MGT401 Midterm Subjective

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JOIN FB GROUP FOR VU HELP · MGT401-MidTerm-subjective · Differentiate between impairment and depreciation

Depreciation is the result of systematic allocation of the depreciable amount of an asset over its estimated useful life. Depreciation for the accounting period is charged to net profit or loss for the period either directly or indirectly.

However the impairment in the value of any asset is a fall in the value of an asset due to many reasons beyond the control of the company, so that its recoverable amount is now less than its carrying value in the balance sheet.

Authorized and paid up capital difference

Authorized Capital:

A maximum limit of the amount of capital that a company can issue is mentioned in the Memorandum and Articles of Association of the company. Company cannot issue capital exceeding this amount unless it amends the memorandum and articles of association.

Paid Up Capital:

Paid up capital is amount that the company issues out of the authorized capital.

• The minimum amount of capital that a company can issue is one share each for each of its members and the maximum is equal to the authorized capital.
• A company can issue shares of different classes having different denominations and different rights attached to them.

Example:

• Suppose a company has a:
•  Partially completed inventory item at the year end.
•  Expected selling price of the item when completed is Rs. 2500.
•  A further cost of Rs. 500 is required to complete the item
•  Expected selling cost of the item is Rs. 100

Required:

What will be the carrying value of the inventory item if the cost incurred to date is:

•  Rs. 1000
•  Rs. 1900
•  Rs. 2100

Solution:

Net Realizable Value of the stock item:

Selling price – Selling Exp – Completion costs

2500 – 100 – 500 = 1900

•  1900 vs. 1000 – Cost is less than NRV therefore inventory will be shown at cost and no adjustment will be required.
•  1900 vs. 1900 – Cost is equal to NRV therefore inventory will be shown at cost and no adjustment will be required.
•  1900 vs. 2100 – Cost is greater than NRV therefore inventory will be shown at NRV.

Differentiate between Benchmark Treatment and Allowed Alternative Treatment for the Borrowing cost

Recognition of Fixed Assets – Benchmark Treatment

The benchmark treatment of borrowing costs is the most straightforward and prudent. The accounting policy adopted for borrowing costs should be disclosed Under the benchmark treatment of IAS 23 borrowing cost should be treated as expense in the period they are incurred regardless of the of how the loan is used. If benchmark treatment is used the enterprise is only required to disclose the policy adopted for borrowing costs.

Under the allowed alternative treatment, certain borrowing costs may be capitalized. Any other borrowing costs remaining must still be recognized as an expense as under the benchmark treatment.

The standard also lays out the criteria for determining which borrowing costs are eligible for capitalization.