DOC

# Topic7SuggestedSolutions

By Marion Perkins,2014-05-17 10:38
10 views 0
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

Report this document

For any questions or suggestions please email
cust-service@docsford.com