Conceptual Framework & Accounting Standards

PRE – FINAL EXAMINATION

1. An item of property, plant and equipment should be recognized as an asset when:

I. It is probable that future economic benefits associated with the asset will flow
to the enterprise.
II. The cost of the asset to the enterprise can be measured reliably.
(a) I only (c) both I and II
(b) II only (d) neither I nor II

2. Which statement is false concerning recognition of property, plant and equipment?

(a) Most spare parts and servicing equipment are usually carried as inventory and recognized
as expense when consumed.
(b) If the spare parts and servicing equipment can be used only in connection with an item of
property, plant and equipment and their use is expected to be irregular, they are
accounted for as property, plant and equipment and are depreciated over their useful life
or useful life of the related asset, whichever is longer.
(c) An aircraft and its engines need to be treated as separate depreciable assets if they have
different useful lives.
(d) Property, plant and equipment may be acquired for safety and environmental reasons in
order for the enterprise to obtain future economic benefits from its other assets.

3. As a benchmark treatment, subsequent to initial recognition as an asset, an item of property,

plant and equipment should be carried at:
(a) cost
(b) revalued amount
(c) cost less any accumulated depreciation and any accumulated impairment loss
(d) revalued amount less any accumulated depreciation and any accumulated impairment loss

4. Directly attributable costs include all of the following except:

(a) cost of site preparation, initial delivery, handling and installation
(b) professional fees such as for architects and engineers
(c) estimated cost of dismantling and removing the asset and restoring the site, to the extent
that it is recognized as a provision
(d) initial operating losses incurred prior to an asset achieving planned performance

5. When payment for item of property, plant and equipment is deferred beyond normal credit
terms, the difference between the cash price equivalent and the total payments should be
recognized as:
(a) interest expense of the current year
(b) component of cost of the property, plant and equipment
(c) interest expense over the credit period
(d) interest expense over the life of the asset

6. The cost of an item of property, plant and equipment that is acquired in exchange or part
exchange for a dissimilar item of property, plant and equipment is measured at the:
(a) fair value of the asset given up adjusted by the amount of any cash or cash equivalent
transferred
(b) fair value of the asset received adjusted by the amount of any cash or cash equivalent
transferred
(c) book value of the asset given up adjusted by the amount of any cash or cash equivalent
transferred
(d) book value of the asset received adjusted by the amount of any cash or cash equivalent
transferred

7. The cost of an item of property, plant and equipment acquired in a nonmonetary exchange
for a similar asset that has a similar use and similar fair value is measured at the:
(a) carrying amount of the asset given up
(b) fair value of the asset given up
(c) carrying amount of the asset received
(d) fair value of the asset received

8. Gains and losses arising from the retirement or disposal of an item of property, plant and
equipment should be determined as the difference between:
(a) gross disposal proceeds and the cost of the asset
(b) gross disposal proceeds and the carrying amount of the asset
(c) net disposal proceeds and the cost of the asset
(d) net disposal proceeds and the carrying amount of the asset
9. An item of property, plant and equipment that is retired from active use and held for disposal
is carried at its:
(a) carrying amount
(b) net realizable value
(c) carrying amount or net realizable value, whichever is lower
(d) carrying amount or net realizable value, whichever is higher

10. If a company 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 intention of the management for the property when the building was acquired

11. What is the benchmark treatment for the borrowing costs?

(a) Borrowing costs should be recognized as expense in the period in which they are incurred
regardless of how borrowings are applied.
(b) Borrowing costs that are directly attributable to the acquisition, construction and
production of a qualifying asset should be capitalized as cost of the asset.
(c) Borrowing costs should be deferred and subsequently amortized over the term of the
borrowing.
(d) Borrowing costs should be capitalized regardless of how borrowings are applied.

12. As to land, capitalizable incidental costs do not include?

(a) legal fees for establishing clean title
(b) commission paid to broker
(c) cost of permanent improvement such as grading, leveling and other landscaping
(d) expenditures for fence, water system, sidewalk and paving

13. 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 enterprise.
II. The number of production or similar units expected to obtained from the asset by the
enterprise.
(a) I only (c) both I and II
(b) II only (d) neither I nor II

14. Carrying amount is:

(a) Cost of an asset or the amount substituted for cost in the financial statements, less its
residual value.
(b) Amount of cash or cash equivalent paid or the fair value of the other consideration given
to acquire an asset at the time of its acquisition or construction.
(c) Net amount which the enterprise expects to obtain for an asset at the end of its useful life
after deducting the expected costs of disposal.
(d) Amount at which an asset is recognized in the balance sheet after deducting any
accumulated depreciation and accumulated impairment loss.

15. The sum of units method of depreciation results in:

(a) constant charger over the life of the asset.
(b) decreasing charge over the life of the asset.
(c) increasing charge over the life of the asset.
(d) charge based on the expected use or output of the asset.

16. If there is a change from double declining balance to straight line method:
(a) The accumulated depreciation is adjusted to its appropriate balance through retained
earnings based on the straight line method.
(b) The accumulated depreciation is adjusted to its appropriate balance through net income
based on the straight line method.
(c) The accumulated depreciation is not adjusted but the remaining book value is allocated
over the remaining life using the straight line method.
(d) The accumulated depreciation is not adjusted but the remaining book value is allocated
over the original life using the straight line method.

17. Rock Company acquired equipment on January 1, 2000. Rock used the straight line
depreciation with a useful life of 15 years and no residual value for this equipment. On
 January 1, 2004, Rock estimated that the remaining life of the equipment was six years with
no residual value. How should this change be accounted for?
(a) Revising future depreciation annually to equal the original cost divided by six.
(b) Revising future depreciation annually to equal the carrying amount of January 1, 2004
divided by six.
(c) Disclosing the effect of the change on each year’s earnings, but maintaining the
depreciation as originally determined.
(d) Revising future depreciation annually to equal the depreciable amount divided by six.

18. What is the recoverable amount of an asset?

(a) net selling price
(b) value in use
(c) net selling price or value in use, whichever is higher
(d) net selling price or value in use, whichever is lower

19. Value in use of an asset is equal to the:

(a) undiscounted future net cash flows from the use of the asset
(b) undiscounted future net cash flows from the use and eventual disposition of the asset
(c) discounted future net cash flows from the use of the asset
(d) discounted future net cash flows from the use and eventual disposition of the asset

20. The estimates of future cash flows in calculating value in use should include all of the
following, except:
(a) cash inflows from the continuing use of the asset
(b) cash outflows incurred to generate the cash inflows from the continuing use of the asset
(c) net cash flows from the disposal of the asset at the end of its useful life
(d) future cash outflows for capital expenditure that will improve the asset beyond the
standard of performance originally assessed

21. It is an entity over which the investor has significant influence.

(a) Associate
(b) Investee
(c) Venture capital organization
(d) Mutual fund

22. Which of the following statement best describes the term “significant influence”?
(a) The holding of a significant proportion of the share capital in another entity
(b) The contractually agreed sharing of control over an economic entity
(c) The power to participate in the financial and operating policy decisions of an entity
(d) The mutual sharing in the risks and benefits of a combined entity

23. Which of the following statements is true concerning significant influence?

I. If an investor holds, directly or indirectly, less than 20% of the voting power of the
investee, it is presumed that the investor does not have significant influence, unless
such influence can be clearly demonstrated.
II. If an investor holds, directly or indirectly, 20% or more of the voting power of the
investee, it is presumed that the investor does have significant influence, unless it can
be clearly demonstrated that this is not the case.
III. A substantial or majority ownership by another investor does not necessarily preclude
an investor from having significant influence.
(a) I, II, and III
(b) I and II only
(c) III only
(d) II only

24. Which of the following statements is incorrect concerning the equity method?
(a) The investment in associate is initially recorded at cost.
(b) The investment in associate is increased or decreased by the investor’s share of the profit
or loss of the investee after the date of acquisition.
(c) The investor’s share of the profit or loss of the investee is not recognized in the investor’s
profit or loss.
(d) Distributions received from the investee reduce the carrying amount of the investment .

25. Goodwill arising from an investment in associate is

(a) Included in the carrying amount of the investment and amortized over the useful life.
(b) Included in the carrying amount of the investment and not amortized.
 (c) Excluded from carrying amount of the investment but charged to retained earnings.
(d) Excluded from carrying amount of the investment but charged to expense immediately.

26. If an associate has outstanding cumulative preference shares, held by outside interests, the
investor computes its share of profit or loss
(a) After adjusting for preference dividends which were actually paid during the year.
(b) Without regard for preference dividends.
(c) After adjusting for the preference dividends only when declared.
(d) After adjusting for the preference dividends, whether or not the dividends have been
declared.

27. An investor shall discontinue the use of the equity method from the date
I. The investor cease to have significant influence over an associate.
II. The associates operates under severe long-term restrictions that significantly impair
the ability to transfer funds to the investor.
(a) I only
(b) II only
(c) Both I and II
(d) Neither I nor II

28. If under the equity method, an investor’s share of losses of an associate equals or exceeds
the carrying amount of an investment, which of the following statements is incorrect?
(a) The investor ordinarily discontinues its share of further losses.
(b) Additional losses are provided for a liability is recognized to the extent that the investor
has incurred legal or constructive obligations or made payments on behalf of the
associate.
(c) If the associate subsequently reports profit, the investor resumes its share of the profit
without regard to the share of net loss not previously recognized.
(d) The investment is reported at NIL value.

29. When the investor discontinues the use of equity method because significant influence is lost,
the investment in associate retained by the investor shall be measured at
(a) Fair value
(b) Carrying amount
(c) Amortized cost
(d) Original cost

30. When an entity holds between 20% and 50% of the voting power of an investee, which of
the following statements is true?
(a) The investor must use the equity method.
(b) The investor should use the equity method unless circumstances indicate that it is unable
to exercise significant influence over the investee.
(c) The investor must use fair value method unless it can be clearly demonstrated that the
investor has significant influence over the investee.
(d) The investor must use the fair value method

31. It is a fall in the market value of an asset so that its recoverable amount is now less than its
carrying amount in the statement of financial position.
(a) Impairment
(b) Depreciation
(c) Amortization
(d) Decline in value

32. Cost of disposal include all of the following except:

(a) Legal costs
(b) Stamp and similar transaction tax
(c) Cost of removing the asset
(d) Finance cost

33. Value in use of an asset is equal to the

(a) Undiscounted future net cash flows from the use of the asset
(b) Undiscounted future net cash flows from the use and eventual disposition of the asset
(c) Discounted future net cash flows from the use of the asset
(d) Discounted future net cash flows from the use and eventual disposition of the asset

34. Which of the following statements is incorrect concerning the estimation of future cash flows?
(a) Future cash flows shall be based on reasonable and supportable assumptions.
 (b) Future cash flows shall be based on the most recent budgets or financial forecasts, usually
up to a maximum of 5 years.
(c) Future cash flows do not include income tax receipts and payments.
(d) The discount rate used in estimating future cash flows shall be the current rate after tax.

35. If the fair value less cost of disposal cannot be determined

(a) The asset is not impaired.
(b) The recoverable amount is the value in use.
(c) The net realizable value is used.
(d) The carrying amount of the asset remains the same.

36. When deciding on the discount rate to be used in determining value in use, which factor
should not be taken into account?
(a) The time value of money.
(b) Risk specific to the asset for which future cash flow estimates have not been adjusted.
(c) Risk specific to the asset for which future cash flow estimates have been adjusted.
(d) Pretax discount rate

37. 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 the 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 the useful life.
(d) The amount at which an asset could be exchanged between knowledgeable and willing
parties in an arm’s length transaction.

38. Which of the following statements best describes the term “impairment loss”?
(a) The removal of an asset from an entity’s statement of financial position.
(b) The amount by which the carrying amount of an asset exceeds the recoverable amount.
(c) The systematic allocation of an asset’s cost less residual value over the useful life.
(d) The amount by which the recoverable amount of an asset exceeds the carrying amount.

39. When the revaluation surplus is realized because of the use of an asset by the entity or
disposal of the asset, it may be transferred directly to
(a) Retained Earnings
(b) Income
(c) Share Capital
(d) Share Premium

40. If an asset is to be disposed of

(a) The recoverable amount is the fair value less cost of disposal.
(b) The recoverable amount is the value in use.
(c) The asset is not impaired.
(d) The recoverable amount is the carrying amount.