12. Non-Current Assets and Depreciation

Question 1

What are non-current assets?

Answer 1

Resources owned by a business which benefit current and future periods. e.g. motor vehicles

Question 2

What are current assets?

Answer 2

Resources owned by a business which benefit one year or less e.g. cash at bank.

Question 3

Give three differences between non-current assets and current assets.

Answer 3

1. NCA benefits current and future periods. CA benefits only one year or less.
2. NCA is a result of capital expenditure; CA is a result of revenue expenditure.
3. Most NCA is subjected to depreciation. CA is not depreciated.

Question 4

Give double entries for the purchase of a delivery van on credit from YoYo Ltd, $50 000.

Answer 4

Dr Motor Vehicle $50 000

Cr Other payable - YoYo Ltd $50 000

Question 5

Define depreciation.

Answer 5

Depreciation is the allocation of the cost of the non-current assets over its useful life.

Question 6

Why must NCA be depreciated?

Answer 6

Two main reasons:

1. Matching Principle requires the portion of the cost of the NCA consumed in the year to be matched against the revenue earned in the year.
2. Depreciating NCA allows the value of NCA to be adjusted to a fair value.

Question 7

Explain matching principle

Answer 7

Matching principle requires that all costs incurred in the year to generate the income of the year must be matched against the revenue earned in the year. This allows profit for the year to be computed.

Question 8

Name the two ways to calculate depreciation.

Answer 8

1. Straight-line method (aka: equal instalment method)

2. Reducing balance method (aka: diminishing balance method)

Question 9

Explain straight-line depreciation method.

Answer 9

Straight-line depreciation method assumes that the asset is used evenly over its useful life. An equal amount of depreciation is charged for each year of use. Depreciation is constant each year.

Question 10

Keith bought two computers at $4 000 each on 1 January 2015. He estimated they will last 4 years with no residual value. What were the depreciation for the each of the years ended 31 Dec 2015 and 2016?
What were the book values on the two dates?

Answer 10

Depreciation per year = $4000X2 divide by 4 years
= $2 000 per year.
Depreciation for year end 31 Dec 2015 = $2 000
Book value on 31 Dec 2015 = 8000 - 2000 = $6 000

Depreciation for year end 31 Dec 2016 = $2 000
Book value on 31 Dec 2016 = 8000 - 4 000 = $4 000

Question 11

Kelvin bought two computers at $4 000 each on 1 January 2015. He estimated they will last 4 years with no residual value. What were the depreciation for each of the years ended 30 June 2015 and 2016?
What are the book values on the two dates?

Answer 11

Depreciation per year = $4000X2 divide by 4 years
= $2 000 per year.
Depr for year end 30 Jun 2015 = $1 000 (0.5 year only)
Book value on 30 Jun 2015 = 8000 - 1000 = $7 000

Depreciation for year end 31 Jun 2016 = $2 000
Book value on 30 Jun 2016 = 8000 - 3000 = $5 000

Question 12

Kevin bought two vans at $30 000 each on 1 April 2015. He charged depreciation at 20% per annum using straight line method. What were the depreciation for the year ended 30 June 2015 and 2016?
What were the book values on the two dates?

Answer 12

Depreciation per year = $30 00 X 2 X 20%
= $12 000 per year.
Depreciation for year end 30 Jun 2015 = $3 000
(from 1 April 2015 to 30 Jun 2015 = only 3 months)
Book value on 30 Jun 2015 = 60 000-3000 = $57 000

Depreciation for year end 30 Jun 2016 = $12 000
Book value on 31 Dec 2016 = 60 000-15000 = $45 000

Question 13

Explain reducing balance method of depreciation.

Answer 13

Reducing balance method assumes the NCA is used less when it gets older and thus a lower depreciation charge is made on the NCA in its later years.
Depreciation is calculated at a fixed rate on its book value.

Question 14

Name two assets which suits reducing balance method of depreciation.

Answer 14

Any two:

Office equipment / Motor Vehicles / Machinery

Question 15

Larry bought a vehicle at $42 000 on 1 April 2015. He charged depreciation at 20% per annum using reducing balance method. What were the depreciation for the year ended 31 March 2016 and 2017?
What were the book values on the two dates?

Answer 15

Depr for year end 31/3/2016: 20% x 42 000 = $8 400
Book Value on 31/3/2016 = 42000 - 8400 =$33 600

Depr for year end 31/3/2017= 20% x 33600 =$6 720
Book Value on 31/3/2017 = 42000 - 15120 = $26 880

Question 16

Lester bought a machine at $36 000 on 1 April 2015. He charged depreciation at 25% per annum using reducing balance method. What were the depreciation for the year ended 30 Sep 2015 and 2016?
What were the book values on the two dates?

Answer 16

Depr for year end 30/9/2015:25%x36000X6/12 = $4500
Book Value on 30/9/2015 = 36000 - 4500 = $31 500

Depr for year end 30/9/2016= 25% x 31500 =$7 875
Book Value on 30/9/2016 =36000-12375 = $23 625

Question 17

On 1 May 2016, Luke’s books showed equipment of $30 000 with accumulated depreciation of $12 000.
On 1 Aug 2016, Luke bought new equipment $8 000 on credit.
Given that Luke depreciates equipment at 20% on book value, what is the depreciation charge for the year ended 30 April 2017? What was the book value of the equipment on 30 April 2017?

Answer 17

Depr on existing equipment:
    20% X [30 000 - 12 000] = $3 600
Depr on new equipment:
    20% X 8 000 X 9/12 = $1 200
Total depreciation = $4 800

Book value on 30/4/2017 = [30000+8000] - [8000+4800] = 38 000 - 12 800 = $25 200