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PROPERTY, PLANT AND EQUIPMENT - THEORY

Related standards: PAS 16, 20, 23 & 36
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. Both I and II b. Neither I nor II c. I only d. II only

2. Which is not an essential characteristic of property, plant and equipment?

a. The property, plant and equipment are subject to depreciation.
b. The property plant and equipment are tangible assets.
c. The property, plant and equipment are used in production or supply of goods and services,
for rental and administrative purposes.
d. The property, plant and equipment are expected to be used over a period of more than one year.

3. The depreciable amount of an item of property, plant and equipment is the

a. Cost of the asset, or other amount substituted for cost in the financial statements, less its residual
value.
b. 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.
c. Amount of cash or cash equivalent paid or the fair value of other consideration given to acquire
an asset at the time of its acquisition or construction.
d. Amount at which an asset is recognized in the balance sheet after deducting any
accumulated depreciation and accumulated impairment losses thereon.

4. It is the amount for which an asset could be exchanged between knowledgeable, willing parties in
an arm’s length transaction.
a. Cost c. Realizable value
b. Sales price d. Fair value

5. Which is incorrect concerning recognition of property, plant and equipment?

a. Most spare parts and servicing equipment are usually carried as inventory and recognized as an
expense when consumed.
b. Major spare parts and stand-by equipment qualify as property, plant and equipment when the
enterprise expects to use them during more than one period.
c. If spare parts and servicing equipment can be used only in connection with an item of property,
plant and equipment, they are accounted for as property, plant and equipment and are
depreciated over the useful life of the related asset.
d. Property, plant and equipment acquired for safety and environmental reasons qualify for
recognition as assets.

6. The cost of an item of property, plant and equipment includes all of the following, except
a. Trade discount and rebates
b. Purchase price
c. Import duties and nonrefundable purchase taxes
d. Directly attributable costs of bringing the asset to working condition for its intended use.

7. Directly attributable costs of bringing the asset to working condition for its intended use include
all, except
a. Initial operating losses incurred prior to an asset achieving planned performance
b. Cost of site preparation
c. Delivery, handling and installation costs
d. Estimated cost of dismantling and removing the asset and restoring the site, to the extent that it
is recognized as a provision
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8. Examples of costs that are expensed rather than recognized as an element of cost of property,
plant and equipment include all of the following, except
a. Cost of employee benefits arising directly from the construction on acquisition of an item of
property, plant and equipment.
b. Cost of opening a new facility
c. Cost of introducing a new product or service, including cost of advertising and promotion.
d. Cost of relocating or reorganizing part or all of an entity’s operations.
9. Which is correct concerning measurement of property, plant and equipment?
I. An entity shall choose either the cost model or the revaluation model as its accounting
policy and shall apply that policy to an entire class of property, plant and equipment.
II. The cost model means that property, plant and equipment are carried at cost less any
accumulated depreciation and any accumulated impairment loss.
III. The revaluation model means that property, plant and equipment are carried at revalued
amount, being the fair value at date of revaluation less any accumulated depreciation and
subsequent accumulated impairment loss.
a. I, II and III b. I only c. II and III only d. II only
10. The cost of an item of property, plant and equipment acquired in exchange for a nonmonetary asset
or a combination of monetary and nonmonetary asset is measured at
a. Fair value of asset given plus cash payment
b. Fair value of asset received plus cash payment
c. Book value of asset given plus cash payment
d. Book value of asset received plus cash payment
11. Which statement is incorrect regarding initial measurement of PPE?
a. PPE should be initially recorded at cost, which includes all costs necessary to bring the asset to
working condition for its intended use.
b. If payment for an item of property, plant, and equipment is deferred, interest at a market rate
must be recognized or imputed.
c. If an asset is acquired in exchange for another asset the cost will be measured at the fair value.
d. If an asset acquired in exchange for another asset is not measured at fair value, its cost is
measured at the carrying amount of the asset received.
12. If the exchange transaction lacks commercial substance, the acquired item of property, plant and
equipment is measured at
a. Fair value of asset given plus cash payment
b. Fair value of asset received plus cash payment
c. Carrying amount of asset given plus cash payment
d. Carrying amount of asset received plus cash payment
13. When payment for an item of property, plant and equipment is deferred beyond normal credit terms,
its cost is the
a. Cash price equivalent c. Invoice price
b. Installment price d. List price

14. As to land, capitalizable incidental costs include all, except

a. Attorney’s fees for establishing clean title
b. Special assessments for local improvement which benefits the property
c. Cost of relocation or reconstruction of property belonging to others in order to acquire
possession
d. Expenditures for sidewalks, pavements, parking lot and driveways
15. The cost of the plant asset “building” should usually include all, except
a. Cost of renovation or remodeling required to prepare the building for its intended use
b. Expenditures for service equipment and fixtures made as permanent part of the building
c. Property taxes related to the period prior to acquisition that are assumed by the buyer
d. Costs incurred to have existing building removed to make room for the construction of new
building
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16. Improvements which result to increased future economic benefits include all, except
a. Modification of an item of property to extend its useful life or increase its capacity.
b. Upgrade of machine parts to improve quality of output
c. Adoption of a new production process leading to large reduction in operating cost
d. Expenditure on repair or maintenance of property, plant and equipment, such as cost of
servicing or overhauling plant and equipment.
17. Which is incorrect concerning the concept of the depreciation?
a. The depreciable amount of an item of property, plant and equipment should be allocated on a
systematic basis over its useful life.
b. The depreciation method should not reflect the pattern in which the asset’s economic benefits
are consumed by the enterprise.
c. The depreciation charge for each period should be recognized as an expense, unless it is
included in the carrying amount of another asset.
d. The estimation of the useful life of an item of property, plant and equipment is a matter of
judgment based on experience of the enterprise with similar assets.

18. Which is incorrect concerning the residual value of an item of property, plant and equipment?
a. The depreciable amount of an asset is determined after deducting the residual value of the asset.
b. In practice, the residual value of an asset is often insignificant and therefore is immaterial in the
calculation of the depreciable amount.
c. The residual value of an asset may increase to an amount equal or greater than the asset’s
carrying amount.
d. The residual value of an asset shall be reviewed at least at each financial year-end and if
expectation differs from previous estimate, the change shall be accounted for as a change in
accounting policy.

19. 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 enterprise.
II. The number of production or similar units expected to be obtained from the asset by the
enterprise.
a. I only b. II only c. Both I and II d. Neither I nor II

20. Which statement is true concerning depreciation?

I. When a change in depreciation method is necessary to reflect the new pattern of economic
benefits the change should be accounted for as a change in accounting estimate and the
depreciation charge for the current and future periods should be adjusted.
II. The useful life of an item of property, plant and equipment should be reviewed periodically
and if expectations are significantly different from previous estimates, the depreciation for
the current and future periods should be adjusted.
a. I only b. II only c. Both I and II d. Neither I nor II

21. All of the following factors are considered in determining the useful life of an asset, except
a. Expected usage of the asset by the enterprise
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value

22. The sum of units method of depreciation results in

a. Constant charge over the useful life of the asset
b. Decreasing charge over the useful life of the asset
c. Increasing charge over the useful life of the asset
d. Charge based on the expected use or output of the asset

23. Technical obsolescence arises from

a. Expected usage of the asset
b. Expected physical wear and tear
c. Expiry date of related lease of the asset
d. Change or improvements in production or change in the market demand for the product output
of the asset.
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24. The cost of fully depreciated asset remaining in service and the related accumulated
depreciation
a. Should be removed from the accounts and excluded from property, plant and equipment
b. Should not be removed from the accounts and therefore included in property, plant and
equipment with disclosure
c. Should not be removed from the accounts and therefore included in property, plant and
equipment without disclosure
d. Should be adjusted to conform with new estimated useful life

25. Enterprises are encouraged to disclose all of the following amounts, except
a. Gross carrying amount of fully depreciated property that is still in use.
b. Carrying amount of property, plant and equipment retired from active use and held for disposal.
c. Fair value of property, plant and equipment when the fair value is not materially different from
the carrying amount.
d. Carrying amount of temporarily idle property, plant and equipment.

26. An item of property, plant and equipment that is retired from active use and held for disposal is
carried at
a. Net realizable value
b. Carrying amount
c. Carrying amount or net realizable value, whichever is higher
d. Carrying amount or net realizable value, whichever is lower

27. Gain or loss from disposal of an item of property, plant and equipment is equal to the
difference between
a. Fair value of the asset on balance sheet date and its carrying amount
b. Net realizable value on balance sheet date and its carrying amount
c. Net proceeds from disposal and the cost of the asset
d. Net proceeds from disposal and the carrying amount of the asset

28. Which statement is incorrect concerning revaluation of property, plant and equipment?
a. When an item of property, plant and equipment is revalued, the entire class of property, plant
and equipment to which that asset belongs should be revalued.
b. The basis of revaluation is fair value which is usually the market value determined by appraisal
undertaken by professional qualified valuers, or depreciated replacement cost, in the absence of
evidence of market value.
c. Items of property, plant and equipment that experience significant and volatile movements in
fair value should be revalued annually.
d. Frequent revaluations are unnecessary for items of property, plant and equipment with only
insignificant movements in fair value and instead, revaluation every five to ten years may be
sufficient.

29. Which statement is incorrect concerning revaluation of property, plant and equipment?
a. When an item of property, plant and equipment is revalued, any accumulated depreciation at the
date of revaluation is restated proportionately with the change in the gross carrying amount of
the asset so that the carrying amount of the asset after revaluation should equal its revalued
amount, or eliminated against the gross carrying amount of the asset and the net amount restated
to the revalued amount of the asset.
b. Any revaluation increase should be credited to equity as revaluation surplus.
c. The revaluation surplus included in equity may be transferred directly to retained earnings when
the surplus is realized.
d. Any revaluation decrease should be debited to revaluation loss, a contra equity account.

30. When the revaluation surplus is realized because of the use of the asset by the enterprise or disposal
of the asset, it may be transferred directly to
a. Income c. Deferred income
b. Donated capital d. Retained earnings