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Depreciation of NCAs
UNIT 3 CH 11
| Question | Answer |
|---|---|
| depreciable asset | a NCA that has a finite life, and must be depreciated over it life |
| Effect of GST paid on a GST clearing with debit balance: | increases this asset rather than decreases the liability |
| finite life: | the limited period of time *in years* for which a NCA will exist |
| characteristic common to both A and E | both refer to economic benefit that is brought to the the business. A - e, benefit yet to be consumed and E - e,c already consumed |
| Why is GST excluded from consideration from dept. exp? | Not part of of cost of NCA, no effect on economic benefit provided by NCA, will not provide an economic benefit for the life of the A but represents a reduction of GST L owing to ATO when A is purchased. |
| effect GST paid has on GST clearing of debit balance: | increases the asset *debits GST C account |
| some assets do not require depr. which and why? | e.g. land, it has an infinite life, as its e, benefit is never used up/consumed |
| AC: why entire cost of NCA is not reported as E: | When a business purchases a NCA, It cannot be reported as an E as its entire benefit has not been consumed in the current RP |
| depreciation: | the allocation of the cost of a NCA over its UL |
| depreciation E: | the part of the cost of a NCA that has been consumed in the current RP |
| purpose of depreciation: | it is a BDA: ensures accurate profit is calculated, by comparing R earned against E incurred in the current RP___ dept does this by recognising depr as an E |
| Depreciation E formula: | per annum: (HC -RV)/ UL |
| HC | the original purchase price of the NCA |
| RV | the estimated value of the NCA at the end of its UL |
| UL | the estimated period of time for which the NCA will be used by the current entity to earn R. * measured in years |
| depreciable value: | the value of the A that will be consumed by the current entity and so must be allocated over its UL |
| note: straight line method: | the s/line method less suitable for A that do not contribute evenly to R |
| note about how to measure depr. | it's by time, not by use as reflected in the formula, UL not a measure of use |
| AP: Why is RV deducted from HC? | RV is deducted from the HC, as this is the amount that will NOT be consumed by the business, but by another entity. entity principle. |
| Accumulated Depreciation: | the value of the NCA that has been consumed/incurred over its life thus far *negative A account |
| GJ entries for BDA for Depr. Exp | Depreciation of Bla, debit ___ Acc Depr of Bla Credit |
| narration for depr Exp | Yearly Depr of boa - s/line method (memo X) |
| Effect of Depr Exp on Acc Eq. | A - Decr (incr Acc. Depr of bla) ____ OE - decr. (depr of Bla exp decreases Net Profit) |
| Depreciation vs Acc Depr | acc depr. the dept that has accumulated/built up over the life of the NCA so far |
| close the depr of bla account: | P & L summary account credit |
| Balancing the acc depr of van account: | use the right dates, e.g. using 30th of june on the left side, 1st of July on the right side |
| AC: difference between depr E and Acc depr: | dept. E refers to the amount consumed in the current RP. acc. depr. refers to depr that has accumulated over the life of the A so far (over a number of RP). |
| 2 reasons why depr E account must be closed at the end of the RP: | 1. transfer dep Exp to P&LS to calc profit for current RP ___ 2. reset dep exp account to zero in prep for the next RP |
| Carrying Value (CV): | Value of a NCA that is yet to be consumed.allocated as an E, plus any RV |
| Why must the A be reported initially at it's HC? | keep reports free from bias - this amount is verifiable to the source doc |
| Why state acc. depr of NCA in BS? | Relevance: as this represents the total value of the A consumed over its UL so far it is useful for decision making + calc of CV |
| How is CV calculated? | HC - acc. depr. + RV |
| Why included CV in BS? | Relevant to know how much future economic benefit the A represents |
| Depreciation Rate Formula: | p.a. = (depr Exp / HC ) x 100 |
| Depreciation Rate: | depreciation expressed as a percentage of the cost. |
| Calculating Depr Exp using rate formula: | Depr. Exp ($ p.a.) = Depr rate x HC |
| cost of a NCA: | all costs incurred in order to bring the A into a location and condition ready for use, which will provide benefit for the life of the A |
| e.g of costs of NCA: | purchase price, delivery costs, modification costs, installation costs |
| Why is GST not part of the cost of the A? | Is represents a reduction in the GST L owed to the ATO |
| Why isn't insurance paid yearly part of the cost of NCA? | it is a yearly fee, and its benefit will be consumed within a year, it is another E and needs its own ledger account |
| AP: why isn't it always accurate to report dept E p.a.? | the business may not have been in control over the A for a whole year. |
| Calculating depr of A firm has had control over for less than a year: | times depr E p.a. by months divided by 12 |
| How is Reliability undermined by including depr? | Because RV and UL are estimates, depr meanst that the reports will be less free from bias |
| If depr is excluded from reports what QC is undermined? | Relevance. As reports will not indluce all info that is useful for decision making |
| Why does QC Relevance override Reliability? | So that Acc reports fulfil their function of providing useful financial info: not accounting for any dept at all would be more incorrect than accounting for depr using estimates. |
| Explain why the residual value is deducted from the historical cost when determining the depreciation expense for the period. | RV will not be used by the business to earn R. It represents the amount from which future economic benefit is expected to flow to the entity who acquires the A after it has been sold. |
| Explain, referring to one accounting principle, why balance day adjustments must be made. | RP: requires that the ongoing life of the business be divided into regular intervals of time for the prep of financial reports that show R earned less E incurred in that period so that an accurate NP can be calculated. |
| How depreciation ensures Relevance in the IS: | includes all information that is useful for decision-making about profit, by showing the consumption of NCA in the current RP |
| How depreciation ensures Relevance in the BS: | recording acc depr, ensures that A are shown at their CV, which is vital for decision-making about their replacement. |
| explain why a rego fee is not part of cost of asset: | will not provide an economic benefit for the life of the asset – it only lasts for 12 months so it is a current asset rather than a non-current asset. |
| Why HC is included in BS: | the original purchase price of the A is verifiable by reference to source doc |
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