Departures from GAAP. On January 1, Graham Company purchased land (the site of a new building) for $100,000. Soon thereafter, the state highway department announced that a new feeder road would run next to the site. The effect was a dramatic increase in local property values. Comparable land located nearby sold for $700,000 in December ofthe current year. Graham presents the land at $700,000 in its accounts and, after reduction for implicit taxes at 33 percent, the fixed asset total is $400,000 higher than historical cost with the same amount shown separately in the shareholder equity account Current Value Increment. The valuation is fully disclosed in a footnote to the financial statementswith a letter from a certified property appraiser attesting to the $700,000 value.Required:a. Draft the appropriate auditors’ report, assuming that you believe the departure from GAAP is material but not pervasive enough to cause you to issue an adverse opinion.b. Draft the appropriate auditors’ report, assuming that you believe an adverse opinion is necessary
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Departures from GAAP. On January 1, Graham Company purchased land (the site of a new building) for $100,000. Soon thereafter, the state highway department announced that a new feeder road would run next to the site. The effect was a dramatic increase in local property values. Comparable land located nearby sold for $700,000 in December of
the current year. Graham presents the land at $700,000 in its accounts and, after reduction for implicit taxes at 33 percent, the fixed asset total is $400,000 higher than historical cost with the same amount shown separately in the shareholder equity account Current Value Increment. The valuation is fully disclosed in a footnote to the financial statements
with a letter from a certified property appraiser attesting to the $700,000 value.
Required:
a. Draft the appropriate auditors’ report, assuming that you believe the departure from GAAP is material but not pervasive enough to cause you to issue an adverse opinion.
b. Draft the appropriate auditors’ report, assuming that you believe an adverse opinion is necessary
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 7 images
