Midterm Examination – ACN002

1. Which of the following is the recommended approach in accounting for interest incurred in financing
the construction of property, plant and equipment?
a. Capitalize only the actual interest incurred during construction.
b. Charge construction with all costs of funds employed.
c. Capitalize no interest during construction
d. Capitalize interest equal to the prime interest rate times the estimated cost of the asset being
constructed.

2. Assets that qualify for interest capitalization include

a. Asset under construction for an entity's use.
b. Asset that is ready for the intended use.
c. Asset that is not currently being used because of excess capacity.
d. All of these assets qualify for interest capitalization.

3. Which of the following is not a condition that must be satisfied before interest capitalization can begin
on a qualifying asset?
a. Interest is being incurred.
b. Expenditures for the asset have been made.
c. The interest rate is equal to or greater than the entity cost of capital.
d. Activities that are necessary to get the best ready to the intended use are in progress.

4 The period of time during which interest must be capitalized ends when
a. The asset is substantially complete and ready for the intended use.
b. No further interest is being incurred.
c. The asset is abandoned, sold or fully depreciated.
d. The activities that are necessary to get the asset ready for the intended use have begun.

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 5. Interest revenue earned on specific borrowing for qualifying asset
a. Reduces the cost of the qualifying asset.
b. Reduces interest expense reported in the income statement.
c. Increases equity.
d. Must be credited to interest income.

6. The production method of depreciation results in

a. Constant charge 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.

7. Which of the following statements is incorrect concerning the residual value of an item of property,
plant and equipment?
a. The depreciable amount is determined without deducting the residual value of the asset.
b. In practice, the residual value of asset is often insignificant and therefore immaterial in the calculation
of the depreciable amount.
c. The residual value of an asset may increase to an amount equal to or greater than the asset's carrying
amount.
d. The residual value of an asset shall be reviewed at least at each financial year-end

8. The useful life of an item of property, plant and equipment shall be reviewed periodically and if
expectations are significantly different from previous estimates, the depreciation charge for the
a. Current period only shall be adjusted
b. Future period only shall be adjusted
c. Prior periods shall be adjusted
d. Current and future periods shall be adjusted

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 9. The depreciation method applied to property, plant and equipment shall be reviewed periodically, and
if there has been a significant change in the expected pattern of consumption of economic benefits from
those assets, the change
a. Shall be accounted for as a change in accounting policy
b. Shall not be recognized
c. Shall be accounted for as a change in accounting estimate
d. Shall be accounted for as correction of a prior period error

10. Technical obsolescence arises from

a. Expected usage of the asset
b. Expected physical wear and tear
c. Changes or improvements in production or change in the market demand for the product output of the
asset.
d. Expiry date of related lease of the asset

11. Which of the following terms best describes the cost or an amount substituted for cost of an asset less
the residual value?
a. Revalued amount b. Carrying amount c. Recoverable amount d. Depreciable amount

12. Which of the following statements best describes residual value?

a. The estimated net amount currently obtainable if the asset is at the end of the useful life.
b. The present value of estimated future cash flows expected to arise from the continuing use of the asset
and from its ultimate disposal.
c. The amount at which the asset could be exchanged between knowledgeable and willing parties in an
arm's length transaction.
d. The amount of cash or cash equivalents that could currently be obtained by selling the asset in an
orderly disposal.

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 13. Which of the following statements is true?
a. Assets are depreciated even if their fair value exceeds their carrying amount.
b. Land and buildings are not accounted for separately when acquired together.
c. A noncurrent asset acquired as the result of an exchange of assets is not recognized.
d. A gain on disposal of a noncurrent asset is classified as revenue.

14. Which of the following statements regarding depreciation is true?

a. An' asset must be depreciated from the date of purchase to the date of sale.
b. The annual depreciation charge must be constant over the life of the asset.
c. The total cost of an asset must eventually be depreciated.
d. If the carrying amount of an asset is less than the residual value, depreciation is not charged.

15. An entity bought a private jet for the use of its top ranking officials. The private jet is expected to be
used over a period of 7 years. The engine of the jet has a useful life of 5 years. The private jet's tires are
replaced every 2 years. The private jet shall be depreciated using the straight line method over
a. 7 years composite useful life.
b. 5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life applied to the
balance cost of the jet.
c. 2 years useful life based on conservatism.
d. 5 years useful life based on a simple average of the useful lives of all major components of the jet.

16. Hothead Company had the following loans outstanding for 2018.
Specific construction loan 1,000,000 10%
General loan 20,000,000 12%
The entity began the self-construction of a building on January 1, 2018 and the building was completed
on December 31, 2018. The following expenditures were made during the year:
January 1 1,000,000
July 1 2,000,000
November 1 3,000,000

What is the cost of the new building?

a. 6,000,000 b. 6,280,000 c. 6,300,000 d. 6,250,000

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 (17-18) Norraine Company used the composite method of depreciation based on a composite rate of 25%.
At the beginning of 2018, the total cost of equipment was P 5,000,000 with a total residual value of P
600,000. The accumulated depreciation was P 3,000,000 at that time. In January 2018, the entity
purchased an equipment for P 2,500,000 with no residual value. At the end of 2018, the entity sold an
equipment with an original cost of P 1,000,000 and a residual value of P 200,000 for P 350,000. This
asset was acquired on January 1, 2016.

17. What is the depreciation for 2018?

a. 1,625,000 b. 1,875,000 c. 1,125,000 d. 975,000

18. What is the gain or loss from the derecognition of the asset on December 31, 2018?
a. 100,000 gain b. 150,000 loss c. 50,000 loss d. 0

19. On April 1, 2018, Kew Company purchased new machinery for P 3,300,000. The machinery has an
estimated useful life of five years with residual value of P 300,000. Depreciation is computed by the sum
of the years' digits method. What is the accumulated depreciation on December 31, 2019?
a. 1,600,000 b. 1,800,000 c. 1,200,000 d. 1,000,000

(20-21). On July 1, 2018, Lam Company, a calendar year corporation, purchased the rights to a mine. The
total purchase price was P 16,400,000, of which P 2,000,000 was allocable to the land. Estimated reserves
were 1,800,000 tons. The entity expects to extract and sell 25,000 tons per month. The entity purchased
new equipment on July 1, 2018. The equipment cost P 7,500,000 and had a useful life of 8 years.
However, after all the resource is removed, the equipment will be of no use and will be sold for P
300,000.

20. What amount should be recorded as depletion for 2018?

a. 1,200,000 b. 2,400,000 c. 1,366,500 d. 2,733,000

21. What amount should be recorded as depreciation of the mining equipment for 2018?
a. 450,000 b. 900,000 c. 600,000 d. 300,000

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