COLEGIO DE DAGUPAN

Arellano Street, Dagupan City

School of Business and Accountancy

BUSINESS POLICY AND STRATEGY

First Semester, AY 2018-2019
Midterm Examination

Set A

1. A brand name that was acquired separately should initially be recognized , according to IAS38
Intangible assets, at (select one answer)
A recoverable amount
B either cost or fair value at the choice of the acquirer
C fair value
D cost

2. The Palila Company purchased a varnishing machine for PHP150,000 on 1 January 20X7.
The company received a government grant of PHP13,500 in respect of this asset. Company policy was
to depreciate the asset over 4 years on a straight-line basis and to treat the grant as deferred
income. Under IAS20 Government grants and government assistance, what should be the carrying
amounts of the machine and the deferred income ("DI") balance at 31 December 20X8?
Carrying amount DI balance
a PHP75,000 PHP6,750
b PHP112,500 PHP10,125
c PHP81,750 PHP6,750
d PHP75,000 PHP13,500

3. The Markab Company has acquired a trademark relating to the introduction of a new manufacturing
process. The costs incurred were as follows:
Cost of trademark PHP 3,500,000
Expenditure on promoting the new product PHP 50,000
Employee benefits relating to the testing of the
proper functioning of the new process PHP 200,000
According to IAS38 Intangible assets, what is the total cost that should be capitalized as an intangible
non-current asset in respect of the new process?
A PHP3,750,000
B PHP3,700,000
C PHP3,500,000
D PHP3,550,000

4. Which of the following is not considered a research and development activity?

a. Laboratory research aimed at discovery of new knowledge.
b. Design, construction and operation of pilot plant.
c. Engineering follow-through in an early phase of commercial production.
d. Conceptual formulation and design of possible product or process.

5. What is the maximum amortization period mandated for intangible assets?

a. 10 years
b. 20 years
c. 40 years
d. No arbitrary cap on the useful life has been established

6. Which of the following research and development costs should be capitalized and amortized over
current and future periods?
a. Labor and material costs incurred in building a prototype model
b. Cost of testing equipment that will also be used in another separate research and development
project scheduled to begin next year

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c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project currently in
process

7. Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product
b. Acquisition of R and D equipment for use in current project only
c. Cost of marketing research for a new product
d. Engineering activity to advance the design of product to the manufacturing stage

8. In the case of grant related to an asset, which accounting treatment is prescribed?

a. Record the grant at a nominal value in the first year and write it off in the subsequent year.
b. Either as deferred income or deduction from the carrying amount of the asset.
c. Record the grant at fair value in the first year ad take it to income in the subsequent year.
d. Take it to income immediately.

9. Government assistance includes all the following, except

a. Free technical and marketing advice
b. Provision of guarantee
c. Government procurement policy that is responsible for a portion of the entity’s sales.
d. Improved irrigation water system or infrastructure for the benefit of an entire local community and
imposition of trading constraints

10. Assets that qualify for interest capitalization include

a. Assets under construction for an entity’s own use.
b. Assets that are ready for their intended use.
c. Assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest capitalization.

11. Which of the following is not a condition that must be satisfied before interest capitalization can
begin on a qualifying asset?
a. Interest cost is being incurred.
b. Expenditures for the assets have been made.
c. The interest rate is equal to or greater than the entity’s cost of capital.
d. Activities that are necessary to get the asset ready for the intended use are in progress.

12. Which of the following is the recommended approach to handling interest incurred in financing the
construction of property, plant and equipment?
a. Capitalize only the actual interest costs incurred during construction.
b. Charge construction with all costs of funds employed, whether identifiable or not.
c. Capitalize no interest during construction.
d. Capitalize interest costs equal to the prime interest rate times the estimated cost of the asset being
constructed.

13. Exploration and evaluation expenditures are incurred

a. When searching for an area that may warrant detailed exploration even though the entity has not yet
obtained the legal rights to explore a specific area.
b. When the legal rights to explore an area have been obtained but the technical feasibility and
commercial viability of extracting a mineral resource are not yet demonstrable.
c. When preparations for commercial extraction are being made.
d. In extracting mineral resource and processing the resource to make it marketable.

14. Exploration and evaluation asset shall be classified as either tangible or intangible asset and
measured initially at cost and subsequently at
a. Cost model
b. Revaluation model
c. Cost model or the revaluation model
d. Cost model or fair value model

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15. Depletion expense
a. Is usually part of cost of goods sold.
b. Includes tangible equipment cost in the depletion base.
c. Excludes intangible development cost from the depletion base.
d. Excludes restoration cost from the depletion base.

16. Which of the following is not part of depletable cost?

a. Acquisition cost of the mineral resource deposit
b. Exploration cost
c. Tangible equipment cost associated with machinery used to extract the mineral resource
d. Intangible development cost such as drilling, tunnel and shaft

17. Which of following is not a similarity in the treatment for depreciation and depletion?
a. The estimated life is based on economic or productive life.
b. Assets are reported in the same classification in the statement of financial position.
c. The rate may be changed upon revision of the estimated productive life.
d. Both depreciation and depletion are based on time.

18.Which of the following must be met for an item to be recognized as an intangible asset other than
goodwill?
a. The fair value can be measured reliably.
b. The item is part of an activity aimed at gaining new scientific or technical knowledge.
c. The item is expected to be used in the production or supply of goods or services.
d. The item is identifiable and lacks physical substances

19. An entity that acquired an intangible asset may use the revaluation model for subsequent
measurement only when
a. The useful life of the intangible asset can be reliably determined.
b. An active market exists for the intangible asset.
c. The cost of the intangible asset can be measured reliably.
d. The intangible asset is a monetary asset.

20. Under current accounting practice, intangible assets are classified as

a. Amortizable or unamortizable.
b. Limited life or indefinite life.
c. Specifically identifiable or goodwill type.
d. Legally restricted or goodwill type.

21. The major problem of accounting for intangible asset is determining

a. Fair value
b. Separability
c. Residual value
d. Useful life

22. Which disclosure is not required with respect to intangible assets?

a. Useful life of the intangible asset
b. Reconciliation of carrying amount at the beginning and the end of the year
c. Contractual commitment for the acquisition of intangible asset
d. Fair value of similar intangible asset used by the competitor

23. Which of the following is not one of the criteria which must be met before development costs can be
capitalized?
a. The entity has sufficient financial resources to complete the project.
b. The entity intends to complete the project and either use or sell the intangible asset.
c. The entity can reliably identify the research costs incurred to bring the project to economic
feasibility.
d. The project has achieved technical feasibility.

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24. Under IFRS, which of the following statements is true about accounting for development costs.
a. Development costs must be expensed.
b. Development costs are always deferred and expensed against future revenue.
c. Development costs may be capitalized as an intangible asset in very restrictive situations.
d. Development costs are recorded in other comprehensive income.

25. Which of the following research and development costs should be capitalized and amortized over
current and future periods?
a. Labor and material costs incurred in building a prototype model.
b. Cost of testing equipment that will also be used in another separate research and development
project scheduled to begin next year.
c. Administrative salaries allocated to research and development.
d. Research findings purchased from another company to aid a particular research project currently in
process.

26. Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product
b. Acquisition of R and D equipment for use in current project only
c. Cost of marketing research for a new product
d. Engineering activity to advance the design of product to the manufacturing stage

27.The accounting for costs incurred in creating computer software products is to

a. Capitalize all costs until the software is sold.
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 use.
d. Capitalize all costs as incurred until a detailed program design or working model is created.

28. Which is incorrect concerning the recognition and measurement of an intangible asset?
a. If an intangible asset is acquired separately, the cost comprises its purchase price, including
import duties and taxes and any directly attributable expenditure of preparing the asset for
its intended use.
b. If an intangible asset is acquired in a business combination that is an acquisition, the cost is
based on its fair value at the date of acquisition.
c. If an intangible asset is acquired free of charge
or by way of government grant, the cost is equal to its fair value.
e. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal to the
total payments over the credit period.

29. Which of the following expenditures would never qualify as an exploration and evaluation asset?
a. Expenditure for acquisition of rights to explore
b. Expenditure for exploratory drilling
c. Expenditures related to the development of mineral resources
d. Expenditurefor activitiesin relationto evaluatingthe technicalfeasibilityand commercial viability of
extracting a mineral resource

30. Which statement is incorrect regarding recognition of government grants as income?

a. Grants in recognition of specific expenses should be recognized as income over the
period of the related expense.
b. Grants related to depreciable assets should be recognized as income over the periods and in
proportion to the depreciation of the related assets.
c. Grantsrelatedto nondepreciableassets
requiringfulfillment of certainconditions should be recognized as income immediately after meeting
the condition.
d. A grant receivable as compensation for costs already incurred or for immediate financial
support, with no future related costs, should be recognized as income in the period in which it is
receivable.

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31. What is the acceptable approach in accounting for government grants?
a. Government grants should be recognized as income over the periods necessary to match them with
the related costs
b. Government grants should be credited directly to donated capital
c. Government grants should be credited directly to retained earnings
d. Government grants should be deferred and
amortized over a maximum period of 20 years

32. Which statement is correct regarding initial recognition of research and development costs?
a. All research costs should be charged to expense.
b. All development costs should be capitalized.
c. If an enterprise cannot distinguish the research phase of an internal project to create an
intangible asset from the development phase, the enterprise treats the expenditure for that
project as if it were incurred in the development phase only.
d. A research and development project acquired in a business combination is not recognized as an
asset.

II.
1. Explain the recognition and measurement of government grant. (10 points)
2. Give examples of disclosures related to government grant. (10 points)

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