Financial Accounting 1
Plant, Property and Equipment
Activity 2
Question 1
Property, plant and equipment are:
a. Intangible assets
b. Current assets
c. Tangible and non-current assets held in use for production of goods and services
d. Expected to be use for one accounting period only
e. Asset usually purchased with cash
Question 2
Which one of the following is a general principle for recognition of property, plant and equipment in the
financial statements?
a. It is probable that future economic benefits associated with the item will flow to the entity and the
cost of the item can be measured reliably.
b. It is probable that future economic benefits associated with the item will flow to the entity and the
cost of the item cannot be measured reliably.
c. It is not probable that future economic benefits associated with the item will flow to the entity and
the cost of the item can be measured reliably.
d. It is probable that future economic benefits associated with the item will not flow to the entity and
the cost of the item cannot be measured reliably.
Question 3
Total property, plant and equipment of an entity may be broken down into separate assets. This is referred
to as:
a. Separation approach to asset recognition
b. Composite approach to asset recognition
c. Components approach to asset recognition
d. Common approach to asset recognition
e. Generation approach to asset recognition
Question 4
An entity allocates the amount initially recognized in respect of an asset to its component parts and
accounts for each component separately.
a. Separation approach to asset recognition
b. Composite approach to asset recognition
c. Components approach to asset recognition
d. Common approach to asset recognition
e. Generation approach to asset recognition
Question 5
An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at:
a. Its current value
b. Its replacement value
c. Its cost
d. Its deprival value
e. None of the above
Question 6
Which one of the following is not a component of cost in acquiring property, plant and equipment?
a. Purchase price
b. Directly attributable costs
c. Initial estimate of the costs of dismantling and removing the item or restoring the site on which it is
located
d. Transportation cost
Question 7
Which one of the following is a purchase price of a property, plant and equipment?
a. Import duties
b. Transportation to the location
c. Installation cost
d. Dismantling of the old equipment
e. Insurance cost
Question 8
Ignoring GST, what is the correct entry to record the purchase of a motor vehicle for $25 000 cash?
a.
Debit bank $25 000; credit motor vehicles $25 000
b.
Debit motor vehicles $25 000; credit bank $25 000
c.
Debit motor vehicles $25 000; credit capital $25 000
d.
Debit motor vehicles $25 000; credit accounts receivable $25 000
Question 9
Blue Horizon has acquired equipment and incurred these expenses in doing so.
Gross invoice price, net of GST, subject to terms of 2/10, n/30)
Transportation costs to get equipment to factory
Speeding ticket incurred by company driver while
delivering equipment to the factory
Cost to repair wall damaged during installation
Special permit to allow wide load on freeway
$
14 500
1 200
120
500
300
The equipment should be recorded in Blue Horizon’s records at:
a.
b.
c.
d.
$14 500.
$15 700.
$16 000.
$16 500.
Question 10
Milligan & Miles purchased a small clothing company for $250 000 (net of GST). The fair values of the
individual assets acquired (net of GST) were as follows.
$
$
Building
100 000
Shop fittings
80 000
Land
60 000
Equipment
30 000
At what amount should shop fittings be recorded by Milligan & Miles?
a.
b.
c.
d.
$80 000
$63 491
$74 074
$86 400
Question 11
Kamp Gravel Co purchased three trucks for $50 000 each plus GST by making a $20 000 down payment and
agreeing to pay the balance at the end six months. The journal entry to record the acquisition is which of the
following?
$
$
a.
Trucks
150 000
GST outlays
15 000
Sundry creditor
165 000
b.
Trucks
150 000
GST outlays
15 000
Cash
20 000
Sundry creditor
145 000
c.
Cash
20 000
Sundry creditor
130 000
Trucks
150 000
d.
Trucks
20 000
Cash
20 000
Question 12
In the financial statements prepared at the end of the accounting period the item accumulated depreciation
appears on:
a.
the income statement as an expense.
b.
the balance sheet as a liability.
the balance sheet as a deduction from the related asset.
c.
d.
both the balance sheet and the income statement.
Question 13
Ryan Co purchased a computer for $15 000. Originally it had an estimated useful life of 4 years and a
residual value of $3000, but on the first day of the 4th year of life the estimated useful life was extended by
a further two years and the residual value was reduced to zero. Ryan Co uses the straight-line method to
depreciate its computer equipment. At the end of year 4, how much depreciation should be recorded for
the computer?
a.
$4000
b.
$3000
c.
$2000
d.
$5000
Question 14
If the straight-line method of depreciation rather than the reducing-balance method is selected, in the later
years of the asset’s life the depreciation charge will be:
a.
b.
c.
d.
greater.
smaller.
the same.
cannot say.
Question 15
Which statement best describes the nature of depreciation?
a.
Writing down the value of an asset according to the change in its market value.
b.
Writing down the value of an asset according to the decline in its physical efficiency.
c.
Allocating the cost of an asset over its useful life.
d.
A charge against profits to provide funds for asset replacement.
Question 16
Which statement concerning the sum-of-the-years’-digits method of depreciation is true?
a.
It results in a decreasing depreciation charge per annum over the life of the asset.
b.
It is the most common method of depreciation used in Australia.
c.
d.
It is an alternative name for the reducing balance method.
The formula is carrying amount multiplied by remaining years of life.
Question 17
Depreciation charged at the end of the accounting period is what type of entry?
a.
Closing entry
b.
Reversing entry
c.
Adjusting entry
Correcting entry
d.
Question 18
Which statement best describes the nature of accounting depreciation?
a.
A charge representing the change in the asset’s market value.
b.
An allocation of the cost of the asset over its estimated useful life.
c.
The amount that can be claimed as a tax deduction.
A revaluation of the asset to its current replacement value.
d.
Question 19
How many of these factors will have an effect on the amount of depreciation charged on an asset in a
particular accounting period?
 Cost or revalued amount of asset
 The size of the asset
 Method of depreciation used
 Estimated residual value of asset
a.
b.
c.
d.
1
2
3
4
Question 20
The Delivery Equipment account in the ledger of A Co has a balance of $17 600 which is the cost of two 2nd
hand trucks purchased on 1 January 2015. The Accumulated Depreciation Delivery Equipment account
has a balance on 31 December 2016 of $8000, before adjusting entries. No additional delivery trucks have
been acquired or sold. The residual value of each truck is estimated to be $800 and the straight-line
depreciation method is used. What is the necessary adjusting entry to record annual depreciation on 31
December 2017?
a.
b.
c.
Depreciation exp.
Accumulated depr.
Depreciation exp.
Debit
$8000 Delivery equipment
$4000 Delivery equipment
$8000 Cash at bank
Credit
$8000
$4000
$8000
d.
Depreciation exp.
$4000 Accumulated depr.
$4000
Question 21
On 31 December 2014 a new motor vehicle with a life of five years and no estimated residual value was
purchased by a business at a cost of $23 000, net of GST. The diminishing-balance depreciation method is
employed. At a rate of 25% p.a. what is the carrying value of the motor vehicle at 31 December 2016 after
charging depreciation for that year?
a.
b.
c.
d.
$9703
$15 000
$17 250
$12 937
Question 22
Which statement concerning the diminishing-balance method of depreciation is true?
a.
b.
c.
d.
It charges the same amount of depreciation each period.
It applies a declining percentage factor to the asset’s original cost.
It is also known as the units-of-production method.
It is an appropriate method when proportionately more of the asset’s benefits are
consumed in the early years of its life.
Question 23
Melbourne Manufacturing purchased a machine for $60 000 on 1 January 2015 which is expected to have a 5
year life, no residual value, and to produce a total of 20 000 wingdings before it is scrapped. Assuming the
Melbourne Manufacturing uses the units-of-production method and actual production up to 31 December 2015,
(the end of the accounting year) is 5000 wingdings, calculate depreciation expense for 2015.
a.
b.
c.
d.
$5000
$10 000
$12 000
$15 000
Question 24
If the straight-line method of depreciation rather than the reducing-balance method is selected, in the early
years of the asset’s life the depreciation charge will be comparatively:
a.
greater.
b.
smaller.
c.
the same.
d.
cannot say.
Question 25
Your examination of the records of Wilson Ltd, which was established on 1 March 2015, reveals that the
accountant debited the Land, Buildings and Equipment account with the following items (ignore GST):
Purchase price of land and building
(An independent valuation was obtained, showing land being valued at
$600 000 and the building at $80 000)
Legal and transfer costs
Cost of demolition of building
Earthmoving on property
Architect’s and other professional fees in respect of the erection of new
buildings on the property
Cost of erection of new building
Layout of parking area
Lighting of parking area
Cost of machinery and equipment (including $9000 for a machine which was
dropped from one of the company’s vehicles during off-loading and irreparably
damaged)
Installation cost of machinery
Cost of replacement of damaged machine
$
650 000
3 500
25 000
15 000
160 000
2 100 000
75 000
18 000
1 267 000
85 000
9 000
$
4 407 500
Examination of the wage records shows that the salary of the manager, $4000 per month, was debited to
the Salaries Expense account. From 1 March to 31 August 2015, he supervised the erection of the factory
buildings, and from 1 September to 31 October 2015 he supervised the installation of the machinery.
The accountant credited sundry income with $8400, being $7000 received for scrap building material from
the demolished building and $1400 for the damaged machine.
The value of land is:
a) $678 500
b) $768 500
c) $876 500
d) $687 500
e) None of the above
The value of building is:
a) $3 268 000
b) $2 638 000
c) $2 368 000
d) $2 836 000
e) None of the above
The value of machinery is:
a)
b)
c)
d)
e)
$1 632 000
$1 362 000
$1 325 000
$1 352 000
None of the above
Question 26
In early July 2015, Masterton Ltd is considering the acquisition of some machinery for $1 200 000 plus GST
to be used in the manufacture of a new product. The machinery has a useful life of 10 years, during which
management plans to produce 500 000 units of the new product. The residual value of the machinery is
$100 000.
The following projections were made in order to select a depreciation method to be used for the machinery:
Year ended 30
June
2016
2017
2018
2019
2020
Units of output
50 000
45 000
55 000
58 000
60 000
Repairs and
maintenance
$70 000
60 000
90 000
95 000
100 000
Profit before
depreciation
$350 000
340 000
355 000
360 000
380 000
In calculating the profit before depreciation, all expenses have been deducted, including the repairs and
maintenance expense.
Required
As the accountant for Masterton Ltd, prepare separate depreciation schedules for the machinery for the 5year period, using the following depreciation methods: (a) straight-line, (b) diminishing balance, (c) sumof-years’-digits, and (d) units-of-production. Use the following headings for each schedule: ‘Year ending
30 June’, ‘Annual depreciation expense’, ‘Accumulated depreciation’, ‘Carrying amount at end of year’.
Straight-line
Year ended
30 June
2016
2017
2018
2019
2020
Diminishing balance
Annual
depreciation
Accumulated
depreciation
Carrying amount –
end of year
110,000
110,000
1,090,000
110,000
220,000
980,000
110,000
110,000
330,000
440,000
870,000
760,000
110,000
550,000
650,000
Year ended
30 June
2016
2017
2018
2019
2020
Annual
depreciation
Accumulated
depreciation
Carrying amount –
end of year
264,000
264,000
936,000
205,920
469,920
730,080
160,618
125,282
630538
755,820
569,462
444,180
97,720
853,540
346,460
Sum-of-years’-digits
Year ended
30 June
2016
2017
2018
2019
2020
Annual
depreciation
Accumulated
depreciation
Carrying amount –
end of year
218,182
218,182
981,818
196,364
414,546
785,454
174,545
589,091
610,909
152,727
741,818
458,182
130,909
872,727
327,273
Units-of-production
Year ended
30 June
2016
2017
2018
2019
2020
Annual
depreciation
Accumulated
depreciation
Carrying amount –
end of year
110,000
110,000
1,090,000
99,000
121,000
209,000
330,000
991,000
870,000
127,600
457,600
742,400
132,000
589,600
610,400