Depreciation methods

Use the following information for the next four cases:

Fact pattern
On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated useful life of 4 years and a
residual value of ₱80,000 for a total purchase cost of ₱400,000.

Straight line method

Case #1: Use the straight-line method for the next two questions.
1. How much is the depreciation expense in the 2nd year?
a. 100,000 b. 80,000 c. 200,000 d. 160,000

2. How much is the accumulated depreciation on December 31, 20x2?

a. 100,000 b. 80,000 c. 200,000 d. 160,000

Sum-of-the-years’ digits (SYD) method

Case #2: Use the sum-of-the-years’ digits (SYD) method for the next two questions.
3. How much is the depreciation expense in the 2nd year?
a. 120,000 b. 96,000 c. 128,000 d. 224,000

4. How much is the accumulated depreciation on December 31, 20x2?

a. 120,000 b. 96,000 c. 128,000 d. 224,000

Double declining balance method

Case #3: Use the double declining balance method for the next two questions.
5. How much is the depreciation expense in the 2nd year?
a. 120,000 b. 100,000 c. 128,000 d. 224,000

6. How much is the accumulated depreciation on December 31, 20x2?

a. 120,000 b. 96,000 c. 160,000 d. 300,000

Units of production method (Activity method or Variable-charge method)

Case #4: Use the units of production method for the next two questions:
The equipment has an expected total output of 160,000 units and an expected total input of 40,000 hours.

Information on actual operations is presented below:

Yea Units Manufacturing
r produced hours
20x
1 60,000 16,000
20x
2 30,000 8,000
20x
3 45,000 12,000
20x
4 25,000 4,000

160,000 40,000

7. If SIMPLETON Co. uses the output method, how much is the depreciation expense in the 2nd year?
a. 128,000 b. 96,000 c. 60,000 d. 64,000

8. If SIMPLETON Co. uses the output method, how much is the accumulated depreciation on December 31,
20x2?
a. 120,000 b. 180,000 c. 192,000 d. 256,000

9. If SIMPLETON Co. uses the input method, how much is the depreciation expense in the 2nd year?
a. 64,000 b. 96,000 c. 60,000 d. 64,000

10. If SIMPLETON Co. uses the input method, how much is the accumulated depreciation on December 31,
20x2?
a. 120,000 b. 210,000 c. 192,000 d. 256,000
Increasing depreciation charge under double declining balance method
11. The following information pertains to an equipment owned by RABBLE MOB Co.:
Cost 800,000
Useful life 5 years
Double declining rate (2/ 5 year life) 40%
Residual value None

How much is the depreciation in 20x5?

a. 41,472 b. 103,680 c. 86,400 d. 0

Partial year depreciation

Use the following information for the next three questions:
DEPLORABLE BAD Co. acquired a machine on September 21, 20x1 for a total cost of ₱160,000. The machine
was estimated to have a useful life of 4 years and a salvage value of ₱10,000.

12. How much is the depreciation expense in 20x2 under the straight-line method?
a. 37,500 b. 93,750 c. 36,400 d. 35,000
13. How much is the depreciation expense in 20x2 under the sum-of-years’ digits method?
a. 45,000 b. 11,250 c. 56,250 d. 57,250

14. How much is the depreciation expense in 20x2 under the double declining balance method?
a. 70,000 b. 60,000 c. 10,000 d. 0

Composite method
Use the following information for the next four questions:
On January 1, 20x1, DEVIOUS CROOKED Co. purchased the following:
Cost Residual value Useful life
Machine tools 80,000 4,000 3 years
Meters costing 64,000 2,000 5 years
Returnable containers 120,000 - 6 years

15. What is the composite life?

a. 5.40 b. 5 c. 4.50 d. 4.71

16. What is the composite rate?

a. 21.87% b. 22.21% c. 95.45% d. 4.50%

17. How much is the depreciation expense in 20x1?

a. 57,733 b. 56,000 c. 58,667 d. 59,8774

18. During 20x3, machine tools with original cost of ₱20,000 and residual value of ₱2,000 were sold for
₱6,000. How much is the gain (loss) on the sale?
a. (345) b. 430 c. (667) d. 0

Retirement and Replacement methods

Use the following information for the next two questions:
The small tools account of ATROCIOUS CRUEL Co. has a balance of ₱600,000 as of January 1, 20x1.
Movements in this account during the year are as follows:
Feb. April Sept. Nov.
Cost of newly acquired small
tools 40,000 - 120,000 88,000
Cost of old small tools
retired 24,000 48,000 - 72,000
Proceeds from sale of old
small tools 2,000 3,200 - 4,000

19. Assuming ATROCIOUS Co. uses the retirement method, how much is the depreciation expense in 20x1?
a. 134,800 b. 166,800 c. 144,000 d. 118,800

20. Assuming ATROCIOUS Co. uses the replacement method, how much is the depreciation expense in 20x1?
a. 134,800 b. 166,800 c. 144,000 d. 118,800
Inventory method
21. The small tools account of AUGUST MAJESTIC Co. has a balance of ₱600,000 as of January 1, 20x1.
Acquisitions of small tools during the period totaled ₱240,000 and proceeds from sale of small tools retired
and/or replaced totaled ₱100,000. The annual asset count on December 31, 20x1 revealed a balance of small
tools of ₱440,000. How much is the depreciation expense under the inventory method?
a. 400,000 b. 300,000 c. 240,000 d. 140,000

Revenue method
22. On January 1, 20x1, COCKY ARROGANT Co. acquired an equipment costing ₱4,000,000. The equipment
will be used to reproduce a gaming software which is expected to be marketed for 3 years. The equipment is
expected to be used in producing products over the next two years, after which, the equipment will be
disposed of at a negligible amount.

Estimated revenues from the software are as follows:

Year Estimated revenues

20x1 120,000,000

20x2 80,000,000

20x3 40,000,000
Tota
l 240,000,000

The actual revenue earned in 20x1 is ₱180,000,000. Depreciation expense in 20x1 is most likely equal to
a. 3,000,000 b. 2,000,000 c. 2,977,667 d. 333,333
Leasehold improvements
Use the following information for the next two questions:
On January 1, 20x1, DIMINUTIVE SMALL Co. signed a ten-year lease for office space. DIMINUTIVE has the
option to renew the lease for an additional five-year period on or before January 1, 2x10. During the first half of
January 20x2, DIMINUTIVE Co. incurred the following costs:
- ₱3,600,000 for general improvements to the leased premises with an estimated useful life of ten years.
- ₱400,000 for office furniture and equipment with an estimated useful life of ten years.
- ₱800,000 for movable assembly line equipment with useful life of 5 years.

23. At the time the leasehold improvement were finished, DIMINUTIVE Co. is uncertain as to the exercise of
the renewal option. How much is the 20x2 depreciation expense on the leasehold improvements?
a. 400,000 b. 360,000 c. 533,333 d. 488,889

24. Assume that in DIMINUTIVE Co. is certain that it will exercise the renewal option. How much is the 20x2
depreciation expense on the leasehold improvements?
a. 400,000 b. 360,000 c. 480,000 d. 440,000

Change in depreciation method (from DDB to SL)

25. On January 1, 20x1, DISCORDANT DISAGREEING Co. acquired machinery for a total cost of
₱80,000,000. The machinery is depreciated using the double declining balance method over a period of 10
years. On January 1, 20x4, DISCORDANT Co. changed its depreciation method to straight line method.
How much is the depreciation expense in 20x4?
a. 5,815,428 b. 7,314,286 c. 6,581,342 d. 5,851,429

Change in depreciation method (from SYD to DDB)

26. On January 1, 20x1, KNAVE RASCAL Co. acquired machinery for a total cost of ₱80,000,000. The
machinery is depreciated using the SYD method over a period of 10 years. On January 1, 20x4, KNAVE
Co. changed its depreciation method to double declining balance method. How much is the depreciation
expense in 20x4?
a. 40,727,272 b. 11,635,782 c. 12,556,780 d. 13,556,702

Change in useful life and residual value

27. On January 1, 20x1, SMUTTY OBSCENE Co. acquired machinery for a total cost of ₱80,000,000 and
estimated residual value of ₱8,000,000. The machinery is depreciated using the straight line method over a
period of 10 years. On January 1, 20x4, SMUTTY Co. revised the total useful life of the asset to 15 years
from acquisition date and the residual value to ₱10,400,000. How much is the depreciation expense in
20x4?
a. 4,000,000 b. 3,899,567 c. 4,010,250 d. 4,129,335

Improvements and Replacements

Use the following information for the next two questions:
ENTREAT Co. acquired an aircraft from BEG, Inc. on January 1, 20x1 for a total cost of ₱24,000,000. The
aircraft is estimated to have a useful life of 10 years. ENTREAT Co. uses the straight line method of
depreciation. On January 1, 20x5, a major part of the equipment was replaced for a total cost of ₱3,200,000.

28. Assuming ENTREAT Co. determined that the cost of the replaced part is ₱2,000,000, how much is the loss
on replacement?
a. 1,920,000 b. 1,200,000 c. 2,000,000 b. 0

29. Assuming it is impracticable to determine the cost of the replaced part, how much is the loss on
replacement?
a. 1,920,000 b. 1,200,000 c. 2,000,000 b. 0

Revaluation: Appraised value

30. On December 31, 20x1, the building of HISTRIONAL THEATRICAL Co. with a historical cost of
₱80,000,000, accumulated depreciation of ₱20,000,000, and an estimated useful life of 20 years has been
assessed by an external valuer to have an appraised value of ₱100,000,000. How much is the revaluation
surplus?
a. 40,000,000 b. 28,000,000 c. 20,000,000 d. 10,000,000

Depreciated replacement cost (without residual value)

31. On December 31, 20x1, the building of SWIMMY UNSTEADY Co. with a historical cost of ₱80,000,000,
accumulated depreciation of ₱20,000,000, and an estimated useful life of 20 years has been estimated to
have a replacement cost of ₱140,000,000. How much is the revaluation surplus?
a. 31,500,000 b. 36,778,750 c. 45,000,000 d. 60,000,000

Depreciated replacement cost (with residual value)

32. On December 31, 20x1, the building of LITHE FLEXIBLE Co. was revalued. Information on revaluation
date is shown below:
Cost Replacement cost
Building 72,000,000 144,000,000
Accumulated depreciation 16,000,000
Residual value 8,000,000 8,000,000
Remaining useful life 10 years 12 years

How much is the revaluation surplus?

a. 45,000,000 b. 54,000,000 c. 36,000,000 d. 46,333,333

Methods of recording revaluation surplus – Replacement cost

Use the following information for the next three questions:
On December 31, 20x1, the building of SUBTERFUGE DECEPTION Co. with a historical cost of
₱80,000,000, accumulated depreciation of ₱20,000,000, and an estimated useful life of 20 years has been
estimated to have a replacement cost of ₱140,000,000. Income tax rate is 30%.
33. How much is the revaluation surplus?
a. 31,500,000 b. 36,778,750 c. 45,000,000 d. 60,000,000

34. Assuming SUBTERFUGE Co. uses the proportional method, the entry to record the revaluation includes:
a. a debit to accumulated depreciation for ₱15,000,000
b. a debit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱25,000,000
d. a debit to building for ₱60,000,000

35. Assuming SUBTERFUGE Co. uses the elimination method, the entry to record the revaluation includes:
a. a credit to accumulated depreciation for ₱20,000,000
 b. a debit to building for ₱25,000,000
c. a debit to accumulated depreciation for ₱15,000,000
d. a debit to deferred tax for ₱13,500,000

Methods of recording revaluation – Appraised value

Use the following information for the next two questions:
On December 31, 20x1, the building of ABC Co. with a historical cost of ₱320,000,000, accumulated
depreciation of ₱160,000,000, and an estimated useful life of 20 years has been assessed by an external valuer
to have an appraised value of ₱200,000,000. Income tax rate is 30%

36. The entry under the proportional method to record the revaluation includes
a. a debit to accumulated depreciation for ₱40,000,000
b. a credit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱80,000,000
d. a credit to building for ₱80,000,000

37. The entry under the proportional method to record the revaluation includes
a. a debit to accumulated depreciation for ₱40,000,000
b. a debit to accumulated depreciation for ₱20,000,000
c. a debit to building for ₱80,000,000
d. a credit to building for ₱80,000,000

Revaluation: Change in useful life

Use the following information for the next two questions:
On January 1, 20x1, the building of PRODIGIOUS EXTRAORDINARY Co. with a historical cost of
₱80,000,000 purchased 5 years ago with an estimated useful life of 20 years has been estimated to have a
replacement cost of ₱140,000,000. The building is estimated to have a remaining useful life of 25 years as of
January 1, 20x1. Depreciation is computed using the straight line method. Income tax rate is 30%.

38. How much is the revaluation surplus?

a. 31,500,000 b. 45,000,000 c. 37,500,000 d. 36,788,366

39. How much is the depreciation expense in 20x1?

a. 2,940,000 b. 4,200,000 c. 3,200,000 d. 3,333,976

Revaluation: Change in residual value and useful life

Use the following information for the next two questions:
On December 31, 20x1, the building of COLLOQUY CONVERSATION Co. was revalued. Information on
revaluation date is shown below:
Cost Replacement cost
Building 72,000,000 144,000,000
Accumulated depreciation 16,000,000
Residual value 8,000,000 16,000,000
Remaining useful life 10 years 12 years

40. How much is the revaluation surplus?

a. 45,000,000 b. 31,500,000 c. 36,788,366 d. 51,428,571

41. How much is the depreciation expense in 20x2?

a. 3,333,976 b. 4,200,000 c. 7,619,048 d. 8,990,344

Revaluation of non-depreciable asset

42. On December 31, 20x1, the land of FARCICAL ABSURD Co. with a historical cost of ₱80,000,000 has
been appraised at ₱140,000,000. Income tax rate applicable to profits is 30% and the tax rate applicable to
profits made on the sale of property is 6%. How much is the revaluation surplus?
a. 42,000,000 b. 56,400,000 c. 45,000,000 d. 51,428,572

Revaluation decrease representing impairment loss

43. On December 31, 20x1, the land of ATTAINDER DISHONOR Co. with an original cost of ₱32,000,000
was appraised at ₱48,000,000. On December 20x4, the land was appraised at ₱28,000,000. How much is the
impairment loss in 20x4?
a. 20,000,000 b. 4,000,000 c. 2,800,000 d. 0

Revaluation increase representing reversal of impairment loss

44. On December 31, 20x1, the land of CONJUNCTION UNION Co. with an original cost of ₱40,000,000 was
revalued at ₱28,000,000. This was the first revaluation made on the land since it was purchased 2 years ago.
On December 20x4, the building was appraised at ₱48,000,000. Ignore income taxes. How much is the gain
on impairment reversal in 20x4?
a. 8,000,000 b. 20,000,000 c. 12,000,000 d. 0

Sale of item of PPE measured under cost model

45. FORTITUDE ENDURANCE Co. purchased equipment on August 14, 20x1 for a total cost of ₱400,000.
The equipment has an estimated useful life of 10 years and residual value of ₱80,000. It is the policy of
FORTITUDE Co. to provide full-year depreciation in the year of acquisition and none in the year of
disposal. On May 12, 20x4, the equipment was sold for ₱120,000. Additional costs incurred on the sale
amounted to ₱8,000. How much is the gain (loss) on the sale?
a. (184,000) b. 184,000 c. 192,000 d. (192,000)

Sale of item of PPE measured under revaluation model

46. OBDURATE STUBBORN Co. disposed of a machinery on December 31, 20x1 for a total net disposal
proceeds of ₱6,800,000. Information of the machinery as of December 31, 20x1 is as follows:
Cost at revalued amount ₱ 9,200,000
Accumulated depreciation 3,200,000
Revaluation surplus (presented in equity) 4,800,000

How much is the gain (loss) on the sale?

a. 5,600,000 b. 4,000,000 c. (800,000) d. 800,000