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REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

PROPERTY, PLANT AND EQUIPMENT - THEORY
Related standards: PAS 16, 20, 23 & 36
1. An item of property, plant and equipment should be recognized as an asset when
I. It is probable that future economic benefits associated with the asset will flow to the
enterprise.
II. The cost of the asset to the enterprise can be measured reliably.
a. Both I and II b. Neither I nor II c. I only d. II only

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

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

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

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

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

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

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

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

7. Directly attributable costs of bringing the asset to working condition for its intended use
include all, except
a. Initial operating losses incurred prior to an asset achieving planned performance
b. Cost of site preparation
c. Delivery, handling and installation costs
d. Estimated cost of dismantling and removing the asset and restoring the site, to the
extent that it is recognized as a provision
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8. Examples of costs that are expensed rather than recognized as an element of cost of
property, plant and equipment include all of the following, except
a. Cost of employee benefits arising directly from the construction on acquisition of an
item of property, plant and equipment.
b. Cost of opening a new facility
c. Cost of introducing a new product or service, including cost of advertising and
promotion.
d. Cost of relocating or reorganizing part or all of an entity’s operations.
9. Which is correct concerning measurement of property, plant and equipment?
I. An entity shall choose either the cost model or the revaluation model as its
accounting policy and shall apply that policy to an entire class of property, plant and
equipment.
II. The cost model means that property, plant and equipment are carried at cost less
any accumulated depreciation and any accumulated impairment loss.
III. The revaluation model means that property, plant and equipment are carried at
revalued amount, being the fair value at date of revaluation less any accumulated
depreciation and subsequent accumulated impairment loss.
a. I, II and III b. I only c. II and III only d. II only
10. The cost of an item of property, plant and equipment acquired in exchange for a
nonmonetary asset or a combination of monetary and nonmonetary asset is measured at
a. Fair value of asset given plus cash payment
b. Fair value of asset received plus cash payment
c. Book value of asset given plus cash payment
d. Book value of asset received plus cash payment
11. Which statement is incorrect regarding initial measurement of PPE?
a. PPE should be initially recorded at cost, which includes all costs necessary to bring the
asset to working condition for its intended use.
b. If payment for an item of property, plant, and equipment is deferred, interest at a market
rate must be recognized or imputed.
c. If an asset is acquired in exchange for another asset the cost will be measured at the
fair value.
d. If an asset acquired in exchange for another asset is not measured at fair value, its cost
is measured at the carrying amount of the asset received.
12. If the exchange transaction lacks commercial substance, the acquired item of property,
plant and equipment is measured at
a. Fair value of asset given plus cash payment
b. Fair value of asset received plus cash payment
c. Carrying amount of asset given plus cash payment
d. Carrying amount of asset received plus cash payment
13. When payment for an item of property, plant and equipment is deferred beyond normal
credit terms, its cost is the
a. Cash price equivalent c. Invoice price
b. Installment price d. List price
14. If an asset is acquired on credit or by installment, the difference between the total
payments and cash price, if any, should be
a. Considered interest expense of the current year
b. Included as part of the asset cost
c. Amortized as interest expense over the life of the asset
d. Amortized as interest expense over the credit period
15. Which is incorrect concerning self-constructed asset?
a. The cost of self-constructed asset is determined using the same principles as for an
acquired asset.
b. Any internal profits from construction are eliminated in arriving at the cost of self-
constructed asset.
c. The cost of abnormal amounts of wasted material, labor or other resources incurred in
the production of a self- constructed asset is included in the cost of asset.
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d. The cost of normal amounts of wasted material, labor or other resources incurred in the
production of a self-constructed asset is included in the cost of the asset.
16. Which statement is incorrect concerning government grants?
a. Grants in recognition of specific expenses should be recognized as income over the
period of the related expense.
b. Grants related to depreciable assets should be recognized as income over the periods
and in proportion to the depreciation of the related assets.
c. Grants related to nondepreciable assets requiring fulfillment of certain conditions
should be recognized as income immediately.
d. Grants that become receivable as compensation for expenses or losses already
incurred should be recognized as income of the period in which the grants become
receivable.
17. Government grants related to assets should be presented in the balance sheet
I. By setting the grant as deferred income
II. By deducting the grant in arriving at the carrying amount of the assets.
a. I only b. II only c. Both I and II d. Neither I nor II
18. Government grants related to income are presented preferably as
a. Other income in the income statement
b. Deduction from the related expense
c. Addition to the beginning balance of retained earnings
d. Additional paid in capital
19. When computing the amount of interest cost to be capitalized, the concept of “avoidable
interest” refers to
a. The total interest cost actually incurred.
b. A cost of capital charge for stockholders’ equity.
c. That portion of total interest cost which would not have been incurred if expenditures for
asset construction had not been made.
d. That portion of average accumulated expenditures on which no interest cost was
incurred.
20. The period of time during which interest must be capitalized ends when
a. The asset is substantially complete and ready for its intended use.
b. No further interest cost is being incurred.
c. The asset is abandoned, sold or fully depreciated.
d. The activities that are necessary to get the asset for its intended use have begun.
21. As to land, capitalizable incidental costs include all, except
a. Attorney’s fees for establishing clean title
b. Special assessments for local improvement which benefits the property
c. Cost of relocation or reconstruction of property belonging to others in order to acquire
possession
d. Expenditures for sidewalks, pavements, parking lot and driveways
22. The cost of the plant asset “building” should usually include all, except
a. Cost of renovation or remodeling required to prepare the building for its intended use
b. Expenditures for service equipment and fixtures made as permanent part of the building
c. Property taxes related to the period prior to acquisition that are assumed by the buyer
d. Costs incurred to have existing building removed to make room for the construction of
new building
23. Improvements which result to increased future economic benefits include all, except
a. Modification of an item of property to extend its useful life or increase its capacity.
b. Upgrade of machine parts to improve quality of output
c. Adoption of a new production process leading to large reduction in operating cost
d. Expenditure on repair or maintenance of property, plant and equipment, such as cost of
servicing or overhauling plant and equipment.
24. Which is incorrect concerning the concept of the depreciation?
a. The depreciable amount of an item of property, plant and equipment should be
allocated on a systematic basis over its useful life.
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b. The depreciation method should not reflect the pattern in which the asset’s economic
benefits are consumed by the enterprise.
c. The depreciation charge for each period should be recognized as an expense, unless it
is included in the carrying amount of another asset.
d. The estimation of the useful life of an item of property, plant and equipment is a matter
of judgment based on experience of the enterprise with similar assets.

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

26. The useful life of an item of property, plant and equipment is

I. The period of time over which an asset is expected to be used by the enterprise.
II. The number of production or similar units expected to be obtained from the asset by
the enterprise.
a. I only b. II only c. Both I and II d. Neither I nor II

27. Which statement is true concerning depreciation?

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

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

29. The sum of units method of depreciation results in

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

30. Technical obsolescence arises from

a. Expected usage of the asset
b. Expected physical wear and tear
c. Expiry date of related lease of the asset
d. Change or improvements in production or change in the market demand for the product
output of the asset.

31. The cost of fully depreciated asset remaining in service and the related accumulated
depreciation
a. Should be removed from the accounts and excluded from property, plant and
equipment
b. Should not be removed from the accounts and therefore included in property, plant and
equipment with disclosure
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c. Should not be removed from the accounts and therefore included in property, plant and
equipment without disclosure
d. Should be adjusted to conform with new estimated useful life

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

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

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

35. Dividends representing a return of capital to stockholders are not uncommon among
enterprises which
a. Use accelerated depreciation
b. Use straight line depreciation
c. Recognize both functional and physical factors in depreciation
d. Do not expect to purchase additional property after depleting existing property.

36. Depletion expense

a. Is usually part of cost of goods sold.
b. Includes tangible equipment cost in the depletion base
c. Excludes intangible equipment cost from the depletion base.
d. Excludes restoration cost from the depletion base.

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

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

account.

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

40. An asset is impaired when

a. Its recoverable amount exceeds its carrying amount.
b. Its carrying amount exceeds its recoverable amount.
c. Its fair value less costs to sell is less than its value in use.
d. Its net selling price is less than its value in use.

41. Recoverable amount is

a. The amount at which an asset is recognized in the balance sheet after deducting
accumulated depreciation and accumulated impairment losses.
b. The higher of an asset's fair value less costs to sell and its value in use.
c. The amount obtainable from the sale of an asset in a bargained transaction between
knowledgeable, willing parties.
d. The discounted present value of estimated future cash flows.

42. Which statement is incorrect in determining recoverable amount?

a. If the carrying amount is less than fair value less costs to sell or value in use, it is not
necessary to calculate the other amount.
b. If fair value less costs to sell cannot be determined, then recoverable amount is value in
use.
c. For assets to be disposed of, recoverable amount is fair value less costs to sell.
d. None of the above.

43. Fair value less cost to sell is

I. The amount obtainable from the sale of an asset in an arm’s length transaction
between knowledgeable, willing parties less cost of disposal.
II. The present value of future cash flows expected to be derived from an asset.
a. I only b. II only c. Both I and II d. Neither I nor II

44. Which statement is incorrect regarding fair value less costs to sell?
a. If there is a binding sale agreement, use the price under that agreement less costs of
disposal.
b. If there is an active market for that type of asset, use market price less costs of
disposal.
c. If there is no active market, use the best estimate of the asset's selling price less costs
of disposal.
d. Costs of disposal are the direct added costs including existing costs and overhead.

45. The following are external indicators of impairment, except

a. Market value declines.
b. Negative changes in technology, markets, economy, or laws.
c. Increases in market interest rates.
d. Worse economic performance than expected.

46. Which statement is incorrect concerning the reversal of an impairment loss?

a. The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been recognized.
b. Reversal of an impairment loss is recognized as income in the income statement.
c. Adjust depreciation for future periods.
d. Reversal of an impairment loss for goodwill is recognized as income in the income
statement.
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