Chapter 8 - Non Current Assets and Depreciation Flashcards
What is capital expenditure?
Expenditure used to purchase long-term assets or improve their earning capcaity
What is included in the cost of a non-current asset
Any amount incurred to acquire the asset and bring into working condition
What are examples of what is included in capital expenditure
- Purchase price
- Delivery costs
- Legal fees
- Subsequent expenditure which enhances the asset
What are examples of what is not included in revenue expenditure
- Repairs
- Renewals
- Repaintint
How to record a cost of non-current asset
Dr Non-current asset
Cr - Bank/Cash/Payable
What is subsequent expenditure?
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
What are examples of costs which cannot be capitalised
Repair work: Any repair costs must be debited to the statement of profit or loss as an EXPENSE
What is depreciaiton?
Cost - residual value over/ assets useful life
What is the residual value
Estimated amount entity would obtain from selling asset at the end of its useful life
What is useful life
The period when an asset is expected to be available for use by an entity
What is the dual effect of depreciation?
- Reduce the statement of financial position value of the non-current asset by cumulative depreciation to reflect wearing out
- Record depreciation charge as expense in statement of profit or loss to match with revenue generated of non-current asset
What are the methods of depreciation??
- Straight line methods
- Reduce balance methods
how do you work out straight line depreciation?
Assumed to be charged monthly in the exam
Depreciation charge = [Cost-residual value]/useful life
OR
x% x cost (when no residual value)
What is the reducing balance methods?
Depreciation charge = X% x carrying amount
What is the carrying amount?
Original cost of the non-current asset - accumulated depreciation of the asset
What is the accounting entries for Accounting for depreciation?
Dr Depreciation statement of profit and loss
Cr Accumulated Depreciation sfp
Depreciation method
Residual Value
Useful economic life are all estimates of depreciaiton
That’s all!
How to change an estimate for depreciation (equation)Ari
Subsequent depreciation - (Carrying amount) @ data changed - RV) / Remaining UEL
Or if you change to reducing balance
Depreciation = % x carrying amount at date estimated changed
What is profit/loss on disposal?
Arise on disposal of a non-current asset
How to calculate profit/loss on disposal?
Proceeds
- Carrying amount
= Profit loss on dispoals
Where are the disposals of a non-current asset recorded?
- Statement of profit or loss account
- Reflects any profit or loss on disposal
What is the four step process for disposal for cash consideration?
- Remove the original cost of the non-current asset from the current asset account
- Remove the accumulated depreciation on the non-current asset from the ‘accumulated depreciation account
- Record the cash proceeds
- Balance off the disposals account to identify profit and loss
What is a part exchange?
An old asset that is provided in part exchange for a new one.
The balance of new asset is paid in cash
What is the accounting entries for recording a disposal through a part exchange?
- Dr Disposals
Cr Non-current assets - Dr Acc’m Dep’n
Cr Disposals - Dr Non-current assets
Cr Disposals - Dr Non-current assets
Cr - Cash - Balance off