PRC-1 · Chapter 6

Property, Plant and Equipment MCQs with Answers

100 multiple-choice questions on Property, Plant and Equipment for PRC-1 Fundamentals of Accounting. Try each one before revealing the answer and explanation.

1. Question 1

   According to IAS 16, which of the following criteria must be met for an item to be classified as Property, Plant, and Equipment (PPE)?

   • A) It must be held for short-term resale in the ordinary course of business.
   • B) It must be an intangible asset with a life of more than one year.
   • C) It must be a tangible item held for use in production, supply of goods/services, rental, or administrative purposes, and expected to be used during more than one period.
   • D) It must be a liquid financial investment.
   Show answer & explanation

   Answer: C) It must be a tangible item held for use in production, supply of goods/services, rental, or administrative purposes, and expected to be used during more than one period.

   PPE refers specifically to tangible non-current assets that a business uses in its operations (production, rental, or administration) and expects to use for more than one accounting period.

2. Question 2

   Which of the following assets should NOT be classified as Property, Plant, and Equipment?

   • A) A delivery van used to transport goods to customers.
   • B) A commercial building held specifically for resale by a real estate company.
   • C) Specialized machinery installed in a factory.
   • D) Furniture used in the sales manager's office.
   Show answer & explanation

   Answer: B) A commercial building held specifically for resale by a real estate company.

   A building held for resale in the ordinary course of business is classified as Inventory (IAS 2), not Property, Plant, and Equipment (IAS 16).

3. Question 3

   At what point should an entity COMMENCE the depreciation of an item of property, plant, and equipment?

   • A) When the asset is actually put into physical use.
   • B) When the asset is fully paid for.
   • C) When the asset is available for use (in the location and condition necessary for it to be capable of operating in the manner intended by management).
   • D) At the beginning of the next financial year.
   Show answer & explanation

   Answer: C) When the asset is available for use (in the location and condition necessary for it to be capable of operating in the manner intended by management).

   Depreciation begins when the asset is available for use, meaning it is in the correct location and condition to operate as intended, regardless of whether it is actively being used yet.

4. Question 4

   Which of the following costs should be EXCLUDED from the initial capitalized cost of a newly acquired machine?

   • A) Non-refundable import duties.
   • B) Delivery and handling costs.
   • C) Costs of training staff to operate the new machine.
   • D) Costs of site preparation.
   Show answer & explanation

   Answer: C) Costs of training staff to operate the new machine.

   Staff training costs cannot be capitalized as part of the asset's cost because the business does not control the staff or guarantee future economic benefits from them. These costs must be expensed immediately.

5. Question 5

   How should refundable sales taxes (e.g., input VAT) paid on the purchase of a non-current asset be treated in the accounting records?

   • A) Added to the capital cost of the asset.
   • B) Ignored completely.
   • C) Excluded from the asset's cost and recorded as a receivable (current asset).
   • D) Recorded as an immediate expense in Profit or Loss.
   Show answer & explanation

   Answer: C) Excluded from the asset's cost and recorded as a receivable (current asset).

   Refundable taxes will be claimed back from the tax authorities, so they do not represent a permanent cost to the business. They are excluded from the asset's capitalized cost.

6. Question 6

   Which of the following is considered a 'Capital Expenditure'?

   • A) Routine maintenance and repair of a factory machine.
   • B) The cost of replacing a vehicle engine, which significantly extends its useful life and capacity.
   • C) The annual insurance premium for the company's premises.
   • D) Fuel costs for delivery vans.
   Show answer & explanation

   Answer: B) The cost of replacing a vehicle engine, which significantly extends its useful life and capacity.

   Capital expenditure results in the acquisition of non-current assets or an improvement in their earning capacity. An engine replacement that extends life/capacity qualifies; routine repairs are revenue expenditure.

7. Question 7

   If a business incorrectly records the purchase of a new computer (capital expenditure) as office stationery (revenue expenditure), what is the effect on the financial statements?

   • A) Assets are overstated, and net profit is overstated.
   • B) Assets are understated, and net profit is understated.
   • C) Assets are overstated, and net profit is understated.
   • D) Assets are understated, and net profit is overstated.
   Show answer & explanation

   Answer: B) Assets are understated, and net profit is understated.

   Expensing an asset means it does not appear on the balance sheet (Assets understated) and the full cost is immediately deducted from revenue (Net profit understated) instead of being capitalized and gradually depreciated.

8. Question 8

   Which of the following defines the 'Depreciable Amount' of a non-current asset?

   • A) Its historical cost multiplied by the depreciation rate.
   • B) Its historical cost minus accumulated depreciation.
   • C) Its historical cost minus its estimated residual value.
   • D) Its estimated market value minus disposal costs.
   Show answer & explanation

   Answer: C) Its historical cost minus its estimated residual value.

   The depreciable amount is the total cost of the asset that will be allocated as an expense over its useful life, calculated as the original cost less any estimated residual value.

9. Question 9

   What is the primary rationale for charging depreciation on non-current assets?

   • A) To accumulate a cash fund for replacing the asset.
   • B) To match the cost of the asset against the revenue it helps generate over its useful economic life.
   • C) To reflect the exact drop in market value of the asset each year.
   • D) To reduce the amount of tax the business has to pay.
   Show answer & explanation

   Answer: B) To match the cost of the asset against the revenue it helps generate over its useful economic life.

   Depreciation is an application of the matching concept. It systematically allocates the depreciable amount of the asset as an expense across the periods in which the asset provides economic benefits.

10. Question 10

    A machine was purchased for Rs. 250,000. Its estimated residual value is Rs. 50,000, and its useful life is 5 years. Using the straight-line method, what is the annual depreciation charge?

    • A) Rs. 50,000
    • B) Rs. 40,000
    • C) Rs. 60,000
    • D) Rs. 10,000
    Show answer & explanation

    Answer: B) Rs. 40,000

    Straight-line depreciation = (Cost - Residual Value) / Useful Life = (250,000 - 50,000) / 5 = 200,000 / 5 = Rs. 40,000 per year.

11. Question 11

    An entity purchases a vehicle for Rs. 800,000. The business uses the reducing balance method at a rate of 20% per annum. What is the depreciation expense for the SECOND year of ownership?

    • A) Rs. 160,000
    • B) Rs. 128,000
    • C) Rs. 320,000
    • D) Rs. 102,400
    Show answer & explanation

    Answer: B) Rs. 128,000

    Year 1 depreciation: 20% of 800k = 160k. Year 1 carrying amount = 800k - 160k = 640k. Year 2 depreciation = 20% of 640k = Rs. 128,000.

12. Question 12

    Which of the following statements accurately contrasts the straight-line and reducing balance methods of depreciation?

    • A) The straight-line method ignores residual value, while the reducing balance method relies on it.
    • B) The straight-line method charges a constant amount each year, whereas the reducing balance method charges a declining amount each year.
    • C) Both methods charge an increasing amount as the asset gets older and requires more maintenance.
    • D) The reducing balance method is calculated based on machine hours.
    Show answer & explanation

    Answer: B) The straight-line method charges a constant amount each year, whereas the reducing balance method charges a declining amount each year.

    Straight-line allocates a fixed equal amount every period. Reducing balance applies a fixed percentage to the declining carrying amount, resulting in a higher charge in early years and a lower charge in later years.

13. Question 13

    If an entity buys a machine with an expected total production capacity of 100,000 units, costs Rs. 550,000, and has a residual value of Rs. 50,000, what is the depreciation charge in a year where 15,000 units are produced?

    • A) Rs. 82,500
    • B) Rs. 75,000
    • C) Rs. 50,000
    • D) Rs. 100,000
    Show answer & explanation

    Answer: B) Rs. 75,000

    Depreciation per unit = (550,000 - 50,000) / 100,000 = Rs. 5 per unit. Depreciation for 15,000 units = 15,000 x 5 = Rs. 75,000.

14. Question 14

    If an asset is temporarily idle and not used in production for several months, under which depreciation method will NO depreciation be charged for that specific period?

    • A) Straight-line method
    • B) Reducing balance method
    • C) Sum-of-the-years'-digits method
    • D) Units of production method
    Show answer & explanation

    Answer: D) Units of production method

    The units of production method bases the depreciation charge entirely on the actual output or usage of the asset. Therefore, if the asset is idle (zero units produced), the depreciation charge is zero.

15. Question 15

    A machine has a list price of Rs. 82,000. The supplier offers a 10% trade discount and a 5% settlement (cash) discount, both of which are taken. The business also incurs import duty of Rs. 1,500, delivery fees of Rs. 2,050, electrical installation costs of Rs. 9,500, and pre-production testing costs of Rs. 4,900. What is the capitalized cost of the machine?

    • A) Rs. 91,750
    • B) Rs. 88,060
    • C) Rs. 73,800
    • D) Rs. 82,000
    Show answer & explanation

    Answer: B) Rs. 88,060

    List price 82,000 - 10% trade discount (8,200) = 73,800. Less 5% cash discount (3,690) = 70,110. Add import duty (1,500) + delivery (2,050) + installation (9,500) + testing (4,900) = Rs. 88,060.

16. Question 16

    An entity purchases equipment for Rs. 120,000 on 1 September. The financial year ends on 31 December. If the straight-line depreciation rate is 10% per annum, what is the depreciation charge for the first year?

    • A) Rs. 12,000
    • B) Rs. 3,000
    • C) Rs. 4,000
    • D) Rs. 6,000
    Show answer & explanation

    Answer: C) Rs. 4,000

    Annual depreciation = 120,000 x 10% = 12,000. The asset was held for 4 months (Sept, Oct, Nov, Dec). Pro-rated depreciation = 12,000 x (4/12) = Rs. 4,000.

17. Question 17

    If an asset is temporarily idle and not used in production for three months during the year, what is the correct treatment for depreciation under the straight-line method?

    • A) Depreciation is paused for those three months.
    • B) Depreciation continues to be charged as normal.
    • C) Depreciation for the entire year is ignored.
    • D) The asset must be written down to zero immediately.
    Show answer & explanation

    Answer: B) Depreciation continues to be charged as normal.

    Under time-based methods like straight-line or reducing balance, depreciation does not cease when an asset becomes idle or is retired from active use, unless it is fully depreciated or formally classified as held for sale.

18. Question 18

    When an entity acquires a plot of land with an old building on it, intending to use both, how should depreciation be applied?

    • A) Both the land and building should be depreciated together over the building's useful life.
    • B) Neither the land nor the building should be depreciated.
    • C) The building should be depreciated over its useful life, but the land should not be depreciated.
    • D) The land should be depreciated over 50 years, and the building over 20 years.
    Show answer & explanation

    Answer: C) The building should be depreciated over its useful life, but the land should not be depreciated.

    Land normally has an unlimited useful life and is therefore not depreciated. Buildings have a limited useful life and must be depreciated. The two must be accounted for separately.

19. Question 19

    The double-entry to record the annual depreciation charge for the year is:

    • A) Debit Accumulated Depreciation, Credit Depreciation Expense
    • B) Debit Depreciation Expense, Credit Accumulated Depreciation
    • C) Debit Depreciation Expense, Credit Bank
    • D) Debit Asset Account, Credit Accumulated Depreciation
    Show answer & explanation

    Answer: B) Debit Depreciation Expense, Credit Accumulated Depreciation

    Depreciation is an expense, so the Depreciation Expense account is debited. It reduces the carrying amount of the asset via a contra-asset account, so Accumulated Depreciation is credited.

20. Question 20

    A business disposes of a vehicle for Rs. 150,000 cash. The original cost of the vehicle was Rs. 400,000, and its accumulated depreciation at the date of disposal was Rs. 280,000. What is the gain or loss on disposal?

    • A) Rs. 30,000 Gain
    • B) Rs. 30,000 Loss
    • C) Rs. 130,000 Loss
    • D) Rs. 150,000 Gain
    Show answer & explanation

    Answer: A) Rs. 30,000 Gain

    Carrying amount = Cost (400,000) - Accumulated Depreciation (280,000) = 120,000. Proceeds = 150,000. Gain = Proceeds (150,000) - Carrying amount (120,000) = Rs. 30,000 Gain.

21. Question 21

    In the disposal journal entry, how are the original Cost and the Accumulated Depreciation of the disposed asset fundamentally handled to remove them from the ledger?

    • A) Cost is Debited, Accumulated Depreciation is Credited.
    • B) Cost is Credited, Accumulated Depreciation is Debited.
    • C) Only the net carrying amount is credited to the asset account.
    • D) Both Cost and Accumulated Depreciation are debited to the disposal account.
    Show answer & explanation

    Answer: B) Cost is Credited, Accumulated Depreciation is Debited.

    To remove the asset completely from the books, the asset's original cost account (a debit balance) must be credited, and its accumulated depreciation account (a credit balance) must be debited.

22. Question 22

    A machine's cost is Rs. 500,000. Accumulated depreciation is Rs. 350,000. The machine is sold, and the business incurs a loss on disposal of Rs. 40,000. What were the exact cash proceeds from the sale?

    • A) Rs. 150,000
    • B) Rs. 190,000
    • C) Rs. 110,000
    • D) Rs. 40,000
    Show answer & explanation

    Answer: C) Rs. 110,000

    Carrying amount = 500k - 350k = 150k. Loss = Carrying amount - Proceeds. 40k = 150k - Proceeds. Therefore, Proceeds = 150k - 40k = Rs. 110,000.

23. Question 23

    Which of the following describes the correct accounting treatment if management decides to change an asset's depreciation method from straight-line to reducing balance?

    • A) Restate all prior years' financial statements retroactively.
    • B) The change is ignored until the asset is fully depreciated.
    • C) Adjust the current year's opening retained earnings for the cumulative difference.
    • D) Account for the change prospectively, applying the new method to the carrying amount from the current period forward.
    Show answer & explanation

    Answer: D) Account for the change prospectively, applying the new method to the carrying amount from the current period forward.

    A change in depreciation method is a change in accounting estimate. Changes in estimates are accounted for prospectively, meaning the new method is applied to the current carrying amount moving forward.

24. Question 24

    A company acquires a machine for Rs. 400,000 with an estimated residual value of Rs. 40,000 and a useful life of 5 years. Using the sum-of-the-years'-digits (SYD) method, what is the depreciation charge for Year 1?

    • A) Rs. 120,000
    • B) Rs. 96,000
    • C) Rs. 80,000
    • D) Rs. 133,333
    Show answer & explanation

    Answer: A) Rs. 120,000

    Sum of digits (5 years) = 5 + 4 + 3 + 2 + 1 = 15. Depreciable amount = 400,000 - 40,000 = 360,000. Year 1 Depreciation = 360,000 x (5/15) = Rs. 120,000.

25. Question 25

    Following the previous scenario (Cost 400k, Residual Value 40k, Life 5 yrs), what is the depreciation charge for Year 2 using the sum-of-the-years'-digits method?

    • A) Rs. 120,000
    • B) Rs. 96,000
    • C) Rs. 72,000
    • D) Rs. 80,000
    Show answer & explanation

    Answer: B) Rs. 96,000

    The depreciable amount remains 360,000. For Year 2, the fraction is 4/15. Depreciation = 360,000 x (4/15) = Rs. 96,000.

26. Question 26

    Which of the following costs incurred while acquiring a new factory machine should NOT be capitalized?

    • A) Electrical installation costs.
    • B) Costs of testing if the machine functions properly.
    • C) Delivery and handling fees.
    • D) Costs of introducing a new product or service.
    Show answer & explanation

    Answer: D) Costs of introducing a new product or service.

    Costs of introducing a new product or service (like advertising or marketing) cannot be capitalized as part of the asset's cost under IAS 16. They are recognized as expenses when incurred.

27. Question 27

    'Carrying Amount' or 'Written Down Value' (WDV) is formally defined as:

    • A) The amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses.
    • B) The current estimated market resale value of the asset.
    • C) The original purchase price plus any installation costs.
    • D) The cost of the asset minus its residual value.
    Show answer & explanation

    Answer: A) The amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses.

    The carrying amount (WDV) is the net value of an asset recorded on the balance sheet, mathematically calculated as Cost less Accumulated Depreciation (and any impairment).

28. Question 28

    A machine was purchased for Rs. 200,000 on 1 October 2020 with an expected residual value of Rs. 40,000. The straight-line method is used. As of 31 December 2022, the written down value is Rs. 128,000. What is the remaining useful life of the machine at 31 December 2022?

    • A) 2.25 years
    • B) 2.75 years
    • C) 4 years
    • D) 5 years
    Show answer & explanation

    Answer: B) 2.75 years

    Accumulated depreciation = 200k - 128k = 72,000. Time passed (1 Oct 2020 to 31 Dec 2022) = 2.25 years. Annual depreciation = 72,000 / 2.25 = 32,000. Total life = (200k - 40k) / 32k = 5 years. Remaining life = 5 - 2.25 = 2.75 years.

29. Question 29

    If an asset's useful life estimate is revised downwards (e.g., from 10 years to 8 years total) halfway through its life, how does this specifically affect the annual depreciation charge?

    • A) It remains the same.
    • B) It decreases.
    • C) It increases prospectively.
    • D) The asset is immediately fully written off.
    Show answer & explanation

    Answer: C) It increases prospectively.

    A shorter useful life means the remaining depreciable amount must be expensed over a shorter remaining timeframe, resulting in a higher annual depreciation charge moving forward.

30. Question 30

    Which accounting principle establishes that a business should use the same depreciation method from one period to the next unless a change is justified by a change in the pattern of economic benefits?

    • A) Materiality Concept
    • B) Consistency Concept
    • C) Prudence Concept
    • D) Going Concern Concept
    Show answer & explanation

    Answer: B) Consistency Concept

    The consistency concept requires that accounting policies and measurement methods (like depreciation methods) are applied consistently from one period to another to ensure financial statements are comparable.

31. Question 31

    A generator was purchased on 1 March 2022 for Rs. 135,000. The estimated useful life is 5 years. The accountant calculated the correct straight-line depreciation of Rs. 20,000 for the financial year ended 31 December 2022. What residual value was estimated?

    • A) Rs. 20,000
    • B) Rs. 15,000
    • C) Rs. 10,000
    • D) Rs. 35,000
    Show answer & explanation

    Answer: B) Rs. 15,000

    The asset was held for 10 months (March to December). Depreciation = (Cost - RV) / 5 * (10/12). 20,000 = (135,000 - RV) / 6. 120,000 = 135,000 - RV. Therefore, RV = 15,000.

32. Question 32

    The written down value of a fixture at 30 June 2022 was Rs. 86,400. It was originally purchased on 1 January 2020 and depreciated at 20% p.a. on the reducing balance method. What was its original purchase cost?

    • A) Rs. 120,000
    • B) Rs. 135,000
    • C) Rs. 150,000
    • D) Rs. 180,000
    Show answer & explanation

    Answer: C) Rs. 150,000

    Time passed: Jan-Jun 2020 (6 months at 10%), Jul 2020-Jun 2021 (1 yr at 20%), Jul 2021-Jun 2022 (1 yr at 20%). WDV at 30.6.21 = 86,400 / 0.8 = 108,000. WDV at 30.6.20 = 108,000 / 0.8 = 135,000. Cost at 1.1.20 = 135,000 / (1 - 0.10) = 150,000.

33. Question 33

    Which of the following statements about 'Residual Value' is completely correct according to IAS 16?

    • A) It is the amount a business expects to obtain from an asset at the end of its useful life, before deducting disposal costs.
    • B) It is the estimated amount currently realizable from disposal, assuming the asset is already of the age and condition expected at the end of its useful life.
    • C) It must always be zero for tax purposes.
    • D) It is only relevant for the reducing balance method.
    Show answer & explanation

    Answer: B) It is the estimated amount currently realizable from disposal, assuming the asset is already of the age and condition expected at the end of its useful life.

    IAS 16 defines residual value based on current prices, essentially estimating what the asset would fetch today if it were already in the condition expected at the end of its useful life, less disposal costs.

34. Question 34

    When acquiring property, plant, and equipment, which of the following is an example of an 'initial estimate of dismantling and removing' cost?

    • A) The cost of removing an old, existing building to clear land for a new factory.
    • B) The estimated future cost of decommissioning an oil rig and restoring the ocean floor at the end of the rig's life.
    • C) The daily cost of sweeping the factory floor.
    • D) The fee paid to a transport company to deliver the asset.
    Show answer & explanation

    Answer: B) The estimated future cost of decommissioning an oil rig and restoring the ocean floor at the end of the rig's life.

    IAS 16 requires the initial cost of an asset to include the estimated present value of dismantling and restoring the site on which it is located, a common obligation in industries like mining or oil extraction.

35. Question 35

    A business trades in its old delivery van for a new one. The new van's fair value is Rs. 800,000. The dealer gives a trade-in allowance of Rs. 300,000 for the old van, and the business pays the remaining Rs. 500,000 in cash. What is the capitalized cost of the NEW van?

    • A) Rs. 500,000
    • B) Rs. 800,000
    • C) Rs. 300,000
    • D) Rs. 1,100,000
    Show answer & explanation

    Answer: B) Rs. 800,000

    The cost of the new asset is its full fair value (Rs. 800,000). The trade-in allowance represents the disposal proceeds received for the old asset, not a reduction in the capital cost of the new asset.

36. Question 36

    A company purchases a commercial aircraft. The aircraft has a body (useful life 20 years) and engines (useful life 5 years). How should this asset be depreciated?

    • A) The entire aircraft must be depreciated over 20 years.
    • B) The entire aircraft must be depreciated over 5 years (prudence concept).
    • C) The body and engines must be identified as separate components and depreciated separately over their respective useful lives.
    • D) Depreciation is ignored until the engines are replaced.
    Show answer & explanation

    Answer: C) The body and engines must be identified as separate components and depreciated separately over their respective useful lives.

    Under the component approach in IAS 16, each part of an item of PPE with a cost that is significant in relation to the total cost must be depreciated separately if it has a different useful life.

37. Question 37

    The depreciation expense for a machine was Rs. 48,000 in 2020, Rs. 33,600 in 2021, and Rs. 23,520 in 2022 using the reducing balance method. What is the depreciation rate?

    • A) 20%
    • B) 30%
    • C) 50%
    • D) 70%
    Show answer & explanation

    Answer: B) 30%

    Under the reducing balance method, the ratio of depreciation between consecutive years is (1 - r). 33,600 / 48,000 = 0.70. Therefore, 1 - r = 0.70, which means r = 0.30 or 30%.

38. Question 38

    Which of the following errors will logically cause the 'Net Book Value' of Non-Current Assets to be OVERSTATED?

    • A) Capitalizing routine repair and maintenance costs.
    • B) Charging depreciation at 20% instead of the required 10%.
    • C) Expensing the installation cost of a new machine.
    • D) Recording the purchase of land as rent expense.
    Show answer & explanation

    Answer: A) Capitalizing routine repair and maintenance costs.

    Routine maintenance is a revenue expense. If incorrectly capitalized, it artificially inflates the cost of the asset, causing the Net Book Value to be overstated.

39. Question 39

    An accountant extracts an unadjusted trial balance. The Accumulated Depreciation account shows a credit balance. This balance represents:

    • A) Only the depreciation expense for the current year.
    • B) The total depreciation charged on the asset since it was purchased, up to the end of the previous accounting period.
    • C) The current market value of the asset.
    • D) A liability owed to the supplier of the asset.
    Show answer & explanation

    Answer: B) The total depreciation charged on the asset since it was purchased, up to the end of the previous accounting period.

    In an unadjusted trial balance, the Accumulated Depreciation account shows the sum of all depreciation charged in prior years. The current year's expense has not yet been added during adjusting entries.

40. Question 40

    During the pre-production testing phase of a new machine, some sample products are produced and sold for Rs. 5,000. How should these proceeds generally be treated under basic accounting rules for asset cost determination?

    • A) Add the Rs. 5,000 to the cost of the machine.
    • B) Recognize the Rs. 5,000 as a separate loan liability.
    • C) Deduct the Rs. 5,000 from the capital cost of the machine (traditional approach) or recognize in P&L depending on specific standard updates.
    • D) Ignore the proceeds entirely.
    Show answer & explanation

    Answer: C) Deduct the Rs. 5,000 from the capital cost of the machine (traditional approach) or recognize in P&L depending on specific standard updates.

    Traditionally, the net proceeds from selling items produced while bringing the asset to its intended location/condition are deducted from the testing costs capitalized.

41. Question 41

    If the cost of a newly purchased machine wrongly included general maintenance costs, which of the following statements correctly reflects the impact of this error?

    • A) The net assets were understated.
    • B) Depreciation expense for the year was understated.
    • C) Profit for the year was understated.
    • D) Depreciation expense for the year was overstated.
    Show answer & explanation

    Answer: D) Depreciation expense for the year was overstated.

    By capitalizing maintenance costs, the depreciable base of the machine is artificially inflated. Consequently, applying the depreciation percentage to this higher base results in an overstated depreciation expense.

42. Question 42

    An entity uses the straight-line method. The cost of an asset is Rs. 100,000, residual value is Rs. 10,000, and useful life is 10 years. At the start of year 4, management revises the remaining useful life to 4 years (7 years total life) and residual value to Rs. 6,000. What is the depreciation charge for Year 4?

    • A) Rs. 9,000
    • B) Rs. 16,750
    • C) Rs. 18,500
    • D) Rs. 23,500
    Show answer & explanation

    Answer: B) Rs. 16,750

    Original Depr = 90k/10 = 9k/year. WDV at start of Y4 (after 3 yrs) = 100k - (9k*3) = 73,000. New Depreciable Amount = 73,000 - 6,000 (new RV) = 67,000. New remaining life = 4 years. New Depr = 67,000 / 4 = Rs. 16,750.

43. Question 43

    Which of the following best describes 'Depreciation' in financial accounting?

    • A) A process of asset valuation to match market prices.
    • B) A process of cost allocation over an asset's useful life.
    • C) A cash fund set aside for purchasing new assets.
    • D) An expense that represents physical deterioration only.
    Show answer & explanation

    Answer: B) A process of cost allocation over an asset's useful life.

    Depreciation is strictly a process of cost allocation (matching concept), not a process of valuation or cash accumulation.

44. Question 44

    A vehicle cost Rs. 600,000 and is depreciated at 25% reducing balance. What is the depreciation charge in Year 3?

    • A) Rs. 150,000
    • B) Rs. 112,500
    • C) Rs. 84,375
    • D) Rs. 63,281
    Show answer & explanation

    Answer: C) Rs. 84,375

    Y1: 600k * 25% = 150k (WDV = 450k). Y2: 450k * 25% = 112.5k (WDV = 337.5k). Y3: 337.5k * 25% = Rs. 84,375.

45. Question 45

    If a non-current asset is destroyed by a fire and there is no insurance coverage, how is the disposal accounted for?

    • A) No entry is made; the asset stays on the books.
    • B) The asset's carrying amount is transferred to the disposal account and written off as a total loss.
    • C) The asset's cost is refunded by the government.
    • D) Accumulated depreciation is converted to cash.
    Show answer & explanation

    Answer: B) The asset's carrying amount is transferred to the disposal account and written off as a total loss.

    Because the asset is destroyed, it must be derecognized. With zero proceeds, the entire carrying amount becomes a loss on disposal in the Statement of Profit or Loss.

46. Question 46

    Which depreciation method naturally results in a higher tax deduction (and lower taxable profit) in the EARLY years of an asset's life?

    • A) Straight-line method
    • B) Reducing balance method
    • C) They both provide the exact same deduction each year
    • D) Units of production method (assuming steady output)
    Show answer & explanation

    Answer: B) Reducing balance method

    The reducing balance method (an accelerated depreciation method) calculates a higher depreciation expense in the early years of an asset's life, reducing reported profit more heavily during those years.

47. Question 47

    When presenting the Statement of Financial Position, where should 'Property, Plant and Equipment' be located?

    • A) Current Assets
    • B) Non-Current Assets
    • C) Equity
    • D) Non-Current Liabilities
    Show answer & explanation

    Answer: B) Non-Current Assets

    PPE consists of long-term assets held for use over multiple periods, making them the primary component of Non-Current Assets.

48. Question 48

    A business purchases a second-hand machine. It pays Rs. 40,000 for the machine, Rs. 5,000 for delivery, and Rs. 15,000 to replace broken parts before it can be used. What is the capitalized cost?

    • A) Rs. 40,000
    • B) Rs. 45,000
    • C) Rs. 60,000
    • D) Rs. 55,000
    Show answer & explanation

    Answer: C) Rs. 60,000

    All costs necessary to bring the second-hand asset to the location and condition intended for its operation must be capitalized. Cost = 40k + 5k + 15k = Rs. 60,000.

49. Question 49

    At the end of an asset's useful life, assuming the initial estimates were perfectly accurate, its Carrying Amount should logically equal its:

    • A) Historical Cost
    • B) Replacement Cost
    • C) Residual Value
    • D) Accumulated Depreciation
    Show answer & explanation

    Answer: C) Residual Value

    Depreciation allocates the 'depreciable amount' (Cost - Residual Value). Once fully depreciated over its useful life, the remaining carrying amount on the books will exactly equal its estimated residual value.

50. Question 50

    An entity decides to sell a machine. On the date it makes this decision and stops using it, classifying it as 'held for sale', what happens to depreciation?

    • A) Depreciation continues until the actual date of sale.
    • B) Depreciation is paused immediately upon classification as held for sale.
    • C) The asset is immediately written down to zero.
    • D) Depreciation is doubled to clear the balance quickly.
    Show answer & explanation

    Answer: B) Depreciation is paused immediately upon classification as held for sale.

    Under accounting standards (like IFRS 5), once an asset is formally classified as held for sale and retired from active use, depreciation ceases.

51. Question 51

    How should the cost of small but expensive alterations to a manufacturing machine, which directly increases the machine's output capacity by 15%, be classified?

    • A) Revenue expenditure
    • B) Capital expenditure
    • C) Intangible asset
    • D) General administrative expense
    Show answer & explanation

    Answer: B) Capital expenditure

    Because the alteration enhances the future economic benefits of the asset (by increasing its output capacity beyond its original standard of performance), it must be capitalized as part of the asset's cost.

52. Question 52

    How should the annual motor vehicle tax paid immediately after the purchase of a new delivery car be classified in the financial records?

    • A) Capital expenditure
    • B) Revenue expenditure
    • C) Intangible asset
    • D) Non-current liability
    Show answer & explanation

    Answer: B) Revenue expenditure

    Annual motor vehicle tax is a recurring operational cost required to legally drive the vehicle. It does not enhance the vehicle's capacity or life, so it is classified as revenue expenditure and expensed immediately.

53. Question 53

    A machine was bought on 1 March 2022 for Rs. 250,000 with a residual value of Rs. 20,000. Its expected life is 100,000 machine hours. For the year ended 31 December 2022, the machine operated for 15,000 hours. What is the depreciation charge?

    • A) Rs. 37,500
    • B) Rs. 34,500
    • C) Rs. 30,000
    • D) Rs. 40,000
    Show answer & explanation

    Answer: B) Rs. 34,500

    Depreciable amount = 250,000 - 20,000 = 230,000. Depreciation per hour = 230,000 / 100,000 = Rs. 2.3 per hour. Depreciation for 15,000 hours = 15,000 x 2.3 = Rs. 34,500.

54. Question 54

    Normal Limited purchased premises for Rs. 16 million with no salvage value and a useful life of 45 years. Using the sum-of-the-years'-digits method, what is the exact depreciation charge for the fourth year?

    • A) Rs. 6,492,754
    • B) Rs. 4,692,754
    • C) Rs. 7,544,926
    • D) Rs. 5,744,926
    Show answer & explanation

    Answer: A) Rs. 6,492,754

    Sum of digits = 45 x (45+1) / 2 = 1,035. The sequence for the first four years is 45, 44, 43, 42. For Year 4, the fraction is 42 / 1,035. Depreciation = 16,000,000 x (42/1035) = Rs. 6,492,754.

55. Question 55

    A delivery truck is acquired for Rs. 4,800,000 on 1 April 2019. The expected life is 8 years with a nil residual value. Assuming a financial year-end of 31 December, what is the straight-line depreciation charge for 2019?

    • A) Rs. 600,000
    • B) Rs. 800,000
    • C) Rs. 500,000
    • D) Rs. 450,000
    Show answer & explanation

    Answer: D) Rs. 450,000

    Annual depreciation = 4,800,000 / 8 = 600,000. From 1 April to 31 Dec is 9 months. Pro-rated charge = 600,000 x (9/12) = Rs. 450,000.

56. Question 56

    Which of the following is explicitly EXCLUDED from the scope of IAS 16 Property, Plant and Equipment?

    • A) Assets held for administrative purposes.
    • B) Tangible assets with a useful life of more than one year.
    • C) Assets held for sale in the ordinary course of business.
    • D) Machinery used to produce goods.
    Show answer & explanation

    Answer: C) Assets held for sale in the ordinary course of business.

    Assets held for short-term resale in the ordinary course of business are classified as Inventories under IAS 2, not as PPE under IAS 16.

57. Question 57

    An entity purchased a machine for Rs. 20 million with a 6-year useful life in 2019. Which of the following represents the conceptually correct estimation of its 'residual value' at the date of purchase?

    • A) Rs. 4 million that could currently be obtained from disposing of a similar 6-year-old machine in its present condition.
    • B) Rs. 6 million expected to be received in 2025 when the machine is eventually sold.
    • C) The historical cost divided by 6.
    • D) Rs. 15 million currently obtainable for the new machine.
    Show answer & explanation

    Answer: A) Rs. 4 million that could currently be obtained from disposing of a similar 6-year-old machine in its present condition.

    Residual value is estimated using current prices. It is the estimated amount the entity would currently obtain from disposal if the asset were already of the age and in the condition expected at the end of its useful life.

58. Question 58

    If an asset remains entirely idle throughout the accounting year, what is the depreciation charge under the sum-of-the-years'-digits method?

    • A) Zero
    • B) It is charged normally as per the formula.
    • C) It is charged at half the normal rate.
    • D) The asset is immediately fully impaired.
    Show answer & explanation

    Answer: B) It is charged normally as per the formula.

    Time-based depreciation methods (like straight-line, reducing balance, and sum-of-digits) continue to charge depreciation even if the asset is idle, because physical deterioration and obsolescence still occur over time.

59. Question 59

    Which depreciation method will mathematically result in NO depreciation being charged for a period where the asset is left completely idle?

    • A) Straight line method
    • B) Units of production method
    • C) Reducing balance method
    • D) Sum of digits method
    Show answer & explanation

    Answer: B) Units of production method

    The units of production (or machine hours) method calculates depreciation directly based on output. If output is zero (the asset is idle), the depreciation charge is zero.

60. Question 60

    According to the Conceptual Framework and accounting standards, what is the primary objective of depreciation?

    • A) To accumulate a cash fund for future asset replacement.
    • B) To write the asset down to its exact market value each period.
    • C) To allocate the depreciable cost on a systematic basis over the asset's useful life.
    • D) To show how much cash was spent on the asset this year.
    Show answer & explanation

    Answer: C) To allocate the depreciable cost on a systematic basis over the asset's useful life.

    Depreciation is an allocation process (matching expense to revenue generation), not a valuation process or a cash fund accumulation process.

61. Question 61

    Hunza Limited acquired an office building on 1 October 2014. Initial costs were: Land Rs. 2,000k, Building structure Rs. 10,000k (25 yr life), Air conditioning Rs. 4,000k (10 yr life, 500k RV). What is the total carrying amount at 31 March 2015?

    • A) Rs. 15,625,000
    • B) Rs. 16,000,000
    • C) Rs. 15,800,000
    • D) Rs. 15,000,000
    Show answer & explanation

    Answer: A) Rs. 15,625,000

    Time = 6 months. Land is not depreciated (2,000). Building depr = 10,000 / 25 * 6/12 = 200 (WDV = 9,800). AC depr = (4,000 - 500) / 10 * 6/12 = 175 (WDV = 3,825). Total = 2,000 + 9,800 + 3,825 = Rs. 15,625k.

62. Question 62

    Assuming estimates do not change, at the end of an asset's estimated useful life, its Carrying Amount will logically be equal to its:

    • A) Historical Cost
    • B) Accumulated Depreciation
    • C) Residual Value
    • D) Fair Market Value
    Show answer & explanation

    Answer: C) Residual Value

    By definition, the total depreciation charged over an asset's life equals Cost minus Residual Value. Therefore, the remaining un-depreciated carrying amount exactly equals the Residual Value.

63. Question 63

    Under IAS 16, how frequently must the useful life and residual value of property, plant, and equipment be formally reviewed?

    • A) At least annually, at the end of each financial year.
    • B) Every three years.
    • C) Only when the asset is physically relocated.
    • D) Never; initial estimates must be permanent.
    Show answer & explanation

    Answer: A) At least annually, at the end of each financial year.

    IAS 16 mandates that management must review estimates of useful life, residual value, and depreciation methods at least at the end of each financial year.

64. Question 64

    A company constructed a building for Rs. 800,000. An accountant mistakenly capitalized an additional Rs. 25,000 opening ceremony expense. Depreciation was 5% on Rs. 825,000. What is the combined impact on the company's recorded assets and profit?

    • A) Assets overstated by Rs. 25,000; Profit overstated by Rs. 25,000
    • B) Assets overstated by Rs. 23,750; Profit overstated by Rs. 23,750
    • C) Assets overstated by Rs. 25,000; Profit overstated by Rs. 1,250
    • D) Assets understated by Rs. 23,750; Profit understated by Rs. 23,750
    Show answer & explanation

    Answer: B) Assets overstated by Rs. 23,750; Profit overstated by Rs. 23,750

    The 25,000 should be expensed. By capitalizing it, gross assets are +25k. But 5% depr on this 25k (1,250) was charged, meaning net assets are overstated by 23,750 (25k - 1.25k). Profit is overstated because 25,000 wasn't expensed, but an extra 1,250 depr was, netting to a 23,750 overstatement in profit.

65. Question 65

    Which of the following costs is NOT permitted to be capitalized as part of the cost of an item of Property, Plant, and Equipment?

    • A) Initial delivery and handling costs.
    • B) Professional fees (e.g., architects or engineers).
    • C) Costs of introducing a new product or service (e.g., advertising).
    • D) Costs of site preparation.
    Show answer & explanation

    Answer: C) Costs of introducing a new product or service (e.g., advertising).

    Marketing, advertising, and promotional costs for introducing new products do not relate to bringing the physical asset to the necessary location and condition, so they must be expensed.

66. Question 66

    When an entity decides to change its method of depreciation (e.g., from reducing balance to straight-line) because the pattern of consumption of economic benefits has changed, how must this be recorded?

    • A) Prospectively, by applying the new method to the carrying amount from the date of the change.
    • B) Retrospectively, by recalculating all prior years and adjusting opening equity.
    • C) By keeping the old method until the asset is completely written off.
    • D) By taking the entire remaining carrying amount as an immediate expense.
    Show answer & explanation

    Answer: A) Prospectively, by applying the new method to the carrying amount from the date of the change.

    A change in depreciation method is treated as a change in accounting estimate under IAS 8, which requires prospective application to the current and future periods only.

67. Question 67

    A machine is bought for Rs. 100,000 on 1 January 2021 with an estimated useful life of 5 years and a residual value of Rs. 10,000. Using the sum-of-the-years'-digits method, what is the exact depreciation charge for the FIRST year (2021)?

    • A) Rs. 18,000
    • B) Rs. 30,000
    • C) Rs. 33,333
    • D) Rs. 20,000
    Show answer & explanation

    Answer: B) Rs. 30,000

    Sum of digits = 5+4+3+2+1 = 15. Depreciable amount = 100,000 - 10,000 = 90,000. First year fraction = 5/15. Depreciation = 90,000 x (5/15) = Rs. 30,000.

68. Question 68

    Following the previous scenario (Cost 100k, RV 10k, Life 5 yrs), what is the exact depreciation charge for the FIFTH year (2025) using the sum-of-the-years'-digits method?

    • A) Rs. 6,000
    • B) Rs. 12,000
    • C) Rs. 18,000
    • D) Rs. 10,000
    Show answer & explanation

    Answer: A) Rs. 6,000

    The depreciable amount remains 90,000. The fraction for the final (fifth) year is 1/15. Depreciation = 90,000 x (1/15) = Rs. 6,000.

69. Question 69

    Entity A has PPE with a cost of 100 million and accumulated depreciation of 80 million. Entity B has PPE with a cost of 25 million and accumulated depreciation of 5 million. Both have a carrying amount of 20 million. Which conclusion is most logical?

    • A) Entity B is inherently more profitable than Entity A.
    • B) Entity A has initially invested more in non-current assets and holds older assets compared to Entity B.
    • C) Both entities have the exact same operational capacity.
    • D) The data provides absolutely no comparable information.
    Show answer & explanation

    Answer: B) Entity A has initially invested more in non-current assets and holds older assets compared to Entity B.

    Entity A's assets are 80% depreciated (80/100), implying they are much older, whereas B's are only 20% depreciated (5/25). A also had a much higher initial capital investment.

70. Question 70

    Jupiter Ltd purchased a machine on 1 July 2017 for Rs. 500k. Straight-line life 10 years, RV 20k. On 1 January 2018, they fitted a safety guard for Rs. 25k (life 5 years, nil RV). What is the total combined depreciation charge for the financial year ended 30 June 2018?

    • A) Rs. 48,000
    • B) Rs. 50,500
    • C) Rs. 53,000
    • D) Rs. 25,000
    Show answer & explanation

    Answer: B) Rs. 50,500

    Machine: (500k - 20k)/10 = 48k for the full year. Safety guard: 25k/5 = 5k per year, but fitted 1 Jan to 30 June (6 months) = 2.5k. Total = 48k + 2.5k = Rs. 50,500.

71. Question 71

    What is the correct journal entry to record the depreciation charge for the year?

    • A) Debit Accumulated Depreciation, Credit Property, Plant & Equipment
    • B) Debit Depreciation Expense, Credit Bank
    • C) Debit Depreciation Expense, Credit Accumulated Depreciation
    • D) Debit Retained Earnings, Credit Depreciation Expense
    Show answer & explanation

    Answer: C) Debit Depreciation Expense, Credit Accumulated Depreciation

    Depreciation is an income statement expense (Debit) and accumulates as a contra-asset deduction against the gross PPE balance (Credit Accumulated Depreciation).

72. Question 72

    An entity has an asset with a carrying amount of Rs. 2,916,000 on 1 Jan 2021. It was bought 3 years ago for Rs. 4,000,000 and is depreciated on a reducing balance basis. What is the approximate depreciation rate being used?

    • A) 10%
    • B) 15%
    • C) 20%
    • D) 25%
    Show answer & explanation

    Answer: A) 10%

    Using the formula: Carrying Amount = Cost x (1-r)^n. 2,916,000 = 4,000,000 x (1-r)^3. (1-r)^3 = 0.729. Cube root of 0.729 is 0.9. Therefore, 1-r = 0.9, meaning r = 0.10 or 10%.

73. Question 73

    Using the data from the previous question (WDV 2,916,000 at 10% reducing balance), what will be the depreciation expense for the current year (2021)?

    • A) Rs. 400,000
    • B) Rs. 291,600
    • C) Rs. 324,000
    • D) Rs. 262,440
    Show answer & explanation

    Answer: B) Rs. 291,600

    Under the reducing balance method, the current year's depreciation is the opening written down value multiplied by the rate. 2,916,000 x 10% = Rs. 291,600.

74. Question 74

    Which of the following principles dictates that an asset is recorded at the amount of cash paid or the fair value of consideration given at the exact time of its acquisition?

    • A) Accrual Concept
    • B) Going Concern Concept
    • C) Historical Cost Concept
    • D) Matching Concept
    Show answer & explanation

    Answer: C) Historical Cost Concept

    The historical cost concept requires that assets are initially recorded in the books at their original purchase price (historical cost) rather than their current market value.

75. Question 75

    A business has a building costing Rs. 15.5m and machinery costing Rs. 10.2m. During the year, building extension costs Rs. 1.5m, building repairs cost Rs. 0.5m, and a machinery capacity overhaul costs Rs. 1.2m. What is the capitalized cost of the building at year-end?

    • A) Rs. 15.5m
    • B) Rs. 17.5m
    • C) Rs. 17.0m
    • D) Rs. 16.0m
    Show answer & explanation

    Answer: C) Rs. 17.0m

    The extension (1.5m) is a capital expenditure and is added to the building's cost (15.5m + 1.5m = 17.0m). The repairs (0.5m) are revenue expenditure and are expensed, not capitalized.

76. Question 76

    Using the data from the previous question, what is the capitalized cost of the machinery at year-end?

    • A) Rs. 10.2m
    • B) Rs. 11.4m
    • C) Rs. 10.7m
    • D) Rs. 11.9m
    Show answer & explanation

    Answer: B) Rs. 11.4m

    The overhaul increased the production capacity, qualifying it as an enhancement (capital expenditure). Therefore, it is added to the cost: 10.2m + 1.2m = Rs. 11.4m.

77. Question 77

    Alpha Trading Limited used its own staff and paid wages for their time spent constructing a new warehouse for the business. How should these staff wages be accounted for?

    • A) They must be expensed as normal staff salaries.
    • B) They are ignored because no external cash left the business.
    • C) They must be capitalized as part of the cost of the new warehouse.
    • D) They are deducted from the company's retained earnings directly.
    Show answer & explanation

    Answer: C) They must be capitalized as part of the cost of the new warehouse.

    Directly attributable costs of constructing a self-constructed asset, including the wages of employees directly involved in the construction process, must be capitalized as part of the asset's cost.

78. Question 78

    A business purchased an asset for Rs. 600,000. Accumulated depreciation is Rs. 240,000. It was sold for Rs. 430,000 cash. When posting to the Disposal T-account, what is the balancing entry to close the account?

    • A) Debit Disposal Rs. 70,000 (Gain)
    • B) Credit Disposal Rs. 70,000 (Loss)
    • C) Debit Disposal Rs. 170,000 (Gain)
    • D) Debit Disposal Rs. 430,000 (Gain)
    Show answer & explanation

    Answer: A) Debit Disposal Rs. 70,000 (Gain)

    Carrying amount = 600k - 240k = 360k. Proceeds = 430k. Gain = 70k. In the Disposal account, Debits = Cost (600k). Credits = Acc Dep (240k) + Cash (430k) = 670k. To balance, a Debit of 70k is needed, representing the transfer of Gain to the Profit or Loss account.

79. Question 79

    Which of the following best describes the 'Component Approach' required by IAS 16?

    • A) All assets in a building must be depreciated at the same rate.
    • B) Significant parts of an item of PPE with different useful lives must be depreciated separately.
    • C) Only external components can be capitalized.
    • D) Components can only be depreciated using the units of production method.
    Show answer & explanation

    Answer: B) Significant parts of an item of PPE with different useful lives must be depreciated separately.

    IAS 16 requires that each part of an item of PPE with a cost that is significant in relation to the total cost, and a different useful life, must be depreciated separately (e.g., an aircraft body vs. its engines).

80. Question 80

    If an asset's unadjusted trial balance shows an 'Accumulated Depreciation' balance of Rs. 40,000, this figure represents:

    • A) Only the current year's depreciation expense.
    • B) The market value of the asset.
    • C) The total depreciation charged in all prior years, excluding the current year's adjustment.
    • D) The estimated residual value.
    Show answer & explanation

    Answer: C) The total depreciation charged in all prior years, excluding the current year's adjustment.

    In an unadjusted trial balance, the accumulated depreciation figure is simply the balance brought forward from previous periods. The current year's depreciation expense is recorded during the period-end adjustment phase.

81. Question 81

    Which of the following actions constitutes an 'Error of Principle' regarding Property, Plant, and Equipment?

    • A) Forgetting to record an asset purchase entirely.
    • B) Recording a vehicle purchase at Rs. 4,500 instead of Rs. 5,400.
    • C) Recording the purchase of a new delivery van in the 'Motor Expenses' account.
    • D) Charging depreciation at 10% instead of 15%.
    Show answer & explanation

    Answer: C) Recording the purchase of a new delivery van in the 'Motor Expenses' account.

    An error of principle occurs when an entry violates fundamental accounting principles, such as recording a capital expenditure (asset purchase) as a revenue expenditure (expense).

82. Question 82

    A company buys a non-current asset for Rs. 100,000. It intends to use it for 10 years and expects a residual value of Rs. 10,000. After 4 years (carrying amount Rs. 64,000), it revises the remaining life to 4 years and the residual value to Rs. 4,000. What is the new annual straight-line depreciation?

    • A) Rs. 15,000
    • B) Rs. 9,000
    • C) Rs. 16,000
    • D) Rs. 12,000
    Show answer & explanation

    Answer: A) Rs. 15,000

    Changes in estimates are prospective. New depreciable amount = Carrying Amount (64,000) - New RV (4,000) = 60,000. New remaining life = 4 years. New annual charge = 60,000 / 4 = Rs. 15,000.

83. Question 83

    When calculating the initial cost of a manufactured machine, pre-production testing was required. The testing cost Rs. 8,000, and the products made during testing were sold for Rs. 3,000. Under traditional basic accounting methods, what is the net impact on capitalized cost?

    • A) Rs. 8,000 is added, and Rs. 3,000 is recorded as revenue.
    • B) Rs. 5,000 is added to the capitalized cost of the machine.
    • C) Rs. 11,000 is added to the capitalized cost.
    • D) None of these costs can be capitalized.
    Show answer & explanation

    Answer: B) Rs. 5,000 is added to the capitalized cost of the machine.

    Traditionally (and as typically tested in introductory frameworks), the net cost of testing (testing cost minus proceeds from selling test samples) is capitalized. 8,000 - 3,000 = 5,000 capitalized.

84. Question 84

    A company sells a machine for Rs. 14,000. It originally cost Rs. 50,000 and had been depreciated by Rs. 40,000. The journal entry to record this transaction must include a:

    • A) Credit to the machine account for Rs. 10,000.
    • B) Debit to accumulated depreciation for Rs. 10,000.
    • C) Credit to gain on disposal for Rs. 4,000.
    • D) Debit to loss on disposal for Rs. 4,000.
    Show answer & explanation

    Answer: C) Credit to gain on disposal for Rs. 4,000.

    Carrying amount = 50k - 40k = 10k. Proceeds = 14k. Gain = 14k - 10k = 4k. A gain is a credit to the P&L (or Disposal) account.

85. Question 85

    Which of the following is the correct formula to calculate the Net Book Value (Carrying Amount) of an asset?

    • A) Historical Cost minus Estimated Residual Value
    • B) Historical Cost minus Accumulated Depreciation
    • C) Historical Cost plus Installation Costs
    • D) Replacement Cost minus Accumulated Depreciation
    Show answer & explanation

    Answer: B) Historical Cost minus Accumulated Depreciation

    Net Book Value (or Carrying Amount) is mathematically defined as the original capitalised Cost of the asset minus all Accumulated Depreciation charged to date.

86. Question 86

    If an accountant completely omits the year-end adjustment for depreciation, how will the Statement of Financial Position be affected?

    • A) Non-current assets will be understated, and equity will be overstated.
    • B) Non-current assets will be overstated, and equity will be understated.
    • C) Non-current assets will be overstated, and equity will be overstated.
    • D) Current liabilities will be understated.
    Show answer & explanation

    Answer: C) Non-current assets will be overstated, and equity will be overstated.

    Without the depreciation charge, accumulated depreciation is too low, making net assets too high (overstated). Concurrently, expenses are too low, making profit (and thus equity) too high (overstated).

87. Question 87

    Under the reducing balance method of depreciation, what generally happens to the depreciation expense year over year?

    • A) It remains constant.
    • B) It increases every year.
    • C) It decreases every year.
    • D) It fluctuates based on actual machine hours.
    Show answer & explanation

    Answer: C) It decreases every year.

    Because the fixed percentage is applied to a carrying amount that shrinks each year (due to prior depreciation), the resulting annual depreciation expense declines steadily.

88. Question 88

    Which of the following requires a formal change in the depreciation rate or method?

    • A) The market value of the asset increases significantly.
    • B) The asset is temporarily moved to a different factory.
    • C) There is a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset.
    • D) The business pays off the bank loan used to buy the asset.
    Show answer & explanation

    Answer: C) There is a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset.

    IAS 16 states that the depreciation method shall be reviewed at least annually, and if there has been a significant change in the expected pattern of consumption of future economic benefits, the method shall be changed to reflect that pattern.

89. Question 89

    At 1 January 2021, an entity had machinery with a carrying amount of Rs. 450,000. It depreciates at 20% reducing balance. What is the accumulated depreciation from the date of purchase up to 31 December 2022 if the asset was originally bought for Rs. 703,125?

    • A) Rs. 333,125
    • B) Rs. 90,000
    • C) Rs. 415,125
    • D) Rs. 162,000
    Show answer & explanation

    Answer: C) Rs. 415,125

    Carrying amount on 1 Jan 2021 = 450,000. Depr 2021 = 20% * 450k = 90k. WDV at 31 Dec 2021 = 360k. Depr 2022 = 20% * 360k = 72k. Total accumulated depreciation = Original Cost (703,125) - Final WDV (360k - 72k = 288,000) = Rs. 415,125.

90. Question 90

    Which accounting concept underpins the requirement that the cost of an asset should be matched against the revenue it generates over multiple periods?

    • A) Accruals (Matching) Concept
    • B) Prudence Concept
    • C) Materiality Concept
    • D) Business Entity Concept
    Show answer & explanation

    Answer: A) Accruals (Matching) Concept

    The matching concept requires that expenses are recognized in the same period as the related revenues. Depreciation perfectly embodies this by spreading the capital cost over the periods benefiting from the asset.

91. Question 91

    A business purchased an asset but completely forgot to enter the transaction in the books. Which specific type of accounting error is this?

    • A) Error of commission
    • B) Error of principle
    • C) Error of complete omission
    • D) Compensating error
    Show answer & explanation

    Answer: C) Error of complete omission

    When a transaction is entirely left out of the accounting records (neither debited nor credited), it is classified as an error of complete omission. It will not disrupt the trial balance.

92. Question 92

    If an asset is revalued upwards, how does this typically affect the subsequent annual depreciation charge?

    • A) It remains unaffected.
    • B) It will decrease.
    • C) It will increase.
    • D) Depreciation ceases immediately.
    Show answer & explanation

    Answer: C) It will increase.

    An upward revaluation increases the carrying amount (the depreciable base). Consequently, spreading a larger amount over the remaining useful life will result in a higher annual depreciation charge.

93. Question 93

    What is the correct journal entry if a business replaces a major component of an asset (like an aircraft engine)?

    • A) Capitalize the new engine cost and leave the old engine's cost untouched.
    • B) Expense the new engine as routine maintenance.
    • C) Capitalize the new engine cost and derecognize the carrying amount of the old engine.
    • D) Add the new engine cost to inventory.
    Show answer & explanation

    Answer: C) Capitalize the new engine cost and derecognize the carrying amount of the old engine.

    Under IAS 16, when a major component is replaced, the cost of the replacement is capitalized, and the carrying amount of those parts that are replaced must be derecognized (removed from the books).

94. Question 94

    Which of the following is TRUE regarding 'Land' as an asset in financial accounting?

    • A) It is heavily depreciated using the straight-line method.
    • B) It normally has an unlimited useful life and is therefore not depreciated.
    • C) It is classified as a current asset.
    • D) It must be grouped with the building standing on it for depreciation purposes.
    Show answer & explanation

    Answer: B) It normally has an unlimited useful life and is therefore not depreciated.

    With a few exceptions (like quarries or landfill sites), land is assumed to have an unlimited useful life and thus does not undergo systematic depreciation.

95. Question 95

    An entity disposes of an old computer. It originally cost Rs. 40,000, and Accumulated Depreciation is Rs. 35,000. It is scrapped for zero cash. What is the impact on the Profit or Loss statement?

    • A) Rs. 40,000 Loss
    • B) Rs. 5,000 Gain
    • C) Rs. 5,000 Loss
    • D) No impact.
    Show answer & explanation

    Answer: C) Rs. 5,000 Loss

    The carrying amount at disposal is Cost (40k) - Acc Dep (35k) = 5k. Since it was scrapped for zero proceeds, the entire carrying amount of Rs. 5,000 must be written off as a loss on disposal.

96. Question 96

    In periods of rapid technological change, which depreciation method might management choose to best reflect the rapid obsolescence of high-tech assets?

    • A) Straight-line method
    • B) Reducing balance method (or sum-of-digits)
    • C) Units of production method
    • D) Physical inventory method
    Show answer & explanation

    Answer: B) Reducing balance method (or sum-of-digits)

    Accelerated methods like reducing balance or sum-of-digits charge more depreciation in the early years. This aligns well with high-tech assets that lose their economic value and usefulness very rapidly due to technological obsolescence.

97. Question 97

    A business extracts an unadjusted trial balance. The 'Equipment' account has a debit balance of Rs. 200,000. This figure represents:

    • A) The current market value of the equipment.
    • B) The net book value (carrying amount) of the equipment.
    • C) The historical cost of the equipment.
    • D) The estimated residual value of the equipment.
    Show answer & explanation

    Answer: C) The historical cost of the equipment.

    In standard accounting ledgers, the main asset account (Equipment) holds the historical cost. Accumulated depreciation is kept in a separate contra account.

98. Question 98

    When presenting Property, Plant, and Equipment in the final financial statements, the normal format in the notes or on the face of the balance sheet is:

    • A) Cost minus Liabilities = Net Assets
    • B) Cost minus Residual Value = Depreciable Amount
    • C) Cost minus Accumulated Depreciation = Carrying Amount
    • D) Market Value plus Accumulated Depreciation = Gross Value
    Show answer & explanation

    Answer: C) Cost minus Accumulated Depreciation = Carrying Amount

    Transparency requires showing the gross historical cost, explicitly subtracting the accumulated depreciation, and presenting the net carrying amount (Written Down Value).

99. Question 99

    A company buys a vehicle for Rs. 50,000. It expects to sell it for Rs. 10,000 after 4 years. In year 3, the vehicle is destroyed in an accident, and insurance pays out Rs. 22,000. If the straight-line method was used, what is the gain or loss on disposal?

    • A) Rs. 2,000 Gain
    • B) Rs. 8,000 Loss
    • C) Rs. 2,000 Loss
    • D) Rs. 12,000 Gain
    Show answer & explanation

    Answer: B) Rs. 8,000 Loss

    Annual depr = (50k - 10k) / 4 = 10k/yr. After 2 full years, Acc Dep = 20k, WDV = 30k (start of yr 3). Proceeds = 22k. Loss = 8k. (Assuming destroyed at point WDV is 30k).

100. Question 100

     Which of the following is the fundamental basis for the 'Going Concern' concept regarding PPE?

     • A) It assumes the business will quickly sell all assets.
     • B) It assumes the business will continue in operation for the foreseeable future, justifying the depreciation of assets over a long useful life instead of immediate liquidation.
     • C) It assumes all assets are held for sale.
     • D) It assumes the business is bankrupt.
     Show answer & explanation

     Answer: B) It assumes the business will continue in operation for the foreseeable future, justifying the depreciation of assets over a long useful life instead of immediate liquidation.

     The going concern concept presumes the entity will not liquidate. Without it, assets would have to be valued at their immediate break-up or forced-sale values, rendering systematic long-term depreciation meaningless.