Chapter 11 NCA

Question 1

Non-current assets

Answer 1

Resources that businesses own or control that are expected to provide future benefits beyond one financial year

Question 2

1. Capital expenditure
2. Revenue expenditure

Answer 2

1. Costs to buy and bring the non-current assets to their intended use

2.Costs to operate, repair and maintain the non-current assets in working condition

Question 3

Two differences between capital and revenue expenditure

Answer 3

1. Capital expenditure is recorded as a non-current asset but revenue expenditure is recorded as an expense
2. Capital expenditure provides benefits for more than one year but revenue expenditure provides benefits which will be used within one year

Question 4

Materiality theory

Answer 4

If the amount spent on a non-current asset is insignificant to decision-making when compared to the size of the income, profit, assets or equity of the business, it will be classified as revenue expenditure

Question 5

Depreciation

Answer 5

A portion of the original cost of the non-current assets used by the business to generate income

Question 6

Causes of depreciation

Answer 6

Usage, wear ad tear, obsolescence, legal limits

Question 7

Accumulated depreciation

Answer 7

The total depreciation to date

Question 8

Using two theories explain why a business should depreciate its non-current assets

Answer 8

1. Matching theory states that depreciation expense incurred from the use of non-current assets must be matched against the income earned from the use of non-current assets in the same financial period to derive profit for the year
2. Prudence theory states that accumulated depreciation is deducted from the original cost of non-current assets to arrive at the net book value so that non-current assets is not overstated

Question 9

Consistency theory

Answer 9

A business should use the same method of depreciation and rate of depreciation every financial year to enable meaningful comparison of the net book value of non-current assets over time, unless there is a change of usage pattern

Question 10

Why a particular method of depreciation is suitable for a certain type of non-current assets

Answer 10

Straight-line method of depreciation is suitable for non-current assets which provides the same benefits throughout their estimated useful lives.

Reducing-balance method is suitable for non-current assets which provides more benefits in the earlier years than in its later years.