ACCA FA · Chapter 6
Tangible and intangible non-current assets MCQs with Answers
12 multiple-choice questions on Tangible and intangible non-current assets for ACCA FA Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following items should be treated as capital expenditure?
- A) The annual service of factory equipment
- B) Repainting the exterior of the office building
- C) Installation costs of a new production machine
- D) Replacing worn tyres on a delivery van
Show answer & explanation
Answer: C) Installation costs of a new production machine
Capital expenditure is spent on acquiring non-current assets or enhancing their earning capacity, including costs necessary to bring an asset to working condition such as installation. Repainting, replacing tyres and routine servicing maintain existing assets and are revenue expenditure charged to profit or loss.
Question 2
A company buys a machine with a list price of $48,000 and receives a 5% trade discount. It also pays delivery of $1,200, installation of $2,300, staff training on the machine of $900, and a one-year maintenance contract of $1,500. Recoverable sales tax of $9,120 was charged on the invoice. What is the cost of the machine under IAS 16 Property, Plant and Equipment?
- A) $51,500
- B) $58,220
- C) $50,000
- D) $49,100
Show answer & explanation
Answer: D) $49,100
Purchase price after trade discount = $48,000 x 95% = $45,600. Directly attributable costs of delivery ($1,200) and installation ($2,300) are capitalised: $45,600 + $1,200 + $2,300 = $49,100. Staff training and maintenance are expensed, and recoverable sales tax is not a cost. Including training gives $50,000; including training and maintenance gives $51,500.
Question 3
A company with a 31 December year end bought equipment on 1 April 20X5 for $36,000. Its useful life is 8 years with a residual value of $4,000. Depreciation is charged on a straight-line basis, pro rata to the number of months owned. What is the depreciation charge for the year ended 31 December 20X5?
- A) $3,375
- B) $4,500
- C) $3,000
- D) $4,000
Show answer & explanation
Answer: C) $3,000
Annual depreciation = ($36,000 - $4,000) / 8 = $4,000. The asset was owned for 9 months, so the charge = $4,000 x 9/12 = $3,000. Ignoring the residual value gives $36,000 / 8 x 9/12 = $3,375, and a full year's charge is $4,000.
Question 4
A vehicle costing $20,000 is depreciated at 25% per year on the reducing balance basis, with a full year's charge in the year of purchase. What is its carrying amount at the end of its third year, to the nearest $?
- A) $11,250
- B) $8,438
- C) $6,328
- D) $5,000
Show answer & explanation
Answer: B) $8,438
Year 1: $20,000 x 75% = $15,000. Year 2: $15,000 x 75% = $11,250. Year 3: $11,250 x 75% = $8,437.50, which rounds to $8,438. Straight-line at 25% of cost would give $5,000, $11,250 is the carrying amount after two years, and $6,328 is after four years.
Question 5
A company with a 31 December year end bought a machine on 1 January 20X2 for $60,000. It is depreciated at 10% per year on cost, with a full year's charge in the year of acquisition and none in the year of disposal. The machine was sold on 30 June 20X6 for $33,500. What is the profit or loss on disposal?
- A) Loss of $2,500
- B) Profit of $3,500
- C) Profit of $500
- D) Loss of $26,500
Show answer & explanation
Answer: A) Loss of $2,500
Depreciation is charged for 20X2, 20X3, 20X4 and 20X5 only: 4 x ($60,000 x 10%) = $24,000. Carrying amount at disposal = $60,000 - $24,000 = $36,000. Proceeds $33,500 - carrying amount $36,000 = loss of $2,500. Charging five years gives a profit of $3,500, and time-apportioning to June gives a profit of $500.
Question 6
A business traded in an old van for a new van with a list price of $42,000. The dealer gave a part-exchange allowance of $9,500 and the balance was paid in cash. The old van had cost $30,000 and had accumulated depreciation of $22,000. What is the profit or loss on disposal of the old van?
- A) Loss of $20,500
- B) Profit of $1,500
- C) Loss of $1,500
- D) Profit of $9,500
Show answer & explanation
Answer: B) Profit of $1,500
The part-exchange allowance is the disposal proceeds of the old van. Carrying amount = $30,000 - $22,000 = $8,000. Profit = $9,500 - $8,000 = $1,500. The new van is recorded at its full cost of $42,000 ($9,500 allowance + $32,500 cash). Comparing proceeds with original cost gives a loss of $20,500.
Question 7
A building with a cost of $400,000 and accumulated depreciation of $80,000 is revalued to $500,000. What amount should be credited to the revaluation surplus?
- A) $100,000
- B) $500,000
- C) $180,000
- D) $80,000
Show answer & explanation
Answer: C) $180,000
The revaluation surplus is the revalued amount less the carrying amount: $500,000 - ($400,000 - $80,000) = $180,000. The accumulated depreciation is eliminated as part of the revaluation. Comparing the valuation with original cost gives only $100,000, which ignores the depreciation already charged.
Question 8
A building originally cost $600,000 and had a useful life of 50 years. After 20 years it was revalued to $720,000, with its remaining useful life unchanged. What is the annual depreciation charge after the revaluation?
- A) $36,000
- B) $24,000
- C) $14,400
- D) $12,000
Show answer & explanation
Answer: B) $24,000
After revaluation the asset is depreciated over its remaining useful life: 50 - 20 = 30 years. Annual depreciation = $720,000 / 30 = $24,000. Using the full original life gives $14,400, continuing on cost gives $12,000, and dividing by the 20 years already used gives $36,000.
Question 9
A machine was bought on 1 January 20X1 for $90,000 with a useful life of 10 years and no residual value, depreciated on a straight-line basis. On 1 January 20X4 the remaining useful life was revised to 4 years. What is the depreciation charge for 20X4?
- A) $22,500
- B) $15,750
- C) $9,000
- D) $12,857
Show answer & explanation
Answer: B) $15,750
A change in useful life is a change in accounting estimate, applied prospectively. Depreciation for 20X1 to 20X3 = 3 x $9,000 = $27,000, so the carrying amount at 1 January 20X4 = $63,000. The new charge = $63,000 / 4 = $15,750. Dividing the original cost by 4 years gives $22,500, and $9,000 ignores the revision.
Question 10
Under IAS 38 Intangible Assets, how should research expenditure be treated?
- A) It must be capitalised and amortised over its useful life
- B) It may be capitalised if the research is likely to lead to a profitable product
- C) It must be capitalised and reviewed annually for impairment
- D) It must be recognised as an expense when it is incurred
Show answer & explanation
Answer: D) It must be recognised as an expense when it is incurred
IAS 38 prohibits capitalisation of research costs because an entity cannot demonstrate at the research stage that an intangible asset will generate probable future economic benefits. Research costs are therefore always expensed. Only development costs that meet all of the IAS 38 criteria are capitalised.
Question 11
During the year, a company spent $120,000 on research and $250,000 on developing a new product. Of the development costs, $90,000 was incurred before all the IAS 38 recognition criteria were met, and $160,000 afterwards. What amount should be recognised as an intangible asset at the year end (ignoring amortisation)?
- A) $160,000
- B) $280,000
- C) $250,000
- D) $370,000
Show answer & explanation
Answer: A) $160,000
Only development costs incurred after all the recognition criteria are met can be capitalised, so $160,000 is recognised. The $90,000 incurred earlier and the $120,000 research costs are expensed (a total of $210,000), and costs once expensed cannot later be reinstated as an asset.
Question 12
Which of the following can be recognised as an intangible asset in a company's statement of financial position?
- A) Internally generated goodwill
- B) An internally generated brand
- C) A patent purchased from another company
- D) The cost of training new staff
Show answer & explanation
Answer: C) A patent purchased from another company
A separately acquired patent has a cost that can be measured reliably and gives the company control over future economic benefits, so it qualifies. IAS 38 specifically prohibits recognising internally generated goodwill and brands, and training costs are expensed because the company does not control its employees.