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In: Accounting

Koh Brothers Limited acquired a factory for $54 million on June 30, 2013, to produce hospital...

Koh Brothers Limited acquired a factory for $54 million on June 30, 2013, to produce hospital machines and equipment. The company estimated the factory has a useful life of 25 years with $2 million in residual value at the end of its useful life. The company adopted a straight-line depreciation method for all its property, plant, and equipment. The factory’s market value appreciated steadily to $60 million at the end of the company’s financial year, December 31, 2013. On June 30, 2014, the factory was sold for cash at $59 million. Assume that Koh Brothers Limited rented out the factory to another unrelated party. Show the journal entries if the company account for the factory using the fair value method.

Solutions

Expert Solution

As per the given information, purchase value of factory =$ 54 million

useful  life of factory =25 years

   residual value at end = $2 million

Depreciation of factory as per straight-linemethod=

  purchasevalue- residualvalue/$

life of the property

=$ 54 million -$ 2million/25

=$2.04 million

Market value of the factory at the end of december 31st 2013 =$60 million

sale value of factory on 30th june 2014 = $ 59 million

Profit or loss on sale of factory = fair value on 30th june - actual cost on 30th june ( purchase value - deprection upto 30th june 2014 )

= $ 60 million - ($54 million -$2.04 million )

=$8.04 million

Journal Entries of Koh brothers limited

Date Particulars L/F      Debit amount   Credit amount           ( in millions dollars)

30-6-2013 factory a/c Dr. 54

To bank a/c   54    (being factory purchased)

30-6-2013 Unrelated party a/c Dr. 54

To factorya/c 54

(being factory rent outto unrelated party )

31-12-2013 Depreciation a/c Dr. 1.04

To factorya/c 1.04

( being depreciation charged on property

using straight linemethod for 6 months )

30-6-2014 depreciation a/c Dr. 1.04

To factory a/c 1.04

(being depreciation charged )

30-6-2014 bank a/c Dr. 59

To factory a/c 59

(being factory sold )

30-6-2014 factory a/c Dr 8.04

To profit and loss a/c 8.04

(being profit on sales transfered

to profit and loss a/c)

ekkarill92 answered 2 years ago
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