NAME: SECTION: DATE:

Written Recitation:

1. Road Truckers Inc. has acquired a heavy road transporter at a cost of P100,000 (with no breakdown of the component
parts). The estimated useful life is 10 years. At the end of the sixth year, the power train requires replacement, as further
maintenance is uneconomical due to the off-road time required. The remainder of the vehicle is perfectly roadworthy and is
expected to last for the next four years. The cost of a new power train is P45,000. Can the cost of the new power train be
recognized as an asset, and, if so, what treatment should be used? (10%)

The new power train will produce economic benefits to Road Truckers Inc., and the cost is measurable. Hence the item
should be recognized as an asset. The original invoice for the transporter did not specify the cost of the power train;
however, the cost of the replacement—$45,000—can be used as an indication (usually by discounting) of the likely cost, six
years previously. If an appropriate discount rate is 5% per annum, $45,000 discounted back six years amounts to $33,500
[$45,000 / (1.05)]6, which would be written out of the asset records. The cost of the new power train, $45,000, would be
added to the asset record, resulting in a new asset cost of $111,500 ($100,000 – $33,500 + $45,000).

2. Healthy Inc. bought a private jet for the use of its top-ranking officials. The cost of the private jet is $15 million and can be
depreciated either using a composite useful life or useful lives of its major components. It is expected to be used over a
period of 7 years. The engine of the jet has a useful life of 5 years. The private jet’s tires are replaced every 2 years. The
private jet will be depreciated using the straight-line method over? (10%)

5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life applied to the balance cost of the jet.

3. An entity imported machinery to install in its new factory premises before year-end. However, due to circumstances
beyond its control, the machinery was delayed by a few months but reached the factory premises before year-end. While
this was happening, the entity learned from the bank that it was being charged interest on the loan it had taken to fund the
cost of the plant. What is the proper treatment of freight and interest expense under IAS 16? (10%)

Freight charges should be capitalized but interest cannot be capitalized under these circumstances

4. XYZ Inc. owns a fleet of over 100 cars and 20 ships. It operates in a capital-intensive industry and thus has significant other
property, plant, and equipment that it carries in its books. It decided to revalue its property, plant, and equipment. The
company’s accountant has suggested the alternatives that follow. What option/s should XYZ Inc. select in order to be in line
with the provisions of IAS 16?(10%)

Revalue an entire class of property, plant, and equipment

5. An entity installed a new production facility and incurred a number of expenses at the point of installation. The entity’s
accountant is arguing that most expenses do not qualify for capitalization. Included in those expenses are initial operating
losses. These should be?(10%)

Expensed and charged to the income statement

6. IAS 16 requires that revaluation surplus resulting from initial revaluation of property, plant, and equipment should be
treated in one of the following ways. What option/s mirrors the requirements of IAS 16?(5%)

Debited to the class of property, plant, and equipment that is being revalued and credited to a reserve captioned
“revaluation surplus,” which is presented under “equity.”

7. An entity has a factory that has been shut down for a year due to various reasons, including worker unrest and strike. The
entity plans to sell this factory. It should(5%)

Classify the factory as property held for sale in the ordinary course of business under IAS2.
8. What are the exceptions to equity method? (10%)
An investment in an associate should be accounted for using the equity method except in these three exceptional
circumstances:
(1) Where the investment is classified as held for sale in accordance with IFRS 5
(2) Where a parent does not have to present consolidated financial statements because of the exemption in IAS 27
(3) The investor need not use the equity method if all of these criteria apply:
(a) The investor is a wholly owned subsidiary or is a partially owned subsidiary of another entity and its
owners have been informed about and do not object to the investor not applying the equity method. The
owners in this case are all of those entitled to vote.
b) The investor’s debt or equity instruments are not traded in a public market.
(c) The investor did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory body for the purpose of issuing any class of financial instrument in a
public market.
(d) The ultimate or any intermediate parent of the investor produces consolidated financial statements
that are available for public use and that comply with IFRS.

9. Company X owns 22% of Company Y and is entitled to appoint two directors to the board, which consists of eight members.
The remaining 78% of the voting rights are held by two other companies, each of which is entitled to appoint three
directors. The board makes decisions on the basis of a simple majority. Because board meetings are often held at very short
notice, Company X does not always have representation on the board. Often the suggestions of the representative of
Company X are ignored, and the decisions of the board seem to take little notice of any representations made by the
director from Company X. What is the relationship between Company X and Company Y? (10%)

Company X is unable to exercise significant influence as its directors seem to be ignored at board meetings. Therefore, the
equity method should not be used.

10. Intelligent Corp. received a grant of P150 million to install and run a windmill in an economically backward area. Intelligent
Inc. has estimated that such a windmill would cost P250 million to construct. The secondary condition attached to the grant
is that the entity should hire labor in the local market (i.e., from the economically backward area where the windmill is
located) instead of employing workers from other parts of the country. It should maintain a ratio of 1:1 local workers to
workers from outside in its labor force for the next 5 years. The windmill is to be depreciated using the straight-line method
over a period of 10 years.

The grant received by Intelligent Corp. will be recognized over a period of 10 years. In each of the 10 years, the grant will be
recognized in proportion to the annual depreciation on the windmill. Thus P15 million will be recognized as income in each
of the 10 years. With regard to the secondary condition of maintenance of the ratio of 1:1 in the labor force, this
contingency would need to be disclosed in the footnotes to the financial statements for the next 5 years (during which
period the condition is in force), in accordance with disclosure requirements of IAS 37. (10%)

11. State the disclosure requirement for Investment Property(10%)