Question

Based on past experience with a client, an auditor determined performance materiality for fixed assets should be calculated at 1/4 of total materiality (5% of total gross fixed assets). Calculate performance materiality based on the following:

Fixed assets (gross) at 1/1/2017 $1,000,000
Capital expenditures 250,000
Dispositions 200,000
Accumulated depreciation at 1/1/2017 400,000
Accumulated depreciation at 12/31/2017 370,000

A. $8,500

B. $7,500

C. $15,625

D. $13,125

Answer 1

Performance materiality for fixed assets is calculated by adjusting the beginning gross fixed assets for capital expenditures and dispositions, and then applying the specified percentage. The adjusted gross fixed assets arrive at $1,050,000, and when we apply the 5% and then the 1/4 fraction, we get a performance materiality value of $13,125. The correct answer is option D.

Step-by-step explanation:

To calculate performance materiality for fixed assets based on the provided figures, we first need to determine the adjusted gross fixed assets as of the end of the year. This is computed by taking the beginning gross fixed assets, adding capital expenditures, and subtracting dispositions. Then we will apply the performance materiality percentage (1/4 of total materiality or 5% of the adjusted gross fixed assets).

Here are the steps:

• Adjusted gross fixed assets as of 12/31/2017 = Beginning gross fixed assets + Capital expenditures - Dispositions
• = $1,000,000 + $250,000 - $200,000
• = $1,050,000
• Performance materiality = Adjusted gross fixed assets × 5%
• = $1,050,000 × 0.05
• = $52,500
• Performance materiality for fixed assets = Performance materiality × 1/4
• = $52,500 × 1/4
• = $13,125

The correct answer to the question is therefore $13,125, which corresponds to option D.