Week 6

Question 1

4 primary activities for property plant and equipment (main non current assets)

Answer 1

1. Acquisition of non-current assets
2. Depreciation of non-current assets over their useful lives
3. Expenditures after acquisition - Revenue and capital expenditure
4. Disposal of non current assets

Question 2

Recording acquisition of non-current assets

Answer 2

A non-current asset is any tangible resource that is expected to be used in the normal course of operations for more than one year and is not intended for resale.

Examples include land, buildings, equipment, furniture and fixtures.

Non-current assets should be recorded at the cost of acquiring them, and like inventory including the costs of bringing the asset into use:

Purchase price + taxes and duties paid on the purchase + delivery costs + installation costs etc

Question 3

Is insurance included as the cost of a non current asset

Answer 3

No

Question 4

Expensing non current assets

Answer 4

A non current converts to an expense as it is used or consumed. The expensing of non-current assets is accomplished through depreciation.

Question 5

Depreciation

Answer 5

Depreciation is the process of allocating the cost of a non current asset over its useful life. Depreciation is an application of the matching principle - because a non-current asset is used to generate revenues period after period, some of its cost should be expensed in, or matched to, those same periods.1

Question 6

Recording depreciation

Answer 6

Depreciation expense is normally calculated at the end of an accounting period and recorded with an adjusting journal entry. The general form of the entry to record depreciation is:

Debit depreciation expense (expense increasing)

Credit accumulated depreciation (contra asset increasing)

Question 7

Accumulated depreciation

Answer 7

A contra asset account, meaning that its balance is subtracted from the non-current asset account to yield the carrying amount (net book value) of the non-current asset.

Question 8

How NCA’s are expensed (depreciated) requires estimates

Answer 8

of useful life residual value and the pattern or method of depreciation.

Question 9

Calculating depreciation expense

Answer 9

When a company owes depreciable assets, it must calculate depreciation expense each period.

Doing so requires the following information about the asset:

• Cost
• Residual or salvage value
• Useful life
• Depreciation method

Cost refers to the historical cost of the asset being depreciated.

Question 10

Residual/salvage value

Answer 10

The net realisable value (market value) of the asset at the end of its useful life

Question 11

Useful life

Answer 11

The length of time the asset will be used in operations.

Question 12

Depreciable amount =

Answer 12

Cost- residual value

Question 13

Depreciation method

Answer 13

The method used to calculate depreciation expense. Generally accepted accounting principles allow the use of several different methods for calculating depreciation expense.

Question 14

Depreciation methods

Answer 14

Straight-line
Reducing balance
Units-of-activity

Question 15

Straight line method

Answer 15

Spreads depreciation evenly over the useful life of an asset. IT is commonly used because it is a simple technique. The depreciable cost of the asset is divided by the useful life of the asset (in years) to yield the amount of depreciation expense per period.

Annual depreciation = depreciable amount divided by useful life

Question 16

Reducing balance method

Answer 16

An accelerated method that results in more depreciation expense in the early years of an asset’s life and less depreciation expense in later years. Accelerated deprecation methods may match expenses to revenues better than the straight line method. More depreciation expense is recorded when the asset is more useful. They provide larger expenses and if used for tax purposes larger tax deductible expenses in earlier years of a non-current assets life

Question 17

Reducing balance formula

Answer 17

For simplicity often 1.5 or 2 times the straight line rate is used. This often means the last depreciation expense calculation is to reduce the carrying amount to the residual value.

Question 18

An issue of reducing-balance

Answer 18

Over an assets life an entity cannot record more total depreciation than the assets depreciable cost. That is why some adjustment must be made in final period

Question 19

Units of activity method

Answer 19

Both the straight line and reducing balance methods are a function of the passage of time rather than the actual use of the asset. In contrast, the units of activity method of depreciation calculates depreciation based on use. Because it relies on an estimate of an assets lifetime activity, the method is limited to assets whose units of activity can be in some way determined.

Question 20

Units of activity formula

Answer 20

Depreciation per unit of expected activity is the depreciable cost of the asset divided by the estimated units of activity over the life of the asset.

Question 21

Adjustments for useful life

Answer 21

Since non-current assets are used for multiple years, companies sometimes need to make adjustments as new information is available or as new activity occurs. These adjustments can arise from the following:

Changes in estimates

Additional expenditures to improve the non current asset

Significant declines in the assets net realisable value

Question 22

Expenditures after acquisition

Answer 22

Most non-current assets require expenditures throughout their useful lives. The accounting treatment for expenditures made during the useful life of a non-current asset depends on whether they are classified as ‘capital’ or ‘revenue’ expenditures.

A capital expenditure increases the expected useful life or productivity of the asset. A revenue expenditure maintains the expected useful life or productivity of the asset.

Question 23

The accounting for the disposal of a non-current asset consists of the following 3 steps:

Answer 23

1. Update depreciation of the asset.
2. Calculate the gain or loos on the disposal.
3. Record the disposal.

Question 24

Scrapping

Answer 24

No longer useful and has no sales value

Question 25

Rule for calculating the gain or loss on disposal

Answer 25

1. Record any necessary depreciation expense (possibly for a partial period) to update the accumulated depreciation account.
2. Calculate any gain or loss on the disposal by comparing the asset’s carrying amount.
3. Prepare a journal entry that decreases the asset account and and its related accumulated depreciation account.
4. Record any gain or loss on the disposal.