MC Question 6
Balotelli Beach Hotel Co (Balotelli) operates a number of hotels providing accommodation, leisure facilities and restaurants.
You are an audit senior of Mario & Co and are currently conducting the audit of Balotelli for the year ended 31 December 20X4. During the course of the audit a number of events and issues have been brought to your attention:
Non-current assets and depreciation
Balotelli incurred significant capital expenditure during the year updating the leisure facilities at several of the company’s hotels. Depreciation is charged monthly on all assets on a straight line basis (SL) and it is company policy to charge a full month’s depreciation in the month of acquisition and none in the month of disposal.
During the audit of non-current assets, the audit team has obtained the following extract of the non-current assets register detailing some of the new leisure equipment acquired during the year.
Extract from Balotelli’s non-current assets register
| Date | Description | Original cost $ | Depreciation policy | Accumulated depreciation $ | Charge for the year $ | Carrying value $ |
|---|---|---|---|---|---|---|
| 1 May 20X4 | 15 treadmills | 18,000 | 36 months SL | 0 | 4,000 | 14,000 |
| 15 May 20X4 | 20 exercise bikes | 17,000 | 3 years SL | 0 | 5,667 | 11,333 |
| 17 August 20X4 | 15 rowing machines | 9,750 | 36 months SL | 0 | 2,167 | 7,583 |
| 19 August 20X4 | 10 cross trainers | 11,000 | 36 months SL | 0 | 1,528 | 9,472 |
55,750 | 0 | 13,362 | 42,388 |
In order to verify the depreciation expense for the year, you have been asked to perform a proof in total. This will involve developing an expectation of the depreciation expense for the year and comparing this to the actual expense to assess if the client has calculated the depreciation charge for the year correctly.
What is the expected depreciation expense for the above assets for the year ended 31 December 20X4 and the resultant impact on non-current assets?
A. Depreciation should be $10,660, assets are understated
B. Depreciation should be $18,583, assets are understated
C. Depreciation should be $9,111, assets are overstated
D. Depreciation should be $12,549, assets are overstated