Theory Exam Term 1

Question 1

Define Capital Expenditure

Answer 1

• Capital expenditure is any significant cost that increases the value of a non-current asset.

Question 2

Define Revenue Expenditure

Answer 2

• Revenue expenditure is any cost relating to non-current assets that is incurred to maintain, but not to extend, the useful life of the asset.

Question 3

Explain the difference between capital and revenue expenditure

Answer 3

• Capital expenditure are costs that improve the asset eg. Installation cost, freight, ute tray etc. Whereas, revenue expenditure are expenses associated with maintaining the product such as fuel, oil, insurance, repairs etc.

Question 4

How is capital expenditure accounted for in the accounting reports of a business?

Answer 4

-	Shown in the balance sheet as an asset 
3 Aug 2010 	Computer Equipment 	150 000	
			GST Clearning 		15 000
				Computer solution Pty Ltd		165 000
			(credit purchase of asset)

Question 5

How is revenue expenditure accounted for in the accounting reports of a business?

Answer 5

-	Shown in the income statement as an expense  
31 Oct 2010 	Computer Expense 			100
			GST Clearing 			10 
				Bank 					110 
(paid for computer expenses)

Question 6

Define Depreciation

Answer 6

-Depreciation is the allocation of the cost of the asset to the accounting periods in which it is expected that the asset will contribute to the production of that the asset will contribute to the production of revenue. Usually used in relation to physical assets.

Question 7

Define Amortization

Answer 7

• Amortization refers to the gradual writing off of the cost of certain assets through the passing of time or depletion. It usually refers to the writing off of intangible assets and natural resources.

Question 8

Explain the difference between Amortization and Depreciation

Answer 8

• Amortization is the depletion of value of intangible assets which are considered to be of non-physical form whereas, depreciation is the depletion of value to tangible assets which are usually of physical form.

Question 9

Two different ways to depreciate?

Answer 9

• Both the straight line method and diminishing balance can be used to determine the depreciation of assets.

Question 10

Straight Line Formula

Answer 10

Straight line = original cost- residual value

Useful life of the asset

Question 11

Diminishing Balance Formula

Answer 11

Diminishing Balance = rate of depreciation x diminished value of asset

Question 12

Explain why depreciation is taken into consideration within the accounting system.

Answer 12

• Depreciation is taken into consideration within the accounting system because over time some non-current assets decrease in value due to wear and tear, obsolesces or depletion. The historical cost assumption and the matching principle are two significant concepts that relate to non-current assets.

Question 13

Name the two accounting concepts.

Answer 13

Historical Cost Assumption and Matching Principle

Question 14

Explain Historical Cost Assumption

Answer 14

• The historic cost assumption states that non-current assets are recorded in the financial records of an enterprise at their original cost. However, over time the service potential or future economic benefits of some non-current assets decrease over time. The historic cost of the non-current asset as recorded in the balance sheet may be misleading to some users of the information.

Question 15

Explain Matching Principle

Answer 15

• The matching principle refers to allocating the cost of the asset being matched to the periods in which the assets contributes to earning revenue. Depreciation is created as the expense incurred to be matched against the revenues earned by the business.
• Therefore, depreciation expense is created to allow for this allocation of cost and resolve the two accounting concepts.

Question 16

State the factors that need to be known to calculate the annual depreciation expense of an asset.

Answer 16

There are four factors which need to be known in order to calculate depreciation.

1. Original cost of that asset
2. Useful life of the asset
3. Residual value
4. Method of depreciation

Question 17

State the different methods of calculating the depreciation charge. Give an example of an asset for each method of depreciation and justify your response.

Answer 17

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