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In: Accounting

Timber Merchants Limited supplies fencing materials and landscaping products in Australia. The following transactions relate to...

Timber Merchants Limited supplies fencing materials and landscaping products in Australia. The following transactions relate to a fencing machine that was purchased by the company on 1 July 2017. Timber Merchants Limited is registered for GST and the GST rate is 10%.

1 July 2017

On 1 July 2017, a new fencing machine was purchased for $88,000 (including GST). The fencing machine is depreciated using the straight-line depreciation method and the fencing machine has an estimated useful life of 4 years with a residual value of $4,000.

1 July 2018

1 July 2020

On 1 July 2018, a special digging tool was installed to the fencing

machine at a cost of $9,900 (including GST) to improve its productivity.

With the installation of the digging tool, the company estimates that the

residual value of the fencing machine at the end of its useful life will be

$7,000, with no change to its estimated useful life.

The fencing machine was sold for $27,500 (including GST).

REQUIRED:

c) Prepare the journal entries to record the installation of the digging tool on 1 July 2018.

d) Prepare the journal entry to record the sale of the fencing machine on 1 July 2020.

Solutions

Expert Solution

c) Journal Entry for for installation of digging Tool on 1 July 2018.

Fencing Machine A/c   Dr. $9,000

Input GST A/c Dr. $900

To Cash A/c Cr. $9,900

(Addition of digging Tool to the Fencing Machine)

Note:

Since the Estimated Residual Value has been changes i.e., Change in th Accounting Estimate leads to Change in the Depreciation from the year in which digging Tool is being installed. Prospective application of Chnage in the Accounting Estimate. Depreciation till 1 July 2018 is = $80,000- $4,000/4 =$19,000. arrying Value before installation is $80,000- $19000=$61,000

Depreciation from 1 July 2018 = $61,000+$9,000-$7000/3 = $21,000 Per annum.

d) Journal Entry for Sale of Fencing Machine as on 01.07.2020

Cash A/c Dr. $27,500

Loss on Sale of Asset A/c Dr. $3,000

To Fenching Machine A/c Cr. $28,000

($80,000-$19,000+$9000-$21000-$21000)

To GST Payable A/c Cr. $2,500

($27500/110%*10%=$2,500)

[Being Sale of Fencing Machine on 01.07.2020]     

ekkarill92 answered 1 year ago
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