week 5

Question 1

what are non-current assets

Answer 1

long term in nature
expected to contribute income for more than one year
indirect relationship with trading activities
acquired through capital expenditure
divided into intangible, tangible and financial

Question 2

what are current assets

Answer 2

short term in nature
convertible into cash in less than one year
usually relate directly to trading activities
linked to revenue expenditure
divided into inventories, trade recievables and cash

Question 3

what is the initial value of non-current assets

Answer 3

cost of acquiring the asset + cost of bringing it to its working condition and location
includes costs like purchase price, costs of site preparation, delivery and installation, professional fees
excludes cost of warranty, maintenance agreement, replacements and spare parts

Question 4

when do assets need revaluing

Answer 4

due to inflation value of non-current assets needs evaluating
a business needs to revalue all assets of the same type at once

Question 5

what is depreciation

Answer 5

systematic allocation of the depreciable amount of an asset over its useful economic life
reflects amounts of the economic benefits of the tangible non-current asset that have been consumed during the period

Question 6

what is annual depreciation

Answer 6

amount of the total cost of a non-current asset used up during the year

Question 7

how do you calculate depreciable amount

Answer 7

cost of an asset - expected residual value
residual value is the estimated disposal proceeds at the end of an assets useful life

Question 8

what is useful economic life

Answer 8

determines the expected useful life for calculating depreciation
time for which an asset is expected to generate economic benefits for the firm
needs to be estimated for non-current asset
depend on physical life and technological obsolesence

Question 9

what data do you need to calculate depreciation

Answer 9

historical cost
length of an assets expected useful economic life
estimated residual value

Question 10

what is straight line depreciation

Answer 10

assumes the amount of asset used up is constant each year

Question 11

how do you calculate straight line depreciation

Answer 11

(original cost - estimated residual value) / estimated useful life (years)

Question 12

what are the advantages of straight line method

Answer 12

most appropriate for assets that are depleted as a result of time
may be suitable where an assets utilisation is the same each year
easy to understand and calculate

Question 13

what are the disadvantages of straight line depreciation

Answer 13

may not give an accurate measure of the loss in value or reduction in useful life

Question 14

what is reducing balance depreciation

Answer 14

applies a constant/fixed percentage depreciation rate each period to the assets net book value at the end of the period

Question 15

how do you calculate reducing balance depreciation

Answer 15

Question 16

what are the advantages of reducing balance method

Answer 16

most appropriate for assets that deteriorate as a result of usage where this is greater in earlier years
may also be suitable where the utilisation is the same each year
decreasing annual depreciation combined with increasing repair costs give a relatively constant combined annual charge
gives a more realistic approximation of the reduction in resale value

Question 17

what are the disadvantages of reducing balance method

Answer 17

contains random assumption on rate of declining value
quite complex

Question 18

how do you calculate the sum of digits depreciation

Answer 18

(N x (N+1)) / 2
which is the denominator
numerator is the year number in reverse
eg if N = 4 years
year 1 is 4/10

Question 19

how do you bookkeep for depreciation

Answer 19

depreciation reduces the amount the asset is recorded at in the balance sheet by the amount that has been used
amount of depreciation charged in the year is an expense in the income statement
in the balance sheet asset shown at net book value

Question 20

what happens when you dispose of a non-current asset

Answer 20

before disposal - depreciation based on knowledge of historical costs and estimates of residual value and economic life
at disposal - have actual values for residual value and economic life, calculate if you made a profit or loss

Question 21

how do you calculate CB of NBV

Answer 21

OB of NBV - disposed NBV

Question 22

how do you calculate profit/loss on disposal

Answer 22

proceeds - disposed NBV

Question 23

how do you calculate NBV

Answer 23

cost - accumulated depreciation

Question 24

how do you calculate partial year depreciation

Answer 24

either on a strict time basis, from date of purchase to end of accounting year
or
in year of disposal, from start of accounting year to date of sale

Question 25

what are intangible assets

Answer 25

non-monetary assets without physical substance, includes patents and copyrights
own category in statement of financial position

Question 26

what are the three attributes of intangible assets

Answer 26

identifiability - separable and can be transferred
control - ability to obtain benefits from asset
will create future economic benefits

Question 27

what are identifiable intangible assets

Answer 27

a specific value can be placed on each individual asset, and can be separately identified and sold

Question 28

what are unidentifiable intangible assets

Answer 28

intangible assets that cannot be separately sold

Question 29

what is amortisation of intangible assets

Answer 29

intangible assets with a limited useful life are amortised (depreciated) over their useful lives
the amortisation method should reflect pattern economic benefits are derived, if a pattern cannot be determined use straight line