8: Further fixed assets Flashcards
Characteristics of an operating lease (4)
- Short term
- User rents the asset
- Not shown as an asset on the B/S
- Rent is shown as an expense on the pnl
What is the double entry for an operating lease?
Dr Operating lease expense
Cr Bank
Characteristics of a finance lease (4)
- Long term
- Pays rent amounts
- Considered an asset on the balance sheet
- Record depreciation and interest expense
What are the double entry recordings for a finance lease and hire purchase? (4)
- When lease is taken out
Dr Fixed asset cost account
Cr Loan creditor
- If deposit is paid
Dr Loan creditor
Cr Cash and bank
- For each periodic payment
Dr Loan creditor
Cr Cash and bank
- Re allocate interest
Dr Finance expense
Cr Loan creditor
(x months of interest payable, it is an expense)
What is the difference between a finance lease and hire purchase?
The only difference is that with a finance lease, you don’t have the option to purchase the asset as the end of the lease term. However with a hire purchase you do.
How should you calculate the interest payable, or ‘finance charge’ in a question?
(Total amount paid by way of instalments + deposit) - cash price if purchased outright = total finance charge
What are the two types of government grants?
Revenue grants
Asset grants
What is the double entry for a revenue grant?
Dr Bank
Cr Grant income account (in the pnl)
What are the two double entries for an asset grant?
- Initial cash receipt
Dr Bank
Cr Grant account (deferred income B/S)
- ‘Release’ of the grant income in proportion with the associated depreciation expense in the pnl
Dr Grant account (deferred income B/S)
Cr Grant income account (pnl)
For example, if the depreciation is 2% p.a, you will ‘release’ the grant from the grant account (deferred income on B/S) by 2% of the government grant.
R&D: Define research (3)
- Original investigations
- Gain new scientific or technical knowledge
- For alternative products, devices, systems, processes and services
R&D: Define development (2)
- The use of new scientific or technical knowledge
- To produce new or substancially improved materials, devices, products, systems, processes and services
How should research expenditure be shown on the financial accounts?
Research expenditure should ALWAYS be shown as an expense on the profit and loss account.
It will never be classed as an asset on the balance sheet on the basis that there is no certainty it will provide the business with future revenues
How should development expenditure be shown on the financial accounts?
Development expenditure should be written off as incurred costs on the profit and loss.
UNLESS
it can be related to a project that is technically feasible or commercially viable and the business is virtually certain it will provide future economic benefit.
Should ammortisation occur on research and/or development expenditure?
Ammortisation should only occur to development expenditure IF it is classed as an asset on the balance sheet.
What does FRS Section 18 state about the useful life of intangible assets? (2 points)
- Intangible fixed assets should always have a finite useful life
- If the useful life is not reliable, it should not exceed 10 years
