MFRS 116

Which of the following costs would be classified as capital expenditure for a restaurant business?

• Replacement for a broken window

• Repainting the restaurant

• Illuminated business signboard

• Cleaning of the kitchen floors

Answer explanation

Illuminated business signboard will provide long-term benefits for the business, therefore it is a non-current asset i.e. a capital expenditure.

The others costs are repair and maintenance i.e. revenue expenditure.

JT used its own staff, assisted by contractors when required, to construct a new warehouse for its own use.

Which ONE of the following costs would NOT be included in attributable costs of the warehouse?

• Clearance of the site prior to work commencing

• Professional surveyors’ fees for managing the construction work

• Own staff wages for time spent working on the construction

• Allocation of admin costs based on percentage of time spent on the construction

Answer explanation

Admin costs are not directly incurred cost as a results of carrying out the construction. All other costs would not have been incurred without the related asset being built.

YSL bought a new printing machine. The cost of the machine was $80,000. The installation costs were $5,000 and the employees received training on how to use the machine, at a cost of $2,000. Before using the machine to print customers' orders, a test was undertaken and the paper and ink cost $1,000.

What should be the cost of the machine in the company's statement of financial position?

• $80,000

• $85,000

• $86,000

• $88,000

Answer explanation

Cost of machine $80,000 + Installation $5,000 + Testing $1,000 = Total $86,000. Staff training cost cannot be capitalised.

Which of the following statements is correct?

Statement 1: If the revaluation model is used for PPE, revaluations must subsequently be made with sufficient regularity to ensure carrying amount does not differ materially from the fair value at each reporting date.

Statement 2: When an item of property, plant and equipment is revalued, there is no requirement that the entire class of assets to which the item belongs must be revalued.

• Statement 1 only is correct

• Statement 2 only is correct

• Both statements are correct

• Neither statement is correct

Answer explanation

MFRS 116 requires whole class of asset to be revalued and the fair value to be updated regularly - should entity adopts the revaluation model.

On 1 July 20X4, ECG opened a chemical reprocessing plant. The plant was due to be active for five years until 30 June 20X9, when it would be decommissioned. At 1 July 20X4, the costs of decommissioning the plant were estimated to be $4 million in 5 years time. The company considers that a discount rate of 12% is appropriate for the calculation of a present value, and the discount factor at 12% for Year 5 is 0.567.

What is the total charge to the statement of profit or loss (depreciation and finance charge) in respect of the decommissioning for the year ended 30 June 20X5?

• $453,600

• $725,760

• $800,000

• $2,268,000

Answer explanation

Decommissioning costs = $4m x 0.567 = $2.268m

Finance charge = $2.268m x 12% = $272,160

Depreciation $2.268m / 5 years = $453,600

Total charge: $272,160 + $453,600 = $725,760

Demolition Co purchases a machine for $15,000.

After incurring transportation costs of $1,300 and spending $2,500 on installing the machine the company are disappointed when it breaks down and costs $600 to repair. Depreciation is charged at 10% per annum with a full year's charge in the year of acquisition.

What is the net book value of the machine that will be shown in Demolition's statement of financial position at the year end?

• $18800

• $16920

• $19400

• $17460

Answer explanation

Explanation

Cost (15,000 + 1,300 + 2,500) 18,800

Depreciation (10% x 18,800) (1,880)

NBV 16,920

John & Co sold an item of used machinery at $5000.

What will be the effect on financial statements?

1. Sales will increase by $5000

2. Profit will increase by $5000

3. Non-Current assets will decrease by $5000

• 1 & 2

• 1 & 3

• 3 only

• 1, 2 & 3

Answer explanation

sold items at $5000, not making that profit! sale of assets is not sales revenues. hence, 1 & 2 will not be the effect on the financial statement.

YY buy an asset on 1 March 20X1 with the following costs:

1) Purchase Price 1,000

2) Legal fees 500

3) Admin costs in negotiating the fee 100

4) Future dismantling cost of 200 in 3 years time

Discount rate is 10%

How much is the cost of the asset on 1 March 20X1?

• $1500

• $1650

• $1750

• $1600

Answer explanation

Explanation

Purchase Price 1,000 + Legal fees 500 + Future dismantling cost of 150 (200 / 1.1 / 1.1 / 1.1) = 1,650

Admin. costs are expensed and not capitalised, therefore not added to the cost of the assets.

A business sells a non-current asset for $55,000. The asset originally cost $100,000 and accumulated depreciation is $45,000. What is the profit or loss on disposal?

• $10,000 loss

• $10,000 profit

• No gain or loss

Answer explanation

NBV = Selling Price = No gain or loss

A company buys a machine on 31 August 20X0 for $22,000. It has an expected life of seven years and an estimated residual value of $1,000. On 30 June 20X4 the machine is disposed of for $9,000. The company's year end is 31 December. Its accounting policy is to charge depreciation using the straight line method with a proportionate charge in the years of acquisition and disposal.

What is the profit or loss on disposal of the machine which will appear in the statement of profit or loss for the year ended 31 December 20X4?

• No gain or loss

• $1,500 gain

• $1,500 loss

Answer explanation

The depreciable amount is $(22,000 – 1,000) = $21,000. This is to be written off over seven years (or 84 months). The monthly depreciation charge is therefore $250.

Cost of asset 22,000

Accumulated depreciation (46 months × $250) 11,500

Net book value at date of disposal 10,500

Proceeds on disposal 9,000

Loss on disposal 1,500