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FAR OCAMPO/OCAMPO
FAR.3106-Property, Plant and Equipment – Depreciation and Derecognition OCTOBER 2021

DISCUSSION PROBLEMS
1. What is depreciation? Use the following information for the next three questions.
a. The systematic allocation of the depreciable
An entity has a machine with the following details:
amount of an asset over its useful life.
b. The cost of an asset, or other amount substituted Cost P1,750,000
for cost, less its residual value. Residual value P155,000
c. The removal of a previously recognized asset from Year purchased 2014
an entity’s statement of financial position. Useful life 10 years
d. Price that would be received to sell an asset in an Expected units of production 100,000
orderly transaction between market participants at Units produced in 2020 8,000
the measurement date.
It is the entity’s policy to take full year’s depreciation in
2. Depreciation of an asset begins the year of disposal and none in the year of acquisition.
a. When it is available for use.
b. When it is actually used. Compute deprecation for 2020 using the appropriate
c. When it is retired from active use. method.
d. When it is derecognized.
7. The machine’s service potential declines with use.
3. Depreciation of an asset ceases a. P175,000 c. P140,000
a. At the date that the asset is derecognized. b. P159,500 d. P127,600
b. At the date that the asset is classified as held for
sale in accordance with PFRS 5 8. Sum-of-the-years’ digits method
c. At the earlier of a or b. a. P174,000 c. P145,000
d. At the later of or b. b. P159,000 d. P116,000

4. Depreciation is not recognized if 9. 200% declining-balance method

a. The fair value of the asset exceeds its carrying a. P114,688 c. P91,750
amount. b. P104,530 d. P83,624
b. The asset becomes idle.
c. The asset is retired from active use.
d. The asset’s residual value exceeds its carrying 10. Holdaway, Inc., a small furniture manufacturer,
amount. purchased the following assets at the end of the year.
Asset # Cost R.V. D.A. Life
5. The Seoul Company purchased an office equipment with
1 P24,000 P5,000 P19,000 5 years
a useful life of 10 years on 1 June 2020 for P4,500,000.
2 900 130 770 7 years
At its year end of 31 December 2020, the amount the 3 320 - 320 8 years
company would receive from the disposal of the asset if
4 9,000 500 8,500 5 years
it was already of the age and in the condition expected
P34,220 P5,630 P28,590
at the end of its useful life was estimated at P300,000.
Inclusive of inflation the actual amount expected to be The group depreciation rate is
received on disposal was estimated at P500,000. a. 16.51% c. 19.76%
What should be the depreciation charge for the year b. 15.61% d. 17.96%
ended 31 December 2020?
a. P420,000 c. P233,333 SOLUTION GUIDE:
b. P245,000 d. P210,000

6. The depreciation method used shall reflect the pattern

in which the asset’s future economic benefits are
expected to be consumed by the entity. Which
statement is incorrect regarding depreciation methods?
a. Straight-line depreciation results in a constant
charge over the useful life if the asset’s residual
value does not change.
b. The diminishing balance method results in a
decreasing charge over the useful life.
c. The units of production method results in a charge
based on the expected use or output.
d. A depreciation method that is based on revenue
that is generated by an activity that includes the
use of an asset is appropriate.
11. Takatak, Inc., uses the group depreciation method for
its furniture account. The depreciation rate used for
furniture is 21%. The balance in the furniture account
on December 31, 2019, was P125,000, and the
balance in Accumulated Depreciation - Furniture was
P61,000. The following purchases and dispositions of
furniture occurred in 2020 (assume that all purchases
and disposals occurred at the beginning of each year).

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EXCEL PROFESSIONAL SERVICES, INC.

Assets Sold 15. As of January 1, 2020, Seniors decided to change the

Assets Purchased Cost Selling Price method of computing depreciation on its sole piece of
equipment from the sum-of-the-years' digits method
P35,000 P27,000 P8,000
to the straight-line method. The equipment, acquired
The carrying amount of furniture at December 31, in January 2017 for P520,000, had an estimated life of
2020 is five years and a salvage value of P20,000. The
a. P71,070 c. P63,070 amount of the depreciation expense for 2020 is
b. P64,750 d. P44,070 a. P100,000 c. P50,000
b. P 60,000 d. P42,000

12. Kuya Company uses hand tools in its manufacturing

activities. On January 1, 2020, there are 800 of such 16. Useful life of Property, Plant and Equipment is:
tools on hand at a cost of P200 each. Acquisition and a. The period over which an asset is expected to be
retirement in the year 2020 are: available for use by an entity.
b. The number of production or similar units expected
Estimated value
to be obtained from the asset by an entity.
Acquisition Retirement at year end
c. Either a or b.
400 @ P300 300 @ P50 P200,000 d. Neither a nor b.
Assuming that retirements are on a first-in, first-out
basis, which of the following statements is true? 17. Which of the following factors are considered in
a. The depreciation using the retirement method is determining the useful life of an asset?
P60,000. I. Expected usage of the asset
b. The depreciation using the replacement method is II. Expected physical wear and tear
P90,000. III. Technical or commercial obsolescence
c. The depreciation using the inventory method is IV. Legal or similar limits on the use of the asset
P75,000. a. I, II, III and IV
d. The retirement method yields the lowest amount of b. I, II and III only
depreciation compared to replacement and c. I, II and IV only
inventory methods. d. I and II only
SOLUTION GUIDE:
18. On January 1, 2018, Paete Company signed a 12-year
lease for a building. Paete has an option to renew the
lease for an additional 8-year period on or before
January 1, 2022. During January 2020, Paete made
substantial improvements to the building. The cost of
the improvements was P3,600,000, with an estimated
useful life of 15 years. At December 31, 2020, Paete
intended to exercise the renewal option. Paete has
taken a full year’s depreciation on this improvement.
What should be the depreciation charge for the year
ended 31 December 2020?
a. P360,000 c. P240,000
b. P300,000 d. P200,000

13. Pantabangan Company takes a full year’s depreciation 19. Which statement is incorrect regarding derecognition
in the year of an assets acquisition, and no of property, plant and equipment?
depreciation in the year of disposition. Data relating to a. Derecognition is the removal of a previously
one depreciable asset acquired in 2018, with residual recognized asset from an entity’s statement of
value of P900,000 and estimated useful life of 8 years, financial position.
at December 31, 2019 are: b. An asset should be removed from the statement of
financial position on disposal or when it is
Cost P9,900,000 withdrawn from use and no future economic
Accumulated depreciation 3,750,000 benefits are expected from its disposal.
Using the same depreciation method in 2018 and c. The gain or loss on disposal is the difference
2019, how much depreciation should Pantabangan between the net disposal proceeds and the
record in 2020 for this asset? carrying amount and should be recognized in the
a. P1,125,000 c. P1,650,000 income statement.
b. P1,250,000 d. P1,500,000 d. Gains on disposal of property, plant and equipment
may be classified as revenue.

14. The residual value, the useful life of an asset and the
depreciation method applied to an asset shall be
reviewed
a. At least at each financial year-end.
b. At least every two years.
c. At least every three years.
d. Only if there is an indication they may have
changed since the most recent annual reporting
date.
20. Entity A acquired an asset that had a cost of P130,000.
The asset is being depreciated over a 5-year period
using the sum-of-the-years’ digit method. It has a
salvage value estimated at P10,000. The loss/gain if
the asset is sold for P38,000 at the end of the third
year is
a. P4,000 gain c. P68,000 loss
b. P20,000 loss d. P92,000 loss

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EXCEL PROFESSIONAL SERVICES, INC.

Use the following information for the next three questions. 26. Bugis Corp. acquired a machine on January 1, 2012.
Details of the machine at December 31, 2019 are
Riles Truckers, Inc. acquired a heavy road transporter on
given below:
January 1, 2014 at a cost of P10 million. The estimated
useful life is 10 years. On January 1, 2020, the powertrain Depreciation
requires replacement, as further maintenance is Component Cost basis
uneconomical due to the off-road time required. The Engine P170,000,000 Useful life of
remainder of the vehicle is perfectly roadworthy and is 40,000 hours
expected to last for the next four years. The cost of the Outer casings 510,000,000 25 years
new powertrain is P4.5 million. straight line
Other 12 years
21. Assuming that the original cost of the powertrain is P3 components 255,000,000 straight line
million, the total depreciation expense in 2020 is P935,000,000
a. P2,200,000 c. P1,150,000
b. P1,825,000 d. P1,450,000 During the year 2020, the following events took place:
a) Engine, which had run for 30,000 hours till date
22. If an entity recognizes in the carrying amount of an developed serious snags. It was replaced by a
item of property, plant and equipment the cost of a better engine with a cost of P238 million and
replacement for part of the item, then it derecognizes estimated life of 50,000 hours. The new engine
the carrying amount of the replaced part was used for 5,000 hours during the year.
a. If the replaced part had been depreciated b) Polishing and painting was done to the outer
separately. casings at a cost of P1.3 million.
b. If the asset is depreciated using components c) Other components were upgraded at a cost of
depreciation. P102 million. The remaining life of the other
c. If it is practicable for an entity to determine the components is 5 years.
carrying amount of the replaced part. Compute the total depreciation for the year 2020,
d. Regardless of whether the replaced part had been assume that all the work mentioned above was
depreciated separately. completed at the beginning of 2020.
a. P85,850,000 c. P90,950,000
23. Assuming that the original cost of the powertrain is not b. P81,676,470 d. P81,600,000
separately identifiable and the appropriate discount
rate is 5% (the present value of 1 at 5% for 6 years is
0.7462), the total depreciation expense in 2020 is 27. In relation to depreciation, an entity’s financial
a. P1,000,000 c. P2,934,362 statements shall disclose
b. P2,500,000 d. P1,789,210 I. The depreciation methods used
II. The useful lives or the depreciation rates used
24. When an entity allocates depreciation to the separate III. A reconciliation of the carrying amount at the
parts of an asset and each part is accounted for beginning and end of the period showing
separately, the entity is using which of the following depreciation
approaches to depreciation? IV. Whether depreciation during the period is
a. Periodic depreciation recognized in profit or loss or as a part of the cost
b. Segment depreciation of other assets
c. Replacement cost depreciation V. Accumulated depreciation at the end of the
d. Components depreciation period.

25. Which statement is incorrect regarding ‘components a. I, II, III IV and V c. I, II and III only
depreciation’? b. I, II, III and IV only d. I, II and IV only
a. Each part of an item of property, plant and
equipment with a cost that is significant in relation
to the total cost of the item shall be depreciated
separately. J - end of FAR.3106 - J
b. An entity allocates the amount initially recognized
in respect of an item of property, plant and
equipment to its significant parts and depreciates
separately each such part.
c. It may be appropriate to depreciate separately the
airframe and engines of an aircraft, whether owned
or subject to a finance lease.
d. An entity shall not depreciate separately the parts
of an item that do not have a cost that is
significant in relation to the total cost of the item.

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