Asset Revaluation | Ch15 – Test Bank – 10th Ed - Test Bank | Financial Accounting 10e by John Hoggett by John Hoggett. DOCX document preview.
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Testbank
to accompany
Financial accounting
10th edition
by
Hoggett et al.
© John Wiley & Sons Australia, Ltd 2018
Chapter 15: Non-current assets: revaluation, disposal and other aspects
Multiple-choice questions
1. Accounting standard IAS 16/AASB 116, Property, Plant and Equipment:
a. requires all assets to be revalued yearly.
b. requires all assets to be revalued every three years.
c. requires all assets to be revalued every five years.
d. does not require an entity to revalue its assets.
Correct answer: d
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
2. Which of the following terms have the same meaning in accounting?
- Book value
- Carrying amount
- Written down value
a. I, II and III
b. I and II
c. II and III
d. I and III
Correct answer: a
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
3. Under the accounting standard dealing with revaluations, IAS 16/AASB 116, an entity is required to:
a. revalue its assets
b. adopt a revaluation model.
c. adopt a cost model.
d. adopt either a cost model or a revaluation model.
Correct answer: d
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
4. If assets are to be valued at other than cost, accounting standard IAS 16/AASB 116, Property, Plant and Equipment, requires what basis of valuation to be used?
a. Market value
b. Fair value
c. The lower of cost and net realisable value
d. No basis of valuation is specified
Correct answer: b
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
5. Which of the following are requirements of IAS 16/AASB 116?
- An entire class of non-current assets must be revalued together.
- If the revaluation model is adopted non-current assets should be revalued to either fair value or the value in use.
Before a depreciable asset is revalued accumulated depreciation should be written back to the asset account.
a. I, II and III only
b. II and III only
c. I and III only
d. None of the above
Correct answer: c
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
6. The carrying amount of a depreciable, non-current asset is its:
a. historic cost.
b. net realisable value.
c. cost less residual amount.
d. cost or revalued amount less accumulated depreciation.
Correct answer: d
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
7. Any revaluations that occur must be upward or downward from an asset’s:
a. original cost.
b. carrying amount.
c. net realisable value.
d. lower of cost and net realisable value.
Correct answer: b
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
8. Which of the following is the basic accounting entry for a revaluation decrease of a non-depreciable asset that is not a reversal of an original increase?
a. DR Revaluation surplus reserve; CR Asset
b. DR Asset; CR Revaluation surplus reserve
c. DR Expense on revaluation of asset; CR Asset
d. DR Asset; CR Expense on the revaluation of asset
Correct answer: c
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
9. High Tide Ltd’s balance sheet at 30 June 2019 disclosed the following.
$
Buildings 650 000
Less accumulated depreciation 280 000
370 000
On 1 July 2019 the director of High Tide decided to revalue the buildings to a fair value of $400 000. The general journal entry to record the revaluation is:
a. DR Gain on revaluation $30 000; CR Buildings $30 000
b. DR Accumulated depreciation buildings $30 000; CR Gain on revaluation $30 000
c. DR Accumulated depreciation buildings $280 000; CR Gain on revaluation $30 000; CR Buildings $250 000
d. DR Accumulated depreciation buildings $280 000; CR Loss on revaluation $30 000; CR Buildings $250 000
Correct answer: c
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
10. Mackenzie Ltd’s fleet of delivery trucks (original cost $850 000) had a carrying amount on 1 July 2019 of $470 000. On that date, their value was revised to $500 000. Future depreciation charges will be based on which amount?
a. $500 000
b. $450 000
c. $330 000
d. $470 000
Correct answer: a
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
11. In accounting standard IAS 16/AASB 116, a downward revaluation is now known as a:
a. revaluation decrement.
b. revaluation depletion.
c. revaluation increment.
d. revaluation decrease.
Correct answer: d
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
12. What type of account is a revaluation surplus?
a. Income
b. Equity
c. Asset
d. Liability
Correct answer: b
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
13. Which statement concerning revaluations that reverse prior adjustments in value is untrue?
a. A revaluation decrease that reverses a previous increase should be recognised as a decrease in other comprehensive income to the extent of any credit balance existing in the revaluation surplus reserve account.
b. A revaluation increase that reverses a previous decrease should be recognised in the income statement to the extent that it reverses any previously downward revaluation of the same asset.
c. When a change in valuation is a reversal of a previous revaluation, accumulated depreciation does not have to be written off against the asset before the revaluation is recorded.
d. A debit to a revaluation surplus reserve account that is a reversal of a previous revaluation increase should not exceed the amount of the original credit.
Correct answer: c
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
14. The balance sheet of Toby Ltd at 31 December 2019 shows the following.
$
Plant 80 000
Accumulated depreciation — plant 20 000
60 000
On 1 January 2020, based on a valuer’s estimate of fair value, it was decided to revalue the plant to $70 000. This was the first time the asset had been revalued.
The journal entry to record the revaluation is which of the following?
a. DR Accumulated depreciation — plant 20 000
CR Plant 10 000
CR Gain on revaluation plant 10 000
b. DR Plant 10 000
CR Gain on revaluation plant 10 000
c. DR Expense on revaluation of plant 10 000
CR Plant 10 000
d. DR Plant 10 000
DR Expense on revaluation of plant 10 000
CR Accumulated depreciation — plant 20 000
Correct answer: a
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
15. The balance sheet of Toby Ltd at 31 December 2019 shows the following.
$
Plant 80 000
Accumulated depreciation — plant 20 000
60 000
On 1 January 2020, based on a valuer’s estimate of fair value, it was decided to revalue the plant to $70 000. This was the first time the asset had been revalued. The plant was then assessed to have a further useful life of 5 years and an expected residual amount of $10 000.
What is the journal entry in the books of Toby Ltd to record depreciation on plant on a straight-line basis for the half-year ending 30 June 2020 (balance date)?
a. DR Depreciation expense — plant 12 000
CR Accumulated depreciation— plant 12 000
b. DR Depreciation expense — plant 6 000
CR Accumulated depreciation — plant 6 000
c. DR Accumulated depreciation — plant 6 000
CR Depreciation expense — plant 6 000
d. DR Depreciation expense — plant 14 000
CR Accumulated depreciation— plant 14 000
Correct answer: b
Feedback: ($70 000 – $10 000)/5 × ½
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
16. Which of the following statements is correct?
a. A revaluation decrease should occur if a non-current asset's carrying amount is less than its fair value.
b. An initial revaluation decrease should be treated as a debit to the revaluation surplus reserve.
c. An initial revaluation decrease should be treated as a debit against the current period’s profit or loss.
d. An initial revaluation decrease should be disclosed in the profit report as a reduction in other comprehensive income.
Correct answer: c
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
17. Which statement relating to revaluations of non-current assets is incorrect?
a. A revaluation decrease should be included as a reduction in profit.
b. A revaluation increase is regarded as income to be added to the firm's profit for the year.
c. Future depreciation charges will be based on the revalued carrying amount of the asset.
d. Before assets are revalued any existing accumulated depreciation must be written off against the asset account.
Correct answer: b
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
18. What is the basic accounting entry for an initial revaluation decrease of a non-depreciable asset?
a. DR expense on revaluation of asset; CR asset
b. DR asset; CR expense on the revaluation of asset
c. DR revaluation surplus reserve; CR asset
d. DR asset; CR revaluation surplus reserve
Correct answer: a
Learning objective 15.1 ~ account for the revaluation of non-current assets, both upwards and downwards.
19. On 31 December 2018 Fraser Ltd’s balance sheet shows motor vehicles at a cost price of $400 000 less accumulated depreciation $100 000. Fraser Ltd uses the cost model to value its assets. On 31 December 2018 an estimate is made that the recoverable amount of the vehicles is $270 000. Under IAS 36/AASB 136, Impairment of Assets, the accounting entry to record the write down of the motor vehicles to recoverable amount is which of the following?
a. DR Impairment loss on motor vehicles (expense) $130 000; CR Accumulated depreciation $130 000
b. DR Impairment loss on motor vehicles (expense) $30 000; CR Accumulated depreciation and impairment losses $30 000
c. DR Impairment loss on motor vehicles (expense) $30 000; CR Motor vehicles $30 000
d. No entry is required
Correct answer: b
Learning objective 15.2 ~ account for the write-down of an impaired non-current asset to recoverable amount.
20. Under IAS 36/AASB 136 Impairment of Assets, which of the following statements are true?
- When an asset’s carrying amount is less than its recoverable amount the asset is said to suffer impairment.
- Impairment losses are accounted for as a revaluation decrease if the revaluation model is used.
- Impairment losses must be recognised as an expense in that period if the cost model is used.
a. None of the above
b. I and III only
c. II and III only
d. I, II and III
Correct answer: c
Feedback: Not the first.
Learning objective 15.2 ~ account for the write-down of an impaired non-current asset to recoverable amount.
21. An asset’s recoverable amount is the:
a. lower of an its fair value and its net realisable value.
b. higher of its fair value less costs to sell, and its value in use.
c. amount expected to be received from the disposal of the asset.
d. amount expected to be recovered from the use of the asset.
Correct answer: b
Learning objective 15.2 ~ account for the write-down of an impaired non-current asset to recoverable amount.
22. What is the name given to the higher of an asset’s fair value less costs to sell, and its value in use?
a. recoverable amount
b. carrying amount
c. fair value amount
d. written down value
Correct answer: a
Learning objective 15.2 ~ account for the write-down of an impaired non-current asset to recoverable amount.
23. When an asset is sold, the gain or loss on disposal is the difference between the:
a. proceeds of sale and the fair value of the asset.
b. proceeds of sale and the original cost of the asset.
c. proceeds of sale and the carrying amount of the asset.
d. original cost and the accumulated depreciation of the asset.
Correct answer: c
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
24. On 31 December 2019 an item of machinery had a cost of $300 000 and accumulated depreciation of $280 000. If the machinery was sold for a profit of $30 000 on 1 January 2020, how much was recorded as income from the proceeds of the sale?
a. $20 000
b. $50 000
c. Nil
d. $300 000
Correct answer: b
Feedback: ($300 000 - $280 000) + $30 000.
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
25. Proceeds from the sale of equipment is a/an account.
a. income
b. liability
c. expense
d. negative asset
Correct answer: a
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
26. Equipment which had a carrying amount at the end of the financial year 2018/19 of $18 000, was disposed of on 1 October 2019. Depreciation was calculated on the equipment at 20% per annum using the diminishing-balance method. What was the depreciation expense charged for the first 3 months of the financial year 2019/20, before the asset was sold?
a. $1800
b. $0
c. $3600
d. $900
Correct answer: d
Feedback: $900 = $18 000 x 20% x 3/12.
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
27. What type of account is the Carrying Amount of Equipment account?
a. Asset
b. Expense
c. Negative asset
d. Negative expense
Correct answer: b
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
28. On 31 December 2019 a machine with a cost of $150 000 has accumulated depreciation written off of $90 000. If the machine was sold for $80 000 on 1 January 2020 how much will be recognised to the account “Carrying amount on the disposal of machinery”?
a. $80 000
b. $150 000
c. $60 000
d. $90 000
Correct answer: c
Feedback: $60 000 = $150 000 – $90 000
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
29. The gain or loss on disposal of a non-current asset is calculated as the difference between:
a. fair value and selling price.
b. replacement value and selling price.
c. selling price and carrying amount.
d. fair market value and accumulated depreciation.
Correct answer: c
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
30. Assume that a machine with a cost of $90 000 has accumulated depreciation of $48 000 on the date of its disposal. What is the profit or loss on disposal of the old machine if it was traded-in for $40 000 on a new machine? (Ignore GST.)
a. $40 000 loss
b. $2 000 loss
c. $8 000 gain
d. $42 000 loss
Correct answer: b
Feedback: $40 000 – $42 000
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
31. The balance sheet of Foster Ltd at 31 December 2019 showed:
$
Equipment 60 000
Accumulated depreciation of equipment 44 000
16 000
On 1 January 2020 the equipment was sold for $18 000. What is the accounting entry to record the receipt of the proceeds from the sale of the equipment?
a. DR Bank $18 000; CR Equipment $18 000
b. DR Bank $2000; CR Proceeds from sale of equipment $2000
c. DR Bank $18 000; CR Proceeds from sale of equipment $18 000
d. DR Bank $16 000; CR Proceeds from sale of equipment $16 000
Correct answer: c
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
32. If a computer with a fully depreciated cost of $10 000 is discarded as worthless, the correct accounting entry to record the scrapping is:
a. DR Expense on disposal of asset $10 000; CR Computer $10 000
b. DR Accumulated depreciation computer $10 000; CR Computer $10 000
c. DR Expense on disposal of asset $10 000; CR Accumulated depreciation computer $10 000
d. DR Expense on disposal of asset $10 000; CR Proceeds of disposal of asset $10 000
Correct answer: b
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
33. On 31 May 2018 a photocopying machine with a cost of $12 000 has accumulated depreciation written off of $10 000. If the machine is sold for $1 500 on 1 June 2018 what will be the net effect of the sale on the income statement?
a. $500 loss
b. $500 profit
c. $1 500 loss
d. $1 500 profit
Correct answer: a
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
34. Which of the following statements is incorrect?
a. If an asset is scrapped as worthless before it is fully depreciated its carrying amount represents an expense on disposal.
b. An amount paid to remove an asset that is scrapped before it is fully depreciated is an addition to the expense recorded on its disposal.
c. When an asset is scrapped during the year an entry should be made to record depreciation expense for the portion of the year before scrapping.
d. If an asset is scrapped as worthless before it is fully depreciated its original cost represents an expense on disposal.
Correct answer: d
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
35. The balance sheet of Fullwood Ltd at 31 December 2018 showed:
$
Furniture & Fittings 40 000
Accumulated depreciation of F&F 30 000
10 000
On 1 January 2019 the equipment was sold for $13 000. The accounting entry to record the closing of the equipment and the accumulated depreciation of equipment accounts is:
a. DR Accumulated depreciation equipment $30 000; CR Equipment $30 000
b. DR Bank $13 000; CR Carrying amount of equipment $13 000
c. DR Accumulated depreciation equipment $30 000; DR Carrying amount of equipment $10 000; CR Equipment $40 000
d. DR Accumulated depreciation equipment $10 000; CR Equipment $10 000
Correct answer: c
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
36. Bronwyn’s Computer Shop purchased some new equipment by trading in old equipment with a carrying amount of $10 000. Cash of $8 000 was paid to the supplier and a trade-in allowance of $7 000 was granted. The new equipment should be recorded at:
a. $7 000.
b. $8 000.
c. $10 000.
d. $15 000.
Correct answer: d
Learning objective 15.3 ~ account for the derecognition of non-current assets by scrapping, by sale, or by exchange.
37. Which of the following pairs of terms match?
Non-current fixed assets and depreciation
Natural resources and amortisation
Intangible assets and depletion
- Land and depreciation
a. I
b. i, ii, iv
c. i, ii, iii, iv
d. ii, iii
Correct answer: a
Learning objective 15.4 ~ account for depreciation using composite rates.
38. Which statement relating to the composite-rate depreciation approach is not true?
a. It is only used for items valued at less than $1000 each.
b. A single depreciation rate is applied to the average cost of a functional group of assets.
c. The composite rate is applied to the average of the beginning and ending balances in the asset account for the year.
d. It is often used in practice by business entities with many similar assets in the one class.
Correct answer: a
Learning objective 15.4 ~ account for depreciation using composite rates.
39. Scot Ltd uses a composite-rate depreciation rate of 8% p.a. for its office equipment. The office equipment account had a balance of $15 000 at the beginning of the period and a balance of $28 000 at the end of the accounting period. The annual depreciation charge for the period is:
a. $1 040
b. $1 200
c. $1 720
d. $2 240
Correct answer: c
Feedback: ($15 000 + $28 000)/2 × 8%
Learning objective 15.4 ~ account for depreciation using composite rates.
40. Which of the following statements relating to the composite-rate depreciation approach is not correct?
a. Composite-rate depreciation always uses the straight-line method of depreciation.
b. It is often used in practice by business entities with many similar assets in the one class.
c. A single average depreciation rate is applied to the average of the beginning and ending balances of a functional group of assets.
d. No gain or loss is recognised on the disposal of individual assets within the composite group.
Correct answer: a
Learning objective 15.4 ~ account for depreciation using composite rates.
41. Which of the following statements relating to the composite rate depreciation approach are correct?
- The general asset mix of a functional group of assets is assumed to be the same through new assets are added and old assets are sold.
- Additions and retirements are assumed to occur uniformly throughout the year.
- The method is often used by business entities with many similar assets in one class.
- Profits and losses on disposal of assets are debited/credited to the accumulated depreciation account so no losses or profits on disposal are recorded.
a. I and IV only
b. II, III and IV only
c. I, III and IV only
d. I, II, III and IV
Correct answer: d
Learning objective 15.4 ~ account for depreciation using composite rates.
42. Which statement relating to mineral resources is not true?
a. The cost at which mineral resources are recorded may include amounts spent on exploration and development.
b. As the mineral resource asset is used up its cost is proportionately transferred to an amortisation (depletion) expense account.
c. The most common approach to the calculation of the depletion of mineral resources is the reducing-balance method.
d. Accounting for mineral resources is governed by IAS 16/AASB 116.
Correct answer: c
Learning objective 15.5 ~ describe the accounting for the acquisition and depletion of mineral resources.
43. Which of the following are mineral resources?
Oil
- Coal
Natural gas
Uranium
a. I and III only
b. I, II, III and IV
c. II and III only
d. I, II and III only
Correct answer: b
Learning objective 15.5 ~ describe the accounting for the acquisition and depletion of mineral resources.
44. A coal mine was purchased for $900 000. Estimated production is 20 000 000 tons of coal after which the mine will be sold for $50 000. During the current year 5 500 000 tons of coal were produced and sold. Amortisation for the year is:
a. $139 091
b. $212 500
c. $233 750
d. $247 500
Correct answer: c
Feedback: ($900 000 – $50 000) × (5 500 000/20 000 000)
Learning objective 15.5 ~ describe the accounting for the acquisition and depletion of mineral resources.
45. Which of the following are not examples of biological assets?
a. Cattle and sheep
b. Wine and wool
c. Planted wheat and grape vines
d. Trees in an avocado plantation, coffee bushes on a coffee plantation
Correct answer: b
Feedback: Wine and wool are examples of agricultural produce as they are not living.
Learning objective 15.6 ~ describe the nature of biological assets and agricultural produce and how to account for them.
46. Under IAS 41/AASB 141 the basis for measuring biological assets is:
a. replacement value.
b. fair value less costs to sell.
c. historical cost less costs to sell.
d. estimated market value less costs to sell.
Correct answer: b
Learning objective 15.6 ~ describe the nature of biological assets and agricultural produce and how to account for them.
47. Under IAS 41/AASB 141,biological assets are recorded in the accounting records based on their:
a. net fair value.
b. market value.
c. historical cost.
d. replacement value.
Correct answer: a
Learning objective 15.6 ~ describe the nature of biological assets and agricultural produce and how to account for them.
48. Which pairing of non-current assets and acquisition value does not match?
a. Mineral resources and cost.
b. Identifiable intangible assets and cost.
c. Biological assets and agricultural produce and cost.
d. Goodwill and cost of the business combination less the sum of the fair values of the net assets acquired.
Correct answer: c
Learning objective 15.6 ~ describe the nature of biological assets and agricultural produce and how to account for them.
49. The correct accounting entry to amortise an intangible asset over its useful life is:
a. DR Amortisation expense; CR Asset
b. DR Accumulated amortisation; CR Amortisation of asset
c. DR Amortisation expense; CR Accumulated depreciation
d. DR Amortisation expense; CR Accumulated amortisation
Correct answer: d
Learning objective 15.7 ~ describe the nature of intangible assets and the problems of accounting for them.
50. Under IAS 38/AASB 138, which statement concerning internally generated intangible assets is incorrect?
a. They can only be recognised if their cost can be measured reliably.
b. If patents and copyrights are deemed to be in the research phase all expenditure incurred should be expensed rather than capitalised.
c. It is likely that the cost of internally generated brand names, mastheads and customer lists can be measured reliably.
d. The tests for recognising internally generated intangibles are more stringent than for recognising internally generated property, plant and equipment.
Correct answer: c
Learning objective 15.7 ~ describe the nature of intangible assets and the problems of accounting for them.
51. Intangible assets may be further classified as:
a. production and non-production.
b. identifiable and unidentifiable.
c. physical and non-physical.
d. living and non-living.
Correct answer: b
Learning objective 15.7 ~ describe the nature of intangible assets and the problems of accounting for them.
52. Which of the following is not an example of an intangible asset?
- Trademark
Goodwill
Licences
Oil and gas reserves
a. II and III only
b. III only
c. I, II and IV only
d. IV only
Correct answer: d
Learning objective 15.7 ~ describe the nature of intangible assets and the problems of accounting for them.
53. Which statement concerning the accounting treatment of intangible assets under IAS 38/AASB 138 is correct?
a. Goodwill can be purchased or sold as a separate asset.
b. An intangible asset is defined as an asset without physical substance.
c. Any internally generated trademark or brand name can be recognised as an asset.
d. IAS 38/AASB 138 accepts the view that some intangible assets have unlimited lives and therefore should not be amortised.
Correct answer: d
Learning objective 15.7 ~ describe the nature of intangible assets and the problems of accounting for them.
54. Which of the following statements concerning patents is correct?
a. Research costs spent on internal patent development cannot be recognised as an asset under IAS 38/AASB 138.
b. A patent in Australia gives the holder the exclusive right to produce and sell a particular product for a period of 50 years.
c. A patent that is purchased from its holder is debited to an asset account and must be amortised over a maximum period of 15 years.
d. A patent that has been capitalised is shown in the balance sheet on one line at its net value.
Correct answer: a
Learning objective 15.7 ~ describe the nature of intangible assets and the problems of accounting for them.
55. According to IAS 38/AASB 138 intangible assets that have been established to have finite useful lives:
a. amortised over their legal lives.
b. should be amortised over a period not exceeding 10 years.
c. should be amortised on a systematic basis over their useful lives.
d. should not be amortised but tested each year for impairment.
Correct answer: c
Learning objective 15.7 ~ describe the nature of intangible assets and the problems of accounting for them.
56. The excess of the purchase price of a business over the fair values of the identifiable net assets acquired is a measure of:
a. profit.
b. net fair value.
c. revaluation surplus.
d. purchased goodwill.
Correct answer: d
Learning objective 15.8 ~ describe the nature of goodwill and how to account for goodwill acquired by an entity.
57. IFRS 3/AASB 3 requires that, if the amount paid for a business is less than the sum of the fair value of the net identifiable assets acquired, and this is a genuine bargain purchase, then the difference is to be:
a. taken directly to an equity account.
b. offset against any goodwill previously acquired.
c. used to reduce the value of the monetary assets acquired.
d. recognised immediately as a gain in the income statement.
Correct answer: d
Learning objective 15.8 ~ describe the nature of goodwill and how to account for goodwill acquired by an entity.
58. Goodwill is defined in IFRS 3/AASB 3 Business Combinations as:
a. an asset having no physical substance.
b. future economic benefits arising from assets that are not capable of being individually identified and separately recognised.
c. an asset not specifically brought to account.
d. the benefits of a favourable customer relations.
Correct answer: b
Learning objective 15.8 ~ describe the nature of goodwill and how to account for goodwill acquired by an entity.
59. White Ltd acquired the net assets of Knight Ltd for $240 000. At the date of purchase, the fair values of the net assets acquired were:
$
Plant and equipment 190 000
Inventory 65 000
Bank overdraft (25 000)
The value of purchased goodwill recorded by White Ltd is:
a. $0.
b. $10 000.
c. $15 000.
d. $40 000.
Correct answer: b
Feedback: $10 000 = Purchase price minus fair value of net assets acquired = $240 000 – $225 000 ($190 000 + $65 000 – $25 000).
Learning objective 15.8 ~ describe the nature of goodwill and how to account for goodwill acquired by an entity.
60. Which of the following does not contribute to the value of purchased goodwill?
a. Customer confidence
b. Manufacturing efficiency
c. A franchise
d. Good employee relations
Correct answer: c
Learning objective 15.8 ~ describe the nature of goodwill and how to account for goodwill acquired by an entity.
61. Which of the following statements about goodwill is correct?
a. Goodwill is classified as a current asset.
b. Goodwill can be purchased or sold as a separate item.
c. Under IFRS 3/AASB 3 goodwill must be amortised.
d. Goodwill arises from many factors, such as customer confidence, superior management and a favourable location.
Correct answer: d
Learning objective 15.8 ~ describe the nature of goodwill and how to account for goodwill acquired by an entity.
62. According to IFRS 3/AASB 3 purchased goodwill:
a. should be written off immediately on recognition.
b. should be written off over the useful life of the asset.
c. should remain in the accounts at cost less any accumulated impairment losses.
d. should be written off by a systematic charge against profits using the straight-line method, over a period not exceeding 20 years.
Correct answer: c
Learning objective 15.8 ~ describe the nature of goodwill and how to account for goodwill acquired by an entity.
63. On 1 June 2019 Goodwin Limited acquired the business of Monty Inc. for $280 000. The carrying amount of Monty Inc's net assets at the time of the acquisition was $215 000 while independent valuers calculated their fair value at $250 000. Goodwin Limited should debit ‘Goodwill’ for the amount of:
a. $0.
b. $30 000.
c. $35 000.
d. $65 000.
Correct answer: b
Feedback: $280 000 – $250 000
Learning objective 15.8 ~ describe the nature of goodwill and how to account for goodwill acquired by an entity.
64. Cobra Ltd acquired the business of Rattle Ltd for a cash payment of $820 000. The carrying amount of Rattle Ltd’s assets at the time of purchase was $690 000 while the independent fair value was $760 000. There were no liabilities. What is the value of the purchased goodwill recorded by Cobra Ltd?
a. $0
b. $60 000
c. $70 000
d. $130 000
Correct answer: b
Feedback: $820 000 – $760 000
Learning objective 15.8 ~ describe the nature of goodwill and how to account for goodwill acquired by an entity.
65. In rare cases the cost of purchasing a business combination may be less than the sum of the fair values of the identifiable assets and liabilities acquired (bargain purchase). Which of the following statements concerning the requirements of IFRS 3/AASB 3 in this situation is correct?
a. A genuine bargain purchase should be recognised immediately as a gain that is an addition to profit.
b. The buyer and the seller must adjust the value to the consideration to eliminate the bargain purchase.
c. Any bargain purchase difference should be eliminated by adjusting the values of the assets acquired as it is not possible to recognise a bargain purchase.
d. A genuine bargain purchase should be recognised progressively as an addition to profit over a 5-year period.
Correct answer: a
Learning objective 15.8 ~ describe the nature of goodwill and how to account for goodwill acquired by an entity.
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Test Bank | Financial Accounting 10e by John Hoggett
By John Hoggett