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Part 2: Financial position and financial
performance
Chapter 7: Tangible and
intangible assets
Multiple choice
questions
Multiple choice questions
Try the multiple choice questions below to test your knowledge of this chapter. Once you have completed
the test, click on 'Submit Answers for Grading' to get your results.
This activity contains 30 questions.
The book-keeper at Bobby Bunter & Co has discovered that the following
errors have occurred during the year which affect the amount of PPE in
the balance sheet:
Included in repairs is the sum of 2,300 which should have been capitalised
The purchase of a new food processor costing 237 has been added to PPE twice
Insurance payments of 1,800 in respect of property have been included in the PPE.
The correction of these errors will cause the carrying value of PPE in the
balance sheet to:


Increase by 263

Increase by 26

Decrease by 4,576

Decrease by 3,626

None of the above is correct
According to IAS 16 - 'Property, Plant and Equipment', which two of the
following items can be capitalized (i.e. recorded in the balance sheet as
PPE)?


Cost of preparing the site for installation

Initial operating losses whilst demand builds up

Cost of training staff on the new asset

Cost of testing whether the asset works properly

Cost of excess materials resulting from a purchase error
Which one of the following statements best describes the 'carrying value'
of an asset?


The cost of the asset less its residual value

The higher of the asset's NRV and its value in use

The higher of the asset's value in use and its recoverable amount

The amount at which the asset is recognised in the balance sheet after deducting any
accumulated depreciation and accumulated impairment losses

None of the above is correct
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None of the above is correct
James & Arun Ltd. is purchasing a second-hand grinding machine from a
competitor who has gone bankrupt. James & Arun Ltd. will incur the
following costs:
Agreed price to be paid to vendor, 16,000
Dismantling the machine at its current location, 1,300
Transportation to James & Arun's factory, 700
Machine refurbishment costs prior to re-installation, 350
Re-installation, 550
According to IAS 16 - 'Property, Plant and Equipment', the total included
in non-current assets (PPE) in respect of the machine should be:


17,600

18,550

16,550

17,050

18,900
The H&W Co. acquired a new industrial washing machine, the list price of
which was 52,000. The supplier allowed a trade discount of 4,000 off
the list price. On delivery, the cost of installing the machine in its desired
location was 950. According to IAS 16 - 'Property, Plant and Equipment',
what is the cost of the machine to be capitalised?


56,950

48,950

52,950

52,000

48,000
The depreciation charge is required to be based on:


The replacement cost of the asset being depreciated

The expected useful life of the asset being depreciated

The profitability of the asset being depreciated

A period not exceeding 5 years for plant and machinery, and 20 years for buildings
and land

None of the above is correct
At the beginning of this financial period, the balance sheet of Brambilla &
Co. showed motor vehicles at cost for 20,000 and accumulated
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At the beginning of this financial period, the balance sheet of Brambilla &
Co. showed motor vehicles at cost for 20,000 and accumulated
depreciation amounting to 7,200. Depreciation is at 20% per annum
using the diminishing balance method. The carrying value of motor
vehicles in the balance sheet at the end of this financial year, after
allowing for this year's depreciation will be:


11,520

8,800

12,800

10,240

None of the above is correct
Charging depreciation of PPE to the income statement is an attempt to:


Comply with the prudence concept

Spread the cost of the assets over their estimated useful life

Reduce profits and dividends

Ensure that sufficient funds are available to replace the assets

None of the above is correct
The carrying value of furniture and fittings at 1 October 2004 was
20,976, being cost of 35,672 less accumulated depreciation and
impairment losses of 14,696. During the year, fittings costing 2,972
were purchased. Depreciation is charged on the diminishing balance basis
at 15% per annum. The depreciation charge, to the nearest , for the year
ended 30 September 2005 would be:


2,650

3,118

3,592

5,810

None of the above is correct
The carrying value of equipment at 1 January 2005 was 19,720 (cost
25,670 and accumulated depreciation 5,950). In 2005 equipment costing
5,670 was purchased. The depreciation policy is to charge depreciation
at 25% on all equipment held at the year end using the diminishing-
balance method.
The depreciation expense for the year ended 31 December 2005 would be:


7,835

6,417

9,322

6,347

None of the above is correct
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6,347

None of the above is correct
The carrying value of PPE at 1 July 2004 was 15,780 (cost 20,580 and
accumulated depreciation 4,800). During the year to 30 June 2005 PPE
costing 4,530 were purchased. The depreciation policy is to charge
depreciation at 20% on all assets held at the year end on the diminishing
balance basis.
Accumulated depreciation for the balance sheet as at 30 June 2005 would
be:


9,822

10,782

12,978

8,862

None of the above is correct
Mr Miller buys a car for 10,000. He is advised to trade it in for a new car
in three year's time when it will probably fetch 4,000. He decides to
depreciate on this basis. The annual depreciation expense, based on a
straight line basis, will be:


1,500 per annum

1,000 per annum

3,000 per annum

2,000 per annum

None of the above is correct
The Little Shell Co. purchased a drilling machine on 1 January 2006 for
174,000. The useful life of the machine is estimated at three years with a
residual value at the end of this period of 24,000.
The total units expected to be produced over three years are 24,000:
Year 2005: 1,100 units
Year 2006: 700 units
Year 2007: 600 units
Using the most appropriate depreciation method, the depreciation expense
for 2007 would be:


58,000

50,750

43,750

50,000

None of the above is correct
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An enterprise sells on 1 January 2005 a van which it bought on 1 January
2002 for 3,000, and has been depreciating the van each year at 25% per
annum on a straight line basis. It trades this van in for a new van costing
5,000 and pays the supplier 4,600 cash.
What is the gain or loss on the disposal of the old van?


750 gain

350 gain

750 loss

350 loss

None of the above is correct
Plush Tred Ltd the carpet shop traded its old delivery van in for a new one
on 31 December 2004. The old van was purchased during the year ended
31 December 1997 for 17,000, and has been depreciated using 15%
straight line. (A full year depreciation is charged in the year of purchase,
none in the year of sale).
The purchase price of the new van is 21,000 but Plush Tred Ltd only
needed to pay 20,300 following the trade in.
The gain (loss) on disposal of the old van is:


4,100 gain

1,550 gain

700 gain

150 loss

None of the above is correct
A machine costing 55,000 has an expected useful life of 10 years and an
estimated residual value of 3,000. Depreciation is calculated on the
diminishing balance method at the rate of 25%. In year 5 the machine was
actually disposed of for 15,000. (Depreciation is charged in all years 1 -
5).
The resulting gain or loss arising on the disposal, to the nearest euro, is:


14,000 loss

1,948 gain

13,052 loss

15,000 gain

None of the above is correct
Pronto Pack Ltd sells its old packaging machine for 300 on 31 December
2005. The machine was bought during the year ended 31 December 2000
for 10,000. Depreciation on plant and machinery is charged at 20% on a
straight-line basis.
The gain on disposal is:


2,300
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straight-line basis.
The gain on disposal is:


2,300

300

3,700

1,700

None of the above is correct
What is the impact on the accounting equation of the following lease
agreement?
Lease payment of 15,000 per year for 8 years. Each annual lease payment will be
made in advance on 1 January
35,000 fair market value purchase option at the end of Year 8 (guaranteed by the
lessee to be the minimum value of the equipment)
estimated economic life is 12 years
fair market value of the leased asset is 105,000
the interest rate implied in the lease is 10 percent; while the company's incremental
borrowing rate is 11 percent
The financial year ends at 31 December.


15,000 increase in expense and decrease in cash and cash equivalents when
payment is made

The accounting equation is unaffected when the lease is entered into

125,000 increase in assets and liabilities

96,351 increase in assets and liabilities

None of the above is correct
On 1 January 2005, ABC SpA, lessee, enters into an operating lease for
new equipment valued at 1.5 million. Terms of the lease agreement
include five annual lease payments of 125,000 to be made by ABC to the
leasing company.
During the first year of the lease, ABC will record which of the following?


No entry is required

Initially, an increase of leased assets of 625,000 and an increase in trade payables
of 625,000. At year-end, a decrease in trade payables of 125,000 and a decrease
in cash of 125,000

An increase in rent expense of 125,000 and a decrease in cash of 125,000

An increase in leased assets 125,000 and a decrease in cash of 125,000. The
income statement is not affected

None of the above is correct
According to IAS 38 - 'Intangible assets', which two of the following
criteria are relevant in determining the useful life of an intangible asset?
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According to IAS 38 - 'Intangible assets', which two of the following
criteria are relevant in determining the useful life of an intangible asset?


The residual value of the asset

The expected usage of the asset

Amortisation period

Obsolescence

None of the above is correct
According to IAS 38 - 'Intangible assets', amortisation of an intangible
asset with a finite useful life should commence when:


It is probable it will generate future economic benefits

It is first recognised as an asset

The cost can be identified with reasonable certainty

It is available for use

None of the above is correct
According to IAS 38 - 'Intangible assets', the recognition criteria for an
item asset include which two of the following conditions?


It is an integral part of the enterprise

It must be measured at cost

Its cost can be measured reliably

It is probable that future economic benefits will arise from its use

None of the above is correct
According to IAS 38 - 'Intangible assets', which of the following
statement(s) is(are) true?
(a) Expenditure during the research phase of a project may sometimes be
capitalised as an intangible asset
(b) Expenditure during the development phase of a project may
sometimes be capitalised as an intangible asset
(c) Intangible assets cannot be treated as having an indefinite useful
economic life
(d) Intangible assets with a finite useful life should be maintained at cost
and tested annually for impairment


(b) only

(b) and (d)

(d) only

(a) and (b)

(b) and (c)
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(d) only

(a) and (b)

(b) and (c)
The Pooja Co. has acquired a trademark relating to the introduction of a
new manufacturing process.
The costs incurred were as follows:
Cost of trademark, 100,000
Expenditure on promoting the new product, 1,400
Employee benefits relating to the testing of the proper functioning of the new process,
40,000
According to IAS 38 - 'Intangible assets', what is the total cost that can be
capitalised as an intangible fixed asset in respect of the new process?


140,000

101,400

138,600

141,400

100,000
When the depreciated cost of a tangible asset is higher than its
recoverable amount:


An unrealised gain must be accounted for

The tangible asset must be reported at its fair value

An impairment loss should be recognised as expense in the income statement
immediately

An impairment loss should be recognised only if the NRV is higher than the value in
use

None of the above is correct
Which one of the following statements best describes 'value in use'?


The net amount an enterprise expects to obtain for an asset at the end of its useful
life

The present value of estimated future cash flows expected to arise from the
continuing use of an asset and from its ultimate disposal

The amount at which an asset could be exchanged between knowledgeable, willing
parties in an arm's length transaction

The amount of cash or cash equivalents that could currently be obtained by selling an
asset in an orderly disposal

The higher of an asset's NRV and its recoverable amount
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Which of the following best describes the higher of an asset's net selling
price and its value in use?


Carrying value

Revalued amount

Depreciable amount

Recoverable amount

None of the above is correct
Which of the following statements best describes the term 'impairment
loss'?


The amount by which the carrying value of an asset exceeds its recoverable amount

The systematic allocation of an asset's cost less residual value over its useful life

The removal of an asset from an enterprise's balance sheet

The amount by which the recoverable amount of an asset exceeds its carrying value

None of the above is correct
According to IAS 36 - 'Impairment of Assets', which two of the following
are relevant in determining a non-current asset's 'value in use'?


The carrying value of the asset

The expected future cash flows from the asset

The time value of money

The future annual depreciation charge on the asset

None of the above is correct
The Limoncello Co. is considering whether according to IAS 36 -
'Impairment of Assets', any impairment loss has occurred on its major
factory on the Amalfi Coast:
Current carrying value (i.e. cost less accumulated depreciation), 80m
Value in use, 120m
Fair value less cost of disposal, 60m
What is the amount of the impairment loss to be recognised and what is
the factory's carrying value after the recognition of any impairment loss?


Impairment loss: 40,000; Carrying value: 40,000

Impairment loss: 20,000; Carrying value: 60,000

Impairment loss: 60,000; Carrying value: 20,000

Impairment loss: Nil; Carrying value: 80,000

Impairment loss: Nil; Carrying value: 120,000
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Impairment loss: Nil; Carrying value: 80,000

Impairment loss: Nil; Carrying value: 120,000
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