Deck 6: Revaluations and Impairment Testing of Non-Current Assets

Question 1

Entities that elect to report plant and equipment at cost less accumulated depreciation are required to disclose a valuation of plant and equipment every 3 years in a note to the accounts.

Answer 1

False

Question 2

If an asset is subject to depreciation or amortization there is no longer a need to test the asset for impairment.

Answer 2

False

Question 3

An entity that elects the revaluation model to measure a class of asset is permitted to revert back to the cost model provided that this will provide more relevant and reliable information.

Answer 3

True

Question 4

The process of discounting future cash flows in calculating the recoverable amount of an asset will result in a higher recoverable amount than if the cash flows are not discounted.

Question 5

IAS 38 will permit some intangible assets to be revalued upwards only when there is an 'active market' for the asset.

Question 6

IAS 16 requires that if it has been decided to revalue a class of non-current assets,the valuations must be kept up to date.

Question 7

IAS 16 requires entities to review at least at the end of each annual reporting period to assess if the fair value of the non-current assets has changed.

Question 8

Depreciation method used and depreciation rates are required to be disclosed for taxation purposes.

Question 9

Recoverable amount is the amount expected to be recovered through the ongoing use and subsequent disposal of an asset.

Question 10

Where the value of revalued non-current assets does not change frequently and is not material,IAS 16 suggests that revaluations:

A)may be undertaken when next convenient.
B)should be undertaken every 3 to 5 years.
C)may be undertaken for individual assets within a class.
D)should be suspended and the entity should switch back to cost.

Question 11

A class of non-current assets as defined by IAS 116 is a category of non-current assets that:

A)were all purchased at the same time by the reporting entity.
B)all have a similar nature or function in the operations of the entity.
C)are disclosed as a single item without supplementary dissection in the financial report.
D)all have a similar nature or function in the operations of the entity, and are disclosed as a single item without supplementary dissection in the financial report.

Question 12

Once an entity elects to value a class of assets using fair value it can switch back to cost basis measurement as long as there is justifiable reason.

Question 13

The fair value of a non-current asset is defined in IAS 16 as the gross amount for which the asset can be sold when the entity is preparing to liquidate.

Question 14

Once a class of non-current assets has been revalued,IAS 16 requires that:

A)Directors continue to revalue the class of assets on an ad hoc basis.
B)Revaluations must be undertaken regularly enough to ensure that the carrying amount of each asset in the class of assets does not differ materially from its fair value at reporting date.
C)All assets in the class must be revalued every 3 years.
D)Revaluations must be undertaken regularly enough to ensure that the carrying amount of the class of assets does not differ from its fair value at reporting date.

Question 15

By permitting some classes of assets to be valued at cost and others at fair value the IASB has:

A)removed any confusion regarding the total balance of non-current assets.
B)forced entities to accurately reflect their true financial position at any point in time.
C)created a situation where the total asset figure may be a combination of cost and fair value assessments, reducing its meaningfulness.
D)removed the opportunity for managers to act in their own self-interest as suggested by Positive Accounting Theory.

Question 16

A sale of property plant and equipment requires the derecognition of the carrying amount of the asset and any cost of replacement part capitalised.

Question 17

Purple Co Plc purchased an item of land 3 years ago at a cost of £700 000.Two years ago the recoverable value of the land was considered to be £550 000.In the current period the land is revalued and the fair value is now £750 000.What is the treatment of the change in value in each of the periods?

A)Two years ago: a loss of £150 000 is recognised.The current period: a gain of £150 000 and an increase in the asset revaluation reserve of £50 000 is recognised.
B)Two years ago: £150 000 is debited to the asset revaluation reserve.The current period: £200 000 is credited to the asset revaluation reserve.
C)Two years ago: £150 000 is expensed in the period.The current period: £200 000 is transferred to the asset revaluation reserve.
D)Two years ago: £150 000 is written off to the asset revaluation reserve.The current period: £200 000 revenue is recognised.

Question 18

IAS 16 provides guidance on fair values which states:

A)Where an active and liquid market exists for an asset, the market price represents evidence of the asset's fair value.
B)Fair values are determined on the basis that an entity is a going concern.
C)Where no market exists the price should be based on the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.
D)All of the given answers are correct.

Question 19

If an asset's carrying amount is impaired,IAS 16 requires all assets in the same class to be revalued.

Question 20

The revaluation model is a tool used by managers to reduce political costs.

Question 21

Which of the following statements is true of revaluation model in IAS 16?

A)It is the preferred model of managers with bonus based payments.
B)It is required under IAS 16.
C)Once adopted the firm can no longer revert back to cost model.
D)None of the statements are correct.

Question 22

IAS 16 prescribes that,if assets within the same class are revalued and some assets increased in value while others decreased in value:

A)the net decrement for the class of asset should be recognised as loss in the income statement.
B)the net increment for the class of asset should be credited to revaluation reserve.
C)the total increment for all assets in the same class that increased in value should be credited to revaluation reserve and total decrement for all assets in the same class of asset should be recognised as loss in the income statement.
D)All of the given answers are correct.

Question 23

Where management's bonuses are tied to profit-based performance measures management may have an incentive not to revalue assets because:

A)When revaluing assets, the value of the asset base increases, consequently the return on assets will fall.
B)A revaluation may result in a decrease in the value of the asset base.
C)A revaluation that increases the value of the asset base will increase profit measures.
D)When revaluing assets, the value of the asset base increases, consequently the debt to equity ratio will fall.

Question 24

Under IAS 16 when an asset is revalued and the gross method is used,accumulated depreciation:

A)must be written back to profit.
B)must be closed off to reduce the asset account.
C)is ignored during revaluation as it has not effect on carrying amount.
D)should be increased by the same proportion as the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals the revalued amount.

Question 25

On disposal of an asset a gain or loss is the difference between the proceeds from sale and:

A)the cost of an asset.
B)residual value of the asset.
C)carrying amount of the asset.
D)revalued amount of the asset.

Question 26

Brown,Izan and Loh (1992)found that revaluations are more likely to take place:

A)in small firms with low value assets that wished to borrow more.
B)in industries that are strike prone.
C)in entities that are highly geared.
D)in industries that are strike prone and in entities that are highly geared.

Question 27

Which of the following statements is a valid reason to select cost model over the revaluation model?

A)to report relevant information
B)to reduce taxes
C)to properly match costs with expenses
D)to simplify the measurement accounting policy

Question 28

According to Positive Accounting Theory,the size of the entity may have an impact on management's decision to revalue because of management's motivation to reduce political costs.There is more than one possible view regarding the effect of revaluation on political visibility,including which of the following?

A)Since revaluations may increase the variability of asset size, they will increase political costs.
B)Where increases in asset size are expected to result from revaluations, the increase in the size of the entity may reduce political costs.
C)Where revaluations increase the size of the asset base, the return on assets will be lower and this will potentially lower political costs.
D)Where revaluations result in an increase in the asset base, depreciation expense will increase and lead to greater political costs.

Question 29

Cars and Trucks Plc owns an engine testing machine which was purchased for €120 000.After 3 years of use the machine had accumulated depreciation of €58 560 but was revalued to €80 000.Two years later the machine was sold for €60 000 and had accumulated depreciation at the time of sale of €36 800.What journal entries would be required to record the sale of the machine in accordance with IASB 16 requirements?

A) $\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Cash at bank } & 60000 & \\\hline \mathrm{Cr} & \text { Proceeds from testing machine sold } & & 60000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Accumulated depreciation } & 95360 & \\\hline \mathrm{Dr} & \text { Carrying amount of testing machine sold } & 24640 & \\\hline \mathrm{Cr} & \text { Testing machine } & & 120000 \\\hline\end{array}$
B) $$\begin{array} { | l | l | r | l | } \hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \\\hline \mathrm { Cr } & \text { Profit on sale of land } & & 35360 \\\hline \mathrm { Cr } & \text { Testing machine } & & 24640 \\\hline\end{array}$$
C) $$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \\\hline \mathrm { Cr } & \text { Proceeds from sale of land } & & 60000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Carrying amount of land sold } & 43200 & \\\hline \mathrm { Dr } & \text { Accumulated depreciation } & 36800 & \\\hline \mathrm { Cr } & \text { Testing machine } & & 80000 \\\hline\end{array}$$
D) $$\begin{array} { | l | l | r | l | } \hline \mathrm { Dr } & \text { Cash at bank } & 60000 & \\\hline \mathrm { Dr } & \text { Accumulated depreciation } & 36800 & \\\hline \mathrm { Cr } & \text { Profit from sale of testing machine } & & 16800 \\\hline \mathrm { Cr } & \text { Testing machine } & & 80000 \\\hline\end{array}$$

Question 30

Chopin Ltd has a debt contract and is close to violating the return on equity ratio as stipulated in the debt agreement.What is the most appropriate action to take?

A)Negotiate a loan to increase cash balance.
B)Accelerate collection of receivables.
C)Negotiate to prepay long-term debt.
D)Revalue a class of asset.

Question 31

Seagull Marinas Ltd owns land that was purchased for $300 000 to be used as the future site of a boat shed.Due to the development of a resort in the vicinity,the land's fair market value had risen to $480 000 and was revalued on 30 June 2009.A revaluation undertaken on 30 June 2012 of $150,000 reflects the effect of the failure of resort development and local concerns about the protection of the nesting sites of endangered sea birds located near the land.What are the journal entries required to record the revaluations on 30 June 2009 and 30 June 2012?

A) $\text { 30-Jun-09 }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Land } & 180000 & \\\hline \mathrm{Cr} & \text { Gain on revaluation of land } & & 180000 \\\hline\end{array}$

$\text { 30-Jun-12 }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Loss on revaluation of land } & 330000 & \\\hline \mathrm{Cr} & \text { Land } & & 330000 \\\hline\end{array}$
B) $\text { 30-Jun-09 }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Land } & 180000 & \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 180000 \\\hline\end{array}$

$\text { 30-Jun-12 }$
$\begin{array}{|l|l|r|l|}\hline \mathrm{Dr} & \text { Asset revaluation reserve } & 180000 & \\\hline \mathrm{Dr} & \text { Loss on revaluation of land } & 150000 & \\\hline \mathrm{Cr} & \text { Land } & & 330000 \\\hline\end{array}$
C) $\text { 30-Jun-09 }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Land } & 180000 & \\\hline \mathrm{Cr} & \text { Gain on revaluation of land } & & 180000 \\\hline\end{array}$

$\text { 30-Jun-12 }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Loss on revaluation of land } & 150000 & \\\hline \mathrm{Cr} & \text { Land } & & 150000 \\\hline\end{array}$
D) $\text { 30-Jun-09 }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Land } & 180000 & \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 180000 \\\hline\end{array}$

$\text { 30-Jun-12 }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Asset revaluation reserve } & 330000 & \\\hline \mathrm{Cr} & \text { Land } & & 330000 \\\hline\end{array}$

Question 32

Staples Plc has invested in two parcels of land that are treated as belonging to the same class of assets.The first parcel of land was purchased for €500 000 and has been valued this period at €650 000.The second parcel of land has a carrying value of €340 000 and has been valued this period at €100 000.What is the appropriate journal entry to record the revaluations?

A) $$\begin{array} { | c | l | c | c | } \hline \mathrm { Dr } & \text { Land (parcel 1) } & 150000 & \\\hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 150000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Asset revaluation reserve } & 240000 & \\\hline \mathrm { Cr } & \text { Land (parcel 2) } & & 240000 \\\hline\end{array}$$
B) $$\begin{array} { | c | l | c | c | } \hline \mathrm { Dr } & \text { Land (parcel 1) } & 150000 & \\\hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 150000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Loss on revaluation of land } & 240000 & \\\hline \mathrm { Cr } & \text { Land (parcel 2) } & & 240000 \\\hline\end{array}$$
C) $$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Asset revaluation reserve } & 90000 & \\\hline \mathrm { Cr } & \text { Land } & & 90000 \\\hline\end{array}$$
D) $$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Loss on revaluation of land } & 90000 & \\\hline \mathrm { Dr } & \text { Land (parcel 1) } & 150000 & \\\hline \mathrm { Cr } & \text { Land (parcel 2) } & & 240000 \\\hline\end{array}$$

Question 33

IAS 16 permits which of the following with respect to measurement of non-current assets using revaluation model?

A)Net revaluation decrements for each class of asset are initially debited to asset revaluation reserve.
B)Use of cost model to measure other assets in the same class.
C)All increments arising from revaluation are credited to asset revaluation reserve.
D)None of the given answers are correct.

Question 34

Under IAS 16 when an asset is revalued and the net method is used,accumulated depreciation:

A)must be written back to profit.
B)must be closed off to the equity account.
C)should be eliminated against the gross carrying amount of the asset before revaluation.
D)should be increased by the same proportion as the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals the revalued amount.

Question 35

A machine purchased by White Plc had a cost of €670 000 and an accumulated depreciation balance of €120 000 at 30 June 2012.Its fair value is assessed at this time,with its first revaluation as €450 000.What is/are the appropriate journal entry(ies)to record the revaluation using the net method?

A) $$\begin{array} { | l | l | l | l | } \hline \text { Dr } & \text { Accumulated depreciation —machine } & 120000 & \\\hline \mathrm { Cr } & \text { Machine } & & 120000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Asset revaluation reserve } & 100000 & \\\hline \mathrm { Cr } & \text { Machine } & & 100000 \\\hline\end{array}$$
B) $$\begin{array} { | l | l | l | l | } \hline \text { Dr } & \text { Loss on revaluation of machine } & 220000 & \\\hline \mathrm { Cr } & \text { Machine } & & 220000 \\\hline\end{array}$$
C) $\begin{array}{|c|l|c|c|}\hline \mathrm{Dr} & \text { Accumulated depreciation-machine } & 120000 & \\\hline \mathrm{Cr} & \text { Machine } & & 120000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Asset revaluation reserve } & 100000 & \\\hline \mathrm{Cr} & \text { Accumulated depreciation-machine } & & 100000 \\\hline\end{array}$
D) $\begin{array}{|c|l|c|c|}\hline \mathrm{Dr} & \text { Accumulated depreciation-machine } & 120000 & \\\hline \mathrm{Cr} & \text { Machine } & & 120000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Loss on revaluation of machine } & 100000 & \\\hline \mathrm{Cr} & \text { Machine } & & 100000 \\\hline\end{array}$

Question 36

Smith & Jones Ltd owns equipment that was purchased for $56 000 and has accumulated depreciation of $14 000.The following market value information was gathered about the equipment $$\begin{array} { | l | l | } \hline \text { Equivalent machine } & \$ 55860 \\\hline \text { New machine } & \$ 70000 \\\hline\end{array}$$ The equipment has a remaining useful life to the entity of 10 years.What are the appropriate journal entries to record the revaluation under the gross method and the net-amount method?

A) $\text { Gross method. }$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Equipment } & 14000 & \\\hline \mathrm{Cr} & \text { Accumulated depreciation-equipment } & & 140 \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 13860\\\hline\end{array}$

$\text { Net-amount method. }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Accumulated depreciation-equipment } & 14000 & \\\hline \mathrm{Cr} & \text { Equipment } & & 14000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Equipment } & 13860 & \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 13860 \\\hline\end{array}$

B) $\text { Gross method. }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Equipment } & 14000 & \\\hline \mathrm{Dr} & \text { Accumulated depreciation-equipment } & 13860 & \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 14140 \\\hline \mathrm{Cr} & \text { Equipment } & & 13720\\\hline\end{array}$

$\text { Net-amount method. }$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Accumulated depreciation-equipment } & 14000 & \\\hline \mathrm{Cr} & \text { Equipment } & & 14000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Equipment } & 14000 & \\\hline \mathrm{Cr} & \text { Accumulated depreciation } & & 140 \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 13860 \\\hline\end{array}$
C) $\text { Gross method. }$
$\begin{array}{|c|l|c|c|}\hline \mathrm{Dr} & \text { Accumulated depreciation-equipment } & 14000 & \\\hline \mathrm{Cr} & \text { Equipment } & & 14000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Equipment } & 13860 & \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 13860 \\\hline\end{array}$

$\text { Net-amount method. }$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Equipment } & 14000 & \\\hline \mathrm{Cr} & \text { Accumulated depreciation - equipment } & & 140 \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 13860 \\\hline\end{array}$
D) $\text { Gross method. }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Equipment } & 70000 & \\\hline \mathrm{Cr} & \text { Accumulated depreciation - equipment } & & 42140 \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 27860\\\hline\end{array}$

$\text { Net-amount method. }$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Accumulated depreciation - equipment } & 14000 & \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 14000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Equipment } & 13860 & \\\hline \mathrm{Cr} & \text { Asset revaluation reserve } & & 13860 \\\hline\end{array}$

Question 37

When an entity adopts the valuation model to account for its property,plant and equipment,which of the following statement(s)is/are correct?

A)If an item is revalued, all assets in the same class shall be revalued.
B)If an asset's carrying amount is decreased as a result of a revaluation, the decrease is always recognised in profit and loss.
C)If an asset's carrying amount is increased as a result of a revaluation, the increase is always credited directly to equity.
D)All of the given answers.

Question 38

Where there are debt covenants in place to restrict the level of debt to assets then management may be motivated to:

A)avoid revaluations because an increase in asset values increases depreciation and therefore reduces profit.
B)undertake revaluations where the expectation is that asset values have fallen.
C)avoid revaluations because of their effect on the cash flows of the business and therefore its ability to pay interest under the debt covenant.
D)undertake revaluations where the expectation is that asset values are rising.

Question 39

According to IAS 36 the recoverable amount of an asset or cash-generating unit is the:

A)lower of its fair value less costs of disposal and its value in use.
B)lower of its fair value plus costs of disposal and its value in use.
C)higher of its fair value less costs of disposal and its value in use.
D)higher of its fair value plus costs of disposal and its value in use.

Question 40

Which of the following statement is true of accumulated depreciation?

A)It is the difference between acquisition costs and residual value.
B)It is the difference between acquisition costs and revalued amount.
C)It is initially derecognised on first time revaluations.
D)It is restated proportionately to the carrying amount and the revalued amount of the asset.

Question 41

An investment property is considered to generate cash flows that are:

A)dependent on the other assets of the entity.
B)designed to reduce taxes.
C)largely independent of the other assets of the entity.
D)all of the given answers.

Question 42

What is the rationale for revaluing the entire class of assets when an item of property,plant and equipment is revalued?

Question 43

Compare the accounting treatment for investment properties with that of property,plant and equipment using the valuation model.

Question 44

Explain the process that an entity must undertake when converting from the cost model to the valuation model basis of accounting for its non-current assets.

Question 45

Discuss the process for the reversal of revaluation decrements and increments.

Question 46

A firm that has both compensation and debt contracts will prefer the revaluation model over the cost model to measure its property,plant and equipment.Discuss.

Question 47

Differentiate depreciation expense from impairment loss.

Question 48

Explain why the accounting treatment from increments and decrements are not symmetrical with respect to the revaluation of property,plant and equipment.

Question 49

If an asset's carrying amount is increased due to an initial revaluation that increase shall be recognised in:

A)other comprehensive income.
B)the profit and loss.
C)in the disclosures.
D)None of the given answers are correct.

Question 50

Explain why discounting future cash flows will have direct implications for the calculated value of the recoverable amount.

Question 51

IAS 36 defines the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets as a:

A)class of assets.
B)asset portfolio.
C)value in use asset group.
D)cash-generating unit.

Question 52

Discuss the potential usefulness of the gross method in revaluation of non-current assets.