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Chapter 16
PPE Part 2
1. Depreciation of noncurrent operating assets is an accounting process for the purpose of
a. reporting declining asset values on the balance sheet.
b. allocating asset costs over the periods benefitted by use of the assets.
c. accounting for costs to reflect the change in general price levels.
d. setting aside funds to replace assets when their economic usefulness expires.

2. Which of the following principles best describes the conceptual rationale for the methods of
matching depreciation expense with revenues?
a. Partial recognition
b. Immediate recognition
c. Systematic and rational allocation
d. Associating cause and effect

3. The composite depreciation method

a. is applied to a group of homogeneous assets.
b. is an accelerated method of depreciation.
c. does not recognize gain or loss on the retirement of specific assets in the group.
d. excludes salvage value from the base of the depreciation calculation.

4. The sum-of-the-years'-digits method of depreciation is being used for a machine with a five-year
estimated useful life. What would be the fraction applied to the cost to be depreciated in the
fourth year?
a. 4/5
b. 2/5
c. 4/15
d. 2/15

5. In order to calculate the third year's depreciation on an asset using the sum-of- the-years'-digits
method, which of the following must be known about the asset?
a. Its acquisition cost
b. Its estimated residual value
c. Its estimated useful life
d. All the above must be known.

6. Which of the following statements is the assumption on which straight-line depreciation is

based?
a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
c. Service value declines as a function of obsolescence rather than time.
d. Physical wear and tear are more important than economic obsolescence.

7. A method that ignores residual value in calculating periodic depreciation expenses in the earlier
part of an asset’s useful life is the
a. productive-output method.
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b. group composite method.

c. sum-of-the-years'-digits method.
d. double-declining-balance method.

8. Which of the following depreciation methods applies a uniform depreciation rate each period to
an asset's carrying amount?
a. Straight-line
b. Units-of-production
c. Declining-balance
d. Sum-of-the-years'-digits

9. When does the cost of land affect an entity’s profit or loss?

a. As the asset is used through periodic charges for cost allocation
b. When the asset is revalued upwards
c. When the related revaluation is recognized on a piecemeal basis as the asset is used
d. When the asset is impaired or when it is sold above or below its carrying amount

10. Which of the following reasons provides the best theoretical support for accelerated
depreciation?
a. Assets are more efficient in early years and initially generate more revenue.
b. Expenses should be allocated in a manner that "smooths" earnings.
c. Repairs and maintenance costs will probably increase in later periods, so depreciation
should decline.
d. Accelerated depreciation provides easier replacement because of the time value of money.

11. When the estimate of an asset's useful life is changed,

a. depreciation expense for all past periods must be recalculated.
b. there is no change in the amount of depreciation expense recorded for future years.
c. only the depreciation expense in the remaining years is changed.
d. None of the above is true.

12. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were
a. less than the asset’s current market value.
b. greater than the asset’s cost.
c. greater than the asset’s carrying amount.
d. less than the asset’s carrying amount.

13. On January 1 Stockton Company acquired a machine with a four-year useful life. Stockton
estimates the residual value of the machine will be equal to ten percent of the acquisition cost.
The company is debating between using either the double-declining-balance method or the sum-
of-the-years'-digits method of depreciation. Comparing the depreciation expense for the first two
years computed using these methods, the depreciation expense for the double-declining-balance
method (compared to the sum-of-the-years'-digits method) will match which of the patterns
shown below?
First year Second year
a. Lower Lower
b. Lower Higher
c. Higher Lower
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d. Higher Higher

14. Which of the following utilizes the straight-line depreciation method?

Composite Depreciation Group Depreciation
a. Yes Yes
b. Yes No
c. No Yes
d. No No

15. A depreciable asset has an estimated 15 percent salvage value. At the end of its estimated useful
life, the accumulated depreciation would equal the original cost of the asset under which of the
following depreciation methods?
Productive-Output Sum-of-the-Years'-Digits Double-Declining-Bal.
a. Yes No No
b. No No No
c. No Yes No
d. Yes Yes Yes

“Pride goes before destruction, a haughty spirit before a fall.” (Proverbs 16:18)

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ANSWERS
1. B 6. B 11. C
2. C 7. D 12. D
3. C 8. C 13. C
4. D 9. D 14. A
5. D 10. A 15. B
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1. On January 1, 20x1 Buckle Co. purchased a machine that had a list price of ₱46,320. Buckle Co.
paid cash of ₱18,000 and executed a one-year non-interest-bearing note for the balance. The
going rate of interest was 18%. The machine has a 6-year life and no residual value. Depreciation
expense on the SYD basis at the end of 20x1 is:
a. 8,092
b. 12,000
c. 13,234
d. 14,690

The next four items are based on the following information:

Dirt Corporation schedule of depreciable assets at December 31, 20X7 was as follows:
Accum.
Asset Cost Depreciation Acquisition date Residual value
A 100,000 64,000 20X6 20,000
B 55,000 36,000 20X5 10,000
C 70,000 33,600 20X5 14,000

Dirt takes a full year’s depreciation expense in the year of an asset’s acquisition, and no depreciation
expense in the year of an asset’s disposition. The estimated useful life of each depreciable asset is 5
years.

2. Dirt depreciates asset A on the double-declining-balance method. How much depreciation

expense should Dirt record in 20X8 for asset A?
a. ₱32,000
b. ₱25,600
c. ₱14,400
d. ₱ 6,400

3. Dirt depreciates asset A on the double-declining-balance method. How much depreciation

expense should Dirt record in 20X9 for asset A?
a. ₱ 2,000
b. ₱ 5,600
c. ₱ 1,600
d. ₱ 8,640

4. Using the same depreciation method as used in 20X5, 20X6, and 20X7, how much depreciation
expense should Dirt record in 20X8 for asset B?
a. ₱ 6,000
b. ₱ 9,000
c. ₱11,000
d. ₱12,000

5. Dirt depreciates asset C by the straight-line method. On June 30, 20X8, Dirt sold asset C for
₱28,000 cash. How much gain (loss) should Dirt record in 2008 on the disposal of asset C?
a. ₱ 2,800
b. ₱(2,800)
c. ₱(5,600)
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d. ₱(8,400)

6. Enter Sandman Co. purchased manufacturing equipment from Sad But True Co. on January 1,
20x8 at a total cost of ₱9,000,000. Enter Sandman uses the straight-line method of depreciation
and estimates that the equipment has a useful life of 10 years. On July 1, 20x8 and July 1, 20x9
Enter Sandman performed major regular inspections on the equipment costing ₱380,000 and
₱425,000, respectively. The costs of inspection satisfied the recognition criteria for capitalization.
How much is the carrying amount of the equipment on December 31, 2009?
a. 7,920,000
b. 7,875,000
c. 7,529,412
d. 7,600,000

7. Tonyo Company uses the composite method of depreciation and has a composite rate of 25%.
During 20x1, it sold assets with an original cost of ₱100,000 (residual value of ₱20,000) for
₱80,000 and acquired ₱60,000 worth of new assets (residual value of ₱10,000). The original group
of assets had the following characteristics:
Total Cost ₱250,000
Total Residual Value 30,000

The above original group includes the assets sold in 20x8 but not the assets purchased in 20x8. How
much is the depreciation in 20x8?
a. ₱62,500
b. ₱52,500
c. ₱47,500
d. ₱46,500

Use the following information for the next four items:

Light Company bought a machine for ₱300,000 on January 1, 20x8. The machine's useful life is 10
years and it is estimated to have a zero residual value and is depreciated using the straight-line
method.

The revalued amount of the machine is as follows:

December 31 Fair values of the machine
20x8 ₱ 360,000
20x9 335,000
2x10 320,000

The enacted tax rate was 30% for each year

8. The revaluation surplus in the equity section of Light Company’s December 31, 20x8 statement
of financial position is
a. 60,000
b. 90,000
c. 39,000
d. 63,000
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9. The amount of depreciation expense to be recognized in 20x9 is

a. 32,500
b. 36,000
c. 40,000
d. 42,500

10. The amount of revaluation surplus transferred to retained earnings in 20x9 is

a. 6,667
b. 7,000
c. 4,333
d. 10,000

11. The revaluation surplus in the equity section of Light Company's December 31, 2x10 statement
of financial position is
a. 77,000
b. 110,000
c. 123,443
d. 109,500

Use the following information for the next four items:

Information on Mix Co.’s equipment on June 30, 20x8 is shown below:

Equipment (at cost) ₱ 500,000

Accumulated depreciation 150,000
₱ 350,000

The equipment consists of two machines, Machine A and Machine B. Machine A has a cost of
₱300,000 and a carrying amount of ₱180,000. Machine B has a cost of ₱200,000 and a carrying amount
of ₱170,000. Both machines are measured using the cost model and depreciated on a straight line
basis over a ten-year period.

On December 31, 20x8, Mix Co. decided to change from the cost model to the revaluation model.
Information on this date follows:
Fair values Remaining useful life
Machine A ₱180,000 6 years
Machine B ₱155,000 5 years

On June 30, 20x9, Machine A and Machine B have fair values of ₱163,000 and ₱136,500, respectively,
and remaining useful lives of 5 years and 4 years, respectively. The tax rate is 30%.

12. How much is the depreciation expense for the fiscal year ended June 30, 20x9?
a. 59,900
b. 55,500
c. 50,000
d. 67,000

13. How much is the revaluation surplus on December 31, 20x8?

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a. 10,500
b. (15,000)
c. (10,500)
d. 7,000

14. How much is the carrying amount of the equipment on June 30, 20x9?
a. 163,000
b. 335,000
c. 300,000
d. 299,500

15. Entity A has identified indications that its plant is impaired. The plant has a carrying amount of
₱56,000,000. An independent valuer determined the following:
 Replacement cost of the plant ₱90,000,000
 Actual life 15 years
 Effective life 25 years
 Remaining economic life 20 years

Entity A’s tax rate is 30%.

How much is the revaluation surplus, net of tax?

a. 16,000,000
b. 11,200,000
c. 18,250,000
d. 12,775,000

“Praise be to the God and Father of our Lord Jesus Christ, the Father of compassion and the God of all
comfort, who comforts us in all our troubles, so that we can comfort those in any trouble with the comfort we
ourselves have received from God.” (2 Corinthians 1:3-4)

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SOLUTIONS
1. B
Solution:
Cost =18,000 + [(46,320 – 18,000) x PV of 1 @18%, n=1] = 42,000
SYD denominator = 6 x [(6+1)/2] = 21
Depreciation = 42,000 x 6/21 = 12,000

The next four items are based on the following information:

Dirt Corporation schedule of depreciable assets at December 31, 20X7 was as follows:
Accum.
Asset Cost Depreciation Acquisition date Residual value
A 100,000 64,000 20X6 20,000
B 55,000 36,000 20X5 10,000
C 70,000 33,600 20X5 14,000

Dirt takes a full year’s depreciation expense in the year of an asset’s acquisition, and no depreciation expense in the
year of an asset’s disposition. The estimated useful life of each depreciable asset is 5 years.

2. C DDB rate = 2/5 = 40%

(100,000 – 64,000) x 40% = 14,400

3. C DDB rate = 2/5 = 40%

Year Carrying amt. Depreciation

(a) (b) = 40% x (a)
20x6 100,000 40,000
20x7 60,000 24,000
20x8 36,000 14,400
20x9 21,600 8,640
20x10 12,960 5,184

(21,600 carrying amount - 20,000 residual value) = 1,600

4. A
SYD = 5 x [(5 + 1) / 2] = 15
Depreciation, 20x8 = (55,000 – 10,000 residual value) x 2/15 = 6,000

5. D 28,000 – (70,000 – 33,600)* = (8,400)

*”Dirt takes a full year’s depreciation expense in the year of an asset’s acquisition, and no depreciation expense in
the year of an asset’s disposition.”

6. D (9,000,000 x 8/10) + (425,000 latest inspection x 8/8.5) = 7,600,000

7. B
Adjusted total cost = 250,000 – 100,000 assets sold + 60,000 new assets acquired = 210,000

Depreciation rate = Annual depreciation / Total cost

25% = Annual depreciation / 210,000
Annual depreciation = 210,000 x 25% = 52,500

8. D 360,000 – (300,000 x 9/10) = 90,000 x 70% = 63,000

9. C 360,000 / 9= 40,000

10. B = 63,000 / 9 = 7,000

11. A 320,000 – (300,000 x 7/10) = 110,000 x 70% = 77,000

12. B
6/30/x8 to 12/31/x8
Machine A: (300K historical cost ÷ 10 yrs.) x 6/12 = 15,000
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Machine B: (200K historical cost ÷ 10 yrs.) x 6/12 = 10,000

1/1/x9 to 6/30/x9
Machine A: (180K fair value ÷ 6 yrs.) x 6/12 = 15,000
Machine B: (155K fair value ÷ 5 yrs.) x 6/12 = 15,500

Total depreciation = (15K + 10K + 15K + 15.5K) = 55,500

13. A
Machine A: (180K fair value – 165,000 carrying amount*) x 70% = 10,500
Machine B: (155K fair value – 160,000 carrying amount*) = (5,000) impairment loss

*The carrying amounts are computed as follows:

Machine A: (180K – depreciation 6/30/x8 to 12/31/x8 15,000) = 165,000
Machine A: (170K – depreciation 6/30/x8 to 12/31/x8 10,000) = 160,000

14. D (163,000 + 136,500) = 299,500

15. B Solution:

Replacement cost 90,000,000

Less: Depreciation (90M x 25(a)/45(b)) (50,000,000)
Fair value 40,000,000
Less: Carrying amount (56,000,000)
Revaluation surplus, gross of tax (16,000,000)
Multiply by: 70%
Revaluation surplus, net of tax 11,200,000
(a)
Effective life (Effective age)
(b)
Total economic life = Effective life + Remaining economic life
(10 + 30) = 40