Gov Accounting Solutions Manual PDF

lOMoARcPSD|37607501 CHAPTER 6 PROBLEM 6-1: TRUE OR FALSE False 1. According to the GAM for NGAs, all financial assets are initially measured at fair value. False 2. According to the GAM for NGAs, government entities shall prepar...

lOMoARcPSD|37607501 CHAPTER 6 PROBLEM 6-1: TRUE OR FALSE False 1. According to the GAM for NGAs, all financial assets are initially measured at fair value. False 2. According to the GAM for NGAs, government entities shall prepare bank reconciliations only at year-end or whenever the need arises. False 3. Only debt instruments with remaining maturity of 3 months or less can qualify as cash equivalents. False 4. The PCF of a government entity is replenished when disbursements reach at least 90%, or as needed. True 5. No journal entry is prepared when a disbursement is made out of the petty cash fund. False 6. A government entity established a P30,000 petty cash fund. The custodian must be bonded for at least P5,000. False 7. According to the GAM for NGAs, all financial assets shall be initially measured at fair value plus transaction costs. False 8. Transaction costs on financial assets classified under the held to maturity category are expensed outright. True 9. A derivative derives its value from the changes in value of a specified rate, price, event or some other variable. True 10. 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. PROBLEM 6-2: MULTIPLE CHOICE 1. Which of the following is not considered a financial asset? a. Petty cash fund b. Investment in debt securities c. Accounts receivable d. Prepaid assets 2. A cash shortage of a government entity is most likely recorded as a a. debit to a receivable account b. debit to a cash shortage or overage account c. credit to miscellaneous income account d. credit to a cash shortage or overage account 3. Dishonored checks are recorded by a government entity as a. Notes receivable b. Other receivables c. Accounts receivable d. Losses Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 4. The entry to record the replenishment of a petty cash fund of a government entity is a. Expense accounts xxx Cash-Modified Disbursement System (MDS), Regular xxx b. Expense accounts xxx Petty Cash xxx c. Expense accounts xxx Cash-Collecting Officers xxx d. Expense accounts xxx Cash-Treasury/Agency Deposit, Regular xxx 5. Under this method of bank reconciliation statement preparation, the unadjusted book and bank balances are brought to an adjusted balance that is reported on the statement of financial position. a. Bank to Book Method b. Book to Bank Method c. Adjusted Balance Method d. All of these 6. Which of the following may be paid through the petty cash fund of a government entity? a. Rent worth P12,000. b. Pantry supplies worth P15,000. c. Office supplies worth P20,000. d. None of these. 7. Entity A maintains a petty cash fund. At any given point of time, the cash on hand and the petty cash vouchers must be equal to the ledger balance of the petty cash fund. If these are not equal, the difference is either shortage or overage. This system of handling petty cash fund is called a. Impress System b. Fluctuating Balance System c. Pretty Cash System d. Imprest System 8. According to the GAM for NGAs, the establishment of a petty cash fund a. requires the approval of the Head of Agency. b. requires the approval of the Chief Accountant. c. requires the approval of the President of the Philippines. d. does not require any formal approval because petty cash funds are likely to be immaterial. Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 9. The “Loans Receivable” account is most likely to be used in the books of accounts of which the following government agencies? a. COA b. NIA c. BTr d. All of these 10. Which of the following is not one of the characteristics of a derivative? a. It requires no notional amount (or only a very minimal notional amount). b. Its value changes in response to the change in an underlying. c. It requires no initial net investment (or only a very minimal initial net investment). d. It is settled at a future date. PROBLEM 6-3: MULTIPLE CHOICE 1. According to the GAM for NGAs, these refer to incremental costs that are directly attributable to the acquisition, issue, or disposal of a financial instrument. a. Costs to sell b. Transaction costs c. Financial costs d. Variable costs 2. Which of the following is not one of the categories of financial assets under the GAM for NGAs? a. Held-to-maturity investments b. Loans and receivables c. Available-for-sale financial assets d. Financial asset through other comprehensive income 3. Entity A acquires an investment for P1,000,000. Transaction costs amount to P10,000. At year-end, the investment has a fair value of P900,000. If the investment is classified as financial asset through surplus or deficit, how much is the loss from the change in fair value? a. 100,000 b. 90,000 c. 110,000 d. 0 Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 Use the following information for the next four questions On January 1, 20x1, Entity A acquires 10-year, 10%, P2,000,000 face amount bonds for P1,456,792 and classifies them as held-to-maturity investments. Transaction costs on the acquisition amount to P125,919. The issuer pays annual interest every December 31. The effective interest rate is 14% 4. The initial carrying amount of the investment on January 1, 20x1 is a. 1,456,792 b. 1,330,873 c. 1,582,711 (1,456,792 + 125,919) d. 2,000,000 5. The interest income in 20x1 is a. 221,580 (1,582,711 x 14%) b. 203,951 c. 186,322 d. 200,000 6. If the investment is classified as available for sale financial asset and the fair value at year- end is P1,800,000, how much is the gain (loss) from the change in fair value? a. (200,000) b. (217,289) c. 195,709 (1,800,000 – 1604,291) d. 238,869 Date Collections Interest income Amortization Present value 1/1/x1 1,582,711 12/31/x1 200,000 221,580 21,580 1,604,291 7. If the investment is classified as available for sale financial asset, how much is the interest income in 20x1? a. 221,580 b. 203,951 c. 186,322 d. 200,000 8. According to the GAM for NGAs, changes in fair value of investments classified as available for sale financial assets are a. recognized in surplus or deficit b. recognized in net assets c. not recognized d. a or b Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 9. Entity A acquires an investment for P100,000 and incurs transaction costs of P10,000. At year-end, the fair value of the investment is P80,000. Entity A recognizes a P30,000 loss from the change in fair value. The investment would most likely to have been classified under which of the following categories of financial assets? a. Available-for-sale financial assets b. Financial asset through surplus or deficit c. Held-to-maturity investments d. Loans and receivables 10. Entity A acquires an investment for P100,000 and incurs transaction costs of P10,000. At year-end, the fair value of the investment is P120,000. However, the investment is appropriately reported in the year-end statement of financial position at a carrying amount of P106,382. The investment would most likely to have been classified under which of the following categories of financial assets? a. Available-for-sale financial assets b. Held-to-maturity investments c. Loans and receivables d. Cannot be determined due to insufficient information PROBLEM 6-4: FOR CLASSROOM DISCUSSION 1. According to the GAM for NGAs, a government entity’s cash comprises all of the following except a. cash on hand b. cash in bank c. cash equivalents d. cash treasury accounts 2. Which of the following is excluded from the amount of cash that is reported in the statement of financial position of a government entity? a. unreleased checks drawn b. cancelled checks drawn c. undeposited collections d. post-dated checks received 3. An unexplained cash overage of a government entity is recorded as a a. credit to a payable account b. debit to a cash shortage overage account c. credit to miscellaneous income account d. credo to a cash shortage or overage account Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 4. All of the following are considered internal controls over cash except a. Requiring a cash custodian to be properly bonded. The amount of bond shall not be less than the cash accountability of the custodian. b. Preparing a bank reconciliation for each bank account maintained by a government entity. c. Making estimates of recurring expenses before establishing an amount for a petty cash fund. d. Maintaining the petty cash fund under a Fluctuating Balance System wherein the total cash on hand and petty cash vouchers may or may not be equal to a fixed amount of petty cash fund at any given point of time. e. Requiring at least three bidders or canvases before making purchases. 5. The per transaction threshold for petty cash disbursements of a government entity is a. P5,000 b. P10,000 c. P15,000 d. No limit; sky is the limit. 6. A government agency shall prepare a bank reconciliation for each bank account maintained. Bank reconciliations are prepared using the a. Bank to Book Method b. Book to Bank Method c. Adjusted Balance Method d. Any of these 7. If the adjusted balance of cash is less than the unadjusted balance per books and there are no other reconciling items or errors, the difference is most likely caused by a. Credit memo b. Debit memo c. Deposits in transit d. Outstanding checks 8. According to the GAM for NGAs, receivables are measured at Initial Subsequent a. Fair value Amortized cost b. Fair value plus transaction costs Amortized cost c. Fair value minus transaction costs Amortized cost d. Fair value Fair value 9. The subsequent changes in the fair value of an investment that is classified as available for sale are recognized in a. surplus or deficit b. net assets or equity c. not recognized d. any of these as an accounting policy choice Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 10. According to the GAM for NGAs, the very purpose of derivatives is a. risk management b. speculation c. risk incurrence d. a or b Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 CHAPTER 7 PROBLEM 7-1: TRUE OR FALSE False 1. According to the GAM for NGAs, inventories of government entities are subsequently measured at net realizable value or current replacement cost depending on whether the inventory is classified as held for sale or held for distribution. False 2. According to the GAM for NGAs, purchases of machinery, equipment, furniture and fixtures and similar items below the Ᵽ10,000 capitalization threshold for PPE are recorded as inventories. True 3. Relief goods, office supplies, equipment and furniture and fixture are items that may appropriately be recorded as inventories by a government entity. False 4. The GAM for NGAs allows government entities to use the FIFO cost flow formula. False 5. The GAM for NGAs allows government entities to use a periodic inventory system. False 6. The specific identification cost formula is not available for use by government entities, according to the GAM for NGAs. False 7. The Purchase Request (PR) form is prepared when end users request for the issuance of items of inventory that are available on stock. True 8. 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. Fact pattern Entity A, a government entity, sells eggs. At the start of the period, Entity A’s inventory consisted of (1) red egg with a carrying amount of P2. During the period, Entity A acquired one (1) brown egg for P3 and one (1) blue egg for P4. Entity A sold the brown egg during the period. False 9. Under the Specific identification cost formula, Entity A’s cost of sale is P2. False 10. If the eggs are ordinarily interchangeable, Entity A’s cost of sale is P2.5, assuming the sale occurred only after all the purchases were made. PROBLEM 7-2: MULTIPLE CHOICE 1. Entity A, a government entity, purchases inventories. To record a purchase, Entity A would likely debit the (an). a. Inventory account b. Purchases Account c. Expense Account d. a or b 2. Entity A, a government hospital, acquires medicines to be sold in its pharmacy. Entity A would record the medicines acquired as a. Semi-Expendable Property b. Inventory Held for Consumption c. Inventory Held for Distribution d. Inventory Held for Sale Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 3. Entity A, a government entity, purchases relief goods which are to be held on standby, ready to be distributed when a calamity strikes. Entity A would most likely classify the goods purchased as a. Inventory Held for Consumption b. Inventory Held for Distribution c. Purchases d. None of these, only a note disclosure shall be made 4. According to the GAM for NGAs, this shall be used for large numbers of items of inventory that are ordinarily interchangeable. a. Specific identification b. FIFO c. Weighted average cost applied in a period inventory system d. Weighted average cost applied in a perpetual inventory system e. Any of these as a matter of accounting policy choice 5. This refers to the cost an entity would incur to acquire an asset on the reporting date. a. Net realizable value b. Fair value c. Current replacement cost d. Present value 6. Which of the following inventories of a government entity would be subsequently measured at the lower of cost and current replacement cost? a. Inventories of rice that are held for sale b. Medicines being sold by a government-owned pharmacy c. Books to be distributed to students in public schools d. Forest products held for sale 7. Which of the following events or transactions would not lead to the recognition of the cost of inventory as expense? a. The inventory is written down. b. The inventory is distributed for free. c. The inventory is exchanged for dissimilar inventory. d. The inventory is consumed in the manufacturing process. 8. The accounting division of a government entity uses this record and monitor the movements and balances inventories. a. Stock Card b. Stock Ledger Card c. Journal Entry d. Special Journal Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 9. Which of the following statements correctly differentiates the Stock Card from the Stock Ledger Card? a. The Stock Ledger Card is maintained by the Budget Division while the Stock Card is maintained by the Accounting Division. b. The Stock Card is subject to audit by the COA while the Stock Ledger Card is not. c. The Stock Card shows quantities only while the Stock Ledger Card shows monetary balances only. d. The stock Card shows quantities only while the Stock Ledger Card shows quantities as well as monetary amounts. 10. This document is prepared when end users request for the issuance of inventories that are available on stock. a. Purchase Requisition Form b. Custodian Inventory Slip c. Purchase Order d. Requisition and Issue Slip PROBLEM 7-3: MULTIPLE CHOICE 1. Entity A, a government entity, purchases inventory to be held for sale in the ordinary course of activities. Which of the following is the correct entry, to record the purchase? a. Merchandise Inventory xxx Account Payable xxx b. Purchase xxx Accounts Payable xxx c. a or b depending on the accounting policy being used d. none, a government entity cannot hold inventories for sale; only for consumption. 2. Entity A, a government entity, distributed welfare goods to the intended recipients. The entry to recognize the event is a. Cost of sales xxx Welfare Goods for Distribution xxx b. Welfare Goods Expense xxx Welfare Goods for Distribution xxx c. Distribution costs xxx Welfare Goods for Distribution xxx d. None. The expense is recognized at the end of the period when a physical count is performed. The expense is closed to the Income Summary account. Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 3. At year-end, Entity A, a government entity, determines the following information:  Carrying amount of goods held for distribution — P100,000.  Net realizable value — P80,000.  Current replacement cost — P90,000. How much of the carrying amount of the inventory is recognized as expense? a. 10,000 b. 20,000 c. 90,000 d. None of these Use the following information for the next two questions: Entity A, a government entity, determines the following information regarding the inventory of Goods A, a non-unique item: 4. How much is ending inventory? a. 116,382 b. 117,300 c. 116,495 d. Any of these. 5. How much is the cost of sale? a. 207,805 b. 207,918 (56,862 + 151,056) c. 207,000 d. Any of these. Units Unit Cost Total Cost Balance at January 1, 2002 3,000 19.55 58,650 January 6, 2002 10,200 21.5 219,300 TGAS 13,200 21.06 277,950 January 7, 2002 (2,700) 21.06 (56,862) January 26, 2002 2,250 20.6 46,350 TGAS 12,750 20.98 267,438 January 31, 2002 (7,200) 20.98 (151,056) Ending inventory 5,550 116,382 PROBLEM 7-4: FOR CLASSROOM DISCUSSION Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 1. Entity A, a government entity, purchases furniture and fixtures amounting to P14,000. Entity A would most likely record the purchase as a. Property, Plant and Equipment b. Inventory Held for Consumption c. Inventory Held for Manufacturing d. Semi-Expendable Property 2. Accountable forms such as pre-printed forms used in government transactions are most likely to be classified by a government entity as a. Inventory Held for Consumption b. Inventory Held for Sale c. Semi-Expendable Property d. Not considered inventory, according to the GAM for NGAs 3. Inventories are initially measured at cost and subsequently measured at a. The Lower of Cost and Net realizable value for good s held for sale b. The Lower of Cost and Current replacement cost for goods held for distribution. c. a and b d. cost 4. Which of the following cost formulas is not available for use by government entities? a. Specific identification b. FIFO c. Weighted Average d. All of these are available 5. The GAM for NGAs requires the use of which of the following inventory systems? a. Perpetual inventory system b. Periodic inventory system c. a or b d. none of these 6. Government entities record purchases of inventories a. in an inventory account b. in the Purchases account c. a orb d. as expenses 7. Which of the following may be included as cost of inventory? a. freight-in under a freight collect, FOB destination sale term b. trade discounts c. cost of insurance while the goods are in transit d. advertisement cost that resulted to the resale of inventory purchased Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 8. Arrange the following in the sequence they are used in the requisition and receipt of inventories by a government entity I. Inspection and Acceptance Report (IAR) II. Disbursement Voucher (DV) III. Purchase Request (PR) IV. Journal entry V. Purchase Order (PO). VI. Stock Card (SC) a. III, V, I, VI, IV and II b. III, V, I, IV, VI and II c. III, V, I, II, VI and IV d. V, III, I, II, VI and IV 9. This is maintained in the Property/Supply Division to record the movements of inventories. a. Stock Card (SC) b. Property/Supply Card (PSC) c. Supplies Ledger Card (SLC) d. Magic Card (MC) 10. This is used to report wasted materials, such as destroyed spare parts and other spoilages. a. Wasted Stocks Card (WSC) b. Waste Materials Report c. Report on the Physical Count of Inventories d. Inventory Custodian Slip Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 CHAPTER 8 PROBLEM 8-1: TRUE OR FALSE False 1. Living animals and plants are always accounted for biological assets. True 2. Biological assets are initially and subsequently measured at fair value less costs to sell. True 3. Agricultural produce is measured at fair value less costs to sell only at the point of harvest. True 4. An essential element of agricultural activity is the management of the biological transformation of biological assets. True 5. Entity A’s dairy cattle gave birth to a calf. The fair value less costs to sell of the new born calf is P10,000. Entity A recognizes a gain of P10,000 from the initial recognition of the calf. True 6. A loss can arise from the initial measurement of a biological asset. False 7. Fair value is quoted price in an active market less transaction costs. True 8. Entity A acquires a biological asset for P100, equal to fair value, and incurs transaction cost of P10 on the purchase. If the asset’s costs to sell is P20, Entity A will recognize a loss of P30 on the initial recognition of the purchased asset. False 9. Entity A recognizes a gain of P100 from the change in FVLCS of its biological assets during the period. If the change in FVLCS due to price change is P70, the change in FVLCS due to physical change must be P40. True 10. If there are more than one active markets for a biological asset, the entity shall use the price in the market expected to be used when determining fair value. PROBLEM 8-2: MULTIPLE CHOICE 1. According to the GAM for NGAs, a biological asset is a. an animal or plant b. an asset used in farming c. a living animal or plant d. a harvested product 2. The common features of agricultural activities include all of the following except a. capability to change b. management of change c. measurement of change d. wind of change 3. Which of the following is an agricultural produce? a. carabao b. harvested palay c. extra rice d. powdered milk Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 4. According to the GAM for NGAs, biological assets are measured as follows: Initial measurement Subsequent measurement a. fair value less cost to sell fair value less cost to sell b. cost cost less accumulated depreciation c. cost cost less accumulated depreciation and impairment losses d. fair value less costs to sell cost 5. Which of the following are not considered costs to sell? a. commissions to brokers b. levies by regulatory agencies and commodity exchanges c. transfer taxes and duties d. transport costs 6. According to the GAM for NGAs, if there is no active market for a biological asset a. the entity shall measure the biological asset at cost less accumulated depreciation. b. the entity shall measure the biological asset at cost less accumulated depreciation and accumulated impairment losses. c. the entity shall use a contract price in determining the fair value. d. the entity shall estimate the market price using the guidance set forth in the GAM for NGAs. 7. Agricultural produce after the point of harvest is accounted for as a. Inventory b. PPE c. Prepaid assets d. Investment property 8. 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? a. Entity A will recognize a gain of P15,000 in surplus or deficit. b. Entity A will recognize a gain of P15,000 directly in equity. c. Entity A will recognize a gain of P10,000 in surplus or deficit. d. Entity A will recognize a gain of P25,000 in surplus or deficit. 9. Which of the following need not be disclosed in relation to the accounting for biological assets? a. Consumable and bearer biological assets b. Mature and immature biological assets c. The amount of change in fair value less costs to sell due to physical changes and due to price changes d. The gain or loss on initial recognition of agricultural produce separately from that of biological assets Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 10. 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. There is no separate active market for these trees. However, Entity A was able to gather the following information:  FVLCS of land, land improvements and trees as a package, P10M.  FVLCS of land, P8M.  FVLCS of land improvements, P500,000 How much is the valuation of the trees in Entity A’s year-end statement of financial position? a. P10,000,000 b. P2,000,000 c. P1,500,000 d. P1,000,000 PROBLEM 8-3: FOR CLASSROOM DISCUSSION 1. Living animals and plants are accounted for as biological assets a. only if they are harvested for sale. b. only if they relate to agricultural activity. c. in all cases. d. all of these. 2. The essential element of an agricultural activity is a. the management of the biological transformation of biological assets. b. the assets are alive. c. it involves harvesting activity. d. the conversion of raw materials into finished goods. 3. Which of the following is a biological asset? a. Land used in farming b. Picked fruits c. Fruit cocktail d. Trees in a plantation forest 4. Which of the following statements is correct regarding the measurement of assets related to agricultural activities? a. Biological assets are initially and subsequently measured at fair value. b. No gain or loss shall be recognized on the initial recognition of a biological asset. c. Agricultural produce is initially and subsequently measured at fair value less costs to sell. d. The gain or loss arising from the initial measurement of biological asset or agricultural produce is recognized in surplus or deficit. Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 5. According to the GAM for NGAs, biological assets whose fair value cannot be reliably determined on initial recognition are measured as follows: Initial measurement Subsequent measurement a. fair value less cost to sell fair value less cost to sell b. cost cost less accumulated depreciation c. cost cost less accumulated depreciation and impairment losses d. fair value less costs to sell cost Use the following information for the next three questions: A group of Entity A’s biological assets has a carrying amount of P100,000 before year-end adjustments. Information at year-end is as follows: 6. If Entity A expects to transact in Active Market #1, how much is the fair value? a. 130,000 b. 120,000 c. 118,000 d. 123,000 7. If Entity A expects to transact in Active Market #2, how much is the carrying amount of the biological assets in the year-end statement of financial position? a. 135,000 b. 132,000 c. 120,000 d. 123,000 8. If Entity A expects to transact in Active Market #1, how much is the gain or loss from the year-end remeasurement? a. 18,000 b. 28,000 c. 32,000 d. 23,000 Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 Use the following information for the next two questions: On January 1, 20x1, Entity A has one 1-year old biological asset with carrying amount of P1,000. The following transactions occurred during the period: a. On July 1, 20x1, one I-year old biological asset is acquired for P1,100, equal to the FVLCS on this date. b. On October 1, 20x1, one biological asset is born. The FVLCS of a newborn on this date is P500. The FVLCS on December 31, 20x1 are as follows: Age FVLCS new born P600 3 mos. old P800 1 yr. old P1,200 1.5 yr. old P1,500 2 yrs. Old P2,000 9. How much is change in FVLCS due to price change? a. 400 b. 800 c. 1,800 d. 2,400 Asset Group Change in FVLCS From beg. (1 yr.; 1 yr.) (₱1,200 - ₱1,000) x 1 200 Purchased on July 1 (1 yr.; 1 yr.) (₱1,200 - ₱1,100) x 1 100 Born on Oct. 1 (0; 0) (₱600 - ₱500) x 1 100 Change in FVLCS due to Price Change 400 10. How much is change in FVLCS due to physical change? a. 600 b. 800 c. 1,600 d. 1,800 Asset Group Change in FVLCS From beg. (2yrs.; 1yr.) (₱2,000 - ₱1,200) x 1 800 Purchased on July 1 (1.5yrs.; 1yr.) (₱1,500 - ₱1,200) x 1 300 Born on Dec. 31 (3 mos.; 0 yr.) (₱800 - ₱600) x 1 200 FVLCS of new born on Dec. 31 (₱500 x 1) 500 Change in FVLCS due to Physical Change 1,800 Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 CHAPTER 9 PROBLEM 9-1: TRUE OR FALSE False 1. An entity shall capitalize as part of the cost of an investment property the operating losses incurred before the investment property achieves the planned level of occupancy. False 2. According to the GAM for NGAs, government entities may choose to use either the cost model or the fair value model to subsequently measure investment properties. False 3. According to the GAM for NGAs, an entity shall not depreciate an asset while it is classified as investment property. False 4. Recoverable amount is the lower of an asset’s fair value less costs to sell and value in use. False 5. If an asset’s recoverable amount exceeds its carrying amount, the asset is impaired. False 6. An investment property with carrying amount of PIO is determined to have a fair value less costs to sell of P7 and a value in use of P8. The impairment loss is P3. True 7. An investment property with carrying amount of P10 is sold for P7. Transaction costs on the sale amounted to P1. The loss on derecognition is P4. False 8. An investment property that was previously impaired is determined to have a new recoverable amount of P10. Right now, the asset’s carrying amount is P7. However, if no impairment loss had been recognized in the prior year’ the asset would have a carrying amount of P9 by now. The gain on reversal of impairment, therefore, is P1. False 9. According to the GAM for NGAs, a government entity shall, at each reporting date, determine the recoverable amount of an investment property and compare it with its carrying amount. True 10. An entity need not compute for the value in use of an asset if the entity has no reason to believe that the value in use exceeds the fair value less costs to sell. PROBLEM 9-2: MULTIPLE CHOICE 1. Which of the following is considered an investment property? a. Owner-occupied property awaiting disposal. b. Property that is leased to another entity under a finance lease. c. Property held for use in the production or supply of goods or services or for administrative purposes. d. A building held by the entity under a finance lease and leased out under one or more operating leases on a commercial basis. 2. Which of the following would not be reported as investment property? a. Property owned by the entity and leased out under one or more operating leases. b. Property head by the entity to be leased out under one or more operating leases. c. Real estate held with an undetermined future use. d. Property owned by the entity and leased out to another entity under a finance lease. Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 3. Which of the following costs may properly be included in the carrying amount of an investment property? a. Start-up costs, such as opening costs. b. Operating losses incurred before the investment property achieves the planned level of occupancy. c. Abnormal amounts of wasted materials, labor or other resources incurred in constructing or developing the property. d. Accrued taxes prior to acquisition date that the entity assumes an obligation to pay. 4. Entity A, a government entity, acquires a building to be leased out under various operating leases on commercial basis. Entity A incurs the following costs on the acquisition: Purchase price P10,000,000 Legal services and transfer taxes 10,000 Refurbishments before occupancy 30,000 Occupancy permit fees 25,000 Property taxes after occupancy 8,000 Opening costs (blessing and feng shui) 500,000 The entry to initially recognize the investment property in Entity A’s books of account is a. Investment Property, Land 10,065,000 Cash Modified Disbursement System (MDS), Regular 10,065,000 b. Investment Property, Land 10,565,000 Cash Modified Disbursement System (MDS), Regular 10,565,000 c. Investment Property, Land 10,010,000 Cash Modified Disbursement System (MDS), Regular 10,010,000 d. Investment Property, Land 10,040,000 Cash Modified Disbursement System (MDS), Regular 10,040,000 5. During the period, Entity A, government entity, decides to use as an office one of its building that has previously been leased out under various operating leases on commercial basis. Information on the investment property is as follows: Investment property – Building P1,000,000 Accumulated depreciation 800,000 At the date of change in use, the fair value of the investment property is P250,000. How much is the gain (loss) on the transfer? a. 50,000 b. (50,000) c. 0 d. A transfer is prohibited. Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 6. On January 1, 20x1, Entity A acquires a building to be held as investment property for a total cost of P1,500,000. The building is estimated to have a 30-year useful life and a 5% residual value. Entity A uses the straight-line method of depreciation. On December 31, 20x5, Entity A sells the building for P1,300,000. How much is gain (loss) on the sale? a. 35,700 b. 37,500 c. 53,700 d. 75,300 Use the following information for the next three questions: Entity A determines an indication that its investment property might be impaired. Entity A then gathers the following information: Carrying amount of investment property P1,000,000 Fair value less costs to sell 900,000 Value in use 880,000 Following the impairment, Entity A revises its estimate of residual value to 5% of the recoverable amount and the remaining useful life to 10 years. 7. How much is the impairment loss? a. 120,000 b. 20,000 c. 100,000 d. 0 8. How much is the annual depreciation after the impairment? a. 85,500 b. 90,000 c. 85,000 d. 95,000 9. Five years after the impairment, Entity A determines an indication that the impairment may no longer exist. Entity A makes the following estimates and computations: Fair value less costs to sell P800,000 Value in use P700,000 The investment property would have a carrying amount of P600,000 by now if no impairment loss had been recognized in the past. How much is the gain on the reversal of impairment? a. 125,000 b. 129,500 c. 127,500 d. 327,500 Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 10. During the period, one of the buildings of Entity A, a government entity, was completely destroyed by fire. The building has a historical cost of P1,000,000 and an accumulated depreciation of P400,000. The building is insured for P700,000. Which of the following statements is correct? a. Entity A reports a net gain of P300,000 from the event in its year-end financial statements. b. Entity A reports a net gain of P100,000 from the event in its year-end financial statements. c. Entity A recognizes a loss of P600,000 but no gain. d. Entity A shall treat the loss event and the insurance claim as separate events. PROBLEM 9-3: FOR CLASSROOM DISCUSSION 1. Which of the following is an investment property? a. Property held to provide a social service and which also generate cash inflows. b. Property held for strategic purposes. c. Property occupied by employees. d. Property that is being constructed or developed for future use as investment property. 2. Which of the following is not an investment property? a. Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of operations. b. Land held for a currently undetermined future use. c. A building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases on a commercial basis. d. Equipment held to be leased out under one or more operating leases on a commercial basis to external parties. 3. According to the GAM for NGAs, government entities shall measure an investment property as follows: Initial Subsequent a. cost Cost model or Fair value Model b. cost Cost Model c. fair value Fair value Model d. fair value Cost Model or Fair value Model 4. Investment property acquired through donation is initially measured a. equal to the carrying amount in the donor’s books b. at the cost to the donor c. at fair value on acquisition date d. equal to the costs incurred in transferring title of the investment property to the entity Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 5. An entity acquires investment property in exchange for a long-term noninterest-bearing note. Assuming all of the following are determinable with sufficient reliability but differ in amounts, which of them is most likely to be used in the initial measurement of the investment property? a. cash price equivalent of the investment property b. cash price equivalent of the note payable c. present value of future cash flows on the note payable discounted at the current market rate d. face amount of note which is equal to the installment price 6. Entity A acquires an investment property for P1,000,000 cash. Additional costs incurred are as follows:  Repairs and remodeling before occupancy, P50,000.  Legal costs of transferring title to the property, P20,000.  Repairs after occupancy, P15,000. The investment property is estimated to have a remaining useful life of 10 years and a residual value equal to 5% of initial cost. Entity A uses the straight line method of depreciation. How much is the carrying amount of the investment property after one year? a. 914,850 b. 968,350 c. 923,100 d. 872,100 7. According to the GAM for NGAs, transfers to or from investment property shall be made only when there is a a. change in management’s intention b. change in use c. change in business model d. change in classification Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 8. During the period, Entity A decides to lease out under various operating leases on commercial basis one of its buildings that has previously been used as office building. Information on the building is as follows: Historical cost P1,000,000 Accumulated depreciation 800,000 At the date of change in use, the fair value of the building is P250,000. Which of the following is the correct reclassification entry? a. Investment Property, Buildings 200,000 Accumulated Depreciation – Buildings 800,000 Buildings 1,000,000 b. Investment Property, Buildings 250,000 Accumulated Depreciation – Buildings 800,000 Buildings 1,000,000 Gain on reclassification 50,000 c. Investment Property, Buildings 250,000 Accumulated Depreciation – Buildings 800,000 Buildings 1,000,000 Revaluation Surplus 50,000 d. a or c, depending on the entity’s accounting policy Use the following information for the next two questions: On January 1, 20x1, Entity A acquires a building to be held as investment property for a total cost of P1,500,000. The building is estimated to have a 30-year useful life and a 5% residual value. Entity A uses the straight-line method of depreciation. On December 31, 20x5, Entity A determines that the building is impaired and makes the following estimates: Fair value less costs to sell P900,000 Value in use P1,000,000 Following the impairment, Entity A revises its estimate of residual value to 5% of the recoverable amount. 9. How much is the impairment loss on December 31, 20x5? a. 226,500 b. 326,500 c. 257,500 d. 262,500 Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 10. On December 31, 2x10, Entity A determines an indication that the impairment loss recognized in the prior period may no longer exist. Entity A makes the following estimates and computations: Fair value less costs to sell P1,100,000 Value in use P1,050,000 How much is the gain on the reversal of impairment? a. 215,000 b. 290,000 c. 75,000 d. 218,000 Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 CHAPTER 10 PROBLEM 10-1: TRUE OR FALSE True 1. The capitalization threshold for items of PPE by government entities if P15,000, which is equal to the petty cash disbursement limit. True 2. Individual items of PPE with values below the capitalization threshold but work together as a group are recognized as PPE if the total cost of the group meets the capitalization threshold. False 3. Items below the capitalization threshold of PPE are recognized as Semi- Expandable Property – a separate class of PPE. False 4. According to the GAM for NGAs, trade discounts are excluded from the initial measurement of items of PPE but not cash discounts. True 5. The provision for decommissioning and restoration costs of an item of PPE is subsequently measured at amortized cost. False 6. According to the GAM for NGAs, government entities may choose either the cost model or the revaluation model to subsequently measure their PPE. True 7. Government entities record depreciation on a monthly basis. False 8. An item of PPE with historical cost of P10, accumulated depreciation of P5 and accumulated impairment losses of P1 is sold for P7. The gain on the sale is P2. True 9. Heritage assets are measured at cost. However, they are not subsequently depreciated, but subject to impairment. True 10. Infrastructure assets are accounted for in the same manner as the other items of PPE. However, infrastructure assets are generally assigned a residual value of zero. True 11. Reforestation projects are classified as land improvements. False 12. Entity A’s equipment has a carrying amount of P10 before replacement of an old part. The old part has a carrying amount of P2. The cost of the replacement part is P5. The loss on replacement is P3. True 13. Entity A acquires an equipment in exchange for another equipment owned by Entity B. The carrying amount of Entity A’s equipment is P10 while its fair value is P9. Entity B’s equipment has a fair value of only P7. However, Entity B pays Entity A P2 for the difference. If the exchange has commercial substance, Entity A will recognize a loss of P1 on the exchange. True 14. Entity A acquires an item of PPE from an inter-agency transfer. Entity A will not recognize any gain or loss from this transaction. False 15. Government entities normally assign items of PPE a residual value of 15% of cost. Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 PROBLEM 10-2: MULTIPLE CHOICE 1. Entity A acquires an equipment for P1M. The equipment is acquired not for active use in the production of goods but rather as a standby equipment that will only be used if the main equipment needs to be repaired. Does this equipment qualify for recognition as property, plant and equipment? a. Yes, all of the recognition criteria for a PPE are met. b. No. the equipment does not satisfy all the recognition criteria for a PPE. c. 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.” d. Yes and no. During the periods the equipment is idle, it shall be classified as “Other Assets.” During the periods the equipment is in active use, it shall be classified as “PPE.” 2. For government entities, the capitalization threshold for PPE is a. P15,000 or more b. more than P15,000 c. not less than P25,000 d. at least P5,000 3. According to the GAM for NGAs, cash discounts not taken on purchases of items of PPE are a. included in the cost of PPE b. recognized as “Other Losses” c. ignored d. debited to the “Purchase Discount Lost” account 4. According to the GAM for NGAs, estimates of decommissioning and restoration costs of an item of PPE are (choose the incorrect statement) a. included in the initial cost of the item of PPE at the present value of the estimates. b. credited to the “other provisions” account at their present value. c. included in the initial cost of an item of PPE but not subject to subsequent depreciation, although subject to amortization using the effective interest method. d. are recognized as provisions, at present value, and subsequently measured similar to a financial liability. 5. Which of the following costs is not added to the cost of an intern of PPE? a. Costs of site preparation b. Initial delivery and handling costs c. Net disposal proceeds of samples generated during testing d. Employee benefits arising directly from the acquisition of PPE Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 6. Entity A acquires 5 motor vehicles for a package price of P10M. In conjunction with the purchase, the supplier provides Entity A a promotional item of 1 motor vehicle which is not of the same type as those acquired. The fair value of the motor vehicle is P2M. Which of the following statements is correct? a. For individual costing purposes, the cost of each of the 5 motor vehicles is P1,600,000. b. For individual costing purposes, the cost of each motor vehicle acquired is P1,666,667. c. The promotional item is recognized as gain equal to fair value. d. a and c 7. Entity A acquires a building through self-construction (construction by administration). The initial cost of the building will most likely be based on which of the following? a. The contract price. b. The costs of direct materials, direct labor and construction overhead, excluding wastages. c. a or b d. Fair value at the acquisition date. 8. Entity A acquires a building through self-construction (construction by administration). The construction costs incurred are a. initially recorded in the Registries and recorded in the books of accounts only upon completion of the construction. b. initially recorded in the “Construction in Progress” account. c. recorded in the “Buildings” account in the period they arise. d. initially recorded as “Receivables” during the construction period. 9. Entity A, a government entity, acquires an equipment for P1M on August 6, 20x1. The equipment’s estimated useful life is 5 year. How much is the carrying amount of the equipment on December 31, 20x1? a. 920,833 b. 936,667 c. 916,667 d. 979,167 Computation: (1M x 95%(a) x 5 (b)/60 (c)) = 79,167 accumulated depreciation (1M – 79,167) = 920,833 (a) (100% less 5% standard residual value) (b) (August to December 20x1) (c) (5 yrs. x 12) Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 10. Which of the following assets would most likely not be assigned a residual value by a government entity? a. A major part of an equipment b. A building held as investment property c. A major tool d. Infrastructure asset 11. Which of the following assets is generally not subject to depreciation? a. Heritage assets b. Infrastructure assets c. Roads d. a and b 12. Which of the following is considered a heritage asset? a. road networks b. museum c. bridges d. forest 13. Which of the following assets of a government entity is not subject to impairment? a. Heritage assets b. Reforestation projects c. Idle land d. None of these 14. A government entity derecognizes an item of PPE that is a. idle b. fully depreciated c. unserviceable d. all of these 15. The national government receives a P10M grant from a foreign government condition on the construction of a highway. According to the GAM for NGAs, when shall the national government recognize revenue from the grant? a. when the grant is received b. when the grant becomes receivable c. when the grant becomes receivable and there is reasonable assurance that the attached condition will be satisfied d. when the condition is satisfied Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 PROBLEM 10-3: MULTIPLE CHOICE 1. Entity A acquires a train on January 1, 20x1. Information on costs are as follows: Purchase price 9,000,000 Import duties 200,000 Cash discount not taken 100,000 Freight costs 800,000 Testing costs 300,000 Repairs after the train is brought to its operational state 600,000 Estimated costs of dismantling the train at the end of its 20-year useful 120,000 The current market rate of interest on acquisition date 12%. The entry to recognize the train in the books of accounts is? a. Trains 10,212,440 Other Losses 100,000 Cash-Modified Disbursement System (MDS), Regular 10,300,000 Other Provisions 12,440 b. Trains 10,312,440 Cash-Modified Disbursement System (MDS), Regular 10,300,000 Other Provisions 12,440 c. Trains 10,200,000 Other Losses 100,000 Cash-Modified Disbursement System (MDS), Regular 10,300,000 d. Trains 10,300,000 Cash-Modified Disbursement System (MDS), Regular 10,300,000 2. During the period Entity A starts the construction of a building by administration. Entity A acquires construction materials for Ᵽ10M. the entry to record the transaction is a. Construction Materials Inventory 10,000,000 Account Payable 10,000,000 b. Construction in Progress-Buildings And Other Structures 10,000,000 Account Payable 10,000,000 c. Construction in Progress-Buildings And Other Structures 10,000,000 Construction Materials Inventory 10,000,000 d. None of these. 3. Entity A exchanged an equipment with Entity B. Entity A however, did not recognize any gain or loss on the exchange. Which of the following is a valid reason for this? a. No cash was involved in the exchange. b. The fair values of the equipment exchanged were equal c. The exchanged lacks commercial substance. d. All of these Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 4. Entity A receives a donation of land with fair value of Ᵽ1M.The donor stipulated that the land shall only be used as a portion of a proposed highway. If in case the project is discontinued, Entity A shall return the land to the donor. At the date of receipt of the donation, the construction of the highway is not yet started. When should Entity A recognize the land in its books of accounts? a. Upon receipt of the donation. b. When the construction of the highway is started. c. When the construction of the highway is completed. d. When the land is used in the construction of the highway. 5. During the year Entity A, an NGA, incurred interest of Ᵽ200,000 on a loan taken to specifically finance the construction of a building. The proceeds of a loan were temporarily invested and earned interest income of Ᵽ20,000. Which of the following entries best reflects the recognition of the interest in the books of accounts of Entity A? a. Interest expense 200,000 Interest Payable 200,000 b. Interest expense 180,000 Interest Payable 180,000 c. Construction in Progress-Buildings and Other Structures 180,000 Interest Payable 180,000 d. Buildings and Other Structures 180,000 Interest Payable 180,000 PROBLEM 10-4: FOR CLASSROOM DISCUSSION 1. Which of the following is not one of the characteristics of property, plant and equipment? a. It is a tangible asset. b. It is held for use in the production or supply of goods, services or program outputs, for rental to others, or for administrative purposes. c. It is expected to be used for more than one reporting period. d. It is intended for resale in the ordinary course of operations. 2. Which of the following does not result to the recognition of PPE? a. A single purchase of equipment costing P15,000. b. Purchases of equipment that work together as a group, individually costing P1,000 to P5,000 but with a sum total cost of more than P15,000. c. Bulk acquisitions of small items of PPE with aggregate cost of more than P15,000. d. Acquisition of building for P10M intended to be leased out under various operating leases on commercial basis. Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 3. Entity A acquires an equipment on account with the following terms: P500,000 list price, 20%, 10%, 2/10, n/30. Entity A incurs the following additional costs: Non-refundable purchase taxes (not yet included in the list price above) 10,000 Installation costs 100,000 Estimated costs of dismantling the equipment at the end of its 10-year useful 20,000 The current market rate of interest on acquisition date is 10%. How much is the initial cost of the equipment? a. 468,713 b. 470,511 (500,000 x 80% x 90% x 98%) + 10,000 + 100,000 + (20,000 x PV of 1 @10%, n=10) c. 472,341 d. 489,313 4. Entity A acquires 5 motor vehicles for a package price of P10M. In construction with the purchase, the supplier provides Entity A a promotional item of 1 motor vehicle which is the same as those acquired. The fair value the motor vehicle is P2M. Which of the following statements is correct? a. For individual costing purposes, the cost of each motor vehicle acquired is P2,000,000. b. For individual costing purposes, the cost of each motor vehicle acquired is P1,666,667. c. The promotional item is recognized as gain equal to fair value. d. a and c 5. Entity A acquires a building by awarding a construction contract to a contractor. The initial cost of the building will most likely be based on which of the following? a. The contract price. b. The costs of direct materials, direct labor and construction overhead, excluding wastages. c. a or b d. Fair value at the acquisition date. Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 Use the following information for the next two questions: Entity A exchange equipment with Entity B. Pertinent data are shown below: Entity A Entity B Carrying amount 85,000 130,000 Fair value 95,000 115,000 Cash paid by Entity A to Entity B 15,000 6. If the exchange has commercial substance, how much is the initial measurement of the equipment received by Entity A? a. 95,000 b. 110,000 (95,000 + 15,000) c. 115,000 d. 85,000 7. If the exchange has commercial substance, how much is the gain (loss) recognized by Entity A in the exchange? a. 10,000 (95,000 – 85,000) b. (10,000) c. (15,000) d. 15,000 8. Entity A incurs costs in repairing an item of PPE. It is not clear whether the repair is a minor or major repair. Entity A shall a. recognize the repair costs as expense b. capitalize the repair costs c. a or b d. none of these 9. Entity A, a government entity, acquires an equipment for P1M on August 26, 20x1. The equipment’s estimated useful life is 5 years. How much is the accumulated depreciation of the equipment on December 31, 20x1? a. 66,666 b. 63,333 c. 83,333 d. 79,167 Computation: (1M x 95%(a) x 4 (b)/60 (c)) = 63,333 (a) (100% less 5% standard residual value) (b) (September to December 20x1) (c) (5 yrs. x 12)’ Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 Use the following information for the next three questions: At year-end, Entity A determines an indication that an equipment with carrying amount of P400,000 is impaired. This equipment was acquired 5 year earlier and was originally estimated to have a useful life of 10 years and a 5% residual value. Entity A determines the following information: Fair value less cost to sell P350,000 Replacement costs P700,000 10. How much is the impairment loss assuming Entity A compute for the value in use using the Depreciable Replacement Cost Approach? a. 32,667 b. 32,500 c. 50,000 d. 37,500 Computation: Replacement cost 700,000 Accumulated depreciation - (700K x 95% x 5/10) (332,500) Depreciated Replacement Cost – Value in use 367,500 Recoverable service amount (VIU - higher) 367,500 Carrying amount (400,000) Impairment loss (32,500) 11. Assume the indication of impairment is physical damage to the equipment. Entity A estimates that it would cost P10,000 to restore the equipment’s service potential to the level before the physical change. How much is the impairment loss under the Restoration Cost Approach? a. 42,667 b. 42,500 c. 50,000 d. 47,500 Computation: Depreciated replacement cost (see solution above) 367,500 Less: Restoration cost (10,000) Value in use 357,500 Recoverable service amount (VIU - higher) 357,500 Carrying amount (400,000) Impairment loss (42,500) Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 12. Assume the indication of impairment is a significant decline in the expected output of the equipment, which Entity A estimates to be 10%. How much is the impairment loss under the Service Units Approach? a. 62,667 b. 62,500 c. 50,000 d. 69,250 Computation: Depreciated replacement cost (see solution above) 367,500 Multiply by: 90% Value in use 330,750 Recoverable service amount (FVLCS - higher) 350,000 Carrying amount (400,000) Impairment loss (50,000) 13. Which of the following statements is correct? a. Heritage assets are initially measured at cost and subsequently measured at cost less accumulated depreciation and accumulated impairment losses. b. Infrastructure assets are accounted for similar to the other items of PPE. However, they are generally assigned a 10% residual value. c. Reforestation project are not considered PPE. d. Fully depreciated PPE are derecognized. 14. Which of the following is derecognized? a. Idle PPE b. Fully depreciated PPE c. Unserviceable PPE d. Partially damaged PPE 15. How do government entities account for borrowing costs? a. Capitalized if the borrowing costs relate to the acquisition or construction of a qualifying asset. b. Expensed even if the borrowing costs relate to the acquisition or construction of a qualifying asset. c. Choice (a) for the national government; choice (b) for national government agencies. d. Choice (a) for the national government agencies; choice (b) for the national government. Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 CHAPTER 11 PROBLEM 11-1: TRUE OR FALSE False 1. If it is not clear whether an expenditure is a research or a development cost, it is treated as development cost. True 2. The development cost of an internally generate intangible asset may be capitalized if certain conditions are met. False 3. A government entity does not amortize intangible assets. False 4. Government entities amortize all of their intangible assets over a period of 2 to 10 years, unless a more appropriate estimate of useful life is available. True 5. For subsequent measurement, government entities classify intangible assets into those with finite and indefinite useful lives, similar to business entities. False 6. Government entities normally assign their intangible assets a residual value of 5% of cost. True 7. Subsequent expenditures on recognized intangible assets are generally expensed unless it is clear that the expenditures meet the recognition criteria for intangible assets. False 8. A government entity acquires an intangible asset with indefinite useful life for P100. Assuming the entity uses the maximum amortization period for intangible assets under the GAM for NGAs, the appropriate annual amortization expense on the intangible asset is P10. False 9. The amortization of an intangible asset is credited directly to the intangible asset account, according to the GAM for NGAs. False 10. An entity determines an indication of impairment for the intangible asset with carrying amount of P100. The entity calculates a fair value less costs to sell of P90 and a value in use of P105. The impairment loss is P5. PROBLEM 11-2: MULTIPLE CHOICE 1. In which of the following instances is an asset not considered to be identifiable? a. The asset can be sold separately regardless of whether the entity intends to do so. b. The asset arises from a contractual right. c. The asset can be leased out separately on its own or licensed to be used separately by other entities in exchange for cash payments. d. The asset can only be transferred if the entity is liquidated. 2. Which of the following is most likely to be recognized as intangible asset by a government entity? a. Internally generated brand b. Subsequent expenditure on a copyright c. Development costs incurred in internally generating a patent d. Publishing title acquired as a donation Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 3. Subsequent expenditures on recognized intangible assets are a. generally capitalized and amortized over the remaining useful life or the extended useful life. b. generally expensed, unless they meet the definition of an intangible asset and the asset recognition criteria. c. generally capitalized if they meet the conditions of technical feasibility, probable future economic benefits, and reliable measurement. d. not accounted for. 4. According to the GAM for NGAs, government entities shall use this measurement model in subsequently measuring intangible assets. a. Cost model b. Revaluation model c. Fair value model d. a or b 5. Intangible assets held by government entities are measured as follows: Initial Subsequent a. cost cost less accumulated amortization and impairment losses b. cost fair value less accumulated amortization and impairment losses c. cost fair value through surplus or deficit d. a or b 6. The default amortization method for intangible assets with finite useful life is a. straight line method b. sum-of-the-years digits c. double declining d. none of these 7. which of the following statements is incorrect regarding the accounting for impairment of intangible assets under the GAM for NGAs? a. An entity is required to test for impairment an intangible asset with indefinite useful life or an intangible asset not yet available for use at least annually or whenever there is an indication of impairment. b. An entity shall test for impairment an intangible asset with definite useful life only when an indication of impairment exists. c. The accounting for impairment of intangible assets, and reversal thereof, is the same as those of investment property and PPE. d. Intangible assets are subject to amortization using the straight line method over a period of 2 to 10 years but are not subject to impairment. Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 Use the following information for the next three questions: On December 1, 20x1, Entity A acquired a computed software for P1,000,000 and incurred the following costs:  Non-refundable purchase taxes of P30,000, not included in the purchase price above.  Professional fees incurred in the installation of the software, P100,000.  Modifications to the software before it was brought to the condition intended by management for use, P60,000.  Costs of testing the software, P10,000.  Training costs of staff who will be using the software, P200,000.  Costs of updating the software after it was available for use in the condition originally intended by management, P5,000.  Administrative and other general overhead costs incurred on the acquisition and installation of the software, P15,000. The software’s useful life is 5 years. 8. The entry to initially recognize the software is a. Computer Software 1,200,000 Cash-Modified Disbursement System (MDS), Regular 1,200,000 b. Computer Software 1,140,000 Cash-Modified Disbursement System (MDS), Regular 1,140,000 c. Computer Software 1,400,000 Cash-Modified Disbursement System (MDS), Regular 1,400,000 d. Computer Software 1,190,000 Cash-Modified Disbursement System (MDS), Regular 1,190,000 9. Entry to recognize the amortization expense for the current year is a. Amortization-Intangible Assets 240,000 Computer Software 240,000 b. Amortization-intangible Assets 240,000 Accumulated Amortization-Computer Software 240,000 c. Amortization-Intangible Assets 20,000 Accumulated Amortization-Computer Software 20,000 d. Amortization-Intangible Assets 20,000 Computer Software 20,000 Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 10. On December 31, 20x2, Entity A assesses an indication impairment and makes the following estimates: Fair value less costs to sell P700,000 Value in use P800,000 The entry to recognize the event is a. Impairment Loss-Intangible Assets 140,000 Accumulated Impairment Losses-Computer Software 140,000 b. Impairment Loss-Intangible Assets 140,000 Computer Software 140,000 c. None, the intangible asset is not impaired. d. None, intangible assets held by government entities are not subject to impairment. PROBLEM 11-3: FOR CLASSROOM DISCUSSION 1. Which of the following is not one of the essential an intangible asset? a. Separability b. Arising from binding arrangement c. Control d. Held for use in the production or supply of goods 2. An intangible asset is identifiable if it a. is separable b. arises from binding arrangements c. is a non-monetary asset without physical substance. d. a orb 3. Which of the following is an indicator of control? a. the ability of an entity to benefit from an asset. b. the ability of an entity to deny or regulate the access of others to the benefit of an asset. c. an entity can, depending on the nature of the asset, exchange it, use it to provide goods or services, exact a price for others’ use of it, use it to settle liabilities, hold it, or perhaps even distribute it to owners. d. all of these. 4. Which of the following is most likely not an intangible asset? a. Computer b. Trademark c. Acquired import quota d. Customer list 5. A purchased intangible asset is initially measured at a. cost b. fair value c. the sum of research and development costs d. the total of development costs Downloaded by Nicole Nigos ([email protected])  lOMoARcPSD|37607501 6. The development costs of an internally generated intangible asset can be capitalized if certain conditions are met. Which of the following is not one of those conditions? a. Technical feasibility of completing the intangible asset. b. Intention to complete the intangible asset. c. Ability to measure reliably the expenditure attributable to the intangible asset during its development. d. Existence of similar assets in the market or economic environment where the entity operates. 7. Internally generated brands, mastheads, publishing titles, lists of users of a service, and items similar in substance are not recognized as intangible assets because a. it is illegal to recognize these items as assets, according to international intellectual property laws and other business laws. b. it is often difficult to measure separately the costs of these items. c. these cannot be distinguished from the cost of developing the entity’s operations as a whole. d. the entity normally cannot demonstrate its ability to use these, when completed during their development phase. 8. Government entities normally assign their intangible assets a residual value of a. 5% of cost b. 10% of cost c. 25% of cost d. zero 9. Which of the following intangible assets is not amortized? a. Intangible asset with infinite useful life b. Intangible asset with finite useful life c. All intangible assets held by a government entity d. Intangible asset not yet available for use 10. An entity shall test for impairment an intangible asset with finite useful life a. only when an indication of impairment exists. b. at least annually or whenever there is an indication of impairment. c. at each reporting date, including interim periods, if the entity prepares interim financial statements. d. Never, because intangible assets held by a government entity is not subject to impairment; only amortization. Downloaded by Nicole Nigos ([email protected])