PROPERTY,PLANT AND EQUIPMENT

1-3. EXO COMPANY acquires a new manufacturing equipment on January 1, 2015, on

installment basis. The deferred payment contract provides for a down payment of
P400,000 and an 8-year note for P3,204,160. The note is to be paid in 8 equal annual
installment payments of P400,520, including 10% interest. The payments are to be made
on December 31 of each year, beginning December 31, 2015. The equipment has a cash
price equivalent of P2,470,000. Exo's financial year-end is December 31.

i. The amount to be recognized on January 1, 2015, as discount on note payable is

a. 410,416
b. 0
c. 1,134,160
d. D.P927,160

ii. What is the acquisition cost of the equipment?

a. 3,504,160
b. 2,904,160
c. 2,470,000
d. 3,204,160

iii. The amount of interest expense to be recognized in 2016 is

a. 410,416
b. 207,000
c. 0
d. 187,648

Answer: (i) C (ii) C (iii) D

Solution:
(i)
Cost of equipment (cash price equivalent) P2,470,000
Less: Down payment 400,000
Amount assigned to note payable 2,070,000
Face value of note 3,204,160
Discount on note payable, January 1, 2015 1,134,160
(ii)
Acquisition cost of equipment
(cash price equivalent) P2,470,000
 (iii) Interest expense for 2016:
Note payable, Jan. 1, 2015 P3,204,160
Less: Payment made on Dec. 31, 2015 400,520
Note payable, Dec. 31, 2015 2,803,640
Discount on note payable, Dec. 31, 2015
( P1,134,160 - P207,000) (927,160)
Carrying value of note, Dec. 31, 2015 1,876,480
Interest rate x 10%
Discount amortization (interest expense) for 2016 P 187,648

4-5. Various equipment used by RICHARD CO. in its operations are either purchased from
dealers or self-constructed. The following items for two different types of equipment were
recorded during the calendar year 2015.

Store equipment (purchased):

Cash paid for equipment P275,000
Freight and insurance cost while in transit 4,500
Cost of moving equipment into place at store 2,200
Wage cost for technicians to test equipment 8,000
Insurance premium paid during first year of operation
on this equipment 6,200
Special plumbing fixtures required for this equipment 9,200
Repair cost incurred in first year of operations related
to this equipment 2,450

Manufacturing equipment (self-constructed):

Materials and purchased parts at gross invoice price
(Richard failed to take the 2% cash discount) P550,000
Imputed interest on funds used during construction
(Stock financing) 46,000
Labor costs 285,000
Overhead costs (fixed - P50,000; variable - P70,000) 120,000
Gain on self-construction 84,000
Installation cost 9,600

i. What is the total cost of the store equipment purchased?

a. 293,400
b. 295,700
c. 300,100
d. 298,900
e.
ii. What is the total cost of the self-constructed equipment?
a. 953,600
b. 874,600
c. 970,600
d. 935,600
Answer: (i) D (ii) A

Solution:
(i)
Store equipment (purchased):
Cash paid for equipment P275,000
Freight and insurance cost while in transit 4,500
Cost of moving equipment into place at store 2,200
Wage cost for technicians to test equipment 8,000
Special plumbing fixtures required for this equipment 9,200
Total cost P298,900
(ii)
Manufacturing equipment (self-constructed):
Materials and parts (P550,000 x 98%) P539,000
Labor costs 285,000
Overhead costs 120,000
Installation cost 9,600
Total cost P953,600

6. HELLO COMPANY is a major supplier of computer parts and accessories. To improve

delivery services to customers, the company acquired four new trucks on July 1, 2015.
Described below are the terms of acquisition for each truck.

Truck List Price Terms

No. 1 P700,000 Acquired for a cash payment of P656,000.

No. 2 P900,000 Acquired for a down payment of P90,000 cash

and a 1-year, non-interest
bearing note with a face amount of P820,000.
There was no established cash price for the
equipment. The prevailing interest rate for this
type of note is 10%.

No. 3 P740,000 Acquired in exchange for a computer package

that the company carries in inventory. The
computer package cost P580,000 and is normally
sold by Hello Co. for P708,000.

No. 4 P660,000 Acquired by issuing 50,000 of Hello Co.'s

ordinary shares. The shares
have a par value per share of P10 and a market
value per share of P13.
What is the total cost of the trucks purchased on July 1, 2015?
a. P2,524,000
b. P2,454,000
c. P2,889,454
d. P2,849,454

Answer: D

Solution

Truck No. 1 P656,000

Truck No. 2
Down payment P 90,000
Present value of note issued
(P820,000 x 0.90909) 745,454 835,454
Truck No. 3 708,000
Truck No. 4 (P13 x 50,000 shares) 650,000
Total cost P2,849,454

7. ALDUB, INC. has constructed a production equipment needed for the company's
expansion program. Aldub received a P2,000,000 bid from a reputable manufacturer for
the construction of the equipment.

The costs of direct material and direct labor incurred to construct the equipment were
P1,060,000 and P700,000, respectively. It is estimated that incremental overhead costs for
construction amount to 140% of direct labor costs.

Fixed costs (excluding interest) of P3,200,000 were incurred during the construction
period. This amount was allocated to construction on the basis of total prime costs-the sum
of direct labor and direct material. The prime costs incurred to construct the new
equipment amounted to 35% of the total prime costs incurred for the period. The
company's policy is to capitalize all possible costs on self-construction projects.

To assist in financing the construction of the production equipment, Aldub borrowed P2

million at the beginning of the 6-month construction period. The loan was for 2 years with
interest at 10%.

What is the total cost of the self-constructed equipment?

a. 3,960,000
b. 3,096,000
c. 2,960,000
d. 3,285,000
Answer: A
 Solution:

Direct material P1,060,000

Direct labor 700,000
Variable overhead (P700,000 x 140%) 980,000
Fixed overhead (P3,200,000 x 35%) 1,120,000
Interest on specific borrowing
(P2,000,000 x 10% x 6/12) 100,000
Total cost of self-constructed equipment P3,960,000
8-10. CEILO CORP. has been experiencing a significant increase in customers' demand for
its product. To expand its production capacity, Ceilo decided to purchase equipment from
BigayPera Company on January 2, 2015. Ceilo issues a P2,400,000 5-year, noninterest
bearing note to BigayPera for the new equipment when prevailing market rate of interest
for obligations of this nature is 12%. The company will pay off the note in five P480,000
installments due at the end of each year over the life of the note. Ceilo's financial year-end
is December 31. The appropriate present value factor of an ordinary equity of 1 at 12% for
5 periods 3.60478.

i. What is the cost of the equipment?

a. 2,400,000
b. 1,730,294
c. 1,457,931
d. 2,112,000

ii. What is the carrying value of the note at December 31, 2017?
a. 811,226
b. 1,440,000
c. 1,152,880
d. 1,480,932

iii. What amount of interest expense should be reported in Ceilo's income statement for
the year ended December 31, 2016?
a. 230,400
b. 207,635
c. 174,951
d. 288,000

Answer: (i) B (ii) A (iii) C

Solution:
(i)
Cost of the equipment (P480,000 x 3.60478) P1,730,294

The entry to record the purchase is:

Equipment 1,730,294
Discount on note payable
(P2,400,000 - 1,730,294) 669,706
Note payable 2,400,000
(ii)
Carrying value of note payable at Dec. 31, 2017 P811,226

AMORTIZATION SCHEDULE
Reduction Carrying
Date Payment Interest of Principal Value
Jan. 2, 2015 P1,730,294
Dec. 31, 2015 P480,000 P207,635 P272,365 1,457,929
Dec. 31, 2016 480,000 174,951 305,049 1,152,880
Dec. 31, 2017 480,000 138,346 341,654 811,226
Dec. 31, 2018 480,000 97,347 382,653 428,573
Dec. 31, 2019 480,000 51,427* 428,573 ----------

* P 428,573 x 12% = P51,429

Discrepancy of P2 (P51,429 - P51,427) due to rounding

(iii)
Interest expense for 2016
(See amortization schedule) P174,951

The entries to record the payment and interest for 2016 are:
Interest expense 174,951
Discount on notes payable 174,951

Note payable 480,000

Cash 480,000

GOVERNMENT GRANT
1. On January 1, 2015 Madlangtuta Co. received a grant of P25,000,000 from the British
government for the construction of a laboratory and research facility with an estimated
cost of P15,000,000 and useful life of 5 years. The laboratory and research facility was
completed and ready for the intended use on January 1, 2015. What amount of grant
income should be included in the income statement for 2016?
 a. 3,000,000
b. 5,000,000
c. 0
d. d.1,500,000

Answer: B

Solution:
Grant income (25,000,000/5) 5,000,000

2. On January 1,2015, Lourde Company received a grant of P25,000,000 from the American
Government in order to defray safety and environmental cost within the area where the
entity is located. The safety and environment cost are expected to be incurred over four
years, respectively,P2,000,000 ,P4,000,000 ,P6,000,000 and P8,000,000.What amount of
grant income should be recognized in 2015?
a. 25,000,000
b. 2,000,000
c. 2,500,000
d. 6,250,000

Answer: C

Solution:
Year Cost Fraction Income
2014 2,000,000 2/20 2,500,000
2015 4,000,000 4/20 5,000,000
2016 6,000,000 6/20 7,500,000
2017 8,000,000 8/20 10,000,000
20,000,000 25,000,000

3. On January 2 ,2014, Marlborough Company received a grant of P60,000,000 to

compensate for costs to be incurred in planting trees over a period of 5 years. The entity
will incur such cost at P2,000,000 for 2014, P4,000,000 for 2015, P6,000,000 for 2016,
P8,000,000 for 2017, and P10,000,000 for 2018.

What amount of grant income should be recognized for 2015?

a. 6,000,000
b. 4,000,000
c. 12,000,000
d. 8,000,000

Answer: D
Solution
Grant income (4/30 x 60,000,000) 8,000,000

4-5. Clause Co. purchased a varnishing machine for P4,000,000 on January 1,2015. The
entity received a government grant of P840,000 in respect of this asset. The accounting
policy is to depreciate the asset over 4 years on a straight line method basis and to treat the
grant as deferred income.
i. What amount should be reported as deferred grant income on December 31, 2016?
a. 420,000
b. 720,000
c. 840,000
d. 120,000
ii. What is the carrying amount of the machine on December 31, 2016?
a. 2,000,000
b. 3,000,000
c. 2,420,009
d. 3,160,000

Answer: (i) A (ii) A

Solution:
(i)
Deferred Grant income 840,000
Income Earned (840,000/4x2) 420,000
Deferred Grant Income - Dec. 31,2015 420,000

(ii)
Cost 4,000,000
Accumulated Depreciation (4,000,000/4x2) (2,000,000)
Carrying Amount-Dec. 31 ,2016 2,000,000

6. TMZ Company purchased a jewel polishing machine for P4,000,000 on January 1, 2015
and received a government grant of P500,000 toward the capital cost. The accounting
policy is to treat the grant as reduction in the cost of the asset. The machine is to be
depreciated on a straight line basis over 8 years and estimated to have a residual value of
P200,000 at the end of this period.

What is the depreciation of the machine for 2015?

a. 412,500
b. 475,000
c. 437,500
d. 500,000

Answer: A
Solution :
Cost 4,000,000
Government Grant (500,000)
Net Cost 3,500,000
Residual value (200,000)
Depreciable amount 3,300,000

Annual Depreciation (3,300,000/8) 412,500

7-8. Arancar Company purchased a machine for P8,000,000 on January 1,2015 and
received a government grant of P2,000,000 toward the capital cost. The machine is to be
depreciated on a straight line basis over 5 years and estimated to have a residual value of
P500,000 at the end of this period. The accounting policy is to treat the grant as a deferred
income.
i. What is the deferred grant income on December 31,2016?
a. 1,600,000
b. 400,000
c. 1,200,000
d. 800,000

ii. What is the carrying amount of the asset on December 31,2016?

a. 6,500,000
b. 1,500,000
c. 5,000,000
d. 3,000,000

Answer: (i) C (ii) C

Solution:
(i)
Deferred Income Jan. 1,2015 2,000,000
Earned Grant Income(2,000,000/5x2) (800,000)
Deferred Grant Income - Dec. 31, 2016 1,200,000

(ii)
Cost of Machine 8,000,000
Accumulated Depreciation (8,000,000-500,000=7,500,000/5x2) 3,000,000
Carrying Amount - Dec. 31 ,2016 5,000,000
9. Mikmak Company purchased a varnishing machine for P3,000,000 on January 1,2014.
The entity received a government grant of P500,000 in respect of this aaset. The accounting
policy is to depreciate the asset over 4 years on a straight line basis and to treat the grant
as deferred income.
What amount of grant income should be recognized for 2014?
a. 500,000
b. 125,000
c. 250,000
d. 0
Answer:B

Solution:
Grant income (500,000/4) 125,000
Intangible Assets

10. Brainless Company received a government grant of P15,000,000 to install and run a
windmill in an economically backward area. The entity had estimated that such a windmill
would cost P25,000,000 to construct. The secondary condition attached to the grant is that
the entity shall hire labor in the area where the windmill is to locate. The construction was
completed on January 1,2014 .The windmill is to be depreciated using the straight line
method over a period of 10 years.
What amount of grant income should be recognized for 2014?
a. 1,500,000
b. 3,000,000
c. 2,500,000
d. 5,000,000

Answer: A

Solution:
Grant income (15,000,000/10) = 1,500,000

BORROWING COSTS
1. On January 1, 2015, Shawty Company borrowed 8,750,000 at an annual interest rate of
12% to finance specifically the cost of building a plant. Construction commenced on
January 1, 2015 with a cost P9,500,000. The entity earned P370,000 interest income from
its fund. The plant was completed on December 31, 2015. What amount of interest should
be capitalized?
a. 750,000
b. 680,000
c. 380,000
d. 770,000
Answer: B

Solution:
Actual interest (8,750,000 x 12%) 1,050,000
Interest income (370,000)
Capitalizable interest 680,000

2. Disney Company borrowed P30,000,000 at 15% partly for YOUReral purposes and partly
to finance the construction of an office building on January 1, 2015. The loan shall be repaid
commencing the month following completion of the building. Expenditures incurred evenly
during the year for the completed building totaled P10,000,000 on December 31, 2015. The
entity earned interest of P300,000 for the year on the unexpected portion of the loan. What
amount of interest capitalized on December 31, 2015?
a. 750,000
b. 450,000
c. 1,500,000
d. 1,200,000

Answer: A

Solution:
Average expenditure (10,000,000/2) 5,000,000
5,000,000 Capitalizable Interest (5,000,000 x 15%) 750,000

3. During 2015, Jerusalem Company constructed a building costing P3,200,000. The

weighted average expenditure during 2015 amounted to P2,700,000. The entity borrowed
P1,500,000 at 9.5% on January 1, 2015. Funds not needed for construction were
temporarily invested and earned P45,000 in interest revenue. In addition to the
construction loan, the entity had two other notes outstanding during the year, a
P1,000,000. 10-year, 9% note payable date October 1, 2013, and a P800,000, 7%, 5-year
note payable dated November 5, 2014. What amount of interest should be capitalized
during 2015?
a. 288,500
b. 275,500
c. 320,700
d. 243,500

Answer: B

Solution :
Principal Interest
10-year note (9%) 1,000,000 90,000
5-year note (7%) 800,000 56,000
1,800,000 146,000

Average rate (146,000/1,800,000) 8.1%

 Average expenditure 2,700,000
Applicable to specific loan 1,500,000
Applicable to YOUReral loan 2,200,000

Specific borrowing (1,500,000 x 9.5%) 142,500

Interest related to specific borrowing (45,000)
YOUReral borrowing (2,200,000 x 8.1%) 178,200
Capitalizable interest 275,500

4. UNI Company borrowed 5,500,000 on a 8% note payable to finance a new plant which
the entity is constructing for own use. The only other debt of the entity is a P10,000,000,
12% mortgage payable on an office building. At the end of the current year, average
accumulated expenditure on the new factory totaled P9,000,000. What amount should be
capitalized as interest for the current year?
a. 1,140,000
b. 1,620,000
c. 860,000
d. 640,000

Answer: C

Solution:
Accumulated Average Expenditure 9,000,000
Applicable to specific loan 5,500,000
Applicable to YOUReral loan
3,500,000

Specific borrowing (5,500,000 x 8%) 440,000

YOUReral borrowing (3,500,000 x 12%) 420,000
Capitalizable interest 860,000

5. Agsunta Company started construction of a new building on January 1, 2015, and moved
into the finished building on June 31, 2015. Of the P20,000,000 total cost, P30,000,000 was
incurred in 2015 evenly throughout the year. The incremental borrowing rate was 15%
throughout 2015 and the total amount of interest incurred was P2,000,000. What amount
should be reported as capitalized interest on December 31, 2015?
a. 4,500,000
b. 3,000,000
c. 2,250,000
d. 2,000,000

Answer: D

Solution:
 Average Expenditure ( 30,000,000/2) 15,000,000
Average Interest (15,000,000 x 15%) 2,250,000
Capitalizable Interest 2,000,000
The capitalizable borrowing cost is limited to the actual borrowing cost incurred of
P2,000,000 because this is the lower than the computed amount of P1,200,000.

6. Sheeran Company borrowed P6,000,000 on a 15% note payable to finance a new factory
which the entity is constructing for own use. The only other debt of the entity is a
P8,000,000, 10% mortgage payable on an office building. At the end of the current year,
average accumulated expenditure on the new factory totaled P7,850,000. What amount
should be capitalized as interest for the current year?
a. 1,850,000
b. 1,700,000
c. 1,085,000
d. 1,075,000

Answer: C

Solution:
Accumulated Average Expenditure 7,850,000
Applicable to specific loan 6,000,000
Applicable to YOUReral loan 1,850,000

Specific borrowing (6,000,000 x 15%) 900,000

YOUReral borrowing (1,850,000 x 10%) 185,000
Capitalizable interest 1,085,000

7. Kyra Company had loans outstanding during 2015 and 2016.

Specific construction loan 2,500,000 8%
YOUReral loan 12,000,000 10%
The entity began the self-construction of a new building on January 1, 2015 and the
building was completed on December 31, 2016. Expenditures during 2015 and 2016 were:
January 1, 2015 3,000,000
July 1, 2015 1,500,000
November 1, 2015 3,000,000
July 1, 2016 2,000,000

What is the cost of the new building on December 31, 2016?

a. 8,125,000
b. 7,500,000
c. 7,875,000
d. 7,675,000

Answer: C
Solution:
Fractional Average
Expenditure Months Expenditure
January 1, 2015 3,000,000 12/12 3,000,000
July 1, 2015 1,500,000 6/12 750,000
November 1, 2015 3,000,000 2/12 500,000
7,500,000 4,250,000

Average expenditure in 2015 4,250,000

Applicable to specific loan 2,500,000
Applicable to YOUReral loan 1,750,000

Actual expenditure in 2015 7,500,000

Capitalizable interest in 2015:
Specific (2,500,000 x 8%) 200,000
YOUReral (1,750,000 x 10%) 175,000
Total cost of new building 12/31/2015 7,875,000

Fractional Average
Expenditure Months Expenditure
January 1, 2016 7,875,000 12/12 7,875,000
July 1, 2016 2,000,000 6/12 1,000,000
9,875,000 8,875,000

Average expenditure 2016 8,875,000

Applicable to specific loan 2,500,000
Applicable to YOUReral loan 6,375,000

Actual expenditure 9,875,000

Capitalizable interest in 2016:
Specific (2,500,000 x 8%) 200,000
YOUReral (6,375,000 x10%) 637,500
Total cost of new building 12/31/16 10,712,500
8. On January 1, 2015, BLUE Company borrowed P10,000,000 at an annual interest rate of
9% to finance specifically the cost of building a plant. Construction commenced on January
1, 2015 with a cost P10,000,000. The entity invested its idle funds and earned interest
income of P100,000. The project was completed on October 31, 2015. What is the carrying
amount of the plant?
a. 10,650,000
b. b.10,800,000
c. 10,000,000
d. 10,100,000

Answer: A

Solution:

Construction cost 10,000,000

Interest (10,000,000 x 9% x 10/12) 750,000
Interest income (100,000)
Total cost of plant 10,650,000

9. Benny Company commenced construction of a new plant on February 1, 2015. The cost
of P20,500,000 was paid in full to the contractor on February 1, 2015 and was funded from
existing YOUReral borrowings. The construction was completed on October 31, 2015. The
entitys borrowing during 2015 comprised the following:

Bank A 7% 9,000,000
Bank B 7.7% 11,000,000
Bank C 8% 25,000,000

What is the amount of borrowing cost that should be capitalized in relation of the plant?
a. 2,608,875
b. 2,898,750
c. 3,477,000
d. 3,478,500

Answer: A
Solution:
Principal Interest
Bank A 7% 9,000,000 630,000
Bank B 7.7% 11,000,000 847,000
Bank C 8% 25,000,000 2,000,000
Total 45,000,000 3,477,000

Average interest rate (3,477,000/45,000,000) 7.73%

Capitalizable borrowing cost (45,000,000 x 7.73% x 9/12) 2,608,875
10. On January 1, 2015, Alaska Company borrowed 6,450,000 at an annual interest rate of
7.5% to finance specifically the cost of building a plant. Construction commenced on
January 1, 2015 with a cost 8,000,000. The entity earned P300,000 interest income from its
fund. The plant was completed on December 31, 2015. What amount of interest should be
capitalized?
a. 483,750
b. 300,000
c. 220,000
d. 183,750

Answer: D

Solution:

Actual interest (6,450,000 x 7.5%) 483,750

Interest income (300,000)
Capitalizable interest 183,750

LAND AND BUILDING

1-3. At year-end, Hecker Company provided the following information about property,
plant, & equipment:

Plant assets acquired form Krom Company 8,000,000

Repairs made on building prior to occupancy 250,000
Special tax assessment 40,000
Construction of platform for machinery 70,000
Remodeling of office space in building including
new partitions and walls 500,000
Purchase of new machinery 900,000
Total property, plant and equipment 9,760,000

In exchange for the plant assets of Krom company, Hecker company issued 50,000 shares
with P100 par value. On the date of purchase, the share had a quoted price of P150 and the
plant assets had the following fair value:

Land 600,000
Building 4,500,000
Machinery 2,000,000
 i. What is the cost of Building?
a. 5,250,000
b. 5,500,000
c. 5,000,000
d. 4,500,000

ii. What is the cost of Land?

a. 600,000
b. 640,000
c. 670,000
d. 690,000

iii. What is the cost of machinery?

a. 2,900,000
b. 2,000,000
c. 2,970,000
d. 2,830,000

Answer: (i) A (ii) B (iii) C

Solution:
(i)
Fair Value 4,500,000
Repairs 250,000
Remodeling of Office Space 500,000
Total Cost of Building 5,250,000
(ii)
Fair Value 600,000
Special tax assessment 40,000
Total Cost of Land 640,000
(iii)
Fair Value 2.000,000
Construction of platform 70,000
New Machinery 900,000
Total Cost of Machinery 2,970,000
4. Hasht5 Company purchased a P5,000,000 tract of land for a factory site. The entity razed
an old building on the property to make room for the construction of new building and sold
the materials salvaged from the demolition. The entity incurred additional costs and
realized salvage proceeds as follows:

Legal fees for purchase contract and recording ownership 250,000

Title guarantee insurance 70,000
Demolition of Old Building 400,000
Proceeds from sale of salvaged materials 30,000

What is carrying amount of Land?

a. 5,290,000
b. 4,920,000
c. 5,320,000
d. 5,720,000

Answer: C

Solution:
Purchase Price 5,000,000
Legal fees 250,000
Title guarantee insurance 70,000
Carrying Amount of Land 5,320,000

5-7 Kingsman Company incurred the following costs during the current year in relation to
property, plant and equipment:

Realtor commission 500,000

Legal fees, realty taxes and documentation expenses 40,000
Cash paid for purchase of land 3,500,000
Mortgage assumed on the land purchased, including
interest accrued 400,000
Amount paid to relocate persons squatting on the property 150,000
Cost of tearing down an old building on the land to
make room for construction of new building 350,000
Building permit fee 40,000
Salvage value of the old building demolished 50,000
Cost of fencing the property 110,000
Amount paid to contractor for the building constructed 4,500,000
Excavation 45,000
Architect Fee 200,000
Allowances and hotel accommodation, paid to foreign
technicians during installation and test run of machine 500,000
Interest that would have been earned had the money used
 during the period of construction been invested 1 50,000
Invoice cost of machine acquired 2,500,000
Freight, unloading and delivery charges 60,000
Custom duties and other charges 140,000

i. What amount should be capitalized as cost of machine?

a. 3,060,000
b. 3,140,000
c. 3,200,000
d. 3,000,000

ii. What amount should be capitalized as cost of land?

a. 5,450,000
b. 5,440,000
c. 5,590,000
d. 5,550,000

iii. What amount should be capitalized as cost of building?

a. 5,000,000
b. 5,135,000
c. 5,085,000
d. 4,885,000

Answer: (i) C (ii)C (iii)C

Solution:
(i)
Invoice cost 2,500,000
Freight 60,000
Custom duties and other charges 140,000
Allowances and hotel accommodation 500,000
Cost of Machine 3,200,000

(ii)
Cash paid for Land 3,500,000
Mortgage assumed including interest accured 1,400,000
Commission 500,000
Legal fees, realty taxes and documentation 40,000
Cost of relocating squatters 150,000
Cost of land 5,590,000
 (iii)
Cost of tearing down old building 350,000
Salvage value of old building ( 50,000)
Amount paid to contractor 4,500,000
Building permit fee 40,000
Excavation 45,000
Architect fee 200,000
Cost of Building 5,085,000

8-10. Pabebe Company incurred the following expenditures related to the construction of a
new home office:

Legal fees, including fee for title search 20,000

Payment of land mortgage and related interest due
at time of sale 60,000
Payment of delinquent property taxes 15,000
Cost of Land, which included usable old apartment
building with fair value of P200,000 3,000,000
Architect fee on new building 250,000
Payment to building contractor 7,000,000
Interest cost on specific borrowing during construction 200,000
Cost of razing the apartment building 45,000
Grading and drainage on land site 20,000
Payment of medical bills of employees accidentally
injured while inspecting building construction 30,000
Premium for insurance on building during construction 22,000
Cost of paving driveway and parking lot 70,000
Cost of trees, shrubs, and other landscaping 65,000
Cost of installing light in parking lot 8,000
Cost of open house party to celebrate opening of building 80,000

i. What is the cost of land?

a. 2,720,000
b. 3,205,000
c. 2,915,000
d. 2,950,000

ii. What is the cost of land improvement?

a. 200,000
b. 143,000
c. 203,000
d. 0
iii. What is the cost of building?

a. 7,517,000
b. 7,495,000
c. 7,537,000
d. 7,525,000

Answer: (i) C (ii) B (iii ) A

Solution:
(i)
Allocated cost of land (3,000,000 200,000) 2,800,000
Legal fees 20,000
Payment of land mortgage 60,000
Payment of delinquent property taxes 15,000
Graining and drainage 20,000
Total Cost of Land 2,915,000

(ii)
Cost of paving driveway and parking lot 70,000
Cost of trees, shrubs, and other landscaping 65,000
Cost of installing light in parking lot 8,000
Total Cost of Land Improvement 143,000

(iii)
Cost of razing old apartment building 45,000
Architect fee 250,000
Payment to building contractor 7,000,000
Interest cost 200,000
Premium for insurance during construction 22,000
Total Cost of New Building 7,517,000

MACHINERY
1. Tiny Company purchased a second-hand polishing machine and incurred the following
costs:

Agreed price to be paid to vendor 7,500,000

Dismantling the machine at the current location 500,000
Transportation to Tinys factory 450,000
Machine refurbishment costs prior to reinstallation 250,000
Reinstallation 150,000
What is the cost of the second-hand machine?
a. 8,850,000
b. 7,500,000
c. 8,600,000
d. 8,350,000

Answer: A

Solution:
Purchase Price 7,500,000
Dismantling the machine 500,000
Transportation 450,000
Refurbishment costs prior to reinstallation 250,000
Reinstallation 150,000
Total Cost 8,850,000

2. Nag-aral Company completed the rearrangement of group of factory machines to secure

greater efficiency in production. The entity estimated that benefits from the rearrangement
would extend the remaining five year useful life of the machines. The following costs were
incurred:

Reinstallation 850,000
Moving 550,000
Annual Maintenance 200,000

What total amount of the costs incurred should be capitalized?

a. 1,600,000
b. 850,000
c. 1,400,000
d. 0

Answer: C

Solution:
Moving 550,000
Reinstallation 850,000
Total Costs 1,400,000

3. On October 1, 2014, Lumpiang Toge Company purchased a machine for P1,270,000 that
was placed in service on November 30, 2014. The entity incurred additional costs for this
machine as follows:

Testing 50,000
Shipping 80,000
Installation 100,000
On December 31, 2014, what amount should be reported as machinery?
 a. 1,270,000
b. 1,450,000
c. 1,500,000
d. 1,350,000

Answer: C

Solution:
Purchase Price 1,270,000
Shipping 80,000
Installation 100,000
Testing 50,000
Total Cost 1,500,000

4. LaPlace Printing Company incurred the following costs:

Purchase of collating and stapling attachment 900,000

Installation of attachment 350,000
Replacement parts for overhaul of press 250,000
Labor and overhead in connection with overhaul 100,000

The overhaul resulted in significant increase in production. Neither the attachment nor the
overhaul increased the estimated useful life of the press. What total amount of the costs
should be capitalized?
a. 1,600,000
b. 900,000
c. 1,500,000
d. 0

Answer: A

Solution:
Purchase Price 900,000
Installation 350,000
Replacement parts for overhaul of press 250,000
Labor and overhead in connection with overhaul 100,000
Total Cost 1,600,000
5. On July 1, 2014, Magic Company had a delivery van which was destroyed in an accident.
On that date, the vans carrying amount was P600,000. On July 15, 2014, the entity received
and recorded a P160,000 invoice for a new engine installed in the van in May, and another
P100,000 invoice for various repairs. In August, the entity received P850,000 under an
insurance policy on the van, which it plans to use to replace the van.
What amount should be reported as gain on disposal of the van in the income statement?
a. 190,000
b. 90,000
c. 850,000
d. 0

Answer: B

Solution:
Carrying amount, July 1 600,000
Add: Cost of new engine 160,000
Adjusted carrying amount 760,000

Proceeds of Insurance Policy 850,000

Less: Adjusted carrying amount 760,000
Gain on Disposal 90,000

6. On December 31, 2014, a building owned by SUNSHINCECompany was totally destroyed

by fire. The building had fire insurance coverage up to P6,000,000. Other pertinent
information on December 31, 2014 follows:

Building, carrying amount 6,300,000

Building, fair value 6,700,000
Removal and clean-up cost 200,000

During January 2015, before the 2014 financial statements were issued, the entity received
insurance proceeds of P6,000,000. On what amount should the determination of the loss on
involuntary conversion be based?
a. 6,700,000
b. 6,900,000
c. 6,500,000
d. 6,300,000

Answer: C

Solution:
Carrying Amount 6,300,000
Removal and clean-up cost 200,000
Total Carrying Amount 6,500,000
7. Troll Company made the following expenditures:

Renovation of a group of machines at a cost of P700,000 to secure greater efficiency

in production over their remaining five-year useful lives. The project was completed
on December 31.
Continuing, frequent, and low cost repairs at a cost of P430,000.
A broken gear on a machine was replaced at a cost of P70,000.

What amount should be charged to repair and maintenance expense?

a. 770,000
b. 500,000
c. 1,130,000
d. 1,200,000

Answer: B

Solution:
Continuing, frequent and low cost repairs 430,000
Replacement of broken gear of a machine 70,000
Total Repair and maintenance expense 500,000
8. On June 30, 2014, a fire in Durian Companys plant caused a total loss to a production
machine. The machine was depreciated at P200,000 annually and had a carrying amount of
P2,600,000 on January 1, 2014. On the date of the fire, the fair value of the machine was
P3,200,000, and the entity received insurance proceeds of P3,000,000 in October 2014.
What amount should be recognized as gain on disposal?
a. 500,000
b. 700,000
c. 400,000
d. 600,000

Answer: A

Solution:
Carrying amount January 1, 2014 2,600,000
Depreciation January 1, 2014 to June 30, 2014
(200,000 x 6/12) ( 100,000)
Carrying amount June 30, 2014 2,500,000

Insurance proceeds 3,000,000

Carrying amount 2,500,000
Gain on Disposition 500,000
9. Gigolo Company made the following expenditures:

Major improvements to the electrical wiring system 400,000

Continuing and frequent repairs 350,000
Partial replacement of roof tiles 160,000
Repainted the plant building 150,000

What amount should be charged to repair and maintenance expense?

a. 1,060,000
b. 660,000
c. 510,000
d. 550,000

Answer: B

Solution:
Continuing and frequent repairs 350,000
Repainted the plant building 150,000
Partial Replacement of roof tiles 160,000
Total Repair and Maintenance Expense 660,000

10. Begonia Company installed a new equipment at the production facility and incurred the
following costs: Initial delivery and handling cost 400,000 Cost of site preparation 700,000
Cost of equipment per suppliers invoice 3,000,000 Consultants used for advice on the
acquisition of equipment 800,000Interest charges paid to supplier for deferred credit
300,000 Estimated dismantling cost to be incurred as required by contract 350,000
Operating losses before commercial production 450,000.

What total amount should be capitalized as cost of the equipment?

a. 5,250,000
b. 5,550,000
c. 4,900,000
d. 5,100,000

Answer: A
Solution:

Cost of Equipment 3,000,000

Initial delivery and handling cost 400,000
Cost of site preparation 700,000
Consultants used for advice 800,000
Estimated dismantling cost 350,000
Total Cost 5,250,000
 DEPRECIATION
1. On April 1, 2012, Everbleen Co. purchased a new equipment for P300,000. The
equipment has an estimated useful life of 5 years, and the depreciation expense is
computed using sum-of-the-year- digits method. The accumulated depreciation of the
machinery at March 31, 2014 should be
a. 192,000
b. 180,000
c. 100,000
d. 150,000

Answer: B

Solution:
SYD = ( ) ; where n= useful life (in years)
Depreciation Formula: Cost x
Depreciation for the year ended March 31, 2013(300,000 x 5/15) P 100,000
Depreciation for the year ended March 31, 2014(300,000 x 4/15) 80,000
Accumulated Depreciation 3/31/14 P 180,000

2. Anneth runs a business making embroidered linens for receptions. She purchases a new
machine for P15,000. The machine is expected to produce approximately 5,000 linens, at
which point it will be valueless. During the first year after buying the machine, Anneth uses
it to produce 1,500 linens. She plans to use the units of production method of depreciation.
At year end, which of the following entries is correct?
a. A debit to Depreciation Expense 5,500.
b. A credit to Depreciation Expense 4,500.
c. A credit to Accumulated Depreciation 5,500.
d. A debit to Depreciation Expense 4,500.

Answer: D

Solution:
P15,000 depreciable value 5,000 units = P3 of depreciation per unit
1,500 units produce x P3 per unit = P 4,500 depreciation expense.
To record depreciation for the first year:
Depreciation Expense 4,500
Accumulated Depreciation 4,500
3. JJ spends P20,000 cash on a piece of equipment for use in her restaurant. She plans to use
the straight-line method to depreciate the equipment over 5 years. She expects it to have
no value at the end of the 5 years. After 4 years, JJ sells the equipment for P2,000. What is
the gain/loss on sale of the equipment?
a. P4,000 loss
b. P4,000 gain
c. P2,000 loss
d. P2,000 gain

Answer: C

Solution:
Accumulated Depreciation after 4 years : ( )= 4000 x 4 = 16,000
Computation for gain or loss:
Selling Price P 2,000
Less : Carrying Amount (20,000-16,000) 4,000
P 2,000 loss

4. On July 1, 2006, Oh Corp. purchased computer equipment at a cost of P360,000. This

equipment was estimated to have a six-year life with no residual value and was depreciated
by the straight-line method. On January 1, 2009, Oh determined that this equipment could
no longer process data efficiently, that its value had been permanently impaired, and that
P70,000 could be recovered with a residual value of 5,000 over the remaining useful life of
the equipment. What is the amount of accumulated depreciation that should be reported at
December 31, 2009 statement of financial position?
a. 308,571.43
b. 380,571.34
c. 308,517.43
d. 308,517.43

Answer: A

Solution:
Accumulated Depreciation ( )= 60000 x 2 = 150,000
New Carrying Amount as of 1/1/09 = 70,000 ,
Impairment Loss = 70,000- 210,000 = 140,000
New Depreciation Expense = = 18,571.43
.
Accumulated Depreciation 12/31/09 = 150,000 + 140,000 = 18,571.43 = 308,571.43
5. Jun-jun Companys statement of financial position at December 31, 2014 and 2013
reported accumulated depreciation balances of P950,000 and P600,000 respectively.
Property with a cost of P50,000 and a carrying amount of P35,000 was the only property
sold in 2014. Depreciation charged to operations in 2014 was
a. 350,000
b. 365,000
c. 370,000
d. 375,000

Answer: B

Solution:
Accumulated Depreciation for 2013 600,000
Less: Accumulated Depreciation of the
property sold (50,000-35,000) 15,000
Accumulated Depreciation balance before 2014 depreciation expense 585,000

Accumulated Depreciation for 2014 950,000

Accumulated Depreciation, per above 585,000
Depreciation charged to operations in 2014 365,000

6. On January 1, 2013, Tropang OTWOL Co. sold a building for P900,000 to Tutan Corp. , its
wholly-owned subsidiary. Tropang OTWOL Co. paid P1,000,000 for this building, which
had accumulated depreciation of P250,000. Tropang OTWOL Co. estimated a P100,000
salvage value and depreciated the building on the straight-line method over 20 years. In
Tropang OTWOL Co.s December 31, 2013 consolidated statement of financial position, this
building should be included in cost and accumulated depreciation as

Cost Accumulated Depreciation

a. 850,000 42,500
b. 900,000 40,000
c. 1,100,000 290,000
d. 1,100,000 300,000

Answer: D

Solution:
Cost of the building P1,100,000

Accumulated Depreciation
At January 1, 2013 P 250,000
, , ,
For 2013 ( ) 50,000
Total P 300,000
7. Klatuu purchased a photocopy machine at P500,000 on January 2008. The machine had
an estimated salvage value of P100,000, an estimated 8-year useful life, and was being
depreciated by the straight line method. Two years later, it became apparent to Klaatu that
this machine suffered a permanent impairment value. In January 2010, management
determined the carrying amount should be only P175,000, with a 2-year remaining useful
life, and the salvage value should be reduced by P25,000. How much will be the difference
of the original depreciation expense and the new depreciation expense of the machine?
a. 12,500
b. 25,000
c. 0
d. no answer

Answer: C

Solution:
, ,
Original Depreciation Expense= ( ) = 50,000
2010 New Carrying amount = 175,000
, ,
New Depreciation Expense = ( ) = 50,000
Difference of the original depreciation expense and the new depreciation expense of the
machine = 0

8. Sapphire Sky Company provided the following information with respect to a building:
The building was acquired January 1, 2011 at cost of P3,000,000. It has an estimated
useful life of 12 years and salvage value of P150,000. The method of depreciation
used was double declining method.
The building was renovated on January 1, 2014 at a cost of P800,000. The residual
value became P200,000.
On January 1, 2015, the management decided to change the method being used to
straight line method.
What is the depreciation of the building for December 2014?
a. 439,351.85
b. 304,513.89
c. 493,351.58
d. 340,513.98

Answer: A

Solution:
Accumulated Depreciation =
Y1 (3,000,000 )= P 500,000
Y2 (2,500,000 )= 416,666.67
Y3 (2,083,333.33 )= 247,222.22
P 1,163,888.89
CA = 3,000,000 1,163,888.89 = 1,836,111.11 + 800,000 capitalized cost = 2, 636,111.11
Depreciation for 2014:
(2, 636,111.11 ) = P 439,351.85

9. Angela Company used straight line depreciation for property, plant and equipment
which consisted the following:
2014 2013
Land 500,000 500,000
Machinery and Equipment 1,800,000 1,350,000
Total 2,300,000 1,850,000
Less: Accumulated Depreciation 1,000,000 700,000
1,300,000 1,150,000

What amount was debited to accumulation depreciation during 2014 of property, plant and
equipment retirements if the depreciation for 2013 and 2014 was P300,000 and P200,000
respectively.
a. 50,000
b. 75,000
c. 100,000
d. 125,000

Answer: C

Solution:
Accumulated Depreciation December 2013 P 700,000
Add: Depreciation for 2014 200,000
900,000
Less: Accumulated Depreciation on Property Retirement (squeeze) 100,000
Accumulated Depreciation December 2014 P 1,000,000

10. On January 1, 2011, Lene Corporation purchased a building with an estimated useful
life of 10 years. At the end of its life, it is expected to sold at 5,000. The sum-of-the-years-
digit method was used in computing its depreciation. For the year ended December 31,
2014, the depreciation applicable to the equipment was P42,000. What is the acquisition
cost of the equipment?
a. 309,000
b. 390,000
c. 930,000
d. 903,000

Answer: B
 Solution:
x = acquisition cost
42,000 = ( 5000) x
,
= x 5000

385,000 + 50000 = x
390,000 = x

DEPLETION
1-3. On January 1, 2012, Spiderman Company paid 10,000,000 for property containing
natural resources of 3,000,000 tons. The present value of the estimated cost of restoring
the land is 800,000 and the land will have a value of 600,000 after it is restored for suitable
use.
Building and bunk houses were build costing 8,000,000 , it is use as a storage of
mining equipment and houses for the miners. Its expected useful life is 10 years with no
residual value.
Operations began on January 1, 2013 and resources removed totaled 500,000 tons.
During 2014, it is discovered that available resource will total 1,500,000 tons.
At the beginning of 2014, 800,000 development cost were incurred, and only
200,000 tons are extracted.
i. What is the depreciation for the year ended December 31, 2013 assuming that it uses a
straight line method of depreciation.
a. 800,000
b. 1,700,000
c. 888,888
d. 900,000

ii. What amount should be reported as depletion for 2013?

a. 1,800,000
b. 1,600,000
c. 1,700,000
d. 1,500,000

iii. What is the depletion for the year ended December 31, 2014?
a. 1,240,000
b. 1,300,000
c. 1,200,000
d. 1,340,000

Answer: (i) A (ii) C (iii) A

Solution:
(i)
Depreciation (8,000,000/ 10 years) 800,000

(ii)
Acquisition cost 10,000,000
Restoration cost 800,000
Residual value (600,000)
Total cost 10,200,000
Rate per ton ( 10,200,000/3,000,000) 3.4
Depletion (500,000 x 3.4) 1,700,000
(iii)
Total cost 10,200,000
Depletion-2013 (1,700,000)
Carrying amount 8,500,000
Development cost 800,000
Total cost 9,300,000

Depletion rate (9,300,000/1,500,000) 6.2

Depletion- 2015 (200,000 x 6.2) 1,240,000

4. The following data are available at year-end:

Wasting asset, at cost 5,000,000
Accumulated depletion 3,500,000
Unrealized depletion in ending inventory 850,000
Retained earnings 9,000,000
Capital liquidated 2,000,000

What amount will be the maximum dividend?

a. 10,500,000
b. 9,650,000
c. 12,500,000
d. 9,000,000

Answer: B

Solution:
Retained earnings 9,000,000
Accumulated depletion 3,500,000
Total 12,500,000
Capital liquidated (2,000,000)
Unrealized depletion in ending inventory (850,000)
Maximum dividend 9,650,000
 5-6. Tropang OTWOL Company, purchased a tract of land for mining worth 5,000,000 with
removable ore estimated at 20,000,000 tons. Before the start of its operation the company
incurred 3,000,000 exploration cost. Of these cost 2,000,000 was associated with
successful wells and the remaining with so called dry holes. The entity uses the full cost
method in accounting the exploration cost. The entity also incurred development cost of
3,600,000 during the current year. The entity is required by the law to restore the land to
its original condition at estimated cost of 4,000,000. The present value of estimated
restoration cost is 3,300,000The land is estimated to be sold at 1,500,000 afterwards. The
entity removed 400,000 tons during the year and sold 300,000 of it.

i. What total amount of depletion should be recorded for the current year?
a. 262,000
b. 268,000
c. 312,000
d. 201,000

ii. Using the same information, what amount of depletion will be included on cost of goods
sold?
a. 196,500
b. 150,750
c. 234,000
d. 201,000

Answer: (i) B (ii) D

Solution:
(i)
Cost of land 5,000,000
Exploration cost 3,000,000
Development cost 3,600,000
Restoration cost 3,300,000
Total cost of wasting asset 14,900,000
Residual value of land 1,500,000
Depletable amount 13,400,000

Rate per ton (13,400,000/20,000,000) .67

Depletion (400,000 x .67) 268,000
(ii)
Cost of goods sold (.67 x 300,000) 201,000
 7. On July 1, 2012, Nasasaktan Corp. purchased a mining land for 12,000,000. The entity
expects to extract 3,000,000 tons for the entire operation. They also estimated to extract
500,000 tons per year. The entity purchased new mining equipment for10,000,000 with
estimated useful life of 10 years. The equipment is said to have a residual value of 400,000.
The entity was able to extract 250,000 tons for the year. What amount should be reported
as depreciation of the mining equipment for 2012?
a. 960,000
b. 1,000,000
c. 2,000,000
d. 500,000

Answer: B

Solution:
Depreciation per rate (12,000,000/3,000,000) 4
Depreciation (4 x 250,000) 1,000,000

Since the life of the mine(3,000,000/500,000= 6 years) is shorter than the life of the
equipment (8 years)he output method is used.

8-9. Ganda company acquired a tract of land containing an extractable natural resource.
The entity is required to restore the land after it has extracted the natural resources.
Geological studyindicated that the recoverable reserves will be 2,500,000 tons which will
be completed in 10 years. Relevant costs are as follows:
Land
12,000,000
Exploration and development costs
3,000,000
Expected cash flow for restoration cost
2,000,000
Credit adjusted risk free interest rate 10%
PV of 1 at 10% for 10 periods .39

i. What is the depletion rate per ton?

a. 6.31
b. 6.8
c. 5.56
d. 6.5

ii. Assuming that the entity has extracted 250,000 at the end of the year and new
geological study reveals that 5,000,000 tons are available for mining . What is the new
depletion per ton?
a. 3.16
b. 4.31
c. 2.84
d. 6.31
Answer: (i) A (ii) C

Solution:
(i)
Cost of land 12,000,000
Exploration and development costs 3,000,000
Restoration cost (2,000,000 x .39) 780,000
15,780,000
Depletion rate (15,780,000/ 2,500,000) 6.31

(ii)
Total cost 15,780,000
Less: depletion for the year (6.31 x 250,000) (1,577,500)
Carrying amount at the end of the year 14,202,500

New depletion per rate (14,202,500/5,000,000) 2.84

10. The entity purchased a mining land for 7,000,000. The entity incurred exploration costs
of 5,000,000. Of these cost 3,500,000 is associated with successful holes and the remaining
is with dry holes. The entity uses successful method in accounting the exploration costs.
The entity also incurred 2,000,000 development costs. What is the total amount of the
wasting asset?
a. 12,000,000
b. 14,000,000
c. 11,500,000
d. 12,500,000

Answer: D

Solution:
Land cost 7,000,000
Exploration costs 3,500,000
Development costs 2,000,000
Total cost 12,500,000
______________________________________________________________________________________________________
 REVALUATION
1. Optimism Corporation provided the following information on January 1, 2010 relating to
property, plant and equipment: Land 15,000,000 Building 40,000,000 Accumulated
Depreciation- Building 20,000,000 Equipment 13,000,000 Accumulated Depreciation-
Equipment 8,000,000. There were no new non-current assets or disposals acquired during
the year 2010. The management is applying straight line method for the building and
equipment that has useful life of 10 years and 13 years respectively with both having no
residual value. On September 30, 2010, all of the property, plant and equipment had sound
values as follows: Land 20,000,000 Building 30,000,000 Equipment 8,000,000. The balance
of revaluation surplus at December 31, 2010 is
a. 18,000,000
b. 17,350,000
c. 16,550,000
d. 15,400,000

Answer: B

Solution:
Sound Value Carrying Amount Revaluation Surplus
Land 20,000,000 15,000,000 5,000,000
Building 30,000,000 20,000,000 10,000,000
Equipment 8,000,000 5,000,000 3,000,000
Total P 18,000,000
Amortization of Revaluation Surplus
, ,
Building: = 2,000,000 x 3/12 = 500,000
, ,
Equipment: = 600,000 x 3/12 = 150,000

Unamortized Revaluation Surplus = 18,000,000 (500,000+150,000) = 17,350,000

2. A machinery was acquired on January 1, 2005 at a cost of P6,000,000. Depreciation of the

machinery is computed on a straight line basis and the annual depreciation is 150,000. On
December 31, 2013, the machinery is appraised at a fair market value of 5,550,000 with a
new total useful life of 30 years. What amount should be debited to Revaluation Surplus at
December 31, 2014?

a. 20,177.50
b. 29,032.26
c. 27, 435.74
d. no answer

Answer: B
Solution:
, ,
Useful Life = ,
= 40 yrs.
Carrying Amount as of 12/31/13 = 6,000,000 (150,000x 9yrs) = 4,650,000
Revaluation Surplus = 5,550,000 - 4,650,000 = 900,000
,
Amortization of Revaluation Surplus: = 29,032.26

3. Due to obsolescence, Castillo Company discovered that a sewing machine with an

original cost of P300,000 and accumulated depreciation at December 31, 2012 of P60,000
had suffered permanent impairment and as a result should have a carrying value of only
P200,000 at that date. In addition, its original estimated useful life of 30 years and straight
line method for depreciation was not changed. On January 1, 2015 the same asset had a
recoverable amount of P250,000. If the company uses the revaluation model to measure
long live assets, what is the Revaluation Surplus to be reported on December 31, 2015?
a. 200,000
b. 183,333.33
c. 66,666.67
d. 63,636.37

Answer: D

Solution:
12/31/12 CA = 300,000 60,000 = 240,000
Impairment loss = 200,000 - 240,000 = 40,000
New CA = 200,000
1/1/15
,
CA = 200,000 [ ( ) x 2yrs ] = 183,333.33
Revaluation Surplus = 250,000 - 183,333.33 = 66,666.67
, .
Amortization: = 3,030.30
12/31/15 Unamortized Revaluation Surplus = 63,636.37

4. Pastillas Corp. carries in its books a factory that was constructed years ago at a cost of P
7,000,000 and accumulated depreciation of 1,000,000 on September 1, 2014. The factory
has been depreciated on the straight line method over a fourteen-year estimated useful life.
On the same day, the plant is revalued at P9,000,000. What is the amount credited to
Retained Earnings on the second year assuming that the corporation uses elimination
approach?
a. 250,000
b. 205,000
c. 200,500
d. 520,000

Answer: A
Solution:
7,000,000 1,000,000 = 6,000,000
Revaluation Surplus = 9,000,000 6,000,000 = 3,000,000
, ,
Amortization of Revaluation Surplus: = 250,000

5. Rogelio Rogelio Company bought a land for P1,750,000. On 2010, It was revalued
downward to conform with the market value of P1,300,000. However on 2011, there has
been a surge in land therefore having a fair value of P 2,000,000. Which of the following
entries is included to record the revaluation?
a. a credit to Retained Earnings 700,000
b. a credit to Revaluation Gain 250,000
c. a credit to Revaluation Surplus 250,000
d. a debit to Land 2,000,000

Answer:

Solution:
Impairment Loss : 1,300,000 - 1,750,000 = 450,000
2011 Revaluation Surplus : 2,000,000 - 1,300,000 = 700,000

Land 700,000
Revaluation Gain 450,000
Revaluation Surplus 250,000

6. On December 31, 2012, Powermart Corp. reported the following in relation to

machinery: Machinery 3,250,000 Accumulated Depreciation P1,000,000. It was
depreciated using straight line basis over a 13-year period with a residual value of
P250,000 and measured using the cost model. On January 1, 2013, the management
discovered that the machinery was impaired. Its fair value less cost of disposal is
P2,000,000 while its value in use is P1,750,000. On December 31, 2014, the entity decided
to change the basis of measurement of the machinery from cost to revaluation model. It
was revalued to the market value of P2,750,000 with an expected remaining useful life of 5
years. What amount is the revaluation surplus on December 31,2015?
a. 670,000
b. 680,000
c. 690,000
d. 700,000

Answer: C
Solution:

1/1/13 Imp. Loss = 2,000,000 - 2,250,000 = 250,000

, , ,
12/31/14 CA = 2,000,000 [( ) x 2] = 1,912,500
Revaluation Surplus: 2,750,000 - 1,912,500= 837,500
Amortization: 837,500 /5 = 167,500
2015 Unamortized Revaluation Surplus = 837,500 - 167,500 = P 670,000

7. The following data was available on EXO Companys book on January 1, 2011: Building
2,350,000 Accumulated Depreciation P 940,000. It was depreciated using straight line basis
over a 10-year period with a residual value of zero. On January 1, 2012, a test for
impairment indicated that the building was impaired. As of the same date, its fair value less
cost of disposal was P1,100,000 while its value in use was P1,150,000. At the beginning of
2013 a revaluation of the building was made and it appraised to the market value of
P3,200,000. What is the amount of revaluation surplus on January 1, 2013?
a. 1,175,000
b. 2,737,000
c. 2,337,500
d. 862,500

Answer: C

Solution:
1/1/12 CA = 2,350,000 - (940,000 + 235,000)= 1,175,000
Imp. Loss = 1,175,000 - 1,150,000 = 25,000
1/1/13
CA = 1,150,000 (1,150,000/4) = 862,500
Revaluation Surplus = 3,200,000 - 862,500 = P 2,337,500

8. On May 17, 2004, Selene Company bought a land for P7,230,000. The land was revalued
downward on April 7, 2012 to conform with the market value of P5,000,000. However on
2014, there has been a reversal of revaluation decrease in land therefore having a fair
market value of P 5,900,000. Which of the following entries is not included to record the
2014 revaluation?
a. a credit to Revaluation Surplus 540,000
b. a credit to Revaluation Gain 2,230,000
c. a credit to Revaluation Surplus 2,770,000
d. a debit to Land 2,770,000

Answer: C
 Solution:
Impairment Loss : 5,000,000 7,230,000 = 2,230,000
4/7/12 Revaluation Surplus : 5,000,000 - 2,230,000 = 2,770,000

Land 2,770,000
Revaluation Gain 2,230,000
Revaluation Surplus 540,000

9-10. Based on the books of Jaeger Corporation, the following account balances are
available relating to real properties: Land A P4,555,000 Land B P3,200,500 Land C
P5,000,000. On December 31, 2014, the entity revalued land to fair value. As of this date,
the following data is available:
Land A P 7,000,000
Land B P 5,000,000
Land C P 6,000,000

The buildings and other facilities located on all three properties are depreciated using sum-
of-the-years-digit method using a 12-year useful life. On December 31, 2015, Land A and C
were sold for a lump sum of P10,000,000.

i. What amount of revaluation surplus should be transferred to retained earnings on

2015?
a. 3,445,000
b. 5,244,500
c. 1,799,500
d. 0
ii. Using the same problem above, which of the following is true?
a. The remaining unrealized revaluation surplus is 1,799,500.
b. The retained earnings will have piecemeal realization of Land Bs Realization
on the next years.
c. The remaining unrealized revaluation surplus is 3,445,000.
d. All of the above

Answer: (i) A (ii) A

Solution:
Sound Value Carrying Amount Revaluation Surplus
Land A 7,000,000 4,555,000 2,445,000
Land B 5,000,000 3,200,500 1,799,500
Land C 6,000,000 5,000,000 1,000,000
Total P 5,244,500
Realization of Revaluation Surplus:
Land A 2,445,000
Land C 1,000,000
Total P 3,445,000
Unrealized Revaluation Surplus: P 1,799,500
 IMPAIRMENT OF ASSETS
1-3. Gold Company operates a product line which is treated as a cash YOURerating unit for
impairment purposes. On December 31, 2014, the carrying amounts of the noncurrent
assets are as follows:
Machine 4,000,000
Equipment 3,000,000
Goodwill 1,000,000

On December 31, 2014 the fair value less cost to sell is 7,500,000

i. What amount will be the balance of goodwill?

a. 500,000
b. 62,500
c. 1,000,000
d. 66,667
ii. Assuming that the fair value less cost to sell is 6,000,000. What is the amount of
impairment allocated to machine?
a. 4,000,000
b. 571,428.57
c. 857,142.86
d. 3,000,000

iii. What is the new carrying amount of goodwill, machine and equipment respectively?
a. 500,000; 3,500,000; 2,500,000
b. 0; 3,428,571.43; 3,000,000
c. 0; 3,428,571.43; 2,571,428.57
d. 750,000; 3,000,000; 2,250,000

Answer: (i) A (ii) B (iii) C

Solution:
(i)
Carrying amount of CGU 8,000,000
Fair value less cost to sell 7,500,000
Impairment loss 500,000

Impairment is charged to goodwill up to the extent of it balance.

Goodwill (1,000,000-500,000) 500,000

(ii)
Impairment loss (8,000,000-6,000,000) 2,000,000
Charged to goodwill 1,000,000
Allocable to other assets 1,000,000
Allocated to machine (1,000,000 x 4/7) 571, 428.57

(iii)
Goodwill 0
Machine [4,000,000-(1,000,000 x 4/7)] 3,428,571.43;
Equipment [3,000,000-(1,000,000 x 3/7)] 2,571,428.57

4. James Pogi Company acquired a machine for 5,000,000 on July 1, 2014. The machine has
a12-year useful life, a 500,000 residual value, and was depreciated using the straight-line
method. On June 30, 2016 a test for recoverability revealed that the machine has been
impaired. The fair value less cost of disposal on this date is 1,750,000 and the value in use
amount to 1,500,000. What amount should be recognized as impairment loss?
a. 2,750,000
b. 2,500,000
c. 2,875,000
d. 3,125,000

Answer : B

Solution:
Acquisition cost 5,000,000
Residual value (500,000)
Depreciable amount 4,500,000

Accumulated Depreciation (4,500,000/12 x 2) 750,000

Cost 5,000,000
Accumulated depreciation ( 750,0000)
Carrying amount 4,250,000
Fair value less cost of disposal (1,750,000)
Impairment loss 2,500,000

5, January 1, 2008, Maganda company purchased a sewing machine for 3,000,000, with a
residual value of 500,000. On January 1, 2011 the Accumulated Depreciation account has a
balance of 750,000. A test for impairment also revealed that the undiscounted cash flow
from the sewing machine are 200,000 a year for the remaining 7 periods. The prevailing
market rate at this date is 5%. The fair value less cost of disposal amounted to 1,600,000.
PV of ordinary annuity if 1 at 5% for 7 period is 5.79.
What amount should be reported as loss on impairment?
a. 650,000
b. 1,092,000
c. 150,000
d. 592,000

Answer: A
 Solution:
Value in use (200,000 x 5.79) 1,158,000
Fair value less cost of disposal 1,600,000

Cost 3,000,000
Accumulated Depreciation (750,000)
Carrying amount 2,250,000
Less: fair value less cost of disposal 1,600,000
Impairment loss 650,000

6-7. On January 1, 2013, Umasa Corporation acquired equipment for 19,000,000 with an
estimated useful life of 15 years. It is also estimated that the equipment will be sold for
1,500,000 at the end of its useful life. The entity uses the sum of years digit for
depreciation. At the year ended December 31, 2014one of the adjusting entry includes an
impairment loss of 500,000.

i. What will be the carrying amount of the equipment on December 31, 2014?
a. 16,812,500
b. 17,312,500
c. 14,270,833
d. 19,000,000

ii. Using the same information in No.2,Umasa Corporation changeits depreciation method
into straight line method at the beginning of 2015. It is estimated to have a residual
value of 1,000,000it is estimated to have a total of 10-year useful life. What amount
should be recognized as depreciation in 2015?
a. 1,914,062.5
b. 2,039,062.5
c. 1,701,388.89
d. 1,531,250

Answer: (i)C (ii)A

Solution:
(i)
SYD [15(15+1/2)] 120

Cost 19,000,000
Residual value (1,500,000)
Depreciable amount 17,500,000
 Cost 19,000,000
Depreciation-2013(17,500,000 x 15/120) 2,187,500
Carrying amount-January2014 16,812,500
Depreciation-2014(17,500,000 x 14/120) 2,041,667
14,770,883
Carrying amount 14,770,883
Impairment loss (500,000)
Recoverable amount/ carrying amount- December 2014 14,270,833

(ii)
Carrying amount 16,312,500
Residual value (1,000,000)
Depreciable amount 15,312,500

Depreciation (15,312,500/8years) 1,914,062.5

8-10. On January 1, 2013, Diosa Company purchased equipment with cost of 15,000,000,
useful life of 10 years and no residual value. The entity used straight line depreciation. On
December 31, 2013, and December 31, 2014, the entity determined the impairment
indicators are present. There is no change in useful life or residual value.

December 31, 2013 December 31, 2014

Fair value less cost of disposal 9,100,000 9,300,000
Value in use 9,600,000 9,200,000

i. What would be the balance of Accumulated Depreciation on December 31, 2013?

a. 1,500,000
b. 3,000,000
c. 3,900,000
d. 5,400,000

ii. What is the impairment loss for 2013?

a. 4,400,000
b. 5,000,000
c. 5,400,000
d. 3,900,000

iii. What is the gain on reversal of impairment for 2014?

a. 766,667
b. 800,000
c. 866,667
d. 700,000

Answer: (i)D (ii)D(iii)A

Solution:
(i)
Accumulated Depreciation 1,500,000
Impairment loss 3,900,000
Accumulated Depreciation- 2013 5,400,000

(ii)
Cost 15,000,000
Depreciation (15,000,000/10) 1,500,000
Carrying amount 13,500,000
Value in use- (higher) 9,600,000
Impairment loss 3,900,000

(iii)
Carrying amount- 01/01/2014 9,600,000
Depreciation- 2014(9,600,000/9) (1,066,667)
Carrying amount- with impairment 8,533,333

Cost- 01/01/2013 15,000,000

Accumulated Depreciation(15,000,000/10 x 2) (3,000,000)
Carrying amount- with no impairment 12,000,000

Fair value less cost of disposal (higher) 9,300,000

Carrying amount with impairment (8,533,333)
Gain on reversal of impairment 766,667

INTANGIBLE ASSETS
1. A patent for a new consumer product for P900,000 was bought ME Inc. on January
1,2012. At the time of purchase, the patent was valid for 15 years. However, the patent's
useful life was estimated to be only 10 years due to competitive nature of the product. On
Dec. 31,2015, the product was permanently withdrawn from sale under governmental
order because of a potential health hazard in the product. What amount should be changed
against income of 2015 if amortization is recorded at the end of each year?
a. 90,000
b. 540,000
c. 720,000
d. 630,000

Answer: D