INTERMEDIATE ACCOUNTING 3 (CA51016)

MOCK PRELIMINARY EXAMINATION REVIEWER

Prepared by the Mentors’ Circle Committee of the UST – Junior Philippine Institute of Accountants

THEORIES (2 pts each) PROBLEM SOLVING (3 pts each)

1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
6. 6.
7. 7.
8. 8.
9. 9.
10. 10.
11. 11.
12. 12.
13. 13.
14. 14.
15. 15.
16. 16.
17. 17.
18. 18.
19. 19.
20. 20.

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I. Theories.

Multiple Choice. Choose the best answer.

1. Rosaria Company planned to construct a new headquarters in Quezon City. The

company decided to borrow cash from a financing company to fulfill the funding of
the construction. Of the said borrowings, a loan of Php 10,000,000 with an interest
rate of 5% was obtained and to used specifically to construction only. Proceeds of the
loan were invested and earned an interest of Php 50,000. How should the earned
interest of Php 50,000 be treated?
A. To be recognized as interest revenue
B. To be added to the fund for construction
C. Netted against the actual interest to be capitalized
D. Ignore

2. A machine was acquired 5 years ago, remaining useful life of the said machine is 20
years. After review of experts, it is recommended that the machine should have a
remaining life of 10 years. The accountant made the said revisions, how should the
accountant depreciate the machine after revisions?
A. 5 years only
B. 20 years
C. 10 years
D. 25 years

3. Which of the following statements are in accordance with PAS 36?

Statement 1: An asset is impaired when the carrying amount exceeds its
recoverable amount.
Statement 2: An impairment loss on a revalued asset with a corresponding
revaluation surplus shall be recognized immediately in profit or loss.
A. Statement 1 only
B. Statement 2 only
C. Both statements are correct.
D. None of the statements are correct.

4. TIAN COMPANY is a wholly owned subsidiary of PHUPHA COMPANY. PHUPHA

has a building that it leases out to TIAN under an operating lease arrangement. How
should this building be presented in (1) PHUPHA’s individual financial statements
and (2) the group’s consolidated financial statements?
A. (1) Investment property; (2) Property, plant, and equipment
B. (1) Property, plant, and equipment; (2) Investment property
C. (1) Investment property; (2) Investment property
D. (1) Property, plant, and equipment; (2) Property, plant, and equipment

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5. A transfer of classification from property, plant, and equipment to investment may
include the following entries EXCEPT:
A. Debit to revaluation loss
B. Credit to revaluation loss
C. Debit to revaluation surplus
D. Credit to revaluation surplus

6. Which of the following statements is/are correct?

Statement 1: Tangible equipment costs associated with machinery used to extract the
mineral resource do not form part of the depletable cost.
Statement 2: PFRS 6 applies to expenditures incurred before the entity has obtained
the legal rights to explore a specific area and after the technical feasibility and
commercial viability of extracting a mineral resource.
A. Both statements are correct
B. Statement 1 only
C. Statement 2 only
D. None of the above

7. The two accounting policies applied on Exploration and Evaluation Assets are
_______ and ______.
A. Percentage of completion method; full-cost method
B. Cost recovery method; successful efforts method
C. Percentage of completion; cost recovery method
D. Successful efforts method; full-cost method

8. The following independent transactions are as follows:

I. ICHIKA CO. was able to create an original script for an independent film.
The same company also paid legal fees to make it a copyright and thus
recognize it as directly attributable cost.
II. NINO CO. established a café and it is open for franchise. The company
incurred startup costs in order to establish a franchise. This cost is recognized
as directly attributable cost.
III. MIKU CO. created an original recipe and become a trademark. It consumed
various ingredients and used cooking equipment in order to obtain a good
recipe. This cost to create a recipe is recognized as an expense.
IV. YOTSUBA CO. was able to make a patent, however there are inefficiencies
found in the same patent before it becomes useful for the company. The cost
of inefficiencies is recognized as expense.
V. ITSUKI CO. created a software to track food deliveries. The employees who
helped creating the software receive additional employee benefits in
exchange for contribution. The cost of these benefits is recognized as
directly attributable cost.

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 VI. FUTARO CO. created a software in order to track students’ records. It
trained staff so that they can operate the software effectively. The cost for
this training is recognized as an expense.

Which of the following statements above is/are accounted for correctly?

A. I, II, III, IV
B. I, III, IV, VI
C. I, IV, V, VI
D. I, II, III, IV, V, VI

9. Which among the following expenses incurred in developing a software program is

capitalized?
A. Costs incurred with high uncertainty of future benefits.
B. Costs incurred before technical feasibility is established.
C. Costs incurred when the entity has produced a detailed program design.
D. Costs incurred to produce the software.

10. All of the following are characteristics of goodwill except:

A. It is identified with the entity as a whole.
B. It cannot be identified separately.
C. It shall not be recognized as an asset.
D. It is the excess of payment over the carrying value of the net assets.

TRUE or FALSE.

11. An investment property is subsequently measured using either the cost model or the
revaluation model.
12. A gain or loss on transfer of investment property can only be recognized if the
investment property is carried at the cost model.
13. Exploration and evaluation assets are classified on the statement of financial position
under property, plant, and equipment only.
14. Any subsequent expenditures on intangible assets are expensed unless these
expenditures provide economic benefits in excess of the originally assessed standard
of performance.
15. Research and development costs that have been recognized as expense may be
recognized as part of the cost of an asset as long as subsequently, technical feasibility
is established.
16. A biological asset is initially recognized at its fair value less costs to sell.
17. Bearer plants and bearer animals are accounted for as Property, Plant, and Equipment
under PAS 16.

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 18. The land on which biological assets are being cultivated must also be classified as a
biological asset.
19. Agricultural produce that are subject to processing are no longer covered by PAS 41
but by PAS 2.
20. It is required by PAS 41 for an entity to distinguish between fair value fluctuations
arising from price changes and fair value fluctuations arising from physical changes.

II. Problem Solving.

Supply the Answer.
PROBLEM 1
PPE – SUBSEQUENT EXPENDITURES AND CHANGES IN ACCOUNTING ESTIMATE
On July 1, 2019, CHARMY CO. acquired an equipment and it is the policy that time by the company to
depreciate all of its assets using the straight-line method. Details regarding the equipment includes a cost
of P5,000,000, residual value of 10% of cost, and an estimated useful life of 5 years. During the start of
2022, CHARMY decided to change its policy from straight-line method to double-declining balance
method. In addition, the company terms in its long-term assets also changed, extending the remaining useful
life of the asset to 5 years, without residual value.
1. What is the revised depreciation charge for 2022?

2. How much is the carrying value of the equipment at the end of 2022?

PROBLEM 2
PPE – IMPAIRMENT LOSS
OISHI CO. purchased a group of machines on January 1, 2014 for a total of P4,000,000. The machineries
have been depreciated using the straight-line method with a 20-year useful life and 5% residual value. On
December 31, 2020, it has been determined that the group of machinery constitutes a cash generating unit
for purposes of applying PAS 36. Upon analysis, the following facts about future expected cash inflows
and outflows become apparent based on the diminishing productivity expected of the machinery as it ages,
and the increasing costs that will be incurred to generate output from the machines.

Year Revenues Costs, excluding PV of Discount Rate of

depreciation 5%
2021 1,225,000 184,000 0.95
2022 1,240,000 526,000 0.91
2023 1,195,000 765,000 0.86
2024 880,000 495,000 0.82
TOTAL 4,540,000 1,970,000

The fair value less cost to sell the machinery in this cash-generating unit is determined by
reference to use machinery quotation sheets obtained from a prominent dealer. After deducting
disposition costs, the net selling price is calculated as 2,234,500.

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 3. What is the amount of impairment loss to be recognized by OISHI CO. on
December 31, 2020?

PROBLEM 3
PPE – REVALUATION
On July 1, 2019, GILMORE Co. purchased an equipment costing ₱1,200,000 with residual value of
₱10,000 and estimated to have a useful life of 8 years. The company employs the double-declining balance
method of depreciation and computes such on the basis of the nearest full month.
An appraisal made on December 31, 2020, showed that the equipment’s fair value on that date is ₱950,000
and no proceeds can be expected at the end of its useful life.
GILMORE Co. adopts the revaluation model and restates its accumulated depreciation proportionately with
the change in the gross carrying amount of the asset. It is also the company’s policy to transfer a portion of
revaluation surplus to retained earnings every period.

4. How much is the Revaluation Surplus recognized in 2020?

PROBLEM 4
INV. PROPERTY – INITIAL RECOGNITION
OFF COMPANY had the following assets at January 1, 2021:
Acquisition Fair Value @
Cost January 1, 2021

A 300-sq.m. tract of land the company acquired on January 01, P5,000,000 P6,500,000
2021 which it intends to hold for capital appreciation purposes.

A 150-sq.m. tract of land the company acquired on January 01, P2,700,000 P3,400,000
2021 which is currently held for an undetermined future use by
the company.

A building acquired on January 01, 2021, currently being used P15,000,000 P16,500,000
as the headquarters of the company.

A building acquired on January 01, 2021, currently being rented P4,500,000 P4,200,000
out to a different entity under an operating lease.

Machineries acquired on January 01, 2021, currently leased out P2,100,000 P2,500,000
under an operating lease to a different entity.

Machineries acquired on January 01, 2021, currently being used P3,500,000 P4,000,000
by the company in the manufacture of its products.

A building acquired on January 01, 2021, used as a factory by P12,000,000 P10,500,000

the company in production.

5. How much is the initial cost of Investment Property?

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PROBLEM 5
INV. PROPERTY – SUBSEQUENT MEASUREMENT
FEARLESS COMPANY carries its investment properties using the fair value model. On July 1, 2020, it
acquired a building in a certain area that it intends to lease out as commercial spacing under operating leases
to various tenants. The company paid P7,500,000 for the acquisition, including legal fees of P50,000 and
other transaction costs of P100,000, and estimated the useful life of the building at 15 years. However, due
to the circumstances surrounding the building, there was clear evidence at initial recognition that the fair
value of the building could not be reliably measured on a continuing basis. Aside from the building,
FEARLESS had other investment properties with fair values totaling P13,000,000 at December 31, 2022.

6. How much is to be presented as FEARLESS’ investment properties at

December 31, 2022?

PROBLEM 6
INV. PROPERTY – RECLASSIFICATION TO AND FROM INVESTMENT PROPERTY
DBK COMPANY measures its investment properties using the fair value model. The following
reclassifications to investment property were done by DBK COMPANY:
• An asset previously classified as inventory with a carrying amount of P12,000,000 is reclassified as
investment property. The fair value on reclassification date is P13,600,000.
• An asset previously classified as PPE with a carrying amount of P26,000,000 is reclassified as
investment property. The fair value on reclassification date is P29,500,000.
• An asset previously classified as PPE with a carrying amount of P9,300,000 is reclassified as
investment property. The fair value on reclassification date is P9,500,000.

7. How much should be recognized in profit or loss as result of the above?

8. How much should be recognized as revaluation surplus as a result of the

above?

PROBLEM 7
WASTING ASSETS
On July 1, 2019, DIKASAYANG COMPANY purchased for P8,500,000 a property containing 4,800,000
tons of mineral resources. The entity is required to restore the property to its original state at a discounted
amount of P2,000,000. Capitalized development costs amounted to P540,000. On the same date, the entity
bought new equipment costing P7,200,000 to be used in the mining activity. The equipment is estimated to
have a useful life of 12 years. Operations of DIKASAYANG COMPANY started immediately. The entity
expects to extract 50,000 tons of minerals per month. However, during the third year of operations, no
mineral deposits were extracted. At the beginning of 2022, the company incurred additional development
costs of P510,000, which increased the reserves by 50,000 tons.
9. What is the carrying value of equipment at the end of 2019?

10. What is the revised depletion rate per ton/unit in 2022?

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PROBLEM 8
INTANGIBLES – INITIAL RECOGNITION
WIN COMPANY is planning on developing a new product that it plans to sell to its customers—a unique
piece of ergonomic office equipment that has not yet been introduced in the market by any company. The
following expenditures were incurred by WIN:
Fees paid for market research and analysis 780,000
Salaries paid to research personnel 560,000
Development costs incurred before establishment of technical feasibility 450,000
Development costs incurred after establishment of technical feasibility 620,000
Legal costs of registering the patent 45,000
Drawings required to be filed for the application of the patent 35,000

Patent registration was finished on December 31, 2018. The patent will then be amortized over its legal life
of 20 years. However, on July 01, 2020, WIN lost a legal case over its right to the patent, incurring legal
fees of P500,000 and making the patent obsolete.

11. How much is the capitalizable cost of Intangible asset?

PROBLEM 9
INTANGIBLES – MEASUREMENT AFTER INITIAL RECOGNITION
BRIGHT COMPANY made the following transactions pertaining to its intangible assets on January 01,
2018:
• BRIGHT COMPANY purchased a customer list from WIN COMPANY by paying P200,000 cash.
BRIGHT estimates that the customer list will be useful for 5 years.
• BRIGHT COMPANY acquired a franchise to operate as a franchisee of HAPPIBEE, a famous chain
of quick-service restaurants, by issuing a 3-year promissory note with a face value of P30,000,000,
payable in 3 equal annual installments beginning December 31, 2018. The market rate for similar
obligations is 10%. The franchise is valid for 15 years. BRIGHT is also required to pay the franchisor
an annual franchise fee of 2% of its yearly revenues. For 2020, it has earned P15,000,000 in revenues.
• BRIGHT COMPANY incurred costs in order to train its staff amounting to P950,000 as well as costs
in order to promote its operations to the market amounting to P2,500,000.

12. How much is the carrying value of the intangible assets of BRIGHT
COMPANY at December 31, 2020? Round off present value factor up to four
decimal places.

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PROBLEM 10
INTANGIBLES – AMORTIZATION OF FINITE USEFUL LIVES
On January 1, 2021, MEDUSA Co. acquired a patent for P450,000 with an estimated useful life of 10 years
and a legal life of 15 years. During the year 2021, HADES Co. lost the infringement suitcase filed against
the patent of MEDUSA Co. Legal fees worth P80,000 was paid by MEDUSA Co. for this case. On
December 31, 2022, MEDUSA Co. acquired a related patent for P120,000 that extended the useful life of
the original patent by 4 years.

13. How much is the amortization of the patent for the year 2023?

PROBLEM 11
INTANGIBLES – AMORTIZATION OF FINITE AND INDEFINITE USEFUL LIVES
On December 31, 2016, DIMSUM TREATS Co. acquired a trademark for P360,000 and paid P25,000 for
the legal fees. As of that date, the trademark has 9 years remaining legal life, and it is anticipated to be
renewed in the future, indefinitely, without any problem.
In 2019, ANGKONG Company was introduced to the public and made the sales of DIMSUM TREATS
decline. Because of this, on December 31, 2019, the DIMSUM TREATS Co. reviewed the trademark is
now expected to generate cash flows of just P20,000 per year. The useful life of trademark still extends
beyond the foreseeable horizon.

The appropriate discount rate for all items is 8%.

14. How much is the expense recognized with the transactions given for the year
2019?

PROBLEM 12
INTERNALLY GENERATED INTANGIBLE ASSETS
The following costs are incurred by SENKU INC. in creation of a patent for the satellite called SENKU-
1:

Legal costs to make it a legal patent 10,000,000

Materials used (includes 1,500,000 worth of materials initially recognized as expense) 45,000,000
Services consumed (excludes 4,000,000 which is not yet recognized despite being part of 12,500,000
the intangible asset)
Amortization from other intangible assets used for the generation of the patent 5,000,000
Cost of employee benefits for those who contribute 13,000,000
Cost of inefficiencies found in the patent 7,500,000
Cost for training staff 15,000,000
Selling, Administrative and General Overhead (2,000,000 of these is use for prepayment 6,000,000
for marketing)

15. How much directly attributable costs must be recognized for the
patent?

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PROBLEM 13
GOODWILL
THARN COMPANY is considering expanding its operations. After careful contemplation, THARN
COMPANY decided to acquire TYPE COMPANY for P15,000,000 cash. The following schedule shows
the assets and liabilities of TYPE COMPANY on the acquisition date:
Carrying Value Fair Value
Receivables P 560,000 P 560,000
Inventories 6,300,000 7,000,000
Property, Plant, and Equipment 18,500,000 19,500,000

Current Liabilities 2,500,000 2,500,000

Noncurrent Liabilities 7,500,000 7,500,000

16. How much is the goodwill arising from the acquisition of TYPE COMPANY?

PROBLEM 14
IMPAIRMENT OF GOODWILL AND CASH GENERATING UNIT
One of the cash-generating units of SARAWAT COMPANY is being assessed for impairment. It consists
of Property, Plant, and Equipment with a carrying value of P5,375,000, intangible assets with a carrying
value of P4,625,000, and goodwill allocated to the CGU amounting to P1,000,000. The CGU has a fair
value of P9,500,000 and costs to sell were P500,000.

17. How much is the impairment loss attributed to the Intangible assets?

PROBLEM 15
BIOLOGICAL ASSETS – INITIAL RECOGNITION
TINE FARM is a well-known producer of fresh organic fruits and animal produce in its locality. It recently
received an award for being the most sustainable farm for the year, and the recognition has greatly
contributed to business as more people are turning to TINE FARM to buy fruits and animal produce. TINE
FARM currently has the following assets:

Mango trees P3,500,000

Apple trees 3,000,000
Orange trees 2,500,000
Decorative trees alongside the pathways 1,750,000
Land used for cultivating fruit trees 875,000
Shed used for storage 2,500,000
Cows and goats 1,425,000

18. How much should be classified as biological assets?

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PROBLEM 16
BIOLOGICAL ASSETS – MEASUREMENT AFTER INITIAL RECOGNITION
STARDROP VALLEY FARM had 30 2-years old pigs on January 01, 2020 with a per-unit fair value less
costs to sell of P4,000 each. On July 1, 2020, the farm purchased 10 2.5-years old pigs for P5,200 each, and
5 new pigs were born also on this date. On December 31, 2020, 15 3-years old pigs were sold for P6,650
each.
The following schedule shows the per-unit fair values less costs to sell for pigs during 2020:
January 01, 2020 July 01, 2020 December 31, 2020
Newborn P2,000 P2,200 P2,500
0.5 year old P3,100 P3,250 P3,400
2 year old P4,000 P4,300 P4,550
2.5 year old P4,950 P5,200 P5,400
3 year old P6,200 P6,400 P6,650

19. How much is the change in fair value less costs to sell due to price change for
the year?

20. What is the carrying value of the biological assets at the end of the year?

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 ANSWER KEY

THEORIES (2 pts each) PROBLEM SOLVING (3 pts each)

1. C 1. 1,100,000
2. C 2. 1,650,000
3. A 3. 345,810
4. A 4. 162,500
5. B 5. 12,200,000
6. B 6. 19,250,000
7. D 7. 1,600,000
8. C 8. 3,700,000
9. C 9. 6,750,000
10. D 10. 2.4 per ton
11. FALSE 11. 700,000
12. FALSE 12. 19,975,200
13. FALSE 13. 40,000
14. TRUE 14. 135,000
15. FALSE 15. 92,000,000
16. TRUE 16. 0
17. FALSE 17. 462,500
18. FALSE 18. 1,425,000
19. TRUE 19. 20,000
20. FALSE 20. 183,250

“Stick to the fight when you’re hardest hit —

It’s when things seem worse that you must not quit.”
– Don’t Quit by John Greenleaf Whittier
Prepared by:
Jen Margaret Hilario Jerald Patrick Reyes Rich Anne Magsombol
Vince Emmanuel Labeña Franz Emmanuel Cacatian Ghoseph Aleckzander Monzon
Liz Angela Ruiz Lyle Andrey Flores Francis Matthew Obligacion
Mika Chua Kristian Celson Abella Patricia Santos
Erika Carranza

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