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The MCQs below are drawn from the Accountancy & Auditing subject category.
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2591
Against which account should a loss incurred from the sale of machinery be written off?
When an asset is sold, any loss on disposal is typically offset against the accumulated depreciation or the depreciation fund associated with that asset. This practice aligns with the principle of matching the asset's cost and its related provisions. Note: Some accounting standards may prefer charging this to the P&L account directly; this answer reflects a specific traditional accounting treatment.
2592
A non-current asset with a cost of $8,000 and a net book value of $3,000 is sold for $4,800. Calculate the resulting profit or loss on disposal.
Profit or loss on disposal is calculated by subtracting the net book value from the sale proceeds. Here, $4,800 (sale proceeds) minus $3,000 (net book value) equals a profit of $1,800. The original cost is irrelevant to this specific calculation as the net book value already accounts for accumulated depreciation.
2593
A machine costing $20,000 was sold for $13,000. If the accumulated depreciation before the sale was $28,000 and the annual depreciation rate is 10% on cost, what is the remaining balance in the provision for depreciation account?
When an asset is sold, the accumulated depreciation associated with that specific asset must be removed from the provision account. Since the machine cost $20,000 and was held for two years at 10% per annum, the depreciation to be removed is $4,000. Thus, $28,000 - $4,000 = $24,000.
2594
A fixed asset with a book value of $2,000 is sold for $1,500. What is the financial result of this transaction?
The gain or loss on the sale of a fixed asset is determined by comparing the sale proceeds with the book value at the time of disposal. Since the asset was sold for $1,500, which is $500 less than its book value of $2,000, the company incurs a loss of $500.
2595
Under what condition does the book value of a fixed asset equal its market value or sale proceeds upon disposal?
The book value of an asset is its original cost minus accumulated depreciation. If an asset is sold for an amount exactly equal to its book value, there is neither a gain nor a loss on the disposal. Therefore, the sale proceeds equal the book value when the gain or loss on sale is zero.
2596
A company purchased a van for $12,600 and sold it four years later for $3,750. At the time of sale, the accumulated depreciation was $7,400. What is the resulting gain or loss to be recorded in the Income Statement?
The book value at the time of sale is the cost ($12,600) minus accumulated depreciation ($7,400), which equals $5,200. The van was sold for $3,750. Since the sale price is less than the book value ($5,200 - $3,750), a loss of $1,450 is incurred. This loss is recorded as a debit in the Income Statement.
2597
Against which account should a loss incurred from the sale of a fixed asset be written off?
A loss on the sale of a fixed asset is a revenue loss that must be charged to the Profit and Loss Account for the period in which the sale occurs. It is not written off against share premium, sales, or depreciation funds, as those accounts serve different accounting purposes.
2598
What is another common name for the sinking fund method of depreciation?
The sinking fund method of depreciation is often referred to as the Depreciation Fund Account. Under this method, a fixed amount is set aside annually and invested in external securities to accumulate the necessary funds for the replacement of an asset at the end of its useful life.
2599
Which depreciation method is considered equivalent to the 'Sinking Fund Method'?
The Depreciation Fund Method is synonymous with the Sinking Fund Method. In this approach, a fixed amount is charged to the Profit and Loss account annually and invested in external securities. The interest earned on these investments is reinvested, allowing the fund to accumulate to the original cost of the asset by the end of its useful life, ensuring funds are available for replacement.
2600
Which depreciation method involves taking out an insurance policy to provide funds for the replacement of an asset?
The insurance policy method is a specific approach where a business pays annual premiums on an insurance policy. Upon the policy's maturity, the proceeds are used to replace the asset, effectively spreading the cost of replacement over the asset's useful life.
