Question

You are the assistant to the Financial Director of TreesRUs Plc who primarily provide forestry and landscaping services to large organisations. The Financial Director has recently been appointed and he is considering the accounting treatment of certain transactions.

Specifically, he has noted the following transactions during December 20X9:

1. Private Hospital Donation

       TreesRUs has given a £150,000 donation towards the cost of a new private hospital in the nearby town. The hospital has extensive grounds and the donation has been given following a verbal promise by the Hospital’s Operations Director that all landscaping services and garden maintenance work will be given to TreesRUs over the next three years. However, there is no signed contract in place. TreesRUs have estimated that if they are awarded this work they could possibly achieve profits of approximately £200,000 per year.

2. Managing Director Contract

TreesRUs has signed a contract to pay its managing director £400,000 per annum for the next three years. He has agreed to work full time for the company over that period.

3. Free Lawnmowers

       TreesRUs took delivery of four ‘ride-on’ lawnmowers for free. The typical trade price of these lawnmowers would be £3,000 each. They were given these lawnmowers for “nothing” on the agreement that TreesRUs would provide gardening services to the supplier’s Headquarters over the next couple of months. Completion of this task will mean that no cash need be paid for the lawnmowers.

REQUIRED:

a)    The definition of an asset contains the following key phrases:

• “economic resource”                                  
• “controlled by an entity”                            
• “past events”                                             

Explain your understanding of the meaning and scope of these phrases.

Answer 1

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it's manufacturing equipment or a patent.

Key takeaways

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.

Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations.

An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses or improve sales, regardless of whether it's manufacturing equipment or a patent.

Types of Assets

When it comes to businesses, assets are usually classified by convertibility (current or fixed assets), physical existence (tangible or intangible assets), and usage (operating or non-operating assets).

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