Chapter 7 Practice Questions
Rina Dhillon
Practice Questions
- Drew Shannon purchased a boat at a cost of $12000. The boat has an estimated residual value of $2000 and an estimated life of five years, or 100 000 hours of operation. The boat was purchased on 1 July 2022, and was used 27 000 hours in 2022/23 and 26 000 hours in 2023/24.
If Shannon uses the straight-line method, what is the carrying amount (book value) at 30 June 2025?
a. | $8000 | |
b. | $6000 | |
c. | $10 000 | |
d. | $4000 |
- Drew Shannon purchased a boat at a cost of $12000. The boat has an estimated residual value of $2000 and an estimated life of five years, or 100 000 hours of operation. The boat was purchased on 1 July 2022, and was used 27 000 hours in 2022/23 and 26 000 hours in 2023/24.
If Shannon uses the units-of-activity method, what is the depreciation rate per hour for the equipment?
a. | $1.00 | |
b. | $1.10 | |
c. | $.10 | |
d. | $.12 |
- Drew Shannon purchased a boat at a cost of $12000. The boat has an estimated residual value of $2000 and an estimated life of five years, or 100 000 hours of operation. The boat was purchased on 1 July 2022, and was used 27 000 hours in 2022/23 and 26 000 hours in 2023/24.
If Shannon uses the reducing-balance depreciation method, at double the straight-line rate, what amount is the depreciation expense for 2024?
a. | $4800 | |
b. | $2880 | |
c. | $1728 | |
d. | $2000 |
- Which of the following accounts would not be reported in the non-current asset section of a balance sheet?
a. Accumulated depreciation – buildings
b. Buildings
c. Depreciation expense – buildings
d. Land
- On the balance sheet, the cumulative amount of depreciation expense recognised to date on a non-current asset is called:
a. accumulated amortisation
b. accumulated depreciation
c. amortisation expense
d. depreciation expense
- Meriton Company purchased land and incurred the following costs:
Purchase price $1000000
Excavation costs 100000
Removing old building 25000
Broker fees 20000
Cost of a parking lot 50000
What is the cost of the land?
a. $1100000
b. $1195000
c. $1145000
d. $1125000
- Which of the following costs related to the purchase of production equipment incurred by ABS Company during 2022 would be considered an expense (revenue expenditure)?
a. Installation costs for equipment
b. Purchase price of the equipment less the cash discount
c. Repair and maintenance costs during the equipment’s first year of service
d. Transportation charges to deliver the equipment to ABS Company
- On 1 July 2022, Lee Company sold a machine for $10000 that it had used for several years. The machine cost $22000 and had accumulated depreciation of $9000 at the time of sale. What gain or loss will be reported on the income statement for the sale of the machine?
a. Gain of $10000
b. Loss of $13000
c. Loss of $3000
d. Gain of $3000
- On 1 July 2022, Banderas Corporation sold a piece of equipment for $30000 which it had used for several years. The equipment had cost $45000 and its accumulated depreciation amounted to $20000 at the time of the sale. What are the net effects on the accounting equation of selling the equipment?
a. Assets and equity increase $30000
b. Assets decrease and equity increases $5000
c. Assets and equity increase $5000
d. Assets and equity decrease $5000
- Land is not depreciated because it:
a. appreciates in value
b. does not have an established depreciable life
c. has a useful life that is limited to the period of time a company is in business
d. will provide future benefits for a company for an unlimited period of time
- Assets classified as property, plant and equipment are reported at:
a. each asset’s estimated market value at the balance sheet date less depreciation
b. each asset’s estimated market value at the balance sheet date
c. the estimated residual value at the date
d. each asset’s original cost less depreciation since acquisition
- Alberts Company purchased equipment at the beginning of July 2022 for $500000. The company decided to depreciate the equipment over a 10-year period using the straight-line method. The company estimated the equipment’s residual value at $50000. The journal entry to record depreciation expense for the financial year ended 30 June 2023 is a debit to:
a. Depreciation expense and a credit to accumulated depreciation for $50 000
b. Accumulated depreciation and a credit to equipment for $50 000
c. Depreciation expense and a credit to equipment for $45 000
d. Depreciation expense and a credit to accumulated depreciation for $45000
- Medina Apartments purchased an apartment building to rent to university students on 15 December 2021. The tenants moved in on 1 January 2022. During the third cricket test, a student punched a hole in the wall when the Australian captain was out for a duck (again). It cost the landlord $400 to repair the hole. How should this cost be recorded?
a. It should be recorded as part of the asset account
b. It should be recorded as repair and maintenance expense
c. It should not be recorded as the tenants will be charged for the damage
d. It should not be recorded since this is an immaterial amount to the landlord
- United Salvage Company sold an old machine on 30 June 2022, for $22000 cash. The following data was available when the machine sold:
Acquisition cost $100 000
Estimated residual value at time of acquisition 8 000
Accumulated depreciation on 30 June 2022, after adjustment 85 000
When this transaction is recorded, the journal entry will be
a. DR Cash $22000
DR Accumulated depreciation $85000
CR Gain on Sale $7000
CR Old machine $100000
b. DR Old machine $100000
DR Gain on Sale $7000
CR Accumulated depreciation $85000
CR Cash $22000
c. DR Cash $22000
DR Accumulated depreciation $85000
CR Loss on Sale $7000
CR Old machine $100000
d. DR Old machine $100000
DR Loss on Sale $7000
CR Accumulated depreciation $85000
CR Cash $22000
- On 1 July 2022, United Marine Salvage purchased a ship for $1000000. It has a ten-year useful life and a residual (salvage) value of $100000. The company uses the reducing-balance depreciation method at twice the straight-line rate.
What would be the carrying amount of the ship after ten years?
a. $200 000
b. $400 000
c. $0
d. $100 000
Solutions:
- b
(12000-2000)/5 = 2000 per year
To 2025, 3 years of depreciation, $2000 x 3 = $6000
- c
(12000-2000)/100000 = $0.10 per hour
- b
2022/3 = 12000 x (1/5) x 2 = 4800 Carrying amount = 12000 – 48000 = 7200
2023/4 = 7200 x (1/5) x 2 = 2880
- c
Depreciation expense is reported in the income statement
- b
- c
1000000+100000+25000+20000 = $1145000. The cost of the parking lot is not included as it is not related to making the land ready for use.
7.c
All other costs are acquisition cost which should be capitalised
- c
Carrying amount = Cost – Accumulated Depreciation = $22000 – $9000 = $13000
Proceeds from Sale = $10000
Sale – Carrying amount = 10000 – 13000 = ($3000) Loss
Since carrying amount > Proceeds, Loss = $3000
- c
Carrying amount = Cost – Accumulated Depreciation = $45000 – $20000 = $25000
Proceeds from Sale = $30000
Sale – Carrying amount = 30000 – 25000 = $5000 Gain
Since Proceeds > Carrying amount, Gain = $5000
Receive cash (asset increase), Gain (equity increase)
- d
Land has unlimited useful life and hence is not depreciated
- d
Refer to Section 7.1 of textbook – NCA reported at Acquisition Cost and separate line for accumulated depreciation (depreciation since acquisition)
- d
Straight line depreciation same annually = (500000-50000)/10 = 45000
DR Depreciation expense $45000 (expense-debit)
CR Accumulated Depreciation $45000 (contra-asset – credit)
- b
Repair and maintenance are revenue expenditure that should be expensed.
- a
Carrying amount of old machine = $100000-85000 = $15000
Proceeds from Sale = $22000
Proceeds > Carrying amount, thus Gain on Sale = $22000-15000=$7000
Journal entry:
DR Cash $22000 (cash coming in from sale, asset increase debit)
DR Accumulated depreciation $85000 (Elimination of accumulated depreciation as asset no longer belongs to company – debit)
CR Gain on Sale $7000 (A gain increases equity – credit)
CR Old machine $100000 (Remove old machine from books, decrease asset
credit)
- d
At the end of an asset’s useful life, carrying amount = residual/salvage value