U3, AOS 1 - KK4 - Classification of Assets & Liabilities

Question 1

Cost of a Non-current asset

Answer 1

Cost incurred in getting the asset into a condition and location ready to use, that will provide benefit for the life of the asset. Examples include delivery in, installation, modifications, signage etc. Non - examples include insurance, registration and maintence fees/contracts as these are annual fees that need to be renewed annually.

Question 2

Reducing balance method of depreciation

Answer 2

Reducing balance method of depreciation assumes that the non-current asset will contribute more to the generation of revenue early in its life or has an UNEVEN revenue generation pattern.

Examples: vehicle, equipment and photocopiers as they all have many moving parts.

Question 3

Conflict created by depreciation

Answer 3

Does anyone have an issue with the fact that a lot of what we rely on when we depreciate an asset is based on estimates?

Residual value

Useful life

To what extent can reports claim to provide a Faithful Representation of firm’s performance and position?

However, Relevance is upheld by showing the expense related to non-current assets that have been incurred in the current Period to match it with the revenue earned, plus showing accumulated depreciation and carrying value in the Balance Sheet, so that decisions can be made around profitability of the business and when non-current assets might need replacement.

Residual value and useful life is difficult to Verify because …

Reporting no depreciation is even less Faithful Representation of firms’ performance.

Therefore providing depreciation based on estimates still provides a more Faithful Representation than leaving out depreciation.

Question 4

Depreciation

Answer 4

the allocation of the cost of a non-current asset over its Useful life.

Question 5

Depreciation expense

Answer 5

the part of the cost of the non-current asset that has been incurred in the current Period.

Question 6

Straight line method of depreciation

Answer 6

of depreciation assumes that the non-current asset will contribute evenly to the generation of revenue or has an even revenue generation pattern.

Question 7

Residual value

Answer 7

the estimated economic benefit of the non-current asset at the end of its useful life.

Question 8

Useful life (Life)

Answer 8

the estimated period of time for which the non-current asset will be used by the current entity to earn revenue (usually measured in years)

Question 9

Carrying value

Answer 9

the economic benefit that remains in the asset that is yet to be consumed by the business, plus any estimated residual value

Question 10

Reasons for a loss on the disposal of a NCA (LUPO)

Answer 10

Under-depreciation: when insufficient depreciation expense has been allocated over the life of a non-current asset due to overstating its residual value and/or useful life, resulting in an overstatement of the asset’s Carrying Value.

This could occur because:

• Damage
• Outdated or superseded by a new, technologically superior model.

Question 11

Reasons for a profit (gain) on the disposal of a NCA (LUPO)

Answer 11

Over-depreciation: occurs when depreciation has been allocated of the life of a non-current asset due to understating its residual value and/or useful life, resulting in an understatement of the asset’s carrying value.

This could occur because:

• In good condition / better condition than expected due to good maintenance.
• Asset type in high demand.

Question 12

Steps to recording the disposal of a NCA for cash.

Answer 12

1. Update accumulated depreciation (if applicable)
2. Remove the historical cost
3. Remove the accumulated depreciation
4. Record the proceeds from the sale (selling price)
5. Transfer the profit (gain) or loss on disposal