Q35770931

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Andhra University *

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ACCOUNTING

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Accounting

Date

Nov 24, 2024

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docx

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Q35770931 AID: 1825 | 24/03/2019 [Delimiter] [General guidance] [Section: Concepts and reason] Accounting: Accounting is a process of recording the transactions, classifying them in a specific manner, and then it is the process of summarizing and analyzing to interpret the results. It is a process of preserving the accounts. Financial accounting is a process of preparing reports to provide all financial information to both the internal and external users of an organization. The financial statements that are prepared under the financial accounting are examined by independent certified public accountants, at the yearend, who would express their opinion on the fairness of the reports shown by a company. Straight line method: Straight line method is one of the methods of depreciation where the amount of depreciation charged is the same and does not differ till the useful life of the asset. [Section: Fundamentals] Depreciation: Depreciation is the process of reducing the value of the assets. It is a non- cash expense of the company. The value of assets is reduced due to the wear and tear caused for assets by its usage. Accumulated depreciation: Accumulated depreciation refers to the total depreciation of a fixed asset that is charged to the depreciation expense from the date of purchase of an asset till the life of an asset. It is considered as a contra asset, that is, an asset with a credit balance. It is shown as reduction from the asset value on the balance sheet. The amount of accumulated depreciation increases with the decrease in the value of the asset. Estimated useful life: It is referred as the period that the company expects the fixed cost to be operationally efficient in order to be able to generate revenue. Residual value: It is the remaining value of an asset that is estimated to be recovered after completion of the estimated useful life of the asset or at the disposal of asset. It is also called as salvage value. In other words, salvage value is the value of asset after the asset has been completely used up or has become obsolete. Salvage value is generally based on the value of asset. [Delimiter] [Starting Hint] Based on the information given in the question, describe the depreciation and the accumulated depreciation. [Delimiter] [Step 1] Describe the depreciation and the accumulated depreciation: Depreciation is said to be the method in the accounting which allocates the tangible asset cost over the useful life and will be used in the decline of the value. Accumulated depreciation is the contra asset in the long term it will be reported under the property, plant and equipment in the balance sheet. [Explanation] It is mentioned to calculate the original cost of the machinery and determine when the equipment is purchased. Thus, the accumulated depreciation is the account which shows the total depreciated value over plant assets as on a particular date. The plant assets are reported, net of accumulated depreciation on the balance sheet. Depreciation is the written down value charged against the asset at the end of every accounting period. It is a deferred expenditure, that is, cost incurred in advance to get benefits of the asset in the future years. [Hint for next step] Based on the information given in the question, calculate the original cost of the machinery and determine when the equipment is purchased. [Delimiter] [Step 2] Calculate the original cost of the machinery: Original cost=Accumulated depreciation+Book value =$612,500+$262,500 =$875,000 Therefore, the original cost of the machinery is $875,000. Determine when the equipment is purchased: Current year Year of equipment purchased = Period of valuation =2017 7 2010         

Therefore, the equipment is purchased on 2010. Working notes: Calculate the depreciation of the equipment: Depreciation of Original cost = the equipment Useful life $875,000 10years $87,500      Therefore, the depreciation of the equipment is $87,500. Determine the period of valuation: Accumulated depreciation Period of valuation = Depreciation of the equipment $612,500 $87,500 7   Therefore, the period of valuation is 7 years. [Answer] The original cost of the machinery was $875,000, and the machinery was purchased at the beginning of the year 2010. [Answer End] [Answer Choice: Wrong] The original cost of the machinery was $787,500, and the machinery was purchased at the beginning of the year 2013. [Answer Choice End] [Answer Choice: Wrong] The original cost of the machinery was $875,000, and the machinery was purchased at the beginning of the year 2012. [Answer Choice End] [Answer Choice: Correct] The original cost of the machinery was $875,000, and the machinery was purchased at the beginning of the year 2010. [Answer Choice End] [Answer Choice: Wrong] The original cost of the machinery was $787,500, and the machinery was purchased at the end of year 2011. [Answer Choice End] [Explanation] It is mentioned to calculate the original cost of the machinery and determine when the equipment is purchased. Thus, the original cost is calculated by adding the accumulated depreciation with the book value. Therefore, the original cost of the machinery is $875,000. The year of equipment purchased is calculated by deducting the period of valuation from the current year. The period of valuation is calculated by dividing the accumulated depreciation by the depreciation of the equipment. Therefore, the period of valuation is 7 years. The depreciation of the equipment is calculated by dividing the original cost by the useful life of 10 years. Therefore, the depreciation of the equipment is $87,500. And the equipment was purchased at the beginning of the year 2010. [Common mistakes] To calculate the original cost both the year can be considered. The wrong formula to calculate the original cost of the machinery is as follows: Accumulated depreciation Original cost= Book value Useful life  The correct formula to calculate the original cost of the machinery is as follows: Original cost=Accumulated depreciation+Book value

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