Quiz 5: Depreciation of Property, Plant and Equipment
Business
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Q 3Q 3
The useful life of the asset reflects the time from when an asset is built/acquired until it is no longer able to produce any benefits:
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True False
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Q 4Q 4
The depreciable amount is the historical cost of the non-current asset, or revalued amount substituted for historical cost in the financial report, less the net amount expected to be recovered on disposal of the asset at the end of its useful life:
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True False
Q 5Q 5
The depreciation rate and useful lives of assets should not be revised during the depreciable life of the asset:
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True False
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True False
Q 7Q 7
Amortisation has the same meaning as depreciation, but conventionally is used in relation to intangible assets:
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True False
Q 8Q 8
The expenditure to modify an asset so that its service potential is improved should be expensed.
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True False
Q 9Q 9
Where an addition to or extension of a depreciable asset is separable from the original asset and able to be used after that asset is disposed of, the extension or addition should still be depreciated over the life of the original asset:
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True False
Q 10Q 10
The profit or loss on the sale of an asset is calculated by deducting the cost of the asset from the sale amount:
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True False
Q 11Q 11
Depreciation of an asset is required when market value accounting is applied on a non-current asset.
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True False
Q 12Q 12
AASB 116 allows capitalisation of items of plant and property because these are considered prepayments.
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True False
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True False
Q 14Q 14
Depreciation functions as an allocation process of cash outflows where economic benefits are expected to arise over several accounting periods and the association with income can only be broadly or indirectly determined.
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True False
Q 15Q 15
Under the declining balance method of depreciation, the depreciable amount of an asset is determined by deducting residual value from cost or revalued amount.
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True False
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True False
Q 17Q 17
A non-current asset that is subjected to depreciation is no longer subjected to impairment testing.
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True False
Q 18Q 18
Consistent with the prediction of positive accounting theory, managers of companies with compensation contracts prefer revaluation model over cost model as a measurement basis for non-current assets.
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True False
Q 19Q 19
Depreciation is required because it is generally accepted that:
A) Assets will decrease in value over time.
B) The economic benefits of an asset will not last indefinitely.
C) Wear and tear on an asset must be recorded as an expense.
D) Even though land may go up in value its cost needs to be recognised as an expense.
E) None of the given answers.
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Multiple Choice
Q 20Q 20
If market-value accounting (also known as CoCoA or exit-price accounting) were to be applied in a set of accounts, then typically the treatment for recording depreciation would be:
A) Restate the residual value and the cost to exit price and recalculate the depreciation.
B) Restate the cost but leave the residual value unchanged and recalculate the depreciation.
C) No depreciation is recognised.
D) Continue to charge the same depreciation and recognise any changes in value in the income statement.
E) None of the given answers.
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Multiple Choice
Q 21Q 21
What issues need to be addressed to determine how to allocate the cost of an asset?
A) The depreciation method, the probable future benefit and the years to obsolescence.
B) The depreciable base, its useful life and the method of cost apportionment.
C) The cost of the asset, its residual value and the method of cost apportionment.
D) The probable future benefit, the depreciation method and the depreciable base.
E) None of the given answers.
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Multiple Choice
Q 22Q 22
When selecting a method of cost apportionment an accountant should choose:
A) The method that best reflects how the asset is used, taking into account its total physical life.
B) The method that produces the best profit for the firm.
C) The method stipulated by the taxation department for submitting tax returns.
D) The method that shows the highest depreciation in early years.
E) The method that best reflects the economic use of the asset.
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Multiple Choice
Q 23Q 23
Where an asset is revalued, the treatment of depreciation is to:
A) Recalculate and charge it to the income statement based on the revalued amount and the original residual value.
B) Charge the original amount of depreciation to the income statement and transfer any change in value to the asset revaluation reserve.
C) Recalculate and charge it to the income statement based on the revalued amount for the asset and the revalued residual value.
D) Charge the original amount of depreciation to the income statement and calculate the new depreciation based on the revalued amount and treat it as a special item.
E) None of the given answers.
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Multiple Choice
Q 24Q 24
The useful life of an asset may be estimated based on:
A) The period of time over which the future economic benefits of the asset are expected to be consumed by the entity.
B) The total service, expressed in terms of production or similar units that may most likely be obtained from the asset under normal operating conditions.
C) The period of time over which the future economic benefits of the asset are expected to be generated in normal use by a typical entity.
D) The total service, expressed in terms of production or similar units that may most likely be obtained from the asset under ideal operating conditions.
E) The period of time over which the future economic benefits of the asset are expected to be consumed by the entity and the total service, expressed in terms of production or similar units that may most likely be obtained from the asset under normal operating conditions.
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Multiple Choice
Q 25Q 25
Assets should be depreciated from:
A) The date the asset is ordered.
B) The date the asset is delivered to the premises until it is no longer in use.
C) The date the asset is first put into use or held ready for use.
D) The date the asset is paid for until it is disposed of.
E) None of the given answers.
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Multiple Choice
Q 26Q 26
French Co Ltd has a machine with the following characteristics:
A more technically advanced machine is expected to be available in 8 years.
It is expected to continue operating efficiently for the next 13 years.
The product that the machine is used to produce is expected to have a viable market for the next 6 years.
What is the period of time that should be used as the useful life of the asset for the purpose of calculating depreciation?
A) 8 years.
B) 6 years.
C) 13 years.
D) 9 years.
E) None of the given answers.
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Multiple Choice
Q 27Q 27
AASB 116 requires that depreciation be reviewed
A) At least annually.
B) As soon as the expectations regarding the patterns of use of the asset change.
C) Only when changes in the depreciation calculation are material.
D) Immediately upon a revision of the useful life of the asset.
E) All of the given answers.
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Multiple Choice
Q 28Q 28
Tantrax Ltd has just purchased a piece of equipment for $45,000. It is expected to operate at its normal output level for 20 years, but the product it is used to manufacture is expected to be marketable only for the next 13 years. The expected salvage values are $5,000 after 20 years and $8,000 after 13 years. The equipment is expected to generate output consistently over its life. What depreciation should be charged in each of the first 3 years of the equipment's life?
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Multiple Choice
Q 29Q 29
Hugo Ltd has acquired a machine for $26,000 and it cost a further $2,000 to install and set up the machine for operation. It is expected to operate within normal parameters for 6 years. It will be technologically obsolete in 10 years. The expected salvage values are $1,500 after 10 years and $2,000 after 6 years. The benefits to be derived from the machine are expected to be greater in the early years of its life. What depreciation should be charged in each of the first 2 years of the equipment's life using sum-of-digits depreciation?
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Multiple Choice
Q 30Q 30
Pentec Ltd has just acquired 5 new computers for $29,000 in total and paid a further $1,000 to have additional zip drives added. The computers are expected to have a useful life of 5 years and its salvage value is expected to be $3,000. Pentec Ltd has decided to apply the declining balance method of calculating depreciation. What is the first 2 years depreciation charge on the computers?
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Multiple Choice
Q 31Q 31
Forwind Ltd has recently acquired a machine that cost $29,000. The machine normally remains productive for 6 years. It is expected to continue in the production process at Forwind for 8 years due to the excellent maintenance and operating policies in place at Forwind. The machine has the capacity to produce 20,000 units over a 6 year life and 27,000 units over an 8 year life. Its salvage value after 6 years is expected to be $2,500 and after 8 years $1,000. What depreciation would be charged in the first year of the machine's operation when 4,000 units were produced (rounded to the nearest dollar)?
A) $5,600
B) $4,148
C) $4,296
D) $5,300
E) None of the given answers.
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Multiple Choice
Q 32Q 32
Boysone Ltd has constructed a piece of complex equipment to be used in its updated production facility. The construction took a year to complete and although the equipment was ready for use, the rest of the facility was not completed and so the equipment was not put into use for another 6 months; that is, on 1 July 2003. The cost of constructing the equipment was $70,000 and it is expected to have an operating life of 12 years. It is very likely to be technologically obsolete in 10 years. It is expected to have a scrap value at the end of its life (at whatever time) of $5,000. The expected pattern of benefits derived from the equipment is uniform throughout its life. What is the amount of depreciation to be charged in the year ending 31 December 2003 (rounded to the nearest dollar)?
A) $3,500
B) $5,417
C) $3,250
D) $6,500
E) None of the given answers.
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Multiple Choice
Q 33Q 33
Magpie Ltd purchased a building on a prime central business district site for $800,000. The value of the land is considered to be $350,000. The useful life of the building is expected to be 25 years after Magpie Ltd spends a further $80,000 on improvements. The residual value of the building at that time is estimated to be $60,000. The benefits from owning the land and building are expected to be derived evenly. What is the appropriate annual depreciation charge?
A) $18,800
B) $32,800
C) $15,600
D) $14,000
E) None of the given answers.
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Multiple Choice
Q 34Q 34
Profit on the sale of an asset is calculated
A) By subtracting the disposal proceeds from the current carrying amount of the asset.
B) After assessing the fair value of the asset and subtracting the proceeds on the sale.
C) Once depreciation has been applied to the date of sale.
D) By subtracting the updated carrying amount from the net proceeds on disposal.
E) None of the given answers.
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Multiple Choice
Q 35Q 35
Super Industries purchased a new vehicle on 1 May for $28,000. Upon delivery the vehicle required a new two-way radio to be installed before it could be used. This installation was completed on 30 June. Assuming a residual value of $4,000 and a declining balance rate of 20 per cent, calculate the depreciation expense recorded at the end of the first two financial years since purchase. (Financial Year ends on 30 June, round to the nearest dollar.)
A) $5,600; $4,480
B) $0; $5600
C) $4,800; $3,840
D) $933; $5,413
E) $800; $4,640
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Multiple Choice
Q 36Q 36
Cutting Edge Ltd purchased a state of the art hedge trimming tractor for a contract to maintain country roadside hedges for a local council. The manufacturer of the tractor stated in marketing material that the tractor is able to trim 700 000 kilometres of hedges in its operating life. Cutting Edge believes that the particularly woody type of hedges they have been contracted to maintain means that the life of the tractor is likely to be 15 per cent less than the manufacturer specified. The tractor cost $100 000 and is expected to have a salvage value at the end of its useful life of $30 000. The tractor trimmed 60 000 kilometres this period. What is the depreciation charge this period (rounded to the nearest dollar)?
A) $7,059
B) $6,000
C) $10,084
D) $9,524
E) None of the given answers.
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Multiple Choice
Q 37Q 37
Precious Gems Co purchased a diamond-cutting machine at a cost of $58 000. They bought it at a discount from the recommended price of $67 000 because of a drop in the demand for diamonds around that time. There were additional costs of $12 000 to get the machine operational. It was installed on 30 June 1997, but the machine was not used for 2 years. The operational life of the machine is expected to be 10 years at the end of which its salvage value is estimated to be $5000. On 30 June 2002, the machine was upgraded to allow a more sophisticated range of cutting styles to be used. The addition to the cutting machine cost $10 000, has an estimated life of 9 years and can be used on other machines. The addition is expected to have a nil salvage value. The machine and the addition are expected to generate economic benefits evenly over their lives. What is the depreciation expense for the diamond-cutting machine and addition for the years ended 30 June 1998; 30 June 2003; 30 June 2010 (rounded to the nearest dollar)?
A) $6,500; $7,929; $1,429
B) $0; $7,611; $1,111
C) $5,417; $6,527; $1,111
D) $0; $6,829; $1,429
E) None of the given answers.
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Multiple Choice
Q 38Q 38
Yellow Limited purchased an asset 6 years ago for $75 000. At that time it was deemed to have a residual value of $15 000 and estimated useful life of 6 years. After 4 years of use the asset was overhauled at a cost of $35 000. The overhaul extended the useful life of the asset by 4 more years but reduced its residual value to $7000. Assuming the straight-line method of depreciation is applied, calculate the depreciation expense in the year after the overhaul (rounded to the nearest dollar)?
A) $8,000
B) $10,000
C) $8,800
D) $10,300
E) $10,500
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Multiple Choice
Q 39Q 39
Red Enterprises purchased a vehicle for $35 000. A further $5000 was spent to prepare it for use. The useful life of the vehicle is expected to be 15 years, but Red Enterprises expects to replace it with a better model in 7 years' time. The salvage value is estimated to be $6500 after 15 years and $15 000 at the end of 7 years. What is the depreciation for the first 2 years using the declining-balance method of depreciation (rounded to the nearest dollar)?
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Multiple Choice
Q 40Q 40
Fast Movers Ltd purchased a machine on the first day of their financial year: 1 January 2002. The machine cost $75 000 and has an expected useful life of 10 years at which time its salvage value will be $8000. An even pattern of benefits is expected to be derived from the machine. Then on 31 December 2005 (3 years later) the machine is sold for $65 000. What are the appropriate journal entries to record the disposal of the machine in line with the requirements of AASB 116?
A)
B)
C)
D)
E) None of the given answers.
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Multiple Choice
Q 41Q 41
Galway Ltd purchased a computer for $6,000 2 years ago. At the beginning of this year the motherboard was replaced to maintain its existing service capacity at a cost of $2,000. The improvement to the computer will work only on the existing computer and it does not extend its useful service potential. Galway has been depreciating the equipment using the declining-balance method at a rate of 33 per cent. What is the depreciation charge calculated at the end of the current year (rounded to the nearest dollar)?
A) $1,778
B) $1,549
C) $2,640
D) $889
E) None of the given answers.
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Multiple Choice
Q 42Q 42
Priceless Products Ltd purchased some display stands for $5,000. They were modified to make them suitable for the premises at a further cost of $1,500. The expected life of the stands is 20 years, but Priceless Products expects to replace them in 5 years' time as the style of product presentation will change in that time. The stands are expected to have a zero salvage value in either case. The benefits from the stands are expected to be derived evenly over their life. Priceless Products reviewed the useful life of the stands as part of the process of assessing the amount to be depreciated in year 4 and decided that they could be used for an additional 2 years. The recoverable amount at that time is close to the net book value of the stands after depreciation is recorded for the 4th year. What is the amount of depreciation charge in years 3 and 5?
A) $1,000; $500
B) $325; $276
C) $1,300; $650
D) $250; $213
E) None of the given answers.
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Multiple Choice
Q 43Q 43
Managers of some entities have resisted depreciating buildings in accordance with AASB 116. A reason suggested for this, based on the Positive Accounting Theory approach, is:
A) Depreciating buildings when their value is generally increasing does not make economic sense.
B) Management is concerned that the effect on ratios such as the times interest-covered and debt/equity may lead to an entity breaching its debt covenants.
C) Management considers that when the asset is sold the amount of gain or loss that will be reflected in the books will be incorrect.
D) Depreciating buildings when their value is generally increasing does not make economic sense and management is concerned that the effect on ratios such as the times interest-covered and debt/equity may lead to an entity breaching its debt covenants.
E) None of the given answers.
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Multiple Choice
Q 44Q 44
AASB 116 requires disclosure of a reconciliation of the carrying amount at the beginning and end of the period for depreciable assets. This reconciliation includes:
A) Additions and Disposals.
B) Impairment gains recognised in the balance sheet.
C) Depreciation.
D) Additions and Disposals and Depreciation.
E) All of the given answers.
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Multiple Choice
Q 45Q 45
Intangible assets are not depreciated under AASB 116:
A) Because they do not have a finite life.
B) They are now amortised under AAS 138, which provides specific guidance on intangibles.
C) Intangible assets only appreciate and so cannot be depreciated.
D) Intangibles are not physical assets and so are not subject to wear and tear.
E) All of the given answers.
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Multiple Choice
Q 46Q 46
Kent Express owns a fleet of delivery vehicles. They were purchased for $120 000 and are expected to have a useful life of 8 years. Their residual value is expected to be $20 000. What is the depreciation expense recorded using the sum-of-digits depreciation method in years 1 and 2 (rounded to the nearest dollar)?
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Multiple Choice
Q 47Q 47
Percy Ltd has a piece of equipment that has been depreciated for 3 years using the declining-balance depreciation method at a rate of 20 per cent. The equipment cost $34,000 and has a salvage value of $4,000. At the end of the third year the asset is sold for $24,000. What is the appropriate journal entry to record the disposal in line with the requirements of AASB 116?
A)
B)
C)
D)
E) None of the given answers.
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Multiple Choice
Q 48Q 48
All Saints Ltd acquired a machine for $50,000 on 1 January. This asset has useful life of 4 years and a residual value of $10,000. The declining balance rate adopted by the entity for similar machines is 40%. What is the depreciation expense for the first year, if the depreciation policy adopted is straight-line, declining-balance or sum-of-digits method, respectively?
A) $10,000; $20,000; $16,000
B) $10,000; $25,000; $20,000
C) $12,500; $20,000; $16,000
D) $12,500; $25,000; $20,000
E) E: None of the given answers.
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Multiple Choice
Q 49Q 49
Pursuant to AASB 116, what is the carrying amount of an asset?
A) Cost less accumulated depreciation.
B) Cost or revalued amount less the accumulated depreciation and any accumulated impairment losses.
C) Revalued amount less accumulated depreciation and any impairment losses.
D) Cost or revalued amount less the accumulated depreciation.
E) None of the given answers.
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Multiple Choice
Q 50Q 50
The company has a depreciable asset with a purchase price of $500,000 and an estimated residual of $20,000. The company estimates that the asset will generate future economic benefits for the next 10 years. You are not sure on what depreciation method to adopt but would like to be aware of the effect of using different depreciation methods. Which of the following is correct with respect depreciation expense for Year 1?
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Multiple Choice
Q 51Q 51
A company recently replaced a significant part of equipment carried at cost. Which action would be consistent with AASB 116?
A) Include cost of replacement part in the asset's carrying amount without regard for the carrying amount of the part replaced.
B) Revalue the carrying amount of equipment before recognizing the replacement part purchased.
C) Derecognise the carrying amount of the part replaced and include cost of replacement part in the asset's carrying amount.
D) Recognise the cost of replacement part as expense as the cost is a material amount.
E) None of the given answers
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Multiple Choice
Q 52Q 52
The company recently acquired factory equipment. Which of the following costs should be included in the depreciable amount of the equipment?
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Multiple Choice
Q 53Q 53
A company recently ordered a piece of machinery from Germany to be used to manufacture a new product. Which of the following are generally included as cost of an item of property, plant and equipment in accordance with AASB 116?
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Multiple Choice
Q 54Q 54
Swans Ltd constructed a building on a property already owned by the football club. Which of the following items should be included in determining the depreciable amount of the building?
A) Architect's fees.
B) Interest during construction.
C) Promotional expense.
D) All of the given answers.
E) Architect's fees and Interest during construction.
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Multiple Choice
Q 55Q 55
Crows Ltd purchased a photocopier on 1 July 2007 for $30,000. It was estimated that it would have a useful life of 3 years and produce 5,000,000 copies over its life. The asset's residual value is estimated at $3,000. Other similar assets are depreciated on a reducing balance method is at 40% rate. Which of the following statement is correct for year ending 30 June 2008?
A) If the straight-line method is used, depreciation expense is $10 000.
B) If the reducing balance method is used, depreciation expense is $10 800.
C) If the sum of digits method is used, depreciation expense is $13, 500.
D) If the reducing balance method is used, depreciation expense is $10 800 and If the sum of digits method is used, depreciation expense is $13, 500.
E) None of the given answers.
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Multiple Choice
Q 56Q 56
In accordance with AASB 116, under the cost model, the carrying amount of property, and equipment should be greater than:
A) Historical cost.
B) Recoverable amount
C) Revalued amount.
D) Depreciable amount.
E) None of the given answers.
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Multiple Choice
Q 57Q 57
In light of a company being subject to political costs, PAT predicts managers to select which depreciation policy?
A) Last-in first-out
B) Straight-line rate
C) Declining-balance
D) Straight-line
E) E: None of the given answers
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Multiple Choice
Q 58Q 58
Which depreciation policy is likely to reduce debt-to-equity ratio?
A) Sum-of-digits
B) Straight-line rate
C) Declining-balance
D) Sum-of-digits or Declining-balance
E) E: None of the given answers
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Multiple Choice
Q 59Q 59
A non-current asset has the following information available for valuation at balance date:
Depreciable Amount $50,000
Accumulated depreciation $10,000
Residual value $5,000
Recoverable amount $35,000
Value in use $80,000
Which amount should be the carrying amount of this asset at balance date?
A) $5,000
B) $35,000
C) $40,000
D) $80,000
E) E: None of the given answers
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Multiple Choice
Q 60Q 60
Which of the following statement is applicable to the declining-balance method of depreciation?
A) The expense is constant for the useful life of the asset.
B) The process is complex because you need to know the carrying amount, residual value and estimated useful life of the asset.
C) A company subject to political costs is more likely to select this depreciation method.
D) Assumes that the consumption of the asset is a function of time.
E) E: None of the given answers.
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Multiple Choice
Q 61Q 61
Which of the following statement is applicable to the straight-line method of depreciation??
A) The expense is variable for the useful life of the asset.
B) The process is complex because you need to know the carrying amount, residual value and estimated useful life of the asset.
C) A company subject to political costs is more likely to select this depreciation method.
D) Assumes that the consumption of the asset is a function of time.
E) E: None of the given answers.
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Multiple Choice
Q 62Q 62
On 1 January, Broncos Ltd paid $20 million for a track of land with a building. The building was in a bad condition and had to be refurbished for another $2,000,000. The adjacent vacant land is valued at $15,000,000. It is expected that the building will be in use for at 20 years. What is the depreciation expense for the first year?
A) $100,000
B) $250,000
C) $350,000
D) $1,100,000
E) E: None of the given answers
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Multiple Choice