Question

State your position on each item and give theoretical support in each situation.

1. In as much as profit for the year appears to be extremely small, no depreciation is recorded for the year.

2. An amount paid for an advertising campaign to promote a new product that will be placed on the market in the following year is charged to prepaid advertising.

3. The entire cost of leasehold improvement is to be charged to an expense account.

4. No entry is made when a storm surge destroyed a considerable amount of uninsured inventory.

5. Goods with measurable cost have become obsolete. The goods are included as part of the inventory since no loss

Answer 1

Answer 1. In as much as profit for the year appears to be extremely small, no depreciation is recorded for the year. This statment is not correct as depreciation is systematic allocation of depreciable amount over the period of an asset. But a firm will follow this practice to window dress there FS, as due to non chargng of depreiciation the profit will show higher and Assets in Balance sheet will be at higher value.

Answer 2. Advertisement expenses are need to be expensed off as per current applicable standards. Charging it to prepaid will overvalue your current assets as there is an ficticious asset in your FS.

Abswer 3. Entire cost of lleasedhold improvement is not charged to expense account as there can be improvement which increase the life or benefits from future from assets, which need to be capitalised to asset.

Answer 4. Entry need to be booked for inventory to show there correct value as standards recommend to value inventory at cost or NRV, whichever is lower. As inventory is damanged than there net realisable value will be lower.

Answer 5. Entry need to be booked for inventory to show there correct value as standards recommend to value inventory at cost or NRV, whichever is lower. As inventory is obsolete than there net realisable value will be lower and company should book loss on it.