Introduction: appropriate recommendation has been conducted upon accounting for asset. This is done through suggesting appropriate accounting treatments for each of the cases as well as referring to relevant accounting concepts, convention and accounting standards.
The period for which the loan is being borrowed from the bank is not clearly specified, for this reason the concept of prudence must be take into consideration as it suggest that the risk of understatement of liabilities should be very serious, "since understating liabilities leads to overstating net income" (Clare B. Roberts, 2005), standards will now show a common theme of identfying liabilities & assests as clear as possible.
The Financial reporting standard 5 identifies liabilities as "an entity's obligations to transfer economic benefits" (Financial reporting standard, 1994) and because the 2 million is a huge sum it is assumed to be a long term loan which will then be reporting in the balance sheet under liabilities as it is account payable.
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As for the interest rate, it is calculated per annum due to the borrowing being identified as a long term loan. According to accounting treatment for loans, at the end of the financial year the interest rate of £200,000 will be transferred to the profit and loss account and will be written off (Taylor, 2004).
According to accounting treatment for capital expenditure, once the £100,000 is capitalised it is recorded in the balance sheet and profit and loss account. This means once the office block is completed the transaction will appear under assets in the building company for next year and therefore the accumulated depreciation is credited according to the assets year after year, decreasing the book value of the asset (Shanker, 2010).
As per financial reporting standard 15 subsequence expenditure should be capitalised "once it enhances the economical benefits of the asset in excess of its previously assessed standard of performance and should be recognised in the profit and loss account as it is incurred" (Financial reporting standard, 1999).
This illustrated that the £20,000 will be added to the cost of the assets and will be capitalised since it will be going under modification to enhance its performance.
According to accounting treatment for capital expenditure, once the £20,000 is capitalised it will make an entry in the balance sheet under assets as well as the profit and loss account.
Although the managing director senses profitability within the future, he should not go against the prudence concept as it clearly states not to account items unless a sale has been completed (W. Steve Albrecht, 2008). Therefore the managing director should not record any estimated profit. However the prudence concept does suggest that the managing director should take a cautious view of future problems occurring and costs of the business.
Even though sales are expected to increase in the next 2 years, such estimation is hard to measure as it more opinionated than factual.
According to FRS 12 "future costs are not present obligations of the entity resulting from past events, and therefore no provision should be made for them, if the asset is to continue to be used" (Financial reporting standard, 1998). This shows that manufacturing company has gone against the standard, as the firm managed to depreciate the asset for another 2 years while the assets has an expected remaining useful life of four years. In this circumstance, the entity should charge the expenditure of 34,000 to the profit and loss account as it is incurred according to accounting treatment.
This will therefore affect the profit of the year as the profit will be relatively low and in later years the business would be using the machine without suffering any charges in the income statement for the years.
This will result in profits being distorted, and managers would not find it easy to monitor the business performance.
Alternatively the company should turn to the accrual concept and capitalise the subsequence expenditure because it results in the restoration of the asset or replacement of some of it components (Financial reporting standard, 1998).
On the other hand, the £24,000 net book value should appear in the balance sheet under tangible non-current assets as it's an expense which has been capitalised and accumulated depreciation is credited according to the assets year after year, decreasing the book value of the asset and recorded in the profit and loss account (Shanker, 2010).
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The reason for the modification and a 'face-life' was not specified, for this reason we must assume the building to be very old, as well as the construction to be very weak. This is the reason as to why the interior & exterior being repainted and the numbers of repair being carried out. Since the building looks much smarter as a whole, it is expected to generate more sales and once enough profit has been generated the business is then recommended to refurbish the building in order for the building to look new and having a better and stronger construction. This will then extend the life of the building by further years and increase profitability in the future.
As per FRS 15 the 8,000 will be capitalised as its enhancing the "economical benefits of the asset in excess of its previously assessed standard of performance" (Financial reporting standard, 1999).
Since the expenditure is being capitalised the transaction will be recognised in both profit and loss account and balance sheet under assets.
The period for which the expected remaining life of the vehicle is not specified. For this reason declining balance method of calculating depreciation will be used instead on straight line method. This is due to being more realistic reflection of an asset's actual expected benefit from the use of the asset. According to accounting standard (Financial reporting standard, 1999) depreciation is therefore calculated at 10% per annum (calculation shown on appendix 1). Since the book value is net after depretiation for previous years has been deducted (walker, 2006), giving a result of £340. Which is then writen off in the profit and loss account under expence while deducting from the assets in balace sheet according to the accounting treatment. The net book value of £3,060 is subtrated from the offer received of £3,800 resulting in a profit of £740.
In this circumstance, the company should accept the offer since they are making a profit of £740. However the company must take the historical cost concept and going concern concept into consideration as it records values when first acquired. This is to prevent the restate of changes in value. So at the end of the year the asset is recorded in the balance sheet at cost of £3060. No account should be taken of the increase in value from 3060 to 3800. Therefore in the following year the company records the sale of £3,800. This gives rise to a profit of £740 which is recognised in that year.
According to the calculation in appendix 2 this illustrates that the local retail group will be making a profit of £60,000 since the firm knew the value of the tangible net assets is worth 500,000 and it's making an offer of 440,000. On the other hand, the competitor should take the comparability and realisation accounting concept into consideration since it is not recognised as a loss. These concepts implies the ability to compare similar offer with other firm in order to gain the best offer possible as well as be able to realise at what point to asses profit. As a recommendation the competitor is advice not to accept this offer due to complication occurring within their financial statement since a loss is gained which could later impact their performance.
According to accounting treatment "where a tangible fixed asset is revalued its carrying amount should be its current value at the balance sheet" (Financial reporting standard, 1999).
As per accounting standard 5, copyright is identified as intangible asset (Financial repoting standard, 1994). For this reason the calculation of depreciation (as shown in appendix 3) must be conducted in order to gain the accurate net book value. This will then help allocate the accurate account entries for this entity to the appropriate financial statement. According to accounting treatment the costs of intangible assets have to be capitalised as they have to be recorded as assets not expense (Day, 2008). The account entries for the financial year of 30th September,2010 will be entired in profit and loss account as well as balance sheet. Therfore the depreciation of £19,000 will be charged in profit and loss account, as the fair cost of using the copyright of the book. The remaining net book value of £76,000 will be shown in the balance sheet.
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According to financial standard 5 " The Board believes that the value of intangible assets at any one date eventually disappears and that the recorded costs of intangible assets should be amortized by systematic charges to income over the periods estimated to be benefited." (Financial reporting standard, 1994).
This illistrates that the publishing company is able to write off this intangible asset for this period of 5 years.
DISCLOSURE NOTES TO THE MAIN FINANCIAL STATEMENTS
The following financial statement shows the entries of depreciation and net book value of the copyright at the end of the second financial year. The depreciation provision is a mechanism used to allocate the cost of an asset as fairly as possible over its useful life (Walker, 2006). The straight-line method of calculating depreciation is used to determine the result. This is due to depreciation being charged each year throughout the life of the asset, making comparison easier.
Clare B. et al. (2005) International financial reporting. Great Britain : Financial times professional LTD.
Day, J. W. (2008). THEME: INTANGIBLE ASSETS. Great Britain:
Financial Reporting Council.
Financial reporting standard (1998) 12 Provision, contingent liabilities and contindent assets. Available at: http://www.frc.org.uk/images/uploaded/documents/FRS%2012.pdf [Accessed: 2 February 2011].
Financial reporting standard. (1999). 15 Tangible, Fixed assets. Available at: http://www.frc.org.uk/images/uploaded/documents/FRS%2015.pdf [Accessed: 2 February 2011].
Financial reporting standard. (1994). 5 Reporting substance of transaction. Available at: http://www.frc.org.uk/images/uploaded/documents/FRS%205.pdf [Accessed: 1 February 2011].
Shanker, S. (2010). Capital Expenditure Accounting Treatment. Available at: http://www.ehow.com/about_7285561_capital-expenditure-accounting-treatment.html [Accessed: 1 February 2011].
Taylor, P. (2004) Book-keeping & accounting for the small business. Great Britain: Cromwell Press.
W. Steve Albrecht, J. D. (2008). Accounting: Concepts and Applications. USA: Thomson south-western.
Walker, J. (2006) Accounting in a nutshell. Burlington: Elsevier Ltd.
10 % of depreciation per annum
340 will be shown as an expense in profit and loss and deducted from assets in balance sheet.
3060 will be the net book value.
The following calculation is conducted in order to see whether a profit or a loss would be made within this offer