Chapter 11 Accounting for the depreciation of non-current assets

What is depreciation?

• The amount of time that the business expects to keep the asset.

• Expenditure on the day-to-day running costs of the business.

• The remaining value of the asset (cost - accumulated depreciation).

• The loss in value of a noncurrent asset as a result of usage, wear and tear, obsolescence or the passing of time.

What are the reasons for assets to depreciate?

• Residual value, accumulated depreciation, and net book value.

• Capital expenditure, revenue expenditure, and useful life.

• Straight-line method, reducing balance method, and revaluation.

• Wear and tear, obsolescence, passage of time, and depletion.

What is the straight-line method of depreciation?

• A method used to calculate the cost of consumption in the accounting year of small non-current assets such as power tools.

• The cumulative total of all the depreciation that has been charged on the non-current assets.

• Depreciation is calculated as a fixed percentage of the net book value of the non-current asset at the start of the year.

• A method of applying depreciation that assumes that the loss in value will occur at a constant rate.

When should the reducing balance method of depreciation be used?

• When the pattern of a non-current asset's earning power is uncertain.

• For non-current assets that have a limit to their useful lives.

• For non-current assets that are expected to earn revenue evenly over their useful working lives.

• When it is considered that a non-current asset's earning power will reduce as the asset gets older.

Which assets should be depreciated?

• Only non-current assets with a high net book value should be depreciated.

• Only non-current assets with a residual value should be depreciated.

• Freehold land, which does not have such a limit, should be depreciated.

• All non-current assets that have a limit to their useful lives should be depreciated.

What is the revaluation method of depreciation used for?

• To calculate the amount of value lost by a non-current asset.

• To find out how much to charge as an expense to the statement of profit or loss for small non-current assets.

• To calculate the cost of consumption in the accounting year of non-current assets.

• To calculate the depreciation charge for the period of non-current assets.

Is depreciation a cash expense?

• Depreciation is a cash expense only in the year of disposal.

• No, depreciation is not a cash expense.

• Depreciation is a cash expense only in the year of acquisition.

• Yes, depreciation is a cash expense.

What is the end of useful life of a non-current asset?

• The amount that a business will receive for the asset at the end of its useful life.

• The amount of time that the business expects to keep the asset.

• The cumulative total of all the depreciation that has been charged on the non-current assets.

• The remaining value of the asset (cost - accumulated depreciation).

What is the purpose of consistency in the chosen method of depreciating a non-current asset?

• To ensure that the profits or losses of different periods of account can be compared on a like-for-like basis.

• To allow for changes in the method of calculating depreciation for different types of assets.

• To make the financial results and position of the business appear more favorable.

• To manipulate profit by changing the method of calculating depreciation.

What is the disposal of non-current assets?

• The removal of any record of the non-current asset being disposed of.

• The amount of money received from the disposal of a non-current asset.

• The cumulative total of all the depreciation that has been charged on the non-current assets.

• The loss in value of a noncurrent asset as a result of usage, wear and tear, obsolescence or the passing of time.