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

Building 550 000
Less Accumulated Depreciation 55 000$495 000

Building 550 000 is the amount been paid for building at the time of purchase. Accumulated depreciation 55 000 is the total depreciated of building since it was first purchase. Carry amount 495 000 is the purchase value of the building less the depreciated amount; this is the book value of the building. The carry amount has no effect of the current market value, it do not represent the true value or selling price of the building at current time.

iii) Heath wants to know if he still has to include depreciation expense in the income statement as in the current year excluding the depreciation expense would increase the profit figure. He wants to record a higher profit figure so that he can get a better price for his business.

In income statement Building depreciation expense must be record, it is a cost in relation to business operation ( Heath use the building to operate his business). Excluding depreciation will understate expense over state profit and over state income tax liability, but it does not guarantee better sale value, when purchasing a company most investor or purchaser will need to look 3 year profit and lost statement not just this year, as comparative method this will make the company look like there is something to hide and will have revert effect. The purchase might choose not offer good value due to unjustified record. [3]

B.

i)Define Assets and Income as used by accountants by outlining the three (3) parts of the definitions concerned. Asset is anything that has economic value and own individually or by business, this value must able to convert to cash. To explain in accounting term we can look into the balance sheet, (Asset = Liability + Equity), here asset are divide into two categories as current and non-current. Current Assets are cash,...
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