Question

he following transactions appeared in the accounting records of GT Gold during the year. Stella comes to your office, and wants to understand how we should be entering these into the accounting system for the December 31 year-end. Please summarize these transactions using the metric below (i.e. show how the change in Assets, Liabilities or Shareholder Equity should be shown). Show your calculations.

1. On January 1, GT purchased a mining machine from Japan. The machine cost CAN$1,350,000 and had to be shipped to Vancouver. Once it arrived in Vancouver, there were customs duties of CAN$50,000. The machine and its unassembled components were placed on a train and assembled on site. The cost of the freight was CAN$10,000, and a friendly mechanic named Mitch assembled the machine components once it arrived at its destination in Northern BC. GT paid Mitch $2,000.

1. One week into the machine operating, a cable snapped, and Mitch had to replace it. Mitch recommended that we get a better cable that can lift more weight. It would make the machine way better Mitch said. The new cable cost $12,000.

1. GT employs a double declining method depreciation, assuming a salvage value of 15,000, and 6 year life. Stella wants to know what to book for depreciation for the year.

1. On March 31 the next year, a competitor firm to GT offered to buy the mining machine for $2,000,000. GT took the offer and sold the machine on the same day. Assume for the purpose of this point only that accumulated depreciation on this asset at the time of sale was $200,000. Stella wants to know how to account for the sale. .

1. GT currently has $2,000,000 in its receivables on its books. Last year Stella booked $100,000 on the AFDA account. This year, you estimate that 3.5% of receivables are uncollectible. Stella wants to know what to book this year .

1. After making the adjustment in point 5, Stella finds out that one of the accounts is uncollectible. They owe GT $65,000. Please help Stella with the adjustment .

Answer 1

Machine Cost	1350000 CAN$
Custom Duties	50000 CAN$
Freight Cost	10000 CAN$
Assembly Cost	2000 CAN$
Cable Breaked	12000 CAN$
Salvage Value:	15000 CAN $
Life		6 Years
Accumulated Depreciation	200000 CAN $
Total Cost of the Asset to be Booked As Machinery is
1350000 CAN$ + 50000 CAN $+ 10000 CAN $ + 2000 CAN $ = 1412000 CAN $
Here all cost is included or capitalised because
1. Custome Duty because credit for the same is not available in other taxation laws.
2. Freight Cost, cost incurred to bring the machine at factory need to be capitalised
3. Further cost incurred to make the machine in Ready for use.
4. Cable Breaked can not increase the producion level, hence charged to P and L a/c rather than capitalising the same.
Book Value	1412000 CAN $
Accumulated Dep:	200000 CAN $
Carrying Value	1212000 CAN $
Sale Value	2000000 CAN $
Profit on Sale	788000

Gross Value of AR			2000000 $
Less: AFDA ( Allownace for Doubtful accounts)		100000$
Book Value			1900000 $
Book Value :			1900000 $
Add: Old Provision			100000$
Less: New Provision			70000$
Current Year Book Value			1930000$
Less: Bad Debts further			65000$
Book Value to be reported			1865000$

Here Old allownace is added becasue as per new estimate rate only 3.5% is required rather than 100000$. Secondly further reduction of bad debts of 65000$ becasue they are not collectible at any how, and provision of 3.5% is other than that.