Government Accounting Chapter 6
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Questions and Answers

Living animals and plants are always accounted for as biological assets.

False

Biological assets are initially and subsequently measured at fair value less costs to sell.

True

Agricultural produce is measured at fair value less costs to sell only at the point of harvest.

True

An essential element of agricultural activity is the management of the biological transformation of biological assets.

<p>True</p> Signup and view all the answers

Entity A's dairy cattle gave birth to a calf. The fair value less costs to sell of the newborn calf is P10,000. Entity A recognizes a gain of P10,000 from the initial recognition of the calf.

<p>True</p> Signup and view all the answers

A loss can arise from the initial measurement of a biological asset.

<p>False</p> Signup and view all the answers

Fair value is the quoted price in an active market less transaction costs.

<p>True</p> Signup and view all the answers

According to the GAM for NGAs, all financial assets are initially measured at fair value.

<p>False</p> Signup and view all the answers

According to the GAM for NGAs, government entities shall prepare bank reconciliations only at year-end or whenever the need arises.

<p>False</p> Signup and view all the answers

Only debt instruments with remaining maturity of 3 months or less can qualify as cash equivalents.

<p>False</p> Signup and view all the answers

The PCF of a government entity is replenished when disbursements reach at least 90%, or as needed.

<p>True</p> Signup and view all the answers

No journal entry is prepared when a disbursement is made out of the petty cash fund.

<p>True</p> Signup and view all the answers

A government entity established a P30,000 petty cash fund. The custodian must be bonded for at least P5,000.

<p>False</p> Signup and view all the answers

According to the GAM for NGAs, all financial assets shall be initially measured at fair value plus transaction costs.

<p>False</p> Signup and view all the answers

Transaction costs on financial assets classified under the held to maturity category are expensed outright.

<p>True</p> Signup and view all the answers

A derivative derives its value from the changes in value of a specified rate, price, event, or some other variable.

<p>True</p> Signup and view all the answers

Risk management is the process of identifying the desired level of risk, identifying the actual level of risk, and altering the latter to equal the former.

<p>True</p> Signup and view all the answers

Which of the following is not one of the characteristics of property, plant and equipment?

<p>It is intended for resale in the ordinary course of operations.</p> Signup and view all the answers

Which of the following does not result in the recognition of PPE?

<p>Acquisition of a building for P10M intended to be leased out under various operating leases on commercial basis.</p> Signup and view all the answers

How much is the initial cost of the equipment acquired by Entity A?

<p>470,511</p> Signup and view all the answers

Which of the following statements is correct regarding the treatment of idle PPE?

<p>Idle PPE is derecognized.</p> Signup and view all the answers

Government entities capitalize borrowing costs if they relate to the acquisition or construction of a qualifying asset.

<p>True</p> Signup and view all the answers

According to the GAM for NGAs, a biological asset is

<p>An animal or plant</p> Signup and view all the answers

The common features of agricultural activities include all of the following except

<p>Wind of change</p> Signup and view all the answers

Which of the following is an agricultural produce?

<p>Harvested palay</p> Signup and view all the answers

Which of the following are not considered costs to sell?

<p>Levies by regulatory agencies and commodity exchanges</p> Signup and view all the answers

Agricultural produce after the point of harvest is accounted for as

<p>Inventory</p> Signup and view all the answers

The carrying amount of a group of biological assets of Entity A is P100,000 before any year-end adjustment. If the year-end fair value is P120,000 while the year-end estimate of costs to sell is P5,000, which of the following statements is correct?

<p>Entity A will recognize a gain of P10,000 in surplus or deficit</p> Signup and view all the answers

Entity A is determining the measurement of its biological assets at the end of the period. Entity A’s biological assets consist of trees in a plantation forest. How much is the valuation of the trees in Entity A’s year-end statement of financial position?

<p>P1,000,000</p> Signup and view all the answers

Living animals and plants are accounted for as biological assets

<p>True</p> Signup and view all the answers

The essential element of an agricultural activity is

<p>The management of the biological transformation of biological assets</p> Signup and view all the answers

Which of the following costs may properly be included in the carrying amount of an investment property?

<p>Start-up costs, such as opening costs.</p> Signup and view all the answers

The entry to initially recognize the investment property in Entity A’s books of account is?

<p>Investment Property, Land 10,010,000 / Cash Modified Disbursement System (MDS), Regular 10,010,000</p> Signup and view all the answers

How much is the gain (loss) on the transfer of the investment property in question 5?

<p>50,000</p> Signup and view all the answers

How much is the gain (loss) on the sale of the building in question 6?

<p>37,500</p> Signup and view all the answers

How much is the impairment loss after Entity A revises its estimate of residual value and remaining useful life?

<p>100,000</p> Signup and view all the answers

Does the equipment acquired by Entity A, not for active use in the production of goods but rather as standby equipment, qualify for recognition as property, plant, and equipment?

<p>No, although the equipment satisfies some of the recognition criteria for a PPE, it does not satisfy all. The equipment shall be classified as 'Other Assets.'</p> Signup and view all the answers

What is the capitalization threshold for property, plant, and equipment for government entities?

<p>More than P15,000</p> Signup and view all the answers

How are cash discounts not taken on purchases of items of PPE treated according to the GAM for NGAs?

<p>Included in the cost of PPE</p> Signup and view all the answers

According to the GAM for NGAs, which statement about estimates of decommissioning and restoration costs of an item of PPE is incorrect?

<p>Credited to the 'other provisions' account at their present value.</p> Signup and view all the answers

Which of the following costs is not added to the cost of an item of PPE?

<p>Net disposal proceeds of samples generated during testing</p> Signup and view all the answers

In a package purchase of 5 motor vehicles with a promotional item, how are the costs of individual motor vehicles typically handled?

<p>For individual costing purposes, the cost of each motor vehicle acquired is $1,666,667.</p> Signup and view all the answers

When Entity A acquires a building through self-construction, what is the initial cost of the building likely based on?

<p>a or b</p> Signup and view all the answers

How are construction costs incurred when Entity A acquires a building through self-construction recorded?

<p>Initially recorded in the 'Construction in Progress' account.</p> Signup and view all the answers

What is the carrying amount of an equipment acquired for P1M on August 6, 20x1, with an estimated useful life of 5 years, on December 31, 20x1?

<p>920,833</p> Signup and view all the answers

Which of the following assets would most likely not be assigned a residual value by a government entity?

<p>A building held as investment property</p> Signup and view all the answers

Which assets are generally not subject to depreciation?

<p>a and b</p> Signup and view all the answers

Which of the following is considered a heritage asset?

<p>Museum</p> Signup and view all the answers

Which of the following assets of a government entity is not subject to impairment?

<p>None of these</p> Signup and view all the answers

When does a government entity derecognize an item of PPE?

<p>All of these</p> Signup and view all the answers

When does the national government recognize revenue from a grant received for the construction of a highway, according to the GAM for NGAs?

<p>When the grant becomes receivable and there is reasonable assurance that the attached condition will be satisfied</p> Signup and view all the answers

According to the GAM for NGAs, government entities shall use which measurement model in subsequently measuring intangible assets?

<p>a or b</p> Signup and view all the answers

How are intangible assets held by government entities measured during subsequent periods?

<p>a or b</p> Signup and view all the answers

What is the default amortization method for intangible assets with finite useful life?

<p>Straight line method</p> Signup and view all the answers

Which statement is incorrect regarding the accounting for impairment of intangible assets under the GAM for NGAs?

<p>Intangible assets are subject to amortization and impairment over a 2 to 10 year period.</p> Signup and view all the answers

What entry is made to initially recognize the software acquired by Entity A?

<p>Computer Software 1,200,000, Cash-Modified Disbursement System 1,200,000</p> Signup and view all the answers

Which entry recognizes the amortization expense for the current year for the software?

<p>Amortization-Intangible Assets 240,000, Computer Software 240,000</p> Signup and view all the answers

When Entity A assesses impairment and estimates fair value less costs to sell and value in use, what entry is made to recognize the event?

<p>Impairment Loss-Intangible Assets 140,000, Accumulated Impairment Losses-Computer Software 140,000</p> Signup and view all the answers

Which of the following is not one of the essential criteria for an intangible asset?

<p>Arising from binding arrangement</p> Signup and view all the answers

How is a purchased intangible asset initially measured?

<p>Cost</p> Signup and view all the answers

Under what conditions can the development costs of an internally generated intangible asset be capitalized?

<p>Existence of similar assets in the market or economic environment</p> Signup and view all the answers

Government entities normally assign their intangible assets a residual value of

<p>Zero</p> Signup and view all the answers

Study Notes

Government Accounting and Management (GAM) for National Government Agencies (NGAs)

Financial Assets

  • Initially measured at fair value, not fair value plus transaction costs
  • Debt instruments with remaining maturity of 3 months or less can qualify as cash equivalents
  • Derivatives derive their value from changes in value of a specified rate, price, event, or variable
  • Risk management is the process of identifying desired level of risk and altering it to equal the former

Petty Cash Fund

  • Replenished when disbursements reach at least 90%, or as needed
  • No journal entry is prepared when a disbursement is made out of the petty cash fund
  • Custodian must be bonded for at least P5,000

Bank Reconciliation

  • Government entities shall prepare bank reconciliations only at year-end or whenever the need arises
  • Unadjusted book and bank balances are brought to an adjusted balance that is reported on the statement of financial position
  • Cash shortage of a government entity is most likely recorded as a debit to a cash shortage or overage account
  • Dishonored checks are recorded by a government entity as losses

Financial Instruments

  • Transaction costs on financial assets classified under the held to maturity category are expensed outright
  • "Loans Receivable" account is most likely to be used in the books of accounts of government agencies
  • Characteristics of a derivative:
    • Requires no notional amount (or only a very minimal notional amount)
    • Its value changes in response to the change in an underlying
    • Requires no initial net investment (or only a very minimal initial net investment)
    • Is settled at a future date

Investments

  • Classified as available for sale, held-to-maturity, or loans and receivables
  • Changes in fair value of investments classified as available for sale financial assets are recognized in surplus or deficit
  • Interest income in 20x1 is interest income in 20x1 is 221,580 (1,582,711 x 14%)
  • If the investment is classified as available for sale financial asset and the fair value at year-end is P1,800,000, the gain (loss) from the change in fair value is 195,709 (1,800,000 – 1,604,291)

Inventory Management

  • Inventories of government entities are subsequently measured at net realizable value or current replacement cost
  • Purchases of machinery, equipment, furniture, and fixtures, and similar items below the capitalization threshold for property, plant, and equipment (PPE) are recorded as inventories
  • Relief goods, office supplies, equipment, and furniture and fixtures are items that may appropriately be recorded as inventories by a government entity
  • GAM for NGAs allows government entities to use the FIFO cost flow formula
  • GAM for NGAs allows government entities to use a periodic inventory system
  • Specific identification cost formula is not available for use by government entities, according to the GAM for NGAs
  • If the beginning balance of inventory is P50, the net purchases are P100, and the cost of goods sold is P30, the ending inventory must be P120.### Inventory Management
  • Inventory measurement: initially measured at cost and subsequently measured at the lower of cost and net realizable value for goods held for sale
  • Cost formulas: government entities can use specific identification, FIFO, and weighted average cost formulas
  • Inventory systems: government entities can use perpetual or periodic inventory systems
  • Record purchases of inventories: in an inventory account or purchases account
  • Cost of inventory: includes freight-in, trade discounts, cost of insurance while in transit, but excludes advertisement costs
  • Inspection and Acceptance Report (IAR) is used to inspect and accept goods, followed by Disbursement Voucher (DV) and Journal Entry
  • Stock Card (SC) is maintained to record movements of inventories
  • Wasted Stocks Card (WSC) is used to report wasted materials, such as destroyed spare parts and other spoilages

Biological Assets

  • Definition: a living animal or plant, such as trees in a plantation forest
  • Measurement: initially measured at fair value less costs to sell and subsequently measured at fair value less costs to sell
  • Agricultural produce: measured at fair value less costs to sell only at the point of harvest
  • Essential element: management of biological transformation of biological assets
  • Initial recognition: no gain or loss is recognized on initial recognition of a biological asset
  • Measurements at year-end: fair value less costs to sell, with changes in fair value less costs to sell recognized in surplus or deficit

Investment Property

  • Definition: property held to generate rental income or for capital appreciation, such as a building held to be leased out under operating leases
  • Measurement: initially measured at cost and subsequently measured using either the cost model or fair value model
  • Fair value model: subsequent measurement at fair value, with changes in fair value recognized in surplus or deficit
  • Cost model: subsequent measurement at cost less accumulated depreciation and accumulated impairment losses
  • Impairment: recoverable amount is the higher of fair value less costs to sell and value in use
  • Derecognition: loss on derecognition is the difference between carrying amount and sale proceeds, minus transaction costs### Investment Property
  • Carrying amount: P1,000,000
  • Fair value less costs to sell: P900,000
  • Value in use: P880,000
  • After impairment, entity revises estimate of residual value to 5% of recoverable amount and remaining useful life to 10 years

Impairment Loss

  • Impairment loss: P120,000 (option a)
  • Annual depreciation after impairment: P85,500 (option a)

Reversal of Impairment

  • Gain on reversal of impairment: P127,500 (option c)
  • Carrying amount of investment property after one year: P872,100 (option d)

Property Held for Social Service

  • Property held to provide a social service and generating cash inflows is an investment property (option a)

Measurement of Investment Property

  • Government entities shall measure investment property at cost or fair value (option d)

Initial Measurement of Investment Property

  • Acquired through donation: measured at fair value on acquisition date (option c)

Depreciation of Investment Property

  • Entity A uses the straight-line method of depreciation (option a)
  • Carrying amount of investment property after one year: P914,850 (option b)

Transfers to/from Investment Property

  • Transfers are only made when there is a change in management's intention or use (option a)

Capitalization Threshold for PPE

  • Government entities: P15,000 (option a)

Subsequent Measurement of PPE

  • Government entities may choose either the cost model or the revaluation model (option b)

Heritage Assets

  • Measured at cost, but not subsequently depreciated, and subject to impairment (option 9)

Infrastructure Assets

  • Accounted for in the same manner as other items of PPE, but generally assigned a residual value of zero (option 10)

Reforestation Projects

  • Classified as land improvements (option 11)

Loss on Replacement

  • Loss on replacement: P3 (option 12)

Inter-Agency Transfer

  • No gain or loss is recognized on inter-agency transfer (option 14)

Residual Value of PPE

  • Government entities normally assign items of PPE a residual value of 0% or a value that can be measured reliably (option 15)

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Description

This quiz covers problem 6-1 of Government Accounting Chapter 6, testing understanding of financial assets, bank reconciliations, and cash equivalents.

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