UNIT 4 NCA Flashcards
Reducing balance depreciation method
The reducing balance depreciation method should be applied to the (nca) as it best reflects the revenue earning patterns of the asset, which will contributed more at the start of it’s life and less to the end of it’s life. (As it has moving parts) this method allocates depreciation expense more at the start, as it is more efficient then and less at the end of it’s life due to it’s decrease in efficient levels.
Reasons for loss on disposal of nca
Under depreciation - the carry value of the asset is overstated or too high. We haven’t written off enough deprecation of the asset over it life due to
Estimated residual value too high and estimated life expectancy too high.
Caused by damage to asset or outdated asset due to new technology.
Reasons for profit
Over depreciation - carry value is understated, too,low. We have written off too much of the depreciation.
Estimated residual value was too low or estimated life expectancy was too low.
Caused by not anticipating asset to be in good condition or not anticipated high demand for the asset.
Cost of nca
Refers to all costs incurred in getting the asset into doin diction and location ready for use that will provide benefit to the assets life.
Supplier price, delivery, modifications and installation.
Difference between creditor control and sundry creditor
While both are current liabilities, the creditors control arises from the purchase of stock on credit, it is also a control account so it’s a balance of amounts owing to creditors. Where as a sundry creditor arises from the purchase of a non current asset in credit, a sundry creditor in the balance sheet is only the value owing to one sundry creditor, not the lot. They require separate entities.
Comparability
To ensure that reports can be compared from one reporting period to the next firms must apply the same method of depreciation it has used in previous reporting periods.
Consistency
Once a relevant depreciation method has been selected consistency demands that the method is used throughout the assets life and from one reporting period to the next to ensure that the depreciation expenses is applied in a constant manner.
Why would we change depreciation methods
We may need to change depreciation method as the nca will contributed more at the start of it’s life then at it’s end, therefore the straight line doesn’t reflect the revenue earning pattern or the asset.
Or
we may need to change the depreciation method as the nca will contributed to revenue evenly through out it’s life, therefore the reducing balance doesn’t reflect the revenue earning pattern of the asset.
Straight line depreciation method
The straight line depreciation method should be applied to the (nca) as it best reflects the revenue earning patterns of the asset, which contributes evenly to revenue over it’s useful life. (As It has no moving parts) this method allocated depreciation expense evenly over the assets life.
