MUHASEBE II

They are not acquired for resale.

The matching principle indicates that the revenues of a period must be matched with the expenses of the same period for calculating the profit/loss of the period.

Total price= 150.000 +10.500 +5000 = 165.500

The cost of the land includes the following items; – purchase price – brokerage commission – survey and legal fees – property taxes in arrears – taxes assessed to transfer the ownership on the land – cost of clearing the land and removing unwanted buildings.

Installments are not included in the cost of the land. These type of separate long-lived assets are called land improvements.

3,450,000 +1,125,000 =3,575,000

Capitalization means recording the expenditure as an asset.

All assets, except land, lose their ability to provide services and wear out as they are used.

In order to measure the depreciation, three elements must be known;

The cost of the long-lived asset - The estimated residual value of the long lived asset - The estimated useful life of the long-lived asset

Double− Declining Balance Depreciation = (Cost − Accumulated Depreciation)x 2/ Useful Life

=(280.000 +20.000 - 0)  x 2/5= 120.000 for the year 2018

= (300.000 - 120.000) x 2/5 = 72.000 for the year 2019

Assets are defined as the economic resources acquired by the business in order to benefit from them in the future. In fact, there is an expectation for the businesses to use the assets in their operations. Some of these assets can be converted into cash, sold, collected and consumed within one year or operation cycle which is shorter but some of the assets will be used in operations for more than a year. The first group of assets are called current assets whereas the latter is called non-current assets (long-term assets). Non-current assets are the assets that are acquired to use in the operations of the business for several years. Besides these assets, receivables that have due dates of more than one year will also be reported under non-current assets. In this chapter we will focus on Property, Plant and Equipment which generally holds the largest portion in noncurrent assets. The correct answer is D.

First of all, for an economic resource to be recognized as an asset, it must have a capacity of providing future benefit. Secondly, it must be controlled by the business and lastly the transaction that caused future benefit and control must occur in the past. The control property here indicates that an economic resource must be fully under control of a business but other parties don’t have a right of providing benefit from it. When the business rents a building to use in the operations, it cannot be recognized as an asset because the business doesn’t have full control on building. The correct answer is B.

Property, plant and equipment assets have the following major characteristics:  They are acquired for use in operations and not for resale: Because those assets are acquired for use in operations for several years, they are recognized under non-current assets. 

They are in long-term in nature and usually depreciated: Property, plant and equipment assets provide economic benefit for several years. This means that within the revenue the company earned these assets have contributions.

They possess physical substance: Property, plant and equipment have physical existences. They are also called tangible assets because of this characteristic.

The correct answer is D.

There are also some expenditures made for building and these expenditures yielded as extending the useful life of the asset and/or increasing the capacity of the asset. These kinds of expenditures must be capitalized. Capitalization means recording as an asset. In this context, if an expenditure extends the useful life and/or increases the capacity of an asset, it must be added to the cost of the related asset. The correct answer is B.

There are also some regular maintenance operations during the life of property, plants and equipment. As for the building, it may be the inside paintwork, some repairs, etc. These expenditures will not be added to the cost of the building, because they do not extend the useful life or increase the capacity of the asset. These kinds of expenditures will be recognized as a period expense and are debited to Repairs and Maintenance Expense account. The correct answer is C.

A capital expenditure (balance sheet expenditure) is debited to an asset account because it increases the asset’s capacity or efficiency or extends the asset’s useful life. A capital expenditure is reported on the balance sheet as an asset. The correct answer is A.

These costs incur only at the initial recognition of machinery and equipment. In other words, for the first recognition of these assets, expenditures made for bringing them to their initial use are capitalized. Assume that the machinery has been installed and the company is using them. After three years of using, the company needs to move and settle to a new location. In this case, the expenditure for disassembling and reassembling the machinery, transportation charges, insurance during transportation, etc. will not be capitalized. They will be recorded as period expenses. The correct answer is A.

The cost of the vehicles include the purchase price and other necessary expenditures made to bring them to their intended uses. If the expenditure made for vehicles extends the useful life of the vehicle and/ or increases the capacity, like modification or engine renewal, then these expenditures will be capitalized. But the regular maintenance expenditures such as oil change or minor engine repairs will be recorded as period expenses. The correct answer is D.

Straight-line depreciation method allocates the depreciable cost of the asset equally to its useful life and is calculated as follows:

Depreciable Cost = Cost of the asset – Residual value

Straight − linedepreciation = DepreciableCost x 1 / Useful life

The residual value (also called salvage value) and the useful life of the asset are estimations. The company should estimate the cash value of the asset at the end of its useful life. In other words, residual value is the amount that the company will receive when it is sold at the end of its useful life. By considering together, the company will find out the depreciable cost of the asset. Depreciable cost is the cost when residual value is subtracted from capitalized cost of the asset. The correct answer is E.