Page 1 of 5 | FAR Live Handout 05

Borrowing Costs, Wasting Assets and Intangible Assets

VHINSON JAY GARCIA

Borrowing Costs, Wasting Assets and Intangible

Assets

w
VHINSON JAY GARCIA

ie
THEORY QUESTIONS
1. IAS 23 Borrowing cost applies to acquisition, construction or production of a/an

ev
I. qualifying asset measured at fair value.
II. inventories manufactured or produced in large quantities on a repetitive basis.
a. I only
b. II only

R
c. Both I and II
d. Neither I nor II

2. Which of the following is a qualifying asset?

a. Financial assets.
ad
b. Inventories manufactured over a short period of time.
c. Assets ready for intended use or sale when acquired.
d. None of these is a qualifying asset.
gr
3. When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not
needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these
temporary investments should be
er

a. offset against interest cost incurred during construction.

b. used to increase the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.
nd

d. recognized as revenue of the period.

4. If the actual interest incurred during the period of construction is lower than the weighted average accumulated
expenditure multiplied by the weighted average interest rate,
a. the capitalizable borrowing cost is the weighted average accumulated expenditure multiplied by the weighted
U

average interest rate.

b. the actual interest incurred during the period of construction is treated as interest expense.
c. the excess of the weighted average accumulated expenditure multiplied by the weighted average interest rate over
the actual interest incurred during the period of construction is treated as interest expense is treated as interest
EO

expense.
d. then there is no interest expense.

5. 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.
R

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.

REO UNDERGRAD REVIEW Be accelerated above the rest with REO BASICS
www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774/0919 093 8620 [email protected]/[email protected]
 Page 2 of 5 | FAR Live Handout 05

VHINSON JAY GARCIA

Borrowing Costs, Wasting Assets and Intangible Assets

6. An entity purchased a drilling rig. The rig was consumed in developing an intangible asset. Which of the following
statements is true in relation to the said asset?
a. The drilling rig is classified as intangible asset.
b. The drilling is classified as tangible asset and the amount reflecting the consumption of the drilling rig is part of the
cost of the intangible asset being developed.
c. The drilling rig is classified as intangible asset and the amount reflecting the consumption of the drilling rig is part
of the cost of the intangible asset being developed.

w
d. The drilling rig is classified as either tangible or intangible asset and the amount reflecting the consumption of the
drilling rig is recorded as either depreciation or amortization expense in profit or loss.

ie
7. Which of the following shall be applied on the recognition of assets from development of mineral resources?
a. Conceptual framework and IFRS 6 Exploration for and Evaluation of Mineral Resources
b. Conceptual framework and IAS 38 Intangible Assets

ev
c. Conceptual framework, IFRS 6 Exploration for and Evaluation of Mineral Resources and IAS 38 Intangible Assets
d. IFRS 6 Exploration for and Evaluation of Mineral Resources and IAS 38 Intangible Assets
8. After initial recognition, exploration and evaluation asset is measured using
I. Cost model

R
II. Fair value model
III. Revaluation model
a. I and II
b. I and III
c. II and III
d. I, II, or III
ad
9. Which one of the following is not a component of the cost of internally generated intangible asset?
gr
a. Cost of materials and services used or consumed in generating the intangible asset
b. Cost of employee benefits arising from the generation of the intangible asset
c. Fees to register a legal right
d. Expenditure on training staff to operate the asset
er

10. Which statement is incorrect concerning internally generated intangible asset?

a. To assess whether an internally generated intangible asset meets the criteria for recognition, an enterprise classifies
the generation of the asset into a research phase and a development phase.
nd

b. The cost of an internally generated asset comprises all directly attributable costs necessary to create, produce and
prepare the asset for its intended use.
c. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance should not
be recognized as intangible assets.
U

d. Internally generated goodwill may be recognized as an intangible asset.

11. The appropriate method of amortizing intangible asset is best described by which of the following?
a. The straight-line method, unless the pattern in which the asset’s economic benefits are consumed by the enterprise
EO

can be determined reliably

b. The double declining balance in all circumstances
c. Management can make a subjective amount of periodic amortization without regard to any particular method
d. The straight-line method in all circumstances
12. If a company constructs a laboratory building to be used as a research and development facility, the cost of the laboratory
building is matched against earnings as
R

a. Research and development expense in the period of construction

b. Depreciation deducted as part of research and development cost
c. Depreciation or immediate write-off depending on company policy
d. An expense at such time as productive research has been obtained from the facility

REO UNDERGRAD REVIEW Be accelerated above the rest with REO BASICS
www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774/0919 093 8620 [email protected]/[email protected]
 Page 3 of 5 | FAR Live Handout 05

VHINSON JAY GARCIA

Borrowing Costs, Wasting Assets and Intangible Assets

PROBLEMS
1. On January 1, 2021, a company began the construction of its production building. The entity borrowed P3,500,000 at
7.5% on January 1, 2021 to finance the construction. Funds not needed for construction were temporarily invested in
short-term securities, and earned P75,200 interest revenue in 2021. In addition to the construction loan, the entity had
two other notes outstanding during the year: a P1,950,000, 10-year, 10% note payable dated October 1, 2019; and a 5-
year P1,300,000, 8%, note payable dated November 2, 2020.

w
The company completed the construction of the building on December 31, 2021 at a total cost of P5,876,269. The
weighted average accumulated expenditure on the building during 2021 was P4,970,000.

ie
What is the total cost of the building?
a. P5,415,540
b. P5,876,269

ev
c. P6,198,809
d. P6,274,009

2. On January 1, 2021, a company constructed a new plant. It estimated that the construction will run until mid-2022. A

R
10% 2-year loan for P5,000,000 was obtained on January 1, 2021, to finance the construction. In addition to the
construction loan, the company also had 12%, P25,000,000 outstanding general borrowing during the construction
period.

April 1, 2021
P2,000,000
5,000,000
ad
The following expenditures were incurred in 2021 and 2022:

January 1, 2021
gr
December 1, 2021 3,000,000
March 1, 2022 6,000,000
June 1, 2022 3,000,000
June 30, 2022 1,000,000
er

The new plant was completed on June 30, 2022.

nd

What is the total cost of the building on June 30, 2022?

a. P20,000,000
b. P21,023,600
c. P21,440,000
d. P21,477,200
U

3. In 2019, a company purchased a property with natural resources for P12,000,000. The national government required
the company to restore the property after the duration of the mining activities. Estimated restoration cost was P2,000,000,
after which, the company can sell the property at P5,000,000. Exploration and development costs incurred in 2019
EO

amounted to P5,000,000 and P3,500,000, respectively.

In 2020, the entity incurred additional development cost of P2,500,000.

The number of mineral resources extracted in 2019 to 2021 follows (measured per ton):
R

Remaining per
Year Extracted
estimate
2019 2,500,000 11,500,000
2020 4,500,000 7,000,000
2021 5,500,000 2,000,000

REO UNDERGRAD REVIEW Be accelerated above the rest with REO BASICS
www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774/0919 093 8620 [email protected]/[email protected]
 Page 4 of 5 | FAR Live Handout 05

VHINSON JAY GARCIA

Borrowing Costs, Wasting Assets and Intangible Assets

What amount should be recorded as depletion in 2019?

a. P3,025,000
b. P3,125,000
c. P3,500,000
d. P3,800,000

What amount should be recorded as depletion in 2020? (Round depletion rate to 3 decimal places)

w
a. P6,601,500
b. P7,593,750

ie
c. P7,830,000
d. P9,000,000

What amount should be recorded as depletion in 2021? (Round depletion rate to 3 decimal places)

ev
a. P6,806,250
b. P7,300,000
c. P7,535,000
d. P8,085,000

R
4. A mining company constructed a building costing P2,500,000 on the mine property. The building has an estimated life
of 12 years. The total estimated recoverable output from the mine is 1,00,000 tons. The production of the first four years
of operations were:

1st year
2nd year
3rd year
ad
100,000 tons
100,000 tons
Shutdown
gr
4th year Shutdown
5th year and onwards 150,000 tons

What is the depreciation expense for the fifth year?

er

a. P200,000
b. P250,000
c. P300,000
nd

d. P375,000

5. In 2020, a company purchased a patent for P375,000. The estimated useful life of the patent was 10 years. On January
1, 2021, the company determined that the remaining useful life of the patent was only five years.
U

On January 1, 2021, the company also purchased a franchise for P3,125,000. The franchise contract provided a
continuing franchise fee of 5% of revenue. The estimated useful life of the franchise was 10 years.

Towards the middle of 2021, the company incurred research and development expense as follows:
EO

Materials and supplies used in research P 100,000

Equipment which will be used in other research
projects (estimated useful life was five years) 500,000
Research salaries 700,000
R

Indirect costs 300,000

The company generated a revenue of P5,000,000 in 2021. It is the company’s policy to take one-half year of depreciation
and amortization both in the year of acquisition and disposal.

REO UNDERGRAD REVIEW Be accelerated above the rest with REO BASICS
www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774/0919 093 8620 [email protected]/[email protected]
 Page 5 of 5 | FAR Live Handout 05

VHINSON JAY GARCIA

Borrowing Costs, Wasting Assets and Intangible Assets

What total amount should be charged to profit or loss in 2021?

a. P1,627,500
b. P1,673,750
c. P1,677,500
d. P1,830,000

6. During 2021, a company incurred the following costs to develop and produce a computer software product:

w
Cost of producing product masters for training materials P1,725,000

ie
Costs incurred for coding and testing to establish technological feasibility 1,150,000
Packaging product 1,035,000
Completion of detailed program design 1,495,000
Other testing costs after establishment of technological feasibility 2,300,000

ev
Duplication of computer software and training materials
from product masters 2,875,000
Other coding costs after establishment of technological feasibility 2,760,000

R
The company correctly capitalized some of these expenditures as cost of the computer software. It determined the life
of the software to be 5 years and it has a policy to take full year amortization in the year an internally generated asset
was recognized.

ad
Based on its forecast, the pattern of future revenue from the software can be determined reliably and the software would
bring total revenue of P10,000,000 over its life. The company reported a revenue of P2,500,000 in 2021.

What is the software amortization expense to be reported in 2021.

gr
a. P1,357,000
b. P1,564,000
c. P1,696,250
d. P1,955,000
er

----- END OF HANDOUTS -----

nd
U
EO
R

REO UNDERGRAD REVIEW Be accelerated above the rest with REO BASICS
www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774/0919 093 8620 [email protected]/[email protected]