Quiz – PPE

1. Under the principles of PAS 16 PPE, which of the following should be included in the cost of an item of
property, plant and equipment?
I. Initial delivery and handling costs
II. Cost of training staff on the new asset
III. Apportioned general overhead costs
IV. Installation and assembly costs
a. I, II, III, and IV
b. I, II and III only
c. II and IV only
d. I and IV only

Use the following information for the next four questions:

Toronto Manufacturing started operations on September 1, 2011. The entity’s accounts at December 31, 2014
included the following balances:

Machinery (at cost) P 91,000

Accumulated depreciation – machinery 48,200
Vehicles (at cost; purchased Nov. 21, 2013) 46,800
Accumulated depreciation – vehicles 19,656
Land (at cost; purchased Oct. 25, 2011) 81,000
Buildings (at cost; purchased Oct. 25, 2011) 185,720
Accumulated depreciation – building 28,614

Details of the machines owned at December 31 2014 are as follows:

Machine Purchase date Cost Useful life Residual value

1 October 7, 2011 P 43,000 5 years P 2,500
2 February 4, 2012 P 48,000 6 years P 3,000

Additional information:
 The entity calculates depreciation to the nearest month and balances the records at month-end.
Recorded amounts are rounded to the nearest peso, and the reporting date is 31 December.
 The entity uses straight line depreciation for all depreciable assets except vehicles, which are
depreciated on the diminishing balance at 40% p.a.
 The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which
cost P 23,400.
 On acquiring the land and the building, the entity estimated the building’s useful life and residual value
at 20 years and P 5,000 respectively.

The following transactions occurred from January 1, 2015:

January 3, 2015 - Bought a new machine (machine 3) for a cash price of P 57,000. Freight charges of P 442 and
installation of P 1,758 were paid in cash. The useful life and residual value were estimated at five years and P
4,000 respectively.
June 22, 2015- Bought a second hand vehicle for P 15,200 cash. Repainting costs of P 655 and four new tires
costing P 345 were paid in cash.

August 28, 2015 – Exchanged machine 1 for furniture that had a fair value of P 12,500 at the date of exchange.
The fair value of the machine 1 at the date of exchange was P 11,500. The office furniture originally cost P
36,000 and, to the date of exchange, had been depreciated by P 24,100 in the previous owner’s book. The entity
Ltd estimated the office furniture’s useful and residual value at eight years and P 540 respectively.

Dec. 31, 2015 – Recorded depreciation.

April 30, 2016 - Paid for repairs and maintenance on the machinery at a cash cost of P 928.

May 25, 2016 – Sold one of the vehicles bought on November 21, 2013 for P 6,600 cash.

June 26, 2016 – Installed a fence around the property at a cash cost of P 5,500. The fence has an estimated
useful life of 10 years and zero residual value.

Dec. 31, 2016 – Recorded depreciation.

2. The gain on exchange of machine 1 on August 28, 2015 is

a. P 1,225 c. P 225
b. P 900 d. P 0

3. The total depreciation expense in 2015 is

a. P 42,131 c. P 47,572
b. P 47,531 d. P 47,400

4. The loss on sale of vehicle on May 25, 2016 is

a. P 186 c. P 457
b. P 1,543 d. P 0

5. The total depreciation expense in 2016 is

a. P 37,662 c. P 38,744
b. P 39,144 d. P 39,019

6. On January 1, 2013, Neal Corporation acquired equipment at a cost of P 540,000. Neal adopted the sum of
years digit method of depreciation for this equipment and had bee recording depreciation over an estimated life
of eight years, with no residual value. At the beginning of 2016, a decision was made to change to the straight-
line method of depreciation for this equipment. The depreciation expense for 2016 would be
a. P 28,125 c. P 67,500
b. P 45,000 d. P 108,000

7. The Gargantuar Company commenced the construction of a new packaging plant on February 1, 2016. The
cost of P 1,800,000 was funded from existing borrowings. The construction was completed on September 30,
2016.

Gargantuar’s borrowings during 2016 comprised:

 Loan from Allied Bank; P 800,000 at 6% per annum;
  Loan from BDO Bank; P 1 million at 6.6% per annum; and
 Loan from Metro Bank; P 3 million at 7% per annum

The amount of borrowing costs to be capitalized in relation to the packaging plant is

a. Nil c. P 81,000
b. P 121,500 d. P 91,125

8. On January 1, 2016 Central Company purchased a plating machine with a 5-year useful life for P 135,000.
Central received a grant of P 13,500 towards the capital cost. Company policy is to treat the GRANT as a
reduction in the cost of the asset. What should be the depreciation expense in respect of this machine for the
year ended December 31, 2016, assuming that depreciation is calculated on a straight-line basis?
a. P 27,000 c. P 21,600
b. P 24,300 d. P 19,440

9. On March 31, 2017, Nathaniel Company traded in an old machine having a carrying amount of P 168,000, and
paid a cash difference of P 60,000 for a new machine having a total cash price of P 205,000. The cash flows from
the new machine are expected to be significantly different than the cash flows from the old machine. On March
31, 2017, what amount of loss should Nathaniel recognize on this exchange?
a. P 60,000 c. P 23,000
b. P 37,000 d. P 0

10. Utah Company takes a full year’s depreciation expense in the year of an asset acquisition, and no
depreciation expense in the year of disposition. Data relating to one of Utah’s depreciable assets at December
31, 2016 are as follows:
Acquisition year 2014
Cost P 110,000
Residual value 20,000
Accumulated depreciation 72,000
Estimated useful life 5 years

Using the same depreciation method as used in 2014, 2015, and 2016, how much depreciation expense should
Utah record in 2017 for this asset?
a. P 12,000 c. P 22,000
b. P 18,000 d. P 24,000

11. Green Company acquired new manufacturing equipment on January 1, 2016 on installment basis. The
deferred payment contract provides for a down payment of P 300,000 and an 8-year note for P 3,104,160. The
note is to be paid in 8 equal annual installment payments of P 388,020, including 10% interest. The payments
are to be made on December 31 of each year beginning December 31, 2016. The equipment has a cash price
equivalent of P 2,370,000. Green’s financial year-end is December 31. The amount of interest expense to be
recognized in 2017 is
a. P 310,416 c. P 207,000
b. P 188,898 d. P 0

12. According to PAS 16, PPE, which of the following items should be capitalized into the cost of property, plant
and equipment?
I. Cost of excess materials resulting from a purchasing error.
II. Cost of testing whether the assets work correctly.
 III. Initial operating losses while demand builds up
IV. Cost of preparing the site for installation
a. II and IV only c. II, III, and IV only
b. I and II only d. I, II, III and IV

13. A piece of machinery has a marked price of P 550,000. It was purchased under the term, 15%, 10%, and 5%
discounts. The cost of freight and installation after deducting the P 8,000 sales proceeds of the old machinery
which was replaced is P 12,000. The new machinery shall be recorded at cost of
a. P 411,712 c. P 419,712
b. P 405,000 d. P 397,000

14. During the current year, Benguet Company purchased a secondhand machine at a price of P 300,000. A cash
down payment of P 50,000 was made and a two-year, noninterest bearing note was issued for the balance.
Recent transactions involving similar machinery indicate that the used machine has a secondhand market value
of P 240,000. A new machine would cost P 400,000.

The following costs were incurred on the machine during the year:
Cost of removing the old machine P 2,000
Cash proceeds from the sale of the old machine 1,200
General overhaul and repair to recondition the machine prior to use 10,000
Cost of spare parts purchased and set aside for breakdowns
during the first two years of normal use of the machine 20,000
Cost of labor to install the machine 4,000
Cost of testing the machine prior to use 1,800
Cost of hauling the machine from the vendor’s
Place of business to the company’s premises 5,000
Cost of repairing the damage to the machine when it was
Dropped during installation 3,000
Repairs incurred during the first year of operations 6,000
Safety devices added to the machine to comply with the
Terms of the collective bargaining agreement entered into with the
Employees union 12,000
Cost of training workers to operate the machine 1,500

Determine the amount to be capitalized as cost of the machine.

a. P 292,800 c. P 272,800
b. P 280,800 d. P 262,800

15. A machine has a cost of P 60,000, has an annual depreciation of P 12,000 and has accumulated depreciation
of P 30,000 on December 31, 2016. On April 1, 2017, when the machine has a fair value of P 24,000, it is
exchanged for a similar machine with a fair value of P 72,000 and the proper amount of cash is paid. The loss to
be recognized on exchange is
a. P 6,000 c. P 21,000
b. P 3,000 d. P 0

16. Lukashenko Company acquired land and an old building. Lukashenko acquired the land and building by
providing 40,000 of its shares that were trading on the Stock Exchange at price of P 13 per share, and by paying
off the existing mortgage of P 30,000 and back taxes on the old building of P 5,000. Lukashenko also paid P
20,000 to demolish the old building on the land, P 30,000 to an architect to design a new building, and P 220,000
to a contractor to build the building. How much is the cost of the new building in accordance with PIC Q & A
2012-2?
a. P 250,000 c. P 300,000
b. P 270,000 d. P 305,000

17. Which of the following statements regarding depreciation is true, according to PAS 16, PPE?
a. The total cost of an asset must eventually be depreciated.
b. The annual depreciation charge should be constant over the life of the asset.
c. An asset must be depreciated from the date of its purchase to the date of sale.
d. If the carrying amount of an asset is less than the residual value, depreciation is not charged.

18. In January 2017, Utah Corporation entered into a contract to acquire a new machine for its factory. The
machine, which had a cash price of P 2,000,000, was paid for as follows:
Down payment P 300,000
5,00 ordinary shares of Utah with an agreed-upon value of P 370 per share 1,850,000

Prior to the machine’s use, installation costs of P 70,000 were incurred. The machine has an estimated useful life
of 10 years and an estimated salvage value of P 100,000. The straight-line method of depreciation is used. The
depreciation to be recognized in 2017 is
a. P 212,000 c. P 1,820,000
b. P 190,000 d. P 197,000

19. Jeric Company purchased a machine on December 2, 2015 at an invoice price of P 4,500,000 with terms
2/10, n/30. On December 10, 2015., Jeric paid the required amount for the machine. On December 2, 2015, Jeric
paid P 80,000 for delivery of the machine and on December 31, 2015, it paid P 310,000 for installation and
testing of the machine. The machine was ready for use on January 1, 2016. It was estimated that the machine
would have a useful life of 5 years, and a residual value of P 800,000. Engineering estimates indicated that the
useful life in productive units was P 200,000. Units actually produced during the first two years were 30,000 in
2016 and 48,000 in 2017. Jeric Company decided to use the productive output method of depreciation. What is
the depreciation of the machine for 2017?
a. P 1,560,000 c. P 960,000
b. P 720,000 d. P 600,000

20. On January 1, 2017, Minnesota Corp. began construction of homes for those families that were hit by the
tsunami disaster and were homeless. The construction is expected to take 3.5 years. It is being financed by
issuance of bonds for P 7 million at 12% per annum. The bonds were issued at the beginning of the construction.
The bonds carry a 1.5% issuance cost. The project is also financed by issuance of P 3 million share capital with a
14% cost of capital. The borrowing costs to be capitalized in 2017 (Use the straight-line amortization method).
a. P 870,000 c. P 1,290,000
b. P 840,000 d. P 1,260,000