Depreciation Of Non-Current Assets

Question 1

Where is the double entry for the purchase of a non-current asset (Dr Non-current asset, Cr Cash/Payable) posted to?

Answer 1

SFP

Question 2

Describe the general purpose of depreciation

Answer 2

Depreciation is the mechanism we use to charge the cost to the Statement of Profit and Loss over an appropriate period of time.

Question 3

What is the accounting rule that tells us how to deal with non-current assets and depreciation?

Answer 3

International Accounting Standard 16 (IAS 16)

Question 4

Define depreciation

Answer 4

• Depreciation is the spreading of the depreciable amount of an asset over its estimated useful life.
• Depreciation spreads the cost of a non-current asst on a systematic basic over its useful life.

Question 5

Define Depreciable Amount

Answer 5

The cost of the asset less any residual value

Question 6

Define Cost (regarding an asset)

Answer 6

The purchase price of the asset plus all directly attributable costs

Question 7

Define Residual Value

Answer 7

The sale or scrap proceeds you will get for the asset at the end of its life (may be nil)

Question 8

Define estimated useful life

Answer 8

The period of time the asset will be used in the business (not the same as the asset’s physical life which may be a lot longer).

Question 9

We do not include the full amount of the asset purchase as an __ in the __ of __ and __ upon purchase. Rather, we __ the cost of the non-current asset over its __ __ and include a portion of its cost each year.

Answer 9

• Expense
• Statement of profit or loss
• Spread
• Useful life

Question 10

Which concept says that transaction should be reflected in the accounting period to which they relate?

Answer 10

Accruals concept

Question 11

Depreciation is __ an attempt to arrive at the market value of the asset

Answer 11

NOT

Question 12

All non-currents assets are depreciated except ___

Answer 12

Land because that has an indefinite useful life

Question 13

What are the two main methods of depreciation?

Answer 13

1. Straight-line depreciation
2. Reducing balance depreciation

Question 14

IAS 16 tells us the depreciation method used should…

Answer 14

Reflect the pattern in which the asset’s economic benefits are consumed by the entity.

Question 15

Describe Straight Line Depreciation

Answer 15

• This makes the depreciation charge the same every year.
• Is it suitable for assts that do not change or perform any differently over the period the business owns them, e.g., furniture as it is no better or worse at its function at the start or end of its life.

Question 16

What are some assets that would normally use straight line depreciation?

Answer 16

• Buildings
• Fixtures and fittings
• Office equipment

Question 17

Formula for straight-line depreciation:

Answer 17

(Cost - Residual Value) / Useful Economic Life = Annual Depreciation Charge

Question 18

If given a % to use for straight line deprecation, e.g., “the depreciation policy is 25% per annum straight line), how would you calculate the annual depreciation charge?

Answer 18

Multiply the cost by the percentage to get the annual depreciation charge

Question 19

Describe Carrying Amount (CA)

Answer 19

This is the cost less accumulated depreciation

Question 20

Define Accumulated Depreciation

Answer 20

All of the depreciation charged to date on an asset

Question 21

Describe Reducing Balance Depreciation

Answer 21

• With Reducing balance depreciation, the depreciation charge is higher at the start of an asset’s life and as the asset gets older, the annual depreciation charge will be reduced.
• This is suitable for assets where the business gets more benefit from the asset in early years, i.e., generates more revenue at the start.

Question 22

What are some assets that normally use reducing balance depreciation?

Answer 22

• Motor Vehicles
• Plant and Machinery

Question 23

To calculate reducing balance depreciation you must learnt the formula…

Answer 23

Carrying amount (CA) x Depreciation rate (%) = Annual depreciation charge is higher

Question 24

What is another name of Reducing Balance Depreciation?

Answer 24

Diminishing Balance

Question 25

If an asset is bought or sold part-way throughout the year then strictly speaking, the annual depreciation charge should be __-__ for the appropriate number of months. Depreciations begins when the asset is __ for __ and continues until the asset is __.

Some business will have the policy “…” instead.

Answer 25

• Pro-rated
• Available for use
• Derecognised
• “A full year of depreciation is charged in the year of purchase and none in the year of disposal”

Question 26

When is depreciation calculated?

Answer 26

At the end of the period

Question 27

Does the method of calculating depreciation affect the double entry?

Answer 27

No

Question 28

What is the double entry for depreciation?

Answer 28

Dr Depreciation Expense (SPL)
Cr Accumulated Depreciation (SFP)

Question 29

Why will ‘Dr Depreciation Expense’ go to the SPL?

Answer 29

• As owning an asset that is losing value is costing you money we show this as an expense in the SPL.
• The expense is being matched to the same period as the revenue that the asset has helped generate so we are applying the accruals concept.
• The depreciation expense account will only show the expense for the year in question.

Question 30

Why will ‘Cr Accumulated Depreciation’ go to SFP?

Answer 30

• As an asset has started to lose value in the period we need to reduce the CA on the SFP.
• The accumulated depreciation account is offset against the cost account so we end up with a carrying amount on the SFP.
• The accumulated depreciation account shows the ENTIRE LOSS IN VALUE since the purchase of an asset.

Question 31

What is the accumulated depreciation account sometimes referred to as?

Answer 31

Provision for depreciation

Question 32

Describe SPL T accounts

Answer 32

• These T accounts record the income or expense for one year only, and at the end of the year they are cleared out to nil so we can start from scratch the following year (after the bal fig is transferred to the P&L).
• Just because you generate some sales in one year doesn’t mean you will make sales in the following year so we start the account again from nil.

Question 33

Describe T accounts for SFP items

Answer 33

• As they record assets and liabilities, they work differently to P&L items, i.e., if you own a car at the end of one year you are likely to still own it at the start of the next year.
• Therefore T accounts for SFP items are not ‘cleared off’ to nil but are ‘carried down’ to the following year.
• The figure at the end of the year is called the ‘carried down/forward’ balance.
• The figure then inserted at the start of the next year is called the ‘brought down/forward’ balance.

Question 34

What is the brought down/forward balance also referred to as?

Answer 34

Opening balance

Question 35

If the business is using the non-current asset register function in their accounts software, the depreciating may be calculated and posted __. If they are using a separate record such a spreadsheet, a __ will need to be posted in the accounts software to __ enter the depreciation each year.

Answer 35

• Automatically
• Journal
• Manually