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ACA KAPLAN > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

What is a capital and revenue transaction?

A

non-current assets

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2
Q

What are the two types of non-current assets?

A

tangible non-current asset

intangible non-current asset

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3
Q

Examples of tangible non-current asset

A

cost

depreciation

disposals

impairment

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4
Q

What is a capital expenditure?

A

its a expenditure on the purchase of long-term asset or expenditure that improves their earning capacity

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5
Q

Long term assets =?

A

non-current assets = assets to be used in the business for >1 year

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6
Q

Revenue expenditure

A

its all expenditure other than capital expenditure and relates to the business’s day to day running costs

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7
Q

What is a cost of a non-current asset?

A

is any amount incurred to quire the asset and bring it into working condition

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8
Q

What does a non-current asset include?

A

capital expenditure such as

  • purchase price
  • delivery costs
  • legal fees
  • subsequent expenditure which enhances the asset
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9
Q

What does a non-current asset exclude?

A

revenue expenditure such as

  • repairs
  • renewals
  • repainting
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10
Q

What is a right of use asset?

A

businesses may have right to use assets under a lease agreement

these assets are known as right of use assets and are recognised in the statement of financial position under non-current asset

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11
Q

What does it mean when non-current assets are capitalised?

A

they are included in the statement of financial positions

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12
Q

Where do you a record the cost of a non-current asset?

A

they are capitalised

ei included in the statement of financial position

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13
Q

What is the correct double entry to record a purchase for recording the cost of the non-current asset?

A

Dr Non-Current asset (cross)

Cr Bank/Cash/Payables (cross)

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14
Q

How should sole traders record the cost of a non-current asset?

A

a seperate cost account should be kept for each catagory of non-current asset

eg. motor vehicles, fixtures and fitting etc.

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15
Q

How should a company record the cost of a non-current asset?

A

all purchases are grouped together under property, plant and equipment

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16
Q

What is a subsequent expenditure?

A

is a cost incurred after acquiring an asset, such as repairs, maintenance, or improvements.

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17
Q

How is a subsequent expenditure on a non-current asset recorded?

A

it has to be recorded as a part of the cost (capitalised) if it enhances the benefits of the asset

ei increases the revenues the asset can generate

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18
Q

Capital expenditure

A

improves or extends the asset’s life, added to the asset’s value.

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19
Q

Two types of subsequent expenditure

A

capital expenditure

revenue expenditure

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20
Q

Revenue expenditure

A

Maintains the asset’s current state, expensed immediately.

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21
Q

Subsequent Expenditure- Examples of cost that can be capitalised

A

an extension to a shop building which provides extra selling space

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22
Q

Subsequent Expenditure- Examples of cost that cannot be capitalised

A

repair work

  • any repair cost must be debited to the statement of profit or loss (expensed)
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23
Q

How does the ISA 16 Property, Plant and Equipment define depreciation?

A

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

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24
Q

How does the ISA 16 Property, Plant and Equipment define depreciable?

A

the cost of an asset, or other amount substituted for cost, less its residual value

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25
Q

What does depreciation recognise in simple terms?

A

deprivation recognises the depreciation amount
(cost less residual value)
over the assets useful life

26
Q

Residual Value
ISA 16 Property, Plant and Equipment

A

the estimated amount that entity would currently obtain from disposal of the asset at the end of its useful life

27
Q

Useful Life
ISA 16 Property, Plant and Equipment

A

the period when an asset is expected to be available for use by an entity

28
Q

What is the deprecation mechanism?

A

to reflect the wearing out of a non-current asset

29
Q

What is characteristics that may cause the wear out of a non-current asset?

A

use

physical wear and tear

passing of time
eg. a ten year lease on a property

obsolescence through technology and market changes
eg. plant and machinery of a specialised nature

depletion
eg. the extraction of a mineral from a quarry

30
Q

What are two things depreciation is not meant to?

A

show the asset at its current value in the statement of financial position

provide a fund for the replacement of the asset

31
Q

What is the dual effect?

A

we record a depreciation charge each year, the effect of which is twofolds (duel effect)

  • reduce the statement of financial position value of the non-current asset by cumulative depreciation to reflect the wearing out
  • record depreciation charges an expense in the statement of profit or loss to match with the revenue generated by the non-current asset
32
Q

When does depreciation of asset begin?

A

when the asset is available for use

33
Q

Relationship between land and buildings and depreciation

A

land has infinite life - does not require depreciation

buildings has finite life - should be depreciation

34
Q

Relationship between right of use assets and depreciation

A

it is assumed that right of use assets have a useful life equivalent to the lease term

should be depreciated over this period

35
Q

What are the two methods of depreciation?

A

straight line

reducing balance methods

36
Q

Straight line method for depreciation

A

depreciation charge

= [ cost - residual value ] / useful life

or

X% x cost

(can be used when there is no residual value)

37
Q

What does straight-line depreciation assumed in the exam?

A

its assumed to be charged monthly in the exam

therefore you should always time-apportion the depreciation if you only owned the asset for part of the year

38
Q

Reducing balance method

A

depreciation charge

= X% x carrying amount

39
Q

What is carrying amount?

A

original cost of the non-current asset less accumulated depreciation on the asset

40
Q

In the exam, will you be asked to calculate what amount of reducing balance depreciated charged monthly?

A

no

41
Q

What do you do when disposal of an item of PPE (where reducing balance method is used) when disposal will be in the first day of the year?

A

we do not charge any depreciation

42
Q

What do you do when disposal of an item of PPE (where reducing balance method is used) when disposal will be in the last day of the year?

A

we should deprecate for the year

43
Q

What do we record depreciation for Dr and Cr?

A

Dr
Depreciation expense
- statement of profit or loss

Cr
Acculated depreciation
- statement of financial position

44
Q

What statement do we record our depreciation?

A

statement of profit or loss

45
Q

When is depreciation closed off?

A

at the end of the year

and taken to the statement of profit or loss
(there is no carried forward balance)

46
Q

What is the accumulated depreciation account?

A

it is the statement of financial position account and is accumulative

47
Q

How is accumulated depreciation reflected?

A

as credit directly in the property plant and equipment account

48
Q

What are three things based on estimates made by the management of a business?

A

depreciation method

residual value

useful economic life

49
Q

What is a trouble of estimates made by the management of a business?

A

these subjective areas could therefore results in manipulation of the accounts by management

50
Q

What are the three things ISA 16 P,P and E to reduce the scope of manipulation and increase consistency of estimates made by management of a business?

A

depreciation method should be reviewed at each year end and changed if the method used no longer reflect the asset pattern of use

residual value and useful life should be reviewed at each year end and charged if expectations differ from previous estimate

asset carrying amount is then depreciated using the new estimates

51
Q

Subsequent depreciation =?

A

(carrying amount @ date estimate changed - RV) / remaining UEL

52
Q

If we change to reducing balance
depreciation =?

A

% x carrying amount at date estimate changed

53
Q

When is a disposal t account required?

A

when recording the disposal of a non-current asset

  • this is a statement of profit or loss account
  • it reflects any profit or loss on disposal
54
Q

When does a part exchange agreement arise?

A

an old asset is provided in part payment for a new one

the balance of the new asset is paid in cash

55
Q

Impairment of non-current asset

A

means that recoverable amount of an asset is less than its carrying amount

56
Q

What is a non-current asset register?

A

a list of all the non-current assets of the business

broken down normally by location and asset type

maintained in order to control non-current assets and keep track of what is owned and where its kept

57
Q

What is an intangible asset?

A

assets held for a long term that have no physical form

58
Q

examples of intangible asset

A

patents, copy rights , licence, goodwill

59
Q

Where are tangible and intangible non-current asset held?

A

statement of financial position at their carrying amount under the non-current asset heading

60
Q

Amortization

A

is the gradual expense of an intangible asset over time or the repayment of a loan in installments.

ACA KAPLAN (13 decks)

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