Topic 10 - tutorial answers
UNIVERSITY OF ADELAIDE SCHOOL OF COMMERCE
MASTER OF COMMERCE (ACCOUNTING)
ACCTING 7019 ACCOUNTING CONCEPTS AND METHODS (M)
Topic 10:Accounting for non-current assets.
TUTORIAL Questions and Problems
1. Text, page 619, Discussion questions 5 and 7
5. Z Ltd depreciates its equipment using the straight-line method of depreciation. Y Ltd,
which owns similar equipment, and purchased the item on the same day from the same supplier as Z Ltd, uses the diminishing-balance method. Are the depreciation charges of these two companies non-comparable? Explain.
This question requires a discussion of the nature and purpose of depreciation. Assuming that depreciation is an allocation of cost over useful life, as per IAS 16/AASB 116, it is important to consider how to select an allocation method. Refer to the appropriate sections of the standard, and to the relevant discussion on allocation methods and their outcomes as covered in the text. Note that the total cost of an asset over its useful life and disposal is the same under all methods. It is not necessarily inconsistent that both Z Ltd and Y Ltd adopt different depreciation allocation patterns for the same asset, as they may have used the asset differently over their useful lives. The important criterion to consider in selecting a depreciation method is the expected pattern of usage of the economic benefits to be derived from the asset. The depreciation charges would be non-comparable if both companies used different depreciation methods over the same useful lives if the pattern of usage is the same between Z Ltd and Y Ltd.
7. At a recent seminar, a managing director of a well-known company argued that the
diminishing-balance method of depreciation was the best method to use because it had the effect of producing a ‘nice, smooth income (profit) flow’. Discuss how this could occur, and consider the desirability of reporting smooth profit flows. What role does/should the accountant play in this respect?
A smooth income (profit) flow can come about in that, during the early years when
maintenance costs are low, depreciation charges are high; and in the later years when maintenance costs are high, depreciation charges are low. See figure 20.1 in the text.
Smooth income flows, however, are not the reason for selecting a depreciation policy.
Since depreciation under IAS 16/AASB 116 is a process of allocation of the asset’s depreciable amount over useful life, the basis for selecting an allocation technique is the expected pattern of the usage or expiration of the asset’s economic benefits. The
diminishing balance method is justified where an asset can be expected to yield more economic benefits in the earlier reporting periods than in the later.
2. Text, page 620, Exercise 14.2 (diminishing balance rate = 43%).
DEXTEROUS LTD
Required:
A. Determine the amount that should be debited to the machinery account and prepare a
general journal entry to record the purchase, assuming a financial year ending 31 December. B. Determine the amount of depreciation expense for each of the 4 years ending 31 December
assuming use of: 1. the straight-line depreciation method 2. the diminishing-balance method of depreciation.
C. Prepare a journal entry to record depreciation expense for the year ending 31 December
2013 under the diminishing-balance method. A. Cost of machine = $213 000* + $5 400 + $5 280 = $223 680 *$213 000 = $234 300 less GST of $21 300
Machinery 223 680 GST Outlays [21300 + 540 + 528] 22 368 Accounts Payable 246 048 To record purchase of machine, plus freight, installation costs, and GST.
B.
Year ended 31 December Depreciation Method 2013 2014 2015 2016 Total
Straight-line 1
49 920 49 920 49 920 49 920 199 680
Diminishing-balance 2
96 182 54 824 31 250 17 424 199 680 1. ($223 680 - $24 000)/4 = $49 920 p.a.
2.
Depreciation rate 1 – 457.1223680
24000-= = .43 or 43%
$223 680 x .43 = 96 182 127 498 x .43 = 54 824 72 674 x .43 = 31 250 41 424 – 24 000 = 17 424
C.
Depreciation Expense – Machinery 96 182
Accumulated Depreciation – Machinery 96 182
Record depreciation expense for year ended 31 December 2013.
3.
Text, page 621, Exercise 14.5 (diminishing balance rate = 22%).
DUBIOUS LTD
Required:
A. Assume the van was purchased on 2 July 2013 and that the accounting period ends on 30
June. Calculate the depreciation expense for the year 2013-14 using each of the following depreciation methods:
1. straight-line
2. sum-of-years’-digits
3. diminishing-balance
4. units of production (assume the van was driven 78 000 kilometres during the
financial year).
B. Assume the van was purchased on 1 October 2013 and that the accounting period ends
on 30 June. Calculate the depreciation expense for the year 2013-14 using each of the following depreciation methods:
1. straight-line
2. sum-of-years’-digits
3. diminishing- balance
4. units of production (assume the van was driven 60 000 kilometres during the
financial year).
A. 1. Straight-line: ($32 000 - $12 000)/4 = $5 000
2. Sum-of-the-years’ digits: 4 + 3 + 2 + 1 = 10
($32 000 - $12 000) 4/10 = $8 000
3. Diminishing-balance:
1 –4
32000
12000
= 22% (approx.)
= 1 - .78 = .22
$32 000 x .22 = $7 040
4. Units-of-production:
Expense per kilometre = ($32 000 - $12 000)/200 000 = $0.1
0.1 x 78 000 = $7 800
B. 1. Straight-line: ($32 000 – $12 000)/4 x 9/12 = $3 750
2. Sum-of-the-years’-digits: (4/10 x $20 000) 9/12 = $6 000
3. Diminishing- balance: ($32 000 x .22) 9/12 = $5 280
4. Units-of-production: $0.1 x 60 000 = $6 000
4. Text, page 659, Discussion question 2.
2. What is meant by ‘recoverable amount’? When are assets to be written down to
recoverable amount? What must an entity do if it is unable to determine the recoverable amount of an individual asset?
Recoverable amount is the higher of an asset’s “fair value less costs to sell” and its “value in use” (see definition of value in use in the text). The write down of non-current assets to recoverable amount occurs if the asset has satisfied an impairment test. Whenever an asset’s carrying amount exceeds recoverable amount, the asset has been impaired and must be written down to recoverable amount, with the write down amount treated as an expense, unless the asset had been previously revalued to fair value under the revaluation model. In this case the impairment is written down against the revaluation reserve/surplus.
If the impairment test cannot be applied to individual assets because the entity cannot determine the recoverable amount of an individual asset, the impairment test must be applied to each cash-generating unit.
5. Text, page 660, Exercise 15.3.
BONDI LTD
Required:
A.Prepare a general journal entry to record depreciation on the machine for the five months in 2016.
Use the straight-line depreciation method
B.Prepare an entry to record the sale of the machine on 31 May 2016 assuming a selling price of 1.
$16 000, 2. $17 800.
A. 2016
31 May Depreciation Expense – Machinery 1 250
Accumulated Depreciation – Machinery 1 250
Depreciation of machine .
[$33 000 – $3 000]/10 = $3 000 x 5/12
B. 1.
31 May Cash at Bank 16 000
Proceeds on Sale of Machinery 16 000
Sale of machine
Expense - Carrying Amount of Machinery Sold 16 750
Accumulated Depreciation – Machinery 16 250
Machinery 33 000
Carrying amount on disposal, resulting in a loss of
$750.
B. 2.
31 May Cash at Bank 17 800
Proceeds on Sale of Machinery 17 800
Sale of machine
.
Expense - Carrying Amount of Machinery Sold 16 750
Accumulated Depreciation – Machinery 16 250
Machinery 33 000
Carrying amount on disposal, resulting in a gain of
$1 050.
6. Text, page 662, Exercise 15.10.
RICHMOND LTD
RICHMOND LTD
Required:
A. Determine the price that Richmond Ltd would pay for goodwill in acquiring Windsor Ltd if
the consideration transferred in the business combination was $ 2 000 000, in cash.
B. Prepare entries for Richmond Ltd in general journal form to record the acquisition of
Windsor Ltd for $1 500 000 cash.
A.
Fair value of identifiable assets $2 400 000
Fair value of identifiable liabilities (700 000)
Total consideration transferred 2 000 000
Goodwill (difference) $300 000
B.
Identifiable Assets 2 400 000
Identifiable Liabilities 700 000
Payable to Windsor Ltd 1 500 000
Gain on Bargain Purchase 200 000
Acquisition of Windsor Ltd
Payable to Windsor Ltd 1 500 000
Cash at Bank 1 500 000
Payment to Windsor Ltd.