Excel Professional Services Inc.

Management Firm of Professional Review and Training Cenfer (PRTC) ·

(LUZON) Manila 7339344 * Santiago City, Isabela (0918) 2807130
Calamba City, Laguna • Dasmarlrias City'- Cavite * Lipa City, Batangas (0917) 8852769
(VISAYAS) Bacofod City (034) 4346.d4 "Cebu City (032} 2537900 loc. 21 8 Since 1977
(MINDANAO) Cagayan De Oro tity (091 ~~81465 • Davao City (082) 2250049
FAR CPA RtvlEW
ocAMPO/CABARLes1souMANIocAMPO
FAR.2806-Property, Plant and Equipment - Depreciation and Derecognition MAY ZOZ_Q_

DISCUSSION PROBLEMS G -;1 t '..4..1 •

( ltlft• ·)
1. .What is depreciation? Q P580,000
' 0 -·
c.
d.
P650,000
Nil
( a. ) The systematic allocation of the depreciable b. PS60,000
V amount of an asset over its useful life.
,b. The cost of an asset, or other amount substituted
for cost, less its residual value . .., 0·, ,•. ,,,,t ·, IA" 1' 7. The depreciation method used shall reflect the pattern
c. The removal of a previously recognized asset from in which the asset's future economic benefits are
an entity's statement of financial position. "' ~,,•u9, '· · expected to b_e _ consumed by the entity. Which
d. Price that would be received to sell an asset in an statement iS.,iDS:P~r-e.aJegarding depreciation methods 7
orderly transaction between market particip.ants at a. Straight-line depreciation results in a constant
the measurement date. 4 11,·r ~.,1,•~ charge over the useful life if the asset's residual
value does not change. _ ··
2. ,. Depreciation of an asset begins ;, ., . , . b. The dimipJstiing balance method results in a
'.,~) When it is available for use. ---+------+-- 1
decreasing charge over the useful life . ..,,,.,
D. When it is actually used. A,( t'.l I ~'ll ' I · ,,, ., r c. The ynits of production method results ii'! a charge
c. When it is retired from active use. F i 'fl( ' · . ~, based on the expected use or output. · ~
d. When it is derecognized. .~-'. ··: ,; '( •A depreciation method that _i~ based _on i(E:,~~~
0. ,,,u I r that is generated by an act1v1ty that includes the
3. Depreciation of an asset ceases r, •. use of an asset isippropriate.
a. At the date that the asset is d~ecognized. . , ·1
b. At the date that the asset is classified as held for 8. Which of the following is a realistic assumption of the
sale in accordance with PFRS 5 _grajgh.t: Uoe method of depreciation?
:,c~.' At the earlier of a orb. ·_- a. Depreciation is a function of time rather than a
a. At the.later of orb. · _.1 function of usage.
b. The asset's economic usefulness is the same each
4. Depreciation is not recognized if year. .
a. The fair value of the asset exceeds its carrying c. · The repair and maintenance expense is essentially
amount. the same each period.
b. The asset becomes idle. d. The rate of return analysis is enhanced using the
-~ The asset is retired from active use. straight-line method.
(EJ The asset's residual value exceeds its carrying
amount. -" '"''' ,; ~u½ orpr-,·_~-.1 9. J,!seful life of Property, Plant and Equipment is:
a:--fhe .Q.eriod over which an asset is expected to be
5. On April 1, 2020, the new machinery was ordered at a available for·use by an entity.
quoted price of P56,000. On July 1, 2020, it arrived at b. The number of production or similar units expected
Dodik Corp. 's plant with an actual invoice price of • to be obtained from the asset by an entity.
rr ~g;-~ which it paid immediately .. During July 2020, r 21 Either a or b.
q_new concrete platform was constructed at a cost of '-a. Neither a nor b.
( i:>4,06.o>to properly install the machine.. I!1 _~ugust
:2020, testing was performed at a cost of (P7,0dO. to 10. Which of the following factors are considered in
ensure the machine was operating properly. --· On determining the useful life of an asset?
August 31, 2020, the machine was entered into I. Expected YSa,ge of the asset ✓ .
service. · Minor repairs and maintenance costs on the II. Expected pby,ical wear and tear . /
new machineamounted to P3,000 in S~ber 2020 In. Technical pr commercial obsolescence ./ _
No othe'r costs were incurred prior to December 31, IV. Legal or similar limits on the use of the asset ./
2020. Simllar~ac . inery is depreciated on a straight-
( ; ) I, II, III and IV ·
line basis over. 0 rs and typically has no residual
value. What s .d be the d~reciatir;iA eitpense for the b., I, II and III only
C,· I, II and IV only
·c par ended 31 December 2020?
a P2,300 s~@ ' ~OJJ ' '"'-ti ,_· cJt,r::: c. P2,875 d. I and II only
. P2,233 '1/ n, d. P3,350 11
01 t . !«'Ill r:, v,rpJ\ r•r,e , ..,'rill\t11rr ;\ )i"..X,~£ 1
11
--
2,co
.=====-
11. On January 1, 2018, Paete Company signed a 12-yea.-
lease for a building. Paete has an option to renew the
6. The Seoul Com~3/1f£U~chased an office equipment with lease for an additional 8-year period on or before
a _us~ful life ~ e a r s on 1 January 2020 for January 1, 2022. During January 2020, Paete mad,,
!£§,500J)~O,.;:, . . substantial Improvements to the building. The cost of
the improve~ts was ~ with an estimatcc
At its year end of 31 December 2020, the amount the useful life of\1§/years. At December 31, 2020, Paete
company would receive from the disposal of the asset if intended to exercise the renewal option. Paete ha~
it was already of the age and .in the condition expected taken a full year's amortization on this improvemer. ;.
at the end of its useful life was estimated at~700,000) What should be the depreciation charge for the yea.
Inclusive of inflatx>n the actual amount expected to be ended 31 December 2020? ,. -,
received on disposal was estimated at P900,000. a. P360,000 1i:.-:i , .,,i ~ - ,~. -;,t.1-l c.J P240,000
What should be the depreciation charge for the year b. P300,000 "l"""(li 'c( P200,000
ended 31 December 2020? • II"

'.. 40lUJ
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 EXCEL PROFESSIONAL SERVICES, INC .

12. Holdaway, Inc., a iman rumllurt manufMtorer, , An 11sset Incurs increasing repairs ,md m11lntenanrr-
purthbse'd th, followillg auets 11t the ere, of lhc ~ca, w1th U!>C
d. 1\n asset 's service p0ten!lel de?Cllnes with use.
~ ~ Mt.. Q..A. Uf()
1 P24,000 PS,000 P19,000 5 yci,r-s -... 17. Oll!Sjtng Corp . us«?s the sum ·or-the·vears' digit:;
2 900 1Jo no 1 ye11~ "' method to dcprcc111te cQu1pment purchased In January
3 320 J 20 8 yei,rs • 20 18 ror f>20,000 The estimated resldu11 I value or till!.,
4 J ...O!lQ ~ J.29.0 S yearsI,." eQulpment Is P2,00d and the estimated useful is. rollr
PJ~.22,0 PJ.G..lQ .rL~ ,,,· years. Wh~l should be the depreCJeU~i1 charge for the
year ended 31 ~c.ember 20207 ' , ,,
-;_ 11 /
The group dcprc<.,al!Cln rate Is a. P6,000 C, P4,000
'-~ 1651% ' • •• • • , c. 19 .76% b. PS ,400 , ,, d. PJ,600 , "' . ,
b. 15.61% d. 17 .96%

SOLUTION GUIOE:
.,
\_ .,,..,__ __
Deprecteble
-Amount
1- --: -
- Ufa J PePc:ccllllPD .
Ann ~o l
18. Cuyapo Company purchased a machine on January 2,
2017 , for PS00,000 . The machine has an estimated
useful life or eight years and a salvage valu e of

·- ----'--- __ ~9,ooo , s t -~.eoo I PS0,000. Depreciation was computed by the 200%

~- _ .
2
3
4
-- ~fi--j-~ --
8,500
-
. 2_1!_,590
----
5
_ _ _ L_ __
• ·-
1

1,700
--
!~ _j
l
St.650 __ ,
declining-balance method .

2020)
a. P70, 313
I '
What should be the
depreaation charge ror the year ended 31 December
• I i 'f I •

t . P47,461
• /

fl,,.... •u~~ .l ~b- P52,734 d. P41,870

• 1'3. Takatak, Inc., uses t he group depreciation method for
19. Ku ya Company uses hand tools in It s manufacturing
'E oq;,• 11tts furniture account. The depredation rate used for
activities . On January l , 2020, there are 800 or such
., . , ~ ' l.l furniture ls (21%2 The balance In the furniture account
tools on hand at a cost of P200 each . Acquisition and
u ''•"'on Decemb~r'3 1, 2019, was ~ 25,000, and the
retirement in the year 2020 are :
1 , , ... ~ balance In Accumulated Depreciation . Furniture was
n J-, P61,000. The following purchases and dispositions of Estimated value
, , , ,~..n, furniture occurred In 2020 (assume that all purchases Acauisition Retirement at year end
•,, ·• ,•.i.t nd disposals occurred at the beginning of each year) . 400 @ P300 300@ PSO P200,000

t 0 Assets Sold Assuming that retirements are on a first -i n, first-out

~•" Assets Purchased Cost Selling Price basis, which of the following statements is true?
a. The depreciation using the retirement method i$
~ .oop \ P27,000 PB,000
P60,000 .
The carrying amount of furniture at December 31, b. The depreciation using the replacement method is
202Q Is w , ,.u, P90,{)6Q • '/)
a. P71,070 •~ ~~ 1 ,rt.OJ)
1
P63,070 ._y c. The depreciation using the Inventory method is
b. P64,750 ~"~~ l ' . : <,:JQl .) d. P44,070 ~ (Jt O.I)
,.,.
,~ e/11 t /11 1. , , ,.::..,_:!,.. ~
~ The retirement method yields the lowest amount of
14. 'ongabon Corporation acquired a machine at a total depreciation compared to replacement and
~( · ~ ost of PS,200,000. The estimated life of the mac~ine inventory methods.
-:-:,--;:.,,, ,.. J is 8 years or a total of 100,000 working hours with no
' .-' salvage value. The operating hours of the machine SOLUTION GUIDE:
r._ totaled: 2019, 5,000 hours; 2020, 12,000 hours. If Retirement method:
'R:_ ~ , , the company uses the working hours method, the Cost (300 x P200) P60,000
3
depreciation for the year 2020 is Proceeds (300 x PSO) (15,000)
.. ~~ a. P260,000 ,:((,~ ' , : , ~~"!W c. P650,000 P4S.ooo
: .z @ P624,000 - d. P884,000 Replacement method:
Replacement cost (300 x P300) P90,000
15. The :Vientiane Company purchased a machine on 1 Proc-ds (300 x PSO) (15,000)
~ January 2019 for P81,000. The useful life of the
ezs.ooo
Inventory method :
~..,.,.; / machine is estimated at 3 years with a residual value at Balance, 1./1 (800 x P200) P160,000
~ the end of this period of P6,000. , During its useful life, Purchases (400 x P300)
Retirement (300 x PSO)
120,000
c 1s:ooo,
the expected units of production from the machine are : Balance, 1.2/31 265,000
Per physical count (200.000)
Q. ,o., l"'~;,!,·Jrn~- r-, ~;, .
" ' JJ'IJl ' 2019 12 000 units
, P 65.000
· ·i; •o.,.\>.r
2020 7,000 units
,(WJ- :'-! w ' 1 1-t /vr.~ 2021 5,000 units
20. Pantabangan Company takes a full year's depreciation
What should be the depreciation expense for the year in the year of an assets acquisition, and no
ended 31 December 2020, using the most appropriate depreciation in the year of disposition. Data relating to
depreciation method permitted by PAS16 Property, plant one depreciable~sset acquired in 2018, with residual
and equipment? value ot(_P900,000 and estimated useful life o!.!_years,
p., P27,000 :;ooox;n! : ~ c. P23,625 at December 31, 2019 are:
(Q) P21,875 . ::::=-- d. P25,000
Cost . P9,900,000
Accumulated depreciation 3,750,000
16. In which of the f~llowing situations is the .u nits-of-
production method of depreciation most appropriate? Using the same depreciation . method in 2018 and
a. An asset's service potential declines with the 2019, how much depreciation should Pantabangan
passage of time. record in 2020 for this asset?
An asset is subject to rapid obsolescence . a. Pl,125,000 C. Pl,650,000
b. Pl,250,000 Pl,?00,000 @
- om ~oh
www.p rtc.c _...,, •r/i, :
Q•-• ""' \ :95'J,w FAR.2806
 ROFESSIONAL SERVICES, INC.
. . t determine the
e re~idual value, the useful life of an asset and the c. If it is practicable for a·n entity o
de~rec1atlon method applied to an asset shall be --..., carrying amount of t_he replaced part . rt had been
reviewed ( d ....., Regardless of whether the replaced pa
1
a. At least at each financial year-end. ~ depreciated separately.
'b. At least every two years.
c. At least every three years. 27 . Assuming that the original .cost of the power train ;~
d. Only if there Is an indication they may have not separately identifiable and the appropriate discoun
changed since the most recent annual reporting rate is 5% (the present value of 1 at 5% for 6 years ,s
date. o.7462), the total depreciation expense in 2020 1s
a. Pl ,000,000 c. P2,934,362
22. As of January 1, 2020, Seniors decided to change the b. P2,S00,000 Pl,789,210 G;.'
method of computing depreciation on its sole piece of
equipment from the sum-of-the-years' digits method 28 . When an entity allocates depreciation to the separate
to the straight-lioe method. The equipment, acquired parts of an asset and each part is accounted for
in January 201 7 for P520,000, had an estimated life of separately, the entity is using which of the following
~years and a salvage value of P20,000. The approaches to depreciation?
amount of the depreciation expense for 2020 is a. Periodic depreciation
a, PlOO 1000 ,:, '-"' · · · " -~:vi c PSO 000 b. Segment depreciation
U '-fn - < ti 'r ' '
b. P 60,000 ('Jiv.JJ • vt ·~, _-,~. ?~t ~~'. ~,~o
1••
c. Replacement cost depreciation
d. Components depreciation
23. Which statement is inco'rrecf''regarding derecognition
of property, plant and equipment? 29. Which statement is( incorrect regarding 'components
a. Derecognition is the removal of a ·previously depreciation'? ··
recognized asset from an entity's statement of a. Each part of an item of property, plant and
financial position. ✓ equipment with a cost that is significant in relation
b. An asset should be removed from the statement of tp the total cost of the item shall be depreciated
financial position on disposal or when it is separately . • ., ff\ •'" " ,
withdrawn from use and no future economic b. An entity .allocates the amount initially recognized
benefits are expected from its disposal. / in respect of an item of property, plant and
c. The gain or loss on disposal is the difference equipment to Its significant parts and depreciates
between the net -disposal proceeds and the separalely each such part. 1
carrying amount an~ should be recognized in the c. It may be appropriate to depreciate separately the
,,,-. income statement. · airframe and engines of an aircraft, whether .owned
\ d. )_yalns on dlspo.s,aJ...oLpropert.:y.,...plant.ancLequii:iment ,,- , or subject to a finarice lease . .-
J ~ be classified as revenue. ( dj An· entity may·JlO( depreciate separately the parts
Jfv.ild no! .__,,. of an item (hat do not have a cost that is
24. _Entity ·A acqu ired an asset that had a cost of RUQ,.000: significant in relatiori to the total cost of the itern.
The asset is beiAg depreciated over a _J_:year period ----1-c,,~·: f . ( f : '•

using the sum-of-the-years' digit method . . It has a 30. Bugis Corp. acquired a machine on January 1, 201 2.
salvage value estimated at PJ.Q,_OD0. The loss/gain if Details of the machine at December 31 , 2019 are
the asset is sold for P38,Q00 at the end of the third given below :
year is '11):.0..,
Depreciation
a. P4,000 gain ~ "nl c. P68,000 loss
Component
b. P20,000 loss r,, •. 9) { •~" ",UJJ d. P92,000 loss , ~ basis
Engine . Pl 70,000,000 r Useful.Jife of
~
~- lf:)...O.:J '11L
40,0,00 hours
Outer casings 510,000,000 -/ 2'S)years
-Use the following information for the next three questions.
strai,ght line
Riles Truckers, Inc. acquired a _heav.y_road transporter on Other ( 12\years
J,anuary 1,...2.0~ t a ~ of,.f!0 in.i!!!QJJ) The estimated components 255,000,000 straight line
useful life is..J,Q_y..ears. On J~ _u.ary--1,~_?_91 the power _PZ§S ooo ooo
train requires replacem.elit, as further maintenance ' Is
uneconomical due to the off-road time required. The During the year 2020, the following events took place :
remainder of the vehicle is perfectly roadworthy and is a) Engine, which had run for 30,000 hou~ till date
expected to last fQ! the next four years. The cost of the developed serious snags. It W Sir·~- lacea• by a
new power train is:P4.5 .million. . better engine with a cost of P238 m i!Tion and
estimated iife of ~ hours. e new ~nglne
25. Assuming that the original cost of the power train is P3 was used for 5,000 hours during the year.
·, million, the tota.l depreciation expense in.2020 Is • b) Polishing and · painting was done to the outer
a. P2,200,000 c. Pl,,150,000 casings at a cost of Pl.3 million. ·
-@ Pl,825,000 d. Pl,450,000 c) Other components were upgraded at a cost · of
P102 milllonr ~he remaining life · of the other
26. If an entity recognizes in the carrying amount of an components ~ears.
item of property, plant and· equipment the cost ·of a
replacement for part of the item, then It derecognizes Compute the total depreciation for the year 2020,
the carrying amount of the replaced part assume that all the ~ork mentioned above was
· a. If the replaced part had been depreciated completed at the beginning of 20,20 .
separately. a. PBS,850,000 ·c . P90,950,000
b. If the asset is depreciated using components b. PSl,676,470
t,1 f Ut U., 1 ft(
~ P81, 600 , 000
depreciation. ('2 · , co:; a:v- hl,(L, = l/ l i,<O , ''..\Xl , ; 1 S\.l.• l\.l.
C\J" < ,fr ' -)£. - now do the DIV drlll -
.HJn • 1r," "':' : I' .
C,Zltr (,r,1(Hl t\ '10 IJ :) 1, ,J
:«;'; : ,-, , ('llrt? "-'·'-'-' tUJ ,.. , 'I\.•\) 1\1,.

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-=-
 EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIV) DRILL

1. On January 2, 2020, Lem Corp. bought mach inery 6. On J9-n_uary 2, 2017, Union Co. purchased !l-(Tlachlne
under a contract that required a down payment of for ( f>264,0Q0 and depreciated it by the ~ rai!:!~!-line
Pl0,000 plus twenty-four monthly payments of PS,000 method using an estimated useful life oJ:~~ ars
each, for total payments of P130,000. The cash with no salvage value. On January 2, 2020, Unipn•
equivalent price of the machinery was--.Pll0,000. The determined that the machine had a useful life of ~iX)
machinery has an estimated; useful life of _ter.i years \ years from the da.te of acguisition and will have a
· and estimated residual value of PS,000. Lem uses salvage vaiue of P-24~0OO.- An--a,c ountlng change was
straight-line depreciation . In its 2020 income made in 2020 to reflect the additional data. The
· statement, what amount should Lem report as accumulated depreciation for this machine should have
depreciation for this machinery? a balance at December 31, 2020, of
( a. Pl0,500 c. P12,500 a. Pl 76,000 c. P154,000
l>. Pll,000 d. P13,000 b. P160,000 ( d: P146,000
2. Jaen Advertising Inc. reported the following on its 7. On July 1, 2020, New Orleans Corporation purchased
December 31, 2020, balance sheet: equipment at a cost oft 3~ 0,000. V,e equipment has
Equipment PS00,000 an estimated salvage value of P39',000 and is being
Accumulated depreciation-equipment P135,000 depreciated over an estimated· life o'(S-years under the
double-declining-balance method of depreciation. The
In a footnote, Jaen Indicates that it usEis straight-line
depreciation to be reco9nized In 2020 is ·
depreciation over 10 years and estimates salvage
a. P77,S00 ( 1 \)i '' / . c. P38,750
value as 10% of cost. What is the average age of tile 1
equipment owned by Jaen? (b. P42,500 , { t~• d. PBS,000
- l \l~~
a. 2.7 years fi' · (\I • ~(\, c. 7 years
5 3 years Ile _ ~,v , w/. d. 7.3 years
8. Natividad C9mpany- purchased a tooling machine in
2010 for R3,000,000. The machine was being
depreciated on the str{light-line method over an
3. Laur Company uses the composite method of
estimated useful life of (fwenty years, with no salvage
depreciation an~ has a composite rate of 25%. During
value. At the beginning of 2020, when the machine
2020, it sold assets with an original cost of Pl00,000
had been in use for ten years, the company paid
and residual value of P20,000 ·for P80 000 and
P600,000 to overhaul the machine. As a result of this
acquired ~ worth of new assets'-witlfresidual
improvement, the company estimated that the useful
value ofl5'10,000. The original group of assets had the
life of the machine would be extended an additional
following characteristics:
. five years. What should be the depreciationexpense
Total cost P250,000
r ecorded for the machine in 2020?
Total residual value 30,000
19~\lY ~_-..j a. PlS0,000 in, ·., , · , · , , , c. P210,000
The above original grbup includes the assets sold in \_~) P140,000 ,-s;;.
d. P340,000
2020 but- not the assets purchased in 2020. What was - I ("

the depreciation iii 2026? 9. OKC ·Manufacturing Co.,'·f ialendar-year company, .

A P62,500 i wt>O~• vO'fN' ~~-8-, c. P47,500 purchas~d a machine for P650,000 on January 1,
~ P52,500 ffe, d. P46,500 2018. At the date of purchase, OKC incurred the
W\)'('t.1\r( ·, . .. ~ following additional costs:
4. On the first day of its current fiscal year, Lupao
Loss on sale of ~lg machinery . PlS,000
Corporation purchased equipment costing P400,000
Freight cost .}, .1 1
\ &~ 5 000
with a salvage value of P80,0Q0. Depreciation expense ~ l _!J0 ,
for the year was P160,000. If Lupao uses the double- Installation cost ~ \ " , .,. 1,J~1. u1 "20,000
declining-balance method of depreciation, what is the Testing costs prior to regular operation 4,000
timated useful life of the asset?
5 years c. 2.5 years The estimated s ~ t u e of the machine was
~ 4 years • d. 2 years PS0,000, and OKC~s ·mated that the machine would
h'avecrusefu! life f 20 ~ears~ with depreciation being
i 5. On January 1, 2018, Famy Company signed ari eight-
year lease for office space. Famy has the option to
. computed using the ~bt:Une-method. In January
2020, accessories costing P48,600 were added to the
renew the lease for an additional six-year period on· or machine to reduce its operating costs. These
before January 1, 2024. During January 2020, Famy accessories neither prolonged the machine's life nor
incurred the following costs. did they provide any additional salvage value. The
deprecia~lon to be recognized in 2020 Is
General ·improvements to the leased a. P31,450 u1~ ., : !k'= l'fll'J lS} P34,150
premises with useful life of 10 years PS,400,000 b. ?33,880 d. P36,930
Office furniture and equipment with
useful life of 8 years 2,400,000 · 10. On March 31, 2020, Shooter Corp. retired a machine
Moveable assembly line ,equipment , used In manufacturing designer parts. The machine
with useful life of 5 years 1,80Q,000 was acquired May 1, 2Q_!Z,. Straight-line depreciation
m.,e~hod was used. r "Tl'fe. asset had an estimated
At December 31, 2020, Famy's Intention as to the
r ~ a l u e of P ~ and ikfi"le-)ear life. On
exercise of the renewal option is uncertain. A full year
December31, 2019,_tbe.._balance'-inToe accumulated
depreciation of leasehold improvement is taken for
depreciation is P@ 0oo....)The machine was scrapped
year 2020. In Famy's · December 31, 2020 balance
ana· ""the company did not receive a single
sheet, accumulated depreciation of leasehold
con"sicleration. The loss on retlrefl?en~ is
improvement should be
a. P250,000 v;1 ?277,812
a. Pl,200,000 x·
P'l,300,000
b. P270,000 d. P300,000
, P 540,000 ~ P 900,000
(::> - end of F~R.2806 - e

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