8-ppe

FINANCIAL ACCOUNTING AND REPORTING HAND-OUT NO. 18: Property, Plant, and Equipment NATURE OF PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment (PPE) are tangible items that: (a) Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) Are expected to be used during more than one period. The following are examples of PPE: 1. Land used in business 2. Land held for future plant site 3. Building used in business 4. Equipment used in the production of goods 5. Equipment held for rentals 6. Major spare parts 7. Furniture and fixture 8. Bearer plants The following are not examples of PPEs: 1. Land held for speculation 2. Land held for an undetermined future use 3. Land and/or building classified as investment property under IAS 40 Investment Property 4. Property held for sale in the ordinary course of business. 5. Assets classified as held for sale under IFRS 5 6. Biological assets related to agricultural activity, other than bearer plants 7. Intangible assets 8. Minor spare parts RECOGNITION PRINCIPLE The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably. MEASUREMENT AT INITIAL RECOGNITION An item of PPE is initially measured at cost. Elements of cost The cost of a PPE comprises the following: 1. Its purchase price, including import duties, nonrefundable purchase taxes, after deducting trade discounts and rebates. 2. Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by the management. 3. The initial estimate of the costs of dismantling, removal and site restoration costs on which the PPE is located, for which the entity incurs an obligation by acquiring or using the asset other than to produce inventories. Examples of directly attributable costs: a. Costs of employee benefits arising directly from the construction or acquisition of PPE; b. Costs of site preparation; c. Initial delivery and handling costs; d. Installation and assembly costs; e. Costs of testing whether the asset is functioning properly, net of disposal proceeds of samples generated during testing; and f. Professional fees Examples of costs that are expensed outright: a. Costs of opening a new facility. b. Costs of introducing a new product or service c. Costs of conducting business in a new location. d. Administration and other general overhead costs. e. Abnormal amounts of wasted material, labor or other resources. Cessation of capitalization of costs Capitalization of costs ceases when the PPE is in the location and condition necessary for it to be capable of operating in the manner intended by management.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Problem 1: (Initial Cost of equipment; with decommissioning costs) On January 1, 2018, XYZ Co. acquired an oil rig for P100,000,000. Installation and other necessary costs in bringing the equipment to its intended condition for use totaled P20,000,000. The entity 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 P10,000,000. The imputed rate of interest is 12%. 1. Compute for the initial cost of equipment (use four decimal places for PV factor) A. 100,000,000 C. 121,037,000 B. 120,000,000 D. 130,000,000 Problem 2: (Acquisition on cash basis) ABC Co. acquired an equipment overseas on cash basis for P100,000. Additional costs incurred include the following: • Commissions paid to brokers for the purchase of equipment, P5,000 • Import duties, P25,000 • Non-refundable purchase taxes, P10,000 • Freight cost of transferring the equipment to ABC Co.’s premises, P1,000 • Costs of assembling and installing the equipment, P2,000 • Costs of testing the equipment, P1,500. • Administration and other general overhead costs, P4,200 • Advertisement and promotion costs of the new product to be produced by the equipment, P3,800 The samples generated from testing the equipment were sold at P500. How much is the initial cost of the equipment? A. 100,000 C. 144,500 B. 134,500 D. 144,000 Problem 3: (Deferred settlement; with and without cash price equivalent) On January 1, 2018, an entity purchased equipment with an installment price of P130,000 by paying P10,000 down payment and issuing a three-year noninterest-bearing note of P120,000 payable in equal annual installments starting December 31, 2018. The prevailing rate for the note as of January 1, 2018 is 12%. Case 1: The cash price equivalent is P100,000. 1. Compute for the initial cost of the equipment A. 100,000 C. 96,000 B. 106,000 D. 130,000 2. Prepare the journal entry to record the acquisition of the equipment. 1/1/2018

Equipment Discount on notes payable Cash Notes payable

100,000 30,000

10,000 120,000

Case 2: The cash price equivalent is not available. 1. Compute for the initial cost of the equipment. A. 100,000 C. 96,000 B. 106,000 D. 130,000 2. Prepare the journal entry to record the acquisition of the equipment. 1/1/2018

Equipment Discount on notes payable Cash Notes payable

106,000 24,000

10,000 120,000

Problem 4: (Deferred payment basis) BB Company purchased a new machine on a deferred payment basis. A down payment of P100,000 was made and 4 monthly installments of P250,000 are to be made at the end of each month. The cash equivalent price of the machine was P950,000. The company incurred and paid installation costs amounting to P30,000. What is the amount to be capitalized as cost of the machine? A. 950,000 C. 1,000,000 B. 980,000 D. 1,130,000 SUGGESTED ANSWER: B

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Problem 5: Apple Berry Company acquired two items of machinery: •

On December 31, 2018, Apple Berry Company purchased a machine in exchange for a non-interest bearing note requiring 10 payments of P500,000. The first payment was made on December 31, 2019, and the others are due annually on December 31 of every year after 2019. The prevailing rate of interest for this type of note at date of issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 5.33 for nine periods and 5.65 for ten periods.

•

On December 31, 2018, Apple Berry Company acquired used machinery by issuing the seller a two-year non-interest bearing note for P3,000,000. In recent borrowing, the company has paid a 12% interest for this type of note. The present value of 1 at 12% for 2 years is 0.80 and the present value of an ordinary annuity of 1 at 12% for 2 years is 1.69.

What is the total cost of the machinery? A. 5,065,000 C. 5,565,000 B. 5,225,000 D. 8,235,000 SUGGESTED ANSWER: B Problem 6: (On account with available cash discounts) Leo Company recently acquired two items of equipment: •

Acquired a press at an invoice price of P3,000,000 subject to a 5% cash discount which was taken. Cost of freight and insurance during shipment were P50,000 and installation cost amounted to P200,000.

•

Acquired a welding machine at an invoice price of P2,000,000 subject to a 10% cash discount which was not taken.

What is the total increase in the equipment account as a result of the above transactions? A. 4,900,000 C. 5,100,000 B. 5,000,000 D. 5,200,000 Problem 7: (Acquisition through issuance of equity securities) XYZ Co. acquired land with fair value of P1,000,000 by issuing 10,000 shares with par value of P10 per share and quoted price of P90 per share. 1. What is the initial cost of land? Prepare the journal entry to record the acquisition of land. A. 900,000 C. 100,000 B. 1,000,000 D. 0 2. Assuming the fair value of the land is not determinable, what is the initial cost of land? Prepare the journal entry to record the acquisition of land. A. 900,000 C. 100,000 B. 1,000,000 D. 0 3. Assuming both the fair value of the land and the shares are not determinable, what is the initial cost of land? Prepare the journal entry to record the acquisition of land. A. 900,000 C. 100,000 B. 1,000,000 D. 0

1 Land OS (10K x 10) SP-OS

1,000,000.00

2 Land (10K x 90) OS (10K x 10) SP-OS

900,000.00

3 Land (10k x 10) OS (10K x 10)

100,000.00

100,000.00 900,000.00

100,000.00 800,000.00

100,000.00

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Problem 8: (Acquisition through issuance of bonds) On January 2, 2020, Bricksman Company acquired a building with fair value of P1,900,000 by issuing a 3-year, 12% bonds with face amount of P2,000,000. Interest is due annually at the end of each year starting December 31, 2020. The bonds are quoted at 101 on the same date. 1. What is the initial measurement of the building? Prepare the journal entry to record the acquisition of the building. A. 0 C. 2,000,000 B. 1,900,000 D. 2,020,000 2. Assuming the quoted price of the bonds is not determinable, what is the initial measurement of the building? Prepare the journal entry to record the acquisition of the building. A. 0 C. 2,000,000 B. 1,900,000 D. 2,020,000 3. Assuming both the quoted price of the bonds and the fair value of the building are not determinable, what is the initial measurement of the building? Prepare the journal entry to record the acquisition of the building. A. 0 C. 2,000,000 B. 1,900,000 D. 2,020,000

1 Building Bonds payable Premium on bonds payable

2,020,000.00

2 Building Discount on bonds payable Bonds payable

1,900,000.00 100,000.00

3 Building Bonds payable

2,000,000.00

2,000,000.00 20,000.00

2,000,000.00

2,000,000.00

Problem 9: (Lump-Sum purchase of various items of PPE) The YTS Co. acquired land, building, and equipment at a lump sum price of P1,800,000. At the time of acquisition, the entity also paid P120,000 to have the assets appraised. The appraisal disclosed the following: Land Building Equipment

1,200,000 800,000 400,000

1. Compute for the cost to be assigned to (1) land, (2) building, and (3) equipment. A. (1) 1,200,000; (2) 800,000; (3) 400,000 B. (1) 960,000; (2) 640,000; (3) 320,000 C. (1) 900,000; (2) 600,000; (3) 300,000 D. (1) 1,920,000; (2) 0; (3) 0 SUGGESTED ANSWER: B 2. Prepare the journal entry to record the acquisition. Land Building Equipment Cash

960,000 640,000 320,000

1,920,000

ACQUISITION THROUGH EXCHANGE One or more items of PPE may be acquired in exchange for a (a) nonmonetary asset or assets or (b) a combination of monetary and nonmonetary assets. The measurement of PPE depends in whether the exchange transaction has commercial substance or not. Commercial substance is defined as the event or transaction causing the cash flows of the entity to change significantly by reason of the exchange.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Problem 10: (Acquisition through exchange; with and without commercial substance) Sunrise Co. exchanged equipment with Sunset Co. Pertinent data are shown below: Equipment Accumulated depreciation Fair value Cash paid Cash received

Sunrise Co.: 1,000,000 200,000 950,000 150,000

Sunset Co.: 2,000,000 800,000 1,100,000 150,000

Case 1: The configuration (risk, timing and amount) of the cash flows of the equipment are determined to be significantly different. 1. How much should (1) Sunrise Co. and (2) Sunset Co. record the asset? (1) (2) (1) (2) A. 950,000 1,100,000 C. 800,000 1,200,000 B. 1,100,000 950,000 D. 950,000 1,050,000 2. How much is the gain (loss) on exchange of (1) Sunrise Co. and (2) Sunset Co.? (1) (2) (1) (2) A. 0 0 C. 300,000 (250,000) B. 150,000 (100,000) D. (150,000) 100,000 3. Prepare the journal entry to record the transaction in the books of Sunrise Co. and Sunset Co.

Equipment-new A/D Eqpt.-old Cash Gain on Exch.

Sunrise 1,100,000.00 200,000.00 1,000,000.00 150,000.00 150,000.00

Equipment-new Cash A/D Loss on Exch. Eqpt.-old

Sunset 950,000.00 150,000.00 800,000.00 100,000.00 2,000,000.00

Case 2: The configuration (risk, timing and amount) of the cash flows of the equipment are determined to be insignificant. 1. How much should (1) Sunrise Co. and (2) Sunset Co. record the asset? (1) (2) (1) (2) A. 950,000 1,100,000 C. 800,000 1,200,000 B. 1,100,000 950,000 D. 950,000 1,050,000 2. How much is the gain (loss) on exchange of (1) Sunrise Co. and (2) Sunset Co.? (1) (2) (1) (2) A. 0 0 C. 300,000 (250,000) B. 150,000 (100,000) D. (150,000) 100,000 3. Prepare the journal entry to record the transaction in the books of Sunrise Co. and Sunset Co.

Equipment-new A/D Eqpt.-old Cash

Sunrise 950,000.00 200,000.00 1,000,000.00 150,000.00

Equipment-new Cash A/D Eqpt.-old

Sunset 1,050,000.00 150,000.00 800,000.00 2,000,000.00

Problem 11: During the current year, PARADISE Company paid P100,000 cash and traded inventory, which had a carrying amount of P2,000,000 and a fair value of P2,100,000, for other inventory in the same line of business with a fair value of P2,200,000. What amount should be recorded as cost of the inventory received in exchange? A. 2,000,000 C. 2,200,000 B. 2,100,000 D. 2,300,000 SUGGESTED ANSWER: C Problem 12: Rolls Company exchanged a truck with a carrying amount of P1,200,000 and a fair value of P2,000,000 for a truck and P200,000 cash. The fair value of the truck received was P1,800,000. The cash flows from the new truck are not expected to be significantly different from the cash flows of the old truck. At what amount should the truck received in the exchange be recorded? A. 2,000,000 C. 1,000,000

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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B.

1,400,000

D.

1,800,000

SUGGESTED ANSWER: C Problem 13: At the beginning of 2020, Mew Company traded in an old machine having a carrying amount of P1,680,000 and paid a cash difference of P600,000 for a new machine having a cash price of P2,050,000. What amount of loss should be recognized on the exchange? A. 600,000 C. 370,000 B. 230,000 D. 0 TRADE-INS A trade-in is a form of exchange. Under a trade-in arrangement, a property is acquired by exchanging another property as partial payment and the balance payable in cash or any other form of payment in accordance with agreed payment terms. Problem 14: (Acquisition through Trade-In) Trinidad Co. traded an old equipment with a dealer for a newer model. Data relative to the old and new equipment follow: Old equipment: Cost Accumulated depreciation Fair value Trade-In Value New equipment: Cash price without trade-in

P1,400,000 1,000,000 350,000 500,000 2,000,000

1. How much should the company initially recognize the new equipment? A. 1,850,000 C. 2,350,000 B. 2,000,000 D. 2,000,000 2. How much is the gain (loss) on trade-in? A. 50,000 C. 100,000 B. (50,000) D. (100,000) 3. Assuming the fair value of the old equipment is not determinable, how much should the company initially recognize the new equipment? A. 1,850,000 C. 2,350,000 B. 2,000,000 D. 2,000,000 4. In connection with item no. 3, how much is the gain (loss) on trade-in? A. 50,000 C. 100,000 B. (50,000) D. (100,000) Problem 15: On January 1, 2020, MAZDA Co. traded in an old machine for a newer model. Data relative to the old and new machines follow: Old machine Original cost Accumulated depreciation Average published retail value

50,000 20,000 6,000

New machine List price Cash price without trade-in Cash price with trade-in

95,000 70,000 55,000

1. How much should the entity record the asset? A. 6,000 C. 55,000 B. 30,000 D. 70,000 2. How much is the gain (loss) on trade-in? A. 0 C. (15,000) B. 15,000 D. (24,000) 3. Prepare the journal entry to record the transaction.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Machine-new A/D Loss on T-In Mach-old Cash

70,000.00 20,000.00 15,000.00 50,000.00 55,000.00

DONATION When an item of PPE is received through donation, the asset is recorded at the fair value when received or receivable considering the source of the donated asset: 1. From shareholders – the fair value should be credited to donated capital. ✓ Expenses incurred in connection with the donation such as payment of registration fees and legal fees shall be charged to the donated capital account. However, directly attributable costs incurred such as installation and testing cost necessary to bring the donated asset to the location and condition for its intended use shall be capitalized. 2. From non-shareholders – the fair value should either be credited to income (if no restrictions) or liability until the restrictions are met. If the restrictions are met, the liability shall then be transferred to income. ✓ Incurrence or payment of direct costs such as payment for transfer of title to the corporation, shall be capitalized. Problem 16: (Donation) XYZ Co. received a land as a donation. The land has a fair value of P900,000. XYZ paid P80,000 for legal expenses for land transfer. 1. Prepare the journal entry to record the donation of land assuming the donor is a shareholder. 2. Prepare the journal entry to record the donation of land assuming the donor is a nonshareholder who imposed restrictions on the donated land. 3. In relation to item no. 2, prepare the journal entry assuming the company met these donorimposed restrictions on the donated land. 4. Prepare the journal entry to record the donation of land assuming the donor is a nonshareholder. The donor imposed no restrictions on the donated land.

1 Land Cash Donated capital

900,000.00

2 Land Cash Unearned income from donation

980,000.00

3 Unearned income from donation Income from donation

900,000.00

4 Land Cash Income from donation

980,000.00

80,000.00 820,000.00

80,000.00 900,000.00

900,000.00

80,000.00 900,000.00

CAPITALIZABLE COSTS OF SPECIFIC ITEMS OF PROPERTY, PLANT AND EQUIPMENT LAND 1. Purchase price 2. Legal fees for establishing clean title 3. Broker commission 4. Escrow fees 5. Fees for registration and transfer of title 6. Cost of relocation or reconstruction of property belonging to others in order to acquire possession 7. Mortgages, encumbrances and interest on such mortgages assumed by the buyer 8. Unpaid taxes up to date of acquisition assumed by the buyer 9. Cost of survey 10. Payments to tenants to induce them to vacate the land in order to prepare the land for its intended use but not to make room for the construction of new building 11. Cost of permanent improvements such as cost of clearing, cost of grading, leveling and landfill 12. Cost of option to buy the acquired land.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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-

If the land is not acquired, the cost of option is expensed immediately.

Special assessments Special assessments are taxes paid by the landowner as a contribution to the cost of public improvements. These are treated as part of the cost of the land. LAND IMPROVEMENTS Land improvements not subject to depreciation are charged to the land account. Examples of these are: 1. Cost of grading, leveling and landfill 2. Cost of subdividing and other cost of permanent improvement Land improvements that are depreciable are charged to land improvements account. Examples of these are: 1. Fences 2. Water systems 3. Drainage systems 4. Sidewalks 5. Pavements and costs of trees, shrubs and other landscaping These are depreciation over their useful life. BUILDING Through purchase 1. Purchase price 2. Legal fees incurred in connection with the purchase 3. Unpaid taxes up to date of purchase assumed by the buyer 4. Interests, mortgage, liens and other encumbrances assumed by the buyer 5. Payments to tenants to induce them to vacate the building 6. Any renovating or remodeling costs incurred to put the building purchased in a condition suitable for the intended use. Through self-construction 1. Materials used, labor employed and overhead directly attributable to construction 2. Building permit or license 3. Architect fee 4. Superintendent fee 5. Cost of excavation 6. Cost of temporary building used as construction office and tools or materials shed 7. Expenditures incurred during the construction period such as borrowing cost on construction loan and insurance 8. Expenditures for service equipment and fixtures made a permanent part of the structure 9. Cost of temporary safety fence around construction site and cost of subsequent removal thereof - However, the construction of a permanent fence after the completion of the building is recognized as land improvement. 10. Safety inspection fee Sidewalks, pavements, parking lot, driveways 1. If such expenditures are part of the blueprint for the construction of the new building, these are charged to the buildings account. 2. If these expenditures are incurred not in connection with the construction of a new building, these are charged to land improvements. Claims for damages When insurance is taken during the construction of a building, the cost of insurance is charged to the building because it is necessary and a reasonable cost of bringing the building into existence. However, when insurance is not taken and the entity is required to pay claims for damages for injuries sustained during the construction, the payment for such should be expensed outright because the damages represent management negligence in procuring insurance and are not a reasonable and necessary cost of construction. Building fixtures (e.g., shelves, cabinets and partitions) 1. If such expenditures are immovable in the sense that these are attached to the building in such a manner that the removal may destroy the building, these are charged to the building account. 2. If such expenditures are movable, these are charged to the furniture and fixtures and depreciated over their useful life.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Ventilating system, lighting system, elevator If installed during construction, these are charged to the building account. Otherwise, these are charged to building improvements and depreciated over their useful life or remaining life of the building, whichever is shorter. PIC Interpretation on Land and Building acquired at Basket Price ➢ If the old building is still usable, the single cost is allocated to land and building based on relative fair value. ➢ If the old building is already unusable, the single cost is assigned to land only. PIC Interpretation on Usable Old Building demolished 1. If the old building is demolished immediately to make room for construction of a new building: ➢ Any allocated carrying amount of the usable old building is recognized as a loss. ➢ The net demolition cost (demolition cost less salvage value) is capitalized as cost of the new building. However, it is capitalized as cost of land if the old building is demolished to prepare the land for its intended use but not to make room for the construction of new building. 2. If the old building is demolished at a later period to make room for the construction of new building ➢ The carrying amount of the old building is recognized as a loss. ➢ The net demolition cost (demolition cost less salvage value) is capitalized as cost of the new building. ➢ If the old building is subject to a contract of lease, any payments to tenants to induce them to vacate the old building shall be capitalized as cost of the new building. MACHINERY When machinery is purchased, the cost normally includes the following: 1. Purchase price 2. Freight, handling, storage and other cost related to the acquisition 3. Insurance while in transit 4. Installation cost, including site preparation and assembling 5. Cost of testing and trial run, and other costs necessary in preparing the machinery for its intended use. 6. Initial estimate of cost of dismantling and removing the machinery and restoring the site on which it is located, and for which the entity has a present obligation. 7. Fees paid to consultants for advice on the acquisition of the machinery. 8. Cost of safety rail and platform surrounding machine. 9. Cost of water device to keep machine cool. If a machinery is removed and retired to make room for the installation of a new one, the removal cost not previously recognized as a provision is charged to expense. The VAT on the purchase of machinery is not capitalizable but charged to input tax to be offset against output tax. However, any irrevocable or nonrefundable purchase tax is capitalized as cost of the machinery. Problem 17: (Cost of Land and Building) During the year 2020, PK Company had the following transactions pertaining to a new office building: Purchase price of land Legal fees for contract to purchase land Architect fee Demolition of old building on site to make room for construction of new building Sale of scrap from old building Construction cost of new building fully completed

600,000 20,000 80,000 50,000 30,000 3,500,000

1. What amount should be reported as cost of land? A. 600,000 C. 640,000 B. 620,000 D. 650,000 2. What amount should be reported as cost of building? A. 3,520,000 C. 3,500,000 B. 3,600,000 D. 3,620,000 Problem 18: Yankee Company incurred the following costs in purchasing a land as a factory site: Purchase price Cost of tearing down old building Legal fee for title investigation Title insurance

2,400,000 240,000 15,000 10,000

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Architect fee Liability insurance during construction Excavation cost Payment to building contractor Special assessment by city for public improvement Interest cost during construction

125,000 25,000 40,000 8,800,000 30,000 300,000

1. What is the cost of the land? A. 2,425,000 C. B. 2,455,000 D.

2,495,000 2,695,000

2. What is the cost of the building? A. 9,505,000 C. B. 9,490,000 D.

9,250,000 9,530,000

Problem 19: Duchess Co. incurred the following expenditures related to land and building: Cash paid for land and dilapidated building Removal of old building to make room for construction of a new building Payment to tenants for vacating old building Architect fee for new building Building permit for new construction Fee for title search Survey before construction of new building Excavation before new construction New building constructed Assessment by city for drainage project Cost of grading, leveling and landfill Driveways and walks to new building from street (part of building plan) Temporary quarters for construction crew Temporary building to house tools and materials Cost of changes during construction to make new building more energy efficient Cost of windows broken by vandals 1. What is the cost of land? A. 1,080,000 B. 1,130,000

C. D.

2. What is the cost of new building? A. 6,560,000 C. B. 6,575,000 D.

P1,000,000 50,000 15,000 200,000 30,000 10,000 20,000 100,000 6,000,000 5,000 45,000 40,000 80,000 60,000 50,000 25,000

1,145,000 1,215,000 6,585,000 6,625,000

Problem 20: Doodle Company incurred the following costs during the current year: Option fee for land acquired Option fee for land not acquired Taxes in arrears on land Payment for land Architect fee Payment to city hall for approval of building construction Contract price for factory building Safety fence around construction site Safety inspection on building Removal of safety fence after completion of building New fence surrounding the factory Driveway, parking bay and safety lighting Trees, shrubs and other landscaping 1. What is the cost of land? A. 1,050,000 B. 1,060,000

C. D.

10,000 10,000 50,000 1,000,000 230,000 120,000 5,000,000 35,000 30,000 20,000 80,000 550,000 200,000

1,145,000 1,010,000

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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2. What is the cost of new building? A. 5,635,000 C. B. 5,435,000 D.

5,350,000 5,550,000

3. What is the cost of land improvements? A. 750,000 C. 630,000 B. 830,000 D. 280,000 Problem 21: Landers Company incurred the following expenditures related to the construction of a new head office: Purchase price of land and an old apartment building Fair value of land Legal fees, including fee for title search Payment of land mortgage and related interest due at time of sale Payment of delinquent property taxes assumed Cost of razing the apartment building Grading and drainage on land site Architect fee on new building Payment to building contractor Interest cost on specific borrowing during construction Payment of medical bills of employees accidentally injured while inspecting building construction Cost of paving driveway and parking lot Cost of trees, shrubs and other landscaping Cost of installing lights in parking lot Premium for insurance on building during construction Cost of open house party to celebrate opening of building 1. What is the cost of land? A. 1,845,000 B. 1,895,000

C. D.

2. What is the cost of new building? A. 8,525,000 C. B. 8,530,000 D.

P2,000,000 1,800,000 10,000 50,000 20,000 30,000 15,000 200,000 8,000,000 300,000 10,000 40,000 55,000 5,000 25,000 60,000

1,920,000 2,120,000 8,540,000 8,555,000

3. What is the cost of land improvement? A. 0 C. 115,000 B. 100,000 D. 300,000 Problem 22: Lea Company acquired a new machinery: Invoice price of the machinery Cash discount available but not taken on purchase Freight paid on the new machinery Cost of removing the old machinery Installation cost of the new machinery Testing cost before the machinery was put into regular operation including P10,000 in wages of the regular machinery operator Loss on premature retirement of the old machinery Estimated cost of manufacturing similar machinery

1,400,000 20,000 40,000 15,000 50,000 30,000 5,000 1,300,000

What amount should be capitalized as cost of the new machinery? A. 1,500,000 C. 1,515,000 B. 1,490,000 D. 1,520,000 Problem 21: Harry Company installed a new equipment at the production facility and incurred the following costs: Cost of equipment per supplier’s invoice Initial delivery and handling cost Cost of site preparation Consultants used for advice on the acquisition of equipment Interest charges paid to supplier for deferred credit Estimated dismantling cost to be incurred as required by contract Operating losses before commercial production

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

2,500,000 200,000 600,000 700,000 200,000 300,000 400,000

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What total amount should be capitalized as cost of the equipment? A. 4,300,000 C. 4,200,000 B. 4,000,000 D. 4,500,000 Problem 22: Raptors Company acquired a machine and incurred the following costs: Cash paid for the machine, including a VAT of P96,000 Cost of transporting machine Labor cost of installation by expert fitter Labor cost of testing machine Insurance cost for the current year Cost of training for personnel who will use the machine Cost of safety rails and platform surrounding machine Cost of water device to keep machine cool Cost of adjustment to machine to make it operate more efficiently Estimated dismantling cost to be incurred as required by contract

P896,000 30,000 50,000 40,000 15,000 25,000 60,000 80,000 75,000 65,000

What total amount should be capitalized as cost of the machine? A. 1,135,000 C. 1,200,000 B. 1,150,000 D. 1,231,000 NATURE OF DEPRECIATION Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It is not a matter of valuation as it is a matter of cost allocation in recognition of the exhaustion of the life of an item of PPE used in operations. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. FACTORS OF DEPRECIATION 1. Depreciable amount – cost less residual value. 2. Residual value – the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. 3. Useful life – it is either the period of time over which an asset is expected to be used by the entity or number of production or units expected to be obtained from the asset by the entity. ➢ The factors that should be considered in determining the useful life of an asset are: (a) Expected usage of the asset (b) Expected physical wear and tear (c) Technical obsolescence (d) Legal limits for the use of the asset RECOGNITION OF DEPRECIATION ➢ Depreciation is recognized as expense (in profit or loss) unless it is included in the cost of producing another asset. For example, the depreciation of a factory building is included in the cost of inventories. ➢ Depreciation starts when the asset is available for use, in the manner intended by management. ➢ Depreciation stops when the asset is: (a) Derecognized (i.e., sold or disposed of) (b) Classified as held for sale under IFRS 5; or (c) Fully depreciated (i.e., carrying amount is zero or equal to its residual value) ➢ Depreciation does not cease when the asset becomes idle or is retired from active use. Depreciation Method There are a variety of depreciation methods. IAS 16 does not prescribe any specific method. The choice of depreciation method depends on management’s judgment. When making the judgment, IAS 16 requires management to choose the method that best reflects the expected pattern of consumption of the future economic benefits embodied in the asset and to apply that method consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits. IAS 16, however, prohibits the use of a depreciation method that is based on revenue. IAS 16 requires an annual review of the depreciation method and the estimates of useful life and residual value at each reporting period. Any change is accounted for prospectively as a change in accounting estimate. Depreciation methods based on time is appropriate when depreciation is a function of time or caused by the passage of time rather than as a function of usage. Problem 23: Jhonson Co. provided the following information regarding an automobile:

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Acquisition date Acquisition cost Useful life (in years) Useful life (in miles) Residual value Actual miles driven 2019 2020

April 1, 2019 P5,000,000 5 100,000 P1,000,000 20,000 15,000

1. What is the depreciation expense for 2019 and 2020 using the: (a) Straight-line method (b) Sum-of-the-years’ digits (SYD) method (c) Double-declining balance method. (d) 150% declining balance method. (e) Output method (miles driven). Problem 24: Angel Company purchased a machine at an invoice price of P4,500,000 with terms 2/10, n/30. The company paid the required amount for the machine beyond the discount period. The company paid P80,000 for the delivery of the machine and P310,000 for installation and testing. The machine was ready for use on January 1, 2018. It was estimated that the machine would have a useful life of 5 years and a residual value of P800,000. Engineering estimate indicated that the useful life in productive units was 200,000. Units actually produced during the first two years were 30,000 in 2018 and 48,000 in 2019. The company decided to use the output method of depreciation. What is the accumulated depreciation of the machine on December 31, 2019? A. 1,560,000 C. 960,000 B. 1,600,000 D. 600,000 SUGGESTED ANSWER: A Problem 25: Que Company acquired a machine on July 1, 2018 and paid P5,200,000 including freight P50,000 and installation P150,000. The estimated life of the machine is 8 years or a total of 100,000 working hours with no residual value. The operating hours of the machine totaled 5,000 hours in 2018 and 12,000 hours in 2019. The company followed the working hours method of depreciation. On December 31, 2019, what is the carrying amount of the machine? A. 3,900,000 C. 4,940,000 B. 4,299,000 D 4,316,000 SUGGESTED ANSWER: D Problem 26: On April 1, 2019, LL Cool Jay Company purchased new machinery for P3,300,000. The machinery had an estimated useful life of five years with residual value of P300,000. Depreciation is computed by the sum of the years’ digit method (SYD). 1. What is the depreciation for 2019? A. 500,000 C. 900,000 B. 750,000 D 800,000 2. What is the depreciation for 2020? A. 1,600,000 C. 850,000 B. 1,800,000 D 600,000 SUGGESTED ANSWERS: B, C

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Problem 27: Benette Company purchased factory equipment which was installed and put into service on January 1, 2018 at a total cost of P1,280,000. The equipment is depreciated over eight years by the double declining balance method with residual value of P80,000. What amount of depreciation expense should be recorded on the equipment for 2019? A. 225,000 C. 300,000 B. 240,000 D 320,000 SUGGESTED ANSWER: B Problem 28: Banner Company purchased a machine on July 1, 2018 for P6,000,000. The machine has an estimated useful life of five years and a residual value of P800,000. The machine is being depreciated by the 150% declining balance method. For the year ended December 31, 2019, what amount should be recorded as depreciation expense on the machine? A. 1,530,000 C. 1,040,000 B. 1,326,000 D 1,800,000 SUGGESTED ANSWER: A ACCOUNTING CHANGES IN DEPRECIATION METHOD AND USEFUL LIFE Change in depreciation method Depreciation method used shall reflect the pattern in which the asset’s economic benefits are expected to be consumed by the entity. The depreciation method shall be reviewed at least at each financial year-end and if there has been a significant change in the expected pattern of economic benefits embodied in the asset, the method shall be changed to reflect the new pattern. Change in useful life The useful life of an item of property, plant and equipment shall be reviewed at least at each financial year-end and if expectations are significantly different from previous estimate, the estimate of the useful life shall be changed. Both changes in depreciation method and useful life shall be accounted for as a change in accounting estimate. Therefore, the depreciation charge for the current and future periods shall be adjusted. Problem 29: (Change in Depreciation method; No change in useful life) Sky Company purchased a machinery on January 1, 2017 for P7,200,000. The machinery had useful life of 10 years with no residual value and was depreciated using the straight line method. In 2020, a decision was made to change the depreciation method to sum of years’ digits. The estimate of useful life and residual value remained unchanged. What is the depreciation for 2020? A. 720,000 C. 1,260,000 B. 916,360 D. 1,440,000 Problem 30: (Change in estimate of useful life and residual value; No change in depreciation method) Stake Company acquired a machine on January 1, 2018 for P10,000,000. The machine had an 8-year useful life with P1,000,000 residual value and was depreciated using the double-declining balance method. In January 2020, the entity estimated that the useful life of the asset from the date of acquisition should have been six years and the residual value is P400,000. What is the depreciation for 2020? A. 2,612,500 C. 2,831,250 B. 2,812,500 D. 3,031,250 Problem 31: (Change in estimate of useful life and residual value; No change in depreciation method) Arreza Company acquired a machine on January 1, 2018 for P10,000,000. The machine had an 8-year useful life with P1,000,000 residual value and was depreciated using the sum of years’ digit method. In January 2020, the entity estimated that the remaining useful life of the asset is six years and the residual value is P400,000. What is the accumulated depreciation on December 31, 2020? A. 4,400,360 C. 6,090,000 B. 5,212,500 D. 6,250,000

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Composite or Group method of depreciation Composite method of depreciation is a process of averaging the useful lives of a number of property units and depreciating the entire class of assets over a single life, thus simplifying record keeping of assets and depreciation calculations. Group method is a variation of the composite method. The only difference is that under the composite method, dissimilar assets are grouped and depreciated as one while under the group method, similar assets are grouped and depreciated as one. Since depreciation is computed on the entire group, only one accumulated depreciation account is used. Thus, no gain or loss is recognized when an asset in the group is derecognized. The accumulated depreciation is debited or credited for the difference between the original cost of the asset sold and any proceeds received from the sale. If the asset is retired but not sold, accumulated depreciation is debited by the asset’s original cost. When an asset is replaced, accumulated depreciation is debited by the replaced asset’s original cost and the cost of replacement is added to the total cost of the group. Problem 32: Goofy Company provided the following data:

Machine 1 Machine 2 Machine 3

Total cost 5,500,000 2,000,000 400,000

Residual value 500,000 200,000 --

Estimated life 20 15 5

The company computed depreciation on the straight line method. 1. What is the composite life of the asset? A. 13.3 C. 18.0 B. 16.0 D 19.8 2. What is the composite rate of depreciation? A. 6.25% C. 2.50% B. 5.70% D 7.50% Problem 33: Herod Company used the composite method of depreciation based on a composite rate of 25%. At the beginning of 2020, the total cost of equipment was P5 million with a total residual value of P600,000 and accumulated depreciation of P3 million. In January 2020, the company purchased an equipment for P2.5 million with no residual value. At the end of 2020, the company sold an equipment with an original cost of P1 million and a residual value of P200,000 for P350,000. This asset was acquired on January 1, 2018. 1. What is the depreciation for 2020? A. 1,625,000 C. 1,125,000 B. 1,875,000 D 975,000 2. What is the gain or loss from derecognition of the asset on December 31, 2020? A. 100,000 gain C. 50,000 loss B. 150,000 loss D 0 LEASEHOLD IMPROVEMENTS Leasehold improvements are modifications made by a tenant to a property leased under an operating lease. LHI is depreciated over the UL of improvements or the remaining LT, whichever is SHORTER. Problem 34: On January 1, 2018, Lao Company signed a 12-year lease for warehouse space. The company has an option to renew the lease for an additional 8-year period on or before January 1, 2022. During 2020, the company made substantial improvement to the warehouse. The cost of the improvement was P540,000 with an estimated useful life of 15 years. On December 31, 2020, the company intended to exercise the renewal option.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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On December 31, 2020, what is the carrying value of the leasehold improvement? A. 486,000 C. 510,000 B. 504,000 D 513,000 MEASUREMENT AFTER INITIAL RECOGNITION An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment. Cost model After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. Revaluation model After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. The frequency of revaluations depends upon the changes in fair values of the items of property, plant and equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. Some items of property, plant and equipment experience significant and volatile changes in fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant changes in fair value. Instead, it may be necessary to revalue the item only every three or five years. When an item of property, plant and equipment is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following ways: (a) The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. ➢ For example, the gross carrying amount may be restated by reference to observable market data or it may be restated proportionately to the change in the carrying amount. The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses; or (b) The accumulated depreciation is eliminated against the gross carrying amount of the asset. If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognized in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognized. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss. Problem 35: On June 30, 2020, JENNICA Company reported the following information: Equipment Accumulated depreciation

5,000,000 1,500,000

The equipment was measured using the cost model and depreciated on a straight-line basis over a 10-year period. On December 31, 2020, the management decided to change the basis of measuring the equipment from the cost model to the revaluation model.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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The equipment had a fair value of P4,550,000 with remaining useful life of 5 years on December 31, 2020. 1. What amount should be reported as revaluation surplus on December 31, 2020? A. 1,050,000 C. 1,500,000 B. 1,300,000 D. 2,000,000 2. What is the depreciation of the equipment for 2020? A. 500,000 C. 455,000 B. 910,000 D. 650,000 3. What amount should be reported as revaluation surplus on December 31, 2020? A. 1,170,000 C. 390,000 B. 1,040,000 D. 845,000 Problem 36: Parisian Company owned an equipment costing P5,200,000 with original residual value of P400,000. The life of the asset is 10 years and was depreciated using the straight line method. The equipment has a replacement cost of P8,000,000 with residual value of P200,000. The age of the asset is 4 years. The appraisal of the equipment a total revised useful life of 12 years and the entity decided to carry the equipment at revalued amount. Before income tax, what amount should be initially reported as revaluation surplus? A. 1,600,000 C. 1,680,000 B. 2,600,000 D. 6,680,000 BASIC PRINCIPLE There is an established principle that an asset shall not be carried above its recoverable amount. If the carrying amount of an asset exceeds its recoverable amount, the asset is impaired. The excess shall be written off as impairment loss. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. Problem 37: On January 1, 2019, LULU Company has a machinery with cost of P5,000,000 and accumulated depreciation of P1,000,000. On January 1, 2019 the company has properly tested the machinery for impairment. The machinery has a remaining life of 5 years with a residual value of P500,000 and is expected to generate undiscounted net cash inflows of P800,000 per year. The fair value of the machinery on January 1, 2019 is P3,050,000 and the estimated cost of disposal is P50,000. The appropriate discount rate is 8%. The present value of 1 at 8% for periods is 0.68 and the present value of an ordinary annuity of 1 at 8% for 5 periods is 3.99. 1. What amount should be recognized as an impairment loss for 2019? A. 0 C. 808,000 B. 468,000 D. 1,000,000 2. What amount should be recorded as depreciation for 2019? A. 500,000 C. 700,000 B. 606,400 D. 538,400 3. Assuming the accumulated depreciation of the machinery as of January 1, 2019 has a balance of P1,500,000, what amount should be recognized as impairment loss for 2019? A. 0 C. 468,000 B. 308,000 D. 808,000 REVERSAL OF IMPAIRMENT An impairment loss recognized for an asset in prior years shall be reversed if there has been a change in the estimate of the recoverable amount. The increased carrying amount of an asset due to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined, had no impairment loss been recognized for the asset in prior periods.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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Problem 38: On January 1, 2017, Hi Tech Company acquired an equipment at a cost of P10,000,000. It was estimated to have a useful life of 10 years and no residual value. The straight line method is used in recording depreciation. On December 31, 2018, the company reported this asset at P6,000,000 which is the fair value on such date. On December 31, 2019, the company determined that the fair value of the impaired asset had increased to P7,500,000. 1. What is the carrying amount of the impaired asset on December 31, 2019? A. 5,250,000 C. 6,000,000 B. 5,400,000 D. 8,000,000 2. What is the carrying value of the asset on December 31, 2019 on the basis that it was not impaired? A. 8,000,000 C. 7,000,000 B. 9,000,000 D. 6,000,000 3. What amount of gain on reversal of impairment should be reported in the 2019 income statement? A. 2,250,000 C. 1,750,000 B. 1,500,000 D. 0 Problem 39: On January 1, 2018, Ed Company purchased equipment with cost of P11,000,000, useful life of 10 years and no residual value. The company used straight line depreciation. On December 31, 2018 and 2019, the company determined that impairment indicators are present. There is no change in the useful life or residual value.

Fair value less cost of disposal Value in use

December 31, 2018 8,100,000 8,550,000

December 31, 2019 8,400,000 8,200,000

1. What is the impairment loss for 2018? A. 1,800,000 C. 1,350,000 B. 2,450,000 D. 0 2. What is the gain on reversal of impairment for 2019? A. 400,000 C. 250,000 B. 800,000 D. 0 3. What is the depreciation for 2020? A. 1,100,000 C. 1,050,000 B. 1,025,000 D. 950,000 SUGGESTED ANSWERS: C, B, C Problem 40: (Impairment and reversal of impairment of asset carried at revalued amount) Martis Co. purchased a machinery on January 1, 2019 at a cost of P1,000,000. It is being depreciated using the straight-line method over its useful life of 10 years. At December 31, 2019, the asset’s fair value was P1,125,000. An impairment was detected on December 31, 2021 and the recoverable amount of the asset was determined to be P673,750. At December 31, 2022, the fair value of the asset was determined to be P730,000. 1. What amount of revaluation surplus should be recognized on December 31, 2019? 2. What is the amount of impairment loss to be reported for 2021? 3. How much is recognized as revaluation surplus on December 31, 2022? FINANCIAL ACCOUNTING THEORIES: 1. Which of the following is not a characteristic of property, plant, and equipment? A. The property, plant, and equipment are tangible assets. B. The property, plant, and equipment are used in business operations. C. The property, plant, and equipment are expected to be used over a period of more than one year. D. The property, plant, and equipment are subject to depreciation.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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2. When property is acquired by issuing equity securities, which of the following is the best basis for establishing the historical cost of the acquired asset? A. Historical cost of the asset to the seller. B. Historical cost of a similar asset C. Fair value of the asset received. D. Fair value of shares issued. 3. Which cost should be expensed immediately? A. Cost of opening a new facility. B. Cost of introducing a new product or service, including cost of advertising and promotional activities. C. Cost of conducting business in a new location. D. All of these are expensed immediately. 4. An A. B. C. D.

item of PPE acquired in an exchange with commercial substance is measured at the Fair value of asset given up Fair value of asset given up minus cash paid or plus cash received Fair value of asset given up plus cash paid or minus cash received Fair value of asset received plus cash paid or minus cash received

5. Which exchange has commercial substance? A. Exchange of assets with no difference in future cash flows. B. Exchange by entities in the same line of business. C. Exchange of assets with difference in future cash flows. D. Exchange of assets that causes the entities to remain in essentially the same economic position. 6. Which statement is true concerning acquisition of PPE by self-construction? A. The cost of self-constructed asset is determined using the same principles as for an acquired asset. B. Any internal profit is eliminated in arriving at the cost of self-constructed asset. C. The cost of abnormal amount of wasted material is not included in the cost of the asset. D. All of the statements are true. 7. Costs of uninsured hazards or claims for uninsured accidents during construction A. Are included as cost of PPE B. Are charged immediately as expense. C. Are necessary overheads, thus, are included as cost of PPE D. Ignored for financial reporting purposes 8. Depreciation of an asset begins when the asset and ceases when the asset A. (a) is acquired; (b) is sold B. (a) is available for use; (b) is derecognized C. (a) is available for use; (b) is sold, becomes idle or abandoned D. (a) is acquired; (b) is sold, becomes idle or abandoned 9. On January 1, 2018, Scott Co. placed an order for equipment. The supplier shipped the equipment on January 15, 2018 and was received by Scott on February 1, 2018. Installation and testing were finished on March 1, 2018 and the equipment is available for use on this date. However, Scott started using the equipment only on May 1, 2018. According to IAS 16, when should Scott start depreciating the equipment? A. January 15, 2018 B. February 1, 2018 C. March 1, 2018 D. May 1, 2018 10. According to IAS 16, which of the following is not an acceptable method of depreciation? A. Depreciation based on usage B. Depreciation based on time C. Depreciation based on revenue D. Accelerated depreciation 11. Leasehold improvement is depreciated over the A. Useful life of the improvement B. Remaining lease term C. Shorter of A and B D. Longer of A and B 12. Which of the following statements is true about revaluation model? A. An entity shall apply the revaluation model to all of its items of PPE. B. An entity shall revalue all of its items of PPE every end of reporting period. C. An entity shall apply the revaluation model to an entire class of PPE. D. All of the above.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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13. If the asset’s carrying amount is increased as a result of a revaluation, the increase shall be A. Credited directly to equity under the heading of revaluation surplus. B. Recognized in profit or loss. C. Credited directly to retained earnings. D. Ignored. 14. Revaluations of items of PPE are recorded using the A. Proportional method B. Elimination method C. Replacement method D. A or B 15. Subsequent to revaluation, the depreciation on the revalued asset is computed on A. Fair value on revaluation date B. Carrying amount before the revaluation C. Historical cost D. Any of these 16. When the carrying amount of an asset exceeds its recoverable amount, A. The asset is impaired. B. The excess represents impairment loss. C. There is a need to write-down the asset’s carrying amount to its recoverable amount. D. All of the foregoing. 17. It is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. A. Fair value B. Value in use C. Fair value less costs of disposal D. Recoverable amount 18. According to IAS 36, Impairment of Assets, the recoverable amount of an asset is A. Fair value less costs of disposal B. Value in use C. Lower of A and B D. Higher of A and B 19. The gain on impairment loss reversal of an asset which is recognized in profit or loss is computed as A. The difference between the recoverable amount on date of reversal and the carrying amount on date of reversal. B. The difference between the recoverable amount on date of reversal and carrying amount of the asset had no impairment loss been recognized previously. C. The difference between the carrying amount of the asset had no impairment loss been recognized previously and the carrying amount of the asset on the date of reversal. D. The difference between the carrying amount of the asset had no impairment loss been recognized previously and the recoverable amount on the date of the previous impairment testing. 20. If an asset’s carrying amount is decreased as a result of revaluation, the decrease shall be recognized in profit or loss. However, if there is a revaluation surplus account balance as a result of prior revaluation, the decrease shall be A. Debited directly to equity for the entire amount of the decrease. B. Debited to revaluation surplus to the extent of its balance and any remainder of the decrease is debited to retained earnings. C. Debited directly to equity to the extent of the balance of revaluation surplus and any remainder of the decrease is recognized in profit or loss. D. Ignored. END OF HANDOUT

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Auditing (Theory and Problems)

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