Question

Snowish Boutique Corp. Property, plant, and equipment and intangible assets December 31, 20X3

Life (in years ) Cost Residual value Accumulated depreciation / impairment to December 31, 20X3 Net book value, at December 31, 20X3

Tools and other equipment 15 $ 38,850 $ 0 $24,605 $14,245

Vehicles — old 5 16,500 500 14,400 2,100

Computer equipment 3 10,500 600 8,167 2,333

Patent   15 75,000 * 0 * 40,278 34,722

Trademark NA 45,000 0 0 45,000

total $185,850 $1,100 $87,450 $98,400

*Reported at its net amount of $34,722 on the statement of financial position

Other information follows

: 1. SBC uses the straight-line method to depreciate all depreciable assets other than computer equipment. The company takes a half-year of depreciation in the year of acquisition and a half-year of depreciation in the year of disposal. SBC uses a double-declining balance method to depreciate its computer equipment.

2. As SBC does not prepare interim statements, it only prepares adjusting entries at its year end

. 3. The offsetting entry for depreciation expense is a credit to an accumulated depreciation account for both tangible and intangible assets.

4. The offsetting entry for impairment losses is a credit to an accumulated impairment loss account for both tangible and intangible assets.

5. SBC’s trademark and patent are each considered to be a cash-generating unit as SBC leases (rents out) both these assets to an outside entity for a royalty fee

. 6. SBC paid $75,000 to acquire a patent in 20X1. In 20X3 SBC wrote down the value of its patent $30,000 as it its value was judged to be impaired due to a competitor’s copying of the design. During 20X4, SBC spent $12,000 successfully defending its patent. In light of the successful patent defence, SBC now estimates that both the fair value of the patent and its value in use are $69,000. Estimated costs of disposal are $2,000.

7. SBC tested its trademark for impairment at its December 31, 20X4, year end. Its fair value and value in use were estimated to be $39,000 and $41,000, respectively. Estimated costs of disposal are $4,000

. 8. During 20X4 the company bought and sold the following property, plant, and equipment

: a) On March 15, 20X4, SBC paid $201,500 cash to purchase land to be used for future expansion, including $1,500 in legal fees directly attributable to the purchase. SBC elected to subsequently value the land using the revaluation model. The fair market value of the land on December 31, 20X4, was $208,000.

b) October 1, 20X4, SBC purchased a new vehicle at a cost of $16,500 plus nonrefundable taxes of $2,000. The expected useful life of the vehicle is five years, at which time the residual value is estimated to be $4,000

. c) On November 15, 20X4 the company sold its old delivery vehicle for $800 cash

. Required:

Prepare journal entries to record the transactions detailed above including all adjusting entries required at December 31, 20X4. Prepare a separate entry for the depreciation of each asset and for other events that must be recorded.

Answer 1

Step By step Detailed Answer:

.

Journal entry to record the purchase of land:

MARCH 15--- DR. LAND 201500 CR. CASH 201500

Purchasing the land would increase the balance of the land. In the case of increase in the asset, the related asset account is debited. Hence, land is debited

This would decrease the balance of cash. In the case of the decrease in the asset, the related account is credited. Hence, cash is credited.

journal entry to record the purchase of the vehicle as follows:

OCTOBER: DR. VEHICLE 18500 CR. CASH 18500

Purchasing the vehicle would increase the balance of the vehicle. In the case of increase in the asset, the related asset account is debited. Hence, vehicle is debited

This would decrease the balance of cash. In the case of the decrease in the asset, the related account is credited. Hence, cash is credited.

Note: Nonrefundable taxes would be added to the cost of the vehicle.

Compute the depreciation charged to old machinery using the equation as shown below:

Depreciation = (Cost - Salvage value) / Expected useful life

= ($16,500 - 500) / 5

= $3,200

Hence, the yearly depreciation is $3,200.

Compute the remaining useful life of vehicle using the equation as shown below:

Remaining useful life = Total useful life - (Total accumulated depreciation / Depreciation per year)

= 5 - ($14,400 / $3,200)

= 5 - 4.5

= 0.5 years

Hence, the remaining useful life is 0.5 years.

Since the asset is sold in November its book value would be zero and $800 would be profit.

journal entry to record the depreciation as follows:

JUNE 30: DR. DEPRECIATION 1600 CR. ACCUMULATED DEPRECIATION 1600

All the expenses are of debit nature. Since depreciation is an expense, it is debited.

Accumulated depreciation is a contra asset account. Charging depreciation would increase the balance of accumulated depreciation. In the case of increase in the contra-asset account, the related account is credited. Hence, accumulated depreciation is credited.

journal entry to record the sales of the vehicle as follows:

NOVEMBER 15 --- DR. ACCUMULATED DEPRECIATION 16000 DR. BANK 800 CR. VEHICLE 16500 CR. GAIN ON SALE 300

The sale of the vehicle would decrease the balance of accumulated depreciation which is the contra-asset account. In the case of decrease in the contra-asset account, the related account is debited. Hence, accumulated depreciation is debited.

This would also increase the balance of the bank. In the case of increase in the asset, the related account is debited. Hence, bank is debited.

The sale of the vehicle would decrease the balance of vehicle. In the case of decrease in the asset, the related account is credited. Hence, vehicle is credited.

All the gains are of credit nature. Hence, gain on sale of the vehicle is credited.

Compute the depreciation of year 1 using the equation as shown below:

Depreciation = Cost of asset / Estimated useful life *

= $10,500 / 3

= $3,500

Hence, the depreciation for Year 1 is $3,500.

Compute the depreciation of year 2 using the equation as shown below:

Depreciation = (Cost of asset - Depreciation of year 1) / Estimated useful life * 2

= ($10,500 - $3,500) / 3 * 2

= $4,667

Hence, the depreciation for Year 2 is $4,667.

Compute the depreciation for year 3 using the equation as shown below:

Depreciation = (Cost of an asset - Depreciation of year 1 - Depreciation for year 3) / Estimated useful life * 2

= ($10,500 - $3,500 - $4,667) / 3 * 2

= $1,556

Hence, the depreciation for Year 3 is $1,556.

journal entry to record the depreciation on the computer as follows:

DECEMBER 31--- DR. DEPRECIATION 1556 CR. ACCUMULATED DEPRECIATION 1556

All the expenses are of debit nature. Since depreciation is an expense, it is debited.

Accumulated depreciation is a contra asset account. Charging depreciation would increase the balance of accumulated depreciation. In the case of increase in the contra-asset account, the related account is credited. Hence, accumulated depreciation is credited.

Compute the depreciation on tools and other equipment using the equation as shown below:

Depreciation = (Cost - Salvage value) / Expected useful life

= ($38,850 - $24,605) / 15

= $950

Hence, the yearly depreciation is $950.

journal entry to record the depreciation on tools as follows:

DECEMBER 31--- DR. DEPRECIATION 950 CR. ACCUMULATED DEPRECIATION 950

All the expenses are of debit nature. Since depreciation is an expense, it is debited.

Accumulated depreciation is a contra asset account. Charging depreciation would increase the balance of accumulated depreciation. In the case of increase in the contra-asset account, the related account is credited. Hence, accumulated depreciation is credited.

Legal expenses of successfully defending the patent should be capitalized. Therefore, the balance of patent would increase. In the case of the increase in the asset, the related asset account is debited. Hence, patent is debited.

This would also decrease the balance of the bank account. In the case of decrease in the asset, the related account is credited. Hence, bank is credited.

Compute the impairment loss on patent using the equation as follows:

Impairment loss = Value in use - Fair value

= $41,000 - $39,000

= $2,000

Hence, the impairment loss is $2,000.

journal entry to record the impairment loss as follows:

DECEMBER 31--- DR. PATENT 1300 CR. BANK 1300

All the losses and expenses are of credit nature. Hence, the impairment loss is debited.

This would decrease the value of trademark. In the case of decrease in the asset, the related account is credited. Hence, the trademark is credited.