Australian Financial Accounting 7th Edition By Deegan – Test Bank

 

 

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Sample Questions 

 

 

 

Chapter 04

Student: ___________________________________________________________________________

1.	If an asset’s carrying amount is less than its recoverable amount, the increase in value is recognised as a gain. True    False

 

2.	The AASB Framework allows use of a different measurement basis for similar assets as long as this is disclosed in the summary of accounting policies adopted in the notes to the accounts. True    False

 

3.	AASB 101 Presentation of Financial Statements requires all current and non-current assets to be presented in the statement of financial position in the order of maturity. True    False

 

4.	AASB 116 Property, Plant and Equipment allows both cost and revaluation models to be applied as a measurement basis to one class of property, plant and equipment. True    False

 

5.	Previously written-off assets are allowed to be reinstated under AASB 136 Impairment of Assets. True    False

 

6.	AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors requires material prior period errors to be corrected retrospectively, in the period when the error was discovered. True    False

 

7.	A reporting entity must have legal ownership of an asset to record it as such within its statement of financial position . True    False

 

8.	The term ‘probable’ is described in the AASB Framework as meaning that the chance of the future economic benefits arising is more likely rather than less likely. True    False

 

9.	Current generally accepted accounting practices require one approach to measurement to be applied to all classes of assets. True    False

 

10.	The sum of the total assets of an entity will typically reflect their cost under current generally accepted accounting practices. True    False

 

11.	For an asset to be recognised, it is required to possess a cost or other value that can be measured exactly. True    False

 

12.	Advertising expenditures are typically expensed as incurred because the future economic benefits are uncertain to occur. True    False

 

13.	The preserved body of famous Australian racehorse Phar Lap is an example of a heritage asset. True    False

 

14.	For an asset to be recognised it is essential that it be acquired by purchase or exchange of another asset. True    False

 

15.	Future economic benefits can only be derived from the sale of an asset. True    False

 

16.	If the expected value in use of an asset is more than its market value, then it is expected that the entity will retain the asset. True    False

 

17.	Relevance and reliability are important considerations for determining the format to use for the purposes of presenting the statement of financial position. True    False

 

18.	When an asset’s recoverable amount is less than the asset’s cost, the asset’s cost must be written down to recognise an impairment loss. True    False

 

19.	AASB 116 states that the cost of property, plant and equipment must include dismantling, removal and site restoration costs. True    False

 

20.	Borrowing costs may include amortisations of discounts or premiums related to borrowings. True    False

 

21.

According to the AASB Framework an asset should have a number of characteristics, including: A. It must be owned by the entity.   B. It must be expected to provide future economic benefits to the entity.   C. The transaction giving rise to the ownership must have already occurred.   D. The future economic benefits must be very likely to eventuate.

 

22.

The description of ‘probable’ in the AASB Framework means that: A. Assessments of the degree of uncertainty attaching to the flow of economic benefits are made on the basis of evidence.   B. Assets will be recognised if the expected probability of future benefits arising is less than 50%.   C. A high degree of professional judgment may be required in preparing accounting reports.   D. Assessments of the degree of uncertainty and a high degree of professional judgment may be required in preparing accounting reports.

 

23.	If it is not probable that expenditure will generate future benefits, the accounting treatment should be: A. to treat it as a deferred asset.   B. to amortise it over a period of no more than two operating cycles.   C. to expense it.   D. to treat it as unearned revenue.

 

24.

Bruno Enterprises has constructed a heavy weight hydraulic lifter that it plans to use in maintaining and repairing its fleet of 18 wheeler trucks. The costs to build the lifter were wages of $11 000, raw materials of $19 000, depreciation of $4000 and supplies of $1000. Wages have not yet been paid. The equipment is judged to have probable future economic benefits of greater than its cost. What would be the accounting entry to record this event? A.     B.     C.     D.

 

25.

Bella Enterprises recorded as an asset a piece of equipment purchased for $13 000 this period. No depreciation has been recorded as yet and it has been revealed that it is not probable that the equipment will generate future economic benefits. What is the appropriate accounting entry? A.     B.     C.     D.

 

26.

The decision to expense or capitalise an item is important because: A. It may have direct implications for the value of the organisation and wealth of managers.   B. It may have an impact on contractual arrangements that are based on accounting numbers related to profits and/or assets.   C. It may give managers scope to maximise personal wealth, in line with Positive Accounting Theories.   D. All of the given answers are correct.

 

27.	In a previous period Banshee Ltd wrote off its ‘dynamic mover’ equipment, but new information has shown that it is probable that the future economic benefits exceed its cost of $40 000. What is the appropriate accounting entry? A.     B.     C.     D.

 

28.	Land and buildings may be valued at: A. recoverable amount.   B. opportunity cost.   C. fair value.   D. recoverable amount or fair value.

 

29.	The class of assets that is to be valued at lower than cost or net realisable value is: A. non-current assets.   B. debtors.   C. self-generating and regenerating assets.   D. inventories.

 

30.	Which of the following assets are recognised at fair value? A. biological assets   B. revalued property, plant equipment   C. assets under a finance lease   D. biological assets and revalued property, plant equipment

 

31.

Heritage assets have characteristics that create doubt about whether or not they satisfy the definition of an asset. These characteristics include: A. They are not expected to generate net economic benefits.   B. They never generate cash inflows.   C. They are unlikely ever to be sold.   D. They are not expected to generate net economic benefits and they are unlikely ever to be sold.

 

32.	Under AASB 101 the classification of assets into current and non-current will depend on the entity’s: A. average operating cycle.   B. current accounting period.   C. ordinary course of business.   D. normal operating cycle.

 

33.

AASB 101’s definition of current assets and further discussion at paragraph 59 will: A. simplify the recognition of current assets.   B. require greater professional judgment in order to determine an entity’s normal operating cycle.   C. improve analysts’ decisions, as ratios that use current assets will use the same information.   D. have implications for assessing the liquidity of entities as current assets will now include fewer items.

 

34.

In the case of classifying a liability as current or non-current, what approach does AASB 101 require if there is no clearly identifiable operating cycle? A. The most common length of operating cycle for other entities in a comparable industry must be used.   B. The operating cycle of the event that gave rise to the creation of the liability must be used as the basis for determining the liability’s operating cycle.   C. The 12-month period from the reporting date must be used.   D. The average operating cycle length over all operations of the entity must be used.

 

35.

The classification of assets into current or non-current in the statement of financial position will provide useful information on the short-term solvency of the entity: A. when the entity supplies goods or services within a clearly identifiable normal operating cycle.   B. when the operating cycle of the entity is greater than 12 months.   C. when the operating cycle of the entity is less than 12 months.   D. when the entity is a financial institution.

 

36.

AASB 101 indicates that when presenting a statement of financial position, an entity should: A. present all assets and liabilities as two groups and disclose their specific classifications in notes as per paragraphs 57–67.   B. only present items on the basis of liquidity if that information is reliable and more relevant. If this is the case, assets should be discretely grouped into current and non-current classifications.   C. present items broadly in order of liquidity if that information is reliable and more relevant than following paragraphs 66–76.   D. always classify items as current and non-current.

 

37.

Where the entity presents current assets separately from non-current assets and current liabilities separately from non-current liabilities what disclosure is the entity required to make under AASB 101? A. the reason for selecting that style of presentation   B. the length of its operating cycle if it has clearly been identified as being greater than 12 months   C. the net amount of working capital   D. a list of the assets and liabilities in the order of their liquidity

 

38.	An asset is classified as current when: A. it is expected to be realised or intended for sale or consumption in the entity’s normal operating cycle.   B. the item is held form trading.   C. it is cash or cash equivalent.   D. All of the given answers are correct.

 

39.

If an asset’s ‘value in use’ exceeds its market value then: A. An entity should adjust the current carrying amount of the asset to book value.   B. It would be expected that the entity would dispose of the asset immediately.   C. An impairment loss will need to be recorded.   D. It would be expected that the entity would retain the asset.

 

40.

‘Recognised’ in relation to asset disclosure may be defined as meaning: A. disclosed in the notes to the accounts but not reported on, or incorporated in amounts reported on the face of the statement of financial position .   B. classified according to nature or type within liquidity categories based on the operating cycle of the reporting entity.   C. reported on, or incorporated in amounts reported on, the face of the statement of financial position .   D. familiar, of well-known usefulness.

 

41.

AASB 101 requires, as a minimum, certain line items to be included on the face of the statement of financial position . Additional line items may be disclosed based on an assessment of: A. the nature and liquidity of assets.   B. the functions of the assets within the entity.   C. the amounts, nature and timing of liabilities.   D. all of the given answers.

 

42.

Where the entity presents current assets separately from non-current assets and current liabilities separately from non-current liabilities, AASB 101 requires items to be disclosed on the face of the statement of financial position , including: A. total assets.   B. total liabilities.   C. total parent entity interest.   D. all of the given answers.

 

43.

According to AASB 136, a non-current asset should be: A. revalued downwards where the net amount that is expected to be recovered through the cash inflows and outflows from its continued use and subsequent disposal exceeds its cost.   B. written down to its replacement cost when the recoverable amount is greater than its value in use.   C. written down to its recoverable amount when its carrying amount is greater than its recoverable amount.   D. revalued upwards where its value in use is greater than its net realisable value.

 

44.

Recoverable amount of an asset is defined in AASB 136 as the higher of its fair value less costs to sell and its value in use. In the case where an asset’s carrying amount is less than its recoverable amount, which action is consistent with AASB 136? A. recognise difference as increase is asset revaluation reserve   B. recognise difference as impairment loss   C. recognise difference as gain from reinstatement of asset   D. leave asset at its carrying amount

 

45.

It is expected that the service potential of a non-current asset will decline over time. The appropriate accounting treatment is to: A. amortise the asset over its useful life.   B. disclose the effect in the notes to the statement of financial position if it is material in nature.   C. write-off the asset.   D. accrue the difference as a payable in adjusting entries at the end of the period.

 

46.

Advertising costs are not typically capitalised because: A. It is not considered probable that the advertising will generate future economic benefits.   B. The advertising cannot be controlled by the entity.   C. The future economic benefits cannot generally be measured reliably.   D. The cost of the advertising is typically greater than the recoverable amount.

 

47.

The effect of capitalising expenditures is to: A. decrease current period profit, increase current period assets and decrease future period equity.   B. increase current period profit, increase current period assets and decrease future period profit.   C. increase current period profit, decrease current period assets and decrease future period liabilities.   D. increase current period profit, increase current period equity and increase future period profit.

 

48.

O’Briens Construction Ltd exchanged equipment that had a book value of $40 000 for a truck that had a book value (in the other entity’s books) of $38 000. The fair value of the equipment is $45 000 and the fair value of the truck is $48 000. Further cost incurred to prepare the truck for use by O’Briens was $700 for signage. What is the acquisition cost of the truck? A. $48 700   B. $40 000   C. $48 000   D. $45 700

 

49.

The cost of an asset will typically include the purchase price and: A. other expenditures on material and services to generate the asset.   B. depreciation costs of other assets used to generate the asset.   C. salaries and wages of the Chief Executive Officer.   D. other expenditures on material and services to generate the asset and depreciation costs of other assets used to generate the asset.

 

50.

Calling Card Co Ltd has acquired a printing press from Metal Manufacturers Ltd. The deal required Calling Card Co Ltd to exchange the following assets for the printing press The cost to install the press was $1000 (not yet paid). What is the entry to record the purchase of the printing press? A.     B.     C.     D.

 

51.

How should borrowing costs relating to an asset being constructed over a substantial period of time be treated in the accounts? A. expensed as incurred   B. capitalised and amortised over the period of the construction of the asset   C. accrued and amortised over the period of the loan   D. capitalised as part of the cost of the asset

 

52.

Golden Co Ltd has donated a vehicle to Bushman Enterprises as a result of publicity about the plight of Bushman Enterprises after bushfires destroyed most of its fleet of vehicles. The vehicle had cost Golden Co $25 000 and has accumulated depreciation of $10 000. Its market value is $20 000. How should the asset transfer be recorded in both companies’ books? A.     B.     C.     D.

 

53.	The treatment of repairs and additions to property, plant and equipment can be best described as: A. written off as incurred.   B. capitalised when it maintains a certain level of service.   C. capitalised when the asset’s estimated useful life is extended.   D. none of the given answers.

 

54.	If the entity received a donated asset the entity must: A. recognise an asset.   B. recognise a liability.   C. recognise an income.   D. recognises an asset and an income.

 

55.

The accountant in preparation for the financial statement for the year 2013 realised an error in the determination of recoverable amounts in last year’s financial statements. This error had it been detected in 2012 would have required the recognition of impairment losses amounting to $500 000. To comply with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, the accountant should: A. make a prospective change to the 2013 figures, on the basis that he has made an error in 2012.   B. make a prospective change to the 2013 figures, on the basis that he is making a change to an estimate in 2012.   C. make a retrospective change to the 2013 figures, on the basis that that this is a change in accounting estimates.   D. make a retrospective change to the 2013 figures, on the basis that he has made an error in 2012.

 

56.

AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors specifies the accounting treatment for changes in accounting policies, correction of errors and changes in accounting estimates. Which of the following statement(s) in relation to these items is/are true? A. Prior period errors are to be corrected by restating prior period information.   B. Voluntary changes in accounting policy are to be accounted for prospectively.   C. Changes in accounting estimates are to be accounted for retrospectively, unless it is impracticable to do so.   D. A change in the useful life of an asset is considered a change in accounting policy.

 

57.	Which of the following measurement bases are acceptable for property, plant and equipment? A. historical cost   B. revaluation model   C. fair value model   D. historical cost and revaluation model

 

58.	Which of the following are considered to be an asset? A. deposit on a futures contract   B. asset under finance lease   C. deferred acquisition costs   D. All of the given answers are considered assets.

 

59.

An accountant is not sure about how to recognise an asset that is purchased in excess of fair value. Which of the following action will you recommend? A. Recognise the asset at fair value and the excess as goodwill.   B. Recognise the asset at fair value and the excess as a loss on purchase.   C. Recognise the asset at fair value and the excess as receivable from supplier.   D. Recognise the asset at cost.

 

60.	Which of the following items is not considered capitalisable cost of property, plant and equipment? A. freight costs   B. import duties   C. trade discount   D. installation costs

 

61.	Which of the following items are required to calculate ‘value in use’ of an asset? A. exit and entry prices   B. purchase price and cost of disposal   C. estimated net future cash flows and appropriate discount rate   D. estimated net future cash flows

 

62.

If an impairment loss recognised in prior periods for a revalued asset no longer exists, AASB 136 Impairment of Assets requires a reporting entity to: A. reverse the impairment loss to increase the asset to its recoverable amount.   B. reverse the impairment loss in profit and loss, only if the asset adopts the revaluation model.   C. treat this as a prior period adjustment and recognise the reversal as a gain.   D. ignore this information as previously written off assets are precluded from being reinstated.

 

63.

A material prior period error in year ending 2009 was subsequently discovered in 2010. To comply with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors an entity should: A. reissue the 2009 financial statements with the error corrected.   B. make a retrospective adjustment in 2009.   C. make a retrospective adjustment in 2010.   D. make a prospective adjustment in 2009.

 

64.

Applying the asset recognition criteria, which of the following accounting treatments are incorrect? A. Transfer duties were included in the cost of acquisition of the photocopier.   B. Monthly servicing of the photocopier was capitalised.   C. Monthly servicing of the photocopier was expensed.   D. Replacement of a minor component part of the photocopier was expensed.

 

65.	Financial institutions dealing with investments and other financial instruments prefer which method of measurement for that class of assets? A. historical cost   B. fair value   C. present value   D. net realisable value

 

66.	Using the cost model outlined in AASB 116 to measure property, plant and equipment at acquisition, which of the following costs would not be included? A. directly attributable costs   B. initial estimates of dismantling and removal costs   C. 12-month servicing plan   D. purchase price

 

67.

Certain classes of property, plant and equipment, for example, aircraft, might comprise a number of individual component parts. How does AASB 116 paragraph 43 require these components to be accounted for? A. The components can be measured as one asset.   B. There is a prescribed unit of measurement for recognition that must be followed.   C. Only one depreciation rate can be used for the asset.   D. Each component with a significant cost must be depreciated separately.