76. Managers often argue that property values appreciate and therefore depreciation is irrelevant. Discuss the contractual implications of building depreciation to debt covenants in place. 77. Discuss how the useful life of a depreciable asset is determined.Chapter 05 Key Depreciation represents a decline in the market value of an asset over its life FALSE chapter Chapter 05 #1 Ditty: Easy Section: § 01 Deprecsble amount (base) ofan aset Section: introduction Where a non-current asset appreciates in value over time, no depreciation should be charged. FALSE Chapter ~ Chapter 05 22 Ditty: Medurn Section: 5.31 Depreciation ass process of allocating the cost ofan asset over ts useful ite further considerations 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 Chapter Chapter 05 23 Ditty: Easy Section’ 5.02 Determination of uetul ite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 Chapter - Chapter 05 24 Ditty: Easy Section: § 01 Deprecsble amount (base) ofan aset The depreciation rate and useful lives of assets should not be revised during the depreciable life of the asset. FALSE Chapter - Chapter 05 25 Ditty: Easy Seaton: §.06 Revision of depreciation tate and depreciation method Assets must be depreciated from the time they are acquired. FALSE Chapter Chapter 05 26 Ditty: Easy Section: 5.05 When to start depreciating an asset Amortisation has the same meaning as depreciation, but conventionally is used in relation to intangible assets. TRUE Chapter ~ Chapter 05 27, Ditty: Easy Section 5.07 Land and buildings Section: Introduction10. 11 The expenditure to modify an asset so that its service potential is improved should be expensed FALSE chapter - Chapter 0528 Dil asy Seaton 5.08 Dipotion of depreciable asset 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 stil be depreciated over the life of the original asset. FALSE Chapter Chapter 05 28 Ditty: Easy Section: § 08 Modliving exiting non-aurent assets The profit or loss on the sale of an asset is calculated by deducting the cost of the asset from the sale amount. chapter - Chapter 05216 Ditty: Easy Seaton: §.09 Dspostion ofa depreciable asset Depreciation of an asset is required when market value accounting is applied on a non-current asset. FALSE Chapter - Chapter 05 21112 B 14, 15, Ditty: Mediuen Section: introduction AASB 116 allows capitalisation of items of plant and property because these are considered prepayments. FALSE Chapter ~ Chapter 05 12 Ditty: Medurn Section: § 08 Modliving exiting non-rrent assets Depreciation expense is always recognised in profit and loss. FALSE chapter ~ Chapter 05213 Ditty: Medurn Section: introduction 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 Chapter - Chapter 05218 Ditty: Medurn Section: § 01 Deprecsble amount (base) ofan asset 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 Chapter Chapter 05 215 Ditty: Easy16. 17 18, 19, Section: §.03 Method of cost apportionment Land that has a definite useful life should be depreciated. TRUE Chapter ~ Chapter 05 216 Diticuty Easy Section 5.07 Land and buildings Annon-current asset that is subjected to depreciation is no longer subjected to impairment testing, FALSE chapter- chapter 05217 italy edn Secon 5.07 and and butings 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 chapter ~ Chapter 05218 Ditty: Medurn Seaton: §.09 Dspostion ofa depreciable asset 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 chapter ~ Chapter 05218 Ditty: Medurn Seaton: 5.09 Dspostion ofa depreciable asset20, 24 22, 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 Chapter - Chapter 05 #26 Ditty: Easy Section: §.12 Disclosure requirements 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 Chapter - Chapter 05221 ical Medium Seaton 502 Detention of ue Me Secton’5 03 Method of cost sppomtonment Secon: troduction 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. Chapter - Chapter 05 #2223, 24, Ditty: Mediuen Section: introduction 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 Chapter - Chapter 5 #23 Ditty: Easy Section: § 01 Deprecsble amount (base) ofan aset When selecting a method of cost apportionment an accountant should choose > the method that best reflects how the asset is used, taking into account its total physical life the method that produces the best profit for the firm ; the method stipulated by the taxation department for submitting tax returns. the method that best reflects the economic use of the asset. chapter Chapter 05 #24 Ditty: Easy Section’ 5.03 Method of cost apportionment25, 26. 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 8. charge the original amount of depreciation to the income statement and transfer any change in value to the asset revaluation reserve. In . 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. Chapter ~ Chapter 0 225 Ditty: Easy Seaton: 8.06 Revision of depreciation rate and depreciation method 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. 8, the total service, expressed in terms of production or similar units that may most likely be obtained from the asset under normal operating conditions. ; 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. the total service, expressed in terms of production or similar units that may most likely be obtained from the asset under ideal operating conditions Chapter - Chapter 05 #26 Ditty: Easy Section’ 5.02 Determination of uetul ite27. 28, Assets should be depreciated from: A. the date the asset is ordered B. the date the asset is delivered to the premises until itis no longer in use. G the date the asset is first put into use or held ready for use. D. the date the asset is paid for until itis disposed of. Chapter - Chapter 05227 Dict asy Secon’ 505 When to star deprecting an set 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. B years B. years C. 18 years D. 9 years Chapter chapter 05228 Ditty: Easy Section’ 5.03 Method of cost apportionment29, 30, 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 Chapter - Chapter 05 #26 Ditty: Medurn Seaton: 8.06 Revision of depreciation rate and deprecation methoa 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 Chapter - Chapter 05 #36 Ditty: Medurn Section’ 5.03 Method of cost apportionment31 32, 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 ofits life. What depreciation should be charged in each of the first twp 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 chapter ~ Chapter 05231 Ditty: Medurn Section’ 5.03 Method of cost apportionment 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 Chapter - Chapter 05 #32 Ditty: Hara Section’ 5.03 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 Chapter chapter 05233 Ditty: Medurn Section’ 5.03 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. Its 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 8. $5417 C. $3250 D. $6500 Chapter Chapter 05 434 Difieuty: Medurn Section’ 5.03 Method of cost apportionment35, 36. 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? $18 800 $32 800 C $15 600 D. $14 000 oP Chapter - Chapter 05 #35 Ditty: Medurn Section’ 5.07 Land and buildings Profit on the sale of an asset is calculated: A. by subtracting the disposal proceeds from the current carrying amount of the asset. after assessing the fair value of the asset and subtracting the proceeds on the sale, A once depreciation has been applied to the date of sale. Ig by subtracting the updated carrying amount from the net proceeds on disposal Chapter - Chapter 05 #38 Ditty: Easy Seaton: §.09 Dspostion ofa depreciable asset37, 38, 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, Chapter - Chapter 05 237 Ditty: Medurn Section’ 5.03 Method of cost apportionment 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 8. $6000 C. $1084 D. $9524 Chapter - Chapter 05 #3839, Ditcuty: Easy Section’ 5.03 Method of ost apportionment 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 anil 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 Chapter - Chapter 05 #35 Ditty: Hara Section’ 5.03 Method of cost apportionment Section: §.04 Depreciation of separate components40. 41 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 8. $1000 C. $8800 D, $10500 chapter Chapter 05 46 Difieuty: Medurn Section’ 5.03 Method of cost apportionment 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 Chapter - Chapter 05241 Ditty: Medurn Section’ 5.03 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? Is Dr_ [Proceeds from sale of machine 65 000) Dr_|Gain on sale of machine 30 100) Cr_|Machine 75 000 Cr_|Accumulated depreciation—machine 20 100 Dr_[Gash at bank 5 O00] Cr_ [Proceeds from sale of machine 66 000] Dr_[Canying amount of machinery sold [54 900 Cr_ [Accumulated depreciation—machine 20 100] Cr_[Machine 7 000| Dr_[Cash at bank 65 000) Dr [Accumulated depreciation—machine _ | 20 100 Cr_|Profit on sale of machine 10 100] Cr_|Machine 75 000 Dr [Accumulated depreciation—machine _ | 20,100 Dr_[Cash at bank 54 900) Cr_|Machine 75,000 Chapter ~ Chapter 0542 Ditty: Medurn Seaton §.08 Dispostion ofa deprecab 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 Chapter Chapter 05 #483 Difieuty: Medurn Section’ 5.03 Method of cost apportionment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 Chapter Chapter 05248 Ditty: Medurn Section’ 5.03 Method of cost apportionment45. 46. 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. A 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. chapter - Chapter 05245 Dict ayy Secon 5.07 and and bstdngs 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. 8. impairment gains recognised in the statement of financial position. C. depreciation. Io ), additions and disposals and depreciation. chapter Chapter 05 46 Ditty: Easy Section: §.12 Disclosure requirements41. 48. Intangible assets are not depreciated under AASB 116 because: they do not have a finite life. I= 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. Chapter - Chapter 05 #47 sections 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 Neart [822722 [Year2 [$19 44a Yeart [26667 [Year2 [623333 c. Yeart 625000 jYear2 |621 875 p, Neart [22222 [Year2 [815 124 Chapter ~ Chapter 05 #48 bith Section’ 5.03 Method of ost sporti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, Dr [Cash at bank 24 O00] Dr [Accumulated depreciation—equipment | 18 000] Cr_[Equipment 34 000) Cr_|Gain on sale of equipment 8000) Cash at bank 24 000 Proceeds from sale of equipment 24000 Dr_| Loss on disposal of equipment 000 Dr_| Canying amount of equipment sold 75 360 Dr_[ Accumulated depreciation - machine 14640 Cr_[ Equipment 3000 c (Dr [Proceeds fom sale of equipment 24 O00] Cr [Gain on sale of equipment 6592 Cr_|Canying arount of equipment sold 17 408 p, _Dr [Cash at bank 24 O00] "Dr [Accumulated depreciation —machine | 16 592 CR |Gain on sale of equipment 6592 Cr_ [Equipment 34 000) chapter ~ Chapter 05 #48 Ditty: Medurn Seaton §.08 Dispostion ofa deprecsb asset50. 51 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 Chapter - Chapter 05 #56 Ditty: Hara Section’ 5.03 Method of cost apportionment 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 Chapter - Chapter 05251 Ditty: Medurn Section’ 5.07 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, Straight Reducing balance [Sum-of digits Lowest [Second highest Highest Straight line Reducing balance [Sum-of digits Second highest Highest Lowest Straight ne lo Reducing balance [Sum-of digits Lowest Highest [Second highest p, Straightline Reducing balance Sum-of-digits Highest [Second highest Lowest Chapter ~ Chapter 08 #52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 8. revalue the carrying amount of equipment before recognising the replacement part purchased G. 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 Chapter - Chapter 5 453 ical Median Section: §.04 Depreciation of separate components Seaton: §.09 Dspostion ofa depreciable asset54. The company recently acquired factory equipment. Which of the following costs should be included in the depreciable amount of the equipment? Ig Stafftraining to | Installation | Equipment modifications | Purchase operate equipment costs before it was ready for use price Yes Yes No Yes Staff training to | Installation | Equipment modifications | Purchase operate equipment costs before it was ready for use price No Yes Yes Yes Staff training to | Installation | Equipment modifications | Purchase operate equipment| costs before it was ready for use price No Yes No Yes Staff training to | Installation | Equipment modifications | Purchase operate equipment costs before it was ready for use price Yes Yes Yes Yes Section: 5.01 Deprecshle chapter Chapter 05 #54 1 (base) ofan Section: 5.05 When to start depreciating an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? Share of fixed overhead Cost of marketing Purchase price | Import duties ae the new product Yes Yes No No Purchase price | Import duties | 5"? of ied overhead | Cost of marketing costs the new product, Yes Yes Yes Yes Purchase price | Import duties | Share of ixed overhead | Cost of marketing costs the new product, Yes Yes No No Purchase price | Import duties | Share of ixed overhead | Cost of marketing costs the new product, Yes No Yes Yes Chapter - Chapter 05 #55 Ditty: Medurn Seaton 1 Depreciable amount (base ofan asset Section: 5.05 When to start depreciating an asset56, 57. 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 8. interest during construction C. promotional expense D. architect's fees and interest during construction Chapter ~ Chapter 05 #56 Ditty: Easy Section: § 01 Deprecsble amount (base) ofan aset 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 Ifthe straight-line method is used, depreciation expense is $10 000. 8. Ifthe reducing balance method is used, depreciation expense is $10 800. C. Ifthe sum of digits method is used, depreciation expense is $13 500. D. Ifthe reducing balance method is used, depreciation expense is $10 800 and if the sum of digits method is used, depreciation expense is $13 500. Chapter ~ chapter 05257 Ditty: Medurn Section’ 5.03 Method of cost apportionment58. 59. 60, In accordance with AASB 116, the residual value and useful life of an asset shall be reviewed: > 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. Chapter ~ Chapter 5 458 Ditty: Medurn Seaton: 8.06 Revision of depreciation rate and depreciation method 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. at least at the end of each annual reporting period as and when required Chapter ~ Chapter 5 458 Dict asy Section’ 5.02 Determination of uetul ite Seaton: 8.06 Revision of deprecation rate and deprecation methoa Which depreciation policy is likely to reduce debt-to-equity ratio? > sum-of-digits B, straight-line rate C. declining-balance D. sum-of-digits or declining-balance Chapter - Chapter 05 #6661 62, Ditty: Mediuen Section: § 01 Deprecsble amount (base) ofan asset Anon-current asset, for example, a building, has the following information available for valuation at balance date Depreciable amount $50 000 Accumulated depreciation $10 000 Residual value $5 000 Recoverable amount $35 000 Value in use $80 000 Which amount should be the carrying amount of this asset at balance date? A. $5000 B. $35 000 C $40 000 D. $80 000 Chapter - Chapter 05261 ical edn Secon 5.07 and and bstdngs 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. 8. 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. Chapter - Chapter 05 #6263, Ditty: Mediuen Section’ 5.03 Method of cost apportionment 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. The process is complex because you need to know the carrying amount, residual value and estimated useful life of the asset. A A company subject to political costs is more likely to select this depreciation method. ). Assumes that the consumption of the asset is uniform over its expected useful life. Ig Chapter - Chapter 05 #63 Ditty: Medurn Section’ 5.03 Method of cost apportionment On 1 January, Broncos Ltd paid $20 million for a tract of land with a building, The building was in abad condition and had to be refurbished for another $2 000 000. The adjacent vacant land is valued at $15 000 000. t 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. $1100 000 chapter - Chapter 05 #64 Ditty: Medurn Section’ 5.03 Method of cost apportionment65, 66. 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 Chapter ~ Chapter 5 465 ical Medium Secton’503 Method of cost sppomtonment 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. 8, the expected residual amount. the remaining useful life of the asset. D. the cost of the asset. Chapter - Chapter 05 #68 Ditty: Medurn Section: §08 Modliving exiting non-urrent asses67. 68, 69, 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. Chapter chapter 05 267 Diet: Meda Section 5.08 Dispostion of a depreciable asset 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. chapter ~ chapter 05 #68 Diticuty Easy Seaton 5.06 Revision of deprecation rate and deprecation methoa Ifa company finds out years later that the expected pattern of consumption of future economic benefits of an asset had changed, how must a company deal with this accounting issue? Chapter - Chapter 05 #68 Ditty: MedurnSection: 8.06 Revision of deprecation rate and deprecation method 70. Explain why the combined cost of acquiring land and building is required to be apportioned to each specific asset and accounted for separately as per AASB 116? What aspects of this provision is presumed inconsistent with the manager's view under Positive Accounting Theory? Chapter - Chapter 05 276 Ditty: Hara Section 5.07 Land and buildings Section’ 5.10 Contractual implications of buldng deprecation 71. In accordance with AASB 116, how should a company treat additions, major repairs and improvements and replacements? chapter - Chapter 0571 Ditty: Hara Seaton: 8.06 Revision of depreciation tate and depreciation method Section: § 08 Modliving exiting non-current assets 72. How are gains or losses on sale of depreciable assets accounted for in accordance with AASB 118 Revenue? Chapter - Chapter 05 #72 Ditty: Medurn Seaton: §.09 Dspostion ofa depreciable asset73. _ Explain how different methods of cost apportionment may unrealistically provide high values for non-current assets. Chapter - Chapter 05 273 Ditty: Medurn Section’ 5.03 Method of cost apportionment 74. Depreciation is intended to track the asset's declining value. Do you agree or disagree with this statement. Discuss. Chapter - Chapter 05 #74 Ditty: Medurn Section: introduction 75. Discuss the criticisms on depreciation of non-current assets under the historical cost of accounting in periods of rising prices. Chapter - Chapter 05 #75 Ditty: Hara Section: 5.11 Depreciation ass process of allocating the cost ofan asset over ts useful ite further considerations76. Managers often argue that property values appreciate and therefore depreciation is irrelevant. Discuss the contractual implications of building depreciation to debt covenants in place Chapter - Chapter 05 276 Ditty: Hara Section: § 01 Deprecsble amount (base) ofan asset 77. Discuss how the useful life of a depreciable asset is determined. Chapter Chapter 05 277 Ditty: Medurn Setion: 5.02 Determination of useful ite