Company accounting 10th edition leo solutions manual

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Solutions Manual to accompany

Company Accounting 10e prepared by

Ken Leo John Hoggett John Sweeting Jeffrey Knapp Sue McGowan

© John Wiley & Sons Australia, Ltd 2015

Solution Manual to accompany Company Accounting 10e

Chapter 9 - Property, plant and equipment REVIEW QUESTIONS 1.

What assets constitute property, plant and equipment?

Para 6 of AASB 116 defines PPE as follows: Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period.

2.

What are the recognition criteria for property, plant and equipment?

Para 7 of AASB 116 contains the following recognition criteria: The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.

3.

How should items of property, plant and equipment be measured at point of initial recognition, and would gifts be treated differently from acquisitions?

Para 15 of AASB 116 requires the initial measurement to be at cost.

The measurement rule applies regardless of how the entity obtains the asset. A gift has a zero cost.

4.

How is cost determined?

Para 16 states: The cost of an item of property, plant and equipment comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. (b) 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. (c) 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

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Chapter 9: Property, plant and equipment

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.

5.

What choices of measurement model exist subsequent to assets being initially recognised?

Para 29 of AASB 116 states: An entity shall choose either the cost model in paragraph 30 or the revaluation model in paragraph 31 as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.1

6.

What factors should entities consider in choosing alternative measurement models?

Relevance of information provided: generally current information is preferred to past information.

Reliability of the information: cost measures are generally more reliable than valuation measures.

Cost of providing the information: Adoption of the valuation model entails costs of valuation and audit.

7.

What is meant by ‘depreciation expense’?

Para 6 of AASB 116 defines depreciation as: Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life

8.

How is useful life determined?

Para 6 of AASB 116 states: Useful life is: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity Paras 56-57 state:

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Solution Manual to accompany Company Accounting 10e

56.

The future economic benefits embodied in an asset are consumed by an entity principally through its use. However, other factors, such as technical or commercial obsolescence and wear and tear while an asset remains idle, often result in the diminution of the economic benefits that might have been obtained from the asset. Consequently, all the following factors are considered in determining the useful life of an asset: (a) expected usage of the asset. Usage is assessed by reference to the asset's expected capacity or physical output. (b) expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme, and the care and maintenance of the asset while idle. (c) technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset. (d) legal or similar limits on the use of the asset, such as the expiry dates of related leases.

57.

9.

The useful life of an asset is defined in terms of the asset's expected utility to the entity. The asset management policy of the entity may involve the disposal of assets after a specified time or after consumption of a specified proportion of the future economic benefits embodied in the asset. Therefore, the useful life of an asset may be shorter than its economic life. The estimation of the useful life of the asset is a matter of judgement based on the experience of the entity with similar assets.

What is meant by ‘residual value’ of an asset?

Para 6 of AASB 116 states: The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

10.

How does an entity choose between depreciation methods, for example, straightline versus reducing-balance models?

Para 60 of AASB 116 states: The depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity.

Choice is based on which method best reflects the pattern of benefits expected to be consumed by a specific asset given its use in a specific entity.

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Chapter 9: Property, plant and equipment

11.

What is meant by ‘components depreciation’?

Note paras 43-47 of AASB 116: 43.

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

44.

An entity allocates the amount initially recognised in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part. For example, it may be appropriate to depreciate separately the airframe and engines of an aircraft, whether owned or subject to a finance lease.

45.

A significant part of an item of property, plant and equipment may have a useful life and a depreciation method that are the same as the useful life and the depreciation method of another significant part of that same item. Such parts may be grouped in determining the depreciation charge.

46.

To the extent that an entity depreciates separately some parts of an item of property, plant and equipment, it also depreciates separately the remainder of the item. The remainder consists of the parts of the item that are individually not significant. If an entity has varying expectations for these parts, approximation techniques may be necessary to depreciate the remainder in a manner that faithfully represents the consumption pattern and/or useful life of its parts.

47.

An entity may choose to depreciate separately the parts of an item that do not have a cost that is significant in relation to the total cost of the item.

Components depreciation means breaking an asset down into its component parts for separate depreciation of those parts.

12.

Under the revaluation model, how is a revaluation increase accounted for?

Para 39 of AASB 116 states: If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognized in other comprehensive income and accumulated equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.

13.

Under the revaluation model, how is a revaluation decrease accounted for?

Para 40 of AASB 116 states: If an asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognized in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.

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Solution Manual to accompany Company Accounting 10e

14.

When, and why, must tax-effect be considered in accounting for revaluation increases and decreases?

Para 42 of AASB 116 states: The effects of taxes on income, if any, resulting from the revaluation of property, plant and equipment are recognised and disclosed in accordance with AASB 112 Income Taxes.

Tax-effects are accounting at the point of revaluation only when there is an effect on the asset revaluation surplus. This is because of the recognition of equity at that point.

Where revaluation decrements occur, any tax-effect is calculated at the end of the period when the balance day adjustment for tax is determined.

15.

Should accounting for revaluation increases and decreases be done on an asset-byasset basis or on a class-of-assets basis?

Paras 36-38 of AASB 116 state:

16.

36.

If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued.

37.

A class of property, plant and equipment is a grouping of assets of a similar nature and use in an entity's operations. The following are examples of separate classes: (a) land; (b) land and buildings; (c) machinery; (d) ships; (e) aircraft; (f) motor vehicles; (g) furniture and fixtures; and (h) office equipment.

38.

The items within a class of property, plant and equipment are revalued simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture of costs and values as at different dates. However, a class of assets may be revalued on a rolling basis provided revaluation of the class of assets is completed within a short period and provided the revaluations are kept up to date.

What differences occur between asset-by-asset or class-of-asset bases in accounting for revaluation increases and decreases?

Using an asset-by asset basis means that decrements affect the profit or loss for the period while increments are taken directly to equity.

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Chapter 9: Property, plant and equipment

With a class basis, by netting off increments and decrements within a class, there will be a net effect, affecting either profit or loss or equity depending on whether decrements are greater than or less than increments.

17.

When should property, plant and equipment be derecognised?

Para 67 of AASB 116 states: The carrying amount of an item of property, plant and equipment shall be derecognised: (a) on disposal; or (b) when no future economic benefits are expected from its use or disposal.

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Solution Manual to accompany Company Accounting 10e

CASE STUDY QUESTIONS Case study 1

Fair value basis for measurement

The management of Ransom Ltd has decided to use the fair value basis for the measurement of its equipment. Some of this equipment is very hard to obtain and has in fact increased in value over the current period. Management is arguing that, as there has been no decline in fair value, no depreciation should be charged on these pieces of equipment. Discuss.

Para 50 of AASB 116 notes that depreciation is a process of allocation. Depreciation is not a change in value.

Depreciation is measuring the change in value due to the use of an asset over the period, and not changes in value due to other factors such as changes in customer tastes.

The consumption of benefits is considered to be separate from changes in the fair value of an asset.

Consider the example [in section 7.5.1 of the text] used by the Accounting Standards Board in the UK in its 1996 Discussion Paper concerning the drop in value of a new car during its first year.

Case study 2

Straight-line vs diminishing balance depreciation

Silence Ltd uses tractors as a part of its operating equipment, and it applies the straight-line depreciation method to depreciate these assets. Silence Ltd has just taken over Lambs Ltd, which uses similar tractors in its operations. However, Lambs Ltd has been using a diminishing balance method of depreciation for these tractors. The accountant in Silence Ltd is arguing that for both entities the same depreciation method should be used for tractors. Provide arguments for and against this proposal.

The arguments for and against must be based on the pattern in which the assets’ future economic benefits are expected to be consumed by the entities.

If both entities use the assets such that the pattern of consumption of benefits is the same, then the same depreciation method should be used.

If the entities use the tractors in ways such that the pattern of consumption of benefits is different then different methods of depreciation can be used.

The method chosen must be applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits.

Case study 3

Annual depreciation charge

A company is in the movie rental business. Movies are generally kept for 2 years and then either sold or destroyed. However, management wants to show increased profits, and believes that the annual depreciation charge can be lowered by keeping the movies for 3 years. Discuss.

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Chapter 9: Property, plant and equipment

Changing the number of years does not necessarily change the annual depreciation charge.

If after 2 years the movies are worth nothing – hence they are normally destroyed at this point – then to keep the movies for another year simply means that there is no depreciation charge in the 3rd year as all the benefits have been received by the end of the 2nd year and there are none received in the third year.

If the movies could be still rented in a 3rd period, again there may be no change in the depreciation in the first two years. The depreciation charge is also a function of the residual value of the asset. Consider the following case: Scenario 1: Movie cost $30 and has a residual value at the end of year 2 of $15. Assuming equal benefits over the 2 years [unlikely], the annual depreciation charge is $7.50.

Scenario 2: Movie cost $30 and has a residual value at end of year 3 of $5. Assuming equal benefits [very unlikely], the annual depreciation charge is $8.33.

Case study 4

Decline in value of assets

A new accountant has been appointed to the firm of Simpsons Ltd, which owns a large number of depreciable assets. Upon analysing the entity’s depreciation policy, the accountant has implemented a new policy based on the principle that the depreciation rate for particular assets should measure the decline in the value of the assets. Discuss this policy change.

It could be argued that there are 2 concepts of depreciation, namely: -

a process of allocation, and a change in the value of an asset.

There are at least 3 variables that cause a change in value of an asset over the period: -

a reduction in value due to the use of the asset over the period, an increase/decrease in the value due to a change in the general price level, a change in the specific price level for this type of asset

Where depreciation is calculated as an allocation of the cost of the asset, what is being measured is variable (1) above. If depreciation is measured as a change in the value of an asset, the depreciation charge is a mixture of all the above variables.

AASB 116 para. 6 describes depreciation as a systematic allocation, hence adopting the process of allocation approach.

Hence if the accountant wants to adopt accounting policies that are compliant with international accounting standards, then he/she will need to change the depreciation policy to one of allocation rather than change in value.

To discuss the differences in approach, consider the example [in section 7.5.1 of the text] used by the Accounting Standards Board in the UK in its 1996 Discussion Paper concerning the drop in value of a new car during its first year.

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Solution Manual to accompany Company Accounting 10e

Case study 5

Depreciation charges

A new accountant has been appointed to Outlander Ltd and has implemented major changes in the calculation of depreciation. As a result, some parts of the factory have much larger depreciation charges. This has incensed some operations managers who believe that, as they take particular care with the maintenance of their machines, their machines should not attract large depreciation charges that reduce the profitability of their operations and reflect badly on their management skills. The operations managers plan to meet the accountant and ask for change. How should the new accountant respond?

The determination of the depreciation charge relies on the consideration of a large number of factors such as useful life, residual value, and consumption of benefits.

Some parts of the factory may have: -

assets with high initial costs low residual values high patterns of use on initial acquisition

These parts of the factory will attract high depreciation charges.

However, careful maintenance may lead to: -

higher residual values longer useful lives

The depreciation charge per annum can then be reduced.

Good management will not judge performance on factors outside the control of the employees. Cost savings may be a better measure of performance than profitability.

Case study 6

Depreciation charges

The management of Predator Ltd has been analysing the financial reports provided by the accountant, who has been with the firm for a number of years. Management has expressed its concern over depreciation charges being made in relation to the company’s equipment. In particular, it believes that the depreciation charges are not high enough in relation to the factory machines because new technology applied in that area is rapidly making the machines obsolete. Management’s concern is that the machines will have to be replaced in the near future and, with the low depreciation charges, the fund will not be sufficient to pay for the replacement machines. Discuss.

Two key mistakes are being made by management: (i) (ii)

the depreciation charge relates to the replacement cost of the asset, and charging depreciation results in the creation of a fund for the replacement of assets.

Re (i): depreciation is an allocation of the depreciable amount of an asset. The depreciable amount is the cost or other amount substitute for cost. Under AASB 116, there are two

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Chapter 9: Property, plant and equipment

measurement models available namely the cost model and the revaluation model. Under the revaluation model, an asset can be carried at fair value.

Neither of these models result in a depreciation charge that measures the replacement cost of the asset.

However, note para. 33 of AASB 116: where there is no market-based evidence of fair value, an entity may use, as an estimate of fair value, a depreciated replacement cost approach.

AASB 116 does not give any information as to how this method works, for example whether it is based on the replacement cost of a similar asset or the replacement cost of a new asset.

Given that replacement cost is used as an estimate of fair value, it is more likely that a replacement cost of used assets would be used. Again, the depreciation charge is not related to the cost of new replacement assets.

Re (ii):Depreciation is a book entry. It does not reflect cash flows. There are no monies deposited in a sinking fund to replace the assets being depreciated.

Even if the entity creates an asset replacement reserve as an appropriation of retained earnings, there is no cash fund as this is also a book entry.

Case study 7

Building costs

Tourist Ltd has acquired a new building. Which of the following items should be included in the cost of the building? (a) Stamp duty (b) Real estate agent’s fees (c) Architect’s fees for drawings for internal adjustments to the building to be made before use (d) Interest on the bank loan to acquire the building, and an application fee to the bank to get the loan, which is secured on the building (e) Cost of changing the name on the building (f) Cost of changing the parking bays (g) Cost of refurbishing the lobby to the building to attract customers and make it more user friendly See paragraph 16 of AASB 116 Include: (a) stamp duty (b) real estate agent’s fees (c) architect’s fees (d) interest [ may be expensed or capitalised – see AASB Borrowing Costs] (e) costs of changing name on building (g) costs of refurbishing lobby Exclude: (f) these may be considered as a separate asset, depends for example whether the parking bays are an integral part of the building or external to the building

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Solution Manual to accompany Company Accounting 10e

Case study 8

Capitalisation

Transporter Ltd has acquired a new machine, which it has had installed in its factory.

Which of the following items should be capitalised into the cost of the building? (a) Labour and travel costs for managers to inspect possible new machines and for negotiating for a new machine (b) Freight costs and insurance to get the new machine to the factory (c) Costs for renovating a section of the factory, in anticipation of the new machine’s arrival, to ensure that all the other parts of the factory will have easy access to the new machine (d) Cost of cooling equipment to assist in the efficient operation of the new machine (e) Costs of repairing the factory door, which was damaged by the installation of the new machine (f) Training costs of workers who will use the machine See paragraph 16 of AASB 116.

Include: (a) labour and travel costs (b) freight costs (c) costs of renovating (d) cost of cooling equipment Exclude: (e) costs of repair – these are not directly attributable to bringing the asset to its location & condition for operation. These costs should be expensed. (f) training costs – these benefits cannot be controlled

Case study 9

Expensing of costs

Blitz Ltd has acquired a new building for $500 000. It has incurred incidental costs of $10 000 in the acquisition process for legal fees, real estate agent’s fees and stamp duties. Management believes that these costs should be expensed because they have not increased the value of the building and, if the building was immediately resold, these amounts would not be recouped. In other words, the fair value of the building is considered to still be $500 000. Discuss how these costs should be accounted for.

According to para 16 of AASB 116, the cost of an asset includes any directly attributable costs. The $10 000 incidental costs should therefore be include in the cost of the asset. The cost is then $510 000.

Paragraph 15 of AASB 116 requires an asset to be recognised initially at cost – in this case $510 000.

If the asset is subsequently measured under the cost model: Whether or not the asset should be written down depends on whether the asset is impaired. Paragraph 63 of AASB 116 requires an entity to apply AASB 136 Impairment of Assets. If the asset is a part of a cash generating unit, and the recoverable amount of the CGU is greater than the carrying amount of the assets of the CGU then the building will not be written down.

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Chapter 9: Property, plant and equipment

If the asset is subsequently measured under the revaluation model: As the fair value is only $500 000, a revaluation decrement would be determined and an expense recognised.

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Solution Manual to accompany Company Accounting 10e

PRACTICE QUESTIONS Question 9.1

Initial recognition of an asset

Miami Ltd recently acquired a second-hand machine for installation in its factory. The machine was acquired from Vice Ltd, with Miami Ltd giving a block of land plus $5 000 cash in exchange for the machine. The land had been acquired by Miami Ltd for $200 000 three years ago, but was considered to have a fair value of $300 000 at the date of exchange. The machine had a carrying amount in the records of Vice Ltd of $310 000 at this date.

Miami Ltd planned to use the machine in its main factory. The installation of the machine would require that it be cemented into the factory floor in order to achieve sufficient stability for the machine to operate. The cost is expected to be $550. However, when the machine is replaced in three years’ time, the costs of removal of the machine are expected to be $250. As the operation of the machine requires some technical knowledge, current staff will need to be trained for its use. As it has supplied the machine, Vice Ltd has agreed to supply training at a cost of $250.

Required The accountant of Miami Ltd is unsure of how to account for the acquisition of the machine and has asked for your advice. Prepare a report providing detailed advice to the accountant.

1. The appropriate accounting standard to apply is AASB 116 Property, Plant and Equipment as the machine meets the definition of property, plant and equipment.

2. Under AASB116, the machine must initially be measured at cost.

3. Cost is defined as having 3 components, purchase price, directly attributable costs and dismantling costs.

4. Purchase price is based on the fair value of what is given up by the acquirer. In this case, the purchase price is the fair value of the land plus the cash, namely $305 000.

5. Costs directly attributable to the acquisition and necessary to get the machine into the condition and location for management to use the machine can be capitalised into the cost of the machine. In this case, the $550 cost for the cementing of the machine into the factory floor meets this criterion, but the training of the staff does not.

6. The dismantling costs can only be capitalised if there is an obligation at the time of acquisition of the asset for such dismantling. Such an obligation does not exist in this case. Therefore the dismantling costs on replacement of the machine cannot be capitalised into the cost of the machine.

7. The machine must initially be recognised at a cost of $305 550.

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Chapter 9: Property, plant and equipment

Question 9.2

Application of revaluation model

At 1 July 2014, Twister Ltd acquired the following non-current assets: Equipment Vehicles

$100 000 80 000

They are in different classes of non-current assets and are to be measured at fair value. The expected useful lives of vehicles and equipment are 5 years and 10 years, respectively.

At 30 June 2015, the fair values of both assets were assessed. The equipment had a fair value of $82 000, and the vehicles, $70 000. The remaining useful lives were assessed to be 8 years for equipment and 7 years for vehicles.

At 30 June 2016, the fair value of equipment was assessed to be $81 750 and the fair value of vehicles was $55 000.

Required Prepare the journal entries for Twister Ltd for the years ending 30 June 2015 and 2016.

Twister Ltd General Journal 30 June 2015 Depreciation expense – equipment Dr Accumulated depreciation – equipment Cr (Depreciation – $100 000 / 10 years)

10 000 10 000

Accumulated depreciation - equipment Dr 10 000 Equipment Cr (Write down of equipment to carrying amount: $90 000)

Expense- write-down of equipment Dr Equipment Cr (Revaluation from carrying amount to fair value: $90 000 to $82 000)

8 000

Depreciation expense – vehicles Accumulated depreciation – vehicles (Depreciation – 20% x $80 000)

Dr Cr

16 000

Accumulated depreciation – vehicles Dr Vehicles Cr (Write-down to carrying amount: $64 000)

16 000

Vehicles Dr Gain on revaluation of vehicles (OCI) Cr (Revaluation increment: $64 000 to $70 000)

6 000

Income tax expense (OCI)

1 800

10 000

8 000

16 000

Dr

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16 000

6 000

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Solution Manual to accompany Company Accounting 10e

Deferred tax liability (Tax effect of revaluation increment)

Cr

1 800

Gain on revaluation of vehicles (OCI) Dr Income tax expense (OCI) Cr Asset revaluation surplus - vehicles Cr (Accumulation of net revaluation gain in equity)

6 000 1 800 4 200

30 June 2016 Depreciation Expense – Equipment Dr Accumulated depreciation – Equipment Cr (Depreciation – $82 000 / 8years)

10 250

Accumulated depreciation - Equipment Dr Equipment Cr (Write down from previous FV $82 000 to carrying amount $71 750)

10 250

10 250

10 250

Equipment Dr 10 000 Gain on revaluation of equipment (P/L) Cr Gain on revaluation of equipment (OCI) Cr (Revaluation of equipment from $71 750 to $81 750, with prior revaluation write-down of $8 000) Income tax expense (OCI) Deferred tax liability (Tax effect of revaluation gain)

Dr Cr

600

Gain on revaluation of equipment (OCI) Dr Income tax expense (OCI) Cr Asset revaluation surplus Cr (Accumulation of revaluation gain in equity)

2 000

Depreciation expense – vehicles Accumulated Depreciation – vehicles (Being depreciation – $70 000 / 7 years)

Dr Cr

10 000

Accumulated depreciation – vehicles Dr Vehicles Cr (Write down of vehicles to carrying amount of $60 000)

10 000

Loss on revaluation of vehicles (OCI) Dr Vehicles Cr (Write down to fair value: $60 000 to $55 000)

5 000

Deferred tax liability Income tax expense (OCI) (Tax effect of write down to fair value)

1 500

8 000 2 000

600

600 1 400

10 000

Dr Cr

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10 000

5 000

1 500

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Asset revaluation surplus Income tax expense (OCI) Loss on revaluation of vehicles (OCI) (Reduction in accumulated equity due to revaluation decrement on vehicles)

Dr Dr Cr

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3 500 1 500 5 000

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Solution Manual to accompany Company Accounting 10e

Question 9.3

Initial recognition of an asset, depreciation

Mongol Trading operates in a very competitive field. To maintain its market position, it purchased two new machines for cash on 1 January 2016. It previously rented machines. Machine A cost $40 000, and machine B cost $100 000. Each machine was expected to have a useful life of 10 years, and residual values were estimated at $2000 for machine A and $5000 for machine B. Due to technological advances, Mongol Trading decided to replace machine A. It traded in machine A on 31 March 2018 for machine C, which cost $64 000. A trade-in of $28 000 was allowed for machine A, and the balance of machine C’s cost was paid in cash. Machine C was expected to have a useful life of 8 years and a residual value of $8000.

On 2 July 2018, extensive repairs were carried out on machine B at a cash cost of $66 000. Mongol Trading expected these repairs to extend machine B’s useful life by 4 years and to increase machine B’s estimated residual value to $13 450. Machine B was eventually sold for cash on 1 April 2020 for $115 000.

Mongol Trading uses the straight-line depreciation method, recording depreciation to the nearest month. The end of the reporting period is 30 June.

Required Prepare general journal entries to record the above transactions and depreciation journal entries required at the end of each reporting period up to and including 30 June 2020.

1.

GENERAL JOURNAL ENTRIES 01/01/16 Machinery Cash (Machines A & B purchased) 30/06/16

30/06/17

31/03/18

31/03/18

Dr Cr

140 000

Depreciation - machinery Dr Accumulated depreciation - machinery Cr (Depreciation at year end: [A: (40 000–2 000)/10 x ½ = 1 900] [B: (100 000-5 000)/10 x ½ = 4 750]

6 650

Depreciation - machinery Dr Accumulated depreciation - machinery Cr (Depreciation at year end: [A: (40 000–2 000)/10 = 3 800] [B: (100 000-5 000)/10 = 9 500])

13 300

Depreciation - Machinery Dr Accumulated Depreciation - Machinery Cr (Depreciation up to point of sale: A: (40 000–2 000)/10 x 9/12)

2 850

Accumulated depreciation – machinery (1900 + 3800 + 2850) Carrying amount of machinery sold (40 000 – 8 550) Machinery

140 000

6 650

13 300

2 850

Dr

8 550

Dr Cr

31 450

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40 000

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(De-recognition of asset sold - Machine A) 31/03/18

30/06/18

02/07/18

Machinery Dr Proceeds – Machine A Cr Cash Cr (Purchase of Machine C and trade-in of Machine A)

64 000

Depreciation - Machinery Dr Accumulated Depreciation - Machinery Cr (Depreciation at year end: [B: 9 500] + [C: (64 000-8 000)/8 x 3/12 = 1 750])

11 250

Machinery Cash (Cost of extensive repairs on machine B)

66 000

Cost of Machine B Depreciation up to repair date Residual value Depreciable amount Useful life remaining Depreciation p.a.

30/06/19

01/04/20

01/04/20

01/04/20

30/06/20

= = = = = = = = = = =

Dr Cr

28 000 36 000

11 250

66 000

100 000 + 66 000 166 000 4 750 + 9500 +9500 23 750 13 450 166 000 – 23 750 – 13 450 128 800 10 – 2.5 + 4 11.5 years 128 800/11.5 11 200

Depreciation – machinery Dr Accumulated depreciation - machinery Cr Depreciation at year end: (C: (64 000–8 000)/8 = 7 000) (B: 128 800/11.5 = 11 200)

18 200

Depreciation - machinery Dr Accumulated depreciation - machinery Cr (Depreciation up to point of sale: B: 11 200 x 9/12)

8 400

Cash Proceeds – sale of machine B (Sale of machine B)

18 200

8 400

Dr Cr

115 000

Accumulated depreciation – machinery (23 750 + 11 200 + 8 400) Carrying amount of machinery sold Machinery (De-recognition of Machine B on sale)

Dr Dr Cr

43 350 122 650

Depreciation - machinery

Dr

7 000

© John Wiley and Sons Australia, Ltd 2015

115 000

166 000

9.18

Solution Manual to accompany Company Accounting 10e

Accumulated depreciation - machinery Cr (Depreciation at year end: machine C)

© John Wiley and Sons Australia, Ltd 2015

7 000

9.19

Chapter 9: Property, plant and equipment

Question 9.4

Revaluation of assets

On 30 June 2016, the statement of financial position of Miss Congeniality Ltd showed the following non-current assets after charging depreciation: Building Accumulated Depreciation Motor Vehicle Accumulated Depreciation

$

300 000 (100 000)

$200 00 0

120 000 (40 000)

80 000

The company has adopted fair value for the valuation of non-current assets. This has resulted in the recognition in previous periods of an asset revaluation surplus for the building of $14 000. On 30 June 2016, an independent valuer assessed the fair value of the building to be $160 000 and the vehicle to be $90 000. The income tax rate is 30%.

Required A. Prepare any necessary entries to revalue the building and the vehicle as at 30 June 2016.

B. Assume that the building and vehicle had remaining useful lives of 25 years and 4 years respectively, with zero residual value. Prepare entries to record depreciation expense for the year ended 30 June 2017 using the straight-line method.

A. *NOTE: there is an amount of $14 000 in the asset revaluation surplus (ARS) account for building from previous periods. This would have been recognised from net revaluation gains to the building and can therefore be decreased with any revaluation losses on building before those losses are required to be recognised directly in the P&L. The amount in the ARS account is net of tax. Therefore, the full amount of previous revaluation gains for the buildings would have been $20 000 ($14 000 / 0.7). The tax amount would be recognised in the Deferred Tax Liability account for $6 000.

30 June 2016 Accumulated depreciation – Building Building (Writing down to carrying amount)

Dr Cr

100 000

Loss on revaluation of building (P&L) Dr Loss on revaluation of building (OCI) Dr Building Cr (Revaluation downwards of building - *Note)

20 000 20 000

Deferred tax liability Income tax expense (OCI) (Tax-effect of revaluation decrement on previously revalued asset - *Note)

Dr Cr

6 000

Asset revaluation surplus - Building Dr Income tax expense (OCI) Dr Loss on revaluation of building (OCI) Cr

14 000 6 000

100 000

40 000

6 000

© John Wiley and Sons Australia, Ltd 2015

20 000

9.20

Solution Manual to accompany Company Accounting 10e

(Reduction in accumulated equity due to revaluation decrement on building - *Note) Accumulated depreciation – Vehicle Vehicle (Writing down to carrying amount)

Dr Cr

40 000

Vehicle Dr Gain on revaluation of vehicle (OCI) Cr (Revaluation to fair value)

10 000

Income tax expense (OCI) Deferred tax liability (Tax-effect of revaluation increment)

Dr Cr

3 000

Gain on revaluation of vehicle (OCI) Income tax expense (OCI) Asset revaluation surplus - vehicle

Dr Cr Cr

10 000

B. 30 June 2017 Depreciation expense – Building Dr Accumulated depreciation – Building Cr ($160 000/25) Depreciation expense – Vehicle Dr Accumulated depreciation – Vehicle Cr ($90 000/ 4)

40 000

10 000

3 000

3 000 7 000

6 400 6 400

22 500

© John Wiley and Sons Australia, Ltd 2015

22 500

9.21

Chapter 9: Property, plant and equipment

Question 9.5

Revaluation of assets

In the 30 June 2016 annual report of Payback Ltd, the equipment was reported as follows: Equipment (at cost) Accumulated Depreciation

$

500 000 (150 000) 350 000

The equipment consisted of two machines, Machine A and Machine B. Machine A had cost $300 000 and had a carrying amount of $180 000 at 30 June 2016, and Machine B had cost $200 000 and was carried at $170 000. Both machines are measured using the cost model, and depreciated on a straight-line basis over a 10-year period.

On 31 December 2016, the directors of Payback Ltd decided to change the basis of measuring the equipment from the cost model to the revaluation model. Machine A was revalued to $180 000 with an expected useful life of 6 years, and Machine B was revalued to $155 000 with an expected useful life of 5 years.

At 30 June 2017, Machine A was assessed to have a fair value of $163 000 with an expected useful life of 5 years, and Machine B’s fair value was $136 500 with an expected useful life of 4 years.

The tax rate is 30%.

Required A. Prepare the journal entries during the period 1 July 2016 to 30 June 2017 in relation to the equipment.

B. According to accounting standards, on what basis may management change the method of asset measurement, for example from cost to fair value?

PAYBACK LTD 31 December 2016 – Change from cost model to revaluation model Depreciation expense – Machine A Accumulated depreciation (1/2 x 10% x $300 000)

Dr Cr

15 000

Depreciation expense – Machine B Accumulated depreciation (1/2 x 10% x $200 000)

Dr Cr

10 000

Machine A

Machine B

Cost Accum depn Fair value Increment

300 000 135 000 165 000 180 000 15 000

Accumulated depreciation – Machine A Machine A

15 000

10 000

Cost Accum depn

200 000 40 000 160 000 155 000 5 000

Fair value Decrement Dr Cr

© John Wiley and Sons Australia, Ltd 2015

135 000 135 000 9.22

Solution Manual to accompany Company Accounting 10e

(Writing the asset down to carrying amount) Machine A Gain on revaluation of machinery (OCI) (Revaluation of asset)

Dr Cr

15 000

Dr Cr

4 500

Gain on revaluation of machinery (OCI) Dr Income tax expense (OCI) Cr Asset revaluation surplus – Machine A Cr (Accumulation of net revaluation gain in equity)

15 000

Accumulated depreciation – Machine B Machine B (Writing the asset down to carrying amount)

Dr Cr

40 000

Loss – revaluation decrement (P/L) Machine B (Revaluation of machine from $200 000 to $155 000)

Dr Cr

5 000

Income tax expense – gain on revaluation of asset (OCI) Deferred tax liability (Tax-effect of revaluation)

15 000

4 500

4 500 10 500

40 000

5 000

30 June 2017 Depreciation expense – Machine A Accumulated depreciation (1/6 x ½ x $180 000)

Dr Cr

15 000

Depreciation expense – Machine B Accumulated depreciation (1/5 x ½ x $155 000)

Dr Cr

15 500

Machine A Carrying amount Fair value Decrement

Machine B Carrying amount Fair value Decrement

$ 139 500 136 500 3 000

Accumulated depreciation – Machine A Machine A (Writing down to carrying amount)

Dr Cr

15 000 15 000

Loss on revaluation of machinery (OCI) Machine A (Revaluation downwards)

Dr Cr

2 000

$ 165 000 163 000 2 000

© John Wiley and Sons Australia, Ltd 2015

15 000

15 500

2 000

9.23

Chapter 9: Property, plant and equipment

Deferred tax liability Dr Income tax expense (OCI) Cr (Tax-effect of revaluation decrement on asset previously revalued upwards)

600

Asset revaluation surplus – Machine A Dr Income tax expense (OCI) Dr Loss on revaluation of machinery (OCI) Cr (Reduction in accumulated equity due to revaluation decrement)

1 400 600

Accumulated depreciation – Machine B Machine B (Writing down to carrying amount)

Dr Cr

15 500

Loss – revaluation decrement Machine B (Writing down to fair value)

Dr Cr

3 000

600

2 000

15 500

3 000

B: Basis for change in accounting policy Refer to AASB 8 paragraph 9.

Discuss the cost basis method and the fair value method in relation to the relevance and reliability of information.

Current information is generally more relevant than past information. Determination of cost is generally more reliable than determination of fair value.

Discuss the trade-off between relevance and reliability, that is, as information becomes less reliable it also loses its relevance. A fair value measure may, because of its timeliness, be more relevant but if the measure becomes more unreliable, the relevance of the information decreases.

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9.24

Solution Manual to accompany Company Accounting 10e

Question 9.6 Acquisition of assets, depreciation and change to revaluation model Robert Niro commenced operations on 30 March 2012 in the rubbish and recycling industry, trading as Midnight Run Services Ltd. The end of the reporting period is 31 December, and the company depreciates all depreciable assets using the straight-line method.

The following events occurred during 2015 and 2016: 2015 April

01

June

30

Aug. Dec.

31 31

2016 March 13 Aug. 01

Dec.

31

Paid $140 000 cash for a second-hand truck (Truck A). Robert estimated the truck’s useful life and residual value at 5 years and $20 000.

Paid $1500 cash to recondition Truck A’s engine.

Paid $32 000 cash for equipment. Robert estimated the equipment’s useful life and residual value at 10 years and $1500.

Paid $600 cash for Truck A’s transmission repairs and oil change.

Recorded depreciation on Truck A and equipment.

Paid $290 cash to replace a damaged bumper bar on Truck A. Traded in Truck A for a new truck (Truck B) that cost $240 000.

The dealer granted a trade-in allowance of $90 000 on the Truck A, and the balance was paid in cash. Robert estimated Truck B’s useful life and residual value at 7 years and $30 000.

Recorded depreciation on Truck B and the equipment. Robert decided to change the basis of measuring equipment to the revaluation model. He assessed the equipment’s fair value at 31 December 2016 at $29 000.

Required Prepare general journal entries to record the above events.

MIDNIGHT RUN SERVICES 01/04/15 Truck A Cash (Acquisition of Truck A)

Dr Cr

140 000

Dr Cr

1 500

30/06/15 Equipment Cash

Dr Cr

32 000

31/08/15 Repairs & maintenance expense

Dr

600

Truck A Cash (Reconditioning of Truck A’s engine)

© John Wiley and Sons Australia, Ltd 2015

140 000

1 500

32 000

9.25

Chapter 9: Property, plant and equipment

Cash (Repairs and maintenance on Truck A) 31/12/15 Depreciation – Truck A Accumulated depreciation – Truck A (Depreciation of Truck A: 9/12 x 1/5[141 500 – 20 000)

Cr

600

Dr Cr

18 225

Dr Cr

1 525

Dr Cr

290

Dr Cr

14 175

Dr Dr Cr

32 400 109 100

Dr Proceeds on sale of Truck A Cr Cash Cr (Acquisition of Truck B and trade-in of Truck A)

240 000

Depreciation – equipment Accumulated depreciation – equipment (Depreciation of equipment: 6/12 x 1/10[32 000 – 1 500) 13/03/16 Repairs & maintenance expense Cash 01/08/16 Depreciation – Truck A Accumulated depreciation – Truck A (Depreciation for year to date of sale: 7/12 x 1/5[141 500 – 20000]) 01/08/16 Accumulated depreciation – Truck A (18 225 + 14 175) Carrying amount on sale – Truck A Truck A (Carrying amount of asset sold) 01/08/16 Truck B

31/12/16 Depreciation – Truck B Accumulated depreciation – Truck B (Depreciation of Truck B: 5/12 x 1/7[240 000 – 30 000]) Depreciation – equipment Accumulated depreciation – equipment (Depreciation of equipment: 1/10[32 000 – 1 500)

18 225

1 525

290

14 175

141 500

90 000 150 000

Dr Cr

12 500

Dr Cr

3 050

12,500

3 050

31/12/16 Accumulated depreciation – equipment

© John Wiley and Sons Australia, Ltd 2015

9.26

Solution Manual to accompany Company Accounting 10e

(1 525 + 3 050) Equipment (Write down to carrying amount of $27 425)

Dr Cr

4 575

Equipment Gain on revaluation of equipment (OCI) (Recognition of revaluation increment: 27 425 to 29 000)

Dr Cr

1 575

Income tax expense (OCI) Dr Deferred tax liability Cr (Tax-effect of revaluation of equipment: 30% x 1575)

473

Gain on revaluation of equipment (OCI) Dr Income tax expense (OCI) Cr Asset revaluation surplus Cr (Accumulation of revaluation surplus in equity)

1 575

© John Wiley and Sons Australia, Ltd 2015

4 575

1 575

473

473 1 102

9.27

Chapter 9: Property, plant and equipment

Question 9.7

Depreciation calculation

On 1 July 2016, Salt Airlines Ltd acquired a new aeroplane for a total cost of $10 million. A breakdown of the costs to build the aeroplane was given by the manufacturers as follows: Aircraft body Engines (2) Fitting out of aircraft: Seats Carpets Electrical equipment — passenger seats — cockpit Food preparation equipment

$

3 000 000 4 000 000 1 000 000 50 000 200 000 1 500 000 250 000

All costs include installation and labour costs associated with the relevant part.

It is expected that the aircraft will be kept for 10 years and then sold. The main value of the aircraft at that stage is the body and the engines. The expected selling price is $2.1 million, with the body and engines retaining proportionate value.

Costs in relation to the aircraft over the next 10 years are expected to be as follows: • Aircraft body. This requires an inspection every 2 years for cracks and wear and tear, at a cost of $10 000.

• Engines. Each engine has an expected life of 4 years before being sold for scrap. It is expected that the engines will be replaced in 2020 for $4.5 million and again in 2024 for $6 million. These engines are expected to incur annual maintenance costs of $300 000. The manufacturer has informed Salt Airlines Ltd that a new prototype engine with an extra 10% capacity should be on the market in 2022, and that existing engines could be upgraded at a cost of $1 million.

• Fittings. Seats are replaced every 3 years. Expected replacement costs are $1.2 million in 2019 and $1.5 million in 2025. The repair of torn seats and faulty mechanisms is expected to cost $100 000 p.a. Carpets are replaced every 5 years. They will be replaced in 2021 at an expected cost of $65 000, but will not be replaced again before the aircraft is sold in 2026. Cleaning costs amount to $10 000 p.a. The electrical equipment (such as the TV) for each seat has an annual repair cost of $15 000. It is expected that, with the improvements in technology, the equipment will be totally replaced in 2022 by substantially better equipment at a cost of $350 000. The electrical equipment in the cockpit is tested frequently at an expected annual cost of $250 000.

Major upgrades to the equipment are expected every 2 years at expected costs of $250 000 (in 2015), $300 000 (in 2017), $345 000 (in 2019) and $410 000 (in 2024). The upgrades will take into effect the expected changes in technology.

• Food preparation equipment. This incurs annual costs for repair and maintenance of $20 000. The equipment is expected to be totally replaced in 2022.

Required A. Discuss how the costs relating to the aircraft should be accounted for.

B. Determine the expenses recognised for the 2016–17 financial year.

A. Discuss:

© John Wiley and Sons Australia, Ltd 2015

9.28

Solution Manual to accompany Company Accounting 10e

- the advantages of a components approach versus a simple depreciation of the $10 million dollars over the 10-year period.

- the treatment of the upgrades of cockpit equipment - accounting for inspections

B: Expenses for the 2016-17 year: Aircraft body: Annual expense of $5 000 ($10 000 / 2years) for inspection for cracks Depreciation expense = 1/10 (3 000 000 – 3/7 x $2 100 000) = $210 000 It is explained that the main value of the aircraft is the body ($3m) and engines ($4m), a total of $7m. These two components are expected to retain their proportionate values for when the aircraft is sold in 10 years’ time for $2.1m Therefore, the depreciable amount for the aircraft body is adjusted by its proportionate residual value. That is, $3m/$7m x $2.1m selling price.

Engines: Depreciation expense = 4 000 000/4 = $1 000 000 Maintenance expense = $300 000 The depreciation calculation does not take into account the proportionate value of the engines compared to the aircraft body. Why? The aircraft body is kept until it is expected to be sold in 10 years’ time, whereas the engines are replaced every 4 years.

Fittings Seats: Depreciation = 1/3 x $1 000 000 = $333 333 Annual expense = $100 000 Carpets: Depreciation = 1/5 x 50 000 = $10 000 Cleaning = $10 000 Electrical: Passenger Annual expense = $15 000 Depreciation = 1/6 x $200 000 = $33 333 (expected to be replaced in 2020 – 6 years from date of purchase) Electrical: Cockpit Annual expense = $250 000 Depreciation = 1/10 x $1 500 000 = $150 000 Food preparation equipment: Annual expense = $20 000 Depreciation = 250 000/6 = $41 667

© John Wiley and Sons Australia, Ltd 2015

9.29

Chapter 9: Property, plant and equipment

Total other expenses = $ 700 000 Annual depreciation = $1 778 333

© John Wiley and Sons Australia, Ltd 2015

9.30

Solution Manual to accompany Company Accounting 10e

Question 9.8

Depreciation

Max Ltd was formed on 1 July 2014 to provide delivery services for packages to be taken between the city and the airport. On this date, the company acquired a delivery truck from Payne Trucks. The company paid cash of $50 000 to Payne Trucks, which included government charges of $600 and registration of $400. Insurance costs for the first year amounted to $1200. The truck is expected to have a useful life of 5 years. At the end of the useful life, the asset is expected to be sold for $24 000, with costs relating to the sale amounting to $400.

The company went extremely well in its first year, and the management of Max Ltd decided at 1 July 2015 to add another vehicle, a flat-top, to the fleet. This vehicle was acquired from a liquidation auction at a cash price of $30 000. The vehicle needed some repairs for the elimination of rust (cost $2300), major servicing to the engine (cost $480) and the replacement of all tyres (cost $620). The company believed it would use the flattop for another 2 years and then sell it. Expected selling price was $15 000, with selling costs estimated to be $400. On 1 July 2015, both vehicles were fitted out with a radio communication system at a cost per vehicle of $300. This was not expected to have any material effect on the future selling price of either vehicle. Insurance costs for the 2015– 16 period were $1200 for the first vehicle and $900 for the newly acquired vehicle.

All went well for the company except that, on 1 August 2016, the flat-top that had been acquired at auction broke down. Max Ltd thought about acquiring a new vehicle to replace this one but, after considering the costs, decided to repair the flat-top instead.

The vehicle was given a major overhaul at a cost of $6500. Although this was a major expense, management believed that the company would keep the vehicle for another 2 years. The estimated selling price in 3 years’ time is $12 000, with selling costs estimated at $300. Insurance costs for the 2016–17 period were the same as for the previous year.

Required Prepare the journal entries for the recording of the vehicles and the depreciation of the vehicles for each of the 3 years. The financial year ends on 30 June.

MAX LTD 2014 1/7

2015 30/6

Vehicles Cash (Acquisition of delivery truck)

Dr Cr

50 000

Insurance expense Cash (Truck insurance)

Dr Cr

1 200

Depreciation expense - Vehicles Accumulated depreciation (Annual depreciation: 1/5 x $50 000 - $23 600)

Dr Cr

5 280

© John Wiley and Sons Australia, Ltd 2015

50 000

1 200

5 280

9.31

Chapter 9: Property, plant and equipment

1/7

2016 30/6

1/7

1/8

Vehicles Cash (Acquisition of flat-top truck)

Dr Cr

30 000

Vehicles Cash (Amounts paid on flat-top truck: $2 300 + $620)

Dr Cr

2 920

Servicing expense Cash (Service of flat-top truck)

Dr Cr

480

Vehicles Cash (Installation of radios to trucks)

Dr Cr

600

Insurance expense Cash (Insurance on trucks)

Dr Cr

2 100

Depreciation expense - Vehicles Dr Accumulated depreciation Cr (Depreciation of vehicles: 1/5 ($50 000 - $23 600) + ¼ x $300= $5 355 ½ ($32 920 + $300 – $14 600 = $9 310

14 665

Insurance expense Cash (Insurance on trucks)

Dr Cr

2 100

Depreciation expense – Vehicles Accumulated depreciation (Depreciation on flat-top: 1/12 x ½ ($32 920 + $300 - $14 600)

Dr Cr

776

Accumulated depreciation – Vehicles Dr Vehicles Cr (Write-down of flat-top truck to carrying amount: $9 310 + $776)

10 086

30 000

2 920

480

600

2 100

14 665

2 100

776

© John Wiley and Sons Australia, Ltd 2015

10 086

9.32

Solution Manual to accompany Company Accounting 10e

Vehicles Cash (Overhaul of flat-top truck)

Dr Cr

6 500 6 500

2017 30/6

Depreciation expense – Vehicles Dr 5 480 Accumulated depreciation Cr 5 480 (Depreciation on vehicles: delivery truck: $5 355 as per previous year flat-top truck: 11/12[1/3 ($32 920 + $300 - $9 310 - $776 +$ 6 500 – ($12 000 - $300)] = $5 480)

© John Wiley and Sons Australia, Ltd 2015

9.33

Chapter 9: Property, plant and equipment

Question 9.9

Depreciation

Sting Ltd constructed a building for use by the administration section of the company.

The completion date was 1 July 2010, and the construction cost was $840 000. The company expected to remain in the building for the next 20 years, at which time the building would probably have no real salvage value and have to be demolished. It is expected that demolition costs will amount to $15 000. In December 2016, following some severe weather in the city, the roof of the administration building was considered to be in poor shape so the company decided to replace it. On 1 July 2017, a new roof was installed at a cost of $220 000. The new roof was of a different material to the old roof, which was estimated to have cost only $140 000 in the original construction, although at the time of construction it was thought that the roof would last for the 20 years that the company expected to use the building. Because the company had spent the money replacing the roof, it thought that it would delay construction of a new building, thereby extending the original life of the building from 20 years to 25 years.

Required Discuss how you would account for the depreciation of the building and how the replacement of the roof would affect the depreciation calculations.

If the roof were treated as a separate component of the building: Roof: depreciation p.a. = $140 000 x 1/20 = $7 000 Rest of building: depreciation p.a. = $700 000 x 1/20 = $35 000 At 1 July 2017, the roof would have been depreciated to $91 000 (being $140,000 less 7 x $7 000). This would then be written off on replacement of the roof. The new roof would be depreciated at $12 222, being 1/18 x $220,000 p.a. (18 years depn = 207+5) Further, the rest of the building would have a carrying amount of $455 000, being $700 000 less 7 x $35 000. Depreciation p.a. for the next 18 years would be $25 278.

Total depreciation is then $37 500.

If the roof were not treated as a separate component: Depreciation p.a. = 1/20 x $840 000 = $42 000 At 1 July 2017, the building would have been depreciated to a carrying amount of $546 000, being $840 000 – 7 x $42 000. On replacement of the roof, the total depreciable cost is $766 000, being $546 000 + $220 000. Depreciation p.a. for the next 18 years is $42 556.

© John Wiley and Sons Australia, Ltd 2015

9.34

Solution Manual to accompany Company Accounting 10e

Question 9.10

Acquisition, disposal and depreciation of non-current assets

Avatar Bricklaying Ltd commenced trading on 1 July 2015. On 8 July 2015, a brickcutting machine was purchased for $3500, payable in two equal instalments due on 1 August and 1 October 2015. Transport costs of $120 were paid in cash to deliver the machine to Avatar Bricklaying Ltd’s premises. Machinery is depreciated at 20% p.a. on the diminishing balance.

On 25 September 2015, the business purchased a second-hand truck, Truck X, 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 onto 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 2017, major repairs were carried out on the brick-cutting machine, which affected its productive capacity at a cost of $1820, paid in cash. Avatar Bricklaying Ltd made no change to the depreciation rate.

On 23 April 2017, Truck X was traded in on a new truck, Truck Y, costing $56 000.

An amount of $17 000 was allowed for the trade-in of Truck X and the balance paid in cash. Truck Y was expected to have a useful life of 7 years and a residual value of $7000.

Avatar Bricklaying Ltd depreciates trucks using the straight-line method and records depreciation to the nearest month. The end of the reporting period is 30 June. On 30 June 2017, the business changed the basis of measuring trucks to the revaluation model.

The fair value of Truck Y at that date was $58 000.

Required A. Prepare general journal entries (round all amounts to the nearest dollar) to record the above transactions and to record depreciation necessary for the years ended 30 June 2016 and 2017.

B. Justify the value you recognised as the cost of the second-hand truck, Truck X, purchased on 25 September 2015 by reference to the requirements of AASB 116.

C. Assume that on 30 June 2018 the carrying amount of the truck was $49 500 and its fair value was $46 000. Prepare the general journal entry/entries to revalue the truck to fair value on that date in accordance with the requirements of AASB 116.

A.

General journal entries

08/07/15

01/08/15

25/09/15

Machinery (3500 + 120) Payable Cash (Acquisition of brick-cutting machine, including transport costs)

Dr Cr Cr

3 620

Payable Cash (Payment of instalment of machine)

Dr Cr

1 750

Truck X

Dr

28 400

© John Wiley and Sons Australia, Ltd 2015

3 500 120

1 750

9.35

Chapter 9: Property, plant and equipment

01/10/15

30/06/16

Cash (Acquisition of Truck X: 26 000 + 700 + 1200 + 500)

Cr

28 400

Payable Cash (Payment of 2nd instalment on machine)

Dr Cr

1 750

Depreciation – machinery Dr Accumulated depreciation – machinery Cr (Depreciation of machinery: 20% x 3620)

724

1 750

724

Depreciation – Truck X Dr 5 850 Accumulated depreciation – Truck X Cr (Depreciation of Truck X: 9/12 x 1/3[28 400 – 5 000]) 01/03/17

Depreciation – machinery Dr Accumulated depreciation – machinery Cr (Depreciation of machinery up to date of major repairs: 8/12 x 20% x 2 896.

CA = 2 510 = 3 620 – 724 - 386) Machinery Cash (Repairs on machinery: Revised CA = 2 510 + 1 820 = 4 330)

23/04/17

386

1,820

Depreciation – Truck X Dr Accumulated depreciation – Truck X Cr (Depreciation of Truck X up to time of trade-in: 10/12 x 1/3[28 400 – 5000]

6 500

Truck Y Proceeds on sale of Truck X Cash (Acquisition of Truck Y) 30/06/17

386

Dr Cr

Accumulated depreciation – Truck X (5 850 + 6 500) Carrying amount of Truck X on sale Truck X (De-recognition of Truck X on sale)

Depreciation – Truck Y Accumulated depreciation – Truck Y (Depreciation of Truck Y:

1,820

6 500

Dr Dr Cr

12 350 16 050

Dr Cr Cr

56 000

Depreciation – machinery Dr Accumulated depreciation – machinery Cr (Depreciation of machinery: 4/12 x 20% x 4330) Dr Cr

© John Wiley and Sons Australia, Ltd 2015

5 850

28 400

17 000 39 000

289 289

1 167 1 167

9.36

Solution Manual to accompany Company Accounting 10e

2/12 x 1/7[56 000 – 7 000 CA = 54 833) Truck Y Dr Gain on revaluation of Truck Y (OCI) Cr (Revaluation of Truck Y from 54 833 to 58 000)

B.

3 167 3 167

Income tax expense (OCI) Deferred tax liability (Tax effect of revaluation gain on truck) 30% x 3 167)

Dr Cr

950

Gain on revaluation of Truck Y (OCI) Income tax expense (OCI) Asset revaluation surplus

Dr Cr Cr

3 167

950

950 2 217

Justify the value recognised as the truck cost on 25/09/15

AASB 116 requires items of property, plant and equipment that quality for recognition as an asset to be recognised at their cost.

Cost is defined as the amount of cash paid or the fair value of other consideration given to acquire an asset at the time of its acquisition. This includes its purchase price and 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.

In the case of the truck the purchase price was $26 000 and attributable costs included the stamp duty, new tyres and sign writing (total of $2 400). All these costs were necessary to get the truck into the location and condition that was required for management to use the asset. Thus, the total cost of the truck is $28 400.

C.

General journal entry required on 30/06/18 to revalue the truck from ca of $49 500 to fv of $46 000

30/06/18

Accumulated depreciation – Truck Y Truck Y (Write down asset from former FV of 58 000 to its carrying amount of 49 500)

Dr Cr

8 500 8 500

Loss on revaluation of Truck Y (OCI) Dr 3 167 Loss on revaluation of Truck Y (P/L) Dr 333 Truck Y Cr (Revaluation downwards of truck from CA of 49 500 to FV of 46 000) Deferred tax liability Income tax expense (OCI) (Tax effect of revaluation decrement)

Dr Cr

950

Asset revaluation surplus Income tax expense (OCI)

Dr Dr

2 217 950

© John Wiley and Sons Australia, Ltd 2015

3 500

950

9.37

Chapter 9: Property, plant and equipment

Loss on revaluation of Truck Y (OCI) Cr (Reduction in equity due to revaluation decrement)

© John Wiley and Sons Australia, Ltd 2015

3 167

9.38

Solution Manual to accompany Company Accounting 10e

Question 9.11

Revaluation of assets

On 1 July 2016, Kingdom Ltd acquired two assets within the same class of plant and equipment. Information on these assets is as follows:

Machine A Machine B

Cost $100 000 60 000

Expected useful life 5 years 3 years

The machines are expected to generate benefits evenly over their useful lives. The class of plant and equipment is measured using fair value.

At 30 June 2017, information about the assets is as follows:

Machine A Machine B

Fair value $84 000 38 000

Expected useful life 4 years 2 years

On 1 January 2018, Machine B was sold for $29 000 cash. On the same day, Kingdom Ltd acquired Machine C for $80 000 cash. Machine C has an expected useful life of 4 years. Kingdom Ltd also made a bonus issue of 10 000 shares at $1 per share, using $8000 from the general reserve and $2000 from the asset revaluation surplus created as a result of measuring Machine A at fair value.

At 30 June 2018, information on the machines is as follows:

Machine A Machine C

Fair value $61 000 68 500

Expected useful life 3 years 1.5 years

The income tax rate is 30%.

Required Prepare the journal entries in the records of Kingdom Ltd to record the described events over the period 1 July 2016 to 30 June 2018, assuming the ends of the reporting periods are 30 June 2017 and 30 June 2018.

1 July 2016 Machine A Machine B Cash

Dr Dr Cr

100 000 60 000

Dr Cr

20 000

160 000

30 June 2017 Depreciation expense – Machine A Accumulated depreciation (1/5 x $100 000)

© John Wiley and Sons Australia, Ltd 2015

20 000

9.39

Chapter 9: Property, plant and equipment

Depreciation expense – Machine B Accumulated depreciation (1/3 x $60 000)

Dr Cr

20 000

Accumulated depreciation- Machine A Machine A (Writing down to carrying amount)

Dr Cr

20 000

Machine A Dr Gain on revaluation of Machine A (OCI) Cr (Revaluation increment: $80 000 to $84 000)

4 000

Income tax expense (OCI) Deferred tax liability (Tax effect of revaluation increment)

Dr Cr

1 200

Gain on revaluation of Machine A (OCI) Dr Income tax expense (OCI) Cr Asset revaluation surplus – Machine A Cr (Accumulation of net revaluation gain in equity))

4 000

Accumulated depreciation – Machine B Machine B (Writing down to carrying amount)

Dr Cr

20 000

Expense – revaluation decrement (P&L) Machine B (Revaluation to fair value at 30/6/17)

Dr Cr

2 000

Machine C Cash (Acquisition of machine C)

Dr Cr

80 000

Depreciation expense – Machine B Accumulated depreciation (($38 000 / 2years) x 1/2 year depn)

Dr Cr

9 500

Cash

Dr Cr

29 000

Carrying amount of Machine B Sold Accumulated depreciation Machine B (Carrying amount of machine sold)

Dr Dr Cr

28 500 9 500

General reserve Asset revaluation surplus – Machine A

Dr Dr

8 000 2 000

20 000

20 000

4 000

1 200

1 200 2 800

20 000

2 000

1 January 2018

Proceeds on sale of Machine B (Sale of Machine B)

© John Wiley and Sons Australia, Ltd 2015

80 000

9 500

29 000

38 000

9.40

Solution Manual to accompany Company Accounting 10e

Share Capital

Cr

10 000

30 June 2018 Depreciation expense – Machine A Accumulated depreciation (1/4 x $84 000)

Dr Cr

21 000

Depreciation expense – Machine C Accumulated depreciation (1/4 x ½ x $80 000)

Dr Cr

10 000

Accumulated depreciation – Machine A Machine A (Writing down to carrying amount)

Dr Cr

21 000

Loss on revaluation of Machine A (OCI) Machine A (Write down of plant from $63000 to $61000)

Dr Cr

2 000

Deferred tax liability Income tax expense (OCI) (Tax-effect on downward revaluation subsequent to upward revaluation)

Dr Cr

600

21 000

10 000

21 000

2 000

600

*Asset revaluation surplus – Machine A Dr 800 Income tax expense (OCI) Dr 600 Loss on revaluation of Machine A(P&L) Dr 600 Loss on revaluation of Machine A (OCI) Cr 2 000 (Accumulation of revaluation loss to equity) *Note: in the previous year the value of the ARS account from a revaluation increment for Machine A was $2 800. However, the entity used $2 000 of this surplus for a bonus share issue, leaving $800 balance in this account. Therefore, when recognising a revaluation decrement for Machine A the ARS account can only be reduced by the $800 remaining. The balance of the loss on revaluation must now be recognised directly in P&L. Accumulated depreciation – Machine C Machine C (Writing down to carrying amount)

Dr Cr

10 000

Loss on revaluation (P&L) Machine C (Revaluation to fair value at 30/6/18)

Dr Cr

1 500

© John Wiley and Sons Australia, Ltd 2015

10 000

1 500

9.41

Chapter 9: Property, plant and equipment

Question 9.12

Acquisition and sale of assets, depreciation

Jeremiah’s Turf Farm owned the following items of property, plant and equipment as at 30 June 2015: Land (at cost) Office building (at cost) Accumulated depreciation Turf cutter (at cost) Accumulated depreciation Water desalinator (at fair value)

150 000 (23 375 ) 65 000 (42 367)

$120 000 126 625

22 633 189 000

Additional information (at 30 June 2015) (a) The straight-line method of depreciation is used for all depreciable items of property, plant and equipment. Depreciation is charged to the nearest month and all figures are rounded to the nearest dollar. (b) The office building was constructed on 1 April 2011. Its estimated useful life is 20 years and it has an estimated residual value of $40 000. (c) The turf cutter was purchased on 21 January 2012, at which date it had an estimated useful life of 5 years and an estimated residual value of $3200. (d) The water desalinator was purchased and installed on 2 July 2014 at a cost of $200 000. On 30 June 2015, the plant was revalued upwards by $7000 to its fair value on that day. Additionally, its useful life and residual value were re-estimated to 9 years and $18 000 respectively.

The following transactions occurred during the year ended 30 June 2016: (Note: All payments are made in cash.) (e) On 10 August 2015, new irrigation equipment was purchased from Johnson Supplies for $37 000. On 16 August 2015, the business paid $500 to have the equipment delivered to the turf farm. Bob Redford was contracted to install and test the new system. In the course of installation, pipes worth $800 were damaged and subsequently replaced on 3 September. The irrigation system was fully operational by 19 September and Bob Redford was paid $9600 for his services. The system has an estimated useful life of 4 years and a residual value of $0. (f) On 1 December 2015, the turf cutter was traded in on a new model worth $80 000. A trade-in allowance of $19 000 was received and the balance paid in cash. The new machine’s useful life and residual value were estimated at 6 years and $5000 respectively. (g) On 1 January 2016, the turf farm’s owner decided to extend the office building by adding three new offices and a meeting room. The extension work started on 2 February and was completed by 28 March at a cost of $49 000. The extension is expected to increase the useful life of the building by 4 years and increase its residual value by $5000. (h) On 30 June 2016, depreciation expense for the year was recorded. The fair value of the water desalination plant was $165 000.

Required (Show all workings and round amounts to the nearest dollar.)

Prepare general journal entries to record the transactions and events for the reporting period ended 30 June 2016 (narrations are not required).

© John Wiley and Sons Australia, Ltd 2015

9.42

Solution Manual to accompany Company Accounting 10e

General Journal Entries

DATE

DETAILS

Dr

Cr

10/08/15 Irrigation equipment Cash

37 000

16/08/15 Irrigation equipment Cash

500

03/09/15 Repairs and maintenance expense Cash

800

37 000

500

8 00

19/09/15 Irrigation equipment Cash

9 600

01/12/15 Depreciation – Turf cutter Accumulated depreciation – Turf cutter (($65 000 – $3 200)/5 x 5/12 = $5 150))

5 150

01/12/15 Carrying amount – Turf cutter ($65 000 – $47 517) Accumulated depreciation – Turf cutter ($42 367 + $5 150) Turf Cutter

17 483 47 517

01/12/15 Turf cutter Cash Proceeds on sale – Turf cutter

80 000

28/03/16 Depreciation - Building Accumulated depreciation - Building ($150 000 – $40 000/20 x 9/12 = $4 125)

4 125

28/03/16 Accumulated depreciation – Building ($23 375 + $4 125) Office building

27 500

28/03/16 Office building Cash

49 000

30/06/16 Depreciation expense – Turf cutter Accumulated depreciation – Turf cutter ($80 000 – $5 000/6 x 7/12 = $7 292)

7 292

© John Wiley and Sons Australia, Ltd 2015

9 600

5 150

65 000

61 000 19 000

4 125

27 500

49 000

7 292

9.43