Deprecication And Disposal Of Non Current Assets

Question 1

Define depreciation

Answer 1

Depreciation is an estimate of the loss in value of a non current asset over its expected working life

Question 2

Name 4 causes of depreciation

Answer 2

-Physical deterioration
-economic reasons
-passage of time
-depletion

Question 3

Explain how depreciation is an application of the matching principle

Answer 3

Deprivation ensures that the cost of the non current asset is spread over the years which benefit from the use of that asset.this annual charge for depreciation means that the cost of the asset is matched against the revenue of the business it helped to earn each year

Question 4

What are the 3 main methods of depreciation

Answer 4

-straight line method
-reducing balance method
-revaluation method

Question 5

What is the straight line method of depreciation

Answer 5

The same amount of depreciation is charged each year

Question 6

Formula for straight line method

Answer 6

Cost of asset/number of expected years of use
Or
Cost of assets - residual value / number of expected years of use

Question 7

Advantages of straight line method of depreciation

Answer 7

-it is relatively easy to calculate
-it is useful when a non current asset provides equal benefit for each year of its useful life

Question 8

Disadvantages of straight line method of depreciation

Answer 8

-it is necessary to estimate the useful life and the residual value of the non current asset
-it ignores the actual rate at which the non current asset will lose value

Question 9

Define the reducing balance method of depreciation

Answer 9

The depreciating charged each year decreases as it is calculated on the net book value rather than the cost

Question 10

Advantages of the reducing balance method of depreciation

Answer 10

-it matches costs with revenue
-it is usefull for those non current assets where greater benefits area gained in early years of usage

Question 11

Disadvantages of the reducing balance method

Answer 11

-the depreciation has to be recalculated each year
-the depreciation charge against profit is greater in the early years of the non current assets’s life

Question 12

Define the revaluation method of depreciation

Answer 12

The opening balance And closing value of a non-current assets are compared to determine the depreciation for the year

Question 13

Advantages of the revaluation method of depreciation

Answer 13

-It is not necessary to estimate the useful life and the rest of the value of the non-current assets
-No complex calculations are required

Question 14

Disadvantages of the reevaluation method of depreciation

Answer 14

-the non current has been revalued at the end of each year
-The valuation may be based on personal opinion