Chapter 11 : Non-current assets

Question 1

State two differences between capital expenditure and revenue expenditure.

Answer 1

1 Capital expenditure provides benefits that last more than one year whereas revenue expenditure provides benefits that last only for the current year.

2 Capital expenditure is recorded in a non-current asset account and shown in the statement of financial position whereas revenue expenditure is recorded in an expense
account and shown in the statement of financial performance.

Question 2

What is the effect on the profit and the non-current assets when capital expenditure is wrongly classified as revenue expenditure?

Answer 2

Profit would decrease because the expense is overstated and non-current assets
would decrease.

Question 3

What is the effect on the profit and the non-current assets when revenue
expenditure is wrongly classified as capital expenditure?

Answer 3

Profit will increase because the expense is understated and non-current assets
would increase.

Question 4

What is depreciation?

Answer 4

Depreciation is the allocation of the original cost of a non-current asset over its
useful life. It is an expense reported in the statement of financial performance.

Question 5

State three causes of depreciation.

Answer 5

1 Wear and tear from usage and exposure.
2 Obsolescence due to technological advancements.
3 Legal limit where the value may be decreased with the passage of time.