Solution of Financial Accounting Problem

>> March 25, 2010


Problem

Sir can u answer these problems....Please !

Financial accounting

Part 1

Rockhampton Ltd has acquired a new machine, which it had installed in its factory. Which of the following items should be capitalized into the cost of the building?
(a) Labor and travel costs for managers to inspect possible new machines and for negotiating for a new machine
(b) Freight costs and insurance to get the new machine to the factory
(c) Costs for renovating a section of the factory, in anticipation of the new machine’s arrival, to ensure that all the other parts of the factory will have easy access to the new machine
(d) Cost of cooling equipment to assist in the efficient operation of the new machine.
(e) Costs of repairing the factory door, which was damaged by the installation of the new machine
(f) Training costs of workers who will use the machine

Provide a one sentence explanation giving the reason for capitalizing or expensing, in each case.

Solution:

a) It is revenue expenditure because, it is routine duty of purchase manager to see and negotiate for new machine. It will not be the part of capital expenditure.
b) It must be capital expenditure and also be the part of machine’s cost.
c) It is also revenue expenditure because there is no increment in fixed asset.
d) It is capital expenditure due to increasing the fixed asset in factory.
e) It is general expense and be revenue expenditure.
f) It is also revenue expenditure. You can ask me why and I can answer, training costs is part of salary of worker not the part of asset. After installing machine by labor, no other charges will add except purchasing of new part of machine. You should also read "Difference between revenue and capital items."

Part 2

Maryborough Ltd has acquired a new building for $500000. It has incurred incidental costs of $10000 in the acquisition process for legal fees, real estate agent‘s fees and stamp duties. Management believes that these costs should be expensed because they have not increased the value of the building and if the building was immediately resold, these amounts would not recouped. In other words, the fair value of the building is considered to still be $500000.

Required:

Explain how Maryborough Ltd should account for the $510000 it has expended with respect to the building.

Solution:

Maryborough ltd should not sell building even for $ 510000 because, he should earn minimum 20% margin. But if Maryborough ltd is providing free services like me, then it should clearly say to purchaser who is purchasing your building

1. Do you eat bread or wheat? He will surely say bread not wheat. In India, the cost of bread is Rs. 20 just two pieces and cost of wheat is Rs. 15 per kg. It means the person who gives you bread in plate calculate the full price of 2 bread after adding following fees.

a) Salary of worker
b) Wheat cost
c) Fire cost
d) Furniture depreciation
e) Lighting cost
f) Rent
g) Depreciation of fan
h) Owner’s profit
i) Depreciation of plate
j) Owner’s Mobile expenses
k) Owner’s petrol expenses
l) Owner’s cable expense
m) Damage of food
n) Inflation in the prices of raw material
o) Insurance bill of employee
p) Gifts of wife
q) Fees of children
r) And many other expenses

Dear purchaser, I am taking minor cost which is the part of building and capital expenditure, so please give me $ 510000 instead of $ 500000. I think that purchaser will agree with you.





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