I.
Cost of excess materials resulting from a purchasing error
II.
Cost of testing whether the asset works correctly
III.
Initial operating losses whilst demand builds up
IV.
Cost of preparing the site for installation
a. I, II
b. I, II, III
c. II, IV
d. I, II, III, IV
(ACCA)
22. Capitalizable make-ready cost related to a new machine does not include:
a. restoration costs related to the machine
b. installation costs related to the machine
c. taxes related to the machine during the make-ready period
d. depreciation on the machine during the make-ready period
(Adapted)
23. Under the principles of PAS16 Property, plant and equipment, which of the
following should be included in the cost of an item of property, plant and
equipment?
I.
Initial delivery and handling costs
II.
Apportioned general overhead costs
III.
Costs of training staff on the new asset
IV.
Installation and assembly costs
a. I, II, IV
b. I, IV
c. II, IV
d. I, II, III, IV
(ACCA)
24. Plant assets purchased on long-term credit contracts should be accounted for
at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.
(AICPA)
25. The cost of land typically includes the purchase price and all of the following
costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost included in special
assessment
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
(AICPA)
26. Property, plant and equipment items which are subject to any provision for
depreciation or reduction in value, should be valued in the balance sheet by
adding to the actual price paid any expenses incidental to its acquisition.
Which of the following cost items might be included in such incidental
expenses and are to be capitalized as part of machinery?
Cost items
I. installation
II. cost delivery and handling
44
III.
IV.
cost site preparation
professional fees
Item 1
Item 2
a.
yes
yes
b.
yes
yes
c.
yes
no
d.
no
yes
(Adapted)
Item 3
yes
yes
yes
no
Item 4
yes
no
no
no
27. NBA Co. exchanged merchandise that cost ₱24,000 and normally sold for
₱36,000 for a new delivery truck with a list price of ₱40,000. The delivery
truck should be recorded on NBA's books at
a. 24,000. b. 30,000.
c. 36,000.
d. 40,000.
(AICPA)
28. When a plant asset is acquired by issuance of common stock (ordinary
shares), the cost of the plant asset is properly measured by the
a. par value of the stock.
c. book value of the stock.
b. stated value of the stock.
d. market value of the stock.
(AICPA)
29. When a closely held corporation issues preferred stock for land, the land
should be recorded at the
a. total par value of the stock issued.
b. total book value of the stock issued.
c. total liquidating value of the stock issued.
d. fair market value of the land.
(AICPA)
30. Fire insurance on building being constructed is an example of:
Capital expenditure
Revenue expenditure
a.
yes
no
b.
no
yes
c.
no
no
d.
yes
yes
(Adapted)
31. Any renovating or remodeling costs incurred to put a building purchased in a
condition suitable for its intended use is a:
Capital expenditure
Revenue expenditure
a.
no
yes
b.
yes
no
c.
no
no
d.
yes
yes
(RPCPA)
32. If the land acquired has a building that should be demolished, any amount
received as salvage from the removal of the building should be:
a. credited to the building account
c. credited to the land account
b. treated as income
d. adjusted to prior years
33. 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. allocation of cost of payment to tenants to vacate premises
c. property taxes accruing during the period of plant construction.
45
d. costs for grading, clearing, and draining the property.
34. Bianca Corp., a closely held corporation, acquired a used machine by issuing
15,000 shares (par value ₱1.00 per share) of its own common stock. The stock
has a market value of ₱1.40 per share based on a recent sale of 100 shares.
The machine was carried on the vendor’s books at ₱12,000, and was
determined to have a fair market value of ₱17,000. What is the amount at
which Bianca should record the machine on its books?
a. 21,000
b. 17,000
c. 15,000
d. 12,000
(RPCPA)
35. 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
c has a useful life beyond one year
b. not acquired for resale
d. subject to depreciation
36. Land was purchased to be used as the site for the construction of a plant. A
building on the property was sold and removed by the buyer so that
construction on the plant could begin. The proceeds from the sale of the
building should be
a. classified as other income.
b. deducted from the cost of the building.
c. netted against the costs to clear the land and expensed as incurred.
d. netted against the costs to clear the land and amortized over the life of the
plant.
(AICPA)
37. Plant assets may properly include
a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant site.
d. none of these.
(AICPA)
38. Accounting recognition should be given to some or all of the gain realized on a
nonmonetary exchange of plant assets except where
a. the assets exchanged are similar and additional cash is paid.
b. the assets exchanged are similar and additional cash is received.
c. the assets exchanged are dissimilar and additional cash is paid.
d. the assets exchanged are dissimilar and additional cash is received.
e. the exchange transaction lacks commercial substance
(AICPA)
39. For a nonmonetary exchange of plant assets, accounting recognition should
not be given to
a. a loss when the assets exchanged are similar.
b. a gain when the assets exchanged are dissimilar.
c. a gain when the exchange lacks commercial substance.
d. part of a gain when the assets exchanged are similar and cash is received.
(AICPA)
40. When an entity is the recipient of a donated asset from other than a
shareholder, the account credited may be a(n)
a. paid-in capital account.
c. deferred revenue account.
b. income account.
d. all of these.
(AICPA)
46
41. Noun Co. and Nameword Co. exchanged similar plots of land with fair values
in excess of carrying amounts in an exchange transaction that lacks
commercial substance. In addition, Noun received cash of less than 10% of the
total consideration received from Nameword to compensate for the difference
in land values. As a result of the exchange, Noun should recognize:
a. A gain equal to the difference between the fair value and the carrying
amount of the land given up.
b. A gain in an amount determined by the ratio of cash received to total
consideration.
c. A loss in an amount determined by the ratio of cash received to total
consideration.
d. Neither a gain nor a loss.
(AICPA)
42. Adverb Co. and LY Co. exchanged similar trucks with fair values in excess of
carrying amounts in an exchange with commercial substance. In addition,
Adverb paid LY to compensate for the difference in truck values. As a
consequence of the exchange, Adverb recognizes:
a. A gain equal to the difference between the fair value and carrying amount
of the truck given up.
b. A gain determined by the proportion of cash received to the total
consideration.
c. A loss determined by the proportion of cash received to the total
consideration.
d. Neither a gain nor a loss.
(AICPA)
43. In an exchange transaction with commercial substance, DEADLOCK
STANDSTILL Co. received equipment with a fair value equal to the carrying
amount of other assets given up. Deadlock also contributed cash. As a result of
the exchange, Deadlock recognized:
a. A loss equal to the cash given up.
b. A loss determined by the proportion of cash paid to the total transaction
value.
c. A gain determined by the proportion of cash paid to the total transaction
value.
d. Neither gain nor loss.
(AICPA)
44. E.G. Co. exchanged similar nonmonetary assets with Example Co. and no cash
was exchanged. The carrying amount of the asset surrendered by E.G.
exceeded both the fair value of the asset received and Example's carrying
amount of that asset. E.G. should: (assume exchange has commercial
substance)
a. Recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it surrendered as a loss.
b. Recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it received as a gain.
c. Recognize the difference between the carrying amount of the asset it
surrendered and the carrying amount of the asset it received as a loss.
d. Recognize no gain or loss.
(AICPA)
45. Adjective Co. and Relating 2 Company exchanged assets with equal fair values.
The retail price of the asset that Adjective gave up is less than the retail price
47
of the asset received. What gain or loss should Adjective Co. recognize on the
nonmonetary exchange?
a. A gain or loss is not recognized.
b. A gain equal to the difference between the retail prices of the asset
received and the asset foregone.
c. A gain equal to the difference between the retail price and the cost of the
asset received.
d. A gain or loss equal to the difference between the fair value and the cost of
the asset given foregone.
(AICPA)
46. Theoretically, which of the following costs incurred in connection with a
machine purchased for use in a company's manufacturing operations would
be capitalized?
I.
Insurance on machine while in transit
II.
Testing and preparation of machine for use
a. Yes, Yes
b. Yes, No
c. No, Yes
d. No, No
(AICPA)
47. Which of the following is not an example of fixed asset?
a. plant and machinery
c. royalty
b. land and building
d. molds and dies
48. Discounts given for early payment of credit purchases of operational assets
should be:
a. recorded as interest expense at purchase date.
b. capitalized as a cost of the asset acquired and subsequently allocated to
depreciation expense.
c. recorded as interest revenue at purchase date.
d. deducted from the invoice price when determining the cost of the asset
(Adapted)
49. Apportionment of the purchase price in a lump-sum acquisition of different
assets may be based on all the following except?
a. carrying amount of the assets to the seller
b. relative fair values
c. tax assessment values
d. appraised values
(Adapted)
50. Which of the following is least likely to be classified in property, plant and
equipment?
a. land improvements
c. leasehold improvements
b. land
d. idle land
51. When land and building are acquired for a lump sum price and the building is
demolished, the materials salvaged from the building that were used in the
construction of a new building should be
a. Ignored when the demolition costs, net of actual sale proceeds of salvaged
materials, are capitalized as cost of the new building.
b. Included as income from continuing operations.
c. Added to the cost of the new building.
d. Deducted from the cost of the land and added to the cost of the building
52. Pronoun Co. exchanged similar nonmonetary assets with Substitute-4-Noun
Co. No cash was exchanged. The carrying amount of the asset surrendered by
48
Pronoun Co. exceeded both the fair value of the asset received and Substitute4-Noun Co.’s carrying amount of the asset. Pronoun Co. should recognize the
difference between the carrying amount of the asset surrendered and
a. The fair value of the asset received as a loss
b. The fair value of the asset received as a gain
c. Pronoun Co.’s. carrying amount of the asset received, as a loss
d. Pronoun Co.’s. carrying amount of the asset received, as again
(AICPA)
53. I.E. Co. recently purchased the That-Is Hotel and the land on which it is
located. The plans are to demolish the That-Is Hotel and to build a new luxury
hotel on the site. I.E. Co. should account for the total purchase cost of the
That-Is Hotel as follows:
a. capitalize it as part of the cost of the new hotel.
b. depreciate it over the period from the acquisition until the Majestic is torn
down.
c. allocate between the land and the That-Is Hotel building, then charge the
allocated cost of the That-Is Hotel building to loss.
d. capitalized it as part of the cost of the land.
(Adapted)
54. What is the general principle of capitalizing costs to property, plant and
equipment?
a. All costs which will provide a benefit beyond one year are capitalized.
b. Only depreciable costs are capitalized.
c. All cost associated with the acquisition or construction of a plant asset are
capitalized.
d. All cost incurred to bring the asset to its intended condition and location
are capitalized.
e. All costs relevant to the acquisition and long-term maintenance of a plant
asset are capitalized.
(Adapted)
55. The amount of nonrefundable sales tax paid on the purchase of machinery (an
operational asset) should be debited to a:
a. machinery account.
b. accumulated depreciation account.
c. tax expense (which includes all taxes other than income tax) account.
d. separate deferred charge account
(Adapted)
56. Discounts available for early payment of liabilities on purchases of
operational assets should:
a. be capitalized as part of the cost of the asset, whether taken or not, and
subsequently included as depreciation expense.
b. be recorded and reported as a contra account to the related liability
account.
c. not be capitalized as cost of the asset whether taken or not.
d. be given no recognition until taken or until the discount period has
expired; if not taken, the discounts should be added to the cost of the
asset.
(Adapted)
57. Assets received in donation from other than the government should
a. be depreciated based on the market value at the time of the donation.
b. be depreciated based on their book value at the time of the donation.
49
c. should not be depreciated.
d. be expensed upon receipt.
(Adapted)
58. Acoustic Company needed a new warehouse and a contractor quoted a
₱5,000,000 price to construct it. Acoustic believed that it could build the
warehouse for ₱4,300,000 and decided to use company employees to build it.
The final construction cost incurred by Acoustic was ₱4,800,000 but the asset
was recorded at ₱5,000.000. What principle is this a violation of?
a. Cost principle
c. Matching principle
b. Separate entity
d. Full disclosure
(Adapted)
59. Which of the following should not be classified as property, plant and
equipment?
a. Building used as a factory
b. Land used in ordinary business operations
c. A truck held for resale by an automobile dealership
d. Land improvement, such as parking lots and fences
(ACCA)
60. A characteristic of property, plant, and equipment is that it is
a. intangible.
b. used in the operations of a business.
c. held for sale in the ordinary course of the business.
d. not currently used in the business but held for future use.
(ACCA)
61. On November 1, 2010, a company purchased a new machine that it does not
have to pay for until November 1, 2012. The total payment on November 1,
2012, will include both principal and interest. Assuming interest at a 10%
rate, the cost of the machine would be the total payment multiplied by what
time value of money concept?
a. Present value of annuity of ₱1.
c. Future amount of annuity of ₱1.
b. Present value of ₱1.
d. Future amount of ₱1.
(AICPA)
62. Stings Co. recently purchased an old building and the land on which it is
located. The old building will be demolished at a net cost of ₱10,000. A new
building will be built on the site. The demolition cost should be:
a. capitalized as part of the cost of the new building
b. capitalized as part of the cost of the land
c. depreciated over the remaining life of the old building
d. written off as an extraordinary loss in the year of the demolition
(Adapted)
Chapter 14 - Suggested answers to theory of accounts questions
1. A
11. A
21. C
31. B
41. D
51. A
2. A
12. A
22. D
32. A
42. A
52. A
3. B
13. D
23. B
33. C
43. A
53. C
4. D
14. E
24. C
34. B
44. A
54. D
5. D
15. D
25. C
35. D
45. D
55. A
6. D
16. A
26. A
36. B
46. A
56. C
7. D
17. B
27. C
37. D
47. C
57. A
8. D
18. D
28. D
38. E
48. D
58. A
50
61. B
62. A
9. B
10. B
19. A
20. C
29. D
30. A
39. C
40. B
51
49. A
50. D
59. C
60. B
Chapter 15
Property, Plant and Equipment (Part 2)
Chapter 15: Multiple choice – Computational (SET B) – (For classroom
instruction purposes)
Depreciation methods
Use the following information for the next four cases:
Fact pattern
On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated
useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of
₱400,000.
Straight line method
Case #1: Use the straight-line method for the next two questions.
1. How much is the depreciation expense in the 2nd year?
a. 100,000
b. 80,000
c. 200,000
d. 160,000
2. How much is the accumulated depreciation on December 31, 20x2?
a. 100,000
b. 80,000
c. 200,000
d. 160,000
Sum-of-the-years’ digits (SYD) method
Case #2: Use the sum-of-the-years’ digits (SYD) method for the next two questions.
3. How much is the depreciation expense in the 2nd year?
a. 120,000
b. 96,000
c. 128,000
d. 224,000
4. How much is the accumulated depreciation on December 31, 20x2?
a. 120,000
b. 96,000
c. 128,000
d. 224,000
Double declining balance method
Case #3: Use the double declining balance method for the next two questions.
5. How much is the depreciation expense in the 2nd year?
a. 120,000
b. 100,000
c. 128,000
d. 224,000
6. How much is the accumulated depreciation on December 31, 20x2?
a. 120,000
b. 96,000
c. 160,000
d. 300,000
Units of production method (Activity method or Variable-charge method)
Case #4: Use the units of production method for the next two questions:
The equipment has an expected total output of 160,000 units and an expected
total input of 40,000 hours.
Information on actual operations is presented below:
Year Units produced Manufacturing hours
20x1
60,000
16,000
20x2
30,000
8,000
20x3
45,000
12,000
20x4
25,000
4,000
160,000
40,000
7. If SIMPLETON Co. uses the output method, how much is the depreciation
expense in the 2nd year?
a. 128,000
b. 96,000
c. 60,000
d. 64,000
52
8. If SIMPLETON Co. uses the output method, how much is the accumulated
depreciation on December 31, 20x2?
a. 120,000
b. 180,000
c. 192,000
d. 256,000
9. If SIMPLETON Co. uses the input method, how much is the depreciation
expense in the 2nd year?
a. 64,000
b. 96,000
c. 60,000
d. 64,000
10. If SIMPLETON Co. uses the input method, how much is the accumulated
depreciation on December 31, 20x2?
a. 120,000
b. 210,000
c. 192,000
d. 256,000
Increasing depreciation charge under double declining balance method
11. The following information pertains to an equipment owned by RABBLE MOB
Co.:
Cost
800,000
Useful life
5 years
Double declining rate (2/ 5 year life)
40%
Residual value
None
How much is the depreciation in 20x5?
a. 41,472
b. 103,680
c. 86,400
d. 0
Partial year depreciation
Use the following information for the next three questions:
DEPLORABLE BAD Co. acquired a machine on September 21, 20x1 for a total cost
of ₱160,000. The machine was estimated to have a useful life of 4 years and a
salvage value of ₱10,000.
12. How much is the depreciation expense in 20x2 under the straight-line
method?
a. 37,500
b. 93,750
c. 36,400
d. 35,000
13. How much is the depreciation expense in 20x2 under the sum-of-years’ digits
method?
a. 45,000
b. 11,250
c. 56,250
d. 57,250
14. How much is the depreciation expense in 20x2 under the double declining
balance method?
a. 70,000
b. 60,000
c. 10,000
d. 0
Composite method
Use the following information for the next four questions:
On January 1, 20x1, DEVIOUS CROOKED Co. purchased the following:
Cost
Residual value Useful life
Machine tools
80,000
4,000
3 years
Meters costing
64,000
2,000
5 years
Returnable containers
120,000
6 years
15. What is the composite life?
a. 5.40
b. 5
c. 4.50
d. 4.71
16. What is the composite rate?
a. 21.87%
b. 22.21%
c. 95.45%
d. 4.50%
17. How much is the depreciation expense in 20x1?
53
a. 57,733
b. 56,000
c. 58,667
d. 59,8774
18. During 20x3, machine tools with original cost of ₱20,000 and residual value of
₱2,000 were sold for ₱6,000. How much is the gain (loss) on the sale?
a. (345)
b. 430
c. (667)
d. 0
Retirement and Replacement methods
Use the following information for the next two questions:
The small tools account of ATROCIOUS CRUEL Co. has a balance of ₱600,000 as of
January 1, 20x1. Movements in this account during the year are as follows:
Cost of newly acquired small
tools
Cost of old small tools
retired
Proceeds from sale of old
small tools
Feb.
April
Sept.
Nov.
40,000
-
120,000
88,000
24,000
48,000
-
72,000
2,000
3,200
-
4,000
19. Assuming ATROCIOUS Co. uses the retirement method, how much is the
depreciation expense in 20x1?
a. 134,800
b. 166,800
c. 144,000
d. 118,800
20. Assuming ATROCIOUS Co. uses the replacement method, how much is the
depreciation expense in 20x1?
a. 134,800
b. 166,800
c. 144,000
d. 118,800
Inventory method
21. The small tools account of AUGUST MAJESTIC Co. has a balance of ₱600,000
as of January 1, 20x1. Acquisitions of small tools during the period totaled
₱240,000 and proceeds from sale of small tools retired and/or replaced
totaled ₱100,000. The annual asset count on December 31, 20x1 revealed a
balance of small tools of ₱440,000. How much is the depreciation expense
under the inventory method?
a. 400,000
b. 300,000
c. 240,000
d. 140,000
Revenue method
22. On January 1, 20x1, COCKY ARROGANT Co. acquired an equipment costing
₱4,000,000. The equipment will be used to reproduce a gaming software
which is expected to be marketed for 3 years. The equipment is expected to
be used in producing products over the next two years, after which, the
equipment will be disposed of at a negligible amount.
Estimated revenues from the software are as follows:
Year Estimated revenues
20x1
120,000,000
20x2
80,000,000
20x3
40,000,000
Total
240,000,000
The actual revenue earned in 20x1 is ₱180,000,000. Depreciation expense in
20x1 is most likely equal to
a. 3,000,000
b. 2,000,000 c. 2,977,667 d. 333,333
54
Leasehold improvements
Use the following information for the next two questions:
On January 1, 20x1, DIMINUTIVE SMALL Co. signed a ten-year lease for office
space. DIMINUTIVE has the option to renew the lease for an additional five-year
period on or before January 1, 2x10. During the first half of January 20x2,
DIMINUTIVE Co. incurred the following costs:
- ₱3,600,000 for general improvements to the leased premises with an
estimated useful life of ten years.
- ₱400,000 for office furniture and equipment with an estimated useful life of
ten years.
- ₱800,000 for movable assembly line equipment with useful life of 5 years.
23. At the time the leasehold improvement were finished, DIMINUTIVE Co. is
uncertain as to the exercise of the renewal option. How much is the 20x2
depreciation expense on the leasehold improvements?
a. 400,000
b. 360,000
c. 533,333
d. 488,889
24. Assume that in DIMINUTIVE Co. is certain that it will exercise the renewal
option. How much is the 20x2 depreciation expense on the leasehold
improvements?
a. 400,000
b. 360,000
c. 480,000
d. 440,000
Change in depreciation method (from DDB to SL)
25. On January 1, 20x1, DISCORDANT DISAGREEING Co. acquired machinery for a
total cost of ₱80,000,000. The machinery is depreciated using the double
declining balance method over a period of 10 years. On January 1, 20x4,
DISCORDANT Co. changed its depreciation method to straight line method.
How much is the depreciation expense in 20x4?
a. 5,815,428
b. 7,314,286 c. 6,581,342 d. 5,851,429
Change in depreciation method (from SYD to DDB)
26. On January 1, 20x1, KNAVE RASCAL Co. acquired machinery for a total cost of
₱80,000,000. The machinery is depreciated using the SYD method over a
period of 10 years. On January 1, 20x4, KNAVE Co. changed its depreciation
method to double declining balance method. How much is the depreciation
expense in 20x4?
a. 40,727,272
b. 11,635,782 c. 12,556,780 d. 13,556,702
Change in useful life and residual value
27. On January 1, 20x1, SMUTTY OBSCENE Co. acquired machinery for a total cost
of ₱80,000,000 and estimated residual value of ₱8,000,000. The machinery is
depreciated using the straight line method over a period of 10 years. On
January 1, 20x4, SMUTTY Co. revised the total useful life of the asset to 15
years from acquisition date and the residual value to ₱10,400,000. How much
is the depreciation expense in 20x4?
a. 4,000,000
b. 3,899,567 c. 4,010,250 d. 4,129,335
Improvements and Replacements
Use the following information for the next two questions:
ENTREAT Co. acquired an aircraft from BEG, Inc. on January 1, 20x1 for a total
cost of ₱24,000,000. The aircraft is estimated to have a useful life of 10 years.
ENTREAT Co. uses the straight line method of depreciation. On January 1, 20x5, a
major part of the equipment was replaced for a total cost of ₱3,200,000.
28. Assuming ENTREAT Co. determined that the cost of the replaced part is
₱2,000,000, how much is the loss on replacement?
55
a. 1,920,000
b. 1,200,000 c. 2,000,000 b. 0
29. Assuming it is impracticable to determine the cost of the replaced part, how
much is the loss on replacement?
a. 1,920,000
b. 1,200,000 c. 2,000,000 b. 0
Revaluation: Appraised value
30. On December 31, 20x1, the building of HISTRIONAL THEATRICAL Co. with a
historical cost of ₱80,000,000, accumulated depreciation of ₱20,000,000, and
an estimated useful life of 20 years has been assessed by an external valuer to
have an appraised value of ₱100,000,000. How much is the revaluation
surplus?
a. 40,000,000
b. 28,000,000 c. 20,000,000 d. 10,000,000
Depreciated replacement cost (without residual value)
31. On December 31, 20x1, the building of SWIMMY UNSTEADY Co. with a
historical cost of ₱80,000,000, accumulated depreciation of ₱20,000,000, and
an estimated useful life of 20 years has been estimated to have a replacement
cost of ₱140,000,000. How much is the revaluation surplus?
a. 31,500,000
b. 36,778,750 c. 45,000,000 d. 60,000,000
Depreciated replacement cost (with residual value)
32. On December 31, 20x1, the building of LITHE FLEXIBLE Co. was revalued.
Information on revaluation date is shown below:
Cost
Replacement cost
Building
72,000,000
144,000,000
Accumulated depreciation
16,000,000
Residual value
8,000,000
8,000,000
Remaining useful life
10 years
12 years
How much is the revaluation surplus?
a. 45,000,000 b. 54,000,000
c. 36,000,000
d. 46,333,333
Methods of recording revaluation surplus – Replacement cost
Use the following information for the next three questions:
On December 31, 20x1, the building of SUBTERFUGE DECEPTION Co. with a
historical cost of ₱80,000,000, accumulated depreciation of ₱20,000,000, and an
estimated useful life of 20 years has been estimated to have a replacement cost of
₱140,000,000. Income tax rate is 30%.
33. How much is the revaluation surplus?
a. 31,500,000
b. 36,778,750
c. 45,000,000
d. 60,000,000
34. Assuming SUBTERFUGE Co. uses the proportional method, the entry to record
the revaluation includes:
a. a debit to accumulated depreciation for ₱15,000,000
b. a debit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱25,000,000
d. a debit to building for ₱60,000,000
35. Assuming SUBTERFUGE Co. uses the elimination method, the entry to record
the revaluation includes:
a. a credit to accumulated depreciation for ₱20,000,000
b. a debit to building for ₱25,000,000
c. a debit to accumulated depreciation for ₱15,000,000
d. a debit to deferred tax for ₱13,500,000
56
Methods of recording revaluation – Appraised value
Use the following information for the next two questions:
On December 31, 20x1, the building of ABC Co. with a historical cost of
₱320,000,000, accumulated depreciation of ₱160,000,000, and an estimated
useful life of 20 years has been assessed by an external valuer to have an
appraised value of ₱200,000,000. Income tax rate is 30%
36. The entry under the proportional method to record the revaluation includes
a. a debit to accumulated depreciation for ₱40,000,000
b. a credit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱80,000,000
d. a credit to building for ₱80,000,000
37. The entry under the proportional method to record the revaluation includes
a. a debit to accumulated depreciation for ₱40,000,000
b. a debit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱80,000,000
d. a credit to building for ₱80,000,000
Revaluation: Change in useful life
Use the following information for the next two questions:
On January 1, 20x1, the building of PRODIGIOUS EXTRAORDINARY Co. with a
historical cost of ₱80,000,000 purchased 5 years ago with an estimated useful life
of 20 years has been estimated to have a replacement cost of ₱140,000,000. The
building is estimated to have a remaining useful life of 25 years as of January 1,
20x1. Depreciation is computed using the straight line method. Income tax rate is
30%.
38. How much is the revaluation surplus?
a. 31,500,000
b. 45,000,000
c. 37,500,000
d. 36,788,366
39. How much is the depreciation expense in 20x1?
a. 2,940,000
b. 4,200,000
c. 3,200,000
d. 3,333,976
Revaluation: Change in residual value and useful life
Use the following information for the next two questions:
On December 31, 20x1, the building of COLLOQUY CONVERSATION Co. was
revalued. Information on revaluation date is shown below:
Cost
Replacement cost
Building
72,000,000
144,000,000
Accumulated depreciation
16,000,000
Residual value
8,000,000
16,000,000
Remaining useful life
10 years
12 years
40. How much is the revaluation surplus?
a. 45,000,000
b. 31,500,000
c. 36,788,366
d. 51,428,571
41. How much is the depreciation expense in 20x2?
a. 3,333,976
b. 4,200,000
c. 7,619,048
d. 8,990,344
Revaluation of non-depreciable asset
42. On December 31, 20x1, the land of FARCICAL ABSURD Co. with a historical
cost of ₱80,000,000 has been appraised at ₱140,000,000. Income tax rate
applicable to profits is 30% and the tax rate applicable to profits made on the
sale of property is 6%. How much is the revaluation surplus?
57
a. 42,000,000
b. 56,400,000
c. 45,000,000
d. 51,428,572
Revaluation decrease representing impairment loss
43. On December 31, 20x1, the land of ATTAINDER DISHONOR Co. with an
original cost of ₱32,000,000 was appraised at ₱48,000,000. On December
20x4, the land was appraised at ₱28,000,000. How much is the impairment
loss in 20x4?
a. 20,000,000
b. 4,000,000
c. 2,800,000
d. 0
Revaluation increase representing reversal of impairment loss
44. On December 31, 20x1, the land of CONJUNCTION UNION Co. with an original
cost of ₱40,000,000 was revalued at ₱28,000,000. This was the first
revaluation made on the land since it was purchased 2 years ago. On
December 20x4, the building was appraised at ₱48,000,000. Ignore income
taxes. How much is the gain on impairment reversal in 20x4?
a. 8,000,000
b. 20,000,000
c. 12,000,000
d. 0
Sale of item of PPE measured under cost model
45. FORTITUDE ENDURANCE Co. purchased equipment on August 14, 20x1 for a
total cost of ₱400,000. The equipment has an estimated useful life of 10 years
and residual value of ₱80,000. It is the policy of FORTITUDE Co. to provide
full-year depreciation in the year of acquisition and none in the year of
disposal. On May 12, 20x4, the equipment was sold for ₱120,000. Additional
costs incurred on the sale amounted to ₱8,000. How much is the gain (loss) on
the sale?
a. (184,000)
b. 184,000
c. 192,000
d. (192,000)
Sale of item of PPE measured under revaluation model
46. OBDURATE STUBBORN Co. disposed of a machinery on December 31, 20x1
for a total net disposal proceeds of ₱6,800,000. Information of the machinery
as of December 31, 20x1 is as follows:
Cost at revalued amount
₱ 9,200,000
Accumulated depreciation
3,200,000
Revaluation surplus (presented in equity)
4,800,000
How much is the gain (loss) on the sale?
a. 5,600,000
b. 4,000,000
c. (800,000)
d. 800,000
The answers and solutions to the computational problems above
(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
Chapter 15: Theory of Accounts Reviewer
1. Under PAS 16 Property, plant and equipment, which of the following costs
relating to non-current assets should be capitalized?
I.
Replacement of a building's roof every 15 years
II.
Maintenance of an asset on a three-monthly basis
III.
Installation and assembly costs
IV.
Replacement of small spare parts annually
a. I, III
b. I, III, IV
c. I, II, III
d. I, II, III, IV
(ACCA)
2. Which of the following statements correctly relate to accounting for property,
plant and equipment?
58
I.
If property, plant and equipment are stated at current valuation, the
financial position and progress of an entity will be more realistically
portrayed.
II.
If land and building are purchased for a lump sum price, the broker’s
commission should be apportioned between the land and the building.
III.
The price paid for a plant asset is actually a prepayment of an expense.
IV.
Treating a capital expenditure as an expense may overstates profit in the
year after this action was taken.
V.
If a fully depreciated asset with no residual value continues to be used,
management can continue to provide for depreciation.
a. II, III, V
b. I, II, III, IV
c. II, III, V
d. I, II, III, IV, V
3. A plant asset acquired by issuance of ordinary shares is properly measured at
the
a. Par value of the shares
c. Carrying amount of the asset given
b. Stated value of the shares
d. Fair value of the asset received
4. RESTIVE UNEASY Cooperative recently replaced all the tires in two of its
trucks at a very insignificant amount. This cost should be accounted for
a. as an increase in the cost of the trucks
b. as repair and maintenance expense
c. as an intangible asset
d. as a reduction in the accumulated depreciation of the trucks
(Adapted)
5. The following statements relate to accounting for property, plant and
equipment. Choose the incorrect statement.
a. Accumulated depreciation is a contra account to an asset reported in the
property, plant and equipment section of the statement of financial
position.
b. Improvements to leased facilities are included under property, plant and
equipment as long as the amount is not material and if the terms of the
lease extend over a long period of time, otherwise, the amount maybe
shown among deferred charges or other assets.
c. When a unit of property is retired or disposed of by sale, trade, scrapping
and removal or abandonment, its cost is credited to the appropriate
property account; the related accumulated depreciation is removed and
any gain or loss adjusted for salvage value and cost of disposition is
reported in the statement of profit or loss and other comprehensive
income.
d. Assets subject to depreciation may take the form of buildings, machinery
and equipment, furniture, improvements to leased facilities, bookplates,
fruit trees and breeding animals for which the fair value cannot be
determined.
6. An old building formerly occupied by ABC Company was replaced. The loss on
the retirement of the old building should
a. not be capitalized but treated as an expense
b. not be capitalized but treated as a loss
c. be capitalized and included in the cost of the land
d. be capitalized and included in the cost of the new building
7. Which of the following statements are correctly stated?
I.
Property, plant and equipment are permitted to be revalued in response
to inflation.
59
II.
Residual value is ignored when computing for depreciation in the earlier
years of an asset’s life when the depreciation method used is the double
declining balance.
III.
Cost of building would include expenditures for service equipment and
fixtures made a permanent part of the structure.
IV.
Cost inefficiencies on self-constructed assets whether due to temporary
idle capacity, industrial dispute or other causes, should not be included as
part of the cost of asset.
V.
When used property is acquired, the actual cost in cash or equivalent is
generally the proper basis for depreciation, regardless of the previous
history of the property, unless the entity uses the revaluation method.
a. III, V b. I, II, IV
c. I, II, IV, V d. I, II, III, IV, V
8. Which of the following correctly relate(s) to accounting for property, plant
and equipment?
I.
Devin Co.’s building with an estimated useful life of 20 years was
constructed on a land leased for a term of 15 years. The cost of the
building should be depreciated over 20 years, the life of the building.
II.
Vaughn Company acquired a site for the construction of a new plant. The
title examination fees, surveying fees and property taxes accruing during
the period of plant construction should be charged to the land account of
the company.
III.
At the time Meagan Corp became a subsidiary of Andre Corp., Meagan
switched depreciation of its plant assets from the straight-line method of
depreciation to the sum-of-the-year digits method used by Andre. As to
Meagan, this change is a change in reporting entity.
IV.
Functional depreciation is the wear and tear, deterioration and decay, and
damage, reducing the usefulness of the asset.
V.
Revaluation surplus in property is an element constituting shareholders’
equity.
a. IV, V
b. II, IV, V
c. II, III, IV, V
d. V
9. The sale of a depreciable asset resulting in a gain, indicates that the proceeds
from the sale were
a. greater than cost
c. less than carrying amount
b. greater than carrying amount
d. less than cost
10. Improvements are
a. revenue expenditures
b. debited to an appropriate asset account when they do not increase useful
life but improves efficiency beyond the state or condition originally
intended by management
c. debited to an appropriate asset account when they do not increase useful
life
d. debited to accumulated depreciation when they do not increase useful life
(AICPA)
11. In order for a cost to be capitalized (capital expenditure), the following must
be present:
a. The useful life of an asset must be increased.
b. The quantity of assets must be increased.
c. The quality of assets must be increased beyond the condition originally
intended by management.
d. Any one of these.
(AICPA)
60
12. An improvement made to a machine increased its fair value and its
production capacity by 25% above the condition originally intended by
management but without extending the machine's useful life. The cost of the
improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.
(AICPA)
13. Which of the following is a capital expenditure?
a. Payment of an account payable
c. Payment of income taxes
b. Retirement of bonds payable
d. None of these
(AICPA)
14. Which of the following is not a capital expenditure?
a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement
(AICPA)
15. When a plant asset is sold for less than its carrying amount
a. cash received plus accumulated depreciation plus loss on disposal equals
the original cost
b. original cost minus accumulated depreciation equals cash received minus
loss on disposal
c. carrying amount of the asset plus loss on disposal equals cash received
d. cash received plus accumulated depreciation minus loss on disposal
equals the original cost
16. The sale of a depreciable asset resulting in a loss indicates that the proceeds
from the sale were
a. less than current market value.
c. greater than carrying amount.
b. greater than cost.
d. less than carrying amount.
(AICPA)
17. Burnham Corp.'s forestland was condemned for use as a national park.
Compensation for the condemnation exceeded the forestland's carrying
amount. Burnham purchased similar, but larger, replacement forest land for
an amount greater than the condemnation award. As a result of the
condemnation and replacement, what is the net effect on the carrying amount
of forestland reported in Burnham 's balance sheet?
a. The amount is increased by the excess of the replacement forestland's cost
over the condemned forestland's carrying amount.
b. The amount is increased by the excess of the replacement forestland's cost
over the condemnation award.
c. The amount is increased by the excess of the condemnation award over
the condemned forestland's carrying amount.
d. No effect, because the condemned forestland's carrying amount is used as
the replacement forestland's carrying amount.
(AICPA)
18. A building suffered uninsured fire damage. The damaged portion of the
building was refurbished with higher quality materials. The cost and related
61
accumulated depreciation of the damaged portion are identifiable. To account
for these events, the owner should:
a. Reduce accumulated depreciation equal to the cost of refurbishing.
b. Record a loss in the current period equal to the sum of the cost of
refurbishing and the carrying amount of the damaged portion of the
building.
c. Capitalize the cost of refurbishing and record a loss in the current period
equal to the carrying amount of the damaged portion of the building.
d. Capitalize the cost of refurbishing by adding the cost to the carrying
amount of the building.
(AICPA)
19. Choose the correct statement about the accounting treatment for special onetime assessments made by local governments requiring a firm to pay for
improvements including streetlights, sewers and other infrastructure.
a. They are capitalized but not depreciated
b. If probable and estimable, they are expensed when determinable
c. They are expensed as incurred
d. They are capitalized and depreciated over their useful life
(Adapted)
20. An enterprise installed an assembly line in 20x1. Four years later, ₱100,000
was spent in rearranging the line to promote efficiency. The rearrangement
but did not affect the assembly line’s useful life. Proper accounting for the cost
of the automation should be to
a. Report it as an expense
b. Establish a separate account for the ₱100,000.
c. Allocate the cost of automation between the asset and accumulated
depreciation accounts.
d. Debit to asset account.
(Adapted)
21. Choose the correct statement.
a. An operational asset received in exchange for ordinary shares issued by
the buyer should be recorded at the par value of the securities issued if the
cash price of the asset is not known.
b. Sales tax paid upon acquisition of an operational asset should be expensed
because such amounts are usually immaterial with respect to the cost of
the acquired asset.
c. Purchased operational assets acquired on a long-term payment plan
should be recorded at full cost (including interest and financing charges)
only if the cost cannot be estimated by the purchaser.
d. A primary principle in recording and reporting operational assets is that
they are recorded at cost when acquired and subsequently are reported at
cost or cost less accumulated depreciation.
(Adapted)
22. Which of the following statement is true?
a. All operational assets are subject to either depreciation, depletion, or
amortization.
b. The matching principle does not require depreciation on an operational
asset donated to a company because no purchase cost was incurred at
acquisition.
c. The only requirement an asset must meet to be considered an operational
asset is that its useful life extend over more than one accounting period.
62
d. The determination of cost is conceptually consistent between operational
assets and inventory in regard to the accounting treatment of cash
discounts.
(Adapted)
23. Which of the following is not an appropriate basis for measuring the cost of
property, plant, and equipment?
a. The purchase price, freight costs, and installation costs of a productive
asset should be included in the asset’s cost.
b. Proceeds obtained in the process of readying land for its intended
purpose, such as from the sale of cleared timber, should be recognized
immediately as income.
c. The cost of improvement to equipment incurred after the equipment is
placed in the location and condition originally intended by management is
generally expensed out rightly.
d. All necessary costs incurred in the construction of a plant building, from
excavation to completion, should be considered as part of the asset’s cost
24. When a plant asset is sold for less than its carrying amount:
a. cash received plus accumulated depreciation plus gain on disposal equals
the original cost.
b. cash received plus accumulated depreciation minus loss on disposal
equals the original cost.
c. cost of the asset minus loss on disposal equals cash received.
d. original cost minus accumulated depreciation equals cash received plus
loss on disposal.
Depreciation methods
25. Depreciation
a. is an allocation of the cost of property, plant and equipment over the time
period of usefulness, in a systematic and rational manner.
b. is a process of recognizing the decreasing value of an asset over time.
c. is a cash expense.
d. expense of ₱2,000 reflects a ₱2,000 increase in liquid funds.
26. Choose the best description of depreciable amount.
a. minimum carrying amount
c. residual value
b. carrying amount
d. initial cost less residual value
27. An entity acquired an asset with an estimated useful life of 20 years and a
10% residual value. At the end of the asset’s useful life, the accumulated
depreciation will be equal to the original cost of the asset under which of the
following depreciation methods?
Double-declining
Sum-of-the-years’ Digits Straight-line Method
a. Yes
Yes
Yes
b. Yes
Yes
No
c. No
Yes
Yes
d. No
No
No
(Adapted)
28. Obsolescence of a depreciable asset may be caused by
a. Technological changes
b. Improvement in production method
c. Change in market demand for the product or service output
d. Legal or other restrictions
e. (a), (b), (c) and (d) above
63
29. An entity installed a new production facility and incurred a number of
expenses at the point of installation. The entity’s accountant is arguing that
most expenses do not qualify for capitalization. Included in those expenses
are initial operating losses. These should be
a. Deferred and amortized over a reasonable period of time.
b. Expensed and charged to the income statement.
c. Capitalized as part of the cost of the plant as a directly attributable cost.
d. Taken to retained earnings since it is unreasonable to present it as part of
the current year’s income statement.
(Adapted)
30. Choose the incorrect statement.
a. Land and an old building thereon are purchased with the intent to build a
new and better structure. Upon demolition of the old structure, the total
purchase price plus the demolition cost should be included as land.
b. When an operational asset (such as land or buildings) is purchased, any
unpaid property taxes (for the period prior to the purchase date) that are
paid by the purchaser should be recorded as part of the cost of the asset.
c. An operational asset purchased on credit for ₱2,000, terms 2/20, n/30,
should be recorded at ₱1,960 even though payment is made after the
discount period.
d. If operational assets are acquired in exchange for bonds, issued by the
buyer, the assets should be capitalized at the fair value of the operational
assets received or the fair value of the bonds, whichever is more reliably
determinable.
(Adapted)
31. Which of the following statements is true?
I.
Depreciation expense shown on a company's income statement is always
equal to the depreciation expense on the company's income tax return.
II.
The purpose of depreciation is to have the balance sheet report the
current value of an asset.
III.
Depreciation expense reflects an allocation of an asset's original cost
rather than an allocation based on the economic value that is being
consumed.
IV.
An asset's useful life is the same as its physical life.
V.
One company might depreciate a new computer over three years while
another company might depreciate the same model of computer over five
years...and both companies are right.
VI.
Depreciation expense is shown on the income statement in order to
achieve accounting's matching principle.
a. III, V, VI
b. I, III, VI
c. III, IV, V, VI d. V, VI
32. Which of the following depreciation methods is not an accelerated method?
a. Double declining balance
c. Sum-of-the-years’ digits
b. Straight line
d. 150% declining balance
33. An entity acquired an asset for a purchase price of ₱100,000. Necessary
installation costs incurred amounted to ₱2,000. It was estimated that the
asset has a 4-year useful life and after that it can be sold at ₱10,000. Cost of
uninstalling the asset is estimated at ₱1,000. If the company uses the sum-ofthe-years’ digits method, the depreciation expense in the third year is
computed as
a. 10% multiplied by ₱102,000
c. 20% multiplied by ₱92,000
b. 20% multiplied by ₱93,000
d. 20% multiplied by ₱102,000
(Adapted)
64
34. A depreciable asset has an estimated 15% residual value. Under which of the
following methods, properly applied, would the accumulated depreciation
equal the original cost at the end of the asset’s estimated useful life?
Straight-line
Double-declining balance
a. Yes
Yes
b. Yes
No
c. No
Yes
d. No
No
(AICPA)
35. An entity operates a chain of hotels and is proposing to stop depreciating the
hotel equipment and expense the cost of replacement each year. The entity
should:
a. Not capitalize groups of assets and expense the replacement cost
b. Not capitalize groups of assets and expense them
c. Capitalize groups of assets but not depreciate them
d. Capitalize all assets with a useful life of more than one year and depreciate
them
(ACCA)
36. An entity manufactures components for the car industry and uses self-made
tools, which it continually develops. Costs of tooling are depreciated over four
years and the tools are manufactured in its one factory, where 4% of the
space is allocated to development. The factory depreciation charge should:
a. Be allocated on the basis of the value of the tools compared with the
factory output to the cost of the tooling
b. Be allocated on the basis of 1% per year for four years to the cost of the
tooling
c. Not be allocated to the cost of the tooling
d. Be allocated on the basis of 4% per annum and added to the cost of the
tooling
37. An entity has a policy of revaluing its PPE. An asset cost ₱15M on January 1,
20x8, has a useful life of 15 years and is depreciated on a straight-line basis to
a zero residual value. The value of the asset at December 31, 20x8 was
₱14.5M. At December 31, 20x9, the market value of the asset was ₱12.5M. The
accounting entry at 31 December 20x9 would be:
a. Depreciation ₱1.04M to income statement, fall in value of ₱0.5M charged
to revaluation reserve and ₱0.46M to the income statement
b. Depreciation ₱1.04M to income statement, fall in value of ₱0.96M charged
to revaluation reserve
c. Depreciation ₱1M to income statement, fall in value of ₱0.5M charged to
revaluation reserve and ₱0.5M to the income statement
d. Depreciation ₱1M to income statement, fall in value of ₱0.96M to the
income statement
(ACCA)
38. A graph is set up with "depreciation expense" on the vertical axis and "time"
on the horizontal axis. Assuming linear relationships, how would the lines for
straight-line and sum-of-the-years'-digits depreciation expense, respectively,
be drawn on this graph?
Straight-line
SYD
a. Vertically
Sloping down to the right.
b. Vertically
Sloping up to the right.
c. Horizontally
Sloping down to the right.
65
d. Horizontally
Sloping up to the right.
39. Under the composite method, the composite
a. rate is the total cost divided by the total annual depreciation
b. rate is the total annual depreciation divided by the total depreciable cost
c. life is the total cost divided by the total annual depreciation
d. life is the total depreciable cost divided by the total annual depreciation.
40. The composite depreciation method
a. is applied to a group of homogenous assets
b. is an accelerated method of depreciation
c. does not recognize gain or loss on the retirement of specific assets in the
group
d. excludes salvage value from the base of the depreciation calculation
(AICPA)
41. Under what conditions will the service hours and productive output methods
of depreciation result in the same depreciation expense for a particular year?
a. When the total estimated service hours and production in units are the
same.
b. When the ratio of actual service hours to productive output for the year is
the same as the ratio of the estimates used in their respective depreciation
rates.
c. When salvage value is zero.
d. The two methods cannot produce the same depreciation expense amount
for any given year.
(Adapted)
42. Which of the following are correctly stated regarding the accounting for
property, plant and equipment?
I.
In special instances, when inflation has been a major factor, property,
plant and equipment are permitted to be revalued based on index
numbers or on an appraisal performed by an independent expert or
specialist.
II.
The sum of the year’s digit method always results in larger total
depreciation than does the straight line method.
III.
Composite depreciation method does not recognize gain or loss on
retirement of a single asset in the group.
IV.
Depreciation is the process of periodically writing down an asset to arrive
at its fair market value.
V.
Depreciation accounting automatically provides the cash required to
replace plant assets as they wear out.
a. I, II, III, V
b. I, II, III
c. I, III
d. II, III
43. The use of the double-declining balance method
I.
results in a decreasing charge to depreciation expense.
II.
means salvage value is not deducted in computing the depreciation base.
III.
means the carrying amount should not be reduced below salvage value.
a. I, II, and III
b. I, II
c. I, III
d. none
44. Which of the following statements best describes 'residual value'?
a. The estimated net amount currently obtainable if the asset were at the
end of its useful life
b. The present value of estimated future cash flows expected to arise from
the continuing use of the asset and from its ultimate disposal
66
c. The amount at which the asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction
d. The amount of cash or cash equivalents that could currently be obtained
by selling the asset in an orderly disposal
(ACCA)
45. Which of the following terms best describes the cost (or an amount
substituted for cost) of an asset less its residual value?
a. Revalued amount
c. Recoverable amount
b. Carrying amount
d. Depreciable amount
(ACCA)
46. The carrying amount of an asset is defined as
a. Cost minus residual value
b. Cost minus accumulated depreciation minus accumulated impairment
losses
c. Cost minus residual value minus accumulated depreciation
d. Estimated fair market value
47. Which of the following statements best describes the carrying amount of an
asset?
a. The cost (or an amount substituted for cost) of the asset less its residual
value
b. The amount at which the asset is recognized in the statement of financial
position after deducting any accumulated depreciation and accumulated
impairment losses
c. The higher of the asset's net selling price and its value in use
d. The fair value of the asset at the date of a revaluation less any subsequent
accumulated impairment losses
(ACCA)
48. Which of the following statements best describes the term 'depreciation'?
a. The systematic allocation of an asset's cost less residual value over its
useful life
b. The removal of an asset from an entity's statement of financial position
c. The amount by which the recoverable amount of an asset exceeds its
carrying amount
d. The amount by which the carrying amount of an asset exceeds its
recoverable amount
(ACCA)
49. Which of the following terms best describes the systematic allocation over its
useful life of the cost of an asset, or other amount substituted for cost, less its
residual value?
a. Depreciation
b. Derecognition c. Impairment
d. Value in use
(ACCA)
50. Which of the following terms best describes the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date?
a. Fair value
b. Value in use c. Residual value d. Realizable value
(ACCA)
51. Which of the following statements regarding depreciation is true, according to
PAS16 Property, plant and equipment?
67
a. An asset must be depreciated from the date of its purchase to the date of
sale
b. The annual depreciation charge should be constant over the life of the
asset
c. The total cost of an asset must eventually be depreciated
d. If the carrying amount of an asset is less than the residual value,
depreciation is not charged
(ACCA)
52. The straight-line method of depreciation is based on the assumption that
a. The operating efficiency of the asset decreases in the later years.
b. Service value declines as a function of time rather than of use.
c. Service value declines as a function of obsolescence rather than of time.
d. Physical wear and tear are more important than economic obsolescence.
(AICPA)
53. A principal objection to the straight-line method of depreciation is that it
a. Gives smaller periodic write-offs than decreasing charge methods.
b. Ignores variations in the rate of asset use.
c. Provides for the declining productivity of an aging asset.
d. Tends to result in a constant rate of return on a diminishing investment
use.
(RPCPA)
54. The straight-line method of depreciation is not appropriate for
a. A company that is neither expanding nor contracting its investments in
equipment because it is replacing equipment as the equipment is
required.
b. Equipment on which the amount of maintenance and repairs increase
substantially with age.
c. Equipment with useful life that is not affected by the amount of use.
d. Equipment that is used consistently every period.
(RPCPA)
55. Which of the following statements correctly relate to accounting for
depreciation?
I.
The best theoretical support for using an accelerated depreciation method
is that expenses should be allocated in a certain manner so that earnings
will be equalized.
II.
When partial use of a building under construction can be identified with
an income producing center and the corresponding cost can be
ascertained, the related depreciation should be allocated to that operation.
III.
One of the reasons for recording depreciation is to have proper matching
of costs and revenues.
IV.
The periodic expense associated with the use of land is called depreciation
expense.
V.
Plant assets with a nominal cost may be charged to expense when
acquired.
a. II, III, V
b. I, II, III, V c. II, III, IV, V d. I, II, III, IV, V
56. An asset has a nine-year useful life and is to be depreciated under the sum-ofthe-years’ digits method. The annual depreciation expense would be the same
as that under the straight line depreciation method in
a. the third year in the life of the asset
b. the fifth year of the life of the asset
c. the seventh year of the life of the asset
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d. the ninth year of the life of the asset
(Adapted)
57. Which of the following is not under time-factor method depreciation?
a. straight line
c. declining balance
b. SYD method
d. productive output
58. Depreciation which arises from obsolescence or inadequacy to perform
efficiently is called:
a. periodic
b. physical
c. normal
d. functional
59. The depreciation method that provides higher depreciation expense in the
early years and lower charges in the late years is
a. SYD
c. units of production and hours of use method
b. straight line
d. FIFO
60. Which of the following is an economic factor related to the service life of a
long-lived asset?
a. obsolescence
c. decay
b. wear and tear
d. casualties
61. A and B companies purchase identical equipment having an estimated service
life of 5 years with no residual value. A uses the straight-line depreciation
method; B uses the sum-of-the-years-digits method. Assuming that the
companies are identical in all other respects:
a. if both companies keep the asset for five years, B company’s 5-year total
for depreciation expense will be greater than A company’s 5-year total.
b. if the asset is sold after three years, A company is more likely to report a
gain on the transaction than B company.
c. A company’s depreciation expense will be higher during the first year than
B company’s.
d. A company’s net income will be lower during the 4th year than B
company’s.
(Adapted)
62. Which statement(s) is(are) correct?
I.
Depreciation on units of property, plant and equipment that are reserved
or standby should not be continued
II.
Art collections should not be depreciated on a systematic and rational
basis over the life of the asset irrespective of the earnings of the entity
a. true, true
b. true, false
c. false, true
d. false, false
63. The highest amount of depreciation will usually be recorded in the last year of
an asset’s life when using:
a. straight line
b. SYD
c. double-declining balance d. either b or c
64. Which of the following depreciation methods usually results in paying the
lowest taxes in the early years of an assets life?
a. SYD
c. straight line
b. double declining balance
d. units of production method
65. Which of the following is/are true about straight-line depreciation?
I.
With constant pre-depreciation income, it leads to an increasing rate of
return over time.
II.
It ignores loss of productivity and increased maintenance costs over time.
69
III.
It leads to higher taxes in later years compared to accelerated
depreciation methods.
a. I, II & III
b. I & III
c. II & III
d. I & II
66. An asset is estimated to have a total life of 8 years. Its acquisition cost is
₱16,000 and a residual value of ₱4,000. The firm follows the double declining
method of depreciation. In the second year, the rate of depreciation for the
firm's asset is closest to
a. 25%
b. 17%
c. 9.5%
d. 12.5%
67. With respect to depreciation methods, which of the following is true?
I.
Accelerated depreciation methods lead to higher depreciation expense
over time.
II.
The Straight-line method causes higher taxes in later years compared with
the accelerated depreciation methods.
III.
Accelerated methods are preferred for tax reasons.
a. III only
b. II & III
c. I & III
d. II only
68. An analysis of an entity's financial statements indicates that the average age
of its assets is declining. This could be due to which of the following?
I.
The entity is acquiring new assets with longer depreciable lives.
II.
The entity's capital expenditures are outpacing depreciation.
III.
The entity is not using its assets as intensively as it should.
IV.
The entity is operating in its maturity phase.
a. I & IV
b. I & II
c. I, II, III & IV d. III & IV
*Hint: Average age of assets can be computed using any of the following:
i. Average age: (Accumulated depreciation ÷ Depreciation expense) = x
years
ii. Relative age: (Accumulated depreciation ÷ Total cost of depreciable
assets) = % of age
iii. Average depreciable life: (Total depreciable amount ÷ Depreciation
expense) = x years
69. All of the following are attributes of depreciation except
a. depreciation stays on the statement of financial position as long as the
asset is owned by the entity.
b. depreciation provides funds for replacement of an asset.
c. depreciation is the allocation of the cost of an asset over its useful life.
d. the purpose of depreciation is to charge against operations, by means of
allocation, the cost of an asset.
70. Which of the following statements is incorrect?
a. The term "revenue expenditures" refers to those amounts paid out which
are expected to provide revenue in the current period or a future period.
b. Expenditure for one item which has questionable or highly uncertain
future benefit usually will be recognized as expense when incurred.
c. Subsequent to acquisition, operational assets usually are reported at cost
or cost less accumulated depreciation, depletion, or amortization.
d. A primary principle in recording and reporting operational assets is that
they are recorded at cost when acquired and subsequently are reported at
cost or cost less accumulated depreciation.
(Adapted)
71. A machine with a 4-year estimated useful life and an estimated 15% residual
value was acquired on January 1. Would depreciation expense using the sum-
70
of-the-year's-digit method be higher or lower than depreciation expense
using the double-declining-balance-method in the first and second years?
First year
Second year
a.
Higher
Higher
b.
Higher
Lower
c.
Lower
Higher
d.
Lower
Lower
(AICPA)
72. An exchange of assets with no cash exchanged:
a. records the cost of the asset received at the book value of the asset given.
b. records the asset received at the fair value of the asset given.
c. culminates to an earning process.
d. results in recognition of a loss or gain of each party.
(Adapted)
73. A primarily theoretical objection to the straight-line method of depreciation is
that it:
a. gives a lower periodic expense than the accelerated method over the life
of the asset.
b. recognizes the declining productivity of the asset.
c. ignores variation in the rate of the asset use among periods.
d. tends to result in a constant rate of return on a diminishing investment
base.
(AICPA)
74. Periodic depreciation expense is primarily the result of applying the:
a. revenue principle
c. systematic and rational allocation
b. full-disclosure
d. matching
75. All of the following are causes of depreciation except:
a. obsolescence of the asset
c. wear and tear from operational use
b. inadequacy of the assets
d. decline in current market value of the asset
(AICPA)
76. Accounting for depreciation primarily:
a. is an accounting process which allocates long-lived asset cost to
appropriate accounting periods.
b. is used to indicate a decline in market value of a long-lived asset.
c. is a process of asset valuation for balance sheet purposes.
d. applies only to long-live intangible assets.
(AICPA)
77. Which of the following items relevant to the depreciation of an asset can be
negative?
a. residual value
c. useful life
b. depreciable amount
d. carrying amount subsequent to acquisition
(AICPA)
78. Which depreciation method is particularly appropriate where:
(a)
obsolescence is not the primary factor, (b) actual use can be accounted for,
and (c) the service life in units of use can be estimated reliably?
a. SYD
c. Productive output
b. Double declining balance
d. Straight line
(AICPA)
71
79. Which is not an objection to the use of the straight-line method of
depreciation?
a. It may not satisfactorily match expense with revenue, depending on the
asset.
b. It tends to ignore obsolescence as a major source of decline in economic
value.
c. It does not recognize the investment characteristics of the ownership of
operational assets.
d. It generally results in the lowest earnings.
(Adapted)
80. The following statements relate to functional depreciation
I.
Inadequacy may arise when there is no future demand for the product
that the depreciable asset produces or from the availability of a new
depreciable asset that can perform for the same function at a substantially
lower cost.
II.
Obsolescence results when an asset is no longer suitable for the size of the
company’s operations.
a. True, true
b True, false
c. False, true
d. False, false
81. A method that excludes residual value from the base for the depreciation
calculation is
a. SYD
c. productive output
b. Double declining balance
d. straight line
(AICPA)
82. An enterprise is depreciating an asset with a 5-year useful life. It cost
₱100,000 and has no residual value. If the <List A> method is used,
depreciation expense in the second year will be <List B>.
List A
List B
a. Sum-of-years’ digits
20,000
b. Sum-of-years’ digits
40,000
c. 200% diminishing balance
16,000
d. 200% diminishing balance
24,000
(Adapted)
83. In the years after mid-service point of a depreciable asset, which of the
following depreciation methods will result in the highest depreciation
expense?
a. Sum-of-the-years’-digits.
c. 200% diminishing-balance
b. Diminishing-balance
d. Straight-line
(Adapted)
84. If an enterprise employs the sum-of-the-years’ digits (SYD) method of
depreciation for an asset with an estimated useful life of 4 years, the
percentage of the total depreciable cost that will be expensed in the third year
is
a. 10%
b. 25%
c. 20%
d. 70%
(Adapted)
85. The following statements relate to depreciation accounting, choose the
incorrect one
a. Depreciation, normally, should not be recognized on property, plant and
equipment construction period or while new equipment is undergoing
testing and breaking in until such assets are capable of being used
72
b. When partial use of the asset, during construction can be identified with
an income-producing center and the corresponding cost can be
ascertained, the related depreciation should he allocated to that operation.
c. Depreciation should not be continued on units of property, plant and
equipment that are reserved or standby, or idle either temporarily or for
an extended period.
d. When used property is acquired, the actual cost in cash or equivalent is
generally the proper basis for depreciation, regardless of the previous
history of the property
86. A plant facility has an originally estimated physical life equal to 15 years. As a
result of accelerated usage, it is now estimated that the physical life will be
reduced by 3 years. The depreciation rate applied to this facility need not be
changed if the depreciation method used is
a. SYD
b. Double declining balance
c. Units of output or hours of use method
d. Straight line method
e. The rate should be changed under all of these methods
87. A machine with a 4-year useful life and a 15% salvage value was acquired on
January 1, 20x2. The increase in accumulated depreciation for 20x3 using the
double-declining balance method would be
a. initial cost x 85% x 50%
c. initial cost x 50%
b. initial cost x 85% x 50% x 50%
d. initial cost x 50% x 50%
88. Accumulated depreciation, as used in accounting, represents.
a. funds set aside to replace assets.
b. earnings retained in the business that will be used to purchase another
operational asset when the related asset becomes fully depreciated.
c. the allocation of the cost of a depreciable asset recognized in profit or loss
during the period.
d. the portion of the asset’s cost that is written off as an expense since the
acquisition date.
89. Which of the following statements is most likely not correct?
a. Periodic allocations of acquisition cost, made on a systemic and rational
basis, are recognized as current expense in conformity with the matching
principle.
b. Depreciation accounting is a process of valuation, not of allocation.
c. At acquisition, tangible, operational assets are recorded at cost on the
basis of the cost principle.
d. Subsequent to acquisition, tangible operational assets that have a limited
life are reported at the cost recognized at acquisition date less
accumulated allocations of such cost.
90. Depreciation is a variable (as opposed to fixed) expense if the depreciation
method used for reporting purposes is:
a. declining balance
c. straight line
b. units-of-production
d. SYD
91. Which of the following methods permits total depreciation on a plant asset to
exceed depreciable cost?
a. Straight-line
b. Declining balance
c. Sum of year's digits
73
d. No acceptable depreciation method
e. All acceptable methods if salvage value is not zero
(Adapted)
92. Choose the incorrect statement concerning the half-year convention as it
applies to depreciation.
a. It can be used only for tax purposes.
b. It adds a year to the class life of the asset for tax purposes.
c. It reduces the accelerated nature of the deduction.
d. It results in depreciation rate equal to the straight-line rate based on class
life in the first year of the asset's life.
(AICPA)
93. For each succeeding period, the units-of-production method of depreciation
usually recognizes an amount of depreciation expense that is:
a. constant
b. varying
c. increasing d. decreasing
94. Which method of depreciation results in periodic depreciation expense that
may fluctuate from one period to the next, but not necessarily in a steadily
upward or downward direction?
a. SYD
c. straight line
b. output or service hours
d. declining balance
95. Which of the following is/are advantages of accelerated methods of
depreciation?
I.
They implicitly recognize the loss of productivity and increased
maintenance costs over time.
II.
They allow deferral of taxes compared to the straight-line method, thus
making more cash available for current operations.
III.
The lower depreciation charges in later years compensate for the greater
uncertainty in future revenues.
a. I & III
b. II only
c. I, II & III
d. I & II
96. An end-of-period adjustment for depreciation of fixed assets is necessary
a. for proper statement of profit
b. to be consistent with the matching principle
c. to recognize the expense of using fixed assets
d. all of these answers are correct
97. Depreciation expense for fixed assets is recorded
a. for each period the asset is in use
b. as a liability until the asset is sold
c. at the end of each period during the asset's useful life
d. when the asset is sold
98. Changes in depreciation methods, useful lives, and residual values
a. are changes in accounting estimates accounted for prospectively
b. are changes in accounting estimates accounted for retrospectively
c. are changes in accounting policies accounted for prospectively
d. does not affect previously recognized expenses, as well as future expenses
99. If there is a change in useful life, depreciation method, or residual value
a. the accountant should compute first the carrying amount of the asset as of
the beginning of the period of change; thereafter, the carrying amount is
allocated over the remaining revised useful life using the new depreciation
method or revised residual value
74
b. the accountant should compute the carrying amount of an asset as if the
new depreciation method, revised useful life or revised residual value had
been used all along
c. the accountant is in for very complex accounting computations and should
consult her college instructor first before doing anything
d. there should be no changes in useful lives, depreciation methods, or
residual values because once selected or determined, they are irrevocable,
according to accountant’s standards
Revaluation model
100. An entity owns a fleet of company cars and executive vehicles, and has
other property and equipment in order to service the fleet. It decided to
revalue some of its property, plant and equipment. Which one of the following
options complies with PAS 16?
a. Revalue only those parts of the fleet that have increased in value
b. Revalue only the cars and not the executive vehicles
c. Revalue only one-half of each class of property, plant and equipment
d. Revalue an entire class of property, plant and equipment
(ACCA)
101. In case of downward revaluation of an asset, which is revalued for the first
time, the account to be debited is
a. fixed asset account
c. profit or loss account
b. revaluation reserve
d. general reserve
102. An entity has a policy of revaluing its PPE. An asset cost ₱5M on January 1,
20x1 and has a useful life of five years and is depreciated on a straight-line
basis to a zero residual value. The value of the asset at December 31, 20x1
was ₱3.8M. The fall in value will be accounted for as follows:
a. Depreciation ₱1M and fall in value of ₱200,000 both to the income
statement
b. Depreciation ₱1M and fall in value of ₱200,000 both to the reserves
c. Depreciation ₱1M to income statement and fall in value of ₱200,000 to the
reserves
d. Depreciation ₱1M to the income statement and fall in value of ₱200,000
ignored until there is a revaluation surplus
(ACCA)
103. Appraisal value is:
a. the revalued amount of property, plant and equipment determined by
recognized specialists or authorities
b. the value per appraisal computed by deducting observed depreciation
from appraised value
c. computed by deducting historical cost from appraised value
d. the excess of sound value over net book value
104. When revalued amounts are to be incorporated in the financial statements
the following requirements are to be observed:
I.
the appraisal must be made only by a recognized specialist independent of
the company which owns the property
II.
depreciation to be charged to operations should be based on cost only
III.
the revaluation surplus should be presented on the face of statement of
financial position under equity as a separate line item in accordance with
the minimum line items under PAS 1
IV.
certain required disclosures should be made in the financial statements
V.
the appraisal should cover all property, plant and equipment items
75
a. I, II, III, IV, and V
b. I, III, IV and V only
c. I, III and IV only
d. IV only
105. Which of the following incorrectly relate(s) to the accounting for property,
plant and equipment?
I.
Sum of the years’ digits method is one of the accelerated methods of
depreciation that provides higher depreciation expense in the early years
and lower charges in the late years.
II.
Mortgage or liens on property, plant and equipment need not be disclosed
in the financial statements or notes.
III.
Any property, plant and equipment that is idle or abandoned and remains
in the property, plant and equipment account should be revalued if this
results in increasing their carrying values.
IV.
Depreciation of appraised properties charged to operations shall be based
on the appraised values and it should be computed from the date of
appraisal.
V.
An entity may be allowed to, revalue its property, plant and equipment if
their current value is substantially more than their cost provided the
company adheres to the provisions of PAS
a. I, IV and V
b. I, IV
c. II, III
d. II, III, V
106. When an appraised property is retired, the revaluation surplus pertaining
to such asset may be handled
a. revaluation surplus which can be subsequently transferred to
unappropriated retained earnings
b. revaluation surplus which can be subsequently transferred to other
appraised property not retired
c. revaluation surplus which can be subsequently transferred to other
properties not revalued
d. revaluation surplus which cannot be subsequently transferred to
unappropriated retained earnings
(RPCPA)
107. The value per appraisal or the value computed by deducting observed
depreciation from replacement cost is called
a. revaluation surplus
c. sound value
b. appraisal value
d. replacement cost
108. Internet Protocol-IP, Inc. owns a fleet of over 100 cars and 20 ships. It
operates in a capital-intensive industry and thus has significant other
property, plant, and equipment that it carries in its books. It decided to
revalue its property, plant, and equipment. The company’s accountant has
suggested the alternatives that follow. Which one of the options should
Internet Protocol-IP, Inc. select in order to be in line with the provisions of
PAS 16?
a. Revalue only one-half of each class of property, plant, and equipment, as
that method is less cumbersome and easy compared to revaluing all assets
together.
b. Revalue an entire class of property, plant, and equipment.
c. Revalue one ship at a time, as it is easier than revaluing all ships together.
d. Since assets are being revalued regularly, there is no need to depreciate.
(Adapted)
109. Under PAS 16, revaluation of property, plant and equipment to appraised
value is an acceptable alternative to historical cost provided certain
76
requirements are complied with. Which of the following is not one of the
requirements?
a. the appraisal should be made by a competent and independent specialist
once a year at each end of reporting period.
b. depreciation to be charged to operations should be based on appraised
values or its equivalent
c. the revaluation surplus should be presented in equity
d. appropriate disclosures should be made in the financial statements
(Adapted)
110. 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 an unrealized gain.
b. Released to the income statement an amount equal to the difference
between the depreciation calculated on historical cost vis-à-vis revalued
amount.
c. Deducted from current assets and added to the property, plant, and
equipment.
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.”
(Adapted)
111. Which of the following is correct regarding the revaluation model as it is
applied to PPE?
a. When the revaluation model is used, depreciation ceases.
b. The appropriate basis for revaluation is replacement cost without any
adjustment whatsoever.
c. When replacement cost is used, observed depreciation should first be
deducted to arrive at the depreciated replacement cost.
d. Observed depreciation is determined through a very complex
computation.
112.
I.
The following statements correctly relate to the revaluation model.
Revaluation should be made for an entire class of PPE and not made
selectively.
II.
Revaluation should be made simultaneously for all items of PPE within a
class. Revaluation on a rolling basis is permitted so long as revaluation is
completed within a short period.
III.
If fair values are volatile, revaluation should be made on an annual basis. If
not, revaluation may be made every 3 to 5 years.
IV.
Revalued amounts are required under PAS 16 to be determined by
independent professionals.
a. II, III
b. I, II, III
c. II, III, IV
d. I, II, III, IV
113.
a.
b.
c.
d.
Revaluation surplus may be computed as
Replacement cost minus Carrying amount
Appraised value or Depreciated replacement cost minus Carrying amount
Replacement cost minus Observed depreciation
Accumulated depreciation divided by Historical cost multiplied by
Replacement cost
114. When the asset being revalued has no residual value, observed
depreciation may be computed as
a. Replacement cost minus Carrying amount
77
b. Appraised value or Depreciated replacement cost minus Carrying amount
c. Replacement cost minus Observed depreciation
d. Accumulated depreciation divided by Historical cost multiplied by
Replacement cost
115. When the asset being revalued has a residual value, observed depreciation
may be computed as
a. Replacement cost minus Carrying amount
b. Accumulated depreciation divided by Depreciable amount multiplied by
Depreciable amount of replacement cost
c. Replacement cost minus Observed depreciation
d. Accumulated depreciation divided by Historical cost multiplied by
Replacement cost
116. When there is a change in useful life as a result of revaluation,
a. the computation of revaluation surplus is affected by a series of
adjustments and complex computations
b. only the computation for observed depreciation is affected
c. the revised useful life is disregarded when computing for revaluation
surplus and subsequent depreciation
d. the computation of revaluation surplus is unaffected, observed
depreciation is computed in the same way as if there was no change in
useful life
117. When the revalued asset is depreciable,
a. a portion of the revaluation surplus is periodically transferred to retained
earnings through profit or loss.
b. a portion of the revaluation surplus may be periodically transferred
directly to retained earnings.
c. no portion should be transferred periodically to retained earnings unless
the asset is derecognized.
d. revaluation surplus is presented in equity and must be transferred only to
retained earnings when the revalued asset is derecognized.
118. A long-term asset currently has a carrying amount of ₱45,000 and a
salvage value of ₱5,000. It was acquired 3 years ago at a cost of ₱75,000. If the
firm uses straight-line depreciation, how many more years is the asset
expected to be in service?
a. 5 years
b. 4 years
c. 6 years
d. 7 years
Disclosure
119. Which of the following disclosures must be made under PAS16 Property,
plant and equipment?
I.
The existence and amounts of restrictions on title
II.
A narrative discussion of future capital expenditure plans
III.
The disposal proceeds of each major asset sold in the period
IV.
The measurement bases used for determining the gross carrying amount
a. I, IV
b. I, II, IV
c. I, III, IV
d. I, II, III, IV
(ACCA)
120. Which of the following is a required disclosure under PAS 16?
a. the description of each item of PPE, their nature, and the purpose of their
acquisition.
b. the depreciation methods used unless the PPE is measured under
revaluation model
c. lapsing schedule
78
d. all of these
121.
a.
b.
c.
d.
All of the following are required disclosure under PAS 16, except?
accounting policies and estimates of useful lives and residual value
reconciliation of carrying amounts at the beginning and end of the year
commitments related to items of property, plant, and equipment
changes in fair values of assets measured under cost model
Chapter 15 - Suggested answers to theory of accounts questions
1. A
21. D
41. B
61. D
81. B
101. C
2. B
22. D
42. C
62. C
82. D
102. A
3. D
23. B
43. A
63. A
83. D
103. A
4. B
24. D
44. A
64. B
84. C
104. D
5. B
25. A
45. D
65. D
85. C
105. C
6. B
26. D
46. B
66. A
86. C
106. A
7. D
27. D
47. B
67. A
87. D
107. C
8. D
28. E
48. A
68. C
88. D
108. B
9. B
29. B
49. A
69. B
89. B
109. A
10. B
30. A
50. A
70. A
90. B
110. D
11. D
31 A
51. D
71. C
91. D
111. C
12. C
32. B
52. B
72. B
92. A
112. B
13. D
33. B
53. B
73. C
93. B
113. B
14. A
34. D
54. B
74. C
94. B
114. D
15. A
35. D
55. A
75. D
95. C
115. B
16. D
36. D
56. B
76. A
96. D
116. D
17. A
37. A
57. D
77. A
97. C
117. B
18. C
38. C
58. D
78. C
98. A
118. B
19. A
39. D
59. A
79. D
99. A
119. A
20. A
40. C
60. A
80. D
100. D
120. C
79
121. D
Chapter 16
Depletion of Mineral Resources
Chapter 16: Multiple choice – Computational (SET B) – (For classroom
instruction purposes)
Recognition of depletion in the financial statements
Use the following information for the next two questions:
In 20x1, OBSTREPEROUS NOISY Mining Corp. acquired the right to use 1,000
acres of land to mine for gold. The lease cost is ₱200,000,000, and the related
exploration costs on the property amounted to ₱40,000,000. It is the policy of
OBSTREPEROUS Mining Corp. to capitalize all costs of exploration and evaluation
of mineral resources. Intangible development costs for drilling, tunnels, shafts,
and wells incurred before opening the mine amounted to ₱340,00,000. At the end
of the mine’s economic useful life, OBSTREPEROUS Mining Corp. is required by
legislation to restore the site. Estimated restoration costs have a fair value of
₱20,000,000. OBSTREPEROUS Mining Corp. estimates that the mine will provide
approximately 100,000,000 ounces of gold. Actual ounce of gold mined in 20x2
totaled 300,000 ounces.
1. How much is the depletion charge in 20x2?
a. 1,740,000
b. 1,800,000 c. 165,000
d. 150,000
2. Assuming that of the 300,000 ounces of gold extracted in 20x2, 280,000
ounces were sold and 20,000 ounces remain in inventory. How much
depletion is recognized in the (a) statement of financial position and (b)
statement of profit or loss and other comprehensive income?
Statement of financial position
Statement of profit or loss
a. 1,680,000
120,000
b. 116,000
1,624,000
c. 11,000
154,000
d. 120,000
1,680,000
Changes in estimates
Use the following information for the next two questions:
In 20x1, BUCOLIC RURAL Co. acquired land for a total cost of ₱40,000,000 to be
used to quarry marble, limestone, and construction aggregates. Costs incurred to
obtain legal right to explore the property amounted to ₱8,000,000. Expenditures
incurred in the exploration for and evaluation of mineral resources before
technical feasibility and commercial viability of extracting a mineral resource are
demonstrable totaled ₱12,000,000. Intangible development costs of drilling,
tunnels, shafts, and wells before the actual production totaled ₱20,000,000.
BUCOLIC Co. estimates that total recoverable reserves are 100,000,000 units.
Furthermore, BUCOLIC Co. expects to sell the land for ₱4,800,000 after resource
is depleted. However, no buyer will pay this price unless the mine is drained,
filled and leveled, a process that will cost ₱800,000. It is BUCOLIC’s policy to
capitalize all exploration costs.
Actual units quarried in 20x1 through 20x4 totaled 30,000,000 units. On January
1, 20x5, BUCOLIC Co. estimated that remaining recoverable reserves is only
25,000,000 units and after the reserves are exhausted, the land will be sold for
₱3,200,000. Costs of disposal are estimated at ₱1,200,000. Actual units quarried
in 20x5 totaled 6,000,000 units.
80
3. How much is the depletion charge in 20x5?
a. 13,284,000
b. 13,480,000
c. 13,280,000
d. 13,248,000
4. What is the carrying amount of the wasting asset on December 31, 20x5?
a. 43,852,000
b. 44,272,000
c. 42,720,00
d. 43,952,000
5. In 20x1, INNOCUOUS HARMLESS Co. acquired land to be used to mine coal.
Total costs of acquisition, exploration, and intangible development amounted
to ₱40,000,000. It was estimated that total recoverable reserves is 50,000,000
units. Total units extracted from 20x1 through 20x4 totaled 30,000,000 units.
In 20x5, after extracting 5,000,000 units, it was estimated that the remaining
recoverable reserves is 20,000,000 units. How much is the depletion charge in
20x5?
a. 3,200,000
b. 3,333,333
c. 3,266,667
d. 3,400,000
Immovable tangible equipment with shorter life
Use the following information for the next three questions:
In 20x1, RIBALD OFFENSIVE Co. purchased real estate containing copper for a
total cost of ₱64,000,000. Exploration costs amounted to ₱4,000,000 and
intangible development costs of drilling, tunnels, shafts, and wells totaled
₱16,000,000. Movable tangible equipment costs for heavy equipment totaled
₱32,000,000 and immovable tangible equipment costs for drilling rig foundation
totaled ₱24,000,000.
Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated
that 300,000 units will be extracted each year. The heavy equipment and the
drilling rig foundation have estimated useful lives of 10 years and 5 years,
respectively. Actual units extracted during 20x1 are 320,000 units.
6. How much is the 20x1 depreciation on the immovable tangible equipment?
a. 4,800,000
b. 3,428,571
c. 4,571,429
d. 3,200,000
7. How much is the 20x1 depletion of the natural resource?
a. 12,800,000
b. 16,428,571
c. 15,229,879
d. 14,679,097
8. How much is the 20x1 depreciation on the movable tangible equipment?
a. 3,428,571
b. 3,200,000
c. 4,800,000
d. 4,571,429
Immovable tangible equipment with longer life
Use the following information for the next three questions:
In 20x1, DIAPHANOUS TRANSPARENT Co. purchased real estate containing
copper for a total cost of ₱64,000,000. Exploration costs amounted to ₱4,000,000
and intangible development costs of drilling, tunnels, shafts, and wells totaled
₱16,000,000. Movable tangible equipment costs for heavy equipment totaled
₱32,000,000 and immovable tangible equipment costs for drilling rig foundation
totaled ₱24,000,000.
Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated
that 300,000 units will be extracted each year. The heavy equipment and the
drilling rig foundation have estimated useful lives of 20 years and 10 years,
respectively. Actual units extracted during 20x1 are 320,000 units.
9. How much is the depreciation on the immovable tangible equipment?
a. 3,657,600
b. 3,480,000
c. 3,460,800
d. 3,260,800
10. How much is the depletion on the natural resource?
81
a. 12,832,677
b. 11,988,322
c. 13,489,00
d. 12,800,000
11. How much is the depreciation on the movable tangible equipment?
a. 1,573,290
b. 1,620,000
c. 1,613,890
d. 1,600,000
No production in a period
Use the following information for the next two questions:
In 20x1, THRALL SLAVE Co. purchased real estate containing copper for a total
cost of ₱40,000,000. Immovable tangible equipment costs for drilling rig
foundation totaled ₱20,000,000. Estimated recoverable reserves from the mine
are 1,000,000 units. It is estimated that 100,000 units will be extracted each year;
therefore, the life of the mine in years is 10 years. The drilling rig foundation has
an estimated useful life of 15 years.
Actual units extracted from 20x1 through 20x3 totaled 340,000 units. No units
were extracted during 20x4 due to an employee strike. Extraction resumed in
20x5 and total units extracted during that year was 80,000 units.
12. How much is the depreciation charge on the immovable tangible equipment
in 20x4?
a. 980,967
b. 1,090,800
c. 1,100,000
d. 1,200,000
13. How much is depreciation charge on the immovable tangible equipment in
20x5?
a. 1,400,000
b. 1,466,667
c. 1,500,000
d. 1,600,000
Liquidating dividends
14. MYNHEER MISTER Co. has the following balances in its accounts as of
December 31, 20x1:
Resource deposit – coal mine
40,000,000
Accumulated depletion
16,000,000
Ordinary share capital
80,000,000
Capital liquidated
8,000,000
Unappropriated retained earnings
20,000,000
Inventory (600,000 units)
28,000,000
Depletion rate per unit
6.00 per unit
How much is the maximum amount that can be declared as dividends?
a. 24,400,000
b. 32,400,000
c. 28,000,000
d. 31,600,000
Restoration and decommissioning costs – Wasting asset
In 20x1, MULIEBRITY FEMINITY Mining Corp. acquired the right to use 1,000
acres of land to mine for gold. The lease cost is ₱200,000,000, and the total costs
of exploration and intangible development costs are ₱40,000,000. MULIEBRITY is
required by environmental laws to restore the site after 5 years. MULIEBRITY’s
best estimate for the restoration cost is ₱20,000,000 and current market-based
discount rate is 12%. Total deposits expected to be extracted is 13,000,000
ounces. Actual ounces extracted in 20x1 and 20x2 are 2,700,000 and 2,600,000,
respectively.
15. How much is the initial carrying amount of the mineral deposit?
a. 24,143,840
b. 251,348,540
c. 251,764,540
d. 256,340,540
16. How much is the depletion in 20x1?
a. 52,191,000
b. 52,260,000
c. 53,140,000
82
d. 54,164,000
17. How much is the interest expense in 20x2?
a. 1,361,824
b. 1,198,406
c. 1,421,266
d. 1,525,244
Restoration and decommissioning costs – Equipment
Use the following information for the next three questions:
On January 1, 20x1, DEMULCENT EMBARRASSING Co. acquired an oil rig for
₱400,000,000. Installation and other necessary costs in bringing the equipment
to its intended condition for use totaled ₱80,000,000. DEMULCENT Co. uses the
straight line depreciation method. DEMULCENT is required by law to dismantle
the equipment and restore the site where it is installed after 20 years, the end of
the equipment’s useful life. The estimated decommissioning and restoration costs
are ₱40,000,000. The imputed rate of interest is 12%.
18. How much is the initial cost of the equipment?
a. 475,853,328
b. 480,000,000
c. 400,000,000
d. 484,146,672
19. How much is the depreciation expense in 20x2?
a. 23,792,666
b. 24,000,000
c. 20,000,000
d. 24,207,332
20. How much is the interest expense in 20x2?
a. 248,800
b. 437,889
c. 557,312
d. 665,443
Estimating fair value of ARO
Use the following information for the next two questions:
On January 1, 20x1, VERITY FIRMNESS Mining Company purchased a quartz
mine for ₱40,000,000 that it intends to work for the next 10 years. According to
environmental laws, VERITY must restore the mine site to its original natural
prairie state after it ceases mining operations at the site.
There is no active market for retirement obligations such as these but VERITY
has been able to develop cash flow estimates based on its prior experience in
mining-site restoration. It will take 3 years to restore the mine site when mining
operations cease in 10 years. Each estimated cash outflow reflects an annual
payment at the end of each year of the 3-year restoration period. The current
market-based rate is 12%.
VERITY made the following estimates of future cash flows for the restoration
cost:
Restoration estimated cash outflow
Probability assessment
8,000,000
10%
14,000,000
15%
16,000,000
50%
16,800,000
25%
100%
21. How much is the initial cost of the mine?
a. 51,677,212
b. 51,879,233
c. 51,986,412
d. 52,108,922
22. How much is the interest expense in 20x2?
a. 1,233,114
b. 1,569,416
c. 1,667,892
d. 1,678,612
Changes in estimates of Restoration costs
Use the following information for the next two questions:
On January 1, 20x1, PRECIPITOUS STEEP Co. acquired a quarry for ₱400,000,000.
PRECIPITOUS Co. is required by law to restore the site after 5 years. The
estimated restoration costs are ₱40,000,000. The imputed rate of interest is 12%.
83
On January 1, 20x4, PRECIPITOUS Co. estimated that the restoration costs should
be ₱48,000,000 and the imputed rate of interest is 10%.
23. How much is the interest expense in 20x2?
a. 2,723,648
b. 2,396,811
c. 3,050,488
d. 3,155,341
24. The entry on January 1, 20x4 to adjust Asset retirement obligation (ARO)
includes
a. debit to retained earnings for ₱7,781,664
b. debit to ARO for ₱7,781,664
c. debit to “resource deposit – quarry” for ₱7,781,664
d. credit to “resource deposit – quarry” for ₱7,781,664
The answers and solutions to the computational problems above
(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
Chapter 16: Theory of Accounts Reviewer
1. PFRS 6 is applied to which of the following?
a. the search for mineral resources before the entity has obtained legal rights
to explore in a specific area.
b. the search and evaluation of mineral resources, agricultural produce, and
biological assets prior to commencement of actual production
c. the search for mineral resources after the entity has obtained legal rights
to explore in a specific area.
d. the development of mineral resources after the entity has in fact
established the existence of mineral deposits in an area.
2. PFRS 6 applies to expenditures incurred
a. When searching for an area that may warrant detailed exploration, even
though the entity has not yet obtained the legal rights to explore a specific
area.
b. When the legal rights to explore a specific area have been obtained, but
the technical feasibility and commercial viability of extracting a mineral
resource is not yet demonstrable.
c. When a specific area is being developed and preparations for commercial
extraction are being made.
d. In extracting mineral resources and processing the resource to make it
marketable or transportable.
(Adapted)
3. PFRS 6
a. shall be applied by all entities adopting full PFRSs
b. shall be applied only by entities engaged in agricultural activity
c. temporarily exempts entities in applying some provisions in PAS 8
d. when adopted, shall replace PAS 16
4. It refers to the activities geared towards the search for mineral resources
after the entity has obtained legal rights to explore in a specific area
a. exploration and evaluation
c. probe and investigation
b. development
d. adventure and conquest
5. Does PFRS 6 require an entity to recognize exploration and evaluation
expenditure as assets?
84
a. Yes, but only to the extent such expenditure is recoverable in future
periods.
b. Yes, but only to the extent the technical feasibility and commercial
viability of extracting the associated mineral resource have been
demonstrated.
c. Yes, but only to the extent required by the entity’s accounting policy for
recognizing exploration and evaluation assets.
d. No, such expenditure is always expensed in profit or loss as incurred.
(Adapted)
6. Which of the following is incorrect in relation to the provisions of PFRS 6?
a. Exploration and evaluation expenditures start to be incurred only after
the legal right to explore a specific area is obtained.
b. Exploration and evaluation expenditures cease to be incurred when the
existence of reserves is in fact established.
c. PFRS 6 permits entities to develop their own accounting policy for
exploration and evaluation assets based entirely on management’s
judgment.
d. Although PFRS 6 permit entities to develop their own accounting policy,
the management of an entity should comply with the provision of PAS 8 on
hierarchy of standards when developing accounting policy for exploration
and evaluation of mineral resources.
7. What is an entity required to consider in developing accounting policies for
exploration and evaluation activities?
a. The requirements and guidance in Standards and Interpretations dealing
with similar and related issues.
b. The definitions, recognition criteria, and measurement concepts for assets,
liabilities, income, and expenses in the Conceptual Framework.
c. Recent pronouncements of standard-setting bodies, accounting literature,
and accepted industry practices.
d. Whether the accounting policy results in information that is relevant and
reliable.
(Adapted)
8. Expenditures incurred after the existence of reserves is in fact established in a
specific area but before commencement of commercial production are called
a. exploration and evaluation expenditures
b. development expenditures
c. extraction costs
d. cost of drilling rig foundation and sewers
9. Which of the following is in accordance with the provisions of PFRS 6?
a. PFRS 6 applies even before an entity has obtained legal rights to explore in
a specific area.
b. Exploration and evaluation expenditures start to be incurred only before
the legal right to explore a specific area is obtained.
c. Exploration and evaluation expenditures start to be incurred when the
existence of reserves is in fact established.
d. PFRS 6 permits entities to develop their own accounting policy for
exploration and evaluation assets which results in relevant and reliable
information based entirely on management’s judgment.
10. Under PFRS 6, exploration and evaluation assets shall be initially measured at
a. cost
b. fair value
c. amortized cost
d. any of these
85
11. Which of the following correctly relates to the provisions of PFRS 6?
I.
Exploration and evaluation assets shall be measured at cost, fair value, or
amortized cost, whichever is more appropriate.
II.
Exploration and evaluation assets are exploration and evaluation
expenditures recognized as assets in accordance with the entity’s
accounting policy. Nothing in PFRS 6 overrides the accounting policy
developed by an entity.
III.
After recognition, an entity shall apply either the cost model or the
revaluation model to the exploration and evaluation assets.
IV.
After recognition, an entity shall apply either the cost model or the fair
model to the exploration and evaluation assets.
a. II, III
b. I, II, III
c. I, III, IV
d. I, II, III, IV
12. Under PFRS 6, an entity may change its accounting policies for exploration
and evaluation expenditures
a. If the change is required or permitted under the standards
b. If the change is required or permitted under the standards and not
prohibited by a relevant regulation
c. if the change makes the financial statements more relevant and no less
reliable, or more reliable and no less relevant.
d. If the change makes the financial statements more relevant or more
reliable
13. Is an entity ever required or permitted to change its accounting policy for
exploration and evaluation expenditures?
a. Yes, entities are required to change their accounting policy for these
expenditures if the change would result in more useful information for
users of financial statements.
b. Yes, entities are free to change accounting policy for these expenditures as
long as the selected policy results in information that is relevant and
reliable.
c. Yes, but only if the change makes the financial statements more relevant
to the economic decision-making needs of users and no less reliable, or
more reliable and no less relevant to those needs.
d. No, entities would be permitted to change accounting policy only on
adoption of a new or revised Standard that replaces the existing
requirements in PFRS 6.
(Adapted)
14. According to PFRS 6, an entity shall classify exploration and evaluation assets
as
a. tangible or intangible according to the nature of the assets
b. depreciable or non-depreciable according to the nature of the assets
c. exploration and development
d. movable or immovable
15. An exploration and evaluation asset
a. shall be measured initially and subsequently at cost less any accumulated
depreciation and impairment loss but shall not be measured at revalued
amount.
b. shall never be subsequently restated at revalued amount
c. shall continue to be classified as such until commercial production
commences.
d. shall no longer be classified as such when the technical feasibility and
commercial viability of extracting a mineral resource are demonstrable.
86
16. These assets are physically consumed and are irreplaceable.
a. consumable
c. wasting assets (natural resources)
b. bearer
d. a or c
17. The cost of natural resources include
I.
acquisition costs
II.
exploration costs to the extent that they are capitalized in accordance with
an entity’ accounting policy
III.
intangible development costs
IV.
restoration or decommissioning costs.
a. I, II
b. I, II, III
c. I, II, IV
d. I, II, III, IV
18. Which of the following expenditures would never qualify as an exploration
and evaluation asset?
a. Expenditure for acquisition of rights to explore.
b. Expenditure for exploratory drilling.
c. Expenditures related to the development of mineral resources.
d. Expenditure for activities in relation to evaluating the technical feasibility
and commercial viability of extracting a mineral resource.
(Adapted)
19. Which measurement model applies to exploration and evaluation assets
subsequent to initial recognition?
a. The cost model.
c. either a or b
b. The revaluation model.
d. The recoverable amount model.
(Adapted)
20. Which of the following facts or circumstances would not trigger a need to test
an evaluation and exploration asset for impairment?
a. The expiration - or expected expiration in the near future -of the period
for which the entity has the right to explore in the specific area, unless the
right is expected to be renewed.
b. The absence of budgeted or planned substantive expenditure on further
exploration and evaluation activities in the specific area.
c. A decision to discontinue exploration and evaluation activities in the
specific area when those activities have not led to the discovery of
commercially viable quantities of mineral resources.
d. Lack of sufficient data to determine whether the carrying amount of the
exploration and evaluation asset is likely to be recovered in full from
successful development or by sale.
(Adapted)
21. Tangible development costs (tangible equipment costs) costs
a. are accounted for under PFRS 6
b. are capitalized as cost of natural resource and depreciated over the
economic life of the natural resource
c. are not capitalized as cost of natural resource but capitalized as
equipment and depreciated separately.
d. are development costs with no physical substance but nevertheless
treated as part of wasting asset because of the application of substance
over form
22. Tangible development (equipment) costs are sub-classified into movable or
immovable for purposes of subsequent depreciation. Which of the following
statements is correct?
87
I.
Movable tangible equipment costs such as heavy equipment used from
one extracting site to another are depreciated separately over their useful
life.
II.
Immovable tangible equipment costs such as drilling rig foundation are
depreciated separately over their useful life or the life of the resource,
whichever is shorter.
III.
If the useful life of the immovable tangible equipment is shorter than the
economic life of the mine, units-of-production method should be used to
depreciate the equipment’s cost.
IV.
If the useful life of the immovable tangible equipment is longer than the
economic life of the mine, no depreciation is recognized during a period
where there are no extraction activities.
a. I, II
b. III, IV
c. I, II, IV
d. I, II, III, IV
23. Depletion is normally computed using
a. straight line
c. units-of-production
b. SYD
d. any of these
24. The depletion charge for each period
a. is expensed immediately
b. shall form part of operating expense when the extracted goods are sold
c. shall initially form part of the cost of inventory and charged to expense
when the inventory is sold.
d. shall be presented in the statement of financial position until mineral
resources are fully depleted
25. Changes in residual value or estimated quantity of mineral reserves are
a. changes in accounting estimates accounted for prospectively.
b. changes in accounting estimates accounted for retrospectively.
c. changes in accounting policy accounted for prospectively.
d. changes in accounting policy accounted for retrospectively.
26. Liquidating dividends received by a shareholder in a wasting asset
corporation
a. are return to capital and thus treated as reduction to investment account
b. are return of capital and thus treated as income
c. are return on capital and thus treated as income
d. are return of capital and thus treated as reduction to investment account
27. Provisions for restoration and decommissioning costs
a. are recognized only when the entity incurs legal obligation
b. are recognized only when the entity incurs present obligation
c. are recognized as a separate asset if the entity incurs present obligation
d. are recognized as part of the cost of an asset only if the entity has legal
obligation.
28. Which of the following is correct regarding the accounting for provisions for
decommissioning and restoration costs?
I.
The amount of decommissioning or restoration costs to be included as
part of the cost of an asset is the fair value of the estimated liability as of
initial recognition.
II.
The provision shall be the best estimate of the expenditure required to
settle the present obligation.
III.
The fair value of the obligation for restoration and decommissioning cost
is recorded under “Asset retirement obligation” (ARO) with a
corresponding debit to the related asset for the same amount.
88
IV.
Periodic unwinding of the discount on the liability recognized for the
decommissioning or restoration cost shall be recognized in profit or loss
as a finance cost as it occurs.
V.
Periodic unwinding of the discount on the liability does not affect
depletion or depreciation recognized for the period.
a. I, II, III
b. I, II, IV
c. I, II, III, IV d. I, II, III, IV, V
29. In the full cost method, oil firms:
a. are required to expense all oil-drilling costs resulting in dry holes.
b. must expense drilling costs which result in productive oil wells.
c. can capitalize all oil-drilling costs.
d. shall not reduce costs below their recoverable amounts
30. For charging depreciation, on which of the following assets is depletion
method adopted?
a. plant and machinery
c. patents
b. goodwill
d. wasting assets
31. Which of the following incorrectly refer to accounting for property, plant and
equipment?
I.
Land improvements should never be depreciated since they are attached
to the land.
II.
The cost of original installation of a machine should be credited to a
machinery account.
III.
Natural resources are generally recorded at cost, including the cost of
exploration and development.
IV.
In calculating depletion for a period, the residual value of acquired land
containing an ore deposit should be deducted from the total purchase
price.
V.
If property, plant and equipment are stated at current valuation, the
financial position and progress of an enterprise will be more realistically
portrayed. The impression that the company is more profitable than what
it really is, is avoided.
a. III, IV, V
b. I, II, V
c. II, III, IV, V
d. I, II
32. Development costs are divided into tangible equipment and intangible
development costs. The intangible development costs are generally
considered as part of the depletion base while tangible equipment are
normally not included in the depletion base.
I.
Tangible equipment that can be moved and be used from one site to
another should be depreciated over their useful life or the life of the
wasting asset whichever is shorter.
II.
Tangible equipment that cannot be moved and does not have alternative
use (cannot be used from one site to another) should be depreciated over
their useful life or the life of the wasting asset whichever is shorter.
a. True, true
b. True, false
c. False, true d. False, false
33. Development costs represent
a. the price paid to obtain the property right to search and find an
undiscovered natural resource
b. the costs incurred in extracting or exploiting the natural resource
c. the costs incurred in locating the natural resource that can be
economically extracted
d. the costs incurred to bring back the wasting asset to its natural state after
extraction has occurred
(AICPA)
89
34. Which of the following models may be applied by entities for the
measurement after recognition of exploration and evaluation assets, in
accordance with PFRS6 Exploration for and evaluation of mineral resources?
a Cost
d. Present value
b. Revaluation
e. a or b
c. Realization
(ACCA)
35. Does PFRS6 Exploration for and evaluation of mineral resources apply to the
following types of expenditure?
I.
The extraction and processing of mineral resources for transport to
market.
II.
The commercial review of possible areas for mineral extraction before
bidding for the legal rights to explore a specific area.
a. No, no
b. No, Yes
c. Yes, No
d. Yes, yes
36. The Strider Company is involved in the exploration for mineral resources. Its
policy is to recognize exploration assets and measure them initially at cost. It
is currently exploring a new gas field in Ruritania. The exploration license for
the new Ruritanian gas field is about to expire and Strider is now preparing to
undertake an impairment review. Strider reports its financial performance as
'Mineral Production' and 'Energy Trading' in its financial statements in
accordance with PFRS8 Operating segments. The Mineral Production segment
comprises two cash-generating units – 'oil production' and 'gas production'.
In accordance with PFRS 6 Exploration for and evaluation of mineral resources,
what is the highest level at which the impairment test can be undertaken?
a. A cash-generating unit based on the assets in the Ruritanian gas field
b. Gas production cash-generating unit
c. Oil production and gas production cash-generating units combined
d. A cash-generating unit at The Strider Company level
(ACCA)
37. Which of the following is not a disclosure required by PFRS 6?
a. Information about commercial reserve quantities.
b. Accounting policies for exploration and evaluation expenditures, including
the recognition of exploration and evaluation assets.
c. The amounts of assets, liabilities, income and expense, and operating and
investing cash flows arising from the exploration for and evaluation of
mineral resources.
d. Information that identifies and explains the amounts recognized in the
financial statements arising from the exploration for and evaluation of
mineral resources.
(Adapted)
38. Under which of the following methods is depreciation computed in the same
way as depletion is computed?
a. Straight-line
c. Double-declining-balance
b. Sum-of-the-years-digits
d. Productive-output
(AICPA)
90
Chapter 16 – Suggested answers to theory of accounts questions
1. C
6. D
11. A
16. C
21. C
26. D
31. D
2. B
7. D
12. C
17. D
22. A
27. B
32. C
3. C
8. B
13. C
18. C
23. C
28. D
33. B
4. A
9. D
14. A
19. C
24. C
29. C
34. E
5. C
10. A
15. D
20. D
25. A
30. D
35. A
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36. C
37. A
38. D
Chapter 17
Government Grants
Chapter 17: Multiple Choice – Computational (For classroom instruction
purposes)
Grant related to asset (Gross and Net presentation)
Use the following information for the next four questions:
On January 1, 20x1, CHIDE SCOLD Co. received cash of ₱16,000,000 from a local
government to be used in constructing a building. The construction was
completed on December 31, 20x1 for a total cost of ₱40,000,000. The building
will be depreciated over 20 years.
1. If CHIDE Co. uses the gross presentation of government grants, how much is
the carrying amount of the deferred income from the government grant on
December 31, 20x5?
a. 15,200,000
b. 12,800,000
c. 12,000,000
d. 0
2. If CHIDE Co. uses the net presentation of government grants, how much is the
carrying amount of the deferred income from the government grant on
December 31, 20x5?
a. 15,200,000
b. 12,800,000
c. 12,000,000
d. 0
3. If CHIDE Co. uses the gross presentation of government grants, how much is
the carrying amount of the building on December 31, 20x1?
a. 40,000,000
b. 24,000,000
c. 38,000,000
d. 22,800,000
4. If CHIDE Co. uses the net presentation of government grants, how much is the
carrying amount of the building on December 31, 20x1?
a. 40,000,000
b. 24,000,000
c. 38,000,000
d. 22,800,000
Grant related to income (Gross and Net presentation)
Use the following information for the next four questions:
On January 1, 20x1, MACABRE HORRIBLE Co. received cash of ₱16,000,000 from
a local government to be used to defray safety and other hazard-related costs
over a five-year period. It was estimated that such costs will total ₱32,000,000
over the next five years. In 20x1 and 20x2, actual costs of safety and other
hazard-related costs amounted to ₱4,000,000 and ₱4,800,000, respectively.
5. If MACABRE Co. uses the gross presentation of government grants, how much
is the carrying amount of the deferred income from the government grant on
December 31, 20x1?
a. 14,000,000
b. 12,800,000
c. 12,000,000
d. 0
6. If MACABRE Co. uses the net presentation of government grants, how much is
the carrying amount of the deferred income from the government grant on
December 31, 20x1?
a. 14,000,000
b. 12,800,000
c. 12,000,000
d. 0
7. If MACABRE Co. uses the gross presentation of government grants, how much
safety expense is recognized in 20x1?
a. 4,000,000
b. 2,400,000
c. 2,000,000
d. 0
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8. If MACABRE Co. uses the net presentation of government grants, how much is
safety expense is recognized in 20x1?
a. 4,000,000
b. 2,400,000
c. 2,000,000
d. 0
Grant related to non-depreciable asset
9. On January 1, 20x1, UNFLEDGED IMMATURE Co. received land from the
government with the condition that a factory building should be constructed
on it. The fair value of the land was estimated at ₱20,000,000. The
construction of the factory building was completed on January 1, 20x2 for a
total cost of ₱80,000,000. The building will be depreciated using SYD over a
useful life of 10 years. The estimated residual value is ₱8,000,000. CHIDE Co.
uses the gross presentation of government grants. How much is the carrying
amount of the deferred income from the government grant on December 31,
20x2?
a. 20,000,000
b. 16,363,636
c. 13,090,908
d. 0
Compensation for losses incurred (Financial aid)
10. On January 1, 20x1, various properties of ABOMINATE DISLIKE Co. were
destroyed due to flood. It was estimated that the cost of the destroyed
properties amounted to ₱60,000,000. On July 1, 20x1, ABOMINATE received
₱8,000,000 from the government as a financial aid. ABOMINATE Co. estimates
that it would take about 5 years before it can recover from the loss.
How much is the income from government grant recognized in 20x1?
a. 8,000,000
b. 1,600,000
c. (52,000,000)
d. 0
Forgivable loans
11. On January 1, 20x1, because of an exemplary accomplishment that brought
international recognition to the community, the government waived the
repayment of CONGEAL TO THICKEN Co.’s loan payable with a carrying
amount of ₱800,000 and remaining term of 4 years. How much income from
government grant is recognized in 20x1?
a. 800,000
b. 200,000
c. 400,000
d. 0
Loans at below market-interest rate
12. On January 1, 20x1, BREEZY LIVERLY Co. was granted by the government a 3year, zero-interest loan of ₱4,000,000 payable on December 31, 20x3.
Prevailing interest rate for this type of loan is 10%. How much is the income
from government grant recognized in 20x1?
a. 3,005,260
b. 400,000
c. 300,526
d. 0
Repayment of grant related to income
13. On January 1, 20x1, SIBILATE HISS Co. received cash of ₱16,000,000 from the
government to be used to defray safety and other hazard-related costs over a
five-year period. It was estimated that such costs will accumulate to
₱32,000,000 over the next five years. In 20x1 and 20x2, actual costs of safety
and other hazard-related costs amounted to ₱4,000,000 and ₱4,800,000,
respectively. On January 1, 20x3, the government demanded repayment of the
₱16,000,000 given as grant in 20x1. How much is the loss on repayment of
government grant recognized in 20x3?
a. 4,400,000
b. 3,800,000
c. 2,800,000
d. 0
Repayment of grant related to asset
14. On January 1, 20x1, DREARY DISMAL Co. received cash of ₱16,000,000 from
the government to be used in constructing a building. The construction was
completed on December 31, 20x1 for a total cost of ₱40,000,000. The building
is depreciated over 20 years. On January 1, 20x4, the government demanded
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repayment of the ₱16,000,000 grant given as grant in 20x1. How much is the
loss on repayment of government grant recognized in 20x4?
a. 2,800,000
b. 1,800,000
c. 1,600,000
d. 0
The answers and solutions to the computational problems above
(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
Chapter 17: Theory of Accounts Reviewer
Scope
1. PAS 20 applies to which of the following?
a. accounting for government grants under hyperinflationary economies
b. tax benefits such as income tax holidays, investment tax credits,
accelerated depreciation allowances and reduced income tax rates
c. government participation in the ownership of the entity
d. government grants related to biological assets measured at fair value less
costs to sell.
e. The benefit of a government loan at a below-market rate of interest.
2. Under PAS 20, it is action by government designed to provide an economic
benefit specific to an entity or range of entities qualifying under certain
criteria. It does not include benefits provided only indirectly through action
affecting general trading conditions, such as the provision of infrastructure in
development areas or the imposition of trading constraints on competitors.
a. Government assistance
c. Grants related to assets
b. Government grants
d. Grants related to income
3. Under PAS 20, these are assistance by government in the form of transfers of
resources to an entity in return for past or future compliance with certain
conditions relating to the operating activities of the entity. They exclude those
which cannot reasonably have a value placed upon them and transactions
with government which cannot be distinguished from the normal trading
transactions of the entity.
a. Government assistance
c. Grants related to assets
b. Government grants
d. Grants related to income
4. Which of the following is not a term used as substitute for government
grants?
a. subsidies
c. premiums
b. subventions
d. income tax holiday
5. Which of the following may not form a valid basis for the accounting for
government grants?
a. cost principle
c. full disclosure
b. matching
d. comparability
6. Which of the following is not specifically excluded from the purview of PAS
20?
a. Government participation in ownership of the entity.
b. Government grant covered by PAS 41.
c. Government assistance provided in the form of tax benefits.
d. Forgivable loan from the government.
(Adapted)
94
7. Which of the following statements incorrectly relate to the scope of PAS 20?
a. PAS 20 shall be applied in accounting for, and in the disclosure of,
government grants and in the disclosure of other forms of government
assistance.
b. PAS 20 shall be applied in accounting for, and in the disclosure of,
government grants and other forms of government assistance.
c. PAS 20 does not deal with the special problems arising in the accounting
for government grants in financial statements reflecting the effects of
changing prices or in supplementary information of a similar nature.
d. PAS 20 does not deal with government assistance that is provided for an
entity in the form of benefits that are available in determining taxable
profit or tax loss, or are determined or limited on the basis of income tax
liability. Examples of such benefits are income tax holidays, investment tax
credits, accelerated depreciation allowances and reduced income tax
rates.
e. PAS 20 does not deal with government participation in the ownership of
the entity and government grants covered by PAS 41 Agriculture.
Recognition
8. When shall an entity recognize government grants?
a. when there is reasonable assurance that the entity will comply with the
conditions attaching to grants
b. when the grants are received
c. when there is reasonable assurance that the grants will be received
d. a and c
9. In relation to the accounting for government grants, which of the following is
true?
a. The receipt of a grant is of itself provides conclusive evidence that the
conditions attaching to the grant have been or will be fulfilled.
b. Government assistance that qualify as government grants are disclosed
but not accounted for under PAS 20.
c. Government assistance that do not qualify as government grants are
accounted for and disclosed under PAS 20.
d. Government grants, including non-monetary grants at fair value, shall not
be recognized until there is reasonable assurance that the entity will
comply with the conditions attaching to them and the grants will be
received
10. Which of the following are considered characteristics of a recognized
government grant?
I.
An economic benefit received from the government
II.
Direct benefits is specific to the recipient entity
III.
With measurable value
IV.
Received or receivable in return for past or future compliance with
attached condition
V.
There is reasonable assurance that the recipient entity will comply to the
attached conditions and that the grant will be received.
VI.
Direct recognition in equity.
a. I, II, III b. I, II, III, IV
c. I, II, III, IV, V d. all of these
11. Under PAS 20, this refers to government, government agencies and similar
bodies whether local, national or international.
a. Government
c. Internal Revenue Services
b. Regulatory agencies
d. Securities Commission
95
12. Under PAS 20, these are government grants whose primary condition is that
an entity qualifying for them should purchase, construct or otherwise acquire
long-term assets. Subsidiary conditions may also be attached restricting the
type or location of the assets or the periods during which they are to be
acquired or held.
a. Government assistance
c. Grants related to assets
b. Government grants
d. Grants related to income
13. Under PAS 20, these are government grants other than those related to assets.
a. Government assistance
c. Grants related to assets
b. Government grants
d. Grants related to income
14. Which of the following is a government grant related to asset?
a. Cash received to defray costs already incurred by an entity.
b. Financial aid received from the government to compensate for casualty
losses incurred
c. Cash received to aid an entity in its “clean and green” program
d. Land received from government with the condition that a building should
be constructed on it.
15. Which of the following is a government grant related to income?
a. Cash received from the government to be used in acquiring equipment.
b. Land received from government with the condition that a building should
be constructed on it.
c. Marketing advice received from a government agency.
d. Financial aid received from the government to compensate for casualty
losses incurred
16. Monetary grants are measured at the
a. amount of cash received
b. the fair value of amount receivable
c. carrying amount of loan payable to government for which repayment is
forgiven
d. discount on loan payable to government at a below-market rate of
interest.
e. any of these
17. Non-monetary grants are measured at the
a. fair value of non-monetary asset received
b. at nominal amount or zero, plus direct costs incurred in preparing the
asset for its intended use
c. amount of cash received
d. a or b
18. A donated fixed asset received as government grant for which the fair value
has been determined should be recorded as a debit to fixed asset and a credit
to
a. retained earnings
c. deferred income
b. additional paid-in capital
d. other income
19. Under PAS 20, these are loans which the lender undertakes to waive
repayment of under certain prescribed conditions.
a. Non-derivative financial assets with fixed or determinable payments
b. Waivable loans
c. Agricultural loans
d. Forgivable loans
96
20. A forgivable loan from government is treated as a government grant when
a. there is reasonable assurance that the entity will meet the terms for
forgiveness of the loan.
b. the loan is forgiven
c. there is reasonable assurance that the loan will not be repaid in the future
d. under no circumstance
21. The benefit of a below-market rate of interest loan from the government is
measured
a. as the fair value of the loan at date of grant
b. as the amount needed to settle the liability at maturity
c. as the difference between the initial carrying amount of the loan
determined in accordance with PFRS 9 and the proceeds received.
d. as the difference between the initial carrying amount of the loan
determined in accordance with PFRS 9 and the present value of the loan.
22. Which approach is used to account for government grants?
a. Capital approach
c. Gentle approach
b. Romantic approach
d. Income approach
23. Which of the following is correct regarding the recognition of government
grants?
a. Government grants shall be recognized in equity on a systematic basis
over the periods in which the entity recognizes as expenses the related
costs for which the grants are intended to compensate.
b. Government grants shall be recognized in profit or loss immediately on
grant date.
c. Government grants shall be recognized in profit or loss on a systematic
basis over the periods in which the entity recognizes as expenses the
related costs for which the grants are intended to compensate.
d. Government grants shall be recognized immediately in equity on grant
date.
24. Which of the following is the least desirable accounting procedure for
government grants?
a. Government grants are recognized immediately in profit or loss if the
related costs for which the grants are intended to compensate have
already been incurred.
b. Government grants are initially deferred if the related costs for which the
grants are intended to compensate are not yet incurred.
c. Government grants are not immediately recognized in profit or loss but
rather amortized to profit or loss as the costs for which the grants are
intended to compensate are being incurred.
d. Government grants are recognized in profit or loss on a receipts basis.
25. Which of the following is not applied when accounting for government
grants?
a. matching
c. cash basis accounting
b. accrual accounting
d. income recognition
26. The use of cash basis of accounting to account for government grants is
permitted
a. only if no basis existed for allocating a grant to periods other than the one
in which it was received.
97
b. only if there is no reasonable assurance that the entity will comply with
the conditions attached to the grant.
c. only if, at initial recognition, there is no reasonable basis that the grant
will be received
d. under no circumstance
27. Which of the following is an acceptable accounting procedure for government
grants?
I.
Income from government grant is recognized in the period the costs or
expenses related to the government grant are recognized.
II.
Grants related to depreciable assets are usually recognized in profit or
loss over the periods and in the proportions in which depreciation
expense on those assets is recognized.
III.
Grants related to non-depreciable assets are recognized in profit or loss as
depreciation expense is recognized on a related depreciable asset for
which the grant was received.
IV.
A government grant that becomes receivable as compensation for
expenses or losses already incurred or for the purpose of giving
immediate financial support to the entity with no future related costs shall
be recognized in profit or loss in the period in which it becomes
receivable.
V.
Grants in the form of tax benefits are recognized in profit or loss when the
related deferred tax liability reverses.
a. I, II
b. II, III, IV
c. I, II, III, IV d. I, II, III, IV, V
28. Which of the following grants shall be recognized in profit or loss
immediately?
a. The government makes a grant to a start-up entity writing teaching
software for children with learning difficulties. The purpose of the grant is
to help with general financing on start up, and there are no further
conditions attaching to the grant.
b. The area where an entity operates was struck by a super-typhoon. Various
properties were destroyed. Accordingly, the entity received ₱10M as
financial aid.
c. A manufacturing entity sets up a plant in an area of high unemployment. A
grant of ₱4 million is receivable if it continues to employ at least 100
people over a period of four years. It is highly probable it will do so. ₱2
million of the grant is to be received immediately and a further ₱2 million
is receivable in four years’ time.
d. a and b
29. Which of the following grants shall be recognized in profit or loss periodically
as the related costs are incurred?
a. An agricultural research entity is given land that belonged to the
government to set up a new laboratory and to investigate new farming
methods.
b. Free technical advice is provided by the government to help an export
entity to market its new technology in North America.
c. A local government made public improvements in the area where an
entity operates. The public improvements increased business in the area
since it became more accessible to customers. Also, the value of land in the
area increased.
d. An entity operating in an economic zone was awarded a tax holiday of 5
years in the condition that the entity should continue to operate for at
least 10 years and that it should employ only residents from the area.
98
30. In relation to a benefit included in the term 'government assistance', are the
following statements true or false according to PAS20 Government grants and
government assistance?
I.
The provision of infrastructure in developing areas is a benefit.
II.
The imposition of trading constraints on competitors is a benefit.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
31. PAS 20 shall be applied in accounting for, and in the disclosure of,
government grants and in the disclosure of other forms of government
assistance. 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 asset.
d. Record only the asset at fair value; do not recognize the fair value of the
grant.
(Adapted)
32. An unrestricted grant received from the government to support enterprise
fund operations should be reported as
a. Contributed capital.
c. Revenue
b. Income.
d. Revenues and expenditures.
(AICPA)
33. To induce MONARCHY “KING, QUEEN, OR EMPEROR” Co. to do business in
Baguio City, the City government donated a factory site to the company. The
donation may be reflected in the books of Monarchy at
a. cost of titling the site
c. current market value
b. nominal value
d. either a, b or c
(AICPA)
34. ARISTOCRACY County owned an idle parcel of real estate consisting of land
and a factory building. Aristocracy gave title to this realty to ARISTOCRAT Co.
as an incentive for Aristocrat to establish manufacturing operations in the
County. Aristocrat paid nothing for this realty, which had a fair market value
of ₱250,000 at the date of the grant. Aristocrat should record this
nonmonetary transaction as a
a. memo entry only.
b. credit to deferred income for ₱250,000.
c. credit to income for ₱250,000.
d. credit to donated capital for ₱250,000.
(AICPA)
35. A plant site donated by a township to a manufacturer that plans to open a new
factory should be recorded on the manufacturer's books at
a. the nominal cost of taking title to it.
b. its market value.
c. “b” but alternatively, the entity may use “a”
d. not recorded
(AICPA)
36. An entity donated land to a municipality for a park. The acquisition cost of the
land was ₱75,000, and the revalued carrying amount at the time of the
donation was ₱200,000 as determined by a professional appraiser. If the
enterprise has adopted the allowed alternative treatment for measurement of
99
property, plant, and equipment subsequent to initial recognition, the journal
entry to record the disposition of the land is
a. Land
75,000
Deferred income
75,000
b. Land
125,000
Revaluation surplus
125,000
Revaluation surplus
125,000
Income
125,000
Expense
75,000
Land
75,000
c. Expense
200,000
Revaluation surplus
125,000
Land
200,000
Retained earnings
125,000
d. Donation expense
200,000
Land
75,000
Income
125,000
37. On January 1, 20x1, DEMOCRACY “RULE BY THE PEOPLE” Company
commenced trading to provide key skills education facilities in a region
identified for technology development. Also on January 1, 20x1, the company
received two grants from its government for setting up its operations in this
location:
Grant (a) – was paid to give financial assistance for start-up costs already
incurred.
Grant (b) – was paid to subsidize the costs of purchasing computer software over
the five-year period.
The company is almost certain to keep the facilities operational for the next five
years. The company's accounting year end is December 31. Are the following
statements concerning recognition of the income from the two government
grants true or false, according to PAS 20 Government grants and government
assistance?
(1) Income from Grant (a) should be recognized in full on receipt in 20x1.
(2) Income from Grant (b) should be recognized in full at the end of 5 years.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
Presentation
38. REPUBLIC “PEOPLE ELECT” Company purchased a major new piece of
machinery for ₱10 million on January 1, 20x1. It will depreciate this
machinery on a straight line basis over its useful life of 10 years, assuming a
zero residual value. Also on January 1, 20x1 the company received a
government grant of ₱1 million to help finance this machinery.
According to PAS20 Government grants and government assistance, which, if
either, of the following methods would be an acceptable treatment of this
machinery and the related government grant in the company's statement of
financial position at December 31, 20x1?
Method 1
Non-current asset
Cost
9,000,000
Depreciation
900,000
Carrying amount 8,100,000
Method 2
Non-current asset
Cost
10,000,000
Depreciation
1,000,000
Carrying amount
9,000,000
100
Deferred income
a. Method 1 only
b. Method 2 only
(ACCA)
900,000
c. Neither method
d. Method 1 or Method 2
39. In the case of grants related to an asset, which of these accounting treatments
(balance sheet presentation) is prescribed by PAS 20?
a. Record the grant at a nominal value in the first year and write it off in the
subsequent year.
b. Either set up the grant as deferred income or deduct it in arriving at the
carrying amount of the asset.
c. Record the grant at fair value in the first year and take it to income in the
subsequent year.
d. Take it to the income statement and disclose it as an extraordinary gain.
(Adapted)
40. In the case of grants related to income, which of these accounting treatments
is prescribed by PAS 20?
a. Credit the grant to “general reserve” under shareholders’ equity.
b. Present the grant in the income statement as “other income”’ or as a
separate line item, or deduct it from the related expense.
c. Credit the grant to “retained earnings” on the balance sheet.
d. Credit the grant to sales or other revenue from operations in the income
statement.
(Adapted)
Repayment of government grants
41. Which of the following statements are correct according to PAS20
Government grants and government assistance?
I.
Any adjustment needed when a government grant becomes repayable is
accounted for as a change in accounting estimate
II.
In respect of loans from the government at an interest rate of 0%, an
interest charge should be made periodically in profit or loss
III.
Where conditions apply to a government grant, it should only be
recognized when there is reasonable assurance that the conditions will be
met
IV.
A government grant should not be recognized until it is received in cash
a. I, III
b. I, II, III
c. I, III, IV
d. I, II, III, IV
(ACCA)
42. Which of the following statements is true?
a. A donated machinery equipment for which the fair value has been
determined and for which installation costs were incurred should be
measured at its carrying amount on the books of the donee plus
installation cost incurred.
b. Donations of property, plant and equipment received from shareholders
should be recorded at the fair value of the donated asset.
c. A donated fixed asset received as government grant and for which the fair
value has been determined should be recorded as a debit to fixed asset
and credit to other income.
d. A government grant that becomes repayable is accounted for
retrospectively.
Disclosure
43. Which of these disclosures is not required by PAS 20?
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a. The accounting policy adopted for government grants, including methods
of presentation adopted in the financial statements.
b. Unfulfilled conditions and other contingencies attaching to government
assistance.
c. The names of the government agencies that gave the grants along with the
dates of sanction of the grants by these government agencies and the
dates when cash was received in case of monetary grants.
d. The nature and extent of government grants recognized in the financial
statements and an indication of other forms of government assistance
from which the entity has directly benefited.
(Adapted)
Chapter 17 - Suggested answers to theory of accounts questions
1. E 11. A
21. C 31. C
41. B
2. A 12. C
22. D 32. B
42. B
3. B 13. D
23. C 33. D
43. C
4. D 14. D
24. D 34. B
5. A 15. D
25. C 35. C
6. D 16. E
26. A 36. C
7. B 17. D
27. C 37. C
8. D 18. C
28. D 38. D
9. D 19. D
29. A 39. B
10. C 20. A
30. A 40. B
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Chapter 18
Borrowing Costs
Chapter 18: Multiple choice – Computational (SET B) – (For classroom
instruction purposes)
Specific borrowing
1. On January 1, 20x1, HOMILY SERMON Co. borrowed ₱20 million to finance the
construction of a new building. Interest is payable on the loan at 8%. Stage
payments were due throughout the construction period and therefore excess
funds were invested during that period. By the end of the project on
December 31, 20x1, investment income of ₱600,000 had been earned. How
much is the capitalizable borrowing cost?
a. 1,600,000
b. 1,000,000 c. 600,000 d. 0
General borrowing
2. On January 1, 20x1, ENERVATE TO WEAKEN Company had the following
borrowings made for general purposes and a part of the proceeds was used to
finance the construction of a qualifying asset.
Principal
12% short-term note
₱ 40,000,000
14% bank loan (3-year)
72,000,000
16% note payable (5-year)
88,000,000
The construction of the qualifying asset was started on immediately and
expenditures incurred on the qualifying asset were as follows:
Jan. 1
₱19,200,000
Mar. 31
8,800,000
July 30
14,000,000
October 1
21,600,000
December 31
1,200,000
How much is the capitalizable borrowing cost?
a. 28,960,000
b. 7,556,423
c. 5,362,428
d. 0
General borrowing (expenditures incurred evenly)
3. On January 1, 20x1, MAGISTERIAL AUTHORITATIVE Company had the
following borrowings made for general purposes and a part of the proceeds
was used to finance the construction of a qualifying asset.
Principal
12% short-term note
₱ 40,000,000
14% bank loan (3-year)
72,000,000
16% note payable (5-year)
88,000,000
The construction started on January 1 and was completed on December 20x1.
The total cost of construction was ₱72,000,000 which was incurred evenly during
the year. How much is the capitalizable borrowing cost?
a. 28,960,000
b. 5,212,800
c. 5,362,428
d. 0
Specific and General borrowing
4. On January 1, 20x1, OMNIPRESENT PRESENT EVERYWHERE EVERYTIME Co.
contracted for the construction of a building for ₱80,000,000 on a land that it
had previously purchased. The building was completed on December 20x1.
The following payments were made to the contractor:
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Payment date
January 1, 20x1
March 31, 20x1
September 30, 20x1
December 31, 20x1
Amount
₱ 8,000,000
24,000,000
40,000,000
8,000,000
The following represents the borrowings of OMNIPRESENT Co. as of December
31, 20x1.
 10%, ₱28,000,000, 4-year note dated January 1, 20x1 with simple interest
payable annually, specifically borrowed to finance the construction
project. Interest income earned on the temporary investment of the
proceeds is ₱480,000.
 12.5%, ₱40,000,000, 10-year note dated January 1, 20x1 with interest
payable annually
 10%, ₱60,000,000, 10-year note dated December 31, 19x9 with interest
payable annually
How much is the capitalizable borrowing cost?
a. 13,320,000
b. 3,200,000
c. 2,867,343
d. 0
Specific borrowing used for general purposes
5. UBIQUITOUS WIDESPREAD Co. started construction of a new office building
on January 1, 20x1. Funds borrowed specifically for the construction the
building is ₱8,000,000 accruing interest at 10% annually. However, a part of
the borrowing is used for other business requirements during the year.
Investment income earned on temporary investments of proceeds from the
borrowing amounted to ₱48,000 which was received in cash on September 1,
20x1. Expenditures on the building amounted ₱7,200,000 which was incurred
evenly during the year. How much is the capitalizable borrowing cost?
a. 358,400
b. 324,800
c. 289,600
d. 0
Limit on average expenditures
6. RETRENCH Co. started construction of a qualifying asset for CUT DOWN, Inc.
on January 1, 20x1. The following were expenditures incurred on the
construction.
Date
Expenditures
January 1, 20x1
4,000,000
May 1, 20x1
1,800,000
December 1, 20x1
2,880,000


Included in the January 1, 20x1 expenditures is cost of materials purchased
on account for ₱400,000. The account was settled on July 1, 20x1.
Included in the May 1, 20x1 expenditures is ₱40,000 cost of materials
obtained in exchange for old equipment.
Progress billings during the year are as follows:
Date of billing
Amount billed Date billings were collected
April 1, 20x1
800,000
June 1, 20x1
September 1, 20x1 2,400,000
November 1, 20x1


Payments on billings are subject to 10% withholding by CUT DOWN, Inc.
RETRENCH Co. determined the capitalization rate to be 10%.
How much is the capitalizable borrowing cost?
a. 646,000
b. 546,000
c. 446,000
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d. 0
Extended period of construction
Use the following information for the next four questions:
CONVALESCE Co. started construction of a qualifying asset for RECOVER, Inc. on
January 1, 20x1. The following were expenditures incurred on construction.
Date
Year 20x1
January 1, 20x1
May 1, 20x1
December 1, 20x1
Expenditures
4,000,000
1,800,000
2,880,000
Year 20x2
January 1, 20x2
August 30, 20x2
3,600,000
1,200,000
Year 20x3
July 1, 20x3
2,400,000
COVALESCE Co. determined the capitalization rate to be 10%. The construction of
the qualifying asset was substantially completed on September 30, 20x3.
7. How much is the capitalizable borrowing cost in 20x1?
a. 430,000
b. 445,0000
c. 544,000
d. 645,000
8. How much is the capitalizable borrowing cost in 20x2?
a. 1,233,400
b. 1,322,400
c. 1342,400
d. 1,440,400
9. How much is the capitalizable borrowing cost in 20x3?
a. 1,210,980
b. 1,233,400
c. 1,435,980
d. 1,580,980
10. How much is the total cost of the constructed qualifying asset on September
30, 20x3?
a. 18,957,830
b. 19,776,830
c. 13,765,380
d. 18,957,380
The answers and solutions to the computational problems above
(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
Chapter 18: Theory of Accounts Reviewer
Scope
1. Which of the following is the core principle under PAS 23?
a. Borrowing costs incurred in the acquisition, construction or production of
a qualifying asset is expensed. Alternatively, such borrowing costs may be
capitalized.
b. Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost of
that asset. Other borrowing costs are recognized as an expense.
c. Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost of
that asset. Alternatively, such borrowing costs are recognized as an
expense.
d. Borrowing costs that are directly attributable to the acquisition,
construction or production of any long-lived asset form part of the cost of
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that asset. Alternatively, such borrowing costs are recognized as an
expense.
2. PAS 23 may be applied to which of the following?
a. actual or imputed cost of equity and interest expense on callable
preference shares.
b. interest expense incurred on borrowings taken to finance the acquisition
of qualifying assets measured at fair value
c. borrowing costs incurred related to the production of inventories that are
manufactured in large quantities on a repetitive basis.
d. interest expense incurred on financial liabilities measured at amortized
cost under the effective interest method.
3. These refer to interest and other costs incurred by an entity in connection
with the borrowing of funds.
a. borrowed costs
c. borrowing costs
b. interest income
d. cost of qualifying asset
4. Borrowing costs subject to accounting under PAS 23 include all of the
following except
a. interest expense calculated using the effective interest method
b. interest expense incurred on finance leases
c. exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.
d. interest expense incurred on redeemable preference shares
e. all of these may be subject to accounting under PAS 23
5. It is an asset that necessarily takes a substantial period of time to get ready
for its intended use or sale.
a. qualified asset
c. Nine-nine asset
b. qualifying asset
d. deferred asset
6. Which of the following assets may not qualify as a qualifying asset?
a. Inventories
b. Property, plant and equipment
c. Investment property measured under the fair model
d. Intangible assets
7. Which of the following may qualify as a qualifying asset?
a. Financial assets
b. Inventories that are produced over a short period of time.
c. Assets that are ready for their intended use or sale when acquired
d. Assets that are routinely manufactured or produced in large quantities on
a repetitive basis.
e. Biological asset measured at cost
8. Which of the following may qualify as a qualifying asset?
a. 100-storey building purchased from a contractor
b. Titanic ship that took 100 years to construct, purchased from a retail store
c. Movie that takes 10 years to shoot
d. Building that takes 3 years to construct, to be classified as investment
property under fair value model
e. Fish balls
9. Which of the following may not be considered a “qualifying asset” under PAS
23?
106
a. A power generation plant that normally takes two years to construct.
b. An expensive private jet that can be purchased from a local vendor.
c. A toll bridge that usually takes more than a year to build.
d. A ship that normally takes one to two years to complete.
(Adapted)
10. What type of borrowing costs is eligible for capitalization under PAS 23?
a. avoidable borrowing costs
b. non-avoidable borrowing costs
c. non-payable borrowing costs
d. either a or b
11. Which of the following principles supports the capitalization of interest?
a. Conservatism
c. Full-disclosure
b. Matching
d. Relevance
(CGA)
12. Borrowing costs can be capitalized as part of the asset under PAS 23 when
a. They are a qualifying asset and the entity has opted for the benchmark
treatment under PAS 23.
b. They are a qualifying asset; the entity has opted for the allowed
alternative treatment under PAS 23, but it is not probable that they will
result in future economic benefits to the entity.
c. They are a qualifying asset; the entity has opted for the allowed
alternative treatment under PAS 23, and it is probable that they will result
in future economic benefits to the entity, but the costs cannot be measured
reliably.
d. They are a qualifying asset; the entity has opted for the allowed
alternative treatment under PAS 23, and it is probable that they will result
in future economic benefits to the entity, but the costs cannot be measured
reliably.
e. The borrowing costs are directly attributable to the acquisition,
construction or production of a qualifying asset. Other borrowing costs
are recognized as expense in the period in which the entity incurs them.
(Adapted)
Recognition
13. Under PAS 23, the capitalization of borrowing costs as part of the cost of a
qualifying asset commences on the date when which of the following
conditions is met?
a. The entity incurs expenditures for the asset
b. The entity incurs borrowing costs
c. It undertakes activities that are necessary to prepare the asset for its
intended use or sale
d. all of these
14. Which of the following statements regarding the provisions of PAS 23 is not
true?
a. Borrowing costs eligible for capitalization are those that would have been
avoided if the expenditure on the qualifying asset had not been made.
b. Expenditures on a qualifying asset include only those expenditures that
have resulted in payments of cash, transfers of other assets, or the
assumption of interest-bearing liabilities.
c. Expenditures are reduced by any progress payments received and grants
received in connection with the asset.
107
d. The average carrying amount of the asset during a period, excluding
borrowing costs previously capitalized, is the expenditures to which the
capitalization rate is applied in that period.
15. Which of the following costs may not be eligible for capitalization as
borrowing costs under PAS 23?
a. Interest on bonds issued to finance the construction of a qualifying asset.
b. Amortization of discounts or premiums relating to borrowings that
qualifies for capitalization.
c. Imputed cost of equity.
d. d Exchange differences arising from foreign currency borrowings to the
extent they are regarded as an adjustment to interest costs pertaining to a
qualifying asset.
(Adapted)
16. In which of the following instances is an entity not permitted under PAS 23 to
capitalize borrowing costs?
a. Prior to the start of physical construction but where technical and
administrative work are being performed.
b. During the period of actual physical construction.
c. During the period when an asset is being held but no production or
development is being made.
d. a and c
17. Capitalization of borrowing costs
a. Shall be suspended during temporary periods of delay.
b. May be suspended only during extended periods of delays in which active
development is delayed.
c. Should never be suspended once capitalization commences.
d. Shall be suspended only during extended periods of delays in which active
development is delayed.
(Adapted)
18. Which of the following is true according to PAS 23?
I.
There is no limit on the capitalization of borrowing costs for as long as the
amount capitalized does not exceed the actual borrowing costs incurred
during the period.
II.
All borrowing costs on general borrowings taken to finance the
construction of a qualifying asset `may be capitalized, even if the
borrowing costs are unavoidable.
a. True, true
b. True, false
c. False, true
d. False, false
19. Under PAS 23, capitalization of borrowing costs is suspended
a. when there is temporary delay that is a necessary part of the process of
getting an asset ready for its intended use
b. during a period where substantial technical and administrative work is
being performed
c. during extended periods of suspension of active development of a
qualifying asset
d. when the construction of the asset is completed
20. Under PAS 23, an entity shall cease capitalizing borrowing costs when
a. substantially all the activities necessary to prepare the qualifying asset for
its intended use or sale are complete.
b. the physical construction of the asset is complete even though routine
administrative work might still continue
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c. only minor modifications are all that are outstanding
d. any of these
21. Capitalization of borrowing costs is permitted during the period activities
necessary to prepare the asset for its intended use or sale are being
undertaken. Which of the following is not among the necessary activities?
a. Technical and administrative work prior to the start of physical
construction such as obtaining permits to construct.
b. Actual physical construction.
c. Negotiation is being made with a government official regarding his fair
share so the construction can begin.
d. Merely holding asset when no production or development is being made.
22. Activities necessary in preparing a qualifying asset for its intended use or sale
encompasses more than physical construction. Which of the following is a
necessary activity which is not physical construction?
a. excavation in preparation for the construction of a structure’s foundation
b. survey of land prior to actual construction
c. obtaining permit to start construction and performing technical planning
d. preparing PERT, Gantt Chart or CPM before construction of a small public
toilet
23. In which of the following may capitalization of borrowing costs not be
suspended?
a. Construction is delayed in order to give pavements and other cemented
structures time to fully harden.
b. Construction of a bridge is delayed due to high levels of water which is
common at the construction site.
c. Construction is delayed; however, substantial technical and administrative
work is being performed.
d. The foreman lost his arm due to an accident at the construction site.
e. The capitalization of borrowing costs is not suspended in any of these.
24. In which of the following may capitalization of borrowing costs be
suspended?
a. The accountant lost his calculator and cannot account for the costs of
snacks of workers consisting of banana-Q and sago.
b. Mr. Politician’s daughter is wed and all contractors and workers were
invited.
c. Construction is temporarily delayed due to a typhoon.
d. Construction is delayed because the contractor spent the entire
construction fund at the beer house; it would take up a very long period to
put up the lost fund.
25. The borrowing costs from specific borrowings that are eligible for
capitalization is computed as
a. Interest expense minus investment income
b. Investment income minus interest expense
c. Capitalization rate multiplied by average expenditures
d. Total borrowings minus average expenditures multiplied by capitalization
rate
26. The borrowing costs from general borrowings that are eligible for
capitalization may be computed as
a. Interest expense minus investment income
b. Investment income minus interest expense
109
c. Capitalization rate multiplied by average carrying amount of qualifying
asset
d. Total borrowings minus average expenditures multiplied by capitalization
rate
27. A company is constructing an asset for its own use. Construction began in
20x1. The asset is being financed entirely with a specific new borrowing.
Construction expenditures were made in 20x1 and 20x2 at the end of each
quarter. The total amount of interest cost capitalized in 20x2 should be
determined by applying the interest rate on the specific new borrowing to the
a. total accumulated expenditures for the asset in 20x1 and 20x2.
b. average accumulated expenditures for the asset in 20x1 and 20x2.
c. average expenditures for the asset in 20x2.
d. total expenditures for the asset in 20x2.
(AICPA)
28. Which of the following assets do not qualify for capitalization of interest costs
incurred during construction of the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them
for their intended use.
(AICPA)
29. Assets that qualify for interest cost capitalization include
a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the
company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.
(AICPA)
30. When computing the amount of interest cost to be capitalized, the concept of
"avoidable interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders' equity.
c. that portion of total interest cost which would not have been incurred if
expenditures for asset construction had not been made.
d. that portion of average accumulated expenditures on which no interest
cost was incurred.
31. The period of time during which interest must be capitalized ends when
a. the asset is substantially complete and ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended use
have begun.
(AICPA)
32. Which of the following statements is true regarding capitalization of interest?
a. Interest cost capitalized in connection with the purchase of land to be
used as a building site should be debited to the land account and not to the
building account.
b. The amount of interest cost capitalized during the period should not
exceed the actual interest cost incurred.
110
c. When excess borrowed funds from general borrowings not immediately
needed for construction are temporarily invested, any interest earned
should be offset against interest cost incurred when determining the
amount of interest cost to be capitalized.
d. The minimum amount of interest to be capitalized is determined by
multiplying a weighted average interest rate by the amount of average
accumulated expenditures on qualifying assets during the period.
(AICPA)
33. Construction of a qualifying asset is started on April 1 and finished on
December 1. The fraction used to multiply an expenditure made on April 1 to
find weighted-average accumulated expenditures is
a. 8/8.
b. 8/12.
c. 9/12.
d. 11/12.
(AICPA)
34. When funds are borrowed to pay for construction of assets that qualify for
capitalization of interest, the excess funds not needed immediately may be
temporarily invested in interest-bearing securities. Interest earned on these
temporary investments should be
a. offset against interest cost to be capitalized
b. used to reduce the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of
interest to be capitalized.
d. recognized as revenue of the period.
(AICPA)
35. Interest cost that is capitalized should
a. be written off over the remaining term of the debt.
b. be accumulated in a separate deferred charge account and written off
equally over a 40-year period.
c. not be written off until the related asset is fully depreciated or disposed of.
d. none of these.
(AICPA)
36. During 2002, TIER ROW Co. constructed machinery for its own use and for
sale to customers. Machines sold to customers are manufactured in large
quantities on a repetitive basis. Bank loans financed the construction of these
assets, both during and after construction were complete. How much of the
interest incurred should be reported as interest expense in the 2002 income
statement?
Interest incurred for machinery
Interest incurred for machinery
constructed for own use
held for sale
a. All interest incurred
All interest incurred
b. All interest incurred
Interest incurred after completion
c. Interest incurred after completion Interest incurred after completion
d. Interest incurred after completion
All interest incurred
(Adapted)
37. It is permissible to capitalize interest on
a. assets that are not being used in earning activities of the entity and that
are not undergoing the activities necessary to get them ready for such use.
b. assets manufactured in large quantities on a repetitive basis
c. assets that are already are in use or are ready for their intended use in the
earning activities on the entity.
d. assets under construction.
111
38. The following statements relate to the cost of self-constructed assets
I.
Direct cost of materials and labor as well as indirect costs and
incremental overhead specifically identifiable and traceable to the
construction shall be capitalized.
II.
Financing costs attributable to a long-term construction project that are
incurred up to the completion of construction are to be included in the
gross carrying amount of the asset to which they relate
III.
Cost inefficiencies, whether due to temporary idle capacity, industrial
disputes or other causes, should be included as part of the cost of the
asset
a. True, true, true
c. True, true, false
b. True, false, true
d. True, false, false
39. After determining which items on the balance sheet properly comprise
basis of interest capitalization for operational assets under construction,
interest calculation is based on the:
a. accumulated borrowing used only for the construction.
b. accumulated expenditures on qualifying assets as of the start of
construction period.
c. average accumulated expenditures on qualifying assets during
construction period.
d. accumulated expenditures on qualifying assets as of the end of
construction period.
the
the
the
the
the
40. The interest capitalization period for a self-constructed asset begins when
certain conditions are met. Which of the following is not one of these
conditions?
a. Activities necessary to get the asset ready for its intended use actually are
in progress.
b. Qualifying expenditures for the asset have actually been made.
c. Interest cost has actually been incurred.
d. Liabilities, such as trade payables or accruals, are incurred in connection
with the asset.
41. Which of the following costs generally would be capitalized to property, plant,
and equipment account?
a. Interest on debt incurred to purchase the item
b. Property taxes relating to periods after acquisition
c. Import duties incurred on purchase
d. Freight-out
(Adapted)
42. An entity imported machinery to install in its new factory premises before
year-end. However, due to circumstances beyond its control, the machinery
was delayed by a few months but reached the factory premises before yearend. While this was happening, the entity learned from the bank that it was
being charged interest on the loan it had taken to fund the cost of the plant.
What is the proper treatment of freight and interest expense under PAS 16?
a. Both expenses should be capitalized.
b. Interest may be capitalized but freight should be expensed.
c. Freight charges should be capitalized but interest cannot be capitalized
under these circumstances.
d. Both expenses should be expensed.
(Adapted)
112
43. A firm decides to capitalize the interest expenditure on a large, building
construction project, instead of expensing it. This ________ its debt-to-equity
ratio.
a. has an ambiguous effect on
c. decreases
b. leaves unaffected
d. increases
(Adapted)
44. According to PAS23 Borrowing costs, which of the following assets could be
treated as qualifying assets for the purpose of capitalizing interest costs?
I.
Investment property
II.
Investments in financial instruments
III.
Inventory of finished goods produced over a short period of time
IV.
Power generation facilities
a. I, II, III
b. I, III, IV
c. I, II, IV
d. I, IV
(ACCA)
45. According to PAS23 Borrowing costs, which of the following statements about
the capitalization of borrowing costs as part of the cost of a qualifying asset is
true?
a. If funds come from general borrowings, the amount to be capitalized is
based on the weighted average cost of borrowing
b. Capitalization always continues until the asset is brought into use
c. Capitalization always commences as soon as expenditure of the asset is
incurred
d. Capitalization always commences as soon as interest on relevant
borrowings is being incurred
(ACCA)
46. The following events take place: An entity buys some land on December 1.
Planning permission is obtained on January 31. Payment for the land is
deferred until February 1. The entity takes out a loan to cover the cost of the
land and the construction of the building on February 1. Due to adverse
weather conditions there is a delay in starting the building work for six weeks
and work does not commence until March 15. Capitalization of borrowing
costs will start on
a. December 1
b. January 1
c. February 1
d. March 15
(ACCA)
47. If the acquisition or construction of a qualifying asset has been financed partly
through specific and partly through general borrowings, then when
computing for the borrowing costs eligible for capitalization
a. the capitalization rate shall be multiplied to the average expenditures
during the year
b. the capitalization rate shall be multiplied to the average carrying amount
of the qualifying asset financed through specific borrowings
c. the capitalization rate shall be multiplied to the average carrying amount
of the qualifying asset financed through general borrowings
d. the borrowing costs are treated as incurred on general borrowings only
48. Which of the following statements is true in relation to PAS 23?
I.
The capitalization rate is computed as the ratio of borrowing costs
incurred on general borrowings over total general borrowings.
II.
The borrowing cost to be capitalized during the period should exceed the
actual borrowing costs incurred for that period.
a. True, true
b. True, false
c. False, true
d. False, false
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49. Which of the following is not a disclosure requirement under PAS 23?
a. Accounting policy adopted for borrowing costs.
b. Amount of borrowing costs capitalized during the period.
c. Segregation of assets that are “qualifying assets” from other assets on the
balance sheet or as a disclosure in the footnotes to the financial
statements.
d. Capitalization rate used to determine the amount of borrowing costs
eligible for capitalization.
(Adapted)
Chapter 18 - Suggested answers to theory of accounts questions
1. B
11. B
21. D
31. A
2. D
12. E
22. C
32. B
3. C
13. D
23. E
33. A
4. E
14. D
24. D
34. A
5. B
15. C
25. A
35. D
6. C
16. C
26. C
36. D
7. E
17. D
27. B
37. D
8. C
18. D
28. D
38. C
9. B
19. C
29. A
39. C
10. A
20. D
30. C
40. D
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41.
42.
43.
44.
45.
46.
47.
48.
49.
C
C
C
D
A
D
C
B
C
Chapter 19
Investment Property
Chapter 19: Multiple Choice – Computational (For classroom instruction
purposes)
Classification as investment property
1. COALESCE TO UNITE Co. has the following assets.
Land held for long-term capital appreciation
800,000
Land held for a currently undetermined future use
2,800,000
Land held for future plant site
4,000,000
Land held for sale in ordinary course of business
400,000
Building rented out under finance lease
7,600,000
Building rented out under operating lease
3,200,000
Building held under an operating lease
4,400,000
Building held under finance lease and rented out under
4,800,000
operating lease
Equipment leased out under an operating lease
200,000
How much is the total investment property?
a. 11,600,000
b. 12,400,00
c. 15,600,000
d. 16,600,000
Total investment property
2. MODULATE Co. has the following assets.
Vacant building to be leased out under operating lease 4,000,000
Building being constructed for TO ADJUST, Inc.
800,000
Building under construction to be used as office
1,600,000
Building under construction to be rented out under
operating lease
400,000
Building rented out to MODULATE’s employees who pay rent
at market rates
3,200,000
Office building awaiting disposal
200,000
How much is the total investment property?
a. 4,200,000
b. 4,400,000
c. 4,600,000
d. 7,600,000
Portions sold separately
3. VARMINT RASCAL Co. has a 10-storey condominium building with a carrying
amount of ₱16,000,000. The first 4 floors are being rented out to tenants
under operating lease and the rest are used as office space. Each portion of
the building can be sold separately or leased out separately under finance
lease. Assuming that the fair values of the condominium units are
approximately equal, how much is classified as investment property?
a. 4,600,000
b.9,600,000
c. 6,400,000
d. 0
Portions not sold separately (PPE as insignificant portion)
4. INTERCEDE MEDIATE Co. owns a 100,000 sq. meter mall. The rentable space
is 80,000 sq. meters. However, a 10 sq. meter space is occupied as an
administration office. The carrying amount of the building is ₱40,000,000.
How much is classified as investment property?
a. 40,000,000
b. 39,995,000
c. 39,996,000
d. 0
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Insignificant ancillary services
5. LANGUISH TO BECOME WEAK Co. owns a building being rented out to
various tenants under operating lease. LANGUISH Co. provides security and
maintenance services. The building has a carrying amount of ₱4,000,000.
Leasing is not the primary business of LANGUISH. How much would be
classified as investment property?
a. 4,000,000
c. a or b as an accounting policy choice
b. 0
d. none of these
Significant ancillary services
6. LASCIVIOUS LUSTFUL Co. owns a building operated as hotel The building has
a carrying amount of ₱4,000,000. How much would be classified as
investment property?
a. 4,000,000
c. a or b as an accounting policy choice
b. 0
d. none of these
Investment property in consolidated financial statements
7. TOKEN Co. owns a 90% interest in SYMBOL, Inc. During the year, TOKEN
rented out a building to SYMBOL. As of year-end, the building has a carrying
amount of ₱4,000,000. In the consolidated financial statements, how much
would be presented as investment property?
a. 4,000,000
c. a or b as an accounting policy choice
b. 0
d. none of these
Initial measurement of investment property
8. LIMBO OBLIVIOUS Co. has the following transactions during the year.
 Purchased building to be held as investment property for ₱4,000,000. Direct
costs incurred amounted to ₱80,000. Costs of day-to-day servicing for the asset
totaled ₱20,000.
 Constructed building to be used as investment property. Total costs incurred
include the following:
i. Materials, labor, and overhead
₱8,000,000
ii. Start-up costs
400,000
iii. Operating losses
200,000
iv. Abnormal amounts of wasted materials during
construction
80,000
 Land acquired with currently undetermined future use by issuing note payable
with face amount of ₱4,000,000 and a present value of ₱3,200,000.
 Building acquired through finance lease to be rented out under various
operating leases. The fair value of the building is ₱2,120,000 and the present
value of minimum lease payments is ₱2,000,000.
 Land to be used as investment property was acquired through exchange. Fair
value of asset given up in exchange for the land is ₱12,000,000. Fair value of
the land received is ₱14,400,000. Additional cash paid for the land received is
₱2,000,000. The exchange has commercial substance.
How much is the total cost of investment property on initial recognition?
a. 30,340,000
b. 31,820,000
c. 32,420,000
d. 31,280,000
Fair value model
9. On January 1, 20x1, NURTURE REAR Co. acquired a building with an
estimated useful life of 10 years and residual value of ₱400,000 for a total cost
of ₱4,000,000. The fair value of the building on January 1, 20x1 is ₱4,800,000
while the fair value on December 31, 20x1 is ₱5,200,000. NURTURE estimates
that if the building is sold currently on December 31, 20x1, costs to sell
amount to ₱200,000. NURTURE uses the straight line method in depreciating
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its PPE. NURTURE uses the fair value model for its investment properties. The
year-end adjusting entry will include
a. 360,000 depreciation
c. 200,000 unrealized gain
b. 400,000 unrealized gain
d. 1,200,000 unrealized gain
Change in accounting policy
Use the following information for the next two questions:
GENRE Co. has an investment property with carrying amount of ₱4,400,000 and
fair value of ₱5,200,000 on January 1, 20x1.
10. If GENRE Co. decides to change its accounting policy from the cost model to
the fair value model, how much is the gain or loss on the change?
a. 800,000 recognized in profit or loss
b. 800,000 recognized in other comprehensive income
c. 800,000 recognized directly in equity
d. 0
11. If GENRE Co. decides to change its accounting policy from the fair value model
to the cost model, how much is the gain or loss on the change? What is the
entry to effect the change?
a. 800,000 recognized in profit or loss
b. 800,000 recognized in other comprehensive income
c. 800,000 recognized directly in equity
d. 0
Property interest in operating lease
12. On January 1, 20x1, WARY Co. entered into an operating lease with CAUTIOUS
Leasing, Inc. for a building. The building will be sublet under various
operating leases. Annual rental is ₱400,000 for 10 years.
On January 1, 20x1, WARY Co. decided to classify the property interest in the
operating lease as investment property. It was determined that the present value
of the minimum lease payments is ₱3,200,000 which is equal to the fair value of
the property interest on that date.
Prior to January 1, 20x1, WARY Co. uses the cost model to measure its investment
property. The carrying amounts and fair values of the other investment
properties are shown below:
Item of investment property
Carrying amount – Fair value – Jan.
Jan. 1, 20x1
1, 20x1
Land
₱ 2,000,000
₱2,400,000
Building (purchased 10 years ago)
800,000
1,200,000
₱2,800,000
₱3,600,000
How much is the total carrying amount of the all the investment properties held
by WARY Co. on January 1, 20x1 immediately upon recognition of the property
interest as investment property?
a. 2,800,000
b. 6,000,000
c. 6,800,000
d. 3,600,000
Inability to determine fair value reliably on initial recognition
13. SLEAZY CHEAP Co. uses the fair value model for its investment property. On
January 1, 20x1, SLEAZY acquired a plant for ₱4,000,000 to be rented out
under various operating leases. The plant has an estimated useful life of 10
years and a residual value of ₱800,000. Due to its special nature, SLEAZY
assessed that the fair value of the plant cannot be determined reliably at
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initial recognition and on a continuing basis. How much is the carrying
amount of the plant as of December 31, 20x1?
a. 4,000,000
b. 3,680,000
c. 3,600,000
d. none of these
Transfer under Cost model – PPE to IP
14. On January 1, 20x1, JADED EXHAUSTED Co. decided to lease out under
operating lease one of its buildings that was previously used as office space.
The building has an original cost of ₱12,000,000 and a carrying amount of
₱4,000,000 and fair value of ₱4,800,000 as of January 1, 20x1. JADED Co. uses
the cost model for both PPE and investment property. The building has a
remaining useful life of 10 years as of January 1, 20x1. JADED Co. uses the
straight line method of depreciation. How much is the gain (loss) on the
reclassification to investment property?
a. 800,000
b. (800,000)
c. (7,200,000)
d. 0
Transfer under Cost model – IP to PPE
15. On December 31, 20x1, SPELLBLIND FACINATE Co. decided to use as office
space one of its buildings that was previously leased out. The building has an
original cost of ₱12,000,000 and an accumulated depreciation of ₱8,000,000.
The recoverable value of the building is ₱3,200,000 as of December 31, 20x1.
SPELLBLIND Co. uses the cost model for PPE and investment property. The
entry on December 31, 20x1 includes
a. debit to investment property for ₱3,200,000
b. debit to building for ₱4,000,000
c. debit to loss on reclassification of ₱800,000
d. debit to impairment loss of ₱800,000
Transfer under Fair value model – IP to PPE
16. On December 31, 20x1, HEFT WEIGHT Co. decided to use as office space one
of its buildings that was previously leased out. The building has fair values of
₱4,000,000 and ₱4,800,000 on January 1, 20x1 and December 31, 20x1,
respectively. HEFT Co. uses the fair value model for investment property. The
entry on December 31, 20x1 includes
a. debit to investment property for ₱4,000,000
b. debit to investment property for ₱4,800,000
c. credit to building for ₱4,000,000
d. credit to unrealized gain for ₱800,000
Transfer under Fair value model – PPE to IP
17. On December 31, 20x1, DECAPITATE BEHEAD Co. decided to lease out under
operating lease one of its buildings that was previously used as office space.
The building has an original cost of ₱12,000,000 and accumulated
depreciation of ₱8,000,000 as of January 1, 20x1. Annual depreciation is
₱400,000. DECAPITATE Co. uses the fair value model for investment property.
The fair value of the building on December 31, 20x1 is ₱6,000,000. The entry
to record the transfer of the building to investment property includes
a. credit to gain on reclassification for ₱2,000,000
b. credit to revaluation surplus for ₱2,000,000
c. debit to building for ₱12,000,000
d. credit to revaluation surplus for ₱2,400,000
Transfer under Fair value model – PPE to IP
Use the following information for the next two questions:
On December 31, 20x1, DISDAINFUL PROUD Co. decided to reclassify a building
previously used as owner-occupied property to investment property.
DISDAINFUL Co. determined the following:
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Historical cost
Accumulated depreciation – Dec. 31, 20x1
Carrying amount – Dec. 31, 20x1
Carrying amount had no impairment loss been
recognized previously – Dec. 31, 20x1
Fair value – Dec. 31, 20x1
₱12,000,000
8,000,000
4,000,000
4,800,000
6,400,000
DISDAINFUL Co. uses the fair value model for investment property.
18. How much is recognized in profit or loss on December 31, 20x1 relating to the
transfer?
a. 2,400,000
b. 1,600,000
c. 800,000
d. 0
19. How much is recognized in other comprehensive income and accumulated in
equity on December 31, 20x1 relating to the transfer?
a. 2,400,000
b. 1,600,000
c. 800,000
d. 0
Transfer under Fair value model – PPE to IP
20. On December 31, 20x1, HEAVE THROW Co. decided to reclassify a building
previously used as owner-occupied property to investment property. HEAVE
Co. determined the following:
Historical cost
₱12,000,000
Accumulated depreciation – Dec. 31, 20x1
8,000,000
Carrying amount – Dec. 31, 20x1
4,000,000
Revaluation surplus
800,000
Fair value – Dec. 31, 20x1
2,800,000
HEAVE Co. uses the fair value model for investment property. The transfer
resulted to
a. a loss of ₱400,000
c. increase in equity of ₱800,000
b. a loss of ₱1,200,000
d. no effect on profit or loss
Transfer under Fair value model – IP to Inventory
21. On December 31, 20x1, RAMBLE ROAM Co. decided to redevelop its building
to be sold in the ordinary course of business. RAMBLE Co. uses the fair value
model for investment property. Fair values of the investment property are:
Fair value – Jan. 1, 20x1
6,800,000
Fair value – Dec. 31, 20x1
6,400,000
The transfer of the investment property to inventory resulted to
a. an unrealized loss of ₱400,000
c. increase in equity for ₱400,000
b. an unrealized gain of ₱400,000
d. no effect on profit or loss
Replacement of parts – Cost model
Use the following information for the next two questions:
EXPECTORATE SPIT Co. acquired a building on January 1, 20x1 for a total cost of
₱24,000,000 and classified it as investment property. The building is estimated to
have a useful life of 10 years. EXPECTORATE Co. uses the cost model for its
investment property and the straight line method of depreciation. On January 1,
20x5, the elevator in the building was replaced for a total cost of ₱3,200,000.
22. Assuming EXPECTORATE Co. determined that the cost of the old elevator
replaced is ₱2,000,000, how much is the gain (loss) on the replacement?
a. 800,000
b. (1,200,000)
c. 2,000,000
d. (1,920,000)
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23. Assuming it is impracticable to determine the cost of the old elevator
replaced, how much is the gain (loss) on the replacement?
a. 1,280,000
b. (1,200,000)
c. 2,000,000
d. (1,920,000)
Replacement of parts – Fair value model
24. PERIODIC REGULAR Co. acquired a building on January 1, 20x1 for a total cost
of ₱24,000,000 and classified it as investment property. PERIODIC Co. uses
the fair value model for its investment property. On January 1, 20x5, when the
carrying amount of the building is ₱16,000,000, the elevator in the building
was replaced for a total cost of ₱3,200,000. It is impracticable to determine
the fair value of the replaced part. The fair value of the building on December
31, 20x5 is ₱17,200,000. How much is the loss recognized during the year?
a. 3,200,000
b. 2,000,000
c. no loss
d. indeterminable
The answers and solutions to the computational problems above
(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
Chapter 19: Theory of Accounts Reviewer
Scope
1. PAS 40 shall be applied to which of the following?
a. biological assets related to agricultural activity
b. inventories held for sale in the ordinary course of business
c. mineral rights and mineral reserves such as oil, natural gas and similar
non-regenerative resources.
d. building that is vacant but is held to be leased out under one or more
operating leases
2. A factory is in the process of being constructed on behalf of the government.
The property should be accounted for under
a. PAS 20
b. PAS 16
c. PAS 40
d. PAS 11
3. A new office building used by an insurance entity as its head office which was
purchased specifically in the center of a major city in order to exploit its
capital gains potential. The property should be accounted for under
a. PAS 20
b. PAS 16
c. PAS 40
d. PAS 11
4. The applicable PFRS/PAS for a property being constructed or developed for
future use as investment property is
a. PAS 2, Inventories, until construction is complete and then it is accounted
for under PAS 40, Investment Property.
b. PAS 40, Investment Property.
c. PAS 11, Construction Contracts, until construction is complete and then it
is accounted for under PAS 40, Investment Property.
d. PAS 16, Property, Plant, and Equipment, until construction is complete and
then it is accounted for under PAS 40, Investment Property.
(Adapted)
5. Which of the following statements best describe 'owner-occupied property',
according to PAS40 Investment property?
a. Property held for sale in the ordinary course of business
b. Property held for use in the production and supply of goods or services
c. Property held to earn rentals
d. Property held for administrative purposes
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e. b and d
(ACCA)
Recognition and derecognition
6. Which of the following would be reported as Investment Property?
a. Property that is being constructed or developed for future use as owneroccupied property.
b. Property that is leased to another entity under a finance lease.
c. Owned-occupied property awaiting sale.
d. Property available for lease.
7. 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 held by the entity under finance lease to be leased out under one
or more operating leases
c. Real estate held for an undetermined future use.
d. Property owned by the entity and leased out to another entity under a
finance lease.
8. A property will be classified as investment property if
a. it is leased under a finance lease
b. the owner-occupied portion is significant
c. the entity provides relatively insignificant ancillary services (security,
janitorial services) to the occupants of the property
d. it is rented out to a subsidiary and consolidated financial statements are
prepared
9. Investment properties are initially recognized at cost which comprises
purchase price and any directly attributable expenditure. Which of the
following may be treated as direct costs of acquisition and, therefore,
increases the cost to be initially recognized for the investment property?
a. Professional fees for legal services and property transfer taxes.
b. Start-up costs
c. Operating losses incurred before the investment property achieves the
planned level of occupancy
d. Abnormal amounts of wasted material, labor or other resources incurred
in constructing or developing the property
10. Which of the following is an investment property?
a. Properties currently being developed for sale
b. Investment properties that are currently being developed for future use as
owner-occupied property
c. Property that is leased out to another entity under a finance lease
d. Building rented out in an operating lease where the owner provides
minimal services
11. All of the following will not qualify as investment property, except?
a. Machineries that are held for lease
b. Hotels or motels
c. An agricultural land purchased for appreciation purposes
d. Equipment purchased for an indeterminate purpose
12. In accounting for investment property,
I.
The cost model used for property, plant, and equipment is the same as the
cost model used for investment property.
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II.
The revaluation model used for property, plant, and equipment is the
same as the fair value model used for investment property.
a. true, true
b. true, false
c. false, true
d. false, false
13. Under PAS 40, in determining the fair value of an investment property, which
of following should not be considered?
a. contingent rent
c. furniture included in rented property
b. future capital expenditure d. air-conditioning in a rental building
14. The fair value of an investment property excludes which of the following?
a. prepaid or accrued operating lease income
b. equipment made an integral part of the property
c. future costs of day-to-day servicing of the asset
d. elevator in a building that is replaced every after 10 years.
15. Identify the correct statements from the following.
I.
Investment property may be valued subsequent to initial recognition
using the cost model or the revaluation model.
II.
Depreciable properties measured under the revaluation model are subject
to depreciation.
III.
Depreciable investment properties measured under the fair value model
are not subject to depreciation.
IV.
The fair value of a property classified as investment property measured
under the fair value model is required to be determined more frequently
than the fair value of a property measured under the revaluation model.
a. I, II, III, IV
b. II, III, IV
c. III, IV
d. III
16. An entity has a factory, which due to a decline in activity, is no longer required
and is now classified as held for sale. Which of the following is correct?
a. The property may be classified as investment property if there is
commencement of development with view to sale.
b. The property should be measured using cost model or fair value model
but not both.
c. The property should still be depreciated if the property is measured under
fair value model.
d. The property is classified as held for sale and is not an investment
property.
17. An agricultural land is purchased for its investment potential. Planning
permission has not been obtained for building constructions of any kind.
Which of the following is correct?
a. the property should be classified as PPE
b. the property may be classified as investment property because of the lack
of permission
c. the property may be classified as investment property despite the lack of
permission
d. the property should be classified initially as investment property pending
the receipt of permission; after the receipt of permission, the property
should be classified as PPE.
18. A gain arising from a change in the fair value of an investment property for
which an entity has opted to use the fair value model is recognized in
a. Profit or loss for the year.
b. General reserve in the shareholders’ equity.
c. Valuation reserve in the shareholders’ equity.
d. None of the above.
(Adapted)
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19. Which of the following terms best describes property held to earn rentals or
for capital appreciation?
a. Freehold property
c. Owner-occupied property
b. Leasehold property
d. Investment property
(ACCA)
20. How does the fair value model differ from the revaluation model?
a. Increases in carrying amount above a cost-based measure are recognized
in equity
b. Changes in fair value are recognized through profit or loss
c. a and b
d. neither a nor b
21. Select the correct statement.
a. A leasing company should treat all of its assets used in providing lease
services as investment property
b. Investment properties that are to be disposed of without further
development are treated as investment property until they are
derecognized
c. All investment properties held for capital appreciation will be classified as
held for sale in the long run
d. Investment properties being re-developed as investment properties on
behalf of third parties are investment properties
22. The distinguishing characteristic that identifies an investment property from
other assets of an entity is?
a. Changes in fair value of the asset is charged to profit or loss
b. The property do not derive cash flows separate from other entities
c. Generates separately identifiable cash flows from other assets of the
entities
d. Earns rental as part of the ordinary operation of the entity
23. Which is not correct?
a. The entire asset is classified as property, plant and equipment if the
portion devoted to investment property is insignificant
b. If the portions of a building held partly for lease and partly for
administrative use cannot be sold separately, the entire property is
classified as owner-occupied if the portion used for administrative use is
more significant.
c. If services provided to the occupants of a building is significant in relation
to the whole arrangement, the building is classified as investment property
d. Only the property interest in an asset acquired through a finance lease is
classified as investment property and not the property itself
24. Property interest held by the lessee under an operating lease may be
classified and accounted for:
a. As investment property at fair value
b. As property, plant and equipment at cost model
c. As intangible asset at cost
d. Either a or b
25. The initial cost of a property interest in an operating lease classified as
investment property shall be:
I.
The fair value of the property interest
II.
The present value of the minimum lease payments to the operating lease
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a. I only
b. II only
c. Whichever is lower between I and II
d. Whichever is higher between I and II
26. Regarding property interest in an operating lease, which of the following can
be classified as investment property?
a. Property interest in an operating lease that has no reliably determinable
fair value
b. Property interest in an operating lease wherein the underlying premises is
currently used by the owner for its regular operation
c. Property interest in an operating lease that is held for appreciation by the
lessee or wherein the underlying premises is held for sub-lease by the
lessee
d. Neither a, b nor c
27. Which of the following investment property will have a changed classification
in the Consolidated Financial Statements?
a. Investment properties that are intended by management to be disposed of
b. Investment properties wherein owner occupation commenced during the
period
c. Investment properties that are leased out to affiliates or subsidiaries in
the consolidated group
d. Investment properties leased out to equity method investees
(Adapted)
28. Which is correct regarding the fair value model for investment property?
a. Investment properties are initially measured as cost; subsequently, they
are measured at fair value, any fluctuations in fair value are recognized as
revaluation in equity similar to the revaluation model of property, plant
and equipment
b. Investment properties are initially measured at fair value, any subsequent
changes in fair value are recognized in profit or loss
c. Change of policy from the fair value model to the cost model is least likely
to happen
d. Investment properties are initially recognized at fair value, any
subsequent changes in fair value are recognized as revaluation in equity
29. Which of the following circumstances demonstrate a change from owneroccupied property to investment property?
a. Commencement of development with a view to sale
b. End of re-development of the investment property for use as investment
property
c. Commencement of owner occupation
d. End of use of property for administrative purposes to be leased in one or
more operating leases.
30. Which is incorrect regarding reclassification of investment properties?
a. Under the cost model, the carrying amount of the property when classified
as investment property is the deemed cost of the investment property
b. Under the fair value model, any difference in fair value and the carrying
amount of an inventory classified as investment property is recognized in
profit or loss
c. The fair value of an investment property measured under the fair value
model that is reclassified to owner-occupied property at cost model is
considered the cost of the owner occupied property
d. When an owner occupied property under the revaluation model is
reclassified to investment property at cost model, the difference between
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the carrying amount of the owner-occupied property and its fair value at
the time of reclassification is included in profit or loss
31. Select the incorrect statement.
a. Investment properties are intended for long-term appreciation while held
for sale assets are non-current assets held for immediate disposal
b. When the fair value of an investment property becomes indeterminable,
the fair value model is foregone
c. Investment property is held for appreciation or incidental operations
while owner-occupied property is directly employed in the operations of
the entity
d. Investment properties are not held for sale, inventories are held for sale in
the ordinary course of business
32. Which of the following properties fall under the definition of investment
property and therefore within the scope of PAS 40 Investment property?
I.
Land held for long-term capital appreciation
II.
Property occupied by an employee paying market rent
III.
Property being constructed on behalf of third parties
IV.
A building owned by an entity and leased out under an operating lease
a. I, II
b. II, IV
c. I, IV
d. II, III, IV
33. Investment property is initially recognized at
a. cost
b. fair value
c. fair value plus transaction cost
d. cost if the entity follows the cost method; fair value if the entity follows
the fair value method
34. The initial cost of a property interest held under a finance lease and classified
as an investment property shall be
a. the fair value of the property
b. the present value of the minimum lease payments
c. the lower of the fair value of the property and the present value of the
minimum lease payments
d. the fair value of the property or the present value of the minimum lease
payments at the option of the entity
35. Which of the following generally provides the best evidence of fair value for
an investment property?
a. Discounted cash flow projections based on reliable estimates of future
cash flows.
b. Recent prices on less active markets with adjustments to reflect changes
in economic conditions.
c. Current prices for properties of a different nature or subject to different
conditions.
d. Current prices on an active market for similar property in the same
location and condition.
36. When a property interest in an operating lease is classified as investment
property?
a. The use of the fair value model becomes compulsory only for similar
property interests
b. The use of the fair value model becomes compulsory for all investment
properties
125
c. The use of the fair value model becomes the priority for all investment
properties
d. Either a and c
37. IRK ANNOY Co.’s investment in real property has carrying value of
₱1,000,000 under the fair value model, before adjustment. If the fair market
value at end of the year is ₱800,000, how much should be the gain or loss on
transfer if Irk would shift to cost model?
a. gain of ₱200,000 reported as other comprehensive income
b. loss of ₱200,000 reported as other loss in the income statement
c. loss of ₱200,000 reported in equity as decrease in revaluation surplus
d. none
(Adapted)
38. Which of the following does not indicate change in use of the property and
therefore precludes transfers to or from investment property classification?
a. Start of owner occupation
b. End of owner occupation
c. Start of development with a view to sale
d. Entity decides to sell an investment property without development.
39. Under PAS40 Investment property, which of the following additional
disclosures must be made when an entity chooses the cost model as its
accounting policy for investment property?
a. The fair value of the property
b. The present value of the property
c. The value in use of the property
d. The net realizable value of the property
(ACCA)
40. PAS40 Investment property gives a choice between two different models as
the accounting policy to be used in relation to investment property. Which of
the following disclosures should be made when the fair value model has been
adopted?
a. Depreciation methods used
b. The amount of impairment losses recognized
c. Useful lives or depreciation rates used
d. Net gains or losses from fair value adjustments
(ACCA)
41. In case of property held under an operating lease and classified as investment
property
a. The entity has to account for the investment property under the cost
model only.
b. The entity has to use the fair value model only.
c. The entity has the choice between the cost model and the fair value model.
d. The entity needs only to disclose the fair value and can use the cost model
under PAS 38.
(Adapted)
42. An investment property is derecognized when
a. It is disposed to a third party.
b. It is permanently withdrawn from use.
c. No future economic benefits are expected from its disposal.
d. in any of these
(Adapted)
126
43. Derecognition of investment property will not be required when
a. it becomes the subject of an operating lease
b. it is sold
c. it becomes the subject of a sale and leaseback deal
d. it becomes the subject of finance lease
44. An entity has a factory that has been shut down for a year due to various
reasons, including worker unrest and strike. The entity plans to sell this
factory. It should
a. Classify the factory as investment property.
b. Classify the factory as property held for sale if all the requirements of
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations are
met.
c. Classify the factory as property, plant, and equipment under PAS 16.
d. Write off the net book value and disclose that fact in the footnotes to the
financial statements.
(Adapted)
45. Transfers from investment property to property, plant, and equipment are
appropriate
a. When there is change of use.
b. Based on the entity’s discretion.
c. Only when the entity adopts the fair value model under PAS 38.
d. The entity can never transfer property into another classification on the
balance sheet once it is classified as investment property.
(Adapted)
Disclosure
46. Which of the following is not a required disclosure involving investment
property?
a. The accounting model followed for investment property
b. Whether property interests under operating leases are classified as
investment properties
c. The depreciation method used for investment property measured under
the fair value model
d. Criteria to distinguish investment property from owner-occupied property
when there is classification difficulty
47. Which is not a disclosure under the cost model for investment property?
a. The depreciation rates used
b. The fair value of the investment property
c. The net gain or loss from fair value adjustments
d. The depreciation methods used
Chapter 19 - Suggested answers to theory of accounts questions
1. D
11. C
21. B
31. B
2. D
12. B
22. C
32. C
3. B
13. B
23. C
33. A
4. B
14. A
24. A
34. C
5. E
15. B
25. A
35. D
6. D
16. D
26. C
36. B
7. D
17. C
27. C
37. D
8. C
18. A
28. C
38. D
9. A
19. D
29. D
39. A
10. D
20. B
30. D
40. D
127
41.
42.
43.
44.
45.
46.
47.
B
D
A
B
A
C
C
Chapter 20
Intangible Assets
Chapter 20: Multiple choice – Computational (SET B) – (For classroom
instruction purposes)
Research and development expense
1. DEBUNK EXPOSE Co. made expenditures for the following:
 Cost in activities aimed at obtaining new knowledge
 Marketing research to study consumer tastes
 Cost of developing and producing a prototype model
 Cost of testing the prototype model for safety and environmental
friendliness
 Cost revising designs for flaws in the prototype model
 Salaries of employees, consultants, and technicians involved in
R&D
 Cost of conference for the introduction of the newly developed
product including fee of a model hired as endorser
 Advertising to establish recognition of the newly developed
product
₱40,000
20,000
12,000
160,000
60,000
80,000
400,000
120,000
How much is recognized as research and development expense?
a. 292,000
b. 352,000
c. 392,000
d. 792,000
Research and development expense – with receivable
2. GOOSEY FOOLISH Co. made expenditures for the following:
 Cost incurred on search for alternatives for materials, devices,
products, processes, systems or services
 Cost of final selection of possible alternatives for a new process
 Trouble-shooting during commercial production
 Periodic or routine design changes to existing products
 Modification of design for a specific customer
 Payments made to SPOONY, Inc. for R&D performed by SPOONY for
GOOSEY
 Cost of R&D performed by GOOSEY for SILLY Corp.
₱40,000
32,000
20,000
12,000
160,000
60,000
80,000
How much is recognized as research and development expense?
a. 132,000
b. 152,000
c. 324,000
d. 152,000
Research and development expense – with intangible asset
3. REALM KINGDOM Co. made expenditures for the following:
 Cost of design, construction and operation of a pilot plant that is
not of a scale economically feasible for commercial production
 Cost of design, construction and operation of plant that is feasible
for commercial production
 Cost of design of tools, jigs, molds and dies involving new
technology
128
₱40,000
32,000
20,000
 Cost of routine, seasonal, and periodic design of tools, jigs, molds
and dies
 Cost of engineering follow through in an early phase of
commercial production
 Cost of quality control during commercial production
 Adaptation of an existing capability to a particular customer’s
need
 Costs in developing software for internal use in REALM’s general
management information system (after technological feasibility
has been established)
12,000
160,000
60,000
80,000
160,000
How much is recognized as research and development expense?
a. 60,000
b. 220,000
c. 92,000
d. 252,000
Research and development expense – with PPE
4. FEROCIOUS FIERCE Co. made expenditures for the following:
 Cost of purchased building to be used in various R&D projects
 Depreciation on the building described above
 Cost of machine acquired to be used on only one R&D project
 Modification to the formulation of a chemical product
 Laboratory research aimed at discovery of new technology
₱400,000
32,000
800,000
60,000
48,000
How much is recognized as research and development expense?
a. 140,000
b. 880,000
c. 80,000
d. 940,000
Items not recognized as intangible assets
5. JUMBO VERY LARGE Co. has made expenditures for the following:
 Internally generated brand
 Self-created masthead and publishing title
 Internally created customer list and order backlog
 Purchased goodwill from a business combination
 Expenditure incurred to improve the acquired goodwill
 Internally generated goodwill
 Purchased brands, mastheads, publishing titles, customer lists,
and order and production backlogs
 Expenditures incurred to improve purchased brands,
mastheads, publishing titles, customer lists, and order and
production backlogs
₱40,000
20,000
12,000
160,000
60,000
80,000
400,000
120,000
How much of the expenditures incurred may qualify as intangible assets to be
accounted for under PAS 38?
a. 892,000
b. 492,000
c. 400,000
d. 520,000
Trademark acquired through purchase
6. On January 1, 20x1, SUFFICIENT Co. acquired trademark from ENOUGH, Inc.
for a total cost of ₱400,000. Other related costs incurred include the
following:
 Costs of employee benefits arising directly from bringing the asset
₱40,000
to its intended condition
 Professional fees arising directly from bringing the asset to its
129
intended condition
 Costs of introducing the new product including advertisement
costs
How much is the cost of the intangible asset?
a. 460,000
b. 472,000
c. 400,000
20,000
12,000
d. 412,000
Trademark obtained through self-generation
7. On January 1, 20x1, PRIME FIRST Co. generated a trademark. Costs incurred
include the following:
 Costs of materials and services used or consumed in generating
₱200,000
the trademark
40,000
 Costs of employee benefits incurred in generating the trademark
20,000
 Fees to register the trademark
 Amortization of patents and licenses that were used to generate
8,000
the trademark
120,000
 Selling, administrative and other general overhead expenditures
How much is the cost of the intangible asset?
a. 20,000
b. 268,000
c. 260,000
d. 388,000
Web site cost
8. BRAWNY STRONG Co., an audit firm, incurred the following costs in selfdevelopment of its web site. The web site will be used by its auditors in,
among other things, sending emails to clients, posting updates on financial
reporting and auditing standards and other relevant regulations, uploading
and retrieving working papers, and in checking their pay slips.
 Costs incurred in purchasing web servers, staging servers,
2,000,000
production servers and Internet connections
400,000
 Costs incurred during the planning stage
 Costs incurred during the application and infrastructure,
1,200,000
graphical design, and content development stage.
200,000
 Costs incurred during operating stage
Assume that all conditions for capitalization of development costs are met, how
much is the cost of web site recognized as intangible asset?
a. 3,600,000
b. 1,200,000 c. 1,600,000 d. 0
Web site cost
9. HUMANE CONSIDERATE Co. incurred the following costs in relation to the
development of web site:
200,000
 Development costs of a web site to be used internally
 Development costs of a web site to be used externally in
promoting and advertising products. Customers place orders
personally at retail outlet stores or through telephone or
40,000
facsimile.
120,000
 Development costs of web sites held for sale to various clients.
4,000
 Internet fee paid for the month
How much is capitalized as intangible asset?
a. 200,000
b. 240,000
c. 320,000
130
d. 0
Web site cost
10. SECRETE GIVE OFF Co. incurred the following costs in relation to the
development of its web site.
 Development costs of a web site to be used externally.
120,000
Customers place orders and pay directly through the web site.
 Payment to Mr. Web developer for his assistance in developing
40,000
the web site.
20,000
 Cost of digital photographs of goods uploaded to the web site
12,000,000
 Professional fee of Mr. Manny Boksingero, the product endorser
 Fee of Mr. Freddie Croach for making Mr. Manny sweat before
4,000,000
the pictorial.
How much is capitalized as intangible asset?
a. 580,000
b. 16,580,000
c. 180,000
d. 160,000
Customer list
11. On January 1, 20x1, PLUMP FULLY ROUNDED Co. purchased a customer list of
a large distributor of health products for ₱180,000. This customer database
includes name, contact information, order history, and demographic
information. PLUMP expects to benefit from the information evenly over a 3year period. How much is the carrying amount of the intangible on December
31, 20x1?
a. 120,000
b. 60,000
c. 180,000
d. 0
Franchise with finite useful life
12. On January 1, 20x1, WHOLESOME Co. acquired a franchise from HEALTHY Co.
for ₱1,600,000. The franchise gives WHOLESOME the right to sell HEALTHY’s
products until December 31, 20x5, at which date WHOLESOME may renew
the franchise for another fee subject to a new franchise agreement. In January
20x1, HEALTHY has performed substantially all the services required under
the franchise contract and WHOLESOME started operating the franchise.
Annual periodic franchise fee for 20x1 is ₱60,000. How much is the
amortization expense recognized in 20x1?
a. 320,000
b. 60,000
c. 80,000
d. 0
Franchise with finite useful life
Use the following information for the next two questions:
On January 1, 20x1, CLUSTER Co. acquired a perpetual franchise from BUNCH Co.
for ₱800,000 by paying ₱400,000 cash as down payment and issuing a note
payable for the remainder. The note payable is payable in five equal annual
payments of ₱80,000 starting January 1, 20x1. The franchise gives CLUSTER the
right to manufacture and sell Queen’s balls using the processes developed by
BUNCH Co. for an indefinite period. The imputed rate of interest is 10%
In January 20x1, BUNCH has performed substantially all the services required
under the franchise contract and CLUSTER started making balls. Annual periodic
franchise fee for 20x1 is ₱200,000.
13. How much is the initial cost of the franchise?
a. 333,600
b. 842,162
c. 656,744
d. 733,600
14. How much is the total expense recognized in 20x1 related to the franchise?
a. 200,000
b. 225,360
c. 7,364
d. 447,364
131
Acquired broadcasting license
15. On January 1, 20x1, KEEN SHARP Co. acquired a broadcasting license for
₱400,000 that is renewable every 10 years if KEEN provides at least an
average level of service to its customers and complies with the relevant
legislative requirements. The license may be renewed indefinitely at little cost
and has been renewed twice before the most recent acquisition. KEEN intends
to renew the license indefinitely and evidence supports its ability to do so.
Historically, there has been no compelling challenge to the license renewal.
The technology used in broadcasting is not expected to be replaced by
another technology at any time in the foreseeable future.
How much is amortization expense to be recognized on December 31, 20x1?
a. 40,000
b. 400,000
c. 36,547
d. 0
Purchased patent
Use the following fact pattern for the next three questions:
Fact pattern
On January 1, 20x1, SPARSE Co. purchased a patent from THINLY SPREAD, Inc.
for ₱400,000. THINLY SPREAD has held this patent for 5 years. SPARSE estimates
that the patent has a remaining useful life of 8 years.
16. How much is the patent amortization in 20x1?
a. 80,000
b. 50,000
c. 266,667
d. 20,000
17. On January 1, 20x3, SPARSE Co. purchased a competitive patent from
MEAGER Corp. for ₱180,000 in order to protect the old patent. The
competitive patent has a remaining legal life and useful life of 20 years. How
much is the total amortization expense in 20x3?
a. 50,000
b. 80,000
c. 133,367
d. 42,500
18. On January 1, 20x4, SPARSE incurred litigation costs of ₱80,000 in an
unsuccessful defense of the patents held. How much is the total expense
recognized in 20x4?
a. 80,000
b. 160,000
c. 523,667
d. 480,000
Internally generated patent
Use the following information for the next four questions:
In 20x1, VENERATE RESPECT Co. started to develop a patent. Total costs
incurred during the year amounted to ₱400,000. On January 1, 20x2, the patent
was fully developed. Legal and registration costs incurred in registering the
patent amounted to ₱240,000. It was estimated that the patent has a useful life of
25 years.
19. How much is the carrying amount of the patent on December 31, 20x2?
a. 614,400
b. 608,000
c. 230,400
d. 228,000
20. In 20x4, VENERATE Co. started to develop a new improved patent to extend
the life of the old patent. Development costs totaled ₱800,000. How much is
the carrying amount of the patent on December 31, 20x4?
a. 204,000
b. 870,400
c. 1,272,000 d. 216,000
21. On January 1, 20x5, the new patent was completed and legal and registration
costs incurred to register the new patent amounted to ₱320,000. It was
estimated that the new patent will extend the life of the old patent by another
20 years starting January 1, 20x5. How much is the amortization expense in
20x5?
132
a. 78,200
b. 26,200
c. 346,200
d. 416,200
22. On January 1, 20x6, VENERATE Co. incurred litigation costs of ₱80,000 in a
successful defense of the patents held. How much is the total expense
recognized in 20x6 relating to the patent?
a. 158,200
b. 106,200
c. 80,000
d. 26,200
Patent with residual value
23. On January 1, 20x1, PROMPT Co. incurred ₱400,000 in registering a patent.
QUICK, Inc., a third party, committed to purchase the patent for the remaining
5 years of its legal useful life for a total cost of ₱100,000. How much is the
carrying amount of the patent on December 31, 20x1?
a. 320,000
b. 240,000
c. 340,000
d. 380,000
Change in useful life
24. On January 1, 20x1, PUISSANCE POWER Co. incurred ₱400,000 in registering
a patent. It was initially estimated that the useful life of the asset is 20 years,
equal to its legal life. However, on January 1, 20x6, PUISSANCE assessed that
the useful life of the patent was only 15 years starting on date of registration.
How much is the amortization expense in 20x6?
a. 30,000
b. 32,400
c. 36,800
d. 28,000
Computer software
25. ENTITY BEING Co. incurred the following costs in self-generating computer
software.
₱2,000,000
 Completion of detailed program design
 Cost incurred for coding and testing to establish technological
1,600,000
feasibility
4,000,000
 Other coding costs after establishment of technological feasibility
3,200,000
 Other testing costs after establishment of technological feasibility
2,400,000
 Costs of producing product masters
4,800,000
 Reproduction and duplication costs from product masters
1,200,000
 Packaging costs for the reproduced software
How much is the cost of computer software recognized as intangible asset?
a. 13,200,000 b. 11,200,000 c. 7,200,000 d. 9,600,000
Amortization of computer software
26. TRAVERSE TO CROSS Co. incurred the following costs in developing software:
Development costs prior to reaching technological
feasibility
₱800,000
Development cost after reaching technological feasibility
480,000
Cost of duplicating salable product to be sold over the life
of the software
9,600,000
Estimated revenues over 3-year total product life
24,000,000
Revenue in the first year of product life
8,000,000
How much is the total software-related expense for the year?
a. 4,160,000
b. 160,000
c. 960,000
d. 3,360,000
Acquisition of intangible assets in lump sum
27. SPONTANEOUS SELF-ACTING Co. acquired the intangible assets listed below
for a total lump sum price of ₱400,000.
133




Intangible asset
Service mark
Order and production backlogs
In-house research and development
Masthead
Fair value
₱160,000
120,000
80,000
120,000
How much is the initial measurement of the masthead?
a. 100,000
b. 120,000
c. 133,333
d. 266,667
The answers and solutions to the computational problems above
(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
Chapter 20: Theory of Accounts Reviewer
Objective and scope
1. Which of the following may PAS 38 be applied to?
a. goodwill acquired in a business combination
b. rights arising from exploration and evaluation assets
c. computer software held for sale in the ordinary course of business
d. leasehold improvements
e. web site costs
2. PAS 38 does not apply to all of the following, except
a. receivables without physical substance
b. intangible assets classified as assets held for sale
c. insurer’s contractual rights under insurance contracts
d. assets arising from employee benefits
e. right to utilize another entity’s business concept
3. It is an identifiable non-monetary asset without physical substance.
a. intangible asset
c. ghost asset
b. financial asset
d. dream asset
4. PAS 38 states that an asset meets the identifiability criterion in the definition
of an intangible asset when it:
I.
is separable, i.e., capable of being separated or divided from the entity and
sold, transferred, licensed, rented or exchanged, either individually or
together with a related contract, asset or liability
II.
arises from contractual or other legal rights, regardless of whether those
rights are transferable or separable from the entity or from other rights
and obligations.
a. I
b. II
c. I or II
d. none
5. All of the following are essential characteristics of an intangible asset, except
a. Identifiability
c. Future economic benefits
b. Control
d. Subject to amortization
6. Which of the following is one of the essential characteristics of an intangible
asset?
a. used in business
c. identifiable
b. subject to amortization
d. monetary
7. The definition of an intangible asset
134
a. requires an intangible asset to be used in business
b. requires an intangible asset to provide future economic benefits through
increased revenues
c. requires an intangible asset to be identifiable to distinguish it from
goodwill.
d. requires an intangible asset to be without physical substance, whether the
asset is monetary or not.
8. An asset that cannot be sold, transferred, licensed, rented, or exchanged
separately is called
a. goodwill
c. unidentifiable
b. intangible
d. no such thing
9. Which of the following items may qualify for recognition as intangible asset?
a. Market and technical knowledge
b. Employees’ skills developed from training
c. Specific managerial or technical talent
d. Market share and customer loyalty
e. None of these
10. Future economic benefits from an intangible asset may be obtained in various
ways which include
a. restricting others from the use of the asset
b. enjoyment of legal enforceability
c. reduced operating costs
d. separability through transferable right
11. Which of the following is not true regarding control over an intangible asset?
a. An entity controls an asset if the entity has the power to obtain the future
economic benefits flowing from the underlying resource and to restrict
the access of others to those benefits.
b. The capacity of an entity to control the future economic benefits from an
intangible asset would normally stem from legal rights that are
enforceable in a court of law. In the absence of legal rights, it is more
difficult to demonstrate control.
c. Legal enforceability of a right is a necessary condition for control because
without it an entity cannot be able to control the future economic benefits
from the asset.
d. Control may be acquired from contractual rights such as rights arising
from franchises and non-competition agreements.
12. Regarding an asset that contains both intangible and tangible components,
which of the following statements is incorrect?
a. the entity uses its judgment on how to classify the asset
b. the asset is classified as property, plant and equipment if the intangible
component forms an integral part of the tangible asset
c. the entire asset is classified as property, plant and equipment if the
intangible component is necessary for the tangible asset to operate
d. the entire asset is classified as intangible asset if the tangible component is
necessary for the intangible asset to operate.
13. Which item listed below does not qualify as an intangible asset?
a. Computer software.
c. Copyrights that are protected.
b. Registered patent.
d. Notebook computer.
(Adapted)
135
Financial statement presentation
14. The line item intangible asset presented on the face of the statement of
financial position normally includes which of the following items?
a. goodwill
b. leasehold improvements
c. operating software costs
d. significant application software costs
e. all of these
15. Which of the following is not an acceptable financial statement presentation
for intangible assets?
a. Intangible assets accounted for under PAS 38 shall be presented
separately from Goodwill.
b. Intangible assets accounted for under PAS 38 are aggregated and
presented as one line item under the heading “Intangible assets” or “Other
intangible assets” in the statement of financial position. The breakdown of
the line item is disclosed in the notes.
c. Goodwill is presented separately in a statement of financial position under
a line item described as “Goodwill.”
d. Goodwill is aggregated with other intangible assets and the breakdown is
provided in the notes.
Recognition
16. An intangible asset shall be recognized if management can demonstrate that:
I.
the item meets the definition of intangible asset
II.
it is probable that the expected future economic benefits will flow to the
entity
III.
the cost of the asset can be measured reliably.
IV.
the entity becomes a party to the contractual provisions of the intangible
asset
V.
the fair value of the intangible asset can be reliably determined
a. I, II, III b. I, II, III, IV c. I, II, III, IV, V
d. I, II, V
17. At initial recognition, an intangible asset shall be measured
a. at cost
c. at fair value plus direct acquisition costs
b. at fair value
d. any of these
18. Measurement of cost depends on how the intangible asset is acquired.
Intangible assets may be acquired through:
I.
Separate acquisition
II.
Acquisition as part of a business combination
III.
Acquisition by way of a government grant
IV.
Exchanges of assets
V.
Internal generation
a. I, II, III, IV
b. I, V
c. I only
d. any of these
19. When an intangible asset is separately acquired through purchase, which of
the following is incorrect?
a. trade discounts and rebates are deducted from the purchase price
whether taken or not
b. any directly attributable cost of preparing the asset for its intended use
forms part of initial cost
c. if settlement is deferred, the intangible asset is recognized at its cash price
equivalent, any difference between this amount and future payments is
recognized as interest expense
136
d. trade discounts and rebates are deducted from the purchase price only
when taken
20. MYTHICAL Co. acquired an intangible asset from IMAGINARY Co. during the
year. Which of the following costs incurred by Mythical should not be
included as initial cost of the intangible asset purchased?
a. fees of Mr. Programmer in installing the software purchased
b. fees of Mr. Auditor in auditing the system prior to closing the purchase
contract
c. costs of testing the new system whether it is functioning properly
d. advertising costs for the new product that will be produced using the
newly acquired software
21. SPLICE Co. acquired an intangible asset from 2UNITE Co. during the year.
Which of the following costs should be included as initial cost of the intangible
asset purchased?
a. costs of training Mrs. Old Baket, the designated employee to operate the
newly acquired asset
b. allocation of administration and other general overhead costs
c. rebates on the invoice price not taken
d. non-refundable sales taxes paid on the purchase
22. SVELTE Co. acquired an intangible asset from SLENDER Co. during the year.
All of the following costs incurred by Svelte related to the newly acquired
asset should be expensed immediately, except
a. initial operating losses incurred while demand for the asset’s output
builds up
b. modifications to the intangible asset after it was put to the operating
condition originally intended by Svelte
c. costs incurred while the asset capable of operating in the manner
intended by management has yet to be brought into use
d. salvage proceeds from samples produced during testing
23. The cost of intangible asset acquired in a business combination is its
a. fair value at the acquisition date
b. purchase cost
c. lower of cost or fair value
d. fair value less costs to sell at acquisition date
24. Which of the following provides the most reliable estimate of the fair value of
an intangible asset?
a. quoted market price in an active market
b. price in a binding sale agreement
c. present value of future cash flows
d. any of these
25. If no active market exists for an intangible asset, which of the following is
true?
I.
its fair value is the amount that the entity would have paid for the asset, at
the acquisition date, in an arm’s length transaction between
knowledgeable and willing parties, on the basis of the best information
available.
II.
Its fair value may be determined by discounting estimated future net cash
flows from the asset
a. True, true
b. True, false
c. False, true d. False, false
137
26. Intangible assets acquired by way of government grant may be initially
recognized at
a. fair value
b. nominal amount
c. zero
d. any of these
27. During the year, ENDEAVOR Co. received an intangible asset from 2TRY Co. in
an exchange transaction with commercial substance. Which of the following
statements is true?
a. Endeavor measures the intangible asset received at the fair value of the
intangible asset given up minus cash paid
b. Endeavor recognizes gain or loss on the exchange for the difference
between the fair value of the asset received and the carrying amount of
the asset received
c. If Endeavor cannot determine the fair value of the asset received, it shall
measure the intangible asset received using the fair value of the intangible
asset given up.
d. Endeavor recognizes gain or loss on the exchange for the difference
between the fair value of the asset given up and the carrying amount of
the asset given up, regardless of whether cash is received or paid
28. During the year, ZENITH Co. received an intangible asset from HIGHEST
POINT Co. in an exchange transaction that lacks commercial substance. Which
of the following statements is incorrect?
a. Zenith should measure the asset received at the carrying amount of the
asset given up
b. Zenith should not recognize any gain or loss on the sale unless cash is paid
on the exchange
c. Zenith should measure the asset received at an amount equal to the
difference between the initial cost of the asset given up and its related
accumulated amortization
d. Zenith should not recognize any gain or loss on the sale regardless of
whether cash is received or paid.
29. To assess whether an internally generated intangible asset meets the criteria
for recognition, an entity classifies the generation of the asset into research
phase and development phase. Which of the following statements is true?
a. If an entity cannot distinguish the research phase from the development
phase, the entity treats expenditures as if they were incurred in the
development phase only.
b. Expenditures incurred in the research phase shall be recognized as
expense when incurred.
c. An intangible asset may be recognized for expenditures incurred in
research phase.
d. An in-process research and development (R&D) project acquired as part
of a business combination is expensed if a component is research.
30. Which of the following transactions may not give rise to recognition of an
intangible asset?
a. HEARTY Co. acquired SINCERE Co. in a business combination. Among the
items acquired is an R&D project composed mainly of expenditures
incurred by Sincere in research phase.
b. Expenditures incurred in development phase that meet all of the
conditions for recognition as intangible asset
c. Expenditures incurred in research phase for an invention that is highly
viable
d. Registration and legal fees for a patent filed with the IPO.
138
31. Which of the following is included in research and development expense for a
period?
a. The total cost of a building with useful life of 25 years acquired during the
year to be used in various research and development projects
b. Depreciation on a building used for research and development
c. The cost incurred during the year to ensure quality control for existing
production processes
d. The cost incurred during the year for research activities performed for
another entity.
(Adapted)
32. Intangible assets have all of the following characteristics, except:
a. their ownership confers rights, but no physical substance.
b. they have no physical substance.
c. they are relatively long-lived.
d. they provide benefits to current operations only.
(AICPA)
33. Which of the following statements is correct?
a. Some intangible assets convey exclusive rights which are represented only
by tangible physical substance.
b. Intangible assets used in the operation of a business are always long term.
c. The process of recording the expiration of the economic benefits of an
intangible asset is called depletion.
d. Intangible assets are obtained in two ways: acquisition from an external
source or internally developed.
(AICPA)
34. Which of the following statements is true?
a. The only cost of an internally developed patent that should be capitalized
as patent cost are legal fees and other registration costs.
b. An identifiable tangible asset developed internally is never recognized in
the accounts as an asset.
c. Intangible assets usually have a residual value that must be considered in
the amortization of cost.
d. An intangible asset is usually amortized by a credit to an income account.
(Adapted)
35. For some purposes, assets are classified as identifiable and unidentifiable.
Which of the following is an unidentifiable asset?
a. cash in bank
c. goodwill
b. patent
d. prepaid insurance
(Adapted)
36. Goodwill should properly appear on the financial statements of an entity
which:
a. has purchased another entity
b. consistently operates profitably
c. consistently reports above-normal profits
d. meets all of the conditions regarding legal goodwill.
(AICPA)
37. Costs incurred by a company that developed its own goodwill internally
should be :
a. capitalized and amortized as the company profits increased.
b. capitalized and amortized over the useful life of the goodwill.
139
c. expensed when incurred as a current operating expense.
d. capitalized and amortized over a period not to exceed 40 years.
(AICPA)
38. According to PAS38 Intangible assets, the recognition criteria for an intangible
asset include which of the following conditions?
a. It must be measured at cost
b. Its cost can be measured reliably
c. It is probable that future economic benefits will arise from its use
d. It is an integral part of the business
e. b and c
(ACCA)
39. Which of the following items qualify as an intangible asset under PAS 38?
a. Advertising and promotion on the launch of a huge product.
b. College tuition fees paid to employees who decide to enroll in an executive
M.B.A. program at Harvard University while working with the company.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers to register a patent.
(Adapted)
40. Which of the following assets typically are amortized?
Patents
Trademarks
a.
No
No
b.
Yes
Yes
c.
No
Yes
d.
Yes
No
(AICPA)
41. The creative chief executive of a corporation who is personally responsible
for numerous inventions and innovations is not reported as an asset on the
corporation's statement of financial position. The accounting
principle/guideline that prevents the corporation for reporting this person as
an asset is
a. Conservatism
b. Cost
c. Going concern d. Materiality
(AICPA)
42. What is the proper time or time period over which to match the cost of an
intangible asset with revenues if it is likely that the benefit of the asset will
last for an indefinite period?
a. Forty years
b. Fifty years
c. Immediately
d. At such time as reduction in value can be quantitatively determined.
(AICPA)
43. Which of the following expenditures qualifies for asset capitalization?
a. Cost of materials used in prototype testing
b. Costs of testing a prototype and modifying its design
c. Salaries of engineering staff developing a new product
d. Legal costs associated with obtaining a patent on a new product
(AICPA)
44. Which of the following statements is correct concerning start-up costs?
a. Costs of start-up activities, including organization costs, should be
expensed as incurred.
140
b. Costs of start-up activities, including organization costs, should be
capitalized and expensed only if an impairment exists.
c. Costs of start-up activities, including organization costs, should be
capitalized and amortized on a straight-line basis over the lesser of the
estimated economic life of the company, or 60 months.
d. Costs of start-up activities should be capitalized and amortized on a
straight-line basis over the lesser of the estimated economic life of the
company, or 60 months, while organization cost should be expensed as
incurred.
(AICPA)
45. Which of the following incorrectly relate(s) to accounting for long-lived
assets?
I.
Goodwill arising from a consolidation which appears among the assets on
the consolidated balance sheet of a parent company and its only
subsidiary shows that the subsidiary was acquired at a price that was less
than the underlying book value of its tangible assets.
II.
Provisions for renewal or extension may alter a specified limit on useful
life of intangible assets thus affecting the amortization amount.
III.
Amortization policy on intangible assets should be continually evaluated
to determine whether later events and circumstances necessitate revision
of estimates of useful lives.
IV.
Costs to develop a product or process to be patented may form part of the
costs of patents.
V.
To be consistent, amortization policy of intangible assets should not be
evaluated often even if later events and circumstances warrant revised
estimates of useful lives.
a. IV, V
b. II, III
c. II, III, IV
d. I, IV, V
46. Goodwill arising from a business combination should:
a. be expensed in the year of acquisition
b. be amortized over its economic life
c. not be amortized but tested for impairment at least annually
d. be written off after (40) years or (20) years depending on the GAAP
adopted
(AICPA)
47. Accounting for intangible assets involves the same kind of problem as
accounting for other long-lived assets, such as:
a. accounting after acquisition (amortization)
b. accounting if the values decline substantially & permanently
c. determining an initial carrying amount
d. all of these
(AICPA)
48. Improvements to leased facilities are included under property, plant and
equipment if:
Material in amount
Terms extend over long period
a.
no
yes
b.
yes
no
c.
no
no
d.
yes
yes
(AICPA)
49. Which of the following is not a required characteristics for an item to be
classified as an intangible asset?
141
a. lack of physical substance
b. ownership confers some exclusive right, privilege or competitive
advantage
c. estimated life should not exceed forty years
d. provide future benefits by enhancing revenues or reducing costs
(AICPA)
50. The following statements relate to intangible assets:
I.
All intangible assets have no physical existence, but not all assets having
no physical existence are intangible assets.
II.
Under current accounting practice, intangible assets are classified into
those with finite useful lives such as patents and those with indefinite
useful lives such as trademark.
III.
Research and development costs must be expended for financial reporting
purposes in the year in which the costs are incurred even though the costs
may provide benefits to future periods.
IV.
Only when intangible assets are acquired from other entities can they be
recognized as assets.
State whether the foregoing statements are false.
a. All the statements are false.
c. Only two statements are false.
b. Only one statement is false.
d. Three statements are false.
51. Costs incurred internally to create intangibles are
a. capitalized.
b. capitalized if they have an indefinite life.
c. generally expensed as incurred.
d. expensed only if they have a limited life.
(AICPA)
52. The cost of an intangible asset includes all of the following except
a. purchase price.
c. other incidental expenses.
b. legal fees.
d. all of these
(AICPA)
53. Are the following statements true or false, according to PAS38 Intangible
assets?
1) The cost of an asset should include the amount of any cash or cash
equivalents paid to acquire the asset.
2) The cost of an asset should include non-cash consideration measured at
fair value.
a. False False
b. False True
c. True False
d. True True
(ACCA)
Subsequent measurement
54. Subsequent to initial recognition, an intangible asset may be measured using
a. cost model or revaluation model
c. cost model only
b. cost model or fair value model
d. either a or b
55. The revaluation model may be used for an intangible asset
a. which has an active market
b. whose fair value can be determined reliably through a valuation technique
such as discounted future cash flows
c. which has an active market and a residual value
d. the revaluation model is applicable only to items of PPE but not to
intangible assets
142
56. Which of the following factors should not be considered in determining the
useful life of an intangible asset?
a. Legal, regulatory, or contractual provisions.
b. Expected action of competitors.
c. Provisions for renewal or extension of life.
d. Initial cost
(AICPA)
57. Which of the following is not considered in estimating the useful life of
intangible assets?
a. effects of obsolescence, demand and competition
b. the salvage value of the asset
c. the service life expectancies of individuals or groups of employees
d. expected actions of competitors
(AICPA)
58. Factors considered in determining an intangible asset’s useful life include all
of the following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life
d. the amortization method used.
(AICPA)
59. Amortization of intangible assets results primarily from the application of the:
a. matching principle
c. cost principle
b. full-disclosure
d. revenue principle
(Adapted)
60. Once recognized, intangible assets can be carried at
a. Cost less accumulated amortization.
b. Cost less accumulated amortization and less accumulated impairment
losses.
c. Revalued amount without deduction for accumulated amortization.
d. Cost plus a notional increase in fair value since the intangible asset is
acquired.
(Adapted)
61. Amortization of an intangible asset is usually recorded as a:
a. debit to retained earnings and a credit to a contra account.
b. debit to retained earnings and a credit to the intangible asset account.
c. debit to retained earnings and a credit to a contra account.
d. debit to amortization expense and a credit to a contra account.
(AICPA)
62. Which of the following methods of cost allocation cannot be used for
intangible assets?
a. Declining balance
c. Units of production
b. Revenue method
d. Effective interest method
63. Which of the following methods of cost allocation can be used for intangible
assets?
a. straight line
c. units-of-production
b. revenue method
d. any of these
143
64. Under PAS 38, the default cost allocation method for intangible assets is?
a. revenue method
c. SYD
b. straight line
d. no default method
65. JOCUND Co. has an intangible asset, which it estimates will have a useful life of
10 years, while MERRY Co. has goodwill, which has an indefinite life. Which
company should report amortization in its financial statements?
JOCUND MERRY
JOCUND
MERRY
a. Yes
Yes
c. No
Yes
b. Yes
No
d. No
No
(AICPA)
66. According to PAS38 Intangible assets, which of the following criteria are
relevant in determining the useful life of an intangible asset?
a. obsolescence
d. residual value
b. amortization period
e. a and c
c. expected usage
(ACCA)
67. According to PAS 38, the residual value of an intangible asset is presumed
a. equal to fair value in active market
b. equal to the amount the third party wants to buy
c. equal to a conservative estimation
d. zero
68. In accordance with generally accepted accounting principles, which of the
following methods of amortization is normally recommended for intangible
assets?
a. SYD
c. units of production
b. straight-line
d. double declining balance
(AICPA)
69. On January 1, 20x1, an intangible asset with a thirty-five year estimated useful
life was acquired. On January 1, 20x6, a review was made of the estimated
useful life and it was determined that the intangible asset had an estimated
useful life of forty-five more years. As a result of the review
a. The original cost at January 1, 20x6 should be amortized over a fifty-year
life.
b. The original cost at January 1, 20x1 should be amortized over the
remaining thirty-year life.
c. The unamortized cost at January 1, 20x6 should be amortized over a fortyyear life.
d. The unamortized cost at January 1, 20x6 should be amortized over a
thirty-five year life.
(AICPA)
70. A brand name that was acquired separately should initially be recognized,
according to PAS38 Intangible assets, at
a. recoverable amount
c. fair value
b. either cost or fair value at the choice of the acquirer
d. cost
(ACCA)
71. Which of the following should be expensed as incurred on a franchise with an
estimated useful life of ten years?
a. Amount paid to the franchisor for the franchise.
144
b. Periodic payments to a company, other than the franchisor, for that
company’s franchise.
c. Legal fees paid to the franchisee’s lawyers to obtain the franchise.
d. Periodic payments to the franchisor based on the franchisee’s revenues.
(AICPA)
72. Are the following statements true or false, according to PAS38 Intangible
assets?
1) Intangible assets acquired in a business combination should only be
recognized if they have already been recognized by the entity being
acquired.
2) Intangible assets acquired in a business combination should not be
recognized separately from goodwill.
a. False False
b. False True c. True False d. True True
(ACCA)
73. A change in the amortization method or amortization rate for an intangible
asset is accounted for:
a. prospectively
b. retrospectively c. currently
d. gracefully
74. Which of the following factors influence(s) the Brand strength of a company?
I. Customer loyalty
II. Statutory protection
III. Brand Management by the company
a. I, II
b. I
c. II
d. I, II, III
75. Which of the following is not specifically an identifiable intangible asset?
a. Kina Rogers franchise
c. secret formula for a Krabby Patty
b. secret processes
d. goodwill
76. Are the following statements true or false, according to PAS38 Intangible
assets?
1) Intangible assets cannot be treated as having an indefinite useful life.
2) Intangible assets with a finite useful life should be measured at cost and
tested annually for impairment.
a. False False
b. False True
c. True False
d. True True
(ACCA)
77. According to PAS38 Intangible assets, amortization of an intangible asset with
a finite useful life should commence when
a. it is first recognized as an asset
b. it is available for use
c. it is probable that it will generate future economic benefits
d. the costs can be identified with reasonable certainty
(ACCA)
78. Are each of the following factors relevant, according to PAS38 Intangible
assets, in determining the annual amortization expense on an intangible
asset?
I.
The cost.
II.
The amortization method.
a. Not relevant, Not relevant
c. Relevant, Not relevant
b. Not relevant, Relevant
d. Relevant, Relevant
(ACCA)
79. Which of the following is not a long-term investment?
145
a. shares held to exert influence on another entity
b. land held for speculation
c. trademarks
d. cash surrender value of life insurance
(Adapted)
80. Which of the following would not be included in research and development
expense for APATHETIC Co. for current period?
a. The portion of plant assets, devoted completely to research for
APATHETIC, which is amortized in the current period.
b. The cost of materials used in conducting research for APATHETIC during
the current period.
c. Cash paid by APATHETIC to INDIFFERENT Co. for research performed by
INDIFFERENT Co. for APATHETIC in the current period.
d. The cost of labor incurred by APATHETIC in conducting research for
UNCONCERNED Co. during the current period.
(Adapted)
81. Which of these statements about research and development expenditure are
correct?
1. If certain conditions are satisfied, research and development expenditure
must be capitalized.
2. One of the conditions to be satisfied if development expenditure is to be
capitalized is that the technical feasibility of the project is reasonably
assured.
3. If capitalized, development expenditure must be amortized over a period
not exceeding five years.
4. The amount of capitalized development expenditure for each project
should be reviewed each year. If circumstances no longer justify the
capitalization, the balance should be written off over a period not
exceeding five years.
5. Development expenditure may only be capitalized if it can be shown that
adequate resources will be available to finance the completion of the
project and all other conditions are also met.
a. 2 and 5
b. 3, 4 and 5
c. 2, 3 and 5
d. 1, 2 and 3
(Adapted)
82. Which of the following is a true statement concerning research and
development (R&D) costs?
a. All R&D costs, without exception, must be charged to expense when
incurred.
b. R&D costs can only be amortized over a life of 40 years or more.
c. Almost any treatment is acceptable for handling R&D costs.
d. Financial statements must disclose total R&D costs charged to expense in
the period
(Adapted)
83. Total research and development expense for CUNNING, Inc. would include
which of the following items:
I.
Depreciation on CUNNING, Inc. property, plant and equipment used in
CUNNING, Inc.'s development projects
II.
Amortization of CUNNING, Inc. patents used in CUNNING, Inc.'s research
III.
Resources paid by CUNNING, Inc. for SLY Co.'s research efforts performed
for CUNNING, Inc. research and development projects
IV.
CUNNING, Inc. cost of research performed for CLEVER Corporation's
research and development projects
146
V.
CUNNING, Inc. costs of internal development efforts which culminated in a
patent granted to CUNNING, Inc.
VI.
Overhead costs allocated to CUNNING Inc.’s research and development
efforts which took the place of another CUNNING, Inc. activities
VII.
Costs to train CUNNING, Inc. employees to run machines used in ongoing
production. These machines had earlier been developed by CUNNING, Inc.
a. I, II, III
b. I, II, III, IV, V
c. I, II, III, V, VI
d. all of these
(Adapted)
84. A newly set up dot-com entity has engaged you as its financial advisor. The
entity has recently completed one of its highly publicized research and
development projects and seeks your advice on the accuracy of the following
statements made by one of its stakeholders. Which one is it?
a. Costs incurred during the “research phase” can be capitalized.
b. Costs incurred during the “development phase” can be capitalized if
criteria such as technical feasibility of the project being established are
met.
c. Training costs of technicians used in research can be capitalized.
d. Designing of jigs and tools qualify as research activities.
(Adapted)
85. Which of the following is an example of activities that would typically be
excluded in research and development costs?
a. Design, construction, and testing of preproduction prototypes and modes.
b. Laboratory research aimed at discovery of new knowledge.
c. Quality control during commercial production, including routine testing of
products.
d. Testing in search for, or evaluation of, product or process alternatives.
(AICPA)
86. Which of the following is a research and development cost?
a. Development or improvement of techniques and processes.
b. Offshore oil exploration that is the primary activity of a company.
c. Research and development performed under contract for others.
d. Market research related to a major product for the company.
(AICPA)
87. HEARTY Company and WARM-SINCERE Company were combined in a
purchase transaction. HEARTY was able to acquire WARM-SINCERE at a
bargain price. The sum of the market or appraised values of identifiable assets
acquired less the fair value of liabilities assumed exceeded the cost to
HEARTY. After revaluing noncurrent assets to zero, there was still some
"negative goodwill." Proper accounting treatment by HEARTY is to report the
amount as
a. an extraordinary gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.
(AICPA)
88. Goodwill may be
a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.
(AICPA)
147
89. Which of the following research and development related costs should be
capitalized and amortized over current and future periods?
a. Research and development general laboratory building which can be put
to alternative uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular
research project currently in process
(AICPA)
90. Which of the following principles best describes the current method of
accounting for research and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense
(AICPA)
91. How should research and development costs be accounted for, according to
PAS 38?
a. Must be capitalized when incurred and then amortized over their
estimated useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the
materiality of the amounts involved.
d. Must be expensed in the period incurred unless development costs
incurred qualify under the recognition criteria set forth under PAS 38.
92. Which of the following costs should be excluded from research and
development expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the
manufacturing stage
(AICPA)
93. If a company constructs a laboratory building to be used as a research and
development facility, the cost of the laboratory building is matched against
earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been
obtained from the facility.
(AICPA)
94. What is the proper time or time period over which to match the cost of an
intangible asset with revenues if it is likely that the benefit of the asset will
last for a determinate but very long period of time?
a. Forty years.
b. Fifty years.
c. Shorter of legal life and useful life
d. At such time as diminution in value can be quantitatively determined.
(Adapted)
148
95. How should research and development costs be accounted for according to
current standards?
a. Must be capitalized when incurred and then amortized over their
estimated useful lives.
b. Must be expensed in the period incurred unless contractually
reimbursable.
c. May be either capitalized or expensed, when incurred, depending upon
the facts
d. Must be expensed in the period incurred unless it can be clearly
demonstrated that the research expenditure will have significant future
benefits.
(AICPA)
96. The current trend in the accounting treatment for research and development
costs is to
a. Capitalize all costs as assets when incurred and amortize when revenue
are earned.
b. Treat all costs as current expenses as incurred.
c. Capitalize selectively, and predetermine the conditions that would require
capitalization as well as those that would be written off as current
expenses.
d. Accumulate all costs in a special intangible asset account until a
determination can made as to the degree of future benefits.
(AICPA)
97. Research and development costs, under prevailing practice, may be accounted
for as follows:
a. Research and development costs related to successful projects should be
capitalized; others expensed.
b. Research and development costs related to unsuccessful projects should
be capitalized; others expensed.
c. Research and development costs should be expensed as incurred.
d. Research and development costs should be allocated between successful
and unsuccessful projects.
e. Research and development costs, whether related to successful or
unsuccessful projects, should be capitalized.
(AICPA)
98. An activity that would be expensed currently as research and development
costs is the
a. Testing in search for or evaluation of product or process alternatives.
b. Adaptation of an existing capability to a particular requirement or
customer’s need as a part of continuing commercial activity.
c. Legal work in connection with patent applications or litigation, and the
sale or licensing of patents.
d. Engineering follow-through in an early phase of commercial production.
(AICPA)
99. Which of the following expenses can be capitalized?
I.
Research costs incurred in developing a new medicine.
II.
Purchase of intangibles for R&D activities which have alternative future
uses.
III.
Salaries of research personnel.
a. II only
b. I & II
c. III only
d. none of them
149
100. Are the following statements true or false, according to PAS 38 Intangible
assets?
(1) Expenditure during the research phase of a project may sometimes be
capitalized as an intangible asset.
(2) Expenditure during the development phase of a project may sometimes be
capitalized as an intangible asset.
a. False False
b. False True c. True False d. True True
(ACCA)
101. Are the following statements in relation to development true or false,
according to PAS38 Intangible assets?
(1) The products being developed should have already been put into
commercial production or use.
(2) Development involves the application of research findings.
a. False False
b. False True
c. True False
d. True True
(ACCA)
102. Which of the following is not considered as research and development
costs?
a. Testing in search for product alternatives
b. Legal work on patent application
c. Modification of design of a process
d. Searching for application of new research findings
e. The design of tools, molds and dies involving new technology.
103. According to PAS 38, which of the following is true for an acquiring
company in connection with in-process research and development held by an
acquired company at the date of acquisition?
a. The amount that has been spent on these projects is expensed, but any
value in the project in excess of the amount spent is capitalized by the
acquiring company.
b. The value of in-process research and development is capitalized because
the acquiring company has a clear vision of its value.
c. In-process research and development is still research and development
and the value is always expensed by the acquiring company.
d. The value of in-process research and development is expensed unless it
has a direct connection with a product or asset owned by the acquiring
company.
(Adapted)
104. AJAR Airline purchased airline gate rights at SLIGHTLY OPEN
International Airport for ₱2,000,000 with a legal life of five years. However,
AJAR has the ability and right to extend the rights every ten years for an
indefinite period of time. Over what period of time should AJAR amortize the
gate rights?
a. 5 years.
c. 40 years.
b. 15 years
d. The rights should not be amortized.
(AICPA)
105. The following statements relate to accounting for intangible assets.
Choose the incorrect statement.
a. Because it has an indefinite life, a trademark need not be amortized.
b. If a company purchases a competing patent to ensure revenue-generating
capability of a previously owned patent, the cost of the purchased patent
should be expensed at the time of purchase.
150
c. The process of assigning the cost of an intangible asset to operations in a
systematic and rational manner is called amortization.
d. Goodwill may represent the excess of the cost of an acquired company
over the sum of the fair values assigned to identifiable assets acquired less
liabilities assumed.
106. Consider the following statements and state whether they are correctly
stated or not.
I.
Goodwill is recorded by accountants only if it is purchased.
II.
A copyright’s legal life is 30 years and it gives its owner protection against
writings and literary productions being reproduced illegally.
a. I
b. II
c. I and II
d. neither I nor II
107. A patent purchased from another entity which had held it for 3 years
should be amortized over
a. the asset’s remaining useful life, not to exceed 37
b. any number not to exceed to 40
c. 17 years
d. the asset’s remaining useful life, not to exceed 17
(Adapted)
108. Which of the following intangible assets should be amortized over the
periods of estimated benefit?
a. research and development costs related to a successful product
b. goodwill arising from the purchase of an existing business
c. costs incurred in organizing a corporation
d. patent right purchased from an inventor
(AICPA)
109. In a case of a patent infringement suit, the suit may be either successful or
lost. The results of the legal decision are accounted for as follows:
a. if successful, debit the cost of the lawsuit to patent expense.
b. if lost, debit the cost of the lawsuit to extraordinary loss.
c. if lost, write the balance in the patent account.
d. after recognizing the results of the lawsuit as an expense, amortize the
remaining balance in the patent occur over its remaining economic life.
(Adapted)
110. A purchased patent has a remaining legal life of 15 years. It should be
a. Expensed in the year of the acquisition.
b. Amortized over 15 years regardless of its useful life.
c. Amortized over its useful life if less than 15 years.
d. Not amortized.
(AICPA)
111. A corporation which incurs costs in defending a patent in an infringement
suit should:
a. expense currently the costs of all suits.
b. capitalize only the costs of unsuccessful suits.
c. capitalize only the costs of successful suits.
d. capitalize the cost of all such suits.
(Adapted)
112. Should the following fees associated with the registration of an internally
developed patent be capitalized? (Item#1) Legal fees; (Item#2) Registration
fees
151
a. No, No
(AICPA)
b. No, Yes
c. Yes, No
d. Yes, Yes
113. Which of the following statements concerning patents is correct?
a. Legal costs incurred to successfully defend an internally developed patent
should be expensed immediately in the period incurred.
b. Legal fees and other direct costs incurred in registering a patent should be
capitalized and amortized on a straight-line basis over a five-year period.
c. Research and development contract services purchased from others and
used to develop a patented manufacturing process should be capitalized
and amortized over the patent’s economic life.
d. Research and development costs incurred to develop a patented item
should be capitalized and amortized on a straight-line basis over
seventeen years.
(AICPA)
114. Which of the following amounts incurred in connection with a trademark
should be capitalized?
Cost of successful defense
Registration fees
a.
no
yes
b.
yes
no
c.
no
no
d.
yes
yes
(AICPA)
115. Which of the following should not be capitalized as part of the cost of an
internally developed patent?
a. costs to develop the product or process to be patented
b. patent registration fees
c. legal fees incurred in successfully defending a patent infringement suit.
d. legal fees associated with registration of the patent
e. a and c
(AICPA)
116. The cost of purchasing patent rights for a product that might otherwise
have seriously competed with one of the purchaser's patented products
should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser's
product.
d. amortized over the remaining estimated life of the original patent
covering the product whose market would have been impaired by
competition from the newly patented product.
(AICPA)
117. Inventor Corporation was granted a patent on a product on January 1,
20x1. To protect its patent, the corporation purchased on January 1, 2x10 a
patent on a competing product which was originally issued on January 10,
20x6. Because of its unique plant, Inventor Corporation does not feel the
competing patent can be used in producing a product. The cost of the
competing patent should be
a. amortized over a maximum period of 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 11 years.
d. expensed in 2x10.
152
(AICPA)
118. Plaintiff, Inc. went to court this year and successfully defended its patent
from infringement by a competitor. The cost of this defense should be
charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.
(AICPA)
119. Which of the following is not an intangible asset?
a. Trade name
d. Copyrights
b. R&D expense
e. No answer
c. Franchise
(AICPA)
120. Which of the following intangible assets should not be amortized?
a. Copyrights
c. Perpetual franchises
b. Customer lists
d. No answer
(AICPA)
121. Under current PFRSs, when a patent is amortized, the credit is made to
a. the patent account.
b. an accumulated amortization account.
c. a deferred credit account.
d. an expense account.
(Adapted)
122. Which of the following confers exclusive right to conduct business in a
particular territory
a. trademark
b. franchise
c. patent
d. copyright
(Adapted)
123. An exclusive right or privilege received by a business or individual to
perform certain business functions or use certain products or services is
referred to as:
a. patents
b. copyright
c. franchise
d. none of these
124. If a franchise becomes worthless prior to the end of its estimated useful
life, the unamortized balance in the franchise account should be written off as
a(n):
a. impairment loss
c. prior period adjustment
b. operating expense
d. change in estimate
(Adapted)
125. Which of the following statements is incorrect?
a. An intangible asset acquired by issuance of ordinary shares should
generally be valued at the fair value of the intangible asset.
b. Amortization of intangible assets involves an adjusting entry that should
not be reversed in the next accounting period.
c. An unidentifiable asset developed internally is never recognized in the
accounts as an asset.
d. All annual payments made by a franchisee to the franchiser for assistance
should be capitalized as part of the cost of the franchise.
(Adapted)
153
126. A franchise should be classified on the balance sheet as a (n):
a. operational asset
c. intangible asset
b. deferred charge
d. current asset
(Adapted)
127. Which of the following cost related to computer software is capitalized to
an intangible asset account?
a. Cost to duplicate discs and manuals for sale
b. Development costs preceding technological feasibility
c. Coding and testing costs incurred after technological feasibility but before
completing the product master
d. Cost of customer service
(Adapted)
128. If a business purchased a new computer system software which forms an
integral part of a machine, the account to be debited is
a. machine
c. intangible asset
b. computer building
d. Bill Gates
129. OUTLANDISH and STRANGE are rival firms which are similar in size and
scope of operations. OUTLANDISH has decided not to capitalize but expense
software development costs in Year 1. STRANGE on the other hand, has
decided to capitalize a similar amount of development costs, to be amortized
over 5 years. Which of the following is/are true over the next 5 years?
I.
STRANGE will show higher equity than OUTLANDISH
II.
The difference in STRANGE's assets and OUTLANDISH's assets will be
lower in Year 3 than in Year 2.
III.
The total tax deductions due to the development costs are equal for the
two firms.
IV.
After technological feasibility, all software development costs can be
capitalized under PAS 38.
a. III only
b. II & III
c. I & II
d. I, II, III, IV
130.
a.
b.
c.
d.
Which of the following costs can be capitalized?
drilling costs for oil wells
public relations costs to develop goodwill
research and development
internally developed brand
131. Accounting rules differentiate research and development activities from
activities not considered research and development. Which one of the
following is not considered a research and development activity?
a. Periodic design changes to existing products.
b. Testing in search of product processing alternatives.
c. Modification of the design of a process.
d. Laboratory research intended for the discovery of a new product.
132. On January 1, 20x1, Joca purchased equipment for use in developing a new
product. Joca uses the straight-line depreciation method. The equipment
could provide benefits over a 10-year period. However, the new product
development is expected to take five years, and the equipment can be used
only for this project. Joca 's 20x1 expense equals:
a. The total cost of the equipment.
b. One-fifth of the cost of the equipment.
c. One-tenth of the cost of the equipment.
d. Zero.
154
(AICPA)
Disclosures
133. Which of the following disclosures is not required by PAS 38?
a. Useful lives of the intangible assets.
b. Reconciliation of carrying amount at the beginning and the end of the
year.
c. Contractual commitments for the acquisition of intangible assets.
d. Fair value of similar intangible assets used by its competitors.
(Adapted)
134. All of the following are required disclosures for intangible assets except
a. Whether the useful lives are indefinite or finite and, if finite, the useful
lives or the amortization rates used
b. Amortization methods used for intangible assets with finite useful lives
c. Gross carrying amount and any accumulated amortization (aggregated
with accumulated impairment losses) at the beginning and end of the
period
d. A reconciliation of the carrying amount at the beginning and end of the
period showing increases and decreases to intangible assets and related
accumulated amortization and accumulated impairment loss.
e. Net carrying amount of intangible assets. Accumulated amortization is not
required to be disclosed because periodic amortization is deducted
directly from the related asset account.
Chapter 20 - Suggested answers to theory of accounts questions
1. E
21. D 41. B 61. D
81. A
101. B
121.
2. E
22. D 42. D 62. D
82. D
102. B
122.
3. A
23. A 43. D 63. D
83. C
103. B
123.
4. C
24. A 44. A 64. B
84. B
104. D
124.
5. D
25. A 45. D 65. B
85. C
105. B
125.
6. C
26. D 46. C 66. E
86. A
106 A
126.
7. C
27. D 47. D 67. D
87. B
107. D
127.
8. C
28. B 48. D 68. B
88. A
108. D
128.
9. A
29. B 49. C 69. C
89. A
109. A
129.
10. C
30. C 50. C 70. D
90. D
110. C
130.
11. C
31. B 51. C 71. D
91. D
111. A
131.
12. D
32. D 52. D 72. A
92. C
112. D
132.
13. D
33. D 53. D 73. A
93. B
113. A
133.
14. D
34. A 54. A 74. D
94. C
114. A
134.
15. D
35. C 55. A 75. D
95. B
115. E
16. A
36. A 56. D 76. A
96. B
116. D
17. A
37. C 57. B 77. B
97. C
117. C
18. D
38. E 58. D 78. D
98. A
118. C
19. D
39. D 59. A 79. C
99. A
119. B
20. D
40. D 60. B 80. D 100. B
120. C
155
B
B
C
A
D
C
C
A
D
A
A
A
D
E
Chapter 21
Impairment of Assets
Chapter 21: Multiple choice – Computational (SET B) – (For classroom
instruction purposes)
Costs of disposal
1. On December 31, 20x1, QUIRK ACCIDENT Co. identified that its machinery
with a carrying amount of ₱4,000,000 has been impaired. In estimating the
recoverable amount, QUIRK determined that the fair value of the asset is
₱3,200,000. The following costs were also estimated:
Transaction taxes
₱200,000
Legal costs, stamp duty, commissions, and similar fees
40,000
Costs of dismantling or removing the asset included in
provision for restoration and decommissioning cost
20,000
Termination benefits and costs associated with reducing
or reorganizing a business following the disposal of an
asset
60,000
QUIRK does not have any reason to believe that the value in use of the asset
materially exceeds fair value less costs of disposal. How much is the impairment
loss?
a. 1,120,000
b. 1,060,000
c. 1,040,000
d. 800,000
Value in use
2. On December 31, 20x1, MASSIVE HEAVY Co. identified that its building with a
carrying amount of ₱2,400,000 has been impaired. In estimating the
recoverable amount, MASSIVE has determined that the fair value less costs of
disposal of the asset is ₱1,600,000.
In estimating the value in use, MASSIVE determined the following:
Future cash in
Future cash out
Year
flows
flows
20x1
1,200,000
400,000
20x2
1,120,000
400,000
20x3
1,040,000
320,000
Additional information:
 Each year’s estimated future cash flows include ₱40,000 representing cash
outflows from future restructuring not yet committed and ₱20,000
representing cash outflows on planned improvement and enhancement of the
asset.
 Not included in the estimated future cash flows are costs of day-to-day
servicing of the asset amounting to ₱8,000 per year.
 The discount rate is 10%.
How much is the impairment loss?
a. 407,424
b. 456,773
c. 365,472
d. 412,365
Value in use – with residual value
3. On December 31, 20x1, HEARTEN ENCOURAGE Co. identified that its
intangible asset with a carrying amount of ₱2,400,000 has been impaired. In
156
estimating the recoverable amount, HEARTEN has determined that the fair
value less costs of disposal of the intangible asset is ₱1,600,000. HEARTEN
estimated that the future net cash flows expected to arise from the continuing
use of the asset is ₱400,000 per year for the remaining useful life of 5 years.
The estimate of future cash flows includes cash out flows for income taxes and
financing activities totaling ₱40,000 per year. The equipment has a residual
value of ₱80,000. The discount rate is 10%. How much is the impairment loss?
a. 628,384
b. 682,384
c. 289,334
d. 298,902
Recoverable amount exceeding Carrying amount
4. One of OFFSHOOT BRANCH Co.’s plant has a carrying amount of ₱3,200,000
and a value in use of ₱3,120,000. A recent market transaction for a similar
plant involved a net selling price of ₱3,280,000. How much is the impairment
loss?
a. 80,000
b. 160,000
c. 320,000
d. 0
Impairment loss on newly constructed asset
5. LUCRATIVE PROFITABLE Co. has just completed constructing a new building.
Costs incurred are shown below:
Materials, labor, and overhead
₱2,800,000
Borrowing costs appropriately capitalized
320,000
Total construction costs
₱3,120,000
If the recoverable amount of the building is ₱3,000,000, how much is the
impairment loss?
a. 120,000
b. 200,000
c. 320,000
d. 0
Impairment loss – subsequent depreciation
6. On January 1, 20x1, RIGHTEOUS MORAL Co. acquired an equipment for
₱2,000,000. The equipment is depreciated using the straight line method over
an estimated useful life of 10 years and residual value of ₱200,000.
On January 1, 20x6, RIGHTEOUS Co. determined that the equipment is impaired.
Fair value less costs of disposal is ₱560,000. Projected future net cash flows from
revenues produced by the equipment is ₱200,000 annually. The revised
estimated useful life is 4 years and the new estimated residual value is ₱40,000.
The appropriate discount rate is 10%. How much is the depreciation expense in
20x6?
a. 156,732
b. 155,324
c. 155,132
d. 154,324
Impairment loss – Revaluation model
7. Information on LISTLESS WEAK Co.’s impaired building is shown below:
Carrying amount
3,200,000
Revaluation surplus
320,000
Fair value less costs of disposal
2,800,000
Value in use
2,720,000
How much is the impairment loss?
a. 80,000
b. 400,000
c. 320,000
d. 0
Impairment loss – Intangible asset with indefinite useful life
8. INSUPERABLE UNSURPASSABLE Co. determined that its trademark is
impaired. INSUPERABLE cannot estimate reliably the trademark’s fair value
less costs of disposal. However, the following information has been
determined:
157
Carrying amount
Annual future cash flows from the trademark
Discount rate
How much is the impairment loss?
a. 0
b. 80,000
c. 120,000
₱520,000
40,000
10%
d. 400,000
Impairment loss – asset to be disposed of
9. One of MIME IMMITATE Co.’s machines has been impaired. Repairs and
maintenance costs on the machine have been increasing over the past years
making the machine a bottleneck in MIME’s production. At year-end,
management made a decision to sell the machine as soon as a pending
application for a loan is approved and a replacement machine is acquired.
Information on the machine is shown below:
Carrying amount
₱400,000
Fair value less costs of disposal
200,000
Value in use
240,000
How much is the impairment loss?
a. 0
b. 160,000
c. 40,000
d. 200,000
Allocation of goodwill – business combination
10. At the end of 20x1, EXIGENCY Co. acquires PRESSING NEED Corp. for
₱40,000,000. PRESSING NEED has manufacturing plants in three countries.
Data at the end of 20x1 is shown below.
Fair Value of identifiable assets
Activities in Country #1
₱4,000,000
Activities in Country #2
12,000,000
Activities in Country #3
16,000,000
Total fair value of identifiable assets
₱32,000,000
How much goodwill is allocated to each to the CGU in Country #3?
a. 16,000,000
b. 3,000,000 c. 4,000,000 d. 0
Allocation of goodwill – disposal of portion of CGU
11. SOP SOAK Co. has a cash-generating unit for which goodwill of ₱240,000 was
allocated. During the year, an operation that was part of the CGU was sold for
₱2,000,000. The relative values of the portions sold and retained cannot be
determined reliably. Information on the assets included in the CGU is as
follows:
Carrying amount of operation sold excluding goodwill
Carrying amount of portion not sold excluding goodwill
Total carrying amount of CGU excluding goodwill
₱1,600,000
4,800,000
₱6,400,000
How much is the gain or loss on the sale of the operation?
a. 340,000
b. 400,000
c. 60,000
d. 0
Reallocation of goodwill
12. EXUBERANT OVERFLOWING Co. previously allocated ₱240,000 goodwill to
CGU A. The goodwill allocated to CGU A cannot be identified or associated
with an asset group at a level lower than CGU A, except arbitrarily. During the
year, EXUBERANT Co. reorganizes its reporting structure such that CGU A is
divided and integrated into three other cash-generating units – CGU’s B, C and
D. Additional information is shown below:
158
CGU
B
C
D
Fair values
800,000
1,600,000
2,400,000
4,800,000
At the end of the year, CGU D is sold for ₱2,000,000 when its carrying amount is
₱2,320,000 excluding allocated goodwill. How much is the gain (loss) on the sale?
a. (320,000)
b. 440,000
c. (420,000) d. (440,000)
Impairment loss of CGU – no goodwill allocated
Use the following information for the next two questions:
NEGATE DENY Co. determined that one of its cash-generating units is impaired.
Information on the assets of the CGU is shown below:
Assets
Carrying amount
Inventory
800,000
Investment property (at cost model)
1,600,000
Building
2,400,000
4,800,000
It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value
less costs of disposal is ₱3,200,000.
13. How much is the impairment loss?
a. 2,100,000
b. 1,600,000 c. 1,200,000 d. 1,000,000
14. How much is the carrying amount of the building after the impairment
testing?
a. 1,680,000
b. 1,120,000
c. 1,860,000
d. 2,040,000
Impairment loss of CGU – with allocated goodwill
Use the following information for the next two questions:
INSTIGATE PROVOKE Co. determined that one of its cash-generating units is
impaired. Information on the assets of the CGU is shown below:
Assets
Carrying amount
Inventory
800,000
Investment property (at cost model)
1,600,000
Building
2,400,000
Goodwill
1,200,000
6,000,000
It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value
less costs of disposal is ₱2,400,000.
15. How much is the impairment loss?
a. 4,200,000
b. 3,200,000
c. 2,400,000
d. 2,000,000
16. How much is the carrying amount of the building after the impairment
testing?
a. 1,680,000
b. 1,120,000
c. 1,860,000
d. 2,040,000
Impairment loss of CGU – Limit on allocation of impairment loss
Use the following information for the next two questions:
159
TRICE INSTANT Co. determined that one of its cash-generating units is impaired.
Information on the assets of the CGU is shown below:
Assets
Carrying amount
Inventory
800,000
Investment property (at cost model)
1,600,000
Building
2,400,000
Goodwill
1,200,000
6,000,000
 It was estimated that the value in use of the CGU is ₱3,200,000 and its fair
value less costs of disposal is ₱3,600,000.
 The building’s fair value less costs of disposal is ₱2,040,000.
17. How much is the impairment loss?
a. 4,200,000
b. 3,200,000
c. 2,400,000
d. 2,000,000
18. How much is the carrying amount of the building after the impairment
testing?
a. 1,680,000
b. 1,120,000
c. 1,860,000
d. 2,040,000
Impairment of individual asset belonging to a CGU
Use the following information for the next two independent cases:
One of the machines of SKEWER PIERCE Co. has suffered physical damage but is
still working, although not as well as before it was damaged. The machine does
not generate independent cash inflows. The smallest identifiable group of assets
that includes the machine and generates cash inflows that are largely
independent of the cash inflows from other assets is the production line to which
the machine belongs. Information on the machine and the production line is
shown below:
Carrying amount of machine
Fair value less costs of disposal of machine
Carrying amount of production line
Recoverable amount of production line
₱ 800,000
600,000
32,000,000
36,000,000
Case #1:
19. The budgets/forecasts approved by management reflect no commitment of
management to replace the machine. How much is the impairment loss?
a. 4,000,000
b. 200,000
c. 3,800,000
d. 0
Case #2:
20. The budgets/forecasts approved by management reflect a commitment of
management to replace the machine and sell it in the near future. Cash flows
from continuing use of the machine until its disposal are estimated to be
negligible. How much is the impairment loss?
a. 4,000,000
b. 200,000
c. 3,800,000
d. 0
Impairment of individual asset – with commitment for disposal
21. ASININE STUPID Co. determined that one of its cash-generating units is
impaired. Information on the assets of the CGU is shown below:
Assets
Carrying amount
Inventory
800,000
Investment property (at cost model)
1,600,000
Building
2,400,000
Goodwill
1,200,000
160
6,000,000
 The recoverable amount of the CGU was estimated at ₱5,600,000.
 The building’s fair value less costs of disposal is ₱1,600,000. Management is
committed on selling the building.
How much is the impairment loss?
a. 0
b. 400,000
c. 600,000
d. 800,000
Carrying amount of a CGU – Financial instruments excluded
22. EXUBERANT OVERFLOWING Co. determined that its CGU has been impaired.
Information on the CGU is shown below:
Cash
400,000
Accounts receivable
800,000
Inventory
2,000,000
Machinery – net
4,000,000
Other intangible assets
800,000
Goodwill
400,000
Accounts payable
(1,200,000)
Accrued liabilities
(1,600,000)
Total
5,600,000
The recoverable amount of the CGU is ₱4,000,000, representing the CGU’s value
in use. EXUBERANT Co. excluded cash flows from financial assets and recognized
liabilities when the value in use was computed
How much is the impairment loss?
a. 3,200,000
b. 3,600,000
c. 4,000,000
d. 0
Carrying amount of a CGU – including financial instruments
23. INFRACTION VIOLATION Co. determined that its CGU has been impaired.
Information on the CGU is shown below:
Cash
400,000
Accounts receivable
800,000
Inventory
2,000,000
Machinery – net
4,000,000
Other intangible assets
800,000
Goodwill
400,000
Accounts payable
(1,200,000)
Accrued liabilities
(1,600,000)
Total
5,600,000
The recoverable amount of the CGU is ₱2,400,000, representing the CGU’s value
in use. INFRACTION Co. included cash flows from financial assets and recognized
liabilities when the value in use was computed
How much is the impairment loss?
a. 3,200,000
b. 3,600,000
c. 4,000,000
d. 0
Allocation of corporate asset
24. On December 31, 20x1, BAFFLE CONFUSE Co. determined that an EDP
equipment, a mainframe computer used as server in BAFFLE’s network, might
have been impaired. There are three cash-generating units using this
mainframe computer. Information on these assets is shown below:
Carrying amount
Recoverable amount
161
CGU #1
CGU #2
CGU #3
Corporate asset - Mainframe
8,000,000
24,000,000
32,000,000
12,000,000
76,000,000
How much is the impairment loss?
a. 0
b. 2,000,000
c. 2,666,667
8,000,000
28,000,000
40,000,000
N/A
76,000,000
d. 3,133,333
Impairment loss – restoration and decommissioning costs
25. INSUPERABLE UNSURPASSABLE Co. determined that its CGU (comprising
INSUPERABLE’s mining operations in a foreign country) is impaired. The laws
in that foreign country require INSUPERABLE to restore the mining site at the
end of the wasting asset’s useful life. INSUPERABLE made a provision for
decommissioning and restoration costs10 years ago when it started
operations. At year-end, the carrying amount of the provision is ₱2,400,000
which is equal to the present value of the obligation.
INSUPERABLE Co. recently received various offers to buy the mine at around
₱3,600,000. This price reflects the fact that the buyer will assume the obligation
to restore the overburden. Disposal costs for the mine are negligible. The value in
use is ₱5,600,000 excluding decommissioning and restoration costs. The carrying
amount of the mine is ₱4,800,000.
How much is the impairment loss?
a. 800,000
b. 1,600,000
c. 1,200,333
d. 0
Impairment reversal – Revaluation model
Use the following information for the next two questions:
On January 1, 20x1, FALLACIOUS MISLEADING Co. acquired a building for
₱4,000,000. The asset is depreciated using the straight line method over an
estimated useful life of 10 years.
On January 1, 20x6, the building was estimated to have a recoverable amount of
₱1,600,000. Consequently, impairment loss was recognized on that date. There
was no change in the estimated useful life.
On January 1, 20x9, the building was estimated to have a new recoverable
amount of ₱2,400,000 and a remaining useful life of 3 years. The building is
measured under the revaluation model.
26. How much of the impairment reversal is recognized in profit or loss?
a. 160,000
b. 1,760,000
c. 1,600,000
d. 0
27. How much of the impairment reversal is recognized in equity?
a. 160,000
b. 1,760,000
c. 1,600,000
d. 0
Impairment reversal – Cost model
Use the following information for the next two questions:
On January 1, 20x1, RAMIFICATION CONSEQUENCE Co. acquired a building for
₱4,000,000. The asset is depreciated using the straight line method over an
estimated useful life of 10 years.
On January 1, 20x6, the building was estimated to have a recoverable amount of
₱1,600,000. Consequently, impairment loss was recognized on that date. There
was no change in the estimated useful life.
162
On January 1, 20x9, the building was estimated to have a new recoverable
amount of ₱2,400,000 and a remaining useful life of 3 years. The building is
measured under the cost model.
28. How much of the impairment reversal is recognized in profit or loss?
a. 160,000
b. 1,760,000
c. 1,600,000
d. 0
29. How much of the impairment reversal is recognized in equity?
a. 160,000
b. 1,760,000
c. 1,600,000
d. 0
Non-reversal of goodwill - with Extrapolation
Use the following information for the next four questions:
After a year of operations, STRATUM LEVEL Co. is calculating the value in use of
one of its cash-generating unit on January 1, 20x2. Data is shown below.
Year
Year-end Future Cash Flows
20x2
₱ 920
20x3
1,012
20x4
1,092
20x5
1,160
20x6
1,216
The appropriate discount rate was determined to be 15%. Projections of future
cash flows should be extended up to 11 years. The long-term growth rates were
determined as 3%, -2%, -6%, -15%, -25% and -67% from year 20x7 up to year
2x12.
The gross carrying amount of the CGU is ₱12,000, inclusive of ₱4,000 allocated
goodwill. As of January 1, 20x2, the CGU has an accumulated depreciation of
₱668.
On December 31, 20x3, the entity estimates a revised recoverable amount of
₱7,640.
30. How much is the total undiscounted future cash flows?
a. 10,993
b. 5,444
c. 9,364
d. 4,987
31. How much is the value in use?
a. 10,992
b. 5,444
c. 9,364
d. 4,987
32. How much is the impairment loss?
a. 5,888
b. 5,444
c. 6,345
d. 1,888
33. How much is the reversal of impairment loss to be recognized in profit or loss
on December 31, 20x3?
a. 0
b. 1,588
c. 1,635
d. 1,545
The answers and solutions to the computational problems above
(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
163
Chapter 21: Theory of Accounts Reviewer
1. PAS 36 applies to which of the following assets?
a. Inventories.
c. Assets held for sale.
b Financial assets.
d. Property, plant, and equipment.
2. PAS 36 Impairment of assets should be applied in accounting for the
impairment of which of the following types of asset?
a. Assets arising from construction contracts
b. Non-current assets held for sale
c. Investment properties measured at fair value
d. Non-current assets measured at cost
3. PAS 36 applies to all of the following assets, except
a. Intangible assets
b. Property, plant and equipment measured under revaluation surplus
c. Investment property measured at fair value
d. Investment in associates
4. Which of the following conditions must exist in order for an impairment loss
to be recognized?
I.
The carrying amount of the long-lived asset is less than its fair value.
II.
The carrying amount of the long-lived asset is not recoverable.
a. I only. b. II only.
c. Both I and II.
d. Neither I nor II.
(Adapted)
5. A cash-generating unit is:
a. any group of assets that has independent cash flows
b. the smallest group of assets that generates independent cash flows from
continuing use
c. any group of assets which forms part of the management reporting
structure
d. a reporting segment
6. Estimates of future cash flows would normally cover projections over a
maximum of:
a. eight years
b. 12 years c. five years d. 20 years
(ACCA)
7. When deciding upon the discount rate to be used, which factors should not be
taken into account?
a. Risks specific to the asset which future cash flow estimates have not been
adjusted
b. Corporate lending rates
c. Cost of capital
d. Risks which relate to the asset for which future cash flow estimates have
been adjusted
(ACCA)
8. Value in use is:
a. the discounted present value of future cash flows arising from use of the
asset and from its disposal
b. the realizable value
c. the carrying amount
d. the higher of an asset's fair value less costs of disposal and its market
value
164
9. Which impairment losses should never be reversed?
a. Loss on a cash generating unit
c. Loss on leases
b. Loss on property, plant and equipment
d. Loss on goodwill
(ACCA)
10. Under PAS 36, an asset is impaired if the asset’s
a. fair value is less than carrying amount
b. carrying amount exceeds fair value
c. recoverable amount exceeds carrying amount
d. carrying amount is greater than recoverable amount.
11. If fair value less costs of disposal is higher than value in use
a. the asset is impaired
b. the asset is not impaired
c. there is no need to compute for carrying amount
d. the recoverable amount is the fair value less costs of disposal
12. If there is no reason to believe that an asset’s value in use materially exceeds
its fair value less costs of disposal
a. the asset is not impaired
b. there is no need to compute for carrying amount
c. the recoverable amount is the value in use
d. there is no need to determine future cash flows
13. The asset is not impaired if
a. carrying amount exceeds recoverable amount
b. fair value is way above value in use
c. recoverable amount is less than the carrying amount
d. carrying amount is less than recoverable amount
14. Goodwill should be tested for value impairment at which of the following
levels?
a. Each identifiable long-term asset.
c. Each acquisition unit.
b. Each reporting unit.
d. Entire business as a whole.
(AICPA)
15. After an impairment loss is recognized, the adjusted carrying amount of the
cash-generating unit shall be its new accounting basis. Which of the following
statements about subsequent reversal of a previously recognized impairment
loss is correct?
a. It is prohibited to reverse impairment loss on goodwill allocated to a cashgenerating unit
b. It is required when the reversal is considered permanent.
c. It must be disclosed in the notes to the financial statements.
d. It is encouraged, but not required.
(AICPA)
16. Property, plant, and equipment must be reviewed for impairment when
which of the following events occurs?
a. A significant change in the asset's estimated useful life occurs
b. The costs of constructing the asset are less than the budgeted amount
c. A current period operating loss occurs
d. Investing activities produce a negative cash flow
(Adapted)
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17. Which of the following regarding goodwill is correct?
a. Goodwill should be amortized over a five-year period.
b. Goodwill should be amortized over its expected useful life.
c. Goodwill should be recorded and never adjusted.
d. Goodwill should be recorded and periodically evaluated for impairment.
(AICPA)
18. Goodwill should be tested periodically for impairment
a. For the entity as a whole.
b. At the subsidiary level.
c. At the industry segment level.
d. At the operating segment level or one level below.
(AICPA)
19. Purchased goodwill should
a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense over
the period benefited.
d. not be amortized.
(AICPA)
20. A loss on impairment of an intangible asset is the difference between the
asset’s
a. carrying amount and the present value of expected future net cash flows.
b. carrying amount and its fair value less costs of disposal.
c. fair value and the expected future net cash flows.
d. recoverable amount and carrying amount
21. If the fair value less costs of disposal cannot be determined
a. The asset is not impaired.
b. The recoverable amount is the value-in-use.
c. The net realizable value is used.
d. The carrying value of the asset remains the same.
(Adapted)
22. If assets are to be disposed of
a. The recoverable amount is the fair value less costs of disposal.
b. The recoverable amount is the value-in-use.
c. The asset is not impaired.
d. The recoverable amount is the carrying value.
(Adapted)
23. Which of the following is the best evidence of a fixed asset’s fair value less
costs of disposal?
a. An asset that is trading in an active market.
b. The price in a binding sale agreement.
c. Information available that determines the disposal value of the asset in an
arm’s length transaction.
d. d The carrying value of the asset.
(Adapted)
24. When calculating the estimates of future cash flows, which of the following
cash flows should not be included?
a. Cash flows from disposal.
b. Income tax payments.
166
c. Cash flows from the sale of assets produced by the asset.
d. Cash outflows on the maintenance of the asset.
(Adapted)
25. An impairment loss that relates to an asset that has been revalued upwards
should be recognized in
a. Profit or loss.
b. Revaluation surplus that relates to the revalued asset.
c. Opening retained profits.
d. Any reserve in equity.
(Adapted)
26. Goodwill should be tested for impairment
a. If there is an indication of impairment.
c. Every five years.
b. Annually.
d. On the acquisition of a subsidiary.
(Adapted)
27. Where part of the cash-generating unit is disposed of, the goodwill associated
with the element disposed of
a. Shall be written off to the income statement entirely.
b. Shall not be included in the calculation of gain or loss on disposal.
c. Shall be included in the calculation of gain or loss on disposal.
d. Shall be written off against retained profits.
(Adapted)
28. When impairment testing a cash-generating unit, any corporate assets, such
as the head office business or computer equipment, should
a. Be allocated on a reasonable and consistent basis.
b. Be separately impairment tested.
c. Be included in the head office assets or parent’s assets and impairment
tested along with that cash-generating unit.
d. Not be allocated to cash-generating units.
(Adapted)
29. When allocating an impairment loss, such a loss should reduce the carrying
amount of which asset first?
a. Property, plant, and equipment.
c. Goodwill.
b. Intangible assets.
d. Current assets.
(Adapted)
30. Which of the following impairment losses should never be reversed?
a. Loss on property, plant, and equipment.
b. Loss on goodwill.
c. Loss on a business segment.
d. Loss on inventory.
(Adapted)
31. Is an entity required to perform the impairment test of goodwill specifically at
the end of the reporting period?
a. Yes, performing impairment testing during the period increases the risk
that all information existing at the reporting date may not be considered.
b. No, the entity can perform impairment testing any time during the year
for as long as the interval between each impairment testing should not
exceed one year.
167
c. No, the entity can perform impairment testing any time during the year
for as long as the interval between each impairment testing should not fall
below one year.
d. Yes, however, if there is any indication of impairment during the year, the
entity should not defer the testing to the end of reporting period.
32. Under PAS 36 Impairment of assets, which of the following statements best
describes 'value in use'?
a. The present value of estimated future cash flows expected to arise from
the continuing use of an asset and from its ultimate disposal
b. The amount of cash or cash equivalents that could currently be obtained
by selling an asset in an orderly disposal
c. The net amount which an entity expects to obtain for an asset at the end of
its useful life
d. The amount at which an asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction
33. Under PAS 36 Impairment of assets, which of the following terms best
describes the higher of an asset's fair value less costs of disposal and its value
in use?
a. Recoverable amount
c. Depreciable amount
b. Revalued amount
d. Carrying amount
34. Under PAS36 Impairment of assets, are the following statements relating to
an active market true or false?
(1) Willing buyers and sellers are usually found.
(2) Prices are available to the public.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
35. Under PAS36 Impairment of assets, which of the following statements best
describes the term 'impairment loss'?
a. The removal of an asset from an entity's statement of financial position
b. The amount by which the carrying amount of an asset exceeds its
recoverable amount
c. The systematic allocation of an asset's cost less residual value over its
useful life
d. The amount by which the recoverable amount of an asset exceeds its
carrying amount
(ACCA)
36. According to PAS36 Impairment of assets, which of the following are relevant
in determining a non-current asset's 'value in use'?
I.
The expected future cash flows from the asset
II.
The carrying amount of the asset
III.
The future annual depreciation expense in respect of the asset
IV.
The time value of money
a. I, II, III
b. II, III, IV
c. I, IV
d. I, II, IV
37. An entity is considering whether to apply an impairment test to an individual
asset or to the cash-generating unit to which that asset belongs. Are the
following statements true or false, according to PAS36 Impairment of assets?
I.
If the individual asset does not generate cash inflows that are largely
independent of those from other assets, then the cash-generating unit
should be identified.
168
II.
If the individual asset generates an insignificant proportion of the cash
inflows of the entity as a whole, then the cash-generating unit should not
be identified.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
38. The HAVOC DEVASTATION Co. has determined that it needs to recognize an
impairment loss on each of two non-current assets; plant and land. The
relevant amounts are as follows:
Plant
Land
Original cost
₱700,000
₱1,400,000
Previous revaluations
Nil
₱ 450,000
Existing carrying amount
₱700,000
₱1,850,000
Impairment loss to be recognized
in year
₱200,000
₱ 300,000
According to PAS36 Impairment of assets, how should each of the impairment
losses be recognized?
Plant
Land
a. In profit or loss
In profit or loss
b. In profit or loss
In other comprehensive income
c. In other comprehensive income
In profit or loss
c. In other comprehensive income
In other comprehensive income
(ACCA)
39. On January 1, 20x2 AMIABLE FRIENDLY Company acquired a non-current
asset with an estimated useful life of 8 years for ₱320,000. Non-current assets
are accounted for under the cost model and depreciation is charged by the
straight-line method.
On January 1, 20x7 an impairment review identified an impairment loss of
₱10,000 and the remaining useful life was revised to four years. Are the following
statements true or false, according to PAS 36 Impairment of assets?
(1) Future depreciation expenses should be measured by reference to the
carrying amount after deducting the impairment loss.
(2) Future depreciation expenses should be measured by reference to the new
estimate of the remaining useful life.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
40. In testing a cash generating unit (CGU) for impairment the bottom-up test
means that
a. Goodwill can be allocated to the CGU and an impairment loss has occurred
if the recoverable amount of the CGU’s less than the carrying amount, plus
the allocated goodwill.
b. Goodwill can be allocated to the CGU’s and an impairment loss occurred if
the recoverable amount of the CGU is less than its carrying amount,
excluding the allocated goodwill
c. Goodwill can be allocated to the COG and an impairment loss has occurred
if the recoverable amount of the CGU is more than the carrying amount.
d. Goodwill can be allocated to the CGU and an impairment loss has occurred
if the recoverable amount of the CGU is more than its carrying amount.
(Adapted)
169
41. Select the incorrect statement regarding impairments on investment
properties.
a. Investment properties under the fair value model are not subject to
impairment
b. Impairments of investment properties under the cost model is recognized
in profit or loss
c. Compensation from third parties for investment properties that was
impaired or lost shall be recognized in profit or loss when the
compensation becomes receivable and not offset with the amount of loss
d. Reversal of impairment on investment properties under the cost model
are never reversed
42. Which of the following analysis on asset impairment is most likely to have
been made by a CPA? (where: RA = recoverable amount; FVLCS = fair value
less costs of disposal; VIN = value in use; CA = carrying amount; IL =
impairment loss)
a. if “FVLCS > CA,” then, “IL = 0”
b. if “FVLCS < VIN,” then, IL = > 0”
c. if “FVLCS > VIN,” then, “RA = FVLCS,” now, if “CA > RA,” then “IL = RA – CA”
d. if “FVLCS > VIN,” then, “RA = VIN,” now, if “CA < RA,” then “IL = RA – CA”
43. Ampersand “&” Co. determines that a printing press used in its operations has
suffered a permanent impairment in value because of technological changes.
An entry to record the impairment should
a. recognize an extraordinary loss for the period
b. include a credit to the equipment accumulated depreciation account
c. include a credit to the equipment account
d. not be made if the equipment is still being used.
(AICPA)
Chapter 21 - Suggested answers to theory of accounts questions
1. D
11. D
21. B
31. B
41. D
2. D
12. D
22. A
32. A
42. C
3. C
13. D
23. B
33. A
43. B
4. B
14. B
24. B
34. D
5. B
15. A
25. B
35. B
6. C
16. C
26. B
36. C
7. D
17. D
27. C
37. D
8. A
18. D
28. A
38. B
9. D
19. D
29. C
39. D
10. D
20. D
30. B
40. A
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