Question 1

The assumption underlying the reducing balance method of depreciation is:

Accepted Answer

The reducing balance method assumes that the asset will make a higher contribution to income in the earlier years of its life, as it depreciates by a fixed percentage of its carrying value each year. This means that the amount of depreciation expense will decrease over time, resulting in a higher net income and contribution to income in later years.

Question 2

The nature of depreciation can best be described as:

Accepted Answer

Depreciation is the systematic allocation of the cost of an asset over its useful life, in order to reflect the gradual reduction in its value due to wear and tear, obsolescence, or other factors. This allows businesses to match the cost of acquiring and using the asset to the revenue it generates, and to ensure that the asset is replaced when it can no longer be used effectively.

Question 3

On what basis would the costs of several items of property, plant and equipment, acquired for a lump-sum payment, normally be allocated?

Accepted Answer

The costs of several items of property, plant and equipment acquired for a lump-sum payment are normally allocated based on their fair values at the acquisition date. This method ensures that the cost of each asset reflects its relative value to the total purchase price.

Question 4

IAS 16/AASB 116 Property, Plant and Equipment specifies that the cost of acquisition for fixed assets includes:

Accepted Answer

IAS 16/AASB 116 Property, Plant and Equipment specifies that the cost of acquisition for fixed assets includes purchase cost plus any incidental costs directly attributable to acquiring the asset and getting it ready for use. Therefore, option D is the correct answer. Options A and B are incorrect because they only consider the purchase price or carrying value of the asset. Option C is also incorrect because it only considers the cost of acquiring the asset, and not the incidental costs associated with getting it ready for use.

Question 5

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

Accepted Answer

Fixed assets such as property, plant, and equipment are distinguished by the intention to use them for the future production of goods and services, rather than for immediate sale or purely for investment purposes. This usage is what differentiates them from other assets, as it implies a long-term benefit to the company's operations rather than short-term financial gain.

Question 6

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

Accepted Answer

The stock of coal is not a fixed asset as it is a current asset which is held for sale or consumption within a year. Land, storage depot, and mining equipment are examples of fixed assets used in coal mining operations.

Question 7

A transport company would classify their delivery vehicles on the balance sheet as:

Accepted Answer

Delivery vehicles are long-term assets and would be classified as non-current assets on the balance sheet.

Question 8

The correct entry to record the purchase of a motor vehicle for $40 000 cash, plus 10% GST is which of the following?

Accepted Answer

The correct entry to record the purchase of a motor vehicle for $40 000 cash, plus 10% GST is to record the cost of the vehicle as $40,000 and the GST component as $4,000 separately as GST is a tax that is collected by the seller and paid to the government. Therefore, the entry should be DR Motor vehicles $40,000, DR GST receivable $4,000, and CR Bank $44,000.

Question 9

Which of the following items are required to calculate depreciation?
I. Estimated residual value
II. Estimated useful life
III. Cost or revalued amount
IV. Method of depreciation

Accepted Answer

All four items (estimated residual value, estimated useful life, cost or revalued amount, and method of depreciation) are required to calculate depreciation accurately. Estimated residual value and estimated useful life are needed to determine the amount of depreciation to be taken each year, while cost or revalued amount and method of depreciation are needed to calculate the depreciation base.

Question 10

Myster Co purchased equipment for $25 000. Originally it had an estimated useful life of 4 years and a residual value of $5000. At the beginning of the 4th year of the equipment's life the estimated useful life was extended by a further three years and the residual value was reduced to zero. Myster Co uses the straight-line method to depreciate its equipment. At the end of year 4, how much depreciation should be recorded for the computer?

Accepted Answer

Using the straight-line method, the annual depreciation expense can be calculated as follows:

Depreciation expense = (Cost - Residual Value) / Useful Life

For the first three years, the depreciation expense is:

Depreciation expense = ($25,000 - $5,000) / 4 = $5,000 per year

At the beginning of year 4, the useful life was extended by a further three years, making the new total useful life 7 years. The remaining depreciable base at the beginning of year 4 can be calculated as:

Remaining depreciable base = Cost - Accumulated depreciation 
= $25,000 - $5,000 x 3 
= $10,000

The annual depreciation expense for the remaining 4 years (years 4 to 7) is:

Annual depreciation expense = Remaining depreciable base / Remaining useful life 
= $10,000 / 4 = $2,500

Therefore, the total depreciation expense for year 4 is the sum of the depreciation expense for the first three years and the depreciation expense for year 4 calculated above:

Total depreciation expense for year 4 = $5,000 + $2,500 = $7,500

In conclusion, the correct choice is B.

Question 11

A popular method for an entity to acquire the benefits of property, plant and equipment is to lease assets. Which of the following asset types are commonly subject to lease agreements?
I. Buildings
II. Motor vehicles
III. Storage space
IV. Equipment and Machinery

Accepted Answer

All four asset types (buildings, motor vehicles, storage space, and equipment/machinery) are commonly subject to lease agreements. This allows entities to use the assets for a period of time while avoiding the upfront costs of purchasing, while the lessor receives regular payments and retains ownership of the asset.

Question 12

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 based on:

Accepted Answer

The fair value at the date of acquisition is the most appropriate basis for allocating the lump-sum cost to individual assets. It reflects the actual cost of acquiring each asset at the time of purchase, rather than relying on less reliable measures such as replacement value or market value. Independent valuation may also be used, but it is not necessarily required if the fair value can be reliably determined.

Question 13

When comparing the straight-line and the reducing-balance methods of depreciation, in the later years of the asset's life the depreciation charge using the straight-line method will be:

Accepted Answer

In the reducing-balance method, the depreciation charge decreases over the asset's life because it's calculated as a percentage of the asset's diminishing book value. In contrast, the straight-line method spreads the cost evenly over the asset's useful life, resulting in a greater depreciation charge in later years compared to the reducing-balance method.

Question 14

The ______________is the historical cost of an asset less its residual value.

Accepted Answer

The depreciable amount is the cost of an asset minus its residual value. This is the amount that can be depreciated over the useful life of the asset.

Question 15

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

Accepted Answer

IAS 16/AASB 116 specifies that all assets must be accounted for at cost at the time of acquisition. The cost includes all costs necessary to bring the asset to its present location and condition for its intended use. Market value, depreciable value, and net realizable value may be used for assessing the value of an asset in subsequent periods, but not for the initial recognition of the asset.

Question 16

Ignoring GST, the correct entry to record the purchase of a motor vehicle for $45 000 cash is:

Accepted Answer

The correct entry to record the purchase of a motor vehicle for $45,000 cash is to debit the Motor Vehicles account and credit the Bank account. This is because the entity has acquired an asset (motor vehicle) and paid for it in cash, which means there is a decrease in the bank balance and an increase in the value of the motor vehicle. Option A records the transaction in reverse order, which is incorrect. Option C records the transaction as an equity transaction, which is also incorrect. Option D suggests an Accounts Receivable account, which means there is no indication of a credit sale or a credit transaction, hence it is also incorrect.

Question 17

In the financial statements prepared at the end of the accounting period the Accumulated Depreciation account appears on:

Accepted Answer

Accumulated Depreciation account appears on the balance sheet as a deduction from the related asset. This is because it represents the total amount of depreciation that has been charged against the asset over its useful life, reducing the asset's carrying value. It is not a liability and neither an expense, so options A and B are incorrect. It does not appear on the income statement, so option D is also incorrect.

Question 18

Which of the following statements is incorrect?

Accepted Answer

The cash at bank account is not affected by depreciation as it is a non-cash expense. Depreciation only affects the income statement and balance sheet.

Question 19

When a second-hand building is purchased which of the following should be recognised in a separate asset account instead of being debited to the building account?

Accepted Answer

The cost of installing an air conditioning system should be recognized in a separate asset account because it represents a distinct asset that provides future economic benefits and can be depreciated over its useful life, separate from the building itself. Legal fees and stamp duty are directly associated with the acquisition of the building and are thus capitalized as part of its cost. Initial repairs to make the building usable are also considered part of the building's acquisition cost.

Question 20

Depreciation is classified as a(n):

Accepted Answer

Depreciation is considered an expense in the income statement as it represents the allocation of the cost of a tangible asset over its useful life.

Quiz 14: Non-Current Assets: Acquisition and Depreciation