Question

Question 1
Part a
On January 1, 2018, Iron Limited purchased a piece of equipment for production of goods. The purchase price of the equipment was $670,000. Iron Limited paid on the date of purchase by the issue of ordinary shares. Iron Limited estimated that the equipment has an expected useful life of 4 years with a residual value of $30,000 on December 31, 2021. On February 15, 2020, Iron Limited disposed of equipment for cash amount of $358,000.

Iron Limited adopts revaluation model for measuring equipment. For items with revaluation, it is Iron Limited’s policy to eliminate accumulated depreciation against gross carrying amount of asset in a revaluation. There is no need to transfer the excess depreciation from revaluation reserve to retained earnings.

Iron Limited usually depreciates equipment of similar type on a straight line basis. Full year of depreciation is to be charged in the year of purchase and none to be charged in the year of disposal.

Iron Limited revalued the equipment on both December 31, 2018 and December 31, 2019; the revalued amounts were $528,000 and $370,000 respectively.

Required
In accordance with the requirement of HKAS 16 `Property, Plant and Equipment’, prepare all journal entries that Iron Limited should make relating to the equipment:

1. For the year ended December 31, 2018 and 2019.

2. For the disposal of the equipment on February 15, 2020 (5 marks）

Part b

ABC Ltd is a software producing entity, it recorded a software license in its books $5.65 million on 1 January 2017, it represented the development cost of software owned by it and generated revenue correspondingly. The price $3.5 million offered by interested buyer of the license is regarded as valid market price. Owing to the loss of customers and upgrading the software, it needs to prepare the cash flow projection for the software license in coming 4 years and calculate the recoverable amount at discount rate of 8%, the forecasted net cash inflows for the year ended 31 December 2017 up to 31 December 2020 were formulated as follows:

Year Net cash inflow (in $000)

2017 250
2018 750
2019 1,500
2020 1,750

The expected disposal value of the software license is $800,000 as at 31 December 2020

Required
With reference to above information, determine whether the impairment losses were required to the software license on 1 January 2017 in accordance with HKAS 36. Prepare relevant journal entries if necessary.

Part c

GHI Ltd owned a building worth $1,386,000 purchased at 1 January 2016, estimated useful life for 30 years, and using straight line method for depreciation. After the usage of 4 years, at the beginning of 1 January 2020, GHI Ltd re-assessed the useful life of the building, after the professional valuer advise, the remaining useful life available should be 48 years.

Required
Calculate the depreciation expenses of above building as at 31 December 2020 and show the relevant journal entry. All workings must be shown

Answer 1

Equipment purchased on January 1, 2018

Purchase price = 670000

Life = 4 years

Residual value = 30000

Depreciation per year = (670000-30000)/4

= 160000

Book Value as on 31 Dec, 2018 =                             510000

(670000-160000)

Revalued Amount             =                                      528000

Amount t/f to Revaluation Reserve=                      18000

Journal Entries as on 31^st Dec, 2018:

Accumulated depreciation A/c                           To Equipment A/c (Being Dep. Charged)	160000               160000
Equipment A/c                            To Revaluation Reserve A/c (Being Asset revalued)	18000                18000

Depreciation for the year 2019= (528000-30000)/3

= 166000

Book Value as on 31 Dec, 2019 =                             362000

(528000-166000)

Revalued Amount             =                                      370000

Amount t/f to Revaluation Reserve=                      8000

Journal Entries as on 31^st Dec, 2019:

Accumulated depreciation A/c                           To Equipment A/c (Being Dep. Charged)	166000               166000
Equipment A/c                            To Revaluation Reserve A/c (Being Asset revalued)	8000                8000

Depreciation for the period Jan 1,2020 – Feb 15,2020 = (370000-30000)/2 *1.5/12

= 21250

Book Value as on Feb 15, 2020 =                             348750

(370000-21250)

Sale Amount             =                                               358000

Profit                         =                                               9250

Journal Entries as on Feb 15,2020:

Accumulated depreciation A/c                           To Equipment A/c (Being Dep. Charged)	21250               21250
Bank A/c                            To Equipment A/c                            To Profit & Loss A/c (Being Asset sold)	358000               348750                 9250

Part B

Software purchased on January 1, 2017

Purchase price = 5650000

Recoverable Value = Value in use or FVLCTD, whichever is higher

Value in use= 3939560

Year	Cash Inflows	Discount Rate @ 8%	Discounted value (‘000)
1	250	0.93	231.48
2	750	0.86	643.00
3	1500	0.79	1190.75
4	2550	0.74	1874.33
			3939.56

FVLCTD = 3500000

Recoverable Amount = 3939560

Impairment Loss = Purchase Price – Recoverable Amount

= 5650000- 3939560

= 1710440

Journal Entries as on Jan 1, 2017:

Impairment loss A/c                            To Software (Being loss recognised)

1710440             1710440

Part C:

Building purchased on January 1, 2016

Purchase price = 1386000

Life = 30 years

Residual value = 0

Depreciation per year = (1386000-0)/30

= 46200

Purchase Price as on 31 Dec, 2016=                        1386000

Depreciation for 4 years (46200 *4)             =          184800

Book value as on Jan 1, 2020                      =            1201200

Change in Life

Life = 48 years

Depreciation per year as at 31 Dec, 2020 = (1201200-0)/48

= 25025

Journal Entries as on Dec 31, 2020:

Depreciation A/c                            To building A/c (Being depreciation charged)

25025             25025

Hope u find the answer useful