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Depreciation of NCAs

UNIT 3 CH 11

QuestionAnswer
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
Created by: 96.0