Which of the following transactions does not meet the definition of an asset?
A)Deposit for purchase of equipment.
B)Commitment to purchase equipment.
C)Finance leased equipment.
D)Purchase of equipment on credit.
E)None of the given answers.

Question

Quizplus · Accepted Answer

An asset is defined as a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. Based on this definition, let's evaluate each of the given transactions:
1. Deposit for purchase of equipment: This is a payment made in advance for equipment that the company will control in the future. The deposit represents a current asset because it is a recoverable amount or will be applied against the purchase price once the equipment is acquired.
2. Commitment to purchase equipment: A commitment is a promise to purchase equipment in the future. It does not represent a resource currently controlled by the entity, nor does it represent a past event. No asset is recognized until the purchase is actually made and control of the equipment is obtained.
3. Finance leased equipment: When a company enters into a finance lease, it effectively gains control over the use of the equipment for a significant portion of its useful life. The leased equipment is recognized as an asset on the balance sheet, along with a corresponding liability for the lease obligation.
4. Purchase of equipment on credit: Purchasing equipment on credit results in the company gaining control of the equipment immediately, even though payment is deferred. The equipment is recognized as an asset, and the obligation to pay the supplier is recognized as a liability.
5. None of the given answers: This option would be chosen if all the other transactions met the definition of an asset.
Based on the above analysis, the transaction that does not meet the definition of an asset is:
A: 2. Commitment to purchase equipment.
This is because a commitment is merely an intention or promise to acquire an asset in the future and does not represent a resource currently controlled by the entity or a past event that has resulted in control of a resource.

Which of the Following Transactions Does Not Meet the Definition