CH-15 Non-Current Assets: Revaluation, Disposal and Other Aspects – Accounting : Book Guide

Chapter 15: Non-current assets: Revaluation, Disposal and other Aspects Questions and solutions which have a GST version: • Exercise 15.3 • Exercise 15.4 • Exercise 15.7 • Problem 15.16 • Problem 15.17 • Problem 15.19 • Problem 15.25 Discussion questions 1. Discuss whether and how a company should account for a revaluation increase and a revaluation decrease on property, plant and equipment. Discuss also the accounting treatment if such an increase or decrease is reversed. IAS 16/AASB 116 states the general policy that, whenever a non-current asset is to be revalued, the entire class of assets to which that asset belongs must be revalued to fair value, so that all assets of the same class are stated at amounts which are determined at the same date. When non-current assets of a particular class are initially revalued upwards to fair value, the revaluation increase on each asset in that class must be credited directly to a Gain on Revaluation (Other Comprehensive Income) account. This account is then closed as the end of the reporting period, through the Other Comprehensive Income (OCI) Summary account, into the equity account entitled ‘Revaluation Surplus’ in IAS 16/AASB 116. Accumulated depreciation up to the date of the revaluation is usually written back against the asset’s cost/carrying amount on the date of the revaluation. Under the standard, downward revaluations of assets within a class of non-current assets can occur only when those assets’ carrying amounts exceed their fair values. A revaluation decrease represents a write-down of a class of non-current assets from carrying amount to fair value. The standard requires a revaluation decrease to be treated as an expense (and hence a reduction of profit) in the current period. As with revaluation increases, any accumulated depreciation on the assets should be written off against the assets. For reversal and/or offset of a revaluation increase credited to a Revaluation Surplus, the Revaluation Surplus created under the standard should be written down through Other comprehensive Income, but only to the extent that it has been previously written up. Additional reversals are then treated as an expense, (a decrease) Any reversal of an initial revaluation decrease should be credited as income and added to the entity’s profit to reverse the previously recognised expense, but only to the extent of the previous write-down. Any amount in excess of the previous write-down should then be credited to a Gain on Revaluation (Other Comprehensive Income) account, and eventually into the Revaluation Surplus. 2. What is meant by ‘recoverable amount’? When are assets to be written down to recoverable amount? What must an entity do if it is unable to determine the recoverable amount of an individual asset? • Recoverable amount is the higher of an asset’s ‘fair value less costs to sell’ and its ‘value in use’ (see definition of value in use in the text). The write down of non-current assets to recoverable amount occurs if the asset has satisfied an impairment test. Whenever an asset’s carrying amount exceeds recoverable amount, the asset has been impaired and must be written down to recoverable amount, with the write down amount treated as an expense, unless the asset had been previously revalued to fair value under the revaluation model. In this case the impairment is written down against the revaluation surplus. • If the impairment test cannot be applied to individual assets because the entity cannot determine the recoverable amount of an individual asset, the impairment test must be applied to each cash-generating unit. 3. The following statement was included in the annual report of a company: ‘All research, advertising and promotion costs are charged to expense in the year in which they are incurred. This enables the company to begin each new year with a “clean slate”. Each new year benefits from the future earnings generated from new products developed and advertised in prior periods, and there is no offsetting by amortisation of introductory costs.’ Discuss whether this treatment of research, advertising and promotion costs complies with the requirements of current accounting standards, and the definition of an asset. •If, as a result of the incurrence of research, advertising, and promotion costs, an entity is entitled to future economic benefits which are under its control, should not an asset be seen to exist, and possibly be recognised rather than treating all such costs as expenses? Should these costs then be written off gradually (amortised) over the periods under which those benefits are to be received as is the case with non-current assets such as property, plant and equipment? Should they be subject to an impairment test under the impairment of assets standard? Discuss the statement in light of the definition and recognition criteria for an asset in the Conceptual Framework. Consider also the requirements of IAS 38/AASB 138 Intangible Assets with respect to research and development expenditure, discussed the current chapter of the text. •Internally generated intangibles cause valuation problems, and IAS 38/AASB 138 requires that any internally-generated intangible can only be recognised if a faithfully representative measure of ‘cost’ can be obtained. The bias in the standard is towards non-recognition. For internally generated intangibles (e.g. patents, copyrights), the entity must determine whether the intangible is in the ‘research’ phase or the ‘development’ phase. In this context, ‘research’ is defined as an original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding, whereas ‘development’ is the application of research knowledge to a plan or design for the production of new materials, products, processes, systems or services before commercial production. It is argued in IAS 38/AASB 138 that no internally-generated intangible asset arising from the research phase should be recognised and that all expenditure on the research phase be recognised as an expense when incurred. Even if the intangible asset has reached the development phase, it can only be recognised as an asset if the entity can demonstrate all of the following. • The technical feasibility of completing the intangible asset so that it will be available for use or sale. • Its intention to complete the asset and use or sell it. • Its ability to use or sell the asset. • How the asset will generate probable future economic benefits, including a demonstration that a market exists for the asset or its products. • The availability of adequate resources to complete the development and to use or sell the asset. • Its ability to determine a faithfully representative measure of the expenditure on the asset in the development phase. 4. Discuss whether internally generated intangible assets should be treated in the same way as acquired intangible assets. •Under IAS 38/AASB 138, an intangible asset is an identifiable non-monetary asset without physical substance. They are usually held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. IAS 38/AASB 138 requires an intangible asset, whether acquired externally or generated internally, to be recognised only if the ‘cost’ can be measured with a faithfully representative measure. It is argued in the standard that certain intangibles generated internally will never satisfy the recognition test and should not be recorded in the accounts. Such intangibles are brand names, mastheads, publishing titles, customer lists and items similar in substance. Nevertheless IAS 38 does allow recognition of internally generated patents and copyrights once they have gone beyond the ‘research’ phase and reached the ‘development’ phase (see the text). Once in the development phase, internally generated intangibles such as patents and copyrights can be recognised as an asset only if the entity can demonstrate all of the following. • The technical feasibility of completing the asset so that it will be available for use or sale. • Its intention to complete the asset and use or sell it. • Its ability to use or sell the asset. • How the asset will generate future economic benefits, including a demonstration that a market exists for the asset or its products. • The availability of adequate resources to complete the development and to use or sell the asset. • The ability to measure the expenditure on the asset with a faithfully representative measure. •It is expected that under IAS 38/AASB 138, very few internally generated intangible assets will be recognised. 5. In order to comply with IAS 38/AASB 138 Intangible Assets, how must an entity handle goodwill on the acquisition of the net assets or shares of another entity? Is this treatment consistent with the principle of recording all assets acquired at cost? Explain why or why not. • •Under IAS 38/AASB 138 goodwill is defined as the future economic benefits arising from assets that are not capable of being individually identified and separately recognised. Goodwill is recognised as a non-current asset only if it has been purchased as part of a business combination. It is measured as the difference between the consideration transferred to the acquiree in the combination and the fair value of the identifiable assets and liabilities acquired. • •Even though goodwill is measured as a residual, it can be argued that this measure is consistent not with the cost principle but with the alternative principle of measuring certain assets at fair value. Goodwill is measured by subtracting from the fair value of the consideration transferred to the acquiree, the fair values of identifiable assets and liabilities acquired. The remainder is the fair value of the unidentifiable assets purchased in the business combination. 6. ‘Machinery is an asset. It may be disclosed as a tangible asset, an intangible asset, or as part of goodwill.’ Discuss. •Goodwill represents under IAS 38/AASB 138 the future benefits from unidentifiable assets. Identifiable assets represent those assets which can be individually identified and are capable of being specifically recorded in the accounts. Thus goodwill represents a collection of all assets which cannot be individually identified and specifically recognised. (Nothing in the standard requires goodwill to be regarded as an ‘intangible’ asset. What is an intangible asset anyway? Does the definition in IAS 38/AASB 138 mean that goodwill is intangible?). If there is an item of machinery, or any other physical asset, which for some reason is incapable of being recognised in the accounts, perhaps because a faithfully representative measure cannot be obtained, the machinery automatically becomes an unidentifiable asset and therefore part of goodwill! Consider the situation of resources or ore and precious minerals prior to their extraction. Are they not physical assets? However, if they cannot be measured in a faithfully representative manner, they automatically become part of an entity’s goodwill by definition. 7. Aquarium Ltd has been developing specialised computer software for its own use. At the end of the current reporting period, the company has spent $260 000 on the project. The final date for full implementation of the software is scheduled to be in six-months-time. However, the management accountant believes that the project will not be ready on time and that the company will have to acquire a commercial package instead, which will not be as efficient as the specialised software, but would be better than having no operational software at all. Others in the software department agree with her. In the financial statements, how should Aquarium Ltd account for the development costs of $260 000? Why? For internally generated intangibles such as computer software, the entity must determine whether the intangible is in the ‘research’ phase or the ‘development’ phase. ‘Research’ is defined as an original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding, and ‘development’ is the application of research knowledge to a plan or design for the production of new materials, products, processes, systems or services before commercial production. IAS 38/AASB 138 requires that no internally-generated intangible asset arising from the research phase should be recognised and that all expenditure on the research phase be recognised as an expense when incurred. But an intangible asset in the development phase can be recognised as an asset only if the entity can demonstrate all of the following. • The technical feasibility of completing the intangible asset so that it will be available. • For use or sale. • Its intention to complete the asset and use or sell it. • Its ability to use or sell the asset. • How the asset will generate probable future economic benefits, including a demonstration that a market exists for the asset or its products. • The availability of adequate resources to complete the development and to use or sell the asset. • Its ability to measure the expenditure on the asset in the development phase. At this point in time, because of the doubt that the software will be ready on time for commercial use, it cannot be demonstrated that the costs of the specialized computer software being developed by Acquarium Ltd satisfy the development phase criteria above; hence, all costs should be written off to expense. 8. Several years ago, Baxter Ltd acquired for $160 000 a patent for the manufacture of special ‘seal-tight’ plastic containers. After 5 years, the manufacture of these containers was discontinued because of the development of a new, more environmentally-friendly container by a competitor. Baxter Ltd is continuing to deduct amortisation expense of $8000 per year based on the patent’s life of 20 years. Discuss whether this treatment is in accord with accounting standards. Even though Baxter Ltd has acquired the patent and treated it as an asset at an original cost of $160 000, and has then been amortising it over its useful life, the value-in-use of this patent is no longer there as the product that had been patented has been discontinued. The patent has therefore been impaired and should be written off, or written down to its recoverable amount (if any). Under IAS 36/AASB 136, an asset is ‘impaired’ whenever its recoverable amount is less than its carrying amount. Recoverable amount is defined as the higher of an asset’s fair value less costs to sell and its value in use. Value in use is based on present value calculations of future net cash flows expected from the continuing use of an asset and from its disposal at the end of its useful life. 9. What are biological assets? How should they be accounted for in a company’s accounting records? Biological assets are defined in IAS 41/AASB 141 Agriculture as living animals or plants, and agricultural produce is defined as the harvested product of the entity’s biological assets. Biological assets and agricultural produce include: • livestock such as sheep, from which are harvested wool and meat, cattle for dairy products and beef, chickens for eggs and meat, pigs for meat, and fish and other marine life as part of the industry of aquaculture • vines, which produce berries, grapes and wine • trees in a forest, which produce logs and timber • bushes and other plants, which produce tea, coffee, sugar cane, fruit and vegetables • exotic animals such as angora goats and alpacas for wool, and emus, crocodiles and kangaroos for meat. IAS 41/AASB 141 requires all biological assets and agricultural produce controlled by an entity to be recognised in the accounting records when their fair values or costs can be measured in a faithfully representative and verifiable manner, and it is probable that the future economic benefits associated with the assets will eventuate. The basis for measurement of biological assets is the fair value less costs to sell (or net fair value). However, if fair values cannot be measured, then biological assets are to be measured at cost less any accumulated depreciation and any impairment losses but only until faithfully representative measures of fair values can be estimated. Agricultural produce harvested from the entity’s biological assets is also measured at net fair value. This measurement is regarded as the cost of the produce for the purpose of applying IAS 2/AASB 102 Inventories; consequently, the value cannot be increased above this deemed cost, but can be written down in applying the lower of cost and net realisable value rule. A gain or loss arising from initial recognition of a biological asset or agricultural produce at net fair value must be included in the entity’s profit or loss for the period in which it arises. For any change in the net fair value of a biological asset in subsequent periods, the entity must recognise this change as a gain or loss in the income statement for the period in which the change arises. As soon as the produce of a biological asset becomes non-living (e.g. the fruit picked from the trees) or the asset itself becomes non-living, either through harvest, felling or slaughter, the non-living agricultural produce must be accounted for as inventory. The initial net fair value of the agricultural produce is then regarded as its cost (for accounting for inventory purposes) immediately after it becomes non-living. 10. Outline the treatment of exploration, evaluation and development costs on a mineral reserve in accordance with the latest accounting standards. If an entity engages in exploration for mineral resources, including their evaluation, the costs of such activities are to be accounted for under International Financial Reporting Standard (IFRS) 6/AASB 6 Exploration for and Evaluation of Mineral Resources. In Australia, where AASB 6 applies, an entity’s accounting policy for the treatment of exploration and evaluation expenditures in to be assessed according to each ‘area of interest’. An area of interest refers to an individual geological area whereby the presence of a mineral deposit or oil or natural gas field is considered favourable or has been proved to exist. AASB 6 requires that, for each area of interest, an entity must expense the exploration and evaluation costs as incurred. However, the initial costs may be partially or fully capitalised and recognised as an ‘exploration and evaluation asset’ if: (a) the rights to tenure of the area of interest are current, and (b) at least one of the following conditions is met: (i) the costs are expected to be recovered through successful development and exploitation of the area of interest, or by its sale, and (ii) at the end of the reporting period the continuing exploration and evaluation activities have not reached a stage where a reasonable assessment can be made of the existence of economically recoverable mineral reserves. After initial recognition, the exploration and evaluation asset is then subject to the requirements of IAS 16/AASB 116. The entity could apply either the cost model or the revaluation model to the asset, and the requirements for eventual depreciation of the asset. Irrespective of the model adopted, the entity must then apply the impairment test under IAS 36/AASB 136 to the exploration and evaluation asset. After an entity has assessed that a mineral deposit or oil or gas reserve is suitable for development, any costs of development are to be treated in accordance with the accounting standards IAS 38/AASB 138 Intangible Assets. When a mineral resource becomes a viable proposition, and the production of inventories of ore or natural gas or oil begins, the exploration and evaluation asset recognised under AASB 6 should then be amortised over useful life. Exercises Exercise 15.1 Revaluations (increase and decrease) Surguy Ltd has disclosed the following non-current asset classes as at 30 June 2019. At 1 July 2019, the directors of Surguy Ltd decide to adopt the revaluation model and revalue the non-current asset classes to the following fair values. Required (a) Prepare general journal entries to record the revaluations, including any closing entries at the end of the reporting period. (LO1) (a) 2019 July 1 Accumulated Depreciation – Machinery 180 000 Expense on Revaluation of Machinery (P/L) 40 000 Machinery 220 000 Revaluation decrease on machinery. July 1 Accumulated Depreciation – Buildings 240 000 Buildings 80 000 Gain on Revaluation – Buildings (OCI) 160 000 Revaluation increase on buildings. Closing entries (extract): 2020 June 30 Gain on Revaluation – Buildings (OCI) 160 000 Other Comprehensive Income Summary 160 000 Transfer of OCI gain. June 30 Other Comprehensive Income Summary 160 000 Revaluation Surplus 160 000 Transfer of OCI to revaluation surplus. June 30 Profit or Loss Summary 40 000 Expense on Revaluation of Machinery (P/L) 40 000 Transfer of expense. June 30 Retained Earnings 40 000 Profit or Loss Summary 40 000 Transfer of revaluation decrease. Exercise 15.2 Derecognition of assets Amorico Pty Ltd scrapped the following machines as worthless. Depreciation expense was recorded last on 31 December 2018. Required (a) Prepare separate entries to record the disposal of the machines by Amorico Pty Ltd. (LO3) (a) 2019 Jan. 2 Accumulated Depreciation – Machinery 8 400 Machinery 8 400 Disposal of machine 1. Accumulated Depreciation – Machinery 15 500 Loss on Disposal of Machinery 3 400 Machinery 18 000 Cash at Bank 900 Disposal of machine 2. Apr. 1 Depreciation Expense – Machinery 1 950 Accumulated Depreciation – Machinery 1 950 ($27 300/3.5 years = $7 800 per year  3/12) Depreciation to date of disposal. Accumulated Depreciation – Machinery 29 250 Loss of Disposal of Machinery 10 750 Machinery 40 000 Disposal of machine 3. Exercise 15.3 Sale of non-current assets Non-GST version On 3 January 2017, Bennetti Ltd paid $33 000 for a machine with a useful life of 10 years and a residual value of $3000. On 31 December 2021, accumulated depreciation on the machine was $15 000. The machine was sold on 31 May 2022. Ignore GST. Required (a) Prepare a general journal entry to record depreciation on the machine for the five months in 2022. Use the straight-line depreciation method (b) Prepare an entry to record the sale of the machine on 31 May 2022 assuming a selling price of: i. $16 000 ii. $17 800. (LO3) (a) 2022 May 31 Depreciation Expense – Machinery 1 250 Accumulated Depreciation – Machinery 1 250 Depreciation of machine. [$33 000 – $3000]/10 = $3000  5/12 (b) i. May 31 Cash at Bank 16 000 Proceeds on Sale of Machinery 16 000 Sale of machine Carrying Amount of Machinery Sold 16 750 Accumulated Depreciation – Machinery 16 250 Machinery 33 000 Carrying amount on disposal, resulting in a loss of $750. (b) ii. May 31 Cash at Bank 17 800 Proceeds on Sale of Machinery 17 800 Sale of machine. Carrying Amount of Machinery Sold 16 750 Accumulated Depreciation – Machinery 16 250 Machinery 33 000 Carrying amount on disposal, resulting in a gain of $1050. Exercise 15.3 Sale of non-current assets GST version On 3 January 2017, Bennetti Ltd paid $33 000 for a machine with a useful life of 10 years and a residual value of $3000. On 31 December 2021, accumulated depreciation on the machine was $15 000. The machine was sold on 31 May 2022. Account for GST. Required (a) Prepare a general journal entry to record depreciation on the machine for the five months in 2022. Use the straight-line depreciation method (b) Prepare an entry to record the sale of the machine on 31 May 2022 assuming a selling price of: i. $16 000, plus GST ii. $17 800, plus GST. (LO3) (a) 2022 May 31 Depreciation Expense – Machinery 1 250 Accumulated Depreciation – Machinery 1 250 Depreciation of machine. [$33 000 – $3000]/10 = $3000  5/12 (b) i. May 31 Cash at Bank 17 600 Proceeds on Sale of Machinery 16 000 GST Payable 1 600 Sale of machine Carrying Amount of Machinery Sold 16 750 Accumulated Depreciation – Machinery 16 250 Machinery 33 000 Carrying amount on disposal, resulting in a loss of $750. (b) ii. May 31 Cash at Bank 19 580 Proceeds on Sale of Machinery 17 800 GST Payable 1 780 Sale of machine. Carrying Amount of Machinery Sold 16 750 Accumulated Depreciation – Machinery 16 250 Machinery 33 000 Carrying amount on disposal, resulting in a gain of $1050. Exercise 15.4 Non-current asset derecognition Non-GST version Cosenza Ltd acquired a truck with a cost of $250 000, an estimated useful life of 6 years and a residual value of $30 000. Sum-of-years-digits depreciation was used. Ignore GST. Required (a) Prepare the journal entries for each of the following events: i. Sell the tractor for cash of $120 000 after 2 years of use. ii. Trade in the tractor for a $40 000 allowance after 4 years on another tractor with a cash price of $275 000. iii. Scrap the tractor after 5 years of use. The tractor was given to a scrap dealer who pays $2000 to remove it. (LO3) (a) Depreciation calculations: Sum of years’ digits = n(n+1)/2 = (6  7)/2 = 21. Assuming sum-of-years’-digits depreciation, depreciation for the first year would be: ($250 000 – $30 000)  6/21 = $62 857. For the second year, depreciation = ($250 000 – $30 000)  5/21 = $ 52 381. Hence, total accumulated depreciation after 2 years = $115 238. For the third year, depreciation = ($250 000 – $30 000)  4/21 = $41 905. For the fourth year, depreciation = ($250 000 – $30 000)  3/21 = $31 429. Hence total accumulated depreciation after 4 years = $188 572. For the fifth year, depreciation = ($250 000 – $30 000)  2/21 = $20 952. Hence total accumulated depreciation after 5 years = $209 524. i. Cash at Bank 120 000 Proceeds on Sale of Tractor 120 000 Sale of tractor. Carrying Amount of Tractor Sold 134 762 Accumulated Depreciation – Tractor 115 238 Tractor 250 000 Carrying amount on disposal, resulting in a loss of $6666. ii. Tractor (new) 275 000 Cash at Bank 235 000 Proceeds on Sale of Tractor 40 000 Trade-in of old tractor for new. Carrying Amount of Tractor Sold 61428 Accumulated Depreciation – Tractor 188 572 Tractor 250 000 Carrying amount on disposal. iii. Expense on Disposal of Tractor 40 476 Accumulated Depreciation – Tractor 209 524 Tractor 250 000 Expense on scrapping of tractor. The $2000 cost of removal was paid by the scrap dealer, not by Cosenza Ltd; hence no entry. Exercise 15.4 Non-current asset derecognition GST version Cosenza Ltd acquired a truck with a cost of $250 000, an estimated useful life of 6 years and a residual value of $30 000. Sum-of-years-digits depreciation was used. Include GST. Required (a) Prepare the journal entries for each of the following events: i. Sell the tractor for cash of $120 000 after 2 years of use. ii. Trade in the tractor for a $40 000, plus GST, allowance after 4 years on another tractor with a cash price of $275 000, plus GST. iii. Scrap the tractor after 5 years of use. The tractor was given to a scrap dealer who pays $2000 to remove it. (LO3) (a) Depreciation calculations: Sum of years’ digits = n(n+1)/2 = (6  7)/2 = 21. Assuming sum-of-years’-digits depreciation, depreciation for the first year would be ($250 000 – $30 000)  6/21 = $62 857. For the second year, depreciation = ($250 000 – $30 000)  5/21 = $ 52 381. Hence, total accumulated depreciation after 2 years = $115 238. For the third year, depreciation = ($250 000 – $30 000)  4/21 = $41 905. For the fourth year, depreciation = ($250 000 – $30 000)  3/21 = $31 429. Hence total accumulated depreciation after 4 years = $188 572. For the fifth year, depreciation = ($250 000 – $30 000)  2/21 = $20 952. Hence total accumulated depreciation after 5 years = $209 524. i. Cash at Bank 132 000 Proceeds on Sale of Tractor 120 000 GST Payable 12 000 Sale of tractor. Carrying Amount of Tractor Sold 134 762 Accumulated Depreciation – Tractor 115 238 Tractor 250 000 Carrying amount on disposal, resulting in a loss of $6666. ii. Tractor (new) 275 000 GST Receivable 27 500 Cash at Bank 258 500 Proceeds on Sale of Tractor 40 000 GST Payable 4 000 Trade-in of old tractor for new. Carrying Amount of Tractor Sold 61428 Accumulated Depreciation – Tractor 188 572 Tractor 250 000 Carrying amount on disposal. iii. Expense on Disposal of Tractor 40 476 Accumulated Depreciation – Tractor 209 524 Tractor 250 000 Expense on scrapping of tractor. The $2000 cost of removal was paid by the scrap dealer, not by Cosenza Ltd; hence no entry. Exercise 15.5 Exchange of similar assets On 3 January 2019, Greskowiak Ltd exchanged a machine with a cost of $430 000 and accumulated depreciation of $150 000 for a new similar machine with a cash price of $460 000. Ignore GST. Required (a) Prepare general journal entries to record the exchange of the machines, assuming a trade-in allowance of $280 000 was received for the old machine and $180 000 was paid in cash. (b) Prepare general journal entries to record the exchange of machines assuming a trade-in allowance of $250 000 for the old machine and $210 000 was paid in cash. (LO3) (a) 2019 Jan. 3 Machinery 460 000 Cash at Bank 180 000 Proceeds from Sale of Machinery 280 000 Purchase of machine and trade-in. Carrying Amount of Machinery Sold 280 000 Accumulated Depreciation – Machinery 150 000 Machinery 430 000 Write off old machine. (b) Jan. 3 Machinery 460 000 Cash at Bank 210 000 Proceeds from Sale of Machinery 250 000 Purchase of machine and trade-in. Carrying Amount of Machinery Sold 280 000 Accumulated Depreciation – Machinery 150 000 Machinery 430 000 Write off old machine. Exercise 15.6 Exchange of dissimilar assets Kapor Ltd exchanged machinery with a cost of $350 000 and accumulated depreciation of $180 000 for a parcel of land. There were no other assets given in exchange. Ignore GST. Required (a) Prepare general journal entries to record the exchange assuming: i. the trade-in value of the machinery was $190 000 ii. the trade-in value of the machinery was $150 000. (LO3) (a) i. Land 190 000 Proceeds from Sale of Machinery 190 000 Exchange machinery for land. Carrying Amount of Machinery Sold 170 000 Accumulated Depreciation – Machinery 180 000 Machinery 350 000 Write off old machine. ii. Land 150 000 Proceeds from Sale of Machinery 150 000 Exchange machinery for land. Carrying Amount of Machinery Sold 170 000 Accumulated Depreciation – Machinery 180 000 Machinery 350 000 Write off old machine. Exercise 15.7 Revaluation and derecognition Non-GST version On 1 January 2016, Leibhardt Ltd acquired two identical pieces of equipment for a total cost of $540 000. It was estimated that each item would have a useful life of 8 years and a residual value of $40 000 each. The company uses the straight-line method of depreciation and its end of reporting period is 30 June. On 1 July 2022, the company changed its accounting policy and revalued each item of equipment upwards by a total of $60 000, based on an independent valuer’s report, to fair value. There was no need to revise useful lives or residual amounts. On 31 December 2023, one of the items of equipment was sold for $120 000 cash. Required (a) Prepare entries (in general journal format) in relation to the equipment from acquisition date to 31 December 2023. (LO1 and LO3) (a) 2016 Jan. 1 Equipment 1 080 000 Cash at Bank/Payable 1 080 000 Acquisition of equipment. Jun. 30 Depreciation Expense – Equipment 62 500 Accumulated Depreciation – Equipment 62 500 Depreciation for 6 months. (2  ($540 000 – $40 000)/8  6/12) 2017–2022 Jun. 30 Depreciation Expense – Equipment 125 000 Accumulated Depreciation – Equipment 125 000 Annual depreciation. 2022 Jul. 1 Accumulated Depreciation – Equipment 812 500 Equipment 692 500 Gain on Revaluation (OCI) 120 000 Revaluation of equipment. 2023 Jun. 30 Depreciation Expense – Equipment 205000 Accumulated Depreciation – Equipment 205000 Annual depreciation. (($387 500 – $80 000)  1.5 years) Dec. 31 Depreciation Expense – Equipment 51250 Accumulated Depreciation – Equipment 51250 Depreciation on one piece for 6 months. ($205000 /2  6/12) Dec. 31 Cash at Bank 120x 000 Proceeds from Sale of Equipment 120 000 Sale of equipment for cash. Carrying Amount of Equipment Sold 40000 Accumulated Depreciation – Equipment *153750 Equipment 193750 Write off equipment sold. *($153750 = $51250 + ($205000 /2) Note: As part of closing entries on 30 June 2023, the Gain on Revaluation (OCI) will be transferred to the Other Comprehensive Income Summary account, and then transferred to Revaluation Surplus. Also, each year, Depreciation Expense would be closed to the Profit or Loss Summary account. Exercise 15.7 Revaluation and derecognition GST version On 1 January 2016, Leibhardt Ltd acquired two identical pieces of equipment for a total cost of $540 000 plus GST. It was estimated that each item would have a useful life of 8 years and a residual value of $40 000 each. The company uses the straight-line method of depreciation and its end of reporting period is 30 June. On 1 July 2022, the company changed its accounting policy and revalued each item of equipment upwards by a total of $60 000, based on an independent valuer’s report, to fair value. There was no need to revise useful lives or residual amounts. On 31 December 2023, one of the items of equipment was sold for $120 000 cash plus GST. Required (a) Prepare entries (in general journal format) in relation to the equipment from acquisition date to 31 December 2023. (LO1 and LO3) (a) 2016 Jan. 1 Equipment 1 080 000 GST Receivable 108 000 Cash at Bank/Payable 1 188 000 Acquisition of equipment. Jun. 30 Depreciation Expense – Equipment 62 500 Accumulated Depreciation – Equipment 62 500 Depreciation for 6 months. (2  ($540 000 – $40 000)/8  6/12) 2017–2022 Jun. 30 Depreciation Expense – Equipment 125 000 Accumulated Depreciation – Equipment 125 000 Annual depreciation. 2022 Jul. 1 Accumulated Depreciation – Equipment 812 500 Equipment 692 500 Gain on Revaluation (OCI) 120 000 Revaluation of equipment. 2023 Jun. 30 Depreciation Expense – Equipment 205000 Accumulated Depreciation – Equipment 205000 Annual depreciation. (($387 500 – $80 000)  1.5 years) Dec. 31 Depreciation Expense – Equipment 51250 Accumulated Depreciation – Equipment 51250 Depreciation on one piece for 6 months. ($205000 /2  6/12) Dec. 31 Cash at Bank 132 000 Proceeds from Sale of Equipment 120 000 GST Payable 12 000 Sale of equipment for cash. Carrying Amount of Equipment Sold 40000 Accumulated Depreciation – Equipment *153750 Equipment 193750 Write off equipment sold. *($153750 = $51250 + ($205000 /2) Note: As part of closing entries on 30 June 2023, the Gain on Revaluation (OCI) will be transferred to the Other Comprehensive Income Summary account, and then transferred to Revaluation Surplus. Also, each year, Depreciation Expense would be closed to the Profit or Loss Summary account. Exercise 15.8 Mineral resources Miyazono Ltd, which operated a silver, lead and zinc mine, was purchased by Pagnozzi Ltd for $112 000 000 (residual value $10 000 000). It is estimated that the mine will produce 25 million tonnes of ore. Mining equipment with a useful life of 12 years was installed at a cost of $6 000 000. Extraction of ore will exhaust the mine in about 10 years, after which time the equipment will be abandoned. Required (a) Prepare entries for Pagnozzi Ltd to record amortisation of the mine and depreciation of the mining equipment for the first year, assuming that 2 000 000 tonnes of silver, lead and zinc ore were mined and sold. (b) Prepare a partial statement of financial position for Pagnozzi Ltd showing how the mine and the mining equipment would be reported at the end of the first year of operations. (LO5) (a) Amortisation Expense 8 160 000 Accumulated Amortisation 8 160 000 (102 000 000  25 000 000)  2 000 000 Depreciation Expense 480 000 Accumulated Depreciation – Mining Equipment (6 000 000  25 000 000)  2 000 000 480 000 (b) Partial statement of financial position Mineral deposits $112 000 000 Less: Accumulated amortisation 8 160 000 $103 840 000 Mining equipment 6 000 000 Less: Accumulated depreciation 480 000 5 520 000 Exercise 15.9 Composite-rate depreciation Reipl Ltd uses the composite-rate method to record depreciation of its store equipment. On 1 January 2019, the company owned the following store equipment (ignore GST). Required (a) Calculate the composite rate for depreciating the store equipment. (b) Prepare the entry to record depreciation expense on 31 December 2019 assuming the store equipment account had a balance of $190 000 at year-end. (c) Prepare general journal entries to record the sale of a display case for $1500. The case had an original cost of $2600. (d) Prepare general journal entries to record the exchange of a cash register with an original cost of $3200 for a new cash register with a cash price of $5000. The company received a trade-in allowance of $1400 for the old register and paid the balance of $3600 in cash. (LO4) (a) Item Cost Residual Value Depreciable Amount Useful Life Annual Depreciation Display cases $73 000 $3 000 $70 000 10 yrs. $7 000 Cash registers 28 000 8 000 20 000 5 yrs. 4 000 Shopping trolleys 30 000 6 000 24 000 6 yrs. 4 000 Shelving 30 000 2 000 28 000 7 yrs. 4 000 Display racks 12 000 1 800 10 200 4 yrs. 2 550 $173 000 $21 550 Composite rate = $21 550  $173 000 = 12.46% (b) Depreciation Expense 22 615 Accumulated Depreciation – Store Equipment 22 615 Depreciation on store equipment. (($173 000 + $190 000)  2 = 181 500  12.46%) (c) Cash at Bank 1 500 Proceeds from Sale of Store Equipment 1 500 Sale of display case. Carrying Amount of Store Equipment Sold 1 500 Accumulated Depreciation – Store Equipment 1 100 Store Equipment 2 600 Write off display case sold. (d) Store Equipment 5 000 Cash at Bank 3 600 Proceeds from Sale of Store Equipment 1 400 Exchange of cash registers. Carrying Amount of Store Equipment Sold* 1 400 Accumulated Depreciation – Store Equipment 1 800 Store Equipment 3 200 Write off cash register sold. * Carrying amount must equal proceeds. Exercise 15.10 Goodwill Sage Ltd is considering the purchase of Rosemary Ltd, which produces a product that Sage Ltd uses in its manufacturing process. Relevant data for Rosemary Ltd are as follows. Required (a) Determine the price Sage Ltd would pay for goodwill in acquiring Rosemary Ltd if the total consideration transferred in the business combination was $1 500 000, in cash. (b) Prepare entries for Sage Ltd in general journal form to record the acquisition of Rosemary Ltd for $1 000 000 cash. (LO8) (a) Fair value of identifiable assets $1 800 000 Fair value of identifiable liabilities (720 000) Total consideration transferred 1 500 000 Goodwill (difference) $420 000 (b) Identifiable Assets 1 800 000 Identifiable Liabilities 720 000 Cash at bank 1 000 000 Gain on Bargain Purchase 80 000 Acquisition of Rosemary Ltd Exercise 15.11 Non-current asset derecognition During 2019, Truong Ltd disposed of four different non-current assets. On 1 January 2019 the accounts were as follows. Truong Ltd depreciates its motor vehicles and machines by the straight-line method and records depreciation to the nearest month. Assets were disposed of as follows. •Motor vehicle No. 3, which was not insured, was completely destroyed by fire on 6 January 2019. A towing company was paid $1000 to remove the motor vehicle and to clean up any debris. •Motor vehicle No. 7 was traded in on a new motor vehicle on 3 July 2019. The new motor vehicle had a cash price of $56 000. The old motor vehicle plus cash of $26 000 were given in exchange. •Machine A was sold for $100 000 cash on 1 October 2019. •Machine D was traded in on a new machine with a cash price of $300 000 on 24 December 2019. The old machine plus cash of $290 000 were given in exchange. Required (a) Prepare all general journal entries to record the transactions. Ignore GST. (LO3) (a) 2019 6 Jan. Accumulated Depreciation – Motor vehicles 18 000 Loss from Fire 19 000 Motor vehicles 36 000 Cash at Bank 1 000 Derecognise Motor vehicle no. 3. July 3 Depreciation Expense – Motor vehicles 4 500 Accumulated Depreciation – Motor vehicles 4 500 Depreciation on van. ($45 000 /5 years = $9000  6/12) Motor vehicles 56 000 Cash at Bank 26 000 Proceeds on Sale of Motor vehicles 30 000 Exchange Motor vehicles Carrying Amount of Motor vehicle Sold 13 000 Accumulated Depreciation – Motor vehicles 39 000 Motor vehicles 52 000 Write off Motor vehicle no. 7 traded in. Oct. 1 Depreciation Expense – Machinery 12 900 Accumulated Depreciation – Machinery 12 900 Depreciation on machine sold. ($172 000 /10 years = $17 200  9/12) Cash at Bank 100 000 Proceeds on Sale of Machinery 100 000 Sale of machine A. Carrying Amount of Machinery Sold 55 900 Accumulated Depreciation – Machinery 124 100 Machinery 180 000 Write off machine A. Dec. 24 Depreciation Expense – Machinery 20 000 Accum. Depreciation – Machinery 20 000 Depreciation on machine sold. ($240 000 /12 years = $20 000) Machinery 300 000 Proceeds on Sale of Machinery 10 000 Cash at Bank 290 000 Trade in of machine B. Accumulated Depreciation – Machinery 280 000 Machinery 280 000 Write off machine B traded in. Exercise 15.12 Ledger accounts for non-current asset acquisition and derecognition On 1 July 2019, Weiland Pty Ltd owned several farming vehicles that had cost a total of $155 000. Accumulated depreciation on these vehicles to 1 July 2019 amounted to $73 000. On 30 September 2019, Weiland Pty Ltd acquired a new delivery vehicle and traded in one vehicle that had cost $32 000 and which had accumulated depreciation of $14 400 up to 1 July 2019. The full price of the new vehicle was $29 500 and the trade-in value of the old vehicle was agreed at $18 400. Ignore GST. On 31 December 2019, an additional delivery vehicle was purchased for $34 000 cash. Depreciation is calculated at the rate of 20% p.a. on the diminishing balance. Required (a) Prepare the following accounts for the year ended 30 June 2020: i. Delivery Vehicles ii. Accumulated Depreciation – Delivery Vehicles. (LO3) (a) Delivery Vehicles 1/7/16 Balance $155 000 30/9/16 Carrying amt of asset sold $32 000 30/9/16 Cash and Sale Proceeds on old vehicle 29 500 31/12/16 Cash at Bank 34 000 30/6/17 Balance c/d 186 500 218 500 218 500 30/6/17 Balance b/d $186 500 Accumulated Depreciation – Delivery Vehicles 30/9/16 Carrying amount of vehicle sold $15 280 1/7/16 Balance b/d $73 000 30/9/16 Depreciation* 880 30/6/17 Balance c/d 79 305 30/6/17 Depreciation** 20 705 94 585 94 585 30/6/17 Balance b/d 79 305 * Depreciation up to 30 September on vehicle traded in = 20%  ($32 000 – $14 400)  3/12 = $880. Total accumulated depreciation up to 30 September on vehicle sold is $15 280. ** Depreciation on remaining vehicles plus new vehicles: Remaining vehicles at 1 July 2019: Cost = $155 000 – $32 000 = $123 000 Accum depn = $73 000 – $14 400 = $58 600 Depreciation for year ended 30/6/17 = ($123 000 – $58 600)  20% = $12 880. Depreciation on vehicle acquired 30/9/16 = $29 500  20%  9/12 = $4 425. Depreciation on vehicle acquired 31/12/16 = $34 000  20%  6/12 = $3 400. Total depreciation expense recorded on 30 June 2020 = $12 880 + $4 425 + $3 400) =$ 20 705 Exercise 15.13 Non-current asset revaluation model On 30 June 2019, Wong Ltd reported the following information for equipment in its statement of financial position. Investigation of the property and plant records showed that the equipment consisted of two items: a machine (no. 1) that cost the company $800 000 and had a carrying amount of $420 000 at 30 June 2019, and another machine (no. 2) that originally cost $600 000 and had a carrying amount at 30 June 2019 of $460 000. Both machines are depreciated on a straight-line basis over 10 years. On 1 January 2020, the directors of Wong Ltd decided to switch the valuation method from the cost model to the revaluation model. Machine no. 1 was revalued to its fair value of $480 000, with an expected future useful life of 6 years, and machine no. 2 was revalued to $450 000, with an expected remaining useful life of 6 years. On 30 June 2020, the fair value of machine no. 1 was assessed at $450 000, and the future useful life was estimated as 5 years. For machine no. 2, fair value was assessed to be only $300 000, and its future useful life to be 4 years because of a certain degree of commercial obsolescence. Required (a) Prepare journal entries for Wong Ltd, in general journal form, for the equipment during the period from 1 July 2019 to 30 June 2020. (LO1, LO2 and LO3) (a) 2020 Jan. 1 Depreciation Expense 70000 Accum. Depreciation – Equipment 70000 Depreciate equipment up to date of revaluation ($80 000 + $60 000)*6/12. Jan. 1 Accumulated Depreciation – Equipment 420000 Equipment 420000 Reverse accum depn on machine 1 (380k + 40 k). Equipment 100000 Gain on Revaluation (OCI) 100 000 Revaluation increase on machine 1. (Note: these two entries could be combined.) Jan. 1 Accumulated Depreciation – Equipment 170000 Equipment 170000 Reverse accum depn on machine 2. Equipment 20 000 Gain on Revaluation (OCI) 20 000 Revaluation increase on machine 2. (Note: these two entries could be combined.) June 30 Depreciation Expense 77 500 Accum. Depreciation – Equipment 57 500 Depreciation on machines for 6 months. Machine 1 = $480 000 ÷ 6  6/12 = $40 000 Machine 2 = $450 000 ÷ 6  6/12 = $37 500 June 30 Accumulated Depreciation – Equipment 40,000 Equipment 40,000 Reverse accum. Dep’n on machine 1. Equipment 10,000 Gain on Revaluation (OCI) 10,000 Revaluation increase on Machine 1 Accumulated Depreciation – Equipment 37,500 Equipment 37,500 Reverse accum depn on Machine 2. Loss on Revaluation (OCI) 20,000 Expense on Revaluation (P/L) 92,500 Equipment 112,500 Reverse previous increase and record decrease on machine 2. Exercise 15.14 Goodwill and business combination Zhang Ltd acquired the business of Azzam Ltd for a cash outlay of $5 000 000 on 1 July 2019. The summarised balance sheet of Azzam Ltd on that date was as follows. Most of the assets were recorded at fair value except for inventories and land, which were assessed to have fair values of $1 000 000 and $1 100 000 respectively. Required (a) Determine the amount that Zhang Ltd should record as goodwill or gain on bargain purchase on 1 July 2019. (b) Prepare journal entries in the records of Zhang Ltd to acquire the business of Azzam Ltd on 1 July 2019. (c) Discuss how your answer would differ if Zhang Ltd had paid $3 800 000 cash to acquire the business of Zhang Ltd. (LO8) (a) Fair value of identifiable assets and liabilities acquired: Cash at bank $185 000 Accounts receivable 370 000 Inventories 1 000 000 Land 1 100 000 Plant and equipment 2 800 000 5 455 000 Accounts payable (520 000) Bank loan payable (1 350 000) $3 585 000 Consideration payable $5 000 000 Hence. Goodwill $1 415 000 (b) General Journal of Zhang Ltd Cash at Bank 185 000 Accounts Receivable 370 000 Inventories 1 000 000 Land 1 100 000 Plant and Equipment 2 800 000 Goodwill 1 415 000 Accounts Payable 520 000 Bank Loan Payable 1 350 000 Payable to Azzam Ltd 5 000 000 Acquire assets and liabilities. Payable to Azzam Ltd 5 000 000 Cash at Bank 5 000 000 Pay Azzam Ltd. (c) If Zhang Ltd had paid $3 800 000 cash, there would be goodwill of $215 000 which would be recorded as an asset as shown above in part A. In parts A and B of the question, the size of the goodwill figure is of some concern compared to other assets, and it would be worthwhile investigating as to whether the payment made by Azzam Ltd was too large. Did Zhang Ltd pay more than the assets were worth? If Zhang Ltd did pay too much, then a loss for the overpayment should be recorded. Exercise 15.15 Non-current asset depreciation and derecognition The following information was obtained from the accounting records of Crothers Ltd. On 1 July 2019, vehicle A was traded in for vehicle B. The trade-in price for vehicle A was determined to be $21 000. Required (a) Prepare the journal entries (in general journal form) for all vehicle transactions from 1 July 2018 to 30 June 2020 in the accounting records of Crothers Ltd. (LO3) (a) 2018 July 1 Vehicle 30 800 Cash at Bank 30 800 Purchase of vehicle A. 2019 June 30 Depreciation Expense – Vehicles 5 760 Accumulated Depreciation – Vehicles 5 760 Depreciation of vehicle A. ($30 800 – $2000)/5 years = $5760 July 1 Vehicle 28 800 Cash at Bank 7 800 Proceeds on Sale of Vehicle 21 000 Trade-in vehicle A for Vehicle B. Carrying Amount of Vehicle Sold 25 040 Accumulated Depreciation – Vehicles 5 760 Vehicle 30 800 Write off vehicle traded in. 2020 June 30 Depreciation Expense – Vehicles 4 400 Accumulated Depreciation – Vehicles 4 400 Depreciation of vehicle B. ($28 800 – $2400)/6 years = $4400 July 1 Vehicles 39 600 Cash at Bank 39 600 Purchase of vehicle C 2021 June 30 Depreciation Expense – Vehicles 12 222 Accumulated Depreciation – Vehicles 12 222 Depreciation of vehicle B and Vehicle C $12 222 = $4400 + ($39 600 – $4400)  8/36 36 = n(n+1)/2 = (8  9)/2 Problems Problem 15.16 Methods of derecognising a non-current asset Non-GST version Deduhin Ltd acquired two new machines for cash on 1 January 2017. The cost of machine A was $400 000, and of machine B, $600 000. Each machine was expected to have a useful life of 10 years, and residual values were estimated at $20 000 for machine A and $50 000 for machine B. Because of technological advances, Deduhin Ltd decided to replace machine A. It traded in machine A on 31 March 2021 for a new machine, C, which cost $420 000. A $200 000 trade-in was allowed for machine A, and the balance of machine C’s cost was paid in cash. Machine C was expected to have a useful life of 8 years and a residual value of $20 000. On 2 July 2021, extensive repairs were carried out on machine B for $66 000 cash. Deduhin Ltd expected these repairs to extend machine B’s useful life by 4 years and it revised machine B’s estimated residual value to $19 500. Machine B was eventually sold on 1 April 2023 for $300 000 cash. Deduhin Ltd uses the straight-line depreciation method, recording depreciation to the nearest whole month. The end of the reporting period is 30 June. Required (a) Prepare general journal entries to record the above transactions and depreciation journal entries required at the end of each reporting period up to 30 June 2023. (b) Prepare the following ledger accounts for the period 1 January 2017 to 1 July 2023: i. Machinery ii. Accumulated Depreciation – Machinery. (LO3) (a) DEDUHIN LTD General Journal 2017 Jan 1 Machinery 1 000 000 Cash at Bank 1 000 000 Purchase of machines A and B. June 30 Depreciation Expense – Machinery 46 500 Accum. Depreciation – Machinery 46 500 Depreciation of machines A and B. Mach A: (400 000 – 20 000)/10  ½ = $19 000 Mach B: (600 000 – 50 000)/10  ½ = $27 500 2018 June 30 Depreciation Expense – Machinery 93 000 Accum. Depreciation – Machinery 93 000 Depreciation of machines A and B. Mach A: (400 000 – 20 000)/10 = $38 000 Mach B: (600 000 – 50 000)/10 = $55 000 2019 June 30 Depreciation Expense – Machinery 93 000 Accum. Depreciation – Machinery 93 000 Depreciation of machines A and B. 2020 June 30 Depreciation Expense – Machinery 93 000 Accum. Depreciation – Machinery 93 000 Depreciation of machines A and B. 2021 Mar. 31 Depreciation Expense – Machinery 28 500 Accum. Depreciation – Machinery 28 500 Depreciation of machine A to date of sale. Mach A: $38 000  9/12 =$28 500 Mar 31 Machinery [C] 420 000 Cash at Bank 220 000 Proceeds on Sale of Machine 200 000 Trade-in machine A for Machine C. Carrying Amount of Machine Sold 238 500 Accumulated Depreciation – Machinery 161 500 Machinery 400 000 Write off machine traded in. $161 500 = ($38 000  3) + 19 000 + 28 500 June 30 Depreciation Expense – Machinery 67 500 Accum. Depreciation – Machinery 67 500 Depreciation of machines B and C. Mach B: $55 000 Mach C: ($420 000 – 20 000)/8  ¼ = $12 500 July 2 Accumulated Depreciation – Machinery 247 500 Machinery [B] 247 500 Write back accumulated depreciation on machine B on overhaul. Machinery [B] 66 000 Cash at Bank 66 000 Overhaul of machine B. New carrying amount of machine B = 600 000 – 247 500 + 66 000 = $418 500 Remaining useful life is now 9½ years 2022 30 June Depreciation Expense – Machinery 92 000 Accum. Depreciation – Machinery 92 000 Depreciation of machines B and C. Mach B: ($418 500 – 19 500) ÷ 9½ = 42 000 Mach C: ($420 000 – 20 000) /8 = 50 000 2023 April 1 Depreciation Expense – Machinery 31 500 Accum. Depreciation – Machinery 31 500 Depreciation of machine B before sale. ($418 500 – 19 500)÷ 9½  9/12= 31 500 April 1 Cash at Bank 300 000 Proceeds on Sale of Machine 300 000 Sale of machine B. Carrying Amount of Machine Sold 345 000 Accumulated Depreciation – Machinery 73 500 Machinery 418 500 Write off machine B. $73 500 = 42 000 + 31 500 June 30 Depreciation Expense – Machinery 50 000 Accum. Depreciation – Machinery 50 000 Depreciation of machine C. (b) The following accounts (in T account format) should be balanced at least on a yearly basis but have not been on the grounds of simplicity. Machinery 1/1/14 Cash at bank $1 000 000 1/4/18 Carrying amount 400 000 31/3/18 Cash and proceeds on sale 420 000 2/7/18 Accum. depreciation 247 500 2/7/18 Cash at bank 66 000 1/4/20 Carrying amount 418 500 30/6/20 Balance c/d 420 000 1 486 000 1 486 000 1/7/20 Balance b/d 420 000 Accumulated Depreciation – Machinery 1/4/18 Carrying amount and machinery. $161 500 30/6/14 Depreciation $46 500 2/7/18 Machinery 247 500 30/6/15 Depreciation 93 000 1/4/20 Carrying amount and machinery 73 500 30/6/16 Depreciation 93 000 30/6/17 Depreciation 93 000 31/3/18 Depreciation 28 500 30/6/18 Depreciation 67 500 30/6/19 Depreciation 92 000 1/4/20 Depreciation 31 500 30/6/20 Balance c/d 112 500 30/6/20 Depreciation 50 000 595 000 595 000 1/7/20 Balance b/d 112 500 Problem 15.16 Methods of derecognising a non-current asset GST version Deduhin Ltd acquired two new machines for cash on 1 January 2017. The cost of machine A was $400 000, plus GST, and of machine B, $600 000, plus GST. Each machine was expected to have a useful life of 10 years, and residual values were estimated at $20 000 for machine A and $50 000 for machine B. Because of technological advances, Deduhin Ltd decided to replace machine A. It traded in machine A on 31 March 2021 for a new machine, C, which cost $420 000. A $200 000, plus GST, trade-in was allowed for machine A, and the balance of machine C’s cost was paid in cash. Machine C was expected to have a useful life of 8 years and a residual value of $20 000. On 2 July 2021, extensive repairs were carried out on machine B for $66 000 cash. Deduhin Ltd expected these repairs to extend machine B’s useful life by 4 years and it revised machine B’s estimated residual value to $19 500. Machine B was eventually sold on 1 April 2023 for $300 000, plus GST, cash. Deduhin Ltd uses the straight-line depreciation method, recording depreciation to the nearest whole month. The end of the reporting period is 30 June. Required (a) Prepare general journal entries to record the above transactions and depreciation journal entries required at the end of each reporting period up to 30 June 2023. (b) Prepare the following ledger accounts for the period 1 January 2017 to 1 July 2023: i. Machinery ii. Accumulated Depreciation – Machinery. (LO3) (a) DEDUHIN LTD General Journal 2017 Jan 1 Machinery 1 000 000 GST Receivable 100 000 Cash at Bank 1 100 000 Purchase of machines A and B. June 30 Depreciation Expense – Machinery 46 500 Accum. Depreciation – Machinery 46 500 Depreciation of machines A and B. Mach A: (400 000 – 20 000)/10  ½ = $19 000 Mach B: (600 000 – 50 000)/10  ½ = $27 500 2018 June 30 Depreciation Expense – Machinery 93 000 Accum. Depreciation – Machinery 93 000 Depreciation of machines A and B. Mach A: (400 000 – 20 000)/10 = $38 000 Mach B: (600 000 – 50 000)/10 = $55 000 2019 June 30 Depreciation Expense – Machinery 93 000 Accum. Depreciation – Machinery 93 000 Depreciation of machines A and B. 2020 June 30 Depreciation Expense – Machinery 93 000 Accum. Depreciation – Machinery 93 000 Depreciation of machines A and B. 2021 Mar. 31 Depreciation Expense – Machinery 28 500 Accum. Depreciation – Machinery 28 500 Depreciation of machine A to date of sale. Mach A: $38 000  9/12 =$28 500 Mar 31 Machinery [C] 420 000 GST Receivable 42 000 Cash at Bank 242 000 Proceeds on Sale of Machine 200 000 GST Payable 20 000 Trade-in machine A for Machine C. Carrying Amount of Machine Sold 238 500 Accumulated Depreciation – Machinery 161 500 Machinery 400 000 Write off machine traded in. $161 500 = ($38 000  3) + 19 000 + 28 500 June 30 Depreciation Expense – Machinery 67 500 Accum. Depreciation – Machinery 67 500 Depreciation of machines B and C. Mach B: $55 000 Mach C: ($420 000 – 20 000)/8  ¼ = $12 500 July 2 Accumulated Depreciation – Machinery 247 500 Machinery [B] 247 500 Write back accumulated depreciation on machine B on overhaul. Machinery [B] 66 000 GST Receivable 6 000 Cash at Bank 72 000 Overhaul of machine B. New carrying amount of machine B = 600 000 – 247 500 + 66 000 = $418 500 Remaining useful life is now 9½ years 2022 30 June Depreciation Expense – Machinery 92 000 Accum. Depreciation – Machinery 92 000 Depreciation of machines B and C. Mach B: ($418 500 – 19 500) ÷ 9½ = 42 000 Mach C: ($420 000 – 20 000) /8 = 50 000 2023 April 1 Depreciation Expense – Machinery 31 500 Accum. Depreciation – Machinery 31 500 Depreciation of machine B before sale. ($418 500 – 19 500)÷ 9½  9/12= 31 500 April 1 Cash at Bank 330 000 Proceeds on Sale of Machine 300 000 GST Payable 30 000 Sale of machine B. Carrying Amount of Machine Sold 345 000 Accumulated Depreciation – Machinery 73 500 Machinery 418 500 Write off machine B. $73 500 = 42 000 + 31 500 June 30 Depreciation Expense – Machinery 50 000 Accum. Depreciation – Machinery 50 000 Depreciation of machine C. (b) The following accounts (in T account format) should be balanced at least on a yearly basis but have not been on the grounds of simplicity. Machinery 1/1/14 Cash at bank $1 000 000 1/4/18 Carrying amount 400 000 31/3/18 Cash and proceeds on sale 420 000 2/7/18 Accum. depreciation 247 500 2/7/18 Cash at bank 66 000 1/4/20 Carrying amount 418 500 30/6/20 Balance c/d 420 000 1 486 000 1 486 000 1/7/20 Balance b/d 420 000 Accumulated Depreciation – Machinery 1/4/18 Carrying amount and machinery. $161 500 30/6/14 Depreciation $46 500 2/7/18 Machinery 247 500 30/6/15 Depreciation 93 000 1/4/20 Carrying amount and machinery 73 500 30/6/16 Depreciation 93 000 30/6/17 Depreciation 93 000 31/3/18 Depreciation 28 500 30/6/18 Depreciation 67 500 30/6/19 Depreciation 92 000 1/4/20 Depreciation 31 500 30/6/20 Balance c/d 112 500 30/6/20 Depreciation 50 000 595 000 595 000 1/7/20 Balance b/d 112 500 Problem 15.17 Methods of derecognising a non-current asset Non-GST version On 2 January 2018, Gormly Ltd purchased a machine for $165 000. The machine had a useful life of 5 years and a residual value of $5000. Straight-line depreciation is used. The machine is to be disposed of on 1 July 2022. Ignore GST. Gormly Ltd balances its accounts on 31 December. Required (a) What entry should be made to record depreciation prior to the disposal? (b) Prepare journal entries to record the disposal of the machine under each of the following assumptions. i. The machine is sold for $80 000 cash. ii. The machine is sold for $48 500 cash. iii. The machine and cash of $120 000 are exchanged for a new machine with a cash price of $140 000. iv. The machine was completely destroyed by fire and cash of $45 000 was received from the insurance company. v. The machine and cash of $140 000 are exchanged for a new machine with a cash price of $170 000. (LO3) (a) 2022 July 1 Depreciation Expense – Machinery 16 000 Accumulated Depreciation – Vans 16 000 Depreciation of machine for 6 months ($160 000/5 years = $32 000  6/12) (b) i. Cash at Bank 80 000 Proceeds on Sale of Machinery 80 000 Sale of machine. Carrying Amount of Machinery Sold 21 000 Accumulated Depreciation – Machinery 144 000 Machinery 165 000 Write off machine. Accum dep’n = $32 000  4 + $16 000 (b) ii. Cash at Bank 48 500 Proceeds on Sale of Machinery 48 500 Sale of machine. Carrying Amount of Machinery Sold 21 000 Accumulated Depreciation – Machinery 144 000 Machinery 165 000 Write off machine. (b) iii. Machinery 140 000 Proceeds on Sale of Machinery 20 000 Cash at Bank 120 000 Trade in of machine Carrying Amount of Machinery Sold 21 000 Accumulated Depreciation – Machinery 144 000 Machinery 165 000 Write off machine traded in. (b) iv. Cash at Bank 45 000 Accumulated Depreciation – Machinery 144 000 Machinery 165 000 Gain from Fire Insurance 24 000 Derecognise machine destroyed. (b) v. Machinery 170 000 Cash at Bank 140 000 Proceeds on Sale of Machinery 30 000 Exchange machines Carrying Amount of Machinery Sold 21 000 Accumulated Depreciation – Machinery 144 000 Machinery 165 000 Write off machine traded in. Problem 15.17 Methods of derecognising a non-current asset GST version On 2 January 2018, Gormly Ltd purchased a machine for $165 000. The machine had a useful life of 5 years and a residual value of $5000. Straight-line depreciation is used. The machine is to be disposed of on 1 July 2022. Ignore GST. Gormly Ltd balances its accounts on 31 December. Required (a) What entry should be made to record depreciation prior to the disposal? (b) Prepare journal entries to record the disposal of the machine under each of the following assumptions. i. The machine is sold for $80 000 cash. ii. The machine is sold for $48 500 cash. iii. The machine and cash of $120 000 are exchanged for a new machine with a cash price of $140 000. iv. The machine was completely destroyed by fire and cash of $45 000 was received from the insurance company. v. The machine and cash of $140 000 are exchanged for a new machine with a cash price of $170 000. (LO3) (a) 2022 July 1 Depreciation Expense – Machinery 16 000 Accumulated Depreciation – Vans 16 000 Depreciation of machine for 6 months ($160 000/5 years = $32 000  6/12) (b) i. Cash at Bank 88 000 Proceeds on Sale of Machinery 80 000 GST Payable 8 000 Sale of machine. Carrying Amount of Machinery Sold 21 000 Accumulated Depreciation – Machinery 144 000 Machinery 165 000 Write off machine. Accum dep’n = $32 000  4 + $16 000 (b) ii. Cash at Bank 53 350 Proceeds on Sale of Machinery 48 500 GST Payable 4 850 Sale of machine. Carrying Amount of Machinery Sold 21 000 Accumulated Depreciation – Machinery 144 000 Machinery 165 000 Write off machine. (b) iii. Machinery 140 000 GST Receivable 14 000 Proceeds on Sale of Machinery 20 000 GST Payable 2 000 Cash at Bank 132 000 Trade in of machine Carrying Amount of Machinery Sold 21 000 Accumulated Depreciation – Machinery 144 000 Machinery 165 000 Write off machine traded in. (b) iv. Cash at Bank 45 000 Accumulated Depreciation – Machinery 144 000 Machinery 165 000 Gain from Fire Insurance 24 000 Derecognise machine destroyed. (b) v. Machinery 170 000 GST Receivable 17 000 Cash at Bank 154 000 Proceeds on Sale of Machinery 30 000 GST Payable 3 000 Exchange machines Carrying Amount of Machinery Sold 21 000 Accumulated Depreciation – Machinery 144 000 Machinery 165 000 Write off machine traded in. Problem 15.18 Revaluation, reversals and depreciation Hanxhari Ltd has a policy of revaluing its motor vehicles to fair value. The details at 30 June 2020 relating to Hanxhari Ltd’s motor vehicles, which had previously been revalued upwards by $7000, are as follows. At the date of the revaluation increase (1 July 2019) the vehicles had a zero residual value and a useful life of 4 years. Depreciation has been calculated using the straight-line method. On 31 December 2020, Hanxhari Ltd was informed that the fair value of the vehicles was $50 000. The useful life and residual value have not changed. At 30 June 2021, the carrying amounts are not materially different from fair values. Required (a) Prepare the necessary general journal entries at 31 December 2020. (b) Calculate depreciation expense at 30 June 2021. (c) How would the motor vehicle be shown in financial statements at 30 June 2021? (LO1) (a) 2020 Dec. 31 Depreciation Expense – Motor Vehicles 11 000 Accum. Depreciation – Motor Vehicles 11 000 Depreciation for half-year to 31 December 2020. Accumulated Depreciation – Motor Vehicles 33 000 Motor Vehicles 33 000 Write back accum. depreciation against asset. Loss on Revaluation of Vehicles (OCI) 5 000 Motor Vehicles 5 000 Reversing revaluation increase by recognising a loss in other comprehensive income. (b) 2021 June 30 Depreciation Expense – Motor Vehicles 10 000 Accum. Depreciation – Motor Vehicles 10 000 Depreciation on revalued motor vehicles. ($50 000  2.5 years  6/12) (c) Statement of Financial Position (Extract) as at 30 June 2021 Motor Vehicles $50 000 Less: Accumulated Depreciation 10 000 $40 000 Problem 15.19 Derecognition of assets Non-GST version Jaensch Ltd reported the following non-current assets at 30 June 2019. During the year 2019–20, the following transactions occurred: Required (a) Prepare journal entries to record the transactions. Jaensch Ltd uses straight-line depreciation for buildings and equipment. The buildings are estimated to have a 50-year useful life and no residual value. The equipment is estimated to have a 10-year useful life and no residual value. (b) Record adjusting entries for depreciation for the year ended 30 June 2020. (c) Prepare the non-current assets section of Jaensch Ltd’s statement of financial position as at 30 June 2020. (LO3 and LO5) (a) 2019 Oct. 1 Land 3 500 000 Cash at Bank/Payable 3 500 000 Acquisition of land. Nov. 1 Depreciation Expense – Equipment 40 000 Accum. Depreciation – Equipment 40 000 Depreciation for 4 months. [= 10%  $1 200 000  4/12 = $40 000] Nov. 1 Cash at Bank/Receivables 700 000 Proceeds on Sale of Equipment 700 000 Equipment sold. Nov. 1 Carrying Amount of Equipment Sold 800 000 Accumulated Depreciation – Equipment 400 000 Equipment 1 200 000 Write off equipment sold. [Accum. Dep’n = ($1 200 000  3/10) + $40 000] Dec. 1 Cash at Bank/Receivables 3 200 000 Proceeds on Sale of Land 3 200 000 Land sold. Dec. 1 Carrying Amount of Land Sold 600 000 Land 600 000 Write off land sold. 2020 Jan 1. Equipment 4 000 000 Cash at Bank 4 000 000 Acquisition of equipment. 2020 May 1. Depreciation Expense – Equipment 83 333 Accum. Depreciation – Equipment 83 333 Depreciation for 10 months to 1 May 2020. [= $1 000 000/10  10/12 ] May 1 Accumulated Depreciation – Equipment 883 333 Loss on Equipment 116 667 Equipment 1 000 000 Loss on scrapping of equipment. [Accum. dep’n = $1 000 000  8/10 + $83 333] (b) Depreciation Expense – Equipment 6 480 000 Accumulated Depreciation – Equipment 6 480 000 Depreciation on equipment (see workings below). 840 000 Depreciation Expense – Buildings 840 000 Accumulated Depreciation – Buildings Depreciation on buildings (workings below). Workings for depreciation calculations: Equipment: ACCOUNT: Equipment Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 7 Balance 65 000 000 1 11 Accum depn and Carrying amt sold 1 200 000 63 800 000 2020 1 1 Cash/Payables 4 000 000 67 800 000 Accum. Dep’n and loss on equipment 1 000 000 66 800 000 ACCOUNT: Accumulated Depreciation – Equipment Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 7 Balance 10 000 000 1 11 Depreciation Exp 40 000 10 040 000 1 11 Equipment (sold) 400 000 9 640 000 2020 1 5 Depreciation Exp 83 333 9 723 333 1 5 Equipment (scrapped) 883 333 8 840 000 30 6 Depreciation Expense 6 480 000 15 320 000 Depreciation on equipment = 10%(65 000 000 – 1 200 000 – 1 000 000) + 10%( 4 000 000  6/12) = $6 480 000. Buildings: ACCOUNT: Buildings Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 7 Balance 42 000 000 ACCOUNT: Accumulated Depreciation – Buildings Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 7 Balance 19 400 000 2020 30 6 Depreciation Exp 840 000 20 240 000 Depreciation on buildings = ($42 000 000/50) = $840 000. Balance of Land account = $4 800 000 + $3 500 000 – $600 000 = $7 700 000. (c) JAENSCH LTD Statements of Financial Position (Extract) as at 30 June 2020 Land $7 700 000 Buildings 42 000 000 Accumulated depreciation (20 240 000) 21 760 000 Equipment 66 800 000 Accumulated depreciation (15 320 000) 51 480 000 $80 940 000 Problem 15.19 Derecognition of assets GST version Jaensch Ltd reported the following non-current assets at 30 June 2019. During the year 2019–17, the following transactions occurred. Required (a) Prepare journal entries to record the transactions. Jaensch Ltd uses straight-line depreciation for buildings and equipment. The buildings are estimated to have a 50-year useful life and no residual value. The equipment is estimated to have a 10-year useful life and no residual value. (b) Record adjusting entries for depreciation for the year ended 30 June 2020. (c) Prepare the non-current assets section of Jaensch Ltd’s statement of financial position as at 30 June 2020. (LO3 and LO5) (a) 2019 Oct. 1 Land 3 500 000 GST Receivable 350 000 Cash at Bank/Payable 3 850 000 Acquisition of land. Nov. 1 Depreciation Expense – Equipment 40 000 Accum. Depreciation – Equipment 40 000 Depreciation for 4 months. [= 10%  $1 200 000  4/12 = $40 000] Nov. 1 Cash at Bank/Receivables 770 000 Proceeds on Sale of Equipment 700 000 GST Payable 70 000 Equipment sold. Nov. 1 Carrying Amount of Equipment Sold 800 000 Accumulated Depreciation – Equipment 400 000 Equipment 1 200 000 Write off equipment sold. [Accum. Dep’n = ($1 200 000  3/10) + $40 000] Dec. 1 Cash at Bank/Receivables 3 520 000 Proceeds on Sale of Land 3 200 000 GST Payable 320 000 Land sold. Dec. 1 Carrying Amount of Land Sold 600 000 Land 600 000 Write off land sold. 2020 Jan 1. Equipment 4 000 000 GST Receivable 400 0000 Cash at Bank 4 400 000 Acquisition of equipment. 2020 May 1. Depreciation Expense – Equipment 83 333 Accum. Depreciation – Equipment 83 333 Depreciation for 10 months to 1 May 2020. [= $1 000 000/10  10/12 ] May 1 Accumulated Depreciation – Equipment 883 333 Loss on Equipment 116 667 Equipment 1 000 000 Loss on scrapping of equipment. [Accum. dep’n = $1 000 000  8/10 + $83 333] (b) Depreciation Expense – Equipment 6 480 000 Accumulated Depreciation – Equipment 6 480 000 Depreciation on equipment (see workings below). 840 000 Depreciation Expense – Buildings 840 000 Accumulated Depreciation – Buildings Depreciation on buildings (workings below). Workings for depreciation calculations: Equipment: ACCOUNT: Equipment Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 7 Balance 65 000 000 1 11 Accum depn and Carrying amt sold 1 200 000 63 800 000 2020 1 1 Cash/Payables 4 000 000 67 800 000 Accum. Dep’n and loss on equipment 1 000 000 66 800 000 ACCOUNT: Accumulated Depreciation – Equipment Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 7 Balance 10 000 000 1 11 Depreciation Exp 40 000 10 040 000 1 11 Equipment (sold) 400 000 9 640 000 2020 1 5 Depreciation Exp 83 333 9 723 333 1 5 Equipment (scrapped) 883 333 8 840 000 30 6 Depreciation Expense 6 480 000 15 320 000 Depreciation on equipment = 10%(65 000 000 – 1 200 000 – 1 000 000) + 10%( 4 000 000  6/12) = $6 480 000 Buildings: ACCOUNT: Buildings Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 7 Balance 42 000 000 ACCOUNT: Accumulated Depreciation – Buildings Account No. Date Explanation Post Ref Debit Credit Balance 2019 1 7 Balance 19 400 000 2020 30 6 Depreciation Exp 840 000 20 240 000 Depreciation on buildings = ($42 000 000/50) = $840 000. Balance of Land account = $4 800 000 + $3 500 000 – $600 000 = $7 700 000. (c) JAENSCH LTD Statements of Financial Position (Extract) as at 30 June 2020 Land $7 700 000 Buildings 42 000 000 Accumulated depreciation (20 240 000) 21 760 000 Equipment 66 800 000 Accumulated depreciation (15 320 000) 51 480 000 $80 940 000 Problem 15.20 Exchanges and derecognition Khan Ltd entered into the following transactions during the year ended 31 December 2019. Ignore GST. Required (a) Prepare entries in general journal form to record the above transactions. (LO3 and LO5) (a) 2019 Jan. 4 Cash at Bank 17 600 Proceeds from Sale of Machinery 17 600 Sale of machine. Carrying Amount of Machinery Sold 17 000 Accumulated Depreciation – Machinery 18 000 Machinery 35 000 Write off machine sold. Mar. 30 Accumulated Depreciation – Machinery 28 000 Loss on Disposal of Machinery 4 500 Machinery 32 000 Cash at Bank 500 Derecognise old machine. Apr. 1 Machinery 220 000 Proceeds on Sale of Land 220 000 Sale of land for machine. Carrying Amount of Land Sold 200 000 Land 200 000 Write off land sold. Jul. 1 Machinery 85 000 Cash at Bank 60 000 Proceeds from Sale of Machinery 25 000 Exchange machines. Carrying Amount of Machinery Sold 30 000 Accumulated Depreciation – Machinery 62 000 Machinery 92 000 Write off old machine. Sept. 1 Depreciation Expense – Machinery 12000 Accumulated Depreciation – Machinery 12000 Depreciation to date of sale. ($16 000 9/12) Cash at Bank 45 000 Proceeds from Sale of Machinery 45 000 Sale of machinery. Carrying Amount of Machinery Sold 25 000 Accumulated Depreciation – Machinery 80 000 Machinery 105 000 Write off machinery sold. Oct. 31 Machinery 90 000 Proceeds on Sale of Buildings 90 000 Exchange buildings for machinery. Carrying Amount of Buildings Sold 80 000 Accumulated Depreciation – Buildings 195 000 Buildings 275 000 Write off buildings. Dec. 31 Amortisation Expense – Gas Reserve 2 000 000 Accumulated Amortisation – Gas Reserve 2 000 000 Amortise cost of gas reserve. ([90 000 000 – 10 000 000]  40 000 000) = $2.00  1 000 000) Problem 15.21 Exchanges of assets The beginning balance in the Machinery control account and Accumulated Depreciation account, and dates in the accounts for various machinery acquisitions and disposals during the year by Liu Ltd are presented below. Liu Ltd records depreciation to the nearest month. At 1 January 2019, the company held only four items of machinery, and four exchange trans-actions took place during 2019 as indicated below. At the dates of acquisition, the useful lives and residual values of the new machines were as follows. Straight-line depreciation is used by the entity. Required (a) Prepare in Liu Ltd’s accounting records the journal entries (in general journal format) to record the acquisition, disposal and depreciation charges for the period 1 January to 31 December 2019. (b) Prepare the Accumulated Depreciation account for the period 1 January 2019 to 31 December 2019. (c) Provide reasons, by referring to appropriate accounting standards, for an entity adopting the straight-line method for depreciating its machinery. (LO3) (a) 2019 Jan. 11 Machinery (No. P) 16 000 Cash at Bank 13 000 Proceeds on Sale of Machinery 3 000 Trade in old machine for Machine P. Accumulated Depreciation – Machinery 7 000 Carrying Amount of Machinery sold 3 000 Machinery 10 000 Write off old machine. Jan. 25 Depreciation Expense – Machinery 800 Accumulated Depreciation – Machinery 800 Depreciation for I month on old machine. Machinery (No. Q) 36 000 Cash at Bank 33 000 Proceeds on Sale of Machinery 3 000 Purchase of new machine Q. Accumulated Depreciation – Machinery 20 000 Carrying Amount of Machinery Sold 4 000 Machinery 24 000 Write off old machine. Apr. 28 Depreciation Expense – Machinery 2 000 Accumulated Depreciation – Machinery 2 000 Depreciation of machine for 4 months. Machinery (No. R) 75 000 Cash at Bank 65 000 Proceeds on Sale of Machinery 10 000 Purchase of new machine R Accumulated Depreciation – Machinery 42 000 Carrying Amount of Machinery Sold 12 000 Machinery 54 000 Write off old machine. Aug. 31 Depreciation Expense – Machinery 400 Accumulated Depreciation – Machinery 400 Depreciation of 8 months. Machine (No. S) 7 000 Cash at Bank 5 000 Proceeds on Sale of Machinery 2 000 Purchase of machine S. Accumulated Depreciation – Machinery 3 900 Carrying Amount of Machinery Sold 1 600 Machinery 5 500 Write off old machine. Dec. 31 Depreciation Expense – Machinery 13 667 Accumulated Depreciation – Machinery 13 667 Depreciation of new machines. Workings: Depreciation of new machines: P : (16 000 – 2 000)/4 $3 500 Q: (36 000 – 6 000)  11/12  1/5 5 500 R: (75 000 – 15 000)  8/12  1/10 4 000 S: (7 000 – 1 500)  4/12  1/3 667 13 667 Machinery Control 1/1/16 Balance 93 500 11/1/16 P 16 000 11/1/16 10 000 25/1/16 Q 36 000 25/1/16 24 000 28/4/16 R 75 000 28/4/16 54 000 31/8/16 S 7 000 31/8/16 5 500 _______ 31/12/16 Balance c/d 134 000 227 500 227 500 1/1/17 Balance b/d 134 000 (b) Accumulated Depreciation 1/1/16 Balance 69 700 11/1/16 7 000 11/1/16 25/1/16 20 000 25/1/16 800 28/4/16 42 000 28/4/16 2 000 31/8/16 3 900 31/8/16 400 31/12/16 13 667 31/12/16 Balance c/d 13 667 _______ 86 511 86 567 1/1/17 Balance b/d 13 667 (c) Referring to accounting standard IAS 16/AASB 116, the only reason that can legitimately be given for selecting straight-line depreciation is that the future economic benefits to be received from use of the asset are to be received approximately evenly over the asset’s useful life. Exercise 15.22 Methods of derecognising a non-current asset On 1 January 2017, Martini Ltd bought a machine for $109 000 cash; its useful life was 12 years and its residual value was $13 000. It was decided to depreciate the machine by the straight-line method. On 30 September 2019, the machine was traded in to Lowe Ltd for a new model, the total cost being $80 000. Lowe Ltd allowed $60 000 for the old machine. It was decided to depreciate the new machine at the rate of 10% p.a. by the diminishing-balance method. Residual value of the new machine was $7000. On 1 July 2020, Martini Ltd decided to adopt the revaluation model and revalue its machine upwards to reflect fair values. This represented a 15% increase in the carrying amount of the machine. The diminishing-balance method of depreciation was continued at the same rate. The accounting period ended on 30 June each year. At 30 June 2021, the carrying amount of the machine was approximately equal to fair value. Required (a) Prepare relevant ledger accounts to record the transactions up to 30 June 2021. Ignore GST. (b) Show how the asset would appear in the financial statements of Martini Ltd as at 30 June 2018, 30 June 2020 and 30 June 2021. (c) Show the Machinery account and Accumulated Depreciation – Machinery account if the revaluation on 1 July 2020 had been downwards instead of upwards. (LO1 and LO3) (a) Machinery 1/1/14 Acquisition – Cash $109 000 30/9/16 Carrying amount $109 000 30/9/16 Proceeds on sale/cash 80 000 1/7/17 Accumulated Depn. 6 000 1/7/17 Gain on Reval (OCI) 11 100 30/6/18 Balance c/d 85 100 91 100 91 100 30/6/18 Balance b/d $85 100 Accumulated Depreciation – Machinery 30/9/16 Carrying amount. $22 000 30/6/14 Depreciation $4 000 30/6/15 Depreciation 8 000 30/6/16 Depreciation 8 000 30/9/16 Depreciation 2 000 22 000 22 000 30/6/17 Depreciation (10%  1/7/17 Machinery 6 000 $80 000  9/12) 6 000 30/6/18 Depreciation (10%  $85 100) 8 510 Depreciation Expense – Machinery 30/6/14 Accum. Depn. $4 000 30/6/14 P or L Summary $4 000 30/6/15 Accum Depn. 8 000 30/6/15 P or L Summary 8 000 30/6/16 Accum. Depn. 8 000 30/6/16 P or L Summary 8 000 30/9/16 Accum. Depn 2 000 30/6/17 Accum Depn. 6 000 30/6/17 P or L Summary 8 000 30/6/18 Accum. Depn. 8 510 30/6/18 P or L Summary 8 510 Carrying Amount of Machinery Sold 30/9/16 Machinery & Accum. Depn. $87 000 30/6/17 P or L Summary $87 000 Proceeds on Sale of Machinery 30/6/17 P or L Summary $60 000 30/9/16 Machinery $60 000 Gain on Revaluation of Machinery (OCI) 30/6/18 OCI Summary $11 100 1/7/17 Machinery $11 100 (b) MARTINI LTD Statements of Financial Position (Extracts) 30/6/15 30/6/17 30/6/18 Machinery $109 000 $80 000 $85 100 Accumulated depreciation (12 000) (6 000) (8 510) $97 000 $74 000 $76 590 (c) Machinery 1/1/14 Acquisition – Cash $109 000 30/9/16 Carrying amount $109 000 30/9/16 Proceeds on sale/cash 80 000 1/7/17 Accumulated depn. 6 000 1/7/17 Loss on Reval (P/L) 11 100 30/6/18 Balance c/d 62 900 80 000 80 000 30/6/18 Balance b/d $62 900 Accumulated Depreciation – Machinery 30/9/16 Carrying amount $22 000 30/6/14 Depreciation $4 000 30/6/15 Depreciation 8 000 30/6/16 Depreciation 8 000 30/9/16 Depreciation 2 000 22 000 22 000 30/6/17 Depreciation (10%  1/7/17 Machinery 6 000 $80 000  9/12) 6 000 30/6/18 Depreciation (10%  $62 900) 6 290 Problem 15.23 Correcting errors The following errors were discovered during the current year. 1. A machine with a cost of $33 500 and accumulated depreciation to the date of sale of $24 000 was sold for $9000. The sale was recorded by a debit to Cash at Bank and a credit to Machinery for $9000. 2. Depreciation of machinery, $3240, was incorrectly credited to Accumulated Depreciation – Buildings. 3. Delivery equipment, purchased on 1 July for $18 620, was debited to the Purchases account. The equipment has a useful life of 4 years and an estimated residual value of $900. The straight-line depreciation method is used for delivery equipment. 4. Land taxes of $9320 were paid and debited to Land Tax Expense. Of this, $4200 was back taxes from previous years on land purchased during the current year. 5. A machine with a cost of $42 000 and accumulated depreciation to the date of exchange of $16 000 was exchanged on 23 December for a new machine with a cash price of $52 000. A trade-in allowance of $20 000 was allowed on the old machine. The following entry was made: 6. The cost of installing security lighting, $8 000, was charged to Maintenance Expense on 4 January. The lights have a useful life of 8 years and no residual value. Assume straight-line depreciation. Required (a) Prepare general journal entries to correct the errors assuming the accounting records have not been closed for the current year ending 31 December. (LO3) 1. Machinery 9 000 Proceeds from Sale of Machinery 9 000 Correct the sale of machine. Carrying Amount of Machinery Sold 9 500 Accum. Depreciation – Machinery 24 000 Machinery 33 500 Write off machinery sold. 2. Depreciation Expense – Machinery 3 240 Depreciation Expense – Buildings 3 240 Correct error in depn. of machinery. Accum. Depreciation – Buildings 3 240 Accum. Depreciation – Machinery 3 240 Correct error in accum. depreciation. 3. Delivery Equipment 18 620 Purchases 18 620 Correct error on purchase of delivery equipment. Deprecation Exp. – Delivery Equipment 2 215 Accum. Depr. – Delivery Equipment 2 215 Depreciate delivery equipment. ([18 620 – 900]  4 = 4 430  6/12) 4. Land 4 200 Land Tax Expense 4 200 Adjustment for Taxes on purchase of land. 5. Carrying Amount of Machinery Sold 26 000 Machinery 6 000 Proceeds from Sale of Machinery 20 000 Correctly record exchange of machine. The entry which had been recorded reduces the cost of the new machine by the loss of $6000 made on the sale of the old machine. 6. Property Improvements 8 000 Maintenance Expense 8 000 Record correctly cost of lighting. Depreciation Exp. – Property Improvements 1 000 Accum. Depr. – Property Improvements 1 000 Depreciate lighting. Problem 15.24 Revaluation and disposal Below are extracts from the financial reports of Wollowiec Traders Ltd for the years ended 30 June 2019 and 30 June 2020. Additional information 1. The revaluation surplus at 30 June 2019 was raised entirely as the result of a previous revaluation increase in relation to the land. 2. No land or buildings were acquired or disposed of during the year ended 30 June 2020. 3. A revaluation of the land and buildings was carried out on 30 June 2020 after all adjusting entries had been entered and posted. The revaluation adjustment was entered into the accounts on 30 June 2020, and the statement of financial position at that date reflects the fair values in accordance with the revaluation. 4. After the revaluation, the building was reassessed to have a residual value of $38 000 and a remaining useful life of 15 years. The building is to be depreciated using the straight-line method of depreciation. 5. The land and buildings were sold on 31 December 2020. A lump sum of $850 000 was received. The proceeds were allocated to the land and buildings at $600 000 and $250 000 respectively. Ignore GST. Required (a) Calculate the balance of the Accumulated Depreciation – Building account immediately before the revaluation on 30 June 2020. (b) Prepare the general journal entries to record: i. the revaluation of the building on 30 June 2020 ii. the revaluation of the land on 30 June 2020 iii. the disposal of the land on 31 December 2020 iv. the disposal of the building on 31 December 2020. (LO1 and LO3) (a) Accumulated Depreciation – building at 30/6/16 $120 000 Add: Depreciation expense for year ended 30/6/17 30 000 Accumulated depreciation – building at 30/6/17 $150 000 (b) i. 2020 June 30 Accumulated Depreciation – Building $150 000 Building $150 000 Write back accumulated depreciation.. Expense on Revaluation of Building (P/L) 20 000 Building ($450 000 – $150 000 – $280 000) 20 000 Revaluation decrease. (b) ii. Loss on Revaluation of Land (OCI) 90 000 Land ($720 000 – $630 000) 90 000 Revaluation decrease after a previous increase. Closing entries: Other Comprehensive Income Summary 90 000 Loss on Revaluation of Land (OCI) 90 000 Revaluation Surplus 90 000 Other Comprehensive Income Summary 90 000 (b) iii. Cash at Bank 600 000 Proceeds on Sale of Land 60 000 Sale of land. Carrying Amount of Land Sold 630 000 Land 630 000 Write off land sold. (b) iv. Depreciation Expense – Building 8 067 Accumulated Depreciation – Building 8 067 Depreciation for six months. ($280 000 – $38 000)  15  6/12 Cash at Bank 250 000 Proceeds on Sale of Building 250 000 Sale of building. Accumulated Depreciation – Building 8 067 Carrying Amount of Building Sold 271 933 Building 280 000 Write off building sold. Problem 15.25 Revaluation, depreciation, disposal Non-GST version On 1 January 2017, Nicolaidis Ltd purchased two identical new machines at a total cost of $700 000 plus GST. It was estimated that the machines would have a useful life of 10 years and a residual value of $50 000 each. Nicolaidis Ltd uses the straight-line method of depreciation for all of its equipment. The company’s end of reporting period is 31 December. Required (a) Record the purchase of the trucks on 1 January 2017. (b) Record the depreciation expense on the trucks for 2022. (c) Assume that early in 2023 the company revalued the machines upwards by $80 000 each and assessed that the machines would last 6 more years instead of 4 but that the residual value would be $80 000. Record all journal entries for the trucks in 2023. (d) Make the necessary entries to record the sale of one of the machines on 31 December 2023. The machine was sold for $200 000. (Assume that the two machines had the same carrying amount, which equalled their fair values at this date.) (e) How much depreciation expense would be recorded on the second machine during 2025 if it were still being used and if its residual value were still $50 000? Why? (LO1 and LO3) (a) 2017 Jan. 1 Machinery 700 000 Cash at Bank 700 000 Purchase of two machines. (b) 2022 Depreciation – Machinery 60 000 31 Dec Accumulated Depreciation – Machinery 60 000 Depreciate trucks ([$700 000 – $100 000]  10) (c) 2023 Jan Accumulated Depreciation – Machinery 360 000 Machinery 360 000 Write back accumulated depreciation on revaluation $60 000  6 Machinery 160 000 Gain on Revaluation – Machinery (OCI) 160 000 Revalue Machinery. Or: Accumulated Depreciation – Machinery 360 000 Machinery 200 000 Gain on Revaluation – Machinery (OCI) 160 000 (i.e. previous two entries combined.) Dec. 31 Depreciation Expense – Machinery 70 000 Accumulated Depreciation – Machinery 70 000 Depreciate trucks. ([$500 000 – $80 000]  6) (d) Dec. 31 Cash at Bank 200 000 Proceeds from Sale of Machinery 200 000 Sale of machine. Carrying Amount of Machinery Sold 215 000 Accumulated Depreciation – Machinery 35 000 Machinery 250 000 Write off machine sold. For the year ended 31 December 2025, there would be no depreciation on the machine. The depreciation per annum is $35 000, but by the end of 2024, the machine will have been fully depreciated. If the machine is being used still in 2025, then there will need to have been a revision of the machine’s useful life prior to 2025, as it is impossible to charge depreciation once the asset’s carrying amount has been written down to its residual value. Early 2023 value of one machine = $250k. Depreciation $35k/year. 31/12/2023 250-35k=215k 31/12/2024 $215k-35k=$180k 31/12/2025 $180k-35k=$145k 31/12/2023 $145k-35k=$110k 31/12/2024 $110k-35kk=$75k Depreciation in year ended 31/12/2025 is $25k to leave a residual of $50k. Problem 15.25 Revaluation, depreciation, disposal GST version On 1 January 2017, Nicolaidis Ltd purchased two identical new machines at a total cost of $700 000 plus GST. It was estimated that the machines would have a useful life of 10 years and a residual value of $50 000 each. Nicolaidis Ltd uses the straight-line method of depreciation for all of its equipment. The company’s end of reporting period is 31 December. Required (a) Record the purchase of the trucks on 1 January 2017. (b) Record the depreciation expense on the trucks for 2022. (c) Assume that early in 2023 the company revalued the machines upwards by $80 000 each and assessed that the machines would last 6 more years instead of 4 but that the residual value would be $80 000. Record all journal entries for the trucks in 2023. (d) Make the necessary entries to record the sale of one of the machines on 31 December 2023. The machine was sold for $200 000 plus GST. (Assume that the two machines had the same carrying amount, which equalled their fair values at this date.) (e) How much depreciation expense would be recorded on the second machine during 2025 if it were still being used and if its residual value were still $50 000? Why? (LO1 and LO3) (a) 2017 1 Jan Machinery 700 000 GST Receivable 70 000 Cash at Bank 770 000 Purchase of two machines. (b) 2022 Depreciation – Machinery 60 000 31 Dec Accumulated Depreciation – Machinery 60 000 Depreciate trucks ([$700 000 – $100 000]  10) (c) 2023 Jan Accumulated Depreciation – Machinery 360 000 Machinery 360 000 Write back accumulated depreciation on revaluation $60 000  6 Machinery 160 000 Gain on Revaluation – Machinery (OCI) 160 000 Revalue Machinery. Or: Accumulated Depreciation – Machinery 360 000 Machinery 200 000 Gain on Revaluation – Machinery (OCI) 160 000 (i.e. previous two entries combined.) Dec. 31 Depreciation Expense – Machinery 70 000 Accumulated Depreciation – Machinery 70 000 Depreciate trucks. ([$500 000 – $80 000]  6) (d) Dec. 31 Cash at Bank 220 000 GST Payable 20 000 Proceeds from Sale of Machinery 200 000 Sale of machine. Carrying Amount of Machinery Sold 215 000 Accumulated Depreciation – Machinery 35 000 Machinery 250 000 Write off machine sold. For the year ended 31 December 2025, there would be no depreciation on the machine. The depreciation per annum is $35 000, but by the end of 2024, the machine will have been fully depreciated. If the machine is being used still in 2025, then there will need to have been a revision of the machine’s useful life prior to 2025, as it is impossible to charge depreciation once the asset’s carrying amount has been written down to its residual value. Early 2023 value of one machine = $250k. Depreciation $35k/year. 31/12/2023 250-35k=215k 31/12/2024 $215k-35k=$180k 31/12/2025 $180k-35k=$145k 31/12/2023 $145k-35k=$110k 31/12/2024 $110k-35kk=$75k Depreciation in year ended 31/12/2025 is $25k to leave a residual of $50k. Problem 15.26 Intangibles and mineral resources The following transactions and events affected the accounts of Heritage Ltd for the current year (ignore GST). 1. On 3 January of the current year, Heritage Ltd paid $110 000 in legal fees for the successful defence of a patent infringement suit. 2. A patent with a useful life of 10 years was purchased for cash of $900 000 on 6 January last year. 3. On 31 January of the current year, Heritage Ltd purchased a copper mine for $50 000 000. Of the total purchase price, $36 000 000 was assigned to the copper mine and the remaining amount was assigned to mining machinery. The mine has a residual value of $6 000 000 and contains an estimated 30 000 000 tonnes of copper ore. The mining machinery is expected to be useful for the entire life of the mine and will be abandoned when the copper deposits are depleted. During the current year, 5 000 000 tonnes of copper ore were mined. 4. On 4 February, a valuable copyright held by the company and internally generated was valued independently at $160 000 — $70 000 of this had been previously included in the asset ‘Development Costs’. It is expected that the copyright has a useful life of 6 years. Required (a) Prepare journal entries to record the events occurring in the current year. (b) Prepare journal entries to record amortisation and depreciation for the current year. Record to the nearest whole month. (LO5 and LO7) (a) Jan. 3 Legal Expenses $110 000 Cash at Bank $110 000 Legal costs of defending patent. Jan. 31 Copper Mine 36 000 000 Mining Machinery 14 000 000 Cash at Bank 50 000 000 Acquire copper mine and machinery. Feb. 4 Copyright 160 000 Development Costs 70 000 Gain on Revaluation (OCI) 90 000 Revalue copyright. (b) Dec. 31 Amortisation Expense on Patents 90 000 Accumulated Amortisation – Patents 90 000 Amortise patent ($900 000  10). Amortisation Expense – Copyright 24 444 Accumulated Amort. – Copyright 24 444 Amortise copyright ($160 000/6 for 11 mths from 31/1). Amortisation Expense – Copper Mine 5 000 000 Accumulated Amort. – Copper Mine 5 000 000 Amortise copper mine. ($36 000 000 – $6 000 000 = $30 000 000  30 000 000 = $1.00 1.00  5 000 000 = 5 000 000) Depreciation Expense – Mining Machinery 2 333 333 Accumulated Depn. – Mining Machinery 2 333 333 Depreciate mine machinery. ($14 000 000  30 000 000 tonnes = $0.47  5 000 000) Problem 15.27 Goodwill Adam Hamilton, who recently won a major prize in a lottery, left his coaching job to invest in a business of his own. He found what he believed was an ideal business for his background, Glenside Gym, which had been earning an average profit of $70 000 per year over the last 4 years. Adam has a copy of Glenside’s current balance sheet, which discloses the following. Adam Hamilton and Channelle Eberhart (the owner of Glenside Gym) agree that the carrying amount of assets and liabilities are equal to their fair values with the exception of land, which has a fair value of $80 000, and inventory, which has a fair value of $85 000. Adam proposes to purchase the assets (except cash) and to assume the liabilities of Glenside Gym. Required (a) Determine the fair value of the identifiable assets and liabilities of Glenside Gym. (b) Assuming that Glen is prepared to pay $310 000 cash for Glenside Gym, determine the goodwill figure. Provide reasons Adam would be prepared to pay this amount. (c) Prepare general journal entries to acquire the business of Glenside Gym. (LO8) (a) Fair value of identifiable assets and liabilities of Glenside Gym Inventory $85 000 Building 124 000 Equipment 94 000 Land 80 000 383 000 Less: Liabilities 120 000 Fair value of identifiable assets and liabilities $263 000 (b) Goodwill = $310 000 – $263 000 = $47 000 Adam would be prepared to pay $310 000 only if he expects that there exists unidentifiable assets (goodwill) worth $47 000. This may occur in the form of a well-established group of gym users that generates fees revenue above the industry average. (c) Inventory $85 000 Building 124 000 Equipment 94 000 Land 80 000 Goodwill 47 000 Accounts Payable 20 000 Mortgage Payable 100 000 Payable to Glenside Gym 310 000 Acquire assets (except cash) and liabilities. Payable to Glenside Gym 310 000 Cash at Bank 310 000 To pay Glenside Gym. Problem 15.28 Intangibles Bittoto Ltd has four different intangible assets at the end of 2019. Facts concerning each are as follows. 1. Franchise. On 2 January 2019, Bittoto Ltd purchased a franchise to distribute a new product for a 10-year period with no right of renewal. Cost of the franchise was $860 000. 2. Copyright. On 3 April 2019, the company purchased a copyright for $150 000. The remaining legal life of the copyright was 12 years, and it is expected to have a useful life of 8 years to Bittoto Ltd with no residual value. 3. Goodwill. Bittoto Ltd began operations on 2 January 2015 by purchasing another company for a total cash payment of $640 000. Included in the purchase price was a payment of $120 000 for goodwill. The managing director of Bittoto Ltd believes that ‘the goodwill is such an important non-current asset of the company that it should last for 100 years’. 4. Patent. Bittoto Ltd purchased a patent on 1 July 2019 from Chai Ltd for $86 000. The patent had been registered initially on 1 January 2015 and is expected to be useful to Bittoto Ltd for another 10 years. Required (a) Prepare journal entries to record the acquisition of intangible assets during 2019. (b) Prepare journal entries for each intangible asset that are necessary at the end of the annual accounting period on 31 December 2019. (LO7) (a) Jan. 2 Franchise 860 000 Cash at Bank 860 000 Purchase of franchise. Goodwill Assets Cash Purchase of a company with goodwill 120000 620000 640000 Apr. 3 Copyrights 150 000 Cash at Bank 150 000 Purchase of copyright. 1 July Patent 86 000 Cash at Bank 86 000 Purchase patent. (b) Dec. 31 Amortisation Expense – Franchise 86 000 Accumulated Amortisation – Franchise 86 000 Amortise franchise ($860 000  10). Amortisation Expense – Copyright 14 063 Accumulated Amortisation – Copyright 14 063 Amortise copyright ($150 000  8  9/12). Amortisation Expense – Patent 4 300 Accumulated Amortisation – Patent 4 300 Amortise patent ($86 000/10  6/12). No entry for impairment of goodwill. Problem 15.29 Overhauls and disposals Coomans Ltd, which started operations on 1 October 2016, prepared the following account balances as at 30 June 2019. Details of machines owned at 30 June 2019 were as follows. Additional information 1. Coomans Ltd calculates depreciation to the nearest month and balances its accounts at month-end. Recorded amounts are rounded to the nearest dollar, and end of the reporting period is 30 June. 2. The company uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated using the diminishing-balance method at a rate of 30% p.a. 3. The Vehicles account balance reflects the total paid for four identical delivery vehicles, each of which cost $40 000. The following transactions occurred from 1 July 2019 onwards. Required (a) Prepare journal entries in general journal form to record the transactions. (LO3) (a) 2019 Aug. 3 Machinery 120 000 Cash at Bank 120 000 Acquisition of machine 4 incl. installation costs Nov. 15 Repairs Expense 1 200 Cash 1 200 Repair costs of vehicle. Dec. 30 Depreciation Expense – Vehicles 3 780 Accumulated Depreciation – Vehicles 3 780 Depreciation to date of sale on vehicle, using diminishing-balance method. (100 800/4 = $25 200  30%  6/12) Fixtures 22 000 Proceeds on Sale of Vehicle 22 000 Acquisition of fixtures by exchanging vehicle Carrying Amount of Vehicle Sold (40 000 – 18580 ) 21 420 Accumulated Depreciation – Vehicles 18 580 Vehicles 40 000 Write off vehicle exchanged. ($18 580 = $59 200/4 + 3 780) 2020 March 5 Depreciation Expense – Machinery 12000 Accumulated Depreciation – Machinery 12000 Depreciation up to the date of overhaul ($72 000/48  8) Accumulated Depreciation – Machinery 61 500 Machinery 61 500 Write off accumulated depreciation on machine 1 ($72 000/48  41 months) 2020 March 5 Machinery 12 000 Cash at Bank 12 000 Overhaul costs on machine 1 ( M1: Carrying amount (80 000 – 61 500) 18 500 ) ( + overhaul cost 12 000 ) ( Revised carrying amount 30 500 ) ( – revised residual value (4 000) ) ( Revised depreciable amount 26 500 ) ( Revised depreciation = $26 500/3 = $8 833 per annum.) June 30 Depreciation Expense – Machinery (4 machines) 72 111 Depreciation Expense – Vehicles 15 876 Depreciation Exp – Fixtures (20 000/5y = 4 000  6/12) 2 000 Accumulated Depreciation – Machinery 72 111 Accumulated Depreciation – Vehicles 15 876 Accumulated Depreciation – Fixtures 2 000 Depreciation expense on non-current assets [Machinery: (M1: $26 500/3 = 8 833  4/12 = 2 944) + (M2: $125 000/5 = 25 000) + (M3: $96 000/4 = 24 000) + (M4: $110 000/5 = 22 000  11/12 = 20 167) = $72 111 [Vehicles: 120 000  30%  4/12 = 12 000, (120 000 – 12 000)  30% = 32 400, (108 000 – 32 400)  30% = 22 680, (75 600 – 22 680)  30% = 15 876] Sept. 20 Depreciation Expense – Machinery ($24 000  3/12) 6 000 Accumulated Depreciation – Machinery 6 000 Depreciation on machine 3 up to date of disposal Machinery (M5) 130 000 Proceeds on Sale of Machinery [M3] 20 000 Cash at Bank 110 000 Machine 3 exchanged for machine 5 Accumulated Depreciation – Machinery 76 000 Carrying Amount of Machinery sold ($100,000-$76000 ) 24 000 Machinery [M3] 100 000 Write off machine 3. Accumulated depreciation on machine 3 to date of sale = $24 000 annual dep’n  38/12 (months used) Problem 15.30 Business combination, goodwill, revaluation, impairment On 1 July 2019, Frewville Ltd acquired the assets and liabilities of Glenunga Ltd. The assets and liabilities of Glenunga Ltd consisted of the following. In exchange for the business of Glenunga Ltd, Frewville Ltd provided the following to Glenunga Ltd: • 400 000 shares in Frewville Ltd, these having a fair value of $2.00 per share •cash of $360 000. The acquisition went ahead as planned. The plant acquired was considered by Frewville Ltd to have a further 10-year life with benefits being received evenly over that period; the furniture had an expected life of 5 years. During the first year after the acquisition, the management of Frewville Ltd decided to measure, at 30 June 2020, the plant at fair value (both plant assets being in the same class) and the furniture at cost. At 30 June 2020, Frewville Ltd assessed the fair values of its assets. •Plant A was valued at $552 000, with an expected remaining useful life of 8 years. •Plant B was valued at $320 000, with an expected remaining useful life of 8 years. At 30 June 2020, the furniture’s recoverable amount was assessed to be $70 000, with an expected useful life of 4 years. Required (a) Prepare the journal entries in the records of Frewville Ltd for the year ending 30 June 2020. (LO1, LO2, LO7 and LO8) (a) Fair value of identifiable assets and liabilities of Glenunga Ltd Plant A $600 000 Plant B 350 000 Furniture 100 000 Land 260 000 $1 310 000 Less: Liabilities (300 000) Fair value of identifiable assets and liabilities $1 010 000 Consideration transferred: Shares: 400 000  $2 $800 000 Cash 360 000 Total consideration transferred $ 1 160 000 Goodwill = $1 160 000 – $1 010 000 150 000 FREWVILLE LTD General Journal 2019 July 1 Plant A 600 000 Plant B 350 000 Furniture 100 000 Land 260 000 Goodwill 150 000 Liabilities 300 000 Share Capital 800 000 Payable to Glenunga Ltd 360 000 Acquire assets and liabilities in a business. Payable to Glenunga Ltd 360 000 Cash at Bank 360 000 To pay Glenunga Ltd. 2020 June 30 Depreciation Expense – Plant [$950 000 ÷ 10] 95 000 Depreciation Expense – Furniture [$100 000 ÷ 5] 20 000 Accumulated Depreciation – Plant 95 000 Accumulated Depreciation – Furniture 20 000 Depreciation for the year on non-current assets 2020 June 30 Accumulated Depreciation – Plant 60 000 Plant 48 000 Gain on Revaluation of Plant (OCI) 12 000 Revalue plant A upwards by $12 000 Accumulated Depreciation – Plant 35 000 Plant 30 000 Gain on Revaluation of Plant (OCI) 5 000 Revalue plant B upwards by $5 000 Impairment Loss on Furniture 10 000 Accum. Dep’n and Impairment Losses – Furniture 10 000 Write-down to recoverable amount of $70 000 Case studies Decision analysis Selling price and goodwill The summarised statements of financial position for two business entities are presented below. Sharp Photographics is considering the possibility of acquiring the businesses of Framers & Son and Developers & Co., and is interested in establishing an appropriate purchase price for making offers to the two entities. An assessment of the fair values of the entities’ assets is as follows. The owners of Framers & Son are prepared to sell their firm at a price of 160% of the carrying amount of the entity’s net assets, and the owner of Developers & Co. is prepared to sell at 180% of the carrying amount of the net assets of his business. The owners of Sharp Photographics examined the earnings records and financial positions of the two entities over a number of years, and offered to pay the price required by Framers & Son, but offered to pay only 120% of the fair value of Developers & Co.’s net assets. Required (a) Calculate the selling price being asked by each business and the purchase price offered by Sharp Photographics. Should each business sell out to Sharp Photographics? (b) The sale between Sharp Photographics and Framers & Son went ahead at the negotiated price; and the eventual sale price of Developers & Co. was $121 300. How much goodwill (if any) should be recognised by Sharp Photographics? Calculate the total valuations for all assets acquired from both businesses. Explain. (a) Selling prices asked: Framers & Son Developers & Co 160% of carrying amount of net assets 180% of carrying amount of net assets = 160% of $71 000 = 180% of $68 000 = $113 600 = $122 400 Purchase prices offered for: Framers & Son Developers & Co $113 600 120% of fair value of net assets = 120%  ($141 000* – $41 000) = $120 000 * Fair value of assets and cash at bank. Hence the owners of Framers & Son are probably happy to sell out to Sharp Photographics but the owners of Developers & Co may wish to negotiate with Sharp Photographics for a better deal. Nevertheless, the difference between the offer and asking price is quite small. (b) Goodwill is the difference between the fair values of the identifiable assets and liabilities acquired and the consideration transferred. Goodwill to be recognised by Sharp Photographics on: Framers & Son Developers & Co. Consideration transferred $113 600 $121 300 Fair value of assets $142 000 $141 000 Less: Liabilities 31 000 41 000 Fair value of assets less liabilities $111 000 $100 000 Goodwill $2 600 $21 300 Total goodwill = $23 900 Total value of all assets acquired from both firms by Sharp Photographics would consist of the fair values of total identifiable assets and liabilities acquired plus goodwill. Total value of assets and liabilities acquired would be: Identifiable net assets at fair value – Framers & Son $111 000 Identifiable net assets at fair value – Developers & Co 100 000 Goodwill on purchase – Framers & Son 2 600 Goodwill on purchase – Developers & Co 21 300 $234 900 Valuations for individual assets acquired: From Framers & Son From Developers & Co Total Cash at bank $10 000 $13 000 $23 000 Accounts receivable 12 000 18 000 30 000 Inventory 20 000 25 000 45 000 Property and plant 60 000 70 000 130 000 Intangibles 40 000 15 000 55 000 Goodwill 2 600 21 300 23 900 $144 600 $162 300 $306 900 Critical thinking Accounting for revaluations On 1 January 2019, Good Ltd acquired a block of land for $100 000 cash, and on the same day Better Ltd purchased the adjacent block, which was virtually identical to the block purchased by Good Ltd, also for $100 000 cash. Both companies intended to construct industrial warehouses on these properties. For the next 2 years, the property market went through a boom period and, by coincidence, on 30 June 2021, both companies obtained independent valuations of $180 000 for their blocks of land. Good Ltd has decided to adopt the revaluation model for land in the accounts on the last day of the year ended 30 June 2021 by following the requirements of IAS 16/AASB 116. Better Ltd decided to use the cost model. On 30 April 2022, each company sold its block of land for $200 000 cash. Required (a) In relation to the land, how much profit would each company report for the years ended 30 June 2021 and 30 June 2022? (b) Give reasons for the discrepancy in profit figures between the two companies. Does the existence of the discrepancy make sense? What message is being conveyed to users about the performance of both companies? Discuss fully. How can the discrepancy be avoided? (c) What profit would Good Ltd have made for the year ended 30 June 2022, if the revaluation of land had occurred on 29 April 2022, instead of on 30 June 2021? Compare this with the profit made by Better Ltd in the same year, and explain whether or not you regard the differences as satisfactory reporting. (a) Year ended 30/6/18: Profit made by both companies is nil. However, the revaluation increase of $80 000 recorded by Good Ltd would be credited to a Gain on Revaluation, and reported in good Ltd’s statement of comprehensive income, but not in profits. Eventually the gain on revaluation will be transferred by Good Ltd to the Revaluation Surplus account (an equity account called a reserve). • •Year ended 30/6/22: Profit made by Good Ltd is $20 000 and profit made by Better Ltd is $100 000. •(b) Since both companies have identical blocks of land purchased at $100 000 and sold at $200 000, a discrepancy in profit figures does not make sense from the point of view of a user of the financial statements. Will users of the financial statements be misled, and make inaccurate decisions, as a result of the profit figures communicated? How good a tool for communication is a set of financial statements when results for a period can be altered significantly by making a revaluation book entry to transfer $80 000 to a revaluation surplus? The difference in profits is caused merely by Good Ltd making an entry in accordance with accounting standard IAS 16/AASB 116, a standard which does not require all non-current assets to be revalued, but which lays down a procedure to follow whenever an entity wishes to revalue. Why is a revaluation surplus used for revaluation increases? The standard does not say. Furthermore, the standard does not tell us what to do with the revaluation surplus after the revaluation has occurred and after the revalued asset is sold. Can the surplus be transferred to Retained Earnings? If so, the profit on sale will end up in Retained Earnings without ever going through the income statement! • •To avoid discrepancy in profits, the following courses of action could be taken: (i) require both companies to revalue the asset and both to credit either a revaluation surplus or profit/income on revaluation; or (ii) ban revaluations and require strict adherence to the historical cost system. Note: As a compromise position, the standard setters have required the preparation of a statement of comprehensive income. In this statement, an entity must disclose any ‘profits’ credited directly to equity (e.g. revaluation surplus amendments), then add these to the ‘profit for the period’, (as shown in the income statement) in order to show the ‘total comprehensive income for the period’. This is an attempt to cause entities to disclose their ‘total’ income for the period. Nevertheless, it still does not solve the problem that Good Ltd and Better Ltd can report totally different results depending on their choice to revalue, or not. •(c) If Good Ltd had made a book entry to revalue the asset on 29 April 2022, the date before sale, $100 000 would have been credited to the revaluation surplus. On the date of sale, no profits would then be recorded by Good Ltd! However, Better Ltd will still show a profit of $100 000. Which figure reflects the economic reality of the situation? Is this a case of ‘how to lie with accounting information’, or of creative accounting? How useful is the accounting standard on revaluation? What message is it telling to readers of financial statements? Refer again to the compromise position above. Communication and leadership Research and development costs GeneTech Ltd is a biological research company that is developing gene technology in the hope of finding a vaccine for skin cancer. During the last financial year, GeneTech Ltd spent $1.2 million on research. The scientists involved in the project believe they may be on the right track with the research, although many other companies are claiming the same thing and as yet no one has patented a vaccine. Required (a) In groups of three of four, discuss the options under IAS 38/AASB 138 Intangible Assets for the treatment of the $1.2 million. What impact will each of these options have on the company’s profit? Prepare a one page letter to the managing director of GeneTech Ltd advising her of your preferred treatment for the research and development costs. (a) The relevant paragraphs of IAS 38/AASB138 are: •Para. 8 for the definitions of ‘research’ and ‘development’. •For internally generated assets, see paras. 51–71. The ultimate position is that the expenditure of $1.2 million must all be charged to expense. But let the students come to that conclusion after a careful reading of the standard and discussion in their groups. Financial analysis Refer to the consolidated financial statements and their notes in the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions. 1. Were any items of property, plant and equipment revalued by the entity during the current financial year? During previous years? If so, give details. 2. Were any items of property, plant and equipment derecognised during the year? If so, how has the entity disclosed any gains or losses made on derecognition of such assets? Provide details of any financial amounts involved. 3. From the latest statement of financial position (balance sheet), provide details of the types and amounts of assets regarded by JB Hi-Fi Limited as ‘intangible’. What accounting treatment is adopted in accounting for the acquisition of goodwill? 4. Have there been any instances where the group’s non-current assets were revalued upwards/downwards? If so, provide details. The following solution is based on the 2016 Annual Report of JB Hi-Fi Limited, available on its website. 1. From note 9 it appears that no items of property, plant and equipment were revalued. Some items were impaired. 2. From note 9, there was $4,530,000 of plant and equipment disposed of in the year ended 30 June 2015 and $4,014,000 for the year ended 30 June 2016. For the year ended 30 June 2015 $1,119,000 of assets were impaired for the year ended 30 June 2016 it was $288,000. 3. From note 10, intangibles at 30 June 2016 are described as consisting of goodwill and brand names. From note 10, goodwill represents the excess of the cost of acquisition over the fair value of the company’s share of the net identifiable assets acquired at acquisition date. 4. There do not appear to be any instances where the group’s non-current assets were revalued upwards or downwards. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568