TEST 7 TANGIBLE AND INTANGIBLE NON-CURRENT ASSETS
127 What is the correct accounting treatment for an intangible asset with an indefinite useful life? A It is recognised at cost for as long as the entity has the intangible asset B It is recognised at cost and is subject to an annual impairment review C It is recognised at cost and the entity must make an estimate of estimated useful life so that it can be amortised D It cannot be recognised as an intangible asset as it would not be possible to calculate an annual amortisation charge
127 B Answer (A) is not precise enough - there must be an annual impairment review to ensure that the asset is not overstated in the financial statements.
106 The asset register shows a carrying amount for non-current assets of $85,600; the ledger accounts include a cost balance of $185,000 and an accumulated depreciation balance of $55,000. Which of the following may explain the discrepancy? A The omission of an addition of land costing $30,000 from the ledger account and the omission of the disposal of an asset from the register (cost $25,600 and accumulated depreciation at disposal $11,200). B The omission of the revaluation of an asset upwards by $16,600 and the depreciation charge of $20,000 from the ledger account and the omission of the disposal of an asset with a carrying amount of $41,000 from the register. C The omission of the disposal of an asset from the ledger accounts (cost $25,600 and accumulated depreciation at disposal $11,200) and the omission of an addition of land costing $30,000 from the register. D The omission of an upwards revaluation by $16,400 from the register and the accidental debiting of the depreciation charge of $28,000 to the accumulated depreciation ledger account.
106 C Asset register $ Ledger accounts $ Carrying amount per question 85,600 Carrying amount per question 130,000 Addition of land 30,000 Disposal at carrying amount (14,400) ------- ------- 115,600 115,600 -------
107 Laurie bought an asset on the 1st January 20X4 for $235,000. He has depreciated it at 30% using the reducing balance method. On 1st January 20X7, Laurie revalued the asset to $300,000. What double entry should Laurie post to record the revaluation? $ $ A Dr Non-current assets - cost Dr Accumulated depreciation 65,000 154,395 Cr Revaluation surplus 219,395 B Dr Non-current assets - cost Dr Accumulated depreciation 65,000 211,500 Cr Revaluation surplus 276,500 C Dr Revaluation surplus 219,395 Dr Non-current assets - cost Dr Accumulated depreciation 65,000 154,395 D Dr Revaluation surplus 276,500 Dr Non-current assets - cost Dr Accumulated depreciation 65,000 211,500
107 A $ 1.1.X4 Cost 235,000 Depreciation at 30% (70,500) ------- y/e 31.12.X4 Carrying amount 164,500 Depreciation at 30% (49,350) ------- y/e 31.12.X5 Carrying amount 115,150 Depreciation at 20% (34,545) ------- y/e 31.12.X6 Carrying amount 80,605 ------- Accumulated depreciation (70,500 + 49,350 + 34,545) 154,395 Therefore (1) Uplift cost account to valuation Dr Cost $65,000 (2) Remove depreciation to date Dr Accumulated depreciation $154,395 (3) Send the balance to the revaluation surplus Cr Revaluation surplus $219,395
108 A non-current asset register is: A an alternative name for the non-current asset ledger account B a list of the physical non-current assets rather than their financial cost C a schedule of planned maintenance of non-current assets for use by the plant engineer D a schedule of the cost and other information about each individual non-current asset
108 D A non-current asset register is a detailed schedule of non-current assets, and is not another name for non-current asset ledger accounts in the general ledger.
109 Which of the following four statements are correct? A If all the conditions specified in IAS 38 Intangible assets are met, the directors can chose whether to capitalise the development expenditure or not. B Amortisation of capitalised development expenditure will appear as an item in an entity's statement of changes in equity. C Capitalised development costs are shown in the statement of financial position as non-current assets. D Capitalised development expenditure must be amortised over a period not exceeding five years.
109 C
111 On 1 January 20X7, Z Co purchased an item of plant. The invoice showed: $ Cost of plant 48,000 Delivery to factory 400 One year warranty covering breakdown 800 ------- 49,200 ------- Modifications to the factory building costing $2,200 were necessary to enable the plant to be installed. What amount should be capitalised for the plant in Z Co's accounting records? $
111 $50,600 $ Cost of plant 48,000 Delivery 400 Modifications 2,200 ------ 50,600 ------ Tutorial note: The warranty cost cannot be capitalised. This is a revenue expense which must be debited to the statement of profit or loss.
112 A non-current asset was purchased at the beginning of Year 1 for $2,400 and depreciated by 20% per annum using the reducing balance method. At the beginning of Year 4 it was sold for $1,200. The result of this was: A a loss on disposal of $240.00 B a loss on disposal of $28.80 C a profit on disposal of $28.80 D a profit on disposal of $240.00
112 B $ Year 1 Cost 2,400.00 Depreciation at 20% (480.00) ------- Year 2 Carrying amount 1,920.00 Depreciation at 20% (384.00) ------- Year 3 Carrying amount 1,536.00 Depreciation at 20% (307.20) ------- Year 4 Carrying amount 1,228.80 Sale proceeds 1,200.00 ------- Loss on disposal (28.80)
113 A business' non-current assets had a carrying amount of $125,000. An asset which had cost $12,000 was sold for $9,000, at a profit of $2,000. What is the revised carrying amount of non-current assets? A $113,000 B $118,000 C $125,000 D $127,000
113 B $ $ Original balance 125,000 Carrying amount of assets sold: Proceeds 9,000 Less: Profit (2,000) ------- (7,000) ------- Adjusted balance 118,000 -------
114 W Co bought a new printing machine from abroad. The cost of the machine was $80,000. The installation costs were $5,000 and the employees received specific training on how to use this particular machine, at a cost of $2,000. Before using the machine to print customers' orders, a test was undertaken which used up paper and ink costing $1,000. What should be the cost of the machine in W Co's statement of financial position? $
114 $86,000 $ Purchase cost of machine 80,000 Installation 5,000 Testing 1,000 ------ 86,000 ------ A non-current asset should be measured initially at its cost. 'Cost' means the amounts incurred to acquire the asset and bring it into working condition for its intended use. These include the purchase cost, initial delivery and handling costs, installation costs and professional fees. Costs of testing whether the asset is working properly may be included, but costs of staff training are not.
115 A non-current asset was disposed of for $2,200 during the last accounting year. It had been purchased exactly three years earlier for $5,000, with an expected residual value of $500, and had been depreciated on the reducing balance basis, at 20% per annum. The profit or loss on disposal was: A $360 loss B $150 loss C $104 loss D $200 profit
115 A $ Cost 5,000 Year 1 (20% × 5,000) (1,000) Year 2 (20% × 4,000) (800) Year 3 (20% × 3,200) (640) ------ Carrying amount at time of disposal 2,560 Sale proceeds 2,200 ------ Loss on disposal 360
116 At the end of its financial year, Tanner Co had the following non-current assets: Land and buildings at cost $10.4 million Land and buildings: accumulated depreciation $0.12 million Tanner Co decided to revalue its land and buildings at the year-end to $15 million. What will be the value of the revaluation surplus if the revaluation is accounted for? $
116 $4.72 MILLION $m Non-current assets at cost 10.40 Accumulated depreciation (0.12) ----- Carrying amount 10.28 Revaluation amount 15.00 ----- Transfer to revaluation surplus 4.72
117 Which one of the following should be accounted for as capital expenditure? A The cost of painting a building B The replacement of windows in a building C The purchase of a car by a car dealer for re-sale D Legal fees incurred on the purchase of a building
117 D Painting and replacing windows are maintenance and repairs, and so are classified as 'revenue expenditure' and must be expensed through the statement of profit or loss. The purchase of a car for resale means that the car is an item of inventory for the business, not a non-current asset. Legal fees incurred in purchasing a building are included in the cost of the building, and so are part of the non-current asset cost, i.e. capital expenditure.
118 F Co purchased a car for $12,000 on 1 April 20X1 which has been depreciated at 20% each year straight line, assuming no residual value. F Co's policy is to charge a full year's depreciation in the year of purchase and no depreciation in the year of sale. The car was traded in for a replacement vehicle on 1 August 20X4 for an agreed figure of $5,000. What was the profit or loss on the disposal of the vehicle for the year ended 31 December 20X4? A Loss $2,200 B Loss $1,400 C Loss $200 D Profit $200
118 D Disposals account $ $ Cost 12,000 Accumulated depreciation (3 yrs × 20% × $12,000) 7,200 Profit (β) 200 Proceeds (part exchange allowance) 5,000 ------ ------ 12,200 12,200 ------ ------
119 At 30 September 20X2, the following balances existed in the records of Lambda Co: Plant and equipment: Cost $860,000 Accumulated depreciation $397,000 During the year ended 30 September 20X3, plant with a written down value of $37,000 was sold for $49,000. The plant had originally cost $80,000. Plant purchased during the year cost $180,000. It is the Lambda Co's policy to charge a full year's depreciation in the year of acquisition of an asset and none in the year of sale, using a rate of 10% on the straight line basis. What is the carrying amount that should appear in Lambda Co's statement of financial position at 30 September 20X3 for plant and equipment? $
119 $510,000 Cost Accum dep'n Carrying amount $000 $000 $000 Opening balance 860 397 Disposal (80) (43) ---- ---- 780 354 Purchase 180 ---- 960 Depreciation (10%) ---- 96 ---- 450 CA = 960 - 450 ---- 510
120 Depreciation is best described as: A a means of spreading the payment for non-current assets over a period of years B a decline in the market value of the assets C a means of spreading the net cost of non-current assets over their estimated useful life D a means of estimating the amount of money needed to replace the assets
120 C
121 On 1 January 20X8, Wootton has a building in its books which cost $380,000 with a carrying amount of $260,000. On 1 July 20X8, the asset was valued at $450,000 and Wootton wishes to include that valuation in its books. Wootton's accounting policy is to depreciate buildings at 3% on a straight-line basis. The depreciation charge to the statement of profit or loss for the year ended 31 Dec is: $
121 $12,450 1 Jan - 30 June: 3% of $380,000 × 6/12 = $5,700 1 July - 31 December: 3% of $450,000 × 6/12 = $6,750 Charge for the year: $5,700 + $6,750 = $12,450
122 A car was purchased by a newsagent business in May 20X1 for: $ Cost 10,000 Road tax 150 ------ Total 10,150 ------ The business adopted a date of 31 December as its year-end. The car was traded in for a replacement vehicle in August 20X5 at an agreed value of $5,000. It was depreciated at 25 per cent per annum using the reducing-balance method, charging a full year's depreciation in the year of purchase and none in the year of sale. What was the profit or loss on disposal of the vehicle during the year ended December 20X5? A Profit: $718 B Profit: $781 C Profit: $1,788 D Profit: $1,836
122 D Do not include the road tax in the cost of the car. Road tax is a revenue expense item. $ Cost of asset 10,000 Depreciation 20X1 (25%) (2,500) ------ 7,500 Depreciation 20X2 (25%) (1,875) ------ 5,625 Depreciation 20X3 (25%) (1,406) ------ 4,219 Depreciation 20X4 (25%) (1,055) ------ Carrying amount at time of disposal 3,164 Disposal value 5,000 ------ Profit on disposal 1,836
123 The reducing balance method of depreciating non-current assets is more appropriate than the straight-line method when: A there is no expected residual value for the asset B the expected life of the asset is not capable of being estimated C the asset is expected to be replaced in a short period of time D the asset decreases in value less in later years than in the early years of use
123 D The reducing balance method charges more depreciation in earlier years than in later years. It is therefore appropriate to use for assets such as motor vehicles that lose a large part of their value in the earlier years of their life.
124 SSG bought a machine for $40,000 in January 20X1. The machine had an expected useful life of six years and an expected residual value of $10,000. The machine was depreciated on the straight-line basis. At the end of December 20X4, the machine was sold for $15,000. SSG charges pro rata depreciation. What was the total amount of depreciation charged to the statement of profit or loss over the life of the machine? $
124 $20,000 Annual depreciation = $(40,000 - 10,000)/6 years = $5,000. The machine was held for four years before disposal, giving accumulated depreciation of 4 × $5,000 = $20,000. When the machine was sold, its carrying amount was $40,000 - $20,000 = $20,000. It was sold for $15,000, giving a loss on disposal of $5,000. $ Disposal proceeds 15,000 Carrying amount at disposal date 20,000 ------ Loss on disposal 5,000
125 Liza bought a guillotine for her framing business for $20,000 on 1 July 20X7. She expected the guillotine to have a useful life of ten years and a residual value of $500. On 1 July 20X8, Liza revises these estimations and believes the guillotine to have a remaining useful life of 5 years and no residual value. What is the depreciation charge for the year ended 30 June 20X9? $
125 $3,610 Initial depreciation charge p.a. 10 years $20,000 - $500 = $1,950 Carrying amount at date of change $20,000 - $1,950 = $18,050 New depreciation charge (for y/e 30 June X9 onwards) 5 yrs $18,050 = $3,610 Note that the revision of estimations takes place in the year ended 30 June 20X9 before the depreciation for that year is charged.
126 Complete the following statement by selecting the appropriate wording from the choice available. When accounting for intangible assets using the revaluation model, movements in the carrying amount are................................................................................ A accounted for in other comprehensive income and other components of equity B accounted for in the statement of profit or loss only C accounted for in other comprehensive income only D accounted for on other components of equity only
126 A Tutorial note: When accounting for intangible assets using the revaluation model, movements in the carrying amount are accounted for in other comprehensive income and other components of equity.
128 Decide whether or not each of the following items would be capitalised as intangible assets from the following list. Capitalised? Yes/No Employment costs of staff conducting research activities Cost of constructing a working model of a new product Materials and consumables costs associated with conducting scientific experiments Licence purchased to permit production and sale of a product for ten years
128 Capitalised? Yes/No Employment costs of staff conducting research activities No Cost of constructing a working model of a new product Yes Materials and consumables costs associated with conducting scientific experiments No Licence purchased to permit production and sale of a product for ten years Yes
129 Complete the following statement by selecting the appropriate wording from the choice available. When accounting for intangible assets using the cost model, annual impairment charges are: A accounted for in other comprehensive income and other components of equity B accounted for in the statement of profit or loss only C accounted for in other comprehensive income only D accounted for on other components of equity only
129 B When accounting for intangible assets using the cost model, annual impairment charges are accounted for in the statement of profit or loss
130 Classify each of the following costs as either a research expense or as an intangible asset. Research expense Intangible asset Market research costs Patented product design costs Product advertising Employee training costs
130 Research expense Intangible asset Market research costs Yes Patented product design costs Yes Product advertising Yes Employee training costs Yes
131 Which of the following statements best defines an intangible asset? A An intangible asset is an asset with no physical substance B An intangible asset is always generated internally by a business C An intangible asset is an asset which cannot be sold D An intangible asset is a purchased asset which has no physical substance
131 A Tutorial note: An intangible asset may be internally generated (development costs per IAS 38) and may also be purchased - therefore answers B and D are incorrect. Answer C is incorrect as assets can normally be sold.
132 The following information of P Co is available for the year ended 31 October 20X2: Property $ Cost as at 1 November 2011 102,000 Accumulated depreciation as at 1 November 20X1 (20,400) ------- 81,600 On 1 November 20X1, P Co revalued the property to $150,000. P Co's accounting policy is to charge depreciation on a straight-line basis over 50 years. On revaluation there was no change to the overall useful economic life. It has also chosen not to make an annual transfer of the excess depreciation on revaluation between the revaluation surplus and retained earnings. What should be the balance on the revaluation surplus and the depreciation charge as shown in P Co's financial statements for the year ended 31 October 20X2? Depreciation charge Revaluation surplus $ $ A 3,750 68,400 B 3,750 48,000 C 3,000 68,400 D 3,000 48,000
132 A The revaluation surplus balance as at 31 October 20X2 is being asked for. When revaluing an asset, it is the carrying amount of the asset which is revalued, rather than the cost, and as the question states there is no annual transfer of the excess depreciation, the balance on the revaluation surplus can be found as: $150,000 - $81,600 = $68,400. As the revaluation takes place on 1 November 20X1, a whole year's depreciation is calculated on the revalued amount. The new charge will take the revalued amount of $150,000 and depreciate the asset over its remaining useful economic life. By looking at the accumulated depreciation brought forward you can tell how old the original asset is: Original depreciation charge: $102,000/50 years = $2,040 per annum and as $20,400 is accumulated depreciation brought forward, then the asset must have already been held for 10 years. Therefore, the remaining useful economic life is 50 years - 10 years = 40 years The new depreciation charge should be calculated as: $150,000/40 years = $3,750
133 Which THREE of the following statements are correct in relation to application of IAS 38 Intangible Assets? (A) Research costs should be expenses to the statement of profit or loss. (B) All types of goodwill can be capitalised. (C) Capitalised development costs that no longer meet the criteria specified by IAS 38 must be written off to the statement of profit or loss. (D) Capitalised development costs are amortised from the date the assets is available to use or sell. (E) Research costs written off can be re-capitalised when the developed asset is feasible. (F) Only purchased intangibles can be capitalised.
133 A, C AND D
134 A business has an accounting year end of 31 March. It purchased a truck on 1 April 20X3 at a total cost of $21,000, including $1,000 for one year of insurance cover. At the date of purchase, the truck had an estimated useful life to the business of eight years, and had an estimated residual value of $3,000. The truck was traded in for a replacement vehicle on 31 March 20X8 at an agreed valuation of $10,000. The truck was depreciated on a straight-line basis, with a pro-rated charge in the year of acquisition and disposal. Calculate the profit or loss on disposal of the truck. $
134 $625 PROFIT The capitalised cost of the truck is $20,000 - the insurance cost is not capitalised but accounted for as an expense in profit or loss. The net cost of the truck is: $17,000 ($20,000 - $3,000) and the annual depreciation charge will be $2,125 ($17,000/8 years). At the disposal date, the business had owned the truck for exactly five years - therefore accumulated depreciation to disposal date is $10,625, giving a net carrying amount of $9,375 ($20,000 - $10,625). As the trade-in allowance is $10,000, this will result in a profit on disposal of $625.
135 Complete the following statement by making one choice from each option available. When an entity has revalued a non-current asset, it is (Option 1)..............to account for excess depreciation arising on the revaluation. When excess depreciation is accounted for, the accounting adjustment is reflected in (Option 2)........................... Option 1 compulsory/optional Option 2 profit or loss/other comprehensive income/the statement of changes in equity
135 OPTION 1 - OPTIONAL & OPTION 2 - STATEMENT OF CHANGES IN EQUITY When an entity has revalued a non-current asset, it is optional to account for excess depreciation arising on the revaluation. When excess depreciation is accounted for, the accounting adjustment is reflected in the statement of changes in equity. Tutorial note: Note that when an entity does decide to account for excess depreciation, it must apply that accounting policy every year and cannot apply the policy in some years and not in others.
136 A business has an accounting year end of 30 June. It purchased an item of plant on 1 April 20X5 as follows: $ Cost 15,000 3 year maintenance agreement 450 ------ Total 15,450 ------ At the date of purchase, the item of plant and equipment had an estimated useful life to the business of five years and an estimated residual value of $2,000. This item of plant was traded in for a replacement item on 30 September 20X8 at an agreed valuation of $5,000. It has been depreciated at 20 per cent per annum on a straight-line basis, with a pro-rated charge in the year of acquisition and disposal. Calculate the profit or loss on disposal of the item of plant. $
136 $900 LOSS The cost of the asset is $15,000 - the cost of the maintenance agreement is not capitalised but accounted for as a payment in advance and charged to profit or loss as an expense over three years. The net cost of the asset is: $13,000 ($15,000 - $2,000) and will be depreciated at 20% per annum. At the disposal date, the business had owned the asset for 3.5 years - therefore accumulated depreciation to disposal date is $9,100, giving a net carrying amount of $5,900 ($15,000 - $9,100). As the trade-in allowance was $5,000, this will result in a loss on disposal of $900.
137 Geranium is engaged in the following research and development projects: Project 1 It is applying a new technology to the production of heat resistant fabric. The project is intended to last for a further 18 months after which the fabric will be used in the production of uniforms for the emergency services. Project 2 It is considering whether a particular substance can be used as an appetite suppressant. If this is the case, it is expected be sold worldwide in chemists and pharmacies. Project 3 It is developing a material for use in kitchens which is self-cleaning and germ resistant. A competitor is currently developing a similar material and for this reason Geranium are unsure whether their project will be completed. The costs associated with which of these projects can be capitalised? A Projects 1, 2 and 3 B Projects 1 and 2 C Project 1 only D Projects 1 and 3
137 C The costs of a development project are capitalised only if: • The project is separately identifiable. • Expenditure can be reliably measured. • It is commercially viable. • It is technically feasible. • It is projected to be profitable. • Resources are available to complete it. • Project 2 falls short of these criteria: it does not appear that the appetite suppressant properties of the substance have yet been confirmed and therefore it is not yet commercially viable. • Project 3 may not be completed and therefore does not meet all six criteria. • The costs of projects 2 and 3 should be expensed to the statement of profit or loss and other comprehensive income.
138 Merlot Co is engaged in a number of research and development projects: Project A A project to investigate the properties of a chemical compound Project B A project to develop a new process which will save time in the production of widgets. This project was started on 1 January 20X5 and met the capitalisation criteria on 31 August 20X5. Project C A development project which was completed on 30 June 20X5. Related costs in the statement of financial position at the start of the year were $290,000. Production and sales of the new product commenced on 1 September and are expected to last 36 months. Costs for the year ended 31 December 20X5 were as follows: $ Project A 34,000 Project B costs to 31 August 78,870 Project B costs from 31 August 27,800 Project C costs to 30 June 19,800 What amount is expensed to the statement of profit or loss and other comprehensive income of Merlot Co in respect of these projects in the year ended 31 December 20X5?
138 $147,292 $ Project A 34,000 Project B 78,870 Project C ($290,000 + $19,800) × 4/36 34,422 ------- 147,292 ------- • Project A is a research project and all costs should be written off to the statement of profit or loss and other comprehensive income as incurred. • Project B is a development project. Costs can only be capitalised once the capitalisation criteria are met. Those costs incurred before this was the case cannot be reinstated as an asset. • Project C is a development project which has resulted in capitalised expenditure. This asset must be amortised over the 36 months of sales of the product. Amortisation for the current year should be 4 months (1 September to 31 December 20X5).
