Alloy Manufacturers Limited (AML) is a well-known company working in the automobiles Alloy industry. Mr. Naseer is working as accounts manager at AML and has more than 05 years of relevant experience. His major responsibilities include looking after accounting matters for accounting of fixed assets – incorporation, maintenance, depreciations, revaluation, and disposal etc. as per accounting rules, IASs and other related laws.
a) ALM has been charging depreciation at the rate of 10%-15% from 2001 to 2012 on its all fixed assets. From 2012 onwards, the management has decided to change its depreciation rates from 15%-20%. Balance sheet of AML as at December 31, 2012 has carries the value of inventory and Land at Rs. 850,000 and Rs. 2,000,000 respectively.
As a student of accounting, you are required to suggest that at which rate business should charge depreciation on inventory and land from year 2012 and onwards? Support your answer with logical reasons.
Solution: There is no depreciation would be charged on inventory and land, reason: there is no fixed life of land as well as inventory returns its value after sales of goods. In automobile company either inventory which is available have limited life or items which are finally produced in shape of CAR are not going to sale because of less market growth
b) From year 2005 onwards, AML has also been bringing forward “Revaluation surplus”. But in year 2012, business incurred a loss on revaluation of its Buildings. You are required to suggest that what will be the accounting treatments of this loss? Support your answer with logical reasons.
Solution: There are two methods being used in revaluation of assets, cost methods and revaluation method surplus methods…. In case of surplus you would increase assets value (Assets Dr and Rev.Surplus Cr.) and in case of loss you need to reverse it: Rev. Surplus Dr. Assets Cr. just add your understanding in shape of logical facts
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