Question

Jikes Ltd has a policy of adjusting the net book value of its non-current assets to fair value if

the two values are significantly different. The only asset that required revaluing prior

to 1 July 2014 was land, which had been revalued upwards by $20 000. The following

selected account balances are taken from the general ledger of Jikes Ltd on 1 July 2014

DR CR
Land 320 000
Plant & Equipment 590 000
Accumulated depreciation – Plant & Equipment 60 000
Reserves/Surplus 500 000
Plant & Equipment is being depreciated on a straight-line basis over 5 years with an expected
residual value of $120 000.

The following events took place during the year ended 30 June 2015.
2014
1 July Purchased Motor Vehicles on credit for $65 000 plus $5 000 was paid in cash to
cover freight costs.
2 July Paid $15 000 to modify the new vehicles so that they were suitable for business
use. It is decided that unit of use method will be used to calculate depreciation
for the motor vehicles.
15 Oct Jikes Ltd spent a total of $1 300 for maintenance and repairs on the motor
vehicles.
2015
1 Jan Traded-in the existing plant and equipment for new plant and equipment costing
$920 000. Jikes Ltd received a trade-in of $200 000 on the old plant and
equipment with the balance paid in cash. The new plant and equipment is to be
depreciated on a straight-line basis over 4 years with an expected residual value
of $120 000.
30 June The motor vehicle is expected to have a useful life as measured in kilometres of
250 000km and a residual value of $25 000. At 30 June the motor vehicle had
travelled 50 000km.
After assessing the fair values of the non-current assets of the business, vehicles
need to be revalued to a fair value of $65 000 and land needs to be revalued to a
fair value of $400 000.
Required
a Prepare entries in general journal form to record the events described above.
Depreciation entries have not been recorded for any of the company’s assets in this
financial year. You will need to record any depreciation entries required during or at the
end of the year. [11 marks]
b Explain briefly the reason you have chosen to treat the payment for motor vehicles
maintenance and repairs on the 15 October as either an expense or an asset. [3 marks]
[Total for Question 5 = 14 marks]

Answer 1

1.

Below are the required journal entries. The calculations needed are also shown within the journal entries:

General Journal
Date	Account title and explanation	Ref	Debit	Credit
1-Jul	Land		$20,000.00
	Gain on revaluation			$20,000.00
	(To record appreciation in the value of land)
General Journal
Date	Account title and explanation	Ref	Debit	Credit
1-Jul	Motor vehicle		$70,000.00
	Accounts payable			$65,000.00
	Cash			$5,000.00
	(To record purchase of motor vehicle)
General Journal
Date	Account title and explanation	Ref	Debit	Credit
2-Jul	Motor vehicles		$15,000.00
	Cash			$15,000.00
	(To record improvements in motor vehicles)
General Journal
Date	Account title and explanation	Ref	Debit	Credit
15-Oct	Repairs and Maintenance expense		$1,300.00
	Cash			$1,300.00
	(To record repairs and maintenance expense)
General Journal
Date	Account title and explanation	Ref	Debit	Credit
1-Jan	Depreciation expense - Plant & Equipment (590000-120000)/5*1/2		$47,000.00
	Accumulated depreciaiton - Plant & Equipment			$47,000.00
	(To record depreciation expense - plant & equipment for half year)
General Journal
Date	Account title and explanation	Ref	Debit	Credit
1-Jan	Plant & Equipment		$920,000.00
	Accumulated Depreciation (47000+60000)		$107,000.00
	Loss on trade of plant & equipment - old (590000-107000-200000)		$283,000.00
	Plant & Equipment - Old			$590,000.00
	Cash			$720,000.00
	(To record trade-in of old plant and equipment and purchase of new plant and equipment)
General Journal
Date	Account title and explanation	Ref	Debit	Credit
30-Jun	Depreciation expense - Motor vehicle (85000-25000)X50000/250000		$12,000.00
	Accumulated depreciation - Motor vehicle			$12,000.00
	(To record depreciation expense - motor vehicle)
General Journal
Date	Account title and explanation	Ref	Debit	Credit
30-Jun	Land (400000-(320000+20000)		$60,000.00
	Loss on revaluation on motor vehicle (85000-12000-65000)		$8,000.00
	Motor vehicle			$8,000.00
	Gain on revaluation of land			$60,000.00
	(To record adjustments due to revaluation)

2.

On October 15^th, the payment made for the repairs and maintenance of the motor vehicles is to be treated as a revenue expenditure rather than a capital expenditure.

The reason for such treatment is that an expenditure is treated as a capital expenditure only when due to such expenditure, the value of the asset is increased. This is not true for the repairs and maintenance expense. As repairs and maintenance expense is used to maintain the current running condition of an asset and not for increasing its value. Hence the repairs and maintenance expense is treated as an expense and not an asset.