Name:

ASSIGNMENT 2
Each OTQ worth 2 marks and each case based questions worth 10 marks in total.

NON-CURRENT ASSETS (inc. HfS), BORROWING COST. IMPAIRMENT AND GOVERNMENT GRANTS

1. Which of the following is NOT an indicator of impairment?

A Advances in the technological environment in which an asset is employed have an adverse impact on its
future use
B An increase in interest rates which increases the discount rate an entity uses
C The carrying amount of an entity’s net assets is higher than the entity’s number of shares in issue
multiplied by its share price
D The estimated net realisable value of inventory has been reduced due to fire damage although this value
is greater than its carrying amount
(Dec 14)

2. Which of the following statements relating to intangible assets is true?

A All intangible assets must be carried at amortised cost or at an impaired amount; they cannot be
revalued upwards
B The development of a new process which is not expected to increase sales revenues may still be
recognised as an intangible asset
C Expenditure on the prototype of a new engine cannot be classified as an intangible asset because the
prototype has been assembled and has physical substance
D Impairment losses for a cash generating unit are first applied to goodwill and then to other intangible
assets before being applied to tangible assets
(June 15)

3. Metric owns an item of plant which has a carrying amount of $248,000 as at 1 April 2014. It is being
depreciated at 12½% per annum on a reducing balance basis.
The plant is used to manufacture a specific product which has been suffering a slow decline in sales.
Metric has estimated that the plant will be retired from use on 31 March 2017. The estimated net cash
flows from the use of the plant and their present values are:

Net cash flows Present values

$ $
Year to 31 March 2015 120,000 109,200
Year to 31 March 2016 80,000 66,400
Year to 31 March 2017 52,000 39,000
–––––––– ––––––––
252,000 214,600
–––––––– ––––––––
On 1 April 2015, Metric had an alternative offer from a rival to purchase the plant for $200,000.
At what value should the plant appear in Metric’s statement of financial position as at 31 March
2015?
A $248,000
B $217,000
C $214,600
D $200,000
(June 15)
4. Tibet acquired a new office building on 1 October 2014. Its initial carrying amount consisted of:
$’000
Land 2,000
Building structure 10,000
Air conditioning system 4,000
–––––––
16,000
–––––––
The estimated lives of the building structure and air conditioning system are 25 years and 10 years
respectively. When the air conditioning system is due for replacement, it is estimated that the old system
will be dismantled and sold for $500,000. Depreciation is time apportioned where appropriate.
At what amount will the office building be shown in Tibet’s statement of financial position as at 31
March 2015?
$’000
A 15,625
B 15,250
C 15,585
D 15,600
(June 15)

5. During 20X4, Bloop incurred expenditure on two projects.

Project 1 costs relate to the initial design work on a new product which the company expects to develop
for production over 20X5 and 20X6. At the beginning of the year, the company spent $2m on design
equipment (which has an expected life of four years) and $1m on related salaries and materials.
Project 2 involves the testing of a new product which will be introduced to the market in 20X5 and is
expected to generate profits over a four-year period. The company spent $4m on salaries and materials.
What is the total charge to profit or loss in 20X4 for the two projects in accordance with IFRS?
A $5·5m
B $3m
C $1·5m
D $1m
(Dec15)

6. Pink Co is a company which is not part of a group. It has the following intangible assets:
(1) A licence to distribute a particular product. This was purchased on 1 January 20X3 for $100,000 and is
for 5 years.
(2) The right to use a trademark on its products for 10 years for which Pink Co paid $40,000 on 1 January
20X4. Pink Co also spent $30,000 on the same date constructing a concrete representation of the
trademark for display at its premises which is expected to last for 15 years.
(3) A customer list which has been independently valued at $15,000 at 31 December 20X4. Pink Co is
negotiating with several companies interested in buying the customer list.

What carrying amount should appear in Pink Co's statement of financial position for intangible
assets as at 31 December 20X4?
A $96,000
B $124,000
C $111,000
D $139,000
(March 16)

7. On 1 October 20X1, Bash Co borrowed $6m for a term of one year, exclusively to finance the construction
of a new piece of production equipment. The interest rate on the loan is 6% and is payable on maturity of
the loan. The construction commenced on 1 November 20X1 but no construction took place between 1
 December 20X1 to 31 January 20X2 due to employees taking industrial action. The asset was available for
use on 30 September 20X2 having a construction cost of $6m.
What is the carrying amount of the production equipment in Bash Co’s statement of financial
position as at 30 September 20X2?
A $5,016,000
B $6,270,000
C $6,330,000
D $6,360,000
(Sep 16)

8. An entity has decided to adopt the revaluation model for the first time from 31 December 20X6.
At that date, details relating to two properties were as follows:
Asset at 31 December 20X6: Carrying amount Fair value
($'000) ($'000)
Head Office 10,200 10,800
Factory 7,875 7,500
What is the total gain to be recorded in the revaluation surplus at 31 December 20X6?
A $0
B $225,000
C $375,000
D $600,000 (March 17)

The following scenario relates to questions 9–13.

Aphrodite Co has a year end of 31 December and operates a factory which makes computer chips for
mobile phones. It purchased a machine on 1 July 20X3 for $80,000 which had a useful life of ten years and
is depreciated on the straight-line basis, time apportioned in the years of acquisition and disposal. The
machine was revalued to $81,000 on 1 July 20X4. There was no change to its useful life at that date.
A fire at the factory on 1 October 20X6 damaged the machine leaving it with a lower operating capacity.
The accountant considers that Aphrodite Co will need to recognise an impairment loss in relation to this
damage. The accountant has ascertained the following information at 1 October 20X6:
(1) The carrying amount of the machine is $60,750.
(2) An equivalent new machine would cost $90,000.
(3) The machine could be sold in its current condition for a gross amount of $45,000. Dismantling costs
would amount to $2,000.
(4) In its current condition, the machine could operate for three more years which gives it a value in use
figure of $38,685.

9. In accordance with IAS 16 Property, Plant and Equipment, what is the depreciation charged to
Aphrodite Co’s profit or loss in respect of the machine for the year ended 31 December 20X4?
A $9,000
B $8,000
C $8,263
D $8,500

10. IAS 36 Impairment of Assets contains a number of examples of internal and external events which may
indicate the impairment of an asset.
In accordance with IAS 36, which of the following would definitely NOT be an indicator of the
potential impairment of an asset (or group of assets)?
A An unexpected fall in the market value of one or more assets
B Adverse changes in the economic performance of one or more assets
C A significant change in the technological environment in which an asset is employed making its software
effectively obsolete
D The carrying amount of an entity’s net assets being below the entity’s market capitalisation
11. What is the total impairment loss associated with Aphrodite Co’s machine at 1 October 20X6?
A $nil
B $17,750
C $22,065
D $15,750

12. The accountant has decided that it is too difficult to reliably attribute cash flows to this one machine and
that it would be more accurate to calculate the impairment on the basis of the factory as a cash-generating
unit.
In accordance with IAS 36, which of the following is TRUE regarding cash generating units?
A A cash-generating unit to which goodwill has been allocated should be tested for impairment every five
years
B A cash-generating unit must be a subsidiary of the parent
C There is no need to consistently identify cash-generating units based on the same types of asset from
period to period
D A cash-generating unit is the smallest identifiable group of assets for which independent cash flows can
be identified

13. On 1 July 20X7, it is discovered that the damage to the machine is worse than originally thought. The
machine is now considered to be worthless and the recoverable amount of the factory as a cash-
generating unit is estimated to be $950,000.
At 1 July 20X7, the cash-generating unit comprises the following assets:
$’000
Building 500
Plant and equipment
(including the damaged machine at a carrying amount of $35,000) 335
Goodwill 85
Net current assets (at recoverable amount) 250
––––––
1,170
––––––
In accordance with IAS 36, what will be the carrying amount of Aphrodite Co’s plant and
equipment when the impairment loss has been allocated to the cash-generating unit?
A $262,500
B $300,000
C $237,288
D $280,838
(Sep 16)

14. At 1 April 2014, Tilly owned a property with a carrying amount of $800,000 which had a remaining
estimated life of 16 years. The property had not been revalued. On 1 October 2014, Tilly decided to sell the
property and correctly classified it as being ‘held-for-sale’. A property agent reported that the property’s
fair value less costs to sell at 1 October 2014 was expected to be $790,500 which had not changed at 31
March 2015.
What should be the carrying amount of the property in Tilly’s statement of financial position as at
31 March 2015?
A $775,000
B $790,500
C $765,000
D $750,000
(June 15)
15. Which of the following statements about IAS 20 Accounting for Government Grants and Disclosure
of Government Assistance are true?
(i) A government grant related to the purchase of an asset must be deducted from the carrying amount of
the asset in the statement of financial position
(ii) A government grant related to the purchase of an asset should be recognised in profit or loss over the
life of the asset
(iii) Free marketing advice provided by a government department is excluded from the definition of
government grants
(iv) Any required repayment of a government grant received in an earlier reporting period is treated as
prior period adjustment
A (i) and (ii)
B (ii) and (iii)
C (ii) and (iv)
D (iii) and (iv)
(June 15)
16. On 1 August 20X4, Flash Co received a $12 million training grant from the government on condition that it
employed ten graduates from local universities in each of the next three years. If the condition were to be
broken, the full amount of the grant would be repayable. On the date the grant was received it was
considered virtually certain that the condition would be met.
However, during August 20X6, it became apparent that the economy was entering a severe recession. In
that month Flash Co decided it would not employ any further graduates for the foreseeable future.
By how much will Flash Co's profit for the year ended 31 July 20X7 be reduced as a result of
the repayment of the grant?
A It would not be reduced
B $4 million
C $8 million
D $12 million
(March 16)
17. On 1 January 20X6, Gardenbugs Co received a $30,000 government grant relating to equipment which cost
$90,000 and had a useful life of six years. The grant was netted off against the cost of the equipment. On 1
January 20X7, when the equipment had a carrying amount of $50,000, its use was changed so that it was
no longer being used in accordance with the grant. This meant that the grant needed to be repaid in full
but by 31 December 20X7, this had not yet been done.
Which journal entry is required to reflect the correct accounting treatment of the government
grant and the equipment in the financial statements of Gardenbugs Co for the year ended 31
December 20X7?
A Dr Property, plant and equipment $10,000
Dr Depreciation expense $20,000
Cr Liability $30,000
B Dr Property, plant and equipment $15,000
Dr Depreciation expense $15,000
Cr Liability $30,000
C Dr Property, plant and equipment $10,000
Dr Depreciation expense $15,000
Dr Retained earnings $5,000
Cr Liability $30,000
D Dr Property, plant and equipment $20,000
Dr Depreciation expense $10,000
Cr Liability $30,000
(Sep 16)