Depreciation and sales of Assets

Question 1

Depreciation

Answer 1

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

Question 2

Tangible Asset

Answer 2

A tangible asset is one that can be seen and touched

Question 3

Depreciable Asset

Answer 3

A Depreciable Asset are assets that depreciate

Question 4

Nature of a Depreciable Asset

Answer 4

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

Question 5

Cost of a Depreciable Asset

Answer 5

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.

Question 5

Depreciation Process

Answer 5

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

Question 6

Three causes of depreciation

Answer 6

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

Question 7

Straight line method

Answer 7

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

Question 8

Straight Line calculation

Answer 8

Cost - Residual value/ Useful life

Question 9

Reducing Balance method

Answer 9

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

Question 10

When should the straight lie method be used

Answer 10

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

Question 11

When should the reducing balance method be used?

Answer 11

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.

Question 12

Myth 1

Answer 12

Depreciation sets aside cash for the replacement of an asset.

Question 13

Truth ( Myth1)

Answer 13

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.

Question 14

Myth 2

Answer 14

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

Question 15

Truth (Myth 2)

Answer 15

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

Question 16

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

Answer 16

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

Question 17

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

Answer 17

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

Question 18

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

Answer 18

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

Question 19

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

Answer 19

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

Question 20

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

Answer 20

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

Question 21

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

Answer 21

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

Question 22

What is Accumulated Depreciation

Answer 22

Accumulated Depreciation is the value of an asset overtime