11. Non Current Assets and Depreciation

Question 1

What is a non current asset?

Answer 1

An asset purchased for use on a continuing basis, normally over 1 year

Question 2

Where are non current assets recorded?

Answer 2

In the statement of financial position

Question 3

What is included in the cost recorded of a non current asset?

Answer 3

All the costs incurred in bringing the asset into use, e.g. delivery, installation and set up costs (NOT training)

Question 4

What are the two categories of non current asset?

Answer 4

Tangible and Intangible

Question 5

What is depreciation?

Answer 5

The spreading of the depreciable amount of an asset over its estimated useful life - spreading cost of non current asset on a systematic basis

Question 6

Which concept applies to depreciation?

Answer 6

The matching concept

Question 7

Where is depreciation charged?

Answer 7

As an expense on the P&L

Question 8

What is the straight line method for depreciation?

Answer 8

Charge the same amount of depreciation in each period

(cost - residual value)/expected useful life

Question 9

What is the double entry for depreciaition?

Answer 9

Dr Depreciation expense (P&L)

Cr Accumulated depreciation (SFP)

Question 10

What is the carrying value of an asset?

Answer 10

Cost of NCA - accumulated depreciation

Question 11

What is the reducing balance method for depreciation?

Answer 11

Calculate depreciation as a fixed percentage of the carrying amount at the start of the year

Question 12

What assets is the reducing balance method most appropriate for?

Answer 12

Assets that depreciate quickly in their early years e.g. cars

Question 13

How do you calculate the carrying amount of an asset at a particular date, when using the reducing balance method?

Answer 13

Cost x (1 - Rate of Depreciation)^n

Question 14

What is the rule applied when the estimated useful life of an asset is changed?

Answer 14

Depreciate the carrying amount of the asset over the revised remaining useful life

Question 15

Are modifications included in the cost of the asset when re-estimating the useful life?

Answer 15

Yes

Question 16

Is maintenance included in the cost of the asset when re-estimating the useful life?

Answer 16

No

Question 17

Where is the profit or loss on disposal of a NCA recorded?

Answer 17

The P&L

Question 18

What is the calculation for the profit or (loss) on disposal?

Answer 18

Sale Proceeds - Carrying amount

Question 19

What is the double entries for sale of a NCA?

Answer 19

Dr Cash
Cr Asset Disposal Account (P&L)

Dr Asset Disposal Account (P&L)
Cr Non Current Asset/Accum Deprn Account

Question 20

When we part exchange, how is the profit or loss on disposal calculated?

Answer 20

Part exchange allowance - carrying amount

Question 21

What is the revaluation reserve/surplus calculation?

Answer 21

Revaluation Surplus = Fair Value - carrying amount at date of revaluation

Question 22

What is the double entry for revaluation of a NCA? (increase)

Answer 22

Dr Increase in Asset value

Cr Revaluation Surplus on SFP

Question 23

Why is revaluation surplus on the SFP and not the P&L?

Answer 23

It is not income as it is not realised

Question 24

What value should non current assets be recorded at on the SFP?

Answer 24

The higher of net realisable value and value in use

Question 25

What is an impairment?

Answer 25

Reduction in asset value, sometimes due to damage or obsoletion

Question 26

Where is impairment charged?

Answer 26

As an expense on the P&L

Question 27

What is goodwill?

Answer 27

The difference between the cost of a business as a whole and the fair value of its separable net assets

Question 28

What is purchased goodwill?

Answer 28

When a business is acquired for more than the fair value of its separable net assets

Question 29

How do we account for positive goodwill?

Answer 29

Capitalise on the SFP and review annually for impairment

Question 30

How do we account for negative goodwill?

Answer 30

Recognise immediately on the P&L

Question 31

Can we recognise internally generated goodwill?

Answer 31

No, as we cannot value it

Question 32

What is research?

Answer 32

The original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding

Question 33

What is the accounting treatment for research costs?

Answer 33

Write off as an expense on the P&L in the period in which they are incurred

Question 34

What is development?

Answer 34

The application of research findings to plan for the production of a new or substantially improved materials, products, processes or services before the start of commercial production or use

Question 35

What is the accounting treatment for development costs?

Answer 35

Written off as expense unless:
- Probably future economic benefits
- Intention to complete
- Resources adequate to complete
- Ability to use
- Technically feasible
- Expenditure measured reliably
If so, capitalised as intangible NCA amortised over expected useful life

Question 36

What can be included in development costs?

Answer 36

Materials, services, wages and salaries, depreciation on plant used in development

Question 37

What cannot be included in development costs?

Answer 37

Selling and administrative expenditure (overheads in P&L)

Question 38

When does amortisation of development costs begin?

Answer 38

When the asset is available for use