PROPERTY, PLANT AND EQUIPMENT

1. Which of the following is not within the definition of property, plant

and equipment?
a. Tangible items.
b. Are expected to be used during more than one period.
c. For capital appreciation or to earn rentals.
d. Are held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes.

2. Which is an essential characteristic of property, plant and

equipment?
a. The property, plant and equipment are subject to depreciation.
b. The property plant and equipment are tangible assets.
c. The property, plant and equipment are used in production or
supply of goods and services, for rental, administrative
purposes and capital appreciation.
d. The property, plant and equipment is not expected to be
used over a period of more than one year.

3. An item of property, plant and equipment should be recognized as

an asset when
I. It is probable that future economic benefits associated with
the asset will flow to the enterprise.
II. The cost of the asset to the enterprise can be measured
reliably.
a. Both I and II c. I only
b. Neither I nor II d. II only

4. The cost of an item of property, plant and equipment includes all of

the following, except
a. Trade discount and rebates
b. Purchase price
c. Import duties and nonrefundable purchase taxes

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 d. Directly attributable costs of bringing the asset to working
condition for its intended use.a.
5. Examples of costs that are expensed rather than recognized as an
element of cost of property, plant and equipment include all of the
following, except
a. Cost of employee benefits arising directly from the
construction or acquisition of an item of property, plant and
equipment.
b. Cost of opening a new facility
c. Cost of introducing a new product or service, including cost of
advertising and promotion.
d. Cost of relocating or reorganizing part or all of an entity’s
operations.
6. Cost of day-to-day servicing such as labor and consumables should
be
a. Charged to repairs and maintenance expense
b. Included in the carrying amount of the property plant and
equipment
c. Deferred and amortized over a reasonable period
d. Charged to retained earnings

7. The carrying amount of property, plant and equipment subsequent to

acquisition is the
a. Historical cost less accumulated depreciation
b. Revalued amount less accumulated depreciation and
accumulated impairment losses thereon
c. Fair value less accumulated impairment losses thereon
d. Amount at which an asset is recognized in the balance sheet
less accumulated depreciation and accumulated impairment
losses thereon

8. Which is correct concerning measurement of property, plant and

equipment?

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 I. An entity shall choose either the cost model or the
revaluation model as its accounting policy and shall apply that
policy to an entire class of property, plant and equipment.
II. The cost model means that property, plant and equipment
are carried at are carried at cost less any accumulated
depreciation and any accumulated impairment loss.
III. The revaluation model means that property, plant and
equipment revalued amount, being the fair value at date of
revaluation less any subsequent accumulated depreciation and
accumulated impairment loss.
a. I, II and III c. I and III only
b. I and II only d. II and III only

9. When a corporation issues ordinary shares for land, the land should
be recorded at the
a. Total par value of the shares issued
b. Total book value of the shares issued
c. Fair value of the land
d. Total liquidating value of the shares issued

10. If an entity is able to determine reliably the fair value of either asset
receive or the asset given up, which is used in measuring the cost of
the asset received?
a. Fair value of the asset given up
b. Fair value of the asset received
c. Carrying amount of asset given up
d. Either the fair value of asset given up or fair value of asset
received.

11. Which statement is incorrect concerning measurement of cost of

property, plant and equipment?
a. The cost of an item of property, plant and equipment is the cash
price equivalent at the recognition date.

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 b. If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is
recognized as interest expense over the life of the asset.
c. If an item of property, plant and equipment is acquired in
exchange for a nonmonetary asset or a combination of monetary
and nonmonetary asset, the cost of such item is measured at fair
value unless the exchange transaction lacks commercial
substance.
d. If an entity is able to determine reliably the fair value of either the
asset received or asset given up in an exchange, the fair value of
the asset received is used to measure the cost of asset received
in exchange.

12. Which is incorrect concerning self-constructed asset?

a. The cost of self-constructed asset is determined using the same
principles for an acquired asset.
b. Any internal profits from construction are part of the cost of self-
constructed asset.
c. The cost of abnormal amounts of wasted material, labor or other
resources incurred in the production of a self- constructed asset
is excluded in the cost of asset.
d. The cost of normal amounts of wasted material, labor or other
resources incurred in the production of a self-constructed asset
is included in the cost of the asset.

13. An entity imported machinery to install in its factory premises before

year-end. However due to circumstances beyond its control, the
machinery was delayed by a few months but reached the factory
premises before year-end. While this was happening, the entity
learned from a bank that it was being charged interest on the loan it
had taken to fund the cost of the machinery. What is the proper
treatment of freight and interest expense?
a. Both expenses should be capitalized.
b. Interest may be capitalized but freight should be expensed.

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 c. Freight should be capitalized but the interest should not be
capitalized under these circumstances.
d. Both costs should be expensed.

14. When an enterprise is the recipient of a donated asset, the account

credited may be
a. Paid in capital
b. Revenue account
c. Deferred revenue account
d. Retained earnings

15. As to land, capitalizable incidental costs include all, except

a. Attorney’s fees for establishing clean title
b. Special assessments for local improvement which benefits the
property
c. Cost of relocation or reconstruction of property belonging to
others in order to acquire possession
d. Expenditures for sidewalks, pavements, parking lot and
driveways

16. The cost of the plant asset “building” should usually include all,
except
a. Cost of renovation or remodeling required to prepare the building
for its intended use
b. Expenditures for service equipment and fixtures made as
permanent part of the building
c. Property taxes related to the period prior to acquisition that are
assumed by the buyer
d. Costs incurred to have existing building removed to make room
for the construction of new building

17. When an entity purchases 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, the cost incurred to tear the building should
be

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 a. Expensed
b. Charged to retained earnings
c. Added to the cost of the plant
d. Added to the cost of the land

18. An entity purchased land to be used as the construction site of a

plant. Timber was cut from the building site so that construction of
the plant could begin. The proceeds from the sale of the timber
should be
a. Credited to income
b. Netted against the cost to clear the land and expensed as
incurred.
c. Deducted from the cost of the land
d. Deducted form the cost of the plant.

19. The cost of the land to be used in the operations of a business

should include all of the following, except
a. Commission related to the land acquisition
b. Property taxes at the date of acquisition assumed by the
purchaser
c. Excavation in preparation for the construction of a new building
on the land.
d. The cost of a survey.

20. In a “basket price” or “lump sum” purchase of assets, which of the

following best describes the process by which the historical cost of
the various assets should be determined?
a. Allocation of the total cost to the individual assets on the basis of
the historical cost of the individual assets to the original owner.
b. Allocation of the total cost to the individual assets on the basis of
the fair value of the individual assets at the time of purchase.
c. Recording of the individual assets at their fair value with
recognition of the gain or loss for the difference between the
price and the fair value of the assets.

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 d. Recording of the individual assets at their historical cost to the
seller with gain or loss recognized as the difference between the
price paid and the original cost figures.

21. 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.
d. Any one of these.

22. Improvements which result to increased future economic benefits

include all, except
a. Modification of an item of property to extend its useful life or
increase its capacity.
b. Upgrade of machine parts to improve quality of output
c. Adoption of a new production process leading to large reduction
in operating cost
d. Expenditure on repair or maintenance of property, plant and
equipment, such as cost of servicing or overhauling plant and
equipment.

23. Which type of expenditure occurs when an entity installs a higher

capacity boiler to heat its plant?
a. Replacement
b. Betterment
c. Addition
d. Ordinary repair and maintenance

24. If the cost of ordinary repairs is capitalized as an addition to the

building account during the current year
a. Net income for the current year will be understated
b. Shareholders’ equity at the end of the current year will be
understated.
c. Total assets at the end of the current year will not be affected.

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 d. Total liabilities at the end of the current year will not be affected.

25. An improvement made to a machine increased its fair value and its
production capacity by 25% without extending the machine’s useful
life. The cost of the improvement should be
a. Expensed
b. Debited to accumulated depreciation
c. Capitalized on the machine account
d. Allocated between the accumulated depreciation and the
machine account

26. Future economic benefits will arise from all of the following except
a. Modification of an item to extend its useful life, including an
increase in its capacity.
b. Upgrading of machine parts to achieve a substantial
improvement in the quality of output.
c. Adoption of a new production process enabling a substantial
reduction in previously assessed operating costs.
d. Cost of servicing and overhauling to restore or maintain the
future economic benefits.

27. The Oscar Corporation acquired land, buildings, and equipment from
a bankrupt company at a lump-sum price of P18,000,000. At the
time of acquisition, Oscar paid P1,200,000 to have the assets
appraised. The appraisal disclosed the following values:

Land 12,000,000
Buildings 8,000,000
Equipment 4,000,000

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 a. 6,400,000, 6,400,000, and 6,400,000
b. 9,000,000, 6,000,000, and 3,000,000
c. 9,600,000, 6,400,000, and 3,200,000
d. 12,000,000, 8,000,000, and 4,000,000
What cost should be assigned to the land, buildings, and equipment,
respectively?

28. Doris Corporation purchased a new machine on August 1, 2008. A

P1,000,000 down payment was made and three monthly
installments of P500,000 each are to be made beginning on
September 1, 2008. The cash price would have been P2,250,000.
Doris paid no installation charges under the monthly payment plan
but a P30,000 installation charge would have been incurred with a
cash purchase. The amount to be capitalized as the cost of the
machine on October 31, 2008 would be
a. 2,500,000 c. 2,280,000
b. 2,250,000 d. 2,470,000

29. Jazz Company acquired land with a fair value of P10,500,000 and
paid for it in full by issuing P5,000,000 of its 10 percent bonds
payable and 40,000 shares of its ordinary shares, par P100. The
ordinary shares were selling at P115 per share in the open market
and the bonds were trading at 108. What amount should Jazz record
share premium from the issuance of the ordinary shares in this
transaction?
a. 1,100,000 c. 600,000
b. 1,500,000 d. 830,000

30. During 2008, Norbie Company made the following property, plant
and equipment expenditures:
Land and building acquired from Swiss Company 9,000,000
Repairs made to the building 300,000
Special tax assessment 50,000
Remodeling of office space including new
partitions and walls 400,000

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 In exchange for the land and building acquired from Swiss, Norbie
issued 60,000 shares of its P100 par value ordinary shares. On the
date of purchase, the stock had a market value of P150 per share
and the land and building had fair value of P2,000,000 and
P6,000,000 respectively.

During the year, Norbie also received land from a shareholder to

facilitate the construction of a plant in the city. Norbie paid P100,000
for the land transfer and charged this amount to legal expenses. The
land is fairly valued at P1,500,000. The cost of the land and building
acquired should respectively be
a. 3,800,000, and 7,450,000 c. 3,500,000, and 6,400,000
b. 3,550,000, and 6,700,000 d. 3,500,000, and 6,750,000

31. Nielsen Company acquired a welding machine with an invoice price

of P3,000,000 subject to a cash discount of 5% which was not taken.
Nielsen incurred freight and insurance during shipment of P50,000
and testing and installation cost of P200,000. Nielsen also incurred
cost of P20,000 in removing the old welding machine prior to the
installation of the new one. Welding supplies were acquired at a cost
of P100,000. The VAT on the acquisition is P360,000. The cost of
the new welding machine should be
a. 3,100,000 c. 3,220,000
b. 3,250,000 d. 3,400,000

32. In December 2008, Nash Company exchanged an old machine,

which cost P6,000,000 and 50% depreciated, for a used machine
and paid a cash difference of P1,500,000. The fair value of the old
machine was determined to be P2,000,000. Nash should record the
machine at
a. 6,000,000 c. 3,500,000
b. 2,000,000 d. 3,000,000

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33. Pensacola Company uses many kinds of machines in its operations.
It constructs some of these machines itself and acquires others from
the manufacturers. The following information relates to a machine
that it has recorded in 2008.

Cost of materials to construct machine, including value 784,000

added tax (84,000)
Labor cost to construct machine 450,000
Allocated overhead costs – electricity, factory space 280,000
etc.
Allocated interest costs of financing machine 40,000
Costs of installation 100,000
Insurance taken during construction 16,000
Profit saved by self-construction 80,000
Safety inspection costs prior to use 25,000

What is the cost of this machine?

a. 1,611,000 c. 1,595,000
b. 1,695,000 d. 1,691,000

34. Rafaela Company exchanged heavy-duty equipment for a vehicle to

be used as a transport service of its employees. The following
information relates to this exchange that took place on June 30,
2008:

Cost of the equipment 4,000,000

Accumulated depreciation of the equipment 1,000,000
Listed selling price of the vehicle 3,800,000
Fair value of the vehicle 3,600,000
Cash difference paid by Rafaela 250,000

On June 30, 2008, how much profit should Rafaela recognize on this
exchange?
a. 600,000 c. 350,000

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 b. 550,000 d. 200,000

35. Inquirer Company has recently acquired a computer system for its
central office in Metro Manila. Inquirer acquired a new computer
with the following information:

List price 2,000,000

Trade discount 10%
Removal of old computer 50,000
Concrete slab poured as a base for the new 100,000
computer
Insurance taken during delivery 20,000
Repairs incurred while in transit 10,000
Transportation costs 30,000
Purchase discount available on purchase (not taken) 5%

The cost of the new computer should be

a. 1,860,000 c. 1,850,000
b. 1,950,000 d. 1,920,000

36. On December 31, 2008, Janna Company shows the following

account for machinery that it assembled for its own use:

Cost of dismantling old machine 30,000

Raw materials used 800,000
Labor in construction 500,000
Cost of installation 80,000
Materials spoiled in trial run 20,000
Profit in construction 250,000
Purchase of machine tools 120,000
Cash proceeds from sale of old machine ( 10,000)
1,790,000

An analysis of the details in the account discloses the following:

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  The old machine, which was removed in the installation of
the new one, had been fully depreciated.
 The discount received on the payment of materials used in
construction totaled P50,000 and this was reported in the
purchase discount account.
 The factory overhead account shows a balance of
P2,500,000 for the year ended December 31, 2008. This
balance exceeds normal overhead on plant activities by
P200,000 and is attributable machine construction.
 The profit was recognized on construction for the difference
between cost incurred and the price at which the machine could
have been purchased.
 Machinery has a life of 10 years and was used for production
beginning August 1, 2008.

What is the cost of the machinery?

a. 1,550,000 c. 1,400,000
b. 1,600,000 d. 1,750,000
37. Ma. Andrea Company acquired new machinery by trading used
machinery used in the production facility with a dealer. The pertinent
data are as follows:

Old machinery:
Original cost 5,200,000
Accumulated depreciation 4,400,000
Fair value 1,000,000

New machinery:
List price 6,500,000
Ma. Andrea Company was given a trade in allowance of P1,500,000
for the old machinery . The amount to be recognized as cost for the
new machinery is
a. 6,500,000 c. 5,500,000
b. 5,800,000 d. 6,000,000

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38. On February 1, 2008, San Beda Company purchased a parcel of
land as a factory site for P5,000,000. An old building on the property
was demolished and construction begun on a new warehouse that
was completed December 31, 2008. Costs incurred on the
construction project are listed below.
Demolition of old building 200,000
Architect's fees 500,000
Legal fees--title investigation 50,000
Construction costs 5,000,000
Imputed interest based on stock financing 45,000
Landfill for building site 160,000
Clearing of trees from building site 120,000
Temporary buildings used for construction activities 100,000
Land survey 80,000
Excavation for basement 60,000
Salvaged materials and timber from demolition
retained by the contractor 40,000
Cost of landscaping and other permanent
improvements on land 150,000
What was the total cost of the land?
a. 5,610,000 c. 5,760,000
b. 5,570,000 d. 5,290,000

39. Deacon Company commenced operations on January 1, 2008. The

company acquired a tract of land, demolished the building on the
land and built a new factory. The company incurs the following
costs:

Option fee for land not acquired 10,000

Option fee for land acquired 10,000
Title search and other settlement fee 100,000
Taxes in arrears on building on land 50,000
Payment for land 1,000,000
Demolition of current building on land, net of
salvage of P40,000 80,000

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 Architect fee 230,000
Payment to city hall for approval of building
construction 120,000
Safety fence around construction site 35,000
Contract price for factory building 2,400,000
Driveways, parking bays and safety lighting 550,000
Safety inspection on building 30,000
Removal of safety fence after completion of factory
building 20,000
New fence surrounding the factory 80,000

The land and factory building should respectively measured at

a. 1,240,000 and 2,835,000 c. 1,790,000 and 2,835,000
b. 1,240,000 and 2,780,000 d. 1,790,000 and 2,780,000

40 Pamela Company paid P10,000,000 for a warehouse on January 1,

2009, the beginning of its fiscal year:

Cost of land 2,500,000

Cost of building 7,500,000
Remodeling and repairs prior to occupancy 500,000
Escrow fee 100,000
Clearing, leveling and other landscaping 250,000
Property tax for period prior to acquisition 200,000
Real estate commission 300,000

The company paid a cash in the amount of P5,000,000 and signed

an interest-bearing note for P5,000,000 on January 1, 2009. The
stated interest rate is 10%. Payments of P250,000 are to be made
semiannually beginning December 31, 2009, for 10 years. What is
the cost of the land and building?
a. 2,900,000 and 8,450,000
b. 3,350,000 and 7,500,000
c. 2,500,000 and 8,100,000
d. 3,050,000 and 8,000,000

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41. Toro Roso Company replaced some parts of its factory building as
well as its annual maintenance and upkeep during 2009:
The outside-corrugated covering of the factory walls was removed
and replaced. The job was done by an expert crew from Lions
Construction Company and will extend the life of the building by 4
years. The cost of the new wall was P900,000. The cost of the of
the walls replaced is estimated to be P500,000. The building in 25%
depreciated.
 General maintenance and tune up to its factory equipment in
order to maintain their current projected capacity were incurred
at a cost of P250,000.
 Dust filters in the interior of the factory were replaced at a
cost of P300,000. The new filters are expected to reduce
employee health hazards and thus reduce wage and fringe
benefits costs. The original filters cost P100,000.
 The electrical wiring system was updated at a cost of
P150,000

What is the total amount to be capitalized from the above

expenditures of Toro Roso Company?
a. 1,600,000 c. 1,200,000
b. 1,350,000 d. 900,000

42. San Jose Company developed an equipment to be used in its

manufacturing process. The following expenses were incurred in
developing and patenting the equipment:

Research and development 2,000,000

Metal used in the construction of the equipment 500,000
Blueprints used to design the equipment 200,000
Wages paid for employees’ work on the
research development and construction of the
equipment 1,500,000
Legal expenses to obtain the patent 800,000

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 Expenses of drawings required by the patent
office to be submitted with the patent
application 50,000
Fees paid to the patent office 150,000

1. The total cost to be capitalized, as equipment should be

a. 2,200,000 c. 1,200,000
b. 1,000,000 d. 2,500,000

2. The total cost to be capitalized, as patent should be

a. 3,000,000 c. 1,200,000
b. 1,000,000 d. 2,000,000

43. The following statements related to the depreciation of property,

plant and equipment, which one is false?
a. The depreciation charge for each period shall be recognized in
profit or loss unless it is included in the carrying amount of
another asset.
b. The depreciation method used shall reflect the pattern in which
the asset’s future economic benefits are expected to be
consumed by the entity.
c. The depreciation method applied to an asset shall be reviewed
at least at each financial year-end and, if there has been a
significant change in the pattern of consumption of the future
economic benefits embodied in the asset, the method shall be
changed to reflect the changed pattern.
d. The cost of an asset shall be allocated on a systematic basis
over its useful life.

44. The useful life of an item of property, plant and equipment is

I. The period of time over which an asset is expected to be
used by the enterprise.
II. The number of production or similar units expected to be
obtained from the asset by the enterprise.
a. Both I and II c. I only

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 b. Neither I nor II d. II only

45. Which is incorrect concerning the residual value of an item of

property, plant and equipment?
a. The depreciable amount of an asset is determined after
deducting the accumulated depreciation of the asset.
b. In practice, the residual value of an asset is often insignificant
and therefore is immaterial in the calculation of the depreciable
amount.
c. The residual value of an asset may increase to an amount equal
or greater than the asset’s carrying amount.
d. The residual value of an asset shall be reviewed at least at each
financial year-end and if expectation differs from previous
estimate, the change shall be accounted for as a change in
accounting estimate.

46. As generally used in accounting, what is depreciation?

a. It is a process of asset valuation for balance sheet purposes.
b. It applies only to long-lived intangible assets
c. It used to indicate a decline in market value of long-lived asset.
d. It is an accounting process that systematically allocates long-
lived asset cost to accounting periods.
47. The useful life of an item of property, plant and equipment should be
reviewed periodically and if expectations are significantly different
from previous estimates, the depreciation charge for the
a. Current and future periods should be adjusted
b. Current and future periods should not be adjusted
c. Current period only should be adjusted
d. Future periods only should be adjusted

48. The depreciation method should be reviewed periodically and if

there is a significant change in the expected pattern of economic
benefits, the change should
a. Not be accounted for
b. Be accounted for as a change in accounting estimate

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 c. Be accounted for as a change in accounting policy
d. Be accounted for as a prior period error.

49. The composite depreciation method

a. Is applied to a group of homogeneous assets.
b. Is an accelerated method of depreciation.
c. Does not recognize gain or loss on the retirement of specific
assets in the group.
d. Excludes salvage value from the base of the depreciation
calculation.

50. Which of the following depreciation methods applies a uniform

depreciation rate each period to an asset's book value?
a. Straight-line c. Sum-of-the-years'-digits
b. Units-of-production d. Declining-balance

51. Which statement is true concerning depreciation?

I. When a change in depreciation method is necessary to
reflect the new pattern of economic benefits the change should
be accounted for as a change in accounting policy and the
depreciation charge for the current and future periods should be
adjusted.
II. The useful life of an item of property, plant and equipment
should be reviewed periodically and if expectations are
significantly different from previous estimates, the depreciation
for the current and future periods should be adjusted.
a. Both I and II c. I only
b. Neither I nor II d. II only

52. The sum of years’ digit method of depreciation results in

a. Constant charge over the useful life of the asset
b. Decreasing charge over the useful life of the asset
c. Increasing charge over the useful life of the asset
d. Charge based on the expected use or output of the asset

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53. The cost of fully depreciated asset remaining in service and the
related accumulated depreciation
a. Should be removed from the accounts and excluded from
property, plant and equipment
b. Should not be removed from the accounts and therefore included
in property, plant and equipment with disclosure
c. Should not be removed from the accounts and therefore included
in property, plant and equipment without disclosure
d. Should be adjusted to conform with new estimated useful life

54. Enterprises are encouraged to disclose all of the following amounts,

except
a. Gross carrying amount of fully depreciated property that is still in
use.
b. Carrying amount of property, plant and equipment retired from
active use and held for disposal.
c. Fair value of property, plant and equipment when the fair value is
not materially different from the carrying amount.
d. Carrying amount of temporarily idle property, plant and
equipment.

55. An entity bought a private jet. The jet is expected to be used over a
period of 7 years, its engine has a useful life of 5 years and its tires
are replaced every 2 years. The jet shall be depreciated using
straight-line method over
a. 7 years composite useful life
b. 5 years for the engine, 2 years for the tires and 7 years for the
balance of the cost of the private jet
c. 2 years based on conservatism as this is the lowest useful life of
all parts of the jet.
d. 5 years based on a simple average of the useful lives of the
major components of the jet.

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56. A company using the group depreciation method for its delivery
trucks retired one of the trucks after the average service life of the
group was reached. Cash proceeds were received from a salvage
company. The net carrying amount of these group asset accounts
would be decreased by the
a. Original cost of the truck.
b. Original cost of the truck less the cash proceeds.
c. Cash proceeds received.
d. Cash proceeds received and original cost of the truck.

57. In recording the trade of one asset for another, which of the following
accounts is usually debited?
a. Accumulated Depreciation-Old Asset
b. Cash
c. Gain on Exchange of Asset
d. None of the above

58. Gain or loss from disposal of an item of property, plant and

equipment is equal to the difference between
a. Fair value of the asset on balance sheet date and its carrying
amount
b. Net realizable value on balance sheet date and its carrying
amount
c. Net proceeds from disposal and the cost of the asset
d. Net proceeds from disposal and the carrying amount of the asset

59. The sale of a depreciable asset resulting in a loss indicates that the
proceeds from the sale were
a. Less than book value..
b. Less than current market value.
c. Greater than cost
d. Greater than book value.

60. McClaren Company uses the straight-line depreciation for its

property plant and equipment. The related balances were:

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 December 31, 2008 December 31, 2007
Property, plant and 60,000,000 65,000,000
equipment
Accumulated depreciation 19,000,000 15,000,000

McClaren purchased land during 2008 for P5,000,000 and sold

machinery for P7,000,000 at a gain of P500,000. Depreciation
expense for 2008 is
a. 6,500,000 c. 6,000,000
b. 7,500,000 d. 7,000,000

61. On January 1, 2007, Tiger Company acquired equipment to be used

in its manufacturing operations. The equipment has an estimated
useful life of 5 years and an estimated residual value of P650,000.
The depreciation applicable to this equipment was P1,200,000 for
2008 computed under the sum of years’ digits method. What was
the acquisition cost of the equipment?
a. 6,650,000 c. 4,500,000
b. 6,000,000 d. 5,150,000

62. A schedule of plant assets owned by Oren Company is presented

below.

Cost Scrap Depreciable Life Annual

cost Depreciati
on
Building 8,800,000 800,000 8,000,000 20 years 400,000
Machinery 3,200,000 320,000 2,880,000 15 years 192,000
Equipment . 640,000 640,000 5 years 128,000
Total 12,640,000 11,520,000 720,000

Oren computes depreciation on the straight-line method. The

composite life of the assets should be
a. 19.8 c. 18.0
b. 13.3 d. 16.0

22
63. Machines were acquired by Oswald Incorporated on March 1, 2009,
as follows:

Machine Cost Estimated Estimated

Residual Value Life in
Years
001 P5,000,000 P600,000 5
002 2,500,000 400,000 6
003 1,800,000 400,000 8
004 800,000 50,000 6
005 600,000 None 10

What is the group depreciation rate for this group?

a. 15.75% c. 17.19%
b. 14.86% d. 13.33%

64. Ollen Company uses the composite method of depreciation and has
a composite rate of 25%. During 2009, it sold assets with an original
cost of P500,000 and a residual value of P100,000 for P300,000 and
eventually acquired P900,000 of new assets with a residual value of
P150,000. Information regarding the original group of assets as of
January 1, 2009 is presented below:

Total cost 5,000,000

Total residual value 800,000
Accumulated depreciation 1,000,000

What was the depreciation expense recorded by Ollen Company in

2009?
a. 1,000,000 c. 1,350,000
b. 1,312,500 d. 1,100,000

65. Pagani Corporation’s machinery account on January 1, 2008 shows

the following information:

23
 Machinery 3,000,000
Accumulated depreciation 1,200,000

The additional information and the following transactions transpired

during 2008:
 The estimated life of all machinery is 8 years with no
residual value. The straight-line method is used.
 On June 10, 2008, a new machine was purchased at an
invoice cost of P270,000. Additional costs of P20,000 for freight
and P30,000 for installation and testing were incurred. The
machine was put into use on June 30, 2008.
 On January 4, 2008, a machine purchased for P240,000 on
January 1, 2005 was overhauled at a cost of P60,000. As a
result, the company estimated that its original life would be
extended by two years.

What is the depreciation expense to be recorded by Pagani for

2008?
a. 395,000 c. 345,000
b. 425,000 d. 365,000

66. Anne Company acquired a machine on January 1, 2006 for

P4,000,000. The machine has a 8 year useful life and a P400,000
residual value, and was depreciated using the sum-of-years digits
method. Anne recorded a full year’s depreciation on the asset in
2006 and 2007. In January of 2008, Anne estimated that the asset’s
useful life from the date of acquisition should have been 6 years and
its residual value reduced to P200,000. As a result of this change in
Anne’s accounting estimate, what is the accumulated depreciation
on December 31, 2008?
a. 2,420,000 c. 2,940,000
b. 2,100,000 d. 1,940,000

24
67. When Primetime Company commenced business operations on
January 1, 2007, the following assets were among those acquired at
that date:

Real estate:
Cost of parcel of land 2,200,00
Cost of razing an old structure which d been 100,000
on the land
Title insurance and legal fees pertaining to
land acquisition 50,000
Architect’s fee 300,000
Cost of constructing a new building 6,000,000

Machinery:
Cost 1,000,000
Residual value 100,000
Estimated useful life (double-declining-balance
method) 4 years

At December 31, 2008, after Primetime’s second year of operations,

how much was the accumulated depreciation on the machinery?
a. 450,000 c. 500,000
b. 750,000 d. 675,000

68. Testament Company acquired a machine on January 20067 at a

cost of P1,000,000. The estimated residual value of the machinery
is P200,000 and has an estimated useful life of 8 years to be
depreciated under the straight-line method. On January 2009,
Testament has determined that there was a permanent impairment
in the value of the machinery. Thus, the carrying amount should be
P350,000 only, with a remaining useful life of two years and a
residual value of P50,000. The machinery should be reported in
Testament’s December 31 2009 balance sheet at carrying amount of
a. 300,000 c. 700,000
b. 350,000 d. 200,000

25
69. Maharlika Company bought a building at an auction on June 30,
2008 for P2,000,000. On July 15, 2008, before occupying the
building, Maharlika sold it to a credit–worthy company for
P2,400,000. Maharlika received a cash down payment of P600,000
and a first mortgage note at the market rate of interest for the
balance. No additional payments were required of the buyer until
July 2008. How much gain should Maharlika recognize on July 15,
2008 from the sale of the building?
a. 600,000 c. 100,000
b. 0 d. 400,000

70. How much is the “depletable cost” of a natural resource?

a. Acquisition cost
b. Acquisition cost plus all exploration costs and development cost
c. Acquisition cost plus all exploration cost and intangible
development costs.
d. Acquisition cost plus all exploration cost and intangible
development costs minus the estimated residual value

71. The most common method of recording depletion for accounting

purposes is the
a. Percentage depletion method
b. Straight-line method
c. Decreasing charge method
d. Production or output method

72. Owen Company acquired a mineral right for P30,000,000 in January

2007. The mine has removable ore estimated at 4,000,000 tons.
After it has extracted all the ore, Owen will be required by law to
restore the land to its original condition at an estimated cost of
P2,000,000. Owen believes that the property can be sold afterwards
for P5,000,000. Early in 2007, roads were constructed and other
development costs were incurred to aid in the extraction and
transportation of the mined ore at a cost of P6,000,000. In 2007,

26
 200,000 tons were mined and sold. On December 31, 2008, a new
survey made by a new mining engineer indicated that 5,000,000
tons were available for mining. In 2008, 225,000 tons were mined
and only 150,000 tons were sold. How much depletion was included
in the 2008 cost of sales?
a. 1,350,000 c. 940,500
b. 1,410,750 d. 900,000

73. On July 1, 2008 Olga Company purchased rights to a mine. The

total purchase price was P50,000,000 of which P5,000,000 was
allocated to the land. Estimated reserves were 6,000,000. Olga
expects to extract and sell 100,000 tons per month. Olga Company
purchased new equipment on July 1, 2008 for P21,000,000 with
estimated life of 8 years. However, after all the resource is removed,
the equipment will be of no use and will be sold for P3,000,000.
What is the depreciation of the equipment for 2008?
a. 1,800,000 c. 1,125,000
b. 2,100,000 d. 3,600,000

74. Odessa Company constructed a building costing P15,000,000 on a

mine property. The building has an estimated useful life of six years
with no residual value. After all the resources are removed
expectedly over five years, the building will be of no use. The
estimated recoverable output from the mine is 1,000,000 tons.
During the first year, Odessa produced 200,000 tons but there was a
shutdown and no output in the second year. In the third year,
Odessa resumed operations and produced 300,000 tons. Odessa
Company should record depreciation of the building in the third year
at
a. 3,000,000 c. 3,600,000
b. 2,500,000 d. 4,500,000

75. In 2006, Onyx Mining Company purchased property with natural

resources for P50,000,000. The property was relatively close to a
large city and had an expected residual value of P5,000,000.

27
 Development cost, tonnage mined and estimated remaining tons for
the years 2006 to 2010 are as follows:

Year Development Tons Extracted Estimated Tons

Cost Remaining
2006 4,000,000 0 5,000,000
2007 6,000,000 1,000,000 4,000,000
2008 5,000,000 2,500,000 1,000,000
2009 2,000,000 1,700,000 300,000
2010 0 300,000 0

How much is the depletion in 2008?

a. 27,500,000 c. 30,000,000
b. 35,000,000 d. 34,375,000

76. Fremont Company acquired a mineral right for P5,280,000 in

January 2008. The mine has removable ore estimated at 1,200,000
tons. After it has extracted all the ore, Fremont will be required by
law to restore the land to its original condition at an estimated cost of
P360,000. Fremont believes it will be able to sell the property
afterwards for P600,000. During 2008, Fremont incurred P720,000
of development cost preparing the mine for production and removed
and sold 60,000 tons of ore. In it 2008 income statement, what
amount should Fremont report as depletion?
a. 318,000 c. 288,000
b. 270,000 d. 300,000

77. Aretha Company constructed a building costing P18,000,000 on a

mine property. The building has an estimated useful life of ten years
with no residual value. After all the resources are removed
expectedly over eight years, the building will be of no use and will be
demolished as part of the restoration program. The estimated
recoverable output from the mine is 2,500,000 tons. During the first
year, Aretha produced 300,000 tons but there was a shutdown and
no output in the second year. In the third year, Aretha resumed

28
 operations and produced 400,000 tons. Aretha Company should
record depreciation of the building in the third year at
a. 2,880,000 c. 2,592,000
b. 1,800,000 d. 2,560,000

78. Omrie Company acquired a tract of land containing an extractable

natural resource. Omrie Company is required by the purchase
contract to restore the land to a condition suitable for recreational
use after it has extracted the natural resource. Geological surveys
estimate that the recoverable reserves will be 2,500,000 tons and
that the extraction will be completed in five years. Relevant data
follow:

Land 9,000,000
Exploration and development costs 1,000,000
Expected cash flows for restoration costs 1,500,000
Credit-adjusted risk free interest rate 10%
PV of 1 at 10% for 5 periods 0.62

What should be the depletion charge per ton of extracted material?

a. 4.00 c. 3.97
b. 4.37 d. 3.60

79. This represents assistance by government in the form of transfers of

resources to an entity in return for past or future compliance with
certain conditions relating to the operating activities of the entity.
a. Government grant
b. Government assistance
c. Government donation
d. Government aid

80. What is the acceptable approach in accounting for government

grants?
a. Government grants should be recognized as income over the
periods necessary to match them with the related costs.

29
 b. Government grants should be credited directly to donated
capital.
c. Government grants should be credited directly to retained
earnings.
d. Government grants should be deferred and amortized over a
maximum period of 20 years.

81. These are government grants whose primary condition is that the
enterprise qualifying for them should purchase, construct or
otherwise acquire long-term assets.
a. Grants related to assets c. Government gift
b. Grants related to income d. Government appropriation

82. Government grants related to assets should be presented in the

balance sheet
I. By setting the grant as deferred income
II. By deducting the grant in arriving at the carrying amount of the
asset
a. Both I and II c. I only
b. Neither I nor II d. II only

83. Government grants related to income are presented preferably as

a. Other income in the income statement
b. Deduction from related expense
c. Addition to beginning balance of retained earnings
d. Additional paid in capital

84. On January 1, 2009 Mathew Company received a grant of

P10,000,000 from the British government in order to defray safety
and environmental costs within the area where the enterprise is
located. The safety and environmental costs are expected to be
incurred over four years, respectively, P1,000,000, P2,000,000,
P2,000,000 and P3,000,000. How much income from the
government grant should be recognized in 2009?
a. 2,000,000 c. 10,000,000

30
 b. 1,000,000 d. 1,250,000

85. On January 1, 2007, Phoebe Company received a grant of P50

million from the US government for the construction of a laboratory
and research facility with an estimated cost of P60 million and a
useful life 20 years. Phoebe record government grants related to
assets as deferred income. The facility was completed in early of
2008. Phoebe Company should include in its 2008 income
statement income from the government grant of
a. 5,000,000 c. 2,500,000
b. 2,000,000 d. 2,400,000

86. On January 1, 2008, Mandarin Company received a grant of

P8,000,000 from the Australian government to compensate for
massive losses incurred because of a recent tsunami. The grant
requires no fulfillment of certain conditions. The grant was for the
purpose of giving immediate financial support to the entity. It will
take Mandarin 2 years to reconstruct its facilities destroyed by the
tsunami. How much income from the government grant should be
recognized by Mandarin in 2008?
a. 4,000,000 c. 2,000,000
b. 8,000,000 d. 2,500,000

87. The period of time during which interest must be capitalized ends
when
a. The asset is substantially complete and ready for its intended
use.
b. No further interest cost is being incurred.
c. The asset is abandoned, sold or fully depreciated.
d. The activities that are necessary to get the asset for its intended
use have begun.

88. Borrowing costs include all of the following, except

a. Interest on borrowing
b. Amortization of premium or discount related to borrowings

31
 c. Finance charges with respect to a finance lease.
d. Exchange differences from translation of foreign currency
borrowing

89. When funds are borrowed specifically for the purpose of obtaining a
qualifying asset, the capitalizable borrowing cost is equal to
a. Actual borrowing cost incurred during the period
b. Actual borrowing cost incurred during the period plus any
investment income on the temporary investments of the
borrowings
c. Actual borrowing cost incurred during the period minus any
investment income on the temporary investments of the
borrowings
d. Estimate borrowing cost during the period

90. If the qualifying asset is financed by general borrowings, the

capitalizable borrowing cost is equal to
a. Actual borrowing cost incurred.
b. Total expenditures on the asset multiplied by a capitalization
rate.
c. Average expenditures on the asset multiplied by a capitalization
rate or actual borrowing cost incurred, whichever is lower.
d. Average expenditures on the asset multiplied by a capitalization
rate or actual borrowing cost incurred, whichever is higher.

91. Which of the following statements is true regarding capitalization of

interest?
a. Interest cost capitalized in connection with the purchase of land
to be used as a building site should be debited to the land
account and not to the building account.
b. The amount of interest cost capitalized during the period should
not exceed the actual interest cost incurred.
c. When excess borrowed funds not immediately needed for
construction are temporarily invested, any interest earned should

32
 be offset against interest cost incurred when determining the
amount of interest cost to be capitalized.
d. The minimum amount of interest to be capitalized is determined
by multiplying a weighted average interest rate by the amount of
average accumulated expenditures on qualifying assets during
the period.

92. An asset is being constructed for an enterprise’s own use. The

asset has been finance with a new specific borrowing. The interest
cost incurred during the construction period as a result of the
expenditures for the asset is
a. Interest expense in the construction period
b. A prepaid asset to be written off over the estimated useful life of
the asset
c. A part of the historical cost of acquiring the asset to be written off
over the estimated useful life of the asset
d. A part of the historical cost of acquiring the asset to be written off
over the term of the borrowing used to finance the construction
of the asset

93. Which of the following may not be eligible for capitalization as

borrowing costs?
a. Interest on bonds issued to finance construction of a qualifying
asset.
b. Amortization of discount or premium or ancillary cost relating to
borrowings that qualify for capitalization.
c. Imputed cost of equity
d. Exchange differences arising from foreign currency borrowings
to the extent they are regarded as an adjustment to interest cost
pertaining to a qualifying asset.

94. Which of the following may not be considered as a qualifying asset?

a. A power generation plant that normally takes three years to
construct.

33
 b. An expensive private jet that can be purchased from a local
vendor.
c. A toll bridge that usually takes more than a year to build
d. A ship that normally takes two years to build.

95. The capitalization of borrowing costs as part of the cost of a

qualifying asset should commence when (choose the incorrect one)
a. Expenditures for the asset are being incurred.
b. Borrowing cost are being incurred.
c. Activities that are necessary to prepare the asset for its intended
use or sale are in progress.
d. Substantially all the activities necessary to prepare the qualifying
asset for its intended use or sale are complete.

96. Capitalization of borrowing costs

a. Shall be suspended during temporary period of delay.
b. May be suspended only during extended period of delay in which
active development is delayed.
c. Should never be suspended once capitalization commences.
d. Shall be suspended only during extended period of delay in
which active development is delayed.

97. Maia Company entered into a P15,000,000 fixed contract with Tanya
Company by the end of 2007 for the construction of a new building.
On January 1, 2008, Maia obtained a loan of P15,000,000 at an
interest rate of 12% to finance specifically the construction.
Availments from the loan may be made quarterly at unequal
amounts. Actual interest incurred for 2008 was P1,400,000. Prior to
their disbursement, the proceeds from the loan were temporarily
invested and earned interest of P50,000. The building was
completed on December 31, 2008. Additional costs incurred during
the construction were P200,000 for plans, specifications and
blueprint, and P100,000 for architectural design and supervision.
What is the cost of the building?
a. 16,350,000 c. 16,400,000

34
 b. 16,650,000 d. 15,300,000

98. Etretat Company started construction of a building on January 1 of

this year and completed construction on December 31 of the same
year. Etretat had only two interest notes outstanding during the
year, and both of these notes were outstanding for all 12 months of
the year. The following information is available:

Average accumulated expenditures 2,500,000

Ending balance in construction in progress before
capitalization of interest 3,600,000
6 percent note incurred specifically for the project 1,500,000
9 percent long-term note 5,000,000

What is the total cost of the building?

a. 3,780,000 c. 3,825,000
b. 3,750,000 d. 3,879,000

99. During 2008, Natz Industries, Inc. constructed a new manufacturing

facility at a cost of P30,000,000. The expenditures for this building,
which was finished late in 2008, were incurred evenly during the
year. The company had the following loans outstanding at
December 31, 2008:

 10%, note to finance construction of the manufacturing facility,

dated January 1, 2008, P10,000,000. Unpaid as of December
31, 2008. Investments were made on the proceeds from this
loan and income of P100,000 was realized in 2008.
 12%, 20-year bonds issued at face value on April 30, 2006,
P30,000,000
 8%, 5-year note payable, dated March 1, 2007, P10,000,000.

What is the amount of interest that will be capitalized as cost of the

new building during 2008?
a. 1,550,000 c. 1,400,000

35
 b. 1,450,000 d. 1,500,000

100. The third year of a construction project began with a

P25,000,000 balance in Construction in Progress account. Included
in that figure is 3,000,000 of interest capitalized in the first two years.
Construction expenditures during the third year were P20,000,000,
which were incurred evenly throughout the entire year. The
company has had over P90,000,000 in interest-bearing debt
outstanding the third year, at a weighted average rate of 10 percent.
How much interest for the third year is capitalized?
a. 4,500,000 c. 1,000,000
b. 3,500,000 d. 2,000,000

101. Nida Company had the following loans outstanding during the
years 2008 and 2009:

Specific construction loan 3,000,000 10%

General loan 12,000,000 12%

The company began self-construction of a building on January 1,

2008 and was completed on October 31, 2009. The following
expenditures were made during 2008 and 2009:

January 1, 2008 5,000,000

July 1, 2008 4,000,000
November 1, 2008 3,000,000
July 1, 2009 1,000,000
13,000,000

What is the total cost of the building on December 31, 2009?

a. 14,814,000 c. 15,114,000
b. 13,840,000 d. 14,090,000

102. Crystal Company started construction of a new office building on

January 1, 2007 and moved to the finished building on December

36
 31, 2008. Of the building’s P50,000,000 total cost, P30,000,000 was
incurred in 2008 evenly throughout the year. Crystal’s incremental
borrowing rate was 10% throughout 2008, and the total amount of
interest incurred by Crystal during 2008 was P2,800,000. What
amount should Crystal report as capitalized interest at December 31,
2008?
a. 3,500,000 c. 1,500,000
b. 2,800,000 d. 3,000,000

103. The third year of a construction project began with a

P30,000,000 balance in Construction in Progress. Included in that
figure is 2,000,000 of interest capitalized in the first two years.
Construction expenditures during the third year were P80,000,000
which were incurred evenly throughout the entire year. The
company has had over P300,000,000 in interest-bearing debt
outstanding the third year, at a weighted average rate of 10 percent.
At the end of the third year, what is the balance of the Construction
in Progress account?
a. 110,000,000 c. 121,000,000
b. 114,000,000 d. 117,000,000

104. As a benchmark treatment, the revaluation of property, plant and

equipment should be based on
a. Fair value, which is usually the market value determined by
appraisal undertaken by professionally qualified appraisers.
b. Current replacement cost.
c. Current reproduction cost..
d. Depreciated replacement cost

105. When an item of property, plant and equipment is revalued, any

accumulated depreciation at the date of the revaluation is

I. Restated proportionately with the change in the gross

carrying amount of the asset so that the carrying amount of the
asset after revaluation would equal its revalued amount.

37
 II. Eliminated against the gross carrying amount of the asset
and the net amount restated to the revalued amount of the asset.
a. Both I and II c. I only
b. Neither I nor II d. II only

106. Which statement is incorrect concerning revaluation of property,

plant and equipment?
a. When an item of property, plant and equipment is revalued, the
entire class of property, plant and equipment to which that asset
belongs should be revalued.
b. The basis of revaluation is fair value which is usually the market
value determined by appraisal undertaken by professional
qualified valuers, or depreciated replacement cost, in the
absence of evidence of market value.
c. Items of property, plant and equipment that experience
significant and volatile movements in fair value should be
revalued annually.
d. Frequent revaluations are unnecessary for items of property,
plant and equipment with only insignificant movements in fair
value and instead, revaluation every five to ten years may be
sufficient.
107. When the revaluation surplus is realized because of the use of
the asset by the enterprise or disposal of the asset, it may be
transferred directly to
a. Income c. Donated capital
b. Deferred income d. Retained earnings

108. Which is not valid with respect to revaluation of property?

a. The entire class of property, plant and equipment should be
revalued.
b. The items within a class of property, plant and equipment are
revalued selectively.
c. A class of property, plant and equipment is a grouping of assets
of similar use and nature.

38
 d. A class of assets may be revalued on a rolling basis provided the
revaluation is completed within a short period of time and kept up
to date.

109. An entity 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. It decided to revalue its property, plant and
equipment. The company’s accountant has suggested the following
alternative below. Which one of the options should the entity 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.

110. PAS 16 require that revaluation surplus resulting from initial

revaluation of property, plant ad equipment should be treated in
which of the following way?
a. Credited to retained earnings as this is unrealized gain.
b. Released to the income statement at the 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 “revaluation surplus”, which is
presented under “equity”.

111.When the carrying amount of a revalued asset is decreased as a

result of a revaluation, the decrease should be charged to
a. Expense

39
 b. Retained Earnings
c. Revaluation surplus
d. Revaluation surplus first, if any, then, remaining balance, to expense

112. Which statement is incorrect concerning revaluation of property,

plant and equipment?
a. When an item of property, plant and equipment is revalued, any
accumulated depreciation at the date of revaluation is restated
proportionately with the change in the gross carrying amount of
the asset so that the carrying amount of the asset after
revaluation should equal its revalued amount, or eliminated
against the gross carrying amount of the asset and the net
amount restated to the revalued amount of the asset.
b. Any revaluation increase should be credited to equity as
revaluation surplus.
c. The revaluation surplus included in equity may be transferred
directly to retained earnings when the surplus is realized.
d. Any revaluation decrease should be debited to revaluation loss,
a contra equity account.

113.The following account balances relating to property, plant and

equipment of Queen Company appear on the books on December
31, 2007:

Land 6,000,000
Building 60,000,000
Accumulated depreciation 24,000,000

Plant, property and equipment have been carried at cost since their
acquisition. The land was acquired 15 years ago while the building’s
construction was completed on January 1, 1998. The straight-line
method for depreciation is used and the building is depreciated over
its 25-year useful life with no residual value. On January 1, 2008,
the company revalued property, plant, and equipment. On the same
date, contracted professional appraisers submitted the following

40
 information regarding the replacement cost of the land and the
building:

Land 9,000,000
Building 80,000,000

1. What is the revaluation surplus on January 1, 2008?

a. 15,000,000 c. 10,000,000
b. 13,000,000 d. 8,000,000

2. What is the revaluation surplus on December 31, 2008?

a. 14,000,000 c. 11,600,000
b. 13,800,000 d. 14,200,000

114.Quest Company acquired a building on January 1, 2004 at a cost of

P20,000,000. The building has an estimated life of 10 years and
residual value of P4,000,000. The building was revalued on January
1, 2008 and the revaluation revealed replacement cost of
P30,000,000, residual value of P5,000,000 and revised life of 12
years. What is the revaluation surplus on December 31, 2008?
a. 7,000,000 c. 6,400,000
b. 5,200,000 d. 5,600,000

115. Deloitte Company owns an equipment costing P10,000,000

which was purchased on January 1, 2004 and an original residual
value of P400,000. The life of the asset is 10 years and was
depreciated using the straight-line method. The equipment was
revalued on January 1, 2008 and has a replacement cost of
P12,000,000 with a residual value of P600,000. The appraisal of
the equipment showed a total revised useful life of 12 years and the
company decided to carry the equipment using the revaluation
model. If the income tax rate is 30%, what amount should Deloitte
report as revaluation surplus on January 1, 2008?
a. 1,280,000 c. 896,000
b. 2,040,000 d. 1,428,000

41
116. Quanah Company finished construction of its building on
January 1, 1998 at a total cost of P25,000,000. The building was
depreciated over its estimated useful life of 20 years using the
straight-line method with no residual value. The building was
subsequently revalued on January 1, 2006 and the revaluation
report showed that the asset had a replacement cost of P32,000,000
and was determined to have no change in its useful life. On January
1, 2008 the building was tested for recoverability and the fair value
was ascertained to be P10,000,000 on this date, with no change on
its remaining useful life. What is the impairment loss to be
recognized by Quanah in 2008?
a. 1,800,000 c. 2,850,000
b. 6,000,000 d. 2,500,000

117.An asset was acquired on January 1, 1999 for P10,000,000 was

revalued at the beginning of 2007. The asset was depreciated over
a useful life of 20 years using the straight-line method. The a
professional appraiser determined the asset to have a depreciated
replacement cost of P8,700,000 and was determined to have a
remaining life of 15 years. On January 1, 2010, the asset again is
revalued and is determined to have a depreciated replacement cost
of P3,480,000 with no change in its useful life. In recording
revaluation in 2010, how much revaluation decrease is charged
against income of 2010?
a. 1,320,000 c. 3,480,000
b. 1,580,000 d. 2,960,000

118. The recoverable amount of an impaired asset is equal to its

a. Fair value
b. Fair value or value in use whichever is lower
c. Value in use
d. Fair value or value in use whichever is higher

42
119. It is the amount obtainable from the sale of an asset or cash-
generating unit in an arm’s length transaction between
knowledgeable and willing parties, less cost of disposal.
a. Fair value
b. Fair value less cost to sell
c. Value in use
d. Undiscounted future cash flows expected to be derived from an
asset or cash-generating unit

120. The following statements pertain to recognition and

measurement of an impairment loss. Which statement is incorrect?
a. An impairment loss is the amount by which the carrying amount
of an asset exceeds its recoverable amount.
b. After the recognition of an impairment loss, depreciation of the
asset for the future periods should be equal to the revised
carrying amount less its residual value allocated on a systematic
basis over its original life.
c. An impairment loss shall be recognized in profit or loss
immediately.
d. If the recoverable amount of an asset is less than its carrying
amount, the carrying amount of the asset shall be reduced to its
recoverable amount.

121. White Printing Company determines that a printing press used in

its operations has suffered a permanent impairment in value
because of technological changes. An entry to record the
impairment should
a. Recognize an extraordinary loss for the period.
b. Include a credit to the equipment accumulated impairment losses
account.
c. Include a credit to the equipment account.
d. Not be made if the equipment is still being used.

43
122. It is the smallest identifiable group of assets that generate cash
inflows from continuing use that are largely independent of the cash
inflows from other assets or group of assets.
a. Foreign operation c. Foreign entity
b. Corporate asset d. Cash generating unit (CGU)

123 External sources of information about impairment of asset

include all of the following, except
a. Significant decline in the market value of the asset
b. Significant change in the technological, market, legal or
economic environment of the business in which the asset is
employed.
c. Increase in the interest rate or market rate of return on
investment, which will likely affect the discount rate in computing
value in use.
d. Obsolescence or physical damage of the asset

124. The estimates of future cash flows in calculating value in use

include all of the following, except
a. Future cash flows for improving or enhancing the asset’s
performance
b. Cash inflows from the use of the asset
c. Cash outflows incurred to generate cash inflows from the use of
the asset
d. Net cash flows from the disposal of the asset

125. Which statement is incorrect concerning an estimate of future

cash flows?
a. The discount rate used in the estimate should be the current rate
after tax
b. Foreign currency future cash flows should be forecast in the
currency in which they will be generated and discounted at
appropriate rate.
c. Future cash flows should be based on reasonable and
supportable assumptions.

44
 d. Future cash flows should be based on the most recent budgets
or financial forecast up to a maximum of 5 years.

126.If an impairment of property, plant and equipment is indicated, any

impairment loss is recorded at an amount equal to the
a. Excess of the carrying amount over the fair value of the asset
regardless of the discounted net cash flows from the asset.
b. Excess of the carrying amount over the discounted net cash
flows from the asset, regardless of the fair value of the asset.
c. Excess of the carrying amount over the recoverable amount of
the asset
d. Excess of the recoverable amount of the carrying amount of the
asset

127. If the assets are to be disposed of

a. The recoverable amount is the fair value less cost to sell.
b. The recoverable amount is the value in use
c The asset is not impaired
d. The recoverable amount is the carrying value

128. The best evidence if an asset’s fair value less cost to sell is
a. A price in a binding sale agreement in an arm’s length
transaction, adjusted for incremental cost directly attributable to
the disposal of an asset.
b. The market price of the asset in an active market.
c Best estimate between knowledgeable, willing parties in an arm’s
length transaction.
d. The higher between the price in a binding sale agreement and
the market price of the asset in an active market.

129. The estimates of future cash flows in calculating value in use

include all of the following, except
a. Cash flows from continuing use of the asset.
b. Cash outflows necessarily incurred to generate the cash inflows
from continuing use of the asset.

45
 c Net cash flows from the disposal of the asset at the end of its
useful life.
d. Income tax payments

130. Estimates of future cash flows normally would cover projections

over a maximum of
a. Five years c. Fifteen years
b. Ten years d. Twenty years

131.When allocating an impairment loss, such a loss should reduce the

carrying amount of which asset first?
a. Property, plant and equipment
b. Intangible assets
c. Goodwill
d. Current assets

132. Which is incorrect concerning the reversal of an impairment

loss?
a. The reversal of the impairment loss shall be recognized
immediately as an adjustment of the opening balance of retained
earnings.
b. The carrying amount of the asset shall be increased to its new
recoverable amount.
c. The increased carrying amount of the asset due to a reversal of
an impairment loss shall not exceed the carrying amount that
would have been determined, had no impairment loss been
recognized in the prior years.
d. Any reversal of an impairment loss on a revalued asset shall be
treated as a revaluation increase.

133. During December 2008, Quintessential Company determined that

there had been a significant decrease in market value of its
equipment. At December 31, 2009, Quintessential compiled the
following information concerning the equipment:

46
 Original cost 10,000,000
Accumulated depreciation 3,000,000
Expected undiscounted net future cash inflows
from the continued use and eventual disposal 6,000,000
Expected discounted net future cash inflows
from the continued use and eventual disposal 4,800,000
Fair value less cost to sell 4,000,000

What is the impairment loss that should be reported in the 2009

income statement?
a. 1,500,000 c. 1,000,000
b. 3,000,000 d. 2,200,000

134. Quail Company determined that due to obsolescence, equipment

with an original cost of P18,000,000 and accumulated depreciation
on January 1, 2008 of P8,400,000 had suffered permanent
impairment and as a result should have a carrying value of only
P6,000,000 as of the beginning of the year. In addition, the
remaining useful life of the equipment was reduced from 8 years to 3
years. In its December 31, 2008 balance sheet, what amount should
Quail report as accumulated depreciation and accumulated
impairment loss?
a. 12,000,000 c. 10,400,000
b. 14,000,000 d. 9,600,000

135. Armani Company is reviewing one of its business segments for

impairment. The carrying value of the segment’s net assets is
P25,000,000. Management has produced two computations for the
value in use of the business segment. The first value is
P19,000,000, which excludes the benefit to be derived from future
restructuring of the business segment. The second value is
22,000,000, which includes the benefit to be derived from future
restructuring. The fair value less cost to sell for the business
segment is P18,000,000. How much is the impairment loss that
should be recognized by Armani Company?

47
 a. 6,000,000 c. 7,000,000
b. 3,000,000 d. 2,000,000

136. Wyoming Company purchased a building on January 1, 2005 for

a total of P10,000,000. The building has been depreciated using the
straight-line method with a 25-year useful life and no residual value.
As of December 31, 2008, Wyoming is evaluating the building for
possible impairment. The building has a remaining useful life of 15
years and is expected to generate cash inflows of P700,000 per
year. The applicable discount rate is 8%. Round off present value
factor to two decimal places. The estimated fair value of the building
on December 31, 2008 is P5,300,000. How much should be
recognized as impairment loss on December 31, 2008?
a. 3,100,000 c. 4,700,000
b. 2,408,000 d. 0

137. Sergio Company acquired a machine on January 1, 2006 for

P5,000,000. The machine has a 10 year useful life, and to be
depreciated using the straight-line method with no residual value.
By the end of 2007, the machine was damaged by a catastrophic
accident occurring in the plant. The company’s engineers and
technicians could not repair this damage and therefore the
machine’s performance was expected to decline in the future. At
balance sheet date, a test for recoverability revealed the expected
net future undiscounted cash flows related to the continued use and
eventual disposal of the machine totaled P5,200,000. The
machine’s fair value on December 31, 2007 is P3,800,000 while the
discounted future cash flows amount to P4,200,000. What is the
depreciation expense to be recorded by Sergio for the year ended
December 31, 2008?
a. 525,000 c. 475,000
b. 500,000 d. 650,000

138. Korea Company acquired a machine on January 1, 2006 for

P8,000,000. The machine has a 10 year useful life, a P500,000

48
 residual value. The depreciated method used by the company is
straight-line. By the end of 2007, the machine was damaged by a
major accident occurring in the plant. The company’s engineers and
technicians could not repair this damage and therefore the
machine’s performance was expected to decline in the future and
unlikely to be sold at the end of its useful life. At balance sheet date
a test for recoverability revealed the expected net future
undiscounted cash flows related to the continued use and eventual
disposal of the machine totaled P7,000,000. The machine’s fair
value on December 31, 2007 is P6,600,000 with no residual value,
while the discounted future cash flows amount to P6,300,000. What
is the depreciation expense to be recorded by Korea for the year
ended December 31, 2008?
a. 825,000 c. 750,000
b. 812,500 d. 787,500

139. Chevron Company has determined its auto manufacturing

division is a cash-generating unit. The company calculated the
value in use of the division to be P9,000,000. The carrying amounts
of the identifiable net assets and allocated goodwill are as follows:

Inventory 2,000,000
Equipment 4,000,000
Building 6,000,000
Total 12,000,000

Chevron has also determined that the fair value less cost to sell of
the building is P5,100,000. What is the impairment loss to be
allocated to the equipment?
a. 1,000,000 c. 3,000,000
b. 1,400,000 d. 700,000

140. Quincy Company had purchased equipment for P10,000,000 on

January 1, 2006. The equipment had a 10-year life and a residual
value of 500,000. Quincy Company depreciated the equipment

49
 using the straight-line method. On December 31, 2007, Quincy
questioned the recoverability of the carrying amount of this
equipment. On December 31, 2007, the undiscounted expected net
future cash flows related to the continued use and eventual disposal
of the equipment totaled P6,000,000. The equipment’s fair value on
December 31, 2008 is P4,500,000, while the discounted cash flows
related to the equipment is P5,000,000. After the loss on impairment
was recognized it was determined that the useful life did not change
with no residual value. What is the carrying value of the equipment
on December 31, 2008?
a. 4,375,000 c. 7,150,000
b. 3,937,500 d. 5,250,000

141. Quantas Company reported an impairment loss of P4,000,000 in

its income statement for the year 2007. This loss was related to an
item of property, plant and equipment which was acquired on
January 1, 2006 with cost of P25,000,000, useful life of 10 years and
no residual value. On the December 31, 2007 balance sheet,
Quantas reported this asset at P16,000,000 which is the fair value
on such date. On December 31, 2008, Quantas determined that the
fair value of its impaired asset had increased to P19,000,000. The
straight-line method is used in recording depreciation of this asset.
What amount of gain on impairment recovery should Quantas report
in its 2008 income statement?
a. 5,000,000 c. 1,500,000
b. 3,500,000 d. 0

142. Baltimore Company has an oil platform in the sea. The company
has to decommission the platform at the end of its useful life, and a
provision was set up at the commencement of the production. The
carrying value of the provision is P8 million. The company has
received an offer of P20 million for the rights to the platform, which
reflects the fact that the owners have to decommission it at the end
of its useful life. Disposal cost would be P1,000,000. The value in
use of the oil platform is P26 million ignoring the decommissioning

50
cost. The carrying value of the oil platform is P28 million. What
amount should be recognized by Baltimore Company as impairment
loss for the current year?
a. 9,000,000 c. 1,000,000
b. 2,000,000 d. 0

51