Intermediate Financial Accounting Part 1b by Zeus Millan Compress - Compress

TEST BANK
INTERMEDIATE
Financial
Accounting
Part 1B
2015
ZEUS VERNON B. MILLAN

ALL RIGHTS RESERVED
2015
No part of this work covered by the

copyright hereon may be reproduced
or used in any form or by any means -
electronic or mechanical, including
photocopying – without the written
permission of the author.
ISBN 978-621-95096-1-9
Published by:
BANDOLIN ENTERPRISE
No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600, Philippines
ii
TABLE OF CONTENTS
CHAPTER 12
INVESTMENTS IN ASSOCIATES .............................................................. 1
CHAPTER 12: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION
PURPOSES).............................................................................................. 1
CHAPTER 12: THEORY OF ACCOUNTS REVIEWER........................................ 6
CHAPTER 12 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 23
CHAPTER 13
AGRICULTURE ....................................................................................... 24
CHAPTER 13: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES) 24
CHAPTER 13: THEORY OF ACCOUNTS REVIEWER...................................... 28
CHAPTER 13 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS ........ 34
CHAPTER 14
PROPERTY, PLANT AND EQUIPMENT (PART 1) ................................ 35
PURPOSES)............................................................................................ 35
CHAPTER 15
PROPERTY, PLANT AND EQUIPMENT (PART 2) ................................ 52
PURPOSES)............................................................................................ 52
CHAPTER 16
DEPLETION OF MINERAL RESOURCES ................................................ 80
PURPOSES)............................................................................................ 80
CHAPTER 16 – SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 91
CHAPTER 17
GOVERNMENT GRANTS ........................................................................ 92
CHAPTER 17 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS102
CHAPTER 18
BORROWING COSTS ............................................................................ 103
PURPOSES).......................................................................................... 103
CHAPTER 18: THEORY OF ACCOUNTS REVIEWER.................................... 105
CHAPTER 19
INVESTMENT PROPERTY ................................................................... 115
iii
CHAPTER 20
INTANGIBLE ASSETS ........................................................................... 128
PURPOSES).......................................................................................... 128
CHAPTER 21
IMPAIRMENT OF ASSETS ................................................................... 156
PURPOSES).......................................................................................... 156
iv
Chapter 12
Investments in Associates
Chapter 12: Multiple choice – Computational (SET B) – (For classroom

instruction purposes)
Equity method – Cost equal to fair value of interest acquired

Use the following information for the next five questions:
On January 1, 20x1, ABASE Co. purchased 20,000 shares of the 100,000 total
outstanding shares of PRAISE, Inc. for ₱4,000,000. PRAISE’s assets and liabilities
approximate their fair values. In 20x1, PRAISE, Inc. reported profit of
₱12,000,000 and declared and paid cash dividends of ₱800,000.
In 20x2, PRAISE reported loss of ₱8,000,000, declared and issued 10% stock
dividends, and reported gain on property revaluation of ₱2,000,000 and loss on
exchange differences on translation of foreign operations of ₱400,000.
1. How much is the share in profit or loss of the associate in 20x1?

a. 2,240,000 b. 2,400,000 c. 160,000 d. 0
2. How much is the carrying amount of the investment as of December 31, 20x1?
a. 4,000,000 b. 6,240,000 c. 6,400,000 d. 6,560,000
3. How much is the investment income (loss on investment) to be recognized in

profit or loss in 20x2?
a. (1,280,000) b. 400,000 c. (1,600,000) d. 320,000
4. How much is the net share in the other comprehensive income of the
associate in 20x2?
a. 320,000 b. (1,280,000) c. (1,280,000) d. 0
a. 4,960,000 b. 4,640,000 c. 4,000,000 d. 0
Equity method – Cost exceeds fair value of interest acquired

Use the following information for the next three questions:
On January 1, 20x1, ABET Co. purchased 25% interest in the ordinary shares of
ENCOURAGE, Inc. for ₱8,000,000. ENCOURAGE’s assets and liabilities
approximate their fair values except for inventories with carrying amount of
₱2,000,000 and fair value of ₱400,000 and depreciable asset with carrying
amount of ₱12,000,000 and fair value of ₱20,000,000. The remaining useful life of
the depreciable asset is 10 years. ENCOURAGE’s net assets has a book value of
₱20,000,000.
On December 31, 20x1, ENCOURAGE reported ₱4,800,000 profit and declared

and paid dividends of ₱2,000,000.
6. How much is the goodwill that will be subsumed in the carrying amount of the
investment?
a. 1,400,000 b. 1,250,000 c. 1,100,000 d. 0
7. How much is the net share in the profit or loss of the associate (investment
income) in 20x1?
1
a. 1,400,000 b. 1,200,000 c. 1,000,000 d. 0
a. 8,000,000 b. 8,500,000 c. 8,700,000 d. 8,900,000
Equity method – Determining percentage of ownership

9. On January 1, 20x1, APPRISE Co. acquired 50,000 newly issued shares of
INFORM, Inc. at ₱40 per share. Before the acquisition, INFORM had 100,000
ordinary shares outstanding. During the year, the associate reported profit of
₱900,000. How much is the share in the associate’s profit?
a. 450,000 b. 300,000 c. 333,333 d. 0
Potential voting shares
Use the following for the next two questions:
AFFICIONADO Co. owns 15,000 shares out of the 100,000 outstanding shares of
FAN, Inc. As of year-end, AFFICIONADO holds 20,000 stock rights which enable
AFFICIONADO to acquire additional shares from FAN on a “2 rights for 1 share”
basis. The stock rights are exercisable immediately. However, management does
not intend to exercise the stock rights. FAN does not have any other stock rights
outstanding aside from those held by AFFICIONADO. FAN reports year-end profit
of ₱4,000,000 and declares cash dividends of ₱400,000. The investment has a
carrying amount of ₱1,200,000 before any year-end adjustment.
10. How much is AFFICIONADO’s share in profit of associate for the year?
a. 0 b. 60,000 c. 600,000 d. 909,200
11. How much is the carrying amount of the investment as of year-end?

a. 1,200,000 b. 1,800,000 c. 1,740,000 d. 1,849,200
Cumulative preference shares

Use the following information for the next four questions:
AUSTERE Co. owns 20% of SEVERE, Inc.’s ordinary shares. SEVERE also has an
outstanding cumulative 6% preference shares of ₱8,000,000. None of those
preference shares is held by AUSTERE. Cumulative preference share dividends
are in arrears for 3 years. SEVERE reported year-end profit of ₱4,000,000 and
declared no dividends.
12. How much is AUSTERE Co.’s share in profit or loss of associate?

a. 704,000 b. 800,000 c. 512,000 d. 770,000
13. What if SEVERE Co. declared dividends that pay all of the dividends in arrears
on preference shares, how much is the share in profit or loss of associate?
a. 704,000 b. 800,000 c. 512,000 d. 770,000
14. What if the preference shares are non-cumulative, how much is the share in
profit or loss of associate?
a. 704,000 b. 800,000 c. 512,000 d. 770,000
15. What if the shares are redeemable preference shares and SEVERE declared
₱150,000 cash dividends on the redeemable preference shares during the
year, how much is the share in profit or loss of associate?
a. 704,000 b. 800,000 c. 512,000 d. 770,000
Loss of significant influence

16. On January 1, 20x1, ALLEVIATE Co. acquired 30,000 ordinary shares for
₱12,000,000 which represents 30% interest in LESSEN Co.’s net assets. At the
time of acquisition LESSEN’s net assets are fairly revalued at ₱40,000,000.
2
Prior to revaluation, the net assets had a book value of ₱32,000,000. The
difference between the revalued amount and carrying amount is attributable
to a building which was credited to revaluation surplus. The building has a
remaining useful life of 10 years with no residual value. It is LESSEN’s policy
to depreciate all tangible depreciable assets using the straight-line method.
At the end of 20x1, LESSEN reported a profit of ₱4,000,000 and paid cash
dividends of ₱2,400,000. At December 31, 20x1, the shares are selling at ₱400
per share.
On July 1, 20x2, ALLEVIATE sold 60% of its investment in LESSEN at the

prevailing market price of ₱480 per share. LESSEN reported interim profit of
₱2,000,000 for the six months ended June 30, 20x2. On December 31, 20x2,
LESSEN reported total profit of ₱4,800,000 for the year and declared
₱4,000,000 cash dividend. The shares are quoted at ₱540 per share at year-
end.
If the unsold shares were reclassified to investment in FVOCI, how much is

the total income recognized on the investment in profit or loss in 20x2?
a. 2,640,000 b. 1,632,000 c. 1,968,000 d. 2,160,000
Reclassification adjustment for other comprehensive income

17. AMBULATE Co. owns 30% of WALK, Inc.’s ordinary shares. On July 1, 20x2,
AMBULATE Co. sold half of its investment for ₱1,600,000. The adjusted
balances of the related accounts as of July 1, 20x2 immediately before the sale
are:
 Investment in associate ₱4,800,000
 Cumulative share in associate’s exchange differences
on translation of a foreign operation 2,000,000 Cr
The remaining ownership of 15% (30% x 1/2) does not give AMBULATE
significant influence over WALK. How much is the reclassification gain (loss)
on July 1, 20x2?
a. 800,000 b. (800,000) c. 2,000,000 d. 1,000,000
Partial loss of significant influence – Reclassification of OCI

18. CHASTE Co. owns 40% of PURE, Inc.’s ordinary shares. On July 1, 20x2,
CHASTE Co. sold half of its investment for ₱400,000. The adjusted balances of
the related accounts as of July 1, 20x2 immediately before the sale are:
The remaining 20% ownership (40% x 1/2) still gives CHASTE significant
influence over PURE. How much is the reclassification gain (loss) on July 1,
20x2?
a. 800,000 b. (800,000) c. 2,000,000 d. 1,000,000
Partial loss of significant influence – Reclassification of OCI

19. CIRCUMSPECT Co. owns 40% of CAUTIOUS, Inc.’s ordinary shares. On July 1,
20x2, CIRCUMSPECT Co. sold three-fourths of its investment for ₱1,000,000.
The adjusted balances of the related accounts as of July 1, 20x2 immediately
before the sale are as follows:
3
The remaining ownership interest of 10% (1/4 of 40%) still gives
CIRCUMSPECT significant influence over CAUTIOUS. Many of CAUTIOUS’s
board of directors are appointed by CIRCUMSPECT. How much is the
reclassification gain (loss) on July 1, 20x2?
a. 2,000,000 b. 1,500,000 c. 1,000,000 d. 0
Transfer of other comprehensive income directly in equity

20. SNITCH Co. owns 30% of PILFER, Inc.’s ordinary shares. On July 1, 20x2,
SNITCH Co. sold half of its investment for ₱400,000. The adjusted balances of
the related accounts as of July 1, 20x2 immediately before the sale are:
 Cumulative share in associate’s unrealized gains and
losses on investments in FVOCI 2,000,000 Cr
The remaining ownership of 15% (30% x 1/2) does not give SNITCH
significant influence over PILFER. How much is the reclassification gain (loss)
recognized in profit or loss on July 1, 20x2?
a. 2,000,000 b. 1,500,000 c. 1,000,000 d. 0
Change to equity method from FVPL – “STEP ACQUISITION”

On January 1, 20x1, POSTULATE Co. acquired 10,000 shares representing a 10%
interest in DEMAND, Inc.’s 100,000 outstanding shares for ₱3,200,000. In 20x1,
DEMAND reported profit of ₱20,000,000 and declared and paid dividends of
₱4,000,000. The investment was initially classified as investment in held for
trading securities measured at FVPL. The fair value of the shares on December
31, 20x1 is ₱340 per share. As of December 31, 20x1, the investment in held for
trading securities has a carrying amount of ₱3,400,000, equal to fair value.
On July 1, 20x2, POSTULATE Co. acquired additional 15,000 shares at ₱280 per
share resulting to an increase in ownership interest over DEMAND from the
previous 10% to 25%. The transaction did not give rise to any goodwill or
negative goodwill. In 20x2, DEMAND reported profit of ₱24,000,000, of which
₱16,000,000 were earned in the second half of the year. In addition, DEMAND
declared and paid dividends of ₱4,000,000 on December 31, 20x2. The DEMAND
shares have quoted price of ₱360 per share on December 31, 20x2.
21. How much is the carrying amount of the investment in associate on July 1,
20x2?
a. 7,000,000 b. 7,600,000 c. 6,600,000 d. 5,800,000
22. How much is the share in the profit of the associate in 20x2?
a. 4,000,000 b. 4,800,000 c. 3,200,000 d. 3,000,000
23. How much is the carrying amount of the investment in associate on December
31, 20x2?
a. 10,000,000 b. 11,400,000 c. 9,800,000 d. 8,800,000
Downstream sale of inventory

Use the following information for the next two questions:
PERPETUAL Co. owns 20% of EVERLASTING, Inc. and uses the equity method
because it has significant influence. In 20x1, PERPETUAL sells inventory to
EVERLASTING for ₱400,000 with a 60% gross profit on the transaction. The
inventory remains unsold during 20x1 and was sold by EVERLASTING to external
parties only in 20x2. PERPETUAL’s income tax rate is 30%. EVERLASTING
4
reports profit of ₱4,000,000 and ₱4,800,000 on December 31, 20x1 and 20x2,
respectively.
24. How much is the share in the profit of associate in 20x1?

a. 560,000 b. 632,000 c. 728,000 d. 800,000

a. 1,128,000 b. 1,200,000 c. 1,032,000 d. 960,000
Upstream sale of inventory

LISTLESS Co. owns 20% of WEAK, Inc. and uses the equity method because it has
significant influence. In 20x1, WEAK sells inventory to LISTLESS for ₱400,000
with a 60% gross profit on the transaction. The inventory remains unsold during
20x1 and was sold by LISTLESS to external parties only in 20x2. LISTLESS’s
income tax rate is 30%. WEAK reports profit of ₱4,000,000 and ₱4,800,000 on
December 31, 20x1 and 20x2, respectively.

a. 766,400 b. 752,000 c. 785,600 d. 800,000

a. 960,000 b. 974,400 c. 993,600 d. 1,008,000
Downstream sale of depreciable asset

WOOZY Co. owns 20% of DIZZY, Inc.’s outstanding ordinary shares. On January 1,
20x1, WOOZY sold an equipment with a carrying amount of ₱400,000 and a
remaining useful life of 10 years to DIZZY for ₱480,000. Gain of ₱80,000 was
recorded by WOOZY. Both WOOZY and DIZZY use the straight line method of
depreciation. DIZZY reports profit of ₱4,000,000 and ₱4,800,000 on December
31, 20x1 and 20x2, respectively.

a. 720,000 b. 728,000 c. 785,600 d. 800,000
29. Assuming the sale is an upstream sale, how much is the share in the profit of
associate in 20x1?
a. 968,000 b. 728,000 c. 785,600 d. 800,000
Downstream sale of non-depreciable asset
LUCID Co. owns 20% of CLEAR, Inc.’s outstanding ordinary shares. On January 1,
20x1, LUCID sold land with a carrying amount of ₱400,000 to CLEAR for
₱480,000. Gain of ₱80,000 was recorded by LUCID. CLEAR reports profit of
₱4,000,000 and ₱4,800,000 on December 31, 20x1 and 20x2, respectively.

a. 720,000 b. 784,000 c. 728,000 d. 800,000
31. Assuming the sale is an upstream sale, how much is the share in the profit of
associate in 20x1?
a. 720,000 b. 784,000 c. 728,000 d. 800,000
5
Share in losses of associate
SKEPTICAL Co. owns 20% of the ordinary shares of QUESTIONING, Inc. The
records of SKEPTICAL as of December 31, 20x1 show the following information
before any necessary year-end adjustments.
Investment in associate ₱ 800,000

Trade accounts receivable – QUESTIONING 1,200,000
Investment in preference shares – QUESTIONING 400,000
Advances to associate – QUESTIONING 200,000
Loans receivable, secured - QUESTIONING 480,000
QUESTIONING reported losses of ₱5,600,000, ₱2,000,000 and ₱400,000 in 20x1,

20x2 and 20x3, respectively. In 20x3, SKEPTICAL incurred constructive
obligation in favor of QUESTIONING in the amount of ₱480,000 and made
₱320,000 payments on behalf of QUESTIONING. In 20x4, QUESTIONING reported
profit of ₱4,000,000.
32. How much is the share in the loss of the associate in 20x1?
a. 1,120,000 b. 320,000 c. 800,000 d. 280,000
a. 0 b. 320,000 c. 400,000 d. 280,000
a. 0 b. 480,000 c. 320,000 d. 800,000
35. How much is the share in the profit of the associate in 20x4?
a. 600,000 b. 820,000 c. 1,200,000 d. 200,000
The answers and solutions to the computational problems above

(Multiple choice – Computational (SET B) can be found in the
accompanying Teacher’s Manual.
Chapter 12: Theory of Accounts Reviewer

Scope and applicability
1. PAS 28 applies to which of the following?
a. investments in associates held by a venture capital organization or mutual
fund measured at fair value through profit or loss
b. a 20% investment in preference shares
c. an interest in a partnership which gives the investor significant influence
over the partnership
d. a 60% investment in ordinary shares of another entity
2. An entity shall apply PAS 28

a. to investments which give the entity significant influence over the
investee
b. to account for investments in associates in the entity’s separate financial
statements
c. even when significant influence is lost
d. any of these
6
I. Representation on the board of directors or equivalent governing body of
the investee.
II. Participation in policy-making processes, including participation in
decisions about dividends or other distributions.
III. Material transactions between the investor and the investee
IV. Interchange of managerial personnel.
V. Provision of essential technical information.
a. I, II b. I, II, III c. I, II, IV d. any of these
20. In which of the following does X have significant influence?

a. X owns 30% of the voting shares of ABC Co., the other 60% is held by Y
and all seats on the board of directors are appointed by Y.
b. X owns 30% of the preference shares of Z Co.
c. X owns 15% of the voting shares of ABC Co., all other shares are held in
very small blocks and therefore X has representatives in the board of
directors.
d. X owns 80% of Y, and Y owns 40% of Z. In Y’s separate financial
statements, the investment in Z is classified as “held for sale” in
accordance with PFRS 5.
21. In assessing whether significant influence exists, an investor shall consider

any potential voting rights held only if
a. it intends to exercise the potential voting rights
b. the potential voting rights are currently exercisable
c. a and b
d. they are not considered
22. When computing for its share in the associate’s profit or loss, an investor shall
use
a. its present ownership interest
b. its present ownership interest adjusted for the effect of any potential
voting rights
c. the potential voting rights percentage
d. the effective interest rate
23. According to PAS 28, significant influence is the investor’s participation in the
financial and operating policy decisions of the investee but not control of
these decisions. Which of the following may an investor be unable to exercise
significant influence?
a. participation in policy making process
b. material intercompany transactions
c. majority ownership of the investee concentrated among a small group of
shareholders who operate the investee without regard to the views of the
investor
d. technological dependency
(Adapted)
24. Under PAS 28, these refer to instruments, which if exercised, give the entity
additional voting power or reduce another party’s voting power over the
financial and operating policies of another entity.
a. share rights c. convertible securities
b. share options d. potential voting rights
25. When assessing the existence of significant influence, which of the following
shall be considered by the investor?
a. potential voting rights that are not exercisable immediately
9
b. share options giving the investor the right to purchase preference shares
of the investee
c. stock rights which are exercisable immediately but the entity’s
management does not intend to exercise.
d. potential voting rights that will be received in the following accounting
period
26. Potential voting rights include all of the following except

a. share warrants and share options c. convertible preference shares
b. redeemable preference shares d. convertible bonds
Equity method
27. Investments accounted for under the equity method are initially recognized at
a. cost
b. fair value
c. fair value plus direct acquisition cost
d. cost plus or minus share in profit or loss of associate
28. Which of the following does not correctly relate to the application of the
equity method?
a. the investor recognizes its proportionate share in the profit or loss, other
comprehensive income, and discontinued operations of the associate
b. dividends received are accounted for as reduction in the investment
balance
c. share dividends are not accounted for
d. the investor accounts only its proportionate share in the profit or loss of
the associate but not in other comprehensive income and discontinued
operations.
29. Under the equity method, which of the following does not decrease the
investment account?
a. share in associate’s loss
b. amortization of undervaluation of asset
c. amortization of overvaluation of asset
d. share in dividends declared by the associate
30. For investments in associates, the investor shall not

a. recognize a share in the associate’s other comprehensive income
b. recognize a share in the associate’s discontinued operations
c. recognize a share in the associate’s profit or loss
d. recognize a share in the associate’s revenue, expenses and profit before
d. recognize a share in the associate s revenue, expenses and profit before
tax
31. When computing for its share in the associate’s profit or loss, the investor
should
I. deduct one year dividends on cumulative preference shares of the
associate held by other parties and classified as equity, whether declared
or not.
II. deduct one year dividends on noncumulative preference shares of the
or not.
III. deduct all dividends in arrears on cumulative preference shares of the
or not.
IV. deduct dividends on noncumulative preference shares of the associate
held by other parties and classified as equity only when declared.
10
V. not deduct from profit or loss any dividends on ordinary shares before
computing for the share in the associate’s profit or loss.
a. I, IV, V b. I, IV c. II, III, V d. II, III
32. The equity method causes the balance in the investment account to
approximate:
a. original cost of the investment
b. market value of the investment
c. original cost of the investment minus any dividends declared and paid by
the other company
d. original cost of the investment plus a proportionate share of subsequent
undistributed earnings of the investee company.
(Adapted)
33. How is goodwill arising on the acquisition of an associate dealt with in the
financial statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss.
d. Goodwill is not recognized separately within the carrying amount of the
investment.
(Adapted)
34. If the excess of the acquisition cost of an investment accounted for under
equity method over the book value of net assets acquired is attributable to an
undervalued depreciable asset and an unidentifiable asset, which of the
following statements is correct
a. The carrying amount of the investment is increased by the proportionate
share in the profits earned by the investee and decreased by the
depreciation of the interest in the undervaluation and unaffected by the
separate impairment of the unidentifiable asset
b. The carrying amount of the investment is increased by the depreciation of
the interest in the undervaluation and amortization of the unidentifiable
asset
c. The carrying amount of the investment is decreased by the depreciation of
the interest in the undervaluation and decreased by the separate
impairment on the unidentifiable asset.
d. Investment income is decreased by the depreciation of the interest in the
undervaluation and amortization of the unidentifiable asset
35. The equity method is most likely not applicable to which of the following?
a. ownership interest of 2%, 2 out of 7 of the BOD of the associate is
appointed by the investor
b. ownership interest of 40%
c. ownership interest of 20% but the associate is operating under severe
long-term restrictions that significantly impair its ability to transfer funds
to the investor
d. ownership interest of 25% acquired with an exclusive view of subsequent
disposal within 12months and accounted for under PFRS 5
36. The equity method should be applied in which of the following?

a. The investment is classified as held for sale under PFRS 5
b. The parent is exempted from presenting consolidated financial
statements.
c. The investor is an unlisted subsidiary whose parent allows it not to apply
equity method
11
d. The investor previously held only 10% interest but subsequently acquires
additional 10% interest in the associate.
37. Which of the following computations may properly result to the correct
balance of an investment in associate account at year-end?
a. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, and minus amortization of share
in undervaluation of associate’s asset
b. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, and plus amortization of share in
undervaluation of associate’s asset
c. Beginning balance of investment plus share in associate’s profit plus share
in dividends declared by associate, and minus amortization of share in
d. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, minus amortization of share in
undervaluation of associate’s asset, and minus separate impairment loss
on goodwill included in the carrying amount of the investment
38. Which of the following computations may properly result to the correct
amount of share in associate’s profit or loss for the period?
a. Share in profit of associate minus amortization of share in the
overvaluation of associate’s asset
b. Share in profit of associate minus amortization of share in the
c. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus share in dividends declared by
associate
d. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus separate impairment loss on
goodwill included in the carrying amount of the investment
39. Which of the following may represent the net change in the investment in
associate account during a period?
a. Share in profit of associate minus share in dividends plus increase in the
investment in associate account
b. Share in profit of associate minus share in dividends minus increase in the
investment in associate account
c. Share in profit of associate minus share in dividends
d. Share in profit of associate plus share in dividends
40. Dividends received from an investment in an associate,

a. if in the form of cash dividends, is credited to investment income
b. if in the form of share dividends, is debited to investment income
c. if in the form of cash dividends, is credited to investment account only if
the cash dividends are declared from pre-acquisition retained earnings.
d. if in the form of share dividends, is recorded through memo entry only
41. The excess of purchase cost of an investment in associate over the fair value
of the interest acquired represents
a. goodwill that should not be amortized but tested for impairment at least
annually
b. negative goodwill that should be recognized in the investor’s profit or loss
in the year of acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
12
42. The excess of the fair value of the interest acquired over the purchase cost of
an investment in associate represents
a. goodwill that should not be amortized but tested for impairment at least
annually
b. negative goodwill that should be recognized in the investor’s profit or loss
in the year of acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
43. Equity method shall cease to be applied only when the investor loses
significant influence over the associate. Which of the following is not true?
a. The loss of significant influence can occur with or without a change in the
percentage of ownership.
b. An entity loses significant influence over an investee when it loses the
power to participate in the financial and operating policy decisions of that
investee.
c. There is a presumption of loss of significant influence if the ownership
interest falls below 20%.
d. There is a presumption of loss of significant influence when the associate
is operating under severe long-term restrictions that significantly impair
its ability to transfer funds to the investor.
44. Significant influence may be lost in any of the following, except

a. When an associate becomes subject to the control of a government, court,
administrator or regulator.
b. The investor is precluded, as a result of a contractual agreement, from
participating in the financial and operating policy decisions of the
investee.
c. The investor sells half of its 30% interest in an associate
d. The investor sells half of its 20% interest in an associate but retains the
voting rights on the investment sold through proxy agreement
45. Significant influence may be lost in any of the following, except

a. The investor loses its right to appoint board of directors in the associate
b. The investor purchases additional 31% interest in the associate
c. The associate is operating under severe long-term restrictions that
significantly impair its ability to transfer funds to the investor.
d. The investor retains its 20% interest in the associate but grants its voting
rights to an unrelated party.
46. On the loss of significant influence, the investor shall do any of the following,
except
a. measure at fair value any investment retained in the former associate.
b. recognize gain or loss for the difference between the net disposal
proceeds received and the carrying amount of the investment sold
c. recognize gain or loss for the difference between the fair value of the
interest retained and the carrying amount of the previous interest held
d. account for the discontinuance of equity method retrospectively.
47. If an investor loses significant influence over an associate,

a. all cumulative gain or loss previously recognized in other comprehensive
income is reclassified to profit or loss.
b. any cumulative gain or loss previously recognized in other comprehensive
income is reclassified directly in equity or to profit or loss, subject to the
requirements of PAS 1.
13
c. no adjustment to the investment account is necessary
d. the investment should be reclassified and any gain or loss on
reclassification is recognized in equity.
48. If an investor’s ownership interest in an associate is reduced but significant

influence is not lost,
a. the investor should cease applying the equity method and use PFRS 9 if
ownership interest is reduced below 20% or PFRS 3 and PAS 27 if
ownership interest is increased above 50%.
b. the investor shall reclassify to profit or loss or directly in equity only a
proportionate amount of the gain or loss previously recognized in other
comprehensive income.
c. the investor continues to use the equity method and since significant
influence is not lost, no adjustment is needed
d. do nothing
49. If there is any excess of the investor’s share of the net fair value of the
associate’s identifiable assets and contingent liabilities over the cost of the
investment, that is, negative goodwill, how should that excess be treated?
a. It should be included in the carrying amount of the investment.
b. It should be written off against retained earnings.
c. It should be included as income in the determination of the investor’s
share of the associate’s profit or loss for the period.
d. It should be disclosed separately as part of the investor’s equity.
(Adapted)
50. The investor’s interest on the undervaluation of depreciable assets of the

associate is
a. amortized using the effective rate and deducted to investment income
recognized for the period
b. depreciated and deducted from the carrying amount of the investment
c. amortized using the effective rate and added to the carrying amount of the
investment and deducted to investment income
d. depreciated and deducted from the carrying amount of the investment
and investment income recognized for the period
51. When the equity method is used to account for the investment in an associate,
the recording of the receipt of a cash distribution from the investee will result
in
a. The recognition of investment income.
b. A reduction in the investment balance.
c. An Increase in a liability account.
d. An increase in special equity account.
52. Stock dividends on common stock should be recorded at their fair market
value by the investor when the related investment is accounted for under
which of the following methods?
Cost Equity
a. Yes Yes
b. Yes No
c. No Yes
d. No No
(AICPA)
53. Which of the following statements is in accordance with the provisions of PAS
28?
14
I. The income or loss on the investment in associate is computed on the net

income after tax of the associate.
II. The income or loss on the investment in associate is presented in the
statement of profit or loss and other comprehensive income after the line
item “Income Tax Expense” but before discontinued operations.
a. I b. II c. I and II d. Neither I nor II
54. On January 1, 20x1, Adjacent Inc. purchased 10% of Juxtaposition Co.’s

common stock. Adjacent purchased additional shares bringing its ownership
up to 40% of Juxtaposition’s common stock outstanding on August 1, 20x1.
During October 20x1, Juxtaposition declared and paid a cash dividend on all
of its outstanding common stock. Under PAS 28, how much income from the
Juxtaposition investment should Adjacent’s 20x1 income statement report?
a. 10% of Juxtaposition’s income for January 1 to July 31, 20x1, plus 40% of
Juxtaposition’s income for August 1 to December 31, 20x1.
b. 40% of Juxtaposition’s income for August 1 to December 31, 20x1 only.
c. 40% of Juxtaposition’s 20x1 income.
d. Amount equal to dividends received from Juxtaposition.
(AICPA)
55. Which of the following statements are in accordance with PAS 28?
I. When the associate has cumulative preference shares, the investor
computes its share in the profit or loss of the investee after deducting the
preferred dividends, only when such dividends are declared.
II. When the associate has non-cumulative preference shares, the investor
computes its share in the profit or loss of the investee after deducting the
preferred dividends, whether or not such dividends are declared
a. true, true b. true, false c. false, true d. false, false
56. Bell owns 10% of the common stock of War Co. throughout the year. War Co.
has no preferred stock outstanding. Bella’s stock gives him the right to
a. be paid 10% of the firm’s profits in cash each year
b. receive dividends equal to 10% of the par value each year
c. receive dividends equal to 10% of the total dividends paid by the
corporation for the year to common stockholders
d. keep the corporation from issuing any additional stock unless he is willing
to buy 10% of the newly issued shares
(AICPA)
57. Adjustments to the carrying amount of the investment in associate may be

necessary for changes in the investor’s proportionate interest in the investee
arising from changes in the investee’s equity that have not been recognized in
the investee’s profit or loss. Which of the following may not necessitate an
adjustment to the investment in associate account?
a. Changes in revaluation surplus of associate
b. Changes in valuation of the associate’s FVOCI securities
c. Changes in the actuarial gains and losses of the associate not amortized
through the corridor approach
d. Changes in the Allowance for doubtful accounts of the associate
58. Which of the following is correct in relation to accounting for investments in

associates?
I. Theoretically, the total market value of shares held as investment in
associate which have been subjected to a share dividend should be the
same as it was before the dividend.
15
II. Share dividends received on an investment in associate is accounted for as
deduction from the investment account.
III. Share dividends received on an investment in associate is generally not
accounted for.
a. I b. II c. I and III d. I, II and III
59. Which of the following statements correctly refers to the provisions of PAS 28
Investments in Associates?
I. If an investor acquires additional shares sufficient to give him significant
influence, a retrospective adjustment should be made on the financial
statements to recognize share in profits and losses of the investee not
previously recognized.
II. No adjustment to the investment account is made when changing from the
fair value method to the equity method.
a. I b. II c. I and II d. Neither I nor II
60. An investor in equity securities received cash dividends in excess of the

investor’s share of investee’s earnings subsequent to the date of the
investment. How will the investor’s investment account be affected by those
dividends for each of the following investments?
FVOCI securities Equity method investment
a. No effect No effect
b. Decrease No effect
c. No effect Decrease
d. Decrease Decrease
(AICPA)
61. The investment in associate is reduced to zero when
a. the investment in associate is partly reclassified to FVPL
b. the share in the losses of the associate exceeds the share in the profits
c. at no instance should the investment be reduced to zero unless the
investment is derecognized through sale or other forms of disposal
d. the share in the losses of the associate exceeds the investor’s interest in
the associate
62. Consider the following statements.

I. In applying Equity Method of accounting for investments in associates,
dividends received from the investee are considered a return of capital
and should be credited to stockholders’ equity of the investor.
II. A subsidiary is an affiliate that is not controlled by an enterprise directly,
or indirectly, through one or more intermediaries.
State whether the foregoing statements are correct.

a. Only I is correct c. Only II is correct
b. I and II are correct d. Neither I nor II is correct
(RPCPA)
63. The following statements relate to equity method. Choose the incorrect
statement.
a. In accounting for investments in common stock under the equity method,
sales of stock of an investee by an investor, should be accounted for as
gains or losses equal to the difference at the time of sales between selling
price and carrying amount of the stock sold.
b. The general rule is that an investor owning 20% or more of the voting
stock of an investee is presumed to have the ability to exercise significant
interest over the investee.
16
c. Under the equity method of accounting, the investments in common stock
should be shown as a single amount, and the investor’s share of earnings
or losses from its investment should ordinarily be shown in its income
statement as a single amount including the results of discontinued
operations.
d. The equity method of recording security transactions assumes a close
economic relationship between the investor and the investee. It is used,
when influential interest exists.
(RPCPA)
64. Wrath Co. uses the equity method to account for its January 1, 2003 purchase
of Anger Inc.’s common stock. On January 1, 2003, the fair values of Anger’s
FIFO inventory and land exceeded their carrying amounts. How do these
excesses of fair values over carrying amounts affect Wrath’s reported equity
in Anger’s 2003 earnings?
Inventory excess Land excess
a. Decrease Decrease
c. Increase Increase
d. Increase No effect
(AICPA)
65. On May 1, 20x1, Upbeat Company acquired 30% of the voting stock of Reggae
Corp. In 20x1, Reggae had net earnings of ₱100,000 and paid dividends of
₱10,000. Upbeat mistakenly measured these transactions using the cost
instead of the equity method of accounting. What effect would this have on
working capital, dividend income, and net earnings, respectively?
a. overstate, overstate, overstate
b. no effect, understate, understate
c. no effect, overstate, understate
d. understate, understate, understate
(RPCPA)
66. Select the incorrect statement.

a. The cost method of accounting for an investment in a subsidiary
recognizes the legal fact that the parent and subsidiary are one economic
unit.
b. The net cumulative unrealized gains and losses on investments in equity
securities classified as FVOCI and are accounted for under the cost method
are usually measured by the difference between cost and current selling
price.
c. Under the equity method of accounting for long-term investments in
equity securities, the investor's investment account is decreased by all
cash dividends received from the investee.
d. The equity method of accounting for long-term investments in equity
securities is based on the presumption that the investor owns a sufficient
number of the outstanding voting shares of another company to exercise
significant influence over the operating and financial policies of the other
company.
67. Which of the following statement is the correct statement?

a. At the acquisition date of a long-term investment, the entry would be the
same whether the investor uses PFRS 9 or the equity method under PAS
28.
b. Under PAS 27, an investment in a subsidiary is shown as an asset, while
under the equity method, it is shown as part of equity.
17
c. Long-term investments are classified as long-term only because they are

not readily marketable.
d. Long-term investments in equity securities are written down only when
there has been a material and apparently permanent decline in the market
value of the investment below its cost.
e. Impairment losses on investments in associates are not accounted for
under PAS 28.
68. The following statements relate to the accounting for investments in equity
instruments.
I. Whenever an investment in marketable equity securities does not qualify
for accounting using the equity method, the investor is required to
recognize as dividend income cash dividends received from the investee.
II. The cost measurement for equity investments is permitted in separate
financial statements.
III. An investor may still be able to exercise significant influence over an
investee, even if the investment is less than 20% of the voting stock of the
investee.
IV. No adjustment to the investment account is made when changing from the
equity to the fair value measurement, or vice versa.
a. I, II b. I, II, III c. I, III d. I, II, IV
69. In its financial statements, Musang, Inc. uses the cost measurement of
accounting for its 15% ownership of Kalinga Coffee Co. At December 31, 20x1,
Musang has a receivable from Kalinga Coffee. How should the receivable be
reported in Musang’s December 31, 20x1 statement of financial position?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in
Kalinga Coffee, without separate disclosure.
c. 85% of the receivable should be reported separately, with the balance
offset against Kalinga Coffee’s payable to Musang.
d. The total receivable should be offset against Kalinga Coffee’s payable to
Musang, without separate disclosure.
(AICPA)
70. When the equity method is used to account for investments in common stock,
which of the following affects the investor’s reported investment income?
Equipment amortization related to purchase Cash dividends from investee
a. Yes Yes
b. No Yes
c. No No
d. Yes No
(AICPA)
71. Google Co. received a cash dividend from a common stock investment. Should
Google report an increase in the investment account if it has classified the
stock as FVOCI or uses the equity method of accounting?
FVOCI Equity
a. No No
b. Yes Yes
c. Yes No
d. No Yes
(AICPA)
18
72. Bliss Co. uses the equity method to account for its investment in Nirvana, Inc.
common stock. How should Bliss record a 2% stock dividend received from
Nirvana?
a. As dividend revenue at Nirvana's carrying value of the stock.
b. As dividend revenue at the market value of the stock.
c. As a reduction in the total cost of Nirvana stock owned.
d. As a memorandum entry reducing the unit cost of all Nirvana stock
owned.
(AICPA)
73. Which of the following investments in an associate is not within the scope of
PAS 28 Investments in associates?
a. An associate held by a subsidiary and measured at cost
b. An associate held by a venture capital organization and measured at cost
c. An associate held by a venture capital organization and measured at fair
value with changes in fair value recognized in profit or loss
d. An associate held by a subsidiary and measured at fair value with changes
in fair value recognized in profit or loss
(ACCA)
74. Fretboard Company equity accounts for its 40% interest in Fingerboard
Company. Fingerboard's financial statements include the following:
Revenue ₱ 600,000
Cost of sales (250,000)
350,000
Operating expenses (285,000)
65,000
Tax ( 20,000)
₱ 45,000
Are the following statements true or false, according to PAS 28 Investments in

associates?
1) Fretboard's consolidated revenue should include ₱240,000 in respect of
Fingerboard.
2) Fretboard's consolidated profit before tax should include ₱26,000 in respect
of Fingerboard.
Statement (1) Statement (2)
a. False False
b. False True
c. True False
d. True True
(ACCA)
75. An investor must apply the requirements of PAS 36 in determining whether it

is necessary to recognize any impairment loss in the investment in an
associate. How is the impairment test carried out?
a. The goodwill is separated from the rest of the investment and is
impairment tested individually.
b. The entire carrying amount of the investment is tested for impairment
under PAS 36 by comparing its recoverable amount with its carrying
amount.
c. The carrying value of the investment should be compared with its market
value.
d. The recoverable amounts of all investments in associates should be
assessed together to determine whether there has been an impairment on
all investments.
19
(Adapted)
76. What accounting method should be used for an investment in an associate

where it is operating under severe long-term restrictions - for example where
the government of a company has temporary control over the associate?
a. PFRS 9 should be applied.
b. The equity method should be applied if significant influence can be
exerted.
c. The associate should be shown at cost.
d. Proportionate consolidation should be used.
(Adapted)
77. If the investor ceases to have significant influence over an associate, how
should the investment be treated?
a. It should still be treated using equity accounting.
b. It should be treated in accordance with PFRS 9.
c. The investment should be frozen at the date at which the investor ceases
to have significant influence.
d. The investment should be treated at cost.
(Adapted)
78. When significant influence is achieved from additional purchase of shares

resulting to an increase in ownership interest,
a. the change to equity method is treated retrospectively, “catch up”
adjustments shall be made in order to restate the accounts to what their
balances should be had equity method been used all along.
b. the previous investment is measured at acquisition-date fair value and any
difference between this amount and the previous carrying amount is
recognized immediately in profit or loss.
c. PAS 28 and PFRS 3 requires that the investment account be adjusted for
any share in cash dividends declared by the investee in previous periods
that were recognized as income.
d. the previous investment is measured at acquisition-date fair value and any
recognized immediately in profit or loss or other comprehensive income,
as appropriate.
c. Under the equity method of accounting, the investments in common stock
should be shown as a single amount, and the investor’s share of earnings
or losses from its investment should ordinarily be shown in its income
statement as a single amount including the results of discontinued
operations.
d. The equity method of recording security transactions assumes a close
economic relationship between the investor and the investee. It is used,
when influential interest exists.
(RPCPA)
64. Wrath Co. uses the equity method to account for its January 1, 2003 purchase
of Anger Inc.’s common stock. On January 1, 2003, the fair values of Anger’s
FIFO inventory and land exceeded their carrying amounts. How do these
excesses of fair values over carrying amounts affect Wrath’s reported equity
in Anger’s 2003 earnings?
Inventory excess Land excess
a. Decrease Decrease
c. Increase Increase
d. Increase No effect
(AICPA)
65. On May 1, 20x1, Upbeat Company acquired 30% of the voting stock of Reggae
Corp. In 20x1, Reggae had net earnings of ₱100,000 and paid dividends of
₱10,000. Upbeat mistakenly measured these transactions using the cost
instead of the equity method of accounting. What effect would this have on
working capital, dividend income, and net earnings, respectively?
a. overstate, overstate, overstate
b. no effect, understate, understate
c. no effect, overstate, understate
d. understate, understate, understate
(RPCPA)
66. Select the incorrect statement.

a. The cost method of accounting for an investment in a subsidiary
recognizes the legal fact that the parent and subsidiary are one economic
unit.
b. The net cumulative unrealized gains and losses on investments in equity
securities classified as FVOCI and are accounted for under the cost method
are usually measured by the difference between cost and current selling
price.
c. Under the equity method of accounting for long-term investments in
equity securities, the investor's investment account is decreased by all
d. The equity method of accounting for long-term investments in equity
securities is based on the presumption that the investor owns a sufficient
number of the outstanding voting shares of another company to exercise
significant influence over the operating and financial policies of the other
company.
67. Which of the following statement is the correct statement?

a. At the acquisition date of a long-term investment, the entry would be the
same whether the investor uses PFRS 9 or the equity method under PAS
28.
b. Under PAS 27, an investment in a subsidiary is shown as an asset, while
under the equity method, it is shown as part of equity.
17
c. Long-term investments are classified as long-term only because they are
not readily marketable.
d. Long-term investments in equity securities are written down only when
there has been a material and apparently permanent decline in the market
value of the investment below its cost.
e. Impairment losses on investments in associates are not accounted for
under PAS 28.
68. The following statements relate to the accounting for investments in equity
instruments.
I. Whenever an investment in marketable equity securities does not qualify
for accounting using the equity method, the investor is required to
recognize as dividend income cash dividends received from the investee.
II. The cost measurement for equity investments is permitted in separate
financial statements.
III. An investor may still be able to exercise significant influence over an
investee, even if the investment is less than 20% of the voting stock of the
investee.
IV. No adjustment to the investment account is made when changing from the
equity to the fair value measurement, or vice versa.
a. I, II b. I, II, III c. I, III d. I, II, IV
69. In its financial statements, Musang, Inc. uses the cost measurement of
accounting for its 15% ownership of Kalinga Coffee Co. At December 31, 20x1,
Musang has a receivable from Kalinga Coffee. How should the receivable be
reported in Musang’s December 31, 20x1 statement of financial position?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in
Kalinga Coffee, without separate disclosure.
c. 85% of the receivable should be reported separately, with the balance
offset against Kalinga Coffee’s payable to Musang.
d. The total receivable should be offset against Kalinga Coffee’s payable to
Musang, without separate disclosure.
(AICPA)
70. When the equity method is used to account for investments in common stock,
which of the following affects the investor’s reported investment income?
Equipment amortization related to purchase Cash dividends from investee
a. Yes Yes
b. No Yes
c. No No
d. Yes No
(AICPA)
71. Google Co. received a cash dividend from a common stock investment. Should
Google report an increase in the investment account if it has classified the
stock as FVOCI or uses the equity method of accounting?
FVOCI Equity
a. No No
b. Yes Yes
c. Yes No
d. No Yes
(AICPA)
18
72. Bliss Co. uses the equity method to account for its investment in Nirvana, Inc.
common stock. How should Bliss record a 2% stock dividend received from
Nirvana?
a. As dividend revenue at Nirvana's carrying value of the stock.
b. As dividend revenue at the market value of the stock.
c. As a reduction in the total cost of Nirvana stock owned.
d. As a memorandum entry reducing the unit cost of all Nirvana stock
owned.
(AICPA)
73. Which of the following investments in an associate is not within the scope of
PAS 28 Investments in associates?
a. An associate held by a subsidiary and measured at cost
b. An associate held by a venture capital organization and measured at cost
c. An associate held by a venture capital organization and measured at fair
value with changes in fair value recognized in profit or loss
d. An associate held by a subsidiary and measured at fair value with changes
in fair value recognized in profit or loss
(ACCA)
74. Fretboard Company equity accounts for its 40% interest in Fingerboard
Company. Fingerboard's financial statements include the following:
Revenue ₱ 600,000
Cost of sales (250,000)
350,000
Operating expenses (285,000)
65,000
Tax ( 20,000)
₱ 45,000
Are the following statements true or false, according to PAS 28 Investments in

associates?
1) Fretboard's consolidated revenue should include ₱240,000 in respect of
Fingerboard.
2) Fretboard's consolidated profit before tax should include ₱26,000 in respect
of Fingerboard.
Statement (1) Statement (2)
a. False False
b. False True
c. True False
d. True True
(ACCA)
75. An investor must apply the requirements of PAS 36 in determining whether it

is necessary to recognize any impairment loss in the investment in an
associate. How is the impairment test carried out?
a. The goodwill is separated from the rest of the investment and is
impairment tested individually.
b. The entire carrying amount of the investment is tested for impairment
under PAS 36 by comparing its recoverable amount with its carrying
amount.
c. The carrying value of the investment should be compared with its market
value.
d. The recoverable amounts of all investments in associates should be
assessed together to determine whether there has been an impairment on
all investments.
19
(Adapted)
76. What accounting method should be used for an investment in an associate

where it is operating under severe long-term restrictions - for example where
the government of a company has temporary control over the associate?
a. PFRS 9 should be applied.
b. The equity method should be applied if significant influence can be
exerted.
c. The associate should be shown at cost.
d. Proportionate consolidation should be used.
(Adapted)
77. If the investor ceases to have significant influence over an associate, how
should the investment be treated?
a. It should still be treated using equity accounting.
b. It should be treated in accordance with PFRS 9.
c. The investment should be frozen at the date at which the investor ceases
to have significant influence.
d. The investment should be treated at cost.
(Adapted)
78. When significant influence is achieved from additional purchase of shares

resulting to an increase in ownership interest,
a. the change to equity method is treated retrospectively, “catch up”
adjustments shall be made in order to restate the accounts to what their
balances should be had equity method been used all along.
b. the previous investment is measured at acquisition-date fair value and any
recognized immediately in profit or loss.
c. PAS 28 and PFRS 3 requires that the investment account be adjusted for
any share in cash dividends declared by the investee in previous periods
that were recognized as income.
d. the previous investment is measured at acquisition-date fair value and any
recognized immediately in profit or loss or other comprehensive income,
as appropriate.
79. Profits and losses resulting from “upstream” and “downstream” transactions
between an investor and an associate are
a. recognized in the investor’s financial statements through proportionate
consolidation, meaning the investor recognizes its share in the sale and
cost of sales recorded by the associate
b. recognized in the investor’s financial statements only to the extent of
unrelated investors’ interests in the associate.
c. recognized in the investor’s financial statements only to the extent of
related investors’ interests in the associate.
d. not recognized in the investor’s financial statements
80. Under PAS 28, profits and losses resulting from ‘upstream’ and ‘downstream’
transactions between an investor and an associate
a. must be eliminated to the extent of the investor’s interest in the associate.
b. must be eliminated to the extent of the unrelated interest over the
associate
c. must be recognized in full after adjustment for the increases or decreases
in beginning inventory
d. not recognized
20
81. Under PAS 28, adjustments to share in profit or loss of an associate may differ
if the transaction is “downstream” or “upstream.” Which of the following
statements is true?
I. Jack Co. owns 20% interest in Old Man, Inc. During the year Old Man sold
magic beans to Jack. This is an upstream transaction.
II. Goldilocks Co. owns 20% interest in Papa Bear, Inc. During the year
Goldilocks purchased porridge from Papa Bear. This is a downstream
transaction.
a. true, true b. true false c. false, true d. false, false
82. Daddeh Co. owns 20% interest in Bebeh Co. During the year, Daddeh sold
inventory to Bebeh at 20% gross profit. As of year-end Bebeh still holds 100%
of the inventory. How much share in the profit from the transaction will
Daddeh recognize for the year? Assume income tax rate of 30%.
a. 14% b. 80% c. 2.8% d. none
83. Under PAS 28, it refers to the carrying amount of the investment in the
associate under the equity method together with any long-term interests that
in substance, form part of the investor’s net investment in the associates.
a. investment in associate c. interest in ownership
b. interest in the associate d. none
84. Which of the following may not be included in interest in associate when
determining the threshold in recognizing share in losses of associate?
a. investment in preference shares of associate
b. long-term, unsecured, advances to the associate
c. trade receivables from the associate
d. investment in associate
85. Losses recognized under the equity method in excess of the investor’s
investment in ordinary shares are applied to the other components of the
investor’s interest in the associate
a. in the order of their seniority
b. in the reverse order of their seniority
c. in the order of priority in liquidation
d. in no particular order
86. After the investor’s interest in the associate is reduced to zero, additional
losses are provided for, and a liability is recognized, only to the extent that the
investor has incurred
a. legal or constructive obligations
b. made payments on behalf of the associate
c. a or b
d. further losses are not recognized
87. If the associate subsequently reports profits, the investor resumes

recognizing its share of those profits
a. only after its share of the profits equals the share of losses not recognized
b. only after its share of the profits equals the share of losses previously
recognized
c. only if there are no outstanding legal or constructive obligation incurred
on behalf of the associate
d. a or b
88. How is goodwill arising from investments in associates accounted for?

21
a. Included in the carrying amount of the investment and not amortized but
tested separately for impairment at least annually.
b. Not accounted for separately; however, presented as a separate asset in
the investor’s separate financial statements.
c. Included in the carrying amount of the investment and the entire
investment in associate is tested for impairment under PAS 36.
d. Recognized as a separate asset either in the group financial statements or
in the separate financial statements but not amortized.
Others
89. Investments in associates are normally classified in the statement of financial
position as
a. current assets b. noncurrent assets c. fair value d. equity account
90. The investor’s share in the associate’s revaluation surplus is

a. recognized in the investor’s equity together with the investor’s
revaluation surplus
b. recognized in the investor’s property, plant and equipment with separate
disclosure
c. recognized in the investor’s retained earnings with separate disclosure
d. not recognized
91. What should happen when the financial statements of an associate are not
prepared to the same date as the investor’s accounts?
a. The associate should prepare financial statements for the use of the
investor at the same date as those of the investor.
b. The financial statements of the associate prepared up to a different
accounting date will be used as normal.
c. Any major transactions between the date of the financial statements of the
investor and that of the associate should be accounted for.
d. As long as the gap is not greater than three months, there is no problem.
(Adapted)
92. Preparation of consolidated financial statements is primarily based on the:

a. time period assumption d. cost/benefit constraint
b. full-disclosure principle e. separate entity assumption
c. cost principle
(Adapted)
93. The reporting dates of the investor and its associate should not differ by more
than
a. one month b. two months c. three months d. six months
94. When the accounting policies used by the investor and the associate do not
match
a. PAS 28 requires appropriate adjustments to the associate’s financial
statements to conform them to the investor’s accounting policies for
reporting like transactions and other events in similar circumstances.
b. PAS 28 does not require appropriate adjustments to the associate’s
financial statements to conform them to the investor’s accounting policies
for reporting like transactions and other events in similar circumstances
when it was not practicable to use uniform accounting policies
c. PAS 28 requires the entity to discontinue the use of the equity method
d. In no instance should the accounting policies used by the investor and the
associate be different.
22
95. When financial statements of an associate used in applying the equity method
are prepared as at the end of the reporting period that is different from that of
the investor,
a. the difference must be no greater than three months
b. the difference must be no greater than twelve months
c. the difference must be compensated by an interim financial statement
d. no difference must exist
96. When an entity elects to prepare separate financial statements, it shall

account for its investment in associates
a. at cost c. using the equity method
b. in accordance with PFRS 9 d. any of these
Chapter 12 - Suggested answers to theory of accounts questions

1. C 16. A 31. A 46. D 61. D 76. B 91. A
2. A 17. C 32. D 47. B 62. D 77. B 92. E
3. D 18. D 33. D 48. B 63. C 78. D 93. C
4. B 19. D 34. A 49. C 64. B 79. B 94. A
5. C 20. C 35. D 50. D 65. C 80. A 95. A
6. D 21. B 36. D 51. B 66. A 81. B 96. D
7. D 22. A 37. A 52. D 67. E 82. D
8. A 23. C 38. B 53. A 68. B 83. B
9. D 24. D 39. C 54. B 69. A 84. C
10. C 25. C 40. D 55. D 70. D 85. B
11. D 26. B 41. D 56. C 71. A 86. C
12. A 27. A 42. B 57. D 72. D 87. A
13. C 28. D 43. D 58. C 73. C 88. C
14. C 29. C 44. D 59. D 74. A 89. B
15. D 30. D 45. C 60. C 75. B 90. A
23
Chapter 13
Agriculture
Chapter 13: Multiple Choice – Computational (For classroom instruction

purposes)
Distinction between Biological asset, Agricultural produce, and Inventory
The following information pertains to Madagascar Co.
Sheep 500,000 Wool 6,000
Rubber products 10,000 Thread 3,000
Trees in a timber plantation 95,000 Felled trees 8,000
Maize plants 40,000 Clothing 150,000
Lumber 62,000 Milk 9,000
Pigs 200,000 Carcass 7,000
Roasted peanuts 20,000 Sugar 67,000
Cotton plants 10,000 Harvested cotton 13,000
Peanut plants 5,000 Harvested peanuts 140,000
Sugarcane 25,000 Harvested cane 22,000
Tobacco plants 45,000 Picked leaves 3,000
Tea bushes 800,000 Oil palms 300,000
Dairy cattle 1,000,000 Picked grapes 2,000
Fruit trees 600,000 Picked fruit 10,000
Tea 43,000 Grape vines 2,000,000
Rubber trees 300,000 Harvested latex 10,000
Yarn 22,000 Cured tobacco 320,000
Carpet 33,000 Wine 500,000
Logs 45,000 Processed fruit 20,000
Wheat plants 60,000 Palm oil 50,000
Cheese 75,000 Bean plants 20,000
Sausages 88,000 Cured hams 92,000
1. How much is classified as biological assets that are accounted for under PAS
41 Agriculture?
a. 2,660,000 b. 2,000,000 c. 6,000,000 d. 2,250,000
2. How much is classified as property, plant and equipment that are accounted
for under PAS 16 Property, Plant and Equipment?
a. 4,000,000 b. 4,860,000 c. 4,560,000 d. 3,650,000
3. How much is classified as agricultural produce?

a. 149,000 b. 248,000 c. 290,000 d. 250,000
4. How much is classified as inventory?

a. 1,480,000 b. 1,580,000 c. 1,540,000 d. 1,880,000
Measurement
The following information pertains to a biological asset of PETRIFY STUN Co.
Estimated selling price ₱80,000
Commissions to brokers 4,000
Transport costs 2,800
Levies by commodity exchange 1,200
Transfer taxes and duties 2,000
24
Advertising costs 800
5. How much is the fair value of the biological asset?

a. 80,000 b. 77,200 c. 70,000 d. 69,200
6. How much is the cost to sell of the biological asset?

a. 7,200 b. 10,000 c. 10,800 d. 12,000
7. How much is the valuation of the biological asset in PETRIFY’s statement of

financial position?
a. 80,000 b. 77,200 c. 70,000 d. 69,200
Access to different active markets

8. Information on a biological asset of INSTIGATE PROVOKE Co. is shown below:
Historical cost ₱40,000
Quoted price in Active Market #1 112,000
Quoted price in Active Market #2 120,000
Costs to sell in either active market 20,000
Contract price 128,000
INSTIGATE Co. is contemplating on transacting in Active Market #1, which is the

principal market for the biological asset. At what amount would the biological
asset be recognized in the year-end financial statements?
a. 92,000 b. 100,000 c. 112,000 d. 120,000
Loss on initial recognition of biological asset

9. On January 1, 20x1, SPAT QUARREL Co. acquired a biological asset at its fair
value of ₱40,000. Necessary costs incurred on the purchase totaled ₱8,000. It
was estimated that if the biological asset is to be sold currently, costs to sell
would amount to ₱2,000. How much is the loss recognized on January 1,
20x1?
a. 38,000 b. 30,000 c. 10,000 d. 0
Gain on initial recognition of biological asset

10. On August 1, 20x1, a dairy cattle of WOO COURT Co. gave birth to a calf. The
fair value less cost to sell of a newly born calf as of August 1, 20x1 is ₱20,000.
Costs incurred to induce procreation such as costs of artificial insemination,
costs of labor and cesarean birth totaled ₱12,000. How much is the gain
recognized on August 1, 20x1?
a. 8,000 b. 12,000 c. 20,000 d. 0
Gain on initial recognition of agricultural produce

11. On April 1, 20x1, HALLOWED SACRED Co. harvested ripe mangoes. The
harvested mangoes have fair value less costs to sell of ₱200,000 on April 1,
20x1. Labor costs incurred in the harvest totaled ₱20,000. The harvested
mangoes are initially recognized at
a. 20,000 b. 180,000 c. 200,000 d. 220,000
Gains or losses on changes in fair value less cost to sell

12. On January 1, 20x1, the biological assets of SUAVE POLISHED Co. consist of
ten 2 year old animals with fair value less cost to sell of ₱40,000 each for a
total of ₱400,000.
Transactions during the year include the following:

 One animal aged 2.5 years was purchased on July 1, 20X1 for ₱43,200.
 One animal was born on July 1, 20X1.
25
 No animals were sold or disposed of during the period.
Per-unit fair values less costs to sell are as follows:

Newborn animal at July 1, 20X1 ₱28,000
2.5 year old animal at July 1, 20X1 43,200
Newborn animal at 31 December 20X1 28,800
0.5 year old animal at 31 December 20X1 32,000
2 year old animal at 31 December 20X1 42,000
2.5 year old animal at 31 December 20X1 44,400
3 year old animal at 31 December 20X1 48,000
How much is the total gain from the change in fair value less costs to sell during
20x1?
a. 116,800 b. 156,800 c. 113,600 d. 88,800
Biological assets attached to land

13. CANDOR FAIRNESS Co. has the following assets as of December 31, 20x1:
Land held as plantation ₱1,200,000
Trees (planted on the land referred to above) 480,000
The combined market value of the assets is ₱2,000,000 while the market value of
the land is ₱1,280,000, 10% of which is attributable to improvements on the land.
How much is the valuation of the biological asset?
a. 592,000 b. 720,000 c. 848,000 d. 836,364
Unconditional government grant

14. On January 1, 20x1, LUSTROUS BRIGHT Co. was granted by a local
government a grant of ₱400,000 to aid LUSTROUS in financing the
domestication of ostriches. The ostriches are managed to produce eggs that
are sold to the community. LUSTROUS measures its biological assets at fair
value less cost to sell. No conditions are attached to the grant. How much is
the income from government grant to be recognized in 20x1?
a. 400,000 b. 0 c. either a or b d. neither a nor b
Conditional government grant

15. On December 1, 20x1, MARAUD PLUNDER Co. was granted by a local
government a grant of ₱400,000 to aid MARAUD in planting American
evergreen trees. This certain tree has small yellowish flowers followed by
fleshy pods with many seeds that bears cacao. Cacao beans are dried, partly
fermented, powdered ground and roasted in order to produce a raw material
for the production of chocolates. The grant becomes receivable when
MARAUD acquires a suitable site to plant the trees. As of December 31, 20x1,
MARAUDE has yet to comply with the condition. How much is the income
from government grant to be recognized in 20x1?
a. 400,000 b. 0 c. either a or b d. neither a nor b
Conditional government grant

In 20x1, DEADLOCK STANDSTILL Co. was granted by a local government a 3-
hectare land to plant “camote” (sweet potato). The land has a fair value of
₱2,000,000. The grant requires DEADLOCK to farm only within the city limits for
five years. If any of the conditions is breached, DEADLOCK is required to return
the entire grant.
16. How much income from government grant is recognized in 20x1?

a. 2,000,000 b. 0 c. either a or b d. neither a nor b
26
17. How much income from government grant is recognized in 20x6, after the 5-
year restriction has lapsed?
a. 2,000,000 b. 0 c. either a or b d. neither a nor b
Part of government grant retained due to passage of time

On January 1, 20x1, RESTIVE UNEASY Co. was granted by a local government a
₱2,000,000 grant to aid RESTIVE Co. in planting “sayote” (chayote). The grant
requires RESTIVE to farm only within the city limits for five years. If any of the
conditions is breached, RESTIVE must return the grant taking into consideration
the portion retained based on passage of time.
18. Assuming no breach of condition, how much income from government grant
is recognized in 20x1?
a. 2,000,000 b. 400,000 c. 0 d. either a or c
19. Assuming no breach of condition, how much income from government grant
is recognized in 20x2?
a. 2,000,000 b. 400,000 c. 0 d. either a or c
Change in FVLCS attributable to price change and physical change

On January 1, 20x1, the biological assets of SUAVE POLISHED Co. consist of ten 2
year old animals with fair value less cost to sell of ₱40,000 each for a total of
₱400,000.

 One animal aged 2.5 years was purchased on July 1, 20x1 for ₱43,200.
 One animal was born on July 1, 20x1.
 No animals were sold or disposed of during the period.

Newborn animal at July 1, 20x1 ₱28,000
2.5 year old animal at July 1, 20x1 43,200
Newborn animal at 31 December 20x1 28,800
0.5 year old animal at 31 December 20x1 32,000
2 year old animal at 31 December 20x1 42,000
20. How much is the total gain from the change in fair value less costs to sell
during 20x1?
a. 116,800 b. 156,800 c. 113,600 d. 88,800
21. How much is the gain on change in fair value less costs to sell due to price
change?
a. 22,000 b. 94,800 c. 34,800 d. 122,000
22. How much is the gain on change in fair value less costs to sell due to physical
change?
a. 22,000 b. 94,800 c. 98,400 d. 122,000
27
Change in FVLCS attributable to price change and physical change
On January 1, 20x1, the biological assets of GENTEEL POLITE Co. consist of ten 2-
year old animals with fair value less cost to sell of ₱40,000 each for a total of
₱400,000.

 One animal aged 2.5 years was purchased on July 1, 20X1 for ₱43,200.
 One animal was born on July 1, 20X1.
 Two animals from the January 1, 20x1 biological assets were sold for ₱48,000
each on Sept. 1, 20x1.
 One animal from the January 1, 20x1 biological assets died of “mad cow”
disease on November 1, 20x1.

Newborn animal at July 1, 20x1 ₱28,000
2.5 year old animal at July 1, 20x1 43,200
Newborn animal at 31 December 20x1 28,800
23. How much is the total gain from the change in fair value less costs to sell
during 20x1?
a. 116,800 b. 156,800 c. 113,600 d. 92,800
24. How much is the gain on change in fair value less costs to sell due to price
change?
a. 22,000 c. 94,800 c. 34,800 d. 16,000
25. How much is the gain on change in fair value less costs to sell due to physical
change?
a. 22,000 c. 94,800 c. 122,000 d. 76,800


Objective and scope
1. According to PAS 41 this refers to the management by an entity of the
biological transformation of biological assets for sale, into agricultural
produce, or into additional biological assets.
a. Agricultural activity c. Biological transformation
b. Agricultural management d. Biological activity
2. Agricultural activity covers a diverse range of activities. Such diverse range of

activities have common features which includes all of the following except
a. Capability to change c. Recognition of change
b. Management of change d. Measurement of change
3. It is the detachment of produce from a biological asset or the cessation of a

biological asset’s life processes.
28
a. Harvest b. Death c. Decease d. Cultivation
4. When there is a long aging or maturation process after harvest, the

accounting for such products should be dealt with by
a. PAS 41 b. PAS 2 c. PAS 16 d. PAS 40
5. According to PAS41 Agriculture, which of the following would be classified as

a product that is the result of processing after harvest?
a. Cotton b. Wool c. Bananas d. Cheese
(ACCA)
6. Which of the following items would be classified as agricultural produce,

according to PAS41 Agriculture?
a. Tree b. Bush c. Butter d. Apple
(ACCA)
7. According to PAS41 Agriculture, which of the following items would be

classified as biological assets?
I. Oranges
II. Chickens
III. Eggs
IV. Trees
a. I, II b. III, IV c. II, IV d. I, IV
(ACCA)
8. Are the following statements about classification according to PAS 41

Agriculture true or false?
I. Sugar should be classified as agricultural produce.
II. Wool should be classified as agricultural produce.
a. False, False b. False, True c. True, False d. True, True
(ACCA)
9. Which of the following is not dealt with by PAS 41?

a. The accounting for biological assets.
b. The initial measurement of agricultural produce harvested from the
entity’s biological assets.
c. The processing of agricultural produce after harvesting.
d. The accounting treatment of government grants received in respect of
biological assets.
(Adapted)
10. Which of the following is correct regarding the applicability of PAS 41?
a. PAS 41 applies to biological assets and agricultural produce at the point of
harvest even if they do not relate to agricultural activities.
b. PAS 41 applies to unconditional government grant related to biological
assets measured at cost.
c. PAS 41 applies to land on which tree recognized as biological assets are
planted.
d. PAS 41 applies to living plants and animals only when such items relate to
agricultural activity.
11. PAS 41 applies to which of the following when they relate to agricultural
activity
I. Biological assets
II. Agricultural produce after the point of harvest
III. Agricultural produce at the point of harvest
29
IV. An unconditional government grant related to a biological asset measured
at its fair value less costs to sell
V. An unconditional government grant related to a biological asset measured
at cost land related to agricultural activity
VI. Intangible assets related to agricultural activity
a. I, II, IV b. I, III, IV c. I, II, III, IV, V d. I, II, IV, VI
12. According to PAS 41 this refers to the harvested product of the entity’s
biological assets.
a. biological produce c. agricultural produce
b. agricultural products d. biological assets
13. It is a living animal or plant

a. biological product c. agricultural product
b. biological asset d. mutant assets
14. It comprises the processes of growth, degeneration, production, and

procreation that cause qualitative or quantitative changes in a biological
asset.
a. agricultural activity c. genetic mutation
b. biological activity d. biological transformation
15. Agricultural activity covers a diverse range of activities which includes all of
the following except
a. processing of grapes into wine by a vintner who has grown the grapes.
b. raising livestock, forestry, and annual or perennial cropping
c. cultivating orchards and plantations
d. floriculture and aquaculture (including fish farming).
16. Agricultural activity may include

a. ocean fishing c. animal hunting in the forest
b. deforestation d. fish pond operation
Initial and subsequent measurement

17. According to PAS41 Agriculture, which of the following criteria must be
satisfied before a biological asset can be recognized in an entity's financial
statements?
I. The entity controls the asset as a result of past events
II. It is probable that economic benefits relating to the asset will flow to the
entity
III. An active market for the asset exists
IV. The asset forms a homogenous biological group
a. I, II b. I, II, IV c. I, II, III d. I, II, III, IV
(ACCA)
18. Biological assets and agricultural produce are initially recognized at

a. cost c. fair value less costs to sell
b. fair value d. lower of cost or fair value less costs to sell
19. According to PAS41 Agriculture, which of the following expenses would be

classified as costs to sell when valuing biological assets and agricultural
produce?
I. Commissions to brokers
II. Transport costs
III. Transfer taxes and duties
IV. Advertising costs
30
a. I, II, III b. III, IV c. I, III d. I, III, IV
(ACCA)
20. Regarding the choice of measurement basis used for valuing biological assets,
PAS 41
a. Sets out several ways of measuring fair value.
b. Recommends the use of historical cost.
c. Recommends the use of current cost.
d. Recommends the use of present value.
(Adapted)
21. Where the fair value of the biological asset cannot be determined reliably, the
biological asset is measured at
a. Cost.
b. Cost less accumulated depreciation.
c. Cost less accumulated depreciation and accumulated impairment losses.
d. Net realizable value.
22. Generally speaking, biological assets relating to agricultural activity should be

measured using
a. Historical cost.
b. Historical cost less depreciation less impairment.
c. A fair value approach.
d. Net realizable value.
(Adapted)
23. Which of the following values is unlikely to be used in fair value measurement
of a biological asset?
a. Quoted price in a market.
b. The most recent market transaction price.
c. The present value of the expected net cash flows from the asset.
d. External independent valuation.
(Adapted)
24. The Plants Vs. Zombies Company owns a number of herds of cattle. Where
should changes in the fair value of a herd of cattle recognized in the financial
statements, according to PAS 41 Agriculture?
a. In profit or loss only
b. In other comprehensive income only
c. In profit or loss or other comprehensive income
d. In the statement of cash flows only
(ACCA)
25. An entity had a plantation forest that is likely to be harvested and sold in 30
years. The income should be accounted for in which of the following way?
a. No income should reported annually until first harvest and sale in 30
years
b. Income should be measured annually and reported using a fair value
approach that recognizes and measures biological growth.
c. The eventual sale proceeds should be estimated and matched to the profit
and loss account over the 30 year period.
d. The plantation forest should be valued every 5 years and the increase in
value should be shown in the statement of recognized gains and losses
(Adapted)
31
26. When agricultural produce is harvested, the harvest should be accounted for
by using PAS 2 Inventories, or another applicable PFRS. For the purpose of
that Standard, cost at the date of harvest is deemed to be
a. the fair value less cost to sell at point of harvest.
b. the historical cost of the harvest.
c. the historical cost less accumulated impairment losses.
d. market value.
27. A gain or loss arising on the initial recognition of a biological asset and from a
change in the fair value less costs to sell of a biological asset should be
included in
a. The net profit or loss for the period.
b. The statement of recognized gains and losses.
c. A separate revaluation reserve.
d. A capital reserve within equity.
(Adapted)
28. Land that is related to agricultural activity is valued

a. At fair value.
b. In accordance with PAS 16, Property, Plant and Equipment, or PAS 40,
Investment Property
c. At fair value in combination with the biological asset that is being grown
on the land.
d. At the resale value separate from the biological asset has been grown on
the land.
(Adapted)
29. Which of the following costs are not included in costs to sell?
a. Commissions to brokers and dealers.
b. Levies by regulatory agencies.
c. Transfer taxes and duties.
d. Transport and other costs necessary to get the assets to a market.
30. In relation to PAS 41, which of the following is the least desirable choice of
income recognition?
a. Recognition of income during production
b. Recognition of income when a sale occurs
c. Recognition of income only when cash is collected
d. Recognition of income when production is completed
Government grants
31. An unconditional government grant related to a biological asset that has been
measured at fair value less cost to sell should be recognized as
a. Income when the grant becomes receivable.
b. A deferred credit when the grant becomes receivable.
c. Income when the grant application has been submitted.
d. A deferred credit when the grant has been approved.
(Adapted)
32. Under PAS 41, which of the following statements is untrue?

a. Contract prices are not necessarily relevant in determining fair value, and
the fair value of a biological asset or agricultural produce is not adjusted
because of the existence of a contract.
b. An unconditional government grant related to a biological asset measured
at FVLCS shall be recognized in profit or loss when, and only when, the
government grant becomes receivable.
32
c. A conditional government grant related to a biological asset measured at
FVLCS, including a government grant that requires an entity not to engage
in specified agricultural activity, shall be recognized in profit or loss when
the conditions attaching to the government grant are met.
d. If the terms of a conditional grant allow part of it to be retained according
to the time that has elapsed, the entity recognizes that part in profit or loss
only upon fulfillment of the condition.
33. If the terms of a conditional government grant allow part of the grant to be
retained according to the time that has elapsed, the entity recognizes income
from grant
a. using the straight line method
b. only when the condition is fulfilled
c. in full as time passes
d. using the effective interest method
34. If a government grant is conditional on certain events, then the grant should
be recognized as
a. Income when the conditions attaching to the grant are met.
b. Income when the grant has been approved.
c. A deferred credit when the conditions attached to the government grant
are met.
d. A deferred credit when the grant is approved.
(Adapted)
Disclosures
35. Where there is a production cycle of more than one year for a biological asset,
PAS 41 encourages separate disclosure of the
a. Physical change only. c. Total change in value
b. Price change only d. a and b
36. Which of the following is a required disclosure under PAS 41?

a. a quantified description of each group of biological assets, distinguishing
between consumable and bearer biological assets
b. a quantified description of each group of biological assets, distinguishing
between mature and immature biological assets
c. the amount of change in fair value less costs to sell included in profit or
loss due to physical changes and due to price changes.
d. the depreciation method used if an entity measures biological assets at
their cost less any accumulated depreciation and any accumulated
impairment losses
e. a, b and c
37. Which of the following information should be disclosed under PAS 41?
a. Separate disclosure of the gain or loss relating to biological assets and
agricultural produce.
b. The aggregate gain or loss arising on the initial recognition of biological
assets and agricultural produce and the change in fair value less cost to
sell of biological assets.
c. The total gain or loss from biological assets, agricultural produce, and
from changes in fair value less cost to sell of biological assets.
d. There is no requirement in the Standard to disclose separately any gains
or losses.
(Adapted)
33
38. These refer to those that are to be harvested as agricultural produce or sold
as biological assets.
a. consumable biological assets c. agricultural produce
b. bearer biological assets d. biological assets
39. The following relate to consumable biological assets

I. livestock intended for the production of meat
II. livestock held for sale
III. trees from which firewood is harvested while the tree remains
IV. crops such as maize and wheat
V. trees being grown for lumber
VI. VI fish in farms
a. IV, V, VI b. II, IV, V, VI c. I, II, IV, V, VI d. all of these
40. These biological assets are not agricultural produce but, rather, are self-
regenerating.
a. consumable biological assets c. agricultural produce
b. bearer biological assets d. biological assets
41. The following relate to bearer biological assets

I. livestock from which milk is produced
II. grape vines
III. fruit trees
IV. trees from which firewood is harvested while the tree remains
V. trees being grown for lumber
VI. fish in farms
a. I, II, III, IV b. II, IV, V, VI c. I, II, III, IV, V d. all of these
42. These are biological assets that have attained harvestable specifications (for
consumable biological assets) or are able to sustain regular harvests (for
bearer biological assets).
a. mature biological assets c. harvestable biological assets
b. immature biological assets d. completely mutated biological assets
Chapter 13 - Suggested answers to review theory questions

1. A 11. B 21. C 31. A 41. A
2. C 12. C 22. C 32. D 42. A
3. A 13. B 23. D 33. A
4. B 14. D 24. A 34. A
5. D 15. A 25. B 35. D
6. D 16. D 26. A 36. D
7. C 17. A 27. A 37. B
8. B 18. C 28. B 38. A
9. C 19. C 29. D 39. C
10. D 20. A 30. C 40. B
34
Chapter 14
Property, Plant and Equipment (Part 1)

Acquisition on cash basis
1. LOQUACIOUS TALKATIVE Co. acquired a factory equipment overseas on cash
basis for ₱400,000. Additional costs incurred include the following:
commissions paid to brokers for the purchase of the equipment, ₱20,000;
import duties of ₱100,000; non-refundable purchase taxes of ₱40,000; freight
cost of transferring the equipment to LOQUACIOUS’ premises, ₱4,000; costs of
assembling and installing the equipment, ₱8,000; costs of testing the
equipment, ₱6,000; administration and other general overhead costs,
₱16,800; and advertisement and promotion costs of the new product to be
produced by the equipment, ₱15,200. The samples generated from testing the
equipment were sold at ₱2,000. How much is the initial cost of the
equipment?
a. 578,000 b. 594,800 c. 576,000 d. 592,800
Acquisition on account
2. PRECLUDE PREVENT Co. acquired an equipment for ₱448,000 on account
with a credit term of 2/15, n/30. Any discount is computed based on the
purchase price. The purchase price is inclusive of 12% value added tax (VAT).
PRECLUDE Co. is VAT-registered and any input VAT paid is refundable
through deduction from monthly output VAT remitted to the Bureau of
Internal Revenue (BIR). Additional costs incurred include ₱40,000 cost of
training staff who will be operating the equipment and ₱60,000 cost of
relocating the equipment to a new location after it was installed in a location
originally intended by management. How much is the initial cost of the
equipment?
a. 400,000 b. 391,040 c. 491,040 d. 392,000
Deferred settlement – with cash price equivalent

3. On January 1, 20x1, SQUAMOUS SCALY Co. purchased furniture with an
installment price of ₱520,000 and a cash price equivalent of ₱400,000 by
paying ₱40,000 down payment and issuing a one-year noninterest-bearing
note of ₱120,000 payable in equal semi-annual installments on July 1 and
December 31, 20x1. How much is the initial cost of the furniture?
a. 520,000 b. 480,000 c. 400,000 d. 360,000
Deferred settlement – no cash price equivalent

4. On January 1, 20x1, REEDY SLENDER Co. purchased fixtures with an
installment price of ₱520,000 by paying ₱40,000 down payment and issuing a
three-year noninterest bearing note of ₱480,000 payable in three equal
annual installments starting December 31, 20x1. The prevailing rate for the
note as of January 1, 20x1 is 12%. How much is the initial cost of the fixtures?
a. 520,000 b. 480,000 c. 424,293 d. 360,000
Deferred settlement – no cash price equivalent

5. On January 1, 20x1 ABC Co. acquired a building for ₱380,000, including
₱20,000 non-refundable purchase taxes. The purchase agreement provided
for payment to be made in full on December 31, 20x1. Legal fees of ₱8,000
35
were incurred in acquiring the building and paid on January 1, 20x1. An
appropriate discount rate is 10%. How much is the initial cost of the building?
a. 368,000 b. 388,000 c. 424,634 d. 353,456
Classes of PPE
6. ABC Co. had the following assets on December 31, 20x1.
Land used as plant site 50,000
Land and building classified as held for sale 780,000
Building used as office 500,000
Building rented out under operating lease 420,000
Equipment being sold in the ordinary course of business 330,000
Office furniture 24,000
Fixtures and signage 10,000
Machinery 12,000
Automobiles (used by company officers) 350,000
Delivery trucks (used by the shipping department) 420,000
Computers 70,000
Aircraft rented out to various clients 690,000
Dairy cattle (held to produce milk that is sold to customers) 10,000
Harvested milk 3,000
Apple trees (held to bear fruits to that are sold to customers) 6,000
Harvested apples 2,000
How much is the total of assets classified as property, plant and equipment?
a. 2,132,000 b. 2,126,000 c. 2,142,000 d. 2,148,000
Acquisition on lump-sum price (building not razed)

On April 1, 20x1, ESCULENT EDIBLE Co. purchased land and building by paying
₱40,000,000 and assuming a mortgage of ₱8,000,000. The land and building have
appraised values of ₱20,000,000 and ₱40,000,000, respectively. The building will
be used by ESCULENT Co. as its new office.
Additional costs relating to the purchase include the following:

Legal cost of conveying and registering title to land ₱32,000
Payment to tenants to vacate premises 36,000
Option paid on the land and building 24,000
Option paid on similar land and building not acquired 12,000
Broker's fee on the land and building 60,000
Unpaid real estate taxes prior to April 1, 20x1 assumed
by ESCULENT Co. – assessed on land 120,000
Real estate taxes after April 1, 20x1 80,000
Repairs and renovation costs before the building
is occupied 160,000
Repair costs after the building is occupied 200,000
7. How much is the cost of the land?

a. 16,192,000 b. 17,292,000 c. 15,492,000 d. 14,592,000
8. How much is the cost of the building?

a. 23,420,000 b. 32,640,000 c. 32,240,000 d. 24,440,000
36
Acquisition on lump-sum price (building demolished)
On April 1, 20x1, ABC Co. purchased land and building for a lump-sum price of
₱48,000,000. The existing building will be demolished and a new building will be
constructed.
Additional costs relating to the purchase include the following:

Title guarantee 80,000
Option paid for the land and old building acquired 24,000
Payments to tenants to vacate premises 48,000
Cost of razing the old building (demolition cost) 240,000
Proceeds from sale of salvaged materials 60,000
Fair value of materials salvaged from the
old building and used in the new building 120,000
Construction cost of new building (completed) 34,000,000
9. The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much are the allocated costs of the land and the new
building?
Land New building
a. 16,864,000 33,780,000
b. 16,104,000 34,180,000
c. 15,980,000 36,670,000
d. 16,014,000 34,810,000
10. The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much is charged as loss on initial recognition?
a. 48,000 b. 32,000,000 c. 32,048,000 d. 0
11. The old building is unusable and has an insignificant fair value. How much are
the allocated costs of the land and the new building?
Land New building
a. 46,640,000 33,780,000
b. 46,104,000 34,180,000
c. 48,152,000 34,180,000
d. 46,140,000 34,810,000
12. The old building is unusable and has an insignificant fair value. How much is
charged as loss on initial recognition?
a. 48,000 b. 32,000,000 c. 32,048,000 d. 0
Cost of self-constructed asset

LOATH HATE Co. purchased a lot for ₱8,000,000. Immediately after the purchase,
LOATH started construction of a new building on the lot. The following were
additional costs incurred by LOATH Co.
Legal cost of conveying land ₱ 40,000
Special assessment 20,000
Survey costs 60,000
Materials, labor, and overhead costs 22,000,000
Cash discounts on materials purchased not taken 120,000
Clerical and other expenses related to construction 56,000
Excavation costs 400,000
Architectural fees and building permit 240,000
Supervision by management on construction 48,000
Insurance premiums paid for workers 520,000
37
Payment for claim for injuries not covered by insurance 180,000
Saving on construction 800,000
Cost of changes to plans and specifications due to
560,000
Inefficiencies
Paving of streets and sidewalks (not included in
blueprint) 40,000
Income earned on a vacant space rented as parking
lot during construction 36,000
13. How much is the cost of the land?

a. 8,160,000 b. 8,100,000 c. 8,120,000 d. 8,060,000
14. How much is the cost of the building?

a. 23,144,000 b. 23,184,000 c. 23,264,000 d. 23,096,000
Cost of equipment – with decommissioning cost

15. BAWDY INDECENT Co. acquired an oil rig for ₱400,000,000. Installation and
other necessary costs in bringing the equipment to its intended condition for
use totaled ₱80,000,000. BAWDY is required by law to dismantle the
equipment and restore the site where it is installed after 20 years. The
estimated decommissioning and restoration costs are ₱40,000,000. The
imputed rate of interest is 12%. How much is the initial cost of the
equipment?
a. 480,000,000 b. 440,000,000 c. 484,146,672 d. 404,146,672
With fair value of asset given up

Fact pattern
FEEBLE Co. exchanged equipment with WEAK, Inc. Pertinent data are shown
below:
FEEBLE WEAK,
Co. Inc.
Equipment 4,000,000 8,000,000
Accumulated depreciation 800,000 3,200,000
Carrying amount 3,200,000 4,800,000
Fair value 3,800,000 4,400,000
Cash paid by FEEBLE Co. to 600,000 600,000
WEAK, Inc.
16. How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,400,000
17. How much is the initial cost of the equipment received by WEAK Co.?
a. 3,800,000 b. 4,400,000 c. 5,000,000 d. 3,400,000
18. How much is gain (loss) on exchange recognized by FEEBLE Co.?

a. (600,000) b. 600,000 c. 1,200,000 d. 0
19. How much is gain (loss) on exchange recognized by WEAK Co.?

a. (400,000) b. 400,000 c. (1,000,000) d. 0
Fair value of asset given up is indeterminable

Use the fact pattern in the preceding problem except that FEEBLE Co. cannot
determine the fair value of the equipment given up but is aware that the
equipment that will be received from WEAK, Inc. has a fair value of ₱4,400,000.
38
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,400,000

a. (600,000) b. 600,000 c. 1,200,000 d. 0
No commercial substance
Use the fact pattern in the preceding problem except that the exchange has no
commercial substance.
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,200,000

a. (600,000) b. 600,000 c. 1,200,000 d. 0
Trade-in
TRANSCEND EXCEED Co. traded in an old machine for a new model. Pertinent
data are as follows:
Old equipment:
Cost 200,000
Accumulated depreciation 80,000
Average published retail value 24,000
New equipment:
List price 380,000
Cash price without trade in 280,000
Cash price with trade in 220,000
24. How much is the initial cost of the equipment received by TRANSCEND Co.?
a. 244,000 b. 280,000 c. 320,000 d. 184,000
25. How much is gain (loss) on exchange recognized by TRANSCEND Co.?

a. 60,000 b. 160,000 c. (60,000) d. 0
Acquisition through issuance of own equity instrument

Fact pattern
RESILIENT ELASTIC Co. acquired land with fair value of ₱4,000,000 by issuing
10,000 shares with par value of ₱40 per share and quoted price of ₱360 per
share.
26. How much is the initial cost of the equipment received by RESILIENT Co.?
a. 400,000 b. 4,000,000 c. 3,600,000 d. 180,000
27. How much is gain (loss) on exchange recognized by RESILIENT Co.?

a. 3,200,000 b. 400,000 c. (400,000) d. 0
28. Use the fact pattern above except that the fair value of the land is
indeterminable. How much is the initial cost of the equipment received by
RESILIENT Co.?
a. 400,000 b. 4,000,000 c. 3,600,000 d. 180,000
29. How much is gain (loss) on exchange recognized by RESILIENT Co.?

a. 3,200,000 b. 400,000 c. (400,000) d. 0
39
Acquisition through issuance of bonds payable
Fact pattern
On January 1, 20x1, LABYRINTH MAZE Co. acquired land with fair value of
₱3,800,00 by issuing a 3-year, 10%, ₱4,000,000 bonds. Principal is due on
January 1, 20x4 but interest is due at each year-end. The prevailing market rate
of interest for a similar instrument on January 1, 20x1 is 12%. The present value
of the future cash flows from the bonds discounted at 12% is ₱3,807,852.
30. How much is the initial cost of the equipment received by LABYRINTH Co.?
a. 3,800,000 b. 4,000,000 c. 3,807,852 d. 180,000
31. How much is gain (loss) on exchange recognized by LABYRINTH Co.?

a. 192,148 b. (192,148) c. (200,000) d. 0
32. Use the fact pattern above except that the fair value of the land is
indeterminable. How much is the initial cost of the equipment received by
LABYRINTH Co.?
a. 3,800,000 b. 4,000,000 c. 3,807,852 d. 180,000
33. How much is gain (loss) on exchange recognized by LABYRINTH Co.?

a. 192,148 b. (192,148) c. (200,000) d. 0
Acquisition by donation
GROVEL Co. received donation of equipment from CRAWL, Inc., an unrelated
foreign corporation. The equipment has a fair value of ₱4,000,000. Necessary
costs incurred by GROVEL Co. to bring the asset to its intended condition for use
amounted to ₱40,000.
34. The entry to record the receipt of the donation includes

a. a credit to share premium of ₱4,040,000
b. a credit to share premium of ₱3,960,000
c. a credit to income from donation of ₱4,040,000
d. a credit to income from donation of ₱3,960,000
35. Assuming the donor is a shareholder of GROVEL Co., the entry to record the
receipt of the donation includes
a. a credit to share premium of ₱4,040,000
b. a credit to share premium of ₱3,960,000
c. a credit to income from donation of ₱4,040,000
d. a credit to income from donation of ₱3,960,000


Objective and scope
1. PAS 16 shall be applied to which of the following
a. land held for future plant site
b. building not used in normal operations but is being leased out under
operating lease
40
c. equipment held for sale under PFRS 5
d. biological assets related to agricultural activity
2. The principal issues in the accounting for property, plant and equipment
include which of the following?
I. The recognition of the assets.
II. The determination of carrying amounts and the depreciation charges and
impairment losses to be recognized in relation to assets recognized.
III. The complex computation of revaluation surplus.
a. I, II b. I, III c. III d. I, II, III
Recognition principles
3. Which of the following is not a major characteristic of a plant asset?
a. Possesses physical substance c. Acquired for use
b. Acquired for resale d. Yields services over a number of years
(AICPA)
4. Which of these is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.
(AICPA)
5. Property, plant & equipment has all of the following characteristics except:
a. They are intended for use in operating activities, and are not acquired for
sale in the ordinary course of business.
b. They are classified as noncurrent tangible assets
c. Their service potential normally diminishes with use.
d. They don't typically make up a large part of a corporation's operating
assets.
6. Which of the following statements is consistent with the provisions of PAS

16?
I. If fair value can be measured reliably, an entity may carry all items of
property, plant and equipment of a class at a revalued amount, which is
the fair value of the items at the date of the revaluation less any
subsequent accumulated depreciation and accumulated impairment
losses.
II. An entity is required to determine the depreciation charge separately for
each significant part of an item of property, plant and equipment.
III. An entity is required to measure the residual value of an item of property,
plant and equipment as the amount it estimates it would receive currently
for the asset if the asset were already of the age and in the condition
expected at the end of its useful life.
IV. An entity is required to begin depreciating an item of property, plant and
equipment when it is available for use and to continue depreciating it until
it is derecognized, even if during that period the item is idle.
a. I, II b. I, II, IV c. I, II, III d. I, II, III, IV
7. Which of the following statements is inconsistent with the provisions of PAS

16?
a. An entity is required to derecognize the carrying amount of an item of
property, plant and equipment that it disposes of on the date the criteria
for the sale of goods would be met.
41
b. An entity is required to derecognize the carrying amount of a part of an
item of property, plant and equipment if that part has been replaced and
the entity has included the cost of the replacement in the carrying amount
of the item.
c. An entity cannot classify as revenue a gain it realizes on the disposal of an
item of property, plant and equipment
d. An entity is required to measure the residual value of an item of property,
plant and equipment as the amount it estimates it would receive in the
future for the asset if the asset were already of the age and in the
condition expected at the end of its useful life.
8. Accounting recognition should be given to some or all of the gain realized on a

nonmonetary exchange of plant assets except
a. when the exchange is one with no commercial substance and no cash is
involved and that no impairment losses are needed to be recognized.
b. where the assets exchanged are dissimilar and additional cash is paid
c. where the assets exchanged are dissimilar and additional cash is received
d. when the exchange is one with no commercial substance whether or not
there is cash involved and that no impairment losses are needed to be
recognized.
9. The cost of land most likely does not include

a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with unlimited useful lives.
d. special assessments.
10. When the fair value of the non-monetary asset exchanged in a transaction
with commercial substance is indeterminable, the non-monetary asset
received will be valued at
a. fair value of asset given up adjusted for cash received or given
b. fair value of asset received
c. fair value of asset received adjusted for cash received or given
d. carrying amount of asset given up adjusted for cash received or given
11. Decrease in equity arise from

a. transfers from an entity to its owners
b. investments in an entity by its owners
c. non-reciprocal transfers to an entity from other than owners
d. upward valuation of property, plant and equipment
(RPCPA)
12. Which of the following terms best describes the removal of an asset from an
entity's statement of financial position?
a. Derecognition b. Impairment c. Write-off d. Depreciation
13. If a corporation purchases a lot and building and subsequently tears down the
building and uses the property as a parking lot, the proper accounting
treatment of the cost of the building would depend on
a. the significance of the cost allocated to the building in relation to the
combined cost of the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the non-financial asset’s highest and best use determined from the
perspective of market participants, even if the entity intends a different
use or intends not to use the non-financial asset.
42
(AICPA)
14. Accounting for tangible operational assets is primarily in conformity with the:
a. historical cost principle
b. historical cost principle and reporting principle
c. matching principle and reporting principle
d. matching principle
e. matching principle and historical cost principle
(Adapted)
15. Are the following statements regarding the cost of an asset true or false,
according to PAS16 Property, plant and equipment?
(1) The cost includes cash equivalents paid to acquire an asset.
(2) The cost includes the fair value of any non-monetary consideration given
to acquire an asset.
a. False False b. False True c. True False d. True True
(ACCA)
16. The debit for a non-refundable sales tax properly levied and paid on the
purchase of machinery preferably would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on
income).
d. accumulated depreciation--machinery.
(AICPA)
17. Small tools and containers used repeatedly for more than a year are classified
on the balance sheet as
a. current assets b. fixed assets c. deferred charges d. investments
(AICPA)
18. Hotel California Corporation recently purchased Eagles Hotel and the land on
which it is located with the plan to tear down the Eagles Hotel and build a
new luxury hotel on the site. The cost of the Eagles Hotel should be
a. depreciated over the period from acquisition to the date the hotel is
scheduled to be torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
(AICPA)
19. Which of the following statements are correct per PAS16 Property, plant and
equipment?
I. Assets are depreciated even if their fair value exceeds their carrying
amount
II. Land and buildings are accounted for separately, even when acquired
together
III. A non-current asset acquired as the result of an exchange of assets is not
recognized
IV. A gain on disposal of a non-current asset is classified as revenue
a. I, II b. I, II, III c. I, II, IV d. I, II, III, IV
(ACCA)
20. Plant assets may properly include:

a. property held for investment purposes.
43
b. land held for possible use as a future plant site.
c. self-constructed assets currently in use.
d. idle equipment awaiting sale
e. deposits on machinery purchased and not yet received
21. According to PAS16 Property, plant and equipment, which of the following
items should be capitalized into the cost of property, plant and equipment?
I. Cost of excess materials resulting from a purchasing error
II. Cost of testing whether the asset works correctly
III. Initial operating losses whilst demand builds up
IV. Cost of preparing the site for installation
a. I, II b. I, II, III c. II, IV d. I, II, III, IV
(ACCA)
22. Capitalizable make-ready cost related to a new machine does not include:
a. restoration costs related to the machine
b. installation costs related to the machine
c. taxes related to the machine during the make-ready period
d. depreciation on the machine during the make-ready period
(Adapted)
23. Under the principles of PAS16 Property, plant and equipment, which of the
following should be included in the cost of an item of property, plant and
equipment?
I. Initial delivery and handling costs
II. Apportioned general overhead costs
III. Costs of training staff on the new asset
IV. Installation and assembly costs
a. I, II, IV b. I, IV c. II, IV d. I, II, III, IV
(ACCA)
24. Plant assets purchased on long-term credit contracts should be accounted for
at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.
(AICPA)
25. The cost of land typically includes the purchase price and all of the following
costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost included in special
assessment
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
(AICPA)
26. Property, plant and equipment items which are subject to any provision for
depreciation or reduction in value, should be valued in the balance sheet by
adding to the actual price paid any expenses incidental to its acquisition.
Which of the following cost items might be included in such incidental
expenses and are to be capitalized as part of machinery?
Cost items
I. installation
II. cost delivery and handling
44
III. cost site preparation
IV. professional fees
Item 1 Item 2 Item 3 Item 4
a. yes yes yes yes
b. yes yes yes no
c. yes no yes no
d. no yes no no
(Adapted)
27. NBA Co. exchanged merchandise that cost ₱24,000 and normally sold for
₱36,000 for a new delivery truck with a list price of ₱40,000. The delivery
truck should be recorded on NBA's books at
a. 24,000. b. 30,000. c. 36,000. d. 40,000.
(AICPA)
28. When a plant asset is acquired by issuance of common stock (ordinary

shares), the cost of the plant asset is properly measured by the
a. par value of the stock. c. book value of the stock.
b. stated value of the stock. d. market value of the stock.
(AICPA)
29. When a closely held corporation issues preferred stock for land, the land
should be recorded at the
a. total par value of the stock issued.
b. total book value of the stock issued.
c. total liquidating value of the stock issued.
d. fair market value of the land.
(AICPA)
30. Fire insurance on building being constructed is an example of:

Capital expenditure Revenue expenditure
a. yes no
b. no yes
c. no no
d. yes yes
(Adapted)
31. Any renovating or remodeling costs incurred to put a building purchased in a

condition suitable for its intended use is a:
Capital expenditure Revenue expenditure
a. no yes
b. yes no
c. no no
d. yes yes
(RPCPA)
32. If the land acquired has a building that should be demolished, any amount
received as salvage from the removal of the building should be:
a. credited to the building account c. credited to the land account
b. treated as income d. adjusted to prior years
33. A company purchased land with a building on it and immediately tears down
the building so that the land can be used for the construction of a plant. Which
of the following should not be charged to the land account?
a. title examination and surveying fees
b. allocation of cost of payment to tenants to vacate premises
c. property taxes accruing during the period of plant construction.
45
d. costs for grading, clearing, and draining the property.
34. Bianca Corp., a closely held corporation, acquired a used machine by issuing
15,000 shares (par value ₱1.00 per share) of its own common stock. The stock
has a market value of ₱1.40 per share based on a recent sale of 100 shares.
The machine was carried on the vendor’s books at ₱12,000, and was
determined to have a fair market value of ₱17,000. What is the amount at
which Bianca should record the machine on its books?
a. 21,000 b. 17,000 c. 15,000 d. 12,000
(RPCPA)
35. Which of the following is not a necessary characteristic for an item to be

classified as property, plant and equipment?
a. used in operations of the business c has a useful life beyond one year
b. not acquired for resale d. subject to depreciation
36. Land was purchased to be used as the site for the construction of a plant. A
building on the property was sold and removed by the buyer so that
construction on the plant could begin. The proceeds from the sale of the
building should be
a. classified as other income.
b. deducted from the cost of the building.
c. netted against the costs to clear the land and expensed as incurred.
d. netted against the costs to clear the land and amortized over the life of the
plant.
(AICPA)
37. Plant assets may properly include

a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant site.
d. none of these.
(AICPA)
38. Accounting recognition should be given to some or all of the gain realized on a
nonmonetary exchange of plant assets except where
a. the assets exchanged are similar and additional cash is paid.
b. the assets exchanged are similar and additional cash is received.
c. the assets exchanged are dissimilar and additional cash is paid.
d. the assets exchanged are dissimilar and additional cash is received.
e. the exchange transaction lacks commercial substance
(AICPA)
39. For a nonmonetary exchange of plant assets, accounting recognition should

not be given to
a. a loss when the assets exchanged are similar.
b. a gain when the assets exchanged are dissimilar.
c. a gain when the exchange lacks commercial substance.
d. part of a gain when the assets exchanged are similar and cash is received.
(AICPA)
40. When an entity is the recipient of a donated asset from other than a
shareholder, the account credited may be a(n)
a. paid-in capital account. c. deferred revenue account.
b. income account. d. all of these.
(AICPA)
46
41. Noun Co. and Nameword Co. exchanged similar plots of land with fair values
in excess of carrying amounts in an exchange transaction that lacks
commercial substance. In addition, Noun received cash of less than 10% of the
total consideration received from Nameword to compensate for the difference
in land values. As a result of the exchange, Noun should recognize:
a. A gain equal to the difference between the fair value and the carrying
amount of the land given up.
b. A gain in an amount determined by the ratio of cash received to total
consideration.
c. A loss in an amount determined by the ratio of cash received to total
consideration.
d. Neither a gain nor a loss.
(AICPA)
42. Adverb Co. and LY Co. exchanged similar trucks with fair values in excess of
carrying amounts in an exchange with commercial substance. In addition,
Adverb paid LY to compensate for the difference in truck values. As a
consequence of the exchange, Adverb recognizes:
a. A gain equal to the difference between the fair value and carrying amount
of the truck given up.
b. A gain determined by the proportion of cash received to the total
consideration.
c. A loss determined by the proportion of cash received to the total
consideration.
d. Neither a gain nor a loss.
(AICPA)
43. In an exchange transaction with commercial substance, DEADLOCK

STANDSTILL Co. received equipment with a fair value equal to the carrying
amount of other assets given up. Deadlock also contributed cash. As a result of
the exchange, Deadlock recognized:
a. A loss equal to the cash given up.
b. A loss determined by the proportion of cash paid to the total transaction
value.
c. A gain determined by the proportion of cash paid to the total transaction
value.
d. Neither gain nor loss.
(AICPA)
44. E.G. Co. exchanged similar nonmonetary assets with Example Co. and no cash
was exchanged. The carrying amount of the asset surrendered by E.G.
exceeded both the fair value of the asset received and Example's carrying
amount of that asset. E.G. should: (assume exchange has commercial
substance)
a. Recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it surrendered as a loss.
b. Recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it received as a gain.
c. Recognize the difference between the carrying amount of the asset it
surrendered and the carrying amount of the asset it received as a loss.
d. Recognize no gain or loss.
(AICPA)
45. Adjective Co. and Relating 2 Company exchanged assets with equal fair values.
The retail price of the asset that Adjective gave up is less than the retail price
47
of the asset received. What gain or loss should Adjective Co. recognize on the
nonmonetary exchange?
a. A gain or loss is not recognized.
b. A gain equal to the difference between the retail prices of the asset
received and the asset foregone.
c. A gain equal to the difference between the retail price and the cost of the
asset received.
d. A gain or loss equal to the difference between the fair value and the cost of
the asset given foregone.
(AICPA)
46. Theoretically, which of the following costs incurred in connection with a

machine purchased for use in a company's manufacturing operations would
be capitalized?
I. Insurance on machine while in transit
II. Testing and preparation of machine for use
a. Yes, Yes b. Yes, No c. No, Yes d. No, No
(AICPA)
47. Which of the following is not an example of fixed asset?

a. plant and machinery c. royalty
b. land and building d. molds and dies
48. Discounts given for early payment of credit purchases of operational assets
should be:
a. recorded as interest expense at purchase date.
b. capitalized as a cost of the asset acquired and subsequently allocated to
depreciation expense.
c. recorded as interest revenue at purchase date.
d. deducted from the invoice price when determining the cost of the asset
(Adapted)
49. Apportionment of the purchase price in a lump-sum acquisition of different

assets may be based on all the following except?
a. carrying amount of the assets to the seller
b. relative fair values
c. tax assessment values
d. appraised values
(Adapted)
50. Which of the following is least likely to be classified in property, plant and
equipment?
a. land improvements c. leasehold improvements
b. land d. idle land
51. When land and building are acquired for a lump sum price and the building is
demolished, the materials salvaged from the building that were used in the
construction of a new building should be
a. Ignored when the demolition costs, net of actual sale proceeds of salvaged
materials, are capitalized as cost of the new building.
b. Included as income from continuing operations.
c. Added to the cost of the new building.
d. Deducted from the cost of the land and added to the cost of the building
52. Pronoun Co. exchanged similar nonmonetary assets with Substitute-4-Noun

Co. No cash was exchanged. The carrying amount of the asset surrendered by
48
Pronoun Co. exceeded both the fair value of the asset received and Substitute-
4-Noun Co.’s carrying amount of the asset. Pronoun Co. should recognize the
difference between the carrying amount of the asset surrendered and
a. The fair value of the asset received as a loss
b. The fair value of the asset received as a gain
c. Pronoun Co.’s. carrying amount of the asset received, as a loss
d. Pronoun Co.’s. carrying amount of the asset received, as again
(AICPA)
53. I.E. Co. recently purchased the That-Is Hotel and the land on which it is
located. The plans are to demolish the That-Is Hotel and to build a new luxury
hotel on the site. I.E. Co. should account for the total purchase cost of the
That-Is Hotel as follows:
a. capitalize it as part of the cost of the new hotel.
b. depreciate it over the period from the acquisition until the Majestic is torn
down.
c. allocate between the land and the That-Is Hotel building, then charge the
allocated cost of the That-Is Hotel building to loss.
d. capitalized it as part of the cost of the land.
(Adapted)
54. What is the general principle of capitalizing costs to property, plant and
equipment?
a. All costs which will provide a benefit beyond one year are capitalized.
b. Only depreciable costs are capitalized.
c. All cost associated with the acquisition or construction of a plant asset are
capitalized.
d. All cost incurred to bring the asset to its intended condition and location
are capitalized.
e. All costs relevant to the acquisition and long-term maintenance of a plant
asset are capitalized.
(Adapted)
55. The amount of nonrefundable sales tax paid on the purchase of machinery (an
operational asset) should be debited to a:
a. machinery account.
b. accumulated depreciation account.
c. tax expense (which includes all taxes other than income tax) account.
d. separate deferred charge account
(Adapted)
56. Discounts available for early payment of liabilities on purchases of

operational assets should:
a. be capitalized as part of the cost of the asset, whether taken or not, and
subsequently included as depreciation expense.
b. be recorded and reported as a contra account to the related liability
account.
c. not be capitalized as cost of the asset whether taken or not.
d. be given no recognition until taken or until the discount period has
expired; if not taken, the discounts should be added to the cost of the
asset.
(Adapted)
57. Assets received in donation from other than the government should
a. be depreciated based on the market value at the time of the donation.
b. be depreciated based on their book value at the time of the donation.
49
c. should not be depreciated.
d. be expensed upon receipt.
(Adapted)
58. Acoustic Company needed a new warehouse and a contractor quoted a

₱5,000,000 price to construct it. Acoustic believed that it could build the
warehouse for ₱4,300,000 and decided to use company employees to build it.
The final construction cost incurred by Acoustic was ₱4,800,000 but the asset
was recorded at ₱5,000.000. What principle is this a violation of?
a. Cost principle c. Matching principle
b. Separate entity d. Full disclosure
(Adapted)
59. Which of the following should not be classified as property, plant and
equipment?
a. Building used as a factory
b. Land used in ordinary business operations
c. A truck held for resale by an automobile dealership
d. Land improvement, such as parking lots and fences
(ACCA)
60. A characteristic of property, plant, and equipment is that it is

a. intangible.
b. used in the operations of a business.
c. held for sale in the ordinary course of the business.
d. not currently used in the business but held for future use.
(ACCA)
61. On November 1, 2010, a company purchased a new machine that it does not
have to pay for until November 1, 2012. The total payment on November 1,
2012, will include both principal and interest. Assuming interest at a 10%
rate, the cost of the machine would be the total payment multiplied by what
time value of money concept?
a. Present value of annuity of ₱1. c. Future amount of annuity of ₱1.
b. Present value of ₱1. d. Future amount of ₱1.
(AICPA)
62. Stings Co. recently purchased an old building and the land on which it is
located. The old building will be demolished at a net cost of ₱10,000. A new
building will be built on the site. The demolition cost should be:
a. capitalized as part of the cost of the new building
b. capitalized as part of the cost of the land
c. depreciated over the remaining life of the old building
d. written off as an extraordinary loss in the year of the demolition
(Adapted)

1. A 11. A 21. C 31. B 41. D 51. A 61. B
2. A 12. A 22. D 32. A 42. A 52. A 62. A
3. B 13. D 23. B 33. C 43. A 53. C
4. D 14. E 24. C 34. B 44. A 54. D
5. D 15. D 25. C 35. D 45. D 55. A
6. D 16. A 26. A 36. B 46. A 56. C
7. D 17. B 27. C 37. D 47. C 57. A
8. D 18. D 28. D 38. E 48. D 58. A
50
9. B 19. A 29. D 39. C 49. A 59. C
10. B 20. C 30. A 40. B 50. D 60. B
51
Chapter 15
Property, Plant and Equipment (Part 2)

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

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.
a. 120,000 b. 100,000 c. 128,000 d. 224,000

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:

Year Units produced Manufacturing hours
20x1 60,000 16,000
20x2 30,000 8,000
20x3 45,000 12,000
20x4 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
52
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

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
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?

53
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

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
Total 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
54
Leasehold improvements
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

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?
55
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

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
56
Methods of recording revaluation – Appraised value
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
b. a credit to accumulated depreciation for ₱20,000,000
d. a credit to building for ₱80,000,000
37. The entry under the proportional method to record the revaluation includes
b. a debit to accumulated depreciation for ₱20,000,000
d. a credit to building for ₱80,000,000
Revaluation: Change in useful life

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%.

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

a. 2,940,000 b. 4,200,000 c. 3,200,000 d. 3,333,976
Revaluation: Change in residual value and useful life

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
Residual value 8,000,000 16,000,000
Remaining useful life 10 years 12 years

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

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?
57
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
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


1. Under PAS 16 Property, plant and equipment, which of the following costs
relating to non-current assets should be capitalized?
I. Replacement of a building's roof every 15 years
II. Maintenance of an asset on a three-monthly basis
III. Installation and assembly costs
IV. Replacement of small spare parts annually
a. I, III b. I, III, IV c. I, II, III d. I, II, III, IV
(ACCA)
2. Which of the following statements correctly relate to accounting for property,

plant and equipment?
58
I. If property, plant and equipment are stated at current valuation, the
financial position and progress of an entity will be more realistically
portrayed.
II. If land and building are purchased for a lump sum price, the broker’s
commission should be apportioned between the land and the building.
III. The price paid for a plant asset is actually a prepayment of an expense.
IV. Treating a capital expenditure as an expense may overstates profit in the
year after this action was taken.
V. If a fully depreciated asset with no residual value continues to be used,
management can continue to provide for depreciation.
a. II, III, V b. I, II, III, IV c. II, III, V d. I, II, III, IV, V
3. A plant asset acquired by issuance of ordinary shares is properly measured at

the
a. Par value of the shares c. Carrying amount of the asset given
b. Stated value of the shares d. Fair value of the asset received
4. RESTIVE UNEASY Cooperative recently replaced all the tires in two of its
trucks at a very insignificant amount. This cost should be accounted for
a. as an increase in the cost of the trucks
b. as repair and maintenance expense
c. as an intangible asset
d. as a reduction in the accumulated depreciation of the trucks
(Adapted)
5. The following statements relate to accounting for property, plant and

equipment. Choose the incorrect statement.
a. Accumulated depreciation is a contra account to an asset reported in the
property, plant and equipment section of the statement of financial
position.
b. Improvements to leased facilities are included under property, plant and
equipment as long as the amount is not material and if the terms of the
lease extend over a long period of time, otherwise, the amount maybe
shown among deferred charges or other assets.
c. When a unit of property is retired or disposed of by sale, trade, scrapping
and removal or abandonment, its cost is credited to the appropriate
property account; the related accumulated depreciation is removed and
any gain or loss adjusted for salvage value and cost of disposition is
reported in the statement of profit or loss and other comprehensive
income.
d. Assets subject to depreciation may take the form of buildings, machinery
and equipment, furniture, improvements to leased facilities, bookplates,
fruit trees and breeding animals for which the fair value cannot be
determined.
6. An old building formerly occupied by ABC Company was replaced. The loss on
the retirement of the old building should
a. not be capitalized but treated as an expense
b. not be capitalized but treated as a loss
c. be capitalized and included in the cost of the land
d. be capitalized and included in the cost of the new building
7. Which of the following statements are correctly stated?

I. Property, plant and equipment are permitted to be revalued in response
to inflation.
59
II. Residual value is ignored when computing for depreciation in the earlier
years of an asset’s life when the depreciation method used is the double
declining balance.
III. Cost of building would include expenditures for service equipment and
fixtures made a permanent part of the structure.
IV. Cost inefficiencies on self-constructed assets whether due to temporary
idle capacity, industrial dispute or other causes, should not be included as
part of the cost of asset.
V. When used property is acquired, the actual cost in cash or equivalent is
generally the proper basis for depreciation, regardless of the previous
history of the property, unless the entity uses the revaluation method.
a. III, V b. I, II, IV c. I, II, IV, V d. I, II, III, IV, V
8. Which of the following correctly relate(s) to accounting for property, plant

and equipment?
I. Devin Co.’s building with an estimated useful life of 20 years was
constructed on a land leased for a term of 15 years. The cost of the
building should be depreciated over 20 years, the life of the building.
II. Vaughn Company acquired a site for the construction of a new plant. The
title examination fees, surveying fees and property taxes accruing during
the period of plant construction should be charged to the land account of
the company.
III. At the time Meagan Corp became a subsidiary of Andre Corp., Meagan
switched depreciation of its plant assets from the straight-line method of
depreciation to the sum-of-the-year digits method used by Andre. As to
Meagan, this change is a change in reporting entity.
IV. Functional depreciation is the wear and tear, deterioration and decay, and
damage, reducing the usefulness of the asset.
V. Revaluation surplus in property is an element constituting shareholders’
equity.
a. IV, V b. II, IV, V c. II, III, IV, V d. V
9. The sale of a depreciable asset resulting in a gain, indicates that the proceeds
from the sale were
a. greater than cost c. less than carrying amount
b. greater than carrying amount d. less than cost
10. Improvements are

a. revenue expenditures
b. debited to an appropriate asset account when they do not increase useful
life but improves efficiency beyond the state or condition originally
intended by management
c. debited to an appropriate asset account when they do not increase useful
life
d. debited to accumulated depreciation when they do not increase useful life
(AICPA)
11. In order for a cost to be capitalized (capital expenditure), the following must
be present:
a. The useful life of an asset must be increased.
b. The quantity of assets must be increased.
c. The quality of assets must be increased beyond the condition originally
intended by management.
d. Any one of these.
(AICPA)
60
12. An improvement made to a machine increased its fair value and its
production capacity by 25% above the condition originally intended by
management but 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.
(AICPA)
13. Which of the following is a capital expenditure?

a. Payment of an account payable c. Payment of income taxes
b. Retirement of bonds payable d. None of these
(AICPA)
14. Which of the following is not a capital expenditure?

a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement
(AICPA)
15. When a plant asset is sold for less than its carrying amount
a. cash received plus accumulated depreciation plus loss on disposal equals
the original cost
b. original cost minus accumulated depreciation equals cash received minus
loss on disposal
c. carrying amount of the asset plus loss on disposal equals cash received
d. cash received plus accumulated depreciation minus loss on disposal
equals the original cost
16. The sale of a depreciable asset resulting in a loss indicates that the proceeds
from the sale were
a. less than current market value. c. greater than carrying amount.
b. greater than cost. d. less than carrying amount.
(AICPA)
17. Burnham Corp.'s forestland was condemned for use as a national park.
Compensation for the condemnation exceeded the forestland's carrying
amount. Burnham purchased similar, but larger, replacement forest land for
an amount greater than the condemnation award. As a result of the
condemnation and replacement, what is the net effect on the carrying amount
of forestland reported in Burnham 's balance sheet?
a. The amount is increased by the excess of the replacement forestland's cost
over the condemned forestland's carrying amount.
b. The amount is increased by the excess of the replacement forestland's cost
over the condemnation award.
c. The amount is increased by the excess of the condemnation award over
the condemned forestland's carrying amount.
d. No effect, because the condemned forestland's carrying amount is used as
the replacement forestland's carrying amount.
(AICPA)
18. A building suffered uninsured fire damage. The damaged portion of the
building was refurbished with higher quality materials. The cost and related
61
accumulated depreciation of the damaged portion are identifiable. To account
for these events, the owner should:
a. Reduce accumulated depreciation equal to the cost of refurbishing.
b. Record a loss in the current period equal to the sum of the cost of
refurbishing and the carrying amount of the damaged portion of the
building.
c. Capitalize the cost of refurbishing and record a loss in the current period
equal to the carrying amount of the damaged portion of the building.
d. Capitalize the cost of refurbishing by adding the cost to the carrying
amount of the building.
(AICPA)
19. Choose the correct statement about the accounting treatment for special one-
time assessments made by local governments requiring a firm to pay for
improvements including streetlights, sewers and other infrastructure.
a. They are capitalized but not depreciated
b. If probable and estimable, they are expensed when determinable
c. They are expensed as incurred
d. They are capitalized and depreciated over their useful life
(Adapted)
20. An enterprise installed an assembly line in 20x1. Four years later, ₱100,000
was spent in rearranging the line to promote efficiency. The rearrangement
but did not affect the assembly line’s useful life. Proper accounting for the cost
of the automation should be to
a. Report it as an expense
b. Establish a separate account for the ₱100,000.
c. Allocate the cost of automation between the asset and accumulated
depreciation accounts.
d. Debit to asset account.
(Adapted)
21. Choose the correct statement.

a. An operational asset received in exchange for ordinary shares issued by
the buyer should be recorded at the par value of the securities issued if the
cash price of the asset is not known.
b. Sales tax paid upon acquisition of an operational asset should be expensed
because such amounts are usually immaterial with respect to the cost of
the acquired asset.
c. Purchased operational assets acquired on a long-term payment plan
should be recorded at full cost (including interest and financing charges)
only if the cost cannot be estimated by the purchaser.
d. A primary principle in recording and reporting operational assets is that
they are recorded at cost when acquired and subsequently are reported at
cost or cost less accumulated depreciation.
(Adapted)
22. Which of the following statement is true?

a. All operational assets are subject to either depreciation, depletion, or
amortization.
b. The matching principle does not require depreciation on an operational
asset donated to a company because no purchase cost was incurred at
acquisition.
c. The only requirement an asset must meet to be considered an operational
asset is that its useful life extend over more than one accounting period.
62
d. The determination of cost is conceptually consistent between operational
assets and inventory in regard to the accounting treatment of cash
discounts.
(Adapted)
23. Which of the following is not an appropriate basis for measuring the cost of
property, plant, and equipment?
a. The purchase price, freight costs, and installation costs of a productive
asset should be included in the asset’s cost.
b. Proceeds obtained in the process of readying land for its intended
purpose, such as from the sale of cleared timber, should be recognized
immediately as income.
c. The cost of improvement to equipment incurred after the equipment is
placed in the location and condition originally intended by management is
generally expensed out rightly.
d. All necessary costs incurred in the construction of a plant building, from
excavation to completion, should be considered as part of the asset’s cost
24. When a plant asset is sold for less than its carrying amount:
a. cash received plus accumulated depreciation plus gain on disposal equals
the original cost.
b. cash received plus accumulated depreciation minus loss on disposal
equals the original cost.
c. cost of the asset minus loss on disposal equals cash received.
d. original cost minus accumulated depreciation equals cash received plus
loss on disposal.
Depreciation methods
25. Depreciation
a. is an allocation of the cost of property, plant and equipment over the time
period of usefulness, in a systematic and rational manner.
b. is a process of recognizing the decreasing value of an asset over time.
c. is a cash expense.
d. expense of ₱2,000 reflects a ₱2,000 increase in liquid funds.
26. Choose the best description of depreciable amount.

a. minimum carrying amount c. residual value
b. carrying amount d. initial cost less residual value
27. An entity acquired an asset with an estimated useful life of 20 years and a
10% residual value. At the end of the asset’s useful life, the accumulated
depreciation will be equal to the original cost of the asset under which of the
following depreciation methods?
Double-declining Sum-of-the-years’ Digits Straight-line Method
a. Yes Yes Yes
b. Yes Yes No
c. No Yes Yes
d. No No No
(Adapted)
28. Obsolescence of a depreciable asset may be caused by

a. Technological changes
b. Improvement in production method
c. Change in market demand for the product or service output
d. Legal or other restrictions
e. (a), (b), (c) and (d) above
63
29. 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 the 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.
(Adapted)
30. Choose the incorrect statement.

a. Land and an old building thereon are purchased with the intent to build a
new and better structure. Upon demolition of the old structure, the total
purchase price plus the demolition cost should be included as land.
b. When an operational asset (such as land or buildings) is purchased, any
unpaid property taxes (for the period prior to the purchase date) that are
paid by the purchaser should be recorded as part of the cost of the asset.
c. An operational asset purchased on credit for ₱2,000, terms 2/20, n/30,
should be recorded at ₱1,960 even though payment is made after the
discount period.
d. If operational assets are acquired in exchange for bonds, issued by the
buyer, the assets should be capitalized at the fair value of the operational
assets received or the fair value of the bonds, whichever is more reliably
determinable.
(Adapted)
31. Which of the following statements is true?

I. Depreciation expense shown on a company's income statement is always
equal to the depreciation expense on the company's income tax return.
II. The purpose of depreciation is to have the balance sheet report the
current value of an asset.
III. Depreciation expense reflects an allocation of an asset's original cost
rather than an allocation based on the economic value that is being
consumed.
IV. An asset's useful life is the same as its physical life.
V. One company might depreciate a new computer over three years while
another company might depreciate the same model of computer over five
years...and both companies are right.
VI. Depreciation expense is shown on the income statement in order to
achieve accounting's matching principle.
a. III, V, VI b. I, III, VI c. III, IV, V, VI d. V, VI
32. Which of the following depreciation methods is not an accelerated method?

a. Double declining balance c. Sum-of-the-years’ digits
b. Straight line d. 150% declining balance
33. An entity acquired an asset for a purchase price of ₱100,000. Necessary

installation costs incurred amounted to ₱2,000. It was estimated that the
asset has a 4-year useful life and after that it can be sold at ₱10,000. Cost of
uninstalling the asset is estimated at ₱1,000. If the company uses the sum-of-
the-years’ digits method, the depreciation expense in the third year is
computed as
a. 10% multiplied by ₱102,000 c. 20% multiplied by ₱92,000
b. 20% multiplied by ₱93,000 d. 20% multiplied by ₱102,000
(Adapted)
64
34. A depreciable asset has an estimated 15% residual value. Under which of the
following methods, properly applied, would the accumulated depreciation
equal the original cost at the end of the asset’s estimated useful life?
Straight-line Double-declining balance
a. Yes Yes
b. Yes No
c. No Yes
d. No No
(AICPA)
35. An entity operates a chain of hotels and is proposing to stop depreciating the
hotel equipment and expense the cost of replacement each year. The entity
should:
a. Not capitalize groups of assets and expense the replacement cost
b. Not capitalize groups of assets and expense them
c. Capitalize groups of assets but not depreciate them
d. Capitalize all assets with a useful life of more than one year and depreciate
them
(ACCA)
36. An entity manufactures components for the car industry and uses self-made
tools, which it continually develops. Costs of tooling are depreciated over four
years and the tools are manufactured in its one factory, where 4% of the
space is allocated to development. The factory depreciation charge should:
a. Be allocated on the basis of the value of the tools compared with the
factory output to the cost of the tooling
b. Be allocated on the basis of 1% per year for four years to the cost of the
tooling
c. Not be allocated to the cost of the tooling
d. Be allocated on the basis of 4% per annum and added to the cost of the
tooling
37. An entity has a policy of revaluing its PPE. An asset cost ₱15M on January 1,
20x8, has a useful life of 15 years and is depreciated on a straight-line basis to
a zero residual value. The value of the asset at December 31, 20x8 was
₱14.5M. At December 31, 20x9, the market value of the asset was ₱12.5M. The
accounting entry at 31 December 20x9 would be:
a. Depreciation ₱1.04M to income statement, fall in value of ₱0.5M charged
to revaluation reserve and ₱0.46M to the income statement
b. Depreciation ₱1.04M to income statement, fall in value of ₱0.96M charged
to revaluation reserve
c. Depreciation ₱1M to income statement, fall in value of ₱0.5M charged to
revaluation reserve and ₱0.5M to the income statement
d. Depreciation ₱1M to income statement, fall in value of ₱0.96M to the
income statement
(ACCA)
38. A graph is set up with "depreciation expense" on the vertical axis and "time"
on the horizontal axis. Assuming linear relationships, how would the lines for
straight-line and sum-of-the-years'-digits depreciation expense, respectively,
be drawn on this graph?
Straight-line SYD
a. Vertically Sloping down to the right.
b. Vertically Sloping up to the right.
c. Horizontally Sloping down to the right.
65
d. Horizontally Sloping up to the right.
39. Under the composite method, the composite

a. rate is the total cost divided by the total annual depreciation
b. rate is the total annual depreciation divided by the total depreciable cost
c. life is the total cost divided by the total annual depreciation
d. life is the total depreciable cost divided by the total annual depreciation.
40. The composite depreciation method

a. is applied to a group of homogenous assets
b. is an accelerated method of depreciation
c. does not recognize gain or loss on the retirement of specific assets in the
group
d. excludes salvage value from the base of the depreciation calculation
(AICPA)
41. Under what conditions will the service hours and productive output methods
of depreciation result in the same depreciation expense for a particular year?
a. When the total estimated service hours and production in units are the
same.
b. When the ratio of actual service hours to productive output for the year is
the same as the ratio of the estimates used in their respective depreciation
rates.
c. When salvage value is zero.
d. The two methods cannot produce the same depreciation expense amount
for any given year.
(Adapted)
42. Which of the following are correctly stated regarding the accounting for
property, plant and equipment?
I. In special instances, when inflation has been a major factor, property,
plant and equipment are permitted to be revalued based on index
numbers or on an appraisal performed by an independent expert or
specialist.
II. The sum of the year’s digit method always results in larger total
depreciation than does the straight line method.
III. Composite depreciation method does not recognize gain or loss on
retirement of a single asset in the group.
IV. Depreciation is the process of periodically writing down an asset to arrive
at its fair market value.
V. Depreciation accounting automatically provides the cash required to
replace plant assets as they wear out.
a. I, II, III, V b. I, II, III c. I, III d. II, III
43. The use of the double-declining balance method

I. results in a decreasing charge to depreciation expense.
II. means salvage value is not deducted in computing the depreciation base.
III. means the carrying amount should not be reduced below salvage value.
a. I, II, and III b. I, II c. I, III d. none
44. Which of the following statements best describes 'residual value'?

a. The estimated net amount currently obtainable if the asset were at the
end of its useful life
b. The present value of estimated future cash flows expected to arise from
the continuing use of the asset and from its ultimate disposal
66
c. The amount at which the asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction
d. The amount of cash or cash equivalents that could currently be obtained
by selling the asset in an orderly disposal
(ACCA)
45. Which of the following terms best describes the cost (or an amount
substituted for cost) of an asset less its residual value?
a. Revalued amount c. Recoverable amount
b. Carrying amount d. Depreciable amount
(ACCA)
46. The carrying amount of an asset is defined as

a. Cost minus residual value
b. Cost minus accumulated depreciation minus accumulated impairment
losses
c. Cost minus residual value minus accumulated depreciation
d. Estimated fair market value
47. Which of the following statements best describes the carrying amount of an
asset?
a. The cost (or an amount substituted for cost) of the asset less its residual
value
b. The amount at which the asset is recognized in the statement of financial
position after deducting any accumulated depreciation and accumulated
impairment losses
c. The higher of the asset's net selling price and its value in use
d. The fair value of the asset at the date of a revaluation less any subsequent
accumulated impairment losses
(ACCA)
48. Which 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
(ACCA)
49. Which of the following terms best describes the systematic allocation over its
useful life of the cost of an asset, or other amount substituted for cost, less its
residual value?
a. Depreciation b. Derecognition c. Impairment d. Value in use
(ACCA)
50. Which of the following terms best describes the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date?
a. Fair value b. Value in use c. Residual value d. Realizable value
(ACCA)
51. Which of the following statements regarding depreciation is true, according to

PAS16 Property, plant and equipment ?
67
a. An asset must be depreciated from the date of its purchase to the date of
sale
b. The annual depreciation charge should be constant over the life of the
asset
c. The total cost of an asset must eventually be depreciated
d. If the carrying amount of an asset is less than the residual value,
depreciation is not charged
(ACCA)
52. The straight-line method of depreciation is based on the assumption that

a. The operating efficiency of the asset decreases in the later years.
b. Service value declines as a function of time rather than of use.
c. Service value declines as a function of obsolescence rather than of time.
d. Physical wear and tear are more important than economic obsolescence.
(AICPA)
53. A principal objection to the straight-line method of depreciation is that it

a. Gives smaller periodic write-offs than decreasing charge methods.
b. Ignores variations in the rate of asset use.
c. Provides for the declining productivity of an aging asset.
d. Tends to result in a constant rate of return on a diminishing investment
use.
(RPCPA)
54. The straight-line method of depreciation is not appropriate for

a. A company that is neither expanding nor contracting its investments in
equipment because it is replacing equipment as the equipment is
required.
b. Equipment on which the amount of maintenance and repairs increase
substantially with age.
c. Equipment with useful life that is not affected by the amount of use.
d. Equipment that is used consistently every period.
(RPCPA)
55. Which of the following statements correctly relate to accounting for

depreciation?
I. The best theoretical support for using an accelerated depreciation method
is that expenses should be allocated in a certain manner so that earnings
will be equalized.
II. When partial use of a building under construction can be identified with
an income producing center and the corresponding cost can be
ascertained, the related depreciation should be allocated to that operation.
III. One of the reasons for recording depreciation is to have proper matching
of costs and revenues.
IV. The periodic expense associated with the use of land is called depreciation
expense.
V. Plant assets with a nominal cost may be charged to expense when
acquired.
a. II, III, V b. I, II, III, V c. II, III, IV, V d. I, II, III, IV, V
56. An asset has a nine-year useful life and is to be depreciated under the sum-of-
the-years’ digits method. The annual depreciation expense would be the same
as that under the straight line depreciation method in
a. the third year in the life of the asset
b. the fifth year of the life of the asset
c. the seventh year of the life of the asset
68
d. the ninth year of the life of the asset
(Adapted)
57. Which of the following is not under time-factor method depreciation?

a. straight line c. declining balance
b. SYD method d. productive output
58. Depreciation which arises from obsolescence or inadequacy to perform

efficiently is called:
a. periodic b. physical c. normal d. functional
59. The depreciation method that provides higher depreciation expense in the
early years and lower charges in the late years is
a. SYD c. units of production and hours of use method
b. straight line d. FIFO
60. Which of the following is an economic factor related to the service life of a
long-lived asset?
a. obsolescence c. decay
b. wear and tear d. casualties
61. A and B companies purchase identical equipment having an estimated service

life of 5 years with no residual value. A uses the straight-line depreciation
method; B uses the sum-of-the-years-digits method. Assuming that the
companies are identical in all other respects:
a. if both companies keep the asset for five years, B company’s 5-year total
for depreciation expense will be greater than A company’s 5-year total.
b. if the asset is sold after three years, A company is more likely to report a
gain on the transaction than B company.
c. A company’s depreciation expense will be higher during the first year than
B company’s.
d. A company’s net income will be lower during the 4th year than B
company’s.
(Adapted)
62. Which statement(s) is(are) correct?

I. Depreciation on units of property, plant and equipment that are reserved
or standby should not be continued
II. Art collections should not be depreciated on a systematic and rational
basis over the life of the asset irrespective of the earnings of the entity
a. true, true b. true, false c. false, true d. false, false
63. The highest amount of depreciation will usually be recorded in the last year of
an asset’s life when using:
a. straight line b. SYD c. double-declining balance d. either b or c
64. Which of the following depreciation methods usually results in paying the
lowest taxes in the early years of an assets life?
a. SYD c. straight line
b. double declining balance d. units of production method
65. Which of the following is/are true about straight-line depreciation?

I. With constant pre-depreciation income, it leads to an increasing rate of
return over time.
II. It ignores loss of productivity and increased maintenance costs over time.
69
III. It leads to higher taxes in later years compared to accelerated
depreciation methods.
a. I, II & III b. I & III c. II & III d. I & II
66. An asset is estimated to have a total life of 8 years. Its acquisition cost is
₱16,000 and a residual value of ₱4,000. The firm follows the double declining
method of depreciation. In the second year, the rate of depreciation for the
firm's asset is closest to
a. 25% b. 17% c. 9.5% d. 12.5%
67. With respect to depreciation methods, which of the following is true?

I. Accelerated depreciation methods lead to higher depreciation expense
over time.
II. The Straight-line method causes higher taxes in later years compared with
the accelerated depreciation methods.
III. Accelerated methods are preferred for tax reasons.
a. III only b. II & III c. I & III d. II only
68. An analysis of an entity's financial statements indicates that the average age
of its assets is declining. This could be due to which of the following?
I. The entity is acquiring new assets with longer depreciable lives.
II. The entity's capital expenditures are outpacing depreciation.
III. The entity is not using its assets as intensively as it should.
IV. The entity is operating in its maturity phase.
a. I & IV b. I & II c. I, II, III & IV d. III & IV
*Hint: Average age of assets can be computed using any of the following:
i. Average age: (Accumulated depreciation ÷ Depreciation expense) = x
years
ii. Relative age: (Accumulated depreciation ÷ Total cost of depreciable
assets) = % of age
iii. Average depreciable life: (Total depreciable amount ÷ Depreciation
expense) = x years
69. All of the following are attributes of depreciation except

a. depreciation stays on the statement of financial position as long as the
asset is owned by the entity.
b. depreciation provides funds for replacement of an asset.
c. depreciation is the allocation of the cost of an asset over its useful life.
d. the purpose of depreciation is to charge against operations, by means of
allocation, the cost of an asset.
70. Which of the following statements is incorrect?

a. The term "revenue expenditures" refers to those amounts paid out which
are expected to provide revenue in the current period or a future period.
b. Expenditure for one item which has questionable or highly uncertain
future benefit usually will be recognized as expense when incurred.
c. Subsequent to acquisition, operational assets usually are reported at cost
or cost less accumulated depreciation, depletion, or amortization.
d. A primary principle in recording and reporting operational assets is that
they are recorded at cost when acquired and subsequently are reported at
cost or cost less accumulated depreciation.
(Adapted)
71. A machine with a 4-year estimated useful life and an estimated 15% residual
value was acquired on January 1. Would depreciation expense using the sum-
70
of-the-year's-digit method be higher or lower than depreciation expense
using the double-declining-balance-method in the first and second years?
First year Second year
a. Higher Higher
b. Higher Lower
c. Lower Higher
d. Lower Lower
(AICPA)
72. An exchange of assets with no cash exchanged:

a. records the cost of the asset received at the book value of the asset given.
b. records the asset received at the fair value of the asset given.
c. culminates to an earning process.
d. results in recognition of a loss or gain of each party.
(Adapted)
73. A primarily theoretical objection to the straight-line method of depreciation is

that it:
a. gives a lower periodic expense than the accelerated method over the life
of the asset.
b. recognizes the declining productivity of the asset.
c. ignores variation in the rate of the asset use among periods.
d. tends to result in a constant rate of return on a diminishing investment
base.
(AICPA)
74. Periodic depreciation expense is primarily the result of applying the:

a. revenue principle c. systematic and rational allocation
b. full-disclosure d. matching
75. All of the following are causes of depreciation except:

a. obsolescence of the asset c. wear and tear from operational use
b. inadequacy of the assets d. decline in current market value of the asset
(AICPA)
76. Accounting for depreciation primarily:

a. is an accounting process which allocates long-lived asset cost to
appropriate accounting periods.
b. is used to indicate a decline in market value of a long-lived asset.
c. is a process of asset valuation for balance sheet purposes.
d. applies only to long-live intangible assets.
(AICPA)
77. Which of the following items relevant to the depreciation of an asset can be
negative?
a. residual value c. useful life
b. depreciable amount d. carrying amount subsequent to acquisition
(AICPA)
78. Which depreciation method is particularly appropriate where: (a)

obsolescence is not the primary factor, (b) actual use can be accounted for,
and (c) the service life in units of use can be estimated reliably?
a. SYD c. Productive output
b. Double declining balance d. Straight line
(AICPA)
71
79. Which is not an objection to the use of the straight-line method of
depreciation?
a. It may not satisfactorily match expense with revenue, depending on the
asset.
b. It tends to ignore obsolescence as a major source of decline in economic
value.
c. It does not recognize the investment characteristics of the ownership of
operational assets.
d. It generally results in the lowest earnings.
(Adapted)
80. The following statements relate to functional depreciation

I. Inadequacy may arise when there is no future demand for the product
that the depreciable asset produces or from the availability of a new
depreciable asset that can perform for the same function at a substantially
lower cost.
II. Obsolescence results when an asset is no longer suitable for the size of the
company’s operations.
a. True, true b True, false c. False, true d. False, false
81. A method that excludes residual value from the base for the depreciation
calculation is
a. SYD c. productive output
b. Double declining balance d. straight line
(AICPA)
82. An enterprise is depreciating an asset with a 5-year useful life. It cost

₱100,000 and has no residual value. If the <List A> method is used,
depreciation expense in the second year will be <List B>.
List A List B
a. Sum-of-years’ digits 20,000
b. Sum-of-years’ digits 40,000
c. 200% diminishing balance 16,000
d. 200% diminishing balance 24,000
(Adapted)
83. In the years after mid-service point of a depreciable asset, which of the
following depreciation methods will result in the highest depreciation
expense?
a. Sum-of-the-years’-digits. c. 200% diminishing-balance
b. Diminishing-balance d. Straight-line
(Adapted)
84. If an enterprise employs the sum-of-the-years’ digits (SYD) method of

depreciation for an asset with an estimated useful life of 4 years, the
percentage of the total depreciable cost that will be expensed in the third year
is
a. 10% b. 25% c. 20% d. 70%
(Adapted)
85. The following statements relate to depreciation accounting, choose the

incorrect one
a. Depreciation, normally, should not be recognized on property, plant and
equipment construction period or while new equipment is undergoing
testing and breaking in until such assets are capable of being used
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b. When partial use of the asset, during construction can be identified with
an income-producing center and the corresponding cost can be
ascertained, the related depreciation should he allocated to that operation.
c. Depreciation should not be continued on units of property, plant and
equipment that are reserved or standby, or idle either temporarily or for
an extended period.
d. When used property is acquired, the actual cost in cash or equivalent is
generally the proper basis for depreciation, regardless of the previous
history of the property
86. A plant facility has an originally estimated physical life equal to 15 years. As a
result of accelerated usage, it is now estimated that the physical life will be
reduced by 3 years. The depreciation rate applied to this facility need not be
changed if the depreciation method used is
a. SYD
b. Double declining balance
c. Units of output or hours of use method
d. Straight line method
e. The rate should be changed under all of these methods
87. A machine with a 4-year useful life and a 15% salvage value was acquired on
January 1, 20x2. The increase in accumulated depreciation for 20x3 using the
double-declining balance method would be
a. initial cost x 85% x 50% c. initial cost x 50%
b. initial cost x 85% x 50% x 50% d. initial cost x 50% x 50%
88. Accumulated depreciation, as used in accounting, represents.

a. funds set aside to replace assets.
b. earnings retained in the business that will be used to purchase another
operational asset when the related asset becomes fully depreciated.
c. the allocation of the cost of a depreciable asset recognized in profit or loss
during the period.
d. the portion of the asset’s cost that is written off as an expense since the
acquisition date.
89. Which of the following statements is most likely not correct?

a. Periodic allocations of acquisition cost, made on a systemic and rational
basis, are recognized as current expense in conformity with the matching
principle.
b. Depreciation accounting is a process of valuation, not of allocation.
c. At acquisition, tangible, operational assets are recorded at cost on the
basis of the cost principle.
d. Subsequent to acquisition, tangible operational assets that have a limited
life are reported at the cost recognized at acquisition date less
accumulated allocations of such cost.
90. Depreciation is a variable (as opposed to fixed) expense if the depreciation

method used for reporting purposes is:
a. declining balance c. straight line
b. units-of-production d. SYD
91. Which of the following methods permits total depreciation on a plant asset to
exceed depreciable cost?
a. Straight-line
b. Declining balance
c. Sum of year's digits
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d. No acceptable depreciation method
e. All acceptable methods if salvage value is not zero
(Adapted)
92. Choose the incorrect statement concerning the half-year convention as it

applies to depreciation.
a. It can be used only for tax purposes.
b. It adds a year to the class life of the asset for tax purposes.
c. It reduces the accelerated nature of the deduction.
d. It results in depreciation rate equal to the straight-line rate based on class
life in the first year of the asset's life.
(AICPA)
93. For each succeeding period, the units-of-production method of depreciation

usually recognizes an amount of depreciation expense that is:
a. constant b. varying c. increasing d. decreasing
94. Which method of depreciation results in periodic depreciation expense that

may fluctuate from one period to the next, but not necessarily in a steadily
upward or downward direction?
a. SYD c. straight line
b. output or service hours d. declining balance
95. Which of the following is/are advantages of accelerated methods of

depreciation?
I. They implicitly recognize the loss of productivity and increased
maintenance costs over time.
II. They allow deferral of taxes compared to the straight-line method, thus
making more cash available for current operations.
III. The lower depreciation charges in later years compensate for the greater
uncertainty in future revenues.
a. I & III b. II only c. I, II & III d. I & II
96. An end-of-period adjustment for depreciation of fixed assets is necessary

a. for proper statement of profit
b. to be consistent with the matching principle
c. to recognize the expense of using fixed assets
d. all of these answers are correct
97. Depreciation expense for fixed assets is recorded

a. for each period the asset is in use
b. as a liability until the asset is sold
c. at the end of each period during the asset's useful life
d. when the asset is sold
98. Changes in depreciation methods, useful lives, and residual values

a. are changes in accounting estimates accounted for prospectively
b. are changes in accounting estimates accounted for retrospectively
c. are changes in accounting policies accounted for prospectively
d. does not affect previously recognized expenses, as well as future expenses
99. If there is a change in useful life, depreciation method, or residual value

a. the accountant should compute first the carrying amount of the asset as of
the beginning of the period of change; thereafter, the carrying amount is
allocated over the remaining revised useful life using the new depreciation
method or revised residual value
74
b. the accountant should compute the carrying amount of an asset as if the
new depreciation method, revised useful life or revised residual value had
been used all along
c. the accountant is in for very complex accounting computations and should
consult her college instructor first before doing anything
d. there should be no changes in useful lives, depreciation methods, or
residual values because once selected or determined, they are irrevocable,
according to accountant’s standards
Revaluation model
100. An entity owns a fleet of company cars and executive vehicles, and has
other property and equipment in order to service the fleet. It decided to
revalue some of its property, plant and equipment. Which one of the following
options complies with PAS 16?
a. Revalue only those parts of the fleet that have increased in value
b. Revalue only the cars and not the executive vehicles
c. Revalue only one-half of each class of property, plant and equipment
d. Revalue an entire class of property, plant and equipment
(ACCA)
101. In case of downward revaluation of an asset, which is revalued for the first
time, the account to be debited is
a. fixed asset account c. profit or loss account
b. revaluation reserve d. general reserve
102. An entity has a policy of revaluing its PPE. An asset cost ₱5M on January 1,
20x1 and has a useful life of five years and is depreciated on a straight-line
basis to a zero residual value. The value of the asset at December 31, 20x1
was ₱3.8M. The fall in value will be accounted for as follows:
a. Depreciation ₱1M and fall in value of ₱200,000 both to the income
statement
b. Depreciation ₱1M and fall in value of ₱200,000 both to the reserves
c. Depreciation ₱1M to income statement and fall in value of ₱200,000 to the
reserves
d. Depreciation ₱1M to the income statement and fall in value of ₱200,000
ignored until there is a revaluation surplus
(ACCA)
103. Appraisal value is:

a. the revalued amount of property, plant and equipment determined by
recognized specialists or authorities
b. the value per appraisal computed by deducting observed depreciation
from appraised value
c. computed by deducting historical cost from appraised value
d. the excess of sound value over net book value
104. When revalued amounts are to be incorporated in the financial statements

the following requirements are to be observed:
I. the appraisal must be made only by a recognized specialist independent of
the company which owns the property
II. depreciation to be charged to operations should be based on cost only
III. the revaluation surplus should be presented on the face of statement of
financial position under equity as a separate line item in accordance with
the minimum line items under PAS 1
IV. certain required disclosures should be made in the financial statements
V. the appraisal should cover all property, plant and equipment items
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a. I, II, III, IV, and V c. I, III and IV only
b. I, III, IV and V only d. IV only
105. Which of the following incorrectly relate(s) to the accounting for property,
I. Sum of the years’ digits method is one of the accelerated methods of
depreciation that provides higher depreciation expense in the early years
and lower charges in the late years.
II. Mortgage or liens on property, plant and equipment need not be disclosed
in the financial statements or notes.
III. Any property, plant and equipment that is idle or abandoned and remains
in the property, plant and equipment account should be revalued if this
results in increasing their carrying values.
IV. Depreciation of appraised properties charged to operations shall be based
on the appraised values and it should be computed from the date of
appraisal.
V. An entity may be allowed to, revalue its property, plant and equipment if
their current value is substantially more than their cost provided the
company adheres to the provisions of PAS
a. I, IV and V b. I, IV c. II, III d. II, III, V
106. When an appraised property is retired, the revaluation surplus pertaining

to such asset may be handled
a. revaluation surplus which can be subsequently transferred to
unappropriated retained earnings
b. revaluation surplus which can be subsequently transferred to other
appraised property not retired
c. revaluation surplus which can be subsequently transferred to other
properties not revalued
d. revaluation surplus which cannot be subsequently transferred to
unappropriated retained earnings
(RPCPA)
107. The value per appraisal or the value computed by deducting observed
depreciation from replacement cost is called
a. revaluation surplus c. sound value
b. appraisal value d. replacement cost
108. Internet Protocol-IP, Inc. owns a fleet of over 100 cars and 20 ships. It
operates in a capital-intensive industry and thus has significant other
property, plant, and equipment that it carries in its books. It decided to
revalue its property, plant, and equipment. The company’s accountant has
suggested the alternatives that follow. Which one of the options should
Internet Protocol-IP, Inc. select in order to be in line with the provisions of
PAS 16?
a. Revalue only one-half of each class of property, plant, and equipment, as
that method is less cumbersome and easy compared to revaluing all assets
together.
b. Revalue an entire class of property, plant, and equipment.
c. Revalue one ship at a time, as it is easier than revaluing all ships together.
d. Since assets are being revalued regularly, there is no need to depreciate.
(Adapted)
109. Under PAS 16, revaluation of property, plant and equipment to appraised
value is an acceptable alternative to historical cost provided certain
76
requirements are complied with. Which of the following is not one of the
requirements?
a. the appraisal should be made by a competent and independent specialist
once a year at each end of reporting period.
b. depreciation to be charged to operations should be based on appraised
values or its equivalent
c. the revaluation surplus should be presented in equity
d. appropriate disclosures should be made in the financial statements
(Adapted)
110. PAS 16 requires that revaluation surplus resulting from initial revaluation
of property, plant, and equipment should be treated in one of the following
ways. Which of the four options mirrors the requirements of PAS 16?
a. Credited to retained earnings as this is an unrealized gain.
b. Released to the income statement an amount equal to the difference
between the depreciation calculated on historical cost vis-à-vis revalued
amount.
c. Deducted from current assets and added to the property, plant, and
equipment.
d. Debited to the class of property, plant, and equipment that is being
revalued and credited to a reserve captioned “revaluation surplus,” which
is presented under “equity.”
(Adapted)
111. Which of the following is correct regarding the revaluation model as it is

applied to PPE?
a. When the revaluation model is used, depreciation ceases.
b. The appropriate basis for revaluation is replacement cost without any
adjustment whatsoever.
c. When replacement cost is used, observed depreciation should first be
deducted to arrive at the depreciated replacement cost.
d. Observed depreciation is determined through a very complex
computation.
112. The following statements correctly relate to the revaluation model.

I. Revaluation should be made for an entire class of PPE and not made
selectively.
II. Revaluation should be made simultaneously for all items of PPE within a
class. Revaluation on a rolling basis is permitted so long as revaluation is
completed within a short period.
III. If fair values are volatile, revaluation should be made on an annual basis. If
not, revaluation may be made every 3 to 5 years.
IV. Revalued amounts are required under PAS 16 to be determined by
independent professionals.
a. II, III b. I, II, III c. II, III, IV d. I, II, III, IV
113. Revaluation surplus may be computed as

a. Replacement cost minus Carrying amount
b. Appraised value or Depreciated replacement cost minus Carrying amount
c. Replacement cost minus Observed depreciation
d. Accumulated depreciation divided by Historical cost multiplied by
Replacement cost
114. When the asset being revalued has no residual value, observed
depreciation may be computed as
77
b. Appraised value or Depreciated replacement cost minus Carrying amount
Replacement cost
115. When the asset being revalued has a residual value, observed depreciation
may be computed as
b. Accumulated depreciation divided by Depreciable amount multiplied by
Depreciable amount of replacement cost
Replacement cost
116. When there is a change in useful life as a result of revaluation,

a. the computation of revaluation surplus is affected by a series of
adjustments and complex computations
b. only the computation for observed depreciation is affected
c. the revised useful life is disregarded when computing for revaluation
surplus and subsequent depreciation
d. the computation of revaluation surplus is unaffected, observed
depreciation is computed in the same way as if there was no change in
useful life
117. When the revalued asset is depreciable,

a. a portion of the revaluation surplus is periodically transferred to retained
earnings through profit or loss.
b. a portion of the revaluation surplus may be periodically transferred
directly to retained earnings.
c. no portion should be transferred periodically to retained earnings unless
the asset is derecognized.
d. revaluation surplus is presented in equity and must be transferred only to
retained earnings when the revalued asset is derecognized.
118. A long-term asset currently has a carrying amount of ₱45,000 and a

salvage value of ₱5,000. It was acquired 3 years ago at a cost of ₱75,000. If the
firm uses straight-line depreciation, how many more years is the asset
expected to be in service?
a. 5 years b. 4 years c. 6 years d. 7 years
Disclosure
119. Which of the following disclosures must be made under PAS16 Property,
I. The existence and amounts of restrictions on title
II. A narrative discussion of future capital expenditure plans
III. The disposal proceeds of each major asset sold in the period
IV. The measurement bases used for determining the gross carrying amount
a. I, IV b. I, II, IV c. I, III, IV d. I, II, III, IV
(ACCA)
120. Which of the following is a required disclosure under PAS 16?

a. the description of each item of PPE, their nature, and the purpose of their
acquisition.
b. the depreciation methods used unless the PPE is measured under
revaluation model
c. lapsing schedule
78
d. all of these
121. All of the following are required disclosure under PAS 16, except?
a. accounting policies and estimates of useful lives and residual value
b. reconciliation of carrying amounts at the beginning and end of the year
c. commitments related to items of property, plant, and equipment
d. changes in fair values of assets measured under cost model

1. A 21. D 41. B 61. D 81. B 101. C 121. D
2. B 22. D 42. C 62. C 82. D 102. A
3. D 23. B 43. A 63. A 83. D 103. A
4. B 24. D 44. A 64. B 84. C 104. D
5. B 25. A 45. D 65. D 85. C 105. C
6. B 26. D 46. B 66. A 86. C 106. A
7. D 27. D 47. B 67. A 87. D 107. C
8. D 28. E 48. A 68. C 88. D 108. B
9. B 29. B 49. A 69. B 89. B 109. A
10. B 30. A 50. A 70. A 90. B 110. D
11. D 31 A 51. D 71. C 91. D 111. C
12. C 32. B 52. B 72. B 92. A 112. B
13. D 33. B 53. B 73. C 93. B 113. B
14. A 34. D 54. B 74. C 94. B 114. D
15. A 35. D 55. A 75. D 95. C 115. B
16. D 36. D 56. B 76. A 96. D 116. D
17. A 37. A 57. D 77. A 97. C 117. B
18. C 38. C 58. D 78. C 98. A 118. B
19. A 39. D 59. A 79. D 99. A 119. A
20. A 40. C 60. A 80. D 100. D 120. C
79
Chapter 16
Depletion of Mineral Resources

Recognition of depletion in the financial statements

In 20x1, OBSTREPEROUS NOISY Mining Corp. acquired the right to use 1,000
acres of land to mine for gold. The lease cost is ₱200,000,000, and the related
exploration costs on the property amounted to ₱40,000,000. It is the policy of
OBSTREPEROUS Mining Corp. to capitalize all costs of exploration and evaluation
of mineral resources. Intangible development costs for drilling, tunnels, shafts,
and wells incurred before opening the mine amounted to ₱340,00,000. At the end
of the mine’s economic useful life, OBSTREPEROUS Mining Corp. is required by
legislation to restore the site. Estimated restoration costs have a fair value of
₱20,000,000. OBSTREPEROUS Mining Corp. estimates that the mine will provide
approximately 100,000,000 ounces of gold. Actual ounce of gold mined in 20x2
totaled 300,000 ounces.
1. How much is the depletion charge in 20x2?

a. 1,740,000 b. 1,800,000 c. 165,000 d. 150,000
2. Assuming that of the 300,000 ounces of gold extracted in 20x2, 280,000

ounces were sold and 20,000 ounces remain in inventory. How much
depletion is recognized in the (a) statement of financial position and (b)
statement of profit or loss and other comprehensive income?
Statement of financial position Statement of profit or loss
a. 1,680,000 120,000
b. 116,000 1,624,000
c. 11,000 154,000
d. 120,000 1,680,000
Changes in estimates
In 20x1, BUCOLIC RURAL Co. acquired land for a total cost of ₱40,000,000 to be
used to quarry marble, limestone, and construction aggregates. Costs incurred to
obtain legal right to explore the property amounted to ₱8,000,000. Expenditures
incurred in the exploration for and evaluation of mineral resources before
technical feasibility and commercial viability of extracting a mineral resource are
demonstrable totaled ₱12,000,000. Intangible development costs of drilling,
tunnels, shafts, and wells before the actual production totaled ₱20,000,000.
BUCOLIC Co. estimates that total recoverable reserves are 100,000,000 units.
Furthermore, BUCOLIC Co. expects to sell the land for ₱4,800,000 after resource
is depleted. However, no buyer will pay this price unless the mine is drained,
filled and leveled, a process that will cost ₱800,000. It is BUCOLIC’s policy to
capitalize all exploration costs.
Actual units quarried in 20x1 through 20x4 totaled 30,000,000 units. On January
1, 20x5, BUCOLIC Co. estimated that remaining recoverable reserves is only
25,000,000 units and after the reserves are exhausted, the land will be sold for
₱3,200,000. Costs of disposal are estimated at ₱1,200,000. Actual units quarried
in 20x5 totaled 6,000,000 units.
80
3. How much is the depletion charge in 20x5?
a. 13,284,000 b. 13,480,000 c. 13,280,000 d. 13,248,000
4. What is the carrying amount of the wasting asset on December 31, 20x5?
a. 43,852,000 b. 44,272,000 c. 42,720,00 d. 43,952,000
5. In 20x1, INNOCUOUS HARMLESS Co. acquired land to be used to mine coal.

Total costs of acquisition, exploration, and intangible development amounted
to ₱40,000,000. It was estimated that total recoverable reserves is 50,000,000
units. Total units extracted from 20x1 through 20x4 totaled 30,000,000 units.
In 20x5, after extracting 5,000,000 units, it was estimated that the remaining
recoverable reserves is 20,000,000 units. How much is the depletion charge in
20x5?
a. 3,200,000 b. 3,333,333 c. 3,266,667 d. 3,400,000
Immovable tangible equipment with shorter life

In 20x1, RIBALD OFFENSIVE Co. purchased real estate containing copper for a
total cost of ₱64,000,000. Exploration costs amounted to ₱4,000,000 and
intangible development costs of drilling, tunnels, shafts, and wells totaled
₱16,000,000. Movable tangible equipment costs for heavy equipment totaled
₱32,000,000 and immovable tangible equipment costs for drilling rig foundation
totaled ₱24,000,000.
Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated
that 300,000 units will be extracted each year. The heavy equipment and the
drilling rig foundation have estimated useful lives of 10 years and 5 years,
respectively. Actual units extracted during 20x1 are 320,000 units.
6. How much is the 20x1 depreciation on the immovable tangible equipment?

a. 4,800,000 b. 3,428,571 c. 4,571,429 d. 3,200,000
7. How much is the 20x1 depletion of the natural resource?

a. 12,800,000 b. 16,428,571 c. 15,229,879 d. 14,679,097
8. How much is the 20x1 depreciation on the movable tangible equipment?

a. 3,428,571 b. 3,200,000 c. 4,800,000 d. 4,571,429
Immovable tangible equipment with longer life

In 20x1, DIAPHANOUS TRANSPARENT Co. purchased real estate containing
copper for a total cost of ₱64,000,000. Exploration costs amounted to ₱4,000,000
and intangible development costs of drilling, tunnels, shafts, and wells totaled
₱16,000,000. Movable tangible equipment costs for heavy equipment totaled
₱32,000,000 and immovable tangible equipment costs for drilling rig foundation
totaled ₱24,000,000.
Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated
that 300,000 units will be extracted each year. The heavy equipment and the
drilling rig foundation have estimated useful lives of 20 years and 10 years,
respectively. Actual units extracted during 20x1 are 320,000 units.
9. How much is the depreciation on the immovable tangible equipment?

a. 3,657,600 b. 3,480,000 c. 3,460,800 d. 3,260,800
10. How much is the depletion on the natural resource?

81
a. 12,832,677 b. 11,988,322 c. 13,489,00 d. 12,800,000
11. How much is the depreciation on the movable tangible equipment?

a. 1,573,290 b. 1,620,000 c. 1,613,890 d. 1,600,000
No production in a period
In 20x1, THRALL SLAVE Co. purchased real estate containing copper for a total
cost of ₱40,000,000. Immovable tangible equipment costs for drilling rig
foundation totaled ₱20,000,000. Estimated recoverable reserves from the mine
are 1,000,000 units. It is estimated that 100,000 units will be extracted each year;
therefore, the life of the mine in years is 10 years. The drilling rig foundation has
an estimated useful life of 15 years.
Actual units extracted from 20x1 through 20x3 totaled 340,000 units. No units
were extracted during 20x4 due to an employee strike. Extraction resumed in
20x5 and total units extracted during that year was 80,000 units.
12. How much is the depreciation charge on the immovable tangible equipment
in 20x4?
a. 980,967 b. 1,090,800 c. 1,100,000 d. 1,200,000
13. How much is depreciation charge on the immovable tangible equipment in

20x5?
a. 1,400,000 b. 1,466,667 c. 1,500,000 d. 1,600,000
Liquidating dividends
14. MYNHEER MISTER Co. has the following balances in its accounts as of
December 31, 20x1:
Resource deposit – coal mine 40,000,000
Accumulated depletion 16,000,000
Ordinary share capital 80,000,000
Capital liquidated 8,000,000
Unappropriated retained earnings 20,000,000
Inventory (600,000 units) 28,000,000
Depletion rate per unit 6.00 per unit
How much is the maximum amount that can be declared as dividends?

a. 24,400,000 b. 32,400,000 c. 28,000,000 d. 31,600,000
Restoration and decommissioning costs – Wasting asset

In 20x1, MULIEBRITY FEMINITY Mining Corp. acquired the right to use 1,000
acres of land to mine for gold. The lease cost is ₱200,000,000, and the total costs
of exploration and intangible development costs are ₱40,000,000. MULIEBRITY is
required by environmental laws to restore the site after 5 years. MULIEBRITY’s
best estimate for the restoration cost is ₱20,000,000 and current market-based
discount rate is 12%. Total deposits expected to be extracted is 13,000,000
ounces. Actual ounces extracted in 20x1 and 20x2 are 2,700,000 and 2,600,000,
respectively.
15. How much is the initial carrying amount of the mineral deposit?
a. 24,143,840 b. 251,348,540 c. 251,764,540 d. 256,340,540
16. How much is the depletion in 20x1?

a. 52,191,000 b. 52,260,000 c. 53,140,000 d. 54,164,000
82
17. How much is the interest expense in 20x2?
a. 1,361,824 b. 1,198,406 c. 1,421,266 d. 1,525,244
Restoration and decommissioning costs – Equipment

On January 1, 20x1, DEMULCENT EMBARRASSING Co. acquired an oil rig for
₱400,000,000. Installation and other necessary costs in bringing the equipment
to its intended condition for use totaled ₱80,000,000. DEMULCENT Co. uses the
straight line depreciation method. DEMULCENT is required by law to dismantle
the equipment and restore the site where it is installed after 20 years, the end of
the equipment’s useful life. The estimated decommissioning and restoration costs
are ₱40,000,000. The imputed rate of interest is 12%.
18. How much is the initial cost of the equipment?
a. 475,853,328 b. 480,000,000 c. 400,000,000 d. 484,146,672

a. 23,792,666 b. 24,000,000 c. 20,000,000 d. 24,207,332

a. 248,800 b. 437,889 c. 557,312 d. 665,443
Estimating fair value of ARO

On January 1, 20x1, VERITY FIRMNESS Mining Company purchased a quartz
mine for ₱40,000,000 that it intends to work for the next 10 years. According to
environmental laws, VERITY must restore the mine site to its original natural
prairie state after it ceases mining operations at the site.
There is no active market for retirement obligations such as these but VERITY
has been able to develop cash flow estimates based on its prior experience in
mining-site restoration. It will take 3 years to restore the mine site when mining
operations cease in 10 years. Each estimated cash outflow reflects an annual
payment at the end of each year of the 3-year restoration period. The current
market-based rate is 12%.
VERITY made the following estimates of future cash flows for the restoration
cost:
Restoration estimated cash outflow Probability assessment
8,000,000 10%
14,000,000 15%
16,000,000 50%
16,800,000 25%
100%
21. How much is the initial cost of the mine?

a. 51,677,212 b. 51,879,233 c. 51,986,412 d. 52,108,922

a. 1,233,114 b. 1,569,416 c. 1,667,892 d. 1,678,612
Changes in estimates of Restoration costs

On January 1, 20x1, PRECIPITOUS STEEP Co. acquired a quarry for ₱400,000,000.
PRECIPITOUS Co. is required by law to restore the site after 5 years. The
estimated restoration costs are ₱40,000,000. The imputed rate of interest is 12%.
83

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TEST BANK

ZEUS VERNON B. MILLAN

No part of this work covered by the

Chapter 12: Multiple choice – Computational (SET B) – (For classroom

Equity method – Cost equal to fair value of interest acquired

1. How much is the share in profit or loss of the associate in 20x1?

3. How much is the investment income (loss on investment) to be recognized in

Equity method – Cost exceeds fair value of interest acquired

On December 31, 20x1, ENCOURAGE reported ₱4,800,000 profit and declared

Equity method – Determining percentage of ownership

11. How much is the carrying amount of the investment as of year-end?

Cumulative preference shares

12. How much is AUSTERE Co.’s share in profit or loss of associate?

Loss of significant influence

On July 1, 20x2, ALLEVIATE sold 60% of its investment in LESSEN at the

If the unsold shares were reclassified to investment in FVOCI, how much is

Reclassification adjustment for other comprehensive income

Partial loss of significant influence – Reclassification of OCI

Partial loss of significant influence – Reclassification of OCI

Transfer of other comprehensive income directly in equity

Change to equity method from FVPL – “STEP ACQUISITION”

Downstream sale of inventory

24. How much is the share in the profit of associate in 20x1?

25. How much is the share in the profit of associate in 20x2?

Upstream sale of inventory

26. How much is the share in the profit of associate in 20x1?

27. How much is the share in the profit of associate in 20x2?

Downstream sale of depreciable asset

28. How much is the share in the profit of associate in 20x1?

30. How much is the share in the profit of associate in 20x1?

Investment in associate ₱ 800,000

QUESTIONING reported losses of ₱5,600,000, ₱2,000,000 and ₱400,000 in 20x1,

The answers and solutions to the computational problems above

Chapter 12: Theory of Accounts Reviewer

2. An entity shall apply PAS 28

20. In which of the following does X have significant influence?

21. In assessing whether significant influence exists, an investor shall consider

26. Potential voting rights include all of the following except

30. For investments in associates, the investor shall not

36. The equity method should be applied in which of the following?

40. Dividends received from an investment in an associate,

44. Significant influence may be lost in any of the following, except

45. Significant influence may be lost in any of the following, except

47. If an investor loses significant influence over an associate,

48. If an investor’s ownership interest in an associate is reduced but significant

50. The investor’s interest on the undervaluation of depreciable assets of the

I. The income or loss on the investment in associate is computed on the net

54. On January 1, 20x1, Adjacent Inc. purchased 10% of Juxtaposition Co.’s

57. Adjustments to the carrying amount of the investment in associate may be

58. Which of the following is correct in relation to accounting for investments in

60. An investor in equity securities received cash dividends in excess of the

62. Consider the following statements.

State whether the foregoing statements are correct.

66. Select the incorrect statement.

67. Which of the following statement is the correct statement?

c. Long-term investments are classified as long-term only because they are

Are the following statements true or false, according to PAS 28 Investments in

75. An investor must apply the requirements of PAS 36 in determining whether it

76. What accounting method should be used for an investment in an associate

78. When significant influence is achieved from additional purchase of shares

66. Select the incorrect statement.

67. Which of the following statement is the correct statement?