Chapter 8- Non current assets and depreciation

Question 1

Capital expenditure is…

Answer 1

expenditure on the purchase of LT assets OR expenditure leading to an improvement in their earning capacity

Question 2

Revenue expenditure…

Answer 2

all expenditure other than capita expenditure (relates to day-to-day running of business)

Question 3

Cost of a non-current asset is…

Answer 3

any amount incurred to acquire the asset + bring it into working condition

Includes capital expenditure such as purchase price, delivery costs, legal fees, expenditure which enhances asset.
Does not include revenue expenditure such as repairs, renewals + repainting

Question 4

For companies non-current assets are recording in…

Answer 4

SFP under property, plant + equipment

Question 5

Examples of costs that can and can’t be classified as subsequent expenditure on a NCA and therefore be capitalised

Answer 5

Can
- An extension to a shop providing extra selling space

Can’t
- Repair work (must be debited to SPL or expensed)

Question 6

Depreciation is… (IAS 16 PPE)

Answer 6

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

Question 7

Depreciable amount is… (IAS 16 PPE)

Answer 7

the cost of an asset (other amount substituted for cost) - residual value

Question 8

Residual value is… (IAS 16 PPE)

Answer 8

the estimated amount an entity would currently obtain from disposing of the asset as the end of its useful life

Question 9

Depreciation is not meant to…

Answer 9

• show the asset at its current value in the SFP

- provide a fund for the replacement of the asset

Question 10

Recording depreciation

Answer 10

• Reduce SFP value of NCA by cumulative depreciation to reflect the wearing out
• Record depreciation charge as an expense in SPL to match revenue generated by NCA

Question 11

Does land and buildings require depreciation

Answer 11

Land does not require depreciation but buildings do

Question 12

Two methods of calculating the depreciation charge…

Answer 12

• Straight line method

- Reducing balance method

Question 13

Straight line method of calculating depreciation…

Answer 13

Depreciation charge = (cost- residual value)/ useful life

OR

X% x cost (used when there’s no residual value)

Question 14

Straight line depreciation is assumed to be charged…

Answer 14

monthly, therefore you should time apportion the depreciation charged if asset wasn’t owned for the whole year

Question 15

Reducing balance method of calculating depreciation…

Answer 15

Depreciation charge = X% x carrying amount

carrying amount = original cost of NCA - accumulated depreciation

Question 16

Accounting for depreciation

Answer 16

• Dr Depreciation expense (SPL)

- Cr Accumulated depreciation (SFP- in PPE)

Question 17

As the depreciation expense account is a…

Answer 17

SPL; account it is closed off for the yr + taken to to the SPL (there’s no carried forward)

Question 18

Estimates with depreciation

Answer 18

• Depreciation method
• Residual value
• Useful economic life

Question 19

To reduce chance of management manipulating figures, IAS 16 PPE requires…

Answer 19

• Depreciation method to be reviewed at each yr end + changed if method doesn’t reflect pattern of use of asset
• Residual value + useful life to be reviewed at each yr end + changed if expectations differ from previous estimates
• Carrying amounts of asset is depreciated using new estimates

Question 20

When an estimate is changed, subsequent depreciation =

Answer 20

(Carrying amount at date estimate changed - RV) / remaining UEL

OR if changed to reduce balance

Depreciation = % x Carrying amount at date estimate changed

Question 21

Disposal of NCA used a

Answer 21

a SPL account (T account)

Question 22

Disposal of NCA used a

Answer 22

a SPL account (T account)

Question 23

4 step process for disposal of cash consideration (NCA)

Answer 23

• Remove original cost of NCA from NCA account (by Dr Disposals and Cr NCA)
• Remove accumulated depreciation on NCA from ‘accumulated depreciation’ account (by Dr accumulated depreciation + Cr Disposals)
• Record cash proceeds (by Dr Cash and Cr Disposals)
• Balance off disposals account to identify profit or loss

Question 24

A part exchange agreement arises where…

Answer 24

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

- balance of new asset is paid in cash

Question 25

5 step process to record disposal through a part exchange agreement

Answer 25

• Remove original cost of NCA from NCA account (by Dr Disposals and Cr NCA)
• Remove accumulated depreciation on NCA from ‘accumulated depreciation’ account (by Dr accumulated depreciation + Cr Disposals)
• Record part exchange allowance (PEA) as proceeds + as part of the cost of asset (Dr NCA, Cr Disposals)
• Record cash balance paid for new asset (by Dr NCA and Cr Cash)
• Balance off disposals account to identify profit or loss

Question 26

An impairment of a NCA means…

Answer 26

carrying amount - recoverable amount

Question 27

Recoverable amount is determined by…

Answer 27

the greater of:

• Fair value - costs to sell
• Value in use (present value of future cash flows expected to be generated)

Question 28

Difference between carrying amount and recoverable amount is charged to SPL as…

Answer 28

Dr Impairment expense

Cr Accumulated depreciation

Question 29

Intangible NCA are…

Answer 29

Assets held for the LT that have no physical form

Question 30

Examples of Intangible NCA

Answer 30

• Goodwill
• Patents
• Copyrights
• Licences

Question 31

Intangibles are held on SFP at..

Answer 31

carrying amount under NCA

Question 32

amortisation is…

Answer 32

depreciation of intangibles and is an expense in SPL

Question 33

Goodwill is…

Answer 33

the excess value of a business above carrying amount of assets - liabilities

(not recorded in FS apart from when goodwill in purchased in the acquisition of another business)

Question 34

recognised goodwill is reviewed annually for…

Answer 34

impairment rather than being depreciated or amortised