Non current asset

Question 1

Define capital expenditure

Answer 1

Capital expenditure is the cost to buy and bring the non-current assets to their intended use.

Question 2

Define revenue expenditure

Answer 2

Revenue expenditure is the cost to operate, repair and maintain the non-current assets in working condition .

Question 3

Distinguish 2 differences between capital and revenue expenditure

Answer 3

Capital expenditure is costs to buy and bring the non-current assets to their intended use while revenue expenditure is costs to operate, repair and maintain the non-current assets in working condition. Capital expenditure is recorded in the statement of financial position as non-current asset while revenue expenditure is recorded in the statement financial performance as an expenses. Capital expenditure benefits business for more than one year while revenue expenditure benefit business within on year.

Question 4

What is the effect of wrong classification of capital expenditure as revenue expenditure on expenses, profit, equity and nca?

Answer 4

expenses overstated, profit, equity and NCA will be understated

Question 5

What is the effect of wrong classification of revenue expenditure as capital expenditure on expenses, profit, equity and nca?

Answer 5

expenses understated, profit, equity and NCA will be overstated.

Question 6

Explain, using an accounting theory, why a item bought which is a non current asset in nature is treated as an expense.

Answer 6

According to materiality theory, item spent that is material and significant to decision making when compared to the size of the income, profit , assets or equity of the business, it must be reported in the statement of financial position as a non-current asset.

Question 7

Define depreciation

Answer 7

Depreciation is an allocation of the cost of the non-current asset over its estimated useful life.

Question 8

Explain with an accounting theory, why business needs to charge depreciation?

Answer 8

according to matching concept expenses incurred must be matched against income earned in the same period to determine the period for that period. Hence business charged depreciation an expenses to matched the income earned from using the non current asset in the same period to determine the profit for the year.

Question 9

State one cause of depreciation

Answer 9

wear and tear, usage, obsolescence, legal limits

Question 10

Explain why it is more suitable to use reducing balance method to calculate deprecation for motor vehicle?

Answer 10

Business uses the NCA more in its earlier years and less as the NCA gets older and become less efficient. Hence a higher amount of depreciation expenses is recorded in the earlier years and reduces as time goes by.

Question 11

Explain why it is more suitable to use straight line method to calculate deprecation for fixtures and fittings?

Answer 11

business uses the F&F uniformly throughout its estimated useful life

Question 12

What is the effect of depreciation on expenses, profit, equity and NCA?

Answer 12

Expense increase, profit, equity and NCA decrease

Question 13

State the double entries for for depreciation

Answer 13

DR DEP CR ACC DEP

Question 14

Profit and net book value decrease by ( ) amount in the earlier years for reducing balance method of depreciation.

Answer 14

Higher

Question 15

Profit and net book value decrease by ( ) amount in the later years for reducing balance method of depreciation.

Answer 15

lower

Question 16

What is the double entry for purchase NCA (eg MV) by cheque?

Answer 16

DR MV CR CAB

Question 17

What is the double entry for purchase NCA (eg MV) on credit?

Answer 17

Dr MV CR Trade payable

Question 18

In the NCA account, will you see depreciation posted to the NCA account? Explain why.

Answer 18

No. Because the double entries for depreciation does not invlvoed NCA.