Chapter 14

Multiple Choice

1. Sentosa has acquired manufacturing equipment and incurred these expenses in doing so.
               $
Gross invoice price, net of GST, subject to terms of 2/10, n/30) 9000
Transportation costs to get equipment to factory    1000
Special permit to allow wide load on freeway      300
Speeding ticket incurred by company driver while
delivering equipment to the factory        100
Cost to repair wall damaged during installation    500
The equipment should be recorded in Sentosa’s records at:
a. $10 900
b. $10 300
c. $10 120
d. $10 000

2. 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

3. 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:
            $             $
a. Trucks    150 000
 GST Outlays                   15 000
  Sundry creditor        165 000
b. Trucks    150 000
GST Outlays                              15 000
  Cash            20 000
  Sundry creditor        145 000
c. Cash     20 000
 Sundry creditor  130 000
  Trucks         150 000
d. Trucks     20 000
  Cash               20 000

4. In the financial statements prepared at the end of the accounting period the item Accumulated Depreciation appears:
a. On the income statement as an expense
b. On the balance sheet as a liability
c. On the balance sheet as a deduction from the related asset
d. On both the balance sheet and the income statement

5. The statement that best describes the nature of accounting depreciation is:
a. A charge representing the change in the asset’s market value
b. A charge representing the decline in the physical efficiency of the asset
c. The amount that can be claimed as a tax deduction
d. An allocation of the cost of the asset over its estimated useful life

6. The statement relating to depreciation that is true is:
a. Accumulated depreciation represents the amount of an asset’s cost that has been transferred to depreciation expense
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

7. Which factor will affect the amount of depreciation charged on an asset in a particular accounting period?
a. Estimated useful life
b. Historical cost
c. Estimated residual value
d. All of the above

8. On 31 December 2009 a new motor vehicle with a life of five years and an estimated residual value of $3000 was purchased by a business at a cost of $23 000, net of GST. The straight-line depreciation method is employed. What is the carrying value of the motor vehicle at 31 December 2012 (after charging depreciation for that year)?
a. $23 000
b. $11 000
c. $12 000
d. $15 000

9. The Delivery Equipment account in the ledger of A co has a balance of $17 600 which is the cost of two trucks purchased on 1 January 2007. The Accumulated Depreciation Delivery Equipment account has a balance on 31 December 2009 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. The necessary adjusting entry to record annual depreciation on 31 December 2009 is:
        Debit      Credit   
a. Depreciation Exp      $8000   Delivery Equipment     $8000
b. Accumulated Deprecn  $4000   Delivery Equipment     $4000
c. Depreciation Exp  $8000   Cash at Bank         $8000
d. Depreciation Exp  $4000   Accumulated Deprecn    $4000

10. On 1 January 2009 Dee Ltd acquired electronic equipment for $10 000, net of GST. If depreciation is provided at 10% p.a. on the diminishing-balance basis, the depreciation charge for the year ended 31 December 2011 is:
a. $700
b. $729
c. $810
d. $800

11. The statement concerning the diminishing-balance method of depreciation that is true is:
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

12. NG Ltd purchased a sprinkler system on 1 January of Year 1.
  Cost (net of GST)   $6500
  Residual    $1500
  Estimated Useful Life         4 years
 Under the diminishing-balance method, using a rate of 50%, the depreciation expense for year 2 will be:
a. $3250
b. $1625
c. $1500
d. $1250

13. On 1 July 2006 a retailer purchased a delivery truck for $21 000, net of GST. It has an estimated trade-in-value of $6000 and is expected to last for a total of 60 000 kilometres.
 A schedule of distance travelled is set out below:
   30/6/07  20 000 km
   30/6/08  15 000 km
   30/6/09  15 000 km
   30/6/10  10 000 km
Using the units-of-production method the amount of depreciation charged for the year ended 30 June 2010 is:
a. $3750
b. $3500
c. $2500
d. $5000

14. A machine was purchased on 3 January 2009 for $48 000, net of GST. The machine had an estimated residual value of $6000 and an estimated useful life of 5 years. Depreciation expense for 2009, using sum-of-the-years’-digits method, is:
a. $8400
b. $14 000
c. $19 200
d. $16 000

15. Which of the following 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. B. and C.

16. 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. What depreciation expense should be recorded for the computer for year 3?
a. $1000
b. $1500
c. $3000
d. $4000

17. 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

18. An advantage of maintaining a subsidiary ledger for depreciable assets is:
a. It provides information for the preparation of income tax returns
b. It provides information to support insurance claims in the event of loss from theft or accident
c. It provides information concerning servicing of the assets
d. All are advantages

19. The information to be disclosed about property, plant and equipment in the financial statements prepared for external reporting includes:
a. Cost
b. Accumulated Depreciation
c. Details of useful lives
d. All of the above

Chapter 15
Multiple Choice

1. The balance sheet of Brown Ltd at 31 December 2009 shows the following:
                $
   Plant        50 000
   Accumulated Depreciation-Plant   30 000 
           20 000
 On 1 January 2010, based on a valuer’s estimate of fair value, it was decided to revalue the plant to $35 000.
 The journal entry to record the revaluation is:
 a. Accumulated Depreciation-Plant  30 000
   Plant       15 000
   Revaluation reserve     15 000
 b. Plant      15 000
   Revaluation reserve     15 000
 c. Expense on Revaluation of Plant  15 000
   Plant       15 000
 d. Plant      15 000
  Expense on Revaluation of Plant  15 000
   Accumulated Depreciation-Plant   30 000

2. The balance sheet of Brown Ltd at 31 December 2009 shows the following:
             $
   Plant       50 000
   Accumulated Depreciation-Plant    30 000
          20 000
 On 1 January 2010, based on a valuer’s estimate of fair value, it was decided to revalue the plant to $35 000. The plant was then assessed to have a further useful life of 3 years and an expected residual amount of $5000. The journal entry in the books of Brown Ltd to record depreciation on plant on a straight-line basis for the half-year ending 30 June 2010 (balance date) is:
a. Depreciation Expense-Plant   10 000
  Accumulated Depreciation-Plant   10 000
b. Depreciation Expense-Plant     5 000
   Accumulated Depreciation-Plant    5 000
c. Accumulated Depreciation-Plant    5 000
   Depreciation Expense-Plant        5 000
d. Depreciation Expense-Plant    7 500
   Accumulated Depreciation-Plant                7 500

3. The statement relating to revaluations of non-current assets that is not true is:
a. Before assets are revalued any existing accumulated depreciation must be written off against the asset account
b. A revaluation increment should be credited directly to a revaluation reserve
c. A revaluation increment is regarded as income to be added to the firm’s profit for the year
d. Future depreciation charges will be based on the revalued carrying amount

4. The true statement is:
a. A revaluation decrement occurs if a non-current asset’s carrying amount is less than its fair value
b. An initial revaluation decrement should be treated as a debit to the revaluation reserve
c. An initial revaluation decrement should be treated as a debit against the current period’s profit or loss 
d.  None of the statements is true.

5. When a non-current asset is sold the gain or loss on disposal is the difference between:
a. Fair market value and accumulated depreciation
b. Selling price and accumulated depreciation
c. Fair value and selling price
d. Selling price and carrying amount

6. Assume that a machine with a cost of $3000 has accumulated depreciation of $1400 on the date of its disposal. If it was traded-in for $2000 on a new machine and the balance of $1500 was paid in cash what is the profit or loss on disposal of the old machine? (Ignore GST).
a. $1000 loss
b. $600 gain
c. $400 gain
d. $1200 loss

7. The basic accounting entry for a revaluation decrement is:
a. Debit expense on revaluation of asset; credit asset
b. Debit asset; credit expense on the revaluation of asset
c. Debit revaluation reserve; credit asset
d. Debit asset; credit revaluation reserve

8. Under IAS 36/AASB 136 ‘Impairment of Assets’ it is true that:
a. When an asset’s carrying amount exceeds its recoverable amount the asset is said to suffer impairment
b. Impairment losses are accounted for as decrements under the revaluation model
c. Accumulated depreciation is written off against the asset before the write down to recoverable amount
d. All are true statements

9. The statement relating to the composite-rate depreciation approach that is not true is:
a. It is often used in practice by business entities with many similar assets in the one class
b. A single average depreciation rate is applied to the cost of a functional group of assets
c. It is only used for items valued at less than $500 each
d. None of the above, i.e. all are true statements

10. Under IAS 38/AASB 138 the statement concerning internally generated intangible assets that is not true is:
a. They can only be recognised if their cost can be measured reliably
b. It is likely that the cost of internally generated brand names, mastheads and customer lists can be measured reliably
c. The tests for recognising internally generated intangibles are more stringent than for recognising internally generated property, plant and equipment
d. None of the above, i.e. all are true statements

11. The excess of the purchase price of a business over the fair values of the identifiable net assets acquired is a measure of:
a. Fair value
b. Revaluation reserve
c. Purchased goodwill
d. Improvements

12. The statement about goodwill that is true is:
a. Goodwill can be purchased or sold as a separate item
b. Goodwill arises from many factors, such as customer confidence, superior management and a favourable location
c. Under IFRS 3/AASB 3 goodwill must be amortised
d. Goodwill is classified as a current asset

13. On 1 June 2009 S Company acquired for $145,000 cash the business of G Ltd. The carrying amount of G Ltd’s net assets at the time of the transaction was $110 000 while independent valuers calculated their fair value at $130 000. S Company should debit ‘Goodwill’ for the amount of:
a. $0
b. $15 000
c. $20 000
d. $35 000

14. In rare cases the cost of purchasing a business combination may be genuinely less than the sum of the fair values of the identifiable assets and liabilities acquired (bargain purchase). If so IFRS 3/AASB 3 requires:
a. The acquirer to initially review the measurement of the cost and the fair values of the assets and liabilities acquired
b. Refer to the difference between the cost and the sum of the fair values as an ‘excess’
c. Recognise the excess immediately as income
d. All of the above

15. Which pairing of non-current assets and acquisition value does not match?
A. Mineral resources – cost
b. Biological assets and agricultural produce – cost
c. Identifiable intangible assets – cost 
d. Goodwill – cost of the business combination less the sum of the fair values of the net assets acquired