1. Depreciation represents a decline in the market value of an asset over its life.
FALSE
2. Where a non-current asset appreciates in value over time, no depreciation should be charged.
FALSE
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.
FALSE
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.
TRUE
5. The depreciation rate and useful lives of assets should not be revised during the depreciable life of the asset.
FALSE
6. Assets must be depreciated from the time they are acquired.
FALSE
7. Amortisation has the same meaning as depreciation, but conventionally is used in relation to intangible assets.
TRUE
8. The expenditure to modify an asset so that its service potential is improved should be expensed.
FALSE
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.
FALSE
10. The profit or loss on the sale of an asset is calculated by deducting the cost of the asset from the sale amount.
FALSE
11. Depreciation of an asset is required when market value accounting is applied on a non-current asset.
FALSE
12. AASB 116 allows capitalisation of items of plant and property because these are considered prepayments.
FALSE
13. Depreciation expense is always recognised in profit and loss.
FALSE
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.
TRUE
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.
FALSE
16. Land that has a definite useful life should be depreciated.
TRUE
17. A non-current asset that is subjected to depreciation is no longer subjected to impairment testing.
FALSE
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.
FALSE
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.
TRUE
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.
FALSE
21. Depreciation is required because it is generally accepted that:
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:
23. What issues need to be addressed to determine how to allocate the cost of an asset?
24. When selecting a method of cost apportionment an accountant should choose:
25. Where an asset is revalued, the treatment of depreciation is to:
26. The useful life of an asset may be estimated based on:
27. Assets should be depreciated from:
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?
29. AASB 116 requires that depreciation be reviewed:
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?
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?
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?
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)?
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)?
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?
36. Profit on the sale of an asset is calculated:
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.)
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)?
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)?
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)?
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)?
42. 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)?
43. 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?
44. 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?
45. 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:
46. Intangible assets are not depreciated under AASB 116 because:
47. 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?
48. Pursuant to AASB 116, what is the carrying amount of an asset?
49. A company recently replaced a significant part of equipment carried at cost. Which action would be consistent with AASB 116?
50. 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?
51. 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?
52. In accordance with AASB 116, the residual value and useful life of an asset shall be reviewed:
53. In accordance with AASB 116, the depreciation method applied to an asset shall be reviewed:
54. Which depreciation policy is likely to reduce debt-to-equity ratio?
55. A non-current asset, for example, a building, has the following information available for valuation at balance date:
Depreciable amount |
$50000 |
Accumulated depreciation |
$10000 |
Residual value |
$5000 |
Recoverable amount |
$35000 |
Value in use |
$80000 |
Which amount should be the carrying amount of this asset at balance date?
56. Which of the following statements is applicable to the declining-balance method of depreciation?
57. Which of the following statement is applicable to the straight-line method of depreciation?
58. 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?
59. 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?
60. 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:
61. Using a 'net basis' means that the proceeds from the disposal of a depreciable asset should not be separately treated as:
62. 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:
63. 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?
64. Given the following data about a machine at 1 July 2017:
Costs |
Residual value |
Expected useful life |
Accum. dep'n |
$62 500 |
$7500 |
10 years |
$0 |
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?
65. sperence Ltd operates a manufacturing facility to produce its key products. On 1 July 2018, the balance of an equipment account was as follows:
Manufacturing equipment |
$245 000 |
Accumulated depreciation |
$40 000 |
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.
DR |
Depreciation expense |
10 000 |
CR |
Accumulated depreciation |
10 000 |
B.
DR |
Depreciation expense |
12 250 |
CR |
Accumulated depreciation |
12 250 |
C.
DR |
Depreciation expense |
9 750 |
CR |
Accumulated depreciation |
9 750 |
D.
DR |
Accumulated depreciation |
10 000 |
CR |
Depreciation expense |
10 000 |
66. 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:
$ |
|
Delivery freight |
10 000 |
Testing of the equipment |
20 000 |
Installation costs for the equipment |
30 000 |
Legally obligated safe disposal at the end of the equipment's useful life |
5000 |
What is the depreciable base of the equipment for the purpose of depreciating under the straight-line method?
65. The following information is taken from the accounts of Newtown Ltd.
$000 |
|
Machinery, 1 January 2016 |
620 |
Machinery, 31 December 2016 |
740 |
Accumulated depreciation—machinery, 1 January 2016 |
230 |
Accumulated depreciation—machinery, 31 December 2016 |
290 |
Gain on sale of machinery, year ended 31 December 2016 |
10 |
Cost price of machinery sold during the year |
130 |
The gain on sale represents the difference between:
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