THEORIES

1. It is defined as property (land or building or part of building or both) by an owner or

finance lessee to earn rentals or for capital appreciation or both.
a. Investment property
b. Owner-occupied property
c. Mining property
d. Rental property

2. Investment property includes all of the following, except

a. Land held for long-term capital appreciation

b. Land held for currently undetermined use
c. Building owned by the reporting entity or held by a finance lessee leased out under one or
more operating leases.
d. Property held for sale in the ordinary course of business or in the process of construction
for such sale.

3. Which type of contract is unique in that it protects the owner against unfavorable
movement in the price or rate while allowing the owner to benefit from favorable movement?

a. Interest rate swap

c. Futures contract
d. Option
b. Forward contract

4. Which information should be disclosed in relation to derivative contracts?

a. Fair value only

b. Notional amount only
c. Both fair value and nominal amount
d. Neither fair value nor nominal amount

5. Which type of contract is unique in that it protects the owner against unfavorable
movement in the price or rate while allowing the owner to benefit from favorable movement?

a. Interest rate swap

b. Forward contract
c. Futures contract
d. Option

6. Uncertainty about the future market value of an asset is referred to as

a. Price risk
b. Credit risk
c. Interest rate risk
d. Exchange rate risk
7. Property, plant and equipment are tangible items that

I. Are held for use in production or supply of goods and services, for rental to others or for
administrative purposes.
II. Are expected to be used during more than one period.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

8. Which is not a major characteristic of property, plant and equipment?

a. The property, plant and equipment are tangible assets.

b. The property, plant and equipment are used in business.
c. The property, plant and equipment are expected to be used over a period of more than one
year.
d. The property, plant and equipment are subject to depreciation.

9. The cost of an item of property, plant and equipment comprises all of the following, except

a. Purchase price
b. Import duties and nonrefundable purchase taxes
c. Any cost directly attributable in bringing the asset to the location and condition for its
intended use
d. Initial estimate of the cost of dismantling and removing the item and restoring the site, the
obligation for which the entity does not incur when the item was acquired

10. Which of the following may not be considered a "qualifying asset"?

a. A power generation plant that normally takes two years to construct.

b. An expensive private jet that can be purchased from a local vendor.
c. A toll bridge that usually takes more than a year to build.
d. A ship that normally takes one to two years to complete.

11. Which of the following costs may not be eligible for capitalization as borrowing cost?

a. Interest on bonds issued to finance the construction of a qualifying asset.

b. Amortization of discount or premium relating to borrowings that qualify for capitalization.
c. Imputed cost of equity.
d. Exchange difference arising from foreign currency borrowing to the extent that it is
regarded as an adjustment to interest cost pertaining to a qualifying asset.

12. Which of the following assets could be treated as qualifying asset for purposes of
capitalizing borrowing cost?

a. Investment property
b. Investment in financial instrument
c. Inventory that is manufactured or produced in large quantity on a repetitive basis and takes
a substantial period of time to get ready for use or sale
d. Biological asset
13. It is the systematic allocation of the depreciable amount of an item of property, plant and
equipment.
a. Depreciation
b. Depletion
c. Amortization
d. Realization

14. The useful life of an item of property, plant and equipment is

I. The period of time over which an asset is expected to be used by the entity.
II. The number of production or similar units expected to be obtained from the asset by the
entity.
a. I only
b. It only
c. Both I and II
d. Neither I nor II

15. All the following factors need to be considered in determining the useful life of an asset,
except
a. Expected usage of the asset
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value

16. Depletion expense

a. Is usually part of cost of goods sold.

b. Includes tangible equipment cost in the depletable amount.
c. Excludes intangible development cost form the depletable amount.
d. Excludes restoration cost from the depletable amount.

17. Information needed to compute a depletion charge per unit includes the
a. Estimated total amount of resources available for removal.
b. Amount of resource removed during the period.
c. Cumulative amount of resources removed.
d. Amount of resources sold during the period.

18. Which type of expenditure is included in the term “exploration and evaluation” of
mineral resources.
I. The extraction and processing of mineral resources for transport to market.
II. The commercial review of possible areas for mineral extraction before bidding for the
legal rights to explore a specific area.

a. I only
b. II only
c. Either I or II
d. Neither I or II
19. Revaluation is based on
I. Fair value which is usually the market value of an item of property, plant and
equipment.
II. Depreciated replacement cost.

a. I only
b. II only
c. Either I or II
d. Neither I or II

20. The revaluation surplus that is realized because of the use of the asset or disposal of
the asset may be transferred directly to
a. Retained earnings
b. Income
c. Share capital
d. Share premium

21. When an asset’s carrying amount is decreased as a result of a revaluation, the

decrease shall be

a. Debit to equity
b. Recognized in profit or loss
c. Charged to retained earnings
d. Charged to revaluation surplus

22. Which of the following statements best describes “value in use”

a. The present value of estimated future cash flows expected to arise from the continuing
use of an asset and from its ultimate disposal.
b. The amount of cash or cash equivalents that could currently be obtained by selling an
asset in an orderly disposal.
c. The amount which an entity expects to obtain for an asset at the end of its useful life.
d. The amount at which an asset could be exchanged between knowledgeable and
willing parties in an arm’s length transaction.

23. Costs to sell include all of the following except

a. Legal costs
b. Stamps and similar transaction taxes
c. Costs of removing the asset
d. Finance costs

24. After initial recognition, an intangible asset shall be carried using the

a. Cost model only

b. Revaluation model only
c. Either cost model or revaluation model
d. Neither cost model or revaluation model
25. The recognition criteria for an intangible asset include which of the following
conditions?
I. It must be measured at cost.
II. Its cost can be measured reliably.
III. It is probable that future economic benefits will arise from its use.

a. I, II and III
b. I and II only
c. I and III only
d. II and III only

26. Which of the following statements in incorrect concerning the reversal of an

impairment loss?
I. The reversal of the impairment loss shall be recognized immediately as an adjustment
of the opening balance of retained earnings.
II. An impairment loss is recognized for goodwill shall not be reversed in a subsequent
period.
a. I only
b. II only
c. Both I and II
d. Neither I and II

27. Which disclosure is not required with respect to intangible assets?

a. Useful lives of the intangible assets
b. Reconciliation of carrying amount at the beginning and the end of the year
c. Contractual commitments for the acquisition of intangible assets
d. Fair value of similar intangible assets used by its competitors.

28. Costs are expensed immediately include all of the following, except
a. Cost of opening new facility
b. Cost of introducing a new product or service, including cost of advertising and
promotional activities
c. Cost of conducting business in a new location, including cost of staff training
d. Cost of testing whether the asset is functioning properly

29. Repayment of grant related to income shall be

a. Recognized as component of other comprehensive income
b. Charged to retained earnings
c. Expensed immediately
d. Applied first against the deferred income balance and any excess shall be recognized
immediately as an expense.

30. For the purposes of capitalization of borrowing cost, which of the following is not a
qualifying asset?
a. Manufacturing plant
b. Power generation facility
c. Investment property
d. Asset that is ready for the intended use or sale
PROBLEM SOLVING

Galore Company ventured into construction of a condominium in Makati which is rated as

the
largest state-of-the-art structure. The entity's board of directors decided that instead of selling
the condominium, the entity would hold this property for purposes of earning rentals by
letting
out space to business executives in the area.

The construction of the condominium was completed and the property was placed in service
on January 1, 2013. The cost of the construction was P50,000,000. The useful life of the
condominium is 25 years and its residual value is P5,000,000. An independent valuation
expert
provided the following fair value at each subsequent year-end:

December 31, 2013 55,000,000

December 31, 2014 53,000,000
December 31, 2015 60,000,000

31. Under the cost model, what amount should be reported as depreciation of investment
property for 2013?
a. 1,800,000
b. 2,000,000
c. 2,200,000
d. 0

32. Under the fair value model, what amount should be recognized as gain from change in
fair value in 2013?
a. 5,000,000
b. 3,000,000
c. 7,000,000
d. 0

33. Mactan Company made investment for 5 years at 12% per annum compounded
semiannually to equal P7,160,000 on the date of maturity. What amount must be deposited
now
at the compound interest to provide the desired sum? Round off future value factor to two
decimal places.
a. 4,000,000
b. 4,068,180
c. 4,236,680
d. 3,768,420

34. Cebu Company made an investment of P5,000,000 at 10% per annum compounded
annually for 6 years. What is the amount of the investment on the date of maturity? Round off
future value factor to two decimal places.
a. 8,850,000
b. 8,050,000
c. 9,750,000
d. 5,500,000

35. Hazel Company entered into a call option contract with a bank on January 1, 2020.
This
contract gave the entity the option to purchase 10,000 shares at P100 per share. The option
expires on April 30, 2020. The shares are trading at P100 per share on January 1, 2020, at
which time the entity paid P10,000 for the call option. The market price per share is
P120 on April 30, 2020, and the time value of the option has not changed. In order to settle
the
option contract, what would the entity most likely do?

a. Pay the bank P200,000.

b. Purchase the shares at P100 per share and sell the shares at P120 per share to the bank.
c. Receive P200,000 from the bank.
d. Receive P190,000 from the bank.

36. Figaro Company acquired land and paid in full by issuing P600,000 of its 10 percent
bonds
payable and 40,000 ordinary shares with par value of P10. The share was selling at P19
and the bonds were trading at 102. What amount should be recorded as cost of the land?
a.988,000
b. 1,000,000
c. 1,372,000
d. 1,387,200

37. On January 1, 2013, Valiant Company received a grant of P60,000,000 to compensate for
costs to be incurred in planting trees over a period of 5 years. The entity will incur such costs
at P2,000,000 for 2013. P4,000,000 for 2014, P6,000,000 for 2015, P 8,000,000 for 2016. and
P10,000,000 for 2017. What amount of income from the government grant should be
recognized for 2013?
a. 12,000,000
b. 8,000,000
c. 6,000,000
d. 4,000,000

38.The third year of a construction project of Jilliane Company began with a P3,000,000
balance in construction in progress. Included in that figure is P600,000 of interest capitalized
in the first two years. Construction expenditures during the third year were P8,000,000 which
were incurred evenly throughout the entire year. The entity has had over P30,000,000 in
interest-bearing debt outstanding in the third year at a weighted average rate of 9%. What
amount of interest for the third year is capitalized?
a. 360,000
b. 630,000
c. 936,000
d. 990,000

39. On January 1, 2021 Lem Company bought machinery under a contact that required a
down
payment of P 100,000, plus 24 monthly payments of P50,000 each, for total cash payments of
P1,300,000. The cash price of the machinery was P1,100,000. The machinery has a useful life
of 10 years and residual value of P50,000. The entity used straight line depreciation. What
amount should be reported as depreciation for 2021?
a. 105,000
b. 110,000
c. 125,000
d. 130,000
40. In January 2021, Huff Mining Company purchased a mineral mine for P36,000,000 with
removable ore estimated by geological survey at 2,160,000 tons. The property has an
estimated
value of P3,600,000 after the ore has been extracted. The entity incurred P10,800,000 of
development cost preparing the property for the extraction of ore. During 2021, 270,000 tons
were removed and 240,000 tons were sold. For the year ended December 31, 2021, what
amount of depletion should be included in cost of goods sold?
a. 3,600,000
b. 4,050,000
c. 4,800,000
d. 5,400,000

41. On January 1, 2021, Empower Company received a grant of ₱10,000,000 from the
Australian government for the construction of a laboratory and research facility with an
estimated cost of ₱15,000,000 and useful life of 5 years.

The laboratory and research facility were completed and ready for the intended use on
Decemebr 31, 2021.

What amount of grant income should be included in the income statement for 2021?
a. 10,000,000
b. 2,000,000
c. 1,500,000
d. 0

42. In 2020, Alleje Mining Company purchased property with natural resources for
₱28,000,000. The property had a residual value of ₱5,000,000.

However, the entity is required to restore the property to the original condition at a
discounted amount of ₱2,000,000.

In 2020, the entity spent ₱1,000,000 in development cost and ₱3,000,000 in building on
property.

The entity does not anticipate that the building will have utility after the natural resources are
removed.

In 2021, an amount of ₱1,000,000 was spent for additional development cost on the mine.

The tonnage mined and estimated remaining tons are:

Tons extracted Tons remaining
2020 0 10,000,000
 2021 3,000,000 7,000,000
2022 3,500,000 2,500,000

What amount should be recognized as depletion for 2021?

a. 6,900,000
b. 9,600,000
c. 8,100,000
d. 8,400,000

43. What amount should be recognized as depletion for 2021?

a. 10,150,000
b. 11,025,000
c. 15,750,000
d. 9,450,000

On January 1, 2017, Mercadejas Company purchased a new building at a cost of ₱6,000,000.

Depreciation was computed on the straight-line basis at 4% per year. On January 1, 2022, the
building was revalued at a fair value of ₱8,000,000.

44. What is the depreciation for 2022?

a. 320,000
b. 400,000
c. 100,000
d. 240,000

45. What is the revaluation surplus on December 31, 2022?

a. 3,072,000
b. 1,900,000
c. 3,040,000
d. 1,920,000

46. Vincent Company had an equipment with carrying amount of ₱4,500,000 at year-end:
Expected discounted net cash flows 4,000,000
Fair value of similar asset 4,150,000
Fair value of the asset when sold stand-alone 4,280,000

What amount should be reported as impairment loss for the current year?
a. 500,000
b. 350,000
c. 220,000
d. 0

47. Melch Company acquired equipment on January 1, 2020 for ₱5,000,000. The equipment
had a 10-year useful life and no residual value. On December 31, 2021, the following
information was obtained:
Expected value of undiscovered cash flows 3,600,000
Fair value estimated with in-use premise 3,700,000
Fair value estimated with n-exchange premise 3,500,000

What amount should be recognized as impairment loss for 2021?

a. 300,000
b. 400,000
c. 500,000
d. 0
48. Sharlon Company operates a production line which is treated as a cash generating unit for
impairment review purposes. At year-end, the carrying amounts of the noncurrent assets are
as follows:

Goodwill 1,100,000
Machinery 2,200,000

What is the revised carrying amount of goodwill after recognition of impairment?

a. 1,100,000
b. 900,000
c. 800,000
d. 500,000

49. Rowen Company showed the following balances on December 31, 2020:

Copyright 500,000
Deposit with advertising agency used to promote goodwill 400,000
Bond sinking fund 1,000,000
Excess of cost over fair value of identifiable net assets
of acquired subsidiary 4,000,000
Trademark 900,000

What total amount should be reported as intangible assets?

a. 1,400,000
b. 4,500,000
c. 5,400,000
d. 5,800,000

50. Cloyd Company acquired a trademark relating to introduction of a new manufacturing

process. The entity incurred the following costs:

Cost of trademark 3,500,000

Expenditure on promoting the new product 50,000
Employee benefits relating to testing of new process 200,000

What total cost should be capitalized as intangible noncurrent asset in respect of the new
process?
a. 3,750,000
b. 3,700,000
c. 3,500,000
d. 3,550,000

ANSWER KEY:

1. A 6. A 11. C 16. A 21. B 26. C 31. A 36. C 41. B 46. C

2. D 7. C 12. A 17. A 22. A 27. D 32. A 37. D 42. C 47. A
3. D 8. D 13. A 18. D 23. D 28. D 33. A 38. B 43. B 48. D
4. C 9. D 14. C 19. C 24. C 29. D 34. A 39. A 44. B 49. C
5. D 10. B 15. D 20. A 25. D 30. D 35. C 40. C 45. C 50. B