Chapter 11 - Non current assets

Question 1

1. Define 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.

Question 2

2. Meaning of capital expenditure

Answer 2

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

Question 3

2. Meaning of revenue expenditure

Answer 3

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

Question 4

3. Two differences between capital and revenue expenditure?

Answer 4

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

Question 5

4. What is the Materiality theory?

Answer 5

Materialty theory states that 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 6

5. What is depreciation?

Answer 6

Depreciation is a portion of the original cost of the non-current assets used bu the business to generate income.

Question 7

6. What are the causes of depreciation?

Answer 7

Usage, wear and tear, obsolescence, legal limits

Question 8

7. Explain accumulated depreciation

Answer 8

The total depreciation to date.

Question 9

8. Using an appropriate accounting theory, explain why a business should depreciate its non-current assets. (1)

Answer 9

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 derived profit for the year.

Question 10

8. Using an appropriate accounting theory, explain why a business should depreciate its non-current assets. (2)

Answer 10

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 11

9. Explain the accounting of depreciation expenses in relation to the consistency theory.

Answer 11

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

Question 12

10. Explain why a particular method of depreciation is suitable for a certain type of non-current assets.

Answer 12

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.