INTERMEDIATE ACCOUNTING VOL 1
CHAPTER 23
PROPERTY, PLANT AND EQUIPMENT
 Shares issued for consideration other than actual cash – proceeds measured at FV of the
consideration received
 Property acquired thru issuance of share capital – property measured at:
a) FV of the property received
b) FV of the share capital
c) Par Value or Stated Value of the share capital
 PFRS 9, par 5.1.1 – entity shall measure financial liability at FV + transaction costs that
are directly attributable to the issue of the financial liability
o Asset acquired by issuing bonds payable is measured in the ff order:
a) FV of bonds payable
b) FB of asset received
c) Face amount of bonds payable
 PAS 16, par 24 – cost of an item of PPE acquired in exchange for a nonmonetary asset or
a combination of monetary and nonmonetary asset is measured at FV
o E: Exchange is recognized at CA under the ff circumstances:
a) Exchange transaction lacks commercial substance
b) FV of the asset given or FV of the asset received is not reliably measured
 IFRS explicitly addresses government grant -> reference is made to local GAAP in
relation to accounting for donation
 Contributions received from shareholders shall be recorded at FV with the credit going to
donated capital
 Entities sometimes receive from nonshareholders gifts or grants of funds or other assets
that are restricted for property equipment additions
 PAS 16, par 22 – cost of abnormal amount of wasted material, labor or overhead incurred
in the production of self-constructed asset is not included in the cost of the asset
 PAS 16, par 67 – CA of an item of PPE shall be derecognized on disposal or when no
future economic benefits are expected from the use or disposal
 PFRS 5, par 7 – an item of PPE is classified as “held for sale” if the asset is available for
immediate sale in the present condition within one year from the date of classification as
held for sale
 PFRS 5, par 15 – an entity shall measure a noncurrent asset classified as held for sale at
the lower of carrying amount or FV – cost of disposal
 PFRS 5, par 25 – a noncurrent asset classified as held for sale shall not be depreciated
 PFRS 5, par 13 – an entity shall not classify as held for sale a noncurrent asset that is to
be abandoned
PROBLEMS AND THEORIES
1. Which is not a characteristic of property, plant and equipment?
a. The property, plant and equipment are tangible assets.
b. The property, plant and equipment are used in business.
c. The property, plant and equipment are expected to be used over a period of more than one
year.
d. The property, plant and equipment are subject to depreciation.
2. Major spare parts and standby equipment which are expected to be used over a period of more
than one year shall be classified as
a. Property, plant and equipment
b. Inventory
c. Noncurrent investment
d. Expense
3. Under the cost model, subsequent to initial recognition as an asset, an item of property, plant
and equipment shall be carried at
a. Cost
b. Revalued amount
c. Cost less accumulated depreciation and any accumulated impairment loss
d. Revalued amount less accumulated depreciation and any accumulated impairment loss
4. The cost of an item of property, plant and equipment comprises all of the following, except
a. Purchase price
b. Import duties and non-refundable purchase taxes
c. Any cost directly attributable in bringing the asset to the location and condition for its intended
use.
d. Initial estimate of the cost of dismantling and removing the item and restoring the site, the
obligation for which the entity does not incur when the item was acquired.
5. Costs directly attributable to bringing the asset to the location and condition for the intended
use include all of the following, except
a. Cost of employee benefit not arising directly from the construction and acquisition of property,
plant and equipment
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly cost
Problem 23-1
On February 1, 2007, Morgan Corporation purchased a parcel of land as a factory site for
$200,000. An old building on the property was demolished, and construction began on a
new building which was completed on November 1, 2007. Costs incurred during this
period are listed below:
Demolition of old building $ 20,000
Architect's fees 35,000
Legal fees for title investigation and purchase contract 5,000
Construction costs 1,090,000
(Salvaged materials resulting from demolition were sold for $10,000.)
Morgan should record the cost of the land and new building, respectively, as
a. $225,000 and $1,115,000.
b. $210,000 and $1,130,000.
c. $210,000 and $1,125,000.
d. $215,000 and $1,125,000.
In this problem, aside from the acquisition cost of the land, costs related to building are
construction costs and architect’s fees while costs related to land are demolition of old building
and legal fees. So for the building, it would be 1,090,000+35,000 = 1,125,000. As for the land,
it’s 200,000+20,000+5,000 = 225,000. However, notice that salvaged materials resulting from a
demolition were sold for 10,000. This value will be deducted to the costs of the land, making it
215,000.
Problem 23-2
Tyson Chandler Company purchased equipment for $10,000. Sales tax on the purchase
was $500. Other costs incurred were freight charges of $200, repairs of $350 for damage
during installation, and installation costs of $225. What is the cost of the equipment?
a. $10,000
b. $10,500
c. $10,925
d. $11,275
Repairs for the damages during installation is the only cost that is not included for the cost of the
equipment. Therefore, 10,000+500+200+225 = 10,925.
Problem 23-3
Carpenter Company purchased equipment for $12,000. Sales tax on the purchase was
$600. Other costs incurred were freight charges of $240, repairs of $420 for damage
during installation, and installation costs of $270. What is the cost of the equipment?
a. $12,000.
b. $12,600.
c. $13,110.
d. $13,530.
Same as the problem above/before, repairs for the damages during installation is the only cost
that is not included for the cost of the equipment. Therefore, 12,000+600+240+270 = 13,110.
Problem 23-4
During self-construction of an asset by Jannero Pargo Company, the following were
among the costs incurred:
Fixed overhead for the year $1,000,000
Portion of $1,000,000 fixed overhead that would
be allocated to asset if it were normal production 40,000
Variable overhead attributable to self-construction 35,000
What amount of overhead should be included in the cost of the self-constructed asset?
a. $ -0b. $35,000
c. $40,000
d. $75,000
Since it was not a normal production (self-constructed), the portion of 40,000 is then allocated as
overhead. Including the variable overhead value of 35,000, the amount of overhead that should
be included in the cost of the self-constructed asset is 75,000.
Problem 23-5
During self-construction of an asset by Mitchellson Company, the following were among
the costs incurred:
Fixed overhead for the year $1,000,000
Portion of $1,000,000 fixed overhead that would
be allocated to asset if it were normal production 60,000
Variable overhead attributable to self-construction 55,000
What amount of overhead should be included in the cost of the self-constructed asset?
a. $ -0b. $ 55,000
c. $ 60,000
d. $115,000
Same as the problem before/above, since it was not a normal production (self-constructed), the
portion of 60,000 is then allocated as overhead. Including the variable overhead value of 55,000,
the amount of overhead that should be included in the cost of the self-constructed asset is
115,000.
Problem 23-6
Ben Gordon Corporation constructed a building at a cost of $10,000,000. Average accumulated
expenditures were $4,000,000, actual interest was $600,000, and avoidable interest was
$300,000. If the salvage value is $800,000, and the useful life is 40 years, depreciation expense
for the first full year using the straight-line method is
a. $237,500.
b. $245,000.
c. $257,500.
d. $337,500.
Problem 23-7
Sweet Knee Company is constructing a building. Construction began in 2008 and the
building was completed 12/31/08. Sweet Knee made payments to the construction
company of $1,000,000 on 7/1, $2,100,000 on 9/1, and $2,000,000 on 12/31. Average
accumulated expenditures were
a. $1,025,000.
b. $1,200,000.
c. $3,100,000.
d. $5,100,000.
Solving for average accumulated expenditure requires the payment value to be multiplied to the
number of remaining months before reaching the accounting period over 12. So, for the
1,000,000 payment, since it was done on 7/1, there would be 6 months (from 7/1 – 12/31); for
the 2,100,000 payment, it was done on 9/1 thus the remaining would be 4 months. The payment
made on 12/31 has no months left so the multiplier is 0. Adding the 2 values:
(1,000,000*6/12)+(2,100,000*4/12) gives the value of 1,200,000.
Problem 23-8
Wheeler Corporation constructed a building at a cost of $20,000,000. Average
accumulated expenditures were $8,000,000, actual interest was $1,200,000, and
avoidable interest was $600,000. If the salvage value is $1,600,000, and the useful life is
40 years, depreciation expense for the first full year using the straight-line method is
a. $475,000.
b. $490,000.
c. $515,000.
d. $675,000.
Problem 23-9
Hackleman Company is constructing a building. Construction began in 2008 and the
building was completed 12/31/08. Hackleman made payments to the construction
company of $1,500,000 on 7/1, $3,300,000 on 9/1, and $3,000,000 on 12/31. Average
accumulated expenditures were
a. $1,575,000.
b. $1,850,000.
c. $4,800,000.
d. $7,800,000.
Solving for average accumulated expenditure requires the payment value to be multiplied to the
number of remaining months before reaching the accounting period over 12. So, for the
1,500,000 payment, since it was done on 7/1, there would be 6 months (from 7/1 – 12/31); for
the 3,300,000 payment, it was done on 9/1 thus the remaining would be 4 months. The payment
made on 12/31 has no months left so the multiplier is 0. Adding the 2 values:
(1,500,000*6/12)+(3,300,000*4/12) gives the value of 1,850,000.
Problem 23-10
Seiler Co. purchased land as a factory site for $600,000. Seiler paid $60,000 to tear down two
buildings on the land. Salvage was sold for $5,400. Legal fees of $3,480 were paid for title
investigation and making the purchase. Architect's fees were $31,200. Title insurance cost
$2,400, and liability insurance during construction cost $2,600. Excavation cost $10,440. The
contractor was paid $2,200,000. An assessment made by the city for pavement was $6,400.
Interest costs during construction were $170,000.
The cost of the land that should be recorded by Seiler Co. is
a. $660,480.
b. $666,880.
c. $669,880.
d. $676,280.
Land costs are: Purchase value, demolition value minus salvage value, legal fees, title insurance
cost, and assessment for pavement. These values once added: (600,000 + 60,000 - 5,400 + 3,480
+ 2,400 + 6,400) give 666,880.
CHAPTER 24
GOVERNMENT GRANT
Definition
 PAS 20, paragraph 3, defines government grant as assistance by government in the form of
transfer of resources to an entity in return for part or future compliance with certain
conditions relating to the operating activities of the entity. Government grant is sometimes
called by other names such as subsidy, subvention or premium.
 PAS 20, paragraph 10, provides that the benefit of a government loan with a NIL or belowmarket rate of interest is treated as a government grant.
PROBLEMS AND THEORIES
Problem 24-1 (IFRS)
At the beginning of current year, Sagada Company received a grant of P25,000,000 from the
American government in order to defray safety and environmental costs within the area where
the entity is located.
The safety and environmental costs are expected to be incurred over four years, respectively,
P2,000,000, P4,000,000, P6,000,000 and P8,000,000.
What amount should be recognized as grant income for the current year?
a. 25,000,000
b. 2,000,000
c. 2,500,000
d. 6,250,000
Solution 24-1 Answer c
Year
Costs
First year
2,000,000
Second year
4,000,000
Third year
6,000,000
Fourth year
8,000,000
20,000,000
Fraction
2/20
4/20
6/20
8/20
Income
2,500,000
5,000,000
7,500,000
10,000,000
25,000,000
PAS 20, paragraph 12, provides that government grants are recognized as income over the
periods necessary to match them with the related costs which they are intended to compensate on
a systematic basis.
Problem 24-2 (LFRS)
At the beginning of current year, Besao Company received a grant of P10,000,000 from the
Australian government for the construction of a laboratory and research facility with an
estimated cost of P15,000,000 and useful life of 5 years.
The laboratory and research facility was completed and ready for the intended use at the end of
the current year.
What amount of grant income should be included in the income statement for the current year?
a. 10,000,000
b.
c.
d.
2,000,000
1,500,000
0
Solution 24-2 Answer b
Grant income (10,000,000 / 5)
2,000,000
PAS 20, paragraph 17, provides that grants related to depreciable assets are usually recognized as
income over the periods and in proportion to the depreciation of the related assets.
Problem 24-3 (IFRS)
At the beginning of current year, Barlig Company is granted a large tract of land in the Cordillera
region by the Philippine government. The fair value of the land is P40,000,000. The entity is
required by the grant to construct chemical research facility and employ only personnel residing
in the Cordillera region.
The estimated cost of the facility is P45,000,000 with useful life of 10 years. The chemical
research facility was completed and ready for the intended use at the end of current year. What
amount should be recognized as grant income for the current year?
a. 40,000,000
b. 4,500,000
c. 4,000,000
d.
0
Solution 24-3 Answer c
Grant income (40,000,000/10)
4,000,000
PAS 20, paragraph 18, provides that grants related to nondepreciable assets requiring fulfillment
of certain conditions are recognized as income over the periods which bear the cost of meeting
the conditions.
Problem 24-4 (IFRS)
At the beginning of current year, Exuberant Company received a consolidated grant of
P12,000,000. Three-fourths of the grant will be utilized to purchase a college building for
students from underdeveloped countries.
The balance of the grant is for subsidizing the tuition costs of those students for four years from
date of grant.
The building was purchased in early January and is to be depreciated using the straight line
method over 10 years. The tuition costs paid amounted to P600,000 during the current year.
What amount of grant income should be recognized for the current year?
a. 1,200,000
b. 3,000,000
c. 1,650,000
d. 1,050,000
Solution 24-4 Answer c
Grant related to asset (12,000,000 x 3/4 =9,000,000/10)
Grant related to income (12,000,000 x 1/4 = 3,000,000/4)
900,000
750,000
Grant income
1,650,000
Problem 24-5 (IFRS)
At the beginning of current year, Sabangan Company received a grant of P6,000,000 from the
British government to compensate for massive losses incurred because of a recent tsunami.
The grant was made for the purpose of giving immediate financial support to the entity. It will
take the entity two years to reconstruct the assets destroyed by the tsunami.
What amount of grant income should be recognized in the current year?
a. 6,000,000
b. 3,000,000
c. 1,500,000
d.
0
Solution 24-5 Answer a
PAS 20, paragraph 20, provides that a government grant becomes receivable as compensation for
expenses already incurred or for the purpose of giving financial support to the entity with no
related future costs is recognized as income of the period in which it becomes receivable or when
received.
Problem 24-6 (IFRS)
Peach Company purchased a machine for P7,000,000 on January 1, 2019 and received a
government grant of P1,000,000 toward the capital cost.
The machine is to be depreciated on a straight line basis over 5 years and estimated to have a
residual value of P500,000 at the end of this period.
The accounting policy is to treat the grant as a deferred income.
1. What is the carrying amount of the asset on December 31,2020?
a. 4,200,000
b. 5,700,000
c. 4,400,000
d. 3,900,000
2. What is the deferred grant income on December 31, 2020?
a. 400,000
b. 800,000
c. 600,000
d.
0
Solution 24-6
Question I Answer c
Acquisition cost - January 1, 2019
Accumulated depreciation (7,000,000-500,000/5 x 2)
Carrying amount - December 31, 2020
7,000,000
(2,600,000)
4,400,000
Question 2 Answer c
Government grant
1,000,000
Income recognized for 2019 and 2020 (1,000,000/5 x 2)
Deferred grant income - December 31, 2020
( 400,000)
600,000
Problem 24-7 (IFRS)
Betty Company purchased a jewel polishing machine for P3,600,000 on January 1, 2019 and
received a government grant of P500,000 toward the capital cost.
The accounting policy is to treat the grant as a reduction in the cost of the asset.
The machine is to be depreciated on a straight line basis over 8 years and estimated to have a
residual value of P100,000 at the end of period.
1. What is the depreciation of the machine for 2019?
a. 387,500
b. 500,000
c. 437,500
d. 375,000
2. What is the carrying amount of the asset on December 31, 2020?
a. 2,725,000
b. 2,350,000
c. 3,000,000
d. 2,250,000
Solution 24-7
Question I Answer d
Cost
Government grant
Net cost
Residual value
Depreciable amount
Annual depreciation (3,000,000/8)
Question 2 Answer b
Net cost - January 1, 2019
Accumulated depreciation - December 31, 2020
(375,000 x 2 years)
Carrying amount - December 31, 2020
3,600,000
(500,000)
3,100,000
(100,000)
3,000,000
375,000
3,100,000
(750,000)
2,350,000
Problem 24-8 (IFRS)
On January 1, 2019, Darwin Company purchased a plating machine for P5,400,000. The entity
received a government grant of P400,000 toward this capital cost.
The machine is to be depreciated on a 20% reducing balance basis 10 years. The estimated
residual value is P200,000.
The accounting policy is to treat the government grant as a reduction in the cost of the asset.
1 What is the accumulated depreciation on December 31, 2020?
a. 1,000,000
b. 1,944,000
c. 1,800,000
d. 2,000,000
2. What is the carrying amount of the machine on December 31, 2020?
a. 4,000,000
b. 4,040,000
c. 3,456,000
d. 3,200,000
Solution 24-8
Question 1 Answer c
Question 2 Answer d
Cost
Government grant
Net cost
Accumulated depreciation - December 31, 2020:
2019 (20% x 5,000,000)
1,000,000
2020 (20% x 4,000,000)
800,000
Carrying amount - December 31, 2020
5,400,000
( 400,000)
5,000,000
1,800,000
3,200,000
Problem 24-9 (IFRS)
On January 1, 2019, Easy Company received a grant of P1,500,000 from the government to
subsidize tuition fees for a period of 5 years.
On January 1, 2021, the entity violated certain conditions attached to the grant, and therefore had
to repay fully such grant to the government
1. What is the grant income for 2019?
a. 1,500,000
b. 600,000
c. 300,000
d.
0
2. What amount should be recognized as loss resulting from the repayment of the grant in 2021?
a. 1,500,000
b.
900,000
c.
600,000
d.
0
Solution 24-9
Question 1 Answer c
Grant income for 2019 (1,500,000/5 years)
300,000
Question 2 Answer c
Total grant received
Income recognized in 2019 and 2020 (1,500,000/5 x 2)
Deferred grant income - December 31, 2020
1,500,000
(600,000)
900,000
PAS 20, paragraph 32, provides that repayment of government grant shall be accounted for as a
change in accounting estimate. The repayment of grant related to income shall be applied first to
the unamortized deferred income and any balance shall be recognized in profit or loss.
Deferred grant income
Loss on repayment of grant
Cash
900,000
600,000
1,500,000
Problem 24-10 (IFRS)
Tarhata Company received a government grant of P2,000,000 related to a factory building that it
bought in January 2019.
The entity's policy is to treat the grant as deferred income.
The entity acquired the building from an industrialist identified by the government. If the entity
did not purchase the building, which was located in the slums of the city, it would have been
repossessed by the government agency.
The entity purchased the building for P12,000,000. The useful life of the building is 10 years
with no residual value.
On January 1,2021, the entire amount of the government grant became repayable by reason of
noncompliance with conditions attached to the grant
1. What is the depreciation of the building for 2019?
a. 1,200,000
b. 1,000,000
c. 600,000
d. 500,000
2. What amount should be recognized as grant income for 2019?
a. 400,000
b. 200,000
c. 100,000
d.
0
3. What amount of loss should be recognized resulting from the repayment of the grant in 2021?
a. 1,200,000
b. 2,000,000
c. 1,400,000
d. 400,000
Solution 24-10
Question 1 Answer a
Depreciation of building (12,000,00/10 years)
Question 2 Answer b
Grant income for 2019 (2,000,000/ 10 years)
200,000
1,200,000
Journal entries for 2019
Cash
Deferred grant income
Deferred grant income
Grant income
2,000,000
2,000,000
200,000
200,000
Question 3 Answer d
Total grant received
Income recognized in 2019 and 2020 (2,000,000 / 10x2)
Deferred grant income - January 1, 2021
Journal entry
Deferred grant income
Loss on repayment of grant
Cash
2,000,000
( 400,000)
1,600,000
1,600,000
400,000
2,000,000
1. It is an assistance by the government in the form of transfer of resources to an entity in return
for past or future compliance with certain conditions.
a. Government grant
b. Government assistance
c. Government donation
d. Government aid
2. It is an action by a government designed to provide an economic benefit specific to an entity
and for which the government cannot reasonably place a value.
a. Government grant
b. Government assistance
c. Government takeover
d. Subvention
3. Government grant shall be recognized when there is reasonable assurance that
a. The entity will comply with the conditions of the grant.
b. The grant will be received.
c. The entity will comply with the conditions of the grant and the grant will be received.
d. The grant must have been received.
4. It is a government grant whose primary condition is that an entity qualifying for it should
purchase, construct or otherwise acquire long-term asset.
a. Grant related to asset
b. Grant related to income
c. Government gift
d. Government appropriation
5. Government grant in recognition of specific costs is recognized as income
a. Over the same period as the relevant expense
b. Immediately
c. Over a maximum of 5 years using straight line.
d. Over a maximum of 5 years using sum of digits.
CHAPTER 25
BORROWING COSTS
 Under PAS 23, paragraph 5, borrowing costs are defined interest and other costs that an
entity incurs in connection usth borrowing of funds.
Paragraph 6 provides that borrowing costs specifically include:
a. Interest expense calculated using the effective interest method.
b. Finance charge with respect to a finance lense.
c. Exchange difference arising from foreign currency borrowing to the extent that it is
regarded as an adjustment to interest cost.
Excluded from capitalization
 PAS 23 does not require capitalization of borrowing costs relating to the following:
a. Assets measured at fair value, such as biological assets.
b. Inventory manufactured or produced in large quantity on a repetitive basis, such as
maturing whisky, even if it takes a substantial period of time to get ready for sale.
c. Assets that are ready for their intended use or sale when acquired.
Accounting for borrowing cost PAS 23, paragraph 8, mandates the following rules on
borrowing cost:
1. If the borrowing is directly attributable to the acquisition, construction or production of a
qualifying asset, the borrowing cost is required to be capitalized as cost of the asset.
 In other words, the capitalization of borrowing cost is mandatory for a qualifying asset.
The borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are borrowing costs that would have been avoided if the
expenditure on the qualifying asset had not been made.
2. All other borrowing costs shall be expensed as incurred. In other words, if the borrowing is not
directly attributable to a qualifying asset, the borrowing cost is expensed immediately.
Asset financed by specific borrowing
 PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the purpose of
acquiring a qualifying asset, the amount of capitalizable borrowing cost is the actual
borrowing cost incurred during the period less any investment income troim the temporary
investment of those borrowings.
Asset financed by general borrowing
 PAS 23, paragraph 14, provides that if the funds are borrowed generally and used for
acquiring a qualifying asset, the amount of capitalizable borrowing cost is equal to the
average carrying amount of the asset during the period multiplied by a capitalization rate or
average interest rate. However, the capitalizable borrowing cost shall not exceed the actual
interest incurred.
 PAS 23, paragraph 18, provides that the average expenditures during a period shall include
the borrowing cost previously capitalized.
PROBLEMS AND THEORIES
Problem 25-1 (IFRS)
On January 1, 2019, Hamlet Company borrowed P6,000,000 at an annual interest rate of 10% to
finance specifically the cost of building an electricity generating plant. Construction commenced
on January 1, 2019 with a cost of P6,000,000.
Not all the cash borrowed was used immediately, so interest income of P80,000 was generated
by temporarily investing some of the borrowed funds prior to use. The project was completed on
November 30, 2019.
1. What is the carrying amount of the plant on November 30, 2019?
a. 6,000,000
b. 6,470,000
c. 6,520,000
d. 6,550,000
Solution 25-1 Answer b
Construction cost
6,000,000
Interest
(6,000,000 x 10% x 11/12)
500,000
Interest income
( 800,000)
Total cost of plant
6,470,000
PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the purpose of
acquiring a qualifying asset, the amount of capitalizable borrowing cost is the actual borrowing
cost incurred during the period less any investment income from the temporary investment of
those borrowings.
Problem 25-2 (IFRS)
On January 1, 2019, Cagayan Company took out a loan of P24,000,000 in order to finance
specifically the renovation of a building. The renovation work started on the same date.
The loan carried annual interest at 10%. Work on the building was substantially complete on
October 31,2019.
The loan was repaid on December 31,2019 and P200,000 investment income was earned in the
period to October 31 on the proceeds of the loan not yet used for the renovation.
1. What amount of capitalizable borrowing cost should be included in the cost of the building?
a. 2,400,000
b. 2,200,000
c. 2,000,000
d. 1,800,000
2. What amount should be reported as interest expense for 2019?
a. 800,000
b. 400,000
c. 200,000
d.
0
Solution 25-2
Question 1 Answer d
Interest actually incurred(24,000,000 x 10% x 10/12)
2,000,000
Interest income
Capitalizable borrowing cost
Question 2 Answer b
Interest expense for November and December 2019
(24,000,000 x 10% x 2/12)
( 200,000)
1,800,000
400,000
The interest from November 1 to December 31, 2019 is charged to interest expense because the
building was completed on October 31, 2019.
Problem 25-3(AICPA Adapted)
Sun Company was constructing an asset that qualified for interest capitalization. The
construction began at the beginning of the current year and was completed at the end of current
year.
The construction cost totaled P12,000,000 and was incurred evenly during the current year.
The entity had outstanding notes payable during the entire year of construction comprising
P6,000,000 8% interest and P9,000,000 9% interest. None of the borrowings were specified for
the construction of the qualified asset.
1. What amount of interest should be capitalized?
a. 480,000
b. 516,000
c. 810,000
d. 960,000
2. What amount should be reported as interest expense for the current year?
a. 960,000
b. 645,000
c. 774,000
d.
0
Solution 25-3
Question 1 Answer b
If the construction is financed by general borrowing, the average interest rate is multiplied by
average expenditures in computing capitalizable borrowing cost.
Principal
Interest
8% note payable (8% x 6,000,000)
6,000,000
480,000
9% note payable (9% x 9,000,000)
9,000,000
810,000
Total
15,000,000
1,290,000
Average interest rate (1,290,000/15,000,000)
8.60%
Average expenditures (12,000,000 / 2)
6,000,000
Capitalizable interest (6,000,000 x 8.6%)
516,000
Question 2 Answer c
Total interest incurred
1,290,000
Capitalizable interest
Interest expense for the year
( 516,000)
774,000
Problem 25-4 (AICPA Adapted)
Marian Company borrowed P20,000,000 at 10% partly for general purposes and partly to finance
the construction of a building on January 1, 2019. The loan shall be repaid commencing the
month following completion of the building.
Expenditures incurred evenly during the year for the completed building totaled P12,000,000 oh
December 31, 2019. The entity eamed interest of P200,000 for the year on the unexpended
portion of the loan.
What amount of interest is capitalized on December 31,2019?
a. 1,200,000
b. 1,000,000
c. 600,000
d. 400,000
Solution 25-4 Answer c
The average expenditures amount to P12,000,000 divided by 2 or P6.000,000. The interest is
P6,000,000 times 10% or P600,000.
The investment income of P200,000 is ignored because the construction is financed by general
borrowing.
Problem 25-5 (IAA)
Moses Company borrowed P4,000,000 on a 10% note payable to finance a new warehouse
which the entity is constructing for its own use.
The only other debt of the entity is a P6,000,000, 12% mortgage payable on an office building.
At the end of the current year, average accumulated expenditures on the new warehouse totaled
P4,750,000.
What amount should be capitalized as interest for the current year?
a. 400,000
b. 475,000
c. 490,000
d. 522,500
Solution 25-5 Answer c
Specific borrowing (4,000,000 x 10%)
General borrowing ( 750,000 x 12%)
Capitalizable interest
400,000
90,000
490,000
Average expenditures applicable to general borrowing
(4,750,000 less 4,000,000 specific)
750,000
Problem 25-6 (IAA)
The third year of a construction project of Jilliane Company began with a P3,000,000 balance in
construction in progress.
Included in that figure is P600,000 of interest capitalized in the first two years.
Construction expenditures during the third year were P8,000,000 which were incurred evenly
throughout the entire year.
The entity had P30,000,000 in interest-bearing debt outstanding in the third year at an interest
rate of 9%.
1. What amount of interest for the third year is capitalized?
a. 360,000
b. 630,000
c. 936,000
d. 990,000
2. What amount should be reported as interest expense for the thind year?
a. 2,700,000
b. 2,070,000
c. 1,980,000
d. 1,350,000
Solution 25-6
Question 1 Answer b
Construction in progress - beginning of third year
Average expenditures during the third year (8,000,000/2)
Total
Capitalizable interest (9% x 7,000,000)
3,000,000
4,000,000
7,000,000
630,000
Question 2 Answer b
Interest incurred in the third year (9% x 30,000,000)
2,700,000
Capitalizable interest
Interest expense for third year
( 630,000)
2,070,000
Problem 25-7 (IAA)
Jam Company started construction on a building at the beginning of the current year and
completed construction at year-end.
The entity had only two interest notes outstanding during the year and both of these notes were
outstanding for all 12 months of the year.
The following information is available:
Average accumulated expenditures
Ending balance in construction in progress before
capitalization of interest
2,500,000
3,600,000
6% note incurred specifically for the project
9% long-term note
1,500,000
5,000,000
What amount should be recorded as cost of the building?
a. 3,780,000
b. 2,680,000
c. 3,750,000
d. 3,825,000
Solution 25-7. Answer a
Average expenditures
Specific borrowing
General borrowing
Construction in progress - actual expenditures
Capitalizable interest:
Specific borrowing (6% x 1,500,000)
General borrowing (9% x 1,000,000)
Total cost of building
2,500,000
(1,500,000)
1,000,000
3,600,000
90,000
90,000
3,780,000
Problem 25-8 (IAA)
During 2019, Joshua Company constructed assets costing P5,000,000. The weighted average
expenditures totaled P3,000,000.
To help pay for construction, P2,200,000 was borrowed at 10% on January 1, 2019.
Funds not needed for construction were temporarily invested in short-term securities yielding
P45,000 in interest revenue.
Other than the construction funds borrowed, the only other debt outstanding during the year was
a P2,500,000. 10-year, 9% pote payable dated January 1, 2018.
1. What amount of interest should be capitalized during 2019?
a. 300,000
b. 150,000
c. 247,000
d. 472,000
2. What amount should be reported as interest expense for 2019?
a. 225,000
b. 178,000
c. 153,000
d,
0
Solution 25-8
Question 1 Answer c
Specific borrowing
Interest revenue
General borrowing
Capitalizable interest
220,000
( 45,000)
72,000
247,000
Average expenditures
Specific borrowing
General borrowing
3,000,000
(2,200,000)
800,000
Question 2 Answer c
Interest on general borrowing (9% x 2,500,000)
Capitalizable interest on general borrowing
Interest expense for 2019
(
225,000
72,000)
153,000
Problem 25-9 (AICPA Adapted)
During 2019, Elysee Company constructed a new facility at a cost of P30,000,000.
The expenditures for the building, which was finished late in 2019, were incurred evenly during
the year.
The entity had the following loans outstanding on December 31, 2019:
● 10% note to finance specifically the construction, dated January 1, 2019, P10,000,000.
This note is unpaid on December 31, 2019.
Investments were made on the proceeds from this loan and income of P100,000 was
realized in 2019.
● 12% 20-year bonds issued at face amount on April 30, 2018, P30,000,000.
● 8% 5-year note payable, dated March 1, 2018, P10,000,000.
What amount of interest is capitalized as cost of the new building?
a 1,550,000
b. 1,450,000
c. 1,400,000
d. 1,500,000
Solution 25-9 Answer b
Average expenditures (30,000,000 / 2)
Applicable to specific borrowing
Applicable to general borrowing
12% 20-year bonds payable
8% 5-year note payable
Total general borrowing
Average capitalization rate (4,400,000/40,000,000)
Interest on specific borrowing (10% x 10,000,000)
Interest income related to specific borrowing
( 100,000)
Interest on general borrowing (11% x 5,000,000)
Total capitalizable interest
Principal
30,000,000
10,000,000
40,000,000
15,000,000
(10,000,000)
5,000,000
Interest
3,600,000
800,000
4,400,000
11%
1,000,000
550,000
1,450,000
Problem 25-10 (IAA)
During 2019, Israel Company constructed assets costing P4,215,000. The weighted average
expenditures during the year amounted to P3,900,000.
The entity borrowed P2,000,000 at 7.5% on January 1,2019. Funds not needed for construction
were temporarily invested in short-term securities and earned P59,000 in interest revenue.
In addition to the construction loan, the entity had two other notes outstanding during the year, a
P1,500,000, 10-year, 10% note payable dated October 1, 2018, and a P1,000,000, 8% 5-year note
payable dated November 1,2018.
What amount of interest should be capitalized during 2019?
a. 324,800
b. 297,500
c. 273,000
d. 265,800
Solution 25-10 Answer d
Specific borrowing (2,000,000 x 7.5%)
Interest revenue related to specific borrowing
General borrowing (1,900,000 x 9.2%)
Capitalizable interest
Average expenditures
Specific borrowing
General borrowing
10-year 10% note payable
5-year 8% note payable
Total general borrowing
Average interest rate (230,000/2,500,000)
Principal
1,500,000
1,000,000
2,500,000
150,000
( 59,000)
174,800
265,800
3,900,000
(2,000,000)
1,900,000
Interest
150,000
80,000
230,000
9.2%
1. Borrowing costs can be capitalized as cost of the asset when
a. The asset is a qualifying asset.
b. The asset is a qualifying asset and it is not probable that the borrowing costs will result in
future benefits.
c. The asset is a qualifying asset and it is probable that the borrowing costs will result in future
economic benefits to the entity but the costs cannot be measured reliably.
d. The asset is a qualifying asset and it is probable that the borrowing costs will result in future
economic benefits to the entity and the costs can be measured reliably.
2. If the qualifying asset is financed by specific borrowing, the capitalizable borrowing cost is
equal to
a. Actual borrowing cost incurred
b. Actual borrowing cost incurred up to completion of asset
c. Actual borrowing cost incurred up to completion of asset minus any investment income from
the borrowing
d. Zero
3. Which of the following assets could be treated as qualifying asset for the purpose of
capitalizing borrowing costs?
a. Investment property
b. Investment in financial instrument
c. Inventory that is manufactured or produced in large quantity on a repetitive basis
d. Biological asset
4. Which of the following is not a condition that must be satisfied before interest capitalization
can begin on a qualifying asset?
a. Interest is being incurred.
b. Expenditures for the asset have been made.
c. The interest rate is equal to or greater than the cost of capital.
d. Activities necessary to get the asset ready for the intended use are in progress.
5. If the qualifying asset is financed by general borrowing, the capitalizable borrowing cost is
equal to
a. Actual borrowing cost incurred
b. Total expenditures on the asset multiplied by a capitalization rate
c. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost
incurred. whichever is lower
d. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost
incurred whichever is higher
CHAPTER 26
LAND, BUILDING AND MACHINERY
CAPITAL AND REVENUE EXPENDITURE
Statement classification
 Land used as a plant site shall be treated as property, plant and equipment.
 Land held for a currently undetermined use is treated as an investment property.
 However, if the land is held definitely as a future plant site, it is classified as owner-occupied
property and not an investment property and therefore shall be included in property, plant
and equipment. This accounting treatment is in accordance with paragraph 9 of PAS 40.
Rearrangement cost
 Rearrangement cost is the relocation or redeployment of an existing property, plant and
equipment. PAS 16, paragraph 20, provides that recognition of costs in the carrying amount
of property, plant and equipment ceases when the asset is in the location and condition for
the intended use.
 In other words, IFRS expressly mandates that the costs of relocating existing property, plant
and equipment or costs of reorganizing part or all of an entity's operations are not capitalized
but expensed as incurred.
 The rearrangement merely maintains the existing level of standard performance of the asset.
PROBLEMS AND THEORIES
Problem 26-1 (IAA)
Altitude Company purchased a plot of land for P2,000,000 as a plant site. There was a small
office building on the plot with a fair value of P700,000 which the entity will continue to use
with some modification and renovation. The entity decided to construct a factory building and
incurred the following costs:
Materials and supplies
3,000,000
Excavation
100,000
Labor on construction
2,500,000
Cost remodeling office building
300,000
Legal cost of conveying land
50,000
Cash discounts on materials purchased
60,000
Supervision by management
70,000
Compensation insurance premium for workers
20,000
Clerical and other expenses related to construction
30,000
Plans and specifications
340,000
Payment for claim for injuries not covered by insurance
25,000
Legal cost of injury claim
15,000
1. What amount should be recorded as cost of land?
a. 1,350,000
b. 1,300,000
c. 1,450,000
d. 1,410,000
2. What amount should be recorded as cost of office building?
a. 1,050,000
b. 1,000,000
c. 700,000
d. 850,000
3. What amount should be recorded as cost of factory building
a. 5,920,000
b. 6,120,000
c. 6,000,000
d. 5,800,000
Solution 26-1
Question I Answer a
Purchase price allocated to land
Legal cost of conveying land
Total cost of land
Purchase price of land and office building
Fair value of office building
Purchase price allocated to land
Question 2 Answer b
Purchase price equal to fair value
Cost of remodeling
1,300,000
50,000
1,350,000
2,000,000
( 700,000)
1,300,000
700,000
300,000
Total cost of office building
Question 3 Answer c
Materials and supplies
Excavation
Labor on construction
2,500,000
Cash discount
Supervision by management
Compensation insurance
Clerical and other expenses related to construction
Plans and specifications
Total cost of factory building
1,000,000
3,000,000
100,000
(
60,000)
70,000
20,000
30,000
340,000
6,000,000
The imputed interest is not capitalizable.
Only interest actually incurred on construction shall be capitalized.
The payment of claim for injuries and the legal cost of injury claim are treated as outright
expense. Saving on construction is not recognized.
Problem 26-2 (IAA)
Facetious Company incurred the following expenditures related to the construction of a new
home office:
Purchase price of land and an old apartment building
2,000,000
Fair value of land
1,800,000
Legal fees, including fee for title search
10,000
Payment of land mortgage and related interest due
at time of sale
50,000
Payment of delinquent property taxes
20,000
Cost of razing the apartment building
30,000
Grading and drainage on land site
15,000
Architect fee on new building
200,000
Payment to building contractor
8,000,000
Interest cost on specific borrowing during construction
300,000
Payment of medical bills of employees accidentally
injured while inspecting building construction
10,000
Cost of paving driveway and parking lot
40,000
Cost of trees, shrubs and other landscaping
55,000
Cost of installing light in parking lot
5,000
Premium for insurance on building during construction
25,000
Cost of open house party to celebrate opening of building
60,000
1. What amount should be capitalized as cost of land?
a. 2,120,000
b. 1,920,000
c. 1,895,000
d. 1,845,000
2. What amount should be capitalized as cost of building?
a. 8,555,000
b. 8,525,000
c. 8,540,000
d. 8,530,000
3. What amount should be capitalized as cost of land improvement?
a. 300,000
b. 115,000
c. 100,000
d.
0
Solution 26-2
Question 1 Answer c
Allocated cost of land equal to fair value
Legal fees
Payment of land mortgage
Payment of delinquent property taxes
Grading and drainage
Total cost of land
Purchase price of land and an old apartment building
Fair value of land
Allocated cost of old apartment building
1,800,000
10,000
50,000
20,000
15,000
1,895,000
2,000,000
(1,800,000)
200,000
The allocated cost of the old apartment building of P200,000 should be accounted for as loss
because the old building is razed in order to construct new building.
Question 2 Answer a
Cost of razing old apartment building
30,000
Architect fee
Payment to building contractor
Interest cost on specific borrowing
Premium for insurance during constructión
Total cost of new building
200,000
8,000,000
300,000
25,000
8,555,000
Question 3 Answer c
Cost of paving driveway and parking lot
Cost of trees, shrubs and other landscaping
Cost of installing light in parking lot
Total cost of land improvement
40,000
55,000
5,000
100,000
The payment of medical bills of employees and the cost of open house party should be treated as
outright expense.
Problem 26-3 (AICPA Adapted)
At the beginning of current year, Uptown Company disclosed the following balances:
Land
4,000,000
Land improvement
1,300,000
Building
20,000,000
Machinery and equipment
8,000,000
During the current year, the following transactions occurred:
● Land was acquired for P2,000,000 cash as a building site.
● A plant facility consisting of land and building was acquired in exchange for 200,000
shares of the entity. On the acquisition date, each share had a quoted price of P45 on a
stock exchange.
● Current appraised values for the land and the building, respectively, are P2,000,000 and
P8,000,000. The building has an expected life of 40 years with a P200,000 residual value.
● Items of machinery and equipment were purchased at a total cost of P4,000,000.
Additional costs incurred were freight and unloading P100,000 and installation P300,000.
The equipment has a useful life of ten years with no residual value.
● Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalk at
the entity's various plant locations. These expenditures had an estimated useful life of
fifteen years.
● Research and development costs amounted to P1,100,000.
● A machine costing P200,000 acquired seven years ago w scrapped at year-end. Straight
line depreciation had been recorded on the basis of a 10-year life with no residual value.
● A machine was sold for P500,000 at the middle of the year. Original cost of the machine
sold was P700,000 when acquired three years ago and it was depreciated on the straight
line basis over an estimated useful life of eight years and a residual value of P50,000.
1. What is the total cost of land at year-end?
a. 7,800,000
b. 7,600,000
c. 8,000,000
d. 6,800,000
2. What is the total cost of land improvement at year-end?
a. 1,200,000
b. 3,600,000
c. 1,300,000
d. 2,500,000
3. What is the total cost of building at year-end?
a. 28,000,000
b. 25,400,000
c. 27,200,000
d. 27,000,000
4. What is the total cost of machinery and equipment at year-end?
a. 12,400,000
b. 11,500,000
c. 11,000,000
d. 11,700,000
Solution 26-3
Question 1 Answer a
Land - January 1
Land acquired for cash
Land acquired by issuing shares (2/10 x 9,000,000)
Land- December 31
Quoted price of shares issued for land and building
(200,000 x P45)
Current appraised value:
Land
Building
Total
4,000,000
2,000,000
1,800,000
7,800,000
9,000,000
2,000,000
8,000,000
10,000,000
The total cost of the land and building is equal to the quoted price of the shares which is
allocated prorata to the land and building based on the current appraised value.
Question 2 Answer d
Land improvements - January 1
Expenditures for parking lot, street and sidewalk
Balance - December 31
Question 3 Answer c
Building- January 1
Building acquired by issuing shares (8/10 x 9,000,000)
Balance - December 31
Question 4 Answer b
Machinery and equipment - January 1
Machinery and equipment purchased
Freight and unloading
100,000
Installation
Cost of machinery scrapped
Cost of machinery sold
Machinery and equipment- December 31
1,300,000
1,200,000
2,500,000
20,000,000
7,200,000
27,200,000
8,000,000
4,000,000
300,000
( 200,000)
( 700,000)
11,500,000
Problem 26-4 (AICPA Adapted)
Excelsior Company was incorporated on January 1,2019 but began activities on July 1, 2019. An
analysis of the land and building account on December 31, 2019 showed the following:
January 31
Land and an old building
1,600,000
February 28
May 1
May 1
June 1
June 1
June 1
June 30
July 1
Cost of removal of old building
Partial payment on new construction
Legal fees paid
Second payment on new construction
Insurance premium
Special tax assessment
General expenses
Final payment on new construction
90,000
700,000
50,000
400,000
480,000
60,000
320,000
900,000
To acquire land and building, the entity paid P800,000 cash and issued 8,000 preference shares
with par value of P100 and fair value of P150.
The old building with insignificant fair value was demolished to make room for the construction
of a new building.
Legal fees covered organization cost P15,000, title examination of land purchased P10,000, and
legal work P25,000 in connection with construction contract.
Insurance premium covered the building for a two-year term beginning May 1, 2019.
The special tax assessment was for street improvements that are permanent in nature.
General expenses included the president's salary of P220,000 and the plant superintendent's
salary of P100,000.
1. What amount should be recorded as cost of land?
a. 2,070,000
b. 2,160,000
c. 2,000,000
d. 2,100,000
2. What amount should be recorded as cost of building?
a. 2,155,000
b. 2,065,000
c. 2,395,000
d. 2,305,000 .
Solution 26-4
Question 1 Answer a
Cash paid
Fair value of preference shares (8,000 x 150)
Title examination
Special assessment
Cost of land
800,000
1,200,000
10,000
60,000
2,070,000
Note that the amount recorded for land and building considered only the par value of the shares.
Cash paid
Par value of preference shares (8,000 x 100)
Recorded amount
Question 2 Answer a
800,000
800,000
1,600,000
Cost of removal of old building
Partial payment
Second payment
Final payment
Legal expense on construction contract
Insurance during construction period (480,000/2 x 2/12)
Cost of building
90,000
700,000
400,000
900,000
25,000
40,000
2,155,000
The capitalizable insurance premium is only for 2 months from May 1 to July 1, 2019. The
general expenses and organization cost are expensed immediately.
Problem 26-5 (AICPA Adapted)
Negros Company acquired a new machinery.
Invoice price of the machinery
Cash discount available but not taken on purchase
Freight paid on the new machinery
Cost of removing the old machinery
Installation cost of the new machinery
Testing cost before the machinery was put into
regular operation including P10,000 in wages
of the regular machinery operator
Loss on premature retirement of the old machinery
Estimated cost of manufacturing similar machinery
including overhead
1,400,000
20,000
40,000
15,000
50,000
30,000
5,000
1,300,000
What amount should be capitalized as cost of new machinery?
a. 1,500,000
b. 1,490,000
c. 1,515,000
d. 1,520,000
Solution 26-5 Answer a
List price
Cash discount
Freight
Installation cost
Testing cost
Total cost
1,400,000
( 20,000)
40,000
50,000
30,000
1,500,000
The cost of removing the old machinery is treated as outright expense. hy cash discount is
deducted from the cost of the machinery regardless of whether taken or not taken.
Problem 26-6 (AICPA Adapted)
Shaw Company purchased a machine for P1,260,000 that was placed in service at year-end. The
entity incurred additional costs for this machine.
Shipping
Installation
Testing
30,000
40,000
50,000
At year-end, what amount should be reported as machinery?
a. 1,260,000
b. 1,290,000
c. 1,330,000
d. 1,380,000
Solution 26-6 Answer d
All costs are capitalizable.
Problem 26-7 (IFRS)
Charry Company purchased a second-hand polishing machine and incurred the following costs:
Agreed price to be paid to vendor
8,000,000
Dismantling the machine at the current location
400,000
Transportation to Charry's factory
350,000
Machine refurbishment cost prior to reinstallation
175,000
Reinstallation
125,000
What amount should be capitalized as cost of the second-hand machine?
a. 8,875,000
b. 9,050,000
c. 8,125,000
d. 8,000,000
Solution 26-7 Answer b
All costs are capitalizable.
Problem 26-8 (IFRS)
Basilan Company acquired a machine at the beginning of the current year.
Cash paid for machine, including VAT of P96,000
Cost of transporting machine
Labor cost of installation by expert fitter
Labor cost of testing machine
40,000
Insurance cost for the current year
Cost of training personnel who will use the machine
25,000
Cost of safety rails and platform surrounding machine
Cost of water device to keep machine cool
Cost of adjustment to machine to make it operate more
efficiently
Estimated dismantling cost to be incurred as required
by contract
896,000
30,000
50,000
15,000
60,000
80,000
75,000
65,000
What total amount should be capitalized as cost of the machine?
a. 1,135,000
b. 1,231,000
c. 1,200,000
d. 1,150,000
Solution 26-8 Answer c
Cash paid (896,000 – 96,000)
Cost of transporting machine
Installation cost
Testing cost
Safety rails and platform
Water device
Cost of adjustment
Estimated dismantling cost
Total cost of machine
800,000
30,000
50,000
40,000
60,000
80,000
75,000
65,000
1,200,000
The recoverable VAT or value added tax is not capitalizable.
The cost of training personnel who will operate the machine should be treated as expense.
Note that the estimated dismantling cost is capitalized because the entity has a present obligation
as required by contract. In the absence of a present obligation, the estimated dismantling cost is
not capitalized.
Problem 26-9 (AICPA Adapted)
Boyd Company purchased a P4,000,000 tract of land for a factory site.
The entity razed an old building on the property to make room for the construction of new
building and sold the materials salvaged from the demolition.
Demolition of old building
Legal fees for purchase contract and recording ownership
Title guarantee insurance
Proceeds from sale of salvaged materials
What amount should be capitalized as cost of the land?
a. 4,200,000
b. 4,150,000
c. 4,050,000
d. 4,400,000
Solution 26-9 Answer a
Purchase price
Legal fees for purchase contract
Title guarantee insurance
Carrying amount of land
4,000,000
150,000
50,000
4,200,000
Under PIC Interpretation, the net cost of demolishing an old building to make room for the
construction of a new building is charged to the cost of the new building.
Otherwise, if the land is acquired as an investment property, the net cost of demolishing an old
building is charged to the cost of the land.
Problem 26-10 (AICPA Adapted)
Kay Company purchased for P4,500,000 a tract of land as a factory site. An existing building on
the property was razed to pave the way for the construction of a new factory building.
Cost of razing old building
300,000
Title insurance and legal fees to purchase land
200,000
Architect fee
950,000
New building construction cost
8,000,000
Paving of street and sidewalk
100,000
1. What is the cost of the land?
a. 4,700,000
b. 5,000,000
c, 4,500,000
d. 4,800,000
2. What is the cost of new building?
a. 9,250,000
b. 9,450,000
c. 8,000,000
d. 9,150,000
Solution 26-10
Question I Answer a
Purchase price
Title insurance and legal fees
Total cost of land
Question 2 Answer a
Cost of razing old building
Architect fee
New building construction cost
Total cost of new building
The paving of street and sidewalk is land improvement.
1. The cost of land usually includes all, except
a. Commission related to acquisition
b. Property tax after date of acquisition
c. Property tax to date of acquisition
d. Cost of survey
2. The cost of land typically includes all, except
4,500,000
200,000
4,700,000
300,000
950,000
8,000,000
9,250,000
a. Grading, filling, draining and clearing cost
b. Special assessment for drainage system
c. Private driveway and parking lot
d. Assumption of any lien on the property
3. Fence and parking lot are reported as
a. Building
b. Land improvement
c. Land
d. Expense
4. Which should be capitalized as cost of land?
a. Filling in dirt to level the property prior to excavation
b. Excavation cost
c. Cost incurred to construct sidewalk and fence
d. All of these are capitalized as cost of land
5. Which cost should be charged to land improvement?
a. Clearing of trees and grading
b. Architect fee
c. Installation of a septic system
d. Cost of demolishing an old building
CHAPTER 27
DEPRECIATION
Depreciation period
 Depreciation of an asset begins when it is available for use, meaning, when the asset is in the
location and condition necessary for it to be capable of operating in the manner intended by
management.
 Depreciation ceases when the asset is derecognized.
 Therefore, depreciation does not cease when the asset becomes idle temporarily.
 Temporary idle activity does not preclude depreciating the asset as future economic benefits
are consumed not only through usage but also through wear and tear and obsolescence.
 PFRS 5, paragraph 25, provides that if the asset is classified as held for sale depreciation
shall be discontinued.
PROBLEMS AND THEORIES
Problem 27-1 (AICPA Adapted)
At the beginning of current year, Lem Company bought machinery under a contract that required
a down payment of P100,000, plus 24 monthly payments of P50,000 each, for total cash
payments of P1,300,000. The cash price of the machinery was P1,100,000.
The machinery has a useful life of 10 years and residual value of P50,000. The entity used
straight line depreciation.
What amount should be reported as depreciation for the current year?
a. 105,000
b. 110,000
c. 125,000
d. 130,000
Solution 27-1 Answer a
Cost of machinery
Residual value
Depreciable amount
Straight line depreciation (1,050,000 /10)
1,100,000
( 50,000)
1,050,000
105,000
If an asset is acquired by installment, the cost is equal to the casa price or present value of future
payments.
The difference between the total payments and cash price is an interest expense.
Down payment
100,000
Monthly payments (50,000 x 24)
1,200,000
Total cash payments
1,300,000
Cash price
(1,100,000)
Interest expense
200,000
Problem 27-2 (AICPA Adapted)
Poe Company disclosed that the following depreciation policy on machinery:
● A full year depreciation is taken in the year of acquisition.
● No depreciation is taken in the year of disposition.
● The estimated useful life is five years.
● The straight line method is used.
On June 30, 2020, the entity sold for P2,300,000 a machine acquired in 2017 for P4,200,000.
The residual value was P600,000.
What amount of gain on the disposal should be recorded in 2020?
a. 140,000
b. 260,000
c. 620,000
d. 980,000
Solution 27-2 Answer b
Sale price
Carrying amount of machine:
Cost-2017
Accumulated depreciation - 12/312019
(4,200,000 - 600,000/5 x 3 years) 2,160,000
Gain on disposal
2,300,000
4,200,000
2,160,000
2,040,000
260,000
No depreciation is recognized from January 1 to June 30, 2020 because the depreciation policy is
that no depreciation is taken in the year of disposition and full year depreciation in the year
acquisition.
Problem 27-3 (AICPA Adapted)
At the beginning of current year, Diamond Company acquired for P1,000,000 a new machinery
with useful life of 10 years.
The machine hada drum costing P200,000 that must be replaced every five years.
Continued operation of the machine required an inspection every four years after purchase and
the inspection cost is P80,000. The straight line method of depreciation is used.
What amount should be recorded as depreciation for the current year?
a. 100,000
b. 108,000
c. 120,000
d. 140,000
Solution 27-3 Answer c
Depreciation of machinery (1,000,000 –200,000/ 10)
Depreciation of drum (200,000/ 5)
Total depreciation for the current year
80,000
40,000
120,000
Problem 27-4 (IAA)
On March 30, 2019, Camia Company purchased a drilling machine for P8,400,000. The
estimated useful life of the machine is 10 years with no residual value. An important component
of the machine is the drill housing component that will need to be replaced in five years.
The P2,000,000 cost of the drill housing component is included in the P8,400,000 cost of the
machine. The entity used the straight-line depreciation. The fiscal year ends on December 31.
What total amount of depreciation should be recorded in 2019?
a. 630,000
b. 840,000
c. 780,000
d. 480,000
Solution 27-4 Answer c
Depreciation-drilling machine (6,400,000 / 10 x 9/12)
Depreciation-drill housing component
Total depreciation for 2019
480,000
300,000
780,000
Problem 27-5 (LAA)
Jade Company acquired a new milling machine on April 1,2013. The machine has a special
component that required replacement before the end of the useful life. The asset was originally
recorded in two accounts, one representing the main unit and the other for the special
component. Depreciation is recorded by the straight line method and residual value is
disregarded.
On April 1, 2019, the special component is scrapped and is replaced with a similar component.
This new component is expected to have a residual value of approximately 20% of cost at the
end of the useful life of the main unit, and because of materiality, the residual value will be
considered in calculating depreciation.
Main milling machine:
Purchase price in 2013
Residual value
Estimated useful life 10 years
First special component:
Purchase price
Residual value
Estimated useful life 6 years
Second special component:
Purchase price
Residual value
What is the total depreciation for 2019?
a. 1,100,000
b. 1,087,500
c. 1,350,000
d. 1,175,000
Solution 27-5 Answer a
Main machine (7,500,000/10) 750,000
First component -from January I to April 1, 2019
(1,200,000/6 x 3/12)
Second component- from April I to December 31, 2019
(2,000,000 – 400,0000/4 x 9/12)
Total depreciation for 2019
The second component is depreciated over the remaining life of the main machine of 4 years.
The original life of the main machine is 10 years and 6 years already expired from April 1, 2013
to April 1,2019.
Problem 27-6 (AICPA Adapted)
Frey Company purchased a machine for P4,500,000 on January 1, 2019. The machine has an
estimated useful life of four years and a residual value of P500,000. The machine is being
depreciated using the sum of the years' digits method.
1. What is the accumulated depreciation on December 31, 2020?
a. 1,600,000
b. 2,800,000
c. 1,200,000
d. 3,150,000
2. What is the carrying amount on December 31, 2020?
a. 2,900,000
b. 2,700,000
c. 1,700,000
d. 1,350,000
Solution 27-6
Question I Answer b
Question 2 Answer c
SYD =1 +2+ 3+4=10
Acquisition cost
Accumulated depreciation
2019 (4/10 x 4,000,000)
2020 (3/10 x 4,000,000)
Carrying amount - December 31, 2020
4,500,000
1,600,000
1,200,000
2,800,000
1,700,000
Problem 27-7 (AICPA Adapted)
On January 1, 2017, Mogul Company acquired equipment to be used in the manufacturing
operations.
The equipment had an estimated useful life of 10 years and an estimated residual value of
P50,000.
The depreciation applicable to this equipment was P240,000 for 2019 computed under the sum
of years' digits method.
What was the acquisition cost of the equipment?
a. 1,650,000
b. 1,700,000
c. 2,400,000
d. 2,450,000
Solution 27-7 Answer b
SYD =1+2+ 3+4+5+6+7+8+9+10 = 55
The first three fractions are 10/55 for 2017, 9/55 for 2018, and 8/55 for 2019.
Thus, the 2019 depreciation of P240,00 is equal to 8/55.
Depreciation for 2019
240,000
Divide by equivalent fraction
8/55
Depreciable amount
1,650,000
Residual value
50,000
Acquisition
1,700,000
Problem 27-8 (AICPA Adapted)
On April 1, 2019, Kew Company purchased new machinery for P3,300,000. The machinery had
an estimated useful life of five years with residual value of P300,000. Depreciation is computed
by the sum of the years' digits method.
1. What amount should be recorded as depreciation for 2019?
a. 500,000
b. 750,000
c. 900,000
d. 800,000
2. What amount should be recorded as depreciation for 2020?
a. 1,600,000
b. 1,800,000
c. 850,000
d. 600,000
Solution 27-8
Question I Answer b
SYD 1+2 + 3+4 +5
SYD = 15
April 1, 2019 to March 31, 2020 (5/15 x 3,000,000)
April 1,2020 to March 31, 2021 (4/15 x 3,000,000)
Accumulated depreciation - March 31, 2021
April 1, 2019 - December 31, 2019 (1,000,000 x 9/12)
1,000,000
800,000
1,800,000
750,000
Question 2 Answer c
January 1, 2020 - March 31, 2020 (1,000,000 x 3/12)
April 1, 2020- December 31, 2020 (800,000 x 9/12)
Total 2020 depreciation
Accumulated depreciation - December 31, 2020 (750,000 + 850,000)
250,000
600,000
850,000
1,600,000
Problem 27-9 (AICPA Adapted)
Rago Company takes a full year depreciation expense in the year of acquisition and no
depreciation expense in the year of disposition.
Data relating to a depreciable asset on January 1, 2019:
Acquisition year
2016
Cost
1,100,000
Residual value
200,000
Accumulated depreciation
720,000
Estimated useful life
5 years
Using the same depreciation method in 2016, 2017 and 2018, what 5 years amount of
depreciation should be recorded in 2019?
a. 120,000
b. 180,000
c. 220,000.
d, 240,000
Solution 27-9 Answer a
The accumulated depreciation on January 1, 2019 is recomputed following a certain method.
The same is arrived at using the SYD.
SYD = 1 +2+ 3 +4 +5 = 15
2016 (5/15 x 900,000)
300,000
2017 (4/15 x 900,000)
240,000
2018 (3/15 x 900,000)
180,000
Accumulated depreciation - January 1, 2019
720,000
Accordingly, the SYD is followed for 2019.
Depreciation for 2019 (2/15 x 900,000)
120,000
Problem 27-10 (AICPA Adapted)
Bergen Company purchased factory equipment which was installed and put into service January
1, 2019 at a total cost of PI,280,000.
The equipment is depreciated over eight years by the double declining balance method with
residual value of P80,000.
What amount of depreciation expense should be recorded on the equipment for 2020?
a. 225,000
b. 240,000
c. 300,000
d. 320,000
Solution 27-10 Answer b
Straight line rate (100% /8 years)
12.5%
Fixed rate (12.5 x 2)
25%
2019 depreciation (1,280,000 x 25%)
320,000
2020 depreciation (1,280,000 - 320,000 x 25%)
240,000
Under double declining balance, the residual value is ignored in the meanwhile.
1. Depreciation is best described as a method of
a. Asset valuation
b. Current value allocation
c. Cost allocation
d. Useful life determination
2. Which depreciation method is not based on the passage of time?
a. Production method
b. Sum of years' digits
c. Declining balance
d. Straight line
3. A method which excludes residual válue from the base for the depreciation calculation in the
earlier years is
a. Straight line
b. Sum of years' digits
c. Double declining balance
d. Output method
4. The double declining balance method
a. Results in a decreasing depreciation charge.
b. Means residual value is not deducted in computing the depreciation base.
c. Means the carrying amount should not be reduced below residual value.
d. All of these describe double declining balance
5. Which depreciation method applies a uniform depreciation rate each period to the carrying
amount of an asset?
a. Straight line
b. Declining balance
c. Output method
d. Sum of years' digits
CHAPTER 28
DEPLETION
IFRS 6
 The objective of this standard is to specify the financial reporting for the exploration and
evaluation of mineral resources Mineral resources include minerals, oil, natural gas and
similar nonregenerative resources.
Definition
 The term exploration and evaluation of mineral resources is defined as the search for mineral
resources after the entity has obtained legal right to explore in a specific area as well as the
determination of the technical feasibility and commercial viability of extracting the mineral
resources.
 The expenditures incurred by an entity in connection with the exploration and evaluation of
mineral resources before the technical feasibility and commercial viability of extracting a
mineral resource are known as exploration and evaluation expenditures.
Exploration and evaluation asset
 The exploration and evaluation expenditures may qualify as exploration and evaluation asset.
 However, the standard does not provide a clearcut guidance for the recognition of exploration
and evaluation asset.
 Accordingly, an entity must develop its own accounting policy for the recognition of such
asset.
 As a matter of fact, IFRS 6 permits an entity to continue to apply its previous accounting
policy provided that the resulting information is relevant and reliable.
Cost of wasting asset
 Entities follow a wide variety of practices in accounting for an extractive industry.
 At present, IFRS does not address wasting assets. There is no comprehensive standard that is
applicable to the extractive or mining industry. The only standard related to the mining
industry is IFRS 6 on the reporting of exploration and evaluation expenditures. In general,
the cost of wasting asset can be divided into four categories, namely:
a. Acquisition cost
b. Exploration cost
c. Development cost
d. Estimated restoration cost
Restoration cost
 Estimated restoration cost is the cost to be incurred in order to bring the property to its
original condition.
 Such restoration cost may be added to the cost of resource property or "netted" against the
expected residual value of the resource property.
 PAS 16, paragraph 16, provides that the estimated cost of restoring the property to its
original condition is capitalized only when the entity incurs the obligation when the asset is
acquired. In other words, the estimated restoration cost must be an existing present obligation
required by law or contract. The estimated restoration cost must be "discounted".
PROBLEMS AND THEORIES
Problem 28-1 (AICPA Adapted)
At the beginning of the current year, Vorst Company purchased a mineral mine for P26,400,000
with removable ore estimated at 1,200,000 tons.
After it has extracted all the ore, the entity will be required by law to restore the land to its
original condition at an estimated cost of P2,100,000. The present value of the estimated
restoration cost is P1,800,000.
The entity believed that it will be able to sell the property afterwards for P3,000,000. During the
current year, the entity incurred P3,600,000 of development cost preparing the mine for
production, removed 80,000 tons of ore and sold 60,000 tons.
What total amount of depletion should be recorded for the current year?
a. 1,920,000
b. 1,440,000
c. 1,940,000
d. 1,455,000
Solution 28-1 Answer a
Acquisition cost
Development cost
Estimated restoration cost at present value
Total cost
Residual value
Depletable amount
Rate per unit (28,800,000/1,200,000)
Depletion for the current year (80,000 x 24)
Depletion included in cost of goods sold (60,000 x 24)
26,400,000
3,600,000
1,800,000
31,800,000
(3,000,000)
28,800,000
24
1,920,000
1,440,000
Problem 28-2 (AICPA Adapted)
At the beginning of current year, Huff Mining Company purchased a mineral mine for
P36,000,000 with removable ore estimated by geological survey at 2,160,000 tons.
The property has an estimated value of P3,600,000 after the ore has been extracted.
The entity incurred P10,800,000 of development cost preparing the property for the extraction of
ore.
During the current year, 270,000 tons were removed and 240,000 tons were sold.
What amount of depletion should be included in cost of goods sold for the current year?
a. 3,600,000
b. 4,050,000
c. 4,800,000
d. 5,400,000
Solution 28-2 Answer c
Purchase price
Development cost
Total cost of ore property
Residual value
Depletable amount
Rate per ton (43,200,000/2,160,000)
Total depletion for the year (270,000 x 20)
Depletion in cost of goods sold (240,000 x 20)
36,000,000
10,800,000
46,800,000
(3,600,000)
43,800,000
20
5,400,000
4,800,000
Problem 28-3 (LAA)
June Company acquired for P9,000,000 property which is believed to include mineral deposit.
Geological estimates indicate that approximately 1,000,000 tons of mineral may be extracted.
It is further estimated that the property can be sold for P2,500,000 following mineral extraction.
After initial acquisition, the following costs were incurred:
Exploration cost 3,500,000
Development cost related to drilling of wells
Development cost related to production equipment
The entity is legally required to restore the land to a condition appropriate for resale at a
discounted amount of P800,000.
The entity extracted 50,000 tons of the mineral in the current year.
What amount should be recorded as depletion for the current year?
a. 825,000
b. 930,000
c. 700,000
d. 785,000
Solution 28-3 Answer c
Acquisition cost
Exploration cost
Development cost related to drilling of wells
Estimated restoration cost
Total
Residual value
Depletable amount
Rate per unit (14,000,000/1,000,000)
Depletion for the current year (50,000 x 14)
The development cost related to production equipment is not part of
property because it is subject depreciation.
Problem 28-4 (IAA)
9,000,000
3,500,000
3,200,000
800,000
16,500,000
(2,500,000)
14,000,000
14
700,000
the cost of the mineral
On February 20, 2019, Genoa Company incurred cost of P36,000,000 to acquire and prepare to
extract an estimated 4,000,000 tons of mineral deposits. The entity mined 500,000 tons of ore in
2019.
On December 31, 2020, Geologists estimated that 3,000,000 tons of ore still remained. The
entity mined 600,000 tons of ore in 2020.
What amount should be recorded as depletion for 2019?
a. 4,500,000
b. 2,250,000
c. 6,000,000
d. 3,000,000
2. What amount should be recorded as depletion for 2020?
a. 5,250,000
b. 6,300,000
c. 7,200,000
d. 6,000,000
Solution 28-4
Question 1 Answer a
Rate per ton (36,000,000 /4,000,000)
Depletion for 2019 (500,000 x 9)
Question 2 Answer a
Cost
Depletion for 2019
Remaining depletable amount
Estimated tons- December 31, 2020
Extracted in 2020
New estimate - January 1, 2020
New rate per ton (31,500,000/3,600,000)
Depletion for 2020 (600,000 x 8.75)
9.00
4,500,000
36,000,000
( 4,500,000)
31,500,000
3,000,000
600,000
3,600,000
8.75
5,250,000
Problem 28-5 (IAA)
On March 31, 2019, Mariel Company purchased the right to remove gravel from an old rock
quarry. The gravel is to be sold as roadbed for highway construction.
The cost of the quarry right was P1,640,000 with estimated salable rock of 200,000 tons. During
2019, the entity loaded and sold 40,000 tons of rock.
On January 1, 2020, the entity estimated that 200,000 tons still remained. During 2020, the entity
loaded and sold 80,000 tons.
1. What amount should be recorded as depletion for 2019?
a. 410,000
b. 328,000
c. 307,500
d. 246,000
2. What amount should be recorded as depletion for 2020?
a. 540,000
b. 656,000
c. 524,800
d. 557,600
Solution 28-5
Question 1 Answer b
Rate per ton (1,640,000/200,000)
Depletion for 2019 ( 40,000 x 8.20)
Question 2 Answer c
Cost of rock quarry
Depletion for 2019
Remaining depletable amount
New rate per ton (1,312,000 / 200,000)
Depletion for 2020 ( 80,000 x 6.56)
8.20
328,000
1,640,000
( 328,000)
1,312,000
6.56
524,800
Problem 28-6 (IAA)
On January 1, 2019, Mankayan Company purchased land with valuable natural ore deposits for
P10,000,000. The residual value of the land was P2,000,000. At the time of purchase, a
geological survey estimated a recoverable output of 4,000,000 tons.
Early in 2019, roads were constructed on the land to aid in the extraction and transportation of
the mined ore at a cost of P1,600,000. In 2019, 500,000 tons were mined and sold.
A new survey at the end of 2020 estimated 4,200,000 tons of ore available for mining. In 2020,
800,000 tons were mined and sold.
1. What amount should be recognized as depletion for 2019?
a. 1,250,000
b. 1,200,000
c. 1,450,000
d. 1,000,000
2. What amount should be recognized as depletion for 2020?
a. 1,344,000
b. 1,920,000
c. 1,200,000
d. 1,600,000
Solution 28-6
Question 1 Answer b
Acquisition cost
Development cost
Total
Residual value of land
Depletable amount
Rate per ton (9,600,000/ 4,000,000)
Depletion for 2019 (500,000 x 2.40)
10,000,000
1,600,000
11,600,000
(2,000,000)
9,600,000
2.40
1,200,000
Question 2 Answer a
Production in 2020
Estimated output - December 31, 2020
Total estimate - January 1, 2020
Depletable amount
Depletion for 2019
Remaining depletable amount
New rate in 2020 (8,400,000 / 5,000,000)
Depletion for 2020 (800,000 x 1.68)
800,000
4,200,000
5,000,000
9,600,000
(1,200,000)
8,400,000
1.68
1,344,000
A change in estimated output is a change in accounting estimate.
A change in accounting estimate should be accounted for currently and prospectively.
Problem 28-7 (IAA)
In 2016, Sunflower Company acquired a silver mine in Eastern Mindanao. Because the mine is
located deep in the Mindanao frontier, the entity was able to acquire the mine for the low price of
P50,000.
In 2017, the entity constructed a road to the silver mine costine P5,000,000. Improvements and
other development costs made in 2017 cost P750,000.
Because of the improvements to the mine and to the surrounding land, it is estimated that the
mine can be sold for P600,000 when mining activities are complete.
During 2018, a building was constructed near the mine site to house the mine workers and their
families.
The tótal cost of the building was P2,000,000. Estimated residual value is P200,000.
Geologists estimated that 4,000,000 tons of silver ore could be removed from the mine for
refining. During 2019, the first year of operations, only 500,000 tons of silver ore were removed
from the mine.
However, in 2020, workers mined 1,000,000 tons of silver. During that same year, geologists
discovered that the mine contained 3,000,000 tons of silver ore in addition to the original
4,000,000 tons.
Development costs of P1,300,000 were made to the mine early in 2020 to facilitate the removal
of the additional silver.
Early in 2020, an additional building was constructed at a cost of P375,000 to house the
additional workers needed to excavate the added silver, This building is not expected to have any
residual value.
1. What amount should be recorded as depletion for 2019?
a. 718,750
b. 650,000
c. 725,000
d. 643,750
2. What amount should be recorded as depletion for 2020?
a. 1,300,000
b. 1,525,000
c. 900,000
d. 700,000
3. What amount should be recorded as depreciation of building for 2019?
a. 250,000
b. 225,000
c. 318,750
d. 343,750
4. What amount should be recorded as depreciation of building for 2020?
a. 300,000
b. 450,000
c. 500,000
d. 290,000
Solution 28-7
Question 1 Answer b
Purchase price
Road construction
Improvements and other development costs
Total cost
Residual value
Depletable amount
Depletion rate per unit (5,200,000/4,000,000)
Depletion for 2019 (500,000 x 1.30)
50,000
5,000,000
750,000
5,800,000
( 600,000)
5.200,000
1.30
650,000
Question 2 Answer c
Depletable amount
Depletion in 2019
Remaining depletable amount
Development costs in 2020
Total depletable amount - January 1, 2020
Original estimate
Additional estimate
Total estimate
Extracted in 2019 7,000,000
Remaining estimate - January 1, 2020
New depletion rate per unit (5,850,000/6,500,000)
Depletion for 2020 (1,000,000 x .90)
5,200,000
( 650,000)
4,550,000
1,300,000
5,850,000
4,000,000
3,000,000
7,000,000
(500,000)
6,500,000
.90
900,000
Question 3 Answer b
Cost of building
Residual value
Depreciable amount
Depreciation rate per unit (1,800,000/4,000,000)
Depreciation for 2019 (500,000 x 45)
2,000,000
( 200,000)
1,800,000
.45
225,000
Question 4 Answer a
Depreciable amount
Depreciation for 2019
Remaining depreciable amount
Additional building in 2020
Total depreciable amount - January 1, 2020
New depreciation rate per unit (1,950,000/6,500,000)
Depreciation for 2020 (1,000,000 x .30)
1,800,000
( 225,000)
1,575,000
375,000
1,950,000
.30
300,000
Problem 28-8 (LAA)
Samar Company paid P5,400,000 for property containing natural resource of 2,000,000 tons of
ore.
The present value of the estimated cost of restoring the land after the resource is extracted is
P450,000. The land will have a value of P650,000 after it is restored for suitable use.
Tunnels, bunk houses and other fixed installations are constructed ata st of P8,000,000 and such
expenditures are charged to mine improvements,
Operations began on January 1,2019 and resources removed totaled 600,000 tons. During 2020,
a discovery was made indicating that available resource after 2020 will total 1,875,000 tons.
At the beginning of 2020, additional bunk houses were constructed in the amount of P770,000.
In 2020, only 400,000 tons were mined because of a strike.
1. What amount should be recorded as depletion for 2019?
a. 1,560,000
b. 1,755,000
c. 1,620,000
d. 1,425,000
2. What amount should be recorded as depletion for 2020?
a. 1,560,000
b. 1,040,000
c. 640,000
d. 776,000
3. What amount should be recorded as depreciation for 2019?
a. 2,400,000
b. 1,200,000
c. 1,000,000
d. 500,000
4. What amount should be recorded as depreciation for 2020?
a. 1,120,000
b. 2,400,000
c. 1,600,000
d. 1,360,000
Solution 28-8
Question 1 Answer a
Cost of resource property
Restoration cost
Total cost
Residual value
Depletable amount
Depletion rate (5,200,000/2,000,000)
Depletion for 2019 (600,000 x 2.60)
5,400,000
450,000
5,850,000
( 650,000)
5,200,000
2.60
1,560,000
Question 2 Answer c
Depletable amount
Depletion in 2019
Remaining depletable amount
Production in 2020
Estimated output after 2020
Total estimated output - January 1, 2020
New depletion rate in 2020 (3,640,000 / 2,275,000)
Depletion for 2020 (400,000 x 1.60)
5,200,000
(1,560,000)
3,640,000
400,000
1,875,000
2,275,000
1.60
640,000
Question 3 Answer a
Depreciation rate (8,000,000 / 2,000,000)
Depreciation for 2019 (600,000 x 4)
4.00
2,400,000
Question 4 Answer a
Mine improvements (8,000,000 + 770,000)
Depreciation for 2019
Carrying amount - January 1, 2020
New depreciation rate in 2020 (6,370,000 /2,275,000)
Depreciation for 2020 (400,000 x 2.80)
8,770,000
(2,400,000)
6,370,000
2.80
1,120,000
Problem 28-9 (IAA)
In 2018, Lepanto Mining Company purchased property with natural resources for P28,000,000.
The property had a residual value of P5,000,000.
However, the entity is required to restore the property to the original condition at a discounted
amount of P2,000,000.
In 2018, the entity spent P1,000,000 in development cost and P3,000,000 in building on the
property.
The entity does not anticipate that the building will have utility after the natural resources are
removed.
In 2019, an amount of P1,000,000 was spent for additional development on the mine.
The tonnage mined and estimated remaining tons are:
Tons extracted
Tons remaining
2018
0
10,000,000
2019
3,000,000
7,000,000
2020
3,500,000
2,500,000
1. What amount should be recognized as depletion for 2019?
a. 6,900,000
b. 9,600,000
c. 8,100,000
d. 8,400,000
2. What amount should be recognized as depletion for 2020?
a. 10,150,000
b. 11,025,000
c. 15,750,000
d. 9,450,000
Solution 28-9
Question I Answer c
Purchase price
Estimated restoration cost
Development cost - 2018
Development cost - 2019
Total cost
Residual value
Depletable amount
Tons extracted in 2019
Remaining tons - December 31, 2019
Total estimated output - January 1, 2019
Rate in 2019 (27,000,000 /10,000,000)
Depletion for 2019 (3,000,000 x 2.70)
28,000,000
2,000,000
1,000,000
1,000,000
32,000,000
( 5,000,000)
27,000,000
3,000,000
7,000,000
10,000,000
2.70
8,100,000
Question 2 Answer b
Tons extracted in 2020
Tons remaining on December 31, 2020
Total estimated output - January 1, 2020
Original depletable amount
Depletion in 2019
Remaining depletable amount
New rate in 2020 (18,900,000/6,000,000)
Depletion for 2020 (3,500,000 x 3.15)
3,500,000
2,500,000
6,000,000
27,000,000
(8,100,000)
18,900,000
3.15
11,025,000
Problem 28-10 (IAA)
On January 1, 2019, Panatag Company purchased a mining site for P20,000,000 and spent an
additional P5,000,000 to prepare the mine for extraction of the mineral resources. After the
resources are extracted in 5 years, the entity is required by law to restore the land to its original
condition. The entity provided the following three cash flows and their probabilities for such
restoration:
3,000,000
30%
2,500,000
20%
4,000,000
50%
During 2019, the entity purchased new equipment at a cost of P8,000,000 with useful life of 8
years. After the resources are removed from the mine, the equipment would be of no use. Based
on geological survey, the entity expected to extract 10,000,000 tons of minerals. Actual
production was 1,200,000 and 2,000,000 tons during 2019 and 2020 respectively. All resources
extracted were sold. The appropriate risk-free rate is 9% and the present value of I at 5% for 5
periods is 0.65.
1. What amount should be recorded as total cost of the mining site?
a. 25,000,000
b. 20,000,000
c. 27,210,000
d. 28,400,000
2. What amount of total expenses should be recognized in 2019?
a. 4,265,200
b. 4,424,100
c. 4,225,200
d. 3,960,000
3. What amount of total expenses should be recognized in 2020?
a. 7,258,801
b. 7,042,000
c. 5,442,000
d. 4,507,500
Solution 28-10
Question I Answer c
Purchase price of the mining site
Development cost
Present value of the restoration cost
Total cost of the mining site
Estimated restoration cost:
3,000,000 x 30%
2,500,000 x 20%
4,000,000 x 50%
Expected cash flow for the restoration cost
Multiply by present value factor
Present value of the restoration cost
20,000,000
5,000,000
2,210,000
27,210,000
900,000
500,000
2,000,000
3,400,000
x 0.65
2,210,000
Question 2 Answer b
Depletion rate (27,210,000/ 10,000,000)
Depreciation rate (8,000,000/10,000,000)
Depletion for 2019 (1,200,000 x 2.721)
Depreciation for 2019 (1,200,000 x .80)
Interest expense for 2019 (2,210,000.x 9%)
Total expenses for 2019
2,721
0.80
3,265,200
960,000
198,900
4,424,100
Question 3 Answer a
Depletion for 2020 (2,000,000 x 2.721)
5,442,000
Depreciation for 2020 (2,000,000 x .80)
Interest expenses for 2020 (2,408,900 x 9%)
Total expenses for 2020
Present value of restoration cost- January 1, 2019
Interest expense for 2019
Present value of restoration cost- January 1, 2020
1,600,000
216.801
7,258,801
2,210,000
198,900
2,408,900
1. The most common method of computing depletion is
a. Percentage depletion method
b. Decreasing charge method
c. Straight line
d. Production method
2. Depletion expense
a. Is usually part of cost of goods sold.
b. Includes tangible equipment in the depletable amount.
c. Excludes intangible development cost from the depletable amount.
d. Excludes restoration cost from the depletable amount.
3. Information needed to compute a depletion charge per unit includes the
a. Estimated total amount of resources available.
b. Amount of resources removed during the period.
c. Cumulative amount of resources removed.
d. Amount of resources sold during the period.
4. Which accurately describes the GAAP regarding the accounting for the costs of drilling dry
holes in the oil and gas industry?
a. Successful effort method
b. Full cost method
c. Both successful effort and full cost
d. Neither successful effort nor full cost method
5. Which of the following is not part of depletable amount?
a. Acquisition cost of the mineral resource deposit
b. Exploration cost
c. Tangible equipment used to extract the mineral resource
d. Intangible development cost such as drilling and tunnel
CHAPTER 29
REVALUATION
Measurement of property, plant and equipment
 Initially, an item of property, plant and equipment that qualifies for recognition shall be
measured at cost. After recognition, an entity shall choose either the cost model or
revaluation model as an accounting policy and shall apply that policy to an entire class of
property, plant and equipment.
Frequency of revaluation
 When the fair value of a revalued asset differs materially from the carrying amount, a further
revaluation is necessary. Some property, plant and equipment may experience significant and
volatile changes in fair value thus necessitating annual revaluation.
A class of property, plant and equipment is a grouping of assets of a similar nature and use in an
entity's operations.
Basis of revaluation
 The revalued amount of property, plant and equipment in based on the following:
a. Fair value - The fair value is determined by appraisal normally undertaken by professional
qualified valuers.
b. Depreciated replacement cost- Where market value is not available, depreciated
replacement cost shall be used.
Two approaches in recording the revaluation
1. Proportional approach - The accumulated depreciation at the date of revaluation is restated
proportionately with the change in the gross carrying amount of the asset so that the carrying
amount of the asset after revaluation equals the revalued amount.
2. Elimination approach The accumulated depreciation ja eliminated against the gross carrying
amount of the asset and the net amount restated to the revalued amount of the asset.
Query
 When an asset's carrying amount is increased as a result of the revaluation, the increase shall
be credited to revaluation surplus as a component of other comprehensive income.
 The revaluation surplus may be transferred directly to retained earnings when the surplus is
realized. The whole surplus may be realized on the retirement or disposal of the asset.
 However, if the revalued asset is being depreciated, part of the surplus is being realized as the
asset is used.
 The revaluation surplus is allocated or realized over the remaining useful life of the asset and
reclassified through retained earnings.
Reversal of a revaluation surplus
 A revaluation decrease shall be charged directly against any revaluation surplus to the extent
that the decrease is a reversal of a previous revaluation and the balance is charged to expense.
PROBLEMS AND THEORIES
Problem 29-1 (ACP)
On January 1, 2014, Raven Company acquired a building at cost of P5,000,000. The building has
been depreciated on the basis of a 20-year life.
On January 1, 2019, an appraisal of the building showed replacement cost at P8,000,000 with no
change in useful life.
1. Before income tax, what amount should be credited to revaluation surplus on January 1, 2019?
a. 3,000,000
b. 2,250,000
c. 4,250,000
d. 6,000,000
2. What amount should be recorded as depreciation for 2019?
a. 250,000
b. 150,000
c. 400,000
d. 300,000
3. What is the revaluation surplus that should be reported in the December 31, 2019 statement of
financial position?
a. 2,100,000
b. 2,250,000
c. 1,850,000
d. 2,800,000
Solution 29-1
Question 1- Answer b
Cost
Building
5,000,000
Accumulated depreciation
(25%)
1,250,000
CA I SV / RS
3,750,000
Percentage of accumulated depreciation
(5 years expired / 20 years)
Replacement
Cost
8,000,000
Appreciation
3,000,000
2,000,000
6,000,000
750,000
2,250,000
25%
Question 2- Answer c
Depreciation (6,000,000 / 15 years remaining)
400,000
Question 3- Answer a
Revaluation surplus - January 1, 2019
Annual realization in 2019 (2,250,000/15)
Revaluation surplus - December 31, 2019
Journal entries in 2019
1. Building
Accumulated depreciation
Revaluation surplus
2. Depreciation
Accumulated depreciation
3. Revaluation surplus
Retained earnings
Problem 29-2 (IFRS)
2,250,000
( 150,000)
2,100,000
3,000,000
750,000
2,250,000
400,000
400,000
150,000
150,000
On June 30, 2019, Louisiana Company reported the following information:
Equipment at cost 5,000,000
Accumulated depreciation 1,500,000
The equipment was measured using the cost model and depreciated on a straight line basis over a
10-year period.
On December 31, 2019, the management decided to change the basis of measuring the
equipment from the cost model to the revaluation model.
The equipment had a fair value of P4,550,000 with remaining useful life of 5 years on December
31, 2019.
1. What amount should be reported as pretax revaluation surplus on December 31, 2019?
a. 1,050,000
b. 1,300,000
c. 1,500,000
d. 2,000,000
2. What amount should be recorded as depreciation of the equipment for 2020?
a. 500,000
b. 910,000
c. 455,000
d. 650,000
3. What amount should be reported as pretax revaluation surplus on December 31, 2020?
a. 1,170,000
b. 1,040,000
c. 390,000
d. 845,000
Solution 29-2
Question I Answer b
Cost - June 30, 2019
5,000,000
Accumulated depreciation
(1,500,000)
Carrying amount - June 30, 2019
3,500,000
Depreciation from July I to December 31, 2019
(5,000,000/10 x 6/12)
(250,000)
Carrying amount - December 31, 2019
3,250,000
Fair value - December 31, 2019
4,550,000
Carrying amount - December 31, 2019
3,250,000
Revaluation surplus - December 31, 2019
1,300,000
The fair value is already the sound value or revalued amount of the equipment.
Question 2 Answer b
Depreciation for 2020 (4,550,000 / 5 years)
Question 3 Answer b
Revaluation surplus – December 31, 2019
Realization of revaluation surplus in 2020
910,000
1,300,000
(1,300,000/5 years) 1,300,000
Revaluation surplus - December 31, 2020
(260,000)
1,040,000
Problem 29-3 (IAA)
On January 1, 2014, Boston Company purchased a new building at a cost of P6,000,000.
Depreciation was computed on the straight line basis at 4% per year. On January 1, 2019, the
building had a fair value of P8,000,000.
1. What amount should be recorded as depreciation for 2019?
a. 320,000
b. 400,000
c. 100,000
d. 240,000
2. What is the pretax revaluation surplus on December 31, 2019?
a. 3,072,000
b. 1,900,000
c. 3,040,000
d. 1,920,000
Solution 29-3
Question 1 Answer b
Accumulated depreciation (4% x 5 years expired)
Life of asset (5 years/20%)
Expired
Remaining life
Depreciation for 2019 (8,000,000 / 20)
Question 2 Answer c
Fair value
Carrying amount (6,000,000 x 80%)
Revaluation surplus - January 1, 2019
Annual realization in 2019 (3,200,000/20)
Revaluation surplus - December 31, 2019
20%
25 years
(5)
400,000
8,000,000
4,800,000
3,200,000
( 160,000)
3,040,000
Problem 29-4 (IAA)
Cycle Company provided the following account balances relating to property, plant and
equipment on January 1,2019.
Land
Building
Accumulated depreciation 3,750,000
Machinery
Accumulated depreciation
Assets have been carried at cost since their acquisition. All assets were acquired on January 1,
2009. The straight line method is used.
On January 1, 2019, the entity revalued the property, plant and equipment. On such date,
competent appraisers submitted the following:
Replacement cost
Land
5,000,000
Building
20,000,000
Machinery
5,000,000
1. What is the pretax revaluation surplus on January 1, 2019?
a. 15,000,000
b. 11,500,000
c. 30,000,000
d. 8,500,000
2. What amount should be recorded as depreciation for 2019?
a. 531,000
b. 875,000
c. 525,000
d. 625,000
3. What is the pretax revaluation surplus on December 31, 2019?
a. 11,075,000
b. 11,150,000
c. 11,050,000
d. 10,850,000
Solution 29-4
Question 1- Answer b
Percentage of accumulated depreciation
Building (3,750,000/15,000,000) 25%
Machinery (1,500,000/ 3,000,000) 50%
Useful life
Building (10 years expired / 25%) 40 years
Machinery (10 years expired /50%) 20 years
Sound
Carrying
value
amount
Land
5,000,000
2,000,000
Building (25,000,000 x 75%)
18,750,000
11,250,000
Machinery ( 5,000,000 x 50%)
2,500,000
1,500,000
Question 2- Answer b
Depreciation- building (18,750,000/ 30 years remaining)
Depreciation - machinery ( 2,500,000/10 years remaining)
Total
Question 3- Answer b
Revaluation
surplus
3,000,000
7,500,000
1,000,000
11,500,000
625,000
250,000
875,000
Revaluation surplus - January 1, 2019
Annual realization in 2019
Building (7,500,000 / 30)
Machinery (1,000,000 / 10)
Revaluation surplus- December 31, 2019
11,500,000
( 250,000)
( 100,000)
11,150,000
Problem 29-5 (IAA)
On January 1, 2019, Cool Company owned an equipment costing P5,200,000 with residual value
of P400,000.
The life of the asset is 10 years and was depreciated using the straight line method.
On such date, the equipment has a replacement cost of P8,000,000 with residual value of
P200,000. The age of the asset is 4 years.
The appraisal of the equipment showed a total revised useful life of 12 years and the entity
decided to carry the equipment at revalued amount.
1. What amount should be reported as pretax revaluation surplus on January 1, 2019?
a. 1,600,000
b. 2,600,000
c. 1,680,000
d. 6,680,000
2. What amount should be reported as pretax revaluation surplus on December 31 2019?
a. 1,440,000
b. 1,400,000
c. 2,450,000
d. 2,520,000
3. What amount should be recorded as annual depreciation subsequent to revaluation?
a. 468,000
b. 390,000
c. 585,000
d. 975,000
Solution 29-5
Question I Answer a
Cost
5,200,000
( 200,000)
5,000,000
Equipment
Residual value
Depreciable amount
Accumulated depreciation
(40% x 4,800,000)
1,920,000
(40% x 7,800,000)
________
Balance
3,080,000
Percentage of accumulated depreciation
(4 years expired / 10 years original life)
Replacement
Cost
8,000,000
( 200,000)
7,800,000
Appreciation
2,800,000
________
2,800,000
3,120,000
4,680,000
1,200,000
1,600,000
40%
Question 2 Answer b
Revaluation surplus - January I, 2019
Annual realization in 2019 (1,600,000 /8 years)
Revaluation surplus – December 31, 2019
Revised useful life
Age of asset
Remaining revised life
Subsequent annual depreciation (4680,000 / 8 years)
1,600,000
( 200,000)
1,400,000
12 years
4 years
8 years
585,000
Problem 29-6 (PHILCPA Adapted)
On January 1,2019, Sabengan Company reported the following account balances:
Cost
Accumulated depreciation
Land
50,000,000
Building
300,000,000
90,000,000
The land and building were revalued on January 1, 2019 and the revaluation revealed the
following sound value:
Land
70,000,000
Building
315,000,000
There were no additions or disposals during 2019. Depreciation is computed on the straight line.
The estimated life of the building is 20 years.
1. What amount should be recognized as pretax revaluation surplus on January 1, 2019?
a. 125,000,000
b. 105,000,000
c. 385,000,000
d. 315,000,000
2. What amount should be recorded as depreciation for 2019?
a. 22,500,000
b. 15,000,000
c. 15,750,000
d. 27,500,000
3. What amount should be reported as pretax revaluation surplus on December 31, 2019?
a. 117,500,000
b. 125,000,000
c. 105,000,000
d. 119,750,000
Solution 29-6
Question 1 Answer a
Sound value
Land
70,000,000
Building
315,000,000
Total
385,000,000
Question 2 Answer a
Carrying amount
50,000,000
210,000,000
260,000,000
Revaluation surplus
20,000,000
105,000,000
125,000,000
Percentage of accumulated depreciation
(90,000,000/300,000,000)
Remaining useful life (70% x 20 years)
Subsequent annual depreciation (315,000,000/14)
30%
14 years
22,500,000
Question 3 Answer a
Revaluation surplus - January 1, 2019
125,000,000
Realization of revaluation surplus on building
(105,000,000/14)
(7,500,000)
Revaluation surplus - December 31, 2019
117,500,000
The revaluation surplus on building is realized annually over the remaining life of the building.
The revaluation surplus on land is not realized annually because the land is nondepreciable,
The revaluation surplus is realized in full upon disposal of the land.
Problem 29-7 (PHILCPA Adapted)
Kibungan Company provided the following information on January 1, 2019 relating to property,
plant and equipment.
Land
Building
Accumulated depreciation-building ( 37,500,000)
Machinery
Accumulated depreciation- machinery
Carrying amount
There were no additions or disposals during 2019. Depreciation is computed using straight line
over 20 years for building and 10 years for machinery.
On June 30, 2019, all of the property, plant and equipment were revalued.
Replacement cost
Sound value
Land
40,000,000
40,000,000
Building
500,000,000
425,000,000
Machinery
650,000,000
455,000,000
1. What is the pretax revaluation surplus on June 30, 2019?
a. 355,000,000
b. 920,000,000
c. 345,000,000
d. 327,500,000
2. What amount should be recorded as total depreciation for 2019?
a. 72,500,000
b. 90,000,000
c. 55,000,000
d. 66,750,000
3. What is the pretax revaluation surplus on December 31, 2019?
a, 337,500,000
b. 355,000,000
c. 345,000,000
d. 327,500,000
Solution 29-7
Question 1- Answer a
Depreciation on cost from January 1 to June 30, 2019:
Building (300,000,000/20 x 6/12)
Machinery (400,000,000 /10 x 6/12)
Sound value
Carrying amount
Land
40,000,000
30,000,000
Building
425,000,000
255,000,000
Machinery
455,000,000
280,000,000
Total - 6/30/2019
920,000,000
565,000,000
Question 2- Answer a
Percentage of accumulated depreciation - June 30, 2019:
Building (37,500,000 + 7,500,000/300,000,000)
Machinery (100,000,000 + 20,000,000 /400,000,000)
Remaining useful life:
Building (20 years x 85%)
Machinery (10 years x 70%)
Building:
January to June 30, 2019
7,500,000
July 1 to December 31, 2019
(425,000,000 / 17x 6/12)
12,500,000
Machinery:
January 1 to June 30, 2019
20,000,000
July I to December 31, 2019
(455,000,000/7 x 6/12)
32,500,000
Total depreciation for 2019
Question 3 - Answer a
Revaluation surplus - June 30, 2019
Piecemeal realization from July I to December 31, 2019:
Building (170,000,000/17 x 6/12)
Machinery (175,000,000/ 7x 6/12)
Revaluation surplus - December 31, 2019
7,500,000
20,000,000
Revaluation surplus
10,000,000
170,000,000
175,000,000
355,000,000
15%
30%
17 years
7 years
20,000,000
52,500,000
72,500,000
355,000,000
( 5,000,000)
(12,500,000)
337,500,000
Problem 29-8 (LAA)
On January 1, 2019, Divine Company provided the following information relating to the
revaluation of an equipment:
Cost
Replacement cost
Equipment
6,500,000
9,200,000
Residual value
500,000
200,000
Useful life
Age of the equipment
Accumulated depreciation
12
2
?
?
The equipment was sold on December 31, 2019 for P8,000,000.
1. What is the pretax revaluation surplus on January 1,2019?
a. 2,700,000
b. 2,200,000
c. 2,500,000
d. 2,000,000
2. What amount should be recorded as depreciation for 2019?
a. 530,000
b. 900,000
c. 750,000
d. 220,000
3. What is the pretax revaluation surplus on December 31, 2019?
a. 2,200,000
b. 2,250,000
c. 2,430,000
d. 1,980,000
4. What amount of gain on sale of equipment should be recognized on December 31, 2019?
a 1,050,000
b. 3,030,000
c. 3,230,000
d. 300,000
Solution 29-8
Question 1 Answer b
Cost
6,500,000
(200,000)
6,300,000
Replacement cost
9,200,000
(200,000)
9,000,000
Equipment
Residual value
Depreciable amount
Accumulated depreciation
(6,000,000/12 x 2)
(9,000,000/12 x 2)
(1,000,000)
________
(1,500,000)
Remaining depreciable amount
5,300,000
7,500,000
Question 2 Answer c
Depreciation for 2019 (7,500,000/10 years remaining)
Appreciation
2,700,000
________
2,700,000
(
500,000)
2,200,000
750,000
Question 3 Answer d
Revaluation surplus - January 1, 2019
Annual realization in 2019 (2,200,000/10)
Revaluation surplus- December 31, 2019
2,200,000
(220,000)
1,980,000
Question 4 Answer a
Replacement cost of equipment
9,200,000
Accumulated depreciation - December 31, 2019
(2,250,000)
Carrying amount - December 31, 2019
6,950,000
Accumulated depreciation - January 1, 2019
1,500,000
Depreciation for 2019 (7,500,000 / 10)
750,000
Accumulated depreciation- December 31, 2019
2,250,000
Sale price
8,000,000
Carrying amount
(6,950,000)
Gain on sale of equipment
1,050,000
The revaluation surplus of P1,980,000 on December 31, 2019 should be transferred to retained
earnings upon disposal of the equipment.
Problem 29-9 (IFRS)
On January 1,2019, Global Company reported the following information:
Building at cost
30,000,000
Accumulated depreciation
12,000,000
The building was measured using the cost model and depreciated on a straight line basis over 10year period. On January 1, 2019, the management decided to change the basis of measurement
from the çost model to the revaluation model. The equipment was revalued at the fair value of
P27,000,000 with no change in useful life. The income tax rate is 30%.
1. What is the revaluation surplus on January 1, 2019?
a. 9,000,000
b. 6,300,000
c. 4,500,000
d. 7,000,000
2. What is the revaluation surplus on December 31, 2019?
a. 6,300,000
b. 9,000,000
c. 5,250,000
d. 5,670,000
3. What amount should be recorded as depreciation for 2019?
a. 4,500,000
b. 2,700,000
c. 3,000,000
d. 1,500,000
4. What is deferred tax liability on December 31, 2019?
a. 2,700,000
b. 2,250,000
c. 1,350,000
d. 2,500,000
Solution 29-9
Question I Answer b
Cost
Accumulated depreciation
Carrying amount
Fair value
Carrying amount
Revaluation surplus- January 1
Deferred tax liability (30% x 9,000,000)
Net revaluation surplus – January 1
Question 2 Answer c
Revaluation surplus – January 1
Annual realization (6,300,000/6)
Revaluation surplus - December 31
Percentage of accumulated depreciation
(12,000,000/30,000,000)
Expired life (40% x 10 years)
Remaining life (10 years- 4 years)
30,000,000
(12,000,000)
18,000,000
27,000,000
18,000,000
9,000,000
( 2,700,000)
6,300,000
6,300,000
(1,050,000)
5,250,000
40%
4 years
6 years
Question 3 Answer a
Annual depreciation (27,000,000 /6)
4,500,000
Question 4 Answer b
Deferred tax liability-January 1
Reduction of deferred tax liability (2,700,000/6)
Deferred tax liability-December 31
2,700,000
(450,000)
2,250,000
Problem 29-10 (IFRS)
London Company owned a building on January 1,2019 with historical cost of P40,000,000. The
property is depreciated over 40 years on a straight line basis with no residual value.
The entity adopted a policy of revaluation of property. The building had so far been revalued
twice at fair value.
January 1, 2020
46,800,000
January 1, 2022
55,500,000
1. What is the pretax revaluation surplus on January 1, 2020?
a. 7,800,000
b. 6,800,000
c. 5,800,000
d. 4,800,000
2. What is the increase in revaluation surplus to be recognized as component of other
comprehensive income on January 1, 2022?
a. 15,500,000
b. 11,100,000
c. 8,700,000
d. 9,900,000
3. What is the pretax revaluation surplus to be reported in the statement of changes in equity for
the year ended December 31, 2022?
a. 18,200,000
b. 18,000,000
c. 18,900,000
d. 18,500,000
Solution 29-10
Question I Answer a
Cost- January 1, 2019
Accumulated depreciation - December 31, 2019
(40,000,000/ 40)
Carrying amount - January 1, 2020
Fair value - January 1, 2020
Carrying amount- January 1, 2020
Revaluation surplus- January 1, 2020
Question 2 Answer b
Fair value - January 1, 2020
Accumulated depreciation- December 31, 2021:
2020 (46,800,000 /39)
1,200,000
2021
1,200,000
Carrying amount - January 1, 2022
Fair value - January 1, 2022
Carrying amount - January 1, 2022
Increase in revaluation surplus - January 1, 2022
Question 3 Answer b
Revaluation surplus-January 1, 2020
Increase in revaluation surplus - January 1, 2022
Total
Annual realization of revaluation surplus:
2020 (7,800,000/39)
2021
2022
2022 (11,100,000/37)
Revaluation surplus- December 31, 2022
40,000,000
( 1,000,000)
39,000,000
46,800,000
39,000,000
7,800,000
46,800,000
(2,400,000)
44,400,000
55,500,000
44,400,000
11,100,000
7,800,000
11,100,000
18,900,000
( 200,000)
( 200,000)
( 200,000)
( 300,000)
18,000,000
1. What is the revalued amount of property plant and equipment?
a. Fair value
b. Depreciated replacement cost
c. Replacement cost
d. Fair value and depreciated replacement cost
2. When accounting for property, plant and equipment, an entity
a. Must use the cost model.
b. May elect to use the cost model or the revaluation model on any individual asset.
c. May elect to use the cost model or the revaluation model on any asset class.
d. Must use the cost model for land.
3. Under the revaluation model
a. Assets must be revalued quarterly
b. Assets must be revalued annually
c. Assets must be revalued biannually
d. There is no rule regarding the frequency of revaluation
4. When the revaluation model is used for reporting property. plant and equipment, the gain
should be included in
a. Retained earnings
b. Revaluation gain in the income statement
c. Revaluation surplus
d. An extraordinary gain in the income statement
5. The revaluation surplus realized because of the use or disposal of the asset is transferred
directly to
a. Retained earnings
b. Income
c. Share capital
d. Share premium
CHAPTER 30
IMPAIRMENT OF ASSETS
 Impairment is a fall in the market value of an asset so that the recoverable amount is now less
than the carrying amount in the statement of financial position.
 The carrying amount is the amount at which an asset is recognized in the statement of
financial position after deducting accumulated depreciation and accumulated impairment
loss.
There is an established principle that an asset shall not be carried at above the recoverable
amount.
Accounting for impairment. In this regard, there are three main accounting issues to
consider, namely:
a. Indication of possible impairment
b. Measurement of the recoverable amount
c. Recognition of impairment loss
Measurement of recoverable amount
 After establishing evidence that an asset has been impaired the next step is to determine the
recoverable amount preparatory to the recognition of an impairment loss.
 The recoverable amount of an asset is the fair value less cost of disposal or value in use,
whichever is higher.
Fair value less cost of disposal
 Fair value of an asset is the price that would be received to sell the asset in an orderly
transaction between market participants at the measurement date. Cost of disposal is an
incremental cost directly attributable to the disposal of an asset or cash generating unit,
excluding finance cost and income tax expense.
PFRS 13, paragraph 72, enumerates the fair value hierarchy or best evidence of fair value
as follows:
 Level 1 inputs are the quoted prices in an active market for identical assets. A quoted price in
an active market provides the most reliable evidence of fair value and shall be used without
adjustment.
 Level 2 inputs are inputs that are observable either directly or indirectly. Level 2 inputs
include quoted prices for similar assets in an active market and quoted prices for identical or
similar assets in a market that is not active.
 Level 3 inputs are unobservable inputs for the asset. Unobservable inputs are usually
developed by the entity using the best available information from the entity's own data.
Active market and principal market
 An active market is a market in which transactions for the asset take place with sufficient
regularity and volume to provide pricing information on an ongoing basis.
 A principal market is the market with the greatest volume and level of activity for the asset.
Reversal of an impairment loss
 PAS 36, paragraph 114, provides that an impairment loss recognized for an asset in prior
years shall be reversed if there has been a change in the estimate of the recoverable amount.
 In other words, if the recoverable amount of an asset that has previously been impaired turns
out to be higher than the current carrying amount, the carrying amount of the asset shall be
increased to new recoverable amount.
 However, PAS 36, paragraph 117, provides that "the increased carrying amount of an asset
due to a reversal of an impairment loss shall not exceed the carrying amount that would have
been determined, had no impairment loss been recognized for the asset in prior years.”
Cash generating unit (CGU)
● A cash generating unit is the smallest identifiable group of assets that generate cash
inflows from continuing use that are largely independent of the cash inflows from other
assets or group of All assets.
Allocation based on carrying amount
 Paragraph 105 of PAS 36 provides that the carrying amount of an asset shall not be reduced
below the highest of fair value less cost of disposal, value in use and zero.
 The amount of impairment loss that would otherwise have been allocated to the asset shall be
allocated prorata to the other assets of the cash generating unit.
Cash generating unit with goodwill
 Goodwill does not generate cash flows independently from other assets or group of assets,
and therefore, the recoverable amount of goodwill as an individual asset cannot be
determined.
 As a consequence, if there is an indication that goodwill may be impaired, recoverable
amount is determined for the cash generating unit to which goodwill belongs.
Determination of impairment
 PAS 36, paragraph 90, provides that a cash generating unit to which goodwill has been
allocated shall be tested for impairment at least annually by comparing the carrying amount
of the unit, including the goodwill, with the recoverable amount.
a. If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit
and the goodwill allocated to that unit shall be regarded as not impaired.
b. If the carrying amount of the unit exceeds the recoverable amount of the unit,
the entity must recognize an impairment loss.
Reversal of impairment loss on goodwill
 PAS 36, paragraph 124, explicitly provides that an impairment loss recognized for goodwill
shall not be reversed in a subsequent period.
Carrying amount of CGU
 Observe that the liabilities of the cash generating unit are ignored in determining the carrying
amount of the CGU.
● PAS 36, paragraph 76, provides that the carrying amount of a cash generating unit
includes the carrying amount of only those assets that can be attributed directly or
allocated on a reasonable and consistent basis to the cash generating unit and can
generate the future cash inflows used in determining the value in use of the cash
generating unit.
● Paragraph 76 further provides that the carrying amount of the cash generating unit does
not include the carrying amount of any recognized liability, unless the recoverable
amount of the cash generating unit cannot be determined without consideration of this
liability.
 The reason is stated in Paragraph 43 of PAS 36 which mandates that to avoid double
counting, estimates of future cash flows do not include cash outflows that relate to
obligations that have been recognized as liabilities by the cash generating unit, such as
payables and provisions.
PROBLEMS AND THEORIES
Problem 30-1 (AICPA Adapted)
At year-end, Zee Company has an equipment with the following cost and accumulated
depreciation:
Equipment
9,000,000
Accumulated depreciation
3,000,000
Due to obsolescence and physical damage, the equipment is found to be impaired.
At year-end, the entity has determined the following information related to the equipment:
Fair value less cost of disposal
4,500,000
Value in use or discounted net cash inflows
4,000,000
Undiscounted net cash inflows
5,500,000
What amount should be reported as impairment loss for the year?
a. 1,500,000
b. 2,000,000
c. 500,000
d.
0
Solution 30-1 Answer a
Fair value - higher than value in use
4,500,000
Carrying amount
6,000,000
Impairment loss
(1,500,000)
If the recoverable amount of an asset is lower than the carrying amount, the difference is
recognized as arr impairment loss.
The undiscounted net cash inflows are ignored in determining the recoverable amount.
The recoverable amount is equal to the value in use or fair value less cost of disposal, whichever
is higher.
Impairment loss
1,500,000
Accumulated depreciation
1,500,000
Problem 30-2 (AICPA Adapted)
Jacqueline Company had an equipment with carrying amount of P4,500,000 at year-end:
Expected discounted net cash flows
Fair value of similar asset
Fair value of the asset when sold stand-alone
What amount should be reported as impairment loss for the current year?
a. 500,000
b. 350,000
c. 220,000
d.
0
Solution 30-2 Answer c
Carrying amount
Recoverable amount equal to fair value assuming
asset is sold stand-alone which is higher than
discounted net cash flows
Impairment loss
4,500,000
4,280,000
220,000
Problem 30-3 (AICPA Adapted)
Ball Company determined as result of a plant rearrangement that there had been a significant
change in the manner in which machinery was going to be used in the manufacturing process.
Expected future cash inflows from use of the mạchinery
3,500,000
Expected future cash outflows from use of the machinery
750,000
Expected future cash proceeds from sale of the machinery
at the disposal date
500,000
For purposes of determining an impairment, what is the amount of expected future cash flows
that would be used for the machinery?
a. 4,000,000
b. 3,250,000
c. 3,500,000
d. 2,750,000
Solution 30-3 Answer b
Cash inflows from use of machinery
Cash outflows frơm use of machinery
Cash proceeds from sale of machinery
Net cash inflows
3,500,000
( 750,000)
500,000
3.250,000
Problem 30-4 (AICPA Adapted)
Listless Company acquired equipment on January 1, 2018 for P5,000,000. The equipment had a
10-year useful life and no residual value. On December 31,2019, the following information was
obtained:
Expected value of undiscounted cash flows
Fair value estimated with in-use premise
Fair value estimated with in-exchange premise
What amount should be recognized as impairment loss for 2019?
a. 300,000
b. 400,000
c. 500,000
d.
0
Şolution 30-4 Answer a
Cost - January 1, 2018 5,000,000
Accumulated depreciation (5,000,000/ 10 x 2) (1,000,000)
Carrying amount - December 31, 2019 4,000,000
Recoverable amount equal to fair value with in-use premise 3,700,000
Impairment loss: 4,000,000 – 3,700,000 = 300,000
Problem 30-5 (AICPA Adapted)
Bubba Company determined that there had been a significant decrease in market value of an
equipment used in the manufacturing process.
Original cost of equipment
Accumulated depreciation
Expected undiscounted net future cash inflows
Fair value of equipment
What amount of impairment loss should be reported?
a. 3,250,000
b. 3,750,000
c. 750,000
d. 250,000
Solution 30-5 Answer c
Cost of equipment
Accumulated depreciation
Carrying amount
Fair value of equipment
Impairment loss
The undiscounted net future cash inflows are ignored.
5,000,000
3,000,000
2,000,000
1,250,000
750,000
Problem 30-6 (IFRS)
At the beginning of current year, Jolo Company acquired all the assets and liabilities of another
entity. The acquiree has a number of operating divisions, including one whose major industry is
the manufacture of toy train. The toy train division is regarded as a cash generating unit.
In paying P20,000,000 for the net assets of the acquiree, Jolo Company calculated that it had
acquired goodwill of P2,400,000. The goodwill was allocated to each of the divisions, and the
assets and liabilities acquired are measured at fair value at acquisition date. At year-end, the
carrying amounts of the assets of the toy train division were:
Building
2,000,000
Inventory
1,500,000
Trademark
1,000,000
Goodwill
500,000
There is a declining interest in toy train because of the aggressive marketing of computer-based
toys.
The entity measured the value in use of the toy train division at year-end at P3,600,000.
1. What amount should be recognized as impairment loss on goodwill?
a. 140,000
b. 250,000
c. 500,000
d.
0
2. What amount should be recognized as impairment loss to be allocated to the building?
a. 400,000
b. 500,000
c. 900,000
d. 300,000
Solution 30-6
Question 1 Answer c
Carrying amount of cash generating unit
Value in use
Impairment loss
Impairment loss allocated to goodwill
Remaining impairment loss
The carrying amount of goodwill is fally recognized as impairment loss.
PAS 36, paragraph 104, provides that when an impairment loss is recognized for a cash
generating unit, the loss is allocated to the assets of the unit in the following order:
a. First, to the goodwill, if any.
b. Then, to all other noncash assets of the unit prorata based on their carrying amount.
Question 2 Answer a
Building
Inventory
Trademark
Carrying amount
2,000,000
1,500,000
1,000,000
4,500,000
Fraction
20/45
15/45
10/45
Loss
400,000
300,000
200,000
900,000
The remaining loss of P900,000 is allocated to the assets other than goodwill based on carrying
amount.
Problem 30-7 (IFRS)
Bronze Company operates a production line which is treated as a cash generating unit for
impairment review purposes. At year-end, the carrying amounts of the noncurrent assets are as
follows:
Goodwill 1,100,000
Machinery
The value in use of the production line is estimated at P2,700,000 at this time.
1. What is the revised carrying amount of goodwill after recognition of impairment?
a. 1,100,000
b. 900,000
c. 800,000
d. 500,000
2. What is the revised carrying amount of machinery after recognition of impairment?
a. 2,200,000
b. 1,800,000
c. 1,600,000
d. 1,900,000
Solution 30-7
Question 1 Answer d
Carrying amount of cash generating unit
Value in use
3,300,000
2,700,000
Impairment loss
Goodwill
Impairment loss applied against goodwill only
Adjusted carrying amount
600,000
1,100,000
( 600,000)
500,000
Question 2 Answer a
The machinery is not impaired.
The carrying amount remains at P2,200,000.
Problem 30-8 (IFRS)
Palawan Company determined that the electronics division is a cash generating unit. The entity
calculated the value in use of the division to be P8,000,000.
The assets of the cash generating unit at carrying amount are as follows:
Building
5,000,000
Equipment
3,000,000
Inventory
2,000,000
10,000,000
The entity also determined that the fair value less cost of disposal of the building is P4,500,000.
1. What is the total impairment loss?
a. 2,000,000
b. 4,000,000
c. 3,000,000
d.
0
2. What is the impairment loss allocated to building?
a. 1,000,000
b. 500,000
c. 750,000
d.
0
3. What is the impairment loss allocated to equipment?
a. 600,000
b. 850,000
c. 900,000
d.
0
4. What is the impairment loss allocated to inventory?
a. 400,000
b. 200,000
c. 600,000
d.
0
Solution 30-8
Question 1 Answer a
Question 2 Answer b
Question 3 Answer c
Question 4 Answer c
Carrying amount of cash generating unit
Value in use
Impairment loss
Allocation of impairment loss
Building (5/10 x 2,000,000)
Equipment (3/10 x 2,000,000)
Inventory (2/10 x 2,000,000)
10,000,000
8,000,000
2,000,000
1,000,000
600,000
400,000
2,000,000
Observe that after allocating the P1,000,000 loss to the building, the carrying amount of the
building would be P4,000,000 which is lower than its fair value of P4,500,000.
PAS 36, paragraph 105, provides that the carrying amount of an asset shall not be reduced below
the highest of fair value less cost of disposal, value in use and zero.
The amount of impairment loss that would otherwise have been allocated to the asset shall be
reallocated prorata to the other noncash assets of the cash generating unit.
Accordingly, only P500,000 loss is allocated to the building and the balance of P500,000 is
reallocated to the equipment and inventory prorata.
Building
Equipmént
Inventory
Allocated loss
1,000,000
600,000
400,000
Reallocated loss:
( 500,000)
(3/5 x 500,000)
300,000
(2/5 x 500,000)
_________
_______
200,000
Impairment loss
500,000
900,000
600,000
Problem 30-9 (IAA)
At the beginning of current year, Revlon Company acquired all of the outstanding ordinary
shares of an acquiree for P44,000,000. The fair value of the acquiree's identifiable tangible and
intangible assets totale P50,000,00 and the fair value of liabilities assumed by the acquirer was
P15,000,000. The acquirer performed the required goodwill impairment test at year-end.
Management provided the following data:
Fair value of acquiree's net assets including goodwill
37,000,000
Carrying amount of acquirce's net assets including
41,000,000
goodwill
What amount of goodwill should be reported at year-end after recognizing any impairment loss?
a. 9,000,000
b. 4,000,000
c. 5,000,000
d.
0
Solution 30-9 Answer c
Fair value of acquiree's net assets including goodwill
Carrying amount of acquiree's net assets, including
goodwill
Impairment loss
37,000,000
41,000,000
4.000,000
Fair value of acquiree's identifiable assets
Fair value of acquiree's liabilities
Fair value of acquiree's net assets
Acquisition cost
Goodwill
Impairment loss - all charged against goodwill
Carrying amount of goodwill
50,000,000
15,000,000
35,000,000
44,000,000
9,000,000
(4,000,000)
5,000,000
Problem 30-10 (IFRS)
Devin Company is testing two reporting units for impairment of goodwill.
Telecommunication
Segment carrying amount
including goodwill
2,500,000
Carrying amount of goodwill
500,000
Estimated total fair value of segment
2,900,000
Estimated total fair value of segment
other than goodwill
2,100,000
Networking
3,000,000
500,000
2,800,000
2,500,000
1. After properly adjusting the goodwill for impairment, what is the adjusted amount of goodwill
for the reporting unit telecommunication?
a. 400,000
b. 800,000
c. 500,000
d.
0
2. After properly adjusting the goodwill for impairment, what is the adjusted amount of goodwill
for the reporting unit networking?
a. 500,000
b. 200,000
c. 300,000
d.
0
Solution 30-10
Question I Answer c
Segment carrying amount - Telecommunication
Estimated total fair value of segment
No impairment loss
Question 2 Answer c
Segment carrying amount - Networking
Estimated total fair value of segment
Impairment loss - applied to goodwill only
Goodwill- Networking (500,000 -200,000)
2,500,000
2,900,000
3,000,000
2,800,000
200,000
300,000
1. Which statement best describes impairment loss?
a. The removal of an asset from the statement of financial position.
b. The amount by which the carrying amount of an asset exceeds recoverable amount.
c. The systematic allocation of depreciable amount over the useful life.
d. The amount by which the recoverable amount of an asset exceeds carrying amount.
2. What is the recoverable amount of an asset?
a. Fair value less cost of disposal
b. Value in use
c. Fair value less cost of disposal or value in use, whichever is higher
d. Fair value less cost of disposal or value in use, whichever is lower
3. What is fair value of an asset?
a. The price that would be received to sell an asset in an orderly transaction.
b. The price that would be paid to transfer a liability in an orderly transaction.
c. The discounted future net cash flows from an asset.
d. The undiscounted future net cash flows from an asset.
4. Which statement best describes value in use?
a. The present value of estimated future net cash flows expected to be derived from an asset
b. The amount of cash that could currently be obtained by selling an asset in an orderly disposal
c. The amount which an entity expects to obtain for an asset at the end of the useful life
d. Undiscounted future net cash flows
5. Which is nọt relevant in determining value in use?
a. The expected future cash flows from the asset
b. The carrying amount of the asset
c. Expectation about possible variation in the amount and timing of future cash flows
d. The time value of money
CHAPTER 31
INTANGIBLE ASSETS
GOODWILL
Definition
● PAS 38, paragraph 8, simply defines an intangible asset as an identifiable nonmonetary
asset without physical substance.
● Paragraph 8 further states that "the intangible asset must be controlled by the entity as a
result of past event and from which future economic benefits are expected to flow to the
entity."
 Control is the power of the entity to obtain the future economic benefits flowing from the
intangible asset and restrict the access of others to those benefits.
● Customers cannot be forced to buy from the entity and can go elsewhere.
Initial measurement of intangible asset
 PAS 38, paragraph 24, provides that an intangible asset shall be measured initially at cost. The
cost of an intangible asset depends on the following:
a. Separate acquisition
b. Acquisition as part of a business combination
c. Acquisition by way of a government grant
d. Acquisition by exchange
e. Acquisition by self-creation or internal generation
Internally generated intangible asset
 PAS 38, paragraph 63, explicitly provides that "internally generated brands, mastheads,
publishing titles, customer lists and items similar in substance shall not be recognized as
intangible assets".
 Such items cannot be identified separately from the cost of developing the business as a
whole. Instead, such items are seen as being components of internally generated goodwill.
Accordingly, such expenditures shall be expensed when incurred.
Classification of intangible assets
a. Intangible assets with definite life
b. Intangible assets with indefinite life
Identifiable intangible assets
● PAS 38 specifically pertains to identifiable intangible assets. If the intangible asset is
acquired through purchase, there is a transfer of legal right that would make the asset
identifiable.
Amortization and impairment of intangible assets
 PAS 38, paragraph 97, states that intangible assets with limited or finite life are amortized
over their useful life.
 Intangible assets with finite useful life are tested for impairment whenever there is an
indication of impairment at the end of reporting period.
 Paragraphs 107 and 108 state that intangible assets with indefinite life are not amortized but
are testęd for impairment at least annually and whenever there is an indication that the
intangible asset may be impaired.
 An impairment loss on an intangible asset is recognized if the recoverable amount is less than
the carrying amount.
 The recoverable amount of the intangible asset is the higher between fair value less cost of
disposal and value in use.
Useful life
 The useful life of an intangible asset is indefinite when there is no foreseeable limit to the
period over which the asset is expected to generate net cash flows.
 Such "homegrown" goodwill is not recorded.
 The measurement of internal goodwill may prove to be difficult and a great deal of
subjectivity and misrepresentation might occur.
 PAS 38, paragraph 48, provides that internally generated goodwill shall not be recognized as
an asset.
Purchased goodwill is the goodwill that has been paid for. Purchased goodwill arises when a
business is purchased. People wishing to set up a business either would start the business from
scratch or buy an existing business.
Impairment of goodwill
 PAS 38, paragraph 107, mandates that goodwill shall not be amortized because the useful life
is indefinite.
 However, goodwill shall be tested for impairment at least annually and whenever there is an
indication that it may be impaired.
 Moreover, goodwill shall be tested for impairment at the operating segment level or any
lower level. An impairment loss recognized for goodwill shall not be reversed in a
subsequent period.
Negative goodwill
 If the purchase price or consideration transferred for the entity is less than the net fair value
of the identifiable assets acquired and liabilities assumed, the difference is negative goodwill.
 PFRS 3, paragraph 34, provides that such negative goodwill is recognized in profit or loss as
"gain on bargain purchase".
 The standard has already dropped the term negative goodwill.
PROBLEMS AND THEORIES
Problem 31-1 (IAA)
Wella Company acquired all of the outstanding ordinary shares of an acquiree paying
P7,400,000 çash. The carrying amount and fair value of the assets and liabilities of the acquiree
were:
Carrying amount
Fair value
Accounts receivable
1,080,000
975,000
Inventory
1,620,000
2,400,000
Property, plant and equipment
5,400,000
6,975,000
Accounts payable
(1,800,000)
(1,800,000)
Bonds payable
(2,700,000)
(2,475,000)
Net assets acquired
3,600,000
6,075,000
What amount of goodwill should be reported at year-end?
a. 3,800,000
b. 1,325,000
c. 2,300,000
d.
0
Solution 31-1 Answer b
Acquisition cost
Net assets acquired at fair value
Goodwill
7,400,000
(6,075,000)
1,325,000
PAS 38, paragraph 107, provides that goodwill or an intangible asset with an indefinite useful
life shall not be amortized but tested for impairment annually and whenever there is an indication
that the intangible asset may be impaired.
Problem 31-2 (LAA)
Brewer Company acquired all of the outstanding ordinary shares of an acquiree paying
P12,000,000 cash.
The carrying amount and fair value of the assets and liabilities of the acquiree were:
Carrying amount
Fair value
Accounts receivable
1,800,000
2,000,000
Inventory
2,700,000
5,000,000
Property, plant and equipment
10,000,000
13,000,000
Accounts payable
3,000,000
3,000,000
Bonds payable
4,500,000
3,500,000
What amount should be recognized as gain on bargain purchase?
a. 2,500,000
b. 8,000,000
c. 1,500,000
d.
0
Solution 31-2 Answer c
Accounts receivable
Inventory
Property, plant and equipment
Accounts payable
Bonds payable
Net assets at fair value
Acquisition cost
Net assets at fair value
Gain on bargain purchase
2,000,000
5,000,000
13,000,000
( 3,000,000)
( 3,500,000)
13,500,000
12,000,000
13,500,000
1,500,000
Problem 31-3 (IAA)
At year-end, Bliss Company purchased the net assets of another entity for P6,000,000. On the
date of the transaction, the acquiree had P2,000,000 of liabilities,
The assets of the acquiree at fair value were P3,000,000 for current assets and P6,000,000 for
noncurrent assets.
How should the purchase be accounted for?
a. Retained earnings should be credited for P1,000,000.
b. Gain on bargain purchase should be credited for P1,000,000.
c. The current assets should be reported at P3,000,000 and the noncurrent assets at P5,000,000.
d. Negative goodwill should be credited for P1,000,000.
Solution 31-3 Answer b
Current assets
Noncurrent assets
3,000,000
6,000,000
Total assets
Liabilities
Net assets at fair value
Acquisition cost
Excess net fair value
9,000,000
(2,000,000)
7,000,000
6,000,000
1,000,000
Since the net assets acquired at fair value exceeded acquisition cost, the difference is accounted
for as gain from bargain purchase.
Journal entry
Current assets
3,000,000
Noncurrent assets
6,000,000
Liabilities
Cash
Gain on bargain purchase
2,000,000
6,000,000
1,000,000
Problem 31-4 (IAA)
Java Company purchased an entity for P6,000,000 cash at the beginning of the current year. The
carrying amount and fair value of the assets of the acquiree on the date of the acquisition are as
follows:
Carrying amount
Fair value
Cash
50,000
50,000
Accounts receivable
500,000
500,000
Inventory
1,000,000
1,500,000
Patent
0
250,000
Property, plant and equipment
2,000,000
3,000,000
Total
3,550,000
5,300,000
In addition, the acquiree had liabilities totaling P2,000,000 at the time of acquisition. The
acquiree had no other separately identifiable intangible assets.
What is the goodwill arising from the acquisition?
a. 2,700,000
b. 2,450,000
c. 4,450,000
d. 700,000
Solution 31-4 Answer a
Acquisition cost
Net assets acquired at fair value
Goodwill
Total assets at fair value
Total liabilities
Net assets acquired at fair value
Problem 31-5 (IAA)
6,000,000
(3,300,000)
2,700,000
5,300,000
(2,000,000)
3,300,000
Mayer Company purchased Tara Company for P8,000,000 cash. Tara Company had total
liabilities of P3,000,000.
Mayer Company's assessment of the fair value it obtained when it purchased Tara Company is as
follows:
Cash
1,000,000
Inventory
500,000
In-process research and development
5,000,000
Assembled workforce
1,200,000
What is the goodwill arising from the acquisition?
a. 4,500,000
b. 3,300,000
c. 1,500,000
d. 300,000
Solution 31-5 Answer a
Cash
Inventory
In-process R and D
Total assets at fair value
Total liabilities
Net assets acquired at fair value
Acquisition cost
Net assets acquired at fair value
Goodwill
1,000,000
500,000
5,000,000
6.500,000
(3,000,000)
3,500,000
8,000,000
(3,500,000)
4,500,000
The goodwill includes the fair value of the assembled workforce of P1,200,000. The assembled
workforce is not accounted for separately as an asset.
Problem 31-6 (IAA)
Casanova Company purchased another entity for P5,000,000 cash, The following carrying
amount and fair value were associated with the items acquired in this business combination:
Carrying amount
Fair value
Accounts receivable
2,000,000
2,000,000
Inventory
1,000,000
500,000
Government contract
0
1,000,000
Equipment
400,000
500,000
Short-term loan payable
(2,000,000)
(2,000,000)
Net assets
1,400,000
2,000,000
The fair value associated with the acquired entity's government contract is not based on any legal
or contractual relationship. In addition, for obvious reason, there is no open market trading for an
intangible of this sort.
What is the goodwill arising from the business combination?
a. 3,000,000
b. 3,600,000
c. 4,000,000
d.
0
Solution 31-6 Answer c
Accounts receivable
Inventory
Equipment
Short-term payable
Net assets at fair value
Acquisition cost
Net assets at fair value
Goodwill
2,000,000
500,000
500,000
(2,000,000)
1,000,000
5,000,000
(1,000,000)
4,000,000
The government contract is not recognized separately because it is not based on any legal or
contractual relationship nor is it separately tradable. The fair value of P1,000,000 is imbedded in
the amount of goodwill of P4,000,000.
Problem 31-7 (IAA)
High Company purchased for cash at P50 per share all 150,000 ordinary shares outstanding of
Skyline Company.
The statement of financial position of the acquiree on the date of acquisition showed net assets
with a carrying amount of P6,000,000.
The fair value of property, plant, and equipment on the date of acquisition was P800,000 in
excess of carrying amount.
What amount should be recorded as goodwill on the date of purchase?
a. 1,500,000
b. 800,000
c. 700,000
d.
0
Solution 31-7 Answer c
Acquisition cost (150,000 x P50)
Fair value of net assets acquired
Goodwill
Carrying amount of net assets
Excess fair value of property, plant and equipment
Fair value of net assets acquired
7,500,000
6,800,000
700,000
6,000,000
800,000
6,800,000
Problem 31-8 (IAA)
At year-end, Sky Company reported assets of P5,000,000 and liabilities of P2,000,000. The
carrying amounts of the assets approximate fair value, except for land which has a fair value that
is P300,000 greater than carrying amount.
On same date, Blue Company paid P6,000,000 to acquire Sky Company.
What amount of goodwill should be recorded by the acquirer as a result of this purchase?
a. 1,000,000
b. 3,300,000
c. 2,700,000
d. 3,000,000
Solution 31-8 Answer c
Acquisition cost
Net assets at fair value (3,000,000 + 300,000)
Goodwill
6,300,000
3,300,000
2,700,000
Problem 31-9 (IAA)
Clever Company purchased for P4,000,000 cash all of the outstanding ordinary shares of Sun
Company when Sun's statement of financial position showed net assets of P3,200,000.
On the date of acquisition, Sun's assets and liabilities had fair value different from the carrying
amount as follows:
Carrying amount
Fair value
Property, plant and equipment, net 5,000,000
5,750,000
Other assets
500,000
0
Long-term debt
3,000,000
2,800,000
What amount should be reported as goodwill in the consolidated statement of financial position
of Clever Company and its wholly-owned subsidiary?
a. 350,000
b. 250,000
c. 750,000
d. 800,000
Solution 31-9 Answer a
Carrying amount of net assets
Undervaluation of property, plant and equipment
Overvaluation of other assets
Overvaluation of long-term debt
Fair value of net assets acquired
Acquisition cost
Fair value of net assets acquired
Goodwill
3,200,000
750,000
( 500,000)
200,000
3,650,000
4,000,000
(3,650,000)
350,000
Problem 31-10 (IFRS)
Brisbane Company has recently diversified by taking over the operations of Darwin Company at
a cost of P10,000,000.
Darwin manufactures and sells a cleaning cloth called the "Superswipe" which was developed by
Darwin's highly trained staff.
The unique nature of the coating used on the "Superswipe" has resulted in Darwin Company a
significant share of the South African market.
As a result of the takeover, Brisbane Company acquired the following assets at fair value:
Land and building
3,200,000
Production machinery
2,000,000
Inventory
1,800,000
Accounts receivable
700,000
In addition, Darwin Company owned, but had not recognized, the following:
● Trademark - "Superswipe" with fair value of P1,000,000.
● Patent-Formula for the special coating with fair value of P500,000.
What amount of goodwill should be recognized on the date of acquisition?
a. 2,300,000
b. 1,300,000
c. 1,800,000
d. 800,000
Solution 31-10 Answer d
Acquisition cost
Assets acquired:
Land and building
Production machinery
Inventory
Accounts receivable
Trademark
Patent
Goodwill
10,000,000
3,200,000
2,000,000
1,800,000
700,000
1,000,000
500,000
9,200,000
800,000
1. Which condition must be met for an item to be recognized as an intangible asset other than
goodwill?
a. The fair value can be measured reliably.
b. The item is part of an activity aimed at gaining new scientific or technical knowledge.
c. The item is expected to be used in the production or supply of goods or services.
d. The item is nonmonetary, identifiable and lacks physical substance.
2. An intangible asset is identifiable when
a. It is separable.
b. It arises from contractual and other legal right.
c. It is either separable or it arises from contractual and other legal right.
d. It is neither separable nor it arises from contractual and other legal right.
3. The recognition criteria for an intangible asset include which of the following conditions?
a. The intangible asset must be measured at cost.
b. The cost can be measured reliably.
c. It is probable that future economic benefit will arise from use.
d. It is probable that future economic benefit will arise from use and the cost can be measured
reliably.
4. Which statement is true in relation to internally generated intangible asset?
a. Internally generated brand, masthead, publishing title, and customer list shall not be
recognized as an intangible asset.
b. The cost of internally generated intangible asset comprises all directly attributable costs
necessary to produce and prepare the asset for the intended use.
c. Internally generated goodwill shall not be recognized as an intangible asset.
d. All of these statements are true.
5. After initial recognition, an intangible asset shall be measured using
a. Cost model
b. Revaluation model
c. Cost model or revaluation model
d. Cost model or fair value model
CHAPTER 32
IDENTIFIABLE INTANGIBLE ASSETS
Patent
 A patent is an exclusive right granted by the government to an inventor enabling him to
control the manufacture, sale or other use of invention for a specified period of time.
 The capitalized development cost is recognized as intangible asset and amortized over the
useful life of the patent.
Impairment of patent
 Since a patent is an intangible asset with finite useful life, the cost is amortized. However, the
patent should be tested for impairment whenever there is an indication of impairment at the
end of reporting period.
Trademark
 A trademark is a symbol, sign, slogan or name used to mark a product to distinguish it from
other products. The terms trademark, tradename and brand name are interchangeably used.
 The cost of a trademark is not amortized but subject to test for impairment at least annually
and whenever there is an indication that it may be impaired.
Copyright
 A copyright is an exclusive right granted by the government to the author, composer or artist
enabling the grantee to publish, sell or otherwise benefit from the literary, musical or artistic
work.
 Under US GAAP, a copyright is considered an artistic related intangible asset.
Franchise
 Under a franchise agreement, one party called the franchisor grants certain rights to another
party called the franchisee. Under US GAAP, a franchise is a contract-based intangible asset.
The franchise agreement may be:
a. Between the government and a private entity or individual.
b. Between private entities or individuals.
Lease right
 The accounting for lease is now governed by IFRS 16.
 Under the new lease standard, a lessee is required to initially recognize a right of use asset for
the lease term and a lease liability for the obligation to make lease payments.
 The right of use asset is presented as a separate line item in the statement of financial
position.
 Leasehold improvement is classified under property, plant and equipment of the lessee.
Broadcasting license with indefinite useful life
 The license may be renewed indefinitely at little cost.
Customer list
 Literally, a customer list is a customer database containing the name, contract information,
order history and other vital and social statistics, such as birth, death and even sickness.
 PAS 38, paragraph 63, provides that internally generated customer list shall not be
recognized as an intangible asset.
 However, an acquired customer list may be recognized as an intangible asset and amortized
over the useful life.
Organization cost
 PAS 38, paragraph 69, provides that start-up costs which include legal and secretarial costs in
establishing a legal entity shall be recognized as expense when incurred.
PROBLEMS AND THEORIES
Problem 32-1 (LAA)
Vanessa Company reported the following data at year-end:
Franchise
Computer software
Deferred charges
Patent
Customer list purchased
Copyright
Deposit with advertising agency to promote goodwill
Bond sinking fund
Goodwill
Trademark
Research and development cóst
1,000,000
1,500,000
100,000
2,500,000
500,000
700,000
400,000
1,300,000
4,000,000
900,000
2,000,000
What total amount should be reported as intangible assets?
a. 11,100,000
b. 11,500,000
c. 10,600,000
d. 13,100,000
Solution 32-1 Answer a
Franchise
Computer software
Patent
1,000,000
1,500,000
2,000,000
Customer list
Copyright
Goodwill
Trademark
Total intangible assets
500,000
700,000
4,000,000
900,000
11,100,000
Problem 32-2 (IAA)
Webster Company commenced operations in the current year. A number of expenditures were
made during the current year that were debited to one account intangible assets.
State incorporation fees and legal costs related to
organizing the corporation
100,000
Fire insurance premium for three-year period
60,000
Purchase of a copyright
200,000
Legal fees for filing a patent on a new product resulting
from an R&D project
50,000
Legal fees for successful defense of the patent
developed from the project
10,000
Entered into a 10-year franchise agreement with
a franchisor
500,000
Advertising cost
150,000
Purchase of all of the outstanding ordinary shares
of an acquiree. On the date of purchase, the acquiree
had total assets of P6,000,000 at fair value and total
liabilities of P2,200,000 at fair value.
5,000,000
What total amount should be reported as intangible assets?
a. 1,950,000
b. 1,960,000
c, 2,050,000
d. 2,350,000
Solution 32-2 Answer a
Copyright
Patent
Franchise
Goodwill
Total intangible assets
Acquisition cost
Net assets of acquiree (6,000,000 - 2,200,000)
Goodwill
200,000
50,000
500,000
1,200,000
1,950,000
5,000,000
(3,800,000)
1,200,000
Problem 32-3 (IAA)
Alcaraz Company paid P5,000,000 to purchase intangible assets with the following fair value:
Internet domain name
1,500,000
Order backlog
1,200,000
In-process research and development
2,400,000
Operating permit
900,000
In addition, the entity spent P2,000,000 to run an advertising campaign to boost its image in the
local community.
What amount should be recognized as cost of the in-process research and development?
a. 2,400,000
b. 2,000,000
c. 2,800,000
d.
0
Solution 32-3 Answer b
Fair value
Fraction
Cost
1,500,000
15/60
1,250,000
1,200,000
12/60
1,000,000
2,400,000
24/60
2,000,000
900,000
9/60
750,000
6,000,000
5,000,000
An in-process research and development project acquired separately is recognized as an asset at
cost, even if a component is research.
Subsequent expenditure on that project is accounted for as any other research and development
expenditure which may be expensed or capitalized depending on the criteria for the recognition
of an intangible asset.
The cost of the advertising should be expensed immediately.
Internet domain name
Order backlog
In-process R and D
Operating permit
Problem 32-4 (IAA)
Golden Company developed a new machine for manufacturing baseballs, Because the machine is
considered very valuable, the entity had it patented.
The following expenditures were incurred in developing and patenting the machine:
Purchase of special equipment to be used solely for
development of the new machine
Research salaries and fringe benefits for engineers
and scientists
Cost of testing prototype
Legal cost for filing of patent
Fees paid to government patent office
Drawings required by patent office to be filed with
patent application
1,800,000
200,000
250,000
150,000
50,000
40,000
1. What amount should be capitalized as cost of patent?
a. 240,000
b. 540,000
c. 740,000
d. 200,000
2. What amount of research and development cost should be expensed in the current year?
a. 2,250,000
b. 2,000,000
c. 2,490,000
d. 1,800,000
Solution 32-4
Question I Answer a
Legal cost for filing of patent
Fees paid to patent office
Drawings required by patent office
Total cost of patent
Question 2 Answer a
Purchase of special equipment
Research salaries and fringe benefits
Cost testing prototype
Research and development expense
150,000
50,000
40,000
240,000
1,800,000
200,000
250,000
2,250,000
Problem 32-5 (IAA)
Harmonious Company acquired a patent for a drug with a remaining legal and useful life of six
years on January 1,2017 for P5,400,000.
On January 1,2019, a new patent is received for an improved version of the same drug. The new
patent has a legal and useful life of twenty years.
What amount should be recorded as amortization expense for 2019?
a. 900,000
b. 200,000
c. 180,000
d. 300,000
Solution 32-5 Answer c
Cost- January 1, 2017
Amortization for 2017 and 2018 (5,400,000/6 x 2)
Carrying amount - January 1, 2019
Amortization for 2019 (3,600,000 / 20)
5,400,000
(1,800,000)
3,600,000
180,000
Problem 32-6 (IAA)
Iceberg Company purchased a patent on January 1, 2014 for P6,000,000. The original useful life
was estimated to be 15 years.
However, in December 2019, the management received information proving conclusively that
the product protected by the Iceberg patent would be obsolete within four years.
Accordingly, the entity decided to write off the unamortized cost of the patent over five years
beginning in 2019.
What amount should be recorded as patent amortization for 2019?
a. 1,200,000
b. 1,000,000
c. 800,000
d.
400,000
Solution 32-6 Answer c
Cost - January 1, 2014
Accumulated amortization-December 31, 2018
(6,000,000/15 x 5)
Carrying amount- January 1, 2019
Amortization for 2019 (4,000,000 /5)
6,000,000
2,000,000
4,000,000
800,000
Problem 32-7 (AICPA Adapted)
On January 1, 2016, Taft Company purchased a patent for P7,140,000. The patent is being
amortized over the remaining legal life of 15 years expiring on January 1, 2031.
During 2019, the entity determined that the economic benefits of the patent would not last longer
than ten years from the date of acquisition.
What is the carrying amount of patent on December 31, 2019?
a. 4,284,000
b. 4,896,000
c. 5,050,000
d. 5,236,000
Solution 32-7 Answer b
Cost - January 1, 2016
Amortization for 2016, 2017 and 2018
(7,140,000 / 15 x 3)
Carrying amount - January 1, 2019
Amortization for 2019 (5,712,000 / 7)
Carrying amount - December 31, 2019
Revised life
Years expired - 2016, 2017, 2018
Remaining revised life
7,140,000
(1,428,000)
5,712,000
( 816,000)
4,896,000
10 years
(3)
7 years
The change in the useful life of the patent is a change in accounting estimate. The change in
accounting estimate should be treated currently and prospectively.
Problem 32-8 (AICPA Adapted)
On January 1, 2016, Lava Company purchased a patent for a new consumer product for
P900,000. At the time of purchase, the patent was valid for 15 years.
However, the useful life of the patent was estimated to be only 10 years due to the competitive
nature of the product.
On December 31, 2019, the product was permanently withdrawn from sale under governmental
order because of a potential health hazard in the product.
What amount should be charged against income in 2019 if amortization is recorded at the end of
each year?
a. 90,000
b. 540,000
c. 630,000
d. 720,000
Solution 32-8 Answer c
Acquisition cost – January 1, 2016
Amortization for 2016, 2017 and 2018
(900,000 / 10 x 3)
Carrying amount - January 1, 2019
900,000
(270,000)
630,000
The remaining carrying amount on January 1,2019 is entirely expensed in 2019.
Amortization of patent for 2019 (900,000/ 10)
90,000
Writeoff of unamortized cost
540,000
Total amount charged to expense in 2019
630,000
Problem 32-9 (AICPA Adapted)
Gray Company was granted a patent on January 1, 2016 and capitalized P450,000. The entity
was amortizing the patent over the useful life of 15 years.
During 2019, the entity paid P150,000 in successfully defending an attempted infringement of
the patent.
After the legal action was completed, the entity sold the patent to the plaintiff for P750,000. The
policy is to take no amortization in the year of disposal.
What amount should be reported as gain from sale of patent in 2019?
a. 150,000
b. 240,000
c. 270,000
d. 390,000
Solution 32-9 Answer d
Acquisition cost - January 1, 2016
Amortization for 2016, 2017 and 2018 (450,000 / 15 x 3)
Carrying amount - January 1, 2019
Gain from sale of patent
(750,000 – 360,000)
450,000
(90,000)
360,000
390,000
Problem 32-10 (AICPA Adapted)
At the beginning of current year, Boracay Company bought a trademark from Lamitan Company
for P3,000,000. The entity retained an independent consultant who estimated the trademark's life
to be indefinite. The carrying amount of the trademark was P1,500,000 on the books of Lamitan
Company.
What is the carrying amount of the trademark at year-end?
a. 3,000,000
b. 1,500,000
c. 2,850,000
d.
0
Solution 32-10 Answer a
The legal life of a trademark is 10 years and may be renewed every 10 years. Considering the
almost automatic renewal of a trademark, the trademark can be classified as an intangible asset
with indefinite life. Accordingly, the cost of trademark is not amortized but tested for impairment
at least annually.
1. Patent is an example of which category of intangible asset?
a. Market-related
b. Customer-related Artistic-related
d. Technology-based
2. A patent should be amortized over
a. Twenty years
b. The useful life
c. The useful life or twenty years, whichever is longer
d. The useful life or twenty years, whichever is shorter
3. When a patent is amortized, the credit is usually made to
a. The patent account
b. As accumulated amortization account
c. An accumulated depreciation account
d. An expense account
4. When an entity successfully defended a patent from infringement by a competitor, the cost of
successful litigation should be
a. Amortized over the legal life of the patent.
b. Amortized over five years.
c. Expensed in the period when incurred.
d. Amortized over the remaining useful life of the patent.
5. The cost of purchasing right for a product that might otherwise have seriously competed with
the purchaser's patented product should be
a. Charged off in the current period.
b. Amortized over the legal life of the purchased patent.
c. Added to factory overhead.
d. Amortized over the remaining useful life of the patent for the product whose market would
have been impaired by competition from the newly patented product.
– END OF VOL 1 –
INTERMEDIATE ACCOUNTING VOL 2
CHAPTER 1
LIABILITIES
 Liabilities are present obligations of an entity to transfer an economic resource as a result of
past events.
 An essential characteristic of a liability is that the entity has a present obligation.
 The present obligation may be a legal obligation or a constructive obligation.
 PAS 1, paragraph 69, provides that an entity shall classify a liability as current when:
a. The entity expects to settle the liability within the entity’s operating circle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve months after the reporting period.
d. The entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.
 PAS 1, paragraph 74, provides that such a liability is classified as current even if the lender
has agreed, after the reporting period and before the statements are authorized for issue, not
to demand payment as a consequence of the breach.
 Under Paragraph 54 of PAS 1, as a minimum, the face of the statement of financial position
shall include the following line items for current liabilities:
a. Trade and other payables
b. Current provisions
c. Short - term borrowing
d. Current portion of long - term debt
e. Current tax liability
 The term trade and other payables is a line item for accounts payable, notes payable, accrued
interest on note payable, dividends payable and accrued expenses.
 No objection can be raised if the trade accounts and notes payable are separately presented.
 Estimated liabilities are either current or noncurrent in nature.
 The Philippine Department of Trade and Industry ruled that gift certificates no longer have
an expiration period.
 Refundable deposits consist of cash or property received from customers but which are
refundable after compliance with certain conditions.
 The best example of a refundable deposit is the customer deposit required for returnable
containers like bottles, drums, tanks, and barrels.
PROBLEMS AND THEORIES
1) Which of the following is a current liability?
a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new
debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these
2) Among the short-term obligations of Lance Company as of December 31, the balance
sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are
90-day notes, renewable for another 90-day period. These notes should be classified on the
balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.
3) Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance
sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the
stated discount rate.
d. All of these are true.
4) Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these
5) Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term
investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven
months.
d. Bonds to be refunded when due in eight months, there being no doubt about the
marketability of the refunding issue.
1) Glaus Corp. signed a three-month, zero-interest-bearing note on November 1, 2010 for
the purchase of $150,000 of inventory. The face value of the note was $152,205.
Assuming Glaus used a “Discount on Note Payable” account to initially record the
note and that the discount will be amortized equally over the 3-month period, the
adjusting entry made at December 31, 2010 will include a
a. debit to Discount on Note Payable for $735.
b. debit to Interest Expense for $1,470.
c. credit to Discount on Note Payable for $735.
d. credit to Interest Expense for $1,470.
(FV of Note minus the amount of the note) multiplied to the amount of months passed divided by
the total months of the note > (152,205-150,000)*2/3 = 2,205*2/3 = 1,470. Since it is an
expense, debit the value.
2) The effective interest on a 12-month, zero-interest-bearing note payable of $300,000,
discounted at the bank at 10% is
a. 10.87%.
b. 10%.
c. 9.09%.
d. 11.11%.
3) On September 1, Hydra purchased $9,500 of inventory items on credit with the terms
1/15, net 30, FOB destination. Freight charges were $200. Payment for the purchase was
made on September 18. Assuming Hydra uses the perpetual inventory system and the net
method of accounting for purchase discounts, what amount is recorded as inventory from this
purchase?
a. $9,405.
b. $9,605.
c. $9,700.
d. $9,500.
Using perpetual inventory system and net method of accounting for purchase discounts, the
amount recorded as inventory from the purchase will be the discounted value which is 9,500
times 0.85. Since the discount was 15%, then the value of the original should be 85%, hence the
value of 0.85.
4) Sodium Inc. borrowed $175,000 on April 1. The note requires interest at 12% and
principal to be paid in one year. How much interest is recognized for the period from April1
to December 31?
a. $0.
b. $21,000.
c. $5,250.
d. $15,750.
The interest of 12% will be allocated monthly and since the loan was made on April 1, by
December 31 it would be equivalent to 9 months, giving you a value of 9/12. Multiply that value,
the interest rate and the principal to get the interest recognized for the period mentioned =>
175,000 *12%*9/12 = 15,750.
5) Collier borrowed $175,000 on October 1 and is required to pay $180,000 on March
1. What amount is the note payable recorded at on October 1 and how much interest
is recognized from October 1 to December 31?
a. $175,000 and $0.
b. $175,000 and $3,000.
c. $180,000 and $0.
d. $175,000 and $5,000.
The amount recorded is 175,000 as stated in the problem, and given that the span of time from
October 1 to March 1 is 5 months and the increase from 175,000 to 180,000 is 5,000, then we
just have to divide that by 5, making the interest per month is 1,000. And since the value asked
was from October 1 to December 31 (equivalent to 3 months), we multiply 3 to 1,000, giving us
3,000.
6) Purest owes $1 million that is due on February 28. The company borrows $800,000
on February 25 (5-year note) and uses the proceeds to pay down the $1 million note
and uses other cash to pay the balance. How much of the $1 million note is classified as longterm in the December 31 financial statements.
a. $1,000,000.
b. $0.
c. $800,000.
d. $200,000.
Long-term notes are basically notes payable that have a term longer than 1 year. Since the 1
million note is due on the current year, it should not be included under said classification. The
800,000 note is a 5 year note used to pay the 1 million note, making the 800,000 part of it as a
long term payable. Therefore, the value asked is 800,000.
7) Vista newspapers sold 4,000 of annual subscriptions at $125 each on September 1. How
much unearned revenue will exist as of December 31?
a. $0.
b. $333,333.
c. $166,667.
d. $500,000.
Given the values, multiply 4,000 and 125, then count how many months it is from September 1
to December 31 and divide it by 12 making it 4/12. That would make it 500,000*4/12. This value
is then used to subtract it to the original value of 500,000, giving the value of 333,333 which is
the answer. This is because unearned revenue refers to the revenue that’s not yet earned, which is
basically the value of the subscriptions that have been sold but not yet earned.
8) Purchase Retailer made cash sales during the month of October of $132,600. The sales are
subject to a 6% sales tax that was also collected. Which of the following would be
included in the summary journal entry to reflect the sale transactions?
a. Debit Cash for $132,600.
b. Credit Sales Tax Payable for $7,506.
c. Credit Sales for $125,094.
d. Credit Sales Tax Payable for $7,956.
Simply multiply the value of 132,600 and 6%. Doing so will get you the sales tax value of 7,956.
This sales tax value is a liability and therefore credited.
9) Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from
the sale of 75,000 shares of common stock. If the stock is sold for $20 per share
subsequent to the balance sheet date, but before the balance sheet is issued, what
amount of short-term debt could be excluded from current liabilities?
a. $1,500,000
b. $2,500,000
c. $1,000,000
d. $0
If the stocks were sold for $20 per share subsequent to the balance sheet date, then the value of
all the sold stock should be excluded from current liabilities, which is 75,000*20 = 1,500,000.
10) Ermler Corporation has $1,800,000 of short-term debt it expects to retire with
proceeds from the sale of 60,000 shares of common stock. If the stock is sold for
$20 per share subsequent to the balance sheet date, but before the balance sheet is
issued, what amount of short-term debt could be excluded from current liabilities?
a. $1,200,000
b. $1,800,000
c. $600,000
d. $0
Same as problem stated above. Since the 60,000 stocks is sold for $20, the value of the stocks
sold should be excluded from current liabilities, which is 60,000*20 = 1,200,000.
CHAPTER 2
PREMIUM LIABILITY
 Premiums are articles of value such as toys, dishes, silverware and other goods given to
customers as result of past sales or sales promotion activities.
 An entity shall account for the award credits as a separately component of the initial sale
transaction.
 In other words, the granting of award credits is effectively accounted for as a future delivery
of goods or services.
 IFRS 15, paragraph 74, provides that an entity shall allocate the transaction price to each
performance obligation identified in a contract on a relative stand - alone selling price basis.
 In other words, the fair value of the consideration received with respect to the initial sale
shall be allocated between the award credits and the sale based on relative stand - alone
selling price.
 The consideration allocated to the award credits is initially recognized as deferred revenue
and subsequently recognized as revenue when the award credits are redeemed.
 The amount of revenue recognized shall be based on the number of award credits that have
been redeemed relative to the total number expected to be redeemed.
 Revenue from points is recognized when the electrical goods are sold.
Problem 2-1 (AICPA Adapted)
In an effort to increase sales, Mill Company inaugurated a sales promotional campaign on June
30, 2019. The entity placed a coupon redeemable for a premium in each package of cereal sold.
Each premium cost P20 and five coupons must be presented by a customer to receive a premium.
The entity estimated that only 60% of the coupons issued would be redeemed.
For the six months ended December 31, 2019, the following information is available:
Packages of cereal sold
Premium purchased
Coupons redeemed
160,000
12,000
40,000
1. What is the premium expense for 2019?
a.
b.
c.
d.
640,000
384,000
240,000
160,000
2. What is the estimated premium liability on December 31, 2019?
a.
b.
c.
d.
160,000
224,000
288,000
384,000
Solution 2-1 Question 1 Answer b Question 2 Answer b
Coupons to be redeemed (160,000 x 60 %)
Coupons redeemed
96,000
(40,000)
Coupons outstanding
Premium expense (96,000 / 5 = 19,200 x 20)
Estimated liability (56,000 / 5 = 11,200 x 20)
56,000
384,000
224,000
Explanation: We are asked to get premium expense and estimated premium liability for 2019,
and to solve for them, we need the percentage of coupons that will be multiplied to the total
number of packages sold, the cost of each premium, and number of coupons redeemed. We have
all the values needed which are 160,000 packages sold each with a coupon, 60% of the coupons
will be redeemed,
Problem 2-2 (AICPA Adapted)
During the current year, Day Company sold 500,000 boxes of cake mix under a new sales
promotional program.
Each box contained one coupon, which entitled the customer to a baking pan upon remittance of
P40.
The entity paid P50 per pan and P5 for handling and shipping and estimated that 80 % of the
coupons would be redeemed , even though only 300,000 coupons had been processed during the
year.
1. What amount should be reported as premium expense for the current year?
a. 6,000,000
b. 7,500,000
c. 4,500,000
d. 2,000,000
2. What amount should be reported as liability for unredeemed coupons at year - end?
a. 1,000,000
b. 1,500,000
c. 3,000,000
d. 5,000,000
Solution 2-2 Question 1 Answer a
Net premium expense (50 + 5 - 40)
15
Coupons to be redeemed (80 % x 500,000)
400,000
Coupons redeemed
(300,000)
Coupons outstanding
100,000
Premium expense (400,000 x 15)
6,000,000
Question 2 Answer b
Liability for unredeemed coupons (100,000 x 15)
1,500,000
Problem 2-3 (AICPA Adapted)
In packages of the products, Curran Company included coupons that may be presented at retail
stores to obtain discounts on other Curran products.
Retailers were reimbursed for the face amount of coupons redeemed plus 10% of that amount for
handling costs.
The entity honored requests for coupon redemption by retailers up to three months after the
consumer expiration date.
The entity estimated that 70% of all coupons issued would ultimately be redeemed. The
consumer expiration date is December 31, 2019.
The total face amount of coupons issued was P600,000 and the total payments to retailers during
2019 amounted to P220,000.
1. What amount should be reported as premium expense for 2019?
a. 600,000
b. 180,000
c. 462,000
d. 198,000
2. What amount should be reported as liability for unredeemed coupons on December 31, 2019?
a. 308,000
b. 200,000
c. 242,000
d. 0
Solution 2-3
Question 1 Answer c
Question 2 Answer c
Total coupons to be redeemed
(600,000 x 70% x 110%)
Total payments to retailers
Liability for unredeemed coupons - December 31 , 2019
462,000
(220,000)
242,000
Problem 2-4 ( AICPA Adapted )
Blake Company mailed coupons to consumers which may be presented at a stated expiration date
at retail food stores to obtain discounts on certain Blake products.
Retailers were reimbursed for the face value of coupons redeemed plus 10% of coupon face
value as compensation for handling costs.
The entity honored requests for coupon redemption by retailers received up to three months after
the expiration date. Based on past experience, 60% of the coupons issued ultimately are
redeemed.
The entity provided the following information with respect to the two separate series of coupons
issued during 2019:
Series A
Series B
Consumer expiration date
June 30, 2019
December 31, 2019
Total face value of coupons issued
1,000,000
2,000,000
Total payments to retailers on December 31, 2019
605,000
405,000
What amount should be reported as liability for unredeemed coupons on December 31, 2019?
a. 970,000
b. 915,000
c. 795,000
d. 0
Solution 2-4 Answer b
Total face value of coupons - Series B
Multiply by
2,000,000
60%
Coupons to be redeemed
Compensation for handling costs (10 % x 1,200,000)
1,200,000
120,000
Total liability for coupons
Payments to retailers - Series B
Estimated liability - December 31, 2019
1,320,000
(405,000)
915,000
The Series A coupons already expired on June 30, 2019 and therefore there is no more estimated
liability.
Problem 2-5 (AICPA Adapted)
Case Cereal Company distributed coupons to promote new products. On October 1, 2019, the
entity mailed 100,000 coupons for P45 off each box of cereal purchased.
The entity expected 12,000 of these coupons to be redeemed before the December 31, 2019
expiration date.
It takes 30 days from the redemption date for the entity to receive the coupons from the retailers.
The entity reimbursed the retailers an additional P5 for each coupon redeemed.
On December 31, 2019, the entity had paid retailers P250,000 related to these coupons and had
5,000 coupons on hand that had not been processed for payment.
What amount should be reported as liability for coupons on December 31, 2019?
a. 350,000
b. 290,000
c. 250,000
d. 225,000
Solution 2-5 Answer a
Coupons expected to be redeemed
Multiply by payment for each coupon ( 45 + 5 )
Total liability for coupons
12,000
50
600,000
Payments on December 31, 2019
(250,000)
Liability for coupons - December 31, 2019
350,000
The coupon liability on December 31, 2019 is not reduced by the 5,000 coupons on hand because
the coupons had not been processed for payment.
Problem 2-6 (AICPA Adapted)
Baker Company sold consumer products that are packaged in boxes. The entity offered an
unbreakable glass in exchange for two box tops and P50 as a promotion during the current year.
The cost of the glass was P200.
The entity estimated at the end the year that it would be probable that 50 % of the box tops will
be redeemed.
The entity sold 100,000 boxes of the product during the current year and 40,000 box tops were
redeemed during the year.
1. What amount should be reported as premium expense for the current year?
a. 3,750,000
b. 3,000,000
c. 5,000,000
d. 4,000,000
2. What amount should be reported as estimated premium liability at year-end?
a. 3,000,000
b. 1,500,000
c. 750,000
d. 0
Solution 2-6
Question 1 Answer a
Cost of glass
Remittance from customer
200
(50)
Net premium cost
150
Box tops to be redeemed (50 % x 100,000)
Box tops redeemed
50,000
40,000
Outstanding
10,000
Premium expense ( 50,000 / 2 = 25,000 x 150 )
Question 2 Answer c
3,750,000
Estimated liability at year - end (10,000 / 2 = 5,000 x 150)
750,000
Problem 2-7 (AICPA Adapted)
Topsy Company started a new promotional program. For every 10 box tops returned, customers
receive a basketball.
The entity estimated that only 60 % of the box tops reaching the market would be redeemed.
Sales of product
Basketballs purchased
Basketballs distributed
Units
100,000
5,500
4,000
Amount
30,000,000
4,125,000
1. What amount should be reported as premium expense for the year?
a. 4,500,000
b. 1,500,000
c. 4,125,000
d. 7,500,000
2. What amount should be reported as year-end estimated liability associated with this
promotion?
a. 4,125,000
b. 1,500,000
c. 3,000,000
d. 4,500,000
Solution 2-7
Question 1 Answer a
Basketballs to be distributed ( 100,000 x 60 % / 10 )
Basketballs distributed
6,000
4,000
Balance
2,000
Cost of basketball ( 4,125,000 / 5,500 )
Premium expense ( 6,000 x 750 )
750
4,500,000
Question 2 Answer b
Estimated liability ( 2,000 x 750 )
1,500,000
Problem 2-8 ( IAA )
Charlene Company includes one coupon in each box of laundry soap it sells. A towel is offered
as a premium to customers who send in 10 coupons and a remittance of P10.
Distribution cost of premium is P5. Experience indicates that only 30% of the coupons will be
redeemed.
Boxes of soap sold
Number of towels purchased at P50 each
Coupons redeemed
2019
2,000,000
50,000
400,000
2020
2,500,000
80,000
700,000
1. What amount should be reported as premium expense for 2019?
a. 2,500,000
b. 2,400,000
c. 1,800,000
d. 2,700,000
2. What amount should be reported as estimated premium liability on December 31, 2019?
a. 1,000,000
b. 1,100,000
c. 800,000
d. 900,000
3. What amount should be reported as premium expense for 2020?
a. 3,000,000
b. 3,750,000
c. 3,375,000
d. 4,000,000
4. What amount should be reported as estimated premium liability on December 31, 2020?
a. 1,000,000
b. 1,250,000
c. 1,125,000
d. 1,375,000
Solution 2-8
Question 1 Answer d
Cost of towel
Remittance from customer
Distribution cost
Net premium cost
Coupons to be redeemed in 2019 ( 2,000,000 x 30 % )
Coupons redeemed in 2019
Coupons outstanding - December 31, 2019
Premium expense for 2019 ( 600,000 / 10 x 45 )
Question 2 Answer d
Estimated liability - 12/31/2019 ( 200,000 / 10 x 45 )
50
(10)
5
45
600,000
(400,000)
200,000
2,700,000
900,000
Question 3 Answer c
Coupons to be redeemed in 2020 ( 2,500,000 x 30 % )
Premium expense for 2020 ( 750,000 / 10 x 45 )
750,000
3,375,000
Question 4 Answer c
Coupons outstanding - December 31 , 2019
Coupons to be redeemed in 2020 ( 2,500,000 x 30 % )
Total coupons to be redeemed
Coupons redeemed in 2020
Coupons outstanding - December 31 , 2020
Estimated liability - 12/31/2020 ( 250,000 / 10 x 45 )
200,000
750,000
950,000
(700,000)
250,000
1,125,000
Problem 2-9 ( IAA )
Love Company included one coupon in each package sold . A premium is offered to customers
who send in 10 coupons.
Number of packages sold
Number of premiums purchased at P40 each
Number of premiums distributed
Number of premiums to be distributed next period
2019
500,000
30,000
20,000
5,000
2020
800,000
60,000
50,000
3,000
1. What amount should be reported as premium expense for 2019?
a. 1,000,000
b. 1,200,000
c. 600,000
d. 500,000
2. What amount should be reported as estimated premium liability on December 31, 2019?
a. 400,000
b. 200,000
c. 600,000
d. 300,000
3. What amount should be reported as premium expense in 2020?
a. 2,400,000
b. 2,000,000
c. 2,120,000
d. 1,920,000
4. What amount should be reported as estimated premium liability on December 31, 2020?
a. 320,000
b. 400,000
c. 120,000
d. 520,000
Solution 2-9
Question 1 Answer a
Number of premiums distributed in 2019
Number of premiums to be distributed in 2020
Total premiums in 2019
Premium expense for 2019 ( 25,000 x 40 )
20,000
5,000
25,000
1,000,000
Question 2 Answer b
Estimated liability - 12/31/2019 ( 5,000 x 40 )
200,000
Question 3 Answer d
Premiums distributed in 2020
Premiums to be distributed in 2021
Total
Premiums arising from 2019 sales distributed in 2020
Premiums applicable to 2020
Premium expense for 2020 ( 48,000 x 40 )
50,000
3,000
53,000
(5,000)
48,000
1,920,000
Question 4 Answer c
Estimated liability - 12/31/2020 ( 3,000 x 40 )
120,000
Problem 2-10 ( IAA )
Energy Company offered a cash rebate of P20 on each P150 package of batteries sold during the
current year. Historically, 10% of customers mail in the rebate form.
During the year, 600,000 packages of batteries are sold, and 25,000 P20 rebates are mailed to
customers.
1. What amount of rebate expense should be reported for the current year?
a. 1,200,000
b. 1,500,000
c. 500,000
d. 600,000
2. What amount should be reported as rebate liability at year - end?
a. 700,000
b. 500,000
c. 350,000
d. 400,000
Solution 2-10
Question 1 Answer a
Rebate expense ( 10 % x 600,000 x 20 )
1,200,000
Question 2 Answer a
Rebate expense
Rebate paid ( 25,000 x 20 )
Rebate liability
1,200,000
(500,000)
700,000
1. The cost of customer premium offer should be charged to expense
a. When the related product is sold.
b. When the premium offer expires.
c. Over the life cycle of the product to which the premium relates.
d. When the premium is claimed.
2. The accounting concept that requires recognition of a liability for customer premium offer is
a. Time period
b. Prudence
c. Historical cost
d. Matching principle
3. Accounting for cost of incentive program for frequent customer purchases involves
a. Recording an expense and a liability each period.
b. Recording a liability and a reduction of revenue each period.
c. Recording an expense and an asset reduction each period.
d. Recording an expense and revenue each period.
4. Accounting for cost of incentive program for customer purchases
a. Requires probability estimation.
b. Follows the matching principle.
c. Is a loss contingency situation.
d. All of these are correct.
5. Providing a monetary rebate program
a. Is accounted for similarly to a premium offer
b. Creates an expense for the seller in the period of sale.
c. Creates a liability for the seller at the time of sale.
d. All of these are correct.
CHAPTER 3
WARRANTY LIABILITY
 PAS 37, paragraph 14, provides that a provision shall be recognized as a liability in the
financial statements under the following conditions:
a. The entity has a present obligation, legal or constructive, as a result of a past event.











b. It is probable that an outflow of resources embodying economic benefits would be
required to settle the obligation.
c. The amount of the obligation can be measured reliably.
The obligating event in this case is the sale of the product which gives rise to a constructive
obligation.
The amount recognized as the warranty provision should be the best estimate of the
expenditure to settle the present obligation.
Where no reliable estimate can be made, no warranty liability is recognized.
The accrual approach has the soundest theoretical support because it properly matches cost
with revenue.
Any difference between estimate and actual cost is a change in estimate and therefore treated
currently or prospectively, if necessary.
The expense as incurred approach is the approach of expensing warranty cost only when
actually incurred.
The first contract year under a 2-year warranty of the sales made on January 1, 2020 will be
within January 1, 2020 to December 31, 2020, and the second contract year will be within
January 1, 2021 to December 31, 2021.
A warranty is sometimes sold separately from the product sold.
However, the seller may offer an "extended warranty" on the product sold but with
additional cost.
The amount received from the sale of the extended warranty is recognized initially as
deferred revenue and subsequently amortized using straight line over the life of the warranty
contract.
The extended warranty contract starts only after the expiration of the regular two - year
warranty period.
PROBLEMS AND THEORIES
Problem 3-1 ( AICPA Adapted )
Mill Company sells washing machines that carry a three - year warranty against manufacturer's
defects.
Based on the entity's experience, warranty costs are estimated at P300 per machine.
During the current year, the entity sold 2,400 washing machines and paid warranty costs of
P170,000.
1. What amount should be reported as warranty expense for the current year?
a. 170,000
b. 240,000
c. 550,000
d. 720,000
2. What amount should be reported as warranty liability at year-end?
a. 550,000
b. 720,000
c. 170,000
d. 0
Solution 3-1
Question 1 Answer d
Warranty expense for current year ( 2,400 x 300 )
720,000
Question 2 Answer a
Warranty expense for current year
Warranty payment
Warranty liability
720,000
(170,000)
550.000
Problem 3-2 ( AICPA Adapted )
On April 1, 2019, Ash Company began offering a new product for sale under a one - year
warranty.
Of the 50,000 units in inventory on April 1, 2019,30,000 had been sold by June 30, 2019.
Based on its experience with similar products, the entity estimated that the average warranty cost
per unit sold would be P80.
Actual warranty costs incurred from April 1 through June 30, 2019 amounted to P700,000.
1. What amount should be reported as warranty expense for 2019?
a. 2,400,000
b. 4,000,000
c. 2,000,000
d. 1,200,000
2. On June 30, 2019, what amount should be reported as estimated warranty liability?
a. 900,000
b. 1,600,000
c. 1,700,000
d. 3,300,000
Solution 3-2
Question I Answer a
Warranty expense for 2019 ( 30,000 x 80 )
2,400,000
Question 2 Answer c
Warranty expense for 2019
2,400,000
Actual warranty cost
Warranty liability - June 30, 2019
(700,000)
1,700,000
Problem 3-3 ( AICPA Adapted )
Bold Company estimated the annual warranty expense at 2 % of annual net sales. The net sales
for 2019 amounted to P4,000,000.
On January 1, 2019, the warranty liability was P60,000 and the warranty payments during 2019
totaled P50,000.
1. What amount should be reported as warranty expense for 2019?
a. 70,000
b. 50,000
c. 80,000
d. 60,000
2. What amount should be reported as warranty liability on December 31, 2019?
a. 10,000
b. 70,000
c. 80,000
d. 90,000
Solution 3-3
Question 1 Answer c
Warranty expense for 2019 ( 2 % x 4,000,000 )
80,000
Question 2 Answer d
Warranty liability - January 1, 2019
Warranty expense for 2019 ( 2 % x 4,000,000 )
Total
Warranty payments during 2019
Warranty liability - December 31, 2019
60,000
80,000
140,000
(50,000)
90,000
Problem 3-4 ( AICPA Adapted )
Wall Company sold a product under a two - year warranty. The estimated cost of warranty
repairs is 2 % of net sales.
During the first two years in business, the entity made the following sales and incurred the
following warranty repair costs:
2019
2020
Net sales
2,500,000
3,000,000
Total repair costs incurred
45,000
50,000
What amount should be reported as warranty expense for 2020?
a. 60,000
b. 50,000
c. 10,000
d. 59,000
Solution 3-4 Answer a
Warranty expense for 2020 ( 2 % x 3,000,000 ) 60,000
Problem 3-5 ( IAA )
Bass Company manufactures high-end home electronic systems. The entity provides a one - year
warranty for all products sold.
The entity estimated that the warranty cost is P200 per unit sold and reported a liability for
estimated warranty cost of P650,000 at the beginning of the year.
During the current year, the entity sold 5,000 units for a total of P9,000,000 and paid warranty
claims of P750,000 on current and prior year sales.
What amount should be reported as warranty liability at year-end?
a. 250.000
b. 350,000
c. 900,000
d. 750,000
Solution 3-5 Answer c
Warranty liability - January 1
Warranty expense for the year ( 5,000 x 200 )
Warranty payments
Warranty liability - December 31
650,000
1,000,000
(750,000)
900,000
Problem 3-6 ( AICPA Adapted )
In 2019, Dubious Company began selling new line of products that carry a two-year warranty
against defects.
Based upon past experience with other products, the entity estimated warranty costs as a
percentage of peso sales.
First year of warranty
2%
Second year of warranty
Sales
Actual warranty cost
5%
2019
5,000,000
100,000
2020
7,000,000
300,000
1. What amount should be reported as warranty expense for 2019?
a. 350,000
b. 100,000
c. 175,000
d. 150,000
2. What amount should be reported as warranty liability on December 31, 2019?
a. 150,000
b. 250,000
c. 125,000
d. 0
3. What amount should be reported as warranty expense for 2020?
a. 300,000
b. 350,000
c. 490,000
d. 140,000
4. What amount should be reported as warranty liability on December 31, 2020?
a. 390,000
b. 440,000
c. 490,000
d. 840,000
Solution 3-6
Question 1 Answer a
Warranty expense for 2019 ( 5,000,000 x 7 % )
350,000
Question 2 Answer b
Warranty expense for 2019
Warranty cost in 2019
Warranty liability - December 31 , 2019
350,000
(100,000)
250,000
Question 3 Answer c
Warranty expense for 2020 ( 7,000,000 x 7 % )
Question 4 Answser b
490,000
Warranty liability - December 31, 2019
Warranty expense for 2020
Total
Warranty cost in 2020
Warranty liability - December 31, 2020
250,000
490,000
740,000
(300,000)
440,000
Problem 3-7 ( AICPA Adapted )
During 2019, Namnama Company introduced a new product carrying a two - year warranty
against defects.
The estimated warranty costs related to peso sales are 4% within 12 months following sale and
6% in the second 12 months following sale.
The entity reported sales of P5,000,000 for 2019 and P6,000,000 for 2020.
The actual expenditures incurred amounted to P150,000 for 2019 and P550,000 for 2020.
1. What amount should be reported as warranty expense for 2019?
a. 500,000
b. 200,000
c. 250,000
d. 300,000
2. What amount should be reported as estimated warranty liability on December 31, 2019?
a. 350,000
b. 150,000
c. 100,000
d. 50,000
3. What amount should be reported as warranty expense for 2020?
a. 650,000
b. 600,000
c. 500,000
d. 550,000
4. What amount should be reported as estimated warranty liability on December 31, 2020?
a. 360,000
b. 400,000
c. 240,000
d. 100,000
Solution 3-7
Question 1 Answer a
Warranty expense for 2019 ( 10 % x 5,000,000 )
Question 2 Answer a
500,000
Warranty expense for 2019
Warranty expenditure in 2019
Warranty liability - December 31, 2019
500,000
(150,000)
350,000
Question 3 Answer b
Warranty expense for 2020 ( 10 % x 6,000,000 )
600,000
Question 4 Answer b
Warranty liability - December 31, 2019
Warranty expense for 2020
Total
Warranty expenditure in 2020
Warranty liability - December 31, 2020
350,000
600,000
950,000
(550,000)
400,000
Problem 3-8 ( IFRS )
Toyo Company owns a car dealership that it uses for servicing cars under warranty. The entity
sold 500 cars during the year.
The entity's experience with warranty claims is that 60 % of all cars sold in a year have zero
defect, 25 % of all cars sold in a year have normal defect, and 15 % of all cars sold in a year have
significant defect.
The cost of rectifying a “normal defect” in a car is P10,000. The cost of rectifying a “significant
defect" in a car is P30,000.
What amount should be reported as warranty liability at year-end?
a. 3,500,000
b. 1,750,000
c. 1,400,000
d. 4,000,000
Solution 3-8 Answer a
Normal defect ( 25 % x 500 x P10,000 )
Significant defect ( 15 % x 500 x P30,000 )
Warranty liability
1,250,000
2,250,000
3,500,000
Problem 3-9 ( IFRS )
Chato Company sold electrical goods covered by a one - year warranty for any defects. Of the
sales of P70,000,000 for the year, the entity estimated that 3% will have major defect, 5% will
have minor defect and 92% will have no defect.
The cost of repairs would be P5,000,000 if all the products sold had major defect and P3,000,000
if all had minor defect.
What amount should be recognized as a warranty liability?
a. 8,000,000
b. 5,600,000
c. 300,000
d. 190,000
Solution 3-9 Answer c
Major defect (3 % x P5,000,000)
Minor defect (5 % X P3,000,000)
Total warranty provision
150,000
150.000
300.000
Problem 3-10 ( IFRS )
Electro Company gives warranties at the time of sale to purchasers of its product. The entity
undertakes to make good, by repair replacement, manufacturing defects that become apparent
within one year from the date of sale.
Sales of P5,000,000 were made evenly throughout 2019. The expenditures for warranty repairs
and replacements for the products sold in 2019 are expected to be made 50 % in 2019 and 50 %
in 2020.
The 2020 ourflows of economic benefits related to the warranty will take place on December 31,
2020.
The entity estimated that 75% of products sold require no warranty repairs, 15% of products sold
require minor repairs costing P100,000 and 10% of products sold require major repairs costing
P400,000.
An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an
increment of 6 % to the probability weighted expected cash flows.
The appropriate discount factor for cash flows expected to occur on December 31, 2020 is 0.94.
1. What amount should be reported as warranty expense for 2019?
a. 500,000
b. 498,200
c. 514,100
d. 530,000
2. What amount should be reported as warranty liability on December 31, 2019?
a. 265,000
b. 249,100
c. 250,000
d. 235,000
Solution 3-10
Question 1 Answer c
Cost of minor repair
Cost of major repair
Total warranty cost
Multiply by
Total cash flow after risk adjustment
Expenditure in 2019 ( 530,000 x 50 % )
Expenditure in 2020 at present value ( 265,000 x 0.94 )
Warranty expense for 2019
100,000
400,000
500,000
1.06
530,000
265,000
249,100
514,100
Question 2 Answer b
Total cash flow for warranty
Paid in 2019 ( 50 % x 530,000 )
Warranty cost to be paid in 2020
Multiply by PV factor
Warranty liability - December 31, 2019
530,000
(265,000)
265,000
.94
249,100
1. The accrual approach in accounting for warranty
a. Is required for income tax reporting.
b. Is frequently justified on the basis of expediency.
c. Finds the expense account being charged when the seller performs in compliance with the
warranty.
d. Represents accepted practice and should be used whenever the warranty is an integral and
inseparable part of the sale.
2. Which of the following best describes the accrual approach of accounting for warranty cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when incurred
3. Which of the following best describes the expense as incurred approach of accounting for
warranty cost?
a. Expensed based on estimate in year of sale
b. Expensed when liability is accrued
c. Expensed when warranty claims are certain
d. Expensed when incurred
4. What is the classification of the estimated warranty liability in a three-year warranty?
a. Noncurrent
b. Current
c. Partly current and partly noncurrent
d. No need for disclosure
5. Which of the following is a characteristic of the accrual of warranty but not the sale of
warranty?
a. Warranty liability
b. Warranty expense
c. Unearned warranty revenue
d. Warranty revenue
CHAPTER 4
PROVISION
Contingent liability
 PAS 37, paragraph 14, provides that a provision shall be recognized as a liability in the
financial statements under the following conditions:
a. The entity has a present obligation, legal or constructive, as a result of a past event.
b. It is probable that an outflow of resources embodying economic benefits would be
required to settle the obligation.
c. The amount of the obligation can be measured reliably.
 As a rule of thumb, probable means more than 50% likely or substantially more.
 Possible means 50% or less likely to occur.
 Remote means 10% or less likely to occur or very slight occurrence.
 Paragraph 25 of PAS 37 provides that the use of estimates is an essential part of the
preparation of financial statements and does not undermine their reliability.
 Provisions shall be reviewed at every end of the reporting period and adjusted to reflect the
current best estimate.
 The provision shall be reversed if it is no longer probable that an outflow of economic
benefits would be required to settle the obligation.
 Provision shall not be recognized for future operating losses.
 PAS 37, paragraph 68, mandates that the unavoidable costs under a contract represent "least
net cost of exiting from the contract".
 Examples of provision
a. Warranties
b. Environmental contamination
c. Decommissioning or abandonment costs
d. Court case
e. Guaranteee
 PAS 37, paragraph 10, defines restructuring as a "program that is planned and controlled by
management and materially changes either the scope of a business of an entity or the manner
in which that business is conducted".
 PAS 37, paragraph 81, specifically excludes the following expenditures from the
restructuring provision:
a. Cost of retraining or relocating continuing staff.
b. Marketing or advertising program to promote the new company image.
c. Investment in new system and distribution network.
 Such expenditures are categorically disallowed as restructuring provisions because these are
considered to be expenses relating to the future conduct of the business of the entity, and thus
are not liabilities relating to the restructuring program.
 PAS 37, paragraph 10, defines a contingent liability in two ways:
o A contingent liability is a possible obligation that arises from past event and whose
existence will be confirmed only by the occurrence or nonoccurrence of one or more
uncertain future events not wholly within the control of the entity.
o A contingent liability is a present obligation that arises from past event but is not
recognized because it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation or the amount of the obligation cannot be
measured reliably.
 PAS 37, paragraph 10, provides the following definition:
 A contingent asset is a possible asset that arises from past event and whose existence will be
confirmed only by the occurrence or nonoccurrence of one or more uncertain future events
not wholly within the control of the entity.
 A contingent asset shall not be recognized because this may result to recognition of income
that may never be realized.
 However, when the realization of income is virtually certain, the related asset is no longer
contingent asset and its recognition is appropriate.
 A contingent asset is only disclosed when it is probable
 If a contingent asset is only possible or remote, no disclosure is required.
 A decommissioning liability is also called asset retirement obligation.
 The decommissioning liability is initially recognized at present value and included in the cost
of the related asset.
PROBLEMS AND THEORIES
Problem 4-1 ( IFRS )
During 2019, Odyssey Company is the defendant in a patent infringement lawsuit. The entity's
lawyers believe there is a 30% chance that the court will dismiss the case and the entity will
incur no outflow of economic benefits.
However, if the court rules in favor of the claimant, the lawyers believe that there is a 20 %
chance that the entity will be required to pay damages of P200,000 and an 80% chance that the
entity will be required to pay damages of P100,000. Other outcomes are unlikely.
The court is expected to rule in late December 2020. There is no indication that the claimant will
settle out of court.
A 7 % risk adjustment factor to the probability - weighted expected cash flows is considered
appropriate to reflect the uncertainties in the cash flow estimates.
An appropriate discount rate is 5% per year. The present value of 1 at 5 % for one period is 0.95.
What is the measurement of the provision for lawsuit?
a. 100,000
b. 84,000
c. 89,880
d. 85,386
Solution 4-1 Answer d
Weighted probabilities:
20 % x 200,000 x 70%
80 % x 100,000 x 70 %
Weighted cash flows
Multiply by risk adjustment factor ( 100 % + 7 % )
Adjusted cash flows
Multiply by PV of 1 at 5 % for one period
Present value of cash flows
28,000
56,000
84,000
1.07
89,880
.95
85,386
Problem 4-2 ( IFRS )
During 2019, Libya Company is the defendant in a breach of patent lawsuit. The lawyers believe
there is an 80% chance that the court will not dismiss the case and the entity will incur outflow
of benefits.
If the court rules in favor of the claimant, the lawyers believe that there is a 60% chance that the
entity will be required to pay damages of P2,000,000 and a 40% chance that the entity will be
required to pay damages of P1,000,000. Other amounts of damages are unlikely.
The court is expected to rule in late December 2020. There is no indication that the claimant will
settle out of court.
A 7% risk adjustment factor to the cash flows is considered appropriate to reflect the
uncertainties in the cash flow estimates.
An appropriate discount rate is 10 % per year. The present value of 1 at 10% for one period is
0.91.
What is the measurement of the provision on December 31, 2019?
a. 1,280,000
b. 1,369,600
c. 1,500,000
d. 1,246,336
Solution 4-2 Answer d
Weighted probabilities:
60% x 2,000,000 x 80%
40% x 1,000,000 x 80%
Expected cash flows
960,000
320,000
1,280,000
Multiply by risk adjustment factor ( 100 % + 7 % )
Adjusted cash flows
Multiply by PV of 1 at 10 % for one period
Present value of cash flows
1.07
1,369,600
.91
1,246,336
Problem 4-3 ( AICPA Adapted )
During 2019, Manfred Company guaranteed a supplier's P500,000 loan from a bank. On October
1, 2019, the entity was notified that the supplier had defaulted on the loan and filed for
bankruptcy protection. Counsel believed that the entity would probably have to pay P250,000
under the guarantee.
As a result of the supplier's bankruptcy, the entity entered into a contract in December 2019 to
retool its machines so that the entity could accept parts from other suppliers. Retooling costs are
estimated to be P300,000.
What amount should be reported as liability on December 31, 2019?
a. 250,000
b. 450,000
c. 550,000
d. 750,000
Solution 4-3 Answer a
The guarantee should be accrued as a provision because the loss is probable and the amount can
be reasonably estimated.
Problem 4-4 ( AICPA Adapted )
On February 5, 2020, an employee filed a P2,000,000 lawsuit against Steel Company for
damages suffered when one of Steel's plant exploded on December 29, 2019.
The legal counsel believed the entity would probably lose the lawsuit and estimated the loss to be
P500,000.
The employee offered to settle the lawsuit out of court for P900,000 but the entity did not agree
to the settlement.
On December 31, 2019, what amount should be reported as liability from lawsuit?
a. 2,000,000
b. 1,000,000
c. 900,000
d. 500,000
Solution 4-4 Answer d
The loss is accrued as a provision because it is probable and the amount can be reasonably
estimated.
Problem 4-5 ( AICPA Adapted )
During 2019, Beal Company became involved in a tax dispute with the BIR. On December 31,
2019, the tax advisor believed that an unfavorable outcome was probable and a reasonable
estimate of additional taxes was P500,000.
After the 2019 financial statements were issued, the entity received and accepted a BIR
settlement offer of P550,000.
What amount of accrued liability should have been reported on December 31, 2019?
a. 650,000
b. 550,000
c. 500,000
d. 0
Solution 4-5 Answer c
The reasonable estimate of P500,000 is recorded. The accepted BIR offer is not recorded because
it was made after the statements are issued. In 2020, when the BIR settlement offer of P550,000
is accepted , an additional liability of P50,000 will be recognized.
Problem 4-6 ( IAA )
Nia Company is involved in litigation regarding a faulty product sold in a prior year. The entity
has consulted with an attorney and determined that it is possible that the entity may lose the case.
The attorney estimated that there is a 40% chance of losing. If this is the case, the attorney
estimated that the amount of any payment would be P5,000,000.
What is the required journal entry as a result of this litigation?
a. Debit litigation expense and credit litigation liability P5,000,000.
b. No journal entry is required.
c. Debit litigation expense and credit litigation liability P2,000,000.
d. Debit litigation expense and credit litigation liability P3,000,000.
Solution 4-6 Answer b
The possible loss is only disclosed as a contingent liability since the probability of loss is 40%.
The probability of loss should be more than 50 % in order to be accrued as a provision.
Problem 4-7 ( AICPA Adapted )
On March 1, 2019, a suit was filed against Dean Company for patent infringement. Dean's legal
counsel believed an unfavorable outcome is probable and estimated that Dean will have to pay
between P850,000 and P900,000 in damages.
However, Dean's legal counsel is of the opinion that P600,000 is a better estimate than any than
other amount in the range.
The situation was unchanged when the December 31, 2019 financial statements were released on
February 15, 2020.
What amount should be accrued as liability on December 31, 2019 in connection with this suit?
a. 900,000
b. 600,000
c. 500,000
d. 0
Solution 4-7 Answer b
Accrued liability – best estimate
600,000
Problem 4-8 ( AICPA Adapted )
On November 5, 2019, a Dunn Company truck was in an accident with an auto driven by Bell.
Dunn received notice on January 15, 2020 of a lawsuit for P700,000 damages for personal
injuries suffered by Bell.
The entity's counsel believed it is probable that Bell will be awarded an estimated amount in the
range between P200,000 and P450,000, and no amount is a better estimate of potential liability
than any other amount because each point in the range is as likely as any other.
The 2019 financial statements were issued on March 1, 2020.
What amount of loss should be accrued on December 31, 2019?
a. 450,000
b. 200,000
c. 325,000
d. 0
Solution 4-8 Answer c
Midpoint of the range ( 200,000 + 450,000 / 2 )
325,000
Problem 4-9 ( IAA )
Prime Company has long owned a manufacturing site that has now been discovered to be
contaminated with toxic waste. The entity has acknowledged its responsibility for the
contamination.
An initial clean up feasibility study has shown that it will cost at least P500,000 to clean up the
toxic waste.
During the current year, the entity has been sued for patent infringement and lost the case. A
preliminary judgment of P300,000 was issued and is under appeal.
The entity's attorneys agree that it is probable that the entity will lose this appeal.
What amount of provision should be accrued as liability?
a. 500,000
b. 800,000
c. 300,000
d. 0
Solution 4-9 Answer b
Accrued liability ( 500,000 + 300,000 )
800,000
Problem 4-10 ( IAA )
Winter Company is being sued for illness caused to local residents as a result of negligence on
the entity's part in permitting the local residents to be exposed to highly toxic chemicals from its
plant.
The entity's lawyer stated that it is probable that the entity would lose the suit and be found liable
for a judgment costing the entity anywhere from P1,200,000 to P6,000,000. However, the lawyer
estimated that the most probable cost is P3,600,000.
What amount should be accrued and disclosed?
a. Accrue a loss contingency of P1,200,000 and disclose an additional contingency of
P4,800,000.
b. Accrue a loss contingency of P3,600,000 and disclose an additional contingency of
P2,400,000.
c. Accrue a loss contingency of P3,600,000 but not disclose any additional contingency.
d. No loss accrual but disclose a contingency of P1,200,000 to P6,000,000.
Solution 4-10 Answer b
1. Contingent liabilities will or will not become actual liabilities depending on
a. Whether probable and measurable.
b. The degree of uncertainty.
c. The present condition.
d. The outcome of a future event.
2. A contingent liability shall be recognized when
a. Any lawsuit is actually filed against an entity.
b. It is certain that funds are available to pay the amount of the claim.
c. It is probable that a liability has been incurred but the amount cannot be reliably
measured.
d. The amount of the loss can be reliably measured and it is probable prior to issuance of
financial statements that a liability has been incurred.
3. How should a contingent liability be reported in the financial statements when it is
reasonably possible?
a. As a deferred liability
b. As an accrued liability
c. As a disclosure only
d. As an account payable
4. Disclosure usually is not required for
a. Contingent gain that is probable and measurable.
b. Contingent loss that is possible and measurable.
c. Contingent loss that is probable and cannot be reliably measured.
d. Contingent loss that is remote and measurable.
5. Reporting in the financial statements is required for
a. Loss contingency that is probable and measurable
b. Gain contingency that is probable and measurable
c. Loss contingency that is possible and measurable
d. All loss contingencies
CHAPTER 5
BONDS PAYABLE
 A bond is a formal unconditional promise, made under seal, to pay a specified sum of money
at a determinable future date, and to make periodic interest payment at a stated rate until the
principal sum is paid.
 PFRS 9, paragraph 5.1.1, provides that bonds payable not designated at fair value through
profit or loss shall be measured initially at fair value minus transaction costs that are directly
attributable to the issue of the bonds payable.
 PFRS 9, paragraph 5.3.1, provides that after initial recognition, bonds payable shall be
measured either:
a. At amortized cost, using the effective interest method
b. At fair value through profit or loss
 Under PFRS 9, bond issue costs shall be deducted from the fair value or issue price of bonds
payable in measuring initially the bonds payable.
 PFRS 9 requires the use of the effective interest method in amortizing discount, premium and
bond issue cost.
 PFRS 9, paragraph 4.2.2, provides that at initial recognition, bonds payable may be
irrevocably designated as at fair value through profit or loss.
 PFRS 9, paragraph 5.7.7, provides that the gain or loss on financial liability designated at fair
value through profit or loss shall be accounted for as follows:
a. The change in fair value attributable to the credit risk of the liability is recognized in
other comprehensive income.
Credit risk is the risk that the issuer of the liability would cause a financial loss to the
other party by failing to discharge the obligation.
Credit risk does not include market risk such as interest risk, currency risk and price risk.
b. The remaining amount of the change in fair value is recognized in profit or loss.
 Application Guidance B5.7.9 provides that amounts recognized in other comprehensive
income resulting from changes in fair value of credit risk of a financial liability designated at
fair value through profit or loss shall not be subsequently transferred to profit or loss.
PROBLEMS AND THEORIES
1)
Glen Company had the following long-term debt:
Sinking fund bonds, maturing in installments
Industrial revenue bonds, maturing in installments
Subordinated bonds, maturing on a single date
2,200,000
1,800,000
3,000,000
What is the total amount of serial bonds?
a. 3,000,000
b. 4,000,000
c. 4,800,000
d. 7,000,000
Answer B
Serial bonds are bonds that mature in a series or by installments.
Total serial bonds (2,200,000 + 1,800,000)
4,000,000
Subordinated bonds are bonds that rank below the amounts owing to general creditors.
2)
Zola Company had the following long - term debt:
Bonds maturing in installments, secured by machinery 1,000,000
Bonds maturing on a single date, secured by realty 1,800,000
Collateral trust bonds 2,000,000
What is the total amount of debenture bonds?
a. 2,000,000
b. 1,000,000
c. 1,800,000
d. 0
Answer D
Debenture bonds are unsecured bonds or bonds without collateral security.
Collateral trust bonds are bonds secured by investments in shares and bonds.
3)
Blue Company reported the following long-term debt on December 31, 2019:
9% registered debentures, callable in 2020, due in 2021
11% collateral trust bonds, convertible into ordinary
shares beginning in 2020, due in 2021
10 % subordinated debentures, P500,000 maturing
annually beginning in 2020
3,500,000
3,000,000
1,500,000
What is the total amount of term bonds?
a. 3,000,000
b. 3,500,000
c. 5,000,000
d. 6,500,000
Answer D
9 % registered debentures
11 % collateral trust bonds
Total term bonds
Term bonds are bonds that mature on a single date.
3,500,000
3,000,000
6,500,000
4)
On March 1, 2019, Cain Company issued at 103 plus accrued interest 4,000 bonds of 9%, P1,000
face amount. The bonds are dated January 1, 2019 and mature on January 1, 2029.
Interest is payable semiannually on January 1 and July 1. The entity paid bond issue cost of
P200,000.
What is the net cash received from the bond issuance?
a. 4,320,000
b. 4,180,000
c. 4,120,000
d. 3,980,000
Answer D
Issue price ( 4,000,000 x 103 % )
Accrued interest from January 1 to March 1, 2019 ( 4,000,000 x 9 % x 2/12 )
Total
Bond issue cost
Net cash received from bond issuance
4,120,000
60,000
4,180,000
(200,000)
3,980,000
5)
On April 1, 2019, Greg Company issued at 99 plus accrued interest, 2,000 of 8% P1,000 face
amount bonds. The bonds are dated January 1, 2019, mature on January 1, 2029, and pay interest
on January 1 and July 1. The entity paid bond issue cost of P70,000.
From the bond issuance, what is the net cash received?
a.
b.
c.
d.
2,020,000
1,980,000
1,950,000
1,910,000
Answer C
Issue price ( 2,000,000 x 99 % )
Accrued interest from January 1 to April 1, 2019 ( 2,000,000 x 8 % x 3/12 )
Total
Bond issue cost
Net cash received from bond issuance
1,980,000
40,000
2,020,000
70,000
1,950,000
6)
On July 1, 2019, Tara Company issued 4,000 bonds of 8%, P1,000 face amount for P3,504,000.
The bonds were issued to yield 10%.
The bonds are dated July 1, 2019 and mature on July 1, 2029. Interest is payable semiannually on
January 1 and July 1.
Using the effective interest method, what amount of the bond discount should be amortized for
the six months ended December 31, 2019?
a. 30,400
b. 24,800
c. 19,840
d. 15,200
Answer D
Interest expense ( 3,504,000 x 10 % x6 / 12 )
Interest paid ( 4,000,000 x 8 % x 6/12 )
Discount amortization for six months
175,200
160,000
15,200
Effective interest method
Under the effective interest method, the difference between the interest expense and interest paid
is the discount or premium amortization.
The interest expense is equal to the carrying amount of bonds payable multiplied by the effective
interest rate.
The interest paid is equal to the face amount of bonds payable multiplied by the nominal interest
rate.
7)
On January 1, 2019, Carrow Company issued 10% bonds in the face amount of P1,000,000 that
mature on December 31, 2028.
The bonds were issued for P886,000 to yield 12%, resulting in bond discount of P114,000.
The entity used the interest method of amortizing bond discount Interest is payable on June 30
and December 31.
For the year ended December 31, 2019, what amount should be reported as bond interest
expense?
a. 106,510
b. 100,000
c. 53,160
d. 50,000
Answer A
Date
1/1/2019
6/30/2019
12/31/2019
Interest
Paid
Interest
expense
Discount
amortization
50,000
50,000
53,160
53,350
3,160
3,350
Carrying
amount
886,000
889,160
892,510
Interest paid ( 1,000,000 x 10 % x 6/12 )
Interest expense for 2019:
886,000 x 12 % x 6/12
889,160 x 12 % x 6/12 ( rounded )
Total interest expense for 2019
50,000
53,160
53,350
106,510
8)
On January 1, 2019, West Company issued 9 % bonds in the face amount of P5,000,000 which
mature on January 1, 2029. The bonds were issued for P4,695,000 to yield 10%.
Interest is payable annually on December 31. The entity used the interest method of amortizing
bond discount.
1. What amount should be reported as interest expense for 2019?
a. 450,000
b. 469,500
c. 422,550
d. 500,000
2. On December 31, 2019, what is the carrying amount of the bonds payable?
a. 4,695,000
b. 4,714,500
c. 4,704,750
d. 5,000,000
Question 1 Answer b
Interest expense ( 4,695,000 x10 % )
Interest paid ( 5,000,000 x 9 % )
Amortization of discount for 2019
469,500
450,000
19,500
Question 2 Answer b
Bonds payable
Discount on bonds payable
Carrying amount - December 31, 2019
Face amount of bonds payable
Issue price
Discount on bonds payable
Amortization of discount for 2019
Discount on bonds payable - December 31, 2019
5,000,000
(285,500)
4,714,500
5,000,000
4,695,000
305,000
(19,500)
285,500
9)
On January 1, 2019, Wolf Company issued 10 % bonds in the face amount of P5,000,000, which
mature on January 1, 2029.
The bonds were issued for P5,675,000 to yield 8% resulting in bond premium of P675,000.
The entity used the interest method of amortizing bond premium. Interest is payable annually on
December 31.
1. On December 31, 2019, what is the adjusted unamortized bond premium?
a. 675,000
b. 629,000
c. 607,500
d. 507,500
2. What is the carrying amount of bonds payable on December 31, 2019?
a. 5,000,000
b. 5,629,000
c. 4,371,000
d. 5,675,000
Question 1 Answer b
Interest expense ( 5,675,000 x 8 % )
Interest paid ( 5,000,000 x 10 % )
Premium amortization for 2019
Premium on bonds payable
Premium amortization for 2019
Premium on bonds payable - December 31, 2019
454,000
500,000
46,000
675,000
(46,000)
629,000
Question 2 Answer b
Bonds payable
Premium on bonds payable
Carrying amount - December 31, 2019
5,000,000
629.000
5,629,000
10)
Webb Company had outstanding a 7%, 10-year bond payable with face amount of P5,000,000.
The bond was originally sold to yield 6 % annual interest.
The entity used the effective interest method to amortize bond premium. On January 1, 2019, the
carrying amount of the bond payable was P5,250,000.
1. What amount of unamortized premium on bond payable should be reported on December 31,
2019?
a. 225,000
b. 172,500
c. 215,000
d. 52,500
2. What is the carrying amount of the bond payable on December 31, 2019?
a. 5,250,000
b. 4,785,000
c. 5,215,000
d. 5,000,000
Question 1 Answer c
Interest expense ( 5,250,000 x 6 % )
Interest paid ( 5,000,000 x 7 % )
Premium amortization for 2019
Premium on bond payable -- January 1, 2019
Premium amortization for 2019
Premium on bond payable - December 31 , 2019
315,000
350,000
35,000
250,000
(35,000)
215,000
Question 2 Answer c
Bond payable
Premium on bond payable
Carrying amount - December 31, 2019
1) Most corporate bonds are
a. Mortgage bonds
b. Debenture bonds
c. Secured bonds
d. Colateral bonds
5,000,000
215,000
5,215,000
2) The method used to pay interest depends on whether the bonds are
a. Registered or coupon
b. Mortgaged or unmortgaged
c. Indebentured or debentured
d. Callable or redeemable
3) Zero-coupon bonds
a. Offer a return the form of a deep discount off the face amount
b. Result in zero interest expense for the issuer
c. Result in zero interest revenue for the investor
d. Are reported as shareholders' equity by the issuer
4) To evaluate the risk and quality of an individual bond issue, investors rely heavily on
a. Bond ratings provided by investment houses
b. Newspaper articles
c. Bond interest payments
d. The audit report
5) Bonds payable should be reported as noncurrent at
a. Face amount less any unamortized discount or plus any unamortized premium
b. Current market price
c. Face amount less any unamortized premium or plus any unamortized discount
d. Face amount less accrued interest since the last payment date
CHAPTER 8
NOTE PAYABLE
 A promissory note is an unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand or at a fixed or determinable future time a
sum certain in money to order or to bearer.
 PFRS 9, paragraph 5.1.1, provides that a note payable not designated at fair value through
profit or loss shall be measured initially at fair value minus transaction costs that are directly
attributable to the issue of the note payable.
 The fair value of the note payable is equal to the present value of the future cash payment to
settle the note payable using market rate of interest.
 PFRS 9, paragraph 5.3.1, provides that after initial recognition, a note payable shall be
measured:
a. At amortized cost using the effective interest method.
b. At fair value through profit or loss if the note payable is designated irrevocably as
measured at fair value through profit or loss.
 Actually, the difference between the face amount and present value is either discount or
premium on the issue of note payable.
 When a note is issued solely for cash, the present value is equal to the cash proceeds.
 When a property or noncash asset is acquired by issuing a promissory note which is interest
bearing, the property or asset is recorded at the purchase price.
 When a noninterest bearing note is issued for property, the property is recorded at the cash
price of the property.
 PFRS 9, paragraph 4.2.2, provides that at initial recognition, a note payable may be
irrevocably designated as at fair value through profit or loss.
 PFRS 9, paragraph 5.7.7, provides that the gain or loss on financial liability designated at fair
value through profit or loss shall be accounted for as follows:
a. The change in fair value attributable to the credit risk is recognized in other
comprehensive income.
Credit risk is the risk that the issuer of the liability would cause a financial loss to the
other party by failing to discharge the obligation.
Credit risk does not include market risk such as interest risk , currency risk and price risk.
b. The remaining amount of the change in fair value is recognized in profit or loss.
 Application Guidance B5.7.9 provides that amount recognized in other comprehensive
income resulting from change in fair value attributable to credit risk shall not be
subsequently transferred to profit or loss.
 However, the cumulative gain or loss recognized may be transferred within equity or
retained earnings.
 Under the fair value option, any transaction cost is recognized as outright expense.
 There is no amortization of discount and premium on note payable.
PROBLEMS AND THEORIES
Problem 8-1 ( AICPA Adapted )
On September 1, 2019, Pine Company issued a note payable to National Bank in the amount of
P1,800,000, bearing interest at 12%, and payable in three equal annual principal payments of
P600,000. On this date, the bank's prime rate was 11%.
The first interest and principal payment was made on September 1, 2020.
1. On December 31, 2020, what amount should be reported as accrued interest payable?
a. 44,000
b. 48,000
c. 66,000
d. 72,000
2. What amount should be reported as interest expense for 2020?
a. 144,000
b. 216,000
c. 192,000
d. 132,000
Solution 8-1
Question 1 Answer b
Note payable - September 1, 2019
1,800,000
Payment on September 1, 2020
Note payable, September 1, 2020
Accrued interest payable from September 1 to December 31 , 2020
( 1,200,000 x 12 % x 4/12 )
(600,000)
1,200,000
48,000
Question 2 Answer c
January 1 - August 31, 2020 ( 1,800,000 x 12 % x 8/12 )
September 1 - December 31, 2020
Total interest expense for 2020
144,000
48,000
192,000
Problem 8-2 ( AICPA Adapted )
Mann Company reported on June 30, 2020 a 10% note payable in the amount of P3,600,000.
The note is dated October 1, 2018 and is payable in three equal annual payments of P1,200,000
plus interest. The first interest and principal payment was made on October 1, 2019.
On June 30, 2020, what amount should be reported as accrued interest payable?
a. 270,000
b. 180,000
c. 90,000
d. 60,000
Solution 8-2 Answer b
Note payable - October 1, 2018
Payment on October 1, 2019
Note payable, October 1, 2019
Accrued interest payable from October 1 , 2019 to
June 30 , 2020 ( 2,400,000 x 10 % x 9/12 )
3,600,000
(1,200,000)
2,400,000
180,000
Problem 8-3 ( AICPA Adapted )
At year-end, Roth Company issued a P1,000,000 face amount note payable to Wake Company in
exchange for services rendered to Roth.
The note, made at usual trade terms, is due in nine months and bears interest, payable at
maturity, at the annual rate of 3%.
The market interest rate is 8%. The compound interest factor of 1 due in nine months at 8 %
is.944.
At what amount should the note payable be reported at year-end?
a. 1,030,000
b. 1,000,000
c. 965,200
d. 944,000
Solution 8-3 Answer b
Note payable at face amount
1,000,000
Problem 8-4 ( AICPA Adapted )
Loob Company had the following loans at 12% interest payable at maturity. The entity repaid
each loan on scheduled maturity date.
Date
11/1/2018
2/1/2019
5/1/2019
Amount
500,000
1,500,000
3,000,000
Maturity date
10/31/2019
7/31/2019
1/31/2020
Term
1 year
6 months
9 months
The entity recorded interest expense when the loans are repaid. As a result, interest expense of
P150,000 was recorded in 2019.
1. What amount should be reported as interest expense for 2019?
a. 150,000
b. 380,000
c. 390,000
d. 500,000
2. If no correction is made, by what amount would interest expense for 2019 be understated?
a. 230,000
b. 350,000
c. 240,000
d. 0
Solution 8-4
Question 1 Answer b
Question 2 Answer a
January 1 - October 31 , 2019 ( 500,000 x 12 % x 10/12 )
February 1 - July 31 , 2019 ( 1,500,000 x 12 % x 6/12 )
May 1 - December 31 , 2019 ( 3,000,000 x 12 % x 8/12 )
Total interest expense for 2019
Recorded interest expense in 2019
Understatement of interest expense
Problem 8-5 ( AICPA Adapted )
50,000
90,000
240,000
350,000
(150,000)
230,000
On December 31, 2019, Boston Company purchased a machine from Helix Company in
exchange for a noninterest bearing note requiring eight payments of P200,000.
The first payment was made on December 31, 2019 and the others are due annually on
December 31.
At date of issuance, the prevailing rate of interest for this type of note was 11%. The PV of an
ordinary annuity of 1 at 11% for 8 periods is 5.146, and the PV of an annuity of 1 in advance at
11% for 8 periods is 5.712.
1. On December 31, 2019, what is the carrying amount of the note payable?
a. 1,142,400
b. 1,029,200
c. 1,046,200
d. 942,400
2. What amount should be reported as interest expense for 2020?
a. 125,664
b. 103,664
c. 176,000
d. 154,000
Solution 8-5
Question 1 Answer d
PV of note payable ( 200,000 x 5.712 )
1,142,400
Payment on December 31, 2019
(200,000)
PV of note payable - December 31, 2019
942,400
The PV of an annuity of 1 in advance is used because the date of purchase is December 31, 2019
and the first payment is made on same date, December 31, 2019.
Question 2 Answer b
Interest expense for 2020 ( 11 % x 942,400 )
103,664
Problem 8-6 ( AICPA Adapted )
At the beginning of current year, Pares Company borrowed P3,600,000 from a major customer
evidenced by a noninterest bearing note due in three years. The entity agreed to supply the
customer's inventory needs for the loan period at lower than market price.
At the 12 % imputed interest rate for this type of loan, the present value of the note is P2,550,000
at the beginning of current year.
What amount of interest expense should be reported for current year?
a.
b.
c.
d.
432,000
350,000
306,000
0
Solution 8-6 Answer c
Interest expense for current year ( 2,550,000 x 12 % )
Discount on note payable ( 3,600,000 - 2,550,000 )
306,000
1,050,000
Problem 8-7 ( AICPA Adapted )
On March 1, 2019, Fine Company borrowed P1,000,000 and signed a 2 - year note bearing
interest at 12 % per annum compounded annually. Interest is payable in full at maturity on
February 28, 2021.
What amount should be reported as accrued interest payable on December 31, 2020?
a. 100,000
b. 120,000
c. 232,000
d. 240,000
Solution 8-7 Answer c
Accrued interest from March 1, 2019 to February 28, 2020
( 1,000,000 x 12 % )
120,000
Accrued interest from March 1 to December 31, 2020
( 1,000,000 + 120,000 x 12 % x 10/12 )
Accrued interest payable - December 31, 2020
112,000
232,000
If the interest is compounded annually, it means that the accrued interest for one year will also
earn interest.
Problem 8-8 ( AICPA Adapted )
On September 30, 2019, World Company borrowed P1,000,000 on a 9% note payable. The
entity paid the first of four quarterly payments of P264,200 when due on December 31, 2019.
1. What amount should be reported as interest expense for 2019?
a. 90,000
b. 22,500
c. 67,500
d. 30,000
2. On December 31 , 2019 , what is the carrying amount of the note payable?
a. 758,300
b. 750,000
c. 825,800
d. 735,800
Solution 8-8
Question 1 Answer b
Interest expense from October 1 to December 31, 2019
( 9 % x 1,000,000 x 37 12 )
22,500
Question 2 Answer a
Note payable - September 30 , 2019
Principal payment:
Quarterly payment - December 31 , 2019
Interest expense for 3 months
Carrying amount - December 31, 2019
1,000,000
264,200
( 22,500 ) (241,700)
758,300
Problem 8-9 ( IAA )
On January 1, 2019, Solemn Company sold land to Glory Company. There was no established
market price for the land.
Glory gave Solemn a P2,400,000 noninterest bearing note payable in three equal annual
installments of P800,000 with the first payment due December 31, 2019.
The note has no ready market. The prevailing rate of interest for a note of this type is 10%.
The present value of a P2,400,000 note payable in three equal annual installments of P800,000 at
a 10% rate of interest is P1,989,600.
1. What amount should be reported as interest expense for 2019?
a. 240,000
b. 198,960
c. 410,400
d. 205,200
2. What is the carrying amount of the note payable on December 31, 2019?
a. 1,989,600
b. 2,126,400
c. 1,388,560
d. 2,400,000
Solution 8-9
Question I Answer b
Interest expense for 2019 ( 10 % x 1,989,600 ) 198,960
Journal entries for 2019
Land
Discount on note payable
Note payable
Interest expense
Discount on note payable
Note payable
Cash
1,989,600
410,400
2,400,000
198,960
198,960
800,000
800,000
Question 2 Answer c
Note payable
Present value
Discount on note payable - January 1, 2019
Amortization of discount for 2019 ( 10 % x 1,989.600 )
Discount on note payable - December 31 , 2019
Note payable - January 1, 2019
Annual payment on December 31, 2019
Note payable - December 31 , 2019
Discount on note payable - December 31 , 2019
Carrying amount - December 31 , 2019
2,400,000
1,989,600
410,400
(198,960)
211,440
2,400,000
(800,000)
1,600,000
(211,440)
1,388,560
Problem 8-10 ( AICPA Adapted )
Jason Company offered a contest in which the winner would receive P1,000,000 payable over
twenty years.
On December 31, 2019, Jason Company announced the winner of the contest and signed a note
payable to the winner for P1,000,000 payable in P50,000 installments every January 31.
On December 31, 2019, Jason Company purchased an annuity for P418,250 to provide the
P950,000 prize remaining after the first P50,000 installment which was paid on January 31,
2020.
1. On December 31, 2019, what amount should be reported as note payable-contest winner, net
of current portion?
a. 368,250
b. 418,250
c. 900,000
d. 950,000
2. What amount should be reported as contest prize expense for 2019?
a. 500,000
b. 418,250
c. 468,250
d. 0
Solution 8-10
Question 1 Answer b
Contest prize expense
Discount on note payable
Note payable - noncurrent
Contest prize expense
Note payable - current
418,250
531,750
950,000
50,000
50,000
The noncurrent note payable of P950,000 is presented minus the discount on note payable of
P531,750 or P418,250.
Question 2 Answer c
Contest prize expense for 2019 ( 418,250 + 50,000 )
468,250
1. When an entity issued a note solely in exchange for cash, the present value of the note at
issuance is equal to
a. Face amount
b. Face amount discounted at the prevailing interest rate
c. Proceeds received
d. Proceeds received discounted at the prevailing interest rate
2. If the present value of a note issued in exchange for a property is less than face amount, the
difference should be
a. Included in the cost of the asset
b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance
3. An entity borrowed cash from a bank and issued to the bank a short - term noninterest
bearing note payable. The bank discounted the note at 10% and remitted the proceeds to the
entity. The effective interest rate paid by the entity in this transaction would be
a. Equal to the stated discount rate of 10 %
b. More than the stated discount rate of 10 %
c. Less than the stated discount rate of 10 %
d. Independent of the stated discount rate of 10 %
4. At issuance date, the present value of a promissory note is equal to the face amount if the
note
a. Bears a stated rate of interest which is realistic.
b. Bears a stated rate of interest which is less than the pervailing market rate for similar
notes.
c. Is noninterest bearing and the implicit interest rate is less than the prevailing market rate
for similar notes.
d. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate
for similar notes.
5. Which statement concerning discount on note payable is incorrect?
a. Discount on note payable may be debited when entity discounts its own note with the
bank.
b. The discount on note payable is a deduction from the face amount note payable.
c. The discount on note payable represents interest charges applicable to future periods.
d. Amortizing the discount on note payable gradually decreases the carrying amount of the
liability over the life of the note.
CHAPTER 9
DEBT RESTRUCTURE
 Debt restructuring is a situation where the creditor, for economic or legal reasons related to
the debtor’s financial difficulties, grants to the debtor concession that would not otherwise
be granted in a normal business relationship.
 Under PFRS 9, paragraph 3.3.1, asset swap is treated as a derecognition of a financial
liability or extinguishment of an obligation.
 Paragraph 3.3.3 provides that the difference between the carrying amount of the financial
liability and the consideration given shall be recognized in a profit or loss.
 The difference between the fair value of the asset and the carrying amount is the gain or loss
on exchange.
 The difference between the carrying amount of the liability and the fair value of the asset is
gain or loss from restructuring.
 Dacion en pago arises when mortgaged property is offered by the debtor in full settlement of
the debt.
 An equity swap is the issuance of share capital by the debtor to the creditor in full or partial
payment of an obligation.
 IFRIC 19 provides that when equity instruments issued to extinguish all or part of a financial
liability are recognized initially, an entity shall measure the equity instruments at the fair
value of the equity instruments issued, unless that fair value cannot be reliably measured.
 PFRS 9, paragraph 3.3.2, provides that a substantial modification of terms of an existing
financial liability shall be accounted for as an extinguishment of the old financial liability and
the recognition of a new financial liability.
 Under Application Guidance B3.3.6 of PFRS 9, there is substantial modification of terms if
the gain or loss on extinguishment is at least 10 % of the old financial liability.
 The difference between the carrying amount of the old liability and the present value of new
or restructured liability shall be accounted for as gain or loss on extinguishment of debt.
 The old effective rate is used in computing the present value of the new liability.
 Any costs or fees incurred as a result of the substantial modification of terms shall be
recognized as part of gain or loss on extinguishment.
 Under Application Guidance B3.3.6 of PFRS 9, there is no substantial modification of terms.
 In accordance with PFRS 9, paragraph B5.4.6, the IASB recently clarified that any gain or
loss on modification should be recognized in profit or loss even if there is no substantial
modification of terms.
PROBLEMS AND THEORIES
Problem 9-1 ( AICPA Adapted )
Hull Company is indebted to Apex under a P5,000,000, 12%, three-year note dated December
31, 2017. Because of Hull's financial difficulties developing in 2019, Hull Company owed
accrued interest of P600,000 on the note on December 31, 2019.
Under a debt restructuring on December 31, 2019, Apex Company agreed to settle the note and
accrued interest for a tract of land having a fair value of P4,500,000. The carrying amount of the
land is P3,600,000.
What amount of pretax gain on extinguishment should Hull Company report as component of
income from continuing operations in 2019?
a. 2,000,000
b. 1,400,000
c. 1,100,000
d. 900,000
Solution 7-1 Answer a
Note payable
Accrued interest payable
Total liability
Carrying amount of land
Gain on extinguishment - IFRS
5,000,000
600,000
5,600,000
(3,600,000)
2,000,000
PFRS 9, paragraph 3.3.3, provides that the difference between the carrying amount of a financial
liability extinguished and the consideration paid, including any noncash asset transferred or
liability assumed shall be recognized in profit or loss.
Problem 9-2 ( IAA )
Versatile Company, after having experienced financial difficulties in 2019, negotiated with a
major creditor and arrived at an agreement to restructure a note payable on December 31, 2019.
The creditor was owed principal of P3,600,000 and interest of P400,000 but agreed to accept
equipment worth P700,000 and note receivable from a Versatile Company's customer with
carrying amount of P2,700,000.
The equipment had an original cost of P900,000 and accumulated depreciation of P300,000.
What amount should be recognized as gain from debt extinguishment on December 31, 2019?
a.
b.
c.
d.
700,000
600,000
400,000
0
Solution 9-2 Answer a
Note payable
Accrued interest payable
Total liability
Assets transferred:
Note receivable
Equipment at carrying amount ( 900,000 - 300,000 )
Gain from debt extinguishment - IFRS
3,600,000
400,000
4,000,000
2,700,000
600,000
3,300,000
700,000
Problem 9-3 ( AICPA Adapted )
Knob Company transferred real estate to Mene Company pursuant to a debt restructuring in full
liquidation of Knob's liability to Mene:
Carrying amount of liability liquidated
Carrying amount of real estate transferred
Fair value of real estate transferred
1,500,000
1,000,000
900,000
1. Under IFRS , what amount should be reported as gain on extinguishment of liability?
a. 600,000
b. 500,000
c. 100,000
d. 900,000
2. Under USA GAAP, what amount should be reported as gain or loss on restructuring?
a. 600,000 gain
b. 500,000 gain
c. 100,000 loss
d. 0
3. Under USA GAAP, what amount should be reported as gain or loss on transfer of real estate?
a. 100,000 loss
b. 500,000 gain
c. 600,000 gain
d. 0
Solution 9-3
Question 1 Answer b
Carrying amount of liability
Carrying amount of real estate
1,500,000
1,000,000
Gain on extinguishment
500,000
Question 2 Answer a
Carrying amount of liability
Fair value of real estate
Gain on restructuring
1,500,000
900,000
600,000
Question 3 Answer a
Fair value of real estate
Carrying amount of real estate
Loss on transfer of real estate
900,000
1,000,000
(100,000)
Problem 9-4 ( AICPA Adapted )
Ace Company entered into a troubled debt restructuring agreement with National Bank.
The bank agreed to accept land with a carrying amount of P800,000 and a fair value of
P1,000,000 in exchange for a note payable with a carrying amount of P1,500,000.
Under IFRS, what amount should be reported as a gain on extinguishment of debt?
a. 700,000
b. 300,000
c. 500,000
d. 0
Solution 9-4 Answer a
Carrying amount of note payable
Carrying amount of land
Gain on extinguishment - IFRS
1,500,000
800,000
700,000
Problem 9-5 ( AICPA Adapted )
During 2019, Mann Company experienced financial difficulties and is likely to default on a
P5,000,000, 15% three-year note dated January 1, 2017, payable to Summit Bank.
On December 31, 2019, the bank agreed to settle the note and unpaid interest of P750,000 for
2019 for P4,100,000 cash payable on January 31, 2020.
What amount should be reported as gain from extinguishment of debt in 2019?
a. 1,650,000
b. 900,000
c. 750,000
d. 0
Solution 9-5 Answer a
Note payable
Accrued interest payable
Total liability
Cash settlement
Gain on extinguishment of debt
5,000,000
750,000
5,750,000
(4,100,000)
1,650,000
Problem 9-6 ( IAA )
Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its
creditor to relieve its financial stress. Seal has a P2,500,000 note payable to United Bank.
The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares
quoted at P12 per share. The par value is P10 per share.
The fair value of the note payable on the date of restructuring is P2,200,000
1. What amount should be recognized as gain from debt extinguishment as a result of the equity
swap?
a. 400,000
b. 100,000
c. 500,000
d. 200,000
2. What amount should be recognized as share premium from the issuance of the shares?
a. 500,000
b. 100,000
c. 400,000
d. 200,000
3. If the shares have no fair value, what amount should be recognized as gain on
extinguishment?
a. 200,000
b. 300,000
c. 400,000
d. 500,000
Solution 9-6
Question 1 Answer b
Note payable
Fair value of shares ( 200,000 x 12 )
Gain on debt extinguishment
2,500,000
2,400,000
100,000
Under IFRIC 19, when equity instruments are issued to extinguish all or part of a financial
liability, the equity instruments issued shall be measured initially at the following in the order of
priority.
a. Fair value of the equity instruments issued
b. Fair value of the liability extinguished
c. Carrying amount of the liability extinguished
The difference between the carrying amount of the liability and the initial measurement of the
equity instruments issued shall be recognized in profit or loss.
Question 2 Answer c
Fair value of shares
Par value of shares ( 200,000 x 10 )
Share premium
2,400,000
2,000,000
400,000
Question 3 Answer b
Note payable
Fair value of note payable
Gain on extinguishment
Fair value of note payable
Par value of shares
Share premium
2,500,000
2,200,000
300,000
2,200,000
2,000,000
200,000
Problem 9-7 ( IAA )
At year-end, Sunshine Company showed the following data with respect to a matured obligation:
Note payable
Accrued interest payable
5,000,000
500,000
The entity is threatened with a court suit if it could not pay a maturing debt. Accordingly, the
entity entered into an agreement with the creditor for the issuance of share capital in full
settlement of the note payable.
The agreement provided for the issue of 35,000 shares with par value of P100. The share is
currently quoted at P130.
The fair value of the note payable on the date of restructuring is P4,700,000.
1. What amount should be recognized as gain from extinguishment of debt?
a. 1,000,000
b. 2,000,000
c. 950,000
d. 800,000
2. If the shares do not have fair value, what amount should be recognized as gain from
extinguishment of debt?
a. 200,000
b. 800,000
c. 300,000
d. 0
3. If both the shares and the note payable do not have fair value, what amount should be
recognized as gain from extinguishment of debt?
a. 2,000,000
b. 1,500,000
c. 1,000,000
d. 0
Solution 9-7
Question 1 Answer c
Note payable
Accrued interest payable
Total carrying amount of liability
Fair value of shares ( 35,000 x 130 )
Gain on extinguishment of debt
5,000,000
500,000
5,500,000
4,550,000
950,000
Question 2 Answer b
Total carrying amount of liability
Fair value of note payable
Gain on extinguishment of debt
5,500,000
4,700,0000
800,000
Question 3 Answer d
Total carrying amount of liability 5,500,000
Par value of shares ( 35,000 x 100 ) (3,500,000)
Share premium 2,000,000
In the absence of the fair value of shares and fair value of liability, the carrying amount of the
liability is the basis of measurement.
In such a case, the excess of the carrying amount of liability over the par value of shares is
recognized as share premium and not gain on extinguishment.
Note payable
Accrued interest payable
Share capital
Share premium
5,000,000
500,000
3,500,000
2,000,000
Problem 9-8 ( IAA )
Quest Company is threatened with bankruptcy due to its inability to meet interest payments and
fund requirements to retire P6,000,000 note payable with accrued interest payable of P600,000.
The entity has entered into an agreement with the creditor to exchange equity instruments for the
liability.
The terms of the exchange are 300,000 ordinary shares with P5 par value and P10 market value ,
and 25,000 preference shares with P10 par value and P60 market value.
1. What amount should be reported as gain on the extinguishment of the note payable?
a. 2,100,000
b. 1,500,000
c. 2,750,000
d. 0
2. What amount should be reported as total share premium from the issuance of the preference
and ordinary shares?
a. 2,750,000
b. 4,850,000
c. 1,500,000
d. 2,100,000
Solution 9-8
Question 1 Answer a
Note payable
Accrued interest payable
Total carrying amount of liability
Fair value of shares:
Ordinary ( 300,000 x 10 )
Preference ( 25,000 x 60 )
Gain on extinguishment
6,000,000
600,000
6,600,000
3,000,000
1,500,000
4,500,000
2,100,000
Question 2 Answer a
Fair value of ordinary shares
Par value of ordinary shares ( 300,000 x 5 )
Fair value of preference shares
Par value of preference shares ( 25,000 x 10 )
Total share premium
3,000,000
1,500,000
1,500,000
250,000
1,500,000
1,250,000
2,750,000
Problem 9-9 ( IAA )
Sunset Company had bonds payable with face amount of P5,000,000 and a carrying amount of
P4,800,000. In addition, unpaid interest on the bonds was accrued in the amount of P250,000.
The creditor had agreed to the settlement of the bonds payable in exchange for 50,000 shares of
P50 par value.
The shares have no reliable measure of fair value. However, the bonds are quoted at P3,500,000.
1. What amount should be reported as gain on the extinguishment of the bonds payable?
a. 1,500,000
b. 1,300,000
c. 1,550,000
d. 0
2. What amount should be recorded as share premium from the issuance of the shares?
a. 2,300,000
b. 1,000,000
c. 1,500,000
d. 0
Solution 9-9
Question 1 Answer c
Carrying amount of bonds payable
Accrued interest on bonds payable
Total
Fair value of bonds payable
Gain on extinguishment of bonds payable
4,800,000
250,000
5,050,000
(3,500,000)
1,550,000
Question 2 Answer b
Fair value of bonds payable
Par value of shares ( 50,000 x 50 )
Share premium
3,500,000
2,500,000
1,000,000
Problem 9-10 ( AICPA Adapted )
Due to extreme financial difficulties, Armada Company had negotiated a restructuring of a 10 %
P5,000,000 note payable due on December 31,2019. The unpaid interest on the note on such date
is P500,000.
The creditor had agreed to reduce the face value to P4,000,000, forgive the unpaid interest,
reduce the interest rate to 8% and extend the due date three years from December 31, 2019.
The PV of 1 at 10 % for three periods is 0.75 and the PV of an ordinary annuity of 1 at 10 % for
three periods is 2.49.
1. What amount should be reported as gain on extinguishment of debt in 2019?
a. 1,703,200
b. 1,203,200
c. 2,000,000
d. 540,000
2. What amount should be reported as interest expense for 2020?
a. 320,000
b. 379,680
c. 400,000
d. 500,000
Solution 9-10
PFRS 9, paragraph 3.3.2, provides that a substantial modification of terms of an existing
financial liability shall be accounted for as an extinguishment of the old liability and the
recognition of a new liability.
Under Application Guidance B3.3.6 of PFRS 9, there is substantial modification of terms if the
gain or loss on extinguishment is at least 10% of the total carrying amount of the old liability.
Application Guidance B3.3.6 further provides that the difference between the old liability and
the present value of the new liability which is discounted using the old effective rate shall be
accounted for as gain or loss on extinguishment.
Question 1 Answer a
PV of principal ( 4,000,000 x .75 )
PV of annual interest payments ( 320,000 x 2.49 )
Total present value of new liability
Note payable -- old
Accrued interest payable
Total old liability
Present value of new liability
Gain on extinguishment of debt
Note payable - new
Present value of new liability
Discount on note payable
3,000,000
796,800
3,796,800
5,000,000
500,000
5,500,000
3,796,800
1,703,200
4,000,000
3,796,800
203,200
Journal entry
Note payable - old
Accrued interest payable
Discount on note payable
Note payable - new
Gain on extinguishment of debt
Question 2 Answer b
5,000,000
500,000
203,200
4,000,000
1,703,200
Interest expense for 2020 ( 10 % x 3,796,800 ) 379,680
Interest paid ( 8 % x 4,000,000 ) 320,000
Amortization of discount 59,680
The entries to record the payment of interest on December 31, 2020 and amortization of the
discount on note payable for 2020 are:
Interest expense
320,000
Cash
320,000
Interest expense
59,680
Discount on note payable
59,680
1. An entity shall initially measure equity instruments issued to extinguish a financial liability at
a. Fair value of the equity instruments issued
b. Fair value of the liability extinguished
c. Par value of the equity instruments issued
d. Carrying amount of the liability extinguished
2. If the fair value of the equity instruments issued cannot be reliably measured, the equity
instruments issued to extinguish a financial liability shall be measured at
a. Fair value of the liability extinguished
b. Par value of the equity instruments issued
c. Carrying amount of the liability extinguished
d. Book value of the equity instruments issued
3. If both the fair value of the equity instruments issued and the fair value of the financial
liability extinguished cannot be measured reliably, the equity instruments issued shall be
measured at
a. Carrying amount of the liability extinguished
b. Par value of equity instruments issued
c. Carrying amount of the equity instruments issued
d. Value assigned by the Board of Directors
4. The difference between the carrying amount of the financial liability extinguished and the
fair value of equity instruments issued shall be recognized in
a. Profit or loss
b. Other comprehensive income
c. Retained earnings
d. General reserve
5. The gain or loss from extinguishment of a financial liability by issuing equity instruments is
presented as
a. Other income or other expense
b. Separate line item in the income statement
c. Component of other comprehensive income
d. Component of finance cost
CHAPTER 20
SHAREHOLDERS' EQUITY
 In a corporation, the owners' claim against the assets is called shareholders' equity or
stockholders' equity.
 However, the term equity may simply be used for all the business organizations.
 PAS 38, paragraph 69, provides that start up costs which include legal and secretarial costs in
establishing a legal entity shall be recognized as expense when incurred.
 Shareholders’ equity or stockholders’ equity is the residual interest of owners in the net
assets of a corporation measured by the excess of assets over liabilities.
 Share capital is the portion of the paid in capital representing the total par or stated value of
the shares issued.
 Subscribed share capital is the portion of the authorized share capital that has been
subscribed but not yet fully paid and therefore still unissued.
 The subscribed share capital is reported minus subscription receivable not collectible
currently.
 Share premium is the portion of the paid in capital representing excess over the par or stated
value.
 Retained earnings represent the cumulative balance of periodic earnings, dividend
distributions, prior period errors and other capital adjustments.
 Revaluation surplus is the excess of revalued amount over the carrying amount of the
revalued asset.
 Treasury shares are the corporation's own shares that have been issued and then reacquired
but not canceled.
 Deposits on subscriptions to a proposed increase in share capital may be reported as part of
shareholders' equity as a separate item in the equity section.
 The term capital stock is the amount fixed in the articles of incorporation to be subscribed
and paid in or secured to be paid in by the shareholders of the corporation, either in money or
property or services, at the organization of the corporation, or afterwards and upon which the
corporation is to conduct its operations.
 Accounting for share capital
a. Memorandum method – No entry is made to record the authorized share capital. Only a
memorandum is made for the total authorized share capital. When share capital is issued,
it is credited to the share capital account.
b. Journal entry method – The authorization to issue share capital is recorded by debiting
unissued share capital and crediting authorized share capital.
 The Revised Corporation Code provides that a share shall not be issued for a consideration
less than the par or stated value.
 The law further provides that shares without par value cannot be issued for less than P5.
 Thus, in the Philippines, the no-par share must have a stated value of at least P5.
 The Revised Corporation Code prohibits the issue of share at a discount.
 Thus, when a share is sold at a discount, the discount is not considered a loss to the issuing
corporation but the shareholder is held liable therefor.
 The Revised Corporation Code provides that where the consideration for the issuance of
share capital is other than actual cash or consists of property such as patent or copyright, the
valuation thereof shall be initially determined by the shareholders or the board of directors
subject to the approval of the Securities and Exchange Commission.
 PFRS 2, paragraph 10, provides that for equity-settled share-based payment transactions, the
entity shall measure the goods and services received and the corresponding increase in equity
directly at the fair value of the goods and services received.
 However, if the entity cannot estimate reliably the fair value of the goods and services
received, the entity shall measure their value and the corresponding increase in equity
indirectly by reference to the fair value of the equity instruments issued.
 In conformity with the legal provision and PFRS 2, if shares are issued for services, the
shares shall be recorded at the fair value of such services or fair value of the shares issued,
whichever is reliably determinable.
 PAS 32, paragraph 37, provides that transaction costs that are directly attributable to the
issuance of new shares shall be deducted from equity, net of any related income tax benefit.
 In other words, share issuance costs shall be debited to share premium arising from the share
issuance.
 The Philippine Interpretations Committee concluded that costs that relate to stock market
listing, or otherwise are not incremental costs directly attributable to the issuance of new
shares, shall be recorded as expense in the income statement.
 PAS 32, paragraph 38, requires that transaction costs that relate jointly to the concurrent
listing and issuance of new shares, and listing of old existing shares shall be allocated
between the newly issued and listed shares, and the newly listed old existing shares.
 PAS 32, paragraph 18, defines redeemable preference share as:
a. A preference share that provides for mandatory redemption by the issuer for a fixed or
determinable amount at a future date.
b. A preference share that gives the holder the right to require the issuer to redeem the
instrument for a fixed or determinable amount at a future date.
 The preference shares are redeemable at the option of the preference shareholders.
 A convertible preference share is one which gives the holder the right to exchange the
holdings for other securities of the issuing corporation.
PROBLEMS AND THEORIES
Problem 20-1 ( IAA )
Mara Company provided the following data at year-end:
Authorized share capital
Unissued share capital
Subscribed share capital
Subscription receivable
Share premium
Retained earnings unappropriated
Retained earnings appropriated
Revaluation surplus
Treasury shares, at cost
What total amount should be reported as shareholders' equity?
a. 5,100,000
b. 5,500,000
5,000,000
2,000,000
1,000,000
400,000
500,000
600,000
300,000
200,000
100,000
c. 4,900,000
d. 4,800,000
Solution 20-1 Answer a
Authorized share capital
Unissued share capital
Issued share capital
Subscribed share capital
Subscription receivable
Share premium
Retained earnings:
Unappropriated
Appropriated
Revaluation surplus
Total
Treasury shares
Shareholders' equity
5,000,000
(2,000,000)
3,000,000
1,000,000
(400,000)
600,000
300,000
600,000
500,000
900,000
200,000
5,200,000
(100,000)
5,100,000
The subscription receivable is a deduction from the related subscribed share capital. However,
subscription receivable collectible within one year is shown as current asset.
Problem 20-2 ( PHILCPAAdapted )
Glenn Company provided the following information at year-end:
Preference share capital, P100 par
Share premium - preference share
Ordinary share capital, P10 par
Share premium - ordinary share
Subscribed ordinary share capital
Retained earnings
Subscription receivable - ordinary share
3,000,000
500,000
6,000,000
2,000,000
4,000,000
2,500,000
1,000,000
What is the amount of legal capital?
a. 15,500,000
b. 13,000,000
c. 15,000,000
d. 12,000,000
Solution 20-2 Answer b
Preference share capital
Ordinary share capital
Subscribed ordinary share capital
Total legal capital
3,000,000
6,000,000
4,000,000
13,000,000
In case of par value share capital, legal capital is the aggregate par value of all shares issued and
subscribed. In the case of no - par value share capital, legal capital is the aggregate stated value
of shares issued and subscribed plus any excess over stated value. This is in accordance with the
provision of Corporation Code of the Republic of the Philippines.
Problem 20-3 ( AICPA Adapted )
At the beginning of the current year, Ria Company issued 10,000 ordinary shares of P20 par
value and 20,000 convertible preference shares of P20 par value for a total of P800,000.
At this date, the ordinary share was selling for P36 and the convertible preference share was
selling for P27.
1. What amount of the proceeds should be allocated to the preference shares?
a. 600,000
b. 540,000
c. 480,000
d. 440,000
2. What amount of the proceeds should be allocated to the ordinary shares?
a. 360,000
b. 200,000
c. 320,000
d. 400,000
3. What amount should be recorded as share premium from the issuance of preference shares?
a. 180,000
b. 100,000
c. 80,000
d. 0 4.
4. What amount should be recorded as share premium from the issuance of ordinary shares?
a. 200,000
b. 160,000
c. 120,000
d. 0
Solution 20-3
Question 1 Answer c
Question 2 Answer c
Ordinary shares ( 10,000 x 36 )
Preference shares ( 20,000 x 27 )
Market value
360,000
540,000
900,000
Fraction
36/90
54/90
Allocated proceeds
320,000
480,000
800,000
Question 3 Answer c
Proceeds from preference shares
Par value of preference shares ( 20,000 x 20 )
Share premium - preference shares
480,000
400,000
80,000
Question 4 Answer c
Proceeds from ordinary shares
Par value of ordinary shares ( 10,000 x 20 )
Share premium - ordinary shares
Journal entry
Cash
Preference share capital
Share premium - preference
Ordinary share capital
Share premium - ordinary
320,000
200,000
120,000
800,000
400,000
80,000
200,000
120,000
Problem 20-4 ( AICPA Adapted )
At the beginning of the current year, Cove Company, a closely - held entity, issued 6 % bonds
with a maturity value of P6,000,000, together with 10,000 ordinary shares of P50 par value, for a
combined cash amount of P11,000,000.
If issued separately, the bonds would have sold for P4,000,000 on an 8% yield to maturity basis.
1. What amount of the proceeds should be allocated to the ordinary shares?
a. 4,000,000
b. 7,000,000
c. 8,000,000
d. 5,000,000
2. What amount should be reported for share premium on the issuance of the ordinary shares?
a. 7,500,000
b. 6,500,000
c. 5,500,000
d. 4,500,000
Solution 20-4
Question 1 Answer b
Question 2 Answer b
Cash received
Market value of bonds payable
Residual amount allocated to ordinary shares
11,000,000
(4,000,000)
7,000,000
Par value of ordinary shares ( 10,000 x 50 )
Share premium
Cash
Discount on bonds payable
Bonds payable
Share capital
Share premium
(500,000)
6,500,000
11,000,000
2,000,000
6,000,000
500,000
6,500,000
Problem 20-5 ( AICPA Adapted )
At the beginning of current year, Ashe Company was organized with authorized capital of
100,000 shares of P200 par value.
January
March
September
10 Issued 25,000 shares at P220 a share
25 Issued 1,000 shares for legal services when the fair value was P240 a share
30 Issued 5,000 shares for a tract of land when the fair value was P260 a share
1. What amount should be reported as share capital?
a. 7,640,000
b. 6,200,000
c. 7,440,000
d. 5,000,000
2. What amount should be reported for share premium?
a. 840,000
b. 800,000
c. 540,000
d. 500,000
Solution 20-5
Question 1 Answer b
January
March
September
10 ( 25,000 x 200 )
25 ( 1,000 x 200 )
30 ( 5,000 x 200 )
5,000,000
200,000
1,000,000
6,200,000
Share capital
Question 2 Answer a
January
10 ( 25,000 x 20 )
March
25 ( 1,000 x 40 )
September
30 ( 5,000 x 60 )
Total share premium
500,000
40,000
300,000
840,000
Problem 20-6 ( AICPA Adapted )
Day Company held 10,000 shares of P10 par value as treasury reacquired for P120,000. At yearend, the entity reissued all 10,000 shares for P190,000.
What is credited for the excess of the reissue price over the cost of treasury shares?
a. Share capital P100,000
b. Retained earnings P70,000
c. Gain on sale of investment P70,000
d. Share premium P70,000
Solution 20-6 Answer d
1. Treasury shares are recorded at cost.
2. If the treasury shares are reissued or sold at more than cost, the gain is credited to share
premium.
3. If the treasury shares are sold at less than cost , the loss on sale is debited to the following:
a. Share premium from treasury shares
b. Retained earnings
4. If the treasury shares are not reissued but retired, any gain on retirement (cost less than par) is
credited to share premium.
5. If the treasury shares are not reissued but retired, any loss on retirement (cost more than par)
is debited to the following:
a. Share premium from original issuance
b. Share premium from treasury shares
c. Retained earnings
Problem 20-7 ( AICPA Adapted )
At the beginning of current year , Rona Company issued 50,000 shares of P10 par value for P100
per share.
During the year, the entity reacquired 2,000 shares at P150 per share and immediately canceled
these 2,000 shares.
1. In connection with the retirement of shares, what amount should be debited to share
premium?
a. 20,000
b. 100,000
c. 180,000
d. 280,000
2. In connection with the retirement of shares, what amount should be debited to retained
earnings?
a. 280,000
b. 180,000
c. 100,000
d. 0
Solution 20-7
Question 1 Answer c
Question 2 Answer c
Share capital ( 2,000 x 10 )
Share premium ( 2,000 x 90 )
Retained earnings ( balancing )
Cash
20,000
180,000
100,000
300,000
If an entity's share capital is retired, the share capital is reduced by the par value.
If the retirement results in a loss (cost exceeds par value), such loss is debited to:
a. Share premium from original issuance first
b. Share premium from treasury shares second
c. Retained earnings last
Problem 20-8 ( IAA )
At the beginning of current year, Hanna Company reported the following shareholders' equity:
Share capital, P10 par, outstanding 225,000 shares
Share premium
Retained earnings
2,250,000
1,500,000
2,000,000
During the current year, the entity had the following transactions:
 Acquired 10,000 treasury shares for P50 per share or P500,000.
 Sold 5,000 treasury shares at P60 a share.
 Sold 2,000 treasury shares at P45 per share.
 Net income for the year was P2,500,000.
1. What amount should be reported as total amount of share premium at year-end?
a. 1,500,000
b. 1,560,000
c. 1,540,000
d. 2,550,000
2. What amount should be reported as share capital at year-end?
a. 2,250,000
b. 2,150,000
c. 2,320,000
d. 2,300,000
3. What amount should be reported as total shareholders' equity a year-end?
a. 8,140,000
b. 8,300,000
c. 8,250,000
d. 8,290,000
Solution 20-8
Question 1 Answer c
Treasury shares
Cash
Cash ( 5,000 x 60 )
Treasury shares ( 5,000 x 50 )
Share premium - treasury
Cash ( 2,000 x 45 )
Share premium - treasury
Treasury shares ( 2,000 x 50 )
Share premium -- issuance January 1
Share premium - treasury ( 50,000 - 10,000 )
Total share premium
500,000
500,000
300,000
250,000
50,000
90,000
10,000
100,000
1,500,000
40,000
1,540,000
Question 2 Answer a
Share capital
2,250,000
The share capital issued is not affected by the acquisition and sale of treasury shares.
Question 3 Answer a
Share capital
Share premium
Retained earnings
Treasury shares ( 3,000 shares remaining x 50 )
Total shareholders' equity
Retained earnings - beginning
Net income for the year
Retained earnings - ending
2,250,000
1,540,000
4,500,000
(150,000)
8,140,000
2,000,000
2,500,000
4,500,000
Problem 20-9 ( AICPA Adapted )
At year-end, Pack Company canceled 5,000 shares of P50 par value held in treasury at an
average cost of P120 per share.
Before recording the cancelation of the treasury shares, the entity had the following balances:
Share capital issued originally at P75 per share
Share premium
2,500,000
1,250,000
Retained earnings
Treasury shares, at cost
1,000,000
600,000
1. What amount should be reported as adjusted share capital at year-end?
a. 2,250,000
b. 2,500,000
c. 1,900,000
d. 2,125,000
2. What amount should be reported as adjusted share premium at year-end?
a. 1,250,000
b. 1,125,000
c. 900,000
d. 800,000
3. What amount should be reported as adjusted retained earnings at year-end?
a. 1,000,000
b. 1,200,000
c. 775,000
d. 650,000
Solution 20-9
Question 1 Answer a
Share capital
Par value of treasury shares canceled ( 5,000 x 50 )
Adjusted share capital
2,000,000
(250,000)
2,250,000
Question 2 Answer b
Share premium
Share premium of treasury shares canceled ( 5,000 x 25 )
Adjusted share premium
1,250,000
(125,000)
1,125,000
Question 3 Answer c
Retained earnings
Loss on cancelation of treasury shares
Adjusted retained earnings
Cost of treasury shares
Original issue price of treasury shares ( 5,000 x 75 )
Loss cancelation of treasury shares
1,000,000
(225,000)
775,000
600,000
(375,000)
225,000
Journal entry for the cancelation
Share capital
Share premium
( 5,000 x 50 )
( 5,000 x 25 )
250,000
125,000
Retained earnings
Treasury shares
225,000
600,000
Problem 20-10 ( AICPA Adapted )
Vicar Company was organized at the beginning of current year with 100,000 authorized shares
of P100 par value and issued 75,000 shares at P140 per share.
During the year, the entity purchased 5,000 shares at P110 per share. The entity used the par
value method to record the purchase of the treasury shares.
1. What is the balance of the share premium from the original issuance of shares at year-end?
a. 3,000,000
b. 2,800,000
c. 4,000,000
d. 3,800,000
2. What is the balance of the share premium from treasury shares at year-end ?
a. 200,000
b. 150,000
c. 50,000
d. 0
Solution 20-10
Question 1 Answer b ( 3,000,000 - 200,000 )
Cash ( 75,000 x 140 )
Share capital ( 75,000 x 100 )
Share premium - issuance
2,800,000
10,500,000
7,500,000
3,000,000
Question 2 Answer b
150,000
Under the par value method the treasury shares account is debited at par and any share premium
from original issuance is canceled.
Treasury shares ( 5,000 x 100 )
500,000
Share premium - issuance ( 5,000 x 40 )
200,000
Cash ( 5,000 x 110 )
550,000
Share premium - treasury shares ( balancing )
150.000
1. What is the meaning of net assets of a corporation?
a. Contributed capital
b. Retained earnings
c. Shareholders' equity
d. Legal capital
2. The two primary account classifications within shareholders' equity are
a. Preference shares and retained earnings
b. Par value of ordinary shares and retained earnings
c. Contributed capital and retained earnings
d. Preference shares and ordinary shares
3. Details of each class of share capital should be reported
a. On the face of the statement of financial position only.
b. In disclosure notes only.
c. On the face of the statement of financial position or in disclosure notes.
d. On the face of the statement of comprehensive income and in disclosure notes.
4. The corporate charter is known as
a. Articles of incorporation
b. Statement of organization
c. By-laws
d. Registration statement
5. Characteristics of the corporate form that have led to the growth of this form of business
ownership include all of the following, except
a. Ease of raising capital
b. Low government regulation
c. Limited liability
d. Ease of ownership transfer
– END OF VOL 2 –
SOURCE:
Practical Financial Accounting Vol 1 & 2
by Conrado Valix & Christian Valix