Question

Provide your response in the chart.  

DON’T FORGET: YOU MUST BE SPECIFIC AND PROVIDE REASONS FOR YOUR STATEMENTS.

1. Ordinary repairs on capital assets were recorded as follows:

             Capital assets     10,000

                 Cash                                      10,000

Capital assets are collateral for the Bank’s loan, and the Bank is the key user of these financial statements.

What is the Financial Accounting issue? (ie. recognition, measurement, presentation, disclosure)
Identify and explain the accounting practice violation(s) with reference to the Conceptual Framework for Financial Reporting (‘Pyramid’ Illustration in Kieso textbook)
Identify implications to the users of the financial statements
Explain briefly how you would “fix” the problem from a “Proper Accounting Practice” perspective. Provide the correct Journal Entry if possible.

Answer 1

All expenses related to the asset at the time of purchase must be capitalised. this includes the cost of the asset and expenses related to get it in working condition.

Hence, reqular expenses incurred on capital assets cannot be capitasied and must be taken to Profit and loss account and booked under expenses. These expenes cannot be adde dto the cost of the asset.

here, the journal entry passed is incorrect and needs to be rectified

Rectification entry

Expenses A/c Dr.. 10,000

To Capital Asset 10,000