Chapter 7- Fixed Assets And Depreciation

Question 1

What are the two types of fixed assets?

Answer 1

• tangible
• intangible

Question 2

What are tangible assets?

Answer 2

• assets which can be physically seen and touched
• examples buildings and motor vehicles

Question 3

What are intangible assets?

Answer 3

• assets which cannot be physically seen or touched
• example goodwill and patents

Question 4

When an asset is purchased what is the double entry?

Answer 4

• asset cost a/c is debited (increase in asset)
• bank account or creditor a/c credited (either decrease in cash or increase in liability)

Question 5

How does FRS 102 define depreciation?

Answer 5

• systematic allocation of the depreciable amount of an asset over its useful life

Question 6

What is the aim of depreciation?

Answer 6

• spread the cost of the fixed asset over the period of which the entity expect to benefit from the use of the asset

Question 7

What 3 factors need to be considered when determining the amount of depreciation?

Answer 7

1. Carrying amount
2. Expected useful life
3. Residual value

Question 8

What is the carrying amount of the asset?

Answer 8

• historic cost of the asset / original purchase price
• assets revalued amount

Question 9

What is the assets useful life?

Answer 9

• period over which the present owner will derive economic benefit
• determined on business by business basis

Question 10

What factors may affect an assets useful life?

Answer 10

Depletion - exyraction of resources from the asset itself
- e.g oil fields

Physical deterioration - erosion through passing of time primarily due to rust rot etc.

Time - some assets have a flow of benefits directly related to time
- e.g patents

-economic obsolescence - useful life of asset may be reined by economic or technological obsolescence
-e. Computers

Question 11

What is the estimated residual value?

Answer 11

• estimated aunt that the entity could currently obtain for the asset at the end of its useful life taking into account the age and expected condition at the end of its useful life

Question 12

What are the two main methods for calculation depreciation?

Answer 12

• straight line method
• reducing balance method

Question 13

What is the equation for the straight line method

Answer 13

Annual charge
= cost - residual value / useful life

Question 14

What is the equation for the reducing balance method

Answer 14

Annual charge =
(Cost-Accumulated Depreciation) X depreciation%

Question 15

Describe tax implications of depreciation

Answer 15

• tax legislation dictates that depreciation is not allowed to reduce profits for tax purposes
• whilst it is disallowed it will be replaced by capital allowances which represent the tax equivalent for depreciation but are charged at set rates by the government

Question 16

What is the double entry for recording depreciation

Answer 16

• depreciation account debited as it is an expense (P&L)
• provision of depreciation/accumulated depreciation a/c credited as reduces value of asset (B/S)

Question 17

Describe the approach to record a disposal of a fixed asset?

Answer 17

1. Disposals A/c debited
   Fixed asset a/c credited
2. Provision for depreciation a/c debited
   Disposals a/c credited
3. Bank a/c debited
   Disposals a/c credited
4. Difference between credits/debits on disposals ledger = profit / loss on disposal

Question 18

Describe the double entry to record the part exchange of a fixed asset

Answer 18

1. Disposals a/c debited
   Fixed asset cost a/c credited
2. Provision for depreciation a/c debited
   Disposals a/c credited
3. Fixed asset cost account debited
   Disposals a/c credited
4. Fixed asset cost account debited
   Bank account credited

Again difference between debits and credits on disposals ledger = profit/loss

Question 19

How is a loss of on a disposal recorded in the P&L

Answer 19

• recorded as a decrease in income
• P&L debited

Question 20

How is a gain on a disposal recorded in the P&L

Answer 20

• recorded as income
• P&L debited