Depreciation +Sale of Asset

Question 1

What are non-current assets?

Answer 1

Assets whose worth or service potential to a business diminishes over time, such as machinery, motor vehicles, equipment, and furniture.

Question 2

What causes non-current assets to lose value?

Answer 2

Wear and tear, commercial obsolescence, and technical obsolescence.

Question 2

What is commercial obsolescence?

Answer 2

When equipment loses value due to reduced market demand for the goods or services it helps produce.

Question 2

Define “wear and tear” in relation to asset depreciation.

Answer 2

Damage or change to an asset caused by normal use, leading to a decline in value over time.

Question 3

Explain technical obsolescence

Answer 3

The process by which an asset becomes outdated or inefficient due to new technologies.

Question 4

What is depreciation?

Answer 4

The allocation of an asset’s cost over time, reflecting its decreasing service potential.

Question 5

How is the depreciation expense determined?

Answer 5

By considering the asset’s cost price, useful life, and anticipated residual value.

Question 6

What costs are included in an asset’s cost price?

Answer 6

Purchase price, freight, transit insurance, installation, and testing.

Question 7

What is the “useful life” of an asset?

Answer 7

An estimate of how long the business expects the asset to be productive.

Question 8

Define “residual value.”

Answer 8

The estimated value of an asset at the end of its useful life, often as a trade-in or scrap value.

Question 9

What are the two main depreciation methods?

Answer 9

The straight-line method and the reducing (diminishing) balance method.

Question 10

When is the straight-line method of depreciation used?

Answer 10

When an asset is expected to contribute evenly to the business’s income over its useful life.

Question 11

Describe the reducing (diminishing) balance method.

Answer 11

: A method where depreciation expense decreases over time, used when more income is expected in the asset’s early years.

Question 12

Why doesn’t depreciation set aside cash for asset replacement?

Answer 12

It’s a non-cash accounting entry that reduces profit but does not involve an actual cash outflow.

Question 13

What misconception exists about depreciation and asset market value?

Answer 13

Depreciation does not calculate market value; it is an allocation process for cost over time.

Question 13

What are key questions in determining a non-current asset’s cost?

Answer 13

The frequency of the cost (one-off or recurring) and the benefit period (one year or more).

Question 14

What costs are excluded from a non-current asset’s cost?

Answer 14

Ordinary repairs, ongoing short-term costs, and consumables like fuel and paper.

Question 15

Describe the formula for the straight-line method of depreciation.

Answer 15

: (Original cost - Residual value) / Useful life

Question 16

List advantages of the straight-line depreciation method.

Answer 16

Simple to use, appropriate for assets with consistent benefits over time.

Question 17

What is a disadvantage of the straight-line method?

Answer 17

It doesn’t account for variations in asset usage, age, or efficiency over time.

Question 18

What is the formula for the reducing balance depreciation method?

Answer 18

: (Original Cost - Accumulated Depreciation) x Depreciation Rate

Question 19

When is the reducing balance method advantageous?

Answer 19

For assets that provide greater service in early years and have rising maintenance costs over time.

Question 20

What’s the first step in disposing of a depreciable asset?

Answer 20

Depreciate the asset for the part of the current period it was used.

Question 21

How do you determine a gain or loss on the sale of an asset?

Answer 21

By comparing the sale proceeds to the asset’s carrying amount.

Question 22

What does a gain on the sale of an asset indicate?

Answer 22

The asset was over-depreciated, meaning too much depreciation was recorded over time.

Question 23

What does a loss on the sale of an asset signify?

Answer 23

The asset was under-depreciated, meaning too little depreciation was recorded over time.