PROPERTY PLANT AND EQUIPMENT

1. Property, plant, and equipment may properly include

a. deposits on machinery not yet received.
b. idle equipment classified as held for sale asset under PFRS 5.
c. land held for speculation, rather than for use in the entity’s normal business activities.
d. none of these.

2. Which of these is not a major characteristic of a PPE?

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 PPE.

3. PPE purchased on long-term credit contracts should be initially recognized at

a. the total amount of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.

4. Nimbus Inc. purchased certain plant assets under a deferred payment contract. The agreement was to pay ₱30,000
per year for ten years. The plant assets should be initially measured at
a. ₱300,000.
b. ₱300,000 plus imputed interest.
c. present value of ₱30,000 annuity for ten years at an imputed interest rate.
d. future value of ₱30,000 annuity for ten years at an imputed interest rate.

5. A company purchased land to be used as the site for the construction of a plant. Timber was cut from the building site
so that construction of the plant could begin. The proceeds from the sale of the timber should be
a. classified as other income.
b. netted against the costs to clear the land and expensed as incurred.
c. deducted from the cost of the plant.
d. deducted from the cost of the land.

6. Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to tear
down the Holiday Hotel and build a new luxury hotel on the site. The demolition costs of the Holiday Hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.

7. The cost of land typically includes the purchase price and all of the following costs except
a. improvements, such as grading, filling, draining, and clearing.
b. survey costs.
c. cost of private driveways and parking lots.
d. assumption of any liens or mortgages on the property.

8. A donated plant asset for which the fair value has been determined, and for which incidental costs were incurred in
acceptance of the asset, should be recorded at an amount equal to its
a. incidental costs incurred.
b. fair value.
c. book value on books of donor and incidental costs incurred.
d. book value on books of donor.

9. The debit for a non-refundable sales tax properly levied and paid on the purchase of machinery preferably would be a
charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on income).
d. accumulated depreciation--machinery.
10.A cost may be capitalized (capital expenditure) if
a. it clearly increases the useful life of an asset.
b. it increases the quantity of an asset.
c. it clearly increases the quality of an asset beyond its original state.
d. Any of these

11. Merry Co. purchased a machine costing ₱125,000 for its manufacturing operations and paid shipping costs of
₱20,000. Merry spent an additional ₱10,000 in testing and preparing the machine for use. What amount should Merry
record as cost of the machine?
a. 155,000 b. 145,000 c. 135,000 d. 125,000

12. Peterson, Inc. purchased a machine under a deferred payment contract on December 31, 20x1. Under the terms of
the contract, Peterson is required to make eight annual payments of ₱140,000 each beginning December 31, 20x2. The
appropriate interest rate is 8%. The purchase price of the machine is
a. 1,389,190 b. 1,120,000 c. 868,900 d. 804,520

13. Marburg Manufacturing Company purchased a machine on January 2, 20x2. The invoice price of the machine was
₱40,000, and the vendor offered a 2 percent discount for payment within ten days. The following additional costs were
incurred in connection with the machine:
Transportation-in 1,200
Installation cost 700
Testing costs prior to regular operation 550
If the invoice is paid within the discount period, Marburg should record the acquisition cost of the machine at
a. 41,650 b. 41,100 c. 40,400 d. 39,200

14. Enter Sandman Co. purchased manufacturing equipment from Sad But True Co. on January 1, 20x8 at a total cost of
₱9,000,000. Enter Sandman uses the straight-line method of depreciation and estimates that the equipment has a useful
life of 10 years. On July 1, 20x8 and July 1, 20x9 Enter Sandman performed major regular inspections on the equipment
costing ₱380,000 and ₱425,000, respectively. The costs of inspection satisfied the recognition criteria for capitalization.
How much is the carrying amount of the equipment on December 31, 2009?
a. 7,920,000 b. 7,875,000 c. 7,529,412 d. 7,600,000

15. Light Company bought a machine for ₱300,000 on January 1, 20x8. The machine's useful life is 10 years and it is
estimated to have a zero residual value and is depreciated using the straight-line method.

The revalued amount of the machine is as follows:

December 31 Fair values of the machine
20x8 ₱ 360,000
20x9 335,000
2x10 320,000
The enacted tax rate was 30% for each year

The revaluation surplus in the equity section of Light Company’s December 31, 20x8 statement of financial position is
a. 60,000
b. 90,000
c. 39,000
d. 63,000
16. The amount of depreciation expense to be recognized in 20x9 is
a. 32,500
b. 36,000
c. 40,000
d. 42,500

17. The amount of revaluation surplus transferred to retained earnings in 20x9 is

a. 6,667
b. 7,000
c. 4,333
d. 10,000

18. The revaluation surplus in the equity section of Light Company's December 31, 2x10 statement of financial position is
a. 77,000
b. 110,000
c. 123,443
d. 109,500

19. On January 1, 20x1 Buckle Co. purchased a machine that had a list price of ₱46,320. Buckle Co. paid cash of ₱18,000
and executed a one-year non-interest bearing note for the balance. The going rate of interest was 18%. The machine has
a 6-year life and no residual value. Depreciation expense on the SYD basis at the end of 20x1 is:
a. 8,092
b. 12,000
c. 13,234
d. 14,690

20. Marburg Manufacturing Company purchased a machine on January 2, 20x2. The invoice price of the machine was
₱40,000, and the vendor offered a 2 percent discount for payment within ten days. The following additional costs were
incurred in connection with the machine:
Transportation-in 1,200
Installation cost 700
Testing costs prior to regular operation 550
If the invoice is paid within the discount period, Marburg should record the acquisition cost of the machine at
a. 41,650
b. 41,100
c. 40,400
d. 39,200

21. On July 1, 20x1, Town Company purchased for ₱540,000 a warehouse building and the land on which it is located.
The following data were available concerning the property:
Current appraised value Seller’s original cost
Land 200,000 140,000
Warehouse building 300,000 280,000
Totals 500,000 420,000
Town should record the land at
a. 140,000
b. 180,000
c. 200,000
d. 216,000

22. The Oscar Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum price of
₱180,000. At the time of acquisition, Oscar paid ₱12,000 to have the assets appraised. The appraisal disclosed the
following values:
Land 120,000
Buildings 80,000
Equipment 40,000
What cost should be assigned to the land, buildings, and equipment, respectively?
a. 64,000, 64,000, and 64,000
b. 90,000, 60,000, and 30,000
c. 96,000, 64,000, and 32,000
d. 120,000, 80,000, and 40,000

23. On December 1, 20x1, Boyd Co. purchased a ₱400,000 tract of land for a factory site. Boyd razed an old building on
the property to make way for the construction of the new factory. Boyd sold the materials it salvaged from the
demolition. Boyd incurred additional costs and realized salvage proceeds during
December 20x1 as follows:
Demolition of old building ₱50,000
Legal fees for purchase contract and recording ownership 10,000
Title guarantee insurance 12,000
Proceeds from sale of salvaged materials 8,000

In its December 31, 20x1 statement of financial position, Boyd should report a balance in the land account of
a. 464,000
b. 460,000
c. 442,000
d. 422,000

24. On February 12, Laker Company purchased a tract of land as a factory site for ₱175,000. An existing building on the
property was razed and construction was begun on a new factory building in March of the same year. Additional data
are available as follows:
Cost of razing old building 35,000
Title insurance and legal fees to purchase land 12,500
Architect's fees 42,500
New building construction cost 875,000

The recorded cost of the completed factory building should be

a. 910,000
b. 917,500
c. 930,000
d. 952,500

25. Amble, Inc. exchanged a truck with a carrying amount of ₱12,000 and a fair value of ₱20,000 for a truck and ₱5,000
cash. The fair value of the truck received was ₱15,000. At what amount should Amble record the truck received in the
exchange?
a. 7,000
b. 9,000
c. 12,000
d. 15,000

26. On March 31, 20x1, Winn Company traded in an old machine having a carrying amount of ₱16,800, and paid a cash
difference of ₱6,000 for a new machine having a total cash price of ₱20,500. On March 31, 20x1, what amount of loss
should Winn recognize on this exchange?
a. 0
b. 2,300
c. 3,700
d. 6,000

27. On October 1, Takei, Inc. exchanged 8,000 shares of its ₱25 par value ordinary share for a parcel of land to be held
for a future plant site. Takei's ordinary share had a fair value of ₱80 per share on the exchange date. Takei received
₱36,000 from the sale of scrap when an existing building on the site was razed. The land should be carried at
a. 200,000
b. 236,000
c. 604,000
d. 640,000
PROVISIONS AND CONTINEGENT LIABILITIES
1. Which of the following about provisions is not correct?
A. Provisions are a liability.
B. Provisions are a contingent liability.
C. Provisions are often an estimate.
D. Provisions are an uncertain liability.

2. Which of the following about contingent liabilities is correct?

A. Contingent liabilities have the same accounting treatment as provisions.
B. Contingent liabilities must be recognized in the statement of financial position.
C. Contingent liabilities are a possible obligation where the outflow of resources in the future is certain.
D. Contingent liabilities are a present obligation where the outflow of resources in the future is not probable.

3. Which of the following about contingent assets is not correct?

A. Contingent assets are possible assets as their present existence is unclear.
B. Contingent assets are based on the definition of an asset according to the Conceptual Framework.
C. Contingent assets are recognised in the statement of financial position and in the notes to the accounts.
D. Contingent assets are disclosed in the notes to the accounts where the flow of economic benefits is probable.

4. Which of the following describes elements of when a provision is recognised in the statement of financial position?
Item I A present obligation as a result of a future event.
Item II The provision amount must be measured accurately.
Item III An outflow of economic benefits to settle the obligation is probable.
Item IV The provision amount can be measured reliably, even if it has to be estimated.
A. I and III only.
B. III and IV only.
C. I, II and IV only.
D. II, III and IV only.

5. RRR Ltd (RRR) operates in the recycling industry. Three weeks ago, it inadvertently released poisonous gases into the
air which caused a number of local residents to become ill. A law firm representing the affected residents has submitted
a compensation claim to the entity for pain and suffering of between $10 000 to $50 000 per affected resident. There
was a total of 15 residents affected. The court hearing is scheduled to occur sometime over the next three months. RRR
does not believe that they will be required to make any payments to claimants, as this was an accident and no-one has
been seriously harmed as a result.

Which of the following is the most correct approach for accounting for this event?
A. As a liability as it is a present obligation arising as a result of a past event that will result in a probable outflow of
economic benefits which can be reliably measured.
B. As a contingent liability as it is a possible obligation arising as a result of a past event that may result in a probable
outflow of economic benefits which can be reliably measured.
C. No recognition or disclosure is required as there is no present obligation arising as a result of a past event that will
result in a probable outflow of economic benefits which can be reliably measured.
D. As a provision as it is a present obligation arising as a result of a past event that will result in a probable outflow of
economic benefits which can be reliably measured however the timing of this occurring is uncertain.

6. Which of the following is not a key disclosure requirement for provisions according to IAS 37 Provisions, Contingent
Liabilities and Contingent Assets?
A. Amount charged against the provision during the period.
B. Increases made to the provisions during the reporting period.
C. The opening balance of provisions from the previous reporting period.
D. Amount of unused provisions reversed during the reporting period.

7. Which of the following about the disclosure of contingent assets and liabilities is not correct?
A. An estimate of the financial effect of a contingent asset should be disclosed.
B. Contingent liabilities require recognition in the statement of financial position and disclosure in the notes.
C. Disclosure of contingent liabilities is required unless the possibility of an outflow of resources is remote.
D. A description of the nature of the contingent asset at the end of the reporting period should be disclosed.
8. Library Laser Ltd (LL) is restructuring one of its major production facilities. LL is in the process of developing a
detailed formal plan for the restructuring provision.
Which of the following is not likely to be an element identified in the formal plan?
A. The business unit concerned.
B. Date that the plan will be implemented.
C. The roles and approximate numbers of affected staff.
D. The number of years' service provided by each affected employee.

9. Farnot Ltd (Farnot) has acquired 100 per cent ownership and control of Closeso Ltd (Closeso). As part of the due
diligence process, Farnot developed a detailed formal plan to discontinue the homewares division of Closeso, due to
underperforming sales. Farnot estimated the restructure costs to be $60 000. Management formally announced the
homewares division closure and mentioned that it is unsure when the restructure will take place, but that it will
definitely finalise the process within six months of acquisition.
Which of the following statements about the need for Farnot to recognise a provision for restructuring is correct?
A. Farnot should recognise a provision of $60 000 in its post-acquisition financial statements.
B. Farnot should recognise a provision of $60 000 at acquisition date as part of the acquisition process.
C. Farnot cannot recognise the provision because it should be recognised in the financial statements of Closeso.
D. Farnot cannot recognise a provision for restructuring as has not confirmed when the restructure will take place.

10. The accountant for RYK Ltd (RYK) is preparing the financial report for the period ended 31 December 20X6. The
accountant notes that an electricity invoice for the last six months' usage has not been received.
Which of the following is most correct for recognising the liability?
A. A present obligation exists and RYK should recognise a liability based on a reliable estimate.
B. As the invoice has not yet been received, no present obligation exists so RYK cannot recognise a liability.
C. A possible obligation exists, however it is not certain when the invoice will be received so the accountant should
recognise a provision.
D. A present obligation exists, however as the amount of usage cannot be reliably measured, the
estimated costs can only be disclosed as a contingent liability.

11. HP Computers, which began operations in January 2021, sells home computers that carry a two-year warranty.
Management projects that 3% of the computers will require repairs in the first year and 8% in the second year at an
average cost of P3,000 per computer. The computers sell for P30,000. Sales and warranty repairs for 2021 and 2022 are
recorded as follows:
2021 2022
Computers Sold 550 850
Actual Warranty Expenditures P85,000 P153,300

Instruction:
a. Determine the warranty expense for the years ended December 31, 2021 and 2022?

b. Compute for the balance of the estimated warranty liability at the end of 2021 and 2022?

12. On February 5, 2022, an employee files a P2,000,000 lawsuits against Amkor Co. for damages suffered when one of
Amkor’s plants exploded on December 20, 2021. Amkor’s legal counsel expects the company will lose the lawsuit and
estimates the loss to be between P500,000 and P1,000,000. The employee has offered to settle the lawsuit out of court
for P900,000, BUT Amkor will not agree to the settlement. In its December 31, 2021 balance sheet, what amount should
Amkor report as liability from lawsuit?
13. On December 31, 2021, the bookkeeper of Diamond Company provided the following information:
Accounts Payable, including deposits and
advances from customers, P500,000 P2,500,000
Notes Payable, including note payable to
Bank due on December 31, 2023 for P1M 3,000,000
Share Dividends Payable 800,000
Credit balance in customer’s account 400,000
Serial bonds, payable in semiannual payment
Of P1M 10,000,000
Accrued interest on Bonds Payable 300,000
Contested BIR assessments 600,000
Unearned rent income 100,000
Determine the amount of current liabilities to be reported in the December 31, 201, SFP.

14. An analysis of Silver Company’s liabilities disclosed the following:

Accounts Payable after deducting debit balance in
Supplier’s accounts amounting to P 225,000
(A/P included non-trade liabilities of 325k) P1,050,000
Accrued Expenses 150,000
Credit balance of customer’s account 135,000
Stock dividends payable 700,000
Claims for increase in wages and allowances by
employees of the company, covered by
pending lawsuit 1,250,000
Estimated liabilities for premium 600,000
How much should be presented as total current liabilities?

15. Amsterdam Company’s trial balance reflected the following liability account balance at December 31, 2021:
Accounts payable P380,000
Bonds payable due 2022 680,000
Discount bonds payable 40,000
Cash dividends payable on 2/15/22 100,000
Income tax payable 180,000
Notes payable due 1/19/23 120,000
The total current liabilities:

16. The balance in Argentina Company’s accounts payable at December 31, 2021 was P1,800,000 before any year-end
adjustments relating to the following:

Goods were in transit from a vendor to Argentina on December 31, 2021. The invoice cost was P100,000 and the goods
were shipped FOB Destination on December 29, 2021. The goods were received on January 3, 2022.
Goods shipped FOB shipping point on December 20, 2021 from a vendor to Argentina were lost in transit. The invoice
cost was P50,000. On January 5, 2022, Argentina filed a P50,000 claim against the common carrier.
Goods shipped FOB destination on December 21, 2021 from a vendor to Argentina were received on January 6, 2022.
The invoice cost was P30,000.
What amount should Argentina report as accounts payable on its December 31, 2021 balance sheet
17. Africa Co. is preparing its financial statement for the year ended December 31, 2021. Accounts payable amounted to
P720,000 before any necessary year-end adjustments related to the following:
At December 31, 2021, Africa has P100,000 debit balance in its accounts payable to Ross, a supplier, resulting from a
P100,000 advance payment for goods to be manufactures to Africa’s specifications.
Checks in the amount of P200,000 were written to vendors and recorded on December 29, 2021. The checks were
picked
up on January 3, 2022. (UNDELIVERED CHECKS)
What amount should Africa report as account payable in its December 31, 2021 balance sheet?

LONG TERM LIABILITIES

1. A ten-year bond was issued in 2011 at a discount with a call provision to retire the bonds. When the bond issuer
exercised the call provision on an interest date in 2013, the carrying amount of the bond was less than the call price. The
amount of bond liability removed from the accounts in 2013 should have equaled the
a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount

INCOME TAXES
1. Taxable income of a corporation
a. differs from accounting income due to differences in intraperiod allocation between the two methods of income
determination.
b. differs from accounting income due to differences in interperiod allocation and permanent differences between the
two methods of income determination.
c. is based on generally accepted accounting principles.
d. is reported on the corporation's income statement.

2. Taxable income of a corporation differs from pretax financial income because of

Permanent Temporary
Differences Differences
a. No No
b. No Yes
c. Yes Yes
d. Yes No

3. The deferred tax expense is the

a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

4. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could
result in
Future Future
Taxable Amounts Deductible Amounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No

At the beginning of 2010, Pitman Co. purchased an asset for $600,000 with an estimated useful life of 5 years and an
estimated salvage value of $50,000. For financial reporting purposes the asset is being depreciated using the straight-
line method; for tax purposes the double-declining balance method is being used. Pitman Co.’s tax rate is 40% for 2010
and all future years.
4. At the end of 2010, what is the book basis and the tax basis of the asset?
Book basis Tax basis
a. $440,000 $310,000
b. $490,000 $310,000
c. $490,000 $360,000
d. $440,000 $360,000

5. At the end of 2010, which of the following deferred tax accounts and balances is reported on Pitman’s balance sheet?
Account Balance
a. Deferred tax asset $52,000
b. Deferred tax liability $52,000
c. Deferred tax asset $78,000
d. Deferred tax liability $78,000

6. Lehman Corporation purchased a machine on January 2, 2009, for $2,000,000. The machine has an estimated 5-year
life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and
the following MACRS amounts will be deducted for tax purposes:
2009 $400,000 2012 $230,000
2010 640,000 2013 230,000
2011 384,000 2014 116,000
Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Lehman's
balance sheet at December 31, 2010, should be
Deferred Tax Liability
Current Noncurrent
a. $0 $72,000
b. $4,800 $67,200
c. $67,200 $4,800
d. $72,000 $0

Use the following information for questions 7 through 9.

Mathis Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and
taxable income as follows:
Pretax financial income $ 500,000
Estimated litigation expense 1,250,000
Installment sales (1,000,000)
Taxable income $ 750,000
The estimated litigation expense of $1,250,000 will be deductible in 2012 when it is expected to be paid. The gross profit
from the installment sales will be realized in the amount of $500,000 in each of the next two years. The estimated
liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $500,000 current
and $500,000 noncurrent. The income tax rate is 30% for all years.

7. The income tax expense is

a. $150,000.
b. $225,000.
c. $250,000.
d. $500,000.

8. The deferred tax asset to be recognized is

a. $0.
b. $75,000 current.
c. $375,000 current.
d. $375,000 noncurrent.

9. The deferred tax liability—current to be recognized is

a. $75,000.
b. $225,000.
c. $150,000.
d. $300,000.
Use the following information for questions 10 through 12.
Hopkins Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income
and taxable income as follows:
Pretax financial income $ 750,000
Estimated litigation expense 1,000,000
Extra depreciation for taxes (1,500,000)
Taxable income $ 250,000
The estimated litigation expense of $1,000,000 will be deductible in 2011 when it is expected to be paid. Use of the
depreciable assets will result in taxable amounts of $500,000 in each of the next three years. The income tax rate is 30%
for all years.
10. Income tax payable is
a. $0.
b. $75,000.
c. $150,000.
d. $225,000.

11. The deferred tax asset to be recognized is

a. $75,000 current.
b. $150,000 current.
c. $225,000 current.
d. $300,000 current.

12. The deferred tax liability to be recognized is

Current Noncurrent
a. $150,000 $300,000
b. $150,000 $225,000
c. $0 $450,000
d. $0 $375,000

13. Eckert Corporation's partial income statement after its first year of operations is as follows:
Income before income taxes $3,750,000
Income tax expense
Current $1,035,000
Deferred 90,000 1,125,000
Net income $2,625,000
Eckert uses the straight-line method of depreciation for financial reporting purposes and accelerated depreciation for
tax purposes. The amount charged to depreciation expense on its books this year was $1,500,000. No other differences
existed between book income and taxable income except for the amount of depreciation. Assuming a 30% tax rate,
what
amount was deducted for depreciation on the corporation's tax return for the current year?
a. $1,200,000
b. $1,425,000
c. $1,500,000
d. $1,800,000

14. Cross Company reported the following results for the year ended December 31, 2010, its first year of operations:
2007
Income (per books before income taxes) $ 750,000
Taxable income 1,200,000
The disparity between book income and taxable income is attributable to a temporary difference which will reverse in
2011. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2010, assuming
that the enacted tax rates in effect are 40% in 2010 and 35% in 2011?
a. $180,000 deferred tax liability
b. $157,500 deferred tax asset
c. $180,000 deferred tax asset
d. $157,500 deferred tax liability