Question

On 1 July 2018 Fraser Ltd acquired an item of equipment with an acquisition cost of $400,000. The equipment can be used for 8 years. On 30 June 2019, the end of financial year, the fair value of the equipment was $357,000. The equipment was sold for $330,000 on 1 January 2020. Non-current asset is depreciated evenly over the useful life and has no residual value. The company uses the revaluation model to record non-current asset. The income tax rate is 30%. Ignore GST.

Required: Prepare relevant journal entries to record non-current asset in 2018/2019 and 2019/2020 financial years in accordance with AASB 116 and AASB 136. (Narrations are required, tax effect entries are required.)

Answer 1

SOLUTION:

Calculation of Depreciation:

Equal benefits all over the year hence straight line method of depreciation.

Cost of Equipment = $400,000

Useful life = 8 years

No Residual Value

Depreciation = 400,000 / 8 = $ 50,000

Equipment acquired on 1 July 2018	$ 400,000
Less : Depreciation	$ 50,000
Balance on 30 June, 2019	$ 350,000
Revalued Amount on 30 June, 2019	$ 357,000
Revaluation Profit	$ 7,000

Calculation of Profit or Loss on sale of Equipment:

Sold on 1 January, 2020	330,000
Less: Balance as on 30 June, 2019	(357,000)
Loss on Sale	(27,000)

Journal Entries in the Books of Fraser Ltd.

DATE	PARTICULARS	DEBIT	CREDIT
1-July-18	Equipment A/C	400,000
	To Bank A/C		400,000
	(Being Equipment purchased)
30-Jun-19	Depreciation A/C	50,000
	To Provision for Depreciation A/C		50,000
	(Being Depreciation provided)
30-Jun-19	Profit & Loss A/C	50,000
	To Depreciation A/C		50,000
	(Being Depreciation carried to P&L A/C)
30-Jun-19	Equipment A/C	7,000
	To Revaluation Reserve A/C		7,000
	(Being Revaluation done for Equipment)
1-Jan-20	Bank A/C	330,000
	Provision for Depreciation A/C	50,000
	Profit & Loss A/C (loss on Sale)	27,000
	To Equipment A/C		407,000
	(Being Equipment sold & loss on sale accounted)
	Total	914,000	914,000