Ch8 - PPE Flashcards
Are the following (part of an item of) property, plant, and
equipment in accordance with IAS 16 ?
Factory building in which a company manufactures its products
YES
Are the following (part of an item of) property, plant, and
equipment in accordance with IAS 16 ?
Building that a company holds to earn rentals under lease contracts
No
Are the following (part of an item of) property, plant, and
equipment in accordance with IAS 16 ?
Fleet of cars that are used by a company’s sales staff
Yes
Are the following (part of an item of) property, plant, and
equipment in accordance with IAS 16 ?
Car for the exclusive business and private use of a company’s chief
financial officer
YES
Are the following (part of an item of) property, plant, and
equipment in accordance with IAS 16 ?
Specialised servicing equipment that is unique to the servicing requirements of a manufacturing plant that a company uses to produce
chemicals
YES
Are the following (part of an item of) property, plant, and
equipment in accordance with IAS 16 ?
Common low-value tools that a company uses to service a plant that is
used to produce bricks; the tools are not unique to the servicing
requirements of the plant
NO
Are the following (part of an item of) property, plant, and
equipment in accordance with IAS 16 ?
Costs of the inspection of an aircraft that a company operates for
executive aviation services; the inspection is required by the national
aviation authority every two years
YES
Multiple Choice
Which of the following is not part of the cost of an item of property, plant,
and equipment in accordance with IAS 16 ?
A: Costs of materials used in preparing the site on which an item of PPE is
to be constructed
B: Wages and salaries arising on the construction of an item of PPE
C: Costs incurred while an item of PPE that is capable of operating in the
manner intended by management has yet to be brought into use
D: Costs of dismantling and removing an item of PPE and restoring the site on
which it is located
C: Is the answer
Under IAS 16 (International Accounting Standard 16 - Property, Plant, and Equipment), the costs that can be included in the initial measurement of an item of PPE are those that are necessary to bring the asset to the location and condition necessary for it to operate in the manner intended by management.
Which statement best describes the revaluation model for the measurement of items of property, plant, and equipment according to IAS 16 ?
A: If a company revalues an item of PPE, it does not have to revalue the entire
class of PPE to which that asset belongs.
B:The volatility of changes in the fair values of items of PPE being revalued has
no impact on the frequency of the revaluations
C:If the carrying amount of an item of PPE is increased as a result of a
revaluation, the increase has to be recognised in profit or loss.
D: If the carrying amount of an item of PPE is increased as a result of a revaluation, the increase has to be recognised in other comprehensive income.
However, the increase has to be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in
profit or loss.
D: is the answer
Under the revaluation model of IAS 16, if an asset’s carrying amount is increased due to revaluation:
The increase is generally recognized in Other Comprehensive Income (OCI) and is accumulated in equity under a revaluation surplus.
However, if the increase reverses a previous revaluation decrease of the same asset that was previously recognized in profit or loss, then the increase is recognized in profit or loss to that extent.
Which of the following statements does not apply to the depreciation of
items of property, plant, and equipment according to IAS 16 ?
A: The depreciable amount of an item of PPE has to be allocated on a
systematic basis over its useful life.
B: The depreciation method used has to reflect the pattern in which the future
economic benefits of the item of PPE are expected to be consumed by the
company.
C: The depreciation method applied to an item of PPE has to be reviewed at
least at each financial year-end. Even if there has only been an insignificant
change in the expected pattern of consumption of the future economic
benefits embodied in the item of PPE, the depreciation method has to be
changed to reflect the changed pattern.
D: In determining the useful life of an item of PPE, a company considers the
expected usage, the expected physical wear and tear and the technical or
commercial obsolescence of the item of PPE as well as legal or similar limits
on the use of the item of PPE.
C:
While it is true that the depreciation method needs to be reviewed at least at each financial year-end, IAS 16 does not require a change in the depreciation method for insignificant changes in the expected pattern of consumption. Changes are only required if the change in the pattern of consumption is considered significant. This statement is overly strict and does not align with the standard’s guidance.
Which statement best describes the fair value model for the measurement of investment property in accordance with IAS 40 ?
A: A company that chooses the fair value model has to measure all of its investment property at fair value except there is clear evidence when the investment property is first acquired that the fair value of the investment property is
not reliably measurable on a continuing basis.
B: The fair value of an investment property is not reliably measurable on a
continuing basis if the market for comparable properties is inactive even if
alternative reliable measurements of fair value (e.g., discounted cash flow
projections) are available.
C: A gain arising from an increase in the fair value of investment property has to
be recognised in other comprehensive income; a loss arising from a decrease
in the fair value of investment property has to be recognised in profit or loss.
D: If a company has measured an investment property at fair value and comparable market transactions become less frequent, the company may choose to
continue to measure the property at fair value until disposal or to measure the
property at cost less accumulated depreciation and accumulated impairment.
A:
Under IAS 40 (Investment Property), if a company chooses the fair value model for its investment properties, it must measure all investment properties at fair value. However, there is an exception if the fair value is not reliably measurable on a continuing basis when the investment property is first acquired. This is a rare situation, but in such cases, the company is allowed to use the cost model instead.
In acquiring an item of equipment a company incurs:
- price of the equipment (incl. 19% VAT): € 95,200
- costs of transporting the equipment to the company (incl. 19% VAT): € 595
- costs of installing the equipment (incl. 19% VAT): € 3,570
- costs of the procurement staff for selecting and purchasing the equipment:
€ 4,995
The 19% value-added tax (VAT) is refundable.
What is the cost of the equipment at initial recognition?
A: € 104,360
B: € 88,495
C: € 83,500
D: € 79,930
B:
Calculation:
Price of the equipment (incl. 19% VAT)€95,200
Net price (excluding VAT):
€95,200/(1+0.19)=€80,000
Costs of transporting the equipment (incl. 19% VAT): €595
Net transport cost (excluding VAT):
€595/(1+0.19)=€500
Costs of installing the equipment (incl. 19% VAT): €3,570
Net installation cost (excluding VAT):
€3,570/(1+0.19)=€3,000
Costs of the procurement staff for selecting and purchasing the equipment: €4,995
Total Cost:
€80,000+€500+€3,000+€4,995=€88,495
Multiple Choice
On 1 January 2034 a company acquires a plant for € 500,000. The management of the company estimates that the useful life of the plant is five years and
the residual value of the plant is € 20,000. The management assumes that the
straight-line method best reflects the pattern in which it expects to consume the
plant’s future economic benefits. On 30 December 2034 the plant is damaged
and the company incurs an impairment loss of € 120,000. What is the carrying
amount of the plant on 31 December 2034?
A: € 404,000
B: € 400,000
C: € 284,000
D: € 280,000
AnnualDepreciation
C:
Calculation:
Cost of the plant: €500,000
Residual value: €20,000
Useful life: 5 years
Depreciation method: Straight-line
(€500,000-€20,000)/5=€480,000/5=€96,000
Carrying Amount before Impairment (as of 31 December 2034):
=€500,000−€96,000=€404,000
Impairment Loss: €120,000
Carrying Amount after Impairment:
=€404,000−€120,000=€284,000
A company that manufactures chemicals is required to have the protective lining of its
chemical production plant inspected for corrosion at six-months intervals. If an inspection reveals damage to the lining the company is required to replace the lining immediately.
Experience has shown that the lining requires replacement, on average, every four years. The company depreciates the linings on a straight-line basis over their estimated four-year useful
life. The other parts of the plant are depreciated on a straight-line basis over their estimated 20-year useful life. At the end of the current period an inspection reveals that a three-year-old lining with a carrying amount of € 100,000 is damaged. The lining is immediately replaced at a
cost of € 420,000. How does the company account for this event at the time of the damage and the replacement of the lining in accordance with IAS 16 ?
A: Dr. Other operating expenses € 100,000 Cr. PPE € 100,000
B: Dr. Other operating expenses € 520,000 Cr. PPE € 100,000
Cr. Bank € 420,000
C: Dr. Other operating expenses € 100,000 Cr. PPE € 100,000
Dr. PPE € 420,000 Cr. Bank € 420,000
D: None of the Above
C: is right
