Chapter 10: Non-current assets and
depreciation
1 A company purchases energy-efficient machinery with a list price of £130,000. The
company pays £100,000 in cash and trades in an old machine, which has a carrying
amount of £32,000. It is the company's policy to depreciate machines at the rate of
10% per annum on cost.
What is the carrying amount of the new energy-efficient machinery after one year?
A £88,200
B £117,000
C £90,000
D £61,200 LO 1d; 3a, c
2 A company purchases a machine for £20,000 on the first day of the reporting period.
After incurring transportation costs of £1,000 and spending £2,000 on installation, the
machine runs satisfactorily for several months before it breaks down and costs £800 to
repair. Depreciation is charged at 20% per annum.
At what carrying amount will the machine be shown in the company's statement of
financial position at the end of the reporting period?
A £19,040
B £18,400
C £16,800
D £16,000 LO 1d; 3a, c
3 A company buys a machine on 31 August 20X3 for £36,000. It has an expected life of
seven years and an estimated residual value of £2,400. On 30 June 20X7 the machine is
disposed of for £12,000. The company's year end is 31 December. Its accounting policy
is to charge depreciation using the straight-line method.
Calculate the loss on disposal of the machine which will appear in the statement of
profit or loss for the year ended 31 December 20X7.
A £4,286
B £4,800
C £5,600
D £9,600 LO 1d; 3a, c
4 A sole trader purchased an electric delivery van on 1 October 20X7 for a total cost of
£20,000 by paying £16,000 cash and trading in an old van. The old van had cost
£18,000 and the related accumulated depreciation was £12,200. The £16,000 cash paid
for the new electric van has been correctly recorded as DR Motor vehicles and CR Cash
at bank. No other accounting has taken place.
What is the journal entry to record the loss on disposal of the old van for the year ended
31 December 20X7?
A DR Accumulated depreciation £12,200; DR Loss on disposal £1,800;
CR Motor vehicles £14,000
B DR Motor vehicles £14,000; CR Accumulated depreciation £12,200;
CR Loss on disposal £1,800
C DR Loss on disposal £2,000; CR Motor vehicles £2,000
D DR Motor vehicles £2,000; CR Loss on disposal £2,000 LO 1d; 2c; 3a, c
5 Vernon, a sole trader, purchased some new equipment on 1 April 20X7 for £8,000. The
scrap value of the new equipment in five years' time is estimated to be £800. Vernon
charges depreciation monthly on the straight-line basis.
What should the depreciation charge for the equipment be in the year to
30 September 20X7?
A £720
B £1,440
C £1,080
D £1,600 LO 1d; 3a, c
6 An asset register showed a total carrying amount of £81,770. A non-current asset
costing £12,000 had been sold for £3,000, making a loss on disposal of £1,600. No
entries had been made in the asset register for this disposal.
The correct balance on the asset register is:
A £86,370
B £69,770
C £78,770
D £77,170 LO 1d; 3a, c
7 Windsor plc calculated its draft profit for the year to 31 December 20X2 as £184,800. It
later discovered that a repairs and maintenance expense of £12,000 on 30 June 20X2
relating to buildings repairs was incorrectly capitalised. Buildings are depreciated
monthly over
10 years on the straight-line basis.
What is Windsor plc's profit for the year after adjusting for this error?
A £173,400
B £196,200
C £174,000
D £194,800 LO 1d; 2a; 3a, c
8 A company's plant and machinery ledger account for the 12-month reporting period
ended 30 September 20X7 was as follows:
PLANT AND MACHINERY – COST
20X6 £ 20X7 £
1 Oct Balance b/d 167,900 1 Jun Disposal account –
cost of asset sold 24,000
1 Dec Cash at bank – 30 Sep Balance c/d 155,900
addition 12,000
179,900 179,900
The company's policy is to charge depreciation monthly at 20% per year on the straight-
line basis.
What is the journal entry to record the depreciation charge for the reporting period
ended 30 September 20X7?
A DR Depreciation expense £33,980; CR Accumulated depreciation £33,980
B DR Accumulated depreciation £33,980; CR Depreciation expense £33,980
C DR Depreciation expense £31,180; CR Accumulated depreciation £31,180
D DR Accumulated depreciation £28,780; CR Depreciation expense £28,780
LO 1d; 2a; 3a, c
9 A business' statement of profit or loss for the year ended 31 December 20X4 showed a
profit for the year of £101,400. It was later found that £20,000 paid for the installation
of air purification filters on 1 January 20X4 had been debited to the administrative
expenses account. The filters are expected to require replacing after four years.
What is the profit for the year after adjusting for this error?
A £86,400
B £121,400
C £116,400
D £96,400 LO 1d; 2a; 3a, c
10 A company entered into a lease contract for some new low-carbon equipment and
recognised a right of use asset of £64,000. The lease contract was for eight years and
the equipment had an expected useful life of eight years.
The equipment was depreciated monthly using the straight-line method for two years.
The company has now decided to change the depreciation method to reducing balance
at 30%.
The annual depreciation for the first year under the new method will be:
A £8,000
B £14,400
C £19,200
D £9,408 LO 1d; 3a, c
11 Argonaut Ltd purchased a machine for £63,000 on 1 January 20X5. It has no residual
value and an estimated useful life of seven years. It is depreciated using the straight-line
method. On 31 December 20X8, the company carried out an impairment review and
determined that the recoverable amount is £24,000.
What amount will be charged to profit or loss in respect of the machine in the year
ended 31 December 20X8?
A £3,000
B £9,000
C £12,000
D £39,000 LO 1d; 3a, c
12 A company buys a machine for £10,000. It has an estimated residual value of £500, a
useful life of ten years and the company depreciates the asset using the straight-line
method.
After four years the company decides that the asset has no residual value.
The depreciation charge for the fifth year will be:
A £1,033
B £1,000
C £967
D £950 LO 1d; 3a, c
13 On 1 June 20X8, Yogi's business traded in a car which it had bought on 1 June 20X6 for
£6,000. The business had been depreciating the car using the reducing balance method
at the rate of 50% per annum. The new car cost £12,200 and Yogi paid the garage the
balance of £11,800 via electronic transfer. Yogi's year end is 31 May.
What was the profit or loss on the sale of the old car?
A £2,600 loss
B £1,500 loss
C £1,100 loss
D £400 profit LO 1d; 3a, c
14 Hollis bought a van for his business on 30 June 20X1 for £13,750, including £150 for a
car tax licence. Hollis depreciates motor vehicles at 20% per annum on cost, charging
depreciation on a monthly basis. His year end is 31 December.
On 1 January 20X4, Hollis traded in the van for a new one which runs on bio-fuel,
receiving a part-exchange allowance of £7,250.
What was the profit on disposal of the van?
A £375
B £450
C £1,750
D £1,810 LO 1d; 3a, c
15 Santa plc acquired a new building on 1 January 20X6, and incurred the following further
costs in relation to this building over the next year.
(1) Costs of initial adaptation of the building
(2) Legal costs relating to purchase
(3) Monthly cleaning contract
(4) Office furniture
Which of these costs should be included in the cost of the building in the company's
statement of financial position at 31 December 20X6?
A (1) and (2) only
B (2) and (3) only
C (3) and (4) only
D (1) and (4) only LO 1d; 3a, c
16 Caron depreciates non-current assets monthly on the straight-line basis over their useful
life. Caron bought a machine on 1 January 20X5 for £11,000 with a residual value of
£1,000 and an estimated useful life of four years. On 1 January 20X7 Caron revised the
machine's total useful life to six years but estimated that at the end of that time it would
have no residual value.
What was the depreciation charge for the year to 31 December 20X7?
A £1,000
B £1,280
C £1,500
D £3,000 LO 1d; 3a, c
17 On 31 December 20X3, Mustafa's financial statements included a machine that cost
£200,000 and accumulated depreciation of £95,600. At that date, Mustafa tested the
asset for impairment and found that its recoverable amount was £106,000.
What is the carrying amount of the machine to be included in the statement of financial
position at 31 December 20X3?
A £95,600
B £104,400
C £106,000
D £200,000 LO 1d; 3a, c
18 Which of the following describes why depreciation is charged on non-current assets?
A To ensure that the statement of financial position value equates to market value
B To ensure that there are enough funds available to replace the asset
C To ensure that the asset has no value when it is disposed of
D To spread the cost of the asset over its useful life LO 1d; 3a, c
19 Samech purchased a new car, giving his old car in part exchange. The bookkeeper
recorded the following entries.
DR Motor vehicles – Total price of new car
CR Cash – Cash paid for new car
CR Disposals – Part exchange value
DR Disposals – Original cost of old car
CR Motor vehicles – Original cost of old car
No other entries were made.
Which two of the following entries must be made in addition to the above?
A DR Cash at bank account with the part exchange value
B CR Accumulated depreciation account with the accumulated depreciation of the old
car
C DR Accumulated depreciation account with the accumulated depreciation of the old
car
D CR Disposals account with the accumulated depreciation of the old car
E DR Disposals account with the accumulated depreciation of the old car
LO 1d; 2c; 3a, c
20 The cost of a business's non-current assets is £24,000. The directors have to choose
between charging depreciation at 10% per annum using the straight-line method and
charging depreciation at 10% per annum using the reducing balance method.
How much greater will the total profits of the business be over three years if the
reducing balance method rather than the straight-line method is adopted?
A £669
B £696
C £966
D £969 LO 2a; 3a, c
21 Frankie is a sole trader. In the current year, Frankie has purchased an expensive item of
equipment which will last for many years. This will be treated as a non-current asset in
the financial statements.
Which of the following statements provides the best explanation for this treatment of
the equipment?
A A large sum of money was paid for it
B It ensures that profits are not unfairly reduced in the year the equipment was
purchased
C Its use will generate income for the business in the future
D The treatment is consistent with that used by similar businesses LO 1d; 3a, c
22 Why is depreciation charged on non-current assets?
A To ensure that there are funds available to replace the assets
B To spread the cost of the assets over their estimated useful lives
C To comply with the concept of materiality
D To show the assets at market value in the statement of financial position
LO 1d; 3a, b, c
23 The accounting concept or characteristic that underlies the fact that non-current assets
are depreciated over their useful lives is:
A going concern
B fair presentation
C accruals
D materiality LO 1d; 3a, b, c
24 Yves purchased equipment on 1 July 20X4 for £22,000. The payment for the equipment
was correctly entered in the cash at bank account but was accounted for as a repairs
and maintenance expense.
Yves charges depreciation on the straight-line basis at 25% per year, calculated monthly
with depreciation charged in the month of purchase but not in the month of sale, and
assuming no scrap value at the end of the life of the asset.
How will Yves's profit for the year ended 30 September 20X4 be affected by the error?
A Understated by £16,500
B Understated by £20,625
C Understated by £22,000
D Overstated by £1,375 LO 2a; 3a, c
25 Evans Co purchased a machine with an estimated useful life of 10 years for £76,000 on
30 September 20X5. The machine had an estimated residual value of £16,000.
What are the ledger entries to record the depreciation charge for the machine in the
year ended 30 September 20X8?
A DEBIT Depreciation expense £6,000
CREDIT Accumulated depreciation £6,000
B DEBIT Depreciation expense £6,000
DEBIT Non-current assets £12,000
CREDIT Accumulated depreciation £18,000
C DEBIT Accumulated depreciation£6,000
CREDIT Depreciation expense £6,000
D DEBIT Accumulated depreciation£18,000
CREDIT Non-current assets £18,000 LO 1d; 2a; 3a, c
26 On 1 January 20X5, a company purchased a new machine.
The company has capitalised the following costs included on the purchase invoice:
£
Cost of machine 48,000
Delivery to factory 400
Cost of training staff to operate the machine 800
49,200
Modifications to the factory building costing £2,200 were incurred to enable the
machine to be installed and have been written off to administrative expenses.
Depreciation at 20% on the straight-line basis has been calculated for the year ended 31
December 20X5. Draft profit for the year, before any corrections in respect of the
machine, has been calculated as £42,600.
What is the correct profit for the year after making any necessary corrections in respect
of the machine?
A £44,360
B £44,800
C £44,000
D £43,720 LO 2a
27 During the year ended 31 July 20X1, Feltz Co sold equipment which cost £70,000 for
£25,000 on which it made a loss of £5,000. The proceeds on sale have been correctly
recorded in cash at bank but the other side of the transaction has been recorded in the
suspense account.
What is the correct journal entry to record the disposal of the equipment in the year
ended 31 July 20X1?
A DR Suspense account £25,000; DR Loss on disposal £5,000; CR Equipment cost
£30,000
B DR Suspense account £25,000; DR Loss on disposal £5,000;
DR Accumulated depreciation £40,000; CR Equipment cost £70,000
C DR Equipment cost £30,000; CR Suspense account £25,000; CR Loss on disposal
£5,000
D DR Equipment cost £70,000; CR Suspense account £25,000;
CR Loss on disposal £5,000; CR Accumulated depreciation £40,000
LO 1d; 2a; 3a, c
28 Rose has a machine which cost £90,000 and has a carrying amount of £62,000 on
1 September 20X7. It is being depreciated at 25% per annum on the reducing balance
basis. On 31 August 20X8, Rose performed an impairment review and concluded that
the recoverable amount was £35,000.
What is the impairment loss in respect of the machine at 31 August 20X8?
A £27,000
B £11,500
C £55,000
D £Nil LO 1d
29 Clementine Co operates from a factory and warehouse on the outskirts of large city
centre. The directors are considering whether an impairment review is necessary. They
have identified the following matters relevant to the factory and warehouse but are
unsure whether they are indicators of impairment:
(1) The company has changed the range of products that it manufactures in the
factory. The new products are expected to generate increased benefit for the
company.
(2) The warehouse suffered damage during adverse weather which has not been fully
rectified.
(3) Interest rates have recently increased and the directors expect this will have a
negative impact on sales of Clementine Co's product.
Which of the above are indicators of impairment?
A (1) only
B (2) only
C (2) and (3) only
D (1), (2) and (3) LO 1d
30 Emery purchases a fishing licence on 1 January 20X5 which will allow them to catch fish
in protected seas for a period of five years. Emery paid £15,000 to purchase the licence
and incurred £2,000 in legal fees associated with negotiating the purchase of the
licence. Emery incurred general overheads of £500 during the negotiation period. Emery
would otherwise have spent their time elsewhere in the business. The licence has nil
residual value and Emery wishes to use the straight-line method of amortisation.
What is the carrying amount of the fishing licence at 31 December 20X5?
A £nil (the licence cannot be capitalised)
B £17,500
C £13,600
D £14,000 LO 1d; 3a, c
