In: Accounting
The Wong family incorporated Alberta Wholesale Limited (AWL) on
January 1, 20X1 when the company issued common shares to several
family members for cash. After obtaining mortgage financing, the
company constructed a warehouse and began a food wholesale
business.
The company has a small accounting staff that recorded transactions
throughout the year. The company’s CEO knows that cash is correct
because she has reviewed the bank reconciliation. However, she was
unable to hire a professionally trained CFO and is concerned that
the draft financial statements prepared by her staff (Exhibit I),
which are prepared using IFRS, may have errors including the final
calculation of income tax expense based on a 30% income tax
rate.
The CEO has hired you to correct any accounting errors made by her
staff by:
1. Providing a memo listing any adjusting entries that the company
needs to make along with comments explaining why the company
recorded items incorrectly and how and why the company should have
recorded the transaction along with supporting calculations
relating to adjustments. You should have at least one adjusting
journal entry (you may need several entries for some issues) for
each of the following issues. If an issue deals with more than one
transaction, try to have an adjusting entry for each transaction
within the issue.
Issue 1
AWL depreciates the warehouse using the straight-line method
assuming no residual value and a useful life of 25 years. The
company has opted to use the revaluation method (gross not
proportional) on real estate and has obtained an appraisal of these
assets from an independent appraiser. The appraiser estimated the
fair value of the land at $1,800,000 and the warehouse at
$13,000,000 as at December 31, 20X1.
Issue 2
The company purchased equipment costing $1,800,000 during the first
week of May when the warehouse opened. All equipment has no
residual value and an estimated life of 8 years. On October 1, the
company sold equipment costing $240,000 for $175,000 cash. AWL
bought other equipment costing $200,000 on July 1, 20X1. For
equipment, the company uses the straight-line method.
Issue 1- Solution:-
Under IFRS, the company can claim depreciation either on cost model or revaluation model. However, since land has an infinite life, it is not considered as a Depreciable Asset. Since, the Company has adopted Revaluation model for Land, it is Incorrect since Land cannot be depreciated. With respect to Warehouse, it can be depreciated on straight line basis over the useful life of the Asset ie. 25years and any subsequent revaluation is to be credited to Other comprehensive Income and accumulated under the heading "Revaluation Surplus" unless it represents a reversal of revaluation decrease of same Asset.
With reference to the Question, the Warehouse is to be depreciated over the Life of the Asset ie. 25years and in subsequent year if it is revalued then the following entry is to be passed:-
Warehouse A/c Dr. $1,30,00,000
To Other Comprehensive Income Cr. 1,30,00,000
Issue 2- Solution:-
On the purchase of the Asset as per IFRS, the asset will be recorded at cost and the entry will be as follows:-
Equipment A/c dr. $ 18,00,000
To Cash/ Bank A/c cr. $ 18,00,000
On sale of Asset the following entry will be passed:-
Cash/ Bank dr. $ 1,75,000
Profit and Loss A/c dr. $ 52,500
To Equipment A/c cr. $ 2,27,500
Note- Equipment of $ 2,40,000 will be depreciated for 5 months, since it was sold after that and it is assumed that it was purchased on May 1st. The calculation goes as follows
Depreciation per year on 2,40,000 will be (2,40,000/8= 30,000 every year) and out of that deprecition for 5 months will be $30,000*5/12=$12,500 and hence depreciated value will be $2,40,000-$12,500=$2,27,500
At the end of the year the following entry of depreciation will be passed:-
Provision of Depreciation A/c dr. 2,07,500
To Equipment A/c cr. 2,07,500
Note:- Calculation of depreciation goes as follows-
From $18,00,000 depreciation on $2,40,000 has been calculated above as $12,500 and for the rest, ie. ($18,00,000-$2,40,000)=$15,60,000 will be ($15,60,000/8years=$1,95,000)
Therefore Total Depreciation will be $1,95,000 + $12,500= $2,07,500
In the Next year when another asset is purchased then the following entry will be passed in July 1, 20X1
Equipment A/c dr. $ 2,00,000
To Cash/ Bank cr. $ 2,00,000
At the end of the year the following depreciation entry will be passed:-
Provision for Depreciation A/c dr. $2,16,430
To Equipment A/c cr. $2,16,430
Note- Calculation of above goes as follows-
For Asset costing $15,60,000, depreciation of $1,95,000 has already been calculated above and the Asset purchased for $ 2,00,000 will be depreciated over 7years and since it was purchased in July, depreciation will be for 9months, ie. ($200000/7*(9/12)=$21,430) and hence the total depreciation will be $2,16,430