Quiz 5: Depreciation of Property, Plant and Equipment

Depreciation represents a decline in the market value of an asset over its life.

Where a non-current asset appreciates in value over time,no depreciation should be charged.

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.

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.

The depreciation rate and useful lives of assets should not be revised during the depreciable life of the asset.

Assets must be depreciated from the time they are acquired.

Amortisation has the same meaning as depreciation,but conventionally is used in relation to intangible assets.

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.

Depreciation of an asset is required when market value accounting is applied on a non-current asset.

IASB 16 allows capitalisation of items of plant and property because these are considered prepayments.

Depreciation expense is always recognised in profit and loss.

The depreciable base is the cost of a depreciable asset,or other amount substituted for cost in the financial statement,less its residual value.

Under the declining balance method of depreciation,the depreciable amount of an asset is determined by deducting residual value from cost or revalued amount.

If the receipt of the sale proceeds on disposal is deferred for a period of time the consideration received is recognised initially at the fair value.

IASB 16 paragraph 73 states that financial statements shall disclose,for each class of property,plant and equipment the measurement bases used for determining the net carrying amount.

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.

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

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.

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.

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.

French Co Plc 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

IASB 16 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.

Tantrax Plc 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 £5000 after 20 years and £8000 after 13 years.The equipment is expected to generate output consistently over its life.What depreciation should be charged in each of the first three years of the equipment's life? A)Year 1: £2846.15, Year 2: £2846.15, Year 3: £2846.15 B)Year 1: £5285.71, Year 2: £4879.12, Year 3: £4472.53 C)Year 1: £3461.54, Year 2: £3461.54, Year 3: £3461.54 D)Year 1: £1850, Year 2: £1850, Year 3: £1850

Hugo Plc has acquired a machine for £26 000 and it cost a further £2000 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 £1500 after 10 years and £2000 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 two years of the equipment's life using sum-of-digits depreciation? A)Year 1: £8000, Year 2: £6667.67, Year 3: £5333.33 B)Year 1: £4818.18, Year 2: £4336.36, Year 3: £3854.55 C)Year 1: £7428.57, Year 2: £6190.48, Year 3: £4952.38 D)Year 1: £4333.33, Year 2: £4333.33, Year 3: £4333.33

Boysone Plc 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 2013.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 £5000.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 2013 (rounded to the nearest pound)? A)£3500 B)£5417 C)£3250 D)£6500

Magpie Plc 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

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.

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 £4000 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 pound.) A)£5600; £4480 B)£0; £5600 C)£4800; £3840 D)£933; £5413

Cutting Edge Plc 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% 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 euro)? A)€7059 B)€6000 C)€10084 D)€9524

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 2007,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 2012,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 2008; 30 June 2013; 30 June 2020 (rounded to the nearest pound)? A)£6500; £7929; £1429 B)£0; £7611; £1111 C)£5417; £6527; £1111 D)$0; $6829; $1429

Yellow Plc 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 euro)? A)€8000 B)€10000 C)€8800 D)€10500

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 euro)? A)Year 1: €5230, Year 2: €4546 B)Year 1: €4564, Year 2: €4043 C)Year 1: €3990, Year 2: €3535 D)Year 1: €3269, Year 2: €2841

Fast Movers Plc purchased a machine on the first day of their financial year: 1 January 2011.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 2014 (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 IASB 16? A) B) C) D)

Galway Plc purchased a computer for €6000,2 years ago.At the beginning of this year the motherboard was replaced to maintain its existing service capacity at a cost of €2000.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%.What is the depreciation charge calculated at the end of the current year (rounded to the nearest euro)? A)€1778 B)€1549 C)€2640 D)€889

Priceless Products Plc purchased some display stands for £5000.They were modified to make them suitable for the premises at a further cost of £1500.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)£1000; £500 B)£325; £276 C)£1300; £650 D)£250; £213

Managers of some entities have resisted depreciating buildings in accordance with IASB 16.Which of the following is the grounds given by directors for failing to act in compliance with IASB 16? A)Depreciating buildings when their values are generally increasing over time. 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.

IASB 16 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 statement of financial position. C)depreciation. D)additions and disposals and depreciation.

All Saints Plc 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

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 about 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? A) B) C) D)

The company recently acquired factory equipment.Which of the following costs should be included in the depreciable amount of the equipment? A) B) C) D)

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 IASB 16? A) B) C) D)

Swans Plc 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)architect's fees and interest during construction

Crows Plc purchased a photocopier on 1 July 2012 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 £3000.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 2013? 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.

In accordance with IASB 16,the residual value and useful life of an asset shall be reviewed: A)every 3 years. B)at least at the end of each annual reporting period. C)as determined by the company directors. D)as and when required.

In accordance with IASB 16 the depreciation method applied to an asset shall be reviewed: A)as determined by the company directors. B)every 3 years. C)at least at the end of each annual reporting period. D)as and when required.

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

A non-current asset,for example,a building,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)€5000 B)€35 000 C)€40 000 D)€80 000

Which of the following statements 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.

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 uniform over its expected useful life.

On 1 January,Broncos Plc paid €20 million for a tract 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

When an asset has a defined life,and it is expected that it will be used uniformly,which depreciation policy is likely to be used? A)sum-of-digits B)straight-line rate C)declining-balance D)sum-of-digits or declining-balance

The depreciable amount of any addition or extension to an existing depreciable asset that becomes an integral part of that asset must be allocated over: A)the life of the asset. B)the expected residual amount. C)the remaining useful life of the asset. D)the cost of the asset.

Using a 'net basis' means that the proceeds from the disposal of a depreciable asset should not be separately treated as: A)revenue. B)gain. C)income. D)loss.

Information is material if it has the potential,individually or collectively,to influence economic decisions of users taken on the basis of financial statements through: A)non-disclosure. B)omission. C)misstatement. D)all of the given answers.

If a company finds out years later that the expected pattern of consumption of future economic benefits of an asset had changed,how must a company deal with this accounting issue?

Explain why the combined cost of acquiring land and building is required to be apportioned to each specific asset and accounted for separately as per IAS 16? What aspects of this provision is presumed inconsistent with the manager's view under Positive Accounting Theory?

In accordance with IAS 16,how should a company treat additions,major repairs and improvements and replacements?

How are gains or losses on sale of depreciable assets accounted for in accordance with IAS 18 Revenue?

Explain how different methods of cost apportionment may unrealistically provide high values for non-current assets.

Depreciation is intended to track the asset's declining value.Do you agree or disagree with this statement.Discuss.

Discuss the criticisms on depreciation of non-current assets under the historical cost of accounting in periods of rising prices.

Managers often argue that property values appreciate and therefore depreciation is irrelevant.Discuss the contractual implications of building depreciation to debt covenants in place.

Discuss how the useful life of a depreciable asset is determined.