6 - Tangible non-current assets

Question 1

how are non current assets commonly categorised

Answer 1

• land and buildings
• machinery
• motor vehicles
• furniture and fittings
• computers

Question 1

what is property, plant and equipment

Answer 1

items which are:
‘held for use in the production or supply of goods or services or for administrative purposes’ and ‘are expected to be used during more than one period’

Question 2

what is capital expenditure

Answer 2

= results in the acquisition/replacement/improvement of non current assets

results in a non current asset being shown on statement of financial position

should be recorded in non current asset register

Question 3

what is revenue expenditure and where does it appear

Answer 3

= for the trade of the business or to repair, maintain or service non-current assets

results in expense in statement of profit/loss

Question 4

what is capitalisation policy

Answer 4

when businesses set minimum expenditure amounts for items to be capitalised, eg 500$

= if business has items of capital expenditure under $500 then it will be recorded in statement of profit/loss even though they are capital expenditure

Question 5

other considerations in a capitalisation policy

Answer 5

the lifespan of a product
short lifespan = written off to profit/loss quickly so account wouldn’t change much

Question 6

what does the cost of property, plant and equipment include

Answer 6

• purchase price
• costs directly linked to procurement and condition to be operated

Question 7

examples of capitalised costs

Answer 7

• cost of purchase, including delivery
• cost of construction, including labour costs
• cost of site preparation, including labour costs
• cost of installation and assembly
• cost of testing
• professional fees

NOT CAPITALISED =
- repair, maintenance and servicing costs
- admin and overheads

Question 8

where is a non current asset accounted for

Answer 8

when a non current asset meets criteria for capitalisation = recorded in NOMINAL LEDGER

Question 9

what happens when a non current asset is purchased for cash

Answer 9

• increases cost of non current assets in statement of financial position
• reduces funds in business’ bank account

Question 10

what is depreciation

Answer 10

process of allocating the cost of non current assets to different financial periods in order to match the cost of the asset with the consumption of the assets economic benefits

Question 11

why is depreciation needed

Answer 11

arises from the accruals assumption

if money is expended in purchasing an asset then the amount expended must at some time be charged against profits

HOWEVER, land usually has unlimited useful life so isn’t depreciated, but buildings have limited life

Question 12

depreciation key terms

Answer 12

DEPRECIABLE AMOUNT = cost of the asset - residual value (amount subject to depreciation)
RESIDUAL VALUE = amount asset can be sold for at end of useful life (scrap value)
ACCUMULATED DEPRECIATION = total amount of depreciation that has been charged on an asset to date
CARRYING AMOUNT = value at which asset is shown in the statement of financial position. calculated as cost of asset - accumulated depreciation

Question 13

two methods for calculating depreciation?

Answer 13

1. straight line method
2. reducing balance method

Question 14

what is the straight line method

Answer 14

most commonly used

total depreciable amount charged in equal instalments to each accounting period over expected useful life of asset

Question 15

straight line method FORMULA

Answer 15

1. depreciation = (cost - residual figure) / useful life in yrs
   OR
2. (cost - residual value) x %

suitable for assets which are used up evenly over useful life

Question 16

what is the reducing balance method

Answer 16

calculates annual depreciation charge as a fixed % of carrying amount of asset

may be used when benefits obtained by business from asset use over time declines

eg machine in factory, productivity falls as machine gets older

Question 17

reducing balance method FORMULA

Answer 17

depreciation = depreciation rate (%) x carrying amount

Question 18

what happens if assets are acquired part the way through the year

Answer 18

• either charges 12 months worth of depreciation regardless of when asset was acquired
  OR
• calculate depreciation on pro-rota basis meaning it will charge depreciation on asset for number of months held

Question 19

what is the dual effect of depreciation

Answer 19

1. reduces carrying amount of non current asset on statement of financial position through increasing accumulated depreciation on non current assets. accumulated depreciation account (credit balance) is offset against non current asset cost account (credit)
2. it is an expense in the statement of profit or loss

Question 20

what accounts are set up to record depreciation

Answer 20

two additional accounts:
1. debit depreciation charges (SPL)
2. credit non current asset accumulated depreciation (SOFP)

Question 21

what are the considerations of disposal of non current assets

Answer 21

1. gain/loss arising on disposal
2. accounting entries to record disposal
3. offering an asset in part exchange against purchase of a new asset

Question 22

what happens when a non current asset is disposed

Answer 22

the actual amount shown in financial statement = carrying amount of asset

when a non current asset is disposed of, its carrying amount needs to be removed from statement of financial position and a gain/loss will arise

Question 23

how do you know if there is a gain/loss on disposal

Answer 23

sales proceeds > carrying amount = gain
sales proceeds < carrying amount = loss

Question 24

what does gain/loss mean in disposal

Answer 24

GAIN = asset suffered too much depreciation during its lifetime and some of this must be credited back to statement of profit/loss
LOSS = asset was not depreciated enough during its lifetime and so an extra charge is needed on disposal in statement of profit/loss

Question 25

what is a part exchange

Answer 25

instead of receiving sale proceeds in the form of cash, a part exchange allowance could be offered against the cost of a replacement asset

part exchange allowance takes the place of sales proceeds in the disposals account

Question 26

what is a non current asset register

Answer 26

records all tangible non current assets owned by the business, listing detailed information on the assets including:
- reference/serial number
- item description
- date asset was acquired
- useful economic life (UEL)
- depreciation method
- depreciation charge for current year
- accumulated depreciation
- carrying amount

is used internally, not part of nominal ledger

Question 27

what is a cost model

Answer 27

an item is carried at historical cost less accumulated depreciation

Question 28

what is a revaluation model

Answer 28

item is carried at fair value less any subsequent accumulated depreciation

Question 29

what is fair value

Answer 29

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

= the market value of an asset

Question 30

what is the frequency of valuation

Answer 30

depends on the changes in the fair values of the items or property, plant and equipment being revalued

however, if one item is revalued then the entire class of property, plant and equipment that the asset belongs to must also be revalued. ie, if you revalue one building you have to revalue them all

Question 31

what happens after valuation if amount increases

Answer 31

if the assets carrying amount increases, in the nominal ledger:
- debit, non current asset cost (to make cost equal to valuation)
- debit, accumulated depreciation (to cancel all previous depreciation)
- credit, revaluation surplus

Question 32

what is other comprehensive income (OCI)

Answer 32

when a non current asset is revalued the gain is unrealised= the asset hasn’t been sold so gain is unrealised

= not included in statement of profit or loss and instead credit is included in other comprehensive income

when asset that has been revalued is sold, any remaining balance on revaluation surplus is recognised in retained earnings

Question 33

what happens after valuation if amount decreases

Answer 33

if carrying amount is decreased, entry should be made directly to the statement of profit or loss as long as asset hasnt been previously revalued

entry is:
- debit, statement of profit or loss
- debit, accumulated depreciation (to cancel all previous depreciation)
- credit, non current asset cost account (to make cost = valuation)