Chapter 8 - Non Current Assets and Depreciation

Question 1

What is capital expenditure?

Answer 1

Expenditure used to purchase long-term assets or improve their earning capcaity

Question 2

What is included in the cost of a non-current asset

Answer 2

Any amount incurred to acquire the asset and bring into working condition

Question 3

What are examples of what is included in capital expenditure

Answer 3

• Purchase price
• Delivery costs
• Legal fees
• Subsequent expenditure which enhances the asset

Question 4

What are examples of what is not included in revenue expenditure

Answer 4

• Repairs
• Renewals
• Repaintint

Question 5

How to record a cost of non-current asset

Answer 5

Dr Non-current asset
Cr - Bank/Cash/Payable

Question 6

What is subsequent expenditure?

Answer 6

Can only be recorded as part of the cost (Capitalised) if it enhances the benefits of the asset i.e. increases the revenue the asset generates

Example - Extension to shop building which provides external selling space

Question 7

What are examples of costs which cannot be capitalised

Answer 7

Repair work: Any repair costs must be debited to the statement of profit or loss as an EXPENSE

Question 8

What is depreciaiton?

Answer 8

Cost - residual value over/ assets useful life

Question 9

What is the residual value

Answer 9

Estimated amount entity would obtain from selling asset at the end of its useful life

Question 10

What is useful life

Answer 10

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

Question 11

What is the dual effect of depreciation?

Answer 11

1. Reduce the statement of financial position value of the non-current asset by cumulative depreciation to reflect wearing out
2. Record depreciation charge as expense in statement of profit or loss to match with revenue generated of non-current asset

Question 12

What are the methods of depreciation??

Answer 12

• Straight line methods
• Reduce balance methods

Question 13

how do you work out straight line depreciation?

Answer 13

Assumed to be charged monthly in the exam

Depreciation charge = [Cost-residual value]/useful life

OR

x% x cost (when no residual value)

Question 14

What is the reducing balance methods?

Answer 14

Depreciation charge = X% x carrying amount

Question 15

What is the carrying amount?

Answer 15

Original cost of the non-current asset - accumulated depreciation of the asset

Question 16

What is the accounting entries for Accounting for depreciation?

Answer 16

Dr Depreciation statement of profit and loss
Cr Accumulated Depreciation sfp

Question 17

Depreciation method
Residual Value
Useful economic life are all estimates of depreciaiton

Answer 17

That’s all!

Question 18

How to change an estimate for depreciation (equation)Ari

Answer 18

Subsequent depreciation - (Carrying amount) @ data changed - RV) / Remaining UEL

Or if you change to reducing balance

Depreciation = % x carrying amount at date estimated changed

Question 19

What is profit/loss on disposal?

Answer 19

Arise on disposal of a non-current asset

Question 20

How to calculate profit/loss on disposal?

Answer 20

Proceeds
- Carrying amount
= Profit loss on dispoals

Question 21

Where are the disposals of a non-current asset recorded?

Answer 21

• Statement of profit or loss account
• Reflects any profit or loss on disposal

Question 22

What is the four step process for disposal for cash consideration?

Answer 22

1. Remove the original cost of the non-current asset from the current asset account
2. Remove the accumulated depreciation on the non-current asset from the ‘accumulated depreciation account
3. Record the cash proceeds
4. Balance off the disposals account to identify profit and loss

Question 23

What is a part exchange?

Answer 23

An old asset that is provided in part exchange for a new one.

The balance of new asset is paid in cash

Question 24

What is the accounting entries for recording a disposal through a part exchange?

Answer 24

1. Dr Disposals
   Cr Non-current assets
2. Dr Acc’m Dep’n
   Cr Disposals
3. Dr Non-current assets
   Cr Disposals
4. Dr Non-current assets
   Cr - Cash
5. Balance off

Question 25

What is impairment of non-current assets?

Answer 25

Recoverable amount is less than its carrying amount

Question 26

What is the recoverable amount?

Answer 26

Greater of Fair value - Cost to sell

Value in use = present value of future cash flows

Question 27

What are the accounting entries for impairment losses

Answer 27

Dr Impairment expense
Cr Accum’n Depn

Question 28

What is the purpose of a non-current asset register?

Answer 28

• List of all non-current assets of the business
• Broken down normally by location and asset type
• Maintain in order to control non-current assets and keep track of what is owned and where it’s kept

Question 29

What are intangible non-current asset

Answer 29

Assets held for the long term have no physical form

Question 30

Do internally-generated intangible assets

Answer 30

Do not appear on the statements of financial position as it is generally deemed too difficult to determine their value reliably

Question 31

What is goodwill?

Answer 31

Excess value of a business above the carrying amount of its assets - its liabilities in its accounting records.

e.g. reputation, skills and staff. But it’s not recorded on the financial statements

Question 32

What is the research and development expenditure

Answer 32

• The topic will be looked at in more detail in future studies
• Research costs are always charged to the statement of profit or loss
• If certain criterias are met, development expenditure must be shown as a non-current asset on the statement of financial position
• Where this is the case, amortisation is recorded to reflect the use of the assets.