Chapter 11 Multiple Choice Questions

Question 1

What type of costs are typically included when acquiring land?
a) Only the purchase price
b) Purchase price and demolition costs
c) Purchase price, closing costs, and preparation costs
d) Purchase price and legal fees

Answer 1

c) Purchase price, closing costs, and preparation costs

Question 2

Which costs are related to the preparation of land for use?
a) Installation of machinery
b) Removal of old buildings
c) Depreciation of land
d) Mortgage costs

Answer 2

b) Removal of old buildings

Question 3

What happens to proceeds from salvaged materials during land acquisition?
a) They are capitalized as part of the land cost
b) They are credited to the income statement
c) They are deducted from the cost of land
d) They are ignored in the land acquisition process

Answer 3

c) They are deducted from the cost of land

Question 4

Leasehold improvements are depreciated over which period?
a) The useful life of the property
b) The remaining lease life
c) 5 years
d) The useful life of the improvements, whichever is shorter

Answer 4

b) The remaining lease life

Question 5

Which of the following is classified as “Land Improvements” under accounting standards?
a) Driveways
b) Landscaping with indefinite life
c) Buildings
d) Office equipment

Answer 5

a) Driveways

Question 6

What is the accounting treatment when replacing a component of an asset under the revaluation model?
a) The cost of the new component is added to the asset’s carrying amount
b) The cost of the replacement is expensed immediately
c) The asset is written off entirely
d) Only the original cost is adjusted, not the carrying amount

Answer 6

a) The cost of the new component is added to the asset’s carrying amount

Question 7

What treatment is given to the costs of rearranging and reinstalling equipment?
a) If the original installation cost is known, capitalize the costs as part of the asset’s carrying amount
b) These costs are always expensed immediately
c) The costs are removed from the books entirely
d) If the rearrangement cost is material and original cost is unknown, expense the costs

Answer 7

a) If the original installation cost is known, capitalize the costs as part of the asset’s carrying amount

Question 8

Which of the following would be considered a capital expenditure (CapEx)?
a) Routine repairs to keep an asset running
b) Costs to extend the life of an asset
c) Office supplies
d) Salaries of employees maintaining equipment

Answer 8

b) Costs to extend the life of an asset

Question 9

Under IFRS, what is the key difference between the cost model and the revaluation model for PPE?
a) The cost model measures assets at historical cost minus depreciation, while the revaluation model measures assets at fair value with periodic revaluation
b) The cost model requires depreciation, while the revaluation model does not
c) The revaluation model is only available for buildings
d) The cost model can only be used for intangible assets

Answer 9

a) The cost model measures assets at historical cost minus depreciation, while the revaluation model measures assets at fair value with periodic revaluation

Question 10

Under ASPE, what should be done if the original installation cost of an asset is unknown and the rearrangement/reinstallation cost is material?
a) Expense the cost immediately
b) Ignore the cost
c) Capitalize the cost as part of the asset’s carrying value
d) Treat it as a disposal cost for the old asset

Answer 10

c) Capitalize the cost as part of the asset’s carrying value

Question 11

What is the primary treatment of biological assets under IFRS?
a) They are expensed as incurred
b) They are treated as inventory and measured at cost
c) They are valued at fair value, with changes in fair value recognized in profit and loss
d) They are capitalized and amortized over time

Answer 11

c) They are valued at fair value, with changes in fair value recognized in profit and loss

Question 12

What is the difference between the “Full Cost” method and the “Successful Efforts” method for natural resources?
a) The Full Cost method only capitalizes successful exploration efforts, while the Successful Efforts method capitalizes both successful and unsuccessful efforts
b) The Full Cost method capitalizes both successful and unsuccessful exploration costs, while the Successful Efforts method only capitalizes successful efforts
c) The Full Cost method does not capitalize any exploration costs, whereas the Successful Efforts method does
d) Both methods treat exploration costs the same

Answer 12

b

Question 13

How is the carrying value of a revalued asset calculated under the revaluation model, and what happens to accumulated depreciation?
a) The carrying value is updated based on fair market value, and accumulated depreciation is eliminated using the asset adjustment method
b) The carrying value remains unchanged, and depreciation is recalculated based on the original cost
c) The carrying value remains based on historical cost, and accumulated depreciation is recalculated
d) The asset is written off entirely, and no depreciation is recorded

Answer 13

a) The carrying value is updated based on fair market value, and accumulated depreciation is eliminated using the asset adjustment method

Question 14

What are the steps involved in accounting for asset replacements under the revaluation model?
a) Add the new replacement costs to the carrying amount, and remove the cost of the replaced component
b) Capitalize the replacement costs as a separate asset, without adjusting the original asset’s carrying amount
c) Remove the old asset completely, and then record the replacement cost as a new asset
d) Only remove the old asset’s accumulated depreciation, not its carrying amount

Answer 14

a) Add the new replacement costs to the carrying amount, and remove the cost of the replaced component

Question 15

What happens to the costs incurred for major overhauls, inspections, or reconditioning of an asset?
a) They are always expensed as incurred, as they do not improve the asset’s life
b) They are capitalized as part of the asset’s carrying amount, extending the useful life or increasing its service potential
c) They are treated as liabilities, not assets
d) They are ignored if the overhaul doesn’t affect the asset’s useful life

Answer 15

b) They are capitalized as part of the asset’s carrying amount, extending the useful life or increasing its service potential

Question 16

What is the treatment for costs incurred after the acquisition of natural resources under the “Successful Efforts” method?
a) All exploration costs are expensed immediately
b) Costs are capitalized until exploration is complete and expensed if the exploration is unsuccessful
c) Only successful exploration costs are capitalized, and unsuccessful efforts are expensed
d) Exploration costs are capitalized no matter the outcome of the efforts

Answer 16

c) Only successful exploration costs are capitalized, and unsuccessful efforts are expensed

Question 17

What should a company do when the carrying amount of a natural resource asset is not recoverable under the full cost method?
a) Write off the full cost immediately as an impairment loss
b) Write down the capitalized cost to reflect the recoverable amount
c) Maintain the asset’s value at historical cost
d) Capitalize any additional exploration costs to increase recoverability

Answer 17

b) Write down the capitalized cost to reflect the recoverable amount

Question 18

What is the main reason why biological assets are measured at fair value under IFRS?
a) To ensure they are expensed when sold
b) To reflect the changes in the asset’s value based on market conditions
c) To ignore depreciation completely
d) To account for the biological assets as inventory

Answer 18

b) To reflect the changes in the asset’s value based on market conditions

Question 19

Which of the following costs should be capitalized as part of the cost of a building?
a) Office supplies
b) Construction costs
c) Salaries of management
d) Routine repairs and maintenance

Answer 19

b) Construction costs

Question 20

When should the cost of an asset replacement be capitalized under the cost model?
a) If the replacement increases the asset’s productivity or extends its useful life
b) Only when the asset is disposed of
c) If the replacement is considered an ordinary repair
d) When the replacement is below a certain threshold of value

Answer 20

a) If the replacement increases the asset’s productivity or extends its useful life

Question 21

Under IFRS, when are costs incurred for a major overhaul capitalized?
a) When the overhaul is routine and expected to occur frequently
b) Only when the overhaul improves the asset’s performance
c) Only when the overhaul extends the asset’s useful life
d) Never, they are always expensed

Answer 21

c) Only when the overhaul extends the asset’s useful life

Question 22

Which of the following is TRUE when the revaluation model is applied to Property, Plant, and Equipment (PPE)?
a) The asset is always written off when it is revalued
b) Depreciation is calculated based on the revalued amount, not the historical cost
c) The asset’s revaluation is not recognized in the financial statements
d) Revaluation is only done when the market value is lower than the carrying amount

Answer 22

b) Depreciation is calculated based on the revalued amount, not the historical cost

Question 23

What is the treatment for costs incurred when repairing an asset that has suffered minor damage?
a) The costs are capitalized as part of the asset
b) The costs are expensed as repairs
c) The costs are capitalized if the damage is significant
d) The costs are treated as a liability

Answer 23

b) The costs are expensed as repairs

Question 24

If the useful life of an asset is extended due to a major overhaul, how should the cost of the overhaul be treated?
a) As an expense
b) As a liability
c) As an addition to the carrying amount of the asset
d) As a reduction in the asset’s value

Answer 24

c) As an addition to the carrying amount of the asset

Question 25

Under the cost model, what happens when a major component of an asset is replaced?
a) The cost of the new component is added to the carrying amount of the asset, and no adjustment is made to the old component’s value
b) The cost of the replacement is capitalized, and the replaced component’s carrying value is removed from the asset
c) The old component’s value is deducted from the asset, but the new component is expensed
d) The asset is written off entirely, and a new asset is recognized

Answer 25

b) The cost of the replacement is capitalized, and the replaced component’s carrying value is removed from the asset

Question 26

Under ASPE, what happens when the quantity or quality of an asset’s service potential is increased?
a) The cost of the increase should be expensed immediately
b) The cost should be capitalized as part of the asset’s cost
c) The cost should be deferred as a liability
d) No action is required, the cost is ignored

Answer 26

b) The cost should be capitalized as part of the asset’s cost

Question 27

What is the accounting treatment when land is acquired with an existing building on it, and the building is subsequently demolished?
a) The demolition cost is capitalized as part of the land’s cost
b) The demolition cost is expensed as incurred
c) The building is written off entirely without any effect on land costs
d) The demolition cost is deferred and amortized over the life of the land

Answer 27

a) The demolition cost is capitalized as part of the land’s cost

Question 28

Under the fair value model for investment property, what happens after the replacement of a component?
a) The replacement cost is added to the carrying amount, and the asset is revalued to fair value
b) The replacement cost is capitalized as a separate asset and depreciated over time
c) The replacement cost is treated as an expense in the period incurred
d) The replacement cost is deferred until the property is sold

Answer 28

a) The replacement cost is added to the carrying amount, and the asset is revalued to fair value

Question 29

What is the accounting treatment for costs incurred after acquisition that improve the quality or quantity of an asset’s service potential?
a) These costs are expensed immediately as incurred
b) The costs are capitalized as part of the asset’s cost
c) The costs are deferred and amortized over time
d) The costs are treated as liabilities until paid

Answer 29

The costs are capitalized as part of the asset’s cost

Question 30

How should costs related to the rearrangement or reinstallation of machinery be treated if the original installation cost is unknown and the costs are material?
a) The costs are ignored and expensed
b) The costs are capitalized as part of the asset’s carrying value
c) The costs are capitalized as a new asset and depreciated separately
d) The costs are written off as a one-time expense

Answer 30

b) The costs are capitalized as part of the asset’s carrying value

Question 31

Under the successful efforts method for natural resources, how are costs incurred for unsuccessful exploration treated?
a) The costs are capitalized and added to the cost of the natural resource asset
b) The costs are expensed immediately as exploration costs
c) The costs are capitalized as part of the asset’s carrying value
d) The costs are deducted from the revenue generated by the resource

Answer 31

b) The costs are expensed immediately as exploration costs

Question 32

If a biological asset is measured at fair value under IFRS, what happens to any changes in its fair value?
a) Changes are recognized in equity only
b) Changes are recognized in profit and loss
c) Changes are deferred and amortized over time
d) Changes are ignored until the asset is sold

Answer 32

b) Changes are recognized in profit and loss

Question 33

How should the cost of a major overhaul be treated when it results in an increase in the service potential of an asset?
a) The cost should be capitalized as part of the asset’s carrying amount
b) The cost should be expensed immediately
c) The cost should be deferred and amortized over the asset’s remaining life
d) The cost should be treated as a liability until the overhaul is complete

Answer 33

a) The cost should be capitalized as part of the asset’s carrying amount

Question 34

What treatment is applied to the costs of reconditioning or retooling an asset that extends its useful life?
a) The costs are expensed as incurred
b) The costs are capitalized and amortized over the extended useful life
c) The costs are added to the original cost of the asset
d) The costs are ignored as they are considered part of routine maintenance

Answer 34

b) The costs are capitalized and amortized over the extended useful life

Question 35

6. Which of the following costs related to equipment are capitalized?
   a) Purchase price and freight
   b) Training costs
   c) Routine repairs and maintenance
   d) Salary of employees for trial runs

Answer 35

a

Question 36

7 Under IFRS, what is the treatment of investment property?
a) Always carried at historical cost
b) Can be carried at fair value, with changes recognized in income
c) Depreciated annually
d) Only revalued once during the holding period

Answer 36

b

Question 37

8. What is the depletion base for natural resources?
   a) The amount invested in land
   b) The capitalized costs related to exploration, development, and decommissioning
   c) Only exploration costs
   d) Only the costs of acquiring the rights to natural resources

Answer 37

b

Question 38

9. In the “Successful Efforts” method of accounting for natural resources, what happens when an exploration attempt is successful?
   a) Exploration costs are expensed immediately
   b) Exploration costs remain capitalized until production begins
   c) Costs are capitalized only until exploration is complete
   d) Costs are never capitalized, even if exploration is successful

Answer 38

b

Question 39

11. When using the revaluation model for PP&E, which of the following is added to the carrying amount of an asset?
    a) Depreciation
    b) Replacement or overhaul costs
    c) Old asset costs
    d) Salvage value

Answer 39

b

Question 40

12. Under ASPE, if the original installation cost is unknown, and the rearrangement/reinstallation cost is material, what is the accounting treatment?
    a) Capitalize the cost as part of the asset’s carrying value
    b) Expense the cost immediately
    c) Ignore the cost and leave the asset’s value unchanged
    d) Treat it as a disposal cost for the old asset

Answer 40

a

Question 41

13. Which of the following would not be capitalized as part of an asset under the Cost Model for PPE?
    a) Costs to improve the asset
    b) Routine repairs to maintain the asset
    c) Installation costs
    d) Transport and handling charges

Answer 41

b

Question 42

14. When does a company use the Fair Value Model for investment property under IFRS?
    a) When the property is held for sale only
    b) When the fair value of the property can be reliably measured
    c) When the asset is used for business operations
    d) When the property is under construction for future sale

Answer 42

b

Question 43

16. Which of the following is an example of ordinary repairs that should be expensed?
    a) Replacing worn-out machinery components
    b) Installing new parts to increase production capacity
    c) Repainting a factory building to maintain its appearance
    d) Replacing an old roof with a new one

Answer 43

c

Question 44

17. What method is commonly used for revaluing an asset’s depreciation balance when using the revaluation model?
    a) The asset adjustment method
    b) The straight-line method
    c) The proportionate approach
    d) The fair value method

Answer 44

c

Question 45

18. Under the “Full Cost” method for natural resources, how are unsuccessful exploration efforts treated?
    a) They are expensed immediately
    b) They are capitalized alongside successful efforts
    c) They are never capitalized
    d) They are capitalized and amortized over time

Answer 45

b

Question 46

19. What is the treatment for a major overhaul or reconditioning of an asset under ASPE?
    a) Always expensed immediately
    b) Capitalized as part of the asset’s cost
    c) Not recorded if the overhaul increases capacity
    d) Treated as a disposal cost of the original part

Answer 46

b

Question 47

20. If a company incurs a significant cost to rearrange equipment or re-install it, but the original installation cost is not known, and the cost is material, what is the appropriate accounting treatment?
    a) Expense the cost
    b) Capitalize the cost as part of the asset’s carrying value
    c) Ignore the cost
    d) Treat it as a disposal cost for the original asset

Answer 47

b