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Property, Plant and Equipment

(Problems)
1. Company S had the following balances.
Cost of equipment = $300,000
Accumulated depreciation for equipment = $80,000
What is the amount of book value of equipment?
Ans.

Book value of equipment


= Cost of the asset – Accumulated depreciation
= $300,000 – $80,000 = $220,000
2. Company T had the following balances.
Property, plant and equipment = $720,000
Accumulated depreciation = $170,000
What is the amount of net property, plant and equipment?
Net property, plant and equipment
= Property, plant and equipment – Accumulated depreciation
= $720,000 – $170,000 = $550,000

3. On September 1, 20×1, Company M purchased a building at $1,200,000.


Buildings are depreciated using the straight-line depreciation method.
Useful life of the building is 40 years.
Salvage value of the building at the end of useful life is estimated as $120,000
What is the amount of depreciation expense for 20×1?
What is the book value of the building at December 31, 20×1?
Ans.
Annual depreciation expense
= ($1,200,000 – $120,000) x (1/40) = $1,080,000 x (1/40) = $27,000
Depreciation expense for the period from September 1, 20×1 to December 31, 20×1
= $27,000 x (4/12) = $9,000
Book value of the building at December 31, 20×1
= $1,200,000 – $9,000 = $1,191,000
4. On January 1, 20×1, Company G purchased equipment at $80,000.
Residual value (salvage value) at the end of useful life is estimated as $8,000.
The equipment was designed and manufactured to be used for 20,000 hours in production.
In 20×1, Company G used this equipment of 5,000 hours in production.
What is the depreciation expense for 20×1?

Ans.
Depreciation expense for 20×1
= ($80,000 – $8,000) x (5,000 hours / 20,000 hours)
= $72,000 x (1/4) = $18,000
5. Carpenter company purchased equipment for P12,000. Sales tax on the purchase was P600.
Other costs incurred were freight charges of P240, repairs P420 for damage during installation, and
installation costs of P270. What is the cost of equipment?
a. P12,000
b. P12,600
c. 13,110
d. 13,530
Ans. C

P12,000 + 600 + 240 + 270 = P13,110

6. Tyson Chandler Company purchased equipment for $10,000. Sales tax on the purchase was $500. Other
costs incurred were freight charges of $200, repairs of $350 for damage during installation, and
installation costs of $225. What is the cost of the equipment?

a. $10,000
b. $10,500
c. $10,925
d. $11,275
Ans. C

$10,000 + $500 + $200 + $225 = $10,925.

7. On August 1, 2007, Limon Corporation purchased a new machine on a deferred payment basis. A
down payment of $3,000 was made and 4 monthly installments of $2,500 each are to be made
beginning on September 1, 2007. The cash equivalent price of the machine was $12,000. Limon incurred
and paid installation costs amounting to $500. The amount to be capitalized as the cost of the machine
is

a. $12,000.
b. $12,500.
c. $13,000.
d. $13,500.
Ans. B
$12,000 + $500 = $12,500.

8. On August 1, 2007, Tanner Corporation purchased a new machine on a deferred payment basis. A down
payment of $2,000 was made and 4 annual installments of $6,000 each are to be made beginning
on September 1, 2007. The cash equivalent price of the machine was $23,000. Due to an employee
strike, Tanner could not install the machine immediately, and thus incurred $300 of storage costs.
Costs of installation (excluding the storage costs) amounted to $800. The amount to be capitalized
as the cost of the machine is

a. $23,000.
b. $23,800.
c. $24,100.
d. $26,000.
Ans. B

$23,000 + $800 = $23,800.

9. On December 1, 2007, Fiene Company acquired a new delivery truck in exchange for an old delivery
truck that it had acquired in 2004. The old truck was purchased for $35,000 and had a book value
of $13,300. On the date of the exchange, the old truck had a market value of $14,000. In addition,
Fiene paid $45,500 cash for the new truck, which had a list price of $63,000. The exchange lacked
commercial sunstance. At what amount should Fiene record the new truck for financial
accounting purposes?

a. $45,500.
b. $58,800.
c. $59,500.
d. $63,000
Ans. B

$13,300 + $45,500 = $58,800]

10. On February 1, 2007, Morgan Corporation purchased a parcel of land as a factory site for $200,000.
An old building on the property was demolished, and construction began on a new building which
was completed on November 1, 2007. Costs incurred during this period are listed below:

Demolition of old building $ 20,000

Architect's fees 35,000

Legal fees for title investigation and purchase contract 5,000

Construction costs 1,090,000

(Salvaged materials resulting from demolition were sold for $10,000.)

Morgan should record the cost of the land and new building, respectively, as

a. $225,000 and $1,115,000.


b. $210,000 and $1,130,000.
c. $210,000 and $1,125,000.
d. $215,000 and $1,125,000.
Ans. D

Land: $200,000 + $20,000 + $5,000 – $10,000 = $215,000.

Building: $35,000 + $1,090,000 = $1,125,000.

11. Ben Gordon Corporation constructed a building at a cost of $10,000,000. Average accumulated
expenditures were $4,000,000, actual interest was $600,000, and avoidable interest was
$300,000. If the salvage value is $800,000, and the useful life is 40 years, depreciation expense
for the first full year using the straight-line method is

a. $237,500.
b. $245,000.
c. $257,500.
d. $337,500.

Ans. A

[($10,000,000 + $300,000) – $800,000] ÷ 40 = $237,500.

12. Wheeler Corporation constructed a building at a cost of $20,000,000. Average accumulated


expenditures were $8,000,000, actual interest was $1,200,000, and avoidable interest was
$600,000. If the salvage value is $1,600,000, and the useful life is 40 years, depreciation expense
for the first full year using the straight-line method is

a. $475,000.
b. $490,000.
c. $515,000.
d. $675,000.
Ans. A

[($20,000,000 + $600,000) – $1,600,000] ÷ 40 = $475,000.

13. During 2007, Gannon Co. incurred average accumulated expenditures of $400,000 during construction
of assets that qualified for capitalization of interest. The only debt outstanding during 2007 was a
$500,000, 10%, 5-year note payable dated January 1, 2005. What is the amount of interest that
should be capitalized by Gannon during 2007?

a. $0.
b. $10,000.
c. $40,000.
d. $50,000.

Ans. C

$400,000 × .10 = $40,000.

14. On December 1, Wynne Corporation exchanged 2,000 shares of its $25 par value common stock held
in treasury for a parcel of land to be held for a future plant site. The treasury shares were acquired
by Wynne at a cost of $40 per share, and on the exchange date the common shares of Wynne had
a fair market value of $50 per share. Wynne received $6,000 for selling scrap when an existing
building on the property was removed from the site. Based on these facts, the land should be
capitalized at

a. $74,000.
b. $80,000.
c. $94,000.
d. $100,000.
Ans. C

(2,000 × $50) – $6,000 = $94,000.

15. Carly Corporation purchased a new machine on October 31, 2007. A $1,200 down payment was made
and three monthly installments of $3,600 each are to be made beginning on November 30, 2007.
The cash price would have been $11,600. Carly paid no installation charges under the monthly
payment plan but a $200 installation charge would have been incurred with a cash purchase. The
amount to be capitalized as the cost of the machine on October 31, 2007 would be
a. $12,200.
b. $12,000.
c. $11,800.
d. $11,600.
Ans. C

$11,600 + $200 = $11,800.


(Theories)

1. A company purchases land with an office building. The building has a useful life of 20 years.
How should the land be depreciated?
a. Depreciated over 20 years
b. Depreciated over useful life of the land
c. Don’t depreciate the land
d. None of these
Ans. C
2. What is the amount an asset could achieve if sold between knowledgeable, willing parties in
an arms length transaction?
a. Current value
b. Net present value
c. Written down value
d. Fair value
Ans. D

3. If an asset increases in value, the increase is noted as…


a. An increase in net profit in the SOCI
b. An increase in revaluation surplus in the SOFP and other comprehensive income in the SOCI
c. An increase in retained earnings in SOFP
d. An increase in “other profit” in SOCI
Ans. B
If a revaluation results in an increase in value, it should be credited to other comprehensive
income and accumulated in equity under the heading “revaluation surplus” unless it represents
the reversal of a revaluation decrease of the same asset previously recognised as an expense,
in which case it should be recognised in profit or loss.
4. Which of the following disclosures is not required when an asset is revalued?
a. Name of valuer
b. Basis used
c. Effective date of revaluation
d. Revaluation surplus
e. Whether valuer was independent
Ans. A
The name of the valuer is not a required disclosure when an asset is revalued.
5. Under IAS 16, if assets are exchanged in an arms length, commercial transaction, their value
will be measured at:
a. Written down value
b. Fair value
c. Carrying value
d. Net present value
Ans. B
Fair value –
If an asset is acquired in exchange for another asset, the cost will be measured at fair value
unless
(a) the exchange transaction lacks commercial substance or
(b) the fair value of neither the asset received nor the asset given up is reliably measurable.
If the acquired item is not measured at fair value, cost is measured at the carrying amount of the
asset given up.

6. If one large asset has a number of individual components with different useful lives, how
should this be depreciated?
a. Treat as one asset
b. Break down into different parts
c. Expense it all
d. Treat as one asset, but disclose in the notes to the financial statements
Ans. B
Break down into different parts. This often occurs with assets such as aircraft, where the body of
the aircraft may have a useful life of 20-30 years, but the engines may require replacing every 5
years. In cases like these, the body and aircraft should be noted separately and depreciated
differently.
7. Under IAS 16, which of the following is not allowable as a directly attributable cost of a
machine?
a. Initial test batches
b. Site preparation
c. Delivery
d. Estimated dismantling costs
Ans. A
Initial test batches are not allowable as a directly attributable cost of an asset. If they cannot be
used they should be expensed to the SOCI, if they can be used they should be recorded as
inventory.
8. Which of the following is covered by IAS 16 – Property, Plant and Equipment?
a. Assets held for sale
b. Biological assets related to agricultural activity
c. Exploration assets
d. Office buildings
e. All of these
Ans. D

Assets held for sale are accounted for using IFRS 5 – Non-Current Assets Held for Sale
and Discontinued Operations.
Biological assets related to agricultural activity are dealt with under IAS 41 – Agriculture.
Mineral rights are accounted for using IFRS 6 – Exploration for and Evaluation of
Minteral Resources.

9. Under IAS 16, how often should the useful life of an asset be reviewed?
a. At least at each financial year end
b. Every six months
c. At management’s discretion
d. Never
Ans. A
The useful life of property, plant and equipment should be reviewed at least each financial year
end.
10. What is the amount an asset is recognised at in the SOFP less any accumulated
depreciation or impairment losses?
a. Carrying amount
b. Residual value
c. Impairment amount
d. Fair value
Ans. A
11. How should an asset be initially recognised in the financial statements?
a. Measure at market value
b. Measure at cost
c. Measure at net realisable value
d. Measure at fair value
Ans. B
12. Which of these is an allowable cost of an asset under IAS 16?
a. Professional fees
b. General overheads
c. Initial operating losses
d. Administration expenses
Ans. A
Professional fees are allowed as a cost of an asset, so long as the costs incurred relate directly
to the asset.
13. What is an impairment loss?
a. The amount by which the carrying amount of an asset exceeds the recoverable amount
b. The amount by which the market value of an asset exceeds the net present value
c. The difference between the fair value of an asset and the net realisable value of the asset
d. The amount by which the carrying amount of an asset exceeds the book value
Ans. A
The amount by which the carrying amount of an asset exceeds the recoverable amount.
14. Which of the following is not a component of cost of an asset?
a. Purchase price
b. Import duties
c. Refundable sales tax
d. Estimate of compulsory future dismantling costs
Ans. C
A refundable tax is not allowable as a cost, this will be recovered at a later date by the entity.
15. Under IAS 16, if an asset is idle…
a. Depreciation is paused
b. Depreciation for the entire period does not apply
c. Depreciation continues
d. Depreciation is ignored
Ans. C
Depreciation begins when the asset is available for use and continues until the asset is
derecognised. Even if it is not in use, it is depreciated.

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