Chapter 8- Non current assets and depreciation Flashcards
Capital expenditure is…
expenditure on the purchase of LT assets OR expenditure leading to an improvement in their earning capacity
Revenue expenditure…
all expenditure other than capita expenditure (relates to day-to-day running of business)
Cost of a non-current asset is…
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
For companies non-current assets are recording in…
SFP under property, plant + equipment
Examples of costs that can and can’t be classified as subsequent expenditure on a NCA and therefore be capitalised
Can
- An extension to a shop providing extra selling space
Can’t
- Repair work (must be debited to SPL or expensed)
Depreciation is… (IAS 16 PPE)
the systematic allocation of the depreciable amount of an asset over its useful life
Depreciable amount is… (IAS 16 PPE)
the cost of an asset (other amount substituted for cost) - residual value
Residual value is… (IAS 16 PPE)
the estimated amount an entity would currently obtain from disposing of the asset as the end of its useful life
Depreciation is not meant to…
- show the asset at its current value in the SFP
- provide a fund for the replacement of the asset
Recording depreciation
- 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
Does land and buildings require depreciation
Land does not require depreciation but buildings do
Two methods of calculating the depreciation charge…
- Straight line method
- Reducing balance method
Straight line method of calculating depreciation…
Depreciation charge = (cost- residual value)/ useful life
OR
X% x cost (used when there’s no residual value)
Straight line depreciation is assumed to be charged…
monthly, therefore you should time apportion the depreciation charged if asset wasn’t owned for the whole year
Reducing balance method of calculating depreciation…
Depreciation charge = X% x carrying amount
carrying amount = original cost of NCA - accumulated depreciation
Accounting for depreciation
- Dr Depreciation expense (SPL)
- Cr Accumulated depreciation (SFP- in PPE)
As the depreciation expense account is a…
SPL; account it is closed off for the yr + taken to to the SPL (there’s no carried forward)
Estimates with depreciation
- Depreciation method
- Residual value
- Useful economic life
To reduce chance of management manipulating figures, IAS 16 PPE requires…
- 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
When an estimate is changed, subsequent depreciation =
(Carrying amount at date estimate changed - RV) / remaining UEL
OR if changed to reduce balance
Depreciation = % x Carrying amount at date estimate changed
Disposal of NCA used a
a SPL account (T account)
Disposal of NCA used a
a SPL account (T account)
4 step process for disposal of cash consideration (NCA)
- 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
A part exchange agreement arises where…
- an old asset is provided in part payment for a new one
- balance of new asset is paid in cash
