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Financial Statement Preparation

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Added on  2020-03-16

Financial Statement Preparation

   Added on 2020-03-16

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Solution-1Financial statement preparation is one of the critical activities performed by accountant. It normallyincludes the actual expenses incurred along with the estimates. This estimate may belong to provision fordoubtful debts, depreciation, etc. For estimating the depreciation amount, following information arerequired:a)Cost of assetb)Useful life of assetc)Residual value of asset after useful lifed)Method of depreciation calculationThe above elements of depreciation estimation have been explained below:a)Cost of assetCost of asset not only includes the cost paid to the supplier but other costs likefreight charges, installation charges, etc (Bragg and Bragg, 2017). This is the starting point inestimating the cost of depreciation. All costs which are incurred to bring the assets in such aposition that asset can be put to use, are considered part of the cost of asset. For example, amachinery was purchased. In such a case, cost of asset would include purchase cost, freightcharges (if any) paid to bring machinery to the factory, its installation charges, other expensesincurred before the asset is put to use.b)Useful life of asset The period for which asset will be used by the organisation without anymajor upgradation or maintenance is called useful life of the asset. It is a period up to whichorganisation expect that asset will generate economic benefits. Depreciation on the asset ischarged during this period.c)Residual Value of asset after useful life – This is the amount which is expected to recover fromsale of the asset after the useful life of asset has completed. This amount itself is an estimate. Thisamount is received at the end of the useful life of asset. In some cases, depreciation is calculatedon the net amount remained after residual value of asset is deducted from the cost of asset.d)Method of depreciation calculation There are many ways for calculation of depreciation onany asset. Some of the methods of depreciation calculation are (Investopedia, 2017):Straight-line DepreciationWritten Down or Diminishing Balance MethodUnit-of-Production DepreciationHours-of-Service DepreciationAccelerated DepreciationSum-of-Year MethodDouble-Declining-Balance MethodOrganisation needs to select one of the method to calculate depreciation. We have explained themost popular two method of depreciation below:
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i.Straight line method – This is most simple method for calculation of depreciation. In thismethod, residual value of asset is subtracted from cost of asset. Remaining amount isthen divided by the useful life of the asset (in years or months) to arrive at depreciationamount (annual depreciation amount in case useful life is in years or monthlydepreciation amount in case useful life is in months). In this method, depreciation amountremains constant over the life of asset.ii.Written down or diminishing balance method – In this method, depreciation in each yearkeeps on reducing. In the first year, depreciation is calculated on the cost of asset at somepercentage rate driven from the useful life. In the second year, depreciation is calculatedon the cost of assets minus first year depreciation at the same percentage rate. In the thirdyear, depreciation is calculated on the cost of assets minus first year and second yeardepreciation at the same percentage rate and so on till the useful life of asset iscompleted.References:Investopedia. (2017). Types Of Depreciation. [online] Available at: http://www.investopedia.com/walkthrough/corporate-finance/2/depreciation/types-depreciation.aspx [Accessed 6 Oct. 2017].Bragg, S. and Bragg, S. (2017). Which costs to assign to a fixed asset. [online] AccountingTools. Available at: https://www.accountingtools.com/articles/which-costs-can-i-assign-to-a-fixed-asset.html [Accessed 6 Oct. 2017].Solution-2Journal Entries in the books of Midnight Boil Ltd.DateParticularsDr./ Cr. Debit Credit 30-Jun-18Capital Work in Progress A/cDr.12,550,000 To Cash A/c12,550,000 (Expenses incurred for construction)30-Jun-18Capital Work in Progress A/cDr.4,001,500 To Cash A/c4,001,500 (Expenses incurred for construction)01-Jul-18Nuclear Power Generator A/cDr.16,551,500 To Capital Work in Progress A/c
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16,551,500 (Contraction completed and asset recognised in books)01-Jul-18Nuclear Power Generator A/c (2,100,000/(1 + 10%)^10)Dr.809,641 To Provision for Asset Retirement Obligation A/c809,641 (Provision for dismantling cost accounted for)30-Jun-19Interest expense A/cDr.80,964 To Provision for Asset Retirement Obligation A/c80,964 (Interest expenses incurred on dismantling cost)30-Jun-24Interest expense A/c (as per calculation below)Dr.130,393 To Provision for Asset Retirement Obligation A/c130,393 (Interest expenses incurred on dismantling cost)Calculation of Interest expensesDate Interest expenses Provisionfor Asset Retirement Obligation 30-Jun-18- 809,641 30-Jun-1980,964 890,605 30-Jun-2089,060 979,665 30-Jun-2197,967 1,077,632 30-Jun-22107,763 1,185,395 30-Jun-23118,540 1,303,935 30-Jun-24130,393 1,434,328 30-Jun-25
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