David, supervisor for the ABC Corporation, is preparing the company’s income sta
ID: 2487865 • Letter: D
Question
David, supervisor for the ABC Corporation, is preparing the company’s income statement at year-end of 2014. He notes that the company had decided and replaced one of its equipment and lost $60000 on the sale of that equipment which was costs 150000 and its depreciation is $50000. Since the company has sold equipment routinely in the past with amount of $40000, David knows the losses cannot be reported as unusual. He also does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the useful life of the assets (increasing the depreciation with 80%), the losses would not be so great. Since depreciation is included among the company’s operating expenses, he wants to report the losses along with the company’s expenses, where he hopes it will not be noticed.
What should David do? Discuss in any of financial statement should be reported the losses arising from the sale equipment, specify the section of financial statement.
Explanation / Answer
ans : David should show the loss arising due to sale of equipment in the income statement of financial statement and the book value of the same assets will be written off from total assets on the balance sheet. Dep should not be suddenly changed charging of depreciation requires to follow the rules of GAAP.
under GAAP the depreciation can not be charged simply on the wish of supervisor, there are the process, which one has to follow. The first step is to determine the cost of the assets second step is estimate the life of the assets step 3 is estimate the salvage value and then last step is to choose an appropriate method of dep. and accordingly calculated dep is charged against that assets. Hence Dep simply can not be changed just to cover up the loss arising due to sale of assets. Loss can be shown in the income statement of financial statement and the book value of the same assets will be written off from total assets on the balance sheet.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.