Question 1

According to AASB 136 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

AASB 136 defines the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets as a:

Accepted Answer

A)  class of assets. 
B)  asset portfolio. 
C)  value in use asset group. 
D)  cash-generating unit. 
A)  class of assets. 
B)  asset portfolio. 
C)  value in use asset group. 
D)  cash-generating unit.

Question 3

Mendelssons Ltd has a machine that has been revaluing over a number of years.The valuation as at 1 January 2012 is $130 000.The previous valuation was $145 000 and the accumulated depreciation is $40 000.The revised salvage value is $15 000 and the estimated useful life remaining is 12 years.The benefits from the machine are expected to be derived evenly over its life.In the previous year,the machine had been devalued by $15 000 and this amount written off to the income statement.What are the entries at 1 January 2012 to record the revaluation using the net method and at 31 December 2012 to record depreciation?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 4

Smith & Jones Ltd owns equipment that was purchased for $56 000 and has accumulated depreciation of $14 000.The following market value information was gathered about the equipment
$$\begin{array} { | l | l | } 
\hline \text { Equivalent machine } & \$ 55860 \
\hline \text { New machine } & \$ 70000 \
\hline
\end{array}$$
 The equipment has a remaining useful life to the entity of 10 years.What are the appropriate journal entries to record the revaluation under the gross method and the net-amount method?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 5

Cars and Trucks Ltd owns an engine testing machine which was purchased for $120 000.After 3 years of use the machine had accumulated depreciation of $58 560 but was revalued to $80 000.Two years later the machine was sold for $60 000 and had accumulated depreciation at the time of sale of $36 800.What journal entries would be required to record the sale of the machine in accordance with AASB 116 requirements?

Accepted Answer

A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \
\hline \mathrm { Cr } & \text { Proceeds from testing machine sold } & & 60000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Accumulated depreciation } & 95360 & \
\hline \mathrm { Dr } & \text { Carrying amount of testing machine sold } & 24640 & \
\hline \mathrm { Cr } & \text { Testing machine } & & 120000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \
\hline \mathrm { Cr } & \text { Profit on sale of land } & & 35360 \
\hline \mathrm { Cr } & \text { Testing machine } & & 24640 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \
\hline \mathrm { Cr } & \text { Proceeds from sale of land } & & 60000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Carrying amount of land sold } & 43200 & \
\hline \mathrm { Dr } & \text { Accumulated depreciation } & 36800 & \
\hline \mathrm { Cr } & \text { Testing machine } & & 80000 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \
\hline \mathrm { Dr } & \text { Accumulated depreciation } & 36800 & \
\hline \mathrm { Cr } & \text { Profit from sale of testing machine } & & 16800 \
\hline \mathrm { Cr } & \text { Testing machine } & & 80000 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \
\hline \mathrm { Cr } & \text { Proceeds from testing machine sold } & & 60000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Accumulated depreciation } & 95360 & \
\hline \mathrm { Dr } & \text { Carrying amount of testing machine sold } & 24640 & \
\hline \mathrm { Cr } & \text { Testing machine } & & 120000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \
\hline \mathrm { Cr } & \text { Profit on sale of land } & & 35360 \
\hline \mathrm { Cr } & \text { Testing machine } & & 24640 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \
\hline \mathrm { Cr } & \text { Proceeds from sale of land } & & 60000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Carrying amount of land sold } & 43200 & \
\hline \mathrm { Dr } & \text { Accumulated depreciation } & 36800 & \
\hline \mathrm { Cr } & \text { Testing machine } & & 80000 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \
\hline \mathrm { Dr } & \text { Accumulated depreciation } & 36800 & \
\hline \mathrm { Cr } & \text { Profit from sale of testing machine } & & 16800 \
\hline \mathrm { Cr } & \text { Testing machine } & & 80000 \
\hline
\end{array}$$

Question 6

Casey Co Ltd is assessing the recoverable amount of some land it invested in 5 years ago at a cost $600 000.Management has sought independent valuation advice that indicates that the land may be sold in 6 years' time for $800 000.Since the land is not generating any cash flows,this is its undiscounted recoverable amount.The appropriate discount rate is estimated to be 7%.The present value of $1 received in 6 years' time at a discount rate of 7% is 0.6663.What is the effect of using the discount rate on the need to write down the value of the asset?

Accepted Answer

A)  Since the recoverable amount of $800 000 is greater than the cost of $600 000, there is no need to write down the asset. 
B)  The undiscounted amount may not be used according to AASB 136 so the asset should be written down by $66 960. 
C)  There is no need to write down the asset in either case since the undiscounted amount is greater than the cost and the discounted amount of $900 438 is also greater than the cost. 
D)  The undiscounted amount may be used in this case as the asset will not be continually in use, and therefore 'value in use' cannot be calculated. As this amount is higher than the cost there is no need to write down the asset. 
A)  Since the recoverable amount of $800 000 is greater than the cost of $600 000, there is no need to write down the asset. 
B)  The undiscounted amount may not be used according to AASB 136 so the asset should be written down by $66 960. 
C)  There is no need to write down the asset in either case since the undiscounted amount is greater than the cost and the discounted amount of $900 438 is also greater than the cost. 
D)  The undiscounted amount may be used in this case as the asset will not be continually in use, and therefore 'value in use' cannot be calculated. As this amount is higher than the cost there is no need to write down the asset.

Question 7

Differentiate depreciation expense from impairment loss.

Accepted Answer

Depreciation expense and impairment loss

Question 8

According to Positive Accounting Theory,the size of the entity may have an impact on management's decision to revalue because of management's motivation to reduce political costs.There is more than one possible view regarding the effect of revaluation on political visibility,including which of the following?

Accepted Answer

A)  Since revaluations may increase the variability of asset size, they will increase political costs. 
B)  Where increases in asset size are expected to result from revaluations, the increase in the size of the entity may reduce political costs. 
C)  Where revaluations increase the size of the asset base, the return on assets will be lower and this will potentially lower political costs. 
D)  Where revaluations result in an increase in the asset base, depreciation expense will increase and lead to greater political costs. 
A)  Since revaluations may increase the variability of asset size, they will increase political costs. 
B)  Where increases in asset size are expected to result from revaluations, the increase in the size of the entity may reduce political costs. 
C)  Where revaluations increase the size of the asset base, the return on assets will be lower and this will potentially lower political costs. 
D)  Where revaluations result in an increase in the asset base, depreciation expense will increase and lead to greater political costs.

Question 9

Discuss the process for the reversal of revaluation decrements and increments.

Accepted Answer

The reversal of revaluation decrements a

Question 10

When an item of property,plant and equipment is derecognised the treatment of any asset revaluation reserve that relates to an asset include:

Accepted Answer

A)  debiting the asset revaluation reserve in the journal entry to record the profit or loss on sale of the asset. 
B)  transferring the relevant amount out of the asset revaluation reserve and showing it as revenue in the income statement. 
C)  transferring the asset revaluation reserve to retained earnings. 
D)  writing off the amount out of the asset revaluation reserve against the remaining assets in the class of assets to which the asset that was sold belonged. 
A)  debiting the asset revaluation reserve in the journal entry to record the profit or loss on sale of the asset. 
B)  transferring the relevant amount out of the asset revaluation reserve and showing it as revenue in the income statement. 
C)  transferring the asset revaluation reserve to retained earnings. 
D)  writing off the amount out of the asset revaluation reserve against the remaining assets in the class of assets to which the asset that was sold belonged.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

A firm that has both compensation and de

Question 13

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

Question 14

Brown,Izan and Loh (1992)found that revaluations are more likely to take place:

Accepted Answer

A)  in small firms with low value assets that wished to borrow more. 
B)  in industries that are strike prone. 
C)  in entities that are highly geared. 
D)  in industries that are strike prone and in entities that are highly geared. 
A)  in small firms with low value assets that wished to borrow more. 
B)  in industries that are strike prone. 
C)  in entities that are highly geared. 
D)  in industries that are strike prone and in entities that are highly geared.

Question 15

A class of non-current assets as defined by AASB 116 is a category of non-current assets that:

Accepted Answer

A)  were all purchased at the same time by the reporting entity. 
B)  all have a similar nature or function in the operations of the entity. 
C)  are disclosed as a single item without supplementary dissection in the financial report. 
D)  all have a similar nature or function in the operations of the entity, and are disclosed as a single item without supplementary dissection in the financial report. 
A)  were all purchased at the same time by the reporting entity. 
B)  all have a similar nature or function in the operations of the entity. 
C)  are disclosed as a single item without supplementary dissection in the financial report. 
D)  all have a similar nature or function in the operations of the entity, and are disclosed as a single item without supplementary dissection in the financial report.

Question 16

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 17

Depreciation method used and depreciation rates are required to be disclosed for taxation purposes.

Accepted Answer

A) True 
 B)False

Question 18

AASB 116 provides guidance on fair values which states:

Accepted Answer

A)  Where an active and liquid market exists for an asset, the market price represents evidence of the asset's fair value. 
B)  Fair values are determined on the basis that an entity is a going concern. 
C)  Where no market exists the price should be based on the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. 
D)  All of the given answers are correct. 
A)  Where an active and liquid market exists for an asset, the market price represents evidence of the asset's fair value. 
B)  Fair values are determined on the basis that an entity is a going concern. 
C)  Where no market exists the price should be based on the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. 
D)  All of the given answers are correct.

Question 19

Australia is the only country that allows upward revaluations of non-current assets.

Accepted Answer

A) True 
 B)False

Question 20

A sale of property plant and equipment requires the derecognition of the carrying amount of the asset and any cost of replacement part capitalised.

Accepted Answer

A) True 
 B)False

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

According to AASB 136 the recoverable amount of an asset or cash-generating unit is the:

AASB 136 defines the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets as a:

Differentiate depreciation expense from impairment loss.

Discuss the process for the reversal of revaluation decrements and increments.

When an item of property,plant and equipment is derecognised the treatment of any asset revaluation reserve that relates to an asset include:

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

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 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.

Brown,Izan and Loh (1992)found that revaluations are more likely to take place:

A class of non-current assets as defined by AASB 116 is a category of non-current assets that:

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

Depreciation method used and depreciation rates are required to be disclosed for taxation purposes.

AASB 116 provides guidance on fair values which states:

Australia is the only country that allows upward revaluations of non-current assets.

A sale of property plant and equipment requires the derecognition of the carrying amount of the asset and any cost of replacement part capitalised.

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Accounting

An Overview of Accounting for Assets

Depreciation of Property, plant and Equipment

Inventory

Accounting for Intangibles

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Leases

Accounting for Employee Benefits

Share Capital and Reserves

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Share-Based Payments

Accounting for Income Taxes

The Statement of Cash Flows

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After the End of the Reporting Period

Segment Reporting

Related Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues IV: Accounting for Changes in the Degree of Ownership of a Subsidiary

Accounting for Equity Investments,including Investments in Associates and Joint Arrangements

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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