lOMoARcPSD|21377486

PPE test bank for accounting students

Accounting (Governor Alfonso D. Tan College)

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Theory of Account
Francisco A. Camilon Jr.

PROPERTY, PLANT & EQUIPMENT

Multiple Choice –Theory
Questions:
1. Which is not an essential characteristic of property, plant, and equipment?
a. The property, plant and equipment are tangible assets.
b. The property, plant and equipment are used in production or supply of goods and
services, for rental purposes and for administrative purposes.
c. The property, plant and equipment are expected to be used over a period of more
than one year.
d. The property, plant and equipment are subjected to depreciation.

2. An item of property, plant and equipment shall 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. I only
b. II only
c. Both I and II
d. Neither I nor II

3. Major spare parts and standby equipment which are expected to be used over a period
of more than one year shall be classified as

a. Property, plant and equipment

b. Inventory
c. Non-current investment
d. Expense

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4. Which statement is correct concerning recognition of property of property, plant and

equipment?

I. Most spare part s and servicing equipment are usually carried as inventory and
recognized as expense when consumed.
II. If the spare parts and servicing equipment can be used only in connection with an
item of property, plant and equipment and their use is expected to be irregular, they
are accounted for as property, plant and equipment and are depreciated over their
useful life of the related asset, whichever is shorter.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

5. Under the cost model, subsequent to initial recognition as an asset, an item of property,
plant and equipment shall be carried at

a. Cost
b. Revalued amount
c. Cost less accumulated depreciation and any accumulated impairment loss
d. Revalued amount less accumulated depreciation and any accumulated impairment loss

6. The cost of an item of property, plant and equipment comprises all of the following,
except

a. Purchase price
b. Import duties and nonrefundable purchase taxes
c. Any cost directly attributable in bringing the asset to the location and condition for its
intended use
d. Initial estimate of the cost of dismantling and removing the item and restoring the
site, the obligation for which the entity does not incur when the item was acquired

7. Cost directly attributable to bringing the asset to the location and condition for its
intended use include all of the following , except

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a. Cost of employee benefits not arising directly from the construction and acquisition of
property, plant and equipment.
b. Cost of site preparation.
c. Initial delivery and handling cost.
d. Installation and assembly cost.

8. Cost that are not included in the cost of an item of property, plant and equipment but
are expensed immediately include all of the following, except

a. Cost of opening a new facility

b. Cost of introducing a new product or service, including cost of advertising and
promotional activities
c. Cost of conducting business in a new location, including cost of staff training
d. Cost of testing whether the asset is functioning properly

9. Cost that are not included in the carrying amount of an items or property, plant and
equipment but are expensed immediately include all of the following, except

a. Cost incurred while an item capable of operating in a manner intended b management

has yet to be brought into use or is operated at less than full capacity
b. Initial operating loss
c. Cost of relocating or reorganizing part or all of an entity’s operations
d. Professional fee arising directly from the acquisition of an item of property, plant and
equipment

10. It is the present value of the cash flows an entity expects to arise from the continuing
use of an asset from its disposal at the end of its useful life or expects to incur when
settling a liability.

a. Entity-specific value
b. Fair value
c. Value in use
d. Discounted value

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11. When payment for item of property, plant and equipment is deferred beyond normal
credit terms, the difference between the cash price equivalent and the total payments
shall be recognized as

a. Interest expense of the current year

b. Component of cost of the property, plant and equipment
c. Interest expense over the credit period
d. Interest expense over the life of the asset

12. The cost of an item of property, plant and equipment that is acquired in exchange for a
combination of monetary and non-monetary asset is measured at the
a. Fair value of the asset given up plus the amount of any cash or cash equivalent
transferred.
b. Fair value of the asset received plus the amount of any cash or cash equivalent
transferred.
c. Carrying amount of the asset given up plus amount of any cash or cash equivalent
transferred.
d. Carrying amount of the asset received plus the amount of any cash equivalent
transferred.

13. The cost of an item of property, plant and equipment acquired in a non-monetary
exchange is measured at the

a. Carrying amount of the asset given up

b. Fair value of the asset given up
c. Carrying amount of the asset received
d. Fair value of the asset received

14. value of the asset received in an exchange transaction, the cost of the asset acquired is
measured at

a. Fair value of asset given up

b. Fair value of asset received
c. Either the fair value of asset received or fair value of asset given up

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d. Neither the fair value of asset received nor the fair value of asset given up

15. If an item of property, plant and equipment is acquired in exchange for a non-monetary
asset and the exchange lacks commercial substance, the cost of the asset acquired is
measured at

a. Fair value of the asset given up

b. Fair value of the asset received
c. Carrying amount of the asset given up
d. Carrying amount of the asset received

16. Which is incorrect concerning acquisition of on item of property, plant and equipment
by self-construction?

a. The cost of self-constructed asset is determined using the same principles as for an
acquired asset.
b. Any internal profit eliminated in arriving at the cost of self-constructed asset.
c. The cost of abnormal amount of wasted material, labor and other resources incurred
in the production of self-constructed asset is included in the cost of the asset.
d. The cost of normal amount of wasted material, labor and other resources incurred in the
production of self-constructed asset is included in the cost of the asset.

17. Which of the following terms best describes the removal of an asset from an entity’s
statement of financial position?

a. De recognition
b. Impairment
c. Write off
d. Depreciation

18. The carrying amount of an item of property, plant and equipment shall be derecognized

I. On disposal

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II. When no future economic benefits are expected from the use or disposal of the
asset.
a. I only
b. II only
c. Either I or II
d. Neither I nor II

19.Gains and losses arising from the de recognition of an item of property, plant and
equipment shall be determined as the difference between.

a. Gross disposal proceeds and the cost of the asset

b. Gross disposal proceeds and the carrying amount of the asset
c. Net disposal proceeds and the cost of the asset
d. Net disposal proceeds and the carrying amount of the asset

20.Entities are encouraged to disclose all of the following information in relation to property,
plant and equipment, except

a. The carrying amount of temporarily idle property, plant and equipment.

b. The gross carrying amount of fully depreciated property, plant and equipment still in use.
c. The carrying amount of property, plant and equipment classified as held for sale.
d. The fair value of property, plant and equipment that is not materially different from
carrying amount when the cost model is used.

21 which of the following items shall not be capitalized into the cost of property, plant and
equipment?

a. Cost of excess materials resulting from a purchasing error

b. Cost of testing whether the asset works correctly
c. Initial delivery and handling cost
d. Cost of preparing the site for installation

22.At the beginning of the current year, an entity purchased a new machinery that it does
not have to pay until after three years. The total payment on maturity will include both

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principal and interest. The cost of the machine would be the total payment multiple by what
time value of money concept?

a. Present value of annuity of 1

b. Present value of 1
c. Future amount of annuity of 1
d. Future amount of 1

23. An entity installed a new production facility and incurred a number of expenses at the
point o installation. The entity’s account is arguing that most expenses do not quality for
capitalization. Included in those expenses are initial operating losses. The initial operating
losses shall be

a. Deferred and amortized over a reasonable period of time.

b. Expensed and charged to the income statement.
c. Capitalized as part of the cost of plant as a directly attributable cost.
d. Taken to retained earnings since it is unreasonable to present it as part of the current
year’s income statement.

24. An entity imported machinery to install in its new 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 the bank that it was being charged interest on the loan it had taken to
fund the cost of the plant.

What is the proper treatment of freight and interest expense?

a. Both expenses are capitalized.

b. Interest may be capitalized but freight is expensed.
c. Freight is capitalized but interest cannot be capitalized under these circumstances.
d. Both expenses are expensed.

25. The following statement s relate to the cost of an asset. Which statement is true?

I. The cost includes cash equivalents paid to acquire an asset.

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II. The cost includes the fair value of any nonmonetary consideration given to acquire an
asset.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

26. When an item of property, plant and equipment is acquired by issuing securities, which
of the following is the best basis for establishing the historical cost of the acquired asset?

a. Historical cost of the asset to the seller

b. Historical cost of a similar asset acquired in another transaction by the buyer
c. Fair value of the asset received or the fair value of the securities issued, whichever is
more d. readily determinable
d. Historical cost of the asset is zero since non-cash is paid in the acquisition

27. When a plant asset is acquired by deferred payment, which of the following conditions
generally does not indicate the need to consider the imputation of interest cost in the
transaction price?

a. The interest rate stated on the deferred obligation is significantly different from current
market interest rate.
b. The cash price of the plant asset is significantly different from the deferred obligation
assumed by buyer of the asset.
c. The instrument representing the deferred obligation is non-interest bearing.
d. The face amount of the instrument representing the deferred obligation is equal to the
market value of the plant asset exchanged.

28. A donated plant asset for which the fair value has been determined, and for which
directly attributable costs were incurred, shall be recorded at an amount equal to the

a. Directly attributable costs incurred.

b. Fair value and directly attributable costs incurred.

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c. Carrying amount and directly attributable costs incurred.

d. Carrying amount.

29. Donated equipment for which the fair value has been determined shall be as a debit to
the appropriate equipment account and a credit to

a. Other comprehensive income

b. Retained earning
c. Share capital
d. Income

30. Which of the following is the most appropriate policy as regards the allocation of join
overhead cost to plant and equipment constructed by the entity for its own use?

a. Assign no over head

b. Assign only variable overhead
c. Assign overhead equal to the amount that would have been assigned to production that is
curtailed because of the construction
d. Assign a proportionate share of overhead to the construction on the same basis as that
used for the assignment to normal production.

Multiple choice – Problem

(AICPA Adapted)

1. At the beginning of the current year, Town Company purchased for P5,400,000, including
appraiser’s fee of P50,000, a warehouse building and the land on which it is located. The
following data were available concerning the property.

Current appraised value Seller’s original cost

Land 2,000,000 1,400,000
Warehouse building 3,000,000 2,800,000

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5,000,000 4,200,000

What is the initial measurement of the land?

a. 2,140,000 solution:
b. 1,800,000 P5,400 x 2/5 = 2,160
c. 2,000,000
d. 2,160,000

ANSWER: d. 2,160,000

2. On August 1, 2010, Bamco Company purchased a new machine on a deferred payment

basis . A down payment of P100,000 was made and 4 monthly installment of P250,000
each are to be made beginning on September 1, 2010. The cash equivalent price of the
machine was P950,000. Bamco Company incurred and paid installation costs amounting
to P30,000.

What is the amount to be capitalized as cost of the machine?

a. 950,000
b. 980,000 solution:
c. 1,100,000 950,000 (cash equivalent price of the machine)
d. 1,130,000 30,000 ( paid installation cost)
-----------------
total: 980, 000
ANSWER: b. 980,000
3. Grey Company entered into a contract to acquire a new machine for its factory. The
machine, which had a cash price of P2,000,000, was paid as follows:

Down Payment 400,000

Note payable in 3 equal annual installments 1,200,000
20,000 shares of Grey Company with
A fair value of P40 per share 800,000
2,400,000

Prior to the machine’s use installation cost of P50,000 was incurred. The machine has a residual
value of P100,000.

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What is the initial measurement of the new machine?

a. 2,000,000 solution: cash price of the machine 2,000,000

b. 2,400,000 installation cost 50,000
c. 2,050,000 ----------------
d. 2,450,000 2,050,000

ANSWER: c. 2,050,000

4. On December 30,2010, Bart Company purchased a machine from Fell Company in

exchange for a noninterest bearing note requiring eight payments of P500,000. The first
payment was made on December 30,2010, and the other are due annually on December
30. At date of issuance, the prevailing rate of interest for this type of note was 11%.
Present value factors are as follows:

Present value of ordinary Present value of annuity

Period Annuity of 1 at 11% in advance of 1 at 11%
7 4.712 (500,000) = 2,356,000 5.231
8 5.146 + 500,000 5.712 (500,000) = 2,856,000
----------------------------
2,856,000

What is the initial cost of the machine?

a. 2,856,000
b. 2,356,000
c. 2,615,000
d. 2,573,000

ANSWER: a. 2,856,000

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5. Wendy Company acquired several fixtures for its new building, including display cases,
shelves and hanging racks. The invoice price of the fixtures was P700,000. The entity
received a 2% cash discount by paying within the discount period.

Freight and insurance during shipment totaled P3,000. Costs of assembling and installing
fixtures were P5,000. While installing a display case, a new employee carelessly broke a
glass top. This top was replaced at a cost of P2,000.

What is the total cost of the fixtures?

a. 694,000 solution: 7,000 x 98% = 686,000

b. 696,000 freight and insurance 3,000
c. 708,000 assembling and installing fixture cost 5,000
d. 710,000

ANSWER: a. 694,000

6. Lax Company recently acquired two items of equipment. The transactions are as follows:

Acquired a press at an invoice price of P3,0000,000 subjected to a 5% cash discount which

was taken. Cost of freight and insurance during shipment were P50,000 and installation cost
amounted to P200,000.
Acquired a welding machine at an invoice of P2,000,000 subjected to a 10% cash discount
which was not taken. Additional welding supplies were acquired at a cost of P100,000.

What is the increase in the equipment account as a result of the transactions?

a. 4,900,000 solution 3,000,000 x 95% = 2,850,000

b. 5,000,000 cost of freight 50,000
c. 5,100,000 installation cost 200,000
d. 5,200,000 ------------------
3,100,000

Solution 2,000,000 x 98% = 1,800,000

-----------------
4,900,000
ANSWER: a. 4,900,000

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Figaro Company acquired land and paid in full by issuing P600,000 of its 10 percent bonds
payable and 40,000 ordinary shares with par value of P10. The share was selling at P19 and the
bonds were trading at 102.

What is the initial cost of the land?

a. 988,00
b. 1,000,000
c. 1,372,000
d. 1,387,200

ANSWER: c. 1,372,000

7. Dawson Company has received a donation of land from a rich local philanthropist. The
land originally had a cost of P1,000,000. On the date of the donation, the land had a fair
value of P1,500,000 and an assessed value of P1,200,000.

How much income should be recognized from the donation?

a. 1,500,000
b. 1,200,000
c. 1,000,000
d. 0

ANSWER: a. 1,500,000

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8. Jazz Company purchased land with a current market value of P2,400,000. The carrying
amount of land was P1,305,000. In exchange for the land, Jazz Company issued 20,000
ordinary shares with par value of P100 and an estimated market value of P140 per share.
The shares are not traded in an established stock exchange.

What amount should Jazz Company record as cost of the land?

a. 1,305,000
b. 2,000,000
c. 2,400,000
d. 2,800,000

ANSWER: c. 2,400,000

9. On September 1, 2010, Ron Company issued 100,000 treasury share with P25 par value
for a parcel of land to be held as a future plant site. The treasury shares were acquired
by Ron Company at a cost of P30 per share. Ron Company’s share had a fair market
value of P40 on September 1,2010. Ron Company received P50,000from the sale of
scrap when an existing structure on the site was razed.

What is the initial measurement of the land?

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a. 4,000,000
b. 3,950,000
c. 3,000,000
d. 2,500,000

ANSWER: b. 3,950,000

10. Tres Company acquired the following plant assets during the current year.

Equipment- Acquired at an invoice price of P600,000, subject to a 5% cash discount

which was not taken.

Land- Acquired by issuing 10,000 shares of P50 par value when the market price of the
share was P120. The shares issued are treasury shares which had been acquired at a cost
of P90 per share. The fair value of the is P1,100,000.

Machinery- Acquired at a cost of P275,000. Installation cost was P7,000, trial run and
other testing cost P18,000, and construction of base, P10,000.

What is the total increase in property, plant and equipment as a result of plant asset
transactions?

a. 1,980,000
b. 1,970,000
c. 2,080,000
d. 1,770,000

ANSWER: a. 1,980,000

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11. At the beginning of the current year, Wing Company an old packaging machine, which
cost P1,200,000 and was 50% depreciated, for a used machine and paid a cash
difference of P160,000. The fair value of the old packaging machine was determined to
be P700,000. What is the cost of the new asset acquired?

a. 700,000
b. 860,000
c. 660,000
d. 600,000

ANSWER: b. 860,000

12. At the beginning of the current year, Bell Company exchanged an old machine, with a
carrying amount of P390,000 and a fair value of P350,000, and paid P100,000 cash for
another used machine having a list price of P500,000. At what amount should the
machine acquired in the exchange be recorded by Bell Company?

a. 450,000
b. 460,000
c. 490,000
d. 500,000

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ANSWER: a. 450,000

13. At the beginning of the current year , Winn Company traded in an old machine having a
carrying amount of P1,680,000 and paid a cash difference of P600,000 for a new
machine having a cash price of P2,050,000. What amount of loss should Winn Company
recognize on this exchange?

a. 600,000
b. 230,000
c. 370,000
d. 0

ANSWER: b. 230,000

14. During the current year, White Company paid P400,000 and exchanged inventory which
has a carrying amount of P2,000,000 and a fair value of P2,100,000 for other inventory
in the same line of business with fair value of P2,500,000.

What is the initial measurement of the new inventory received by White Company in
exchange?

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a. 2,400,000
b. 2,500,000
c. 3,200,000
d. 2,000,000

ANSWER: b. 2,500,000

15. Yola Company and Zero Company are fuel oil distributors. To facilitate the delivery of oil
to their consumers, Yola Company and Zero Company exchanged ownership of 1,200
barrels of oil without physically moving the oil. Yola Company and Zero Company
P300,000 to compensate for a difference in the grade of oil.

On the date of exchange, cost and market value of the oil were as follows:

Yola Company Zero Company

Cost 1,000,000 1,250,000
Market value 1,200,000 1,500,000

In Zero Company’s income statement, what amount of gain is reported from the
exchange of oil?

a. 250,000
b. 200,000
c. 50,000
d. 0

ANSWER: a. 250,000

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16. At the beginning of the current year, Wilbur Company traded in an old machine for a
newer model. Data relative to the old and new machines follow:

Old machine

Original cost 800,000

Accumulated depreciation on January 1 600,000
Average published retail value 170,000

New machine

List price 1,000,000

Cash price without trade in 900,000
Cash paid with trade in 780,000

What is the initial cost of the new machine acquired by the Wilbur Company in the
exchange?

a. 900,000
b. 950,000
c. 980,000
d. 1,000,000

ANSWER: a. 900,000

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