Intermediate Financial Accounting Part 1b by Zeus Millan Compress - Compress
Intermediate Financial Accounting Part 1b by Zeus Millan Compress - Compress
Intermediate Financial Accounting Part 1b by Zeus Millan Compress - Compress
INTERMEDIATE
Financial
Accounting
Part 1B
2015
ISBN 978-621-95096-1-9
Published by:
BANDOLIN ENTERPRISE
No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600, Philippines
ii
TABLE OF CONTENTS
CHAPTER 12
INVESTMENTS IN ASSOCIATES .............................................................. 1
CHAPTER 12: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).............................................................................................. 1
CHAPTER 12: THEORY OF ACCOUNTS REVIEWER........................................ 6
CHAPTER 12 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 23
CHAPTER 13
AGRICULTURE ....................................................................................... 24
CHAPTER 13: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES) 24
CHAPTER 13: THEORY OF ACCOUNTS REVIEWER...................................... 28
CHAPTER 13 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS ........ 34
CHAPTER 14
PROPERTY, PLANT AND EQUIPMENT (PART 1) ................................ 35
CHAPTER 14: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................................................ 35
CHAPTER 14: THEORY OF ACCOUNTS REVIEWER...................................... 40
CHAPTER 14 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 50
CHAPTER 15
PROPERTY, PLANT AND EQUIPMENT (PART 2) ................................ 52
CHAPTER 15: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................................................ 52
CHAPTER 15: THEORY OF ACCOUNTS REVIEWER...................................... 58
CHAPTER 15 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 79
CHAPTER 16
DEPLETION OF MINERAL RESOURCES ................................................ 80
CHAPTER 16: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................................................ 80
CHAPTER 16: THEORY OF ACCOUNTS REVIEWER...................................... 84
CHAPTER 16 – SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 91
CHAPTER 17
GOVERNMENT GRANTS ........................................................................ 92
CHAPTER 17: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES) 92
CHAPTER 17: THEORY OF ACCOUNTS REVIEWER...................................... 94
CHAPTER 17 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS102
CHAPTER 18
BORROWING COSTS ............................................................................ 103
CHAPTER 18: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).......................................................................................... 103
CHAPTER 18: THEORY OF ACCOUNTS REVIEWER.................................... 105
CHAPTER 18 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS114
CHAPTER 19
INVESTMENT PROPERTY ................................................................... 115
CHAPTER 19: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES) 115
CHAPTER 19: THEORY OF ACCOUNTS REVIEWER.................................... 120
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CHAPTER 19 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS127
CHAPTER 20
INTANGIBLE ASSETS ........................................................................... 128
CHAPTER 20: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).......................................................................................... 128
CHAPTER 20: THEORY OF ACCOUNTS REVIEWER.................................... 134
CHAPTER 20 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS155
CHAPTER 21
IMPAIRMENT OF ASSETS ................................................................... 156
CHAPTER 21: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).......................................................................................... 156
CHAPTER 21: THEORY OF ACCOUNTS REVIEWER.................................... 164
CHAPTER 21 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS170
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Chapter 12
Investments in Associates
In 20x2, PRAISE reported loss of ₱8,000,000, declared and issued 10% stock
dividends, and reported gain on property revaluation of ₱2,000,000 and loss on
exchange differences on translation of foreign operations of ₱400,000.
2. How much is the carrying amount of the investment as of December 31, 20x1?
a. 4,000,000 b. 6,240,000 c. 6,400,000 d. 6,560,000
4. How much is the net share in the other comprehensive income of the
associate in 20x2?
a. 320,000 b. (1,280,000) c. (1,280,000) d. 0
5. How much is the carrying amount of the investment as of December 31, 20x2?
a. 4,960,000 b. 4,640,000 c. 4,000,000 d. 0
6. How much is the goodwill that will be subsumed in the carrying amount of the
investment?
a. 1,400,000 b. 1,250,000 c. 1,100,000 d. 0
7. How much is the net share in the profit or loss of the associate (investment
income) in 20x1?
1
a. 1,400,000 b. 1,200,000 c. 1,000,000 d. 0
8. How much is the carrying amount of the investment as of December 31, 20x1?
a. 8,000,000 b. 8,500,000 c. 8,700,000 d. 8,900,000
10. How much is AFFICIONADO’s share in profit of associate for the year?
a. 0 b. 60,000 c. 600,000 d. 909,200
13. What if SEVERE Co. declared dividends that pay all of the dividends in arrears
on preference shares, how much is the share in profit or loss of associate?
a. 704,000 b. 800,000 c. 512,000 d. 770,000
14. What if the preference shares are non-cumulative, how much is the share in
profit or loss of associate?
a. 704,000 b. 800,000 c. 512,000 d. 770,000
15. What if the shares are redeemable preference shares and SEVERE declared
₱150,000 cash dividends on the redeemable preference shares during the
year, how much is the share in profit or loss of associate?
a. 704,000 b. 800,000 c. 512,000 d. 770,000
At the end of 20x1, LESSEN reported a profit of ₱4,000,000 and paid cash
dividends of ₱2,400,000. At December 31, 20x1, the shares are selling at ₱400
per share.
The remaining ownership of 15% (30% x 1/2) does not give AMBULATE
significant influence over WALK. How much is the reclassification gain (loss)
on July 1, 20x2?
a. 800,000 b. (800,000) c. 2,000,000 d. 1,000,000
The remaining 20% ownership (40% x 1/2) still gives CHASTE significant
influence over PURE. How much is the reclassification gain (loss) on July 1,
20x2?
a. 800,000 b. (800,000) c. 2,000,000 d. 1,000,000
The remaining ownership of 15% (30% x 1/2) does not give SNITCH
significant influence over PILFER. How much is the reclassification gain (loss)
recognized in profit or loss on July 1, 20x2?
a. 2,000,000 b. 1,500,000 c. 1,000,000 d. 0
On July 1, 20x2, POSTULATE Co. acquired additional 15,000 shares at ₱280 per
share resulting to an increase in ownership interest over DEMAND from the
previous 10% to 25%. The transaction did not give rise to any goodwill or
negative goodwill. In 20x2, DEMAND reported profit of ₱24,000,000, of which
₱16,000,000 were earned in the second half of the year. In addition, DEMAND
declared and paid dividends of ₱4,000,000 on December 31, 20x2. The DEMAND
shares have quoted price of ₱360 per share on December 31, 20x2.
21. How much is the carrying amount of the investment in associate on July 1,
20x2?
a. 7,000,000 b. 7,600,000 c. 6,600,000 d. 5,800,000
22. How much is the share in the profit of the associate in 20x2?
a. 4,000,000 b. 4,800,000 c. 3,200,000 d. 3,000,000
23. How much is the carrying amount of the investment in associate on December
31, 20x2?
a. 10,000,000 b. 11,400,000 c. 9,800,000 d. 8,800,000
29. Assuming the sale is an upstream sale, how much is the share in the profit of
associate in 20x1?
a. 968,000 b. 728,000 c. 785,600 d. 800,000
Downstream sale of non-depreciable asset
Use the following information for the next two questions:
LUCID Co. owns 20% of CLEAR, Inc.’s outstanding ordinary shares. On January 1,
20x1, LUCID sold land with a carrying amount of ₱400,000 to CLEAR for
₱480,000. Gain of ₱80,000 was recorded by LUCID. CLEAR reports profit of
₱4,000,000 and ₱4,800,000 on December 31, 20x1 and 20x2, respectively.
31. Assuming the sale is an upstream sale, how much is the share in the profit of
associate in 20x1?
a. 720,000 b. 784,000 c. 728,000 d. 800,000
5
Share in losses of associate
Use the following information for the next four questions:
SKEPTICAL Co. owns 20% of the ordinary shares of QUESTIONING, Inc. The
records of SKEPTICAL as of December 31, 20x1 show the following information
before any necessary year-end adjustments.
32. How much is the share in the loss of the associate in 20x1?
a. 1,120,000 b. 320,000 c. 800,000 d. 280,000
33. How much is the share in the loss of the associate in 20x2?
a. 0 b. 320,000 c. 400,000 d. 280,000
34. How much is the share in the loss of the associate in 20x3?
a. 0 b. 480,000 c. 320,000 d. 800,000
35. How much is the share in the profit of the associate in 20x4?
a. 600,000 b. 820,000 c. 1,200,000 d. 200,000
22. When computing for its share in the associate’s profit or loss, an investor shall
use
a. its present ownership interest
b. its present ownership interest adjusted for the effect of any potential
voting rights
c. the potential voting rights percentage
d. the effective interest rate
23. According to PAS 28, significant influence is the investor’s participation in the
financial and operating policy decisions of the investee but not control of
these decisions. Which of the following may an investor be unable to exercise
significant influence?
a. participation in policy making process
b. material intercompany transactions
c. majority ownership of the investee concentrated among a small group of
shareholders who operate the investee without regard to the views of the
investor
d. technological dependency
(Adapted)
24. Under PAS 28, these refer to instruments, which if exercised, give the entity
additional voting power or reduce another party’s voting power over the
financial and operating policies of another entity.
a. share rights c. convertible securities
b. share options d. potential voting rights
25. When assessing the existence of significant influence, which of the following
shall be considered by the investor?
a. potential voting rights that are not exercisable immediately
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b. share options giving the investor the right to purchase preference shares
of the investee
c. stock rights which are exercisable immediately but the entity’s
management does not intend to exercise.
d. potential voting rights that will be received in the following accounting
period
Equity method
27. Investments accounted for under the equity method are initially recognized at
a. cost
b. fair value
c. fair value plus direct acquisition cost
d. cost plus or minus share in profit or loss of associate
28. Which of the following does not correctly relate to the application of the
equity method?
a. the investor recognizes its proportionate share in the profit or loss, other
comprehensive income, and discontinued operations of the associate
b. dividends received are accounted for as reduction in the investment
balance
c. share dividends are not accounted for
d. the investor accounts only its proportionate share in the profit or loss of
the associate but not in other comprehensive income and discontinued
operations.
29. Under the equity method, which of the following does not decrease the
investment account?
a. share in associate’s loss
b. amortization of undervaluation of asset
c. amortization of overvaluation of asset
d. share in dividends declared by the associate
31. When computing for its share in the associate’s profit or loss, the investor
should
I. deduct one year dividends on cumulative preference shares of the
associate held by other parties and classified as equity, whether declared
or not.
II. deduct one year dividends on noncumulative preference shares of the
associate held by other parties and classified as equity, whether declared
or not.
III. deduct all dividends in arrears on cumulative preference shares of the
associate held by other parties and classified as equity, whether declared
or not.
IV. deduct dividends on noncumulative preference shares of the associate
held by other parties and classified as equity only when declared.
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V. not deduct from profit or loss any dividends on ordinary shares before
computing for the share in the associate’s profit or loss.
a. I, IV, V b. I, IV c. II, III, V d. II, III
32. The equity method causes the balance in the investment account to
approximate:
a. original cost of the investment
b. market value of the investment
c. original cost of the investment minus any dividends declared and paid by
the other company
d. original cost of the investment plus a proportionate share of subsequent
undistributed earnings of the investee company.
(Adapted)
33. How is goodwill arising on the acquisition of an associate dealt with in the
financial statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss.
d. Goodwill is not recognized separately within the carrying amount of the
investment.
(Adapted)
34. If the excess of the acquisition cost of an investment accounted for under
equity method over the book value of net assets acquired is attributable to an
undervalued depreciable asset and an unidentifiable asset, which of the
following statements is correct
a. The carrying amount of the investment is increased by the proportionate
share in the profits earned by the investee and decreased by the
depreciation of the interest in the undervaluation and unaffected by the
separate impairment of the unidentifiable asset
b. The carrying amount of the investment is increased by the depreciation of
the interest in the undervaluation and amortization of the unidentifiable
asset
c. The carrying amount of the investment is decreased by the depreciation of
the interest in the undervaluation and decreased by the separate
impairment on the unidentifiable asset.
d. Investment income is decreased by the depreciation of the interest in the
undervaluation and amortization of the unidentifiable asset
35. The equity method is most likely not applicable to which of the following?
a. ownership interest of 2%, 2 out of 7 of the BOD of the associate is
appointed by the investor
b. ownership interest of 40%
c. ownership interest of 20% but the associate is operating under severe
long-term restrictions that significantly impair its ability to transfer funds
to the investor
d. ownership interest of 25% acquired with an exclusive view of subsequent
disposal within 12months and accounted for under PFRS 5
d. The investor previously held only 10% interest but subsequently acquires
additional 10% interest in the associate.
37. Which of the following computations may properly result to the correct
balance of an investment in associate account at year-end?
a. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, and minus amortization of share
in undervaluation of associate’s asset
b. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, and plus amortization of share in
undervaluation of associate’s asset
c. Beginning balance of investment plus share in associate’s profit plus share
in dividends declared by associate, and minus amortization of share in
undervaluation of associate’s asset
d. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, minus amortization of share in
undervaluation of associate’s asset, and minus separate impairment loss
on goodwill included in the carrying amount of the investment
38. Which of the following computations may properly result to the correct
amount of share in associate’s profit or loss for the period?
a. Share in profit of associate minus amortization of share in the
overvaluation of associate’s asset
b. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset
c. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus share in dividends declared by
associate
d. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus separate impairment loss on
goodwill included in the carrying amount of the investment
39. Which of the following may represent the net change in the investment in
associate account during a period?
a. Share in profit of associate minus share in dividends plus increase in the
investment in associate account
b. Share in profit of associate minus share in dividends minus increase in the
investment in associate account
c. Share in profit of associate minus share in dividends
d. Share in profit of associate plus share in dividends
41. The excess of purchase cost of an investment in associate over the fair value
of the interest acquired represents
a. goodwill that should not be amortized but tested for impairment at least
annually
b. negative goodwill that should be recognized in the investor’s profit or loss
in the year of acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
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42. The excess of the fair value of the interest acquired over the purchase cost of
an investment in associate represents
a. goodwill that should not be amortized but tested for impairment at least
annually
b. negative goodwill that should be recognized in the investor’s profit or loss
in the year of acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
43. Equity method shall cease to be applied only when the investor loses
significant influence over the associate. Which of the following is not true?
a. The loss of significant influence can occur with or without a change in the
percentage of ownership.
b. An entity loses significant influence over an investee when it loses the
power to participate in the financial and operating policy decisions of that
investee.
c. There is a presumption of loss of significant influence if the ownership
interest falls below 20%.
d. There is a presumption of loss of significant influence when the associate
is operating under severe long-term restrictions that significantly impair
its ability to transfer funds to the investor.
46. On the loss of significant influence, the investor shall do any of the following,
except
a. measure at fair value any investment retained in the former associate.
b. recognize gain or loss for the difference between the net disposal
proceeds received and the carrying amount of the investment sold
c. recognize gain or loss for the difference between the fair value of the
interest retained and the carrying amount of the previous interest held
d. account for the discontinuance of equity method retrospectively.
13
c. no adjustment to the investment account is necessary
d. the investment should be reclassified and any gain or loss on
reclassification is recognized in equity.
49. If there is any excess of the investor’s share of the net fair value of the
associate’s identifiable assets and contingent liabilities over the cost of the
investment, that is, negative goodwill, how should that excess be treated?
a. It should be included in the carrying amount of the investment.
b. It should be written off against retained earnings.
c. It should be included as income in the determination of the investor’s
share of the associate’s profit or loss for the period.
d. It should be disclosed separately as part of the investor’s equity.
(Adapted)
51. When the equity method is used to account for the investment in an associate,
the recording of the receipt of a cash distribution from the investee will result
in
a. The recognition of investment income.
b. A reduction in the investment balance.
c. An Increase in a liability account.
d. An increase in special equity account.
52. Stock dividends on common stock should be recorded at their fair market
value by the investor when the related investment is accounted for under
which of the following methods?
Cost Equity
a. Yes Yes
b. Yes No
c. No Yes
d. No No
(AICPA)
53. Which of the following statements is in accordance with the provisions of PAS
28?
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55. Which of the following statements are in accordance with PAS 28?
I. When the associate has cumulative preference shares, the investor
computes its share in the profit or loss of the investee after deducting the
preferred dividends, only when such dividends are declared.
II. When the associate has non-cumulative preference shares, the investor
computes its share in the profit or loss of the investee after deducting the
preferred dividends, whether or not such dividends are declared
a. true, true b. true, false c. false, true d. false, false
56. Bell owns 10% of the common stock of War Co. throughout the year. War Co.
has no preferred stock outstanding. Bella’s stock gives him the right to
a. be paid 10% of the firm’s profits in cash each year
b. receive dividends equal to 10% of the par value each year
c. receive dividends equal to 10% of the total dividends paid by the
corporation for the year to common stockholders
d. keep the corporation from issuing any additional stock unless he is willing
to buy 10% of the newly issued shares
(AICPA)
15
II. Share dividends received on an investment in associate is accounted for as
deduction from the investment account.
III. Share dividends received on an investment in associate is generally not
accounted for.
a. I b. II c. I and III d. I, II and III
59. Which of the following statements correctly refers to the provisions of PAS 28
Investments in Associates?
I. If an investor acquires additional shares sufficient to give him significant
influence, a retrospective adjustment should be made on the financial
statements to recognize share in profits and losses of the investee not
previously recognized.
II. No adjustment to the investment account is made when changing from the
fair value method to the equity method.
a. I b. II c. I and II d. Neither I nor II
63. The following statements relate to equity method. Choose the incorrect
statement.
a. In accounting for investments in common stock under the equity method,
sales of stock of an investee by an investor, should be accounted for as
gains or losses equal to the difference at the time of sales between selling
price and carrying amount of the stock sold.
b. The general rule is that an investor owning 20% or more of the voting
stock of an investee is presumed to have the ability to exercise significant
interest over the investee.
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c. Under the equity method of accounting, the investments in common stock
should be shown as a single amount, and the investor’s share of earnings
or losses from its investment should ordinarily be shown in its income
statement as a single amount including the results of discontinued
operations.
d. The equity method of recording security transactions assumes a close
economic relationship between the investor and the investee. It is used,
when influential interest exists.
(RPCPA)
64. Wrath Co. uses the equity method to account for its January 1, 2003 purchase
of Anger Inc.’s common stock. On January 1, 2003, the fair values of Anger’s
FIFO inventory and land exceeded their carrying amounts. How do these
excesses of fair values over carrying amounts affect Wrath’s reported equity
in Anger’s 2003 earnings?
Inventory excess Land excess
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
(AICPA)
65. On May 1, 20x1, Upbeat Company acquired 30% of the voting stock of Reggae
Corp. In 20x1, Reggae had net earnings of ₱100,000 and paid dividends of
₱10,000. Upbeat mistakenly measured these transactions using the cost
instead of the equity method of accounting. What effect would this have on
working capital, dividend income, and net earnings, respectively?
a. overstate, overstate, overstate
b. no effect, understate, understate
c. no effect, overstate, understate
d. understate, understate, understate
(RPCPA)
17
68. The following statements relate to the accounting for investments in equity
instruments.
I. Whenever an investment in marketable equity securities does not qualify
for accounting using the equity method, the investor is required to
recognize as dividend income cash dividends received from the investee.
II. The cost measurement for equity investments is permitted in separate
financial statements.
III. An investor may still be able to exercise significant influence over an
investee, even if the investment is less than 20% of the voting stock of the
investee.
IV. No adjustment to the investment account is made when changing from the
equity to the fair value measurement, or vice versa.
a. I, II b. I, II, III c. I, III d. I, II, IV
69. In its financial statements, Musang, Inc. uses the cost measurement of
accounting for its 15% ownership of Kalinga Coffee Co. At December 31, 20x1,
Musang has a receivable from Kalinga Coffee. How should the receivable be
reported in Musang’s December 31, 20x1 statement of financial position?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in
Kalinga Coffee, without separate disclosure.
c. 85% of the receivable should be reported separately, with the balance
offset against Kalinga Coffee’s payable to Musang.
d. The total receivable should be offset against Kalinga Coffee’s payable to
Musang, without separate disclosure.
(AICPA)
70. When the equity method is used to account for investments in common stock,
which of the following affects the investor’s reported investment income?
Equipment amortization related to purchase Cash dividends from investee
a. Yes Yes
b. No Yes
c. No No
d. Yes No
(AICPA)
71. Google Co. received a cash dividend from a common stock investment. Should
Google report an increase in the investment account if it has classified the
stock as FVOCI or uses the equity method of accounting?
FVOCI Equity
a. No No
b. Yes Yes
c. Yes No
d. No Yes
(AICPA)
18
72. Bliss Co. uses the equity method to account for its investment in Nirvana, Inc.
common stock. How should Bliss record a 2% stock dividend received from
Nirvana?
a. As dividend revenue at Nirvana's carrying value of the stock.
b. As dividend revenue at the market value of the stock.
c. As a reduction in the total cost of Nirvana stock owned.
d. As a memorandum entry reducing the unit cost of all Nirvana stock
owned.
(AICPA)
73. Which of the following investments in an associate is not within the scope of
PAS 28 Investments in associates?
a. An associate held by a subsidiary and measured at cost
b. An associate held by a venture capital organization and measured at cost
c. An associate held by a venture capital organization and measured at fair
value with changes in fair value recognized in profit or loss
d. An associate held by a subsidiary and measured at fair value with changes
in fair value recognized in profit or loss
(ACCA)
74. Fretboard Company equity accounts for its 40% interest in Fingerboard
Company. Fingerboard's financial statements include the following:
Revenue ₱ 600,000
Cost of sales (250,000)
350,000
Operating expenses (285,000)
65,000
Tax ( 20,000)
₱ 45,000
19
(Adapted)
77. If the investor ceases to have significant influence over an associate, how
should the investment be treated?
a. It should still be treated using equity accounting.
b. It should be treated in accordance with PFRS 9.
c. The investment should be frozen at the date at which the investor ceases
to have significant influence.
d. The investment should be treated at cost.
(Adapted)
64. Wrath Co. uses the equity method to account for its January 1, 2003 purchase
of Anger Inc.’s common stock. On January 1, 2003, the fair values of Anger’s
FIFO inventory and land exceeded their carrying amounts. How do these
excesses of fair values over carrying amounts affect Wrath’s reported equity
in Anger’s 2003 earnings?
Inventory excess Land excess
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
(AICPA)
65. On May 1, 20x1, Upbeat Company acquired 30% of the voting stock of Reggae
Corp. In 20x1, Reggae had net earnings of ₱100,000 and paid dividends of
₱10,000. Upbeat mistakenly measured these transactions using the cost
instead of the equity method of accounting. What effect would this have on
working capital, dividend income, and net earnings, respectively?
a. overstate, overstate, overstate
b. no effect, understate, understate
c. no effect, overstate, understate
d. understate, understate, understate
(RPCPA)
68. The following statements relate to the accounting for investments in equity
instruments.
I. Whenever an investment in marketable equity securities does not qualify
for accounting using the equity method, the investor is required to
recognize as dividend income cash dividends received from the investee.
II. The cost measurement for equity investments is permitted in separate
financial statements.
III. An investor may still be able to exercise significant influence over an
investee, even if the investment is less than 20% of the voting stock of the
investee.
IV. No adjustment to the investment account is made when changing from the
equity to the fair value measurement, or vice versa.
a. I, II b. I, II, III c. I, III d. I, II, IV
69. In its financial statements, Musang, Inc. uses the cost measurement of
accounting for its 15% ownership of Kalinga Coffee Co. At December 31, 20x1,
Musang has a receivable from Kalinga Coffee. How should the receivable be
reported in Musang’s December 31, 20x1 statement of financial position?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in
Kalinga Coffee, without separate disclosure.
c. 85% of the receivable should be reported separately, with the balance
offset against Kalinga Coffee’s payable to Musang.
d. The total receivable should be offset against Kalinga Coffee’s payable to
Musang, without separate disclosure.
(AICPA)
70. When the equity method is used to account for investments in common stock,
which of the following affects the investor’s reported investment income?
Equipment amortization related to purchase Cash dividends from investee
a. Yes Yes
b. No Yes
c. No No
d. Yes No
(AICPA)
71. Google Co. received a cash dividend from a common stock investment. Should
Google report an increase in the investment account if it has classified the
stock as FVOCI or uses the equity method of accounting?
FVOCI Equity
a. No No
b. Yes Yes
c. Yes No
d. No Yes
(AICPA)
18
72. Bliss Co. uses the equity method to account for its investment in Nirvana, Inc.
common stock. How should Bliss record a 2% stock dividend received from
Nirvana?
a. As dividend revenue at Nirvana's carrying value of the stock.
b. As dividend revenue at the market value of the stock.
c. As a reduction in the total cost of Nirvana stock owned.
d. As a memorandum entry reducing the unit cost of all Nirvana stock
owned.
(AICPA)
73. Which of the following investments in an associate is not within the scope of
PAS 28 Investments in associates?
a. An associate held by a subsidiary and measured at cost
b. An associate held by a venture capital organization and measured at cost
c. An associate held by a venture capital organization and measured at fair
value with changes in fair value recognized in profit or loss
d. An associate held by a subsidiary and measured at fair value with changes
in fair value recognized in profit or loss
(ACCA)
74. Fretboard Company equity accounts for its 40% interest in Fingerboard
Company. Fingerboard's financial statements include the following:
Revenue ₱ 600,000
Cost of sales (250,000)
350,000
Operating expenses (285,000)
65,000
Tax ( 20,000)
₱ 45,000
77. If the investor ceases to have significant influence over an associate, how
should the investment be treated?
a. It should still be treated using equity accounting.
b. It should be treated in accordance with PFRS 9.
c. The investment should be frozen at the date at which the investor ceases
to have significant influence.
d. The investment should be treated at cost.
(Adapted)
79. Profits and losses resulting from “upstream” and “downstream” transactions
between an investor and an associate are
a. recognized in the investor’s financial statements through proportionate
consolidation, meaning the investor recognizes its share in the sale and
cost of sales recorded by the associate
b. recognized in the investor’s financial statements only to the extent of
unrelated investors’ interests in the associate.
c. recognized in the investor’s financial statements only to the extent of
related investors’ interests in the associate.
d. not recognized in the investor’s financial statements
80. Under PAS 28, profits and losses resulting from ‘upstream’ and ‘downstream’
transactions between an investor and an associate
a. must be eliminated to the extent of the investor’s interest in the associate.
b. must be eliminated to the extent of the unrelated interest over the
associate
c. must be recognized in full after adjustment for the increases or decreases
in beginning inventory
d. not recognized
20
81. Under PAS 28, adjustments to share in profit or loss of an associate may differ
if the transaction is “downstream” or “upstream.” Which of the following
statements is true?
I. Jack Co. owns 20% interest in Old Man, Inc. During the year Old Man sold
magic beans to Jack. This is an upstream transaction.
II. Goldilocks Co. owns 20% interest in Papa Bear, Inc. During the year
Goldilocks purchased porridge from Papa Bear. This is a downstream
transaction.
a. true, true b. true false c. false, true d. false, false
82. Daddeh Co. owns 20% interest in Bebeh Co. During the year, Daddeh sold
inventory to Bebeh at 20% gross profit. As of year-end Bebeh still holds 100%
of the inventory. How much share in the profit from the transaction will
Daddeh recognize for the year? Assume income tax rate of 30%.
a. 14% b. 80% c. 2.8% d. none
83. Under PAS 28, it refers to the carrying amount of the investment in the
associate under the equity method together with any long-term interests that
in substance, form part of the investor’s net investment in the associates.
a. investment in associate c. interest in ownership
b. interest in the associate d. none
84. Which of the following may not be included in interest in associate when
determining the threshold in recognizing share in losses of associate?
a. investment in preference shares of associate
b. long-term, unsecured, advances to the associate
c. trade receivables from the associate
d. investment in associate
85. Losses recognized under the equity method in excess of the investor’s
investment in ordinary shares are applied to the other components of the
investor’s interest in the associate
a. in the order of their seniority
b. in the reverse order of their seniority
c. in the order of priority in liquidation
d. in no particular order
86. After the investor’s interest in the associate is reduced to zero, additional
losses are provided for, and a liability is recognized, only to the extent that the
investor has incurred
a. legal or constructive obligations
b. made payments on behalf of the associate
c. a or b
d. further losses are not recognized
Others
89. Investments in associates are normally classified in the statement of financial
position as
a. current assets b. noncurrent assets c. fair value d. equity account
91. What should happen when the financial statements of an associate are not
prepared to the same date as the investor’s accounts?
a. The associate should prepare financial statements for the use of the
investor at the same date as those of the investor.
b. The financial statements of the associate prepared up to a different
accounting date will be used as normal.
c. Any major transactions between the date of the financial statements of the
investor and that of the associate should be accounted for.
d. As long as the gap is not greater than three months, there is no problem.
(Adapted)
93. The reporting dates of the investor and its associate should not differ by more
than
a. one month b. two months c. three months d. six months
94. When the accounting policies used by the investor and the associate do not
match
a. PAS 28 requires appropriate adjustments to the associate’s financial
statements to conform them to the investor’s accounting policies for
reporting like transactions and other events in similar circumstances.
b. PAS 28 does not require appropriate adjustments to the associate’s
financial statements to conform them to the investor’s accounting policies
for reporting like transactions and other events in similar circumstances
when it was not practicable to use uniform accounting policies
c. PAS 28 requires the entity to discontinue the use of the equity method
d. In no instance should the accounting policies used by the investor and the
associate be different.
22
95. When financial statements of an associate used in applying the equity method
are prepared as at the end of the reporting period that is different from that of
the investor,
a. the difference must be no greater than three months
b. the difference must be no greater than twelve months
c. the difference must be compensated by an interim financial statement
d. no difference must exist
1. How much is classified as biological assets that are accounted for under PAS
41 Agriculture?
a. 2,660,000 b. 2,000,000 c. 6,000,000 d. 2,250,000
2. How much is classified as property, plant and equipment that are accounted
for under PAS 16 Property, Plant and Equipment?
a. 4,000,000 b. 4,860,000 c. 4,560,000 d. 3,650,000
Measurement
Use the following information for the next three questions:
The following information pertains to a biological asset of PETRIFY STUN Co.
Estimated selling price ₱80,000
Commissions to brokers 4,000
Transport costs 2,800
Levies by commodity exchange 1,200
Transfer taxes and duties 2,000
24
Advertising costs 800
How much is the total gain from the change in fair value less costs to sell during
20x1?
a. 116,800 b. 156,800 c. 113,600 d. 88,800
The combined market value of the assets is ₱2,000,000 while the market value of
the land is ₱1,280,000, 10% of which is attributable to improvements on the land.
How much is the valuation of the biological asset?
a. 592,000 b. 720,000 c. 848,000 d. 836,364
18. Assuming no breach of condition, how much income from government grant
is recognized in 20x1?
a. 2,000,000 b. 400,000 c. 0 d. either a or c
19. Assuming no breach of condition, how much income from government grant
is recognized in 20x2?
a. 2,000,000 b. 400,000 c. 0 d. either a or c
20. How much is the total gain from the change in fair value less costs to sell
during 20x1?
a. 116,800 b. 156,800 c. 113,600 d. 88,800
21. How much is the gain on change in fair value less costs to sell due to price
change?
a. 22,000 b. 94,800 c. 34,800 d. 122,000
22. How much is the gain on change in fair value less costs to sell due to physical
change?
a. 22,000 b. 94,800 c. 98,400 d. 122,000
27
Change in FVLCS attributable to price change and physical change
Use the following information for the next three questions:
On January 1, 20x1, the biological assets of GENTEEL POLITE Co. consist of ten 2-
year old animals with fair value less cost to sell of ₱40,000 each for a total of
₱400,000.
23. How much is the total gain from the change in fair value less costs to sell
during 20x1?
a. 116,800 b. 156,800 c. 113,600 d. 92,800
24. How much is the gain on change in fair value less costs to sell due to price
change?
a. 22,000 c. 94,800 c. 34,800 d. 16,000
25. How much is the gain on change in fair value less costs to sell due to physical
change?
a. 22,000 c. 94,800 c. 122,000 d. 76,800
10. Which of the following is correct regarding the applicability of PAS 41?
a. PAS 41 applies to biological assets and agricultural produce at the point of
harvest even if they do not relate to agricultural activities.
b. PAS 41 applies to unconditional government grant related to biological
assets measured at cost.
c. PAS 41 applies to land on which tree recognized as biological assets are
planted.
d. PAS 41 applies to living plants and animals only when such items relate to
agricultural activity.
11. PAS 41 applies to which of the following when they relate to agricultural
activity
I. Biological assets
II. Agricultural produce after the point of harvest
III. Agricultural produce at the point of harvest
29
IV. An unconditional government grant related to a biological asset measured
at its fair value less costs to sell
V. An unconditional government grant related to a biological asset measured
at cost land related to agricultural activity
VI. Intangible assets related to agricultural activity
a. I, II, IV b. I, III, IV c. I, II, III, IV, V d. I, II, IV, VI
12. According to PAS 41 this refers to the harvested product of the entity’s
biological assets.
a. biological produce c. agricultural produce
b. agricultural products d. biological assets
15. Agricultural activity covers a diverse range of activities which includes all of
the following except
a. processing of grapes into wine by a vintner who has grown the grapes.
b. raising livestock, forestry, and annual or perennial cropping
c. cultivating orchards and plantations
d. floriculture and aquaculture (including fish farming).
20. Regarding the choice of measurement basis used for valuing biological assets,
PAS 41
a. Sets out several ways of measuring fair value.
b. Recommends the use of historical cost.
c. Recommends the use of current cost.
d. Recommends the use of present value.
(Adapted)
21. Where the fair value of the biological asset cannot be determined reliably, the
biological asset is measured at
a. Cost.
b. Cost less accumulated depreciation.
c. Cost less accumulated depreciation and accumulated impairment losses.
d. Net realizable value.
23. Which of the following values is unlikely to be used in fair value measurement
of a biological asset?
a. Quoted price in a market.
b. The most recent market transaction price.
c. The present value of the expected net cash flows from the asset.
d. External independent valuation.
(Adapted)
24. The Plants Vs. Zombies Company owns a number of herds of cattle. Where
should changes in the fair value of a herd of cattle recognized in the financial
statements, according to PAS 41 Agriculture?
a. In profit or loss only
b. In other comprehensive income only
c. In profit or loss or other comprehensive income
d. In the statement of cash flows only
(ACCA)
25. An entity had a plantation forest that is likely to be harvested and sold in 30
years. The income should be accounted for in which of the following way?
a. No income should reported annually until first harvest and sale in 30
years
b. Income should be measured annually and reported using a fair value
approach that recognizes and measures biological growth.
c. The eventual sale proceeds should be estimated and matched to the profit
and loss account over the 30 year period.
d. The plantation forest should be valued every 5 years and the increase in
value should be shown in the statement of recognized gains and losses
(Adapted)
31
26. When agricultural produce is harvested, the harvest should be accounted for
by using PAS 2 Inventories, or another applicable PFRS. For the purpose of
that Standard, cost at the date of harvest is deemed to be
a. the fair value less cost to sell at point of harvest.
b. the historical cost of the harvest.
c. the historical cost less accumulated impairment losses.
d. market value.
27. A gain or loss arising on the initial recognition of a biological asset and from a
change in the fair value less costs to sell of a biological asset should be
included in
a. The net profit or loss for the period.
b. The statement of recognized gains and losses.
c. A separate revaluation reserve.
d. A capital reserve within equity.
(Adapted)
29. Which of the following costs are not included in costs to sell?
a. Commissions to brokers and dealers.
b. Levies by regulatory agencies.
c. Transfer taxes and duties.
d. Transport and other costs necessary to get the assets to a market.
30. In relation to PAS 41, which of the following is the least desirable choice of
income recognition?
a. Recognition of income during production
b. Recognition of income when a sale occurs
c. Recognition of income only when cash is collected
d. Recognition of income when production is completed
Government grants
31. An unconditional government grant related to a biological asset that has been
measured at fair value less cost to sell should be recognized as
a. Income when the grant becomes receivable.
b. A deferred credit when the grant becomes receivable.
c. Income when the grant application has been submitted.
d. A deferred credit when the grant has been approved.
(Adapted)
33. If the terms of a conditional government grant allow part of the grant to be
retained according to the time that has elapsed, the entity recognizes income
from grant
a. using the straight line method
b. only when the condition is fulfilled
c. in full as time passes
d. using the effective interest method
34. If a government grant is conditional on certain events, then the grant should
be recognized as
a. Income when the conditions attaching to the grant are met.
b. Income when the grant has been approved.
c. A deferred credit when the conditions attached to the government grant
are met.
d. A deferred credit when the grant is approved.
(Adapted)
Disclosures
35. Where there is a production cycle of more than one year for a biological asset,
PAS 41 encourages separate disclosure of the
a. Physical change only. c. Total change in value
b. Price change only d. a and b
37. Which of the following information should be disclosed under PAS 41?
a. Separate disclosure of the gain or loss relating to biological assets and
agricultural produce.
b. The aggregate gain or loss arising on the initial recognition of biological
assets and agricultural produce and the change in fair value less cost to
sell of biological assets.
c. The total gain or loss from biological assets, agricultural produce, and
from changes in fair value less cost to sell of biological assets.
d. There is no requirement in the Standard to disclose separately any gains
or losses.
(Adapted)
33
38. These refer to those that are to be harvested as agricultural produce or sold
as biological assets.
a. consumable biological assets c. agricultural produce
b. bearer biological assets d. biological assets
40. These biological assets are not agricultural produce but, rather, are self-
regenerating.
a. consumable biological assets c. agricultural produce
b. bearer biological assets d. biological assets
42. These are biological assets that have attained harvestable specifications (for
consumable biological assets) or are able to sustain regular harvests (for
bearer biological assets).
a. mature biological assets c. harvestable biological assets
b. immature biological assets d. completely mutated biological assets
Acquisition on account
2. PRECLUDE PREVENT Co. acquired an equipment for ₱448,000 on account
with a credit term of 2/15, n/30. Any discount is computed based on the
purchase price. The purchase price is inclusive of 12% value added tax (VAT).
PRECLUDE Co. is VAT-registered and any input VAT paid is refundable
through deduction from monthly output VAT remitted to the Bureau of
Internal Revenue (BIR). Additional costs incurred include ₱40,000 cost of
training staff who will be operating the equipment and ₱60,000 cost of
relocating the equipment to a new location after it was installed in a location
originally intended by management. How much is the initial cost of the
equipment?
a. 400,000 b. 391,040 c. 491,040 d. 392,000
Classes of PPE
6. ABC Co. had the following assets on December 31, 20x1.
Land used as plant site 50,000
Land and building classified as held for sale 780,000
Building used as office 500,000
Building rented out under operating lease 420,000
Equipment being sold in the ordinary course of business 330,000
Office furniture 24,000
Fixtures and signage 10,000
Machinery 12,000
Automobiles (used by company officers) 350,000
Delivery trucks (used by the shipping department) 420,000
Computers 70,000
Aircraft rented out to various clients 690,000
Dairy cattle (held to produce milk that is sold to customers) 10,000
Harvested milk 3,000
Apple trees (held to bear fruits to that are sold to customers) 6,000
Harvested apples 2,000
How much is the total of assets classified as property, plant and equipment?
a. 2,132,000 b. 2,126,000 c. 2,142,000 d. 2,148,000
9. The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much are the allocated costs of the land and the new
building?
Land New building
a. 16,864,000 33,780,000
b. 16,104,000 34,180,000
c. 15,980,000 36,670,000
d. 16,014,000 34,810,000
10. The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much is charged as loss on initial recognition?
a. 48,000 b. 32,000,000 c. 32,048,000 d. 0
11. The old building is unusable and has an insignificant fair value. How much are
the allocated costs of the land and the new building?
Land New building
a. 46,640,000 33,780,000
b. 46,104,000 34,180,000
c. 48,152,000 34,180,000
d. 46,140,000 34,810,000
12. The old building is unusable and has an insignificant fair value. How much is
charged as loss on initial recognition?
a. 48,000 b. 32,000,000 c. 32,048,000 d. 0
16. How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,400,000
17. How much is the initial cost of the equipment received by WEAK Co.?
a. 3,800,000 b. 4,400,000 c. 5,000,000 d. 3,400,000
No commercial substance
Use the fact pattern in the preceding problem except that the exchange has no
commercial substance.
22. How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,200,000
Trade-in
Use the following information for the next two questions:
TRANSCEND EXCEED Co. traded in an old machine for a new model. Pertinent
data are as follows:
Old equipment:
Cost 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
24. How much is the initial cost of the equipment received by TRANSCEND Co.?
a. 244,000 b. 280,000 c. 320,000 d. 184,000
26. How much is the initial cost of the equipment received by RESILIENT Co.?
a. 400,000 b. 4,000,000 c. 3,600,000 d. 180,000
28. Use the fact pattern above except that the fair value of the land is
indeterminable. How much is the initial cost of the equipment received by
RESILIENT Co.?
a. 400,000 b. 4,000,000 c. 3,600,000 d. 180,000
30. How much is the initial cost of the equipment received by LABYRINTH Co.?
a. 3,800,000 b. 4,000,000 c. 3,807,852 d. 180,000
32. Use the fact pattern above except that the fair value of the land is
indeterminable. How much is the initial cost of the equipment received by
LABYRINTH Co.?
a. 3,800,000 b. 4,000,000 c. 3,807,852 d. 180,000
Acquisition by donation
Use the following information for the next two questions:
GROVEL Co. received donation of equipment from CRAWL, Inc., an unrelated
foreign corporation. The equipment has a fair value of ₱4,000,000. Necessary
costs incurred by GROVEL Co. to bring the asset to its intended condition for use
amounted to ₱40,000.
35. Assuming the donor is a shareholder of GROVEL Co., the entry to record the
receipt of the donation includes
a. a credit to share premium of ₱4,040,000
b. a credit to share premium of ₱3,960,000
c. a credit to income from donation of ₱4,040,000
d. a credit to income from donation of ₱3,960,000
2. The principal issues in the accounting for property, plant and equipment
include which of the following?
I. The recognition of the assets.
II. The determination of carrying amounts and the depreciation charges and
impairment losses to be recognized in relation to assets recognized.
III. The complex computation of revaluation surplus.
a. I, II b. I, III c. III d. I, II, III
Recognition principles
3. Which of the following is not a major characteristic of a plant asset?
a. Possesses physical substance c. Acquired for use
b. Acquired for resale d. Yields services over a number of years
(AICPA)
5. Property, plant & equipment has all of the following characteristics except:
a. They are intended for use in operating activities, and are not acquired for
sale in the ordinary course of business.
b. They are classified as noncurrent tangible assets
c. Their service potential normally diminishes with use.
d. They don't typically make up a large part of a corporation's operating
assets.
10. When the fair value of the non-monetary asset exchanged in a transaction
with commercial substance is indeterminable, the non-monetary asset
received will be valued at
a. fair value of asset given up adjusted for cash received or given
b. fair value of asset received
c. fair value of asset received adjusted for cash received or given
d. carrying amount of asset given up adjusted for cash received or given
12. Which of the following terms best describes the removal of an asset from an
entity's statement of financial position?
a. Derecognition b. Impairment c. Write-off d. Depreciation
13. If a corporation purchases a lot and building and subsequently tears down the
building and uses the property as a parking lot, the proper accounting
treatment of the cost of the building would depend on
a. the significance of the cost allocated to the building in relation to the
combined cost of the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the non-financial asset’s highest and best use determined from the
perspective of market participants, even if the entity intends a different
use or intends not to use the non-financial asset.
42
(AICPA)
14. Accounting for tangible operational assets is primarily in conformity with the:
a. historical cost principle
b. historical cost principle and reporting principle
c. matching principle and reporting principle
d. matching principle
e. matching principle and historical cost principle
(Adapted)
15. Are the following statements regarding the cost of an asset true or false,
according to PAS16 Property, plant and equipment?
(1) The cost includes cash equivalents paid to acquire an asset.
(2) The cost includes the fair value of any non-monetary consideration given
to acquire an asset.
a. False False b. False True c. True False d. True True
(ACCA)
16. The debit for a non-refundable sales tax properly levied and paid on the
purchase of machinery preferably would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on
income).
d. accumulated depreciation--machinery.
(AICPA)
17. Small tools and containers used repeatedly for more than a year are classified
on the balance sheet as
a. current assets b. fixed assets c. deferred charges d. investments
(AICPA)
18. Hotel California Corporation recently purchased Eagles Hotel and the land on
which it is located with the plan to tear down the Eagles Hotel and build a
new luxury hotel on the site. The cost of the Eagles Hotel should be
a. depreciated over the period from acquisition to the date the hotel is
scheduled to be torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
(AICPA)
19. Which of the following statements are correct per PAS16 Property, plant and
equipment?
I. Assets are depreciated even if their fair value exceeds their carrying
amount
II. Land and buildings are accounted for separately, even when acquired
together
III. A non-current asset acquired as the result of an exchange of assets is not
recognized
IV. A gain on disposal of a non-current asset is classified as revenue
a. I, II b. I, II, III c. I, II, IV d. I, II, III, IV
(ACCA)
21. According to PAS16 Property, plant and equipment, which of the following
items should be capitalized into the cost of property, plant and equipment?
I. Cost of excess materials resulting from a purchasing error
II. Cost of testing whether the asset works correctly
III. Initial operating losses whilst demand builds up
IV. Cost of preparing the site for installation
a. I, II b. I, II, III c. II, IV d. I, II, III, IV
(ACCA)
22. Capitalizable make-ready cost related to a new machine does not include:
a. restoration costs related to the machine
b. installation costs related to the machine
c. taxes related to the machine during the make-ready period
d. depreciation on the machine during the make-ready period
(Adapted)
23. Under the principles of PAS16 Property, plant and equipment, which of the
following should be included in the cost of an item of property, plant and
equipment?
I. Initial delivery and handling costs
II. Apportioned general overhead costs
III. Costs of training staff on the new asset
IV. Installation and assembly costs
a. I, II, IV b. I, IV c. II, IV d. I, II, III, IV
(ACCA)
24. Plant assets purchased on long-term credit contracts should be accounted for
at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.
(AICPA)
25. The cost of land typically includes the purchase price and all of the following
costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost included in special
assessment
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
(AICPA)
26. Property, plant and equipment items which are subject to any provision for
depreciation or reduction in value, should be valued in the balance sheet by
adding to the actual price paid any expenses incidental to its acquisition.
Which of the following cost items might be included in such incidental
expenses and are to be capitalized as part of machinery?
Cost items
I. installation
II. cost delivery and handling
44
III. cost site preparation
IV. professional fees
Item 1 Item 2 Item 3 Item 4
a. yes yes yes yes
b. yes yes yes no
c. yes no yes no
d. no yes no no
(Adapted)
27. NBA Co. exchanged merchandise that cost ₱24,000 and normally sold for
₱36,000 for a new delivery truck with a list price of ₱40,000. The delivery
truck should be recorded on NBA's books at
a. 24,000. b. 30,000. c. 36,000. d. 40,000.
(AICPA)
32. If the land acquired has a building that should be demolished, any amount
received as salvage from the removal of the building should be:
a. credited to the building account c. credited to the land account
b. treated as income d. adjusted to prior years
33. A company purchased land with a building on it and immediately tears down
the building so that the land can be used for the construction of a plant. Which
of the following should not be charged to the land account?
a. title examination and surveying fees
b. allocation of cost of payment to tenants to vacate premises
c. property taxes accruing during the period of plant construction.
45
d. costs for grading, clearing, and draining the property.
34. Bianca Corp., a closely held corporation, acquired a used machine by issuing
15,000 shares (par value ₱1.00 per share) of its own common stock. The stock
has a market value of ₱1.40 per share based on a recent sale of 100 shares.
The machine was carried on the vendor’s books at ₱12,000, and was
determined to have a fair market value of ₱17,000. What is the amount at
which Bianca should record the machine on its books?
a. 21,000 b. 17,000 c. 15,000 d. 12,000
(RPCPA)
36. Land was purchased to be used as the site for the construction of a plant. A
building on the property was sold and removed by the buyer so that
construction on the plant could begin. The proceeds from the sale of the
building should be
a. classified as other income.
b. deducted from the cost of the building.
c. netted against the costs to clear the land and expensed as incurred.
d. netted against the costs to clear the land and amortized over the life of the
plant.
(AICPA)
38. Accounting recognition should be given to some or all of the gain realized on a
nonmonetary exchange of plant assets except where
a. the assets exchanged are similar and additional cash is paid.
b. the assets exchanged are similar and additional cash is received.
c. the assets exchanged are dissimilar and additional cash is paid.
d. the assets exchanged are dissimilar and additional cash is received.
e. the exchange transaction lacks commercial substance
(AICPA)
40. When an entity is the recipient of a donated asset from other than a
shareholder, the account credited may be a(n)
a. paid-in capital account. c. deferred revenue account.
b. income account. d. all of these.
(AICPA)
46
41. Noun Co. and Nameword Co. exchanged similar plots of land with fair values
in excess of carrying amounts in an exchange transaction that lacks
commercial substance. In addition, Noun received cash of less than 10% of the
total consideration received from Nameword to compensate for the difference
in land values. As a result of the exchange, Noun should recognize:
a. A gain equal to the difference between the fair value and the carrying
amount of the land given up.
b. A gain in an amount determined by the ratio of cash received to total
consideration.
c. A loss in an amount determined by the ratio of cash received to total
consideration.
d. Neither a gain nor a loss.
(AICPA)
42. Adverb Co. and LY Co. exchanged similar trucks with fair values in excess of
carrying amounts in an exchange with commercial substance. In addition,
Adverb paid LY to compensate for the difference in truck values. As a
consequence of the exchange, Adverb recognizes:
a. A gain equal to the difference between the fair value and carrying amount
of the truck given up.
b. A gain determined by the proportion of cash received to the total
consideration.
c. A loss determined by the proportion of cash received to the total
consideration.
d. Neither a gain nor a loss.
(AICPA)
44. E.G. Co. exchanged similar nonmonetary assets with Example Co. and no cash
was exchanged. The carrying amount of the asset surrendered by E.G.
exceeded both the fair value of the asset received and Example's carrying
amount of that asset. E.G. should: (assume exchange has commercial
substance)
a. Recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it surrendered as a loss.
b. Recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it received as a gain.
c. Recognize the difference between the carrying amount of the asset it
surrendered and the carrying amount of the asset it received as a loss.
d. Recognize no gain or loss.
(AICPA)
45. Adjective Co. and Relating 2 Company exchanged assets with equal fair values.
The retail price of the asset that Adjective gave up is less than the retail price
47
of the asset received. What gain or loss should Adjective Co. recognize on the
nonmonetary exchange?
a. A gain or loss is not recognized.
b. A gain equal to the difference between the retail prices of the asset
received and the asset foregone.
c. A gain equal to the difference between the retail price and the cost of the
asset received.
d. A gain or loss equal to the difference between the fair value and the cost of
the asset given foregone.
(AICPA)
48. Discounts given for early payment of credit purchases of operational assets
should be:
a. recorded as interest expense at purchase date.
b. capitalized as a cost of the asset acquired and subsequently allocated to
depreciation expense.
c. recorded as interest revenue at purchase date.
d. deducted from the invoice price when determining the cost of the asset
(Adapted)
50. Which of the following is least likely to be classified in property, plant and
equipment?
a. land improvements c. leasehold improvements
b. land d. idle land
51. When land and building are acquired for a lump sum price and the building is
demolished, the materials salvaged from the building that were used in the
construction of a new building should be
a. Ignored when the demolition costs, net of actual sale proceeds of salvaged
materials, are capitalized as cost of the new building.
b. Included as income from continuing operations.
c. Added to the cost of the new building.
d. Deducted from the cost of the land and added to the cost of the building
53. I.E. Co. recently purchased the That-Is Hotel and the land on which it is
located. The plans are to demolish the That-Is Hotel and to build a new luxury
hotel on the site. I.E. Co. should account for the total purchase cost of the
That-Is Hotel as follows:
a. capitalize it as part of the cost of the new hotel.
b. depreciate it over the period from the acquisition until the Majestic is torn
down.
c. allocate between the land and the That-Is Hotel building, then charge the
allocated cost of the That-Is Hotel building to loss.
d. capitalized it as part of the cost of the land.
(Adapted)
54. What is the general principle of capitalizing costs to property, plant and
equipment?
a. All costs which will provide a benefit beyond one year are capitalized.
b. Only depreciable costs are capitalized.
c. All cost associated with the acquisition or construction of a plant asset are
capitalized.
d. All cost incurred to bring the asset to its intended condition and location
are capitalized.
e. All costs relevant to the acquisition and long-term maintenance of a plant
asset are capitalized.
(Adapted)
55. The amount of nonrefundable sales tax paid on the purchase of machinery (an
operational asset) should be debited to a:
a. machinery account.
b. accumulated depreciation account.
c. tax expense (which includes all taxes other than income tax) account.
d. separate deferred charge account
(Adapted)
57. Assets received in donation from other than the government should
a. be depreciated based on the market value at the time of the donation.
b. be depreciated based on their book value at the time of the donation.
49
c. should not be depreciated.
d. be expensed upon receipt.
(Adapted)
59. Which of the following should not be classified as property, plant and
equipment?
a. Building used as a factory
b. Land used in ordinary business operations
c. A truck held for resale by an automobile dealership
d. Land improvement, such as parking lots and fences
(ACCA)
61. On November 1, 2010, a company purchased a new machine that it does not
have to pay for until November 1, 2012. The total payment on November 1,
2012, will include both principal and interest. Assuming interest at a 10%
rate, the cost of the machine would be the total payment multiplied by what
time value of money concept?
a. Present value of annuity of ₱1. c. Future amount of annuity of ₱1.
b. Present value of ₱1. d. Future amount of ₱1.
(AICPA)
62. Stings Co. recently purchased an old building and the land on which it is
located. The old building will be demolished at a net cost of ₱10,000. A new
building will be built on the site. The demolition cost should be:
a. capitalized as part of the cost of the new building
b. capitalized as part of the cost of the land
c. depreciated over the remaining life of the old building
d. written off as an extraordinary loss in the year of the demolition
(Adapted)
Depreciation methods
Use the following information for the next four cases:
Fact pattern
On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated
useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of
₱400,000.
7. If SIMPLETON Co. uses the output method, how much is the depreciation
expense in the 2nd year?
a. 128,000 b. 96,000 c. 60,000 d. 64,000
52
8. If SIMPLETON Co. uses the output method, how much is the accumulated
depreciation on December 31, 20x2?
a. 120,000 b. 180,000 c. 192,000 d. 256,000
9. If SIMPLETON Co. uses the input method, how much is the depreciation
expense in the 2nd year?
a. 64,000 b. 96,000 c. 60,000 d. 64,000
10. If SIMPLETON Co. uses the input method, how much is the accumulated
depreciation on December 31, 20x2?
a. 120,000 b. 210,000 c. 192,000 d. 256,000
12. How much is the depreciation expense in 20x2 under the straight-line
method?
a. 37,500 b. 93,750 c. 36,400 d. 35,000
13. How much is the depreciation expense in 20x2 under the sum-of-years’ digits
method?
a. 45,000 b. 11,250 c. 56,250 d. 57,250
14. How much is the depreciation expense in 20x2 under the double declining
balance method?
a. 70,000 b. 60,000 c. 10,000 d. 0
Composite method
Use the following information for the next four questions:
On January 1, 20x1, DEVIOUS CROOKED Co. purchased the following:
Cost Residual value Useful life
Machine tools 80,000 4,000 3 years
Meters costing 64,000 2,000 5 years
Returnable containers 120,000 - 6 years
18. During 20x3, machine tools with original cost of ₱20,000 and residual value of
₱2,000 were sold for ₱6,000. How much is the gain (loss) on the sale?
a. (345) b. 430 c. (667) d. 0
19. Assuming ATROCIOUS Co. uses the retirement method, how much is the
depreciation expense in 20x1?
a. 134,800 b. 166,800 c. 144,000 d. 118,800
20. Assuming ATROCIOUS Co. uses the replacement method, how much is the
depreciation expense in 20x1?
a. 134,800 b. 166,800 c. 144,000 d. 118,800
Inventory method
21. The small tools account of AUGUST MAJESTIC Co. has a balance of ₱600,000
as of January 1, 20x1. Acquisitions of small tools during the period totaled
₱240,000 and proceeds from sale of small tools retired and/or replaced
totaled ₱100,000. The annual asset count on December 31, 20x1 revealed a
balance of small tools of ₱440,000. How much is the depreciation expense
under the inventory method?
a. 400,000 b. 300,000 c. 240,000 d. 140,000
Revenue method
22. On January 1, 20x1, COCKY ARROGANT Co. acquired an equipment costing
₱4,000,000. The equipment will be used to reproduce a gaming software
which is expected to be marketed for 3 years. The equipment is expected to
be used in producing products over the next two years, after which, the
equipment will be disposed of at a negligible amount.
23. At the time the leasehold improvement were finished, DIMINUTIVE Co. is
uncertain as to the exercise of the renewal option. How much is the 20x2
depreciation expense on the leasehold improvements?
a. 400,000 b. 360,000 c. 533,333 d. 488,889
24. Assume that in DIMINUTIVE Co. is certain that it will exercise the renewal
option. How much is the 20x2 depreciation expense on the leasehold
improvements?
a. 400,000 b. 360,000 c. 480,000 d. 440,000
28. Assuming ENTREAT Co. determined that the cost of the replaced part is
₱2,000,000, how much is the loss on replacement?
55
a. 1,920,000 b. 1,200,000 c. 2,000,000 b. 0
29. Assuming it is impracticable to determine the cost of the replaced part, how
much is the loss on replacement?
a. 1,920,000 b. 1,200,000 c. 2,000,000 b. 0
34. Assuming SUBTERFUGE Co. uses the proportional method, the entry to record
the revaluation includes:
a. a debit to accumulated depreciation for ₱15,000,000
b. a debit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱25,000,000
d. a debit to building for ₱60,000,000
35. Assuming SUBTERFUGE Co. uses the elimination method, the entry to record
the revaluation includes:
a. a credit to accumulated depreciation for ₱20,000,000
b. a debit to building for ₱25,000,000
c. a debit to accumulated depreciation for ₱15,000,000
d. a debit to deferred tax for ₱13,500,000
56
Methods of recording revaluation – Appraised value
Use the following information for the next two questions:
On December 31, 20x1, the building of ABC Co. with a historical cost of
₱320,000,000, accumulated depreciation of ₱160,000,000, and an estimated
useful life of 20 years has been assessed by an external valuer to have an
appraised value of ₱200,000,000. Income tax rate is 30%
36. The entry under the proportional method to record the revaluation includes
a. a debit to accumulated depreciation for ₱40,000,000
b. a credit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱80,000,000
d. a credit to building for ₱80,000,000
37. The entry under the proportional method to record the revaluation includes
a. a debit to accumulated depreciation for ₱40,000,000
b. a debit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱80,000,000
d. a credit to building for ₱80,000,000
4. RESTIVE UNEASY Cooperative recently replaced all the tires in two of its
trucks at a very insignificant amount. This cost should be accounted for
a. as an increase in the cost of the trucks
b. as repair and maintenance expense
c. as an intangible asset
d. as a reduction in the accumulated depreciation of the trucks
(Adapted)
6. An old building formerly occupied by ABC Company was replaced. The loss on
the retirement of the old building should
a. not be capitalized but treated as an expense
b. not be capitalized but treated as a loss
c. be capitalized and included in the cost of the land
d. be capitalized and included in the cost of the new building
9. The sale of a depreciable asset resulting in a gain, indicates that the proceeds
from the sale were
a. greater than cost c. less than carrying amount
b. greater than carrying amount d. less than cost
11. In order for a cost to be capitalized (capital expenditure), the following must
be present:
a. The useful life of an asset must be increased.
b. The quantity of assets must be increased.
c. The quality of assets must be increased beyond the condition originally
intended by management.
d. Any one of these.
(AICPA)
60
12. An improvement made to a machine increased its fair value and its
production capacity by 25% above the condition originally intended by
management but without extending the machine's useful life. The cost of the
improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.
(AICPA)
15. When a plant asset is sold for less than its carrying amount
a. cash received plus accumulated depreciation plus loss on disposal equals
the original cost
b. original cost minus accumulated depreciation equals cash received minus
loss on disposal
c. carrying amount of the asset plus loss on disposal equals cash received
d. cash received plus accumulated depreciation minus loss on disposal
equals the original cost
16. The sale of a depreciable asset resulting in a loss indicates that the proceeds
from the sale were
a. less than current market value. c. greater than carrying amount.
b. greater than cost. d. less than carrying amount.
(AICPA)
17. Burnham Corp.'s forestland was condemned for use as a national park.
Compensation for the condemnation exceeded the forestland's carrying
amount. Burnham purchased similar, but larger, replacement forest land for
an amount greater than the condemnation award. As a result of the
condemnation and replacement, what is the net effect on the carrying amount
of forestland reported in Burnham 's balance sheet?
a. The amount is increased by the excess of the replacement forestland's cost
over the condemned forestland's carrying amount.
b. The amount is increased by the excess of the replacement forestland's cost
over the condemnation award.
c. The amount is increased by the excess of the condemnation award over
the condemned forestland's carrying amount.
d. No effect, because the condemned forestland's carrying amount is used as
the replacement forestland's carrying amount.
(AICPA)
18. A building suffered uninsured fire damage. The damaged portion of the
building was refurbished with higher quality materials. The cost and related
61
accumulated depreciation of the damaged portion are identifiable. To account
for these events, the owner should:
a. Reduce accumulated depreciation equal to the cost of refurbishing.
b. Record a loss in the current period equal to the sum of the cost of
refurbishing and the carrying amount of the damaged portion of the
building.
c. Capitalize the cost of refurbishing and record a loss in the current period
equal to the carrying amount of the damaged portion of the building.
d. Capitalize the cost of refurbishing by adding the cost to the carrying
amount of the building.
(AICPA)
19. Choose the correct statement about the accounting treatment for special one-
time assessments made by local governments requiring a firm to pay for
improvements including streetlights, sewers and other infrastructure.
a. They are capitalized but not depreciated
b. If probable and estimable, they are expensed when determinable
c. They are expensed as incurred
d. They are capitalized and depreciated over their useful life
(Adapted)
20. An enterprise installed an assembly line in 20x1. Four years later, ₱100,000
was spent in rearranging the line to promote efficiency. The rearrangement
but did not affect the assembly line’s useful life. Proper accounting for the cost
of the automation should be to
a. Report it as an expense
b. Establish a separate account for the ₱100,000.
c. Allocate the cost of automation between the asset and accumulated
depreciation accounts.
d. Debit to asset account.
(Adapted)
23. Which of the following is not an appropriate basis for measuring the cost of
property, plant, and equipment?
a. The purchase price, freight costs, and installation costs of a productive
asset should be included in the asset’s cost.
b. Proceeds obtained in the process of readying land for its intended
purpose, such as from the sale of cleared timber, should be recognized
immediately as income.
c. The cost of improvement to equipment incurred after the equipment is
placed in the location and condition originally intended by management is
generally expensed out rightly.
d. All necessary costs incurred in the construction of a plant building, from
excavation to completion, should be considered as part of the asset’s cost
24. When a plant asset is sold for less than its carrying amount:
a. cash received plus accumulated depreciation plus gain on disposal equals
the original cost.
b. cash received plus accumulated depreciation minus loss on disposal
equals the original cost.
c. cost of the asset minus loss on disposal equals cash received.
d. original cost minus accumulated depreciation equals cash received plus
loss on disposal.
Depreciation methods
25. Depreciation
a. is an allocation of the cost of property, plant and equipment over the time
period of usefulness, in a systematic and rational manner.
b. is a process of recognizing the decreasing value of an asset over time.
c. is a cash expense.
d. expense of ₱2,000 reflects a ₱2,000 increase in liquid funds.
27. An entity acquired an asset with an estimated useful life of 20 years and a
10% residual value. At the end of the asset’s useful life, the accumulated
depreciation will be equal to the original cost of the asset under which of the
following depreciation methods?
Double-declining Sum-of-the-years’ Digits Straight-line Method
a. Yes Yes Yes
b. Yes Yes No
c. No Yes Yes
d. No No No
(Adapted)
35. An entity operates a chain of hotels and is proposing to stop depreciating the
hotel equipment and expense the cost of replacement each year. The entity
should:
a. Not capitalize groups of assets and expense the replacement cost
b. Not capitalize groups of assets and expense them
c. Capitalize groups of assets but not depreciate them
d. Capitalize all assets with a useful life of more than one year and depreciate
them
(ACCA)
36. An entity manufactures components for the car industry and uses self-made
tools, which it continually develops. Costs of tooling are depreciated over four
years and the tools are manufactured in its one factory, where 4% of the
space is allocated to development. The factory depreciation charge should:
a. Be allocated on the basis of the value of the tools compared with the
factory output to the cost of the tooling
b. Be allocated on the basis of 1% per year for four years to the cost of the
tooling
c. Not be allocated to the cost of the tooling
d. Be allocated on the basis of 4% per annum and added to the cost of the
tooling
37. An entity has a policy of revaluing its PPE. An asset cost ₱15M on January 1,
20x8, has a useful life of 15 years and is depreciated on a straight-line basis to
a zero residual value. The value of the asset at December 31, 20x8 was
₱14.5M. At December 31, 20x9, the market value of the asset was ₱12.5M. The
accounting entry at 31 December 20x9 would be:
a. Depreciation ₱1.04M to income statement, fall in value of ₱0.5M charged
to revaluation reserve and ₱0.46M to the income statement
b. Depreciation ₱1.04M to income statement, fall in value of ₱0.96M charged
to revaluation reserve
c. Depreciation ₱1M to income statement, fall in value of ₱0.5M charged to
revaluation reserve and ₱0.5M to the income statement
d. Depreciation ₱1M to income statement, fall in value of ₱0.96M to the
income statement
(ACCA)
38. A graph is set up with "depreciation expense" on the vertical axis and "time"
on the horizontal axis. Assuming linear relationships, how would the lines for
straight-line and sum-of-the-years'-digits depreciation expense, respectively,
be drawn on this graph?
Straight-line SYD
a. Vertically Sloping down to the right.
b. Vertically Sloping up to the right.
c. Horizontally Sloping down to the right.
65
d. Horizontally Sloping up to the right.
41. Under what conditions will the service hours and productive output methods
of depreciation result in the same depreciation expense for a particular year?
a. When the total estimated service hours and production in units are the
same.
b. When the ratio of actual service hours to productive output for the year is
the same as the ratio of the estimates used in their respective depreciation
rates.
c. When salvage value is zero.
d. The two methods cannot produce the same depreciation expense amount
for any given year.
(Adapted)
42. Which of the following are correctly stated regarding the accounting for
property, plant and equipment?
I. In special instances, when inflation has been a major factor, property,
plant and equipment are permitted to be revalued based on index
numbers or on an appraisal performed by an independent expert or
specialist.
II. The sum of the year’s digit method always results in larger total
depreciation than does the straight line method.
III. Composite depreciation method does not recognize gain or loss on
retirement of a single asset in the group.
IV. Depreciation is the process of periodically writing down an asset to arrive
at its fair market value.
V. Depreciation accounting automatically provides the cash required to
replace plant assets as they wear out.
a. I, II, III, V b. I, II, III c. I, III d. II, III
45. Which of the following terms best describes the cost (or an amount
substituted for cost) of an asset less its residual value?
a. Revalued amount c. Recoverable amount
b. Carrying amount d. Depreciable amount
(ACCA)
47. Which of the following statements best describes the carrying amount of an
asset?
a. The cost (or an amount substituted for cost) of the asset less its residual
value
b. The amount at which the asset is recognized in the statement of financial
position after deducting any accumulated depreciation and accumulated
impairment losses
c. The higher of the asset's net selling price and its value in use
d. The fair value of the asset at the date of a revaluation less any subsequent
accumulated impairment losses
(ACCA)
48. Which of the following statements best describes the term 'depreciation'?
a. The systematic allocation of an asset's cost less residual value over its
useful life
b. The removal of an asset from an entity's statement of financial position
c. The amount by which the recoverable amount of an asset exceeds its
carrying amount
d. The amount by which the carrying amount of an asset exceeds its
recoverable amount
(ACCA)
49. Which of the following terms best describes the systematic allocation over its
useful life of the cost of an asset, or other amount substituted for cost, less its
residual value?
a. Depreciation b. Derecognition c. Impairment d. Value in use
(ACCA)
50. Which of the following terms best describes the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date?
a. Fair value b. Value in use c. Residual value d. Realizable value
(ACCA)
56. An asset has a nine-year useful life and is to be depreciated under the sum-of-
the-years’ digits method. The annual depreciation expense would be the same
as that under the straight line depreciation method in
a. the third year in the life of the asset
b. the fifth year of the life of the asset
c. the seventh year of the life of the asset
68
d. the ninth year of the life of the asset
(Adapted)
59. The depreciation method that provides higher depreciation expense in the
early years and lower charges in the late years is
a. SYD c. units of production and hours of use method
b. straight line d. FIFO
60. Which of the following is an economic factor related to the service life of a
long-lived asset?
a. obsolescence c. decay
b. wear and tear d. casualties
63. The highest amount of depreciation will usually be recorded in the last year of
an asset’s life when using:
a. straight line b. SYD c. double-declining balance d. either b or c
64. Which of the following depreciation methods usually results in paying the
lowest taxes in the early years of an assets life?
a. SYD c. straight line
b. double declining balance d. units of production method
66. An asset is estimated to have a total life of 8 years. Its acquisition cost is
₱16,000 and a residual value of ₱4,000. The firm follows the double declining
method of depreciation. In the second year, the rate of depreciation for the
firm's asset is closest to
a. 25% b. 17% c. 9.5% d. 12.5%
68. An analysis of an entity's financial statements indicates that the average age
of its assets is declining. This could be due to which of the following?
I. The entity is acquiring new assets with longer depreciable lives.
II. The entity's capital expenditures are outpacing depreciation.
III. The entity is not using its assets as intensively as it should.
IV. The entity is operating in its maturity phase.
a. I & IV b. I & II c. I, II, III & IV d. III & IV
*Hint: Average age of assets can be computed using any of the following:
i. Average age: (Accumulated depreciation ÷ Depreciation expense) = x
years
ii. Relative age: (Accumulated depreciation ÷ Total cost of depreciable
assets) = % of age
iii. Average depreciable life: (Total depreciable amount ÷ Depreciation
expense) = x years
71. A machine with a 4-year estimated useful life and an estimated 15% residual
value was acquired on January 1. Would depreciation expense using the sum-
70
of-the-year's-digit method be higher or lower than depreciation expense
using the double-declining-balance-method in the first and second years?
First year Second year
a. Higher Higher
b. Higher Lower
c. Lower Higher
d. Lower Lower
(AICPA)
77. Which of the following items relevant to the depreciation of an asset can be
negative?
a. residual value c. useful life
b. depreciable amount d. carrying amount subsequent to acquisition
(AICPA)
81. A method that excludes residual value from the base for the depreciation
calculation is
a. SYD c. productive output
b. Double declining balance d. straight line
(AICPA)
83. In the years after mid-service point of a depreciable asset, which of the
following depreciation methods will result in the highest depreciation
expense?
a. Sum-of-the-years’-digits. c. 200% diminishing-balance
b. Diminishing-balance d. Straight-line
(Adapted)
86. A plant facility has an originally estimated physical life equal to 15 years. As a
result of accelerated usage, it is now estimated that the physical life will be
reduced by 3 years. The depreciation rate applied to this facility need not be
changed if the depreciation method used is
a. SYD
b. Double declining balance
c. Units of output or hours of use method
d. Straight line method
e. The rate should be changed under all of these methods
87. A machine with a 4-year useful life and a 15% salvage value was acquired on
January 1, 20x2. The increase in accumulated depreciation for 20x3 using the
double-declining balance method would be
a. initial cost x 85% x 50% c. initial cost x 50%
b. initial cost x 85% x 50% x 50% d. initial cost x 50% x 50%
91. Which of the following methods permits total depreciation on a plant asset to
exceed depreciable cost?
a. Straight-line
b. Declining balance
c. Sum of year's digits
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d. No acceptable depreciation method
e. All acceptable methods if salvage value is not zero
(Adapted)
Revaluation model
100. An entity owns a fleet of company cars and executive vehicles, and has
other property and equipment in order to service the fleet. It decided to
revalue some of its property, plant and equipment. Which one of the following
options complies with PAS 16?
a. Revalue only those parts of the fleet that have increased in value
b. Revalue only the cars and not the executive vehicles
c. Revalue only one-half of each class of property, plant and equipment
d. Revalue an entire class of property, plant and equipment
(ACCA)
101. In case of downward revaluation of an asset, which is revalued for the first
time, the account to be debited is
a. fixed asset account c. profit or loss account
b. revaluation reserve d. general reserve
102. An entity has a policy of revaluing its PPE. An asset cost ₱5M on January 1,
20x1 and has a useful life of five years and is depreciated on a straight-line
basis to a zero residual value. The value of the asset at December 31, 20x1
was ₱3.8M. The fall in value will be accounted for as follows:
a. Depreciation ₱1M and fall in value of ₱200,000 both to the income
statement
b. Depreciation ₱1M and fall in value of ₱200,000 both to the reserves
c. Depreciation ₱1M to income statement and fall in value of ₱200,000 to the
reserves
d. Depreciation ₱1M to the income statement and fall in value of ₱200,000
ignored until there is a revaluation surplus
(ACCA)
105. Which of the following incorrectly relate(s) to the accounting for property,
plant and equipment?
I. Sum of the years’ digits method is one of the accelerated methods of
depreciation that provides higher depreciation expense in the early years
and lower charges in the late years.
II. Mortgage or liens on property, plant and equipment need not be disclosed
in the financial statements or notes.
III. Any property, plant and equipment that is idle or abandoned and remains
in the property, plant and equipment account should be revalued if this
results in increasing their carrying values.
IV. Depreciation of appraised properties charged to operations shall be based
on the appraised values and it should be computed from the date of
appraisal.
V. An entity may be allowed to, revalue its property, plant and equipment if
their current value is substantially more than their cost provided the
company adheres to the provisions of PAS
a. I, IV and V b. I, IV c. II, III d. II, III, V
107. The value per appraisal or the value computed by deducting observed
depreciation from replacement cost is called
a. revaluation surplus c. sound value
b. appraisal value d. replacement cost
108. Internet Protocol-IP, Inc. owns a fleet of over 100 cars and 20 ships. It
operates in a capital-intensive industry and thus has significant other
property, plant, and equipment that it carries in its books. It decided to
revalue its property, plant, and equipment. The company’s accountant has
suggested the alternatives that follow. Which one of the options should
Internet Protocol-IP, Inc. select in order to be in line with the provisions of
PAS 16?
a. Revalue only one-half of each class of property, plant, and equipment, as
that method is less cumbersome and easy compared to revaluing all assets
together.
b. Revalue an entire class of property, plant, and equipment.
c. Revalue one ship at a time, as it is easier than revaluing all ships together.
d. Since assets are being revalued regularly, there is no need to depreciate.
(Adapted)
109. Under PAS 16, revaluation of property, plant and equipment to appraised
value is an acceptable alternative to historical cost provided certain
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requirements are complied with. Which of the following is not one of the
requirements?
a. the appraisal should be made by a competent and independent specialist
once a year at each end of reporting period.
b. depreciation to be charged to operations should be based on appraised
values or its equivalent
c. the revaluation surplus should be presented in equity
d. appropriate disclosures should be made in the financial statements
(Adapted)
110. PAS 16 requires that revaluation surplus resulting from initial revaluation
of property, plant, and equipment should be treated in one of the following
ways. Which of the four options mirrors the requirements of PAS 16?
a. Credited to retained earnings as this is an unrealized gain.
b. Released to the income statement an amount equal to the difference
between the depreciation calculated on historical cost vis-à-vis revalued
amount.
c. Deducted from current assets and added to the property, plant, and
equipment.
d. Debited to the class of property, plant, and equipment that is being
revalued and credited to a reserve captioned “revaluation surplus,” which
is presented under “equity.”
(Adapted)
114. When the asset being revalued has no residual value, observed
depreciation may be computed as
a. Replacement cost minus Carrying amount
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b. Appraised value or Depreciated replacement cost minus Carrying amount
c. Replacement cost minus Observed depreciation
d. Accumulated depreciation divided by Historical cost multiplied by
Replacement cost
115. When the asset being revalued has a residual value, observed depreciation
may be computed as
a. Replacement cost minus Carrying amount
b. Accumulated depreciation divided by Depreciable amount multiplied by
Depreciable amount of replacement cost
c. Replacement cost minus Observed depreciation
d. Accumulated depreciation divided by Historical cost multiplied by
Replacement cost
Disclosure
119. Which of the following disclosures must be made under PAS16 Property,
plant and equipment?
I. The existence and amounts of restrictions on title
II. A narrative discussion of future capital expenditure plans
III. The disposal proceeds of each major asset sold in the period
IV. The measurement bases used for determining the gross carrying amount
a. I, IV b. I, II, IV c. I, III, IV d. I, II, III, IV
(ACCA)
121. All of the following are required disclosure under PAS 16, except?
a. accounting policies and estimates of useful lives and residual value
b. reconciliation of carrying amounts at the beginning and end of the year
c. commitments related to items of property, plant, and equipment
d. changes in fair values of assets measured under cost model
Actual units quarried in 20x1 through 20x4 totaled 30,000,000 units. On January
1, 20x5, BUCOLIC Co. estimated that remaining recoverable reserves is only
25,000,000 units and after the reserves are exhausted, the land will be sold for
₱3,200,000. Costs of disposal are estimated at ₱1,200,000. Actual units quarried
in 20x5 totaled 6,000,000 units.
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3. How much is the depletion charge in 20x5?
a. 13,284,000 b. 13,480,000 c. 13,280,000 d. 13,248,000
4. What is the carrying amount of the wasting asset on December 31, 20x5?
a. 43,852,000 b. 44,272,000 c. 42,720,00 d. 43,952,000
Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated
that 300,000 units will be extracted each year. The heavy equipment and the
drilling rig foundation have estimated useful lives of 10 years and 5 years,
respectively. Actual units extracted during 20x1 are 320,000 units.
Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated
that 300,000 units will be extracted each year. The heavy equipment and the
drilling rig foundation have estimated useful lives of 20 years and 10 years,
respectively. Actual units extracted during 20x1 are 320,000 units.
No production in a period
Use the following information for the next two questions:
In 20x1, THRALL SLAVE Co. purchased real estate containing copper for a total
cost of ₱40,000,000. Immovable tangible equipment costs for drilling rig
foundation totaled ₱20,000,000. Estimated recoverable reserves from the mine
are 1,000,000 units. It is estimated that 100,000 units will be extracted each year;
therefore, the life of the mine in years is 10 years. The drilling rig foundation has
an estimated useful life of 15 years.
Actual units extracted from 20x1 through 20x3 totaled 340,000 units. No units
were extracted during 20x4 due to an employee strike. Extraction resumed in
20x5 and total units extracted during that year was 80,000 units.
12. How much is the depreciation charge on the immovable tangible equipment
in 20x4?
a. 980,967 b. 1,090,800 c. 1,100,000 d. 1,200,000
Liquidating dividends
14. MYNHEER MISTER Co. has the following balances in its accounts as of
December 31, 20x1:
Resource deposit – coal mine 40,000,000
Accumulated depletion 16,000,000
Ordinary share capital 80,000,000
Capital liquidated 8,000,000
Unappropriated retained earnings 20,000,000
Inventory (600,000 units) 28,000,000
Depletion rate per unit 6.00 per unit
15. How much is the initial carrying amount of the mineral deposit?
a. 24,143,840 b. 251,348,540 c. 251,764,540 d. 256,340,540
There is no active market for retirement obligations such as these but VERITY
has been able to develop cash flow estimates based on its prior experience in
mining-site restoration. It will take 3 years to restore the mine site when mining
operations cease in 10 years. Each estimated cash outflow reflects an annual
payment at the end of each year of the 3-year restoration period. The current
market-based rate is 12%.
VERITY made the following estimates of future cash flows for the restoration
cost:
Restoration estimated cash outflow Probability assessment
8,000,000 10%
14,000,000 15%
16,000,000 50%
16,800,000 25%
100%