10: Non-current assets and depreciation

Question 1

What is the double entry for non current asset?

Answer 1

Dr Non-current asset (NCA)
Cr Cash/payables

Question 2

What is included in the cost of a NCA?

Answer 2

All directly attributable amounts to bring it to its present location and condition e.g. purchase price, delivery costs, import duties etc.
It can also include costs that enhance the asset e.g. improvements

Question 3

What is a NCA’s life span known as? And what is the exception to this?

Answer 3

Useful life - every tangible NCA has a limited life except land.

Question 4

What is writing off an NCA known as? Explain

Answer 4

Depreciation - matches the cost of the asset to the period the business expects to gain benefits from using it.

Question 5

How is the carrying amount worked out?

Answer 5

Cost - Accumulated depreciation = CA

Question 6

What are the two methods to calculate the depreciation charge?

Answer 6

• Straight line method
• Reducing balance basis

Question 7

What is the calculation of depreciation (straight line)?

Answer 7

(Cost - residual value)/ Useful life (Months or years)

Question 8

What is the calculation for reducing balance depreciation?

Answer 8

Cost - accumulated depreciation x Percentage depreciation

Question 9

What is a shortcut to work out carrying value when there is a lot of years for reducing balance method?

Answer 9

Carrying value after n years = Cost x (1-depreciation rate as decimal)^n

Question 10

What happens to depreciation where expenditure is incurred to enhance an asset after initial purchase?

Answer 10

This is added to assets cost and depreciated over the assets remaining useful life - known as subsequent expenditure.

Question 11

Why should the depreciation method be reviewed?

Answer 11

Should be reviewed anually for appropriateness due to changes in expected useful life, residual value or pattern of usage.

Question 12

What happens when an asset falls in value?

Answer 12

The asset should be written down to its new carrying value, called the recoverable amount which is the higher of the “fair value less cost to sell” and its value in use.

Question 13

What is the double entry accounting for depreciation each period?

Answer 13

Dr Depreciation expense (P/L)
Cr Accumulated depreciation (SOFP)

Question 14

What is it called when a business sells a NCA? What is the calculation for P/L?

Answer 14

Disposal

Net disposals proceeds - Carrying value (Cost - acc depr) = P/L

Question 15

What are the double entries for disposals?

Answer 15

1. Remove cost of disposed asset
   Dr Disposals account
   Cr Non-current cost account
2. Remove acc depreciation from acc depr ledger
   Dr Acc dep account
   Cr Disposals account
3. Account for the disposals proceeds
   Dr Cash
   Cr Disposals account

Question 16

What are disposals given in a part exchange?

Answer 16

A business does not receive cash for an asset but receives a part exchange allowance against the cost of a new asset?

3 steps are the same but the cash proceeds in step 3 is replaced with part exchange value assigned to the old asset and debited to the new asset cost account e.g.
Dr new asset
Cr disposal

Question 17

What is asset register?

Answer 17

A detailed listing of all non-current assets held by an organisation.

Question 18

What are intangible assets? Give examples

Answer 18

NCA that do not have a physical substance. e.g. Licenses, patents, brands.

Treated same way as tangible NCAs. Initally valued at directly attributable cost, then amortised over assets useful life on straight line basis assuming a nil residual value.

Question 19

What is goodwill?

Answer 19

Where the value of a business as a whole exceeds the value of its individual net assets, due to factors such as a good reputation with customers, skilled workers, good location/business and relationships with suppliers.

Internally generated goodwill cannot be recognised as an asset.

Purchased goodwill arises when an entity purchases an existing business.

Question 20

What is the double entry for internally generated intangible assets?

Answer 20

Dr Expense (Revenue expenditure) or intangible asset (capital expenditure LT future income)
Cr Cash