CA Foundation Exam > CA Foundation Questions > Cost of Machinery: Rs. 10,00,000Installation ...
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Cost of Machinery: Rs. 10,00,000
Installation charges: Rs. 1,00,000
Market Value on 31.3.06: Rs. 12,00,000
While finalizing the accounts, if the company values the machinery at Rs. 12,00,000. Which concept is violated by the Company?
Installation charges: Rs. 1,00,000
Market Value on 31.3.06: Rs. 12,00,000
While finalizing the accounts, if the company values the machinery at Rs. 12,00,000. Which concept is violated by the Company?
- a)Cost
- b)Matching
- c)Realization
- d)Periodicity
Correct answer is option 'A'. Can you explain this answer?
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Verified Answer
Cost of Machinery: Rs. 10,00,000Installation charges: Rs. 1,00,000Mark...
Machinery should be valued at Rs. 11,00,000 on 31.3.06 and not for Rs. 12,00,000. This entails adherence of Cost Concept. If the machinery is valued at Rs. 12,00,000 on 31.03.06 it will mean violation of cost concept. Cost concept means that assets should be recorded at their buying cost or historical cost and not on their market value existing at the date of balance sheet.
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Most Upvoted Answer
Cost of Machinery: Rs. 10,00,000Installation charges: Rs. 1,00,000Mark...
Explanation:
The concept violated by the company in this scenario is the cost concept. Let's understand why:
1. Cost Concept:
The cost concept is a fundamental accounting principle that states that assets should be recorded in the books of accounts at their original cost. This concept assumes that the cost at which an asset was acquired is the most reliable measure of its value.
2. Valuation of Machinery:
In this case, the cost of the machinery is Rs. 10,00,000, which includes the actual cost of the machinery and the installation charges. However, the company values the machinery at Rs. 12,00,000 while finalizing the accounts.
3. Violation of Cost Concept:
By valuing the machinery at Rs. 12,00,000, the company is violating the cost concept. The cost concept requires assets to be recorded at their original cost, which in this case is Rs. 10,00,000. The market value of an asset does not impact its recorded value unless there is an actual sale or disposal of the asset.
4. Reasons for Violation:
There could be several reasons why the company is valuing the machinery at Rs. 12,00,000 instead of its original cost:
- Increase in market value: The market value of the machinery may have increased since its acquisition, leading the company to believe that it should be valued at the higher amount.
- Unrealized gains: The company may want to show higher profits by recognizing unrealized gains on the machinery.
- Inaccurate accounting: The company may not have a proper understanding of the cost concept or may be intentionally misrepresenting the value of the machinery.
5. Impact on Financial Statements:
By violating the cost concept, the company is overstating the value of the machinery on its balance sheet. This will lead to an inflated value of assets and shareholders' equity. It may also result in higher reported profits if the company recognizes the increase in value as a gain.
Conclusion:
In conclusion, the company violated the cost concept by valuing the machinery at Rs. 12,00,000 instead of its original cost of Rs. 10,00,000. The cost concept requires assets to be recorded at their original cost, and any increase in market value should not impact the recorded value unless there is an actual sale or disposal of the asset.
The concept violated by the company in this scenario is the cost concept. Let's understand why:
1. Cost Concept:
The cost concept is a fundamental accounting principle that states that assets should be recorded in the books of accounts at their original cost. This concept assumes that the cost at which an asset was acquired is the most reliable measure of its value.
2. Valuation of Machinery:
In this case, the cost of the machinery is Rs. 10,00,000, which includes the actual cost of the machinery and the installation charges. However, the company values the machinery at Rs. 12,00,000 while finalizing the accounts.
3. Violation of Cost Concept:
By valuing the machinery at Rs. 12,00,000, the company is violating the cost concept. The cost concept requires assets to be recorded at their original cost, which in this case is Rs. 10,00,000. The market value of an asset does not impact its recorded value unless there is an actual sale or disposal of the asset.
4. Reasons for Violation:
There could be several reasons why the company is valuing the machinery at Rs. 12,00,000 instead of its original cost:
- Increase in market value: The market value of the machinery may have increased since its acquisition, leading the company to believe that it should be valued at the higher amount.
- Unrealized gains: The company may want to show higher profits by recognizing unrealized gains on the machinery.
- Inaccurate accounting: The company may not have a proper understanding of the cost concept or may be intentionally misrepresenting the value of the machinery.
5. Impact on Financial Statements:
By violating the cost concept, the company is overstating the value of the machinery on its balance sheet. This will lead to an inflated value of assets and shareholders' equity. It may also result in higher reported profits if the company recognizes the increase in value as a gain.
Conclusion:
In conclusion, the company violated the cost concept by valuing the machinery at Rs. 12,00,000 instead of its original cost of Rs. 10,00,000. The cost concept requires assets to be recorded at their original cost, and any increase in market value should not impact the recorded value unless there is an actual sale or disposal of the asset.
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Cost of Machinery: Rs. 10,00,000Installation charges: Rs. 1,00,000Market Value on 31.3.06: Rs. 12,00,000While finalizing the accounts, if the company values the machinery at Rs. 12,00,000. Which concept is violated by the Company?a)Costb)Matchingc)Realizationd)PeriodicityCorrect answer is option 'A'. Can you explain this answer?
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Cost of Machinery: Rs. 10,00,000Installation charges: Rs. 1,00,000Market Value on 31.3.06: Rs. 12,00,000While finalizing the accounts, if the company values the machinery at Rs. 12,00,000. Which concept is violated by the Company?a)Costb)Matchingc)Realizationd)PeriodicityCorrect answer is option 'A'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Cost of Machinery: Rs. 10,00,000Installation charges: Rs. 1,00,000Market Value on 31.3.06: Rs. 12,00,000While finalizing the accounts, if the company values the machinery at Rs. 12,00,000. Which concept is violated by the Company?a)Costb)Matchingc)Realizationd)PeriodicityCorrect answer is option 'A'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Cost of Machinery: Rs. 10,00,000Installation charges: Rs. 1,00,000Market Value on 31.3.06: Rs. 12,00,000While finalizing the accounts, if the company values the machinery at Rs. 12,00,000. Which concept is violated by the Company?a)Costb)Matchingc)Realizationd)PeriodicityCorrect answer is option 'A'. Can you explain this answer?.
Cost of Machinery: Rs. 10,00,000Installation charges: Rs. 1,00,000Market Value on 31.3.06: Rs. 12,00,000While finalizing the accounts, if the company values the machinery at Rs. 12,00,000. Which concept is violated by the Company?a)Costb)Matchingc)Realizationd)PeriodicityCorrect answer is option 'A'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Cost of Machinery: Rs. 10,00,000Installation charges: Rs. 1,00,000Market Value on 31.3.06: Rs. 12,00,000While finalizing the accounts, if the company values the machinery at Rs. 12,00,000. Which concept is violated by the Company?a)Costb)Matchingc)Realizationd)PeriodicityCorrect answer is option 'A'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Cost of Machinery: Rs. 10,00,000Installation charges: Rs. 1,00,000Market Value on 31.3.06: Rs. 12,00,000While finalizing the accounts, if the company values the machinery at Rs. 12,00,000. Which concept is violated by the Company?a)Costb)Matchingc)Realizationd)PeriodicityCorrect answer is option 'A'. Can you explain this answer?.
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