PROPERTY, PLANT & EQUIPMENT

Property, Plant and Equipment – (PAS 16) are tangible assets that are;
a) Are held for use in the production or supply of goods and services, for rental to others, or for administrative
purposes; and
b) Are expected to be used during more than one accounting period.
Scope of PAS 16 - An entity applies Philippine Accounting Standard 16 for Property, plant and equipment
except when another standard requires or permits a different accounting treatment. PAS 16 does not apply to;
a) Property, plant and equipment classified as held for sale
b) A property classified as Investment Property
c) Biological assets related to agricultural activity other than bearer plants
d) The recognition and measurement of exploration and evaluation assets
e) Mineral rights and mineral reserves such as oil, natural gas and similar non-generative resources.
However, the Standard applies to property, plant and equipment used to develop or maintain the assets in
letter C to letter E. For example, machinery and equipment used in oil exploration is accounted as property,
plant and equipment within the scope of PAS 16.

A hotel property where the owner also manages the hotel is not an investment property and shall be classified
as property, plant and equipment and treated in accordance with PAS 16.
A building used for administrative purposes (an owner-occupied property) may generate some rent income from
the letting out of a part of the building. If the part rented out is insignificant relative to the building as a whole
and rental income is incidental to the use of the building, the entire building is classified as property, plant and
equipment. However, if the part rented out is considered significant and rental is an important source of
income to the entity, the part rented out should be treated as Investment Property within the scope of PAS 40,
and the other part used for administrative purpose treated as Property, plant and equipment.

Presentation is by Class - each item of property, plant and equipment shall be recorded separately in the
accounts of an entity. However, for presentation in the financial statements, they are aggregated and
presented by classes. A class of property, plant and equipment is a grouping of assets of a similar nature or
use in an entity’s operations. Examples of separate classes are:
a) Land f) motor vehicles
b) Land and buildings g) furniture and fittings
c) Machinery h) office equipment
d) Ships i) bearer plants, such as rubber trees and oil palms
e) aircraft

Measurement at Initial Recognition - is at Cost. The cost of an item of property, plant and equipment shall
comprise:
a) Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates.
b) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management; and
c) The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs either when the item is acquired, or as a consequence of
having used the item during a particular period, for purposes other than to produce inventories during the
period.

PPE acquired for Cash – the cost of an item of property, plant and equipment shall comprise its purchase
price (net of trade discounts and rebates) and other incidental costs incurred in connection with its acquisition
plus necessary costs incurred to bring the asset to its present location and condition and to prepare the asset
for its intended use. In arriving at the purchase price, any trade or cash discount shall be deducted,
irrespective of whether or not the discount is taken. In other words, the equivalent cash purchase price shall be
used.

Costs directly attributable to bringing the asset to its working condition may include:
a) Site preparation
b) Initial Delivery and handling costs
c) Installation and assembly costs
d) cost of testing whether the asset is functioning properly, after deducting
Administrative and general overhead expenses shall not be included in the cost of PPE. Start-up and pre-
production costs shall be excluded unless they are necessary to bring the asset to its working condition.
Relocation costs and exchange differences of payables related to the purchase of the asset are also excluded.

Self-Constructed Property, Plant and Equipment – the costs to be capitalized shall include all costs that
relate specifically to the construction of the asset (such as materials, labor, contractor’s costs, etc), and costs
that relate to the construction in general and can be allocated to the assets (such as engineering and technical
costs). Cost of borrowings, such as interest on a loan taken to finance the construction of the asset, shall be
included in the gross carrying amount of the asset. Borrowing costs can only be capitalized during the period of
construction, up to the point when the asset is ready for its intended use.
Non-monetary Consideration and Barter Trade – PAS 16 requires that the cost of an item of property,
plant and equipment acquired in exchange of non-monetary asset(s) shall be measured at its fair value unless;
a) The exchange lacks commercial substances; or
b) The fair value of neither the asset received nor the asset given up is reliably measurable
If the acquired asset is not measured at fair value, its cost is measured at the net carrying amount of the
asset given up.

An exchange transaction has commercial substance when:

1. The cash flows of the asset received differ from the cash flows of the asset transferred and the difference is
significant relative to the fair value of the asset exchanged.
2. The entity specific value of the portion of the entity’s operations affected by the transaction changes as a
result of the exchange is significant relative to the fair value of the asset exchanged. The entity specific
value is the present value of the cash flows an entity expects to arise from the continuing use of an asset
and from its disposal at the end of its useful life.

In most circumstances of barter-trade exchanges of non-monetary assets, it is expected that the

contracting parties must have commercial reasons of their exchange. The conditions of commercial
substance will be most likely be met because each contracting party would have its separate configuration
of future cash flows. Accordingly, the fair value basis shall be applied.

Trade-In Transactions – a purchase of an item of PPE paid partly by a trade-in transaction, tax rules would
treat the two as separate transactions, i.e. one for the purchase of a new PPE, and the other, for the sale of the
other PPE. Conventional practice follow more of the tax rule by recording the cost of the new asset at its
equivalent purchase price while the trade-in allowance granted by the dealer is regarded as for the sale value of
the old PPE. Under such circumstances, the fair value basis shall be applied as there must be commercial
reasons for the trade-in.

Property, Plant and Equipment acquired by issuing own equity shares or bonds - the cost of the
property, plant and equipment shall be its fair value or the fair value of the securities issued, whichever is more
clearly evident. For example, when property, plant and equipment acquired has a market value or a quoted
price, that value or price shall be used, notwithstanding that the entity’s own shares or bonds issued in the
exchange may have their own fair value. However, when the property, plant and equipment acquired has no
active market or quoted price, the cost of the asset is determined by reference to the fair value of the securities
issued in the exchange.

Subsequent Costs of Property Plant and Equipment- after the initial purchase or construction on the
property, plant and equipment expenditure will continue to be incurred over their useful lives to maintain and
repair the assets, to replace worn-out components, to upgrade the assets and /or to improve their performance.
The issue is whether these subsequent costs are to be treated as capital in nature or to be regarded as an
expense.

In the case of repairs and maintenance, it is clear that these costs shall be treated as revenue expenditure, this
is because repairs and maintenance are necessary to ensure that the assets are operating in their working
order. They do not add on or enhance the value of the property, plant and equipment.

In other cases, of subsequent expenditures such as those incurred for replacements and improvements the
dividing line between capital and revenue expenditures may not be clearly evident. The original standard took
the view that a subsequent expenditure can be capitalized only if it enhances the value of the property, plant
and equipment. For an enhancement, the original standard required that subsequent expenditures shall be
capitalized only if they increase the future benefits from the existing asset beyond its originally assessed
standard of performance.

Examples of increase future benefits include:

a. An extension in asset’s estimated life;
b. An increase in output capacity;
c. A substantial improvement in product quality or service potential, and
d. Significant reduction in previously assessed operating costs

Under the original standard, all other subsequent expenditures that do not meet the enhancement criteria shall
be charged to profit or loss as incurred. However, the dividing line between and enhancement and a mere
replacement is not clear, and this leads to controversies in the application of the principle. For example, cost of
replacement of a component part of a machine shall normally be treated as revenue expenditure and charged to
expense as incurred. This treatment would be appropriate if the replacement is of a same component and
merely puts the machine back to its working order. But if the worn-out component is being replaced by a more
modern and efficient component, shall the new component be treated as a mere replacement or can be treated
as an improvement? Also, how significant shall the enhancement be before it can qualify as representing an
increase in the originally assessed standard of performance?
Each Replacement is a New Item - for a significant item of property, plant and equipment, the total
expenditure shall be allocated to its component parts (component approach). Each part shall be accounted for
separately in terms of depreciation and derecognition. This component approach avoids the two-recognition
issue because any subsequent costs incurred to replace a component shall be treated as a new component.
Because each new component is treated as a new item of property, plant and equipment, and therefore only
one recognition principle is applied, the principle of initial recognition. The cost of the new component shall be
added to the carrying value of the related property, plant and equipment, while the carrying value of the old
component shall be taken out or derecognized

Replacement includes Major Inspection Cost – for some items of property, plant and equipment, a
condition for continuing to operate may require regular major inspection for faults regardless of whether parts
of the items are replaced. The cost of each major inspection is recognized in the carrying amount of the related
asset and accounted as a separate component and allocated over the period to the next major inspection.

Depreciation – is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciation of an asset begins when it is available for use, ie when it is in the location and condition necessary
for it to be capable of operating in the manner intended by management.
Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included
in a disposal group that is classified as held for sale) in accordance with PFRS 5 and the date that the asset is
derecognized. Therefore, depreciation does not cease when the asset becomes idle or retired from active use
unless the asset is fully depreciated. However, under the usage methods of depreciation, the depreciation can
be zero while there is no production.
The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if
expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting
estimate.
Depreciation is recognized even if the fair value of the asset exceeds its carrying value, as long as the asset’s
residual value does not exceed its carrying amount.
The depreciation amount of an asset is determined after deducting its residual value. In practice, the residual
value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable amount.

The residual value of an asset may increase to an amount equal to or greater than the carrying value of the
asset. If it does, the asset’s depreciation charge is zero unless and until its residual value subsequently
decreases to an amount below the asset’s carrying amount.

The depreciation method applied to an asset shall be reviewed at least at each financial year-end, if there has
been a significant change in the expected pattern of consumption of the future economic benefits embodied in
the asset, the method shall be changed to reflect the changed pattern. Such a change shall be accounted for as
a change in accounting estimate in accordance with PAS 8.

Derecognition – an item of property plant and equipment should be derecognized when:

a. It is disposed of.
b. No future economic benefits are expected from its use or disposal,

Gain or Loss on Derecognition:

IAS/PAS 16 requires that the gain or loss on derecognition of an item of property, plant and equipment is the
difference between the estimated net disposal proceeds and the carrying amount. The consideration receivable
or received is measured at fair value. Therefore, if payment is deferred, the consideration is recognized at the
cash price equivalent. The difference between the cash price equivalent and the actual amount of receivable is
treated as interest receivable under IAS/PAS 18 over the period of credit. The gain or loss is reported in the
profit or loss for the period in which derecognition occurs. The only exception is where IAS/PAS 17 requires a
different treatment on sale and leaseback.

However, an entity that, in the course of its ordinary activities, routinely sells items of property, plant and
equipment that it has held for rental to others shall transfer such assets to inventories at their carrying amount
when they cease to be rented and become held for sale. The proceeds from the sale of such assets shall be
recognized as revenue in accordance with IFRS 15 Revenue from Contracts with Customers. IFRS 5 does not
apply when assets that are held for sale in the ordinary course of business are transferred to inventories.

Exploration for and Evaluation of Mineral Resources - IFRS 6

Exploration and evaluation (E&E) assets – are merely those E&E expenditures that have been capitalized
as assets in accordance with the entity’s accounting policy.

Exploration and evaluation expenditures – relates to costs incurred on the exploration and evaluation of
potential mineral reserves and resources and includes cost such as exploratory drilling and sample testing and
the costs of pre-feasibility studies. Exploration and evaluation expenditure for each area of interest other than
that acquired from the purchase of another mining company is carried forward as an asset provided that one of
the following conditions is met:
1.Such costs are expected to be recouped in full through successful development and exploration of the area of
interest or alternatively, by its sale; or
2.Exploration and evaluation activities in the area of interest have not yet reached a stage which permits a
reasonable assessment of the existence or otherwise of economically recoverable reserves and active and
significant operations in relation to the area are continuing or planned for the future.

Purchased exploration and evaluation assets are recognized as assets at their cost of acquisition or at fair value
if purchased as part of a business combination.

Measurement of exploration and evaluation assets:

Initial recognition measurement – exploration and evaluation assets shall be measured at costs.

Elements of cost of exploration and evaluation assets

The following expenditures that might be included in the initial measurement of exploration and evaluation
asset (the list is not exhaustive)
a. acquisition of rights to explore
b. topographical, geological, geochemical and geophysical studies
c. exploratory drilling
d. trenching
e. sampling
f. activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral
resource

Costs related to activities undertaken prior to commencement of E&E activities, which is presumed to be
before the entity has obtained the legal rights to explore a specific area, and costs incurred for the
development of mineral resources after the E&E phase are not covered by the standard and therefore
should be accounted for in accordance with other applicable IFRS and the Framework. In practice, this
usually results in the immediate expensing of costs incurred prior to obtaining exploration licenses and the
treatment of development costs as intangible assets accounted for under IAS 38 Intangible assets.

Obligation for removal and restoration:

Obligations for removal and restoration incurred as a result of E&E activities are recognized in accordance with
IAS 37 Provisions, contingent liabilities and contingent assets.. This means if an entity has an obligation to
restore an area of interest damaged by its E&E activities in that area, it must recognize a liability for that
restoration as the related damage is incurred.

Subsequent measurement of exploration and evaluation assets:

Exploration and evaluation assets must be measured using the cost or revaluation model. The revaluation
model in IAS 38 requires the existence of an active market, whereas the revaluation model in IAS 16 only
requires that fair value be reliably measurable. Note that regardless of which model is selected, cost or
revaluation, it must be applied consistently.

Impairment of exploration and evaluation assets:

E&E assets shall be assessed for impairment when facts and circumstances suggest that the carrying amount of
an exploration and evaluation asset may exceed its recoverable amount. When facts and circumstances
suggest that the carrying amount exceeds the recoverable amount and entity shall measure, present and
disclose any resulting impairment loss in accordance with IAS 36 except as provided in IFRS/PFRS 6 par. 21.

Classification of exploration and evaluation assets:

An entity shall classify exploration and evaluation assets as tangible or intangible according to the nature of
the assets acquired and apply the classification consistently. Some exploration assets are treated as intangible
such as drilling rights whereas others are tangible such as vehicles and drilling rigs. To the extent that a
tangible asset is consumed in developing an intangible asset, the amount reflecting that consumption is part of
the cost of the intangible asset. However, using a tangible asset to develop an intangible asset does not
change a tangible asset into an intangible asset.

Depletion – is a systematic allocation of the cost of the natural resource or wasting asset. The computation of
depletion expense is an adaptation of the productive output method of depreciation.
When structures and improvements are constructed in connection with the removal of natural resources and
their usefulness is limited to the duration of the project, it is reasonable to recognize the depreciation on such
properties using the output method. However, when the structures and improvements provide benefits
expected to terminate prior to the exhaustion of the natural resource, the cost of such improvements should be
allocated on the basis of the expected number of units to be extracted or produced during the life of the
improvements or on a time basis, whichever is more suitable.

Equipment used in the exploration and development activity should be depreciated using the shorter of the life
of the natural resource or life of the equipment, provided the equipment will be of no use after the natural
resource has been totally exhausted. However, if the equipment is of a significant use after the natural activity
is over, the equipment should be depreciated using its own estimated life.
Revaluation of Property, Plant and Equipment:
After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried at a
revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation
and any subsequent impairment losses. Revaluation shall be made with sufficient regularity to ensure that the
carrying amount does not differ materially from that which would be determined using fair value at balance
sheet date.

The frequency of revaluation depends upon the changes in fair values of the items of property, plant and
equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount,
a further revaluation is required. Some items of PPE experience significant and volatile changes in fair value,
thus, necessitating annual revaluation while items of PPE with only insignificant changes in fair value may be
necessary to revalue every three or five years.

When an item of PPE is revalued, any accumulated depreciation at the date of the revaluation is treated in one
of the following ways: (a) restated proportionately with the change in the gross carrying amount of the asset so
that the carrying amount of the asset after revaluation equals its revalued amount (this method is often used
when an asset is revalued by means of applying index to its depreciated replacement cost), (b) eliminated
against the gross carrying amount of the asset and the net amount restated to the revalued amount of the
asset (this method is often used for buildings).

If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be credited directly to
equity under the heading revaluation surplus, however, the increase shall be recognized in profit or loss to the
extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

If an asset’s carrying amount is decreased as a result of revaluation, the decrease shall be recognized in profit
or loss; however, the decrease shall be debited directly to equity under the heading revaluation surplus to the
extent of the credit balance existing in the revaluation surplus in respect of that asset.

The revaluation surplus included in the equity in respect of an item of PPE may be transferred to retained
earnings/accumulated profits and losses when the asset is derecognized. This may involve transferring the
whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred
as the asset is used by an entity. In such a case, the difference between depreciation based on the revalued
carrying amount of the asset and depreciation based on the asset’s original cost shall be transferred directly to
Accumulated Profits & Losses/Retained Earnings. The transfers from revaluation surplus to retained
earnings/accumulated profits and losses shall be a debit to Revaluation Surplus and a credit to Accumulated
Profits & Losses account.

Impairment of Assets (Individual Asset):

a. Measurement of recoverable amount - is the higher of an asset’s fair value less cost to sell and value in
use.
b. The recoverable amount is determined for an individual asset, unless the asset does not generate cash
inflows from continuing use that are largely independent of those from other assets or groups of assets. If
this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs.
c. The fair value less cost to sell is a price in binding sale agreement in an arm’s length transaction,
adjusted for incremental costs that would be directly attributable to the disposal of the asset. If there is no
binding sale agreement but an asset is traded in an active market, fair value less cost to sell is the asset’s
market price less the costs of disposal. The appropriate market price is usually the current bid price.
When current bid prices are unavailable, the price of the most recent transaction may provide a basis from
which to estimate fair value less cost to sell, provided that there has not been a significant change in
economic circumstances between the transaction date and the date as at which the estimate is made (PAS
36, paragraphs 25 and 26).

If there is no binding sale agreement or active market for an asset, fair value less cost to sell is based on
the best information available to reflect the amount that an entity could obtain, at the balance sheet date,
from the disposal of the asset in an arm’s length transactions between knowledgeable, willing parties, after
deducting the costs of disposal. In determining this amount, an entity considers the outcome of recent
transactions for similar assets within the same industry. Fair value less cost to sell does not reflect a forced
sale, unless management is compelled to sell immediately (PAS 36, paragraph 27).

Cost of disposal, other than those that have already been recognized as liabilities are deducted in
determining fair value less cost to sell. Example of such costs is legal costs, stamp duty and similar
transaction taxes, cost of removing the asset, and direct incremental costs to bring the asset into condition
for sale. However, termination benefits (as defined in PAS 19) and costs associated with reducing or
reorganizing a business following the disposal of an asset are not direct incremental costs to dispose of the
asset.

d. Value in use is the present value of estimated future cash flows expected to arise from the continuing use
of an asset and from its disposal at the end of its useful life.
 Estimate of future cash inflows and outflows to be derived from continuing use of the asset and from its
ultimate disposal, should include the following:
a. Cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the
asset (including cash outflows to prepare the asset for use) and that can be reasonably attributed or
allocated on a reasonable and consistent basis.
b. Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.
c. Cash outflows include future overheads that can be attributed or allocated on a reasonable and
consistent basis, to the use of the asset.
d. Cash flows for future expenditure necessary to maintain or sustain an asset at its original assessed
standard.
e. Cash flows should include the cost savings and other benefits from the restructuring of the asset where
the company is committed to the restructuring.

Estimate Of Future Cash Flows Does Not Include The Following:

a. Cash inflows from assets that generate cash inflows that are largely independent of the cash inflows
from the asset under review (ex. Financial assets such as Receivables);
b. Cash outflows that relate to obligations that have already been recognized as liabilities (ex. Payables,
pensions or provisions);
c. Cash flows for future restructuring to which the company is not yet committed;
d. Cash flows for future expenditure that will improve or enhance the asset in excess of its original
assessed standard of performance;
e. Cash inflows or outflows from financing activities;
f. Income tax receipts or payments.

e. The discount rate or rates should be a pretax rate or rates that reflect(s) current market assessments of the
time value of money and the risks specific to the asset.
f. If the recoverable amount of an asset is less than its carrying amount, the carrying amount should be
reduced to its recoverable amount. The reduction is an impairment loss.
g. An impairment loss on a revalued asset is recognized as an expense in the income statement. However, an
impairment loss on a revalued asset is recognized directly against any revaluation surplus for the asset to
the extent that the impairment loss does not exceed the amount held in the revaluation surplus for that
same asset.
h. After the recognition of an impairment loss, the depreciation charge for the asset should be adjusted in
future periods to allocate the asset’s revised carrying amount, less its residual value (if any) on systematic
basis over its remaining useful life.

Reversal of Impairment Loss (Individual Asset):

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss
shall not exceed the carrying amount that would have been determined (net of amortization or depreciation)
had no impairment loss been recognized for the asset in prior years.

A reversal of an impairment loss for an asset other than goodwill shall be recognized immediately in profit or
loss, unless the asset is carried at revalued amount. Any reversal of an impairment loss of a revalued asset
shall be treated as a revaluation increase and credited directly to equity under the heading revaluation surplus.

Reversal of Impairment Loss for an Individual Asset:

Cost model - the reversal should not exceed the carrying value that would have been determined (net of
accumulated depreciation or amortization) had no impairment loss been recognized for the asset in prior years.
The amount of reversal should be recognized immediately in the income statement.

Revaluation model – the amount of reversal of impairment loss on a revalued asset is credited directly to
equity under the heading revaluation surplus, however, to the extent that an impairment loss on the same
asset was previously recognized as an expense in the income statement. A reversal of that impairment loss is
recognized as income in the income statement.

Impairment loss (Group of Assets):

An impairment loss should be recognized for a cash-generating unit if, and only if, its recoverable amount of the
unit (group of units) is less than its carrying amount of the unit (group of units). The impairment loss should
be allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order:

First, to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and
then to the other assets of the unit (group of units) on a pro-rata basis based on the carrying amount of each
asset in the unit (group units).
In allocating an impairment loss, the carrying amount of an asset should not be reduced below the
highest of
(a) Its fair value less cost to sell (if determinable) (b) its value in use (if determinable) and (c) zero.
The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated
pro rata to the other assets of the unit (group of units).
The goodwill allocated to a cash-generating unit is reduced before reducing the carrying amount of the other
assets of the unit because of its nature.
Reversal of an Impairment Loss for a Cash-Generating Unit:
The reversal of an impairment loss for cash generating unit shall be allocated to the assets of the unit, except
for goodwill, on a pro rata based on the carrying amounts of those assets. These increases in carrying amounts
shall be treated as reversals of impairment losses for individual assets and recognized in profit or loss, unless
the assets are carried at revalued amount, that any reversal of impairment on revalued asset or assets shall be
treated as revaluation increase and credited directly to equity.
In allocating a reversal of an impairment loss for a cash-generating unit, the carrying amount of an asset shall
not be increased above the lower of: (a) its recoverable amount (if determinable), (b) the carrying amount that
would have been determined (net of accumulated depreciation or amortization) had no impairment loss been
recognized for the asset in prior periods.
The amount of reversal of the impairment loss that would otherwise have been allocated to the asset shall be
allocated pro rata to the other assets of the unit, except for goodwill.
Differences between IFRS for SMEs and FULL IFRS
IFRS for SMEs Full IFRS
No scope exclusion for PPE held for sale and Scope exclusion for PPE held for sale and
exploration and evaluation assets exploration and evaluation assets
Applies to PPE and investment property whose Only applicable to PPE , Investment property
fair value cannot be measured reliably without carried at cost is depreciated by following the
undue cost or effort principles in IAS 16 – Property, plant and
equipment and not reclassified
The scope of any replacement part is capitalized Capitalization of replacement parts are based on
if the replacement is expected to provide the normal recognition criteria
incremental future benefits
If the major components of an item of PPE have If the major components of an item of PPE have
significantly different patterns of consumption of significantly different patterns of consumption of
economic benefits, an entity must allocate the economic benefits, an entity must allocate the
initial cost of the asset to its major components initial cost of the asset to its major components
and depreciate each component separately over and depreciate each component separately over
its useful life its useful life.
Borrowing costs are not capitalized Borrowing costs are capitalized
The cost model or revaluation model is applied The cost or revaluation model is applied
Re-assessment is only applicable when there is Annual re-assessment of the residual value,
an indication of changes in the residual value, depreciation method, or useful life of an item of
depreciation method, or useful life of an item of PPE is required
PPE
When an investment property is reclassified due When an investment property is reclassified to
to a reliable estimate of the property not being PPE due to reliable estimate of the property not
determinable without undue cost or effort, there being determinable, the residual value must be
is no prescription or limitation on the residual zero for depreciation purposes
value for depreciation purposes
A plan to dispose of an asset before a previous Non-current assets held for sale are classified
expected date is an indication of impairment separately limited to the fair value less cost to
sell
I: Initial Recognition

1. Plant assets may properly include

a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant site.
d. None of these answer choices are correct.
2. Which of the following is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Long-term in nature
3. Which of these is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for use in operations
c. Long-term in nature
d. All of these are major characteristics of a plant asset.
4. Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is located with the
plan to tear down the Emporia Hotel and build a new luxury hotel on the site. The cost of the Emporia
Hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down.
b. written off as loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
5. The cost of land does not include
a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.
6. The cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
7. If a corporation purchases a lot and building and subsequently tears down the building and uses the
property as a parking lot, the proper accounting treatment of the cost of the building would depend on
a. the significance of cost allocated to the building in relation to combined cost of the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was acquired.
8. The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a
charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on income).
d. accumulated depreciation--machinery.
9. Fences and parking lots are reported on the statement of financial position as
a. current assets.
b. land improvements.
c. land.
d. property and equipment.
10. To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing
its own building should be
a. allocated on the basis of lost production.
b. eliminated completely from the cost of the asset.
c. allocated on an opportunity cost basis.
d. allocated on a pro rata basis between the asset and normal operations.
11. Which of the following costs are capitalized for self-constructed assets?
a. Materials and labor only
b. Labor and overhead only
c. Materials and overhead only
d. Materials, labor, and overhead
12. Which of the following assets do not qualify for capitalization of interest costs incurred during
construction of the assets?
a. Assets under construction for a company's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them for their intended
use.
13. Assets that qualify for interest cost capitalization include
a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.
14. Interest revenue earned on specific borrowings for qualifying assets
a. reduces the cost of the qualifying asset.
b. reduces interest expense reported on the income statement.
c. increases equity in the period earned.
d. None of these answer choices are correct.
15. Which of the following is required by IFRS?
a. Resources acquired through government grants must be recorded at cost.
b. Resources acquired through government grants must be recorded at fair value.
c. Resources acquired through government grants must be accounted for using the capital approach.
d. Resources acquired through government grants must be accounted for using the income approach.
16. If the cost of the asset is recorded net of the government grant,
a. equity will likely be overstated.
b. liabilities will likely be overstated.
c. assets will likely be understated.
d. revenues will likely be understated.
17. Which of the following non-monetary exchange transactions has commercial substance?
a. Exchange of assets with no difference in future cash flows.
b. Exchange of products by companies in the same line of business with no difference in future cash
flows.
c. Exchange of assets with a difference in future cash flows.
d. Exchange of an equivalent interest in similar productive assets that causes the companies involved
to remain in essentially the same economic position.
18. When cash is involved in an exchange having commercial substance.
a. gains or losses are recognized in their entirety.
b. a gain or loss is computed by comparing the fair value of the asset received with the fair value of
the asset given up.
c. only gains should be recognized.
d. only losses should be recognized.
19. The cost of a non-monetary asset acquired in exchange for another non-monetary asset and the
exchange has commercial substance is usually recorded at
a. the fair value of the asset given up, and a gain or loss is recognized.
b. the fair value of the asset given up, and a gain but not a loss may be recognized.
c. the fair value of the asset received if it is equally reliable as the fair value of the asset given up.
d. either the fair value of the asset given up or the asset received, whichever one results in the largest
gain (smallest loss) to the company.
20. Plant assets purchased on long-term credit contracts should be accounted for at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these answer choices are correct.
21. When a plant asset is acquired by issuance of ordinary shares, the cost of the plant asset is properly
measured by the
a. par value of the shares.
b. stated value of the shares.
c. book value of the shares.
d. fair value of the shares.
22. When a closely held corporation issues preference shares for land, the land should be recorded at the
a. total par value of the shares issued.
b. total book value of the shares issued.
c. total liquidating value of the shares issued.
d. fair value of the land.
23. Which of the following statements is true regarding capitalization of interest?
a. Interest cost capitalized in connection with the purchase of land to be used as a building site should
be debited to the land account and not to the building account.
b. The amount of interest cost capitalized during the period should not exceed the actual interest
cost incurred.
c. When excess borrowed funds not immediately needed for construction are temporarily invested, any
interest earned should be recorded as interest revenue.
d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average
interest rate by the amount of average accumulated expenditures on qualifying assets during the
period.
26. Chandler Company purchased equipment for P10,000. Sales tax on the purchase was P500. Other costs
incurred were freight charges of P200, repairs of P350 for damage during installation, and installation
costs of P225. What is the cost of the equipment?
a. P10,000 c. P10,925
b. P10,500 d. P11,275

27. On February 2, 2020 Youth Company purchased a machine from Elders Corporation in exchange for a
non-interest bearing note requiring eight payments of P80,000. The first payment is to be made on
February 2, 2020, and the others are due annually on February 2. At date of issuance, the prevailing
rate of interest for this type of note was 11%. Present value (PV) factors are as follows:
Period PV of ordinary annuity of 1 at 11% PV of annuity in advance of 1 at
11%
7 4.712 5.231
8 5.146 5.712
What is the initial carrying amount of the machine to be reported by Youth Company on February 2,
2020?
a. P376,960 c. P418,480
b. P411,680 d. P456,960
28. During self-construction of an asset by V Company, the following were among the costs incurred:
Fixed overhead for the year P1,000,000
Portion of P1,000,000 fixed overhead that would
be allocated to asset if it were normal production 40,000
Variable overhead attributable to self-construction 35,000
What amount of overhead should be included in the cost of the self-constructed asset?
a. P0 c. P40,000
b. P35,000 d. P75,000

29. Herald Company received P40,000 in cash and a used computer with a fair value of P120,000 from Page
Corporation for Herald Company's existing computer having a fair value of P160,000 and an
undepreciated cost of P150,000 recorded on its books. The transaction has commercial substance. How
much gain should Herald recognize on this exchange, and at what amount should the acquired
computer be recorded, respectively?
a. P0 and P110,000 c. P10,000 and P120,000
b. P40,000 and P110,000 d. P40,000 and P150,000

30. On December 1, Miser Corporation exchanged 2,000 shares of its P25 par value ordinary shares held in
treasury for a parcel of land to be held for a future plant site. The treasury shares were acquired by
Miser at a cost of P40 per share, and on the exchange date the ordinary shares of Miser had a fair value
of P50 per share. Miser received P6,000 for selling scrap when an existing building on the property was
removed from the site. Based on these facts, the land should be capitalized at
a. P74,000 c. P 94,000
b. P80,000 d. P100,000

31. Storm Corporation purchased a new machine on October 31, 2020. A P120,00 down payment was made
and three monthly installments of P360,000 each are to be made beginning on November 30, 2020. The
cash price would have been P1,160,000. Storm paid no installation charges under the monthly payment
plan but a P20,000 installation charge would have been incurred with a cash purchase. The amount to
be capitalized as the cost of the machine on October 31, 2020 would be
a. P1,160,000 c. P1,200,000
b. P1,180,000 d. P,1220,000
II: Accounting for Depreciation and Depletion
1. Which of the following is true of depreciation accounting?
a. It is not a matter of valuation.
b. It is part of the matching of revenues and expenses.
c. It retains funds by reducing income taxes and dividends.
d. All of these answer choices are correct.
2. Which of the following principles best describes the conceptual rationale for the methods of matching
depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition

3. Which of the following most accurately reflects the concept of depreciation as used in accounting?
a. The process of charging the decline in value of an economic resource to income in the period in
which the benefit occurred.
b. The process of allocating the cost of tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the use of the asset.
c. A method of allocating asset cost to an expense account in a manner which closely matches the
physical deterioration of the tangible asset involved.
d. An accounting concept that allocates the portion of an asset used up during the year to the contra
asset account for the purpose of properly recording the fair market value of tangible assets.
4. The major difference between the service life of an asset and its physical life is that
a. service life refers to the time an asset will be used by a company and physical life refers to how
long the asset will last.
b. physical life is the life of an asset without consideration of residual value and service life requires
the use of residual value.
c. physical life is always longer than service life.
d. service life refers to the length of time an asset is of use to its original owner, while physical life
refers to how long the asset will be used by all owners.

5. The term "depreciable base," or "depreciation base," as it is used in accounting, refers to

a. the total amount to be charged (debited) to expense over an asset's useful life.
b. the cost of the asset less the related depreciation recorded to date.
c. the estimated fair value of the asset at the end of its useful life.
d. the acquisition cost of the asset.

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6. Economic factors that shorten the service life of an asset include
a. obsolescence.
b. supersession.
c. inadequacy.
d. All of these answer choices are correct.

7. Which of the following is not one of the basic questions that must be answered before the amount of
depreciation charge can be computed?
a. What depreciable base is to be used for the asset?
b. What is the asset's useful life?
c. What method of cost apportionment is best for this asset?
d. What product or service is the asset related to?
8. Which of the following is a realistic assumption of the straight-line method of depreciation?
a. The asset's economic usefulness is the same each year.
b. The repair and maintenance expense is essentially the same each period.
c. The rate of return analysis is enhanced using the straight-line method.
d. Depreciation is a function of time rather than a function of usage.
9. The activity method of depreciation
a. is a variable charge approach.
b. assumes that depreciation is a function of the passage of time.
c. conceptually associates cost in terms of input measures.
d. All of these answer choices are correct.
10. For income statement purposes, depreciation is a variable expense if the depreciation method used is
a. units-of-production. c. sum-of-the-years'-digits.
b. straight-line. d. declining-balance.
11. If an industrial firm uses the units-of-production method for computing depreciation on its only plant
asset, factory machinery, the credit to accumulated depreciation from period to period during the life of
the firm will
a. be constant.
b. vary with unit sales.
c. vary with sales revenue.
d. vary with production.
12. Use of the double-declining balance method
a. results in a decreasing charge to depreciation expense.
b. means residual value is not deducted in computing the depreciation base.
c. means the book value should not be reduced below residual value.
d. All of these answer choices are correct.
13. Use of the sum-of-the-years'-digits method
a. results in residual value being ignored.
b. means the denominator is the years remaining at the beginning of the year.
c. means the book value should not be reduced below residual value.
d. All of these answer choices are correct.
14. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal
axis. Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits
depreciation, respectively, be drawn?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right
15. A principal objection to the straight-line method of depreciation is that it
a. provides for the declining productivity of an aging asset.
b. ignores variations in the rate of asset use.
c. tends to result in a constant rate of return on a diminishing investment base.
d. gives smaller periodic write-offs than decreasing charge methods.
16. When depreciation is computed for partial periods under a diminishing-charge depreciation method, it is
necessary to
a. charge a full year's depreciation to the year of acquisition.
b. determine depreciation expense for the full year and then prorate the expense between the two
periods involved.
c. use the straight-line method for the year in which the asset is sold or otherwise disposed of.
d. use a residual value equal to the first year's partial depreciation charge.
17. Depreciation is normally computed on the basis of the nearest
a. full month and to the nearest cent.
b. full month and to the nearest peso.
c. day and to the nearest cent.
d. day and to the nearest dollar.
18. Myers Company acquired machinery on January 1, 2015 which it depreciated under the straight-line
method with an estimated life of fifteen years and no residual value. On January 1, 2020, Myers
estimated that the remaining life of this machinery was six years with no residual value. How should
this change be accounted for by Myers?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2020
c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2020
d. By continuing to depreciate the machinery over the original fifteen year life

19. On January 1, 2015, Indians Corporation bought a factory equipment for P924,000 salvage value was
estimated at P24,000. The asset will be depreciated over 10 years using the double declining balance
method. How much is the total accumulated depreciation to be reported in the balance sheet on
December 31, 2019?
a. P450,912 c. P621,224
b. P545,530 d. P681,779

20. On January 1, 2018, Graham Company purchased a new machine for P2,100,000. The new machine has
an estimated useful life of nine years and the residual value was estimated to be P75,000. Depreciation
was computed on the sum-of-the-years'-digits method. What amount should be shown in Graham's
balance sheet at December 31, 2019, net of accumulated depreciation, for this machine?
a. P1,695,000 c. P1,306,000
b. P1,335,000 d. P1,244,250

21. On January 2, 2016, Stacy Company acquired equipment to be used in its manufacturing operations.
The equipment has an estimated useful life of 10 years and an estimated residual value of P15,000. The
depreciation applicable to this equipment was P70,000 for 2019, computed under the sum-of-the-
years'-digits method. What was the acquisition cost of the equipment?
a. P535,000 c. P550,000
b. P541,667 d. P565,000

22. Gardner Corporation purchased a truck at the beginning of 2020 for P2,250,000. The truck is estimated
to have a residual value of P90,000 and a useful life of 120,000 miles. It was driven 18,000 miles in
2020 and 32,000 miles in 2021. What is the depreciation expense for 2021?
a. P576,000 c. P 960,000
b. P600,000 d. P1,600,000
23. During 2020, Eldred Corporation acquired a mineral mine for P1,500,000 of which P200,000 was
ascribed to land value after the mineral has been removed. Geological surveys have indicated that 10
million units of the mineral could be extracted. During 2020, 1,500,000 units were extracted and
1,200,000 units were sold. What is the amount of depletion expensed for 2020?
a. P130,000 c. P180,000
b. P156,000 d. P195,000

24. In March, 2020,Valley Mines Co. purchased a coal mine for P6,000,000. Removable coal is estimated at
1,500,000 tons. Valley is required to restore the land at an estimated cost of P720,000, and the land
should have a value of P630,000. The company incurred P1,500,000 of development costs preparing
the mine for production. During 2020, 450,000 tons were removed and 300,000 tons were sold. The
total amount of depletion that Valley should record for 2020 is
a. P1,374,000 c. P2,061,000
b. P1,518,000 d. P2,277,000

III: Subsequent Costs

1. An improvement made to a machine increased its fair value and its production capacity by 25% without
extending the machine's useful life. The cost of the improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machinery account.
d. allocated between accumulated depreciation and the machinery account.

2. An improvement made to a machine increased its fair value and its production capacity by 25% without
extending the machine's useful life. The cost of the improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machinery account.
d. allocated between accumulated depreciation and the machinery account.
3. Which of the following is a capital expenditure?
a. Payment of an account payable
b. Retirement of bonds payable
c. Payment of income taxes
d. None of these answer choices are correct

4. Which of the following is not a capital expenditure?

a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement

5. In accounting for plant assets, which of the following outlays made subsequent to acquisition should be
fully expensed in the period the expenditure is made?
a. Expenditure made to increase the efficiency or effectiveness of an existing asset
b. Expenditure made to extend the useful life of an existing asset beyond the time frame originally
anticipated
c. Expenditure made to maintain an existing asset so that it can function in the manner intended
d. Expenditure made to add new asset services

6. An expenditure made in connection with a machine being used by a company should be

a. expensed immediately if it merely extends the useful life but does not improve the quality.
b. expensed immediately if it merely improves the quality but does not extend the useful life.
c. capitalized if it maintains the machine in normal operating condition.
d. capitalized if it increases the quantity of units produced by the machine

7. Rivera Company purchased a tooling machine on January 3, 2013 for P500,000. The machine was being
depreciated on the straight-line method over an estimated useful life of 10 years, with no residual
value. At the beginning of 2020, the company paid P125,000 to overhaul the machine. As a result of
this improvement, the company estimated that the useful life of the machine would be extended an
additional 5 years (15 years total). What should be the depreciation expense recorded for the machine
in 2020?
a. P34,375 c. P50,000
b. P41,667 d. P55,000

8. Extreme Company acquired a building at a cost of P50,000,000 10 years ago. The building is accounted
for as a single unit that includes the lift and elevator equipment. The carrying amount of the building
now is P40,000,000 (P50,000,000 cost less P10,000,000 accumulated depreciation). Extreme Company
replaces the lift and elevator system at a replacement cost of P5,000,000. It is not practicable to
determine the original cost of the old lift and elevator system. What amount should be charged against
profit or loss as a result of the replacement of the old lift and elevator system?
a. none c. P4,000,000
b. P1,000,000 d. P5,000,000

9. Grant Company has acquired a plant machine and plant equipment on January 2, 2018. The cost of the
plant machine (including installation cost and commissioning cost), P80,000,000 and the cost of the
plant equipment is P20,000,000. Also on January 2, 2018, Grant Company incurred major inspection
cost in the amount of P3,000,000. The plant machine produces chemical products that are sold to
overseas customers. As a condition to operate the plant machine, regular major inspection for faults
are performed every 3 years. The life of the plant machine is 10 years while the plant equipment 5
years. The company uses the straight line method of depreciation. The replacement cost of the
component parts increase by 20% when they are replaced. Replacement costs are incurred at the end
of the third year. What is the total carrying value of the manufacturing plant (plant machine, plant
equipment and major inspection) as of December 31, 2020?
a. P64,000,000 c. P67,600,000
b. P67,000,000 d. P68,000,000

IV: Impairment Loss and Impairnent Reversal (Recovery)

1. Lynch Printing Company determines that a printing press used in its operations has suffered an
impairment in value because of technological changes. An entry to record the impairment should
a. recognize extra depreciation expense for the period.
b. include a credit to the equipment accumulated depreciation account.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.
2. All of the following are true with regard to impairment testing of long-lived assets except:
a. If impairment indicators are present, the company must conduct an impairment test.
b. The impairment test compares the asset’s carrying value with the lower of its fair value
less cost to sell and its value-in-use.
c. If the recoverable amount is lower than the carrying value, an impairment loss will be reported on
the period’s income statement.
d. If either the fair value less cost to sell or the value-in-use is higher than the carrying amount, no
impairment loss will be recorded.

3. All of the following are true of the recoverable amount used in the impairment test of a long-lived asset
except:
a. An asset’s recoverable amount is the lower of its value-in-use and its fair value less cost to sell.
b. An asset’s recoverable amount is the higher of its fair value less cost to sell and its value-in-use.
c. The recoverable amount is calculated as the asset’s value in use less costs to sell.
d. If an asset’s recoverable amount is higher than the carrying amount, no impairment loss will be
reported on the period’s income statement.

4. Roman Corporation owns machinery with a book value of P3,800,000. The machinery has a fair value
less costs to sell of P3,500,000, and its value-in-use is P3,400,000. Roman should recognize a loss on
impairment of
a. P0 c. P300,000
b. P100,000 d. P400,000

5. On January 1, 2020, W. Poon Inc. purchased equipment with a cost of P4,668,000 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 P3,600,000. The asset’s value-in-use is estimated to be P3,690,000. There is no change
in the asset’s useful life or salvage value. The 2021 income statement will report Loss on Impairment of
a. P0 c. P290,000
b. P200,000 d. P300,000

6. On January 2, 2020, Q. Tong Inc. purchased equipment with a cost of P10,440,000, a useful life of 10
years and no salvage value. The Company uses straight-line depreciation. At December 31, 2020 and
December 31, 2021, the company determines that impairment indicators are present. The following
information is available for impairment testing at each year end:

12/31/2020 12/31/2021
Fair value less cost to sell P9,315,000 P8,350,000
Value-in-use P9,351,000 P8,315,000

There is no change in the asset’s useful life or salvage value. The 2021 income statement will report
a. Recovery of Impairment Loss of P3,889
b. Impairment Loss of P10,000. .
c. Recovery of Impairment Loss of P38,000
d. Recovery of Impairment Loss of P40,000

7. The following information is provided for the impairment of a CGU as at the reporting date of Dec. 31,
2020:
Accounts Carrying value Fair value less cost to sell
Goodwill P1,000,000 None
Machinery 2,000,000 P1,400,000
Computer equipment 400,000 350,000

Based on the discounted cash flow method, the recoverable amount of the cash generating unit was
determined to be P1,800,000. What is the amount of impairment loss that should be allocated to the
machinery?
a. none c. P550,000
b. P500,000 d. P600,000

8. On December 31, 2017, a manufacturing plant with a carrying amount of P40,000,000 (cost of
P50,000,000 less accumulated depreciation of P10,000,000) was tested for impairment. An impairment
loss of P12,000,000 was recognized and the basis of the recoverable amount was the estimated fair
value less costs to sell of P28,000,000. The plant had a remaining useful life of 10 years. On
December 31, 2019, there are indications that the impairment loss recognized in 2017 may be
reversed. The value in use is estimated at P35,000,000 whilst the fair value less costs to sell is
estimated at P30,000,000. What is the amount of impairment reversal should be recognized on
December 31, 2019?
a. none c. P 9,600,000
b. P2,400,000 d. P12,000,000
V: Revaluation
1. Under IFRS, how is the account revaluation surplus reported?
a. As “other revenues and expenses” on the income statement.
b. As part of other comprehensive income which can be reported presented in separate
statement, combined with income statement, or in changes in stockholders’ equity statement.
c. It is included with Reserves in the stockholders’ equity section of the Statement of Financial
Position.
d. The account is not reported in the financial statements.

2. Simpson Company applies revaluation accounting to plant assets with a carrying value of P800,000, a
useful life of 4 years, and no salvage value. Depreciation is calculated on the straight-line basis. At the
end of year 1, independent appraisers determine that the asset has a fair value of P750,000.

Question 1: The journal entry to record depreciation for year one will include a
a. debit to Accumulated Depreciation for P200,000.
b. debit to Depreciation Expense for P50,000.
c. credit to Accumulated Depreciation for P50,000.
d. debit to Depreciation Expense for P200,000.

Question 2: The journal entry to adjust the plant assets to fair value and record revaluation surplus in
year one will include a
a. debit to Accumulated Depreciation for P50,000.
b. credit to Depreciation Expense for P150,000.
c. credit to Plant Assets for P150,000.
d. credit to Revaluation Surplus for P150,000.

Question 3: The financial statements for year one will include the following information
a. Accumulated depreciation P200,000.
b. Depreciation expense P50,000.
c. Plant assets P750,000.
d. Revaluation surplus P50,000.

Question 4: The entry to record depreciation for this same asset in year two will include a
a. debit to Accumulated Depreciation for P200,000.
b. debit to Depreciation Expense for P250,000.
c. credit to Accumulated Depreciation for P150,000.
d. debit to Depreciation Expense for P200,000.
.
VI: Disposal
1. A plant asset with a five-year estimated useful life and no residual value is sold at the end of the second
year of its useful life. How would using the sum-of-the-years'-digits method of depreciation instead of
the double-declining balance method of depreciation affect a gain or loss on the sale of the plant asset?
Gain Loss
a. Decrease Decrease
b. Decrease Increase
c. Increase Decrease
d. Increase Increase

2. On January 1, 2012, Mill Corporation purchased for P152,000, equipment having a useful life of ten
years and an estimated salvage value of P8,000. Mill has recorded monthly depreciation of the
equipment on the straight-line method. On December 31, 2020, the equipment was sold for P28,000.
As a result of this sale, Mill should recognize a gain of
a. P0 c. P13,600
b. P5,600 d. P28,000
 INTANGIBLE ASSETS
An Intangible asset – is a long term asset that is non-monetary in nature and without physical existence, its
value dependent on the rights or benefits that possession confers upon the owners. It is usually an asset that
brings benefits over several accounting periods. The lack of physical existence is not by itself a sufficient
criterion to distinguish an intangible asset from a tangible asset because many assets lack physical existence
but they are not classified as intangible assets. The non-monetary criterion is equally important because
intangible assets are not associated with money or claims to money.

FULL APPLICATION OF THE ACCOUNTING STANDARDS

1. Recognition – An intangible is recognized if, and only if
a. It is probable that future economic benefits attributable to the asset will flow to the enterprise
b. The cost of the asset can be measured reliably
Identifiable and separable– costs or other values attributable can be defined, identified and reliably
measured. Capable of realization or sale separate from the business as a whole.
Examples: product patents, process patent, copyrights, franchises, certain trademarks and branded
product names.
Identifiable but not separable –costs or other values attributable may be defined or identified but
usually cannot be reliably measured. Incapable of separation from the business as a whole.
Examples: license, concessions, brand names associated with business names and most
trademarks.
Not identifiable and not separable – costs or other values cannot usually be defined or identified.
Examples: goodwill, super earnings, business names and connections and reputations.
2. Measurement of intangibles - Initial Recognition: The intangible asset is initially recognized and
recorded at cost. The cost of an identifiable intangible asset includes all directly attributable costs
incurred to develop or acquire the asset, plus other incidental costs necessary to prepare the asset for
its intended use.
By purchase – the purchase price including any import duties and non-refundable purchase taxes
and any directly attributable expenditure on preparing the asset for its intended use . Directly
attributable costs include:
a. Cost of employee benefits directly from bringing the asset to its working condition
b. Professional fees arising from bringing the asset to its working condition
c. Cost of testing whether the asset is functioning properly. Any trade discounts and rebates are
deducted in arriving at the cost.
By a deferred plan beyond a normal credit terms – the cash price equivalents (the cash price or
the present or discounted value for a non-interest long term liability). The difference of the cash
price equivalents and the total amount of payments is interest and recognized as expense over the
term of the credit period.
By the issuance of equity instruments – the fair market value of the instruments, which is equal to
the fair market value of the intangible.
By way of government grant - an intangible may be acquired free of charge, or for nominal
consideration. The entity may choose to recognize both the intangible asset and the grant initially
at fair value. If an entity chooses not to recognize the asset initially at fair value, the entity
recognizes the asset initially at a nominal value plus any expenditure that is directly attributable to
preparing the asset for its intended use.
By part of a business combination – the fair market value on the date of acquisition. The fair
market value is equal to the following.
• if there is an active market – quoted market price which is usually the current bid price.
• If there is no active market – the amount, which would have been paid by the company in
an arm’s length transaction between knowledgeable and willing parties (by discounting
estimated cash flows from the intangible asset).
If the fair market value of the intangible asset in a business combination cannot be measured
reliably, the asset is not recognized as a separate intangible but is included within the over-all cost
of purchase goodwill.
By exchange – the cost of the intangible asset is measured at the fair market value unless the
transaction lacks commercial substance. If the exchange lacks the necessary commercial
substance, the intangible asset is not measured at fair market value but its cost is the carrying
value of the asset given up.
Internally generated intangible – are the cost that can be directly attributed or allocated on a
reasonable and consistent basis to creating, producing and preparing the asset for its intended use.
The cost includes the following:
• cost of materials and services used or consumed in generating the intangible asset.
• Salaries and wages and other employment related cost of personnel directly engaged in
generating the asset.
 • Expenditure that is directly attributable to generating the asset such as fees to register a legal
right and amortization of patents and licenses that are used to generate the asset.
• Overhead that are necessary to generate the asset and that can be allocated on a reasonable
and consistent basis to the asset.
3. Measurement subsequent to acquisition: An entity shall choose either the cost model or the
revaluation model as its accounting policy. If an intangible asset is accounted for using the revaluation
model, all the other assets in its class shall also be accounted for using the same model, unless there is
no active market for those assets.
Cost model – after initial recognition, the intangible asset shall be carried at its cost less any
accumulated amortization and any accumulated impairment losses.
Revaluation model – after initial recognition, an intangible asset shall be carried at a revalued
amount, being its fair value at the date of revaluation less any subsequent accumulated
amortization and any accumulated impairment losses.
4. Amortization period – the amortizable/depreciable amount of an intangible asset should be allocated
on a systematic basis over the best estimate of its useful life. The intangible assets with a limited life
are amortized over their useful life. The intangible assets with indefinite life are not amortized but are
tested for impairment at least annually. The method of amortization shall reflect the pattern in which
the future economic benefits from the asset are expected to be consumed by the entity. If the pattern
cannot be determine reliably, the straight line method is used The residual value of an intangible
asset shall be presumed to be zero, unless a third party is committed to buy the intangible asset at the
end of its useful life or unless there is an active market. Any change in the method of amortization or
life of an intangible should be treated as a change in estimate.
Useful Life – the accounting standard requires that an entity shall assess whether the useful life of an
intangible asset is finite or indefinite and, if finite, the length of or number of production or similar units
constituting that useful life. An intangible asset shall be regarded by the entity as having an indefinite
useful life when, based on an analysis of all of the relevant factors, there is no forseeable limit to the
period over which the asset is expected to generate net cash flows for the entity. However, for private
entities (IFRS for SME’s) considers all intangible assets to have finite useful life, and if a private entity
us unable to make a reliable estimate of the useful life of an intangible asset, the life shall be presumed
to be 10 years.
Review of Amortization period and amortization method - IAS 38 requires that the amortization
period and the amortization method should be reviewed at least at each financial year end. If the
expected useful life of the asset is significantly different from previous estimates, the amortization
period should be changed accordingly. If there has been a significant change in the expected pattern of
economic benefits from the asset, the amortization method should be changed to reflect the changed
pattern. Such changes should be accounted for as changes in accounting estimates in accordance with
the accounting standard IAS 8 Accounting Policies, Changes in Estimates and Errors, by adjusting the
amortization charge for the current and future periods.
5. Subsequent cost in relation to intangible assets – PAS 38 does not deal with subsequent
expenditure on all intangible assets except for “acquired in-process research and development project”
acquired separately, or in a business combination. In accordance generally accepted accounting
principles, subsequent expenditure incurred on a recognized intangible asset can only be capitalized if
the expenditure increases the future economic benefits of the asset beyond its original assessed
standard of performance. This increase in standard of performance includes extension of useful life and
increase in revenue capacity of the intangible asset.

Any other subsequent costs expenditure should be recognized as an expense in the period incurred. For
an in-process research and development project that is acquired shall be distinguished into those that
are research and those that are development. Only development costs shall be capitalized.

5. Specific guidelines on specific intangibles:

Patent- an exclusive right granted by the government to an inventor enabling him to control the
manufacture, sale or other use of his invention for a specified period of time.
The cost of a purchased patent should be amortized over its legal life (20 years) or useful life
whichever is shorter.
The cost of a developed patent (the cost should include only the licensing and other related legal
fees in securing the patent rights) should be amortized the shorter of the legal life or useful life.
If a competitive patent was acquired to protect the old patent, the competitive patent should be
amortized over the remaining life of the old patent.
Legal fees and other costs of successfully prosecuting or defending a patent should be charged
outright as an expense. Any cost of unsuccessful litigation on patent should also be charged
outright as an expense including the unamortized cost of the patent.
If a new patent negates the old patent’s value, the cost of the new patent can be made for adding
the unamortized cost of the old patent, however, most business enterprises rely on the
conservatism constraint and immediately write-off the unamortized cost of the old patent.
 Copyright – exclusive right granted by the government to the author, composer or artist enabling to
publish, sell or otherwise benefit from his literacy, musical and artistic work.
The costs (the expenses incurred in the production of the work including those required to establish
or obtain the right) should be amortized over the period it is expected to provide a revenue or legal
life whichever is shorter. However, if revenues are expected to be received for an indefinite period
of time and renewal and registration can be done with minimal effort and cost, it should not be
amortized but should however be reviewed for impairment at each reporting date.

Franchise – an exclusive right granted by the franchisor (government or private companies) to a

franchisee to use the property or the rights (trademark, patent and process of the franchisor).
The cost of the franchise should be should be amortized or should be reviewed at each reporting
period for impairment.
a. If the franchise has a definite period – it should be amortized over the definite period (not
exceeding 20 years) or useful life whichever is shorter.
b. If the franchise has an indefinite life – it is not amortize but should however be reviewed for
impairment at each reporting date.

Trademark/trade name/brand name – is a symbol, sign, slogan or name use to mark a product to
distinguish it from other products. The cost of the intangible should include
a. When purchased –the purchase price or the cash price equivalents.
a) When developed –the expenditures required to establish including filing fees, registry fees and
other expenses incurred in securing the trademark.
The legal life of a trademark or trade name or brand name is 10 years and maybe renewed for
periods of 10 years each – R.A. No. 8293). The cost of a trademark is not amortized but
subject to test of impairment at least annually as a result of the almost automatic renewal.
Trademark may be properly classified as an intangible asset with an indefinite life. However, if
its life is no longer considered indefinite, it should be amortized over its remaining useful life.
Goodwill:
Only a purchased goodwill (external) should be recognized as an asset. Developed (internal) goodwill
should be charged outright as an expense. Subsequent costs related to the goodwill should be
charged immediately against income. The cost of goodwill is determined by the following
computations:
a. Acquisition cost less the fair market value of net asset acquired
b. Purchase of average excess earnings: average earnings – normal earnings x number of years
c. Capitalization of average excess earnings: average earnings – normal earnings  capitalization
rate
d. Capitalization of average earnings: average earnings  capitalization rate – net assets
The cost of goodwill is not amortized because its useful life is indefinite. However, goodwill shall be
tested for impairment at least annually or more frequently if events or changes in circumstances
indicate a possible impairment.

The amount of goodwill impairment is determined by comparing the recoverable amount for the cash-
generating unit (CGU) to which the goodwill belongs against the carrying value of the cash-generating
unit to which the goodwill belongs.
• If the recoverable amount of the CGU exceeds the carrying value of the CGU, the CGU and the
goodwill allocated to that unit shall be regarded as not impaired.
• If the carrying amount of the CGU exceeds the recoverable amount of the unit, the company must
recognize an impairment loss.
Research – an activity undertaken to discover new knowledge that will be useful in developing new
product or that will result in significant improvement of existing product. Examples of these are:
a) laboratory research aimed at obtaining or discovering new knowledge
b) searching for application of research findings and other knowledge
c)conceptual formulation and design of possible product or process alternative, and
d) testing in search for product or process alternative.
Development: is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved material, device, product, process, system, and prior to
the commencement of commercial production. Examples of these are:
a) design, construction and testing of pre-production prototype and model
b) design of tools, jigs, molds and dies involving new technology
c) design, construction and operation of a pilot plant that is not of a scale economically feasible to the
enterprise for commercial production, and
d) design, construction and testing of a chosen alternative for new or improved product or process.
The standard allows recognition of an intangible asset during the development phase,
provided the enterprise can demonstrate all the following:
a. Technical feasibility of completing the intangible asset so that it will be available for use or sale
b. Its intention to complete the intangible asset and either use it or sell it.
c. Its ability to use or sell the intangible asset
 d. The mechanism by which the intangible will generate probable future economic benefits.
e. The availability of adequate technical, financial and other resources to complete the development
and to use or sell the intangible asset, and
f. The entity’s ability to reliably measure the expenditure attributable to the intangible asset during
its development.
If the company cannot distinguish the research phase from the development phase, the company
treats the expenditure as if it was incurred in the research phase only.
Internally Developed Computer Software- the cost incurred on the research stage in creating the
software should be charged outright to expense when incurred until a technological feasibility has
been established for the product. Technological feasibility is established when a company has
produced either a detailed program design of the software or a working model. After establishing
technological feasibility, the cost of software to be capitalized should include the costs of
coding and testing and the cost to produce the product masters.
The cost of the computer software should be allocated base on the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity. If such pattern cannot be determined
reliably, the straight-line method is used.
Purchased Software:
a. If it is for sale – should be treated as an inventory
b. If it is held for licensing or rental to others - recognized as an intangible asset
c. If it is for used and integral part to the hardware – treated as part of the hardware and capitalized
as property, plant and equipment.
7. Impairment of Intangible Assets Other Than Goodwill:
a. Subject to amortization
b. Not subject to amortization
If the recoverable amount of an intangible asset is less than its carrying amount, the carrying amount
of the intangible asset should be reduced to its recoverable amount, the reduction is an impairment
loss.
If there is an impairment loss on a non-revalued intangible asset, it is recognized in profit or loss. If
there is an impairment loss on a revalued intangible asset, the carrying value based on the revalued
amount less the fair value of the intangible less the existing revaluation surplus is the measure of
impairment loss.

8. Impairment of Goodwill – related to the acquisition of a business:

a. Compute the recoverable value (higher of the fair value less cost to sell and value in use) of each
reporting unit to which goodwill has been assigned.

b. If recoverable amount of the reporting unit exceeds the net carrying value of the assets (including
goodwill) and liabilities of the reporting unit, the goodwill is assumed not to be impaired and no
impairment loss is recognized.
c. If the recoverable amount of the reporting unit is less than the net carrying amount of the assets
and liabilities of the reporting unit, then a new fair value of the goodwill is computed.
9. Reversal of impairment loss for an Individual Asset:
The increased carrying amount of an asset other than goodwill attributable to a reversal of an
impairment loss shall not exceed the carrying amount that would have been determined (net of
amortization or depreciation) had no impairment loss been recognized for the asset in prior years.
A reversal of an impairment loss for an asset other than goodwill shall be recognized immediately in
profit or loss, unless the asset is carried at revalued amount. A reversal of impairment loss on a
revalued asset is credited directly to equity under the heading revaluation surplus. However, to the
extent that an impairment loss on the same revalued asset was previously recognized in profit or loss, a
reversal of that impairment loss is also recognized in profit or loss.
10. Leasehold Improvements – are alteration or modifications on the leased property made by the
lessee, such as buildings, walkways, pavements, landscaping, driveways, lightning installations, major
repairs or replacements, partitions, cabinets, shelves, ventilating system and etc, made on leased
assets.
Leasehold improvements are generally classified as property plant and equipment. The cost of
leasehold improvements should be depreciated over the shorter of the life of the improvements or the
life of the leased asset.
If the lease contract contains a provision for an option to renew and the likelihood of the renewal option
is highly probable, the cost of the leasehold improvements should be depreciated the shorter of the life
of the improvement and the remaining extended lease term. But when the renewal option is uncertain,
the cost of the leasehold improvements should be depreciated the shorter between the life of the
improvements and the remaining lease term, as if there was no renewal option.
1. Which of the following does not describe intangible assets?
a. They lack physical existence.
b. They are monetary assets.
c. They provide long-term benefits.
d. They are classified as long-term assets.
2. Which of the following characteristics do intangible assets possess?
a. Physical existence.
b. Claim to a specific amount of cash in the future.
c. Long-lived.
d. Held for resale.
3. Which characteristic is not possessed by intangible assets?
a. Physical existence.
b. Identifiable.
c. Result in future benefits.
d. Expensed over current and/or future years.
4. Costs incurred internally to create intangibles are
a. capitalized.
b. capitalized if they have an indefinite life.
c. expensed as incurred.
d. expensed only if they have a limited life.
5. Which of the following costs incurred internally to create an intangible asset is generally expensed?
a. Research phase costs.
b. Filing costs.
c. Legal costs.
d. All of these choices are correct.
6. The major problem of accounting for intangibles is determining
a. fair value.
b. separability.
c. salvage value.
d. useful life.
7. Copyrights should be amortized over
a. their legal life.
b. the life of the creator plus fifty years.
c. twenty years.
d. their useful life or legal life, whichever is shorter.
8. A patent should be amortized over
a. twenty years.
b. its useful life.
c. its useful life or twenty years, whichever is longer.
d. its useful life or twenty years, whichever is shorter.
9. Limited-life intangibles are reported at their
a. replacement cost.
b. carrying amount unless impaired.
c. acquisition cost.
d. liquidation value.
10. Which of the following methods of amortization is normally used for intangible assets?
a. Sum-of-the-years'-digits
b. Straight-line
c. Units of production
d. Double-declining-balance
11. The cost of an intangible asset includes all of the following except
a. purchase price.
b. legal fees.
c. other incidental expenses.
d. all of these are included.
12. Factors considered in determining an intangible asset’s useful life include all of the following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life.
d. the amortization method used.
13. Under current accounting practice, intangible assets are classified as
a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
d. legally restricted or goodwill-type.
14. Companies should evaluate indefinite life intangible assets at least annually for:
a. recoverability.
b. amortization.
c. impairment.
d. estimated useful life.
15. One factor that is not considered in determining the useful life of an intangible asset is
a. salvage value.
b. provisions for renewal or extension.
c. legal life.
d. expected actions of competitors.
16. Which intangible assets are amortized?
Limited-Life Indefinite-Life
a. Yes Yes
b. Yes No
c. No Yes
d. No No

17. The cost of purchasing patent rights for a product that might otherwise have seriously competed with
one of the purchaser's patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser's product.
d. amortized over the remaining estimated life of the original patent covering the product whose
market would have been impaired by competition from the newly patented product.
18. Broadway Corporation was granted a patent on a product on January 1, 2009. To protect its patent, the
corporation purchased on January 1, 2020 a patent on a competing product which was originally issued
on January 10, 2016. Because of its unique plant, Broadway Corporation does not feel the competing
patent can be used in producing a product. The cost of the competing patent should be
a. amortized over a maximum period of 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 9 years.
d. expensed in 2020.
19. Wriglee, Inc. went to court this year and successfully defended its patent from infringe-ment by a
competitor. The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.
20. Which of the following is not an intangible asset?
a. Trade name
b. Research and development costs
c. Franchise
d. Copyrights
21. Which of the following intangible assets should not be amortized?
a. Copyrights
b. Customer lists
c. Perpetual franchises
d. All of these intangible assets should be amortized.
22. When a patent is amortized, the credit is usually made to
a. the Patents account.
b. an Accumulated Amortization account.
c. an Accumulated Depreciation account.
d. an expense account.
23. When a company develops a trademark the costs directly related to securing it should generally be
capitalized. Which of the following costs associated with a trademark would not be allowed to be
capitalized?
a. Attorney fees.
b. Consulting fees.
c. Research and development fees.
d. Design costs.
24. In a business combination, the excess of the cost of the purchase over the fair value of the identifiable
net assets purchased is
a. other assets.
b. indirect costs.
c. goodwill.
d. a bargain purchase.
25. Goodwill may be recorded when
a. it is identified within a company.
b. one company acquires another in a business combination.
c. the fair value of a company’s assets exceeds their cost.
d. a company has exceptional customer relations.
26. When a new company is acquired, which of these intangible assets, unrecorded on the acquired
company’s books, might be recorded in addition to goodwill?
a. A trade name.
b. A patent.
c. A customer list.
d. All of the above.
27. Which of the following intangible assets could not be sold by a business to raise needed cash for a
capital project?
a. Patent.
b. Copyright.
c. Goodwill.
d. Trade name.
28. The reason goodwill is sometimes referred to as a master valuation account is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair value of the net identifiable assets as compared with the
purchase price of the acquired business.
c. the value of a business is computed without consideration of goodwill and then goodwill is added to
arrive at a master valuation.
d. it is the only account in the financial statements that is based on value, all other accounts are
recorded at an amount other than their value.
29. Purchased goodwill should
a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an other expense item.
c. be written off by systematic charges as a regular operating expense over the period benefited.
d. not be amortized.
30. The intangible asset goodwill may be
a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.
31. A loss on impairment of an intangible asset is the difference between the asset’s
a. carrying amount and the expected future net cash flows.
b. carrying amount and its recoverable amount.
c. recoverable amount and the expected future net cash flows.
d. book value and its fair value.
32. Recovery of impairment is recognized for all the following except
a. Patent held for sale.
b. Patent held for use.
c. Trademark.
d. Goodwill.

33. All of the following are true regarding recovery of impairments for intangible assets except
a. After a recovery of impairment has been recognized, the carrying value of the asset reported
on the statement of financial position will be the higher of the fair value less cost to sell or the
value-in-use.
b. No recovery of impairment is allowed for Goodwill.
c. A recovery of impairment will be reported in the "Other income and expense" section of the income
statement.
d. The amount of the recovery is limited to the carrying value of the asset that would have been
reported had no impairment occurred.
34. Which of the following is not a criteria which must be met before development costs can be capitalized?
a. The company has sufficient financial resources to complete the project.
b. The company intends to complete the project and either use or sell the intangible asset.
c. The company can reliably identify the research costs incurred to bring the project to economic
feasibility.
d. The project has achieved technical feasibility.
35. Which of the following research and development related costs should be capitalized and depreciated
over current and future periods?
a. Research and development general laboratory building which can be put to alternative uses in
the future
b. Inventory used for a specific research project
 c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project currently in
process
36. Which of the following principles best describes the current method of accounting for research and
development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense
37. How should research and development costs be accounted for, according to an IASB Statement?
a. Must be capitalized when incurred and then amortized over their estimated useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the materiality of the
amounts involved.
d. Must be expensed in the period incurred unless it can be clearly demonstrated that the
expenditure will have alternative future uses or unless contractually reimbursable.
38. Which of the following would be considered research and development?
a. Routine efforts to refine an existing product.
b. Periodic alterations to existing production lines.
c. Marketing research to promote a new product.
d. Construction of prototypes.
39. Research and development costs
a. are intangible assets.
b. may result in the development of a patent.
c. are easily identified with specific projects.
d. all of the above.
40. Which of the following is considered research and development costs?
a. Laboratory research aimed at discovery of new knowledge.
b. Application of research findings or other knowledge to a plan or design for a new product or
process.
c. Conceptual formulation and design of possible product or process alternatives.
d. all of the above.
41. Which of the following is considered research and development costs?
a. Planned investigation undertaken with the prospect of gaining new scientific or technical knowledge
and understanding.
b. Application of research findings or other knowledge to a plan or design for a new product or
process.
c. Neither a nor b.
d. Both a and b.
42. Which of the following costs should be capitalized in the year incurred?
a. Research and development costs.
b. Costs to internally generate goodwill.
c. Organizational costs.
d. Costs to successfully defend a patent.
43. Which of the following costs would be capitalized?
a. Acquisition cost of equipment to be used on current research project only.
b. Engineering costs incurred to advance the product to the full production stage.
c. Cost of research to determine whether a market for the product exists.
d. Salaries of research staff.
44. Which of the following costs would not be capitalized?
a. Acquisition cost of equipment to be used on current and future research projects.
b. Engineering costs incurred to advance the project to the full production stage.
c. Cost incurred to file for patent.
d. Cost of testing prototype before economic feasibility has been demonstration.
45. Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the manufacturing stage
46. If a company constructs a laboratory building to be used as a research and development facility, the
cost of the laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been obtained from the
facility.
47. Operating losses incurred during the start-up years of a new business should be
a. accounted for and reported like the operating losses of any other business.
b. written off directly against retained earnings.
c. capitalized as a deferred charge and amortized over five years.
d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.

48. Which of the following should not be reported under the “Other income and expense” section of the
income statement?
a. Goodwill impairment losses.
b. Trade name amortization expense.
c. Recovery of impairment losses
d. All of these choices are correct.
49. The total amount of patent cost amortized to date is usually
a. shown in a separate Accumulated Patent Amortization account which is shown contra to the Patent
account.
b. shown in the current income statement.
c. reflected as credits in the Patent account.
d. reflected as a contra property, plant and equipment item.
50. Intangible assets are reported on the statement of financial position
a. with an accumulated depreciation account.
b. in the property, plant, and equipment section.
c. as a separate item.
d. None of these choices are correct.

51. Condor Corporation acquired a patent on May 1, 2020. Condor paid cash of P35,000 to the seller. Legal
fees of P900 were paid related to the acquisition. What amount should be debited to the patent
account?
a. P900 c. P35,000
b. P34,100 d. P35,900
52. White Corp. acquires a patent from Blue Co. in exchange for 2,500 shares of White Corp.’s P5 par value
ordinary shares and P85,000 cash. When the patent was initially issued to Blue Co., White Corp.’s
shares were selling at P7.50 per share. When White Corp. acquired the patent, its shares were selling
for P9 a share. White Corp. should record the patent at what amount?
a. P85,000 c. P103,750
b. P97,500 d. P107,500

53. Alonzo Co. acquires 3 patents from Shrink Corp. for a total of P300,000. The patents were carried on
Shrink’s books as follows: Patent AA: P5,000; Patent BB: P2,000; and Patent CC: P3,000. When Alonzo
acquired the patents their fair values were: Patent AA: P20,000; Patent BB: P240,000; and Patent CC:
P60,000. At what amount should Alonzo record Patent BB?
a. P100,000 c. P225,000
b. P200,000 d. P240,000
54. Phil Company’s 12/31/20 statement of financial position reports assets of P6,000,000 and liabilities of
P2,500,000. All of Phil’s assets’ book values approximate their fair value, except for land, which has a
fair value that is P400,000 greater than its book value. On 12/31/20, Gilbert Corporation paid
P6,500,000 to acquire Phil. What amount of goodwill should Gilbert record as a result of this purchase?
a. P0 c. P2,600,000
b. P500,000 d. P3,000,000

55. During 2020, Bond Company purchased the net assets of May Corporation for P1,300,000. On the date
of the transaction, May had P300,000 of liabilities. The fair value of May's assets when acquired were as
follows:
Current assets P 540,000
Noncurrent assets 1,260,000
P1,800,000
How should the P200,000 difference between the fair value of the net assets acquired (P1,500,000) and
the cost (P1,300,000) be accounted for by Bond?
a. The P200,000 difference should be credited to retained earnings.
b. The P200,000 difference should be recognized as a gain.
c. The current assets should be recorded at P540,000 and the noncurrent assets should be recorded at
P1,060,000.
d. A deferred credit of P200,000 should be set up and then amortized to income over a period not to
exceed forty years.
56. Thompson Company incurred research and development costs of P100,000 and legal fees of P50,000 to
acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years. What amount
should Thompson record as Patent Amortization Expense in the first year?
a. P0 c. P 7,500
b. P5,000 d. P15,000
57. The general ledger of Glance Corporation as of December 31, 2020, includes the following accounts:
Copyrights P 30,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Bond sinking fund 70,000
Excess of cost over fair value of identifiable net assets of acquired subsidiary 390,000
Trademarks 120,000
In the preparation of Glance's statement of financial position as of December 31, 2020, what should be
reported as total intangible assets?
a. P510,000 c. P537,000
b. P527,000 d. P540,000

58. In January, 2015, Find Corporation purchased a patent for a new consumer product for P840,000. At
the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the
product, however, the patent was estimated to have a useful life of only ten years. During 2020 the
product was permanently removed from the market under governmental order because of a potential
health hazard present in the product. What amount should Find charge to expense during 2020,
assuming amortization is recorded at the end of each year?
a. P560,000 c. P84,000
b. P420,000 d. P56,000
59. Below Corporation purchased a patent for P135,000 on September 1, 2018. It had a useful life of 10
years. On January 1, 2020, Below spent P33,000 to successfully defend the patent in a lawsuit. Below
Corporation feels that as of that date, the remaining useful life is 5 years. What amount should be
reported for patent amortization expense for 2020?
a. P30,900 c. P28,200
b. P30,000 d. P23,400

60. Joyful Company made the following cash expenditures during 2020 related to the R&D of a new
industrial plastic:
R&D salaries and wages P 10,000,000*
R&D supplies consumed 3,000,000*
Purchased of new R&D equipment on Jan. 1, 2020 5,000,000
Patent filing and legal costs incurred on Nov. 1, 2020 100,000
Payments to others for services performed in connection with R&D activities 1,200,000*
*These costs were incurred evenly throughout 2020.

Joyful Company is able to demonstrate that at July 1, 2020, the production process met the criteria for
recognition as an intangible asset. The project resulted in a new product to be manufactured in 2021.
A patent was filed with the Philippine Patent Office. The equipment purchased will be employed in other
projects. Depreciation on the equipment for 2020 was P500,000.

Question 1: What amount of R&D expense should Joyful Company report in year 2020?
a. none c. P 7,450,000
b. P7,350,000 d. P14,800,000

Question 2: What amount of R&D asset should Joyful Company report in year 2020?
a. none c. P7,450,000
b. P7,350,000 d. P14,800,000

61. Advance Technology Company has two projects under development, and the amounts capitalized as
assets as at the end of the prior financial year are as follows:

Project A Project B
Deferred development costs P 10,000,000 P 15,000,000

For the current financial year ended December 31, 2020, development costs of P3,000,000 and
P4,000,000 were incurred for Project A and Project B respectively. At the end of the current financial
year, the directors assessed and concluded that the market for the products under Project A is unlikely
to exist and therefore not feasible to continue with its development. For Project B, the criteria for
capitalization continue to be met. Estimates made for this project are as follows: Revenue from sale
of products, P38,000,000; Further development costs to complete project, P6,000,000; Related
production costs of products, P12,000,000 and directly attributable selling and administrative costs,
P4,000,000.

What total amount of impairment loss on project B should the company recognized?
a. none c. P4,000,000
b. P3,000,000 d. P7,000,000
62. Struck Company incurred P1,500,000 (P400,000 in 2018 and P1,100,000 in 2019) to develop a
computer software product. P500,000 of this amount was expended before technological feasibility was
established in early 2019. The product will earn future revenues of P4,000,000 over its 5-year life, as
follows: 2019 – P1,000,000; 2020 – P1,000,000; 2021 – P800,000; 2022 –P800,000; and 2023 –
P400,000.
What portion of the P1,500,000 computer software costs should be expensed in 2019?
a. P250,000 c. P 350,000
b. P300,000 d. P1,100,000

63. On January 2, 2020, Porous Inc. purchased a patent with a cost P1,880,000 a useful life of 4 yeaP. At
December 31, 2020, and December 31, 2021, the company determines that impairment indicatoP are
present. The following information is available for impairment testing at each year end:

12/31/2020 12/31/2021
Fair value less costs to sell P1,430,000 P840,000
Value-in-use P1,500,000 P890,000

No changes were made in the asset's estimated useful life.

Question 1: The company's 2020 income statement will report

a. Amortization Expense of P470,000
b. Amortization Expense of P470,000 and Loss on Impairment of P20,000.
c. Amortization Expense of P470,000 and a Recovery of Impairment of P90,000.
d. Loss on impairment of 380,000.

Question 2: The company's 2021 income statement will report

a. Amortization Expense of P470,000.
b. Amortization Expense of P500,000 and Loss on Impairment of P110,000.
c. Amortization Expense of P470,000 and a Loss on Impairment of P50,000.
d. Loss on impairment of P140,000.

64. India Enterprises has four divisions. It acquired one of them, Bombay Products, on January 1, 2020 for
P400,000,000, and recorded goodwill of P50,750,000 as a result of that purchase. At December 31,
2020, Bombay Products had a recoverable amount of P375,000,000. The carrying value of the
company’s net assets at December 31, 2020 was P355,000,000 (including goodwill). What amount of
loss on impairment of goodwill should India record in 2020?
a. P0 c. P25,000,000
b. P20,000,000 d. P45,000,000