Question

On 1 November 2018, ACP imported a new multi-colour printing machine (No-10) for $68,300 cash. In addition, ACP paid $6,500 of import duties and $1,200 of transport costs for the machine on 3 November 2018. The useful life of the machine and the residual value were estimated to be 8 years and $7,000 respectively. ACP decides to depreciate the machine using a straight-line basis. The company’s financial year-end is 30 June.

On 30 June 2019, Auckland City Printers revalued the machine to $73,000 following a review by an independent valuer.

On 1 July 2019, due to the changes in technology caused the company to revise the estimated useful life of the printing machine from 8 years to 6 years. On the same day, it was also determined that the residual value of the machine is nil.

On 30 June 2020, the printing machine has been revalued at a fair value of $55,200.

On 30 September 2020, the accountant believes that the value of the printing machine has declined substantially. The value in use is nil, but it is estimated that the company may be able to sell the printing machine for $35,000 to a purchaser and the costs associated with making the sale would be $2,000.

On 1 October 2020, Auckland City Printers sold the printing machine for $32,000 cash.

Required:

(a)   Prepare relevant journal entries to record the depreciation expense for the year ended 30 June 2019 and revaluation entries on 30 June 2019.

(b)   Prepare relevant journal entries to record the depreciation the year ended 30 June 2020 and revaluation entries on 30 June 2020.

(c) Explain the accounting treatment for the transaction on 30 September 2020 in respect of the printing machine with reference to the relevant accounting standards. Prepare the journal entry required.  

(d) Prepare the journal entry required on 1 October 2020 to reflect the disposal of the printing machine. Show all workings.  

Answer 1

1) VALUE OF ASSETS = 68300 $

+ IMPORT DUTIE = 6500 $

+ TRANSPORT COST = 1200 $

TOTAL VALUE = 76000 $

DEPRICIATION = VALUE OF ASSET - RESIDUAL VALE / USEFUL LIFE

= 76000-7000/ 8 = 8625 PER YEAR ( 8625 /12 ) 718 .75 PER MONTH

PURCHASE DATE = 1 NOV 2018 USED IN 2019 JUST FOR 8 MONTH THAT IS FROM NOVEMBER TO JUNE

DEPTICIATION FOR THE YEAR JUNE 2019 - 718.75*8 =5750  

JOURNAL ENRTY'

DEPRICIATION A/C DR. 5750
TO PRINTING MACHINE 5750

  

REVALUATION = CARRYIUNG AMOUNT = 76000-5750 = 70250

FAIR VALUE = 73000

REVALUE = 2750

PRINTING MACHINE A/C DR 2750 $

TO REVALUATION REERVE A/C 2750 $

2) DEPREIATION AMOUNT = 73000 - 7000 = 66000/64 * 12 = 12375 $

DEPRICIATION A/C DR . 12375 $

TO PRINTING MACHINE A/C 12375 $

FAIR VALUE = 55200

CARRYING AMOUNT = 73000-12375 = 60625

FAIR VALUE DECREASE = 60625-55200 = 5425 $

REVALUATION DECREASE A/C DR 2750 $

PROFIT LOSS A/C DR 2675 $

30 SEPTEMBER

DEPRICIATION OF 3 MONTH = 55200-7000 =48200/52*3 =2780 $
  

DEPRICIATION A/C DR. 2780 $

TO PRINTING MACHINE A/C 2780 $

AS PER IND AS 36 IMPAIRMENT OF ASSETS

ASSET WILL BE LOWER OF CARRYING AMOUNT AND RECOVERABLE AMOUNT

HOW TO CALCULATE RECOVERABLE AMOUNT = IT WILL BE HIGHER OF VALUE IN USE AND FAIR VALUE LESS COST TO SELL

VALUE IM USE = NIL

FAIR VALUE LESS COST TO SELL = 35000-2000 =33000 $

RECOVERABLE AMOUNT = 33000 $

IMPAIRMENT LOSS = CARRYING AMOUNT -RECOVERABLE AMOUNT

= 19420 $ ( 52420 $ - 33000)

JOURNAL ENTRY

IMPAIRMENT LOSS A/C DR.19420 $

TO PRINTING MACHINE A/C 19420 $

PROFIT & loss A/C DR 19420 $

TO IMPAIRMENT LOSS A/C 19420 $

  

4) 1 OCTOBER

JOURNAL ENTRY

BANK A/C DR 32000 $

PROFIT & LOSS A/C DR .1000 $

TO PRINTING MACHINE A/C 33000 $