PROPERTY, PLANT & EQUIPMENT

Property, plant & These are tangible assets which are held by entity for use in production
equipment or supply of goods and services, for rental to others, or for administrative
purposes, and are expected to be used during more than one period.

Tangible Items
Major Characteristics Used in Business
Expected to be used over a period of more than 1 year

Cost
Cost comprises:

1. Purchase price , including import duties & nonrefundable purchase

taxes, after deducting trade discounts & rebates

2. Cost directly attributable to bringing the asset to the location &

condition necessary for it to be capable of operating in the manner
intended by management
✓ Cost of employee benefits
✓ Cost of site preparation
✓ Initial delivery & handling cost
✓ Installation & assembly cost
Initial Measurement ✓ Professional fees
✓ Cost of testing whether the asset is functioning properly

EXPENSED OUTRIGHT
X Cost of opening a new facility
X Cost of introducing a new product or service, including cost of
advertising & promotion
X Cost of conducting business in a new location or with a
new class of customer, including cost of staff training
X Administration & other general overhead cost
X Cost incurred while an item capable of operating in the
manner intended by management has yet to be brought
into use or is operated at less than full capacity
X Initial operating loss
X Cost of relocating or reorganizing part or all of an entity’s
operations

3. Initial estimate of dismantling & removing the item & restoring the site
on which it is located, the obligation for which an entity incurs.

Cost Model Revaluation Model

Cost Fair value at date of revaluation
Subsequent Less: Accum. Depreciation Less: Subseq. Accum. Depreciation
Measurement Accum. Impairment Loss Subseq. Accum. Impairment Loss
Carrying Amount Revalued Amount

1. Frequency of revaluation depends upon

the changes in the fair value of PPE being
revalued. When the fair value of a
revalued asset differs materially from the
carrying amount, a further revaluation is
necessary.

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 2. When PPE are revalued, the entire class of
PPE should be revalued.

3. The revalued amount of PPE is based on

the following:
a. Fair Value
b. Depreciated Replacement Cost

DEFINITION OF TERMS:

Revalued Amount It is the fair value or depreciated replacement cost of the item of PPE.
It is the price that would be received to sell an asset or paid to transfer a
Fair Value liability in an orderly transaction between market participants at the
measurement date.
Depreciated It is the replacement cost of the PPE minus the corresponding accumulated
Replacement Cost depreciation
Replacement Cost It is the current purchase price of the PPE
Carrying Amount It is equal to historical cost minus the corresponding accumulated
depreciation
Revaluation Surplus It is equal to the fair value or depreciated replacement cost minus the
carrying amount of the PPE
Appreciation or It is the excess of the revalued amount over the historical cost
Revaluation Increase
Appreciation minus the corresponding accumulated depreciation
Revaluation Surplus
ACCOUNTING TREATMENT:
1. RS is a component of OCI
2. RS may be transferred to RE when surplus is realized
3. Whole RS may be realized on the retirement or disposal of the asset

When an asset’s carrying amount is decreased as a result of

Reversal of Revaluation revaluation, the decrease shall be recognized as an expense.
Increase However, a revaluation decrease shall be charged directly against
any revaluation surplus to the extent that the decrease is a reversal
of a previous revaluation and the balance is charged to expense.
When an asset’s carrying amount is increased as a result of
Reversal of Revaluation revaluation, the increase shall be credited to revaluation surplus.
Decrease However, a revaluation increase shall be recognized as income to the
extent that it reverses a revaluation decrease of the same asset
previously recognized as an expense.

Determining COST of PPE

Mode of Acquisition Cost
Cash Basis ( Single Item) Cash Price Equivalent at recognition date
Cash Basis ( Several Items at Basket Price) Cash Price Equivalent at recognition date. Allocate
the cash price equivalent to the assets relative to
their fair values
On Account Invoice Price minus cash discount whether taken
or not
Installment Basis Cash Price. If not available, present value of all
payments using an implied interest rate
Issuance of Share Capital 1. Fair value of property received
2. Fair value of share capital
3. Par Value/stated value of share capital

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 Issuance of Bonds Payable 1. Fair value of bonds payable
2. Fair value of asset received
3. Face value of bonds payable
Exchange – with commercial substance (no cash 1. Fair value of property given
involved) 2. Fair value of property received
3. Carrying amount of property given
Exchange- with commercial substance (cash Fair value of asset given + cash payment
involved)
Exchange – without commercial substance Carrying amount of asset given
Exchange – without commercial substance Carrying amount of asset given + cash payment
Fair value of asset received with credit going to
donated capital. Expenses incurred in relation with
Donation ( from shareholders) donation shall be charged to donated capital
account.
Construction DM , DL, OH
Government Grant separate topic

Depreciation Method How to compute depreciation?

Straight Line Depreciation (Cost – Residual Value)/ Useful Life in Years
Composite Method Cost x Composite Rate
Group Method Cost x Group Rate
Working Hours Method Depreciable Amount / Estimated Useful Life in Service Hours
Output or Production Method Depreciable Amount / Estimated Useful Life in Units of Output
Sum of Years’ Digits Depreciable Amount x Series of Fractions
150% Declining Balance ( 1÷ Useful Life) x 1.5 x Carrying Amount
Double Declining Balance ( 1÷ Useful Life) x 2 x Carrying Amount

BORROWING COST: They are interest and other costs that an entity incurs in connection with
borrowing of funds. They include the following:
a. Interest expense calculated using the effective interest
b. Finance charge with respect to a finance lease
c. Exchange difference arising from foreign currency borrowing to the extent that is
regarded as an adjustment to interest cost.

QUALIFYING ASSET: It is an asset that necessarily takes a substantial period of time to get ready for the
intended use or sale.

BORROWING COSTS RELATED TO ASSETS BELOW ARE:

Capitalized Expensed
Manufacturing Plant Assets measured at Fair Value
Power Generation Facility Inventories that are manufactured or
produced on a repetitive basis
Intangible Asset
Investment Property Assets that are ready for their intended
Other Qualifying Assets use or sale when acquired

ACCOUNTING OR BORROWING COST

1. If borrowing cost is directly attributable to the acquisition, construction, or production of a

qualifying asset, the borrowing cost is required to be capitalized.

2. If the borrowing cost is not directly attributable to a qualifying asset, the borrowing cost is
expended immediately.

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 CAPITALIZATION
Upon meeting the following conditions:
a. When the entity incurs expenditures for the asset
Commencement b. When the entity incurs borrowing costs
c. When the entity undertakes activities that are necessary to
prepare the asset for the intended use or sale
Suspension During extended periods in which active development is interrupted
Cessation When substantially all the activities necessary to prepare the qualifying
asset for the intended use or sale are complete.

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 Land Land Improvements Building – Purchased Building – Constructed Building Improvements
➢ Purchase Price ➢ Cost of permanent ➢ Purchase Price ➢ DM, DL, OH ➢ Ventilating system,
➢ Cost to establish clean title fences ➢ Legal fees & other ➢ Building Permit/License Lighting System, &
➢ Broker/agent commission ➢ Cost of sidewalks, expenses ➢ Cost of sidewalks, Elevator during
➢ Escrow fees pavements, parking ➢ Lighting Installations, pavements, parking lot, after construction
➢ Registration fees & fees for lot, driveways -if not Partitions, and other driveways -if part of
transfer of title to land part of blueprint renovating /remodeling blueprint
➢ Cost of costs ➢ Superintendent Fee
relocation/reconstruction of ➢ Payments to tenants to ➢ Architect Fee
property of others to acquire induce them to vacate ➢ Excavation cost
possession building ➢ Temporary buildings &
➢ Payments of tenants to vacate ➢ Mortgages/encumbranc temporary safety fences
land for purposes of preparing es/interest assumed by ➢ Capitalizable Borrowing
the land for intended use and buyer costs
not for building construction ➢ Unpaid taxes up to date ➢ Cost of insurance taken
➢ Mortgages/encumbrances/inte of acquisition during construction
rest assumed by buyer ➢ Permanent fixtures-if
➢ Unpaid taxes up to date of permanent
acquisition assumed by buyer ➢ Safety inspection fee
➢ Cost of survey ➢ Ventilating system, Lighting
➢ Cost of System, & Elevator during
clearing/grading/leveling/landfi building construction
ll minus sold scrap
➢ Cost of option if only acquired
➢ Special assessments (taxes by
owner of land)

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GOVERNMENT GRANT

It is an assistance by government in the form of transfer of resources to an

Government Grant entity in return for part or future compliance with certain conditions relating
to the operating activities of the entity.

Government grant shall be recognized when there is reasonable assurance that:

a. The entity will comply with the conditions attaching to the grant
b. The grant will be received

Grant in recognition of specific expenses Shall be recognized as income over the period of the
related expense
Grant related to depreciable asset Shall be recognized as income over the periods and in
proportion to the depreciation of the related asset
Grant related to nondepreciable asset Shall be recognized as income over the periods which
requiring fulfillment of certain conditions bear the cost of meeting the conditions
Grant that becomes receivable as
compensation for expenses or losses Shall be recognized as income of the period in which it
already incurred or for the purpose of becomes receivable
giving immediate financial support to the
entity with no further related costs

PRESENTATION OF GOVERNMENT GRANT

Government Grant Related to Asset Government Grant Related to Income

Presented in the income statement either
Setting the grant as deferred income separately or under the general heading “other
income”
Deducting the grant in arriving at the carrying Deducted from the related expense
amount of the asset

REPAYMENT OF GOVERNMENT GRANT

1. A grant, that becomes repayable because of noncompliance with condition, shall be accounted for
as a change in accounting estimate.
2. Repayment of grant related to income shall be applied first against any unamortized deferred
income and any excess shall be recognized immediately as an expense
3. Repayment of a grant related to an asset shall be recorded by increasing the carrying amount of
the asset
4. The cumulative additional depreciation that would have been recognized to date in the absence of
the grant shall be recognized immediately as an expense.

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MACHINERY
Cost of Purchased Machinery includes:

Purchase Price
Freight , handling, storage & other cost related to the acquisition
Insurance while in transit
Installation cost, including site preparation and assembling
Cost of testing and trial run, & other cost necessary in preparing the machinery for its
intended use
Initial estimate of dismantling & removing the machinery and restoring the site on which
it is located , and for which the entity has a present obligation
Fees paid to consultants for advice on the acquisition of the machinery
Cost of safety rail & platform surrounding machine
Cost of water device to keep machine cool

SUBSEQUENT COST

Additions are modifications or alterations which increase the physical size or

capacity of the asset
Improvements are modifications or alterations which increase the service life or the
capacity of the asset
Replacements are substitution but new asset is not better than the old asset when
acquired
Repairs are those expenditures used to restore assets to good operating
condition upon their breakdown or replacement of broken parts
Rearrangement Cost Relocation or redeployment of an existing PPE

WASTING ASSET
Wasting asset: material objects of economic value and utility to man produced by nature

The COST of wasting asset is comprised as follows:

• Acquisition Cost
• Exploration Cost
o Successful effort method
o Full cost method
• Development Cost
o Tangible items
▪ depreciated using either straight line method or output method
▪ use straight line method to depreciate:
• if useful life of PPE is shorter than that of wasting asset
• during the event of shutdown

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 ▪ use output method to depreciate if useful life of wasting asset is shorter than
that of output method
o Intangible items
• Estimated Restoration Cost
o capitalize only when entity incurs the obligation when the asset is acquired

Depletion Rate = Cost of Wasting Asset – Residual Value

Estimated Units to be Extracted

Revision of Depletion Rate = Remaining Depletable Amount

Revised Estimate of Units to be Extracted

RELEVANT FORMULAE:

➢ Cost of Wasting Asset

Acquisition Cost
Exploration Cost
Development Cost
Estimated Restoration Cost
Total Wasting Asset

➢ Depletable Amount
Remaining Cost of Wasting Asset
Less: Residual Value
Depletable Amount

➢ Depletion
Depletion Rate
Multiplied by: Actual Units Extracted
Depletion

➢ Depreciation

Output Method Straight Line Method

Remaining Depreciable Amount Remaining Depreciable Amount
Divided by: Total Units of Extraction Divided by: Useful Life
Depreciation Rate Depreciation
Multiplied by: Actual Units Extracted
Depreciation

➢ Cost per Unit Extracted

Depletion (Materials Used in Production)
Direct Labor
Production Overhead
Inventoriable Depreciation Expense
Total Production Cost
Divided by: Actual Units Extracted

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 Cost per Unit

➢ Inventory & Cost of Sales

Cost per Unit x Unsold Extracted Units = Inventory
Cost per Unit x Sold Extracted Units = Cost of Sales

INVESTMENT PROPERTY
Investment property:
• applies only to land and building
• held by an owner or by lessee (under finance lease) to earn rentals or for capital appreciation

Initial measurement: Cost

Subsequent measurement: Either fair value model or cost model

Cost Model Fair Value Model

Cost
Less: Accumulated depreciation Fair value
Accumulated Impairment loss Add(Less): Change in fair value
Carrying Amount Fair value

Investment in Property Owner-Occupied Property

for capital appreciation for use in production or supply of goods/services;
for administrative purposes
for undetermined use for future use as owner-occupied property
for rental under operating lease for rental under finance lease
being constructed or developed for future for sale in the ordinary course of business; others
use as investment property

PRACTICAL EXERCISE
1. At the beginning of the current year, Karen Joy Company purchased for P 5,400,000.00,
including appraiser fee of P 50,000.00, a warehouse building and the land on which it is located
& assumed an existing P 2,500,000 mortgage. The land has a current appraised value of P
2,000,000 and the building P3, 000,000. The original cost is P 1,400,000 for the land and P
2,800,000 for the building. What is the initial measurement of the land?
a. 2,140,000 c. 2,000,000
b. 2,180,000 d. 3,160,000

2. Joshua Company had the following property acquisitions during the current year:

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 ➢ Acquired a tract of land in exchange for 50,000 ordinary shares of P100 par value with a
market price of P150 per share on the date of acquisition. The last property tax bill
indicated assessed value of P4, 000,000 for the land. However, the land has a fair value of
P6, 000,000.
➢ Received land as donation from a major shareholder as an inducement to locate a plant in
the city. No payment was required but the entity paid P50, 000 for legal expenses for land
transfer. The land is fairly valued at P1, 000,000.
➢ Acquired machine with an invoice price of P3, 000,000 subject to a cash discount of 10%
which was not taken. The entity incurred cost of P50, 000 in removing the old welding
machine prior to the installation of the new one. Machine supplies were acquired at a cost
of P150,000.00

What is the total increase in property, plant and equipment as a result of the acquisitions?
a. 11,200,000 c. 9,700,000
b. 10,000,000 d. 9,750,000

3. Katherine Company acquired the following machinery:

➢ During 2019, the entity purchased a machine for P500, 000 down and four monthly
installments of P 1,250,000. The cash price of the machine was P4, 700,000.
➢ On January 1, 2019, the entity purchased a machine for P2, 000,000 in exchange for a
noninterest bearing note requiring four payments of P500, 000. The first payment was made
on December 31, 2019. The rate of interest for this note at date of issuance was 10%. The
present value of an ordinary annuity of 1at 10% is 3.17 for four periods. The present value
of an annuity of 1 in advance at 10% is 3.49 for four periods.
➢ On January 1, 2019, the entity acquired a machine by issuing a four-year, noninterest-
bearing note for P2, 000,000. The note is due on January 1, 2023. The entity has a 10%
interest for this type of note. The present value of 1 at 1% for 4 years is 0.68.

What is the total cost of the three machines?

a. 7,645,000 c. 8,445,000
b. 7,805,000 d. 8,605,000

4. Joanne Company exchanged an old machine, costing P3, 000,000 and 50% depreciated, for a used
machine and paid cash difference of P500, 000. The fair value of the old machine was determined
to be P1, 800,000. What amount should be recorded as cost of the machine received in exchange?
a. 1,800,000 c. 1,300,000
b. 2,300,000 d. 2,000,000

5. Charlemagne Company purchased a machine for P3, 000,000 on January 1, 2017. The entity
received a government grant of P500, 000 in respect of this asset. The policy is to depreciate the
asset over 5 years on a straight-line basis and to treat the grant as deferred income. On January 1,
2019, the grant income became fully repayable because of noncompliance with conditions. What
is the loss on repayment of grant in 2019?
a. 500,000 c. 200,000
b. 300,000 d. 100,000

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6. Jeanette Company purchased a machine for P6, 600,000 on January 1, 2016 and received a
government grant of P600, 000 towards the capital cost. The policy is to treat the grant as a
reduction in the cost of the asset. The machine is to be depreciated on a straight-line basis over 5
years with a residual value of P500, 000. On January 1, 2018, the grant became fully repayable
because of noncompliance with conditions.

6.1 What is the depreciation for 2016?

a. 1,100,000 c. 1,200,000
b. 1,200,000 d. 1,320,000

6. 2What is the depreciation for 2018?

a. 1,460,000 c. 1,220,000
b. 1,200,000 d. 1,560,000

6.3 What is the depreciation for 2019?

a. 1,100,000 c. 1,200,000
b. 1,320,000 d. 1,220,000

7. On January 1, 2019, Marivic Company from the government a P5, 000,000 three-year, zero-interest
loan evidenced by a promissory note. The prevailing rate of interest for a loan of this type is 10%. The
present value of 1 at 10% is 0.75 for three periods.

7.1 What is included in the journal entry to record the loan and grant?
a. Debit discount on note payable P1, 250,000
b. Credit note payable P5, 000,000
c. Credit deferred grant income P1, 250,000
d. All of these are included in the journal entry

7.2 What is the grant income for 2019?

a. 1,250,000
b. 375,000
c. 416,667
d. 0

8. Molave Company had the following outstanding loans during 2018 and 2019.

Specific construction loan 3,000,000 10%

General loan 25,000,000 12%

The entity began the self-construction of a new building on January 1, 2018 and the
building was completed on June 30, 2019. The following expenditures were made in
2018 and 2019:
January 1, 2018 4,000,000
April 1, 2018 5,000,000
December 1, 2018 3,000,000
March 1, 2019 6,000,000

8.1 What is the cost of the new building on December 31, 2018?

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 a. 12,000,000 c. 12,300,000
b. 12,900,000 d. 12,600,000

8.2 What is the cost of the new building on June 30, 2019?
a. 18,000,000 c. 20,868,000
b. 19,884,000 d. 19,377,000

8.3 What is the interest expense for 2019?

a. 3,000,000 c. 2,016,000
b. 2,166,000 d. 666,000

9. At the beginning of the current year, Rock Company reported the following balances:
Land 2,200,000
Building 6,500,000

During the current year, the following transactions occurred:

a. A piece of land acquired for P 1,600,000 to be able to acquire the land, P 175,000
was paid to a real estate agent, and P50, 000 was incurred to clear the land.
During the course of clearing the land, timber and gravel were recovered and sold
for P25, 000.

b. A second piece of land with a building was acquired for P 4,500,000. The
appraiser valued the land at P2, 000,000 and the building at P 1,000,000. Shortly,
after acquisition, the building was demolished at a cost of P100, 000. A new
building was constructed at a cost of P5, 000,000 plus excavation fee P50, 000,
architect fee P80, 000 and building permit P70, 000.

c. A third piece of land was acquired for P2, 000,000 and was held for undetermined
use.

9.1 What total cost of land should be reported in the statement of financial position
under property, plant and equipment?
a. 8,500,000 c. 7,100,000
b. 7,000,000 d. 8,600,000

9.2 What is the cost of new building?

a. 5,200,000 c. 6,800,000
b. 5,300,000 d. 6,700,000

10. Paragon Company incurred the following costs during the current year in relation to
property, plant and equipment:

Cash paid for purchase of land 2,500,000

Mortgage assumed on the land purchased, including interest accrued 1,000,000
Realtor commission 300,000
Legal fees, realty taxes, and documentation expenses 50,000

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 Amount paid to relocate persons squatting on the property 100,000
Cost of tearing down an old building on the land to make room for
construction of new building 200,000
Salvage value of the old building demolished 50,000
Cost of fencing the property
110,000
Amount paid to the contractor for the building constructed 5,000,000
Building permit fee 50,000
Excavation 50,000
Architect fee 200,000
Interest that would have been earned had the money used during the
period of construction been invested 150,000
Invoice cost of machine acquired 2,000,000
Freight, unloading, and delivery charges 60,000
Custom duties and other charges 140,000
Allowances and hotel accommodation, paid to foreign technicians during
Installation and test run of machine 400,000

10.1 What amount should be capitalized as cost of land?

a. 3,950,000 c. 3,850,000
b. 4,100,000 d. 3,800,000

10.2 What amount should be capitalized as cost of building?

a. 5,300,000 c. 5,450,000
b. 5.410,000 d. 5,560,000

10.3 What amount should be capitalized as cost of machine?

a. 2,600,000 c. 2,200,000
b. 2,000,000 d. 2,560,000

11. On January 1, 2019, Harbor Company purchased land and building at a single cost of P
20,000,000. On this date, it was determined that the land and building had a fair value
of P 18,000,000 and P 7,000,000, respectively. The entity also incurred legal fees for
purchase contract and recording ownership P200, 000, and title guarantee insurance
P100, 000. The entity immediately demolished the building to make way for
construction of a new building to be used as owner-occupied. The total contract price
and other directly attributable cost to the building amounted to P 15,000,000. The
entity incurred demolition cost of P350, 000. Under PIC Interpretation, what is the
initial cost of the land?
a. 14,700,000 c. 15,350,000
b. 15,050,000 d. 20,300,000

12. Alyssa Company owned a machine that was bought on January 1, 2016 for P8,
000,000. The machine was estimated to have a useful life of five years and a residual
value of P500, 000. The entity used the sum of the years’ digits method of
depreciation. On January 1, 2019, the entity determined that the total useful life of the

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 machine should have been four years and the residual value is P 600,000. What
amount should be recorded as depreciation expense on the machine for 2019?
a. 700,000 c. 1,400,000
b. 1,000,000 d. 2,000,000

13. Bauk Company signed a 10-year lease for office space on January 1, 2018. The entity
has the option to renew the contract for an additional five years on or before January
1, 2028. During January, 2019, the entity incurred P1, 400,000 for general
improvements on the space. The improvements have a useful life of 16 years. Also, the
entity acquired furniture for P300, 000 with a useful life of 12 years. On December 31,
2019, the entity’s intentions to renew the lease contract are certain. What is the
depreciation of the lease improvements in 2019?
a. 87,500 c. 125,000
b. 100,000 d. 140,000

14. On January 1, 2016, Union Company purchased a machine for P 264,000 and
depreciated it by the straight-line method using an estimated useful life of eight years
with no residual value. On January 1, 2019, the entity determined that the machine
had a useful life of six years from the date of acquisition with residual value of P24,
000. What is the accumulated depreciation on December 31, 2019?
a. 146,000 c. 160,000
b. 154,000 d. 176,000

15. On January 1, 2018, London Company purchased a large quantity of personal

computers. The cost of these computers was P6, 000,000.

On the date of purchase, the management estimated that the computers would last
approximately 4 years and would have a residual value at that time of P600, 000. The
entity used the double declining balance method.

During January, 2019, the management realized that technological advancements had
made the computers virtually obsolete and that they would have to be replaced.
Management proposed changing the remaining useful life of the computers to 2 years.

What is the depreciation expense for 2019?

a. 3,000,000 c. 1,500,000
b. 2,400,000 d. 1,200,000

16. Tania Company purchased a boring machine on January 1, 2018 for P 8,100,000. The
useful life of the machine is estimated at 3 years with a residual value at the end of
this period of P600, 000.

During the useful life, the expected units of production are 12,000 units in 2018, 7,000
units in 2019, and 6,000 units in 2020.

What is the depreciation expense for 2019 using the most appropriate depreciation
method?

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 a. 2,100,000 c. 3,600,000
b. 2,268,000 d. 1,800,00

17. Norraine Company used the composite method of depreciation based on a composite
rate of 25%. At the beginning of 2019, the total cost of equipment was P5, 000,000
with a total residual value of P600, 000 and accumulated depreciation of P3, 000,000.

In January 1, 2019, the entity purchased an equipment for P 2,500,000 with no

residual value.

At the end of 2019, the entity sold an equipment with an original cost of P1, 000,000
and a residual value of P200, 000 for P350, 000. This asset was acquired on January 1,
2017.

17.1 What is the depreciation for 2019?

a. 1,625,000 c. 1,125,000
b. 1,875,000 d. 975,000

17.2 What is the gain or loss from the derecognition of the asset on December 31,
2019?
a. 100,000 gain c. 50,000 loss
b. 150,000 loss d. 0

18. On January 1, 2017, Samar Company paid P 5,400,000 for property containing natural
resource of P2, 000,000 tons of ore. The present value of the estimated cost of
restoring the land after the resource is extracted is P450, 000. The land will have a
value of P650, 000 after it is restored for suitable use.

Tunnels, bunk houses, and other fixed installations are constructed at a cost of P8,
000,000 and such expenditures are charged to mine improvements.

Operations began on January 1, 2018 and resources removed totaled 600,000 tons.
During 2019, a discovery was made indicating that available resource after 2019 will
total 1,875,000 tons.

At the beginning of 2019, additional bunk houses were constructed in the amount of
P770, 000. In 2019, only 400,000 tons were mined because of a strike.

18.1 What amount should be recorded as depletion for 2018?

a. 1,560,000 c. 1,620,000
b. 1,755,000 d. 1,425,000

18.2 What amount should be recorded as depletion for 2019?

a. 1,560,000 c. 640,000
b. 1,040,000 d. 776,000

18.3 What amount should be recorded as depreciation for 2018?

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 a. 2,400,000 c. 1,000,000
b. 1,200,000 d. 500,000

18.4 What amount should be recorded as depreciation for 2019?

a. 1,120,000 c. 1,600,000
b. 2,400,000 d. 1,360,000

19. Cool Company owned an equipment costing P 5,200,000 with original residual value of
P400, 000. The life of the asset is 10 years and was depreciated using the straight-line
method. The equipment has a replacement cost of P8, 000,000 with residual value of
P200, 000. The age of the asset is 4 years. The appraisal of the equipment showed a
total revised useful life of 12 years and the entity decided to carry the equipment at
revalued amount.

Before income tax, what amount should be initially reported as revaluation surplus?

a. 1,600,000 c. 1,680,000
b. 2,600,000 d. 6,680,000

20. On January 1, 2016, Crosswind Company owned an investment property which had an
original cost of P5, 800,000 and useful life of 40 years. On December 31, 2018, the fair
value was P6,000,000 and on December 31, 2019, the fair value was P 5,900,000.00

20.1 Under the fair value model, what is the expense to be recognized for the year
ended December 31, 2019?
a. 147,500 c. 200,000
b. 100,000 d. 0

20.2 Under the cost model, what is the expense to be recognized for the year ended
December 31, 2019?
a. 145,000 c. 147,500
b. 150,000 d. 0

21. Rhino Company, a real estate entity, had a building with a carrying amount of P20,
000,000 on December 31, 2019. The building was used as offices of the entity’s
administrative staff. On December 31, 2019, the entity intended to rent out the
building to independent third parties. The staff will be moved to a new building
purchased early in 2019. On December 31, 2019, the original building had a fair value
of P35, 000,000. On December 31, 2019, the entity also had land that was held for sale
in the ordinary course of business. The land has a carrying amount of P10, 000,000 and
fair value of P 15,000,000 on December 31, 2019. On such date, the entity decided to
hold the land for capital appreciation. The accounting policy is to carry all investment
property at fair value.

21.1 On December 31, 2019, what amount should be recognized in revaluation surplus
as a result of transfer of the building to investment property?
a. 20,000,000 c. 15,000,000

11
 b. 35,000,000 d. 0

21.2 On December 31, 2019, what amount should be recognized I profit or loss as a
result of transfer of the land to investment property?
a. 15,000,000 c. 5,000,000
b. 10,000,000 d. 0

22. Moledo Mining Company constructed a building costing P2, 800,000 on the mine property. The
estimated residual value will not benefit the entity and will be ignored for purposes of
computing depreciation. The building has an estimated life of 10 years. The total estimated
recoverable output from the mine is 500,000 tons. The production of the first four years of
operation was:

First year 100,000 tons

Second year 100,000 tons
Third year Shut down, no output
Fourth year 100,000 tons

What is the depreciation for the fourth year?

a. 490,000 c. 210,000
b. 560,000 d. 336,000

23. On January 1, 2018, Camia Company purchased a drilling machine for P8, 400,000 with useful
life of 10 years and no residual value. An important component of the machine is the drill
housing component that will need to be replaced in 5 years. The P2, 000,000 cost of the drill
housing component is included in the P8, 400,000 cost of the machine. The straight line
depreciation is used.

During 2018, Camia Company incurred P4, 000,000 in exploration cost for each of 15 oil wells
drilled in 2018. Of the 15 well drilled in 2018, 10 were dry holes. The entity used the successful
effort method of accounting. The entity depleted 30% of the oil discovered in 2018.

What total amount of depreciation should be recorded in 2018?

a. 1,040,000 c. 840,000
b. 1,240,000 d. 640,000

24. On January 1, 2018, Dower Company purchased equipment costing P2, 400,000 with a 6-year
useful life and no residual value. The entity used the straight-line method of depreciation. On
December 31, 2018, the fair value of the equipment was P2, 200,000. The entity used the
revaluation model and the entity revalued the equipment on December 31, 2018. The entity
restated its accumulated depreciation proportionately. What is the pretax revaluation surplus
on December 31, 2019?
a. 240,000 c. 400,000
b. 200,000 d. 160,000

25. The following independent transactions relate to depreciation of property, plant and
equipment:

12
 ➢ On July 1, 2018, Straight Company purchased equipment for P 5,000,000. Residual value
was estimated at P 200,000. The equipment is depreciated over ten years using the
double declining balance method.

➢ On January 1, 2018, Gay Company purchased a machine for P 4,500,000. The machine
has an estimated useful life of four years and a residual value of P 500,000. The machine
is being depreciated using the sum of the years’ digits method.

➢ On July 1, 2018, Queer Company purchased a machine for P 6,000,000. The machine has
an estimated useful life of five years and a residual value of P 800,000. The machine is
being depreciated by the 150% declining balance method.

25.1 What is the total depreciation expense to be recorded in 2018?

a. 3,000,000 c. 3,200,000
b. 2, 980,000 d. 2,880,000

25.2 What is the carrying amount of property, plant and equipment as of December 31,
2018?
a. 12, 620,000 c. 12,300,000
b. 12, 500,000 d. 12, 520,000

THEORY OF ACCOUNTS
1. Which of the following is not a capital expenditure?
a. An addition
b. A betterment
c. A replacement
d. Repair that maintains an asset in operating condition.

2. Which of the following is not a major characteristic of an item of property, plant and equipment?
a. Acquired for resale
b. Acquired for use
c. Long-term in nature
d. Possesses physical substance

3. Under PAS 16, which of the following is not a major characteristic of a plant asset?
a. Long-term in nature
b. Acquired for use in operations
c. Possesses physical substance
d. All of these are major characteristic of a plant asset

4. Fence and parking lot are reported in the statement of financial position as:
a. Current assets
b. Land
c. Land improvements
d. Property, Plant and Equipment

13
5. A non-recoverable purchase tax on the purchase of machinery should be charged to:
a. A separate deferred charge account
b. Accumulated depreciation
c. Miscellaneous tax expense
d. The machinery account

6. Which of the following costs should be capitalized for self-constructed assets?

a. Materials and labor
b. Materials and overhead
c. Materials, labor, and overhead
d. Labor and overhead

7. For a nonmonetary exchange, the configuration of cash flows includes which of the following?
a. The entity-specific value of the asset.
b. The estimated present value of the assets exchanged.
c. The risk, timing, and amount of cash flows of the asset.
d. The implicit rate, maturity date of loan, and amount of loan

8. The cost of a non-monetary asset acquired in exchange for another non-monetary asset with
commercial substance is usually recorded at:
a. Either the fair value of the asset given or the asset received.
b. The fair value of the asset given and a gain or loss is recognized
c. The fair value of the asset given and a gain but not a loss may be recognized.
d. The fair value of the asset received if it is equally reliable as the fair value of the asset given.

9. Accounting recognition should be given to the gain realized on non-monetary exchange of plant
asset, except when the exchange has:
a. Commercial substance and additional cash is paid
b. No commercial substance and additional cash is paid
c. Commercial substance and additional cash is received
d. All of these cause recognition of a gain

10. Plant assets purchased on long-term credit contracts should be accounted for at:
a. The total value of the future payments.
b. The future amount of the future payments.
c. The present value of the future payments
d. None of these

11. When accounting for property, plant and equipment, an entity

a. Must use the cost model for land
b. Must use the cost model for presenting the assets
c. May elect to use the cost model or the revaluation model on any asset class
d. May elect to use the cost model or the revaluation model on an individual asset

12. The revaluation surplus resulting from initial revaluation of property, plant and equipment should be
a. Credited to retained earnings
b. Credited to revaluation surplus
c. Released to the income statement

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 d. Deducted from current assets and added to the property, plant and equipment

13. When the revaluation model is used for reporting property, plant and equipment, the gain or loss
should be included in:
a. Income for the period
b. Gain from revaluation in the income statement
c. An extraordinary gain or loss in the income statement
d. A revaluation surplus account in other comprehensive income

14. How is the account revaluation surplus reported?

a. As part of other comprehensive income
b. As other income in the income statement
c. It is included with Reserves in shareholder’s equity
d. The account is not presented in the financial statements

15. Under the revaluation model for accounting for property, plant and equipment
a. Asset must be revalued quarterly
b. Asset must be revalued annually
c. Asset must be revalued bi-annually
d. There is no rule regarding the frequency of revaluation

16. Which is true about the revaluation model for valuing plant, property, and equipment?
a. Revaluation of assets must be made every two years
b. There is no rule for the frequency or date of revaluation
c. Revaluation of assets must be made on the same date each year
d. Revaluation of assets must be made on the last day of the fiscal year

17. When an entity chooses the revaluation model as the accounting policy for measuring property,
plant and equipment
a. Revaluation of property, plant and equipment must be made at least every three years
b. When an asset is revalued, the entire class of property, plant and equipment to which the
asset belongs must be revalued
c. Increase in an asset’s carrying amount as a result of the first revaluation must be recognized
as a component of profit or loss
d. When an asset is revalued, individual asset within a class of property, plant and equipment
to which the asset belongs can be revalued.

18. Which of the following most accurately reflects the concept of depreciation?
a. The process of charging the decline in value of an economic resource to income in the
period in which the benefit incurred
b. A method of allocating asset cost to an expense account in a manner which closely matches
the physical deterioration of the asset
c. The process of allocating the cost of tangible asset to expense in a systematic and rational
manner to those periods expected to benefit from the use of the asset
d. An accounting concept that allocates the portion of an asset used up during the year to the
contra asset account for the purpose of properly recording the fair value of the asset

19. The term “depreciable value” or “depreciation base” refers to

15
 a. The acquisition of the asset
b. The estimated fair value of the asset at the end of the useful life
c. The cost of the asset less the related depreciation recorded to date
d. The total amount to be charged to expense over an asset’s useful life

20. Depreciation is a variable expense if the depreciation method used is

a. Declining balance
b. Straight line
c. Sum of the years’ digit
d. Units of production

21. The activity method of depreciation

a. Is a variable charge approach
b. Results in constant charge to depreciation expense
c. Results in a decreasing charge to depreciation expense
d. Assumes that depreciation is a function of passage time

22. The sum-of-the-years’-digit method of depreciation

a. Results in residual value being ignored
b. Means the carrying amount should not be reduced below residual value
c. Means the denominator is the years remaining at the beginning of the year
d. All of these describe the sum-of-years’-digits method.

23. Which of the following is not a similarity in the treatment for depreciation and depletion?
a. Both depreciation and depletion are based on time
b. The estimated life is based on economic or productive life
c. The rate may be changed upon revision of the estimated original productive life
d. Assets are reported in the same classification in the statement of financial position

24. Which of the following statements is correct?

a. A gain on disposal of a noncurrent asset is classified as revenue
b. Assets are depreciated even if the fair value exceeds carrying amount
c. Land and building are not accounted for separately when acquired together
d. A noncurrent asset acquired as the result of an exchange of assets is not recognized

25. During year 4, Bay Co. constructed machinery for its own use and for sale to customers. Bank
loans financed these assets both during construction and after construction was complete. How
much of the interest incurred should be reported as interest expense in the year 4 income
statement?
Interest incurred for machinery Interest incurred for machinery
for own use held for sale
a. All interest incurred All interest incurred
b. All interest incurred Interest incurred after completion
c. Interest incurred after completion Interest incurred after completion
d. Interest incurred after completion All interest incurred

16
26. For purposes of nonmonetary exchanges, the configuration of cash flows includes which of the
following?
a. The implicit rate, maturity date of loan, and amount of loan
b. The risk, timing, and amount of cash flows of the assets.
c. The entity-specific value of the asset which is equal to the fair value of the asset exchanged
d. The estimated present value of the assets exchanged.

27. In an exchange of assets that is deemed to lack commercial substance, Transit Co. received with
a fair value equal to the carrying amount of equipment given up. Transit also contributed cash.
As a result of the exchange, Transit recognized
a. A loss equal to the cash given up
b. A loss determined by the proportion of cash paid to the total transaction value
c. A gain determined by the proportion of cash paid to the total transaction value
d. Neither gain or loss

28. In which of the following situations is the units-of-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.

29. A building suffered uninsured fire damage. The damaged portion of the building was refurbished
with higher quality materials. The cost and related accumulated depreciation of the damaged
portion are identifiable. To account of these events, the owner should
a. Reduce accumulated depreciation equal to the cost of refurbishing
b. Record a loss in the current period equal to the sum of the cost of refurbishing and the
carrying amount of the damaged portion of the building.
c. Capitalize the cost of refurbishing and record a loss in the current period equal to the
carrying amount of the damaged portion of the building.
d. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building.

30. Under PAS 20, a government grant shall be recognized when

a. The entity has complied with all the conditions attaching to the grant
b. The entity has complied with all the conditions attaching to the grant and the grant will be
received.
c. There is reasonable assurance that the entity will comply with the conditions attaching to
the government grant.
d. There is reasonable assurance that the entity will comply with the conditions attaching to
the grant and the grant will be received.

31. Which of the following in NOT considered an item of Property, Plant and Equipment’ (PPE)?
a. Property subject to depreciation, such as office building
b. Property not subject to depreciation, such as land used as a plant site
c. Property used to develop and maintain biological assets and mineral reserves
d. Property subject to amortization, such as copyright acquired as protection from piracy

17
32. Which of the following costs is capitalized as part of the cost of PPE?
a. Cost of conducting business in a new location
b. Cost of relocating or reorganizing an entity’s operations
c. Cost of introducing a new product or conducting business in a new location
d. Cost directly attributable to bringing the PPE to intended use, location and condition

33. Directly attributable costs of PPE include all of the following, EXCEPT:
a. Professional fees
b. Initial operating loss
c. Installation and assembly cost
d. Cost of site preparation and testing
34. Which is NOT chargeable to the Land Account?
a. Cost of survey by engineers
b. Expenditure for fence, water system, sidewalk and pavement
c. Broker’s commission and fees for registration and title transfer
d. Attorney’s fee and any other expenditures for establishing clean title

35. Which is NOT chargeable to the Land account?

a. Cost of option of land not acquired
b. Payments to tenants to induce them to vacate the premises
c. Buyer-assumed mortgages and encumbrances like property taxes
d. Special assessments for local improvements which benefit the property.

36. The single cost of acquiring land and usable old building shall be allocated to the
a. Land only
b. Building only
c. Land and building, using assessed values
d. Land and building, using relative fair values

37. The single cost of acquiring land and unusable old building with no fair value shall be allocated
to the
a. Land only
b. Building only
c. Land and building, using assessed values
d. Land and building, using relative fair values

38. The cost of demolishing an unwanted building purchased as part of a parcel of land on which a
new building is intended to be constructed shall be charged to
a. Profit or loss
b. Land account
c. Old building account
d. New building account

39. The cost of demolishing an unwanted building purchased as part of a parcel of land on which
there is no intention to construct a new building shall be charged to
a. Profit or loss
b. Land account

18
 c. Old building account
d. New building account

40. Which is NOT chargeable to the Machinery and Equipment account?

a. Freight and installation costs
b. Repair cost incurred when equipment is damaged in the process of installation
c. Testing costs of the equipment or facilities before they are ready for productive use
d. Material, labor and other expenditures incurred in placing the equipment ready for use

41. Major spare parts and standby equipment that are expected to be used over a period of more
than one year should be classified as
a. Property, plant and equipment
b. Inventory
c. Noncurrent investment
d. Expense

42. The cost of property acquired on credit with available cash discount is equal to
a. Invoice price plus cash discount, taken or not
b. Invoice price minus cash discount, taken or not
c. Invoice price plus cash discount, only when taken
d. Invoice price minus cash discount, only when taken

43. The cost of property acquired by installment is equal to

a. Cash price
b. Invoice price
c. Installment price
d. Present value of installment payments
44. Property acquired through the issuance of shares should be recorded at
a. Par value of the shares issued
b. Fair value of the shares issued
c. Fair value of the property acquired
d. Fair value of the property acquired or fair value of the shares issued, whichever is higher

45. A property acquired in an exchange for a non-monetary asset shall be measured at

a. Fair value of the asset given, plus any cash payment
b. Fair value of the asset received, plus any cash payment
c. Carrying amount of the asset given, plus any cash payment
d. Carrying amount of the asset received, plus any cash payment

46. A property acquired in exchange for a non-monetary asset, where the exchange lacks
commercial substance, shall be measured at
a. Fair value of the asset given
b. Fair value of the asset received
c. Carrying amount of the asset given
d. Carrying amount of the asset received

47. The cost of self-constructed property, plant and equipment does NOT include
a. Direct costs of materials and labor

19
 b. Indirect costs and overhead specifically identifiable or traceable to the construction
c. Abnormal amount of wasted material, labor or overhead incurred in the construction
d. Financing costs attributable to construction incurred up to the completion of
construction

48. BORROWING costs incurred in acquiring, producing or constructing a qualifying asset shall be:
a. Expensed in the period incurred
b. Capitalized as part of the cost of the qualifying asset
c. Expensed (benchmark treatment); capitalized (allowed alternative treatment)
d. Capitalized (benchmark treatment); expensed (allowed alternative treatment)

49. Which of the following items is NOT a qualifying asset for purposes of capitalizing borrowing
costs?
a. Manufacturing plants
b. Power generation facilities
c. Inventories that produced in large quantities over a short period of time
d. Inventories that require a substantial period of time to bring them to a salable condition

50. If the qualifying asset is financed by SPECIFIC borrowing, the borrowing cost capitalized is equal
to
a. Actual borrowing costs incurred during the construction period
b. Actual borrowing costs incurred during and after the construction period
c. Actual borrowing costs incurred during the construction period less any investment
income on the temporary investment of borrowings
d. Actual borrowing costs incurred during and after the construction period less any
investment income on the temporary investment of borrowings

51. If the qualifying asset is financed by GENERAL borrowing, the capitalizable borrowing cost is
equal to
a. Actual borrowing costs incurred
b. Total expenditures on the asset multiplied by a capitalization rate
c. (Average expenditures on the asset multiplied by a capitalization rate) or (actual
borrowing costs), whichever is higher
d. (Average expenditures on the asset multiplied by a capitalization rate) or (actual
borrowing costs), whichever is lower

52. Capitalization of borrowing costs shall cease when

a. No further interest will be incurred
b. There is a temporary period of delay
c. The asset is abandoned, sold or fully depreciated
d. The asset is substantially complete and ready for its intended use

53. PAS 16 requires that PPE be accounted for using the

a. Cost model or fair value model, item-by-item basis
b. Cost model or fair value, applied to an entire class of PPE
c. Cost model or revaluation model, item-by-item basis
d. Cost model or revaluation model, applied to an entire class of PPE

20
54. The carrying amount of property is increased as a result of revaluation. Assuming no revaluation
was made before, the increase should be credited to
a. Accumulated depreciation
b. Revaluation gain, shown as a component of income
c. Revaluation surplus, shown as a component of equity
d. Retained earnings, shown under equity section of balance sheet

55. The carrying amount of a property is decreased as a result of revaluation. Assuming no

revaluation was made before, the decrease should be debited to
a. Accumulated depreciation
b. Revaluation or impairment loss
c. Revaluation surplus, shown as a component of equity
d. Retained earnings, shown under equity section of balance sheet

56. A revaluation increase shall be recognized as income

a. Always
b. When the asset is revalued for the first time
c. When the asset is revalued frequently than usual
d. When it reverses a revaluation decrease of the same asset previously recognized as
expense

57. If a revalued property is sold, the related revaluation surplus is transferred directly to
a. Revaluation gain
b. Retained earnings
c. Additional paid-in capital
d. Accumulated depreciation

58. Depreciation is a process that is designed to:

a. Allocate the cost of an asset over its useful life to an entity
b. Reflect the change in value of an asset as a result of obsolescence
c. Spread the cost of an asset across a period no greater than 5 years
d. Reduce the carrying amount of an asset to reflect the diminishing fair value of the asset

59. Depreciation is best described as a method of

a. Cost allocation
b. Asset valuation
c. Current value allocation
d. Useful life determination

60. Depreciation measurement should be based on:

a. Past input exchange price
b. Future input exchange price
c. Current input exchange price
d. Current output exchange price

61. Which of the following is NOT considered in determining the useful life of PPE?
a. Residual value
b. Technical obsolescence

21
 c. Expected usage of the asset
d. Expected wear and tear of the asset

62. Which term best describes the cost of an asset or other amount substituted for cost less residual
value?
a. Carrying amount
b. Revalued amount
c. Depreciable amount
d. Recoverable amount

63. Which method provides higher depreciation expense during the early years of an asset’s useful
life?
a. Straight-line method
b. Service hours method
c. Units of production method
d. Sum-of-years-digits method

64. Which of the following statements is the assumption on which straight-line depreciation is
based?
a. Service value declines as a function of time rather than use
b. The operating efficiency of the asset decreases in later years
c. Service value declines as a function of obsolescence rather than time
d. Physical wear and tear are more important than economic obsolescence

65. It is a depreciation method that EXCLUDES the residual value from the base of the depreciation
calculation.
a. Straight-line method
b. Declining balance method
c. Productive output method
d. Sum of the years’ digit

66. Which depreciation method is used when the usage of the asset varies considerably from period
to period and the service life is more a function of use rather than passage of time?
a. Straight line method
b. Declining balance method
c. Units of production method
d. Sum of years’ digits method

67. What is the most common method of recording depletion of wasting assets?
a. Production method
b. Straight line method
c. Effective interest method
d. Sum-of-the-years method

68. If there is a change from sum of years’ digits method to straight line method of depreciation,
then
a. The accumulated depreciation is adjusted to its appropriate balance through net income
based on the straight line method

22
 b. The accumulated depreciation is adjusted to its appropriate balance through retained
earnings based on the straight line method
c. The accumulated depreciation balance is not adjusted but the remaining book value is
allocated over the original life using the straight line method
d. The accumulated depreciation balance is not adjusted but the remaining book value is
allocated over the remaining life using the straight line method

69. The gain or loss from the sale or derecognition of property shall be based on the difference
between
a. Net disposal proceeds and the cost of the property
b. Gross disposal proceeds and the cost of the property
c. Net disposal proceeds and the carrying amount of the property
d. Gross disposal proceeds and the carrying amount of the property

70. Which of the following assets shall NOT be subject to depreciation?

I) Land used a plant site
II) Investment property under the fair value model
III) Non-current assets classified as held for sale under PFRS 5
a. I and II
b. I and III
c. II and III
d. I, II and III

ANSWER KEY-PPE

PRACTICAL EXERCISE

1.D 6.A,A,D 11.A 16.A 21.C,C

2.C 7.D,B 12.C 17.A 22.A
3.A 8.B,B,B 13.B 18.A,C,A,A 23.A
4.B 9.B,B 14.A 19.A 24.D
5.C 10.A,C,A 15.B 20.B,A 25.A,B

THEORY OF ACCOUNTS

1.D 15.D 29.C 43.A 57.B

2.A 16.B 30.D 44.C 58.A
3.D 17.B 31.D 45.A 59.A
4.C 18.C 32.D 46.C 60.A
5.D 19.D 33.B 47.C 61.A
6.C 20.D 34.B 48.B 62.C
7.C 21.A 35.A 49.C 63.D
8.B 22.B 36.D 50.C 64.A
9.B 23.A 37.A 51.D 65. B
10.C 24.B 38.D 52.D 66.C
11.C 25.D 39.A 53.D 67.A

23
 12.B 26.B 40.B 54.C 68.D
13.D 27.D 41.A 55.B 69.C
14.A 28.A 42.B 56.D 70.D

AGRICULTURE
The management by an entity of the biological transformation and harvest of
Agricultural Activity biological transformation and harvest of biological assets for sale or for
conversion into agricultural produce or into additional biological assets.

PAS 41 shall be applied to account for the following when they relate to AGRICULTURAL ACTIVITY.
➢ Biological assets, except bearer plants

Bearer plants should now be accounted for as PROPERTY, PLANT & EQUIPMENT as
operation of bearer plants is similar to that of manufacturing. A bearer plant is a living
plant that:
1. Is used in the production or supply of agricultural produce.
2. Is expected to bear produce for more than one period.
3. Has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales

Living animals related to recreational activities shall be accounted for as PROPERTY,

PLANT & EQUIPMENT because they are not held for agricultural activity.

➢ Agricultural produce at the point of harvest

➢ Unconditional government grants related to a biological asset measured at its fair value less
costs to sell

PAS 41 does not apply to the following:

➢ Land related to agricultural activity
➢ Bearer plants. However, PAS 41 applies to the produce on those bearer plants
➢ Government grants related to bearer plants
➢ Intangible assets related to agricultural activity

BIOLOGICAL ASSETS

A living plant or living animal related to agricultural activity

Note: (1) Bearer living plants are PPE

(2) Living animals related to recreational activities are PPE

Initial measurement Fair value – cost of disposal. If fair value is clearly unreliable, cost
less accumulated depreciation less accumulated impairment loss
Subsequent measurement Fair value – cost of disposal

24
 Fair Value: is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date.

Costs to sell: These are the incremental costs directly attributable to the disposal of
an asset, excluding finance costs and income taxes.

AGRICULTURAL PRODUCE

The harvested product of a living plant or animal

Note: Though bearer plants are PPE, growing fruits in bearer plants are considered
agricultural produce.

Initial Measurement:
Agricultural produce as it grows: Fair value less cost of disposal
Note: PAS 41 further provides that agricultural produce growing on bearer plant shall be
classified & presented as BIOLOGICAL ASSET.
Harvested agricultural produce: Fair value less cost of disposal at point of harvest

Subsequent Measurement:
Prior to harvest : Fair value less cost of disposal
Harvested agricultural produce : Lower of cost and net realizable value

TRANSACTION JOURNAL ENTRIES

Purchase of cows Biological asset xx
Cash xx
Birth of heifers Biological asset xx
Gain from change in fair value of biological asset xx
Harvest of milk from cows Inventory xx
and heifers Gain from change in fair value of agricultural produce xx
Milk to Cheese Production PAS 2 Inventories applies
Change of fair value on Biological assets xx
cows Gain from change in fair value of biological asset xx
Change in fair value on Biological assets xx
heifers Gain from change in fair value of biological asset xx

Fair Value Changes of Biological Assets

- Price Change
- Physical Change (inclusive of initial recognition of newborn animals)

ILLUSTRATION
Mango Tree Bearer plant (held to produce ) PAS 16 PPE

25
 Mango fruits Biological asset PAS 41
growing on the tree
Harvested mangoes Agricultural produce PAS 41 at the point of harvest
Dried Mangoes Subjected to processing PAS 2 Inventories

DO NOT FORGET!

1. The initial recognition of newborn animals is considered physical change

2. Agricultural produce growing in a bearer plant is presented as biological asset. Fair value of
harvest of agricultural produce is the initial cost of inventory and gain from agricultural
produce.
3. Bearer plants are PPE; Animals related to recreational activity are treated as PPE
4. Biological asset is measured at fair value less cost of disposal
5. Gain from change in fair value to growth or price change minus loss from change in fair value
due to harvest or price change equals net gain from biological asset.

PRACTICAL EXERCISES
1. An entity produces milk for local ice cream producers. The entity began operations at the beginning
of current year by purchasing milking cows for P5, 000,000. The entity provided the following
information at year-end relating to the milking cows:

Carrying amount – beginning of year 5,000,000

Change in fair value due to growth and price change 2,000,000
Decrease in fair value due to harvest 250,000
Newborn calf at year-end at fair value 400,000
Milk harvested during the year but not yet sold 850,000

1.1 What amount of gain on biological asset should be reported in the current year?
a. 2,400,000 c. 3,000,000
b. 2,150,000 d. 3,250,000

1.2 What amount of gain on agricultural produce should be recognized in the current year?
a. 1,250,000 c. 850,000
b. 1,000,000 d. 0

1.3 What is the carrying amount of the biological asset at year-end?

a. 8,000,000 c. 7,150,000
b. 8,250,000 d. 7,600,000

2. An entity provided the following assets in a forest plantation forest:

26
 Freestanding trees 5,000,000
Land under trees 600,000
Roads in forests 300,000
Animals related to recreational activities 1,000,000
Bearer plants 1,500,000
Bearer animals 2,000,000
Agricultural produce growing on bearer plants 800,000
Agricultural produce harvested 1,200,000

2.1 What total amount should be classified as biological assets?

a. 7,800,000 c. 7,500,000
b. 7,000,000 d. 8,500,000

2.2 What total amount should be included in property, plant and equipment?
a. 5,400,000 c. 2,900,000
b. 3,400,000 d. 1,900,000

3. On January 1, 2019, an entity has a herd of 100 2-year old animals. Ten animals aged 2.5 years were
purchased on July 1, 2019 for P10, 800 each. Ten animals were born on July 1, 2019. No animals
were sold or disposed of during the year. The fair values less cost of disposal per unit were:

2- year old animal on January 1 10,000

2.5-year old animal on July 1 10,800
Newborn animal on July 1 7,000
2-year old animal on December 31 10,500
2.5-year old animal on December 31 11,100
Newborn animal on December 31 7,200
3-year old animal on December 31 12,000
0.5 year old animal on December 31 8,000

3.1 What is the carrying amount of the biological assets before adjustment on December 31, 2019?
a. 1,178,000 c. 1,000,000
b.1, 108,000 d. 1,070,000

3.2 What is the adjusted carrying amount of the biological assets on December 31, 2019?
a. 1,400,000 c. 1,392,000
b. 1,440,000 d. 1,320,000

3.3 What is the total gain from change in fair value of biological asset?
a. 292,000 c. 400,000
b. 222,000 d. 152,000

3.4 What is the gain from biological asset attributable to price change?
a. 237,000 c. 222,000
b. 292,000 d. 55,000

27
 3.5 What is the gain from biological asset attributable to physical change?
a. 167,000 c. 292,000
b. 222,000 d. 237,000

THEORY OF ACCOUNTS

1. Biological assets:
a. Are found only in Biotech entities
b. Are living animals or living plants and must be disclosed as a separate line item in the
statement of financial position
c. Must be valued at cost
d. Do not generally have future economic benefits

2. Agricultural activity includes all of the following, except:

a. Raising livestock
b. Annual perennial cropping
c. Floriculture and aquaculture, including fish
d. Ocean fishing

3. All of the following must be satisfied before a biological asset can be recognized, except:
a. The entity controls the asset as a result of past event
b. It is probable that future economic benefits relating to the asset will flow to the entity
c. An active market for the asset exists
d. The fair value or cost of the asset can be measured reliably

4. Biological assets are measured at:

a. Cost
b. Lower of cost and net realizable value
c. Net realizable value
d. Fair value less cost of disposal

5. Costs of disposal include all of the following , except:

a. Commissions to brokers and dealers
b. Levies by regulatory agencies
c. Transfer taxes and duties
d. Transport costs

6. Where the fair value cannot be determined reliably, the biological asset shall be measured at:
a. Cost
b. Cost less accumulated depreciation
c. Cost less accumulated depreciation and accumulated impairment loss
d. Net realizable value

7. Where there is a production cycle of more than one year for a biological asset, separate disclosure is
encouraged for:
a. Physical change only
b. Price change only

28
 c. Total change in value
d. Physical change and price change

8. Which of the following statements is true regarding agricultural produce?

a. In all cases, an entity shall measure agricultural produce at fair value less cost of
disposal at the point of harvest
b. The fair value of agricultural produce at the point of harvest can always be measured
reliably
c. The fair value measurement of agricultural produce stops at the time of harvest
d. All of these statements are true regarding agricultural produce

9. When agricultural produce is harvested, the harvest should be accounted for as inventory. For this
purpose, the cost at the date of harvest is deemed to be the:
a. Fair value less cost of disposal at the point of harvest
b. Historical cost of the harvest
c. Historical cost less impairment
d. Market value

10. Land that is related to agricultural activity is measured:

a. At fair value
b. At fair value in combination with the biological asset that is being grown on the land
c. At the resale value separate from the biological asset that is being grown on the land
d. In accordance with PAS 16 Property, Plant & Equipment or PAS 40 Investment Property

ANSWER KEY-AGRICULTURE

PRACTICAL EXERCISE

1.B,C,C
2.A,B
3.A,A,A,D,D

THEORY OF ACCOUNTS

1.B 7.D
2.D 8.D
3.C 9.A
4.D 10.D
5.D
6.C

INTANGIBLE ASSETS

29
 Intangible Assets These are identifiable non-monetary assets without physical substance

Identifiability As asset is identifiable if it either is separable or arises from

contractual or other legal rights.
Essential Control The entity has the ability to benefit from the intangible asset or
Criteria prevent others from benefitting from it.
Future Economic These may include revenue from sales of products or services,
Benefits cost savings or other benefits resulting from the entity’s use of the
asset

Initial Measurement: Cost

Subsequent Measurement: Either Cost Model or Revaluation Model

Cost Model Revaluation Model

Cost Revalued Amount
Less: Accumulated Amortization Less: Subsequent Amortization
Less: Accumulated Impairment Loss Less: Subsequent Impairment Loss

MODES OF ACQUISITION:

MODES OF ACQUISITION INITIAL MEASUREMENT

Separate Acquisition Purchase cost + Direct Costs
Business Combination Fair Value at the acquisition date
Government Grant Fair Value or Nominal Amount
Exchange (with commercial substance) 1. Fair Value of Asset Given Up
2. Fair Value of Asset Received
3. Carrying Amount of Asset Given Up
Exchange (without commercial substance) Carrying Amount of Asset Given Up
Research – expensed (except R&D acquired
Internal Generation (Self-Creation) in a business combination)
Development – expensed; capitalize only if
all the conditions are met.

RULES ON AMORTIZATION:

Definite Life/Limited Life/Finite Life Indefinite Life

Amortize over useful life Not Amortized
Tested for impairment whenever there is Tested for impairment at least
an indication of impairment at the end annually & whenever there is an
of reporting period. indication of impairment

30
 - The method of amortization reflects the pattern in which future economic benefits
from the asset are expected to be consumed by the entity. If such pattern cannot be
reliably determined, straight line method is used.

- Residual value is zero, except:

• Third party is committed to buy the intangible asset
• There is an active market

SPECIFIC INTANGIBLE ASSETS

1. Patent – an exclusive right granted to an INVENTOR enabling the grantee to control the
manufacture, sale or other use of the invention for a specified period of time.

- Patent can be either purchased or developed.

- If developed, the cost should include only the licensing and other related legal fees
in securing patent rights.
- Legal fees and other costs of successfully prosecuting or defending a patent should
be charged outright as an expense. Any cost of unsuccessful litigation on patent
should also be charged outright as an expense including the unamortized cost of the
patent.
- Amortization of patent
1. Cost of acquired or developed patent should be amortized over its legal life
(20 years) or useful life whichever is shorter.
2. If competitive patent is acquired, cost of competitive patent is amortized
over the remaining life of the old patent.
3. If related patent is acquired to extend life of old patent, cost of related
patent + unamortized cost of old patent is amortized over the extended life.

2. Trademark is a symbol, sign, or name used to mark a product to distinguish it from other
products.
- Trademark can be either purchased or developed.
- If purchased, the cost of trademark is purchase price or cash price equivalent
- If developed, the cost of trademark includes expenditures such as filing fees, registry
fees, and other expenses incurred in securing the trademark.
- The legal life of a trademark is 10 years and maybe renewed for periods of 10 years
each. The cost of trademark is not amortized but subject to test of impairment at
least annually as a result of the almost automatic renewal. Trademark may be
properly classified as an intangible asset with an indefinite life. However, if its life is
no longer considered indefinite, it should be amortized over its remaining useful life.

3. Goodwill is an intangible asset that is not specifically identifiable, has an indeterminate life, is
inherent in a continuing business and relates to the entity as a whole.

- If purchased, recognize as an ASSET. The cost of purchased goodwill is determined by

the following computations:

31
 a. Residual approach: The excess of purchase price over fair value of net tangible
& identifiable assets is considered as goodwill.
b. Direct approach

Direct Approach Formula

Average Earnings
Less: Normal Earnings
Purchase of average excess earnings Average Excess Earnings
Multiplied by: No. of Years
Goodwill
Average Earnings
- I Less: Normal Earnings
f
Capitalization of average excess earnings Average Excess Earnings
Divided by: Capitalization Rate
d Goodwill
e Average Earnings
v Divided by: Capitalization Rate
e
Capitalization of average earnings Net assets , including goodwill
l Less: Net assets, excluding goodwill
o Goodwill
p Average Earnings
e Less: Normal Earnings
d
Present Value method Average Excess Earnings
Multiplied by: PV Factor
i Goodwill
n
ternally, goodwill is not recognized.
- Goodwill shall not be amortized, however, it shall be tested for impairment at least
annually and whenever there is an indication that it may be impaired.

4. Copyright is an exclusive right granted by the government to the author, composer, or artist
enabling the grantee to publish, sell, or otherwise benefit from the literary, musical, or artistic
work.
- If purchased, cost of copyright is cash + directly attributable cost necessary for the
intended use
- If internally generated, cost of copyright includes all expenses incurred in the
production of the work including those required to establish or obtain the right
- The copyright should be amortized over the shorter between the remaining legal life
and remaining useful life.

5. Franchise
- Cost = initial franchise fee + directly attributable costs necessary for the intended use
- Periodic franchise fee is expensed outright
- If franchise is for a definite period, the cost of franchise shall be amortized over the
useful life or definite period, whichever is shorter
- If franchise is granted indefinitely, cost of franchise is not amortized but tested for
impairment at least annually.

32
6. Leasehold is the right acquired by the lessee by virtue of a contract of lease to use the specific
property owned by the lessor for a definite period of time in consideration for a certain sum of
money in the form of rent
- Amortize over the life of the lease
- Leasehold improvements are classified as PPE and depreciated over the lease term or
useful life of the improvements, whichever is shorter.
- If there is an option to renew & too uncertain, depreciate over the original lease term
or useful life whichever is shorter
- If there is an option to renew is probable or certain, depreciate over the extended lease
term or useful life, whichever is shorter.

7. Internally Developed Computer Software - the cost incurred on the research stage in creating
the software should be charged outright to expense when incurred until a technological
feasibility has been established for the product. Technological feasibility is established when a
company had produced either a detailed program design of the software or a working model.
After establishing technological feasibility, the cost of software to be capitalized should include
the costs of coding and testing and the cost to produce the product masters.

The cost of the computer software should be allocated based on the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity. If such pattern cannot be
determined reliably, the straight line method is used.

RESEARCH AND DEVELOPMENT COSTS

Research: original and planned investigation undertaken with the prospect of gaining scientific or
technical knowledge and understanding
1. Laboratory research aimed at obtaining or discovering new knowledge
2. Searching for application of research finding and other knowledge
3. Conceptual formulation and design of possible product or process alternative
4. Testing in search for product or process alternative

Expenditure on research or on the research phase of an internal project shall be

recognized as expense when incurred.

Development: the application of research findings or other knowledge to a plan or design for
the production of new or substantially improved material, device, product, process, system, or
service, prior to the commencement of commercial production.
1. Design, construction, and testing of preproduction prototype and model
2. Design of tools, jigs, molds, and dies involving new technology
3. Design, construction, and operation of a pilot plant that is not of a scale economically
feasible to the entity for commercial production.
4. Design, construction, and testing of a chosen alternative for new or improved product
or process

33
 Expenditure on development phase of an internal project shall be recognized as expense
when incurred unless an entity can demonstrate all of the following:
1. There is a technical feasibility of completing the intangible asset (a prototype is
produced)
2. There is an intention to complete the intangible asset
3. There is ability to use or sell the intangible asset
4. There is an existence of a market for the output of the intangible asset
5. Availability of resources or funding to complete development and to use or sell the
asset
6. The ability to measure reliably the expenditure attributable to the intangible asset
during its development.

NOTE: Expenditures for research and development which have alternative future use, either in
additional research projects or for productive purposes, can be capitalized. This means that costs
incurred for materials, equipment and intangible asset related to research and development
activities which have alternative future use can be capitalized. Subsequently, the following
should be charged to research and development expense:
a. Cost of materials used
b. Depreciation of equipment used in research and development
c. Amortization of intangible asset used in research and development

Acquired in-process R&D is recognized as an asset at cost even if a component is research.

Subsequent expenditures may be expensed or capitalized depending on the recognition criteria
for an intangible asset.

The following are examples not considered research & development include:
a. Engineering follow through in an early phase of commercial production
b. Quality control during commercial production including routine testing
c. Trouble shooting in connection with breakdowns during production
d. Routine on-going efforts to refine, enrich, or improve qualities of existing product
e. Adaptation of an existing capability to a particular requirement or customer need
f. Periodic design of tools, jigs, molds and dies
g. Routine design of tools, jigs, molds, and dies
h. Activity, including design and construction engineering , related to construction , relocation,
rearrangement or start-up of facilities and equipment

PRACTICAL EXERCISES
1. Angeluz Company incurred P 1,600,000 of research and development costs to develop a product
for which a patent was granted on January 1, 2019. Legal fees and other costs associated with
registration of the patent totaled P300, 000. During the year, the entity paid P450, 000 for legal
fees in successful defense of the patent. What amount that should be capitalized as cost of
patent?
a. 2,350,000 c. 750,000
b. 2,050,000 d. 300,000

34
2. On January 1, 2016, Josabelle Company purchased a patent for P7, 140,000. The patent is being
amortized over the remaining legal life of 15 years. During 2019, the entity determined that the
economic benefits of the patent would not last longer than ten years from the date of
acquisition. What is the carrying amount of the patent on December 31, 2019?
a. 4,282,000 c. 5,050,000
b. 4,896,000 d. 5,236,000

3. Rhoda Company is planning to sell the business to new interests. The cumulative net earnings
for the past five years amounted to P16, 500,000 including expropriation loss of P1, 500,000.
The normal rate of return is 20%. The fair value of net assets of the entity at current year-end
was P 10,000,000.

3.1 What is the acquisition cost if goodwill is measured by capitalizing excess earnings at 25%?
a. 16,400,000 c. 15,200,000
b. 14,000,000 d. 10,000,000

3.2 What is the acquisition cost if goodwill is measured by capitalizing average annual earnings
at 25%?
a. 14,400,000 c. 12,000,000
b. 13,600,000 d. 11,600,000

4. Jennylyn Company purchased another entity for P8, 000,000 cash. The assets and liabilities of
the acquire are as follows:
Carrying Amount Fair Value
Cash 1,000,000 1,000,000
Inventory 400,000 500,000
In-process R&D 6,000,000 5,000,000
Assembled workforce 1,100,000 1,200,000
Liabilities 2,500,000 3,000,000

What is the goodwill arising from the acquisition?

a. 4,500,000 c. 3,100,000
b. 3,300,000 d. 2,000,000

5. On January 1, 2019, Rowena Company acquired a trademark for P3, 000,000. The trademark has
eight years remaining in the legal life. It is anticipated that the trademark will be renewed in the
future indefinitely without problem. On December 31, 2019, the trademark is assessed for
impairment. Because of a decline in economy, the trademark is expected to generate cash flows
of just P120, 000 annually. The useful life of the trademark still extends beyond the foreseeable
horizon. The appropriate discount rate is 6%. What amount should be recognized as impairment
loss on trademark for 2019?
a. 1,000,000 c. 3,000,000
b. 2,000,000 d. 0

35
6. On January 1, 2016, Arra Company signed a 12-year for a building. The entity has an option to
renew the lease for an additional 6-year period on or before January 1, 2020. During January
2019, the entity made substantial improvement to the building. The cost of the improvement
was P4, 500,000 with an estimated useful life of 10 years. On December 31, 2019, the entity
intended to exercise the renewal option. The entity has taken full year depreciation on this
improvement. On December 31, 2019, what is the carrying amount of the leasehold
improvement?
a. 4,500,000 c. 4,200,000
b. 4,050,000 d. 4,000,000

7. Celina Company incurred the following research and development costs in the current year:

Materials used in research and development projects 400,000

Equipment acquired that will have alternate future use in future
research and development projects 2,000,000
Depreciation on above equipment 500,000
Personnel costs of persons involved in research and development projects 1,000,000
Consulting fees paid to outsiders for research and development projects 100,000
Indirect costs reasonably allocable to research and development projects 200,000

What amount of research and development costs should be expensed in the current year?
a. 1,500,000 c. 2,200,000
b. 1,700,000 d. 3,500,000

8. Earth Company incurred the following costs during the current year:

Laboratory research aimed at discovery of new knowledge 750,000

Design of tools, jigs, molds, and dies involving new technology 220,000
Quality control during commercial production including routine testing 350,000
Equipment acquired two years ago, having an estimated useful life of
five years with no residual value in various R&D projects 1,500,000
Research and development services performed by Star Company
for Earth Company 250,000
Research and development services performed by Earth Company
for Moron Company 200,000

What amount of research and development expense should be reported in the current year?
a. 1,200,000 c. 1,720,000
b. 1,520,000 d. 1,870,000

9. Halina Company acquired a patent for drug with a remaining legal and useful life of six years on
January 1, 2017 for P5, 400,000. On January 1, 2019, a new patent is received for an improved
version of the same drug. The new patent has a legal and useful life of 20 years.

36
 What is the amortization expense for 2019?
A. 900,000 C. 200,000
B. 180,000 D. 300,000

10. On January 1, 2016, SME entered a trademark for line of products from a competitor for P300,
000. The product was patented for P300, 000 for a useful life of 15 years. The SME expected to
continue marketing the line of products using trademark indefinitely.
An analysis of market, competitive and environmental trend provides evidence that the line of
trademarked products may generate net cash inflows for the acquiring entity for an indefinite
period. Management is unable to estimate the useful life of the trademark. In 2019, a
competitor unexpectedly revealed a technological breakthrough that is expected to result in a
product, that when launched by the competitor, will extinguish demand for SME’s patented
product line. Demand for SME’s patented product line is expected to remain strong until
December 2021, when competitor is expected to launch new product. On December 31, 2019,
SME assessed the recoverable amount of the trademark at P50, 000.
SME intended to continue manufacturing the patented products until December 31, 2021.

10.1 What is the amortization of the patent for 2016?

A. 60,000 C. 30,000
B. 90,000 D. 20,000

10.2 What is the carrying amount of the patent on January 1, 2019?

A. 300,000 C. 240,000
B. 210,000 D. 260,000

10.3 What is the amortization of the patent for 2019?

A. 30,000 C. 70,000
B. 60,000 D. 0

THEORY OF ACCOUNTS

1. Under PAS 38, which of the following is a criterion that must be met in order for an item to be
recognized as an intangible asset other than goodwill?
a. The fair value can be measured reliably
b. The item is identifiable and lacks physical substance
c. The item is expected to be used in the production or supply of goods or services
d. The item is part of the activities aimed at gaining new scientific or technical knowledge

2. Which characteristic is not possessed by an intangible asset?

a. Identifiable
b. Physical existence
c. Results in future benefits
d. Expensed over current and future periods

3. Which of the following intangible assets might be recorded when a new entity is acquired?
a. A customer list

37
 b. A patent
c. A trade name
d. All of these intangible assets

4. Which of the following costs should be capitalized when incurred?

a. Costs to internally generate goodwill
b. Filing fees for patent
c. Organizational costs
d. Research and development costs

5. An entity that acquires an intangible asset may use the revaluation model for subsequent
measurement only if:
a. The intangible asset is a monetary asset
b. An active market exists for the intangible asset
c. The cost of the intangible asset can be measured reliably
d. The useful life of the intangible asset can be reliably determined

6. The reason goodwill is sometimes referred to as a master valuation account is because:

a. the value of a business is computed without consideration of goodwill
b. it represents the purchase price of a business that is about to be sold
c. it is the only account in the financial statements that is based on fair value
d. it is the difference between the fair value of the net identifiable assets as compared with the
purchase price of the acquired business.

7. An entity should recognize goodwill at which of the following points?

a. The fair value of assets exceeds the carrying amount
b. Costs have been incurred in the development of goodwill
c. Goodwill has been created in the purchase of a business
d. The entity expects a future benefit from the creation of goodwill

8. What is required with respect to accounting for goodwill?

a. Goodwill should be recorded and never adjusted
b. Goodwill should be amortized over a five-year period
c. Goodwill should be amortized over the expected useful life
d. Goodwill should be recorded and periodically evaluated for impairment

9. Which of the following methods of amortization is normally used for intangible assets?
a. Double-declining balance
b. Straight Line
c. Sum of the years’ digits
d. Units of Production

10. Which of the following would not be considered an R&D activity?

a. Laboratory research aimed at discovery of new knowledge
b. Conceptual formulation and design of possible product or process alternative
c. Adaptation of existing capability to a particular requirement or customer need
d. Application of research findings or other knowledge to plan for an new product process

38
11. Which of the following would be considered research and development?
a. Construction of prototype
b. Routine effort to refine an existing product
c. Periodic alteration to existing product line
d. Marketing research to promote a new product

12. Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product
b. Cost of marketing research for a new product
c. Acquisition of R&D equipment for use on a current project only
d. Engineering activity required to advance the design of a product to the manufacturing stage.

13. Which of the following statements is true about accounting for development costs?
a. Development costs must be expensed
b. Development costs are recorded in other comprehensive income
c. Development costs are always deferred and expensed against future revenue
d. Development costs may be capitalized as an intangible asset in very restrictive situations

14. Which of the following research and development related costs should be capitalized and
depreciated over current & future periods?
a. Inventory used for a specific research period
b. Administrative salaries allocated to research and development
c. Research findings purchased to aid a particular research project currently in process
d. Research and development general laboratory building which can be put to alternative use in
the future.

15. Which of the following costs should not be capitalized?

a. Costs incurred to file for patent
b. Cost of testing prototype before economic feasibility has been demonstrated
c. Engineering costs incurred to advance the project to the full production stage
d. Acquisition cost of equipment to be used on current and future research projects.

ANSWER KEY- INTANGIBLE ASSETS

PRACTICAL EXERCISES:

1. D 4.A 7.C 10.C,B,C

2. B 5.A 8.B
3. A,A 6.B 9.B

THEORY OF ACCOUNTS

1.B 7.C 13.D

2.B 8.D 14.D
3.D 9.B 15.B

39
 4.B 10.C
5.B 11.A
6.D 12.B

IMPAIRMENT OF ASSETS
Impairment It is a fall in the market value of an asset so that the “recoverable amount” is now less
than the carrying amount in the statement of financial position.

An asset shall not be carried at above the recoverable amount. The basic principle is
that if the recoverable amount of an asset is lower than the carrying amount, the
asset is judged to have suffered an impairment loss. The recoverable amount of an
asset shall be determined for the asset individually. If it is not possible to estimate
the recoverable amount of the individual asset, an entity shall determine the cash
generating unit (CGU) to which the asset belongs.

INDICATION OF IMPAIRMENT

An entity shall assess whether there is any indication of impairment at each reporting date.
Indicators of impairment are classified into external sources and internal sources.
If such indication of impairment exists , conduct now an impairment test, meaning entity
estimates the recoverable amount of the asset
If no such indication exists, the entity need not estimate the recoverable amount of the asset.
The following assets are required to be tested for impairment at least annually even of there are no
indications for impairment:
1. Intangible asset with indefinite useful life
2. Intangible asset not yet available for use
3. Goodwill acquired in a business combination

INDICATORS OF IMPAIRMENT
EXTERNAL SOURCES INTERNAL SOURCES
Significant decrease in the market value of the Evidence of obsolescence or physical damage of
asset an asset
Significant change in the technological, market, Significant change in the manner or extent in
legal or economic environment of the business which the asset is used with an adverse effect on
in which the asset is employed the entity
Increase in the interest rate or market rate of
return on investment Evidence that the economic performance of an
Carrying amount of net assets is more than the asset will be worse than expected
market capitalization (Fair value of net assets)

40
MEASUREMENT OF RECOVERABLE AMOUNT

It is the fair value less cost of disposal or value in use, whichever is

Recoverable Amount HIGHER

HIGHER BETWEEN
FAIR VALUE – COST OF DISPOSAL VALUE IN USE
- Fair value is the price that would be - Value in use is the present value of the future
received to sell an asset or paid to cash flows expected to be derived from an
transfer a liability in an orderly asset or cash-generating unit.
transaction between market participants
at the measurement date.

- Costs of disposal are incremental costs

directly attributable to the disposal of an
asset or CGU, excluding finance costs
and income tax expense.

FAIR VALUE HIERARCHY

PFRS 13, para. 72, enumerates the fair value hierarchy or best evidence of fair value as follows:

Level 1 Inputs Quoted Prices Active Market Identical Assets

Quoted Prices Active Market Similar Assets
Level 2 Inputs Identical/Similar
Quoted Prices Not Active Market Assets
Level 3 Inputs They are unobservable inputs for the asset. Unobservable inputs
are usually developed by the entity using the best available
information from the entity’s own data.

VALUE IN USE COMPUTATION

Calculating value in use calls for estimates of future cash flows. The discount rate used in estimating
future cash flows is the current pretax rate that reflects the current assessment of the time value of
money & the risks specific to the asset.

Estimates of future cash flows:

INCLUDES (/) EXCLUDES (X)

Cash inflows from the continuing use of the Future cash flows relating to restructuring to
asset which the entity is not yet committed
Cash outflows necessarily incurred to generate Future cost of improving or enhancing the
the cash inflows from the continuing use of the asset’s performance
asset

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 Net cash flows received or paid on the disposal Cash inflows or outflows from financing activities
of the asset at the end of its useful life in an
arm’s length transaction.
Income tax receipts or payments

RECOGNITION OF IMPAIRMENT LOSS

Carrying Amount > Recoverable Amount

INDIVIDUAL ASSET
COST MODEL REVALUATION MODEL
Impairment loss is recognized in Profit /Loss & Impairment loss is charged first against the
presented separately in the Income Statement revaluation surplus and the remainder to
expense.
After the recognition of an impairment loss, the depreciation charge for the asset shall be adjusted
in future periods to allocate the revised carrying amount less residual value on systematic basis
over the remaining useful life.

CASH GENERATING UNIT

It is the smallest identifiable group of assets that generate cash inflows
Cash Generating Unit from continuing use that are largely independent of the cash inflows from
other assets or group of assets.

When an impairment loss is recognized for a CGU, this loss shall be allocated to the assets of the
unit in the following order:
1. Goodwill
2. Other Noncash Assets of the unit prorata based on their carrying amount

In the computation of Impairment Loss, the carrying amount of CGU includes cash and goodwill but
excludes liabilities. The carrying amount of an asset shall not be reduced below the highest of fair
value less cost of disposal, value in use and zero.

REVERSAL OF AN IMPAIRMENT LOSS

Recoverable Amount > Carrying Amount

INDIVIDUAL ASSET
COST MODEL REVALUATION MODEL
The reversal of impairment loss on a revalued
The reversal of impairment loss shall be asset shall be credited to income to the extent
recognized immediately as income in the that it reverses a previous revaluation decrease
income statement. and any excess credited directly to revaluation
surplus.

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 The increased carrying amount of an asset due to reversal of an impairment loss shall not exceed
the carrying amount that would have been determined, had no impairment loss been recognized
for the asset in prior years.

CASH GENERATING UNIT

The reversal of an impairment loss for CGU shall be allocated to the assets of the unit, except
goodwill, on a prorata based on the carrying amount of those assets. These increases in carrying
amounts shall be treated as reversals of impairment losses for individual assets and recognized in
profit or loss, unless the assets are carried at revalued amount, that any reversal of impairment on
revalued asset or assets shall be treated as revaluation increase and credited directly to equity.

PRACTICAL EXERCISES
2. On December 31, 2019, Athena Company had an equipment with a cost of P 9,000,000 and
accumulated depreciation of P 3,000,000. Due to obsolescence and physical damage, the
equipment was found to be impaired. On same date, the entity determined that the equipment
had a fair value less cost of disposal of P 4,500,000, discounted net cash inflows of P4, 000,000
and undiscounted net cash inflows of P5, 000,000.00. What is the impairment loss for 2019?
a. 1,500,000 c. 1,000,000
b. 2,000,000 d. 0

3. Alyssa Company determined that the electronics division in a cash generating unit. The entity
calculated the value in use of the division at P 8,000,000. The carrying amounts of the assets are
building P5, 000,000, equipment P3, 000,000 and inventory P2, 000,000. The entity also
determined that the fair value less cost of disposal of the building is P4,500,000.00

2.1 What is the impairment loss on building?

a. 1,000,000 c. 750,000
b. 500,000 d. 0

2.2 What is the impairment loss on equipment?

a. 600,000 c. 450,000
b. 900,000 d. 0

2.3 What is the impairment loss on inventory?

a. 400,000 c. 300,000
b. 600,000 d. 0

4. On January 1, 2018, Merill Company purchased equipment for P1, 200,000 with a useful life of 8
years with no residual value. On December 31, 2019, new technology was introduced that
would accelerate the obsolescence of the equipment. The entity estimated the present value of

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 the expected future net cash flows on the equipment at P580, 000 and the fair value less cost of
disposal at P600, 000. The entity determined the recoverable amount of the equipment on
December 31, 2020 at P570, 000.00.

What amount of gain on reversal of impairment loss should be recognized for the year 2020?
a. 300,000 c. 70,000
b. 250,000 d. 0

5. On January 1, 2018, Red Company purchased equipment with cost of P 11,000,000, useful life of
10 years and no residual value. The entity used straight line depreciation. On December 31,
2018 and December 31, 2019, the entity determined that impairment indicators are present.
There is no change in the useful life or residual value.

12/31/2018 12/31/2019
Fair value less cost of disposal 8,100,000 8,400,000
Value in Use 8,550,000 8,200,000

4.1 What is the impairment loss for 2018?

b. 1,800,000 c. 2,450,000
c. 1,350,000 d. 0

4.2 What is the gain on reversal of impairment for 2019?

b. 400,000 c. 800,000
c. 250,000 d. 0

6. On January 1, 2017, Joyce Company purchased equipment with a cost of P10, 000,000, useful
life of 10 years and no residual value. The entity used straight line depreciation. On December
31, 2017 and December 31, 2018, the entity determined that impairment indicators are present.
There is no change in useful life or residual value.

December 31, 2017 December 31, 2018

Fair value less cost of disposal 8,100,000 8,300,000
Value in use 8,550,000 8,200,000

5.1 What is the impairment loss for 2017?

a. 900,000 c. 600,000
b. 450,000 d. 0

5.2 What is the gain on reversal of impairment for 2018?

a. 400,000 c. 600,000
b. 700,000 d. 0

5.3 What is the depreciation for 2019?

a. 1,000,000 c. 1,025,000
b. 1,050,000 d. 950,000

THEORY OF ACCOUNTS
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1. An impairment loss is the amount by which:
b. The carrying amount of an asset exceeds recoverable amount
c. The carrying amount of an asset exceeds value in use
d. The carrying amount of an asset exceeds fair value less cost of disposal
e. The recoverable amount of an asset exceeds carrying amount

2. The recoverable amount of an asset or cash generating unit is the:

a. Fair value less cost of disposal
b. Value in use
c. Higher between fair value less cost of disposal and value in use
d. Lower between fair value less cost of disposal and value in use

3. Value in use:
a. The market value
b. The discounted value of future cash flows arising from use of the asset and from disposal
c. The higher of fair value less cost of disposal and market value
d. The amount of which the asset is recognized in the statement of financial position

4. If the fair value less cost of disposal cannot be determined:

a. The asset is not impaired
b. The recoverable amount is the value in use
c. The net realizable value is used
d. The carrying amount of the asset remains the same

5. If the asset is to be disposed of:

a. The recoverable amount is the fair value less cost of disposal
b. The recoverable amount is the value in use
c. The asset is not impaired
d. The recoverable amount is the carrying amount

6. The estimates in calculating value in use include all of the following, except:
a. Cash inflows from continuing use of the asset
b. Cash outflows incurred to generate the cash inflows from continuing use of the asset
c. Net cash inflows from the disposal of the asset at end of useful life
d. Income tax payments

7. Which of the following is not relevant in determining value in use?

a. The expected future cash flows from the asset
b. The carrying amount of the asset
c. Expectation about possible variation in the amount and timing of future cash flows
d. The time value of money

8. Which of the following impairment loss should never be reversed?

a. Loss on property, plant and equipment
b. Loss on goodwill
c. Loss on business segment
d. Loss on inventory

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9. A cash generating unit is:
a. The smallest business segment
b. Any group of assets that generates cash flows
c. Any group of assets that is reported separately to management
d. The smallest group of assets that generates independent cash flows from continuing use

10. Where cash generating unit is disposed of, any goodwill associated shall
a. Be written off against retained profits
b. Be included in the calculation of gain or loss
c. Not be included in the calculation of gain or loss
d. Not be written off to the income statement entirely

11. When an entity determined than an equipment used in operations has suffered impairment in value,
the entity to record the impairment should
a. Include a credit to equipment
b. Include a credit to accumulated depreciation
c. Not be made if the equipment is still being used
b. Recognize extra depreciation expense for the period

12. An impairment loss that relates to an asset that have been revalued should be recognized in:
a. Profit or loss
b. Any reserve in equity
c. Opening retained earnings
d. Revaluation surplus that relates to the revalued asset

13. The allocation of an impairment loss should reduce the carrying amount of which asset first?
a. Current assets
b. Goodwill
c. Intangible Assets
d. Property, Plant & Equipment

14. Under PAS 36, which of the following statements is incorrect with regard to impairment?
a. If impairment indicators are present, the entity must conduct an impairment test
b. If the recoverable amount is lower than carrying amount, an impairment loss is recognized
c. If recoverable amount is higher than carrying amount, no impairment loss is recognized
d. The impairment test compares the carrying amount with the lower of fair value less cost of
disposal and value in use

15. Which of the following statements in relation to recovery of impairment for an intangible asset is not
true?
a. No recovery of impairment is allowed for goodwill
b. The recovery of impairment is reported as other income
c. The amount of recovery is limited to the carrying amount of the asset that would have been
reported had no impairment occurred.
d. After a recovery of impairment has been recognized, the carrying amount of the asset
reported would be higher between the fair value less cost of disposal and value in use

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 ANSWER KEY- IMPAIRMENT OF ASSETS

PRACTICAL EXERCISE
1. A 4.B,C
2. B, B, B 5.B,A,A
3. C

THEORY OF ACCOUNTS

1.A 7.B 13.B

2.C 8.B 14.D
3.B 9.D 15.D
4.B 10.B
5.A 11.B
6.D 12.D

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