CH-14 Non-Current Assets: Acquisition and Depreciation – Accounting : Book Guide

Chapter 14: Non-current assets: acquisition and depreciation Questions and solutions which have a GST version: • Exercise 14.1 • Exercise 14.2 • Exercise 14.3 • Exercise 14.4 • Exercise 14.5 • Exercise 14.6 • Exercise 14.7 • Exercise 14.9 • Exercise 14.10 • Problem 14.11 • Problem 14.12 • Problem 14.13 • Problem 14.14 • Problem 14.16 • Problem 14.17 • Problem 14.18 • Problem 14.19 • Problem 14.20 • Problem 14.21 • Case study | Decision analysis | Depreciation of machinery • Case study | Critical thinking | Purchase price of land, building and furniture Discussion questions 1. Discuss which of the following should be included in the cost of equipment: (a) installation charges, (b) freight charges, (c) cost of building foundations, (d) new parts needed to replace those damaged while unloading, (e) borrowing costs incurred to finance the purchase of the equipment. What is the general principle to be followed in determining what should be included in the cost of property, plant and equipment? The cost of property, plant and equipment should include all of the expenditure needed to obtain the asset and to get it to a condition and location ready for the use intended by the purchaser. All of the expenditure listed, with the exception of (c), (d) and (e), should be included in the cost of the equipment. The cost of building foundations should be treated as part of the cost of property. The cost of the new parts needed to replace those damaged while unloading should be charged to expense. Borrowing costs could be treated as part of the cost of property, plant and equipment only if the asset is a qualifying asset under IAS 23/AASB 123. See p. 850 of the text for further discussion. 2. ‘According to IAS 16/AASB 116, an item of property, plant and equipment that qualifies for recognition must be recorded at cost, representing the fair value of any assets given up in order to acquire them. Would it not be better to record the assets acquired at their own fair values rather than at those of the assets given up?’ Discuss this suggestion and explain the rationale behind the accounting standard. Do you agree with this rationale? Why or why not? Since the cost system has been adopted in accounting standard IAS 16/AASB 116 for the acquisition of assets, assets acquired are to be valued at their cost, as measured by the fair value of all net assets given up. Cost is logically measured by what is given up or sacrificed, not by what is received. If assets acquired are to be valued at their own fair values, this would mean that the cost system has been abandoned in favour of some other system e.g. fair value/current value accounting. Consider whether fair values at acquisition date provide information more relevant than the cost system to help users to make economic decisions. After acquisition date, consider then whether fair values would be more relevant than (depreciated) cost. 3. ABC acquired a piece of open land for speculation purposes. It is expected that the value of the land will increase so that it can be sold in the future at a profit. Where should land be reported in the balance sheet? Land held for speculation purposes or as an investment should be excluded from the property, plant and equipment section and reported as an investment on the balance sheet (non-current asset), or as a current asset if it is expected that the land will be sold within the entity’s operating cycle. Note carefully the requirements of IFRS 5/AASB 5 Non-current Assets Held for Sale and Discontinued Operations. Paragraph 6 states that an entity shall classify a non-current asset as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to occur the asset must be available for immediate sale in its present condition, and the sale must be highly probable. If the land held for speculation is deemed to satisfy these characteristics, then IFRS 5/AASB 5 applies and the land must be valued at the lower of its carrying amount and fair value less costs to sell. Note how disclosure of ‘land held for sale’ has been illustrated in AASB 101 Compiled in the Appendix as a current asset. 4. During your lunchtime, which you usually spend at the university canteen in the presence of other students, one particular accounting student who was having difficulty with the textbook complained that he did not understand which costs were to be regarded as part of the acquisition cost of land, which costs were to be attributed to buildings under construction, and which were to be treated as an expense. Explain the basic principles to be followed. Are there any difficulties in applying these principles? Explain by providing examples. The main principle to be applied in determining the cost of property, plant and equipment is to treat, as part of the cost, the purchase price plus directly attributable costs necessarily incurred in getting the asset to a position and condition where it is ready to be put into production, or its intended use by management. Another important principle is that only ‘reasonable and necessary’ costs are to be included. For example, should the cost of a function to officially open a building be included as part of the cost of the building? Probably not! There are several difficulties in applying these principles e.g. how to assess which costs are ‘necessary’, how to determine whether the cost incurred has added to the expected economic benefits to be derived from the asset, either by increasing its expected cash flows, or by increasing its expected useful life. For assets which are constructed internally by the entity, does the entity allocate any indirect costs to the asset, e.g. part of the manager’s salary, part of the accounting costs? Another problem arises in determining whether a particular cost attaches to a particular asset, e.g. the cost of the car park surrounding a shopping centre may be treated as part of the cost of the land, or possibly the building, or be classified separately and called land improvements. A major consideration in such a case is to assess whether the useful life of the asset is the same as the building, or indeterminable. This must be decided in assessing whether the asset needs to be depreciated. A further difficulty arises in deciding whether interest costs on money borrowed to construct a building are correctly treated as part of the building’s cost, or treated separately as a financial expense. Different treatments occur across different countries in this respect. For further discussion of other issues, e.g. treatment of trade and cash discounts and GST. 5. Z Ltd depreciates its equipment using the straight-line method of depreciation. Y Ltd, which owns the same equipment, and has purchased the item on the same day from the same supplier as Z Ltd, uses the diminishing balance method. Are the depreciation charges of these two companies non-comparable? Explain. This question requires a discussion of the nature and purpose of depreciation. Assuming that depreciation is an allocation of cost over useful life, as per IAS 16/AASB 116, it is important to consider how to select an allocation method. Refer to the appropriate sections of the standard, and to the relevant discussion on allocation methods and their outcomes as covered in the text (see pages 000–00). Note that the total cost of an asset over its useful life and disposal is the same under all methods. It is not necessarily inconsistent that both Z Ltd and Y Ltd adopt different depreciation allocation patterns for the same asset. The important criterion to consider in selecting a depreciation method is the expected pattern of usage of the economic benefits to be derived from the asset. 6. Should depreciation be recorded on a building for a year in which the market value of the building has increased? Discuss. Depreciation should be recorded on a building for a year even though the market value of the building increased during the year. Depreciation is an allocation process, not a valuation process. Even though an asset may increase in value temporarily, its cost less residual value is expected to be used up by the end of its useful life. 7. At a recent seminar, a managing director of a well-known company argued that the diminishing balance method of depreciation was the best method to use because it had the effect of producing a ‘nice, smooth income (profit) flow’. Discuss how this could occur, and consider the desirability of reporting smooth profit flows. What role does/should the accountant play in this respect? A smooth income (profit) flow can come about in that, during the early years when maintenance costs are low, depreciation charges are high; and in the later years when maintenance costs are high, depreciation charges are low. Smooth income flows, however, are not the reason for selecting a depreciation policy. Since depreciation under IAS 16/AASB 116 is a process of allocation of the asset’s cost over useful life, the basis for selecting an allocation technique is the pattern expected in the usage or expiration of the asset’s economic benefits. The diminishing balance method is justified where an asset can be expected to yield more economic benefits in the earlier reporting periods than in the later. 8. This is based on an actual case: A ‘particularly aggressive’ DVD rental store chain amended its depreciation charges for DVDs by extending their useful lives from 12 months to 48 months. This had the effect of adding $5 million to the company’s profits, an increase of nearly 20% for the year! On publication of a report critical of this practice, the share price for the company fell dramatically. Critically examine the company’s depreciation policy, and comment on the likely effects on shareholders, managers and customers of the consequences of the adverse report. Can the company justify its actions? Possible reasons for this company’s change in depreciation policy are: (a) to reflect the ‘real’ useful life of the DVDs in that, after a certain level of past experience, a useful life of 12 months was found to be too short. In this case it can be argued that the change in policy may be a legitimate one to reflect the ‘economic reality’ of the DVDs’ worth, and the company’s actions are justified. If this is the case, the report was not correct in criticising the company publicly. (The current accounting standard IAS 16/AASB 116 requires that the useful life of an asset be reviewed annually and management’s decision is therefore in accordance with the current standard.) For a good discussion of useful life, see the relevant section in the standard. (b) to show a higher profit for shareholders or for management (which will increase their bonuses under a bonus plan tied to profitability!?). If this adjustment is merely manipulative rather than an indication of economic events affecting the entity, it is to be condemned by shareholders and customers. Since there has been a dramatic fall in the share price (efficient markets hypothesis), this indicates that the market may have been duped by the change in depreciation policy until it received bad publicity. If this is the case, the report was correct in criticising the company. Perhaps the criticism could have been non-public initially in order to protect the shareholders from adverse share price effects. 9. What is the distinction between an overhaul, replacement of a component, and day-to-day repairs and maintenance? Give an example of each and explain how the accounting treatment is different. Expenditures for overhauls and replacement of components of assets are incurred to extend an asset’s useful life or to significantly extend an asset’s capacity to produce goods and services. Since these expenditures are regarded as an addition or extension to the asset, they should be depreciated over the useful life of that asset. When the costs of components are recorded separately and apart from another asset, such costs should still be depreciated but over the useful life of the components. Since expenditures on day-to-day repairs and maintenance do not extend or enhance the life of the asset, such expenditures are expensed in the period in which they are incurred. 10. ‘With proper maintenance, certain equipment will last almost indefinitely, in which case depreciation is not necessary.’ Discuss. Depreciation results not only from wear and tear, but also from technical and commercial obsolescence which causes assets to have limited useful life. Hence, although assets can be well maintained, their useful lives are still limited to the requirements of the entity (see the definition of ‘useful life’ in the standard), and depreciation is still necessary to allocate the cost or depreciable amount of an asset over its limited useful life. Exercises Exercise 14.1 Lump-sum acquisition Non-GST version Baxter Ltd acquired a parcel of land, buildings and machinery on 10 July for a cash price of $2 400 000. Fair values of the assets on the acquisition date were appraised as follows. The acquisition was not considered to be a business combination. Required (a) Calculate the amount of cost that should be assigned to each of the assets and prepare a journal entry to record the acquisition. Ignore GST. (LO2) (a) Asset type Fair value Proportion of total value Allocation of purchase price Land $1 400 000 1 400 000/2 350 000 $1 429 787 Building 800 000 800 000/2 350 000 817 021 Machinery 150 000 150 000/2 350 000 153 192 $2 350 000 $2 400 000 Land 1 429 787 Building 817 021 Machinery 153 192 Cash at Bank 2 400 000 Exercise 14.1 Lump-sum acquisition GST version Baxter Ltd acquired a parcel of land, buildings and machinery on 10 July for a cash price of $2 6400 000 (GST inclusive). Fair values of the assets on the acquisition date were appraised as follows. The acquisition was not considered to be a business combination. Required (a) Calculate the amount of cost that should be assigned to each of the assets and prepare a journal entry to record the acquisition. (LO2) (a) Note: purchase price of $2,640,000 includes GST, it is necessary to exclude GST from the purchase price to allocate the cost to the assets purchased. $2,640,000 – GST $240,000 = $ 2,400,000 purchase price. Asset type Fair value Proportion of total value Allocation of purchase price Land $1 400 000 1 400 000/2 350 000 $1 429 787 Building 800 000 800 000/2 350 000 817 021 Machinery 150 000 150 000/2 350 000 153 192 $2 350 000 $2 400 000 Land 1 429 787 Building 817 021 Machinery 153 192 Cash at Bank 2 400 000 Exercise 14.2 Cost and annual depreciation Non-GST version On 2 January 2019, Johnston Ltd purchased a machine with a list price of $234 300 and credit terms of 2/10, n/30. Payment was made within the discount period. Freight costs of $5400 and installation costs of $5280 were also paid. The machine has a useful life of 4 years and a residual value at the end of its useful life of $24 000. Ignore GST. Required (a) Determine the amount that should be debited to the machinery account and prepare a general journal entry to record the purchase, assuming a financial year ending 31 December. (b) Determine the amount of depreciation expense for each of the 4 years ending 31 December assuming use of: i. the straight-line depreciation method ii. the diminishing balance method of depreciation. (c) Prepare a journal entry to record depreciation expense for the year ending 31 December 2019 under the diminishing balance method. (LO2 and LO5) (a) Cost of machine = $234 300 + $5400 + $5280 = $244 980. Note payment to supplier within the discount period will not affect the cost price of the machine, but it will affect the amount of cash paid to the supplier. Machinery 244 980 Accounts Payable 244 980 To record purchase of machine, plus freight, installation costs, and GST. (b) Year ended 31 December Depreciation method 2019 2020 2021 2022 Total Straight-line1 55 245 55 245 55 245 55 245 220 980 Diminishing balance2 107791 60363 33803 19023 220 980 1. ($244 980 – $24 000)/4 = $55 245 p.a. 2. Depreciation rate = 1 – ∜((24 000)/(244 980))=1-0.5595 = 0.4405 or 44% $244 980  0.44 = $107 791.20 or $107 791 $137 189  0.44 = $60 363.16 or $60 363 $78 826  0.44 = $33 803.44 or $33 803 $43 023 – $24 000 = $19 023 (c) Depreciation Expense – Machinery 107 791 Accumulated Depreciation – Machinery 107 791 Record depreciation expense for year ended 31 December 2019. Exercise 14.2 Cost and annual depreciation GST version On 2 January 2019, Johnston Ltd purchased a machine with a list price of $234 300 (excludes GST) and credit terms of 2/10, n/30. Payment was made within the discount period. Freight costs of $5940 (GST inclusive) and installation costs of $5808 (GST inclusive) were also paid. The machine has a useful life of 4 years and a residual value at the end of its useful life of $24 000. Required (a) Determine the amount that should be debited to the machinery account and prepare a general journal entry to record the purchase, assuming a financial year ending 31 December. (b) Determine the amount of depreciation expense for each of the 4 years ending 31 December assuming use of: i. the straight-line depreciation method ii. the diminishing balance method of depreciation. (c) Prepare a journal entry to record depreciation expense for the year ending 31 December 2019 under the diminishing balance method. (LO2 and LO5) (a) Cost of machine = $234 300 + ($5940 – GST $540) + ($5808 – GST $528) = $244 980. Also note, that while the machine has a list price of $234 300, GST will also need to be added to determine the GST inclusive price. Total GST on the purchase will amount to: •$23 430 (machine) + 540 (freight) + $525 (installation+ = total GST $24 495. Note payment to supplier within the discount period will not affect the cost price of the machine, but it will affect the amount of cash paid to the supplier. Machinery 244 980 GST Receivable 24 495 Accounts Payable 269 475 To record purchase of machine, plus freight, installation costs, and GST. (b) Year ended 31 December Depreciation method 2019 2020 2021 2022 Total Straight-line1 55 245 55 245 55 245 55 245 220 980 Diminishing balance2 107791 60363 33803 19023 220 980 1. ($244 980 – $24 000)/4 = $55 245 p.a. 2. Depreciation rate = 1 –∜((24 000)/(244 980))=1-0.5595 = 0.4405 or 44% $244 980  0.44 = $107 791.20 or $107 791 $137 189  0.44 = $60 363.16 or $60 363 $78 826  0.44 = $33 803.44 or $33 803 $43 023 – $24 000 = $19 023 (c) Depreciation Expense – Machinery 107 791 Accumulated Depreciation – Machinery 107 791 Record depreciation expense for year ended 31 December 2019. Exercise 14.3 Depreciation methods Non-GST version Hampstead Ltd purchased new equipment on 1 January 2019, at a cost of $590 000. The company estimated that the equipment has a useful life of 5 years and a residual value of $45 000. Ignore GST. Required (a) Assuming a financial year ending 30 June, calculate the amount of depreciation expense for each year ending 30 June 2019 through to 30 June 2024, with each of the following methods: i. straight-line ii. diminishing balance. (LO5) (a) i. Straight-line: ($590 000 – $45 000)/5 = $109 000 per annum. Depreciation for the year ending 30 June 2019 = $109 000  2 = $54 500 note only 6 months of depreciation. Depreciation for each of the years ending 30 June 2020–23 = $109 000. Depreciation for the year ending 30 June 2024 = $54 500. Note only 6 months to 31 December 2023 as equipment will be fully depreciated at that date but will be recorded for the year end 30 June 2024. ii. Diminishing-balance: Rate of depreciation = 1– = 1 – 0.5977 = 40.23 or 40% Year ended 30 June Depreciation Carrying amount 2019 *$118 000 $472 000 2020 188 800 283 200 2021 113 280 169 920 2022 67 968 101 952 2023 40 780.80 61 171.20 2024 16 171.20 45 000 $545 000 * 40%  $590 000  6/12 * $16 171.20 adjusted to produce a carrying amount of $45 000 residual value. Exercise 14.3 Depreciation methods GST version Hampstead Ltd purchased new equipment on 1 January 2019, at a cost of $649 000 (GST Inclusive). The company estimated that the equipment has a useful life of 5 years and a residual value of $45 000. Required (a) Assuming a financial year ending 30 June, calculate the amount of depreciation expense for each year ending 30 June 2019 through to 30 June 2024, with each of the following methods: i. straight-line ii. diminishing balance. (LO5) (a) i. Straight-line: First it is necessary to remove the GST from the purchase price of the equipment: $649 000 – GST $59 000 = $590 000 cost price excluding GST. ($590 000 – $45 000)/5 = $109 000 per annum. Depreciation for the year ending 30 June 2019 = $109 000  2 = $54 500 note only 6 months of depreciation. Depreciation for each of the years ending 30 June 2020–23 = $109 000. Depreciation for the year ending 30 June 2024 = $54 500. Note only 6 months to 31 December 2023 as equipment will be fully depreciated at that date but will be recorded for the year end 30 June 2024. ii. Diminishing-balance: Rate of depreciation – 1– = 1 – 0.60 = 40% Year ended 30 June Depreciation Carrying amount 2019 *$118 000 $472 000 2020 188 800 283 200 2021 113 280 169 920 2022 67 968 101 952 2023 40 780.80 61 171.20 2024 16 171.20 45 000 $545 000 * 40%  $590 000  6/12 * $16 171.20 adjusted to produce a carrying amount of $45 000 residual value. Exercise 14.4 Depreciation methods Non-GST version Nevertire Ltd purchased a delivery van costing $52 000. It is expected to have a residual value of $12 000 at the end of its useful life of 4 years or 200 000 kilometres. Ignore GST. Required (a) Assume the van was purchased on 2 July 2019 and that the accounting period ends on 30 June. Calculate the depreciation expense for the year 2019–20 using each of the following depreciation methods: i. straight-line ii. diminishing balance iii. units of production (assume the van was driven 78 000 kilometres during the financial year). (b) Assume the van was purchased on 1 October 2019 and that the accounting period ends on 30 June. Calculate the depreciation expense for the year 2019–20 using each of the following depreciation methods: i. straight-line ii. diminishing balance iii. units of production (assume the van was driven 60 000 kilometres during the financial year). (LO5) (a) i. Straight-line: ($52 000 – $12 000)/4 = $10 000. ii. Diminishing balance: = 1 – = 1 – 0.6931 = 0.3069 or 31% $52 000  0.31 = $16 120 iii. Units-of-production: Expense per kilometre = ($52 000 – $12 000)/200 000 = $0.2 0.2  78 000 = $15 600 (b) i. Straight-line: ($52 000 – $12 000)/4  9/12 = $7 500. ii. Diminishing balance: ($52 000  0.31)  9/12 = $12 090. iii. Units-of-production: $0.2  60 000 = $12 000. Exercise 14.4 Depreciation methods GST version Nevertire Ltd purchased a delivery van costing $57 200 (GST Inclusive). It is expected to have a residual value of $12 000 at the end of its useful life of 4 years or 200 000 kilometres. Required (a) Assume the van was purchased on 2 July 2019 and that the accounting period ends on 30 June. Calculate the depreciation expense for the year 2019–20 using each of the following depreciation methods: i. straight-line ii. diminishing balance iii. units of production (assume the van was driven 78 000 kilometres during the financial year). (b) Assume the van was purchased on 1 October 2019 and that the accounting period ends on 30 June. Calculate the depreciation expense for the year 2019–20 using each of the following depreciation methods: i. straight-line ii. diminishing balance iii. units of production (assume the van was driven 60 000 kilometres during the financial year). (LO5) (a) First it is necessary to remove the GST from the purchase price of the van. $57 200 – GST $5 200 = $52 000 i. Straight-line: ($52 000 – $12 000)/4 = $10 000. ii. Diminishing balance: 1 – = 1 – 0.6931 = 0.3069 or 31% $52 000  0.31 = $16 120 iii. Units-of-production: Expense per kilometre = ($52 000 – $12 000)/200 000 = $0.2. 0.2  78 000 = $15 600. (b) i. Straight-line: ($52 000 – $12 000)/4  9/12 = $7 500 ii. Diminishing balance: ($52 000  0.31)  9/12 = $12 090 iii. Units-of-production: $0.2  60 000 = $12 000 Exercise 14.5 Revision of depreciation rates Non-GST version Star Ltd purchased new equipment for $60 000 on 2 July 2019. The equipment was expected to have a $10 000 residual value at the end of its 8-year useful life. Straight-line depreciation has been recorded. While reviewing the accounts in anticipation of adjusting them for the annual financial reports for the year ended 30 June 2022, Star Ltd decided that the useful life of the equipment should be extended by 2 years, and that the residual value should be revised to $6000. Ignore GST. Required (a) Give the general journal entry to record depreciation expense on the equipment for the year ended 30 June 2022. (b) Calculate the carrying amount of the equipment at 30 June 2022. (LO5) (a) Depreciation Expense $5 188 Accumulated Depreciation – Equipment $5 188 Record depreciation expense for year ended 30 June 2022. Workings: Original asset cost $60 000 Residual value 10 000 Depreciable amount over original 8 years $50 000 Depreciation recorded to 30 June 2021 (2 years  $6250) 12 500 Depreciation remaining $37 500 Revised remaining useful life 8 years Revised depreciable amount ($60 000 – $6000 – $12 500) $41 500 Revised annual depreciation: $41 500  8 = $5 187.50 $5 188 (b) Original cost $60 000 Accumulated depreciation at 30 June 2022 ($12 500 + $5188) 17 688 Carrying amount at 30 June 2022 $42 312 Exercise 14.5 Revision of depreciation rates GST version Star Ltd purchased new equipment for $66 000 (GST Inclusive) on 2 July 2019. The equipment was expected to have a $10 000 residual value at the end of its 8-year useful life. Straight-line depreciation has been recorded. While reviewing the accounts in anticipation of adjusting them for the annual financial reports for the year ended 30 June 2022, Star Ltd decided that the useful life of the equipment should be extended by 2 years, and that the residual value should be revised to $6000. Required (a) Give the general journal entry to record depreciation expense on the equipment for the year ended 30 June 2022. (b) Calculate the carrying amount of the equipment at 30 June 2022. (LO5) (a) Firstly, remove the GST component from the purchase price of the equipment. $66 000 – GST $6 000 = cost price $60 000 excluding GST. Depreciation Expense $5 188 Accumulated Depreciation – Equipment $5 188 Record depreciation expense for year ended 30 June 2022. Workings: Original asset cost $60 000 Residual value 10 000 Depreciable amount over original 8 years $50 000 Depreciation recorded to 30 June 2021 (2 years  $6250) 12 500 Depreciation remaining $37 500 Revised remaining useful life 8 years Revised depreciable amount ($60 000 – $6000 – $12 500) $41 500 Revised annual depreciation: $41 500  8 = $5 187.50 $5 188 (b) Original cost $60 000 Accumulated depreciation at 30 June 2022 ($12 500 + $5188) 17 688 Carrying amount at 30 June 2022 $42 312 Exercise 14.6 Overhauls, repairs and revision of depreciation Non-GST version On 2 January 2019, McGrath Ltd purchased a machine for $36 000 with a useful life of 5 years and a residual value of $6000. In order to keep the machine running properly, the company has performed regular maintenance and repairs each year since its acquisition. In the fourth year (2022), ordinary repairs amounted to $900. On 3 January 2023, McGrath Ltd decided to completely overhaul the machine’s major operating parts at a cost of $9600, after which the machine is expected to have a useful life of 4 more years and a revised residual value of $4000. McGrath Ltd uses the straight-line depreciation method. The carrying amount of the parts replaced was considered to be $400. Required (a) Prepare general journal entries to record: i. the purchase of the machine on 2 January 2019 ii. the day-to-day repairs on the machine in 2022 iii. the overhaul of the machine on 3 January 2023 iv. depreciation expense on the machine on 31 December 2023. (LO5 and LO6) (a) Annual depreciation (first 4 years) = ($36 000 – $6000)/5 = $6000 per year. i. General journal entry on 2 January 2019: Machine $36 000 Cash at Bank $36 000 To record purchase of machine. ii. General journal entry to record repairs during 2022: Repairs and Maintenance Expense 900 Cash at Bank 900 To record repairs to machine. iii. General journal entry to record overhaul on 3 January 2023: Accumulated Depreciation (4  $6000) 24 000 Machine 24 000 To reverse accumulated depreciation. Machine 9 600 Cash at Bank 9 600 To record overhaul of machine. Expense on Parts Scrapped 400 Machine 400 To record carrying amount of parts scrapped. iv. General journal entry to record depreciation expense for year ended 31 December 2023: Depreciation Expense – Machine 4 300 Accumulated Depreciation – Machine 4 300 To record depreciation expense for year. ($36 000 – $24 000 + $9600 – $400 = $21 200 carrying amount) Depreciation = ($21 200 – $4000)/4 = $4300 Exercise 14.6 Overhauls, repairs and revision of depreciation GST version On 2 January 2019, McGrath Ltd purchased a machine for $39 600 (GST Inclusive) with a useful life of 5 years and a residual value of $6000. In order to keep the machine running properly, the company has performed regular maintenance and repairs each year since its acquisition. In the fourth year (2022), ordinary repairs amounted to $990 (GST Inclusive). On 3 January 2023, McGrath Ltd decided to completely overhaul the machine’s major operating parts at a cost of $10560 (GST Inclusive), after which the machine is expected to have a useful life of 4 more years and a revised residual value of $4000. McGrath Ltd uses the straight-line depreciation method. The carrying amount of the parts replaced was considered to be $400. Required (a) Prepare general journal entries to record: i. the purchase of the machine on 2 January 2019 ii. the day-to-day repairs on the machine in 2022 iii. the overhaul of the machine on 3 January 2023 iv. depreciation expense on the machine on 31 December 2023. (LO5 and LO6) (a) Annual depreciation (first 4 years) = ($36 000 – $6000)/5 = $6000 per year. i. General journal entry on 2 January 2019: Machine $36 000 GST Receivable 3 600 Cash at Bank $39 600 To record purchase of machine. ii. General journal entry to record repairs during 2022: Repairs and Maintenance Expense 900 GST Receivable 90 Cash at Bank 990 To record repairs to machine. iii. General journal entry to record overhaul on 3 January 2023: Accumulated Depreciation (4  $6000) 24 000 Machine 24 000 To reverse accumulated depreciation. Machine 9 600 GST Receivable 960 Cash at Bank 10 560 To record overhaul of machine. Expense on Parts Scrapped 400 Machine 400 To record carrying amount of parts scrapped. iv. General journal entry to record depreciation expense for year ended 31 December 2023: Depreciation Expense – Machine 4 300 Accumulated Depreciation – Machine 4 300 To record depreciation expense for year. ($36 000 – $24 000 + $9600 – $400 = $21 200 carrying amount) Depreciation = ($21 200 – $4000)/4 = $4300 Exercise 14.7 Improvements and revision of depreciation Non-GST version At 30 June 2019, the financial statements of McMaster Ltd showed a building with a cost of $300 000 and accumulated depreciation of $152 000. The business uses the straight-line method to depreciate the building. When acquired, the building’s useful life was estimated at 30 years and its residual value at $60 000. On 1 January 2020, McMaster Ltd made structural improvements to the building costing $94 000. Although the capacity of the building was unchanged, it is estimated that the improvements will extend the useful life of the building to 40 years, rather than the 30 years originally estimated. No change is expected in the residual value. Ignore GST. Required (a) Calculate the number of years the building had been depreciated to 30 June 2019. (b) Give the general journal entry to record the cost of the structural improvements on 1 January 2020. (c) Give the general journal entry to record the building’s depreciation expense for the year ended 30 June 2020. (LO5 and LO6) (a) ($300 000 – $60 000)/30 = $8000 annual depreciation; $152 000 accumulated depreciation  $8000 = 19 years (b) and (c) Depreciation expense – Building $4 000 Accumulated Depreciation – Building $4 000 To record depreciation for 6 months. Accumulated Depreciation – Building 156 000 Building 156 000 To write back accumulated depreciation. Entry on 1 January 2020: Building 94 000 Cash at Bank 94 000 To record structural improvements to building. Depreciation for six months to 1 January 2020 = $4 000 Carrying amount of building at 1 January 2020: $300 000 – $156 000 + $94 000 = $238 000 Less: Residual value 60 000 Amount to be depreciated over remaining life of 20½ years $178 000 Annual depreciation: $178 000  201/2 = $8 683 Depreciation. for six months to 30 June 2020 = $4 341 C. Entry on 30 June 2020: Depreciation Expense – Building $4 341 Accumulated Depreciation – Building $4 341 To record depreciation expense for second six months (first 6 months previously recorded). Exercise 14.7 Improvements and revision of depreciation GST version At 30 June 2019, the financial statements of McMaster Ltd showed a building with a cost of $300 000 and accumulated depreciation of $152 000. The business uses the straight-line method to depreciate the building. When acquired, the building’s useful life was estimated at 30 years and its residual value at $60 000. On 1 January 2020, McMaster Ltd made structural improvements to the building costing $103 400 (GST Inclusive). Although the capacity of the building was unchanged, it is estimated that the improvements will extend the useful life of the building to 40 years, rather than the 30 years originally estimated. No change is expected in the residual value. Required (a) Calculate the number of years the building had been depreciated to 30 June 2019. (b) Give the general journal entry to record the cost of the structural improvements on 1 January 2020. (c) Give the general journal entry to record the building’s depreciation expense for the year ended 30 June 2020. (LO5 and LO6) (a) ($300 000 – $60 000)/30 = $8000 annual depreciation; $152 000 accumulated depreciation  $8000 = 19 years (b) and (c) Depreciation expense – Building $4 000 Accumulated Depreciation – Building $4 000 To record depreciation for 6 months. Accumulated Depreciation – Building 156 000 Building 156 000 To write back accumulated depreciation. Entry on 1 January 2020: Building 94 000 GST Receivable 9 400 Cash at Bank 103 400 To record structural improvements to building. Depreciation for six months to 1 January 2020 = $4 000 Carrying amount of building at 1 January 2020: $300 000 – $156 000 + $94 000 = $238 000 Less: Residual value 60 000 Amount to be depreciated over remaining life of 20½ years $178 000 Annual depreciation: $178 000  201/2 = $8 683 Depreciation. for six months to 30 June 2020 = $4 341 C. Entry on 30 June 2020: Depreciation Expense – Building $4 341 Accumulated Depreciation – Building $4 341 To record depreciation expense for second six months (first 6 months previously recorded). Exercise 14.8 Depreciation, financial position and management decision making On 1 July 2019, Chadstone Ltd purchased a motor vehicle which is estimated to have a $6000 residual value and a useful life of 4 years. On 1 July 2021, the company purchased plant and equipment which is estimated to have a residual value of $10 000 and a useful life of 4 years. The following is an extract from the balance sheet showing the carrying amounts of these assets at 30 June 2022: Required (a) For each asset, calculate the percentage of useful life expired. (b) What decisions will management need to make in the next financial year? (c) Prepare the journal entries to record depreciation expense at 30 June 2023. (d) Prepare an extract from the balance sheet at 30 June 2023 (assuming no new assets have been purchased). (LO5, LO6 and LO8) (a) If using the internal information available to management: At 30 June 2022, useful lives expired are: Plant and Equipment — 1 year Motor Vehicle — 3 years Therefore, % of useful life expired is: Plant and Equipment — 25% Motor Vehicle — 75% If using only the information contained in the balance sheet: Plant & Equipment Motor Vehicle % of U/L expired = Accum. Depreciation = $20 000 $18 000 Ave Recorded Cost = $90 000 $30 000 = 22.2% 60% (b) Under IAS 16/AASB 116, management will need to assess whether to revise the useful life of the motor vehicle. If it is decided that the useful life is not to be changed, then the normal depreciation charge will apply in 2022 –23, and the vehicle will not be used after that date since management would be implying that the vehicle has no further useful life. It should then be sold (traded-in) for an amount approximating its residual value. A new motor vehicle would need to be purchased, and the method of financing the purchase would need to be determined. If the life of the vehicle is expected to go beyond its originally expected 4 years, the asset’s depreciation charge must be adjusted accordingly. (c) Information provided indicates that the straight-line method of depreciation is being used. Assuming no revision of the useful lives of the assets: Depreciation – Plant and Equipment $20 000 Motor Vehicle $6 000 The general journal to record annual depreciation charge would be: Depreciation Expense – Plant & Equipment 20 000 Depreciation Expense – Motor Vehicle 6 000 Accumulated Depreciation – Plant & Equipment 20 000 Accumulated Depreciation – Motor Vehicle 6 000 Record annual depreciation expense to 30 June 2023. Accumulated Depreciation – Motor Vehicle 24 000 Carrying amount of Vehicle Disposed of 6 000 Motor Vehicle $30 000 Elimination for carrying amount of expired asset. (d) CHADSTONE LTD Balance Sheet as at 30 June 2023 NON-CURRENT ASSETS Property, Plant and Equipment: Plant and Equipment (at cost) $90 000 Less: Accumulated Depreciation 40 000 $50 000 $50 000 NOTE: Given the information in the question, the useful life of the motor vehicle has not been revised. Therefore, since the motor vehicle is considered to have no further economic benefits to the company, it is written off to expense and would not appear in the balance sheet. NOTE: There is no GST inclusive version of this question because GST is already excluded from the cost price of the assets when presented in the Balance Sheet. Exercise 14.9 Depreciation methods Non-GST version Edwards Ltd recently paid $290 000 for manufacturing equipment, which is expected to have a useful life of 4 years and a residual value of $50 000. The manager of Edwards Ltd wants information about the effect that various depreciation methods will have on profit and asks you to prepare a schedule comparing the straight-line and diminishing balance methods of depreciation. Ignore GST. Required (a) Prepare a schedule and calculate the annual depreciation charge and end-of-year carrying amount for the expected life of the equipment. (LO5) (a) Straight line Diminishing balance Year Depreciation Carrying Depreciation Carrying amount amount Acquisition $290 000 $290 000 1 $60 000 230 000 $104 400 185 600 2 60 000 170 000 66 816 118 784 3 60 000 110 000 42 762.24 76 021.76 4 60 000 50 000 26 021.76 50 000 Diminishing balance rate = 1 – = 1 – 0.6444 = 0.3556 or 36% Exercise 14.9 Depreciation methods GST version Edwards Ltd recently paid $319 000 (GST Inclusive) for manufacturing equipment, which is expected to have a useful life of 4 years and a residual value of $50 000. The manager of Edwards Ltd wants information about the effect that various depreciation methods will have on profit and asks you to prepare a schedule comparing the straight-line and diminishing balance methods of depreciation. Required (a) Prepare a schedule and calculate the annual depreciation charge and end-of-year carrying amount for the expected life of the equipment. (LO5) (a) It is first necessary to remove the GST component from the cost price of the equipment. $319 000 – GST $29 000 = $290 000 cost of the equipment. Straight line Diminishing balance Year Depreciation Carrying Depreciation Carrying amount amount Acquisition $290 000 $290 000.00 1 $60 000 230 000 $104 400.00 185 600.00 2 60 000 170 000 66 816.00 118 784.00 3 60 000 110 000 42 762.24 76 021.76 4 60 000 50 000 26 021.76 50 000.00 Diminishing balance rate = 1 – = 1 – 0.6444 = 0.3556 or 36% Exercise 14.10 Depreciation and overhauls Non-GST version Prestige Printing Ltd commenced business on 1 July 2019. On 5 July 2019, a printing machine was purchased for $35 000, payable in two equal instalments due on 1 August and 1 October 2019. Transport costs of $1200 were paid in cash to deliver the machine to Prestige Printing Ltd’s premises. The machine was expected to have a useful life of 5 years and a residual value of $3000. On 22 September 2019, the business purchased a second-hand truck for $26 000. Stamp duty amounted to $700. The truck dealer also fitted four new tyres at a cost of $1200 and spray-painted the business logo on the truck doors at a cost of $500. All amounts were paid in cash. The truck was expected to have a useful life of 3 years and a residual value of $5000. On 1 March 2020, extensive repairs were carried out on the printing machine at a cost of $18 230, paid in cash. The company expects these repairs to extend the machine’s useful life by 2 years. The residual value was revised to $4000. The carrying amount of the parts replaced in the machine was considered to be equal to $14 000. The company uses the straight-line depreciation method, recording depreciation to the nearest month. The end of its reporting period is 30 June. Required (a) Prepare general journal entries (narrations are not required, but show all workings) to record the transactions and to record depreciation adjustments necessary for the year ended 30 June 2020. (b) Justify the value you recognised as the cost of the second-hand truck purchased on 22 September 2019 by reference to the requirements of IAS 16/AASB 116. (LO2 and LO5) Note: please round all amounts to the nearest dollar. (a) 2019 July 5 Printing Machine ($35 000 + $1200 Accounts Payable Cash at Bank Purchase of printing machine on credit and payment of installation costs 36 200 35 000 1 200 Aug. 1 Accounts Payable Cash at Bank Paid supplier for half of printing machine 17 500 17 500 Sept. 22 Truck ($26 000 + $700+ $1200 + $500) Cash at Bank Purchased truck, incl stamp duty, new tyres and sign writing 28 400 28 400 Oct. 1 Accounts Payable Cash Paid supplier balance remaining on printing machine 17 500 17 500 2020 March 1 Depreciation expense – Printing Machine Accumulated Depreciation – Printing Machine To record 8 months depreciation expense on printing machine ($36 200 – $3000/5 = $6640  8/12 = $4427) 4 427 4 427 Accumulated Depreciation – Printing Machine Printing Machine To write back the accum dep’n to the printing machine 4 427 4 427 Printing Machine Cash at Bank To pay for the extensive repairs on the printing machine 18 230 18 230 Expense of Parts Replaced Printing Machine To record the expense of the parts replaced due to extensive repairs (New carrying amount = $36 200 – $4427 = $31 773 + $18 230 – $14 000 = $36 003) 14 000 14 000 June 30 Depreciation expense – Printing Machine Accumulated Depreciation – Printing Machine To record depreciation expense for 4 months ($36 003 – $4000/6.3 = $5079.84 or 5080  4/12 = $1760) note remaining life is 6 years and 4 months or 6.3 years 1 760 1 760 Depreciation expense – Truck Accumulated depreciation – Truck To record annual depreciation expense for the truck Note: truck was purchased 22/9, record 9.25 months dep’n exp ($28 400 – $3000/3 = $7800p.a x 9.25/12 = 6012.50 or 6013 ) 6 013 6 013 (b) IAS 16/AASB 116 requires assets to be recognised at their cost on the date of acquisition. According to the standard, the cost of an item of property, plant and equipment comprises: i. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; ii. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and iii. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. In the case of the truck the purchase price was $26 000 and directly attributable costs included the transfer costs (stamp duty), new tyres and sign writing. Thus, the total cost of the truck is $28 400. Exercise 14.10 Depreciation and overhauls GST version Prestige Printing Ltd commenced business on 1 July 2019. On 5 July 2019, a printing machine was purchased for $38 500 (GST Inclusive), payable in two equal instalments due on 1 August and 1 October 2019. Transport costs of $1320 (GST Inclusive) were paid in cash to deliver the machine to Prestige Printing Ltd’s premises. The machine was expected to have a useful life of 5 years and a residual value of $3000. On 22 September 2019, the business purchased a second-hand truck for $28 600 (GST Inclusive). Stamp duty amounted to $700 (GST Exempt) . The truck dealer also fitted four new tyres at a cost of $1 320 (GST Inclusive) and spray-painted the business logo on the truck doors at a cost of $550 (GST Inclusive). All amounts were paid in cash. The truck was expected to have a useful life of 3 years and a residual value of $5000. On 1 March 2020, extensive repairs were carried out on the printing machine at a cost of $20 053 (GST Inclusive), paid in cash. The company expects these repairs to extend the machine’s useful life by 2 years. The residual value was revised to $4000. The carrying amount of the parts replaced in the machine was considered to be equal to $14 000. The company uses the straight-line depreciation method, recording depreciation to the nearest month. The end of its reporting period is 30 June. Required (a) Prepare general journal entries (narrations are not required, but show all workings) to record the transactions and to record depreciation adjustments necessary for the year ended 30 June 2020. (b) Justify the value you recognised as the cost of the second-hand truck purchased on 22 September 2019 by reference to the requirements of IAS 16/AASB 116. (LO2 and LO5) Note: please round all amounts to the nearest dollar. (a) 2019 July 5 Printing Machine ($35 000 + $1200) GST Receivable Accounts Payable Cash at Bank Purchase of printing machine on credit and payment of installation costs 36 200 3 620 38 500 1 320 Aug. 1 Accounts Payable Cash at Bank Paid supplier for half of printing machine 19 250 19 250 Sept. 22 Truck GST Receivable Cash at Bank 28 400 2 770 31 170 Oct. 1 Accounts Payable Cash Paid supplier balance remaining on printing machine 19 250 19 250 2020 March 1 Depreciation expense – Printing Machine Accumulated Depreciation – Printing Machine To record 8 months depreciation expense on printing machine ($36 200 – $3000/5 = $6640  8/12 = $4427) 4 427 4 427 Accumulated Depreciation – Printing Machine Printing Machine To write back the accum dep’n to the printing machine 4 427 4 427 Printing Machine GST Receivable Cash at Bank To pay for the extensive repairs on the printing machine 18 230 1 823 20 053 Expense of Parts Replaced Printing Machine To record the expense of the parts replaced due to extensive repairs (New carrying amount = $36 200 – $4427 = $31 773 + $18 230 – $14 000 = $36 003) 14 000 14 000 June 30 Depreciation expense – Printing Machine Accumulated Depreciation – Printing Machine To record depreciation expense for 4 months ($36 003 – $4000/6.3 = $5079.84 or 5080  4/12 = $1760) note remaining life is 6 years and 4 months or 6.3 years 1 760 1 760 Depreciation expense – Truck Accumulated depreciation – Truck To record annual depreciation expense for the truck Note: truck was purchased 22/9, record 9.25 months dep’n exp ($28 400 – $3000/3 = $7800p.a x 9.25/12 = 6012.50 or 6013 ) 6 013 6 013 (b) IAS 16/AASB 116 requires assets to be recognised at their cost on the date of acquisition. According to the standard, the cost of an item of property, plant and equipment comprises: i. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; ii. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and iii. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. In the case of the truck the purchase price was $26 000 and directly attributable costs included the transfer costs (stamp duty), new tyres and sign writing. Thus, the total cost of the truck is $28 400. Problems Problem 14.11 Depreciation and overhauls Non-GST version Branson Ltd owns two delivery vehicles (each with a residual value of $5000 and useful life of 4 years) and uses the straight-line method of depreciation. The business closes its accounting records annually on 30 June. The following events and transactions occurred during the first 3 financial years. Ignore GST. Required (a) Prepare entries (in general journal form) to record the transactions of Branson Ltd as they relate to both vehicles to 30 June 2022. (LO2, LO5 and LO6) (a) 2019 July 1 Delivery Vehicles ($60 000 + $620 + $840) $61 460 Cash at Bank $61 460 To record acquisition of delivery truck. 2020 June 1 Repair Expense 420 Cash at Bank 420 To record minor repair work. June 30 Depreciation Expense ($61 460 – $5000)/4 14 115 Accumulated Depreciation – Delivery Vehicles 14 115 To record annual depreciation expense. July 1 Delivery Vehicles 45 000 Cash at Bank 45 000 To record acquisition of delivery van. Delivery Vehicles 1 320 Cash at Bank 1 320 To record installation of new tyres on van. 2021 June 30 Depreciation Expense 24 445 Accumulated Depreciation – Delivery Vehicles 24 445 Truck: as above = $14 115 Delivery Van: ($46 320 – $5000)/4 = $10 330 Total depreciation = $24 445 July 1 Accumulated Depreciation – Delivery Vehicles 38 560 Delivery Vehicles 38 560 To write off accumulated depreciation on delivery truck ($28 230 = $14 115  2) and delivery van $10 330 (due to increased efficiency of the van). July 1 Delivery Vehicles 3 700 Cash at Bank 3 700 To record overhaul costs on delivery truck. July 1 Expense of Parts Replaced 2 000 Delivery Vehicles 2 000 To record write-off of parts replaced Delivery Vehicles 1 600 Cash at Bank 1 600 To record acquisition of two-way radio for the van. 2022 June 30 Depreciation Expense 20 840 Accumulated Depreciation – Delivery Vehicles 20 840 To record depreciation expense. Delivery truck: Carrying amount prior to improvement ($61 460 – $28 230) $33 230 Add: Cost of improvement (major overhaul) 3 700 Less: Cost of parts replaced (2 000) Less: Residual value (5 000) Revised depreciable amount $29 930 Remaining useful life 3 years Revised annual depreciation $9 977 Delivery van: Carrying amount prior to capital expenditure: $35 990 ($46 320 – $10 330) Add: Cost of capital expenditure 1 600 Less: Residual value (5 000) Depreciable amount $32 590 Depreciation $32 590/3 10 863 Total depreciation expense = $9977 + $10 863 = $20 840 Problem 14.11 Depreciation and overhauls GST version Branson Ltd owns two delivery vehicles (each with a residual value of $5000 and useful life of 4 years) and uses the straight-line method of depreciation. The business closes its accounting records annually on 30 June. The following events and transactions occurred during the first 3 financial years. 2019–2020 July 1 June 1 June 30 Purchased a delivery truck from Mangrove Mountain Motors for $66 000 (GST Inclusive) plus cash plus stamp duty of $620 (GST exempt), and registration and third-party insurance of $840 (GST exempt. Made minor repairs to the truck for cash at a cost of $462 (GST Inclusive) Recorded annual depreciation. 2020–2021 July 1 June 30 Purchased a delivery van from Northern Motors for cash, $49 500 (GST Inclusive). This van was a used vehicle which was expected to last 4 years from the date of purchase. Fitted four new tyres to the van at a cash cost of $1452 (GST Inclusive). Recorded depreciation on both truck and van. 2021–2022 July 1 June 30 Paid $4070 (GST Inclusive) for an overhaul of the motor of the delivery truck. This expenditure is expected to extend the useful life by 1 year. The parts replaced in the truck were considered to have a carrying amount of $2000. Installed a two-way radio in the delivery van at a cost of $1760 (GST Inclusive) to improve efficiency. This expenditure will not increase the useful life. Recorded depreciation on both truck and van. Required (a) Prepare entries (in general journal form) to record the transactions of Branson Ltd as they relate to both vehicles to 30 June 2022. (LO2, LO5 and LO6) (a) 2019 July 1 Delivery Vehicles ($60 000 + $620 + $840) GST Receivable $61 460 6 000 Cash at Bank $67 460 To record acquisition of delivery truck. 2020 June 1 Repair Expense GST Receivable 420 42 Cash at Bank 462 To record minor repair work. June 30 Depreciation Expense ($61 460 – $5000)/4 14 115 Accumulated Depreciation – Delivery Vehicles 14 115 To record annual depreciation expense. July 1 Delivery Vehicles GST Receivable 45 000 4 500 Cash at Bank 459 500 To record acquisition of delivery van. Delivery Vehicles GST Receivable 1 320 132 Cash at Bank 1 452 To record installation of new tyres on van. 2021 June 30 Depreciation Expense 24 445 Accumulated Depreciation – Delivery Vehicles 24 445 Truck: as above = $14 115 Delivery Van: ($46 320 – $5000)/4 = $10 330 Total depreciation = $24 445 July 1 Accumulated Depreciation – Delivery Vehicles 28 230 Delivery Vehicles 28230 To write off accumulated depreciation on delivery truck ($28 230 = $14 115  2) due to overhaul of motor July 1 Delivery Vehicles GST Receivable 3 700 370 Cash at Bank 4 070 To record overhaul costs on delivery truck. July 1 Expense of Parts Replaced 2 000 Delivery Vehicles 2 000 To record write-off of parts replaced Delivery Vehicles GST Receivable 1 600 160 Cash at Bank 1 760 To record acquisition of two-way radio for the van. Note: while the question information states the two way radio was purchased to increase efficiency, this treatment in this solution is to record and depreciate as a separate asset from the delivery van, because the radio has a longer useful life and can be removed and installed in another vehicle at the end of the van’s useful life. 2022 June 30 Depreciation Expense – Delivery Vehicles 20 307 Accumulated Depreciation – Delivery Vehicles 20 307 To record depreciation expense (Truck = 9977, Van = 10330) Depreciation Expense – communication equipm Accum Depreciation – communication equipmt To record depreciation expense (radio 1600/6 = 266.67 or 267) 267 Workings – depreciation delivery truck Delivery truck: Carrying amount prior to improvement ($61 460 – $28 230) $33 230 Add: Cost of improvement (major overhaul) 3 700 Less: Cost of parts replaced (2 000) Less: Residual value (5 000) Revised depreciable amount $29 930 Remaining useful life 3 years Revised annual depreciation $9 976.66 or 9977 Problem 14.12 Depreciation methods and partial years Non-GST version Brunswick Ltd operates four types of equipment. Because of their varied functions, management has decided that four different depreciation methods will be used to determine depreciation charges. Information on the equipment is summarised as follows (ignore GST). Use of equipment type 4 was 200 hours in the year ended 30 June 2020; 3200 hours in 2021; 2600 hours in 2022 and 2850 in 2023. Required (a) Assuming the financial year ends on 30 June and that depreciation is recorded to the nearest month, calculate the depreciation charges for 2016, 2017, 2018 and 2019 by preparing a schedule with the following headings: (LO5) (a) Depreciation expense for year ended 30 June Equipment type 2020 2021 2022 2023 1 23 850 17 888 13 416 10 062 2 38 000 31 667 25 333 19 000 3 1 100 2 200 2 200 2 200 4 351 5 616 4 563 5 002 Equipment Type 1 Rate = 1 – Date Depreciation Carrying Amount 1/7/2019 $95 400 30/6/2020 $23 850 71 550 30/6/2021 17 888 53 662 30/6/2022 13 416 40 246 30/6/2023 10 062 30 184 Equipment Type 2 Sum-of-years’-digits: 6 + 5 + 4 + 3 + 2 + 1 = 21 Depreciable amount: $148 000 – $15 000 = $133 000 Depreciation y/e 30/6/2020: $133 000  6/21 = $38 000 Depreciation y/e 30/6/2021: $133 000  5/21 = $31 667 (rounded) Depreciation y/e 30/6/2022 $133 000  4/21 = $25 333 (rounded) Depreciation y/e 30/6/2023: $133 000  3/21 = $19 000 Equipment Type 3 Depreciable amount: $27 500 – $5500 = $22 000 Straight-line depreciation per annum: $22 000  10 = $2 200 For year ended 30 June 2020, depreciation is 6/12 of $2200 = $1 100 Equipment Type 4 Depreciable amount: $39 700 – $4600 = $35 100 Depreciation y/e 30/6/2020: $35 100  200/20 000 = $351 Depreciation y/e 30/6/2021: $35 100  3200/20 000 = $5 616 Depreciation y/e 30/6/2022: $35 100  2600/20 000 = $4 563 Depreciation y/e 30/6/2023: $35 100  2850/20 000 = $5002 (rounded) Problem 14.12 Depreciation methods and partial years GST version Brunswick Ltd operates four types of equipment. Because of their varied functions, management has decided that four different depreciation methods will be used to determine depreciation charges. Information on the equipment is summarised as follows. Equipment type Date acquired Cost GST inclusive Residual value Useful life Depreciation method 1 2 3 4 1/7/19 1/7/19 1/1/20 15/4/20 $104 940 162 800 30 250 43 670 $10 000 15 000 5 500 4 600 8 years 6 years 10 years 20 000 hours Diminishing balance Sum-of-years’-digits Straight-line Production units Use of equipment type 4 was 200 hours in the year ended 30 June 2020; 3200 hours in 2021; 2600 hours in 2022 and 2850 in 2023. Required (a) Assuming the financial year ends on 30 June and that depreciation is recorded to the nearest month, calculate the depreciation charges for 2016, 2017, 2018 and 2019 by preparing a schedule with the following headings: (LO5) (a) Depreciation expense for year ended 30 June Equipment type 2020 2021 2022 2023 1 23 850 17 888 13 416 10 062 2 38 000 31 667 25 333 19 000 3 1 100 2 200 2 200 2 200 4 351 5 616 4 563 5 002 First it is necessary to remove the GST component from the cost price of the assets: •Equipment 1: ($104 940 – GST $9 540) = $95 400 cost. •Equipment 2: ($162 800 – GST $14 800) = $148 000 cost. •Equipment 3: ($30 250 – GST $2 750) = $27 500 cost. •Equipment 4: ($43 670 – GST $3 970) = $39 700 cost. Equipment Type 1 Rate = 1 – Date Depreciation Carrying Amount 1/7/2019 $95 400 30/6/2020 $23 850 71 550 30/6/2021 17 888 53 662 30/6/2022 13 416 40 246 30/6/2023 10 062 30 184 Equipment Type 2 Sum-of-years’-digits: 6 + 5 + 4 + 3 + 2 + 1 = 21 Depreciable amount: $148 000 – $15 000 = $133 000 Depreciation y/e 30/6/2020: $133 000  6/21 = $38 000 Depreciation y/e 30/6/2021: $133 000  5/21 = $31 667 (rounded) Depreciation y/e 30/6/2022 $133 000  4/21 = $25 333 (rounded) Depreciation y/e 30/6/2023: $133 000  3/21 = $19 000 Equipment Type 3 Depreciable amount: $27 500 – $5500 = $22 000 Straight-line depreciation per annum: $22 000  10 = $2 200 For year ended 30 June 2020, depreciation is 6/12 of $2200 = $1 100 Equipment Type 4 Depreciable amount: $39 700 – $4600 = $35 100 Depreciation y/e 30/6/2020: $35 100  200/20 000 = $351 Depreciation y/e 30/6/2021: $35 100  3200/20 000 = $5 616 Depreciation y/e 30/6/2022: $35 100  2600/20 000 = $4 563 Depreciation y/e 30/6/2023: $35 100  2850/20 000 = $5002 (rounded) Problem 14.13 Cost of various assets Non-GST version Mason’s Manufacturing Ltd began operations during 2019. The company had a building constructed and acquired manufacturing equipment during the first 6 months of the year. Manufacturing operations began early in July 2019. The company’s accountant, who was unsure how to treat property, plant and equipment transactions, opened a Property, Plant and Equipment account and debited (credited) that account for all the expenditures and receipts involving assets as shown below (ignore GST). Required (a) Prepare a schedule similar to the one below. Analyse each transaction and enter the payment (receipt) in the appropriate column. Total the columns. (b) Prepare a general journal entry to close the $937 200 balance in the Property, Plant and Equipment account and allocate the transactions to their appropriate accounts. (c) Prepare an entry to record depreciation expense for half the year to 31 December 2019 on land improvements, building and manufacturing equipment using straight-line depreciation. Useful lives and residual values are as follows. (LO2 and LO5) (a) Item no. Land Land improvements Building Manufacturing equipment Other 1. $148 400 2. 15 000 3. 6 700 4. 600 5. (4 600) 6. $40 000 7. 23 300 8. 84 000 9. 225 000 10. $15 700 11. $18 000 12. 275 000 13. $84 000 14. 1 600 15. 2 900 16. 1 300 17. (500) 18. 800 Total $166 100 $15 700 $648 100 $88 500 $18 800 (b) Land 166 100 Land Improvements 15 700 Buildings 648 100 Manufacturing Equipment 88 500 Damage to Machinery Loss 800 Interest on Building Loan Expense 18 000 Property Plant and Equipment 937 200 To reallocate cost of acquisition. (c) Depreciation Expense – Land Improvements 785 Depreciation Expense – Buildings 15 050 Depreciation Expense – Equipment 5 063 Accumulated Depreciation – Land Improvements 785 Accumulated Depreciation – Buildings 15 050 Accumulated Depreciation – Equipment 5 063 To record depreciation expense. Land Improvements = $15 700/10  6/12 = 785 Buildings = $648 100 – $46 100 = $602 000/20  6/12 = 15 050 Equipment = $88 500 – $7500 = $81 000/8  6/12 = 5 063 Problem 14.13 Cost of various assets GST version Mason’s Manufacturing Ltd began operations during 2019. The company had a building constructed and acquired manufacturing equipment during the first 6 months of the year. Manufacturing operations began early in July 2019. The company’s accountant, who was unsure how to treat property, plant and equipment transactions, opened a Property, Plant and Equipment account and debited (credited) that account for all the expenditures and receipts involving assets as shown below: Note all transactions include GST unless otherwise stated. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Cost of real estate purchased: Land Old building Paid for the demolition of the old building to prepare the site for a new one. Paid for taxes in arrears on the property in (1) (excludes GST) Paid fee for title search on property in (1) Received for sale of salvaged materials from old building (excludes GST) Paid architect for designing new building Paid for a temporary fence around the construction site Paid excavation costs for new building Partial payment to building contractor Paid for construction of parking spaces and installation of parking area lights Paid interest on building loan during construction (excludes GST) Made final payment to building contractor Paid for manufacturing equipment Paid freight on manufacturing equipment Paid installation costs of manufacturing equipment Paid for removal of temporary fencing around construction site Received for temporary fencing materials salvaged Paid for repair of manufacturing equipment that was damaged during installation $ 124 740 38 500 16 500 6 700 660 (4 600) 44 000 25 630 92 400 247 500 17 270 18 000 302 500 92 400 1 760 3 190 1 430 (550) 880 Property, Plant and Equipment account balance $ 1 028 960 Required (a) Prepare a schedule similar to the one below. Analyse each transaction and enter the payment (receipt) in the appropriate column excluding GST. Total the columns. (b) Prepare a general journal entry to close the balance in the Property, Plant and Equipment account and allocate the transactions to their appropriate accounts. (c) Prepare an entry to record depreciation expense for half the year to 31 December 2019 on land improvements, building and manufacturing equipment using straight-line depreciation. Useful lives and residual values are as follows. (LO2 and LO5) (a) Item no. Land Land improvements Building Manufacturing equipment Other 1. $148 400 2. 15 000 3. 6 700 4. 600 5. (4 600) 6. $40 000 7. 23 300 8. 84 000 9. 225 000 10. $15 700 11. $18 000 12. 275 000 13. $84 000 14. 1 600 15. 2 900 16. 1 300 17. (500) 18. 800 Total $166 100 $15 700 $648 100 $88 500 $18 800 (b) Land 166 100 Land Improvements 15 700 Buildings 648 100 Manufacturing Equipment 88 500 Damage to Machinery Loss 800 Interest on Building Loan Expense 18 000 Property Plant and Equipment 937 200 To reallocate cost of acquisition. (c) Depreciation Expense – Land Improvements 785 Depreciation Expense – Buildings 15 050 Depreciation Expense – Equipment 5 063 Accumulated Depreciation – Land Improvements 785 Accumulated Depreciation – Buildings 15 050 Accumulated Depreciation – Equipment 5 063 To record depreciation expense. Land Improvements = $15 700/10  6/12 = 785 Buildings = $648 100 – $46 100 = $602 000/20  6/12 = 15 050 Equipment = $88 500 – $7500 = $81 000/8  6/12 = 5 063 Problem 14.4 Major overhauls and revision of depreciation Non-GST version Powerhouse Ltd purchased machinery on 2 January 2019, at a cost of $800 000. The machinery is depreciated using the straight-line method over a useful life of 8 years with a residual value of $80 000. On 3 January 2022, an overhaul of the machinery was made at a cost of $112 000. Because of this overhaul, the useful life was re-estimated at 4 years from 3 January 2022, and the residual value was amended to $40 000. The carrying amount of parts replaced was considered to be $10 000. Required (a) Assuming the financial year ends on 31 December, prepare journal entries to record: i. the purchase of the machinery on 2 January 2019 ii. depreciation expense for 2019, 2020 and 2021 iii. the overhaul expenditure on 3 January 2022 iv. depreciation expense for 2022. (LO5 and LO6) i. 2019 Jan. 2 Machinery $800 000 Cash at Bank/Accounts Payable $800 000 To record purchase of machinery. ii. 2019 Dec. 31 Depreciation Expense – Machinery 90 000 Accumulated Depreciation – Machinery 90 000 To record annual depreciation. ($800 000 – $80 000 )/8 2020 Dec. 31 Depreciation Expense – Machinery 90 000 Accumulated Depreciation – Machinery 90 000 To record annual depreciation. 2021 Dec. 31 Depreciation Expense – Machinery 90 000 Accumulated Depreciation – Machinery 90 000 To record annual depreciation. iii. 2022 Jan. 3 Accumulated Depreciation – Machinery 270 000 Machinery 270 000 To reverse accumulated depreciation on machinery overhauled. Machinery 112 000 Cash at Bank/Accounts Payable 112 000 To record cost of overhaul to machinery. iv. 2022 Expense of Parts Replaced 10 000 Machinery 10 000 To record write-off of parts replaced Dec. 31 Depreciation Expense – Machinery 148 000 Accumulated Depreciation – Machinery 148 000 To record annual depreciation.* *[$800 000 – $270 000 + $112 000 – $10 000 – $40 000]  4 Problem 14.14 Major overhauls and revision of depreciation GST version Powerhouse Ltd purchased machinery on 2 January 2019, at a cost of $880 000 (GST Inclusive). The machinery is depreciated using the straight-line method over a useful life of 8 years with a residual value of $80 000. On 3 January 2022, an overhaul of the machinery was made at a cost of $132 200 (GST Inclusive). Because of this overhaul, the useful life was re-estimated at 4 years from 3 January 2022, and the residual value was amended to $40 000. The carrying amount of parts replaced was considered to be $10 000. Required (a) Assuming the financial year ends on 31 December, prepare journal entries to record: i. the purchase of the machinery on 2 January 2019 ii. depreciation expense for 2019, 2020 and 2021 iii. the overhaul expenditure on 3 January 2022 iv. depreciation expense for 2022. (LO5 and LO6) (a) i. 2019 Jan. 2 Machinery $800 000 GST Receivable 80 000 Cash at Bank/Accounts Payable $880 000 To record purchase of machinery. ii. 2019 Dec. 31 Depreciation Expense – Machinery 90 000 Accumulated Depreciation – Machinery 90 000 To record annual depreciation. ($800 000 – $80 000 )/8 2020 Dec. 31 Depreciation Expense – Machinery 90 000 Accumulated Depreciation – Machinery 90 000 To record annual depreciation. 2021 Dec. 31 Depreciation Expense – Machinery 90 000 Accumulated Depreciation – Machinery 90 000 To record annual depreciation. iii. 2022 Jan. 3 Accumulated Depreciation – Machinery 270 000 Machinery 270 000 To reverse accumulated depreciation on machinery overhauled. Machinery 112 000 GST Receivable 11 200 Cash at Bank/Accounts Payable 123 200 To record cost of overhaul to machinery. iv. 2022 Expense of Parts Replaced 10 000 Machinery 10 000 To record write-off of parts replaced Dec. 31 Depreciation Expense – Machinery 148 000 Accumulated Depreciation – Machinery 148 000 To record annual depreciation.* *[$800 000 – $270 000 + $112 000 – $10 000 – $40 000]  4 Problem 14.15 Comprehensive problem On 2 January 2019, Powerhouse Ltd purchased, by exchanging $300 000 cash and a $180 000, 12%, 18-month finance company loan, assets with the following independently determined appraised values. The estimated useful life of the building is 30 years and its residual value is $20 000. The $100 000 machinery and equipment amount consists of three machines independently valued at $30 000 each and some office equipment valued at $10 000. The estimated useful lives and residual values for these assets are shown below. Powerhouse Ltd uses the straight-line depreciation method. Ignore GST. Required (a) Prepare journal entries(in general journal form) to record: i. the purchase of the assets ii. the accrual of interest expense on the loan on 31 December 2019 iii. depreciation expense for the year 2019 iv. the payment of the loan on 2 July 2020. (b) Show how the assets would be reported on the 31 December 2019 balance sheet. (LO2, LO5 and LO8) (a) i. 2019 Jan. 2 Building 307 200 Land 76 800 Machinery 86 400 Office Equipment 9 600 Cash at Bank 300 000 Loan from Finance Company 180 000 To record purchase of various assets. Allocation of $480 000 cost: Building ($320 000/$500 000)  $480 000 $307 200 Land ($80 000 /$500 000)  $480 000 76 800 Machinery ($90 000 /$500 000)  $480 000 86 400 Office Equipment ($10 000/$500 000)  $480 000 9 600 $480 000 ii. 2019 Dec. 31 Interest Expense 21 600 Interest Payable 21 600 To record annual interest. Not a qualifying asset. (iii) 2019 Dec. 31 Depreciation Expense 24 760 Accumulated Depreciation – Building 9 573 Accumulated Depreciation – Machinery 13 367 Accumulated Depreciation – Office Equipment 1 820 To record annual depreciation. Building depreciation = $307 200 – 20 000 = $287 200/30 $9 573 Machine 1 = $28 800 – $3000 = $25 800/6 $4 300 Machine 2 = $28 800 – $3000 = $25 800/9 2 867 Machine 3 = $28 800 – $4000 = $24 800/4 6 200 13 367 Office equipment = $9600 – $500 = $9100/5 1 820 $24 760 (iv) 2019 Dec. 31 Interest Expense 10 800 Interest Payable 21 600 Loan from Finance Company 180 000 Cash at Bank 212 400 To record repayment of loan plus interest. Assumes no discounting of cash flows. (b) Non-current assets Property, plant and equipment Land $76 800 Building $307 200 Accumulated depreciation (9 573) 297 627 Machinery 86 400 Accumulated depreciation (13 367) 73 033 Office equipment 9 600 Accumulated depreciation (1 820) 7 780 $455 240 Problem 14.16 Comprehensive problem Non-GST version Over a 5-year period, Downton Ltd completed the following transactions affecting non-current assets in financial years ending 31 December. The company uses straight-line depreciation on all depreciable assets and records depreciation to the nearest month. Ignore GST. Required (a) Prepare journal entries to record all the transaction of Downton Ltd. (b) Prepare a schedule showing the cost and accumulated depreciation of each asset after recording depreciation on 31 December 2019. (c) Post the journal entries in requirement A to the appropriate non-current asset accounts from 3 January 2015 to 31 December 2019. (LO2, LO5 and LO6) (a) 2019 Jan. 3 Machinery $33 900 Cash at Bank $33 900 To record acquisition of machine. June 25 Delivery Van 20 300 Cash at Bank 20 300 To record acquisition of delivery van. Dec. 31 Depreciation Expense – Machinery 5 780 Depreciation Expense – Delivery Van 3 167 Accumulated Depreciation – Machinery 5 780 Accumulated Depreciation – Delivery Van 3 167 To record depreciation expense. ($33 900 – $5000)/5 = $5780 ($20 300 – $1300)/3 = $6333  6/12 = $3167 2020 July 30 Repairs and Maintenance Expense 520 Cash at Bank 520 To record repairs on machine and van. Dec. 31 Depreciation Expense – Machinery 5 780 Depreciation Expense – Delivery Van 6 333 Accumulated Depreciation – Machinery 5 780 Accumulated Depreciation – Delivery Truck 6 333 To record depreciation expense. 2021 April 2 Land Improvements 8 000 Cash at Bank 8 000 To record installation of fence. Dec. 31 Depreciation Expense – Machinery 5 780 Depreciation Expense – Delivery Van 6 333 Depreciation Expense – Land Improvements* 500 Accumulated Depreciation – Machinery 5 780 Accumulated Depreciation – Delivery Van 6 333 Accumulated Depreciation – Land Improvements 500 To record depreciation expense. * $8000/12 = $667  9/12 = $500. 2022 June 30 Depreciation Expense – Delivery Van 3 167 Accumulated Depreciation – Delivery Van 3 167 To record final depreciation. Accumulated Depreciation – Delivery Van 19 000 Delivery Van 19 000 To write off delivery van’s accumulated depreciation and removal of asset from accounting records. Building 58 800 Cash at Bank 58 800 To record construction of warehouse. Dec. 27 Depreciation Expense – Machinery 5 780 Accumulated Depreciation – Machinery 5 780 To record depreciation to date of overhaul. Accumulated Depreciation – Machinery 23 120 Machinery 23 120 To write back depreciation prior to overhaul. Machinery 5 000 Cash at Bank 5 000 To record overhaul of machinery. Dec. 31 Depreciation Expense – Land Improvements 667 Depreciation Expense – Building* 863 Accumulated Depreciation – Land Improvements 667 Accumulated Depreciation – Building 863 To record depreciation expense. * $863 = ($58 800 – $7000)  30 = $1727  6/12 2023 Dec. 31 Depreciation Expense – Machinery* 1 956 Depreciation Expense – Land Improvements 667 Depreciation Expense – Building 1 727 Accumulated Depreciation – Machinery 1 956 Accumulated Depreciation – Land Improvements 667 Accumulated Depreciation – Building 1 727 To record depreciation expense. *Total cost ($33 900 + $5000) $38 900 Accumulated depreciation to 31 Dec 2018 ($5780  4) 23 120 Carrying amount 15 780 Residual value 6 000 Amount to be depreciated $9 780 Remaining useful life 5 years Depreciation expense per year $1 956 (b) Machinery Land improvements Building Cost $15 780 $8 000 $58 800 Accumulated depreciation 1 956 1 834 2 590 Carrying amount $13 824 $6 166 $56 210 (c) Machinery Accumulated Depreciation – Machinery 2019 2022 2022 2019 3/1 33 900 27/12 23 120 27/12 23 120 31/12 5 780 2022 2023 2020 27/12 5 000 1/1 15 780 31/12 5 780 $38 900 $38 900 2021 2023 31/12 5 780 1/1 Bal $15 780 2022 27/12 5 780 2023 31/12 1 956 Delivery Van Accumulated Depreciation – Delivery Van 2019 2022 2022 2019 25/6 20 300 30/6 19 000 30/6 19 000 31/12 3 167 2020 31/12 6 333 2021 31/12 6 333 2022 30/6 3 167 $19 000 $19 000 Land Improvements Accumulated Depn. – Land Improvements 2021 2021 2/4 8 000 31/12 500 2022 31/12 667 2023 31/12 667 Building Accumulated Depn. – Building 2022 2022 30/6 58 800 31/12 863 2023 31/12 1 727 Problem 14.16 Comprehensive problem GST version Over a 5-year period, Downton Ltd completed the following transactions affecting non-current assets in financial years ending 31 December. The company uses straight-line depreciation on all depreciable assets and records depreciation to the nearest month. All purchases are GST inclusive unless otherwise stated. 2019 Jan. 3 June 25 Dec. 31 Purchased a new machine for a cash price of $33 000. Freight charges of $770 and installation expenditures of $3520 were paid in cash. The machine has a useful life of 5 years and a residual value of $5000. Purchased a used delivery van for $20 900 cash. The van was repainted at a cost of $440, a new battery was installed at a cost of $110 and new tyres were installed at a cost of $880. The van has a useful life of 3 years and a residual value of $1300. Recorded depreciation expense on the assets. 2020 July 30 Dec. 31 Paid for day-to-day repairs and maintenance on the machine and van at a cost of $572. Recorded depreciation expense on the assets. 2021 April 2 Dec. 31 Installed a fence around the company property at a cost of $8800. The fence has a useful life of 12 years with no residual value. Recorded depreciation expense on the assets. 2022 June 30 June 30 Dec. 27 Dec. 31 Recorded the final depreciation on the delivery van. The company completed construction of a new warehouse. Construction costs incurred (all paid in cash) were: labour, $19 800; materials, $36 300; building permits, $1500 (excludes GST); architect fees, $2 530; and overhead, $4400. The warehouse is expected to have a residual value of $7000 and a useful life of 30 years. Completely overhauled the machine purchased on 3 January 2019, at a cost of $5500, after which the useful life was estimated to be 4 additional years, and residual value was revised to $6000. The parts replaced were considered to have zero carrying amount. Recorded depreciation expense on the assets. 2023 Dec. 31 Recorded depreciation expense on the assets. Required (a) Prepare journal entries to record all the transaction of Downton Ltd. (b) Prepare a schedule showing the cost and accumulated depreciation of each asset after recording depreciation on 31 December 2019. (c) Post the journal entries in requirement A to the appropriate non-current asset accounts from 3 January 2015 to 31 December 2019. (LO2, LO5 and LO6) (a) 2019 Jan. 3 Machinery $33 900 GST Receivable 3 390 Cash at Bank $37 290 To record acquisition of machine. June 25 Delivery Van 20 300 GST Receivable 2 030 Cash at Bank 22 330 To record acquisition of delivery van. Dec. 31 Depreciation Expense – Machinery 5 780 Depreciation Expense – Delivery Van 3 167 Accumulated Depreciation – Machinery 5 780 Accumulated Depreciation – Delivery Van 3 167 To record depreciation expense. ($33 900 – $5000)/5 = $5780 ($20 300 – $1300)/3 = $6333  6/12 = $3167 2020 July 30 Repairs and Maintenance Expense 520 GST Receivable 52 Cash at Bank 572 To record repairs on machine and van. Dec. 31 Depreciation Expense – Machinery 5 780 Depreciation Expense – Delivery Van 6 333 Accumulated Depreciation – Machinery 5 780 Accumulated Depreciation – Delivery Truck 6 333 To record depreciation expense. 2021 April 2 Land Improvements 8 000 GST Receivable 800 Cash at Bank 8 800 To record installation of fence. Dec. 31 Depreciation Expense – Machinery 5 780 Depreciation Expense – Delivery Van 6 333 Depreciation Expense – Land Improvements* 500 Accumulated Depreciation – Machinery 5 780 Accumulated Depreciation – Delivery Van 6 333 Accumulated Depreciation – Land Improvements 500 To record depreciation expense. * $8000/12 = $667  9/12 = $500. 2022 June 30 Depreciation Expense – Delivery Van 3 167 Accumulated Depreciation – Delivery Van 3 167 To record final depreciation. Accumulated Depreciation – Delivery Van 19 000 Delivery Van 19 000 To write off delivery van’s accumulated depreciation and removal of the asset from the accounting records. Building 58 800 GST Receivable 4 110 Cash at Bank 62 910 To record construction of warehouse. Dec. 27 Depreciation Expense – Machinery 5 780 Accumulated Depreciation – Machinery 5 780 To record depreciation to date of overhaul. Accumulated Depreciation – Machinery 23 120 Machinery 23 120 To write back depreciation prior to overhaul. Machinery 5 000 GST Receivable 500 Cash at Bank 5 500 To record overhaul of machinery. Dec. 31 Depreciation Expense – Land Improvements 667 Depreciation Expense – Building* 863 Accumulated Depreciation – Land Improvements 667 Accumulated Depreciation – Building 863 To record depreciation expense. * $863 = ($58 800 – $7000)  30 = $1727  6/12 2023 Dec. 31 Depreciation Expense – Machinery* 1 956 Depreciation Expense – Land Improvements 667 Depreciation Expense – Building 1 727 Accumulated Depreciation – Machinery 1 956 Accumulated Depreciation – Land Improvements 667 Accumulated Depreciation – Building 1 727 To record depreciation expense. Workings – Depreciation of machinery after overhaul Total cost $33 900 Accumulated depreciation to 31 Dec 2022 ($5780  4) 23 120 Carrying amount 10 780 Overhaul 5 000 New asset cost 15 780 Residual value 6 000 Amount to be depreciated $9 780 Remaining useful life 5 years *Depreciation expense per year $1 956 (b) Machinery Land improvements Building Cost $15 780 $8 000 $58 800 Accumulated depreciation 1 956 1 834 2 590 Carrying amount $13 824 $6 166 $56 210 (c) Machinery Accumulated Depreciation – Machinery 2019 2020 2020 2019 3/1 33 900 27/12 23 120 27/12 23 120 31/12 5 780 2018 2019 2016 27/12 5 000 1/1 15 780 31/12 5 780 $38 900 $38 900 2017 2019 31/12 5 780 1/1 Bal $15 780 2018 27/12 5 780 2019 31/12 1 956 Delivery Van Accumulated Depreciation – Delivery Van 2019 2022 2022 2019 25/6 20 300 30/6 19 000 30/6 19 000 31/12 3 167 2020 31/12 6 333 2021 31/12 6 333 2022 30/6 3 167 $19 000 $19 000 Land Improvements Accumulated Depn. – Land Improvements 2021 2021 2/4 8 000 31/12 500 2022 31/12 667 2023 31/12 667 Building Accumulated Depn. – Building 2022 2022 30/6 58 800 31/12 863 2023 31/12 1 727 Problem 14.17 Comprehensive problem Non-GST version Alexander Ltd completed the following transactions during 2019. The company uses sum-of-years’-digits depreciation and records depreciation to the nearest month. Ignore GST. Required (a) Prepare journal entries to record all the transactions of Alexander Ltd. (b) Prepare an entry to record depreciation expense on 31 December 2019. (LO2 and LO5) (a) 2019 Jan. 5 Machinery 8 900 Repairs Expense 300 Cash at Bank 9 200 To record acquisition of machine and incurrence of repairs. Mar. 7 Land 150 500 Cash at Bank 150 500 To record acquisition of land. Mar. 20 Land 9 000 Cash at Bank 9 900 To record demolition costs. Apr. 10 Land Improvements 28 000 Cash at Bank 30 800 To record costs of sealing car park. June 23 Machinery* 17 076 Cash at Bank 17 076 To record acquisition of machinery (see calculation below) List price $16 500 Less: Trade discount (4%  $16 500) (660) Net purchase price 15 840 Freight 1 236 *Total cost $17 076 Nov. 1 Machinery 29 000 Cash at Bank 29 000 To record acquisition of machine. (b) Dec. 31 Depreciation Expense – Machinery 6 976 Depreciation Expense – Land Improvements 4 667 Accumulated Depreciation – Machinery 6 976 Accumulated Depreciation – Land Improvements 4 667 Depreciation expense – calculation – sum-of-years’-digits Machine 1 = ($8900 – 500)  4/10 $3 360 Machine 2 = ($17 076 – $1600)  5/15  6/12 2 579 Machine 3 = ($29 000 – $1000)  8/36  2/12 1 037 Total machinery depreciation 6 976 Land improvements = $28 000  8/36  9/12 4 667 Total depreciation expense $11 463 Problem 14.17 Comprehensive problem GST version Alexander Ltd completed the following transactions during 2019. The company uses sum-of-years’-digits depreciation and records depreciation to the nearest month. All purchase prices include GST. Jan. 5 Mar. 7 Mar. 20 April 10 June 23 Nov. 1 Purchased a used machine (No. 1) for $8800 cash. The machine was painted and reconditioned at a cost of $990. During installation, one of the major components was dropped and had to be repaired at a cash cost of $330. The machine is expected to have a useful life of 4 years and a residual value of $500. Purchased land and a building with the intention of tearing down the building and constructing a new office complex. Alexander Ltd paid $154 000 for the property, plus an agent’s commission of $8800 and title search fees of $2750. Paid Dan’s Demolition Services $9900 to demolish the building acquired on 7 March. The company’s parking area was paved at a cost of $30 800. The parking area has a useful life of 8 years with no residual value. Purchased for cash a machine (No. 2) with a list price (note, the list price does not include GST, this is added once the purchase price is determined) of $16 500. The seller granted a 4% trade discount. Transportation and freight charges of $1359.60 were also paid. The machine’s useful life is estimated to be 5 years and its residual value $1600. Purchased for $31 900 cash a machine (No. 3) with a useful life of 8 years and a residual value of $1000. Required (a) Prepare journal entries to record all the transactions of Alexander Ltd. (b) Prepare an entry to record depreciation expense on 31 December 2019. (LO2 and LO5) (a) 2019 Jan. 5 Machinery 8 900 Repairs Expense 300 GST Receivable 920 Cash at Bank 10 120 To record acquisition of machine and incurrence of repairs. Mar. 7 Land 150 500 GST Receivable 15 050 Cash at Bank 165 550 To record acquisition of land. Mar. 20 Land 9 000 GST Receivable 900 Cash at Bank 9 900 To record demolition costs. Apr. 10 Land Improvements 28 000 GST Receivable 2 800 Cash at Bank 30 800 To record costs of sealing car park. June 23 Machinery 17 076 GST Receivable 1 707.60 Cash at Bank 18 783.60 To record acquisition of machinery. List price $16 500 Less: Trade discount (4%  $16 500) (660) Net purchase price (ex GST) 15 840 Add: Freight (ex GST) 1 236 Total cost machine (ex GST) $17 076 Add: GST 1 707.60 Total paid to supplier 18 783.60 Nov. 1 Machinery 29 000 GST Receivable 2 900 Cash at Bank 31 900 To record acquisition of machine. (b) Dec. 31 Depreciation Expense – Machinery 6 976 Depreciation Expense – Land Improvements 4 667 Accumulated Depreciation – Machinery 6 976 Accumulated Depreciation – Land Improvements 4 667 Depreciation expense – calculation – sum-of-years’-digits Machine 1 = ($8900 – 500)  4/10 $3 360 Machine 2 = ($170 – $1600)  5/15  6/12 2 579 Machine 3 = ($29 000 – $1000)  8/36  2/12 1 037 Total machinery depreciation 6 976 Land improvements = $28 000  8/36  9/12 4 667 Total depreciation expense $11 643 Problem 14.18 Property and plant records Non-GST version Selected transactions of Coromandel Ltd are given on the next page. The company uses straight-line depreciation and calculates depreciation expense to the nearest whole month. Ignore GST. Required (a) Prepare journal entries to record the purchase of the assets and to record depreciation expense on 30 June 2019 and 2020, the end of the company’s reporting periods. (b) Open a Machinery account (No. 230) and an Accumulated Depreciation-Machinery account (No. 231), and prepare subsidiary property and plant records for the two assets. Post the journal entries to the general ledger accounts and to the subsidiary property and plant records. (LO5 and LO7) (a) 2019 Jan. 4 Machinery 44 000 Cash at Bank 44 000 To record purchase of bottle washer. Apr. 10 Machinery 39 000 Cast at Bank 39 000 To record purchase of dryer. June 30 Depreciation Expense 4 850 Accumulated Depreciation – Machinery 4 850 To record depreciation on machinery. Bottle washer = $44 000 – $8000 = $36 000/5  6/12 $3 600 Dryer = $39 000 – $9000 = $30 000/6  3/12 1 250 Total 4 850 2020 June 30 Depreciation Expense 12 200 Accumulated Depreciation – Machinery 12 200 To record depreciation on machinery. ($7200 + $5000) (b) Account Machinery No. 230 Date Explanation Post Ref. Debit Credit Balance 2019 4/1 $44 000 $44 000 10/4 39 000 83 000 Account Accumulated Depreciation – Machinery No. 231 Date Explanation Post Ref. Debit Credit Balance 2019 30/6 $4 850 $4 850 2020 20/6 12 200 17 050 Property and Plant Record Item Bottle washer Account no. 230 231 Serial no. 17538X General ledger account Machinery Purchased from Brampton Ltd Useful life 5 years Residual value $8 000 Depreciation p.a. $7 200 Depreciation method Straight-line ASSET DEP’N Date Explanation p/r Dr Cr Bal Dr Cr Bal. 4/1/2019 44 000 44 000 30/6/2019 3 600 3 600 30/6/2020 7 200 10 800 Property and Plant Record Item Dryer Account no. 230 231 Serial no. PY43121 General ledger account Machinery Purchased from Granada Ltd Useful life 6 years Residual value $9 000 Depreciation p.a. $5 000 Depreciation method Straight-line ASSET DEP’N Date Explanation p/r Dr Cr Bal Dr Cr Bal. 10/4/2019 39 000 39 000 30/6/2019 1 250 1 250 30/6/2020 5 000 6 250 Problem 14.18 Property and plant records GST version Selected transactions of Coromandel Ltd are given on the next page. The company uses straight-line depreciation and calculates depreciation expense to the nearest whole month. All purchase prices include GST. 2019 Jan. 4 April 10 Purchased from Brampton Ltd a bottle washer (Serial No. 17538X) for $48 400 cash. The useful life of the machine is 5 years and its residual value is expected to be $8000. Purchased from Granada Ltd a dryer (Serial No. PY43121) for $42 900 cash. The machine has a useful life of 6 years and a residual value of $9000. Required (a) Prepare journal entries to record the purchase of the assets and to record depreciation expense on 30 June 2019 and 2020, the end of the company’s reporting periods. (b) Open a Machinery account (No. 230) and an Accumulated Depreciation-Machinery account (No. 231), and prepare subsidiary property and plant records for the two assets. Post the journal entries to the general ledger accounts and to the subsidiary property and plant records. (LO5 and LO7) (a) 2019 Jan. 4 Machinery 44 000 GST Receivable 4 400 Cash at Bank 48 400 To record purchase of bottle washer. Apr. 10 Machinery 39 000 GST Receivable 3 900 Cast at Bank 42 900 To record purchase of dryer. June 30 Depreciation Expense 4 850 Accumulated Depreciation – Machinery 4 850 To record depreciation on machinery. Bottle washer = $44 000 – $8000 = $36 000/5  6/12 $3 600 Dryer = $39 000 – $9000 = $30 000/6  3/12 1 250 Total 4 850 2020 June 30 Depreciation Expense 12 200 Accumulated Depreciation – Machinery 12 200 To record depreciation on machinery. ($7200 + $5000) (b) Account Machinery No. 230 Date Explanation Post Ref. Debit Credit Balance 2019 4/1 $44 000 $44 000 10/4 39 000 83 000 Account Accumulated Depreciation – Machinery No. 231 Date Explanation Post Ref. Debit Credit Balance 2019 30/6 $4 850 $4 850 2020 20/6 12 200 17 050 Property and Plant Record Item Bottle washer Account no. 230 231 Serial no. 17538X General ledger account Machinery Purchased from Brampton Ltd Useful life 5 years Residual value $8 000 Depreciation p.a. $7 200 Depreciation method Straight-line ASSET DEP’N Date Explanation p/r Dr Cr Bal Dr Cr Bal. 4/1/2019 44 000 44 000 30/6/2019 3 600 3 600 30/6/2020 7 200 10 800 Property and Plant Record Item Dryer Account no. 230 231 Serial no. PY43121 General ledger account Machinery Purchased from Granada Ltd Useful life 6 years Residual value $9 000 Depreciation p.a. $5 000 Depreciation method Straight-line ASSET DEP’N Date Explanation p/r Dr Cr Bal Dr Cr Bal. 10/4/2019 39 000 39 000 30/6/2019 1 250 1 250 30/6/2020 5 000 6 250 Problem 14.19 Depreciation and overhauls Non-GST version Rawsons’ Recycling Ltd commenced business on 31 March 2019 in the recycling industry. The company balances its accounting records at month-end and the end of its reporting period is 31 December. Ignore GST. The following events occurred during 2019 and 2020. Required (a) Prepare journal entries to record the events. (b) Prepare the following ledger accounts for the period 31 March 2019 to 31 December 2020. i. Truck ii. Equipment iii. Accumulated depreciation – truck iv. Accumulated depreciation – equipment (LO5 and LO6) (a) 2019 April 1 Truck ($140 000 + $1500) 141 500 Cash at Bank 141 500 (Truck purchased) June 30 Equipment 12 000 Cash at Bank 12 000 (Equipment purchased) Aug. 31 Repairs Expense 600 Cash at Bank 600 (Repairs to truck) Dec. 31 Depreciation – Truck ($141 500  40%  9/12) 42 450 Depreciation – Equipment ($12 000 – $1500/10  ½) 525 Accumulated Depreciation – Truck 42 450 Accumulated Depreciation – Equipment 525 (Depreciation) 2020 Mar. 13 Repairs Expense 600 Cash at Bank 600 (Repairs to truck) July 1 Depreciation –Truck 19 810 Accumulated Depreciation – Truck 19 810 Depreciation = ($141 500 – $42 450)  40%  6/12 Accumulated Depreciation – Truck 62 260 Truck 62 260 ($42 450 + $19 810) New carrying amount = $141 500 – $62 260 = $79 240 2020 July 1 Truck 11 000 Cash at Bank 11 000 (cost of new motor) Expense of Motor Replaced 600 Truck 600 (write off old motor) Dec 31 Depreciation – Truck* 13 446 Depreciation – Equipment ($12 000 – 1500/10) 1 050 Accumulated Depreciation – Truck 13 446 Accumulated Depreciation – Equipment 1 050 (Depreciation) *New carrying amount of truck = $79 240 + $11 000 – $600 = $89 640 Depreciation = $89 640  30%  6/12 = 13 446 (b) Ledger accounts: Account Truck No. Date Explanation Post Ref. Debit Credit Balance 2019 April 1 Cash at Bank $141 500 $141 500 2020 July 1 Accumulated Depreciation 62 260 79 240 Cash at Bank 11 000 90 240 Expense of replaced motor 600 89 640 Account Accumulated Depreciation – Truck No. Date Explanation Post Ref. Debit Credit Balance 2019 Dec. 31 Depreciation $42 450 $42 450 2020 July 1 Depreciation 19 810 62 260 Truck 62 260 — Dec. 31 Depreciation 13 446 13 446 Account Equipment No. Date Explanation Post Ref. Debit Credit Balance 2019 June 30 Cash at Bank $12 000 $12 000 Account Accumulated Depreciation – Equipment No. Date Explanation Post Ref. Debit Credit Balance 2019 Dec. 31 Depreciation $525 $525 2020 20/6 Depreciation 1 050 1 575 Problem 14.19 Depreciation and overhauls GST version Rawsons’ Recycling Ltd commenced business on 31 March 2019 in the recycling industry. The company balances its accounting records at month-end and the end of its reporting period is 31 December. All purchase prices include GST. The following events occurred during 2019 and 2020. 2019 April 1 June 30 Aug. 31 Dec. 31 Paid $154 000 cash for a second-hand disposal truck. Paid $1650 cash to recondition the truck’s engine. Paid $13 200 cash for equipment. The company estimated the equipment’s useful life at 10 years and residual value at $1500. Paid $660 cash for the truck’s transmission repairs and oil change. Recorded depreciation on the truck at 40% p.a. on the diminishing balance, and on the equipment using the straight-line method. 2020 Mar. 13 July 1 Dec. 31 Paid $660 cash to replace a damaged bumper bar on the truck. Installed a new motor in the truck for a cost of $12 100. The company considered that the carrying amount of the old motor was only $600 at this date, and the old motor was written off. With the new motor installed, the truck’s depreciation rate using the diminishing-balance method was revised to 30% from 1 July. Recorded depreciation on the truck and on the equipment. Required (a) Prepare journal entries to record the events. (b) Prepare the following ledger accounts for the period 31 March 2019 to 31 December 2020. i. Truck ii. Equipment iii. Accumulated depreciation – truck iv. Accumulated depreciation – equipment (LO5 and LO6) (a) 2019 April 1 Truck ($140 000 + $1500) 141 500 GST Receivable 14 150 Cash at Bank 155 650 (Truck purchased) June 30 Equipment 12 000 GST Receivable 1 200 Cash at Bank 13 200 (Equipment purchased) Aug. 31 Repairs Expense 600 GST Receivable 60 Cash at Bank 660 (Repairs to truck) Dec. 31 Depreciation – Truck ($141 500  40%  9/12) 42 450 Depreciation – Equipment ($12 000 – $1500/10  ½) 525 Accumulated Depreciation – Truck 42 450 Accumulated Depreciation – Equipment 525 (Depreciation) 2020 Mar. 13 Repairs Expense 600 GST Receivable 60 Cash at Bank 660 (Repairs to truck) July 1 Depreciation –Truck 19 810 Accumulated Depreciation – Truck 19 810 Depreciation = ($141 500 – $42 450)  40%  6/12 Accumulated Depreciation – Truck 62 260 Truck 62 260 ($42 450 + $19 810) New carrying amount = $141 500 – $62 260 = $79 240 2020 July 1 Truck 11 000 GST Receivable 1 100 Cash at Bank 12 100 (cost of new motor) Expense of Motor Replaced 600 Truck 600 (write off old motor) Dec 31 Depreciation – Truck 13 446 Depreciation – Equipment ($12 000 – 1500/10) 1 050 Accumulated Depreciation – Truck 13 446 Accumulated Depreciation – Equipment 1 050 (Depreciation) New carrying amount of truck = $79 240 + $11 000 – $600 = $89 640 Depreciation = $89 640  30%  6/12 (c) Ledger accounts Account Truck No. Date Explanation Post Ref. Debit Credit Balance 2019 April 1 Cash at Bank $141 500 $141 500 2020 July 1 Accumulated Depreciation 62 260 79 240 Cash at Bank 11 000 90 240 Expense of replaced motor 600 89 640 Account Accumulated Depreciation – Truck No. Date Explanation Post Ref. Debit Credit Balance 2019 Dec. 31 Depreciation $42 450 $42 450 2020 July 1 Depreciation 19 810 62 260 Truck 62 260 — Dec. 31 Depreciation 13 446 13 446 Account Equipment No. Date Explanation Post Ref. Debit Credit Balance 2019 June 30 Cash at Bank $12 000 $12 000 Account Accumulated Depreciation – Equipment No. Date Explanation Post Ref. Debit Credit Balance 2019 Dec. 31 Depreciation $525 $525 2020 20/6 Depreciation 1 050 1 575 Problem 14.20 Correcting errors Non-GST version At the end of Sovereign Ltd’s financial year, 30 June 2019, the following items must be resolved before adjusting entries and financial statements are prepared. Ignore GST. 1. On 1 July 2018, Sovereign Ltd purchased a used machine for $48 000 cash. The cost was debited to the Machinery account. Prior to use, additional cash expenditures were made for painting and repairing the machine, $4200, and installing and testing the machine, $3000. These additional expenditures were debited to Repairs and Maintenance Expense. The repairs and installation were completed on 1 October 2018, and the machine was put to use. The machine has a useful life of 5 years with a residual value of $4000. Sovereign Ltd uses straight-line depreciation and records depreciation to the nearest month. 2. Land and a building were purchased on 2 July 2018 for $180 000 cash, debited to the Land account. The appraised values of the building and land were $100 000 and $60 000, respectively. The building has a useful life of 20 years with a residual value of $6000. Sovereign Ltd uses straight-line depreciation for buildings. 3. A new truck was purchased on 1 March 2019; Sovereign Ltd paid cash of $55 500 and also obtained a 12-month loan payable for the amount of $30 000. The Trucks account was debited for $85 500. The truck has a useful life of 4 years with a residual value of $20 000 and is to be depreciated by the diminishing balance method. However, due to an oversight, the business used the straight-line method. Required (a) Prepare journal entries on 30 June 2019 to correct the accounts. (b) Prepare journal entries as necessary to record depreciation expense after the corrections in requirement A have been made. (LO2 and LO5) (a) 2019 June 30 Machinery 7 200 Repairs and Maintenance Expense 7 200 To correct error in cost of machinery. June 30 Building 100 000 Loss on Acquisition 20 000 Land 120 000 To correct error in recording purchase of land and building. Total appraised value ($100 000 + $60 000) = $160 000 Hence, a loss incurred. (b) Depreciation entry, assuming that depreciation straight line is recorded initially on the truck. June 30 Depreciation Expense – Machinery [1] 7 680 Depreciation Expense – Building [2] 4 700 Depreciation Expense – Truck 5 458 Accumulated Depreciation – Machinery 7 680 Accumulated Depreciation – Building 4 700 Accumulated Depreciation – Truck 5 458 To record depreciation expense. [1] $48 000 + $7200 – $4000 = $51 200 $51 200/5 years = $10 240  9/12 = $7680 [2] $100 000 – $6000 = $94 000/20 yrs = $4700 [3] St line:$85 500 – $20 000 = $65 500/4  4/12 = $5458 Depreciation Expense – Truck 3 235 Accumulated Depreciation – Truck 3 235 To correct error. Diminishing balance depreciation rate: = 1 – Hence, depreciation = 30.5%  $85 500  4/12 = $8692.50 or $8693 Hence, error adjustment to dep’n = $8693 – $5458 = $3 235 Problem 14.20 Correcting errors GST version At the end of Sovereign Ltd’s financial year, 30 June 2019, the following items must be resolved before adjusting entries and financial statements are prepared. All purchase prices include GST. 1. On 1 July 2018, Sovereign Ltd purchased a used machine for $52 800 cash. The cost was debited to the Machinery account. Prior to use, additional cash expenditures were made for painting and repairing the machine, $4620, and installing and testing the machine, $3300. These additional expenditures were debited to Repairs and Maintenance Expense. The repairs and installation were completed on 1 October 2018, and the machine was put to use. The machine has a useful life of 5 years with a residual value of $4000. Sovereign Ltd uses straight-line depreciation and records depreciation to the nearest month. 2. Land and a building were purchased on 2 July 2018 for $198 000 cash, debited to the Land account. The appraised values of the building and land were $100 000 and $60 000, respectively. The building has a useful life of 20 years with a residual value of $6000. Sovereign Ltd uses straight-line depreciation for buildings. 3. A new truck was purchased on 1 March 2019; Sovereign Ltd paid cash of $64 050 and also obtained a 12-month loan payable for the amount of $30 000. The Trucks account was debited for $94 050. The truck has a useful life of 4 years with a residual value of $20 000 and is to be depreciated by the diminishing balance method. However, due to an oversight, the business used the straight-line method. Required (a) Prepare journal entries on 30 June 2019 to correct the accounts. (b) Prepare journal entries as necessary to record depreciation expense after the corrections in requirement A have been made. (LO2 and LO5) Note: it is necessary to exclude GST from the purchase price when recording the adjustment errors. (a) 2019 June 30 Machinery 7 200 Repairs and Maintenance Expense 7 200 To correct error in cost of machinery. June 30 Building 100 000 Loss on Acquisition 20 000 Land 120 000 To correct error in recording purchase of land and building. Total appraised value ($100 000 + $60 000) = $160 000 Hence, a loss incurred. (b) Depreciation entry, assuming that depreciation straight line is recorded initially on the truck. June 30 Depreciation Expense – Machinery [1] 7 680 Depreciation Expense – Building [2] 4 700 Depreciation Expense – Truck 5 458 Accumulated Depreciation – Machinery 7 680 Accumulated Depreciation – Building 4 700 Accumulated Depreciation – Truck 5 458 To record depreciation expense. [1] $48 000 + $7200 – $4000 = $51 200 $51 200/5 years = $10 240  9/12 = $7680 [2] $100 000 – $6000 = $94 000/20 yrs = $4700 [3] St line:$85 500 – $20 000 = $65 500/4  4/12 = $5458 Depreciation Expense – Truck 3 235 Accumulated Depreciation – Truck 3 235 To correct error. Diminishing balance depreciation rate: = 1 – Hence, depreciation = 30.5%  $85 500  4/12 = $8692.50 or $8693 Hence, error adjustment to dep’n = $8693 – $5458 = $3 235 Problem 14.21 Determination of cost and depreciation Non-GST version Your examination of the records of Wilson Ltd, which was established on 1 March 2019, reveals that the accountant debited the Land, Buildings and Equipment account with the following items (Ignore GST). Examination of the wage records shows that the salary of the manager, $4000 per month, was debited to the Salaries Expense account. From 1 March to 31 August 2019, he supervised the erection of the factory buildings, and from 1 September to 31 October 2019 he supervised the installation of the machinery. The accountant credited sundry income with $8400, being $7000 received for scrap building material from the demolished building and $1400 for the damaged machine. Required (a) Show journal entries to transfer the amounts to three different accounts, i.e. Land account, Buildings account and Machinery account. (b) Assuming that the enterprise started operations on 1 November 2019 and that its financial year ends on 31 March, journalise the following depreciation entries using the straight-line method: i. buildings: useful life 40 years, $20 000 residual value ii. machinery: useful life 12 years and residual value amounting to 10% of cost. (LO2 and LO5) Analysis of costs are set out in the table below: Expenditure and receipts Land Building Machinery Cost of land $650 000 Legal and transfer fees 3 500 Cost of demolishing old building 25 000 Earthmoving on property* $15 000 Architect’s fees on building 160 000 Cost of erection of new building 2 100 000 Layout of parking area** 75 000 Lighting of parking area** 18 000 Cost of machinery and equipment $ 1258 000 Cost of replacing damaged machine 9 000 Installation cost of machinery 85 000 TOTAL $678 500 $2 368 000 $1 352 000 * The expenditure might properly be a cost of either the land (if it was basically ‘curing’ the land) or of the building (if it involves a basement excavation). ** These items could legitimately be costed to a Land Improvements account and be depreciated separately. They have been included in the cost of the building, and will be depreciated at the same rate as the building. (a) 2019 Nov. 1 Land $678 500 Buildings 2 368 000 Machinery 1 352 000 Loss on Damaged Machine 9 000 Land, Buildings and Equipment 4 407 500 To transfer costs to correct accounts. Nov. 1 Buildings 24 000 Machinery 8 000 Salaries Expense 32 000 To reallocate salary of production manager during erection. Nov. 1 Sundry Revenue 8 400 Land 7 000 Loss on Damaged Machine 1 400 To correct the allocation of proceeds of building materials and damaged machine sold. (b) 2020 Mar. 31 Depreciation Expense – Buildings 24 708 Depreciation Expense – Machinery 42 500 Accumulated Depreciation – Buildings 24 708 Accumulated Depreciation – Machinery 42 500 To record depreciation expense. Depreciation calculation: Buildings ($2 368 000 + $24 000 – $20 000)/40  5/12 = $24 708 Machinery ($1 352 000 + $8000 – $136 000)/12  5/12 = $42 500 Problem 14.21 Determination of cost and depreciation GST version Your examination of the records of Wilson Ltd, which was established on 1 March 2019, reveals that the accountant debited the Land, Buildings and Equipment account with the following items Purchase prices include GST unless otherwise stated. Purchase price of land and building (An independent valuation was obtained, showing land being valued at $600 000 and the building at $80 000) Legal and transfer costs (excludes GST) Cost of demolition of building Earthmoving on property Architect’s and other professional fees in respect of the erection of new buildings on the property Cost of erection of new building Layout of parking area Lighting of parking area Cost of machinery and equipment (including $9900 for a machine which was dropped from one of the company’s vehicles during off-loading and irreparably damaged) Installation cost of machinery Cost of replacement of damaged machine $ 715 000 3 500 27 500 16 500 176 000 2 310 000 82 500 19 800 1 393 700 935 000 9 900 $ 5 689 400 Examination of the wage records shows that the salary of the manager, $4000 per month, was debited to the Salaries Expense account. From 1 March to 31 August 2019, he supervised the erection of the factory buildings, and from 1 September to 31 October 2019 he supervised the installation of the machinery. The accountant credited sundry income with $8400, being $7000 received for scrap building material from the demolished building and $1400 for the damaged machine. Required (a) Show journal entries to transfer the amounts to three different accounts, i.e. Land account, Buildings account and Machinery account. (b) Assuming that the enterprise started operations on 1 November 2019 and that its financial year ends on 31 March, journalise the following depreciation entries using the straight-line method: i. buildings: useful life 40 years, $20 000 residual value ii. machinery: useful life 12 years and residual value amounting to 10% of cost. (LO2 and LO5) Note, GST needs to be excluded from all costs. Analysis of costs are set out in the table below and exclude GST: Expenditure and receipts Land Building Machinery GST Cost of land $650 000 65 000 Legal and transfer fees 3 500 - Cost of demolishing old building 25 000 2 500 Earthmoving on property* $15 000 1 500 Architect’s fees on building 160 000 16 000 Cost of erection of new building 2 100 000 210 000 Layout of parking area** 75 000 7 500 Lighting of parking area** 18 000 1 800 Cost of machinery and equipment $1267000 – 9000 due to damaged machine $ 1258 000 126 700 Cost of replacing damaged machine 9 000 900 Installation cost of machinery 85 000 8500 TOTAL $678 500 $2 368 000 $1 352 000 440 400 * The expenditure might properly be a cost of either the land (if it was basically ‘curing’ the land) or of the building (if it involves a basement excavation). ** These items could legitimately be costed to a Land Improvements account and be depreciated separately. They have been included in the cost of the building, and will be depreciated at the same rate as the building. (a) 2019 Nov. 1 Land $678 500 Buildings 2 368 000 Machinery 1 352 000 Loss on Damaged Machine 9 000 GST Receivable 440 400 Land, Buildings and Equipment 4 847 900 To transfer costs to correct accounts. Nov. 1 Buildings 24 000 Machinery 8 000 Salaries Expense 32 000 To reallocate salary of production manager during erection. Nov. 1 Sundry Revenue 8 400 Land 7 000 Loss on Damaged Machine 1 400 To correct the allocation of proceeds of building materials and damaged machine sold. (b) 2020 Mar. 31 Depreciation Expense – Buildings 24 708 Depreciation Expense – Machinery 42 500 Accumulated Depreciation – Buildings 24 708 Accumulated Depreciation – Machinery 42 500 To record depreciation expense. Depreciation calculation: Buildings ($2 368 000 + $24 000 – $20 000)/40  5/12 = $24 708 Machinery ($1 352 000 + $8000 – $136 000)/12  5/12 = $42 500 Case studies Decision analysis Depreciation of machinery Non-GST version In early July 2019, Masterton Ltd is considering the acquisition of some machinery for $1 200 000 to be used in the manufacture of a new product. The machinery has a useful life of 10 years, during which management plans to produce 500 000 units of the new product. The residual value of the machinery is $100 000. The following projections were made in order to select a depreciation method to be used for the machinery. In calculating the profit before depreciation, all expenses have been deducted, including the repairs and maintenance expense. Ignore GST Required (a) As the accountant for Masterton Ltd, prepare separate depreciation schedules for the machinery for the 5-year period, using the following depreciation methods: i. straight-line ii. diminishing balance iii. sum-of-years’-digits iv. units-of-production. Use the following headings for each schedule: ‘Year ending 30 June’, ‘Annual depreciation expense’, ‘Accumulated depreciation’, ‘Carrying amount at end of year’. (b) Prepare a report for management, stating the advantages and disadvantages of each depreciation method. Include in the report your recommendations on the choice of method consistent with the requirements of IAS 16/AASB 116. Support your recommendations with schedules showing the total annual cost of operating the machinery, and the profit after depreciation. (c) Write an addendum to your report, making further recommendations based on the following additional information supplied to you by management. As an alternative to acquiring the machinery, management is considering leasing the machinery for an annual rental charge of $250 000; all repairs and maintenance costs would be paid by the lessor. Secondly, management wishes to show the most favourable financial results in anticipation of acquiring a long-term bank loan. (a) Straight-line Year ended 30 June Annual depreciation Accumulated depreciation Carrying amount – end of year 2020 110 000 110 000 1 090 000 2021 110 000 220 000 980 000 2022 110 000 330 000 870 000 2023 110 000 440 000 760 000 2024 110 000 550 000 650 000 ($1 200 000 – $100 000)/10 = $110 000 Diminishing balance Year ended 30 June Annual depreciation Accumulated depreciation Carrying amount – end of year 2020 264 000 264 000 936 000 2021 205 920 469 929 730 080 2022 160 618 630 538 569 462 2023 125 282 755 820 444 180 2024 97 720 853 540 346 460 Rate = Sum-of-years’-digits Year ended 30 June Annual depreciation Accumulated depreciation Carrying amount – end of year 2020 200 000 (10/55) 200 000 1 000 000 2021 180 000 (9/55) 380 000 820 000 2022 160 000 (8/55) 540 000 660 000 2023 140 000 (7/55) 680 000 520 000 2024 120 000 (6/55) 800 000 400 000 Sum of digits for 10 years = 55 Year 2016 = $1 100 000  10/55 = $200 000 Units-of-production Year ended 30 June Annual depreciation Accumulated depreciation Carrying amount – end of year 2020 110 000 110 000 1 090 000 2021 99 000 209 000 991 000 2022 121 000 330 000 870 000 2023 127 600 457 600 742 400 2024 132 000 589 600 610 400 Year 2020 = ($1 200 000 – $100 000)  50 000/500 000 (b) Supporting schedules Total cost of operating machinery (depreciation + repairs & maintenance) Method 2020 2021 2022 2023 2024 Total Straight-line 180 000 170 000 200 000 205 000 210 000 965 000 Diminishing balance 334 000 265 920 250 618 220 282 197 720 1 268 540 Sum-of-the-years’-digits 270 000 240 000 250 000 235 000 220 000 1 215 000 Units of production 180 000 159 000 211 000 222 600 232 000 1 004 600 Profit after depreciation Method 2020 2021 2022 2023 2024 Total Straight-line 240 000 230 000 245 000 250 000 270 000 1 235 000 Diminishing balance 86 000 134 080 194 382 234 718 282 280 931 460 Sum-of-the-years’-digits 150 000 160 000 195 000 220 000 260 000 985 000 Units of production 240 000 241 000 234 000 232 400 248 000 1 195 400 Management report – issues to report are: All methods produce the same total charge to depreciation over the asset’s useful life, however the amounts charged as depreciation in each year the asset is used differ depending on the method used. Under IAS 16/AASB 116, the method chosen must reflect the pattern in which the asset’s future economic benefits are consumed by or lost to the entity. Straight-line method produces a uniform depreciation charge in each time period. It assumes that the usage or consumption of the assets future benefits is a function of time, with an equal amount of resources consumed each period. It is simple to calculate. In the case of a machine, this method would be appropriate where the machine is used equally (same units of output) each year. If the machine’s usage differs from period to period, the method will not be appropriate. Both the diminishing balance and sum-of-the-year’s-digits methods result in higher charges for depreciation being made in the earlier years of the asset’s useful life. These are appropriate where the asset’s economic resources are consumed more heavily in the earlier part of the asset’s life. Given the information provided, the usage of the machine as reflected in units produced will be greater in the later periods, since just over 200 000 units of a total expected output of 500 000 have been consumed after 5 years of a 10-year life. These methods therefore appear to be inappropriate. Where usage of an asset, e.g. a machine, differs from period to period as evidenced by the output from that machine, it can be argued that the economic benefits are consumed as it produces units of output. The units of production method of depreciation therefore appears to most closely conform with the requirements in IAS 16/AASB 116 in the selection of a depreciation method. This conclusion is supported by the tables in A. While repairs and maintenance costs are necessary, their incurrence should not be considered in the selection of the depreciation method. These costs are necessary to ensure that the entity is able to obtain the full economic benefits from the relevant asset. These costs may be expected to rise as the asset gets older. The analysis in B above, while of interest to management, should not receive a high emphasis in selecting the most appropriate depreciation method. In conclusion, the use of the units-of-production method is recommended. (c) Report addendum: As an alternative to owning the machinery, the option of leasing the machinery under an operating lease arrangement would give a total charge against profits (annual lease payment) which would cost a flat $250 000 per annum. Reference to the schedules in B above, reveals that the cost of depreciation + repairs and maintenance is higher in the immediate future years. Both the straight line and the units of production methods provide a lower cost than leasing over at least the next five years. Owning the machinery and using these methods of depreciation would better meet management’s objectives than would leasing the machinery. However, using the units of production method would provide management with the opportunity to show the most favourable profit results in the short term, as well as conforming to the conceptually correct method of depreciation. It is recommended (1) not to lease the machinery, and (2) to use the units of production method of depreciation. Decision analysis Depreciation of machinery GST version In early July 2019, Masterton Ltd is considering the acquisition of some machinery for $1 320 000 (GST inclusive) to be used in the manufacture of a new product. The machinery has a useful life of 10 years, during which management plans to produce 500 000 units of the new product. The residual value of the machinery is $100 000. The following projections were made in order to select a depreciation method to be used for the machinery. In calculating the profit before depreciation, all expenses have been deducted, including the repairs and maintenance expense. Required (a) As the accountant for Masterton Ltd, prepare separate depreciation schedules for the machinery for the 5-year period, using the following depreciation methods: i. straight-line ii. diminishing balance iii. sum-of-years’-digits iv. units-of-production. Use the following headings for each schedule: ‘Year ending 30 June’, ‘Annual depreciation expense’, ‘Accumulated depreciation’, ‘Carrying amount at end of year’. (b) Prepare a report for management, stating the advantages and disadvantages of each depreciation method. Include in the report your recommendations on the choice of method consistent with the requirements of IAS 16/AASB 116. Support your recommendations with schedules showing the total annual cost of operating the machinery, and the profit after depreciation. (c) Write an addendum to your report, making further recommendations based on the following additional information supplied to you by management. As an alternative to acquiring the machinery, management is considering leasing the machinery for an annual rental charge of $250 000; all repairs and maintenance costs would be paid by the lessor. Secondly, management wishes to show the most favourable financial results in anticipation of acquiring a long-term bank loan. It is necessary to remove GST from the purchase price of the machinery = $1 320 000 – GST $120 000 = $1 200 000. (a) Straight-line Year ended 30 June Annual depreciation Accumulated depreciation Carrying amount – end of year 2020 110 000 110 000 1 090 000 2021 110 000 220 000 980 000 2022 110 000 330 000 870 000 2023 110 000 440 000 760 000 2024 110 000 550 000 650 000 ($1 200 000 – $100 000)/10 = $110 000 Diminishing balance Year ended 30 June Annual depreciation Accumulated depreciation Carrying amount – end of year 2020 264 000 264 000 936 000 2021 205 920 469 929 730 080 2022 160 618 630 538 569 462 2023 125 282 755 820 444 180 2024 97 720 853 540 346 460 Rate = Sum-of-years’-digits Year ended 30 June Annual depreciation Accumulated depreciation Carrying amount – end of year 2020 200 000 (10/55) 200 000 1 000 000 2021 180 000 (9/55) 380 000 820 000 2022 160 000 (8/55) 540 000 660 000 2023 140 000 (7/55) 680 000 520 000 2024 120 000 (6/55) 800 000 400 000 Sum of digits for 10 years = 55 Year 2016 = $1 100 000  10/55 = $200 000 Units-of-production Year ended 30 June Annual depreciation Accumulated depreciation Carrying amount – end of year 2020 110 000 110 000 1 090 000 2021 99 000 209 000 991 000 2022 121 000 330 000 870 000 2023 127 600 457 600 742 400 2024 132 000 589 600 610 400 Year 2020 = ($1 200 000 – $100 000)  50 000/500 000 (b) Supporting schedules Total cost of operating machinery (depreciation + repairs & maintenance) Method 2020 2021 2022 2023 2024 Total Straight-line 180 000 170 000 200 000 205 000 210 000 965 000 Diminishing balance 334 000 265 920 250 618 220 282 197 720 1 268 540 Sum-of-the-years’-digits 270 000 240 000 250 000 235 000 220 000 1 215 000 Units of production 180 000 159 000 211 000 222 600 232 000 1 004 600 Profit after depreciation Method 2020 2021 2022 2023 2024 Total Straight-line 240 000 230 000 245 000 250 000 270 000 1 235 000 Diminishing balance 86 000 134 080 194 382 234 718 282 280 931 460 Sum-of-the-years’-digits 150 000 160 000 195 000 220 000 260 000 985 000 Units of production 240 000 241 000 234 000 232 400 248 000 1 195 400 Management report – issues to report are: All methods produce the same total charge to depreciation over the asset’s useful life, however the amounts charged as depreciation in each year the asset is used differ depending on the method used. Under IAS 16/AASB 116, the method chosen must reflect the pattern in which the asset’s future economic benefits are consumed by or lost to the entity. Straight-line method produces a uniform depreciation charge in each time period. It assumes that the usage or consumption of the assets future benefits is a function of time, with an equal amount of resources consumed each period. It is simple to calculate. In the case of a machine, this method would be appropriate where the machine is used equally (same units of output) each year. If the machine’s usage differs from period to period, the method will not be appropriate. Both the diminishing balance and sum-of-the-year’s-digits methods result in higher charges for depreciation being made in the earlier years of the asset’s useful life. These are appropriate where the asset’s economic resources are consumed more heavily in the earlier part of the asset’s life. Given the information provided, the usage of the machine as reflected in units produced will be greater in the later periods, since just over 200 000 units of a total expected output of 500 000 have been consumed after 5 years of a 10-year life. These methods therefore appear to be inappropriate. Where usage of an asset, e.g. a machine, differs from period to period as evidenced by the output from that machine, it can be argued that the economic benefits are consumed as it produces units of output. The units of production method of depreciation therefore appears to most closely conform with the requirements in IAS 16/AASB 116 in the selection of a depreciation method. This conclusion is supported by the tables in A. While repairs and maintenance costs are necessary, their incurrence should not be considered in the selection of the depreciation method. These costs are necessary to ensure that the entity is able to obtain the full economic benefits from the relevant asset. These costs may be expected to rise as the asset gets older. The analysis in B above, while of interest to management, should not receive a high emphasis in selecting the most appropriate depreciation method. In conclusion, the use of the units-of-production method is recommended. (c) Report addendum: As an alternative to owning the machinery, the option of leasing the machinery under an operating lease arrangement would give a total charge against profits (annual lease payment) which would cost a flat $250 000 per annum. Reference to the schedules in B above, reveals that the cost of depreciation + repairs and maintenance is higher in the immediate future years. Both the straight line and the units of production methods provide a lower cost than leasing over at least the next five years. Owning the machinery and using these methods of depreciation would better meet management’s objectives than would leasing the machinery. However, using the units of production method would provide management with the opportunity to show the most favourable profit results in the short term, as well as conforming to the conceptually correct method of depreciation. It is recommended (1) not to lease the machinery, and (2) to use the units of production method of depreciation. Critical thinking Purchase price of land, building and furniture Non-GST version Prestige Property Ltd has acquired a two-story office building on a large piece of land. The land also includes a fully established car park and landscaping. The offices have recently been fitted out with new carpets, curtains and office furniture which are all included in the purchase price. As the accountant of Prestige Property Ltd you have been asked to work out the cost of the office building, the land and the furniture and fittings so that they can be entered into the accounts of the company. You have gathered the following information (ignore GST). • The advertised purchase price of the office building and land was $1.5 million. Prestige Property Ltd issued the owner of the land with 200 000 shares in Prestige Property Ltd that had been trading on the share market for $7.50 before the issue of the new shares but had subsequently fallen to $7 as a result of the share issue being made. • A piece of vacant land next to the one purchased, and of equal size, recently sold for $800 000. • The vendor of the office building has shown you the value of the furniture and fittings in their accounts as being $300 000. • A builder has estimated that to build an office building similar to the one acquired would cost about $700 000. • You want to maximise the cost of the furniture and fittings and the buildings as these are depreciable for taxation purposes. Required (a) What is the fair value of the office buildings and the land? (b) How would you divide the purchase price between the land, buildings and office furniture? (c) Show the journal entry to record the acquisition of these assets in the accounts of Prestige Property Ltd. (a) The fair value of the land is probably best determined by the price paid for the equivalent land next to the one purchased. This would give a fair value of $800 000. There are some difficulties with this; for example the land next to the one purchased may have a better or worse view from any building put on it. Vacant land has a different value from developed land as it doesn’t need to be cleared to put up a new building and the owner can build accommodation specifically tailored to their needs rather than adapting an existing building. The demand and supply for a given piece of land may vary depending on the market conditions on the date of sale. The land purchased also includes a fully established car park and landscaping. These should probably be treated as separate assets from the land as they will need maintenance and eventually replacement whereas the land won’t. As there is no other guide to go by, the $800 000 is probably the best estimate of the fair value of the land, due to the recent purchase in an arm’s length transaction The building value is more difficult. Given that the $1.5M paid for the assets represents the fair value of the land, building, and the furniture and fittings combined, and that the fair value of the land is $800 000 (see above), it follows that the buildings and furniture and fittings together have a fair value of $700 000. The value of the furniture and fittings recorded in the vendor’s records of $300 000 represents the historical cost paid less accumulated depreciation to reflect using up of the initial economic benefit purchased. This does not necessarily represent the fair value of the furniture to Prestige Property Ltd — it could be more or less than $300 000. The replacement cost of a new building of $700 000 would most likely exceed the value of the existing building; by how much would depend on its age and how well it has been maintained. If the building is assessed to have a fair value of $700 000, then it follows that the fair value of the furniture and fittings (F&F) is $0, which is unlikely! An examination of the replacement value of the F&F in their current state could assist in arriving at a fair value for the F&F. If one assumes that the fair value of the furniture and fittings lies between $200 000 and $400 000, then the value of the building would be between $500 000 and $300 000. In the final analysis, the fair values assigned to the building and furniture and fittings will be arbitrary within the broad ranges suggested above. (b) The best way to divide the purchase price between the various assets is to get an independent valuer to value each of them. Given the tax benefits of maximising the value placed on the buildings and office furniture, students may suggest that the company place a fair value of $700 000 on these. (c) Land XXX Buildings XXX Furniture and fittings XXX Share Capital 1 500 000 Critical thinking Purchase price of land, building and furniture GST version Prestige Property Ltd has acquired a two-story office building on a large piece of land. The land also includes a fully established car park and landscaping. The offices have recently been fitted out with new carpets, curtains and office furniture which are all included in the purchase price. Assuming this is a commercial property As the accountant of Prestige Property Ltd you have been asked to work out the cost of the office building, the land and the furniture and fittings so that they can be entered into the accounts of the company. You have gathered the following information. • The advertised purchase price of the office building and land was $1.65 million, (GST Inclusive). Prestige Property Ltd issued the owner of the land with 200 000 shares in Prestige Property Ltd that had been trading on the share market for $7.50 before the issue of the new shares but had subsequently fallen to $7 as a result of the share issue being made. • A piece of vacant land next to the one purchased, and of equal size, recently sold for $880 000 (GST Inclusive). • The vendor of the office building has shown you the value of the furniture and fittings in their accounts as being $300 000 (excluding GST). • A builder has estimated that to build an office building similar to the one acquired would cost about $770 000 (GST Inclusive). • You want to maximise the cost of the furniture and fittings and the buildings as these are depreciable for taxation purposes. Required (a) What is the fair value of the office buildings and the land? (b) How would you divide the purchase price between the land, buildings and office furniture? (c) Show the journal entry to record the acquisition of these assets in the accounts of Prestige Property Ltd. (a) The fair value of the land is probably best determined by the price paid for the equivalent land next to the one purchased. This would give a fair value of $800 000 (excluding GST). There are some difficulties with this; for example the land next to the one purchased may have a better or worse view from any building put on it. Vacant land has a different value from developed land as it doesn’t need to be cleared to put up a new building and the owner can build accommodation specifically tailored to their needs rather than adapting an existing building. The demand and supply for a given piece of land may vary depending on the market conditions on the date of sale. The land purchased also includes a fully established car park and landscaping. These should probably be treated as separate assets from the land as they will need maintenance and eventually replacement whereas the land won’t. As there is no other guide to go by, the $800 000 is probably the best estimate of the fair value of the land, due to the recent purchase in an arm’s length transaction. The building value is more difficult. Given that the $1.5M (excluding GST) paid for the assets represents the fair value of the land, building, and the furniture and fittings combined, and that the fair value of the land is $800 000 (see above), it follows that the buildings and furniture and fittings together have a fair value of $700 000 (excluding GST). The value of the furniture and fittings recorded in the vendor’s records of $300 000 represents the historical cost paid less accumulated depreciation to reflect using up of the initial economic benefit purchased. This does not necessarily represent the fair value of the furniture to Prestige Property Ltd — it could be more or less than $300 000. The replacement cost of a new building of $700 000 (excluding GST) would most likely exceed the value of the existing building; by how much would depend on its age and how well it has been maintained. If the building is assessed to have a fair value of $700 000, then it follows that the fair value of the furniture and fittings (F&F) is $0, which is unlikely! An examination of the replacement value of the F&F in their current state could assist in arriving at a fair value for the F&F. If one assumes that the fair value of the furniture and fittings lies between $200 000 and $400 000, then the value of the building would be between $500 000 and $300 000 (excluding GST). In the final analysis, the fair values assigned to the building and furniture and fittings will be arbitrary within the broad ranges suggested above. (b) The best way to divide the purchase price between the various assets is to get an independent valuer to value each of them. Given the tax benefits of maximising the value placed on the buildings and office furniture, students may suggest that the company place a fair value of $700 000 on these. (c) Land XXX Buildings XXX Furniture and fittings XXX GST Receivable XXX Cash at Bank XXXX Share Capital 1 500 000 Communication and leadership Acquisition of property by issuing shares In groups of four or five, consider the following information. On 1 July 2019, Stevenson Pty Ltd, a proprietary company with three shareholders, acquired some property by issuing 100 000 shares to the owner. Prior to the acquisition, the property had been advertised for sale at $350 000. This advertised price had been based to some extent on a previous independent appraisal, obtained by the owner, of the approximate fair market value, $300 000; 20% of this value was considered to apply to the land and 80% to the buildings. Required Discuss how the situation should be recorded in the accounting records of the company. Write a brief memorandum to the manager explaining the reasons for the preferred method. The first issue to be decided here is whether the fair value of the land is $300 000 or $350 000. As the independent appraisal was for $300 000, this is the value that should be placed on the land and buildings. Conservative (or prudent) accountants would suggest that this is the appropriate value to use. The $350 000 appears to be the price placed on the property in the hope of achieving a sale price above the fair value. If the fair market value of the shares in the Stevenson Pty Ltd could be estimated, then this could be used to determine the value of the 100 000 shares. If this was done, then there may be goodwill included in the transaction as well. As Stevenson Pty Ltd is a private company with only three shareholders, it may be difficult to place a fair value on the shares. Assuming the value of $300 000 is agreed upon, then the journal entry to record the issue of shares in exchange for land and buildings would be as follows: Land 60 000 Buildings 240 000 Share Capital 300 000 Exchanged 100 000 shares for land and buildings. Ethics and governance Changing depreciation methods Pringles Ltd is a large department store that has used the straight-line depreciation method since the company was first formed. For the year ended 30 June 2019, the company made a record profit and management expected these high profits to continue at least into 2020 and 2021, although economists were generally predicting an economic slowdown and a subsequent fall in profits in 2022 and 2023. The general manager, Peter Pringle, approached the accountant, Marion Mason, and asked her if she could find a way to reduce the profit in the next couple of years and transfer it to 2022 and 2023 when things may not be going so well. ‘This would give us consistent profits over the next few years and keep our shareholders happy,’ said Peter. Although Marion did not feel that Peter’s reason for the change was justified, she was concerned that her contract with the company would not be renewed if she upset the general manager. After some consideration, Marion decided to change the depreciation method from the straight-line method to the sum-of-years’-digits method. Marion did not disclose this change in the notes to the financial statements as she felt that the reason given by Peter would not give a good impression. Required (a) Who are the stakeholders in this situation? (b) What ethical issues, if any, arise in this situation? (c) How does the change in accounting methods by Marion meet the objectives set out by Peter? (d) Do Marion’s actions comply with the requirements of IAS 16/AASB 116? (a) The stakeholders in this situation are: • Peter Pringle, the general manager, for trying to manipulate profits to give a certain impression. • Marion Mason, the accountant, who is concerned that her contract won’t be renewed if she doesn’t comply with the general manager’s request. • Shareholders in Pringles Ltd. (b) The first ethical issue is the undue pressure being placed by Peter Pringle on Marion Mason due to his position of authority and her weak position due to concern over her contract renewal. This can be seen as an abuse of power. The attempt to manipulate profits to ‘keep our shareholders happy’ is also an ethical issue as it is an attempt to mislead them as to the true trading position of the business over the next few years. (c) The change in accounting methods by Marion to a sum of the years’-digits method will result in higher depreciation in earlier years and lower depreciation in later years. This means that in the earlier years when profits are higher the higher depreciation will depress the profits somewhat. In the later years when the profits are expected to fall, the reducing depreciation expense will lessen the impact of these falls in profit. (d) Marion could argue that IAS 16/AASB1021 applies to this case, i.e. depreciation methods must be reviewed at least annually and, if there has been a change in the expected pattern of consumption or loss of future economic benefits, the method applied must be changed to reflect the changed pattern. Marion’s actions do not comply with the standard in that a change in depreciation methods must be disclosed as a change in accounting estimates in accordance with IAS 8/AASB 108. Investigate paras. 32–40 of that standard. Financial analysis Refer to the consolidated financial statements and their notes in the latest financial report of Wesfarmers Ltd on its website, www.wesfarmers.com.au, and answer the following questions. 1. How is the property, plant and equipment reported in the consolidated balance sheet? What is the total carrying amount for property, plant and equipment as disclosed at the end of the financial year? 2. What was the composition of Wesfarmers Ltd’s property, plant and equipment at the end of the reporting period? How have these assets been valued? 3. What methods of depreciation have been used for the various categories of property, plant and equipment? 4. Has the group disclosed the rates of depreciation or the useful lives of these assets? 5. What was the amount of depreciation charged on these assets for the current and prior years? 6. Were any items of property, plant and equipment purchased during the year? Were any such items constructed or under construction? How has the company treated borrowing costs incurred on properties under development? Does the company have any commitments for future capital expenditure not provided for in the financial statements? Provide details of any financial amounts involved. 1. In reference to the 2016 Annual Report: Property is recorded separately from plant & equipment in the annual report. The values are then recorded in the notes to the financial statements at cost, less accumulated depreciation and impairment to obtain the net carrying amount. The notes also disclose the changes that have occurred to the asset category since the beginning of the year & discloses additions, transfers, assets classified as held for sale, disposals, depreciation expense for the current year & any exchange differences to determine the value of the asset disclosed in the financial statement. The carrying value of property at the end of 2016 represents a total of $2,396,000 & the carrying value of plant & equipment amounts to $7,216,000. 2. Property, plant & equipment at the end of the reporting period consists of freehold land, buildings, leasehold improvements, plant, vehicles & equipment & mineral lease & development costs. According to the significant accounting policies note (7), property plant & equipment is stated at cost less accumulated depreciation & any impairment losses. 3. Wesfarmers uses straight-line depreciation for property, plant & equipment. 4. Buildings are depreciation over a useful life that ranges from 20 – 40 years useful life. Plant & equipment are depreciated using a useful life that ranges from 3 – 40 years. Land is not depreciated. 5. There is no depreciation expense on freehold land as this is a non-depreciable asset. Buildings incurred a depreciation expense of $26m, this increased from $21m expensed in 2015, probably due to the increase in buildings of $21m during 2016. Leasehold improvements incurred an amortisation expense totalling $124min 2016, this was an increase of $8m on the $116m recorded as an expense in 2015, most likely due to the increase in leasehold improvements of $176m obtained during 2016. Depreciation expense on plant, vehicles & equipment increased from $913m in 2015 to $959m in 20163 most likely due to the $736m additions in the current year, the overall net carrying value is greater in 2016 in comparison to 2015. Amortisation expenses on mineral lease & development costs amount to 53m, $2m higher than the $51mm expensed in 2015. 6. There were several additions in relation to buildings $21m, leasehold improvements $176m, plant, vehicles & equipment $736m, & mineral lease & development costs $116m. Buildings, leasehold improvements, plant, vehicles & equipment all contained a component under construction. Wesfarmers does not specifically state in the annual report how they treat borrowing costs incurred on properties under development, but disclose their funding activities in the form of term loans & corporate bonds in note 14. Commitments for future capital expenditure contracted for at balance date but not included in the financial report amounted to $199m within 12 months. This information is disclosed in note 21. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568