ACCA FR · Chapter 2
Tangible non-current assets MCQs with Answers
11 multiple-choice questions on Tangible non-current assets for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Plover Co bought a machine with a list price of $80,000, and received a 5% trade discount. It also paid delivery of $2,000, installation of $5,000, staff training on the machine of $3,000, an allocation of general administrative overheads of $1,500 and testing costs of $1,000 before the machine came into use. Under IAS 16, at what amount should the machine first be recognised?
- A) $84,000
- B) $87,000
- C) $88,000
- D) $88,500
Show answer & explanation
Answer: A) $84,000
IAS 16 cost includes the purchase price net of trade discounts and directly attributable costs of bringing the asset to working condition. Cost = $80,000 x 95% = $76,000 + delivery $2,000 + installation $5,000 + testing $1,000 = $84,000. Staff training and general administrative overheads are not directly attributable, so they are expensed.
Question 2
Tern Co bought a building on 1 January 20X1 for $500,000 and gave it a useful life of 50 years with no residual value. Tern Co uses the revaluation model, and on 1 January 20X6 the building was revalued to $630,000. The remaining useful life is unchanged. What revaluation surplus arises, and what is the depreciation charge for 20X6?
- A) Surplus $130,000; depreciation $14,000
- B) Surplus $180,000; depreciation $14,000
- C) Surplus $180,000; depreciation $12,600
- D) Surplus $130,000; depreciation $12,600
Show answer & explanation
Answer: B) Surplus $180,000; depreciation $14,000
Carrying amount at 1 January 20X6 = $500,000 - ($10,000 x 5) = $450,000. Revaluation surplus = $630,000 - $450,000 = $180,000, recognised in OCI. The revalued amount is depreciated over the remaining 45 years: $630,000 / 45 = $14,000.
Question 3
Continuing the Tern Co building (revalued to $630,000 on 1 January 20X6, giving a surplus of $180,000 and a remaining life of 45 years), Tern Co transfers the excess depreciation from the revaluation surplus to retained earnings each year. What is the annual transfer?
- A) $14,000
- B) $10,000
- C) $3,600
- D) $4,000
Show answer & explanation
Answer: D) $4,000
Excess depreciation = depreciation on revalued amount - depreciation on historical cost = $14,000 - $10,000 = $4,000. You get the same figure from surplus / remaining life = $180,000 / 45 = $4,000. The transfer is made within equity and does not go through profit or loss or OCI.
Question 4
Gannet Co uses the revaluation model for land, which cost $1,000,000. In 20X3 the land was revalued to $1,300,000. In 20X6 a slump in the property market reduced its value to $850,000. How should the 20X6 decrease be recognised?
- A) $450,000 charged to profit or loss
- B) $300,000 charged to OCI (revaluation surplus) and $150,000 charged to profit or loss
- C) $450,000 charged to OCI (revaluation surplus)
- D) $150,000 charged to OCI and $300,000 charged to profit or loss
Show answer & explanation
Answer: B) $300,000 charged to OCI (revaluation surplus) and $150,000 charged to profit or loss
Total decrease = $1,300,000 - $850,000 = $450,000. A revaluation decrease is first set against any surplus previously recognised for the same asset, which here is $1,300,000 - $1,000,000 = $300,000 (charged to OCI). The remaining $450,000 - $300,000 = $150,000 takes the land below its original cost, so it is charged to profit or loss.
Question 5
On 1 January 20X5 Heron Co took out a $6,000,000 loan at 8% a year specifically to build a new warehouse. Construction began on 1 April 20X5 and was still in progress at 31 December 20X5. During the construction period Heron Co earned $40,000 by temporarily investing loan funds it had not yet spent. What borrowing cost should be capitalised for the year ended 31 December 20X5?
- A) $440,000
- B) $360,000
- C) $320,000
- D) $480,000
Show answer & explanation
Answer: C) $320,000
Under IAS 23, capitalisation begins when expenditure and borrowing costs are being incurred and construction activity has started, which is 1 April. Interest for April to December = $6,000,000 x 8% x 9/12 = $360,000. Investment income earned on the specific borrowing during that period is deducted: $360,000 - $40,000 = $320,000. Interest for January to March ($120,000) is expensed.
Question 6
Avocet Co funds its construction projects from general borrowings, which were unchanged throughout the year: a $4,000,000 loan at 6% and a $6,000,000 loan at 9%. During the year it spent $3,000,000 on a qualifying asset on 1 January and a further $2,000,000 on 1 July. Construction continued all year. What borrowing cost should be capitalised?
- A) $390,000
- B) $300,000
- C) $312,000
- D) $234,000
Show answer & explanation
Answer: C) $312,000
Capitalisation rate = weighted average cost of general borrowings = ($4,000,000 x 6% + $6,000,000 x 9%) / $10,000,000 = $780,000 / $10,000,000 = 7.8%. Capitalised = $3,000,000 x 7.8% + $2,000,000 x 7.8% x 6/12 = $234,000 + $78,000 = $312,000. Using the simple average of 7.5%, or ignoring when the second payment was made, gives the wrong answer.
Question 7
Under IAS 20 Accounting for Government Grants, how may a grant related to the purchase of an asset be presented?
- A) Either as deferred income released over the asset's life, or by deducting it from the asset's carrying amount
- B) Credited directly to retained earnings when received
- C) Recognised in full in profit or loss when the cash is received
- D) Only as deferred income; deduction from the asset is prohibited
Show answer & explanation
Answer: A) Either as deferred income released over the asset's life, or by deducting it from the asset's carrying amount
IAS 20 allows two presentations for grants related to assets: set the grant up as deferred income and recognise it in profit or loss over the asset's useful life, or deduct it from the asset's carrying amount, which reduces depreciation. Either way, the grant is recognised in profit or loss as the asset is depreciated. Crediting the grant straight to equity is not allowed.
Question 8
On 1 April 20X6 Puffin Co received a government grant of $300,000 towards a machine costing $1,200,000, which it bought and brought into use on that date. The machine has a 5-year useful life and no residual value. Puffin Co uses the deferred income method and has a 31 December year end. What non-current liability for deferred income should be shown at 31 December 20X6?
- A) $195,000
- B) $255,000
- C) $240,000
- D) $180,000
Show answer & explanation
Answer: A) $195,000
Annual release = $300,000 / 5 = $60,000. Released in 20X6 = $60,000 x 9/12 = $45,000, so the deferred income balance at 31 December 20X6 = $300,000 - $45,000 = $255,000. The amount to be released in the next 12 months ($60,000) is current, so the non-current part is $255,000 - $60,000 = $195,000.
Question 9
Which of the following properties would be classified as investment property under IAS 40 in the individual financial statements of the owner?
- A) A building occupied by the entity's own administrative staff
- B) An office block owned by the entity and let to an unrelated company under an operating lease
- C) Houses built by a property developer for sale in the ordinary course of business
- D) A factory being built by the entity on behalf of a customer under a construction contract
Show answer & explanation
Answer: B) An office block owned by the entity and let to an unrelated company under an operating lease
Investment property is property held to earn rentals or for capital appreciation, or both. An office block let to a third party fits this definition. Owner-occupied property falls under IAS 16, property held for sale in the ordinary course of business is inventory under IAS 2, and property built for customers is accounted for under IFRS 15.
Question 10
On 1 January Curlew Co bought an investment property for $2,000,000 and paid legal fees of $50,000. The property has a 40-year useful life. Curlew Co uses the IAS 40 fair value model. At 31 December the property's fair value was $2,300,000. What is the effect on profit or loss for the year?
- A) Fair value gain of $300,000 and no depreciation
- B) Fair value gain of $250,000 recognised in other comprehensive income
- C) Fair value gain of $250,000 less depreciation of $51,250
- D) Fair value gain of $250,000 and no depreciation
Show answer & explanation
Answer: D) Fair value gain of $250,000 and no depreciation
Investment property is first measured at cost including transaction costs: $2,000,000 + $50,000 = $2,050,000. Under the fair value model it is remeasured to fair value at each reporting date, with the change going to profit or loss: $2,300,000 - $2,050,000 = $250,000. No depreciation is charged under the fair value model.
Question 11
On 1 July Dunlin Co moved out of its head office building and let it to a third party, so it became an investment property. Dunlin Co measures investment property under the fair value model. On 1 July the building's carrying amount was $1,600,000 and its fair value was $2,000,000. At 31 December its fair value was $2,100,000. How should these changes in value be recognised?
- A) $500,000 in profit or loss
- B) $400,000 in OCI (revaluation surplus) and $100,000 in profit or loss
- C) $400,000 in profit or loss and $100,000 in OCI
- D) $500,000 in OCI (revaluation surplus)
Show answer & explanation
Answer: B) $400,000 in OCI (revaluation surplus) and $100,000 in profit or loss
When owner-occupied property becomes investment property carried at fair value, IAS 40 requires IAS 16 to be applied up to the date of change. The increase from $1,600,000 to $2,000,000, which is $400,000, is therefore a revaluation surplus in OCI. After the transfer, fair value changes go to profit or loss: $2,100,000 - $2,000,000 = $100,000.