Week 8 Tangible Non-Current Assets (Fixed)

Question 1

A business should classify an asset as current when?

Answer 1

It expects to realise, sell or consume the asset in its normal oeprating cycle

The asset is held primarily fort he purpose of trading

It expects to realise the asset within twelve months after the reporting period or the asset is cash or a cash equivalent.

If it doesn’t fit this criteria then it should be clasified as a non-current.

Question 2

What are examples of current assets?

Answer 2

Inventories

Prepaymetns

Recievables

Cash

Question 3

What are Non-current assets (fixed)?

Answer 3

Are assets which are intended to be used by the business on a continuing basis and include both tangible and intangible assets

Question 4

What are examples of non-current assets?

Answer 4

Buildings

Machines

Vehicles

IT Equipment

Furtniture, Fixtures and Fittings

Question 5

In accounting according to IAS 16 tangible non-current assets are defined as those which?

Answer 5

Are held for use in the production or supply of goods or services or for administrative purposes.

Are expected to be used during more than one period.

Question 6

At what cost should tangible non-current assets be recorded at?

Answer 6

Tangible non-current assets should initally be recorded at cost.

Cost includes:

Purchase price- exluding sales tax and traded discounts but including import duties.

Directly attrituable costs to bring the asset to its intended location and ready to use. These include:

Inital delivery and handling costs

Installation and assembly costs

Costs of testing whether the asset is working properly

Professional fees

Question 7

What does inital cost not include when recording its value in accounting?

Answer 7

It doesn’t include the cost of maintaince contracts, administration and genreal overheads costs nor staff training costs.

Question 8

Where does the need to depreciate assets in accounting come from?

Answer 8

The need to depreicate assets arises from the matching concept - expenses incurred in generating revenues must be recognised in the same period.

It follows tehrefore that the purchase costs of assets must be charged to revenues/profits.

Question 9

What is Depreciation?

Answer 9

Depreciation is a means of systematically spreading the cost an asset over its useful life, in order to match the cost of the asset with tehc osnumption of the asset’s economical benefits.

Land normally has an unlimited useful life and is therefore not depreicated wheras building have a limited life and therefore are depreciated.

Question 10

What are the two methods of depreciation?

Answer 10

Straight line method

Reducing balance method.

Question 11

What is the straight line method of depreciation?

Answer 11

The depreciation charged is the same every, this is suitable for assets used evenly over their life.

Question 12

What is the formula for stiraght line method depreciation?

Answer 12

Cost - Residual value / Useful life (Years)

Question 13

What is residual value?

Answer 13

Expected scrap value at the end of the asset’s useful life.

Question 14

What is useful life?

Answer 14

The number of years the asset will be in use.

Question 15

What is the Reducing Balance method of depreciation?

Answer 15

Depreciation charge will be higher in the eariier years and reduce over time.

Question 16

What is the formula for the reducing balance method?

Answer 16

Depreciation= Depreciation Rate % * Net Book Value

Question 17

What is the Net Book Value?

Answer 17

Cost - Accumlated Depreciation

Question 18

When is it suitable to use the reducing balance method?

Answer 18

Where the benfits obtained from using the asset declines over time.

Question 19

When it suitable to use the straight line method?

Answer 19

Suitable for assets used evenly over their life.

Question 20

What is the dual efffect depreciation has?

Answer 20

It is an expense in the statement of profit or loss.

It reduces the value of the asset in teh statement of financial position.

Question 21

How is depreciation charged?

Answer 21

Is either charged on:

On a monthly pro-rata basis (proportionate depreciation in the year of purchase and disposal)

or

Full year in the year of prucahse and none in the year of disposal

Question 22

Why may businesses set a minimum levle of expenditure for items to be capitalised as non-current assets?

Answer 22

Businesses often purchase items that meet the definition of a non-current asset but for relatively small amounts e.g. a pack of staplers.

Question 23

What happens when a non-current asset is sold or disposed of?

Answer 23

Its Net book value (the value the asset is recorded at) needs to be removed from the statement of financial position.

The proceeds recieved are unlikely to be the same as the asset’s NBV and soa profit or loss on disposal will arise if depending on the assets current value compared to the NBV.