6. Depreciation

Question 1

What is depreciation?

Answer 1

The charging of the cost of a non-current asset over its useful life.

Question 2

In which statement is depreciation expense shown?

Answer 2

The Statement of Profit or Loss.

Question 3

What is straight line depreciation?

Answer 3

Where depreciation is charged at a fixed amount each year.

Question 4

How is the depreciation charge calculated for the straight line method?

Answer 4

(Original cost - residual value) / estimated useful life

Question 5

What is reducing balance depreciation?

Answer 5

When the depreciation charge has a logarithmic progression over time.

Depreciation charge becomes progressively lower each year.

Question 6

What is the accounting entry to charge depreciation?

Answer 6

• Debit Depreciation Expense account.
• Credit Accumulated depreciation account

Question 7

On which statement is the depreciation expense account shown?

Answer 7

The Statement of Profit or Loss.

Question 8

On which statement is the accumulated depreciation account shown?

Answer 8

The Statement of Financial Position.

Question 9

When might a company choose to revaluate a non-current asset?

Answer 9

When the value of said asset is in excess of their net book value (carrying value).

Question 10

What may cause a non-current asset to be in excess of their net book value?

Answer 10

A period of high-inflation.

Question 11

What is profit from revaluation called?

Answer 11

Unrealized profit.

The asset has not been sold, so no real profit has been made.

Question 12

When selling a non-current asset, what is the profit or loss on sale?

Answer 12

The difference between the proceeds of the sale, and the value in the financial statements.

Question 13

When selling a non-current asset, what is the accounting entry for the cost of the asset sold?

Answer 13

• Debit Disposal account
• Credit Asset account

Question 14

When selling a non-current asset, what is the accounting entry for the accumulated depreciation on the asset sold?

Answer 14

• Debit Accumulated depreciation account
• Credit Disposal account

Question 15

When selling a non-current asset, what is the accounting entry for the proceeds of sale?

Answer 15

• Debit Cash
• Credit Disposal account

Question 16

When selling a non-current asset, what is the accounting entry for the disposal account once all other entries are made?

Answer 16

It should be transferred to the SoPL.

Question 17

Where is profit from revaluation of a non-current asset shown?

Answer 17

Separately from the SoPL, in a revaluation reserve.

Question 18

In regards to IAS 16, what must happen when an item in property, plant or equipment is revalued?

Answer 18

The entire class of property, plant and equipment to which the asset belongs must be revalued.

Question 19

Does depreciation charge change when an asset has been revalued?

Answer 19

Yes, the future charge should be based on the revalued amount and the remaining economic life of the asset.

Question 20

What is a non-current asset register?

Answer 20

A record of the detailed information related to non-current assets.

It is not part of the double entry system.

Question 21

What information is included in the non-current asset register?

Answer 21

• Cost of each asset
• Date each asset was purchased
• Accumulated depreciation for each asset
• The depreciation method used
• The estimated residual value of each asset
• Supplier’s information and item’s serial number
• Physical location of the asset
• Date the asset was last inspected
• Date the asset was scrapped or sold