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Company Accounting 10th Edition Leo
Test Bank
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Testbank
to accompany
Company Accounting
10e
by
Ken Leo, Jeffrey Knapp, Sue McGowan &
John Sweeting
Prepared by
Peter Baxter
© John Wiley & Sons Australia, Ltd 2015

Chapter 9: Property, plant and equipment
Multiple-choice questions
1. Property, plant and equipment are assets that:
a. are expected to be used up within the current financial period.

b. are held for resale within the current period.
*c. are tangible in nature.
d. have a remaining productive life of less than one financial year.
Correct answer: c
Learning Objective 9.1 ~ discuss the nature of property, plant and equipment.
2. Property, plant and equipment includes items that are:
a. intangible.
b. held for resale.
c. held for investment.
*d. used in an entity’s production process.
Correct answer: d
Learning Objective 9.1 ~ discuss the nature of property, plant and equipment.
3. According to AASB 116 Property, Plant and Equipment, the cost of property, plant and
equipment is only recognised as an asset if it is probable that the future economic
benefits will flow to the entity and if:
*a. the cost can be reliably measured.

b. it is a physical asset.
c. the asset has been received by the purchaser.
d. the asset is held for rental.
Correct answer: a
Learning Objective 9.2 ~ explain the recognition criteria for initial recognition of property,
plant and equipment.
4. An entity acquired an item of plant in exchange for an item of equipment. The

equipment has a carrying amount of $15 000 and a fair value of $20 000. The journal
entry to record the acquisition of the plant will show:
a. a loss on acquisition of $5000.

*b. a gain on sale of $5000.
c. proceeds on sale of equipment of $15 000.
d. proceeds on sale of plant of $15 000.
© John Wiley & Sons Australia, Ltd 2012 7.1

Testbank to accompany Company Accounting 10e
Correct answer: b
Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial
recognition.
5. Hoffman Limited acquired a bundle of assets for a cash consideration of $400 000. The
fair values of the assets on date of acquisition were as follows: machinery $264 000,
motor vehicles $176 000. Which of the following is the appropriate journal entry to
record this acquisition?
a. DR Property, plant and equipment $400 000

CR Cash $400 000
b. DR Property, plant and equipment $220 000

CR Cash $220 000
*c. DR Machinery $240 000

DR Motor vehicles $160 000
CR Cash $400 000
d. DR Machinery $264 000

DR Motor vehicles $176 000
CR Cash $440 000
Correct answer: c
recognition.
6. Which of the following are not examples of directly attributable costs that should be
included in the cost of acquisition for property, plant and equipment?
a. Costs of site preparation

b. Installation and assembly costs
c. Initial delivery and handling costs
*d. Costs of opening a new facility
Correct answer: d
recognition.
7. Estimated future restoration costs associated with mining land are:
a. expensed in the period in which they are incurred.

b. recorded directly into equity.
c. regarded as contingent liability and are disclosed in the notes to the
financial statements.
*d. capitalised into the cost of the land.

Correct answer: d
recognition.
8. For the purpose of the initial recognition of an item of property, plant and equipment,
the date on which the fair values should be measured is referred to as the:
*a. acquisition date.

b. recognition date.
c. measurement date.
d. fair value date.
Correct answer: a
recognition.
9. For the purposes of recognising an item of property, plant and equipment, the
acquisition date is defined in AASB 3 Business Combination as the date:
*a. on which the acquirer obtains control of the acquiree.

b. the contract to exchange the assets is signed.
c. on which the offer to acquire the asset becomes unconditional.
d. the consideration is paid.
Correct answer: a
recognition.
10. After an asset has been initially recognised, an entity has a choice between the cost
model and the:
a. liquidation value model.

b. accrual model.
*c. revaluation model.
d. realisable value model.
Correct answer: c
Learning Objective 9.4 ~ explain the alternative ways in which property, plant and
equipment can be measured subsequent to initial recognition.
11. When changing from the revaluation to the cost model of measurement for non-current
assets, the model must be applied:
a. in the current and future accounting periods.

b. only to assets acquired after date of changing to the cost model.

*c. retrospectively.
d. prospectively.
Correct answer: c
12. Under the cost model, after initial recognition an item of property, plant and equipment
must be carried at its:
a. estimated liquidation value.

*b. cost less accumulated depreciation and less accumulated impairment losses.
c. initial cost.
d. current replacement cost.
Correct answer: b
Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature
and calculation of depreciation.
13. The cost of an asset less its residual value is referred to as its:
a. book value.
b. residual amount.
*c. depreciable amount.
d. carrying amount.
Correct answer: c
14. Hunt Limited applied the straight-line method of depreciation to its non-current assets.
The cost of the buildings was $850 000, the residual value is $150 000 and the useful
life is 10 years. The annual depreciation expense is:
a. $100 000.
b. $15 000.
c. $85 000.
*d. $70 000.
Correct answer: d

15. Webcke Limited acquired an item of machinery with an expected useful life of 4 years.
The expected total production output over this period was: year 1, 30 000 units; year 2,
25 000 units; year 3, 15 000 units; year 4, 10 000 units. The machinery cost $85 000
and the residual value is $15 000. The amount of depreciation expense recorded in the
first year is:
*a. $26 250.

b. $31 875.
c. $21 875.
d. $17 500.
Correct answer: a
16. Which of the following depreciation methods is most appropriate when the asset’s
benefits are expected to be received evenly over its useful life?
a. Consistent benefit method

*b. Straight-line method
c. Diminishing balance method
d. Unit-of-production method
Correct answer: b
17. Under AASB 116 Property, Plant and Equipment, the purpose of calculating the
depreciation charge for a period on an item of property, plant and equipment is to
measure:
a. the fall in the fair value of the asset across the period.
b. a change in the re-sale value of the asset that has occurred over the period.
c. a reduction in the estimated market value of the asset across the period.
*d. the consumption of economic benefits over the period.
Correct answer: d

18. On 1 July 2009, Barba Limited acquired an item of equipment for $105 000 which it
depreciated using the straight line basis. The equipment had an estimated useful life of
10 years and its residual value was $15 000. The carrying amount of the equipment in
the financial statements dated 30 June 2014 is:
*a. $60 000.

b. $45 000.
c. $52 500.
d. $0.
Correct answer: a
19. Which of the following is the appropriate journal entry to recognise depreciation
expense calculated using the diminishing balance method?
a. DR Depreciation expense
CR Non-current asset
b. DR Accumulated depreciation
CR Non-current asset
*c. DR Depreciation expense
CR Accumulated depreciation
d. DR Accumulated depreciation
CR Depreciation expense
Correct answer: c
20. The depreciation expense calculated using the diminishing balance method reflects:
a. an increasing pattern of benefits over the asset’s useful life.

*b. a decreasing pattern of benefits over the asset’s useful life.
c. a constant pattern of benefits over the asset’s useful life.
d. a fluctuating pattern of benefits over the asset’s useful life.
Correct answer: b

21. Which of the following is not an example of a separate class of property, plant and
equipment?
a. Office equipment
b. Land and buildings
*c. Inventory
d. Motor vehicles
Correct answer: c
Learning Objective 9.6 ~ explain the revaluation model of measurement.
22. A non-current property, plant and equipment asset is depreciated using the straight-line
method over a 10 year useful life. The asset was revalued upwards after four years of
use. There is no change in the remaining useful life of six years or to the residual value.
Which of the following relationships reflects the effect of the revaluation on the future
depreciation of the asset?
Depreciation Annual depreciation

rate expense
*a. Same Higher
b. Same Same
c. Higher Higher
d. Higher Same
Correct answer: a
23. Under AASB 116 Property, Plant and Equipment, the revaluation model is applied to:
a. all assets on an individual basis.

b. individual current assets only.
c. individual property, plant and equipment assets only.
*d. property, plant and equipment assets on a class-by-class basis.
Correct answer: d

24. On 30 June 2014, Walters Limited had an item of plant with an original cost of $140 000
and accumulated depreciation of $56 000. At this date, the fair value of the plant was
$100 000. The net effect of the journal entries necessary to record the revaluation of the
plant by Walters to fair value on 30 June 2014 in accordance with AASB 116 Property,
Plant and Equipment is which of the following?
*a. Accumulated depreciation — plant Dr 28 000

Plant Cr 12 000
Asset revaluation surplus Cr 16 000
b. Plant Dr 12 000
c. Gain on revaluation — OCI Dr 12 000

d. Plant Dr 12 000
Gain on revaluation — OCI Dr 16 000
Accumulated depreciation — plant Cr 28 000
Correct answer: a
25. On 30 June 2014, Walters Limited had an item of plant with an original cost of $140 000
and accumulated depreciation of $56 000. At this date, the fair value of the plant was
$100 000 and Walters Limited revalued the plant. Assuming a tax rate of 30%, the tax
effect of the revaluation would be recorded as which of the following?
a. Income tax expense — OCI Dr 4 800

Current tax liability Cr 4 800
b. Deferred tax asset Dr 4 800

Income tax expense — OCI Cr 4 800
c. Deferred tax asset Dr 4 800

Current tax liability Cr 4 800
*d Income tax expense — OCI Dr 4 800

Deferred tax liability Cr 4 800
Correct answer: d

26. Gillet Limited acquired a block of land for $150 000 on 1 January 2012. This amount
was also the tax base of the land. On 30 June 2014, the land was revalued to $200 000.
The tax rate is 30%. The appropriate journal entry to recognise the net effect of the
revaluation is which of the following?
a. DR Gain on revaluation — OCI $50 000

CR Asset revaluation surplus $50 000
b. DR Land $35 000

DR Deferred tax asset $15 000
*c. DR Land $50 000

CR Deferred tax liability $15 000
d. DR Gain on revaluation — OCI $50 000

CR Income tax expense — OCI $15 000
Correct answer: c
27. Copely Limited had an existing asset revaluation surplus in respect to an item of plant
that had been derecognised. An appropriate journal entry to transfer the surplus to
retained earnings would include which of the following?
a. DR Gain on revaluation — OCI

b. CR Asset revaluation surplus
c. DR Retained earnings
*d. CR Retained earnings
Correct answer: d
28. When using the revaluation model:
a. ongoing record keeping costs are generally lower than if the cost model were
used.
*b. the values reported for property, plant and equipment will provide more relevant
information to users of the financial statements.
c. depreciation expenses will generally be lower than under the cost model.
d. the entity’s financial statements will be consistent with US GAAP requirements.
Correct answer: b
Learning Objective 9.7 ~ confirm the factors to consider when choosing which measurement
model to apply.

29. When an item of property, plant and equipment is sold, the resulting gain or loss is
calculated as the difference between the:
a. net proceeds from sale and the asset’s original cost.

b. asset’s estimated fair value and its carrying amount at the date of sale.
c. asset’s original cost and its accumulated depreciation at the date of sale.
*d. net proceeds from sale and the asset’s carrying amount at the date of sale.
Correct answer: d
Learning Objective 9.8 ~ account for derecognition.
30. Which of the following statements is not correct in relation to the disclosure of
property, plant and equipment balances?
a. Paragraph 79 of AASB 116 contains information that entities are encouraged to

disclose, but not required to do so.
b. An entity must disclose the useful life estimates for each class of assets.
c. A summary of movements in the revaluation surplus must be disclosed.
*d. Information on assets carried at revalued amounts must be disclosed on an
individual asset basis.
Correct answer: d
Learning Objective 9.9 ~ apply the disclosure requirements of AASB 116.

True/false questions
31. On initial recognition of property, plant and equipment, the cost only comprises the
purchase price plus an initial estimate of dismantling and/or restoration costs.
The statement is false. There are three components to the cost of property, plant and
equipment per paragraph 16 of AASB 116 Property, Plant and Equipment. In addition to the
two components referred to above directly attributable costs also form part of the cost of
property, plant and equipment.
recognition.
32. Fair value is defined in AASB 116 Property, Plant and Equipment as the amount for
which an asset can be exchanged between knowledgeable willing parties in an arm’s
length transaction.
The statement is false. Fair value is defined in paragraph 6 of AASB 116 as ‘the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.’
recognition.
33. Where an entity acquires a bundle of assets and the total cost of the assets is greater
than the sum of the fair values of the assets acquired, a bargain purchase has been
made.
The statement is false. A bargain purchase occurs if the cost of the assets is less than the total
of the fair value of the assets acquired.
recognition.
34. Costs of testing whether an asset is functioning property should be capitalised into the
initial cost of the asset under AASB 116 Property, Plant and Equipment.
The statement is true. This is an example of a directly attributable cost per paragraph 17 of
AASB 116.
recognition.
35. Costs of training staff in the use of a new asset are capitalised into the initial cost of the
asset under AASB 116 Property, Plant and Equipment.
The statement is false. Such costs are specifically excluded as an example of directly
attributable costs per paragraphs 19 and20 of AASB 116.
recognition.

36. Costs of removal or dismantling an asset at the end of its useful life are measured on a
present value basis and capitalised into the initial cost of the asset.
The statement is true. AASB 137 Provisions Contingent Liabilities and Contingent Assets,
requires that a liability for future restoration be recognised. Acceptance of the liability for
dismantling and removal is an essential part of bringing the asset to a position of intended
use.
recognition.
37. Under AASB 116 Property, Plant and Equipment, subsequent to initial recognition
property, plant and equipment assets can only be measured using the revaluation model.
The statement is false. Subsequent to initial recognition, an entity can measure property, plant
and equipment assets using either the cost or the revaluation models.
38. Expenditure designed to improve the quality of the output of an asset are capitalised
into the cost of the asset in accordance with paragraph 7 of AASB 116 Property, Plant
and Equipment.
The statement is true. Such costs should be capitalised if it is probable that the expenditure
increases the future economic benefits embodied in the asset in excess of its standard of
performance assessed at the time the expenditure is made.
39. Depreciation is an accounting process which involves a systematic allocation of the

depreciable amount of an asset over its useful life.
The statement is true. This principle is provided in the definitions in AASB 116 Property,
Plant and Equipment.
40. Depreciation is not recognised if an asset’s residual value exceeds its carrying amount.
The statement is true. The recognition of depreciation requires the existence of an asset’s
depreciable amount which is the asset’s cost less its residual value.

41. The residual value of a non-current asset is the amount or consideration actually
received by an entity at the date of the asset’s disposal.
The statement is false. The residual value is the estimated amount or consideration that the
entity expects to receive from disposal after deducting the estimated costs of disposal.
42. The units-of-production method of recognising depreciation is only suitable for use by
entities involved in manufacturing.
The statement is false. AASB 116 Property, Plant and Equipment allows entities to choose
the depreciation method that most closely reflects the pattern of consumption of future
economic benefits embodied in the asset. Where an entity in a service industry has an asset
that has a finite life in terms of the number of hour’s usage, they may depreciate the asset
using the units-of-production method.
43. Once an entity has selected a depreciation method to use to depreciate an asset, it must
use that same method for the entire useful life of the asset.
The statement is false. AASB 116 Property, Plant and Equipment requires entities to review
the depreciation method chosen at least at the end of each financial year If there has been a
change in the pattern of benefits such that the current method is inappropriate, the method
should be changed to one that reflects the changed pattern of benefits.
44. The expected physical wear and tear on an asset should be taken into account when
determining the useful life of the asset.
The statement is true. Paragraph 56 of AASB 116 Property, Plant and Equipment provides a
number of factors to consider when determining an asset’s useful life, of which the expected
physical wear and tear is one. Others are: the expected usage of the asset; technical or
commercial obsolescence; and legal or similar limits on the asset’s use.
45. The revaluation model must be applied to classes of assets.
The statement is true. This is a requirement of paragraph 36 of AASB 116 Property, Plant
and Equipment. For each class of assets, management must choose whether to apply the cost
model or the revaluation model.

46. A revaluation increment reversing a previous revaluation decrement must be credited to

the profit or loss.
The statement is true. AASB 116 paragraph 39 requires that revaluation increments shall be
recognised in profit or loss to the extent that it reverses a revaluation decrease of the same
asset previously recognised in profit or loss. Where there has been no previous revaluation
decrement, the increment is credited to the Asset Revaluation Surplus.
47. When a property, plant and equipment asset is derecognised through sale, any
associated asset revaluation surplus must always be transferred to retained earnings.
The statement is false. There is no requirement in AASB 116 that the asset revaluation
surplus must be transferred, although it may be transferred if the entity chooses to do so.
48. One of the reasons for selecting the cost model over the revaluation model is because of
the increased relevance of such measures.
The statement is false. It is argued that the revaluation model provides more relevant
information than the cost model.
Learning Objective 9.7 ~ confirm the factors to consider when choosing which measurement
model to apply.
49. Items of property, plant and equipment may only be derecognised if they are sold.
The statement is false. Items of property, plant and equipment may also be derecognised
when no future economic benefits are expected, either from future use or from disposal.
Learning Objective 9.8 ~ account for derecognition.
50. Disclosures under AASB 116 Property, Plant and Equipment are required on an asset-
by-asset basis where the revaluation model has been used.
The statement is false. Disclosures are required on a class-by-class basis where the
revaluation model has been used.
Learning Objective 9.9 ~ apply the disclosure requirements of AASB 116.

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© John Wiley & Sons Australia, Ltd 2015

Chapter 9: Property, plant and equipment

a. are expected to be used up within the current financial period.

2. Property, plant and equipment includes items that are:

*a. the cost can be reliably measured.

4. An entity acquired an item of plant in exchange for an item of equipment. The

a. a loss on acquisition of $5000.

© John Wiley & Sons Australia, Ltd 2012 7.1

a. DR Property, plant and equipment $400 000

b. DR Property, plant and equipment $220 000

*c. DR Machinery $240 000

d. DR Machinery $264 000

a. Costs of site preparation

7. Estimated future restoration costs associated with mining land are:

a. expensed in the period in which they are incurred.

© John Wiley & Sons Australia, Ltd 2015 9.2

*a. acquisition date.

*a. on which the acquirer obtains control of the acquiree.

a. liquidation value model.

a. in the current and future accounting periods.

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a. estimated liquidation value.

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*a. $26 250.

a. Consistent benefit method

© John Wiley & Sons Australia, Ltd 2015 9.5

*a. $60 000.

a. an increasing pattern of benefits over the asset’s useful life.

© John Wiley & Sons Australia, Ltd 2015 9.6

Depreciation Annual depreciation

a. all assets on an individual basis.

© John Wiley & Sons Australia, Ltd 2015 9.7

*a. Accumulated depreciation — plant Dr 28 000

c. Gain on revaluation — OCI Dr 12 000

a. Income tax expense — OCI Dr 4 800

b. Deferred tax asset Dr 4 800

c. Deferred tax asset Dr 4 800

*d Income tax expense — OCI Dr 4 800

© John Wiley & Sons Australia, Ltd 2015 9.8

a. DR Gain on revaluation — OCI $50 000

b. DR Land $35 000

*c. DR Land $50 000

d. DR Gain on revaluation — OCI $50 000

a. DR Gain on revaluation — OCI

28. When using the revaluation model:

© John Wiley & Sons Australia, Ltd 2015 9.9

a. net proceeds from sale and the asset’s original cost.

a. Paragraph 79 of AASB 116 contains information that entities are encouraged to

© John Wiley & Sons Australia, Ltd 2015 9.10

© John Wiley & Sons Australia, Ltd 2015 9.11

39. Depreciation is an accounting process which involves a systematic allocation of the

© John Wiley & Sons Australia, Ltd 2015 9.12

45. The revaluation model must be applied to classes of assets.

© John Wiley & Sons Australia, Ltd 2015 9.13

46. A revaluation increment reversing a previous revaluation decrement must be credited to

© John Wiley & Sons Australia, Ltd 2015 9.14

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