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QUESTION 3 (14 marks) The end of ABC’s reporting period is 30 April 2018. During the...

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)

Solutions

Expert Solution

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


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