Further Fixed Assets - Hire Purchase, Leasing, Grants and Intangibles Flashcards
What are the accounting entries for a revenue grant?
Debit bank, credit grant income account
How do you calculate a finance charge?
Deposit
Add instalments
Less cash price
———–
Divided by no. instalments
=
Finance charge per instalment
What is a hire purchase agreement?
When the trader obtains the use of an asset in exchange for a periodic monthly payment. At the end, the the asset can be purchased.
How is a hire purchase agreement treated in the accounts?
As if it had been purchased outright with a loan being provided by the hire purchase company
What are the two forms of leasing?
Short term leasing e.g 6 months, known as an operating lease
and long term leasing, e.g 3+ years, known as a finance lease
What is the double entry to record an operating lease?
Debit lease rental expense (P+L)
Credit bank account
How does a finance lease differ to a hire purchase lease?
No option to purchase at the end. all the risks and rewards on the lessee
Who is the lessee?
The person hiring the service
How is a finance lease accounted for?
The effect of the transaction is that the trader is borrowing money and purchasing the asset
What is the finance charge?
The excess that the trader is incurring for paying for the asset over a period of time, it is charged as an expense to the P+L
How is the cost of the asset as if purchased outright accounted for?
Debit fixed asset cost
Credit loan creditor account
How is the amount of an asset’s deposit accounted for?
Debit loan creditor account
Credit bank
How are the monthly payments made to the finance/loan provider accounted for?
Debit loan creditor account
Credit bank
How is the period finance charge/allocation of interest accounted for?
Debit finance expense
Credit loan creditor account
What is a revenue grant?
A contribution towards revenue expenditure e.g wages
What is an asset grant?
A grant that is received in respect of capital expenditure
How should an asset grant be treated in the accounts?
As a type of deferred income
How do you account for the initial cash receipt of an asset grant?
Debit bank, credit grant income account (deferred income balance sheet)
How do you account for the release of grant income in line with the associated depreciation expense in the P+L?
Debit grant account (deferred income balance sheet)
Credit grant income account (profit and loss)
What are the most common examples of intangible fixed assets?
Goodwill, patents, copyright. research and development expenditure
What is the useful life of an intangible asset?
Finite useful life, if it cannot be reliably estimated, it cannot exceed 10 years.
It is then amortised on a systematic basis.
How is research defined?
Original investigations to gain new knowledge or the search for applications of research findings or searching for alternative materials, devices, products etc
How is development defined?
Using existing knowledge to produce new or substantially improved materials, devices, products etc
How should research expenses be treated?
Written off as it is incurred as there is no certainty that research will result in future revenues
How should development expenditures be treated?
It should also be written off unless it can be clearly linked to a project which is technically feasible and commercially viable. Need to be virtually certain of future economic benefit.
How should development expenditures be amortised?
Amortisation should start in the period of commercial production of the produce or process, and should be charged on a systematic basis over useful life
What is goodwill?
The difference between the value of the business as a whole and the sum of the values of the individual assets that are shown on the balance sheet
True or false, goodwill should always be recognised as an intangible asset on the balance sheet?
False
Where does the loan creditor account appear in the set of accounts?
Balance sheet
If a company wishes to minimise the risks and rewards of asset ownership, how should it acquire assets?
Operating lease
Is the cash deposit in the loan creditor account a debit or a credit?
Debit
True or false, development expenditure can be capitalised where it is probable that it will result in future economic benefit?
FALSE
True or false, where development expenditure is shown as an asset, amortisation should start in the period of commercial production?
TRUE
True or false, research expenditure can be capitalised as long as it gives rise to new scientific knowledge?
FALSE
Who accepts the risks and rewards of an asset in a finance lease?
The lessee
