The following situations are independent of one another. 1. An accounting studen
ID: 2715657 • Letter: T
Question
The following situations are independent of one another.
1. An accounting student recently employed by a small company doesn’t understand why the company is only depreciating its buildings and equipment, but not its land. The student prepared journal entries to depreciate all the company’s property, plant, and equipment for the current year-end.
2. The same student also thinks the company’s amortization policy on its intangible assets is wrong. The company is currently amortizing its patents but not its goodwill. As a result, the student added goodwill to her adjusting entry for amortization at the end of the current year. She told a fellow employee that she felt she had improved the consistency of the company’s accounting policies by making these changes.
3. The same company has a building still in use that has a zero book value but a substantial fair value. The student felt that this practice didn’t benefit the company’s users—especially the bank—and wrote the building up to its fair value. After all, she reasoned, you can write down assets if fair values are lower. Writing them up if fair value is higher is yet another example of the improved consistency that she has brought to the company’s accounting practices. Explain whether or not the accounting treatment in each of the above situations is in accordance with generally accepted accounting principles.
Explain what accounting principle or assumption, if any, has been violated and what the appropriate accounting treatment should be.
Explanation / Answer
1. all assets which have a useful life are depriciated, but land is considered to have an infinite life and also it is a resource which is limited , hence the value of land does not depriciate it only appreciates.
Hence students entries for depriciating land is incorrect
The accounting principle that has been violated is matching principle , wherein depriciation is an example of matching principle, since depriciation on land is incorrect , hence this principle has been violated
2. Goodwill is an unidentifiable and unseparable asset. An asset can be seperated / identifiable when it can be seperated from an entity and sold without the entity being sold.
Plant and Machinery is such an asset which can be seperated and sold , whereas goodwill cannot be sold individually and its repute can only be transferred to the new buyer when the entity is sold
Amortisation is a systematic allocation of value of asset over its useful life. It is very difficult to assign a useful life to goodwill. There is no method yet devised to amortise infinite life asset
Hence goodwill is not amortised but only impaired
Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable value
Hence it os better that goodwill should be tested for impairement from time to time rathaer than amortised
US GAAP isn 2001 abandoned amortisation of goodwill in favour of impairement of goodwill
3. The fair value accounting is acceptable in US , specially in the case of an asset whose book value is zero, but the fair value should be properly determined because it is in absolutely different from historical cost .
Hence it is advisable tp acccount for building at fair value