non-current assets

Question 1

define capital expenditure

Answer 1

consists of the cost to buy and bring the NCA to its intended use. provides benefits that last for more than one year.

Question 2

define revenue expenditure

Answer 2

consists of the cost to operate, repair and maintain the NCA in working condition. provides benefits that are the used up within one year.

Question 3

distinguish between capital and revenue expenditure

Answer 3

capital expenditure: provides benefits that last for more than one year
revenue expenditure: provide benefits which will be used up within one year

capital expenditure: recorded as a NCA in the statement of financial position
revenue expenditure: recorded as an expense in the statement of financial performance

capital expenditure: cost to buy and bring the NCA to a ready-to-use condition
revenue expenditure: cost to operate, repair and maintain the NCA in working condition

Question 4

examples of capital expenditure

Answer 4

cost price of a new machine, delivery cost of the new minute, installation cost

Question 5

examples of revenue expenditure

Answer 5

petrol, repair expense, maintenance expense

Question 6

the application of the materiality theory on the treatment of capital and revenue expenditure

Answer 6

if the amount spent on a NCA is insignificant to decision-making when compared to the size of the income, profit, assets or equity of the business, it can be recorded as a revenue expenditure (expense). This is in accordance to the materiality theory.

Question 7

capital expenditure wrongly recorded as revenue expenditure

Answer 7

effect on other expenses: overstated
effect on profit: understated
effect on NCA: understated

Question 8

revenue expenditure wrongly recorded as capital expenditure

Answer 8

effect on other expenses: understated
effect on profit: overstated
effect on NCA: overstated

Question 9

define depreciation

Answer 9

the allocation of the cost of a NCA over its estimated useful life. it is recorded as an expense in the statement of a financial performance.

Question 10

define accumulated depreciation

Answer 10

total depreciation to date of a non-current asset. it is a contra-asset and is presented as a deduction against the NCA in the statement of financial position.

Question 11

causes of depreciation

Answer 11

usage, wear and tear, obsolescence, legal limits

Question 12

in relation the relevant accounting theories, why is there a need to charge depreciation

Answer 12

• when a business uses a NCA to generate income, a portion of the cost of the NCA has to be recorded as depreciation expense and matched against the income earned in the same financial period to arrive at the profit for the period. this in accordance to matching theory.
• NCA should be valued at their net book value, which is cost less accumulated depreciation. this is in accordance with the prudence theory which states that the accounting treatment chosen should be the one that least overstates assets and profits.

Question 13

state the valuation method for NCA in the statement of financial position

Answer 13

NCA valued at cost less accumulated depreciation in the statement of financial position

Question 14

straight-line method

Answer 14

assumes that the NCA provides the same benefits throughout its estimated useful life

an equal amt of depreciation is recorded every year

Question 15

straight-line method formula

Answer 15

1) rate of depreciation x (cost-scrap)
2) (cost-scrap value)/useful life

Question 16

reducing-balance method

Answer 16

assumes that the NCA provides more benefits in the earlier years than in its later years

depreciation amount reduces every year.

Question 17

reducing-balance method formula

Answer 17

rate of depreciation x net book value (cost price-accumulated depn)

Question 18

straight line method useful when

Answer 18

business uses NCA uniformly throughout its estimated useful life

Question 19

reducing balance method useful when

Answer 19

business uses NCA more in earlier years and less as NCA gets older and becomes less efficient

Question 20

consistency theory application in depn

Answer 20

states that a business should use the same method of depn and rate of depn for every financial period to enable meaningful comparison of the net book value of the NCA over time

Question 21

journal entries for credit purchase of NCA

Answer 21

dr NCA
cr trade payables-name

Question 22

journal entries for depreciation

Answer 22

dr depreciation expense
cr accumulated depn

Question 23

presentation in financial statements for depn

Answer 23

name of business
statement of financial performance for the year ended —-
less: other expenses $
depreciation of — (x)

name of business
statement of financial position for the year ended —–
nca cost accumulated depn net book value
—- A B A-B

Question 24

journal entries for recording sale of NCA, including closing entry

Answer 24

dr sale of NCA
cr NCA

dr accumulated depn
cr sale of NCA

dr cab/cash in hand/other receivable
cr sale of NCA

if gain,
dr sale of NCA
cr income summary

if loss,
dr income summary
cr sale of NCA

Question 25

presentation in financial statement for sale of NCA

Answer 25

statement of financial performance for the year ended —— (extract)

if gain,
add: other income $
gain on sale of NCA xx

if loss,
less: other expenses $
loss on sale of NCA xx