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Acc201 Su4
Acc201 Su4
Acc201 Su4
https://www.wallstreetmojo.com/net-fixed-assets/
The Net fixed asset is the asset’s residual value of the fixed asset. It is calculated using the
total price paid for all fixed assets at the time of purchase minus the total depreciation amount
already taken since the time assets were purchased.
Net Fixed Assets Formula= (Total Fixed Asset Purchase Price + capital improvements) –
(Accumulated Depreciation + Fixed Asset Liabilities)
3. What are included in the cost of an item of property, plant and equipment?
The cost of property, plant, and equipment includes the purchase price of the asset and all
expenditures necessary to prepare the asset for its intended use. Land purchases often
involve real estate commissions, legal fees, bank fees, title search fees, and similar expenses.
4. Explain the different methods of depreciation.
Features of Depreciation and the Methods
Every asset has only a timely use. And with that, the value has declined accordingly. So the
measure of declination of asset value over the period is calculated with depreciation. And the
following methods; straight-line method, written down value method, production unit
method, annuity method, sinking fund method have their features making the depreciation
process unique.
● By the usage, obsolescence or time that have passed, there is a loss of value occurred
for the assets. And it is included in it.
● The booked value of fixed assets that have affected a declination is what depreciation
is.
● Depreciation is a continuous process until the useful life period of the asset.
● We must deduct the cost of expiration, that is depreciation before calculating the
taxable profit.
● It doesn’t involve cash flow. Hence it can be called a non-cash expense.
● The loss measured must be constant and gradual.
● In depreciation, maintenance cannot be included.
If you only owned the item for part of the year, then you will need to make a partial-year
depreciation calculation. To make this calculation, you take your full-year depreciation,
divide it by the number of months in a year, and then multiply it by the number of
months you've owned the item.
6. How do you change your depreciation computation when there are changes in the
estimates of useful lives or residual values?
To calculate depreciation using the straight-line method, subtract the asset's salvage value
(what you expect it to be worth at the end of its useful life) from its cost. The result is the
depreciable basis or the amount that can be depreciated. Divide this amount by the number of
years in the asset's useful lifespan.
7. What journal entries are passed upon disposal of a property, plant and equipment?
https://fitsmallbusiness.com/journal-entry-disposal-of-fixed-assets/
When an asset reaches the end of its useful life and is fully depreciated, asset disposal occurs
by means of a single entry in the general journal. The accumulated depreciation account is
debited, and the relevant asset account is credited.
The accounting for plant asset disposals requires two journal entries: One to bring
depreciation up to date and (2) a second journal entry to record the disposal. Upon
disposal, the plant asset's cost and related accumulated depreciation should be removed from
the books. Any cash received is recorded.
The accounting treatment for all research expenditure is to write it off to the profit and loss
account as incurred. As a basic rule, expenditure on development costs should be written
off to the profit and loss account as incurred, as with the expenditure on research.
Capital expenditure is the money spent by a firm to acquire assets or to improve the quality of
existing ones.
Revenue expenditure is the money spent by business entities to maintain their everyday
operations.
10. Illustrate the accounting for depreciation using various methods
https://www.wallstreetmojo.com/depreciation/#:~:text=Companies%20depreciate%20assets
%20using%20these,into%20the%20accumulated%20depreciation%20account.
Companies depreciate assets using these five methods: straight-line, declining balance,
double-declining balance, units of production, and sum-of-years digits. In the balance
sheet, the amount shown as a depreciation expense charged goes into the accumulated
depreciation account.
https://accounting-simplified.com/financial/fixed-assets/accounting-for-disposals/
1. Record cash receive or the receivable created from the sale: Debit Cash/Receivable.
2. Remove the asset from the balance sheet. Credit Fixed Asset (Net Book Value)
3. Recognize the resulting gain or loss. Debit/Credit Gain or Loss (Income Statement)
12. Illustrate the accounting for intangible assets and its amortisation
The company should subtract the residual value from the recorded cost, and then divide that
difference by the useful life of the asset. Each year, that value will be netted from the
recorded cost on the balance sheet in an account called "accumulated amortization," reducing
the value of the asset each year.
13. Distinguish between expenditure in the research phase and the development phase
4 main types of financial assets: bank deposits, stocks, bonds, and loans.
Bank deposits are a savings product that customers can use to hold an amount of money
at a bank for a specified length of time. In return, the financial institution will pay the
customer the relevant amount of interest, based on how much they choose to deposit and for
how long.
Bonds are issued by governments and corporations when they want to raise money. By
buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value
of the loan on a specific date, and to pay you periodic interest payments along the way,
usually twice a year.
A loan is a financial product that allows a user to access a fixed amount of money at the
outset of the transaction, with the condition that this amount, plus the agreed interest, be
returned within a specified period. The loan is repaid in regular instalments.
15. How are each type of financial assets accounted?
Transactions on deposit accounts are recorded in a bank's books, and the resulting
balance is recorded as a liability of the bank and represents an amount owed by the
bank to the customer. In other words, the banker-customer (depositor) relationship is one of
debtor-creditor.
Stock is an ownership share in an entity, representing a claim against its assets and
profits. The owner of stock is entitled to a proportionate share of any dividends declared by
an entity's board of directors, as well as to any residual assets if the entity is liquidated or
sold.
A loan is recognised on the balance sheet when the entity becomes party to a loan
agreement. Like other financial instruments, a loan is recognised on the balance sheet when
the entity becomes party to a contract that is a loan.
https://corporatefinanceinstitute.com/resources/knowledge/accounting/financial-assets/
17. Compute asset turnover and return on assets
https://www.indeed.com/career-advice/career-development/how-to-calculate-return-on-assets
Asset turnover, total asset turnover, or asset turns is a financial ratio that measures the
efficiency of a company's use of its assets in generating sales revenue or sales income to the
company.
Return on assets (ROA) is a ratio that tells you how much of a profit a company earns from
its resources and assets. This information is valuable to a company's owners and management
team and investors because it is an indication of how well the company uses its resources and
assets to generate a profit. Return on assets is represented as a percentage. For example, if a
company's ROA is 7.5%, this means the company earns seven and a half cents per dollar in
assets.
ROA is calculated by dividing a firm's net income by the average of its total assets. It is
then expressed as a percentage. Net profit can be found at the bottom of a company's income
statement, and assets are found on its balance sheet.
18. Illustrate the accounting for current and non-current liabilities and contingent
liabilities
Current and contingent liabilities are both important financial matters for a business. The
primary difference between the two is that a current liability is an amount that you
already owe, whereas a contingent liability refers to an amount that you could
potentially owe depending on how certain events transpire.
Current liabilities are listed on the balance sheet and are paid from the revenue generated by
the operating activities of a company. Examples of current liabilities include accounts
payables, short-term debt, accrued expenses, and dividends payable.
Contingent liabilities require a credit to the accrued liability account and a debit to an
expense account. Once the obligation is realized, the balance sheet's liability account is
debited and the cash account is credited. Also, an entry is made in the associated expense of
the income statement.
19. Explain the nature and classification of long-term liabilities and related interest
expense
Long-term liabilities are typically due more than a year in the future. Examples of
long-term liabilities include mortgage loans, bonds payable, and other long-term leases or
loans, except the portion due in the current year. Short-term liabilities are due within the
current year.
An interest expense is the cost incurred by an entity for borrowed funds. Interest expense is a
non-operating expense shown on the income statement.
A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio
of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of
less than 100% indicates that a company has more assets than debt.
The times interest earned (TIE) ratio, also known as the interest coverage ratio, measures how
easily a company can pay its debts with its current income. To calculate this ratio, you divide
income by the total interest payable on bonds or other forms of debt.
A company reports its liabilities on its balance sheet. According to the accounting equation,
the total amount of the liabilities must be equal to the difference between the total amount of
the assets and the total amount of the equity.
Liabilities are settled over time through the transfer of economic benefits including money,
goods, or services. Recorded on the right side of the balance sheet, liabilities include loans,
accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.
Liabilities can be classified into three categories: current, non-current and contingent.
Current liabilities are short-term debts that you pay within a year. Types of current liabilities
include employee wages, utilities, supplies, and invoices. Noncurrent liabilities, or long-term
liabilities, are debts that are not due within a year. List your long-term liabilities separately on
your balance sheet.
Businesses sort their liabilities into two categories: current and long-term. Current
liabilities are debts payable within one year, while long-term liabilities are debts payable over
a longer period. For example, if a business takes out a mortgage payable over a 15-year
period, that is a long-term liability.
Liabilities are on the right side of the accounting equation. Liability account balances
should be on the right side of the accounts. Thus liability accounts such as Accounts Payable,
Notes Payable, Wages Payable, and Interest Payable should have credit balances.
A balance sheet is a financial statement that reports a company's assets, liabilities, and
shareholder equity.
A company reports its liabilities on its balance sheet. According to the accounting
equation, the total amount of the liabilities must be equal to the difference between
the total amount of the assets and the total amount of the equity.