Question

On 1 November 2018, Auckland City Printers (ACP) imported a new multi-colour printing machine (No-10) for $68,300 cash. In addition, ACP paid $6,500 of import duties and $1,200 of transport costs for the machine on 3 November 2018. The useful life of the machine and the residual value were estimated to be 8 years and $7,000 respectively. ACP decides to depreciate the machine using straight-line basis. The company’s financial year-end is 30 June.

On 30 June 2019, Auckland City Printers revalued the machine to $73,000 following a review by an independent valuer. On 1 July 2019, due to the changes in technology caused the company to revise the estimated useful life of the printing machine from 8 years to 6 years. On the same day, it was also determined that the residual value of the machine is nil.

On 30 June 2020, the printing machine has been revalued at a fair value of $55,200.

On 30 September 2020, the accountant believes that the value of the printing machine has declined substantially. The value in use is nil, but it is estimated that the company may be able to sell the printing machine for $35,000 to a purchaser and the costs associated with making the sale would be $2,000.

On 1 October 2020, Auckland City Printers sold the printing machine for $32,000 cash.

Required:

(a)Prepare relevant journal entries to record the depreciation expense for the year ended 30 June 2019 and revaluation entries on 30 June 2019.

(b)Prepare relevant journal entries to record the depreciation the year ended 30 June 2020 and revaluation entries on 30 June 2020.

(c) Explain the accounting treatment for the transaction on 30 September 2020 in respect of the printing machine with reference to the relevant accounting standards. Prepare the journal entry required.

(d) Prepare the journal entry required on 1 October 2020 to reflect the disposal of the printing machine. Show all workings.

Answer 1

Journal Entries:-

(a) 01.11.2018           Printing Machine A/c Dr. $76000

                           To Cash A/c                          $76000      

                         (Being printing machine purchased)

Note:- Cost of Machine:-Purchase Price + Import Duties + Transport Costs

                                    $68300+$6500+$1200 = $76000

    All the costs incurred before installing the printing machine are capitalised to the cost of printing machine

30.06.2019        Revaluation Reserve A/c Dr.   $3000

                               To Printing Machine A/c                        $3000

                       (Being machine revalued downwards)

30.06.2019        Depreciation A/c    Dr.    $5750

                               To Printing Machine A/c                     $5750

                        (Being depreciation charged)

Note:- Depreciation:- $76000-$7000/8 = $8625

          Depreciation (01.11.18-30.06.19) = $8625/12*8 = $5750

(b) 30.06.2020 Depreciation A/c Dr.     $8625

                            To Printing Machine a/c      $8625

                       (Being depreciation charged)

Note:- Depreciation :- $76000-$7000/8 = $8625

30.06.2020    Revaluation reserve A/c Dr. $17400

                             To Printing Machine A/c         $17400

                  (Being machine revalued downwards)

Note:- Revaluation Amount = $73000-$55600

                                       = $17400

(c) 30.09.2020 Impairement A/c    Dr.   $22600

                               To Printing machine A/c                $22600

                     (Being machine revalued)

Note:- Impairement = Amount Expected to get by sale = $35000

                                           Less:- Purchase Costs               = $2000     $33000

         Value of asset Till date                                                                  $55600

         Downward Revaluation                                                                   $22600

If machine is expected to sell at lower price then its cost has to be impaired by the value it is expected to valued down. Thus, the machine has been impaired with an amount $22600 as calculated above. The cost to purchase is also reduced from the selling price.

(d)   01.10.2020    Cash A/c Dr.                                   $32000

                           Statement of profit & loss A/c          $1000

                                   To printing machine A/c                         $33000

                          (Being machine sold)