Noncurrent Asset

Question 1

What is the “cost of asset”?

Answer 1

Cost of asset is the purchase price and incurred expense that getting the asset into a condition ready to generate revenue.

Question 2

What is the “depreciation”?

Answer 2

Allocation of the cost of a noncurrent asset over its useful working life.

Question 3

Why we need to record the depreciation?

Answer 3

To match the cost of using asset to the revenue it earns each period.

Question 4

What is the accumulated depreciation?

Answer 4

Total amount of depreciation written off during the life of existing noncurrent asset.

Question 5

What is the carrying value?

Answer 5

Carrying value is the amount of depreciation still to be written off plus the estimated residual value of the asset.

Question 6

What is the difference between straight-line and reducing-balance method?

Answer 6

The amount of allocated depreciation is different in each period. However, the total accumulated depreciation at the end of NCA’s useful life is same. Thus, choose the method according to the best matching revenue-earning pattern of the asset.

Question 7

What qualitative characteristic does depreciation breaches and ensures?

Answer 7

Breaches faithful representation and verifiability because it is an estimation that cannot verified with a source document. However, noncurrent asset declines in value as they get older. Thus, if you don’t depreciate it, the provided information for noncurrent asset is not useful. Thus, recording depreciation ensures relevance.

Question 8

What is the steps for disposal of a NCA (General Journal)?

Answer 8

1. Remove cost of the asset (Dr disposal of A and Cr A)
2. Remove the accumulated depreciation from general ledger (Dr Acc D and Cr disposal of A)
3. Record the proceeds of sale (Dr Cash/A and Cr Disposal of A)
4. Record the profit or loss on disposal of asset (Dr loss on disposal and Cr disposal of A / Dr disposal of A and Cr Profit on disposal of A)
5. Record the purchase of new asset (Dr A & GST and Cr Cash)

Question 9

What is the steps of disposal of a NCA (General Ledger)?

Answer 9

1. Dr Disposal of A, Cr NCA
2. Dr Accumulated D, Cr Disposal of A
3. Dr NCA/Cash at bank, Cr Disposal of A
4. Dr Loss on disposal, Cr disposal
   or
   Dr disposal, Cr Profit on disposal
5. Dr NCA and GST, Cr Cash

Question 10

Why we must value noncurrent asset with fair value?

Answer 10

Fair value is the estimate of its market value at the time the owner contributes to the business. The noncurrent asset cannot be valued at the original price paid by the owner because the owner is assumed to be a separate entity (accounting entity assumption).