10 - Non current assets and depreciation Flashcards
What is a non current asset?
Asset that is expected to be held for longer than one year. It is referred to as capital expenditure
What is the journal entry for a NCA?
Dr NCA
Cr Cash/Trade payable
What are the costs of a NCA?
All directly attributable amounts to bring it to its present location and condition.
Purchase price
Delivery costs
Stamp duty and import duties (and irrecoverable VAT on cars)
Site preparation
Installation and assembly costs
Professional fees (legal)
Testing costs
It can also include subsequent costs that enhance the asset, such as major improvements or a major overhaul.
What costs are NOT included?
These are expenses and not a cost
General overheads
Staff training costs
Fuel for cars
License fees for operating the asset
Repairs and maintenance
What is useful economic life?
Every tangible NCA has a limited life, with the exception of land. It is known as its useful economic life.
What is the definition of depreciation?
The “systematic allocation of the cost of an asset - its residual value divided by its useful economic life.
What 3 things are useful when calculating an assets depreciation?
Asset cost
Useful life
Asset residual value
What is the residual value?
The residual value is the estimated scrap value for an asset at the end of its useful life for the business
For exam purposes, always assume residual value is 0.
How do we calculate carrying amount?
Carrying amount = Cost - Accumulated depreciation
What is the straight line depreciation formula?
Cost - residual value / Useful economic life (months or years)
10% = 10 years
25% = 4 years
20% = 5 years
5% = 20 years
What is reducing balance depreciation?
The value of the asset will depreciate less and less as the asset gets older
You will usually need to calculate this depreciation on an annual basis and will be given the relevant % of carrying value
Cost x (1-depn%)^however many years
Depreciating enhancement expenditure
When you enhance an asset after its original purchase, this is added to the assets cost and it is depreciated over the assets remaining useful life. This is referred to as subsequent expenditure
Impairment losses
The asset should be written down to its new carrying value (the recoverable amount)
This is the amount higher between scrap value and its value in use
Carrying amount before impairment x
Recoverable amount (after impairment) x
Impairment expense in profit or loss x
Dr depreciation expense
Cr CV of asset
Accounting for depreciation
Dr depreciation expense (pnl) - one year expense
Cr Accumulated depreciation (sofp) - total depreciation to date
NCA disposals formula
Net disposal proceeds x
Less carrying value at disposal (x)
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Profit/loss on disposal x/(x)
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A profit on disposals would be reported in other income. A loss on disposal will be recorded in expenses
What 3 steps do you follow when you dispose of an asset? NCA cost is normally debit and accumulated depreciation normally a credit
Remove cost of disposed asset from cost ledger
Dr Disposals account
Cr Non - current asset cost account
Remove accumulated depreciation from the accumulated depreciation ledger
Dr Accumulated depreciation account
Cr Disposals account
Account for the disposal proceeds
Dr Cash
Cr Disposals account
Accounting for part exchange
Remove cost of disposed asset from cost ledger
Dr Disposals account
Cr Non - current asset cost account
Remove accumulated depreciation from the accumulated depreciation ledger
Dr Accumulated depreciation account
Cr Disposals account
Account for the disposal proceeds
Dr New asset cost account
Cr Disposals account
The remaining cash paid for the new asset is then accounted for like this:
Dr New asset cost account
Cr cash
What is the asset register?
It is a detailed listing of all NCA held by an organisation. It can be used to record info such as:
Reference number
Location
Purchase date
Depreciation method
Estimated useful life
Residual value
Asset register can be used to check the completeness and accuracy of the ledgers. This can help detect stolen, damaged or scrapped assets.
Intangible assets
They are initially valued at their cost you bough them for. They should then be amortised (depreciated) over the assets useful economic life.
Goodwill
You can never amortise good will.
It will be annually reviewed for impairment (it is not depreciated).
