PROPERTY, PLANT & EQUIPMENT – Quiz Material

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) I only (c) both I and II
(b) II only (d) neither I nor II C

2. Which statement is false concerning recognition of property, plant and equipment?

(a) Most spare parts and servicing equipment are usually carried as inventory and recognized
as expense when consumed.
(b) If the spare parts and servicing equipment can be used only in connection with an item of
property, plant and equipment and their use is expected to be irregular, they are
accounted for as property, plant and equipment and are depreciated over their useful life
or useful life of the related asset, whichever is longer.
(c) An aircraft and its engines need to be treated as separate depreciable assets if they have
different useful lives.
(d) Property, plant and equipment may be acquired for safety and environmental reasons in
order for the enterprise to obtain future economic benefits from its other assets. B

3. As a benchmark treatment, subsequent to initial recognition as an asset, an item of property,

plant and equipment should be carried at:
(a) cost
(b) revalued amount
(c) cost less any accumulated depreciation and any accumulated impairment loss
(d) revalued amount less any accumulated depreciation and any accumulated impairment loss
C
4. Directly attributable costs include all of the following except:
(a) cost of site preparation, initial delivery, handling and installation
(b) professional fees such as for architects and engineers
(c) estimated cost of dismantling and removing the asset and restoring the site, to the extent
that it is recognized as a provision
(d) initial operating losses incurred prior to an asset achieving planned performance D

5. When payment for item of property, plant and equipment is deferred beyond normal credit
terms, the difference between the cash price equivalent and the total payments should be
recognized as:
(a) interest expense of the current year
(b) component of cost of the property, plant and equipment
(c) interest expense over the credit period
(d) interest expense over the life of the asset C

6. The cost of an item of property, plant and equipment that is acquired in exchange or part
exchange for a dissimilar item of property, plant and equipment is measured at the:
(a) fair value of the asset given up adjusted by the amount of any cash or cash equivalent
transferred
(b) fair value of the asset received adjusted by the amount of any cash or cash equivalent
transferred
(c) book value of the asset given up adjusted by the amount of any cash or cash equivalent
transferred
(d) book value of the asset received adjusted by the amount of any cash or cash equivalent
transferred A
7. The cost of an item of property, plant and equipment acquired in a nonmonetary exchange
for a similar asset that has a similar use and similar fair value is measured at the:
(a) carrying amount of the asset given up
(b) fair value of the asset given up
(c) carrying amount of the asset received
(d) fair value of the asset received A

8. Gains and losses arising from the retirement or disposal of an item of property, plant and
equipment should be determined as the difference between:
(a) gross disposal proceeds and the cost of the asset
(b) gross disposal proceeds and the carrying amount of the asset
(c) net disposal proceeds and the cost of the asset
(d) net disposal proceeds and the carrying amount of the asset D

9. An item of property, plant and equipment that is retired from active use and held for disposal
is carried at its:
(a) carrying amount
(b) net realizable value
(c) carrying amount or net realizable value, whichever is lower
(d) carrying amount or net realizable value, whichever is higher C

10. If a company 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 the cost allocated to the building in relation to the 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 the management for the property when the building was acquired D

11. What is the benchmark treatment for the borrowing costs?

(a) Borrowing costs should be recognized as expense in the period in which they are incurred
regardless of how borrowings are applied.
(b) Borrowing costs that are directly attributable to the acquisition, construction and
production of a qualifying asset should be capitalized as cost of the asset.
(c) Borrowing costs should be deferred and subsequently amortized over the term of the
borrowing.
(d) Borrowing costs should be capitalized regardless of how borrowings are applied. A

12. As to land, capitalizable incidental costs do not include?

(a) legal fees for establishing clean title
(b) commission paid to broker
(c) cost of permanent improvement such as grading, leveling and other landscaping
(d) expenditures for fence, water system, sidewalk and paving D

13. 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 obtained from the asset by the
enterprise.
(a) I only (c) both I and II
(b) II only (d) neither I nor II C

14. Carrying amount is:

(a) Cost of an asset or the amount substituted for cost in the financial statements, less its
residual value.
(b) Amount of cash or cash equivalent paid or the fair value of the other consideration given
to acquire an asset at the time of its acquisition or construction.
(c) 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.
(d) Amount at which an asset is recognized in the balance sheet after deducting any
accumulated depreciation and accumulated impairment loss. D
15. The sum of units method of depreciation results in:
(a) constant charger over the life of the asset.
(b) decreasing charge over the life of the asset.
(c) increasing charge over the life of the asset.
(d) charge based on the expected use or output of the asset. D

16. If there is a change from double declining balance to straight line method:
(a) The accumulated depreciation is adjusted to its appropriate balance through retained
earnings based on the straight line method.
(b) The accumulated depreciation is adjusted to its appropriate balance through net income
based on the straight line method.
(c) The accumulated depreciation is not adjusted but the remaining book value is allocated
over the remaining life using the straight line method.
(d) The accumulated depreciation is not adjusted but the remaining book value is allocated
over the original life using the straight line method. C

17. Rock Company acquired equipment on January 1, 2000. Rock used the straight line
depreciation with a useful life of 15 years and no residual value for this equipment. On
January 1, 2004, Rock estimated that the remaining life of the equipment was six years with
no residual value. How should this change be accounted for?
(a) Revising future depreciation annually to equal the original cost divided by six.
(b) Revising future depreciation annually to equal the carrying amount of January 1, 2004
divided by six.
(c) Disclosing the effect of the change on each year’s earnings, but maintaining the
depreciation as originally determined.
(d) Revising future depreciation annually to equal the depreciable amount divided by six. B

18. What is the recoverable amount of an asset?

(a) net selling price
(b) value in use
(c) net selling price or value in use, whichever is higher
(d) net selling price or value in use, whichever is lower C

19. Value in use of an asset is equal to the:

(a) undiscounted future net cash flows from the use of the asset
(b) undiscounted future net cash flows from the use and eventual disposition of the asset
(c) discounted future net cash flows from the use of the asset
(d) discounted future net cash flows from the use and eventual disposition of the asset D

20. The estimates of future cash flows in calculating value in use should include all of the
following, except:
(a) cash inflows from the continuing use of the asset
(b) cash outflows incurred to generate the cash inflows from the continuing use of the asset
(c) net cash flows from the disposal of the asset at the end of its useful life
(d) future cash outflows for capital expenditure that will improve the asset beyond the
standard of performance originally assessed D

Items 21 and 22:

On January 11, 2002, Cart Corporation bought a piece of land as an office site for P200,000.
An old building on the property was demolished and on February 1, 2002, the construction of
the new building started and was completed on October 15, 2002. Costs incurred during this
period were:
Architect’s fees P20,000
Construction costs 400,000
Demolition of old building 10,000
Interest on construction loan 8,000
Legal fees for title investigation and
purchase contract 5,000
Proceeds from the sale of salvaged
materials from the demolition 15,000
21. The amount that Cart Corporation should record for the cost of the land is:
(a) P190,000 (b) P200,000 (c) P205,000 (d) P215,000 B
22. The amount that Cart Corporation should record for the cost of the building is:
(a) P438,000 (b) P428,000 (c) P423,000 (d) P413,000 B

Items 23 to 26:
Mart Company acquired a tract of land on which was located an office building, a warehouse,
and a manager’s residence for a lump sum price of P675,000. The following data were taken
relative to these real properties:
Current Vendor’s
Assessed Valuation Original Cost
Land P218,750 P175,000
Office building 200,000 180,000
Warehouse 93,750 100,000
Manager’s residence 50,000 45,000
P562,500 P500,000

23. What cost should be assigned to the land?

(a) P262,500 (b) P218,750 (c) P236,250 (d) P175,000 A
24. What cost should be assigned to the office building?
(a) P180,000 (b) P240,000 (c) P200,000 (d) P243,000 B
25. What cost should be assigned to the warehouse?
(a) P112,500 (b) P93,750 (c) P135,000 (d) P100,000 A
26. What cost should be assigned to the manager’s residence?
(a) P45,000 (b) P50,000 (c) P60,000 (d) P60,750 C

27. The following expenditures relating to the plant building were made by Pine Company during
the year ended December 31, 2002:
Replacement of a broken gear on a machine P1,500
Replacement of tiles on a portion of the roof 4,500
Overhaul of machinery that is expected to extend its
useful life for another three years 7,500
How much should be charged to expense in 2002?
(a) P1,500 (b) P4,500 (c) P6,000 (d) P9,000 C

28. In December 2002, West Company exchanged an old packing machine, which cost P120,000
and was 50% depreciated, for a dissimilar used machine and paid a cash difference of
P16,000. The market value of the old packaging machine was determined to be P70,000.
For the year ended December 31, 2002, what amount of gain should West recognize on this
exchange?
(a) P 0 (b) P16,000 (c) P50,000 (d) P10,000 D

29. On January 1, 2002, Dean Company purchased a new machine for P4,000,000. The new
machine has an estimated useful life of eight years and the salvage value was estimated to be
P400,000. Depreciation was computed on the sum-of-the-years-digits method. What amount
should be shown in Dean’s balance sheet at December 31, 2003, net of accumulated
depreciation for this machine?
(a) P2,100,000 (b) P2,500,000 (c) P1,150,000(d) P3,300,000 B

30. Bright Company purchased factory equipment which was installed and put into service
January 3, 2002 at a total cost of P1,280,000. Salvage value was estimated at P80,000. The
equipment is being depreciated over 8 years by the double declining balance method. For the
year 2003, how much depreciation expense should Bright record on this equipment?
(a) P225,000 (b) P240,000 (c) P300,000 (d) P320,000 B
31. Sheree Company uses the inventory system to account for numerous small tools used by
employees. The balance of the tools account at the beginning of 2003 was P350,000. The
following activity concerning small tools occurred during 2003:
Acquisitions (at cost):
January – June P180,000
July – December 70,000
Sale of used tools (at salvage value) December 31 5,000
Inventory of tools on December 31, 2003 (at cost) 300,000
What is the depreciation of tools for 2003?
(a) P295,000 (b) P300,000 (c) P250,000 (d) P245,000 A

32. Cream Corporation provided the following information with respect to its building:
 The building was acquired January 1, 1998 at a cost of P7,800,000 with an estimated
useful life of 40 years and salvage value of P200,000. Yearly depreciation was
computed on the straight line method.
 The building was renovated on January 1, 2000 at a cost of P760,000. This was
considered as improvement. Salvage value did not change.
 On January 1, 2003, the management decided to change the total life of the building
to 30 years.
What is the depreciation on the building for 2003?
(a) P292,400 (b) P266,000 (c) P334,400 (d) P294,000 D

33. On December 31, 2002, Zee Company has an equipment with the following cost and
accumulated depreciation:
Equipment P9,000,000
Accumulated depreciation 3,000,000
Due to obsolescence and physical damage, the equipment is found to be impaird. On
December 31, 2002, Zee has determined the following:
Fair value of the equipment P4,500,000
Value in use of the equipment 4,000,000
Zee Company should report an impairment loss for the year 2002 at:
(a) P1,500,000 (b) P2,000,000 (c) P500,000 (d) P 0 A

34. During December 2002, Bob Company determined that there had been a significant decrease
in market value of its equipment used in its manufacturing process. At December 31, 2002,
Bob compiled the information below:
Original cost of equipment P5,000,000
Accumulated depreciation 3,000,000
Expected undiscounted net future cash inflows
related to the continued use and eventual
disposal of the equipment 1,750,000
Fair value of the equipment 1,250,000
What is the amount of impairment loss that should be reported on Bob’s income statement
for the year ended December 31, 2002?
(a) P3,250,000 (b) P3,750,000 (c) P750,000 (d) P250,000 C

35. Pike Company acquired a plant asset at the beginning of year 1. The asset has an estimated
useful service life of 5 years. An employee has prepared depreciation schedules for this asset
using two different methods to compare the results of using one method with the results of
other methods. You are to assume that the following schedules have been correctly prepared
for this asset using the straight-line method (SL) and the double declining balance (DDB).
Year SL DDB
1 P6,000 P13,200
2 6,000 7,920
3 6,000 4,752
4 6,000 2,851
5 6,000 1,277
P30,000 P30,000
The acquisition cost of the plant asset was:
(a) P30,000 (b) P31,277 (c) P33,000 (d) P36,000 C
36. Part’s building is being depreciated using the straight-line method. The building has a 20-
year estimated useful life and an estimated salvage value of P6,000,000. The number of
years the building has been depreciated by Part as of November 30, 2002 is:
(a) 7.5 years (b) 12.5 years (c) 9 years (d) 15 years C

Solution: Depreciable cost (P36,000,000 – 6,000,000) P30,000,000

Annual depreciation (P30,000,000 / 20) P1,500,000
Years expired (P13,500,000 / 1,500,000) 9 years

37. On March 31, 2002, Win Company traded in an old machine having a carrying amount of
P168,000 and paid a cash difference of P60,000 for a new machine having a total cash price
of P205,000. On March 31, 2002, what amount of loss should Win recognize on this
exchange?
(a) P 0 (b) P23,000 (c) P37,000 (d) P60,000 B

38. On October 1, 2002, Shaw purchased a machine for P126,000 that was placed in service on
November 30, 2002. Shaw incurred additional costs for this machine, as follows:
Shipping P3,000
Installation 4,000
Testing 5,000
In Shaw’s December 31, 2002 balance sheet, the machine’s cost should be reported as:
(a) P126,000 (b) P129,000 (c) P133,000 (d) P138,000 D

39. On January 2, 2002, Park replaced its boiler with a more efficient one. The following
information was available on that date:
Purchase price of new boiler P60,000
Carrying amount of old boiler 5,000
Fair value of old boiler 2,000
Installation cost of new boiler 8,000
The old boiler was sold for P2,000. What amount should Parke capitalize as the cost of the
new boiler?
(a) P68,000 (b) P66,000 (c) P63,000 (d) P60,000 A

40. Scar Company had purchased equipment for P2,800,000 on December 31, 2000. The
equipment had an 8 year life and salvage value of P400,000. Scars depreciated the
equipment using the straight line method. In August 2004, the undiscounted expected net
future cash inflows related to the continued use and eventual disposition of equipment total
P1,750,000. The equipment’s fair value on August 31, 2004 is P1,500,000. After any loss on
impairment has been recognized, what is the carrying amount of Scar’s equipment?
(a) P1,750,000 (b) P1,700,000 (c) P1,500,000 (d) P1,300,000 B