Accounting 2010
Sample assessment instrument and student responses
Supervised written: ES5 Accounting for
non-current assets
This sample is intended to inform the design of assessment instruments in the senior phase of
learning. It highlights the qualities of student work and the match to the syllabus standards.
Dimension assessed
• Interpretation and evaluation
Assessment instrument
The student work presented in this sample is in response to an assessment task.
Context
ABC Enterprises is a business specialising in selling and delivering gift items. Charles Fictitious, the
Managing Director, has requested your expertise to examine his current business practices relating to
the non-current assets and provide advice and recommendations.
Task
As his accountant, you are required to prepare a memorandum (600–800 words) for Mr Fictitious.
Your memo should:
•
analyse the accounting practices used by the business when accounting for non-current assets
•
develop a reasoned argument which evaluates the effectiveness of current practices
•
provide justified recommendations for practices which should be introduced and current practices
which should be continued.
Supporting documentation
Motor vehicles
On 1 January 2013 ABC Enterprises purchased a new delivery vehicle for $33 000 (GST inclusive)
from DEF Motors. At the time of purchase a 2-way radio was installed by GHI 4WD Accessories at a
cost of $2 200 (GST inclusive) and the name “ABC Enterprises” was painted on the side of the vehicle
by JKL Paint for $3 300 (GST inclusive). Both the 2-way radio and the sign writing were paid by
cheque. Registration of $660 (GST inclusive) and insurance of $550 (GST inclusive) were paid in cash
on the same date. On 1 May, repairs were made to the delivery vehicle at a cost of $440
(GST inclusive) which was paid in cash. ABC Enterprises estimated the life of the delivery vehicle to
be 5 years and to have a residual value of $5 000. The Tax Guide recommended rate of depreciation
for delivery vehicles is 30% diminishing balance.
ABC Enterprises has recorded the purchase and depreciation of the asset for the year in its records
as follows:
General Ledger (extract)
Date
Particulars
Dr
Cr
Balance
2013
Motor Vehicle Expenses
Jan 01
Cash at Bank
3 000
3 000 Dr
May 01
Cash at Bank
400
3 400 Dr
2 810
2 810 Dr
30 000
30 000 Dr
Cash at Bank
2 000
32 000 Dr
Cash at Bank
1 100
33 100 Dr
Depreciation on Motor Vehicles
June 30
Accumulated Depreciation
Motor Vehicle
Jan 01
DEF Motors: Nissan
Accumulated Depreciation on Motor Vehicles
June 30
Depreciation
Profit and Loss
2 810
2 810
2 810 Cr
0
Non-current assets
Recently the auditors conducted a stocktake of the business’s non-current assets. They found it
impossible to ascertain which non-current assets should be in the business. Also when they did find
items on business premises, multiple assets of a similar nature such as computers and office furniture
were often indistinguishable.
Buildings
The business’s buildings were purchased five years ago when the business was first established at a
cost of $100 000. A real estate agent recently conducted a valuation of this building and, as at 30 June
2013, found the building is now worth $200 000. Mr Fictitious would like to show the current valuation
of the building in the balance sheet as he believes this is a more accurate representation of its true
worth.
Depreciation
Mr Fictitious would like more details about the figure that has been allocated for depreciation this
financial year as he is unsure how this figure was calculated.
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Accounting 2010: Sample student assessment and responses Non-current assets
Instrument-specific standards matrix
Student responses have been matched to instrument-specific standards. Those that best
describe the student work in this sample are highlighted below. For more information about the
syllabus dimensions and standards descriptors, see
www.qsa.qld.edu.au/11034-assessment.html.
Interpretation and evaluation
Standard A
Standard C
The student work has the
following characteristics:
The student work has the
following characteristics:
• thorough and effective
analysis and interpretation of
relevant accounting
information relating to
non-current assets
• analysis of accounting
information relating to noncurrent assets
• development of logical and
convincing arguments to
thoroughly justify valid
recommendations relating to
non-current assets
• development of reasoned
arguments to justify
recommendations relating to
non-current assets
• effective communication of
accounting information using
appropriate modes for a
variety of purposes.
• clear communication of
accounting information using
appropriate modes for a
variety of purposes.
Note: Colour highlights have been used in the table to emphasise the qualities that discriminate
between the standards.
Queensland Studies Authority March 2014 | 3
Student response — Standard A
The annotations show the match to the instrument-specific standards.
Comments
Memo
To:
Effective communication of
accounting information for a
purpose demonstrated through:
•
clarity of expression and
logical exposition
•
understanding of technical
terms
•
use of correct spelling,
punctuation and grammar.
Mr Fictitious (ABC Enterprises)
From: Student name
Date:
3/11/2013
Re:
Accounting for Non-Current Assets
After a recent investigation of your business, a number of concerns were
raised about the current procedures in place to account for non-current
assets. These issues can be addressed if the recommendations outlined
in the following memo are followed.
Non-current assets
Non-current assets are long term economic resources which are not
expected to be turned over for cash within one financial year. There are
three types of non-current assets: property, plant and equipment,
intangibles and investments. They are important to the business as they
help it to grow and earn revenue. The appropriate controls must be used
over non-current assets.
Thorough and effective
analysis and interpretation
of accounting information
Logical and convincing
argument to thoroughly
justify valid
recommendations
Thorough and effective
analysis and interpretation
of accounting information
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The analysis of the business suggests that you are having difficulties
distinguishing between assets and locating them. As the business has
invested significant amounts of money on these assets they must be
able to be located quickly and that we can identify individual assets so
that we can ensure they are working to maximum efficiency. A property,
plant and equipment register (PPE) can assist with these issues. The
PPE register is the most important control over non-current assets. This
is a comprehensive record of all the business’s assets which details the
location, ID number, cost, capital and revenue expenditure, disposal and
depreciation details. Maintaining information regarding non-current
assets in a PPE Register will ensure assets can be located quickly and
are easily distinguishable.
In addition it was also noted that you would like to show the buildings at
the current valuation of $200 000 in the Statement of Financial position
rather than recording them at their original cost of $100 000. The
Historical Cost assumption in use in most accounting systems, requires
you to use the historical cost or purchase price. This provides a stable
measuring unit assumption. However a note within the Statement of
Financial Position can detail the current valuation of the building
($200 000) for future reference.
Accounting 2010: Sample student assessment and responses Non-current assets
Comments
Capital and Revenue Expenditure
There are two main ways in which expenses which relate to the
business’s assets can be classified; either capital expenditure or
revenue expenditure. It is essential that the correct classifications are
used for each expense as this can impact the figures within Statement of
comprehensive income and can significantly affect depreciation rates.
Thorough and effective
analysis and interpretation
of accounting information
Logical and convincing
argument to thoroughly
justify valid
recommendations
Upon analyzing your business’s accounting records it was found that
some of your expenses are classified incorrectly. Currently, the paint job
on the side of the vehicle is classified as a revenue expenditure,
however as it helps to promote the business it should be considered a
capital expense. Capital expenditure is any expense which increases the
life or value of the asset for more than one accounting period. Examples
include large outlays of cash which improve the asset, or expenses
which are paid to bring the assets into a location or condition ready for
use.
Revenue expenditure however are costs incurred for the maintenance
and upkeep of an asset. For example, expenditures which will be used
up within one accounting period (insurance, registration) or small
expenses used to improve the asset. The registration and insurance
paid on 1st January 2013 (adding up to $1100) is also incorrectly
classified as a capital expenditure as both expenses will be used up
within one financial year and are paid to upkeep the asset.
Therefore capital expenditures should be recorded in your books at
$35 000 (cost of vehicle, 2-way radio & paint job), whilst revenue
expenditure should be at $1500 (registration, insurance and repairs). If a
capital expenditure is incorrectly recorded as a revenue expenditure the
business’s profits will be understated (because expenses are
overstated), and an understatement of the asset. This will also impact on
future profit because the asset is not recorded at its full amount resulting
in smaller amounts of depreciation being written off in future periods.
Depreciation
Depreciation is a decline in the future economic benefit of a depreciable
asset through wear and tear and obsolescence. There are two ways of
depreciating an asset; straight line and diminishing balance method.
Thorough and effective
analysis and interpretation
of accounting information
It is apparent from your accounting records ($2 810) that the incorrect
depreciation method, straight line, has been used for the delivery
vehicle. The straight line method of depreciation suits assets which
depreciate evenly over its lifetime, such as furniture. Each accounting
period is allocated a uniform cost less any residual value. Diminishing
balance method however is when a uniform rate of depreciation is
applied each period to the cost of the asset reduced by any accumulated
depreciation. It best suits those assets which give most of its service
potential early in its life. As a delivery vehicle would give most of its
service potential when first purchased, the diminishing balance method
would have been more appropriate.
Queensland Studies Authority March 2014 | 5
Comments
Logical and convincing
argument to thoroughly
justify valid
recommendations
Using The Tax Guide which recommends delivery vehicles be
depreciated at a rate of 30% using diminishing balance method, the
depreciation expense should be $5250. It is essential that the correct
depreciation method is used for each non-current asset as it can
significantly impact the figures in both the Statement of financial position
and the Statement of comprehensive income.
In summary the following recommendations should be considered:
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•
Introducing a property, plant and equipment register to record the
details of all non-current assets to ensure they can be located and
individually identified
•
Recording the value of the building at its historical cost in your
accounting records, but including a note to the report detailing the
building’s current valuation.
•
Ensuring expenditures relating to non-current assets are classified
correctly as either revenue expenditure or capital expenditure to
ensure accuracy of figures in financial reports.
•
Follow ‘The Tax Guide’ recommendation to use the diminishing
balance method of depreciation, at a rate of 30%, when depreciating
delivery vehicles — in recognition of the service potential provided in
each vehicle’s early life.
Accounting 2010: Sample student assessment and responses Non-current assets
Student response — Standard C
Comments
Memo
To:
ABC Enterprises
From: Student name
Date:
3/11/2013
Re:
Non-Current Assets
While investigating ABC Enterprises there have been many incorrect
accounting procedures. After evaluating and interpreting, many
recommendations have been suggested.
Non-current asset are the economic resources that will not be used up
or converted into cash within an accounting period. These assets are
required as they will help the business make profits.
Analysis of accounting
information
In this business there is an incorrect practice as the business can’t
ascertain what non-current assets should be in the business and that
office furniture and computers are indistinguishable. This is poor practice
as the business can’t identify if anything is stolen.
Reasoned argument to
justify recommendations
To improve on this practice the business should label all assets and
keep a record of all that have been serviced. The Property, plant and
equipment register provides a comprehensive record of all details
associated with the business’s assets, for example original cost,
location, ID number and depreciation, etc.
The Historical cost assumption relates to non-current assets. This is the
original cost plus any capital expenditures. For example the building was
purchased 5 years ago at a value of $100 000 but now is valued by a
real estate at $200 000. This would be shown in the balance sheet and
increase the value of the business.
Analysis of accounting
information
Capital expenditure is any non-current asset that will increase the value
of the business for more than one accounting period. Examples of
capital expenditure are any significant cost to move the asset to location
and in condition ready for use, such as freight or installation, or
significant costs that increase the value of the asset, such as an air
conditioner for a motor vehicle, or costs that will increase the life
potential of the asset, such as a new motor. ABC Enterprises uses
incorrect accounting procedures for classifying capital and revenue
expenditure. Registration of $600 and Insurance of $500 were classified
as capital expenditure but these expenses are revenue expenditure as
these costs maintain the asset but do not add value or extend its useful
life.
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Comments
Reasoned argument to
justify recommendations
Analysis of accounting
information
Revenue expenditure is any expense made on the asset that will maintain but not
extend its useful life. In this business the repairs made to the delivery van for $400
and registration and insurance of $1 100 should be revenue expenditure. The
painted sign on the vehicle should be capital expenditure as this increases the
value of the asset by advertising the business and this should result in increased
profit.
Depreciation is the allocation of the cost towards the asset. There are two types of
depreciation, straight line method and diminishing balance. The straight line is the
original cost plus any capital expenditure less any residual value over the
estimated life of the asset, for example, furniture. Whereas diminishing balance is
the percentage of the original cost less any accumulated depreciation. This means
that the asset is at its peak worth at the start and depreciates more each
accounting period, which would suit machinery and delivery vehicles. Therefore an
incorrect practice was used when the business used the straight line method for
the delivery van. The business should use diminishing balance by getting the
original cost of $35 000 find the 30 per cent less any accumulated depreciation.
As this asset has only been in the business, you would divide the total amount by
12 and times by 6 so that only 6 months is recorded. This will affect the Statement
of financial position.
Recommendations for ABC Enterprises are that property, plant and equipment
registers be installed, labelling and showing a record of all non-current assets.
Also, capital and revenue expenditure should be applied properly so that the
correct amounts are in Statement of financial position and the right depreciation
method of diminishing balance is used.
Acknowledgments
The QSA acknowledges the contribution of Pimlico State High School in the preparation of this
document.
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Accounting 2010: Sample student assessment and responses Non-current assets