Chapter 11 Flashcards
What is the difference between an expense and and asset?
expense is always a debit and represents something that is used up immediately. An asset is also a debit but generally can be used over a period of more than one yea
e.g. buying a car - asset
the petrol/servicing/repairs - expenses
What is the difference between a current asset and a non current asset?
Non-current asset: Assets used over a period of more than one year
e.g. land, buildings, computers, furniture
Current asset: Assets that continually flow through the business and are generally used within one year
e.g.
Receivables, Inventory, cash in bank, licenses/patent
Under non-current assets, what is the difference between tangible asset and intangible asset?
Intangible asset - has no physical existence but still has an ongoing value to the business
e.g. lincence/patent/goodwill
Tangible asset - a physical object that can be seen/touched
e.g. land/buildings/computers/furniture/motor vehicles
Where are non-current assets recorded?
Statement of financial position
What should the cost of an asset include?
All costs incurred bringing the asset into use (delivery, installation and set up)
EXCEPT cost of training staff - may not stay in business
Definition of depreciation
the spreading of the depreciable amount of an asset over its estimated useful life.
Depreciation spreads the cost of a non-current asset on a systematic basis over its useful life.
What is residual value?
Residual value is the value an asset is expected still to have at the end of its useful life. In practice, this is normally zero. Residual value and expected useful life will be estimates.
what is NOT definition of depreciation
Note that deprecation is NOT an attempt to arrive at the market value of the asset this is a common error in the exam.
How is depreciation charged?
To the statement of profit or loss
as an EXPENSE
unless otherwise stated:
depreciate from the month of acquisition to the month of disposal
What are the two common methods of depreciation?
Straight line (most common)
Reducing balance
Either way must be applied consistently
must be disclosed in the notes to the financial statements
General definition of straight line method
Charges the same amount of depreciation in each period
Calculation: depreciation - straight line method
(Cost-residual value)/Expected useful life
What is the DE for a non current asset?
Dr Non current assets
Cr Cash
What is the DE for annual depreciation expense? (straight line per year)
straight line - $N per year
Dr Depreciation expense (SPL)
Cr Accumulated depreciation (SFP)
cost vs depreciation expense per annum vs accumulated depreciation at year-end vs carrying amount (straight line)
cost always same - $26000 for car
depreciation expense per year $4000
accumulated depreciation at year end $4000, $8000, $12000 etc etc
Carrying amount $22000, $18000 etc etc
What is the equation for carrying amount?
Carrying amount = cost - accumulated depreciation
For depreciation in the statements, depreciation is shown where?
The carrying amount in Statement of Financial Position
Accumulated depreciation is always a credit balance that is deducted from cost in the SFP
What are other words for carrying amount?
Carrying value, net book value, NBV
start N end M, depreciation policy is to depreciated the asset on a straight line basis at 25% per annum
25% x (M-N) = $ blah per annum
25% x (26,000-10,000) = $4,000
How does the reducing balance method work?
Calculates depreciation as a fixed percentage of the carrying amount at the start of the year
e.g. depreciation of 20% per annum on the reducing balance basis
= (1- rate(20%))* carrying amount from start of year/end of last year
Equation for carrying amount for reduced balance method
carrying amount = cost x (1-rate of depreciation)^n
where n is the no. of years that the asset has been depreciated for.
10,000 with rate of 20%
carrying amount at end of 3 years = 10,000 x 0.8^3
How are maintenance expenses treated for depreciation?
Ignored as they are charged directly to the statement of profit or loss as an expense
How to treat a change in estimated useful life
Depreciate the carrying amount over the revised remaining useful life
e.g 10,000/5 after one year 8000 remaining but extra year
8000/5 (the four remaining years plus one
if 1000 extra work required to do
8000(carrying amount)+1000-residual value/5 (new years)=
What is a disposal?
When a business disposes of a non-current asset at any time during or after the end of its usual life.
How is a disposal calculated
Profit (or loss) = sale proceeds - carrying amount of asset at date of disposal
How is a disposal treated
Profit/loss on disposal is recorded in statement of profit and loss
Proceeds
D Cash
C Asset disposal aacount
Balances on Non-current asset cost and accumulated depreciated account are cleared to nil and transferred to disposal account
Balance on that account is the profit or loss on disposal
What is a part exchange
Old machine costs 10,000 carrying amount, 64,000
New machine cost 12,000 but with part exchange, costs 5000
Part exchange allowance is 7000
Profit/loss on disposal = part exchange allowance - carry amount of old
In part exchange asset disposal what happens in terms of accounts
same as other disposals
new asset cost ledger debited with part exchange allowance of 7000 and 5000 cash
What is revaluation
An alternative accounting policy
Revalues non-current assets and includes them in the SFP at their fair value
If a company chooses this policy it must apply it consistently to all assets in that class
Normal treatment is recording current assets at historic cost and depreciating them, with the carrying amount being put in the SFP
What is a revaluation reserve/surplus?
The difference between the carrying amount an its fair value
revaluation surplus = fair value - carrying amount of asset at date of valuation
In a revaluation, how do you calculated depreciation
from the revalued amount over the remaining useful life
10,000 over ten years
after four years
11,000 revaluation
devaluation amount = 11/6 (10 years -current)
What is an imparement
a fall in value
damage, obsolete or other
Impairment: Non-current assets should be included in the financial statements at no more than their
“recoverable amount”, where “recoverable amount” = the higher of net realisable value and value in use.
Where is impairment generally charged?
Any impairment is generally charged to the statement of profit or loss. The amount of the impairment is the difference between the asset’s carrying amount and its recoverable amount.
After impairment how is depreciation treated
Depreciation after the impairment adjustment is charged on the revalued (impaired) amount.
What is the non-current asset register
Contains details of all non-current assets
Companies keep as part of ICS
Not part of nominal ledger but should be reconcilled on reg basis
What details does the non-current assets contain?
Name, description, internal reference number
Purchase date
Cost
Location
Estimated life/depreciation method and rate
Carrying amount
What are the three important points to remember for intangible assets?
no physical substance
controlled by entity
future economic benefits are expected to flow
Four most common examples of intangible assets?
Goodwill
Research and Development
Licenses
Patents
What is the definition of Goodwill?
Difference between the
cost of a business as a whole
and the fair value of its seperable net assets
What is purchased goodwill
purchased goodwill is created when
a business is acquired for more than the fair value of its separable net assets
What is negative goodwill?
When a business is acquired for less than the fair value of its seperable net assets,
What else is negative goodwill sometimes called?
gain on a bargain purchase
what is the accounting treatment of positive goodwill?
Capitalise and review annually for impairment
Cannot increase in value, can only maintain or reduce by way of impairment adjustments
show asset separately in statement of financial position, within non-current assets
What is the accounting treatment of negative goodwill?
recognize immediately as a gain the statement of profit or loss
What is the accounting treatment of internally generated goodwill?
inherent in a business and should not be recognised in the financial statements
What is research?
Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge or understanding
E.gs of research
Activities aimed at gaining new knowledge.
Search for applications of research findings.
Search for alternative uses for materials, products or services.
Design, evaluation and final selection of possible alternatives for new or improved materials, products, or services.
Accounting treatment of research?
Research costs must be written off in the period in which they are incurred
i.e. recorded as an expense in the statement of profit or loss
What is development?
The application of resesarch findings
to a plan for the production of new or substantially improved materials, products, processes or sevices
before the start of commercial production or use
e.g.s of development
Design and production of prototypes and models.
Design of tools, moulds, dies etc involving new technology.
Design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production.
Design, construction and testing of a chosen alternative for new or improved materials, products, or services.
Accounting treatment of development
Development costs should be written off in the period in which they are incurred, unless they satisfy all of the following conditions: PIRATE
What are PIRATE conditions
Probable future economic benefits will be generated by the asset
I ntention to complete and use/sell asset
R esources adequate and available to complete and use/sell asset
A bility to use/sell the asset
T echnical feasibility of completing asset for use/sale
E xpenditure can be measured reliably.
Where development costs meet all of the PIRATE conditions?
they must be capitalised as an intangible non-current asset and amortised over their expected useful life.
Note. Total development costs recognised as an asset should not exceed the probable future net economic benefits expected to be derived from the asset.
What costs should be included in the amount capitalised as an intangible asset:
-Materials
-Services
-Wages and salaries
-Depreciation on plant etc used in development
-Selling and administrative expenditure cannot be included.
What is net realisable value
estimated selling price of the asset in the ordinary course of business, minus any costs associated with selling it.
What is value in use
the present value of the future cash flows that the asset is expected to generate through its use.
What is amortisation
Depreciation for intangible non-current assets.
What is the capitalisation of development costs?
When a company incurs costs related to the development of a product or service, these costs can be capitalized,
meaning they are recorded as an asset on the balance sheet rather than being expensed immediately.
What are the ‘rules’ for amortisation
1) once capitalised, dev costs must be amortised on a systematic basis
to match the cost with the related revenue or cost savings
in reality straight line method is usually used
2) amortisation must begin when the asset is available for use
For amortisation: if an asset is considered to have an infinitely useful life,
it is not amortised but is subjected to an annual impairment review
How are other internally generated intangible assets treated
Cannot be recognized as assets in the financial statements
e.g. brand names, publishing titles and customer lists
Quick: if research project - how treat -
costs expensed for end of year
Quick: if development project - how treat
If PIRATE:
capitalise expediture to create an intangible non-current asset at end of year
amortisation begins in 2016.
amort matched against future rev on regular basis
If non PIRATE: development expenditure
