Depreciation and sales of Assets Flashcards

1
Q

Depreciation

A

Depreciation is the allocation as an expense, of the depreciable amount of an asset, over its useful life

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2
Q

Tangible Asset

A

A tangible asset is one that can be seen and touched

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3
Q

Depreciable Asset

A

A Depreciable Asset are assets that depreciate

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4
Q

Nature of a Depreciable Asset

A

a) It is held/ owned for the use in the production or supply of goods or services, rental to others, or administration purposes
b) It is expected to be used during more than one accounting period

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5
Q

Cost of a Depreciable Asset

A

The cost of a depreciable asset includes, before GST: The purchase price of an asset, The cost of transportation to the premises, and The cost of setting it up.

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5
Q

Depreciation Process

A

End of an accounting period, a portion of the cost of a depreciable asset, less its estimated resale value is transferred to the P+L ledger account

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6
Q

Three causes of depreciation

A

a)Wear and tear: The decline in the efficiency of an asset due to use
b) Technology obsolescence: asset is redundant due to the introduction of new technology
c) Commercial obsolescence: the asset is redundant due of the fall in demand for goods and services that the asset was used to produce

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7
Q

Straight line method

A

The straight-line method produces the same amount of depreciation expense each full year that a business owns the asset

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8
Q

Straight Line calculation

A

Cost - Residual value/ Useful life

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9
Q

Reducing Balance method

A

The reducing balance method applies a percentage of depreciation to the cost of the asset less the accumulated depreciation

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10
Q

When should the straight lie method be used

A

Allocates the same amount of depreciation expense in each accounting period. Appropriate when the asset is expected to earn income evenly overuse

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11
Q

When should the reducing balance method be used?

A

Allocates more depreciation in the early years of the life of an the asset than in the latter years of the assets life and is appropriate if asset is expected to earn more income in its earlier years of life than in its latter years.

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12
Q

Myth 1

A

Depreciation sets aside cash for the replacement of an asset.

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13
Q

Truth ( Myth1)

A

The depreciation entry is a book of entry, that is an entry in the accounting system that doesn’t involve a cash inflow or outflow.

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14
Q

Myth 2

A

Depreciation is a means of calculating the current market value of an asset

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15
Q

Truth (Myth 2)

A

Depreciation is a process of expense allocation, not asset valuation.

16
Q

What is the effect on profit by charging depreciation on a depreciable asset?

A

a) By charging depreciation and a depreciation on a depreciable asset, the profit is reduced as depreciation is an expense
b) Whilst profit is affected, it is also made to be a more true and accurate reflection of the true profit of the business in that period

17
Q

What type of account is a Sale of Asset ledger account?

A

Sales of Assets account is no particular type of account - it is a calculation account, designed to determine the loss and gain on sale

18
Q

If a “Gain of Sale” was made what does it mean with regards to the amount you depreciated the asset?

A

If a gain on sale is made it means that you sold it for more than you thought it was valued at. So you have actually depreciated too much over its life

19
Q

Which part of the Income statement would loss on sales of delivery vehicles appear?

A

Appears in selling and distribution as the asset was used for selling and distribution.

20
Q

Which part of the income statement would accumulate depreciation - Motor Vehicles appear

A

It doesn’t it’s a non-current asset( Balance Sheet)

21
Q

Which part of the Income statement does the Gain on the sale of Motor Vehicle appear

A

In the other income section, below the cost of sales section

22
Q

What is Accumulated Depreciation

A

Accumulated Depreciation is the value of an asset overtime