Chapter 6

Bailey acquires an item of machinery with a cost of $45,000. The residual value is expected
to be $4,000 after ten years. He depreciates machinery using a policy of 25% reducing
balance (to the nearest $).
13. What will the carrying value of the machinery be after three years? $_____
The correct answer is $18,984.
The residual value is not needed when using the reducing balance method of depreciation.

End year 1 (75% × 45,000) = $33,750.00

End year 2 (75% × 33,750) = $25,312.50

End year 3 (75% × 25,312.50) = $18,984.38

Charlotte depreciates equipment on a straight-line basis. She charges depreciation for each
complete month that an asset is owned. An item of equipment was purchased on 1 July
20X4 for $70,000. It has an expected residual value of $22,000 after five years.
14. What is the net book value of this item of property, plant and equipment at 31
December 20X5? $_____
The correct answer is $55,600.
Depreciable amount: $70,000 − $22,000 = $48,000. This is expected to have a useful life of
5 years (60 months) so $800 per month (48,000/60 months).
Accumulated depreciation is therefore 18 months × $800 = $14,400 (for the 18 months from
1 July 20X4 to 31 December 20X5) and the carrying value is $70,000 − $14,400 = $55,600.

Cai builds a car showroom from which to conduct her car sales business. The amounts she
paid for this include the following:

Purchase of land 70,000

Demolishing the previous building 10,000

Architect's fees 4,000

Building costs 42,000

Opening party 3,000

15. What is the initial cost of the building? $_____
The correct answer is $126,000.
All of the costs are unavoidable in order to bring the asset into a condition where it is ready
for use, with the exception of the grand opening party which must be written off to profit or
loss. The total is $(70,000+10,000+4.000+42,000) = $126,000.
The statement of financial position of Chen contains an item of plant with a carrying book
value of $8,000. This is traded in for new plant with a cost of $21,000. Chen pays $14,000 in
cash towards the purchase of the new plant.
16. What is the loss on disposal of the original plant? $_____
The correct answer is $1,000.
The proceeds of the sale of the original plant will be the difference between the cost of the
new plant and the amount of cash paid $21,000 (new asset) − $14,000 (cash) = $7,000.
If the assumed proceeds for the disposal are $7,000 and the carrying value is $8,000 then
there is a loss on disposal of $1,000.

Kimi sold an item of property, plant and equipment that had originally cost $8,000. The asset
had an expected useful life of 5 years, after which time it was expected to be sold for $500.
After exactly two years of use, it was sold for proceeds of $3,200.
17. What is the loss on disposal of this asset? $_____
The correct answer is $1,800.
The carrying amount of the asset at the date of disposal is $5,000
$8,000 − (($8,000 − $500) / 5 years) × 2 years = $5,000
When this is compared to disposal proceeds of $3,200 it creates a loss of $1,800 ($5,000 −
$3,200)

18. Which of the following costs would NOT be capitalised as part of the cost of a non-
current asset?
A. A.Architect's fees for an extension to the factory
B. B.Purchase price of a new delivery van
C. C.Repairs to existing machinery
D. D.Upgraded engine for machinery
The correct answer is C.
The costs of repairing the existing machinery is a revenue expense for using the item, and
are not an improvement, so they would not be included in the non-current asset account.

An item of equipment bought for $5,500 in 20X1 was sold exactly six years later for $1,450.
Depreciation policy for equipment is straight line at 10%.
19. What is the loss was made on the disposal? $_____
The correct answer is $750.
Depreciation = $5,500 × 10% × 6 years = $3,300
Cost 5,500 − Accum Depn $3,300 carrying value = $2,200
Proceeds 1,450 − carrying value 2,200 = $750 Loss

In the year ended 31 August 20X3, Bailey incorrectly recorded repairs as plant and
machinery as an acquisition of a new item of plant and machinery. Depreciation has not yet
been charged for the year.
20. What effect will this error have on his profit and net assets for the year ended 31
August 20X3 before it is corrected?
Profit Overstated
Understated
Net assets Overstated
Understated
Solution:
Profit: Overstated
Net Assets: Overstated

Stephanie has incorrectly included an insurance expense in the motor vehicle cost account.
21. How will this affect profit and net assets at the end of the accounting period?
Profit Overstated
Understated
No effect

Net assets Overstated

Understated
No effect
Solution:
Profit: Overstated
Net assets: Overstated
The insurance fee should be classified as an expense, not capitalised as an asset. The
expense is understated, leading to an overstatement of profits. Therefore, the double entry
to correct the error is DR Insurance Expense and CR Motor Vehicle Cost.

22. Classify each of the following cash payments into either non-current assets or
expenses.
Purchase price of machinery Asset
Expense

Inwards Delivery of machine Asset

Expense

Annual servicing of machine Asset

Expense

Cost of installing a new production machine Asset

Expense
Solution:
Purchase price of machinery: Asset
Inwards Delivery of machine: Asset
Annual servicing of machine: Expense
Cost of installing a new production machine: Asset
The purchase price of machinery, inwards delivery cost and the cost of installing the
machine are all capital expenditures that form part of the cost of non-current assets. The
annual servicing of the machine is an expense.

Fred sells an asset for $600 on 31 December 20X5. The asset had cost $2,400 on 1 July
20X2. The depreciation rate applied to the asset was 20% on a straight line basis. Fred's
policy is to calculate his depreciation charge pro rata.
23. What is the profit or loss on disposal of this asset?
A. A.Profit of $120
B. B.Loss of $120
C. C.Profit of $360
D. D.Loss of $360
The correct answer is B.
The asset will have been owned and therefore depreciated for all of X3, X4 and X5 and half
of X2 – therefore 3.5 years' depreciation will have accumulated. Annual depreciation is
$2,400 × 20% = $480 – therefore accumulated depreciation is $480 × 3.5 = $1,680. Net
book value is $2,400 − $1,680 = $720. The asset was sold for $600, therefore this is a loss
of $120.

An asset that had cost $1,000 was later scrapped. At the time of scraping the asset was fully
depreciated.
24. What impact will this have on profit?
A. A.Increase
B. B.Decrease
C. C.Stay the same
D. D.Insufficient information to know
The correct answer is C.
If the asset has been fully depreciated, it will have a net book value of nil. Therefore, neither
a profit nor loss will arise, and hence there will be no impact on profit.

25. Which statement or statements about the non-current asset register are true?
1. The register is part of the double-entry system.
2. The register includes a record of the location of tangible non-current assets.
A. A.1 only
B. B.2 only
C. C.1 and 2
D. D.Neither
The correct answer is B.
The register is not part of the double-entry system but does contain information about an
asset's location.

26. What is the purpose of charging depreciation on a business’s non-current assets?

A. A.To comply with the prudence concept
B. B.To ensure the net book value is equal to the market value of the asset
C. C.To spread the cost of the asset over its useful life
D. D.To ensure the eventual net book value is nil at the end of its useful life
The correct answer is C.
 Depreciation allocates the cost of the non-current asset over its useful life.

27. Which of the following is typically recorded in a non-current asset register?

i. Location of each asset
ii. The payment method of each asset including part exchanges
iii. The accumulated depreciation of each asset
A. A.(i) only
B. B.(ii) and (iii) only
C. C.(i) and (iii) only
D. D.(i), (ii), and (iii)
The correct answer is D.
Non-current asset registers provide a much more in-dept knowledge of each asset
compared to the ledger accounts.

A business recorded a purchase of a new delivery truck as travel expenses.

28. What is the effect of this error in relation to profit and net assets?
A. A.Profit: Understated, Net Assets: Overstated
B. B.Profit: Overstated, Net Assets: Overstated
C. C.Profit: Understated, Net Assets: Understated
D. D.Profit: Overstated, Net Assets: Understated
The correct answer is C.
The amount has been wrongly recorded as an expense, which overstates expenses and
understates profit. Assets have been understated as the new delivery truck is not capitalised,
leading to understated net assets.

29. Is each of the following statements about IAS 16 Property, Plant and Equipment
true or false?
 True
False
All non-current assets accounted for in accordance with IAS 16 must be depreciated
 True
False
Depreciation is the process of putting money aside to replace an asset when it has expired
All non-current assets accounted for in accordance with IAS 16 must be depreciated False

Depreciation is the process of putting money aside to replace an asset when it has
expired False
Statement (1) is false. Land, generally, is deemed to have an indefinite useful life and so
would not be depreciated.
Statement (2) is false. The asset has already been purchased. Depreciation is an application
of actual accounting and spreads the cost of the asset over its useful life.

The following statements have been made about the non-current assets register:
i. The register is part of the general ledger
ii. The register includes the carrying amount on each asset
iii. The register shows the location of the asset
30. Which of the statements above are correct?
A. A.(i) and (ii) only
B. B.(ii) and (iii) only
C. C.(i) and (iii) only
D. D.(i), (ii) and (iii)
The correct answer is B.
The non-current asset register is not part of the general ledger. It is a memorandum
document, which means that it is outside of the general ledger, so statement (i) is incorrect.
The register does include the carrying amount of each asset and the location of the assets,
so the other statements are correct.

31. Which of the following is NOT one of the purposes of the Non-Current Assets
register?
A. A.To enable a business to verify the existence of assets by performing asset counts
B. B.To act as supporting documentation to verify the accuracy of balances in the general
ledger
C. C.To record the carrying value of non-current assets for the financial statements
D. D.To allow businesses to track their non-current assets to ensure that none have been
stolen.
The correct answer is C.
The value of non-current assets for the financial statements for the financial statements is
maintained in the general ledger accounts, not the fixed asset register. The value of the
assets is also maintained in the fixed asset register, but this is not for the purpose of
recording the value for the financial statements. Therefore item C is incorrect.
The other items are valid purposes of a non-current assets register.

Bob uses a car in his business. The car cost $20,000 on 1 Jan 20X0. On 1 January 20X3,
the balance of accumulated depreciation on the car was $13,140. On that date, Bob
purchased a new car. The price of the new car was $25,000, but the dealer agreed to give
Bob a trade in allowance of $5,000 for his old car.
32. What is the profit or loss on disposal of the old car?
A. A.Profit of $8,140
B. B.Loss of $8,140
C. C.Profit of $1,860
D. D.Loss of $1,860
The correct answer is D.
Proceeds $5,000

Carrying value of
asset $6,860 ($20,000 − $13,140)

⇨loss on disposal $1,860

If you chose option A or B, then you wrongly used the accumulated depreciation rather than
the carrying value of the asset. The carrying value is calculated by deducting the
accumulated depreciation from the initial cost of the asset.
If you chose option A and C, then you wrongly thought that a profit on disposal had been
made, when a loss had been made.
Fred acquired a laptop on 1 Jan 20X1 for $1,500. On 1 January 20X2, the carrying value of
the laptop was $500. On that date, Fred visited a computer dealer, where he bought a new
laptop with a price of $1,800. The dealer agreed that Fred could pay cash of $1,200 and
trade in his old laptop for the balance.
33. What amount would be recorded as the profit or loss on the sale of the old laptop?
A. A.Loss of $100
B. B.Profit of $100
C. C.Profit of $500
D. D.Loss of $500
The correct answer is B.
The correct answer is B. The dealer has accepted cash of $1,200 plus Fred’s old laptop in
exchange for a new laptop with a value of $1,800. By doing so, the dealer is giving Fred a
trade in allowance of $600 for his old laptop. Since the old laptop had a carrying value of
$500, the profit on sale is $100 ($600 − $500).

Asha recently bought a new car. The car dealer agreed that she could part exchange her old
car for $4,000 off the value of a new car.
34. What would be the correct journal for recording the part exchange allowance
given in respect of the old car?
A. A.Dr. Cash $4,000
Cr. Motor vehicles $4,000
B. B.Dr. Motor vehicles $4,000
Cr. Cash $4,000
C. C.Dr. Motor vehicles – cost $4000
Cr. Disposals - $4000
D. D.Dr. Disposals
Cr. Motor vehicles – cost
The correct answer is C.
The allowance represents the sale proceeds of the old vehicle. If the sale had been for cash,
the journal would be dr. cash, credit disposals. Here, instead of receiving cash, the
allowance from the old car is being used to partly pay for the new Motor Vehicle – so the
Motor vehicles cost is debited instead of cash. However, the disposals account still forms the
corresponding side of the journal.
Items A and B are incorrect – the part exchange allowance itself involves no cash. Item D
has listed the correct accounts, but the debits and credits are the opposite of what they
should be.

Maria maintains a non-current asset register in a separate system to her general ledger.
Both systems automatically calculate depreciation each year, based on the original costs of
assets, and based on this, calculate their carrying value. Plant and machinery is depreciated
using straight line depreciation at the rate of 25% per year. Motor vehicles are depreciated
using the straight line over three years. A full year’s depreciation is charged on all assets
owned at 31 December.
At 31 December 20X1, Maria discovered that some inventory with a value of $1,800 had
wrongly been booked to the motor vehicles cost account in the general ledger. This
inventory has not been entered into the non-current assets register.
35. When Maria compares the total carrying value of assets in the general ledger to
the total carrying value in the non-current assets register, what difference will she
find?
 A. A.The value in the general ledger will be $1,800 higher than the value in the non-
current assets register.
B. B.The value in the general ledger will be $1,800 lower than the value in the non-current
assets register.
C. C.The value in the general ledger will be $1,200 higher than the value in the non-current
assets register.
D. D.The value in the general ledger will be $1,200 lower than the value in the non-current
assets register.
The correct answer is C.
Inventory wrongly booked as a non-current asset in the general ledger would initially have
caused the balance in the general ledger to show a carrying value that is $1,800 higher than
the correct figure. Since the item was booked as a motor vehicle, $600 of depreciation would
have been calculated (1/3 of the cost) leaving a carrying value of $1,200 in the general
ledger. Thus the general ledger would show a balance that is $1,200 higher than the value in
the non-current assets register.
Item A is incorrect because it fails to take into account the depreciation that would have
automatically been charged by the general ledger system.
Item B is incorrect for two reasons – it fails to take into account the depreciation, and it
wrongly concludes that the balance in the general ledger would be less than the balance in
the non-current asset register.
Item D is incorrect – although the difference between the two balances is correct, it wrongly
concludes that the general ledger balance will be less than the balance in the non-current
asset register, when it will actually be higher.

Faisal’s non-current asset register is not part of his general ledger system. Both systems
automatically calculate depreciation each year, based on the original costs of assets, and
based on this, calculate their carrying value. Plant and machinery is depreciated using
straight line depreciation at the rate of 25% per year. Motor vehicles are depreciated on a
straight line basis over three years. A full year’s depreciation is charged on all assets owned
at 31 December.
At 31 December 20X1, Faisal compared the total carrying value of his non-current assets in
the non-current asset register with the total carrying value of his non-current assets in the
general ledger, and discovered that the balance in the non-current asset register was $1,200
lower than the balance in the general ledger.
36. Which of the following would explain the difference?
A. A.An item of machinery costing $14,400, which was acquired during the year, was
wrongly booked as motor vehicles in the general ledger, but correctly booked as
plant and machinery in the non-current assets register.
B. B.A vehicle costing $4,600 which was acquired during the year had been entered into
the non-current asset register with a value of $6,400, but correctly booked in the general
ledger.
C. C.An item of machinery with a value of $1,200, acquired during the year had been
correctly entered into the non-current asset register, but omitted from the general ledger.
D. D.An item of machinery costing $14,400, which was acquired during the year, was
wrongly booked as motor vehicles in the non-current assets register, but correctly
booked as plant and machinery in the general ledger.
The correct answer is D.
The best way to approach this is to consider the impact of each of the four items:
A: Since the item has wrongly been treated as motor vehicles in the general ledger, rather
than plant and machinery, depreciation of $4,800 would have been charged ($14,400 ÷ 3)
rather than the correct $3,600 ($14,400 × 25%), being over depreciation of $1,200. This
would mean that the carrying value in the general ledger would be $1,200 lower than the
balance in the non-current assets register, which has recorded the asset in the correct
category
B: The correct carrying value for this asset, and the value in the general ledger would be
$3,082 after depreciation of 33% ($4,600 × 67%). In the non-current assets register, the item
was wrongly entered as $6,400 so the carrying value would be $4288 after depreciation of
33% (6,400 × 67%). The balance in the general ledger would therefore be $1,206 lower than
the balance in the non-current assets register.
C: The value of the machinery entered into the non-current asset register was $1,200, but
after depreciation of 25% it would have a value of $900 ($1,200 × 75%). Since the asset was
omitted from the general ledger, the total balance in the general ledger would be $900 less
than the value in the non-current assets register. Item
D: The logic here is exactly the same as for item A, except this time, the machinery is
wrongly categorized in the non-current asset register rather than the general ledger,
meaning that the non-current asset register would show a balance that is $1,200 lower than
the general ledger. This is the correct answer.

Devi, a sole trader, bought a new motor car for $15,000. Devi took out a business loan of
$9,600 and paid the balance from her personal bank account.
37. What journal entry should Devi use to account for this transaction?
Dr Loan $9,600 Cr Motor vehicles
Dr Capital $5,400
A.

Dr Loan $9,600 Cr Motor vehicles

Dr Cash at bank $5,400
B.

Dr Motor vehicles $15,000 Cr Loan

Cr Capital
C.

Dr Motor vehicles $15,000 Cr Loan

Cr Cash at bank
D. A.
The correct answer is C.
Devi has purchased a new car for the business, and this has been financed with both a
business loan and by using some of Devi’s personal funds.
As a result, non-current assets (motor vehicles) will increase by $15,000. When an asset
increases it is recorded in the accounting system as a debit entry. The business loan of
$9,600 will increase the liabilities of the business and an increase in a liability is recorded as
a credit entry. Finally, Devi financed the remainder of the motor vehicle using funds from her
personal bank account. This is an example of capital introduced for a sole trader. The
business now owes this money back to Devi and therefore the capital account will increase.
When there is an increase in capital, this is recorded in the accounting system as a credit
entry.
Roger bought a non-current asset for $40,000 with an estimated useful life of four years. The
asset was depreciated on a straight-line basis with a residual value of $4,000. The asset was
scrapped after three years.
38. What was the loss on disposal? (Answer in $)
The correct number entry is $13,000.
To calculate a gain or loss on disposal the carrying amount of the asset at disposal is
compared to the disposal proceeds. If the disposal proceeds are greater than the carrying
amount of the asset, then there is a gain on disposal. If the disposal proceeds are less than
carrying amount, then there is a loss on disposal. In this example the sales proceeds are
zero because the asset has been scrapped and therefore there must be a loss on disposal
of the asset.
It is important that you pay attention to any residual value in questions like this and
understand how to calculate the carrying amount of the asset at the date of disposal. This
will then allow you to calculate the loss on disposal:

Depreciable amount of asset:

Cost
Residual value
Depreciable amount
Carrying amount at disposal:
Cost
Accumulated depreciation ($36,000 × 3/4 years)
Carrying amount
Disposal proceeds
Loss on disposal
Note that although the annual depreciation charge (and therefore the accumulated
depreciation at the date of disposal) is calculated using the depreciable amount of the asset,
the carrying amount at disposal is calculated by deducting the accumulated depreciation
from the cost of the asset. It is not deducted from the depreciable amount of the asset.
It is also important to note that the residual value represents Roger’s estimate of how much
the asset would have been worth at the end of its useful life. It does not represent any
guaranteed proceeds from disposing of or scrapping the asset.