1st Midterm Departmental Quiz – Intermediate Accounting 2
(50 POINTS)
Test 1: Alternate Response Type. Write the word “TRUE” if
the statement is correct, otherwise write the word “FALSE”.
Write your answers in a separate sheet of yellow paper. (11
POINTS)
1. Generally, expenditures to repair, recondition, or improve
a used asset before it is placed in service are expensed in
the period incurred.
2. The costs of uninsured hazards or claims for uninsured
accidents during construction are recognized as expense.
3. Under retirement method of estimating depreciation, the
depreciation during the period is equal to the original cost
of the replaced part minus any salvage value.
4. Under retirement method, if there are new acquisitions of
PPE items during the year but nothing is retired during the
same period, the depreciation expense for the period is
zero.
5. Under replacement method of estimating depreciation, if
there are assets retired during the period, but nothing is
replaced during the same period, the depreciation
expense for the period is zero.
6. Under replacement method, if there are new acquisitions
of PPE items during the year but nothing is retired during
the same period, the depreciation expense for the period
is zero.
7. If there are assets retired during the period but nothing is
replaced during the same period, depreciation expense
during the period is the same for both retirement and
replacement method.
8. When an entity is validly applying a composite rate or life
to a group of heterogenous assets in estimating
depreciation, if an asset in the group is retired but not sold,
the accumulated depreciation is eliminated based on the
asset’s historical cost.
9. If there are fully depreciated assets that are still in use,
PAS 16 requires derecognition of these assets.
10. If subsequent to initial recognition a major part of an asset
is replaced, the carrying amount of the replaced major part
is derecognized regardless whether the replaced part is
depreciated separately or not.
11. Subsequent expenditures incurred to maintain the asset’s
capacity or efficiency are generally accounted as capital
expenditures.
Test 2: Problem Solving: Present your solution in GOOD
FORM in a separate sheet of yellow paper. (39 points)
PROBLEM 1 You were hired by Charie Company during
2019 as their new Accountant. The following were discovered
by you at the end of the year 2019.
1. On December 24, 2019, Charie purchased office equipment
for 400,000, terms 2/5, n/15. No entry was made on the date
of purchase. The same was paid on December 31, 2019
and the former accountant debited Office Equipment and
credited Cash for 400,000.
2. Machine C, with a cash price of 128,000, was purchased on
January 2, 2019. The company paid 20,000 down and
10,000 for 12 months. The last payment was made on
December 30, 2019. Straight line depreciation based on a
5-year useful life and no salvage value was recorded at
28,000 for the year. Freight of 4,000 on Machine C was
debited to the Freight in account
3. Machine P with a cash selling prices of 360,000 was
acquired on April 1, 2019 in exchange for 400,000 face
amount of bonds payable selling at 94, and maturing on
April 1, 2029. The accountant recorded acquisition by a
debit to Machinery and a credit to Bonds Payable for
400,000. Straight line Depreciation was recorded based on
a 5-year economic life and amounted to 54,000 for nine
months. In the computation of depreciation, residual value
of 40,000 was used.
4. Machine A was acquired on January 22, 2019, in exchange
for past due accounts receivable of 140,000 on which
allowance of 20% was established at the end of 2018. The
current fair value of the machine on January 22 was
estimated at 110,000. The machine was recorded by a debit
to Machinery and a credit to Accounts Receivable for
140,000. No depreciation was recorded on Machine A
because it was not installed and never used in operations.
On February 2, 2019, Machine A was exchanged for 1,000
shares of the company’s outstanding share capital with
market price of 105 per share. The Treasury stock account
was debited for 140,000 with a corresponding credit to
Machinery.
5. On December 29, 2019, the company exchanged 10,000
shares of Lulu, Inc. common stock, which Charie was
holding as an investment, for an equipment from Faye
Corporation. The common stock of Lulu, Inc., which had
been purchased by Charie for 45 per share, had a quoted
market value of 50 per share on the date of exchange the
equipment had a market value of 470,000. The transaction
was recorded by a debit to Equipment and a credit to
Investment in Lulu, Inc. for 450,000
6. On December 30, 2019, Machine M with a carrying amount
of 120,000 (Cost 400,000) was exchanged for a similar
asset with a fair value of 150,000. In addition, Charie paid
20,000 to acquire the new machine. The exchange, which
lacks commercial substance, was recorded by a debit to
Machinery and a credit to cash for 20,000
7. Machine E was recorded at 102,000 which included the
carrying amount of 22,000 for an old machine accepted as
trade in, and cash of 80,000. The cash price of Machine S.
was 90,000 and the trade in allowance was 10,000. This
transaction took place on December 31, 2019.
8. Ms. Rosselle, the company’s president, donated land and
building appraised at 200,000 and 400,000 respectively, to
the company to be used as a plant site. The company
began operating the plant on September 30, 2019. The
building is estimated to have a useful life of 25 years. Since
no money was involved, no journal entry was made.
9. On July 1, 2018, the national government granted a parcel
of land located in Baliuag, Bulacan to Charie. On the date
of grant, the land had a value of 2,000,000. The grant
required Charie to construct a cold storage building on the
site. Charie finished the construction, which has an
estimated useful life of 25 years, on January 2, 2019. Charie
appropriately recorded the cost of building of 4,000,000 but
failed to record depreciation in 2019. Unaware if the
accounting procedures for government grants, the
company did not reflect the grant on its books.
Required: Compute the adjusted carrying amount of the
PPE for each item, i.e., 1 to 9, as of December 31, 2019. (10
points)
PROBLEM 2 Lecherous Company traded a used
equipment for a newer model with Aldrian, a dealer.
Old equipment:
Original cost 1,000,000
Accumulated depreciation 500,000
Fair Value 650,000
Trade-in value 400,000
New equipment:
List Price 1,600,000
Cash Price without trade-in 1,350,000
Cash Payment with trade-in 950,000
Required: (5 points)
1. What is the initial carrying amount of the new
equipment acquired by Lecherous Company?
2. Describe and compute for the amount to be presented
as component of profit or loss as a result of the
transaction in Lecherous’ statement of
comprehensive income.
3. If the fair value of the old equipment cannot be
determined reliably, would your answer be the same
in number 1? If “yes”, why? If “no”, give the correct
amount.
4. Provide the entry to record the transaction in Aldrian’s
books.
5. Assuming the transaction lacks commercial
substance, what is the initial carrying amount of the
new equipment in the books of Lecherous?
PROBLEM 3 At the beginning of current year 2019, PROBLEM 4 Hilarious Company provided the following
Obvious Company provided the following: data pertaining to a machinery on December 31, 2019

Cost Accumulated Cost of Machinery 4,500,000

depreciation Original residual value 500,000
Land 875,000 - Accumulated Depreciation 2,400,000
Building 7,500,000 1,644,500 Actual life 3 years
Machinery and Equipment 2,250,000 635,000 Effective life 5 years

Building – SL, 25 years The following occurred during the life of the machinery:
Machinery and Equipment – SL, 10 years
Land Improvements – DDB  The entity revalued the machinery on December 31, 2019
Leasehold Improvements – SYD and determined that its replacement cost is
P5,000,000.The entity also made the following changes in
 On January 9, 2019, a plant facility consisting of land and estimates:
building was acquired from another entity in exchange for a. The revised residual value is 300,000.
25,000 shares of Obvious Company. b. Remaining economic life is 5 years.

On this date, the share had a market price of P50. Current  On December 31, 2020, the entity determined that the
fair values of land and building are P150,000 and replacement cost of the machinery is P3,800,000. The
P600,000, respectively. entity made the necessary revaluation.

 On March 13, 2019, new parking lot, street and sidewalk
at the acquired plant facility were completed at a total cost
of P192,000. These expenditures had an estimated useful
life of 10 years and estimated residual value of P20,000.
 On April 1, 2018, the company signed a ten-year lease for
office space. Obvious Company has the option to renew
the lease for an additional five-year period on or before
April 1, 2029. During the second half of April 2019, the
Company incurred the following costs:
- P900,000 for general improvements to the leased
premises with an estimated useful life of ten
years.
- P100,000 for office equipment with an estimated
useful life of ten years.
- P200,000 for movable assembly line equipment
with useful life of 5 years.
At the time the leasehold improvement were finished,
Obvious Company is certain as to the exercise of the
renewal option.
 On July 19, 2019, machinery and equipment were
purchased at a total invoice cost of P340,000. Additional
cost of P10,000 for delivery and P50,000 for installation
were incurred.
 On September 12, 2019, a machine with a cost of
P170,000 and a carrying amount of P29, 750 at date of
disposition was scrapped without cash recovery.
 On December 31, 2022, the entity determined that the
replacement cost of the machinery is P4,300,000. The
entity made the necessary revaluation.
 On May 17, 2023, the entity sold the machinery at
P650,000. The entity paid broker’s commission of
P10,000.
Required: (12 points)
1. Compute the OCI item balance as of December 31,
2019. (1)
2. Compute the revaluation decrease on December
31, 2020 to be presented in the 2020 Statement of
Comprehensive income as:
a. Component of profit or loss. (2)
b. Component of other comprehensive. (2)
3. Compute the revaluation increase on December
31, 2022 to be presented in the 2022 Statement of
Comprehensive income as:
c. Component of profit or loss. (2)
d. Component of other comprehensive. (2)
4. Compute the carrying amount of the machinery to
be presented in the statement of financial position
as of December 31, 2022. (1)
5. Compute the gain or (loss) on the disposal of the
machinery. (1)
6. Compute the amount of OCI item that is
transferred directly to the retained earnings in
2023. (1)

Required: (12 points)

1. Compute the depreciation for the following class
of PPE in 2019:
a. Building. (1)
b. Machinery and Equipment. (3)
c. Land Improvements. (1)
d. Leasehold Improvements. (1)

2. Compute the carrying amount of the following

class of PPE as of December 31, 2020:
a. Building. (1)
b. Machinery and Equipment. (2)
c. Land Improvements. (1)
d. Leasehold Improvements. (1)
e. Land. (1)

LEARNING is the only thing the mind

NEVER EXHAUSTS,
NEVER FEARS, and
NEVER REGRETS.
- da Vinci