ICAEW AF · Chapter 11
Non-current assets: cost, depreciation, revaluation and disposal MCQs with Answers
13 multiple-choice questions on Non-current assets: cost, depreciation, revaluation and disposal for ICAEW AF Accounting Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A company buys a machine with a list price of £64,000, on which it receives a trade discount of 5%. It also pays: delivery £1,200; installation £2,400; staff training on the machine £1,500; and a maintenance contract for the first year £900. Under IAS 16 Property, Plant and Equipment, what is the cost of the machine?
- A) £67,600
- B) £66,800
- C) £65,900
- D) £64,400
Show answer & explanation
Answer: D) £64,400
Cost includes the purchase price after trade discounts and costs directly attributable to bringing the asset to the location and condition needed for it to operate. Purchase price = £64,000 x 95% = £60,800. Cost = £60,800 + delivery £1,200 + installation £2,400 = £64,400. Staff training and maintenance are expensed as incurred.
Question 2
Which of the following is capital expenditure?
- A) Building an extension that increases the floor area of a warehouse
- B) Repainting the outside of the warehouse
- C) Paying the annual insurance premium on the warehouse
- D) Replacing broken roof tiles on the warehouse
Show answer & explanation
Answer: A) Building an extension that increases the floor area of a warehouse
Capital expenditure creates or enhances a non-current asset and is recognised in the statement of financial position. An extension adds to the asset's capacity, so it is capitalised. Repainting, minor repairs and insurance maintain the asset or are running costs, so they are revenue expenditure charged to profit or loss.
Question 3
A company buys a vehicle on 1 April for £45,000. It has an estimated residual value of £5,000 and a useful life of 8 years. Depreciation is charged on a straight-line basis, pro rata for each month of ownership. The year end is 31 December. What is the depreciation charge for the year of purchase?
- A) £5,000
- B) £3,750
- C) £5,625
- D) £4,218.75
Show answer & explanation
Answer: B) £3,750
Annual depreciation = (cost £45,000 - residual value £5,000) / 8 years = £5,000. The vehicle is owned for 9 months (April to December). Charge = £5,000 x 9/12 = £3,750.
Question 4
A machine costing £32,000 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?
- A) £18,000
- B) £13,500
- C) £8,000
- D) £4,500
Show answer & explanation
Answer: B) £13,500
Year 1: £32,000 x 75% = £24,000. Year 2: £24,000 x 75% = £18,000. Year 3: depreciation £18,000 x 25% = £4,500, leaving a carrying amount of £13,500. Applying 25% to cost each year (straight line) would give £8,000.
Question 5
A company sells equipment that cost £28,000 and has accumulated depreciation of £17,500 for proceeds of £9,200. What is the profit or loss on disposal?
- A) Profit of £1,300
- B) Profit of £9,200
- C) Loss of £1,300
- D) Loss of £18,800
Show answer & explanation
Answer: C) Loss of £1,300
Carrying amount = £28,000 - £17,500 = £10,500. Proceeds of £9,200 are less than the carrying amount, so there is a loss on disposal of £10,500 - £9,200 = £1,300, charged to profit or loss.
Question 6
A company trades in an old van for a new one. The old van cost £24,000 and has accumulated depreciation of £15,600. The dealer gives a part-exchange allowance of £7,000 against the new van's price of £30,000, and the company pays the balance of £23,000 in cash. What is the profit or loss on disposal of the old van?
- A) Profit of £7,000
- B) Profit of £1,400
- C) Loss of £1,000
- D) Loss of £1,400
Show answer & explanation
Answer: D) Loss of £1,400
The part-exchange allowance is treated as the disposal proceeds of the old van. Carrying amount = £24,000 - £15,600 = £8,400. Loss = £8,400 - £7,000 = £1,400. The new van is recorded at its full cost of £30,000, made up of the allowance £7,000 plus cash £23,000.
Question 7
A company's building has a cost of £450,000 and accumulated depreciation of £70,000. It is revalued to £520,000. There have been no previous revaluations. How is the revaluation recognised?
- A) A gain of £140,000 in other comprehensive income, accumulated in the revaluation surplus
- B) A gain of £70,000 in other comprehensive income, accumulated in the revaluation surplus
- C) A gain of £70,000 in profit or loss for the year
- D) A gain of £140,000 in profit or loss for the year
Show answer & explanation
Answer: A) A gain of £140,000 in other comprehensive income, accumulated in the revaluation surplus
Carrying amount before revaluation = £450,000 - £70,000 = £380,000. Increase = £520,000 - £380,000 = £140,000. Under IAS 16, a revaluation increase is recognised in other comprehensive income and accumulated in equity as a revaluation surplus, unless it reverses a previous decrease recognised in profit or loss.
Question 8
A company bought a building for £400,000 with a useful life of 50 years and no residual value. After 10 years it was revalued to £600,000, with no change in its total useful life. The company makes an annual transfer of excess depreciation from the revaluation surplus to retained earnings. What is the amount of the annual transfer?
- A) £8,000
- B) £15,000
- C) £5,600
- D) £7,000
Show answer & explanation
Answer: D) £7,000
Depreciation based on cost = £400,000 / 50 = £8,000 a year. Remaining life after 10 years = 40 years, so depreciation based on the revalued amount = £600,000 / 40 = £15,000. The excess depreciation transferred from the revaluation surplus to retained earnings = £15,000 - £8,000 = £7,000. This equals the surplus of £280,000 spread over the remaining 40 years.
Question 9
A company revalues a piece of land downwards from its carrying amount of £150,000 to £120,000. The land has never been revalued before. How is the £30,000 decrease recognised?
- A) It is not recognised until the land is sold
- B) As an expense in profit or loss
- C) As a deduction from share premium
- D) As a debit to a revaluation surplus, creating a negative reserve
Show answer & explanation
Answer: B) As an expense in profit or loss
Under IAS 16, a revaluation decrease is recognised in other comprehensive income only to the extent that there is a credit balance in the revaluation surplus for that asset. Because the land has never been revalued upwards, there is no surplus to absorb the loss. The full £30,000 is therefore recognised in profit or loss.
Question 10
A machine was bought for £60,000 and depreciated straight line over 10 years with no residual value. At the start of year 5, the total remaining useful life is reassessed as 3 years. What is the depreciation charge for year 5?
- A) £20,000
- B) £12,000
- C) £6,000
- D) £9,000
Show answer & explanation
Answer: B) £12,000
Carrying amount after 4 years = £60,000 - (£6,000 x 4) = £36,000. A change in useful life is a change in accounting estimate, applied prospectively under IAS 8, so past depreciation is not restated. The carrying amount is spread over the revised remaining life: £36,000 / 3 = £12,000.
Question 11
At 1 January, a company's plant and machinery had a cost of £240,000, none of which was fully depreciated. On 1 April it sold plant that had cost £30,000, and on 1 October it bought new plant costing £48,000. Plant is depreciated at 10% per year straight line on cost, pro rata for each month of ownership. The year end is 31 December. What is the depreciation charge for the year?
- A) £22,200
- B) £25,200
- C) £28,800
- D) £22,950
Show answer & explanation
Answer: D) £22,950
Plant held all year: (£240,000 - £30,000) x 10% = £21,000. Plant sold on 1 April, 3 months: £30,000 x 10% x 3/12 = £750. Plant bought on 1 October, 3 months: £48,000 x 10% x 3/12 = £1,200. Total = £22,950.
Question 12
Under IAS 38 Intangible Assets, how should a company account for expenditure on a project to discover new scientific knowledge (research), and for later expenditure on developing a new product that meets all the recognition criteria (development)?
- A) Both research and development are capitalised
- B) Research is expensed; development is capitalised as an intangible asset
- C) Research is capitalised; development is expensed
- D) Both research and development are expensed
Show answer & explanation
Answer: B) Research is expensed; development is capitalised as an intangible asset
IAS 38 requires all expenditure in the research phase to be recognised as an expense when incurred, because future economic benefits cannot be demonstrated. Development expenditure must be capitalised as an intangible asset once all the recognition criteria are met, such as technical feasibility, intention and ability to complete and use or sell the asset, probable future economic benefits and reliable measurement.
Question 13
What is the purpose of depreciation under IAS 16?
- A) To allocate the depreciable amount of an asset systematically over its useful life
- B) To show the asset at its current market value
- C) To build up a cash fund to replace the asset
- D) To reduce the asset's carrying amount to its realisable value at each year end
Show answer & explanation
Answer: A) To allocate the depreciable amount of an asset systematically over its useful life
Depreciation is the systematic allocation of the depreciable amount (cost or revalued amount less residual value) of an asset over its useful life. It matches the cost of using the asset against the revenue it helps to generate. It does not aim to show market value and does not set aside any cash.