Question 1

Which of the following statements about depreciation is true?

Accepted Answer

Accumulated depreciation represents the amount of an asset's cost that has been transferred to depreciation expense to date. This means that it is a contra-asset account, which reduces the value of the asset on the balance sheet. Depreciation charges do not affect the cash account directly, as they are non-cash expenses. Depreciation does not represent the amount of cash available to replace assets; it is simply a recognition of the fact that assets lose value over time.

Question 2

On 1 January 2018 Panorama Ltd acquired equipment for $22 000, net of GST. The estimated residual value for the equipment is zero. Depreciation is calculated at 10% p.a. on the diminishing-balance basis. The depreciation expense for the year ended 31 December 2020 is:

Accepted Answer

Depreciation rate = 10% p.a.
Depreciation for 2018 = 10% x $22,000 = $2,200
Depreciation for 2019 = 10% x ($22,000 - $2,200) = $1,980
Depreciation for 2020 = 10% x ($22,000 - $2,200 - $1,980) = $1,782

Therefore, the depreciation expense for the year ended 31 December 2020 is $1,782. Option B is the correct answer.

Question 3

A machine was purchased on 2 January 2018 for $70 000, net of GST. The machine had an estimated residual value of $12 000 and an estimated useful life of 6 years. Using the sum-of-the-years'-digits method and rounding to the nearest dollar, depreciation expense for the year ended 31 December 2019 , is:

Accepted Answer

The answer of A machine was purchased on 2 January...

Question 4

The correct statement concerning the diminishing-balance method of depreciation is:

Accepted Answer

The diminishing-balance method of depreciation is used when an asset's benefits are consumed more in the early years of its life, resulting in higher depreciation charges in these years and lower charges in later years. This method does not apply a declining percentage to the original cost, but rather to the book value at the beginning of each period, which decreases over time.

Question 5

Which of the following is not an advantage of the use of accelerated depreciation methods for tax purposes as opposed to the straight-line method?

Accepted Answer

The use of accelerated depreciation methods for tax purposes reduces the total amount of tax paid over the lifetime of the asset, which is an advantage. Option A and C are also advantages of accelerated depreciation methods. Option D is a disadvantage of accelerated depreciation methods as it may result in higher total periodic expenses for the business due to increasing repairs and maintenance expenses. Therefore, option B is the correct answer as it is not an advantage of using accelerated depreciation methods for tax purposes.

Question 6

Depreciation charged at the end of the accounting period is a/an __________________entry.

Accepted Answer

Depreciation is a type of expense that is recognized over time, rather than all at once. As such, it is necessary to adjust the value of the asset and the accumulated depreciation at the end of the accounting period. This is done through an adjusting entry in the general ledger, which reduces the value of the asset and increases the amount of accumulated depreciation, resulting in a lower net book value for the asset. Therefore, depreciation charged at the end of the accounting period is an adjusting entry.

Question 7

The allocation of the cost of an asset over its estimated useful life best describes the nature of:

Accepted Answer

The allocation of the cost of an asset over its estimated useful life is commonly known as depreciation. This process of spreading the cost of an asset over its useful life helps to accurately match the cost of the asset with the revenue it generates.

Question 8

All of the following are common methods used to calculate depreciation except for:

Accepted Answer

The correct term is "sum-of-the-years' digits method." There is no such method as the "sum-of-the-provisions method." Therefore, all the other options (A, B, and C) are common methods used to calculate depreciation.

Question 9

On 31 December 2018 a new motor vehicle with a life of five years and no estimated residual value was purchased by a business at a cost of $48 000, net of GST. The diminishing-balance depreciation method is used at a rate of 20% p.a. What is the carrying value of the motor vehicle at 31 December 2020 after charging depreciation for that year?

Accepted Answer

The annual depreciation rate using the diminishing-balance method is calculated as follows:

Year 1: 20% x $48,000 = $9,600
Year 2: 20% x ($48,000 - $9,600) = $7,680
Year 3: 20% x ($48,000 - $9,600 - $7,680) = $6,144

Therefore, the carrying value of the motor vehicle at 31 December 2020 is:

$48,000 - $9,600 - $7,680 - $6,144 = $24,576

Thus, the correct option is D, $38,400.

Question 10

Hightop's balance sheet of 30 June 2018 shows a motor vehicle at a cost price of $46 000 less accumulated depreciation of $17 500. Depreciation is calculated on a straight-line basis. If the vehicle had a useful life of 6 years at the time of purchase and a residual value of $4 000, its carrying amount on 1 July 2020 is:

Accepted Answer

The annual depreciation of the vehicle can be calculated as follows:

Annual depreciation = (Cost - Residual value) / Useful life
Annual depreciation = ($46,000 - $4,000) / 6
Annual depreciation = $7,000

Depreciation for the period from 1 July 2018 to 30 June 2020 (2 years) can be calculated as follows:

Depreciation for 2 years = $7,000 x 2
Depreciation for 2 years = $14,000

The carrying amount of the vehicle on 1 July 2020 can be calculated as follows:

Carrying amount = Cost - Accumulated depreciation
Carrying amount = $46,000 - $17,500 - $14,000
Carrying amount = $14,500

Therefore, the correct answer is C) $14,500.

Question 11

The underlying assumption of the straight-line method of depreciation is:

Accepted Answer

The straight-line method assumes that the asset will make the same contribution to income each year, meaning it will depreciate at a constant rate over its useful life. This assumption is why the depreciation expense is calculated by dividing the cost of the asset by its estimated useful life, as the same amount of expense is recognized each year.

Question 12

Which of the following are ways in which a residual value can be recovered from an asset on its disposal?
I. Trade in
II. Sell second-hand
III. Gift the asset to charity
IV. Sell for scrap

Accepted Answer

Options I, II, and IV are common ways to recover residual value from an asset on disposal. Option III is not a viable method for recovering residual value, as it involves giving the asset away instead of selling it. Therefore, choice D (I, II, and IV only) is the correct answer.

Question 13

Which of the following will have an effect on the amount of depreciation charged on an asset in a particular accounting period?
I. The size of the asset
II. Method of depreciation used
III. Cost or revalued amount of asset
IV. Estimated residual value of asset

Accepted Answer

The method of depreciation, cost or revalued amount, and estimated residual value all affect the depreciation charged. The size of the asset does not directly affect depreciation.

Question 14

According to IAS 16/AASB 116, which of the following are factors contributing to the decline in an asset's future economic benefits?
I. Inflation
II. Wear and tear
III. Commercial obsolescence
IV. Technical obsolescence

Accepted Answer

According to IAS 16/AASB 116, factors contributing to the decline in an asset's future economic benefits include wear and tear, commercial obsolescence, and technical obsolescence. Inflation is not considered a direct factor for the decline in an asset's future economic benefits under these standards.

Question 15

Mighty Models acquired a machine for $20 000 on 31 December 2018. Calculate depreciation for the year ended 31 December 2020 using the diminishing-balance method at 12% p.a. Assume a nil residual value.

Accepted Answer

The diminishing-balance method calculates depreciation as a percentage of the net book value (cost − accumulated depreciation). The rate is double the straight-line rate, which is 12% p.a. in this instance, so the diminishing-balance rate is 24% (12% × 2).

Depreciation for 2019 = $20,000 x 24% = $4,800
Accumulated depreciation at 31 December 2019 = $4,800
Net book value at 31 December 2019 = $20,000 - $4,800 = $15,200

Depreciation for 2020 = $15,200 x 24% = $3,648
Total accumulated depreciation at 31 December 2020 = $4,800 + $3,648 = $8,448

Therefore, the answer is C ($2,112)

Question 16

Which of the following statements concerning the sum-of-the-years'-digits method of depreciation is correct?

Accepted Answer

The sum-of-the-years'-digits method of depreciation is a type of accelerated depreciation method where the depreciation charge per annum decreases over the life of the asset. The formula for this method is: (Remaining useful life/Sum of the years' digits) x (Cost of asset - Salvage value). Options A, C, and D are all incorrect.

Question 17

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:

Accepted Answer

The straight-line method of depreciation allocates an equal amount of depreciation expense each year over the asset's useful life. Therefore, in the early years of the asset's life, the depreciation charge will be smaller compared to the reducing-balance method, which allocates more depreciation expense in the early years and decreases the amount each year over the asset's useful life.

Question 18

Molly's Manufacturing purchased a machine for $80 000 on 1 January 2018. The machine is expected to have a useful life of 5 years, no residual value, and to produce a total of 50 000 units before it is scrapped. Assuming Molly's Manufacturing uses the units-of-production method and actual production during the machine's first year of use is 12 000 units, the depreciation expense for 2018 is:

Accepted Answer

The units-of-production method calculates depreciation based on the actual usage or production of the asset. The formula is: (Cost - Residual Value) / Total Expected Production * Actual Production. Here, it's ($80,000 - $0) / 50,000 units * 12,000 units = $19,200.

Question 19

The Novice Corporation purchased a machine for $80 000 on 1 January 2018. The machine is expected to have a useful life of 5 years, a residual value of zero, and a production capacity of 120 000 units before it is scrapped. The Novice Corporation uses the units-of-production method to calculate depreciation. For the year ending 31 December 2018, the depreciation was $16 000. The number of units produced during 2019 is 30 000. The carrying amount of the machine at 31 December 2019 is:

Accepted Answer

To calculate the carrying amount of the machine at 31 December 2019, we need to calculate the total depreciation for the machine until that date.

Total units of production = 120,000

Total depreciation = (cost - residual value)/total units of production * number of units produced

= ($80,000 - $0)/120,000 * 30,000

= $20,000

Therefore, the carrying amount of the machine at 31 December 2019 is:

Carrying amount = Cost - Total depreciation

= $80,000 - $16,000 - $20,000

= $44,000

So the correct choice is D, $44,000.

Question 20

The Delivery Vehicles account in the ledger of Transit Co. has a balance of $55 000 which is the cost of two second-hand trucks purchased on 1 July 2017. The Accumulated Depreciation - Delivery Vehicles account has a balance on 30 June 2020, before adjusting entries, of $20 000. No additional delivery trucks have been acquired or
Sold. The residual value of each truck is estimated to be $2500 and the straight-line depreciation method is used. What is the necessary adjusting entry to record annual depreciation on 30 June 2020?

Accepted Answer

The necessary adjusting entry to record annual depreciation on 30 June 2020 is to debit Depreciation Expense for $10 000 and credit Accumulated Depreciation for $10 000. This is because the cost of the trucks ($55 000) minus their residual value ($2 500 x 2 = $5 000) gives a depreciable amount of $50 000, which is then divided by the trucks' estimated useful life (3 years) to give an annual depreciation expense of $16 666.67 ($50 000 ÷ 3 years ÷ 2 trucks). As the Accumulated Depreciation balance on 30 June 2020 is $20 000, which represents the total depreciation expense for the past three years, the necessary adjusting entry is to record the current year's depreciation expense of $16 666.67 ($20 000 - $16 666.67 = $3 333.33) by debiting Depreciation Expense and crediting Accumulated Depreciation. Therefore, the correct answer is D.

Quiz 14: Non-Current Assets: Acquisition and Depreciation