Deck 14: Non-Current Assets: Acquisition and Depreciation

Question 1

The assumption underlying the reducing balance method of depreciation is:

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.

Answer 1

D

Question 2

The nature of depreciation can best be described as:

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.

Answer 2

A

Question 3

On what basis would the costs of several items of property, plant and equipment, acquired for a lump-sum payment, normally be allocated?

A) Net realisable value at acquisition date
B) Independent valuation at acquisition date
C) Replacement cost at acquisition date
D) Fair value at acquisition date

Answer 3

D

Question 4

IAS 16/AASB 116 Property, Plant and Equipment specifies that the cost of acquisition for fixed assets includes:

A) invoice cost.
B) carrying value in the previous owner's books.
C) invoice cost plus freight inwards, plus other costs of acquiring the asset.
D) purchase cost plus any incidental costs directly attributable to acquiring the asset and getting it ready for use.

Question 5

The factor that distinguishes fixed assets such as property, plant and equipment from other assets is the:

A) intention to sell the asset.
B) fact that they have a physical existence.
C) fact that the asset will provide future benefits.
D) intention to use the asset for the future production of goods and services.

Question 6

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

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

Question 7

A transport company would classify their delivery vehicles on the balance sheet as:

A) current assets.
B) contra assets.
C) non-current assets.
D) non-current liabilities.

Question 8

The correct entry to record the purchase of a motor vehicle for $40 000 cash, plus 10% GST is which of the following?

A) DR Motor vehicles $44 000; CR Bank $44 000
B) DR Motor vehicles $40 000; DR GST receivable $4000; CR Bank $44 000
C) DR Motor vehicles $44 000; CR Bank $40 000; CR GST collected $4000
D) DR Motor vehicles $36 000; DR GST receivable $4000; CR Bank $40 000

Question 9

Which of the following items are required to calculate depreciation?
I) Estimated residual value
II) Estimated useful life
III) Cost or revalued amount
IV) Method of depreciation

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

Question 10

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?

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

Question 11

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

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

Question 12

Items of property, plant and equipment may be acquired for a lump-sum without identification of the cost of each asset. The total cost must be allocated to the individual assets based on:

A) replacement value.
B) independent valuation.
C) fair value at date of acquisition.
D) market value at the date of acquisition.

Question 13

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:

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

Question 14

The is the historical cost of an asset less its residual value.

A) straight-line value.
B) carrying amount.
C) depreciable amount.
D) accumulated depreciation.

Question 15

IAS 16/AASB 116 specifies that all assets must be accounted for on acquisition at:

A) cost.
B) market value.
C) depreciable value.
D) net realisable value.

Question 16

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

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 17

In the financial statements prepared at the end of the accounting period the Accumulated Depreciation account appears on:

A) the balance sheet as a liability.
B) the income statement as an expense.
C) the balance sheet as a deduction from the related asset.
D) both the balance sheet and the income statement.

Question 18

Which of the following statements is incorrect?

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 19

When a second-hand building is purchased which of the following should be recognised in a separate asset account instead of being debited to the building account?

A) Legal fees for the purchase of the building
B) Expenditure on initial repairs to the floor of the building
C) Stamp duty paid on the building purchase
D) The cost of installing an air conditioning system

Question 20

Depreciation is classified as a(n):

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 21

Which of the following statements about depreciation is true?

A) The cash account is affected by depreciation charges.
B) Accumulated depreciation represents the amount of an asset's cost that has been transferred to depreciation expense to date.
C) Accumulated depreciation is shown in the financial statements as a contra-expense account.
D) Depreciation represents the amount of cash available to replace assets when they wear out.

Question 22

On 1 January 2018 Panorama Ltd acquired equipment for $22 000, net of GST. The estimated residual value for the equipment is zero. Depreciation is calculated at 10% p.a. on the diminishing-balance basis. The depreciation expense for the year ended 31 December 2020 is:

A) $1604.
B) $1782.
C) $1980.
D) $2200.

Question 23

A machine was purchased on 2 January 2018 for $70 000, net of GST. The machine had an estimated residual value of $12 000 and an estimated useful life of 6 years. Using the sum-of-the-years'-digits method and rounding to the nearest dollar, depreciation expense for the year ended 31 December 2019 , is:

A) $13 810.
B) $16 667.
C) $16 571.
D) $20 000.

Question 24

The correct statement concerning the diminishing-balance method of depreciation is:

A) It is an appropriate method when proportionately more of the asset's benefits are consumed in the early years of its life.
B) It is also known as the units-of-production method.
C) It charges the same amount of depreciation each period.
D) It applies a declining percentage factor to the asset's original cost.

Question 25

Which of the following is not an advantage of the use of accelerated depreciation methods for tax purposes as opposed to the straight-line method?

A) Lower tax payments are made during the early years of the asset's life.
B) The total amount of tax paid over the lifetime of the asset is reduced.
C) The business has the interest-free use of deferred tax dollars until the later years of the asset's life.
D) For many assets, the combination of decreasing depreciation expense of the asset and increasing repairs and maintenance expense tends to equalise the total periodic expense of holding the asset.

Question 26

Depreciation charged at the end of the accounting period is a/an entry.

A) Closing
B) Reversing
C) Correcting
D) Adjusting

Question 27

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

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

Question 28

All of the following are common methods used to calculate depreciation except for:

A) Straight-line method
B) Reducing-balance method
C) Units-of-production method
D) Sum-of-the-provisions method

Question 29

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?

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

Question 30

Hightop's balance sheet of 30 June 2018 shows a motor vehicle at a cost price of $46 000 less accumulated depreciation of $17 500. Depreciation is calculated on a straight-line basis. If the vehicle had a useful life of 6 years at the time of purchase and a residual value of $4 000, its carrying amount on 1 July 2020 is:

A) $7 666
B) $13 160
C) $14 500
D) $17 500

Question 31

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

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.

Question 32

Which of the following are ways in which a residual value can be recovered from an asset on its disposal?
I) Trade in
II) Sell second-hand
III) Gift the asset to charity
IV) Sell for scrap

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

Question 33

Which of the following will have an effect on the amount of depreciation charged on an asset in a particular accounting period?
I) The size of the asset
II) Method of depreciation used
III) Cost or revalued amount of asset
IV) Estimated residual value of asset

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

Question 34

According to IAS 16/AASB 116, which of the following are factors contributing to the decline in an asset's future economic benefits?
I. Inflation
II. Wear and tear
III. Commercial obsolescence
IV. Technical obsolescence

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

Question 35

Mighty Models acquired a machine for $20 000 on 31 December 2018. Calculate depreciation for the year ended 31 December 2020 using the diminishing-balance method at 12% p.a. Assume a nil residual value.

A) $1800
B) $2000
C) $2112
D) $2400

Question 36

Which of the following statements concerning the sum-of-the-years'-digits method of depreciation is correct?

A) It is an alternative name for the reducing balance method.
B) The depreciation charge per annum decreases over the life of the asset.
C) It is the most common method of depreciation used in Australia.
D) The formula is: carrying amount multiplied by remaining years of useful life.

Question 37

If the straight-line method of depreciation rather than the reducing-balance method is selected, in the early years of the asset's life the depreciation charge will be comparatively:

A) greater.
B) smaller.
C) the same.
D) cannot say.

Question 38

Molly's Manufacturing purchased a machine for $80 000 on 1 January 2018. The machine is expected to have a useful life of 5 years, no residual value, and to produce a total of 50 000 units before it is scrapped. Assuming Molly's Manufacturing uses the units-of-production method and actual production during the machine's first year of use is 12 000 units, the depreciation expense for 2018 is:

A) $7 500
B) $12 000
C) $16 000
D) $19 200

Question 39

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:

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

Question 40

The Delivery Vehicles account in the ledger of Transit Co. has a balance of $55 000 which is the cost of two second-hand trucks purchased on 1 July 2017. The Accumulated Depreciation - Delivery Vehicles account has a balance on 30 June 2020, before adjusting entries, of $20 000. No additional delivery trucks have been acquired or
Sold. The residual value of each truck is estimated to be $2500 and the straight-line depreciation method is used. What is the necessary adjusting entry to record annual depreciation on 30 June 2020?

A) DR Depreciation expense $5 000; CR Delivery vehicles $5 000
B) DR Accumulated depreciation $10 000; CR Delivery vehicles $10 000
C) DR Depreciation expense $5 000; CR Cash at bank $5 000
D) DR Depreciation expense $10 000; CR Accumulated depreciation $10 000

Question 41

The correct statement concerning subsequent costs incurred in relation to a depreciable asset after its original acquisition is:

A) If the subsequent cost of replacing part of an item of equipment is added to the carrying amount of that asset then the carrying amount of the part that is replaced must be decommissioned.
B) The replacement of the tyres on a motor would add to the expected life of the vehicle.
C) The painting of a building would normally be considered an improvement and capitalised.
D) Subsequent costs should nearly always be capitalised rather than charged to an expense account.

Question 42

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:

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 43

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

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

Question 44

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:

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 45

If the cost of a major service on a motor vehicle, which did not increase the vehicles' useful life was incorrectly capitalised and added to the carrying amount of the vehicle rather than being expensed, expenses would be:

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

Question 46

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:

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

Question 47

A reduction in the ratio net sales/average property, plant and equipment over time could mean:

A) there is an elevated level of inflation.
B) the price of plant and equipment is falling.
C) the firm may be heading for a liquidity crisis.
D) there is an over-investment in plant and equipment.

Question 48

The cost of a major overhaul of equipment that extends its total useful life by five years would be:

A) treated as an expense.
B) charged to a separate asset account and depreciated over five years.
C) cause for an adjustment to prior years' depreciation on the equipment.
D) added to the carrying amount of the asset causing future depreciation to be increased.

Question 49

refers to the management function of planning and financing of capital investment.

A) Differential analysis
B) Capital budgeting
C) Analysis and interpretation
D) Net present value analysis

Question 50

Which of the following should not to be recorded in the 'office equipment' ledger account?

A) Photocopier
B) Computers
C) Office curtains and carpets
D) Printer / Fax machine

Question 51

Under IAS 16/AASB 116, the cost of the annual service of a 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 52

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

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 53

Which of the following statements concerning fixed assets is not true?

A) knowledge of the approximate average age of fixed assets can be useful in assessing the efficiency of the assets.
B) knowledge of the approximate average age of fixed assets can be useful in deciding whether the assets may need to be replaced in the near future.
C) knowledge of the approximate average age of fixed assets can be calculated by the formula accumulated depreciation divided by average recorded cost of fixed assets.
D) knowledge of the approximate average age of fixed assets can be useful in deciding whether the asset register is up-to-date.

Question 54

Wong purchased a computer for $15 000, net of GST. Originally it had an estimated useful life of 4 years and a residual value of $3000. The straight-line method is used. At the start of the third year of usage Wong revised the life of the computer to a total life of 6 years. The residual value had not changed. What depreciation expense should be recorded for the computer for year 3?

A) $1500
B) $1000
C) $3000
D) $4000

Question 55

The formula to calculate the asset turnover ratio is:

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 56

How many of the following items of information about office equipment are required to be disclosed in the financial statements prepared for external reporting?
$\bullet$ Depreciation method used
$\bullet$ Aggregate cost of office equipment
$\bullet$ Aggregate Accumulated Depreciation of office equipment
$\bullet$ Depreciation rates used or useful lives of office equipment
$\bullet$ The total number of assets held in the office equipment grouping

A) 2
B) 3
C) 4
D) 5

Question 57

Which of the following are advantages of maintaining a subsidiary ledger for depreciable assets?
I) It provides information for the preparation of income tax returns.
II) It provides information concerning servicing of the assets.
III) It provides information for internal control over assets.
IV) It provides information to support insurance claims in the event of loss from theft or accident.

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

Question 58

The most commonly used depreciation method in Australia, as disclosed by a survey of the annual reports of listed companies, is:

A) straight-line.
B) units-of-use.
C) sum-of-the digits.
D) reducing-balance.

Question 59

A separate record that contains detailed information concerning individual assets is known as a(n):

A) stock card.
B) fixed asset register.
C) special journal.
D) asset control account.