Intermediate Accounting 1&2

Quiz no. 2 - Midterms

NAME:________________________

THEORIES
Instruction: Write the letter of your answer before each number

1. When accounting for property, plant and equipment, an entity

a. Must use the cost model.
b. May elect to use the cost model or the revaluation model on any individual asset.
c. May elect to use the cost model or the revaluation model on any asset class.
d. Must use the cost model for land.

2. When the revaluation model is used for reporting property, plant and equipment, the gain should be included in
a. Retained earnings
b. Gain from revaluation in the income statement
c. Revaluation surplus as component of other comprehensive income
d. An extraordinary gain in the income statement

3. When an entity chooses the revaluation model for property, plant and equipment, which statement is true?
a. When an asset is revalued, the entire class of property, plant and equipment to which that asset belongs must be revalued.
b. Individual asset within a class to which that asset belongs can be revalued.
c. Revaluation must be made every three years.
d. Increase in an asset's carrying amount as a result of the revaluation must be recognized in income.

4. Under the revaluation model for accounting for property, plant and equipment
a. Assets must be revalued quarterly
b. Assets must be revalued annually
c. Assets must be revalued biannually
d. There is no rule regarding the frequency of revaluation

5. Which statement best describes impairment loss?

a. The removal of an asset from the statement of financial position.
b. The amount by which the carrying amount of an asset exceeds the recoverable amount.
c. The systematic allocation of cost of an asset less residual value over the useful life.
d. The amount by which the recoverable amount of an asset exceeds the carrying amount.

6 What is the recoverable amount of an asset?

a. Fair value less cost of disposal
b. Value in use
c. Fair value less cost of disposal or value in use, whichever is higher
d. Fair value less cost of disposal or value in use, whichever is lower

7. Which statement best describes value in use?

a. The present value of estimated future cash flows expected to arise from the continuing use of an asset and from the ultimate
disposal
b. The amount of cash that could currently be obtained by selling an asset in an orderly disposal
c. The amount which an entity expects to obtain for an asset at the end of the useful life
d. Undiscounted future net cash flows

8. An impairment loss that relates to an asset that has been revalued shall be recognized in
a. Profit or loss
b. Revaluation surplus that relates to the revalued asset
c. Opening retained earnings
d. Any reserve in equity

9. Which of the following is not relevant in determining value in use?

a. The expected future cash flows from the asset
b. The carrying amount of the asset
c. Expectation about possible variation in the amount and timing of future cash flows
d. The time value of money

10. Which of the following statements is not true with regard to impairment of asset?
a. If impairment indicators are present, the entity must conduct an impairment test
b. The impairment test compares the carrying amount of the asset with the lower of fair value less cost of disposal and value in use.
c. If the recoverable amount is lower than carrying amount, an impairment loss is recognized
d. If recoverable amount is higher than carrying amount, no impairment loss is recognized.
PROBLEMS
Instruction: Write the letter of your answer before each number

Use the following to answer questions 11-13:

On June 30, 2021, The Company reported the following information:

Equipment at cost 5,000,000

Accumulated depreciation 1,500,000

The equipment was measured using the cost model and depreciated on a straight line basis over a 10-year period.

On December 31, 2021, the management decided to change the basis of measuring the equipment from the cost model to the revaluation
model.

The equipment had a fair value of P4,550,000 with remaining useful life of 5 years on December 31, 2021.

11. What amount should be reported as pretax revaluation surplus on December 31, 2021?
a. 1,050,000 c. 1,500,000
b. 1,300,000 d. 2,000,000

Cost - June 30, 2021 5,000,000.00

(1,500,000.00
Accum. Dep. )

Carrying Amount June 30, 2021 3,500,000.00

Dep. From July 1 to Dec 31, 2021

(5,000,000/10 x 6/12) (250,000.00)

3,250,000.00

FV - Dec 31, 2021 4,550,000.00

Carrying Amount Dec 31, 2021 3,250,000.00

Revaluation Surplus - Dec 31, 2021 1,300,000.00

12. What amount should be recorded as depreciation of the equipment for 2022?
a. 500,000 c. 455,000
b. 910,000 d. 650,000

Dep for 2022 (4,550,000 / 5 years) 910,000.00

13. What amount should be reported as pretax revaluation surplus on December 31, 2022?
a. 1,170,000 c. 390,000
b. 1,040,000 d. 845,000

Revaluation surplus - Dec. 31, 2021 1,300,000.00

Realization of revaluation surplus in 2022

(1,300,000 / 5 years) (260,000.00)

Revaluation surplus Dec. 31, 2022 1,040,000.00

Use the following to answer questions 14-15:

On January 1, 2021, The Company has a machinery with cost of P5,000,000 and accumulated depreciation of P1,500,000.

The machinery was acquired on January 1, 2018 and had been depreciated using the straight line method with useful life of 10 years
and no residual value. On January 1, 2021. the entity has properly tested the machinery to be impaired.

The machinery has a remaining life of 5 years and is expected to generate undiscounted net cash inflows of P800,000 per year. The fair
value of the machinery on January 1, 2021 is P3,000,000.

The appropriate discount rate is 8%. The present value of an ordinary annuity of 1 at 8% for 5 periods is 3.99.
 14. What amount should be recognized as an impairment loss for 2021?
a. 308,000 c. 808,000
b. 500,000 d. 0

Fair Value 3,500,000.00

PV of net cash inflows (800,000 x 3.99) 3,192,000.00

Machinery 5,000,000.00

(1,500,000.00
Accum. Dep. )

CV - Jan 1, 2021 3,500,000.00

PV of net cash inflows or value in use -
higher 3,192,000.00

Impairment loss 308,000.00

15. What amount should be recorded as depreciation for 2021?.

a. 638,400 c. 319,200
b. 600,000 d. 300,000

Depreciation for 2021 (3,192,000 / 5 years) 638,400.00

Lincoln Corporation has the following information as of January 1, 2011 on its Property, Plant and Equipment account:
Historical Cost Accum. Depreciation
Land P 25,000,000
Buildings & improvements 150,000,000 50,000,000
Machinery & equipment 200,000,000 18,750,000

There were no additions or disposals during 2011. Depreciation expense is computed on a straight-line method over 20 years for buildings
and improvements and 10 years for machinery and equipment. On January 1, 2011, all of the company's property, plant and equipment
were appraised as follows:
Fair Values
Land P 50,000,000
Buildings and improvements P225,000,000
Machinery and equipment 225,000,000

Lincoln booked the appraisal on December 31, 2011.

16. How much should Lincoln report as revaluation surplus in Property, Plant & Equipment under the shareholders' equity?
a) P143,750,000 c) P207,500,000
b) P193,750,000 d) P318,250,000

Fair Value of Assets 500,000.00

Net book value 306,250.00

Revaluation increment 193,750.00

17. On January 2, 2004, Beige Company has completed the construction of a building for a total cost of P10,000,000. The building is to
be depreciated on a straight-line basis over its estimated useful life of 40 years. On January 2, 2009, Beige converted the building into a
commercial establishment with only minor renovation costs incurred. In consultation with an appraiser, the building's fair value as of
January 1, 2009 was P11,970,000. On January 1, 2011, due to sudden change in the economic environment, Beige is evaluating possible
impairment and determined that the recoverable value of the building was P7,000,000. What is the amount of impairment loss, if any, on
January 1, 2011?
a) P1,050,000 c) P3,500,000
b) P1,250,000 d) P4,286,000
 FV of building, Jan 1, 2009 11,970,000.00
Less: CV

Cost 10,000,000.00
Less: Accum Dep.

(01/01/04 to 01/01/09: 10,000,000 x 5/40 yrs) 1,250,000.00 8,750,000.00

3,220,000.00

Recoverable amt, Jan 1, 2011 7,000,000.00

Less: CV based on revalued amt. 11,970,000.00

Depreciation (11,970,000 x 2/35) (684,000.00) 11,286,000.00

Revaluation decrease (4,286,000.00)

Revaluation surplus (3,220,000 x 33/35) 3,036,000.00

Impairment loss (1,250,000.00)

TRUE OR FALSE

Instruction: Write T if True or F if false before each number

F 18. Costs of disposal are incremental costs directly attributable to the disposal of an asset, including finance costs and income tax
expense.

T 19. A decrease in the carrying amount of the asset as a result of revaluation is recognized in profit or loss.

F 20. Revaluation surplus is an income statement account reflecting the excess of the fair value of property, plant and equipment and
intangible assets, measured using revaluation model, over their carrying amount based on cost

Prepared by:
Prof. Rellie H. Sernero, CPA, MBA