Question 1

According to IAS 36 the recoverable amount of an asset or cash-generating unit is the:

Accepted Answer

A) lower of its fair value less costs of disposal and its value in use. 
B) lower of its fair value plus costs of disposal and its value in use. 
C) higher of its fair value less costs of disposal and its value in use. 
D) higher of its fair value plus costs of disposal and its value in use. 
A) lower of its fair value less costs of disposal and its value in use. 
B) lower of its fair value plus costs of disposal and its value in use. 
C) higher of its fair value less costs of disposal and its value in use. 
D) higher of its fair value plus costs of disposal and its value in use.

Question 2

Purple Co Plc purchased an item of land 3 years ago at a cost of £700 000.Two years ago the recoverable value of the land was considered to be £550 000.In the current period the land is revalued and the fair value is now £750 000.What is the treatment of the change in value in each of the periods?

Accepted Answer

A) Two years ago: a loss of £150 000 is recognised.The current period: a gain of £150 000 and an increase in the asset revaluation reserve of £50 000 is recognised. 
B) Two years ago: £150 000 is debited to the asset revaluation reserve.The current period: £200 000 is credited to the asset revaluation reserve. 
C) Two years ago: £150 000 is expensed in the period.The current period: £200 000 is transferred to the asset revaluation reserve. 
D) Two years ago: £150 000 is written off to the asset revaluation reserve.The current period: £200 000 revenue is recognised. 
A) Two years ago: a loss of £150 000 is recognised.The current period: a gain of £150 000 and an increase in the asset revaluation reserve of £50 000 is recognised. 
B) Two years ago: £150 000 is debited to the asset revaluation reserve.The current period: £200 000 is credited to the asset revaluation reserve. 
C) Two years ago: £150 000 is expensed in the period.The current period: £200 000 is transferred to the asset revaluation reserve. 
D) Two years ago: £150 000 is written off to the asset revaluation reserve.The current period: £200 000 revenue is recognised.

Question 3

Which of the following statement is true of accumulated depreciation?

Accepted Answer

A) It is the difference between acquisition costs and residual value. 
B) It is the difference between acquisition costs and revalued amount. 
C) It is initially derecognised on first time revaluations. 
D) It is restated proportionately to the carrying amount and the revalued amount of the asset. 
A) It is the difference between acquisition costs and residual value. 
B) It is the difference between acquisition costs and revalued amount. 
C) It is initially derecognised on first time revaluations. 
D) It is restated proportionately to the carrying amount and the revalued amount of the asset.

Question 4

Once an entity elects to value a class of assets using fair value it can switch back to cost basis measurement as long as there is justifiable reason.

Accepted Answer

A) True 
 B)False

Question 5

IAS 16 permits which of the following with respect to measurement of non-current assets using revaluation model?

Accepted Answer

A) Net revaluation decrements for each class of asset are initially debited to asset revaluation reserve. 
B) Use of cost model to measure other assets in the same class. 
C) All increments arising from revaluation are credited to asset revaluation reserve. 
D) None of the given answers are correct. 
A) Net revaluation decrements for each class of asset are initially debited to asset revaluation reserve. 
B) Use of cost model to measure other assets in the same class. 
C) All increments arising from revaluation are credited to asset revaluation reserve. 
D) None of the given answers are correct.

Question 6

On disposal of an asset a gain or loss is the difference between the proceeds from sale and:

Accepted Answer

A) the cost of an asset. 
B) residual value of the asset. 
C) carrying amount of the asset. 
D) revalued amount of the asset. 
A) the cost of an asset. 
B) residual value of the asset. 
C) carrying amount of the asset. 
D) revalued amount of the asset.

Question 7

Where there are debt covenants in place to restrict the level of debt to assets then management may be motivated to:

Accepted Answer

A) avoid revaluations because an increase in asset values increases depreciation and therefore reduces profit. 
B) undertake revaluations where the expectation is that asset values have fallen. 
C) avoid revaluations because of their effect on the cash flows of the business and therefore its ability to pay interest under the debt covenant. 
D) undertake revaluations where the expectation is that asset values are rising. 
A) avoid revaluations because an increase in asset values increases depreciation and therefore reduces profit. 
B) undertake revaluations where the expectation is that asset values have fallen. 
C) avoid revaluations because of their effect on the cash flows of the business and therefore its ability to pay interest under the debt covenant. 
D) undertake revaluations where the expectation is that asset values are rising.

Question 8

A firm that has both compensation and debt contracts will prefer the revaluation model over the cost model to measure its property,plant and equipment.Discuss.

Accepted Answer

Brown,Izan and Loh (1992)argue that,as t

Question 9

The revaluation model is a tool used by managers to reduce political costs.

Accepted Answer

A) True 
 B)False

Question 10

By permitting some classes of assets to be valued at cost and others at fair value the IASB has:

Accepted Answer

A) removed any confusion regarding the total balance of non-current assets. 
B) forced entities to accurately reflect their true financial position at any point in time. 
C) created a situation where the total asset figure may be a combination of cost and fair value assessments, reducing its meaningfulness. 
D) removed the opportunity for managers to act in their own self-interest as suggested by Positive Accounting Theory. 
A) removed any confusion regarding the total balance of non-current assets. 
B) forced entities to accurately reflect their true financial position at any point in time. 
C) created a situation where the total asset figure may be a combination of cost and fair value assessments, reducing its meaningfulness. 
D) removed the opportunity for managers to act in their own self-interest as suggested by Positive Accounting Theory.

Question 11

If an asset is subject to depreciation or amortization there is no longer a need to test the asset for impairment.

Accepted Answer

A) True 
 B)False

Question 12

IAS 38 will permit some intangible assets to be revalued upwards only when there is an 'active market' for the asset.

Accepted Answer

A) True 
 B)False

Question 13

What is the rationale for revaluing the entire class of assets when an item of property,plant and equipment is revalued?

Accepted Answer

A class of property,plant and equipment

Question 14

Staples Plc has invested in two parcels of land that are treated as belonging to the same class of assets.The first parcel of land was purchased for €500 000 and has been valued this period at €650 000.The second parcel of land has a carrying value of €340 000 and has been valued this period at €100 000.What is the appropriate journal entry to record the revaluations?

Accepted Answer

A)  $$\begin{array} { | c | l | c | c | } 
\hline \mathrm { Dr } & \text { Land (parcel 1) } & 150000 & \
\hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 150000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Asset revaluation reserve } & 240000 & \
\hline \mathrm { Cr } & \text { Land (parcel 2) } & & 240000 \
\hline
\end{array}$$ 
B)  $$\begin{array} { | c | l | c | c | } 
\hline \mathrm { Dr } & \text { Land (parcel 1) } & 150000 & \
\hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 150000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Loss on revaluation of land } & 240000 & \
\hline \mathrm { Cr } & \text { Land (parcel 2) } & & 240000 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Asset revaluation reserve } & 90000 & \
\hline \mathrm { Cr } & \text { Land } & & 90000 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Loss on revaluation of land } & 90000 & \
\hline \mathrm { Dr } & \text { Land (parcel 1) } & 150000 & \
\hline \mathrm { Cr } & \text { Land (parcel 2) } & & 240000 \
\hline
\end{array}$$ 
A)  $$\begin{array} { | c | l | c | c | } 
\hline \mathrm { Dr } & \text { Land (parcel 1) } & 150000 & \
\hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 150000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Asset revaluation reserve } & 240000 & \
\hline \mathrm { Cr } & \text { Land (parcel 2) } & & 240000 \
\hline
\end{array}$$ 
B)  $$\begin{array} { | c | l | c | c | } 
\hline \mathrm { Dr } & \text { Land (parcel 1) } & 150000 & \
\hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 150000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Loss on revaluation of land } & 240000 & \
\hline \mathrm { Cr } & \text { Land (parcel 2) } & & 240000 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Asset revaluation reserve } & 90000 & \
\hline \mathrm { Cr } & \text { Land } & & 90000 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Loss on revaluation of land } & 90000 & \
\hline \mathrm { Dr } & \text { Land (parcel 1) } & 150000 & \
\hline \mathrm { Cr } & \text { Land (parcel 2) } & & 240000 \
\hline
\end{array}$$

Question 15

Recoverable amount is the amount expected to be recovered through the ongoing use and subsequent disposal of an asset.

Accepted Answer

A) True 
 B)False

Question 16

The fair value of a non-current asset is defined in IAS 16 as the gross amount for which the asset can be sold when the entity is preparing to liquidate.

Accepted Answer

A) True 
 B)False

Question 17

Explain why the accounting treatment from increments and decrements are not symmetrical with respect to the revaluation of property,plant and equipment.

Accepted Answer

If a business has contracts in place tha

Question 18

Explain why discounting future cash flows will have direct implications for the calculated value of the recoverable amount.

Accepted Answer

The process of discounting the expected

Question 19

When an entity adopts the valuation model to account for its property,plant and equipment,which of the following statement(s)is/are correct?

Accepted Answer

A) If an item is revalued, all assets in the same class shall be revalued. 
B) If an asset's carrying amount is decreased as a result of a revaluation, the decrease is always recognised in profit and loss. 
C) If an asset's carrying amount is increased as a result of a revaluation, the increase is always credited directly to equity. 
D) All of the given answers. 
A) If an item is revalued, all assets in the same class shall be revalued. 
B) If an asset's carrying amount is decreased as a result of a revaluation, the decrease is always recognised in profit and loss. 
C) If an asset's carrying amount is increased as a result of a revaluation, the increase is always credited directly to equity. 
D) All of the given answers.

Question 20

The process of discounting future cash flows in calculating the recoverable amount of an asset will result in a higher recoverable amount than if the cash flows are not discounted.

Accepted Answer

A) True 
 B)False

Exam 6: Revaluations and Impairment Testing of Non-Current Assets

According to IAS 36 the recoverable amount of an asset or cash-generating unit is the:

Which of the following statement is true of accumulated depreciation?

Once an entity elects to value a class of assets using fair value it can switch back to cost basis measurement as long as there is justifiable reason.

IAS 16 permits which of the following with respect to measurement of non-current assets using revaluation model?

On disposal of an asset a gain or loss is the difference between the proceeds from sale and:

Where there are debt covenants in place to restrict the level of debt to assets then management may be motivated to:

A firm that has both compensation and debt contracts will prefer the revaluation model over the cost model to measure its property,plant and equipment.Discuss.

The revaluation model is a tool used by managers to reduce political costs.

By permitting some classes of assets to be valued at cost and others at fair value the IASB has:

If an asset is subject to depreciation or amortization there is no longer a need to test the asset for impairment.

IAS 38 will permit some intangible assets to be revalued upwards only when there is an 'active market' for the asset.

What is the rationale for revaluing the entire class of assets when an item of property,plant and equipment is revalued?

Recoverable amount is the amount expected to be recovered through the ongoing use and subsequent disposal of an asset.

The fair value of a non-current asset is defined in IAS 16 as the gross amount for which the asset can be sold when the entity is preparing to liquidate.

Explain why the accounting treatment from increments and decrements are not symmetrical with respect to the revaluation of property,plant and equipment.

Explain why discounting future cash flows will have direct implications for the calculated value of the recoverable amount.

When an entity adopts the valuation model to account for its property,plant and equipment,which of the following statement(s)is/are correct?

The process of discounting future cash flows in calculating the recoverable amount of an asset will result in a higher recoverable amount than if the cash flows are not discounted.

An Overview of the International External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, Plant and Equipment

Inventory

Accounting for Intangibles

An Overview of Accounting for Liabilities

Accounting for Leases

Share Capital, Reserves and Share Options Employee Bonus Schemes

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Income Taxes

The Statement of Cash Flows

Events Occurring After the Reporting Date

Related-Party Disclosures

Earnings Per Share

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues III: Accounting for Indirect Ownership Interest

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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