Question

1.      In preparing the draft financials for PE Co you have identified the following.

The company depreciates assets as follows:

                                  Building                                   2%     

 

                                 Equipment                               10%

 

                                 Motor Vehicle                           25%

 

                                 Computers and equipment      33.3%

 

                                Employee Benefit                     10% (see note d)

 

a.       It was discovered that Land costing $3 million was depreciated at 2% during the financial period. This is included within the depreciation charge for the period of $2.6 million.

b.      Purchases for the period amounted to $6.3 million included in this purchase is value Added Tax of $300,000. The entire purchase cost was included in the Cost of Sales.

c.       Closing inventory was value at 1.6 million. However, a fire has damaged $200,000 worth of goods. It was noted that these goods can be sold at 10% less than the current cost of $200 per unit. The items are still included in the Closing inventory at full cost. Opening inventory was $1.3 million.

d.      The HR Manager stated that he believes his employees are skilled and that this skill is an asset to the company. He further noted that the company has spent over $3.5 million on this training and that apart from this cost, the employees have a personal worth estimated at $2.5 million. The Accountant agreed and included $3.5 million as employee training cost and $2.5 million in assets as employee benefit asset. Depreciation for this asset was included in expenses for the financial year.

 

Required:

        I.            Determine how each scenario would be treated and state its impact on the income statement and balance sheet. You are to clearly identify which accounts would be affected and the double-entry required to either record or correct the transaction. (30 Marks)

 

Recalculate the Cost of Sales for the period and depreciation.