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Topic7SuggestedSolutions

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Topic7SuggestedSolutions

ACCT5930 ‘Financial Accounting’

    Semester 2 2010

    Exercise Suggested Solutions Topic 7

Problem 9.2*

    Note that this suggested solution may also be downloaded from the student resources section the

    textbook website:

    http://higher.cengage.com.au/title/9780170178211

1 Schedules:

     Land

     At cost 320,000

     Buildings

     At cost 180,000

     Demolition 1,200

    Construction costs 40,000

    Architects fees 4,000

    Legal Fees 500

     225,700

    Less Salvage 200

     225,500

    Machinery

    At cost 200,000

    New machinery 50,000

    Sales Tax (4%) 2,000

    Freight and Installation 750

    Improvement to existing machine 500

     253,250

2 Shareholders’ equity would decline by $400, being repairs to machinery

    damaged during demolition.

     1

ACCT5930 ‘Financial Accounting’

    Semester 2 2010

    Exercise Suggested Solutions Topic 7

Problem 9.3*

    Note that this suggested solution may also be downloaded from the student resources section the textbook website:

    http://higher.cengage.com.au/title/9780170178211

    1 The purpose of depreciation of the cost of an asset is to attempt to match the cost

    of the asset to the benefit generated through the use of the asset. In Z’s case the

    benefit of the use of the truck is the delivery revenue earned by using the truck.

    Therefore, the purpose of depreciating assets is not to provide a market valuation

    of the asset on the balance sheet. The truck could be used more in the first year

    than in subsequent years. If no depreciation expense is recorded because the value

    of the truck has not declined, there will be an improper matching of revenues and

    expenses in the first year.

2a Accumulated depreciation at the end of the second year.

     i. Straight line:

     20,000 ? 5 = $4,000 per year

     4,000 x 2 = $8,000

     ii. Reducing balance (25 percent rate):

     20,000 x 0.25 = $5,000 year 1 depreciation

     (20,000 5,000) x 0.25 = $3,750 year 2 depreciation

     = $8,750

     iii. Units of production

     20,000 ? 5,000 = $4 per lawn

     500 x 4 = $2,000 year 1 depreciation

     1,000 x 4 = $4,000 year 2 depreciation

     = $6,000

    2b Units of production method would result in the highest retained profits at the end

    of the second year because the expense for the first two years taken together is

    lower, resulting in net profit for the two years taken together being higher.

    2c Revenue is generated when a unit is sold. If the total units that an asset is capable

    of producing can be readily estimated, the units of production method will result

    in good matching of revenues and expenses. Whether it would make sense for this

    business depends on how good the estimates are. For example, if each lawn

    mower costs $500, then 40 lawn mowers have been purchased. Is it plausible to

    assume that each lawn mower can be used to mow 125 (5,000 ? 40) lawns before

    it is no longer useful? It does appear that estimated revenues will increase each

    year until they decline in the fifth year. Therefore, the units of production method

    would probably make more sense than the straight-line or reducing balance

    method.

     2

ACCT5930 ‘Financial Accounting’

    Semester 2 2010

    Exercise Suggested Solutions Topic 7

2d i. Net book value

     Cost $20,000

     Accumulated Depreciation (15,254)

     $4,746

     Proceeds $100

     Less NBV $(4,746)

     Loss on Disposal $(4,646)

    2d ii. The $100 received just reduces the loss on disposal. The lawn mowers were

    sold because they were no longer useful, therefore they will no longer provide a

    benefit. Since they will no longer provide a benefit they should not be included in

    the balance sheet as an asset. The fact that there is a loss recorded in the sixth year

    indicates that the cost of the lawn mowers was not properly matched to the benefit

    provided by the use of lawn mowers over their useful life. Since choice of

    depreciation method involves some estimation as to the appropriate amounts to

    charge in each period for depreciation expense, it is inevitable that gains and

    losses on disposal of assets will be recorded. If the units of production method had

    been used and the estimated number of lawns were actually mowed, there would

    have been a $100 gain on disposal of the asset. However, cumulative expense for

    the five years would have been lower. At the end of six years, total expense will

    be the same under any depreciation method chosen.

     3

ACCT5930 ‘Financial Accounting’

    Semester 2 2010

    Exercise Suggested Solutions Topic 7

Problem 9.5

    1 a Van $20,000 + $4,800 + $500 = $25,300 (Costs of making ready for use).

    Arguably, the van will still operate without the advertising and therefore this

    could be an immediate advertising expense and the van would have a cost of $24,

    800

    b Paint trays and rollers, cost not market value: $500

    2 i Van Diminishing value over 4 years, cost $25,300, salvage value of $800.

     $14,631.27 depreciation expense in first year.

    ii Rollers 9 months of a total depreciation period of 21 months (assume

    straight line depreciation): $214

    iii Three year licence but purchased on 1 February, therefore 11/36 amortisation

     $1,375 is the amortisation expense. stiv Truck The truck was fully depreciated on the 31 of August 2005 (8 year

    useful life). Therefore, no depreciation expense is recorded for the year ended

    31 December 2009.

3

    $ Non-current Assets

    Property, plant and equipment 41,800

    Less: accumulated depreciation (30,045)

    Net property, plant and equipment 11,755

Intangible assets 4,500

    Less: accumulated amortisation (1,375)

    Net intangible assets 3,125

Property, plant and equipment:

     $

    Van 25,300

    Less: Accumulated Depreciation (14,631)

    Rollers 500

    Less: Accumulated Depreciation (214)

    Truck 16,000

    Less: Accumulated Depreciation (15,200)

    Total 11,755

     4

ACCT5930 ‘Financial Accounting’

    Semester 2 2010

    Exercise Suggested Solutions Topic 7

Problem 9.6

1 Asset

    2 Asset

    3 Asset

    4 Expense

    5 Asset

    6 Expense

    7 Expense

Problem 9.9

1 Purchase price of new machine $135,000

     Freight and installation charges $ 25,000

     Cost of machine for accounting purposes $160,000

    10,0004 1Reducing balance;

    160,000

     = 50% per annum

     Straight Reducing Sum-of-the-

    line balance year’s digits

     $ $ $ Year ending 31 December 2006 37,500 80,000 60,000

     2007 37,500 40,000 45,000

     2008 37,500 20,000 30,000

     2009 37,500 10,000 15,000

     150,000 150,000 150,000

2

     $ $

     Depreciation expense 42,000

     Accumulated depreciation 42,000

     150,000?25,000 = $6 per hour

     7,000 hours x $6 = $42,000

3 Dombey & Son should use the depreciation method that approximates the use

    pattern of the asset. While the choice of depreciation method will affect annual profit

    figures and financial position during the life of the asset, it will have no effect over

    the entity’s life.

     5

ACCT5930 ‘Financial Accounting’

    Semester 2 2010

    Exercise Suggested Solutions Topic 7

Problem 9.10

    Please note that the equipment was purchased on 1 July 2005, not 1 July 2002 as noted in the question.

    81,00041 Depreciation rate (reducing balance) = 1 - = 40%625,000

     Straight-line Sum-of-the-year’s digits Reducing balance (40%)

     $ $ $

    2006 136,000 217,600 250,000

    2007 136,000 163,200 150,000

    2008 136,000 108,800 90,000

    2009 136,000 54,400 54,000

     544,000 544,000 544,000

    2 A depreciation method should be appropriate to the nature of the asset and its

    expected use. The basis chosen is that which best reflects the underlying physical,

    technical, commercial and, where appropriate, legal facts.

     6

ACCT5930 ‘Financial Accounting’

    Semester 2 2010

    Exercise Suggested Solutions Topic 7

Problem 9.15

    1 Schedule showing annual depreciation expense and end of year carrying amount for

    both methods:

     Straight-line Reducing balance

    Year Depreciation Carrying Depreciation Carrying

    expense amount expense amount

     $ $ $ $

    Acquisition 810,000 810,000

    1 200,000 610,000 540,000 270,000

    2 200,000 410,000 180,000 90,000

    3 200,000 210,000 60,000 30,000

    4 200,000 10,000 20,000 10,000 2Note: Using the formula the reducing balance depreciation rate is 0.6667, i.e. /. 3

    2 Factors likely to influence the useful life of a depreciable asset:

    i Physical factors, such as wear and tear.

    ii Technical factors, such as obsolescence of the asset.

    iii Commercial factors, such as changes in the demand for the product or other

    output produced by the asset.

    iv Legal factors, such as the term of a lease or patent.

    Factors likely to influence management’s choice of a depreciation method include

    the effect that the method will have on the firm’s financial statements, income tax

    laws, information needs of management and financial statement users, the clerical

    cost of applying a particular method, and requirements of accounting standards.

     7

ACCT5930 ‘Financial Accounting’

    Semester 2 2010

    Exercise Suggested Solutions Topic 7

Problem 9.20

    General journal

     $ $

    Accumulated depreciation buildings 2,140 1

     Accumulated depreciation machinery 2,140

Accumulated depreciation machinery 16,000 2

     Machinery 14,500

     Gain on sale of machinery 1,500

    Delivery equipment 7,900 3

     Purchases 7,900

    Depreciation expense delivery equipment 875

     Accumulated depreciation delivery equipment 875

Car park lighting 12,000 4

     Maintenance expense 12,000

    Depreciation expense car park lighting 1,484

     Accumulated depreciation car park lighting 1,484

Machinery 2,000 5

     Gain on sale of machinery 2,000

The correct entries for item 5 are:

    Accumulated depreciation machinery 19,000

    Supplier 9,000

     Machinery 26,000

     Gain on sale of machinery 2,000

    Machinery 35,000

     Supplier 9,000

     Cash 26,000

     8

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