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What is Capital Expenditure?
Expenditure which results in the acquisition of long term assets, or an improvement or enhancement of their earning capacity.
Creates a non-current asset in the Statement of Financial Position
What is the key journal for capital expenditure?
Dr Non-current asset $cost
Cr Cash / Trade Payables $cost
What is a residual value of an non-current asset?
The residual value is the estimated scrap value for an asset at the end of its useful life for the business. In an exam, always assume the residual value is zero unless told otherwise.
What is the useful life of non-current assets?
Ever tangible non-current asset, with the exception of land, has a limited life (ie; they wear out and lose their usefulness over time). This is known as its useful life.
What does the term Carrying Amount mean?
An accounting concept used to measure the current value of an asset. It is the original cost of an asset (as reflected in a company’s balance sheet) minus the accumulated depreciation of the asset.
CA = Cost - Accumulated Depreciation
The cost of non-current assets include?
Direct attributable amounts which bring said asset to its present location and condition. (Eg; purchase price, delivery costs, professional/legal fees etc.) It can also include subsequent costs that enhance the asset, like major improvements.
How to calculate Depreciation Charge?
Cost - Residual Value / Useful life
What is the journal entry for depreciation?
Dr Depreciation expense (P/L)
Cr Accumulated Depreciation (SOFP)
When a business decides to sell off a non-current asset, it makes what?
Profit or loss on disposal
How is Profit/Loss on disposal calculated?
Net disposals proceeds - Carrying Value = Profit / Loss on disposal
What is Net Disposal Proceeds?
The Amount of money a seller receives from a sale or disposal, minus any costs relating to the sale or disposals, such as fees and tax.
A profit on disposal would be recorded as what?
Other income
A loss on disposal would be recorded as what?
Expenses
When an asset is disposed of, we create a disposals account and have 3 steps. What are the three steps?
REMOVE COST OF DISPOSED ASSET FROM COST LEDGAR
Dr Disposals Account $Cost
Cr Non-Current Cost Account $Cost
REMOVE ACCUMULATED DEPRECIATION FROM THE AD LEDGAR
Dr Accumulated Depreciation Amount $AD
Cr Disposal Account $AD
ACCOUNT FOR THE DISPOSAL PROCEEDS
Dr Cash $Proceeds
Cr Disposal Account $Proceeds
What is Impairment Loss?
When an asset suffers a permanent fall in its value (perhaps due to damage).
How to calculate impairment expense in the P/L?
How to calculate the recoverable amount? (IMPAIRMENT LOSS/ FALL IN VALUE)
The recoverable amount is whichever value between ‘fair value less cost to sell’ of the asset (ie; the price that a willing buyer would pay for an asset, minus the costs of selling said asset) and its ‘value in use’ (the current value of the future cash flows an asset will produce for the company) is the biggest.
What is the double-entry for Impairment Loss?
Dr Expense (or Impairment Loss)
Cr Non-current assets
What are Intangible Assets?
Non-current assets which do not have a physical substance.
What is a License?
An intangible asset purchased to allow a business to operate in a certain area.
What is a Patent?
An intangible asset which gives a business legal right to be the only company to sell a product for a particular number of years. It is essentially copyright.
What is amortisation?
Depreciation but for intangible assets
Most intangible assets have finite useful lives (eg; a license is granted for only a set period.) However, what may have an indefinite useful life, and what does this lead to?
A purchased brand may have an indefinite useful life. Therefore, brands are not amortised but instead tested annually for impairment.
What is Goodwill?
An intangible asset that represents the value of a company as a whole, which often exceeds the value of individual assets, This is due to the brand, customer base, skilled staff, strong relations with supplier etc. Whilst it is a very valuable asset to a company, it is rarely recognised within financial statements.
Internally generated goodwill cannot be recognised as an asset. Why?
Because it cannot be identified separately from the business, does not arise form legal rights and is not controlled by the entity.
What is Purchased Goodwill?
The difference between the price paid to acquire a business and the value of assets minus its liabilities.
P - (A-L)
Purchased Good will shows in the SOFP as an intangible non-current asset. Does Purchase goodwill depreciate?
Not, it is instead annually reviewed for impairment.
