Depreciation of Assets | Test Bank - 9e

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Chapter 05 Testbank

1. A depreciable asset is a non-current asset having a limited useful life.

True   False

2. AASB 138 prohibits the capitalisation of expenditures on certain types of intangible assets.

True   False

3. Three key issues associated with determining depreciation expense are the depreciable base, useful life and method of cost apportionment.

True   False

4. When we do an analysis of financial statements, we consider whether depreciation expense has been based on asset costs that are low relative to what the replacement cost would currently be for the assets.

True   False

5. AASB 116 does not provide the disclosure requirements in relation to depreciation.

True   False

6. Yellow Ltd purchased an asset six years ago for $75 000. At that time it was deemed to have a residual value of $15 000 and estimated useful life of six years. After four years of use, the asset was overhauled at a cost of $35 000. The overhaul extended the useful life of the asset by four more years but reduced its residual value to $7 000. Assuming the straight-line method of depreciation is applied; calculate the depreciation expense in the year after the overhaul (rounded to the nearest dollar)?

A. $8 000

B. $10 000

C. $8 800

D. $10 500

7. Red Enterprises purchased a vehicle for $35 000. A further $5 000 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 seven years' time. The salvage value is estimated to be $6 500 after 15 years and $15 000 at the end of seven years. What is the depreciation for the first two years, using the declining-balance method of depreciation (rounded to the nearest dollar)?

A. Year 1: $5 230, Year 2: $4 546

B. Year 1: $4 564, Year 2: $4 043

C. Year 1: $3 990, Year 2: $3 535

D. Year 1: $3 269, Year 2: $2 841

8. Forwind Ltd has recently acquired a machine that cost $29 000. The machine normally remains productive for six years. It is expected to continue in the production process at Forwind for eight years due to the excellent maintenance and operating policies in place at Forwind. The machine has the capacity to produce 20 000 units over a six-year life and 27 000 units over an eight-year life. Its salvage value after six years is expected to be $2 500 and after eight years $1 000. What depreciation would be charged in the first year of the machine's operation when 4 000 units were produced (rounded to the nearest dollar)?

A. $5 600

B. $4 148

C. $4 296

D. $5 300

9. Profit on the sale of an asset is calculated:

A. by subtracting the disposal proceeds from the carrying amount of the asset

B. by subtracting the fair value of asset from the net proceeds on sale

C. by subtracting disposable value from the historical cost of the asset

D. by subtracting the carrying amount from the net proceeds on disposal

10. Cutting Edge Ltd purchased a state-of-the-art hedge trimming tractor for a contract to maintain country roadside hedges for a local council. The manufacturer of the tractor stated in marketing material that the tractor is able to trim 700 000 kilometres of hedges in its operating life. Cutting Edge believes that the particularly woody type of hedges they have been contracted to maintain means that the life of the tractor is likely to be 15 per cent less than the manufacturer specified. The tractor cost $100 000 and is expected to have a salvage value at the end of its useful life of $30 000. The tractor trimmed 60 000 kilometres this period. What is the depreciation charge for this period (rounded to the nearest dollar)?

A. $7 059

B. $6 000

C. $10 084

D. $9 524

11. 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. The operational life of the machine is expected to be 12 years at the end of which its salvage value is estimated to be $5 000. 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 nine 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 dollar)?

A. $6 167; $7 596; $1 429

B. $6 167; $7 596; $0

C. $6 500; $7 611; $1 111

D. $5 417; $6 846; $1 429

12. Fast Movers Ltd purchased a machine on the first day of their financial year: 1 January 2010. 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 2012 (three years later) the machine is sold for $65 000. What are the appropriate journal entries to record the disposal of the machine in line with the requirements of AASB 116?

A.

B.

C.

D.

13. AASB 116 requires disclosure of a reconciliation of the carrying amount at the beginning and end of the period for depreciable assets. This reconciliation includes:

A. additions

B. acquisitions through business combinations

C. depreciation.

D. All of the given answers are correct.

14. Which of the following is not an intangible asset?

A. Brand names

B. Copyrights

C. Patents

D. Equipment

15. In determining how to allocate the cost of an asset to the period’s profit or loss, three key issues must be addressed. Which of the following is not one of these issues?

A. What depreciable base should be used for the asset?

B. What is the asset’s useful life?

C. What method of cost apportionment is most appropriate for the asset?

D. Who is the owner of the asset?

16. The depreciable amount is also called the _________________.

A. depreciable base

B. historical amount

C. depreciable asset

D. carrying amount

17. AASB 116 does not mandate the use of a particular method of depreciation, but rather it indicates that the basis chosen for cost apportionment should be that which best reflects the underlying physical, technical, commercial and, where appropriate, ____________.

A. legal facts

B. political facts

C. geographical facts

D. managerial facts

18. The method of depreciation that allocates a greater amount of depreciation in the early years of an asset’s life is the:______________.

A. sum-of-digits method

B. units-of-production method

C. straight-line method

D. None of the given answers are correct.

19. AASB 116 requires the ‘_______ approach’ be used when accounting for items of property, plant and equipment.

A. diminishing balance

B. historic cost

C. fair value

D. components

20. Three key issues associated with determining depreciation expense are the depreciable base, ___________ and method of cost apportionment.

A. useful life

B. depreciable amount

C. salvage value

D. purchase cost

21. In relation to expectations about the useful life (and the residual value) of a non-current asset, paragraph 51 of AASB 116 requires that: ‘The __________and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors’ (AASB 116).

A. depreciable asset

B. residual value

C. depreciable base

D. cost apportionment

22. Irrespective of the method of disposal, accounting treatments follow three basic steps: Which of the following is not one of these steps?

A. Eliminate from the accounts the cost (or revalued amount) and the accumulated depreciation

B. Record the consideration received (if any)

C. Record the gain or loss on disposal

D. Include in the accounts the cost (or revalued amount) and the accumulated depreciation

23. AASB 138 prohibits the capitalisation of expenditure on certain types of __________.

A. intangible assets

B. tangible assets

C. current assets

D. non-current assets

24. When modifications or improvements are made to existing non-current assets and the expenditure is material and considered to enhance the service potential of the asset, such expenditure should be ________ to the extent that particular accounting standards do not preclude such treatment.

A. expensed

B. capitalised

C. added to the current year profit

D. added to the retained earnings

25. Useful life is defined as: (a) the period over which an asset __________ by an entity.

A. can be economically used

B. is technically viable for use

C. is scrapped and sold

D. is expected to be available for use

26. AASB 116 requires the ‘_________’ approach to be used when accounting for items of property, plant and equipment.

A. components

B. wholesome

C. delayed

D. instant

27. The depreciation expense charged to each accounting period is an estimate that involves the exercise of__________judgement.

A. personal

B. professional

C. legal

D. political

28. If a company finds retrospectively that the expected pattern of consumption of future economic benefits of an asset has changed, how must this be accounted for and which standard applies?

______________________________________________________________________________

29. Discuss the disclosure requirements in relation to depreciation.

______________________________________________________________________________

30. What is a depreciation expense?

______________________________________________________________________________

31. What are the three main issues to consider when determining depreciation expense?

______________________________________________________________________________

32. What is meant by impairment testing?

______________________________________________________________________________

33. The terms ‘depreciation’ and ‘amortisation’ are often used interchangeably. Explain the differences in their use.

______________________________________________________________________________

34. What is meant by the ‘useful life of an asset’?

______________________________________________________________________________

35. Where expenditure made on modifications or improvements of an asset is capitalised, what is its impact on an entity’s statement of profit or loss?

______________________________________________________________________________

36. Discuss briefly the approach used in the context of the depreciation of separate components.

______________________________________________________________________________

37. Briefly explain when depreciation of an asset begins.

______________________________________________________________________________

38. What are intangible assets? Give some examples.

______________________________________________________________________________

Chapter 05 Testbank