Tag: AQA

A business which owns all of its fixed assets should normally depreciate . . .

Select ONE answer:

1. all of its fixed assets.
2. all of its fixed assets which are of significant value.
3. all of its fixed assets except freehold land.
4. all of its fixed assets except land.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Freehold land is not normally depreciated because it has an infinite useful economic life. Sometimes, for example, if freehold land is subject to coastal erosion, it should be depreciated.
2. As per answer A above, but also assets do not have to have a significant value to be depreciated. However, GAAP in general applies only to material (significant) amounts of money.
3. Correct
4. Leasehold land has to be depreciated because the lease (it is the lease, not the land, which has been paid for) has a finite life. Freehold land normally does not have to be depreciated because it has an infinite useful economic life. If a building is leased and improvements are made to it, the cost of those improvements should be depreciated over the remaining term of the lease – because once the lease expires, the improvements have no value to the firm which paid for them.

 

This work is licensed under a Creative Commons Attribution 4.0 International License.

GAAP says …

Select ONE answer:

1. specifies that the straight line method of depreciation must always be used.
2. specifies that the reducing balance method of depreciation must always be used.
3. allows either the straight line method or the reducing balance method of depreciation to be used provided that only one of them is used in any particular accounting period.
4. does not specify that any particular method of depreciation must be used at any time.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 4

1. Not correct
2. Not correct
3. Not correct
4. It may be appropriate to use different methods of depreciation for different fixed assets. For example, the reducing balance method may be chosen for cars, as they decline most in value in the early years of their life, and the straight-line method chosen for plant and equipment which is used at a constant rate and which declines in value in proportion to usage. There are also many other methods of depreciation which could be used. Although GAAP does not specify that any particular method of depreciation must be used at any time, once one method is chosen for a particular fixed asset (or category of fixed asset), it should be consistently used for that asset / category.

 

This work is licensed under a Creative Commons Attribution 4.0 International License.

‘Obsolescence’ means . . .

Select ONE answer:

1. the decline in the value of fixed assets as a result of them becoming outdated by technological improvement and invention.
2. the decline in the book value of fixed assets as a result of them being depreciated using the straight-line method of depreciation.
3. the decline in the book value of fixed assets as a result of them being depreciated using the reducing balance method of depreciation.
4. none of the above.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. The depreciation charge shown in the profit and loss account is an estimate of the decline in the value of fixed assets that takes place for all sorts of reasons. Obsolescence is one of those reasons but it is not the only one. For example, wear and tear and use are two other possible reasons.

 

This work is licensed under a Creative Commons Attribution 4.0 International License.

The depreciation charge shown in the profit and loss account . . .

Select ONE answer:

1. is a revenue expense.
2. is capital expenditure.
3. can be either capital expenditure or a revenue expense, depending on the nature of the fixed asset being depreciated.
4. none of the above.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. If the depreciation charge was capital expenditure it would be shown as an increase in fixed assets in the balance sheet – not as an expense in the profit and loss account.

 

This work is licensed under a Creative Commons Attribution 4.0 International License.

The purpose of charging depreciation as an expense in the profit and loss account is . . .

Select ONE answer:

1. to allocate the cost of acquiring fixed assets over the accounting periods expected to benefit from their use.
2. to ensure that funds will be available for the eventual replacement of fixed assets.
   to reduce the figure shown in the balance sheet for fixed assets from the cost of
3. those fixed assets to their estimated market value.
4. to comply with the prudence concept.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct
2. Charging depreciation, of itself, does not necessarily mean that funds will be available for the eventual replacement of fixed assets.
3. Cost less depreciation is unlikely to equal market value.
4. It is the accruals concept, not the prudence concept, which underlies the charging of depreciation as an expense in the profit and loss account.

 

This work is licensed under a Creative Commons Attribution 4.0 International License.