Chapter 8

Question 1

What is the cost of a non-current asset?

Answer 1

Any amount incurred to acquire the asset and bring it into working condition. (Purchase price, delivery costs, legal fees, expenditure which enhances the asset)

Question 2

What is the double entry to record a purchase of a non-current asset?

Answer 2

Dr Non-Current Asset
Cr Cash/Payables

Question 3

What is Residual Value?

Answer 3

The estimated amount that an entity would currently obtain from disposing of the asset at the end of its useful life.

Question 4

What is useful life?

Answer 4

The new period when an asset is expected to be available for use by an entity.

Question 5

What is depreciation?

Answer 5

A mechanism to reflect the wearing out of a non-current asset. It may arise from:
Use
Physical wear & tear
Passing of time
Depletion
It is not meant to show the asset at its current value in the SFP or provide a fund for the replacement.

Question 6

What is the dual effect of depreciation?

Answer 6

Reduce the SFP value of NCA by cumulative depreciation
Record the depreciation charge as an expense in the P&L to match the revenue generated by the NCA.

Question 7

When does deprecation begin?

Answer 7

When it is available for use

Question 8

Why does Land not get depreciated?

Answer 8

Land has an infinite life and so does not require depreciation. Buildings however do have a finite life and are therefore depreciated.

Question 9

What are the methods for depreciation?

Answer 9

Straight Line
Reducing Balance

Question 10

What is Straight Line Depreciation?

Answer 10

(Cost - Residual value) / Useful Life
Or
X% x cost
Straight line depreciation is assumed to be charged monthly in the exam so always time proportion.

Question 11

How often is straight line depreciation charged (in the exam)?

Answer 11

Monthly

Question 12

What is Reducing Balance?

Answer 12

Depreciation Charge = X% x Carrying amount

Question 13

What is Carrying Amount?

Answer 13

Original cost of the NCA less accumulated depreciation

Question 14

How would reducing balance depreciation be charged in an exam question?

Answer 14

You will not have to calculate what amount of RB depreciation should be charged monthly. Disposals will be made on either the first or last day of the year.

Question 15

What is the double entry to record depreciation?

Answer 15

Dr Depreciation Expense (P&L)
Cr Accumulated Depreciation (SFP)

Question 16

How is accumulated depreciation shown on the FS?

Answer 16

A credit balance reducing the balance of the cost for PPE. What is left is known as the Carrying Amount (Cost of NCA - Accumulated depreciation)

Question 17

What is the problem with depreciation?

Answer 17

It is based off of estimates made by management (method, residual value, useful life). Therefore the IAS requires depreciation methods and residual values/economic life should be reviewed each year.

Question 18

What happens if you change estimates regarding depreciation?

Answer 18

Use the carrying amount at the date of the change in estimate and remember to change the useful life to whatever is remaining. E.g if 5 years have passed since NCA was acquired, new useful life should have 5 years subtracted from it

Question 19

How is the profit/loss on disposal calculated?

Answer 19

Proceeds - Carrying Amount

Question 20

What is the process for recording a disposal of NCA?

Answer 20

Remove the original cost from the NCA account
Remove the accumulated depreciation on the NCA from the accumulated depreciation account
Record the cash proceeds
Balance off the disposals to identify the profit/loss