7: Fixed assets and depreciation

Question 1

Capital expenditure is expenditure incurred in: (2)

Answer 1

1. Acquisition of assets for continuing use in the business

2. Alteration, improvement of assets for the purpose of increasing the revenue earning capacity

Question 2

Revenue expenditure is expenditure incurred in: (3)

Answer 2

1. Acquisition of assets required for conversion into cash
2. the manufactureing, selling, or distribution of goods and day to day admin
3. the maintenance of fixed assets

Question 3

Example of intangible fixed asset

Answer 3

Goodwill, copyrights, patents

Question 4

Double entry for acquisition of an asset

Answer 4

Dr Assets

Cr Cash and bank

Question 5

How is an asset’s useful life determined? (5)

Answer 5

Timing
Depletion
Economic obsolence 
Pre determined
Physical deterioration

TONNY DEPP (T. DEPP)

Question 6

What are the two methods called for calculating depreciation? (2)

Answer 6

1. Straight line method

2. Reducing balance method

Question 7

Three factors to consider when determining the amount of depreciation expense: (3)

Answer 7

1. The carrying amount of the asset
2. The length of the asset’s expected useful life to the entity
3. The estimated residual value of the asset at the end of its useful life to the entity.

Question 8

Explain the straight line method of depreciation

Answer 8

Annual value = Cost less residual value (if any) / Useful life

Question 9

What does it mean by the carrying amount? (2)

Answer 9

The asset is valued to the business by:

• The historic cost (what it orignally cost to purchase)
• The asset’s revalued amount

Question 10

Net Book Value NBV =

Answer 10

Asset’s cost less accumulated depreciation

Question 11

Mr Bob buys a machine which costs £11,000 on 1 Jan 2020. It is expected to be used for four years after which time it is hoped it will realise £1,000. Show the relevant depreciation expense for 2020 and 2021.

Answer 11

Use formula: 11000-1000 / 4 = 2500 p.a

2020 depreciation = £2,500
2021 depreciation = £2,500

Question 12

Why might someone use the straight line method over the reducing balance method?

Answer 12

The straight line method gives a consistant and even level of depreciation each year, which might be appropriate for that particular asset.

Question 13

Why might someone use the reducing balance method over the straight line method?

Answer 13

Some types of assets may depreciate in the earlier years of it’s life (such as a car) and therefore reducing balance may be more appropriate.

Question 14

Explain the reducing balance method (no calculations necessary)

Answer 14

It applies a fixed percentage to the asset’s net book value.

net book value = cost - accumulated depreciation

Question 15

Describe the 4 double entries for the disposal of a fixed asset (4)

Answer 15

1. Transfer the cost of the fixed asset to the disposal account

Dr Disposal a/c
Cr Fixed asset cost account

2. Transfer the accumulated depreciation from the fixed asset to the disposal account

Dr Provision for depreciation a/c
Cr Disposal a/c

3. Record the cash receipt on sale

Dr Bank
Cr Disposal a/c

4. Close off the disposal account
   The balance on the disposal account will determine whether it was a profit or loss on sale and will be sent to the pnl

Question 16

Describe the 4 double entries for the part exchange for a fixed asset (5)

Answer 16

1. Transfer cost of fixed asset to the disposal account

Dr Disposal account
Cr Fixed asset cost account

2. Transfer the accumulated depreciation to the disposal account

Dr Provision for depreciation
Cr Disposal a/c

3. Record the amount you will receive for your old asset (part exchange allowance)

Dr Fixed asset cost account
Cr Disposal a/c

4. Record the rest of the cash payment for the new fixed asset

Dr Fixed asset cost account
Cr Bank

5. Then close off the disposal account and transfer to P&L