Ch14 | Asset Depreciation – Complete Test Bank – 10e

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Testbank

to accompany

Financial accounting

10^th edition

by

Hoggett et al.

© John Wiley & Sons Australia, Ltd 2018

Chapter 14: Non-current assets: acquisition and depreciation

Multiple-choice questions

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

a. intention to sell the asset.

b. fact that they have a physical existence.

c. fact that the asset will provide future benefits.

d. intention to use the asset for the future production of goods and services.

Correct answer: d

Learning objective 14.1 ~ explain the nature of property, plant and equipment.

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

a. current assets.

b. contra assets.

c. non-current assets.

d. non-current liabilities.

Correct answer: c

Learning objective 14.1 ~ explain the nature of property, plant and equipment.

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

a. Land

b. Stock of coal

c. Storage depot

d. Mining equipment

Correct answer: b

Learning objective 14.1 ~ explain the nature of property, plant and equipment.

4. 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?

a. Legal fees for the purchase of the building

b. Expenditure on initial repairs to the floor of the building

c. Stamp duty paid on the building purchase

d. The cost of installing an air conditioning system

Correct answer: d

Learning objective 14.2 ~ compute the cost of property, plant and equipment.

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

a. invoice cost.

b. carrying value in the previous owner’s books.

c. invoice cost plus freight inwards, plus other costs of acquiring the asset.

d. purchase cost plus any incidental costs directly attributable to acquiring the asset and getting it ready for use.

Correct answer: d

Learning objective 14.2 ~ compute the cost of property, plant and equipment.

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

a. DR Bank $45 000; CR Motor vehicles $45 000

b. DR Motor vehicles $45 000; CR Bank $45 000

c. DR Motor vehicles $45 000; CR Equity $45 000

d. DR Motor vehicles $45 000; CR Accounts receivable $45 000

Correct answer: b

Learning objective 14.2 ~ compute the cost of property, plant and equipment.

7. Green Pastures has acquired equipment and incurred the following expenses.

$

Gross invoice price, net of GST, subject to terms of 5/10, n/30) 46 500

Transportation costs to get equipment to factory 3 200

Speeding ticket incurred by company driver while
delivering equipment to the factory 120

Cost to repair wall damaged during installation 1 200

Special permit to allow wide load on freeway 600

The equipment should be recorded in Green Pastures’ records at:

a. $46 500.

b. $49 700.

c. $50 300.

d. $51 500.

Correct answer: c

Feedback: $46 500 + $3 200 + $600

Learning objective 14.2 ~ compute the cost of property, plant and equipment.

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

a. cost.

b. market value.

c. depreciable value.

d. net realisable value.

Correct answer: a

Learning objective 14.2 ~ compute the cost of property, plant and equipment.

9. 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?

1. Buildings
2. Motor vehicles
3. Storage space
4. Equipment and Machinery

a. I and III only

b. II and IV only

c. I, II and IV only

d. I, II, III and IV.

Correct answer: d

Learning objective 14.2 ~ compute the cost of property, plant and equipment.

10. Harrison Company incurred the following expenses in acquiring fixtures and fittings for their warehouse. $

Gross invoice price (including GST) 33 000

Transportation costs to get the fixtures and fittings to the warehouse

(net of GST) 400

Twelve month insurance policy on the fixtures and fittings (net of GST) 800

The equipment should be recorded in the company’s books at:

a. $30 400.

b. $31 200.

c. $33 000.

d. $34 200.

Correct answer: a

Feedback: $30 400 = $30 000 + $400.

Learning objective 14.2 ~ compute the cost of property, plant and equipment.

11. 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:

a. replacement value.

b. independent valuation.

c. fair value at date of acquisition.

d. market value at the date of acquisition.

Correct answer: c

Learning objective 14.3 ~ apportion the cost of a lump-sum payment for multiple asset acquisitions.

12. Buster Limited purchased a small clothing company for $180 000 (net of GST). The fair values of the individual assets acquired (net of GST) were as follows.

$ $

Building 80 000 Shop fittings 50 000

Land 70 000 Equipment 20 000

What amount should Buster Limited record for the shop fittings?

a. $22 727

b. $40 909

c. $50 000

d. $61 111

Correct answer: b

Feedback: $50 000/$220 000 x $180 000

Learning objective 14.3 ~ apportion the cost of a lump-sum payment for multiple asset acquisitions.

13. Kev’s Truck Company purchased three trucks for $150 000 each by paying a deposit of $200 000 and agreeing to pay the balance at the end six months. Ignoring GST, the journal entry to record the acquisition is:

$ $

a. Trucks 450 000

Sundry creditor 450 000

b. Trucks 450 000

Cash 200 000

Sundry creditor 250 000

c. Cash 200 000

Sundry creditor 250 000

Trucks 450 000

d. Trucks 200 000

Cash 200 000

Correct answer: b

Learning objective 14.3 ~ apportion the cost of a lump-sum payment for multiple asset acquisitions.

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

a. Net realisable value at acquisition date

b. Independent valuation at acquisition date

c. Replacement cost at acquisition date

d. Fair value at acquisition date

Correct answer: d

Learning objective 14.3 ~ apportion the cost of a lump-sum payment for multiple asset acquisitions.

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

a. the balance sheet as a liability.

b. the income statement as an expense.

c. the balance sheet as a deduction from the related asset.

d. both the balance sheet and the income statement.

Correct answer: c

Learning objective 14.3 ~ apportion the cost of a lump-sum payment for multiple asset acquisitions.

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

a. DR Motor vehicles $44 000; CR Bank $44 000

b. DR Motor vehicles $40 000; DR GST receivable $4000; CR Bank $44 000

c. DR Motor vehicles $44 000; CR Bank $40 000; CR GST collected $4000

d. DR Motor vehicles $36 000; DR GST receivable $4000; CR Bank $40 000

Correct answer: b

Learning objective 14.3 ~ apportion the cost of a lump-sum payment for multiple asset acquisitions.

17. Depreciation is classified as a(n):

a. expense in the income statement.

b. liability in the balance sheet.

c. contra asset in the balance sheet.

d. contra expense in the income statement.

Correct answer: a

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

18. Which of the following statements is incorrect?

a. Depreciation is an internal transaction.

b. The cash at bank account is affected by depreciation.

c. Depreciation causes cash flow from operations to be greater than profit.

d. The total depreciation charged over the life of the asset should be the same regardless of the method of depreciation used.

Correct answer: b

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

19. The assumption underlying the reducing balance method of depreciation is:

a. the asset makes a lower contribution to income in the earlier years of its life and a higher contribution in the later years.

b. the asset makes the same contribution to income in each year of its life.

c. the contribution the asset makes to income depends on its usage.

d. the asset makes a higher contribution to income in the earlier years of its life.

Correct answer: d

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

20. Which of the following items are required to calculate depreciation?

1. Estimated residual value
2. Estimated useful life
3. Cost or revalued amount
4. Method of depreciation

a. I and III only

b. II and III only

c. I, II and IV only

d. I, II, III and IV

Correct answer: d

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

21. 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?

a. $1 250

b. $2 500

c. $4 000

d. $5 000

Correct answer: b

Feedback: $2500. Depreciable amount on revision date/remaining useful life = $10 000/4.

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

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

a. straight-line value.

b. carrying amount.

c. depreciable amount.

d. accumulated depreciation.

Correct answer: c

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

23. 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:

a. smaller.

b. greater.

c. the same.

d. do not have enough information.

Correct answer: b

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

24. The nature of depreciation can best be described as:

a. the allocation of the cost of an asset over its useful life.

b. the reduction in value of an asset according to the change in its market value.

c. the writing down of the value of an asset according to the decline in its physical efficiency.

d. a charge against profits to provide funds for asset replacement.

Correct answer: a

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

25. All of the following are common methods used to calculate depreciation except for:

a. Straight-line method

b. Reducing-balance method

c. Units-of-production method

d. Sum-of-the-provisions method

Correct answer: d

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

26. Which of the following statements concerning the sum-of-the-years’-digits method of depreciation is correct?

a. It is an alternative name for the reducing balance method.

b. The depreciation charge per annum decreases over the life of the asset.

c. It is the most common method of depreciation used in Australia.

d. The formula is: carrying amount multiplied by remaining years of useful life.

Correct answer: b

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

27. Depreciation charged at the end of the accounting period is a/an entry.

a. Closing

b. Reversing

c. Correcting

d. Adjusting

Correct answer: d

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

28. According to IAS 16/AASB 116, which of the following are factors contributing to the decline in an asset’s future economic benefits?

1. Inflation
2. Wear and tear
3. Commercial obsolescence
4. Technical obsolescence

a. I, III and IV only

b. I, II and IV only

c. II, III and IV only

d. I, II, III and IV

Correct answer: c

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

29. The Novice Corporation purchased a machine for $80 000 on 1 January 2018. The machine is expected to have a useful life of 5 years, a residual value of zero, and a production capacity of 120 000 units before it is scrapped. The Novice Corporation uses the units-of-production method to calculate depreciation. For the year ending 31 December 2018, the depreciation was $16 000. The number of units produced during 2019 is 30 000. The carrying amount of the machine at 31 December 2019 is:

a. $16 000

b. $20 000

c. $30 000

d. $44 000

Correct answer: d

Feedback: $44 000 = cost less accumulated depreciation = $80 000 – ($ 16 000 + $20 000) Depreciation 2018. Depreciation 2019 ($80 000 x 30 000/120 000).

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

30. The allocation of the cost of an asset over its estimated useful life best describes the nature of:

a. residual value.

b. depreciation.

c. obsolescence.

d. carrying amount.

Correct answer: b

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of

depreciation expense using several different cost allocation methods.

31. Which of the following statements about depreciation is true?

a. The cash account is affected by depreciation charges.

b. Accumulated depreciation represents the amount of an asset's cost that has been transferred to depreciation expense to date.

c. Accumulated depreciation is shown in the financial statements as a contra-expense account.

d. Depreciation represents the amount of cash available to replace assets when they wear out.

Correct answer: b

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

32. Which of the following will have an effect on the amount of depreciation charged on an asset in a particular accounting period?

1. The size of the asset
2. Method of depreciation used
3. Cost or revalued amount of asset
4. Estimated residual value of asset

a. I, II and III only

b. I, III and IV only

c. II, III and IV only

d. I, II, III and IV

Correct answer: c

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

33. The underlying assumption of the straight-line method of depreciation is:

a. The asset’s contribution to income is variable.

b. The asset makes the same contribution to income each year.

c. The asset’s contribution to income relates mainly to obsolescence.

d. The asset makes a higher contribution to income in the earlier years of its life.

Correct answer: b

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

34. Which of the following are ways in which a residual value can be recovered from an asset on its disposal?

1. Trade in
2. Sell second-hand
3. Gift the asset to charity
4. Sell for scrap

a. I, II, III and IV

b. I, II and III only

c. II, III and IV only

d. I, II and IV only

Correct answer: d

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

35. Baxter Ltd purchased equipment at the start of its first year of operation.

Cost (net of GST) $36 000

Residual $ 4 000

Estimated Useful Life 5 years

Under the straight-line method, the accumulated depreciation at the end of year 3 will be:

a. $6 400

b. $7 200

c. $19 200

d. $21 600

Correct answer: c

Feedback: ($36 000 - $4000) x 3/5

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of

depreciation expense using several different cost allocation methods.

36. Hightop‘s balance sheet of 30 June 2018 shows a motor vehicle at a cost price of $46 000 less accumulated depreciation of $17 500. Depreciation is calculated on a straight-line basis. If the vehicle had a useful life of 6 years at the time of purchase and a residual value of $4 000, its carrying amount on 1 July 2020 is:

a. $7 666

b. $13 160

c. $14 500

d. $17 500

Correct answer: c

Feedback: Annual depreciation = ($46 000 - $4 000) / 6 = $7 000 p.a.

Carrying amount = $ 46 000 – ($17 500 + $7000 + $7000) = $14 500

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

37. The Delivery Vehicles account in the ledger of Transit Co. has a balance of $55 000 which is the cost of two second-hand trucks purchased on 1 July 2017. The Accumulated Depreciation – Delivery Vehicles account has a balance on 30 June 2020, before adjusting entries, of $20 000. No additional delivery trucks have been acquired or

sold. The residual value of each truck is estimated to be $2500 and the straight-line depreciation method is used. What is the necessary adjusting entry to record annual depreciation on 30 June 2020?

a. DR Depreciation expense $5 000; CR Delivery vehicles $5 000

b. DR Accumulated depreciation $10 000; CR Delivery vehicles $10 000

c. DR Depreciation expense $5 000; CR Cash at bank $5 000

d. DR Depreciation expense $10 000; CR Accumulated depreciation $10 000

Correct answer: d

Feedback: A balance of $20 000 in the accumulated depreciation account after 2 years means depreciation on the two trucks is $10 000 per annum.

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

38. On 1 January 2018 Panorama Ltd acquired equipment for $22 000, net of GST. The estimated residual value for the equipment is zero. Depreciation is calculated at 10% p.a. on the diminishing-balance basis. The depreciation expense for the year ended 31 December 2020 is:

a. $1604.

b. $1782.

c. $1980.

d. $2200.

Correct answer: b

Feedback: ($22 000 – [$2200 + $1980] × 10%)

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of

depreciation expense using several different cost allocation methods.

39. Mighty Models acquired a machine for $20 000 on 31 December 2018. Calculate depreciation for the year ended 31 December 2020 using the diminishing-balance method at 12% p.a. Assume a nil residual value.

a. $1800

b. $2000

c. $2112

d. $2400

Correct answer: c

Feedback: $2112 = $20 000 – ($20 000 x 12%) x 12%.

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

40. On 31 December 2018 a new motor vehicle with a life of five years and no estimated residual value was purchased by a business at a cost of $48 000, net of GST. The diminishing-balance depreciation method is used at a rate of 20% p.a. What is the carrying value of the motor vehicle at 31 December 2020 after charging depreciation for that year?

a. $7 680

b. $9 600

c. $30 720

d. $38 400

Correct answer: d

Feedback: $48 000 – ($48 000 x 20%) = $38 400 – ($38 400 x 20%) = $30 720

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of

depreciation expense using several different cost allocation methods.

41. The correct statement concerning the diminishing-balance method of depreciation is:

a. It is an appropriate method when proportionately more of the asset’s benefits are consumed in the early years of its life.

b. It is also known as the units-of-production method.

c. It charges the same amount of depreciation each period.

d. It applies a declining percentage factor to the asset’s original cost.

Correct answer: a

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of

depreciation expense using several different cost allocation methods.

42. Molly’s Manufacturing purchased a machine for $80 000 on 1 January 2018. The machine is expected to have a useful life of 5 years, no residual value, and to produce a total of 50 000 units before it is scrapped. Assuming Molly’s Manufacturing uses the units-of-production method and actual production during the machine’s first year of use is 12 000 units, the depreciation expense for 2018 is:

a. $7 500

b. $12 000

c. $16 000

d. $19 200

Correct answer: d

Feedback: $19 200 = 12 000 units x $1.60 per unit ($80 000/50 000 units).

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

43. If the straight-line method of depreciation rather than the reducing-balance method is selected, in the early years of the asset’s life the depreciation charge will be comparatively:

a. greater.

b. smaller.

c. the same.

d. cannot say.

Correct answer: b

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

44. A retailer purchased a delivery van for $34 000 on 1 July 2018. It was planned to keep the vehicle until it had done 80 000 kilometres and then to trade it in. The expected trade in value was $6 000. A schedule of actual distance travelled was:

30/6/19 28 000 km

30/6/20 25 000 km

30/6/21 15 000 km

30/6/22 12 000 km

Using the units-of-production method the amount of depreciation charged for the year ended 30 June 2021 was:

a. $3500.

b. $4200.

c. $5250.

d. $9800.

Correct answer: c

Feedback: [$34 000 – $6000]/80 000 km = 35c per km. Depreciation charged for 2021 is 15 000 km × 35c per km.

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

45. A machine was purchased on 2 January 2018 for $70 000, net of GST. The machine had an estimated residual value of $12 000 and an estimated useful life of 6 years. Using the sum-of-the-years'-digits method and rounding to the nearest dollar, depreciation expense for the year ended 31 December 2019 , is:

a. $13 810.

b. $16 667.

c. $16 571.

d. $20 000.

Correct answer: a

Feedback: ($70 000 – $12 000) × 5/21

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of

depreciation expense using several different cost allocation methods.

46. Which of the following is not an advantage of the use of accelerated depreciation methods for tax purposes as opposed to the straight-line method?

a. Lower tax payments are made during the early years of the asset's life.

b. The total amount of tax paid over the lifetime of the asset is reduced.

c. The business has the interest-free use of deferred tax dollars until the later years of the asset's life.

d. For many assets, the combination of decreasing depreciation expense of the asset and increasing repairs and maintenance expense tends to equalise the total periodic expense of holding the asset.

Correct answer: b

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of

depreciation expense using several different cost allocation methods.

47. When an asset’s estimated useful life and residual value turn out to be materially incorrect and the asset has not reached the end of its useful life, the correct procedure to follow is:

a. re-issue corrected financial statements for all prior years.

b. re-issue corrected financial statements for only the most recent three years.

c. ignore the problem since estimates are not expected to be exact anyway.

d. allocate the remaining depreciable amount over the remaining useful life.

Correct answer: d

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of

depreciation expense using several different cost allocation methods.

48. An asset purchased for $120 000 with a zero residual value was expected to last for six years before it needed replacing. If, at the end of the fourth year, it was decided to extend the asset’s total useful life by two years (new remaining life is now eight years), the new depreciation charge using the straight-line approach would be:

a. $5 000

b. $10 000

c. $12 000

d. $20 000

Correct answer: b

Feedback: Annual depreciation at beginning of asset’s life = $120 000 / 6 = $20 000. The depreciable amount at the end of year 4 = $120 000 – (4 x $20 000) = $40 000. Remaining useful life is 4 years. New annual depreciation amount = $40 000 / 4 = $10 000.

Learning objective 14.5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

49. Wong purchased a computer for $15 000, net of GST. Originally it had an estimated useful life of 4 years and a residual value of $3000. The straight-line method is used. At the start of the third year of usage Wong revised the life of the computer to a total life of 6 years. The residual value had not changed. What depreciation expense should be recorded for the computer for year 3?

a. $1500

b. $1000

c. $3000

d. $4000

Correct answer: a

Feedback: Depreciable amount at revision date/remaining useful life = $6000/4

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

50. The most commonly used depreciation method in Australia, as disclosed by a survey of the annual reports of listed companies, is:

a. straight-line.

b. units-of-use.

c. sum-of-the digits.

d. reducing-balance.

Correct answer: a

Learning objective 14. 5 ~ discuss the nature of depreciation and determine the amount of depreciation expense using several different cost allocation methods.

51. The cost of a major overhaul of equipment that extends its total useful life by five years would be:

a. treated as an expense.

b. charged to a separate asset account and depreciated over five years.

c. cause for an adjustment to prior years’ depreciation on the equipment.

d. added to the carrying amount of the asset causing future depreciation to be increased.

Correct answer: d

Learning objective 14.6 – describe how to account for subsequent costs incurred in relation to property, plant and equipment

52. Under IAS 16/AASB 116, the cost of the annual service of a machine:

a. added to the original cost of the machine.

b. should be capitalised and added to the carrying amount of the machine.

c. should be written off as repairs and maintenance.

d. can be either written off as repairs and maintenance or added to the carrying amount of the machine.

Correct answer: c

Learning objective 14.6 – describe how to account for subsequent costs incurred in relation to property, plant and equipment

53. The cost of replacing the engine on a motor vehicle, which increased the vehicles’ useful life by five years, was charged as an expense rather than being capitalised and added to the carrying amount of the vehicle. This error would result in profit being:

a. overstated, fixed assets would be understated and equity would be understated.

b. understated, fixed assets would be understated and equity would be overstated.

c. overstated, fixed assets would be overstated and equity would be overstated.

d. understated, fixed assets would be understated and equity would be understated.

Correct answer: d

Learning objective 14.6 – describe how to account for subsequent costs incurred in relation to property, plant and equipment

54. The correct statement concerning subsequent costs incurred in relation to a depreciable asset after its original acquisition is:

a. If the subsequent cost of replacing part of an item of equipment is added to the carrying amount of that asset then the carrying amount of the part that is replaced must be decommissioned.

b. The replacement of the tyres on a motor would add to the expected life of the vehicle.

c. The painting of a building would normally be considered an improvement and capitalised.

d. Subsequent costs should nearly always be capitalised rather than charged to an expense account.

Correct answer: a

Learning objective 14.6 – describe how to account for subsequent costs incurred in relation to property, plant and equipment.

55. If the cost of a major service on a motor vehicle, which did not increase the vehicles’ useful life was incorrectly capitalised and added to the carrying amount of the vehicle rather than being expensed, expenses would be:

a. overstated, fixed assets would be overstated and equity would be understated.

b. understated, fixed assets would be overstated and equity would be overstated.

c. understated, fixed assets would be understated and equity would be overstated.

d. understated, fixed assets would be overstated and equity would be understated.

Correct answer: b

Learning objective 14.6 – describe how to account for subsequent costs incurred in relation to property, plant and equipment

56. Which of the following are advantages of maintaining a subsidiary ledger for depreciable assets?

1. It provides information for the preparation of income tax returns.
2. It provides information concerning servicing of the assets.
3. It provides information for internal control over assets.
4. It provides information to support insurance claims in the event of loss from theft or accident.

a. I, II and III only

b. I, II and IV only

c. II and IV only

d. I, II, III and IV

Correct answer: d

Learning objective 14.6 ~ describe how to account for subsequent costs incurred in relation to property, plant and equipment.

57. A separate record that contains detailed information concerning individual assets is known as a(n):

a. stock card.

b. fixed asset register.

c. special journal.

d. asset control account.

Correct answer: b

Learning objective 14.7 – record property and plant records in the property and plant subsidiary ledger.

58. Which of the following should not to be recorded in the ‘office equipment’ ledger account?

a. Photocopier

b. Computers

c. Office curtains and carpets

d. Printer / Fax machine

Correct answer: c

Learning objective 14.7 – record property and plant records in the property and plant subsidiary ledger.

59. For a clothing manufacturer which assets would be likely to be grouped together in a ledger account titled ‘factory plant and equipment’?

1. Sewing machines
2. Cutting tables
3. Motor vehicles
4. Office equipment
5. Buttonholer

a. i, ii, v

b. i, ii, iii

c. iii, iv, v

d. ii, iii, iv

Correct answer: a

Learning objective 14.7 – record property and plant records in the property and plant subsidiary ledger.

60. How many of the following items of information about office equipment are required to be disclosed in the financial statements prepared for external reporting?

 Depreciation method used

 Aggregate cost of office equipment

 Aggregate Accumulated Depreciation of office equipment

 Depreciation rates used or useful lives of office equipment

 The total number of assets held in the office equipment grouping

a. 2

b. 3

c. 4

d. 5

Correct answer: c

Feedback: The total number of assets held in the office equipment grouping is NOT required to be disclosed.

Learning objective 14.8 - illustrate the reporting requirements for property, plant and equipment and depreciation in an entity’s financial reports.

61. When examining an external financial report, a ratio that can be useful in determining the approximate age of the assets is:

a. accumulated depreciation/average recorded property, plant and equipment at cost.

b. net sales/average total assets.

c. average total assets/net sales.

d. net sales/ average property, plant and equipment.

Correct answer: a

Learning objective 14.9 – analyse and interpret information on property, plant and equipment and appreciate the critical nature and importance of management decisions in relation to PPE

62. Which of the following statements concerning fixed assets is not true?

a. knowledge of the approximate average age of fixed assets can be useful in assessing the efficiency of the assets.

b. knowledge of the approximate average age of fixed assets can be useful in deciding whether the assets may need to be replaced in the near future.

c. knowledge of the approximate average age of fixed assets can be calculated by the formula accumulated depreciation divided by average recorded cost of fixed assets.

d. knowledge of the approximate average age of fixed assets can be useful in deciding whether the asset register is up-to-date.

Correct answer: d

Learning objective 14.9 – analyse and interpret information on property, plant and equipment and appreciate the critical nature and importance of management decisions in relation to PPE

63. The formula to calculate the asset turnover ratio is:

a. average total assets divided by net sales.

b. net sales divided by average total assets.

c. average cost of assets divided by depreciation expense.

d. depreciation expense divided by average cost of assets.

Correct answer: b

Learning objective 14.9 – analyse and interpret information on property, plant and equipment and appreciate the critical nature and importance of management decisions in relation to PPE

64. A reduction in the ratio net sales/average property, plant and equipment over time could mean:

a. there is an elevated level of inflation.

b. the price of plant and equipment is falling.

c. the firm may be heading for a liquidity crisis.

d. there is an over-investment in plant and equipment.

Correct answer: d

Learning objective 14.9 – analyse and interpret information on property, plant and equipment and appreciate the critical nature and importance of management decisions in relation to PPE

65. refers to the management function of planning and financing of capital investment.

a. Differential analysis

b. Capital budgeting

c. Analysis and interpretation

d. Net present value analysis

Correct answer: b

Learning objective 14.9 – analyse and interpret information on property, plant and equipment and appreciate the critical nature and importance of management decisions in relation to PPE