7. Non-current assets: acquisition and depreciation

Question 1

How do you categorise a non-current asset? (5)

Answer 1

• Long-term
• Tangible/Intangible
• Not bought for resale
• Generates income
• Not normally liquid

Question 2

What is the difference between capital and revenue expenditure?

Answer 2

Revenue expenditure is all expenditure on current assets - this is aimed at generating income within the current accounting period.

HOWEVER…

Capital expenditure is all expenditure on non-current assets. This is long term in nature as the business intends to receive benefits over a longer amount of time.

Question 3

1. What does capital expenditure include? (5)

2. What does revenue expenditure not include? (4)

Answer 3

1. Capital
   - Purchase price
   - Delivery
   - Legal fees
   - Trials and tests
   - Enhancements
2. Revenue
   - Repairs and renewals
   - Overheads
   - Training
   - Wastage

Question 4

1. How do we post the purchase of an asset?
2. What is depreciation?
3. How do we post depreciation?

Answer 4

1. Dr asset code, Cr cash/payables
2. Depreciation is the cost of the asset over the period in which it will be used.
3. Dr depreciation (SOPL), Cr asset depreciation (SOFP)

Question 5

1. Which IAS is responsible for assets?

2. The depreciation method applied to a non-current asset should reflect…

Answer 5

1. 16

2. the pattern of future economic benefit

Question 6

What are the two methods of deprecation? Explain them

Answer 6

1. Straight line.

Depreciation = (cost-residual value)/useful life
Same charge every year

2. Reducing balance

Depreciation = x% x carrying amount

Question 7

In terms of buying/selling assets in regards to depreciation, what two methods can be taken?

Answer 7

1. Provide a full years depreciation on year of purchase and none on year of disposal.
2. Monthly/pro-rata depreciation