FINANCIAL ACCOUNTING & REPORTINGBatangas CPA Review Center Tanauan City, Batangas “Committed to your CPA review needs” MCDFAJICULAY, CPA EXERCISE PROBLEMS 1. In connection with your audit of Capability Company’s financial statements for the year 2016, you noted the following transactions affecting the property and equipment items of the client: January 1 Acquired real property for P5,026,000 including P146,000 charge representing property tax for 2016 that had been prepaid by the vendor; 20% of the purchase price is deemed applicable to land and the balance to the buildings. A mortgage of P3,000,000 was assumed by the client on the purchase. Cash was paid for the balance. January 15 Previous owners had failed to take care of normal maintenance and repair requirements on the buildings necessitating current reconditioning at a cost of P236,800. February 15 Demolished garages in the rear of the building and P36,000 being recovered on the lumber salvage. The company proceeded to construct a warehouse. The cost of such warehouse was P540,800 which was P90,000 less than the average bids made on the construction by independent contractors. Upon completion of construction, city inspectors ordered extensive modifications to the building as a result of failure on the part of the company to comply with the Building Safety Code. Such modifications, which could have been avoided, cost P76,800. March 1 The company exchanged its own shares with a fair value of P320,000 (par P24,000) for a patent and new equipment. The equipment has a fair value of P200,000. April 1 The new machinery for the new building arrived. In addition, a new franchise was acquired from the manufacturer of the machinery. Payment was made by issuing bonds with face value of P400,000 and paying cash of P144,000. The value of the franchise is set at P160,000, while machine’s cash price equivalent is P360,000. May 1 The company contracted for parking lots and waiting sheds at a cost of P360,000 and P76,800, respectively. The work was completed and paid for on June 1. December 31 The business was closed to permit taking the year-end inventory. During this time, required redecorating and repairs were completed at a cost of P60,000. Required: a. Adjusted cost of the Land b. Adjusted cost of the Buildings c. Adjusted cost of the Machinery and Equipment d. Adjusted cost of the Land Improvements e. Adjusted cost of property, plant and equipment 2. Comprehensive Company’s property, plant & equipment and accumulated depreciation balances at December 31, 2014 are: Accumulated Cost Depreciation Machinery and equipment P120,000 P367,500 Automobiles and trucks 50,000 114,326 Leasehold improvements 70,000 108,000 Depreciation policy: a. Depreciation methods and useful lives are as follows: Machinery and equipment – straight-line for 10 years FAR3 Page 1 FINANCIAL ACCOUNTING & REPORTING Automobiles and trucks – 150% declining balance; 5 years and all the belongs to this class were acquired after 2010 Leasehold improvements – straight line b. Depreciation is computed to the nearest month. c. Salvage values are immaterial except for automobiles and trucks which have estimated salvage value equal to 15% of the cost. Additional information: a. The company entered into 12-year operating lease starting January 1, 2012. The leasehold improvements were completed on December 31, 2011 and the facility was occupied on January 1, 2012. b. On July 1, 2015, machinery and equipment were purchased at total invoice cost of P325,000. Installation cost of P44,000 was incurred. c. On August 1, 2015, it purchased new automobile for P25,000. d.On September 30, 2015, a truck costing P48,000 and a carrying amount of P30,000 on December 31, 2014 was sold for P23,500. e. On December 20, 2015, a machine with cost of P17,000 and a carrying amount of P2,975 on the date of disposition was sold for P4,000. Required: a. Gain (loss) on disposition of truck on September 30, 2015 b. Gain (loss) on sale of machinery on December 20, 2015 c. Adjusted balance of property, plant & equipment as of December 31, 2015 d. Depreciation expense for the year ended December 31, 2015 e. Amount of property, plant & equipment to be shown in the statement of financial position at December 31, 2015 MULTIPLE CHOICES 1) The cost of an item of property, plant and equipment comprises of all of the following, except a) Purchase price b) Costs directly attributable to bring the asset to location and condition for its intended use c) Import duties and non-refundable purchase taxes d) Fines paid for violation of import regulations 2) An asset was constructed for an enterprise’s own use. The asset was financed with specific new borrowing. The interest cost incurred during the construction period as a result of expenditures for the asset is a) Part of historical cost of acquiring the asset to be written over the term of the borrowing used to finance the asset construction b) Part of historical cost of acquiring the asset to be written over its estimated useful life c) Recorded as deferred charge and amortized over the term of the borrowing d) Taken as interest expense in the construction period 3) A company bought land to be used as the site for plant construction. Timber was cut from the building site so that the construction could begin. Proceeds from sale of the timber is a) Classified as other income c) Deducted from the cost of the plant b) Deducted from cost of the land d) Netted against clearing cost and expensed 4) When a company bought land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant, the costs incurred to tear down the building should be a) Amortized over estimated time period between tearing down and plant completion b) Added to the cost of the land c) Added to the cost of the plant d) Expensed as incurred 5) The sum-of-the-years’ digits depreciation method is being used for a machine with five-year estimated useful life. The fraction applicable for cost to be depreciated in fourth year should be a) 4/5 c) 2/15 b) 2/15 d) 2/5 6) Which type of expenditure occurs when an entity installs a higher capacity boiler to heat its plant? a) Betterment c) Replacement b) Addition d) Repairs & maintenance FAR3 Page 2 FINANCIAL ACCOUNTING & REPORTING 7) Which of the following is the assumption on which straight line method of depreciation is based? a) Operating efficiency of the asset decreases in later years b) Service value declines as a function of obsolescence instead of time c) Physical wear and tear are more important than economic obsolescence d) Service value declines as a function of time instead of use 8) All of the following consider residual amount in determination periodic depreciation, except a) Group composite method c) Sum-of-the-years digits method b) Productive output method d) Double declining balance method 9) Which statement is not incorrect concerning the residual value of an item of PPE? a) The depreciated amount is obtained by deducting its residual value from asset cost b) The residual value shall be reviewed at least in every three years c) If there is a change in residual amount, the change is accounted for as adjustment to prior depreciation d) Residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset at the end of its useful life, after deducting the costs of disposal 10) Which of the following is not included in the PPE category in the statement of financial position? a) Building which already commenced its construction and completion will occur the following year b) Delivery truck acquired in installment, certificate of ownership being held by the financing company c) Land acquired by the entity currently and placed in the market for resale d) Equipment acquired five years ago but idle temporarily 11) If the carrying amount of an asset is increased as a result of the revaluation, the increase shall be credited directly to a) Equity under other comprehensive income c) Equity under retained earnings account b) Equity under holding gains or losses d) Other income in the profit or loss 12) Donations of property, plant and equipment should be recorded at a) No value – only memorandum entry c) Appraised value as determined by the Board b) Recorded value of the asset d) Fair value of the donated asset 13) The following additional costs shall form part of the cost of property, plant and equipment, except a) Payment of claim for injuries duly covered by insurance for workers on plant’s construction site b) Renovation costs incurred as a result of non-compliance inspection made by local government c) Allowances and hotel accommodations paid to foreign technicians during test run of machine d) Repairs and remodeling costs incurred in the building acquired prior to the occupancy 14) If the qualifying asset is financed by specific borrowing, the capitalized borrowing cost is equal to a) Actual borrowing cost incurred up to completion of the asset, net of income from temporary investment of the borrowing proceeds b) Actual borrowing cost incurred up to completion of the asset c) Actual borrowing cost incurred d) NIL 15) If the qualifying asset is financed by general borrowing, the capitalized borrowing cost is equal to a) Average expenditures on the asset multiplied by weighted average interest rate or actual borrowing cost incurred, whichever is higher b) Average expenditures on the asset multiplied by weighted average interest rate or actual borrowing cost incurred, whichever is more clearly determinable c) Average expenditures on the asset multiplied by weighted average interest rate or actual borrowing cost incurred, whichever is lower d) Total expenditures on the asset multiplied by the capitalization rate 16) Which of the following assets does not have exchangeability characteristic? a) Copyrights c) Franchise b) Patents d) Goodwill 17) A consideration irrelevant in determining useful life of intangible asset is a) Provisions for renewal or extensions c) Legal, regulatory or contractual provisions b) Expected actions of the competitors d) Initial cost FAR3 Page 3 FINANCIAL ACCOUNTING & REPORTING 18) Which of the following research and development related costs should be capitalized and amortized over current and future periods? a) Cost of testing the equipment that will also be used in another separate research and development project scheduled to begin next year b) Labor and material costs incurred in building or creating the prototype model c) Research findings acquired from a company to add a particular research project in progress currently d) Administrative salaries allocated to research and development project undertaking 19) The following additional costs shall form part of the cost of property, plant and equipment, except a) Payment of claim for injuries duly covered by insurance for workers on plant’s construction site b) Renovation costs incurred as a result of non-compliance inspection made by local government c) Allowances and hotel accommodations paid to foreign technicians during test run of machine d) Repairs and remodeling costs incurred in the building acquired prior to the occupancy 20) Paragraph 118 of PAS 38: Intangible Assets requires that the following items in relation to intangible assets, each shall be disclosed separately the a) Impairment losses reversed in the profit or loss during the period b) The closing balance of each item of intangible asset as of the reporting period c) The amortization methods used for intangible assets with finite useful lives d) Any amortization expense recognized during the period 21) Which of the following is not considered additional disclosure requirements in accordance with paragraph 122 of PAS 38: Intangible Assets? a) Amount of contractual commitments for the acquisition of intangible assets b) Existence and book values of intangible assets whose title is restricted c) The gross carrying amount and any accumulated amortization at the beginning and end of the period d) The carrying amounts of intangible assets pledged as security for liabilities 22) Intangible assets are said to be sans physical substance, hence, one of the items listed is not such an asset. a) Mastheads and publishing titles c) Service and operating rights b) Licenses and franchises d) Trading securities 23) In accordance with generally accepted accounting principles, which of the following methods of amortization is most likely recommended for intangible assets? a) Composite rate method c) Sum-of-the-years digit method b) Straight line method d) Double declining balance method 24) Using the revaluation model, intangible assets should be reported in the statement of financial position at a) Fair value at the date of revaluation less subsequent accumulated amortization and impairment loss b) Cost less subsequent accumulated amortization and impairment loss c) Fair value at the date of acquisition less subsequent accumulated amortization and impairment loss d) Amortized cost 25) The proper accounting for the costs incurred in creating computer software products that are to be sold, leased or otherwise marketed to external parties is to a) Capitalize all costs as incurred until a detailed program design or working model is created b) Charge research and development expense when incurred until technological feasibility has been established for the product c) Charge research and development expense only if the computer software has alternative future uses d) Capitalize all costs until the software is sold to the external parties 26) Which of the following should not be recognized as an asset? a) Excess of cost over fair value of net assets acquired in business combination treated as acquisition b) Development costs incurred after establishing commercial and technological feasibility c) Industrial property rights, service rights and operating rights acquired from an investor d) Costs incurred in establishing and organizing the corporation 27) Which of the following should not form part of the cost of internally generated intangible asset? a) Expenditures incurred on training staff to operate the asset b) Any expenditure directly attributable to generate the asset such as fee for registration of legal right c) Salaries and other employment costs of personnel directly engaged in generating the asset d) Materials and services used or consumed in generating the intangible asset 28) What is/are the proper treatment/s of these legal fees related to patent rights? a) Capitalized if related to registration c) Both A and B b) Expensed if related to litigation d) None of the above FAR3 Page 4 FINANCIAL ACCOUNTING & REPORTING 29) The following are not considered essential features of intangible assets. Which is not? a) Controlled by the enterprise c) Subject to amortization b) Indefinite useful life d) Has physical substance 30) In relation to the amortization of intangible assets, the general rule in the paragraph 100 of PAS 38: Intangible Assets pertinent to residual value of intangible asset is a) Residual value need not be reviewed at the end of each annual reporting period b) Residual value does not enter into determination of amortization charge c) Residual value is at least equal to the amount of maintenance costs incurred d) Residual value is presumed to be zero 31) ABC Company bought P2M tract of land for factory site. It razed an old building on the property and sold the materials it salvaged from demolition. Prior to demolition, the company paid P40,000 to the informal settlers so that they would leave the property. It incurred additional costs and realized salvage proceeds as follows: Demolition of old building – P250,000; Legal fees for purchase contract – P50,000 Title guarantee insurance – P60,000; Proceeds from sale of salvaged materials – P40,000. The balance of land account as a result of the foregoing is a) P2,110,000 c) P2,300,000 b) P2,360,000 d) P2,050,000 32) On January 1, 2015, DEF bought machine by paying P100,000 cash as down payment and signing a non- interest bearing note with the seller. The note is payable in three equal amounts of P100,000 beginning January 1, 2016. The prevailing interest rate for similar notes is 10%. How much is the cost of the machine acquired by DEF? a) P400,000 c) P348,690 b) P373,550 d) P300,000 33) On January 1, 2015, the records of GHI Company showed the following accounts and balances in its property, plant & equipment category: Land – P350,000; Land Improvements – P20,000; Buildings – P900,000. During the year, the following data were gathered from an analysis of the accounts: Cash paid on purchase of land – P1,250,000 15% mortgage payable assumed on the acquisition of land – P2,000,000 Realtor’s commission – P150,000 Legal fees, realty taxes and documentation expenses – P25,000 Payment to persons squatting on the property to relocate them – P50,000 Old building on the land was shortly torn down at a cost of P60,000 Recovery from the salvage of the building demolished – P75,000 Cost of fencing the property – P55,000 Payment to contractor for building constructed – P1,000,000 Building permit fees – P10,000 Excavation costs – P25,000 Architect’s fees – P25,000 Interest that would have been incurred if the money used for building construction were borrowed at the prevailing interest rate of 12% - P120,000 The balances of Land, Land Improvements and Building accounts respectively at December 31, 2015 are a) P3.825M; P75,000; P2.020M c) P3.805M; P20,000; P2.020M b) P3.775M; P75,000; P1.995M d) P3.880M; P20,000; P1.945M 34) JKL Company both buys and constructs equipment for use in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2015: Purchases Cash paid for equipment, VAT inclusive of P10,000 – P110,000 Freight and insurance cost while in transit – P2,000 Cost of moving equipment into place at factor – P3,100 Wage cost for technicians to test equipment – P4,000 Insurance premium paid during 1st year of operation on this equipment – P1,500 Special plumbing fixtures required for new equipment – P8,000 Repair cost incurred in 1st year of operation related to this equipment – P1,300 Constructed Materials and purchased parts (gross amount of P200,000; the entity failed to take the 2% cash discount) – P200,000 FAR3 Page 5 FINANCIAL ACCOUNTING & REPORTING Imputed interest on funds used during construction (stock financing) – P14,000 Labor costs – P190,000 Overhead costs (half of the balance pertains to fixed overhead. Of the variable amount, 20% is attributed to the construction of equipment. Of the fixed amount, 70% is attributed to the general operations of the entity.) – P200,000 Profit on self–construction – P30,000 Cost of installing the equipment – P4,400 The correct costs of acquired and constructed equipment, respectively, are a) P120,600; P454,400 c) P117,100; P440,400 b) P123,400; P410,400 d) P122,100; P420,400 35) On January 1, 2015, MNO Corporation traded in an old machine for a newer model. Information relative to the old and new machines follows: Old machine New machine Cost 800,000 List price 1,000,000 Accmulated depreciation as of January 1, 2015 600,000 Cash price 900,000 Average published retail value 170,000 Cash paid with trade in 780,000 The amount should be recognized as the cost of new machine acquired in the exchange is a) P1,000,000 c) P950,000 b) P980,000 d) P900,000 36) The company acquired equipment on April 1, 2016 for P800,000. The equipment has the following data: Estimated service life – 8 years in terms of time period; 100,000 hours in terms of input hours; and 900,000 units to be produced in terms of output production Estimated residual amount – P80,000 During 2016 and 2017, the company used it for 5,000 and 6,000 hours respectively and produced 45,000 and 64,000 units, respectively. Amount of depreciation for 2016 under straight-line method and 2017 depreciation under sum-of-the years digit, respectively, are (each method is assumed independently from each other) a) P67,500; P120,000 c) P67,500; P145,000 b) P90,000; P145,000 d) P90,000; P120,000 37) Refer to Item No. 36, how much will be the 2017 accumulated depreciation under double declining balance method and the carrying amount of the equipment as of December 31, 2017 under 150% declining balance method, respectively? (each method is assumed independently from each other) a) P265,000; P487,500 c) P535,000; P241,406 b) P312,500; P558,594 d) P157,500; P642,500 38) Refer to Item No. 36, the December 31, 2016 carrying amount of equipment under Units of output and the 2017 depreciation expense under hours worked, respectively, are (each method is assumed independently from each other) a) P87,200; P720,800 c) P764,000; P43,200 b) P79,200; P36,000 d) P712,800; P43,200 39) Luna Company had the following outstanding loans during 2014 and 2015: specific construction loan of P3M (10%), and general loan of P25M (12%). The entity began construction of its new building on January 1, 2014 and was completed on June 30, 2015. The following expenditures were made during he years 2014 and 2015: January 1, 2014 – P4M December 1, 2014 – P3M April 1, 2014 – P5M March 1, 2015 – P6M The company’s policy for depreciation is 200% declining balance method. Useful life of the building is twenty–five years. On January 1, 2017, the entity decided to switch to sum-of-the-years digit method. On January 1, 2018, the company made major repairs to the building for an amount of P585,751. The entity assessed the said repair will lengthen its useful life by one and a half year from the date of repair. The 2017 carrying amount of building and 2018 depreciation expense, respectively, are a) P17,561,549; P1,433,596 c) P16,713,704; P1,922,847 b) P16,127,953; P1,337,096 d) P15,376,608; P1,381,111 40) At the beginning of 2015, Fierce Company acquired a machine costing P1M. Its expected useful life is 10 years, at the end of which is expected to be scrapped. On July 1, 2020, the entity replaced the engine block of the machine at cost of P320,000. The replacement is expected to reduce the operating cost of the machined during its extended useful life of 10 years from date of replacement. Per documents assessed, the old part costs P250,000. The amount of gain (loss) from the replacement is a) P(112,500) c) P(137,500) b) P112,500 d) P82,875 FAR3 Page 6 FINANCIAL ACCOUNTING & REPORTING 41) Refer to Item No. 40, the amount of depreciation expense for the year ended December 31, 2020 assuming the cost of the old part is not reliably determinable a) P82,875 c) P144,000 b) P81,300 d) Cannot be ascertained 42) The Great Company acquired for P240,000 cash on July 1, 2011 a machine with estimated life of 10 years and estimated salvage value of P12,000. Depreciation was recorded on monthly basis, using straight-line method. The machined was sold for P130,000 on September 30, 2016. The sale resulted in a a) P21,700 loss c) P9,700 loss b) P21,700 gain d) P9,700 gain 43) At the beginning of 2013, Joyful Company acquired an equipment costing P860,000. Estimated useful life is 9 years with residual value of P50,000. The entity uses straight-line method for this type of equipment. At December 31, 2016, because circumstances indicate economic performance of the asset is less than expected, it was tested for impairment. The estimated asset’s selling price on this date was P450,000, after incurring P30,000 cost to sell. The asset is expected to provide annual net cash inflow of P100,000 during the remaining five year useful life, at the end of which residual value is expected to be only P20,000. Based on current market assessments and risks specific to the asset, a discount rate of 10% is applicable. How much is the impairment loss to be recognized for the year ended December 31, 2016? a) P108,502 c) P80,000 b) P50,000 d) P-0- 44) An equipment owned by MDF Corporation costing P2.4M and with accumulated depreciation of P600,000 is tested for possible impairment on December 31, 2014. It is found to have fair value less costs to sell of P1.1M and value in use of P1.2M. It is further determined that remaining useful life of the asset is six years. On December 31, 2016, the asset is evaluated and is found to have a recoverable amount of P900,000. How much is the impairment recovery to be recognized in December 31, 2016 profit or loss section of statement of comprehensive income? a) P600,000 c) P200,000 b) P400,000 d) P100,000 45) Refer to No. 44, how much is the impairment recovery to be recognized in the December 31, 2016 profit or loss section of the statement of comprehensive income assuming the recoverable amount on December 31, 2016 is determined to be P1.25M instead? a) P450,000 c) P100,000 b) P400,000 d) P-0- 46) On January 1, 2016, Integrity Company bought machinery incurring a total cost of P3.6M. This unit of equipment belongs to a class carried by Integrity using the revaluation model. Any resulting revaluation surplus is periodically transferred to retained earnings as the surplus is realized. Revaluation is recorded maintaining the proportionate relationship between the asset and accumulated depreciation account. Depreciation is consistently provided on equipment based on original estimated useful life of 10 years under straight line method. Revaluation results are as follows: December 31, 2017 – P3,120,000 December 31, 2019 – P2,010,000 December 31, 2021 – P1,800,000 How much is the balance of revaluation surplus to be shown in the equity section of the statement of financial position as of December 31, 2018? a) P240,000 c) P150,000 b) P180,000 d) P-0- 47) Refer to Item No. 46, how much is the amount recognized as impairment loss (if any) in the December 31, 2019 statement of comprehensive income as a result of revaluation? a) P 330,000 c) P150,000 b) P180,000 d) P-0- 48) Refer to Item No. 46, how much is the amount recognized as impairment recovery (if any) in the December 31, 2021 statement of comprehensive income as a result of revaluation? a) P100,000 c) P460,000 b) P360,000 d) P-0- FAR3 Page 7 FINANCIAL ACCOUNTING & REPORTING 49) Refer to Item No. 49, how much is revaluation surplus (if any) to be recognized in the December 31, 2021 statement of comprehensive income under the section of other comprehensive income? a) P100,000 c) P460,000 b) P360,000 d) P-0- 50) On July 1, 2016, Resilience Mining Company paid P3.6M for mining property with a supply of natural resources estimated at 800,000 tons. The entity expects to sell 10,000 tons a month. Operations commenced immediately. Selling price is P20 per ton. It uses percentage (15%) depletion for tax purposes and uses calendar accounting period. For use in production, the company also bought some new equipment on July 1, 2016 at a cost of P96,000 with estimated life of 12 years. After all natural resources are extracted, the equipment will be of no use and will be sold for an amount of P6,000. If sales and production come out as expected, what is the depletion and depreciation expense, respectively, for financial reporting purposes for the year 2016? a) P270,000 and P6,750 c) P300,000 and P14,400 b) P135,000 and P5,200 d) P540,000 and P15,000 51) On January 2, 2016, Knowledge Enterprises Inc. developed a new machined for manufacturing baseballs. Because the machined is considered very valuable, the company had it patented. The following expenditures were incurred in developing and patenting the machined in 2016: Purchase of special equipment (cost was P600,000) with recoverable amount after the development of the new machine is P460,000 Research salaries and fringe benefits for scientists and engineers amounted to P51,300 Costs of testing prototypes was P70,800 Fees paid to Philippine Patent Office amounted to P7,500 Drawings required by the patent office to be filed in connection with patent application at P14,100 Legal costs of filing for patent at P38,100 The company elected the patent to be amortized over ten years. Full year amortization is taken up in the year of acquisition. At January 2, 2018, it paid P72,000 to successfully defend the patent in the infringement suit. On January 2, 2019, it determined that the patent has remaining useful life of 5 years. How much is the research and development expense based on the foregoing data? a) P582,100 c) P511,300 b) P263,300 d) P262,100 52) Refer to Item No. 51, how much is the carrying value of the patent as of December 31, 2017? a) P53,730 c) P47,760 b) P104,400 d) P88,800 53) Refer to Item No. 51, how much is the total expense related to patent for the year ended December 31, 2018 that will be recognized in the profit or loss of statement of comprehensive income? a) P8,358 c) P22,758 b) P80,358 d) P96,340 54) Refer to Item No. 51, how much is the carrying value of the patent as of December 31, 2019? a) P91,032 c) P33,432 b) P38,568 d) P105,432 55) On July 1, 2016, CPA Company signed an agreement to operate as a franchisee of Jollee Foods Inc. for initial franchise fee of P600,000. Of this amount, P200,000 was paid when agreement was signed and the balance is payable in four equal annual payments starting July 1, 2017. Payment is nonrefundable and no future services are required by the franchisee. CPA’s credit rating indicates that it can borrow money at 14% for a loan on this type. The cost of the franchise acquired on July 1, 2016 is a) P436,000 c) P600,000 b) P491,000 d) P676,000 56) Global Topnotcher Corporation is a newly established computer software company. During 2015, the company incurred and paid the following costs relating to new software package, which it expects to market in 2016: Cost of planning, designing and testing during the research and development phase is P500,000 Coding costs to establish technological feasibility amounted to P300,000 Coding and testing costs after establishment of technological feasibility amounted to P100,000 Production of product masters amounted to P400,000 It expects a total revenue of P5M over the 4-year life of the product. The company began marketing the product in 2016. During the year, the revenues amounted to P1M. FAR3 Page 8 FINANCIAL ACCOUNTING & REPORTING How much should be recognized as cost of the computer software asset in 2015? a) P500,000 c) P700,000 b) P800,000 d) P600,000 57) Refer to Item No. 56, how much is the amortization expense for the year ended December 31, 2016? a) P100,000 c) P125,000 b) P250,000 d) Cannot be ascertained 58) MDF Company incurred the following costs during 2016: Quality control during commercial production including routine testing of products – P58,000 Laboratory research aimed at discovery of new knowledge – P68,000 Engineering follow through in an early phase of commercial production – P15,000 Testing for evaluation of new products – P24,000 Adaptation of existing capability to a particular requirement of customers’ needs as part of continuing commercial activity – P13,000 Modification of the formulation of a plastics product – P6,000 Searching for application of new research findings – P19,000 Trouble shooting in connection with breakdowns during commercial production – P29,000 Total amount to be reported as research and development expenditures for 2016 is a) P92,000 c) P117,000 b) P98,000 d) P232,000 59) FAR Company incurred the following costs during 2016: Equipment bought for use in various research projects – P900,000 Depreciation on the equipment above – P210,000 Compensation costs of personnel in research and development – P400,000 Materials used in research and development – P300,000 Outside consulting fees for research and development work – P220,000 Indirect costs appropriately allocated to research and development – P260,000 Total amount of research and expenditures that should be reported for 2016 statement of comprehensive income of FAR Company is a) P2,080,000 c) P1,180,000 b) P1,390,000 d) P880,000 60) Godbless Company was formed towards the end of 2016. At the time of formation, the company spent P50,000 for accounting fees; legal fees of P150,000; stock certification costs for P500,000; initial franchise fee of P1M; initial lease payments of P300,000 and promotional fees of P300,000 The amount initially recorded as intangible asset is a) P-0- c) P1,000,000 b) P700,000 d) P2,300,000 >>>END<<< FAR3 Page 9