Question

On September  1st 2018  the First Order Company purchased the following asset:
	Millenium Falcon  cost $1,000,000 life 9 years $10,000 salvage expected to be driven 495,000 miles
	In 2018 the Millenium Falcon was driven 55,000 miles
	in 2019 the Millenium Falcon was driven 89,000 miles
PART 1:  DETERMINE DEPRECIATION EXPENSE  FOR 2018 AND 2019 IF FIRST ORDER USES
	A) STRAIGHT LINE DEPRECIATION
	B) UNITS OF ACTIVITY (PRODUCTION) DEPRECIATION
	C) SUM OF THE YEAR'S DIGITS DEPRECIATION
	D) DOUBLE DECLINING DEPRECIATION
PART 2:  DETERMINE THE BOOK VALUE OF THE MILLENIUM FALCON ON DECEMBER 31, 2018 AND DECEMBER 31, 2019 IF FIRST ORDER USES
	A) STRAIGHT LINE DEPRECIATION
	B) UNITS OF ACTIVITY (PRODUCTION) DEPRECIATION
	C) SUM OF THE YEAR'S DEPRECIATION
	D) DOUBLE DECLINING DEPRECIATION
PART 3:  AT THE BEGINNING OF 2020 FIRST ORDER DETERMINES THAT THE MILLENIUM FALCON WILL ONLY LAST A TOTAL OF
7 YEARS INSTEAD OF THE ORIGINAL 9 YEARS.   DETERMINE DEPRECIATION EXPENSE FOR 2020 USING STRAIGHT LINE
PART 4:  [IGNORE PART 3 FOR THIS QUESTION]
	ON JANUARY 1ST OF 2020 FIRST ORDER SPENDS $100,000 INSTALLING A NEW HYPER-DRIVE ON THE MILLENIUM FALCON
	THIS NEW HYPER-DRIVE WILL ALLOW THE FALCON TO TRAVEL AT THE SPEED OF LIGHT AND THUS INCREASE ITS
	CAPACITY TO DELIVER PACKAGES TO THE OUTER-RIM TERRITORIES.  THE FIRST ORDER STILL BELIEVES THE
	MILLENIUM FALCON WILL LAST A TOTAL OF 9 YEARS AND STILL HAVE A SALVAGE OF $10,000
	4A:  MAKE THE FIRST ORDER'S JOURNAL ENTRY WHEN THEY PURCHASE/INSTALL THE HYPER-DRIVE
	4B:  MAKE THE JOURNAL ENTRY FOR 2020 USING STRAIGHT LINE DEPRECIATION
PART 5:  [IGNORE PARTS 3 AND 4 FOR THIS QUESTION]
	ON JANUARY 1ST 2020  THE FIRST ORDER EXCHANGED THE MILLENIUM FALCON AND $200,000 FOR A DEATH STAR
	THE DEATH STAR HAS A FAIR MARKET VALUE OF $920,000.
	MAKE THE JOURNAL ENTRY FOR THIS EXCHANGE OF ASSETS.

Answer 1

Part:1

A) Straight line method  

= (Cost of Asset- Salvage Value)/useful life of Asset

=($1,000,000-$10,000)/9

=$110,000

* The Depreciation for both 2018 and 2019 will be $110,000 under straight line method of Depreciation.

B) Units of Activity Depreciation method

=(Cost of Asset- Salvage Value)*No of units of Activity during the year/Total No of Units of Activity

For 2018 =($1,000,000-$10,000)*55,000/495,000

= $110,000

For 2019 =($1,000,000-$10,000)*89,000/495,000

= $178,000

C) Sum of Year`s Digits Method

= (Cost of the Asset - Salvae Value)*(Remaining useful life of the asset/Sum of the years Digits)

For 2018 = ($1,000,000-$10,000)*(9/45)

=$198,000

For 2019 =  ($1,000,000-$10,000)*(8/45)

=$176,000

4) Double Depreciation Method

= 2*Straight-line Depreciation Rate * Book Value at the Beginning of the year

For 2018 = 2*(11%)*$1,000,000

= $220,000

For 2019 = 2*(11%)*($1,000,000-$220,000)

= $171,600

Part 2:

Book Value as on 31 December 2018 and 2019

Book Value = Cost or Opening Value of Assets - Depreciation provided during the year

A) Under Straight line method  

As on 31 December 2018=$1,000,000 - $110,000

= $890,000

As on 31 December 2019= $890,000-$110,000

= $780,000

B) Under Units of Activity Method

  

As on 31 December 2018=$1,000,000 - $110,000

= $890,000

As on 31 December 2019 =$890,000-$178,000

= $ 712,000

C) Under Sum of Years Dep[reciation Method

As on 31 December 2018=$1,000,000 - $198,000

= $802,000

As on 31 December 2019 =$802,000-$176,000

= $ 626,000

D) Under Double Declining Depreciation Method

  

As on 31 December 2018=$1,000,000 - $220,000

= $780,000

As on 31 December 2019 =$780,000-$171,600

= $ 608,400

Part 3

As per Ind AS 8 Accounting policies, change in Accounting Estimates and Errors, if the useful life of an assets has been changed then the remaining value of the asset should be depreciated over the remaining useful life of the asset.

So Depreciation = [(Cost-Accumulated depreciation)-Salvage Value]/Remainng useful life of the Asset

= ($780,000-$10,000)/5

= $154,000

Part 4:

When any expenditure incurred on an asset enhances the Capacity of an asset, then such expenditures can be capitalised.

4A: Entry - Millenium Falcon A/c Dr. $100,000

To Cash/Bank A/c $ 100,000

4B: Entry - Depreciation A/c Dr. $124,285

To Millenium Falcon A/c $124,285

Note: Depreciation for 2020

= [(Net Value of Asset at the beginning+Additional capitalised amount)-Salvage Value]/remaining useful life of the Asset

=[($780,000+$100,000)-$10,000]/7

= $124,285

Part 5

Entry for the Exchange of Asset

Death Star A/c Dr. $ 980,000

To Millenium Falcon A/c $780,000

To Cash/Bank A/c $200,000     

The Assets Should always be capitalised at cost whatever may be the Fair Value.