SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

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REVIEW HANDOUTS AND MATERIALS

SEMESTER FIRST SEMESTER SCHOOL YEAR 2020-2021
SUBJECT FINANCIAL ACCOUNTING AND REPORTING
HANDOUT # MIXED 012
TOPIC PROPERTY, PLANT AND EQUIPMENT PART 1
Summary of IAS 16

Objective of IAS 16

The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition
of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognized in relation to
them.

Scope

IAS 16 applies to the accounting for property, plant and equipment, except where another standard requires or permits differing accounting
treatments, for example:
 assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations
 biological assets related to agricultural activity accounted for under IAS 41 Agriculture
 exploration and evaluation assets recognized in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources
 mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

The standard does apply to property, plant, and equipment used to develop or maintain the last three categories of assets. [IAS 16.3]

The cost model in IAS 16 also applies to investment property accounted for using the cost model under IAS 40 Investment
Property. [IAS 16.5]

The standard does apply to bearer plants but it does not apply to the produce on bearer plants. [IAS 16.3]

Recognition

Items of property, plant, and equipment should be recognized as assets when it is probable that: [IAS 16.7]
 it is probable that the future economic benefits associated with the asset will flow to the entity, and
 the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs
incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of,
or service it.

IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property, plant, and equipment. [IAS 16.9]
Note, however, that if the cost model is used (see below) each part of an item of property, plant, and equipment with a cost that is
significant in relation to the total cost of the item must be depreciated separately. [IAS 16.43]

IAS 16 recognizes that parts of some items of property, plant, and equipment may require replacement at regular intervals. The carrying
amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred
if the recognition criteria (future benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is
derecognized in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require regular major inspections for
faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognized in the carrying
amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated
cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item
was acquired or constructed. [IAS 16.14]

Page 1 of 13
Initial measurement

An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes all costs necessary to bring the
asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation,
delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and
removing the asset and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets). [IAS 16.16-17]

Proceeds from selling items produced while bringing an item of property, plant and equipment to the location and condition necessary for it
to be capable of operating in the manner intended by management are not deducted from the cost of the item of property, plant and
equipment but recognized in profit or loss. [IAS 16.20A]

If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognized or imputed. [IAS 16.23]

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the
fair value unless
 the exchange transaction lacks commercial substance or
 (b) the fair value of neither the asset received nor the asset given up is reliably measurable.

If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS 16.24]

Measurement subsequent to initial recognition

IAS 16 permits two accounting models:

 Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]
 Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent
depreciation and impairment, provided that fair value can be measured reliably. [IAS 16.31]

The Revaluation Model

Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially
from its fair value at the balance sheet date. [IAS 16.31]

If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36] Revalued assets are

depreciated in the same way as under the cost model (see below).

If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the
heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognized as an
expense, in which case it should be recognized in profit or loss. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it exceeds any amount previously
credited to the revaluation surplus relating to the same asset. [IAS 16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity
under the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss. [IAS 16.41]

Depreciation (cost and revaluation models)

For all depreciable assets:

The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50].

The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from
previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51]

The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS 16.60]; a
depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. [IAS
16.62A]

The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation
method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices
could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56]

Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48].
Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle. [IAS 16.55]

Recoverability of the carrying amount

IAS 16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition for property, plant, and equipment. An
item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset's
fair value less costs to sell and its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. [IAS
16.65]

Derecognition (retirements and disposals)

An asset should be removed from the statement of financial position on disposal or when it is withdrawn from use and no future
economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying
amount and should be recognized in profit and loss. [IAS 16.67-71]

If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they
become held for sale in the ordinary course of business. [IAS 16.68A]

Disclosure

Information about each class of property, plant and equipment

For each class of property, plant, and equipment, disclose: [IAS 16.73]

 basis for measuring carrying amount

 depreciation method(s) used
 useful lives or depreciation rates
 gross carrying amount and accumulated depreciation and impairment losses
 reconciliation of the carrying amount at the beginning and the end of the period, showing:
 additions
 disposals
 acquisitions through business combinations
 revaluation increases or decreases
 impairment losses
 reversals of impairment losses
 depreciation
 net foreign exchange differences on translation
 other movements

Additional disclosures

The following disclosures are also required: [IAS 16.74]

 restrictions on title and items pledged as security for liabilities
 expenditures to construct property, plant, and equipment during the period
 contractual commitments to acquire property, plant, and equipment
 compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is
included in profit or loss.

IAS 16 also encourages, but does not require, a number of additional disclosures. [IAS 16.79]

Revalued property, plant and equipment

If property, plant, and equipment are stated at revalued amounts, certain additional disclosures are required: [IAS 16.77]
 the effective date of the revaluation
 whether an independent valuer was involved
 for each revalued class of property, the carrying amount that would have been recognized had the assets been carried under the
cost model
 the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to
shareholders.

Entities with property, plant and equipment stated at revalued amounts are also required to make disclosures under IFRS 13 Fair Value
Measurement.
Characteristics of PPE

 Tangible assets – items of PPE have physical substance

 Used in normal operations – items of PPE are used in the production or supply of goods or services, for rental, or for
administrative purposes
 Long-term in nature – items of PPE are expected to be used from more than a year

Recognition

The cost of an item of property, plant and equipment shall be recognized as an asset only if:
it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item
can be measured reliably.

Initial measurement

An item of PPE is initially measured at its cost.

Elements of Cost
 Purchase price, including non-refundable purchase taxes, after deducting trade discounts and rebates.
 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 the management.
 Present value of decommissioning and restoration costs to the extent that they are recognized as obligation

Cessation of capitalizing costs to PPE

Recognition of costs in the carrying amount of an item of PPE ceases when the item is in the location and condition necessary for it to be
capable of operating in the manner intended by management.

Measurement of Cost

The cost of an item of PPE is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the
difference between the cash price equivalent and the total payment is recognized as interest over the period of credit unless such interest is
capitalized in accordance with PAS 23 Borrowing Costs.

Cost of Land (Property)

 Purchase price including other necessary costs such as broker’s commissions.
 Closing costs, such as titling costs, attorney’s fees, and recording fees.
 Costs incurred in getting the land in the condition for its intended use, such as surveying, grading, filling, draining, and
clearing.
 Unpaid taxes prior to date of acquisition assumed by the buyer.
 Assumption of any liens, mortgages, or encumbrances on the property
 Special assessments for local government-maintained improvements, such as pavements, street lights, sewers, and drainage
systems.
 Option paid to acquire the land.
 Costs incurred to induce tenants to vacate premises and costs of relocating and reconstructing property belonging to others.
 Initial estimate of restoration costs for which the entity has a present obligation
 Any additional land improvements that have indefinite useful life such as costs of draining, clearing, grading, leveling
and filling, surveying, subdividing, and other permanent improvements.

Land improvement

Land improvements are enhancements to the land which have definite useful life, such as private driveways, walks, fences, parking lots,
drainages and water systems, and cost of trees, shrubs, plants and other landscaping.

Cost of purchased Building (Plant)

 Purchase price including other necessary costs such as broker’s commissions and legal fees.
 Assumption of any liens, mortgages, or encumbrances on the property
 Option paid to acquire the building.
 Unpaid taxes prior to date of acquisition assumed by the buyer.
 Costs incurred to induce tenants to vacate premises.
 Costs of getting the building in the condition for its intended use, such as remodeling, renovation, and other repairs prior to
occupancy.
Cost of self-constructed Building (Plant)
 Materials, labor, and overhead costs incurred during construction.
 Architectural costs, supervision costs, and costs of building permit
 Excavation costs
 Insurance costs and safety inspection fees
 Costs of temporary structures built during construction
 Interest on borrowings made to finance construction

The following costs are not included in the cost of a self-constructed building:
 Internal profits or savings on self-construction
 Cost of abnormal amounts of wasted material, labor, or other resources due to inefficiencies
 Costs of uninsured hazards or claims for uninsured accidents
 Costs of private driveways, walks, permanent fences, parking lots, and drainages and water systems that are not included in
the building’s blueprint

Building improvement

Building improvements refer to costs incurred subsequent to occupancy of a purchased building or subsequent to completion of a self-
constructed building that either increase the useful life of the building or improve its current state.

Cost of equipment
 Purchase price including other necessary costs such as broker’s commissions and non-refundable purchase taxes.
 Freight, handling charges, and insurance on the equipment while in transit
 Cost of necessary special foundations or platform,
 Assembling and installation costs
 Costs of testing and conducting trial runs
 The initial estimate of decommissioning and restoration costs for which the entity has a present obligation

The following costs are not included in the cost of an equipment:

 Cost of relocating the equipment after it has been put to the location and condition originally intended by management.
 Cost of training personnel who will be responsible in operating the equipment.
 Cost of dismantling and removing an old equipment belonging to the entity prior to the installation of a new equipment.

Lump-sum purchase

The acquisition cost of a group of items of PPE acquired on a lump-sum price (basket price) is allocated to the individual assets
based on their relative fair values at the date of purchase.

Demolition costs

The accounting treatment for demolition costs depends on the reason for the demolition. Example:
Case: An old structure is demolished to make way for the construction of a new building.

Accounting: The demolition costs are considered as costs of site preparation under PAS 16.; and therefore, capitalized as cost of
the new building.

Any proceeds from sale of salvaged materials from the demolition are deducted from the demolition cost that is capitalized to the new
building.

Acquisition through exchange

If the exchange has commercial substance, the asset received from the exchange is measured using the following order of priority:
 A. Fair value of asset Given up Plus cash Paid/ minus cash received
 B. Fair value of asset Received
 C. Carrying amount of asset Given up Plus cash Paid/ minus cash received

If the exchange lacks commercial substance, the asset received from the exchange is measured at (c) above.

Acquisition through issuance of own equity instrument or debt instrument

The assets acquired is measured using the following order of priority:

 Fair value of asset Received
 Fair value of instrument Issued
Acquisition by donation

Items of PPE received as donation are measured at fair value and accounted for as:
 Income – if the donor is an unrelated party.
 Donated capital – if the donor is an owner (shareholder).
 Government grant, in accordance with PAS 20 Accounting for Government Grants and Disclosure of Government
Assistance. Accounting (see Chapter 17) – if the donor is the government.

Subsequent measurement

Subsequent to initial recognition, an entity shall choose either:

(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that policy to an entire class of PPE.

Cost Model

After recognition, an item of PPE is measured at its cost less any accumulated depreciation and any accumulated impairment losses.

Depreciation

Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful life.

When computing for depreciation, each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall
be depreciated separately.

Depreciation begins when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of
operating in the manner intended by management.

Depreciation ceases when the asset is derecognized or when it is classified as “held for sale” under PFRS 5, whichever comes
earlier.

Selection of depreciation method

There are various methods of depreciation. The entity shall select the method that most closely reflects the expected pattern of
consumption of the future economic benefits embodied in the asset.
However, a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate.

Common types of depreciation methods

1. Straight line method – depreciation is recognized evenly over the life of the asset by dividing the depreciable amount by the
estimated useful life.

Depreciation = (Historical cost – Residual value) ÷ Estimated useful life

2. Sum-of-the-years’ digits (SYD) depreciation – depreciation is computed by applying a series of fractions to the depreciable amount
of the asset.

Depreciation = (Historical cost – Residual value) x Fraction

SYD Life + 1
denominator = Life x 2

3. Double declining balance method – depreciation is computed by applying a fixed rate on the carrying amount of the asset at the end of
each period. Unlike for other depreciation methods, the residual value is initially ignored when computing depreciation under the double
declining method.
Depreciation = Carrying amount x Rate

Double declining rate = 2

Life

4. Units of production method (Activity method or Variable-charge method)

The units-of-production method relates depreciation to the estimated production capability of an asset and is expressed in a rate per unit of
output or per hour of input.

Depreciation = (Historical cost – Residual value) x Rate

Leasehold improvements

Leasehold improvements are depreciated over the useful life of the improvements or the remaining lease term, whichever is shorter.

An option to renew the lease is considered when determining the shorter between the useful life and the remaining lease term if it is
probable that the renewal option will be exercised.

Changes in depreciation method, useful life, and residual value

A change in depreciation method, useful life, or residual value is a change in accounting estimate accounted for prospectively.

Prospective accounting means the change affects only the current period and/or future periods. The change does not affect past periods.

Accounting for replacements of major parts

The cost of the replacement part is recognized while the carrying amount of the replaced part is derecognized.

If the carrying amount of the replaced part is indeterminable, the entity may use the cost of the replacement as an indication of what the
cost of the replaced part was at the time it was acquired or constructed.

Revaluation Model

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 the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Revaluation surplus

Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx

*The fair value is determined using an appropriate valuation technique, taking into account the principles set forth under PFRS
13.

The Cost Approach of fair value measurement

 Total economic life = Effective life + Remaining eco. life

 Percentage depreciation = Effective life ÷ Total eco. life
 Depreciation = Percentage dep’n. x Replacement cost
 Fair value = Replacement cost - Depreciation

Methods of recording revaluation

Proportional method - The gross carrying amount is adjusted proportionately to the change in the carrying amount. Elimination method - The

accumulated depreciation is eliminated against the gross carrying amount of the asset.

Frequency of revaluation

For items with significant and volatile changes in fair value, annual revaluation is necessary. For items with insignificant
changes in fair value, revaluation may be made every 3 or 5 years.

Revaluation applied to all assets in a class

If an item of PPE is revalued, the entire class of PPE to which that asset belongs shall be revalued.
The items within a class of PPE are revalued simultaneously to avoid selective revaluation of assets and the reporting of amounts in the
financial statements that are a mixture of costs and values as at different dates.
Subsequent accounting for revaluation surplus

Revaluation is initially recognized in other comprehensive income unless the revaluation represents impairment loss or reversal of
impairment loss, in which case it is recognized in profit or loss.

Subsequently, the revaluation surplus is accounted for as follows:

If the revalued asset is non-depreciable, the revaluation surplus accumulated in equity is transferred directly to retained earnings when the
asset is derecognized.
If the revalued asset is depreciable, a portion of the revaluation surplus may be transferred periodically to retained earnings as the asset is
being used.

Derecognition

The carrying amount of an item or PPE shall be derecognized:

 on disposal; or
 when no future economic benefits are expected from its use or disposal

Theories

1. An item of property, plant and equipment should be recognized as an asset when

I. It is probable that future economic benefits associated with the asset will flow to the enterprise.
II. The cost of the asset to the enterprise can be measured reliably.
a. Both I and II b. Neither I nor II c. I only d. II only

2. Which is not an essential characteristic of property, plant and equipment?

a. The property, plant and equipment are subject to depreciation.
b. The property plant and equipment are tangible assets.
c. The property, plant and equipment are used in production or supply of goods and services, for rental and administrative purposes.
d. The property, plant and equipment are expected to be used over a period of more than one year.

3. The depreciable amount of an item of property, plant and equipment is the

a. Cost of the asset, or other amount substituted for cost in the financial statements, less its residual value.
b. Net amount which the enterprise expects to obtain for an asset at the end of its useful life after deducting the expected costs of
disposal.
c. Amount of cash or cash equivalent paid or the fair value of other consideration given to acquire an asset at the time of its
acquisition or construction.
d. Amount at which an asset is recognized in the balance sheet after deducting any accumulated depreciation and accumulated
impairment losses thereon.

4. The cost of an item of property, plant and equipment includes all of the following, except
a. Trade discount and rebates
b. Purchase price
c. Import duties and nonrefundable purchase taxes
d. Directly attributable costs of bringing the asset to working condition for its intended use.

5. Directly attributable costs of bringing the asset to working condition for its intended use include all, except
a. Initial operating losses incurred prior to an asset achieving planned performance
b. Cost of site preparation
c. Delivery, handling and installation costs
d. Estimated cost of dismantling and removing the asset and restoring the site, to the extent that it is recognized as a provision

6. Examples of costs that are expensed rather than recognized as an element of cost of property, plant and equipment include all of the
following, except
a. Cost of employee benefits arising directly from the construction or acquisition of an item of property, plant and equipment.
b. Cost of opening a new facility
c. Cost of introducing a new product or service, including cost of advertising and promotion.
d. Cost of relocating or reorganizing part or all of an entity’s operations.

7. Which is correct concerning measurement of property, plant and equipment?

I. An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an
entire class of property, plant and equipment.
II. The cost model means that property, plant and equipment are carried at cost less any accumulated depreciation and any
accumulated impairment loss.
III. The revaluation model means that property, plant and equipment are carried at revalued amount, being the fair value at date of
revaluation less any accumulated depreciation and subsequent accumulated impairment loss.
a. I, II and III b. I only c. II and III only d. II only
8. The cost of an item of property, plant and equipment acquired in exchange for a nonmonetary asset or a combination of monetary and
nonmonetary asset is measured at
a. Fair value of asset given plus cash payment
b. Fair value of asset received plus cash payment
c. Book value of asset given plus cash payment
d. Book value of asset received plus cash payment

9. Which statement is incorrect regarding initial measurement of PPE?

a. PPE should be initially recorded at cost, which includes all costs necessary to bring the asset to working condition for its intended
use.
b. If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognized or imputed.
c. If an asset is acquired in exchange for another asset the cost will be measured at the fair value.
d. If an asset acquired in exchange for another asset is not measured at fair value, its cost is measured at the carrying amount of the
asset received.

10. If the exchange transaction lacks commercial substance, the acquired item of property, plant and equipment is measured at
a. Fair value of asset given plus cash payment
b. Fair value of asset received plus cash payment
c. Carrying amount of asset given plus cash payment
d. Carrying amount of asset received plus cash payment

11. When payment for an item of property, plant and equipment is deferred beyond normal credit terms, its cost is the
a. Cash price equivalent c. Invoice price
b. Installment price d. List price

12. If an asset is acquired on credit or by installment, the difference between the total payments and cash price, if any, should be
a. Considered interest expense of the current year
b. Included as part of the asset cost
c. Amortized as interest expense over the life of the asset
d. Amortized as interest expense over the credit period

13. Which is incorrect concerning self-constructed asset?

a. The cost of self-constructed asset is determined using the same principles as for an acquired asset.
b. Any internal profits from construction are eliminated in arriving at the cost of self- constructed asset.
c. The cost of abnormal amounts of wasted material, labor or other resources incurred in the production of a self- constructed asset
is included in the cost of asset.
d. The cost of normal amounts of wasted material, labor or other resources incurred in the production of a self- constructed asset is
included in the cost of the asset.

14. As to land, capitalizable incidental costs include all, except

a. Attorney’s fees for establishing clean title
b. Special assessments for local improvement which benefits the property
c. Cost of relocation or reconstruction of property belonging to others in order to acquire possession
d. Expenditures for sidewalks, pavements, parking lot and driveways

15. Improvements which result to increased future economic benefits include all, except
a. Modification of an item of property to extend its useful life or increase its capacity.
b. Upgrade of machine parts to improve quality of output
c. Adoption of a new production process leading to large reduction in operating cost
d. Expenditure on repair or maintenance of property, plant and equipment, such as cost of servicing or overhauling plant and
equipment.

16. Which is incorrect concerning the concept of the depreciation?

a. The depreciable amount of an item of property, plant and equipment should be allocated on a systematic basis over its useful life.
b. The depreciation method should not reflect the pattern in which the asset’s economic benefits are
consumed by the enterprise.
c. The depreciation charge for each period should be recognized as an expense, unless it is included in the carrying amount of
another asset.
d. The estimation of the useful life of an item of property, plant and equipment is a matter of judgment based on experience of the
enterprise with similar assets.
17. Which is incorrect concerning the residual value of an item of property, plant and equipment?
a. The depreciable amount of an asset is determined after deducting the residual value of the asset.
b. In practice, the residual value of an asset is often insignificant and therefore is immaterial in the calculation of the depreciable
amount.
c. The residual value of an asset may increase to an amount equal or greater than the asset’s carrying amount.
d. The residual value of an asset shall be reviewed at least at each financial year-end and if expectation differs from previous
estimate, the change shall be accounted for as a change in accounting policy.

18. The useful life of an item of property, plant and equipment is

I. The period of time over which an asset is expected to be used by the enterprise.
II. The number of production or similar units expected to be obtained from the asset by the enterprise.
a. I only b. II only c. Both I and II d. Neither I nor II

19. Which statement is true concerning depreciation?

I. When a change in depreciation method is necessary to reflect the new pattern of economic benefits the change should be
accounted for as a change in accounting estimate and the depreciation charge for the current and future periods should be
adjusted.
II. The useful life of an item of property, plant and equipment should be reviewed periodically and if expectations are significantly
different from previous estimates, the depreciation for the current and future periods should be adjusted.
a. I only b. II only c. Both I and II d. Neither I nor II

20. All of the following factors are considered in determining the useful life of an asset, except
a. Expected usage of the asset by the enterprise
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value

21. The sum of units method of depreciation results in

a. Constant charge over the useful life of the asset
b. Decreasing charge over the useful life of the asset
c. Increasing charge over the useful life of the asset
d. Charge based on the expected use or output of the asset

22. The cost of fully depreciated asset remaining in service and the related accumulated depreciation
a. Should be removed from the accounts and excluded from property, plant and equipment
b. Should not be removed from the accounts and therefore included in property, plant and equipment with disclosure
c. Should not be removed from the accounts and therefore included in property, plant and equipment without disclosure
d. Should be adjusted to conform with new estimated useful life

23. Enterprises are encouraged to disclose all of the following amounts, except
a. Gross carrying amount of fully depreciated property that is still in use.
b. Carrying amount of property, plant and equipment retired from active use and held for disposal.
c. Fair value of property, plant and equipment when the fair value is not materially different from the carrying amount.
d. Carrying amount of temporarily idle property, plant and equipment.

33. An item of property, plant and equipment that is retired from active use and held for disposal is carried at
a. Net realizable value
b. Carrying amount
c. Carrying amount or net realizable value, whichever is higher
d. Carrying amount or net realizable value, whichever is lower

34. Gain or loss from disposal of an item of property, plant and equipment is equal to the difference between
a. Fair value of the asset on balance sheet date and its carrying amount
b. Net realizable value on balance sheet date and its carrying amount
c. Net proceeds from disposal and the cost of the asset
d. Net proceeds from disposal and the carrying amount of the asset

35. Which statement is incorrect concerning revaluation of property, plant and equipment?
a. When an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset
belongs should be revalued.
b. The basis of revaluation is fair value which is usually the market value determined by appraisal undertaken by professional
qualified valuers, or depreciated replacement cost, in the absence of evidence of market value.
c. Items of property, plant and equipment that experience significant and volatile movements in fair value should be revalued
annually.
d. Frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant movements in fair value
and instead, revaluation every five to ten years may be sufficient.
36. Which statement is incorrect concerning revaluation of property, plant and equipment?
a. When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of revaluation is restated
proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation
should equal its revalued amount, or eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset.
b. Any revaluation increase should be credited to equity as revaluation surplus.
c. The revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realized.
d. Any revaluation decrease should be debited to revaluation loss, a contra equity account.

37. When the revaluation surplus is realized because of the use of the asset by the enterprise or disposal of the asset, it may be transferred
directly to
a. Income c. Deferred income
b. Donated capital d. Retained earnings

Problems

1. Antonio Company purchased equipment. Related to the purchase are the following items:
List Price 1,000,000.00
Import Duties 50,000.00
Other Transaction Taxes 25,000.00
Broker's Commission 10,000.00
Freight 5,000.00
Insurance while in transit 1,600.00
Installation and Assembly 3,500.00
Testing Cost 1,800.00
Legal Fees for Title Transfer 7,500.00

Additional Information:
 The list price is gross of 12% VAT. When the purchase was made, the seller gave 10% and 5% trade discount as well as 2%
prompt payment discount. Antonio Company was able to avail of the trade discount but forfeited in the prompt payment
discount.
 Because Antonio Company was initially not certain as to whether it will buy this equipment, it initially paid the seller
20,000 option money. Based on the agreement, if the sale was pushed through, the said amount shall be deducted from the
total amount to be paid.
 To prepare the factory for the new equipment, Antonio Company incurred 14,000 in clearing the site and fixing the mount
of the equipment.
 While testing the equipment, the company incidentally produced samples that may be sold for 600.
 The equipment operator underwent training at a cost of 6,000.
 After all preparations are made, the company finally started to mass produce inventory and incurred 18,000 for the grand
opening.

How much is the capitalizable cost of the equipment? 865,925

2. Basilio Company purchased a cash generating unit from Crispin Company by paying 600,000 cash and issuing a 1,200,000
noninterest-bearing note payable in 4 equal annual payments. The imputed rate on this type of note is 14%. below is the detail of the
fair values of the components of the CGU:
Land 500,000.00
Building 650,000.00
Equipment 390,000.00

At what amount shall each component of the CGU be capitalized? 1,474,114

L 478,608
B 622,191
E 373,315
Use the following information to answer the next 5 questions:

Du30 Company transacted with De5 Company. In the said transaction De5 Company will be transferring its machinery to Du30 Company.
The said machinery has carrying amount of 850,000 and fair value of 920,000.

3. Assuming Du30 Company will be exchanging its equipment plus 200,000 cash for the machinery and its equipment has carrying
amount of 900,000 and fair value of 780,000, at what amount will Du30 Company recognize the machinery considering that the
exchange has commercial substance? 980,000

4. Assuming Du30 Company will be exchanging its equipment plus 200,000 cash for the machinery and its equipment has carrying
amount of 900,000 and fair value of 780,000, at what amount will Du30 Company recognize the machinery considering that the
exchange has no commercial substance? 1,100,000

5. Du30 will be issuing its 1,000,000 bonds currently traded at 97 to acquire the machinery. How much is the capitalizable cost of the
machinery? 970,000

6. Du30 will issue 10,000 shares of its P50 par value ordinary shares currently traded in the stock market at 95 per share to acquire the
machinery. How much is the capitalizable cost of the machinery? 950,000

7. Du30 received the machinery as a donation. De5 Company is a shareholder of Du30. How much is the capitalizable cost of the
machinery? 920,000

8. Electrode Company purchased land and building for a lump sum price of 5,000,000. An independent appraiser assessed that the total
cost must be allocated at a ratio of 8:2 for land and building, respectively. Immediately after purchase, the existing building was
demolished to make way for the construction of a new building. The summary of costs incurred are provided below:
Legal cost of conveying land 40,000
Special assessment 20,000
Survey costs 60,000
Demolition Cost 90,000
Scrap sale from demolition 20,000
Materials, labor, and overhead costs 22,000,000
Cash discounts on materials purchased not taken 120,000
Clerical and other expenses related to construction 56,000
Excavation costs 400,000
Architectural fees and building permit 240,000
Supervision by management on construction 48,000
Insurance premiums paid for workers 520,000
Payment for claim for injuries not covered by insurance 180,000
Saving on construction 800,000

Cost of changes to plans and specifications due to inefficiencies 560,000

Paving of streets and sidewalks (not included in blueprint)

40,000
Income earned on a vacant space rented as parking lot during
construction 36,000

How much is the capitalized cost of the land and new building?
Land 4,120,000
OB 1,000,000 recorded as loss upon demolition
NB 23,178,000
LI 40,000

9. FokemonGo Company purchased land and building for a total cost of 800,000. Assessment of the building showed that the building is
unusable although its scrap can be sold for 20,000. The company razed the building at a cost of 80,000. How much cost is capitalized
to the land and the building, respectively?
Land 860,000
Bldg 0
10. Gohan Co. acquired an oil rig for 400,000,000. Installation and other necessary costs in bringing the equipment to its intended
condition for use totaled 80,000,000. Gohan Company is required by law to dismantle the equipment and restore the site where it is
installed after 20 years. The estimated decommissioning and restoration costs are 40,000,000. The imputed rate of interest is 12%.
How much is the initial cost of the equipment?
484,146,671

11. Halimuyak Company purchased a new service vehicle with fair value of 900,000 by paying 600,000 and trading their old service
vehicle whose cost is 1,000,000 and accumulated depreciation is 850,000. At what amount will the new service vehicle be recorded?
750,000

12. Ianmher Company purchased equipment by issuing a note amounting to 1,000,000 due in 2 years. The equipment is normally sold at
930,000 under a 30-day credit period and receives a 30,000 discount if paid in cash. The equipment is expected to be sold at 100,000
after its 10-year life. The equipment has a normal production capacity of 10,000,000 units throughout its life and the manufacturer’s
manual stated that it will take 36,000 machine hours before any major repairs will be needed. The equipment was able to produce
1,200,000 units, 1,120,000 units, 1,000,000 units and 880,000 units for first four years. At normal production, every machine hour
produces 300 units.

Compute for the depreciation expense, accumulated depreciation and book value of the asset under:
a. Straight line depreciation 80,000
b. SYD method 145,455
c. Double Declining Balance Method 180,000
d. Machine Hours 88,889
e. Units of Production Method 96,000

13. Jamaica Company acquired equipment for 600,000. The asset has 15 years useful life with no residual value. The company depreciates
similar items using SYD. Four years after purchase, the company decided to change the depreciation method to double declining
balance method. At this point, the asset’s useful life was revised to 10 years from the date of original purchase and residual value was
changed to 50,000. How much should the depreciation be for the current year? 110,000

14. Killian Jornet Company bought a facility that cost him 10,000,000 five years ago, having a 20 year useful life. Currently, the asset has
accumulated depreciation amounting to 2,375,000 based on straight line depreciation. At the beginning of the 6th year, the company
evaluated that the sound value of the asset should be 15,000,000 while all other features did not change. Under the revaluation method,
compute for the revaluation surplus and depreciation expense at the end of the 6 th year.

Revaluation Surplus – 6,883,333

Depreciation Expense 966,667

15. Killian Jornet Company bought a facility that cost him 10,000,000 five years ago, 20 year useful life. Currently, the asset has
accumulated depreciation amounting to 2,375,000 based on straight line depreciation. At the beginning of the 6th year, the company’s
evaluated that the replacement cost of the asset should be 15,000,000 while all other features did not change. Under the revaluation
method, compute for the revaluation surplus and depreciation expense at the end of the 6 th year.
RS 3,500,000
DE 725,000

16. Lovandero Company made improvements to leased property amounting to 3,000,000 exactly at the beginning of the 3 rd year of a 10
year lease contract and the leasehold improvement will last for at least 15 years. The improvement has estimated residual value equal
to 10% of the original cost. The lease contract can be renewed for another 10 years and the company is certain that it will exercise the
renewal option. Compute for the depreciation expense at the end of the 3 rd year. 200,000

***end of handout***