Chapter 10 - Non-current assets, depreciation and impairment

Question 1

What is a NCA?

What type of expenditure is this?

What is the journal if we acquire an NCA?

Answer 1

Non Current Asset

Asset kept for more the year When an asset is acquired that is expected to be held for more than one accounting period, we account for this capital expenditure

Dr Non-current asset £ cost
Cr Cash / Trade payables £ cost

(depends how we pay - cash or credit)

Question 2

What are examples of a NCA?

Answer 2

Non-current assets ** (eg land and buildings, motor vehicles, plant and equipment, fixtures and fittings, intangibles)

** disclosed net of accumulated depreciation (negative asset, will be a credit)

Question 3

What do we need to factor in to calculate the cost of a NCA?

Answer 3

The cost of an asset includes all directly attributable amounts to bring it to its present location and condition. It can include:
- Purchase price
- Delivery costs
- Stamp duty and import duties (and irrecoverable VAT on cars)
- Site preparation
- Installation and assembly costs e.g. Manufacturing costs
- Professional fees
- Testing costs

It can also include subsequent costs that enhance (increase the earning capacity) the asset, such as major improvements or a major overhaul.

Question 4

What is not factored in to calculate the cost of a NCA?

Answer 4

If it is going to maintain (so not increase) the earning capacity then it is an expense so not added to NCA.

Maintain earning capacity = Expense

These are all expenses

It does NOT include:
- General overheads
- Staff training costs
- Fuel for cars
- License fees for operating the asset
- Repairs and maintenance

Question 5

If we are maintaining the earning capacity of a NCA what should I debit?

Answer 5

Should be an expense

If it is going to maintain (so not increase) the earning capacity then it is an expense so not added to NCA.

Maintain earning capacity = Expense

These are all expenses

It does NOT include:
- General overheads
- Staff training costs
- Fuel for cars
- License fees for operating the asset
- Repairs and maintenance

Question 6

What does useful life mean?

Answer 6

How long something is useful to the business not the physical life. Every tangible NCA has a limited/useful life EXCEPTION IS LAND

Question 7

What tangible NCA is an exception to the useful life concept

Answer 7

Land

Question 8

What is depreciation? What accounting principle is used?

Answer 8

Depreciation is an application of the accruals principle. Matches cost to No of years the business can benefit from the asset

It matches the cost of the asset to the period that the business expects to gain the benefits from using it. It is defined as the “systematic allocation of the cost of an asset, less its residual value, over its estimated useful life”.

Question 9

What 3 factors should we consider when looking at an asset depreciation?

Answer 9

To calculate an asset’s depreciation, the following factors are relevant:
- Asset cost
- Useful life
- Asset residual value
The residual value is the estimated scrap value for an asset at the end of its useful life for the business.

Question 10

What is the residual value? If this not given in a question, how would we work this out?

Answer 10

The residual value is the estimated scrap value for an asset at the end of its useful life for the business.

For exam purposes, always assume the residual value is zero unless told otherwise.

Question 11

What is the journal when we want to a NCA accumulated depreciation what do we do?

Answer 11

For each period’s calculated depreciation charge:
Dr Depreciation expense (profit or loss)
Cr Accumulated depreciation (statement of financial position)

There is no impact on the non-current asset cost accounts, but in the final statement of financial position the balance on the accumulated depreciation account (Cr) is offset against the cost account (Dr) to derive the carrying amount (carrying value or net book value) of the non-current assets. So the cost - accumulated depreciation = Carry Amount which is the final figure in our SOFP

Question 12

When we journal the NCA to accumulated depreciation why do we not touch the NCA account?

Answer 12

There is no impact on the non-current asset cost accounts, but in the final statement of financial position the balance on the accumulated depreciation account (Cr) is offset against the cost account (Dr) to derive the carrying amount (carrying value or net book value) of the non-current assets. So the cost - accumulated depreciation = Carry Amount which is the final figure in our SOFP

For each period’s calculated depreciation charge:
Dr Depreciation expense (profit or loss)
Cr Accumulated depreciation (statement of financial position

Question 13

Depreciable Amount formula

Answer 13

Depreciable Amount = Cost - Residual Value

Question 14

Carrying Amount/Value (CA) formula

Answer 14

Carrying Amount = Cost - Accumulated depreciation

This is the figure that would appear in our SOFP under our NCA

Accumulated depreciation is all the years I have had the asset. Refers to the accumulated reduction in the value of an asset over time. When an asset is first purchased, it’s typically assigned a value reflecting its expected lifespan, gradually reducing over time. Accumulated depreciation is the total of this depreciation to date.
a.g after 1 year would be price per year, after 7 years would be acc depreciation x7 and so on

Question 15

What financial statement would a Carrying Amount be detailed in?

Answer 15

SOFP

Question 16

What is Accumulated Depreciation?

Answer 16

Accumulated depreciation is all the years I have had the asset. Refers to the accumulated reduction in the value of an asset over time. When an asset is first purchased, it’s typically assigned a value reflecting its expected lifespan, gradually reducing over time. Accumulated depreciation is the total of this depreciation to date.

Question 17

What are the two key methods to calculate depreciate charge for a period?

Answer 17

1. Straight line basis - depreciation is the same each year e.g. property
2. Reducing balance basis - depreciation starts high then lowers each year e.g. computers/cars

Question 18

How do you calculate straight line depreciation?

Answer 18

Depreciation Charge/Expense =
Cost - Residual Value
________________________
Useful life (month or years)

It can be expressed as a % of cost (assuming no residual value) or number of years. For example:
 10% OF COST straight line = 10 years (120 months) - REDUCING IT OVER 10 YEARS
 25% straight line = 4 years (48 months)
 20% straight line = 5 years (60 months)
 5% straight line = 20 years (240 months)

100/% = No of years
100/No of years = % of cost

In your exam, straight line depreciation will normally be calculated on a monthly basis.

Question 19

How many years/months is
 10% straight line
 25% straight line
 20% straight line
 5% straight line

Answer 19

It can be expressed as a % of cost (assuming no residual value) or number of years. For example:
 10% OF COST straight line = 10 years (120 months) - REDUCING IT OVER 10 YEARS
 25% straight line = 4 years (48 months)
 20% straight line = 5 years (60 months)
 5% straight line = 20 years (240 months)

Question 20

How do you calculate the depreciation to be charged to the profit or loss for a year?

Answer 20

From the ledger account, it is possible to distinguish assets held all year (the opening figure less the disposals during the year) on which a full years depreciation should be charged.
The depreciation on the additions and disposals should then be calculated on a pro-rata basis based on the number of months the assets were held.

Question 21

How do you calculate Reducing Balance depreciation?

Answer 21

The annual depreciation charge is a fixed percentage of the brought forward carrying amount (carrying value or net book value) of the asset. It allocates a greater proportion of the cost to the asset’s earlier years, and a lower proportion in its later years and the asset becomes less useful to the business.

(Cost - Accumulated Depreciation) x % given

Carrying Amount = (Cost - Accumulated Depreciation)

Would use a pro forma table in the layout as
Carrying Amount Accumulated depreciation
Asset at cost INITIAL COST
Depreciation Year 1 INTIAL COST X % INITIAL COST x depreciation %
Carrying Amount Year 1 INITIAL COST - ACC DEP
Depreciation Year 2 CA YR 1 X % CA YR 1 x depreciation %
Carrying Amount Year 2 CA YR 1 - ACC DEP YR 2
Depreciation Year 3 CA YR 2 X % CA YR 2 x depreciation %
Carrying Amount Year 3 CA YR 2 - ACC DEP YR 3
Depreciation Year 4 CA YR 3 X % CA YR 3 x depreciation %
Carrying Amount Year 4 CA YR 3 - ACC DEP YR 4
Depreciation Year 5 CA YR 4 X % CA YR 4 x depreciation %
Carrying Amount Year 5 CA YR 4 - ACC DEP YR 5

Question 22

How do you calculate Carrying Amount in Reducing Balance depreciation?

Answer 22

Carrying Value after n years = Cost × (1 – depreciation rate as a decimal)n

power of n is the years

Question 23

When we enhance (increase the earning capacity) of an asset after its initial purchase this is added to the cost of the asset and we need to calculate the cost of the depreciation on this. What is that term called?

Answer 23

Depreciating enhancement expenditure
Where expenditure is incurred to enhance an asset after its initial purchase, this is added to the asset’s cost and depreciated over the asset’s remaining useful life. This type of expenditure is sometimes called subsequent expenditure.

e.g.

Malcolm buys a building on 1.1.X0 for £200,000. On 1.1.X2 he adds an extension that cost £50,000.
Calculate the annual depreciation charge before and after the extension is built, on the basis of straight line depreciation over 10 years, with no residual value.
SOLUTION
Before extension: £200,000/10 years = £20,000 per annum
After extension: £200,000/10years + £50,000/8 years = £26,250 per annum

Question 24

How ofter is the depreciation method of an asset reviewed?

Answer 24

The depreciation method should be reviewed annually for appropriateness.

Question 25

When there is a change in depreciation method how would we approach this?

Answer 25

The depreciation method should be reviewed annually for appropriateness. If there are any changes in the expected useful life, pattern of usage or residual value then the method should be changed. The remaining carrying value less the residual value should be written off over its remaining useful life. Only current and future periods will be affected.

Remaining Useful Life

Question 26

What is a Fall in value (impairment loss)

Outline the PROFORMA

Answer 26

Sometimes an asset might suffer a permanent fall in its value (perhaps due to damage) called an impairment loss. The asset should be written down to its new carrying value, called the “recoverable amount” with the difference being expensed to the profit or loss.
To decide the recoverable amount we choose the higher figure out of the “fair value less cost to sell” (SELL) of the asset and its “value in use” (KEEP)

PROFORMA

                                              NCA
                                    Lower               Recoverable Amount Carrying Amount                                              Higher

Cost X Fair value less Value In Use
Acc Dep (X) cost to Sale (KEEP)
___________________ (SELL)
Carrying Amount
___________________
___________________

Question 27

What is a non-current assets disposal

Answer 27

When a business sells NCA early
Decides to sell off a non-current asset it will make an accounting profit or loss on disposal.

Question 28

How can we calculate if we are making a profit or loss on a disposal?

Answer 28

PROFORMA
£
Net disposals proceeds x
(cash when sold)

Less carrying value (x)
(at disposal)
_______________
Profit/loss on disposal x/(x)

Profit would be reported in other income in SPL
Loss would be reported as an expense in SPL

Question 29

If I want to calculate the profit or loss on disposal or to deduce the carrying value of an asset that has been disposed of, how would I work this out?

Answer 29

PROFORMA
£
Net disposals proceeds x
(cash when sold)

Less carrying value (x)
(at disposal)
_______________
Profit/loss on disposal x/(x)

IF THE VALUE IS A CR Profit would be reported in other income in SPL
IF THE VALUE IS A DR Loss would be reported as an expense in SPL

Question 30

What is the journal when we dispose of an asset?

Answer 30

SHORT CUT
DR CASH
DR ACC DEPRECIATION (clear to 0)
CR NCA COST (clear to 0)

Step 1: Remove cost of disposed asset from cost ledger
Dr Disposals account £ cost
Cr Non-current cost account £ cost

Step 2: Remove accumulated depreciation from the accumulated depreciation ledger
Dr Accumulated depreciation account £ accumulated depreciation
Cr Disposals account £ accumulated depreciation

Step 3: Account for the disposal proceeds
Dr Cash £ proceeds
Cr Disposals account £ proceeds

Question 31

reword
Accounting for disposals given in a part exchange
Sometimes an asset does not receive cash for an asset but instead receives a “part exchange” allowance against the cost of a new asset.
In this case, the three steps are the same but the cash proceeds in step 3 (Dr Cash) is replaced with part exchange value assigned to the old asset and debited to the new asset cost account.

Step 1: Remove cost of disposed asset from cost ledger (as before)
Dr Disposals account £ cost
Cr Non-current cost account £ cost

Step 2: Remove accumulated depreciation from the accumulated depreciation ledger (as before)
Dr Accumulated depreciation account £ accumulated depreciation
Cr Disposals account £ accumulated depreciation

Step 3: Account for the disposal proceeds (replace cash with trade in value)
Dr New asset cost account £ part exchange allowance
Cr Disposals account £ part exchange allowance

The remaining cash paid (after the part exchange allowance) for the new asset is then accounted for in the usual way:
Dr New asset cost account £ cash paid
Cr Cash £ cash paid

Answer 31

reword
Accounting for disposals given in a part exchange
Sometimes an asset does not receive cash for an asset but instead receives a “part exchange” allowance against the cost of a new asset.
In this case, the three steps are the same but the cash proceeds in step 3 (Dr Cash) is replaced with part exchange value assigned to the old asset and debited to the new asset cost account.

Step 1: Remove cost of disposed asset from cost ledger (as before)
Dr Disposals account £ cost
Cr Non-current cost account £ cost

Step 2: Remove accumulated depreciation from the accumulated depreciation ledger (as before)
Dr Accumulated depreciation account £ accumulated depreciation
Cr Disposals account £ accumulated depreciation

Step 3: Account for the disposal proceeds (replace cash with trade in value)
Dr New asset cost account £ part exchange allowance
Cr Disposals account £ part exchange allowance

The remaining cash paid (after the part exchange allowance) for the new asset is then accounted for in the usual way:
Dr New asset cost account £ cash paid
Cr Cash £ cash paid

Question 32

What is an asset register? What information can it contain?

Answer 32

The asset register is a detailed listing of all non-current assets held by an organisation.

It can be used to record information such as:
 Reference number (internal and/or manufacturers serial number)
 Location
 Purchase date
 Depreciation method
 Estimated useful life
 Residual value

In exam qs there will be a discrepancy between the nominal ledgers and asset register, this is usually due to a disposal not being recorded so we will need to look at the carrying value of the disposal.

Profit/loss on disposal = Proceeds - Carrying value at disposal

Question 33

Why is an asset register useful?

Answer 33

As the asset register is not part of the double entry system, it can be reconciled to the ledgers as check on the completeness and accuracy of the ledgers. This reconciliation can help detect stolen, damaged or scrapped assets as well as new assets which may not have been accounted for in the ledgers.

Question 34

What is an intangible assets?

Answer 34

Some non-current assets do not have physical substance, these are called intangible assets.

Question 35

What are some examples of intangible assets?

Answer 35

 Licences: purchased to allow a business to operate in a particular area (e.g. a bus company may be granted a licence to operate in certain areas of the country)
 Patents: on ideas or designs that a business has developed
 Brands: these help to distinguish a business’ products or services from those of other
businesses
Goodwill

Question 36

How do we treat intangible assets?

Answer 36

Purchased intangible assets are treated in the same way as tangible non-current assets. They are initially valued at their directly attributable cost. This should then be amortised over the asset’s useful life, usually on a straight line basis and assuming a nil residual value.

Question 37

What is amortisation?

Answer 37

Same as depreciating an tangible NCA