Question 1

Which of the following statements is incorrect?

Accepted Answer

A)  Depreciation is an internal transaction. 
B)  The cash at bank account is affected by depreciation. 
C)  Depreciation causes cash flow from operations to be greater than profit. 
D)  The total depreciation charged over the life of the asset should be the same regardless of the method of depreciation used. 
A)  Depreciation is an internal transaction. 
B)  The cash at bank account is affected by depreciation. 
C)  Depreciation causes cash flow from operations to be greater than profit. 
D)  The total depreciation charged over the life of the asset should be the same regardless of the method of depreciation used.

Question 2

The nature of depreciation can best be described as:

Accepted Answer

A)  the allocation of the cost of an asset over its useful life. 
B)  the reduction in value of an asset according to the change in its market value. 
C)  the writing down of the value of an asset according to the decline in its physical efficiency. 
D)  a charge against profits to provide funds for asset replacement. 
A)  the allocation of the cost of an asset over its useful life. 
B)  the reduction in value of an asset according to the change in its market value. 
C)  the writing down of the value of an asset according to the decline in its physical efficiency. 
D)  a charge against profits to provide funds for asset replacement.

Question 3

The formula to calculate the asset turnover ratio is:

Accepted Answer

A)  average total assets divided by net sales. 
B)  net sales divided by average total assets. 
C)  average cost of assets divided by depreciation expense. 
D)  depreciation expense divided by average cost of assets. 
A)  average total assets divided by net sales. 
B)  net sales divided by average total assets. 
C)  average cost of assets divided by depreciation expense. 
D)  depreciation expense divided by average cost of assets.

Question 4

When comparing the straight-line and the reducing-balance methods of depreciation, in the later years of the asset's life the depreciation charge using the straight-line method will be:

Accepted Answer

A)  smaller. 
B)  greater. 
C)  the same. 
D)  do not have enough information. 
A)  smaller. 
B)  greater. 
C)  the same. 
D)  do not have enough information.

Question 5

For a clothing manufacturer which assets would be likely to be grouped together in a ledger account titled 'factory plant and equipment'?
I. Sewing machines
II. Cutting tables
III. Motor vehicles
IV. Office equipment
V. Buttonholer

Accepted Answer

A)  i, ii, v 
B)  i, ii, iii 
C)  iii, iv, v 
D)  ii, iii, iv 
A)  i, ii, v 
B)  i, ii, iii 
C)  iii, iv, v 
D)  ii, iii, iv

Question 6

The cost of replacing the engine on a motor vehicle, which increased the vehicles' useful life by five years, was charged as an expense rather than being capitalised and added to the carrying amount of the vehicle. This error would result in profit being:

Accepted Answer

A)  overstated, fixed assets would be understated and equity would be understated. 
B)  understated, fixed assets would be understated and equity would be overstated. 
C)  overstated, fixed assets would be overstated and equity would be overstated. 
D)  understated, fixed assets would be understated and equity would be understated. 
A)  overstated, fixed assets would be understated and equity would be understated. 
B)  understated, fixed assets would be understated and equity would be overstated. 
C)  overstated, fixed assets would be overstated and equity would be overstated. 
D)  understated, fixed assets would be understated and equity would be understated.

Question 7

The Novice Corporation purchased a machine for $80 000 on 1 January 2018. The machine is expected to have a useful life of 5 years, a residual value of zero, and a production capacity of 120 000 units before it is scrapped. The Novice Corporation uses the units-of-production method to calculate depreciation. For the year ending 31 December 2018, the depreciation was $16 000. The number of units produced during 2019 is 30 000. The carrying amount of the machine at 31 December 2019 is:

Accepted Answer

A)  $16 000 
B)  $20 000 
C)  $30 000 
D)  $44 000 
A)  $16 000 
B)  $20 000 
C)  $30 000 
D)  $44 000

Question 8

An asset purchased for $120 000 with a zero residual value was expected to last for six years before it needed replacing. If, at the end of the fourth year, it was decided to extend the asset's total useful life by two years (new remaining life is now eight years), the new depreciation charge using the straight-line approach would be:

Accepted Answer

A)  $5 000 
B)  $10 000 
C)  $12 000 
D)  $20 000 
A)  $5 000 
B)  $10 000 
C)  $12 000 
D)  $20 000

Question 9

On 31 December 2018 a new motor vehicle with a life of five years and no estimated residual value was purchased by a business at a cost of $48 000, net of GST. The diminishing-balance depreciation method is used at a rate of 20% p.a. What is the carrying value of the motor vehicle at 31 December 2020 after charging depreciation for that year?

Accepted Answer

A)  $7 680 
B)  $9 600 
C)  $30 720 
D)  $38 400 
A)  $7 680 
B)  $9 600 
C)  $30 720 
D)  $38 400

Question 10

When an asset's estimated useful life and residual value turn out to be materially incorrect and the asset has not reached the end of its useful life, the correct procedure to follow is:

Accepted Answer

A)  re-issue corrected financial statements for all prior years. 
B)  re-issue corrected financial statements for only the most recent three years. 
C)  ignore the problem since estimates are not expected to be exact anyway. 
D)  allocate the remaining depreciable amount over the remaining useful life. 
A)  re-issue corrected financial statements for all prior years. 
B)  re-issue corrected financial statements for only the most recent three years. 
C)  ignore the problem since estimates are not expected to be exact anyway. 
D)  allocate the remaining depreciable amount over the remaining useful life.

Question 11

Myster Co purchased equipment for $25 000. Originally it had an estimated useful life of 4 years and a residual value of $5000. At the beginning of the 4th year of the equipment's life the estimated useful life was extended by a further three years and the residual value was reduced to zero. Myster Co uses the straight-line method to depreciate its equipment. At the end of year 4, how much depreciation should be recorded for the computer?

Accepted Answer

A)  $1 250 
B)  $2 500 
C)  $4 000 
D)  $5 000 
A)  $1 250 
B)  $2 500 
C)  $4 000 
D)  $5 000

Question 12

Which of the following is not an example of a fixed asset for a company engaged in coal mining?

Accepted Answer

A)  Land 
B)  Stock of coal 
C)  Storage depot 
D)  Mining equipment 
A)  Land 
B)  Stock of coal 
C)  Storage depot 
D)  Mining equipment

Question 13

When examining an external financial report, a ratio that can be useful in determining the approximate age of the assets is:

Accepted Answer

A)  accumulated depreciation/average recorded property, plant and equipment at cost. 
B)  net sales/average total assets. 
C)  average total assets/net sales. 
D)  net sales/ average property, plant and equipment. 
A)  accumulated depreciation/average recorded property, plant and equipment at cost. 
B)  net sales/average total assets. 
C)  average total assets/net sales. 
D)  net sales/ average property, plant and equipment.

Question 14

Ignoring GST, the correct entry to record the purchase of a motor vehicle for $45 000 cash is:

Accepted Answer

A)  DR Bank $45 000; CR Motor vehicles $45 000 
B)  DR Motor vehicles $45 000; CR Bank $45 000 
C)  DR Motor vehicles $45 000; CR Equity $45 000 
D)  DR Motor vehicles $45 000; CR Accounts receivable $45 000 
A)  DR Bank $45 000; CR Motor vehicles $45 000 
B)  DR Motor vehicles $45 000; CR Bank $45 000 
C)  DR Motor vehicles $45 000; CR Equity $45 000 
D)  DR Motor vehicles $45 000; CR Accounts receivable $45 000

Question 15

Under IAS 16/AASB 116, the cost of the annual service of a machine:

Accepted Answer

A)  added to the original cost of the machine. 
B)  should be capitalised and added to the carrying amount of the machine. 
C)  should be written off as repairs and maintenance. 
D)  can be either written off as repairs and maintenance or added to the carrying amount of the machine. 
A)  added to the original cost of the machine. 
B)  should be capitalised and added to the carrying amount of the machine. 
C)  should be written off as repairs and maintenance. 
D)  can be either written off as repairs and maintenance or added to the carrying amount of the machine.

Question 16

The allocation of the cost of an asset over its estimated useful life best describes the nature of:

Accepted Answer

A)  residual value. 
B)  depreciation. 
C)  obsolescence. 
D)  carrying amount. 
A)  residual value. 
B)  depreciation. 
C)  obsolescence. 
D)  carrying amount.

Question 17

Depreciation is classified as a(n):

Accepted Answer

A)  expense in the income statement. 
B)  liability in the balance sheet. 
C)  contra asset in the balance sheet. 
D)  contra expense in the income statement. 
A)  expense in the income statement. 
B)  liability in the balance sheet. 
C)  contra asset in the balance sheet. 
D)  contra expense in the income statement.

Question 18

A popular method for an entity to acquire the benefits of property, plant and equipment is to lease assets. Which of the following asset types are commonly subject to lease agreements?
I. Buildings
II. Motor vehicles
III. Storage space
IV. Equipment and Machinery

Accepted Answer

A)  I and III only 
B)  II and IV only 
C)  I, II and IV only 
D)  I, II, III and IV. 
A)  I and III only 
B)  II and IV only 
C)  I, II and IV only 
D)  I, II, III and IV.

Question 19

The assumption underlying the reducing balance method of depreciation is:

Accepted Answer

A)  the asset makes a lower contribution to income in the earlier years of its life and a higher contribution in the later years. 
B)  the asset makes the same contribution to income in each year of its life. 
C)  the contribution the asset makes to income depends on its usage. 
D)  the asset makes a higher contribution to income in the earlier years of its life. 
A)  the asset makes a lower contribution to income in the earlier years of its life and a higher contribution in the later years. 
B)  the asset makes the same contribution to income in each year of its life. 
C)  the contribution the asset makes to income depends on its usage. 
D)  the asset makes a higher contribution to income in the earlier years of its life.

Question 20

The underlying assumption of the straight-line method of depreciation is:

Accepted Answer

A)  The asset's contribution to income is variable. 
B)  The asset makes the same contribution to income each year. 
C)  The asset's contribution to income relates mainly to obsolescence. 
D)  The asset makes a higher contribution to income in the earlier years of its life. 
A)  The asset's contribution to income is variable. 
B)  The asset makes the same contribution to income each year. 
C)  The asset's contribution to income relates mainly to obsolescence. 
D)  The asset makes a higher contribution to income in the earlier years of its life.

Exam 14: Non-Current Assets: Acquisition and Depreciation

Which of the following statements is incorrect?

The nature of depreciation can best be described as:

The formula to calculate the asset turnover ratio is:

When comparing the straight-line and the reducing-balance methods of depreciation, in the later years of the asset's life the depreciation charge using the straight-line method will be:

For a clothing manufacturer which assets would be likely to be grouped together in a ledger account titled 'factory plant and equipment'? I. Sewing machines II. Cutting tables III. Motor vehicles IV. Office equipment V. Buttonholer

The cost of replacing the engine on a motor vehicle, which increased the vehicles' useful life by five years, was charged as an expense rather than being capitalised and added to the carrying amount of the vehicle. This error would result in profit being:

When an asset's estimated useful life and residual value turn out to be materially incorrect and the asset has not reached the end of its useful life, the correct procedure to follow is:

Which of the following is not an example of a fixed asset for a company engaged in coal mining?

When examining an external financial report, a ratio that can be useful in determining the approximate age of the assets is:

Ignoring GST, the correct entry to record the purchase of a motor vehicle for $45 000 cash is:

Under IAS 16/AASB 116, the cost of the annual service of a machine:

The allocation of the cost of an asset over its estimated useful life best describes the nature of:

Depreciation is classified as a(n):

A popular method for an entity to acquire the benefits of property, plant and equipment is to lease assets. Which of the following asset types are commonly subject to lease agreements? I. Buildings II. Motor vehicles III. Storage space IV. Equipment and Machinery

The assumption underlying the reducing balance method of depreciation is:

The underlying assumption of the straight-line method of depreciation is:

Decision Making and the Role of Accounting

Financial Statements for Decision Making

Recording Transactions

Adjusting the Accounts and Preparing Financial Statements

Completing the Accounting Cycle Closing and Reversing Entries

Accounting for Retailing

Accounting for Systems

Partnerships: Formation, Operation and Reporting

Companies: Formation and Operations

Regulation and the Conceptual Framework

Cash Management and Control

Receivables

Inventories

Non-Current Assets: Revaluation, Disposal and Other Aspects

Liabilities

Presentation of Financial Statements

Statement of Cash Flows

Analysis and Interpretation of Financial Statements

Accounting for Manufacturing

Cost Accounting Systems

Cost-Volume-Profit Analysis for Decision Making

Budgeting for Planning and Control

Performance Evaluation for Managers

Differential Analysis, Profitability Analysis and Capital Budgeting

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