Chapter 4

Question 1

what are the three steps in regards to assets in financial statements?

Answer 1

• is this an asset?
• is it to be recognised on the SoFP?
• what method is to be used to measure or value it?

Question 2

is a leased piece of equipment an asset to a business?

Answer 2

yes, it is controlled by the business and offers economic gain

Question 3

PPE meaning

Answer 3

Property, Plant and Equipment

Question 4

Examples of PPE

Answer 4

• Buildings
• Land
• Equipment
• shop fittings
• Vehicles

Question 5

Impairment loss definition

Answer 5

The difference between the carrying amount and the recoverable amount to correct the value in the SoFP

Question 6

Recoverable amount definition

Answer 6

higher of:

• Asset’s fair value less costs to sell
• It’s value in use

Question 7

Carrying amount equation

Answer 7

deprecation
-
impairment loss

Question 8

what is the criteria of when to recognise an asset?

Answer 8

• future economic benefits
• measured reliably

Question 9

what makes up the initial cost of an asset

Answer 9

• purchase price
• import duties
• other taxes
• any costs to bring item to correct condition and location
• estimated cost of dismantling
• professional fees
• site preparation

Question 10

how is an asset’s value calculated under the cost model?

Answer 10

original cost less depreciation less impairment loss

Question 11

how is an asset’s value calculated under the revaluation model?

Answer 11

fair value less depreciation less impairment loss

Question 12

how often are revaluations made?

Answer 12

either every year or every three to five years

Question 13

How often should the depreciation method be reviewed?

Answer 13

Once a year

Question 14

Another name for derecognition

Answer 14

Asset disposal

Question 15

What happens if an asset revaluation during derecognition results in a surplus?

Answer 15

The ‘profit’ is added directly to retained earnings and not via P&L

Question 16

Define intangible asset

Answer 16

An identifiable non-monetary non-physical asset

Question 17

What are the two ways intangible assets come about?

Answer 17

• Purchased
• Created internally (staff work, innovation, etc)

Question 18

What is Research?

Answer 18

• The pursuit of knowledge
• The pursuit of new alternative processes, systems, knowledge
• Theory

Question 19

What is Development?

Answer 19

• The application of researched knowledge
• The application of research findings to plan and establish new alternative processes, systems, knowledge
• practical

Question 20

When is a development cost to be capitalised?

Answer 20

• if the development is technically feasibly able to be sold or used upon completion
• intention to complete it for usage or sale
• the ability to use or sell the development
• demonstrate the way the development cost will produce economic benefit
• demonstrate the availability of resources to bring the asset to completion
• the ability to measure the costs reliably

Question 21

When would a development cost (intangible asset) have a residual value?

Answer 21

When there is an agreement for a third party to purchase the asset at the end of the useful life, or a market reference is able to prove its value

Question 22

How should a change in the useful life of an indefinite intangible asset that has become a definite useful life be accounted?

Answer 22

As a change in accounting estimate

Question 23

Is goodwill an intangible asset?

Answer 23

No, it is regarded as a separate category and treated as such

Question 24

examples of intangible assets

Answer 24

• scientific/technical knowledge
• design/implementation of new processes
• licenses
• intellectual property
• market knowledge
• trademarks (brands)

Question 25

What happens to revenue expenditure on research?

Answer 25

It is expensed through P&L

Question 26

What happens to development cost expenditure?

Answer 26

It is capitalised if it can demonstrate that it is an intangible asset

Question 27

What happens if a business cannot distinguish research from development costs?

Answer 27

Both costs are then debited in the P&L

Question 28

What happens to an infinite intangible asset?

Answer 28

• It is checked every year for impairment
• It is checked every year to see if it has become finite

Question 29

Value in use definition

Answer 29

the expected future cash flows from an asset due to its use

Question 30

External sources that indicate whether a business entity/net assets require impairment

Answer 30

• significant change in asset’s value
• changes in technology, markets, economy and laws
• increase in interest rates
• market of business is less than net assets

Question 31

Internal sources of info of impairment

Answer 31

• physical damage
• reorganisation causing adverse effect on economy of asset
• a fall in budgeted profit

Question 32

what happens to amortisation/depreciation after impairment loss?

Answer 32

It needs to be adjusted for the future for the new carrying amount

Question 33

what is ROU assets?

Answer 33

Right Of Use Assets (lessee)

Question 34

First double entry for a lease

Answer 34

debit ROU assets
credit lease liability

Question 35

which valuation model can be applied to leases?

Answer 35

both cost model and revaluation model

Question 36

What is the expense account called for impairment loss?

Answer 36

Impairment loss account

Question 37

how should inventories be valued?

Answer 37

At the lower of cost or net realisable value

Question 38

How is net realisable value calculated?

Answer 38

est. selling price - estimated costs to complete sale and finish product