Further Fixed Assets - Hire Purchase, Leasing, Grants and Intangibles

Question 1

What are the accounting entries for a revenue grant?

Answer 1

Debit bank, credit grant income account

Question 2

How do you calculate a finance charge?

Answer 2

Deposit
Add instalments
Less cash price
———–
Divided by no. instalments
=
Finance charge per instalment

Question 3

What is a hire purchase agreement?

Answer 3

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.

Question 4

How is a hire purchase agreement treated in the accounts?

Answer 4

As if it had been purchased outright with a loan being provided by the hire purchase company

Question 5

What are the two forms of leasing?

Answer 5

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

Question 6

What is the double entry to record an operating lease?

Answer 6

Debit lease rental expense (P+L)
Credit bank account

Question 7

How does a finance lease differ to a hire purchase lease?

Answer 7

No option to purchase at the end. all the risks and rewards on the lessee

Question 8

Who is the lessee?

Answer 8

The person hiring the service

Question 9

How is a finance lease accounted for?

Answer 9

The effect of the transaction is that the trader is borrowing money and purchasing the asset

Question 10

What is the finance charge?

Answer 10

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

Question 11

How is the cost of the asset as if purchased outright accounted for?

Answer 11

Debit fixed asset cost
Credit loan creditor account

Question 12

How is the amount of an asset’s deposit accounted for?

Answer 12

Debit loan creditor account
Credit bank

Question 13

How are the monthly payments made to the finance/loan provider accounted for?

Answer 13

Debit loan creditor account
Credit bank

Question 14

How is the period finance charge/allocation of interest accounted for?

Answer 14

Debit finance expense
Credit loan creditor account

Question 15

What is a revenue grant?

Answer 15

A contribution towards revenue expenditure e.g wages

Question 16

What is an asset grant?

Answer 16

A grant that is received in respect of capital expenditure

Question 17

How should an asset grant be treated in the accounts?

Answer 17

As a type of deferred income

Question 18

How do you account for the initial cash receipt of an asset grant?

Answer 18

Debit bank, credit grant income account (deferred income balance sheet)

Question 19

How do you account for the release of grant income in line with the associated depreciation expense in the P+L?

Answer 19

Debit grant account (deferred income balance sheet)

Credit grant income account (profit and loss)

Question 20

What are the most common examples of intangible fixed assets?

Answer 20

Goodwill, patents, copyright. research and development expenditure

Question 21

What is the useful life of an intangible asset?

Answer 21

Finite useful life, if it cannot be reliably estimated, it cannot exceed 10 years.

It is then amortised on a systematic basis.

Question 22

How is research defined?

Answer 22

Original investigations to gain new knowledge or the search for applications of research findings or searching for alternative materials, devices, products etc

Question 23

How is development defined?

Answer 23

Using existing knowledge to produce new or substantially improved materials, devices, products etc

Question 24

How should research expenses be treated?

Answer 24

Written off as it is incurred as there is no certainty that research will result in future revenues

Question 25

How should development expenditures be treated?

Answer 25

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.

Question 26

How should development expenditures be amortised?

Answer 26

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

Question 27

What is goodwill?

Answer 27

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

Question 28

True or false, goodwill should always be recognised as an intangible asset on the balance sheet?

Answer 28

False

Question 29

Where does the loan creditor account appear in the set of accounts?

Answer 29

Balance sheet

Question 30

If a company wishes to minimise the risks and rewards of asset ownership, how should it acquire assets?

Answer 30

Operating lease

Question 31

Is the cash deposit in the loan creditor account a debit or a credit?

Answer 31

Debit

Question 32

True or false, development expenditure can be capitalised where it is probable that it will result in future economic benefit?

Answer 32

FALSE

Question 33

True or false, where development expenditure is shown as an asset, amortisation should start in the period of commercial production?

Answer 33

TRUE

Question 34

True or false, research expenditure can be capitalised as long as it gives rise to new scientific knowledge?

Answer 34

FALSE

Question 35

Who accepts the risks and rewards of an asset in a finance lease?

Answer 35

The lessee