Quiz no.

6 – Theories

Choose the among the standards of which would be applicable on the following situations
a. Investment Property PAS 40
b. Revenue from Contracts with Customers PFRS 15
c. Inventories PAS 2
d. Property Plant and Equipment PAS 16

1. Investment property is land or buildings (or part thereof) held by the owner or lessee under
a finance lease to earn rental income or for capital appreciation, or both. How should
management classify a property that is held for undetermined future use? A
2. You are given some land by the local council. Throughout 2XX3, you build a factory on the
land. On January 1st 2XX4, you let the factory to a third party. A
3. Bank A owns a hotel. B, a fellow subsidiary of A, manages a chain of hotels, and receives
management fees for operating its chain, except for the hotel owned by A. A’s hotel owned is
leased to B for 2,000,000 a month for a period of 5 years. Any profit or losses from
operating A’s hotel rests with B. The hotel that A owns has an estimated remaining useful
life of 40 years. How should A recognize the property? A
4. Referring to No. 3, assuming the financial statement has been consolidated, the hotel will be
classified as? D
5. You own a 99-year (finance) lease on a building. You have converted the building into 50
separate offices, for startup businesses. You plan to sublet these offices (via operating
leases) to different entrepreneurs, but are awaiting the approval of the local authorities. A
6. Property being built, or developed, on behalf of third parties. B
7. B is a supplier of industrial paint in Germany. In 20X3, B purchased a plot of land on the
outskirts of Frankfurt that has mainly low-cost public housing and has very limited public
transport facilities. The government has plans to develop the area as an industrial park in
five years’ time, and the land is expected to greatly appreciate in value if the government
proceeds with the plan. B’s management has not decided what to do with the property. A
8. You buy a property to let, but the tenant goes bankrupt. Temporarily you use it as offices
whilst you seek a new tenant. D
9. How should management recognize land held for a currently undetermined future use? C
10. Your client owns and manages an office building. Services provided to guests are significant
to the arrangement as a whole. D

11. Which of the following is false in commencing capitalization of borrowing costs?

a. Expenditure for the asset(s) has being incurred
b. Borrowing costs are being incurred
c. All necessary activities or tasks required to put the asset to its intended use or
sale are in progress.
d. There must be a loan
12. Capitalization of borrowing costs should stop when
a. Expenditure for the asset(s) has being incurred
b. All necessary activities or tasks required to put the asset to its intended use or
sale are in progress.
c. When work is suspended due to act of God or industrial strike for example
d. All the activities or tasks necessary to prepare the qualifying asset for its intended
use or sale is totally complete
13. An asset is being constructed for an entity’s own use. The asset has been financed with a
specific new borrowing. The interest cost incurred during the construction period is
a. A part of the historical cost of acquiring the asset to be written off over the
estimated useful life of the asset
b. A prepaid asset to be written off over the estimated useful life of the asset
c. A part of the cost of the asset to be written off over the term of the borrowing
d. Interest expense in the construction period
14. An investor uses the equity method to account for investments in ordinary shares. The
purchase price implies a fair value of the investee’s depreciable asset in excess of the
investee’s net asset carrying amounts. The investor’s amortization of the excess
a. Decreases the investment account
b. Decreases the goodwill account
c. Does not affect the investment account
d. Increases the investment revenue account
15. The composite depreciation method
a. Does not recognize gain or loss on the retirement of single asset in the group
b. Does not subtract residual value from the base of the depreciation calculation
c. Is an accelerated method of depreciation
d. Is applied to a group of homogenous assets
16. Which depreciation method is computed in the same way as depletion?
a. Productive output c. Straight line
b. Sum of the years’ digits d. Double declining balance
17. When an investor uses the equity method to account for an investment in ordinary shares and
the fair value option of reporting financial assets is not elected after the date of
acquisition. the investment account of the investor would
a. Be increased by its share of the earnings of the investee but would not be affected by
its share of the losses of the investee.
b. Be increased by its share of the earnings of the investee and decreased by its share
of the losses of the investee.
c. Not be affected by its share of the earnings or losses of the investee.
d. Not be affected by its share of the earnings of the investee but would be decreased by
its share of the losses of the investee.
18. An entity has investment property that leases to another entity. The entity uses the fair
value model to report investment property. Which of the following statements is true?
a. The entity should value the equipment at cost less accumulated depreciation and less
accumulated impairment losses.
b. The entity should report the increase in fair value in other comprehensive income for
the period.
c. The entity depreciates the equipment using normal depreciation method.
d. The entity does not record depreciation on the investment property
19. A derivative financial instrument is best described as
a. A contract that conveys to a second entity a right to future collections on accounts
receivable from a first entity
b. Evidence of an ownership interest in an entity such as ordinary shares
c. A contract that has its settlement value tied to an underlying and a notional amount
d. A contract that conveys to a second entity a right to receive cash from a first
entity.
20. The existence of significant influence by an entity is usually evidenced in one or more of
the following ways, which of the following is false
a. representation on the board of directors or equivalent governing body of the investee
b. participation in the operations, including participation in decisions about dividends
or other distributions
c. provision of essential technical information and non-technical information
d. material transactions between the entity and the investee
21. Which of the following is false regarding equity method?
a. On initial recognition the investment in an associate or a joint venture is recognized
at cost
b. Adjustments to the carrying amount may also be necessary for changes in the investor's
proportionate interest in the investee arising from changes in the investee's other
comprehensive income
c. Distributions received from an investee reduce the carrying amount of the investment
d. An entity's interest in an associate or a joint venture is determined solely on the
basis of existing ownership interests and, generally, does reflect the possible
exercise or conversion of potential voting rights and other derivative instruments.
22. Which of the following cases which the use of the equity method should cease from the date
that significant influence or joint control ceases is not true?
a. If the investment becomes a subsidiary, the entity accounts for its investment in
accordance with PFRS 3 Business Combinations and PFRS 10
b. If the retained interest is a financial asset, it is measured at fair value and
subsequently accounted for under PFRS 9
c. Any amounts recognized in other comprehensive income in relation to the investment in
the associate or joint venture are accounted for on the same basis as if the investee
had directly disposed of the related assets or liabilities
d. If an investment in an associate becomes an investment in a joint venture (or vice
versa), the entity does continues to apply the equity method and does not remeasure
the retained interest
23. Cost of the land does not include
a. Brokers’ Commissions
b. Draining of Swamps
c. Landscaping
d. Existing obligations assumed by buyer
24. What is the effective interest rate of a debt instrument measured at amortized cost?
a. The stated rate of the debt instrument
b. The interest rate currently charged by the entity or by others for similar debt
instrument
c. The interest rate that exactly discounts estimated future cash payments through the
expected life of the debt instrument to the net carrying amount of the instrument.
d. The basic, risk-free interest rate
25. When an entity holds between 20% and 50% of the outstanding ordinary shares of an investee,
which of the following statements applies?
a. The investor should always use the equity method to account for the investment.
b. The investor should use the equity method to account for the investment unless
Circumstances indicate that it is unable to exercise significant influence over the
investee
c. The investor must use the fair value method unless it can clearly demonstrate the
ability to exercise significant influence over the investee.
d. The investor should always use the fair value method to account for the investment.
26. How is the impairment test carried out for an investment in associate?
a. The goodwill is separated from the rest of the investment and is impairment tested
individually.
b. The entire carrying amount of the investment is tested for impairment by comparing the
recoverable amount with the carrying amount.
c. The carrying amount of the investment should be compared with the market value.
d. The recoverable amounts of all investments in associates should be assessed together
to determine whether there has been an impairment on all investments.
27. In which of the following circumstances is derecognition of a financial asset not
appropriate?
a. The contractual rights to the cash flows of the financial asset have expired.
b. The financial asset has been transferred and substantially all of the risks and
rewards of ownership of the transferred asset have also been transferred.
c. The financial asset has been transferred and the entity has retained substantially all
of the risks and rewards of ownership of the transferred asset.
d. The financial asset has been transferred and the entity has lost control of the
transferred asset.
28. Which of the following nonmonetary exchange transactions has commercial substance?
a. Exchange of assets with no difference in future cash flows.
b. Exchange of products by entities 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
entities involved to remain in essentially the same economic position.
29. 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 for major replacement
30. Borrowing costs can be capitalized as part of the cost of an asset when
a. The asset is a qualifying asset
b. The asset is a qualifying asset and it is not probable that the borrowing costs will
result in future economic benefits to the entity
c. The asset is a qualifying asset and it is probable that the borrowing costs will
result in future economic benefits to the entity but the costs cannot be measured
reliably
d. The asset is a qualifying asset and it is probable that the borrowing costs will
result in future economic benefits to the entity and the costs can be measured
reliably
31. Which of the following assets could be treated as qualifying asset for the purpose of
capitalizing interest costs?
a. Investment property
b. Investments in financial instruments
c. Inventories that are manufactured or produced in large quantity on a repetitive basis
and take a substantial period of time to get ready for use or sale
d. Biological assets
32. Which of the following statements is true regarding capitalization of interest?
a. Interest cost in connection with the purchase of land to be used as a building site
should be debited to the land 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.
33. Which of the following is true regarding government grant related to asset?
a. Depreciation is higher and net income lower if the grant is recorded as deferred
revenue
b. Depreciation is higher and net income lower if the grant is an adjustment to the asset
c. Depreciation is higher if the grant is a deferred revenue and net income is not
affected
d. Depreciation is higher if the grant is adjustment of the asset
34. Which of the following statements is incorrect in relation to government grant?
a. Any adjustment needed when a government grant becomes repayable is accounted for as a
change in accounting estimate
b. In respect of loan from the government at zero interest rate, an imputed interest
charge should be recognized in profit or loss
c. Where conditions apply to a government grant, it should only be recognized when there
is reasonable assurance that the conditions will be met
d. A government grant that becomes receivable as compensation for losses already incurred
should be recognized as income of the period in which it becomes receivable
35. Service life refers to the time an asset will be used and physical life refers to how long
the asset will last.
a. Physical life is the life of an asset without consideration of residual value and
service life requires the use of residual value
b. Physical life is always longer than service life
c. Service life refers to the length of time an asset is of use to the original owner,
while physical life refers to how long the asset will be used by all owners
d. Service life refers to the length of time an asset is of use to the original owner,
while physical life refers to how long the asset will be used by all owners
36. Of the following costs related to the development of mineral resources, which one should not
be included in depletable cost?
a. Acquisition cost of the mineral resource deposit
b. Exploration cost
c. Tangible equipment cost associated with machinery used to extract the mineral resource
d. Intangible development cost such as drilling cost, tunnel, and shaft
37. An entity is required to consider which of the following in developing accounting policy for
exploration and evaluation activities?
a. The requirements and guidance in Standards and Interpretations dealing with similar
and related issues.
b. The definitions, recognition criteria, and measurement concepts for assets,
liabilities, income, and expenses in the Conceptual Framework.
c. Recent pronouncements of standard-setting bodies, accounting literature and accepted
industry practices.
d. Whether the accounting policy results in information that is relevant and reliable.
38. When calculating the estimate of future cash flows, which of the following cash flows
should not be included?
a. Cash flows from disposal
b. Income tax payments
c. Cash flows from the sale of assets produced by the asset.
d. Cash outflows incurred to generate the cash inflows from the continuing use of the
asset
39. It is the action by government designed to provide an economic benefit specific to an entity
or range of entities qualifying under certain criteria.
a. Government assistance
b. Government grants
c. Grants related to assets
d. Grants related to income
40. These are assistance by government in the form of transfers of resources to an entity in
return for past or future compliance with certain conditions relating to the operating
activities of the entity.
a. Government assistance
b. Government grants
c. Grants related to assets
d. Grants related to income
41. Entity A is a manufacturer of medical devices. In 20X7 it successfully applied for financial
support from the local government to fund research into a particular new type of technology
that could lead to a significant improvement in healthcare. The local government agrees to
reimburse entity A 50 per cent of specified project costs over a two-year period. In
accordance with the agreement, entity A must meet specified targets with regards to testing
of the technologies being developed. The entity must also prepare six-monthly progress
reports for the government. If targets are met and progress is considered successful the
government is likely to provide further support in the future. Which of the following
statements is true?
a. The refund of a portion (50 per cent) of the qualifying project costs by the
government is a government grant.
b. The refund of a portion (50 per cent) of the qualifying project costs by the
government is a government assistance.
c. The refund of a portion (50 per cent) of the qualifying project costs by the
government is deferred until amortized for a period of six months.
d. The refund of a portion (50 per cent) of the qualifying project costs by the
government is recorded in full in statement of comprehensive income.
42. Entity A has an owner-occupied property which was later transferred to investment property at
fair value, a decrease in carrying amount to the property to its fair value at the date of
transfer
a. Is carried directly to equity under other comprehensive income and excess under profit
and loss for the decrease in carrying amount charged against revaluation surplus
b. Is absorbed by retained earnings by way of revaluation surplus
c. Is recognized in profit and loss at all times
d. Is recognized in profit and loss or charged against revaluation surplus to the extent
of credit balance.
43. A national government develops a scheme to encourage reductions in greenhouse gas emissions.
A government agency issues rights (allowances), free of charge, to participating entities to
emit a specified level of greenhouse gases. Participating entities in the scheme are able to
buy and sell allowances. There is an active market for trading in the allowances. At the end
of a specified period, participating entities are required to deliver allowances equal to
their actual emissions. Which of the followings statements is true?
a. The issue of the greenhouse gas emission allowances by the government agency to an
entity is a government grant as it is a transfer of resources (allowances) to an
entity in return for compliance with specified conditions (emission levels) relating
to its operating activities.
b. The issue of the greenhouse gas emission allowances by the government agency to an
entity is a government grant as it is a transfer of resources (allowances) to an
entity in return for compliance with no specified conditions (emission levels)
relating to its operating activities.
c. The issue of the greenhouse gas emission allowances by the government agency to an
entity is not a government grant as it is a transfer of resources (allowances) to an
entity in return for compliance with no specified conditions (emission levels)
relating to its operating activities.
d. The issue of the greenhouse gas emission allowances by the government agency to an
entity is not a government grant as it is a transfer of resources (allowances) to an
entity in return for non-compliance with no specified conditions (emission levels)
relating to its operating activities.
44. An entity entered, as lessee, into a finance lease over an item of equipment. At the
commencement of the lease term the entity recognized a P100,000 asset and a P100,000
liability. The entity incurred P5,000 costs to negotiate and arrange the lease. The entity
apportioned the minimum lease payment, between the finance charge and the reduction of the
outstanding liability. At what account should the finance charges be recorded?
a. As an interest cost which is outright expense
b. As a borrowing cost which is added to investment property
c. As a borrowing cost which is added to property plant and equipment
d. As an interest cost to be reclassified as borrowing cost upon commencement of lease
45. An entity incurs interest at the fixed rate of 2 per cent per year on a FCU100,000(2) loan
from a foreign bank that is repayable in full on the sixth anniversary of the loan. The
functional currency of the entity is the currency unit (CU). The entity borrowed money in a
foreign currency (FCU) because it believed that after taking account of the expected foreign
exchange loss attributed to the inflation differential between the CU and the FCU, the
effective interest rate on the FCU denominated loan would be 4 per cent per year when
equivalent local CU denominated loans bear interest at 5 per cent per year. Changes in the
CU/FCU exchange rate and the domestic inflation index proved to be consistent with the
entity’s predictions. Which of the following is true?
a. The exchange losses and the interest on the liability are borrowing costs, hence
additional cost attributable to asset account
b. The exchange losses and the interest on the liability are borrowing costs, hence
additional cost attributable to liability account
c. The sum of the exchange losses and the interest for the reporting period are less than
what the interest would have been on an equivalent CU denominated loan for the
reporting period, hence can be classified as borrowing cost
d. The sum of the exchange losses and the interest for the reporting period are less than
what the interest would have been on an equivalent CU denominated loan for the
reporting period, hence can be classified as borrowing cost which is to be added to
forex exchange gain
46. Which of the following is false with regard to PFRS 6 Exploration for and Evaluation of
Mineral Resources?
a. An entity adopting PFRS 6 may continue to use the accounting policies applied
immediately before adopting the IFRS. This includes continuing to use recognition and
measurement practices that are part of those accounting policies
b. Entities recognizing exploration and evaluation assets are required to perform an
impairment test on those assets when specific facts and circumstances outlined in the
standard indicate an impairment test is required. The facts and circumstances outlined
in PFRS 6 are exhaustive, and are applied instead of the 'indicators of impairment' in
PAS 36
c. Entities are permitted to determine an accounting policy for allocating exploration
and evaluation assets to cash-generating units or groups of CGUs. This accounting
policy may result in a different allocation than might otherwise arise on applying the
requirements of PAS 36
d. Exploration for and evaluation of mineral resources means the search for mineral
resources, including minerals, oil, natural gas and similar non-regenerative resources
after the entity has obtained legal rights to explore in a specific area, as well as
the determination of the technical feasibility and commercial viability of extracting
the mineral resource.
47. Which statement is incorrect regarding PPE?
a. Items of PPE should be recognized as assets when it is probable that the future
economic benefits associated with the asset will flow to the enterprise and the cost
of the asset can be measured reliably
b. If an asset acquired in exchange for another asset is not measured a fair value, its
cost is measured at the carrying amount of the asset given up
c. Depreciation should be charged to the income statement, unless it is included in the
carrying amount of another asset
d. Depreciation is not recognized if the fair value of the asset exceeds
its carrying amount, even if the asset’s residual value does not exceed its
carrying amount
48. Which statement is incorrect regarding investment property?
a. Gains or losses arising from changes in the fair value of investment property must be
included in net profit or loss for the period in which it arises.
b. The cost of the purchased investment property includes its purchase price and any
directly attributable expenditure
c. Transfer from investment property to property, plant, and equipment are appropriate
only when the entity adopts the fair value model under PAS 38
d. Investment property includes property that is being constructed or developed fuse as
an investment property
49. An entity imported machinery to install in its new factory before year-end. However, due to
circumstances beyond its control, the machinery was delayed by a few months but reached the
factory premises before year-end. While this was happening, the entity learned from the bank
that it was being charged interest on the loan it had taken to fund the cost of the plant.
What is the proper treatment of freight and interest expense under PAS 16?
a. Both expenses should be capitalized
b. Interest may be capitalized but freight should be expressed
c. Freight charges should be capitalized but interest cannot be capitalized under these
circumstances
d. Both expenses should be expensed
50. What is the acceptable approach in accounting for government grants?
a. Government grants should be recognized as income over the periods necessary to match
them with the related costs
b. Government grants should be credited directly to donated capital
c. Government grants should be credited directly to retained earnings
d. Government grants should be deferred and amortized over a maximum period of 20 years
51. Which of the following is not considered a borrowing cost?
a. Interest on short-term and long-term borrowings
b. Finance charges in respect of finance leases
c. Redeemable amount on redeemable preference share
d. All of the above are considered borrowing costs
52. When a qualifying asset is financed by both specific and general borrowings, the interest
rate to be used in computing capitalizable borrowing costs attributed to general borrowings
should be
a. the lowest interest rate on the general borrowings
b. the highest interest rate on the general borrowings
c. the weighted average interest rate on general borrowings
d. the average of the lowest and highest interest rates on the general borrowings
53. Capitalization of borrowing costs
a. Shall be suspended during temporary periods of delay
b. May be suspended only during extended periods of delay in which active development is
delayed
c. Should never be suspended once capitalization commences
d. Shall be suspended only during extended periods of delays in which active development
is delayed
54. 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.
55. 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. Yields services over a number of years
56. Which of these is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.
57. In a nonmonetary exchange, which of the following situations will require the asset to be
recognized at the recorded value of the asset relinquished?
a. A delivery truck exchanged for a delivery van that can deliver four times the quantity
of goods to customers
b. The exchanged item is intended to facilitate sales to customers
c. The cash flows from the new asset will be significantly different from cash flows of
the exchanged asset
d. The assets are both productive assets
58. For purposes of nonmonetary exchanges, the configuration of cash flows includes which of the
following?
a. The implicit rate, maturity date of loan, and amount of loan
b. The risk, timing, and amount of cash flows of the assets
c. The entity-specific value of the asset which is equal to the fair value of the asset
exchanged
d. The estimated present value of the assets exchanged
59. When determining the commercial substance of the exchange, which of the following items is
not considered?
a. Cash flow of exchanged asset
b. Cash flow of new asset
c. Cash flow from tax effects on the exchange to avoid taxes
d. Cash flow from potential sale of new equipment at a later date
60. In an exchange of assets that is deemed to lack commercial substance, Transit Co. received
equipment with a fair value equal to the carrying amount of equipment given up. Transit also
contributed cash. As a result of the exchange, Transit recognized
a. A loss equal to the cash given up
b. A loss determined by the proportion of cash paid to the total transaction value
c. A gain determined by the proportion of cash paid to the total transaction value
d. Neither gain nor loss.
61. May Co. and Sty Co. exchange nonmonetary assets. The exchange did not result in the expected
cash flows of the assets being significantly different for either May or Sty. May paid cash
to Sty in connection with the exchange. To the extent that the amount of cash exceeds a
proportionate share of the carrying amount of the asset surrendered, should a realized gain
on the exchange should be recognized by May and Sty respectively?
a. Yes Yes c. No Yes
b. Yes No d. No No
62. Vik Auto and King Clothier exchanged goods, held for resale, with equal fair values. Each
will use the other’s goods to promote their own products. The retail price of the car that
Vik gave up is less than the retail price of the clothes received. Assuming the transaction
has commercial substance, what profit should Vik recognize for the nonmonetary exchange?
a. A profit is not recognized
b. A profit equal to the difference between the retail prices of the clothes received and
the car
c. A profit equal to the difference between the retail price and the cost of the car
d. A profit equal to the difference between the fair value and the cost of the car
63. An entity disposes of a nonmonetary asset in a nonreciprocal transfer. A gain or loss should
be recognized on the disposition of the asset when the fair value of the asset transferred is
determinable and the nonreciprocal transfer is to Another entity or A stockholder of the
entity?
a. No Yes c. Yes No
b. No No d. Yes Yes
64. Lano Corp.’s forest land was condemned for use as a national park. Compensation for the
condemnation exceeded the forest land’s carrying amount. Lano purchased similar, but larger,
replacement forest land for an amount greater than the condemnation award. As a result of the
condemnation and replacement, what is the net effect on the carrying amount of forest land
reported in Lano’s balance sheet?
a. The amount is increased by the excess of the replacement forest land’s cost over the
condemned forest land’s carrying amount
b. The amount is increased by the excess of the replacement forest land’s cost over the
condemnation award
c. The amount is increased by the excess of the condemnation award over the condemned
forest land’s carrying amount
d. No effect, because the condemned forest land’s carrying amount is used as the
replacement forest land’s carrying amount
65. A building suffered uninsured fire damage. The damaged portion of the building was
refurbished with higher quality materials. The cost and related accumulated depreciation of
the damaged portion are identifiable. To account for these events, the owner should
a. Reduce accumulated depreciation equal to the cost of refurbishing
b. Record a loss in the current period equal to the sum of the cost of refurbishing and
the carrying amount of the damaged portion of the building
c. Capitalize the cost of refurbishing and record a loss in the current period equal to
the carrying amount of the damaged portion of the building
d. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the
building.
66. Derby Co. incurred costs to modify its building and to rearrange its production line. As a
result, an overall reduction in production costs is expected. However, the modifications did
not increase the building’s market value, and the rearrangement did not extend the production
line’s life. Should the building modification costs and the production line rearrangement
costs be capitalized?
a. Yes No
b. Yes Yes
c. No No
d. No Yes
67. A company using the composite depreciation method for its fleet of trucks, cars, and campers
retired one of its trucks and received cash from a salvage company. The net carrying amount
of these composite asset accounts would be decreased by the
a. Cash proceeds received and original cost of the truck
b. Cash proceeds received
c. Original cost of the truck less the cash proceeds
d. Original cost of the truck
68. During year 4, the management of West Inc. decided to dispose of some of its older equipment
and machinery. By year-end, December 31, year 4, these assets had not been sold, although the
company was negotiating their sale to another company. On the December 31, year 4 balance
sheet of West Inc., this equipment and machinery should be reported at
a. Fair value
b. Carrying amount
c. The lower of carrying amount or fair value
d. The lower of carrying amount or fair value less cost to sell
69. At December 31, year 4, Matson Inc. was holding long-lived assets that it intended to sell.
The assets do not constitute a separate component of the company. The company appropriately
recognized a loss in year 4 related to these assets. On Matson’s income statement for the
year ended December 31, year 4, this loss should be reported as a(n)
a. Extraordinary item
b. Component of income from continuing operations before income taxes
c. Separate component of selling or general and administrative expenses, disclosed net of
tax benefit
d. Component of the gain (loss) from sale of discontinued operations, disclosed net of
income taxes
70. Taft Inc. recognized a loss in year 3 related to long-lived assets that it intended to sell.
These assets were not sold during year 4, and the company estimated, at December 31, year 4,
that the loss recognized in year 3 had been more than recovered. On the December 31, year 4
balance sheet, Taft should report these long-lived assets at their
a. Fair value on December 31, year 3
b. Fair value less cost to sell on December 31, year 3
c. Fair value on December 31, year 4
d. Carrying amount on December 31, year 3
71. Assets intended to be held and used for productive purposes may suffer from impairment in
each of the following circumstances except
a. A change in the way the assets are used or physical change in the assets
b. Asset costs incurred exceed the original amounts planned
c. Discounted expected future cash flows and interest charges are less than the carrying
amount of the assets
d. A significant adverse change in legal factors that might affect the assets’ fair value
72. Which of the following statements is(are) correct about the carrying amount of a long-lived
asset after an impairment loss has been recognized? Assume the long-lived asset is being held
for use in the business and that the asset is depreciable.
i. The reduced carrying amount of the asset may be increased in subsequent years
if the impairment loss has been recovered
ii. The reduced carrying amount of the asset represents the amount that should be
depreciated over the asset’s remaining useful life
a. I only
b. II only
c. Both I and II
d. Neither I nor II
73. If a long-lived asset is determined to be impaired, how is the loss calculated?
a. Future discounted cash flows less asset’s carrying (book) value
b. Future undiscounted cash flows less asset’s carrying (book) value
c. Fair value less asset’s carrying (book) value
d. Cash outflows needed to obtain cash inflows
74. Long-lived assets are required to be reviewed for impairment
a. At the balance sheet date, every three years
b. When the asset is fully depreciated
c. When circumstances indicate that the carrying amount of an asset might not be
recoverable
d. At the balance sheet date, every year
75. Wilson Company maintains its records under PFRS. During the current year Wilson sold a piece
of equipment used in production. The equipment had been accounted for using the revaluation
method and details of the accounts and sale are presented below. Sales price P100,000
Equipment book value (net) 90,000 Revaluation surplus 20,000, Which of the following is
correct regarding recording the sale?
a. The gain that should be recorded in profit and loss is P30,000
b. The gain that should be recorded in other comprehensive income is P10,000
c. The gain that should be recorded in other comprehensive income is P30,000
d. The gain that should be recorded in profit and loss is P10,000; the P20,000
revaluation surplus should be transferred to retained earnings
76. Under IFRS, when an entity chooses the revaluation model as its accounting policy for
measuring property, plant, and equipment, which of the following statements is correct?
a. When an asset is revalued, the entire class of property, plant, and equipment to which
that asset belongs must be revalued
b. When an asset is revalued, individual assets within a class of property, plant, and
equipment to which that asset belongs can be revalued
c. Revaluations of property, plant, and equipment must be made at least every three years
d. Increases in an asset’s carrying value as a result of the first revaluation must be
recognized as a component of profit or loss
77. What should happen when the financial statements of an associate are not prepared at the same
date as the financial statements of the investor?
a. As long as the gap is not greater than three months, there is no problem
b. The financial statements of the associate prepared up to a different date is used as
normal
c. The associate should prepare financial statements for the use of the investor at the
same date as that of the investor
d. Any major transactions between the date of the financial statements of the investor
and that of the associate should be accounted for
78. A passive interest in another entity should be accounted for by
a. Consolidation c. Using the equity method
b. Using effective interest method d. Using the fair value method
79. Held for collection debt instrument are reported at
a. Acquisition cost c. Fair value
b. Amortized cost d. Maturity value
80. Which of the following is false in Exemptions from applying the equity method
a. The entity is a parent that is exempt from preparing consolidated financial statements
under PFRS 10 Consolidated Financial Statements
b. When an investment in an associate or a joint venture is held by, or is held
indirectly through, an entity that is a unit trust
c. When an investment in an associate or a joint venture is held by, or is held
indirectly through investment-linked insurance funds
d. All of the above are true
81. Use of the equity method should cease from the date that significant influence or joint
control ceases, which of the following choices is false?
a. If the investment becomes a subsidiary, the entity accounts for its investment in
accordance with PFRS 3 Business Combinations and PFRS 10
b. If the retained interest is a financial liability, it is measured at fair value and
subsequently accounted for under PFRS 9
c. If an investment in an associate becomes an investment in a joint venture (or vice
versa), the entity continues to apply the equity method and does not remeasure the
retained interest.
d. All of the above are true
82. Which of the following is false in the equity method procedures?
a. Profits and losses resulting from upstream and downstream transactions are eliminated
to the extent of the investor's interest in the associate or joint venture
b. Unrealized losses are eliminated to the extent that the transaction provides evidence
of a reduction in the net realizable value or in the recoverable amount of the assets
transferred
c. The interest in an associate or joint venture is the carrying amount of the investment
in the associate or joint venture under the equity method together with any long-term
interests that, in substance, form part of the investor or joint venture’s net
investment in the associate or joint venture
d. When applying the equity method to an associate or a joint venture, a non-investment
entity investor in an investment entity may retain the fair value measurement applied
by the associate or joint venture to its interests in subsidiaries
83. An improvement made to an old machine increased its fair value and its production capacity by
25% without extending the machine’s useful life. The cost of improvement preferably should be
a. Capitalized c. Recorded as a liability
b. Expensed d. Recoded as a loss
84. An entity installed a new production facility and incurred a number of expenses at the point
of installation. The entity’s accountant is arguing that most expenses do not qualify for
capitalization. Included in those expenses are initial operating losses. Those should be
a. Deferred and amortized over a reasonable period of time
b. Expensed and charged to profit or loss
c. Capitalized as part of the cost of the plant directly attributable cost
d. Taken to retained earnings since it is unreasonable to treat is as part of profit or
loss.
85. A company constructed machinery for its own use. A bank loan specifically financed this
property both during and after the construction. How much of the interest incurred should be
reported as interest expense?
a. All interest incurred
b. Interest incurred after completion
c. Interest incurred before completion
d. ZERO