Question

question 1 Prepare the journal entries for the following independent situations: a) Records Plus paid for several patents on January 1, 2020 for a total price of $300,000. The patents have a legal life of 25 years and are expected to provide revenues for the next 12 years. Record the purchase on January 1, 2020 and the annual depreciation on December 31, 2020. b) January 1, 2020, PG Mower Ltd. paid $800,000 to acquire Garden Man Ltd. Garden Man had assets valued at $2,300,000 and liabilities of $1,650,000. Record the purchase in PG Mower Ltd.’s records.

question 2 Ivan Manufacturing purchased equipment and a delivery van on January 1, 2020. The equipment cost $95,000 and has an estimated useful life of 8 years with a residual value of $10,000.

The delivery van cost $125,000 and has an estimated life of 5 years or 200,000 kilometres and a residual value of $20,000. The delivery truck is expected to be driven 25,000 and 50,000 kilometres in 2019 and 2020, respectively.

Required

1 Ivan has decided to depreciate the equipment using either the straight-line method or double declining method. Calculate depreciation for the equipment for 2020 and 2021 using the straight-line method AND the double declining method.

2 Ivan has decided to depreciate the delivery van using the units-of-production method

calculate depriciation for the delivery of truck for 2020 and 2021

Answer 1

SOLUTION TO Q2

REQUAREMENT 1

COMPUTATION OF DEPRICIATION UNDER STRAIGHT LINE METHODE

FORMULA = (COST VALUE - RESIDUAL VALUE) / NUMBER OF ESTIMATED LIFE

DEPRICIATION FOR EQUIPMENT FOR 2020 & 2021

DEPRICIATION PER YEAR = $ ( 95000 - 10,000) / 8YEARS = $ 4722

2020's DEPRICIATION= $ 4722

2021 's DEPRICIATION = $ 4722

DEPRICIATION FOR DELIVERY TRUCK FOR 2020 & 2021

DEPRICIATION PER YEAR = ( 125,000 - 20,000 ) / 5 YERAS = $ 21,000

2020's DEPRICIATION = $ 21,000

2021 's DEPRICIATION = $ 21,000

NOTE - DEPRICIATION EXPENSES UNDER STRAIGHT LINE METHODE ARE CONSTANT OR EQUAL EVERY YEAR. THERE IS NO CHANGE IN THE CORROSPONDING YEAR'S DEPRICIATION EXPENSES.

COMPUTATION OF DEPRICIATION UNDER DOUBLE DECLINE METHODE

FORMULA = ( COST VALUE * % DEPRICIATION PER YEAR)

STEP 1. COMPUTATION OF % OF DEPRICIATION PER YEAR

= ( 100 / NO.OF ESTIMATED LIFE) * 2

% FOR

EQUIPMENT= ( 100 / 8) * 2 = 25%

DELIVERY VAN = ( 100 / 5) *2 = 40%

STEP2 - COMPUTATION OF DEPRICIATION

EQUIPMENT

2020 = ( 95000 *25 %) = $ 23,750

2021 = (95000 - 23750) * 25% = $ 17,812

DELIVERY VAN

2020 = ( 125,000 * 40%) = $50,000

2021 = (125,000 - 50,000) * 40% = $ 30,000

NOTE- DEPRICIATION EXPENSES FOR CORROSPONDING YEARS ARE CHANGED. IT MEANS THAT FOR INITIAL YEAR THE DEPRICIATION EXPENSES SHOULD CALCULATED ON THE INITIAL VALUE BUT AFTER THAT IT WIL BE CALCULATED ON THE WRITTEN DWON VALUE . WRIITEN DWON VALUE = ( PURCHASE PRICE - DEPRICIATION).

REQUAREMENT 2

DEPRICIATION UNDER UNIT OF PRODUCTION METHODE

FORMULA = ( COST VALUE - RESIDUAL VALUE ) / NO OF KMS RUN DURING THE ESTIMATED LIFE

STEP 1 - COMPUTATION OF DEPRICIATION PER KM

= ( 125,000 - 20,000) / 200,000 KMS

= $ 0.525 PER KM

STEP 2 DEPRCIATON FOR THE YEAR 2020 & 2021

FORMULA = ( DEPRICIATION EXPENSE PER KM * KM RUN DURING THE YEAR)

2020 = ( $ 0.525 * 25,000 KM) = $ 13,125

2021 = ( $ 0.525 * 50,000 KM) = $ 26,25

PLEASE NOTE CAREFULLY THAT IN THE PROBLEM THE EXPECTED RUN IS GIVEN 2019 & 2020. BUT ITS PRACTICALLY HAS NO SENSE BECAUSE IF THE TRUCK PUCHASE IN THE YEAR 2020 SO HOW CAN IT RUN IN 2019. SO IN THIS WE ASSUME THAT THE EXPECTED RUN IN 2020 = 25000 KM & 2021 = 50,000 KM.

SOLUTION TO Q 1

PART A

JOURNAL ENTRIES FOR JANUARY 1

DATE	ACCOUNT NAME	DEBIT($)	CREDI($)
JAN1	PATENT	300,000
	CASH		300,000
	(BEING PATENT PURCHASED)

JOURNAL ENTRY FOR DECEMBER 31

ANNUAL DEPRICIATION OF PATENT = ($ 300,000 / 25 YEARS) = $ 12,000 PER ANNUAM

DATE	ACCOUNT NAME	DEBIT($)	CREDI($)
DEC31	DEPRICIATION EXPENSE ON PATENT	12,000
	ACCUMULATED DEPRCIATION ON PATENT		12,000
	( BEING DEPICIATION TRANSEFERD TO ACCUMATED DEPRICIATION ACCOUNT)
DEC31	DEPRICIATION EXPENSE ON PATENT	12,000
	PATENT		12,000
	( BEING DEPRRICIATION CHARGED ON PATENT)

PART B

COMPUATATION OF PURCHASE NET WORTH

NET WORTH = [ TOTAL ASSTES - LIABILITIES(EXCEPT EQUITY)] = (23,00,000 - 16,50,00) = $ 650,000

COMPUTATION OF GOODWILL

= ( PURCHASE CONSIDERATION - NET WORTH)

= ( $800,000 - 650,000)

= $ 150,000 (AS THE COMPANY PAID EXTRA THAT WILL TREAT AS PURCHASED GOODWILL)

JOURNAL ENTRY IN THE BOOKS OF PG Mower Ltd.’s

DATE	ACCOUNT NAME	DEBIT($)	CREDI($)
JAN 1	PURCHASE CONSIDERATION	650,000
	GOODWILL	150,000
	CASH		800,000

NARATION -(BEING PURCHASED THE Garden Man Ltd. )