4: Non-Current Assets

Question 1

What is different about accounting for a P&L on disposal where a part exchange takes place

Answer 1

A discount is offered against the new asset instead of receiving sale proceeds as income

CREDIT Asset (with cost of disposal)
DEBIT Accumulated depreciation
DEBIT New Asset Cost
Balancing figure is debited/credited to/from P/L on disposal account

Question 2

In a period of rising prices, will applying the FIFO method to determine the cost of inventories give a lower gross profit figure than the AVCO method?

Answer 2

No.

If prices are rising, the FIFO method will give a higher figure for the closing inventory. This will decrease cost of sales and increase GP

Question 3

Closing inventory is a ____ in the SOPL and a _____ in the SOFP

Answer 3

Closing inventory is a credit in the SOPL and a debit in the SOFP

SOPL - DR Expenses CR Inventory

SOFP - inventory is an asset (debit)

Question 4

If a company understates their closing inventory, what is the impact on this year and next years profits?

Answer 4

The current year’s profit will be understated and the next years profits will be overstated

If a company’s closing inventory is understated, the cost of sales will be over stated, thus profit understated.

Next year’s opening inventory will be understated, and so will COS, so profit will be overstated.

Question 5

If the cost of inventory increases, what is the impact on current assets and a company’s losses?

Answer 5

Current assets will increase (closing inventory is an asset)

Closing inventory increasing would decrease COS and increase profit, so losses would decrease

Question 6

Which of the following is excluded from the initial cot of a tangible non-current asset?

a) Site preparation cost

b) Legal fees

c) Cost of a design error

d) Installation costs

Answer 6

c

Any abnormal costs are not directly attributable to the asset and therefore should not be capitalised