Chapter 8 - Further Fixed Assets

Question 1

Describe hire purchase

Answer 1

• trader obtains the use of an asset in exchange for a periodic rental payment
• at the end of the rental payment the trader has an option to purchase the asset

Question 2

Describe an operating lease

Answer 2

• a short term lease with no option to purchase the asset at the of the lease term

Question 3

Describe a finance lease

Answer 3

• a long term lease usually with no option to purchase the asset at the end of its lease term

Question 4

What is the double entry for recording the use of an asset under an operating lease

Answer 4

• operating lease rental expense (p&l) debited (increase in expense)
• bank account credited (reduction of cash/asset due to rental payment)

Question 5

What is the double entry to record an asset acquired under a hire purchase or finance lease ?

Answer 5

Fixed asset cost debited (increase in expenses)
Loan creditor a/c credited (increase in liabilities)

Loan creditor account debited (decrease in expenses)
Bank account credited (cash reduced-payment of deposit)

Loan creditor a/c debited (expenses reduced due to monthly payments)
Bank credited

Finance charges debited (increase in expenses)
Loan creditor account credited (increase in liabilities)

Question 6

How do we calculate the total finance/interest charge on hire purchase and finance lease agreements?

Answer 6

Deposit+monthly instalments - cost

Question 7

What two models does FRS 102 require grants to be recognised as?

Answer 7

• performance model, or
• accruals model

Question 8

What does the performance model state?

Answer 8

• grants should only be recognised when future performance related conditions are met

Question 9

How can accrual grants be classified?

Answer 9

• grant relating to revenue
• grant relating to assets

Question 10

Describe revenue grants

Answer 10

• received in respect of revenue expenditure
  -e.g as contribution to wages for those previously unemployed
• will be recognised in P&L in year on which expenses incurred

Question 11

What is the double entry for a revenue grant?

Answer 11

• bank a/c debited as grant received (increase in cash/assets)
• Grant income a/c (p&l) credited as treated as form of sundry income

Question 12

What is an asset grant?

Answer 12

• grant received in respect of capital expenditure
• should not be recognised in P&L, depreciation charge will be spread iver the useful life of the asset

Question 13

What are the double entries required for an asset grant?

Answer 13

• bank a/c debited (receipt of grant inc. assets)
  Grant a/c-deferred income credited as something is owed (increase in liabilities)

Grant a/c deferred income debited (decrease in liabilities)
Grant income a/c (P&L) credited

Question 14

What are the most common examples of intangible fixed assets?

Answer 14

• research and development expenditure
• goodwill
• patents, know-how and copyrights

Question 15

Describe what is meant by research?

Answer 15

• original investigations undertaken to gain new scientific or technical knowledge, the search for application of research findings, and searching for alternative materials, devices, products, processes, systems or services

Question 16

Describe what is meant by development

Answer 16

• use of scientific or technical knowledge to produce new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial activities

Question 17

Describe treatment of research expenditure under FES 102

Answer 17

• should always be written off or expensed (in P&L) as it is incurred
• because there is no certainty that research expenditure will provide business with future revenues

Question 18

What are the double entries for capital expenditure?

Answer 18

Development expenditure (balance sheet asset) debited
Bank credited

Amortisation expense (P&L) debited
Provision for amortisation (development expenditure) credited

Question 19

Describe goodwill

Answer 19

• good reputation is often referred to as goodwill - asset to the business
• difficult to value
• any value placed on goodwill often unreliable hence not recorded on balance sheet

Question 20

When will goodwill appear on b/s

Answer 20

• only purchased good will appears on the b/s
• occurs when company is bought