Question

On 21 June 20x1, the Large Mart store in Armidale ordered a new company car for its customer service department (called the “Nerd Herd”) from a car dealer in Brisbane for $30,000. The car was delivered to Large Mart on 20 June 20x1. On that day, Large Mart sent the car to one of its suppliers who painted a large “Large Mart” sign on the side of the car. The Large Mart sign on the car cost $500 and was paid in cash on 25 June 20x1. The car was returned to Large Mart on 25 June 20x1 and Large Mart started to use the car on that day. Large paid for the car using the CEO’s credit card, and the car dealer charged a transaction fee of $450 for the use of that credit card. Large Mart will use the new car for 8 years and depreciate the car using the straight-line depreciation. Large Mart expects that the car will have a residual value of zero at the end of its useful life. Required: a) Determine if the cost of painting the “Large Mart” sign on the car and the credit card payment surcharge influence the cost of the car when it is first recognised as an asset in the Large Mart accounts, AND provide an in-depth reflection of the reasons that you have used to make this decision. b) Provide all journal entries that are necessary in the books of Large Mart to account for the purchase of the car during June 20x1 – ASSUMING that Large Mart records all Credit Card transactions as “Cash at Bank” payments. (1 mark) c) Provide all journal entries that are necessary in the books of Large Mart to account for the depreciation of the car for the month of June 20x1, AND provide a detailed outline of your calculations.

Answer 1

a) All costs incurred on an asset to bring it into current state would be eligible for capitalization. Large Mart started to use the car only after painting the "Large Mart" sign on the car. Hence, the cost incurred on painting the sign as well as surcharge on credit card payment can be added to the cost of the asset.

b and c) Journal entries to record purchase of asset and depreciation:

(Amount in $)

Date	Particulars	Debit	Credit
21 June 20X1	Car A/c To Brisbane Car Dealer's A/c (Being car purchased and delivered)	30,000	30,000
25 June 20X1	Car A/c To Cash At Bank (Being sign painting charges and credit card transaction fee incurred)	950	950
25 June 20X1	Depreciation A/c To Accumulated Depreciation on car A/c (Being depreciation on car booked for the month of June 20X1)	64	64

Depreciation calculation:

cost to be capitalized = $ 30,000 + $ 950 = $ 30,950

salvage value - $ 0

Useful Life = 8 years

Number of days of use in June 20X1 = 25 June 20X1 to 30 June 20X1 = 6 days (including 25th June)

Depreciation to be charged per year = Cost of asset - salvage value = 30,950 - 0 = $ 3,869 (approx.)

No. of years 8

Depreciation for June 20X1 = 3,869 * 6/365 = 64 (approx.)