Unit 3 Acc Chapter 11 Review Questions Flashcards
RQ 11.1 // Assets & Expenses
Q1. Referring to the definitions, identify the characteristics common to both assets and expenses.
Assets, in common with expenses, are necessary to help earn revenue and generate profit. They both refer to the economic benefit that is brought to the business.
RQ 11.1 // Assets & Expenses
Q2. Explain the key difference between an asset and an expense.
An asset is defined as future economic benefit, while an expense is defined as the consumption of an economic benefit.
That is, expenses refer to economic benefit that has already been consumed, whereas assets refer to economic benefits that are yet to be consumed.
RQ 11.1 // Assets & Expenses
Q3. Identify the characteristics of a depreciable non-current asset.
Depreciable assets have a finite life, and will be useful for a fixed period of time.
RQ 11.1 // Assets & Expenses
Q4. Explain why it is not necessary to calculate depreciation for assets such as land.
Assets that have an infinite life should not be depreciated, as they may be used, but are never ‘used up’ or consumed.
RQ 11.1 // Assets & Expenses
Q5. Referring to one accounting principle, explain why the entire cost of a non-current asset should not be reported as an expense.
When a business purchases a non-current asset, it is clearly classified as such as the benefit will be provided for more than 12 months.
It cannot be reported as an expense as its entire benefit has not been consumed in the current Reporting Period.
RQ 11.1 // Assets & Expenses
Q6. Explain why GST is excluded from the consideration of depreciation.
GST is excluded because it is not included in the cost of a non-current asset; it actually represents a reduction in the GST liability owed to the ATO.
RQ 11.2 // Depreciation of NCA
Q1. Define the term ‘depreciation’.
Depreciation is the allocation of the cost of a non-current asset over its useful life.
RQ 11.2 // Depreciation of NCA
Q2. Define the term ‘depreciation expense’.
Depreciation expense is the part of the cost of a non-current asset that has been consumed in the current Reporting Period.
RQ 11.2 // Depreciation of NCA
Q3. Referring to one accounting principle, explain the purpose of depreciating a non-current asset.
Because a non-current asset is not consumed entirely within the one Reporting Period, depreciation is an attempt to calculate how much of the asset’s value has been consumed in the current Reporting Period.
RQ 11.2 // Depreciation of NCA
Q4. Explain the effect of depreciation on a firm’s bank balance.
Depreciation has no effect on a firm’s bank balance because depreciation does not involve any payment of cash.
The cash payment relating to each non-current asset will be recorded only at the time when the asset is purchased.
RQ 11.3 // Calculating Depreciation Expense
Q1. Explain the assumption that underlies the straight-line method of depreciation in relation to how assets contribute to revenue.
The straight-line method of depreciation assumes that non-current assets contribute evenly to revenue.
Given that it assumes that the value of the non-current asset is consumed evenly over its life, the depreciation expense is the same every year.
RQ 11.3 // Calculating Depreciation Expense
Q2. State the formula for calculating depreciation using the straight-line method.
Depreciation expense ($ per annum) = HC – RV/Life
RQ 11.3 // Calculating Depreciation Expense Q3. Define the following terms: ● Historical Cost ● residual value ● useful life
● Historical Cost – the original purchase price of the non-current asset
● residual value – the estimated value of the non-current asset at the end of its useful life
● useful life – the estimated period of time for which the non-current asset will be used by the current entity to earn revenue. This is usually measured in years.
RQ 11.3 // Calculating Depreciation Expense
Q4. Explain why each non-current asset must be depreciated individually rather than as a total.
Because each non-current depreciable asset is different in terms of its useful life and residual value, each must be depreciated individually.
RQ 11.3 // Calculating Depreciation Expense
Q5. Referring to one accounting principle, explain why residual value is deducted from Historical Cost when calculating depreciation using the straight-line method.
Residual value is deducted from the historical cost, as this is the amount that will not be consumed by the business, but by another entity.
RQ 11.4 // Recording Depreciation
Q1. Show the General Journal entries to record the balance day adjustment for depreciation expense.
Depreciation of Van
GENERAL LEDGER: Debit
SUBSIDIARY LEDGER : nothing
Accumulated Depreciation of Van
GENERAL LEDGER: nothing
SUBSIDIARY LEDGER : Credit
(Yearly depreciation on van – s/line method (Memo x))
RQ 11.4 // Recording Depreciation
Q2. State one reason why the ledger accounts must name the asset being depreciated.
Given that most businesses will depreciate more than one non-current asset, it is imperative to identify precisely which asset is being depreciated.
RQ 11.4 // Recording Depreciation
Q3. State the effect of depreciation on the accounting equation.
ASSETS: Decrease (increase Accumulated Depreciation of Van)
LIABILITIES: no effect
OWNER’S EQUITY: Decrease (Depreciation of Van expense decreases Net Profit)
RQ 11.4 // Recording Depreciation
Q4. Referring to one accounting principle, explain the difference between depreciation expense and accumulated depreciation.
Whereas depreciation expense refers to the amount consumed in the current Reporting Period, accumulated depreciation refers to depreciation that has accumulated over the life of the asset so far (over a number of Reporting Periods).
RQ 11.4 // Recording Depreciation
Q5. State two reasons why the Depreciation expense account must be closed at the end of the Reporting Period.
● to transfer Depreciation Expense to the Profit and Loss Summary account in order to calculate profit for the current Reporting Period
● to reset the Depreciation Expense account to zero in preparation for the next Reporting Period
RQ 11.4 // Recording Depreciation
Q6. State one reason why the Accumulated Depreciation account is balanced at the end of the Reporting Period.
Accumulated Depreciation is a negative asset account and is an ongoing account; its balance will be carried forward to the next Reporting Period.
RQ 11.5 // Reporting Depreciation
Q1. Referring to one accounting principle, explain why the original purchase price of a non-current asset must be disclosed in the Balance Sheet.
In order to keep the reports free from bias, the asset must always be reported initially at its Historical Cost (its original purchase price), as this amount is verifiable by reference to a source document.
RQ 11.5 // Reporting Depreciation
Q2. Define the term ‘carrying value’.
Carrying value is the value of a non-current asset that is yet to be consumed/allocated as an expense, plus any residual value.
RQ 11.5 // Reporting Depreciation
Q3. Referring to one qualitative characteristic, explain why non-current assets must be reported at their carrying value in the Balance Sheet.
The carrying value is reported in the Balance Sheet as this is information that is useful for decision-making for the owner (Relevance). For example, the owner will be able to see if the asset is nearing the end of its useful life (low carrying value) and may need replacement.
