Ch.15 Accounting for non-current assets 2

What assumption underlies the straight-line method of depreciation?

The asset contributes evenly to revenue over its Useful life, so the same depreciation expense is recognised each Period.

What assumption underlies the reducing balance method of depreciation?

The asset contributes more to revenue when new and less as it ages, so more depreciation expense is recognised early in its life and less later.

What is the reducing balance depreciation formula?

Depreciation expense = Depreciation rate × Carrying value.

What Carrying value is used to calculate reducing balance depreciation?

Historical cost − Accumulated depreciation at the beginning of the Period.

Why does depreciation expense decrease each year under reducing balance?

Accumulated depreciation increases each Period, reducing Carrying value; applying the same rate to a lower Carrying value produces lower depreciation expense.

How is reducing balance depreciation calculated for less than a full year?

Calculate annual depreciation using rate × Carrying value, then multiply by the number of months controlled ÷ 12.

What is the main calculation difference between straight-line and reducing balance depreciation?

Straight-line produces equal annual depreciation, while reducing balance applies a rate to Carrying value and produces decreasing depreciation.

What remains the same regardless of which depreciation method is used?

The General Journal entry, reporting treatment and Accounting equation effects are the same; only the amount of depreciation expense differs.

What is the journal entry for depreciation under either method?

Dr Depreciation of [Asset]; Cr Accumulated depreciation of [Asset].

How does reducing balance affect Net Profit compared with straight-line in the early years?

Reducing balance generally records higher depreciation expense, causing lower Net Profit and owner's equity in the early years.

How does reducing balance affect Net Profit compared with straight-line in later years?

Reducing balance generally records lower depreciation expense, causing higher Net Profit and owner's equity in later years.

What happens to total depreciation under straight-line and reducing balance over the entire Useful life?

If calculated correctly, both allocate the same total depreciable amount and finish at the same Residual value.

What is the main factor used to choose an appropriate depreciation method?

The revenue-earning pattern of the individual asset.

When should straight-line depreciation be used?

When the asset contributes evenly to revenue throughout its Useful life.

When should reducing balance depreciation be used?

When the asset contributes more to revenue early in its life and progressively less as it ages.

How does Comparability affect the choice of depreciation method?

Once an appropriate method is selected, it should generally be used consistently between Periods so performance can be compared meaningfully.

Why can changing depreciation methods raise ethical concerns?

Changing methods to deliberately present performance more favourably introduces bias and may undermine Faithful representation.

What three amounts must be considered when disposing of a non-current asset?

Its Carrying value, the Proceeds on disposal and the resulting Profit or Loss on Disposal.

What is the purpose of the Disposal of Non-current Asset account?

It is a temporary account used to compare the Carrying value of the asset disposed of with the Proceeds on disposal and calculate the Profit or Loss on Disposal.

How is the Carrying value of an asset transferred to the Disposal account?

Dr Disposal of Asset for Historical cost; Cr Asset for Historical cost; Dr Accumulated depreciation; Cr Disposal of Asset for Accumulated depreciation.

How is a profit or loss on disposal calculated?

Profit/Loss on Disposal = Proceeds on disposal − Carrying value. Positive = profit; negative = loss.

When does a Loss on Disposal occur?

When Proceeds on disposal are less than Carrying value.

When does a Profit on Disposal occur?

When Proceeds on disposal are greater than Carrying value.

How are Profit and Loss on Disposal reported?

Profit on Disposal is reported under Other revenue; Loss on Disposal is reported under Other expenses in the Income Statement.

How are cash proceeds from the sale of a non-current asset reported in the Cash Flow Statement?

Proceeds from the sale are an Investing cash inflow; GST received is treated as an Operating cash flow in this course.

What does a Loss on Disposal suggest about previous depreciation estimates?

The asset may have been under-depreciated, causing its Carrying value to be overstated; Useful life and/or Residual value may have been overestimated.

What does a Profit on Disposal suggest about previous depreciation estimates?

The asset may have been over-depreciated, causing its Carrying value to be understated; Useful life and/or Residual value may have been underestimated.

How does a trade-in differ from a cash sale in the Accounting records?

The proceeds are applied toward the new non-current asset rather than received in Bank, and no GST is recorded on the trade-in proceeds.

How is a trade-in reported in the Cash Flow Statement?

The trade-in itself is not reported because it involves no cash flow; only the cash paid for the new asset is reported as an Investing outflow.