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Theory
Revaluation of Fixed Assets
| Question | Answer |
|---|---|
| Explain why it is important for firms to revalue their fixed assets. | The accounts will show fixed assets at their true market value hence show a true and fair view of the financial position of the company. It provides useful information to users of the accounts. It enables ratios to be calculated more accurately. |
| Explain why it is important for firms to revalue their fixed assets. | Depreciation will not be understated and therefore profits will not be overstated |
| The consistency concept is one of the four fundamental accounting concepts. Explain the consistency concept | The Consistency concept states that accounting items must be treated exactly the same way from one accounting period to the next and if you change a policy, you must give the reason for this change, and the effect of the change on profit. |
| Distinguish between the straight line method and reducing balance method of depreciation. | The straight line method is when the same amount of the cost of the asset is written off each year The reducing balance applies a constant percentage to the gradually reducing carrying amount balance so that the amount of depreciation expense diminishes |
| Why would a company choose one method of depreciation over another | The type of asset and its policy on depreciation and ensuring that the consistency concept is applied when preparing accounts |
| Distinguish between capital and revenue expenditure | Capital Expenditure refers to expenditure on items where the benefit derived is expected to last a long time E.g. Purchase of land Revenue Expenditure – refers to expenditure where the benefit derived is of a temporary nature E.g. repairs |
| Explain what is meant by a revenue reserve in the context of revaluation | Revenue reserve is undistributed profit not paid out to the owners in dividends, it is profit retained by the business. A revaluation reserve arises when land and buildings are increased in value but the profit made on these revalued fixed assets isn’t |
| Explain what is meant by a revenue reserve in the context of revaluation | transferred to the revenue reserve until the fixed asset is sold off. Up until the sale of the fixed asset this profit cannot be distributed to the owners. |
| Explain why it is important for firms to revalue their fixed assets | accounts will show fixed assets at their true market value and show a true view of the financial position of the company It provides useful information to users of the accounts Dep not be understated and therefore profit not be overstate |
| Outline the factors that affect the price of property on the market | The use of the land New investments and projects nearby – E.g a new Luas line. Overall state of the property market – boom, recession. Tax rates/breaks etc. to encouragement development. The overall levels of supply and demand |
| What factors are taken into account in arriving at an annual depreciation charge? | Cost of asset Estimated life of asset Estimated residual/scrap value of asset Selection of appropriate method of depreciation |
Created by:
21JulianM
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