Test Bank | Impairment & Revaluation 9th

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Chapter 06 Testbank

1. Recognising a reassessment of the carrying amount of a non-current asset to its fair value as at a particular date is called an asset revaluation.

True   False

2. Assets = Liabilities + Equity

True   False

3. An investment property is defined in AASB 140 as property (land or buildings—or part of a building—or both) that is held by the owner or by the lessees to earn rentals, or for a capital appreciation, but not both.

True   False

4. AASB 116 includes a number of disclosure requirements pertaining to the revaluation of non-current assets.

True   False

5. With respect to a class of assets, where a revaluation decrement reverses a previous increment (or cumulative increment) for an individual asset, it would be shown as a negative item in ‘other comprehensive income’ (and ultimately offset against the ‘revaluation surplus’ previously created for that asset), rather than being debited to the period’s profit or loss.

True   False

6. 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 options are correct.

7. 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.

8. A machine purchased by White Ltd had a cost of $670 000 and an accumulated depreciation balance of $120 000 at 30 June 2022. 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.

9. Pigeon Ltd purchased land for $750 000 six years ago. It was revalued on 31 December 2019 to $600 000. A subsequent revaluation on 31 December 2021 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 2019 and 31 December 2021?

A.

B.

C.

D.

10. Bears and Things acquired a toy-stuffing machine at a cost of $150 000 on 1 July 2019. 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 2021 the asset's fair value is $110 000 and the salvage value and useful life are expected to be unchanged (that is, there is eight years of remaining life). On 30 June 2021 the machine is sold for $60 000 cash. What are the journal entries required to record the depreciation for the year ended 30 June 2021 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.

11. 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

12. The costs associated with revaluing assets include:

A. costs charged by auditors for additional review

B. fees charged by the valuer

C. opportunity costs associated with the directors' time to review the valuations

D. All of the given options are correct.

13. 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. The cost model is used to measure other assets in the same class.

C. All increments arising from revaluation are credited to revaluation surplus.

D. None of the options listed here is correct.

14. 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

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

A. It is the preferred model of managers.

B. It is required under AASB 116.

C. Once adopted, the firm can no longer revert back to the cost model.

D. None of the given options are correct.

16. 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

17. Recognising a reassessment of the carrying amount of a non-current asset to its fair value as at a particular date is known as _________________.

A. asset revaluation

B. intangible asset

C. recoverable amount

D. impairment losses

18. AASB 140 requires that investment properties are measured either using the fair value model or the _________ model.

A. cost

B. income

C. expense

D. asset

19. ____________ is defined in the accounting standard as ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date’.

A. Book value

B. Market value

C. Fair value

D. Predictive value

20. __________ = Liabilities + Equity

A. Non-current assets

B. Assets

C. Profit

D. Loss

21. AASB 116 includes a number of disclosure requirements pertaining to the revaluation of ________________.

A. non-current assets

B. current asset

C. current liabilities

D. current costs

22. AASB 116 requires that a revaluation decrement should be treated as an expense of the period that is included in profit or loss and which might be referred to as ____________on revaluation.

A. a profit

B. a loss

C. a decrement

D. a gain

23. If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in/as ___________.

A. profit

B. loss

C. profit or loss

D. assets

24. According to AASB 116, the revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring _____________ when the asset is retired or disposed of.

A. no surplus

B. part of the surplus

C. the whole of the surplus

D. loss

25. ____________ is defined as the present value of the future cash flows expected to be derived from an asset or cash-generating unit.

A. Accumulated impairment losses

B. Recoverable amount

C. Fair value

D. Value in use

26. Discounting the future cash flows will have direct implications for the calculated value of recoverable amount and perhaps the need to change the value of an asset in __________direction.

A. a downward

B. an upward

C. a visible

D. None of the given options are correct.

27. As per AASB 116, the following, apart from one, are disclosures that a reporting entity is required to make if impairment losses have been recognised. Identify the incorrect item.

A. total impairment losses and reversals of impairment losses within the accounting period

B. the events that led to the non-recognition of impairment losses

C. the nature of the assets that have been the subject of impairment losses

D. whether the recoverable amount was determined on the basis of fair value less costs of disposal, or value in use

28. The requirement that assets shall not have a ‘carrying amount’ above their ‘_______’ is a central foundation of financial reporting.

A. recoverable amount

B. net amount

C. debts

D. cash flows

29. AASB 116 includes a number of disclosure requirements pertaining to the revaluation of non-current assets. Information such as ________________, whether an independent valuer was involved in determining valuations, and the approach used in determining fair value must be disclosed in the notes to the financial statements.

A. dates of valuation

B. inventories

C. cash

D. debt-to-asset ratio

30. Both AASB 116 and AASB 13 provide some guidance on determining fair values. It is emphasised that fair values are determined on the basis that the entity is a going concern and that there is no need or intention to ___________.

A. perform a revaluation

B. invest

C. liquidate its assets

D. acquire other assets

31. Explain why the accounting treatment from increments and decrements are not symmetrical with respect to the revaluation of property, plant and equipment.

______________________________________________________________________________

32. A firm that has both compensation and debt contracts will prefer the revaluation model over the cost model to measure its property, plant and equipment. Discuss.

______________________________________________________________________________

33. What is meant by carrying amount?

______________________________________________________________________________

34. What is revaluation increment?

______________________________________________________________________________

35. What does an ‘impairment loss’ represent and when it is recognised?

______________________________________________________________________________

36. Discuss briefly asset revaluation practices in Australia and the US.

______________________________________________________________________________

37. What is meant by accumulated impairment losses?

______________________________________________________________________________

38. When will equity increase and when will it decrease?

______________________________________________________________________________

39. Why do we need to know that gains on revaluation are included within OCI, but losses on revaluation are included within profit or loss?

______________________________________________________________________________

40. How is the recoverable amount of a non-current asset to be determined?

______________________________________________________________________________

Chapter 06 Testbank