Deck 5: Depreciation and Amortization

Question 1

Griff runs a dance studio.Early in 20X1 he installed a new wooden floor at a cost of £54 000.He decided to depreciate the floor separately from the freehold building which he also owns.Griff reopened his studio after installation of the floor on 1 July 20X1.The floor was to be depreciated over a 25-year period on the straight line basis with a depreciation charge for each full month of ownership.On 26 April 20X5 the studio was flooded following heavy rains, and the floor was ruined.The insurance assessor asks Griff to calculate the carrying amount of the floor at that date to form a basis for negotiation of the insurance settlement. What was the carrying amount of the floor at 25 April 20X5?

A)£45 900
B)£45 360
C)£45 720
D)£43 200

Answer 1

£45 900

Question 2

Pat replaces motor vehicles used in his business every four years.On 1 May 20X6 he bought a new vehicle for £16 200 to replace a four-year old car that was sold on the same day for £3600.The latter vehicle was purchased for £12 300 and was depreciated on the straight-line basis assuming a residual value of £4500. What was Pat's profit or loss on sale of the vehicle?

A)Profit of £900
B)Loss of £900
C)Profit of £3600
D)Loss of £300

Answer 2

Loss of £900

Question 3

Bill buys new shelving for his warehouse on 1 May 20X4 at a total cost of £23 000.He plans to depreciate this cost on the straight-line basis over 10 years, after which it will have no value.He charges depreciation for each full month of ownership.What is the carrying amount of the shelving at 31 December 20X8 (to the nearest £)?

A)£10 733
B)£12 267
C)£11 500
D)£13 033

Answer 3

£12 267

Question 4

Ellie buys a new delivery vehicle on 1 January 20X4 for £15 000.She depreciates vans on a straight line basis over five years.She estimates that she will be able to sell this van on 31 December 20X8 for £750. What is the depreciation charge in respect of this vehicle for Ellie's financial year ended 31 December 20X4?

A)£3000
B)£2250
C)£2850
D)£3150

Question 5

Sohail runs a delivery business which charges a premium compared with its competitors because it offers a very fast and efficient service.He keeps delivery vans for 2½ years only, in order to ensure high levels of reliability.He estimates, on the basis of past experience, that the residual value of his vans is 45% of their cost price.He depreciates each van over the 2½ year period of ownership on the straight-line basis, calculating depreciation for each full month of ownership. Sohail buys a new van on 17 July 20X1 for £17 260.What is the charge for depreciation in respect of this van for inclusion in Sohail's statement of profit or loss for the year ended 31 October 20X1 (to the nearest £)?

A)£777
B)£1266
C)£949
D)£1726

Question 6

Cy employs a sales representative who uses a car supplied by Cy's business.Cy's policy is to depreciate the car over its estimated useful life of four years on the straight-line basis, charging one month's depreciation in respect of every full month of ownership. During March 20X3, the sales rep hands in her notice, and says that she intends to leave at the end of April 20X3.She asks Cy if she can buy the car for its carrying amount at that date.The car was purchased on 10 June 20X1 for £23 600.Its residual value was estimated at £6600.What is the carrying amount of the car at 30 April 20X3 (to the nearest £)?

A)£9208
B)£15 454
C)£12 783
D)£15 808

Question 7

Ruby buys a non-current asset on 1 January 20X2 for £18 000.She plans to depreciate it over a period of 10 years on the straight-line basis, and she estimates that its residual value at the end of the ten-year period will be £2000.What is the carrying amount of the non-current asset at her year end on 31 December 20X6?

A)£10 000
B)£8000
C)£11 600
D)£9000

Question 8

Darlene depreciates shop fittings on a reducing balance basis at 25% each year.At her 31 December 20X4 year end the balances included in non-current assets in respect of shop fittings were: On 1 January 20X5, Darlene bought more shop fittings at a cost of £9650.She did not dispose of any shop fittings during the year.
What was the depreciation charge in respect of Darlene's shop fittings in the year ended 31 December 20X5 (to the nearest £)?

A)£6576
B)£7574
C)£11 737
D)£19 067

Question 9

Which one of the following is not an intangible asset?

A)A patent taken out on a new development in computerized typesetting.
B)A machine used in the production of newspapers.
C)A newspaper title.
D)The brand name of a famous producer of printing machinery.

Question 10

Abbas runs a wholesale confectionery business.During 20X5 he installed a new computerized inventory system at a cost of £320 000.He decided to depreciate the system at 15% each year on the reducing balance basis, but because it did not come online until mid-20X5 he charged only half of the first year's depreciation in his accounts for the year ended 31 December 20X5. What was the carrying amount of the computerized inventory system at 31 December 20X6?

A)£231 200
B)£251 600
C)£53 400
D)£296 000

Question 11

Grigor purchased a freehold building for use in his business on 1 February 20X1 for £235 000.He estimated a useful life of 100 years for the building, with no residual value.On 1 February 20X6 he sold the building for £247 000.What was his profit or loss on sale?

A)£11 750 loss
B)£23 750 profit
C)£23 750 loss
D)£11 750 profit

Question 12

On 1 January 20X4 Solway Pharma Limited buys a licence to produce an anti-depressant.The licence runs for three years and costs £6 000 000.The directors decide to amortize the intangible asset in line with expected sales of the pills over the next three years. What is the amount of amortization in respect of this licence to be charged to the company's statement of profit or loss in the 20X5 financial year (to the nearest £)?

A)£4 000 000
B)£4 141 593
C)£2 000 000
D)£2 017 699

Question 13

Which one of the following statements about amortization is correct? Amortization:

A)describes the process involved in estimating the residual value of a non-current asset.
B)describes the process of spreading the cost of an intangible non-current asset over the period of its useful life.
C)is always calculated on the reducing balance basis.
D)is the term used by management accountants instead of depreciation.

Question 14

Molly buys a new cash till on 1 July 20X4 for £1872.She does not expect it to have any residual value in four years' time, at which point she plans to replace it.She depreciates such assets on the straight-line basis, charging depreciation for each full month of ownership.What is the carrying amount of the till at Molly's year end on 31 October 20X5?

A)£624
B)£936
C)£1170
D)£1248

Question 15

Dagmar spent £11 700 on 1 February 20X2 in acquiring a new car for use in her business.The basic price of the car was £11 000, but she spent an additional £700 on air conditioning for it.Dagmar's policy is to depreciate on the reducing balance basis at a rate of 25%. What was the charge to depreciation in respect of this car for Dagmar's financial year ended 31 January 20X4 (to the nearest £)?

A)£6581
B)£1645
C)£2194
D)£2063

Question 16

Doris buys a non-current asset for £35 000 on 1 February 20X1.She depreciates assets of this type on the reducing balance basis at a rate of 15% each year.What is the carrying amount of this asset at Doris's year end on 31 January 20X5 (to the nearest £)?

A)£18 270
B)£16 730
C)£14 000
D)£21 000

Question 17

Gavin sold an item of machinery on 31 October 20X4 for £6750.He had bought the machine exactly five years previously for £15 500 and had decided to depreciate it at the rate of 15% each year on the reducing balance basis. What was Gavin's profit or loss on disposal of the machine (to the nearest £)?

A)Loss of £2875
B)Loss of £127
C)Profit of £127
D)Profit of £2875

Question 18

Oscar's business invests in a new lorry on 13 September20X3 at a cost of £42 350.On the same date he disposes of the old lorry for £4000.The estimated useful life of the new lorry is five years, with an expected residual value of £6500.Oscar charges a full year's depreciation in the year of acquisition and none in the year of disposal. What is Oscar's depreciation charge in respect of the lorry for the financial year ended 31 January 20X4?

A)£6370
B)£8970
C)£7170
D)£2390

Question 19

Norman runs a storage facility in which he uses two fork lift trucks.He depreciates them on a reducing balance basis at 20% each year.One of the fork lifts currently in use was bought on 1 January 20X1 for £18 220.As his business expanded he bought the second fork lift for £21 400 on 1 January 20X5. What is the carrying amount (to the nearest £) of fork lifts in Norman's accounts at his 31 December 20X6 year end?

A)£18 472
B)£21 896
C)£19 666
D)£23 090

Question 20

Trish runs a boxing club.She installed a new boxing ring at a cost of £25 000 on 1 April 20X1, and decided to depreciate the new ring at a rate of 20% each year on the reducing balance basis.What is the depreciation charge in respect of the boxing ring for Trish's accounting year ended 31 March 20X4?

A)£3200
B)£12 800
C)£4000
D)£2560

Question 21

Stan sells an item of machinery for £8000.The machine had cost £17 500 and accumulated depreciation up to the date of sale was £8600.Using the accounting equation, what was the effect of this transaction on Stan's business assets, capital and liabilities?

A)Assets - increase; capital - increases; liabilities - no change.
B)Assets - increase; capital - no change; liabilities - increase.
C)Assets - decrease; capital - decreases; liabilities - no change.
D)Assets - increase; capital - no change; liabilities - decrease.

Question 22

Daisy runs a small floristry business.She depreciates shop fixtures on the straight-line basis over four years, and assumes that the fixtures will have no value at the end of that period.The following balances were included in Daisy's statement of financial position in respect of shop fittings at 31 January 20X4: On 1 February 20X1, when she started the business, she bought fixtures at a cost of £20 000.One year later, on 1 February 20X2, she spent a further £10 000.She charges 1/12^th of the annual depreciation charge for each complete month of ownership.
On 1 August 20X4, Daisy disposed of all of her 20X1 purchase of shop fittings for £600.On the same day she bought replacement fittings for £25 000.
What is the total charge to Daisy's statement of profit or loss in respect of these transactions for the year ended 31 January 20X5?

A)£8125
B)£10 025
C)£7525
D)£13 150

Question 23

Which of the following statements about depreciation are correct?
A.Depreciation is a way of allocating the cost of a non-current asset to the accounting periods that benefit from its use.
B. Depreciation helps to set aside sufficient cash to buy a replacement once the asset is worn out.

A)Neither of them
B)B only
C)A only
D)Both of them

Question 24

Randolph started business on 1 January 20X1, on which date he invested in machinery and motor vehicles.He made no further acquisitions or disposals of non-current assets during the rest of 20X1 and 20X2.His policy is to depreciate all classes of non-current asset on the reducing balance basis at a rate of 25% each year. Which two of the following statements are correct?
A. Randolph's depreciation charge would have been lower in 20X2 if he had adopted a policy of straight line depreciation over four years with assumed residual values of £nil.
B. Randolph's depreciation charge would have been higher in 20X2 if he had adopted a policy of straight line depreciation over four years with assumed residual values of £nil.
C. His net profit margin was higher in year 2 than it would have been if he had adopted a policy of straight line depreciation over four years with assumed residual values of £nil.
D. His net profit margin was lower in year 2 than it would have been if he had adopted a policy of straight line depreciation over four years with assumed residual values of £nil.

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

Question 25

When a business charges depreciation on its non-current assets, what are the effects on its assets, capital and liabilities?

A)Assets - no change; capital - increases; liabilities - decrease.
B)Assets - no change; capital - no change; liabilities - no change.
C)Assets - decrease; capital - decreases; liabilities - no change.
D)Assets - decrease; capital - no change; liabilities - increase.

Question 26

On 31 December 20X4 Oksana's statement of financial position included the following information in respect of motor vehicles: Oksana's accounting policy is to depreciate motor vehicles on the reducing balance basis at 25% each year.On 31 December 20X5 she disposed of a vehicle that was bought on 1 January 20X3 at a cost of £18 700.She sold the vehicle for £6900, and acquired a replacement straight away for £21 250.There were no other acquisitions or disposals during the 20X5 accounting year.
What is the carrying amount of Oksana's motor vehicles for inclusion in her statement of financial position at 31 December 20X5 (to the nearest £)?

A)£72 751
B)£79 651
C)£99 631
D)£80 640

Question 27

Amie sells a motor vehicle for £6000.The carrying amount of the vehicle at the point of sale was £5400.Using the accounting equation, what is the effect of this transaction on Amie's business assets, capital and liabilities?

A)Assets - decrease; capital - decreases; liabilities - no change.
B)Assets - increase; capital - increases; liabilities - no change.
C)Assets - increase; capital - decreases; liabilities - no change.
D)Assets - decrease; capital - no change; liabilities - decrease.

Question 28

Kevin disposed of a non-current asset on 23 February 20X6 for £7752.He had bought the asset on 1 July 20X1 for £28 000, applying a policy of depreciating it over 8 years on the straight-line basis with 1/12^th of the annual depreciation charged for each full month of ownership.He assumed a residual value of £3000. What was the loss on disposal (to the nearest £)?

A)£5925
B)£4206
C)£2925
D)£6571

Question 29

Keanu disposed of a motor vehicle on 31 December 20X7 for £7700.He bought the vehicle on 1 January 20X6 for £12 580 and depreciated it on the reducing balance basis at 20% each year.His year end is 31 October. What was the profit or loss on the sale of this asset (to the nearest £)?

A)Profit of £1259
B)Loss of £351
C)Profit of £351
D)Loss of £687