Question1 A (i)Branch Account prepared under Debtors Method of Branch Accounting is a nominal account.
(ii)Fundamental Assumptions are always required to be disclosed in the financial statements.
(iii) Change in Accounting Estimate has to be given retrospective effect.
(iv) Economic life is 6 years, lease term is 2.5 years, but the asset is of a special nature, and has been procured only for use of
lessee.This is an operating lease.
(v) Change in Method of Depreciation is regarded as change in Accounting Policy of the entity
(A)True, The excess of the credit over its debit represents a profit or vice-versa, and is transferred to General Profit and Loss Account of Head Office. Branch Account is prepared in the books of Head Office and is a Nominal Account.
(B) True, Fundamental Assumptions are always required to be disclosed in the financial statements.
(C)False, NO Change in Accounting Estimate has to be given retrospective effect.
(D) False, NO IT IS NOT TRUE Economic life is 6 years, lease term is 2.5 years, but the asset is of a special nature, and has been procured only for use oflessee.This is an operating lease.
(E) True, Change in Method of Depreciation is regarded as change in Accounting Policy of the entity.
Question1 B (b) Distinguish between Finance Lease and Operating Lease. [3 Marks]
Answer: A financial lease is a type of lease where the lessor allows the lessee to use the former’s asset instead of a periodical payment for an extended period. Operating lease, on the other hand, is a type of lease where the lessor allows the lessee to use the former’s asset in exchange for a periodical payment for a brief period.
A financial lease is a lease that needs recording under the accounting system. Operating lease, on the other hand, is the concept that doesn’t need recording under any accounting system; that’s why the operating lease is also called “off the balance sheet lease.”
Under the financial lease, the ownership transfers to the lessee. Under an operating lease, the ownership doesn’t transfer to the lessee.
The contract under a financial lease is called a loan agreement/contract. The contract under an operating lease is called a rent agreement/contract.
Once both the parties sign the agreement, usually, financial lease can’t be canceled. Even after the agreement between two parties, the operating lease can be revoked during the initial period only.
Financial lease offers a tax deduction for depreciation, finance charges. The operating lease provides a tax deduction for rent payments.
In a financial lease, there is an asset purchase option given at the end of the contractual period. Under an operating lease, there is no such offer.
(c) Explain in brief the relevant accounting assumption or principle which is applied in Classification of Expenditure as Capital
Expenditure and Revenue Expenditure.
Answer: Capital Expenditure or CAPEX make up those funds which are put to use to acquire, maintain or upgrade long-term assets. Typically, such expenses do not occur frequently and are incurred to boost a company’s proficiency in the long-term.
Some potent capital expenses include – purchasing tangible assets like plant, plot, equipment, furniture, fixtures, etc. and intangible assets like – patent, license or trademark.
Generally, CAPEX influences a firm’s short-term and long-term financial standing and also helps to boost its overall operations over the years. The formula of CAPEX is given as –
Capital expenditure = Net increase in PP & E + Depreciation Expense
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