TOPIC 4 Non-current assets

What are non-current assets?

• long life assets

• Used in the business

• Not bought with main purpose of reselling

• Of material value

What are the 2 main categories of NCAs?

• Tangible - NCAs you can see/touch e.g. land/plants/machinery/equipment

• Intangible - those that don’t have a physical presence

What is spending on NCAs known as?

• capital expenditure

• ( in this context meaning big)

When does Capital Expenditure occur?

• buying NCAs

• Adding to earning capacity of existing NCAs

What’s included in the cost of buying NCAs?

• Delivery cost

• Legal costs of buying land & buildings

• Any initial costs needed to get the NCA ready before first use from which the business will benefit in the long-term

What does revenue expenditure mean?

• spending incurred on the running costs of the business and on maintaining its NCAs

Give examples of capital and revenue expenditure

Capital:

• Buying delivery van 8k

• putting extra headlights on van

• Paint outside of brand new building

Revenue Expenditure:

• Buy petrol for van

• Repainting building 3 years later

What is depreciation in terms of NCAs?

• concept that NCAs don’t last forever

• the cost of an NCA must be spread over its useful life

• All tangible NCAs must be depreciated

What are the 2 ways of spreading the cost of an NCA over time?

• straight-line deprecation

• Reducing balance depreciation

Straight line depreciation formula

• Annual depr’n expense = cost estimated residual value/ expected years of use

Straight-line depreciation example

1.Suppose Meg’s business buys a van for £10,000 on 1 Jan 20X1.

2.Meg expects it to last about three years, after which it should be worth about £1,000.

3.i.e. it is expected to depreciate by £9,000 over three years

4.Meg could assume that she’ll get equal benefit each year from using the van (‘straight-line depreciation’)

• £3000 per year depreciation

What happens when no residual value is estimated? (Common)

• straight line depreciation is expressed as a % of the cost of the asset

• E.G. A computer bought for £1200 is expected to last for 4 years —→ 1200 X 0.25 of SL = £300 depreciation per year

How does the reducing balance method work?

• a fixed percentage is applied to the cost of the NCA in the first year it’s bought

• the same percentage is applied to the reduced balance year after year

Why might a business choose the reducing balance method instead of straight line?

• has a fixed percentage

What’s the double entry for depreciation?

• Dr Depreciation expense (will appear as an expense in the SPL)

• Cr Accumulated depreciation (balance will appear on the SFP, reflecting the amount of the of the original cost that is deemed to have been used up

What is a part-exchange/trade-in in terms of an NCA?

• disposal proceeds’ on the old asset part-exchanged are simply equal to the trade-in value

• e.g. suppose a new van priced at £16,000 is bought by paying £12,000 cash plus the trade-in of an old van

• In this case, the effective disposal ‘proceeds’ would be £4,000 for the old van

Part-exchange example

i.A Ford Focus was purchased for £10,000 on 1 January 20X1 and was depreciated at 25% p.a. straight line

ii.On 1 January 20X4, it was part-exchanged for a VW Golf priced at £15,000

iii.This purchase of the VW Golf was settled by making a bank transfer of £11,000