MODULE 1 INVENTORY

LEARNING OBJECTIVES:
1. Identify major classifications of inventory.
2. Distinguish between perpetual and periodic inventory systems.
3. Understand the items to include as inventory cost.
4. Describe and apply the lower-of-cost-or-net realizable value rule.
5. Explain when companies use the relative sales value method to value inventories.
6. Determine ending inventory by applying the gross profit method.
7. Determine ending inventory by applying the retail inventory method.
8. Explain how to report and analyze inventory.

OVERVIEW
PAS 2 Inventories contains the requirements on how to account for most types of inventory. The standard
requires inventories to be measured at the lower of cost and net realizable value (NRV) and outlines accept-
able methods of determining cost, including specific identification (in some cases), first-in first-out (FIFO) and
weighted average cost.

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Inventories are:
• items held for sale, or
• goods to be used in the production of goods to be sold.

INITIAL VALUATION
Costs – includes cash acquisition price and costs directly connected with bringing the goods to the
buyer’s place of business and converting such goods to a salable condition.

Classification
Four accounts
• Raw materials
• Work in process
• Finished goods
• Mfg. supplies

ACCOUNTING FOR INVENTORIES

Perpetual System
1. Purchases of merchandise are debited to Inventory.
2. Freight-in is debited to Inventory. Purchase returns and allowances and purchase discounts are
credited to Inventory.
3. Cost of goods sold is debited and Inventory is credited for each sale.
4. Subsidiary records show quantity and cost of each type of inventory on hand.

The perpetual inventory system provides a continuous record of Inventory and

Cost of Goods Sold.

Periodic System
1. Purchases of merchandise are debited to Purchases.
2. Ending Inventory determined by physical count.
 3. Calculation of Cost of Goods Sold:
Beginning inventory XX
Purchases, net XX
Goods available for sale XX
Ending inventory XX
Cost of goods sold XX

Inventory Control
All companies need periodic verification of the inventory records by actual count, weight, or measurement, with
the counts compared with the detailed inventory records.
Companies should take the physical inventory near the end of their fiscal year, to properly report inventory
quantities in their annual accounting reports.

Valuation requires determining

• The physical goods (goods on hand, goods in transit, consigned goods, special sales agreements).
• The costs to include (product costs).
• The cost flow assumption (specific Identification, average cost, FIFO, retail, etc.).

Goods Included in Inventory

A company should record purchases when it obtains legal title to the goods.

Subsequent Valuation of Inventory

Net Realizable Value

Estimated selling price in the normal course of business less estimated costs to complete and estimated costs
to make a sale.

Use of an Allowance
Instead of crediting the Inventory account for net realizable value adjustments, companies generally use an
allowance account.

Loss due to decline to NRV xx

Allowance to reduce inventory to NRV xx

Recovery of Inventory Loss

• Amount of write-down is reversed.
 • Reversal limited to amount of original write-down.

Assume the net realizable value increases. Entity makes the following entry, using the loss method.
Allowance to reduce inventory to NRV xx
Recovery of inventory loss xx

Inventory Estimates

Gross Profit Method

(1) Provides an estimate of ending inventory.
(2) Uses past percentages in calculation.
(3) A blanket gross profit rate may not be representative.
(4) Normally unacceptable for financial reporting purposes. IFRS requires a physical inventory as
additional verification.

Retail Inventory Method

A method used by retailers, to value inventory without a physical count, by converting retail prices to cost.

Requires retailers to keep:

(1) Total cost and retail value of goods purchased.
(2) Total cost and retail value of the goods available for sale.
(3) Sales for the period.

Special Items
• Freight costs
• Purchase returns
• Purchase discounts and allowances
• Transfers-in
• Normal spoilage
• Abnormal shortages
• Employee discounts
•
Examples of retail inventory method
Purchase commitments
A firm Purchase commitment is “an agreement with an unrelated party, binding on both parties and usually
legally enforceable, that
a. Specifies all significant terms, including the price and timing of the transactions, and
b. Includes a disincentive for non-performance that is sufficiently large to make performance highly
probable.” (PFRS 5. Appendix)

A contracting party under a firm purchase commitment cannot cancel the contract without suffering penalty.
Thus, the buyer has to accept future delivery even if the goods promised to be purchased become impaired. In
such a case the buyer recognizes loss on purchase commitment.

When prices subsequently increase, the buyer recognizes gain on purchase commitment, however the gain
should not exceed the loss previously recognized.

Analysis of Inventories
Common ratios used in the management and evaluation of inventory levels are inventory turnover and average
days to sell the inventory.

Inventory Turnover Ratio

Measures the number of times on average a company sells the inventory during the period.

Illustration: In its 2020 annual report Tate & Lyle reported a beginning inventory of 562 million, an ending
inventory of 538 million, and cost of goods sold of 2,019 million for the year.

Average Days to Sell Inventory

Measure represents the average number of days’ sales for which a company has inventory on hand.

Average Days to Sell

365 days / 3.67 times = every 99.5 days

Disclosures:
Accounting standards require disclosure of:
 (1) Accounting policies adopted in measuring inventories, including the cost formula used (weighted-
average, FIFO).
(2) Total carrying amount of inventories and the carrying amount in classifications (merchandise,
production supplies, raw materials, work in progress, and finished goods).
(3) Carrying amount of inventories carried at fair value less costs to sell.
(4) Amount of inventories recognized as an expense during the period.
(5) Amount of any write-down of inventories recognized as an expense in the period and the amount of any
reversal of write-downs recognized as a reduction of expense in the period.
(6) Circumstances or events that led to the reversal of a write-down of inventories.
(7) Carrying amount of inventories pledged as security for liabilities, if any.

MODULE 1 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
INVENTORY

PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Angel Company included the following items in inventory:

Materials 1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventory 60,000
Advertising catalogs and shipping cartons 150,000
Finished goods in factory 2,000,000
Finished goods in entity-owned retail store,
Including 50% profit on cost 750,000
Finished goods in hands of consignees
including 40% profit on sales 400,000
Finished goods out on approval at cost 250,000

Unsalable finished goods, at cost 100,000

Office supplies 40,000
Materials in transit, shipped FOB shipping point
Excluding freight of P30,000 330,000
Goods held on consignment, at sales price cost P150,000 200,000

What is the correct amount of inventory?

a. 5,375,000 b. 5,400,000 c. 5,540,000 d. 5,250,000

2. Papa Koo Company provided the following data:

Items counted in the bodega 4,000,000
Items included in the count specifically segregated
per sale contract 100,000
Items in receiving department, returned by customer,
in good condition 50,000
Items ordered and in the receiving department 400,000
Items ordered, invoice received but goods not
received. Freight is on account of seller 300,000
Items shipped today, invoice mailed, FOB shipping point 250,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currently being used for window display 200,000
 Items on counter for sale 800,000
Items on receiving department, refused because of damage 180,000
Items included in count, damaged and unsalable 50,000
Items in the shipping department 250,000

What is the correct amount of inventory?

a. 5,700,000 b. 6,000,000 c. 5,800,000 d. 5,150,000

3. In connection with your audit of the Angel Manufacturing Company, you reviewed its inventory as
of December 31, 2019 and found the following items:

(a) A packing case containing a product costing 100,000 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it was
marked “Hold for shipping instructions.” The customer’s order was dated December 18, but the
case was shipped and the customer billed on January 10, 2020.

(b) Merchandise costing 600,000 was received on December 28, 2019, and the invoice was
recorded. The invoice was in the hands of the purchasing agent; it was marked “On
consignment”.

(c) Merchandise received on January 6, 2020, costing 700,000 was entered in purchase register
on January 7. The invoice showed shipment was made FOB shipping point on December 31,
2019. Because it was not on hand during the inventory count, it was not included.

(d) A special machine costing 200,000, fabricated to order for a particular customer, was finished
in the shipping room on December 30. The customer was billed for 300,000 on that date and the
machine was excluded from inventory although it was shipped January 4, 2020.

(e) Merchandise costing 200,000 was received on January 6, 2020, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on December 29,
2019, FOB destination.

(f) Merchandise costing 150,000 was sold on an installment basis on December 15. The
customer took possession of the goods on that date. The merchandise was included in inventory
because Angel still holds legal title. Historical experience suggests that full payment on
installment sale is received approximately 99% of the time.

(g) Goods costing 500,000 were sold and delivered on December 20. The goods were included in
the inventory because the sale was accompanied by a purchase agreement requiring Angel to
buy back the inventory in February 2020.

Based on the above and the result of your audit, how much of these items should be included in
the inventory balance at December 31, 2019?
a. 1,300,000 b. 800,000 c. 1,650,000 d. 1,050,000

4. Massive Company provided the following information for the current year:
Units Unit cost Total cost
January 1 Inventory on 200 1,500 300,000
hand
April 3 Purchase 300 1,750 525,000
October Purchase 500 2,000 1,000,000
1
The entity sold 400 units on June 25 and 400 on December 10. What is the weighted average
cost of the inventory at year-end?
a. 350,000 b. 400,000 c. 730,000 d. 365,000
5. Adrian Company has two products in the inventory.
Product Product
X Y
1,500,0 2,000,0
Selling price 00 00
Materials and conversion 1,000,0 1,200,0
costs 00 00
General administration 200,00 300,00
costs 0 0
400,00 500,00
Estimated selling costs 0 0

At the year-end, the manufacture of items of inventory has been completed but no selling costs
have yet been incurred.

What is the measurement of Product X and Product Y?

a. 1,000,000 and 1,200,000
b. 1,100,000 and 1,500,000
c. 1,500,000 and 2,000,000
d. 500,000 and 800,000

6. The Starla Corporation applies the lower of cost or net realizable value (NRV) inventory. Data
regarding the items in work-in-process inventory are shown below:
Shorts Pants
Historical cost P56,640 P90,000
Selling Price 108,800 108,000
Estimated cost to complete 14,400 20,400
Replacement Cost 50,400 95,400
Normal profit margin as percentage of selling price 25% 10%

Under the lower cost or NRV rule, the pants should be valued at?
a. 67,800 b. 90,000 c. 87,600 d. 95,400

7. On November 15, 2021, Angel Company entered into a commitment to purchase 10,000 pillows
on February 15, 2022 at a price of 310 per piece. On December 31, 2021, the market price of
pillow is 270 per piece. On February 15, 2022, the price of pillow is P300 per piece. What is the
gain on purchase commitment to be recognized on February 15, 2022?
a. 400,000 b. 100,000 c. 300,000 d. 0

8. Badeth Company’s accounting records indicated the following information for 2020:
Inventory, January 1 700,000
Purchases 3,000,000
Sales 3,500,000

A physical inventory taken on December 31, 2020 resulted in an ending inventory of 700,000.
The gross profit on sales has remained constant at 25% in recent years. The entity suspects
some inventory may have been taken by a new employee.

On December 31, 2020, what is the estimate cost of missing inventory?

a. 300,000 b. 375,000 c. 700,000 d. 0
 9. On September 30, a tsunami destroyed a retail location of Taytay Clothing including the entire
inventory on hand at the location. The inventory on hand as of October 31 totaled 480,000. From
October 31 until the time of the hurricane, the company made purchases of 53,000 and had
sales of 458,000. Assuming the rate of gross profit to selling price is 70%, what is the
approximate value of the inventory that was destroyed?
a. 137,933 b. 181,500 c. 205,000 d. 395,600

10. You obtained the following information in connection with your audit of Shashida Corporation:
Cost Retail
Beginning inventory P1,987,200 P2,760,000
Sales 7,812,000
Purchases 4,688,640 6,512,000
Freight in 94,560
Mark ups 720,000
Mark up cancellations 120,000
Markdown 240,000
Markdown cancellations 40,000
Shashida Corp. uses the retail inventory method in estimating the values of its inventories.
Based on the above and the result of your audit, answer the following:

1. The cost ratio to be used considering the provisions of PAS 2 is

a. 68.58% b. 69.20% c. 70.00% d. 75.78%

2. The estimated ending inventory at retail is

a. 2,300,000 b. 2,060,000 c. 1,940,000 d. 1,860,000

3. The estimated ending inventory at cost is

a. 1,412,786 b. 1,275,588 c. 1,302,000 d. 1,287,120

4. The estimated cost of goods sold is

a. 5,468,400 b. 5,494,812 c. 5,357,614 d. 4,685,117

11. Joseph Factory started operations in 2021. Joseph manufactures bath towels. 60% of the
production are “Class A” which sell for P500 per dozen and 40% are “Class B” which sell for P250
per dozen. During 2021, 6,000 dozens were produced at an average cost of P360 per dozen.
The inventory at the end of the year was as follows:

220 dozens “Class A” @ P360 P 79,200

300 dozens “Class B” @ P360 108,000
P187,200

Using the relative sales value method, which management considers as a more equitable basis of
cost distribution, answer the following:

1. How much of the total cost should be allocated to “Class A”?

a. 1,296,000 b. 1,620,000 c. 1,284,324 d. 925,714

2. How much of the total cost should be allocated to “Class B”?

a. 540,000 b. 875,676 c. 864,000 d. 1,234,286

3. How much is the value of inventory as of December 31, 2021?

a. 187,200 b. 187,946 c. 117,000 d. 166,500

4. How much is the cost of sales for the year 2021?

a. 1,972,800 b. 1,993,500 c. 2,043,000
d. 1,972,054
 5. How much is the gross profit for the year 2021?
a. 242,200 b. 406,500 c. 221,500
d. 242,946

12. Rice Lake Corp. produces milk on its farms. The entity produces 20% of the community's milk
that is consumed. Farmville Incorporated owns 5 farms and had a stock of 4,200 cows and 2,100
heifers.

The farms produce 1,600,000 kilograms of milk a year and the average inventory held is 30,000
kilograms of milk. However, on December 31, 2021 the entity is currently holding 100,000
kilograms of milk in powder. On December 31, 2021, the biological assets are:

Purchased before January 1, 2021. ( 3 years old ) 4,200 cows

Purchased on January 1, 2021. ( 2 years old) 600 heifers
Purchased on July 1, 2021. (1.5 years old) 1,500 heifers

No animals were born or sold during the current year. The unit fair value less cost of disposal is
as follows:

January 1, 2021:
1-year old. 3,000
2-year old. 4,000
July 1, 2021:
1-year old. 3,000
December 31, 2021:
1-year old. 3,200
2-year old. 4,500
1.5-year old. 7,200
3-year old. 10,000

The entity has had problems during the year. Contaminated milk was sold to customers. As a
result, milk consumption has gone down.

The entity's business is spread over different parts of the country. The only region affected by the
contamination was Quezon. However, the cattle in this area were unaffected by the
contamination and were healthy. The entity feels that it cannot measure the fair value of the
cows in the region because of the problems created by the contamination. There are 1,200 cows
and 400 heifers in the Quezon farm and all these animals had been purchased on January 1,
2021.

1. What is the fair value of biological assets on January 1, 2021?

a. 18,600,000 b. 19,200,000 c. 16,800,000 d.
14,400,000

2. What is the fair value of biological assets purchased on July 1, 2021?

a. 4,500,000 b. 6,000,000 c. 7,500,000 d. 6,750,000

3. What is the fair value of biological assets on December 31, 2021?

a. 29,100,000 b. 31,500,000 c. 30,450,000 d.
23,700,000

4. What is the increase in fair value of biological assets due to price change on December 31,
2021?
a. 6,000,000 b. 10,500,000 c. 9,900,000 d.
12,300,000
 5. What is the increase in fair value of biological assets due to physical change?
a. 2,520,000 b. 3,480,000 c. 6,000,000 d. 2,880,000

13. A fire destroyed Jerome Company's inventor on October 31. On January 1, the inventory had a
cost of 3,500,000. During the period January 2 to October 31, the entity had net purchases of
8,500,000 and net sales of 17,000,000. Undamaged inventory at the date of fire had a cost of
170,000. The mark up on cost is 66 2/3%. What was the cost of inventory destroyed by fire?
a. 1,630,000 b. 1,970,000 c. 1,550,000 d. 5,170,000

14. Kaila Company conducted a physical count on December 31, 2020 which revealed total cost of
5,000,000.

However, the following items were excluded from the count:

• Goods costing 100,000 shipped by a vendor FOB shipping point on December 29, 2020
and received by Kaila Company on January 12, 2021.
• Goods in process costing 550,000 held by an outside processor for further processing.
• Goods sold to a customer which is being held for the customer to call for at the customer's
convenience with a cost of 400,000.
• A packing case containing a product costing 150,000 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it was
marked "hold for shipping instructions".

What is the correct inventory on December 31, 2020?

a. 6,200,000 b. 5,800,000 c. 5,650,000 d. 5,000,000

15. In year 2021, a division experienced fire in which it destroyed all of inventory except for P55,000
of inventory measured at cost. Additional Data available are below:

2020 2021 (to date of fire)

Sales P850,000 P510,000
Purchases 560,000 305,000
Cost of goods sold 425,000
Ending inventory 95,000

What is the approximate inventory loss to the fire?

a. 55,000 b. 90,000 c. 145,000 d. 400,000

16. A retailer imported goods at a cost of P 260,000, including P 40,000 non-refundable import duties
and P 20,000 refundable purchase taxes. The risks and rewards of ownership of the time
imported goods were transferred to the retailer upon collection of the goods from the harbor
warehouse. The retailer was required to pay for the goods upon collection. The retailer incurred P
10,000 to transport the goods to its retail outlet and a further P 4,000 in delivering the goods to
its customer. Further selling costs of P 6,000 were incurred in selling the goods.

What amount should the inventory be valued?

a. 240,000 b. 250,000 c. 260,000 d. 270,000

17. The ff. audited balances pertain to Wen Company

Accts. Payable:
Jan.1, 2020 286, 924
Dec.31, 2020 737, 824
Inventory balance:
Jan. 1, 2020 815, 386
Dec.31, 2020 488, 874
 Cost of goods sold-2020 1, 859, 082

How much was paid by Wen Company to its supplier in 2020?

a. 1, 081, 670 b. 1, 065, 900 c. 1, 071, 678 d. 1,
097, 000

18. On October 1, 2020, Ozam Company entered into a 6-month, P5,200,000 purchase commitment
for a supply of a special product on March 31, 2021, On December 31, 2020, the market value of
this material had fallen to P5,000,000. O March 31, 2021, the market value of the purchase
commitment is P4,900,000. What is the loss on purchase commitment that should be recognized
on March 31, 2021?
a. 200,000 b. 100,000 c. 300,000 d. 0

19. A fire destroyed the Catherine Company’s warehouse causing damage to its inventories stored in
the warehouse. The company uses average retail inventory method in inventory estimation. In
connection with this, the company’s accountant gathered the following information relating its
inventories:
Retail
Cost Price
Inventory, Beginning 190,000 300,000
2,900,00
Purchases 0 4,000,000
Purchase Discount 50,000 100,000
Purchase Allowance 90,000 150,000
Purchase returns 60,000 120,000
Freight In 20,000 30,000
Net Mark-up 60,000
Net Mark Down 80,000
Departmental Transfer – in
(Debit) 386,800 430,000
Departmental Transfer – Out
(Credit) 400,000 550,000
Abnormal Wastages 80,000 120,000
Normal Wastages 100,000 120,000
Employee Discounts 6,000 9,500
Sales Discount 5,000 8,200
Sales Allowances 21,000 32,150
Sales Returns 5,000 6,780

The company’s policy is to record sales adjustments directly to sales account. The sales account
showed ending balance of P2,908,000 on the date of fire. Physical inventory conducted after the
fire disclosed usable damaged goods which the company estimates can be sold at P100,000.
Also, it is estimated that the company will incur P4,000 to sell the goods. The original cost of this
goods amounted to P50,000.

How much should the company recognize as loss on inventory fire?

a. 550,000 b. 842,150 c. 386,800 d. 556,348

20. A herd of ten 2 yr-old animals was held at January 1, 2021. One animal aged (2.5 years old) was
purchased on July 1, 2021 for P10,800 and one animal was born on July 1, 2021. Two 3-yr old
animals were sold at 12/31/2021 for P13,500 each, the company incurring P1,500 sale of each.

Per unit fair vale less cost of disposal were as follows:

1/1/2021
2-yr old animal P 10,000
7/1/2021
New born animal 7,000
2.5-yr old animal 10,800
12/31/2021
New born animal 7,200
0.5-yr old animal 8,000
3-yr old animal 10,500
2.5 yr old animal 11,100
3-yr old animal 12,000

1. Compute for the change in fair value less cost to sell of the biological asset due to price
change and physical change respectively.
a. 5,000; 27,300 b. 5,500; 23,700
c. 5,500; 27300 d. 5,000; 23700

2. Which of the following entries in 2021 is false regarding the record for the transactions in the
biological assets?
a. 7/31/2021 debit entry to Biological Assets 10,800
b. 12/31/2021 credit entry to Increase in FV less CTS due to Physical Change 16,700
c. 12/31/2021 credit entry to Increase in FV less CTS due to Physical Change 23,700
d. 12/31/2021 debit entry to Cash 24,000

3. The balance of Biological Assets account at December 31, 2021 is

a. 116,000 b. 126,000 c. 136,000 d. 146,000

MODULE 2 PROPERTY, PLANT & EQUIPMENT

LEARNING OBJECTIVES:
1. Describe property, plant, and equipment.
2. Identify the costs to include in initial valuation of property, plant, and equipment.
 3. Describe the accounting problems associated with self-constructed assets.
4. Describe the accounting problems associated with interest capitalization.
5. Understand accounting issues related to acquiring and valuing plant assets.
6. Describe the accounting treatment for costs subsequent to acquisition.
7. Describe the accounting treatment for the disposal of property, plant, and equipment.

OVERVIEW
PAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of property, plant and
equipment. Property, plant and equipment is initially measured at its cost, subsequently measured either by
using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic
basis over its useful life.

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Property, plant, and equipment is defined as tangible assets that are held for use in production or supply of
goods and services, for rentals to others, or for administrative purposes; they are expected to be used during
more than one period.
 “Used in operations” and not for resale.
 Long-term in nature and usually depreciated.
 Possess physical substance.

Includes:
 Land,
 Building structures (offices, factories, warehouses), and
 Equipment (machinery, furniture, tools).

INITIAL VALUATION

Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing it to the
location and condition necessary for its intended use.

SUBSEQUENT VALUATION
Companies value property, plant, and equipment in subsequent periods using either the
 cost method or
 fair value (revaluation) method.

Cost of Land
Includes all costs to acquire land and ready it for use. Costs typically include:
(1) purchase price;
(2) closing costs, such as title to the land, attorney’s fees, and recording fees;
(3) costs of grading, filling, draining, and clearing;
(4) assumption of any liens, mortgages, or encumbrances on the property;

Improvements with limited lives, such as private driveways, walks, fences, and parking lots, are recorded as
Land Improvements and depreciated.
 Land acquired and held for speculation is classified as an investment.
 Land held by a real estate concern for resale should be classified as inventory.

Cost of Buildings
Includes all costs related directly to acquisition or construction. Cost typically include:
(1) materials, labor, and overhead costs incurred during construction and
(2) professional fees and building permits.
Cost of Equipment
Include all costs incurred in acquiring the equipment and preparing it for use. Costs typically include:
(1) purchase price,
(2) freight and handling charges
(3) insurance on the equipment while in transit,
(4) cost of special foundations if required,
(5) assembling and installation costs, and
(6) costs of conducting trial runs.

Illustration 1: The expenditures and receipts below are related to land, land improvements, and buildings
acquired for use in a business enterprise. Determine how the following should be classified:
Classification
(a) Money borrowed to pay building contractor Notes payable
(b) Payment for construction from note proceeds Building
(c) Cost of land fill and clearing Land
(d) Delinquent real estate taxes on property assumed Land
(e) Premium on 6-month insurance policy during construction Building
(f) Refund of 1-month insurance premium because construction
completed early (Building)
(g) Architect’s fee on building Building
(h) Cost of real estate purchased as a plant site
(land 200,000 and building 50,000) Land/Building
(i) Commission fee paid to real estate agency Land
(j) Installation of fences around property Land Improvements
(k) Cost of razing and removing building Building
(l) Proceeds from salvage of demolished building (Building)
(m) Cost of parking lots and driveways Land Improvements

Self-Constructed Assets
Costs typically include:
(1) Materials and direct labor
(2) Overhead can be handled in two ways:
1. Assign no fixed overhead
2. Assign a portion of all overhead to the construction process.
Companies use the second method extensively.

Interest Costs During Construction

 PFRS requires — capitalizing actual interest (with modification).
 Consistent with historical cost.
 Capitalization considers three items:
1. Qualifying assets.
2. Capitalization period.
3. Amount to capitalize.

Qualifying Assets
Require a substantial period of time to get them ready for their intended use.
 Assets under construction for a company’s own use.

Capitalization Period
Begins when:
1. Expenditures for the asset have been made.
2. Activities for readying the asset are in progress .
3. Interest costs are being incurred.
 Ends when:
The asset is substantially complete and ready for use.

Amount to Capitalize
Capitalize the lesser of:
1. Actual interest costs
2. Avoidable interest - the amount of interest that could have been avoided if expenditures for the asset had
not been made.

Valuation Issues

Cash Discounts — Whether taken or not — generally considered a reduction in the cost of the asset.

Deferred-Payment Contracts — Assets, purchased through long term credit, are recorded at the present
value of the consideration exchanged.

Lump-Sum Purchases — Allocate the total cost among the various assets on the basis of their fair market
values.

Issuance of Shares — The market value asset received or the shares issued if asset fair value is not
clearly determinable.

Acquisition by exchange

Exchanges of Nonmonetary Assets

Ordinarily accounted for on the basis of:
 the fair value of the asset given up or
 the fair value of the asset received,
whichever is clearly more evident.

Companies should recognize immediately any gains or losses on the exchange when the transaction has
commercial substance.

Meaning of Commercial Substance

Exchange has commercial substance if the future cash flows change as a result of the transaction.

That is, if the two parties’ economic positions change, the transaction has commercial substance.

Exchange Lacks Commercial Substance.

Assume that exchange lacks commercial substance. That is, the economic position of Interstate did not
change significantly as a result of this exchange, the asset is recognized based on the carrying amount of
asset given up, no recognition for gain or loss.

Summary of Gain and Loss Recognition on Exchanges of Non-Monetary Assets

The gain or loss is the difference between the

fair value of asset given and its carrying amount.

Disclosure include:
 nature of the transaction(s),
 method of accounting for the assets exchanged, and
 gains or losses recognized on the exchanges.

Government Grants
Grants are assistance received from a government in the form of transfers of resources to a company in return
for past or future compliance with certain conditions relating to the operating activities of the company.

PFRS requires grants to be recognized in income (income approach) on a systematic basis that matches
them with the related costs that they are intended to compensate.

Cost Subsequent to Acquisition

Recognize costs subsequent to acquisition as an asset when the costs can be
 measured reliably and
 it is probable that the company will obtain future economic benefits.

Future economic benefit would include increases in

1. useful life,
2. quantity of product produced, and
3. quality of product produced.

Derecognition of PPE

A company may retire plant assets voluntarily or dispose of them by

 sale,
 exchange,
 involuntary conversion, or
 abandonment.
Depreciation must be taken up to the date of disposition.

MODULE 2 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
PPE
PROF. U.C. VALLADOLID
 Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Ivan Corp. uses different kinds of machines in its manufacturing process. It constructs some of
these machines itself and acquires others from the manufacturers. The following information
relates to two machines that it has recorded in 2021.

Machine A (purchased)

Cash paid for equipment P250,000

Cost of transporting machine - insurance and
transport 9,000
Labor cost of installation by expert fitter 15,000
Labor cost of testing equipment 12,000
Insurance cost for 2021 4,500
Cost of training for personnel who will use the
machine 7,500
Cost of safety rails and platforms surrounding
machine 18,000
Cost of water devices to keep machine cool 24,000
Cost of adjustments to machine during 2021 to
make it operate more efficiently 22,500

Machine B (self-constructed)

Cost of materials to construct machine P210, 000

Labor cost to construct machine 129,000
Allocated overhead cost-electricity, factory space,
etc. 66,000
Allocated interest cost of financing machine 30,000
Cost of installation 36,000
Profit saved by self-construction 45,000
Safety inspection cost prior to use 12,000

1. What is the cost of machine A?

a. 380,500 b. 358,000 c. 328,000 d. 350,500

2. What is the cost of machine B?

a. 471,000 b. 417,000 c. 483,000 d. 438,000

2. Kelly Company installed a new equipment at the production facility and incurred the following
costs:
Initial delivery and handling cost 400,000
Cost of site preparation 700,000
Cost of equipment per supplier’s invoice 3,000,000
Consultants used for advice on the acquisition of equipment 800,000
Interest charges paid to supplier for deferred credit 300,000
Estimated dismantling cost to be incurred as required by contract 350,000
Operating losses before commercial production 450,000

What total amount should be capitalized as cost of the equipment?

a. 5,250,000 b. 5,550,000 c. 4,900,000 d. 5,100,000
3. Kim Company incurred the following costs at the beginning of the current year:
 Cost of land 10,000,000
 Cost of building 11,500,000
 Remodeling and repairs prior to occupancy 600,000
 Escrow fee 300,000
 Property tax for period prior to acquisition 150,000
 Real estate commission 70,000
What is the cost of the building?
a. 12,370,000 b. 12,260,000 c. 12,620,000 d. 12,378,140

4. Capulong Company incurred the following expenditures related to the construction of a new
home office:
Cost of Land, which included usable old apartment
building with fair value of P200,000 3,000,000
Legal fees, including fee for title search 20,000
Payment of land mortgage and related interest due
at time of sale 60,000
Payment of delinquent property taxes 15,000
Cost of razing the apartment building 45,000
Grading and drainage on land site 20,000
Architect fee on new building 250,000
Payment to building contractor 7,000,000
Interest cost on specific borrowing during construction 200,000
Payment of medical bills of employees accidentally
injured while inspecting building construction 30,000
Cost of paving driveway and parking lot 70,000
Cost of trees, shrubs, and other landscaping 65,000
Cost of installing light in parking lot 8,000
Premium for insurance on building during construction 22,000
Cost of open house party to celebrate opening of building 80,000

1. What is the cost of land?

a. 2,720,000 b. 2,915,000 c. 3,205,000 d. 2,950,000

2. What is the cost of building?

a. 7,517,000 b. 7,537,000 c. 7,495,000 d. 7,525,000

3. What is the cost of land improvement?

a. 200,000 b. 203,000 c. 143,000 d. 0

5. At year-end, Santos Company provided the following information about property, plant, &
equipment:

Plant assets acquired from Krom Company 8,000,000

Repairs made on building prior to occupancy 250,000
Special tax assessment 40,000
Construction of platform for machinery 70,000
Remodeling of office space in building including
new partitions and walls 500,000
Purchase of new machinery 900,000
Total property, plant and equipment 9,760,000
 In exchange for the plant assets of Krom Company, Santos Company issued 50,000 shares with
P100 par value. On the date of purchase, the share had a quoted price of P150 and the plant
assets had the following fair value:

Land 600,000
Building 4,500,000
Machinery 2,000,000

1. What is the cost of Building?

a. 5,250,000 b. 5,500,000 c. 5,000,000 d. 4,500,000

2. What is the cost of Land?

a. 600,000 b. 640,000 c. 670,000 d. 690,000

3. What is the cost of machinery?

a. 2,900,000 b. 2,000,000 c. 2,970,000 d. 2,830,000

6. JP Company had the following property acquisitions during the current year:

Acquired a tract of land in exchange for 100,000 shares of Jerome Company with 100 par value
that had a market price of P500 per share on the date of acquisition. The last property tax bill
indicated assessed value of 2,400,000 for the land.

Received land from a major shareholder as an inducement to locate a plant in the city. No
payment was acquired but the entity paid 50,000 for legal expenses for land transfer. The land is
fairly valued at 2,000,000.

What is the total increase in land as a result of acquisitions?

a. 2,400,000 b. 52,000,000 c. 2,000,000 d. 10,000,000.

7. Allison Company acquired a land full by issuing 400,000 10 percent bonds payable and 40,000
ordinary shares with par value of P5. The share was selling at P15 and the bonds were trading at
105.

What amount should be recorded as cost of the land?

a. 42,760,000 b. 79,800,000 c. 42,761,000 d.
1,020,000

8. Pido Company entered into a contract to acquire a new machine which had a cash price of
2,000,000.

Down payment 400,000

Note payable in 3 equal annual installments 1,200,000
20,000 ordinary shares with a par value of P25
and fair value of P40 per share 800,000
2,400,000

Prior to use, installation cost of 50,000 was incurred. The machine has an estimated residual
value of 100,000.

What is the initial cost of the machine?

a. 2,000,000 b. 2,400,000 c. 2,050,000 d. 2,450,000.
 9. On January 2, 2021, Mark Corporation traded is a used delivery truck with a carrying amount of
540,000 for a new delivery truck having a list price of 1,600,000 and paid a cash difference of
750,000 to the dealer. The used truck had a fair value of 600,000 on the date of the exchange.
At what amount should the new truck be recorded on Mark’s book?
a. 1,060,000 b. 1,290,000 c. 1,350,000 d. 1,600,000

10. Theresa Motor Sales exchanged a car from its inventory for a computer to be used as a long term
asset. The following information relates to this exchange that took place on July 31, 2021:
Carrying amount of the car 300,000
Listed selling price of the car 450,000
Fair value of the computer 430,000
Cash difference paid by Theresa 50,000
On July 31, 2021, what amount of profit should Theresa recognize on this exchange?
a. 0 b. 80,000 c. 100,000 d. 130,000

11. Kaila Company received a government grant for 45,000,000 to install and run a windmill in an
economically backward area. The entity had estimated that such a windmill will cost 65,000,000
to construct. The secondary attached to the grant is that the entity shall hire a labor in the area
where the windmill is located. The construction was completed on January 1, 2021. The windmill
is to be depreciated using the straight line method over a period of 10 years. What amount of
income from the government grant should be recognized in 2021?
a. 1,500,000 b. 2,500,000 c. 3,500,000 d. 4,500,000

12. Tricia Co. purchased a varnishing machine for 4,000,000 on January 1, 2021. The entity received
a government grant of 840,000 in respect of this asset. The accounting policy is to depreciate
the asset over 4 years on a straight line method basis and to treat the grant as deferred income.

1. What amount should be reported as deferred grant income on December 31, 2022?
a. 420,000 b. 720,000 c. 840,000 d. 120,000

2. What is the carrying amount of the machine on December 31, 2022?

a. 2,000,000 b. 3,000,000 c. 2,420,009 d. 3,160,000

13. The Tricia Company self-constructed an asset for its own use. Construction started on January 1,
2020 and the asset was completed on December 31, 2020. Costs incurred during the year were
as follows:
January 1- P400, 000; April 1- P500,000; August 1 - P480,000; December 1- P180,000

1. What is the average accumulated expenditures for the self-constructed asset?

a. 1, 560,000 b. 990,000 c. 870,000 d. 780,000

2. If the company had a two-year, 18% loan of P500,000, specifically obtained finance the asset
construction, what is the capitalized interest added to the of the self-constructed asset?
a. 90,000 b. 140, 000 c. 178.200 d. 280, 800

3. Assuming that in addition to the specific borrowing, prior to the construction, the company
had a general borrowing amounting to P600,000 with interest of 20% and a two-year term that
was used in part In the self-construction, what is the total cost of the self-constructed asset?
a. 1, 770,000 b. 1, 748,000 c. 2, 650,000 d. 1.560,
000
 4. Assuming that the total construction costs of P1, 560000 were incurred evenly during the
construction period, and the company has the following outstanding obligations prior to the
start of the construction:

Specific borrowing P700.000, 16%. Due January 1, 2023 General borrowing P500.000. 18%,
due January}, 2022

What is the total capitalized interest?

a. 126, 400 b. 130, 000 c. 112, 000 d. 218, 000

14. The following data relate to a piece of equipment owned by Olivia Company.
Acquisition date - July 1, 2020; Cost - P125,000; Estimated residual value - P5,000; Estimated
service life - 5 years; Estimated service hours - 10,000; Estimated productive output in units -
24,000

1. Under the straight line method, what is the assets depreciation expense for the year ended
December 31.2020?
a. 25, 000 b. 24, 000 c. 12, 500 d. 12, 000

2. Under the sum-of the year’s digits method, what Is the depreciation expense for the year
ended December 31, 2021?
a. 36, 000 b. 56, 000 c. 60, 000 d. 72, 000

3. Under the double-declining balance method. What is the asset's carrying Moe or December
31, 2022?
a. 36,000 b. 34, 560 c. 27,000 d. 24, 000

4. Under the service hours method what is the asset's depreciation rate per hour?
a. 12.00 b. 12.50 c. 5.21 d. 5.00

5. Under the productive output method and assuming that the equipment produced 3,000 units
and 7,500 units in 2020 and 2021. Respectively, what is the accumulated depreciation balance
far the asset at December 31, 2021?
a. 72, 500 b. 67, 500 c. 52, 500 d. 37, 500

15. Mhel Printing Company incurred the following costs:

Purchase of collating and stapling attachment 900,000

Installation of attachment 350,000
Replacement parts for overhaul of press 250,000
Labor and overhead in connection with overhaul 100,000

The overhaul resulted in significant increase in production. Neither the attachment nor the
overhaul increased the estimated useful life of the press.

What total amount of the costs should be capitalized?

a. 1,600,000 b. 900,000 c. 1,500,000 d. 0

16. Amara Sky Company provided the following information with respect to a building:
· The building was acquired January 1, 2016 at cost of 3,000,000. It has an estimated useful
life of 12 years and salvage value of 150,000. The method of depreciation used was
double declining method.
 · The building was renovated on January 1, 2019 at a cost of 800,000. The residual value
became 200,000.
· On January 1, 2020, the management decided to change the method being used to
straight line method.

What is the depreciation of the building for December 2019?

a. 439,351.85 b. 304,513.89 c. 493,351.58 d.
340,513.98

17. Cleo Corporation owns machinery with a book value of 190,000. The machinery has a fair value
less costs to sell is 175,000, and its value-in-use is 170,000. Cleo should recognize a loss on
impairment of
a. -0- b. 5,000 c. 15,000 d. 20,000

18. On January 1, 2021, Eddie Inc. purchased equipment with a cost of 3,060,000, a useful life of 12
years and no salvage value. The company uses straight-line depreciation. At December 31, 2021,
the company determines that impairment indicators are present. The fair value less cost to sell
the asset is estimated to be 2,600,000. The asset’s value-in-use is estimated to be 2,365,000.
There is no change in the asset’s useful life or salvage value

1. The 2021 income statement will report Loss on Impairment of

a. 0 b. 205,000 c. 440,000 d. 460,000

2. The 2022 (second year) income statement will report depreciation expense for the
equipment of
a. 216,667 b. 236,364 c. 255,000 d. 260,000

19. On January 1, 2021, Mary Company reported the following account balances:
Accumulated
Cost
depreciation
Land 50,000,000
Building 300,000,000 90,000,000

The land and building were revalued on January 1, 2021 and the evaluation revealed the
following sound value:
Land 70,000,000
Building 315,000,000

There were no additions or disposals during 2021. Depreciation is computed on the straight line.
The estimated life of the building is 20 years.

1. Before income tax, what amount should be recognized as revaluation surplus on January 1,
2021?
a. 125,000,000 b. 105,000,000 c. 385,000,000 d. 315,000,000

2. What is the depreciation for 2021?

a. 22,500,000 b. 15,000,000 c. 15,750,000 d.
27,500,000
 3. What amount should be reported as revaluation surplus on December 31, 2021?
a. 117,500,000 b. 125,000,000 c. 105,000,000 d. 119,750,000

20. On January 1, 2018, Melvin Company paid 10,000,000 for property containing natural resources
of 3,000,000 tons. The present value of the estimated cost of restoring the land is 800,000 and
the land will have a value of 600,000 after it is restored for suitable use.

Building and bunk houses were build costing 8,000,000 it is use as a storage of mining
equipment and houses for the miners. Its expected useful life is 10 years with no residual value.
Operations began on January 1, 2019 and resources removed totaled 500,000 tons. During
2020, it is discovered that available resource will total 1,500,000 tons.

At the beginning of 2020, 800,000 development cost were incurred, and only 200,000 tons are
extracted.

1. What is the depreciation for the year ended December 31, 2019 assuming that it uses a
straight line method of depreciation.
a. 800,000 b. 1,700,000 c. 888,888 d. 900,000

2. What amount should be reported as depletion for 2019?

a. 1,800,000 b. 1,600,000 c. 1,700,000 d. 1,500,000

3. What is the depletion for the year ended December 31, 2020?
a. 1,240,000 b. 1,300,000 c. 1,200,000 d. 1,340,000

21. You noted during your audit of the Maria Company that the company carried out a number of
transactions involving the acquisition of several assets. All expenditures were recorded in the
following single asset account, identified as Property and equipment:
Property and equipment
Acquisition price of land and building P 960,000
Options taken out on several pieces of property 16,000
List price of machinery purchased 318,400
Freight on machinery purchased 5,000
Repair to machinery resulting from damage
during shipment 1,480
Cost of removing old machinery 4,800
Driveways and sidewalks 102,000
Building remodeling 400,000
Utilities paid since acquisition of building 20,800
P1,828,480

Based on property tax assessments, which are believed to fairly represent the relative values
involved, the building is worth twice as much as the land. The machinery was subject to a 2%
cash discount, which was taken and credited to Purchases Discounts. Of the two options, P6,000
is related to the building and land purchased and P10,000 related to those not purchased. The
old machinery was sold at book value.

Based on the above and the result of your audit, determine the adjusted balance of the following:

1. Land
a. 644,000 b. 322,000 c. 326,000 d. 424,000

2. Building
 a. 644,000 b. 1,040,000 c. 1,044,000 d.
722,000

3. Machinery
a. 317,032 b. 318,512 c. 323,400 d. 321,832

22. On January 1, 2020, DENCIO MFG. CO. began construction of a building to be used as its office
headquarters. The building was completed on June 30, 2021.

Expenditures on the project were as follows:

January 3, 2020 2,500,000

March 31, 2020 3,000,000
June 30, 2020 4,000,000
October 31, 2020 3,000,000
January 31, 2021 1,500,000
March 31, 2021 2,500,000
May 31, 2021 3,000,000

On January 3, 2020, the company obtained a P5 million construction loan with a 10% interest rate. The loan was
outstanding all of 2020 and 2021. The company’s other interest-bearing debts included a long-term note of P25 million
with an 8% interest rate, and a mortgage of P15 million on another building with an interest rate of 6%. Both debts were
outstanding during all of 2020 and 2021. The company’s fiscal year-end is December 31.

1. What is the amount of capitalizable interest in 2020?

a. 3,400,000 b. 1,043,750 c. 663,125 d. 500,000

2. What is the amount of capitalizable interest in 2021?

a. 630,625 b. 654,663 c. 361,707 d. 799,663

3. What amount of interest should be expensed in 2020?

a. 2,736,875 b. 2,356,250 c. 2,900,000 d. 0

4. What amount of interest should be expensed in 2021?

a. 2,769,375 b. 3,038,293 c. 2,600,337 d. 2,745,337

5. What is the total cost of the building (including the interest capitalized in 2020 and 2021)?
a. 24,600,000 b. 20,817,788 c. 20,905,457 d. 20,630,625

23. Florencia Company acquires a new manufacturing equipment on January 1, 2021 on installment
basis. The deferred payment contract provides for a down payment of 300,000 and an 8-year
note for 3,104,160. The note is to be paid in 8 equal annual installment payments of 388,020,
including 10% interest. The payments are to be made on December 31 of each year, beginning
December 31, 2021. The equipment has a cash price equivalent of 2,370,000. Florencia’s
financial year-end is December 31.

1. What is the acquisition cost of the equipment?

a. 2,804,160 b. 3,404,160 c. 2,370,000 d. 3,104,160

2. The amount to be recognized on January 1, 2021 as discount on note payable is

a. 1,034,160 b. 310,416 c. 0 d. 827,160

3. The amount of interest expense to be recognized in 2021 is

a. 310,416 b. 188,898 c. 0 d. 207,000
24. On January 2, 2021, Bimbo Company replaced its old high pressure steam boiler with a more
efficient oil-burning boiler. The following information was available on that date:

Carrying amount of old boiler 40,000

Fair value of old boiler 10,000
Purchase and installation price of the new boiler 500,000

The old boiler was sold to a heating contractor for 10,000. How much should Bimbo capitalize as
the cost of the new boiler?
a. 500,000 b. 490,000 c. 470,000 d. 460,000

25. Norman Company received a government grant of 15,000,000 to install and run a windmill in an
economically backward area. The entity had estimated that such a windmill would cost
25,000,000 to construct. The secondary condition attached to the grant is that the entity shall
hire labor in the area where the windmill is to locate. The construction was completed on January
1, 2021 .The windmill is to be depreciated using the straight line method over a period of 10
years.

What amount of grant income should be recognized for 2021?

a. 1,500,000 b. 3,000,000 c. 2,500,000 d. 5,000,000

26. Norlan Incorporated purchased a new building at a cost of 7,500,000 on January 1, 2015.
Depreciation was computed on the straight line basis at 4% per year. On January 1, 2020, the
building was revalued at fair value of 9,300,000.

1. What is the depreciation for 2020?

a. 456,000 b. 465,000 c. 435,000 d. 445,000

2. What is the revaluation surplus on December 31, 2020?

a. 3,135,000 b. 3,145,000 c. 3,200,000 d. 3,315,000

27. On January 1, 2020, Apple Company borrowed 6,450,000 at an annual interest rate of 7.5% to
finance specifically the cost of building a plant. Construction commenced on January 1, 2020 with
a cost 8,000,000. The entity earned 300,000 interest income from its fund. The plant was
completed on December 31, 2020. What amount of interest should be capitalized?
a. 483,750 b. 300,000 c. 220,000 d. 183,750

28. On January 2, 2019, Gilbert Company received a grant of 60,000,000 to compensate for costs to
be incurred in planting trees over a period of 5 years. The entity will incur such cost at
2,000,000 for 2019, 4,000,000 for 2020, 6,000,000 for 2021, 8,000,000 for 2022, and 10,000,000
for 2023.

What amount of grant income should be recognized for 2020?

a. 6,000,000 b. 4,000,000 c. 12,000,000 d. 8,000,000
29. June Company purchased land as factory site for 5,000,000. The entity paid 700,000 to tear
down an old building on the land for construction of new building. Legal fee of 20,000 incurred
for title investigation and purchased contract. Architect fee was 200,000, title insurance
amounted to 70,000 and insurance during construction is 100,000, excavation cost was 40,000.
The contractor was paid 5,890,000. Assessment for the pavement is 25,000. Interest cost during
construction was 55,000.

What is the cost of the building?

a. 5,890,000 b. 5,915,000 c. 5,850,000 d. 5,250,000

30. On January 2, 2021, Neptalie Inc. purchased equipment with a cost of 10,440,000, a useful life of
10 years and no salvage value. The company uses straight-line depreciation. At December 31,
2021 and December 31, 2022, the company determines that impairment indicators are present.
The following information is available for impairment testing at each year end:

12/31/2021 12/31/2022
Fair value less costs to sell 9,315,000 8,850,000
Value-in-use 9,350,000 8,915,000

There is no change in the asset’s useful life or salvage value. The 2022 income statement will
report
a. no Impairment Loss or Recovery of Impairment Loss.
b. Impairment Loss of 435,000.
c. Recovery of Impairment Loss of 40,889.
d. Recovery of Impairment Loss of 603,889.
MODULE 3 INVESTMENT PROPERTY

LEARNING OBJECTIVES:
1. Define an investment property.
2. State the initial and subsequent measurements of investment property.
3. Apply the fair value model of accounting for investment property.

OVERVIEW
PAS 40 Investment Property applies to the accounting for property (land and/or buildings) held to earn rentals
or for capital appreciation (or both). Investment properties are initially measured at cost and, with some excep-
tions, may be subsequently measured using a cost model or fair value model, with changes in the fair value
under the fair value model being recognised in profit or loss.

Acquiring new knowledge

Asynchronous - links to more information: www.farhatlectures.com

Investment property is property (land or a building or part of a building or both) held (by the owner or by the
lessee under a finance lease) to earn rentals or for capital appreciation or both. [PAS 40.5]

Examples of investment property:

o land held for long-term capital appreciation
o land held for a currently undetermined future use
o building leased out under an operating lease
o vacant building held to be leased out under an operating lease
o property that is being constructed or developed for future use as investment property

Other classification issues

Property held under an operating lease. A property interest that is held by a lessee under an operating lease
may be classified and accounted for as investment property provided that: [PAS 40.6]
o the rest of the definition of investment property is met
o the operating lease is accounted for as if it were a finance lease in accordance with PAS 17 Leases
o the lessee uses the fair value model set out in this Standard for the asset recognised

An entity may make the foregoing classification on a property-by-property basis.

Partial own use. If the owner uses part of the property for its own use, and part to earn rentals or for capital
appreciation, and the portions can be sold or leased out separately, they are accounted for separately.
Therefore the part that is rented out is investment property. If the portions cannot be sold or leased out sepa-
rately, the property is investment property only if the owner-occupied portion is insignificant. [PAS 40.10]

Ancillary services. If the entity provides ancillary services to the occupants of a property held by the entity,
the appropriateness of classification as investment property is determined by the significance of the services
provided. If those services are a relatively insignificant component of the arrangement as a whole (for
instance, the building owner supplies security and maintenance services to the lessees), then the entity may
treat the property as investment property. Where the services provided are more significant (such as in the
case of an owner-managed hotel), the property should be classified as owner-occupied. [PAS 40.13]
Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not investment property
in consolidated financial statements that include both the lessor and the lessee, because the property is owner-
occupied from the perspective of the group.
However, such property could qualify as investment property in the separate financial statements of the lessor,
if the definition of investment property is otherwise met. [PAS 40.15]

Recognition
Investment property should be recognised as an asset when it is probable that the future economic benefits
that are associated with the property will flow to the entity, and the cost of the property can be reliably
measured. [PAS 40.16]

Initial measurement
Investment property is initially measured at cost, including transaction costs. Such cost should not include
start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the
planned level of occupancy.

Subsequent measurement
PAS 40 permits entities to choose between:
o a fair value model, and
o a cost model.

One method must be adopted for all of an entity's investment property. Change is permitted only if this results
in a more appropriate presentation. PAS 40 notes that this is highly unlikely for a change from a fair value
model to a cost model.

Fair value model

Investment property is remeasured at fair value, which 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. [PAS
40.5]

Gains or losses arising from changes in the fair value of investment property must be included in net profit
or loss for the period in which it arises. [PAS 40.35]
Fair value should reflect the actual market state and circumstances as of the balance sheet date. [PAS 40.38]
The best evidence of fair value is normally given by current prices on an active market for similar property in
the same location and condition and subject to similar lease and other contracts. [PAS 40.45]

In the absence of such information, the entity may consider current prices for properties of a different nature or
subject to different conditions, recent prices on less active markets with adjustments to reflect changes in
economic conditions, and discounted cash flow projections based on reliable estimates of future cash flows.
[PAS 40.46]

There is a rebuttable presumption that the entity will be able to determine the fair value of an investment
property reliably on a continuing basis. However: [PAS 40.53]
o If an entity determines that the fair value of an investment property under construction is not reliably de-
terminable but expects the fair value of the property to be reliably determinable when construction is
complete, it measures that investment property under construction at cost until either its fair value
becomes reliably determinable or construction is completed.
o If an entity determines that the fair value of an investment property (other than an investment property
under construction) is not reliably determinable on a continuing basis, the entity shall measure that in-
vestment property using the cost model in PAS 16. The residual value of the investment property shall
be assumed to be zero. The entity shall apply PAS 16 until disposal of the investment property.

Where a property has previously been measured at fair value, it should continue to be measured at fair value
until disposal, even if comparable market transactions become less frequent or market prices become less
readily available. [PAS 40.55]
Cost model
After initial recognition, investment property is accounted for in accordance with the cost model as set out
in PAS 16 Property, Plant and Equipment – cost less accumulated depreciation and less accumulated impair-
ment losses.

Transfers to or from investment property classification

Transfers to, or from, investment property should only be made when there is a change in use, evidenced by
one or more of the following: [PAS 40.57 (note that this list was changed from an exhaustive list to an non-ex-
haustive list of examples by Transfers of Investment Property in December 2016 effective 1 January 2018) ]
o commencement of owner-occupation (transfer from investment property to owner-occupied property)
o commencement of development with a view to sale (transfer from investment property to inventories)
o end of owner-occupation (transfer from owner-occupied property to investment property)
o commencement of an operating lease to another party (transfer from inventories to investment
property)
o end of construction or development (transfer from property in the course of construction/development to
investment property

The following rules apply for accounting for transfers between categories:
o for a transfer from investment property carried at fair value to owner-occupied property or inven-
tories, the fair value at the change of use is the 'cost' of the property under its new classification, any
difference between the fair value at the date of transfer and it previous carrying amount should be
recognised in profit or loss.
o for a transfer from owner-occupied property to investment property carried at fair value, PAS 16
should be applied up to the date of reclassification. Any difference arising between the carrying
amount under PAS 16 at that date and the fair value is dealt with as a revaluation under PAS 16 [PAS
40.61]
o for a transfer from inventories to investment property at fair value, any difference between the fair
value at the date of transfer and it previous carrying amount should be recognised in profit or loss
[PAS 40.63]
o when an entity completes construction/development of an investment property that will be carried
at fair value, any difference between the fair value at the date of transfer and the previous carrying
amount should be recognised in profit or loss. [PAS 40.65]
o When an entity uses the cost model for investment property, transfers between categories do not
change the carrying amount of the property transferred, and they do not change the cost of the
property for measurement or disclosure purposes.
o Disposal
o An investment property should be derecognised on disposal or when the investment property is perma-
nently withdrawn from use and no future economic benefits are expected from its disposal. The gain or
loss on disposal should be calculated as the difference between the net disposal proceeds and the
carrying amount of the asset and should be recognised as income or expense in the income statement.
[PAS 40.66 and 40.69] Compensation from third parties is recognised when it becomes receivable.
[PAS 40.72]

Disclosure
Both Fair Value Model and Cost Model [PAS 40.75]
o whether the fair value or the cost model is used
o if the fair value model is used, whether property interests held under operating leases are classified and
accounted for as investment property
o if classification is difficult, the criteria to distinguish investment property from owner-occupied property
and from property held for sale
o the extent to which the fair value of investment property is based on a valuation by a qualified indepen-
dent valuer; if there has been no such valuation, that fact must be disclosed
o the amounts recognised in profit or loss for:
 o rental income from investment property
o direct operating expenses (including repairs and maintenance) arising from investment property
that generated rental income during the period
o direct operating expenses (including repairs and maintenance) arising from investment property
that did not generate rental income during the period
o the cumulative change in fair value recognised in profit or loss on a sale from a pool of assets in
which the cost model is used into a pool in which the fair value model is used
o restrictions on the realizability of investment property or the remittance of income and proceeds of
disposal
o contractual obligations to purchase, construct, or develop investment property or for repairs, mainte-
nance or enhancements

Additional Disclosures for the Fair Value Model [PAS 40.76]

o a reconciliation between the carrying amounts of investment property at the beginning and end of the
period, showing additions, disposals, fair value adjustments, net foreign exchange differences, transfers
to and from inventories and owner-occupied property, and other changes [PAS 40.76]
o significant adjustments to an outside valuation (if any) [PAS 40.77]
o if an entity that otherwise uses the fair value model measures an item of investment property using the
cost model, certain additional disclosures are required [PAS 40.78]

Additional Disclosures for the Cost Model [PAS 40.79]

o the depreciation methods used
o the useful lives or the depreciation rates used
o the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment
losses) at the beginning and end of the period
o a reconciliation of the carrying amount of investment property at the beginning and end of the period,
showing additions, disposals, depreciation, impairment recognised or reversed, foreign exchange differ-
ences, transfers to and from inventories and owner-occupied property, and other changes
o the fair value of investment property. If the fair value of an item of investment property cannot be
measured reliably, additional disclosures are required, including, if possible, the range of estimates
within which fair value is highly likely to lie
 MODULE 3 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
INVESTMENT PROPERY
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Tricia Company and its subsidiaries own the following properties:

Land held for future factory site 4, 000, 000

Machinery leased out by Tricia to an unrelated party under 1, 500, 000
an operating lease
Land held by Tricia for undetermined use 5, 000, 000
A vacant building owned by Tricia and to be leased out 3, 250, 000
under an operating lease
Land leased by Tricia to a subsidiary under an operating 2, 000, 000
lease
Property held by a subsidiary of Tricia, a real estate firm, in 2, 610, 000
the ordinary course of business
Property held by Tricia for use in production 3, 950, 000
Building owned by a subsidiary of Tricia and for which the 1, 750, 000
subsidiary provides security and maintenance services to
the lessees
Property under construction for use as investment property 5, 550, 000

What is the total investment property that should be reported in the consolidated statement of
financial position of the parent and its subsidiaries?
a. 15, 550, 000 b. 15, 550, 000 c. 17, 170, 000 d. 21,
660, 000

2. On January 1 2020, Jerome company acquired property consisting of ten identical freehold
detached houses each with separate legal title including the land on which it is built for
P200,000,000 , 20% of which is attributable to the land. The units have a useful life of 50 years.

The following costs are also incurred on such date:

• Nonrefundable transfer taxes not included in the purchase price 20,000,000
• Legal cost directly attributable to the acquisition 1,000,000
• Reimbursement to the previous owner for
prepaying nonrefundable property taxes
for the sixth-month period ending June 30, 2020 10,000
• Advertising campaign 500,000
• Opening function to celebrate new rental business 200,000
 On June 30 2020, the entity paid local property taxes of 20,000 for the year ending June 30
2021. Throughout 2020 the entity incurred repairs and maintenance of 120,000.

The entity used one of the ten units to accommodate the administration and maintenance staff.
The other nine units are rented out to independent parties under an operating lease.

On December 31 2020, the fair value of each unit was reliably estimated at 25,000,000. The fair
value of the units can be measured reliably. The accounting policy is to use the fair value model
for investment property.

What is the gain from the increase in fair value of investment property for the current year?
a. 51,100,000 b. 27,000,000 c. 45,000,000 d.
26,100,000

3. Kristine Company acquired a real property for speculation purpose with the intention of selling it
at a higher price in the long term. The property was acquired at cash price of 3,000,000. The
property has 100,000 unpaid real property tax assumed by Kristine Company. In addition, the
company also paid the following transaction costs: broker’s commission of 20,000 and
registration cost of 35,000.

How much should Kristine Company record the Investment Property?

a. 3,155,000 b. 3,100,000 c. 3,055,000 d.
3,000,000

4. The construction of the condominium was completed and the property was placed in service on
January 1, 2020.

The cost of the construction was 40,000,000. The useful life of the condominium is 20 years and
the residual value is 4,000,000.

An independent valuation expert provided the following fair value at each subsequent year-end:

12/31/2020 50,000,000
12/31/2021 43,000,000
12/31/2022 55,000,000

1. Under the cost model, what amount should be reported as depreciation of investment
property 2020?
a. 1,800,000 b. 2,000,000 c. 2,200,000 d. 0

2. Under the fair value model, what amount should be recognized as gain from change in fair
value in 2020?
a. 7,000,000 b. 10,000,000 c. 12,000,000 d. 0

3. Under the fair value model, what amount should be recognized as gain from change in fair
value in 2022?
a. 7,000,000 b. 10,000,000 c. 12,000,000 d. 0

5. Kimberly Company has a single investment property which had an original cost of 5,800,000 on
January 1, 2018

On December 31, 2020 the fair value was 6,000,000 and on December 31, 2021 the fair value
was 5,900,000.
 On acquisition, the property had a useful life of 40 years.

What is the expense recognized in profit or loss for 2021 under the fair value model and cost
model?

Fair value model Cost model

a. 147,500 145,000
b. 100,000 145,000
c. 145,000 100,000
d. 100,000 147,500

6. Jeffrey Company purchased an investment property in January 1, 2018 for 3,450,000. The
property had a useful life of 35 years and on December 31, 2020 had a fair value of 4, 000,000.
On December 31, 2020, the property was sold for net proceeds of 3,900, 000. The entity used
the cost model to account the investment property.

What is the gain or loss to be recognized for the year ended December 31, 2020 regarding the
disposal of the property?
a. 645, 315 b. 735, 451 c. 745, 715 d. 815, 669

7. Company A is a financial service entity that is involved in real estate development. Company
A has purchased land in Quezon City through the exercise of a purchase option that had been
acquired some years ago. The purchase price was P 20,000,000 and the land’s fair value as
determined by an independent value is P 46,400,000 on December 31, 2020.

Company A should report the property as

a. Investment property at its original cost of P 20,000,000
b. Investment property at its fair value of P 46,400,000
c. Inventory at its original cost of P 20,000,000
d. Inventory at its fair value of P 46,400,000

8. Gisel investment property has a historical cost of 1,400,000. On December 31, 2020, the fair
value of this investment property is 1,800,000. If Brian Company uses the fair value model to
account for the difference, Brian should
a. Recognized a 400,000 unrealized gain in shareholder’s equity
b. Recognized a 400,000 unrealized gain in income statement
c. Recognized a revaluation surplus of 400,000
d. Not recognized the 400,000 increase

9. On January 2, 2021, Omar Company converted its occupied property to investment property that
is to be carried at fair value. The carrying value of property in the company’s books is 4,000,000.

Assuming the fair value of the property on that date of transfer or conversion is 4,400,000,
Mighty Company should recognize
a. A 400,000 unrealized gain in the profit or loss
b. A 400,000 revaluation surplus in the share holders’ equity
c. A 400,000 unrealized gain in the liability section
d. A 400,000 direct credit to accumulated profits and losses
10. On January 2, 2020, Cooper Company acquired an investment property and the initial cost of
investment property was 4,000,000. As December 31, 2021, it has a carrying value of 3,900,000
at fair value model. On December 31, 2022, the company decided to transfer the investment
property to owner occupied property. On the date of transfer, the fair value of property is
3,700,000.

What amount of gain or loss on transfer should the company recognize on December 31, 2022?
a. No gain or loss
b. 100,000 loss
c. 200,000 loss
d. 300,000 loss

11. On January 2, 2021, Emerson Corporation has an investment property that was carried at fair
value with a carrying amount of P2,500,000 (historical cost, P,2,400,000). As of December 31,
2021, the carrying value of the property is P2,600,000. On December 31, 2021, the fair market
value of the property was P2,800,000. On this date, Emerson Corporation decided to
reclassify/transfer the property to inventory.

On the date of transfer, what amount should the inventory be valued?

a. 2,400,000 b.
2,500,000 c. 2,600,000 d. 2,800,000

12. On January 1, 2021, Melvin Company acquired an investment property at a total cost of 1,
000,000. At December 31, 2021, the carrying value of the property in the company’s books is 2,
000,000. On December 31, 2022. Melvin Company decided to use the property and immediately
reclassified as plant asset.

1. What would be the initial cost of the plant assert if it has a fair value of 2,500,000 at
conversion date?
a. 1,000,000 b. 1,500,000 c. 2,000,000 d. 2,500,000

2. What amount of revaluation surplus Melvin Company would recognize at the time of
conversion?
a. None b. 500,000 c. 1,000,000 d. 1,500,000

MODULE 4 INTANGIBLES

LEARNING OBJECTIVES:
1. Define an intangible asset.
2. State the initial measurement of intangible assets that are (a) externally acquired and (b) internally
generated.
3. State the subsequent measurement of intangible assets that (a) have finite useful life and (b) indefinite
useful life.

OVERVIEW
PAS 38 Intangible Assets outlines the accounting requirements for intangible assets, which are non-monetary
assets which are without physical substance and identifiable (either being separable or arising from contractual
or other legal rights). Intangible assets meeting the relevant recognition criteria are initially measured at cost,
subsequently measured at cost or using the revaluation model, and amortised on a systematic basis over their
useful lives (unless the asset has an indefinite useful life, in which case it is not amortised).

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Objective
The objective of PAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with
specifically in another PFRS.

The Standard requires an entity to recognise an intangible asset if, and only if, certain criteria are met. The
Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclo-
sures regarding intangible assets. [PAS 38.1]

Intangible asset: an identifiable non-monetary asset without physical substance. An asset is a resource that is
controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future
economic benefits (inflows of cash or other assets) are expected. [PAS 38.8]

Thus, the three critical attributes of an intangible asset are:

a. identifiability
b. control (power to obtain benefits from the asset)
c.future economic benefits (such as revenues or reduced future costs)

Essential elements of an intangible asset:

1. Identifiability - an intangible asset is identifiable when it: [PAS 38.12]
is separable (capable of being separated and sold, transferred, licensed, rented, or
exchanged, either individually or together with a related contract) or
arises from contractual or other legal rights, regardless of whether those rights are transferable or
separable from the entity or from other rights and obligations.

2. Control – means the entity has the ability to benefit from the intangible asset or prevent others from
benefiting from it. Control normally arises from legal rights that are enforceable in a court of law.

3. Future economic benefits – the future economic benefits from an intangible asset may include
revenue from the sale of products or services, cost savings (e.g., reduction in production coast rather
than increase in revenues), or other benefits resulting from entity’s use of asset.

Examples of intangible assets

o patented technology, computer software, databases and trade secrets
o trademarks, trade dress, newspaper mastheads, internet domains
o video and audio visual material (e.g. motion pictures, television programmes)
o customer lists
o mortgage servicing rights
o licensing, royalty and standstill agreements
o import quotas
o franchise agreements
o customer and supplier relationships (including customer lists)
o marketing rights

Intangibles can be acquired:

o by separate purchase
o as part of a business combination
o by a government grant
 o by exchange of assets
o by self-creation (internal generation)

Recognition

Recognition criteria. PAS 38 requires an entity to recognise an intangible asset, whether purchased or self-
created (at cost) if, and only if: [PAS 38.21]
a. it is probable that the future economic benefits that are attributable to the asset will flow to the entity;
and
b. the cost of the asset can be measured reliably.

If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria for
recognition as an intangible asset, PAS 38 requires the expenditure on this item to be recognized as an
expense when it is incurred. [PAS 38.68]

Initial measurement
Intangible assets are initially measured at cost. Cost depends on how the intangible asset is acquired.
Intangible assets may be acquired through:
a. Separate acquisition
b. Acquisition as part of business combination
c. Acquisition by way of government grant
d. Exchange of assets, or
e. Internal generation

Separate acquisition
Cost of a separately acquired intangible assets comprises:
a. “Purchase price, including import duties and non-refundable taxes, after deducting trade discounts and
rebates; and
b. Any directly attributable cost of preparing the asset for its intended use.” (PAS 38.27)

Example of directly attributable costs:

a. Cost of employee benefits arising directly from bringing the asset to its working condition
b. Professional fees arising directly from bringing the asset to its working condition.
c. Cost of testing whether the asset is functioning properly. (PAS 38.29)

Acquisition as part of business combination

The cost of intangible acquire in a business combination is it fair value at the acquisition date.

Acquisition by way of government grant

Intangible asset acquired by way of government grant (e.g., airport landing rights, licenses to operate radio or
television stations, import licenses or quotas or rights to access other restricted resources) may be initially
measured at either:
a. Fair value; or
b. Alternatively at nominal amount plus direct cost incurred in preparing the asset for its intended use

Acquisition by exchange
Measurement of the intangible asset depends on whether the exchange has commercial substance or not.
a. With commercial substance – an exchange has commercial substance if entity’s subsequent cash flows
are expected to change as a result of the exchange.
The intangible asset received is measured using the following order of priority:
1. Fair value of asset given up plus cash and cash equivalent transferred;
2. Fair value of asset received; or
3. Carrying amount of asset given up plus cash and cash equivalent transferred.
b.Exchange lacks commercial substance – the intangible asset received is measured at the carrying
amount of the asset given up plus cash and cash equivalent transferred.
Initial recognition: research and development costs
o Charge all research cost to expense. [PAS 38.54]
o Development costs are capitalised only after technical and commercial feasibility of the asset for sale or
use have been established. This means that the entity must intend and be able to complete the intangi-
ble asset and either use it or sell it and be able to demonstrate how the asset will generate future
economic benefits. [PAS 38.57]

If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the
development phase, the entity treats the expenditure for that project as if it were incurred in the research phase
only.

Initial recognition: in-process research and development acquired in a business combination

A research and development project acquired in a business combination is recognised as an asset at cost,
even if a component is research. Subsequent expenditure on that project is accounted for as any other
research and development cost (expensed except to the extent that the expenditure satisfies the criteria in
PAS 38 for recognising such expenditure as an intangible asset). [PAS 38.34]

Initial recognition: internally generated brands, mastheads, titles, lists

Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated
should not be recognised as assets. [PAS 38.63]

Initial recognition: computer software

o Purchased: capitalise
o Operating system for hardware: include in hardware cost
o Internally developed (whether for use or sale): charge to expense until technological feasibility,
probable future benefits, intent and ability to use or sell the software, resources to complete the
software, and ability to measure cost.
o Amortisation: over useful life, based on pattern of benefits (straight-line is the default).

The following items must be charged to expense when incurred:

o internally generated goodwill
o start-up, pre-opening, and pre-operating costs
o training cost
o advertising and promotional cost, including mail order catalogues
o relocation costs

Measurement subsequent to acquisition: cost model and revaluation models allowed

An entity must choose either the cost model or the revaluation model for each class of intangible asset.

Cost model. After initial recognition intangible assets should be carried at cost less accumulated amortisation
and impairment losses.

Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any sub-
sequent amortisation and impairment losses only if fair value can be determined by reference to an active
market. [PAS 38.75] Such active markets are expected to be uncommon for intangible assets. [PAS 38.78]
Examples where they might exist:
o production quotas
o fishing licences
o taxi licences

Under the revaluation model, revaluation increases are recognised in other comprehensive income and
accumulated in the "revaluation surplus" within equity except to the extent that they reverse a revaluation
decrease previously recognised in profit and loss. If the revalued intangible has a finite life and is, therefore,
being amortised (see below) the revalued amount is amortised. [PAS 38.85]
Classification of intangible assets based on useful life
Intangible assets are classified as:
1. Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash
inflows for the entity.
2. Finite life: a limited period of benefit to the entity.

Measurement subsequent to acquisition: intangible assets with finite lives

The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic
basis over that life: [PAS 38.97]
o The amortisation method should reflect the pattern of benefits.
o If the pattern cannot be determined reliably, amortise by the straight-line method.
o The amortisation charge is recognised in profit or loss unless another PFRS requires that it be included
in the cost of another asset.
o The amortisation period should be reviewed at least annually. [PAS 38.104]

Measurement subsequent to acquisition: intangible assets with indefinite useful lives

o An intangible asset with an indefinite useful life should not be amortised. [PAS 38.107]
o Its useful life should be reviewed each reporting period to determine whether events and circumstances
continue to support an indefinite useful life assessment for that asset. If they do not, the change in the
useful life assessment from indefinite to finite should be accounted for as a change in an
accounting estimate. [PAS 38.109]
o The asset should also be assessed for impairment in accordance with PAS 36. [PAS 38.111]

Subsequent expenditure
o Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for
being recognised in the carrying amount of an asset. [PAS 38.20] Subsequent expenditure on brands,
mastheads, publishing titles, customer lists and similar items must always be recognised in profit or
loss as incurred. [PAS 38.63]

Amortization
o Amortization is “the systematic allocation of the depreciable amount of intangible asset over it useful
life.” (PAS 38.8)
o Intangible assets with finite useful life is amortized over the shorter of its useful life and legal life.
o Intangible assets with indefinite life - An intangible asset with an indefinite useful life should not be
amortised.

Financial Statement Presentation

o Intangible assets accounted for under PAS 38 are presented separately from goodwill. Such intangible
assets are aggregated and presented as one line item under the heading “intangible assets” or “other
intangible assets” in the statement of financial position. The breakdown of the line item is disclose in
the notes.
o Goodwill is presented separately under a line item describe as “goodwill.”

Disclosure
For each class of intangible asset, disclose:
o useful life or amortisation rate
o amortisation method
o gross carrying amount
o accumulated amortisation and impairment losses
o line items in the income statement in which amortisation is included
o reconciliation of the carrying amount at the beginning and the end of the period showing:
o additions (business combinations separately)
o assets held for sale
o retirements and other disposals
 o revaluations
o impairments
o reversals of impairments
o amortisation
o foreign exchange differences
o other changes
o basis for determining that an intangible has an indefinite life
o description and carrying amount of individually material intangible assets
o certain special disclosures about intangible assets acquired by way of government grants
o information about intangible assets whose title is restricted
o contractual commitments to acquire intangible assets

Additional disclosures are required about:

o intangible assets carried at revalued amounts
o the amount of research and development expenditure recognised as an expense in the current period

MODULE 4 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
INTANGIBLES
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. An entity purchases a trademark and incurs the following costs in connection with the trademark:
One-time trademark purchase price 100,000 Nonrefundable VAT taxes 5,000 Training sales
personnel on the use of the new trademark 7,000 Research expenditures associated with the
purchase of the new trademark 24,000 Legal costs incurred to register the trademark 10,500
Salaries of the administrative personnel 12,000 Applying IFRS and assuming that the trademark
meets all of the applicable initial asset recognition criteria, the entity should recognize an asset
in the amount of
a. 100,000 b. 115,500 c. 146,500 d. 158,500

2. Tricia Company developed a new machine for manufacturing volleyballs. Because the machine is
considered very valuable, the entity had it patented. The following expenditures were incurred in
developing and patenting the machine:

Purchase of special equipment to be used solely for 2, 250, 000

development of the new machine
Research salaries and fringe benefits for engineers and 350, 000
scientists
Cost of testing prototype 300, 000
Legal cost of filing the patent 150, 000
Fees paid to government patent office 60, 000
Drawing required by patent office to be filed with patent 30, 000
application

1. What amount should be capitalized as the cost of the patent?

a. 150, 000 b. 240, 000 c. 210, 000 d. 300, 000

2. What amount of research and development should be expensed in the current year?
a. 2, 700, 000 b. 2, 550, 000 c. 2,900, 000 d. 2, 250, 000

3. On July 1, 2020, PIDO purchased a patent from the inventor, who asked 1,100,000 for it. PIDO
paid for the patent as follows: cash, 400,000; issuance of 10,000 shares of its own ordinary
shares, par 10 (market value, P20 per share); and a note payable due at the end of three years,
face amount, 500,000, noninterest-bearing. The current interest rate for this type of financing is
12 percent. PIDO estimates the useful life of the patent to be ten years.
Carrying amount of patent as of December
31, 2020
a. P1,045,000 c. P860,310
b. P 955,900 d. P908,105

4. On January 1, 2021, PIDO signed an agreement to operate as franchisee of Clear Copy Service,
Inc. for an initial franchise of 680,000. Of this amount, 200,000 was paid when the agreement
was signed and the balance was payable in four annual payments of 120,000 each, beginning
January 1, 2022. The agreement provides that the down payment is not refundable and no
future services are required of the franchisor. The implicit rate for loan of this type is 14%. The
agreement also provides the 5% of the revenue from the franchise must be paid to the franchisor
annually. PIDO’s revenue from the franchise for 2021 was 8,000,000. PIDO estimates the useful
life of the franchise to be ten years.

Carrying amount of franchise as of December 31, 2021

a. 549,644 b. 494,680 c. 538,733 d. 612,000
 5. On December 31, year 3, Alfredo Co. had capitalized software costs of 600,000 with an economic
life of four years. Sales for year 4 were 10% of expected total sales of the software. At December
31, year 4, the software had a net realizable value of 480,000. In its December 31, year 4
balance sheet, what amount should Alfredo report as net capitalized cost of computer software?
a. 432,000 b. 450,000 c. 480,000 d. 540,000

6. Mississauga Company was granted a patent on a product on January 1, 2011 with 20-year useful
life. To protect the patent, the entity purchased on January 1, 2021 for 4,500,000 a patent on
competing product which was originally issued on January, 2014. Because of the unique plant,
the entity does not feel the competing patent can be used in producing a product.

What is the amortization of the competing patent for 2021?

a. 450,000 b. 225,000 c. 300,000 d. 0

7. On January 1, 2018 Dundas Company, purchased a patent for P 9,140, 000. The patent is being
amortized over the remaining legal life of 15 years expiring on January 1, 2030. During 2021 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, 2021?

a. 6,267,428.57 b. 1,828,000 c. 7,312,000 d. 9,140,000

8. Mhel Company was granted a patent on January 1, 2018 and appropriately capitalized 450,000 of
related costs. The entity was amortizing the patent over the useful life of 15 years.
During 2021, the entity paid 150,000 in legal costs in successfully defending an attempted
infringement of the patent. After the legal action was completed, the entity sold the patent to
the plaintiff for 750,000. The policy is to take no amortization in the year of disposal

What amount should be reported as gain from sale of patent in 2021?

a. 150,000 b. 240,000 c. 270,000 d. 390,000

9. On January 1, 2017, Connie Company purchased a patent for a new consumer product for 950,
000. At the time of purchase, the patent was valid for 18 years. However the patent’s useful life
was estimated to be only 9 years due to the competitive nature of the product.

On December 31, 2020, the product was permanently withdrawn from sale under governmental
order because of a potential health hazard in the product.

What amount should be charged against income of 2020 if amortization is recorded at the end of
each year?
a. 950,000 b. 316,667 c. 633,333 d. 950, 000

10. Steven Company is planning to sell the business to new interests. The cumulative earnings for
the past seven years amounted to P7, 450, 000 including the expropriation gain of P 450, 000.
The fair value of net assets of Steven Company was P 9, 750, 000. The goodwill is determined by
capitalizing average net earnings at 10%.

What is the amount to be paid for goodwill?

a. 250, 000 b. 7,450, 000 c. 1,000, 000 d. 350, 000
11. At the beginning of the current year Shawn Company purchased Steven Company for P9, 000,
000 cash. Steven Company had total liabilities of P 3, 560, 000. Shawn’s Company assessment of
the fair value it obtained when it purchased Steven Company is as follows:

Cash 2,500,000
Inventory 780,000
In-process research and Development 1,250,000
Assembled workforce 2,000,000

What is the goodwill arising from the acquisition?

a. 910,000 b. 4,530,000 c. 8,030,000 d. 110,000

12. Ana Company purchased the net assets of another entity for 6,000,000. On the date of the
transaction, the acquire had 2,000,000 of liabilities. The assets of the acquiree at fair value were
3,000,000 for current assets and 6,000,000 for noncurrent assets.

How should the purchase be accounted for?

a. Retained earnings should be credited for P1,000,000.
b. Gain on bargain purchase should be credited for P1,000,000.
c. The current assets should be reported at P3,000,000 and the noncurrent assets at P5,000,000.
d. Negative goodwill should be credited for P1,000,000.

13. On January 1, 2018, Arlene Company signed an eight-year lease for office space. The entity has
the option to renew the lease for an additional four-year period on or before January 1, 2025.

During January 2020, two years after occupying the leased premises, the entity made general
improvement to the premises costing 3,600,000 and having an estimated useful life of ten years.

On December 31, 2020, the entity’s intention as to exercise of the renewal option is uncertain
because this will depend upon future office space requirement. A full year depreciation expense
is taken for the current year.

What amount should be recorded as depreciation of leasehold improvement for the current year?
a. 300,000 b. 720,000 c. 450,000 d. 600,000

14. On January 1, 2018, Arlene Company signed an eight-year lease for office space. The entity has
an option to renew the lease for an additional 8-year period on or before January 1, 2023.

During January 2020, the entity made substantial improvement to the warehouse. The cost of the
improvement was 540,000 with an estimated useful life of 15 years.

On December 31, 2020, the entity intended to exercise the renewal option. The entity has taken
a full year depreciation on this leasehold improvement for 2020.

On December 31, 2020, what is the carrying amount of the leasehold improvement?
a. 486,000 b. 504,000 c. 501,429 d. 513,000
15. On January 1, 2018, Johnshtin Company purchased a patent with a cost of 5,800,000 and useful
life of 5 years. The entity used straight line amortization. On December 31, 2020, the entity
determined that impairment indicators are present.

The fair value less cost of disposal of the patent is estimated to be 2,700,000. The value in use is
estimated to be 2,825,000. The remaining useful life of the patent is estimated to be 2 years.

What should be reported as impairment loss for 2020?

a. 655,000 b. 780,000 c. 275,000 d. 0

16. At the beginning of the current, Jerome Company acquired an intangible asset for P3,000,000.
The intangible asset has an estimated useful life of 10 years.

In the current year, the intangible asset was evaluated to determine whether it was impaired. On
same date, the fair value less cost of disposal of intangible asset is 2,000,000. The asset is
expected to generate future cash flows of 300,000 annually for the remaining 9 years.

The appropriate discount rate is 5%. The present value of an ordinary annuity of 1 at 5% for nine
periods is 7.11.

What is the impairment loss to be recognized for the current year?

a. 700,000 b. 567,000 c. 867,000
d. 0

17. Kaila Company operates a production line which is treated as a cash generating unit. At year
end, the carrying amounts of the noncurrent assets of this cash generating unit are:

Intangible- goodwill 1, 100,000

Tangibles- plant and machinery 2, 200,000

At year end, the recoverable amount of the production line is estimated at 2, 700,000.

What are the revised carrying amounts of the intangible and tangible noncurrent asset,
respectively?
a. 500,000 and 2, 200,000
b. 900,000 and 1,800,000
c. 1,100,000 and 1,600,000
d. 800,000 and 1,900,000

18. Alejandro Corp. uses the cost model for intangible assets. On April 10, year 3, Alejandro acquired
assets for 100,000. On December 31, year 3, it was determined that the recoverable amount for
these intangible assets was 80,000. On December 31, year 4, it was determined that the
intangible assets had a recoverable amount of 84,000.

What is the impairment gain or loss recognized in year 3 and year 4 on the income statement?
Year 3 Year 4
a. 20,000 loss 16,000 loss
b. 20,000 loss 0
c. 20,000 loss 4,000 gain
d. 0 0
19. Joseph Corp. incurred the following costs during year 4:
Design of tools, jigs, molds, and dies involving new technology 125,000 Modification of the
formulation of a process 160,000 Troubleshooting in connection with breakdowns during
commercial production 100,000 Adaptation of an existing capability to a particular customer’s
need as part of a continuing commercial activity 110,000 In its year 4 income statement, Joseph
should report research and development expense of
a. 125,000 b. 160,000 c. 235,000 d. 285,000

20. You are in the process of examining the intangible asset accounts of John Company and you
obtained the following information

A patent was purchased from Pizza Hot Company for P2,000,000 on January 1, 2019. John
Company estimated the remaining useful life of the patent to be 10 years at the date of
purchase. The patent was carried on Pizza Hot Company’s accounting records at a net carrying
amount of P1,600,000 when Pizza Hot sold it to John Company

During 2020, a franchise was purchased from Yellow Cob for P516,000. The terms of the payment
are as follows: P180,000 down payment on the date of the purchase, April 1,2020 and P336,000
one year non-interest bearing note due on April 1, 2021. Implicit interest in this transaction is
12%. In addition, 5% of revenue from the franchise must be paid to Yellow Cob. Revenue from
the franchise for 2020 wasP2,500,000. John estimated on the date of purchase that the useful life
of the machine was 10 years.

JOHN incurred the following expenditures relating to research and development activities in
2020:
Materials P42,000
Equipment 100,000
Indirect Cost 102,000
John estimates that these costs will be recouped by December 31,2022The materials and
equipment purchased have no alternative future uses.

During 2020, because of recent events in the field, John estimates that the remaining life of the
patent purchased on January 1, 2019 is only 5 years from January 1, 2020. The company takes a
full year’s amortization or depreciation on assets acquired during the year.

1. The amortization of the patent for the year 2020 is

a. 200,000 b. 288,000 c. 333,000 d. 360,000

2. Total research and development expense to be shown in the 2020 statement of

comprehensive income is
a. 244,000 b. 164,000 c. 144,000 d. 48,800

3. The carrying Value of the Franchise at December 31, 2020 is

a. 360,000 b. 370,000 c. 432,000 d. 444,000

4. The total amount that will be charged against revenue for 2020 related to the franchise is
a. 192,000 b. 188,000 c. 161,000 d. 200,000

5. The amortized cost of the Notes Payable on December 31, 2020 is

a. 300,000 b. 309,000 c. 327,000 d. 336,000

21. On December 31, 2019, Kaila Corporation acquired the following three intangible assets:
 A trademark for P450,000. The trademark has 7 years remaining legal life. It is anticipated
that the trademark will be renewed in the future, indefinitely, without problem.

 Goodwill for P2,250,000. The goodwill is associated with Kaila’s Laguna Manufacturing
reporting unit.

 A customer list for P330,000. By contract, Kaila has exclusive use of the list for 5 years.
Because of market conditions, it is expected that the list will have economic value for just 3
years.

On December 31, 2020, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a) Because of a decline in the economy, the trademark is now expected to generate cash flows
of just P15,000 per year. The useful life of trademark still extends beyond the foreseeable
horizon.

b) The cash flows expected to be generated by the Laguna Manufacturing reporting unit is
P375,000 per year for the next 22 years. Carrying amounts and fair values of the assets and
liabilities of the Laguna Manufacturing reporting unit are as follows:
Carrying Fair values
amount
Identifiable assets P4,050,000 P4,500,000
Goodwill 2,250,000 ?
Liabilities 2,700,000 2,700,000

c) The cash flows expected to be generated by the customer list are 180,000 in 2021 and
120,000 in 2022.

Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%. Round off present value factors to 4 decimal
places):

1. Total amortization for the year 2020

a. P110,000 c. P212,273
b. P174,285 d. P130,285

2. Impairment loss for the year 2020

a. P135,714 c. P200,000
b. P269,376 d. P 0

3. Carrying amount of Trademark as of December 31, 2020

a. P450,000 c. P385,715
b. P250,000 d. P180,624

4. Carrying amount of Goodwill as of December 31, 2020

a. P2,250,000 c. P2,147,727
b. P2,137,500 d. P2,193,750

5. Carrying amount of Customer list as of December 31, 2020

a. P330,000 c. P220,000
b. P264,000 d. P 0
22. A license is acquired July 1, 2017, for 450,000; while it has a legal life of 15 years, due to rapidly
changing environment, management estimates a useful life of only 5 years. Straight-line
amortization will be used. At January 1, 2018, management estimated that the recoverable
amount of the license is only 135,000. Amortization will be taken over 3 years from that point.

On January 1, 2020, due to the change in general economic situations, the license now has a fair
value of 540,000. The entity adopted the revaluation model to measure the license starting
January 1, 2020. The estimated remaining useful life is now believed to be 5 years.

Based on the above and the result of your audit, determine the following:

1. How much is the loss on impairment on January 1, 2018?

a. P270,000 c. P225,000
b. P300,000 d. P 0

2. How much can be recognized as gain on impairment recovery in 2020?

a. P270,000 c. P495,000
b. P180,000 d. P315,000

3. How much will be recognized as revaluation surplus on January 1, 2020?

a. P270,000 c. P495,000
b. P180,000 d. P315,000

MODULE 5 AGRICULTURE

LEARNING OBJECTIVES:
1. Differentiate the following: biological assets, bearer plants, agricultural produce and inventory.
2. State the initial and subsequent measurement of biological assets and agricultural produce.
3. State the accounting for government grants that are within the scope of PAS 41.

OVERVIEW
PAS 41 Agriculture sets out the accounting for agricultural activity – the transformation of biological assets
(living plants and animals) into agricultural produce (harvested product of the entity's biological assets). The
standard generally requires biological assets to be measured at fair value less costs to sell.

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Objective
The objective of PAS 41 is to establish standards of accounting for agricultural activity – the management of
the biological transformation of biological assets (living plants and animals) into agricultural produce (harvested
product of the entity's biological assets).

PAS 41 applies to the following when they relate to agricultural activity:

a. Biological assets, except bearer plants;
b. Agricultural produce at point of harvest; and
c. Unconditional government grants related to a biological asset measured at fair value less cost to sell.

Biological asset – is a “living animal or plant.” (PAS 41.5)

“Bio” means life, therefore, dead animals, dead plants and other non-living things cannot qualify as biological
assets.

Types of biological assets:

1. Consumable biological assets – “those that are to be harvested as agricultural produce or sold as
biological assets.” (PAS 41.44)

Examples:
a. Livestock intended for the production of meat
b. Livestock held for sale
c. Fish in farms
d. Crops such as maize and wheat
e. Produce on bearer plants
f. Trees being grown for lumber.

2. Bearer biological assets – those that are held to bear produce. Only the produce is harvested
while bearer biological asset remains.

Examples:
a. Livestock from which milk is produced
b. Fruit trees from which fruit is harvested (PAS 41.44)

Living animals, whether consumable or bearer, are classified as biological assets if they relate to agricultural
activity. However, living plants are classified as biological assets only if they are consumable. Bearer plant
are classified as PPE.

Bearer plant is a living plant that:

a. Is used in the production or supply of agricultural produce;
b. Is expected to bear produce for more than one period; and
c. Has remote likelihood of being sold as agricultural produce, except for incidental scrap sales. (PAS
41.5)
d. Plants that are to be harvested as agricultural produce are not bearer plants. For example, a tree that
is intended to be cut down and used as lumber is consumable plant, and therefore classified as
biological asset.
e. A tree that is intended to bear fruits and only the fruits are harvested while the tree remains is a bearer
plant, and therefore classified as PPE.
f. Bearer plants may be sold as scrap when no longer used are not necessarily precluded from being
classified as bearer plants.

Agricultural produce – is “the harvested produce of the entity’s biological assets.” (PAS 41.5)

Harvest is “the detachment of produce from a biological assets or cessation of biological asset’s life
processes.” (PAS 41.5)
Agricultural produce refers to those that are in their natural state and are not yet processed. Those processed
are treated as inventory.

PAS 41.5C states that “Produce growing on bearer plants is a biological assets.” However, in many cases, it is
impractical to account for fruits growing on trees before they are harvested. Many companies, therefore, start
to apply PAS 41 on the fruits only at the point of harvest. This is also true for produce of animals, e.g., milk is
accounted for only after it is squeezed from the cow’s breast.

Agricultural activity is “ the management of an entity of the biological transformation and harvest of biological
assets for sale or for conversion into agricultural produce or into additional biological assets.” (PAS 41.5)

Examples of agricultural activities include: raising livestock, forestry, annual or perennial cropping, cultivating
orchards and plantation, floriculture, and aquaculture (including fish farming). (PAS 41.5)

The following are common features of agricultural activities:

a. Capability to change – living animals and plants are capable of biological transformation;
b. Management of change – management facilitates biological transformation by enhancing, or at least
stabilizing, conditions necessary for the process to take place. For example, harvesting from unmanaged
sources (such as ocean fishing and deforestation) is not agricultural activity; and
c. Measurement of change – the change in quality or quantity brought about by biological transformation
or harvest is measured and monitored as a routine management function.

Biological transformation – comprises of the following processes that cause qualitative or quantitative
changes in biological asset:
1. Assets changes through:
a. Growth – an increase in quantity or improvement in quality of an animal or plant.
b. Procreation - is the creation of additional living animals or plants.
c. Degeneration – is a decrease in the quantity or deterioration in quality of an animal or plant.
2. Production of agricultural produce.

Initial recognition
An entity recognises a biological asset or agriculture produce only when the entity controls the asset as a result
of past events, it is probable that future economic benefits will flow to the entity, and the fair value or cost of the
asset can be measured reliably.

Measurement
Biological assets within the scope of PAS 41 are measured on initial recognition and at subsequent
reporting dates at fair value less estimated costs to sell, unless fair value cannot be reliably measured.
[PAS 41.12]

Agricultural produce is measured at fair value less estimated costs to sell at the point of harvest. [PAS
41.13] Because harvested produce is a marketable commodity, there is no 'measurement reliability' exception
for produce.

The gain on initial recognition of biological assets at fair value less costs to sell, and changes in fair
value less costs to sell of biological assets during a period, are included in profit or loss. [PAS 41.26]

A gain on initial recognition (e.g. as a result of harvesting) of agricultural produce at fair value less costs to sell
are included in profit or loss for the period in which it arises. [PAS 41.28]

All costs related to biological assets that are measured at fair value are recognised as expenses when
incurred, other than costs to purchase biological assets.

PAS 41 presumes that fair value can be reliably measured for most biological assets. However, that presump-
tion can be rebutted for a biological asset that, at the time it is initially recognised, does not have a quoted
market price in an active market and for which alternative fair value measurements are determined to be
clearly unreliable. In such a case, the asset is measured at cost less accumulated depreciation and impairment
losses. But the entity must still measure all of its other biological assets at fair value less costs to sell. If cir-
cumstances change and fair value becomes reliably measurable, a switch to fair value less costs to
sell is required. [PAS 41.30]

Other accounting issues

The change in fair value of biological assets is part physical change (growth, etc.) and part unit price
change. Separate disclosure of the two components is encouraged, not required. [PAS 41.51]

Agricultural produce is measured at fair value less costs to sell at harvest, and this measurement is considered
the cost of the produce at that time (for the purposes of PAS 2 Inventories or any other applicable standard).
[PAS 41.13]

Agricultural land is accounted for under PAS 16 Property, Plant and Equipment. However, biological assets
(other than bearer plants) that are physically attached to land are measured as biological assets separate from
the land. In some cases, the determination of the fair value less costs to sell of the biological asset can be
based on the fair value of the combined asset (land, improvements and biological assets). [PAS 41.25]

Intangible assets relating to agricultural activity (for example, milk quotas) are accounted for under PAS 38 In-
tangible Assets.

Government grants
Unconditional government grants received in respect of biological assets measured at fair value less costs to
sell are recognised in profit or loss when the grant becomes receivable. [PAS 41.34]

If such a grant is conditional (including where the grant requires an entity not to engage in certain agricul-
tural activity), the entity recognises the grant in profit or loss only when the conditions have been met.
[PAS 41.35]

Disclosure
Disclosure requirements in PAS 41 include:
o aggregate gain or loss from the initial recognition of biological assets and agricultural produce and the
change in fair value less costs to sell during the period* [PAS 41.40]
o description of an entity's biological assets, by broad group [PAS 41.41]
o description of the nature of an entity's activities with each group of biological assets and non-financial
measures or estimates of physical quantities of output during the period and assets on hand at the end
of the period [PAS 41.46]
o information about biological assets whose title is restricted or that are pledged as security [PAS 41.49]
o commitments for development or acquisition of biological assets [PAS 41.49]
o financial risk management strategies [PAS 41.49]
o reconciliation of changes in the carrying amount of biological assets, showing separately changes in
value, purchases, sales, harvesting, business combinations, and foreign exchange differences* [PAS
41.50]

Disclosure of a quantified description of each group of biological assets, distinguishing between consumable
and bearer assets or between mature and immature assets, is encouraged but not required. [PAS 41.43]

If fair value cannot be measured reliably, additional required disclosures include:

 description of the assets
 an explanation of why fair value cannot be reliably measured
 if possible, a range within which fair value is highly likely to lie
 depreciation method
 useful lives or depreciation rates
 gross carrying amount and the accumulated depreciation, beginning and ending.
 If the fair value of biological assets previously measured at cost subsequently becomes available, certain addi-
tional disclosures are required. [PAS 41.56]

Disclosures relating to government grants include the nature and extent of grants, unfulfilled conditions, and
significant decreases expected in the level of grants.

MODULE 5 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
BIOLOGICAL ASSETS
PROF. U.C. VALLADOLID
Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. A group of twenty 2-year old cattle was held at January 1, 2020. Five 2-year old cattle were purchased on
January 2, 2020 for 12,000 each and five calves were born on the same date. No cows or calves were
disposed of during the period. Per unit fair values less estimated point of sales were as follows:
January 1, 2020
2-year old cattle 12,000
Newborn cattle 4,000

December 31, 2020

3-year old cattle 15,000
2-year old cattle 13,000
1-year old cattle 7,000
Newborn cattle 5,000

1. How much shall be taken to profit or loss as a gain arising from change in fair value due to physical
change?
a. 30,000
b. 60,000
c. 80,000
d. 110,000

2. How much shall be taken to profit or loss as a gain arising from change in fair value due to price
change?
a. 30,000
b. 60,000
c. 80,000
d. 110,000

3. What amount shall be presented on the statement of financial position on December 31, 2020 under
the caption Biological Assets?
a. 320,000
b. 350,000
c. 390,000
d. 410,000

2. The following information is made available by Robby Farms of its dairy livestock:
Carrying amount, January 1, 2020 450,000
Fair value less point of sale costs of livestock
purchased during the year 250,000
Increase in fair value less estimated point of
sale costs attributable to physical changes 220,000
Increase in fair value less estimated point of
sale costs attributable to price change 64,000
Total selling price less point of sale costs of
livestock sold during the period 290,000

1. At what amount should the biological assets on the statement of financial position be reported at
December 31, 2020?
a. 1,274,000
b. 764,000
c. 694,000
d. 630,000
 2. What amount shall be included in gross income of Robby Farms as a result of the transactions on its
dairy livestock?
a. 64,000
b. 220,000
c. 284,000
d. 290,000

3. Burberry Dairy Products produces milk on its farms. At January 1, 2020, Burberry has 125 cows with average
age of two years and 75 heifers with average of one year. On July 1, 2020, Burberry purchased 80 heifers with
average age of one year. The unit values less estimated point of sale costs were:
Age January 1, 2020 July 1, 2020 December 31, 2020
1year old P3,000 P3,100 P3,200
2yearsold 4,000 4,500
1.5years old 3,600
3years old 5,000

The increase in value of biological assets in 2020 due to change in fair value is
a. 525,000
b. 277,000
c. 192,000
d. 85,500

4. A group of thirty 2-year old cattle was held at January 1, 2020. Five 2-year old cattle were purchased on
January 2, 2020 for 12,500 each and 5 calves were born on January 2, 2020. No cows or calves were
disposed of during the period. Per unit value less estimated point of sale costs were:
January 1, 2020 December 31, 2020
2yr old cattle 12,500 3yr old cattle 15,000
Newborn cattle 4,000 2yr old cattle 13,000
1yr old cattle 7,000
Newborn cattle 4,500

1. The company records separately the increase in fair value less point of sale cost due to physical
change and change in fair value less point of sale cost due to price change. How much shall be taken
to profit or loss as a gain arising from the change in fair value less point of sale cost due to physical
change?
a. 70,000
b. 82,000
c. 90,000
d. 102,500

2. How much shall be taken to profit or loss as a gain arising from change in fair value less point of scale
cost due to price change?
a. 17,500
b. 20,000
c. 25,000
d. 102,500

5. The Sergio Company has a herd of ten 2-year old animals on January 1, 2020. One animal aged 2.5 years
was purchased on July 1, 2020 for 10,800 and one animal was born on July 1, 2020. No animals were sold or
disposed of during the year.

The fair value less estimated point of sale costs per unit were:
2-year old animal on January 1 – 10,000
2.5 year old animal on December 31 – 11,100
2.5 year old animal on July 1 – 10,800
 2-year old animal on December 31 – 10,500
Newborn animal on July 1 – 7,000
0.5 year old animal on December 31 – 8,000
3-year old animal on December 31 – 12,000
Newborn animal on December 31 – 7,200

1. The December 31, 2020 statement of financial position should report biological assets of
a. 144,000
b. 140,000
c. 117,000
d. 110,800

2. The gain arising from change in fair value less estimated point of sale costs reported in the 2020
statement of comprehensive income is
a. 5,500
b. 23,700
c. 29,000
d. 29,200

3. What is the change in fair value of the biological assets due to price change?
a. 5,000
b. 6,000
c. 5,500
d. 6,500

4. in fair value of the biological assets due to physical change?

a. 27,300 c, 23,700
b. 26,307 d. 23,607

MODULE 6 Non-current Assets Held for Sale

LEARNING OBJECTIVES:
1. Describe the criteria for held for sale classification.
2. State the initial and subsequent measurement of held for sale assets.
3. State the presentation requirements of discontinued operation.

OVERVIEW
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations outlines how to account for non-cur-
rent assets held for sale (or for distribution to owners). In general terms, assets (or disposal groups) held for
sale are not depreciated, are measured at the lower of carrying amount and fair value less costs to sell, and
are presented separately in the statement of financial position. Specific disclosures are also required for dis-
continued operations and disposals of non-current assets.

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An entity classifies a non-current asset as held-for-sale if its carrying amount will be recovered mainly
through selling the asset rather than through usage.
When a company makes the decision to sell an asset or to stop some part of its business, it is making a
decision that affects the future cash flows, profitability and overall financial situation. The users of the financial
statements should be informed about these events. Therefore, PFRS 5 Non-Current Assets Held for Sale and
Discontinued Operations was issued to highlight the results from continued operations and to separate them
from the results of the ongoing activities.

Classification as Held for Sale

A noncurrent asset (or disposal group) is classified as held for sale or held for distribution to owners it its
carrying amount will be recovered principally through sale transaction rather than through continuing use.

Assets classified as noncurrent in accordance with PAS1 are classified as current only if they meet the criteria
to be classified as held for sale under PFRS 5.

Held-for-sale classification
In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held for
sale:
o management is committed to a plan to sell
o the asset is available for immediate sale
o an active programme to locate a buyer is initiated
o the sale is highly probable, within 12 months of classification as held for sale (subject to limited excep-
tions)
o the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value
o actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or
withdrawn

Exception to the one-year requirement

An asset classified as held for sale, that is not sold within 1 year is continued to be classified as held for sale if
the following conditions are met:
a. The delay is caused by events beyond the entity’s control; and
b. There is sufficient evidence that the entity remains committed on selling the asset (or disposal group).

If none of the above conditions are met, the asset will be reclassified back to its previous classification (e.g.,
PPE).

Measurement
Held for sale assets are initially and subsequently measured at the lower of carrying amount and fair
value less cost to sell.

Changes in fair value less cost to sell

Subsequent changes in fair value less cost to sell are recognized in profit or loss, and impairment losses
or gains on reversal of impairment. However, gain on reversal of impairment is recognized only to the extent of
cumulative impairment losses previously recognized.

Depreciation and amortization

Held for sale assets are not depreciated or amortized while they are classifies as held for sale.

Changes to a plan to sell

The asset that ceases to be classified as held for sale is measured at the lower of asset’s
a. Carrying amount before it was classified as held for sale, adjusted for any depreciation, amortization or
revaluation that would have been recognized had the asset not been classified as held for sale; or
b. Recoverable amount – the higher of fair value less cost of disposal and its value in use, at the date of
subsequent decision not to sell.

Discontinued operation
 A discontinued operation is “ a component of an entity that either has been disposed of or is classified as held
for sale, and
a. Represent a major line of business or geographical area of operations;
b. Is part of a single coordinated plan to dispose of a separate major line of business or geographical area
of operations; or
c. Is a subsidiary acquired exclusively with a view to resale.” (PFRS 5.32)

Illustration:
On March 1, 20x1, A Co. classifies a component of an entity as held for sale and make the following estimates:

a. Estimated gain on sale of some assets of the component, 100,000.

b. Estimated impairment losses and losses on sale of the remaining assets ot he component, 200,000.
c. Estimated operating losses prior to the expected date of sale, 300,000.

The actual result of operations of the component for sale are as follows:
January1 to February 28, 20x1 – 50,000 profit
March 1 to December 31, 20x1 – 1,000,000 loss
Assuming tax rate of 30%, and actual sale occurred in 20x2.

Solutions:
Jan. – Feb. profit from operations 50,000
Mar. – Dec. loss prom operations (1,000,000)
Estimated impairment losses and losses on sale (200,000)
Total (1,150,000)
Multiply by (70% net of tax) x 50%
Loss from discontinued operations (805,000)

Note: both the estimated gain on disposal and estimated operating losses are disregarded.

MODULE 6 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
NON-CURRENT ASSETS HELD FOR SALE
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. On December 31, 2020, Amara Co. committed to a plan to sell a manufacturing facility in its present condition
and classifies the facility as held for sale at this date. After a firm purchase commitment is obtained, the buyer’s
inspection of the property identifies environmental damage not previously known to exist. Amara is required by
the buyer to make good the damage, which will extend the period required to complete the sale beyond one
year. However, the entity has initiated actions to make good the damage, and satisfactory rectification of the
damage is highly probable. On December 31, 2020, the carrying value of the facility is P4,000,000 and its fair
market value is P3,600,000.

In its December 31, 2020 balance sheet, Amara Co. should properly report this manufacturing facility as:
a. should no longer be included in the December 31,2020 balance sheet
b. should be included among the property , plant , and equipment at P4,000,000
c. should be included among the property , plant, and equipment a P3,600,000
d. should be reported separately as non-current asset held for disposal and valued at P3,600,000
2. On January 2, 2020 Ozz Co. intends to sell its building with a carrying value of 3,800,000 but with a fair value
of 4,200,000 but will continue to use the asset until the construction of a new building is completed. The
current building has a remaining useful life of 10 years.

On January 2, 2020, Ozz co. should classify the building as

a. Property, plant and equipment valued at 3,800,000
b. Property, plant and equipment valued at 4,200,000
c. Non-current asset held for sale and valued at 3,800,000
d. Non-current asset held for sale and valued at 4,200,000
3. On January 2, 2020, X co. is committed to a plan to sell a manufacturing facility and has initiated action to
locate a buyer. Any uncompleted customer orders will be transferred to the buyer. The fair value of the facility is
6,000,000 and its carrying value as of January 2, 2020 is 5,600,000.

On January 2, 2020, X co. sold classify the building as

a. PPE valued at 6,000,000
b. PPE valued at 5,600,000
c. Non-current asset held for sale valued at 6,000,000
d. Non-current asset held for sale valued at 5,600,000
4. On December 1, 2020 Tris co. acquired through foreclosure a property comprising land and building that it
intends to sell. However, Tris does not intend to transfer the property of a buyer until after it completes
renovations to increase the property’s sales value. As of December 31, 2020, Tris has paid a total amount of
100,000 for the partial renovation of the property and the property is currently selling at 7,600,000.

In its December 31, 2020 balance sheet, Tris co. should report its held for sale property at
a. 0
b. 7,000,000
c. 7,100,000
d. 7,600,000

5. On July 2020, Vince Carter is committed to a plan to sell a disposal group that represents a significant portion of
its regulated operations. The sale requires regulatory approval, which could extend the period required to
complete the sale beyond one year. Actions necessary to obtain that approval cannot be initiated until after a
buyer is known and a firm purchase commitment is obtained. However, a firm purchase commitment is highly
probable within one year. The non-current assets of disposal group have a carrying value of 5,000,000 and
liabilities of 1,000,000. The assets total fair value as of December 31, 2020 of the disposal group is 4,800,000.
If the sale is completed within one year, the estimated cost to sell is 200,000, but if the sale will exited beyond
one year, the present value of the estimated cost to sell is 180,000.

If the sale will extend beyond one year, what amount of non-current asset should Vince Carter report its held for
sale property at December 31, 2020?
a. 3,600,000
b. 3,620,000
c. 4,000,000
d. 4,620,000

6. On July 1, 2020, Olivia Co. has a building with a cost of 4,000,000 and accumulated depreciation of 1,600,000.
On the same date, Olivia Co. commits to a plan to sell the building by February 1, 2021. The building has a fair
value of 2,000,000 and it is estimated that the selling cost of the building will be 150,000. As of July 1, 2020,
the building has a remaining life of 15 years.

What is the amount to be reported as the carrying value of the building held for sale as of December 31, 2020?
 a. 1,788,333
b. 1,850,000
c. 1,933,333
d. 2,000,000

What is the amount of loss to be recognized by Olivia co. in its income statement as a result of reclassification?
a. none
b. 150,000
c. 400,000
d. 550,000

7. On September 1, 2020, Dee Company has a building with a cost of 4,000,000 and accumulated depreciation of
3,100,000. The company commits to a plan to sell the building by February 1, 2021. On September 1, 2020, the
building has an estimated selling price of 800,000, and it is estimated selling cost associated with the disposal of
the building will be 120,000. On December 31, 2020, the estimated selling price of the building has increased to
1,200,000, with estimated selling costs remaining at 120,000.
1. At the time of reclassification as held for sale, what amount should the noncurrent asset held for sale be
recognized?
a. 680,000
b. 780,000
c. 800,000
d. 900,000

2. What amount of loss should Dee Company recognize at the time the building was reclassified as held for
sale?
a. None
b. 100,000
c. 120,000
d. 220,000

3. As of December 31, 2020, what amount of gain on recovery should Dee Company recognize related to
the asset held for sale?
a. None
b. 180,000
c. 220,000
d. 400,000