Chapter 9 auditing the revenue cycle solutions

Chapter 14

Multiple Choice

1. Sentosa has acquired manufacturing equipment and incurred these expenses in doing so.

               $

Gross invoice price, net of GST, subject to terms of 2/10, n/30) 9000

Transportation costs to get equipment to factory 1000

Special permit to allow wide load on freeway 300

Speeding ticket incurred by company driver while

delivering equipment to the factory 100

Cost to repair wall damaged during installation 500

The equipment should be recorded in Sentosa’s records at:

a. $10 900

b. $10 300

c. $10 120

d. $10 000

2. On what basis would the costs of several items of property, plant and equipment, acquired for a lump-sum payment, normally be allocated?

a. Net realisable value at acquisition date

b. Replacement cost at acquisition date

c. Independent valuation at acquisition date

d. Fair value at acquisition date

3. Kamp Gravel Co purchased three trucks for $50 000 each plus GST by making a $20 000 down payment and agreeing to pay the balance at the end six months. The journal entry to record the acquisition is:

            $ $

a. Trucks 150 000

 GST Outlays 15 000

  Sundry creditor 165 000

b. Trucks 150 000

GST Outlays 15 000

  Cash 20 000

  Sundry creditor 145 000

c. Cash 20 000

 Sundry creditor 130 000

  Trucks 150 000

d. Trucks 20 000

  Cash 20 000

4. In the financial statements prepared at the end of the accounting period the item Accumulated Depreciation appears:

a. On the income statement as an expense

b. On the balance sheet as a liability

c. On the balance sheet as a deduction from the related asset

d. On both the balance sheet and the income statement

5. The statement that best describes the nature of accounting depreciation is:

a. A charge representing the change in the asset’s market value

b. A charge representing the decline in the physical efficiency of the asset

c. The amount that can be claimed as a tax deduction

d. An allocation of the cost of the asset over its estimated useful life

6. The statement relating to depreciation that is true is:

a. Accumulated depreciation represents the amount of an asset's cost that has been transferred to depreciation expense

b. The cash account is affected by charging depreciation

c. Accumulated depreciation is a contra-expense account

d. Depreciation represents cash that can be used to replace assets when they wear out

7. Which factor will affect the amount of depreciation charged on an asset in a particular accounting period?

a. Estimated useful life

b. Historical cost

c. Estimated residual value

d. All of the above

8. On 31 December 2009 a new motor vehicle with a life of five years and an estimated residual value of $3000 was purchased by a business at a cost of $23 000, net of GST. The straight-line depreciation method is employed. What is the carrying value of the motor vehicle at 31 December 2012 (after charging depreciation for that year)?

a. $23 000

b. $11 000

c. $12 000

d. $15 000

9. The Delivery Equipment account in the ledger of A co has a balance of $17 600 which is the cost of two trucks purchased on 1 January 2007. The Accumulated Depreciation Delivery Equipment account has a balance on 31 December 2009 of $8000, before adjusting entries. No additional delivery trucks have been acquired or sold. The residual value of each truck is estimated to be $800 and the straight-line depreciation method is used. The necessary adjusting entry to record annual depreciation on 31 December 2009 is:

        Debit Credit

a. Depreciation Exp $8000 Delivery Equipment $8000

b. Accumulated Deprecn $4000 Delivery Equipment $4000

c. Depreciation Exp $8000 Cash at Bank $8000

d. Depreciation Exp $4000 Accumulated Deprecn $4000

10. On 1 January 2009 Dee Ltd acquired electronic equipment for $10 000, net of GST. If depreciation is provided at 10% p.a. on the diminishing-balance basis, the depreciation charge for the year ended 31 December 2011 is:

a. $700

b. $729

c. $810

d. $800

11. The statement concerning the diminishing-balance method of depreciation that is true is:

a. It charges the same amount of depreciation each period

b. It applies a declining percentage factor to the asset’s original cost

c. It is also known as the units-of-production method

d. It is an appropriate method when proportionately more of the asset’s benefits are consumed in the early years of its life

12. NG Ltd purchased a sprinkler system on 1 January of Year 1.

  Cost (net of GST) $6500

  Residual $1500

  Estimated Useful Life 4 years

 Under the diminishing-balance method, using a rate of 50%, the depreciation expense for year 2 will be:

a. $3250

b. $1625

c. $1500

d. $1250

13. On 1 July 2006 a retailer purchased a delivery truck for $21 000, net of GST. It has an estimated trade-in-value of $6000 and is expected to last for a total of 60 000 kilometres.

 A schedule of distance travelled is set out below:

   30/6/07 20 000 km

   30/6/08 15 000 km

   30/6/09 15 000 km

   30/6/10 10 000 km

Using the units-of-production method the amount of depreciation charged for the year ended 30 June 2010 is:

a. $3750

b. $3500

c. $2500

d. $5000

14. A machine was purchased on 3 January 2009 for $48 000, net of GST. The machine had an estimated residual value of $6000 and an estimated useful life of 5 years. Depreciation expense for 2009, using sum-of-the-years'-digits method, is:

a. $8400

b. $14 000

c. $19 200

d. $16 000

15. Which of the following is an advantage of the use of accelerated depreciation methods for tax purposes as opposed to the straight-line method?

a. The total amount of tax paid over the lifetime of the asset is reduced

b. The business has the interest-free use of deferred tax dollars until the later years of the asset's life

c. Lower tax payments are made during the early years of the asset's life

d. B. and C.

16. Wong purchased a computer for $15 000, net of GST. Originally it had an estimated useful life of 4 years and a residual value of $3000. The straight-line method is used. At the start of the third year of usage Wong revised the life of the computer to a total life of 6 years. What depreciation expense should be recorded for the computer for year 3?

a. $1000

b. $1500

c. $3000

d. $4000

17. When estimates of useful life and residual value, made for the purposes of calculating depreciation, in later years turn out to be materially incorrect and the asset has not reached the end of its useful life, the procedure to be followed is to:

a. Issue corrected financial statements for all prior years

b. Issue corrected financial statements for only the most recent three years

c. Ignore the problem since estimates are not expected to be exact anyway

d. Spread the remaining depreciable amount over the remaining useful life

18. An advantage of maintaining a subsidiary ledger for depreciable assets is:

a. It provides information for the preparation of income tax returns

b. It provides information to support insurance claims in the event of loss from theft or accident

c. It provides information concerning servicing of the assets

d. All are advantages

19. The information to be disclosed about property, plant and equipment in the financial statements prepared for external reporting includes:

a. Cost

b. Accumulated Depreciation

c. Details of useful lives

d. All of the above