Question

CASE:

BIRD'S EYE VIEW LTD.

Macarthur Graham was a retired military pilot who had established Bird’sEyeViewLtd., an aerial touring company that flew over the Niagara Escarpment. Graham had just completed his ninth fiscal year of operations (ending August 31, 2012), and needed to account for all the long-lived asset transactions that had occurred during the past fiscalyear.

HOT AIR BALLOON

For the past eight years, Graham had offered tours from his hot air balloon, which he had purchased for $120,000 when he opened his business. There was now $68,344 of accumulated depreciation. The hot air balloon had an estimated useful life of 10 years and a residual value of $15,000, and it was depreciated using the declining-balance method.

Graham had enjoyed the balloon rides as part of his retirement activities, but he had also been working on obtaining a helicopter pilot’s licence. He had noticed that helicopter rides, in general, were more popular, and he thought the heated cabin in the helicopter would contribute to more stable sales year-round. For this reason, on February 2, 2012, he traded in his hot air balloon towards the purchase of a helicopter.

HELICOPTER

The cost of a used helicopter was still significantly more than that of the hot air balloon. Jeff Meyers, a retiring contract delivery provider for a mining operation, agreed to sell his helicopter to Graham for a price of $840,000 in exchange for the hot air balloon and $800,000 cash. The helicopter had 2,000 flight hours of life remaining and no residual value. Graham used the helicopter for 40 hours during the remainder of the year.

STORAGE FACILITY

On September 1, 2011, Graham negotiated to purchase the storage facility he had been renting previously for $86,000 cash. The facility would be depreciated using the straight-line method and had an expected useful life of 20 years, with an estimated residual value of $25,200. At the end of fiscal 2012, the building had an appraisal value of $78,600.

BUS

Graham had also purchased a used bus to transport people from Owen Sound to the air strip, since the Niagara Escarpment was a popular vacation spot for Owen Sound residents. The bus was purchased for $70,000 on September 1, 2008, and had an estimated residual value of $5,000 and a useful life of four years. At the beginning of the fiscal year, the bus had accumulated depreciation of $61,250. Graham used the double-diminishing-balance method to depreciate the bus.

RESEARCH AND DEVELOPMENT

In anticipation of possibly purchasing a helicopter, Graham had commissioned a family friend to design a camera that he could mount on the bottom of the chopper. Graham envisioned this camera being controllablefromatablet,whichcustomerscouldusetotakepicturesduringtheflight.Grahamcouldthen sell the pictures to the customers after the flight concluded. In addition, Graham thought he could sell the designforthecameraandproducemoreunitstoselltofellowpilotsinotherregions.

He paid the designer $500 per month to work on the project, starting January 5, 2012. On July 3, 2012, Graham received a call from the designer saying that he had solved the majority of the preliminary research problems and the two decided to start development. They determined that these costs met the criteria for development. The part-time designer estimated that development would not be completed until sometime next fiscal year.

Required:

As Macarthur Graham, working asset by asset, post all required transactions for the financial year ending August 31, 2012.

Answer 1

There are various assets in the questions and some of them are being exchanged as well as being developed for professional use. The hot air balloon has been in operation for 8 years and was being depreciated accordingly. This asset has now been exchanged with the helicopter. The price of purchase of the helicopter entails the price of the hot air balloon as well as the said asset is being given up. The helicopter costed $840,000 but it only entailed a outflow of cash of $8,00,000 as $40,000 is towards the cost of the balloon. The discount on the purchase price shall be treated as the sale value of the balloon and the appropriate profit or the loss shall have to be recognized in the books of accounts. The helicopter shall be depreciated using the flight hours as the appropriate method.

For the camera that is being developed there shall be capital work in progress account that shall be created in the books. However one should need to recognize that the camera as an asset only when the asset comes into use and is installed on the helicopter. A patent shall also be developed and the resultant sales shall follow. But we shall restrict the accounting only till the development of the asset in the books for now.

Hence the journal entries are as follows:

JOURNAL IN THE BOOKS OF BIRDS EYE VIEW LTD.
SR NO.	PARTICULARS					LF	DEBIT	CREDIT
1	Accumalated Depreciation on Balloon A/C						68,344
		To Balloon Asset Account						68,344
	( Being the value of the accumalated depreciation
	transferred to the asset account to get to the WDV.
	The balance in the Balloon asset a/c now is $51,656)
2	Helicopter Asset A/C						8,40,000
	Loss on sale of Balloon A/C						16,656
		To Cash A/c						8,00,000
		To Balloon Asset A/C						51,656
	( Being the balloon exchanged for the helicopter and
	balance ammount has been settled in cash.)
3	Depreciation on Helicopter A/C						16,800
		To Accumalated Depreciation on Helicopter						16,800
	( Being the helicopter with remaining flight life of 2000
	hours out of which used for 40 hours and hence
	depreciated accordingly.)
4	Storage facility a/c						86,000
		To Cash						86,000
5	Depreciation on Storage Facility A/c						3,040
	To Accumalated Depreciation on Storage facility							3,040
	( Being depreciation provided on SLM and recorded)
6	Dimunition in value of Storage Facility						7,400
		To Storage Facility A/C						7,400
	(Being the difference between the book value and the
	appraisal value recorded. Students note that this entry
	actually ensures that the value has reduced permenantely
	If the assumption of temporary dimunition is made then
	there is no need to pass this entry.)
7	Capital work in progress a/c						500
	to Cash a/c							500