accounting for non-current assets

Question 1

Property, Plant and equipment (PPE)?

Answer 1

• tangible items
• with specific use within entity
• expected to be used during more than one period (non-current in nature)

Question 2

what are PPE?

Answer 2

physical assets used in business to provide future economic benefits for a number of years

Question 3

property includes:

Answer 3

land and building

Question 4

plant and equipment include:

Answer 4

cash registers, computers, office furniture, factory machinery, motor vehicles

Question 5

PPE assets initially recorded at?

Answer 5

cost

Question 6

fair value is?

Answer 6

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

Question 7

cost of an asset consists of?

Answer 7

fair value of all expenditure necessary to acquire the asset and make it ready for use, e.g. purchase price, freight costs paid, installation costs (capital expense)

Question 8

recognition criteria of PPE?

Answer 8

• probable that economic benefits will flow to entity

- cost can be reliably measured

Question 9

two measurement models?

Answer 9

cost model and revaluation model

Question 10

depreciation expense in income statement recognises?

Answer 10

economic benefits derived from use of an asset recognised on systematic basis over asset’s useful life

Question 11

depreciation is process of…

Answer 11

allocating to expense the cost of a PPE asset over its useful (service) life in a rational and systematic manner

Question 12

what does land not do?

Answer 12

depreciate

Question 13

calculation of depreciation involves consideration of:

Answer 13

cost (c)
useful life (n)
residual value (r)

Question 14

cost is?

Answer 14

all expenditures necessary to acquire the asset and make it ready for intended use

Question 15

useful life?

Answer 15

estimate of expected life based on intended use, need for repair, vulnerability to obsolescence and legal life

Question 16

residual value?

Answer 16

estimate of asset’s value at end of its useful life

Question 17

depreciable cost/amt?

Answer 17

cost - residual value

Question 18

accumulation depreciation?

Answer 18

represents total amount of asset’s cost that has been charged to depreciation expense since asset was acquired.

Question 19

carrying amount (book value)?

Answer 19

cost - accumulated depreciation

Question 20

3 depreciation methods:

Answer 20

straight-line
diminishing balance
unit-of-production

Question 21

Depreciation: Straight-line method

depreciation expense is…

Answer 21

same each year as benefit consumed at same rate each year

Question 22

Depreciation: Straight-line method

calculation for annual charge:

Answer 22

(cost of asset - residual value) / useful life of asset
OR
(c - r)/n

Question 23

Depreciation: Diminishing-balance method

depreciation expense…

Answer 23

decrease each year as greater benefits consumed earlier in assets life

Question 24

Depreciation: Diminishing-balance method
calculation:

Answer 24

1 – (r / c)^1/n

Question 25

Depreciation: Diminishing-balance method

depreciation expense calculation:

Answer 25

carrying amount x depreciation rate

Question 26

Depreciation: Units-of-production method

useful life expressed in terms of:

Answer 26

total units of production/use expected from asset

Question 27

Depreciation: Units-of-production method

calculation?

Answer 27

depreciation cost per unit:

depreciable cost / total units of production

Question 28

Depreciation: Units-of-production method

depreciation expense calculation

Answer 28

depreciation cost per unit x yearly units of production

Question 29

subsequent expenditures:

Answer 29

a. Ordinary repairs – Revenue expenditures
• Expenses in maintaining operating efficiency of the asset
• Expensed in operating statement Dr Repairs Expense
Cr Cash

b. Additions and improvements – Capital expenditures
• Costs incurred to increase operating efficiency
• Expenditure capitalised and depreciated over asset’s
remaining useful life
Dr Asset (e.g., Delivery Truck)
Cr Cash

Question 30

PPE assets may be disposed of by

Answer 30

• Sales
Equipment is sold to another party
• Scrapping
Equipment is scrapped or discarded
• Exchange
Existing equipment is traded for new equipment

Question 31

SALE OF NON-CURRENT ASSETS

proceeds recorded as:

Answer 31

incomes at gross amount received

Question 32

SALE OF NON-CURRENT ASSETS

carrying amount represent

Answer 32

expense

Question 33

SALE OF NON-CURRENT ASSETS

selling price > carrying amount of asset:

Answer 33

there is gain on disposal - gain reported in income statement as past of income

Question 34

SALE OF NON-CURRENT ASSETS

selling price < carrying amount

Answer 34

there is loss on disposal, which is reported as expense

Question 35

Identify three key decisions involving non-current assets.

Answer 35

what non-current assets does the entity need to sustain or expand its future operations and profitability? How much of the entity’s resources should be tied up in non-current assets? Should an entity buy or rent?

Question 36

What impact does GST have on accounting for non- current assets?

Answer 36

GST only impacts on accounting for the purchase and sale of non-current assets

Question 37

Contrast the effects of the three depreciation methods explained in this chapter on annual depreciation expense.

Answer 37

(a) Straight-line - constant amount
(b) Diminishing-balance - decreasing amount
(c) Units-of-production - varying amount.

Question 38

Distinguish between expenses and capital expenditures during an asset’s useful life.

Answer 38

Capital expenditures are additions and improvements incurred to increase the operating efficiency, productive capacity or the expected useful life of the asset - usually material in amount, incur infrequently and are recorded as debits to the PPE asset affected

expenses are expenditures for the ordinary repairs made to maintain the operating efficiency and expected productive life of the asset - usually occur frequently and are recorded as a debit to the Repairs and Maintenance Expense account as incurred and are an expense in the income statement.

Question 39

implications for having one entity with longer depreciation period than other?

Answer 39

By selecting a higher estimated useful life, its spreading the PPE asset’s cost over a longer period of time. The depreciation expense reported in each period is lower and profit is higher.
choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower profit. Therefore, longer may appear to be a better performer

Question 40

which depreciation method preferred for tax purposes?

Answer 40

depre expense highest under unit of production method = higher expense, lower tax payment

Question 41

depre method for profit of company?

Answer 41

depre method that result in lowest expense