Task 7 Theory Depreciation

Question 1

Reasons for assets to diminish

Answer 1

Wear and tear
technical obsolence
commercial obsolence

Question 2

What is commercial obsolence

Answer 2

when equipment has no further use due to a decline in the market demand for the goods or services it helps to produce.

Question 3

what is technical obsolescence

Answer 3

occurs when the asset becomes out of date and inefficient due to new technologies.

Question 4

Factors determining depreciation charge under cost allocation process

Answer 4

Cost price of asset
useful life
residual value

Question 5

What are 2 methods to calc depreciation

Answer 5

straight line method
diminishing balnce method

Question 6

What is straight line method

Answer 6

involves a constant charge of depreciation in every reporting period.

Question 7

when is straight line method used

Answer 7

used when the asset is expected to contribute evenly to the income-earning activities of the business over its useful life

Question 8

what is diminshing balance method

Answer 8

involves a decreasing charge of depreciation being made to the asset in every reporting period. It is used when more income is expected in the early years of an asset’s useful life.

Question 9

egs of straight line method

Answer 9

furniture, fittings, buldings

Question 10

eg of diminishing balance method

Answer 10

equipment and machinery

Question 11

Cost of a Non-Current Asset

Answer 11

purchase price of the asset
cost of preparing the asset for use such as installation cost
additions to the asset(like aircon)

Question 12

straight line formula

Answer 12

Original cost – Estimated residual value/Estimated useful life

Question 13

Advantages of straight line

Answer 13

simple to use
more appropriate where the benefits from the asset are roughly equal in each period

Question 14

disAdvantages of straight line

Answer 14

not take into account the degree of usage, age or efficiency of the asset
doesnt account fro wear and tear in its later life

Question 15

Reducing balance method formula

Answer 15

(Original Cost – Accumulated Depreciation) x % Rate

Question 17

advantages of diminishing balance method

Answer 17

suitable when asset is greatest in the early years of its useful life
depreciation charge is lower as the asset becomes older and when there is a likelihood of higher maintenance costs

Question 18

disadvantage eod diminishing method

Answer 18

• the depreciation charge in the final year may need to be adjusted

Question 19

firs t 3 steps for disposal of depreciable asset

Answer 19

1) Depreciate the non-current asset for that part of the current accounting period 2)Transfer the original cost of the asset being sold from the Non-Current Asset account to the Sale of Asset account.
3)Transfer the depreciation that has been accumulated on the asset sold from the Accumulated Depreciation account to the Sale of Asset account

Question 20

last 3 steps of disposal of depreciable asset

Answer 20

4. Record the proceeds from the sale of the non-current asset in the Sale of Asset account.
5. determine if its a gain or loss
6. on balacne day trnasfer amount from depreciation to profit loss account