Week 5

Question 1

How would you record a change in inventory?

Answer 1

Using the conservatism principle you would choose the lower of
1. Cost Carrying amount - initial cost
2. Net realisable value (NRV) - the estimated selling price less and costs involved in selling and distributing the goods.

Question 2

What is PPE?

Answer 2

Tangible assets that:
-Are held for use in the production or supply of goods or services, for rental to others or for administrative purposes.
- Are expected to be used during more than one period.

Question 3

How is PPE initially measured?

Answer 3

PPE is initially measured at cost. This includes:
1. The purchase price
2. All costs incurred to bring the asset into a location and conditions ready for use. e.g. cost of site preparation, installation costs etc.

Question 4

What classifies as capital expenditure?

Answer 4

▪ Cash spent to purchases assets
▪ The asset is expected to provide
future benefits, items last for more
than a year
▪ Another term is ‘capitalized costs’
▪ Examples:
– Plant and machinery
– Factory buildings
– IT systems

Question 5

What classifies as revenue expenditure?

Answer 5

▪ Cash spent on day-to day
operations
▪ Is consumed within an accounting
year
▪ Entire amount is charged to
income statement
▪ Examples:
– Wages and salaries
– COS
– Marketing costs

Question 6

When can subsequent expenditure on PPE be capitalised (added to the cost of the asset on the SOFP)?

Answer 6

Only if it enhances the economic benefit of the asset.

• Routine repairs and maintenance costs do not add economic benefit –
  they simply restore the asset to its previous condition before it was broken. These are therefore not capitalised and treated as an expense in the
  Income Statement
• Adding an extension to a shop adds economic benefit since capacity is increased leading to higher future sales
• Expenditure extending the useful life of PPE is added to the cost of the asset (SOFP) = capitalised costs

Question 7

In subsequent measurement what are the two models used?

Answer 7

Cost model and revaluation model.

Question 8

What is the cost model?

Answer 8

The asset is included on the SOFP at cost less accumulated depreciation and impairment losses. This net amount is referred to as a Carrying amount, or Net Book Value (NBV).

Question 9

What is the revaluation model?

Answer 9

The asset is included on the SOFP at revalued amount (fair value) less subsequent depreciation and impairment losses. Arising revaluation gains are credited to an account Revaluation Reserve. The Revaluation reserve is part of company’s Equity

Question 10

How would you double entry land which costs £30,000 which is valued at £70,000?

Answer 10

Dr Land £40,000
Cr Revaluation reserve £40,000

Question 11

What are the two PPE depreciation methods?

Answer 11

Straight line method where there is a constant charge over the life of the asset
Reducing Balance Method - decreasing charge over the life of the asset.

Question 12

What are the four factors that need to be considered to calculate depreciation?

Answer 12

1. cost (or fair value) of an asset
2. useful life of an asset
3. residual value of an asset
4. depreciation method

Question 13

What is residual value?

Answer 13

-AKA disposal value, scrap value
-Selling value of an asset at the end of its useful life

Depreciable amount = Initial cost - residual value

Question 14

What is useful economic life?

Answer 14

Period of which an asset generates economic benefit. Assets are depreciated based on their economic life.

Question 15

How is the straight line method used?

Answer 15

Depreciable expense = (initial cost- residual value)/useful economic life

Question 16

How is the reducing balance method used?

Answer 16

The reducing-balance method of depreciation is an accelerated
method that results in more depreciation expense in the early years of an asset’s life and less depreciation expense in the later years of an asset’s life

Depr. expense = Depreciation rate (would be given in exam) x NBV at the start of the year

Question 17

How would you do the double entry for depreciation?

Answer 17

Dr Depreciation expense = EXPENSE, IS
Cr Accumulated depreciation = CONTRA ACCOUNT to PPE @ Cost

Question 18

What determines which depreciation method you use?

Answer 18

▪ The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed by the entity
▪ The method chosen should be applied consistently unless there is a change in the expected pattern of economic benefits
▪ Entities usually select the method used by industry peers to enhance
comparability
▪ The depreciation method, the residual value and the useful life of an asset should be reviewed at least at each financial year-end

Question 19

How would you recognise an impairment loss if its NBV decreases to below recoverable amount?

Answer 19

prudence principle states that you should reduce the asset on the balance sheet to its recoverable amount and recognise an impairment loss.

Question 20

How would you recognise an impairment loss on the double entry?

Answer 20

Dr Impairment loss (expense)
Cr Equipment (asset)

Question 21

Where are impairment losses recorded?

Answer 21

In the income statement regardless of which method the company uses: historic cost or fair value.

Question 22

What is a disposal?

Answer 22

The sale of an asset.

Question 23

How would you calculate gains on disposal?

Answer 23

Gain/loss on disposal = Disposal proceeds(i.e. cash received) - NBV

Question 24

How would you account for the disposal of PPE?

Answer 24

Create a temporary T-account for the disposal – the ‘Disposal’ T account.
1. Remove cost of the asset from the PPE cost account
Dr Disposal
Cr PPE
2. Remove the accumulated depreciation
Dr Accumulated Depreciated
Cr Disposal
3. Record the cash proceeds
Dr Cash
Cr Disposal
4. The balancing figure in the disposal account is the gain / loss on disposal

Question 25

How would you account for a disposal of PPE in double entries.

Answer 25

Write-off the cost, £41,000
1. Dr Disposal account 41,000
Cr Non-current asset @ cost (remove initial cost) 41,000

Write-off the accumulated depreciation, £20,000
2. Dr Accumulated Depreciation (remove AD) 20,000
Cr Disposal account 20,000

Proceeds from sale, £27,000
3. Dr Cash 27,000
Cr Disposal account 27,000

Gain or loss on disposal, £6,000 transferred to the IS (P&L)
4. Dr Disposal Account 6,000
Cr Gains on disposal (P&L) 6,000