Purchase Of Non-Current Assets

Question 1

Describe non-current assets and provide some examples

Answer 1

• Non-current assets are items of equipment that a business buys and uses in its business for a period of more than one year.
• Land, buildings, motor vehicles, plant and machinery, computer equipment, and fixtures and fittings

Question 2

What are non-currents assets sometimes referred to in the workplace?

Answer 2

Fixed assets

Question 3

What do ‘capex’ and revex’ stand for?

Answer 3

Capital expenditure and Revenue expenditure

Question 4

Describe capital expenditure

Answer 4

This arises from the purchase of non-current assets that are…
- necessary for the business to trade over more than one accounting period, e.g., a factory that will be used for a decade or more.
- or an improvement to the earning capacity of an asset, e.g., an extension to an existing factory allowing more goods to be produced.

Question 5

What is the double entry for capital expenditure?

Answer 5

Capital items appear as non-current assets in the SFP so the double entry is…
- Dr Non-current assets
- Cr Cash

Question 6

When you purchase capital expenditure, does it go to the P&L account?

Answer 6

No — purchasing capital expenditure increases the value of the SFP.

It is only when we star to depreciate the capex that an entry is made to the profit and loss account.

Question 7

How do businesses decide what is capital expenditure (capex) and what is revenue expenditure (revex)?

Answer 7

• They may set a minimum monetary amount for an asset to be classified as capex, e.g., only assets costing more than £500 or more are to be capitalised.
• Any assets below that amount would be treated as revex.
• If an internal policy has been established, it’s important to follow it for consistency.

Question 8

Why is capex more time consuming to account for?

Answer 8

Because there are adjustments to be made, and records to be kept each year regarding capex.

Question 9

Describe Revenue expenditure (revex)

Answer 9

This arises from purchasing items that are…
- essential for the business to trade in the current accounting period, e.g., pairing the current quarter’s electricity bill.
- or from maintaining the earning capacity of a non-current asset such as a business repairing a hole in the roof of its factory.

Question 10

Describe how maintenances and improvements to non-current assets are treated regarding revex and capex

Answer 10

• An improvement to a non-current asset would be treated as capital expenditure;
• Whereas maintenance/repairs to a non-current asset would be treated as revenue expenditure.

Question 11

What is the double-entry for revenue expenditure?

Answer 11

Revenue items appear as expenses in the profit and loss of the business so therefore the double-entry is:
- Dr expense account
- Cr Cash

Question 12

Does revex go to the SFP?

Answer 12

No because they are not assets, and they reduce the profits of the business.

Question 13

What is the double-entry for the purchase/acquisition of a non-current asset dependant on?

Answer 13

How it is financed, i.e., with cash out of the bank account (by writing a cheque for example) or through obtaining credit from the supplier of the asset.

Question 14

Where would an asset purchase be recorded in if it was purchased with cash?

Answer 14

Cash payments book

Question 15

What’s the double-entry for the acquisition of a non-current asset via cash?

Answer 15

Dr Non-current asset (to increase an asset account as we now own something)
Cr Cash (to reduce the asset of cash)

Question 16

What’s the double-entry for the purchase of a motor vehicle via cash?

Answer 16

Dr Motor vehicle
Cr Cash

Question 17

Where would the purchase of an asset be recorded in if it was purchased via credit?

Answer 17

Purchase day book

Question 18

As the non-current asset is not part of out normal trading transactions we record this as a ___-___ ___.

Answer 18

Non-trade payables

Question 19

When we record the value of a non-current asset, we can include any other directly attributable costs to the asset purchase, as well as costs incurred to get the asset to the location in which it will be used and into the state it needs to be in to be used effectively. Therefore capital expenditure may include…

Answer 19

• Purchase price of the asset
• Alteration costs to make the asset usable
• Legal fees associated with purchasing the asset, e.g., with property
• Non-refundable taxes and duties
• Site preparation costs
• Delivery costs
• Installation costs
• Testing costs

Question 20

Costs that only relate to one accounting period should be treated as revenue expenditure. This includes…

Answer 20

• Repairs/maintenance
• Cleaning
• Insurance
• Power/fuel

Question 21

Are sales taxes capex or revex?

Answer 21

Sales taxes are sometimes included as part of the costs that are capitalised and sometimes they are not.

Question 22

For a VAT registered business, is the VAT (sales tax) considered capex?

Answer 22

• No, it is not included in the costs of the non-current asset as the business can claim this VAT back from the government (not a real cost but one that can be reimbursed).

Question 23

For a non-VAT registered business, is the VAT (sales tax) considered capex?

Answer 23

• Yes, the gross value is included as the cost as it cannot reclaim the VAT back, thus we capitalise the gross amount.

Question 24

Is the VAT for cars capitalised?

Answer 24

• Yes — cars are capitalised gross as the VAT is not reclaimable from the government

Question 25

What is the first control to consider when administering non-current assets?

Answer 25

Authorisation over the purchase and sale of non-current assets.

There may be a purchasing department that authorises all capex, or the responsibility may lie with a particular director or manager within the business.

Question 26

What are some ways authorisation can present itself?

Answer 26

• Signing a purchase request form
• Signing an invoice before it’s paid
• Business may have a system in place where a capex authorisation form needs to be completed

Question 27

Describe the key features of a capex authorisation form

Answer 27

• Clearly sets out who wants the item
• Reason for purchasing
• It is common that if the item is above a certain value, e.g., £2000, it requires authorisation from more than one person.
• Each business can decide what exact procedures they wish to implement (but it’s important that authorisation is always obtained before the asset is purchased and included in the accounts).

Question 28

A record of all the assets a business own is called a __-__ __ __ (___).

Answer 28

• Non-current asset register (NCAR)

Question 29

A NCAR is used for __ __ only to help the business ensure it has details on all its assets. Some businesses will use their __ __ to maintain this register, whereas others will keep a separate record such as a __.

Answer 29

• Internal purposes
• Accounting software
• Spreadsheet

Question 30

What are some details (7) you would expect to find on the non-current asset register (NCAR).

Answer 30

1. Description/serial number
2. Date of acquisition
3. Original date
4. Depreciation
5. Carrying amount
6. Disposal date
7. Disposal proceeds

Question 31

What are the 2 important controls around the NCAR?

Answer 31

1. Physical reconciliation of assets
2. Reconciling to the general ledger

Question 32

Describe the control of physical reconciliation regarding the NCAR

Answer 32

• Involves taking items on the NCAR and finding the physical asset.
• This checks that the asset is still in use by the business and that the details on the register are valid.

Question 33

Describe the control of reconciling to the general ledger regarding the NCAR

Answer 33

• Involves checking all the costs and depreciation figures are correctly recorded in the general ledger and that the value of the assets is the same on the NCAR as in the accounts.

Question 34

What happens if discrepancies are found between the NCAR and the general ledge/physicality?

Answer 34

• Reason must be investigated and either the accounts or NCAR should be amended as necessary.

Question 35

What would be the double entry for the following transaction?

The purchase of car for £2400, delivery of £50, and one year insurance at £150.

Answer 35

Dr Motor Vehicle: £2450 (NCAR)
Dr Insurance: £150 (SPL)
Cr Bank: £2600

Question 36

Describe the difference between intangible and tangible assets

Answer 36

• Tangible assets are those with physical form whereas intangible assets are those without a physical substance

Question 37

What is the intangible asset that we need to know for the FAPS unit?

Answer 37

Goodwill

Question 38

Describe the intangible asset of Goodwill

Answer 38

• This is an asset which arises because a business is a ‘going concern’.
• The value of the business when assessed by someone wanting to buy it is more than the value of the individual tangible assets added together.
  —> the difference between what the purchaser is willing to pay for it and the actual value of the assets added together is what’s being paid for the goodwill of the business.

Question 39

How is goodwill valued?

Answer 39

A business cannot just decide it has goodwill and then estimate a value for it, and then include it in their non-current assets.

In order for it to appear on the SFP it has to have been purchased.