Chapter 5 : Quiz

Frank is registered for sales tax and he purchases some goods for resale. The invoice
shows the cost of goods as $750 including sales tax of 20%.
What debit entry should be made in the purchases ledger account?
A. $125
B. $600
C. $625
D. $750
The correct answer is C.
This is calculated as $750 × 100/120 = $625. The sales tax is calculated as 20/120 × $750 =
$125.

Susan is registered for sales tax and sells directly to business customers.
Which of the following would not need to be shown on her invoices to customers?
A. The amount of sales tax charged
B. Susan's business name and address
C. Invoice due date
D. Description of the goods sold
The correct answer is C.
Invoice due date is not generally required on VAT invoices.

Alan is registered for sales tax. His sales tax account shows that on 1 March 20X7 he owed
$13,569. For the month ending 31 March 20X7 he recorded output tax of $23,956 and input
tax of $18,725.
What is the balance on Alan's sales tax account at 31 March 20X7?
A. A.$18,800 debit
B. B.$18,800 credit
C. C.$8,338 debit
D. D.$8,338 credit
The correct answer is B.
Sales Tax Account

Input tax $18,725 b/d $13,569

c/d $18,800 Output tax $23,956

$37,525 $37,525

Which TWO of the following documents of a business are the tax authorities most
interested in?
 A. A.Sales Invoice
B. B.Sales Tax Return
C. C.Net Asset Register
D. D.List of Customer Receivables
The correct answers are A and B.
Although tax authorities may be interested in a wide array of information, they are most
concerned with sales and income as a basis for computing the sales tax.

Which of the following statements about output tax is correct?

A. A.It is sales tax charged on purchases from suppliers but can be reclaimed from the
tax authorities by registered taxpayers
B. B.It is charged on sales to customers and is a cost to the selling business cost to
businesses
C. C.It is charged on sales to customers but is not a cost to the selling business
D. D.It is sales tax charged on purchases from suppliers and may not be reclaimed
from the tax authorities
The correct answer is C.
Output tax is charged on sales to customers. It is a cost to customers rather than the selling
business, and the selling business is acting as a tax collector for the tax authorities.

Chapter 5 : practice

Kimi has recorded total net sales of $120,000 and total gross purchases of $96,000. Kimi
owed $3,300 to the tax authority at 1 October 20X8. Sales tax is charged at 20%.
1. What is the balance on Kimi's sales tax account at the quarter ended 31 December
20X8? $_______
The correct answer is $11,300.
$ $
Sales tax on purchases (96,000 ÷ 120) 16,00
× 20 0 Balance b/d 3,300
11,30 Sales tax on sales 20% ×
Balance c/d 0 120,000 24,000
27,30
0 27,300
Alan has recorded total net sales of $100,000 and total net purchases of $84,000. Alan was
owed $2,000 by the tax authority at 1 July 20X8. Sales tax is charged at 20%.
2. What is the balance on Alan's sales tax account at the quarter ended 30 September
20X8?
A. A.$1,200 Debit
B. B.$1,200 Credit
C. C.$5,200 Debit
D. D.$5,200 Credit
The correct answer is B.
$ $
Sales tax on sales (20% ×
2,000
Balance b/d 100,000) 20,000
Sales tax on purchases (84,000 ×
16,800
20%)
1,200
Balance c/d
20,000 20,000
Tutorial note:
$1,200 Debit - the correct balance but shown as a receivable rather than a payable balance.
$5,200 Credit - treated the opening sales tax receivable as a sales tax liability (2,000 +
20,000 − 16,800)
$5,200 Debit - treated the opening sales tax receivable as a sales tax liability (2,000 +
20,000 − 16,800) but classified the closing balance incorrectly as a receivable.

Wang is registered for sales tax. At 1 November 20X7 the amount owing to the local tax
authority was $4,800. During the year ended 31 October 20X8 he makes net sales of
$120,000 and gross purchases of $96,000. The sales tax rate applicable to Wang's business
is 20%.
3. What is the amount of sales tax due to the local tax authority at 31 October
20X8? $_____
The correct answer is $12,800.
$ $

Sales tax on purchases (96,000/120 × 16,000 b/d 4,800

20)

Sales tax on sales (120,000 × 24,000

20%)

c/d 12,800

28,800 28,800

Naima is registered for sales tax. She sells goods on credit of $80 net of sales tax. Sales tax
is charged at 22%.
4. Which of the following journals will record this sale?
A. A.DR Receivables $97.60, CR Sales $80, CR Sales tax control $17.60
B. B.DR Receivables $80, CR Sales $65.57 CR Sales tax control $14.43
C. C.CR Receivables $97.60, DR Sales $80, DR Sales tax control $17.60
D. D.CR Receivables $80, DR Sales $65.57, DR Sales tax control $14.43
The correct answer is A.
Being registered for sales tax means that Naima will be required to charge sales tax at 22%
on the value of her sales 22% × $80 = $17.60 must be added to the net sales figure and be
collected from the customer on behalf of the tax authority. DR Receivables with the gross
amount $97.60 (80 + 17.60), CR Sales with the net amount $80 and CR Sales tax with the
amount due to the tax authority $17.60.

Chen is registered for sales tax. At 1 March 20X7 the amount owed by the local tax authority
was $1,600. During the year ended 30 April 20X8 he makes gross sales of $150,000 and net
purchases of $78,000. The sales tax rate applicable to Chen's business is 20%.
5. What is the amount of sales tax due to the local tax authority at 30 April
20X8? $_____
The correct answer is $7,800.
b/d 1,600 Sales tax on sales (150,000/120 × 25,000
20)

Sales tax on purchases (78,000 × 15,600

20%)

c/d 7,800

25,000 25,000

Lisha is registered for sales tax. At 1 March 20X7 the amount owing to the local tax authority
was $2,700. During the year ended 30 April 20X8 she makes net sales of $100,000 and
gross sales returns of $6,000. Purchases net of sales tax were $88,000. The sales tax rate
applicable to Lisha's business is 20%.
6. What is the amount of sales tax due to the local tax authority at 30 April
20X8? $_____
The correct answer is $4,100.
Sales Tax Account

Sales tax on sales returns (6,000/120 1,000 b/d 2,700

× 20)

Sales tax on purchases (88,000/100 × 17,600 Sales tax on sales (100,000 × 20,000
20) 20%)

c/d 4,100

22,700 22,700
James registered his business for sales tax from the 1 April 20X2. At the end of his first
quarter he has gross sales of $23,895 and has made taxable gross purchases of $15,635.
The sales tax rate is 15%.
7. What is the balance on the sales tax account at the end of the first quarter?
A. A.$1,078 DR
B. B.$1,078 CR
C. C.1,253 DR
D. D.$1,253 CR
The correct answer is B.
Sales (Output tax) = 23,895 /1.15 × 0.15 = $3,117 CR
Purchases (Input tax) = 15,635/ 1.15 × 0.15 = $2,039 DR
Balance on account = 3,117 − 2,039 = $1,078 liability Cr

Sam has a debit balance on his sales tax account on 1 January 20X5 and a credit balance at
31 December 20X5.
8. Which of the following is true?
1 January 20X5 31 December 20X5

A. Owed to the tax authority Owed by the tax authority

B. Owed to the tax authority Owed to the tax authority

C. Owed by the tax authority Owed by the tax authority

D. Owed by the tax authority Owed to the tax authority

The correct answer is D.
As a debit balance suggests an amount owed to Sam and a credit balance suggests an
amount owed by Sam.

1 January 20X5 31 December

20X5

Owed to the tax Owed by the tax Because an amount owed by is debit and an amount
authority authority owed to is a credit so these are round the wrong way.

Owed to the tax Owed to the tax The amount of debit is owed by not to so this opening
authority authority balance is incorrect.

Owed by the tax Owed by the tax The closing balance is wrong as this suggests a
authority authority closing debit balance.

Cai is registered for sales tax. In the draft financial statements, all of the sales, cost of sales
and expenses have been included, incorrectly, gross of 20% sales tax.
Her draft figures are:

Sales revenue 582,120

Cost of sales and expenses (477,072)

9. What is the adjustment to Cai's draft profit to correct this error for sales tax?
A. A.$17,508 decrease.
B. B.$17,508 increase.
C. C.$21,010 decrease.
D. D.$21,010 increase.
The correct answer is A.
Revenue net = $582,120 × 100/120 = $485,100.
Correction:
DR Sales revenue ($582,120 − $485,100) = $97,020
CR Sales tax $97,020
Reduces profit.
Cost of sales and expenses net = $477,072 × 100/120 = $397,560
Correction:
DR Sales tax ($477,072 − $397,560) = $79,512
CR Cost of sales and expenses $79,512
Increases profit.
Net adjustment = $97,020 decrease − $79,512 increase = $17,508 decrease

Sales tax rates are determined by the local tax authorities of each country or state.
10. Which of the following is true when there is an increase in the sales tax rate in
relation to how it affects a business?
i. Sales of a business is affected adversely as the output tax charged on sales to
customers who are not sales tax registered will increase and customers will be
unwilling to purchase anymore items from the business.
ii. Cash flows may be affected as businesses may have to borrow or arrange for
overdraft if payment needs to be made to the authorities before trade customers
settle the amounts due.
iii. The accounting systems of the business will not be affected by the change in
sales tax
A. A.(i) only
B. B.(ii) only
C. C.(i) and (ii) only
D. D.(i), (ii) and (iii)
The correct answer is C.
Option (iii) is incorrect as the accounting system will have to be amended to reflect the
change in sales tax such as changing the tax rate to be printed on the sales invoice.
A sales tax return is required by tax authorities to be filled and filed by sales tax registered
businesses every month or quarter.
11. Which TWO of the following are components of a sales tax return?
A. A.Period to which the sales tax relates to
B. B.Details of each customer name in the Output section
C. C.Total Input Tax paid by the business
D. D.Total payments made to the tax authorities in the past
The correct answers are A and C.
Components of a sales tax return include the period the return relates to and the total input
tax paid during that period.

12. What main source of tax data is unlikely to be required by tax authorities?
A. A.Sales and purchase invoices
B. B.Payment and receipt documents
C. C.Going concern statement by directors
D. D.Statement of profit or loss
The correct answer is C.
It is most unlikely that tax authorities would be interested in the going concern statement as
that is unlikely to impact the tax computation.

13. Which TWO statements about sales tax is correct?

A. A.Business is not liable for any penalties if they pay for the tax the business has
calculated on time.
B. B.Business can choose to register as a sales tax collecting agent depending on
whether it wishes to reclaim input sales tax on purchases.
C. C.Sales tax may not be applied to every type of sale as they may be exempted
supplies depending on each local legislation.
D. D.Wages and salaries are outside the scope of sales tax and their services are
not liable for sales tax.
The correct answers are C and D.
Certain goods or services such as banking and educational services are exempted from
sales tax. Wages and salaries are outside the scope of sales tax as they do not inputs and
outputs.
Option A is incorrect as businesses may still need to pay penalties if they compute the
incorrect amount for sales tax. Option B is incorrect as businesses are required to register as
sales tax businesses if they pass a certain threshold as determined by tax authorities (eg: in
terms of revenue or number of employees)

14. Which of the following is the correct definition of taxable supplies for the purpose
of sales tax?
A. A.Supplies of goods but not services subject to sales tax
B. B.Supplies of services but not goods subject to sales tax
C. C.Supplies of goods and services subject to sales tax
D. D.Supplies of all goods and services regardless of whether they are subject to
sales tax
The correct answer is C.
This is the correct meaning of taxable supplies.
Supplies includes both goods and services, so A and B are incorrect.
Taxable supplies are supplies that are subject to sale tax, not all goods and services, so D is
incorrect.

Tax authorities specify what information is required on sales tax invoices.

15. Which of the following items are likely to be required?
i. A unique sequential number, identifying the invoice
ii. Analysis of amount payable by VAT rate
iii. Description and quantity of goods or services supplied
A. A.(i) only
B. B.(ii) only
C. C.(i) and (ii) only
D. D.(i), (ii) and (iii)
The correct answer is D.
All three items are likely to be required in most jurisdictions.
 A unique sequential number helps to ensure that all invoices have been accounted
for in the VAT return.
 Where there are different rates of VAT, it is important to show that the total VAT
payable has been calculated correctly by reference to these rates.
 A description of the goods and quantity supplied would enable the invoice to be
checked to ensure that the correct rates of VAT had been applied.

In Beeland, businesses whose taxable sales are less than $50,000 are not required to
register for sales tax, but may register for it voluntarily.
Last year, Alpha Co’s sales last year were $30,000. All of Alpha Co’s customers are
registered for sales tax.
16. Which of the following factors would be an advantage to Alpha Co of NOT
registering for sales tax?
i. Alpha Co would save time and administrative costs
ii. Alpha Co’s customers would enjoy a lower cost as no Sales tax would be added
to the invoice.
iii. Alpha Co would be able to reclaim sales tax on purchases
A. A.(i) only
B. B.(ii) only
C. C.(i) and (ii) only
D. D.(i), (ii) and (iii)
The correct answer is A.
Only statement (i) is correct.
Not registering for sales tax would save the burden of complying with the regulations (such a
filing returns), so (i) is correct.
Since all of Alpha Co’s customers are registered for sales tax, they would not save any cost
as a result of Alpha Co not registering for sales tax. If Alpha does not register for sales tax,
there would be no sales tax on Alpha Co’s invoices. If Alpha Co does register for sales tax,
then there will be sales tax, but Alpha Co’s customers would be able to claim it back as input
VAT. Whether or not Alpha Co registers for sales tax will not therefore affect the cost to
Alpha Co’s customers and statement (ii) is therefore incorrect.
Is Alpha Co does not register for sales tax, the company would not be able to claim back
input tax on invoices from its suppliers. Statement (iii) is therefore incorrect.
Harvinder is registered for sales tax. His customers and suppliers are also all registered for
sales tax. The tax authority has just increased the rate of sales tax from 18% to 20%.
17. Which of the following is/are TRUE for Harvinder as a result of the change in the
rate of sales tax?
1. His customers will each have a higher purchases figure in their statement of profit
or loss.
2. His sales figure will increase in his statement of profit or loss
3. His purchases figure will increase in his statement of profit or loss
4. His sales and purchases figures in the statement of profit or loss will be
unchanged.
A. A.1 and 4 only
B. B.2 and 3 only
C. C.1 only
D. D.4 only
The correct answer is D.
There has been an increase in the rate of sales tax during the year. Subsequently, all parties
will experience an increase in the gross amount they have to pay for goods and services
subject to sales tax.
However, sales and purchases are always recorded net of sales tax when those entities are
registered for sales tax. For example, if Harvinder sold goods to a credit customer for $100
(excluding sales tax) when the rate of sales tax is 18%, the sale would be recorded as
follows:
Dr. Trade
receivables $118
Cr. Sales $100
Cr. Sales tax $18
Following the increase in sales tax to 20%, the same sale of $100 will be recorded as
follows:
Dr. Trade
receivables $120
Cr. Sales $100
Cr. Sales tax $20
Therefore you can see that the amount recorded in sales remains unchanged. This is also
the case from a purchase perspective. Any sales tax on purchases would also be recorded
in the sales tax control account.
Options 1, 2 and 3 are not relevant as sales and purchases will be unaffected and the
correct answer is D.

Chapter 6 : Quiz

Which of the following would be classified as asset expenditure for a car dealership?
A. A.Repairs on office equipment
B. B.Insurance of business premises
C. C.Purchase of motor cars for resale
D. D.Purchase of a computer
The correct answer is D.
All the others are expenses.

Which of the following would NOT be included in the cost of a tangible non-current
asset?
A. A.Purchase price
B. B.Costs of installing the asset
C. C.Cost of insuring the asset
D. D.Cost of delivering the asset to the business
The correct answer is C.
A, B and D are all costs that can be included. C is a cost that will need to be incurred every
year and is therefore an expense of the business rather than part of the cost of the asset.

David purchased a machine for $10,000 on 1 January 20X1. On that day he also paid $500
as a delivery charge on the machine. The estimated useful life of the machine is 10 years
with a residual value of $1,500. David uses straight line depreciation. In October 20X2 the
machine had to be repaired at a cost of $1,000.
What is the depreciation charge for this machine for the year to 31 December 20X2?
A. A.$850
B. B.$900
C. C.$1,000
D. D.$1,150
The correct answer is B.
The cost of the machine will include the delivery cost and hence is $10,000 + $500 =
$10,500. The depreciable amount is $10,500 less the residual value (RV) of $1,500 =
$9,000. Therefore, depreciation charge is $9,000 / 10 = $900.
Note that the $1,000 repair cost cannot be included as part of the cost of the asset and will
be charged to profit or loss as a revenue expense.

Jane purchased a delivery van on 1 October 20X1 for $15,000. The delivery van is expected
to have a residual value of $3,560 in 5 years' time. The van is to be depreciated on the
reducing balance basis at 25% a year. Jane's policy is to calculate pro rata the depreciation
charge in the year of purchase.
What is the depreciation charge for year ended 31 December 20X1 to the nearest $?
A. A.$715
B. B.$938
C. C.$2,860
D. D.$3,750
The correct answer is B.
Because this is reducing balance depreciation, the 25% rate will already have adjusted for
the residual value (RV), hence there is no need to calculate the depreciable amount.
Therefore, the correct depreciation charge is
$15,000 × 25% × 3/12 = $938
Remember that you need to calculate pro rata the depreciation charge – options C and D
ignore this.
A incorrectly uses RV ((15,000 − 3,560) × 25%) × 3/12 = $715
A business's year-end is 31 March 20X5. It purchased an asset on 1 October 20X4 for
$8,000. The asset has a residual value of $1,000 and an estimated useful life of 4 years. The
business has a policy of pro rata depreciation.
What is the depreciation charge for this asset for the year ended 31 March 20X5?
A. A.$875
B. B.$1,000
C. C.$1,750
D. D.$2,000
The correct answer is A.
Depreciation charge for a full year = ($8,000 − $1,000) ÷ 4 = $1,750. Therefore for 6 months
= $1,750 × 6 ÷ 12 = $875.

Chapter 6 : Practice

Which TWO of the following would be included in the initial cost of property, plant and
equipment?
A. A.Installation and assembly costs
B. B.Staff training costs
C. C.Professional fees
 D. D.Maintenance costs
The correct answer are A and C.
The correct answers are installation and assembly costs and professional fees as these are
both directly attributable costs to bringing the asset to its working condition for its intended
use.
Tutorial note - staff training costs and maintenance costs will be incurred after the asset has
been brought into working condition and as such will be charged to profit or loss.

Max acquired an item of machinery on 1 July 20X6 for $15,000. He incurred staff training
costs for the new machinery of $2,000 and believes that the residual value will be nil. Max
charges depreciation at 15% per annum on a straight-line basis with a full year's charge in
the year of acquisition.
2. What is the depreciation charge for machinery for the year ended 31 December
20X6?
A. A.$1,125
B. B.$1,275
C. C.$2,250
D. D.$2,550
The correct answer is C.
The correct answer is $2,250 ($15,000 × 15%) The training costs will be charged to profit or
loss so will not form part of the depreciable amount of the machinery. Max's policy is to
charge a full year's depreciation in the year of acquisition even though the machinery was
acquired half way through the year.
Tutorial note:
$1,125 has time apportioned the depreciation charge which is against Max's policy. ($15,000
× 15%) × 6/12
$1,275 has included training costs and time apportioned the depreciation charge both
incorrect treatments. (($15,000 + $2,000) × 15%) × 6/12
$2,550 includes the training costs in the cost of the machinery incorrectly. ($15,000 +
$2,000) × 15%

Jessica purchased a building for use as her main office on 1 September 20X8 for $100,000.
In addition, she paid legal fees associated with the purchase of $5,000. Jessica charges
depreciation on buildings over a useful life of 25 years on a straight-line basis with
depreciation charged from the date of acquisition to the date of disposal.
3. What is the depreciation charge for the building for the year ended 31 December
20X8? $_____
The correct answer is $1,400.
The legal costs are a directly attributable cost of bringing the building to working condition for
its intended use. As such they will be added to the cost of the building $105,000 ($100,000 +
$5,000). This amount is then depreciated over the useful life of the building of 25 years to
give an annual depreciation charge of $4,200 ($105,000 ÷ 25 years). According to Jessica's
policy for depreciation this will then be time apportioned for the period of the year that is was
owned - four months (September - December). The final depreciation charge for the year
ended 31 December 20X8 will therefore be $1,400 ($4,200 ÷ 12 months) × 4 months.
Zinan acquired a motor vehicle on 1 June 20X7 for $18,000. The motor vehicle had an
estimated residual value of $2,000. Zinan charges depreciation on a 25% reducing balance
basis with a full year's charge in the year of acquisition.
4. What is the net book value of the motor vehicle at 31 December 20X7?
A. A.$13,500
B. B.$14,000
C. C.$15,375
D. D.$15,667
The correct answer is A.
The correct answer is $13,500. This is $18,000 cost − ($18,000 × 25%) depreciation. The
residual value is not considered when using a reducing balance method of depreciation.
Zinan's policy is to charge a full year's depreciation in the year of acquisition even though the
machinery was acquired half way through the year.
Tutorial note:
$14,000 adjusts for the residual value in the depreciation calculation. $18,000 (($18,000 −
$2,000) × 25%)
$15,375 has time apportioned the depreciation charge which is against Zinan's policy.
$18,000 − (($18,000 × 25%) × 7/12)
$15,667 has adjusted for the residual value and time apportioned the depreciation charge
both incorrect treatments. $18,000 − (($18,000 − $2,000) × 25%) × 7/12

Binta purchased an item of plant on 1 September 20X5 for $50,000 with a residual value of
$8,000. Binta charges depreciation on plant over an estimated useful life of five years on a
straight-line basis, with a full year's charge in the year of acquisition and none in the year of
disposal. The item of plant is sold on 31 August 20X8 for $35,000. Binta's accounting year
end is 31 December.
5. What is the profit on disposal of the plant recognised in the year ended 31
December 20X8? $_____
The correct answer is $10,200.
Binta's policy is to recognise a full year's depreciation in the year of acquisition which will
mean no depreciation is recognised in the year of sale. The plant was acquired on 1
September 20X5 and would have had depreciation charge of $8,400 (($50,000 − $8,000) ÷ 5
years) in the year ended 31 December 20X5 despite only having owned the plant for four
months.
The same $8,400 charge would have been made again in the years ended 31 December
20X6 and 20X7. However, in the year ended 31 December 20X8 no depreciation will be
charged in line with Binta's policy.
The carrying value of the plant at disposal would therefore be $24,800 which is calculated as
$50,000 cost − $25,200 depreciation for years 20X5 to 20X7 (3 × $8,400).
Compare CV $24,800 to proceeds of $35,000 to give a profit on disposal $10,200.

Riley sold an item of machinery for $25,000 making a profit of $8,000.

6. What is the journal to record the profit on disposal in the profit or loss account?
 Disposal account  Debit
Credit

Profit or loss account  Debit

Credit
Solution:
The correct answer is Disposal account Debit, Profit or loss account Credit
When recording a disposal of a non-current asset the following journals would initially be
recorded:

Dr Accumulated depreciation Cr Disposal account

Dr Disposal account Cr Machinery cost account

Dr Cash Cr Disposal
If the resulting balance is a profit, the profit is transferred to profit or loss account by debiting
the disposal account and crediting profit or loss.
The receipt of cash proceeds is recorded in the disposal account and is not part of the
transfer of profit to profit or loss account.

Emily acquired shop fittings on 1 June 20X5 for $10,000. The shop fittings had an estimated
residual value of $1,000. Emily charges depreciation over a four year estimated useful life on
a straight-line basis with a full year's charge in the year of acquisition and none in the year of
disposal. The shop fittings are sold on 1 April 20X8 for $2,800. Emily has a 30 November
year end.
7. What is the profit/loss on disposal of the shop fittings at 1 April 20X8?
A. A.$825 Loss
B. B.$450 Loss
C. C.$300 Profit
D. D.$1,800 Profit
The correct answer is B.
The correct answer is $450 Loss. Emily's policy is to charge a full year's depreciation in the
year of acquisition, even though the machinery was acquired part way through the year
ended 30 November 20X5, and nothing in the year of disposal. The net book value at the
date of the disposal 1 April 20X8 is therefore calculated as follows:
$
1 June 20X5 Cost 10,000
30 November 20X5 Dep'n charge (10,000 − 1,000) ÷ 4 years (2,250)
30 November 20X6 Dep'n charge (2,250)
30 November 20X7 Dep'n charge (2,250)
30 November 20X8 - year of disposal -

Carrying value at 1 April 20X8 3,250

Compare the proceeds of $2,800 to carrying value $3,250 gives a loss of $450
Tutorial note:
$825 Loss - has time apportioned the depreciation charge which is against Emily's policy.
(2,250 × 6/12) + (2 × 2,250) + (2,250 × 4/12) = $6,375. Proceeds $2,800 − CV (10,000 −
6,375) = $825 Loss
$300 Profit − has excluded the residual value from the depreciation charge. ((10,000 ÷ 4
years) × 3 years) = $7,500. Proceeds $2,800 − CV (10,000 − 7,500) = $300 profit
$1,800 Profit − calculated an extra year of depreciation (10,000 − (4 × $2,250)) = $9,000.
Proceeds $2,800 − NBV (10,000 − 9,000) = $1,800 Profit

8. Which of the following describes a non-current asset register?

A. A.Alternative name for a non-current asset ledger account.
B. B.Descriptive list of each non-current asset and their age.
C. C.Schedule of planned repairs of non-current assets for budgeting purposes.
D. D.Schedule of the carrying value and descriptive information about each
individual non-current asset.
The correct answer is D.
The correct answer is a schedule of the cost and other information about each individual
non-current asset. The NCA register helps to control and monitor the non-current assets
within a business by collating valuable information in one record.
Tutorial note:
Alternative name for a non-current asset ledger accounts - The NCA register is not part of
the double entry system.
Descriptive list of non-current assets and their age - There will be a small descriptive
element within the register but the focus is a monetary one.
Schedule of planned repairs - This should be considered within a business but is likely to be
department based rather than a central register.

9. What is the purpose of depreciation in the financial statements?

A. A.To ensure that the business will have sufficient funds to replace the asset when it
wears out.
B. B.To apply the going concern concept to the financial statements.
C. C.To show the market value of the asset in the statement of financial position.
D. D.To spread the depreciable amount of an asset over its useful life.
The correct answer is D.
Charging depreciation applies the matching concept by spreading the depreciable amount of
the asset over its useful life by charging depreciation expense to profit or loss it matches the
cost of the asset against the income it helps to generate.

Desmond sold an item of property, plant and equipment that had originally cost $6,000. The
asset has an expected useful life of 10 years, after which time it was expected to be sold for
$2,000. After exactly five years' of use, it is sold for $4,800.
10. What was the profit or loss on disposal of this asset?
A. A.$1,200 loss
B. B.$800 profit
C. C.$1,800 profit
D. D.$800 loss
The correct answer is B.
Annual depreciation: ($6,000 − $2,000)/10 years = $400
Carrying value at disposal: $6,000 − ($400 × 5) = $4,000
Profit on disposal: $4,800 − $4,000 = $800

An item of plant was purchased for $20,000 with an expected residual value of $2,000. The
plant is being depreciated at 20% on a reducing balance basis. After three full years of use,
it is sold for $11,000.
11. What is the profit or loss on disposal?
A. A.Loss of $1,784
B. B.Loss of $760
C. C.Profit of $1,784
D. D.Profit of $760
The correct answer is D.
Carrying value at disposal − $20,000 × 80% × 80% × 80% = $10,240
Profit on disposal = $11,000 − $10,240 = $760.
When using reducing balance depreciation, the residual value is not used.

Yuma notices that the total of non-current asset register is $8,000 less than the carrying
value of non-current assets in the general ledger. He discovers that this is because he has
forgotten to remove a non-current asset from the general ledger even though it was sold.
12. Which of the following values for disposal proceeds and profit on disposal might
explain the difference?
A. A.Disposal proceeds of $10,000 and a loss on disposal of $2,000
B. B.Disposal proceeds of $10,000 and a profit on disposal of $2,000
C. C.Carrying value of $10,000 and a loss on disposal of $2,000
D. D.Carrying value of $10,000 and a profit on disposal of $2,000
The correct answer is B.
The difference of $8,000 means that an item with a carrying value of $8,000 is in the general
ledger that is not in the non-current asset register. The only option that would provide a
carrying value of $8,000 is this one.