Pei Hwa Non-Current Assets

PEI HWA SECONDARY SCHOOL Principles of Accounts Secondary Four Name: ____________________________ ( ) Date:___________ Class: __________ Teaching Group Name: ______________________ __________________________________________________________________________ Question 1 (16 Marks) On 1 April 2023, Dan Ser Transport Services purchased a coach on credit from Hung Enterprise at a list price of $80 000 and was given a trade discount of 10%. On 18 May 2023, Dan Ser Transport Services made the following payments by bank transfers. $ (i) Painting of business name on the coach 320 (ii) Annual motor insurance 640 (iii) Annual road tax 450 (iv) Cost of installing seat belts in the coach 230 REQUIRED (a) Identify if the items marked (i) to (iv) are capital expenditure or revenue expenditure. [4] (b) Prepare journal entries to record the transactions on 1 April 2023 and 18 May 2023. Narrations are not required. [6] (c) Explain why non-current assets need to be depreciated with the support of an accounting theory. [2] (d) Explain how a business should decide which depreciation method to use for each type of non-current asset. [2] (e) Name and explain the accounting theory which requires the same depreciation method to be used to depreciate the non-current asset over different financial periods. [2] [Total: 16] Adapted from East Spring 2021 4N Prelim Non-Current Assets Quiz 1 20

Question 2 (4 marks) During the year ended 30 April 2023, the business purchased two tables for office use at $3 000 each . Delivery and installation expenses amounted to a total of $500. The business depreciates its fixtures and fittings at 10% per annum using the straight-line method. REQUIRED (a) Prepare the journal entries to record the depreciation expense for the year ended 30 April 2023. A narration is not required. [2] (b) State two causes of depreciation [2] [Total: 4] Adapted from Damai 2021 4N Prelim

SOLUTIONS Question 1 (a) (i) Capital, (ii) Revenue, (iii) Revenue, (iv) Capital (b) Journal Date Particulars Dr Cr 2023 $ $ Apr 1 Motor vehicles (90% X 80000) [1] 72 000 Trade payable Hung Enterprise [1] 72 000 May 18 Motor vehicles [1] → Painting 320 Cash at bank 320 May 18 Vehicle expenses / Insurance [1] 640 Cash at bank 640 May 18 Vehicle expenses / Road tax expense [1] 450 Cash at bank 450 May 18 Motor vehicles [1] → Installation of seat belts 230 Cash at bank 230 [6] (c) Non-current assets provide benefits over more than one accounting period, therefore their costs should be allocated as expenses over their useful lives to calculate profit fairly for each period. [1] This is to comply with the matching theory which states that the income earned should be matched with the expenses incurred in the same period to calculate profit for that period. [1] Or Non-current assets provide benefits over more than one accounting period and depreciation decreases the net book values of the non-current assets systematically over their useful lives to show that the non-current assets are losing their benefits over the periods of use. [1] This is to comply with the prudence theory which states that the accounting treatment chosen should be the one that least overstate profits and assets and least understate losses and liabilities. [1] (d) The depreciation method chosen should reflect the pattern of usage of the benefits from the non-current assets by the business. [1] If the benefits are consumed evenly over the

non-current assets’ useful lives, the straight-line method is more suitable, If more or better quality benefits are used each year in the earlier years of the non-current assets’ useful lives, the reducing-balance method is more suitable. A suitable method will result in a fairer matching of expenses against income to calculate profit for each period. [1] (e) The accounting theory is consistency theory. [1] It states that once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison. [1] Question 2 a) Yuet Ching Journal Date Particulars Debit Credit 2023 Apr 30 Depreciation of fixtures and fittings [(3000x2)+500]x10% 650 Accumulated depreciation of fixtures and fittings [2] 650 (b) Any 2 of the following: Wear and Tear Usage Obsolescence Legal Limits