Pele Ton is the owner of MAMIL’S R US, a cycling shop. Pele does not understand why he cannot expense the entire cost of a computer purchased on 1 June 2015 in the income statement for the year ended 30 June 2015.
- (i). Explain the correct treatment for recording the computer to Pele, and why he cannot simply expense the entire cost. Refer to any appropriate accounting assumptions and/or definitions in your response (3 marks)
- (ii). Pele is under the impression that the $1 800 listed in his Balance Sheet (see below) represents the current market value or replacement price for the computer. Explain the meaning of the amounts in the balance sheet extract below
(Note: You are not being asked to explain the calculation of the numbers, but rather what these numbers represent)
(4 marks)
MAMIL’S R US
Balance sheet extract
as at 30 June 2015
Computer $2 000
Less Accumulated Depreciation 200 $1 800
- (iii). Pele has been informed by his accountant that he needs to include depreciation expense as an adjusting entry in the preparation of his financial statements. Explain to Pele the importance of adjusting entries by using the relevant accounting concepts and also indicate the effect on his financial statements if this adjusting entry is not included. (3 marks)
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