Day 3 - Chapter 8 Flashcards
Cost in Non-Current Asset
cost incurred when bringing in NCA into use
Depreciation on a NCA
cost of using a NCA
Disposal
sale of NCA
Impairment
decrease in NCA - less than carrying amount
What do we include and exclude in the cost of a NCA?
includes
capital expenditure such as
- purchase price
- delivery costs
- legal fees
- subsequent expenditures which enhance the asset
excludes
- repairs
- renewals
- repainting
How do you record a cost of a non-current asset?
DR non-current asset
CR bank/cash/payables
What is subsequent expenditure on a NCA?
can only be recorded as part of the cost (capitalised) if it enhances the benefits of the assets
What is depreciation?
reflects the cost of using (consuming/wearing out) the NCA over time over its useful life in the business
its an application of the accruals concept
by matching the cost of using NCA to revenue it generates
spreads the cost of NCA over its useful life
Residual Value
estimated amount that an entity would currently obtain from disposing of the asset at the end of its useful life
= scrap value
What is deprecation not meant to do?
show the asset its current value in the statement of financial position
provide a fund for the replacement asset
What is the duel effect of depreciation?
the cost to business - expense
reduce the statement of financial position value of NCA by depreciation to reflect the wear out - reduces carrying value
record the depreciation charge as an expense in the p/l
What is the double entry to record depreciation?
DR deprecation expense -p/l
CR accumulated depreciation - statement of financial position
reduces carrying value of NCA
What are the two methods of depreciation?
straight line
reducing balance
What is the straight line method?
depreciation charge = (cost-residual value)/useful life (years)
or
x% x cost
(can be used when there is no residual value)
What is the reducing balance method equation?
depreciation charge = x% x carrying amount (start of the year)
What do we assume in straight line method?
depreciation is charged monthly
What asset do we not depreciate?
land - it is infinite
Note about the right of use assets
right of use assets have a useful life of the lease term
What is the reducing balance method - carrying amount?
original cost of the NCA - accumulated depreciation of the asset
What is the reducing balance cross matrix set up?
Yr Y/E Calculation Depn Charge Carrying Amount
What is the equation for when we have changed an estimate?
(carrying amount @ date - RV)/ remaining useful life
What is the equation for when we have changed to reducing balance?
% x carrying amount at date estimate changed
Disposal of NCA
- Remove Cost of NCA
DR Disposals - original cost
CR NCA - orignal cost
- Remove Accumulated Depn Relating to NCA
DR accumulated depn - all depn charged on NCA up to disposal date
CR Disposals - all depn charged on NCA up to disposal date
- Record Cash Proceeds Received
DR cash - sales cash proceeds received
CR Disposals - sales proceeds received
- Balance off disposals T-account by calcauting p/l disposals and taking it to the SPL
DR NCA - cost
CR accumulated dpn
CR cash proceeds
balance off and the remaining goes to statement of profit or loss
if we need a balancing figure on DR = profit made
if we need a balancing figure on CR = loss made
Equation for Profit/Loss on Disposals of NCA
sales proceeds - carrying amount at date of disposal
What does disposal through part exchange agreement mean?
old asset is provided in part payment for a new one
the balance of the new asset is paid in cash
What is the procedure to record transaction for a part exchange agreement?
- remove the original cost from the NCA
DR Disposals
CR NCA
- remove accumulated depn on NCA from accumulated depn account
DR Acc depn
CR Disposal
- record part exchange as proceeds as part of cost of new asset
DR NCA - Part Exchange
CR Disposal - Part Exchange
- record cash balance paid for the new asset
DR NCA
CR Cash
What is impairment?
decrease the value of NCA to below its carrying amount
When is NCA impaired?
if the recoverable amount is less than carrying amount
What is the recoverable amount greater of?
fair value - cost to sell
or
value in use = the present value of cash flows expected to be generated by the asset
What is equation for impairment?
impairment = carrying amount - recoverable amount and charged to the p/l
What is the double entry for Impairment?
DR impairment expense
CR accumulated depn
What is research costs considered as?
expense on p/l
Do you consider internally generated intangible assets?
no - too difficult to quantify
