In: Accounting
QUESTION 3
The end of ABC’s reporting period is 30 April 2018. During the past
two years, the following
transactions transpired relating to a machine:
On 15 June 2016 ABC orders a one-of-a-kind machine at a price of
N$800 000 to
manufacture extra small MP3 players and paid in cash. The machine
was delivered to ABC’s
factory on 28 July 2016 and was installed and ready for use on 1
August 2016. The first
products were manufactured on 16 August 2016.
The following costs (excluding VAT) were incurred to get the
machine ready for use and was
expensed to an “Asset installation cost” account:
N$
Import duties (non-recoverable) 150 000
Testing costs (to ensure that the machine was fully operational
before
starting actual production)
20 000
Advertising costs of new product 50 000
Installation costs 30 000
The depreciation policy for the machine is to write off such assets
on a straight line basis at
20% per year.
By 30 April 2017, management realised that there was not really a
great demand for the
extra small MP3 players and that sales were much lower than
expected. They realised that
there was no active market for the machine and were unable to
determine its fair value. They
estimated that they would generate the following cash flows from
the use of the asset in the
future:
Year 1 Year 2 Year 3
Sales of MP3 players 390 985 355
993
288 554
Maintenance costs -20 385 -22
378
-28 375
Operational costs -40 567 -43
058
-46 129
Net cash inflows 330 033 290
557
214 050
Present value factors for a discount rate of 10% are as
follows:
Year 1 0,909
Year 2 0,826
Year 3 0,751
(If you use these factors for calculations, round off to the
nearest NAD).
Based on the information above, early in May 2017 management
estimated that the machine
only had a remaining useful life of 3 years and that the residual
value at the end of such life
would be N$100 000. At the end of April 2018, management’s view was
confirmed that there
was virtually no demand for the MP3 players. They had already
started negotiating a deal
Page 14 of 14
with a Nigerian buyer for a price of N$680 000. It is estimated
that selling costs will be
N$30 000. You may assume that the requirements in order to classify
this machine as a noncurrent
asset held for sale have been met.
REQUIRED
Recognise all the transactions from the information above through
journals with proper
narrations in ABC’s financial records for the period ending 30
April 2017 and 30 April
2018.(14)
Date |
Account titles and explanations |
Debit ($) |
Credit ($) |
15-Jun-16 |
Advance for machine |
800,000.00 |
|
Bank |
800,000.00 |
||
(Being advance for the machine paid) |
|||
28-Jul-16 |
Machine |
800,000.00 |
|
Advance for machine |
800,000.00 |
||
(Being the machine received) |
|||
Import duties |
150,000.00 |
||
Testing costs |
20,000.00 |
||
Installation costs |
30,000.00 |
||
Advertisement |
50,000.00 |
||
Bank |
250,000.00 |
||
(Being cash payment made for the above) |
|||
Machine |
200,000.00 |
||
Import duties |
150,000.00 |
||
Testing costs |
20,000.00 |
||
Installation costs |
30,000.00 |
||
(Being the expenditures capitalized) |
|||
30-Apr-17 |
Depreciation (1000000 x 20%) |
200,000.00 |
|
Machine |
200,000.00 |
||
(Being depreciation charged) |
|||
Impairment loss {(1000000 - 200000) - 700751.63} |
99,248.37 |
||
Machinery |
99,248.37 |
||
(Being impairment loss recognized against the machine) |
|||
Profit and loss account |
349,248.37 |
||
Impairment loss {(1000000 - 200000) - 700751.63} |
99,248.37 |
||
Depreciation (1000000 x 20%) |
200,000.00 |
||
Advertisement |
50,000.00 |
||
(Being expenditures recognized in profit and loss account) |
|||
30-Apr-18 |
Depreciation (1000000 x 20%) |
200,000.00 |
|
Machine |
200,000.00 |
||
(Being depreciation charged) |
|||
Machine (650000 - 600000) |
50,000.00 |
||
Profit and loss account |
50,000.00 |
||
(Being appreciation in the value of machine recognized) |
|||
Profit and loss account |
200,000.00 |
||
Depreciation (1000000 x 20%) |
200,000.00 |
||
(Being the depreciation charged against the profit and loss account) |
Notes:
Present value of the machine as on 30th April, 2017 |
||||
Year 1 |
Year 2 |
Year 3 |
||
Sales |
390,985.00 |
355,993.00 |
288,554.00 |
|
Less: Maintenance costs |
20,385.00 |
22,378.00 |
28,375.00 |
|
370,600.00 |
333,615.00 |
260,179.00 |
||
Less: Operational costs |
40,567.00 |
43,058.00 |
46,129.00 |
|
Net cash inflows |
330,033.00 |
290,557.00 |
214,050.00 |
|
PV factors |
0.909 |
0.826 |
0.751 |
|
Present value of cash inflows |
300,000.00 |
240,000.08 |
160,751.55 |
700,751.63 |
Value of the machine in use as on 30th April, 2017 |
700,751.63 |
|||
|
||||
Expected selling price of the machine as at 30th April, 2018 |
680,000.00 |
|||
Less: Selling expenses |
30,000.00 |
|||
Net selling price of the machine |
650,000.00 |