Question

TOPIC GUIDE Tutorial Activities (Week Beginning Monday 16 March 2020): Part A You should prepare a written or typed submission in response to all questions in part A and submit it in the homework assignment drop box for topic 2 on MyUni by 6.00 p.m one day before your scheduled tutorial TQ.1 This is from a past mid-semester test An Australian company spent $100,000 installing a commercial kitchen and in-house dining room in its head office building. The dining room is to be used for executive lunches, entertaining clients and hosting business functions. The company had previously gone to restaurants located about five kilometres from the company's office for these purposes. The kitchen and dining room fixtures are expected to last as long as the building, which has a remaining useful life of 20 years. The expenditure excludes furniture and equipment which is outside the scope of this question. Required Present an argument to justify the recognition of the commercial kitchen and in-house dining room as part of the head office building based on principles in the Conceptual Framework (2019).

Answer 1

As per the conceptual frame work, the expenditure to upgrade the building must be capitalized as expenditure upon meeting the following criteria:

Defintion: An asset is a resource which is controlled by an entrity due to past events which have occured, which causes future economic benefit to flow.

Recognition:

a) Future economic benefits are expected to flow from the asset.

b) The asset has a cost or value which can be measured reliably.

In the scenario mentioned, control is established as company has paid for the in-house kitchen giving it ownership. Further, instead of going out for executive lunches the company will be having them inhouse, resulting in savings(i.e. future economic benefit).

Even the value can be measured reliably i.e. $100000.

Thus, the inhouse kitchen can be recognized as part of the head office building.