Week 3

Question 1

What are types of capital expenditure?

Answer 1

• New asset
• Improving an asset

Question 2

What are types of revenue expenditure?

Answer 2

• Maintaining an asset
• Operating expenses

Question 3

What is an asset?

Answer 3

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Question 4

How do you recognise tangible assets?

Answer 4

• When purchased, recognise at purchase price.
• When self-constructed recognize at input cost

Question 5

How does the matching principle apply to depreciation?

Answer 5

The cost of the asset has to be allocated over the lifespan of the asset, with some amount expensed each year. Depreciation is the annual charge which is allocated to that year.

Question 6

What are the 3 methods of depreciation?

Answer 6

• Straight line
• Accelerated
• Production methods

Question 7

What are the three key factors for depreciation calculations?

Answer 7

1. Cost
2. Useful life
3. Residual value

Question 8

Equation for straight-line depreciation

Answer 8

Depreciation = (Cost - Residual)/ Useful life in years

Question 9

Why don’t companies revalue assets?

Answer 9

• Returns would be lower

Question 10

How do you recognise a non-purchases intangible asset?

Answer 10

Limited or no recognition

Question 11

How do you recognise a purchased intangible asset?

Answer 11

Capitalise and amortise and/or review for impairment

Question 12

What is goodwill?

Answer 12

An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised.

Question 13

What are revaluations?

Answer 13

Increases in non-current asset values

Question 14

What are impairments?

Answer 14

Decreases in non-current asset values

Question 15

In the impairment process, what is ‘value in use’?

Answer 15

Present value of future cash flows expected to be derived from asset or cash-generating unit (CGU).

Question 16

What is ‘fair value less costs to sell’ in impairment process?

Answer 16

Amount obtainable from sale in an arm’s length transaction between knowledgeable, willing parties less the costs of disposal.

Question 17

When is an asset impaired?

Answer 17

When the carrying amount exceeds the recoverable amount (if sold).

The carrying amount is the cost of an asset less accumulated depreciation.

Question 18

What is the recoverable amount of an asset?

Answer 18

The higher amount of either the ‘Value in use’ or the ‘fair value less costs to sell’.