AIS16Exercises SC

Exercises
IAS-16
1. Example of a Change in Useful Life and Residual Value:
Mind Changing Inc. owns an asset with an original cost of $200,000. On acquisition,
management determined that the useful life was 10 years and the residual value would be
$20,000. The asset is now 8 years old, and during this time there have been no revisions to the
assessed residual value. At the end of year 8, management has reviewed the useful life and
residual value and has determined that the useful life can be extended to 12 years in view of the
maintenance program adopted by the company. As a result, the residual value will reduce to
$10,000.
How this will affect the books of accounts?
Mind Changing Inc. owns an asset with an original cost of $200,000. On acquisition,
management determined that the useful life was 10 years and the residual value would be
$20,000. The asset is now 8 years old, and during this time there have been no revisions to the
assessed residual value. At the end of year 8, management has reviewed the useful life and
residual value and has determined that the useful life can be extended to 12 years in view of the
maintenance program adopted by the company. As a result, the residual value will reduce to
$10,000.
2. Healthy Inc. bought a private jet for the use of its top-ranking officials. The cost of the private
jet is $15 million and can be depreciated either using a composite useful life or useful lives of its
major components. It is expected to be used over a period of 7 years. The engine of the jet has a
useful life of 5 years. The private jet’s tires are replaced every 2 years. The private jet will be
depreciated using the straight-line method over:
(a) 7 years composite useful life.
(b) 5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life
applied to the balance cost of the jet.
(c) 2 years useful life based on conservatism (the lowest useful life of all the parts of the jet).
(d) 5 years useful life based on a simple average of the useful lives of all major components
of the jet.
3. An entity imported machinery to install in its new factory premises before year-end. However,
due to circumstances beyond its control, the machinery was delayed by a few months but reached
the factory premises before year-end. While this was happening, the entity learned from the bank
that it was being charged interest on the loan it had taken to fund the cost of the plant. What is
the proper treatment of freight and interest expense under IAS 16?
(a) Both expenses should be capitalized.
(b) Interest may be capitalized but freight should be expensed.
(c) Freight charges should be capitalized but interest cannot be capitalized under these
circumstances.
(d) Both expenses should be expensed.
4. XYZ Inc. owns a fleet of over 100 cars and 20 ships. It operates in a capital-intensive industry
and thus has significant other property, plant, and equipment that it carries in its books. It
decided to revalue its property, plant, and equipment. The company’s accountant has suggested
the alternatives that follow. Which one of the options should XYZ Inc. select in order to be in
line with the provisions of IAS 16?
(a) Revalue only one-half of each class of property, plant, and equipment, as that method is
less cumbersome and easy compared to revaluing all assets together.
(b) Revalue an entire class of property, plant, and equipment.
(c) Revalue one ship at a time, as it is easier than revaluing all ships together.
(d) Since assets are being revalued regularly, there is no need to depreciate.
5. An entity installed a new production facility and incurred a number of expenses at the point of
installation. The entity’s accountant is arguing that most expenses do not qualify for
capitalization. Included in those expenses are initial operating losses. These should be
(a) Deferred and amortized over a reasonable period of time.
(b) Expensed and charged to the income statement.
(c) Capitalized as part of the cost of the plant as a directly attributable cost.
(d) Taken to retained earnings since it is unreasonable to present it as part of the current year’s
income statement.
6. Bubble Company acquired equipment on January 1, 1995 for $200,000 with an estimated life
of 10 years. Residual value is estimated at $20,000. On January 1, 2000, the company spent
$40,000 on a major overhaul. As a result the useful life is expected to extend an additional three
years. Salvage value remains unchanged.
Requirement: Compute the depreciation for year ended December 31, 2000.
7. ABC Company acquired machinery on January 1, 2000 for $600,000 with an estimated life of
8 years. Residual value is estimated at $30,000. On January 1, 2005, the company spent $60,000
on a major overhaul. As a result the useful life is expected to extend an additional four years.
Salvage value remains unchanged.
Requirement: Compute the depreciation for year ended December 31, 2005.
8. Following information are collected from the books of Tornado Limited on December 31,
2005.
Equipment at cost $300,000

Less: Accumulated depreciation 120,000
$180,000
Rate of depreciation 20% on cost
9. Blue Chips Ltd. exchanged its old equipment for new equipment. The old equipment
originally cost $36,000 and accumulated depreciation at the date of exchange was $24,000. The
list price of the new equipment was $55,000. The agreed value of old equipment was $20,000
and balance was paid in cash.
Requirement: Pass journal entry to record the exchange.
10. In the aim of producing its products, the firm Brooks uses very complex installations that
have to be regularly stopped to undergo “heavy maintenance”. On 01/02/2010, Brooks puts new
machinery into service, with an entry value of €1,600,000. Its utility period is estimated to be 15
years. This installation shall be stopped during one month every 3 years for the heavy
maintenance. Using the reparations of other machines as examples, the cost of the first
maintenance is estimated to be €100,000.
The planned realization of an important maintenance shall not be booked separately in Brooks’
balance sheet. Within the installation valued at €1,600,000, there may be significant components
that have a utility life shorter than other parts of the installation.
11. Prepare the depreciation schedule from the following information:
Assets Date of Purchase Cost Depreciation Rate

Machinery 1ST January 2015 $900,000 10%
Building 1ST January 2014 $20,00,000 20%
Vehicles 1ST January 2015 $800,000 15%
Company applies straight line method of depreciations for all of its assets.
On 1st January 2017, company purchased another building for $100,000.
Required: Prepare a depreciation schedule for the year ended 31st December 2017.

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Equipment at cost $300,000

How this will affect the books of accounts?

11. Prepare the depreciation schedule from the following information:

Assets Date of Purchase Cost Depreciation Rate

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