Question

Question 3 On 21 June 20x1, the Large Mart store in Armidale ordered a new company car for its customer service department (called the “Nerd Herd”) from a car dealer in Brisbane for $30,000. The car was delivered to Large Mart in Armidale on 28 June 20x1, and the delivery company left a delivery invoice of $500 when delivering the car. The invoices for the car and the delivery of the car were paid via bank transfer on 29 June 20x1. On 28 June 20x1, Large Mart also signed a comprehensive 12 month insurance contract for the car at a cost of $2,500. The cost of the insurance was paid on 28 June 20x1. Large Mart will use the new car for 6 years and depreciate the car using the straight-line depreciation. Large Mart expects that the car will have a residual value of $1,000 at the end of its useful life. Required: A) Explain if the delivery fee for the car and the cost of the comprehensive insurance are part of the cost of the car when the car is first recognised as an asset in the Large Mart accounts. B) Provide all journal entries that are necessary in the books of Large Mart to account for the purchase and delivery of the car during June 20x1. (1 mark) C) Provide all journal entries that are necessary in the books of Large Mart to account for the depreciation of the car for the month of June 20x1, AND provide a detailed outline of your calculations. (1.5 marks) D) State the day on which the depreciation of the car commences, AND provide a detailed explanation why the deprecation of the car start on that day.

Answer 1

A) Cost Price of a fixed asset includes the purchase price plus all other cost incurred to bring the fixed asset to an usable asset. This cost price is expensed over the life of the asset through depreciation.

In this case ,the cost price will be

purchase price of the car + delivery fee+ insurance

$30000+500+2500 = $33000//

Therefore $33000 will be depreciated over the life of fixed because that is total amount spent by the company to make the asset put in use.

B)

Date	Description	Debit	Credit
29-06-20x1	Car	$30000
	Cash		$30000
	(purchased Car)
29-06-20x1	Delivery Charge	$500
	Cash		$500
	(Delivered Car)

C) Depreciation are usually expensed at the end of the period ,usually at the end of the month ,quarter or year.During June 20x1 , no depreciation will be expensed as the asset brought hasnt been utilised by the company in the month. However Depreciation will be journalised as below

Dr	Depreciation	xxxx
Cr	Accumulated Depreciation		xxxx

Depreciation Amount for the Year 20x1 is calculated as follows

Deprciation Calculation
Cost Price	33000
Residual Value	1000
Estimated Life	6 years
Deprciation method used	Straight line method
Depreciation =	Cost Price - Residual Value/ Estimated life
	33000-1000/6
	$5333.333per year

D)Depreciation on the car will start at end of july ,i.e 31/07/20x1

The company has started using the asset and the expense related to the revenue generated must be recorded as per the matching concept principle.Morever the Cost price needs to be expenses during its estimated life

Depreciation is usually recorded at the end of the period ,i.e monthly ,quarterly or yearly.In this case we assumed it wll be recorded for monthly.