Assignment 2 – Acg11 Accounting for Business
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Question 1: Accounting concepts A. The owner of Computer World, Heath is confused about the depreciation expense for building in the income statement and the carrying amount in the balance sheet, and would like you to explain the following to him:
i) Why is depreciation expense recoded in the income statement for the building as Heath believes the building is worth more now than when he bought it five years ago? [3] In order to explain building depreciation we must separate land and building, ( a property valuer can provide a separate estimate between cost of land and building),the reason for this separation is land cannot be depreciated but building can. Let’s look at definition of Buildings is a noncurrent asset and the cost of a building (excluding the cost of the land). Buildings will be depreciated over their useful lives, through the business operation activity wear and tear of the building will take place, therefore it need to record an operation expense by debiting the income statement account Depreciation Expense and crediting the balance sheet account Accumulated Depreciation (record of accumulate value loss of building over time). Even though the value of the building might increase due to property market influence, we still need to record this because it is cost to the business and depreciation expense has an effect on income tax.
ii) Heath is considering selling the business now due to the downturn in the economy and buying a retail fast food business. He wants to know whether the carrying amount of $495 000 for building in the balance sheet reflects the current market value or selling price. Explain to Heath what each of the following three numbers represent. [4]
Computer World Balance sheet extract As at 30 June 2012
Question 1: Accounting concepts A. The owner of Computer World, Heath is confused about the depreciation expense for building in the income statement and the carrying amount in the balance sheet, and would like you to explain the following to him:
i) Why is depreciation expense recoded in the income statement for the building as Heath believes the building is worth more now than when he bought it five years ago? [3] In order to explain building depreciation we must separate land and building, ( a property valuer can provide a separate estimate between cost of land and building),the reason for this separation is land cannot be depreciated but building can. Let’s look at definition of Buildings is a noncurrent asset and the cost of a building (excluding the cost of the land). Buildings will be depreciated over their useful lives, through the business operation activity wear and tear of the building will take place, therefore it need to record an operation expense by debiting the income statement account Depreciation Expense and crediting the balance sheet account Accumulated Depreciation (record of accumulate value loss of building over time). Even though the value of the building might increase due to property market influence, we still need to record this because it is cost to the business and depreciation expense has an effect on income tax.
ii) Heath is considering selling the business now due to the downturn in the economy and buying a retail fast food business. He wants to know whether the carrying amount of $495 000 for building in the balance sheet reflects the current market value or selling price. Explain to Heath what each of the following three numbers represent. [4]
Computer World Balance sheet extract As at 30 June 2012