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Ch05 tb loftus 3e - textbook solution

Management Accounting (University of New South Wales)

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Testbank
to accompany

Financial reporting

3rd edition
by
Loftus et al.

Not for distribution. Instructors may assign selected questions in their LMS.

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Testbank to accompany Financial reporting 3e by Loftus et al.

Chapter 5: Property, plant and equipment

Multiple choice questions

1. Property, plant and equipment includes items that:

a. have no physical substance.

b. are held for resale.
*c. held for rental to others.
d. are expected to be used up within one year from date of purchase.

Answer: c
Learning objective 5.1: discuss the nature of property, plant and equipment.

2. Property, plant and equipment are assets that:

a. are expected to be used up within twelve months from purchase date.

*b. are physical in nature.
c. are held for resale within the current period.
d. have a remaining productive life of less than one year.

Answer: b
Learning objective 5.1: discuss the nature of property, plant and equipment.

3. The cost of property, plant and equipment is only recognised as an asset if it is probable
that the future economic benefits will flow to the entity and:

a. the asset has been fully paid for in cash.

b. the asset has been sent to the buyer.
c. it is a physical asset.
*d. the cost can be reliably measured.

Answer: d
Learning objective 5.2: outline the recognition criteria for initial recognition of property,
plant and equipment.

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Chapter 5: Property, plant and equipment

Not for distribution in full. Instructors may assign selected questions in their LMS.

4. The cost of property, plant and equipment is only recognised if the cost of the asset can be
reliably measured and:

a. the asset has been paid for in cash.

b. the asset has been received by the purchaser.
c. the cost is not directly attributable to the asset.
*d. it is probable that future economic benefits associated with the asset will flow to the
entity.

Answer: d
Learning objective 5.2: outline the recognition criteria for initial recognition of property,
plant and equipment.

5. An entity acquired an item of machinery in exchange for a motor vehicle. The carrying
amount of the machinery is $8000 and its fair value is $10 000. The journal entry to
record the acquisition of the machinery will include:

a. a loss on acquisition of $2000.

*b. a gain on sale of $2000.
c. proceeds on sale of motor vehicle of $2000.
d. proceeds on sale of machinery of $2000.

Answer: b
Learning objective 5.3: explain how to measure property, plant and equipment on initial
recognition.

6. For the purposes of recognising property, plant and equipment assets the acquisition date
is the date:

a. the consideration is paid.

*b. on which the acquirer obtains control of the asset.
c. the contract to exchange assets is signed.
d. on which the contract to acquire the asset becomes unconditional.

Answer: b
Learning objective 5.3: explain how to measure property, plant and equipment on initial
recognition.

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Testbank to accompany Financial reporting 3e by Loftus et al.

7. Gemma Limited acquired a number of assets for $400 000 cash. The fair values of the
assets on date of acquisition were: building $320 000, furniture and fittings $80 000. The
correct journal entry to record this acquisition is:

a.DR Property, plant and equipment $400 000

CR Cash $400 000

b.DR Property, plant and equipment $440 000

CR Cash $440 000

*c. DR Building $320 000

DR Furniture and fittings $ 80 000
CR Cash $400 000

d. DR Building $352 000

DR Furniture $ 88 000
CR Cash $440 000

Answer: c
Learning objective 5.3: explain how to measure property, plant and equipment on initial
recognition.

8. Costs that may be included in the cost of acquisition of property, plant and equipment
assets include:

I II III IV
Site preparation No Yes Yes Yes
Initial delivery and handling costs No Yes Yes No
Installation and assembly costs No No Yes Yes
Testing whether the asset is functioning No No Yes Yes

a. I.
b. II.
*c. III.
d. IV.

Answer: c
Learning objective 5.3: explain how to measure property, plant and equipment on initial
recognition.

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Chapter 5: Property, plant and equipment

Not for distribution in full. Instructors may assign selected questions in their LMS.

9. After an item of property, plant and equipment has been initially recognised at cost it may
be measured using which measurement method?

a. liquidation value.
*b. revaluation.
c. accrual.
d. net realisable value.

Answer: b
Learning objective 5.4: explain the alternative ways in which property, plant and equipment
can be measured subsequent to initial recognition.

10. Subsequent to the initial recognition of an asset an entity has a choice on the
measurement basis to be adopted. The entity can choose either:

*a. cost or revaluation.

b. cash or accrual.
c. tax or accounting.
d. current or non-current.

Answer: a
Learning objective 5.4: explain the alternative ways in which property, plant and equipment
can be measured subsequent to initial recognition.

11. When applying the revaluation measurement model to assets, the model:

a. may only be applied to current assets.

b. is applied permanently and may not be changed.
*c. applies to the entire class of non-current assets.
d. is applied to individual assets within a class of non-current assets.

Answer: c
Learning objective 5.4: explain the alternative ways in which property, plant and equipment
can be measured subsequent to initial recognition.

12. Depreciation is a process that is designed to:

*a. allocate the cost of an asset across its useful life to an entity.
b. reduce the carrying amount of an asset to reflect the diminishing fair value of the asset.
c. spread the cost of an asset across a period no greater than 10 years.
d. reflect the change in value of an asset due to advances in technology.

Answer: a
Learning objective 5.5: explain the cost model of measurement and understand the nature
and calculation of depreciation.

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Testbank to accompany Financial reporting 3e by Loftus et al.

13. Under AASB 116, the depreciation charge for a period reflects:

a. the fall in the re-sell value of the asset across the period.
*b. the consumption of economic benefits over the period.
c. a change in the market value of the asset that has occurred over the period.
d. a reduction in the estimated fair value of the asset across the period.

Answer: b
Learning objective 5.5: explain the cost model of measurement and understand the nature
and calculation of depreciation.

14. Under the cost model, after initial recognition of a property, plant and equipment asset the
item must be carried at its:

*a. cost less accumulated depreciation and less accumulated impairment losses.
b. historical cost.
c. initial cost.
d. net present value.

Answer: a
Learning objective 5.5: explain the cost model of measurement and understand the nature
and calculation of depreciation.

15. Wombat Limited applies the straight-line method of depreciation to its non-current assets.
The cost of the buildings was $400 000, the depreciable amount is $350 000, the residual
value is $50 000 and the useful life is 10 years. The annual depreciation charge is:

*a. $35 000.

b. $40 000.
c. $50 000.
d. $100 000.

Answer: a
Learning objective 5.5: explain the cost model of measurement and understand the nature
and calculation of depreciation.

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Chapter 5: Property, plant and equipment

Not for distribution in full. Instructors may assign selected questions in their LMS.

16. Roland Limited acquired an item of plant with an expected useful life of 5 years.
Expected total production output over this period was: Year 1, 40 000 units; Year 2,
40 000 units; Year 3, 32 000 units; Year 4, 28 000 units Year 5, 15 000 units. The plant
cost $200 000 and associated installation costs amounted to $50 000 and residual value is
$20 000. The amount of depreciation charged in the first year is:

*a. $57 500

b. $62 500
c. $67 500
d. $92 000

Answer: a
Learning objective 5.5: explain the cost model of measurement and understand the nature
and calculation of depreciation.

17. If a residual value is determined to be of a material amount the entity is required to

review the residual value:

a. monthly.
*b. at the end of each reporting period.
c. when completing interim reports.
d. at no time.

Answer: b
Learning objective 5.5: explain the cost model of measurement and understand the nature
and calculation of depreciation.

18. Which of the following statements regarding depreciation is incorrect?

a. Depreciation is an allocation of the cost of the asset over its useful life.
b. The depreciation method used should best reflect the pattern of usage of the asset over
its useful life.
*c. Depreciation is a measure of the asset’s change in value.
d. Depreciation is a systematic allocation of the cost of the asset over its useful life.

Answer: c
Learning objective 5.5: explain the cost model of measurement and understand the nature
and calculation of depreciation.

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Testbank to accompany Financial reporting 3e by Loftus et al.

19. A company depreciates an item of machinery using the straight-line method. The asset
was revalued upwards after two years of use. The remaining useful life of four years and
the residual value are determined to remain the same. Which of the following
relationships reflects the effect of the revaluation on the prospective depreciation of the
machinery?

a. Depreciation rate = Same; Annual depreciation expense = Same.

b. Depreciation rate = Higher; Annual depreciation expense = Higher.
*c Depreciation rate = Same; Annual depreciation expense = Higher.
d. Depreciation rate = Higher; Annual depreciation expense = Same.

Answer: c
Learning objective 5.6: explain the revaluation model of measurement.

20. AASB 116 Property, Plant and Equipment requires revaluations to be applied to:

a. all assets on an individual basis.

*b. assets on a class-by-class basis.
c. individual current assets only.
d. individual non-current assets only.

Answer: b
Learning objective 5.6: explain the revaluation model of measurement.

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Chapter 5: Property, plant and equipment

Not for distribution in full. Instructors may assign selected questions in their LMS.

21. Use the following information to answer this question.

The draft statement of financial position for Banjo Ltd as at 30 June 2021 discloses the
following:

Machinery (at cost) $750 000

Less Accumulated depreciation 400 000 $350 000

On the same date, Banjo Ltd assessed the fair value of the machinery to be $400 000.

The tax rate is 30%. Depreciation rates are 10% p.a. (accounting) and 12.5% p.a. (tax) using
the straight-line method.

In accordance with IAS 16 Property, Plant and Equipment, the journal entries necessary to
record the revaluation of machinery (ignoring any tax effect) at 30 June 2021 is:

*a.
Accumulated depreciation — Machinery Dr 400 000
Machinery Cr 400 000

Machinery Dr 50 000
Gain on revaluation — OCI Cr 50 000
b.
Machinery Dr 50 000
Gain on revaluation — OCI Cr 50 000

c.
Gain on revaluation — OCI Dr 50 000
Asset revaluation surplus Cr 50 000
d.
Machinery Dr 350 000
Gain on revaluation — OCI Dr 50 000
Accumulated depreciation — Cr 400 000
Machinery

Answer: a
Learning objective 5.6: explain the revaluation model of measurement.

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Testbank to accompany Financial reporting 3e by Loftus et al.

22. Use the following information to answer this question.

The draft statement of financial position for Banjo Ltd as at 30 June 2021 discloses the
following:

Machinery (at cost) $750 000

Less Accumulated depreciation 400 000 $350 000

On the same date, Banjo Ltd assessed the fair value of the machinery to be $400 000.

The tax rate is 30%. Depreciation rates are 10% p.a. (accounting) and 12.5% p.a. (tax) using
the straight-line method.

The journal entries to adjust for the tax effect of the revaluation at 30 June 2021 is:

a.
Income tax expense — OCI Dr 15 000
Deferred tax liability Cr 15 000
b.
Asset revaluation surplus Dr 15 000
Income tax expense — OCI Cr 15 000
c.
Income tax expense — OCI Dr 15 000
Asset revaluation surplus Cr 15 000
*d.
Income tax expense — OCI Dr 15 000
Deferred tax liability Cr 15 000

Gain on revaluation — OCI Dr 50 000

Income tax expense — OCI Cr 15 000
Asset revaluation surplus Cr 35 000

Answer: d
Learning objective 5.6: explain the revaluation model of measurement.

23. Tully Limited had an existing revaluation surplus in respect to an item of plant that has
now been derecognised. The appropriate journal entry to transfer the surplus to retained
earnings would include:

*a. CR Retained earnings.

b. CR Asset revaluation surplus.
c. DR Gain on revaluation — OCI.
d. DR Retained earnings.

Answer: a
Learning objective 5.6: explain the revaluation model of measurement.

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Chapter 5: Property, plant and equipment

Not for distribution in full. Instructors may assign selected questions in their LMS.

24. The resulting gain or loss from the sale of a non-current asset is:

a. recognised in other comprehensive income, normally with separate disclosure of

income and the carrying amount of the asset.
b. recognised in other comprehensive income, normally on a net basis.
*c. recognised in current period profit or loss, normally on a net basis.
d. recognised in current period profit or loss, normally with separate disclosure of income
and the carrying amount of the asset.

Answer: c
Learning objective 5.7: account for derecognition.

25. Footloose Limited acquired furniture and fittings on 1 July 2019 for $42 000. The
estimated useful life of the furniture and fittings at acquisition date was 8 years and the
residual value was $2000. The company sold all the furniture and fittings on 1 January
2025 for $18 000. The journal entry to reflect the sale is:

a.
DR Cash $18 000
DR Accumulated depreciation $30 000
CR Furniture and fittings $42 000
CR Gain on sale $ 6 000
b.
DR Cash $18 000
CR Proceeds on sale $18 000
DR Carrying amount of F & F $27 500
CR Furniture and fittings $27 500
c.
DR Cash $18 000
DR Loss on sale $ 3 500
CR Furniture and fittings $21 500
*d.
DR Cash $18 000
DR Accumulated depreciation $27 500
CR Furniture and fittings $42 000
CR Gain on sale $ 3 500

Answer: d
Learning objective 5.7: account for derecognition.

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Testbank to accompany Financial reporting 3e by Loftus et al.

26. Which of the following statements is incorrect in relation to disclosure of balances for
property, plant and equipment?

a. An entity must disclose the useful life estimates for each class of assets.
b. A summary of movements in the revaluation surplus is required to be disclosed.
c. The gross carrying amounts of the assets at both the beginning and the end of the
financial period must be disclosed.
*d. Information on assets carried at revalued amounts must be disclosed on an individual
asset basis.

Answer: d
Learning objective 5.8: outline the disclosure requirements of AASB 116/IAS 16.

27. AASB 116 requires which of the following disclosures for each class of property, plant
and equipment?

a. The type of deprecation methods used.

b. The useful lives or the depreciation rates used.
c. Whether the class of assets is valued using the cost or revaluation method.
*d. All of the options are correct.

Answer: d
Learning objective 5.8: outline the disclosure requirements of AASB 116/IAS 16.

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