Repair or Maintenance of Equipment to Plant and Equipment
Added on -2020-02-19
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Solution-1Sr. No.Issue/ConcernConclusionReferenceJustifications1The manager of Golf Gear often debits the cost of repair or maintenance of equipment to Plant and equipment. Yes, debiting cost of repairs or maintenance of equipment to Plantand equipment is a violation of accounting standard AASB 116 “Property, Plant & Equipment” as it fails to meet the recognition criteria prescribed under standard.As per AASB 116 -“The cost ofan item of property, plant andequipment shall be recognizedas an asset if, and only if: (a) it is probable that futureeconomic benefits associatedwith the item will flow to theentity; and(b) the cost of the item can bemeasured reliably.”Since, repair and maintenance does not give anyfuture economic benefits as they does notincreases the life or productivity of the assets,that’s why it should not be added to the cost ofassets rather it should be charged off as anexpense to the Statement of Profit and Lossaccount. Further, it is also a violation of acceptedgood practice as good practice is to follow theaccounting standards and general industrypractice is also aligned with accountingstandards that is to charge off repairs andmaintenance to P&L.2The manager of CastleIndustries often buysplant and equipmentand debits the cost toRepairsandmaintenance expense.Yes, purchasing Property, Plant &Equipment and debiting its cost to repairs and maintenance is a violation of accounting standard AASB 116 “Property, Plant & Equipment” as well as accepted good practice.(a)As per the recognitionCriteria of AASB 116:“The cost of an item of property,plant and equipment shall berecognized as an asset if, andonly if: (a) it is probable thatfuture economic benefitsassociated with the item willflow to the entity; and (b) thecost of the item can be measuredreliably.”As per AASB 116, any transaction that meets therecognition criteria should be classified asproperty, plant and equipment and should bedepreciated over its life. Since, purchase of plantand equipment meets the both recognitioncriteria, i.e. it has future economic benefits andits cost can be reliably measured so it should beclassified as Property, Plant & Equipment. 3Some people suggest that, since many intangible assets have no value except to the business that owns them, e.g. the website, The view that intangible assetsshould be recognized at $1 or $0is not a valid view. As per AASB 138 “IntangibleAssets”, any intangible that hasexpected future economicbenefits to the entity should berecognized as an asset and thesetypes of intangibles should beEvery asset has a value. It is agreeable fact thatmany intangible assets have no value except tothe business that owns them, but to create suchassets, the business might have incurred some orother expenses. For example, for creatingwebsite, the business will have to purchase the
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