Question

24a) The interior of thew building is renovated, extending the useful life of the building by 10 years. Is this a revenue expenditure or a capital expenditure? Type in 1 for revenue expenditure or type in 2 for a capital expenditure.

24b) A cleaning firm is paid $150 per week to clean the carpets in a building. Is this a revenue expenditure or a capital expenditure? Type in 1 for revenue expenditure or type in 2 for a capital expenditure.

24c) On which financial statement if Loss in Disposal of Plant assets recorded? Type in 1 for income statement; type in 2 for statement of retained earnings; type in 3 for balance sheet.

24d) When an exchange of similar plant assets is said to have "commercial substance", what does that mean?

Answer 1

Depreciation=(asset cost-residual value)/estimated life

=(120000-10000)/8=$13,750

At end of 2017 , 4 years passed and the accumulated depreciation of the device

1)=4*13750=$55,000

2) Book value of the device=Device initial value-accumulated depreciation

Device before modification=120000-55000=$65,000

Device after modification = Device before modification+ amount spent afterwards

=65000+45000=$110,000

3)Annual straight line Depreciation=(asset cost-residual value)/estimated life

New asset value after modification=$110,000

Residual value=$4,880

Years of life=6 years

=(110000-4880)/6=$17,520

a)Contingent liabilities are usually recorded when it is certain in future that money will be paid. It means the probability is high and amount to paid is known exactly then it is recorded.

Assets: No effect

Liabilities:

EPA fines payable=$916,500

Litigation claims payable=$257,025

Stockholder equity:

Retained earnings=$(1,173,525)

Statement of cash flows:

No effect

Income statement:

Damage awards and fine expense: $1,173,525

b)Disclose the potential for litigation in a notes disclosure.

Revenue expenditure is one which is done short term benefit while the capital expenditure is done for long term benefir usually more than a year. Revenue expenditure is charged to expense for year it occurred while the capital expenditure is charged through depreciation expense based on life of the asset.

24a)2 . since here it the spend will increase life of asset by 10 years so it is capital expenditure

24b) 1 since here the spend is for short term a week so it is revenue expenditure

24c)1. Loss in disposal of plant asset is recorded in income statement to show it as expense to company

24d) This means it will add value to the organization as we expect future cash flow for this. If the value of asset exceeds the book value then we record gain and if less than book value then it is recorded loss