Sukani Brothers are in the business of manufacturing fine quality cloth for garments .They started with a seed capital of Rs. 5 lakhs. During the first year itself, they earned a profit of Rs. 2 lakhs. Thereafter, the started minting profits regularly.
In the sixth year, they incorporated the firm into a Public Ltd. Co. A team of Professionals, viz. Chartered Accountant, Marketing Expert, Research Officer and the HR Professional was formed to cope up with the emerging challenges. They came out with their IPO as well. Sukanis married their daughter in the sixth year and spent Rs. 50 lakhs on the same. They used company's cash resources for the purpose. In the sixth year itself, they went for a change in the method of depreciation from s-l-m to w-d-v method. Also, they have been charging depreciation on fixed assets only for initial two — three years. Their logic was that the maximum utilization of assets was done only in the initial years. Disclosure about the valuation of inventories in the books of accounts was also stressed upon. Earlier, it was not done. The man behind all these changes was their CA.
There was a sale transaction made to Kenstar Ltd. for Rs. 2 lacs. The goods were dispatched but somehow due to transportation problems, they reached after the closing of the accounting year. Also, in the same year, there was a huge fight between two shop workers — Right and Wrong in the plant. Therefore, there was a delay by 5 hrs. in the production. The General Manager — Operations wants it to be recorded in the books of accounts. Also, they wish to show all their assets at the current market price. Sukanis are really confused about this.
Issues for Discussion
What are the financial reporting issues involved in case of a Public Ltd. (Listed) Company? • What is the accounting treatment of marriage expenses of Sukanis' daughter? • Is change in method of depreciation allowed?
Discuss the rationale of charging depreciation only in the initial years.
Is valuation of inventory's disclosure essential in books of accounts?
What is the status of the sale transaction in the final accounts?
Should the fight between the shop workers be recorded in the books of accounts?
Should assets be shown at the current market price?
Discuss the accounting implications in this context, citing the accounting principles in the present context.
Answers
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Answer:
Purchase Price of machine = 20,00,000
Installation charges = 5,00,000
Total cost of machine = 25,00,000
Depreciation = 25,00,000*10/100
= 2,50,000.
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