Far Eastern University

INSTITUTEOF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

INTERMEDIATE ACCOUNTING 1
POST-TEST 5 – PROPERTY, PLANT AND EQUIPMENT

NAME SECTION
(Family Name) (First Name) (Middle Name) SCORE
DATE RATING

Part 1 (20)
Part 2 (50)
Total (70)

GENERAL INSTRUCTIONS

1. Complete the information above.

2. Only BACK TEXT is allowed to be used for your answers.
3. Any form of cheating will be dealt with accordingly.
4. Failure to comply with the above rules will merit a grade of “F”.

QUIZ PROPER PART 1 – MCQ THEORY (20 POINTS)

PART 1 – THEORY (20 POINTS)
Select the best answer. Write the letter that corresponds to your FINAL ANSWER on the ANSWER SHEET
provided below.

No. Statements

1. Which is a major characteristic of property, plant and equipment?

A. Without physical existence
B. Acquired and intended for sale by the entity acquiring it.
C. Expected to be used for one year.
D. Subject to depreciation.

2. An item of property, plant and equipment shall be recognized as an asset when

A. It is possible that future economic benefits associated with the asset will flow to the entity, and the
cost of the asset to the entity can be measured reliably.
B. It is probable that future economic benefits associated with the asset will flow to the entity, and the
cost of the asset to the entity can be measured accurately.
C. It is possible that future economic benefits associated with the asset will flow to the entity, and the
cost of the asset to the entity can be measured accurately.
D. It is probable that future economic benefits associated with the asset will flow to the entity, and the
cost of the asset to the entity can be measured reliably.

3. Major spare parts and standby equipment which are expected to be used for one year or less should be
classified as
A. Property, plant and equipment
B. Inventory
C. Non-current investment
D. Expense

4. Under the cost model, subsequent to initial recognition as an asset, an item of property shall be carried
at
A. Cost less accumulated depreciation
B. Revaluation amount less accumulated depreciation
C. Cost less accumulated depreciation and any accumulated impairment loss
D. Revalued amount less accumulated depreciation and any accumulated impairment loss.

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 5. The cost of an item of property, plant and equipment comprises its purchase price, including import
duties and non-refundable purchase taxes and
A. The implied interest in 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. All directly attributable costs necessary to bring the asset to working condition for its intended use.

6. An entity installed a new production facility and incurred a number of expenses at the point of
installation. The entity’s accountant is arguing that most expenses do not qualify for capitalization.
Included in those expenses are initial operating losses. These should 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.

7. Which of the following terms best describes the removal of an asset from the statement of financial
position?
A. Derecognition
B. Impairment
C. Write-off
D. Depreciation

8. Which exchange has commercial substance?

A. Exchange of assets with no difference in future cash flows.
B. Exchange by entities in the same line of business.
C. Exchange of assets with a difference in future cash flows.
D. Exchange of assets that causes the entities to remain on essentially the same economic position.

9. Which should not be considered qualifying assets for purposes of capitalization of borrowing cost?
A. Inventories that require a substantial period of time to bring them to a salable condition.
B. Manufacturing plants
C. Power generation facilities.
D. Inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive
basis over a short period of time.

10. What is the acceptable approach in accounting for government grants?

A. Government grants should be recognized as income over the periods necessary to match them with
the related costs.
B. Government grants should be credited directly to donated capital.
C. Government grants should be credited directly to retained earnings.

Government grants should be deferred and amortized over a maximum period of 20 years.

11. An entity purchased a certain plant asset under a deferred payment contract. The agreement was to pay
P 10,000 per year for five years. The plant assets should be valued at
A. P 50,000
B. P 50,000 plus imputed interest
C. Present value of P 10,000 annuity for five years at an imputed interest.
D. Present value of a P 10,000 annuity for fiver years discounted at the bank prime interest rate.

12. The term “betterment” refers to

A. An expenditure made for new facilities which increase “capacity”.
B. An expenditure made to restore “capacity: after abandonment or retirement.
C. An expenditure made to improve existing facilities by increasing its “capacity”.
D. An expenditure made to help ensure continuity of service capacity.

13. An improvement made to a machine increased its fair market value and its production capacity by 25%
without extending the machine’s useful life. The cost of the improvement should be
A. Expensed
B. Debited to Accumulated Depreciation
C. Capitalized in the Machine account
D. Allocated between accumulated depreciation and the machine account.

14. Which of the following expenditures may properly be capitalized?

A. Expenditure for massive advertising campaign.
B. Insurance on plant during construction
C. Research and development related to a long-term asset which is giving the entity a competitive

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 market advantage.
D. Title search and other legal costs related to a piece of property which was not acquired.

15. It is the systematic allocation of the depreciable amount of an item of property, plant and equipment.
A. Depreciation
B. Depletion
C. Amortization
D. Realization

16. The useful life of an item of property, plant and equipment should be reviewed periodically and if
expectations are significantly different from previous estimates, the depreciation charge for
A. Current period only should be adjusted
B. Future period only should be adjusted
C. Prior periods should be adjusted
D. Current and future periods should be adjusted.

17. The depreciation method applied to property, plant and equipment shall be reviewed periodically, and
if there has been a significant change in the expected pattern of consumption of economic benefits
from the assets, the change
A. Shall be accounted for as a change in accounting policy.
B. Shall not be recognized.
C. Shall be accounted for as a change in accounting estimate.
D. Shall be accounted for as correction of a prior period error.

18. Which of the following depreciation methods is not appropriate for situations involving large number of
similar items, each having a small peso amount?
A. Inventory method
B. Retirement method
C. Replacement method
D. Composite method

19. The cost of inventories may not be recoverable under the following circumstances, except:
A. The inventories are damaged.
B. The inventories have become partially obsolete.
C. The selling prices have declined.
D. The estimated cost of completion or disposal has decreased.

20. Which of the following is included in the computation of cost ratio using the conservative approach of
retail inventory method?
A. Markdown
B. Mark-up
C. Mark-up cancellation
D. None of the above

QUIZ PROPER PART 2 – MCQ (50 POINTS)

Instructions: Solve the following problems. For straight problems, your final answers must be written on the
space provided before each number. USE PESO SIGN for the amount. In case of Multiple Choice, write only the
letter that corresponds to your answer using CAPITAL LETTER. For journal entries, use the solution guide
provided in the form of general journal.

ANSWER SHEET

1. JE – Use the solution guide 14

.
2. JE – Use the solution guide 15
.
3. JE – Use the solution guide 16
.
4. JE – Use the solution guide 17
.
5. 18
.
6. 19
.

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 7. 20
.
8. JE – Use the solution guide 21
.
9. 22
.
10 JE – Use the solution guide 23
. .
11 24
. .
12 JE – Use the solution guide 25
. .
13
.

SOLUTION GUIDE FOR JOURNAL ENTRIES

No. Account Names Debit Credit

1

10

12

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PROBLEM 1
On October 1, 2020, ABC Corporation purchased land and building at a basket price of P 30,000,000. A check
was issued upon receipt of the land title. At the time of acquisition, the relative fair values of land and building
are P 12,000,000 and 24,000,000, respectively.

1. What would be the journal entry to record the acquisition?

PROBLEM 2
On October 1, 2020, Hello Company purchased equipment and furniture at a total cost of P 100,000. The
relative sales values of these two properties at acquisition date are P 75,000 and P 50,000, respectively.
Inward related costs paid by entity was P 20,000. Term of purchase is 3/10, n/90.

2. What would be the journal entry to record the acquisition?

PROBLEM 3
On July 1, 2020, Manuel Corporation purchased machinery worth P 8,000,000. Terms: P 500,000 down
payment, the balance on three equal annual payments every July 1 of each year. The cash price of the
machinery is P 6,000,000. A promissory note is issued for the installment balance.

Required:
3. What would be the journal entry to record the acquisition of machinery?
4. What would be the journal entries to record the amortization at December 31, 2020?
5. What is the carrying amount of machinery at December 31, 2020?

PROBLEM 4 (Adapted from Auditing Textbook)

Chot acquired a tract of land with an existing building in exchange for 20,000 ordinary shares of P 10 par value
with a market price of P 20 per share on the date of acquisition. The last tax bill assessed value of P 200,000
for the land and P 120,000 for the building. However, the land has a fair value of P 550,000 and the building
has no determinable fair value. Shortly, after acquisition, the building was razed at a cost of P 9,000 in
anticipation of a new building construction.

6. What is the cost assigned to land?

7. Assuming the fair value of the land is not available, what would be the cost of the land?

PROBLEM 5 (Adapted from Auditing Textbook)

On January 1, 2020, Marcus Company acquired a machinery with a fair value of P 1,900,000 by issuing a 4-
year, 12%, P 2,000,000 bonds. Principal is due on December 31, 2023 but the interest is due annually at the
end of each year. The prevailing market rate of interest for a similar instrument on January 1, 2020 is 14%.
The present value of the future cash flows from the bonds discounted at 10% is P 2,126,776.

8. What would be the journal entries to record the amortization at December 31, 2020?

PROBLEM 6 (Adapted from Auditing Textbook)

On December 15, 2020, Tenorio Company amd Jason Company exchanged equipment. The following data are
available on the exchange.

Tenorio Jason
Equipment (cost) 500,000 300,000
Accumulated Depreciation 300,000 50,000
Fair value of Equipment 180,000 220,000
Cash paid by Tenorio to Jason 40,000 40,000

9. How much should Tenorio record the asset?

A. P 220,000
B. P 180,000
C. P 140,000
D. P 200,000

10. What is the journal entry to record the transaction in the books of Tenorio?

11. How much should Jason record the asset?

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 A. P 220,000
B. P 180,000
C. P 140,000
D. P 250,000

12. What is the journal entry to record transaction in the books of Jason?

PROBLEM 7 (Adapted)
Brave Company carried out a number of transactions involving the acquisition of several assets. All
expenditures were recorded in the following single asset account, identified as Property and equipment:

Property and equipment

Acquisition price of land and building 960,000
Options taken out on several pieces of property 16,000
List price of machinery purchased 318,400
Freight on machinery purchased 5,000
Repair to machinery resulting from damage during shipment 1,480
Cost of removing old machinery 4,800
Driveways and sidewalks 102,000
Building remodeling 400,000
Utilities paid since acquisition of building 20,800
1,828,480

Based on property tax assessments, which are believed to fairly represent the relative values involved, the
building is worth twice as much as the land. The machinery was subject to a 2% cash discount, which was
taken and credited to Purchases Discounts. Of the two options, P 6,000 is related to the building and land
purchased and P 10,000 related to those not purchased. The old machinery was sold at book value.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balance of the following:

13. Land
a. P 644,000 c. P 322,000
b. P 326,000 d. P 424,000

14. Building
a. P 644,000 c. P 1,040,000
b. P 1,044,000 d. P 722,000

15. Machinery
a. P 317,032 c. P 318,512
b. P 323,400 d. P 321,832

PROBLEM 8 (Adapted)
The following items relate to the acquisition of a new machine by Bongabon Corporation in 2020:

Invoice price of machinery P 2,000,000

Cash discount not taken 40,000
Freight on new machine 10,000
Cost of removing the old machine 12,000
Loss on disposal of the old machine 150,000
Gratuity paid to operator of the old machine who was laid off 70,000
Installation cost of new machine 60,000
Repair cost of new machine damaged in the process of installation 8,000
Testing costs before machine was put into regular operation 15,000
Salary of engineer for the duration of the trial run 40,000
Operating cost during first month of regular use 250,000
Cash allowance granted because the new machine proved to be of inferior quality 100,000

16. How much should be recognized as cost of the new machine?

A. P 1,985,000
B. P 1,930,000
C. P 1,993,000
D. P 2,025,000

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PROBLEM 9 (Adapted)
On July 1, 2020, Drenz Company purchased land and incurred other costs relative to the construction of a new
warehouse. A summary of economic activities is listed below.

Purchase price 925,000

Title insurance 7,500
Legal fees to purchase land 5,000
Cost of razing old building on lot 42,500
Proceeds from sale of salvageable materials 6,000
Property taxes, January 1, 2019 to June 30, 2019 15,000
Cost of grading and filling building site 45,000
Cost of building construction 3,100,000
Interest in construction loan 60,000
Cost of constructing driveway 400,000
Cost of parking lot and fencing 60,000

Based on the above data, determine the cost of the following:

17. Land
A. P 997,500
B. P 1,034,000
C. P 952,500
D. P 982,500

18. Building
A. P 3,196,500
B. P 3,160,000
C. P 3,205,000
D. P 3,256,500

19. Land Improvements

A. P 400,000
B. P 460,000
C. P 505,000
D. P 60,000

PROBLEM 10
On January 1, 2020, ABC Company obtained a loan of P 4,000,000 at an interest rate of 10% specifically to
finance the construction of its new building. Availments from the loan were made quarterly in unequal amounts.
Total borrowing cost amounted to P 250,000. Prior to their disbursements, the proceeds of the loan were
temporarily invested and earned interest income amounting to P 40,000. The building was completed on
December 31, 2020.

20. The amount of capitalizable borrowing costs is:

A. P 250,000
B. P 210,000
C. P 400,000
D. P 360,000

PROBLEM 11
Frey Company purchased a machine for P 4,500,000 on January 1, 2020. The machine has an estimated
useful life of four years and a residual value of P 500,000. The machine is depreciated using the SYD.

21. The December 31, 2021 asset balance, net of accumulated depreciation, should be:
A. P 2,900,000
B. P 2,700,000
C. P 1,700,000
D. P 1,350,000

PROBLEM 12
Bergen Company purchased factory equipment which was installed and put into service January 1, 2019 at a
total cost of P 1,280,000. Residual value was estimated at P 80,000. The equipment is being depreciated over
eight years by the double declining balance method.

22. For the year 2020, how much depreciation expense should be recorded on the equipment?
A. P 225,000
B. P 240,000

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 C. P 300,000
D. P 320,000

PROBLEM 13
On June 30, 2020, Clandestine Company reported the following information related to equipment:

Equipment at cost 5,000,000

Accumulated Depreciation 1,500,000

The equipment was measured using the cost model and depreciated on a straight-line basis over a 10-year
period.

On December 31, 2020, the entity decided to change the basis of measuring the equipment from the cost
model to the revaluation model.

On revaluation date, the equipment had a fair value of P 4,550,000 with an expected remaining useful life of 5
years.

23. What is included in the journal entry to record the revaluation on December 31, 2020?
A. Debit machinery P 1,300,000
B. Credit accumulated depreciation, P 2,450,000
C. Credit accumulated depreciation P 700,000
D. Debit accumulated depreciation P 1,750,000

PROBLEM 14
On June 30, 2020, a fire in Pine Company’s plant caused a total loss to a production machine. The machine
was depreciated at P 200,000 annually and had a carrying amount of P 1,600,000 at December 31, 2019. On
the date of fire, the fair value of the machine was P 2,200,000, and Pine received Insurance proceeds of P
2,000,000 in October 2020.

24. In its income statement for the year ended December 31, 2020, what amount should Pine recognized as
gain on disposition?
A. P 500,000
B. P 700,000
C. P 400,000
D. P 600,000

PROBLEM 15
During 2020, Dual Company incurred P 4,000,000 in exploration cost for each of 15 oil wells drilled in 2020.

Of the 15 wells drilled, 10 were dry holes. The entity used the successful effort method of accounting. The
entity depleted 30% of the oil discovered in 2020.

What amount of exploration cost should be reported in the December 31, 2020 statement of financial position?
A. P 42,000,000
B. P 14,000,000
C. P 20,000,000
D. P 6,000,000