INTACC 2 Notes Handouts

RIZAL TECHNOLOGICAL UNIVERSITY
One Dream, One Team
STUDENT HANDOUTS
FINANCIAL ACCOUNTING AND REPORTING HARLEY DAVE I. PUNZALAN
FAR.114—INVENTORIES MAY 2021 CPALE REVIEW
LEARNING OBJECTIVES
1. Enumerate items that are included and excluded from 6. Determine the effect of inventory and purchases error to
inventories. the net income the company.
2. Determine the inventoriable expenditures and the initial 7. Determine the subsequent measurement and compute the
measurement of inventory. inventory impairment and reversal of impairment.
3. Understand and account the different shipping terms. 8. Understand the different cost formulas:
4. Differentiate the periodic from perpetual inventory system. a. First in, first out method
b. Weighted average method
5. Differentiate the gross method and net method in
c. Specific identification method
accounting for cash discount.
9. Understand the concept and accounting the purchase
commitment.
REVIEW NOTES
Inventories (LO 1) – Are assets: Without transfer of title – included to seller. The following
1. Held for sale in the ordinary course of business: shipping terms are without transfer of title:
 Finished goods  FOB destination
 Merchandise inventory  FOB buyer
 FOB ex-ship
2. In the process of production for such sale (Work-in-
c. Sale with special terms:
process):
 Raw materials used With transfer of title – included to buyer. The following
 Direct labor applied special terms are with transfer of title:
 Manufacturing (Factory) overhead applied
1. Bill and Hold Sale – Sale agreement where the seller
3. In the form of materials or supplies to be consumed in the agree to bill the buyer even though the goods are still
production process or in rendering of services. undelivered for the convenience of the buyer.
 Raw materials unused
2. Special Order – Order customized for a certain buyer
 Factory supplies
and cannot be sold to other buyers.
Marketing and office supplies are excluded because it is not 3. Sale on Installment – The goods are delivered even
consumed in the production process. It can included as prepaid though the price is still substantially unpaid.
asset or other-current asset.
Without transfer of title – included to seller. The following
When to Include or Exclude Inventory? special terms are without transfer of title:
Rule of possession – whoever possess the goods, holds the title
1. Lay Away Sale – The goods will not be delivered unless
to the goods and should be included in their inventory. There
the price is substantially paid.
are three exception to the rule of possession:
2. Sale on Approval – The seller provides a trial period to
a. Goods on Consignment
the buyer. If not satisfied the buyer has the right to
Consignor (shipped, sent out) – included return the goods to the seller.
Consignee (held on, received) – excluded
3. Sale with Buy Back Agreement – This is accounted
using the substance of the transaction instead of the
b. Goods in transit
form. This is accounted as a loan where the inventory
With transfer of title – included to buyer. The following is used as a collateral.
shipping terms are with transfer of title:
 FOB shipping point What Expenditures Are Inventoriable? (LO 2)
 FOB seller
 FOB cost, insurance, freight (CIF) The cost of inventories shall comprise:
 FOB free alongside (FAS)
1. Cost of purchase:
 Purchase price
 Import duties
0961-718-5293; 0936-407-4780; (02)-8376-0405 www.arccpalereview.com Page 1 of 12

FAR | FAR.112—INVENTORIES ARC – ACCOUNTANCY REVIEW CENTER
 Irrecoverable taxes Payable Deduction to

 Freight-in Cash
 Handling and other cost directly attributable
Freight-in &
FOB Shipping Point
2. Cost of conversion: Deduction to Ignore
Freight Collect
 Direct labor Cash
 Factory overhead Freight-out
FOB Destination
Ignore Deduction to
3. Other cost incurred in bringing the inventory into its Freight Prepaid
Cash
present location and condition.
Deduction to
Clarifications: Freight-out
FOB Destination Payable and
Deduction to
1. Freight Freight Collect Deduction to
Receivable
 Freight in – included Cash
 Freight to consignees – included
 Freight out – excluded
Trade and Cash Discounts (LO 4)
2. Insurance
 Insurance during transportation – included The formula in computing the cash price of inventory is as
 Insurance after transportation – excluded follows:
List price XX
3. Storage
Trade discount (XX)
 Storage of work-in-process – included
Invoice price XX
 Storage of raw materials – excluded
Cash discount (XX)
 Storage of finished goods – excluded
Cash price XX
4. Waste, spoilage and repair cost of material, labor and
Trade and Cash Discounts:
overhead
 Normal – included
 Abnormal – excluded Trade Cash
5. Interest incurred Reason/s of Reason other than Encourage prompt

 Non routinely produce inventory – included Discount prompt payment payment
 Routinely produce inventory – excluded
Accounting Not recorded Recorded using
6. Professional fees Treatment separately either Gross or Net
 Related to purchase – included (Purchases/Sales is method
 Related to sale – excluded recorded net of
trade discount)
7. Cost of damaged goods
 On saleable condition – included Gross and Net method of recording purchases:
 On unsaleable condition – excluded
Gross Method Net Method
Shipping Terms (LO 3)
Who actually Purchase is initially Purchase is initially

Who should pay? Initial recorded at invoice recorded at cash
paid?
recording price price
FOB Shipping Point
Buyer Seller (gross of discount) (net of discount)
Freight Prepaid
FOB Shipping Point When Discount is deducted No adjustment –
Buyer Buyer discount is to the purchases deducted already
Freight Collect
taken
FOB Destination
Seller Seller
Freight Prepaid When No adjustment – Discount foregone
discounts discount foregone is reported as
FOB Destination
Seller Buyer not taken already included in “discount lost”
Freight Collect
purchases included as other
expense
Accounting Treatment:
Buyer Seller Inventory System (LO 5)
FOB Shipping Point Freight-in & Additional
Freight Prepaid Additional Receivable &
Page 2 of 12
Two inventory system are offered in accounting for inventories, Dr. Accounts receivable XX
namely periodic inventory system and perpetual inventory Cr. Sales XX
system: Sale on
account
Dr. Cost of goods sold XX
Periodic Perpetual Cr. Inventory XX
Return of Dr. Sales return XX

Requires stock cards that
Requires physical counting of sale Cr. Accounts receivable XX
contains the inflow and
the goods to determine
outflow and balance of
quantities
inventory When perpetual inventory system is used, a physical count of
Use for individually small Use for individually large the units on hand should at least be made once a year to
value inventories value inventories determine the accuracy of the accounting records.
Cost of goods sold is computed
Cost of goods sold is If the physical count indicates different amount from the
at the end of the period as
computed every time goods accounting record, the accounting record should be adjusted and
follows:
are sold: the physical count should prevail.
Inventory beg. XX
Selling price XX Inventory, per perpetual record XX
Net purchases XX
Cost ratio *XX Inventory, per physical count (XX)
Inventory end. (XX)
Cost of goods sold XX Shortage XX
Cost of goods sold XX
If the shortage is normal, it is closed to cost of goods sold

Periodic Inventory System – Journal Entries
account. On the other hand, if the shortage is abnormal it is
classified and presented as other expenses.
Transaction Entry
Purchase on Dr. Purchases XX Inventory Errors (LO 6)

account Cr. Accounts payable XX
For periodic inventory system, to determine the cost of goods
Payment of Dr. Freight-in XX sold, the amount of beginning inventory, purchases and ending
freight Cr. Cash XX inventory should be determined. Any error from such amount
will result to erroneous cost of goods sold and subsequently
Return of Dr. Accounts payable XX
erroneous net income.
purchased Cr. Purchase return XX
Sale on Dr. Accounts receivable XX Relationship to Cost Relationship to Net

account Cr. Sales XX of Goods Sold Income
Beginning
Return of Dr. Sales return XX Direct Inverse
Inventory
sale Cr. Accounts receivable XX
Net Purchases Direct Inverse
To record Dr. Cost of goods sold XX
cost of goods Dr. Inventory XX Ending
Inverse Direct
sold and Dr. Purchase return XX Inventory
remaining Cr. Purchases XX
inventory Cr. Freight-in XX Sales No Effect Direct
Periodic Inventory System – Journal Entries

For perpetual inventory system, the cost of goods sold is
Transaction Entry determined by multiplying the sales to cost ratio. Thus, the cost
of goods sold is affected by the sales account.
Purchase on Dr. Inventory XX
account Cr. Accounts payable XX Relationship to Cost Relationship to Net
of Goods Sold Income
Payment of Dr. Inventory XX
freight Cr. Cash XX Sales Direct Direct
Return of Dr. Accounts payable XX Inventory,

Direct Inverse
purchased Cr. Inventory XX Per Record
Inventory,
Physical Inverse Direct
Count
Page 3 of 12
The measurement of raw material will remain at cost if the

Subsequent Measurement & Impairment (LO 7) finished goods in which it will be incorporated are expected to
be sold above total cost.
Inventories shall be subsequently measured at the lower of cost
or net realizable value (NRV). NRV is the estimated selling
However, it will be written down to its NRV (replacement cost)
price less the estimated cost of completion and the estimated
if the total cost is higher than the expected selling price.
cost of disposal.
COMPUTATION:
However, for problem solving purposes, the computation of
NRV will depend on the type of inventory:
Cost of raw materials XX
Cost to complete XX
Type NRV Cost to sell XX
Total cost XX
Estimated selling price XX
Finished Estimated cost to repair (XX) GUIDE:
Goods Estimated cost to sell (XX)
NRV XX Measurement of
Scenario
Estimated selling price XX Raw Material
Work in Estimated cost to complete (XX)
process Estimated cost to sell (XX) Total Cost > Estimated Selling Price Replacement Cost
NRV XX
Total Cost < Estimated Selling Price Cost
Raw
Replacement cost XX
materials
Allowance Method VS. Direct Write Off Method
Allowance method and direct write off method are both

acceptable by the standard since it will provide the same
Lower of Cost of Net Realizable Value (LCNRV) amount of cost of goods sold and inventory.
LCNRV should be computed on an item per item basis or The only difference is that, in allowance method – impairment
individually and not on a total basis. The cost of each item is is separated from cost of goods sold, while in direct write off the
compared to the NRV and select the lower amount. Each lower impairment is already included in the cost of goods sold.
amount should be totaled to obtain the LCNRV of the whole
inventory. Cost of Goods Sold – With Impairment
Impairment of Inventory Impairment of inventory is treated as additional to cost of goods

sold while gain on reversal of impairment is treated as deduction
If the NRV is higher than cost, the measurement of inventory to the cost of goods sold.
will remain at cost and the increase in value is not recognized.
Under periodic inventory system, cost of goods sold requires the
If the NRV is lower than cost, the measurement of inventory beginning inventory, purchases and ending inventory.
should be decreased to its NRV and the decrease in value is
presented as impairment loss. If the allowance method is used, inventory balances used in the
formula in computing cost of goods sold is measured at cost.
COMPUTATION:
If the direct write off method is used, inventory balances used in
1. Ending Inventory – Cost XX formula in computing cost of goods sold is measured at LCNRV.
Ending Inventory – LCNRV (XX)
Ending – Allowance for write down XX COMPUTATION – Allowance Method:
2. Beginning Inventory – Cost XX Beginning inventory – cost XX

Beginning Inventory – LCNRV (XX) Net purchases XX
Beginning – Allowance for write down XX Ending inventory – cost (XX)
Cost of goods sold w/out impairment XX
3. Ending – Allowance for write down XX Impairment loss XX
Beginning – Allowance for write down (XX) Gain on reversal of impairment (XX)
Impairment (reversal of impairment) XX Cost of goods sold with impairment XX
COMPUTATION – Direct Write Off Method:

Impairment of Raw Materials
Page 4 of 12
Beginning inventory – LCNRV XX

Net purchases XX
Ending inventory – LCNRV (XX) Weighted Average Method
Cost of goods sold with impairment XX
Like FIFO, weighted average method can be used in conjunction
with periodic or perpetual inventory system, but unlike FIFO, it
will lead to different amount of cost of goods sold and cost of
ending inventory.
Inventory Cost Flow (LO 8)
Weighted Average – Periodic
There are three (3) cost flow formula that an entity can use,
namely:
The unit cost of goods sold and the unit cost of ending inventory
is the same and that is the average unit cost. The average unit
1. Specific identification method
cost is only computed once and that will apply for the whole
2. First-in, first-out (FIFO) method
period.
3. Weighted average method
Total goods available for sale in Peso
The main issue in inventory cost flow is the: Total goods available for sale in Units = Ave. unit cost
1. Determination of cost of goods sold.

COMPUTATION:
2. Determination of cost of remaining inventory.
1. Cost of goods sold:
Units sold XX
Specific Identification Average unit cost XX
For inventories that are not ordinarily interchangeable and Cost of goods sold XX
segregated for specific projects is the specific identification

2. Cost of ending inventory:
method.
Ending inventory in units XX
Average unit cost XX
If the specific identification is impracticable under the
Cost of ending inventory XX
circumstances, the company may use either FIFO or weighted
average depending on the accounting policy used by the entity.
Weighted Average – Perpetual
In specific identification, unit cost of goods sold and unsold are
This method is also known as moving average. Average unit
identified in the problem that’s why this cost formula is rarely
cost is also computed as the basis of unit sold but unlike periodic
seen the accounting problems.
system, the average unit cost is computed every time there is a
purchase of inventory. Unit cost of inventory sold is based on
the latest average unit cost before each sale.
FIFO Method
Assumes that the goods first purchased or produced are sold first
and the remaining goods came from the latest purchased or
production.
Purchase Commitment (LO 9)
FIFO can be used either periodic or perpetual system.
This is a contract between the company and a certain supplier
Regardless of the inventory system the cost of goods sold and
wherein the company agree to purchase fixed quantity of goods
unsold are the same. The only difference is that:
at fixed purchase price (a.k.a. contract price).
The objective of the company in entering the purchase
Under FIFO periodic commitment is that there should be available supplies at a
certain date the goods are needed and to locked-in the prices.
You are tracing the cost of goods unsold at the end of the period
from the latest purchases. Thus, the cost of ending inventory is
Loss in Entering Purchase Commitment
determined first before determining the cost of goods sold.
If the market price falls below the contract price, the company
will pay more, because instead of purchasing the goods at the
Under FIFO perpetual dropped market price the company should pay the contract
price. Loss and liability from entering the purchase
You are tracing the cost of the goods sold during the period
commitment is recognized.
from the earliest purchases. Thus, the cost of goods sold is
determined first before determining the cost of ending
Gain in Entering Purchase Commitment
inventory.
Page 5 of 12
If the market price raised above the contract price, the company
will pay less, because instead of paying the goods at inflated
price, the company will only pay the contract price. Gain will
be recognized but only up to the extent of loss previously
recognized.
Timing of Loss and Gain

If the year of entering the purchase commitment is in the same
year of delivery of goods, loss is recognized only once. But if
the delivery of goods is in the year subsequent to the year of
entering the contract, loss or gain will be recognize in two
periods, that will be:
1. Year-end of the year the company entered in the

purchase commitment.
2. Date of the delivery.
COMPUTATION:
1. Loss on purchase commitment @ Year-end
Market value at year end XX

Total contract price (XX)
(Loss) on purchase commitment (XX)
2. Loss on purchase commitment @ Delivery date
Market value at delivery date XX

Market value at year end (XX)
(Loss) on purchase commitment (XX)
3. Purchases and accounts payable
Contract price XX
GUIDE:
 Decrease in market value = Loss
 Increase in market value = Gain
 Gain is limited to the previously recorded loss
/ End /
Page 6 of 12
DISCUSSION QUESTIONS
Inventory Composition (LO 1, LO2) C. Administrative overheads that do not contribute to

1. Inventories are assets defined by all of the following, except bringing inventories to their present location and
A. Held for sale in the ordinary course of business. condition
B. In the process of production for such sale. D. Import duties
C. In the form of materials or supplies to be consumed in 5. Presented below is Seduco Company’s December 31, 2021
the production process or the rending or services. balance sheet:
D. Used in the production or supply of goods and services
Goods out on consignment at another
for administrative purpose.
company’s store 800,000
Goods purchased in transit, Free Alongside,
2. Which is incorrect concerning the maritime term FAS (free including delivery cost alongside the vessel
alongside)? of P2,000 but excluding the cost of shipment
A. The seller must bear all expenses and risk in delivering of P1,000 80,000
the goods to the dock next to the vessel on which they Goods purchased FOB shipping point that
are to be shipped. are in transit at December 31 120,000
B. The buyer bears the cost of loading and cost if Goods purchased FOB destination that are in
transit at December 31 200,000
shipment.
Goods sold and delivered on December 20.
C. Title passes to the buyer when the carrier takes
The goods were included in the inventory
possession of the goods. because the sale was accompanied by a
D. Title passes upon receipt of the goods by the buyer. purchase agreement requiring Seduco to buy
back the inventory on February 2022
3. A physical count on December 31, 2021 revealed that 500,000
Valentina Company had inventory with a cost of Goods sold FOB shipping point that are in
P4,400,000. The following items were excluded from this transit December 31 120,000
amount: Freight charges on goods purchased, FOB
shipping point 80,000
 Merchandise of P600,000 is held on consignment by
Factory labor costs incurred on goods still
Valentina.
unsold 50,000
Interest cost incurred for inventories that are
 Goods costing P400,000 was shipped by Valentina “Ex-
routinely manufactured 40,000
ship” to a customer on December 31, 2024. The
Cost incurred to advertise goods held for
customer received the goods on January 3, 2022.
resale 20,000
Materials on hand not yet placed into
 Merchandise costing P500,000 was shipped by
production 350,000
Valentina “Free alongside” to a customer on December
Office supplies 10,000
29, 2024. The customer received the goods on January
Raw materials which the company has
6, 2022.
started production, but which are not
completely processed 280,000
 Goods costing P800,000 shipped by a vendor FOB
destination on December 31, 2021 was received by Factory supplies 20,000
Valentina on January 7, 2022. Goods held on consignment from another 450,000
company
 Goods costing P700,000 was shipped by a supplier “CIF” Costs identified with units completed but not
on December 30, 2021 and received by Valentina on yet sold 260,000
January 10, 2022. Goods sold FOB destination that are in
transit at December 31 40,000
The true amount of inventory on December 31, 2021 is
A 4,900,000 C. 5,500,000 How much of these items would typically be reported as
B. 5,400,000 D. 6,000,000 inventory in the financial statements?
A 2,079,000 C. 2,579,000
4. The following are costs excluded from the cost of B. 2,580,000 D. 3,079,000
inventories, except
A. Abnormal amounts of wasted materials, labor or other Shipping Terms (LO 3)
6. FOB destination point means that
production costs
A. The freight charges are actually to be paid by the seller
B. Storage costs, unless those costs are necessary in the
B. The freight charges are actually to be paid by the buyer
production process before a further production stage
Page 7 of 12
C. The ownership of goods is transferred upon receipt of 12. The use of purchase discounts account implies that the
the goods by the buyer and the seller is the owner of recorded cost of a purchased inventory item is its
the goods while in transit. A. Invoice price
B. Invoice price plus any purchase discount lost
D. The ownership of goods is transferred upon receipt of
C. Invoice price less the purchase discount taken
the goods by the seller and the buyer is the owner of
D. Invoice price less the purchase discount allowable
the goods while in transit. whether taken or not
7. The seller actually paid the freight charges but is not legally
13. The use of a discount lost account implies that the recorded
responsible for the same.
cost of an inventory is
A. FOB destination, freight prepaid
A. Invoice price
B. FOB destination, freight collect
C. FOB shipping point, freight prepaid B. Invoice price plus the purchase discount lost
D. FOB shipping point, freight collect C. Invoice price less the purchase discount taken
D. Invoice price less the purchase discount allowable
8. The buyer paid the shipper freight charges and later asked
whether taken or not
for reimbursement from the seller. The term agreed must
have been
14. On December 3, Francis Company purchased inventory
A. FOB destination point freight prepaid
B. FOB destination point freight collect listed at P8,600 from Lyn Corporation. Terms of the
C. FOB shipping point freight prepaid purchase were 3/10, n/20.
D. FOB shipping point freight collect
Francis Company also purchased inventory from Duck
Company on December 10 for a list price of P7,500. Terms
9. The entry of the buyer to record the settlement of a of the purchase were 3/10, n/30. On December 16, Francis
purchase on account amounting to P100,000 and freight of paid both suppliers for these purchases.
P10,000 on a purchase transaction with terms of FOB
destination, freight prepaid is If Francis uses the net method of recording purchases, the
A. Dr. Freight-in P110,000 journal entry to record the payment on December 16 will
Cr. Cash P110,000 include
B. Dr. Accounts payable P100,000 A. A debit to Accounts payable of P15,875
Cr. Cash P100,000 B. A debit to Purchase Discounts Lost of P258
C. Dr. Accounts payable P 90,000 C. A credit to Purchase Discounts of P258
Cr. Cash P 90,000 D. A credit to Cash of P15,617
D. Dr. Freight-out P 10,000
Cr. Accounts receivable P 10,000
Inventory System (LO 5)
15. An entry debiting inventory and crediting cost of goods sold
10. The entry of the buyer to record the settlement of a would be made when
purchase on account amounting to P100,000 and freight of A. Merchandise is sold and the perpetual inventory is
P10,000 on a purchase transaction with terms of FOB used.
shipping point, freight collect is BONUS B. Merchandise is sold and the periodic inventory method
A. Dr. Freight-in P110,000 is used.
Cr. Cash P110,000 C. Merchandise is returned and the periodic inventory
B. Dr. Accounts payable P100,000 method is used.
Cr. Cash P100,000 D. Merchandise is returned and the perpetual inventory
C. Dr. Accounts payable P 90,000
method is used.
Cr. Cash P 90,000
D. Dr. Freight-out P 10,000
Cr. Accounts receivable P 10,000 16. When a company uses the periodic inventory system in
accounting for its merchandise inventory, which of the
Account for Discount (LO 4)
following is true?
11. Under the gross method of recording purchases,
A. Purchases are recorded in the cost of goods sold
A. Cash discounts are initially ignored and are recorded
account.
only when taken.
B. The inventory account is updated after each sale.
B. Cash discounts are deducted from the cost of inventory
C. Cost of goods sold is computed at the end of the
on initial recognition.
accounting periods rather than at each sale.
C. Cash discounts lost are debited to “purchase discount
D. The inventory account is updated throughout the year
lost” account
as purchases are made.
D. A and C
Page 8 of 12
17. Under this inventory system, a physical count is necessary D. Current assets were understated and income was
before profit is determined understated
A. Perpetual
B. Periodic 23. The failure to record a purchase of merchandise on account
C. FIFO even though the goods are properly included in the physical
D. Both perpetual and periodic inventory results in:
A. An overstatement of assets and net income
18. Which of the following statements is incorrect about B. An understatement of assets and net income
perpetual inventory system? C. An understatement of cost of goods sold and liabilities
A. Inventory account is debited upon purchase and an overstatement of assets
B. One of the entries made to make up return of goods D. An understatement of liabilities and an overstatement
sold on account is Dr. inventory and Cr. cost of goods of owner’s equity
sold.
C. Sales allowance granted to customer on account would 24. Elrond Company began operations in 2021. During the first
two years of operations, Elrond made undiscovered errors
require an entry debiting sales returns and allowance
in taking its year-end inventories that overstated 2021
and crediting accounts receivable.
ending inventory by P50,000 and overstated 2022 ending
D. A physical inventory is made at year-end in order to set inventory by P40,000. The combined effect of these errors
up the cost of goods sold. on reported income is
2021 2022 2023
19. In a perpetual inventory system, recording a sale on account
A. P50,000 over P90,000 over P40,000 under
involves debiting which of the following accounts?
B. P50,000 over P40,000 over not affected
A. Only accounts receivable
C. P50,000 under P90,000 under not affected
B. Accounts receivable and inventory D. P50,000 over P10,000 under P40,000 under
C. Accounts receivable and cost of goods sold
D. Accounts receivable, cost of goods sold and inventory Subsequent Measurement & Impairment (LO 7)
25. Inventories are required to be stated at the
20. When a company uses the perpetual inventory system in A. Lower of cost and net realizable value
accounting for its merchandise inventory, which of the B. Lower of cost and fair value
following is false? C. Lower cost and recoverable value
D. Lower of FIFO cost and net realizable value
A. Total cost of goods sold is computed by deducting
ending inventory from total goods available for sale.
26. Net realizable value (NRV) is computed as
B. The inventory account is updated after each sale.
A. Estimated selling price less estimated cost to sell
C. One of the entries to record return of goods is debit
B. Estimated selling price less estimated cost to complete
inventory and credit cost of goods sold.
C. Estimated selling price less estimated cost to complete
D. None of the above.
and estimated cost to sell
D. Estimated selling price less estimated cost to complete,
Inventory Errors (LO 6)
21. Which of the following will result if the current year’s estimated cost to sell and normal profit margin
ending inventory amount is understated?
27. Inventories are usually written down to net realizable value
A. Cost of goods sold will be understated
A. By classification
B. Gross profit will be understated
B. By total
C. Net income will be overstated
C. By segment
D. Retained earnings will be overstated
D. Item by item
22. A company discovered a P20,000 overstatement of its 2023
28. Reversals of inventory write-downs
ending inventory after the financial statements for 2023
A. Are not prohibited under the PFRSs.
were prepared. The effect of this error on the 2023 financial
B. Should not exceed the amount of write-downs
statement was:
previously recognized.
A. Current assets were overstated and income was
C. Are always recognized in profit or loss.
understated
D. All of these.
B. Current assets were understated and income was
overstated
29. Squat Company uses the lower of cost or net realizable
C. Current assets were overstated and income was
value inventory. Data regarding the items in work-in-
overstated
process inventory are presented below:
Page 9 of 12
The company adjusts and closes its book annually on

Product A Product B December 31. Below are the cost and net realizable value of
Historical cost 24,000 18,800 the company’s year-end inventories for a three-year period:
Selling price 36,000 21,800
Estimated cost to complete 4,800 3,500 Cost NRV
Estimated cost to sell 2,000 1,900 December 31, 2021 700,000 700,000
Replacement cost 20,800 16,800 December 31, 2022 560,000 460,000
Normal profit margin as a 25% 25% December 31, 2023 640,000 580,000
percentage of selling price
Which of the following journal entries would be correct as of
December 31, 2023, to apply the lower of cost or NRV?
What amount should be reported as ending inventory using
A. Dr. Inventory 580,000
the LCNRV individual approach?
A 45,600 C. 42,800 Cr. Income summary 580,000
B. 40,400 D. 48,000 B. Dr. Impairment loss 60,000
Cr. Allowance of inventory write down 60,000
30. Net realizable value of inventories may fall below cost for a C. Dr. Allowance of inventory write down 40,000
number of reason/s including: Cr. Gain on reversal of impairment 40,000
D. Dr. Cost of Goods Sold 60,000
I. Product obsolescence Cr. Allowance of inventory write down 60,000
II. Physical deterioration of inventories
III. An increase in the expected replacement costs of 34. Raw materials and manufacturing supplies held for use in
the inventory
the production of inventories are
IV. An increase in the estimated cost of completion
A. Required under PAS 2 – Inventories, to be separately
A. I, II and IV only presented from the other inventories.
B. II, III and IV only B. Not disclosed since they are normally immaterial.
C. I, III and IV only C. Not written down below cost if the finished products in
D. I and II only which they will be incorporated are expected to be sold
at or above cost.
Numbers 31-32 D. All of these.
At year-end, Eagles Company reported ending inventory at
P15,000,000 and the allowance for inventory writedown before Numbers 35-36
any adjustment at P800,000. The following figures relate to inventory of materials held by
Axew Corporation at December 31:
Product 1 Product 2 Product 3 Product 4
Item X Item Y
Cost 4,000,000 5,000,000 3,500,000 2,500,000
Cost 200,000 400,000
Sales price 6,000,000 6,500,000 6,250,000 5,000,000
NRV 2,750,000 5,500,000 4,750,000 1,750,000 Replacement cost 180,000 370,000
Estimated cost to convert materials into
Normal profit 1,250,000 750,000 1,500,000 1,500,000 100,000 200,000
finished goods
Replacement 4,500,000 6,000,000 5,000,000 3,000,000 Estimated selling price of finished goods 320,000 610,000
Cost
Estimated cost to sell 10,000 15,000
31. What is the measurement of inventory in the statement of

financial position? 35. What is the measurement of inventory in the statement of
A 15,000,000 C. 14,750,000 financial position?
B. 13,000,000 D. 18,750,000
Item X Item Y
32. What amount of loss on inventory writedown should be A. 200,000 400,000

included in cost of goods sold? B. 180,000 370,000
A 2,000,000 C. 1,200,000
B. 2,800,000 D. 1,250,000 C. 200,000 370,000
D. 210,000 395,000
33. Jenny Company uses a periodic inventory accounting
system and values its inventory by using the lower of cost 36. Axew Corporation should recognize loss on write-down of
or net realizable value method. The allowance method is inventory of materials of
used in applying the lower of cost or net realizable value. A 50,000 C. 5,000
B. 30,000 D. 0
Page 10 of 12
Numbers 37-39 Numbers 44-45

On December 31, 2020, Roseland Company experienced Seahawks used the perpetual system. The following information
a decline in the value of inventory resulting in writedown has been extracted from the records about one product:
from P4,000,000 cost to P3,500,000 net realizable value. Date Transaction Units Unit Total cost
The entity used the allowance method to record the cost
necessary adjustment. In 2021, market conditions have January 1 Beginning bal. 8,000 70 560,000
improved dramatically. 6 Purchase 3,000 75 225,000
February 5 Sale 10,000
On December 31, 2021, the inventory had a cost of March 5 Purchase 11,000 80 880,000
P5,000,000 and net realizable value of P4,800,000. The March 8 Purchase return 800 80 64,000
entity made purchases of P20,000,000 in 2021? April 10 Sale 7,000
April 30 Sale return 300
37. What amount should be recognized as gain on
reversal of inventory writedown in 2021? 44. If the FIFO cost flow method is used, what is the cost of the
A 200,000 C. 500,000 inventory on April 30?
B. 300,000 D. 0 A 360,000 C. 337,500
B. 315,000 D. 400,000
38. What amount should be reported as cost of goods
sold in 2021? 45. If the weighted average cost flow method is used, what is
A 19,000,000 C. 18,700,000 the cost of the inventory on April 30?
B. 19,300,000 D. 24,000,000 A 337,500 C. 353,430
39. If the company is using direct write off method, what B. 339,840 D. 348,750
amount should be reported as cost of goods sold in
2021? 46. The pricing of issues from inventory must be deferred until
A 19,000,000 C. 18,700,000 the end of the accounting period under which of the
B. 19,300,000 D. 24,000,000 following method of inventory valuation?
A. Moving average C. Specific identification
Inventory Cost Flow (LO 8) B. Weighted average D. FIFO
40. The proper cost method for inventories that are not
ordinarily interchangeable and segregated for specific 47. During a move to a new location, the inventory records of
projects is the 98 Degrees were misplaced. The bookkeeper has been able
A. Specific identification C. Last in, last out to gather some data for the July purchases:
B. First in, first out D. Weighted average
Units Unit cost Total cost
41. If the specific identification of costing inventory is
July 5 10,000 65 650,000
impracticable under the circumstances, the cost of
10 12,000 70 840,000
inventories is assigned by using set of cost flow
15 15,000 60 900,000
assumptions?
A. First in, first out or weighted average 25 14,000 55 770,000
B. Last in, last out or weighted average
C. First in, first out or last in last out On July 31, 17,000 units were on hand. The sales for July
D. Last in, last out or last in, first out amounted to P6,000,000 or 60,000 units at P100 per unit.
42. During period of rising prices, when the FIFO inventory The entity always used a perpetual FIFO inventory costing
cost flow method is used, a perpetual inventory system system. Gross profit on sales for July was P2,400,000.
would
A. not be permitted What was the cost of inventory on July 1?
B. result in the same ending inventory as a periodic A 1,390,000 C. 950,000
inventory system B. 2,400,000 D. 760,000
C. result in a higher ending inventory than a periodic
inventory system 48. White Farm Supply’s records for the first 3 months of its
D. result in a lower ending inventory than a periodic existence show purchases of Commodity A as follows:
inventory system.
Number of units Cost
43. The FIFO inventory cost flow method may be applied to
August 5,500 280,500
which of the following inventory systems?
A. Periodic inventory system September 8,000 416,000
B. Perpetual inventory system October 5,100 270,300
C. Either periodic or perpetual
Total 18,600 966,800
D. Neither periodic or perpetual
Page 11 of 12
If the market price of jet fuel at the end of the year is P4.00,
The inventory of Commodity A at the end of October using how would this situation be reflected in the annual
FIFO is valued at P363,900. financial statements?
A. Report gain of P1,000,000 in the income statement.
Assuming that none of commodity A was sold during
B. Record loss and estimated liability of P1,000,000.
August and September, what value would be shown at the
end of October if average cost was assumed? C. Record purchases and accounts payable amounting to
A 351,900 C. 358,662 P8,000,000.
B. 353,300 D. 365,700 D. Disclose only the existence of the purchase
commitment in the notes to FS.
49. The following information was available from the inventory
records of Bago Company for January: 53. The credit balance that arises when a loss on purchase
Units Unit cost commitment is recognized should be
Balance at January 1 30,000 9.77 A. Presented as a current liability
B. Subtracted from ending inventory
Purchases: C. Presented as an appropriate of retained earnings
January 6 20,000 10.30 D. Presented in the income statement
January 26 27,000 10.71
Numbers 54-56
Sales:
During 2021, Tartarus Company signed a noncancellable
January 7 25,000
contract to purchase 500 sacks of rice at P900 per sack with
January 31 40,000
delivery to be made in 2022.
What amount of inventory should be reported under the
On December 31, 2021, the price of rice had fallen to P850 per
moving average method? (use two decimal unit cost)
sack. On May 9, 2022, Tartarus Company accepts delivery of
A 126,060 C. 123,120
rice when the price is P880 per sack.
B. 122,880 D. 124,370
54. In December 31, 2021 income statement, what amount of

Purchase Commitment (LO 9)
50. Losses arising from firm and non-cancellable purchase loss on purchase commitment should be recognized?
commitments of inventory items, if material should be A 15,000 C. 25,000
B. 10,000 D. 0
A. Recognized in the accounts by debiting loss on
purchase commitments and crediting estimated liability 55. What amount of recovery of loss on purchase commitment
for loss on purchase commitments. should Tartarus recognize on May 9, 2022?
B. Charged to retained earnings A 10,000 C. 25,000
C. Disclosed in the notes B. 15,000 D. 0
D. Ignored
56. What amount of purchases should be recorded on May 9,
51. During 2020, Hella signed a non-cancellable contract to 2022?
purchase 2,000 pounds of raw materials at P60 per pound in A 450,000 C. 425,000
2021. B. 440,000 D. 480,000
On December 31, 2020, the market price of the raw 57. Under PAS 2, they are “individuals who buy or sell
material is P55 per pound, and the selling price of the
commodities for others or on their own account.”
finished product is expected to decline accordingly.
A. Commissioner
The financial statements prepared for 2020 should report B. Broker-traders
A. A note or memorandum describing the expected loss on C. Commoditers
the purchase commitment. D. Find seekers
B. An appropriation of accumulated profits for P10,000.
C. A loss of P10,000 in the statement of comprehensive 58. Under PAS 2, commodities of broker-traders are measured
income
at
D. Nothing regarding this matter
A. Cost
B. Net realizable value
52. At the end of the fiscal year, Olympus Airlines has an
C. Fair value
outstanding non-cancellable purchase commitment for the
D. Fair value less cost to sell
purchase of 2 million gallons of jet fuel at a price of P4.50
/END OF DISCUSSION QUESTIONS/
per gallon for delivery during the coming summer.
Page 12 of 12
RIZAL TECHNOLOGICAL UNIVERSITY
One Dream, One Team
STUDENT HANDOUTS
FAR.115—INVENTORY ESTIMATION MAY 2021 CPALE REVIEW
LEARNING OBJECTIVES
1. Utilize the Gross profit method in estimating inventory for 2. Utilize the Retail method in estimating inventory for both
both merchandising and manufacturing entities. merchandising and manufacturing entities.
REVIEW NOTES
Gross Profit Estimation
The following are the steps in using the Gross Profit Method to “Sales discount” and “Sales allowance” are not
estimate the ending inventory: deducted to get the net sales because the transaction
is without physical flow.
Step 1 Equation: Step 4 Conversion of Net sales to Cost of goods sold:
Inventory beg. XX Based on Sales:

Net purchases XX
Cost of goods sold (estimate) (XX) Net sales XX
Inventory end. (estimate) XX Times: Cost ratio (100% - GPR) X%
Form the equation for Inventory End, most of the
time Inventory Beg. is given in the problem. Based on Cost:
Step 2 Net Purchases: Net sales XX

Divide: Cost ratio (100% + GPR) X%
Gross purchases XX Cost of goods sold XX
Freight-in XX
Purchase return (XX) Step 5 Computation of Missing Inventory/ Cost of
Purchase discount (XX) Inventory Losses:
Purchase allowance (XX)
Net purchases XX Inventory beg. XX
Net purchases XX
In case the gross purchases is not given, Squeeze it Cost of goods sold (estimate) (XX)
in the T-account of Accounts Payable. Inventory end. (estimate) XX
Accounts Payable LCNRV of actual remaining inventory (XX)
Payment XX XX Beg. balance Cost of missing/inventory losses XX
Purchase return XX XX Gross purchase
Purchase disc. XX The actual remaining inventory consist of all
XX End. Balance inventories that are undamaged and damaged
whether salable or unsalable condition.
Step 3 Net Sales:
Sales on account XX Gross Profit Ratio

Cash sales XX The gross profit method is based on the assumption that the
Sales return (sales return and allow.) (XX) percentage of cost of goods sold over the net sales (a.k.a. cost
Net sales XX ratio) are relatively constant from period to period.
In case the Sales on account is not given, Squeeze it Gross profit from previous period
= Gross Profit Ratio
in the T-account of Accounts Payable. Sales from previous period
Accounts Receivable
Beg. balance XX XX Collection Estimation of Inventory
Sales on accnt. XX XX Collect of Reco. The following are some reason why there is a need to estimate
Recovery of A/R XX XX Write off inventory:
XX Sales discount  To determine the possibility of stock-out
XX Sales return  To determine if the company is carrying excessive
End. Balance XX inventory
Page 1 of 5
FAR | FAR.115—INVENTORY ESTIMATION ARC – ACCOUNTANCY REVIEW CENTER
 To determine the value of recovery from insurance from Retail Estimation

casualty losses The following are the steps in using the Retail Method to
 To estimate any missing inventory estimate the ending inventory:
 To test the accuracy of accounting records
Step 1 Total goods available for sale:
 For budgeting purposes
 For preparation of interim financial statement
Cost Retail
Inventory beg. XX XX
Gross Profit Method – Manufacturing Entities
Purchases XX XX
Statement of cost of goods sold – Manufacturing entity:
Freight in XX
Purchase return (XX) (XX)
Raw materials beg. XX
Purchase discount (XX)
Purchases XX
Purchase allowance (XX)
Freight-in XX
Departmental transfer-in XX XX
Purchase discount (XX)
Departmental transfer-out (XX) (XX)
Purchase return (XX)
Abnormal losses (XX) (XX)
Raw materials end. (XX)
Mark up XX
Raw materials used XX Mark up cancellation (XX)
Direct labor XX Mark down (XX)
Factory overhead XX Mark down cancellation XX
TGAS XX XX
Manufacturing cost XX
Work in process beg. XX
Total goods put in process XX Step 2 Net sales:
Work in process end. (XX)
Cost of goods manufactured XX Gross sales XX
Finished goods beg. XX Sales return (XX)
Employee discount XX
Total goods available for sale XX Normal losses XX
Finished goods end. XX Shrinkage XX
Cost of goods sold XX Shoplifting XX
Net sales XX
Factory Overhead If the problem is silent, losses are considered

Normal costing – under this costing method, overhead amount normal.
is estimated based on predetermined overhead rate. Usually,
estimated overhead is based on direct labor cost or direct labor
hours. Factory overhead under this method is computed as: Step 3 Cost ratio:
Direct labor cost or hours XX Using Average method:

Predetermined overhead rate X% TGAS at Cost
= Ratio
Factory overhead XX TGAS at Retail + Net markdown
Using Conservative method:

Actual costing – the following cost are considered as factory TGAS at Cost
= Ratio
overhead, total of which is the factory overhead recorded under TGAS at Retail + Net markdown
this method:
Using FIFO method:
Indirect material XX TGAS at Cost – Inventory Beg.
= Ratio
Indirect labor XX TGAS at Retail – Inventory Beg.
Factory supervision XX
Factory taxes XX
Depreciation of factory equipment XX Step 4 Inventory End at cost
Depreciation of factory building XX
Light, heat, and power XX TGAS at retail (Step 1) XX
Factory insurance XX Net sales (Step 2) (XX)
Factory maintenance XX Inventory End. At retail XX
Rent of factory building XX Cost ratio (Step 3) X%
Repair of factory equipment XX Inventory End. At cost XX
Normal waste and scrap XX
Total actual overhead XX
Page 2 of 5
Step 5 Cost of goods sold
TGAS at cost (Step 1) XX

Inventory End. At cost (Step 5) (XX)
Gross Profit Method (LO 1) Accounts receivable, January 1 522,360

1. Which inventory costing method is most useful in Accounts, receivable, October 1 515,560
estimating the amount of inventory lost or destroyed by Goods in transit on October 1 purchased 69,500
theft, fire, or other hazards? FOB shipping point included in total
A. FIFO purchases
B. Gross profit method Gross profit rate on sales 30%
C. Average cost method
D. A, B or C How much is the estimated inventory loss?
A 363,360 C. 488,860
2. The gross margin method of estimating ending inventory B. 293,860 D. 558,360
may be used for all of the following, except
A. Internal as well as external interim report 5. On December 31, 2023, a typhoon damaged a warehouse of
B. Internal as well as external year-end report BB Corporation. The entire company and many accounting
C. Estimate of inventory destroyed by fire or other records stored in the warehouse were completely destroyed.
casualties Although the inventory was not insured, a portion could be
D. Rough test of the validity of an inventory cost sold for scrap. Through the use of microfilmed records, the
determined under either periodic or perpetual system following data were gathered.
Inventory, January 1 500,000

3. Which of the following situations is false in calculating an
Purchases 2,200,000
estimated inventory loss due to casualty under the gross Cash sales 273,600
profit method? Collection of accounts receivable 2,520,000
A. Net sales is divided by cost ratio to compute for the (including the amount of recovery)
estimated cost of goods sold if gross profit ratio (GRP) is Accounts receivable, January 1 210,000
based on cost. Accounts written off 9,600
B. Sales return is the only contra-sales account that should Recovery of accounts written off 3,600
be deducted to get net sales. Allowance for bad debts, January 1 10,500
Accounts receivable, December 31 (net of 342,000
C. Partially damaged merchandise should be deducted at
allowance)
cost or realizable value whichever is lower.
Sales returns 36,000
D. Undamaged merchandise usually includes goods owned Sales discount 14,400
but not in the possession of the entity such as goods out Purchase returns 60,000
on consignment. Purchase discounts 12,000
Freight in 21,600
4. A On October 1, 2022, a fire damaged a warehouse of Salvage due of inventory 60,000
Marshall Law Corporation. The entire company and many Gross profit percentage of sales 32%
accounting records stored in the warehouse were
The company consistently measures doubtful accounts in
completely destroyed.
percent of accounts receivable. How much is the value of
inventory loss?
Although the inventory was not insured, a portion could be
A 513,600 C. 538,080
sold for scrap. Through the use of microfilmed records, the
B. 519,600 D. 574,080
following data were gathered:
Inventory, January 1 575,400 6. Which of the following is not a basic assumption of the
Accounts payable, January 1 352,560 gross profit method?
Accounts payable, October 1 491,400 A. The beginning inventory plus the purchases equal the
Goods out on consignment on October 1 195,000 total goods available for sale
at cost B. Goods not sold must be on hand
Payments to suppliers, January 1 to 1,950,000 C. If the sales, reduced to the cost basis, are deducted from
October 1 the sum of the opening inventory plus purchases, the
Collections of accounts receivable, 3,015,200 result is the amount of inventory on hand.
January 1 to October 1
Page 3 of 5
D. The total amount of purchases and the total amount of 13. The following information was taken from MACABEBE
sales remain relatively unchanged from the comparable Company’s accounting records for the year ended
previous period. December 31, 2023:
7. The gross profit method of inventory valuation is invalid
Increase in goods in process inventory 400,000
when
Increase in raw materials inventory 150,000
A. A portion of the inventory is destroyed.
Selling expenses 300,000
B. There is substantial increase in inventory during the
Decrease in finished goods inventory 450,000
year.
General and administrative expenses 180,000
C. There is no beginning inventory because it is the first
Raw materials purchased 4,100,000
year of operation.
Direct labor payroll 2,000,000
D. The gross profit percentage applicable to goods in the
Factory overhead 3,000,000
ending inventory is different from the percentage
Freight out 450,000
applicable to goods sold during the period.
Freight in 200,000
8. The use of gross profit method assumes
A. The amount of gross profit is the same as in prior years. MACABEBE’s cost of goods sold was
B. Sales and cost of goods sold have not changed from A 9,450,000 C. 9,100,000
previous years. B. 9,200,000 D. 9,000,000
C. Inventory values have not increased from previous
years. Retail Method (LO 2)
D. The relationship between selling price and cost of goods 14. The retail inventory method would include which of the
sold is similar to prior years. following in the calculation of the goods available for sale at
both cost and retail
Numbers 9-12 A. Purchase returns
At the end of current year, a fire damage the warehouse and B. Sales returns
factory of Cake Company completely destroying the goods in C. Markdowns and markups
process inventory. D. Purchase discounts
There was no damage to either the raw materials or finished Numbers 15-16
goods. The physical inventory revealed the following: Bettina Retail Store revealed the following data for the month of
January 1 December 31 January 2021:
Raw materials 1,700,000 2,000,000 Sales 12,000,000
Goods in process 4,300,000 0 Sales allowance 100,000
Finished goods 6,000,000 4,500,000 Sales returns 500,000
Factory supplies 500,000 400,000 Employee discounts 200,000
Normal losses at retail 800,000
The gross margin profit historically approximated 30% of sales. Net markup 400,000
The sales for the year amounted to P20,000,000. Raw material Abnormal losses at cost 200,000
purchases totaled P4,000,000. Abnormal losses at retail 250,000
Net markdown 500,000
Direct labor cost amounted to P5,000,000 and manufacturing Freight on purchases 100,000
overhead was applied at 60% of direct labor. Purchases at cost 8,950,000
Purchases at retail 15,150,000
9. What is the cost of raw materials used? Purchase returns at cost 450,000
A 5,700,000 C. 3,800,000 Purchase returns at retail 600,000
B. 3,700,000 D. 3,600,000 Beginning inventory cost 600,000
Beginning inventory at retail 800,000
10. What is the total manufacturing cost?
15. What is the estimated ending inventory using the average
A 13,000,000 C. 11,700,000
retail inventory method? BONUS
B. 11,800,000 D. 11,600,000
A 1,500,000 C. 1,550,000
B. 1,450,000 D. 1,660,000
11. What is the cost of goods sold?
A 12,000,000 C. 13,000,000
16. What is the estimated cost of goods sold using the average
B. 16,000,000 D. 14,000,000
retail inventory method? BONUS
A 7,550,000 C. 5,400,000
12. What is the cost of the goods in process inventory destroyed
B. 7,450,000 D. 7,500,000
in the fire?
A 3,500,000 C. 2,500,000
B. 3,800,000 D. 1,500,000
Page 4 of 5
17. To determine an inventory valuation that using the retail Freight in 200,000
method under the average method, the computation of the Departmental transfer – credit cost 150,000
cost to retail percentage should Departmental transfer – credit sales price 320,000
A. Include markups but not markdowns Markdown cancellation 180,000
B. Include markups and markdowns Mark-up cancellation 90,000
C. include markdowns but not markups Sales 4,000,000
D. exclude markups and markdowns Employee discount 100,000
Sales returns 50,000
Abnormal loss from breakage – sales price 70,000
18. Which of the following is not included in the computation Abnormal loss from breakage – cost 50,000
of cost ratio under the average retail inventory method?
A. Employee discounts 22. How much is the estimated cost of ending inventory?
B. Purchase discounts A 2,107,185 C. 2,950,000
C. Mark-up cancellation B. 2,080,340 D. 2,360,000
D. Departmental transfer-in
23. How much is the estimated cost of goods sold?
A 2,892,815 C. 2,640,000
19. Which statement is accurate about calculating the cost ratio B. 2,919,660 D. 2,050,000
to be used with the average retail inventory method? /End of Discussion Question/
A. The beginning inventory is excluded and markdowns
are not deducted.
B. The beginning inventory is included and markdowns
are not deducted.
C. The beginning inventory is included and markdowns
are deducted.
D. The beginning inventory is excluded and markdowns
are deducted.
Numbers 18-19
Mari used the conservative retail inventory method. T following
information relating to the inventory was gathered:
Cost Retail
Beginning inventory 200,000 450,000
Purchases 3,000,000 4,350,000
Purchase discounts 50,000
Freight in 165,000
Markups 300,000
Markdowns 400,000
Sales 4,400,000
Sales return 100,000
Sales discount 50,000
Sales allowance 30,000
20. What is the estimated cost of the ending inventory?

A 400,000 C. 280,000
B. 260,000 D. 315,000
21. What is the estimated cost of goods sold?

A 3,055,000 C. 4,300,000
B. 2,795,000 D. 3,315,000
Numbers 20-21
The operations of a department of Push-ups Company that uses
FIFO retail inventory method are presented below:
Beginning inventory – sales price 2,500,000

Beginning inventory – cost 1,400,000
Purchases – cost 3,600,000
Purchases – sales price 4,800,000
Page 5 of 5
FAR.117—PPE – ACQUISITION MAY 2021 CPALE REVIEW
LEARNING OBJECTIVES
1. Identify the different modes of acquisition of property,
2. Identify cost that are directly attributable to bring the asset
plant and equipment and determine the measurement of
to the location and condition in the manner intended by the
“purchase price” using the following modes:
management.
a. Cash basis
3. Determine the measurement of the costs of dismantling and
b. On account
removing the item ad restoring the site on which the
c. Issuance of note (deferred payment)
property, plant and equipment is located.
d. Issuance of shares
e. Exchange or trade-in
f. Lump sum acquisition
g. Donation
h. Construction
REVIEW NOTES
Property, Plant and Equipment (PPE)
List price XX
Trade discount (XX)
The following are the characteristics of a property, plant and On Account Invoice price XX
equipment: Cash discount (taken or not) (XX)
Cash price (cost) XX
1. Tangible assets – items of PPE have physical substance.
Priority 1 – Cash Price check first if
may DAC
2. Used in normal operations – items of PPE are either used in
production or supply of goods or services, for rental (if not Priority 2:
land or building), for administrative purposes or for selling
goods. Fair value of the note issued XX
Downpayment XX
Issuance of Cost XX
3. Long-term asset – items of PPE are expected to be used
Notes
from more than a year.
(Deferred Fair value of the note
Payment)  Interest Bearing – Principal Amount
Initial Measurement (Cost)
INT EXP: based  Non-Interest Bearing – Present value of
on PV
Initially, PPE are measured at cost, the cost composed of: >> if PVAA -
the principal amount
deduct first  Interest w/ Unrealistic NR – Present
1. Purchase price, including import duties and nonrefundable payment muna value of principal + present value of
bago kunin
purchase taxes, after deducting trade discounts and rebates. nominal interest
interest
(a.k.a. cost to acquire from seller)
Priority 1 – Fair value of PPE received
2. Cost directly attributable to bringing the asset to the
location and condition necessary for it to be capable of Priority 2:
operating in the manner intended by management. Fair value of shares given up XX
Cash paid XX
3. Initial estimate of the cost of dismantling and removing the Issuance of
Cost XX
item and restoring the site on which it is located, the Shares
obligation for which an entity incurs. Priority 3:
Par value of shares given up XX
Measurement of “COST TO ACQUIRE”: Cash paid XX
The measurement of cost to acquire will depend on the mode of Cost XX
acquisition, the following are the rule in measuring the
purchase price:
Mode Measurement of Cost to Acquire
Cash Basis Cash paid (face value)
Mode Measurement of Cost to Acquire

FAR | FAR.117—PPE ACQUISITION ARC – ACCOUNTANCY REVIEW CENTER
Cost – Fair value of PPE received

CF > significantly diff
WITH COMMERCIAL SUBSTANCE Cost incurred in connection with the
Priority 1: donation (e.g., registration fees and legal fees)
FV of PPE given up (old) XX are deducted to:
Donation
Cash paid XX
Share premium DC – if donated by
Cash received (XX)
shareholders
Cost XX
Other income – if donated by non-
shareholder
Priority 2 – FV of PPE received (new)
The following are capitalized as cost of newly
Exchange or Priority 3: constructed building:
Trade-in CA of PPE given up (old) XX
Cash paid XX a. Cost of demolishing old building (net)
Cash received (XX) b. Cost to vacate the old building
Cost XX c. Raw materials used – net of discount
d. Direct labor applied
WITHOUT COMMERCIAL SUBSTANCE e. Overhead applied
CA of PPE given up (old) XX f. Construction cost
Cash paid XX g. Excavation cost
Cash received (XX) h. Cost of temporary structure
Cost XX i. Supervision (superintendent fee)
j. Inspection fee
k. Building permit
Construction
FV of PPE given up is available: l. Insurance during construction
m. Architect fee
FV of PPE given up XX
n. Other cost that will improve the bldg.
CA of PPE given up (XX)
o. Borrowing cost
Gain or loss on exchange XX
Additional:
FV of PPE given up is NOT available:
- Cost of old building if the new building
cash price
Gain or loss FV of PPE received (new) XX will be investment property.
on Exchange Cash paid (XX) - Cost of sidewalks, pavements, parking lot
Cash received XX and driveways is capitalized as building if
Assumed FV of PPE given up XX such are part of the blueprint.
- Cost of ventilating system, lighting
FV (assumed) of PPE given up XX system, elevator is capitalized as building
CA of PPE given up (XX) if installed during construction.
Gain or loss on exchange XX Direct Attributable Cost
The expenditure that are capitalize as direct attributable cost
The issue in Lump Sum Acquisition is the will depend on the class of PPE acquired:
allocation of the cost to multiple (group) PPE
acquired: >> DO NOT INCLUDE PROF FEES Land:
a. Unpaid mortgage
Priority 1 – Relative FV method b. Unpaid taxes
(FV of all PPE is available) c. Options acquired
d. Professional fees (broker or agent commission)
FV of e. Legal fees
Purchase price single PPE f. Title search or guarantee insurance
x = Cost
of group FV of all PPE g. Fees for registration and transfer of title
Lump Sum h. Cost of surveying
in the group
Acquisition i. City assessments
Priority 2 – Residual method j. Payment to vacant the land
(FV of one PPE is not available) k. Cost of clearing, grading, leveling and landfill
if Land acquired as IP >> the demolition
Building: cost of bldng is charged to Land
Purchase price of group XX
a. Unpaid mortgage
FV of PPE with FV (cost) (XX)
b. Unpaid taxes
Cost of PPE w/o FV XX Sale of scrap from old bldng = deduct/minus
c. Options acquired
d. Professional fees (broker or agent commission)
Priority 3 – Allocated 100% to land
e. Cost to repair (prior to initial use)
(No FV available)
f. Cost to remodel (prior to initial use)

Machine and Equipment: NON Capitalizable Expenditures *VAT not included >> deduct mo
if nakasama
a. Import duties, non-refundable taxes (a) Pre operating loss
b. Discounts and rebates (b) Loss on premature disposal of old PPE
c. Transportation and handling (c) Dismantling cost of the old PPE
d. Insurance while in transit dismantling cost if required
(d) Repair cost due to negligence
e. Cost of testing and trial run
(e) Repair cost after during the use
f. Installation cost and other site preparation
g. Fees paid to consultations for advice (f) Training cost of the personnel
h. Cost of safety rail and platform (g) Insurance cost after delivery
i. Cost of water device to keep machine cool. (h) Recoverable taxes (VAT)
j. Repair necessary before initial use (i) Advertisement cost or marketing cost
(j) Insurance after construction
Land Improvement
The following cost are capitalizable as land improvement:
(k) Taxes subsequent to the acquisition
(a) Landscaping, trees, and scrubs (l) Imputed interest
(b) Permanent fences (m) Damages incurred or accidents during construction
(c) Water and drainage systems (n) Options not acquired
(d) External driveways, parking lots and safety lightings (o) Advertisement and open-house parties
(e) Sidewalks and pavements (p) Abnormal amount of wasted materials, labor and
overhead
(q) Internal profits or savings on constructions
1. Which of these is not a major characteristic of a PPE? 5. The debit for a non-refundable sales tax properly levied on
A. Possesses physical substance the purchase of machinery would be a charge to
B. Acquired for use in operations A. the machinery account.
C. Yields services over a number of years B. a separate deferred charge account.
D. All of these are major characteristics of a PPE. C. miscellaneous tax expense (which includes all taxes
other than those on income).
2. Plan assets may property include:
D. accumulated depreciation--machinery.
A. Idle equipment waiting sale
B. Property held for investment purposes 6. Marla Company acquired new equipment on account on
C. Land held for undetermined future use March 1, 2021 with a 5% discount if paid with in 15 days.
D. Self-constructed asset currently in use The following information is available:
3. Property, plant, and equipment may properly include
A. deposits on machinery not yet received. List price 3,500,000
B. idle equipment classified as held for sale asset under Trade discount 20%
PFRS 5. Removal of old equipment 100,000
C. land held for speculation, rather than for use in the Cost of installation 50,000
entity’s normal business activities. Insurance taken during delivery 20,000
D. none of these. Transportation costs 30,000
4. On January 1, 2022, Romania Company purchased a
If the invoice was paid on March 31, 2021, what should be
specialized factory equipment for cash at a purchase price of
the cost of equipment?
P700,000. The company incurred P20,000 freight cost and A 2,760,000 C. 2,900,000
handling costs of P10,000. The company expects that it will B. 3,425,000 D. 3,010,000
incur dismantling cost amounting to P80,000 at the end of
the equipment’s 5-year useful life. The prevailing market 7. Discount given for early payment of credit purchases of
interest rate during the transaction date was 6%. operational asset should be:
A. Recorded as interest expense at purchase date.
PV factory of 1 at 6% for five periods - 0.747
B. Capitalized as a cost of the asset acquired and
PV factory of annuity at 6% for five periods - 4.212
subsequently allocated to depreciation expense
How much is the initial cost of the equipment? C. Recorded as interest revenue at purchase date
A 730,000 C. 789,760 D. Deducted from the invoice price when determining the
B. 810,000 D. 1,066,960 cost of the asset

8. Taylor Swift (TS) Company purchased machinery on A 1,850,000 C. 2,070,000

December 31, 2020, paying P80,000 down and agreeing to B. 2,150,000 D. 2,300,000
pay the balance in four equal installments of P60,000
13. When a closely held corporation issues equity shares in
payable each December 31.
exchange for land, the land should be recorded at the
Implicit in the purchase price is an assumed interest of 12%. A. Current market value of the land
The following data are abstracted from the present value B. Total par value of the shares issued
tables: C. Current market value of the shares issued
PV factory of 1 at 6% for five periods 0.63552 D. Total book value of the shares issued
PV factory of annuity at 6% for five periods 3.03735
14. Tilt Company acquired land from Display Company which
What is the cost of the machinery purchased on December will be used as a plant site in exchange for 20,000 newly
31, 2020? issued shares of Tilt’s ordinary shares.
A 182,241 C. 262,241
B. 320,000 D. 290,842 At the date of acquisition, Tilt’s ordinary shares had a par
value of P20 per share and a fair value of P30 per share. The
9. PPE purchased on long-term credit contracts should be fair value of the land was P500,000 when Cooper acquired
initially recognized at this 2 years ago.
a. the total amount of the future payments. How much is the initial cost of the newly acquired land?
b. the future amount of the future payments. A 400,000 C. 600,000
c. the present value of the future payments. B. 500,000 D. 200,000
d. none of these.
Numbers 15-18
10. Doug Airlines sold used jet aircraft to Adele Company for Below is the information relative to an exchange of asset by
P800,000, accepting a five-year 6% note for the entire Mimi Bernan Company. The exchange has commercial
amount. Adele’s incremental borrowing rate was 14%. The substance in Case 1 and without commercial substance in Case 2.
annual payment of principal and interest on the note was to
Old Equipment
be P189,930.
Book value Fair value Cash paid
The aircraft could have been sold at an estimated cash price Case 1 75,000 85,000 15,000
of P651,460. The present value of an ordinary annuity of P1 Case 2 50,000 75,000 7,000
at 8% for five periods is 3.99.
15. The initial cost of the new equipment under Case 1 is
The air craft should be capitalized on Adele’s books at A 90,000 C. 70,000
A 949,650 C. 757,820 B. 100,000 D. 60,000
B. 800,000 D. 651,460
16. What is the gain or loss in exchange should Mimi Bernan
11. When payment for is deferred beyond normal credit terms, Company under Case 1?
the difference between the cash price and total payment is A 10,000 gain C. 15,000 gain
B. 10,000 loss D. Zero
A. Capitalized as cost of PPE
B. Charged to retained earnings 17. The initial cost of the new equipment under Case 2 is?
C. Interest expense over the credit period A 57,000 C. 43,000
D. Interest expense over the useful life of the asset B. 82,000 D. 68,000
18. What is the gain or loss in exchange should Mimi Bernan

12. In January 2022, Utah Corporation entered into a contract Company under Case 2?
to acquire a new machine for its factory. The machine, A 25,000 gain C. 7,000 loss
which had a cash price of P2,000,000, was paid for as B. 25,000 loss D. Zero
follows:
Numbers 19-20
Down payment 300,000 On July 1, 2017, Banded Water Company traded in an old
5,000 ordinary shares of Utah with an machine with a carrying amount of P10,000 for a similar new
agreed-upon value of P370 per share 1,850,000 machine having a cash price of P32,000, and paid a cash
2,150,000 difference of P19,000.
Prior to the machine’s use, installation costs of P70,000 19. How much should the property be initially recognized?
were incurred. The machine has an estimated useful life of
A 32,000 C. 51,000
10 years and an estimated salvage value of P100,000. The
B. 29,000 D. 13,000
straight-line method of depreciation is used.
The cost of the machinery purchased on January 2022 is

20. How much is the gain or loss from the trade in transactions? What should Apprentice Company initially recognize the
A 22,000 C. 3,000 donated equipment?
B. 10,000 D. Zer0 A 5,000,000 C. 3,500,000
B. 3,300,000 D. Zero
21. On April 1, 2022, Pacific Corporation purchased for 26. An entity purchased land an old hotel on which it is located
P2,700,000 a tract of land, a warehouse and an office with the plan to tear down and build a new hotel on the
building. The following data were collected regarding the site. Any allocated cost to the old hotel is
property. A. Depreciated over the period from acquisition to the
Fair Vendors’ book date the hotel is to be torn down
values value
B. Written off as loss in the year the hotel is torn down
Land 875,000 700,000
Warehouse 375,000 400,000 C. Capitalized as part of the cost of the land
Office building 1,000,000 975,000 D. Capitalized as part of the cost of the new hotel
The appropriate amounts that Pacific should record for the 27. Lorraine purchased a tract of land as an investment
land? property. The entity razed an old building on the property
A 700,000 C. 945,000
B. 875,000 D. 1,050,000 Purchased price of land and an old building 4,000,000
Fair value of old building 300,000
22. Apportionment of the purchase price in a lump-sum Demolition of old building 200,000
acquisition of various assets may be based on all of these, Proceeds from sale of salvaged materials (20,000)
except Legal fees for purchase contract and 150,000
recording ownership
A. Book values of the assets to the seller
Title guarantee insurance 50,000
B. Relative market values
Payment of property taxes in arrears on land 100,000
C. Tax assessment values Option paid for an alternative land not 30,000
D. Appraised values acquired
Special assessment for city improvements 120,000
Numbers 23-24
On June 1, Thick Company acquired a real property by issuing What is the cost of the land?
35,360 shares of its P100 par value ordinary shares. The shares A 4,600,000 C. 4,330,000
were selling on the same date at P125. B. 4,120,000 D. 4,300,000
A mortgage of P4,000,000 was assumed by Thick on the Numbers 28-29

purchase. Moreover, the company paid P180,000 of real Secrets Inc. was incorporated on January 1, 2021. The following
property taxes in the prior years. Twenty percent of the items relate to Secrets, Inc.’s property, plant and equipment:
purchase price should be allocated to the land and the balance to
the building. Cost of land, which included an old apartment 6,160,000
building
In order to make the building suitable for the use of Thick, Delinquent property taxes assumed by Secrets, 60,000
remolding costs had to be incurred in the amount of P900,000. Inc.
This however necessitated the demolition of a portion of the Payments to tenants to vacate the apartment 40,000
building, which resulted in recovery of salvage material sold for building
P30,000. Cost of razing the apartment building 80,000
Parking lot cost the company P320,000 while repairs in the Architects fee for new building 120,000
main hall were incurred at P45,000 prior to its use. Building permit for new construction 80,000
Fee for title search 50,000
23. The correct cost of the land should be
Survey costs 40,000
A 1,664,000 C. 2,040,000 Excavation before construction of new building 200,000
B. 1,720,000 D. 2,400,000
Payment to building contractor 20,000,000
24. The correct cost of the building should be Assessment by city for drainage project 30,000
A 6,330,000 C. 7,750,000 Cost of grading and leveling 100,000
B. 7,795,000 D. 7,560,000 Temporary quarters for construction crew 160,000
Temporary building to house tools and materials 100,000
25. On July 1, 2017, Apprentice Company accepted an office
Cost of changes during construction to make new 180,000
equipment from a stockholder which originally cost the building more energy efficient
stockholder P5,000,000. On the same date, the equipment Interest cost on specific borrowing incurred 720,000
had a fair market value amounting to P3,300,000. The during construction
company paid P200,000 for payment of registration and Payment of medical bills of employees injured 36,000
legal fees related to the transaction. while inspecting building construction
Cost of paving driveway and parking lot 120,000

Cost of installing lights in parking lot 24,000 30. The cost of land typically includes the purchase price and
Premium for insurance on building during 60,000 all of the following costs except
construction A. improvements, such as grading, filling, draining, and
Cost of open house party to celebrate opening of 100,000 clearing.
new building B. survey costs.
Cost of windows broken by vandals distracted by 24,000 C. cost of private driveways and parking lots.
the celebration D. assumption of any liens or mortgages on the property.
28. What is the cost of land? 31. If an entity demolishes an old building and construct a new
A 5,960,000 C. 6,540,000 building, any demolition cost incurred is
B. 6,440,000 D. 6,410,000
A. Capitalized as cost of the land
29. What is the cost of building? B. Capitalized as cost of the new building
A 21,740,000 C. 21,790,000 C. Expensed immediately
B. 21,750,000 D. 21,720,000 D. Charged to retained earnings
/ END /

Accountancy Review Center (ARC)
of the Philippines Inc.
One Dream, One Team
STUDENT HANDOUTS
FINANCIAL ACCOUNTING AND REPORTING CABARLES/SAGOT/CAYETANO
FAR.118—PPE DEPRECIATION MAY 2021 CPALE REVIEW
LEARNING OBJECTIVES
1. To compute the depreciation using the following j. Inventory method

methods under different scenarios:
a. Straight-line method
b. Sum-of-years’ digit
c. Double and 150% declining balance
d. Output method 2. To compute the gain and loss from disposal of
e. Depreciation of leasehold improvement property, plant and equipment
f. Depreciation with change in cost and/or
estimates
g. Composite method
h. Retirement method
i. Replacement method
REVIEW NOTES
Depreciation The principle under accelerated depreciation is that,

new assets are generally more efficient during the
Is the systematic allocation of the depreciable
earlier years than in the later years.
amount of an asset over its estimated useful life.
Depreciation is cost allocation rather than asset
Sum-of-years’ Digit Method
valuation.
Depreciation under this method is computed as
Depreciation begins when it is available for use and
follows:
depreciation ceases when the asset is derecognized.
Even if the asset is not being used or idle, the Useful life – Age
depreciation continues. Summation of = Depreciation
Cost – RV x
digits in the Exp.
useful life
Double Declining Balance Method

Straight-Line Depreciation Method Depreciation under this method is computed as
follows:
Annual depreciation charges are equal over the
number of years of estimated useful life. Cost XX
Less: Accumulated depreciation – beg. (XX)
The principle in straight-line method considers
Carrying amount XX
depreciation as a function of time rather than as a
Times: Depreciation rate X%
function of usage.
Depreciation expense XX
info abt inflation - just ignore
Cost – Residual value Residual value will be considered only in the last
= Depreciation
Estimated useful life year of the useful life. While the depreciation rate is
Residual value (RV) = Estimated selling price after computed as:
useful life less cost to sell.
2
Estimated useful = Depreciation Rate
Accelerated Depreciation Method life
Provides higher depreciation in the earlier years and

lower depreciation in the later years of the useful life Variable Charge or Activity Method
of the asset. There are three accelerated
depreciation methods, namely: The variable or activity methods assume that
depreciation is more a function of use rather than
a. Sum-of-years’ digit method passage of time. There are two variable methods,
b. Double declining balance method namely:
c. 150% declining balance method
a. Working hours method
b. Output or production method
0961-718-5293; 0936-407-4780; (02)-8376-0405www.arccpalereview.com Page 1 of 8

AUDITING — THEORY | AT.101—THE PUBLIC PRACTITIONER’S ENGAGEMENTS
Working Hours and Output Method Composite and Group Depreciation

Depreciation under this method is computed as This depreciation method computes a single
follows: depreciation amount for the depreciation of many
individual assets.
Actual
output/hours
Composite life:
During the year = Depreciation
Cost – RV x Cost – Residual value
Total estimated Exp. = Composite Life
output/hours over Annual depreciation of the group
the useful life
Composite rate:
Change in Depreciation Annual depreciation of the group
= Composite Rate
Cost
A new depreciation expense should be computed if
any of the following is present: Subsequent Depreciation Under Composite
a. Change (additional) in the capitalized cost Method
b. Change in estimated useful life
c. Change in residual value The composite rate is only computed once and that
d. Change in depreciation method rate will be used in the subsequent year even if there
e. Impairment loss was a acquisition or disposal.
f. Revaluation surplus
The subsequent depreciation expense using the
composite method is computed as follows:
Computation of New Depreciation
Original cost of the group XX
Step 1: Compute the carrying amount on the date Add: Cost of newly acquired PPE XX
of change in estimate: Less: Cost of retired PPE (XX)
Original cost XX Updated cost XX

Less: Accumulated depreciation (XX) Times: Composite rate X
Less: Accumulated impairment (XX) %
Add: Additional capital expenditure XX Depreciation expense XX
Carrying amount – change in est. XX
Step 2: Apply changes and use the carrying amount Disposal of PPE Under Composite Method
on the date of change as the new basis of
depreciation: No gain or loss are recognized when a PPE is sold
under the composite method. The accumulated
Carrying amount at date of depreciation of PPE sold is computed as follows:
change in est. – New residual
= Depreciation
value
Exp. Cost XX
New estimated remaining
useful life
Less: Selling price of PPE sold ( XX)
Accumulated depreciation XX
Capital Expenditure and Revenue Expenditure Retirement Method

Revenue expenditure are expenditure that will only Depreciation under this method is computed as
benefit the current period. This cost is reported as follows:
an expense.
Capital expenditure are expenditure that will benefit Cost of sold PPE XX
the current period and the future period. This cost is Less: Selling price of PPE sold (XX)
capitalized and reported as an asset. Cost will Depreciation expense for the year XX
benefit the future periods when:
Replacement Method
 It extends the life of the property
 It increases the capacity of the property Depreciation under this method is computed as
 Improves the efficiency and safety of the follows:
property
Acquisition cost of new PPE to
Summary of treatment to expenditures: replace the PPE sold XX
Less: Selling price of PPE sold (XX)
 Additions – capitalize Depreciation expense for the year XX
 Improvement or betterment – capitalize
 Replacement – capitalize Inventory Method
 Extraordinary repair – capitalize Depreciation under this method is computed as
 Ordinary repair – expense follows:
 Rearrangement cost – expense
Specific PPE account (e.g., tools)
Tools – beg. XX
Cost of new XX XX Selling price – sold
Page 2
acquisition Less: Accumulated depreciation (XX)

XX Depreciation Carrying amount on sale XX
(squeeze)
Tools – end XX Step 2: Compute the gain or loss on sale
Gain or Loss on Disposal of PPE Net selling price XX
Less: Carrying amount on sale (XX)
Step 1: Compute the carrying amount on the date of Gain or (loss) on sale XX
disposal. / END /
Cost XX
1. Depreciation A. Provides for the declining productivity of an

A. Is allocation of the cost of property, plant and aging asset
equipment over the time period of usefulness, B. Ignores variations in the rate of asset use
in a systematic and rational manner.
C. Tend to result in constant rate of return on
B. Is a process of recognizing the decreasing
value of an asset over time diminishing investment base
C. Is a cash expense D. Gives smaller periodic write-offs than
D. Expense of P2,000 reflects a P2,000 increase decreasing charge method
in liquid funds
7. Which of the following depreciation methods is
2. Which of the following statements best describes not an accelerated method?
‘residual value’? A. Double declining balance
A. The estimated net amount currently B. Straight-line
obtainable if the asset were at the end of its C. Sum-of-the-years’ digit
useful life. D. 150% declining balance
B. The present value of estimated future cash 8. Which of the following reasons provides the best
flows expected to arise from the continuing theoretical support for accelerated depreciation?
use of the asset and from its ultimate A. Assets are more efficient in early years and
disposal. initially generate more revenue.
C. The amount at which the asset could be B. Expenses should be allocated in a manner
exchanged between knowledgeable, willing that “smooths” earnings.
parties in an arm’s length transaction. C. Repairs and maintenance costs will probably
D. The amount of cash or cash equivalents that increase in later periods, so depreciation
could currently be obtained by selling the should decline.
asset in an orderly disposal. D. Accelerated depreciation provides easier
replacement because of the time value of
3. Which of the following terms best describes the money.
cost (or an amount substituted for cost) of an
asset less its residual value? Numbers 9-12
A Revalued amount C. Recoverable
Clothes Company provided the following information
amount
on January 1, 2021:
B Carrying amount D Depreciable
. . amount Acquisition cost of equipment P 400,000
Residual value 80,000
Numbers 4-5 Useful life in years 4 years
Clothes Company provided the following information
Using sum-of-years’ digit method:
on January 1, 2021:
9. What is the depreciation expense in 2022?
Acquisition cost of P 400,000 A 120,000 C. 128,000
equipment B 96,000 D 224,000
Residual value 80,000 . .
Useful life in years 4 years
10. How much is the accumulated depreciation on
Using straight-line method: December 31, 2022?
4. What is the depreciation expense in 2022? A 120,000 C. 128,000
A 100,000 C. 200,000 B 96,000 D 224,000
B 80,000 D 160,000 . .
. .
Using double declining balance method digit:
5. How much is the accumulated depreciation on 11. What is the depreciation expense in 2022?
December 31, 2022? A 120,000 C. 128,000
A 100,000 C. 200,000 B 100,000 D 224,000
B 80,000 D 160,000 . .
. .
12. How much is the accumulated depreciation on
6. A principal objection to the straight-line method December 31, 2022?
of depreciation is that it A 120,000 C. 160,000
Page 3
B 100,000 D 300,000 20. On January 1, 2018, Arra Company sign a 12-year

. . lease for a building. The entity has an option to
renew the lease for an additional 6-year period on
Numbers 13-16
or before January 1, 2022. During January 2020,
Clothes Company acquired machinery on April 1, the entity made substantial improvement to the
2021: building.
Cost P 1,200,000
The cost of the improvement was P4,500,000
Residual value 120,000
Estimated useful life 8 years with an estimated useful life of 10 years. On
December 31, 2021, the entity intended to
13. What is the depreciation for 2021 using sum of exercise the renewal option.
years’ digits?
A 180,000 C. 120,000 On December 31, 2021, what is the carrying
B 240,000 D 160,000 amount of the leasehold improvement?
. . A 4,500,000 C. 4,200,000
B 4,050,000 D 4,000,000
14. What is the depreciation for 2022 using sum of . .
years’ digits?
A 157,500 C. 210,000 21. On January 1, 2020, Wirehair Company signed an
B 217,500 D 105,000
eight-year lease for office space. Wirehair has the
. .
option to renew the lease for an additional six-
15. What is the depreciation for 2021 using double year period on or before January 1, 2028. During
declining balance? January 2022, Wirehair incurred the following
A 300,000 C. 225,000 costs:
B 150,000 D 202,500
. . General improvement to the lease 5,400,000
premises with useful life of 10
16. What is the depreciation for 2022 using double years
declining balance? Office furniture and equipment 2,400,000
A 270,000 C. 243,750 with useful life of 8 years
B 135,000 D 150,000 Moveable assembly line 1,800,000
. . equipment with useful life of 5
17. The use of the double-declining balance method years
I. Results in a decreasing charge to At December 31, 2022, Wirehair’s intention as to
depreciation expense. the exercise of the renewal option is uncertain. A
II. Means salvage value is not deducted in full year depreciation of leasehold improvement
computing the depreciation base. is taken for year 2022.
III. Means the carrying amount should not be
In Wirehair’s December 31, 2022 income
reduced below salvage value.
statement, depreciation should be:
A I, II and III C. I, III A 1,200,000 C. 675,000
B I, II D none B 540,000 D 900,000
. . . .
22. Roxanne Co. purchased equipment for P500,000.
18. Which of the following is not under time-factor The equipment had an estimated 10-year service
method depreciation? life. Roxanne’s policy for 10-year assets is to use
A Straight-line C. Declining balance the 150% declining balance depreciation method
B SYD method D Output method for the first five years of the asset’s life and then
. . switch to the straight-line depreciation method.
What amount should Roxanne report as
19. Marjorie Company purchased a boring machine
accumulated depreciation for equipment at the
on January 1, 2020 for P8,100,000. The useful life end of the sixth year?
of the machine is estimated at three years with a A 300,000 C. 278,147
residual value of P600,000. B 322,518 D 311,425
. .
During the useful life, the expected units of
production from the machine are 10,000 units for 23. Souring Falcons Company acquired a drilling
2020, 9,000 units for 2021 and 6,000 units for machine on October 1, 2018 at a cost of P25,000
2022. and depreciated it at 25% per annum on a
straight-line basis. On October 1, 2020, P5,000
What is the depreciation expense for 2021 using
was spent on an upgrade to the machine in order
the output or production method?
to improve its efficiency and increase the inflow
A 2,700,000 C. 2,500,000
B 3,000,000 D 2,916,000 of economic benefits over the machine’s
. . remaining life.
According to PAS 16 – Property, Plant and
Equipment, what depreciation expense should be
Page 4
recognized in profit or loss for the year ended Hot Issue, Inc. uses hand tools in its manufacturing
September 30, 2021? activities. On January 1, 2024, there are 800 of such
A 8,750 C. 7,500 tools on hand at a cost of P40 each. Acquisition and
B 6,250 D 11,250 retirement in the years 2024 and 2025 are:
. .
Acquisition Retirement Estimated value
24. Which of the following expenditures subsequent Year and cost and proceeds of tools at year-
end
to property acquisition cannot be added to asset
2024 400 @ P60 300 @ P10 P40,000
carrying amount? 2025 900 @ P80 700 @ P14 P35,000
A. Costs of modification of an item or property
that will extend its useful life. 30. What is the depreciation in 2024 and 2025, using
B. Costs of upgrading parts to achieve the retirement method?
substantial improvements in quality of output. 2024 2025
C. Costs of material repairs that did not increase A. 12,00 32,00
the asset life nor productive capacity. 0 0
D. Costs of adopting new production processes B. 9,00 22,20
0 0
that enabled substantial reduction in
C. 9,000 18,20
operating costs. 0
D. 12,00 22,20
Numbers 25-28 0 0
Funseth Company had the following machines on
January 1, 2023: 31. What is the depreciation in 2024 and 2025, using
the replacement method?
Machine Cost Residual value Useful life 2024 2025
A 150,000 30,000 6 A. 18,00 56,00
B 100,000 10,000 5 0 0
C 170,000 20,000 6 B. 18,00 46,20
0 0
During 2024, Funseth sold Machine A for P80,000 and C. 15,00 56,00
purchased Machine D for P200,000. Funseth used the 0 0
composite method for depreciating the machines. D. 15,00 46,20
0 0
25. What is the composite life and composite rate for
the machines of Funseth? 32. What is the depreciation in 2024 and 2025, using
the inventory method?
Composite Life Composite Rate 2024 2025
A. 5.71 years 15.0% A. 13,00 50,00
B. 6.66 years 15.0% 0 0
C. 6.66 years 17.5% B. 16,00 67,20
D. 5.71 years 17.5% 0 0
C. 13,00 67,20
26. What is the depreciation for 2023? 0 0
A 74,000 C. 63,000 D. 16,00 50,00
B 73,333 D 54,000 0 0
. . 33. Gracelle Company acquired an equipment for
P4,200,000 in 2018. The policy is straight line
27. What is the depreciation for 2024?
depreciation, full depreciation in the year of
A 70,500 C. 40,500
acquisition and no depreciation in the year of
B 63,000 D 66,000
. . disposal. The useful life is five years with residual
28. What is included in the journal entry to record the value of P200,000. On July 1, 2021, the
disposal of Machine A? equipment was sold for P2,500,000.
A. Debit accumulated depreciation P70,000
B. Credit machine P80,000 What is the gain on disposal in 2021?
C. Debit loss on disposal P70,000 A 700,000 C. 500,000
D. Credit machine P120,000 B 820,000 D 400,000
. .
29. The composite depreciation method
A. Is applied to a group of homogenous assets 34. A non-current asset was purchased on the first
B. Is an accelerated method of depreciation day of an accounting period, 1 January 2021 for
C. Does not recognize gain or loss on the P34,000 and depreciated by 20% per annum
retirement of specific assets in the group
using the reducing balance method. On 30 June
D. Excludes salvage value from the base of the
depreciation calculation 2018 the asset was sold, realizing a loss on
disposal of 2,100.
Numbers 31-32
What were the proceed of sale?
Page 5
A 14,900 C. 19,660 A 1,200,000 C. 3,600,000

B 17,484 D 21,684 B 2,800,000 D 2,200,000
. . . .
35. Lene Company uses straight line depreciation for

its property, plant and equipment. Balances of
the property, plant and equipment and related
accumulated depreciation accounts on January 1,
2021 are P25,000,000 and P5,000,000 and on
December 31, 2021 are P20,000,000 and
P6,200,000. Lene did not any purchase property,
plant and equipment during 2021.
However, machinery was sold for P3,000,000 that

resulted in a P400,000 loss. What is the
depreciation expense for 2021?
/ END /
Page 6
PRACTICE EXAM – PROBLEMS
1. Andrea Company used the composite method of What is the accumulated depreciation on
depreciation based on a 25% composite rate. On December 31, 2021?
January 1, 2020, the total cost of equipment was A 1,600,000 C. 1,200,000
P5,000,000 with the total residual value of B 1,800,000 D 1,000,000
P600,000 and accumulated depreciation of . .
P3,000,000.
In January 2020, the entity purchased an

6. Abby company purchased equipment on January
equipment for P2,500,000 with no residual value.
1, 2020 for P5,000,000. The equipment had a
On December 31, 2020, the entity sold an
useful life of 5 years and residual value of
equipment costing P1,000,000 for P350,000. The
P600,000. The policy is to depreciate a 5-year
said equipment was acquired on January 1, 2018
asset using 200% double declining method for
with residual value of P200,000.
the first 2 years and then switch to straight line.
What amount of depreciation should be What amount should be reported as accumulated
recognized in 2020? depreciation on December 31, 2022?
A 1,625,000 C. 1,525,000 A 3,000,000 C. 3,920,000
B 1,875,000 D 1,000,000 B 3,800,000 D 3,600,000
. . . .
2. Gracelle Company acquired an equipment for 7. Jake Company purchased equipment on January
P4,200,000 in 2017. The policy is straight line 1, 2025 at an invoice price of P800,000, with
depreciation, full depreciation in the year of credit terms 5/10, n/30. Freight in costs of
acquisition and no depreciation in the year of P25,000, testing and installation costs of P40,000
disposal. The useful life is five years with residual and labor costs during regular operations of
value of P200,000. On July 1,2020, the equipment P20,000 were also incurred before the payment of
was sold for P2,500,000. the invoice on January 20, 2025.
It was expected that the machine could be used

What is the gain on disposal in 2020?
for 10 years, after which the residual value would
A 700,000 C. 500,000
B 820,000 D 400,000 be zero. The entity intends to use the machine for
. . only 8 years, however, after which it expects to
be able to sell it for P50,000. The straight-line
Numbers 3-4 method is used.
Yellow Jack Corporation owned a power plant which
consisted of the following, all acquired on January 1, What is the carrying amount of this equipment on
2024: December 31, 2025?
A 745,625 C. 742,500
Salvage Life in B 728,125 D 760,500
Cost value years . .
Building 6,100,000 100,000 20
Machinery 2,550,000 50,000 5 8. On January 1, 2021, Ding Company acquired an
Equipment 1,030,000 30,000 10 equipment with useful life of 8 years and
P390,000 residual value. using the double-
3. What is the composite rate of depreciation?
declining balance method, the 2022 depreciation
A 9.50% C. 9.47%
expense on this equipment was P1,170,000.
B 9.48% D 9.30%
. . What was the book value of this equipment on
December 31, 2023?
4. What is the composite life?
A 3,412,500 C. 2,242,500
A 10.56 years C. 10.90 years B 2,730,000 D 2,632,500
B 10.76 years D 11.00 years . .
. .
9. Wan Company purchased a machine on
5. On April 1, 2020, Katrina Company purchased
December 2, 2020 at an invoice price of
machinery for P3,300,000. The machinery has an
P4,500,000 with terms 2/10, n/30. On December
estimated useful life of five years with residual
10, 2020, Wan paid the required amount for the
value of P300,000. Depreciation is computed by
machine. On December 2, 2020, Wan paid
the sum of the years’ digit method.
P80,000 for delivery of the machine and on
December 31, 2020, it paid P310,000 for
Page 7
installation and testing of the machine. The

machine was ready for use on January 1, 2021. What should be the charge for depreciation in
2022?
It was estimated that the machine would have a
A 70,800 C. 76,400
useful life of 5 years, and a residual value of B 82,000 D 95,500
P800,000. Engineering estimates indicated that . .
the useful life in productive units was 200,000.
Units actually produced during the first two years
were 30,000 in 2021 and 48,000 in 2022. Wan 13.On July 1, 2022, Piscor Corporation purchased
Company decided to use the productive output factory equipment for P450,000. Residual value
method of depreciation. was estimated to be P12,000. The equipment will
be depreciated over ten years using the double-
What is the depreciation of the machine for
declining balance method.
2022?
A 1,560,000 C. 960,000
B 720,000 D 600,000 Counting the year of acquisition as one-half year,
. . Piscor should be reported as depreciation
10.Carnage Company purchased a boring machine expense for 2023 on this equipment of:
on January 1, 2020 for P81,000. The useful life of A 90,000 C. 78,840
the machine is estimated at 3 years with a B 81,000 D 72,000
residual value at the end of this period of P6,000. . .
During its useful life, the expected units of
14.Tillman Company owned a machine that was
production from the machine are:
bought on January 1, 2021 for P7,520,000. The
machine was estimated to have a useful life of
2020 12,000 units
five years and a residual value of P480,000.
2021 7,000 units
2022 5,000 units
The entity used the sum of the years’ digit
What should be the depreciation expense for the method of depreciation. At the beginning of 2024,
year ended December 31, 2021, using the most the entity determined that the total useful life of
appropriate depreciation method permitted by the machine should have been four years and the
PAS 16 – Property, Plant and Equipment
residual value P704,000.
A 27,000 C. 23,625
B 21,875 D 25,000
. . What is the depreciation expense for 2024?
A 1,184,000 C. 888,000
11.Shogun Company purchased a non-current asset B 1,408,000 D 755,200
with a useful life of 12 years on January 1, 2021 . .
for P6,500,000.
15.On January 1, 2012, the management of Milan
Company determined that a revision in the
At its year end of December 31, 2021, the
amount the company would receive from the estimate associated with the depreciation of plant
disposal of the asset if it was already of the age facilities was necessary. The facilities, purchased
and in the condition expected at the end of its on January 1, 2010, for 7,500,000, had been
useful life was estimated at P700,000. Inclusive of depreciated using the straight-line method with
inflation the actual amount expected to be an estimated residual value of 500,000 and an
received on disposal was estimated at P900,000. estimated useful life of 15 years.
The depreciation charge under PAS 16 – Property,
Plant and Equipment, for the year ended Management has determined from recent
December 31, is appraisal reports that the expected remaining
A 483,333 C. 541,667 useful life of the facilities is only 10 years and the
B 466,667 D 413,333 estimated residual value should be increased by
. . 200,000.
12.Libras Corporation purchased a machine on July

What is the depreciation expense that should be
1, 2019, for P500,000. The machine was
recognized for the year 2012?
estimated to have a useful life of 10 years with an
A 536,667 C. 293,333
estimated residual value of P28,000. During B 633,333 D 586,667
2022, it became apparent that the machine . .
would become uneconomical after December 31,
2026 and that the machine would have no scrap / End /
value.
Page 8
One Dream, One Team
STUDENT HANDOUTS
FAR.125—GOVERNMENT GRANT MAY 2021 CPALE REVIEW
LEARNING OBJECTIVES
1. To compute the grant income and the deferred grant 4. To account for the interest free/below market interest
income for grants related to income. loan from government
2. To compute the grant income, deferred grant income and

depreciation for grants related to asset
3. To compute the amount of loss on grant repayments
REVIEW NOTES
Government Grant – are assistance by government in the C. Loss on Repayments

form of transfer of resources to an entity in return for past or
future compliance with certain conditions relating to the Deferred grant income – date of repayment XX
operating activities of the entity. They exclude those forms Amount of repayment (XX)
of government assistance which cannot reasonably have Loss on grant repayment XX
value placed upon them.
2. Related to Past Compliance (No Condition) – The
Government Assistance – is action by government whole amount of the grant will be recognized as grant
designed to provide an economic benefit specific to an entity income on the date it was received. No liability
or range of entities qualifying under certain criteria. recognized.
Classification of Grants Accounting Treatment – Grant Related to Asset:
1. Grant Related to Asset – grants whose primary § Option 1 – Treated as Deferred Grant Income – initially,
condition is that an entity should purchase, construct the grant is recognized as deferred grant income, a
or otherwise acquire long-term assets. liability similar to unearned income. The grant will be
recognized subsequently as grant income throughout the
2. Grant Related to Income – grants other than those condition period. Unlike the grant related to income, the
related to assets. grant income recognized every period is equal until the
asset is fully depreciated.
Accounting Treatment – Grant Related to Income:
§ Option 2 – Treated as Deduction to Asset – the amount
1. Related to Future Compliance (With Condition) – of grant received was off-set to the cost of the asset. In
initially, the grant is recognized as deferred grant income, effect, since the cost is lower, the depreciation will be
a liability similar to unearned income. The grant will be also lower. No grant income is recognized, this was also
recognized subsequently as grant income throughout the off-set to depreciation.
condition period. The grant income recognized every
period will depend on the expenses incurred over the Option 1 Option 2
total expenses until compliance. The more expenses
PPE XX PPE XX
incur, the more grant income recognize. Purchase of PPE
Cash XX Cash XX
COMPUTATION:
Cash XX Cash XX
Receipt of grant
Def. Grnt. Inc. XX PPE XX
A. Grant income
Expense for the
Dep. Exp. XX Dep. Exp. XX
current year Grant Depreciation
Grant x = Acc. Dep XX Acc. Dep XX
Total expense over Income
compliance period
Recognition of Def. Grnt. Inc. XX
No entry
grant income Grant Income XX
B. Ending balance of deferred grant income
Amount of the grant XX Loss on Repayment – Grant Related to Asset:
Cumulative grant income (XX) Option 1 – Same as grant related to income
Deferred grant income – ending balance XX Option 2 – No loss on repayment since no income was
recorded previously. Depreciation will be adjusted

FAR | FAR.123—GOVERNMENT GRANT ARC – ACCOUNTANCY REVIEW CENTER
COMPUTATION:
Option 1 – As deferred grant income

D. Grant income
Amount of grant XX
Divided by useful life XX
Grant income XX
E. Ending balance of deferred grant income

Amount of the grant XX
Cumulative grant income (XX)
Deferred grant income – ending balance XX
F. Loss on Repayments
Deferred grant income – date of repayment XX
Amount of repayment (XX)
Loss on grant repayment XX
Option 2 – As deduction to the cost of asset
G. Grant income
Zero
H. Ending balance of deferred grant income

Zero
I. Loss on repayments
Zero
Government Loan at Below Market Interest Rate – benefit

of government with a zero or below-market rate of interest is
treated as a government grant.
The accounting for the loans/notes payable from the
government is treated normally. It is initially recognized at the
present value of future payments and subsequently
recognized at amortized cost. The company will continue to
recognize interest expense equal to the effective interest.
The deferred grant income is equal to the difference of the

amortized cost of the loans/notes payable and its face
amount. While the grant income is equal to the difference of
the effective interest and nominal interest.
COMPUTATION:
J. Amortized cost of loans/notes payable

Initial measurement XX
Times 1 + effective interest x%
Less nominal interest (XX)
Amortized cost – ending XX
K. Ending balance of deferred grant income
Face amount of loans/notes payable XX

Amortized cost – ending (XX)
Deferred grant income – end XX
L. Grant income
Effective Int. (CA – beg * Eff. rate) XX

Nominal Int. (Face * Nominal rate) (XX)
Grant income XX

1. These are assistance by the government in the form of 7. In the case of grants related to an asset, which of these
transfers of resources to an entity in return for part or accounting treatments (balance sheet presentation) is
future compliance with certain conditions relating to the prescribed by PAS 20?
operating activities of an entity. A. Record the grant at a nominal value in the first year
A. Government grant and write it off in the subsequent year.
B. Government assistance B. Either set up the grant as deferred income or deduct
C. Government aid in in arriving at the carrying amount of the asset.
D. Government appropriation C. Record the grant at fair value in the first year and take
it to income in the subsequent year.
2. Which statement is incorrect regarding government D. Take it to the statement of comprehensive income
grants in accordance with PAS 20? and disclose it as an extraordinary gain.
A. Government grants are assistance by government in
the form of transfers of resources to an entity in Numbers 8-13
return for past or future compliance with certain On January 1, 2021, So Many Company received cash of
conditions relating to the operating activities of the P16,000,000 from a local government to be used in
entity. constructing a building. The construction was completed on
B. All government grants are government assistance. December 31, 2021 for a total cost of P40,000,000. The
C. All government assistance are government grants. building will be depreciated over 20 years.
D. All the statements are correct.
So Many Company treated the grant as deferred income.
3. Government grants include 8. The grant income for year ended December 31, 2022 is
A. Government assistance, which cannot reasonably
A. 2,000,000 C. 800,000
have a value placed upon them.
B. Transactions with government, which cannot be B. 1,600,000 D. 0
distinguished from the normal trading transactions of 9. How much is the deferred grant income as of December
the entity.
31, 2022?
C. Both a and b.
D. Neither a nor b. A. 15,200,000 C. 14,000,000
B. 14,800,000 D. 0
4. A government grant is recognized only when there is 10. How much is the carrying amount of the building as of
reasonable assurance that:
the year ended December 31, 2022?
A. The entity will comply with any conditions attached
to the grant. A. 40,000,000 C. 22,800,000
B. The grant will be received. B. 38,000,000 D. 24,000,000
C. Both a and b.
Assuming that So Many treated the grant as deduction to
D. Neither a nor b.
asset instead of deferred grant income, answer the following:
Numbers 5-6 11. How much is the grant income for year ended December
On January 2, 2021, Brand Company received a grant of 31, 2022?
P60,000,000 to compensate it for costs it incurred in planting A. 2,000,000 C. 800,000
trees over a period of five years. Brand Company will incur B. 1,600,000 D. 0
such cost in this manner:
12. How much is the deferred grant income as of December
Year Cost 31, 2022?
2021 2,000,000 A. 15,200,000 C. 14,000,000
2022 4,000,000
B. 14,800,000 D. 0
2023 6,000,000
2024 8,000,000 13. How much is the carrying amount of the building as of
2025 10,000,000 the year ended December 31, 2022?
Actual costs incurred in planting the threes showed A. 40,000,000 C. 22,800,000
P2,000,000 and P4,000,000 in years 2021 and 2022, B. 38,000,000 D. 24,000,000
respectively. However, in 2023 and up to year 2024, the
company has stopped planting trees. 14. Which of the following is true regarding the alternative
ways to apply the income approach to accounting of
Due to the non-fulfillment of its obligation, the government is resources acquired through government grants?
demanding an immediate repayment of the grant in the A. Expenses will be higher and net income lower if the
amount of P50,000,000 which is considered reasonable. grant is recorded as deferred income.
5. What is the grant income for the year 2021? B. Expenses will be higher and net income lower if the
A. 12,000,000 C. 4,000,000 grant is accounted for as an adjustment to the asset.
C. Depreciation expense will be higher if the grant is
B. 2,000,000 D. 60,000,000 recorded as an adjustment to the asset, but net
6. What amount should be recognized as an expense income will be the same under the two alternatives.
related to the repayment of grant? D. Depreciation expense will be higher if the grant is
recorded as deferred income, but net income will be
A. 50,000,000 C. 12,000,000
the same under the two alternatives.
B. 44,000,000 D. 2,000,000
15. On January 1, 2021, Hakdog Company received cash of Numbers 19-20

P4,000,000 from the government to be used in
constructing a building. The construction was completed On January 1, 2020, Marivic Company received from the
government a P5,000,000 three-year, zero-interest loan
on December 31, 2021 for a total cost of P10,000,000.
evidenced by a promissory note. The prevailing rate of
The building is depreciated over 20 years. On January 1, interest for a loan of this type is 10%. The present value of 1
2024, the government demanded repayment of the at 10% is .75 for three periods.
P4,000,000 grant given as grant in 2021.
18. What is the included in the journal entry to record the loan
What is the amount of loss on repayment of government and grant?
grant to be reported in 2024? A. Debit discount on notes payable P1,250,000
A. 3,400,000 C. 400,000
B. Credit note payable P5,000,000
B. 600,000 D. 0
C. Credit deferred grant income P1,250,000
16. On January 1, 2021, Feista Company acquired a D. All of these are included in the journal entry
depreciable asset for P3,300,000 and it this same date, it
19. What is the grant income for 2020?
received a government grant of P300,000 which was
A. 1,250,000 C. 416,667
deducted from the cost of the asset acquired. The asset
B. 375,000 D. 0
has 10-year useful life and residual value of P250,000.
Feista failed to comply with the conditions of the grant
Numbers 21-22
and on January 1, 2023, the grant became repayable.
What is the depreciation in 2023? On January 2, 2023, Faster Company receives a government
A. 390,000 C. 305,000 loan of P2,000,000 paying a coupon interest of 2% per year.
B. 365,000 D. 300,000 The loan is repayable on December 31, 2026. Faster
Company’s borrowing cost is 10% per annum. The below-
17. A government grant that becomes repayable shall be market interest is provided by the government to enable
accounted for as Faster Company to bear cost of 2% per annum on the
nominal value of the loan.
A. Change in accounting estimate
B. Change in accounting policy 20. What amount of deferred income should Faster report in
C. Both change in accounting estimate and change in the statement of financial position as of December 31,
accounting policy 2023?
D. Neither change in accounting estimate and change in A. 145,455 C. 377,231
accounting policy B. 277,686 D. 397,896
21. The amount of realized grant should the company report

in its Dec. 31, 2023 statement of comprehensive income
is
A. 109,282 C. 132,231
B. 120,210 D. 397,896
/ END /

Numbers 1-3 6. On January 1, 2015, Amman Company received a grant

of P50 million from a foreign government for the
Jeanette Company purchased a machine for P6,600,000 on construction of a laboratory and research facility with an
January 1, 2020 a received a government grant of P600,000 estimated cost of P60 million and useful life of 25 years.
towards the capital cost. The policy is to treat the grant as a The facility was completed in early 2016. Company
reduction in the cost of the asset. The machine is to be policy is to treat the grant as a reduction in the cost of the
depreciated on a straight-line basis over 5 years with a asset.
residual value of P500,000. On January 1, 2022, the grant
became fully repayable because of noncompliance with What should be the depreciation expense in respect of this
conditions. facility for the year ended 31 December 2016, assuming
that depreciation is calculated on a straight-line basis?
1. What is the depreciation for 2020? A. Nil C. P2,000,000
A. 1,100,000 C. 1,220,000 B. P2,400,000 D. P 400,000
B. 1,200,000 D. 1,320,000
7. Vici Company received an P1,800,000 subsidy from the
2. What is the depreciation for 2022? government to purchase manufacturing equipment on
A. 1,460,000 C. 1,220,000 January 2, 2023. The equipment has a cost of
B. 1,200,000 D. 1,320,000 P3,000,000, a useful life is six years, and no salvage
value. Vici depreciates the equipment on a straight line
3. What is the depreciation for 2023? basis.
A. 1,100,000 C. 1,200,000
B. 1,320,000 D. 1,220,000
If Vici chooses to account for the grant as deferred
4. Bataan Inc. was granted a parcel of land by a local revenue, the combined impact of deferred grant revenue
government authority. The condition attached to this recognition and / or depreciation expense recorded per
grant was that Bataan Inc. should clean up this land and year will be:
lay roads by employing laborers from the village in which A. Decrease to net income of P200,000
the land is located. The entire operation will take three B. Decrease to net income of P300,000
years and is estimated to cost P100 million. This amount C. Increase to net income of P500,000
will be spent in this way: P20 million each in the first and D. Increase to net income of P100,000
second years and P60 million in the third year. The fair
value of this land is currently P120 million. 8. Secret Company purchased a jewel polishing machine
for P360,000 on April 1, 2023 and received a government
How much should be recognized as income from grant of P50,000 towards the capital cost. Company
government grant at the end of the first year?
A. P20,000,000 C. P40,000,000 policy is to treat the grant as a reduction in the cost of
B. P24,000,000 D. P 0 the asset. The machine was to be depreciated on a
straight-line basis over 8 years and was estimated to
5. To encourage entities to expand their operations in a have a residual value of P5,000 at the end of this period.
specified development zone, where it is difficult for
entities to obtain financing for their projects, the Under PAS 20 – Government Grants and Government
government provides interest-free loans to fund the Assistance, what should be the depreciation expense in
purchase of manufacturing equipment. On January 1, respect of the machine for the year ended December 31,
2021, in accordance with the development scheme, an 2023?
entity receives an interest-free loan from the government A. 38,750 C. 38,125
for P5,000,000 for a period of three years. B. 76,250 D. 28,594
The market rate of interest for similar loans is 5% per year 9. On January 1, 2023, the city government provided
(is the market rate of interest for similar three-year loan to Swerte Company a zero interest, P6,000,000 loan with a
the entity). There are no future performance conditions 4-year term. The prevailing market rate of interest for this
attached to the interest-free loan. type of loan is 8%.
What amount should be included immediately in the

What is included in the entries on December 31, 2024?
profit or loss on January 1, 2021?
A. None C. 464,853 (PVF 3 decimals)
B. 238,095 D. 680,815 A. Debit interest expense P352,800
B. Credit income from grant P352,800
C. Credit income from grant P381,024
D. Credit interest expense P381,024

Numbers 10-11 14. Maker Company purchased a varnishing machine for

P450,000 on January 1, 2023. The company received a
Nadine Company received a P1,800,000 subsidy from the government grant of P40,500 in respect of this asset.
government to purchase manufacturing equipment on Company policy was to depreciate the asset over 4
January, 2, 2016. The equipment has a cost of P3,000,000, a years on a straight line basis and to treat the grant as
useful life a six years, and no salvage value. Nadine deferred income. Under PAS 20 – Government Grant
depreciates the equipment on a straight-line basis. and Government Assistance, what should be the
carrying amount of the machine and the deferred
10. If Nadine chooses to account for the grant as deferred income balance at December 31, 2024 of Maker
income, the grant income to be recognized in 2016 is Company?
A. Nil C. P 500,000 Carrying amount Deferred grant income
B. P300,000 D. P1,800,000
A. 225,000 20,250
11. If Nadine chooses to account for the grant as an B. 337,500 30,375
adjustment to the asset, the carrying amount of the asset C. 245,250 20,250
on the December 31, 2016 statement of financial position D. 225,000 40,500
is
A. P1,200,000 C. P2,200,000 15. On January 1, 2023, Got The Feeling Company
B. P1,000,000 D. P2,500,000 purchased a machine for P5,400,000. The company
received a government grant of P400,000 toward this
12. On January 1, 2016, Carmona Company received a grant
of P50 million from the British government in order to capital cost. The machine is to be depreciated using SYD
defray safety and environmental costs within the area over 5 years. The estimated residual value is P200,000.
where the enterprise is located. The safety and The accounting policy is to treat the government grant as
environmental costs are expected to be incurred over a reduction in the cost of the asset. On January 1, 2025,
four years, respectively, P4 million, P8 million, P12 million the company repaid the grant due to noncompliance of
and P16 million. How much income from the government conditions. What is the depreciation of the machine for
grant should be recognized in 2016?
A. P50,000,000 C. P12,500,000 2025?
B. P 5,000,000 D. P 0 A. 1,040,000 C. 1,320,000
B. 1,280,000 D. 1,080,000
13. On July 1, 2015, Corregidor Company is granted a large
tract of land in the Cordillera region by the Philippine
government. The fair value of the land is P10 million.
Corregidor Company is required by the grant to construct
chemical research facility and employ only personnel
residing in the Cordillera region. The estimated cost of
the facility is P50 million with useful life of 20 years. The
facility was completed in early 2016.
Corregidor Company should recognize in 2016 an

income from government grant at
A. P10,000,000 C. P2,500,000
B. P 500,000 D. P 0 / End /

One Dream, One Team
STUDENT HANDOUTS
FAR.119—REVALUATION MODEL MAY 2021 CPALE REVIEW
LEARNING OBJECTIVES
1. To compute for the “whole” revaluation surplus 5. To account for the impairment of asset that was
2. To compute for the “remaining” revaluation previously revalued
surplus
3. To compute for the new depreciation expense
4. To account for the revaluation of asset that was
previously impaired
REVIEW NOTES
Revaluation Model – The PPE are measured Revaluation Surplus – is type of earnings that is
subsequently at revalued amount. This is the fair not yet realized that is why, these earnings are
value less subsequent depreciation and impairment. presented in the other comprehensive income. Once
If the company used revaluation model on an item of realized, revaluation surplus is transferred to
PPE, the entire class of PPE to which that asset retained earnings (RE) so it can now be declared as
belongs shall be revalued. dividends.
Cost Model VS. Revaluation Model PROCESS OF ACCOUNTING FOR REVALUATION

>> CA increases AND COMPUTATIONS:
>> due to revaluation >> CR: RS
1. Increase in Value of the Asset: >> Offsets revaluation decrease:
reported in P/L 1. “Whole” revaluation surplus (date of revaluation):
Cost Model Revaluation Model
Without
Recognize as
Revalued - FV/SV/DRC (a) XX
prior Less: Carrying amount (b) CA @ Reval
Do not recognize “revaluation surplus
impairme (XX)
(RS)”
nt Whole revaluation surplus RS - initial XX
With Recognize as
Prior Recognize as “Gain on reversal a. Revalued amount – if the “fair value” is given,
Impairme “Gain on reversal” And revaluation
no more computation is needed, however, if
nt surplus”
“replacement cost” is given, DRC is computed
as follows:
>> CA decrease if FV/SV not avail
2. Decrease in Value of the Asset >> due to reval >> charged to RS Replacement cost (RC) XX
Balance then excess to P/L
Less: Acc. Dep [(RC/life) * age] consider the RV**
Cost Model Revaluation Model
(XX)
Without
Recognize as Depreciated replacement cost XX
prior Recognize as
“Impairment loss”
revaluatio “Impairment loss” **check the date of reval first
n b. Carrying amount before computing the CA >> add
With the Depre for the year/period
Recognize as Cost XX
Prior
Not applicable “Deduction to RS and Less: Acc. Dep [(Cost/life) * age] (XX)
Revaluati
Impairment loss”
on Carrying amount XX
Revalued Amount – is either: 2. “Remaining” revaluation surplus (subsequent to

1. Fair value or Sound Value – the price that would date of revaluation): RS is realized due to usage or
be received to sell an asset. disposal >> transferred to RE
>> if the FV/SV not avail Whole revaluation surplus (see above) XX
2. Depreciated Replacement Cost (DRC) – Less: Amount transferred to R.E. (a) (XX)
determine from the amount that would be Remaining revaluation surplus XX
required currently to replace the asset
(replacement cost) adjusted for any depreciation a. Amount transferred to retained earnings:
based on the replacement cost. RS xx **Amort. of RS >> Depre
(For depreciable asset) RE xx method of entity
Timing of Revaluation:
 Volatile PPE – Annual revaluation is necessary. Whole revaluation surplus
= Annual transfer
 Not volatile PPE – Every 3 to 5 years. Remaining useful life
(For non-depreciable asset)

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100% when the revalued asset is sold, 0% if not Less: Amount transferred to R.E.
sold. 100% transferred (XX)
Remaining revaluation surplus
Reminders: XX
 Revaluation surplus should be net of tax.
 In computing the accumulated depreciation of
DRC, use the original useful life but the new
residual value.
TWO Approaches In Recording Revaluation: recog. RS in the books:
1. Proportional Approach – the principal account

Asset and the contra-account of the PPE will be Revaluation of Previously Impaired Asset –
Acc Dep
Reval Surplus increased by the percentage of increase from under the cost model the subsequent increase in
the revaluation. value is limited only to the reversal limit, while under
Cost and Acc Dep (@ Reval Date) revaluation there is no limit as to its increase in
will increase
Whole revaluation surplus value.
= % of increase
Carrying amount see sample below**
COMPUTATION:
Acc Dep 2. Elimination Approach – the contra-account will
Asset be reduced by the amount of revaluation. Revalued amount (FV/SV/DRC)
Reval Surplus (whole/initial) XX
Less: Carrying amount on reversal (a)
New Depreciation – Revaluation is a change in (XX)
estimate. When an asset is revalued, the Total increase XX
depreciation expense for this asset will change. The Less: Gain on reversal (b)
basis for the new depreciation is the revalued (XX)
amount (FV/SV/DRC) which will be spread out to the
Revaluation surplus XX
remaining useful life.
FV/SV/DRC New
= a. Remaining Carrying Amount at Reversal:
Remaining useful life Depreciation
Cost - Acc Dep - Acc Imp
Remaining CA date of impairment XX
Less: New depreciation CA after Imp / Rem UL
Impairment of Previously Revalued Asset – the
(XX)
decrease in value is recognize as deduction to the
Remaining CA date of reversal
remaining revaluation surplus and the balance is
XX CA as if no Imp:
treated as impairment loss.
Cost
b. Gain on Reversal Less: Acc Dep as if no Imp
COMPUTATION:
Lower Between: (a) CA as if no
Reversal limit (b) Imp and (b) RA XX
Carrying amount on impairment (a) XX
Less: CA on reversal date (a)
Less: Recoverable amount (b)
(XX)
(XX)
Gain on reversal XX
Total loss XX
Less: Remaining revaluation sur. (c) /THE END/
(XX)
Impairment loss XX
a. Carrying amount COST MODEL:
Cost
Carrying amount on revaluation Less: Acc Dep CA @ Imp / Rem UL = New Depre
(FV/SV/DRC) XX Acc Imp
Less: New depreciation CA @ Imp
(XX)
Carrying amount on impairment Proportional Method:
XX
% increase X Cost Increase in Amt + Cost = Reval
= Increase in Amt Model (Cost + % increase)
b. Recoverable amount w/clever is higher: (a) FV-CTS and
(b) VIU
Increase in Cost
Fair value less cost to sell XX + Increase in Acc Dep
Versus: Value-in-use XX = Reval Surplus
Recoverable amount (select higher) XX
** Increase in Reval Surplus
FV/SV - current period
c. Whole revaluation surplus (see above) Less: CA - based on FV in prior period*
XX *FV
Reval Surplus >> FV changed next period: Less: New Acc Dep (FV / RUL x Age)
Page 2 Remaining RS
+ Increase in RS
Total: New RS
Less: Amt transferred in RE (based on new RS)
Total: Rem RS (to be reported in SCE)
1. If an entity with a fleet of cars and ships decided On January 1, 2021, GGG, Inc. purchased an
to revalue property, plant and equipment, which equipment for P10,400,000. Residual value was
of the following statements is true? P800,000 and useful life was for 10 years. On
December 31, 2024, the equipment’s replacement
A. Revalue only one-half of each class of
cost had increased to P16,000,000 while its residual
property, plant and equipment value was reduced to P400,000. GGG appraised the
B. Revalue an entire class of property, plant and equipment and the process resulted to the original
equipment life being revised to 12 years.
C. Revalue one ship at a time as it is easier than
revaluing all ships together 7. How much is the revaluation surplus recognized
D. Since assets are being revalued regularly, on December 31, 2024?
there is no need to depreciate A. 3,200,000 C. 3,360,000
B. 5,200,000 D. 9,360,000
2. Which statement is true about the revaluation
model for property, plant and equipment? 8. How much is the 2025 depreciation?
A. The frequency of revaluation depends upon A. 780,000 C. 1,040,000
the changes in fair value of the property, B. 960,000 D. 1,170,000
plant and equipment.
B. Property, plant and equipment with significant
9. On January 1, 2023, Stigman Company purchased
and volatile changes in fair value necessitate
building at a cost of P10,000,000 with a 10-year
annual revaluation.
useful life and no residual value. The entity used
C. Property, plant and equipment with
the straight-line depreciation method.
insignificant changes in fair value may be
revalued only every three to five years.
On January 1, 2025, the entity decided to use
D. All of these statements are true about the revaluation model and it was determined that the
revaluation model. fair value of the equipment on this date is
P12,000,000. The income tax rate is 30%.
Numbers 3-5
On January 1, 2023, Dower Company purchased What is included in the entry to record the
equipment costing P2,400,000 with a 6-year useful revaluation on January 1, 2025?
life and no residual value. Dower entity used the A. Debit accumulated depreciation P1,000,000
straight-line method of depreciation. On December B. Debit deferred tax liability P1,200,000
31, 2023, the fair value of the equipment was C. Credit revaluation surplus P5,000,000
P2,200,000. Dower used the revaluation model and
D. Credit revaluation surplus P2,800,000
Dower revalued the equipment on December 31,
2023. The entity restated its accumulated
depreciation proportionately. Numbers 10-11
Cornish Company finished construction of building on
3. What is the pretax revaluation surplus on January 1, 2018 at a total cost of P25,000,000. The
building was depreciated over the estimated useful
December 31, 2023?
life of 20 years using the straight-line method with no
A. 200,000 C. 166,667 residual value.
B. 160,000 D. 566,667
The building was subsequently revalued on
4. What is included in the journal entry to record the December 31, 2021 and the revaluation report
revaluation on December 31, 2023? showed that the asset had a replacement cost of
A. Debit equipment P200,000 P32,000,000 and was determined to have no change
B. Debit depreciation expense P566,667 in the useful life.
C. Credit accumulated depreciation P40,000
D. Credit revaluation surplus P240,000
On January 1, 2023, the building was tested for
5. What is the pretax revaluation surplus on impairment and the fair value was P18,000,000 on
same date, with no change on the remaining useful
December 31, 2024?
life.
A. 240,000 C. 453,333
B. 200,000 D. 160,000 10. What amount of revaluation surplus should be
recognized on December 31, 2021?
6. What is the revalued amount of property plant A. 5,600,000 C. 1,400,000
and equipment? B. 7,000,000 D. 5,250,000
A. Fair value
B. Depreciated replacement cost 11. What is the impairment loss for 2023?
C. Replacement cost A. 6,000,000 C. 750,000
D. Fair value and depreciated replacement cost B. 400,000 D. 0
Numbers 7-8
Page 3
Numbers 12-13 14. When a balance is carried in an “revaluation

Bernadette, Inc. purchased an equipment on January surplus” account in relation to an asset that has
1, 2019 for P13,000,000. This equipment had 10-year been derecognized, it is applicable under PAS 16
useful life. On December 31, 2020, due to
to
obsolescence, Bernadette recognized an impairment
loss of P2,600,000. A. Transfer the balance to “share capital”
account.
On December 31, 2021, Bernadette determined that B. Transfer the balance to retained earnings.
the fair value of the equipment had increased to C. Recognize the balance in profit or loss of the
P9,750,000. period in which the asset was derecognized.
D. Transfer the balance to a provision account for
12. What amount of gain on reversal of impairment
future asset revaluations.
shall Bernadette recognize in 2021?
A. 2,925,000 C. 650,000
B. 2,275,000 D. 325,000
13. Assuming Bernadette was using revaluation

model in accounting for its property, plant and
equipment, how much was the revaluation
surplus resulting from the revaluation in 2021?
A. 2,250,000 C. 650,000
/ END /
B. 2,275,000 D. 325,000
Page 4
Numbers 1-2
On January 1, 2020, Coleen Company showed land Numbers 6-7
with carrying amount of 10,000,000 and building On January 1, 2017, Boston Company purchased a
with cost of P60,000,000 and accumulated new building at a cost of P6,000,000. Depreciation
depreciation of P18,000,000. The land and building was computed on the straight-line basis at 4% per
were revalued on same date and revealed for fair year. On January 1, 2022, the building had a fair
value of land at P15,000,000 and the building at value of P8,000,000.
P70,000,000. The original useful life of the building is
20 years and depreciation is computed on the 6. Using the revaluation model in accounting the
straight line. The income tax rate is 30%. new building, what is the depreciation for 2022?
A. 320,000 C. 100,000
1. What is the revaluation surplus on December
31, 2020? B. 400,000 D. 240,000
A. 33,000,000 C. 21,450,000
B. 23,100,000 D. 21,700,000 7. What is the pretax revaluation surplus on
December 31, 2022?
2. What is the annual depreciation for 2020? A. 3,072,000 C. 3,040,000
A. 5,000,000 C. 4,500,000 B. 1,900,000 D. 1,920,000
B. 3,500,000 D. 3,000,000
Numbers 8-10
Numbers 3-4 On June 30, 2023, Flakes reported the following
Daralyn company acquired a building on January 1, information:
2017 at a cost of P20,000,000. The building had a
useful life of 6 years and residual value of Equipment at cost 30,000,000
P2,000,000. The building was revalued on January Accumulated depreciation 10,500,000
1,2020 and the revaluation revealed replacement
cost of P30,000,000, residual value of P4,000,000 The equipment was measured using the cost model
and revised useful life of 8 years from the date of and depreciated on a straight line basis over 10-year
acquisition. The tax rate is 30%. period. On Dec. 31, 2023, the management decided
to change the basis of measurement from the cost
3. What is the revaluation surplus on December model to the revaluation model. The equipment was
31, 2020? revalued at the fair value of P27,000,000 with no
A. 6,000,000 C. 2,800,000 change in useful life. The income tax rate is 30%.
B. 4,200,000 D. 3,360,000
8. What is the revaluation surplus on December 31,
4. What is the annual depreciation for 2020? 2024?
A. 2,600,000 C. 3,000,000 A. 6,300,000 C. 5,250,000
B. 3,400,000 D. 1,400,000 B. 9,000,000 D. 5,670,000
5. During the current year, Sunrise Company sold a 9. What is the depreciation for 2024?
piece of equipment used in production. The A. 4,500,000 C. 3,000,000
equipment had been accounted for using the B. 2,700,000 D. 1,500,000
revaluation model and details of the account on
the date of sale are as follows: 10.What is deferred tax liability on December 31,
2024?
Sale price 5,000,000 A. 2,700,000 C. 1,350,000
Carrying amount of equipment 4,500,000 B. 2,250,000 D. 2,500,000
Revaluation surplus balance 1,000,000
Which statement is correct about recording the

sale?
A. The gain that should be recorded in profit or
loss is P1,500,000.
B. The gain that should be recorded in other
comprehensive income is P500,000.
C. The gain that should be recorded in other
comprehensive income is P1,500,000.
D. The gain that should be recorded in profit and
loss is P500,000 and the P1,000,000
revaluation surplus should be transferred to / End /
retained earnings.
Page 5
One Dream, One Team
STUDENT HANDOUTS
FAR.116—BIOLOGICAL ASSETS MAY 2021 CPALE REVIEW
LEARNING OBJECTIVES
1. Describe agricultural activities and concepts related 3. Know the principles of recognition and measurement of
thereto under PAS 41 bearer plants under PAS 16
2. Know the principles of recognition and measurement of 4. Enumerate presentation and disclosure requirements for
biological assets and agricultural produce under PAS 41 biological assets.
REVIEW NOTES
Agricultural Activities and Related Concepts (LO1)

PAS 41 defines an “agricultural activity” as the management by Recognition criteria
an entity of the biological transformation and harvest of Under PAS 41.10, an entity shall recognize a biological asset or
biological assets for sale or for conversion into agricultural agricultural produce when, and only when:
produce or into additional biological assets. a. the entity controls the asset as a result of past events
b. it is probable that future economic benefits associated with
a. Biological transformation – comprises the following the asset will flow to the entity; and,
processes that cause qualitative or quantitative changes in c. the fair value or cost of the asset can be measured reliably.
a biological asset.
• Growth (increase in quantity or improvement in quality Measurement
of an animal or plant) 1. Biological assets
• Degeneration (decrease in quantity or deterioration in a. Fair value less cost to sell model
quality of an animal or plant) Biological assets shall be measured at fair value less
• Procreation (creation of additional living animals or costs to sell on:
plants) • Initial recognition
• Production of agricultural produce • At the end of each reporting period
b. Harvest – is the detachment of produce from a biological Gains and losses arising from such are included in profit
asset or the cessation of a biological asset’s life processes. or loss for the period in which it arises.
Common Features of Agricultural Activity Fair value is the price that would be received to sell an
Agricultural activity includes raising livestock, forestry, annual asset or paid to transfer a liability in an orderly
or perennial cropping, cultivating orchards and plantations, transaction between market participants at the
floriculture, and aquaculture. Certain common features exist measurement date. Costs to sell are the incremental
within this diversity: costs directly attributable to the disposal of an asset,
1. Capability to change excluding finance costs and income taxes.
2. Management of change
3. Measurement of change b. Cost model
Biological assets can be measured at its cost less any
Biological Assets and Agricultural Produce (LO2) accumulated depreciation and any accumulated
A biological asset is a living animal or plant, while an impairment losses, when, and only when quoted
agricultural produce is the harvested produce of the entity’s market prices are not available and for which
biological assets. alternative fair value measurements are determined to
be clearly unreliable.
Agricultural Products resulting
Biological asset produce from processing There is a presumption that fair value can be measured
Sheep Wool Yarn, carpet reliably for a biological asset. However, that
Trees in a timber Felled trees Logs, lumber presumption can be rebutted only on initial recognition
plantation for a biological asset. Once the fair value of such a
Dairy cattle Milk Cheese biological asset becomes reliably measurable, an entity
Pigs Carcass Sausages shall measure it at its fair value less costs to sell.
Cotton plants Harvested cotton Thread, clothing
Sugarcane Harvested cane Sugar 2. Agricultural produce – Shall be measured at its fair value
Tobacco plants Picked leaves Cured tobacco less costs to sell at the point of harvest, which becomes the
Tea bushes Picked leaves Tea cost of the produce at that date when applying another
applicable standard (e.g. PAS 2).
Grape vines Picked grapes Wine
Fruit trees Picked fruit Processed fruit
PAS 41 reflects the view that the fair value of agricultural
Oil palms Picked fruit Palm oil
produce at the point of harvest can always be measured
Rubber trees Harvested latex Rubber products
reliably.
FAR | FAR.116—BIOLOGICAL ASSETS ARC – ACCOUNTANCY REVIEW CENTER
Bearer Plants (LO3)

Bearer plants are the only biological asset that is covered under c. information such as:
PAS 16. Bearer plants are living plants that: • the nature of its activities involving each group of
a. are used in the production or supply of agricultural produce biological assets; and
b. are expected to bear produce for more than one period, and • non-financial measures or estimates of the physical
c. have a remote likelihood of being sold as agricultural quantities of each group of the entity’s biological assets
produce, except for incidental scrap sales. at the end of the period and output of agricultural
produce during the period.
When bearer plants are no longer used to bear produce, they
might be cut down and sold as scrap, for example, for use as d. the existence and carrying amounts of biological assets
firewood. Such incidental scrap sales would not prevent the whose title is restricted, and the carrying amounts of
plant from satisfying the definition of a bearer plant. biological assets pledged as security for liabilities
PAS 41.5A discusses that the following are not bearer plants: e. the amount of commitments for the development or
a. plants cultivated to be harvested as agricultural produce acquisition of biological assets; and
(for example, trees grown for use as lumber);
b. plants cultivated to produce agricultural produce when f. financial risk management strategies related to agricultural
there is more than a remote likelihood that the entity will activity.
also harvest and sell the plant as agricultural produce, other
than as incidental scrap sales (for example, trees that are g. reconciliation of changes in the carrying amount of
cultivated both for their fruit and their lumber); and biological assets between the beginning and the end of the
c. annual crops (for example, maize and wheat). current period, showing separately:
Measurement • the gain or loss arising from changes in fair value less
1. Prior to maturity – Bearer plants are accounted for in the costs to sell
same way as self-constructed items of property, plant, and • increases due to purchases
equipment before they are in the location and condition • decreases attributable to sales and biological assets
necessary to be capable of operating in the manner classified as held for sale (or included in a disposal
intended by management (PAS 16.22A). group that is classified as held for sale)
• decreases due to harvest
Note: The cost of a self‑constructed asset is determined • increases resulting from business combinations
using the same principles as for an acquired asset. • net exchange differences arising on the translation of
financial statements into a different presentation
2. After maturity currency, and on the translation of a foreign operation
a. Cost model into the presentation currency of the reporting entity
b. Revaluation model • other changes.
Presentation and Disclosure Requirements (LO4) Additional disclosure requirements where fair value of biological
General requirements assets cannot be measured reliably
An entity shall disclose: If an entity measures biological assets at their cost less any
a. the aggregate gain or loss arising during the current period accumulated depreciation and any accumulated impairment
on initial recognition of biological assets and agricultural losses at the end of the period, the entity shall disclose for such
produce and from the change in fair value less costs to sell biological asset
of biological assets. a. description of the biological assets
b. an explanation of why fair value cannot be measured
Note: Separate disclosure of physical and price changes is reliably
useful in appraising current period performance and future c. if possible, the range of estimates within which fair value is
prospects, particularly when there is a production cycle of highly likely to lie
more than one year. However, such is not required. d. the depreciation method used
e. the useful lives or the depreciation rates used; and
b. the description of each group of biological assets f. the gross carrying amount and the accumulated
depreciation (aggregated with accumulated impairment
An entity is encouraged to provide a quantified description losses) at the beginning and end of the period.
of each group of biological assets, distinguishing between
consumable and bearer biological assets or between If the fair value of biological assets previously measured at their
mature and immature biological assets, as appropriate. cost less any accumulated depreciation and any accumulated
impairment losses becomes reliably measurable during the
• Consumable biological assets are those that are to be current period, an entity shall disclose for those biological
harvested as agricultural produce or sold as biological assets a description of the biological assets, an explanation of
assets. why fair value has become reliably measurable, and the effect of
• Bearer biological assets are those other than the change.
consumable biological assets. These are not
agricultural produce, but rather, are held to bear
produce.
• Mature biological assets are those that have attained
harvestable specifications (for consumable biological
assets) or are able to sustain regular harvests (for
bearer biological assets).

Agricultural Activities and Related Concepts (LO1)

1. Agricultural activity is the management by an entity of the How much will be reported as biological assets in Titanic
biological transformation and harvest of biological assets Sheep’s financial statements?
for: a. 1,600,000
I. Sale b. 2,050,000
II. Conversion to agricultural produce c. 2,160,000
III. Conversion to another biological asset d. 3,330,000
a. I, II and III 9. As of December 31, 2021, an entity has plantation

b. I and II only consisting of around 20,000 trees. There is no separate
c. II and III only market for biological assets that are attached to the land,
d. I only but an active market exists for the combined assets as a
package, i.e. the raw land, the land improvements, and the
2. Which of the following falls under the definition of biological assets. By reference to quoted prices in the active
agricultural activity under PAS 41? market, the entity managed to compile the following details:
a. Managing game parks and zoos
b. Fish farming Fair value of the plantation 9,500,000
c. Deforestation and ocean fishing Fair value of the raw land 6,000,000
d. Processing of agricultural produce after harvest Fair value of the land improvements 1,500,000
3. Which of the following features distinguishes agricultural The planted trees will ultimately be processed into building
activity from other activities? material for houses and furniture and are expected to
a. Capability to change market at P=120 each upon maturity. As of December 31,
b. Management of change 2021, the entity’s biological assets should be valued at:
c. Measurement of change a. 2,000,000
d. Production of agricultural produce b. 2,400,000
c. 3,500,000
4. Which of the following is covered under PAS 41? d. 9,500,000
a. Bearer plants
b. Agricultural produce after the point of harvest 10. Shown below are the details of the Company’s biological
c. Produce growing on bearer plants assets as of December 31, 2021:
d. Land, intangible assets, and right-of-use assets arising
from lease of land related to agricultural activities Selling price per contract to sell 3,500,000
Price to sell an asset to a market participant 3,200,000
Biological Assets and Agricultural Produce (LO2) Agent’s commissions 300,000
5. Which is not a biological asset? Transportation costs necessary to get the
a. Felled trees asset to the market 200,000
b. Broiler
c. Bearer pigs Under PFRS 13 and PAS 41, how will the biological assets be
d. Oil palms valued in the Company’s 2021 financial statements?
a. 3,200,000
6. Under PAS 41, which of the following is an agricultural b. 3,000,000
produce? c. 2,900,000
a. Cheese d. 2,700,000
b. Sugar
c. Bush 11. Under PFRS 13, what would be the best basis on the
d. Latex valuation of biological assets before considering any costs
to sell?
7. Which of the following is required to be measured at fair a. Quoted price for similar biological assets in markets
value less costs to sell on initial recognition in all cases? that are active
a. biological assets b. Quoted price for identical biological assets in markets
b. agricultural produce that are active
c. both a and b c. Inputs other than quoted prices that are observable for
d. neither a nor b the biological asset
d. Quoted price for identical biological assets in markets
8. Titanic Sheep, Ltd. has the following details related to its that are not active
agricultural activities as of December 31, 2021:
12. The Company has dairy livestock used to produce milk
Mature livestock 980,000 produce. The milk is measured at fair value less costs to sale
Immature livestock 450,000 at the time of milking. Subsequently, the milk inventories
Wool 1,280,000 will be measured at
Right-of-use asset recognized from a. Fair value less costs to sell
leasing the grazing land of the sheep 750,000 b. Fair value
Breeding stock 620,000 c. Lower of cost or net realizable value
Sheep bred for recreational activity 110,000 d. Net realizable value

13. The Company, which engages in agricultural activities, 16. How much is the gain from change in fair value less costs to
presents its biological assets-livestock as part of noncurrent sell due to physical change?
assets. How will the Company present its cash flows from a. 167,000
purchases and sales of livestock? b. 200,000
Purchase of livestock Sale of livestock c. 237,000
a. Operating Operating d. 270,000
b. Investing Investing
c. Operating Investing 17. How much will the Company present as biological assets in
d. Investing Operating its 2021 statement of financial position?
a. 1,180,000
14. Dear Dairy, Inc. is engaged in milk production for supply to b. 1,380,000
various customers. At December 31, 2021, the Company c. 1,400,000
held 419 cows able to produce milk and 137 heifers being d. 1,470,000
raised to produce milk in the future. Shown below are
details of an entity’s dairy livestock. Bearer Plants (LO3)
18. Which of the following is a bearer plant accounted for under
Carrying amount at January 1, 2021 9,470,000 PAS 16?
Purchases 840,000 a. Trees grown for use as lumber
Changes attributable to physical change 490,000 b. Trees cultivated for both fruit and lumber
Changes attributable to price change 380,000 c. Trees cultivated for its fruit
Sales (2,560,000) d. Maize
Carrying amount at December 31, 2021 8,620,000
19. Shown below are the details of Mary Jane Tree, Ltd:
Based on the information above, how much will be
presented as the gains arising from changes in fair value Wheat 1,200,000
less costs to sell of dairy livestock? Tea bushes 2,300,000
a. 380,000 Grape vines 800,000
b. 490,000 Rubber trees 1,400,000
c. 850,000
d. 870,000 The Company’s rubber trees are expected to be cut down
and sold as scrap when these are no longer used to bear
Use the following information for Numbers 15 to 17. produce. How much will be presented as bearer plants in
A herd of 10,000 2 year old horses was held at 1 January 2021. the Company’s financial statements?
1,000 horses aged 2.5 years were purchased on 1 July 2021 for a. 3,100,000
108, and another 1,000 horses were born on 1 July 2021. No b. 4,300,000
horses were sold or disposed of during the period. Per‑unit fair c. 4,500,000
values less costs to sell were as follows: d. 5,700,000
2-year old horses at 1 January 2021 100 Presentation and Disclosure (LO4)
3-year old horses at 1 January 2021 115 20. Which of the following is not a required disclosure under
Newborn horses at 1 July 2021 70 PAS 41 for entities engaging in agricultural activities?
0.5-year old horses at 1 July 2021 74 a. carrying amounts of biological assets pledged as
2.5-year old horses at 1 July 2021 108 security for liabilities
Newborn horses at 31 December 2021 72 b. financial risk management strategies related to
0.5-year old horses at 31 December 2021 80 agricultural activity.
2-year old horses at 31 December 2021 105 c. reconciliation of changes in the carrying amount of
2.5-year old horses at 31 December 2021 111 biological assets between the beginning and end of the
3-year old horses at 31 December 2021 120 current period
d. disaggregation of gains and losses from changes in fair
15. How much is the gain from change in fair value less costs to value between price change and physical change
sell due to price change?
a. 55,000
b. 61,000
c. 62,000
d. 68,000

PRACTICE EXAM
1. Subsequent expenditures related to the biological Use the following information for Numbers 7 and 8.
transformation of biological assets measured at fair value On January 1, 2021, an entity reports its 2,500 3-year old
less costs to sell should be: animals at their fair value less costs to sell of =
P300,000. On
a. capitalized as part of the biological assets December 31, 2021, the fair value less costs to sell of these
b. recognized as expense when incurred animals increased to P=450,000. This was a significant change
c. either a or b from the fair value less costs to sell of 4-year old animals on
d. neither a nor b January 1, 2021, which was estimated to be at P=145 per animal.
The entity attributed this change from improvement in the
2. Statement I: The fair value of a biological asset or market conditions of the industry.
agricultural produce is not adjusted because of the
existence of a contract entered by an entity to sell their Furthermore, on December 31, 2021, the entity purchases 500
biological assets or agricultural produce at a future date. additional 3-year old animals for P =80,000. The costs of
Statement II: Costs of replanting trees in a plantation forest purchase represent a good measure of the current fair value less
after harvest are considered in determining the fair value of costs to sell for identical assets on the same period.
the biological assets.
7. How much is the gain from price change?
a. Statement I is incorrect. a. 100,000
b. Statement II is incorrect. b. 87,500
c. Both statements are incorrect. c. 62,500
d. Neither of the statements is incorrect. d. 50,000
3. In which of the following cases will cost sometimes 8. How much is the gain from physical change?
approximate fair value? a. 100,000
I. seedlings planted immediately prior to end of b. 87,500
reporting period c. 62,500
II. newly acquired livestock d. 50,000
III. initial growth in a 30-year pine plantation
production cycle 9. On January 1, 2021, Tita Oils Limited bought oil palm
garden for a basket price of P=150 million. 80% of the price
a. I and II only is attributable to the land, while the remainder is
b. I and III only attributable to the freestanding oil palm trees. The garden
c. II and III only is expected to give agriculture produce for next three years
d. I, II and III before re-plantation process. On December 31, 2021, the
year end, the fair value of garden is P
=25 million (excluding
4. PAS 41 requires an entity to provide a description of each land), with estimated point-of-sale costs amounting to
group of biological assets. Which of the following is a bearer =2 million. Land has a fair value of P
P =130 million, with
biological asset? estimated point-of-sale costs amounting to P =10 million. If
a. Livestock from which milk is produced there are no produce growing on the trees as of
b. Livestock intended for the production of meat December 31, 2021, what is the total amount of noncurrent
c. Trees being grown for lumber assets that will be presented in the statement of financial
d. Annual crops, such as maize and wheat position?
a. 120 million
5. There is a presumption that fair value can be measured b. 137 million
reliably for a biological asset. When can an entity rebut this c. 140 million
presumption? d. 143 million
a. on initial recognition only
b. at the end of each reporting period 10. Costs to sell do not include
c. upon the disposal of the biological asset a. Levies by regulatory agencies
d. on initial recognition and at the end of each reporting b. Levies by commodity exchanges
period c. Transfer taxes and duties
d. Transport, and other costs, necessary to transport the
6. Statement I: A loss may arise upon initial recognition of a assets to the market
biological asset.
Statement II: Agricultural produce shall be measured on
initial recognition and at the end of each reporting period at
its fair value less costs to sell.
a. Only statement I is true.

b. Only statement II is true.
c. Both statements are true.
d. Both statements are false.
- END -

One Dream, One Team
STUDENT HANDOUTS
FAR.124—NCA HELD FOR SALE MAY 2021 CPALE REVIEW
LEARNING OBJECTIVES
1. Initial measurement of NCA held for sale 5. Initial measurement when reclassified back to PPE
2. Impairment loss on initial measurement 6. Gain or loss on reclassification back
3. Gain or loss on disposal
4. Additional impairment or reversal on year-end.
REVIEW NOTES
Noncurrent Asset Held For Sale (NCAHFS) – A noncurrent SOLD YEAR OF RECLASSIFICATION:
asset or disposal group is classified as held for sale if the
carrying amount will be recovered principally through a sale Gain or loss on sale:
transaction rather than through continuing use.
Net selling price P XX
Carrying amount (initial) ( XX)
Noncurrent assets within the scope of PFRS 5:
Gain (loss) on sale P XX
a. Property, plant and equipment
b. Investment property measured under the cost model
YEAR-END NOT SOLD:
c. Investments in associates and subsidiary
d. Intangible assets
Subsequent measurement – subsequent carrying amount:
Depreciation ceases when an asset is reclassified as Fair value at year-end P XX
NCAHFS. Cost of disposal ( XX)
Subsequent measurement P XX
NCAHFS are presented as current asset – liabilities directly
associated with noncurrent assets are presented separately Additional impairment loss or gain on reversal:
as a single amount under current liabilities
Fair value less cost to sell year-end P XX
Conditions – A noncurrent asset or disposal group shall be Fair value less cost to sell reclass ( XX)
classified as held for sale if the following conditions are Gain on reversal (impairment loss) P XX
present:
1. Available for immediate sale in the present condition
SOLD THE FOLLOWING YEAR:
2. Highly probable
Definition of “Highly probable” – For the sale to be highly Gain or loss on sale:
probable, the following conditions must be met: Net selling price P XX
Carrying amount (subsequent) ( XX)
1. Committed to a plan to sell
Gain (loss) on sale P XX
2. Active program to locate buyer
3. Expected to be sold within one year
4. Sale price is reasonable
NOT SOLD – RECLASSIFIED BACK TO PPE/IA/IP:
5. Unlikely to change plan
Exception to the one-year rule: Measurement of the new classification:
a. The delay is attributable to events or circumstances
beyond the entity’s control Carrying amount “as if the asset was
b. There is sufficient evidence that the entity remains not reclassified as NCAHFS” P XX
committed to its plan to sell the asset Versus: Recoverable amount XX
Select lower P XX
DATE OF RECLASSIFICATION TO NCAHFS:
Gain or loss on reclassification back:
Initial measurement – initial carrying amount:
Measurement of new classification P XX
Fair value less cost to sell P XX
Carrying amount of NCAHFS XX
Carrying amount before reclassification ( XX)
Gain on reversal (impairment loss) P XX
Select the lower P XX
Impairment loss:
Carrying amount on reclassification P XX
Initial measurement ( XX)
Impairment loss P XX
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FAR | FAR.124—NCA HELD FOR SALE ARC – ACCOUNTANCY REVIEW CENTER
1. The measurement provisions of PFRS5 apply to which of 6. An asset that meets the criteria for classification as held
the following assets? for sale should be measured in the statement of financial
A. Deferred tax assets. position at
B. Biological assets. A. Carrying amount in accordance with the PFRS
C. Investment properties that are accounted for in applicable to that asset.
accordance with the fair value model. B. Fair value less costs to sell.
D. Property, plant and equipment that are accounted for C. The lower of a and b.
in accordance with the revaluation model. D. The higher of a and b.
2. To be classified as non-current asset held for sale 7. On December 31, 2021, Barcela Company classified its
A. The asset must be available for immediate sale in its building with a historical cost of P4,000,000 and
present condition subject only to terms that are usual accumulated depreciation of P2,400,000 as held for sale.
and customary for sales of such assets. All of the criteria under PFRS 5 are complied with. On that
B. The sale of the asset must be highly probable.
C. Both a and b. date, the land has a fair value of P1,400,000 and cost to
D. Neither a nor b. sell of P80,000.
The entry on December 31, 2021 includes
3. In accordance with PFRS 5, for a sale of the asset to be A. A debit to building for P1,320,000.
highly probable: B. A credit to accumulated depreciation for P2,400,000.
I. Management is committed to a plan to sell C. A debit to impairment loss for P280,000.
II. An active program to locate a buyer is initiated D. No reclassification entry will be made on December
III. The asset is being actively marketed for sale at a 31, 2021.
sales price reasonable in relation to its fair value
IV. The sale is expected to qualify for recognition as a
8. On January 1, 2025, Nether Company classifies a hotel
completed sale within one year from the date of
classification (subject to limited exceptions) property a non-current asset held for sale. Immediately
V. Actions required to complete the plan indicate that before the classification as held for sale, the cost of the
it is unlikely that plan will be significantly changed property is P100,000 and accumulated depreciation of
or withdrawn P40,000. The hotel is depreciated on the straight line
A. I, II, III, IV and V method with a useful life of 10 years. The estimate of the
B. I, III, IV and V only fair value less cost to sell on this date is P62,000.
C. I, IV and V only
D. I and IV only What amount of impairment loss should Nether
Company recognize at the date the asset was classified
Numbers 4-5 as held for sale?
Salvador Company is committed to a plan to sell its A. 38,000 C. 2,000
headquarters building and has initiated actions to locate a B. 12,000 D. 0
buyer. As of this date, the building has a carrying amount of
P5,000,000, a fair value of P6,000,000 and estimated costs Numbers 7-8
to sell of P200,000. Batalla Company accounts for non-current assets using the
cost model. On April 25, 2016 Batalla classified a non-current
4. How should Salvador classify the headquarters building? asset as held for sale in accordance with PFRS5. At that date
A. Included under property, plant and equipment at the asset’s carrying amount was P32,000, its fair value was
P5,000,000. estimated at P22,000 and the costs to sell at P3,200. On May
B. Included under property, plant and equipment at 15, 2016 the asset was sold for net proceeds of P17,400.
P5,800,000. In Batalla’s statement of comprehensive income for the year
C. Classified as held for sale at P5,000,000. ended June 30, 2016:
D. Classified as held for sale at P5,800,000. 9. What amount should be included as an impairment loss?
A. 13,600 C. 13,200
5. Salvador Company will continue to use the building until
B. 10,000 D. 0
construction of a new headquarters is completed. How
should Salvador Company classify the headquarters 10. What amount should be included as loss on disposal?
building? A. 14,600 C. 4,600
A. Included under property, plant and equipment at B. 13,200 D. 1,400
P5,000,000.
B. Included under property, plant and equipment at
P5,800,000.
C. Classified as held for sale at P5,000,000.
D. Classified as held for sale at P5,800,000.
11. On April 1, 2016, Sudaria Company has a piece of Numbers 13-14

machinery with a cost of P1,000,000 and accumulated Wednesday Company purchased equipment for P8,000,000
depreciation of P750,000. On April 1, Sudaria decoded on January 1, 2023 with a useful life of 10 years and no
residual value. on December 31, 2024, Wednesday classified
to sell the machine within 1 year. As of April 1, 2016, the
the equipment as held for sale. The fair value of the
machine had an estimated selling price of P100,000 and
equipment on December 31, 2024 was P6,000,000 and the
a remaining useful life of 2 years. It is estimated that cost of disposal P200,000.
selling costs associated with the disposal of the machine
will be P10,000. On December 31, 2025, Wednesday believed that the criteria
for classification as held for sale can no longer be met. On
On December 31, 2016, the estimated selling price of the such date, the fair value of the equipment was P5,000,000
machine had increased to P150,000, with estimated and the cost of disposal was P100,000. The value in use was
selling costs increasing to P16,000. determined to be P5,500,000. Accordingly, the entity decided
not to sell the asset but to continue to use it.
The gain on reversal of impairment loss on December 31,
2016 is 13. What is the impairment loss to be recognized on
A. 160,000 C. 44,000 December 31, 2024?
B. 50,000 D. 0 A. 2,200,000 C. 600,000
B. 1,600,000 D. 0
12. On December 1, 2016, Malaluan Corporation decided to
dispose of an item of plant that is carried in its records at
14. What amount should be recognized in profit or loss as a
a cost of P450,00, with accumulated depreciation of
result of the reclassification in 2025?
P80,000. Depreciation on the plant since it was originally A. 100,000 C. 300,000
acquired has been charged at P5,000 per month.
B. 200,000 D. 0
The plant will continue to be operated until it is sold, at
which time operations of the plant will be outsourced. Numbers 15-16
The company undertook all the necessary actions to be On December 31, 2021, West Highland Company classified
its building with a carrying amount of P1,600,000 and fair
able to classify the asset as held for sale. It is estimated
value less costs to sell of P1,320,000 as held for sale.
that it could sell the plant for its fair value, P350,000, Impairment loss of P280,000 was recognized on that date.
incurring P10,000 selling costs in the process. The plant The building has a remaining useful life of 4 years and it was
has been depreciated at an amount of P5,000 per month. depreciated using the straight line method.
On December 31, 2016, the plant has not been sold but, As of December 31, 2022, the building was not yet sold and
due to shortage of this type of plant, there had been an management decided not to sell the building anymore. The
increase in the fair value to P360,000 while expected fair value less cost to sell of the building on December 31,
costs to sell remain at P10,000. 2022 is P1,240,000 while the value in use is P1,220,000.
If Malaluan Corporation sold the plant on March 1, 2017 15. How much is the carrying amount of the building upon
for a net proceeds of P351,000, what amount should be reclassification back to property, plant and equipment?
included as gain on disposal in the entity’s statement of A. 1,320,000 C. 1,240,000
comprehensive income for the year ended December 31, B. 1,220,000 D. 1,200,000
2017?
A. 19,000 C. 12,000
B. 11,000 D. 1,000
A. 80,000 C. 100,000
B. 120,000 D. 0
/ END /
Numbers 1-3 Numbers 6-7

On January 1, 2022, LCC Company classifies a hotel property Wednesday Company purchased equipment for P8,000,000
a non-current asset held for sale. Immediately before the on January 1, 2023 with a useful life of 10 years and no
classification as held for sale, the carrying amount of the residual value. on December 31, 2024, Wednesday classified
property is P400,000,000 (cost of P500,000,000 and the equipment as held for sale. The fair value of the
accumulated depreciation of P100,000,000). The hotel is equipment on December 31, 2024 was P6,000,000 and the
depreciated on the straight-line method with a useful life of cost of disposal P200,000.
50 years.
On December 31, 2025, Wednesday believed that the criteria
for classification as held for sale can no longer be met. On
The estimate of the fair value less cost to sell on this date is
such date, the fair value of the equipment was P5,000,000
P350,000,000. On January 1, 2023 no buyer could be
and the cost of disposal was P100,000. The value in use was
identified. On this date, management concludes that the
determined to be P5,500,000. Accordingly, the entity decided
criteria for classification could not be met. The estimate of the
not to sell the asset but to continue to use it.
fair value less cost to sell is revised to P340,000,000 while the
value in use at the time is estimated at P380,000,000.
6. What is the impairment loss to be recognized on
1. What amount of impairment loss should LCC Company December 31, 2024?
recognize at the date the asset was classified as held for A. 2,200,000 C. 600,000
sale? B. 1,600,000 D. 0
A. 50,000,000 C. 100,000,000
B. 150,000,000 D. 0
2. The amount taken to profit or loss on the date the asset A. 100,000 C. 200,000
was reclassified back to property, plant and equipment B. 300,000 D. 0
is
Numbers 8-9
A. 30,000,000 C. 50,000,000
On January 1, 2019, Budha Company acquired machinery
B. 100,000,000 D. 0 worth P6,000,000 with a 10-year useful life and no residual
value. The entity elected to use the cost model. On December
3. The depreciation expense for 2023 after the asset was 31, 2020, Budha decided to sell the asset and classified it as
reclassified back to property, plant and equipment is held for sale. The fair value less cost of disposal on such date
A. 10,000,000 C. 8,974,359 is P4,100,000. On December 31, 2021, Budha decided to
B. 8,717,949 D. 9,743,590 classify the asset back into property, plant and equipment
since there were no buyers for the asset. On this date, the fair
value less cost of disposal is P3,700,000 and the value in use
Number 4-5
is P4,000,000.
Cristel Company purchased equipment for P8,000,000 on
January 1, 2023 with a useful life of 10 years and no residual 8. What amount of impairment loss should be recognized
value. on December 31, 2024, the entity classified the for 2020?
equipment as held for sale. The fair value of the equipment A. 700,000 C. 1,300,000
on December 31, 2024 was P6,000,000 and the cost of
B. 1,900,000 D. 0
disposal P200,000.
9. What amount of gain or loss on reclassification should be
On December 31, 2025, the entity believed that the criteria recognized for 2021?
for classification as held for sale can no longer be met. On A. 300,000 loss C. 400,000 loss
such date, the fair value of the equipment was P5,000,000
B. 100,000 loss D. 100,000 gain
and the cost of disposal was P100,000. The value in use was
determined to be P5,500,000. Accordingly, the entity decided
not to sell the asset but to continue to use it. 10. Lopez Company accounts for non-current assets using
the cost model. On October 30, 2016 Lopez classified a
4. What is the impairment loss to be recognized on non-current asset as held for sale in accordance with
December 31, 2024? PFRS5. At that date the asset’s carrying amount was
A. 2,200,000 C. 1,600,000 P15,000,000, its fair value was estimated at P11,000,000
B. 600,000 D. 0 and the costs to sell at P1,500,000. On November 20,
2016 the asset was sold for net proceeds of P9,200,000.
result of the reclassification in 2025? In accordance with PFRS5, what amount should be
included as a loss on disposal in Lopez’s statement of
A. 100,000 C. 200,000
comprehensive income for the year ended December 31,
B. 300,000 D. 0 2016?
A. 5,800,000 C. 4,300,000
B. 300,000 D. 0
/ End /
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RIZAL TECHNOLOGICAL UNIVERSITY

One Dream, One Team

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 Irrecoverable taxes Payable Deduction to

5. Interest incurred Reason/s of Reason other than Encourage prompt

Who actually Purchase is initially Purchase is initially

Return of Dr. Sales return XX

If the shortage is normal, it is closed to cost of goods sold

Purchase on Dr. Purchases XX Inventory Errors (LO 6)

Sale on Dr. Accounts receivable XX Relationship to Cost Relationship to Net

Periodic Inventory System – Journal Entries

Return of Dr. Accounts payable XX Inventory,

The measurement of raw material will remain at cost if the

Allowance method and direct write off method are both

Impairment of Inventory Impairment of inventory is treated as additional to cost of goods

2. Beginning Inventory – Cost XX Beginning inventory – cost XX

COMPUTATION – Direct Write Off Method:

Beginning inventory – LCNRV XX

1. Determination of cost of goods sold.

segregated for specific projects is the specific identification

Timing of Loss and Gain

1. Year-end of the year the company entered in the

2. Date of the delivery.

1. Loss on purchase commitment @ Year-end

Market value at year end XX

2. Loss on purchase commitment @ Delivery date

Market value at delivery date XX

3. Purchases and accounts payable

Inventory Composition (LO 1, LO2) C. Administrative overheads that do not contribute to

The company adjusts and closes its book annually on

31. What is the measurement of inventory in the statement of

32. What amount of loss on inventory writedown should be A. 200,000 400,000

Numbers 37-39 Numbers 44-45

54. In December 31, 2021 income statement, what amount of

Inventory beg. XX Based on Sales:

Step 2 Net Purchases: Net sales XX

Sales on account XX Gross Profit Ratio

 To determine the value of recovery from insurance from Retail Estimation

Factory Overhead If the problem is silent, losses are considered

Direct labor cost or hours XX Using Average method:

Using Conservative method:

Step 5 Cost of goods sold

TGAS at cost (Step 1) XX

Gross Profit Method (LO 1) Accounts receivable, January 1 522,360

Inventory, January 1 500,000

20. What is the estimated cost of the ending inventory?

21. What is the estimated cost of goods sold?

Beginning inventory – sales price 2,500,000

Cash Basis Cash paid (face value)

Mode Measurement of Cost to Acquire

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Cost – Fair value of PPE received

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8. Taylor Swift (TS) Company purchased machinery on A 1,850,000 C. 2,070,000

18. What is the gain or loss in exchange should Mimi Bernan

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A mortgage of P4,000,000 was assumed by Thick on the Numbers 28-29

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