Test Questions & Answers Professional ethics Ch.5

Chapter 05 Testbank

1. Depreciation represents a decline in the market value of an asset over its life.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-01 Understand the meaning of 'depreciation' and be able to explain the necessity for calculating depreciation expense.
Section: Depreciable amount (base) of an asset
Section: Introduction
Topic: Depreciable amount (base) of an asset
Topic: Introduction
 

2. Where a non-current asset appreciates in value over time, no depreciation should be charged.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-01 Understand the meaning of 'depreciation' and be able to explain the necessity for calculating depreciation expense.
Section: Depreciation as a process of allocating the cost of an asset over its useful life: further considerations
Topic: Depreciation as a process of allocating the cost of an asset over its useful life: further considerations
 

3. The useful life of the asset reflects the time from when an asset is built/acquired until it is no longer able to produce any benefits.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-02 Understand the role of accounting in allocating the depreciable amount of a non-current asset over the asset's expected useful life.
Section: Determination of useful life
Topic: Determination of useful life
 

4. The depreciable amount is the historical cost of the non-current asset, or revalued amount substituted for historical cost in the financial report, less the net amount expected to be recovered on disposal of the asset at the end of its useful life.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Depreciable amount (base) of an asset
Topic: Depreciable amount (base) of an asset
 

5. The depreciation rate and useful lives of assets should not be revised during the depreciable life of the asset.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-07 Know how and when to revise depreciation rates and methods.
Section: Revision of depreciation rate and depreciation method
Topic: Revision of depreciation rate and depreciation method
 

6. Assets must be depreciated from the time they are acquired.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-05 Understand when to start depreciating a depreciable asset.
Section: When to start depreciating an asset
Topic: When to start depreciating an asset
 

7. Amortisation has the same meaning as depreciation, but conventionally is used in relation to intangible assets.  

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05-06 Know how to separately account for land and buildings.
Section: Land and buildings
Section: Introduction
Topic: Introduction
Topic: Land and buildings
 

8. The expenditure to modify an asset so that its service potential is improved should be expensed.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Disposition of a depreciable asset
Topic: Disposition of a depreciable asset
 

9. Where an addition to or extension of a depreciable asset is separable from the original asset and able to be used after that asset is disposed of, the extension or addition should still be depreciated over the life of the original asset.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-02 Understand the role of accounting in allocating the depreciable amount of a non-current asset over the asset's expected useful life.
Section: Modifying existing non-current assets
Topic: Modifying existing non-current assets
 

10. The profit or loss on the sale of an asset is calculated by deducting the cost of the asset from the sale amount.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Disposition of a depreciable asset
Topic: Disposition of a depreciable asset
 

11. Depreciation of an asset is required when market value accounting is applied on a non-current asset.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-01 Understand the meaning of 'depreciation' and be able to explain the necessity for calculating depreciation expense.
Section: Introduction
Topic: Introduction
 

12. AASB 116 allows capitalisation of items of plant and property because these are considered prepayments.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-02 Understand the role of accounting in allocating the depreciable amount of a non-current asset over the asset's expected useful life.
Section: Modifying existing non-current assets
Topic: Modifying existing non-current assets
 

13. Depreciation expense is always recognised in profit and loss.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-01 Understand the meaning of 'depreciation' and be able to explain the necessity for calculating depreciation expense.
Section: Introduction
Topic: Introduction
 

14. The depreciable base is the cost of a depreciable asset, or other amount substituted for cost in the financial statement, less its residual value.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Section: Depreciable amount (base) of an asset
Topic: Depreciable amount (base) of an asset
 

15. Under the declining balance method of depreciation, the depreciable amount of an asset is determined by deducting residual value from cost or revalued amount.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

16. Land that has a definite useful life should be depreciated.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-06 Know how to separately account for land and buildings.
Section: Land and buildings
Topic: Land and buildings
 

17. A non-current asset that is subjected to depreciation is no longer subjected to impairment testing.  

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05-06 Know how to separately account for land and buildings.
Section: Land and buildings
Topic: Land and buildings
 

18. If the receipt of the sale proceeds on disposal is deferred for a period of time the consideration received is recognised initially at the fair value.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Disposition of a depreciable asset
Topic: Disposition of a depreciable asset
 

19. When sale proceeds are deferred the discount rate to be used is the rate at which the vendor could invest the amount under similar circumstances and conditions.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Disposition of a depreciable asset
Topic: Disposition of a depreciable asset
 

20. AASB 116 paragraph 73 states that financial statements shall disclose, for each class of property, plant and equipment the measurement bases used for determining the net carrying amount.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-09 Know the disclosure requirements of AASB 116 Property, Plant and Equipment as they pertain to depreciation.
Section: Disclosure requirements
Topic: Disclosure requirements
 

21. Depreciation is required because it is generally accepted that: 

A. assets will decrease in value over time.
B. the economic benefits of an asset will not last indefinitely.
C. wear and tear on an asset must be recorded as an expense.
D. even though land may go up in value its cost needs to be recognised as an expense.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-02 Understand the role of accounting in allocating the depreciable amount of a non-current asset over the asset's expected useful life.
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Section: Determination of useful life
Section: Method of cost apportionment
Section: Introduction
Topic: Determination of useful life
Topic: Introduction
Topic: Method of cost apportionment
 

22. If market-value accounting (also known as CoCoA or exit-price accounting) were to be applied in a set of accounts, then typically the treatment for recording depreciation would be: 

A. restate the residual value and the cost to exit price and recalculate the depreciation.
B. restate the cost but leave the residual value unchanged and recalculate the depreciation.
C. no depreciation is recognised.
D. continue to charge the same depreciation and recognise any changes in value in the income statement.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05-01 Understand the meaning of 'depreciation' and be able to explain the necessity for calculating depreciation expense.
Section: Introduction
Topic: Introduction
 

23. What issues need to be addressed to determine how to allocate the cost of an asset? 

A. The depreciation method, the probable future benefit and the years to obsolescence.
B. The depreciable base, its useful life and the method of cost apportionment.
C. The cost of the asset, its residual value and the method of cost apportionment.
D. The probable future benefit, the depreciation method and the depreciable base.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Section: Depreciable amount (base) of an asset
Topic: Depreciable amount (base) of an asset
 

24. When selecting a method of cost apportionment an accountant should choose: 

A. the method that best reflects how the asset is used, taking into account its total physical life.
B. the method that produces the best profit for the firm.
C. the method stipulated by the taxation department for submitting tax returns.
D. the method that best reflects the economic use of the asset.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

25. Where an asset is revalued, the treatment of depreciation is to: 

A. recalculate and charge it to the income statement based on the revalued amount and the original residual value.
B. charge the original amount of depreciation to the income statement and transfer any change in value to the asset revaluation reserve.
C. recalculate and charge it to the income statement based on the revalued amount for the asset and the revalued residual value.
D. charge the original amount of depreciation to the income statement and calculate the new depreciation based on the revalued amount and treat it as a special item.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-07 Know how and when to revise depreciation rates and methods.
Section: Revision of depreciation rate and depreciation method
Topic: Revision of depreciation rate and depreciation method
 

26. The useful life of an asset may be estimated based on: 

A. the period of time over which the future economic benefits of the asset are expected to be consumed by the entity.
B. the total service, expressed in terms of production or similar units that may most likely be obtained from the asset under normal operating conditions.
C. the period of time over which the future economic benefits of the asset are expected to be generated in normal use by a typical entity.
D. the total service, expressed in terms of production or similar units that may most likely be obtained from the asset under ideal operating conditions.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-02 Understand the role of accounting in allocating the depreciable amount of a non-current asset over the asset's expected useful life.
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Section: Determination of useful life
Topic: Determination of useful life
 

27. Assets should be depreciated from: 

A. the date the asset is ordered.
B. the date the asset is delivered to the premises until it is no longer in use.
C. the date the asset is first put into use or held ready for use.
D. the date the asset is paid for until it is disposed of.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-05 Understand when to start depreciating a depreciable asset.
Section: When to start depreciating an asset
Topic: When to start depreciating an asset
 

28. French Co Ltd has a machine with the following characteristics:

A more technically advanced machine is expected to be available in 8 years.

It is expected to continue operating efficiently for the next 13 years.

The product that the machine is used to produce is expected to have a viable market for the next 6 years.

What is the period of time that should be used as the useful life of the asset for the purpose of calculating depreciation?

 
A. 8 years
B. 6 years
C. 13 years
D. 9 years

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

29. AASB 116 requires that depreciation be reviewed: 

A. at least annually.
B. as soon as the expectations regarding the patterns of use of the asset change.
C. only when changes in the depreciation calculation are material.
D. immediately upon a revision of the useful life of the asset.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-07 Know how and when to revise depreciation rates and methods.
Section: Revision of depreciation rate and depreciation method
Topic: Revision of depreciation rate and depreciation method
 

30. Tantrax Ltd has just purchased a piece of equipment for $45 000. It is expected to operate at its normal output level for 20 years, but the product it is used to manufacture is expected to be marketable only for the next 13 years. The expected salvage values are $5000 after 20 years and $8000 after 13 years. The equipment is expected to generate output consistently over its life. What depreciation should be charged in each of the first three years of the equipment's life? 

A. Year 1: $2846.15, Year 2: $2846.15, Year 3: $2846.15
B. Year 1: $5285.71, Year 2: $4879.12, Year 3: $4472.53
C. Year 1: $3461.54, Year 2: $3461.54, Year 3: $3461.54
D. Year 1: $1850, Year 2: $1850, Year 3: $1850

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

31. Hugo Ltd has acquired a machine for $26 000 and it cost a further $2000 to install and set up the machine for operation. It is expected to operate within normal parameters for 6 years. It will be technologically obsolete in 10 years. The expected salvage values are $1500 after 10 years and $2000 after 6 years. The benefits to be derived from the machine are expected to be greater in the early years of its life. What depreciation should be charged in each of the first two years of the equipment's life using sum-of-digits depreciation? 

A. Year 1: $8000, Year 2: $6667.67, Year 3: $5333.33
B. Year 1: $4818.18, Year 2: $4336.36, Year 3: $3854.55
C. Year 1: $7428.57, Year 2: $6190.48, Year 3: $4952.38
D. Year 1: $4333.33, Year 2: $4333.33, Year 3: $4333.33

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

32. Pentec Ltd has just acquired five new computers for $29 000 in total, and paid a further $1000 to have additional zip drives added. The computers are expected to have a useful life of 5 years and their salvage value is expected to be $3000. Pentec Ltd has decided to apply the declining balance method of calculating depreciation. What is the first 2 years depreciation charge on the computers? 

A. Year 1: $3000, Year 2: $2700
B. Year 1: $18 928.7, Year 2: $6985.5
C. Year 1: $ 9964.2, Year 2: $6287
D. Year 1: $11 071, Year 2: $6985.5

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

33. Forwind Ltd has recently acquired a machine that cost $29 000. The machine normally remains productive for 6 years. It is expected to continue in the production process at Forwind for 8 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 6 year life and 27 000 units over an 8 year life. Its salvage value after 6 years is expected to be $2500 and after 8 years $1000. What depreciation would be charged in the first year of the machine's operation when 4000 units were produced (rounded to the nearest dollar)? 

A. $5600
B. $4148
C. $4296
D. $5300

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

34. Boysone Ltd has constructed a piece of complex equipment to be used in its updated production facility. The construction took a year to complete and although the equipment was ready for use, the rest of the facility was not completed and so the equipment was not put into use for another 6 months; that is, on 1 July 2013. The cost of constructing the equipment was $70 000 and it is expected to have an operating life of 12 years. It is very likely to be technologically obsolete in 10 years. It is expected to have a scrap value at the end of its life (at whatever time) of $5000. The expected pattern of benefits derived from the equipment is uniform throughout its life. What is the amount of depreciation to be charged in the year ending 31 December 2013 (rounded to the nearest dollar)? 

A. $3500
B. $5417
C. $3250
D. $6500

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

35. Magpie Ltd purchased a building on a prime central business district site for $800 000. The value of the land is considered to be $350 000. The useful life of the building is expected to be 25 years after Magpie Ltd spends a further $80 000 on improvements. The residual value of the building at that time is estimated to be $60 000. The benefits from owning the land and building are expected to be derived evenly. What is the appropriate annual depreciation charge?

 
A. $18 800
B. $32 800
C. $15 600
D. $14 000

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Learning Objective: 05-06 Know how to separately account for land and buildings.
Section: Land and buildings
Topic: Land and buildings
 

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

A. by subtracting the disposal proceeds from the current carrying amount of the asset.
B. after assessing the fair value of the asset and subtracting the proceeds on the sale.
C. once depreciation has been applied to the date of sale.
D. by subtracting the updated carrying amount from the net proceeds on disposal.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Disposition of a depreciable asset
Topic: Disposition of a depreciable asset
 

37. Super Industries purchased a new vehicle on 1 May for $28 000. Upon delivery the vehicle required a new two-way radio to be installed before it could be used. This installation was completed on 30 June. Assuming a residual value of $4000 and a declining balance rate of 20 per cent, calculate the depreciation expense recorded at the end of the first two financial years since purchase. (Financial Year ends on 30 June, round to the nearest dollar.) 

A. $5600; $4480
B. $0; $5600
C. $4800; $3840
D. $933; $5413

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

38. 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% 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 this period (rounded to the nearest dollar)? 

A. $7059
B. $6000
C. $10 084
D. $9524

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

39. 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, but the machine was not used for 2 years. The operational life of the machine is expected to be 10 years at the end of which its salvage value is estimated to be $5000. 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 9 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. $6500; $7929; $1429
B. $0; $7611; $1111
C. $5417; $6527; $1111
D. $0; $6829; $1429

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 05-02 Understand the role of accounting in allocating the depreciable amount of a non-current asset over the asset's expected useful life.
Section: Depreciation of separate components
Section: Method of cost apportionment
Topic: Depreciation of separate components
Topic: Method of cost apportionment
 

40. Yellow Ltd purchased an asset 6 years ago for $75 000. At that time it was deemed to have a residual value of $15 000 and estimated useful life of 6 years. After 4 years of use the asset was overhauled at a cost of $35 000. The overhaul extended the useful life of the asset by 4 more years but reduced its residual value to $7000. 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. $8000
B. $10 000
C. $8800
D. $10 500

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

41. Red Enterprises purchased a vehicle for $35 000. A further $5000 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 7 years' time. The salvage value is estimated to be $6500 after 15 years and $15 000 at the end of 7 years. What is the depreciation for the first 2 years using the declining-balance method of depreciation (rounded to the nearest dollar)? 

A. Year 1: $5230, Year 2: $4546
B. Year 1: $4564, Year 2: $4043
C. Year 1: $3990, Year 2: $3535
D. Year 1: $3269, Year 2: $2841

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

42. Fast Movers Ltd purchased a machine on the first day of their financial year: 1 January 2009. 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 (3 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. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Disposition of a depreciable asset
Topic: Disposition of a depreciable asset
 

43. Galway Ltd purchased a computer for $6000, 2 years ago. At the beginning of this year the motherboard was replaced to maintain its existing service capacity at a cost of $2000. The improvement to the computer will work only on the existing computer and it does not extend its useful service potential. Galway has been depreciating the equipment using the declining-balance method at a rate of 33%. What is the depreciation charge calculated at the end of the current year (rounded to the nearest dollar)? 

A. $1778
B. $1549
C. $2640
D. $889

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

44. Priceless Products Ltd purchased some display stands for $5000. They were modified to make them suitable for the premises at a further cost of $1500. The expected life of the stands is 20 years, but Priceless Products expects to replace them in 5 years' time as the style of product presentation will change in that time. The stands are expected to have a zero salvage value in either case. The benefits from the stands are expected to be derived evenly over their life. Priceless Products reviewed the useful life of the stands as part of the process of assessing the amount to be depreciated in year 4 and decided that they could be used for an additional 2 years. The recoverable amount at that time is close to the net book value of the stands after depreciation is recorded for the 4th year. What is the amount of depreciation charge in years 3 and 5? 

A. $1000; $500
B. $325; $276
C. $1300; $650
D. $250; $213

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

45. Managers of some entities have resisted depreciating buildings in accordance with AASB 116. Which of the following is the grounds given by directors for failing to act in compliance with AASB 116? 

A. Depreciating buildings when their values are generally increasing over time.
B. Management is concerned that the effect on ratios such as the times interest-covered and debt/equity may lead to an entity breaching its debt covenants.
C. Management considers that when the asset is sold the amount of gain or loss that will be reflected in the books will be incorrect.
D. Depreciating buildings when their value is generally increasing does not make economic sense and management is concerned that the effect on ratios such as the times interest-covered and debt/equity may lead to an entity breaching its debt covenants.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-06 Know how to separately account for land and buildings.
Section: Land and buildings
Topic: Land and buildings
 

46. 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 and disposals.
B. impairment gains recognised in the statement of financial position.
C. depreciation.
D. additions and disposals and depreciation.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-09 Know the disclosure requirements of AASB 116 Property, Plant and Equipment as they pertain to depreciation.
Section: Disclosure requirements
Topic: Disclosure requirements
 

47. Intangible assets are not depreciated under AASB 116 because: 

A. they do not have a finite life.
B. they are now amortised under AAS 138, which provides specific guidance on intangibles.
C. intangible assets only appreciate and so cannot be depreciated.
D. intangibles are not physical assets and so are not subject to wear and tear.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-06 Know how to separately account for land and buildings.
Section: Land and buildings
Topic: Land and buildings
 

48. Kent Express owns a fleet of delivery vehicles. They were purchased for $120 000 and are expected to have a useful life of 8 years. Their residual value is expected to be $20 000. What is the depreciation expense recorded using the sum-of-digits depreciation method in years 1 and 2 (rounded to the nearest dollar)? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

49. Percy Ltd has a piece of equipment that has been depreciated for 3 years using the declining-balance depreciation method at a rate of 20%. The equipment cost $34 000 and has a salvage value of $4000. At the end of the third year the asset is sold for $24 000. What is the appropriate journal entry to record the disposal in line with the requirements of AASB 116? 

A. 

B. 

C.  

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Disposition of a depreciable asset
Topic: Disposition of a depreciable asset
 

50. All Saints Ltd acquired a machine for $50 000 on 1 January. This asset has useful life of 4 years and a residual value of $10 000. The declining balance rate adopted by the entity for similar machines is 40%. What is the depreciation expense for the first year, if the depreciation policy adopted is straight-line, declining-balance or sum-of-digits method, respectively? 

A. $10 000; $20 000; $16 000
B. $10 000; $25 000; $20 000
C. $12 500; $20 000; $16 000
D. $12 500; $25 000; $20 000

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

51. Pursuant to AASB 116, what is the carrying amount of an asset? 

A. Cost less accumulated depreciation.
B. Cost or revalued amount less the accumulated depreciation and any accumulated impairment losses.
C. Revalued amount less accumulated depreciation and any impairment losses.
D. Cost or revalued amount less the accumulated depreciation.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-06 Know how to separately account for land and buildings.
Section: Land and buildings
Topic: Land and buildings
 

52. The company has a depreciable asset with a purchase price of $500 000 and an estimated residual of $20 000. The company estimates that the asset will generate future economic benefits for the next 10 years. You are not sure about what depreciation method to adopt but would like to be aware of the effect of using different depreciation methods. Which of the following is correct with respect depreciation expense for Year 1? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

53. A company recently replaced a significant part of equipment carried at cost. Which action would be consistent with AASB 116? 

A. Include cost of replacement part in the asset's carrying amount without regard for the carrying amount of the part replaced.
B. Revalue the carrying amount of equipment before recognising the replacement part purchased.
C. Derecognise the carrying amount of the part replaced and include cost of replacement part in the asset's carrying amount.
D. Recognise the cost of replacement part as expense as the cost is a material amount.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-02 Understand the role of accounting in allocating the depreciable amount of a non-current asset over the asset's expected useful life.
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Depreciation of separate components
Section: Disposition of a depreciable asset
Topic: Depreciation of separate components
Topic: Disposition of a depreciable asset
 

54. The company recently acquired factory equipment. Which of the following costs should be included in the depreciable amount of the equipment? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-05 Understand when to start depreciating a depreciable asset.
Section: Depreciable amount (base) of an asset
Section: When to start depreciating an asset
Topic: When to start depreciating an asset
 

55. A company recently ordered a piece of machinery from Germany to be used to manufacture a new product. Which of the following are generally included as cost of an item of property, plant and equipment in accordance with AASB 116? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-05 Understand when to start depreciating a depreciable asset.
Section: Depreciable amount (base) of an asset
Section: When to start depreciating an asset
Topic: Depreciable amount (base) of an asset
Topic: When to start depreciating an asset
 

56. Swans Ltd constructed a building on a property already owned by the football club. Which of the following items should be included in determining the depreciable amount of the building? 

A. Architect's fees.
B. Interest during construction.
C. Promotional expense.
D. Architect's fees and interest during construction.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Section: Depreciable amount (base) of an asset
Topic: Depreciable amount (base) of an asset
 

57. Crows Ltd purchased a photocopier on 1 July 2012 for $30 000. It was estimated that it would have a useful life of 3 years and produce 5 000 000 copies over its life. The asset's residual value is estimated at $3000. Other similar assets are depreciated on a reducing balance method is at 40% rate. Which of the following statement is correct for year ending 30 June 2013? 

A. If the straight-line method is used, depreciation expense is $10 000.
B. If the reducing balance method is used, depreciation expense is $10 800.
C. If the sum of digits method is used, depreciation expense is $13 500.
D. If the reducing balance method is used, depreciation expense is $10 800 and if the sum of digits method is used, depreciation expense is $13 500.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

58. In accordance with AASB 116, the residual value and useful life of an asset shall be reviewed: 

A. every 3 years.
B. at least at the end of each annual reporting period.
C. as determined by the company directors.
D. as and when required.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-07 Know how and when to revise depreciation rates and methods.
Section: Revision of depreciation rate and depreciation method
Topic: Revision of depreciation rate and depreciation method
 

59. In accordance with AASB 116, the depreciation method applied to an asset shall be reviewed: 

A. as determined by the company directors.
B. every 3 years.
C. at least at the end of each annual reporting period.
D. as and when required.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Learning Objective: 05-07 Know how and when to revise depreciation rates and methods.
Section: Determination of useful life
Section: Revision of depreciation rate and depreciation method
Topic: Determination of useful life
Topic: Revision of depreciation rate and depreciation method
 

60. Which depreciation policy is likely to reduce debt-to-equity ratio? 

A. Sum-of-digits.
B. Straight-line rate.
C. Declining-balance.
D. Sum-of-digits or declining-balance.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Depreciable amount (base) of an asset
Topic: Depreciable amount (base) of an asset
 

61.  A non-current asset, for example, a building, has the following information available for valuation at balance date:

Which amount should be the carrying amount of this asset at balance date?

 
A. $5000
B. $35 000
C. $40 000
D. $80 000

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-06 Know how to separately account for land and buildings.
Section: Land and buildings
Topic: Land and buildings
 

62. Which of the following statements is applicable to the declining-balance method of depreciation? 

A. The expense is constant for the useful life of the asset.
B. The process is complex because you need to know the carrying amount, residual value and estimated useful life of the asset.
C. A company subject to political costs is more likely to select this depreciation method.
D. Assumes that the consumption of the asset is a function of time.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

63. Which of the following statement is applicable to the straight-line method of depreciation? 

A. The expense is variable for the useful life of the asset.
B. The process is complex because you need to know the carrying amount, residual value and estimated useful life of the asset.
C. A company subject to political costs is more likely to select this depreciation method.
D. Assumes that the consumption of the asset is uniform over its expected useful life.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

64. On 1 January, Broncos Ltd paid $20 000 000 for a tract of land with a building. The building was in a bad condition and had to be refurbished for another $2 000 000. The adjacent vacant land is valued at $15 000 000. It is expected that the building will be in use for at 20 years. What is the depreciation expense for the first year? 

A. $100 000
B. $250 000
C. $350 000
D. $1 100 000

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

65. When an asset has a defined life, and it is expected that it will be used uniformly, which depreciation policy is likely to be used? 

A. Sum-of-digits.
B. Straight-line rate.
C. Declining-balance.
D. Sum-of-digits or declining-balance.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

66. The depreciable amount of any addition or extension to an existing depreciable asset that becomes an integral part of that asset must be allocated over: 

A. the life of the asset.
B. the expected residual amount.
C. the remaining useful life of the asset.
D. the cost of the asset.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-02 Understand the role of accounting in allocating the depreciable amount of a non-current asset over the asset's expected useful life.
Section: Modifying existing non-current assets
Topic: Modifying existing non-current assets
 

67. Using a 'net basis' means that the proceeds from the disposal of a depreciable asset should not be separately treated as: 

A. revenue.
B. gain.
C. income.
D. loss.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Disposition of a depreciable asset
Topic: Disposition of a depreciable asset
 

68. Information is material if it has the potential, individually or collectively, to influence economic decisions of users taken on the basis of financial statements through: 

A. non-disclosure.
B. omission.
C. misstatement.
D. all of the given answers.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05-07 Know how and when to revise depreciation rates and methods.
Section: Revision of depreciation rate and depreciation method
Topic: Revision of depreciation rate and depreciation method
 

69. Beacon Ltd purchases an assembly-line stamping machine to punch in a stencilled pattern on lanterns. Which of the following depreciation methods would most closely reflect the pattern of usage of the stamping machine? 

A. Straight-line.
B. Units-of-production.
C. Sum-of-digits.
D. Declining balance method.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

70. Given the following data about a machine at 1 July 2017:

Using the straight-line method, which of the following reflects the equation used for estimating the yearly depreciation for the year ended 30 June 2018?

 
A.  Costs − residual value.

B.  Costs ÷ expected useful life.

C.  Costs ÷ residual value.

D.  (Costs − residual value) ÷ expected useful life.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-01 Understand the meaning of 'depreciation' and be able to explain the necessity for calculating depreciation expense.
Section: Depreciation as a process of allocating the cost of an asset over its useful life: further considerations
Topic: Depreciation as a process of allocating the cost of an asset over its useful life: further considerations
 

71.  sperence Ltd operates a manufacturing facility to produce its key products. On 1 July 2018, the balance of an equipment account was as follows:

During the financial year ending 30 June 2019, Esperence Ltd incurred maintenance costs of $6000 and depreciation expense of $15 000. On 1 July 2019, Esperence Ltd incurred costs of $60 000 in relation to a major upgrade to improve efficiency.  The equipment on 1 July 2019 has an expected remaining useful life of 20 years, and an expected residual value of $50 000. Esperence Ltd uses the cost method to account for equipment and depreciates equipment on a straight-line basis.

What is the journal entry to record the depreciation expense for the year ending 30 June 2020?

 
A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Method of cost apportionment
Topic: Method of cost apportionment
 

72.  Habberfield Ltd purchased equipment on 1 December 2017 for $140 000 with an expected useful life of 15 years and incurred the following on 1 January 2018:
 

What is the depreciable base of the equipment for the purpose of depreciating under the straight-line method?

 
A. $140 000

B. $160 000

C. $205 000

D. $200 000

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-03 Be aware that the practice of calculating depreciation expense requires a number of decisions to be made including determining the 'depreciable base' of the asset, its 'useful life' and the appropriate method of cost apportionment.
Learning Objective: 05-04 Understand the various approaches (straight line, sum of digits, declining balance, production basis) for allocating the depreciable amount of a non-current asset to particular financial periods.
Section: Depreciable amount (base) of an asset
Topic: Depreciable amount (base) of an asset
 

73. The following information is taken from the accounts of Newtown Ltd.
 

The gain on sale represents the difference between:

A. the proceeds received and the original cost of the machinery sold.

B. the proceeds received and the carrying amount of the machinery sold.

C. the carrying amount and the original cost of the machinery sold.

D. the original cost and the accumulated depreciation of the machinery sold.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 05-08 Know how to account for the disposal of a depreciable asset.
Section: Disposition of a depreciable asset
Topic: Disposition of a depreciable asset
 

Chapter 05 Testbank Summary