TEST BANK For Intermediate Financial Accounting Part 1A. by Zeus Vernon B. Millan. All Chapters 1-11

TEST BANK

ZEUS VERNON B. MILLAN

ALL RIGHTS RESERVED 2015

No part of this work covered by the copyrighthereon may bereproduced orusedinanyformorbyanymeanselectronic or mechanical, including photocopying – without the written permissionoftheauthor.

ISBN 978-621-95096-1-9

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

CHAPTER 14: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION

PURPOSES)............................................................................................35

CHAPTER 14: THEORY OF ACCOUNTS REVIEWER......................................40

CHAPTER 14 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 50

CHAPTER 15

PROPERTY, PLANT AND EQUIPMENT (PART 2) ................................52

CHAPTER 15: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION

PURPOSES) 52

CHAPTER 15: THEORY OF ACCOUNTS REVIEWER 58

CHAPTER 15 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 79

CHAPTER 16 DEPLETION OF MINERAL RESOURCES................................................80

CHAPTER 16: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION

PURPOSES)............................................................................................80

CHAPTER 16: THEORY OF ACCOUNTS REVIEWER......................................84

CHAPTER 16 – SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 91

CHAPTER 17

GOVERNMENT GRANTS 92

CHAPTER 17: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES) 92

CHAPTER 17: THEORY OF ACCOUNTS REVIEWER......................................94

CHAPTER 17 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS102

CHAPTER 18

BORROWING COSTS 103

CHAPTER 18: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) 103

CHAPTER 18: THEORY OF ACCOUNTS REVIEWER....................................105

CHAPTER 18 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS114

CHAPTER 19

INVESTMENT PROPERTY ...................................................................115

CHAPTER 19: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES) 115

CHAPTER 19: THEORY OF ACCOUNTS REVIEWER 120

CHAPTER 19 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS127

CHAPTER 20

INTANGIBLE ASSETS 128

CHAPTER 20: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) 128

CHAPTER 20: THEORY OF ACCOUNTS REVIEWER 134

CHAPTER 20 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS155

CHAPTER 21

IMPAIRMENT OF ASSETS ...................................................................156

CHAPTER 21: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES)..........................................................................................156

CHAPTER 21: THEORY OF ACCOUNTS REVIEWER....................................164

CHAPTER 21 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS170

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 outstandingsharesofPRAISE,Inc.for₱4,000,000.PRAISE’sassetsandliabilities approximate their fair values. In 20x1, PRAISE, Inc. reported profit of ₱12,000,000anddeclaredandpaidcashdividendsof₱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 exchangedifferencesontranslationofforeignoperationsof₱400,000.

1. Howmuchistheshareinprofitorlossoftheassociatein20x1?

2. HowmuchisthecarryingamountoftheinvestmentasofDecember

3. Howmuchistheinvestmentincome(lossoninvestment)toberecognizedin profitorlossin20x2?

4. How much is the net share in the other comprehensive income of the associatein20x2?

5. HowmuchisthecarryingamountoftheinvestmentasofDecember31,20x2?

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 amountof₱12,000,000andfairvalueof₱20,000,000.Theremainingusefullifeof 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 andpaiddividendsof₱2,000,000.

6. Howmuchisthegoodwillthatwillbesubsumedinthecarryingamountofthe investment?

a.1,400,000 b.1,250,000

1,100,000

0

7. How much is the net share in the profit or loss of the associate (investment income)in20x1?

8. HowmuchisthecarryingamountoftheinvestmentasofDecember31,20x1?

a.8,000,000

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 ordinarysharesoutstanding.Duringtheyear,theassociatereportedprofit of ₱900,000.Howmuchistheshareintheassociate’sprofit?

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. Thestockrightsareexercisableimmediately. However, managementdoes notintendtoexercisethestockrights.FANdoesnothaveanyotherstockrights outstandingasidefromthoseheldbyAFFICIONADO.FANreportsyear-endprofit of ₱4,000,000 and declares cash dividends of ₱400,000. The investment has a carryingamountof₱1,200,000beforeanyyear-endadjustment.

10.HowmuchisAFFICIONADO’sshareinprofitofassociatefortheyear?

11.Howmuchisthecarryingamountoftheinvestmentasofyear-end?

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 declarednodividends.

12.HowmuchisAUSTERECo.’sshareinprofitorlossofassociate?

13.WhatifSEVERECo.declareddividendsthatpayallofthedividendsinarrears onpreferenceshares,howmuchistheshareinprofitorlossofassociate?

14.What if the preference shares are non-cumulative, how much is the share in profitorlossofassociate?

704,000

800,000

512,000

15.What if the shares are redeemable preference shares and SEVERE declared ₱150,000 cash dividends on the redeemable preference shares during the year, howmuchistheshareinprofitorlossofassociate?

704,000

800,000

Loss of significant influence

16.On January 1, 20x1, ALLEVIATE Co. acquired 30,000 ordinary shares for ₱12,000,000whichrepresents30%interestinLESSENCo.’snetassets.Atthe time of acquisition LESSEN’s net assets are fairly revalued at ₱40,000,000.

Prior to revaluation, the net assets had a book value of ₱32,000,000. The differencebetweentherevaluedamount andcarryingamount isattributable to a building which was credited to revaluation surplus. The building has a remainingusefullifeof10yearswithnoresidualvalue. Itis LESSEN’spolicy todepreciatealltangibledepreciableassetsusingthestraight-linemethod.

At the end of 20x1, LESSEN reported a profit of ₱4,000,000 and paid cash dividendsof₱2,400,000.AtDecember31,20x1,thesharesaresellingat₱400 pershare.

On July 1, 20x2, ALLEVIATE sold 60% of its investment in LESSEN at the prevailingmarketpriceof₱480pershare.LESSENreportedinterimprofitof ₱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 yearend.

If the unsold shares were reclassified to investment in FVOCI, how much is thetotalincomerecognizedontheinvestmentinprofitorlossin20x2?

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 balancesoftherelatedaccountsasofJuly1,20x2immediatelybeforethesale are:

 Investmentinassociate ₱4,800,000

 Cumulativeshareinassociate’sexchangedifferences ontranslationofaforeignoperation

2,000,000 Cr

The remaining ownership of 15% (30% x 1/2) does not give AMBULATE significantinfluenceoverWALK. Howmuchis thereclassificationgain(loss) onJuly1,20x2?

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, CHASTECo.soldhalfofitsinvestmentfor₱400,000.Theadjustedbalancesof therelatedaccountsasofJuly1,20x2immediatelybeforethesaleare:

 Investmentinassociate ₱4,800,000

 Cumulativeshareinassociate’sexchangedifferences ontranslationofaforeignoperation 2,000,000 Cr

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, CIRCUMSPECTCo.sold three-fourths ofitsinvestmentfor₱1,000,000. The adjusted balances of the related accounts as of July 1, 20x2 immediately beforethesaleareasfollows:

 Investmentinassociate ₱4,800,000

 Cumulativeshareinassociate’sexchangedifferences ontranslationofaforeignoperation 2,000,000 Cr

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 reclassificationgain(loss)onJuly1,20x2?

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, SNITCHCo.sold half ofitsinvestmentfor₱400,000.Theadjustedbalancesof therelatedaccountsasofJuly1,20x2immediatelybeforethesaleare:

 Investmentinassociate ₱4,800,000

 Cumulativeshareinassociate’sunrealizedgainsand lossesoninvestmentsinFVOCI 2,000,000 Cr

The remaining ownership of 15% (30% x 1/2) does not give SNITCH significantinfluenceoverPILFER.Howmuchisthereclassificationgain(loss) recognizedinprofitorlossonJuly1,20x2?

a.2,000,000 b.1,500,000 c.1,000,000 d.0

Change to equity method from FVPL – “STEP ACQUISITION”

Use the following information for the next three questions:

OnJanuary1,20x1,POSTULATECo.acquired10,000sharesrepresentinga10% 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, 20x1is ₱340pershare. AsofDecember31, 20x1, theinvestment in heldfor tradingsecuritieshasacarryingamountof₱3,400,000,equaltofairvalue.

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 declaredandpaiddividendsof₱4,000,000onDecember31,20x2.TheDEMAND shareshavequotedpriceof₱360pershareonDecember31,20x2.

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.Howmuchistheshareintheprofitoftheassociatein20x2?

a.4,000,000 b.4,800,000 c.3,200,000 d.3,000,000

23.HowmuchisthecarryingamountoftheinvestmentinassociateonDecember 31,20x2?

a.10,000,000 b.11,400,000c.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 inventoryremainsunsoldduring20x1andwassoldbyEVERLASTINGtoexternal parties only in 20x2. PERPETUAL’s income tax rate is 30%. EVERLASTING

reports profit of ₱4,000,000 and ₱4,800,000 on December 31, 20x1 and 20x2, respectively.

24.Howmuchistheshareintheprofitofassociatein20x1?

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

25.Howmuchistheshareintheprofitofassociatein20x2?

a.1,128,000 b.1,200,000 c.1,032,000 d.960,000

Upstream sale of inventory

Use the following information for the next two questions: LISTLESSCo.owns20%ofWEAK,Inc.andusestheequitymethodbecauseithas significant influence. In 20x1, WEAK sells inventory to LISTLESS for ₱400,000 witha60%grossprofitonthetransaction.Theinventoryremains 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 December31,20x1and20x2,respectively.

26.Howmuchistheshareintheprofitofassociatein20x1?

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

27.Howmuchistheshareintheprofitofassociatein20x2?

a.960,000 b.974,400 c.993,600 d.1,008,000

Downstream sale of depreciable asset

Use the following information for the next two questions: WOOZYCo.owns20%ofDIZZY,Inc.’soutstandingordinaryshares.OnJanuary1, 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 31,20x1and20x2,respectively.

28.Howmuchistheshareintheprofitofassociatein20x1?

a.720,000 b.728,000 c.785,600 d.800,000

29.Assumingthesaleisanupstreamsale,howmuchistheshareintheprofitof associatein20x1?

a.968,000 b.728,000 c.785,600 d.800,000

Downstream sale of non-depreciable asset Use the following information for the next two questions: LUCIDCo.owns20%ofCLEAR,Inc.’soutstandingordinaryshares.OnJanuary1, 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 ₱4,000,000and₱4,800,000onDecember31,20x1and20x2,respectively.

30.Howmuchistheshareintheprofitofassociatein20x1?

a.720,000

b.784,000

c.728,000

d.800,000

31.Assumingthesaleisanupstreamsale,howmuchistheshareinthe profitof associatein20x1?

a.720,000

b.784,000

c.728,000

d.800,000

Share in losses of associate

Use the following information for the next four questions: SKEPTICAL Co. owns 20% of the ordinary shares of QUESTIONING, Inc. The records of SKEPTICAL as of December 31, 20x1 show the following information beforeanynecessaryyear-endadjustments.

QUESTIONINGreportedlossesof ₱5,600,000, ₱2,000,000and ₱400,000in 20x1, 20x2 and 20x3, respectively. In 20x3, SKEPTICAL incurred constructive obligation in favor of QUESTIONING in the amount of ₱480,000 and made ₱320,000paymentsonbehalfofQUESTIONING.In20x4,QUESTIONINGreported profitof₱4,000,000.

32.Howmuchistheshareinthelossoftheassociatein20x1? a.1,120,000 b.320,000 c.800,000 d.280,000

33.Howmuchistheshareinthelossoftheassociatein20x2? a.0 b.320,000

400,000

280,000

34.Howmuchistheshareinthelossoftheassociatein20x3?

a.0

b.480,000

c.320,000 d.800,000

35.Howmuchistheshareintheprofitoftheassociatein20x4?

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. PAS28appliestowhichofthefollowing?

a. investmentsinassociatesheldbyaventurecapitalorganizationormutual fundmeasuredatfairvaluethroughprofitorloss

b. a20%investmentinpreferenceshares

c. an interest in apartnership whichgivestheinvestorsignificantinfluence overthepartnership

d. a60%investmentinordinarysharesofanotherentity

2. AnentityshallapplyPAS28

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. evenwhensignificantinfluenceislost

d. anyofthese

3. When investments in equity securities represent 20% to 50% interest in the voting rights of the investee, which of the following standards most likely wouldbeapplied?

a.PFRS9 b.PAS31 c.PFRS3 d.PAS28

4. When equity investments results to joint control, which standard shall be applied?

a.PFRS9 b.PAS31 c.PFRS3 d.PAS28

5. Whenequityinvestmentsresultstocontrol,whichstandardshallbeapplied?

a.PFRS9 b.PAS31 c.PFRS3 d.PAS28

6. In the consolidated financial statements, to which of the following financial instrumentsisPFRS9 Financial Instrument applicable?

a. investmentinordinarysharesrepresenting51%interest

b. investmentinordinarysharesrepresenting20%interest

c. interestinajointventure

d. investmentinpreferencesharesrepresenting100%interest

7. Whichofthefollowingstatementsiscorrect?

a. AccordingtoPAS28InvestmentsinAssociates,apartnershipcannotbean associate.

b. Goodwillincludedinthecarryingamountofaninvestmentinanassociate istestedforimpairmentseparately.

c. Only investments in ordinary shares can be classified as Investment in Associate.

d. Onlyinvestmentswhichgivetheinvestorvotingrightscanbeclassifiedas InvestmentinAssociate.

8. IfABCCorporationownsacontrollinginterestof51%ofthe equitysharesin XYZCo.,ABCCorporationisa

a.ParentcompanytoXYZCo.

b.AssociatecompanytoXYZCo.

c.SubsidiarycompanytoXYZCo.

d.FellowsubsidiarytoXYZCo.

9. Itisanentity,includinganunincorporatedentitysuchasa partnership,over which the investor has significant influence and that is neither a subsidiary noraninterestinajointventure.

a.association

b.subsidiary

c.jointventure

d.associate

10.Itisthepowertoparticipateinthefinancialandoperatingpolicydecisionsof theinvesteebutisnotcontrolorjointcontroloverthosepolicies.

a.significantinfluenza

b.control

c.significantinfluence

d.jointcontrol

11.It is an entity, including an unincorporated entity such as apartnership, that iscontrolledbyanotherentity(knownastheparent).

a.subsidy

b.associate

c.jointventure

d.subsidiary

12.Itisthepowertogovernthefinancialandoperatingpoliciesofanentitysoas toobtainbenefitsfromitsactivities.

a.control

b.jointcontrol

c.significantinfluence

d.telekineses

13.It is a contractual arrangement whereby two or more parties undertake an economicactivitythatissubjecttojointcontrol.

a.partners

b.jointcontrol

c.jointventure

d.marriage

14.Itisthecontractuallyagreedsharingofcontroloveraneconomicactivity,and existsonlywhenthestrategicfinancialandoperatingdecisionsrelatingtothe activity require the unanimous consent of the parties sharing control (venturers).

a.control b.jointventure c.jointcontrol d.weddingvow

15.A controlling company having subsidiaries which activities were confined primarilytotheirmanagementis:

a.anaffiliate

c.amajorityinterest

d.aholdingcompany (Adapted)

b.subsidiary

16.PAS 28 does not require the equity method to be applied to which of the followinginstance(s)?

I. Whenanassociateisacquiredandheldwith aviewtoitsdisposalwithin twelvemonthsofacquisition.Theremustbeevidencethattheinvestment is acquired with the intention to dispose of it and that management is actively seeking a buyer. The words ‘in the near future’ were replaced with the words ‘within twelve months’. When such an associate is not disposed of within twelve months it must be accounted for using the equity method as from the date of acquisition, except in narrowly specifiedcircumstancesunderPFRS5.

II. An investor continues to have significant influence over an associate; however, the associate is operating under severe long-term restrictions thatsignificantlyimpairitsabilitytotransferfundstotheinvestor.

III. Aninvestorholds10% interest inan investee;however, theinterest held givestheinvestorsignificantinfluenceovertheinvestee.

IV. AninvestorpresentsseparatefinancialstatementinaccordancewithPAS 27.

a.IandIV b.I,III,IV c.I,II,III,IV d.none

Significant influence

17.According to PAS 28 Investments in associates, which of the following statementsbestdescribestheterm'significantinfluence'?

a. The holding of a significant proportion of the share capital in another entity

b. Thecontractuallyagreedsharingofcontroloveraneconomicentity

c. Thepowertoparticipateinthefinancialandoperatingpolicydecisionsof anentity

d. Themutualsharingintherisksandbenefitsofacombinedentity (ACCA)

18.Significantinfluenceispresumedtoexist

a. ifaninvestorholds,directlyorindirectly(e.g.throughsubsidiaries),25% ormoreofthevotingpoweroftheinvestee.

b. ifaninvestorholds,directlyorindirectly(e.g.throughsubsidiaries),51% ormoreofthevotingpoweroftheinvestee.

c. ifaninvestorholds,directlyorindirectly(e.g.throughsubsidiaries),100% ormoreofthevotingpoweroftheinvestee.

d. ifaninvestorholds,directlyorindirectly(e.g.throughsubsidiaries),20% ormoreofthevotingpoweroftheinvestee.

19.Which of the following may provide evidence of significant influence even if thepercentageofownershipinterestislessthan20%?

I. Representationontheboardofdirectorsorequivalentgoverningbodyof theinvestee.

II. Participation in policy-making processes, including participation in decisionsaboutdividendsorotherdistributions.

III. Materialtransactionsbetweentheinvestorandtheinvestee

IV. Interchangeofmanagerialpersonnel.

V. Provisionofessentialtechnicalinformation.

a.I,II b.I,II,III

c.I,II,IV

d.anyofthese

20.InwhichofthefollowingdoesXhavesignificantinfluence?

a. X owns 30% of the voting shares of ABC Co., the other 60% is held by Y andallseatsontheboardofdirectorsareappointedbyY.

b. Xowns30%ofthepreferencesharesofZCo.

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 accordancewithPFRS5.

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

a. itintendstoexercisethepotentialvotingrights

b. thepotentialvotingrightsarecurrentlyexercisable

c. aandb

d. theyarenotconsidered

22.Whencomputingforitsshareintheassociate’sprofitorloss,aninvestorshall use

a. itspresentownershipinterest

b. its present ownership interest adjusted for the effect of any potential votingrights

c. thepotentialvotingrightspercentage

d. theeffectiveinterestrate

23.AccordingtoPAS28,significantinfluenceistheinvestor’sparticipationinthe financial and operating policy decisions of the investee but not control of thesedecisions.Whichofthefollowingmayaninvestorbeunabletoexercise significantinfluence?

a. participationinpolicymakingprocess

b. materialintercompanytransactions

c. majority ownership of the investee concentrated among a small group of shareholderswhooperatetheinvesteewithoutregardtotheviewsofthe investor

d. technologicaldependency (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 financialandoperatingpoliciesofanotherentity.

a.sharerights

b.shareoptions

c.convertiblesecurities

d.potentialvotingrights

25.When assessing the existence of significant influence, which of the following shallbeconsideredbytheinvestor?

a. potentialvotingrightsthatarenotexercisableimmediately

b. share options giving the investor the right to purchase preference shares oftheinvestee

c. stock rights which are exercisable immediately but the entity’s managementdoesnotintendtoexercise.

d. potential voting rights that will be received in the following accounting period

26.Potentialvotingrightsincludeallofthefollowingexcept

a.sharewarrantsandshareoptions

b.redeemablepreferenceshares

Equity method

c.convertiblepreferenceshares

d.convertiblebonds

27.Investmentsaccountedforundertheequitymethodareinitiallyrecognizedat

a. cost

b. fairvalue

c. fairvalueplusdirectacquisitioncost

d. costplusorminusshareinprofitorlossofassociate

28.Which of the following does not correctly relate to the application of the equitymethod?

a. theinvestorrecognizesitsproportionateshareintheprofitorloss,other comprehensiveincome,anddiscontinuedoperationsoftheassociate

b. dividends received are accounted for as reduction in the investment balance

c. sharedividendsarenotaccountedfor

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 investmentaccount?

a. shareinassociate’sloss

b. amortizationofundervaluationofasset

c. amortizationofovervaluationofasset

d. shareindividendsdeclaredbytheassociate

30.Forinvestmentsinassociates,theinvestorshallnot

a. recognizeashareintheassociate’sothercomprehensiveincome

b. recognizeashareintheassociate’sdiscontinuedoperations

c. recognizeashareintheassociate’sprofitorloss

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 otherpartiesand classified as equity, whether declared ornot.

II. deduct one year dividends on noncumulative preference shares of the associate held by otherpartiesand classified as equity, whether declared ornot.

III. deduct all dividends in arrears on cumulative preference shares of the associate held by otherpartiesand classified as equity, whether declared ornot.

IV. deduct dividends on noncumulative preference shares of the associate heldbyotherpartiesandclassifiedasequityonlywhendeclared.

V. not deduct from profit or loss any dividends on ordinary shares before computingfortheshareintheassociate’sprofitorloss.

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. originalcostoftheinvestment

b. marketvalueoftheinvestment

c. originalcostoftheinvestmentminusanydividendsdeclaredandpaidby theothercompany

d. original cost of the investment plus a proportionate share of subsequent undistributedearningsoftheinvesteecompany.

(Adapted)

33.How is goodwill arising on the acquisition of an associate dealt with in the financialstatements?

a. Itisamortized.

b. Itisimpairmenttestedindividually.

c. Itiswrittenoffagainstprofitorloss.

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 equitymethodoverthebookvalueofnetassetsacquiredisattributabletoan undervalued depreciable asset and an unidentifiable asset, which of the followingstatementsiscorrect

a. The carrying amount of the investment isincreased by theproportionate share in the profits earned by the investee and decreased by the depreciation of the interest in the undervaluation and unaffected by the separateimpairmentoftheunidentifiableasset

b. Thecarryingamountoftheinvestmentisincreasedbythedepreciationof the interest in the undervaluation and amortization of the unidentifiable asset

c. Thecarryingamountoftheinvestmentisdecreasedbythedepreciationof the interest in the undervaluation and decreased by the separate impairmentontheunidentifiableasset.

d. Investmentincomeisdecreasedbythedepreciationoftheinterestinthe undervaluationandamortizationoftheunidentifiableasset

35.Theequitymethodismostlikelynotapplicabletowhichofthefollowing?

a. ownership interest of 2%, 2 out of 7 of the BOD of the associate is appointedbytheinvestor

b. ownershipinterestof40%

c. ownership interest of 20% but the associate is operating under severe long-termrestrictionsthatsignificantlyimpairitsabilitytotransferfunds totheinvestor

d. ownershipinterestof25%acquiredwithanexclusiveviewofsubsequent disposalwithin12monthsandaccountedforunderPFRS5

36.Theequitymethodshouldbeappliedinwhichofthefollowing?

a. TheinvestmentisclassifiedasheldforsaleunderPFRS5

b. The parent is exempted from presenting consolidated financial statements.

c. Theinvestorisanunlistedsubsidiarywhoseparentallowsitnottoapply equitymethod

d. Theinvestorpreviouslyheldonly10%interestbutsubsequentlyacquires additional10%interestintheassociate.

37.Which of the following computations may properly result to the correct balanceofaninvestmentinassociateaccountatyear-end?

a. Beginning balance of investment plus share in associate’s profit minus shareindividendsdeclaredbyassociate,and minus amortizationofshare inundervaluationofassociate’sasset

b. Beginning balance of investment plus share in associate’s profit minus shareindividendsdeclaredbyassociate,and plus amortizationofsharein undervaluationofassociate’sasset

c. Beginningbalanceofinvestment plus shareinassociate’sprofit plus share in dividends declared by associate, and minus amortization of share in undervaluationofassociate’sasset

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 ongoodwillincludedinthecarryingamountoftheinvestment

38.Which of the following computations may properly result to the correct amountofshareinassociate’sprofitorlossfortheperiod?

a. Share in profit of associate minus amortization of share in the overvaluationofassociate’sasset

b. Share in profit of associate minus amortization of share in the undervaluationofassociate’sasset

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 goodwillincludedinthecarryingamountoftheinvestment

39.Which of the following may represent the net change in the investment in associateaccountduringaperiod?

a. Share in profit of associate minus share in dividends plus increase in the investmentinassociateaccount

b. Shareinprofitofassociate minus shareindividends minus increaseinthe investmentinassociateaccount

c. Shareinprofitofassociate minus shareindividends

d. Shareinprofitofassociate plus shareindividends

40.Dividendsreceivedfromaninvestmentinanassociate,

a. ifintheformofcashdividends,iscreditedtoinvestmentincome

b. ifintheformofsharedividends,isdebitedtoinvestmentincome

c. if in the form of cash dividends, is credited to investment account only if thecashdividendsaredeclaredfrompre-acquisitionretainedearnings.

d. ifintheformofsharedividends,isrecordedthroughmemoentryonly

41.The excess of purchase cost of an investment in associate over the fair value oftheinterestacquiredrepresents

a. goodwill that should not be amortized but tested for impairment at least annually

b. negativegoodwillthatshouldberecognizedintheinvestor’sprofitorloss intheyearofacquisition.

c. negativegoodwillthatshouldbedeferredandamortized

d. goodwillthatisnotrequiredtobeaccountedforseparately

42.Theexcessofthefairvalueoftheinterestacquiredoverthepurchasecostof aninvestmentinassociaterepresents

a. goodwill that should not be amortized but tested for impairment at least annually

b. negativegoodwillthatshouldberecognizedintheinvestor’sprofitorloss intheyearofacquisition.

c. negativegoodwillthatshouldbedeferredandamortized

d. goodwillthatisnotrequiredtobeaccountedforseparately

43.Equity method shall cease to be applied only when the investor loses significantinfluenceovertheassociate.Whichofthefollowingisnottrue?

a. Thelossofsignificantinfluencecanoccurwithorwithoutachangeinthe percentageofownership.

b. An entity loses significant influence over an investee when it loses the powertoparticipateinthefinancialandoperatingpolicydecisionsofthat investee.

c. There is a presumption of loss of significant influence if the ownership interestfallsbelow20%.

d. Thereisapresumptionoflossofsignificantinfluencewhentheassociate is operating under severe long-term restrictions that significantly impair itsabilitytotransferfundstotheinvestor.

44.Significantinfluencemaybelostinanyofthefollowing,except

a. Whenanassociatebecomessubjecttothecontrolofagovernment,court, administratororregulator.

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. Theinvestorsellshalfofits30%interestinanassociate

d. The investor sells half of its 20% interest in an associate but retains the votingrightsontheinvestmentsoldthroughproxyagreement

45.Significantinfluencemaybelostinanyofthefollowing,except

a. Theinvestorlosesitsrighttoappointboardofdirectorsintheassociate

b. Theinvestorpurchasesadditional31%interestintheassociate

c. The associate is operating under severe long-term restrictions that significantlyimpairitsabilitytotransferfundstotheinvestor.

d. Theinvestorretainsits20%interestintheassociatebutgrantsitsvoting rightstoanunrelatedparty.

46.Onthelossofsignificantinfluence,theinvestorshalldoanyofthefollowing, except

a. measureatfairvalueanyinvestmentretainedintheformerassociate.

b. recognize gain or loss for the difference between the net disposal proceedsreceivedandthecarryingamountoftheinvestmentsold

c. recognize gain or loss for the difference between the fair value of the interestretainedandthecarryingamountofthepreviousinterestheld

d. accountforthediscontinuanceofequitymethodretrospectively.

47.Ifaninvestorlosessignificantinfluenceoveranassociate,

a. all cumulative gain or loss previously recognized in other comprehensive incomeisreclassifiedtoprofitorloss.

b. anycumulativegainorlosspreviouslyrecognizedinothercomprehensive income is reclassified directly in equity or to profit or loss, subject to the requirementsofPAS1.

c. noadjustmenttotheinvestmentaccountisnecessary

d. the investment should be reclassified and any gain or loss on reclassificationisrecognizedinequity.

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

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 ownershipinterestisincreasedabove50%.

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 comprehensiveincome.

c. the investor continues to use the equity method and since significant influenceisnotlost,noadjustmentisneeded

d. donothing

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,thatis,negativegoodwill,howshouldthatexcessbetreated?

a. Itshouldbeincludedinthecarryingamountoftheinvestment.

b. Itshouldbewrittenoffagainstretainedearnings.

c. It should be included as income in the determination of the investor’s shareoftheassociate’sprofitorlossfortheperiod.

d. Itshouldbedisclosedseparatelyaspartoftheinvestor’sequity.

(Adapted)

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

a. amortized using the effective rate and deducted to investment income recognizedfortheperiod

b. depreciatedanddeductedfromthecarryingamountoftheinvestment

c. amortizedusingtheeffectiverateandaddedtothecarryingamountofthe investmentanddeductedtoinvestmentincome

d. depreciated and deducted from the carrying amount of the investment andinvestmentincomerecognizedfortheperiod

51.Whentheequitymethodisusedtoaccountfortheinvestmentinanassociate, therecordingofthereceiptofacashdistributionfromtheinvesteewillresult in

a. Therecognitionofinvestmentincome.

b. Areductionintheinvestmentbalance.

c. AnIncreaseinaliabilityaccount.

d. Anincreaseinspecialequityaccount.

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 whichofthefollowingmethods?

Cost Equity

a. Yes Yes

b. Yes No

c. No Yes

d. No No (AICPA)

53.WhichofthefollowingstatementsisinaccordancewiththeprovisionsofPAS 28?

I. Theincomeorlossontheinvestmentinassociateiscomputedonthenet incomeaftertaxoftheassociate.

II. The income or loss on the investment in associate is presented in the statementofprofitorlossandothercomprehensiveincomeaftertheline item“IncomeTaxExpense”butbeforediscontinuedoperations.

a.I b.II c.IandII d.NeitherInorII

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 JuxtapositioninvestmentshouldAdjacent’s20x1incomestatementreport?

a. 10%ofJuxtaposition’sincomeforJanuary1toJuly31,20x1,plus40%of Juxtaposition’sincomeforAugust1toDecember31,20x1.

b. 40%ofJuxtaposition’sincomeforAugust1toDecember31,20x1only.

c. 40%ofJuxtaposition’s20x1income.

d. AmountequaltodividendsreceivedfromJuxtaposition. (AICPA)

55.WhichofthefollowingstatementsareinaccordancewithPAS28?

I. When the associate has cumulative preference shares, the investor computesitsshareintheprofitorlossoftheinvesteeafterdeductingthe preferreddividends,onlywhensuchdividendsaredeclared.

II. When the associate has non-cumulative preference shares, the investor computesitsshareintheprofitorlossoftheinvesteeafterdeductingthe preferreddividends,whetherornotsuchdividendsaredeclared

a.true,true

b.true,false

c.false,true

d.false,false

56.Bellowns10%ofthecommonstockofWarCo.throughouttheyear.WarCo. hasnopreferredstockoutstanding.Bella’sstockgiveshimtherightto

a. bepaid10%ofthefirm’sprofitsincasheachyear

b. receivedividendsequalto10%oftheparvalueeachyear

c. receive dividends equal to 10% of the total dividends paid by the corporationfortheyeartocommonstockholders

d. keepthecorporationfromissuinganyadditionalstockunlessheiswilling tobuy10%ofthenewlyissuedshares (AICPA)

57.Adjustments to the carrying amount of the investment in associate may be necessaryforchangesintheinvestor’sproportionateinterestintheinvestee arisingfromchangesintheinvestee’sequitythathavenotbeenrecognizedin the investee’s profit or loss. Which of the following may not necessitate an adjustmenttotheinvestmentinassociateaccount?

a. Changesinrevaluationsurplusofassociate

b. Changesinvaluationoftheassociate’sFVOCIsecurities

c. Changes in the actuarial gains and losses of the associate not amortized throughthecorridorapproach

d. ChangesintheAllowancefordoubtfulaccountsoftheassociate

58.Whichofthefollowing iscorrectin relationtoaccountingforinvestmentsin 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 sameasitwasbeforethedividend.

II. Sharedividendsreceivedonaninvestmentinassociateisaccountedforas deductionfromtheinvestmentaccount.

III. Share dividends received on an investment in associate is generally not accountedfor.

a.I b.II c.IandIII d.I,IIandIII

59.WhichofthefollowingstatementscorrectlyreferstotheprovisionsofPAS28 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 previouslyrecognized.

II. Noadjustmenttotheinvestmentaccountismadewhenchangingfromthe fairvaluemethodtotheequitymethod.

a.I b.II c.IandII d.NeitherInorII

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 dividendsforeachofthefollowinginvestments?

FVOCI securities

Equity method investment

a. Noeffect Noeffect

b. Decrease Noeffect

c. Noeffect Decrease

d. Decrease Decrease (AICPA)

61.Theinvestmentinassociateisreducedtozerowhen

a. theinvestmentinassociateispartlyreclassifiedtoFVPL

b. theshareinthelossesoftheassociateexceedstheshareintheprofits

c. at no instance should the investment be reduced to zero unless the investmentisderecognizedthroughsaleorotherformsofdisposal

d. the share in the losses of the associate exceeds the investor’s interest in theassociate

62.Considerthefollowingstatements.

I. In applying Equity Method of accounting for investments in associates, dividends received from the investee are considered a return of capital andshouldbecreditedtostockholders’equityoftheinvestor.

II. Asubsidiaryisanaffiliatethatisnotcontrolledbyan enterprisedirectly, orindirectly,throughoneormoreintermediaries.

Statewhethertheforegoingstatementsarecorrect.

a.OnlyIiscorrect

c.OnlyIIiscorrect

d.NeitherInorIIiscorrect (RPCPA)

b.IandIIarecorrect

63.The following statements relate to equity method. Choose the incorrect statement.

a. Inaccountingforinvestmentsincommonstockundertheequitymethod, sales of stock of an investee by an investor, should be accounted for as gainsorlossesequaltothedifferenceatthetimeofsalesbetweenselling priceandcarryingamountofthestocksold.

b. The general rule is that an investor owning 20% or more of the voting stockofaninvesteeispresumedtohavetheabilitytoexercisesignificant interestovertheinvestee.

c. Undertheequitymethodofaccounting,theinvestmentsincommonstock shouldbeshownasasingleamount, andtheinvestor’sshareof 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, wheninfluentialinterestexists. (RPCPA)

64.WrathCo.usestheequitymethodtoaccountforitsJanuary1,2003purchase 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 inAnger’s2003earnings?

Inventory excess Land excess

a. Decrease Decrease

b. Decrease Noeffect

c. Increase Increase

d. Increase Noeffect (AICPA)

65.OnMay1,20x1,UpbeatCompanyacquired30%ofthevotingstockofReggae 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 workingcapital,dividendincome,andnetearnings,respectively?

a. overstate,overstate,overstate

b. noeffect,understate,understate

c. noeffect,overstate,understate

d. understate,understate,understate (RPCPA)

66.Selecttheincorrectstatement.

a. The cost method of accounting for an investment in a subsidiary recognizesthelegalfactthat theparentandsubsidiaryareoneeconomic unit.

b. The net cumulative unrealized gains and losses on investments in equity securitiesclassifiedasFVOCIandareaccountedforunderthecostmethod 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 cashdividendsreceivedfromtheinvestee.

d. The equity method of accounting for long-term investments in equity securitiesisbasedonthepresumptionthattheinvestorownsasufficient number of the outstanding voting shares of another company to exercise significantinfluenceovertheoperatingandfinancialpoliciesoftheother company.

67.Whichofthefollowingstatementisthecorrectstatement?

a. Attheacquisition dateofalong-term investment, theentrywouldbethe 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 undertheequitymethod,itisshownaspartofequity.

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

d. Long-term investments in equity securities are written down only when therehasbeenamaterialandapparentlypermanentdeclineinthemarket valueoftheinvestmentbelowitscost.

e. Impairment losses on investments in associates are not accounted for underPAS28.

68.The following statements relate to the accounting for investments in equity instruments.

I. Wheneveran investment in marketableequitysecuritiesdoesnotqualify for accounting using the equity method, the investor is required to recognizeasdividendincomecashdividendsreceivedfromtheinvestee.

II. The cost measurement for equity investments is permitted in separate financialstatements.

III. An investor may still be able to exercise significant influence over an investee,eveniftheinvestmentislessthan20%ofthevotingstockofthe investee.

IV. Noadjustmenttotheinvestmentaccountismadewhenchangingfromthe equitytothefairvaluemeasurement,orviceversa.

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 accountingforits15%ownershipofKalingaCoffeeCo.AtDecember31,20x1, Musang has a receivable from Kalinga Coffee. How should the receivable be reportedinMusang’sDecember31,20x1statementoffinancialposition?

a. Thetotalreceivableshouldbereportedseparately.

b. The total receivable should be included as part of the investment in KalingaCoffee,withoutseparatedisclosure.

c. 85% of the receivable should be reported separately, with the balance offsetagainstKalingaCoffee’spayabletoMusang.

d. The total receivable should be offset against Kalinga Coffee’s payable to Musang,withoutseparatedisclosure. (AICPA)

70.Whentheequitymethodisusedtoaccountforinvestmentsincommonstock, whichofthefollowingaffectstheinvestor’sreportedinvestmentincome? Equipment amortization related to purchase Cash dividends from investee

a. Yes Yes

b. No Yes

c. No No

d. Yes No (AICPA)

71.GoogleCo.receivedacashdividendfromacommonstockinvestment.Should Google report an increase in the investment account if it has classified the stockasFVOCIorusestheequitymethodofaccounting? FVOCI Equity

a. No No

b. Yes Yes

c. Yes No d. No Yes (AICPA)

72.BlissCo.usestheequitymethodtoaccountforitsinvestmentinNirvana,Inc. common stock. How should Bliss record a 2% stock dividend received from Nirvana?

a. AsdividendrevenueatNirvana'scarryingvalueofthestock.

b. Asdividendrevenueatthemarketvalueofthestock.

c. AsareductioninthetotalcostofNirvanastockowned.

d. As a memorandum entry reducing the unit cost of all Nirvana stock owned. (AICPA)

73.Whichofthefollowinginvestmentsinanassociate is not withinthescope of PAS28 Investments in associates?

a. Anassociateheldbyasubsidiaryandmeasuredatcost

b. Anassociateheldbyaventurecapitalorganizationandmeasuredatcost

c. An associate held by a venture capital organization and measured at fair valuewithchangesinfairvaluerecognizedinprofitorloss

d. Anassociateheldbyasubsidiaryandmeasuredatfairvaluewithchanges infairvaluerecognizedinprofitorloss (ACCA)

74.Fretboard Company equity accounts for its 40% interest in Fingerboard Company.Fingerboard'sfinancialstatementsincludethefollowing:

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 ofFingerboard. Statement (1) Statement (2)

a. False False

b. False True

c. True False

d. True True (ACCA)

75.AninvestormustapplytherequirementsofPAS36indeterminingwhetherit is necessary to recognize any impairment loss in the investment in an associate.Howistheimpairmenttestcarriedout?

a. The goodwill is separated from the rest of the investment and is impairmenttestedindividually.

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. Thecarryingvalueoftheinvestmentshouldbecomparedwithitsmarket value.

d. The recoverable amounts of all investments in associates should be assessedtogethertodeterminewhethertherehasbeenanimpairmenton allinvestments.

76.What accounting method should be used for an investment in an associate whereitisoperatingunderseverelong-termrestrictions-forexamplewhere thegovernmentofacompanyhastemporarycontrolovertheassociate?

a. PFRS9shouldbeapplied.

b. The equity method should be applied if significant influence can be exerted.

c. Theassociateshouldbeshownatcost.

d. Proportionateconsolidationshouldbeused. (Adapted)

77.If the investor ceases to have significant influence over an associate, how shouldtheinvestmentbetreated?

a. Itshouldstillbetreatedusingequityaccounting.

b. ItshouldbetreatedinaccordancewithPFRS9.

c. Theinvestment shouldbefrozen at thedateat whichtheinvestorceases tohavesignificantinfluence.

d. Theinvestmentshouldbetreatedatcost.

(Adapted)

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

a. the change to equity method is treated retrospectively, “catch up” adjustments shall be made in order to restate the accounts to what their balancesshouldbehadequitymethodbeenusedallalong.

b. thepreviousinvestmentismeasuredatacquisition-datefairvalueandany difference between this amount and the previous carrying amount is recognizedimmediatelyinprofitorloss.

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 thatwererecognizedasincome.

d. thepreviousinvestmentismeasuredatacquisition-datefairvalueandany difference between this amount and the previous carrying amount is recognized immediately in profit or loss or other comprehensive income, asappropriate.

79.Profits and losses resulting from “upstream” and “downstream” transactions betweenaninvestorandanassociateare

a. recognized in the investor’s financial statements through proportionate consolidation, meaning the investor recognizes its share in the sale and costofsalesrecordedbytheassociate

b. recognized in the investor’s financial statements only to the extent of unrelatedinvestors’interestsintheassociate.

c. recognized in the investor’s financial statements only to the extent of relatedinvestors’interestsintheassociate.

d. notrecognizedintheinvestor’sfinancialstatements

80.UnderPAS28,profitsandlossesresultingfrom‘upstream’and‘downstream’ transactionsbetweenaninvestorandanassociate

a. mustbeeliminatedtotheextentoftheinvestor’sinterestintheassociate.

b. must be eliminated to the extent of the unrelated interest over the associate

c. mustberecognizedinfullafteradjustmentfortheincreasesordecreases inbeginninginventory

d. notrecognized

81.UnderPAS28,adjustmentstoshareinprofitorlossofanassociatemaydiffer if the transaction is “downstream” or “upstream.” Which of the following statementsistrue?

I. JackCo.owns20%interestinOldMan,Inc.DuringtheyearOldMansold magicbeanstoJack.Thisisanupstreamtransaction.

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.truefalse

c.false,true d.false,false

82.Daddeh Co. owns 20% interest in Bebeh Co. During the year, Daddeh sold inventorytoBebehat20%grossprofit.Asofyear-endBebehstillholds100% of the inventory. How much share in the profit from the transaction will Daddehrecognizefortheyear?Assumeincometaxrateof30%.

a.14% b.80% c.2.8% d.none

83.Under PAS 28, it refers to the carrying amount of the investment in the associateundertheequitymethodtogetherwithanylong-termintereststhat insubstance,formpartoftheinvestor’snetinvestmentintheassociates.

a.investmentinassociate

b.interestintheassociate

c.interestinownership

d.none

84.Which of the following may not be included in interest in associate when determiningthethresholdinrecognizingshareinlossesofassociate?

a. investmentinpreferencesharesofassociate

b. long-term,unsecured,advancestotheassociate

c. tradereceivablesfromtheassociate

d. investmentinassociate

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’sinterestintheassociate

a. intheorderoftheirseniority

b. inthereverseorderoftheirseniority

c. intheorderofpriorityinliquidation

d. innoparticularorder

86.After the investor’s interest in the associate is reduced to zero, additional lossesareprovidedfor,andaliabilityisrecognized,onlytotheextentthatthe investorhasincurred

a. legalorconstructiveobligations

b. madepaymentsonbehalfoftheassociate

c. aorb

d. furtherlossesarenotrecognized

87.If the associate subsequently reports profits, the investor resumes recognizingitsshareofthoseprofits

a. onlyafteritsshareoftheprofitsequalstheshareoflossesnotrecognized

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 onbehalfoftheassociate

d. aorb

88.Howisgoodwillarisingfrominvestmentsinassociatesaccountedfor?

a. Includedinthecarryingamountoftheinvestmentandnotamortizedbut testedseparatelyforimpairmentatleastannually.

b. Not accounted for separately; however, presented as a separate asset in theinvestor’sseparatefinancialstatements.

c. Included in the carrying amount of the investment and the entire investmentinassociateistestedforimpairmentunderPAS36.

d. Recognizedasaseparateasseteitherinthegroupfinancialstatementsor intheseparatefinancialstatementsbutnotamortized.

Others

89.Investmentsinassociatesarenormallyclassifiedinthestatementoffinancial positionas

a.currentassets

b.noncurrentassets

c.fairvalue

d.equityaccount

90.Theinvestor’sshareintheassociate’srevaluationsurplusis

a. recognized in the investor’s equity together with the investor’s revaluationsurplus

b. recognizedin theinvestor’sproperty, plant andequipment withseparate disclosure

c. recognizedintheinvestor’sretainedearningswithseparatedisclosure

d. notrecognized

91.What should happen when the financial statements of an associate are not preparedtothesamedateastheinvestor’saccounts?

a. The associate should prepare financial statements for the use of the investoratthesamedateasthoseoftheinvestor.

b. The financial statements of the associate prepared up to a different accountingdatewillbeusedasnormal.

c. Anymajortransactionsbetweenthedateofthefinancialstatementsofthe investorandthatoftheassociateshouldbeaccountedfor.

d. Aslongasthegapisnotgreaterthanthreemonths,thereisnoproblem. (Adapted)

92.Preparationofconsolidatedfinancialstatementsisprimarilybasedonthe:

a.timeperiodassumption

b.full-disclosureprinciple

c.costprinciple (Adapted)

d.cost/benefitconstraint

e.separateentityassumption

93.Thereportingdatesoftheinvestoranditsassociateshouldnotdifferbymore than

a.onemonth

b.twomonths

c.threemonths

d.sixmonths

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 reportingliketransactionsandothereventsinsimilarcircumstances.

b. PAS 28 does not require appropriate adjustments to the associate’s financialstatementstoconformthemtotheinvestor’saccountingpolicies for reporting like transactions and other events in similar circumstances whenitwasnotpracticabletouseuniformaccountingpolicies

c. PAS28requirestheentitytodiscontinuetheuseoftheequitymethod

d. Innoinstanceshouldtheaccountingpoliciesusedbytheinvestorandthe associatebedifferent.

95.Whenfinancialstatementsofanassociateusedinapplyingtheequitymethod arepreparedasattheendofthereportingperiodthatisdifferentfromthatof theinvestor,

a. thedifferencemustbenogreaterthanthreemonths

b. thedifferencemustbenogreaterthantwelvemonths

c. thedifferencemustbecompensatedbyaninterimfinancialstatement

d. nodifferencemustexist

96.When an entity elects to prepare separate financial statements, it shall accountforitsinvestmentinassociates

a.atcost

c.usingtheequitymethod

b.inaccordancewithPFRS9 d.anyofthese

Chapter 12 - Suggested answers to theory of accounts questions

Chapter 13 Agriculture

Chapter 13: Multiple Choice – Computational (For classroom instruction purposes)

Distinction between Biological asset, Agricultural produce, and Inventory

Use the following information for the next four questions: ThefollowinginformationpertainstoMadagascarCo.

1. How much is classified as biological assets that are accounted for under PAS 41 Agriculture?

2. How much is classified as property, plant and equipment that are accounted forunderPAS16 Property, Plant and Equipment?

3. Howmuchisclassifiedasagriculturalproduce?

4. Howmuchisclassifiedasinventory?

Use the following information for the next three questions: ThefollowinginformationpertainstoabiologicalassetofPETRIFYSTUNCo.

5. Howmuchisthefairvalueofthebiologicalasset? a.80,000 b.77,200 c.70,000 d.69,200

6. Howmuchisthecosttosellofthebiologicalasset? 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 financialposition?

a.80,000 b.77,200 c.70,000 d.69,200

Access to different active markets

8. InformationonabiologicalassetofINSTIGATEPROVOKECo.isshownbelow:

INSTIGATECo.iscontemplatingontransactinginActiveMarket#1,whichisthe principal market for the biological asset. At what amount would the biological assetberecognizedintheyear-endfinancialstatements?

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 valueof₱40,000.Necessarycostsincurredonthepurchasetotaled₱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.OnAugust 1, 20x1, adairycattleofWOO COURTCo. gavebirthtoacalf. The fairvaluelesscosttosellofanewlyborncalfasofAugust1,20x1is ₱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 recognizedonAugust1,20x1?

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 mangoesareinitiallyrecognizedat 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 totalof₱400,000.

Transactionsduringtheyearincludethefollowing:

 Oneanimalaged2.5yearswaspurchasedonJuly1,20X1for₱43,200.

 OneanimalwasbornonJuly1,20X1.

 Noanimalsweresoldordisposedofduringtheperiod.

Per-unitfairvalueslesscoststosellareasfollows:

NewbornanimalatJuly1,20X1

2.5yearoldanimalatJuly1,20X1

Newbornanimalat31December20X1

0.5yearoldanimalat31December20X1

2yearoldanimalat31December20X1

2.5yearoldanimalat31December20X1

3yearoldanimalat31December

Howmuchisthetotalgainfromthechangeinfairvaluelesscoststosellduring 20x1?

a.116,800 b.156,800 c.113,600 d.88,800

Biological assets attached to land

13.CANDORFAIRNESSCo.hasthefollowingassetsasofDecember31,20x1: Landheldasplantation ₱1,200,000 Trees(plantedonthelandreferredtoabove) 480,000

Thecombinedmarketvalueoftheassetsis₱2,000,000whilethemarketvalueof thelandis₱1,280,000,10%ofwhichisattributabletoimprovementsontheland. Howmuchisthevaluationofthebiologicalasset?

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 theincomefromgovernmentgranttoberecognizedin20x1?

a.400,000 b.0 c.eitheraorb d.neitheranorb

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,powderedgroundandroastedinordertoproducearawmaterial for the production of chocolates. The grant becomes receivable when MARAUDacquiresasuitablesitetoplantthetrees.AsofDecember31,20x1, MARAUDE has yet to comply with the condition. How much is the income fromgovernmentgranttoberecognizedin20x1?

a.400,000 b.0 c.eitheraorb d.neitheranorb

Conditional government grant

Use the following information for the next two questions:

In 20x1, DEADLOCK STANDSTILL Co. was granted by a local government a 3hectare land to plant “camote” (sweet potato). The land has a fair value of ₱2,000,000.ThegrantrequiresDEADLOCKtofarmonlywithinthecitylimitsfor five years. If any of the conditions is breached, DEADLOCK is required to return theentiregrant.

16.Howmuchincomefromgovernmentgrantisrecognizedin20x1?

a.2,000,000 b.0 c.eitheraorb d.neitheranorb

17.Howmuchincomefromgovernmentgrantisrecognizedin20x6,afterthe5yearrestrictionhaslapsed?

a.2,000,000 b.0 c.eitheraorb d.neitheranorb

Part of government grant retained due to passage of time

Use the following information for the next two questions: 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 conditionsisbreached,RESTIVEmustreturnthegranttakingintoconsideration theportionretainedbasedonpassageoftime.

18.Assuming no breach of condition, how much income from government grant isrecognizedin20x1?

a.2,000,000

b.400,000 c.0 d.eitheraorc

19.Assuming no breach of condition, how much income from government grant isrecognizedin20x2?

a.2,000,000 b.400,000 c.0 d.eitheraorc

Change in FVLCS attributable to price change and physical change

Use the following information for the next three questions: OnJanuary1,20x1,thebiologicalassetsofSUAVEPOLISHEDCo.consistoften2 year old animals with fair value less cost to sell of ₱40,000 each for a total of ₱400,000.

Transactionsduringtheyearincludethefollowing:

 Oneanimalaged2.5yearswaspurchasedonJuly1,20x1for₱43,200.

 OneanimalwasbornonJuly1,20x1.

 Noanimalsweresoldordisposedofduringtheperiod.

Per-unitfairvalueslesscoststosellareasfollows:

20.How much is the total gain from the change in fair value less costs to sell during20x1? a.116,800

21.How much is the gain on change in fair value less costs to sell due to price change?

94,800

22.Howmuchisthegainonchangeinfairvaluelesscoststosellduetophysical change?

Change in FVLCS attributable to price change and physical change

Use the following information for the next three questions:

OnJanuary1,20x1,thebiologicalassetsofGENTEELPOLITECo.consistoften2year old animals with fair value less cost to sell of ₱40,000 each for a total of ₱400,000.

Transactionsduringtheyearincludethefollowing:

 Oneanimalaged2.5yearswaspurchasedonJuly1,20X1for₱43,200.

 OneanimalwasbornonJuly1,20X1.

 Twoanimalsfrom theJanuary1, 20x1biologicalassetsweresoldfor ₱48,000 eachonSept.1,20x1.

 One animal from the January 1, 20x1 biological assets died of “mad cow” diseaseonNovember1,20x1.

Per-unitfairvalueslesscoststosellareasfollows:

23.How much is the total gain from the change in fair value less costs to sell during20x1?

24.How much is the gain on change in fair value less costs to sell due to price change? a.

25.Howmuchisthegainonchangeinfairvaluelesscoststosellduetophysical change? a.22,000

The answers and solutions to the computational problems above (Multiple choice – Computational (SET B) can be found in the accompanying Teacher’s Manual.

Chapter 13: Theory of Accounts Reviewer

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,orintoadditionalbiologicalassets.

a.Agriculturalactivity

b.Agriculturalmanagement

c.Biologicaltransformation

d.Biologicalactivity

2. Agriculturalactivitycoversadiverserangeofactivities.Suchdiverserangeof activitieshavecommonfeatureswhichincludesallofthefollowingexcept

a.Capabilitytochange

b.Managementofchange

c.Recognitionofchange

d.Measurementofchange

3. It is the detachment of produce from a biological asset or the cessation of a biologicalasset’slifeprocesses.

a.Harvest b.Death

c.Decease d.Cultivation

4. When there is a long aging or maturation process after harvest, the accountingforsuchproductsshouldbedealtwithby

a.PAS41 b.PAS2

c.PAS16 d.PAS40

5. AccordingtoPAS41 Agriculture,whichofthefollowingwouldbeclassifiedas aproductthatistheresultofprocessingafterharvest?

a.Cotton b.Wool

c.Bananas d.Cheese (ACCA)

6. Which of the following items would be classified as agricultural produce, accordingtoPAS41 Agriculture?

a.Tree b.Bush c.Butter d.Apple (ACCA)

7. According to PAS41 Agriculture, which of the following items would be classifiedasbiologicalassets?

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 trueorfalse?

I. Sugarshouldbeclassifiedasagriculturalproduce.

II. Woolshouldbeclassifiedasagriculturalproduce.

a.False,False b.False,True c.True,False d.True,True (ACCA)

9. WhichofthefollowingisnotdealtwithbyPAS41?

a. Theaccountingforbiologicalassets.

b. The initial measurement of agricultural produce harvested from the entity’sbiologicalassets.

c. Theprocessingofagriculturalproduceafterharvesting.

d. The accounting treatment of government grants received in respect of biologicalassets. (Adapted)

10.WhichofthefollowingiscorrectregardingtheapplicabilityofPAS41?

a. PAS41appliestobiologicalassetsandagriculturalproduceatthepointof harvesteveniftheydonotrelatetoagriculturalactivities.

b. PAS 41 applies to unconditional government grant related to biological assetsmeasuredatcost.

c. PAS 41 applies to land on which tree recognized as biological assets are planted.

d. PAS41appliestolivingplantsandanimalsonlywhensuchitemsrelateto agriculturalactivity.

11.PAS 41 applies to which of the following when they relate to agricultural activity

I. Biologicalassets

II. Agriculturalproduceafterthepointofharvest

III. Agriculturalproduceatthepointofharvest

IV. Anunconditionalgovernmentgrantrelatedtoabiologicalassetmeasured atitsfairvaluelesscoststosell

V. Anunconditionalgovernmentgrantrelatedtoabiologicalassetmeasured at costlandrelatedtoagriculturalactivity

VI. Intangibleassetsrelatedtoagriculturalactivity

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 biologicalassets.

a.biologicalproduce

b.agriculturalproducts

13.Itisalivinganimalorplant

a.biologicalproduct

b.biologicalasset

c.agriculturalproduce

d.biologicalassets

c.agriculturalproduct

d.mutantassets

14.It comprises the processes of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset.

a.agriculturalactivity

b.biologicalactivity

c.geneticmutation

d.biologicaltransformation

15.Agricultural activity covers a diverse range of activities which includes all of thefollowingexcept

a. processingofgrapesintowinebyavintnerwhohasgrownthegrapes.

b. raisinglivestock,forestry,andannualorperennialcropping

c. cultivatingorchardsandplantations

d. floricultureandaquaculture(includingfishfarming).

16.Agriculturalactivitymayinclude

a.oceanfishing

b.deforestation

c.animalhuntingintheforest

d.fishpondoperation

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. Theentitycontrolstheassetasaresultofpastevents

II. It is probablethat economic benefits relating to the asset will flow tothe entity

III. Anactivemarketfortheassetexists

IV. Theassetformsahomogenousbiologicalgroup

a.I,II b.I,II,IV c.I,II,III d.I,II,III,IV (ACCA)

18.Biologicalassetsandagriculturalproduceareinitiallyrecognizedat

a.cost

b.fairvalue

c.fairvaluelesscoststosell

d.lowerofcostorfairvaluelesscoststosell

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. Commissionstobrokers

II. Transportcosts

III. Transfertaxesandduties

IV. Advertisingcosts

a.I,II,III b.III,IV c.I,III d.I,III,IV (ACCA)

20.Regardingthechoiceofmeasurementbasisusedforvaluingbiologicalassets, PAS41

a. Setsoutseveralwaysofmeasuringfairvalue.

b. Recommendstheuseofhistoricalcost.

c. Recommendstheuseofcurrentcost.

d. Recommendstheuseofpresentvalue. (Adapted)

21.Wherethefairvalueofthebiologicalassetcannotbedeterminedreliably,the biologicalassetismeasuredat

a. Cost.

b. Costlessaccumulateddepreciation.

c. Costlessaccumulateddepreciationandaccumulatedimpairmentlosses.

d. Netrealizablevalue.

22.Generallyspeaking,biologicalassetsrelatingtoagriculturalactivityshouldbe measuredusing

a. Historicalcost.

b. Historicalcostlessdepreciationlessimpairment.

c. Afairvalueapproach.

d. Netrealizablevalue. (Adapted)

23.Whichofthefollowingvaluesisunlikelytobeusedinfairvaluemeasurement ofabiologicalasset?

a. Quotedpriceinamarket.

b. Themostrecentmarkettransactionprice.

c. Thepresentvalueoftheexpectednetcashflowsfromtheasset.

d. Externalindependentvaluation. (Adapted)

24.The Plants Vs. Zombies Company owns a number of herds of cattle. Where shouldchangesinthefairvalueofaherdofcattlerecognizedinthefinancial statements,accordingtoPAS41 Agriculture?

a. Inprofitorlossonly

b. Inothercomprehensiveincomeonly

c. Inprofitorlossorothercomprehensiveincome

d. Inthestatementofcashflowsonly (ACCA)

25.Anentityhadaplantation forest that islikely tobeharvestedandsoldin 30 years.Theincomeshouldbeaccountedforinwhichofthefollowingway?

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 approachthatrecognizesandmeasuresbiologicalgrowth.

c. Theeventualsaleproceedsshouldbeestimatedandmatchedtotheprofit andlossaccountoverthe30yearperiod.

d. The plantation forest should be valued every 5 years and the increase in valueshouldbeshowninthestatementofrecognizedgainsandlosses (Adapted)

26.Whenagricultural produceisharvested, theharvest shouldbeaccountedfor by using PAS 2 Inventories, or another applicable PFRS. For the purpose of thatStandard,costatthedateofharvestisdeemedtobe

a. thefairvaluelesscosttosellatpointofharvest.

b. thehistoricalcostoftheharvest.

c. thehistoricalcostlessaccumulatedimpairmentlosses.

d. marketvalue.

27.Againorlossarisingontheinitialrecognitionofabiologicalassetandfroma change in the fair value less costs to sell of a biological asset should be includedin

a. Thenetprofitorlossfortheperiod.

b. Thestatementofrecognizedgainsandlosses.

c. Aseparaterevaluationreserve.

d. Acapitalreservewithinequity.

(Adapted)

28.Landthatisrelatedtoagriculturalactivityisvalued

a. Atfairvalue.

b. In accordance with PAS 16, Property, Plant and Equipment, or PAS 40, InvestmentProperty

c. At fair value in combination with the biological asset that is being grown ontheland.

d. At the resale value separate from the biological asset has been grown on theland.

(Adapted)

29.Whichofthefollowingcostsarenotincludedincoststosell?

a. Commissionstobrokersanddealers.

b. Leviesbyregulatoryagencies.

c. Transfertaxesandduties.

d. Transportandothercostsnecessarytogettheassetstoamarket.

30.In relation to PAS 41, which of the following is the least desirable choice of incomerecognition?

a. Recognitionofincomeduringproduction

b. Recognitionofincomewhenasaleoccurs

c. Recognitionofincomeonlywhencashiscollected

d. Recognitionofincomewhenproductioniscompleted

Government grants

31.Anunconditionalgovernmentgrantrelatedtoabiologicalassetthathasbeen measuredatfairvaluelesscosttosellshouldberecognizedas

a. Incomewhenthegrantbecomesreceivable.

b. Adeferredcreditwhenthegrantbecomesreceivable.

c. Incomewhenthegrantapplicationhasbeensubmitted.

d. Adeferredcreditwhenthegranthasbeenapproved.

(Adapted)

32.UnderPAS41,whichofthefollowingstatementsisuntrue?

a. Contractpricesarenotnecessarilyrelevantindeterminingfairvalue,and the fair value of a biological asset or agricultural produce is not adjusted becauseoftheexistenceofacontract.

b. Anunconditionalgovernmentgrantrelatedtoabiologicalassetmeasured at FVLCS shall be recognized in profit or loss when, and only when, the governmentgrantbecomesreceivable.

c. A conditional government grant related to a biological asset measured at FVLCS,includingagovernmentgrantthatrequiresanentitynottoengage inspecifiedagriculturalactivity,shallberecognizedinprofitorlosswhen theconditionsattachingtothegovernmentgrantaremet.

d. Ifthetermsofaconditionalgrantallowpartofittoberetainedaccording tothetimethathaselapsed,theentityrecognizesthatpartinprofitorloss onlyuponfulfillmentofthecondition.

33.If the terms of a conditional government grant allow part of the grant to be retainedaccordingtothetimethathaselapsed,theentityrecognizesincome fromgrant

a. usingthestraightlinemethod

b. onlywhentheconditionisfulfilled

c. infullastimepasses

d. usingtheeffectiveinterestmethod

34. Ifagovernmentgrantisconditionaloncertainevents,thenthegrantshould berecognizedas

a. Incomewhentheconditionsattachingtothegrantaremet.

b. Incomewhenthegranthasbeenapproved.

c. A deferred credit when the conditions attached to the government grant aremet.

d. Adeferredcreditwhenthegrantisapproved.

(Adapted)

Disclosures

35.Wherethereisaproductioncycleofmorethanoneyearforabiologicalasset, PAS41encouragesseparatedisclosureofthe

a.Physicalchangeonly. c.Totalchangeinvalue

b.Pricechangeonly d.aandb

36.WhichofthefollowingisarequireddisclosureunderPAS41?

a. a quantified description of each group of biological assets, distinguishing betweenconsumableandbearerbiologicalassets

b. a quantified description of each group of biological assets, distinguishing betweenmatureandimmaturebiologicalassets

c. the amount of change in fair value less costs to sell included in profit or lossduetophysicalchangesandduetopricechanges.

d. the depreciation method used if an entity measures biological assets at their cost less any accumulated depreciation and any accumulated impairmentlosses

e. a,bandc

37.WhichofthefollowinginformationshouldbedisclosedunderPAS41?

a. Separate disclosure of the gain or loss relating to biological assets and agriculturalproduce.

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 sellofbiologicalassets.

c. The total gain or loss from biological assets, agricultural produce, and fromchangesinfairvaluelesscosttosellofbiologicalassets.

d. There is no requirement in the Standard to disclose separately any gains orlosses.

(Adapted)

38.These refer to those that are to be harvested as agricultural produce or sold asbiologicalassets.

a.consumablebiologicalassets

b.bearerbiologicalassets

c.agriculturalproduce

d.biologicalassets

39.Thefollowingrelatetoconsumablebiologicalassets

I. livestockintendedfortheproductionofmeat

II. livestockheldforsale

III. treesfromwhichfirewoodisharvestedwhilethetreeremains

IV. cropssuchasmaizeandwheat

V. treesbeinggrownforlumber

VI. VI fishinfarms

a.IV,V,VI b.II,IV,V,VI c.I,II,IV,V,VI d.allofthese

40.These biological assets are not agricultural produce but, rather, are selfregenerating.

a.consumablebiologicalassets

b.bearerbiologicalassets

c.agriculturalproduce

d.biologicalassets

41.Thefollowingrelatetobearerbiologicalassets

I. livestockfromwhichmilkisproduced

II. grapevines

III. fruittrees

IV. treesfromwhichfirewoodisharvestedwhilethetreeremains

V. treesbeinggrownforlumber

VI. fishinfarms

a.I,II,III,IV b.II,IV,V,VI c.I,II,III,IV,V d.allofthese

42.These are biological assets that have attained harvestable specifications (for consumable biological assets) or are able to sustain regular harvests (for bearerbiologicalassets).

a.maturebiologicalassets

b.immaturebiologicalassets

c.harvestablebiologicalassets

d.completelymutatedbiologicalassets

Chapter 13 - Suggested answers to review theory questions

Chapter 14 Property, Plant and Equipment (Part 1)

Chapter 14: Multiple choice – Computational (SET B) – (For classroom instruction purposes)

Acquisition on cash basis

1. LOQUACIOUSTALKATIVECo.acquiredafactoryequipmentoverseasoncash basis for ₱400,000. Additional costs incurred include the following: commissions paid to brokers for the purchase of the equipment, ₱20,000; importdutiesof₱100,000;non-refundablepurchasetaxesof₱40,000;freight costoftransferringtheequipmenttoLOQUACIOUS’premises,₱4,000;costsof 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 producedbytheequipment,₱15,200.Thesamplesgeneratedfromtestingthe 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 purchaseprice.Thepurchasepriceisinclusiveof12%valueaddedtax(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 relocatingtheequipmenttoanewlocationafteritwasinstalledinalocation 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 December31,20x1.Howmuchistheinitialcostofthefurniture?

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 installmentpriceof₱520,000bypaying₱40,000downpaymentandissuinga three-year noninterest bearing note of ₱480,000 payable in three equal annual installments starting December 31, 20x1. The prevailing rate for the noteasofJanuary1,20x1is12%.Howmuchistheinitialcostofthefixtures?

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

were incurred in acquiring the building and paid on January 1, 20x1. An appropriatediscountrateis10%.Howmuchistheinitialcostofthebuilding? a.368,000 b.388,000 c.424,634 d.353,456

31,20x1.

Howmuchisthetotalofassetsclassifiedasproperty,plantandequipment?

Acquisition on lump-sum price (building not razed) Use the following information for the next two questions:

On April 1, 20x1, ESCULENT EDIBLE Co. purchased land and building by paying ₱40,000,000andassumingamortgageof₱8,000,000.Thelandandbuildinghave appraisedvaluesof₱20,000,000and₱40,000,000,respectively.Thebuildingwill beusedbyESCULENTCo.asitsnewoffice.

Additionalcostsrelatingtothepurchaseincludethefollowing:

7. Howmuchisthecostoftheland?

16,192,000 b.17,292,000c.15,492,000 d.14,592,000

8. Howmuchisthecostofthebuilding?

32,640,000

Acquisition on lump-sum price (building demolished)

Use the following information for the next four questions: On April 1, 20x1, ABC Co. purchased land and building for a lump-sum price of ₱48,000,000.Theexistingbuildingwillbedemolishedandanewbuildingwillbe constructed.

Additionalcostsrelatingtothepurchaseincludethefollowing:

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?

10. The land and old building have fair values of ₱20,000,000 and ₱40,000,000, respectively.Howmuchischargedaslossoninitialrecognition?

0

11. Theoldbuildingisunusableandhasaninsignificantfairvalue.Howmuchare theallocatedcostsofthelandandthenewbuilding?

12. Theoldbuildingisunusableandhasaninsignificantfairvalue.Howmuchis chargedaslossoninitialrecognition? a.48,000 b.32,000,000 c.32,048,000 d.0

Cost of self-constructed asset

Use the following information for the next two questions: LOATHHATECo.purchasedalotfor₱8,000,000.Immediatelyafterthepurchase,

started construction of a new building on the lot. The following were additionalcostsincurredbyLOATHCo.

13. Howmuchisthecostoftheland? a.8,160,000 b.8,100,000 c.8,120,000 d.8,060,000

14. Howmuchisthecostofthebuilding? 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 othernecessarycostsinbringingtheequipmenttoitsintendedconditionfor 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 Use the following information for the next four questions: Fact pattern

FEEBLE Co. exchanged equipment with WEAK, Inc. Pertinent data are shown below:

16. HowmuchistheinitialcostoftheequipmentreceivedbyFEEBLECo.?

17. HowmuchistheinitialcostoftheequipmentreceivedbyWEAKCo.?

18. Howmuchisgain(loss)onexchangerecognizedbyFEEBLECo.?

19. Howmuchisgain(loss)onexchangerecognizedbyWEAKCo.?

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 equipmentthatwillbereceivedfromWEAK,Inc.hasafairvalueof₱4,400,000.

20. HowmuchistheinitialcostoftheequipmentreceivedbyFEEBLECo.?

a.4,400,000 b. 5,000,000 c.3,800,000 d.3,400,000

21. Howmuchisgain(loss)onexchangerecognizedbyFEEBLECo.?

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 commercialsubstance.

22. HowmuchistheinitialcostoftheequipmentreceivedbyFEEBLECo.?

a.4,400,000 b. 5,000,000 c.3,800,000 d.3,200,000

23. Howmuchisgain(loss)onexchangerecognizedbyFEEBLECo.?

a.(600,000) b.600,000 c.1,200,000 d.0

Trade-in

Use the following information for the next two questions: TRANSCEND EXCEED Co. traded in an old machine for a new model. Pertinent dataareasfollows:

24. HowmuchistheinitialcostoftheequipmentreceivedbyTRANSCENDCo.?

a.244,000 b. 280,000 c.320,000 d.184,000

25. Howmuchisgain(loss)onexchangerecognizedbyTRANSCENDCo.?

a.60,000 b.160,000 c.(60,000) d.0

Acquisition through issuance of own equity instrument

Use the following information for the next four questions: 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. HowmuchistheinitialcostoftheequipmentreceivedbyRESILIENTCo.?

a.400,000 b. 4,000,000 c.3,600,000 d.180,000

27. Howmuchisgain(loss)onexchangerecognizedbyRESILIENTCo.?

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 RESILIENTCo.?

a.400,000 b. 4,000,000 c.3,600,000 d.180,000

29. Howmuchisgain(loss)onexchangerecognizedbyRESILIENTCo.?

a.3,200,000 b.400,000 c.(400,000) d.0

Acquisition through issuance of bonds payable

Use the following information for the next four questions: 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 ofinterestforasimilarinstrumentonJanuary1,20x1is12%.Thepresentvalue ofthefuturecashflowsfromthebondsdiscountedat12%is₱3,807,852.

30. HowmuchistheinitialcostoftheequipmentreceivedbyLABYRINTHCo.?

a.3,800,000 b. 4,000,000 c.3,807,852 d.180,000

31. Howmuchisgain(loss)onexchangerecognizedbyLABYRINTHCo.?

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 LABYRINTHCo.?

a.3,800,000 b. 4,000,000 c.3,807,852 d.180,000

33. Howmuchisgain(loss)onexchangerecognizedbyLABYRINTHCo.?

a.192,148 b.(192,148) c.(200,000) d.0

Acquisition by donation

Use the following information for the next two questions: GROVEL Co. received donation of equipment from CRAWL, Inc., an unrelated foreign corporation. The equipment has a fair value of ₱4,000,000. Necessary costsincurredbyGROVELCo.tobringtheassettoitsintendedconditionforuse amountedto₱40,000.

34. Theentrytorecordthereceiptofthedonationincludes

a. acredittosharepremiumof₱4,040,000

b. acredittosharepremiumof₱3,960,000

c. acredittoincomefromdonationof₱4,040,000

d. acredittoincomefromdonationof₱3,960,000

35. Assuming the donor is a shareholder of GROVEL Co., the entry to record the receiptofthedonationincludes

a. acredittosharepremiumof₱4,040,000

b. acredittosharepremiumof₱3,960,000

c. acredittoincomefromdonationof₱4,040,000

d. acredittoincomefromdonationof₱3,960,000

The answers and solutions to the computational problems above (Multiple choice – Computational (SET B) can be found in the accompanying Teacher’s Manual.

Chapter 14: Theory of Accounts Reviewer

Objective and scope

1. PAS16shallbeappliedtowhichofthefollowing

a. landheldforfutureplantsite

b. building not used in normal operations but is being leased out under operatinglease

c. equipmentheldforsaleunderPFRS5

d. biologicalassetsrelatedtoagriculturalactivity

2. The principal issues in the accounting for property, plant and equipment includewhichofthefollowing?

I. Therecognitionoftheassets.

II. Thedetermination ofcarryingamountsandthedepreciationchargesand impairmentlossestoberecognizedinrelationtoassetsrecognized.

III. Thecomplexcomputationofrevaluationsurplus.

a.I,II b.I,III c.III

Recognition principles

d.I,II,III

3. Whichofthefollowingis not amajorcharacteristicofaplantasset?

a.Possessesphysicalsubstance

c.Acquiredforuse

d.Yieldsservicesoveranumberofyears (AICPA)

b.Acquiredforresale

4. Whichoftheseis not amajorcharacteristicofaplantasset?

a. Possessesphysicalsubstance

b. Acquiredforuseinoperations

c. Yieldsservicesoveranumberofyears

d. Allofthesearemajorcharacteristicsofaplantasset. (AICPA)

5. Property,plant&equipmenthasallofthefollowingcharacteristicsexcept:

a. Theyareintendedforuseinoperatingactivities,andarenotacquiredfor saleintheordinarycourseofbusiness.

b. Theyareclassifiedasnoncurrenttangibleassets

c. Theirservicepotentialnormallydiminisheswithuse.

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 todetermine the depreciation charge separatelyfor eachsignificantpartofanitemofproperty,plantandequipment.

III. Anentityisrequiredtomeasuretheresidualvalueofanitemofproperty, plantandequipmentastheamountitestimatesitwouldreceivecurrently for the asset if the asset were already of the age and in the condition expectedattheendofitsusefullife.

IV. Anentityisrequiredtobegindepreciatinganitemofproperty,plantand equipmentwhenitisavailableforuseandtocontinuedepreciatingituntil itisderecognized,evenifduringthatperiodtheitemisidle.

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 forthesaleofgoodswouldbemet.

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 theentityhasincludedthecostofthereplacementinthecarryingamount oftheitem.

c. Anentitycannotclassifyasrevenueagainitrealizesonthedisposalofan itemofproperty,plantandequipment

d. Anentityisrequiredtomeasuretheresidualvalueofanitemofproperty, 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 conditionexpectedattheendofitsusefullife.

8. Accountingrecognitionshouldbegiventosomeorallofthegainrealizedona nonmonetaryexchangeofplantassetsexcept

a. when the exchange is one with no commercial substance and no cash is involvedandthatnoimpairmentlossesareneededtoberecognized.

b. wheretheassetsexchangedaredissimilarand additionalcashispaid

c. wheretheassetsexchangedaredissimilarandadditionalcashisreceived

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. Thecostoflandmostlikelydoes not include

a. costsofgrading,filling,draining,andclearing.

b. costsofremovingoldbuildings.

c. costsofimprovementswithunlimitedusefullives.

d. specialassessments.

10.When the fair value of the non-monetary asset exchanged in a transaction with commercial substance is indeterminable, the non-monetary asset receivedwillbevaluedat

a. fairvalueofassetgivenupadjustedforcashreceivedorgiven

b. fairvalueofassetreceived

c. fairvalueofassetreceivedadjustedforcashreceivedorgiven

d. carryingamountofassetgivenupadjustedforcashreceivedorgiven

11.Decreaseinequityarisefrom

a. transfersfromanentitytoitsowners

b. investmentsinanentitybyitsowners

c. non-reciprocaltransferstoanentityfromotherthanowners

d. upwardvaluationofproperty,plantandequipment (RPCPA)

12.Which of the following terms best describes the removal of an asset from an entity'sstatementoffinancialposition?

a.Derecognition

b.Impairment

c.Write-off

d.Depreciation

13.Ifacorporationpurchasesalotandbuildingandsubsequentlytearsdownthe building and uses the property as a parking lot, the proper accounting treatmentofthecostofthebuildingwoulddependon

a. the significance of the cost allocated to the building in relation to the combinedcostofthelotandbuilding.

b. thelengthoftimeforwhichthebuildingwasheldpriortoitsdemolition.

c. thecontemplatedfutureuseoftheparkinglot.

d. the non-financial asset’s highest and best use determined from the perspective of market participants, even if the entity intends a different useorintendsnottousethenon-financialasset.

14.Accountingfortangibleoperationalassetsisprimarilyinconformitywiththe:

a. historicalcostprinciple

b. historicalcostprincipleandreportingprinciple

c. matchingprincipleandreportingprinciple

d. matchingprinciple

e. matchingprincipleandhistoricalcostprinciple (Adapted)

15.Are the following statements regarding the cost of an asset true or false, accordingtoPAS16 Property, plant and equipment?

(1)Thecostincludescashequivalentspaidtoacquireanasset.

(2)Thecostincludesthefairvalueofanynon-monetaryconsiderationgiven toacquireanasset.

a.FalseFalse b.FalseTrue c.TrueFalse d.TrueTrue (ACCA)

16.The debit for a non-refundable sales tax properly levied and paid on the purchaseofmachinerypreferablywouldbeachargeto

a. themachineryaccount.

b. aseparatedeferredchargeaccount.

c. miscellaneous tax expense (which includes all taxes other than those on income).

d. accumulateddepreciation machinery. (AICPA)

17.Smalltoolsandcontainersusedrepeatedlyformorethanayearareclassified onthebalancesheetas

a.currentassets

b.fixedassets c.deferredcharges d.investments (AICPA)

18.HotelCaliforniaCorporationrecentlypurchasedEaglesHotelandthelandon which it is located with the plan to tear down the Eagles Hotel and build a newluxuryhotelonthesite. ThecostoftheEaglesHotelshouldbe

a. depreciated over the period from acquisition to the date the hotel is scheduledtobetorndown.

b. writtenoffasanextraordinarylossintheyearthehotelistorndown.

c. capitalizedaspartofthecostoftheland.

d. capitalizedaspartofthecostofthenewhotel. (AICPA)

19.Which of the following statementsare correctper 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. Anon-currentassetacquiredasthe resultof an exchangeof assetsisnot recognized

IV. Againondisposalofanon-currentassetisclassifiedasrevenue

a.I,II b.I,II,III c.I,II,IV d.I,II,III,IV (ACCA)

20.Plantassetsmayproperlyinclude:

a. propertyheldforinvestmentpurposes.

b. landheldforpossibleuseasafutureplantsite.

c. self-constructedassetscurrentlyin use.

d. idleequipmentawaitingsale

e. depositsonmachinerypurchasedandnotyetreceived

21.According to PAS16 Property, plant and equipment, which of the following itemsshouldbecapitalizedintothecostofproperty,plantandequipment?

I. Costofexcessmaterialsresultingfromapurchasingerror

II. Costoftestingwhethertheassetworkscorrectly

III. Initialoperatinglosseswhilstdemandbuildsup

IV. Costofpreparingthesiteforinstallation

a.I,II b.I,II,III c.II,IV d.I,II,III,IV (ACCA)

22.Capitalizablemake-readycostrelatedtoanewmachinedoesnotinclude:

a. restorationcostsrelatedtothemachine

b. installationcostsrelatedtothemachine

c. taxesrelatedtothemachineduringthemake-readyperiod

d. depreciationonthemachineduringthemake-readyperiod (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. Initialdeliveryandhandlingcosts

II. Apportionedgeneraloverheadcosts

III. Costsoftrainingstaffonthenewasset

IV. Installationandassemblycosts

a.I,II,IV b.I,IV c.II,IV d.I,II,III,IV (ACCA)

24.Plantassetspurchasedonlong-termcreditcontractsshouldbeaccountedfor at

a. thetotalvalueofthefuturepayments.

b. thefutureamountofthefuturepayments.

c. thepresentvalueofthefuturepayments.

d. noneofthese. (AICPA)

25.Thecostoflandtypicallyincludesthepurchasepriceandallofthefollowing costsexcept

a. grading,filling,draining,andclearingcosts.

b. street lights, sewers, and drainage systems cost included in special assessment

c. privatedrivewaysandparkinglots.

d. assumptionofanyliensormortgagesontheproperty. (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 expensesandaretobecapitalizedaspartofmachinery? Cost items

I. installation

II. costdeliveryandhandling

III. costsitepreparation

IV. professionalfees

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 truckshouldberecordedonNBA'sbooksat 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),thecostoftheplantassetisproperlymeasuredbythe

a.parvalueofthestock.

c.bookvalueofthestock.

d.marketvalueofthestock. (AICPA)

b.statedvalueofthestock.

29.When a closely held corporation issues preferred stock for land, the land shouldberecordedatthe

a. totalparvalueofthestockissued.

b. totalbookvalueofthestockissued.

c. totalliquidatingvalueofthestockissued.

d. fairmarketvalueoftheland. (AICPA)

30.Fireinsuranceonbuildingbeingconstructedisanexampleof: Capital expenditure Revenue expenditure

a. yes no

b. no yes

c. no no

d. yes yes (Adapted)

31.Anyrenovatingorremodelingcostsincurredtoputabuildingpurchasedina conditionsuitableforitsintendeduseisa: 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 receivedassalvagefromtheremovalofthebuildingshouldbe:

a.creditedtothebuildingaccount

b.treatedasincome

c.creditedtothelandaccount

d.adjustedtoprioryears

33.Acompanypurchasedlandwithabuildingonitandimmediatelytearsdown thebuildingsothatthelandcanbeusedfortheconstructionofaplant.Which ofthefollowingshouldnotbechargedtothelandaccount?

a. titleexaminationandsurveyingfees

b. allocationofcostofpaymenttotenantstovacatepremises

c. propertytaxesaccruingduringtheperiodofplantconstruction.

d. costsforgrading,clearing,anddrainingtheproperty.

34.Bianca Corp., a closely held corporation, acquired a used machine by issuing 15,000shares(parvalue₱1.00pershare)ofitsowncommonstock.Thestock 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 whichBiancashouldrecordthemachineonitsbooks?

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 classifiedasproperty,plantandequipment?

a.usedinoperationsofthebusiness

b.notacquiredforresale

chasausefullifebeyondoneyear

d.subjecttodepreciation

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 buildingshouldbe

a. classifiedasotherincome.

b. deductedfromthecostofthebuilding.

c. nettedagainstthecoststoclearthelandandexpensedasincurred.

d. nettedagainstthecoststoclearthelandandamortizedoverthelifeofthe plant. (AICPA)

37.Plantassetsmayproperlyinclude

a. depositsonmachinerynotyetreceived.

b. idleequipmentawaitingsale.

c. landheldforpossibleuseasafutureplantsite.

d. noneofthese.

(AICPA)

38.Accountingrecognitionshouldbegiventosomeorallofthegainrealizedona nonmonetaryexchangeofplantassets except where

a. theassetsexchangedaresimilarandadditionalcashispaid.

b. theassetsexchangedaresimilarandadditionalcashisreceived.

c. theassetsexchangedaredissimilarandadditionalcashispaid.

d. theassetsexchangedaredissimilarandadditionalcashisreceived.

e. theexchangetransactionlackscommercialsubstance (AICPA)

39.For a nonmonetary exchange of plant assets, accounting recognition should not begivento

a. alosswhentheassetsexchangedaresimilar.

b. againwhentheassetsexchangedaredissimilar.

c. againwhentheexchangelackscommercialsubstance.

d. partofagainwhentheassetsexchangedaresimilarandcashisreceived. (AICPA)

40.When an entity is the recipient of a donated asset from other than a shareholder,theaccountcreditedmaybea(n)

a.paid-incapitalaccount. c.deferredrevenueaccount.

b.incomeaccount.

d.allofthese. (AICPA)

41.NounCo. andNamewordCo. exchangedsimilarplotsoflandwithfairvalues in excess of carrying amounts in an exchange transaction that lacks commercialsubstance.Inaddition,Nounreceivedcashoflessthan10%ofthe totalconsiderationreceivedfromNamewordtocompensateforthedifference inlandvalues.Asaresultoftheexchange,Nounshouldrecognize:

a. A gain equal to the difference between the fair value and the carrying amountofthelandgivenup.

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. Neitheragainnoraloss. (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 consequenceoftheexchange,Adverbrecognizes:

a. Againequaltothedifferencebetweenthefairvalueandcarryingamount ofthetruckgivenup.

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. Neitheragainnoraloss.

43.In an exchange transaction with commercial substance, DEADLOCK STANDSTILL Co. received equipment with a fair value equal to the carrying amountofotherassetsgivenup.Deadlockalsocontributedcash.Asaresultof theexchange,Deadlockrecognized:

a. Alossequaltothecashgivenup.

b. A loss determined by the proportion of cash paid to the total transaction value.

c. Again determinedbytheproportionofcash paidtothetotaltransaction value.

d. Neithergainnorloss. (AICPA)

44.E.G.Co.exchangedsimilarnonmonetaryassetswithExampleCo.andnocash 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 surrenderedandthefairvalueoftheassetitsurrenderedasaloss.

b. Recognize the difference between the carrying amount of the asset it surrenderedandthefairvalueoftheassetitreceivedasagain.

c. Recognize the difference between the carrying amount of the asset it surrenderedandthecarryingamountoftheassetitreceivedasaloss.

d. Recognizenogainorloss. (AICPA)

45.AdjectiveCo.andRelating2Companyexchangedassetswithequalfairvalues. TheretailpriceoftheassetthatAdjectivegaveupislessthantheretailprice

oftheassetreceived.WhatgainorlossshouldAdjectiveCo.recognizeonthe nonmonetaryexchange?

a. Againorlossisnotrecognized.

b. A gain equal to the difference between the retail prices of the asset receivedandtheassetforegone.

c. Againequaltothedifferencebetweentheretailpriceandthecostofthe assetreceived.

d. Againorlossequaltothedifferencebetweenthefairvalueandthecostof theassetgivenforegone. (AICPA)

46.Theoretically, which of the following costs incurred in connection with a machine purchased for use in a company's manufacturing operations would becapitalized?

I. Insuranceonmachinewhileintransit

II. Testingandpreparationofmachineforuse

a.Yes,Yes b.Yes,No c.No,Yes d.No,No (AICPA)

47.Whichofthefollowingisnotanexampleoffixedasset?

a.plantandmachinery

b.landandbuilding

c.royalty

d.moldsanddies

48.Discounts given for early payment of credit purchases of operational assets shouldbe:

a. recordedasinterestexpenseatpurchasedate.

b. capitalized as a cost of the asset acquired and subsequently allocated to depreciationexpense.

c. recordedasinterestrevenueatpurchasedate.

d. deductedfromtheinvoicepricewhendeterminingthecostoftheasset (Adapted)

49.Apportionment of the purchase price in a lump-sum acquisition of different assetsmaybebasedonallthefollowingexcept?

a. carryingamountoftheassetstotheseller

b. relativefairvalues

c. taxassessmentvalues

d. appraisedvalues (Adapted)

50.Which of the following is least likely to be classified in property, plant and equipment?

a.landimprovements

b.land

c.leaseholdimprovements

d.idleland

51.Whenlandandbuildingareacquiredforalumpsumpriceandthebuildingis demolished, the materials salvaged from the building that were used in the constructionofanewbuildingshouldbe

a. Ignoredwhenthedemolitioncosts,netofactualsaleproceedsofsalvaged materials,arecapitalizedascostofthenewbuilding.

b. Includedasincomefromcontinuingoperations.

c. Addedtothecostofthenewbuilding.

d. Deductedfromthecostofthelandandaddedtothecostofthebuilding

52.Pronoun Co. exchanged similar nonmonetary assets with Substitute-4-Noun Co.Nocashwasexchanged.Thecarryingamountoftheassetsurrenderedby

PronounCo.exceededboththefairvalueoftheassetreceivedandSubstitute4-NounCo.’scarryingamountoftheasset.PronounCo. shouldrecognizethe differencebetweenthecarryingamountoftheassetsurrenderedand

a. Thefairvalueoftheassetreceivedasaloss

b. Thefairvalueoftheassetreceivedasagain

c. PronounCo.’s.carryingamountoftheassetreceived,asaloss

d. PronounCo.’s.carryingamountoftheassetreceived,asagain (AICPA)

53.I.E. Co. recently purchased the That-Is Hotel and the land on which it is located.TheplansaretodemolishtheThat-IsHotelandtobuildanewluxury hotel on the site. I.E. Co. should account for the total purchase cost of the That-IsHotelasfollows:

a. capitalizeitaspartofthecostofthenewhotel.

b. depreciateitovertheperiodfromtheacquisitionuntiltheMajesticistorn down.

c. allocate betweenthe land and the That-Is Hotel building, then chargethe allocatedcostoftheThat-IsHotelbuildingtoloss.

d. capitalizeditaspartofthecostoftheland. (Adapted)

54.What is the general principle of capitalizing costs to property, plant and equipment?

a. Allcostswhichwillprovideabenefitbeyondoneyeararecapitalized.

b. Onlydepreciablecostsarecapitalized.

c. Allcostassociatedwiththeacquisitionorconstructionofaplantassetare capitalized.

d. All cost incurred to bring the asset to its intended condition and location arecapitalized.

e. Allcostsrelevanttotheacquisitionandlong-termmaintenanceofaplant assetarecapitalized.

(Adapted)

55.Theamountofnonrefundablesalestaxpaidonthepurchaseofmachinery(an operationalasset)shouldbedebitedtoa:

a. machineryaccount.

b. accumulateddepreciationaccount.

c. taxexpense(whichincludesalltaxesotherthanincometax)account.

d. separatedeferredchargeaccount

(Adapted)

56.Discounts available for early payment of liabilities on purchases of operationalassetsshould:

a. be capitalized as part of the cost of the asset, whether taken or not, and subsequentlyincludedasdepreciationexpense.

b. be recorded and reported as a contra account to the related liability account.

c. notbecapitalizedascostoftheassetwhethertakenornot.

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.Assetsreceivedindonationfromotherthanthegovernmentshould

a. bedepreciatedbasedonthemarketvalueatthetimeofthedonation.

b. bedepreciatedbasedontheirbookvalueatthetimeofthedonation.

c. shouldnotbedepreciated.

d. beexpenseduponreceipt. (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 warehousefor₱4,300,000anddecidedtousecompanyemployeestobuildit. ThefinalconstructioncostincurredbyAcousticwas₱4,800,000buttheasset wasrecordedat₱5,000.000.Whatprincipleisthisaviolationof?

a.Costprinciple

c.Matchingprinciple

d.Fulldisclosure (Adapted)

b.Separateentity

59.Which of the following should not be classified as property, plant and equipment?

a. Buildingusedasafactory

b. Landusedinordinarybusinessoperations

c. Atruckheldforresalebyanautomobiledealership

d. Landimprovement,suchasparkinglotsandfences (ACCA)

60.Acharacteristicofproperty,plant,andequipmentisthatitis

a. intangible.

b. usedintheoperationsofabusiness.

c. heldforsaleintheordinarycourseofthebusiness.

d. notcurrentlyusedinthebusinessbutheldforfutureuse. (ACCA)

61.On November 1, 2010, a company purchaseda new machinethat 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 timevalueofmoneyconcept?

a.Presentvalueofannuityof₱1.

c.Futureamountofannuityof₱1.

d.Futureamountof₱1. (AICPA)

b.Presentvalueof₱1.

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 buildingwillbebuiltonthesite.Thedemolitioncostshouldbe:

a. capitalizedaspartofthecostofthenewbuilding

b. capitalizedaspartofthecostoftheland

c. depreciatedovertheremaininglifeoftheoldbuilding

d. writtenoffasanextraordinarylossintheyearofthedemolition (Adapted)

Chapter 14 - Suggested answers to theory of accounts questions

Chapter 15

Property, Plant and Equipment (Part 2)

Chapter 15: Multiple choice – Computational (SET B) – (For classroom instruction purposes)

Depreciation methods

Use the following information for the next four cases: Fact pattern

OnJanuary1,20x1,SIMPLETONFOOLCo.acquiredequipmentwithanestimated useful life of 4 years and a residual value of ₱80,000 for a totalpurchase cost of ₱400,000.

Straight line method

Case #1: Use the straight-line method for the next two questions.

1. Howmuchisthedepreciationexpenseinthe2nd year?

a.100,000 b.80,000

c.200,000 d.160,000

2. HowmuchistheaccumulateddepreciationonDecember31,20x2?

a.100,000 b.80,000

c.200,000 d.160,000

Sum-of-the-years’ digits (SYD) method

Case #2: Use the sum-of-the-years’ digits (SYD) method for the next two questions.

3. Howmuchisthedepreciationexpenseinthe2nd year?

a.120,000 b.96,000

c.128,000 d.224,000

4. HowmuchistheaccumulateddepreciationonDecember31,20x2?

a.120,000 b.96,000

c.128,000 d.224,000

Double declining balance method

Case #3: Use the double declining balance method for the next two questions.

5. Howmuchisthedepreciationexpenseinthe2nd year?

a.120,000 b.100,000

c.128,000 d.224,000

6. HowmuchistheaccumulateddepreciationonDecember31,20x2?

a.120,000 b.96,000

c.160,000 d.300,000

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

Case #4: Use the units of production method for the next two questions: The equipment has an expected total output of 160,000 units and an expected total input of40,000hours.

Informationonactualoperationsispresentedbelow:

7. If SIMPLETON Co. uses the output method, how much is the depreciation expenseinthe2nd year? a.128,000 b.96,000

60,000

8. If SIMPLETON Co. uses the output method, how much is the accumulated depreciationonDecember31,20x2?

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 expenseinthe2nd 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 depreciationonDecember31,20x2?

a.120,000 b.210,000 c.192,000 d.256,000

Increasing depreciation charge under double declining balance method

11.ThefollowinginformationpertainstoanequipmentownedbyRABBLEMOB Co.:

Cost

800,000

Usefullife 5years

Doubledecliningrate(2/5yearlife) 40% Residualvalue None

Howmuchisthedepreciationin20x5?

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

Partial year depreciation

Use the following information for the next three questions: DEPLORABLEBADCo.acquiredamachineonSeptember21,20x1foratotalcost of ₱160,000. The machine was estimated to have a useful life of 4 years and a salvagevalueof₱10,000.

12.How much is the depreciation expense in 20x2 under the straight-line method?

93,750

13.Howmuchisthedepreciationexpensein20x2underthesum-of-years’digits method?

14.How much is the depreciation expense in 20x2 under the double declining balancemethod?

Composite method

Use the following information for the next four questions: OnJanuary1,20x1,DEVIOUSCROOKEDCo.purchasedthefollowing:

15.Whatisthecompositelife?

16.Whatisthecompositerate?

17.Howmuchisthedepreciationexpensein20x1?

18.During20x3,machinetoolswithoriginalcostof₱20,000andresidualvalueof ₱2,000weresoldfor₱6,000.Howmuchisthegain(loss)onthesale? a.(345) b.430 c.(667) d.0

Retirement and Replacement methods

Use the following information for the next two questions: ThesmalltoolsaccountofATROCIOUSCRUELCo.hasabalanceof₱600,000asof January1,20x1.Movementsinthisaccountduringtheyearareasfollows:

19.Assuming ATROCIOUS Co. uses the retirement method, how much is the depreciationexpensein20x1?

134,800 b.166,800 c.144,000 d.118,800

20.Assuming ATROCIOUS Co. uses the replacement method, how much is the depreciationexpensein20x1?

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 undertheinventorymethod?

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 equipmentwillbedisposedofatanegligibleamount.

Estimatedrevenuesfromthesoftwareareasfollows:

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 20x1ismostlikelyequalto a.3,000,000 b.2,000,000 c.2,977,667 d.333,333

Leasehold improvements

Use the following information for the next two questions:

On January 1, 20x1, DIMINUTIVE SMALL Co. signed a ten-year lease for office space.DIMINUTIVE hastheoption torenewtheleaseforanadditionalfive-year period on or before January 1, 2x10. During the first half of January 20x2, DIMINUTIVECo.incurredthefollowingcosts:

- ₱3,600,000 for general improvements to the leased premises with an estimatedusefullifeoftenyears.

- ₱400,000 for office furniture and equipment with an estimated useful life of tenyears.

- ₱800,000formovableassemblylineequipmentwithusefullifeof5years.

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 depreciationexpenseontheleaseholdimprovements?

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.OnJanuary1,20x1,DISCORDANTDISAGREEINGCo.acquiredmachineryfora 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. Howmuchisthedepreciationexpensein20x4?

Change in depreciation method (from SYD to DDB)

26.OnJanuary1,20x1,KNAVERASCALCo.acquiredmachineryforatotalcostof ₱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 expensein20x4?

Change in useful life and residual value

27.OnJanuary1,20x1,SMUTTYOBSCENECo.acquiredmachineryforatotalcost of₱80,000,000andestimatedresidualvalueof ₱8,000,000.Themachineryis 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 yearsfromacquisitiondateandtheresidualvalueto₱10,400,000.Howmuch isthedepreciationexpensein20x4?

Improvements and Replacements

Use the following information for the next two questions: ENTREAT Co. acquired an aircraft from BEG, Inc. on January 1, 20x1 for a total cost of ₱24,000,000. The aircraft is estimated to have a useful life of 10 years. ENTREATCo.usesthestraightlinemethodofdepreciation.OnJanuary1,20x5,a majorpartoftheequipmentwasreplacedforatotalcostof₱3,200,000.

28.Assuming ENTREAT Co. determined that the cost of the replaced part is ₱2,000,000,howmuchisthelossonreplacement?

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 muchisthelossonreplacement?

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 historicalcostof₱80,000,000,accumulateddepreciationof₱20,000,000,and anestimatedusefullifeof20yearshasbeenassessedbyanexternalvaluerto have an appraised value of ₱100,000,000. How much is the revaluation surplus?

a.40,000,000 b.28,000,000c.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 historicalcostof₱80,000,000,accumulateddepreciationof₱20,000,000,and anestimatedusefullifeof20yearshasbeenestimatedtohaveareplacement costof₱140,000,000.Howmuchistherevaluationsurplus?

a.31,500,000 b.36,778,750c.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. Informationonrevaluationdateisshownbelow:

Howmuchistherevaluationsurplus? a.45,000,000

Methods of recording revaluation surplus – Replacement cost

Use the following information for the next three questions: On December 31, 20x1, the building of SUBTERFUGE DECEPTION Co. with a historical cost of ₱80,000,000, accumulated depreciation of ₱20,000,000, and an estimatedusefullifeof20yearshasbeenestimatedtohaveareplacementcostof ₱140,000,000.Incometaxrateis30%.

33.Howmuchistherevaluationsurplus?

a.31,500,000 b.36,778,750 c.45,000,000

d.60,000,000

34.AssumingSUBTERFUGECo.usestheproportionalmethod,theentrytorecord therevaluationincludes:

a. adebittoaccumulateddepreciationfor₱15,000,000

b. adebittoaccumulateddepreciationfor₱20,000,000

c. adebittobuildingfor₱25,000,000

d. adebittobuildingfor₱60,000,000

35.AssumingSUBTERFUGECo.usestheeliminationmethod,theentrytorecord therevaluationincludes:

a. acredittoaccumulateddepreciationfor₱20,000,000

b. adebittobuildingfor₱25,000,000

c. adebittoaccumulateddepreciationfor₱15,000,000

d. adebittodeferredtaxfor₱13,500,000

Methods of recording revaluation – Appraised value

Use the following information for the next two questions: On December 31, 20x1, the building of ABC Co. with a historical cost of ₱320,000,000, accumulated depreciation of ₱160,000,000, and an estimated useful life of 20 years has been assessed by an external valuer to have an appraisedvalueof₱200,000,000.Incometaxrateis30%

36.Theentryundertheproportionalmethodtorecordtherevaluationincludes

a. adebittoaccumulateddepreciationfor₱40,000,000

b. acredittoaccumulateddepreciationfor₱20,000,000

c. adebittobuildingfor₱80,000,000

d. acredittobuildingfor₱80,000,000

37.Theentryundertheproportionalmethodtorecordtherevaluationincludes

a. adebittoaccumulateddepreciationfor₱40,000,000

b. adebittoaccumulateddepreciationfor₱20,000,000

c. adebittobuildingfor₱80,000,000

d. acredittobuildingfor₱80,000,000

Revaluation: Change in useful life

Use the following information for the next two questions:

On January 1, 20x1, the building of PRODIGIOUS EXTRAORDINARY Co. with a historicalcostof₱80,000,000purchased5yearsagowithanestimatedusefullife of20yearshasbeenestimatedtohaveareplacementcostof₱140,000,000.The building is estimated to have a remaining useful life of 25 years as of January 1, 20x1.Depreciationiscomputedusingthestraightlinemethod.Incometaxrateis 30%.

38.Howmuchistherevaluationsurplus?

39.Howmuchisthedepreciationexpensein20x1?

Revaluation: Change in residual value and useful life

Use the following information for the next two questions: On December 31, 20x1, the building of COLLOQUY CONVERSATION Co. was revalued.Informationonrevaluationdateisshownbelow:

40.Howmuchistherevaluationsurplus?

41.Howmuchisthedepreciationexpensein20x2?

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 applicabletoprofitsis30%andthetaxrateapplicabletoprofitsmadeonthe saleofpropertyis6%.Howmuchistherevaluationsurplus?

a.42,000,000 b.56,400,000

c.45,000,000

Revaluation decrease representing impairment loss

d.51,428,572

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 lossin20x4?

a.20,000,000 b.4,000,000 c.2,800,000

d.0

Revaluation increase representing reversal of impairment loss

44.OnDecember31,20x1,thelandofCONJUNCTIONUNIONCo.withanoriginal 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.Howmuchisthegainonimpairmentreversalin20x4?

a.8,000,000 b.20,000,000

c.12,000,000 d.0

Sale of item of PPE measured under cost model

45.FORTITUDEENDURANCECo.purchasedequipmentonAugust14,20x1fora totalcostof₱400,000.Theequipmenthasanestimatedusefullifeof10years 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 costsincurredonthesaleamountedto₱8,000.Howmuchisthegain(loss)on thesale?

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 foratotalnetdisposalproceedsof₱6,800,000.Informationofthemachinery asofDecember31,20x1isasfollows:

Howmuchisthegain(loss)onthesale? a.

The answers and solutions to the computational problems above (Multiple choice – Computational (SET B) can be found in the accompanying Teacher’s Manual.

Chapter 15: Theory of Accounts Reviewer

1. Under PAS 16 Property, plant and equipment, which of the following costs relatingtonon-currentassetsshouldbecapitalized?

I. Replacementofabuilding'sroofevery15years

II. Maintenanceofanassetonathree-monthlybasis

III. Installationandassemblycosts

IV. Replacementofsmallsparepartsannually

a.I,III b.I,III,IV c.I,II,III d.I,II,III,IV (ACCA)

2. Whichofthefollowingstatementscorrectlyrelatetoaccountingforproperty, plantandequipment?

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 commissionshouldbeapportionedbetweenthelandandthebuilding.

III. Thepricepaidforaplantassetisactuallyaprepaymentofanexpense.

IV. Treatingacapitalexpenditureasan expense mayoverstatesprofit in the yearafterthisactionwastaken.

V. If a fully depreciated asset with no residual value continues to be used, managementcancontinuetoprovidefordepreciation.

a.II,III,V b.I,II,III,IV

c.II,III,V d.I,II,III,IV,V

3. Aplantassetacquiredbyissuanceofordinarysharesisproperlymeasuredat the

a.Parvalueoftheshares

b.Statedvalueoftheshares

c.Carryingamountoftheassetgiven

d.Fairvalueoftheassetreceived

4. RESTIVE UNEASY Cooperative recently replaced all the tires in two of its trucksataveryinsignificantamount.Thiscostshouldbeaccountedfor

a. asanincreaseinthecostofthetrucks

b. asrepairandmaintenanceexpense

c. asanintangibleasset

d. asareductionintheaccumulateddepreciationofthetrucks (Adapted)

5. The following statements relate to accounting for property, plant and equipment.Choosetheincorrectstatement.

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 shownamongdeferredchargesorotherassets.

c. Whenaunitofpropertyisretiredordisposedofbysale,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. AnoldbuildingformerlyoccupiedbyABCCompanywasreplaced.Thelosson theretirementoftheoldbuildingshould

a. notbecapitalizedbuttreatedasanexpense

b. notbecapitalizedbuttreatedasaloss

c. becapitalizedandincludedinthecostoftheland

d. becapitalizedandincludedinthecostofthenewbuilding

7. Whichofthefollowingstatementsarecorrectlystated?

I. Property, plant and equipment are permitted to be revalued in response toinflation.

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 decliningbalance.

III. Cost of building would include expenditures for service equipment and fixturesmadeapermanentpartofthestructure.

IV. Cost inefficiencies on self-constructed assets whether due to temporary idlecapacity,industrialdisputeorothercauses,shouldnotbeincludedas partofthecostofasset.

V. When used property is acquired, the actual cost in cash or equivalent is generally the proper basis for depreciation, regardless of the previous historyoftheproperty,unlesstheentityusestherevaluationmethod.

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 andequipment?

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 buildingshouldbedepreciatedover20years,thelifeofthebuilding.

II. VaughnCompanyacquiredasitefor theconstructionofanewplant. The title examination fees, surveying fees and property taxes accruing during theperiodofplant constructionshouldbechargedtothelandaccount of thecompany.

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,thischangeisachangeinreportingentity.

IV. Functionaldepreciationisthewearandtear,deteriorationanddecay,and damage,reducingtheusefulnessoftheasset.

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. Thesaleofadepreciableassetresultinginagain,indicatesthattheproceeds fromthesalewere

a.greaterthancost

b.greaterthancarryingamount

10.Improvementsare

a. revenueexpenditures

c.lessthancarryingamount

d.lessthancost

b. debitedtoanappropriateassetaccountwhentheydonotincreaseuseful life but improves efficiency beyond the state or condition originally intendedbymanagement

c. debitedtoanappropriateassetaccountwhentheydonotincreaseuseful life

d. debitedtoaccumulateddepreciationwhentheydonotincreaseusefullife (AICPA)

11.Inorderforacosttobecapitalized(capitalexpenditure), thefollowingmust bepresent:

a. Theusefullifeofanassetmustbeincreased.

b. Thequantityofassetsmustbeincreased.

c. The quality of assets must be increased beyond the condition originally intendedbymanagement.

d. Anyoneofthese. (AICPA)

12.An improvement made to a machine increased its fair value and its production capacity by 25% above the condition originally intended by managementbutwithoutextendingthemachine'susefullife. Thecostofthe improvementshouldbe

a. expensed.

b. debitedtoaccumulateddepreciation.

c. capitalizedinthemachineaccount.

d. allocatedbetweenaccumulateddepreciationandthemachineaccount. (AICPA)

13.Whichofthefollowingisacapitalexpenditure?

a.Paymentofanaccountpayable

c.Paymentofincometaxes

d.Noneofthese (AICPA)

b.Retirementofbondspayable

14.Whichofthefollowingis not acapitalexpenditure?

a. Repairsthatmaintainanassetinoperatingcondition

b. Anaddition

c. Abetterment

d. Areplacement (AICPA)

15.Whenaplantassetissoldforlessthanitscarryingamount

a. cash received plus accumulated depreciation plus loss on disposal equals theoriginalcost

b. originalcostminusaccumulateddepreciationequalscashreceivedminus lossondisposal

c. carryingamountoftheassetpluslossondisposalequalscashreceived

d. cash received plus accumulated depreciation minus loss on disposal equalstheoriginalcost

16.Thesale of adepreciableassetresultingin alossindicatesthat theproceeds fromthesalewere

a.lessthancurrentmarketvalue.

c.greaterthancarryingamount.

d.lessthancarryingamount. (AICPA)

b.greaterthancost.

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 condemnationandreplacement,whatistheneteffectonthecarryingamount offorestlandreportedinBurnham'sbalancesheet?

a. Theamountisincreasedbytheexcessofthereplacementforestland'scost overthecondemnedforestland'scarryingamount.

b. Theamountisincreasedbytheexcessofthereplacementforestland'scost overthecondemnationaward.

c. The amount is increased by the excess of the condemnation award over thecondemnedforestland'scarryingamount.

d. Noeffect,becausethecondemnedforestland'scarryingamountisusedas thereplacementforestland'scarryingamount. (AICPA)

18.A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related

accumulateddepreciationofthedamagedportionareidentifiable.Toaccount fortheseevents,theownershould:

a. Reduceaccumulateddepreciationequaltothecostofrefurbishing.

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. Capitalizethecostofrefurbishingand record alossin thecurrentperiod equaltothecarryingamountofthedamagedportionofthebuilding.

d. Capitalize the cost of refurbishing by adding the cost to the carrying amountofthebuilding. (AICPA)

19.Choosethecorrectstatementabouttheaccountingtreatmentforspecialonetime assessments made by local governments requiring a firm to pay for improvementsincludingstreetlights,sewersandotherinfrastructure.

a. Theyarecapitalizedbutnotdepreciated

b. Ifprobableandestimable,theyareexpensedwhendeterminable

c. Theyareexpensedasincurred

d. Theyarecapitalizedanddepreciatedovertheirusefullife (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 butdidnotaffecttheassemblyline’susefullife.Properaccountingforthecost of theautomationshouldbeto

a. Reportitasanexpense

b. Establishaseparateaccountforthe₱100,000.

c. Allocate the cost of automation between the asset and accumulated depreciationaccounts.

d. Debittoassetaccount.

(Adapted)

21.Choosethecorrectstatement.

a. An operational asset received in exchange for ordinary shares issued by thebuyershouldberecordedattheparvalueofthesecuritiesissuedifthe cashpriceoftheassetisnotknown.

b. Salestaxpaiduponacquisitionofanoperationalassetshouldbeexpensed because such amounts are usually immaterial with respect to the cost of theacquiredasset.

c. Purchased operational assets acquired on a long-term payment plan should be recorded at full cost (including interest and financing charges) onlyifthecostcannotbeestimatedbythepurchaser.

d. A primary principle in recording and reporting operational assets is that theyarerecordedatcostwhenacquiredandsubsequentlyarereportedat costorcostlessaccumulateddepreciation.

(Adapted)

22.Whichofthefollowingstatementistrue?

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. Theonlyrequirementanassetmustmeettobeconsideredanoperational assetisthatitsusefullifeextendovermorethanoneaccountingperiod.

d. Thedetermination ofcostisconceptuallyconsistentbetweenoperational 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,andequipment?

a. The purchase price, freight costs, and installation costs of a productive assetshouldbeincludedintheasset’scost.

b. Proceeds obtained in the process of readying land for its intended purpose, such as from the sale of cleared timber, should be recognized immediatelyasincome.

c. The cost of improvement to equipment incurred after the equipment is placedinthelocationandconditionoriginallyintendedbymanagementis generallyexpensedoutrightly.

d. All necessary costs incurred in the construction of a plant building, from excavationtocompletion,shouldbeconsideredaspartoftheasset’scost

24.Whenaplantassetissoldforlessthanitscarryingamount:

a. cashreceivedplusaccumulateddepreciationplusgainondisposalequals theoriginalcost.

b. cash received plus accumulated depreciation minus loss on disposal equalstheoriginalcost.

c. costoftheassetminuslossondisposalequalscashreceived.

d. original cost minus accumulated depreciation equals cash received plus lossondisposal.

Depreciation methods

25.Depreciation

a. isanallocationofthecostofproperty,plantandequipmentoverthetime periodofusefulness,inasystematicandrationalmanner.

b. isaprocessofrecognizingthedecreasingvalueofanassetovertime.

c. isacashexpense.

d. expenseof₱2,000reflectsa ₱2,000increaseinliquidfunds.

26.Choosethebestdescriptionofdepreciableamount.

a.minimumcarryingamount

b.carryingamount

c.residualvalue

d.initialcostlessresidualvalue

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 depreciationwillbeequaltotheoriginalcostoftheassetunderwhichofthe followingdepreciationmethods?

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.Obsolescenceofadepreciableassetmaybecausedby

a. Technologicalchanges

b. Improvementinproductionmethod

c. Changeinmarketdemandfortheproductorserviceoutput

d. Legalorotherrestrictions

e. (a),(b),(c)and(d)above

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 areinitialoperatinglosses.Theseshouldbe

a. Deferredandamortizedoverareasonableperiodoftime.

b. Expensedandchargedtotheincomestatement.

c. Capitalizedaspartofthecostoftheplantasadirectlyattributablecost.

d. Takentoretainedearningssinceitisunreasonabletopresentitaspartof thecurrentyear’sincomestatement.

(Adapted)

30.Choosetheincorrectstatement.

a. Landandanoldbuildingthereonarepurchasedwiththeintenttobuilda new and better structure. Upon demolition of the old structure, the total purchasepriceplusthedemolitioncostshouldbeincludedasland.

b. When an operational asset (such as land or buildings) is purchased, any unpaidpropertytaxes(fortheperiodpriortothepurchasedate)thatare paidbythepurchasershouldberecordedaspartofthecostoftheasset.

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 discountperiod.

d. If operational assets are acquired in exchange for bonds, issued by the buyer,theassetsshouldbecapitalizedatthefairvalueoftheoperational assets received or the fair value of the bonds, whichever is more reliably determinable.

(Adapted)

31.Whichofthefollowingstatementsistrue?

I. Depreciation expense shown on a company's income statement is always equaltothedepreciationexpenseonthecompany'sincometaxreturn.

II. The purpose of depreciation is to have the balance sheet report the currentvalueofanasset.

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. Anasset'susefullifeisthesameasitsphysicallife.

V. One company might depreciate a new computer over three years while anothercompanymightdepreciatethesamemodelofcomputeroverfive years...andbothcompaniesareright.

VI. Depreciation expense is shown on the income statement in order to achieveaccounting'smatchingprinciple.

a.III,V,VI

b.I,III,VI

c.III,IV,V,VI

d.V,VI

32.Whichofthefollowingdepreciationmethodsisnotanacceleratedmethod?

a.Doubledecliningbalance

b.Straightline

c.Sum-of-the-years’digits

d.150%decliningbalance

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 uninstallingtheassetisestimatedat₱1,000.Ifthecompanyusesthesum-ofthe-years’ digits method, the depreciation expense in the third year is computedas

a.10%multipliedby₱102,000

b.20%multipliedby₱93,000

(Adapted)

c.20%multipliedby₱92,000

d.20%multipliedby₱102,000

34.Adepreciableassethasanestimated15%residualvalue.Underwhichofthe following methods, properly applied, would the accumulated depreciation equaltheoriginalcostattheendoftheasset’sestimatedusefullife?

Straight-line Double-declining balance

a.Yes Yes

b.Yes No

c.No Yes

d.No No (AICPA)

35.Anentityoperatesachainofhotelsandisproposingtostopdepreciatingthe hotel equipment and expense the cost of replacement each year. The entity should:

a. Notcapitalizegroupsofassetsandexpensethereplacementcost

b. Notcapitalizegroupsofassetsandexpensethem

c. Capitalizegroupsofassetsbutnotdepreciatethem

d. Capitalizeallassetswithausefullifeofmorethanoneyearanddepreciate them (ACCA)

36.An entity manufactures components for the car industry and uses self-made tools,whichitcontinuallydevelops.Costsoftoolingaredepreciatedoverfour years and the tools are manufactured in its one factory, where 4% of the spaceisallocatedtodevelopment.Thefactorydepreciationchargeshould:

a. Be allocated on the basis of the value of the tools compared with the factoryoutputtothecostofthetooling

b. Be allocated on the basis of 1% per year for four years to the cost of the tooling

c. Notbeallocatedtothecostofthetooling

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,hasausefullifeof15yearsandisdepreciatedonastraight-linebasisto a zero residual value. The value of the asset at December 31, 20x8 was ₱14.5M.AtDecember31,20x9,themarketvalueoftheassetwas₱12.5M.The accountingentryat31December20x9wouldbe:

a. Depreciation ₱1.04M to income statement, fall in value of ₱0.5M charged torevaluationreserveand₱0.46Mtotheincomestatement

b. Depreciation₱1.04Mtoincomestatement,fallinvalueof₱0.96Mcharged torevaluationreserve

c. Depreciation ₱1M to income statement, fall in value of ₱0.5M charged to revaluationreserveand₱0.5Mtotheincomestatement

d. Depreciation ₱1M to income statement, fall in value of ₱0.96M to the incomestatement (ACCA)

38.Agraphisset upwith "depreciation expense"onthevertical axisand"time" onthehorizontalaxis.Assuminglinearrelationships,howwouldthelinesfor straight-line and sum-of-the-years'-digits depreciation expense, respectively, bedrawnonthisgraph?

Straight-line SYD

a. Vertically Slopingdowntotheright.

b. Vertically Slopinguptotheright.

c. Horizontally Slopingdowntotheright.

d. Horizontally Slopinguptotheright.

39.Underthecompositemethod,thecomposite

a. rateisthetotalcostdividedbythetotalannualdepreciation

b. rateisthetotalannualdepreciationdividedbythetotaldepreciablecost

c. lifeisthetotalcostdividedbythetotalannualdepreciation

d. lifeisthetotaldepreciablecostdividedbythetotalannualdepreciation.

40.Thecompositedepreciationmethod

a. isappliedtoagroupofhomogenousassets

b. isanacceleratedmethodofdepreciation

c. doesnotrecognize gainorloss onthe retirement ofspecificassets in the group

d. excludessalvagevaluefromthebaseofthedepreciationcalculation (AICPA)

41.Underwhatconditionswilltheservicehoursandproductiveoutputmethods ofdepreciationresultinthesamedepreciationexpenseforaparticularyear?

a. When the total estimated service hours and production in units are the same.

b. Whentheratioofactualservicehourstoproductiveoutputfortheyearis thesameastheratiooftheestimatesusedintheirrespectivedepreciation rates.

c. Whensalvagevalueiszero.

d. Thetwomethodscannotproducethesamedepreciationexpenseamount foranygivenyear.

42.Which of the following are correctly stated regarding the accounting for property,plantandequipment?

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 depreciationthandoesthestraightlinemethod.

III. Composite depreciation method does not recognize gain or loss on retirementofasingleassetinthegroup.

IV. Depreciationistheprocessofperiodicallywritingdownanassettoarrive atitsfairmarketvalue.

V. Depreciation accounting automatically provides the cash required to replaceplantassetsastheywearout.

a.I,II,III,V

b.I,II,III

43.Theuseofthedouble-decliningbalancemethod

c.I,III d.II,III

I. resultsinadecreasingchargetodepreciationexpense.

II. meanssalvagevalueisnotdeductedincomputingthedepreciationbase.

III. meansthecarryingamountshouldnotbereducedbelowsalvagevalue.

a.I,II,andIII b.I,II c.I,III d.none

44.Whichofthefollowingstatementsbestdescribes'residualvalue'?

a. The estimated net amount currently obtainable if the asset were at the endofitsusefullife

b. The present value of estimated future cash flows expected to arise from thecontinuinguseoftheassetandfromitsultimatedisposal

c. The amount at which the asset could be exchanged between knowledgeable,willingpartiesinanarm'slengthtransaction

d. The amount of cash or cash equivalents that could currently be obtained bysellingtheassetinanorderlydisposal (ACCA)

45.Which of the following terms best describes the cost (or an amount substitutedforcost)ofanassetlessitsresidualvalue?

a.Revaluedamount

c.Recoverableamount

d.Depreciableamount (ACCA)

b.Carryingamount

46.Thecarryingamountofanassetisdefinedas

a. Costminusresidualvalue

b. Cost minus accumulated depreciation minus accumulated impairment losses

c. Costminusresidualvalueminusaccumulateddepreciation

d. Estimatedfairmarketvalue

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. Theamount at whichtheassetisrecognizedin thestatementoffinancial position after deducting any accumulated depreciation and accumulated impairmentlosses

c. Thehigheroftheasset'snetsellingpriceanditsvalueinuse

d. Thefairvalueoftheassetatthedateofarevaluationlessanysubsequent accumulatedimpairmentlosses (ACCA)

48.Whichofthefollowingstatementsbestdescribestheterm'depreciation'?

a. The systematic allocation of an asset's cost less residual value over its usefullife

b. Theremovalofanassetfromanentity'sstatementoffinancialposition

c. The amount by which the recoverable amount of an asset exceeds its carryingamount

d. The amount by which the carrying amount of an asset exceeds its recoverableamount (ACCA)

49.Whichofthefollowingtermsbestdescribesthesystematicallocationoverits usefullifeofthecostofanasset,orotheramountsubstitutedforcost,lessits residualvalue?

a.Depreciation b.Derecognition c.Impairment d.Valueinuse (ACCA)

50.Whichofthefollowingtermsbestdescribesthepricethatwouldbereceived tosellanassetorpaidtotransferaliabilityinanorderlytransactionbetween marketparticipantsatthemeasurementdate?

a.Fairvalue b.Valueinuse c.Residualvalue d.Realizablevalue (ACCA)

51.Whichofthefollowingstatementsregardingdepreciationistrue,accordingto PAS16 Property, plant and equipment?

a. Anassetmustbedepreciatedfromthe dateof itspurchase tothedateof sale

b. The annual depreciation charge should be constant over the life of the asset

c. Thetotalcostofanassetmusteventuallybedepreciated

d. If the carrying amount of an asset is less than the residual value, depreciationisnotcharged (ACCA)

52.Thestraight-linemethodofdepreciationisbasedontheassumptionthat

a. Theoperatingefficiencyoftheassetdecreasesinthelateryears.

b. Servicevaluedeclinesasafunctionoftimeratherthanofuse.

c. Servicevaluedeclinesasafunctionofobsolescenceratherthanoftime.

d. Physicalwearandteararemoreimportantthaneconomicobsolescence. (AICPA)

53.Aprincipalobjectiontothestraight-linemethodofdepreciationisthatit

a. Givessmallerperiodicwrite-offsthandecreasingchargemethods.

b. Ignoresvariationsintherateofassetuse.

c. Providesforthedecliningproductivityofanagingasset.

d. Tends to result in a constant rate of return on a diminishing investment use. (RPCPA)

54.Thestraight-linemethodofdepreciationisnotappropriatefor

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 substantiallywithage.

c. Equipmentwithusefullifethatisnotaffectedbytheamountofuse.

d. Equipmentthatisusedconsistentlyeveryperiod. (RPCPA)

55.Which of the following statements correctly relate to accounting for depreciation?

I. Thebesttheoreticalsupportforusinganaccelerateddepreciationmethod is that expenses shouldbe allocated in a certain manner so that earnings willbeequalized.

II. When partial use of a building under construction can be identified with an income producing center and the corresponding cost can be ascertained,therelateddepreciationshouldbeallocatedtothatoperation

III. Oneofthereasonsforrecordingdepreciation istohavepropermatching ofcostsandrevenues.

IV. Theperiodicexpenseassociatedwiththeuseoflandiscalleddepreciation 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.Anassethasanine-yearusefullifeandistobedepreciatedunderthesum-ofthe-years’digitsmethod.Theannualdepreciationexpensewouldbethesame asthatunderthestraightlinedepreciationmethodin

a. thethirdyearinthelifeoftheasset

b. thefifthyearofthelifeoftheasset

c. theseventhyearofthelifeoftheasset

d. theninthyearofthelifeoftheasset

(Adapted)

57.Whichofthefollowingisnotundertime-factormethoddepreciation?

a.straightline c.decliningbalance

b.SYDmethod d.productiveoutput

58.Depreciation which arises from obsolescence or inadequacy to perform efficientlyiscalled:

a.periodic b.physical c.normal d.functional

59.The depreciation method that provides higher depreciation expense in the earlyyearsandlowerchargesinthelateyearsis

a.SYD c.unitsofproductionandhoursofusemethod

b.straightline d.FIFO

60.Which of the following is an economic factor related to the service life of a long-livedasset?

a.obsolescence

b.wearandtear

c.decay

d.casualties

61.AandBcompaniespurchaseidenticalequipmenthavinganestimatedservice 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 companiesareidenticalinallotherrespects:

a. if both companies keep the asset for five years, B company’s 5-year total fordepreciationexpensewillbegreaterthanAcompany’s5-yeartotal.

b. iftheassetissoldafter three years, Acompanyismore likely toreporta gainonthetransactionthanBcompany.

c. Acompany’sdepreciationexpensewillbehigherduringthefirstyearthan Bcompany’s.

d. A company’s net income will be lower during the 4th year than B company’s.

(Adapted)

62.Whichstatement(s)is(are)correct?

I. Depreciation onunitsofproperty, plant andequipmentthat arereserved orstandbyshouldnotbecontinued

II. Art collections should not be depreciated on a systematic and rational basisoverthelifeoftheassetirrespectiveoftheearningsoftheentity

a.true,true b.true,false c.false,true

d.false,false

63.Thehighestamountofdepreciationwillusuallyberecordedinthelastyearof anasset’slifewhenusing:

a.straightline b.SYD c.double-decliningbalance

d.eitherborc

64.Which of the following depreciation methods usually results in paying the lowesttaxesintheearlyyearsofanassetslife?

a.SYD c.straightline

b.doubledecliningbalance

d.unitsofproductionmethod

65.Whichofthefollowingis/aretrueaboutstraight-linedepreciation?

I. With constant pre-depreciation income, it leads to an increasing rate of returnovertime.

II. Itignoreslossofproductivityandincreasedmaintenancecostsovertime.

III. It leads to higher taxes in later years compared to accelerated depreciationmethods.

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 ₱16,000andaresidualvalueof₱4,000.Thefirmfollowsthedoubledeclining method of depreciation. In the second year, the rate of depreciation for the firm'sassetisclosestto

a.25% b.17% c.9.5% d.12.5%

67.Withrespecttodepreciationmethods,whichofthefollowingistrue?

I. Accelerated depreciation methods lead to higher depreciation expense overtime.

II. TheStraight-linemethodcauseshighertaxesinlateryearscomparedwith theaccelerateddepreciationmethods.

III. Acceleratedmethodsarepreferredfortaxreasons.

a.IIIonly b.II&III c.I&III d.IIonly

68.An analysis of an entity's financial statements indicates that the average age ofitsassetsisdeclining.Thiscouldbeduetowhichofthefollowing?

I. Theentityisacquiringnewassetswithlongerdepreciablelives.

II. Theentity'scapitalexpendituresareoutpacingdepreciation.

III. Theentityisnotusingitsassetsasintensivelyasitshould.

IV. Theentityisoperatinginitsmaturityphase.

a.I&IV b.I&II

c.I,II,III&IVd.III&IV

*Hint:Averageageofassetscanbecomputedusinganyofthefollowing:

i. Average age: (Accumulated depreciation ÷ Depreciation expense) = x years

ii. Relative age: (Accumulated depreciation ÷ Total cost of depreciable assets)=%ofage

iii. Average depreciable life: (Total depreciable amount ÷ Depreciation expense)=xyears

69.Allofthefollowingareattributesofdepreciationexcept

a. depreciation stays on the statement of financial position as long as the assetisownedbytheentity.

b. depreciationprovidesfundsforreplacementofanasset.

c. depreciationistheallocationofthecostofanassetoveritsusefullife.

d. the purpose of depreciation is to charge against operations, by means of allocation,thecostofanasset.

70.Whichofthefollowingstatementsisincorrect?

a. Theterm"revenueexpenditures"referstothoseamountspaidoutwhich areexpectedtoproviderevenueinthecurrentperiodorafutureperiod.

b. Expenditure for one item which has questionable or highly uncertain futurebenefitusuallywillberecognizedasexpensewhenincurred.

c. Subsequent to acquisition, operationalassetsusually are reported at cost orcostlessaccumulateddepreciation,depletion,oramortization.

d. A primary principle in recording and reporting operational assets is that theyarerecordedatcostwhenacquiredandsubsequentlyarereportedat costorcostlessaccumulateddepreciation.

(Adapted)

71.Amachinewitha4-yearestimatedusefullifeandanestimated15%residual valuewasacquiredonJanuary1.Woulddepreciationexpenseusingthesum-

of-the-year's-digit method be higher or lower than depreciation expense usingthedouble-declining-balance-methodinthefirstandsecondyears?

First year Second year

a. Higher Higher

b. Higher Lower

c. Lower Higher

d. Lower Lower (AICPA)

72.Anexchangeofassetswithnocashexchanged:

a. recordsthecostoftheassetreceivedatthebookvalueoftheassetgiven.

b. recordstheassetreceivedatthefairvalueoftheassetgiven.

c. culminatestoanearningprocess.

d. resultsinrecognitionofalossorgainofeachparty. (Adapted)

73.Aprimarilytheoreticalobjectiontothestraight-linemethodofdepreciationis thatit:

a. gives a lower periodic expense than the accelerated method over the life oftheasset.

b. recognizesthedecliningproductivityoftheasset.

c. ignoresvariationintherateoftheassetuseamongperiods.

d. tends to result in a constant rate of return on a diminishing investment base. (AICPA)

74.Periodicdepreciationexpenseisprimarilytheresultofapplyingthe:

a.revenueprinciple

b.full-disclosure

c.systematicandrationalallocation

d.matching

75.Allofthefollowingarecausesofdepreciationexcept:

a.obsolescenceoftheasset

c.wearandtearfromoperationaluse

d.declineincurrentmarketvalueoftheasset (AICPA)

b.inadequacyoftheassets

76.Accountingfordepreciationprimarily:

a. is an accounting process which allocates long-lived asset cost to appropriateaccountingperiods.

b. isusedtoindicateadeclineinmarketvalueofalong-livedasset.

c. isaprocessofassetvaluationforbalancesheetpurposes.

d. appliesonlytolong-liveintangibleassets. (AICPA)

77.Which of the following items relevant to the depreciation of an asset can be negative?

a.residualvalue

c.usefullife

d.carryingamountsubsequenttoacquisition (AICPA)

b.depreciableamount

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.Productiveoutput

d.Straightline (AICPA)

b.Doubledecliningbalance

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 operationalassets.

d. Itgenerallyresultsinthelowestearnings. (Adapted)

80.Thefollowingstatementsrelatetofunctionaldepreciation

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 depreciableassetthatcanperformforthesamefunctionatasubstantially lowercost.

II. Obsolescenceresultswhenanassetisnolongersuitableforthesizeofthe company’soperations.

a.True,true bTrue,false

c.False,true

d.False,false

81.A method that excludes residual value from the base for the depreciation calculationis

a.SYD

c.productiveoutput

d.straightline (AICPA)

b.Doubledecliningbalance

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, depreciationexpenseinthesecondyearwillbe<ListB>. ListA ListB

a.

b.

c.

d.

digits

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

d.Straight-line (Adapted)

b.Diminishing-balance

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 percentageofthetotaldepreciablecostthatwillbeexpensedinthethirdyear is

a.10% b.25%

c.20% d.70% (Adapted)

85.The following statements relate to depreciation accounting, choose the incorrectone

a. Depreciation, normally, should not be recognized on property, plant and equipment construction period or while new equipment is undergoing testingandbreakinginuntilsuchassetsarecapableofbeingused

b. When partial use of the asset, during construction can be identified with an income-producing center and the corresponding cost can be ascertained,therelateddepreciationshouldheallocatedtothatoperation.

c. Depreciation should not be continued on units of property, plant and equipment that are reserved or standby, or idle either temporarily or for anextendedperiod.

d. When used property is acquired, the actual cost in cash or equivalent is generally the proper basis for depreciation, regardless of the previous historyoftheproperty

86.Aplantfacilityhasanoriginallyestimatedphysicallifeequalto15years.Asa result of accelerated usage, it is now estimated that the physical life will be reducedby 3 years. Thedepreciation rateappliedtothisfacilityneed notbe changedifthedepreciationmethodusedis

a. SYD

b. Doubledecliningbalance

c. Unitsofoutputorhoursofusemethod

d. Straightlinemethod

e. Therateshouldbechangedunderallofthesemethods

87.Amachinewitha4-yearusefullifeanda15%salvagevaluewasacquiredon January1,20x2.Theincreaseinaccumulateddepreciationfor20x3usingthe double-decliningbalancemethodwouldbe

a.initialcostx85%x50%

b.initialcostx85%x50%x50%

c.initialcostx50%

d.initialcostx50%x50%

88.Accumulateddepreciation,asusedinaccounting,represents.

a. fundssetasidetoreplaceassets.

b. earnings retained in the business that will be used to purchase another operationalassetwhentherelatedassetbecomesfullydepreciated.

c. theallocationofthecostofadepreciableassetrecognizedinprofitorloss duringtheperiod.

d. the portion of the asset’s cost that is written off as an expense since the acquisitiondate.

89.Whichofthefollowingstatementsismostlikelynotcorrect?

a. Periodic allocations of acquisition cost, made on a systemic and rational basis,arerecognizedascurrentexpenseinconformitywiththematching principle.

b. Depreciationaccountingisaprocessofvaluation,notofallocation.

c. At acquisition, tangible, operational assets are recorded at cost on the basisofthecostprinciple.

d. Subsequent to acquisition, tangible operational assets that have a limited life are reported at the cost recognized at acquisition date less accumulatedallocationsofsuchcost.

90.Depreciation is a variable (as opposed to fixed) expense if the depreciation methodusedforreportingpurposesis:

a.decliningbalance

b.units-of-production

c.straightline

d.SYD

91.Whichofthefollowingmethodspermitstotaldepreciationonaplantassetto exceeddepreciablecost?

a. Straight-line

b. Decliningbalance

c. Sumofyear'sdigits

d. Noacceptabledepreciationmethod

e. Allacceptablemethodsifsalvagevalueisnotzero (Adapted)

92.Choose the incorrect statement concerning the half-year convention as it appliestodepreciation.

a. Itcanbeusedonlyfortaxpurposes.

b. Itaddsayeartotheclasslifeoftheassetfortaxpurposes.

c. Itreducestheacceleratednatureofthededuction.

d. Itresultsindepreciationrateequaltothestraight-lineratebasedonclass lifeinthefirstyearoftheasset'slife. (AICPA)

93.For each succeeding period, the units-of-production method of depreciation usuallyrecognizesanamountofdepreciationexpensethatis:

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 upwardordownwarddirection?

a.SYD

b.outputorservicehours

c.straightline

d.decliningbalance

95.Which of the following is/are advantages of accelerated methods of depreciation?

I. They implicitly recognize the loss of productivity and increased maintenancecostsovertime.

II. They allow deferral of taxes compared to the straight-line method, thus makingmorecashavailableforcurrentoperations.

III. Thelower depreciation chargesin lateryears compensateforthegreater uncertaintyinfuturerevenues.

a.I&III b.IIonly

c.I,II&III

d.I&II

96.Anend-of-periodadjustmentfordepreciationoffixedassetsisnecessary

a. forproperstatementofprofit

b. tobeconsistentwiththematchingprinciple

c. torecognizetheexpenseofusingfixedassets

d. alloftheseanswersarecorrect

97.Depreciationexpenseforfixedassetsisrecorded

a. foreachperiodtheassetisinuse

b. asaliabilityuntiltheassetissold

c. attheendofeachperiodduringtheasset'susefullife

d. whentheassetissold

98.Changesindepreciationmethods,usefullives,andresidualvalues

a. arechangesinaccountingestimatesaccountedforprospectively

b. arechangesinaccountingestimatesaccountedforretrospectively

c. arechangesinaccountingpoliciesaccountedforprospectively

d. doesnotaffectpreviouslyrecognizedexpenses,aswellasfutureexpenses

99.Ifthereisachangeinusefullife,depreciationmethod,orresidualvalue

a. theaccountantshouldcomputefirstthecarryingamountoftheassetasof the beginning of the period of change; thereafter, the carrying amount is allocatedovertheremainingrevisedusefullifeusingthenewdepreciation methodorrevisedresidualvalue

b. the accountant should compute the carrying amount of an asset as if the newdepreciationmethod,revisedusefullifeorrevisedresidualvaluehad beenusedallalong

c. theaccountantisinforverycomplexaccountingcomputationsandshould consulthercollegeinstructorfirstbeforedoinganything

d. there should be no changes in useful lives, depreciation methods, or residualvaluesbecauseonceselectedordetermined,theyareirrevocable, accordingtoaccountant’sstandards

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 revaluesomeofitsproperty,plantandequipment.Whichoneofthefollowing optionscomplieswithPAS16?

a. Revalueonlythosepartsofthefleetthathaveincreasedinvalue

b. Revalueonlythecarsandnottheexecutivevehicles

c. Revalueonlyone-halfofeachclassofproperty,plantandequipment

d. Revalueanentireclassofproperty,plantandequipment (ACCA)

101. Incaseofdownwardrevaluationofanasset,whichisrevaluedforthefirst time,theaccounttobedebitedis

a.fixedassetaccount

b.revaluationreserve

c.profitorlossaccount

d.generalreserve

102. AnentityhasapolicyofrevaluingitsPPE.Anassetcost₱5MonJanuary1, 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.Thefallinvaluewillbeaccountedforasfollows:

a. Depreciation ₱1M and fall in value of ₱200,000 both to the income statement

b. Depreciation₱1Mandfallinvalueof₱200,000bothtothereserves

c. Depreciation₱1Mtoincomestatementandfallinvalueof₱200,000tothe reserves

d. Depreciation ₱1M to the income statement and fall in value of ₱200,000 ignoreduntilthereisarevaluationsurplus (ACCA)

103. Appraisalvalueis:

a. the revalued amount of property, plant and equipment determined by recognizedspecialistsorauthorities

b. the value per appraisal computed by deducting observed depreciation fromappraisedvalue

c. computedbydeductinghistoricalcostfromappraisedvalue

d. theexcessofsoundvalueovernetbookvalue

104. Whenrevaluedamountsaretobeincorporatedinthefinancialstatements thefollowingrequirementsaretobeobserved:

I. theappraisalmustbemadeonlybyarecognizedspecialistindependentof thecompanywhichownstheproperty

II. depreciationtobechargedtooperationsshouldbebasedoncostonly

III. the revaluation surplus should be presented on the face of statement of financialpositionunderequityasaseparatelineiteminaccordancewith theminimumlineitemsunderPAS1

IV. certainrequireddisclosuresshouldbemadeinthefinancialstatements

V. theappraisalshouldcoverallproperty,plantandequipmentitems

a.I,II,III,IV,andV

b.I,III,IVandVonly

c.I,IIIandIVonly

d.IVonly

105. Whichofthefollowingincorrectlyrelate(s)totheaccountingforproperty, plantandequipment?

I. Sum of the years’ digits method is one of the accelerated methods of depreciationthatprovideshigherdepreciationexpenseintheearlyyears andlowerchargesinthelateyears.

II. Mortgageorliensonproperty,plantandequipmentneednotbedisclosed inthefinancialstatementsornotes.

III. Anyproperty,plantandequipmentthatisidleorabandonedandremains in the property, plant and equipment account should be revalued if this resultsinincreasingtheircarryingvalues.

IV. Depreciationofappraisedpropertieschargedtooperationsshallbebased on the appraised values and it should be computed from the date of appraisal.

V. Anentitymaybeallowedto, revalueitsproperty, plantandequipment if their current value is substantially more than their cost provided the companyadherestotheprovisionsofPAS

a.I,IVandV b.I,IV c.II,III d.II,III,V

106. Whenanappraisedpropertyisretired,therevaluationsurpluspertaining tosuchassetmaybehandled

a. revaluation surplus which can be subsequently transferred to unappropriatedretainedearnings

b. revaluation surplus which can be subsequently transferred to other appraisedpropertynotretired

c. revaluation surplus which can be subsequently transferred to other propertiesnotrevalued

d. revaluation surplus which cannot be subsequently transferred to unappropriatedretainedearnings (RPCPA)

107. The value per appraisal or the value computed by deducting observed depreciationfromreplacementcostiscalled

a.revaluationsurplus

b.appraisalvalue

c.soundvalue

d.replacementcost

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 PAS16?

a. Revalue only one-half of each class of property, plant, and equipment, as thatmethodislesscumbersomeandeasycomparedtorevaluingallassets together.

b. Revalueanentireclassofproperty,plant,andequipment.

c. Revalueoneshipatatime,asitiseasierthanrevaluingallshipstogether.

d. Sinceassetsarebeingrevaluedregularly,thereisnoneedtodepreciate. (Adapted)

109. UnderPAS16,revaluationofproperty,plantandequipmenttoappraised value is an acceptable alternative to historical cost provided certain

requirements are complied with. Which of the following is not one of the requirements?

a. the appraisal shouldbe made by a competent and independent specialist onceayearateachendofreportingperiod.

b. depreciation to be charged to operations should be based on appraised valuesoritsequivalent

c. therevaluationsurplusshouldbepresentedinequity

d. appropriatedisclosuresshouldbemadeinthefinancialstatements

(Adapted)

110. PAS16requiresthatrevaluationsurplusresultingfrominitialrevaluation of property, plant, and equipment should be treated in one of the following ways.WhichofthefouroptionsmirrorstherequirementsofPAS16?

a. Creditedtoretainedearningsasthisisanunrealizedgain.

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 revaluedandcreditedtoareservecaptioned“revaluationsurplus,”which ispresentedunder“equity.”

(Adapted)

111. Which of the following is correct regarding the revaluation model as it is appliedtoPPE?

a. Whentherevaluationmodelisused,depreciationceases.

b. The appropriate basis for revaluation is replacement cost without any adjustmentwhatsoever.

c. When replacement cost is used, observed depreciation should first be deductedtoarriveatthedepreciatedreplacementcost.

d. Observed depreciation is determined through a very complex computation.

112. Thefollowingstatementscorrectlyrelatetotherevaluationmodel.

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 onarollingbasisispermittedsolongas revaluationis completedwithinashortperiod.

III. Iffairvaluesarevolatile,revaluationshouldbemadeonanannualbasis.If not,revaluationmaybemadeevery3to5years.

IV. Revalued amounts are required under PAS 16 to be determined by independentprofessionals.

a.II,III b.I,II,III c.II,III,IV d.I,II,III,IV

113. Revaluationsurplusmaybecomputedas

a. Replacementcost minus Carryingamount

b. AppraisedvalueorDepreciatedreplacementcost minus Carryingamount

c. Replacementcost minus Observeddepreciation

d. Accumulated depreciation divided by Historical cost multiplied by Replacementcost

114. When the asset being revalued has no residual value, observed depreciationmaybecomputedas

a. Replacementcost minus Carryingamount

b. AppraisedvalueorDepreciatedreplacementcost minus Carryingamount

c. Replacementcost minus Observeddepreciation

d. Accumulated depreciation divided by Historical cost multiplied by Replacementcost

115. Whentheassetbeingrevaluedhasaresidualvalue,observeddepreciation maybecomputedas

a. Replacementcost minus Carryingamount

b. Accumulated depreciation divided by Depreciable amount multiplied by Depreciableamountofreplacementcost

c. Replacementcost minus Observeddepreciation

d. Accumulated depreciation divided by Historical cost multiplied by Replacementcost

116. Whenthereisachangeinusefullifeasaresultofrevaluation,

a. the computation of revaluation surplus is affected by a series of adjustmentsandcomplexcomputations

b. onlythecomputationforobserveddepreciationisaffected

c. the revised useful life is disregarded when computing for revaluation surplusandsubsequentdepreciation

d. the computation of revaluation surplus is unaffected, observed depreciation is computed in the same way as if there was no change in usefullife

117. Whentherevaluedassetisdepreciable,

a. aportionoftherevaluationsurplusisperiodicallytransferredtoretained earningsthroughprofitorloss.

b. a portion of the revaluation surplus may be periodically transferred directlytoretainedearnings.

c. no portion shouldbe transferred periodically to retained earnings unless theassetisderecognized.

d. revaluationsurplusispresentedinequityandmustbetransferredonlyto retainedearningswhentherevaluedassetisderecognized.

118. A long-term asset currently has a carrying amount of ₱45,000 and a salvagevalueof₱5,000.Itwasacquired3yearsagoatacostof₱75,000.Ifthe firm uses straight-line depreciation, how many more years is the asset expectedtobeinservice?

a.5years b.4years c.6years d.7years

Disclosure

119. Which of the following disclosures must be made under PAS16 Property, plant and equipment?

I. Theexistenceandamountsofrestrictionsontitle

II. Anarrativediscussionoffuturecapitalexpenditureplans

III. Thedisposalproceedsofeachmajorassetsoldintheperiod

IV. Themeasurementbasesusedfordeterminingthegrosscarryingamount

a.I,IV b.I,II,IV c.I,III,IV d.I,II,III,IV (ACCA)

120. WhichofthefollowingisarequireddisclosureunderPAS16?

a. thedescriptionofeachitemofPPE,theirnature,andthepurposeoftheir acquisition.

b. the depreciation methods used unless the PPE is measured under revaluationmodel

c. lapsingschedule

d. allofthese

121. AllofthefollowingarerequireddisclosureunderPAS16,except?

a. accountingpoliciesandestimatesofusefullivesandresidualvalue

b. reconciliationofcarryingamountsatthebeginningandendoftheyear

c. commitmentsrelatedtoitemsofproperty,plant,andequipment

d. changesinfairvaluesofassetsmeasuredundercostmodel

Chapter 15 - Suggested answers to theory of accounts questions

Chapter 16 Depletion of Mineral Resources

Chapter 16: Multiple choice – Computational (SET B) – (For classroom instruction purposes)

Recognition of depletion in the financial statements

Use the following information for the next two questions:

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 OBSTREPEROUSMiningCorp.tocapitalizeallcostsofexplorationandevaluation of mineral resources. Intangible development costs for drilling, tunnels, shafts, andwellsincurredbeforeopeningthemineamountedto₱340,00,000.Attheend 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. OBSTREPEROUSMiningCorp.estimatesthattheminewillprovide approximately 100,000,000 ounces of gold. Actual ounce of gold mined in 20x2 totaled300,000ounces.

1. Howmuchisthedepletionchargein20x2? 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) statementofprofitorlossandothercomprehensiveincome?

Changes in estimates

Use the following information for the next two questions: In20x1, BUCOLICRURALCo. acquiredland foratotalcost of ₱40,000,000to be usedtoquarrymarble,limestone,andconstructionaggregates.Costsincurredto obtainlegalrighttoexplorethepropertyamountedto₱8,000,000.Expenditures incurred in the exploration for and evaluation of mineral resources before technicalfeasibilityandcommercialviabilityofextractingamineralresourceare 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. expectstosellthelandfor ₱4,800,000afterresource 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 capitalizeallexplorationcosts.

Actualunitsquarriedin20x1through20x4totaled30,000,000units.OnJanuary 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 in20x5totaled6,000,000units.

3. Howmuchisthedepletionchargein20x5?

a.13,284,000 b.13,480,000 c.13,280,000 d.13,248,000

4. WhatisthecarryingamountofthewastingassetonDecember31,20x5?

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. Totalcostsofacquisition,exploration,andintangibledevelopmentamounted to₱40,000,000.Itwasestimatedthattotalrecoverablereservesis50,000,000 units.Totalunitsextractedfrom20x1through20x4totaled30,000,000units. In20x5,afterextracting5,000,000units,itwasestimatedthattheremaining recoverablereservesis20,000,000units.Howmuchisthedepletionchargein 20x5?

a.3,200,000 b.3,333,333 c.3,266,667 d.3,400,000

Immovable tangible equipment with shorter life Use the following information for the next three questions: 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 ₱32,000,000andimmovabletangibleequipmentcostsfordrillingrigfoundation totaled₱24,000,000.

Estimatedrecoverablereservesfromthemineare2,100,000units.Itisestimated 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.Actualunitsextractedduring20x1are320,000units.

6. Howmuchisthe20x1depreciationontheimmovabletangibleequipment?

7. Howmuchisthe20x1depletionofthenaturalresource?

8. Howmuchisthe20x1depreciationonthemovabletangibleequipment?

Immovable tangible equipment with longer life Use the following information for the next three questions: In 20x1, DIAPHANOUS TRANSPARENT Co. purchased real estate containing copperforatotalcostof₱64,000,000.Explorationcostsamountedto₱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 ₱32,000,000andimmovabletangibleequipmentcostsfordrillingrigfoundation totaled₱24,000,000.

Estimatedrecoverablereservesfromthemineare2,100,000units.Itisestimated 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.Actualunitsextractedduring20x1are320,000units.

9. Howmuchisthedepreciationontheimmovabletangibleequipment?

10.Howmuchisthedepletiononthenaturalresource?

11.Howmuchisthedepreciationonthemovabletangibleequipment?

No production in a period

Use the following information for the next two questions: 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 are1,000,000units.Itisestimatedthat100,000unitswillbeextractedeachyear; therefore,thelifeofthemineinyearsis10years.Thedrillingrigfoundationhas anestimatedusefullifeof15years.

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 20x5andtotalunitsextractedduringthatyearwas80,000units.

12.How much is the depreciation charge on the immovable tangible equipment in20x4?

13.How much is depreciation charge on the immovable tangible equipment in 20x5?

c.1,500,000 d.1,600,000

Liquidating dividends

14.MYNHEER MISTER Co. has the following balances in its accounts as of December31,20x1:

Howmuchisthemaximumamountthatcanbedeclaredasdividends?

Restoration and decommissioning costs – Wasting asset

In 20x1, MULIEBRITY FEMINITY Mining Corp. acquired the right to use 1,000 acresoflandtomineforgold.Theleasecostis₱200,000,000,andthetotalcosts ofexplorationandintangibledevelopmentcostsare₱40,000,000.MULIEBRITYis 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.Howmuchistheinitialcarryingamountofthemineraldeposit?

16.Howmuchisthedepletionin20x1?

17.Howmuchistheinterestexpensein20x2?

a.1,361,824 b.1,198,406

c.1,421,266

Restoration and decommissioning costs – Equipment

Use the following information for the next three questions:

d.1,525,244

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 theequipmentandrestorethesitewhereitisinstalledafter20years,theendof theequipment’susefullife.Theestimateddecommissioningandrestorationcosts are₱40,000,000.Theimputedrateofinterestis12%.

18.Howmuchistheinitialcostoftheequipment?

a.475,853,328 b.480,000,000

c.400,000,000

19.Howmuchisthedepreciationexpensein20x2?

a.23,792,666 b.24,000,000

c.20,000,000

20.Howmuchistheinterestexpensein20x2?

a.248,800 b.437,889

Estimating fair value of ARO

c.557,312

Use the following information for the next two questions:

d.484,146,672

d.24,207,332

d.665,443

On January 1, 20x1, VERITY FIRMNESS Mining Company purchased a quartz mine for₱40,000,000thatit intendstoworkforthenext10years. Accordingto environmental laws, VERITY must restore the mine site to its original natural prairiestateafteritceasesminingoperationsatthesite.

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-siterestoration.Itwilltake3yearstorestoretheminesitewhenmining 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-basedrateis12%.

VERITY made the following estimates of future cash flows for the restoration cost:

21.Howmuchistheinitialcostofthemine?

22.Howmuchistheinterestexpensein20x2?

Changes in estimates of Restoration costs

Use the following information for the next two questions: OnJanuary1,20x1,PRECIPITOUSSTEEPCo.acquiredaquarryfor₱400,000,000.

Co. is required by law to restore the site after 5 years. The estimatedrestorationcostsare₱40,000,000.Theimputedrateofinterestis12%.

OnJanuary1,20x4,PRECIPITOUSCo.estimatedthattherestorationcostsshould be₱48,000,000andtheimputedrateofinterestis10%.

23.Howmuchistheinterestexpensein20x2?

a.2,723,648

b.2,396,811

c.3,050,488

d.3,155,341

24.The entry on January 1, 20x4 to adjust Asset retirement obligation (ARO) includes

a. debittoretainedearningsfor₱7,781,664

b. debittoAROfor₱7,781,664

c. debitto“resourcedeposit–quarry”for₱7,781,664

d. creditto“resourcedeposit–quarry”for₱7,781,664

The answers and solutions to the computational problems above (Multiple choice – Computational (SET B) can be found in the accompanying Teacher’s Manual.

Chapter 16: Theory of Accounts Reviewer

1. PFRS6isappliedtowhichofthefollowing?

a. thesearchformineralresourcesbeforetheentityhasobtainedlegalrights toexploreinaspecificarea.

b. thesearchandevaluation ofmineralresources, agriculturalproduce, and biologicalassetspriortocommencementofactualproduction

c. thesearchformineralresourcesafter theentityhasobtainedlegalrights toexploreinaspecificarea.

d. the development of mineral resources after the entity has in fact establishedtheexistenceofmineraldepositsinanarea.

2. PFRS6appliestoexpendituresincurred

a. When searching for an area that may warrant detailed exploration, even thoughtheentityhasnotyetobtainedthelegalrightstoexploreaspecific area.

b. When the legal rights to explore a specific area have been obtained, but the technical feasibility and commercial viability of extracting a mineral resourceisnotyetdemonstrable.

c. Whenaspecificareaisbeingdevelopedandpreparationsforcommercial extractionarebeingmade.

d. In extracting mineral resources and processing the resource to make it marketableortransportable.

(Adapted)

3. PFRS6

a. shallbeappliedbyallentitiesadoptingfullPFRSs

b. shallbeappliedonlybyentitiesengagedinagriculturalactivity

c. temporarilyexemptsentitiesinapplyingsomeprovisionsinPAS8

d. whenadopted,shallreplacePAS16

4. It refers to the activities geared towards the search for mineral resources aftertheentityhasobtainedlegalrightstoexploreinaspecificarea

a.explorationandevaluation

b.development

c.probeandinvestigation

d.adventureandconquest

5. Does PFRS 6 require an entity to recognize exploration and evaluation expenditureasassets?

a. Yes, but only to the extent such expenditure is recoverable in future periods.

b. Yes, but only to the extent the technical feasibility and commercial viability of extracting the associated mineral resource have been demonstrated.

c. Yes, but only to the extent required by the entity’s accounting policy for recognizingexplorationandevaluationassets.

d. No,suchexpenditureisalwaysexpensedinprofitorlossasincurred.

(Adapted)

6. WhichofthefollowingisincorrectinrelationtotheprovisionsofPFRS6?

a. Exploration and evaluation expenditures start to be incurred only after thelegalrighttoexploreaspecificareaisobtained.

b. Exploration and evaluation expenditures cease to be incurred when the existenceofreservesisinfactestablished.

c. PFRS 6 permits entities to develop their own accounting policy for exploration and evaluation assets based entirely on management’s judgment.

d. Although PFRS 6 permit entities to develop their own accounting policy, themanagementofanentityshouldcomplywiththeprovisionofPAS8on hierarchyofstandardswhendevelopingaccountingpolicyforexploration andevaluationofmineralresources.

7. What is an entity required to consider in developing accounting policies for explorationandevaluationactivities?

a. The requirements and guidance in Standards and Interpretations dealing withsimilarandrelatedissues.

b. Thedefinitions,recognitioncriteria,andmeasurementconceptsforassets, liabilities,income,andexpensesinthe Conceptual Framework.

c. Recentpronouncementsofstandard-settingbodies,accountingliterature, andacceptedindustrypractices.

d. Whether the accounting policy results in information that is relevantand reliable.

(Adapted)

8. Expendituresincurredaftertheexistenceofreservesisinfactestablishedina specificareabutbeforecommencementofcommercialproductionarecalled

a. explorationandevaluationexpenditures

b. developmentexpenditures

c. extractioncosts

d. costofdrillingrigfoundationandsewers

9. WhichofthefollowingisinaccordancewiththeprovisionsofPFRS6?

a. PFRS6appliesevenbeforeanentityhasobtainedlegalrightstoexplorein aspecificarea.

b. Exploration and evaluation expenditures start to be incurred only before thelegalrighttoexploreaspecificareaisobtained.

c. Exploration and evaluation expenditures start to be incurred when the existenceofreservesisinfactestablished.

d. PFRS 6 permits entities to develop their own accounting policy for exploration and evaluation assets which results in relevant and reliable informationbasedentirelyonmanagement’sjudgment.

10.UnderPFRS6,explorationandevaluationassetsshallbeinitiallymeasuredat

a.cost b.fairvalue c.amortizedcost d.anyofthese

11.WhichofthefollowingcorrectlyrelatestotheprovisionsofPFRS6?

I. Explorationandevaluationassetsshallbemeasuredatcost,fairvalue,or amortizedcost,whicheverismoreappropriate.

II. Exploration and evaluation assets are exploration and evaluation expenditures recognized as assets in accordance with the entity’s accounting policy. Nothing in PFRS 6 overrides the accounting policy developedbyanentity.

III. After recognition, an entity shall apply either the cost model or the revaluationmodeltotheexplorationandevaluationassets.

IV. After recognition, an entity shall apply either the cost model or the fair modeltotheexplorationandevaluationassets.

a.II,III b.I,II,III c.I,III,IV d.I,II,III,IV

12.Under PFRS 6, an entity may change its accounting policies for exploration andevaluationexpenditures

a. Ifthechangeisrequiredorpermittedunderthestandards

b. If the change is required or permitted under the standards and not prohibitedbyarelevantregulation

c. if the change makes the financial statements more relevant and no less reliable,ormorereliableandnolessrelevant.

d. If the change makes the financial statements more relevant or more reliable

13.Is an entity ever required or permitted to change its accounting policy for explorationandevaluationexpenditures?

a. Yes, entities are required to change their accounting policy for these expenditures if the change would result in more useful information for usersoffinancialstatements.

b. Yes,entitiesarefreetochangeaccountingpolicyfortheseexpendituresas long as the selected policy results in information that is relevant and reliable.

c. Yes, but only if the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or morereliableandnolessrelevanttothoseneeds.

d. No, entities would be permitted to change accounting policy only on adoption of a new or revised Standard that replaces the existing requirementsinPFRS6. (Adapted)

14.AccordingtoPFRS6,anentityshallclassifyexplorationandevaluationassets as

a. tangibleorintangibleaccordingtothenatureoftheassets

b. depreciableornon-depreciableaccordingtothenatureoftheassets

c. explorationanddevelopment

d. movableorimmovable

15.Anexplorationandevaluationasset

a. shallbemeasuredinitiallyandsubsequentlyat cost less anyaccumulated depreciation and impairment loss but shall not be measured at revalued amount.

b. shallneverbesubsequentlyrestatedatrevaluedamount

c. shall continue to be classified as such until commercial production commences.

d. shall no longer be classified as such when the technical feasibility and commercialviabilityofextractingamineralresourcearedemonstrable.

16.Theseassetsarephysicallyconsumedandareirreplaceable.

a.consumable c.wastingassets(naturalresources)

b.bearer d.aorc

17.Thecostofnaturalresourcesinclude

I. acquisitioncosts

II. explorationcoststotheextentthattheyarecapitalizedinaccordancewith anentity’accountingpolicy

III. intangibledevelopmentcosts

IV. restorationordecommissioningcosts.

a.I,II b.I,II,III

c.I,II,IV d.I,II,III,IV

18.Which of the following expenditures would never qualify as an exploration andevaluationasset?

a. Expenditureforacquisitionofrightstoexplore.

b. Expenditureforexploratorydrilling.

c. Expendituresrelatedtothedevelopmentofmineralresources.

d. Expenditureforactivitiesinrelationtoevaluatingthetechnicalfeasibility andcommercialviabilityofextractingamineralresource.

(Adapted)

19. Which measurement model applies to exploration and evaluation assets subsequenttoinitialrecognition?

a.Thecostmodel.

b.Therevaluationmodel.

(Adapted)

c.eitheraorb

d.Therecoverableamountmodel.

20.Whichofthefollowingfactsorcircumstanceswouldnottriggeraneedtotest anevaluationandexplorationassetforimpairment?

a. The expiration - or expected expiration in the near future -of the period forwhichtheentityhastherighttoexploreinthespecificarea,unlessthe rightisexpectedtoberenewed.

b. The absence of budgeted or planned substantive expenditure on further explorationandevaluationactivitiesinthespecificarea.

c. A decision to discontinue exploration and evaluation activities in the specific area when those activities have not led to the discovery of commerciallyviablequantitiesofmineralresources.

d. Lack of sufficient data to determine whether the carrying amount of the exploration and evaluation asset is likely to be recovered in full from successfuldevelopmentorbysale.

(Adapted)

21.Tangibledevelopmentcosts(tangibleequipmentcosts)costs

a. areaccountedforunderPFRS6

b. are capitalized as cost of natural resource and depreciated over the economiclifeofthenaturalresource

c. are not capitalized as cost of natural resource but capitalized as equipmentanddepreciatedseparately.

d. are development costs with no physical substance but nevertheless treated as part of wasting asset because of the application of substance overform

22.Tangible development (equipment) costs are sub-classified into movable or immovable for purposes of subsequent depreciation. Which of the following statementsiscorrect?

I. Movable tangible equipment costs such as heavy equipment used from oneextractingsitetoanotheraredepreciatedseparatelyovertheiruseful life.

II. Immovable tangible equipment costs such as drilling rig foundation are depreciated separately over their useful life or the life of the resource, whicheverisshorter.

III. If the useful life of the immovable tangible equipment is shorter than the economic life of the mine, units-of-production method should be used to depreciatetheequipment’scost.

IV. If the useful life of the immovable tangible equipment is longer than the economic life of the mine, no depreciation is recognized during a period wheretherearenoextractionactivities.

a.I,II b.III,IV c.I,II,IV d.I,II,III,IV

23.Depletionisnormallycomputedusing

a.straightline

b.SYD

c.units-of-production

d.anyofthese

24.Thedepletionchargeforeachperiod

a. isexpensedimmediately

b. shallformpartofoperatingexpensewhentheextractedgoodsaresold

c. shall initially form part of the cost of inventory and charged to expense whentheinventoryissold.

d. shall be presented in the statement of financial position until mineral resourcesarefullydepleted

25.Changesinresidualvalueorestimatedquantityofmineralreservesare

a. changesinaccountingestimatesaccountedforprospectively.

b. changesinaccountingestimatesaccountedforretrospectively.

c. changesinaccountingpolicyaccountedforprospectively.

d. changesinaccountingpolicyaccountedforretrospectively.

26.Liquidating dividends received by a shareholder in a wasting asset corporation

a. arereturntocapitalandthustreatedasreductiontoinvestmentaccount

b. arereturnofcapitalandthustreatedasincome

c. arereturnoncapitalandthustreatedasincome

d. arereturnofcapitalandthustreatedasreductiontoinvestmentaccount

27.Provisionsforrestorationanddecommissioningcosts

a. arerecognizedonlywhentheentityincurslegalobligation

b. arerecognizedonlywhentheentityincurspresentobligation

c. arerecognizedasaseparateassetiftheentityincurspresentobligation

d. are recognized as part of the cost of an asset only if the entity has legal obligation.

28.Which of the following is correct regarding the accounting for provisions for decommissioningandrestorationcosts?

I. The amount of decommissioning or restoration costs to be included as partofthecostofan asset isthefairvalueof theestimatedliabilityasof initialrecognition.

II. The provision shall be the best estimate of the expenditure required to settlethepresentobligation.

III. Thefair valueofthe obligationfor restoration anddecommissioningcost is recorded under “Asset retirement obligation” (ARO) with a correspondingdebittotherelatedassetforthesameamount.

IV. Periodic unwinding of the discount on the liability recognized for the decommissioning or restoration cost shall be recognized in profit or loss asafinancecostasitoccurs.

V. Periodic unwinding of the discount on the liability does not affect depletionordepreciationrecognizedfortheperiod.

29.Inthefullcostmethod,oilfirms:

a.arerequiredtoexpensealloil-drillingcostsresultingindryholes.

b.mustexpensedrillingcostswhichresultinproductiveoilwells.

c.cancapitalizealloil-drillingcosts.

d.shallnotreducecostsbelowtheirrecoverableamounts

30.For charging depreciation, on which of the following assets is depletion methodadopted?

a.plantandmachinery

b.goodwill

c.patents

d.wastingassets

31.Whichofthefollowingincorrectlyrefertoaccountingforproperty,plantand equipment?

I. Land improvements should never be depreciated since they are attached totheland.

II. The cost of original installation of a machine should be credited to a machineryaccount.

III. Natural resources are generally recorded at cost, including the cost of explorationanddevelopment.

IV. In calculating depletion for a period, the residual value of acquired land containing an ore deposit should be deducted from the total purchase price.

V. If property, plant and equipment are stated at current valuation, the financial position and progress of an enterprise will be more realistically portrayed.Theimpressionthatthecompanyismoreprofitablethanwhat itreallyis,isavoided.

a.III,IV,V b.I,II,V

32.Development costs are divided into tangible equipment and intangible development costs. The intangible development costs are generally considered as part of the depletion base while tangible equipment are normallynotincludedinthedepletionbase.

I. Tangible equipment that can be moved and be used from one site to another should be depreciated over their useful life or the life of the wastingassetwhicheverisshorter.

II. Tangible equipment that cannot be moved and does not have alternative use(cannotbeusedfromonesitetoanother)shouldbedepreciatedover theirusefullifeorthelifeofthewastingassetwhicheverisshorter.

a.True,true b.True,false c.False,true d.False,false

33.Developmentcostsrepresent

a. the price paid to obtain the property right to search and find an undiscoverednaturalresource

b. thecostsincurredinextractingorexploitingthenaturalresource

c. the costs incurred in locating the natural resource that can be economicallyextracted

d. thecostsincurredtobringbackthewastingassettoitsnaturalstateafter extraction hasoccurred (AICPA)

34.Which of the following models may be applied by entities for the measurement after recognition of exploration and evaluation assets, in accordancewithPFRS6 Exploration for and evaluation of mineral resources?

aCost

d.Presentvalue

b.Revaluation e.aorb

c.Realization (ACCA)

35.Does PFRS6 Exploration for and evaluation of mineral resources apply to the followingtypesofexpenditure?

I. The extraction and processing of mineral resources for transport to market.

II. The commercial review of possible areas for mineral extraction before biddingforthelegalrightstoexploreaspecificarea.

a.No,no b.No,Yes c.Yes,No d.Yes,yes

36.TheStriderCompanyisinvolvedintheexplorationformineralresources.Its policyistorecognizeexplorationassetsandmeasuretheminitiallyatcost.It iscurrentlyexploringanewgasfieldinRuritania.Theexplorationlicensefor thenewRuritaniangasfieldisabouttoexpireandStriderisnowpreparingto undertakeanimpairmentreview.Striderreportsitsfinancialperformanceas 'Mineral Production' and 'Energy Trading' in its financial statements in accordancewithPFRS8 Operating segments. TheMineralProductionsegment comprises two cash-generating units – 'oil production' and 'gas production'. InaccordancewithPFRS6 Exploration for and evaluation of mineral resources, whatisthehighestlevelatwhichtheimpairmenttestcanbeundertaken?

a. Acash-generatingunitbasedontheassetsintheRuritaniangasfield

b. Gasproductioncash-generatingunit

c. Oilproductionandgasproductioncash-generatingunitscombined

d. Acash-generatingunitatTheStriderCompanylevel (ACCA)

37.WhichofthefollowingisnotadisclosurerequiredbyPFRS6?

a. Informationaboutcommercialreservequantities.

b. Accountingpoliciesforexplorationandevaluationexpenditures,including therecognitionofexplorationandevaluationassets.

c. Theamountsofassets,liabilities, incomeandexpense,andoperatingand investing cash flows arising from the exploration for and evaluation of mineralresources.

d. Information that identifies and explains the amounts recognized in the financial statements arising from the exploration for and evaluation of mineralresources.

(Adapted)

38.Underwhich ofthe followingmethods isdepreciation computedin thesame wayasdepletioniscomputed?

a.Straight-line

c. Double-declining-balance

d. Productive-output (AICPA)

b.Sum-of-the-years-digits

Chapter 16 – Suggested answers to theory of accounts questions

Chapter 17 Government Grants

Chapter 17: Multiple Choice – Computational (For classroom instruction purposes)

Grant related to asset (Gross and Net presentation)

Use the following information for the next four questions: OnJanuary1, 20x1, CHIDESCOLDCo. receivedcashof ₱16,000,000fromalocal government to be used in constructing a building. The construction was completed on December 31, 20x1 for a total cost of ₱40,000,000. The building willbedepreciatedover20years.

1. If CHIDE Co. uses the gross presentation of government grants, how much is the carrying amount of the deferred income from the government grant on December31,20x5?

a.15,200,000 b.12,800,000 c.12,000,000 d.0

2. IfCHIDECo.usesthenetpresentationofgovernmentgrants,howmuchisthe carrying amount of the deferred income from the government grant on December31,20x5?

a.15,200,000

b.12,800,000 c.12,000,000 d.0

3. If CHIDE Co. uses the gross presentation of government grants, how much is thecarryingamountofthebuildingonDecember31,20x1?

a.40,000,000 b.24,000,000

c.38,000,000

d.22,800,000

4. IfCHIDECo.usesthenetpresentationofgovernmentgrants,howmuchisthe carryingamountofthebuildingonDecember31,20x1?

a.40,000,000 b.24,000,000 c.38,000,000 d.22,800,000

Grant related to income (Gross and Net presentation) Use the following information for the next four questions: OnJanuary1,20x1,MACABREHORRIBLECo.receivedcashof₱16,000,000from a local government to be used to defray safety and other hazard-related costs over a five-year period. It was estimated that such costs will total ₱32,000,000 over the next five years. In 20x1 and 20x2, actual costs of safety and other hazard-relatedcostsamountedto₱4,000,000and₱4,800,000,respectively.

5. IfMACABRECo.usesthegrosspresentationofgovernmentgrants,howmuch isthecarryingamountofthedeferredincomefromthegovernmentgranton December31,20x1?

a.14,000,000 b.12,800,000 c.12,000,000 d.0

6. IfMACABRECo.usesthenetpresentationofgovernmentgrants,howmuchis the carrying amount of the deferred income from the government grant on December31,20x1?

a.14,000,000 b.12,800,000 c.12,000,000 d.0

7. IfMACABRECo.usesthegrosspresentationofgovernmentgrants,howmuch safetyexpenseisrecognizedin20x1?

a.4,000,000 b.2,400,000 c.2,000,000 d.0

8. IfMACABRECo.usesthenetpresentationofgovernmentgrants,howmuchis safetyexpenseisrecognizedin20x1?

a.4,000,000 b.2,400,000 c.2,000,000 d.0

Grant related to non-depreciable asset

9. On January 1, 20x1, UNFLEDGED IMMATURE Co. received land from the government with thecondition that afactory buildingshouldbeconstructed on it. The fair value of the land was estimated at ₱20,000,000. The construction of the factory building was completed on January 1, 20x2 for a total cost of ₱80,000,000. The building will be depreciated using SYD over a usefullifeof10years. Theestimatedresidualvalueis₱8,000,000.CHIDECo. uses the gross presentation of government grants. How much is thecarrying amount ofthe deferred incomefromthe governmentgrantonDecember31, 20x2?

a.20,000,000 b.16,363,636 c.13,090,908 d.0

Compensation for losses incurred (Financial aid)

10.On January 1, 20x1, various properties of ABOMINATE DISLIKE Co. were destroyed due to flood. It was estimated that the cost of the destroyed properties amounted to ₱60,000,000. On July 1, 20x1, ABOMINATE received ₱8,000,000fromthegovernmentasafinancialaid.ABOMINATECo.estimates thatitwouldtakeabout5yearsbeforeitcanrecoverfromtheloss. Howmuchistheincomefromgovernmentgrantrecognizedin20x1?

a.8,000,000 b.1,600,000 c.(52,000,000) d.0

Forgivable loans

11.On January 1, 20x1, because of an exemplary accomplishment that brought international recognition to the community, the government waived the repayment of CONGEAL TO THICKEN Co.’s loan payable with a carrying amount of ₱800,000 andremainingterm of 4 years. Howmuchincomefrom governmentgrantisrecognizedin20x1?

a.800,000

b.200,000

Loans at below market-interest rate

c.400,000 d.0

12.OnJanuary1,20x1,BREEZYLIVERLYCo.wasgrantedbythegovernmenta3year, zero-interest loan of ₱4,000,000 payable on December 31, 20x3. Prevailinginterestrateforthistypeofloanis10%. Howmuchistheincome fromgovernmentgrantrecognizedin20x1?

a.3,005,260 b.400,000 c.300,526 d.0

Repayment of grant related to income

13.OnJanuary1,20x1,SIBILATEHISSCo.receivedcashof₱16,000,000fromthe governmenttobeusedtodefraysafetyandotherhazard-relatedcostsovera five-year period. It was estimated that such costs will accumulate to ₱32,000,000overthenextfiveyears.In20x1and20x2,actualcostsofsafety and other hazard-related costs amounted to ₱4,000,000 and ₱4,800,000, respectively.OnJanuary1,20x3,thegovernmentdemandedrepaymentofthe ₱16,000,000 given as grant in 20x1. How much is the loss on repayment of governmentgrantrecognizedin20x3?

a.4,400,000 b.3,800,000 c.2,800,000 d.0

Repayment of grant related to asset

14.On January 1, 20x1, DREARY DISMAL Co. received cash of ₱16,000,000 from the government to be used in constructing a building. The construction was completedonDecember31,20x1foratotalcostof₱40,000,000.Thebuilding isdepreciatedover20years. OnJanuary1,20x4,thegovernmentdemanded

repaymentofthe₱16,000,000grantgivenasgrantin20x1.Howmuchisthe lossonrepaymentofgovernmentgrantrecognizedin20x4?

a.2,800,000 b.1,800,000 c.1,600,000

d.0

The answers and solutions to the computational problems above (Multiple choice – Computational (SET B) can be found in the accompanying Teacher’s Manual.

Chapter 17: Theory of Accounts Reviewer

Scope

1. PAS20appliestowhichofthefollowing?

a. accountingforgovernmentgrantsunderhyperinflationaryeconomies

b. tax benefits such as income tax holidays, investment tax credits, accelerateddepreciationallowancesandreducedincometaxrates

c. governmentparticipationintheownershipoftheentity

d. governmentgrantsrelatedtobiologicalassetsmeasuredatfairvalueless coststosell.

e. Thebenefitofagovernmentloanatabelow-marketrateofinterest.

2. Under PAS 20, it is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. It does not include benefits provided only indirectly through action affectinggeneraltradingconditions,suchastheprovisionofinfrastructurein developmentareasortheimpositionoftradingconstraintsoncompetitors.

a.Governmentassistance

b.Governmentgrants

c.Grantsrelatedtoassets

d.Grantsrelatedtoincome

3. UnderPAS20,theseareassistancebygovernmentintheformoftransfersof resources to an entity in return for past or future compliance with certain conditionsrelatingtotheoperatingactivitiesoftheentity.Theyexcludethose which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactionsoftheentity.

a.Governmentassistance

b.Governmentgrants

c.Grantsrelatedtoassets

d.Grantsrelatedtoincome

4. Which of the following is not a term used as substitute for government grants?

a.subsidies

b.subventions

c.premiums

d.incometaxholiday

5. Which of the following may not form a valid basis for the accounting for governmentgrants?

a.costprinciple

b.matching

c.fulldisclosure

d. comparability

6. Which of the following is not specifically excluded from the purview of PAS 20?

a. Governmentparticipationinownershipoftheentity.

b. GovernmentgrantcoveredbyPAS41.

c. Governmentassistanceprovidedintheformoftaxbenefits.

d. Forgivableloanfromthegovernment.

7. WhichofthefollowingstatementsincorrectlyrelatetothescopeofPAS20?

a. PAS 20 shall be applied in accounting for, and in the disclosure of, government grants and in the disclosure of other forms of government assistance.

b. PAS 20 shall be applied in accounting for, and in the disclosure of, governmentgrantsandotherformsofgovernmentassistance.

c. PAS 20 does not deal with the special problems arising in the accounting for government grants in financial statements reflecting the effects of changingpricesorinsupplementaryinformationofasimilarnature.

d. PAS 20 does not dealwith government assistance that is provided for an entity in the form of benefits that are available in determining taxable profit ortaxloss, oraredeterminedorlimitedonthebasisofincometax liability.Examplesofsuchbenefitsareincometaxholidays,investmenttax credits, accelerated depreciation allowances and reduced income tax rates.

e. PAS 20 does not deal with government participation in the ownership of theentityandgovernmentgrantscoveredbyPAS41 Agriculture

Recognition

8. Whenshallanentityrecognizegovernmentgrants?

a. when there is reasonable assurance that the entity will comply with the conditionsattachingtogrants

b. whenthegrantsarereceived

c. whenthereisreasonableassurancethatthegrantswillbereceived

d. aandc

9. Inrelationtotheaccountingforgovernmentgrants,whichofthefollowingis true?

a. The receipt of a grant is of itself provides conclusive evidence that the conditionsattachingtothegranthavebeenorwillbefulfilled.

b. Government assistance that qualify as government grants are disclosed butnotaccountedforunderPAS20.

c. Government assistance that do not qualify as government grants are accountedforanddisclosedunderPAS20.

d. Governmentgrants,includingnon-monetarygrantsatfairvalue,shallnot be recognized until there is reasonable assurance that the entity will comply with the conditions attaching to them and the grants will be received

10.Which of the following are considered characteristics of a recognized governmentgrant?

I. Aneconomicbenefitreceivedfromthegovernment

II. Directbenefitsisspecifictotherecipiententity

III. Withmeasurablevalue

IV. Received or receivable in return for past or future compliance with attachedcondition

V. Thereisreasonableassurancethat therecipient entitywillcomplytothe attachedconditionsandthatthegrantwillbereceived.

VI. Directrecognitioninequity.

a.I,II,III b.I,II,III,IV c.I,II,III,IV,V d.allofthese

11.Under PAS 20, this refers to government, government agencies and similar bodieswhetherlocal,nationalorinternational.

a.Government

b.Regulatoryagencies

c.InternalRevenueServices

d.SecuritiesCommission

12.Under PAS 20, these are government grants whose primary condition is that anentityqualifyingforthemshouldpurchase,constructorotherwiseacquire long-term assets. Subsidiary conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquiredorheld.

a.Governmentassistance

b.Governmentgrants

c.Grantsrelatedtoassets

d.Grantsrelatedtoincome

13.UnderPAS20,thesearegovernmentgrantsotherthanthoserelatedtoassets.

a.Governmentassistance

b.Governmentgrants

c.Grantsrelatedtoassets

d.Grantsrelatedtoincome

14.Whichofthefollowingisagovernmentgrantrelatedtoasset?

a. Cashreceivedtodefraycostsalreadyincurredbyanentity.

b. Financial aid received from the government to compensate for casualty lossesincurred

c. Cashreceivedtoaidanentityinits“cleanandgreen”program

d. Landreceivedfromgovernmentwiththeconditionthatabuildingshould beconstructedonit.

15.Whichofthefollowingisagovernmentgrantrelatedtoincome?

a. Cashreceivedfromthegovernmenttobeusedinacquiringequipment.

b. Landreceivedfromgovernmentwiththeconditionthatabuildingshould beconstructedonit.

c. Marketingadvicereceivedfromagovernmentagency.

d. Financial aid received from the government to compensate for casualty lossesincurred

16.Monetarygrantsaremeasuredatthe

a. amountofcashreceived

b. thefairvalueofamountreceivable

c. carrying amount of loan payable to government for which repayment is forgiven

d. discount on loan payable to government at a below-market rate of interest.

e. anyofthese

17.Non-monetarygrantsaremeasuredatthe

a. fairvalueofnon-monetaryassetreceived

b. at nominal amount or zero, plus direct costs incurred in preparing the assetforitsintendeduse

c. amountofcashreceived

d. aorb

18.A donated fixed asset received as government grant for which the fair value hasbeendeterminedshouldberecordedasadebittofixedassetandacredit to

a.retainedearnings

b.additionalpaid-incapital

c.deferredincome

d.otherincome

19.Under PAS 20, these are loans which the lender undertakes to waive repaymentofundercertainprescribedconditions.

a. Non-derivativefinancialassetswithfixedordeterminablepayments

b. Waivableloans

c. Agriculturalloans

d. Forgivableloans

20.Aforgivableloanfromgovernmentistreatedasagovernmentgrantwhen

a. there is reasonable assurance that the entity will meet the terms for forgivenessoftheloan.

b. theloanisforgiven

c. thereisreasonableassurancethattheloanwillnotberepaidinthefuture

d. undernocircumstance

21.The benefit of a below-market rate of interest loan from the government is measured

a. asthefairvalueoftheloanatdateofgrant

b. astheamountneededtosettletheliabilityatmaturity

c. as the difference between the initial carrying amount of the loan determinedinaccordancewithPFRS9andtheproceedsreceived.

d. as the difference between the initial carrying amount of the loan determinedinaccordancewithPFRS9andthepresentvalueoftheloan.

22.Whichapproachisusedtoaccountforgovernmentgrants?

a.Capitalapproach

b.Romanticapproach

c.Gentleapproach

d.Incomeapproach

23.Which of the following is correct regarding the recognition of government grants?

a. Government grants shall be recognized in equity on a systematic basis over the periods in which the entity recognizes as expenses the related costsforwhichthegrantsareintendedtocompensate.

b. Government grants shall be recognized in profit or loss immediately on grantdate.

c. Government grants shall be recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the relatedcostsforwhichthegrantsareintendedtocompensate.

d. Government grants shall be recognized immediately in equity on grant date.

24.Which of the following is the least desirable accounting procedure for governmentgrants?

a. Government grants are recognized immediately in profit or loss if the related costs for which the grants are intended to compensate have alreadybeenincurred.

b. Governmentgrantsareinitiallydeferrediftherelatedcostsforwhichthe grantsareintendedtocompensatearenotyetincurred.

c. Government grants are not immediately recognized in profit or loss but rather amortized to profit or loss as the costs for which the grants are intendedtocompensatearebeingincurred.

d. Governmentgrantsarerecognizedinprofitorlossonareceiptsbasis.

25.Which of the following is not applied when accounting for government grants?

a.matching

b.accrualaccounting

c.cashbasisaccounting

d.incomerecognition

26.The use of cash basis of accounting to account for government grants is permitted

a. onlyifnobasisexistedforallocatingagranttoperiodsotherthantheone inwhichitwasreceived.

b. only if there is no reasonable assurance that the entity will comply with theconditionsattachedtothegrant.

c. only if, at initial recognition, there is no reasonable basis that the grant willbereceived

d. undernocircumstance

27.Whichofthefollowingisanacceptableaccountingprocedureforgovernment grants?

I. Income from government grant is recognized in the period the costs or expensesrelatedtothegovernmentgrantarerecognized.

II. Grants related to depreciable assets are usually recognized in profit or loss over the periods and in the proportions in which depreciation expenseonthoseassetsisrecognized.

III. Grantsrelatedtonon-depreciableassetsarerecognizedinprofitorlossas depreciation expense is recognized on a related depreciable asset for whichthegrantwasreceived.

IV. A government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediatefinancialsupporttotheentitywithnofuturerelatedcostsshall be recognized in profit or loss in the period in which it becomes receivable.

V. Grantsintheformoftaxbenefitsarerecognizedinprofitorlosswhenthe relateddeferredtaxliabilityreverses.

28.Which of the following grants shall be recognized in profit or loss immediately?

a. The government makes a grant to a start-up entity writing teaching softwareforchildrenwithlearningdifficulties.Thepurposeofthegrantis to help with general financing on start up, and there are no further conditionsattachingtothegrant.

b. Theareawhereanentityoperateswasstruckbyasuper-typhoon.Various properties were destroyed. Accordingly, the entity received ₱10M as financialaid.

c. Amanufacturingentitysetsupaplantinanareaofhighunemployment.A grant of ₱4 million is receivable if it continues to employ at least 100 people over a period of four years. It is highly probable it will do so. ₱2 millionofthegrantistobereceivedimmediatelyandafurther₱2million isreceivableinfouryears’time.

d. aandb

29.Whichofthefollowinggrantsshallberecognizedinprofitorlossperiodically astherelatedcostsareincurred?

a. An agricultural research entity is given land that belonged to the government to set up a new laboratory and to investigate new farming methods.

b. Free technical advice is provided by the government to help an export entitytomarketitsnewtechnologyinNorthAmerica.

c. A local government made public improvements in the area where an entity operates. The public improvements increased business in the area sinceitbecamemoreaccessibletocustomers.Also,thevalueoflandinthe areaincreased.

d. An entity operating in an economic zone was awarded a tax holiday of 5 years in the condition that the entity should continue to operate for at least10yearsandthatitshouldemployonlyresidentsfromthearea.

30.In relation to a benefit included in the term 'government assistance', are the followingstatementstrueorfalseaccordingtoPAS20 Government grants and government assistance?

I. Theprovisionofinfrastructureindevelopingareasisabenefit.

II. Theimpositionoftradingconstraintsoncompetitorsisabenefit.

a.False,False b.False,True c.True,False d.True,True (ACCA)

31.PAS 20 shall be applied in accounting for, and in the disclosure of, government grants and in the disclosure of other forms of government assistance. In the case of a nonmonetary grant, which of the following accountingtreatmentsisprescribedbyPAS20?

a. Recordtheassetatreplacementcostandthegrantatanominalvalue.

b. Recordthegrantatavalueestimatedbymanagement.

c. Recordboththegrantandtheassetatfairvalueofthenonmonetaryasset.

d. Record only the asset at fair value; do not recognize the fair value of the grant.

(Adapted)

32.An unrestricted grant received from the government to support enterprise fundoperationsshouldbereportedas

a.Contributedcapital.

c.Revenue

d.Revenuesandexpenditures. (AICPA)

b.Income.

33.To induce MONARCHY “KING, QUEEN, OR EMPEROR” Co. to do business in Baguio City, the City government donated a factory site to the company. The donationmaybereflectedinthebooksofMonarchyat

a.costoftitlingthesite

c.currentmarketvalue

d.eithera,borc (AICPA)

b.nominalvalue

34.ARISTOCRACY County owned an idle parcel of real estate consisting of land andafactorybuilding.AristocracygavetitletothisrealtytoARISTOCRATCo. as an incentive for Aristocrat to establish manufacturing operations in the County. Aristocrat paidnothingforthisrealty,whichhadafairmarket value of ₱250,000 at the date of the grant. Aristocrat should record this nonmonetarytransactionasa

a. memoentryonly.

b. credittodeferredincomefor₱250,000.

c. credittoincomefor₱250,000.

d. credittodonatedcapitalfor₱250,000. (AICPA)

35.Aplantsitedonatedbyatownshiptoamanufacturerthatplanstoopenanew factoryshouldberecordedonthemanufacturer'sbooksat

a. thenominalcostoftakingtitletoit.

b. itsmarketvalue.

c. “b”butalternatively,theentitymayuse“a”

d. notrecorded (AICPA)

36.Anentitydonatedlandtoamunicipalityforapark.Theacquisitioncostofthe land was ₱75,000, and the revalued carrying amount at the time of the donation was ₱200,000 as determined by a professional appraiser. If the enterprisehasadoptedtheallowedalternativetreatmentformeasurementof

property, plant, and equipment subsequent to initial recognition, the journal entrytorecordthedispositionofthelandis

37.On January 1, 20x1, DEMOCRACY “RULE BY THE PEOPLE” Company commenced trading to provide key skills education facilities in a region identifiedfortechnologydevelopment.AlsoonJanuary1,20x1,thecompany received two grants from its government for setting up itsoperationsin this location:

Grant (a) – was paid to give financial assistance for start-up costs already incurred.

Grant(b)–waspaidtosubsidizethecostsofpurchasingcomputersoftwareover thefive-yearperiod.

Thecompanyisalmostcertain tokeepthefacilitiesoperationalforthenextfive years. The company's accounting year end is December 31. Are the following statements concerning recognition of the income from the two government grants true or false, according to PAS 20 Government grants and government assistance?

(1)IncomefromGrant(a)shouldberecognizedinfullonreceiptin20x1.

(2)IncomefromGrant(b)shouldberecognizedinfullattheendof5years.

a.False,False

b.False,True

c.True,False

d.True,True (ACCA)

Presentation

38.REPUBLIC “PEOPLE ELECT” Company purchased a major new piece of machinery for ₱10 million on January 1, 20x1. It will depreciate this machinery on a straight line basisover itsuseful life of 10 years, assuming a zero residual value. Also on January 1, 20x1 the company received a governmentgrantof₱1milliontohelpfinancethismachinery.

According to PAS20 Government grants and government assistance, which, if either, of the following methods would be an acceptable treatment of this machinery and the related government grant in the company's statement of financialpositionatDecember31,20x1?

a.Method1only

c.Neithermethod

d.Method1orMethod2 (ACCA)

b.Method2only

39.Inthecaseofgrantsrelatedtoanasset,whichoftheseaccountingtreatments (balancesheetpresentation)isprescribedbyPAS20?

a. Recordthegrantatanominalvalueinthefirstyearandwriteitoffinthe subsequentyear.

b. Either set up the grant as deferred income or deduct it in arriving at the carryingamountoftheasset.

c. Recordthegrantatfairvalueinthefirstyearandtakeittoincomeinthe subsequentyear.

d. Takeittotheincomestatementanddiscloseitasanextraordinarygain.

(Adapted)

40.Inthecaseofgrantsrelatedtoincome,whichoftheseaccountingtreatments isprescribedbyPAS20?

a. Creditthegrantto“generalreserve”undershareholders’equity.

b. Present the grant in the income statement as “other income”’ or as a separatelineitem,ordeductitfromtherelatedexpense.

c. Creditthegrantto“retainedearnings”onthebalancesheet.

d. Credit the grant to sales or other revenue from operations in the income statement.

(Adapted)

Repayment of government grants

41.Which of the following statements are correct according to PAS20 Government grants and government assistance?

I. Any adjustment needed when a government grant becomes repayable is accountedforasachangeinaccountingestimate

II. In respect of loans from the government at an interest rate of 0%, an interestchargeshouldbemadeperiodicallyinprofitorloss

III. Where conditions apply to a government grant, it should only be recognizedwhenthereisreasonableassurancethattheconditionswillbe met

IV. Agovernmentgrantshouldnotberecognizeduntilitisreceivedincash

a.I,III b.I,II,III c.I,III,IV d.I,II,III,IV (ACCA)

42.Whichofthefollowingstatementsistrue?

a. A donated machinery equipment for which the fair value has been determined and for which installation costs were incurred should be measured at its carrying amount on the books of the donee plus installationcostincurred.

b. Donations of property, plant and equipment received from shareholders shouldberecordedatthefairvalueofthedonatedasset.

c. Adonatedfixedassetreceivedasgovernmentgrantandforwhichthefair value has been determined should be recorded as a debit to fixed asset andcredittootherincome.

d. A government grant that becomes repayable is accounted for retrospectively.

Disclosure

43.WhichofthesedisclosuresisnotrequiredbyPAS20?

a. Theaccountingpolicyadoptedforgovernmentgrants, includingmethods ofpresentationadoptedinthefinancialstatements.

b. Unfulfilled conditions and other contingencies attaching to government assistance.

c. Thenamesofthegovernmentagenciesthatgavethegrantsalongwiththe dates of sanction of the grants by these government agencies and the dateswhencashwasreceivedincaseofmonetarygrants.

d. The nature and extent of government grants recognized in the financial statements and an indication of other forms of government assistance fromwhichtheentityhasdirectlybenefited. (Adapted)

Chapter 17 - Suggested answers to theory of accounts questions

1. E 11. A 21. C 31. C 41. B

2. A 12. C 22. D 32. B 42. B

3. B 13. D 23. C 33. D 43. C

4. D 14. D 24. D 34. B

5. A 15. D 25. C 35. C

6. D 16. E 26. A 36. C

7. B 17. D 27. C 37. C

8. D 18. C 28. D 38. D

9. D 19. D 29. A 39. B

10. C 20. A 30. A 40. B

Chapter 18 Borrowing Costs

Chapter 18: Multiple choice – Computational (SET B) – (For classroom instruction purposes)

Specific borrowing

1. OnJanuary1,20x1,HOMILYSERMONCo.borrowed₱20milliontofinancethe construction of a new building. Interest is payable on the loan at 8%. Stage paymentswereduethroughouttheconstructionperiodandthereforeexcess funds were invested during that period. By the end of the project on December 31, 20x1, investment income of ₱600,000 had been earned. How muchisthecapitalizableborrowingcost?

General borrowing

2. On January 1, 20x1, ENERVATE TO WEAKEN Company had the following borrowingsmadeforgeneralpurposesandapartoftheproceedswasusedto financetheconstructionofaqualifyingasset.

The construction of the qualifying asset was started on immediately and expendituresincurredonthequalifyingassetwereasfollows:

Howmuchisthecapitalizableborrowingcost?

General borrowing (expenditures incurred evenly)

3. On January 1, 20x1, MAGISTERIAL AUTHORITATIVE Company had the following borrowings made for general purposes and a part of the proceeds wasusedtofinancetheconstructionofaqualifyingasset.

The construction started on January 1 and was completed on December 20x1. Thetotalcostofconstructionwas₱72,000,000whichwasincurredevenlyduring theyear.Howmuchisthecapitalizableborrowingcost?

5,362,428 d.0

Specific and General borrowing

4. OnJanuary1,20x1,OMNIPRESENTPRESENTEVERYWHEREEVERYTIMECo. contractedfortheconstructionofabuildingfor₱80,000,000onalandthatit had previously purchased. The building was completed on December 20x1. Thefollowingpaymentsweremadetothecontractor:

The following represents the borrowings of OMNIPRESENT Co. as of December 31,20x1.

 10%,₱28,000,000,4-yearnotedatedJanuary1,20x1withsimpleinterest payable annually, specifically borrowed to finance the construction project. Interest income earned on the temporary investment of the proceedsis₱480,000.

 12.5%, ₱40,000,000, 10-year note dated January 1, 20x1 with interest payableannually

 10%, ₱60,000,000, 10-year note dated December 31, 19x9 with interest payableannually

Howmuchisthecapitalizableborrowingcost?

a.13,320,000 b.3,200,000 c.2,867,343 d.0

Specific borrowing used for general purposes

5. UBIQUITOUS WIDESPREAD Co. started construction of a new office building on January 1, 20x1. Funds borrowed specifically for the construction the building is ₱8,000,000 accruing interest at 10% annually. However, a part of the borrowing is used for other business requirements during the year. Investment income earned on temporary investments of proceeds from the borrowingamountedto₱48,000whichwasreceivedincashonSeptember1, 20x1.Expendituresonthebuildingamounted₱7,200,000whichwasincurred evenlyduringtheyear.Howmuchisthecapitalizableborrowingcost?

a.358,400 b.324,800 c.289,600 d.0

Limit on average expenditures

6. RETRENCHCo. startedconstructionofaqualifyingassetforCUTDOWN,Inc. on January 1, 20x1. The following were expenditures incurred on the construction.

 Included in the January 1, 20x1 expenditures is cost of materials purchased onaccountfor₱400,000.TheaccountwassettledonJuly1,20x1.

 Included in the May 1, 20x1 expenditures is ₱40,000 cost of materials obtainedinexchangeforoldequipment.

Progressbillingsduringtheyearareasfollows:

 Paymentsonbillingsaresubjectto10%withholdingbyCUTDOWN,Inc.

 RETRENCHCo.determinedthecapitalizationratetobe10%.

Howmuchisthecapitalizableborrowingcost?

a.646,000 b.546,000 c.446,000 d.0

Extended period of construction

Use the following information for the next four questions: CONVALESCECo.startedconstructionofaqualifyingassetforRECOVER,Inc.on January1,20x1.Thefollowingwereexpendituresincurredonconstruction.

COVALESCECo.determinedthecapitalizationratetobe10%.Theconstructionof thequalifyingassetwassubstantiallycompletedonSeptember30,20x3.

7. Howmuchisthecapitalizableborrowingcostin20x1?

8. Howmuchisthecapitalizableborrowingcostin20x2?

9. Howmuchisthecapitalizableborrowingcostin20x3?

10.How much is the total cost of the constructed qualifying asset on September 30,20x3?

The answers and solutions to the computational problems above (Multiple choice – Computational (SET B) can be found in the accompanying Teacher’s Manual.

Chapter 18: Theory of Accounts Reviewer Scope

1. WhichofthefollowingisthecoreprincipleunderPAS23?

a. Borrowingcostsincurredintheacquisition,constructionorproductionof aqualifyingassetisexpensed.Alternatively,suchborrowingcostsmaybe capitalized.

b. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of thatasset.Otherborrowingcostsarerecognizedasanexpense.

c. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Alternatively, such borrowing costs are recognized as an expense.

d. Borrowing costs that are directly attributable to the acquisition, constructionorproductionofanylong-livedassetformpartofthecostof

that asset. Alternatively, such borrowing costs are recognized as an expense.

2. PAS23maybeappliedtowhichofthefollowing?

a. actual or imputed cost of equity and interest expense on callable preferenceshares.

b. interest expense incurred on borrowings taken to finance the acquisition ofqualifyingassetsmeasuredatfairvalue

c. borrowingcostsincurredrelatedtotheproductionofinventoriesthatare manufacturedinlargequantitiesonarepetitivebasis.

d. interest expense incurred on financial liabilities measured at amortized costundertheeffectiveinterestmethod.

3. These refer to interest and other costs incurred by an entity in connection withtheborrowingoffunds.

a.borrowedcosts

b.interestincome

c.borrowingcosts

d.costofqualifyingasset

4. Borrowing costs subject to accounting under PAS 23 include all of the followingexcept

a. interestexpensecalculatedusingtheeffectiveinterestmethod

b. interestexpenseincurredonfinanceleases

c. exchange differences arising from foreign currency borrowings to the extentthattheyareregardedasanadjustmenttointerestcosts.

d. interestexpenseincurredonredeemablepreferenceshares

e. allofthesemaybesubjecttoaccountingunderPAS23

5. It is an asset that necessarily takes a substantial period of time to get ready foritsintendeduseorsale.

a.qualifiedasset

b.qualifyingasset

c.Nine-nineasset

d.deferredasset

6. Whichofthefollowingassetsmaynotqualifyasaqualifyingasset?

a. Inventories

b. Property,plantandequipment

c. Investmentpropertymeasuredunderthefairmodel

d. Intangibleassets

7. Whichofthefollowingmayqualifyasaqualifyingasset?

a. Financialassets

b. Inventoriesthatareproducedoverashortperiodoftime.

c. Assetsthatarereadyfortheirintendeduseorsalewhenacquired

d. Assetsthatareroutinelymanufacturedorproducedinlargequantitieson arepetitivebasis.

e. Biologicalassetmeasuredatcost

8. Whichofthefollowingmayqualifyasaqualifyingasset?

a. 100-storeybuildingpurchasedfromacontractor

b. Titanicshipthattook100yearstoconstruct,purchasedfromaretailstore

c. Moviethattakes10yearstoshoot

d. Building that takes 3 years to construct, to be classified as investment propertyunderfairvaluemodel

e. Fishballs

9. Whichofthefollowingmaynotbeconsidereda“qualifyingasset”underPAS 23?

a. Apowergenerationplantthatnormallytakestwoyearstoconstruct.

b. Anexpensiveprivatejetthatcanbepurchasedfromalocalvendor.

c. Atollbridgethatusuallytakesmorethanayeartobuild.

d. Ashipthatnormallytakesonetotwoyearstocomplete.

(Adapted)

10.WhattypeofborrowingcostsiseligibleforcapitalizationunderPAS23?

a. avoidableborrowingcosts

b. non-avoidableborrowingcosts

c. non-payableborrowingcosts

d. eitheraorb

11.Whichofthefollowingprinciplessupportsthecapitalizationofinterest?

a.Conservatism c.Full-disclosure

b.Matching d.Relevance (CGA)

12.BorrowingcostscanbecapitalizedaspartoftheassetunderPAS23when

a. They are a qualifying asset and the entity has opted for the benchmark treatmentunderPAS23.

b. They are a qualifying asset; the entity has opted for the allowed alternative treatment under PAS 23, but it is not probable that they will resultinfutureeconomicbenefitstotheentity.

c. They are a qualifying asset; the entity has opted for the allowed alternativetreatmentunderPAS23,anditisprobablethattheywillresult infutureeconomicbenefitstotheentity,butthecostscannotbemeasured reliably.

d. They are a qualifying asset; the entity has opted for the allowed alternativetreatmentunderPAS23,anditisprobablethattheywillresult infutureeconomicbenefitstotheentity,butthecostscannotbemeasured reliably.

e. The borrowing costs are directly attributable to the acquisition, construction or production of a qualifying asset. Other borrowing costs arerecognizedasexpenseintheperiodinwhichtheentityincursthem.

Recognition

13.Under PAS 23, the capitalization of borrowing costs as part of the cost of a qualifying asset commences on the date when which of the following conditionsismet?

a. Theentityincursexpendituresfortheasset

b. Theentityincursborrowingcosts

c. It undertakes activities that are necessary to prepare the asset for its intendeduseorsale

d. allofthese

14.Which of the following statements regarding the provisions of PAS 23 is not true?

a. Borrowingcostseligibleforcapitalizationarethosethatwouldhavebeen avoidediftheexpenditureonthequalifyingassethadnotbeenmade.

b. Expenditures on a qualifying asset include only those expenditures that have resulted in payments of cash, transfers of other assets, or the assumptionofinterest-bearingliabilities.

c. Expenditures are reduced by any progress payments received and grants receivedinconnectionwiththeasset.

d. The average carrying amount of the asset during a period, excluding borrowing costs previously capitalized, is the expenditures to which the capitalizationrateisappliedinthatperiod.

15.Which of the following costs may not be eligible for capitalization as borrowingcostsunderPAS23?

a. Interestonbondsissuedtofinancetheconstructionofaqualifyingasset.

b. Amortization of discounts or premiums relating to borrowings that qualifiesforcapitalization.

c. Imputedcostofequity.

d. d Exchange differences arising from foreign currency borrowings to the extenttheyareregardedasanadjustmenttointerestcostspertainingtoa qualifyingasset.

(Adapted)

16.InwhichofthefollowinginstancesisanentitynotpermittedunderPAS23to capitalizeborrowingcosts?

a. Prior to the start of physical construction but where technical and administrativeworkarebeingperformed.

b. Duringtheperiodofactualphysicalconstruction.

c. During the period when an asset is being held but no production or developmentisbeingmade.

d. aandc

17.Capitalizationofborrowingcosts

a. Shallbesuspendedduringtemporaryperiodsofdelay.

b. Maybesuspendedonlyduringextendedperiodsofdelaysinwhichactive developmentisdelayed.

c. Shouldneverbesuspendedoncecapitalizationcommences.

d. Shallbesuspendedonlyduringextendedperiodsofdelaysinwhichactive developmentisdelayed.

(Adapted)

18.WhichofthefollowingistrueaccordingtoPAS23?

I. Thereisnolimitonthecapitalizationofborrowingcostsforaslongasthe amount capitalized does not exceed the actual borrowing costs incurred duringtheperiod.

II. All borrowing costs on general borrowings taken to finance the construction of a qualifying asset `may be capitalized, even if the borrowingcostsareunavoidable.

a.True,true b.True,false c.False,true d.False,false

19.UnderPAS23,capitalizationofborrowingcostsissuspended

a. when there is temporary delay that is a necessary part of the process of gettinganassetreadyforitsintendeduse

b. during a period where substantial technical and administrative work is beingperformed

c. during extended periods of suspension of active development of a qualifyingasset

d. whentheconstructionoftheassetiscompleted

20.UnderPAS23,anentityshallceasecapitalizingborrowingcostswhen

a. substantiallyalltheactivitiesnecessarytopreparethequalifyingassetfor itsintendeduseorsalearecomplete.

b. the physical construction of the asset is complete even though routine administrativeworkmightstillcontinue

c. onlyminormodificationsareallthatareoutstanding

d. anyofthese

21.Capitalization of borrowing costs is permitted during the period activities necessary to prepare the asset for its intended use or sale are being undertaken.Whichofthefollowingisnotamongthenecessaryactivities?

a. Technical and administrative work prior to the start of physical constructionsuchasobtainingpermitstoconstruct.

b. Actualphysicalconstruction.

c. Negotiation is being made with a government official regarding his fair sharesotheconstructioncanbegin.

d. Merelyholdingassetwhennoproductionordevelopmentisbeingmade.

22.Activitiesnecessaryinpreparingaqualifyingassetforitsintendeduseorsale encompasses more than physical construction. Which of the following is a necessaryactivitywhichisnotphysicalconstruction?

a. excavationinpreparationfortheconstructionofastructure’sfoundation

b. surveyoflandpriortoactualconstruction

c. obtainingpermittostartconstructionandperformingtechnicalplanning

d. preparingPERT,GanttChartorCPMbeforeconstructionofasmallpublic toilet

23.In which of the following may capitalization of borrowing costs not be suspended?

a. Construction is delayed in order to give pavements and other cemented structurestimetofullyharden.

b. Construction of a bridge is delayed due to high levels of water which is commonattheconstructionsite.

c. Constructionisdelayed;however,substantialtechnicalandadministrative workisbeingperformed.

d. Theforemanlosthisarmduetoanaccidentattheconstructionsite.

e. Thecapitalizationofborrowingcostsisnotsuspendedinanyofthese.

24.In which of the following may capitalization of borrowing costs be suspended?

a. The accountant lost his calculator and cannot account for the costs of snacksofworkersconsistingofbanana-Qandsago.

b. Mr. Politician’s daughter is wed and all contractors and workers were invited.

c. Constructionistemporarilydelayedduetoatyphoon.

d. Construction is delayed because the contractor spent the entire constructionfundatthebeerhouse;itwouldtakeupaverylongperiodto putupthelostfund

25.The borrowing costs from specific borrowings that are eligible for capitalizationiscomputedas

a. Interestexpense minus investmentincome

b. Investmentincome minus interestexpense

c. Capitalizationrate multiplied by averageexpenditures

d. Totalborrowings minus average expenditures multiplied by capitalization rate

26.The borrowing costs from general borrowings that are eligible for capitalizationmaybecomputedas

a. Interestexpense minus investmentincome

b. Investmentincome minus interestexpense

c. Capitalization rate multiplied by average carrying amount of qualifying asset

d. Totalborrowings minus average expenditures multiplied by capitalization rate

27.A company is constructing an asset for its own use. Construction began in 20x1. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 20x1 and 20x2 at the end of each quarter. The total amount of interest cost capitalized in 20x2 should be determinedbyapplyingtheinterestrateonthespecificnewborrowingtothe

a. totalaccumulatedexpendituresfortheassetin20x1and20x2.

b. averageaccumulatedexpendituresfortheassetin20x1and20x2.

c. averageexpendituresfortheassetin20x2.

d. totalexpendituresfortheassetin20x2. (AICPA)

28.Whichofthefollowingassetsdonotqualifyforcapitalizationofinterestcosts incurredduringconstructionoftheassets?

a. Assetsunderconstructionforanenterprise'sownuse.

b. Assetsintendedforsaleorleasethatareproducedasdiscreteprojects.

c. Assetsfinancedthroughtheissuanceoflong-termdebt.

d. Assets not currently undergoing the activities necessary to prepare them fortheirintendeduse. (AICPA)

29.Assetsthatqualifyforinterestcostcapitalizationinclude

a. assetsunderconstructionforacompany'sownuse.

b. assets that are ready for their intended use in the earnings of the company.

c. assetsthatarenotcurrentlybeingusedbecauseofexcesscapacity.

d. Alloftheseassetsqualifyforinterestcostcapitalization. (AICPA)

30.Whencomputingtheamountofinterestcostto becapitalized,theconceptof "avoidableinterest"refersto

a. thetotalinterestcostactuallyincurred.

b. acostofcapitalchargeforstockholders'equity.

c. that portion of total interest cost which would not have been incurred if expendituresforassetconstructionhadnotbeenmade.

d. that portion of average accumulated expenditures on which no interest costwasincurred.

31.Theperiodoftimeduringwhichinterestmustbecapitalizedendswhen

a. theassetissubstantiallycompleteandreadyforitsintendeduse.

b. nofurtherinterestcostisbeingincurred.

c. theassetisabandoned,sold,orfullydepreciated.

d. theactivitiesthatarenecessarytogettheassetreadyforitsintendeduse havebegun.

(AICPA)

32.Whichofthefollowingstatementsistrueregardingcapitalizationofinterest?

a. Interest cost capitalized in connection with the purchase of land to be usedasabuildingsiteshouldbedebitedtothelandaccountandnottothe buildingaccount.

b. The amount of interest cost capitalized during the period should not exceedtheactualinterestcostincurred.

c. When excess borrowed funds from general borrowings not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amountofinterestcosttobecapitalized.

d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulatedexpendituresonqualifyingassetsduringtheperiod.

(AICPA)

33.Construction of a qualifying asset is started on April 1 and finished on December1. ThefractionusedtomultiplyanexpendituremadeonApril1to findweighted-averageaccumulatedexpendituresis

a.8/8. b.8/12. c.9/12. d.11/12.

(AICPA)

34.When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed immediately may be temporarily invested in interest-bearing securities. Interest earned on these temporaryinvestmentsshouldbe

a. offsetagainstinterestcosttobecapitalized

b. usedtoreducethecostofassetsbeingconstructed.

c. multiplied by an appropriate interest rate to determine the amount of interesttobecapitalized.

d. recognizedasrevenueoftheperiod.

(AICPA)

35.Interestcostthatiscapitalizedshould

a. bewrittenoffovertheremainingtermofthedebt.

b. be accumulated in a separate deferred charge account and written off equallyovera40-yearperiod.

c. notbewrittenoffuntiltherelatedassetisfullydepreciatedordisposedof.

d. noneofthese.

(AICPA)

36.During 2002, TIER ROW Co. constructed machinery for its own use and for sale to customers. Machines sold to customers are manufactured in large quantitiesonarepetitivebasis.Bankloansfinancedtheconstructionofthese assets, both during and after construction were complete. How much of the interest incurred should be reported as interest expensein the 2002 income statement?

Interest incurred for machinery

Interest incurred for machinery constructed for own use held for sale

a. Allinterestincurred

b. Allinterestincurred

c. Interestincurredaftercompletion

Allinterestincurred

Interestincurredaftercompletion

Interestincurredaftercompletion

Allinterestincurred (Adapted)

d. Interestincurredaftercompletion

37.Itispermissibletocapitalizeintereston

a. assets that are not being used in earning activities of the entity and that arenotundergoingtheactivitiesnecessarytogetthemreadyforsuchuse.

b. assetsmanufacturedinlargequantitiesonarepetitivebasis

c. assetsthatarealreadyareinuseorarereadyfortheirintendeduseinthe earningactivitiesontheentity.

d. assetsunderconstruction.

38.Thefollowingstatementsrelatetothecostofself-constructedassets

I. Direct cost of materials and labor as well as indirect costs and incremental overhead specifically identifiable and traceable to the constructionshallbecapitalized.

II. Financing costs attributable to a long-term construction project that are incurred up to the completion of construction are to be included in the grosscarryingamountoftheassettowhichtheyrelate

III. Cost inefficiencies, whether due to temporary idle capacity, industrial disputes or other causes, should be included as part of the cost of the asset

a.True,true,true

b.True,false,true

c.True,true,false

d.True,false,false

39.After determining which items on the balance sheet properly comprise the basis of interest capitalization for operational assets under construction, the interestcalculationisbasedonthe:

a. accumulatedborrowingusedonlyfortheconstruction.

b. accumulated expenditures on qualifying assets as of the start of the constructionperiod.

c. average accumulated expenditures on qualifying assets during the constructionperiod.

d. accumulated expenditures on qualifying assets as of the end of the constructionperiod.

40.The interest capitalization period for a self-constructed asset begins when certain conditions are met. Which of the following is not one of these conditions?

a. Activitiesnecessarytogettheassetreadyforitsintendeduseactuallyare inprogress.

b. Qualifyingexpendituresfortheassethaveactuallybeenmade.

c. Interestcosthasactuallybeenincurred.

d. Liabilities, such as trade payables or accruals, are incurred in connection withtheasset.

41.Whichofthefollowingcostsgenerallywouldbecapitalizedtoproperty,plant, andequipmentaccount?

a. Interestondebtincurredtopurchasetheitem

b. Propertytaxesrelatingtoperiodsafteracquisition

c. Importdutiesincurredonpurchase

d. Freight-out (Adapted)

42.An entity imported machinery to install in its new factory premises before year-end. However, due to circumstances beyond its control, the machinery was delayed by a few months but reached the factory premises before yearend. While this was happening, the entity learned from the bank that it was being charged interest on the loan it had taken to fund the cost of the plant. WhatisthepropertreatmentoffreightandinterestexpenseunderPAS16?

a. Bothexpensesshouldbecapitalized.

b. Interestmaybecapitalizedbutfreightshouldbeexpensed.

c. Freight charges should be capitalized but interest cannot be capitalized underthesecircumstances.

d. Bothexpensesshouldbeexpensed. (Adapted)

43.A firm decides to capitalize the interest expenditure on a large, building construction project, instead of expensing it. This ________ its debt-to-equity ratio.

a.hasanambiguouseffecton

c.decreases

d.increases (Adapted)

b.leavesunaffected

44.According to PAS23 Borrowing costs, which of the following assets could be treatedasqualifyingassetsforthepurposeofcapitalizinginterestcosts?

I. Investmentproperty

II. Investmentsinfinancialinstruments

III. Inventoryoffinishedgoodsproducedoverashortperiodoftime

IV. Powergenerationfacilities

a.I,II,III b.I,III,IV c.I,II,IV d.I,IV (ACCA)

45.AccordingtoPAS23 Borrowing costs,whichofthefollowingstatementsabout thecapitalizationofborrowingcostsaspartofthecostofaqualifyingassetis true?

a. If funds come from general borrowings, the amount to be capitalized is basedontheweightedaveragecostofborrowing

b. Capitalizationalwayscontinuesuntiltheassetisbroughtintouse

c. Capitalization always commences as soon as expenditure of the asset is incurred

d. Capitalization always commences as soon as interest on relevant borrowingsisbeingincurred (ACCA)

46.The following events take place: An entity buys some land on December 1. Planning permission is obtained on January 31. Payment for the land is deferreduntilFebruary1.Theentitytakesoutaloantocoverthecostofthe land and the construction of the building on February 1. Due to adverse weatherconditionsthereisadelayinstartingthebuildingworkforsixweeks and work does not commence until March 15. Capitalization of borrowing costswillstarton

a.December1 b.January1 c.February1 d.March15 (ACCA)

47.Iftheacquisitionorconstructionofaqualifyingassethasbeenfinancedpartly through specific and partly through general borrowings, then when computingfortheborrowingcostseligibleforcapitalization

a. the capitalization rate shall be multiplied to the average expenditures duringtheyear

b. thecapitalization rateshallbemultipliedtotheaveragecarryingamount ofthequalifyingassetfinancedthroughspecificborrowings

c. thecapitalization rateshallbemultipliedtotheaveragecarryingamount ofthequalifyingassetfinancedthroughgeneralborrowings

d. theborrowingcostsaretreatedasincurredongeneralborrowingsonly

48.WhichofthefollowingstatementsistrueinrelationtoPAS23?

I. The capitalization rate is computed as the ratio of borrowing costs incurredongeneralborrowingsovertotalgeneralborrowings.

II. Theborrowingcosttobecapitalizedduringtheperiodshouldexceedthe actualborrowingcostsincurredforthatperiod.

a.True,true b.True,false c.False,true d.False,false

49.WhichofthefollowingisnotadisclosurerequirementunderPAS23?

a. Accountingpolicyadoptedforborrowingcosts.

b. Amountofborrowingcostscapitalizedduringtheperiod.

c. Segregationofassetsthatare“qualifyingassets”fromotherassetsonthe balance sheet or as a disclosure in the footnotes to the financial statements.

d. Capitalization rate used to determine the amount of borrowing costs eligibleforcapitalization.

(Adapted)

Chapter 18 - Suggested answers to theory of accounts questions

Chapter 19 Investment Property

Chapter 19: Multiple Choice – Computational (For classroom instruction purposes)

Classification as investment property

1. COALESCETOUNITECo.hasthefollowingassets.

How

Total investment property

2. MODULATECo.hasthefollowingassets.

Howmuchisthetotalinvestmentproperty?

Portions sold separately

3. VARMINTRASCALCo.hasa10-storeycondominiumbuildingwithacarrying amount of ₱16,000,000. The first 4 floors are being rented out to tenants under operating lease and the rest are used as office space. Each portion of the building can be sold separately or leased out separately under finance lease. Assuming that the fair values of the condominium units are approximatelyequal,howmuchisclassifiedasinvestmentproperty?

a.4,600,000 b.9,600,000

c.6,400,000 d.0

Portions not sold separately (PPE as insignificant portion)

4. INTERCEDEMEDIATECo.ownsa100,000sq.metermall.Therentablespace is 80,000 sq. meters. However, a 10 sq. meter space is occupied as an administration office. The carrying amount of the building is ₱40,000,000. Howmuchisclassifiedasinvestmentproperty?

a.40,000,000 b.39,995,000

c.39,996,000 d.0

Insignificant ancillary services

5. LANGUISH TO BECOME WEAK Co. owns a building being rented out to various tenants under operating lease. LANGUISH Co. provides security and maintenance services. The building has a carrying amount of ₱4,000,000. Leasing is not the primary business of LANGUISH. How much would be classifiedasinvestmentproperty?

a.4,000,000

b.0

Significant ancillary services

c.aorbasanaccountingpolicychoice

d.noneofthese

6. LASCIVIOUSLUSTFULCo.ownsabuildingoperatedashotelThebuildinghas a carrying amount of ₱4,000,000. How much would be classified as investmentproperty?

a.4,000,000

b.0

c.aorbasanaccountingpolicychoice

d.noneofthese

Investment property in consolidated financial statements

7. TOKEN Co. owns a 90% interest in SYMBOL, Inc. During the year, TOKEN rented out a building to SYMBOL. As of year-end, the building has a carrying amount of ₱4,000,000. In the consolidated financial statements, how much wouldbepresentedasinvestmentproperty?

a.4,000,000

b.0

c.aorbasanaccountingpolicychoice

d.noneofthese

Initial measurement of investment property

8. LIMBOOBLIVIOUSCo.hasthefollowingtransactionsduringtheyear.

 Purchased building to be held as investment property for ₱4,000,000. Direct costsincurredamountedto₱80,000.Costsofday-to-dayservicingfortheasset totaled₱20,000.

 Constructed building to be used as investment property. Total costs incurred includethefollowing:

i. Materials,labor,andoverhead ₱8,000,000

ii. Start-upcosts 400,000

iii. Operatinglosses 200,000

iv. Abnormalamountsofwastedmaterialsduring construction 80,000

 Landacquiredwithcurrentlyundeterminedfutureusebyissuingnotepayable withfaceamountof₱4,000,000andapresentvalueof₱3,200,000.

 Building acquired through finance lease to be rented out under various operating leases. The fair value of the building is ₱2,120,000 and the present valueofminimumleasepaymentsis₱2,000,000.

 Land to be used as investment property was acquired through exchange. Fair value of asset given up in exchange for the land is ₱12,000,000. Fair value of thelandreceivedis ₱14,400,000.Additionalcashpaidforthelandreceivedis ₱2,000,000.Theexchangehascommercialsubstance.

Howmuchisthetotalcostofinvestmentpropertyoninitialrecognition?

a.30,340,000

Fair value model

b.31,820,000

c.32,420,000

d.31,280,000

9. On January 1, 20x1, NURTURE REAR Co. acquired a building with an estimatedusefullifeof10yearsandresidualvalueof₱400,000foratotalcost of₱4,000,000.ThefairvalueofthebuildingonJanuary1,20x1is ₱4,800,000 whilethefairvalueonDecember31,20x1is₱5,200,000.NURTUREestimates that if the building is sold currently on December 31, 20x1, costs to sell amountto₱200,000.NURTUREusesthestraightlinemethodindepreciating

itsPPE.NURTUREusesthefairvaluemodelforitsinvestmentproperties.The year-endadjustingentrywillinclude

a.360,000depreciation

b.400,000unrealizedgain

Change in accounting policy

c.200,000unrealizedgain

d.1,200,000unrealizedgain

Use the following information for the next two questions: GENRE Co. hasan investmentpropertywithcarryingamount of ₱4,400,000 and fairvalueof₱5,200,000onJanuary1,20x1.

10.If GENRE Co. decides to change its accounting policy from the cost model to thefairvaluemodel,howmuchisthegainorlossonthechange?

a. 800,000recognizedinprofitorloss

b. 800,000recognizedinothercomprehensiveincome

c. 800,000recognizeddirectlyinequity

d. 0

11.IfGENRECo.decidestochangeitsaccountingpolicyfromthefairvaluemodel to the cost model, how much is the gain or loss on the change? What is the entrytoeffectthechange?

a. 800,000recognizedinprofitorloss

b. 800,000recognizedinothercomprehensiveincome

c. 800,000recognizeddirectlyinequity

d. 0

Property interest in operating lease

12.OnJanuary1,20x1,WARYCo.enteredintoanoperatingleasewithCAUTIOUS Leasing, Inc. for a building. The building will be sublet under various operatingleases.Annualrentalis₱400,000for10years.

On January 1, 20x1, WARY Co. decided to classify the property interest in the operatingleaseasinvestmentproperty.Itwasdeterminedthatthepresentvalue oftheminimumleasepaymentsis ₱3,200,000whichisequaltothefairvalueof thepropertyinterestonthatdate.

PriortoJanuary1,20x1,WARYCo.usesthecostmodeltomeasureitsinvestment property. The carrying amounts and fair values of the other investment propertiesareshownbelow:

Howmuchisthetotalcarryingamountofthealltheinvestmentpropertiesheld by WARY Co. on January 1, 20x1 immediately upon recognition of the property interestasinvestmentproperty?

a.2,800,000 b.6,000,000 c.6,800,000

d.3,600,000

Inability to determine fair value reliably on initial recognition

13.SLEAZY CHEAP Co. uses the fair value model for its investment property. On January 1, 20x1, SLEAZY acquired a plant for ₱4,000,000 to be rented out under various operating leases. The plant has an estimated useful life of 10 years and a residual value of ₱800,000. Due to its special nature, SLEAZY assessed that the fair value of the plant cannot be determined reliably at

initial recognition and on a continuing basis. How much is the carrying amountoftheplantasofDecember31,20x1?

a.4,000,000 b.3,680,000 c.3,600,000 d.noneofthese

Transfer under Cost model – PPE to IP

14.On January 1, 20x1, JADED EXHAUSTED Co. decided to lease out under operating lease one of its buildings that was previously used as office space. The building has an original cost of ₱12,000,000 and a carrying amount of ₱4,000,000andfairvalueof₱4,800,000asofJanuary1,20x1.JADEDCo.uses the cost model for both PPE and investment property. The building has a remaining useful life of 10 years as of January 1, 20x1. JADED Co. uses the straight line method of depreciation. How much is the gain (loss) on the reclassificationtoinvestmentproperty?

a.800,000 b.(800,000) c.(7,200,000) d.0

Transfer under Cost model – IP to PPE

15.On December 31, 20x1, SPELLBLIND FACINATE Co. decided to use as office spaceoneofitsbuildingsthatwaspreviouslyleasedout.Thebuildinghasan originalcostof ₱12,000,000and an accumulateddepreciation of ₱8,000,000. Therecoverablevalueofthebuildingis₱3,200,000asofDecember31,20x1. SPELLBLIND Co. uses the cost model for PPE and investment property. The entryonDecember31,20x1includes

a. debittoinvestmentpropertyfor₱3,200,000

b. debittobuildingfor₱4,000,000

c. debittolossonreclassificationof₱800,000

d. debittoimpairmentlossof₱800,000

Transfer under Fair value model – IP to PPE

16.OnDecember31, 20x1, HEFTWEIGHTCo. decidedtouseasofficespaceone ofitsbuildingsthatwaspreviouslyleasedout.Thebuildinghasfairvaluesof ₱4,000,000 and ₱4,800,000 on January 1, 20x1 and December 31, 20x1, respectively.HEFTCo.usesthefairvaluemodelforinvestmentproperty.The entryonDecember31,20x1includes

a. debittoinvestmentpropertyfor₱4,000,000

b. debittoinvestmentpropertyfor₱4,800,000

c. credittobuildingfor₱4,000,000

d. credittounrealizedgainfor₱800,000

Transfer under Fair value model – PPE to IP

17.OnDecember31,20x1,DECAPITATEBEHEADCo.decidedtoleaseoutunder operating lease one of its buildings that was previously used as office space. The building has an original cost of ₱12,000,000 and accumulated depreciation of ₱8,000,000 as of January 1, 20x1. Annual depreciation is ₱400,000.DECAPITATECo.usesthefairvaluemodelforinvestmentproperty. ThefairvalueofthebuildingonDecember31,20x1is ₱6,000,000.Theentry torecordthetransferofthebuildingtoinvestmentpropertyincludes

a. credittogainonreclassificationfor₱2,000,000

b. credittorevaluationsurplusfor₱2,000,000

c. debittobuildingfor₱12,000,000

d. credittorevaluationsurplusfor₱2,400,000

Transfer under Fair value model – PPE to IP

Use the following information for the next two questions:

On December 31, 20x1, DISDAINFUL PROUD Co. decided to reclassify a building previously used as owner-occupied property to investment property. DISDAINFULCo.determinedthefollowing:

DISDAINFULCo.usesthefairvaluemodelforinvestmentproperty.

18.HowmuchisrecognizedinprofitorlossonDecember31,20x1relatingtothe transfer? a.2,400,000

1,600,000 c.800,000 d.0

19.Howmuchisrecognizedinothercomprehensiveincomeand accumulatedin equityonDecember31,20x1relatingtothetransfer? a.2,400,000

1,600,000

Transfer under Fair value model – PPE to IP

800,000 d.0

20.On December 31, 20x1, HEAVE THROW Co. decided to reclassify a building previouslyusedasowner-occupiedpropertytoinvestmentproperty. HEAVE Co.determinedthefollowing:

HEAVE Co. uses the fair value model for investment property. The transfer resultedto

a.alossof₱400,000

b.alossof₱1,200,000

c.increaseinequityof₱800,000

d.noeffectonprofitorloss

Transfer under Fair value model – IP to Inventory

21.OnDecember31, 20x1, RAMBLE ROAM Co. decidedtoredevelopitsbuilding tobesoldintheordinarycourseofbusiness.RAMBLECo.usesthefairvalue modelforinvestmentproperty.Fairvaluesoftheinvestmentpropertyare:

Thetransferoftheinvestmentpropertytoinventoryresultedto

a.anunrealizedlossof₱400,000

b.anunrealizedgainof₱400,000

Replacement of parts – Cost model

c.increaseinequityfor₱400,000

d.noeffectonprofitorloss

Use the following information for the next two questions:

EXPECTORATESPITCo.acquiredabuildingonJanuary1,20x1foratotalcostof ₱24,000,000andclassifieditasinvestmentproperty.Thebuildingisestimatedto have a useful life of 10 years. EXPECTORATE Co. uses the cost model for its investment property and the straight line method of depreciation. On January 1, 20x5,theelevatorinthebuildingwasreplacedforatotalcostof₱3,200,000.

22.Assuming EXPECTORATE Co. determined that the cost of the old elevator replacedis₱2,000,000,howmuchisthegain(loss)onthereplacement?

a.800,000 b.(1,200,000) c.2,000,000 d. (1,920,000)

23.Assuming it is impracticable to determine the cost of the old elevator replaced,howmuchisthegain(loss)onthereplacement?

a.1,280,000 b.(1,200,000) c.2,000,000 d. (1,920,000)

Replacement of parts – Fair value model

24.PERIODICREGULARCo.acquiredabuildingonJanuary1,20x1foratotalcost of ₱24,000,000 and classified it as investment property. PERIODIC Co. uses thefairvaluemodelforitsinvestmentproperty.OnJanuary1,20x5,whenthe carrying amount of the building is ₱16,000,000, the elevator in the building was replaced for a total cost of ₱3,200,000. It is impracticable to determine thefairvalueofthereplacedpart.ThefairvalueofthebuildingonDecember 31,20x5is₱17,200,000.Howmuchisthelossrecognizedduringtheyear?

a.3,200,000 b.2,000,000 c.noloss d.indeterminable

The answers and solutions to the computational problems above (Multiple choice – Computational (SET B) can be found in the accompanying Teacher’s Manual.

Chapter 19: Theory of Accounts Reviewer Scope

1. PAS40shallbeappliedtowhichofthefollowing?

a. biologicalassetsrelatedtoagriculturalactivity

b. inventoriesheldforsaleintheordinarycourseofbusiness

c. mineral rights and mineral reserves such as oil, natural gas and similar non-regenerativeresources.

d. building that is vacant but is held to be leased out under one or more operatingleases

2. Afactory isin theprocessofbeingconstructedonbehalfof thegovernment. Thepropertyshouldbeaccountedforunder

a.PAS20 b.PAS16 c.PAS40 d.PAS11

3. Anewofficebuildingusedbyaninsuranceentityasitsheadofficewhichwas purchased specifically in the center of a major city in order to exploit its capitalgainspotential.Thepropertyshouldbeaccountedforunder

a.PAS20 b.PAS16 c.PAS40 d.PAS11

4. The applicable PFRS/PAS for a property being constructed or developed for futureuseasinvestmentpropertyis

a. PAS2, Inventories, untilconstructioniscomplete and thenit isaccounted forunderPAS40, Investment Property.

b. PAS40, Investment Property.

c. PAS 11, Construction Contracts, until construction is complete and then it isaccountedforunderPAS40,Investment Property.

d. PAS16, Property, Plant, and Equipment, untilconstructioniscompleteand thenitisaccountedfor under PAS40,Investment Property.

(Adapted)

5. Which of the following statements best describe 'owner-occupied property', accordingtoPAS40 Investment property?

a. Propertyheldforsaleintheordinarycourseofbusiness

b. Propertyheldforuseintheproductionandsupplyofgoodsorservices

c. Propertyheldtoearnrentals

d. Propertyheldforadministrativepurposes

Recognition and derecognition

6. WhichofthefollowingwouldbereportedasInvestmentProperty?

a. Property that is being constructed or developed for future use as owneroccupiedproperty.

b. Propertythatisleasedtoanotherentityunderafinancelease.

c. Owned-occupiedpropertyawaitingsale.

d. Propertyavailableforlease.

7. Whichofthefollowingwouldnotbereportedasinvestmentproperty?

a. Propertyownedbytheentityandleasedoutunderoneormoreoperating leases.

b. Propertyheldbytheentityunderfinanceleasetobeleasedoutunderone ormoreoperatingleases

c. Realestateheldforanundeterminedfutureuse.

d. Property owned by the entity and leased out to another entity under a financelease.

8. Apropertywillbeclassifiedasinvestmentpropertyif

a. itisleasedunderafinancelease

b. theowner-occupiedportionissignificant

c. the entity provides relatively insignificant ancillary services (security, janitorialservices)totheoccupantsoftheproperty

d. it is rented out to a subsidiary and consolidated financial statements are prepared

9. Investment properties are initially recognized at cost which comprises purchase price and any directly attributable expenditure. Which of the following may be treated as direct costs of acquisition and, therefore, increasesthecosttobeinitiallyrecognizedfortheinvestmentproperty?

a. Professionalfeesforlegalservicesandpropertytransfertaxes.

b. Start-upcosts

c. Operating losses incurred before the investment property achieves the plannedlevelofoccupancy

d. Abnormal amounts of wasted material, labor or other resources incurred inconstructingordevelopingtheproperty

10.Whichofthefollowingisaninvestmentproperty?

a. Propertiescurrentlybeingdevelopedforsale

b. Investmentpropertiesthatarecurrentlybeingdevelopedforfutureuseas owner-occupiedproperty

c. Propertythatisleasedouttoanotherentityunderafinancelease

d. Building rented out in an operating lease where the owner provides minimalservices

11.Allofthefollowingwillnotqualifyasinvestmentproperty,except?

a. Machineriesthatareheldforlease

b. Hotelsormotels

c. Anagriculturallandpurchasedforappreciationpurposes

d. Equipmentpurchasedforanindeterminatepurpose

12.Inaccountingforinvestmentproperty,

I. Thecostmodelusedforproperty,plant,andequipmentisthesameasthe costmodelusedforinvestmentproperty.

II. The revaluation model used for property, plant, and equipment is the sameasthefairvaluemodelusedforinvestmentproperty.

a.true,true b.true,false c.false,true d.false,false

13.UnderPAS40,indeterminingthefairvalueofaninvestmentproperty,which offollowingshouldnotbeconsidered?

a.contingentrent c.furnitureincludedinrentedproperty

b.futurecapitalexpenditure d.air-conditioninginarentalbuilding

14.Thefairvalueofaninvestmentpropertyexcludeswhichofthefollowing?

a. prepaidoraccruedoperatingleaseincome

b. equipmentmadeanintegralpartoftheproperty

c. futurecostsofday-to-dayservicingoftheasset

d. elevatorinabuildingthatisreplacedeveryafter10years.

15.Identifythecorrectstatementsfromthefollowing.

I. Investment property may be valued subsequent to initial recognition usingthecostmodelortherevaluationmodel.

II. Depreciablepropertiesmeasuredundertherevaluationmodelaresubject todepreciation.

III. Depreciable investment properties measured under the fair value model arenotsubjecttodepreciation.

IV. The fair value of a property classified as investment property measured under the fair value model is required to be determined more frequently thanthefairvalueofapropertymeasuredundertherevaluationmodel.

a.I,II,III,IV b.II,III,IV c.III,IV d.III

16.Anentityhasafactory,whichduetoadeclineinactivity,isnolongerrequired andisnowclassifiedasheldforsale.Whichofthefollowingiscorrect?

a. The property may be classified as investment property if there is commencementofdevelopmentwithviewtosale.

b. The property should be measured using cost model or fair value model butnotboth.

c. Thepropertyshouldstillbedepreciatedifthepropertyismeasuredunder fairvaluemodel.

d. The property is classified as held for sale and is not an investment property.

17.An agricultural land is purchased for its investment potential. Planning permission has not been obtained for building constructions of any kind. Whichofthefollowingiscorrect?

a. thepropertyshouldbeclassifiedasPPE

b. thepropertymaybeclassifiedasinvestmentpropertybecauseofthelack ofpermission

c. the propertymaybeclassifiedasinvestmentpropertydespitethelackof permission

d. thepropertyshouldbeclassifiedinitiallyasinvestmentpropertypending the receipt of permission; after the receipt of permission, the property shouldbeclassifiedasPPE.

18.A gain arising from a change in the fair value of an investment property for whichanentityhasoptedtousethefairvaluemodelisrecognizedin

a. Profitorlossfortheyear.

b. Generalreserveintheshareholders’equity.

c. Valuationreserveintheshareholders’equity.

d. Noneoftheabove.

(Adapted)

19.Which of the following terms best describesproperty held to earn rentals or forcapitalappreciation?

a.Freeholdproperty

c.Owner-occupiedproperty

d.Investmentproperty (ACCA)

b.Leaseholdproperty

20.Howdoesthefairvaluemodeldifferfromtherevaluationmodel?

a. Increasesin carryingamount aboveacost-basedmeasurearerecognized inequity

b. Changesinfairvaluearerecognizedthroughprofitorloss

c. aandb

d. neitheranorb

21.Selectthecorrectstatement.

a. A leasing company should treat all of its assets used in providing lease servicesasinvestmentproperty

b. Investment properties that are to be disposed of without further development are treated as investment property until they are derecognized

c. Allinvestmentpropertiesheldforcapitalappreciationwillbeclassifiedas heldforsaleinthelongrun

d. Investment properties being re-developed as investment properties on behalfofthirdpartiesareinvestmentproperties

22.Thedistinguishingcharacteristicthat identifiesan investment propertyfrom otherassetsofanentityis?

a. Changesinfairvalueoftheassetischargedtoprofitorloss

b.Thepropertydonotderivecashflowsseparatefromotherentities

c. Generates separately identifiable cash flows from other assets of the entities

d.Earnsrentalaspartoftheordinaryoperationoftheentity

23.Whichisnotcorrect?

a. The entire asset is classified as property, plant and equipment if the portiondevotedtoinvestmentpropertyisinsignificant

b. If the portions of a building held partly for lease and partly for administrative use cannot be sold separately, the entire property is classified as owner-occupied if the portion used for administrative use is moresignificant.

c. Ifservicesprovidedtotheoccupantsofabuildingissignificantinrelation tothewholearrangement,thebuildingisclassifiedasinvestmentproperty

d. Only the property interest in an asset acquired through a finance lease is classifiedasinvestmentpropertyandnotthepropertyitself

24.Property interest held by the lessee under an operating lease may be classifiedandaccountedfor:

a. Asinvestmentpropertyatfairvalue

b. Asproperty,plantandequipmentatcostmodel

c. Asintangibleassetatcost

d. Eitheraorb

25.The initial cost of a property interest in an operating lease classified as investmentpropertyshallbe:

I. Thefairvalueofthepropertyinterest

II. Thepresentvalueoftheminimumleasepaymentstotheoperatinglease

a.Ionly

c.WhicheverislowerbetweenIandII

b.IIonly d.WhicheverishigherbetweenIandII

26.Regardingpropertyinterestinanoperatinglease,whichofthefollowingcan beclassifiedasinvestmentproperty?

a. Property interest in an operating lease that has no reliably determinable fairvalue

b. Propertyinterestinanoperatingleasewhereintheunderlyingpremisesis currentlyusedbytheownerforitsregularoperation

c. Propertyinterestinanoperatingleasethatisheldforappreciationbythe lessee or wherein the underlying premises is held for sub-lease by the lessee

d. Neithera,bnorc

27.Whichofthefollowinginvestmentpropertywillhaveachangedclassification intheConsolidatedFinancialStatements?

a. Investmentpropertiesthatareintendedbymanagementtobedisposedof

b. Investmentpropertieswhereinowneroccupation commencedduringthe period

c. Investment properties that are leased out to affiliates or subsidiaries in theconsolidatedgroup

d. Investmentpropertiesleasedouttoequitymethodinvestees (Adapted)

28.Whichiscorrectregardingthefairvaluemodelforinvestmentproperty?

a. Investment properties are initially measured as cost; subsequently, they aremeasuredatfairvalue,anyfluctuationsinfairvaluearerecognizedas revaluation in equity similar to the revaluation model of property, plant andequipment

b. Investmentpropertiesareinitiallymeasuredatfairvalue,anysubsequent changesinfairvaluearerecognizedinprofitorloss

c. Changeofpolicyfromthefairvaluemodeltothecostmodelisleastlikely tohappen

d. Investment properties are initially recognized at fair value, any subsequentchangesinfairvaluearerecognizedasrevaluationinequity

29.Which of the following circumstances demonstrate a change from owneroccupiedpropertytoinvestmentproperty?

a. Commencementofdevelopmentwithaviewtosale

b. End of re-development of the investment property for use as investment property

c. Commencementofowneroccupation

d. Endofuseofpropertyforadministrativepurposestobeleasedinoneor moreoperatingleases.

30.Whichisincorrectregardingreclassificationofinvestmentproperties?

a. Underthecostmodel,thecarryingamountofthepropertywhenclassified asinvestmentpropertyisthedeemedcostoftheinvestmentproperty

b. Under the fair value model, any difference in fair value and the carrying amountofaninventoryclassifiedasinvestmentpropertyisrecognizedin profitorloss

c. The fair value of an investment property measured under the fair value model that is reclassified to owner-occupied property at cost model is consideredthecostoftheowneroccupiedproperty

d. When an owner occupied property under the revaluation model is reclassifiedtoinvestment propertyat costmodel, thedifferencebetween

the carrying amount of the owner-occupied property and its fair value at thetimeofreclassificationisincludedinprofitorloss

31.Selecttheincorrectstatement.

a. Investmentpropertiesareintendedforlong-termappreciationwhileheld forsaleassetsarenon-currentassetsheldforimmediatedisposal

b. When the fair value of an investment property becomes indeterminable, thefairvaluemodelisforegone

c. Investment property is held for appreciation or incidental operations while owner-occupied property is directly employed in the operations of theentity

d. Investmentpropertiesarenotheldforsale,inventoriesareheldforsalein theordinarycourseofbusiness

32.Which of the following properties fall under the definition of investment propertyandthereforewithinthescopeofPAS40 Investment property?

I. Landheldforlong-termcapitalappreciation

II. Propertyoccupiedbyanemployeepayingmarketrent

III. Propertybeingconstructedonbehalfofthirdparties

IV. Abuildingownedbyanentityandleasedoutunderanoperatinglease

a.I,II b.II,IV c.I,IV d.II,III,IV

33.Investmentpropertyisinitiallyrecognizedat

a. cost

b. fairvalue

c. fairvalueplustransactioncost

d. cost if the entity follows the cost method; fair value if the entity follows thefairvaluemethod

34.Theinitialcostofapropertyinterestheldundera finance lease andclassified asaninvestmentpropertyshallbe

a. thefairvalueoftheproperty

b. thepresentvalueoftheminimumleasepayments

c. the lower of the fair value of the property and the present value of the minimumleasepayments

d. the fair value of the property or the present value of the minimum lease paymentsattheoptionoftheentity

35.Which of the following generally provides the best evidence of fair value for aninvestmentproperty?

a. Discounted cash flow projections based on reliable estimates of future cashflows.

b. Recent prices on less active markets with adjustments to reflect changes ineconomicconditions.

c. Current prices for properties of a different nature or subject to different conditions.

d. Current prices on an active market for similar property in the same locationandcondition.

36.When a property interest in an operating lease is classified as investment property?

a. The use of the fair value model becomes compulsory only for similar propertyinterests

b. The use of the fair value model becomes compulsory for all investment properties

c. The use of the fair value model becomes the priority for all investment properties

d. Eitheraandc

37.IRK ANNOY Co.’s investment in real property has carrying value of ₱1,000,000 under the fair value model, before adjustment. If the fair market valueatendoftheyearis ₱800,000,howmuchshouldbethegainorlosson transferifIrkwouldshifttocostmodel?

a. gainof₱200,000reportedasothercomprehensiveincome

b. lossof₱200,000reportedasotherlossintheincomestatement

c. lossof₱200,000reportedinequityasdecreaseinrevaluationsurplus

d. none (Adapted)

38.Which of the following does not indicate change in use of the property and thereforeprecludestransferstoorfrominvestmentpropertyclassification?

a. Startofowneroccupation

b. Endofowneroccupation

c. Startofdevelopmentwithaviewtosale

d. Entitydecidestosellaninvestmentpropertywithoutdevelopment.

39.Under PAS40 Investment property, which of the following additional disclosures must be made when an entity chooses the cost model as its accountingpolicyforinvestmentproperty?

a. Thefairvalueoftheproperty

b. Thepresentvalueoftheproperty

c. Thevalueinuseoftheproperty

d. Thenetrealizablevalueoftheproperty (ACCA)

40.PAS40 Investment property gives a choice between two different models as theaccountingpolicytobeusedinrelationtoinvestmentproperty.Whichof thefollowingdisclosuresshouldbemadewhenthefairvaluemodelhasbeen adopted?

a. Depreciationmethodsused

b. Theamountofimpairmentlossesrecognized

c. Usefullivesordepreciationratesused

d. Netgainsorlossesfromfairvalueadjustments (ACCA)

41.Incaseofpropertyheldunderanoperatingleaseandclassifiedasinvestment property

a. The entity has to account for the investment property under the cost modelonly.

b. Theentityhastousethefairvaluemodelonly.

c. Theentityhasthechoicebetweenthecostmodelandthefairvaluemodel.

d. Theentityneedsonlytodisclosethefairvalueandcanusethecostmodel underPAS38.

(Adapted)

42.Aninvestmentpropertyisderecognizedwhen

a. Itisdisposedtoathirdparty.

b. Itispermanentlywithdrawnfromuse.

c. Nofutureeconomicbenefitsareexpectedfromitsdisposal.

d. inanyofthese (Adapted)

43.Derecognitionofinvestmentpropertywillnotberequiredwhen

a. itbecomesthesubjectofanoperatinglease

b. itissold

c. itbecomesthesubjectofasaleandleasebackdeal

d. itbecomesthesubjectoffinancelease

44. An entity has a factory that has been shut down for a year due to various reasons, including worker unrest and strike. The entity plans to sell this factory.Itshould

a. Classifythefactoryasinvestmentproperty.

b. Classify the factory as property held for sale if all the requirements of PFRS 5 Non-current Assets Held for Sale and Discontinued Operations are met

c. Classifythefactoryasproperty,plant,andequipmentunderPAS16.

d. Write off the net book value and disclose that fact in the footnotes tothe financialstatements.

(Adapted)

45.Transfers from investment property to property, plant, and equipment are appropriate

a. Whenthereischangeofuse.

b. Basedontheentity’sdiscretion.

c. OnlywhentheentityadoptsthefairvaluemodelunderPAS38.

d. The entity can never transfer property into another classification on the balancesheetonceitisclassifiedasinvestmentproperty.

(Adapted)

Disclosure

46.Which of the following is not a required disclosure involving investment property?

a. Theaccountingmodelfollowedforinvestmentproperty

b. Whether property interests under operating leases are classified as investmentproperties

c. The depreciation method used for investment property measured under thefairvaluemodel

d. Criteriatodistinguishinvestmentpropertyfromowner-occupiedproperty whenthereisclassificationdifficulty

47.Whichisnotadisclosureunderthecostmodelforinvestmentproperty?

a. Thedepreciationratesused

b. Thefairvalueoftheinvestmentproperty

c. Thenetgainorlossfromfairvalueadjustments

d. Thedepreciationmethodsused

Chapter 19 - Suggested answers to theory of accounts questions

Chapter 20 Intangible Assets

Chapter 20: Multiple choice – Computational (SET B) – (For classroom instruction purposes)

Research and development expense

1. DEBUNKEXPOSECo.madeexpendituresforthefollowing:  Costinactivitiesaimedatobtainingnewknowledge



researchtostudyconsumertastes

Howmuchisrecognizedasresearchanddevelopmentexpense? a.292,000 b.352,000 c.392,000 d.792,000

Research and development expense – with receivable

2. GOOSEYFOOLISHCo.madeexpendituresforthefollowing:



incurredonsearchforalternativesformaterials,devices, products,processes,systemsorservices

Howmuchisrecognizedasresearchanddevelopmentexpense?

132,000 b.152,000 c.324,000 d.152,000

Research and development expense – with intangible asset

3. REALMKINGDOMCo.madeexpendituresforthefollowing:  Costofdesign,constructionandoperationofapilotplantthatis notofascaleeconomicallyfeasibleforcommercialproduction

andoperationofplantthatisfeasible for

 Costofroutine,seasonal,andperiodicdesignoftools,jigs,molds anddies

 Costofengineeringfollowthroughinanearlyphaseof commercialproduction

 Costofqualitycontrolduringcommercialproduction

 Adaptationofanexistingcapabilitytoaparticularcustomer’s need

 CostsindevelopingsoftwareforinternaluseinREALM’sgeneral managementinformationsystem(aftertechnologicalfeasibility hasbeenestablished)

Howmuchisrecognizedasresearchanddevelopmentexpense?

a.60,000 b.220,000 c.92,000 d.252,000

Research and development expense – with PPE

4. FEROCIOUSFIERCECo.madeexpendituresforthefollowing:

 CostofpurchasedbuildingtobeusedinvariousR&Dprojects

 Depreciationonthebuildingdescribedabove







Howmuchisrecognizedasresearchanddevelopmentexpense?

a.140,000 b.880,000 c.80,000 d.940,000

Items not recognized as intangible assets

5. JUMBOVERYLARGECo.hasmadeexpendituresforthefollowing:

Howmuchoftheexpendituresincurredmayqualifyasintangibleassetstobe accountedforunderPAS38?

a.892,000 b.492,000 c.400,000 d.520,000

Trademark acquired through purchase

6. On January 1, 20x1, SUFFICIENT Co. acquired trademark from ENOUGH, Inc. for a total cost of ₱400,000. Other related costs incurred include the following:

 Costsofemployeebenefitsarisingdirectlyfrombringingtheasset toitsintendedcondition

 Professionalfeesarisingdirectlyfrombringingtheassettoits

 Costsofintroducingthenewproductincludingadvertisement costs

Howmuchisthecostoftheintangibleasset?

a.460,000 b.472,000 c.400,000 d.412,000

Trademark obtained through self-generation

7. On January 1, 20x1, PRIME FIRST Co. generated a trademark. Costs incurred includethefollowing:

 Costsofmaterialsandservicesusedorconsumedingenerating thetrademark ₱

 Costsofemployeebenefitsincurredingeneratingthetrademark

 Feestoregisterthetrademark

 Amortizationofpatentsandlicensesthatwereusedtogenerate thetrademark

 Selling,administrativeandothergeneraloverheadexpenditures

Howmuchisthecostoftheintangibleasset?

a.20,000 b.268,000 c.260,000 d.388,000

Web site cost

8. BRAWNY STRONG Co., an audit firm, incurred the following costs in selfdevelopment of its web site. The web site will be used by its auditors in, among other things, sending emails to clients, posting updates on financial reporting and auditing standards and other relevant regulations, uploading andretrievingworkingpapers,andincheckingtheirpayslips.

 Costsincurredinpurchasingwebservers,stagingservers, productionserversandInternetconnections





duringtheapplicationandinfrastructure, graphicaldesign,andcontentdevelopmentstage.



Assume that all conditions for capitalization of development costs are met, how muchisthecostofwebsiterecognizedasintangibleasset?

a.3,600,000 b.1,200,000 c.1,600,000 d.0

Web site cost

9. HUMANE CONSIDERATE Co. incurred the following costs in relation to the developmentofwebsite:

 Developmentcostsofawebsitetobeusedinternally 200,000

 Developmentcostsofawebsitetobeusedexternallyin promotingandadvertisingproducts.Customersplaceorders personallyatretailoutletstoresorthroughtelephoneor facsimile.

 Developmentcostsofwebsitesheldforsaletovariousclients.

 Internetfeepaidforthemonth

Howmuchiscapitalizedasintangibleasset?

a.200,000 b.240,000 c.320,000 d.0

Web site cost

10.SECRETE GIVE OFF Co. incurred the following costs in relation to the developmentofitswebsite.

 Developmentcostsofawebsitetobeusedexternally. Customersplaceordersandpaydirectlythroughthewebsite. 120,000

 PaymenttoMr.Webdeveloperforhisassistanceindeveloping thewebsite. 40,000

 Costofdigitalphotographsofgoodsuploadedtothewebsite 20,000

 ProfessionalfeeofMr.MannyBoksingero,theproductendorser 12,000,000

 FeeofMr.FreddieCroachformakingMr.Mannysweatbefore thepictorial. 4,000,000

Howmuchiscapitalizedasintangibleasset?

a.580,000 b.16,580,000

Customer list

c.180,000 d.160,000

11.OnJanuary1,20x1,PLUMPFULLYROUNDEDCo.purchasedacustomerlistof a large distributor of health products for ₱180,000. This customer database includes name, contact information, order history, and demographic information.PLUMPexpectstobenefitfromtheinformationevenlyovera3yearperiod.HowmuchisthecarryingamountoftheintangibleonDecember 31,20x1?

a.120,000 b.60,000

Franchise with finite useful life

c.180,000 d.0

12.OnJanuary1,20x1,WHOLESOMECo.acquiredafranchisefromHEALTHYCo. for₱1,600,000.ThefranchisegivesWHOLESOMEtherighttosellHEALTHY’s products until December 31, 20x5, at which date WHOLESOME may renew thefranchiseforanotherfeesubjecttoanewfranchiseagreement. InJanuary 20x1, HEALTHY has performed substantially all the services required under the franchise contract and WHOLESOME started operating the franchise. Annual periodic franchise fee for 20x1 is ₱60,000. How much is the amortizationexpenserecognizedin20x1?

a.320,000

b.60,000

Franchise with finite useful life

c.80,000 d.0

Use the following information for the next two questions:

OnJanuary1,20x1,CLUSTERCo.acquiredaperpetualfranchisefromBUNCHCo. for ₱800,000 by paying ₱400,000 cash as down payment and issuing a note payable for the remainder. The note payable is payable in five equal annual payments of ₱80,000 starting January 1, 20x1. The franchise gives CLUSTER the right to manufacture and sell Queen’s balls using the processes developed by BUNCHCo.foranindefiniteperiod.Theimputedrateofinterestis10%

In January 20x1, BUNCH has performed substantially all the services required underthefranchisecontractandCLUSTERstartedmakingballs.Annualperiodic franchisefeefor20x1is₱200,000.

13.Howmuchistheinitialcostofthefranchise?

a.333,600 b.842,162 c.656,744 d.733,600

14.Howmuchisthetotalexpenserecognizedin20x1relatedtothefranchise?

a.200,000 b.225,360 c.7,364 d.447,364

Acquired broadcasting license

15.On January 1, 20x1, KEEN SHARP Co. acquired a broadcasting license for ₱400,000 that is renewable every 10 years if KEEN provides at least an average level of service to its customers and complies with the relevant legislativerequirements.Thelicensemayberenewedindefinitelyatlittlecost andhasbeenrenewedtwicebeforethemostrecentacquisition.KEENintends to renew the license indefinitely and evidence supports its ability to do so. Historically, there has been no compelling challenge to the license renewal. The technology used in broadcasting is not expected to be replaced by anothertechnologyatanytimeintheforeseeablefuture.

HowmuchisamortizationexpensetoberecognizedonDecember31,20x1?

a.40,000 b.400,000 c.36,547 d.0

Purchased patent

Use the following fact pattern for the next three questions: Fact pattern

On January 1, 20x1, SPARSE Co. purchased a patent from THINLY SPREAD, Inc. for₱400,000.THINLYSPREADhasheldthispatentfor5years.SPARSEestimates thatthepatenthasaremainingusefullifeof8years.

16.Howmuchisthepatentamortizationin20x1?

a.80,000 b.50,000 c.266,667 d.20,000

17.On January 1, 20x3, SPARSE Co. purchased a competitive patent from MEAGER Corp. for ₱180,000 in order to protect the old patent. The competitivepatent hasaremaininglegallifeandusefullifeof20years. How muchisthetotalamortizationexpensein20x3?

a.50,000 b.80,000 c.133,367 d.42,500

18.On January 1, 20x4, SPARSE incurred litigation costs of ₱80,000 in an unsuccessful defense of the patents held. How much is the total expense recognizedin20x4?

a.80,000 b.160,000 c.523,667 d.480,000

Internally generated patent

Use the following information for the next four questions: In 20x1, VENERATE RESPECT Co. started to develop a patent. Total costs incurredduringtheyearamountedto ₱400,000. OnJanuary1, 20x2, thepatent was fully developed. Legal and registration costs incurred in registering the patentamountedto₱240,000.Itwasestimatedthatthepatenthasausefullifeof 25years.

19.HowmuchisthecarryingamountofthepatentonDecember31,20x2?

a.614,400 b.608,000 c.230,400 d.228,000

20.In 20x4, VENERATE Co. started to develop a new improved patent to extend the life of the old patent. Development costs totaled ₱800,000. How much is thecarryingamountofthepatentonDecember31,20x4?

a.204,000 b.870,400 c.1,272,000 d.216,000

21.OnJanuary1,20x5,thenewpatentwascompletedandlegalandregistration costs incurred to register the new patent amounted to ₱320,000. It was estimatedthatthenewpatentwillextendthelifeoftheoldpatentbyanother 20 years starting January 1, 20x5. How much is the amortization expense in 20x5?

a.78,200 b.26,200 c.346,200 d.416,200

22.On January 1, 20x6, VENERATE Co. incurred litigation costs of ₱80,000 in a successful defense of the patents held. How much is the total expense recognizedin20x6relatingtothepatent?

a.158,200 b.106,200 c.80,000 d.26,200

Patent with residual value

23.On January 1, 20x1, PROMPT Co. incurred ₱400,000 in registering a patent. QUICK,Inc.,athirdparty,committedtopurchasethepatentfortheremaining 5 years of its legal useful life for a total cost of ₱100,000. How much is the carryingamountofthepatentonDecember31,20x1?

a.320,000 b.240,000 c.340,000 d.380,000

Change in useful life

24.OnJanuary1,20x1,PUISSANCEPOWERCo.incurred ₱400,000inregistering apatent.Itwasinitiallyestimatedthattheusefullifeoftheassetis20years, equaltoitslegallife. However, onJanuary1,20x6, PUISSANCE assessedthat theusefullifeofthepatentwasonly15yearsstartingondateofregistration. Howmuchistheamortizationexpensein20x6?

a.30,000 b.32,400 c.36,800 d.28,000

Computer software

25.ENTITY BEING Co. incurred the following costs in self-generating computer software.

Howmuchisthecostofcomputersoftwarerecognizedasintangibleasset?

26.TRAVERSETOCROSSCo.incurredthefollowingcostsindevelopingsoftware: Developmentcostspriortoreachingtechnological

Howmuchisthetotalsoftware-relatedexpensefortheyear?

27.SPONTANEOUS SELF-ACTING Co. acquired the intangible assets listed below foratotallumpsumpriceof₱400,000.

Howmuchistheinitialmeasurementofthemasthead?

a.100,000 b.120,000 c.133,333 d.266,667

The answers and solutions to the computational problems above (Multiple choice – Computational (SET B) can be found in the accompanying Teacher’s Manual.

Chapter 20: Theory of Accounts Reviewer

Objective and scope

1. WhichofthefollowingmayPAS38beappliedto?

a. goodwillacquiredinabusinesscombination

b. rightsarisingfromexplorationandevaluationassets

c. computersoftwareheldforsaleintheordinarycourseofbusiness

d. leaseholdimprovements

e. websitecosts

2. PAS38doesnotapplytoallofthefollowing,except

a. receivableswithoutphysicalsubstance

b. intangibleassetsclassifiedasassetsheldforsale

c. insurer’scontractualrightsunderinsurancecontracts

d. assetsarisingfromemployeebenefits

e. righttoutilizeanotherentity’sbusinessconcept

3. Itisanidentifiablenon-monetaryassetwithoutphysicalsubstance.

a.intangibleasset

b.financialasset

c.ghostasset

d.dreamasset

4. PAS38statesthatanassetmeetstheidentifiabilitycriterioninthedefinition ofanintangibleassetwhenit:

I. isseparable,i.e.,capableofbeingseparatedordividedfromtheentityand sold, transferred, licensed, rented or exchanged, either individually or togetherwitharelatedcontract,assetorliability

II. arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights andobligations.

a.I b.II

c.IorII d.none

5. Allofthefollowingareessentialcharacteristicsofanintangibleasset,except

a.Identifiability

b. Control

c. Futureeconomicbenefits

d.Subjecttoamortization

6. Which of the following is one of the essential characteristics of an intangible asset?

a.usedinbusiness

b.subjecttoamortization

c.identifiable

d.monetary

7. Thedefinitionofanintangibleasset

a. requiresanintangibleassettobeusedinbusiness

b. requires an intangible asset to provide future economic benefits through increasedrevenues

c. requires an intangible asset to be identifiable to distinguish it from goodwill.

d. requiresanintangibleassettobewithoutphysicalsubstance,whetherthe assetismonetaryornot.

8. An asset that cannot be sold, transferred, licensed, rented, or exchanged separatelyiscalled

a.goodwill

b.intangible

c.unidentifiable

d.nosuchthing

9. Whichofthefollowingitemsmayqualifyforrecognitionasintangibleasset?

a. Marketandtechnicalknowledge

b. Employees’skillsdevelopedfromtraining

c. Specificmanagerialortechnicaltalent

d. Marketshareandcustomerloyalty

e. Noneofthese

10.Futureeconomicbenefitsfromanintangibleassetmaybeobtainedinvarious wayswhichinclude

a. restrictingothersfromtheuseoftheasset

b. enjoymentoflegalenforceability

c. reducedoperatingcosts

d. separabilitythroughtransferableright

11.Whichofthefollowingisnottrueregardingcontroloveranintangibleasset?

a. Anentitycontrolsanassetiftheentityhasthepowertoobtainthefuture economic benefits flowing from the underlying resource and to restrict theaccessofotherstothosebenefits.

b. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficulttodemonstratecontrol.

c. Legalenforceabilityofarightisanecessaryconditionforcontrolbecause withoutitanentitycannotbeabletocontrolthefutureeconomicbenefits fromtheasset.

d. Control may be acquired from contractual rights such as rights arising fromfranchisesandnon-competitionagreements.

12.Regarding an asset that contains both intangible and tangible components, whichofthefollowingstatementsisincorrect?

a. theentityusesitsjudgmentonhowtoclassifytheasset

b. the asset is classified as property, plant and equipment if the intangible componentformsanintegralpartofthetangibleasset

c. the entire asset is classified as property, plant and equipment if the intangiblecomponentisnecessaryforthetangibleassettooperate

d. theentireassetisclassifiedasintangibleassetifthetangiblecomponentis necessaryfortheintangibleassettooperate.

13.Whichitemlistedbelowdoesnotqualifyasanintangibleasset?

a.Computersoftware.

c.Copyrightsthatareprotected.

d.Notebookcomputer. (Adapted)

b.Registeredpatent.

Financial statement presentation

14.The line item intangible asset presented on the face of the statement of financialpositionnormallyincludeswhichofthefollowingitems?

a. goodwill

b. leaseholdimprovements

c. operatingsoftwarecosts

d. significantapplicationsoftwarecosts

e. allofthese

15.Which of the following is not an acceptable financial statement presentation forintangibleassets?

a. Intangible assets accounted for under PAS 38 shall be presented separatelyfromGoodwill.

b. Intangible assets accounted for under PAS 38 are aggregated and presentedasonelineitemundertheheading“Intangibleassets”or“Other intangibleassets”inthestatementoffinancialposition.Thebreakdownof thelineitemisdisclosedinthenotes.

c. Goodwillispresentedseparatelyinastatementoffinancialpositionunder alineitemdescribedas“Goodwill.”

d. Goodwillisaggregatedwithotherintangibleassetsandthebreakdownis providedinthenotes.

Recognition

16.Anintangibleassetshallberecognizedifmanagementcandemonstratethat:

I. theitemmeetsthedefinitionofintangibleasset

II. it is probable that the expected future economic benefits will flow to the entity

III. thecostoftheassetcanbemeasuredreliably.

IV. the entity becomesaparty to the contractualprovisions of theintangible asset

V. thefairvalueoftheintangibleassetcanbereliablydetermined

a.I,II,III b.I,II,III,IV c.I,II,III,IV,V

17.Atinitialrecognition,anintangibleassetshallbemeasured

a.atcost c.atfairvalueplusdirectacquisitioncosts

b.atfairvalue d.anyofthese

18.Measurement of cost depends on how the intangible asset is acquired. Intangibleassetsmaybeacquiredthrough:

I. Separateacquisition

II. Acquisitionaspartofabusinesscombination

III. Acquisitionbywayofagovernmentgrant

IV. Exchangesofassets

V. Internalgeneration

a.I,II,III,IV b.I,V c.Ionly d.anyofthese

19.When an intangible asset is separately acquired through purchase, which of thefollowingisincorrect?

a. trade discounts and rebates are deducted from the purchase price whethertakenornot

b. any directly attributable cost of preparing the asset for its intended use formspartofinitialcost

c. ifsettlementisdeferred,theintangibleassetisrecognizedatitscashprice equivalent, any difference between this amount and future payments is recognizedasinterestexpense

d. trade discounts and rebates are deducted from the purchase price only whentaken

20.MYTHICAL Co. acquired an intangible asset from IMAGINARY Co. during the year. Which of the following costs incurred by Mythical should not be includedasinitialcostoftheintangibleassetpurchased?

a. feesofMr.Programmerininstallingthesoftwarepurchased

b. fees of Mr. Auditor in auditing the system prior to closing the purchase contract

c. costsoftestingthenewsystemwhetheritisfunctioningproperly

d. advertising costs for the new product that will be produced using the newlyacquiredsoftware

21.SPLICE Co. acquired an intangible asset from 2UNITE Co. during the year. Whichofthefollowingcostsshouldbeincludedasinitialcostoftheintangible assetpurchased?

a. costs of training Mrs. Old Baket, the designated employee to operate the newlyacquiredasset

b. allocationofadministrationandothergeneraloverheadcosts

c. rebatesontheinvoicepricenottaken

d. non-refundablesalestaxespaidonthepurchase

22.SVELTE Co. acquired an intangible asset from SLENDER Co. during the year. All of the following costs incurred by Svelte related to the newly acquired assetshouldbeexpensedimmediately,except

a. initial operating losses incurred while demand for the asset’s output buildsup

b. modifications to the intangible asset after it was put to the operating conditionoriginallyintendedbySvelte

c. costs incurred while the asset capable of operating in the manner intendedbymanagementhasyettobebroughtintouse

d. salvageproceedsfromsamplesproducedduringtesting

23.Thecostofintangibleassetacquiredinabusinesscombinationisits

a. fairvalueattheacquisitiondate

b. purchasecost

c. lowerofcostorfairvalue

d. fairvaluelesscoststosellatacquisitiondate

24.Whichofthefollowingprovidesthemostreliableestimateofthefairvalueof anintangibleasset?

a. quotedmarketpriceinanactivemarket

b. priceinabindingsaleagreement

c. presentvalueoffuturecashflows

d. anyofthese

25.If no active market exists for an intangible asset, which of the following is true?

I. itsfairvalueistheamountthattheentitywouldhavepaidfortheasset,at the acquisition date, in an arm’s length transaction between knowledgeable and willing parties, on the basis of the best information available.

II. Itsfairvaluemaybedeterminedbydiscountingestimatedfuturenetcash flowsfromtheasset

a.True,true b.True,false c.False,true d.False,false

26.Intangible assets acquired by way of government grant may be initially recognizedat

a.fairvalue

b.nominalamount c.zero d.anyofthese

27.Duringtheyear,ENDEAVORCo.receivedanintangibleassetfrom2TRYCo.in an exchange transaction with commercial substance. Which of the following statementsistrue?

a. Endeavor measures the intangible asset received at the fair value of the intangibleassetgivenupminuscashpaid

b. Endeavor recognizes gain or loss on the exchange for the difference between the fair value of the asset received and the carrying amount of theassetreceived

c. If Endeavor cannot determine the fair value of the asset received, it shall measuretheintangibleassetreceivedusingthefairvalueoftheintangible assetgivenup.

d. Endeavor recognizes gain or loss on the exchange for the difference between the fair value of the asset given up and the carrying amount of theassetgivenup,regardlessofwhethercashisreceivedorpaid

28.During the year, ZENITH Co. received an intangible asset from HIGHEST POINTCo.inanexchangetransactionthatlackscommercialsubstance.Which ofthefollowingstatementsisincorrect?

a. Zenith should measure the asset received at the carrying amount of the assetgivenup

b. Zenithshouldnotrecognizeanygainorlossonthesaleunlesscashispaid ontheexchange

c. Zenith should measure the asset received at an amount equal to the difference between the initial cost of the asset given up and its related accumulatedamortization

d. Zenith should not recognize any gain or loss on the sale regardless of whethercashisreceivedorpaid.

29.Toassesswhetheraninternallygeneratedintangibleassetmeetsthecriteria for recognition, an entity classifies the generation of the asset into research phaseanddevelopmentphase.Whichofthefollowingstatementsistrue?

a. If an entity cannot distinguish the research phase from the development phase, the entity treats expenditures as if they were incurred in the developmentphaseonly.

b. Expenditures incurred in the research phase shall be recognized as expensewhenincurred.

c. An intangible asset may be recognized for expenditures incurred in researchphase.

d. An in-process research and development (R&D) project acquired as part ofabusinesscombinationisexpensedifacomponentisresearch.

30.Which of the following transactions may not give rise to recognition of an intangibleasset?

a. HEARTYCo. acquiredSINCERE Co. in abusinesscombination. Amongthe items acquired is an R&D project composed mainly of expenditures incurredbySincereinresearchphase.

b. Expenditures incurred in development phase that meet all of the conditionsforrecognitionasintangibleasset

c. Expenditures incurred in research phase for an invention that is highly viable

d. RegistrationandlegalfeesforapatentfiledwiththeIPO.

31.Whichofthefollowingisincludedinresearchanddevelopmentexpensefora period?

a. Thetotalcostofabuildingwithusefullifeof25yearsacquiredduringthe yeartobeusedinvariousresearchanddevelopmentprojects

b. Depreciationonabuildingusedforresearchanddevelopment

c. The cost incurred during the year to ensure quality control for existing productionprocesses

d. The cost incurred during the year for research activities performed for anotherentity. (Adapted)

32.Intangibleassetshaveallofthefollowingcharacteristics,except:

a. theirownershipconfersrights,butnophysicalsubstance.

b. theyhavenophysicalsubstance.

c. theyarerelativelylong-lived.

d. theyprovidebenefitstocurrentoperationsonly. (AICPA)

33.Whichofthefollowingstatementsiscorrect?

a. Someintangibleassetsconveyexclusiverightswhicharerepresentedonly bytangiblephysicalsubstance.

b. Intangibleassetsusedintheoperationofabusinessarealwayslongterm.

c. The process of recording the expiration of the economic benefits of an intangibleassetiscalleddepletion.

d. Intangible assets are obtained in two ways: acquisition from an external sourceorinternallydeveloped. (AICPA)

34.Whichofthefollowingstatementsistrue?

a. Theonlycostofaninternallydevelopedpatentthatshouldbecapitalized aspatentcostarelegalfeesandotherregistrationcosts.

b. An identifiable tangible asset developed internally is never recognized in theaccountsasanasset.

c. Intangibleassetsusuallyhavearesidualvaluethatmustbeconsideredin theamortizationofcost.

d. Anintangibleassetisusuallyamortizedbyacredittoanincomeaccount. (Adapted)

35.For some purposes, assets are classified as identifiable and unidentifiable. Whichofthefollowingisanunidentifiableasset?

a.cashinbank

c.goodwill

d.prepaidinsurance (Adapted)

b.patent

36.Goodwill should properly appear on the financial statements of an entity which:

a. haspurchasedanotherentity

b. consistentlyoperatesprofitably

c. consistentlyreportsabove-normalprofits

d. meetsalloftheconditionsregardinglegalgoodwill. (AICPA)

37.Costs incurred by a company that developed its own goodwill internally shouldbe:

a. capitalizedandamortizedasthecompanyprofitsincreased.

b. capitalizedandamortizedovertheusefullifeofthegoodwill.

c. expensedwhenincurredasacurrentoperatingexpense.

d. capitalizedandamortizedoveraperiodnottoexceed40years. (AICPA)

38.AccordingtoPAS38 Intangible assets,therecognitioncriteriaforanintangible assetincludewhichofthefollowingconditions?

a. Itmustbemeasuredatcost

b. Itscostcanbemeasuredreliably

c. Itisprobablethatfutureeconomicbenefitswillarisefromitsuse

d. Itisanintegralpartofthebusiness

e. bandc (ACCA)

39.WhichofthefollowingitemsqualifyasanintangibleassetunderPAS38?

a. Advertisingandpromotiononthelaunchofahugeproduct.

b. Collegetuitionfeespaidtoemployeeswhodecidetoenrollinanexecutive M.B.A.programatHarvardUniversitywhileworkingwiththecompany.

c. Operatinglossesduringtheinitialstagesoftheproject.

d. Legalcostspaidtointellectualpropertylawyerstoregisterapatent. (Adapted)

40.Whichofthefollowingassetstypicallyareamortized? Patents Trademarks

a. No No

b. Yes Yes

c. No Yes

d. Yes No (AICPA)

41.The creative chief executive of a corporation who is personally responsible for numerous inventions and innovations is not reported as an asset on the corporation's statement of financial position. The accounting principle/guidelinethatpreventsthecorporationforreportingthispersonas anassetis

a.Conservatism b.Cost c.Goingconcern d.Materiality (AICPA)

42.What is the proper time or time period over which to match the cost of an intangible asset with revenues if it is likely that the benefit of the asset will lastforanindefiniteperiod?

a. Fortyyears

b. Fiftyyears

c. Immediately

d. Atsuchtimeasreductioninvaluecanbequantitativelydetermined. (AICPA)

43.Whichofthefollowingexpendituresqualifiesforassetcapitalization?

a. Costofmaterialsusedinprototypetesting

b. Costsoftestingaprototypeandmodifyingitsdesign

c. Salariesofengineeringstaffdevelopinganewproduct

d. Legalcostsassociatedwithobtainingapatentonanewproduct (AICPA)

44.Whichofthefollowingstatementsiscorrectconcerningstart-upcosts?

a. Costs of start-up activities, including organization costs, should be expensedasincurred.

b. Costs of start-up activities, including organization costs, should be capitalizedandexpensedonlyifanimpairmentexists.

c. Costs of start-up activities, including organization costs, should be capitalized and amortized on a straight-line basis over the lesser of the estimatedeconomiclifeofthecompany,or60months.

d. Costs of start-up activities should be capitalized and amortized on a straight-line basis over the lesser of the estimated economic life of the company, or 60 months, while organization cost should be expensed as incurred. (AICPA)

45.Which of the following incorrectly relate(s) to accounting for long-lived assets?

I. Goodwillarisingfromaconsolidationwhichappearsamongtheassetson the consolidated balance sheet of a parent company and its only subsidiaryshowsthatthesubsidiarywasacquiredatapricethatwasless thantheunderlyingbookvalueofitstangibleassets.

II. Provisions for renewal or extension may alter a specified limit on useful lifeofintangibleassetsthusaffectingtheamortizationamount.

III. Amortization policy on intangible assets should be continually evaluated todeterminewhetherlatereventsandcircumstancesnecessitaterevision ofestimatesofusefullives.

IV. Coststodevelopaproductorprocesstobepatentedmayformpartofthe costsofpatents.

V. To be consistent, amortization policy of intangible assets should not be evaluated often even if later events and circumstances warrant revised estimatesofusefullives.

a.IV,V b.II,III

c.II,III,IV d.I,IV,V

46.Goodwillarisingfromabusinesscombinationshould:

a. beexpensedintheyearofacquisition

b. beamortizedoveritseconomiclife

c. notbeamortizedbuttestedforimpairmentatleastannually

d. be written off after (40) years or (20) years depending on the GAAP adopted (AICPA)

47.Accounting for intangible assets involves the same kind of problem as accountingforotherlong-livedassets,suchas:

a. accountingafteracquisition(amortization)

b. accountingifthevaluesdeclinesubstantially&permanently

c. determininganinitialcarryingamount

d. allofthese (AICPA)

48.Improvements to leased facilities are included under property, plant and equipmentif:

Material in amount

Terms extend over long period

a. no yes

b. yes no

c. no no

d. yes yes (AICPA)

49.Which of the following is not a required characteristics for an item to be classifiedasanintangibleasset?

a. lackofphysicalsubstance

b. ownership confers some exclusive right, privilege or competitive advantage

c. estimatedlifeshouldnotexceedfortyyears

d. providefuturebenefitsbyenhancingrevenuesorreducingcosts (AICPA)

50.Thefollowingstatementsrelatetointangibleassets:

I. All intangible assets have no physical existence, but not all assets having nophysicalexistenceareintangibleassets.

II. Under current accounting practice, intangible assets are classified into those with finite useful lives such as patents and those with indefinite usefullivessuchastrademark.

III. Researchanddevelopmentcostsmustbeexpendedforfinancialreporting purposesintheyearinwhichthecostsareincurredeventhoughthecosts mayprovidebenefitstofutureperiods.

IV. Only when intangible assets are acquired from other entities can they be recognizedasassets.

Statewhethertheforegoingstatementsarefalse.

a.Allthestatementsarefalse.

b.Onlyonestatementisfalse.

c.Onlytwostatementsarefalse.

d.Threestatementsarefalse.

51.Costsincurredinternallytocreateintangiblesare

a.capitalized.

b.capitalizediftheyhaveanindefinitelife.

c.generallyexpensedasincurred.

d.expensedonlyiftheyhavealimitedlife. (AICPA)

52.Thecostofanintangibleassetincludesallofthefollowing except

a.purchaseprice.

c.otherincidentalexpenses.

d.allofthese (AICPA)

b.legalfees.

53.Are the following statements true or false, according to PAS38 Intangible assets?

1) The cost of an asset should include the amount of any cash or cash equivalentspaidtoacquiretheasset.

2) The cost of an asset should include non-cash consideration measured at fairvalue.

a.False False b.FalseTrue

c.TrueFalse d.TrueTrue (ACCA)

Subsequent measurement

54.Subsequenttoinitialrecognition,anintangibleassetmaybemeasuredusing

a.costmodelorrevaluationmodel

b.costmodelorfairvaluemodel

c.costmodelonly

d.eitheraorb

55.Therevaluationmodelmaybeusedforanintangibleasset

a. whichhasanactivemarket

b. whosefairvaluecanbedeterminedreliablythroughavaluationtechnique suchasdiscountedfuturecashflows

c. whichhasanactivemarketandaresidualvalue

d. the revaluation model is applicable only to items of PPE but not to intangibleassets

56.Which of the following factors should not be considered in determining the usefullifeofanintangibleasset?

a. Legal,regulatory,orcontractualprovisions.

b. Expectedactionofcompetitors.

c. Provisionsforrenewalorextensionoflife.

d. Initialcost (AICPA)

57.Which of the following is not considered in estimating the useful life of intangibleassets?

a. effectsofobsolescence,demandandcompetition

b. thesalvagevalueoftheasset

c. theservicelifeexpectanciesofindividualsorgroupsofemployees

d. expectedactionsofcompetitors (AICPA)

58.Factors considered in determining an intangible asset’s useful life include all ofthefollowing except

a. theexpecteduseoftheasset.

b. anylegalorcontractualprovisionsthatmaylimittheusefullife.

c. anyprovisionsforrenewalorextensionoftheasset’slegallife

d. theamortizationmethodused. (AICPA)

59.Amortizationofintangibleassetsresultsprimarilyfromtheapplicationofthe:

a.matchingprinciple

c.costprinciple

d.revenueprinciple (Adapted)

b.full-disclosure

60.Oncerecognized,intangibleassetscanbecarriedat

a. Costlessaccumulatedamortization.

b. Cost less accumulated amortization and less accumulated impairment losses.

c. Revaluedamountwithoutdeductionforaccumulatedamortization.

d. Cost plus a notional increase in fair value since the intangible asset is acquired.

(Adapted)

61.Amortizationofanintangibleassetisusuallyrecordedasa:

a. debittoretainedearningsandacredittoacontraaccount.

b. debittoretainedearningsandacredittotheintangibleassetaccount.

c. debittoretainedearningsandacredittoacontraaccount.

d. debittoamortizationexpenseandacredittoacontraaccount. (AICPA)

62.Which of the following methods of cost allocation cannot be used for intangibleassets?

a.Decliningbalance

b.Revenuemethod

c.Unitsofproduction

d.Effectiveinterestmethod

63.Which of the following methods of cost allocation can be used for intangible assets?

a.straightline

b.revenuemethod

c.units-of-production

d.anyofthese

64.UnderPAS38,thedefaultcostallocationmethodforintangibleassetsis?

a.revenuemethod

b.straightline

c.SYD

d.nodefaultmethod

65.JOCUNDCo.hasanintangibleasset,whichitestimateswillhaveausefullifeof 10 years, while MERRY Co. has goodwill, which has an indefinite life. Which companyshouldreportamortizationinitsfinancialstatements?

JOCUND MERRY JOCUND MERRY

a.Yes Yes c. No Yes

b.Yes No d. No No (AICPA)

66.According to PAS38 Intangible assets, which of the following criteria are relevantindeterminingtheusefullifeofanintangibleasset?

a.obsolescence d.residualvalue

b.amortizationperiod e.aandc

c.expectedusage (ACCA)

67.AccordingtoPAS38,theresidualvalueofanintangibleassetispresumed

a. equaltofairvalueinactivemarket

b. equaltotheamountthethirdpartywantstobuy

c. equaltoaconservativeestimation

d. zero

68.In accordance with generally accepted accounting principles, which of the following methods of amortization is normally recommended for intangible assets?

a.SYD c.unitsofproduction

b.straight-line d.doubledecliningbalance (AICPA)

69.OnJanuary1,20x1,anintangibleassetwithathirty-fiveyearestimateduseful life was acquired. On January 1, 20x6, a review was made of the estimated useful life and it was determined that the intangible asset had an estimated usefullifeofforty-fivemoreyears.Asaresultofthereview

a. TheoriginalcostatJanuary1, 20x6shouldbeamortizedoverafifty-year life.

b. The original cost at January 1, 20x1 should be amortized over the remainingthirty-yearlife.

c. TheunamortizedcostatJanuary1,20x6shouldbeamortizedoverafortyyearlife.

d. The unamortized cost at January 1, 20x6 should be amortized over a thirty-fiveyearlife. (AICPA)

70.A brand name that was acquired separately should initially be recognized, accordingtoPAS38 Intangible assets,at

a.recoverableamount

c.fairvalue

b.eithercostorfairvalueatthechoiceoftheacquirer d.cost (ACCA)

71.Whichofthefollowingshouldbeexpensedasincurredonafranchisewithan estimatedusefullifeoftenyears?

a. Amountpaidtothefranchisorforthefranchise.

b. Periodic payments to a company, other than the franchisor, for that company’sfranchise.

c. Legalfeespaidtothefranchisee’slawyerstoobtainthefranchise.

d. Periodicpaymentstothefranchisorbasedonthefranchisee’srevenues. (AICPA)

72.Are the following statements true or false, according to PAS38 Intangible assets?

1) Intangible assets acquired in a business combination should only be recognized if they have already been recognized by the entity being acquired.

2) Intangible assets acquired in a business combination should not be recognizedseparatelyfromgoodwill.

a.FalseFalse b.FalseTrue

c.TrueFalse d.TrueTrue (ACCA)

73.A change in the amortization method or amortization rate for an intangible assetisaccountedfor:

a.prospectively b.retrospectively

c.currently

d.gracefully

74.Whichofthefollowingfactorsinfluence(s)theBrandstrengthofacompany?

I.Customerloyalty

II.Statutoryprotection

III.BrandManagementbythecompany

a.I,II

b.I

c.II

d.I,II,III

75.Whichofthefollowingisnotspecificallyanidentifiableintangibleasset?

a.KinaRogersfranchise

b.secretprocesses

c.secretformulaforaKrabbyPatty

d.goodwill

76.Are the following statements true or false, according to PAS38 Intangible assets?

1) Intangibleassetscannotbetreatedashavinganindefiniteusefullife.

2) Intangible assets with a finite useful life should be measured at cost and testedannuallyforimpairment.

a.FalseFalse

b.FalseTrue

c.TrueFalse d.TrueTrue (ACCA)

77.AccordingtoPAS38 Intangible assets, amortizationofanintangibleassetwith afiniteusefullifeshouldcommencewhen

a. itisfirstrecognizedasanasset

b. itisavailableforuse

c. itisprobablethatitwillgeneratefutureeconomicbenefits

d. thecostscanbeidentifiedwithreasonablecertainty (ACCA)

78.Are each of the following factors relevant, according to PAS38 Intangible assets, in determining the annual amortization expense on an intangible asset?

I. Thecost.

II. Theamortizationmethod.

a.Notrelevant,Notrelevant

c.Relevant,Notrelevant

d.Relevant,Relevant (ACCA)

b.Notrelevant,Relevant

79.Whichofthefollowingisnotalong-terminvestment?

a. sharesheldtoexertinfluenceonanotherentity

b. landheldforspeculation

c. trademarks

d. cashsurrendervalueoflifeinsurance (Adapted)

80.Which of the following would not be included in research and development expenseforAPATHETICCo.forcurrentperiod?

a. The portion of plant assets, devoted completely to research for APATHETIC,whichisamortizedinthecurrentperiod.

b. The cost of materials used in conducting research for APATHETIC during thecurrentperiod.

c. CashpaidbyAPATHETICtoINDIFFERENTCo.forresearchperformedby INDIFFERENTCo.forAPATHETICinthecurrentperiod.

d. The cost of labor incurred by APATHETIC in conducting research for UNCONCERNEDCo.duringthecurrentperiod. (Adapted)

81.Which of these statements about research and development expenditure are correct?

1. If certain conditions are satisfied, research and development expenditure mustbecapitalized.

2. One of the conditions to be satisfied if development expenditure is to be capitalized is that the technical feasibility of the project is reasonably assured.

3. If capitalized, development expenditure must be amortized over a period notexceedingfiveyears.

4. The amount of capitalized development expenditure for each project should be reviewed each year. If circumstances no longer justify the capitalization, the balance should be written off over a period not exceedingfiveyears.

5. Development expenditure may only be capitalized if it can be shownthat adequate resources will be available to finance the completion of the projectandallotherconditionsarealsomet.

a.2and5 b.3,4and5 c.2,3and5 d.1,2and3

(Adapted)

82.Which of the following is a true statement concerning research and development(R&D)costs?

a. All R&D costs, without exception, must be charged to expense when incurred.

b. R&Dcostscanonlybeamortizedoveralifeof40yearsormore.

c. AlmostanytreatmentisacceptableforhandlingR&Dcosts.

d. FinancialstatementsmustdisclosetotalR&Dcostschargedtoexpensein theperiod

(Adapted)

83.Total research and development expense for CUNNING, Inc. would include whichofthefollowingitems:

I. Depreciation on CUNNING, Inc. property, plant and equipment used in CUNNING,Inc.'sdevelopmentprojects

II. AmortizationofCUNNING,Inc.patentsusedinCUNNING,Inc.'sresearch

III. ResourcespaidbyCUNNING,Inc.forSLYCo.'sresearcheffortsperformed forCUNNING,Inc.researchanddevelopmentprojects

IV. CUNNING, Inc. cost of research performed for CLEVER Corporation's researchanddevelopmentprojects

V. CUNNING,Inc.costsofinternaldevelopmenteffortswhichculminatedina patentgrantedtoCUNNING,Inc.

VI. Overhead costs allocated to CUNNING Inc.’s research and development effortswhichtooktheplaceofanotherCUNNING,Inc.activities

VII. Coststotrain CUNNING, Inc. employeestorunmachinesusedin ongoing production.ThesemachineshadearlierbeendevelopedbyCUNNING,Inc.

a.I,II,III b.I,II,III,IV,V c.I,II,III,V,VI d.allofthese (Adapted)

84.A newly set up dot-com entity has engaged you as its financial advisor. The entity has recently completed one of its highly publicized research and developmentprojectsandseeksyouradviceontheaccuracyofthefollowing statementsmadebyoneofitsstakeholders.Whichoneisit?

a. Costsincurredduringthe“researchphase”canbecapitalized.

b. Costs incurred during the “development phase” can be capitalized if criteria such as technical feasibility of the project being established are met.

c. Trainingcostsoftechniciansusedinresearchcanbecapitalized.

d. Designingofjigsandtoolsqualifyasresearchactivities. (Adapted)

85.Which of the following is an example of activities that would typically be excludedinresearchanddevelopmentcosts?

a. Design,construction,andtestingofpreproductionprototypesandmodes.

b. Laboratoryresearchaimedatdiscoveryofnewknowledge.

c. Qualitycontrolduringcommercialproduction,includingroutinetestingof products.

d. Testinginsearchfor,orevaluationof,productorprocessalternatives. (AICPA)

86.Whichofthefollowingisaresearchanddevelopmentcost?

a. Developmentorimprovementoftechniquesandprocesses.

b. Offshoreoilexplorationthatistheprimaryactivityofacompany.

c. Researchanddevelopmentperformedundercontractforothers.

d. Marketresearchrelatedtoamajorproductforthecompany. (AICPA)

87.HEARTY Company and WARM-SINCERE Company were combined in a purchase transaction. HEARTY was able to acquire WARM-SINCERE at a bargainprice.Thesumofthemarketorappraisedvaluesofidentifiableassets acquired less the fair value of liabilities assumed exceeded the cost to HEARTY. After revaluing noncurrent assets to zero, there was still some "negativegoodwill." ProperaccountingtreatmentbyHEARTYistoreportthe amountas

a. anextraordinarygain.

b. partofcurrentincomeintheyearofcombination.

c. adeferredcreditandamortizeit.

d. paid-incapital. (AICPA)

88.Goodwillmaybe

a. capitalizedonlywhenpurchased.

b. capitalizedeitherwhenpurchasedorcreatedinternally.

c. capitalizedonlywhencreatedinternally.

d. writtenoffdirectlytoretainedearnings. (AICPA)

89.Which of the following research and development related costs should be capitalizedandamortizedovercurrentandfutureperiods?

a. Research and development general laboratory building which can be put toalternativeusesinthefuture

b. Inventoryusedforaspecificresearchproject

c. Administrativesalariesallocatedtoresearchanddevelopment

d. Research findings purchased from another company to aid a particular researchprojectcurrentlyinprocess (AICPA)

90.Which of the following principles best describes the current method of accountingforresearchanddevelopmentcosts?

a. Associatingcauseandeffect

b. Systematicandrationalallocation

c. Incometaxminimization

d. Immediaterecognitionasanexpense (AICPA)

91.How should research and development costs be accounted for, according to PAS38?

a. Must be capitalized when incurred and then amortized over their estimatedusefullives.

b. Mustbeexpensedintheperiodincurred.

c. Maybeeithercapitalizedorexpensedwhenincurred,dependinguponthe materialityoftheamountsinvolved.

d. Must be expensed in the period incurred unless development costs incurredqualifyundertherecognitioncriteriasetforthunderPAS38.

92.Which of the following costs should be excluded from research and developmentexpense?

a. Modificationofthedesignofaproduct

b. AcquisitionofR&Dequipmentforuseonacurrentprojectonly

c. Costofmarketingresearchforanewproduct

d. Engineering activity required to advance the design of a product to the manufacturingstage (AICPA)

93.If a company constructs a laboratory building to be used as a research and development facility, the cost of the laboratory building is matched against earningsas

a. researchanddevelopmentexpenseintheperiod(s)ofconstruction.

b. depreciationdeductedaspartofresearchanddevelopmentcosts.

c. depreciationorimmediatewrite-offdependingoncompanypolicy.

d. anexpenseatsuchtimeasproductiveresearchanddevelopmenthasbeen obtainedfromthefacility. (AICPA)

94.What is the proper time or time period over which to match the cost of an intangible asset with revenues if it is likely that the benefit of the asset will lastforadeterminatebutverylongperiodoftime?

a. Fortyyears.

b. Fiftyyears.

c. Shorteroflegallifeandusefullife

d. Atsuchtimeasdiminutioninvaluecanbequantitativelydetermined. (Adapted)

95.How should research and development costs be accounted for according to currentstandards?

a. Must be capitalized when incurred and then amortized over their estimatedusefullives.

b. Must be expensed in the period incurred unless contractually reimbursable.

c. May be either capitalized or expensed, when incurred, depending upon thefacts

d. Must be expensed in the period incurred unless it can be clearly demonstrated that the research expenditure will have significant future benefits. (AICPA)

96.Thecurrenttrendintheaccountingtreatmentforresearchanddevelopment costsisto

a. Capitalize all costs as assets when incurred and amortize when revenue areearned.

b. Treatallcostsascurrentexpensesasincurred.

c. Capitalizeselectively,andpredeterminetheconditionsthatwouldrequire capitalization as well as those that would be written off as current expenses.

d. Accumulate all costs in a special intangible asset account until a determinationcanmadeastothedegreeoffuturebenefits. (AICPA)

97.Researchanddevelopmentcosts,underprevailingpractice,maybeaccounted forasfollows:

a. Research and development costs related to successful projects should be capitalized;othersexpensed.

b. Research and development costs related to unsuccessful projects should becapitalized;othersexpensed.

c. Researchanddevelopmentcostsshouldbeexpensedasincurred.

d. Research and development costs should be allocated between successful andunsuccessfulprojects.

e. Research and development costs, whether related to successful or unsuccessfulprojects,shouldbecapitalized. (AICPA)

98.An activity that would be expensed currently as research and development costsisthe

a. Testinginsearchfororevaluationofproductorprocessalternatives.

b. Adaptation of an existing capability to a particular requirement or customer’sneedasapartofcontinuingcommercialactivity.

c. Legal work in connection with patent applications or litigation, and the saleorlicensingofpatents.

d. Engineeringfollow-throughinanearlyphaseofcommercialproduction.

(AICPA)

99.Whichofthefollowingexpensescanbecapitalized?

I. Researchcostsincurredindevelopinganewmedicine.

II. Purchase of intangibles for R&D activities which have alternative future uses.

III. Salariesofresearchpersonnel.

a.IIonly

b.I&II

c.IIIonly

d.

noneofthem

100. Arethefollowingstatementstrueorfalse,accordingtoPAS38 Intangible assets?

(1) Expenditure during the research phase of a project may sometimes be capitalizedasanintangibleasset.

(2)Expenditureduringthedevelopmentphaseofaprojectmaysometimesbe capitalizedasanintangibleasset.

a.FalseFalse b.FalseTrue c.TrueFalse d.TrueTrue (ACCA)

101. Are the following statements in relation to development true or false, accordingtoPAS38 Intangible assets?

(1) The products being developed should have already been put into commercialproductionoruse.

(2)Developmentinvolvestheapplicationofresearchfindings.

a.FalseFalse b.FalseTrue c.TrueFalse d.TrueTrue (ACCA)

102. Which of the following is not considered as research and development costs?

a. Testinginsearchforproductalternatives

b. Legalworkonpatentapplication

c. Modificationofdesignofaprocess

d. Searchingforapplicationofnewresearchfindings

e. Thedesignoftools,moldsanddiesinvolvingnewtechnology.

103. According to PAS 38, which of the following is true for an acquiring companyinconnectionwithin-processresearchanddevelopmentheldbyan acquiredcompanyatthedateofacquisition?

a. The amount that has been spent on these projects is expensed, but any value in the project in excess of the amount spent is capitalized by the acquiringcompany.

b. The value of in-process research and development is capitalized because theacquiringcompanyhasaclearvisionofitsvalue.

c. In-process research and development is still research and development andthevalueisalwaysexpensedbytheacquiringcompany.

d. The value of in-process research and development is expensed unless it has a direct connection with a product or asset owned by the acquiring company.

104. AJAR Airline purchased airline gate rights at SLIGHTLY OPEN International Airport for ₱2,000,000 with a legal life of five years. However, AJAR has the ability and right to extend the rights every ten years for an indefiniteperiodoftime.OverwhatperiodoftimeshouldAJARamortizethe gaterights?

a.5years.

c.40years.

d.Therightsshouldnotbeamortized. (AICPA)

b.15years

105. The following statements relate to accounting for intangible assets. Choosetheincorrectstatement.

a. Becauseithasanindefinitelife,atrademarkneednotbeamortized.

b. Ifacompanypurchasesacompetingpatenttoensurerevenue-generating capability of a previously owned patent, the cost of the purchased patent shouldbeexpensedatthetimeofpurchase.

c. Theprocessofassigningthecostofan intangibleassettooperationsin a systematicandrationalmanneriscalledamortization.

d. Goodwill may represent the excess of the cost of an acquired company overthesumofthefairvaluesassignedtoidentifiableassetsacquiredless liabilitiesassumed.

106. Consider the following statements and state whether they are correctly statedornot.

I. Goodwillisrecordedbyaccountantsonlyifitispurchased.

II. Acopyright’slegallifeis30yearsanditgivesitsownerprotectionagainst writingsandliteraryproductionsbeingreproducedillegally.

a.I b.II c.IandII d.neitherInorII

107. A patent purchased from another entity which had held it for 3 years shouldbeamortizedover

a. theasset’sremainingusefullife,nottoexceed37

b. anynumbernottoexceedto40

c. 17years

d. theasset’sremainingusefullife,nottoexceed17 (Adapted)

108. Which of the following intangible assets should be amortized over the periodsofestimatedbenefit?

a. researchanddevelopmentcostsrelatedtoasuccessfulproduct

b. goodwillarisingfromthepurchaseofanexistingbusiness

c. costsincurredinorganizingacorporation

d. patentrightpurchasedfromaninventor (AICPA)

109. Inacaseofapatentinfringementsuit,thesuitmaybeeithersuccessfulor lost.Theresultsofthelegaldecisionareaccountedforasfollows:

a. ifsuccessful,debitthecostofthelawsuittopatentexpense.

b. iflost,debitthecostofthelawsuittoextraordinaryloss.

c. iflost,writethebalanceinthepatentaccount.

d. after recognizing the results of the lawsuit as an expense, amortize the remainingbalanceinthepatentoccuroveritsremainingeconomiclife. (Adapted)

110. Apurchasedpatenthasaremaininglegallifeof15years.Itshouldbe

a. Expensedintheyearoftheacquisition.

b. Amortizedover15yearsregardlessofitsusefullife.

c. Amortizedoveritsusefullifeiflessthan15years.

d. Notamortized. (AICPA)

111. Acorporationwhichincurscostsindefendingapatentinaninfringement suitshould:

a. expensecurrentlythecostsofallsuits.

b. capitalizeonlythecostsofunsuccessfulsuits.

c. capitalizeonlythecostsofsuccessfulsuits.

d. capitalizethecostofallsuchsuits. (Adapted)

112. Shouldthefollowingfeesassociatedwiththeregistrationofan internally developed patent be capitalized? (Item#1) Legal fees; (Item#2) Registration fees

a.No,No b.No,Yes c.Yes,No d.Yes,Yes (AICPA)

113. Whichofthefollowingstatementsconcerningpatentsiscorrect?

a. Legalcostsincurredtosuccessfullydefendaninternallydevelopedpatent shouldbeexpensedimmediatelyintheperiodincurred.

b. Legalfeesandotherdirectcostsincurredinregisteringapatentshouldbe capitalizedandamortizedonastraight-linebasisoverafive-yearperiod.

c. Research and development contract services purchased from others and used to develop a patented manufacturing process should be capitalized andamortizedoverthepatent’seconomiclife.

d. Research and development costs incurred to develop a patented item should be capitalized and amortized on a straight-line basis over seventeenyears. (AICPA)

114. Whichofthefollowing amountsincurredin connectionwithatrademark shouldbecapitalized?

Cost of successful defense Registration fees

a. no yes

b. yes no

c. no no

d. yes yes (AICPA)

115. Which of the following should not be capitalized as part of the cost of an internallydevelopedpatent?

a. coststodeveloptheproductorprocesstobepatented

b. patentregistrationfees

c. legalfeesincurredinsuccessfullydefendingapatentinfringementsuit.

d. legalfeesassociatedwithregistrationofthepatent

e. aandc (AICPA)

116. The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser's patented products shouldbe

a. chargedoffinthecurrentperiod.

b. amortizedoverthelegallifeofthepurchasedpatent.

c. addedto factoryoverheadandallocated toproductionof thepurchaser's product.

d. amortized over the remaining estimated life of the original patent covering the product whose market would have been impaired by competitionfromthenewlypatentedproduct. (AICPA)

117. Inventor Corporation was granted a patent on a product on January 1, 20x1. To protect its patent, the corporation purchased on January 1, 2x10 a patent on a competing product which was originally issued on January 10, 20x6. Because of its unique plant, Inventor Corporation does not feel the competing patent can be used in producing a product. The cost of the competingpatentshouldbe

a. amortizedoveramaximumperiodof20years.

b. amortizedoveramaximumperiodof16years.

c. amortizedoveramaximumperiodof11years.

d. expensedin2x10.

(AICPA)

118. Plaintiff, Inc. went to court this year and successfully defended its patent from infringement by a competitor. The cost of this defense should be chargedto

a. patentsandamortizedoverthelegallifeofthepatent.

b. legalfeesandamortizedover5yearsorless.

c. expensesoftheperiod.

d. patentsandamortizedovertheremainingusefullifeofthepatent. (AICPA)

119. Whichofthefollowingis not anintangibleasset?

a.Tradename

b.R&Dexpense

c.Franchise (AICPA)

d.Copyrights

e.Noanswer

120. Whichofthefollowingintangibleassetsshould not beamortized?

a.Copyrights

c.Perpetualfranchises

d.Noanswer (AICPA)

b.Customerlists

121. UndercurrentPFRSs,whenapatentisamortized,thecreditismadeto

a. thepatentaccount.

b. anaccumulatedamortizationaccount.

c. adeferredcreditaccount.

d. anexpenseaccount. (Adapted)

122. Which of the following confers exclusive right to conduct business in a particularterritory

a.trademark

b.franchise

c.patent

d.copyright (Adapted)

123. An exclusive right or privilege received by a business or individual to perform certain business functions or use certain products or services is referredtoas:

a.patents

b.copyright

c.franchise

d.noneofthese

124. If a franchise becomes worthless prior to the end of its estimated useful life,theunamortizedbalanceinthefranchiseaccountshouldbewrittenoffas a(n):

a.impairmentloss

c.priorperiodadjustment

d.changeinestimate (Adapted)

b.operatingexpense

125. Whichofthefollowingstatementsisincorrect?

a. An intangible asset acquired by issuance of ordinary shares should generallybevaluedatthefairvalueoftheintangibleasset.

b. Amortization of intangible assets involves an adjusting entry that should notbereversedinthenextaccountingperiod.

c. An unidentifiable asset developed internally is never recognized in the accountsasanasset.

d. Allannualpaymentsmadebyafranchiseetothefranchiserforassistance shouldbecapitalizedaspartofthecostofthefranchise. (Adapted)

126. Afranchiseshouldbeclassifiedonthebalancesheetasa(n):

a.operationalasset

b.deferredcharge

(Adapted)

c.intangibleasset

d.currentasset

127. Whichofthefollowingcostrelatedtocomputersoftwareis capitalizedto anintangibleassetaccount?

a. Costtoduplicatediscsandmanualsforsale

b. Developmentcostsprecedingtechnologicalfeasibility

c. Codingandtestingcostsincurredaftertechnologicalfeasibilitybutbefore completingtheproductmaster

d. Costofcustomerservice

(Adapted)

128. Ifabusinesspurchasedanewcomputersystemsoftwarewhichformsan integralpartofamachine,theaccounttobedebitedis

a.machine

b.computerbuilding

c.intangibleasset

d.BillGates

129. OUTLANDISH and STRANGE are rival firms which are similar in size and scope of operations. OUTLANDISH has decided not to capitalize but expense software development costs in Year 1. STRANGE on the other hand, has decidedtocapitalizeasimilaramountofdevelopmentcosts,tobeamortized over5years.Whichofthefollowingis/aretrueoverthenext5years?

I. STRANGEwillshowhigherequitythanOUTLANDISH

II. The difference in STRANGE's assets and OUTLANDISH's assets will be lowerinYear3thaninYear2.

III. The total tax deductions due to the development costs are equal for the twofirms.

IV. After technological feasibility, all software development costs can be capitalizedunderPAS38.

a.IIIonly

b.II&III

c.I&II

130. Whichofthefollowingcostscanbecapitalized?

a. drillingcostsforoilwells

b. publicrelationscoststodevelopgoodwill

c. researchanddevelopment

d. internallydevelopedbrand

d.I,II,III,IV

131. Accounting rules differentiate research and development activities from activities not considered research and development. Which one of the followingisnotconsideredaresearchanddevelopmentactivity?

a. Periodicdesignchangestoexistingproducts.

b. Testinginsearchofproductprocessingalternatives.

c. Modificationofthedesignofaprocess.

d. Laboratoryresearchintendedforthediscoveryofanewproduct.

132. OnJanuary1,20x1,Jocapurchasedequipmentforuseindevelopinganew product. Joca uses the straight-line depreciation method. The equipment could provide benefits over a 10-year period. However, the new product development is expected to take five years, and the equipment can be used onlyforthisproject.Joca's20x1expenseequals:

a. Thetotalcostoftheequipment.

b. One-fifthofthecostoftheequipment.

c. One-tenthofthecostoftheequipment.

d. Zero.

(AICPA)

Disclosures

133. WhichofthefollowingdisclosuresisnotrequiredbyPAS38?

a. Usefullivesoftheintangibleassets.

b. Reconciliation of carrying amount at the beginning and the end of the year.

c. Contractualcommitmentsfortheacquisitionofintangibleassets.

d. Fairvalueofsimilarintangibleassetsusedbyitscompetitors. (Adapted)

134. Allofthefollowingarerequireddisclosuresforintangibleassetsexcept

a. Whether the useful lives are indefinite or finite and, if finite, the useful livesortheamortizationratesused

b. Amortizationmethodsusedforintangibleassetswithfiniteusefullives

c. Gross carrying amount and any accumulated amortization (aggregated with accumulated impairment losses) at the beginning and end of the period

d. A reconciliation of the carrying amount at the beginning and end of the period showing increases and decreases to intangible assets and related accumulatedamortizationandaccumulatedimpairmentloss.

e. Netcarryingamountofintangibleassets.Accumulatedamortizationisnot required to be disclosed because periodic amortization is deducted directlyfromtherelatedassetaccount.

Chapter 20 - Suggested answers to theory of accounts questions

Chapter 21 Impairment of Assets

Chapter 21: Multiple choice – Computational (SET B) – (For classroom instruction purposes)

Costs of disposal

1. On December 31, 20x1, QUIRK ACCIDENT Co. identified that its machinery with a carrying amount of ₱4,000,000 has been impaired. In estimating the recoverable amount, QUIRK determined that the fair value of the asset is ₱3,200,000.Thefollowingcostswerealsoestimated:

QUIRK does not have any reason to believe that the value in use of the asset materiallyexceedsfair valuelesscostsofdisposal.Howmuchistheimpairment loss? a.

2. OnDecember31,20x1,MASSIVEHEAVYCo.identifiedthatitsbuildingwitha carrying amount of ₱2,400,000 has been impaired. In estimating the recoverableamount,MASSIVEhasdeterminedthatthefairvaluelesscostsof disposaloftheassetis₱1,600,000.

Inestimatingthevalueinuse,MASSIVEdeterminedthefollowing:

Additional information:

 Each year’s estimated future cash flows include ₱40,000 representing cash outflows from future restructuring not yet committed and ₱20,000 representingcashoutflowsonplannedimprovementandenhancementofthe asset.

 Not included in the estimated future cash flows are costs of day-to-day servicingoftheassetamountingto₱8,000peryear.

 Thediscountrateis10%.

Howmuchistheimpairmentloss?

Value in use – with residual value

3. On December 31, 20x1, HEARTEN ENCOURAGE Co. identified that its intangible asset with a carrying amount of ₱2,400,000 has been impaired. In

estimating the recoverable amount, HEARTEN has determined that the fair value less costs of disposal of the intangible asset is ₱1,600,000. HEARTEN estimatedthatthefuturenetcashflowsexpectedtoarisefromthecontinuing use of the asset is ₱400,000 per year for the remaining useful life of 5 years. Theestimateoffuturecashflowsincludescashoutflowsforincometaxesand financing activities totaling ₱40,000 per year. The equipment has a residual valueof₱80,000.Thediscountrateis10%.Howmuchistheimpairmentloss?

a.628,384 b.682,384 c.289,334 d.298,902

Recoverable amount exceeding Carrying amount

4. One of OFFSHOOT BRANCH Co.’s plant has a carrying amount of ₱3,200,000 and a value in use of ₱3,120,000. A recent market transaction for a similar plantinvolvedanetsellingpriceof₱3,280,000.Howmuchistheimpairment loss?

a.80,000 b.160,000 c.320,000 d.0

Impairment loss on newly constructed asset

5. LUCRATIVEPROFITABLECo.hasjustcompletedconstructinganewbuilding. Costsincurredareshownbelow:

Materials,labor,andoverhead

₱2,800,000

Borrowingcostsappropriatelycapitalized 320,000

Totalconstructioncosts

₱3,120,000

If the recoverable amount of the building is ₱3,000,000, how much is the impairmentloss?

a.120,000

b.200,000 c.320,000 d.0

Impairment loss – subsequent depreciation

6. On January 1, 20x1, RIGHTEOUS MORAL Co. acquired an equipment for ₱2,000,000.Theequipmentisdepreciatedusingthestraightlinemethodover anestimatedusefullifeof10yearsandresidualvalueof₱200,000.

OnJanuary1, 20x6, RIGHTEOUSCo.determinedthat theequipmentisimpaired. Fairvaluelesscostsofdisposalis₱560,000.Projectedfuturenetcashflowsfrom revenues produced by the equipment is ₱200,000 annually. The revised estimatedusefullifeis 4yearsandthenew estimatedresidualvalue is ₱40,000. The appropriate discount rateis 10%. How much is the depreciation expensein 20x6?

a.156,732 b.155,324 c.155,132 d.154,324

Impairment loss – Revaluation model

7. InformationonLISTLESSWEAKCo.’simpairedbuildingisshownbelow:

Howmuchistheimpairmentloss?

a.80,000 b.400,000 c.320,000 d.0

Impairment loss – Intangible asset with indefinite useful life

8. INSUPERABLE UNSURPASSABLE Co. determined that its trademark is impaired. INSUPERABLE cannot estimate reliably the trademark’s fair value less costs of disposal. However, the following information has been determined:

Annualfuturecashflowsfromthetrademark 40,000

Howmuchistheimpairmentloss?

a.0 b.80,000 c.120,000 d.400,000

Impairment loss – asset to be disposed of

9. One of MIME IMMITATE Co.’s machines has been impaired. Repairs and maintenance costs on the machine have been increasing over the past years making the machine a bottleneck in MIME’s production. At year-end, management made a decision to sell the machine as soon as a pending application for a loan is approved and a replacement machine is acquired. Informationonthemachineisshownbelow:

Howmuchistheimpairmentloss?

a.0 b.160,000 c.40,000 d.200,000

Allocation of goodwill – business combination

10.At the end of 20x1, EXIGENCY Co. acquires PRESSING NEED Corp. for ₱40,000,000. PRESSING NEED has manufacturing plants in three countries. Dataattheendof20x1isshownbelow.

HowmuchgoodwillisallocatedtoeachtotheCGUinCountry#3?

Allocation of goodwill – disposal of portion of CGU

11.SOPSOAKCo.hasacash-generatingunitforwhichgoodwillof₱240,000was allocated.Duringtheyear,anoperationthatwaspartoftheCGUwassoldfor ₱2,000,000. The relative values of the portions sold and retained cannot be determined reliably. Information on the assets included in the CGU is as follows:

Carrying

ofoperation sold excluding goodwill

Howmuchisthegainorlossonthesaleoftheoperation?

a.340,000 b.400,000 c.60,000 d.0

Reallocation of goodwill

12.EXUBERANT OVERFLOWING Co. previously allocated ₱240,000 goodwill to CGU A. The goodwill allocated to CGU A cannot be identified or associated withanassetgroupatalevellowerthanCGUA,exceptarbitrarily.Duringthe year, EXUBERANT Co. reorganizes its reporting structure such that CGU A is dividedandintegratedintothreeothercash-generatingunits–CGU’sB,Cand D.Additionalinformationisshownbelow:

C 1,600,000

D

Attheendoftheyear,CGUDissoldfor ₱2,000,000whenitscarryingamountis ₱2,320,000 excluding allocatedgoodwill.Howmuchisthegain(loss)onthesale? a.(320,000) b.440,000 c.(420,000) d.(440,000)

Impairment loss of CGU – no goodwill allocated Use the following information for the next two questions: NEGATE DENY Co. determined that one of its cash-generating units is impaired. InformationontheassetsoftheCGUisshownbelow:

ItwasestimatedthatthevalueinuseoftheCGUis ₱3,600,000anditsfairvalue lesscostsofdisposalis₱3,200,000.

13.Howmuchistheimpairmentloss?

14.How much is the carrying amount of the building after the impairment testing?

Impairment loss of CGU – with allocated goodwill Use the following information for the next two questions: INSTIGATE PROVOKE Co. determined that one of its cash-generating units is impaired.InformationontheassetsoftheCGUisshownbelow:

ItwasestimatedthatthevalueinuseoftheCGUis ₱3,600,000anditsfairvalue lesscostsofdisposalis₱2,400,000.

15.Howmuchistheimpairmentloss?

16.How much is the carrying amount of the building after the impairment testing?

Impairment loss of CGU – Limit on allocation of impairment loss

Use the following information for the next two questions:

TRICEINSTANTCo.determinedthatoneofitscash-generatingunitsisimpaired. InformationontheassetsoftheCGUisshownbelow:

 It was estimated that the value in use of the CGU is ₱3,200,000 and its fair valuelesscostsofdisposalis₱3,600,000.

 Thebuilding’sfairvaluelesscostsofdisposalis₱2,040,000.

17.Howmuchistheimpairmentloss? a.4,200,000 b.3,200,000

2,400,000 d.2,000,000

18.How much is the carrying amount of the building after the impairment testing? a.

Impairment of individual asset belonging to a CGU Use the following information for the next two independent cases: OneofthemachinesofSKEWERPIERCECo.hassufferedphysicaldamagebutis still working, although not as well as before it was damaged. The machine does notgenerate independentcashinflows. Thesmallestidentifiablegroupofassets that includes the machine and generates cash inflows that are largely independentofthecashinflowsfromotherassetsistheproductionlinetowhich the machine belongs. Information on the machine and the production line is shownbelow:

Case

19.The budgets/forecasts approved by management reflect no commitment of managementtoreplacethemachine.Howmuchistheimpairmentloss?

Case

20.The budgets/forecasts approved by management reflect a commitment of managementtoreplacethemachineandsellit inthenearfuture.Cashflows from continuing use of the machine until its disposal are estimated to be negligible.Howmuchistheimpairmentloss?

Impairment of individual asset – with commitment for disposal

21.ASININE STUPID Co. determined that one of its cash-generating units is impaired.InformationontheassetsoftheCGUisshownbelow:

 TherecoverableamountoftheCGUwasestimatedat₱5,600,000.

 The building’s fair value less costs of disposal is ₱1,600,000. Management is committedonsellingthebuilding.

Howmuchistheimpairmentloss?

400,000

800,000

Carrying amount of a CGU – Financial instruments excluded

22.EXUBERANTOVERFLOWINGCo. determinedthatitsCGUhasbeenimpaired. InformationontheCGUisshownbelow:

The recoverable amount of the CGU is ₱4,000,000, representing the CGU’s value inuse.EXUBERANTCo. excluded cashflowsfromfinancialassetsandrecognized liabilitieswhenthevalueinusewascomputed

Howmuchistheimpairmentloss?

Carrying amount of a CGU – including financial instruments

23.INFRACTION VIOLATION Co. determined that its CGU has been impaired. InformationontheCGUisshownbelow:

The recoverable amount of the CGU is ₱2,400,000, representing the CGU’s value inuse.INFRACTIONCo.includedcashflowsfromfinancialassetsandrecognized liabilitieswhenthevalueinusewascomputed

Howmuchistheimpairmentloss?

Allocation of corporate asset

24.On December 31, 20x1, BAFFLE CONFUSE Co. determined that an EDP equipment,amainframecomputerusedasserverinBAFFLE’snetwork,might have been impaired. There are three cash-generating units using this mainframecomputer.Informationontheseassetsisshownbelow:

Howmuchistheimpairmentloss?

Impairment loss – restoration and decommissioning costs

25.INSUPERABLE UNSURPASSABLE Co. determined that its CGU (comprising INSUPERABLE’sminingoperationsinaforeigncountry)isimpaired.Thelaws inthatforeigncountryrequireINSUPERABLEtorestoretheminingsiteatthe end of the wasting asset’s useful life. INSUPERABLE made a provision for decommissioning and restoration costs10 years ago when it started operations. At year-end, the carrying amount of the provision is ₱2,400,000 whichisequaltothepresentvalueoftheobligation.

INSUPERABLE Co. recently received various offers to buy the mine at around ₱3,600,000. Thisprice reflectsthefactthat thebuyerwillassumetheobligation torestoretheoverburden.Disposalcostsfortheminearenegligible.Thevaluein useis₱5,600,000excludingdecommissioningandrestorationcosts.Thecarrying amountofthemineis₱4,800,000.

Howmuchistheimpairmentloss?

a.800,000 b.1,600,000 c.1,200,333 d.0

Impairment reversal – Revaluation model

Use the following information for the next two questions:

On January 1, 20x1, FALLACIOUS MISLEADING Co. acquired a building for ₱4,000,000. The asset is depreciated using the straight line method over an estimatedusefullifeof10years.

OnJanuary1, 20x6, thebuildingwasestimatedtohavearecoverableamount of ₱1,600,000. Consequently, impairment loss was recognized on that date. There wasnochangeintheestimatedusefullife.

On January 1, 20x9, the building was estimated to have a new recoverable amount of ₱2,400,000 and a remaining useful life of 3 years. The building is measuredundertherevaluationmodel.

26.Howmuchoftheimpairmentreversalisrecognizedinprofitorloss?

a.160,000 b.1,760,000 c.1,600,000 d.0

27.Howmuchoftheimpairmentreversalisrecognizedinequity?

a.160,000 b.1,760,000 c.1,600,000 d.0

Impairment reversal – Cost model

Use the following information for the next two questions:

On January 1, 20x1, RAMIFICATION CONSEQUENCE Co. acquired a building for ₱4,000,000. The asset is depreciated using the straight line method over an estimatedusefullifeof10years.

OnJanuary1, 20x6, thebuildingwasestimatedtohavearecoverableamount of ₱1,600,000. Consequently, impairment loss was recognized on that date. There wasnochangeintheestimatedusefullife.

On January 1, 20x9, the building was estimated to have a new recoverable amount of ₱2,400,000 and a remaining useful life of 3 years. The building is measuredunderthecostmodel.

28.Howmuchoftheimpairmentreversalisrecognizedinprofitorloss?

160,000 b.1,760,000 c.1,600,000 d.0

29.Howmuchoftheimpairmentreversalisrecognizedinequity?

160,000

1,760,000 c.1,600,000 d.0

Non-reversal of goodwill - with Extrapolation Use the following information for the next four questions: Afterayearofoperations,STRATUMLEVELCo.iscalculatingthevalueinuseof oneofitscash-generatingunitonJanuary1,20x2.Dataisshownbelow.

The appropriate discount rate was determined to be 15%. Projections of future cashflowsshouldbeextended upto11 years. Thelong-termgrowth rateswere determined as 3%, -2%, -6%, -15%, -25% and -67% from year 20x7 up to year 2x12.

The gross carrying amount of the CGU is ₱12,000, inclusive of ₱4,000 allocated goodwill. As of January 1, 20x2, the CGU has an accumulated depreciation of ₱668.

On December 31, 20x3, the entity estimates a revised recoverable amount of ₱7,640.

30.Howmuchisthetotalundiscountedfuturecashflows?

31.Howmuchisthevalueinuse?

32.Howmuchistheimpairmentloss?

33.Howmuchisthereversalofimpairmentlosstoberecognizedinprofitorloss onDecember31,20x3?

The answers and solutions to the computational problems above (Multiple choice – Computational (SET B) can be found in the accompanying Teacher’s Manual.

Chapter 21: Theory of Accounts Reviewer

1. PAS36appliestowhichofthefollowingassets?

a.Inventories.

bFinancialassets.

c.Assetsheldforsale.

d.Property,plant,andequipment.

2. PAS 36 Impairment of assets should be applied in accounting for the impairmentofwhichofthefollowingtypesofasset?

a. Assetsarisingfromconstructioncontracts

b. Non-currentassetsheldforsale

c. Investmentpropertiesmeasuredatfairvalue

d. Non-currentassetsmeasuredatcost

3. PAS36appliestoallofthefollowingassets,except

a. Intangibleassets

b. Property,plantandequipmentmeasuredunderrevaluationsurplus

c. Investmentpropertymeasuredatfairvalue

d. Investmentinassociates

4. Whichofthefollowing conditionsmustexistinorderforanimpairmentloss toberecognized?

I. Thecarryingamountofthelong-livedassetislessthanitsfairvalue.

II. Thecarryingamountofthelong-livedassetisnotrecoverable.

a.Ionly. b.IIonly.

c.BothIandII.

d.NeitherInorII. (Adapted)

5. Acash-generatingunitis:

a. anygroupofassetsthathasindependentcashflows

b. the smallest group of assets that generates independent cash flows from continuinguse

c. any group of assets which forms part of the management reporting structure

d. areportingsegment

6. Estimates of future cash flows would normally cover projections over a maximumof:

a.eightyears b.12years c.fiveyears d.20years (ACCA)

7. Whendecidinguponthediscountratetobeused,whichfactorsshouldnotbe takenintoaccount?

a. Risksspecifictotheassetwhichfuturecashflowestimateshavenotbeen adjusted

b. Corporatelendingrates

c. Costofcapital

d. Risks which relate to the asset for which future cash flow estimates have beenadjusted (ACCA)

8. Valueinuseis:

a. the discounted present value of future cash flows arising from use of the assetandfromitsdisposal

b. therealizablevalue

c. thecarryingamount

d. the higher of an asset's fair value less costs of disposal and its market value

9. Whichimpairmentlossesshouldneverbereversed?

a.Lossonacashgeneratingunit

c.Lossonleases

d.Lossongoodwill (ACCA)

b.Lossonproperty,plantandequipment

10.UnderPAS36,anassetisimpairediftheasset’s

a. fairvalueislessthancarryingamount

b. carryingamountexceedsfairvalue

c. recoverableamountexceedscarryingamount

d. carryingamountisgreaterthanrecoverableamount.

11.Iffairvaluelesscostsofdisposalishigherthanvalueinuse

a. theassetisimpaired

b. theassetisnotimpaired

c. thereisnoneedtocomputeforcarryingamount

d. therecoverableamountisthefairvaluelesscostsofdisposal

12.Ifthereisnoreasontobelievethatanasset’svalueinusemateriallyexceeds itsfairvaluelesscostsofdisposal

a. theassetisnotimpaired

b. thereisnoneedtocomputeforcarryingamount

c. therecoverableamountisthevalueinuse

d. thereisnoneedtodeterminefuturecashflows

13.Theassetisnotimpairedif

a. carryingamountexceedsrecoverableamount

b. fairvalueiswayabovevalueinuse

c. recoverableamountislessthanthecarryingamount

d.carryingamountislessthanrecoverableamount

14.Goodwill should be tested for value impairment at which of the following levels?

a.Eachidentifiablelong-termasset.

c.Eachacquisitionunit.

d.Entirebusinessasawhole. (AICPA)

b.Eachreportingunit.

15.After an impairment loss is recognized, the adjusted carrying amount of the cash-generatingunitshallbeitsnewaccountingbasis.Whichofthefollowing statementsaboutsubsequentreversalofapreviouslyrecognizedimpairment lossiscorrect?

a. Itisprohibitedtoreverseimpairmentlossongoodwillallocatedtoacashgeneratingunit

b. Itisrequiredwhenthereversalisconsideredpermanent.

c. Itmustbedisclosedinthenotestothefinancialstatements.

d. Itisencouraged,butnotrequired. (AICPA)

16.Property, plant, and equipment must be reviewed for impairment when whichofthefollowingeventsoccurs?

a. Asignificantchangeintheasset'sestimatedusefullifeoccurs

b. Thecostsofconstructingtheassetarelessthanthebudgetedamount

c. Acurrentperiodoperatinglossoccurs

d. Investingactivitiesproduceanegativecashflow (Adapted)

17.Whichofthefollowingregardinggoodwilliscorrect?

a. Goodwillshouldbeamortizedoverafive-yearperiod.

b. Goodwillshouldbeamortizedoveritsexpectedusefullife.

c. Goodwillshouldberecordedandneveradjusted.

d. Goodwillshouldberecordedandperiodicallyevaluatedforimpairment. (AICPA)

18.Goodwillshouldbetestedperiodicallyforimpairment

a. Fortheentityasawhole.

b. Atthesubsidiarylevel.

c. Attheindustrysegmentlevel.

d. Attheoperatingsegmentleveloronelevelbelow. (AICPA)

19.Purchasedgoodwillshould

a. bewrittenoffassoonaspossibleagainstretainedearnings.

b. bewrittenoffassoonaspossibleasanextraordinaryitem.

c. be written off by systematic charges as a regular operating expense over theperiodbenefited.

d. notbeamortized. (AICPA)

20.A loss on impairment of an intangible asset is the difference between the asset’s

a. carryingamountandthepresentvalueofexpectedfuturenetcashflows.

b. carryingamountanditsfairvaluelesscostsofdisposal

c. fairvalueandtheexpectedfuturenetcashflows.

d. recoverableamountandcarryingamount

21. Ifthefairvaluelesscostsofdisposalcannotbedetermined

a. Theassetisnotimpaired.

b. Therecoverableamountisthevalue-in-use.

c. Thenetrealizablevalueisused.

d. Thecarryingvalueoftheassetremainsthesame. (Adapted)

22. Ifassetsaretobedisposedof

a. Therecoverableamountisthefairvaluelesscostsofdisposal.

b. Therecoverableamountisthevalue-in-use.

c. Theassetisnotimpaired.

d. Therecoverableamountisthecarryingvalue. (Adapted)

23.Which of the following is the best evidence of a fixed asset’s fair value less costsofdisposal?

a. Anassetthatistradinginanactivemarket.

b. Thepriceinabindingsaleagreement.

c. Informationavailablethatdeterminesthedisposalvalueoftheassetinan arm’slengthtransaction.

d. dThecarryingvalueoftheasset. (Adapted)

24. When calculating the estimates of future cash flows, which of the following cashflowsshould not beincluded?

a. Cashflowsfromdisposal.

b. Incometaxpayments.

c. Cashflowsfromthesaleofassetsproducedbytheasset.

d. Cashoutflowsonthemaintenanceoftheasset.

(Adapted)

25. An impairment loss that relates to an asset that has been revalued upwards shouldberecognizedin

a. Profitorloss.

b. Revaluationsurplusthatrelatestotherevaluedasset.

c. Openingretainedprofits.

d. Anyreserveinequity. (Adapted)

26.Goodwillshouldbetestedforimpairment

a.Ifthereisanindicationofimpairment. c.Everyfiveyears.

b.Annually. d.Ontheacquisitionofasubsidiary. (Adapted)

27. Wherepartofthecash-generatingunitisdisposedof,thegoodwillassociated withtheelementdisposedof

a. Shallbewrittenofftotheincomestatemententirely.

b. Shallnotbeincludedinthecalculationofgainorlossondisposal.

c. Shallbeincludedinthecalculationofgainorlossondisposal.

d. Shallbewrittenoffagainstretainedprofits. (Adapted)

28. When impairment testing a cash-generating unit, any corporate assets, such astheheadofficebusinessorcomputerequipment,should

a. Beallocatedonareasonableandconsistentbasis.

b. Beseparatelyimpairmenttested.

c. Be included in the head office assets or parent’s assets and impairment testedalongwiththatcash-generatingunit.

d. Notbeallocatedtocash-generatingunits.

(Adapted)

29. When allocating an impairment loss, such a loss should reduce the carrying amountofwhichassetfirst?

a.Property,plant,andequipment.

c.Goodwill.

d.Currentassets. (Adapted)

b.Intangibleassets.

30. Whichofthefollowingimpairmentlossesshouldneverbereversed?

a. Lossonproperty,plant,andequipment.

b. Lossongoodwill.

c. Lossonabusinesssegment.

d. Lossoninventory. (Adapted)

31.Isanentityrequiredtoperformtheimpairmenttestofgoodwillspecificallyat theendofthereportingperiod?

a. Yes, performing impairment testing during the period increases the risk thatallinformationexistingatthereportingdatemaynotbeconsidered.

b. No, the entity can perform impairment testing any time during the year for as long as the interval between each impairment testing should not exceedoneyear.

c. No, the entity can perform impairment testing any time during the year foraslongastheintervalbetweeneachimpairmenttestingshouldnotfall belowoneyear.

d. Yes,however,ifthereisanyindicationofimpairmentduringtheyear,the entityshouldnotdeferthetestingtotheendofreportingperiod.

32.Under PAS 36 Impairment of assets, which of the following statements best describes'valueinuse'?

a. The present value of estimated future cash flows expected to arise from thecontinuinguseofanassetandfromitsultimatedisposal

b. The amount of cash or cash equivalents that could currently be obtained bysellinganassetinanorderlydisposal

c. Thenetamountwhichanentityexpectstoobtainforanassetattheendof itsusefullife

d. The amount at which an asset could be exchanged between knowledgeable,willingpartiesinanarm'slengthtransaction

33.Under PAS 36 Impairment of assets, which of the following terms best describesthehigherofanasset'sfairvaluelesscostsofdisposalanditsvalue inuse?

a.Recoverableamount

b.Revaluedamount

c.Depreciableamount

d.Carryingamount

34.Under PAS36 Impairment of assets, are the following statements relating to anactivemarkettrueorfalse?

(1)Willingbuyersandsellersareusuallyfound.

(2)Pricesareavailabletothepublic.

a.False,False b.False,True

c.True,False

d.True,True (ACCA)

35.Under PAS36 Impairment of assets, which of the following statements best describestheterm'impairmentloss'?

a. Theremovalofanassetfromanentity'sstatementoffinancialposition

b. The amount by which the carrying amount of an asset exceeds its recoverableamount

c. The systematic allocation of an asset's cost less residual value over its usefullife

d. The amount by which the recoverable amount of an asset exceeds its carryingamount (ACCA)

36.AccordingtoPAS36Impairmentofassets,whichofthefollowingarerelevant indetermininganon-currentasset's'valueinuse'?

I. Theexpectedfuturecashflowsfromtheasset

II. Thecarryingamountoftheasset

III. Thefutureannualdepreciationexpenseinrespectoftheasset

IV. Thetimevalueofmoney

c.

37.Anentityisconsideringwhethertoapplyanimpairmenttesttoanindividual asset or to the cash-generating unit to which that asset belongs. Are the followingstatementstrueorfalse,accordingtoPAS36Impairmentofassets?

I. If the individual asset does not generate cash inflows that are largely independent of those from other assets, then the cash-generating unit should beidentified.

II. If the individual asset generates an insignificant proportion of the cash inflowsoftheentityasawhole,thenthecash-generatingunit should not beidentified.

a.False,False b.False,True c.True,False d.True,True (ACCA)

38.The HAVOC DEVASTATION Co. has determined that it needs to recognize an impairment loss on each of two non-current assets; plant and land. The relevantamountsareasfollows:

According to PAS36 Impairment of assets, how should each of the impairment lossesberecognized? Plant

a.Inprofitorloss Inprofitorloss

b.Inprofitorloss Inothercomprehensiveincome

c.Inothercomprehensiveincome Inprofitorloss

c.Inothercomprehensiveincome Inothercomprehensiveincome (ACCA)

39.On January 1, 20x2 AMIABLE FRIENDLY Company acquired a non-current assetwithanestimatedusefullifeof8yearsfor₱320,000.Non-currentassets are accounted for under the cost model and depreciation is charged by the straight-linemethod.

On January 1, 20x7 an impairment review identified an impairment loss of ₱10,000andtheremainingusefullifewasrevisedtofouryears.Arethefollowing statementstrueorfalse,accordingtoPAS36Impairmentofassets?

(1) Future depreciation expenses should be measured by reference to the carryingamountafterdeductingtheimpairmentloss.

(2) Future depreciation expenses should be measured by reference to the new estimateoftheremainingusefullife.

a.False,False b.False,True c.True,False d.True,True (ACCA)

40.In testing a cash generating unit (CGU) for impairment the bottom-up test meansthat

a. GoodwillcanbeallocatedtotheCGUandanimpairmentlosshasoccurred iftherecoverableamountoftheCGU’slessthanthecarryingamount,plus theallocatedgoodwill.

b. GoodwillcanbeallocatedtotheCGU’sandanimpairmentlossoccurredif the recoverable amount of the CGU is less than its carrying amount, excludingtheallocatedgoodwill

c. GoodwillcanbeallocatedtotheCOGandanimpairmentlosshasoccurred iftherecoverableamountoftheCGUismorethanthecarryingamount.

d. GoodwillcanbeallocatedtotheCGUandanimpairmentlosshasoccurred iftherecoverableamountoftheCGUismorethanitscarryingamount.

(Adapted)

41.Select the incorrect statement regarding impairments on investment properties.

a. Investment properties under the fair value model are not subject to impairment

b. Impairmentsofinvestmentpropertiesunderthecostmodelisrecognized inprofitorloss

c. Compensation from third parties for investment properties that was impaired or lost shall be recognized in profit or loss when the compensationbecomesreceivableandnotoffsetwiththeamountofloss

d. Reversal of impairment on investment properties under the cost model areneverreversed

42.Which of the following analysis on asset impairment is most likely to have been made by a CPA? (where: RA = recoverable amount; FVLCS = fair value less costs of disposal; VIN = value in use; CA = carrying amount; IL = impairmentloss)

a. if“FVLCS>CA,”then,“IL=0”

b. if“FVLCS<VIN,”then,IL=>0”

c. if“FVLCS>VIN,”then,“RA=FVLCS,”now,if“CA>RA,”then“IL=RA–CA”

d. if“FVLCS>VIN,”then,“RA=VIN,”now,if“CA<RA,”then“IL=RA–CA”

43.Ampersand“&”Co.determinesthataprintingpressusedinitsoperationshas suffered a permanent impairment in value because of technological changes. Anentrytorecordtheimpairmentshould

a. recognizeanextraordinarylossfortheperiod

b. includeacredittotheequipmentaccumulateddepreciationaccount

c. includeacredittotheequipmentaccount

d. notbemadeiftheequipmentisstillbeingused. (AICPA)

Chapter 21 - Suggested answers to theory of accounts questions