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a.
Identify the errors in the
a.
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Explanation of Solution
Depreciation:
Depreciation is an expense due to regular use and consumption of capital assets. Depreciation is generally calculated by using Straight line or
Rectification of
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Accumulated depreciation-P4 | 150,000 | |||
| 150,000 | |||
(To rectify the opening balance of accumulated depreciation.) |
Table (1)
- Accumulated depreciation-P is a contra asset and it is decreased by $150,000. Therefore, accumulated depreciation-P account is debited with $150,000.
- Retained earnings are income and it is increased by $150,000. Therefore, retained earnings account is credited with $150,000.
Rectification of depreciation account for asset P:
Date | Account Title and Explanation | Post Ref. |
Debit ($) (Thousand) |
Credit ($) (Thousand) |
Accumulated depreciation-P2 | 75,000 | |||
Purchases | 7,500 | |||
Cost of goods sold | 67,500 | |||
(To rectify the depreciation expense of asset P for the year.) |
Table (2)
- Accumulated depreciation-P is a contra asset and it is decreased by $75,000. Therefore, Accumulated depreciation-P account is debited with $75,000.
- Purchases are expenses and it is decreased by $7,500. Therefore, Purchases account is credited with $7,500.
- Cost of goods sold is an expense and it is decreased by $67,500. Therefore, Cost of goods sold account is credited with $67,500.
Rectification of depreciation account for asset C-B:
Date | Account Title and Explanation | Post Ref. |
Debit ($) (Thousand) |
Credit ($) (Thousand) |
Accumulated depreciation-C-B6 | 194,000 | |||
General and administrative expense | 194,000 | |||
(To rectify the depreciation expense of asset C-B for the year.) |
Table (3)
- Accumulated depreciation-C-B is a contra asset and it is decreased by $194,000. Therefore, Accumulated depreciation-C-B account is debited with $194,000.
- General and administrative expense is an expense and it is decreased by $194,000. Therefore, General and administrative expense account is credited with $194,000.
Working Notes:
1. Computation of depreciation for the year for asset P:
2. Computation of rectification of depreciation for the year for asset P:
3. Computation of opening balance of accumulated depreciation for asset P:
4. Computation of rectification of opening balance of accumulated depreciation for asset P:
5. Computation of depreciation for the year for asset C-B:
6. Computation of rectification of depreciation for the year for asset C-B:
b.
Explain the two
b.
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Explanation of Solution
Audit procedures that could be conducted for additions to PP&E are listed as follows:
- Verification of Documents: Invoice of the assets and the related installation expenses could be verified to check the accuracy of the particulars recorded along with asset’s classification and amount.
- Physical existence and Valuation: Asset’s physical existence could be verified along with the appropriateness of the value recorded. Value can be accessed on the basis of condition of the asset and brand.
c.
Compute the gain or loss from the sale of assets. Also, explain the amount of
c.
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Explanation of Solution
Computation of gain or loss from sale of Assets:
Particulars | Amount ($) |
Loss on sale of Asset C-A1 | 542,000 |
Profit on sale of Asset A-1 2 | 1,000 |
Total loss | 541,000 |
Table (4)
Computation of cash flow from investing activities:
Particulars | Amount ($) |
Purchase of asset B-2 | 42,000,000 |
Add: Purchase of asset C-B | 3,500,000 |
Add: Purchase of asset A-2 | 22,000 |
Less: Sale proceeds of asset C-A | 500,000 |
Less: Sale proceeds of asset A-1 | 1,000 |
Cash flow from investing activities |
Table (5)
Working Notes:
1. Computation of gain or loss from sale of Asset C-A:
Particulars | Amount ($) |
Gain or loss from Asset C-A: | |
Book value of asset | 5,000,000 |
Less: Accumulated depreciation | 3,958,000 |
Remaining value (X) | 1,042,000 |
Sale proceeds (Y) | 500,000 |
Loss on sale of Asset C-A | 542,000 |
Table (6)
2. Computation of gain or loss from sale of Asset A-1:
Particulars | Amount ($) |
Gain or loss from Asset A-1: | |
Book value of asset | 15,000 |
Less: Accumulated depreciation | 15,000 |
Remaining value (P) | 0 |
Sale proceeds (Q) | 1,000 |
Profit on sale of Asset A-1 | 1,000 |
Table (7)
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