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onnect/hmEBook do?setTab-sectionTabs 13 go book contents search ebook ge 5. If a capital expenditure is erroneously treated as a revenue expenditure, will the net income of the current year be overstated or understated? Will this error have any effect on the net income reported in future years? Explain. 6. Shoppers' Market purchased for $265,000 a site on which it planned to build a new store. The site consisted of three acres of land and included an old house and two barns. County property tax records showed the following appraised values for this property: land, $160,000; buildings $40,000. Indicate what Shoppers' should do with this $265,000 cost in its financial statements and explain your reasoning 7. Should depreciation continue to be recorded on a building when ample evidence exists that the current market value is greater than original cost and that the rising trend of market values is continuing? Explain. 8. Explain what is meant by an accelerated depreciation method. Are accelerated methods more widely used in financial statements or in income tax returns? Explain. 9. One accelerated depreciation method is called fixed-percentage-of-declining-balance. Explain what is meant by the terms "fixed-percentage" and declining-balance. For what purpose is this method most widely used? 10. Evaluate the following quotation: "We shall have no difficulty in paying for new plant assets needed during the coming year because our estimated outlays for new equipment amount to only $80,000, and we have more than twice that amount in our accumulated depreciation account at present. 11. Explain two approaches to computing depreciation for a fractional period in the year in which an set is purchased. (Neither of vou roaches should require the computation of dExplanation / Answer
5. If capital expenditure is erroneously treated as a revenue expenditure, it will understate the net income for the year of purchase and overstate for the future years. Capital expiditure is debited to asset and depreciation is charged over it for the useful life, whereas revenue expenditure is debited to income statement, reducing the income for the current period. As the depreciation will not be charged for the future period, the error will overstate the net income for the future years.
6. Shoppers should charge the entire purchase cost as well as the cost of removing the old house and two barns to the Land Account. As the Shopper can not use that building, it has to be removed to use the Land the entire amount will be charged to Land Account.
7. Depreciation should continue to be charged to building even if the market value is greater then the original cost of the building as the depreciation is the method of cost allocation and not a method of valuation.
8. Accelerated depreciation method is a depreciation method in which higher depreciation is charged in the early years of assets life and smaller amount is charged in the later years. It is widely used in Income tax returns, to reduce the tax liability.
9. Fixed percentage of declining balance is an accelerated depreciation method, where an accelerated percentage is calculated on straight line depreciation rate and depreciation is charged by applying that rate to the current book value of the asset. Thus in this method there is a fixed percentage at which the depreciation is charged and it is charged on the declining balance of the asset (cost minus accumulated depreciation). It is widely used for income tax returns.
10. Accumulated Depreciation is a contra account the depreciation and it appears in balance sheet with fixed assets. It is not a cash account. thus a company cannot pay for it for buying new equipment.
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