ACCT5001 S1 2010

Self-Study Solutions

Week 9

ACCT5001 S1 2010

Self-Study Solutions

Week 9

Ch.8: Q3, Q5; E8.1, E8.4; PSA8.2, PSA8.3, PSA8.7, & PSA8.10

EXERCISE 8.4 Walrus Ltd

3.

The effects of the three methods on annual depreciation expense are: (a) (b) (c) Straight-line constant amount Diminishing-balance decreasing amount Units-of-production varying amount. 1 January 2008 Equipment Cost Estimated Residual $90,000 10,000 $80,000 Balance date 30 June

5.

In a sale of PPE assets, the carrying (book) value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the carrying value of the PPE asset, a gain on disposal occurs. If the proceeds of the sale are less than the carrying value of the PPE asset sold, a loss on disposal occurs.

Depreciable Amount

Straight line depreciation rate EXERCISE 8.1 Zhang Ltd (a) Depreciation expense for fiscal year 2008 $80,000 x 20% x 6 months (a) The following points explain the application of the cost principle in determining the acquisition of PPE assets.

100% 5 years = 20%

$8,000

Depreciation expense for fiscal year 2009 $80,000 x 20% = $16,000

1. Under the cost principle, the acquisition cost for a PPE asset includes all expenditures necessary to acquire the asset and make it ready for its intended use. 2. For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. 3. Cost is the fair value at acquisition date of all assets given up or liabilities undertaken, plus any incidental costs. 4. Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an arms-length transaction. (b) 1. 2. 3. 4. Land Factory Machinery. Delivery Truck Land Improvements 5. 6. 7. 8. Delivery truck Factory Machinery Prepaid Insurance Motor Vehicle Expense

(b)

Journal entry for overhaul Equipment Cash/Payables $4,000 $4,000

(c)

Depreciation expense for fiscal year 2011

Carrying value at 30/6/10 $90,000 less ($8,000 + $16,000 + $16,000) = $50,000.

1 July 2010 addition $4,000. Therefore the carrying amount is now $54,000 which will also be the depreciable amount as the expected residual is nil.

Depreciation rate is 100% 4 years = 25% Depreciation expense 2011 is $54,000 x 25% = $13,500.

ACCT5001 S1 2010 Week 9 Self-Study Solutions.doc

2/05/2010

ACCT5001 S1 2010 Week 9 Self-Study Solutions.doc

2/05/2010

ACCT5001 S1 2010

Self-Study Solutions

Week 9

ACCT5001 S1 2010

Self-Study Solutions

Week 9

PROBLEM SET A 8.2 2011 Balance date is 30 June Pouncer Ltd (a) 2010 $ Aug 1 Land Cash (Purchase of Land) (b) Oct 1 Depreciation Expense Accumulated Depn Equipment ($675,000 x 1/10 x 3/12) 16,875 16,875 2011 June 30 Depreciation Expense Accumulated Depn Buildings Oct 1 Cash Accumulated Depn Equipment Equipment Gain on Disposal 350,000 455,625 675,000 130,625 June 30 Depreciation Expense Accumulated Depreciation - Equipment 4,735,500 4,735,500 ($28,500,000 x 1/40) 712,500 712,500 2,630,000 2,630,000 $ June 30 Jan 1 Equipment Cash (Purchase of Equipment) 1,000,000 1,000,000

Accumulated Depn Equipment Equipment (Equipment fully depreciated on 31/12/09)

470,000 470,000

$46,855,000* x 1/10 Cost (1/1/04) Accum. Depn Equipment [($675,000 x 1/10 x 6.75yrs)] WDV value Cash proceeds Gain on disposal 219,375 350,000 $130,625 $675,000 $455,625 *($48,000,000 - $675,000 - $470,000) $1,000,000 x 1/10 x 6/12

4,685,500 50,000 4,735,500

Dec 1

Cash Land Gain on Disposal (Sale of Land)

1,800,000 300,000 1,500,000

ACCT5001 S1 2010 Week 9 Self-Study Solutions.doc

2/05/2010

ACCT5001 S1 2010 Week 9 Self-Study Solutions.doc

2/05/2010

ACCT5001 S1 2010

Self-Study Solutions

Week 9

ACCT5001 S1 2010

Self-Study Solutions Accumulated Depreciation - Buildings

Week 9

(c) Pouncer Ltd Partial Statement of financial position as at 30 June 2011 30/06/11 Bal. c/d

30/06/10 12,812,500 30/06/11 12,812,500 30/06/11

Balance Depn Exp.

12,100,000 712.500 12,812,500

Bal b/d

12,812,500

Equipment Property, plant and equipment* Land Buildings Less: Accumulated depreciation buildings Equipment Less: Accumulated depreciation equip. Total property, plant and equipment $28,500,000 12,812,500 47,855,000 8,826,750 39,028,250 $61,045,750 01/10/10 30/06/11 30/06/11 * See T-accounts which follow. Accumulated Depreciation - Equipment Equipment, etc. Equipment Bal. c/d 455,625 30/06/10 470,000 1/10/10 8,826,750 30/06/11 9,752,375 31/12/11 Note that in the external reports the total of Property, plant and equipment would be a one line item in the statement of financial position and the detailed breakdown above would be disclosed in the notes to the financial statements. Bal. b/d Balance Depn Exp. Depn Exp. 5,000,000 16,875 4,735,500 9,752,375 8,826,750 15,687,500 30/06/11 Bal. b/d $6,330,000 30/06/10 01/01/11 Balance Cash 48,000,000 1/10/10 1,000,000 30/6/10 - 30/06/11 49,000,000 47,855,000 Cash, etc. Acc. Depr. Bal. c/d 675,000 470,000 47,855,000 49,000,000

Land 30/06/10 1/8/10 Balance Cash 4,000,000 1/12/10 2,630,000 31/12/10 6,630,000 31/12/10 Bal. b/d 6,330,000 Cash Bal. c/d 300,000 6,330,000 6,630,000

Buildings 30/06/10 Balance 28,500,000

ACCT5001 S1 2010 Week 9 Self-Study Solutions.doc

2/05/2010

ACCT5001 S1 2010 Week 9 Self-Study Solutions.doc

2/05/2010

ACCT5001 S1 2010 PROBLEM SET A 8.3

Self-Study Solutions

Week 9

ACCT5001 S1 2010 PROBLEM SET A 8.7

Self-Study Solutions

Week 9

Donut Ltd 2010 Jan 1 Accumulated Depn Machinery Machinery (scrapping machinery fully deprd 31/12/09) June 30 Depreciation Expense Accumulated Depn Computer (update depreciation $49,000 x 1/7x 6/12) June 30 Cash Accumulated Depreciation Computer Gain on Disposal Computer (Sale of computer ) Calculation of disposal Cost (1/1/07) Accum. Depn Equipment [($49,000 x 1/7 x 3.5yrs)] Carrying value Cash proceeds Gain on disposal 24,500 31,000 $6,500 2009 2010 2011 $49,000 24,500 2009 2010 2011 31,000 24,500 6,500 49,000 3,500 3,500 2008 2009 2010 2011 $ 52,000 52,000 $ Balance date 31 December (a) Year

Erin Ltd

Calculation

Accumulated Depreciation 31/12

MACHINE 1 $128,000 X 10% = $12,800 $128,000 X 10% = $12,800 $128,000 X 10% = $12,800 $128,000 X 10% = $12,800 $12,800 25,600 38,400 51,200

MACHINE 2 $96,000 x 18.75% = $18,000 $78,000 x 18.75% = $14,625 $63,375 x 18.75% = 11,883 $18,000 32,625 44,508

MACHINE 3 500 X $2.00a = $1,000 3,500 x $2.00 = $7,000 4,500 x $2.00 = $9,000 $1,000 8,000 17,000

Dec 31

Depreciation Truck Accumulated Depn Truck ( [ ($27,000- $3,000) x 1/8] update deprn)

3,000 3,000 (b) 15,000 12,000 27,000 Year

$60,000 30,000 hours = $2.00 per machine hour

Dec 31

Accumulated Depn Truck (5yrs) Loss on Disposal Truck (scrapping of truck after 5 years)

Depreciation Calculation

Accumulated Depreciation 31/12

MACHINE 2 (1) 2009 $96,000 x 18.75% x 9/12 = $13,500 $82,500 x 18.75% = $15,469 $13,500

(2) 2010

$28,969

ACCT5001 S1 2010 Week 9 Self-Study Solutions.doc

2/05/2010

ACCT5001 S1 2010 Week 9 Self-Study Solutions.doc

2/05/2010

ACCT5001 S1 2010

Self-Study Solutions

Week 9

PROBLEM SET A 8.10 Barnaby Ltd & Jane Ltd

(a) Barnaby Ltd (1) Average age of PPE assets Jane Ltd

$1,420,000 3.3 years $420,000

$937,500 7.2years $130,000

(2)

Average useful life

$3,360,000 8 years $420,000

$2,000,000 15 years $130,000

(3)

Asset turnover ratio

$10,300,000 2.3times $4,480,000

$12,600,000 3.36times $3,750,000

(b)

Based on the asset turnover ratio, Jane Ltd is more effective in using assets to generate sales. Its asset turnover ratio is 50% higher than Barnaby Ltds ratio. Two factors that inhibit comparing the two companies are the wide differences in average useful life and age of the PPE assets. It is also not clear if both companies follow the same valuation model i.e., cost or revaluation.

ACCT5001 S1 2010 Week 9 Self-Study Solutions.doc

2/05/2010