PPE PART 1 Reviewer

1. Which of the following standards addresses the accounting for property, plant and equipment?
a. PAS 12 c. PAS 26
b. PAS 16 d. PFRS 5

2. Which of the following is least likely capitalized as cost of land?

a. Grading, filling, draining clearing and similar site development activities
b. Survey
c. Landscaping and similar improvements that have limited useful lives.
d. Special assessment

3. LOQUACIOUS TALKATIVE Co. acquired a piece of factory equipment overseas on cash basis
for ₱400,000. Additional costs incurred include the following: commission paid to broker for the
purchase of the equipment, ₱20,000; import duties of ₱100,000; non-refundable purchase taxes
of ₱40,000; freight cost of transferring the equipment to LOQUACIOUS’ premises, ₱4,000; costs
of assembling and installing the equipment, ₱8,000; costs of testing the equipment, ₱6,000;
administration and other general overhead costs, ₱16,800; and advertisement and promotion
costs of the new product to be produced by the equipment, ₱15,200. The samples generated
from testing the equipment were sold at ₱2,000. How much is the initial cost of the equipment?
a. 576,000 c. 592,800
b. 578,000 d. 594,800

4. On January 1, 20x1, REEDY SLENDER Co. purchased fixtures at an installment price of

₱520,000. REEDY paid ₱40,000 cash down payment and issued a three-year noninterest
bearing note of ₱480,000 payable in three equal annual installments starting December 31, 20x1
for the balance. The prevailing rate for the note as of January 1, 20x1 is 12%. How much is the
initial cost of the fixtures?
a. 360,000 c. 480,000
b. 424,293 d. 520,000

5. On April 1, 20x1, ESCULENT EDIBLE Co. purchased land and building by paying ₱40,000,000
and assuming a mortgage of ₱8,000,000. The land and building have appraised values of
₱20,000,000 and ₱40,000,000, respectively. The building will be used by ESCULENT Co. as its
new office.
Additional costs relating to the purchase include the following:
Legal cost of conveying and registering title to land ₱32,000
Payment to tenants to vacate premises 36,000
Option paid on the land and building 24,000
Option paid on similar land and building not acquired 12,000
Broker's fee on the land and building 60,000
Unpaid real estate taxes prior to April 1, 20x1
assumed
by ESCULENT Co. – assessed on land 120,000
Real estate taxes after April 1, 20x1 80,000
Repairs and renovation costs before the building
is occupied 160,000
Repair costs after the building is occupied 200,000

How much are the respective costs of the land and the building?
Land Building
a. 14,592,000 24,440,000
b. 15,492,000 32,640,000
c. 16,192,000 32,240,000
d. 17,292,000 23,420,000
6. Old Room Co. purchased land and building for a lump-sum price of ₱48,000,000. The existing
building will be demolished and a new building will be constructed. Old Room incurred the
following additional costs:
Title guarantee 80,000
Option paid for the land and old building acquired 24,000
Payments to tenants to vacate premises 48,000
Cost of razing the old building 240,000
Construction cost of new building (completed) 34,000,000

 The land and old building have fair values of ₱20,000,000 and ₱40,000,000, respectively.
 Some salvaged wood planks from the demolition were used as wall panels in the new building.
Old Room estimates that the salvaged wood planks have a fair value of ₱120,000. The other
salvaged materials were sold for ₱60,000.

How much are the allocated costs of the land and the new building?
Land New building Land New building
a. 16,864,000 33,780,000 c. 15,980,000 36,670,000
b. 16,104,000 34,180,000 d. 16,014,000 34,810,000

7. LOATH HATE Co. purchased a lot for ₱8,000,000. Immediately after the purchase, LOATH Co.
started the construction of a new building on the lot. Additional information follows:
Legal cost of conveying title to land ₱ 40,000
Special assessment 20,000
Survey costs 60,000
Materials, labor, and overhead costs 22,000,000
Cash discounts on materials purchased not taken 120,000
Clerical and other costs related to construction 56,000
Excavation costs 400,000
Architectural fees and building permit 240,000
Supervision by management on construction 48,000
Insurance premiums paid for workers 520,000
Payment for claim for injuries not covered by
insurance 180,000
Savings on construction 800,000
Cost of changes to plans and specifications due to
560,000
inefficiencies
Paving of streets and sidewalks (not included in
blueprint) 40,000
Income earned on a vacant space rented as parking
lot during construction 36,000

How much are the capitalized costs of the land and the building?
Land Building Land Building
a. 8,160,000 23,096,000 c. 8,100,000 23,184,000
b. 8,120,000 23,144,000 d. 8,060,000 23,264,000
8. FEEBLE Co. exchanged equipment with WEAK, Inc. Pertinent data are shown below:
FEEBLE WEAK,
Co. Inc.
Equipment 4,000,000 8,000,000
Accumulated depreciation 800,000 3,200,000
Carrying amount 3,200,000 4,800,000
Fair value 3,800,000 4,400,000
Cash paid by FEEBLE to WEAK 600,000 600,000

In WEAK’s books, what amounts are recognized for the following?

Equipment Gain (Loss) Equipment Gain (Loss)
a. 3,400,000 400,000 c. 4,400,000 (1,000,000)
b. 3,800,000 (400,000) d. 5,000,000 0

9. TRANSCEND EXCEED Co. traded-in an old machine for a new model. Pertinent data are as
follows:
Old equipment:
Cost 200,000
Accumulated depreciation 80,000
Average published retail value 24,000

New equipment:
List price 380,000
Cash price without trade in 280,000
Cash price with trade in 220,000

How much is the gain (loss) recognized by TRANSCEND Co. on the transaction?
a. 60,000 c. (60,000)
b. 160,000 d. 0

10. Nail Bite Co. acquired land with fair value of ₱4,000,000 in exchange for Nail Bite’s 10,000
shares with par value of ₱40 per share and quoted price of ₱360 per share. How much gain
(loss) should Nail Bite Co. recognize on the exchange?
a. 3,200,000 c. (400,000)
b. 400,000 d. 0
ANSWERS:
1. B
2. C
3. A
Solution:
Purchase price 400,000
Commission to broker 20,000
Import duties 100,000
Non-refundable purchase taxes 40,000
Transportation cost 4,000
Assembling and installation costs 8,000
Testing costs 6,000
Proceeds from sale of samples generated (2,000)
Initial cost of equipment 576,000

4. B
Cash down payment 40,000
PV of note (480K ÷ 3) x PV of an ordinary annuity of 1 @12%, n=3 384,293
Initial cost of fixtures 424,293

5. C
Cash payment 40,000,000
Mortgage assumed 8,000,000
Total acquisition cost 48,000,000

Fair Fraction
 
values s
Land 20,000,000 20/60
Building 40,000,000 40/60
  60,000,000

Land Building
Purchase price (48M x 20/60); (48M x 40/60) 16,000,000 32,000,000
Legal cost of conveying and registering title 32,000 -
to land
Payment to tenants to vacate premises 12,000 24,000
(36K x 20/60); (36K x 40/60)
Option paid on the land and building 8,000 16,000
(24K x 20/60); (24K x 40/60)
Broker's fee on the land and building 20,000 40,000
(60K x 20/60); (60K x 40/60)
Unpaid real estate taxes prior to April 1, 120,000 -
20x1 assumed – assessed on land
Repairs and renovation costs before the - 160,000
building is occupied
Totals 16,192,000 32,240,000
6. B
Land Old building New building
Lump-sum price 16,000,000 32,000,000 -
(48M x 20/60); (48M x 40/60)
Title guarantee 80,000 - -
Option paid 8,000 16,000 -
(24K x 20/60); (24K x 40/60)
Payments to tenants 16,000 32,000 -
(48K x 20/60); (48K x 40/60)
Cost of razing old building - - 240,000
Proceeds from salvaged mats. - - (60,000)
Fair value of mats. - - -
Construction cost of new bldg. - - 34,000,000
Totals 16,104,000 32,048,000 34,180,000

7. B
Land Land improvement New building
Purchase price of lot 8,000,000 - -
Legal cost of conveying 40,000 - -
Special assessment 20,000 - -
Survey costs 60,000 - -
Materials, labor, & OH - - 22,000,000
Cash discounts not taken - - (120,000)
Clerical and other costs - - 56,000
Excavation costs - - 400,000
Arch. fees & bldg. permit - - 240,000
Supervision by mgmt. - - 48,000
Insurance premiums - - 520,000
Paving of streets - 40,000 -
Totals 8,120,000 40,000 23,144,000

8. B
Equipment: (4,400,000 Fair value of asset given up - 600,000 cash received) = 3,800,000
Gain (Loss): (4,400,000 Fair value of asset given up – 4,800,000 carrying amount of asset given up) =
(400,000) loss

9. C
Date Equipment – new (cash price w/o trade-in) 280,000
Accumulated depreciation 80,000
Loss on trade in (squeeze) 60,000
Equipment – old 200,000
Cash 220,000

10. D
PPE PART 2 REVIEWER
1. Subsequent to initial recognition, an entity shall use this model to account for its items of
property, plant and equipment.
a. cost model c. revaluation model
b. fair value model d. a or c as an accounting policy choice

2. It is the systematic allocation of the depreciable amount of an asset over its estimated useful life.
a. Depreciation c. Impairment
b. Revaluation d. all of these

3. Which of the following is considered when depreciating an asset under the cost model?
a. The cost of the asset. c. The change in the fair value of the asset.
b. The useful life of the asset. d. Both a and b.

4. Which of the following depreciation methods will most likely result in the highest amount of
reported profit in the early years of an asset’s useful life?
a. Straight line c. 150% declining balance
b. Double declining balance d. Sum-of-the-years’ digits

5. The most commonly used depreciation method is the

a. straight-line method. c. replacement method.
b. depreciation method based on revenue. d. inventory method.

6. Assume that a drill press is rebuilt during its sixth year of use so that its useful life is extended 5
years beyond the original estimate of 10 years. If the asset recognition criteria are met, the cost
of rebuilding the drill press should be charged to the appropriate:
a. expense account c. asset account
b. accumulated depreciation account d. liability account

7. The carrying amount of an item of property, plant and equipment that is subsequently accounted
for under the cost model is equal to
a. the historical cost less any accumulated depreciation.
b. the fair value less any accumulated depreciation.
c. the historical cost less any accumulated depreciation and any accumulated impairment loss.
d. the fair value less any accumulated depreciation and any accumulated impairment loss.

8. On January 1, 20x1, SIMPLETON FOOL Co. acquired a piece of equipment with an estimated
useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of ₱400,000. At
normal capacity, the equipment’s estimated service life is 40,000 hours or a total productive
capacity of 160,000 units of a product. In 20x1 and 20x2, the actual manufacturing hours were
16,000 and 8,000, respectively, and the actual units produced were 60,000 and 30,000,
respectively. How much is the accumulated depreciation on December 31, 20x2 under each of
the following depreciation methods?
SLM SYD DDB UOPM (input) UOPM (output)
a. 100,000 160,000 200,000 129,000 120,000
b. 160,000 224,000 300,000 192,000 180,000
c. 80,000 128,455 200,000 128,000 120,000
d. 160,000 224,000 300,000 180,000 192,000
*SLM = straight line method; SYD = sum-of-the-years’ digits; DDB = double declining balance; UOPM = units-of-production method

9. DEPLORABLE BAD Co. acquired a machine on October 5, 20x1 for a total cost of ₱160,000.
The machine was estimated to have a useful life of 4 years and a salvage value of ₱10,000.
DEPLORABLE BAD Co. uses the sum-of-the-years’ digits method and prorates full-year
depreciation to the nearest month. DEPLORABLE BAD Co. sold the machine on December 27,
20x2 for ₱40,000. How much is the gain (loss) on the sale?
 a. (48,750) c. (32,250)
b. 48,750 d. 32,250

10. On January 1, 20x1, DEVIOUS CROOKED Co. purchased the following assets and decided to
depreciate them as a single unit:
Cost Residual value Useful life
Machine tools 80,000 4,000 3 years
Meters 64,000 2,000 5 years
Returnable containers 120,000 - 6 years

What is the composite life?

a. 5.40 c. 4.70
b. 5 d. 4.50

11. The small tools account of ATROCIOUS CRUEL Co. has a balance of ₱600,000 as of January
1, 20x1. The movements in this account during the year were as follows:
Feb. April Sept. Nov.
Cost of new tools acquired 40,000 - 120,000 88,000
Cost of old tools retired 24,000 48,000 - 72,000
Disposal proceeds of old tools 2,000 3,200 - 4,000

How much is the depreciation expense in 20x1 under the retirement method?
a. 134,800 c. 144,000
b. 166,800 d. 118,800

12. On January 1, 20x1, COCKY ARROGANT Co. acquired a piece of equipment for ₱4,000,000.
The equipment will be used to reproduce gaming software that is expected to be marketed for 3
years. The equipment is expected to be used in producing products over the next two years,
after which the equipment will be disposed of at a negligible amount. The estimated revenues
from the software are as follows:
Estimated
Year revenues
20x1 120,000,000
20x2 80,000,000
20x3 40,000,000
Total 240,000,000

The actual revenue earned in 20x1 is ₱180,000,000. The depreciation expense in 20x1 is most likely
equal to
a. 3,000,000 c. 2,977,667
b. 2,000,000 d. 333,333

13. On January 1, 20x1, DIMINUTIVE SMALL Co. signed a ten-year lease for office space.
DIMINUTIVE has the option to renew the lease for an additional five-year period on or before
January 1, 2x10. During the first half of January 20x2, DIMINUTIVE Co. incurred the following
costs:
 ₱3,600,000 for general improvements, with an estimated useful life of ten years, on the leased
premises.
 ₱400,000 for office furniture with an estimated useful life of ten years.
 ₱800,000 for movable assembly line equipment with a useful life of 5 years.

At the time the leasehold improvements were finished, DIMINUTIVE Co. was uncertain as to the
exercise of the lease renewal option. How much is the depreciation expense on the leasehold
improvements in 20x2?
a. 400,000 c. 533,333
b. 360,000 d. 488,889
14. On January 1, 20x1, KNAVE RASCAL Co. acquired a machine for a total cost of ₱80,000,000.
The machine was depreciated using the sum-of-the-years’ digits method over a period of 10
years. On January 1, 20x4, KNAVE Co. changed its depreciation method to the double declining
balance method. How much is the depreciation expense in 20x4?
a. 40,727,272 c. 12,556,780
b. 11,635,782 d. 13,556,702

15. ENTREAT Co. acquired an aircraft from BEG, Inc. on January 1, 20x1 for a total cost of
₱24,000,000. The aircraft was estimated to have a useful life of 10 years. ENTREAT Co. uses
the straight line method of depreciation. On January 1, 20x5, a major part of the aircraft was
replaced for a total cost of ₱3,200,000. ENTREAT Co. cannot determine the cost of the replaced
part. How much is the loss on replacement?
a. 1,920,000 c. 1,200,000
b. 1,280,000 b. 0

16. On December 31, 20x1, SWIMMY UNSTEADY Co. determined the following information for the
purpose of revaluing its building:
Historical cost 80,000,000
Initial estimate of useful life 25
Actual life 10
Replacement cost 140,000,000
Effective life 8
Remaining economic life 17
Income tax rate 30%

If SWIMMY UNSTEADY Co. uses the proportional method of recording, the entry to record the
revaluation would include which of the following?
a. a debit to accumulated depreciation of ₱32,000,000.
b. a credit to accumulated depreciation of ₱12,800,000.
c. a credit to building of ₱15,200,000.
d. a debit to deferred tax of ₱14,160,000.

17. On December 31, 20x1, the building of LITHE FLEXIBLE Co. was revalued. Information
determined on revaluation date is as follows:
Historical cost 72,000,000
Accumulated depreciation 16,000,000
Initial estimate of residual value 8,000,000
Actual life on revaluation date 10
Replacement cost 144,000,000
Effective life 12
Remaining economic life 20
Income tax rate 30%

The estimate of residual value remained unchanged. How much are the (1) revaluation surplus, net
of tax, on December 31, 20x1 and (2) revised annual depreciation in periods subsequent to
December 31, 20x1?
a. 25,900,000; 4,650,000
b. 37,000,000; 895,000
c. 37,000,000; 4,650,000
d. 25,900,000; 4,250,000
18. On December 31, 20x1, the building of Borong Co. with a historical cost of ₱320,000,000,
accumulated depreciation of ₱160,000,000, and an estimated useful life of 20 years was
determined to have a fair value of ₱200,000,000. Borong Co. is subject to an income tax rate of
30%. Under the elimination method, the entry to record the revaluation includes
a. a debit to accumulated depreciation for ₱160,000,000.
b. a debit to accumulated depreciation for ₱40,000,000.
c. a debit to building for ₱120,000,000.
d. a credit to building for ₱160,000,000.
19. On December 31, 20x1, the land of CONJUNCTION UNION Co. with an original cost of
₱40,000,000 was revalued to a fair value of ₱28,000,000. This was the first revaluation made on
the land since it was purchased 2 years ago. On December 20x4, the building was appraised at
a fair value of ₱48,000,000. How much is the gain on impairment reversal in 20x4?
a. 8,000,000 c. 12,000,000
b. 20,000,000 d. 0

20. FORTITUDE ENDURANCE Co. purchased a piece of equipment on August 14, 20x1 for a total
cost of ₱400,000. The equipment has an estimated useful life of 10 years and a residual value of
₱80,000. It is the policy of FORTITUDE Co. to provide for full-year depreciation in the year of
acquisition and none in the year of disposal. On May 12, 20x4, the equipment was sold for
₱120,000. Disposal costs of ₱8,000 were incurred. How much is the gain (loss) on the sale?
a. (184,000) c. 192,000
b. 184,000 d. (192,000)
ANSWERS:
1. D
2. A
3. D
4. A
5. A
6. B
7. C

8. B
Solution:
 Straight line: (400,000 – 80,000) x 2/4 = 160,000
 Sum-of-the-years’ digits: SYD denominator = 4 x [(4 + 1) ÷ 2] = 10
(400,000 – 80,000) x [(4 + 3) / 10] = 224,000
 Double declining balance: DDB rate = 2/4 = 50%
Depreciation - 20x1 (400K x 50%) 200,000
Depreciation - 20x2 (400K - 200K) x 50% 100,000
Accumulated depreciation - Dec. 31, 20x2 300,000

 Units-of-production method (based on input):

(400,000 – 80,000) ÷ 40,000 hours = 8 per hr.
(16,000 + 8,000) x 8 = 192,000

 Units-of-production method (based on output):

(400,000 – 80,000) ÷ 160,000 units = 2 per unit
(60,000 + 30,000) x 2 = 180,000

9. A
Solution:
Depreciation for each full year of the asset’s useful life is calculated as follows:
Year SYD
1 4/10 x 150K* = 60,000
2 3/10 x 150K = 45,000
3 2/10 x 150K = 30,000
4 1/10 x 150K = 15,000
* (₱160,000 - ₱10,000) = ₱150,000

The full-year depreciation is prorated as follows:

Year SYD
20x1 60,000 x 3/12 = 15,000
20x2 60,000 x 9/12 = 45,000
  45,000 x 3/12 = 11,250
Accumulated depreciation as of date of sale
71,250

Net disposal proceeds 40,000

Carrying amt. on date of sale (160K - 71,250) (88,750)
Loss on sale (48,750)
10. D
Solution:
Residual Annual
Cost Dep. amt.
value Useful life dep’n.
Machine tools 80,000 4,000 76,000 3 25,333
Meters 64,000 2,000 62,000 5 12,400
R/Containers 120,000 - 120,000 6 20,000
Totals 264,000 258,000 57,733

Composite life = Depreciable amt. ÷ Annual depreciation

(258,000 ÷ 57,773) = 4.5 (rounded-off)

11. A
Solution:
  Feb. April Sept. Nov. Total depreciation
Cost of old tools retired 24,000 48,000 - 72,000 144,000
Disposal proceeds (2,000) (3,200) - (4,000) (9,200)
Totals 22,000 44,800 - 68,000 134,800

12. B
Solution:
 Using the straight-line method: (4M ÷ 2) = 2,000,000
 PAS 16 prohibits the use of a depreciation method that is based on revenue.

13. A (3,600,000 ÷ 9) = 400,000

14. B
Solution:
SYD denominator = 10 x [(10 + 1) / 2)] = 55
Accumulated depreciation on 1/1/x4 = 80M x [(10 + 9 + 8)/55] = 39,272,727
Carrying amt. on 1/1/x4 = 80M – 39,272,727 = 40,727,273
Double declining balance rate = 2/7 = 28.57%
Depreciation in 20x4 = 40,727,273 x 28.57% = 11,635,782

15. A (3.2M x 6/10) = 1,920,000

Supporting journal entries:

Jan. 1, Accumulated depreciation (3.2M x 4/10) 1,280,000
20x5
Loss on replacement (squeeze) 1,920,000
Aircraft (old part) 3,200,000
to derecognize the old part that is replaced
Jan. 1, Aircraft (new part) 3,200,000
20x5
Cash 3,200,000
to recognize the new replacement part

16. B
Solution:
Replacement cost 140,000,000
Depreciation (140M x 8/25(a)) (44,800,000)
Fair value or Depreciated R.C. 95,200,000
Carrying amount (80M x 10/25) (48,000,000)
Revaluation surplus - gross of tax 47,200,000
Less: Deferred tax (47.2M x 30%) (14,160,000)
Revaluation surplus - net of tax 33,040,000

(a)
(8 effective live + 17 remaining economic life) = 25 total economic life

The movements in the accounts are determined as follows:

  Historical Cost Replacement cost Increase
Building 80,000,000 140,000,000 60,000,000
Accum. depreciation (32,000,000) (c) (44,800,000) (12,800,000)
CA/ DRC/ RS (b) 48,000,000 95,200,000 47,200,000
(c)
80M historical cost x 10 actual life / 25 historical life = 32M
(b)
Carrying amount/ Depreciated replacement cost/ Revaluation surplus – gross of tax

The entry under the proportional method is as follows:

Dec. 31, Building (see table above) 60,000,000
20x1
Accumulated depreciation (see table) 12,800,000
Revaluation surplus 33,040,000
Deferred tax liability 14,160,000

17. D
Replacement cost 144,000,000
Depreciation (144M - 8M) x 12/32 (51,000,000)
Fair value or Depreciated R.C. 93,000,000
Carrying amount (72M - 16M) (56,000,000)
Revaluation surplus - gross of tax 37,000,000
Less: Deferred tax (37M x 30%) (11,100,000)
Revaluation surplus - net of tax 25,900,000

Fair value or Depreciated R.C. 93,000,000

Less: Residual value (8,000,000)
Depreciable amount 85,000,000
Divide by: Remaining economic life 20
Revised annual depreciation 4,250,000
18. A
Solution:
Fair value 200,000,000
Carrying amount (160,000,000)
Revaluation surplus - gross of tax 40,000,000
Less: Deferred tax (40M x 30%) (12,000,000)
Revaluation surplus - net of tax 28,000,000

Dec. 31, Accumulated depreciation 160,000,000

20x1
Deferred tax liability 12,000,000
Revaluation surplus 28,000,000
Building (balancing figure) 120,000,000

The carrying amount after the revaluation is reconciled as follows:

Building (320M – 120M credit in entry) 200,000,000
Accumulated depreciation (160M - 160M debit in entry) -
Carrying amount after revaluation (Fair value) 200,000,000

19. C
Solution:
20x1
Fair value 28,000,000
Carrying amount (40,000,000)
Impairment loss (12,000,000)

20x4
Fair value 48,000,000
Carrying amount (28,000,000)
Increase in carrying amount 20,000,000

The increase in carrying amount is allocated as follows:

Increase in carrying amount 20,000,000
Reversal of the previous impairment (gain) 12,000,000
Excess credited to revaluation surplus 8,000,000

20. D
Solution:
May 12, Cash (120K – 8K) 112,000
20x4
Accum. depreciation (400K – 80K) x 3/10 96,000
Loss on disposal of equipment (squeeze) 192,000
Equipment 400,000