Topic 1 - Accounting for Assets

Part A True or False

1. In situations where the fair value of the asset being given up is difficult to determine, perhaps
because the asset is of a type that is not commonly traded, it is not permissible to use the fair
value of the asset being acquired as its cost.

2. It is possible for an entity to acquire an item of property, plant and equipment and arrange
with the vendor that the payment will not be made for some time.

3. According to AASB 13, the cost approach represents a valuation technique that reflects the
amount that would be required currently to replace the service capacity of an asset (often
referred to as current replacement cost).

4. The cost of an item of property, plant and equipment is the cash price equivalent at the
acquisition date, that is, the cost of the item must be determined by discounting the amounts
payable in the future to their present value at the date of acquisition.

5. A ‘qualifying asset’ is defined in AASB 123 as ‘an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale’.

Part B Multiple Choice

6. If there is a relatively high degree of uncertainty about whether an entity has the appropriate
rights to use an asset, or difficulty in assessing the likelihood that future flows of economic
benefits will actually occur, it might not be relevant to provide related information to the financial
statement readers. This statement relates to the idea of:
A. accuracy
B. probability
C. reliability
D. All of the given options are correct.

7. Bella Enterprises recorded as an asset a piece of equipment purchased for $13 000 this
period. No depreciation has been recorded as yet and it has been revealed that it is not
probable that the equipment will generate future economic benefits. What is the appropriate
accounting entry?
A.
Dr Loss on write-down of equipment 13 000
Cr Equipment 13 000
B.
 Dr Equipment 13 000
Cr Write-down of equipment 13 000
C.
Dr Equipment expense 13 000
Cr Write-down of equipment 13 000
D.
Dr Equipment - depreciation 13 000
Cr Accumulated depreciation - equipment 13 000

8. The decision to expense or capitalise an item is important because:

A. it may have direct implications for the value of the organisation and wealth of managers
B. it may have an impact on contractual arrangements that are based on accounting numbers
related to profits and/or assets
C. it may give managers scope to maximise personal wealth, in line with Positive Accounting
Theories
D. All of the given options are correct.

9. In the case of classifying a liability as current or non-current, what approach does AASB 101
require if there is no clearly identifiable operating cycle?
A. The most common length of operating cycle for other entities in a comparable industry must
be used.
B. The operating cycle of the event that gave rise to the creation of the liability must be used as
the basis for determining the liability's operating cycle.
C. The liability is due to be settled within 12 months after the reporting period.
D. The average operating cycle length over all operations of the entity must be used.

10. The classification of assets into current or non-current in the statement of financial position
provides useful information on the short-term solvency of the entity when:
A. the entity supplies goods or services within a clearly identifiable normal operating cycle
B. the operating cycle of the entity is greater than 12 months
C. the operating cycle of the entity is less than 12 months
D. the entity is a financial institution

11. O'Briens Construction Ltd exchanged equipment that had a book value of $40 000 for a
truck that had a book value (in the other entity's books) of $38 000. The fair value of the
equipment is $45 000, and the fair value of the truck is $48 000. Further cost incurred to prepare
the truck for use by O'Briens was $700 for signage. What is the acquisition cost of the truck?
A. $48 700
B. $40 000
C. $48 000
D. $45 700

12. Which of the following is considered to be an asset?

A. property, plant and equipment
B. accounts receivable (debtors)
C. prepayments
D. All of the given options are correct.

13. An accountant is not sure how to recognise an asset that is purchased in excess of fair
value. Which of the following actions will you recommend?
A. Recognise the asset at fair value and the excess as goodwill
B. Recognise the asset at fair value and the excess as a loss on purchase
C. Recognise the asset at fair value and the excess as receivable from supplier
D. Recognise the asset at cost

14. Using the cost model outlined in AASB 116 to measure property, plant and equipment at
acquisition, which of the following costs would not be included?
A. Directly attributable costs
B. Initial estimates of dismantling and removal costs
C. 12-month servicing plan
D. Purchase price

15. Certain classes of property, plant and equipment, for example, aircraft, might comprise a
number of individual component parts. How does AASB 116 paragraph 43 require these
components be accounted for?
A. The components can be measured as one asset.
B. There is a prescribed unit of measurement for recognition that must be followed.
C. Only one depreciation rate can be used for the asset.
D. Each component with a significant cost must be depreciated separately.

16. The cost of an item of property, plant and equipment is the ________ equivalent at the
recognition date.
A. credit terms
B. carrying amount
C. cash price
D. borrowing costs

17. AASB 123 defines borrowing costs as ‘interest and other costs incurred by an entity in
connection with the borrowing of ________’.
A. funds
B. land
C. machinery
D. equipment

18. __________ is the capacity of an entity to benefit from an asset in the pursuit of the entity’s
objectives and to deny or regulate the access of others to that benefit.
A. Provenance (assets)
B. Resource (assets)
C. Control (assets)
D. Benefit (assets)
19. Patents, goodwill, brand names and trademarks are examples of __________.
A. tangible assets
B. intangible assets
C. current assets
D. agricultural assets

20. According to AASB 123, any one of the following may be qualifying assets, depending on
the circumstances, except:
A. inventories
B. manufacturing plants
C. power generation facilities
D. mortgage properties

21. Accounting for a ‘contingent asset’ is defined in ____________.

A. AASB 137
B. AASB 123
C. AASB 124
D. AASB 116

22. Non-current assets that a government intends to preserve indefinitely because of their
unique historical, cultural or environmental attributes are known as ___________.
A. heritage assets
B. intangible assets
C. environmental assets
D. agricultural assets

23. Which among the following is NOT a valuation technique according to ASSB 13?
A. market approach
B. cost approach
C. income approach
D. historical approach

24. ________________ is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (AASB
13).
A. Face value
B. Fair value
C. Market value
D. Historical cost

25. _____________ is a measure of the short-term liquidity or solvency of an organisation and

is determined by dividing current assets by current liabilities.
A. Current ratio
B. Accounting ratio
C. Financial ratio
D. Asset-based ratio

26. AASB 123 defines ____________ as ‘interest and other costs incurred by an entity in
connection with the borrowing of funds’.
A. borrowing costs
B. interest costs
C. qualifying asset
D. weighted average costs

27. Paragraph 54 of AASB 101 requires that the statement of financial position is to include line
items, except for:
A. property, plant and equipment
B. investment property
C. intangible assets
D. financial liabilities

28. _______, plant and equipment is a non-current asset that often accounts for a significant
proportion of the total assets of an organisation.
A. Leases
B. Property
C. Money
D. Storage