Chapter 11 : Non-current assets

Question 1

Explain the term non-current assets

Answer 1

Non-current assets refer to resources that businesses own or control that are expected to provide future benefits beyond one financial year. Non-current assets are used in a business to generate income.

Question 2

Explain the term capital expenditure

Answer 2

Capital expenditure refers to the costs of buying the non-current assets, to enhance the non-current assets as well as to bring the non-current to their intended use. It provides benefits that last for more than one financial year and is recorded as non current assets in the statement of financial position

Question 3

Explain the term revenue expenditure

Answer 3

Revenue expenditure refers to the costs to operate, repair, and maintain the non-current assets in working condition. It provides benefits which will be used within one year. It is recorded as an expense in the statement of financial performance.

Question 4

Explain the differences between capital and revenue expenditure.

Answer 4

• Capital expenditure refer to the costs of buying the non-current asset, enhance the non-current assets as well as to bring the non-current assets to their intended use. On the other hand, revenue expenditure refers to the costs to operate, repair and maintain the non-current assets in working condition.
• Capital expenditure provides benefits that last for more than one year while revenue expenditure provides benefits which will be used within one year.
• Capital expenditure is recorded as non-current assets in the statement of financial position while revenue expenditure is recorded as an expense in the statement of financial performance

Question 5

State the effect on financial statements if a revenue expenditure was recorded as capital expenditure.

Answer 5

If a revenue expenditure was recorded as capital expenditure, other expenses in the statement of financial performance will be understated causing the profit for the year to be overstated. The non-current assets in the statement of financial position will also be overstated causing the owner’s equity to be overstated.

Question 6

State the effect on the financial statements if a capital expenditure was recorded as revenue expenditure.

Answer 6

If capital expenditure was recorded as revenue expenditure, other expenses in the statement of financial performance will be overstated causing the profit for the year to be understated. The non-current assets in the statement of financial position will also be understated causing the owner’s equity to be understated

Question 7

Explain the materiality theory.

Answer 7

According to the materiality theory, 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 does not need to be reported in the statement of financial position as a non-current asset. Instead, it can be recorded as a revenue expenditure and reported in the statement of financial performance as an expense.

Question 8

Explain the term depreciation.

Answer 8

Depreciation is the allocation of the cost of the non-current asset over its estimated useful life.
Depreciation is considered a portion of the cost of the non-current asset that has been used up to generate income. Thus, depreciation is an expense and is presented in the statement of financial performance.

Question 9

Using an appropriate accounting theory, explain why a business should depreciate its non-current assets

Answer 9

According to the matching theory, the portion of the cost of using the non-current asset should be matched against the income earned from using the non-current asset in the same financial period to determine profit for that period.

Question 10

Using an appropriate accounting theory, explain why a business should depreciate its non-current assets

Answer 10

According to the prudence theory, assets and profits should not be overstated while expenses and losses should not be understated. Thus, business provides for accumulated depreciation which will be deducted against the original cost of the non-current asset. This is to ensure that non-current assets are not overstated and reflects their net book value.

Question 11

State the causes of depreciation

Answer 11

• Wear and Tear
• Usage
• Legal Limits
• Obsolescence

Question 12

Explain the term net book value

Answer 12

Net book value is defined as the original cost of the non-current assets less accumulated depreciation

Question 13

Explain the term accumulated depreciation

Answer 13

Accumulated depreciation refers to the total depreciation to date of a non-current asset. It is a contra-asset and is deducted from the original cost of the non-current asset in the statement of financial position to arrive at the net book value.

Question 14

State how profit for the year and non-current assets will be affected if business did not charge depreciation

Answer 14

Profit for the year will be overstated as expenses is understated.
Non-current assets will be overstated

Question 15

Using an appropriate accounting theory, explain how a business should value its non-current assets

Answer 15

Non-current assets should be valued at their net-book value.
This is accordance to the prudence theory which states that assets and profits should not be overstated while expenses and losses should not be understated. Thus, business provides for accumulated depreciation which will be deducted from the original cost of the non-current asset. This ensures that non-current assets are not overstated and reflects their net book value.

Question 16

Explain why different methods of depreciation are used for different non-current assets

Answer 16

the method of depreciation used should reflect an accurate usage pattern of the non-current asset.
The straight-line method is used for non-current assets which provides the same benefits throughout its estimated useful life, such as fixture and fittings where the business uses it uniformly throughout its estimated useful life. Hence, an equal amount of depreciation expense is recorded every financial period
On the other hand, the reducing balance method is used for non-current assets which provides more benefits in its earlier years, such as motor vehicles where the business uses it more in its earlier years and less when it gets old and becomes less efficient. Hence, a higher depreciation expense is recorded in the earlier years and reduces as time goes by.

Question 17

Should a business change its depreciation methods every year? Explain your answer with reference to an accounting theory.

Answer 17

No, unless there is a change of usage pattern, a business should use the same method of depreciation and rate of depreciation every financial period to enable meaningful comparison of net book value of non-current assets over time.
This is based on the consistency theory which states that once an accounting method has been chosen, this method must be applied to all future accounting periods to enable meaningful comparison

Question 18

Explain why business uses the reducing-balance method of depreciation, rather than the straight-line method, for motor vehicles

Answer 18

Motor vehicles provides more benefits in its earlier years than in its later years as the business uses it more in its earlier years and less when it gets old and becomes less efficient.
The reducing-balance method is more appropriate as a higher depreciation expense is recorded in the earlier years and reduces as time goes by as compared to the straight-line method where equal amount of depreciation expense is charged over the useful life of the non-current asset.