5. depreciation and disposal of fixed assets

Question 1

nature of non current assets

Answer 1

• held long term by business
• used to assist production, administration, selling or rental purposes

Question 2

to be recognised in the balance sheet (SOFP), fixed assets must be:
(3)

Answer 2

1. owned by the reporting entity
2. as a result of past transactions or activities
3. be expected to give ride to future economic benefits

Question 3

depreciation of fixed assets
if a business will use an asset over a period longer than 1 year;

Answer 3

charging full amount cost:
- is not in line with accrual principle
- does not show a true and fair picture of the business

Question 4

measurement of fixed assets

Answer 4

• fixed assets may be subjected to ‘impairment reviews’ and this may result in the value being reduced in the balance sheets

Question 5

depreciation of fixed assets
1. effect on accounting equation

Answer 5

1- A = L + C
A -> reduces value of non current assets in sofp
C -> reduces capital available by impacting profit figure in IS
- record usage

Question 6

straight line method depreciation

Answer 6

• an equal amount of depreciation expense is recorded each year over the life of the asset

Question 7

reducing balance depreciation

Answer 7

• method charges higher depreciation in the earlier years of the life of the asset
• % rate designed to reduce the asset value from cost to residual value over the useful life of the asset
• % rate applied to the cost of the asset in its first year, and applied to the net book value for subsequent years

Question 8

what is residual value

Answer 8

• the estimated amount of value that an asset carry at the end of its useful life

Question 9

• asset cost (laptop) cost £1000.
• It will be used by business for 4 years (economic life)
• It has £200 at the end of its life.
• Depreciation Rate per annum (p.a.) = 25%

Answer 9

Annual Depreciation (straight line)
= (Cost – Residual Value) X Depreciation rate
=(£100 - £20) X 25% = £20 per year

Question 9

depreciation reducing balance method
- asset cost £100
- rate per annum 40%
- economic life 4 years

Answer 9

Annual depreciation
Year 1 = £100 * 40% = £40
Year 2 = (£100 - £40) 40% = £24
Year 3 = [£100–(£40+£24)]40% = £14.4

Question 10

what is depreciation

Answer 10

• a method to measure the consumption of a fixed asset during the year
• applies the accrual concept to charge the depreciation in the P/L account with the portion of the cost of the fixed asset each year

Question 11

how is depreciation of fixed assets estimated

Answer 11

using cost, residual (scrap) value and expected years of service

Question 12

recording depreciation rules

Answer 12

Dr. Depreciation Expense A/c XXX (I.S)
Cr. Accumulated Depreciation A/c XXX (S.O.F.P)
THE FIXED ASSET IN THE S.O.F.P:
Cost XXX
Less: accumulated depreciation (XXX)
= Net Book Value XXX

Question 13

straight line depreciation

Answer 13

The depreciation expense each year is computed as
= (Cost - Residual Value) / Life.
OR, can be expressed as a % applied to cost.
Office Furniture & Fittings = 20% x 18000 =
Motor Vehicles = (36,000** - 0) / 4 =£9,000
£3,600

Question 14

reducing balance depreciation

Answer 14

Example: Computer Equipment
(using a rate of 40% p.a.)
Depreciation expense in 1st year
= 40% x 28,000** =
Depreciation expense in 2nd year
= 40% (28,000 - ______) =
£11,200
£11,200 £6,720

Question 15

what if the asset gets sold prior to the end of its useful life? (3)

Answer 15

• there will be profit or loss on disposal depending on:
  > market value (amount
  received for the asset)
  > net book value (value
  recorded at the point of
  sale in the sofp)