QCM : Disposal of Non-Current Assets — 21 questions

Questions et réponses du QCM

1. In accounting for the disposal of a non-current asset, is disposal limited to receiving cash, or can it include a trade-in as well?

It includes only a trade-in and never a cash sale
It is limited to receiving cash only
It refers only to exchanging the asset without any consideration
It includes both a cash sale and a trade-in of the asset

It includes both a cash sale and a trade-in of the asset

Explication

Disposal of a non-current asset includes both a cash sale and a trade-in. This directly addresses the misconception that disposal is cash-only.

2. Which set of actions best describes the accounting treatment for disposing of a non-current asset?

Transfer Carrying value, record Proceeds on disposal, and transfer the resulting profit or loss
Credit Proceeds on disposal, debit accumulated depreciation, and keep profit or loss in the asset account
Debit Proceeds, credit Carrying value, and transfer the profit or loss to GST Clearing
Record GST Clearing only and do not affect profit or loss

Transfer Carrying value, record Proceeds on disposal, and transfer the resulting profit or loss

Explication

Disposal recording involves transferring the asset’s Carrying value, recording proceeds on disposal, and transferring the resulting profit or loss. The distractors misplace what is credited/debited or omit profit/loss.

3. What does the term Carrying value mean for a non-current asset when measuring its disposal?

The asset’s historical cost without any accumulated depreciation
The amount recorded after accumulated depreciation, used to measure disposal
The asset’s market value at the disposal date
The proceeds the business expects to receive from selling the asset

The amount recorded after accumulated depreciation, used to measure disposal

Explication

Carrying value is the amount at which the asset is recorded after accumulated depreciation, and it is used to measure disposal. It is not historical cost or market value.

4. If Proceeds on disposal are $8,000 and Carrying value is $10,000, what is the profit or loss on disposal?

Profit of $2,000
Loss of $18,000
Loss of $2,000
Profit of $18,000

Loss of $2,000

Explication

Profit or loss on disposal equals Proceeds on disposal minus Carrying value ($8,000 − $10,000 = −$2,000), which is a loss. Positive profit would require proceeds exceeding carrying value.

5. In a cash sale of a non-current asset, how is GST handled in the journal entries for proceeds and GST?

Disposal of the asset is credited for the full amount received, and GST Clearing is not used
Bank is debited for GST only, and the proceeds are credited including GST
Bank is debited for the full amount received, GST Clearing is credited for GST, and Disposal is credited excluding GST
GST Clearing is credited for the full sale price, and disposal proceeds are credited excluding GST

Bank is debited for the full amount received, GST Clearing is credited for GST, and Disposal is credited excluding GST

Explication

For a cash sale, Bank is debited for the full amount received, GST Clearing is credited for the GST, and Disposal of the asset is credited for the proceeds excluding GST. Other options incorrectly credit disposal for GST or omit GST Clearing.

6. In recording disposal with a cash sale, what does the Disposal of Equipment account represent and how is it posted?

It is debited with the proceeds on disposal and credited with Carrying value
It is debited for the asset’s Carrying value and credited with accumulated depreciation and proceeds on disposal
It is credited for the asset’s historical cost only
It is debited for GST and credited for accumulated depreciation

It is debited for the asset’s Carrying value and credited with accumulated depreciation and proceeds on disposal

Explication

The Disposal of Equipment account records the asset’s Carrying value as a debit, with accumulated depreciation and proceeds on disposal credited. This matches the specified posting pattern.

7. Where is GST received from the sale of a non-current asset reported in the cash flow statement?

As investing activities cash inflow because it comes from asset sales
As an investing activities cash inflow separate from other proceeds
As an operating activities cash inflow under GST received with other GST
It is not reported in the cash flow statement

As an operating activities cash inflow under GST received with other GST

Explication

GST from a cash sale is reported as a cash inflow under Operating activities with other GST received. The investing-only option and the “not reported” option contradict this rule.

8. Under what condition does a business record a loss on disposal of a non-current asset?

When Proceeds on disposal equal Carrying value
When Proceeds on disposal are less than Carrying value
When Proceeds on disposal are greater than Carrying value
When accumulated depreciation is zero

When Proceeds on disposal are less than Carrying value

Explication

A loss on disposal occurs when proceeds on disposal are less than the asset’s carrying value. A profit would occur when proceeds exceed carrying value.

9. What does a debit balance in the Disposal of Non-current asset account indicate?

It indicates the transaction is incomplete and not closed
It indicates a loss on disposal because Carrying value exceeds proceeds
It indicates that GST Clearing was recorded incorrectly
It indicates a profit on disposal because proceeds exceed Carrying value

It indicates a loss on disposal because Carrying value exceeds proceeds

Explication

A debit balance indicates a loss on disposal because carrying value exceeds proceeds on disposal. A credit balance would indicate a profit instead.

10. How should a Disposal of Equipment account be closed when it has a $2,000 debit balance?

Disposal of Equipment is credited $2,000 and Profit or Loss Summary is credited $2,000
Loss on Disposal of Equipment is credited $2,000 and Profit or Loss Summary is debited $2,000
Disposal of Equipment is debited $2,000 and Loss on Disposal of Equipment is credited $2,000
Disposal of Equipment is credited $2,000 and Loss on Disposal of Equipment is debited $2,000

Disposal of Equipment is credited $2,000 and Loss on Disposal of Equipment is debited $2,000

Explication

To close a disposal account with a $2,000 debit balance, credit Disposal of Equipment $2,000 and debit Loss on Disposal of Equipment $2,000. The other options move debits/credits in the wrong direction.

11. When does a profit on disposal of a non-current asset arise in terms of carrying value and proceeds?

When proceeds on disposal are less than carrying value
When proceeds on disposal are greater than carrying value
When carrying value is greater than proceeds on disposal
When proceeds on disposal are equal to carrying value

When proceeds on disposal are greater than carrying value

Explication

A profit occurs when the proceeds received exceed the asset’s carrying value. If proceeds are below carrying value, the result is a loss instead.

12. What does a credit balance in the Disposal of Non-current asset account indicate?

It indicates a loss on disposal because proceeds are below carrying value
It indicates that no profit or loss has occurred
It indicates a profit on disposal because proceeds exceed carrying value
It indicates that the new asset was purchased for cash

It indicates a profit on disposal because proceeds exceed carrying value

Explication

A credit balance in the Disposal of Non-current asset account indicates a profit because it means proceeds exceed the carrying value. A loss would correspond to the opposite direction of balance.

13. To close a Disposal of Furniture account that has a $300 credit balance, which set of journal entry effects is correct?

Profit on Disposal of Furniture is debited $300 and Income Statement is credited $300
Disposal of Furniture is credited $300 and Bank is credited $300
Dispose of Furniture is credited $300 and Profit on Disposal of Furniture is debited $300
Dispose of Furniture is debited $300 and Profit on Disposal of Furniture is credited $300

Dispose of Furniture is debited $300 and Profit on Disposal of Furniture is credited $300

Explication

A $300 credit balance in Disposal of Furniture is closed by debiting Disposal of Furniture and crediting Profit on Disposal of Furniture for $300. The reverse debit/credit pattern would not close a credit balance correctly.

14. What is the effect of under-depreciation on a non-current asset’s carrying value?

It keeps carrying value correctly measured over the life
It results in an overstatement of carrying value
It prevents any future loss on disposal
It results in an understatement of carrying value

It results in an overstatement of carrying value

Explication

Under-depreciation means insufficient depreciation has been allocated, so the carrying value is overstated. That overstated carrying value is the key consequence.

15. How can under-depreciation contribute to a loss on disposal?

Under-depreciation only affects interest expense, not disposal outcomes
An overstated carrying value can be below resale value and proceeds on disposal
An understated carrying value always leads to a profit
An overstated carrying value can exceed resale value and proceeds on disposal

An overstated carrying value can exceed resale value and proceeds on disposal

Explication

With under-depreciation, carrying value is too high, so it can exceed the asset’s resale value and proceeds on disposal, leading to a loss. Options describing understated carrying value or guaranteed outcomes mismatch the under-depreciation mechanism.

16. What is over-depreciation with respect to carrying value?

It occurs when insufficient depreciation has been allocated, understating carrying value
It occurs when carrying value equals resale value
It occurs when excess depreciation has been allocated, overstating carrying value
It occurs when excess depreciation has been allocated, understating carrying value

It occurs when excess depreciation has been allocated, understating carrying value

Explication

Over-depreciation allocates too much depreciation, which understates the carrying value. Under-depreciation is the situation that causes overstatement.

17. Why can over-depreciation lead to a profit on disposal?

Because over-depreciation guarantees proceeds equal carrying value
Because an understated carrying value is below resale value and proceeds on disposal
Because GST is recorded on trade-in proceeds
Because an overstated carrying value is above resale value and proceeds on disposal

Because an understated carrying value is below resale value and proceeds on disposal

Explication

Over-depreciation understates carrying value, so proceeds on disposal may exceed that lower carrying value, creating a profit. The GST and guaranteed-equality distractors are unrelated to disposal profit mechanics.

18. In accounting terms, what is a trade-in of a non-current asset?

A refund of purchase price from a supplier
A cash payment received for a disposed asset
Proceeds on disposal received as a reduction in the amount payable for a new asset
A disposal recorded at the net present value of the asset

Proceeds on disposal received as a reduction in the amount payable for a new asset

Explication

A trade-in is the proceeds from disposing of the non-current asset received as a reduction in what must be paid for the new asset. It is not a cash proceeds transaction.

19. Which treatment best describes how the disposal of a traded-in asset is recorded?

Recorded at carrying value by crediting the old asset account, debiting the Accumulated depreciation account, and recording corresponding Disposal entries
Recorded at selling price by debiting Bank for the full proceeds
Recorded at carrying value using the same structure as a cash sale to Bank and Disposal
Recorded by debiting the new non-current asset account and crediting Bank for the disposal proceeds

Recorded at carrying value by crediting the old asset account, debiting the Accumulated depreciation account, and recording corresponding Disposal entries

Explication

For a trade-in, the traded-in asset’s disposal is recorded at its carrying value: credit the old asset account, debit Accumulated depreciation, and make corresponding entries in the Disposal account. It is not posted like a cash sale to Bank.

20. For a trade-in, where are the proceeds credited and what happens to GST treatment on those proceeds?

Proceeds are credited to the new asset account; GST is never recorded anywhere in the transaction
Proceeds are credited to Bank; GST is recorded on the trade-in proceeds; the old asset account is debited
Proceeds are credited to Disposal; GST is recorded on the trade-in proceeds; Bank is debited instead of the new asset
Proceeds are credited to Disposal; the new non-current asset is debited; no GST is recorded on the trade-in proceeds

Proceeds are credited to Disposal; the new non-current asset is debited; no GST is recorded on the trade-in proceeds

Explication

In a trade-in, proceeds are credited to the Disposal account and the new non-current asset account is debited, not Bank, with no GST recorded on the trade-in proceeds. Recording GST on trade-in proceeds contradicts the rule.

21. Why is a trade-in not reported in the Cash Flow Statement?

Because it is reported only in the investing section but not in operating activities
Because it does not create a cash flow
Because it is treated as a dividend payment
Because it affects cash flows only when GST is recorded

Because it does not create a cash flow

Explication

A trade-in does not create cash flow, since the proceeds are taken as a reduction in the amount payable for the new asset. Therefore it is not reported in the Cash Flow Statement.

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What does disposal of a non-current asset include?

Both a cash sale and a trade-in of the asset.

What is involved in recording disposal of a non-current asset?

Transferring carrying value, recording proceeds, and transferring profit or loss.

What is carrying value of a non-current asset?

The amount recorded after accumulated depreciation used to measure disposal.

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