Chapter 3 - Purchases of non Current Assets

Question 1

What is capital expenditure

Answer 1

This arises from the purchase of non current assets which are necessary to trade over more then one accounting period

Question 2

What could also be categorised as capital expenditure

Answer 2

Improvements to the earning capacity of an asset e.g an extension to an existing factory allowing more goods to be produced

Question 3

What would the double entry be for capital items

Answer 3

Debit non current assets
Credit cash

non current assets are increased and the bank decreases

Question 4

What financial statement would purchasing capital expenditure affect

Answer 4

Increases the value of the statement of financial position

Question 5

What financial statement would depreciation affect

Answer 5

The profit and loss account

Question 6

What is a minimum monetary amount

Answer 6

Any asset below a set amount would be treated as revenue expenditure. If internal policies have been set it is important to follow this for consistency

Question 7

What is revenue expenditure

Answer 7

From purchasing items which are essential for business to trade in the current accounting period

Question 8

What things can be classed as revenue expenditure

Answer 8

Items which are essential to trade in the current period e.g electricity bills or maintaining the earning capacity of non current assets such as business repairs for hole in factory

Question 9

What would the double entry be for revenue expenditure

Answer 9

Debit expense account and credit the cash

Question 10

What financial statement is affected by revenue expenditure

Answer 10

Profit and loss account as these items aren’t assets of the business they affect the profit of the business

Question 11

What is a cash purchase recorded as

Answer 11

A cash purchase is recorded in the cash payments book

Question 12

What is the double entry for a cash purchase

Answer 12

Debit non current assets
Credit cash

often businesses post the debit to a category of thee non current assets e.g buying car may be posted to motor vehicle

Question 13

Where is a credit purchase recorded

Answer 13

It will be recorded as a payable in our books as it hasn’t been paid for yet.

As the non current asset isn’t part of our normal transactions it is recorded as non trade payable

Question 14

What would the debit and credit be for a cash purchase

Answer 14

Debit non current asset
Credit trade payable

Question 15

What is included in capital expenditure

Answer 15

Any costa other than the basic cost. Any costa which are directly attributed to the asset purchase as well as delivery costs

Question 16

Are repeated costs included in capital or revenue expenditure

Answer 16

Repeated = revenue

Question 17

What types of costs related to the asset are included in capital expenditure

Answer 17

• purchase price of the asset
• alterations costs to the asset usable
• legal fees with purchasing the asset
• non refundable taxes and duties
• site preparation costs
• delivery costs
• installation costs
• testing costs

Question 18

What kind of costs are revenue expenditure

Answer 18

Costs which relate to one accounting period should be treated as revenue expenditure e.g repairs, maintenance, cleaning, insurance and fuel

Question 19

When would VAT be capitalised

Answer 19

If the business is not VAT registered

Question 20

How is VAT treated for VAT registered businesses

Answer 20

Not included in the costs of the non current asset as the business can claim the VAT back. Therefore VAT is a real costs to them so

Question 21

What is a non current asset register and what can be expected to be found on there

Answer 21

Used for internal purposes

• description/ serial number
• acquisition date
• original date
• depreciation
• carrying amount
• disposal date
• disposal proceeds

Question 22

What are the 2 important controls in the reconciliation of non current asset registers

Answer 22

Physical reconciliation of assets and reconciling to the general ledger

Question 23

What is physical reconciliation of assets on the non current asset register

Answer 23

This involves taking items on the NCAR and finding the physical asset which checks that the business is still using the asset and that the details are still valid

Question 24

What is reconciling to the general ledger on the non current asset register

Answer 24

Involves checking all the costs and depreciation figures are correctly recorded in the general ledger and that the value of the assets is the same as the NCAR as in the accounts

Question 25

What are tangible assets

Answer 25

Assets which you can actually touch intangible cannot be touched physically

Question 26

What is an asset known as goodwill

Answer 26

An asset which you pay for the reputation as the business is already established. This is an asset which is a going concern

Question 27

What do you post to record a non current asset

Answer 27

Debit non current asset
Credit cash/ payable

Question 28

What mechanism does depreciation serve

Answer 28

The mechanism we use to charge the cost to the statement of profit or loss over an appropriate period of time

Question 29

What accounting rule tells us how to deal with non current assets and depreciation

Answer 29

International accounting standard 16
IAS 16

Question 30

What does IAS 16 cover

Answer 30

Plant, property and equipment

P is the 16th letter of the alphabet

Question 31

What is depreciation

Answer 31

The spreading of the depreciable amount of an asset over its estimated useful life

Question 32

What is depreciable amount

Answer 32

The cost of the asset minus any residual value

Question 33

What is residual value

Answer 33

The sale or scrap proceeds you will get for the asset at the end of its life

Question 34

What is the only non current asset which is not depreciated

Answer 34

Land which has an indefinite useful life

Question 35

What is the accruals concept

Answer 35

Transactions should be reflected in the accounting period to which they relate not always the same one that the cash is paid or received

Question 36

What does ISA 16 tell us about depreciation methods

Answer 36

Depreciation methods should reflect the pattern in which thee assets economic benefits are consumed by the entity

Question 37

Straight line depreciation formula

Answer 37

Cost - residual value/ useful economic life

Question 38

What classes of assets normally use straight line depreciation

Answer 38

Buildings, fixtures, fittings and office equipment

Question 39

What is the carrying amount

Answer 39

This is the cost less the accumulated depreciation

Question 40

What is accumulated depreciation

Answer 40

All of the depreciation charges to date on an asset

Question 41

What is the formula for reducing balance depreciation

Answer 41

Carrying amount x depreciation rate = annual depreciation charge

Question 42

What classes of assets usually use reducing balance depreciation

Answer 42

Plant and machinery and motor vehicles

Question 43

What is the journal for depreciation

Answer 43

Debit depreciation expense
Credit accumulated depreciation