Fixed Assets (Chapter 5) [P1+2]

Question 1

Definition of fixed assets

Answer 1

Assets with a long lifespan that are not purchased with the intention of reselling them, but to produce an income for the business

Question 2

Fixed asset examples

Answer 2

• land and buildings (aka property and plant)
• vehicles
• equipment (including furniture and fittings)

Question 3

Why do businesses need to keep records of the purchase price and carrying value of their fixed assets?

Answer 3

• financial statement purposes
• to assist in the tax return process
• if business wants to sell assets at a later stage
• for proper internal control purposes

Question 4

What is fixed asset management?

Answer 4

The accounting process of keeping track of all a business’s fixed assets

Question 5

Why is fixed asset management important?

Answer 5

• financial accounting purposes (correct records in case of sale of asset)
• to determine the maintenance cycle of an asset
• to prevent theft and misuse of asset

Question 6

Definition of a capital budget

Answer 6

Forecast of future expenditure on fixed assets.
It sets out the expected expenditure for purchasing, extending, and improving fixed assets over the budgeted period under review

Question 7

Ways fixed assets can be purchased

Answer 7

• cash
• credit
• trade-in (vehicles and equipment)

Question 8

Definition of a mortgage loan

Answer 8

A loan taken out at a commercial bank to buy property, which is repaid over a long period (20 years) with interest accrued on a monthly basis, and is classified as a non-current liability. The title deed is only given to the client by the bank after the final payment has been made.

Question 9

Definition of imputed expense

Answer 9

An expense that is not physically paid but is accounted for by reducing the carrying value of an asset

Question 10

Definition of the straight line method

Answer 10

Where a certain percentage of the cost price is depreciated every year

Question 11

Definition of diminishing balance method

Answer 11

Where a certain percentage of the carrying value is depreciated every year

Question 12

What is the carrying value of fully depreciated assets?

Answer 12

R1

Question 13

Definition of asset disposal?

Answer 13

To sell or dispose of an asset owned by the business

Question 14

Why would a business dispose of an asset?

Answer 14

• computers and equipment may need to be upgraded due to technological advances in the industry
• vehicles may need to be replaced due to wear and tear (that increases maintenance cost)

Question 15

How do you know if the business has made a profit or loss on the sale of an asset?

Answer 15

• if selling price is less than carrying value, a loss has been made
• if selling price is more than carrying value, a profit has been made