Chapter 12&13 Flashcards
how are non-current assets valued?
- In historical cost accounting non-current assets are valued at their historical cost less the aggregate/ accumulated depreciation from the date of acquisition to the date of the statement of financial position.
- This is known as the written down value (WDV), net book value, or net carrying amount.
What is historical costs?
- Historical cost refers to the cost of getting the asset at inception to working order excluding value added tax (VAT).
What does the historical cost of non-current assets exclude?
- the costs of any extended warranty,
maintenance agreement and replacement/spare parts where these have
been included in the invoice price of, for
example, machinery or vehicles; - any road tax and fuel included in the
invoice price of a vehicle.
What does the historical cost of non-current assets include ?
- legal expenses, extensions and improvements, as in the case of buildings, but not repairs and renewals;
- delivery charges and installation expenses, as in the case of plant and machinery
What is fair value?
‘The fair value of a tangible non-current asset is the amount at which the asset can be exchanged between knowledgeable, willing parties, in an arm’s length
transaction’ (IASB)
What are revaluation rules?
- Revaluation is allowed when the fair value can be measured reliably.
- The revalued asset should be depreciated.
- ‘Where a tangible non-current asset is revalued all tangible non-current assets of the same class should be revalued.’ (IASB)
- ‘Revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined
using fair value at the reporting date.’ (IASB)
What is depreciation?
-Depreciation is the allocation of the cost of a non-current asset over the accounting periods that comprise its useful economic life to the business, according to some criterion regarding the amount which is ‘used up’ or ‘consumed’ in each of these periods.
- Depreciation is not a means of revaluing non-current assets.
- Depreciation is not the creation of a provision for the replacement of non-current assets.
What is the essential data to compute
depreciation (4 determinants)?
- Historical cost/carrying value of the asset
- Expected useful economic life to the
business - Estimated residual value of the asset at the end of its useful economic life.
- Method
What is the depreciable amount
-The depreciable amount is ‘the cost of an asset, or other amount substituted for cost, less its residual value.’ (IASB, IAS 16)
- The depreciable amount of a tangible non-current asset should be allocated on a systematic basis over its useful economic life.
What is useful life?
- ‘the period over which an asset is expected to be available for use by an entity; or
- The number of production or similar units
expected to be obtained from the asset by an entity’ (IASB, IAS 16)
What is Residual value?
‘the estimated amount that the entity would
currently obtain from the disposal of the asset, after deducting the estimated costs of disposal, if the asset were already in the condition expected at the end of its useful life.’ (IASB, IAS 16)
What is the straight line method?
-the “straight line method” refers to a depreciation method where the cost of an asset is spread evenly over its estimated useful life, resulting in the same depreciation expense being recorded each accounting period until the asset reaches its salvage value.
What is the annual depreciation expense/charge to the income statement
account?
- (Cost-Residual value)/ useful economic life (in years)
or - . Given percentage rate x Historical cost
Advantages for the straight-line method?
- It is most appropriate for assets that are
depleted as a result of the passage of time (e.g. buildings, leases, patents). - It may be suitable where an asset’s utilisation is the same in each year (e.g. plant & machinery, vehicles).
- It is easy to understand and simple to calculate.
Disadvantages for the straight-line method?
- It may not give an accurate measure of the loss in value or reduction in useful life (e.g. the large decrease in resale value of vehicles in the first year of their life).
What is The Diminishing/Reducing
Balance Method ?
The “Diminishing/Reducing Balance Method” in accounting is a depreciation method where a fixed percentage of an asset’s current book value is depreciated each year, leading to higher depreciation charges in the early years of an asset’s life and gradually decreasing charges as the book value reduces over time
What is percentage rate of depreciation
the depreciation rate is the percentage of an asset’s value that is depreciated each year.
What is percentage rate of depreciation formula?
100 - ( square root (residual value/cost) x 100)
What is the formula for the annual depreciation expense/charge to the
income statement account?
Rate (%) x WDV at the start of the year
-This gives a decreasing annual amount of depreciation over the assets useful life
Arguments for
the reducing balance method?
- It is most appropriate for assets that deteriorate as a result of usage where this is greater in earlier years (e.g. plant & machinery, motor vehicles, office equipment).
- It may also be suitable where the utilisation is the same in each
year. The decreasing annual depreciation combined with increasing repair costs give a relatively constant combined annual charge. - It gives a more realistic approximation of the reduction in resale value.
Arguments against the reducing balance method
- It contains an arbitrary assumption about the rate of decline.
- It is relatively complex.
What is the sum-of-the-years-digits method?
-the sum of years method uses the expected life and adds the digits for every year to give the final depreciation expense amount. Say, the useful life of the asset is 5 years. So, the sum of the years is obtained by adding up the year’s digits as 5+4+3+2+1 = 15.
Equation for the sum-of-the-years-digits method?
(Years of remaining useful life at start of year/ Sum-of-the-years-digits
amount) x Depreciable
-This gives a decreasing annual amount of depreciation over the asset’s useful life.
- The arguments for and against are the same as those relating to the reducing balance method but it is simpler.
What are the ledger entries
for annual depreciation?
Debit - Depreciation expense account
Credit - Provision for depreciation account
Debit - Statement of profit or loss account
Credit - Depreciation expense account
These are usually shortened to one journal:
Debit - Statement of profit or loss account
Credit - Provision for depreciation account
How to create entries for disposals of non- current assets where a disposals
account?
- Reverse all entries in the books in relation
to the asset disposals account. - Post the sale value received/receivable.
- Close the asset disposals account to
determine the profit or loss on sale.
How are entries for disposals of non- current assets where a disposals
account shown in credit and debit?
- Proceeds of sale:
Debit - Cash book/trade receivable account
Credit - Non-current asset disposals account - Accumulated depreciation on disposal:
Debit - Provision for depreciation
Credit- Non-current asset disposals account - Cost of non-current asset:
Debit - Non-current asset disposals account
Credit - Non-current asset account - Profit on sale:
Debit - Non-current asset disposals account
Credit - Statement of profit or loss account
or - Loss on sale:
Debit - Statement of profit or loss account
Credit - Non-current asset disposals account
What is The ledger entries for disposals
of non-current assets (no
disposals account) in credit and debit accounts?
- Proceeds of sale:
Debit - Cash book/trade receivable
Credit - Non-current asset account - Accumulated depreciation on disposal:
Debit - Provision for depreciation account
Credit - Non-current asset account - Profit on sale:
Debit - Non-current asset account
Credit - Statement of profit or loss account
OR - Loss on sale:
Debit - Statement of profit or loss account
Credit - Non-current asset account
What happens to Partial year depreciation ?
When a non-current asset is bought or sold part way through an accounting year, the depreciation expense is computed either:
1. on a strict time basis –
(a) in the year of acquisition, from the date of purchase to the end of that accounting year, and (b) in the year of disposal, from the start of the accounting year to the date of sale; or
2. if the date of acquisition or disposal is not given – (a) a full years charge in the year of purchase, and (b) none in the year of sale.
