Non-current assets and depreciation

Question 1

What is a non-current asset?

Answer 1

An asset acquired for use on a continuing basis, normally over more than one year
E.g., land & buildings, plant and machinery, fixtures and fittings

Question 2

Where are non-current assets recorded in financial statements?

Answer 2

The SoFP

Question 3

The cost of an asset can include …

Answer 3

all the costs incurred in bringing the asset into use e.g., delivery, installation and set up costs.
(however, the cost of training staff on how to use an asset are not included in the cost of the asset)

Question 4

Define depreciation

Answer 4

The allocation of the depreciable amount of an asset over its estimated useful life. Depreciation spreads the cost of a non-current asset on a systematic basis over its useful life.

Question 5

What is depreciation a means of, and what is it not?

Answer 5

It is a means of matching the cost of an asset with the profits that the asset generates, directly or indirectly, for the business.
It is NOT an attempt to arrive at the market value of the asset.

Question 6

True or False - All assets with a finite useful life have to be depreciated.

Answer 6

True
- this includes buildings, but not land (unless the benefit of the land is being used up, e.g., quarrying)

Question 7

Where is depreciation charged to?

Answer 7

The profit or loss account as an expense.

Question 8

What are the two common methods of depreciation?

Answer 8

Straight line (most common)
Reducing balance

Whichever method is chosen must be applied consistently and disclosed in the notes.

Question 9

What is the straight line method?

Answer 9

Charge the same amount of depreciation in each period.

Question 10

How is the straight line method calculated?

Answer 10

(Cost - Residual value) ÷ Expected useful life

Question 11

What is the residual value?

Answer 11

It is the value an asset is expected still to have at the end of its useful life. In practice this is normally zero.

Question 12

What is the double entry for annual depreciation?

Answer 12

Dr Depreciation expense (profit or loss account)
Cr Allowance for depreciation (SPF)

Question 13

What is the carrying value (aka net book value or NBV)?

Answer 13

The cost less the accumulated depreciation.

Question 14

At the end of an asset’s useful life, the carrying value/NBV is equal to what?

Answer 14

The residual value.

Question 15

Carrying value =

Answer 15

Cost - Accumulated depreciation

Question 16

The allowance for depreciation (or “accumulated depreciation”) will always be ….

Answer 16

a credit balance that is deducted from the cost of SFP.

Question 17

What is the reducing the balance method?

Answer 17

Calculates depreciation at a fixed percentage of the carrying value and the start of the year.

Tom note - like compound interest but it’s reducing rather than increasing

Question 18

What happens to the residual value in the reducing balance method?

Answer 18

The expected residual value is ignored when calculating the annual expense.

Question 19

What is the rule to follow when changing the useful life of an asset?

Answer 19

Depreciate the carrying value of the asset over the revised remaining useful life.

Question 20

How do you calculate the profit/loss at the time of disposing of a non-current asset?

Answer 20

Profit/loss = Sale proceeds - carrying value of asset at date of disposal.

Question 21

How does a part exchange work?

Answer 21

Rather than selling an asset, a company can exchange an old asset for a new one. The old asset is treated as a disposal (profit/loss is calculated) but with the part exchange allowance being substituted for proceeds.

Question 22

What are intangible assets?

Answer 22

Assets with no physical substance, controlled by an entity, that from which future economic benefits are expected to flow.

Question 23

What are the most common examples of intangibles?

Answer 23

Goodwill and research and development
Other examples are licences and patents.