Research methods in accounting Exam Questions Deegan Ch.6

Chapter 06 Testbank

1. If an asset's carrying amount is impaired, AASB 116 requires all assets in the same class to be revalued.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-07 Understand what an 'impairment loss' is and know when and how to account for one in accordance with AASB 136 Impairment of Assets.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Impairment of assets
 

2. If an asset is subject to depreciation or amortization there is no longer a need to test the asset for impairment.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-01 Be able to measure the cost of property, plant and equipment.
Section: Recognition of impairment losses
Topic: Impairment testing for assets
 

3. Depreciation method used and depreciation rates are required to be disclosed for taxation purposes.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-01 Be able to measure the cost of property, plant and equipment.
Section: Disclosure requirements
Topic: Disclosure of depreciation
 

4. An entity that elects the revaluation model to measure a class of asset is permitted to revert back to the cost model provided that this will provide more relevant and reliable information.  

AACSB: Analytic
Difficulty: Medium
Learning Objective: 06-12 Be able to explain possible motivations that might drive an organisation to elect, or not elect, to revalue its non-current assets to fair value.
Learning Objective: 06-13 Know the disclosure requirements pertaining to asset revaluation and impairment losses.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Revaluation versus cost model
 

5. The revaluation model is a tool used by managers to reduce political costs.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-12 Be able to explain possible motivations that might drive an organisation to elect, or not elect, to revalue its non-current assets to fair value.
Learning Objective: 06-13 Know the disclosure requirements pertaining to asset revaluation and impairment losses.
Section: Economic consequences of asset revaluations
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Revaluation model and motivations of managers
 

6. A sale of property plant and equipment requires the derecognition of the carrying amount of the asset and any cost of replacement part capitalised.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-06 Understand the difference in accounting treatments for upward revaluations to 'fair value', as opposed to write-downs to 'recoverable amount'.
Section: Offsetting revaluation increments and decrements
Topic: Derecognition in a sale of asset
 

7. Australia is the only country that allows upward revaluations of non-current assets.  

AACSB: Analytic
Difficulty: Easy
Learning Objective: 06-10 Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisation's profits owing to changes in depreciation expenses and in final gains or losses on the sale of the revalued asset.
Section: Accounting for the gain or loss on the disposal or derecognition of a revalued non-current asset
Topic: Australian accounting for revaluation
 

8. Recoverable amount is the amount expected to be recovered through the ongoing use and subsequent disposal of an asset.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-05 Understand the meaning of 'recoverable amount' and be able to calculate it.
Section: Introduction
Topic: Recoverable amount
 

9. AASB 116 requires that where the replacement cost of a non-current asset is less than its carrying value, the asset should be written down to its replacement cost.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Recognition of impairment losses
Section: Introduction
Topic: Estimation of asset write-down
 

10. The fair value of a non-current asset is defined in AASB 116 as the gross amount for which the asset can be sold when the entity is preparing to liquidate.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-02 Understand the meaning of 'fair value'.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Fair value of an asset
 

11. Once an entity elects to value a class of assets using fair value it can switch back to cost basis measurement as long as there is justifiable reason.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-13 Know the disclosure requirements pertaining to asset revaluation and impairment losses.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Disclosure of asset measurement
 

12. AASB 136 does not require the use of present values when determining the recoverable amount of an asset.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-13 Know the disclosure requirements pertaining to asset revaluation and impairment losses.
Section: Recognition of impairment losses
Topic: Disclosure of asset measurement
 

13. The concept of conservatism requires that if a class of non-current assets is revalued a revaluation decrement should be treated as an expense of the period, whereas a revaluation increment should be treated as an increase in a reserve.  

AACSB: Analytic
Difficulty: Easy
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Revaluation decrements
Topic: Revaluation and conservatism
 

14. The process of discounting future cash flows in calculating the recoverable amount of an asset will result in a higher recoverable amount than if the cash flows are not discounted.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-05 Understand the meaning of 'recoverable amount' and be able to calculate it.
Section: Further consideration of present values
Topic: Recoverable amount estimation
 

15. AASB 116 requires that revaluation increments and decrements must be offset recorded directly to equity and not be recorded as a gain or loss.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-10 Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisation's profits owing to changes in depreciation expenses and in final gains or losses on the sale of the revalued asset.
Section: Accounting for the gain or loss on the disposal or derecognition of a revalued non-current asset
Topic: Revaluation gains and losses recognition
 

16. Entities that elect to report plant and equipment at cost less accumulated depreciation are required to disclose a valuation of plant and equipment every 3 years in a note to the accounts.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Disclosure requirements
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Disclosure of plant and equipment
 

17. Positive Accounting Theory suggests that the revalution model is income increasing because the credit is revaluation surplus.  

AACSB: Analytic
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-13 Know the disclosure requirements pertaining to asset revaluation and impairment losses.
Section: Economic consequences of asset revaluations
Topic: Revaluation treatment of gains
 

18. AASB 116 requires entities to review at least at the end of each annual reporting period to assess if the fair value of the non-current assets has changed.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Revaluation disclosures under AASB 116
 

19. AASB 116 requires that if it has been decided to revalue a class of non-current assets, the valuations must be kept up to date.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-02 Understand the meaning of 'fair value'.
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: The use of fair values
Topic: Revaluation and fair value
 

20. AASB 138 will permit some intangible assets to be revalued upwards only when there is an 'active market' for the asset.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Introduction
Topic: Revaluation of intangible assets
 

21. A class of non-current assets as defined by AASB 116 is a category of non-current assets that: 

A. were all purchased at the same time by the reporting entity.
B. all have a similar nature or function in the operations of the entity.
C. are disclosed as a single item without supplementary dissection in the financial report.
D. all have a similar nature or function in the operations of the entity, and are disclosed as a single item without supplementary dissection in the financial report.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Class of assets
 

22. By permitting some classes of assets to be valued at cost and others at fair value the AASB has: 

A. removed any confusion regarding the total balance of non-current assets.
B. forced entities to accurately reflect their financial position at any point in time.
C. created a situation where the total asset figure may be a combination of cost and fair value assessments, reducing its meaningfulness.
D. removed the opportunity for managers to act in their own self-interest as suggested by Positive Accounting Theory.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Classes of assets
 

23. Purple Co Ltd purchased an item of land 3 years ago at a cost of $700 000. Two years ago the recoverable value of the land was considered to be $550 000. In the current period the land is revalued and the fair value is now $750 000. What is the treatment of the change in value in each of the periods? 

A. Two years ago: a loss of $150 000 is recognised. The current period: a gain of $150 000 and an increase in the revaluation surplus of $50 000 is recognised.
B. Two years ago: $150 000 is debited to the revaluation surplus. The current period: $200 000 is credited to the revaluation surplus.
C. Two years ago: $150 000 is expensed in the period. The current period: $200 000 is transferred to the revaluation surplus.
D. Two years ago: $150 000 is written off to the revaluation surplus. The current period: $200 000 revenue is recognised.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-05 Understand the meaning of 'recoverable amount' and be able to calculate it.
Learning Objective: 06-08 Understand how to account for revaluations that reverse previous revaluation increments or decrements.
Section: Recognition of impairment losses
Topic: Revaluation of land
 

24. Where an asset's carrying amount based on its cost is written down to its recoverable amount, AASB 136 specifies that: 

A. since this constitutes a revaluation of the asset, all assets in that class must be revalued.
B. the amount written down is to be treated as an adjustment to the revaluation surplus.
C. the write-down is not considered to be a revaluation, so the entity is not obliged to revalue that whole class of non-current assets.
D. to the extent that the asset was revalued upward in the past, the amount of the write-off may be transferred to the revaluation surplus and any remaining amount should be expensed.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-05 Understand the meaning of 'recoverable amount' and be able to calculate it.
Section: Recognition of impairment losses
Section: Introduction
Topic: Write-downs of assets and revaluation
 

25. AASB 136 requires that: 

A. if a non-current asset is revalued, the revalued amount may be less than the recoverable amount.
B. if a non-current asset is revalued, it must be revalued to the lower of current replacement cost or net realisable value.
C. if a non-current asset is revalued, it must be revalued to the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.
D. if a non-current asset is revalued, it must be revalued to the amount for which the asset could be realised in an active market in a liquidation sale.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-07 Understand what an 'impairment loss' is and know when and how to account for one in accordance with AASB 136 Impairment of Assets.
Section: Recognition of impairment losses
Topic: Revaluation of an asset and impairment testing
 

26. AASB 116 provides guidance on fair values that states: 

A. where an active and liquid market exists for an asset, the market price represents evidence of the asset's fair value.
B. fair values are determined on the basis that an entity is a going concern.
C. where no market exists the price should be based on the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.
D. all of the given answers are correct.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-02 Understand the meaning of 'fair value'.
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: The use of fair values
Topic: Fair value of assets
 

27. Once a class of non-current assets has been revalued, AASB 116 requires that: 

A. directors continue to revalue the class of assets on an ad hoc basis.
B. revaluations must be undertaken regularly enough to ensure that the carrying amount of each asset in the class of assets does not differ materially from its fair value at reporting date.
C. all assets in the class must be revalued every 3 years.
D. revaluations must be undertaken regularly enough to ensure that the carrying amount of the class of assets does not differ from its fair value at reporting date.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Revaluation of assets under AASB 116
 

28. Where the value of revalued non-current assets does not change frequently and is not material, AASB 116 suggests that revaluations: 

A. may be undertaken when next convenient.
B. should be undertaken every 3 to 5 years.
C. may be undertaken for individual assets within a class.
D. should be suspended and the entity should switch back to cost.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-02 Understand the meaning of 'fair value'.
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: The use of fair values
Topic: Revaluation of assets under AASB 116
 

29. Revaluations increments are often a source of discussion because: 

A. historical-cost accounting has traditionally stated that unrealised holding gains should generally be treated as income.
B. a transaction with an external party is always required to recognise income.
C. revaluation increments can be used to offset previous decrements across all asset classes.
D. this model loosens debt covenant restrictions.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 06-12 Be able to explain possible motivations that might drive an organisation to elect, or not elect, to revalue its non-current assets to fair value.
Section: Economic consequences of asset revaluations
Topic: Motivations for managers to adopt a revaluation model
 

30. Manchester Ltd has a building that originally cost $850 000 and has accumulated depreciation of $120 000 as at 30 June 2012. It is decided on 1 July 2012 that the building should be revalued to $820 000. What are the appropriate entries to record the revaluation using the net method? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation of buildings using the net method
 

31. Burchells Ltd owns a machine that originally cost $36 000. It has been depreciated using the straight-line method for 3 years, giving an accumulated depreciation of $15 000 (the salvage value was estimated at $6000 and the useful life at 6 years). At the beginning of the current financial year its carrying value is therefore $21 000. It has been decided by the directors to revalue it to fair value, which is assessed to be $38 000. The salvage value and useful life are considered to be unchanged. What are the appropriate entries to record the revaluation using the net method and the depreciation expense for the current year (rounded to the nearest dollar)? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation of a depreciable asset using the net method
 

32. Peters Ltd has a machine that originally cost $20 000 and has accumulated depreciation of $5000. Its remaining life is assessed to be 5 years with no salvage value. The directors of Peters Ltd decide on 1 July 2003 to revalue the machine. They are unable to find market information on a machine in a similar state to theirs, so the market value of a new machine of the same type, $30 000, is used as a basis. What is/are the appropriate journal entry(ies) using the gross method to record the revaluation? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation of a depreciable asset using the gross method
 

33. Hendersons Ltd has just begun to revalue its plant and equipment. The following information about the items included in this class of non-current assets shows their carrying value, and most recent revaluation.

What is/are the appropriate journal entry(ies) to record the revaluations using the net method?

 
A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation of assets using the net method
 

34. Smith & Jones Ltd owns equipment that was purchased for $56 000 and has accumulated depreciation of $14 000. The following market value information was gathered about the equipment

The equipment has a remaining useful life to the entity of 10 years. What are the appropriate journal entries to record the revaluation under the gross method and the net-amount method?

 
A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation of a depreciable assets under both the gross and net methods
 

35. A machine purchased by White Ltd had a cost of $670 000 and an accumulated depreciation balance of $120 000 at 30 June 2012. Its fair value is assessed at this time, with its first revaluation as $450 000. What is/are the appropriate journal entry(ies) to record the revaluation using the net method? 

A. 

B.

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation of a depreciable asset using the net method
 

36. Seagull Marinas Ltd owns land that was purchased for $300 000 to be used as the future site of a boat shed. Due to the development of a resort in the vicinity, the land's fair market value had risen to $480 000 and was revalued on 30 June 2009. A revaluation undertaken on 30 June 2012 of $150 000 reflects the effect of the failure of resort development and local concerns about the protection of the nesting sites of endangered sea birds located near the land. What are the journal entries required to record the revaluations on 30 June 2009 and 30 June 2012? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-08 Understand how to account for revaluations that reverse previous revaluation increments or decrements.
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Revaluation decrements
Topic: Multiple periods revaluation of land
 

37. Pigeon Ltd purchased land for $750 000 6 years ago. It was revalued on 31 December 2009 to $600 000. A subsequent revaluation on 31 December 2011 found the market value to be $900 000 due to a change in council zoning for the area. What are the journal entries required to record the revaluations on 31 December 2009 and 31 December 2011? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-08 Understand how to account for revaluations that reverse previous revaluation increments or decrements.
Section: Revaluation decrements
Section: Reversal of revaluation decrements and increments
Topic: Multiple periods revaluation of land
 

38. Mendelssons Ltd has a machine that has been revaluing over a number of years. The valuation as at 1 January 2012 is $130 000. The previous valuation was $145 000 and the accumulated depreciation is $40 000. The revised salvage value is $15 000 and the estimated useful life remaining is 12 years. The benefits from the machine are expected to be derived evenly over its life. In the previous year, the machine had been devalued by $15 000 and this amount written off to the income statement. What are the entries at 1 January 2012 to record the revaluation using the net method and at 31 December 2012 to record depreciation? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-08 Understand how to account for revaluations that reverse previous revaluation increments or decrements.
Section: Revaluation decrements
Section: Reversal of revaluation decrements and increments
Topic: Multiple periods revaluation of a depreciable asset
 

39. Cars and Trucks Ltd owns an engine testing machine which was purchased for $120 000. After 3 years of use the machine had accumulated depreciation of $58 560 but was revalued to $80 000. Two years later the machine was sold for $60 000 and had accumulated depreciation at the time of sale of $36 800. What journal entries would be required to record the sale of the machine in accordance with AASB 116 requirements? 

A.

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 06-10 Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisation's profits owing to changes in depreciation expenses and in final gains or losses on the sale of the revalued asset.
Section: Accounting for the gain or loss on the disposal or derecognition of a revalued non-current asset
Topic: Multiple periods revaluation of a depreciable asset
 

40. Bears and Things acquired a toy-stuffing machine at a cost of $150 000 on 1 July 2009. The machine had a useful life of 10 years and a residual value of $30 000. The benefits from the machine are expected to be derived evenly over its life. On 1 July 2011 the asset's fair value is $110 000 and the salvage value and useful life are expected to be unchanged (that is, there is 8 years of remaining life). On 30 June 2009 the machine is sold for $60 000 cash. What are the journal entries required to record the depreciation for the year ended 30 June 2009 and the sale of the machine in accordance with AASB 116 if: (a) the revaluation is undertaken and (b) the revaluation is not recorded? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Learning Objective: 06-10 Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisation's profits owing to changes in depreciation expenses and in final gains or losses on the sale of the revalued asset.
Section: Accounting for the gain or loss on the disposal or derecognition of a revalued non-current asset
Topic: Revaluation and subsequent sale of a depreciable asset
 

41. When an item of property, plant and equipment is derecognised, the treatment of any revaluation surplus that relates to an asset includes: 

A. debiting the revaluation surplus in the journal entry to record the profit or loss on sale of the asset.
B. transferring the relevant amount out of the asset revaluation reserve and showing it as revenue in the income statement.
C. transferring the revaluation surplus to retained earnings.
D. writing off the amount out of the revaluation surplus against the remaining assets in the class of assets to which the asset that was sold belonged.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-10 Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisation's profits owing to changes in depreciation expenses and in final gains or losses on the sale of the revalued asset.
Section: Accounting for the gain or loss on the disposal or derecognition of a revalued non-current asset
Topic: Derecognition of an asset with revaluation surplus
 

42. Casey Co Ltd is assessing the recoverable amount of some land it invested in 5 years ago at a cost $600 000. Management has sought independent valuation advice that indicates that the land may be sold in 6 years' time for $800 000. Since the land is not generating any cash flows, this is its undiscounted recoverable amount. The appropriate discount rate is estimated to be 7%. The present value of $1 received in 6 years' time at a discount rate of 7% is 0.6663. What is the effect of using the discount rate on the need to write down the value of the asset? 

A. Since the recoverable amount of $800 000 is greater than the cost of $600 000, there is no need to write down the asset.
B. The undiscounted amount may not be used according to AASB 136 so the asset should be written down by $66 960.
C. There is no need to write down the asset in either case since the undiscounted amount is greater than the cost and the discounted amount of $900 438 is also greater than the cost.
D. The undiscounted amount may be used in this case as the asset will not be continually in use, and therefore 'value in use' cannot be calculated. As this amount is higher than the cost there is no need to write down the asset.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-05 Understand the meaning of 'recoverable amount' and be able to calculate it.
Section: Accounting for the gain or loss on the disposal or derecognition of a revalued non-current asset
Topic: Estimation of a recoverable amount
 

43. Staples Ltd has invested in two parcels of land that are treated as belonging to the same class of assets. The first parcel of land was purchased for $500 000 and has been valued this period at $650 000. The second parcel of land has a carrying value of $340 000 and has been valued this period at $100 000. What is the appropriate journal entry to record the revaluations? 

A. 

B. 

C.

D. 

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-10 Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisation's profits owing to changes in depreciation expenses and in final gains or losses on the sale of the revalued asset.
Section: Accounting for the gain or loss on the disposal or derecognition of a revalued non-current asset
Topic: Revaluation of land
 

44.  Stairway Ltd is undertaking its regular review of the fair value of its assets. It has discovered the following material changes:

What are the journal entries required to record the revaluations in accordance with relevant accounting standards?

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Revaluation decrements
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation of multiple assets including depreciable assets
 

45. Where management's bonuses are tied to profit-based performance measures, management may have an incentive not to revalue assets because: 

A. when revaluing assets, the value of the asset base increases, consequently the return on assets will fall.
B. a revaluation may result in a decrease in the value of the asset base.
C. a revaluation that increases the value of the asset base will increase profit measures.
D. when revaluing assets, the value of the asset base increases, consequently the debt to equity ratio will fall.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 06-12 Be able to explain possible motivations that might drive an organisation to elect, or not elect, to revalue its non-current assets to fair value.
Section: Economic consequences of asset revaluations
Topic: Management motivations to choose the revaluation method
 

46. Where there are debt covenants in place to restrict the level of debt to assets, then management may be motivated to: 

A. avoid revaluations because an increase in asset values increases depreciation and therefore reduces profit.
B. undertake revaluations where the expectation is that asset values have fallen.
C. avoid revaluations because of their effect on the cash flows of the business and therefore its ability to pay interest under the debt covenant.
D. undertake revaluations where the expectation is that asset values are rising.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 06-12 Be able to explain possible motivations that might drive an organisation to elect, or not elect, to revalue its non-current assets to fair value.
Section: Economic consequences of asset revaluations
Topic: Management motivations to choose the revaluation method
 

47. Research using the Positive Accounting Theory approach investigated public trust deeds and found that in relation to revaluations they: 

A. allowed revaluations but imposed very low debt/asset limits.
B. specified which assets may be revalued and who may conduct the revaluations.
C. generally did not permit revaluations.
D. allowed revaluations but specified the period between revaluations as being no longer than 2 years.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 06-12 Be able to explain possible motivations that might drive an organisation to elect, or not elect, to revalue its non-current assets to fair value.
Section: Economic consequences of asset revaluations
Topic: Management motivations to choose the revaluation method
 

48. The costs associated with revaluing assets include: 

A. additional audit fees.
B. fees charged by the valuer.
C. opportunity costs associated with the directors' time to review the valuations.
D. all of the given answers.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-12 Be able to explain possible motivations that might drive an organisation to elect, or not elect, to revalue its non-current assets to fair value.
Section: Economic consequences of asset revaluations
Topic: Management motivations to choose the revaluation method
 

49. Brown, Izan and Loh (1992) found that revaluations are more likely to take place: 

A. in small firms with low value assets that wished to borrow more.
B. in industries that are strike prone.
C. in entities that are highly geared.
D. in industries that are strike prone and in entities that are highly geared.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-12 Be able to explain possible motivations that might drive an organisation to elect, or not elect, to revalue its non-current assets to fair value.
Section: Economic consequences of asset revaluations
Topic: Management motivations to choose the revaluation method
 

50. According to Positive Accounting Theory, the size of the entity may have an impact on management's decision to revalue because of management's motivation to reduce political costs. There is more than one possible view regarding the effect of revaluation on political visibility, including which of the following? 

A. Since revaluations may increase the variability of asset size, they will increase political costs.
B. Where increases in asset size are expected to result from revaluations, the increase in the size of the entity may reduce political costs.
C. Where revaluations increase the size of the asset base, the return on assets will be lower and this will potentially lower political costs.
D. Where revaluations result in an increase in the asset base, depreciation expense will increase and lead to greater political costs.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 06-12 Be able to explain possible motivations that might drive an organisation to elect, or not elect, to revalue its non-current assets to fair value.
Section: Economic consequences of asset revaluations
Topic: Management motivations to choose the revaluation method
 

51. AASB 116 permits which of the following with respect to measurement of non-current assets using revaluation model? 

A. Net revaluation decrements for each class of asset are initially debited to revaluation surplus.
B. Use of cost model to measure other assets in the same class.
C. All increments arising from revaluation are credited to revaluation surplus.
D. None of the given answers is correct.

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Measurement of non-current assets using the revaluation model
 

52. AASB 116 prescribes that, if assets within the same class are revalued and some assets increased in value while others decreased in value: 

A. the net decrement for the class of asset should be recognised as loss in the income statement.
B. the net increment for the class of asset should be credited to revaluation surplus.
C. the total increment for all assets in the same class that increased in value should be credited to revaluation surplus and total decrement for all assets in the same class of asset should be recognised as loss in the income statement.
D. all of the given answers are correct.

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-08 Understand how to account for revaluations that reverse previous revaluation increments or decrements.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Section: Reversal of revaluation decrements and increments
Topic: Revaluation of assets
 

53. On disposal of an asset, a gain or loss is the difference between the proceeds from sale and: 

A. the cost of an asset.
B. residual value of the asset.
C. carrying amount of the asset.
D. revalued amount of the asset.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-10 Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisation's profits owing to changes in depreciation expenses and in final gains or losses on the sale of the revalued asset.
Section: Accounting for the gain or loss on the disposal or derecognition of a revalued non-current asset
Topic: Gain or loss on disposal of assets
 

54. When an entity adopts the revaluation model to account for its property, plant and equipment, which of the following statement(s) is/are correct? 

A. If an item is revalued, all assets in the same class shall be revalued.
B. If an asset's carrying amount is decreased as a result of a revaluation, the decrease is always recognised in profit and loss.
C. If an asset's carrying amount is increased as a result of a revaluation, the increase is always credited directly to equity.
D. All of the given answers.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Revaluation of assets
 

55. Under AASB 116, when an asset is revalued and the net method is used, accumulated depreciation: 

A. must be written back to profit.
B. must be closed off to the equity account.
C. should be eliminated against the gross carrying amount of the asset before revaluation.
D. should be increased by the same proportion as the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals the revalued amount.

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Net method for revaluation of assets
 

56. Under AASB 116, when an asset is revalued and the gross method is used, accumulated depreciation:

 
A. must be written back to profit.
B. must be closed off to reduce the asset account.
C. is ignored during revaluation as it has not effect on carrying amount.
D. should be increased by the same proportion as the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals the revalued amount.

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Gross method for revaluation of assets
 

57. Palm Beach Ltd has elected to adopt the allowed alternative treatment to account for some of its property, plant and equipment. The information

available for the class of assets the entity wishes to covert to revaluation model follows.

Which of the following statements is correct if Palm Beach Ltd is to comply with AASB 116?

 
A. When office equipment is revalued, net profit will increase $10 000.
B. When machinery is revalued, net profit will increase by $2500.
C. When motor vehicles are revalued, net profit will decrease by $16 000.
D. When all assets are revalued, net profit will increase by $8500.

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Revaluation decrements
Topic: Class of assets revaluation
 

58. Chopin Ltd has a debt contract and is close to violating the return on equity ratio as stipulated in the debt agreement. What is the most appropriate action to take? 

A. Negotiate a loan to increase cash balance.
B. Accelerate collection of receivables.
C. Negotiate to prepay long-term debt.
D. Revalue a class of asset.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-12 Be able to explain possible motivations that might drive an organisation to elect, or not elect, to revalue its non-current assets to fair value.
Section: Economic consequences of asset revaluations
Topic: Management motivations and the revaluation method
 

59. Which of the following statement is of accumulated depreciation?

A. It is the difference between acquisition costs and residual value.
B. It is the difference between acquisition costs and revalued amount.
C. It is initially derecognised on first time revaluations.
D. It is restated proportionately to the carrying amount and the revalued amount of the asset.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Accumulated depreciation
 

60. Which of the following statements is of revaluation model in AASB 116?

A. It is the preferred model of managers with bonus based payments.
B. It is required under AASB 116.
C. Once adopted the firm can no longer revert back to cost model.
D. None of the statements is correct.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Revaluation model
 

61. Which of the following statements is a valid reason to select cost model over the revaluation model? 

A. To report relevant information.
B. To reduce taxes.
C. To properly match costs with expenses.
D. To simplify the measurement accounting policy.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Measuring property, plant and equipment at cost or at fair value-the choice
Topic: Cost model compared to the revaluation model
 

62. Brahms Ltd acquired a property of land and building for $1.5 million. Management estimates the value of land to be 40% of cost. The building is estimated to have a useful life of 50 years. After 25 years, the property was revalued at $1.2 million. It is expected that the life of the building will remain the same and salvage value is expected to be $100 000. What is the revaluation gain(loss) for the building and the depreciation expense one year after revaluation? 

A. $120 000; $24 800
B. ($120 000); $28 800
C. $220 000; $24 800
D. ($220 000); $28 800

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Revaluation decrements
Section: Revaluation increments
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation of a depreciable asset
 

63. Mozart Ltd acquired a building for $1.5 million. Management estimates the value of land to be 40% of cost. The building is estimated to have a useful life of 50 years. After 25 years, the property's fair value is estimated at $1.2 million. It is expected that the life of the building will remain the same and salvage value is expected to be $100 000. Which of the following statements is correct at end of year 25 with respect to the revaluation? 

A. Net profit will increase by $100 000.
B. Net profit will increase by $120 000.
C. Net profit will decrease by $220 000.
D. Net profit is unaffected as the credit is through the revaluation surplus.

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Revaluation decrements
Section: Revaluation increments
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation of land
 

64. According to AASB 136, the recoverable amount of an asset or cash-generating unit is the: 

A. lower of its fair value less costs of disposal and its value in use.
B. lower of its fair value plus costs of disposal and its value in use.
C. higher of its fair value less costs of disposal and its value in use.
D. higher of its fair value plus costs of disposal and its value in use.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-06 Understand the difference in accounting treatments for upward revaluations to 'fair value', as opposed to write-downs to 'recoverable amount'.
Learning Objective: 06-07 Understand what an 'impairment loss' is and know when and how to account for one in accordance with AASB 136 Impairment of Assets.
Learning Objective: 06-11 Understand the meaning of a 'cash-generating unit' and why it is relevant to calculating depreciation and impairment losses.
Section: Recognition of impairment losses
Topic: Recoverable amount
 

65. AASB 136 defines the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets as a: 

A. class of assets.
B. asset portfolio.
C. value in use asset group.
D. cash-generating unit.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-11 Understand the meaning of a 'cash-generating unit' and why it is relevant to calculating depreciation and impairment losses.
Section: Recognition of impairment losses
Topic: Asset grouping within AASB 136
 

66. If an asset's carrying amount is increased due to an initial revaluation that increase shall be recognised in: 

A. other comprehensive income.
B. the profit and loss.
C. in the disclosures.
D. None of the given answers is correct.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Revaluation increments
Topic: Recognition of initial revaluation increment
 

67. An investment property is considered to generate cash flows that are: 

A. dependent on the other assets of the entity.
B. designed to reduce taxes.
C. largely independent of the other assets of the entity.
D. all of the given answers.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Section: Investment properties
Topic: Investment properties
 

68. In the first year of business, Newport Ltd purchased land for $5 million. In the second year, a reputable, independent property valuer's report shows that the value of the land is estimated at $2 million. In the third year, the value of the land is estimated at $6 million. Newport Ltd uses the revaluation method. What would be the journal entry to record this revaluation in the third year? 

A. DR Land 4m; CR Gain on revaluation 3m; CR Revaluation surplus 1m
B. DR Land 4m; CR Gain on revaluation 1m; CR Revaluation surplus 3m
C. Dr Land 4m; CR Gain on revaluation 2m; CR Revaluation surplus 2m
D. Dr Land 4m; CR Gain on revaluation 4m

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Revaluation decrements
Section: Revaluation increments
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation decrements
Topic: Revaluation increments
Topic: Treatment of balances of accumulated depreciation upon revaluation
 

69. In the first year of business, Newport Ltd purchased land for $5 million. In the second year, a reputable, independent property valuer's report shows that the value of the land is estimated at $6 million. In the third year, the value of the land is estimated at $7 million. Newport Ltd uses the revaluation method. What would be the journal entry to record this revaluation in the third year? 

A. DR Land 2m; CR Gain on revaluation 1m; CR Revaluation surplus 1m
B. DR Land 2m; CR Gain on revaluation 1m; CR Revaluation surplus 3m
C. DR Land 2m; CR Gain on revaluation 2m; CR Revaluation surplus 2m
D. DR Land 2m; CR Gain on revaluation 2m

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-03 Understand how and when to revalue an item of property, plant and equipment in accordance with AASB 116 Property, Plant and Equipment.
Learning Objective: 06-09 Understand how to account for accumulated depreciation when a non-current depreciable asset is revalued, and understand that, subsequent to revaluation, new depreciation charges will be based on the revalued amount of the non-current asset.
Section: Revaluation decrements
Section: Revaluation increments
Section: Treatment of balances of accumulated depreciation upon revaluation
Topic: Revaluation decrements
Topic: Revaluation increments
Topic: Treatment of balances of accumulated depreciation upon revaluation
 

70. At 30 June 2017, there was an indication that Botany Ltd's machinery might be impaired. In preparing for the impairment testing, you have estimated, as at 30 June 2017, the piece of machinery's fair value less costs of disposal to be $345 000 and its value in use to be $354 000. The machinery had been purchased and installed on 1 October 2016 for $625 000 cash, with a residual value of $25 000 and useful life of 10 years. Botany Ltd uses the straight-line method of depreciation for this machinery. What would be the impairment loss recorded at 30 June 2017? 

A. $212 000
B. $220 000
C. $226 000
D. $232 000

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-11 Understand the meaning of a 'cash-generating unit' and why it is relevant to calculating depreciation and impairment losses.
Section: Recognition of impairment losses
Topic: Recognition of impairment losses
 

71. At 30 June 2017, there was an indication that Botany Ltd's machinery might be impaired. In preparing for the impairment testing, you have estimated, as at 30 June 2017, the piece of machinery's fair value less costs of disposal to be $350 000 and its value in use to be $354 000. The machinery had been purchased and installed on 1 October 2016 for $625 000 cash, with a residual value of $25 000 and useful life of 10 years. Botany Ltd uses the straight-line method of depreciation for this machinery. What would be the impairment loss recorded at 30 June 2017? 

A. $212 000
B. $220 000
C. $226 000
D. $232 000

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-11 Understand the meaning of a 'cash-generating unit' and why it is relevant to calculating depreciation and impairment losses.
Section: Recognition of impairment losses
Topic: Recognition of impairment losses
 

72. In the first year of business, Newport Ltd purchased land for $5 million. In the second year, a reputable, independent property valuer's report shows that the value of the land is estimated at $6 million. At the beginning of the fourth year, Newport Ltd sold the land for $7 million and received cash in full. Newport Ltd uses the revaluation method. Which of the following would be included in the sale journal entry? 

A. DR Land $5 million
B. CR Revaluation surplus $1 million
C. CR Gain on sale $1 million
D. CR Land $7 million

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 06-10 Know how the profit on disposal of a revalued non-current asset is determined and understand how asset revaluations can affect an organisation's profits owing to changes in depreciation expenses and in final gains or losses on the sale of the revalued asset.
Section: Accounting for the gain or loss on the disposal or derecognition of a revalued non-current asset
Topic: Accounting for the gain or loss on the disposal or derecognition of a revalued non-current asset
 

Chapter 06 Testbank Summary