Wednesday 23 January 2013
Alloy Manufacturers Limited (AML) is a well-known company working in the automobiles Alloy industry. Mr. Naseer is working as accounts manager at AML and has more than 05 years of relevant experience. His major responsibilities include looking after accounting matters for accounting of fixed assets – incorporation, maintenance, depreciations, revaluation, and disposal etc. as per accounting rules, IASs and other related laws.
a) ALM has been charging depreciation at the rate of 10%-15% from 2001 to 2012 on its all fixed assets. From 2012 onwards, the management has decided to change its depreciation rates from 15%-20%. Balance sheet of AML as at December 31, 2012 has carries the value of inventory and Land at Rs. 850,000 and Rs. 2,000,000 respectively.
As a student of accounting, you are required to suggest that at which rate business should charge depreciation on inventory and land from year 2012 and onwards? Support your answer with logical reasons.
b) From year 2005 onwards, AML has also been bringing forward “Revaluation surplus”. But in year 2012, business incurred a loss on revaluation of its Buildings. You are required to suggest that what will be the accounting treatments of this loss? Support your answer with logical reasons.
Note: Your discussion should not exceed 150 words.
Solution:
On 1st January 20X3, a company purchased a machinery having list price of Rs. 500,000
with the condition of making full payment within 15 days from the date of purchase to
avail discount equal to 2% of the list price.
The company incurred transportation expenses Rs. 20,000 and insurance-in-transit Rs.
5,000. The company availed the discount & installed the machinery at the cost of Rs.
35,000.
The estimated useful economic life of the asset is 10 years with the residual value of Rs.
50,000.
Calculate:
(1) The cost of the asset to be capitalized for balance sheet purpose;
(2) The annual depreciation expense for year 20X3under straight line depreciation; &
(3) The annual depreciation expense for year 20X4under declining balance method.
Solution:
(1) The cost of the asset to be capitalized for balance sheet purpose is 500,000
Calculation:
Paid cash for machinery purchase
List price of machinery 500,000
Less 2% discount (500,000*2/100) 1,000
Paid Cost for machinery 490,000
Purchase
Cost of asset capitalized for balance sheet
Calculation:
Paid cost for machinery purchase 490,000
Add Transportation expense 20,000
Add Insurance in transit 5,000
Add Installation expenses 35,000
Cost of asset capitalized for balance 550,000
sheet.
(2) The annual depreciation expense for year 20X3under straight line
depreciation
Calculation:
Depreciation expense under straight line method = Cost – Residual Value / N
= 550,000 – 50,000 / 10
= 500,000 / 10
= 50,000 Rs.
(3) The annual depreciation expense for year 20X4under declining balance method.
Calculation:
Year Details Depreciation Written Down Value
Depreciable Cost 550,000
20 * 3 550,000 * 22% 121,000 429,000
20 * 4 429,000 * 22% 94,380 3,34,620
First waly k bary mren I'm not sure but I think the rate used should be 15-20% because business wants to change its policy from 2012 onwards and the balance sheet is prepared on 31st dec. 2012
Aur 2nd men shayad loss (balance amount) p/l account men charge hoga us sal k jis men building ko revalue kiya gaya.
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In question A, You need to understand first what type of business are going in the above company. Second depreciation would not apply on land because of its life not fixed. U may calculate last depreciation done in inventory (only in this case) by applying previous and new rates....variances would be listed to know the exact inventory value at the of Dec-2012.
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a reduction in value in inventory is not possible in term of depreciation until or unless U fully understand "nature of business" clearly defined. Most of the business have inventory with its expiry date/bar codes system which indicates that items expired or to be expired....In automobile company either inventory which is available have limited life or items which are finally produced in shape of CAR are not going to sale because of less market growth.....So in the second case, you would charge depreciation according to company policy which has been mentioned. Otherwise it would lead to cost of goods sold and closing balance which require in the financial statement.....So in my opinion there would be no depreciation charged on both inventory and land in this case...
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In second question: there are two methods being used in revaluation of assets, cost methods and revaluation method surplus methods....In case of surplus you would increase assets value (Assets Dr and Rev.Surplus Cr.) and in case of loss you need to reverse it: Rev. Surplus Dr. Assets Cr. just add your understanding in shape of logicl facts
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Just mention that no depreciation would be charged on inventory and land, reason: there is no fixed life of land as well as inventory returns its value after sales of goods. simple
Alloy Manufacturers Limited (AML) is a well-known company working in the automobiles Alloy industry. Mr. Naseer is working as accounts manager at AML and has more than 05 years of relevant experience. His major responsibilities include looking after accounting matters for accounting of fixed assets – incorporation, maintenance, depreciations, revaluation, and disposal etc. as per accounting rules, IASs and other related laws.
a) ALM has been charging depreciation at the rate of 10%-15% from 2001 to 2012 on its all fixed assets. From 2012 onwards, the management has decided to change its depreciation rates from 15%-20%. Balance sheet of AML as at December 31, 2012 has carries the value of inventory and Land at Rs. 850,000 and Rs. 2,000,000 respectively.
As a student of accounting, you are required to suggest that at which rate business should charge depreciation on inventory and land from year 2012 and onwards? Support your answer with logical reasons.
b) From year 2005 onwards, AML has also been bringing forward “Revaluation surplus”. But in year 2012, business incurred a loss on revaluation of its Buildings. You are required to suggest that what will be the accounting treatments of this loss? Support your answer with logical reasons.
