Question

[cibicl]

Hey Guys, I'm still confused of what would be the appropriate answer for this question and what accounting principle?

i'd attached the answer in quotes on the first post.
but once again, it is:

entity principle.
To explain this, when a business disposes of an asset (i.e. sells), any of its remaining value (residual value)
will be consumed by a separate entity.
The depreciable value must be the value consumed by the business, so taking the difference between the
purchase price (historical cost) and the sale price (residual value) keeps the entities of the company
and the purchaser separate, hence adhering to the entity principle.

Wow thanks I don't think I would have got that.
Do you know anything else on the exam? ;P

[hello_kitty]

But Why isnt it Reporting Period and how can we be sure??

[luffy]

But Why isnt it Reporting Period and how can we be sure??

Technically, it could be argued as Reporting Period as well - however, I don't think it would be the "best" answer.

The residual value is deducted from historical cost because it will not be consumed by the current entity (entity principle). However, as this value will not be consumed in the current reporting period (nor the next), it can be argued as the Reporting Period principle as well.

[Furbob]

bleh, what my accounting teacher's answer to nacho's question

Remember if you get a Principle or Characteristic question  “out of the box” determine it by the process of elimination

 

Depreciation is the allocation of part of the cost of an NCA as an expense in order to determine an accurate profit for a reporting period.   The residual value is not used in the allocation of the cost as the residual value is the estimated amount that the business has determined that it will not  use to earn revenue.  This portion of the NCA is expected to be used up by another entity once the NCA has been sold.

[hello_kitty]

I still don't understand how it is entity apart fro that different entity will use it after the useful life. Which is the better principle? Reporting Period or Entity?

Also, If i' averaging at around 86-89% on practice exams giving that an A
and say that i get around an A for the exam and ive gotten A+ for all my sacs
would this give me any indication of anything?

Thanks!

[soopertaco]

Neville box said himself, there can be two answers for a question. If you can give a feasible answer for one better than the other then go right ahead

[hello_kitty]

my answer:
cost - scrap determines the cost value that will be consumed to enable the entity to generate future economic benefits from the non current asset. As the life of a non current asset is limited, it is reasonable to write part of its cost in each reporting period until it is sold or used up.

so for this, It is Reporting Period, but what does 123456k mean by (cost - scrap) ?

[ShortBlackChick]

i think he means cost (historical) LESS scrap value, giving the allocated value, if thats what you're asking.
It took me a while to figure that one out.
Can we answer it like that???
Or do we actually say Historical cost less Scrap value??

[hello_kitty]

Ohh that makes sense but instead of scrap value could you say 'residual value' ??

[geoftw]

i was doing some practice exams today and I found that this question was similar to a past theory question;


2009 VCAA Accounting Exam 1:
1.6  The equipment was depreciated using the straight line method. The equipment has an estimated useful life  of 10 years and expected residual value of $20 000.
Required
Explain why the residual value is deducted from the cost price when determining the depreciation expense  for the period. (2 marks)

Assessment report:

The residual value is not going to be used by this business in earning revenue. It represents a potential inflow of future  economic benefit at the end of the asset’s life. This portion of the asset will be used up by someone else once the asset   has been sold.


Average mark: 0.5 .... only 12% got full marks :S

[hello_kitty]

So just clarifying you could say to this question using the infromation everyone has given on vn :

Entity Principle
When a business disposes of an Asset (Sells) any of its remaining value (Residual Value) will be consumed by a separate entity. The depreciable value must be the value consumed by the business, so taking the difference between the purchase price (historical cost) and the sale price (residual value) keeps the entities of the company and the purchaser separate, hence adhering to the Entity Principle.

Reporting Period
Historical Cost – Residual Value determines the Cost Value that will be consumed to enable the Entity to generate future economic benefits from the Non-Current Asset. As the life of a Non-Current Asset is limited, it is reasonable to write part of its cost in each Reporting Period until it is sold or used up. There is also the expected benefit to come into the business in future Reporting Periods when the Asset is sold and the expected Residual Value is received.

[ninwa]

Edited to clarify that this is a troll post, the question is NOT confirmed to be on the exam.

[geoftw]

that awkward moment when this question wasn't on the exam haha.. :/

[soopertaco]

I understand your answer but where his addition to your answer fits in isn't quite clear to me.

I've got my sources

and btw nacho, how credible are your sources?

lol it's not actually on the exam, i just wanted to know the answer ASAP heh

so shifty haha but thanks for sharing i don't i've ever seen this question

this was back up the thread a little bit haha but his post got deleted

[andyzpipe]

i actually thought this was going to be on the exam.. was quite shocked when i didn't see it in reading time...