CHAPTER 10 PROBLEM 10-1: TRUE OR FALSE

True 1. The capitalization threshold for items of PPE by government entities if

P15,000, which is equal to the petty cash disbursement limit.
True 2. Individual items of PPE with values below the capitalization threshold but
work together as a group are recognized as PPE if the total cost of the group
meets the capitalization threshold.
False 3. Items below the capitalization threshold of PPE are recognized as
SemiExpandable Property – a separate class of PPE.
False 4. According to the GAM for NGAs, trade discounts are excluded from the
initial measurement of items of PPE but not cash discounts.
True 5. The provision for decommissioning and restoration costs of an item of PPE is
subsequently measured at amortized cost.
False 6. According to the GAM for NGAs, government entities may choose either
the cost model or the revaluation model to subsequently measure their PPE.
True 7. Government entities record depreciation on a monthly basis.
False 8. An item of PPE with historical cost of P10, accumulated depreciation of P5 and
accumulated impairment losses of P1 is sold for P7. The gain on the sale is P2.
True 9. Heritage assets are measured at cost. However, they are not subsequently
depreciated, but subject to impairment.
True 10. Infrastructure assets are accounted for in the same manner as the other
items of PPE. However, infrastructure assets are generally assigned a residual
value of zero.
True 11. Reforestation projects are classified as land improvements.
False 12. Entity A’s equipment has a carrying amount of P10 before replacement of
an old part. The old part has a carrying amount of P2. The cost of the
replacement part is P5. The loss on replacement is P3.
True 13. Entity A acquires an equipment in exchange for another equipment owned
by Entity B. The carrying amount of Entity A’s equipment is P10 while its fair
value is P9. Entity B’s equipment has a fair value of only P7. However, Entity B
pays Entity A P2 for the difference. If the exchange has commercial substance,
Entity A will recognize a loss of P1 on the exchange.
True 14. Entity A acquires an item of PPE from an inter-agency transfer. Entity A will
not recognize any gain or loss from this transaction.
False 15. Government entities normally assign items of PPE a residual value of 15%
of cost.
PROBLEM 10-2: MULTIPLE CHOICE
1. Entity A acquires an equipment for P1M. The equipment is acquired not for active use in the
production of goods but rather as a standby equipment that will only be used if the main
equipment needs to be repaired. Does this equipment qualify for recognition as property,
plant and equipment?
a. Yes, all of the recognition criteria for a PPE are met.
b. No. the equipment does not satisfy all the recognition criteria for a PPE.
 c. No. Although, the equipment satisfies some of the recognition criteria for a PPE, it does
not satisfy all. The equipment shall be classified as “Other Assets.”
d. Yes and no. During the periods the equipment is idle, it shall be classified as “Other
Assets.” During the periods the equipment is in active use, it shall be classified as “PPE.”

2. For government entities, the capitalization threshold for PPE is

a. P15,000 or more
b. more than P15,000
c. not less than P25,000
d. at least P5,000

3. According to the GAM for NGAs, cash discounts not taken on purchases of items of PPE are
a. included in the cost of PPE
b. recognized as “Other Losses”
c. ignored
d. debited to the “Purchase Discount Lost” account

4. According to the GAM for NGAs, estimates of decommissioning and restoration costs of an
item of PPE are (choose the incorrect statement)
a. included in the initial cost of the item of PPE at the present value of the estimates.
b. credited to the “other provisions” account at their present value.
c. included in the initial cost of an item of PPE but not subject to subsequent depreciation,
although subject to amortization using the effective interest method.
d. are recognized as provisions, at present value, and subsequently measured similar to a
financial liability.

5. Which of the following costs is not added to the cost of an intern of PPE?
a. Costs of site preparation
b. Initial delivery and handling costs
c. Net disposal proceeds of samples generated during testing
d. Employee benefits arising directly from the acquisition of PPE
6. Entity A acquires 5 motor vehicles for a package price of P10M. In conjunction with the
purchase, the supplier provides Entity A a promotional item of 1 motor vehicle which is not
of the same type as those acquired. The fair value of the motor vehicle is P2M. Which of the
following statements is correct?
a. For individual costing purposes, the cost of each of the 5 motor vehicles is P1,600,000.
b. For individual costing purposes, the cost of each motor vehicle acquired is P1,666,667.
c. The promotional item is recognized as gain equal to fair value.
d. a and c

7. Entity A acquires a building through self-construction (construction by administration). The

initial cost of the building will most likely be based on which of the following?
 a. The contract price.
b. The costs of direct materials, direct labor and construction overhead, excluding
wastages.
c. a or b
d. Fair value at the acquisition date.

8. Entity A acquires a building through self-construction (construction by administration). The

construction costs incurred are
a. initially recorded in the Registries and recorded in the books of accounts only upon
completion of the construction.
b. initially recorded in the “Construction in Progress” account.
c. recorded in the “Buildings” account in the period they arise.
d. initially recorded as “Receivables” during the construction period.

9. Entity A, a government entity, acquires an equipment for P1M on August 6, 20x1. The
equipment’s estimated useful life is 5 year. How much is the carrying amount of the
equipment on December 31, 20x1?
a. 920,833
b. 936,667
c. 916,667
d. 979,167

Computation:
(1M x 95%(a) x 5 (b)/60 (c)) = 79,167 accumulated depreciation
(1M – 79,167) = 920,833
(a)
(100% less 5% standard residual value)
(b)
(August to December 20x1)
(c)
(5 yrs. x 12)
10. Which of the following assets would most likely not be assigned a residual value by a
government entity?
a. A major part of an equipment
b. A building held as investment property
c. A major tool
d. Infrastructure asset

11. Which of the following assets is generally not subject to depreciation?

a. Heritage assets
b. Infrastructure assets
c. Roads
d. a and b

12. Which of the following is considered a heritage asset?

 a. road networks
b. museum
c. bridges
d. forest

13. Which of the following assets of a government entity is not subject to impairment?
a. Heritage assets
b. Reforestation projects
c. Idle land
d. None of these

14. A government entity derecognizes an item of PPE that is

a. idle
b. fully depreciated
c. unserviceable
d. all of these

15. The national government receives a P10M grant from a foreign government condition on the
construction of a highway. According to the GAM for NGAs, when shall the national
government recognize revenue from the grant? a. when the grant is received
b. when the grant becomes receivable
c. when the grant becomes receivable and there is reasonable assurance that the attached
condition will be satisfied
d. when the condition is satisfied
PROBLEM 10-3: MULTIPLE CHOICE
1. Entity A acquires a train on January 1, 20x1. Information on costs are as follows:
Purchase price 9,000,000
Import duties 200,000
Cash discount not taken 100,000
Freight costs 800,000
Testing costs 300,000
Repairs after the train is brought to its operational state Estimated 600,000
costs of dismantling the train at the end of its
20-year useful 120,000

The current market rate of interest on acquisition date 12%. The entry to recognize the train in
the books of accounts is?
a. Trains 10,212,440 Other Losses 100,000
Cash-Modified Disbursement System (MDS), Regular 10,300,000

Other Provisions 12,440

 b. Trains 10,312,440

Cash-Modified Disbursement System (MDS), Regular 10,300,000

Other Provisions 12,440

c. Trains 10,200,000

Other Losses 100,000

Cash-Modified Disbursement System (MDS), Regular 10,300,000

d. Trains 10,300,000

Cash-Modified Disbursement System (MDS), Regular 10,300,000

2. During the period Entity A starts the construction of a building by administration. Entity A
acquires construction materials for 10M. the entry to record the transaction isⱣ
a. Construction Materials Inventory 10,000,000
Account Payable 10,000,000
b. Construction in Progress-Buildings And Other Structures 10,000,000
Account Payable 10,000,000
c. Construction in Progress-Buildings And Other Structures 10,000,000
Construction Materials Inventory 10,000,000 d. None of these.

3. Entity A exchanged an equipment with Entity B. Entity A however, did not recognize any gain
or loss on the exchange. Which of the following is a valid reason for this? a. No cash was
involved in the exchange.
b. The fair values of the equipment exchanged were equal
c. The exchanged lacks commercial substance.
d. All of these
4. Entity A receives a donation of land with fair value of Ᵽ1M.The donor stipulated that the
land shall only be used as a portion of a proposed highway. If in case the project is
discontinued, Entity A shall return the land to the donor. At the date of receipt of the
donation, the construction of the highway is not yet started. When should Entity A recognize
the land in its books of accounts?
a. Upon receipt of the donation.
b. When the construction of the highway is started.
c. When the construction of the highway is completed.
d. When the land is used in the construction of the highway.

5. During the year Entity A, an NGA, incurred interest of Ᵽ200,000 on a loan taken to
specifically finance the construction of a building. The proceeds of a loan were temporarily
 invested and earned interest income of 20,000. Which of the following entries best reflects
Ᵽ the recognition of the interest in the books of accounts of Entity A?
a. Interest expense 200,000

Interest Payable 200,000

b. Interest expense 180,000

Interest Payable 180,000

c. Construction in Progress-Buildings

and Other Structures 180,000

Interest Payable 180,000

d. Buildings and Other Structures 180,000

Interest Payable 180,000

PROBLEM 10-4: FOR CLASSROOM DISCUSSION

1. Which of the following is not one of the characteristics of property, plant and equipment?
a. It is a tangible asset.
b. It is held for use in the production or supply of goods, services or program outputs, for
rental to others, or for administrative purposes.
c. It is expected to be used for more than one reporting period.
d. It is intended for resale in the ordinary course of operations.

2. Which of the following does not result to the recognition of PPE?

a. A single purchase of equipment costing P15,000.
b. Purchases of equipment that work together as a group, individually costing P1,000 to
P5,000 but with a sum total cost of more than P15,000.
c. Bulk acquisitions of small items of PPE with aggregate cost of more than P15,000.
d. Acquisition of building for P10M intended to be leased out under various operating
leases on commercial basis.
3. Entity A acquires an equipment on account with the following terms: P500,000 list price,
20%, 10%, 2/10, n/30. Entity A incurs the following additional costs:
Non-refundable purchase taxes
(not yet included in the list price above) 10,000
Installation costs 100,000
Estimated costs of dismantling the equipment at
the end of its 10-year useful 20,000

The current market rate of interest on acquisition date is 10%.

How much is the initial cost of the equipment?

 a. 468,713
b. 470,511 (500,000 x 80% x 90% x 98%) + 10,000 + 100,000 + (20,000 x PV of 1
@10%, n=10)
c. 472,341
d. 489,313

4. Entity A acquires 5 motor vehicles for a package price of P10M. In construction with the
purchase, the supplier provides Entity A a promotional item of 1 motor vehicle which is the
same as those acquired. The fair value the motor vehicle is P2M. Which of the following
statements is correct?
a. For individual costing purposes, the cost of each motor vehicle acquired is P2,000,000.
b. For individual costing purposes, the cost of each motor vehicle acquired is P1,666,667.
c. The promotional item is recognized as gain equal to fair value.
d. a and c

5. Entity A acquires a building by awarding a construction contract to a contractor. The initial

cost of the building will most likely be based on which of the following?
a. The contract price.
b. The costs of direct materials, direct labor and construction overhead, excluding
wastages.
c. a or b
d. Fair value at the acquisition date.
Use the following information for the next two questions:
Entity A exchange equipment with Entity B. Pertinent data are shown below:
Entity A Entity B
Carrying amount 85,000 130,000
Fair value 95,000 115,000 Cash paid by Entity A to Entity
B 15,000

6. If the exchange has commercial substance, how much is the initial measurement of the
equipment received by Entity A? a. 95,000
b. 110,000 (95,000 + 15,000)
c. 115,000
d. 85,000

7. If the exchange has commercial substance, how much is the gain (loss) recognized by Entity
A in the exchange?
a. 10,000 (95,000 – 85,000)
b. (10,000)
c. (15,000)
d. 15,000
8. Entity A incurs costs in repairing an item of PPE. It is not clear whether the repair is a minor
or major repair. Entity A shall
a. recognize the repair costs as expense
b. capitalize the repair costs
c. a or b
d. none of these

9. Entity A, a government entity, acquires an equipment for P1M on August 26, 20x1. The
equipment’s estimated useful life is 5 years. How much is the accumulated depreciation
of the equipment on December 31, 20x1?
a. 66,666
b. 63,333
c. 83,333
d. 79,167

Computation:
(1M x 95%(a) x 4 (b)/60 (c)) = 63,333
(a)
(100% less 5% standard residual value)
(b)
(September to December 20x1)
(c)
(5 yrs. x 12)’
Use the following information for the next three questions:
At year-end, Entity A determines an indication that an equipment with carrying amount of
P400,000 is impaired. This equipment was acquired 5 year earlier and was originally estimated
to have a useful life of 10 years and a 5% residual value. Entity A determines the following
information:
Fair value less cost to sell P350,000
Replacement costs P700,000

10. How much is the impairment loss assuming Entity A compute for the value in use using the
Depreciable Replacement Cost Approach?
a. 32,667
b. 32,500
c. 50,000
d. 37,500

Computation:

Replacement cost 700,000

Accumulated depreciation - (700K x 95% x 5/10) (332,500)
Depreciated Replacement Cost – Value in use 367,500
Recoverable service amount (VIU - higher) 367,500
Carrying amount (400,000)
Impairment loss (32,500)
11. Assume the indication of impairment is physical damage to the equipment. Entity A
estimates that it would cost P10,000 to restore the equipment’s service potential to the
level before the physical change. How much is the impairment loss under the Restoration
Cost Approach? a. 42,667
b. 42,500
c. 50,000
d. 47,500

Computation:
Depreciated replacement cost (see solution above) 367,500
Less: Restoration cost (10,000)
Value in use 357,500

Recoverable service amount (VIU - higher) 357,500

Carrying amount (400,000)
Impairment loss (42,500)
12. Assume the indication of impairment is a significant decline in the expected output of the
equipment, which Entity A estimates to be 10%. How much is the impairment loss under
the Service Units Approach?
a. 62,667
b. 62,500
c. 50,000
d. 69,250

Computation:
Depreciated replacement cost (see solution above) 367,500
Multiply by: 90%
Value in use 330,750

Recoverable service amount (FVLCS - higher) 350,000

Carrying amount (400,000) Impairment loss (50,000)

13. Which of the following statements is correct?

a. Heritage assets are initially measured at cost and subsequently measured at cost less
accumulated depreciation and accumulated impairment losses.
b. Infrastructure assets are accounted for similar to the other items of PPE. However, they
are generally assigned a 10% residual value.
c. Reforestation project are not considered PPE.
d. Fully depreciated PPE are derecognized.

14. Which of the following is derecognized?

 a. Idle PPE
b. Fully depreciated PPE
c. Unserviceable PPE
d. Partially damaged PPE

15. How do government entities account for borrowing costs?

a. Capitalized if the borrowing costs relate to the acquisition or construction of a qualifying
asset.
b. Expensed even if the borrowing costs relate to the acquisition or construction of a
qualifying asset.
c. Choice (a) for the national government; choice (b) for national government agencies.
d. Choice (a) for the national government agencies; choice (b) for the national government.