MGT101 GDB 1 Solution Spring 2017

MGT101- Financial Accounting-GDB#1 Spring 2017

Opening Date = 13 Jul, 2017

Closing Date = 19 Jul, 2017

Topic:

Capital and Revenue Expenditure, Non-Current Assets & Depreciation and their effects in financial statements.

GDB Question:

Mr. Hamid is working as a junior accountant in accounts department of a business concern. He has little knowledge in accounting.  Recently, it has been observed by his senior manager that Mr. Hamid had ignored the distinction between capital and revenue expenditure and charged an amount of Rs. 200,000 incurred on purchase of a non-current asset to the profit and loss account showing a profit of Rs. 500,000. As a result, the financial statements would be failed to reflect true and fair state of affairs of the business. The purchased asset is estimated to have useful life of 5 years with salvage value of Rs. 20,000.

Required:

  1. What would be the annual depreciation expense under the straight line method?
  2. Reporting of non-current assets at written down value rather than at historical cost shows more realistic financial position. Which accounting principle is followed for such reporting?
  3. Whether the above error would understate/overstate the capital reported in the balance sheet of business concern?
  4. What should have been the correct amount of profit?

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