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Site Title: International Financial Reporting: A Practical Guide

Book's Title: International Financial Reporting: A Practical Guide, 5th Edition
Book's Author: Melville
Location on Site: Multiple choice questions > Chapter 5: Property, plant and equipment
Date/Time Submitted: August 19, 2021 at 1:07 PM (UTC/GMT)

Overall Score: 58% of 12 questions

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1. Which of the following items qualifies as property, plant and equipment?

 Your Answer: Computer software bought for use in more than one accounting period
Correct Answer: A machine bought for use in more than one accounting period

2. The "carrying amount" of an item of property, plant and equipment generally refers to:

Your Answer: The replacement cost of the item

Correct Answer: The amount at which the item is recognised in the financial statements

3. A company pays £40,000 to replace a major component of a factory machine. The faulty component that
is replaced is sold for £2,000.
The carrying amount of the machine just before this replacement occurs is
£450,000, of which £10,000 relates to the faulty component that is being replaced.
The revised carrying
amount of the machine after the replacement occurs and the profit or loss on disposal of the faulty
component are:

Your Answer: Carrying amount £480,000, Loss £8,000

4. Which of the following would not be included in the cost of an item of property, plant and equipment?

Your Answer: Refundable value added tax

5. On 31 December 2014, a company acquires land for £500,000. The land is revalued at £530,000 on 31
December 2015 and £460,000 on 31 December 2016.

The company prepares financial statements to 31 December each year and uses the revaluation model in
relation to land.

The correct accounting treatment of each revaluation in the statement of comprehensive income is as
 follows:

Your Answer: 2015

Other comprehensive income £30,000
2016
Negative other comprehensive income £30,000
Expense £40,000

6. Depreciation is defined as the fall in value of an asset during an accounting period. True or False?

Your Answer: True

Correct Answer: False

7. On 1 January 2015, a company which prepares financial statements to 31 December each year buys an
item of equipment for £20,000. Useful life is estimated to be six years and residual value is expected to be
approximately £1,500.
The company uses the diminishing balance method of depreciation at a rate of 35% per annum.
To the nearest pound, the depreciation of this item for the year to 31 December 2016 would be:

Your Answer: £4,550

8. Borrowing costs that are directly attributable to the acquisition of a qualifying asset must be capitalised as
part of the cost of that asset. True or False?

Your Answer: True

9
9. A company has the following general borrowings outstanding throughout the whole of an accounting year:
6.5% Bank loan of £400,000
8% Bank loan of £800,000
If a qualifying asset costing £50,000 is funded out of these general borrowings, the capitalisation rate that
should be used is:

Your Answer: 7.25%

Correct Answer: 7.5%

  Total borrowings are £1,200,000. Total interest is £90,000 (£26,000 + £64,000). This is equivalent to 7.5
% of £1,200,000.

10. If investment property is measured using the fair value model, a gain arising from a change in the fair
value of an investment property must be:

Your Answer: Recognised in the calculation of profit or loss

11. If a company adopts the revaluation method in relation to an item of property, plant and equipment, it is
no longer necessary to charge depreciation in relation to that item. True or False?

Your Answer: True

Correct Answer: False

12. On 1 January 2015, a company which prepares financial statements to 31 December acquires an item of
equipment and receives a government grant of 20% of the item's cost. The item cost £30,000 and has an
expected useful life of seven years with a residual value of approximately £4,000.
The item is depreciated on the diminishing balance basis at a rate of 25% per annum.
The amount of the grant that should be recognised as income in the year to 31 December 2016 is:

Your Answer: £1,298

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