8: NCAs and Depreciation

Question 1

What are included in the costs of a non-current asset?

Answer 1

Any amount incurred to acquire the asset and bring it into a working condition

• Purchase price
• Delivery costs
• Legal fees
• Subsequent expenditure which enhances the asset

Question 2

Are assets under a lease agreement considered assets?

Answer 2

Yes!

There is a liability for the lease, which will be recognised within current and non-current liabilities

Question 3

The correct double entry to record the purchase of NCAs?

Answer 3

Dr Non-current asset
Cr Bank/Cash/Payables

Question 4

Can subsequent expenditure on a NCA be capitalised?

Answer 4

Yes, but it can only be added to the cost (capitalised) if it enhances the benefit of the asset

Question 5

Define depreciation

Answer 5

The systematic allocation of the depreciable amount of an asset over its useful life

Question 6

Define ‘residual value’ and ‘useful life’

Answer 6

Residual value: the estimated amount that an entity would currently obtain from disposing of the asset at the end of its useful life

Useful life: the period when an asset is expected to the available for use by an entity

Question 7

What may cause depreciation?

Answer 7

Use
Physical wear and tear
Passing of time
Obsolescence through technology and market changes
Depletion

Question 8

Does land get depreciated? And should you depreciate right-of-use assets?

Answer 8

No!

And yes - the useful life should be equivalent to the lease term.

Question 9

What happens (transaction and statement wise) when depreciation is recorded?

Answer 9

A depreciation expense is added, which is the amount for that year
(Dr Dep Expense)

The carrying amount of the asset is reduced by this amount for the year, adding to accumulated dep
(Cr Accumulated Depreciation, which offsets the Dr of the asset)

Question 10

How do you calculate the straight line method?

Answer 10

(Cost - Residual Value) / Useful Life

Or (when no residual value)

X% x cost

NOTE: CAN BE CHARGED MONTHLY!

Question 11

Define ‘carrying amount’

Answer 11

Original cost of the non-current asset less accumulated depreciation on the asset

Question 12

How should an accountant use professional scepticism with depreciation?

Answer 12

• Dep method should be reviewed each year and changed if it no longer reflects the asset’s pattern of use
• The residual value and useful life should be reviewed each year and changed if expectations differ from estimates
• Assets carrying amount is then depreciated using new estimates

Question 13

The calculations for subsequent depreciation?

Answer 13

Straight line: (carrying value at date changed) - RV / remaining useful life

Remaining balance: % x carrying value at date changed

Basically change cost to carrying value and adjust the useful life!

Question 14

What’s the calculation to figure out profit/loss on a sale of an asset?

Answer 14

Proceeds
Less: carrying value
= profit/loss on disposal

Question 15

Where do the disposal and impairment accounts sit, and are they debit or credit?

Answer 15

They are both debit (the offset the credit on the NCA account)
They live in the P&L as expenses

Question 16

What is the 4 step process for disposing of a NCA?

Answer 16

1. Remove the original cost of the asset from their account (Cr asset Dr Disposals)
2. Remove the Acc Dep for that item (Dr Acc Dep Cr Disposals
3. Record the cash proceeds from sale (Dr cash Cr disposals)
4. Balance off the disposals account to identify the profit or loss

Question 17

How does the disposal process change when there is a part exchange allowance?

Answer 17

After the original cost and dep has been removed on the accounts, the asset account is Dr with the PEA, and the disposals is credited that amount

Instead of cash from the sale being recorded, the cash from the purchase of the new item is recorded instead

At the very end, any new dep for the new item is added on

Question 18

What is impairment and how is it determined?

Answer 18

Impairment is when the recoverable amount of an asset is less than its carrying amount

The recoverable amount is the greater value of:
- fair value less costs to sell
- value in use (the present value of future cash flows expected to be generated by the asset)

Question 19

How is impairment recorded?

Answer 19

It is an addition into the dep account

The difference between the carrying amount and the recoverable amount is:

Dr impairment expense
Cr Accumulated dep

Question 20

What is a non-current asset register and what is it’s purpose?

Answer 20

A list of all NCAs in the business

Broken down into location and asset type

To control NCAs and keep track of what is owned and where it is kept

Question 21

Examples of intangible NCAs and how they differ from tangible NCAs

Answer 21

Patents, goodwill, copyrights, licences

Not much - amortised instead of depreciated, and this amortisation works the same way as dep

Note: purchased assets go on SFP, but internally generated ones do not

Question 22

What is goodwill

Answer 22

The excess value of a business above the carrying amount of its assets less its liabilities

Can come from reputation, skills, experience, customer relationships

Valued but generally not recorded in statements as is highly subjective - unless purchased in the acquisition of another company

Reviewed annually for impairment