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Fundamentals of Accounting

Posted on Apr 28, 2017 2:05 PM

A proprietor Mr. A has reported a profit of RS 125000 at the end of the financial year after taking into consideration the following amount
1. The cost of an asset of RS 25000 has been taken as an expenses
2. Mr.A is anticipating a profit of RS 10000 on the future sale of a car as an asset in his books
3. Salary of RS 7000 payable in the financial year has not been taken into account
4. Mr.A purchased an asset for RS 75000 but its fair value on the date of purchase was RS 8500. MR.A recorded the value of asset in his book by RS 85000
On the basis of of above fact what is the correct amount of profit to be reported in the books


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Reported profit = rs 125000
rn+ capital expenditure wrongly shown as revenue expenditure = rs 25000
rn- unrealized gain (as it against conservatism concept) = Rs 10000
rn- salary payable though unpaid (accrual concept) = rs 7000
rnRectified profit = Rs 133,000
rnworking notes
rn1. depreciation is to be charged on rs 25000, say @15% for P&M, 10% for building. Since nothing was mentioned, it has been ignored.
rn2. As per conservatism concept, ignore all future gains & provide for anticipated losses.
rn3. As per accrual concept, we need to provide for all expenses incurred during the particular accounting period, whether paid or not.
rn4. typo error. market value is Rs 85,000 ( I guess) .
rnAs per historical cost concept, we should record assets at its purchase price & not at its market/fair value. so revised value of asset should be Rs 75000. If depreciation. has been charged on Rs 85000, the same shall be reduced by proportionate amount to be charged (i.e., depreciate rate) on Rs 10000.
rnsince rates are not mentioned, depreciation has been ignored again & profit will remain not change because of adjustment no. 4.