Question

1.12 Definitions and recognition criteria * L07, 8 Explain how Simpkins Ltd should account for the following items, justifying your answers by reference to the definitions and recognition criteria in the Conceptual Framework. Also state, where appropriate, which ledger accounts should be debited and credited. 1. Photographs of the company's founders, which are of great sentimental and historical value. 2. (a) Simpkins Ltd has been sued for negligence -- likely it will lose the case. (b) Simpkins Ltd has been sued for negligence -- likely it will win the case. 3. Obsolete machinery now retired from use. 4. Simpkins Ltd receives a donation of $5000.

Answer 1

1. Definition of Expenses as per Conceptual Framework is decreases in the economic benefits during the accounting period or depletion of the asset value or increase in the liability values that results in the equity value. Therefore, Photographic charges does not meet the definition as per conceptual framework and the expenses paid is not for the ordinary activities of the business.

2. Journal entry:

Law suit loss A/c

to Law suit liability A/c

This entry should be made if the probability of the occurrence is more than 50% and the estimated value is possible.

at the time of payment:

Law suit liability A/c

To Bank A/c

3. When the obsolete machinery now retired from use, the company remove the cost of the machinery and accumulated depreciation from its Machinery A/c.

Journal entry:

Accumulated Depreciation of Machinery A/c

To Machinery A/c

4. If the donation received for an asset then the entry is:

Asset A/c

To Contribution Revenue A/c