Preparing Financial Statements of Company
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Added on 2020-04-07
Preparing Financial Statements of Company
Added on 2020-04-07
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Solution-1Preparing financial statements is a very important and breath taking exercise for any organization. Itsaccuracy is of utmost importance and each and every element is to be decided and calculated verycarefully, otherwise the output can be drastic. For determining the depreciation for the first year, we needthe following information (Accounting, Financial, Tax, 2017):1.Cost of assets2.Useful life of assets3.Residual Value4.Depreciation Method5.Method of ValuationLet’s discuss these factors in detail:1.Cost of assets – The costpaid for the asset is the important part for calculation of depreciation.This cost includes the purchase price of the assets or any other costs incurred in bringing theassets to its present location and condition and required for use of the assets. These includefreight paid, installation charges, taxes paid, etc.2.Useful life of assets – Useful life means the period up to which the assets can generate futureeconomic benefits or can be used. This life is required to estimate the benefits available and fordepreciating the assets so that revenue and expense concept can be matched.3.Residual Value – The amount that would be received at the end of useful life of the asset isknown as residual value. This amount is received when the asset is scrapped or sold at the end ofits life. Residual Value is deducted from the cost of the assets to determine the depreciation exp.4.Depreciation Method – Thereare different types of depreciation methods prescribed by theaccounting standards. The company needs to adopt one method from these. The method chosenshould be related to the economic future benefits provided by the asset. The methods available areas below:a.Straight Line Method – Under this method, to determine the depreciation expense for ayear, the cost of the asset less residual value is divided by the useful life of the asset. Thedepreciation under this method remains uniform over the life. This method is useful forassets whose benefits are expected to be received uniformly over the life (Accounting-simplified.com, 2017).b.Diminishing Balance Method – Under this method, the depreciation charge is higher inthe initial years and keeps on reducing with the life of the assets. Because, thedepreciation is calculated on the written down value (means cost less accumulateddepreciation of earlier years). This is the most popular method as normally the assetsprovide higher benefits in the initial years and their benefits keeps on reducing with thepassage of time (Accounting-simplified.com, 2017).
c.Units of Production Method – This method is best for the machines / assets involved inthe production / manufacturing. Under this method the cost less residual value is dividedby the number of units expected to be produced over the life of the assets and multipliedby the number of units actually produced during the period (Accounting-simplified.com,2017). 5.Method of Valuation – After calculation of depreciation, AASB 116, “Property, Plant andEquipment”, requires the above factors to be reviewed periodically. Further, the assets should bevalued by using one of the two methods prescribed by the standard. These methods are costmodel and revaluation model. The management needs to decide as to which method to adopt. References:1.Accounting-simplified.com. (2017). Units of Production Depreciation Method - Explanation and Examples. [online] Available at: http://accounting-simplified.com/financial/fixed-assets/depreciation-methods/units-of-production.html [Accessed 21 Sep. 2017].2.Accounting, Financial, Tax. (2017). How To Calculate And Record Depreciation [of Fixed Asset]. [online] Available at: http://accounting-financial-tax.com/2009/04/how-to-calculate-and-record-depreciation-of-fixed-asset/ [Accessed 23 Sep. 2017].3.Accounting-simplified.com. (2017). Methods of Depreciation | Accounting-Simplified.com. [online] Available at: http://accounting-simplified.com/financial/fixed-assets/depreciation-methods/types.html [Accessed 23 Sep. 2017].
Solution-2Journal Entries in the books of Midnight Boil Ltd.DateParticulars Debit Credit 30 June, 2018Capital Work in Progress12,550,000To Cash12,550,000(To record expenses incurred on construction of plant)30 June, 2018Capital Work in Progress4,001,500To Cash4,001,500(To record other expenses incurred on construction)1 July, 2018Nuclear Power Plant16,551,500To Capital Work in Progress16,551,500(To record asset)1 July, 2018Nuclear Power Plant (refer WN-1)809,641To Provision for Asset Retirement Obligation809,641(To record provision for dismantling costs)30 June, 2019Interest expense 80,964To Provision for Asset Retirement Obligation80,964(To record interest expense on dismantling costs)30 June, 2024Interest expense (refer WN-2)130,393To Provision for Asset Retirement Obligation130,393(To record interest expense on dismantling costs)WN-1Calculation of Dismantling Costs:Cost of Plant16,551,500Useful life (in years)10Dismantling Costs2,100,000Discount rate10%PV as on 1 July, 2018809,641WN-2Interest expense scheduleParticulars Interest exp Provision for ARO 30 June, 2018-809,64130 June, 201980,964.09890,605
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