Chapter 8: Property, Plant & Equipment Flashcards Preview

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Flashcards in Chapter 8: Property, Plant & Equipment Deck (46)
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1
Q

What is capital expenditure?

A

expenditure which results in the acquisition of non-current assets

2
Q

What is revenue expenditure?

A

expenditure incurred for the purpose of trade or to maintain non-current assets

3
Q

How is capital expenditure accounted for? (2)

A
  1. not charged as an expense in the SOPL although a depreciation charge is made over time as an expense in the SOPL.
  2. on non-current assets results in the appearance of non-current asset in the SOFP
4
Q

When is revenue expenditure incurred? (2)

A
  1. for the purpose of the trade of the business. includes expenditure classified as selling and distribution expenses, admin expenses & finance charges.
  2. to maintain the existing earning capacity of non-current assets
5
Q

A business purchases a building for $30 000. It then adds an extension to the building at a cost of
$10 000. The purchase of these are funded by a loan from the bank. The building needs to have a few
broken windows mended, its floors polished and some missing roof tiles replaced. These cleaning and
maintenance jobs cost $900.

What is counted as capital expenditure? revenue expenditure?

A

In this example, the original purchase ($30 000) and the cost of the extension ($10 000) are capital
expenditures, because they are incurred to acquire and then improve property, plant and equipment
which is a non-current asset. The other costs of $900 are revenue expenditure because these merely
maintain the building and thus the ‘earning capacity’ of the building.

6
Q

What is capital income?

A

the proceeds from the sale of non-trading assets. i.e. non-current assets like property.

7
Q

Give an example of capital income?

A

the profit from the sale of equipment that the business no longer needs.

8
Q

What is Revenue income? (3)

A
  1. sale of trading assets such as goods
  2. the provision of services
  3. interest & dividends received from investments held by the business.
9
Q

What are capital transactions?

A

transactions relating to an increase or decrease in capital. they add or subtract from the cash assets of a business but are not reported through the P&L

10
Q

What does revenue expenditure result from?

A

the purchases of good and services to either 1. use in the accounting period and be a cost etc. or b. to result in a current asset as they have not been consumed yet i.e. goods still in storage.

11
Q

What does capital expenditure result in?(+3)

A

purchase or improvement of non-current assets.

  1. provide benefits in more than one accounting period.
  2. not acquired with the intent of resale
  3. are gradually depreciated over time
12
Q

Capital or revenue:

a. The purchase of a property (e.g. an office building).
b. The annual depreciation of such a property.

A

a. Capital expenditure.

b. Depreciation of property, plant and equipment is revenue expenditure.

13
Q

Capital or revenue:

c. Solicitors’ fees in connection with the purchase of such a property.
d. The costs of adding extra storage to a computer used by the business.

A

c. The legal fees associated with the purchase of a property may be added to the purchase price
and classified as capital expenditure. The cost of the property in the statement of financial
position of the business will then include the legal fees.
d. Capital expenditure (enhancing an existing non-current asset).

14
Q

Capital or revenue:

e. Computer repairs and maintenance costs.
f. Profit on the sale of an office building.

A

e. Revenue expenditure.

f. Capital income (net of the costs of sale).

15
Q

Capital or revenue:

g. Revenue from sales by credit card.
h. The cost of new plant.

A

g. Revenue income.

h. Capital expenditure.

16
Q

Capital or revenue:
i. Customs duty charged on the plant when imported into the country.
j. The ‘carriage’ costs of transporting the new plant from the supplier’s factory to the premises of the
business purchasing the plant.

A

i. If customs duties are borne by the purchaser of the non-current asset, they are added to the
cost of the machinery and classified as capital expenditure.
j. Similarly, if carriage costs are paid for by the purchaser of the non-current asset, they are
included in the cost of the non-current asset and classified as capital expenditure.

17
Q

Capital or revenue:

k. The cost of installing the new plant in the premises of the business.
l. The wages of the machine operators.

A

k. Installation costs of a non-current asset are also added to the non-current asset’s cost and
classified as capital expenditure.
l. Revenue expenditure.

18
Q

What are the two ways a business can use and get rid of property, plant & equipment?

A
  1. use the asset until it is completely worn out, useless & worthless
  2. sell the asset at the end of its useful life, as second-hand item or scrap
19
Q

Define depreciation

A

systematic allocation of the depreciable amount of an asset over its useful life

20
Q

Define property, plant & equipment. (2)

A
  1. items that are held for use in the production or supply of goods and services, for rental to others, or for admin purposes.
  2. are expected to be used during more than one accounting period.
21
Q

Define useful life (2)

A
  1. the period over which an asset is expected to be available for use by an entity.
  2. the number of production or similar units expected to be obtained from the asset by an entity.
22
Q

Define the depreciable amount

A

the cost of an asset, or other amount substituted for cost less residual value.

23
Q

What factors should be considered when estimating the useful life of a property, plant, and equipment? (3)

A
  1. expected physical wear and tear
  2. obsolescence
  3. legal or other limits on the use of the asset
24
Q

What is ‘residual’ value?

A

the value of an asset after depreciation

25
Q

What are the two common misconceptions around depreciation/

A
  1. that charging depreciation is to reflect the fall in the value of an asset over its life.
  2. that depreciation is provided os that an asset can be replaced at the end of its useful life.
26
Q

What are the two things that need to be accounted for when a non-current asset is depreciated?

A
  1. the charge for depreciation is a cost or expense of the accounting periods in the SOPL
  2. The value of the asset in the SOFP must be reduced by the amount of depreciation charged. the value of asset = carrying value (cost less depreciation) also known as the carrying amount.
27
Q

What is the straight-line method of calculating/applying depreciation?

A

the total depreciable amount is charged in equal instalments to each accounting period for the expected useful life of the asset.(cost-residual value/time = depreciation amount)

28
Q

When is the straight line method of depreciation used?

A

when it is reasonable to assume that the business enjoys equal benefits from the use of the asset in every period throughout its life.

29
Q

What happens if an asset is purchased part of the way through a year and the straight line method of depreciation is applied?

A

calculate the part year amount of depreciation for that period by calculating it annually and then taking the fraction of it.

30
Q

What is the diminishing value method of depreciation?

A

calculates the annual depreciation charge as a fixed percentage of the carrying value of an asset. also called the reducing balance method.

31
Q

What is a thing to note when using the diminishing value method to calculate depreciation?

A

the annual charge of depreciation is higher in the earlier life of the asset

32
Q

When might the diminishing value be used?

A

when it is considered fair to allocate a greater proportion of the total depreciable amount to the earlier years and a lower proportion to the later years, This assumes that the benefits obtained from the asset decline over time. i.e. machinery that is less productive as it gets older

33
Q

When deciding which depreciation method to apply what is the most important thing to consider?

A

doesn’t matter so much which one you use as long as you use it consistently.

34
Q

Who decides what the sensible life of an asset it/

A

the business. this should also be kept consistent from year to year.

35
Q

Can a business depreciate assets in different ways?

A

same asset, different ways = no

different assets, different ways = yes

36
Q

What is the purpose of providing for depreciation?

A

To recognize the cost of an asset, writing it off gradually assures that when you sell it and get less back you have already allowed for that price difference. more accurate reflection of the items worth.

37
Q

In which case would the depreciation method applied to an asset change?

A

Preferably never but if there are changes to the expected pattern of use of the asset and therefore the economic benefit of the asset the method should be changed.

38
Q

When you change the method of depreciation of an asset on what value is this applied and which years does it effect?

A

applied to the carrying value so that only current and future years are affected.

39
Q

What things does the depreciation charge on non-current asset depend on? (3)

A
  1. cost/value of asset
  2. estimated residual value
  3. estimated useful life
40
Q

What formula is used to adjust depreciation?

A

new depreciation = (CV - residual value)/revised useful life

41
Q

Define accumulated depreciation

A

the amount set aside as a charge for the wearing out of property plant and equipment.

42
Q

What are the two basic aspects of accumulated depreciation to remember?

A
  1. depreciation is charged every year in the SOPL

2. total accumulated depreciation builds up until the asset is depreciated fully.

43
Q

Where is depreciation applied when an asset is revalued?

A

to the revalued amount

44
Q

Why is a revaluation not included in the SOPL?

A

the gain in value is not realised ie. the asset is estimated to be more but it hasn’t been sold. it may end up not being sold for that much. the gain only appears in the SOPL when the profit is realised. till then it stays int he ‘revaluation reserve’ as capital.

45
Q

What is ‘profit on disposal of non-current assets’ or ‘loss on disposal’?

A

the profit or loss of non-current assets being disposed of. as they are capital items its counted as a capital gain or capital loss. reported as expenses or income.

46
Q

How is the profit or loss of disposing of an asset calculated?

A

difference between carrying value at the time of sale and net sale price (price - costs of making the sale)