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Notes On Property, Plant and Equipment

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ACCOUNTING FOR FIXED ASSETS

I. PROPERTY, PLANT AND EQUIPMENT

A. Characteristics of Property, Plant, and Equipment. (All must be present)


1. Acquired for use and not resale (production of goods and services, rental
to others and administrative used)
2. Long-term in nature and subject to depreciation, except for land
( expected to be used more than one year)
3. Possess physical substance (Tangible)

Included as PPE are as follows:

The standard does apply to bearer plants but it does not apply to the produce on bearer
plants. [IAS 16.3] which applies to annual periods beginning on or after 1 January 2016.

 A bearer Plant is a living plant that is used in the production or supply of


agricultural produce, is expected to bear produce for more than one period, and,
has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.
 The cost model in IAS 16 also applies to investment property accounted for using
the cost model under IAS 40 Investment Property. [IAS 16.5]

Not Included in PPE Under IAS 16 are the following:

 Assets classified as held for sale in accordance with IFRS 5 Non-current Assets


Held for Sale and Discontinued Operations
 Biological assets related to agricultural activity accounted for
under IAS 41 Agriculture 
 Exploration and evaluation assets recognized in accordance
with IFRS 6 Exploration for and Evaluation of Mineral Resources
 Mineral rights and mineral reserves such as oil, natural gas and similar non-
regenerative resources.

B. Acquisition and Initial Valuation of Property, Plant, and Equipment.


1. Historical cost is the usual basis for valuation. This is the cash or cash
equivalent price or fair value of other consideration given of obtaining the asset
and getting it ready for its intended use plus the obligation to dismantle or
restoring the site.

Cases of Acquisition Valuation


Cash basis Cash Price Equivalent. Cash Paid plus freight, handling, installation
Lump-sum price Prorate single price based on their relative fair values
On Account Invoice Price less discount , regardless whether taken or not
Installment –w/cash price Cash price Equivalent. In excess of total amount paid = Interest
Installment – w/out cash Present Value of payments at implied interest rate
price
a. Fair Value of Consideration received
Issuance of Share Capital b. Fair Value of Share Capital
c. Par or Stated Value of Shares
a. Fair Value of Debt Security
Issuance of Debt Security b. Fair Value of Asset Received
c. Face amount of Debt Security
a. Fair Value of property given plus cash given or less cash received
Exchange with commercial b. Fair Value of property received plus cash given or less cash
substance received
c. Book Value of property given plus cash given or less cash received
Exchange without Book Value of property given plus cash given or less cash received
Commercial Substance
Trade In a. Fair Value of Asset Given up plus cash given
b. Trade In Value of Asset given up plus cash given
Fair Value of assets received and charged to donated capital. Expenses
Donation from Shareholders incurred in connection with the donation are charged to Donated Capital.
Direct cost subsequesnt to donation will be capitalized
Donation from Non- Fair Value when received or receivable and charged to Income (subsidies)
shareholders or liability (with restrictions)
Direct materials and labor, Indirect cost and incremental overhead
Construction identifiable to the construction.Savings, Internal Profit, errors and
inefficiencies are not to be capitalized as part of cost

C. LAND WITH BUILDING PURCHASED AT SINGLE COST


If building is usable Prorate single cost to land and building based on their relative
fair values
If building is unusable Single Cost will be for land only plus demolition cost less any
salvage value.
Old building is demolished immediately to Usable cost of old building will be charged to loss. Demolition
make room for the construction of a new cost less any salvage value is capitalized to the new building
building to be recorded as PPE or
Investment property
Old building is demolished immediately to Usable cost of old building will be capitalized as cost of the
make room for the construction of a new new building. Demolition cost less any salvage value is
building to be recorded as Inventory capitalized to the new building
Old building is demolished immediately to Usable cost of old building will be capitalized as cost of the
prepare the land to its intended use new building.
A previously owned building will be The Carrying Value of the old building will be charged to loss.
demolished to construct a new building The net demolition cost as well as cost incurred to induce
tenants to vacate the place will be capitalized as cost of the
new building

D. BORROWING COST – interest and other costs that the entity incurs in connection
with borrowing of funds for the purchase, construction or production of qualifying
assets.

PROCEDURE IN COMPUTING BORROWING COST


Assets Financed by specific Actual Borrowing cost incurred during the period deducted by any
borrowing investment income for temporary placement of funds
1. Average Carrying Amount of the Asset during the period multiplied by
Assets Financed by general average capitalization rate. Investment Income will not be deducted.
borrowings 2. The amount computed in no. 1 above should not exceed the actual
interest incurred.
Avearge Carrying Amount = Previous period actual cost plus interest
capitalized plus Average Expenditure this period.
Average Capitalization Rate = Annual borrowing cost / Total General
Borrowings
1. Compute Average Carrying Value of the Asset during the period
Assets financed by both 2. Deduct the amount of specific borrowings from no. 1 above to get
specific and general borrowings the expenditures finance from general borrowings
3. The capitalizable borrowing costs = (Actual borrowing cost incurred
less investment income from specific borrowings) plus
( Expenditure financed by general borrowings x general
capitalizable rate)
Assets financed by specific The borrowing is treated as a general borrowing, and follow the same
borrowings used for general procedure using general borrowings.
purposes
Construction period is more The average expenditures during the period shall include the previous
than one year capitalized cost and considered incurred at the beginning of the year

E. SUBSEQUENT COSTS

Meaning Accounting Procedure


Additions Increase physical size and capacity Capitalized as usual
Improvement Substitution for a better or superior one Capitalized as usual
Replacement for equal or lesser quality a. A new one – Capitalized
b. Major Parts- Capitalized
c. Minor Parts - Expensed
The Carrrying Value will be charged to
Replacement Replaced Original Cost can be identified loss and replacement cost will be
capitalized as assets
Replaced Original Cost can’t be identified Use the discounted replacement cost
as substitute to the cost and charged
the depreciated value to loss.
Capitalized replacement cost as asset
Repairs Restoring to good operating condition (Curative) a. Extraordinary – Capitalized
b. Ordinary – Expensed
Maintenance Keeps the asset in good condition ( Preventive) Expense as incurred
Rearrangement Relocation and redeployment of PPE Expense

F. DEPRECIATION METHODS
Depreciation Rationale of the Method Formula of Computing Annual
Methods Depreciation
Straight line This is adapted when the major Cost – Salvage Value or Residual Value
reason of depreciation is passage of Estimated Useful life in years
time giving each period equal
amount.
Group of dissimilar assets in terms of 1. The composite rate (total annual
Composite characteristics and useful life treated depreciation / total cost ) is multiplied to
as a single unit the total cost to get depreciation
expense
2. When asset is retired, Accumulated
Depreciation is debited equal to the
Group of similar assets in terms of cost credited minus any debited
characteristics and useful life treated proceeds. No gain, No loss
Group as a single unit 3. When asset is replaced, assets is
debited and the corresponding
payments or liabilities are credited
4. Multiply the composite rate by the
balance of the asset accounts for
succeeding periods to get the
depreciation expense
Working Hours Based on the usage or function of 1. Depreciation Rate per hour or output =
asset used. Cost-Salvage / estimated use
Output/Productio Based on the output of the asset hours/output
n produced 2. Multiply actual hours used or output
produced x Depreciation rate
A decreasing charge method
whereby the depreciable cost is (Cost – Salvage) x Digit of the Year
Sum of the years’ multiplied by decreasing series of Sum of the Years Digit
Method fractions where the numerator is
equal to the digit of the year in
consideration while the denominator
is equal to the total digits of the years
This method cannot be used unless Rate ( 1- Residual Value / Cost) x
Declining Balance there is a residual value. In the diminishing book value
absence of residual value , we can
assigned P 1
A fixed rate is multiplied by the Rate ( 100%/ estimated life x 2) c
Double Declining declining carrying or book value. diminishing book value
The fixed rate is equal to double the
Straight line rate
This is generally applied to small Balance per Inventory at year end –
Inventory method inexpensive items. This method is Balance per Inventory Account =
not systematic. No contra asset Depreciation Expense
account is maintained, deoreciation
is credited direcly from the asset
account
Retirement No depreciation is recorded unless Original Cost of Asset Retired – Proceeds
there is asset retired.
1. If retired and replaced, depreciation =
No depreciation is recorded unless Replacement cost of assets retires –
Replacement Assets are retired and replaced proceeds
2. If retired but not replaced original cost
of that asset is depreciation

Measurement subsequent to initial recognition

IAS 16 permits two accounting models:

 Cost model. The asset is carried at cost less accumulated depreciation and


impairment. [IAS 16.30]

 Revaluation model. The asset is carried at a revalued amount, being its fair


value at the date of revaluation less subsequent depreciation and impairment,
provided that fair value can be measured reliably. [IAS 16.31]

The revaluation model

Under the revaluation model, revaluations should be carried out regularly, so that the
carrying amount of an asset does not differ materially from its fair value at the balance
sheet date. [IAS 16.31]. If an item is revalued, the entire class of assets to which that
asset belongs should be revalued. [IAS 16.36]

Revalued assets are depreciated in the same way as under the cost model (see below).

If a revaluation results in an increase in value, it should be credited to other


comprehensive income and accumulated in equity under the heading "revaluation
surplus" unless it represents the reversal of a revaluation decrease of the same asset
previously recognised as an expense, in which case it should be recognised in profit or
loss. [IAS 16.39]
A decrease arising as a result of a revaluation should be recognised as an expense to
the extent that it exceeds any amount previously credited to the revaluation surplus
relating to the same asset. [IAS 16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred
directly to retained earnings, or it may be left in equity under the heading revaluation
surplus. The transfer to retained earnings should not be made through profit or loss.
[IAS 16.41]

Depreciation (cost and revaluation models)

For all depreciable assets:

1. The depreciable amount (cost less residual value) should be allocated on a


systematic basis over the asset's useful life [IAS 16.50].
2. The residual value and the useful life of an asset should be reviewed at least at
each financial year-end and, if expectations differ from previous estimates, any
change is accounted for prospectively as a change in estimate under IAS 8. [IAS
16.51]
3. The depreciation method used should reflect the pattern in which the asset's
economic benefits are consumed by the entity [IAS 16.60]; a depreciation
method that is based on revenue that is generated by an activity that includes the
use of an asset is not appropriate. [IAS 16.62A]

Note: The clarification regarding the revenue-based depreciation method was


introduced by Clarification of Acceptable Methods of Depreciation and Amortisation,
which applies to annual periods beginning on or after 1 January 2016.

4. The depreciation method should be reviewed at least annually and, if the pattern
of consumption of benefits has changed, the depreciation method should be
changed prospectively as a change in estimate under IAS 8. [IAS 16.61]
Expected future reductions in selling prices could be indicative of a higher rate of
consumption of the future economic benefits embodied in an asset. [IAS 16.56]

Note: The guidance on expected future reductions in selling prices was introduced
by Clarification of Acceptable Methods of Depreciation and Amortisation, which applies
to annual periods beginning on or after 1 January 2016.

5. Depreciation should be charged to profit or loss, unless it is included in the


carrying amount of another asset [IAS 16.48].
6. Depreciation begins when the asset is available for use and continues until the
asset is derecognised, even if it is idle. [IAS 16.55]

Recoverability of the carrying amount

Property, Plant and Equipment requires impairment testing and, if necessary,


recognition for property, plant, and equipment. An item of property, plant, or equipment
shall not be carried at more than recoverable amount. Recoverable amount is the
higher of an asset's fair value less costs to sell and its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss
when the claim becomes receivable. [IAS 16.65]

Derecognition (retirements and disposals)


An asset should be removed from the statement of financial position on disposal or
when it is withdrawn from use and no future economic benefits are expected from its
disposal. The gain or loss on disposal is the difference between the proceeds and the
carrying amount and should be recognised in profit and loss. [IAS 16.67-71]

If an entity rents some assets and then ceases to rent them, the assets should be
transferred to inventories at their carrying amounts as they become held for sale in the
ordinary course of business. [IAS 16.68A]

Disclosure

1.Information about each class of property, plant and equipment

For each class of property, plant, and equipment, disclose: [IAS 16.73]

 basis for measuring carrying amount


 depreciation method(s) used
 useful lives or depreciation rates
 gross carrying amount and accumulated depreciation and impairment losses
 reconciliation of the carrying amount at the beginning and the end of the period,
showing: additions,disposals,acquisitions through business
combinations,revaluation increases or decreases,impairment losses,reversals of
impairment losses,depreciation,net foreign exchange differences on translation
and other movements

2.Additional disclosures

The following disclosures are also required: [IAS 16.74]

 restrictions on title and items pledged as security for liabilities

 expenditures to construct property, plant, and equipment during the period

 contractual commitments to acquire property, plant, and equipment

 compensation from third parties for items of property, plant, and equipment that
were impaired, lost or given up that is included in profit or loss.

IAS 16 also encourages, but does not required, a number of additional disclosures. [IAS
16.79]

Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts, certain additional


disclosures are required: [IAS 16.77]

 the effective date of the revaluation

 whether an independent valuer was involved

 for each revalued class of property, the carrying amount that would have been
recognised had the assets been carried under the cost model

 the revaluation surplus, including changes during the period and any restrictions
on the distribution of the balance to shareholders.
Entities with property, plant and equipment stated at revalued amounts are also
required to make disclosures under IFRS 13 Fair Value Measurement.

Acquisition on cash basis


LOQUACIOUS TALKATIVE Co. acquired a factory equipment overseas on cash basis
for ₱400,000. Additional costs incurred include the following: commissions paid to
brokers for the purchase of the equipment, ₱20,000; import duties of ₱100,000; non-
refundable purchase taxes of ₱40,000; freight cost of transferring the equipment to
LOQUACIOUS’ premises, ₱4,000; costs of assembling and installing the equipment,
₱8,000; costs of testing the equipment, ₱6,000; administration and other general
overhead costs, ₱16,800; and advertisement and promotion costs of the new product to
be produced by the equipment, ₱15,200. The samples generated from testing the
equipment were sold at ₱2,000. How much is the initial cost of the equipment?
a. 578,000 b. 594,800 c. 576,000 d. 592,800
C
Solution:
Purchase price (cash price equivalent) 400,000
Commissions to brokers 20,000
Import duties 100,000
Non-refundable purchase taxes 40,000
Transportation cost 4,000
Assembling and installation costs 8,000
Testing costs 6,000
Net proceeds from samples generated (2,000)
Initial cost of equipment 576,000

Acquisition on account
PRECLUDE PREVENT Co. acquired an equipment for ₱448,000 on account with a
credit term of 2/15, n/30. Any discount is computed based on the purchase price. The
purchase price is inclusive of 12% value added tax (VAT). PRECLUDE Co. is VAT-
registered and any input VAT paid is refundable through deduction from monthly output
VAT remitted to the Bureau of Internal Revenue (BIR). Additional costs incurred include
₱40,000 cost of training staff who will be operating the equipment and ₱60,000 cost of
relocating the equipment to a new location after it was installed in a location originally
intended by management. How much is the initial cost of the equipment? a.
400,000 b. 391,040 c. 491,040 d. 392,000
B
Solution:
The initial cost of the equipment is computed as follows:
Purchase price inclusive of VAT 448,000
Divide by: 112%
Purchase price exclusive of VAT 400,000
Cash discount based on purchase price (2% x 448,000) (8,960)
Cash price equivalent 391,040

Deferred settlement – with cash price equivalent


On January 1, 20x1, SQUAMOUS SCALY Co. purchased furniture with an installment
price of ₱520,000 and a cash price equivalent of ₱400,000 by paying ₱40,000 down
payment and issuing a one-year noninterest-bearing note of ₱120,000 payable in equal
semi-annual installments on July 1 and December 31, 20x1. How much is the initial cost
of the furniture? a. 520,000 b. 480,000 c. 400,000 d. 360,000
C 400,000 – the cash price equivalent.
Deferred settlement – no cash price equivalent
On January 1, 20x1, REEDY SLENDER Co. purchased fixtures with an installment price
of ₱520,000 by paying ₱40,000 down payment and issuing a three-year noninterest
bearing note of ₱480,000 payable in three equal annual installments starting December
31, 20x1. The prevailing rate for the note as of January 1, 20x1 is 12%. How much is
the initial cost of the fixtures?
a. 520,000 b. 480,000 c. 424,293 d. 360,000
C
Solution:
Cash down payment 40,000
Present value of note payable:
Future cash flows (480,000 ÷ 3) 160,000
Multiply by: PV of an ordinary annuity of ₱1 @12%, n=3 2.401831 384,293
Initial cost of fixtures
424,293

Deferred settlement – no cash price equivalent


On January 1, 20x1 ABC Co. acquired a building for ₱380,000, including ₱20,000 non-
refundable purchase taxes. The purchase agreement provided for payment to be made
in full on December 31, 20x1. Legal fees of ₱8,000 were incurred in acquiring the
building and paid on January 1, 20x1. An appropriate discount rate is 10%. How much
is the initial cost of the building?
a. 368,000 b. 388,000 c. 424,634 d. 353,456
D
Solution:
Purchase price including non-refundable purchase taxes 380,000
Multiply by: PV of ₱1 @10%, n=1 (or simply divide by 110%) 0.90909
Cash price equivalent of building purchased 345,454
Legal fees 8,000
Initial cost of building 353,454

Classes of PPE
ABC Co. had the following assets on December 31, 20x1.
Land used as plant site 50,000
Land and building classified as held for sale 780,000
Building used as office 500,000
Building rented out under operating lease 420,000
Equipment being sold in the ordinary course of business 330,000
Office furniture 24,000
Fixtures and signage 10,000
Machinery 12,000
Automobiles (used by company officers) 350,000
Delivery trucks (used by the shipping department) 420,000
Computers 70,000
Aircraft rented out to various clients 690,000
Dairy cattle (held to produce milk that is sold to customers) 10,000
Harvested milk 3,000
Apple trees (held to bear fruits to that are sold to customers) 6,000
Harvested apples 2,000
How much is the total of assets classified as property, plant and equipment?
a. 2,132,000 b. 2,126,000 c. 2,142,000 d. 2,148,000
A
Solution:
Land used as plant site 50,000
Building used as office 500,000
Office furniture 24,000
Fixtures and signage 10,000
Machinery 12,000
Automobiles (used by company officers) 350,000
Delivery trucks (used by the shipping department) 420,000
Computers 70,000
Aircraft rented out to various clients 690,000
Apple trees (held to bear fruits to that are sold to customers) 6,000
Total property, plant and equipment 2,132,000

Acquisition on lump-sum price (building not razed)


Use the following information for the next two questions:
On April 1, 20x1, ESCULENT EDIBLE Co. purchased land and building by paying
₱40,000,000 and assuming a mortgage of ₱8,000,000. The land and building have
appraised values of ₱20,000,000 and ₱40,000,000, respectively. The building will be
used by ESCULENT Co. as its new office.
Additional costs relating to the purchase include the following:
Legal cost of conveying and registering title to land ₱32,000
Payment to tenants to vacate premises 36,000
Option paid on the land and building 24,000
Option paid on similar land and building not acquired 12,000
Broker's fee on the land and building 60,000
Unpaid real estate taxes prior to April 1, 20x1
assumed
by ESCULENT Co. – assessed on land 120,000
Real estate taxes after April 1, 20x1 80,000
Repairs and renovation costs before the building
is occupied 160,000
Repair costs after the building is occupied 200,000

How much is the cost of the land?


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

How much is the cost of the building?


a. 23,420,000 b. 32,640,000 c. 32,240,000 d. 24,440,000
A
Solution:
The total acquisition cost is determined as follows:
Cash payment 40,000,000
Mortgage assumed 8,000,000
Total acquisition cost 48,000,000

The fractions to be used in the costs allocation are derived from the relative fair values
as follows:
  Fair values Fractions
Land 20,000,000 20/60
Building 40,000,000 40/60
  60,000,000  

Land Building
Purchase price (48M x 20/60); (48M x 40/60) 16,000,000 32,000,000
Legal cost of conveying and registering title 32,000 -
to Land
Payment to tenants to vacate premises 12,000 24,000
(36K x 20/60); (36K x 40/60)
Option paid on the land and building 8,000 16,000
(24K x 20/60); (24K x 40/60)
Broker's fee on the land and building 20,000 40,000
(60K x 20/60); (60K x 40/60)
Unpaid real estate taxes prior to April 1, 120,000 -
20x1 assumed – assessed on land
Repairs and renovation costs before the - 160,000
building is occupied
Totals 16,192,000 32,240,000

C (See solutions above)

Acquisition on lump-sum price (building demolished)


Use the following information for the next four questions:
On April 1, 20x1, ABC Co. purchased land and building for a lump-sum price of
₱48,000,000. The existing building will be demolished and a new building will be
constructed.
Additional costs relating to the purchase include the following:
Title guarantee 80,000
Option paid for the land and old building acquired 24,000
Payments to tenants to vacate premises 48,000
Cost of razing the old building (demolition cost) 240,000
Proceeds from sale of salvaged materials 60,000
Fair value of materials salvaged from the
old building and used in the new building 120,000
Construction cost of new building (completed) 34,000,000
The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much are the allocated costs of the land and the new building?
Land New building
a. 16,864,000 33,780,000
b. 16,104,000 34,180,000
c. 15,980,000 36,670,000
d. 16,014,000 34,810,000

B
Solution:
New
Land Old building
building
Total acquisition cost
16,000,000 32,000,000 -
(48M x 20/60); (48M x 40/60)
Title guarantee 80,000 - -
Option paid for the land and old -
building acquired (24K x 20/60); 8,000 16,000
(24K x 40/60)
Payments to tenants to vacate -
premises (48K x 20/60); 16,000 32,000
(48K x 40/60)
Cost of razing the old building
- - 240,000
(demolition cost)
Proceeds from sale of salvaged
- - (60,000)
materials
Fair value of materials salvaged - - -
from the old building and used in
the new building
Construction cost of new building
- - 34,000,000
(completed)
Totals 16,104,000 32,048,000 34,180,000

The land and old building have fair values of ₱20,000,000 and ₱40,000,000,
respectively. How much is charged as loss on initial recognition?
a. 48,000 b. 32,000,000 c. 32,048,000 d. 0

C 32,048,000 – the allocated cost of the old building (see solution above).

The old building is unusable and has an insignificant fair value. How much are the
allocated costs of the land and the new building?
Land New building
a. 46,640,000 33,780,000
b. 46,104,000 34,180,000
c. 48,152,000 34,180,000
d. 46,140,000 34,810,000

The old building is unusable and has an insignificant fair value. How much is charged as
loss on initial recognition?
a. 48,000 b. 32,000,000 c. 32,048,000 d. 0
C
Solution:
Old New
  Land building building
Total acquisition cost 48,000,000 - -
Title guarantee 80,000 - -
Option paid for the land and old
24,000 - -
building acquired
Payments to tenants to vacate
48,000 - -
premises
Cost of razing the old building
- - 240,000
(demolition cost)
Proceeds from sale of salvaged
- - (60,000)
materials
Fair value of materials salvaged from
the old building and used in the - - -
new building
Construction cost of new building
- - 34,000,000
(completed)
Totals 48,152,000 - 34,180,000

D No cost is allocated to the old building.

Cost of self-constructed asset


Use the following information for the next two questions:
LOATH HATE Co. purchased a lot for ₱8,000,000. Immediately after the purchase,
LOATH started construction of a new building on the lot. The following were additional
costs incurred by LOATH Co.
Legal cost of conveying land ₱ 40,000
Special assessment 20,000
Survey costs 60,000
Materials, labor, and overhead costs 22,000,000
Cash discounts on materials purchased not taken 120,000
Clerical and other expenses related to construction 56,000
Excavation costs 400,000
Architectural fees and building permit 240,000
Supervision by management on construction 48,000
Insurance premiums paid for workers 520,000
Payment for claim for injuries not covered by insurance 180,000
Saving on construction 800,000
Cost of changes to plans and specifications due to
560,000
inefficiencies
Paving of streets and sidewalks (not included in
blueprint) 40,000
Income earned on a vacant space rented as parking
lot during construction 36,000

How much is the cost of the land?


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

How much is the cost of the building?


a. 23,144,000 b. 23,184,000 c. 23,264,000 d. 23,096,000

C
Solution:
The costs are allocated as follows:
Land New
Land
improvement building
Purchase price of lot 8,000,000 - -
Legal cost of conveying land 40,000 - -
Special assessment 20,000 - -
Survey costs 60,000 - -
Materials, labor, and overhead
- - 22,000,000
costs
Cash discounts on materials
- - (120,000)
purchased not taken
Clerical and other expenses
- - 56,000
related to construction
Excavation costs - - 400,000
Architectural fees and building
- - 240,000
permit
Supervision by management
- - 48,000
on construction
Insurance premiums paid for
- - 520,000
workers
Paving of streets and
sidewalks (not included in - 40,000 -
blueprint)
Totals 8,120,000 40,000 23,144,000

A See solution above

Cost of equipment – with decommissioning cost


BAWDY INDECENT Co. acquired an oil rig for ₱400,000,000. Installation and other
necessary costs in bringing the equipment to its intended condition for use totaled
₱80,000,000. BAWDY is required by law to dismantle the equipment and restore the
site where it is installed after 20 years. The estimated decommissioning and restoration
costs are ₱40,000,000. The imputed rate of interest is 12%. How much is the initial cost
of the equipment?
a. 480,000,000 b. 440,000,000 c. 484,146,672 d. 404,146,672
C
Solution:
Purchase price 400,000,000
Direct costs 80,000,000
PV of decommissioning and restoration costs
4,146,672
(40M x 0.1036668)
Cost of equipment 484,146,672

Entry:

Jan 1. Equipment 484,146,672


Cash 480,000,000
Decommissioning Liability 4,146,672

Dec 31. Y1 Interest Expense ( 4,146,672 x .12) 497,601


Decommissioning Liability 497,601

Dec. 31 Y2 Interest Expense 557,313


( 4,146,672 + 497,601) x .12
Decommissioning Liability 557,313

EXCHANGE
NEW ASSET IS EQUAL TO:
Exchange with commercial A. Fair Value of property given plus cash given or less cash received
substance B. Fair Value of property received
C. Book Value of property given plus cash given or less cash received

Gain or Loss on Exchange = Compare your own asset’s Fair Value VS.
Book Value.

Exchange without New Asset = Book Value of property given plus cash given or less cash
Commercial Substance received. No Gain or loss in exchange to be recognized.

Trade In New Asset =


1. Fair Value of Asset Given up plus cash given
2. Trade In Value of Asset given up plus cash given

With fair value of asset given up


Use the following information for the next four questions:
Fact pattern
FEEBLE Co. exchanged equipment with WEAK, Inc. Pertinent data are shown below:
FEEBLE WEAK,
Co. Inc.
Equipment 4,000,000 8,000,000
Accumulated depreciation 800,000 3,200,000
Carrying amount 3,200,000 4,800,000
Fair value 3,800,000 4,400,000
Cash paid by FEEBLE Co. to 600,000 600,000
WEAK, Inc.
How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,400,000
A 3,800,000 Fair value of asset given up + 600,000 cash paid = 4,400,000
Equipment – New 4,400,000
Accumulated Depreciation 800,000
Equipment – Old 4,000,000
Cash 600,000
Gain on Exchange 600,000

How much is the initial cost of the equipment received by WEAK Co.?
a. 3,800,000 b. 4,400,000 c. 5,000,000 d. 3,400,000
A = 4,400,000 Fair value of asset given up - 600,000 cash received = 3,800,000
Equipment – New 3,800,000
Cash 600,000
Loss on Exchange 400,000
Accumulated Depreciation 3,200,000
Equipment – Old 8,000,000

How much is gain (loss) on exchange recognized by FEEBLE Co.?


a. (600,000) b. 600,000 c. 1,200,000 d. 0
B 3,800,000 Fair value of asset given up – 3,200,000 carrying amount of asset given up
= 600,000 gain

How much is gain (loss) on exchange recognized by WEAK Co.?


a. (400,000) b. 400,000 c. (1,000,000) d. 0
A 4,400,000 Fair value of asset given up – 4,800,000 carrying amount of asset given up
= (400,000) loss

Fair value of asset given up is indeterminable


Use the fact pattern in the preceding problem except that FEEBLE Co. cannot
determine the fair value of the equipment given up but is aware that the equipment that
will be received from WEAK, Inc. has a fair value of ₱4,400,000.

How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,400,000
A 4,400,000 – fair value of asset received with no adjustment for cash paid
Equipment – New 4,400,000
Accumulated Depreciation 800,000
Equipment – Old 4,000,000
Cash 600,000
Gain on Exchange 600,000

How much is gain (loss) on exchange recognized by FEEBLE Co.?


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

B
Solution:
Date Equipment – new 4,400,000
Accumulated depreciation 800,000
Cash on hand 600,000
Equipment – old 4,000,000
Gain on exchange 600,000

No commercial substance
Use the fact pattern in the preceding problem except that the exchange has no
commercial substance.
How much is the initial cost of the equipment received by FEEBLE Co.?
a. 4,400,000 b. 5,000,000 c. 3,800,000 d. 3,200,000

C 3,200,000 carrying amount of asset given up + 600,000 cash paid = 3,800,000

How much is gain (loss) on exchange recognized by FEEBLE Co.?


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

Trade-in
Use the following information for the next two questions:
TRANSCEND EXCEED Co. traded in an old machine for a new model. Pertinent data
are as follows:

Old equipment:
Cost 200,000
Accumulated depreciation 80,000
Average published retail value 24,000

New equipment:
List price 380,000
Cash price without trade in 280,000
Cash price with trade in 220,000

How much is the initial cost of the equipment received by TRANSCEND Co.?
a. 244,000 b. 280,000 c. 320,000 d. 184,000
B 280,000 (cash price without trade in) – the Fair value of asset received because the
Fair value of the asset given up is not given.

How much is gain (loss) on exchange recognized by TRANSCEND Co.?


a. 60,000 b. 160,000 c. (60,000) d. 0
C
Solution:
Date Equipment – new (cash price w/o trade in) 280,000
Accumulated depreciation 80,000
Loss on trade in (squeeze) 60,000
Equipment – old 200,000
Cash in bank 220,000

Acquisition through issuance of own equity instrument

ASSET IS EQUAL TO
Issuance of Share Capital 1. Fair Value of Consideration received (THE ASSET RECEIVED)
2. Fair Value of Share Capital Issued
3. Par or Stated Value of Shares Issued

Use the following information for the next four questions:


Fact pattern
RESILIENT ELASTIC Co. acquired land with fair value of ₱4,000,000 by issuing 10,000
shares with par value of ₱40 per share and quoted price of ₱360 per share.
1. P 4M
2. P 10,000 x 360 = 3,600,000
3. 10,000 x 40 = 400,000

How much is the initial cost of the land received by RESILIENT Co.?
a. 400,000 b. 4,000,000 c. 3,600,000 d. 180,000
B 4,000,000 – the fair value of the asset received

How much is gain (loss) on exchange recognized by RESILIENT Co.?


a. 3,200,000 b. 400,000 c. (400,000) d. 0
D
Land 4,000,000
Capital Stock ( 10,000x 40) 400,000
Premium on Capital Stock 3,600,000

Use the fact pattern above except that the fair value of the land is indeterminable. How
much is the initial cost of the land received by RESILIENT Co.?
a. 400,000 b. 4,000,000 c. 3,600,000 d. 180,000
C (10,000 x 360) = 3,600,000 – the fair value of the securities issued

Land 3,600,000
Capital Stock ( 10,000x 40) 400,000
Premium on Capital Stock 3,200,000

How much is gain (loss) on exchange recognized by RESILIENT Co.?


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

Acquisition through issuance of bonds payable


New Asset is equal to:
Issuance of Debt Security a. Fair Value of Debt Security
b. Fair Value of Asset Received
c. Face amount of Debt Security

Use the following information for the next four questions:


Fact pattern
On January 1, 20x1, LABYRINTH MAZE Co. acquired land with fair value of ₱3,800,00
by issuing a 3-year, 10%, ₱4,000,000 bonds. Principal is due on January 1, 20x4 but
interest is due at each year-end. The prevailing market rate of interest for a similar
instrument on January 1, 20x1 is 12%. The present value of the future cash flows from
the bonds discounted at 12% is ₱3,807,852.

How much is the initial cost of the land received by LABYRINTH Co.?
a. 3,800,000 b. 4,000,000 c. 3,807,852 d. 180,000
C 3,807,852 – the fair value of Debt Security

Land 3,807,852
Discount on Bonds Payable 192,148
( 4M – 3,807,852)
Bonds Payable 4,000,000

How much is gain (loss) on exchange recognized by LABYRINTH Co.?


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

Use the fact pattern above except that the fair value of the land is indeterminable. How
much is the initial cost of the equipment received by LABYRINTH Co.?
a. 3,800,000 b. 4,000,000 c. 3,807,852 d. 180,000
A 3,800,000 – the fair value of the securities issued

Land 3,800,000
Discount on Bonds Payable 200,000
Bonds Payable 4,000,000

How much is gain (loss) on exchange recognized by LABYRINTH Co.?


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

Acquisition by donation
Use the following information for the next two questions:
GROVEL Co. received donation of equipment from CRAWL, Inc., an unrelated foreign
corporation. The equipment has a fair value of ₱4,000,000. Necessary costs incurred by
GROVEL Co. to bring the asset to its intended condition for use amounted to ₱40,000.

The entry to record the receipt of the donation includes


a. a credit to share premium of ₱4,040,000 b. a credit to share premium of
₱3,960,000
c. a credit to income from donation of ₱4,040,000 d. a credit to income from
donation of ₱3,960,000

Equipment 4,000,000
Income from Donation 4,000,000

Income from Donation 40,000


Cash 40,000

D Since the donor is both an unrelated party and a non-government entity, the fair
value of the asset received net of the related cost incurred (4M – 40K = 3.96M) is
credited to income.

Assuming the donor is a shareholder of GROVEL Co., the entry to record the receipt of
the donation includes
a. a credit to share premium of ₱4,040,000 b. a credit to share premium of
₱3,960,000
c. a credit to income from donation of ₱4,040,000 d. a credit to income from
donation of ₱3,960,000

Equipment 4,000,000
Donated Capital (APIC) 4,000,000

Donated Capital 40,000


Cash 40,000

B
Since the donor is a shareholder, the fair value of the asset received net of the related
cost incurred (4M – 40K = 3.96M) is credited to share premium.

DEPRECIATION METHODS
Depreciation Rationale of the Method Formula of Computing Annual
Methods Depreciation
Straight line This is adapted when the major Cost – Salvage Value or Residual Value
reason of depreciation is passage of Estimated Useful life in years
time giving each period equal
amount.
Group of dissimilar assets in terms of 5. The composite rate (total annual
Composite characteristics and useful life treated depreciation / total cost ) is multiplied to
as a single unit the total cost to get depreciation
expense
6. When asset is retired, Accumulated
Depreciation is debited equal to the
Group of similar assets in terms of cost credited minus any debited
characteristics and useful life treated proceeds. No gain, No loss
Group as a single unit 7. When asset is replaced, assets is
debited and the corresponding
payments or liabilities are credited
8. Multiply the composite rate by the
balance of the asset accounts for
succeeding periods to get the
depreciation expense
Working Hours Based on the usage or function of 1. Depreciation Rate per hour or output =
asset used. Cost-Salvage / estimated use
Output/Productio Based on the output of the asset hours/output
n produced 2. Multiply actual hours used or output
produced x Depreciation rate
A decreasing charge method
whereby the depreciable cost is (Cost – Salvage) x Digit of the Year
Sum of the years’ multiplied by decreasing series of Sum of the Years Digit
Method fractions where the numerator is Ex. 4 years life.by the fraction to get the
equal to the digit of the year in depreciation
consideration while the denominator 1. Compute the Sum of the digits.
is equal to the total digits of the years Let n = no. of years, n (n+1) / 2
2. Prepare a fraction: numerator is the
digit of the year while denominator is
the sum of the digit. Start from the
highest.
3. Multiply the depreciable cost by the
fraction to get the depreciation
This method cannot be used unless Rate ( 1- Residual Value / Cost) x
Declining Balance there is a residual value. In the diminishing book value.
absence of residual value , we can Ex. 10 years = Yearly rate = 1/10 or 10%.
assigned P 1
A fixed rate is multiplied by the Rate ( 100%/ estimated life x 2) c
Double Declining declining carrying or book value. diminishing book value
The fixed rate is equal to double the Ex. 10 years = Yearly rate = 1/10 or 10% x 2
Straight line rate
This is generally applied to small Balance per Inventory at year end –
Inventory method inexpensive items. This method is Balance per Inventory Account =
not systematic. No contra asset Depreciation Expense
account is maintained, deoreciation
is credited direcly from the asset
account
Retirement No depreciation is recorded unless Original Cost of Asset Retired – Proceeds
there is asset retired.
3. If retired and replaced, depreciation =
No depreciation is recorded unless Replacement cost of assets retires –
Replacement Assets are retired and replaced proceeds
4. If retired but not replaced original cost
of that asset is depreciation
Depreciation methods
Use the following information for the next four cases:
Fact pattern
On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated
useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of
₱400,000.

Straight line method


Case #1: Use the straight-line method for the next two questions.
How much is the depreciation expense in the 2 nd year?
a. 100,000 b. 80,000 c. 200,000 d. 160,000
B (400,000 – 80,000) ÷ 4 = 80,000 annual depreciation
Year Depreciation Expense Accumulated Book Value
Depreciation Cost-
Accumulated
1 80,000 80,000 320,000
2 80,000 160,000 240,000
3 80,000 240,000 160,000
4 80,000 320,000 80,000

How much is the accumulated depreciation on December 31, 20x2?


a. 100,000 b. 80,000 c. 200,000 d. 160,000
D (80,000 x 2) = 160,000

Sum-of-the-years’ digits (SYD) method


Case #2: Use the sum-of-the-years’ digits (SYD) method for the next two questions.
How much is the depreciation expense in the 2 nd year?
a. 120,000 b. 96,000 c. 128,000 d. 224,000

1. Compute For the sum of the year’s digits : n=estimated life in years; n (n+1) / 2
Example : 4 years; (4 x 5) / 2 = 10 (This will be the denominator)

2. Compute the depreciation

YEAR Dep. Exp. Acc. Depre. Book Value


1 4/10 X (400,000 – 80,000) 128,000 128,000 272,000
2 3/10 X (400,000 – 80,000) 96,000 224,000 176,000
3 2/10 X ( 400,000 – 80,000) 64,000 288,000 112,000
4 1/10 X (400,000 – 80,000) 32,000 320,000 80,000

320,000
B
SYD denominator = Life x [(Life + 1) ÷ 2] = 4 x [(4 + 1) ÷ 2] = 10
Depreciation – 2nd yr. = (400,000 – 80,000) x 3/10 = 96,000

How much is the accumulated depreciation on December 31, 20x2?


a. 120,000 b. 96,000 c. 128,000 d. 224,000
D (400,000 – 80,000) x [(4+3)/10] = 320,000 x 7/10 = 224,000

Double declining balance method


Case #3: Use the double declining balance method for the next two questions.
How much is the depreciation expense in the 2 nd year?
a. 120,000 b. 100,000 c. 128,000 d. 224,000
B

On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated


useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of
₱400,000.

1. Double Declining Rate (DDR)= Double the Straight line rate = 2/n

Straight line rate = 1/n = estimated life

In this case, the estimated life in 4 years = ¼ x 2 = 50%

This DDR is multiplied by the declining book value= depreciation expense

YEAR Depreciation
Expense

1 .50 ( 400,000) 200,000

2 .50 (400,000 – 200,000) 100,000

3 .50 (400,000 – 200,000 – 100,000) 50,000

Depreciable Cost = 400,000 – 200,000 – 100,000 10,000


-80,000=remaining depreciable cost, 20,000/ remaining life
of 2 years (Correct)

4 .50 (400,000 – 200,000 – 100,000 -50,000) 25,000

10,000

(Correct)

Double declining balance rate = 2/Life = 2/4 = 50% (400,000 x 50% x 50%) =
100,000

How much is the accumulated depreciation on December 31, 20x2?


a. 120,000 b. 96,000 c. 160,000 d. 300,000
D
Solution:
Depreciation - 20x1 (400K x 50%) 200,000
Depreciation - 20x2 (400K - 200K) x 50% 100,000
Accumulated depreciation - Dec. 31, 20x2 300,000

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


On January 1, 20x1, SIMPLETON FOOL Co. acquired equipment with an estimated
useful life of 4 years and a residual value of ₱80,000 for a total purchase cost of
₱400,000.
Case #4: Use the units of production method for the next two questions:
The equipment has an expected total output of 160,000 units and an expected total
input of 40,000 hours.
Information on actual operations is presented below:
Year Units produced Manufacturing hours
20x
1 60,000 16,000
20x
2 30,000 8,000
20x
3 45,000 12,000
20x
4 25,000 4,000
  160,000 40,000

YR OUTPUT - Depreciation per unit= (400,000 -80,000)/160,000 = 2/ unit Dep.


Depreciation Expense = Dep/unit x of produced Exp.
1 60,000 x 2 120,000
2 30,000 x 2 60,000
3 45,000 x 2 90,000
4 25,000 x 2 50,000
320,000

If SIMPLETON Co. uses the output method, how much is the depreciation expense in
the 2nd year?
a. 128,000 b. 96,000 c. 60,000 d. 64,000
1. C (400,000 – 80,000) x 30,000 / 160,000 = 60,000

If SIMPLETON Co. uses the output method, how much is the accumulated depreciation
on December 31, 20x2?
a. 120,000 b. 180,000 c. 192,000 d. 256,000
2. B (400,000 – 80,000) x [(60,000 + 30,000) / 160,000] = 180,000

YR INPUT - Depreciation per hour= (400,000 -80,000)/40,000 = 8/ hour Depre.


Depreciation Expense = Dep/hour x of hours used Expense
1 16,000 x 8 128,000
2 8,000 x 8 64,000
3 12,000 x 8 96,000
4 4,000 x 8 32,000
320,000

If SIMPLETON Co. uses the input method, how much is the depreciation expense in the
2nd year?
a. 64,000 b. 96,000 c. 60,000 d. 64,000
3. A (400,000 – 80,000) x 8,000 / 40,000 = 64,000

If SIMPLETON Co. uses the input method, how much is the accumulated depreciation
on December 31, 20x2?
a. 120,000 b. 210,000 c. 192,000 d. 256,000
4. C (400,000 – 80,000) x [(16,000 + 8,000) / 40,000] = 192,000

Increasing depreciation charge under double declining balance method


The following information pertains to an equipment owned by RABBLE MOB Co.:
Cost 800,000
Useful life 5 years
Double declining rate (2/ 5 year life) 40%
Residual value None

How much is the depreciation in 20x5?


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

Solution:

Accumu-
Depreciation lated
= (DD rate x depre- Carrying
Date   Carrying amount) ciation amount

Jan. 1, 20x1 800,000


Dec. 31, 20x1 40% x 800,000 320,000 320,000 480,000
Dec. 31, 20x2 40% x 480,000 192,000 512,000 288,000
Dec. 31, 20x3 40% x 288,000 115,200 627,200 172,800
Dec. 31, 20x4 40% x 172,800 69,120 696,320 103,680
Dec. 31, 20x5 40% x 103,680 41,472 737,792 62,208

737,792

Notice that in the table above, the carrying amount of the asset as of December 31,
20x5 is not equal to zero. It should have been zero because the asset does not have a
residual value. Also, the total depreciation charge over the useful life of the asset is
understated by ₱62,208 (800,000 - 737,792).

The carrying amount of ₱62,208 on December 31, 20x5 should be zeroed-out.


However, if we charge the whole amount of ₱62,208 in 20x5, the total depreciation
would be ₱103,680 (₱41,472 + 62,208), which is higher than the ₱69,120 depreciation
in 20x4. This would result to an increasing charge rather than decreasing. Therefore,
the depreciation in 20x4 and 20x5 shall be computed using the straight-line method as
follows:

Carrying amount - Dec. 31, 20x3 172,800


Divide by: 2
Straight line depreciation for 20x4 and 20x5 86,400

The revised depreciation table is shown below:


Accumu-
Depreciation lated
= (DD rate x depre- Carrying
Date   Carrying amount) ciation amount
Jan. 1, 20x1 800,000
Dec. 31, 20x1 40% x 800,000 320,000 320,000 480,000
Dec. 31, 20x2 40% x 420,000 192,000 512,000 288,000
Dec. 31, 20x3 40% x 288,000 115,200 627,200 172,800
Dec. 31, 20x4 172,800 / 2 86,400 713,600 86,400
Dec. 31, 20x5 172,800 / 2 86,400 800,000 -
800,000

Partial year depreciation


Use the following information for the next three questions:
DEPLORABLE BAD Co. acquired a machine on September 21, 20x1 for a total cost of
₱160,000. The machine was estimated to have a useful life of 4 years and a salvage
value of ₱10,000.
Solutions:
Depreciation for each full year of the asset’s life is calculated as follows:
Year Straight line SYD Double declining balance
1 (150K* / 4) = 37,500 4/10 x 150K* = 60,000 50% x 160,000 = 80,000
2 37,500 3/10 x 150K = 45,000 50% x 80,000 = 40,000
3 37,500 2/10 x 150K = 30,000 50% x 40,000 = 20,000
4 37,500 1/10 x 150K = 15,000 50% x 20,000 = 10,000

* (₱160,000 - ₱10,000) = ₱150,000

How much is the depreciation expense in 20x2 under the straight-line method?
a. 37,500 b. 93,750 c. 36,400 d. 35,000
A
Annual Depreciation = (160,000 – 10,000) / 4 = 37,500 per year

20x1 - 37,500 x 3/12 = 9,375 ( Oct 1 to Dec. 31)


20x2 – 37,500 x 12/12 = 37,500 (Jan 1 to Dec 31)
20x3 - = 37,500 (Jan 1 to Dec 31)
20x4 =37,500 (Jan 1 to Dec 31)
20x5 – 37,500 x 9/12 = 28,125 ( Jan 1 to Oct 1)
150,000

How much is the depreciation expense in 20x2 under the sum-of-years’ digits method?
a. 45,000 b. 11,250 c. 56,250 d. 57,250
C (See solutions above)

SYD – Full Year


4/10 x 150K* = 60,000
3/10 x 150K = 45,000
2/10 x 150K = 30,000
1/10 x 150K = 15,000

Year Dep Exp


20x1 60,000 x 3/12 15,000
20x2 60,000 x 9/12 + 45,000 x 3/12 56,250
20x3 45,000 x 9/12 + 30,000 x 3/12 41,250
20x4 30,000 x 9/12 + 15,000 x 3/12 26,250
20x5 15,000 x 9/12 11,250
150,000

How much is the depreciation expense in 20x2 under the double declining balance
method?
a. 70,000 b. 60,000 c. 10,000 d. 0
A (See solutions above)

N= 4 years.
Rate per year = ¼ = 25%
Double the rate = 25% x 2 = 50%

Double declining balance


50% x 160,000 = 80,000
50% x 80,000 (160,000 -80,000) = 40,000
50% x 40,000 (160,000 – 80,000 – 40,000) = 20,000
50% x 20,000 (160,000 -80,000 -40,0000 -20,000)= 10,000

Year Dep Exp


20x1 80,000 x 3/12 20,000
20x2 80,000 x 9/12 + 40,000 x 3/12 70,000
20x3 40,000 x 9/12 + 20,000 x 3/12 35,000
20x4 20,000 x 9/12 + 10,000 x 3/12 17,500
20x5 10,000 x 9/12 7,500
150,000

Since the first full year of the asset’s life does not coincide with the entity’s accounting
period, the amounts shown above are prorated as follows:
Double
Yea Straight declining
r line SYD balance
20x 60,000 x 9/12 = 80,000 x 9/12 =
2 37,500 45,000 60,000
45,000 x 3/12 = 40,000 x 3/12 =
    11,250 10,000
37,500 56,250 70,000

*Since the asset was acquired on September 21, 20x1 (last half of the month), it is
treated as if it has been acquired on October 1, 20x1.

Composite method
Use the following information for the next four questions:
On January 1, 20x1, DEVIOUS CROOKED Co. purchased the following:
Cost Residual value Useful life
Machine tools 80,000 4,000 3 years
Meters costing 64,000 2,000 5 years
Returnable containers 120,000 - 6 years

Depre- Annual
Residual
Cost ciable depre-
value
amt. Useful life ciation
Machine tools 80,000 4,000 76,000 3 25,333
Meters costing 64,000 2,000 62,000 5 12,400
Returnable
containers 120,000 - 120,000 6 20,000
Totals 264,000 258,000 57,733

What is the composite life?


a. 5.40 b. 5 c. 4.50 d. 4.71

Composite life = Depreciable amt. ÷ Annual depreciation


(258,000 ÷ 57,773) = 4.5 (rounded-off)

What is the composite rate?


a. 21.87% b. 22.21% c. 95.45% d. 4.50%
A (Refer to solution above)
Composite rate = Annual depreciation ÷ Total cost = (57,733 ÷ 264,000) = 21.87%

How much is the depreciation expense in 20x1?


a. 57,733 b. 56,000 c. 58,667 d. 59,8774
A (Refer to solution above)

Formula for depreciation Expense : Composite Rate x ( Balance of the Cost)


(.2187 x P 264,000) = 57,733

During 20x3, machine tools with original cost of ₱20,000 and residual value of ₱2,000
were sold for ₱6,000. How much is the gain (loss) on the sale?
a. (345) b. 430 c. (667) d. 0
D No gain or loss is recognized when an individual asset in a group of assets being
depreciated using a group depreciation method is disposed of.

Entry: Cash 6,000


Accumulated Depreciation 14,000
Asset (Tools) 20,000

If in the 2nd year , Half of the Machine Tools was sold at P 30,000 and we bought P
20,000 furniture.

Cash 30,000
Accumulated Depreciation 10,000
(80,000 x ½) -30,000
Machine Tools 40,0000

Furniture 20,000
Cash 20,000

How much is the depreciation expense in 20x2?

Formula for depreciation Expense : Composite Rate x ( Balance of the Cost)

Depreciation Expense = Balance of Cost at year end x composite rate


=(264,000 – 40,000 + 20,000) x .2187
= 53,363
Retirement and Replacement methods

Depreciation Expense
Retirement No depreciation is recorded unless Original Cost of Asset Retired – Proceeds
there is asset retired.
1. If retired and replaced, depreciation =
No depreciation is recorded unless Replacement cost of assets retires –
Replacement Assets are retired and replaced proceeds
2. If retired but not replaced original cost
of that asset is depreciation

Use the following information for the next two questions:


The small tools account of ATROCIOUS CRUEL Co. has a balance of ₱600,000 as of
January 1, 20x1. Movements in this account during the year are as follows:

  Feb. April Sept. Nov.


Cost of newly acquired small
tools 40,000 - 120,000 88,000
Cost of old small tools
retired 24,000 48,000 - 72,000
Proceeds from sale of old
small tools 2,000 3,200 - 4,000

Assuming ATROCIOUS Co. uses the retirement method, how much is the
depreciation expense in 20x1?
a. 134,800 b. 166,800 c. 144,000 d. 118,800
A
Solution:
Total
  Feb. April Sept. Nov.
depreciation
Cost of old small tools
24,000 48,000 - 72,000
retired 144,000
Proceeds from sale (2,000) (3,200) - (4,000) (9,200)
Totals 22,000 44,800 - 68,000 134,800

Assuming ATROCIOUS Co. uses the replacement method, how much is the
depreciation expense in 20x1?
a. 134,800 b. 166,800 c. 144,000 d. 118,800
B
Solution:
Total
  Feb. April Sept. Nov.
depreciation
Cost of newly 40,000 - N/A 88,000 128,000
acquired small tools
Cost of old small 48,000 - 48,000
tools retired
Proceeds from sale (2,000) (3,200) - (4,000) (9,200)
of old small tools
Totals 38,000 44,800 - 84,000 166,800
Inventory method
This is generally applied to small Balance per Inventory at year end –
Inventory method inexpensive items. This method is Balance per Inventory Account =
not systematic. No contra asset Depreciation Expense
account is maintained, depreciation
is credited direcly from the asset
account

The small tools account of AUGUST MAJESTIC Co. has a balance of ₱600,000 as of
January 1, 20x1. Acquisitions of small tools during the period totaled ₱240,000 and
proceeds from sale of small tools retired and/or replaced totaled ₱100,000. The annual
asset count on December 31, 20x1 revealed a balance of small tools of ₱440,000. How
much is the depreciation expense under the inventory method?
a. 400,000 b. 300,000 c. 240,000 d. 140,000
B
Solution:
Small tools
Jan. 1, 20x1 bal. 600,000 100,000 Proceeds from retired/replaced tools
Additions 240,000 300,000 Depreciation for 20x1 (squeeze)
440,000 Dec. 31, 20x1 bal.

Revenue method
On January 1, 20x1, COCKY ARROGANT Co. acquired an equipment costing
₱4,000,000. The equipment will be used to reproduce a gaming software which is
expected to be marketed for 3 years. The equipment is expected to be used in
producing products over the next two years, after which, the equipment will be disposed
of at a negligible amount.

Estimated revenues from the software are as follows:


Year Estimated revenues
20x
1 120,000,000
20x
2 80,000,000
20x
3 40,000,000
Tota
l 240,000,000

The actual revenue earned in 20x1 is ₱180,000,000. Depreciation expense in 20x1 is


most likely equal to
a. 3,000,000 b. 2,000,000 c. 2,977,667 d. 333,333
B
Solution:
Using straight-line method: (4M ÷ 2)
PAS 16 prohibits the use of a depreciation method that is based on revenue.

Leasehold improvements
Use the following information for the next two questions:
On January 1, 20x1, DIMINUTIVE SMALL Co. signed a ten-year lease for office space.
DIMINUTIVE has the option to renew the lease for an additional five-year period on or
before January 1, 2x10. During the first half of January 20x2, DIMINUTIVE Co. incurred
the following costs:
₱3,600,000 for general improvements to the leased premises with an estimated useful
life of ten years.
₱400,000 for office furniture and equipment with an estimated useful life of ten years.
₱800,000 for movable assembly line equipment with useful life of 5 years.

At the time the leasehold improvement were finished, DIMINUTIVE Co. is uncertain as
to the exercise of the renewal option.

How much is the 20x2 depreciation expense on the leasehold improvements?


a. 400,000 b. 360,000 c. 533,333 d. 488,889

Lease term = 9 ; Life = 10; so we go for lease term.


A (3,600,000 ÷ 9) = 400,000

Assume that in DIMINUTIVE Co. is certain that it will exercise the renewal option. How
much is the 20x2 depreciation expense on the leasehold improvements?
a. 400,000 b. 360,000 c. 480,000 d. 440,000

Lease Term = 9 + 5 = 14 ; Useful Life = 10 , so the lower is life,


B (3,600,000 ÷ 10) = 360,000

Change in depreciation method (from DDB to SL)


1. Compute the Carrying Value of the asset up to the time of Change.
2. Use the carrying Value as the new cost and apply the new method or policy.

On January 1, 20x1, DISCORDANT DISAGREEING Co. acquired machinery for a total


cost of ₱80,000,000. The machinery is depreciated using the double declining balance
method over a period of 10 years. On January 1, 20x4, DISCORDANT Co. changed its
depreciation method to straight line method.

How much is the depreciation expense in 20x4?


a. 5,815,428 b. 7,314,286 c. 6,581,342 d. 5,851,429
D
Solution:
Double declining balance rate = 2/Life = 2/10 = 20%
Carrying amt. on 1/1/x4 =( 80M x 80% x 80% x 80%) = 40,960,000
Dep’n. – 20x4 = 40,960,000 ÷ 7 = 5,851,429

Change in depreciation method (from SYD to DDB)


On January 1, 20x1, KNAVE RASCAL Co. acquired machinery for a total cost of
₱80,000,000. The machinery is depreciated using the SYD method over a period of 10
years. On January 1, 20x4, KNAVE Co. changed its depreciation method to double
declining balance method.
How much is the depreciation expense in 20x4?
a. 40,727,272 b. 11,635,782 c. 12,556,780 d. 13,556,702
B
Solution:
SYD denominator = 10 x [(10+1)/2)] = 55
Accumulated depreciation on 1/1/x4 = 80M x [(10 + 9 + 8)/55] = 39,272,727
Carrying amt. on 1/1/x4 = 80M – 39,272,727 = 40,727,273
Or Carrying Value = 55-10-9-8 / 55 (80M) =40,727,272

Double declining balance rate = 2/7 = 28.57%


Dep’n. – 20x4 = 40,727,273 x 28.57% = 11,635,782

Change in useful life and residual value


On January 1, 20x1, SMUTTY OBSCENE Co. acquired machinery for a total cost of
₱80,000,000 and estimated residual value of ₱8,000,000. The machinery is depreciated
using the straight line method over a period of 10 years. On January 1, 20x4, SMUTTY
Co. revised the total useful life of the asset to 15 years from acquisition date and the
residual value to ₱10,400,000.
How much is the depreciation expense in 20x4?
a. 4,000,000 b. 3,899,567 c. 4,010,250 d. 4,129,335
A
Solution:
Carrying amt. on 1/1/x4 = (80M – 8M) x 7/10 + 8M = 58,400,000
Dep’n. – 20x4 = (58.4M – 10.4M) ÷ (15yrs. – 3yrs.) = 4,000,000

mprovements and Replacements


Use the following information for the next two questions:
ENTREAT Co. acquired an aircraft from BEG, Inc. on January 1, 20x1 for a total cost of
₱24,000,000. The aircraft is estimated to have a useful life of 10 years. ENTREAT Co.
uses the straight line method of depreciation. On January 1, 20x5, a major part of the
equipment was replaced for a total cost of ₱3,200,000.

Assuming ENTREAT Co. determined that the cost of the replaced part is ₱2,000,000,
how much is the loss on replacement?
a. 1,920,000 b. 1,200,000 c. 2,000,000 b. 0
B
Solution:
Jan. Accumulated depreciation (2M x 4/10) 800,000
1, Loss on replacement (squeeze) 1,200,000
20x5 Delivery equipment - aircraft (old part) 2,000,000
to derecognize the old part that is replaced
Jan. Delivery equipment - aircraft (new part) 3,200,000
1, Cash in bank 3,200,000
20x5 to recognize the new replacement part

Assuming it is impracticable to determine the cost of the replaced part, how much is the
loss on replacement?
a. 1,920,000 b. 1,200,000 c. 2,000,000 b. 0
A
Solution:
Jan. Accumulated depreciation (3.2M x 4/10) 1,280,000
1, Loss on replacement (squeeze) 1,920,000
20x5 Delivery equipment - aircraft (old part) 3,200,000
to derecognize the old part that is replaced
Jan. Delivery equipment - aircraft (new part) 3,200,000
1, Cash in bank 3,200,000
20x5 to recognize the new replacement part

Revaluation: Appraised value


On December 31, 20x1, the building of HISTRIONAL THEATRICAL Co. with a historical
cost of ₱80,000,000, accumulated depreciation of ₱20,000,000, and an estimated
useful life of 20 years has been assessed by an external valuer to have an appraised
value of ₱100,000,000. How much is the revaluation surplus?
a. 40,000,000 b. 28,000,000 c. 20,000,000 d. 10,000,000
A [100M – (80M – 20M)] = 40,000,000

Based on Cost Revaluation Difference


Cost/ Replacement 80,000,000 133,333,333 53,333,333
(100,000,000 / .75)
Accumulated 20,000,000 33,333,333 13,333,333
Depreciation/Observe (20/80) = 25% (133,333,333 x .25)
d Depreciation
60,000,000 100,000,000 40,000,000
100%- 25% = 75%
Book Value Sound Value/Fair Revaluation
Value/ Appraised Surplus (Gross)

100,000,000 / .75 (60/80) = 133,333,333


133,333,333 x 5/20 (5=.25 of 20 yrs) = 33,333,333
If the tax rate is 30%

Proportionate Elimination
Building 53,333,333 Accumulated Depreciation 20,000,000
Accumulated Depreciation 13,333,333 Building 20,000,000
Revaluation Surplus (40M x.70) 28,000,000 Revaluation Surplus (40M x.70) 28,000,000
Deferred tax Payable (40M x .30)12,00,000 Deferred tax Payable (40M x .30)12,00,000

Depreciation from 1st year to 5th year :

80M / 20 yrs = 4,000,000

1, Depreciation on the 6th year to 20 years..

Depreciation Expense (100,000,000 /15) 6,666,667


Accumulated Depreciation 6,666,667

Difference in Expense = 6,666,667 – 4,000,000 = 2,666,667 x .7 = 1,866,667

2, (Piecemeal Adjustment)

Revaluation Surplus ( 28M /15) 1,866,667


Deferred Tax Payable (12/15) 800,000
Retained Earnings 1,866,667
Income Tax Payable 800,000

Depreciated replacement cost (without residual value)


On December 31, 20x1, the building of SWIMMY UNSTEADY Co. with a historical cost
of ₱80,000,000, accumulated depreciation of ₱20,000,000, and an estimated useful life
of 20 years has been estimated to have a replacement cost of ₱140,000,000. How
much is the revaluation surplus?
a. 31,500,000 b. 36,778,750 c. 45,000,000 d. 60,000,000
C
Solution:
Depreciated replacement cost 105,000,000
Carrying amount (80M - 20M) (60,000,000)
Revaluation surplus 45,000,000

Replacement cost 140,000,000


Observed depreciation (140M x 20/80) (35,000,000)
Depreciated replacement cost 105,000,000

Based on Cost Revaluation Difference


Cost/ Replacement 80,000,000 140,000,000 60,000,000
Accumulated 20,000,000 35,000,000 15,000,000
Depreciation/Observe (140M x 20/80)
d Depreciation
60,000,000 105,000,000 45,000,000
Book Value Sound Value Revaluation
Surplus

Depreciated replacement cost (with residual value)


On December 31, 20x1, the building of LITHE FLEXIBLE Co. was revalued. Information
on revaluation date is shown below:
Cost Replacement cost
Building 72,000,000 144,000,000
Accumulated depreciation 16,000,000
Residual value 8,000,000 8,000,000
Remaining useful life 10 years 12 years

How much is the revaluation surplus?


a. 45,000,000 b. 54,000,000 c. 36,000,000 d. 46,333,333
B
Solution:
Observed Depreciable amt. of Accumulated depreciation
= x
depreciation replacement cost Depreciable amount (old)

Observed depreciation = 136Ma x (16M ÷ 64Mb) = 34,000,000

Replacement cost 144,000,000 Historical cost 72,000,000


Residual value (8,000,000) Residual value (8,000,000)
Depreciable amt. of Depreciable
replacement cost a 136,000,000 amount b 64,000,000

Replacement cost 144,000,000


Less: Observed depreciation (34,000,000)
Depreciated replacement cost 110,000,000

Depreciated replacement cost 110,000,000


Less: Carrying amount (old) (56,000,000)
Revaluation surplus 54,000,000

Methods of recording revaluation surplus – Replacement cost


Use the following information for the next three questions:
On December 31, 20x1, the building of SUBTERFUGE DECEPTION Co. with a
historical cost of ₱80,000,000, accumulated depreciation of ₱20,000,000, and an
estimated useful life of 20 years has been estimated to have a replacement cost of
₱140,000,000. Income tax rate is 30%.

How much is the revaluation surplus?


a. 31,500,000 b. 36,778,750 c. 45,000,000 d. 60,000,000

Based on Cost Revaluation Difference


Cost/ Replacement 80,000,000 140,000,000 60,000,000
(100,000,000 / .75)
Accumulated 20,000,000 35,000,000 15,000,000
Depreciation/Observe (20/80) = 25% (140M x .25)
d Depreciation
60,000,000 105,000,000 45,000,000
100%- 25% = 75%
Book Value Sound Value/Fair Revaluation
Value/ Appraised Surplus (Gross)

45,000,000 x .70 = 31,500,000 Revaluation Surplus

A
Solution:
The depreciated replacement cost is computed as follows:
Replacement cost 140,000,000
Less: Observed depreciation (35,000,000)a
Depreciated replacement cost 105,000,000

a
Where:
Observed Accumulated depreciation
= Replacement cost x
depreciation Historical cost
35,000,000 = 140,000,000 x (20,000,000/80,000,000)

The revaluation surplus is computed as follows:


Depreciated replacement cost 105,000,000
Carrying amount (80,000,000 – 20,000,000) (60,000,000)
Revaluation surplus – gross of tax 45,000,000

The revaluation surplus gross of tax is allocated as follows:

Revaluation surplus after tax (45,000,000 x 70%a) 31,500,000


13,500,000
Deferred tax liability (45,000,000 x 30%)
a
(70% = 100% - 30% tax rate)

Assuming SUBTERFUGE Co. uses the proportional method, the entry to record the
revaluation includes:
a. debit to accumulated depreciation for ₱15,000,000 b. debit to accumulated
depreciation for ₱20,000,000
c. debit to building for ₱25,000,000 d. debit to building for ₱60,000,000
D
Solution:
The movements in the accounts are determined as follows:
  Historical Cost Replacement cost Increase
Building 80,000,000 140,000,000 60,000,000
Accum. depreciation (20,000,000) (35,000,000) (15,000,000)
b
CA/ DRC/ RS 60,000,000 105,000,000 45,000,000
b
Carrying amount/ Depreciated replacement cost/ Revaluation surplus

The entry under the proportional method is as follows:


Dec. Building (see table) 60,000,000
31, Accumulated depreciation (see table) 15,000,000
20x1 Revaluation surplus 31,500,000
Deferred tax liability 13,500,000

Based on Cost Revaluation Difference


Cost/ Replacement 80,000,000 140,000,000 60,000,000
(100,000,000 / .75)
Accumulated 20,000,000 35,000,000 15,000,000
Depreciation/Observe (20/80) = 25% (140M x .25)
d Depreciation
60,000,000 105,000,000 45,000,000
100%- 25% = 75%
Book Value Sound Value/Fair Revaluation
Value/ Appraised Surplus (Gross)

Assuming SUBTERFUGE Co. uses the elimination method, the entry to record the
revaluation includes:
a. credit to accumulated depreciation for ₱20,000,000 b. a debit to building for
₱25,000,000
c. debit to accumulated depreciation for ₱15,000,000 d. a debit to deferred tax for
₱13,500,000
B
Solution:
The entry under the elimination method is as follows:
Dec. Accumulated depreciation 20,000,000
31, Building (balancing figure) 25,000,000
20x1 Revaluation surplus 31,500,000
Deferred tax liability 13,500,000

Methods of recording revaluation – Appraised value


Use the following information for the next two questions:
On December 31, 20x1, the building of ABC Co. with a historical cost of ₱320,000,000,
accumulated depreciation of ₱160,000,000, and an estimated useful life of 20 years has
been assessed by an external value to have an appraised value of ₱200,000,000.
Income tax rate is 30%

The entry under the proportional method to record the revaluation includes
a. debit to accumulated depreciation for ₱40,000,000 b. credit to accumulated
depreciation for ₱20,000,000
c. debit to building for ₱80,000,000 d. credit to building for ₱80,000,000
C
Solution:
The revaluation surplus is computed as follows:
Appraised value 200,000,000
Carrying amount (320M – 160M) (160,000,000)
Revaluation surplus – gross of tax 40,000,000
Less: Deferred tax liability (40M x 30%) (12,000,000)
Revaluation surplus after tax 28,000,000
The change in carrying amount is determined as follows:
Appraised value 200,000,000
Divide by: Carrying amount (320M – 160M) 160,000,000
Change in carrying amount 125%

The gross carrying amount after the revaluation is restated as follows:


Gross carrying amount before revaluation 320,000,000
Multiply by: Change in carrying amount 125%
Gross carrying amount after revaluation 400,000,000

The accumulated depreciation after the revaluation is computed as follows:


Gross carrying amount after revaluation 400,000,000
Accumulated depreciation after revaluation (squeeze) (200,000,000)
Carrying amount after revaluation (Appraised value) 200,000,000

The changes in the accounts are determined as follows:


Before After
Increase
revaluation revaluation
Building 320,000,000 400,000,000 80,000,000
Accumulated depreciation (160,000,000) (200,000,000) (40,000,000)
Carrying amount 160,000,000 200,000,000 40,000,000

The entry under the proportional method is as follows:


Dec. Building 80,000,000
31, Accumulated depreciation 40,000,000
20x1 Deferred tax liability 12,000,000
Revaluation surplus 28,000,000

The entry under the elimination method to record the revaluation includes
a. debit to accumulated depreciation for ₱40,000,000 b. debit to accumulated
depreciation for ₱20,000,000
c. debit to building for ₱80,000,000 d. credit to building for
₱80,000,000
A
Solution:
The entry under the elimination method is as follows:
Dec. Accumulated depreciation 40,000,000
31, Deferred tax liability 12,000,000
20x1 Revaluation surplus 28,000,000

The carrying amount after the revaluation is reconciled as follows:


Building (original balance) 80,000,000
Accumulated depreciation (40M - 10M debit in entry) (30,000,000)
Carrying amount after revaluation (Appraised value) 50,000,000

Revaluation: Change in useful life


Use the following information for the next two questions:
On January 1, 20x1, the building of PRODIGIOUS EXTRAORDINARY Co. with a
historical cost of ₱80,000,000 purchased 5 years ago with an estimated useful life of 20
years has been estimated to have a replacement cost of ₱140,000,000. The building is
estimated to have a remaining useful life of 25 years as of January 1, 20x1.
Depreciation is computed using the straight line method. Income tax rate is 30%.

How much is the revaluation surplus?


a. 31,500,000 b. 45,000,000 c. 37,500,000 d. 36,788,366

(45,000,000 x .70) =31,500,000

Book Revalue Difference


Cost/ Replacement 80,000,000 140,000,000 60,000,000
Acc Dep/Observed 20,000,000 35,000,000 15,000,000
(140M x 20/80)
Book Value / 60,000,000 105,000,000 45,000,000
Sound Value

A
Solution:
The depreciated replacement cost is computed as follows:
Replacement cost 140,000,000
Less: Observed depreciation (35,000,000)a
Depreciated replacement cost 105,000,000

a
Where:
Observed Accumulated depreciation
= Replacement cost x
depreciation Historical cost

Accumulated depreciation = (80,000,000 x 5/20) = 20,000,000


Observed depreciation = 140M x (20,000,000/ 80,000,000) = 35,000,000

The revaluation surplus is computed as follows:


Depreciated replacement cost 105,000,000
Carrying amount (80,000,000 – 20,000,000) (60,000,000)
Revaluation surplus before tax 45,000,000

Revaluation surplus after tax (45,000,000 x 70%b) 31,500,000

How much is the depreciation expense in 20x1?


a. 2,940,000 b. 4,200,000 c. 3,200,000 d. 3,333,976
B
Solution:
The depreciation subsequent to date of revaluation is computed as follows:
Revalued amount (depreciated replacement cost) 105,000,000
Divide by: Revised remaining useful life 25
Revised annual depreciation expense 4,200,000

Entry : Depreciation Expense 4.2M


Accumulated Depreciation 4.2M

Piecemeal Adjustment :
Revaluation Surplus ( 31.5M / 25) 1.26M
Deferred Tax Payable (31.5M/.7 x .30)/25 .54M
Retained Earnings 1.26M
Income Tax Payable .54M
Revaluation: Change in residual value and useful life
Use the following information for the next two questions:
On December 31, 20x1, the building of COLLOQUY CONVERSATION Co. was
revalued. Information on revaluation date is shown below:
Cost Replacement cost
Building 72,000,000 144,000,000
Accumulated depreciation 16,000,000
Residual value 8,000,000 16,000,000
Remaining useful life 10 years 12 years

How much is the revaluation surplus?


a. 45,000,000 b. 31,500,000 c. 36,788,366 d. 51,428,571
D
Solution:
The observed depreciation is computed as follows:

Observed Depreciable amt. of Accumulated depreciation (old)


= x
depreciation replacement cost Depreciable amount

Where:
Replacement cost 144,000,000 Historical cost 72,000,000
Residual value (16,000,000) Residual value (16,000,000)
Depreciable amt. of
replacement cost 128,000,000 Depreciable amount 56,000,000

Observed 16,000,000 (given)


= 128,000,000 x
depreciation 56,000,000
Observed depreciation = 36,571,429

The depreciated replacement cost is computed as follows:


Replacement cost 144,000,000
Less: Observed depreciation (36,571,429)
Depreciated replacement cost (Sound Value) 107,428,571

The revaluation surplus is computed as follows:


Depreciated replacement cost (Sound Value) 107,428,571
Carrying amount (72,000,000 – 16,000,000) (Book Value) (56,000,000)
Revaluation surplus 51,428,571

How much is the depreciation expense in 20x2?


a. 3,333,976 b. 4,200,000 c. 7,619,048 d. 8,990,344
C
Solution:
Depreciation subsequent to date of revaluation is computed as follows:
Revalued amount (depreciated replacement cost)(Sound Value) 107,428,571
New residual value (16,000,000)
Depreciable amount 91,428,571
Divide by: Revised remaining useful life 12
Revised annual depreciation expense 7,619,048

Revaluation of non-depreciable asset


On December 31, 20x1, the land of FARCICAL ABSURD Co. with a historical cost of
₱80,000,000 has been appraised at ₱140,000,000. Income tax rate applicable to profits
is 30% and the tax rate applicable to profits made on the sale of property is 6%. How
much is the revaluation surplus?
a. 42,000,000 b. 56,400,000 c. 45,000,000 d.
51,428,572
B (140,000,000 – 80,000,000) = 60,000,000 x 94% = 56,400,000

Entry : Land ( 140,000 -80,000) 60,000,000


Revaluation Surplus 56,400,000
Deferred Tax Payable (60M x .06) 3,600,000

Revaluation decrease representing impairment loss


On December 31, 20x1, the land of ATTAINDER DISHONOR Co. with an original cost
of ₱32,000,000 was appraised at ₱48,000,000. On December 20x4, the land was
appraised at ₱28,000,000.
How much is the impairment loss in 20x4?
a. 20,000,000 b. 4,000,000 c. 2,800,000 d. 0
B
Solutions:
20x1
Appraised value 48,000,000
Carrying amount (32,000,000)
Revaluation surplus 16,000,000

20x4
Appraised value 28,000,000
Carrying amount (48,000,000)
Decrease in carrying amount (20,000,000)

The decrease in carrying amount is allocated as follows:


Decrease in carrying amount (20,000,000)
Balance in revaluation surplus 16,000,000
Excess charged to impairment loss (4,000,000)

Entry :
Revaluation Surplus 16,000,000
Impairment Loss 4,000,000
Land 20,000,000

Revaluation increase representing reversal of impairment loss


On December 31, 20x1, the land of CONJUNCTION UNION Co. with an original cost of
₱40,000,000 was revalued at ₱28,000,000. This was the first revaluation made on the
land since it was purchased 2 years ago. On December 20x4, the building was
appraised at ₱48,000,000. Ignore income taxes. How much is the gain on impairment
reversal in 20x4?
a. 8,000,000 b. 20,000,000 c. 12,000,000 d. 0
C
Solution:

12.31.20x1 Impairment loss (40-28) 12,000,000


Land 12,000,000

12.31.201x4 Land (48-28) 20,000,000


Gain on Reversal 12,000,000
Revaluation Surplus 8,000,000
20x1
Appraised value 28,000,000
Carrying amount (40,000,000)
Decrease in carrying amount (12,000,000)

The decrease in carrying amount is allocated as follows:


Decrease in carrying amount (12,000,000)
Balance in revaluation surplus -
Impairment loss (12,000,000)

20x4
Appraised value 48,000,000
Carrying amount (28,000,000)
Increase in carrying amount 20,000,000

The increase in carrying amount is allocated as follows:


Increase in carrying amount 20,000,000
Previous impairment loss (gain on impairment reversal) 12,000,000
Excess credited to revaluation surplus 8,000,000

Sale of item of PPE measured under cost model


FORTITUDE ENDURANCE Co. purchased equipment on August 14, 20x1 for a total
cost of ₱400,000. The equipment has an estimated useful life of 10 years and residual
value of ₱80,000. It is the policy of FORTITUDE Co. to provide full-year depreciation in
the year of acquisition and none in the year of disposal. On May 12, 20x4, the
equipment was sold for ₱120,000. Additional costs incurred on the sale amounted to
₱8,000. How much is the gain (loss) on the sale?
a. (184,000) b. 184,000 c. 192,000 d. (192,000)
D
Solution:
May Cash on hand (120K – 8K) 112,000
12, Accumulated depreciation (400k-80k)/10 x 3 96,000
20x4 Loss on disposal of equipment (squeeze) 192,000
Equipment 400,000

Sale of item of PPE measured under revaluation model


OBDURATE STUBBORN Co. disposed of a machinery on December 31, 20x1 for a
total net disposal proceeds of ₱6,800,000. Information of the machinery as of December
31, 20x1 is as follows:
Cost at revalued amount ₱ 9,200,000
Accumulated depreciation 3,200,000
Revaluation surplus (presented in equity) 4,800,000

How much is the gain (loss) on the sale?


a. 5,600,000 b. 4,000,000 c. (800,000) d. 800,000

D
Solution:
Dec. Cash on hand 6,800,000
31, Accumulated depreciation 3,200,000
20x1 Machinery 9,200,000
Gain on disposal of machinery 800,000
Additional Entry:
Revaluation Surplus 4,800,000
Retained Earnings 4,800,000
II. ACCOUNTING FOR WASTING ASSETS

Recognition of depletion in the financial statements


Use the following information for the next two questions:
In 20x1, OBSTREPEROUS Mining Corp. acquired the right to use 1,000 acres of land to mine for gold.
The lease cost is ₱200,000,000, and the related exploration costs on the property amounted to
₱40,000,000. It is the policy of OBSTREPEROUS Mining Corp. to capitalize all costs of exploration and
evaluation of mineral resources. Intangible development costs for drilling, tunnels, shafts, and wells
incurred before opening the mine amounted to ₱340,00,000. At the end of the mine’s economic useful
life, OBSTREPEROUS Mining Corp. is required by legislation to restore the site. Estimated restoration
costs have a fair value of ₱20,000,000. OBSTREPEROUS Mining Corp. estimates that the mine will
provide approximately 100,000,000 ounces of gold. Actual ounce of gold mined in 20x2 totaled 300,000
ounces.

1. How much is the depletion charge in 20x2?


a. 1,740,000 b. 1,800,000 c. 165,000 d. 150,000

2. Assuming that of the 300,000 ounces of gold extracted in 20x2, 280,000 ounces were sold and
20,000 ounces remain in inventory. How much depletion is recognized in the (a) statement of
financial position and (b) statement of profit or loss and other comprehensive income?
Statement of financial position Statement of profit or loss
a. 1,680,000 120,000
b. 116,000 1,624,000
c. 11,000 154,000
d. 120,000 1,680,000

Changes in estimates
Use the following information for the next two questions:
In 20x1, BUCOLIC Co. acquired land for a total cost of ₱40,000,000 to be used to quarry marble,
limestone, and construction aggregates. Costs incurred to obtain legal right to explore the property
amounted to ₱8,000,000. Expenditures incurred in the exploration for and evaluation of mineral resources
before technical feasibility and commercial viability of extracting a mineral resource are demonstrable
totaled ₱12,000,000. Intangible development costs of drilling, tunnels, shafts, and wells before the actual
production totaled ₱20,000,000. BUCOLIC Co. estimates that total recoverable reserves are 100,000,000
units. Furthermore, BUCOLIC Co. expects to sell the land for ₱4,800,000 after resource is depleted.
However, no buyer will pay this price unless the mine is drained, filled and leveled, a process that will cost
₱800,000. It is BUCOLIC’s policy to capitalize all exploration costs.

Actual units quarried in 20x1 through 20x4 totaled 30,000,000 units. On January 1, 20x5, BUCOLIC Co.
estimated that remaining recoverable reserves is only 25,000,000 units and after the reserves are
exhausted, the land will be sold for ₱3,200,000. Costs of disposal are estimated at ₱1,200,000. Actual
units quarried in 20x5 totaled 6,000,000 units.

3. How much is the depletion charge in 20x5?


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

4. What is the carrying amount of the wasting asset on December 31, 20x5?
a. 43,852,000 b. 44,272,000 c. 42,720,00 d. 43,952,000

5. In 20x1, INNOCUOUS HARMLESS Co. acquired land to be used to mine coal. Total costs of
acquisition, exploration, and intangible development amounted to ₱40,000,000. It was estimated that
total recoverable reserves is 50,000,000 units. Total units extracted from 20x1 through 20x4 totaled
30,000,000 units. In 20x5, after extracting 5,000,000 units, it was estimated that the remaining
recoverable reserves is 20,000,000 units. How much is the depletion charge in 20x5?
a. 3,200,000 b. 3,333,333 c. 3,266,667 d. 3,400,000

Immovable tangible equipment with shorter life


Use the following information for the next three questions:
In 20x1, RIBALD Co. purchased real estate containing copper for a total cost of ₱64,000,000. Exploration
costs amounted to ₱4,000,000 and intangible development costs of drilling, tunnels, shafts, and wells
totaled ₱16,000,000. Movable tangible equipment costs for heavy equipment totaled ₱32,000,000 and
immovable tangible equipment costs for drilling rig foundation totaled ₱24,000,000.
Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated that 300,000 units will
be extracted each year. The heavy equipment and the drilling rig foundation have estimated useful lives
of 10 years and 5 years, respectively. Actual units extracted during 20x1 are 320,000 units.

6. How much is the 20x1 depreciation on the immovable tangible equipment?


a. 4,800,000 b. 3,428,571 c. 4,571,429 d. 3,200,000

7. How much is the 20x1 depletion of the natural resource?


a. 12,800,000 b. 16,428,571 c. 15,229,879 d. 14,679,097

8. How much is the 20x1 depreciation on the movable tangible equipment?


a. 3,428,571 b. 3,200,000 c. 4,800,000 d. 4,571,429

Immovable tangible equipment with longer life


Use the following information for the next three questions:
In 20x1, DIAPHANOUS Co. purchased real estate containing copper for a total cost of ₱64,000,000.
Exploration costs amounted to ₱4,000,000 and intangible development costs of drilling, tunnels, shafts,
and wells totaled ₱16,000,000. Movable tangible equipment costs for heavy equipment totaled
₱32,000,000 and immovable tangible equipment costs for drilling rig foundation totaled ₱24,000,000.

Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated that 300,000 units will
be extracted each year. The heavy equipment and the drilling rig foundation have estimated useful lives
of 20 years and 10 years, respectively. Actual units extracted during 20x1 are 320,000 units.

9. How much is the depreciation on the immovable tangible equipment?


a. 3,657,600 b. 3,480,000 c. 3,460,800 d. 3,260,800

10. How much is the depletion on the natural resource?


a. 12,832,677 b. 11,988,322 c. 13,489,00 d. 12,800,000

11. How much is the depreciation on the movable tangible equipment?


a. 1,573,290 b. 1,620,000 c. 1,613,890 d. 1,600,000

No production in a period
Use the following information for the next two questions:
In 20x1, THRALL Co. purchased real estate containing copper for a total cost of ₱40,000,000. Immovable
tangible equipment costs for drilling rig foundation totaled ₱20,000,000. Estimated recoverable reserves
from the mine are 1,000,000 units. It is estimated that 100,000 units will be extracted each year;
therefore, the life of the mine in years is 10 years. The drilling rig foundation has an estimated useful life
of 15 years.

Actual units extracted from 20x1 through 20x3 totaled 340,000 units. No units were extracted during 20x4
due to an employee strike. Extraction resumed in 20x5 and total units extracted during that year was
80,000 units.

12. How much is the depreciation charge on the immovable tangible equipment in 20x4?
a. 980,967 b. 1,090,800 c. 1,100,000 d. 1,200,000

13. How much is depreciation charge on the immovable tangible equipment in 20x5?
a. 1,400,000 b. 1,466,667 c. 1,500,000 d. 1,600,000

Liquidating dividends
14. MYNHEER MISTER Co. has the following balances in its accounts as of December 31, 20x1:
Resource deposit – coal mine 40,000,000
Accumulated depletion 16,000,000
Ordinary share capital 80,000,000
Capital liquidated 8,000,000
Unappropriated retained earnings 20,000,000
Inventory (600,000 units) 28,000,000
Depletion rate per unit 6.00 per unit

How much is the maximum amount that can be declared as dividends?


a. 24,400,000 b. 32,400,000 c. 28,000,000 d. 31,600,000

III.
BORROWING COSTS
Specific borrowing
1. On January 1, 20x1, HOMILY Co. borrowed ₱20 million to finance the construction of a new building.
Interest is payable on the loan at 8%. Stage payments were due throughout the construction period
and therefore excess funds were invested during that period. By the end of the project on December
31, 20x1, investment income of ₱600,000 had been earned. How much is the capitalizable borrowing
cost?
a. 1,600,000 b. 1,000,000 c. 600,000 d. 0

General borrowing
2. On January 1, 20x1, ENERVATE Company had the following borrowings made for general purposes
and a part of the proceeds was used to finance the construction of a qualifying asset.

Principal
12% short-term note ₱ 40,000,000
14% bank loan (3-year) 72,000,000
16% note payable (5-year) 88,000,000

The construction of the qualifying asset was started on immediately and expenditures incurred on the
qualifying asset were as follows:
Jan. 1 ₱19,200,000
Mar. 31 8,800,000
July 30 14,000,000
October 1 21,600,000
December 31 1,200,000

How much is the capitalizable borrowing cost?


a. 28,960,000 b. 7,556,423 c. 5,362,428 d. 0

General borrowing (expenditures incurred evenly)


3. On January 1, 20x1, MAGISTERIAL Company had the following borrowings made for general
purposes and a part of the proceeds was used to finance the construction of a qualifying asset.

Principal
12% short-term note ₱ 40,000,000
14% bank loan (3-year) 72,000,000
16% note payable (5-year) 88,000,000

The construction started on January 1 and was completed on December 20x1. The total cost of
construction was ₱72,000,000 which was incurred evenly during the year. How much is the capitalizable
borrowing cost?
a. 28,960,000 b. 5,212,800 c. 5,362,428 d. 0

Specific and General borrowing


4. On January 1, 20x1, OMNIPRESENT Co. contracted for the construction of a building for
₱80,000,000 on a land that it had previously purchased. The building was completed on December
20x1. The following payments were made to the contractor:

Payment date Amount


January 1, 20x1 ₱ 8,000,000
March 31, 20x1 24,000,000
September 30, 20x1 40,000,000
December 31, 20x1 8,000,000

The following represents the borrowings of OMNIPRESENT Co. as of December 31, 20x1.
 10%, ₱28,000,000, 4-year note dated January 1, 20x1 with simple interest payable annually,
specifically borrowed to finance the construction project. Interest income earned on the temporary
investment of the proceeds is ₱480,000.

 12.5%, ₱40,000,000, 10-year note dated January 1, 20x1 with interest payable annually

 10%, ₱60,000,000, 10-year note dated December 31, 19x9 with interest payable annually

How much is the capitalizable borrowing cost?


a. 13,320,000 b. 3,200,000 c. 2,867,343 d. 0

Specific borrowing used for general purposes


5. UBIQUITOUS Co. started construction of a new office building on January 1, 20x1. Funds borrowed
specifically for the construction the building is ₱8,000,000 accruing interest at 10% annually.
However, a part of the borrowing is used for other business requirements during the year. Investment
income earned on temporary investments of proceeds from the borrowing amounted to ₱48,000
which was received in cash on September 1, 20x1. Expenditures on the building amounted
₱7,200,000 which was incurred evenly during the year. How much is the capitalizable borrowing
cost?
a. 358,400 b. 324,800 c. 289,600 d. 0

Limit on average expenditures


6. RETRENCH Co. started construction of a qualifying asset for CUT DOWN, Inc. on January 1, 20x1.
The following were expenditures incurred on the construction.

Date Expenditures
January 1, 20x1 4,000,000
May 1, 20x1 1,800,000
December 1, 20x1 2,880,000

 Included in the January 1, 20x1 expenditures is cost of materials purchased on account for ₱400,000.
The account was settled on July 1, 20x1.

 Included in the May 1, 20x1 expenditures is ₱40,000 cost of materials obtained in exchange for old
equipment.

Progress billings during the year are as follows:


Date of billing Amount billed Date billings were collected
April 1, 20x1 800,000 June 1, 20x1
September 1, 20x1 2,400,000 November 1, 20x1

 Payments on billings are subject to 10% withholding by CUT DOWN, Inc.

 RETRENCH Co. determined the capitalization rate to be 10%.

How much is the capitalizable borrowing cost?


a. 646,000 b. 546,000 c. 446,000 d. 0

Extended period of construction


Use the following information for the next four questions:
CONVALESCE Co. started construction of a qualifying asset for RECOVER, Inc. on January 1, 20x1. The
following were expenditures incurred on construction.

Date Expenditures
Year 20x1
January 1, 20x1 4,000,000
May 1, 20x1 1,800,000
December 1, 20x1 2,880,000

Year 20x2
January 1, 20x2 3,600,000
August 30, 20x2 1,200,000

Year 20x3
July 1, 20x3 2,400,000

COVALESCE Co. determined the capitalization rate to be 10%. The construction of the qualifying asset
was substantially completed on September 30, 20x3.

7. How much is the capitalizable borrowing cost in 20x1?

a. 430,000 b. 445,0000 c. 544,000 d. 645,000

8. How much is the capitalizable borrowing cost in 20x2?


a. 1,233,400 b. 1,322,400 c. 1342,400 d. 1,440,400
9. How much is the capitalizable borrowing cost in 20x3?
a. 1,210,980 b. 1,233,400 c. 1,435,980 d. 1,580,980

10. How much is the total cost of the constructed qualifying asset on September 30, 20x3?

a. 18,957,830 b. 19,776,830 c. 13,765,380 d. 18,957,380

IMPAIRMENT OF ASSETS

Costs of disposal
1. On December 31, 20x1, QUIRK Co. identified that its machinery with a carrying amount of
₱4,000,000 has been impaired. In estimating the recoverable amount, QUIRK determined that the fair
value of the asset is ₱3,200,000. The following costs were also estimated:

Transaction taxes ₱200,000


Legal costs, stamp duty, commissions, and similar fees 40,000
Costs of dismantling or removing the asset included in
provision for restoration and decommissioning cost 20,000
Termination benefits and costs associated with reducing
or reorganizing a business following the disposal of an
asset 60,000
QUIRK does not have any reason to believe that the value in use of the asset materially exceeds fair
value less costs of disposal. How much is the impairment loss?
a. 1,120,000 b. 1,060,000 c. 1,040,000 d. 800,000

Value in use
2. On December 31, 20x1, MASSIVE Co. identified that its building with a carrying amount of
₱2,400,000 has been impaired. In estimating the recoverable amount, MASSIVE has determined that
the fair value less costs of disposal of the asset is ₱1,600,000.

In estimating the value in use, MASSIVE determined the following:


Future cash in Future cash out
Year flows flows
20x1 1,200,000 400,000
20x2 1,120,000 400,000
20x3 1,040,000 320,000

Additional information:
 Each year’s estimated future cash flows include ₱40,000 representing cash outflows from future
restructuring not yet committed and ₱20,000 representing cash outflows on planned improvement and
enhancement of the asset.
 Not included in the estimated future cash flows are costs of day-to-day servicing of the asset
amounting to ₱8,000 per year.
 The discount rate is 10%.

How much is the impairment loss?


a. 407,424 b. 456,773 c. 365,472 d. 412,365

Value in use – with residual value


3. On December 31, 20x1, HEARTEN Co. identified that its intangible asset with a carrying amount of
₱2,400,000 has been impaired. In estimating the recoverable amount, HEARTEN has determined
that the fair value less costs of disposal of the intangible asset is ₱1,600,000. HEARTEN estimated
that the future net cash flows expected to arise from the continuing use of the asset is ₱400,000 per
year for the remaining useful life of 5 years. The estimate of future cash flows includes cash out flows
for income taxes and financing activities totaling ₱40,000 per year. The equipment has a residual
value of ₱80,000. The discount rate is 10%. How much is the impairment loss?
a. 628,384 b. 682,384 c. 289,334 d. 298,902

Recoverable amount exceeding Carrying amount


4. One of OFFSHOOT Co.’s plant has a carrying amount of ₱3,200,000 and a value in use of
₱3,120,000. A recent market transaction for a similar plant involved a net selling price of ₱3,280,000.
How much is the impairment loss?
a. 80,000 b. 160,000 c. 320,000 d. 0

Impairment loss on newly constructed asset


5. LUCRATIVE Co. has just completed constructing a new building. Costs incurred are shown below:
Materials, labor, and overhead ₱2,800,000
Borrowing costs appropriately capitalized 320,000
Total construction costs ₱3,120,000

If the recoverable amount of the building is ₱3,000,000, how much is the impairment loss?
a. 120,000 b. 200,000 c. 320,000 d. 0

Impairment loss – subsequent depreciation


6. On January 1, 20x1, RIGHTEOUS Co. acquired an equipment for ₱2,000,000. The equipment is
depreciated using the straight line method over an estimated useful life of 10 years and residual value
of ₱200,000.
On January 1, 20x6, RIGHTEOUS Co. determined that the equipment is impaired. Fair value less costs of
disposal is ₱560,000. Projected future net cash flows from revenues produced by the equipment is
₱200,000 annually. The revised estimated useful life is 4 years and the new estimated residual value is
₱40,000. The appropriate discount rate is 10%. How much is the depreciation expense in 20x6?
a. 156,732 b. 155,324 c. 155,132 d. 154,324

Impairment loss – Revaluation model


7. Information on LISTLESS Co.’s impaired building is shown below:
Carrying amount 3,200,000
Revaluation surplus 320,000
Fair value less costs of disposal 2,800,000
Value in use 2,720,000
How much is the impairment loss?
a. 80,000 b. 400,000 c. 320,000 d. 0

Impairment loss – Intangible asset with indefinite useful life


8. INSUPERABLE UNSURPASSABLE Co. determined that its trademark is impaired. INSUPERABLE
cannot estimate reliably the trademark’s fair value less costs of disposal. However, the following
information has been determined:

Carrying amount ₱520,000


Annual future cash flows from the trademark 40,000
Discount rate 10%
How much is the impairment loss?
a. 0 b. 80,000 c. 120,000 d. 400,000

Impairment loss – asset to be disposed of


9. One of MIME Co.’s machines has been impaired. Repairs and maintenance costs on the machine
have been increasing over the past years making the machine a bottleneck in MIME’s production. At
year-end, management made a decision to sell the machine as soon as a pending application for a
loan is approved and a replacement machine is acquired. Information on the machine is shown
below:
Carrying amount ₱400,000
Fair value less costs of disposal 200,000
Value in use 240,000
How much is the impairment loss?
a. 0 b. 160,000 c. 40,000 d. 200,000

Allocation of goodwill – business combination


10. At the end of 20x1, EXIGENCY Co. acquires PRESSING NEED Corp. for ₱40,000,000. PRESSING
NEED has manufacturing plants in three countries. Data at the end of 20x1 is shown below.
Fair Value of identifiable assets
Activities in Country #1 ₱4,000,000
Activities in Country #2 12,000,000
Activities in Country #3 16,000,000
Total fair value of identifiable assets ₱32,000,000
How much goodwill is allocated to each to the CGU in Country #3?
a. 16,000,000 b. 3,000,000 c. 4,000,000 d. 0

Allocation of goodwill – disposal of portion of CGU


11. SOP SOAK Co. has a cash-generating unit for which goodwill of ₱240,000 was allocated. During the
year, an operation that was part of the CGU was sold for ₱2,000,000. The relative values of the
portions sold and retained cannot be determined reliably. Information on the assets included in the
CGU is as follows:
Carrying amount of operation sold excluding goodwill ₱1,600,000
Carrying amount of portion not sold excluding goodwill 4,800,000
Total carrying amount of CGU excluding goodwill ₱6,400,000
How much is the gain or loss on the sale of the operation?
a. 340,000 b. 400,000 c. 60,000 d. 0

Reallocation of goodwill
12. EXUBERANT Co. previously allocated ₱240,000 goodwill to CGU A. The goodwill allocated to CGU
A cannot be identified or associated with an asset group at a level lower than CGU A, except
arbitrarily. During the year, EXUBERANT Co. reorganizes its reporting structure such that CGU A is
divided and integrated into three other cash-generating units – CGU’s B, C and D. Additional
information is shown below:

CG Fair
U values
B 800,000
C 1,600,000
D 2,400,000
4,800,000

At the end of the year, CGU D is sold for ₱2,000,000 when its carrying amount is ₱2,320,000 excluding
allocated goodwill. How much is the gain (loss) on the sale?
a. (320,000) b. 440,000 c. (420,000) d. (440,000)
Impairment loss of CGU – no goodwill allocated
Use the following information for the next two questions:
NEGATE Co. determined that one of its cash-generating units is impaired. Information on the assets of
the CGU is shown below:
Carrying
Assets amount
Inventory 800,000
Investment property (at cost model) 1,600,000
Building 2,400,000
4,800,000

It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value less costs of disposal is
₱3,200,000.
13. How much is the impairment loss?
a. 2,100,000 b. 1,600,000 c. 1,200,000 d. 1,000,000
14. How much is the carrying amount of the building after the impairment testing?
a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000

Impairment loss of CGU – with allocated goodwill


Use the following information for the next two questions:
INSTIGATE Co. determined that one of its cash-generating units is impaired. Information on the assets of
the CGU is shown below:
Carrying
Assets amount
Inventory 800,000
Investment property (at cost model) 1,600,000
Building 2,400,000
Goodwill 1,200,000
6,000,000

It was estimated that the value in use of the CGU is ₱3,600,000 and its fair value less costs of disposal is
₱2,400,000.
15. How much is the impairment loss?
a. 4,200,000 b. 3,200,000 c. 2,400,000 d. 2,000,000
16. How much is the carrying amount of the building after the impairment testing?
a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000
Impairment loss of CGU – Limit on allocation of impairment loss
Use the following information for the next two questions:
TRICE Co. determined that one of its cash-generating units is impaired. Information on the assets of the
CGU is shown below:
Carrying
Assets amount
Inventory 800,000
Investment property (at cost model) 1,600,000
Building 2,400,000
Goodwill 1,200,000
  6,000,000

 It was estimated that the value in use of the CGU is ₱3,200,000 and its fair value less costs of disposal
is ₱3,600,000.
 The building’s fair value less costs of disposal is ₱2,040,000.
17. How much is the impairment loss?
a. 4,200,000 b. 3,200,000 c. 2,400,000 d. 2,000,000
18. How much is the carrying amount of the building after the impairment testing?
a. 1,680,000 b. 1,120,000 c. 1,860,000 d. 2,040,000

Impairment of individual asset belonging to a CGU


Use the following information for the next two independent cases:
One of the machines of SKEWER Co. has suffered physical damage but is still working, although not as
well as before it was damaged. The machine does not generate independent cash inflows. The smallest
identifiable group of assets that includes the machine and generates cash inflows that are largely
independent of the cash inflows from other assets is the production line to which the machine belongs.
Information on the machine and the production line is shown below:
Carrying amount of machine ₱ 800,000
Fair value less costs of disposal of machine 600,000
Carrying amount of production line 32,000,000
Recoverable amount of production line 36,000,000

Case #1:
19. The budgets/forecasts approved by management reflect no commitment of management to replace
the machine. How much is the impairment loss?
a. 4,000,000 b. 200,000 c. 3,800,000 d. 0

Case #2:
20. The budgets/forecasts approved by management reflect a commitment of management to replace the
machine and sell it in the near future. Cash flows from continuing use of the machine until its disposal
are estimated to be negligible. How much is the impairment loss?
a. 4,000,000 b. 200,000 c. 3,800,000 d. 0

Impairment of individual asset – with commitment for disposal


21. ASININE Co. determined that one of its cash-generating units is impaired. Information on the assets
of the CGU is shown below:

Carrying
Assets amount
Inventory 800,000
Investment property (at cost model) 1,600,000
Building 2,400,000
Goodwill 1,200,000
6,000,000

 The recoverable amount of the CGU was estimated at ₱5,600,000.


 The building’s fair value less costs of disposal is ₱1,600,000. Management is committed on selling the
building.
How much is the impairment loss?
a. 0 b. 400,000 c. 600,000 d. 800,000

Carrying amount of a CGU – Financial instruments excluded


22. EXUBERANT Co. determined that its CGU has been impaired. Information on the CGU is shown
below:
Cash 400,000
Accounts receivable 800,000
Inventory 2,000,000
Machinery – net 4,000,000
Other intangible assets 800,000
Goodwill 400,000
Accounts payable (1,200,000)
Accrued liabilities (1,600,000)
Total 5,600,000

The recoverable amount of the CGU is ₱4,000,000, representing the CGU’s value in use. EXUBERANT
Co. excluded cash flows from financial assets and recognized liabilities when the value in use was
computed
How much is the impairment loss?
a. 3,200,000 b. 3,600,000 c. 4,000,000 d. 0

Carrying amount of a CGU – including financial instruments


23. INFRACTION Co. determined that its CGU has been impaired. Information on the CGU is shown
below:

Cash 400,000
Accounts receivable 800,000
Inventory 2,000,000
Machinery – net 4,000,000
Other intangible assets 800,000
Goodwill 400,000
Accounts payable (1,200,000)
Accrued liabilities (1,600,000)
Total 5,600,000

The recoverable amount of the CGU is ₱2,400,000, representing the CGU’s value in use. INFRACTION
Co. included cash flows from financial assets and recognized liabilities when the value in use was
computed
How much is the impairment loss?
a. 3,200,000 b. 3,600,000 c. 4,000,000 d. 0

Allocation of corporate asset


24. On December 31, 20x1, BAFFLE Co. determined that an EDP equipment, a mainframe computer
used as server in BAFFLE’s network, might have been impaired. There are three cash-generating
units using this mainframe computer. Information on these assets is shown below:

  Carrying amount Recoverable amount


CGU #1 8,000,000 8,000,000
CGU #2 24,000,000 28,000,000
CGU #3 32,000,000 40,000,000
Corporate asset - Mainframe 12,000,000 N/A
  76,000,000 76,000,000
How much is the impairment loss?
a. 0 b. 2,000,000 c. 2,666,667 d. 3,133,333

Impairment loss – restoration and decommissioning costs


25. INSUPERABLE Co. determined that its CGU (comprising INSUPERABLE’s mining operations in a
foreign country) is impaired. The laws in that foreign country require INSUPERABLE to restore the
mining site at the end of the wasting asset’s useful life. INSUPERABLE made a provision for
decommissioning and restoration costs10 years ago when it started operations. At year-end, the
carrying amount of the provision is ₱2,400,000 which is equal to the present value of the obligation.
INSUPERABLE Co. recently received various offers to buy the mine at around ₱3,600,000. This price
reflects the fact that the buyer will assume the obligation to restore the overburden. Disposal costs for the
mine are negligible. The value in use is ₱5,600,000 excluding decommissioning and restoration costs.
The carrying amount of the mine is ₱4,800,000.
How much is the impairment loss?
a. 800,000 b. 1,600,000 c. 1,200,333 d. 0

Impairment reversal – Revaluation model


Use the following information for the next two questions:
On January 1, 20x1, FALLACIOUS Co. acquired a building for ₱4,000,000. The asset is depreciated
using the straight line method over an estimated useful life of 10 years.
On January 1, 20x6, the building was estimated to have a recoverable amount of ₱1,600,000.
Consequently, impairment loss was recognized on that date. There was no change in the estimated
useful life.
On January 1, 20x9, the building was estimated to have a new recoverable amount of ₱2,400,000 and a
remaining useful life of 3 years. The building is measured under the revaluation model.
26. How much of the impairment reversal is recognized in profit or loss?
a. 160,000 b. 1,760,000 c. 1,600,000 d. 0

27. How much of the impairment reversal is recognized in equity?


a. 160,000 b. 1,760,000 c. 1,600,000 d. 0

Impairment reversal – Cost model


Use the following information for the next two questions:
On January 1, 20x1, RAMIFICATION Co. acquired a building for ₱4,000,000. The asset is depreciated
using the straight line method over an estimated useful life of 10 years.

On January 1, 20x6, the building was estimated to have a recoverable amount of ₱1,600,000.
Consequently, impairment loss was recognized on that date. There was no change in the estimated
useful life.

On January 1, 20x9, the building was estimated to have a new recoverable amount of ₱2,400,000 and a
remaining useful life of 3 years. The building is measured under the cost model.
28. How much of the impairment reversal is recognized in profit or loss?
a. 160,000 b. 1,760,000 c. 1,600,000 d. 0

29. How much of the impairment reversal is recognized in equity?


a. 160,000 b. 1,760,000 c. 1,600,000 d. 0

Non-reversal of goodwill - with Extrapolation


Use the following information for the next four questions:
After a year of operations, STRATUM Co. is calculating the value in use of one of its cash-generating unit
on January 1, 20x2. Data is shown below.
Year Year-end Future Cash Flows
20x2 ₱ 920
20x3 1,012
20x4 1,092
20x5 1,160
20x6 1,216

The appropriate discount rate was determined to be 15%. Projections of future cash flows should be
extended up to 11 years. The long-term growth rates were determined as 3%, -2%, -6%, -15%, -25% and
-67% from year 20x7 up to year 2x12.

The gross carrying amount of the CGU is ₱12,000, inclusive of ₱4,000 allocated goodwill. As of January
1, 20x2, the CGU has an accumulated depreciation of ₱668.

On December 31, 20x3, the entity estimates a revised recoverable amount of ₱7,640.

30. How much is the total undiscounted future cash flows?


a. 10,993 b. 5,444 c. 9,364 d. 4,987

31. How much is the value in use?


a. 10,992 b. 5,444 c. 9,364 d. 4,987

32. How much is the impairment loss?


a. 5,888 b. 5,444 c. 6,345 d. 1,888

33. How much is the reversal of impairment loss to be recognized in profit or loss on December 31,
20x3?
a. 0 b. 1,588 c. 1,635 d. 1,545

NOTHING FOLLOWS

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