FINANCIAL ACCOUNTING AND REPORTING

Assessment Examination on Property, Plant, and Equipment

(Classification, Acquisition, Government Grant, Borrowing Cost, and Depletion)

Name: ______________________ Section: ____ Score: ____ / 80

Instructions: Choose the letter that corresponds to your answer and write them on a ½ crosswise yellow
paper. Any form of tampering is considered wrong.
1. In December 2016, West Company exchanged an old packing machine, which cost P120,000 and
was 50% depreciated, for a similar used machine and paid a cash difference of P16,000. The market
value of the old packaging machine was determined to be P70,000. For the year ended December 31,
2016, what amount of gain should West recognize on this exchange?
a. P 0 b. P16,000 c. P50,000 d. P10,000

2. HiloKanaba Company acquired new equipment on account on March 1, 2016 with a 5% discount if
paid within 15 days. The following information is available:
List price 3,500,000
Trade discount 20%
Removal of old equipment 100,000
Cost of installation 50,000
Cost of redecoration of office in connection with the purchase 250,000
Insurance taken during delivery 20,000
Repairs incurred while in transit 10,000
Transportation costs 30,000
If the invoice was paid on March 31, 2016, what should be the cost of equipment?
a. 2,760,000 b. 3,425,000 c. 2,900,000 d. 3,010,000

3. When a company decides to switch from a double declining balance method to a straight line
depreciation method, this change should be handled as a:
a. Change in accounting principle c. Change in accounting
estimate
b. Prior period adjustment d. Correction of error

4. In the case of non-monetary grant, which of the following accounting treatment is prescribed by PAS
20:
a. Record the asset at replacement cost and the grant at the nominal
value
b. Record the grant at a value estimated by the management
c. Record both the grant and the asset at fair value of the
nonmonetary asset
d. Record only the asset at fair value and not recognize the fair
value of the grant

5. If the qualifying asset is financed by specific borrowing, the capitalizable borrowing cost is equal to
a. Actual borrowing cost incurred
b. Actual borrowing cost incurred up to completion of asset
c. Actual borrowing cost incurred up to completion of asset minus
any investment income from the temporary investment of the borrowing
d. Zero

6. White Airlines sold a used jet aircraft to brown company for P 800,000 accepting a five year 6% note
for the entire amount. Browns incremental borrowing rate was 14%. The annual payment of principal
and interest on note was to be P189,930. The aircraft could have been sold at an established cash
price of P 651,460. The present value of an ordinary annuity of P1 at 8% for five periods is 3.99. The
aircraft should be capitalized on Browns book at:
a. P 949,650 b. P 757,820 c. P 800,000
d. P 651,460

7. A factory equipment with an estimated useful life of 10 years was purchased by Carranglan Co. on
December 30, 2017. The equipment was expected to have a residual value of P 5,000 at the end of its
service life. The sum of the years’ digit method was used in computing depreciation. For the year

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 ended December 31, 2021 the depreciation applicable to this equipment was P 42,000. The cost of the
factory equipment purchased on December 30, 2017 was:
a. P 325,000 b. P 335,000 c. P 293,750
d. P 330,000

8. On January 1, 2017, Major Company purchased a uranium mine for P 800,000. On that date, Major
estimated that the mine contained 1,000 tons of ore. At the end of the productive years of the mine,
Major Company will be required to spend P 4,200,000 to clean up the mine site. The appropriate
discount rate is 8%, and it is estimated that it will take approximately 14 years to mine all of the ore.
Major uses the productive output method of depreciation. During 2017, Major extracted 100 tons of
ore from the mine. Compute the amount of depreciation for 2017.
a. P 114,408 b. P 80,000 c. P 223,000
d. P 500,000

9. Citimart Inc. was granted a parcel of land by a local government authority. The condition attached to
this grant was that Citimart Inc. should clean up this land and lay roads by employing laborers from
the village in which the land is located. The entire operation will take three years and is estimated to
cost P 100 million. This amount will be spent in this way: P 20 million each in the first and second
years and P 60 million in the third year. The fair value of this land is currently P 120 million. How
much should be recognize as income from government grant at the end of the first year?
a. P 20,000,000 b. P 24,000,000 c. P 40,000,000
d. P 0

10. SEASON’S Inc. acquired an asset that had a cost of P 130,000. The asset is being depreciated over a
5 year period using the sum of the year’s digit method. It has a salvage value estimated at P 10,000.
The loss/gain if the asset is sold for P 38,000 at the end of the third year is:
a. P 4,000 gain b. P 68,000 loss c. P 20,000 loss
d. P 92,000 loss

11. Which one of the following statements best describes the term 'depreciation'?
a. The systematic allocation of an asset's cost less residual value
over its useful life
b. The removal of an asset from an entity's statement of financial
position
c. The amount by which the recoverable amount of an asset
exceeds its carrying amount
d. The amount by which the carrying amount of an asset exceeds its
recoverable amount

12. On 1 January 20X8 The Ebro Company commenced trading to provide key skills education facilities
in a region identified for technology development. Also on 1 January 20X8, the company received
two grants from its government for setting up its operations in this location:
Grant (a) – was paid to give financial assistance for start-up costs already incurred.
Grant (b) – was paid to subsidize the costs of purchasing computer software over the five-year
period. The company is almost certain to keep the facilities operational for the next five years.
The company's accounting year end is 31 December. Are the following statements concerning
recognition of the income from the two government grants true or false, according to IAS20
Government grants and government assistance?
(1) Income from Grant (a) should be recognized in full on receipt in 20X8.
(2) Income from Grant (b) should be recognized in full at the end of 5 years.

Statement (1) Statement (2) Statement (1) Statement (2)

a. False False c. True False
b. False True d. True True

13.The Scandium Company is commencing a new construction project, which is to be financed by

borrowing. The key dates are as follows: 15 May 20X8 Loan interest relating to the project starts to
be incurred
3 June 20X8 Technical site planning commences
12 June 20X8 Expenditures on the project start to be incurred
18 July 20X8 Construction work commences

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 According to IAS23 Borrowing costs, from what date can Scandium commence the capitalization of
borrowing costs?
a. 15 May 20X8 b. 3 June 20X8 c. 12 June 20X8 d. 18 July 20X8

14. The Palila Company purchased a varnishing machine for PHP150,000 on 1 January 20X7. The
company received a government grant of PHP13,500 in respect of this asset. Company policy was to
depreciate the asset over 4 years on a straight-line basis and to treat the grant as deferred income.
Under IAS20 Government grants and government assistance, what should be the carrying amounts of
the machine and the deferred income ("DI") balance at 31 December 20X8?
Carrying amount DI balance Carrying amount DI balance
a. 75,000 6,750 c. 81,750
6,750
b. 112,500 10,125 d. 75,000
13,500

15. The Whitianga Company commenced the construction of a new packaging plant on 1 February 20X7.
The cost of PHP1,800,000 was funded from existing borrowings. The construction was completed on
30 September 20X7. Whitianga's borrowings during 20X7 comprised:
Loan from Largo Bank: 800,000 at 6% per annum;
Loan from Andante Bank: 1 million at 6.6% per annum; and
Loan from Allegro Bank: 3 million at 7% per annum.

In accordance with IAS23 Borrowing costs, the amount of borrowing costs to be capitalized in
relation to the packaging plant is:
a. 0 b. 121,500 c. 81,000 d. 91,125

16.The Tanager Company purchased a boring machine on 1 January 20X1 for PHP81,000. The useful
life of the machine is estimated at 3 years with a residual value at the end of this period of PHP6,000.
During its useful life, the expected units of production from the machine are:
20X1 12,000 units
20X2 7,000 units
20X3 5,000 units
What should be the depreciation expense for the year ended 31 December 20X2, using the most
appropriate depreciation method permitted by IAS16 Property, plant and equipment?
a. 27,000 b. 21,875 c. 23,625 d. 25,000

17. On 1 January 20X7 The Hamerkop Company borrowed PHP6 million at an annual interest rate of
10% to finance the costs of building an electricity generating plant. Construction commenced on 1
January 20X7 and cost PHP6 million. Not all the cash borrowed was used immediately, so interest
income of PHP80,000 was generated by temporarily investing some of the borrowed funds prior to
use. The project was completed on 30 November 20X7. What is the carrying amount of the plant at
30 November 20X7?
a. 6,000,000 b. 6,470,000 c. 6,520,000
d. 6,550,000

18. The cost of property acquired by direct cash purchase includes the cash paid and:
a. the implied interest on the debt to finance the purchase.
b. the market value of any noncash asset surrendered to acquire the asset.
c. the estimated residual value of the asset.
d. directly attributable costs of bringing the asset to working condition for its intended use.

19. For assets acquired on credit or by installment, the cost or fair value is equal to:
a. Cash purchase price c. Installment price
b. Invoice price d. List price

20. A company purchased land to be used as the site for the construction 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. Classified as other income.

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 b. Netted against the costs to clear the land and expensed as
incurred.
c. Deducted from the cost of the plant.
d. Deducted from the cost of the land.

21. A method which excludes salvage value from the base for the depreciation calculation is:
a. Straight-line c. Double declining
balance
b. Sum of years’ digits d. Productive output

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

23. Bright Company purchased factory equipment which was installed and put into service January 3,
2002 at a total cost of P1,280,000. Salvage value was estimated at P80,000. The equipment is being
depreciated over 8 years by the double declining balance method. For the year 2003, how much
depreciation expense should Bright record on this equipment?
a. P225,000 b. P240,000 c. P300,000
d. P320,000

Items 24 to 26:
Harper is contemplating exchanging a machine used in its operations for a similar machine on May
31, 2002. Harper will exchange machines with either Austin Corporation or Lubin Company, or will
trade in the machine with Sub, Inc., a dealer in these machines. The data relating to the machines are
presented below:
Harper Austin Lubin Sub
Original cost of machine P162,500 P180,000 P150,000 P140,000
Accumulated depreciation
through May 31, 2002 98,500 70,000 65,000 0
Fair value at May 31, 2002 80,000 95,000 60,000 165,000

24. If Harper exchanges its used machine and P15,000 cash for Austin’s used machine, the gain that
Harper should recognized from this transaction for financial reporting purposes would be:
a. P0 b. P2,526 c. P15,000
d. P16,000

25. If Harper exchanges its used machine for Lubin’s used machine and also receives P20,000 cash, the
gain that Harper should recognize from this transaction for financial reporting purposes would be:
a. P 0 b. P4,000 c. P16,000
d. P25,000

26. If Harper exchanges its used machine and P85,000 cash for Sub’s machine, the gain that Harper
should recognize from this transaction for financial reporting purposes would be:
a. P 0 b. P8,242 c. P16,000
d. P25,000

27. In December 2017, Kawit Company exchanged an old machine, with a cost P6,000,000 and 50%
depreciated, for a dissimilar 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. Kawit should record the machine at
a. 6,000,000 b. 2,000,000 c. 3,500,000 d. 3,000,000

For items no. 28 – 30, Romblon Company and Looc Company are fuel oil distributors. To facilitate the
delivery of oil to customers. Romblon and Looc exchanged ownership of 5,000 barrels of oil without
physically moving the oil. Romblon paid Looc P9,000,000 to compensate for a difference in the grade of
oil. On the date of exchange, cost and fair value of oil were:
Romblon Company Looc Company
Cost 45,000,000 40,000,000

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Fair value 51,000,000 60,000,000

28. Romblon should record the oil inventory received in exchange at

a. 45,000,000 b. 54,000,000 c. 51,000,000 d. 60,000,000

29. Looc Company should record the oil inventory received in exchange at
a. 40,000,000 b. 34,000,000 c. 60,000,000 d. 51,000,000

30. In Looc’s income statement, what amount of gain should be reported from the exchange of oil?
a. 20,000,000 b. 6,000,000 c. 3,000,000 d. 0

31. Naic Company acquired an equipment by exchanging a similar used equipment with the following
data:
Equipment 10,000,000
Accumulated depreciation 3,500,000
Fair value 8,000,000
Cash received on exchange 2,000,000

Naic Company should record gain on exchange at

a. 1,500,000 b. 2,000,000 c. 375,000 d. 0

32. 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 b. Neither I nor II c. I only
d. II only

33. Which is not 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 and administrative purposes.
d. The property, plant and equipment are expected to be used over a period of more than one
year.

34. The depreciable amount of an item of property, plant and equipment is the
a. Cost of the asset, or other amount substituted for cost in the financial statements, less its
residual value.
b. Net amount which the enterprise expects to obtain for an asset at the end of its useful life
after deducting the expected costs of disposal.
c. Amount of cash or cash equivalent paid or the fair value of other consideration given to
acquire an asset at the time of its acquisition or construction.
d. Amount at which an asset is recognized in the balance sheet after deducting any accumulated
depreciation and accumulated impairment losses thereon.

35. It is the amount for which an asset could be exchanged between knowledgeable, willing parties in an
arm’s length transaction.
a. Cost b. Realizable value c. Sales price d. Fair value

36. Which is incorrect concerning recognition of property, plant and equipment?

a. Most spare parts and servicing equipment are usually carried as inventory and recognized as
an expense when consumed.
b. Major spare parts and stand-by equipment qualify as property, plant and equipment when the
enterprise expects to use them during more than one period.
c. If spare parts and servicing equipment can be used only in connection with an item of
property, plant and equipment, they are accounted for as property, plant and equipment and
are depreciated over the useful life of the related asset.
d. Property, plant and equipment acquired for safety and environmental reasons qualify for
recognition as assets.

37. The cost of an item of property, plant and equipment includes all of the following, except
a. Trade discount and rebates

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 b. Purchase price
c. Import duties and nonrefundable purchase taxes
d. Directly attributable costs of bringing the asset to working condition for its intended use.

38. Directly attributable costs of bringing the asset to working condition for its intended use include all,
except
a. Initial operating losses incurred prior to an asset achieving planned performance
b. Cost of site preparation
c. Delivery, handling and installation costs
d. Estimated cost of dismantling and removing the asset and restoring the site, to the extent that
it is recognized as a provision

39. 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
on 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.

40. Which is correct concerning measurement of property, plant and equipment?

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 cost less any accumulated
depreciation and any accumulated impairment loss.
III.The revaluation model means that property, plant and equipment are carried at revalued amount,
being the fair value at date of revaluation less any accumulated depreciation and subsequent
accumulated impairment loss.
a. I, II and III b. I only c. II and III only d. II only

41. The cost of an item of property, plant and equipment acquired in exchange for a nonmonetary asset or
combination of monetary and nonmonetary asset is measured at:
a. Fair value of asset given plus cash payment
1. Fair value of asset received plus cash payment
2. Book value of asset given plus cash payment
3. Book value of asset received plus cash payment

42. Which statement is incorrect regarding initial measurement of PPE?

a. PPE should be initially recorded at cost, which includes all costs necessary to bring the
asset to working condition for its intended use.
b. If payment for an item of property, plant, and equipment is deferred, interest at a market
rate must be recognized or imputed.
c. If an asset is acquired in exchange for another asset the cost will be measured at the fair
value.
d. If an asset acquired in exchange for another asset is not measured at fair value, its cost is
measured at the carrying amount of the asset received.

43. If the exchange transaction lacks commercial substance, the acquired item of property, plant and
equipment is measured at
a. Fair value of asset given plus cash payment
b. Fair value of asset received plus cash payment
c. Carrying amount of asset given plus cash payment
d. Carrying amount of asset received plus cash payment

44. When payment for an item of property, plant and equipment is deferred beyond normal credit terms,
its cost is the:
a. Cash price equivalent b. Invoice price c. Installment price d. List price

45. If an asset is acquired on credit or by installment, the difference between the total payments and cash
price, if any, should be

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 a. Considered interest expense of the current year
b. Included as part of the asset cost
c. Amortized as interest expense over the life of the asset
d. Amortized as interest expense over the credit period

46. Which is incorrect concerning self-constructed asset?

a. The cost of self-constructed asset is determined using the same principles as for an acquired
asset.
b. Any internal profits from construction are eliminated in arriving at 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 included 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.

47. Which statement is incorrect concerning government grants?

a. Grants in recognition of specific
expenses should be recognized as income over the period of the related expense.
b. Grants related to depreciable assets
should be recognized as income over the periods and in proportion to the depreciation of the
related assets.
c. Grants related to nondepreciable assets
requiring fulfillment of certain conditions should be recognized as income immediately.
d. Grants that become receivable as
compensation for expenses or losses already incurred should be recognized as income of the
period in which the grants become receivable.

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

49. Government grants related to income are presented preferably as

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

50. When computing the amount of interest cost to be capitalized, the concept of “avoidable interest”
refers to
a. The total interest cost actually
incurred.
b. A cost of capital charge for
stockholders’ equity.
c. That portion of total interest cost
which would not have been incurred if expenditures for asset construction had not been
made.
d. That portion of average accumulated
expenditures on which no interest cost was incurred.

51. 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.

52. 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

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 d. Expenditures for sidewalks, pavements, parking lot and driveways

53. The cost of the plant asset “building” should usually include all, except bonus
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

54. 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.

55. Which is incorrect concerning the concept of the depreciation?

a. The depreciable amount of an item of property, plant and equipment should be allocated on a
systematic basis over its useful life.
b. The depreciation method should not reflect the pattern in which the asset’s economic
benefits are consumed by the enterprise.
c. The depreciation charge for each period should be recognized as an expense, unless it is
included in the carrying amount of another asset.
d. The estimation of the useful life of an item of property, plant and equipment is a matter of
judgment based on experience of the enterprise with similar assets.

56. 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 residual value 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 policy.

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

58. 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 estimate 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. I only b. II only c. Both I and II d.
Neither I nor II

59. All of the following factors are considered in determining the useful life of an asset, except
a. Expected usage of the asset by the enterprise
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value

60. The sum of units method of depreciation results in

a. Constant charge over the useful life of the asset

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 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

61. Technical obsolescence arises from

a. Expected usage of the asset
b. Expected physical wear and tear
c. Expiry date of related lease of the asset
d. Change or improvements in production or change in the market demand for the product
output of the asset.

62. 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

63. 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.

64. An item of property, plant and equipment that is retired from active use and held for disposal is
carried at
a. Net realizable value
b. Carrying amount
c. Carrying amount or net realizable value, whichever is higher
d. Carrying amount or net realizable value, whichever is lower

65. 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

66. Dividends representing a return of capital to stockholders are not uncommon among enterprises
which:
a. Use accelerated depreciation
b. Use straight line depreciation
c. Recognize both functional and physical factors in depreciation
d. Do not expect to purchase additional property after depleting
existing property.

67. Depletion expense:

a. Is usually part of cost of goods sold.
b. Includes tangible equipment cost in the
depletion base
c. Excludes intangible equipment cost
from the depletion base.
d. Excludes restoration cost from the
depletion base.

68. During 2017 Magdiwang Company had the following transactions pertaining to its new office
building:

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 Purchase price of land 1,500,000
Legal fees for contract to purchase land 50,000
Architect’s fees 200,000
Demolition of old building on site 150,000
Sale of scrap from old building 20,000
Construction cost of new building (fully completed) 9,000,000

In Magdiwang’s December 31, 2017 balance sheet, what amounts should be reported as the cost of
land and building?
Land Building Land Building
a. 1,500,000 9,380,000 c. 1,550,000 9,330,000
b. 1,680,000 9,200,000 d. 1,550,000 9,200,000

69. On January 1, 2017, Tagaytay Company purchased a tract of land with an old building which was
razed shortly after acquisition. The costs incurred in connection with the acquisition were:
Purchase price 5,000,000
Agent commission 250,000
Legal fees for the purchase contract 100,000
Guarantee insurance 10,000
Cost of razing the old building 200,000
Salvage value of old building materials 50,000
Property taxes for 2004 and 2005 (equally each year) 300,000
Option paid for an alternative land which was not acquired 30,000
Cost of relocating squatters 20,000

The cost of the land should be:

a. 5,680,000 b. 5,660,000 c. 5,830,000
d. 5,530,000

70. Tanza Company entered into a P10,000,000 fixed contract with Philstress Company on January 1,
2005 for the construction of a new building. On January 1, 2005, Tanza obtained a loan of
P10,000,000 at an interest rate of 12% to finance specifically the construction. Availments from the
loan may be made quarterly at unequal amounts. Total interest incurred for 2005 was P900,000.
Prior to their disbursement, the proceeds from the loan were temporarily invested and earned interest
income of P50,000. The building was completed on December 31, 2005. Additional costs incurred
during the construction were P200,000 for plans, specifications and blueprint, and P350,000 for
architectural design and supervision.

Tanza Company follows the alternative treatment of capitalizing borrowing cost. The cost of the
building should be:
a. 11,400,000 b. 11,450,000 c. 10,000,000 d. 10,550,000

71. Maragondon Company had the following borrowings during 2017. The borrowings were made for
general purposes but the proceeds were used in part to finance the construction of a new building:
Principal Interest
12% bank loan 10,000,000 1,200,000
15% long-term loan 20,000,000 3,000,000

The construction began on January 1, 2017 and was completed on December 31, 2017. Expenditures
on the building were made as follows:

January 1 8,000,000
June 30 8,000,000
December 31 4,000,000

Following the alternative treatment, the capitalizable borrowing cost should be

a. 1,680,000 b. 4,200,000 c. 1,400,000 d. 1,620,000

72. On January 1, 2017, Kawit Company borrowed P6,000,000 at an interest rate of 10% specifically for
the construction of its new building. Interest earned from the temporary investment of the proceeds
the loan prior to their disbursement amounted to P75,000. Kawit also had the following other loans

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 in 2005 which were borrowed for general purposes. The proceeds of these loans were used in part for
the construction of the building:
Principal Interest
10% bank loan 4,500,000 450,000
12% long-term loan 6,000,000 720,000

The construction began on January 1, 2017 and the building was completed on December 31, 2017.
Expenditures on the building were made as follows:
January 2 1,500,000
April 1 3,750,000
July 1 4,500,000
September 30 3,750,000
December 31 1,500,000
15,000,000

The amount of capitalizable borrowing cost is

a. 1,350,000 b. 690,000 c. 525,000 d. 165,000

73. During 2017, Dasmariñas Company installed a production assembly line to manufacture furniture. In
2017, Dasmariñas purchased a new machine and rearranged the assembly line to install this machine.
The rearrangement did not increase the estimated useful life of the assembly line but it did result in
significantly more efficient production. The following expenditures were incurred in connection with
this project:

Machine 5,000,000
Labor to install new machine 400,000
Parts added in rearranging the assembly line to provide future benefits 2,000,000
Labor and overhead to rearrange the assembly line 600,000

What amount of the above expenditures should be capitalized in 2017?

a. 8,000,000 b. 5,400,000 c. 7,400,000 d. 2,600,000

74. On January 1, 2017, Carmona Company received a grant of P50 million 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, P4 million,
P8 million, P12 million and P16 million. How much income from the government grant should be
recognized in 2017?
a. 50,000,000 b. 12,500,000 c. 5,000,000
d. 0

75. On January 1, 2016, Indang 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 useful
life of 25 years. The facility was completed in early 2017. Indang Company should include in its
2017 income statement an income from the government at:
a. 50,000,000 b. 2,000,000 c. 2,400,000 d. 0

76. On January 1, 2017, Corregidor Company is granted a large tract of land in the Cordillera region by
the Philippine government. The fair value of the land is P10 million. Corregidor Company is required
by the grant to construct chemical research facility and employ only personnel residing in the
Cordillera region. The estimated cost of the facility is P50 million with useful life of 20 years.
Corregidor Company should recognize in 2017 an income from government grant at:
a. 10,000,000 b. 2,500,000 c. 500,000 d. 0

77. Lemery Company acquired property in 2017 which contains mineral deposit. The acquisition cost of
the property was P20,000,000. Geological estimates indicate that 5,000,000 tons of mineral may be
extracted. It is further estimated that the property can be sold for P5,000,000 following mineral
extraction. For P2,000,000, Lemery is legally required to restore the land to a condition appropriate
for resale. After acquisition, the following costs were incurred:
Exploration cost 13,000,000
Development cost related to drilling of wells 10,000,000
Development cost related to production equipment 15,000,000

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 The company extracted 600,000 tons of the mineral in 2017 and sold 450,000 tons. In the 2017
income statement, what amount of depletion is included in cost of sales?
a. 4,800,000 b. 3,600,000
c. 5,400,000 d.
4,050,000

78. Calaca Company quaries limestone, crushes it and sells it to be used in road building. Calaca paid
P20,000,000 for a certain quarry on January 1, 2016. The property can be sold for P4,000,000 after
production ceases. The original total estimated reserves totaled 5,000,000 tons. Calaca quarried
500,000 tons in 2016 and 1,500,000 tons in 2017. An engineering study performed in 2005 indicated
that as of December 31, 2017, 4,500,000 tons were available. Calaca Company should record 2017
depletion at:
a. 3,600,000 b. 4,800,000 c. 6,000,000
d. 4,500,000

79. On July 1, 2017, Balayan 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.
Balayan expects to extract and sell 100,000 tons per month. Balayan Company purchased new
equipment on July 1, 2017 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 2017?
a. 1,800,000 b. 2,100,000 c. 1,125,000 d. 3,600,000

80. Calatagan Company provides the following balances at the end of 2017:
Wasting asset, at cost 100,000,000
Accumulated depletion 30,000,000
Capital liquidated 10,000,000
Retained earnings 15,000,000
Depletion based on 250,000 units extracted at P50 per unit 12,500,000
Inventory of resource deposit (50,000 units) 6,000,000

Calatagan can declare maximum dividend on December 31, 2017 of:

a. 32,500,000 b. 45,000,000
c. 29,000,000 d.
15,000,000

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