Unit 3 Acc Chapter 11 Review Questions

Question 1

RQ 11.1 // Assets & Expenses

Q1. Referring to the definitions, identify the characteristics common to both assets and expenses.

Answer 1

Assets, in common with expenses, are necessary to help earn revenue and generate profit. They both refer to the economic benefit that is brought to the business.

Question 2

RQ 11.1 // Assets & Expenses

Q2. Explain the key difference between an asset and an expense.

Answer 2

An asset is defined as future economic benefit, while an expense is defined as the consumption of an economic benefit.
That is, expenses refer to economic benefit that has already been consumed, whereas assets refer to economic benefits that are yet to be consumed.

Question 3

RQ 11.1 // Assets & Expenses

Q3. Identify the characteristics of a depreciable non-current asset.

Answer 3

Depreciable assets have a finite life, and will be useful for a fixed period of time.

Question 4

RQ 11.1 // Assets & Expenses

Q4. Explain why it is not necessary to calculate depreciation for assets such as land.

Answer 4

Assets that have an infinite life should not be depreciated, as they may be used, but are never ‘used up’ or consumed.

Question 5

RQ 11.1 // Assets & Expenses
Q5. Referring to one accounting principle, explain why the entire cost of a non-current asset should not be reported as an expense.

Answer 5

When a business purchases a non-current asset, it is clearly classified as such as the benefit will be provided for more than 12 months.
It cannot be reported as an expense as its entire benefit has not been consumed in the current Reporting Period.

Question 6

RQ 11.1 // Assets & Expenses

Q6. Explain why GST is excluded from the consideration of depreciation.

Answer 6

GST is excluded because it is not included in the cost of a non-current asset; it actually represents a reduction in the GST liability owed to the ATO.

Question 7

RQ 11.2 // Depreciation of NCA

Q1. Define the term ‘depreciation’.

Answer 7

Depreciation is the allocation of the cost of a non-current asset over its useful life.

Question 8

RQ 11.2 // Depreciation of NCA

Q2. Define the term ‘depreciation expense’.

Answer 8

Depreciation expense is the part of the cost of a non-current asset that has been consumed in the current Reporting Period.

Question 9

RQ 11.2 // Depreciation of NCA

Q3. Referring to one accounting principle, explain the purpose of depreciating a non-current asset.

Answer 9

Because a non-current asset is not consumed entirely within the one Reporting Period, depreciation is an attempt to calculate how much of the asset’s value has been consumed in the current Reporting Period.

Question 10

RQ 11.2 // Depreciation of NCA

Q4. Explain the effect of depreciation on a firm’s bank balance.

Answer 10

Depreciation has no effect on a firm’s bank balance because depreciation does not involve any payment of cash.
The cash payment relating to each non-current asset will be recorded only at the time when the asset is purchased.

Question 11

RQ 11.3 // Calculating Depreciation Expense
Q1. Explain the assumption that underlies the straight-line method of depreciation in relation to how assets contribute to revenue.

Answer 11

The straight-line method of depreciation assumes that non-current assets contribute evenly to revenue.
Given that it assumes that the value of the non-current asset is consumed evenly over its life, the depreciation expense is the same every year.

Question 12

RQ 11.3 // Calculating Depreciation Expense

Q2. State the formula for calculating depreciation using the straight-line method.

Answer 12

Depreciation expense ($ per annum) = HC – RV/Life

Question 13

RQ 11.3 // Calculating Depreciation Expense
Q3. Define the following terms:
●	Historical Cost
●	residual value
●	useful life

Answer 13

● Historical Cost – the original purchase price of the non-current asset

● residual value – the estimated value of the non-current asset at the end of its useful life

● useful life – the estimated period of time for which the non-current asset will be used by the current entity to earn revenue. This is usually measured in years.

Question 14

RQ 11.3 // Calculating Depreciation Expense

Q4. Explain why each non-current asset must be depreciated individually rather than as a total.

Answer 14

Because each non-current depreciable asset is different in terms of its useful life and residual value, each must be depreciated individually.

Question 15

RQ 11.3 // Calculating Depreciation Expense
Q5. Referring to one accounting principle, explain why residual value is deducted from Historical Cost when calculating depreciation using the straight-line method.

Answer 15

Residual value is deducted from the historical cost, as this is the amount that will not be consumed by the business, but by another entity.

Question 16

RQ 11.4 // Recording Depreciation

Q1. Show the General Journal entries to record the balance day adjustment for depreciation expense.

Answer 16

Depreciation of Van

GENERAL LEDGER: Debit
SUBSIDIARY LEDGER : nothing

Accumulated Depreciation of Van

GENERAL LEDGER: nothing
SUBSIDIARY LEDGER : Credit

(Yearly depreciation on van – s/line method (Memo x))

Question 17

RQ 11.4 // Recording Depreciation

Q2. State one reason why the ledger accounts must name the asset being depreciated.

Answer 17

Given that most businesses will depreciate more than one non-current asset, it is imperative to identify precisely which asset is being depreciated.

Question 18

RQ 11.4 // Recording Depreciation

Q3. State the effect of depreciation on the accounting equation.

Answer 18

ASSETS: Decrease (increase Accumulated Depreciation of Van)

LIABILITIES: no effect

OWNER’S EQUITY: Decrease (Depreciation of Van expense decreases Net Profit)

Question 19

RQ 11.4 // Recording Depreciation
Q4. Referring to one accounting principle, explain the difference between depreciation expense and accumulated depreciation.

Answer 19

Whereas depreciation expense refers to the amount consumed in the current Reporting Period, accumulated depreciation refers to depreciation that has accumulated over the life of the asset so far (over a number of Reporting Periods).

Question 20

RQ 11.4 // Recording Depreciation

Q5. State two reasons why the Depreciation expense account must be closed at the end of the Reporting Period.

Answer 20

● to transfer Depreciation Expense to the Profit and Loss Summary account in order to calculate profit for the current Reporting Period

● to reset the Depreciation Expense account to zero in preparation for the next Reporting Period

Question 21

RQ 11.4 // Recording Depreciation

Q6. State one reason why the Accumulated Depreciation account is balanced at the end of the Reporting Period.

Answer 21

Accumulated Depreciation is a negative asset account and is an ongoing account; its balance will be carried forward to the next Reporting Period.

Question 22

RQ 11.5 // Reporting Depreciation
Q1. Referring to one accounting principle, explain why the original purchase price of a non-current asset must be disclosed in the Balance Sheet.

Answer 22

In order to keep the reports free from bias, the asset must always be reported initially at its Historical Cost (its original purchase price), as this amount is verifiable by reference to a source document.

Question 23

RQ 11.5 // Reporting Depreciation

Q2. Define the term ‘carrying value’.

Answer 23

Carrying value is the value of a non-current asset that is yet to be consumed/allocated as an expense, plus any residual value.

Question 24

RQ 11.5 // Reporting Depreciation
Q3. Referring to one qualitative characteristic, explain why non-current assets must be reported at their carrying value in the Balance Sheet.

Answer 24

The carrying value is reported in the Balance Sheet as this is information that is useful for decision-making for the owner (Relevance). For example, the owner will be able to see if the asset is nearing the end of its useful life (low carrying value) and may need replacement.

Question 25

RQ 11.5 // The Rate of Depreciation

Q1. Show the formula for calculating the rate of depreciation.

Answer 25

Depreciation rate (% per annum) = 
Depreciation expense/Historical Cost x 100

Question 26

RQ 11.5 // The Rate of Depreciation

Q2. Show the formula for calculating depreciation expense using the rate of depreciation.

Answer 26

Depreciation expense ($ per annum) = 
Depreciation rate x Historical Cost

Question 27

RQ 11.7 // The Cost of a NCA

Q1. Define the term ‘cost’ as is relates to non-current assets.

Answer 27

The cost of a non-current asset is defined as all costs incurred in order to bring the asset into a location and condition ready for use, which will provide a benefit for the life of the asset.

Question 28

RQ 11.7 // The Cost of a NCA

Q2. Identify three costs that might be included in the cost of a non-current asset.

Answer 28

● the purchase price/supplier’s price
● delivery costs
● modification costs
● installation costs

Question 29

RQ 11.7 // The Cost of a NCA

Q3. Explain why GST is excluded from the cost of a non-current asset.

Answer 29

GST is excluded because it actually represents a reduction in the GST liability owed to the ATO and does not become part of the cost of a non-current asset.

Question 30

RQ 11.7 // The Cost of a NCA

Q4. Explain why yearly costs are excluded from the cost of a non-current asset.

Answer 30

Yearly costs are excluded as their benefit will be consumed within a year, and so they do not fit the definition of the ‘cost’ of a non-current asset.

Question 31

RQ 11.8 // Depreciating a NCA for Less than a Year
Q1. Referring to one accounting principle, explain why it is not always accurate to report depreciation expense per annum.

Answer 31

If by the end of the Reporting Period, the firm has had control of the asset for less than a year, the depreciation figure will need to be applied on a pro-rata basis.

Question 32

RQ 11.8 // Depreciating a NCA for Less than a Year
Q2. Explain the process for calculating depreciation of an asset when the firm has had control of the asset for less than a year.

Answer 32

After calculating the depreciation expense per annum, multiply this number by the number of months (that the business has had control of the asset) out of 12.

Question 33

RQ 11.9 // Use of Estimates in Calculating Depreciation

Q1. Explain how depreciation can undermine the Reliability of accounting reports.

Answer 33

When calculating depreciation, the residual value and the useful life of the non-current asset are estimates, and are therefore not based on verifiable evidence. This makes the accounting reports not free from bias.

Question 34

RQ 11.9 // Use of Estimates in Calculating Depreciation
Q2 Explain how depreciation ensures relevance in the:
● Income Statement
● Balance Sheet

Answer 34

● Income Statement – depreciation ensures that the Income Statement includes all information that is useful for decision-making about profit, by showing the consumption of non-current assets in the current Reporting Period

● Balance Sheet – By showing accumulated depreciation in the Balance Sheet, it ensures that assets are shown at their carrying value, which is vital for decision-making about their replacement.