Question

Short answers

1. Briefly describe how a company should account for expenditures subsequent to the acquisition of an asset.

2. Briefly describe how a company should account for an asset that is taken out of production and put up for sale.

Answer 1

1) Whenever we aquire an asset for our business purpose. It should be treated as a Capital expenditure of the company. The whole cost of asset should not be ammortized in the year of purchase. The ammortization of this asset is done on the basis of life of the asset which is know as depreciation. we will depreciate the asset and debit the profit and loss account with the value of depreciation charged on asset annually. Depreciation is a non cash expense on which the company will gain the Tax as when we shown this in the profit and loss (Income & Expenditure Account) our profit will decreases due to that we will pay a lower tax to the government. Basically depreciation is charged by 2 method:

- Written down value ( Diminishing method )

- Straight line method

2) As i discuss in the above para about the life of the company. Asset is only used upto the useful life which is 5 year in most of the cases. After that it will be scrap for that company But still if we recover some amount from that asset then we will compair the amount with the written down value (WDV) of the asset till the last year of Asset's life and see if the WDV of the asset is lower than the Scrap value (which is also kown as salvage value) then the company is in gain and transfer the gain amount to the profit and loss account and vice versa.

I hope you are satisfied with this answer. still if you have any doubt then then you can reach me through comment section I really happy to help you.

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