Lecture 15-16 (Non-current Assets)

Question 1

CURRENT ASSET

Answer 1

An entity shall classify an asset as current when: a) it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle. b) it holds the asset primarily for the purpose of trading. c) it expects to realise the asset within twelve months after reporting period. d) the asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

Question 2

NON-CURRENT ASSET

Answer 2

All other assets (other than current).

Question 3

Examples of non-current assets.

Answer 3

Land and buildings Plant and machinery Motor vehicles Patents Trade marks Development costs Goodwill Brands Long term investments in subsidiary companies. Long term investments in other companies.

Question 4

What is the cost of non-current assets?

Answer 4

At acquisition: -Purchase price of an asset plus the cost of preparing it for use. -(legal costs of acquisition and installation and commissioning costs) Add on improvement costs. Also costs to maintain, repair or restore.

Question 5

What does improvement expenditure do for an asset?

Answer 5

Improvement expenditure may extend the asset’s annual output capacity. - Increasing its economic life - Reducing associated running costs - Improving the quality of its output Costs incurred to improve on the asset’s original condition. - Extension to a building. - Rebuilding shop fittings to attract new type of customer. These costs should be added to the original cost of the asset and depreciated over the remainder of its useful life.

Question 6

REPAIRS AND RESTORATION COSTS

Answer 6

Costs incurred to maintain, repair or restore the asset to its original condition- treated as an expense and charged to the income statement. Professional judgement is required to judge whether something is a repair or an improvement.

Question 7

Debits and credits for purchase of non-current asset.

Answer 7

Dr Non-current asset cost Cr Bank

Question 8

What do you need to employ after initial recognition of non-current asset cost?

Answer 8

Cost model: After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. OR Revaluation model: After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

Question 9

DEPRECIATION

Answer 9

Non-current assets are gradually used up in providing goods and services over time. Purpose of accounting depreciation is to spread the cost of a non-current asset over its expected useful life.

Question 10

NET BOOK VALUE

Answer 10

The result of a calculation: Original Cost - Accumulated Depreciation This is the value that appears on the Statement of Financial Position.

Question 11

DEPRECIATION CHARGE

Answer 11

Each year that a non-current asset is in use, a portion of its cost is deducted from the statement of financial position value. That portion of cost is matched against the revenues of that year. This gives the depreciation charge for the year. (income statement: expense)

Question 12

ACCUMULATED DEPRECIATION

Answer 12

The depreciation of the non-current asset in each year is added to the depreciation of earlier years to arrive at the accumulated depreciation. (statement of financial position: part of NBV calculation)

Question 13

How do you work out straight line depreciation?

Answer 13

Those who believe that a non-current asset is used evenly over time apply a method of calculation called straight line depreciation. Depn. = (Cost - Estimated Residual Value)/Estimated Useful Life

Question 14

Double entries for purchase of NCA.

Answer 14

Dr Plant and machinery cost (or whatever it is) Cr Bank

Question 15

Double entries for annual depreciation charge.

Answer 15

Dr Depreciation charge Cr Accumulated depreciation Need to state depreciation policy used.

Question 16

Example of Non-current asset note for Year 1. (fridge £500, £50 residual value, £90 annual depreciation)

Answer 16

Cost: £ Opening - Additions 500 Disposals - Closing 500 Accumulated Depreciation: Opening - Charge for year 90 Disposals - Closing 90 Net Book Value 410 Prior year nil

Question 17

What parts of depreciation are put on the income statement and SoFP

Answer 17

The income statement shows the annual depreciation charge for the year. Statement of financial position shows net book value. Note gives how this is calculated.

Question 18

How do you work out reducing balance depreciation?

Answer 18

Those who believe that the non-current asset depreciates faster in the earlier years of its life would calculate using the formula: Fixed percentage X the net book value at the start of the year. The rate of depreciation to be applied under the reducing balance method is calculated by the formula:

n= the number of years of useful life

R= the estimated residual value

C= the cost of the asset

Question 19

What do you do if the residual value is impossible to estimate?

Answer 19

Assume it is zero.

Question 20

How are non-current assets disposed of?

Answer 20

1. Open NCA Disposal account.
2. Transfer cost and accumulated depreciation here.
3. Record sales price in NCA disposal account.
4. Balance of NCA disposal account is the profit or loss on disposal and this will be shown on the income statement for the period.

A Dr balance represents a loss on disposal.

A Cr balance represents a gain on disposal.

Question 21

Debit and credits for removal of cost element of NCA.

Answer 21

Dr NCA disposal account

Cr NCA cost

Question 22

Debit and credits for removal of accumulated depreciation for the NCA sold.

Answer 22

Dr Accumulated depreciation

Cr NCA Disposal a/c

Question 23

Debits and credits for cash received from NCA sale.

Answer 23

Dr Bank

Cr NCA disposal a/c