Question

Question 5 Explain (3 marks) (a) How should an asset be recognized in the financial statement. (3 marks) (b) What are included in Property, Plant and Equipment? (c) The purpose of depreciation is so an asset can be replaced at the end of its useful life. Do you agree? (4 marks) Question 6 (a) Within the costing system of a manufacturing company the following types of expenses are incurred. Types of expenses Reference number Cost of oils used to lubricate production machinery Motor vehicles licenses for lorries Commission paid to sales representatives Salary of secretary to sales director Trade discount given to customers Fees to advertising agency Rental of finished goods warehouse Insurance of company's premises Costs of lubricant oils used in manufacturing Protective clothing for production staffs Holiday pay to production staffs Depreciation of factory plant and equipment Free gifts given to customers Cost of papers used in general office Salary of administration clerk Depreciation of office equipments 1 2 3 5 6 7 8 10 11 12 13 14 15 16 Required: Complete the following table by placing each expense in the correct cost classification. Cost Classification Production costs Selling and distribution costs Administration costs Reference Number

Answer 1

Answer 15 A) An asset is recognized in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. The economic benefits contribute, directly or indirectly, in the form of cash or cash equivalents. Even though many assets are in physical form, such as machinery, the physical form is not essentials. For example, patents and intellectual property are assets controlled by the entity and have future economic benefits.

B) International Accounting Standard 16 (IAS 16) defines property, plant and equipment as the “tangible items that:

(1) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and

(2) are expected to be used during more than one period”.

Property, plant and equipment is a class of assets which includes tangible assets only. Intangible assets such as patents, copyrights and goodwill are not included in this class of assets.The assets termed as property, plant and equipment are held for the purpose of use. The assets can either be used in the process of production or supply of goods or services or they can be used for administrative purposes. Assets which are held for the purpose of earning rentals are also part of property, plant, and equipment.

c) Yes,Companies use depreciation to report asset use to stakeholders. Deprecation also reduces the historical value of assets. Stakeholders can review this information and know when to expect replacement assets purchased by a company. For example, a company with production equipment will often replace these items at some time during its operations. When accumulated depreciation nears the asset’s historical cost, a replacement purchase may be coming up soon.

Answer 16)

Class Classification	Reference Number
Production Costs	1	7	9	10	11	12
Selling and Distribution Costs	3	4	5	6	13
Administrative Costs	2	8	14	15	16