Non-Current Assets And Depreciation Flashcards
Cost of non-current assets definition
The amount incurred to acquire the asset and bring it into working condition
Non-current asset cost includes?
Capital expenditure
E.g. purchase price, delivery costs, legal fees, subsequent expenditure which enhances the asset
Non-current asset cost doesn’t include ?
Revenue expenditure
E.g. repairs, renewals, repainting
What does capitalised mean?
Included on statement of financial position
How are non-current assets recorded?
They are capitalised
Purchase of non-current asset DE
Dr non-current asset
Cr bank/cash/payables
Non-current asset accounts for sole traders
Separate cost account for each category of non-current asset
E.g. motor vehicles, fixtures and fittings
Non-current asset purchase accounts for companies
All entered in property, plant and equipment
Residual value
The estimated amount that an entity would currently obtain from disposing of the asset at the end of its useful life
Useful life
The period when an asset is expected to be available for use by an entity
What doesn’t depreciation do?
Show the asset at current value in balance sheet
Provide a fund for the replacement of the asset
When does depreciation begin?
When the asset is available for use
Do you depreciate land?
No
Do you depreciate buildings?
Yes
The two methods for calculating depreciation
- Straight line
- Reducing balance
Straight line depreciation
(Cost - residual value)/useful life
x% x cost (can be used when there is no residual value)
Assumed to be charged monthly
Time apportion depreciation if only owned for part of the year
Reducing balance depreciation
X% x carrying amount
Disposing of reducing-balance asset in the exam
Won’t have to calculate monthly %
So disposal will either beginning of year (don’t depreciate) or end (do depreciate)
Depreciation DE
Dr depreciation expense (P&L)
Cr accumulated depreciation (BS)
How accumulated depreciation is shown on statement of financial position
A reduction against non-current assets:
Cost
(Accumulated depreciation)
—————
Carrying amount
Things that are estimated when calculating depreciation
- Depreciation method
- Residual value
- Useful economic life
IAS 16 PPE depreciation requirements
- Method reviewed each year and changed if it no longer reflects asset’s pattern of use
- Residual value reviewed each year and changed if expectations differ from previous estimates
- Carrying amount then depreciated with new estimates
Subsequent depreciation after changing estimate when using straight line
(Changed carrying amount - RV)/remaining UEL
Profit/loss on disposal =
Proceeds - carrying amount
Accounting for a disposal of a non-current asset for cash consideration
- Create profit/loss on disposal account for the asset
- Remove its original cost from non-current asset account (dr)
- Remove its accumulated depreciation from accumulated depreciation account (cr)
- Record cash proceeds (cr)
- Balance off the disposals account to identify the profit or loss (profit will be a dr and loss will be a cr)
Accounting for the disposal of a non-current asset though a part-exchange agreement
- Create profit/loss on disposal account for the asset
- Remove original cost from non-current asset account
- Remove accumulated depreciation from accumulated depreciation account
- Record part-exchange allowance (PEA) as proceeds and as part of the cost of the new asset
- Record the cash balance paid for the new asset
- Balance off the disposals account to find the profit/loss
Part exchange agreement definition
And old asset is provided as part-payment for a new one
The balance of the new asset is paid in cash
Removing original cost of a non-current asset to be disposed of from non-current asset account DE
Dr Disposals
Cr N/C Assets
Removing accumulated depreciation of non-current asset to be disposed of from accumulated depreciation account DE
Dr Accumulated depreciation
Cr Disposals
Recording the PEA DE
Dr NC Assets
Cr Disposals
Recording the cash balance paid for a new asset DE
Dr NC Assets
Cr Cash
Recording the proceeds of the sale of a non-current asset to be disposed of DE
Dr Cash
Cr Disposals
Impairment definition
Recoverable amount of asset is less than its carrying amount
Recoverable amount must be accounted as (what is the rule?)
The greater of:
- Fair value less cost to sell
- Value in use
Value in use
The present value of future cash flows expected to be generated by the asset
Impairment DE
Dr Impairment expense (P&L)
Cr Accumulated depreciation
Non-current assets register
A list of all the non-current assets of the business
Usually broken down by location and asset type
Purpose of a non-current assets register
To control non-current assets and keep track of what is owned and where it is kept
Intangible non-current assets definition
Assets held for the long term that have no physical form
E.g. patents, copyrights, licences, goodwill
What is done to intangibles which have a useful life?
Amortised
Amortisation definition
Depreciation for intangible assets
Which type of intangible doesn’t appear on the statement of financial position?
Why?
Internally generated intangibles
Too difficult to estimate their value
Goodwill definition
The excess value of a business above the carrying amount of its assets less it’d liabilities in its accounting records
E.g. from reputation, skills, staff experience, customer relationships
Where is goodwill recorded?
Why?
Usually not recorded in financial statements
Because highly subjective and volatile
When is goodwill recorded on financial statements?
When goodwill is purchased on the acquisition of another business
How is the value of goodwill reduced over time?
Reviewed annually
Not depreciated/amortised
Where are research costs charged?
P&L
Where is development expenditure recorded?
Usually P&L
In some cases must be shown as non-current asset
How is the use of research reflected if it is recorded in the statement of financial position?
Amortisation
