Tutorial Week 4 Moodle Questions and Solutions

Chapter 7: Property, plant and equipment

PRACTICE QUESTIONS

QUESTION 7.1
SYDNEY LTD
31 December 2012
Depreciation expense Machine A
Accumulated depreciation
(1/2 x 10% x $300 000)

Dr
Cr

15 000

Depreciation expense Machine B

Accumulated depreciation
(1/2 x 10% x $200 000)

Dr
Cr

10 000

Machine A

Machine B

Cost
Accum depn
Fair value
Increment

300 000
135 000
165 000
180 000
15 000

Accumulated depreciation Machine A

Machine A
(Writing the asset down to carrying amount)

15 000

10 000

Cost
Accum depn

200 000
40 000
160 000
155 000
5 000

Fair value
Decrement

Dr
Cr

135 000

Machine A
Dr
Gain on revaluation of machinery (OCI) Cr
(Revaluation of asset)

15 000

Income tax expense gain on

revaluation of asset (OCI)
Deferred tax liability
(Tax-effect of revaluation)

135 000

15 000

Dr
Cr

4 500

Gain on revaluation of machinery (OCI)

Dr
Income tax expense (OCI)
Cr
Asset revaluation surplus Machine A Cr
(Accumulation of net revaluation gain in equity)

15 000

4 500

4 500
10 500

Tutorial Week 4 Moodle Questions and Solutions

Accumulated depreciation Machine B
Machine B
(Writing the asset down to carrying amount)

Dr
Cr

40 000

Loss revaluation decrement (P/L)

Machine B
(Revaluation of machine from $200 000
to $155 000)

Dr
Cr

5 000

Depreciation expense Machine A

Accumulated depreciation
(1/6 x x $180 000)

Dr
Cr

15 000

Depreciation expense Machine B

Accumulated depreciation
(1/5 x x $155 000)

Dr
Cr

15 500

Machine A
Carrying amount
Fair value
Decrement

Machine B
Carrying amount
Fair value
Decrement

40 000

5 000

30 June 2013

$
165 000
163 000
2 000

15 000

15 500

$
139 500
136 500
3 000

Accumulated depreciation Machine A

Machine A
(Writing down to carrying amount)

Dr
Cr

15 000

Loss on revaluation of machinery (OCI)

Machine A
(Revaluation downwards)

Dr
Cr

2 000

Deferred tax liability

Dr
Income tax expense (OCI)
Cr
(Tax-effect of revaluation decrement on asset
previously revalued upwards)

600

Asset revaluation surplus Machine A

Dr
Income tax expense (OCI)
Dr
Loss on revaluation of machinery (OCI) Cr
(Reduction in accumulated equity due
to revaluation decrement)

1 400
600

Accumulated depreciation Machine B

Machine B
(Writing down to carrying amount)

Dr
Cr

15 000

2 000

600

2 000

15 500
15 500

Tutorial Week 4 Moodle Questions and Solutions

Loss revaluation decrement
Machine B
(Writing down to fair value)

Dr
Cr

3 000
3 000

B: Basis for change in accounting policy

Refer to AASB 8 paragraph 9.
Discuss the cost basis method and the fair value method in relation to the relevance and
reliability of information.
Current information is generally more relevant than past information. Determination of cost is
generally more reliable than determination of fair value.
Discuss the trade-off between relevance and reliability, that is, as information becomes less
reliable it also loses its relevance. A fair value measure may, because of its timeliness, be
more relevant but if the measure becomes more unreliable, the relevance of the information
decreases.

QUESTION 7.2
MELBOURNE LTD

General Journal
A.
Accumulated depreciation Building
Building
(Writing down to carrying amount)

Dr
Cr

100 000

Loss on revaluation of building (P&L)

Loss on revaluation of building (OCI)
Building
(Revaluation downwards of building)

Dr
Dr
Cr

20 000
20 000

Deferred tax liability

Income tax expense (OCI)
(Tax-effect of revaluation decrement on
previously revalued asset)

Dr
Cr

6 000

Asset revaluation surplus - Building

Income tax expense (OCI)
Loss on revaluation of building (OCI)
(Reduction in accumulated equity due to
revaluation decrement on building)

Dr
Dr
Cr

14 000
6 000

100 000

40 000

6 000

20 000

Tutorial Week 4 Moodle Questions and Solutions

Accumulated depreciation Vehicle
Vehicle
(Writing down to carrying amount)

Dr
Cr

40 000

Vehicle
Gain on revaluation of vehicle (OCI)
(Revaluation to fair value)

Dr
Cr

10 000

Income tax expense (OCI)

Deferred tax liability
(Tax-effect of revaluation increment)

Dr
Cr

3 000

Gain on revaluation of vehicle (OCI)

Income tax expense (OCI)
Asset revaluation surplus - vehicle

Dr
Cr
Cr

10 000

Depreciation expense Building

Accumulated depreciation Building
($160 000/25)

Dr
Cr

6 400

Depreciation expense Vehicle

Accumulated depreciation Vehicle
($90 000/ 4)

Dr
Cr

22 500

40 000

10 000

3 000

3 000
7 000

B.
6 400

22 500

Tutorial Week 4 Moodle Questions and Solutions

Chapter 9 Intangible assets

REVIEW QUESTIONS
1. What are the key characteristics of an intangible asset?
Para 8 of AASB 138 defines an intangible asset as:
An identifiable non-monetary asset without physical substance.
Key characteristics are:
Identifiable [see 2 below]: because of its emphasis on markets is inserted to exclude
many possible intangibles that are difficult to measure eg staff morale, good customer
relations
Non-monetary: this characteristic excludes financial assets such as receivables from
being classified as intangibles
Without physical substance: excludes items of PP&E covered by AASB 116

3. How do the principles for amortisation of intangible assets differ from those for
depreciation of property, plant and equipment?

Basic principle of allocation of the depreciable amount on a systematic basis over

useful life is the same.
With intangibles, straight-line method is the default method where the pattern of
receipt of benefits cannot be reliably determined. Not so for PPE.
With intangibles can have indefinite lives, not so for PPE
With intangibles with finite lives, residual value is assumed to be zero unless para
100 criteria are met. Not so for PPE.

6. What intangibles can never be recognised if internally generated? Why?

Para 63 states:
Internally generated brands, mastheads, publishing titles, customer lists and items similar
in substance shall not be recognised as intangible assets
Para 64 gives the reason:
Expenditure on internally generated brands, mastheads, publishing titles, customer lists
and items similar in substance cannot be distinguished from the cost of developing the
business as a whole. Therefore, such items are not recognised as intangible assets.

Tutorial Week 4 Moodle Questions and Solutions

7.

Explain the difference between research and development.

Para 8 contains the following definitions:
Research:
is original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.
Development:
is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes,
systems or services before the start of commercial production or use.
Para 56 gives examples of research activities:
(a) activities aimed at obtaining new knowledge;
(b) the search for, evaluation and final selection of, applications of research findings or
other knowledge;
(c) the search for alternatives for materials, devices, products, processes, systems or
services; and
(d) the formulation, design, evaluation and final selection of possible alternatives for
new or improved materials, devices, products, processes, systems or services.
Para 59 gives examples of development activities:
(a) the design, construction and testing of pre-production or pre-use prototypes and
models;
(b) the design of tools, jigs, moulds and dies involving new technology;
(c) the design, construction and operation of a pilot plant that is not of a scale
economically feasible for commercial production; and
(d) the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services

Tutorial Week 4 Moodle Questions and Solutions

8.

Explain when development outlays can be capitalised.

Para 57 states that when all the following criteria are met, development outlays can be
capitalised:
(a) the technical feasibility of completing the intangible asset so that it will be available
for use or sale.
(b) its intention to complete the intangible asset and use or sell it.
(c) its ability to use or sell the intangible asset.
(d) how the intangible asset will generate probable future economic benefits. Among
other things, the entity can demonstrate the existence of a market for the output of
the intangible asset or the intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset.
(e) the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
(f) its ability to measure reliably the expenditure attributable to the intangible asset
during its development.