CHAPTER 31

LAND AND BUILDING

Capital and revenue expenditure

Question 31-1 Multiple Choice (AICPA Adapted)

1. The cost of land usually includes all of the following, except

a. Commission related to acquisition

b. Property tax after date of acquisition
c. Property tax to date of acquisition
d. Cost of survey
2. The cost of land typically includes all of the following, except
a. Grading, filling, draining and clearing cost
b. Special assessment for street light and drainage system
c. Private driveway and parking lot
d. Assumption of any lien on the property
3. Fence and parking lot are reported as
a. Current assets
b. Land improvements
c. Land
d. Expense
4. The cost of building usually includes all of the following. Except
a. Any renovating cost incurred to put the building purchased in a condition for the intended use
b. Cost of excavation
c. Expenditure for movable equipment and fixture
d. cost incurred to have existing building removed to make room for construction of new building
ANSWER 31-1
1. B
2. C
3. B
4. C

EXPLANATIONS
Expenditures capitalized as cost of land
a. Purchase price
b. Legal fees and other expenditures for establishing clean title
c. Broker commission
d. Escrow fees
e. Fees for registration and transfer of title
f. Cost of relocation or reconstruction of property belonging to others in order to acquire possession
g. Mortgages, encumbrances, and interest on such mortgages assumed by the buyer
h. Unpaid taxes up to date of acquisition assumed by the buyer
i. Cost of survey
j. Payments to tenants to induce them to vacate the land in order to prepare the land for the intended use but not to make room for the construction
of new building
k. Cost of permanent improvements such as cost of clearing, cost of grading, leveling and landfill
l. Cost of option to buy the acquired land

If the land is not required, the cost of the option is expensed immediately.

Depreciable land improvements are charged to a special account “land improvements”

Examples of such improvement are fence, water system, drainage system, sidewalk, pavement, parking lot, driveway, and cost of trees, shrubs and
other landscaping.

Expenditures capitalized as cost of building constructed

a. Material used, labor employed and overhead directly attributable to construction.

b. Building permit or license
c. Architect fee
d. Superintended fee
e. Cost of excavation
f. Cost of demolishing an old building to make room for construction of new building.
g. Cost of temporary building used as construction office and tools or materials shed
h. Expenditures incurred during the construction period such as borrowing cost on construction loan and insurance
i. Expenditures for service equipment and fixtures made a permanent part of the structure.
j. Cost of temporary safety fence around construction site and cost of subsequent removal thereof.
However, the construction of a permanent fence after the completion of the building is recognized as land improvement.
k. Safety inspection fee

Expenditures capitalized as cost of building acquired by purchase

a. Purchase price
b. Legal fees incurred in connection with the purchase
c. Unpaid taxes up to date of purchase assumed by the buyer
d. Interest, liens and other encumbrances assumed by the buyer
e. Payments to tenants to induce them to vacate the building
f. Any renovating or remodeling costs incurred to out the building purchased in a condition suitable for the intended use.

Question 31-2 Multiple Choice (PIC Interpretation)

1. The single cost of acquiring land and usable old building is

a. Charged to the land only

b. Charged to the building only
c. Allocated between land and building based on relative fair value
d. Allocated between land and building based on carrying amount

2. The single cost of acquiring land and an unusable old building with no fair value is

a. Charged to the land only

b. Charged to the building only
c. Allocated between land and building based on relative fair value
d. Allocated between land and building based on carrying amount
3. The cost of demolishing an old building to make room for the construction of a new building should be

a. Charged to the land only

b. Charged to the building only
c. Allocated between land and building based on relative fair value
d. Allocated between land and building based on carrying amount

4. When land and ad old building are acquired, the cost of immediately demolishing the old building to prepare the land for the intended use as
investment property should be

a. Expensed immediately
b. Charged to the land
c. Accounted for as deferred charge
d. Charged to retained earnings

5. The carrying amount of an existing old building demolished to make room for the construction of a new building should be

a. Accounted for as loss

b. Capitalized as cost of the new building
c. Charged to the land
d. Charged to the new building if accounted for as inventory

ANSWER 31-2

1. C
2. A
3. C
4. B
5. A

PIC Interpretation on land and building acquired at a single cost

1. Land and an old building are acquired at a single cost:

a. If the old building is usable, the single cost is allocated to land and building based on relative fair value.

b. If the old building Is unusable and with no fair value, the single cost is allocated to land only.
2. The old building is demolished immediately to make room for construction of a new building:

a. Any allocated carrying amount of the old building is recognized as a loss if the new building is accounted for as property, plant and equipment or
investment property.

b. Any allocated carrying amount of the old building is capitalized as cost of the new building if the new building is accounted for as inventory.

c. The demolition cost minus savage value is capitalized as cost of the new building whether the new building is accounted for as property, plant
and equipment, investment property or inventory.

d. Needless to say, the net demolition is capitalized as cost of the land if the building is demolished to prepare the land for the intended use but not
to make room for the construction of new building.

Building is used in a prior period is demolished

A building is used in a prior period but demolished in the current period to make room for construction of a new building.

a. The carrying amount of the old building is recognized as a loss, whether the new building is accounted for as property, plant and equipment,
investment property or inventory.

b. The net demolition cost is capitalized as cost of the new building whether the new building is accounted for as property, plant and equipment,
investment property or inventory.

c. If the old building is subject to a contract of lease, any payments to tenants to induce them to vacate the old building shall be charged to the cost
of the new building.

QUESTION 31-3 Multiple choice (AICPA Adapted)

1. When an entity acquired land with an old building and immediately demolished the old building so that the land can be used for the construction
of a plant, the cost incurred to demolish the old building should be

a. expensed as incurred
b. added to the cost of the plant
c. added to the cost of the land
d. amortized over the estimated time period between the demolition of the building and the completion of the plant

2. If an entity purchased a lot and an old building and demolished the old building to make room for the construction of a new building, the proper
accounting treatment of the carrying amount of the old building would depend on
a. the significance of the cost allocated to building in relation to the combined cost of the lot and building
b. the length of time for which the building was held prior to demolition
c. the contemplation future use of the old building
d. the intention of management when the new building was constructed

3. An entity purchased land to be used as an investment property. Timber was cut from the site so development of the land could begin. The
proceeds from the sale of the timber should be

a. classified as other income

b. credited to retained earnings
c. deducted from the cost of the land
d. classified as deferred income and mortised over five years

4. An entity purchased land and a hotel with the plan to tear down the hotel and build a new hotel. The allocated cost of the old hotel should be

a. depreciated over the remaining life of the old hotel

b. written off as loss in the year the hotel is torn down
c. capitalized as part of the cost of the land
d. capitalized as part of the cost of the new hotel.

5. An entity’s forest land was condemned for use as a national park. Compensation for the condemnation exceeded the forest land’s carrying
amount. The entity purchased similar, but larger, replacement forest land for an amount greater than the condemnation award. As a result of the
condemnation and replacement, what is the net effect on the carrying mount of forest land reported in the statement of financial position?

a. the amount is increased by the excess of the replacement forest land’s cost over the condemned land’s carrying amount
b. the amount is increased by the excess of the replacement forest land’s cost over the condemnation award
c. the amount is increased by the excess of the condemnation award over the condemned forest land’s carrying amount.
d. no effect, because the condemned forest land’s carrying amount is used as the replacement forest land’s carrying amount

ANSWER 31-3

1. B
2. D
3. C
4. B
5. A
CHAPTER 32

DEPRECIATION AND DEPLATION

QUESTION 32-1 MULTIPLE CHOICE (PAS 16)

1. Which of the following statements best describes the term “depreciation?”

a. the systematic allocation of the cost of an asset less residual value over the useful life
b. the removal of an asset from the statement of financial position
c. the amount by which the recoverable amount of an asset exceeds carrying amount
d. the amount by which the carrying amount of an asset exceeds recoverable amount

2. The useful life of property, plant and equipment is

I. The period time over which and asset us expected to be used by the entity.
II. The number of production or similar units expected to be obtained from the asset by the entity.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

3. carrying amount is

a. cost of an asset or the amount substituted for cost in the financial statements, less residual value
b. amount of cash or cash equivalent paid or the fair value of the other consideration given to acquire an asset at the time of acquisition or
construction
c. net amount which the entity expects to obtain for an asset at the end of the useful life after deducting the expected cost of the disposal
d. amount at which an asset is recognized in the statement of financial position after deducting any accumulated depreciation and accumulated
impairment loss

4. Which of the following statements is incorrect with respect to depreciation

a. the depreciation method shall reflect the pattern in which the asset’s economic benefits are consumed by the entity
b. depreciation of an asset begins when it is available for use or when it is in the location and condition necessary for the intended use.
c. depreciation ceases at the earlier between the date the asset is classified as held for sale and the date the asset is recognized
d. depreciation is not recognized if the fair value of an asset exceeds carrying amount

5. which of the following statements is true with respect to residual value?

a. residual value is the estimated net amount currently obtainable if the asset is at the end of the useful life.
b. the residual value of an asset may increase to an amount equal to or greater than carrying amount in which case the depreciation charge is zero.
c. the residual value of an asset shall be reviewed at least at each financial year-end and any charge is accounted for as a change in accounting
estimate.
d. all of these statements are true.

6. all the following factors need to be considered in determining the useful life of an asset, except
a. expected usage of the asset
b. expected physical wear and tear
c. technical obsolescence
d. residual value

ANSWER 32-1
1. A
2. C
3. D
4. D
5. D
6. D

QUESTIONG 32-2 MULTIPLE CHOICE (AICPA ADAPTED)

1. Which of the following statements is the assumption on which straight line depreciation is based?

a. the operating efficiency of the asset decrease in later years.

b. service value declines as a function of time rather than use
c. service value declines as a function of obsolescence rather than time
d. physical wear and tear are more important than economic obsolescence.
2. the straight line method of depreciation is not appropriate for

a. an entity that is neither expanding nor contracting an investment in equipment because it is replacing equipment as the equipment depreciated
b. equipment on which maintenance and repairs increase substantially with age
c. equipment with useful life that is not affected by the amount of use
d. equipment used consistently every period

3. the principal used objection to the straight line method of depreciation is that is

a. provides fot the declining productivity of an aging asset

b. ignores variation in the rate of asset use
c. tends to result in a constant of return on a diminishing investment base
d. gives smaller periodic write-off than a decreasing charge method

4. in which of the following situations is the production method of depreciation most appropriate?

a. an asset’s service potential declines with use

b. an asset’s service potential declines with the passage of time
c. an asset is subject to rapid obsolescence
d. an asset incurs increasing repairs and maintenance with use

5. which of the following provides the best theoretical support for accelerated depreciation?

a. assets are more efficient in early years and initially generate more revenue
b. expenses should be allocated in a manner that “smooths” earnings
c. repairs and maintenance costs probably would increase in later periods so depreciation should decrease
d. accelerated depreciation provides easier replacement because of the time value of money.

6. an asset has a nine-year useful life and is to be depreciated under the sum of years’ digits method. The annual depreciation expense would be the
same as that under the straight line method in the

a. third year
b. fifth year
c. seventh year
d. ninth year

7. the composite depreciation method

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

8. An entity using the composite depreciation method for a fleet of trucks, cars and campers retired one of the trucks an received cash from a
salvage entity. The net carrying amount of these composite asset accounts would be decreased by the

a. cash proceeds received and original cost of the truck

b. cash proceeds received
c. original cost of the truck less the cash proceeds
d. original cost of truck

9. a machine with a four-year estimated useful life and an estimated 15% residual value was acquired at the beginning of the current year. The
increase in accumulated depreciation for the second year using the double declining balance method would be

a. original cost x 85% x 50%

b. original cost x 50%
c. original cost x 85% x 50% x 50%
d. original cost x 50% x 50%

10. A machine with a 5 year estimated useful life and an estimated residual value was acquired at the beginning of the current year. At the end of
the fourth year, accumulated depreciation using the sum of years’ digits method would be

a. original cost less residual value multiplied by 1/15

b. original cost less residual value multiplied by 14/15
c. original cost multiplied by 14/15
d. original cost multiplied by 1/15

ANSWERS 32-2

1. B 6. B
2. B 7. C
3. B 8. B
4. A 9. D
5. A 10. B
QUESTION 32-3 Multiple Choice (IAA)

1. which statement is true about depreciation

a. it is not a matter of valuation but of cost allocation

b. it is part of matching expenses with revenue
c. it retains funds by reducing income tax and dividend
d. all of the statements are true

2. which statement regarding depreciation is true?

a. an asset must be depreciated from the date of purchase to the date of sale
b. the annual depreciation charge must be constant over the life of the asset
c. the total cost of an asset must eventually be depreciated
d. if the carrying amount of an asset is less than the residual value, depreciation is not charged

3. economic factors that shorten the useful life of an asset include

a. wear and tear

b. deterioration or decay through aging or passage of time
c. damage or destruction due to fire, flood, earthquake and other casualties
d. obsolescence, supersession and inadequacy

4. which depreciation method is not based on the passage of time?

a. sum of units method

b. sum of year’s digits
c. declining balance
d. straight line

5. which depreciation method applies a uniform depreciation rate each period to the carrying amount of an asset?

a. straight line
b. declining balance
c. output method
d. sum of year’s digits
6. the sum of year’s digits method

a. results in residual value being ignored

b. means the denominator is the number of years remaning at the beginning of the year
c. means the carrying amount should not be reduced below residual value.
d. results in an increasing depreciation charge

7. a private jet is expected to be used over a period of 7 years. The engine of the jet has a useful life of 5 years. The tires are replaced every 2 years.
The private jet should be depreciated using the straight line method over

a. 7 years composite useful life

b. 5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life applied to the balance cost of the jet
c. 2 years useful life
d. 5 years useful life

8. the major difference between the servie of an asset and the physical life is that

a. service life refers to the time an asset would be used by an entity and physical life refers to how long the asset would last
b. physical life is the life of an asset without consideration of residual value and service life requires the use of residual value
c. physical life is always linger than service life
d. service life refers to the time an asset would be used by the original owner while physical life refers to how long the asset would be used by all
owners

ANSWER 32-3

1. D 5. B
2. D 6. C
3. D 7. B
4. A 8. A
CHAPTER 33
REVALUATION

QUESTION 33-1 MULTIPLE CHOICE (PAS 16)

1. what is the revalued amount of property plant and equipment?

a. fair value
b. depreciated replacement cost
c. replacement cost
d. fair value and depreciated replacement cost

2. what is the treatment of the accumulated depreciated on the date of revaluation?

a. restated proportionately with the change in the gross carrying amount of the asset
b. eliminated against the gross carrying amount of the asset
c. not adjusted on the date of revaluation
d. restated proportionately with the change in the gross carrying amount of the asset or eliminated against the gross carrying amount of the asset

3. if an entity which had a fleet of cars and ships decided to revalue the property, plant and equipment, which of the following statements is true?

a. revalue only one-half of each class of property, plant and equipment

b. revalue an entire class of property, plant and equipment
c. revalue one ship at a time as it is easier than revaluing all ships together
d. since assets are being revalued regularly, there is no need to depreciate

4. when an asset’s carrying amount is increased as a result of revaluation, the increase is credited to

a. revaluation surplus as a component of other comprehensive income

b. revaluation surplus as a component of profit or loss
c. retained earnings
d. deferred income
5. when an asset’s carrying amount is decreased as a result of a revaluation, the decrease is

a. recognized in profit or loss

b.