Deck 20: Non-Current Assets: Acquisition and Depreciation

Question 1

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) Replacement cost at acquisition date
C) Independent valuation at acquisition date
D) Fair value at acquisition date

Answer 1

D

Question 2

The assumption underlying the reducing balance method of depreciation is:

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

Answer 2

C

Question 3

In the financial statements prepared at the end of the accounting period the item accumulated depreciation appears on:

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

Answer 3

C

Question 4

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

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

Question 5

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 on the basis of:

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

Question 6

A) $100 450.
B) $91 450.
C) $91 650.
D) $101 650.

Question 7

How many of these factors are required to calculate depreciation?
$\bullet$ Estimated residual value
$\bullet$ Estimated useful life
$\bullet$ Cost or revalued amount
$\bullet$ A method of depreciation

A) 1
B) 2
C) 3
D) 4

Question 8

The correct entry to record the purchase of a motor vehicle for $25 000 cash, plus 10% GST is which of the following?

A) Debit motor vehicles $27 500; credit bank $27 500
B) Debit motor vehicles $25 000; debit GST outlays $2500; credit bank $27 500
C) Debit motor vehicles $27 500; credit bank $25 000; credit GST collected $2500
D) Debit motor vehicles $22 500; debit GST outlays $2500; credit bank $25 000

Question 9

Depreciation is classified as a(n):

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

Question 10

Delivery vehicles would be classified on the balance sheet of a transport company as:

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

Question 11

Which statement is untrue?

A) The cash at bank account is affected by depreciation.
B) Depreciation is an internal transaction.
C) Depreciation causes cash flow from operations to be greater than profit.
D) No matter which method of depreciation is used, the total depreciation charged over the life of the asset should be the same.

Question 12

When a second-hand building is purchased which of these should not be debited to the building account but charged to a separate asset account?

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

Question 13

The equipment should be recorded in Blue Horizon's records at:

A) $14 500.
B) $15 700.
C) $16 000.
D) $16 500.

Question 14

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

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

Question 15

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

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

Question 16

A) $80 000
B) $63 491
C) $74 074
D) $86 400

Question 17

IAS 16/AASB 116 defines the cost of acquisition for fixed assets as:

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

Question 18

A popular method for an entity to acquire the benefits of property, plant and equipment is to lease assets. How many of these asset types are commonly subject to lease agreements?
$\bullet$ Motor vehicles
$\bullet$ Land and buildings
$\bullet$ Machinery
$\bullet$ Storage space

A) 1
B) 2
C) 3
D) 4

Question 19

Kamp Gravel Co purchased three trucks for $50 000 each plus GST by making a $20 000 down payment and agreeing to pay the balance at the end six months. The journal entry to record the acquisition is which of the following?
$ $

Question 20

Ignoring GST, what is the correct entry to record the purchase of a motor vehicle for $25 000 cash?

A) Debit bank $25 000; credit motor vehicles $25 000
B) Debit motor vehicles $25 000; credit bank $25 000
C) Debit motor vehicles $25 000; credit capital $25 000
D) Debit motor vehicles $25 000; credit accounts receivable $25 000

Question 21

The historical cost of an asset less its residual (scrap) value is called:

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

Question 22

Ryan Co purchased a computer for $15 000. Originally it had an estimated useful life of 4 years and a residual value of $3000, but on the first day of the 4th year of life the estimated useful life was extended by a further two years and the residual value was reduced to zero. Ryan Co uses the straight-line method to depreciate its computer equipment. At the end of year 4, how much depreciation should be recorded for the computer?

A) $4000
B) $3000
C) $2000
D) $5000

Question 23

The statement that describes the assumption underlying the straight-line method of depreciation is which of the following?

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

Question 24

The Egypt Corporation purchased a machine for $40 000 on 1 January 2011 which is expected to have a 5 year life, no residual value, and to produce a total of 20 000 ridgets before it is scrapped. Assuming the Egypt Corporation uses the units-of- production method and actual production for the calendar year 2012 is 8000 ridgets, calculate the carrying value of the machine as at 31 December 2012. The depreciation charge for 2011 was $10 000.

A) $26 000
B) $14 000
C) $16 000
D) $24 000

Question 25

Which statement concerning the sum-of-the-years'-digits method of depreciation is true?

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

Question 26

A) $4400.
B) $5200.
C) $7333.
D) $8667.

Question 27

Which statement best describes the nature of accounting depreciation?

A) A charge representing the change in the asset's market value.
B) An allocation of the cost of the asset over its estimated useful life.
C) The amount that can be claimed as a tax deduction.
D) A revaluation of the asset to its current replacement value.

Question 28

Depreciation charged at the end of the accounting period is what type of entry?

A) Closing entry
B) Reversing entry
C) Adjusting entry
D) ing entry

Question 29

On 31 December 2014 a new motor vehicle with a life of five years and no estimated residual value was purchased by a business at a cost of $23 000, net of GST. The diminishing-balance depreciation method is employed. At a rate of 25% p.a. what is the carrying value of the motor vehicle at 31 December 2016 after charging depreciation for that year?

A) $9703
B) $15 000
C) $17 250
D) $12 937

Question 30

HRH 's balance sheet of 30 June 2014 shows a motor vehicle at a cost price of $56 000 less accumulated depreciation of $28 000. 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 $8000 what is its carrying amount on 1 July 2016?

A) $9443
B) $12 000
C) $16 000
D) $44 000

Question 31

Which of these is not one of the common methods used to calculate depreciation?

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

Question 32

On 1 January 2014 Image Plus Ltd acquired electronic equipment for $18 000, net of GST. It is estimated it will have no residual value. If depreciation is provided at 10% p.a. on the diminishing-balance basis, the depreciation charge for the year ended 31 December 2016 is:

A) $1312.
B) $1458.
C) $2700.
D) $3000.

Question 33

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

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

Question 34

How many of these are ways in which a residual value can be recovered from an asset on its disposal?
$\bullet$ Trade in
$\bullet$ Sell second-hand
$\bullet$ Gift the asset to charity
$\bullet$ Sell for scrap

A) 1
B) 2
C) 3
D) 4

Question 35

Which statement relating to depreciation is true?

A) Accumulated depreciation represents the amount of an asset's cost that has been transferred to depreciation expense to date.
B) The cash account is affected by charging depreciation.
C) Accumulated depreciation is a contra-expense account.
D) Depreciation represents cash that can be used to replace assets when they wear out.

Question 36

How many of these factors will have an effect on the amount of depreciation charged on an asset in a particular accounting period?
$\bullet$ Cost or revalued amount of asset
$\bullet$ The size of the asset
$\bullet$ Method of depreciation used
$\bullet$ Estimated residual value of asset

A) 1
B) 2
C) 3
D) 4

Question 37

According to IAS 16/AASB 116, how many of the following are factors contributing to the decline in an asset's future economic benefits?
$\bullet$ Commercial obsolescence
$\bullet$ Technical obsolescence
$\bullet$ Wear and tear
$\bullet$ Inflation

A) 1
B) 2
C) 3
D) 4

Question 38

The Delivery Equipment account in the ledger of A Co has a balance of $17 600 which is the cost of two 2^nd hand trucks purchased on 1 January 2015. The Accumulated Depreciation Delivery Equipment account has a balance on 31 December 2016 of $8000, before adjusting entries. No additional delivery trucks have been acquired or sold. The residual value of each truck is estimated to be $800 and the straight-line depreciation method is used. What is the necessary adjusting entry to record annual depreciation on 31 December 2017?
Debit Credit

A) Depreciation exp. $8000 Delivery equipment $8000
B) Accumulated depr. $4000 Delivery equipment $4000
C) Depreciation exp. $8000 Cash at bank $8000
D) Depreciation exp. $4000 Accumulated depr. $4000

Question 39

Molly Miller acquired a milling machine for $10 000 on 31 December 2014. Calculate depreciation for the year ended 31 December 2016 using the diminishing-balance method at 15% p.a. Assume a nil residual value.

A) $637
B) $750
C) $1275
D) $1500

Question 40

Which statement best describes the nature of depreciation?

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

Question 41

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

Question 42

Under IAS 16/AASB 116The cost of the annual service of a motor vehicle should be:

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

Question 43

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

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

Question 44

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

A) Fax machine
B) Photocopier
C) Computer
D) Office curtains and carpets

Question 45

An asset bought for $147 000 with a zero residual value was expected to last for seven years before it needed replacing. If at the end of the third year it was decided to extend its total useful life by four years (new remaining life is now eight years), calculate the new depreciation charge using the straight-line approach.

A) $10 225
B) $10 500
C) $13 364
D) $21 000

Question 46

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

Question 47

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

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

Question 48

Which statement concerning the diminishing-balance method of depreciation is true?

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

Question 49

How many of these are advantages of maintaining a subsidiary ledger for depreciable assets?
$\bullet$ It provides information for the preparation of income tax returns.
$\bullet$ It provides information to support insurance claims in the event of loss from theft or accident.
$\bullet$ It provides information concerning servicing of the assets.
$\bullet$ It provides information for internal control over assets.

A) 1
B) 2
C) 3
D) 4

Question 50

If 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, profit would be:

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

Question 51

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

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

Question 52

If the cost of a major service on a motor vehicle, which did not increased 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 understated and equity would be overstated.
C) understated, fixed assets would be overstated and equity would be understated.
D) understated, fixed assets would be overstated and equity would be overstated.

Question 53

When estimates of useful life and residual value made for the purposes of calculating depreciation, in later years turn out to be materially incorrect and the asset has not reached the end of its useful life, the procedure to be followed is to:

A) issue corrected financial statements for all prior years.
B) 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) spread the remaining depreciable amount over the remaining useful life.

Question 54

Melbourne Manufacturing purchased a machine for $60 000 on 1 January 2015 which is expected to have a 5 year life, no residual value, and to produce a total of 20 000 wingdings before it is scrapped. Assuming the Melbourne Manufacturing uses the units- of-production method and actual production up to 31 December 2015, (the end of the accounting year) is 5000 wingdings, calculate depreciation expense for 2015.

A) $5000
B) $10 000
C) $12 000
D) $15 000

Question 55

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 56

A) $3750.
B) $2500.
C) $3500.
D) $5000.

Question 57

A machine was purchased on 3 January 2015 for $56 000, net of GST. The machine had an estimated residual value of $14 000 and an estimated useful life of 5 years. Depreciation expense for the year ended 31 December 2015, using sum-of-the-years'- digits method, is:

A) $16 000.
B) $19 200.
C) $14 000.
D) $8400.

Question 58

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

A) The total amount of tax paid over the lifetime of the asset is reduced.
B) The business has the interest-free use of deferred tax dollars until the later years of the asset's life.
C) Lower tax payments are made during the early 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 59

The correct statement concerning subsequent costs incurred in relation to a depreciable asset after its original acquisition is which of the following?

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 painting of a building would normally be considered an improvement and capitalised.
C) The replacement of the tyres on a motor would add to the expected life of the vehicle.
D) Subsequent costs should nearly always be capitalised rather than charged to an expense account.

Question 60

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

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

Question 61

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 62

The statement concerning fixed assets that is not true is:

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 asset register is up-to-date.
C) 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.
D) 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.

Question 63

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

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

Question 64

The asset turnover ratio is calculated as:

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

Question 65

The planning and financing of capital investment is a function of management known as:

A) differential analysis.
B) analysis and interpretation.
C) net present value analysis.
D) capital budgeting.