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Q4CA.

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Intermediate Accounting (Kieso)
Found in: Page 253

Short Answer

(Presentation of Property, Plant, and Equipment) Carol Keene, corporate comptroller for Dumaine Industries, is trying to decide how to present “Property, plant, and equipment” in the balance sheet. She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company’s plant assets are rather old. She feels that she can disclose one figure titled “Property, plant, and equipment, net of depreciation,” and the result will be a low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. She proposes the following.

Particular

Amount $

Property, Plant, and Equipment (net of depreciation)

$10,000,000

Rather than

Particular

Amount $

Property, Plant, and Equipment

$50,000,000

Less: Accumulated depreciation

(40,000,000)

Net book value

$10,000,000

Instructions

Answer the following questions.

(a) What are the ethical issues involved?

(b) What should Keene do?

(a) Ethical issues involved non-representation of accumulated depreciation.

(b) Keene must report accumulated depreciation as well along with the value of the asset

See the step by step solution

Step by Step Solution

Definition of Misrepresentation

Misrepresentation can be defined as the activity in which the business entity does not report the actual value of the assets and liabilities to influence the investors and users of the financial statement.

Ethical Issued involved

Keene has decided to represent the amount of property, plant, and equipment in the balance sheet as net of accumulated depreciation. Non-representation of the accumulated depreciation in the balance sheet will hide the actual age of the assets, and the business will look more efficient.

Procedure to be Followed

Keene must report property, plant, and equipment and accumulated depreciation separately. It will provide full information and facts about the business entity’s assets, and it will be considered an ethical way of representing assets in the balance sheet.

Most popular questions for Business-studies Textbooks

E5-9 (L02,3) (Current Assets and Current Liabilities) The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.

ALLESSANDRO SCARLATTI COMPANY

BALANCE SHEET PARTIAL

December 31, 2017

Cash

$40,000

Account payable

$61,000

Accounts receivables

$89,000

Note payable

67,000

Less: Allowance for doubtful accounts

(7,000)

82,000

$128,000

Inventory

171,000

Prepaid expenses

9,000

$302,000

The following errors in the corporation’s accounting have been discovered:

1. January 2018 cash disbursements entered as of December 2017 included payments of accounts payable in the amount of $39,000, on which a cash discount of 2% was taken.

2. The inventory included $27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, $12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.

3. Sales for the first four days in January 2018 in the amount of $30,000 were entered in the sales journal as of December 31, 2017. Of these, $21,500 were sales on account and the remainder were cash sales.

4. Cash, not including cash sales, collected in January 2018 and entered as of December 31, 2017, totaled $35,324. Of this amount, $23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.

Instructions

(a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.)

(b) State the net effect of your adjustments on Allessandro Scarlatti Company’s retained earnings balance.

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