Question

QUESTION THREE (PART A)

Aussie Furniture Removals Limited provides furniture removal services in Australia. The following transactions relate to the purchase of a new delivery truck. Aussie Furniture Removals Limited is registered for GST and the GST rate is 10%.

1 July 2019

On 1 July 2019, a new delivery truck was purchased. The delivery truck had a recommended retail price of $165,000 (excluding GST), but after careful negotiation, it was purchased for $158,000 (excluding GST). The company also paid stamp duty of $5,000 (GST exempt) and            $4,000 (excluding GST) to paint the company’s logo on the delivery truck. The delivery truck was purchased on credit, but the painting and stamp duty were all paid in cash. The delivery truck is depreciated using the straight-line depreciation method and company management estimates the delivery truck to have a useful life of 5 years with a residual value of $17,000.

REQUIRED:

1. Prepare the journal entry to record the purchase of the delivery truck on 1 July 2019.
2. Prepare the journal entry to record the depreciation for the year ended 30 June 2020.

(3 + 2 = 5 marks)

PART B

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.

(3 + 3 = 6 marks)

Answer 1

a) Journal entries		(Amount $)
		Debit	Credit
1st july 2019	Delivery truck a/c Dr	158,000.00
	Delivery truck a/c Dr	5,000.00
	Delivery truck a/c Dr	4,000.00
	To Accounts payable a/c		158,000.00
	To Cash a/c		9,000.00
	(Being delivery truck purchased on credit and stamp duty and company logo paid in cash were also capitalised)
1st july 2019	Delivery truck A/c Dr	15,800.00
	To Gst Payable A/c		15,800.00
	(Being GST accounted on the delivery truck purchased @10% on 158,000 being capitalised i.e 15,800)
1st july 2019	Delivery truck A/c Dr	400.00
	To Gst Payable A/c		400.00
	(Being GST accounted on the Company logo paid @10% on 4,000 being capitalised i.e 400)
30th june 2020	Depreciation a/c Dr	33,240.00
	To Accumulated depreciation a/c		33,240.00
	(Being Depreciation charged on the delivery truck for one year whose amount is 158000+5000+4000+15800+400=183200, residual value is 17,000 useful life is 5 years is 33,340 per annum)
	Vehicle value		183,200.00
	Less :Salvage value		17,000.00
	Net		166,200.00
	Useful life		5years
	Depreciation yearly		33,240.00

b) Journal entries		(Amount $)
		Debit	Credit
1st july 2017	Fencing machine a/c Dr	88,000.00
	To Cash a/c		88,000.00
	(Being fencing machine purchased accounted)
30th june 2018	Depreciation A/c Dr	21,000.00
	To Accumulated Depreciation a/c		21,000.00
	(Being depreciation accounted for the fencing machine)
	Value of the asset	88,000.00
	Less: Salvage value	4,000.00
		84,000.00
	useful life	4 years
	Depreciation yearly	21,000.00
1st july 2018	Fencing machine a/c Dr	9,900.00
	To Cash a/c		9,900.00
	(Being special digging tool was installed being capitalised)
30th june 2019	Depreciation a/c Dr	17,475.00
	To accumulated depreciation a/c		17,475.00
	(Being depreciation accounted for the fencing machine)
	Value of the asset	97,900.00
	Less: depreciation already provided	21,000.00
	Less: Salvage value	7,000.00
		69,900.00
	useful life	4 years
	Depreciation yearly	17,475.00
	(if the residual value is changed in any year then the depreciation should be calculated on the balance carrying value-salvage value)
30th june 2020	Depreciation a/c Dr	17,475.00
	To accumulated depreciation a/c		17,475.00
	(Being depreciation accounted for the fencing machine)
1st july 2020	Cash A/c Dr	27,500.00
	Accumulated depreciation a/c Dr	55,950.00
	Loss on sale of fencing machine a/c Dr	14,450.00
	To Fencing machine a/c		97,900.00
	(Being Loss raised on sale of fencing machine for 27,500 as the cost is 97,900 and acc. Depr is 55,950.)