ACC2001 Principles of Accounting

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Introductory Accounting (ACC2001)

Added on 2020-02-24

ACC2001 Principles of Accounting

Introductory Accounting (ACC2001)

Added on 2020-02-24

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Solution-1Part-(a)Issue - The manager of Golf Gear often debits the cost of repair or maintenance ofequipment to Plant and equipment.Explanation - Repairs and Maintenance are necessary for maintaining the assets inproper condition. Repairs and maintenance are of two types, one is ordinary repairsand maintenance and other is Major repairs and maintenance which are done toincrease the productivity or life of the assets. Ordinary repairs are done formaintaining the assets in a good working condition and includes expenses likeoiling, lubrication, small repairs, etc. and are charged off to the P&L whereas majorrepairs and maintenance are those which are done with an intention to increase theproductivity or life of the assets and are considered as capital expenditure and areadded to the cost of assets. Further as per Accounting standard issued byAustralian Accounting Standard Board, the ordinary repairs and maintenance doesnot qualify as an asset since they have no future economic benefits.Reference of Accounting Standard - As per of AASB 116, “The cost of an item ofproperty, plant and equipment shall be recognized as an asset if, and only if: (a) itis probable that future economic benefits associated with the item will flow to theentity; and (b) the cost of the item can be measured reliably.”Conclusion - So, debiting cost of ordinary repairs or maintenance of equipment toPlant and equipment is a violation of accounting standard AASB 116 “Property, Plant& Equipment” as it does not meet the recognition criteria of standard. Manager’s View - Manager might be of the view that since the cost relates to theassets so it should be added to the value of the assets. That’s why he added thecost to the asset instead of charging it to the P&L. Part-(b)Issue - The manager of Castle Industries often buys plant and equipment and debitsthe cost to Repairs and maintenance expense.Explanation – Plant & Equipment are those assets of the company which are vital forthe company’s operations and benefits the company in future in one way oranother. Its example includes machinery engaged in productions, office equipmentwhich facilitate the manufacturing etc. As they have economic future benefits sothey are required to be capitalized. This fact is widely accepted in accounting worldas well as mandated by various accounting standards bodies. Even the recognitionCriteria of AASB 116, also clarifies that any asset which has future economic

benefits and whose cost can be identified is required to be capitalized and shown asPlant & Equipment in financials.Reference of Accounting Standard - As per of AASB 116, “The cost of an item ofproperty, plant and equipment shall be recognized as an asset if, and only if: (a) itis probable that future economic benefits associated with the item will flow to theentity; and (b) the cost of the item can be measured reliably.”Conclusion - So, purchasing Plant & Equipment and debiting its cost to repairs andmaintenance is a violation of accounting standard AASB 116 “Property, Plant &Equipment” as well as accepted good practice. Manager’s View - Manager might have does so because he wants to reduce theprofit for the year by charging the entire cost of assets to P&L. By reducing profit,he can reduce the tax liability, keeping the cash flow intact. This is a commonpractice used to window dressed the profits of the company.Part-(c)Issue - Some people suggest that, since many intangible assets have no valueexcept to the business that owns them, e.g. the website, they should be valued at$1.00 or zero on the balance sheet.Explanation - Intangible assets are those assets which have no physical substancebut have benefits to the business of the company. It commonly includes goodwill,patent, trademark, etc. Generally, these assets are not purchased from anyone,these are created or self-developed. So, these assets always involve some amountof cost incurred either directly or indirectly. So, we can say that every asset has avalue. It is agreeable fact that many intangible assets have no value except to thebusiness that owns them, but to create such assets, the business might haveincurred some or other expenses. For example, for creating website, the businesswill have purchased the domain name, will have incurred expenses on its designingand all, etc. Only after incurring all these expenses, the business will be able to usethat website. So, all these expenses associated with the intangibles should berecognized as intangible assets. Reference of Accounting Standard - Moreover, AASB 138 “Intangible Assets” alsostates that any intangible that has expected future economic benefits to the entityshould be recognized as an asset and these types of intangibles should be recordedat cost. And if the asset is created or acquired at no cost or for a nominal cost, theasset should be recorded at fair value on the transaction date (i.e. acquisition dateor its creation date).

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