Question

Harry Rubenstein operates a private taxi business that provides personal transport services to passengers in the Mornington Peninsula region of Victoria. The following transactions relate to the purchase of a new motor vehicle by the business for use as a private taxi. The business is registered for GST and the GST rate is 10%.

1 July 2015

On 1 July 2015, the business purchased a new motor vehicle. The motor vehicle had a recommended retail price of $55,000 (including GST), but after careful negotiation, it was purchased for $49,500 (including GST). The business also paid stamp duty of $1,000 (GST exempt) and $1,500 (plus GST) to paint the company’s logo on the motor vehicle. In addition, the business also installed a meter device on the front dashboard of the motor vehicle at a cost of $550 (including GST). The motor vehicle was purchased on credit, but the painting and meter installation costs as well as the stamp duty were all paid in cash. The motor vehicle is depreciated using the straight-line depreciation method and Harry Rubenstein estimates the motor vehicle to have a useful life of 7 years with a residual value of $6,000.

15 Mar 2018 1 July 2018 1 July 2020

Regular service of the motor vehicle was performed at a cost of $800 (plus GST). The motor vehicle was overhauled at a cost of $9,900 (including GST) after which its useful life is extended by 2 more years. The residual value remains unchanged. The motor vehicle was sold for $30,000 (plus GST).

REQUIRED:

(a) Prepare the journal entry to record the purchase of the motor vehicle on 1 July 2015.

(b) Prepare the journal entry to record the service expense on 15 March 2018.

(c) Prepare the journal entries to record the overhaul of the motor vehicle on 1 July 2018.

(d) Prepare the journal entry to record the sale of the motor vehicle on 1 July 2020.

Answer 1

For Fixed Asset Valuation cost includes amount paid for acquire of fixed asset, direct expense for making asset for its inteded use and future econmic benefits are available.

Asset Acquired for $49500 (inclusive of GST) GST will not be included in the value of the asset because credit of GST is available by goverment therefore if we capitalize GST to fixed Asset there will be double benefit (i.e., of GST credit and Depreciation on Fixed Asset )

Thus in given case, we will not capitalize GST to fixed Asset assuming that Company will take credit of GST from goverment.

Cost of Motorvehicle for Depreciation

Cost of Fixed asset 49500 (inclusive gst) (49500*10/110) = 45000 (net of Gst)

Add: Stampduty=1000

Add:Paint=1500

Add:meterdevice=550(inclusive of GST) =500(net of GST)

Total Cost of Motor Vehicle is 48000

Calculation of depreciation = 48000-6000/7 =6000

a) Journal Entry as on 01 July,2015

Date	Entry	Debit	Credit
1 July,2015	Motor Vehicle	48000
	GST	4700
	to Cash (Stampduty, paint, meter device expenses)		3200
	to Payables		49500

Service cost is done which is temporary it will not increase the life or value of motorvehicle thus it will be charged to expense account

b) Journal Entry as on 15 march, 2018

Date	Entry	Debit ($)	Credit($)
1 March,2018	Service Cost	800
	GST	80
	to Cash/Bank		880

Overhaul cost will increase the life of Motorvehicle for 2 years thus, it will be capitalize and depreciation will be (48000-6000*3/6 =5500)

c) Journal Entry as on 1 July, 2018

Srno	Entry	Debit($)	Credit($)
1 July, 2018	Motor Vehicle	9000
	GST	900
	to Cash/Bank		9900

At the time of sale value of motorvehicle will be (39000-11000(i.e., depreciation for 2 years=28000)

and motorvehicle is sold at 30000 therefore there is profit of 2000)and at the time of sale outward gst will be paid at 10%

d) Journal Entry as on 1 July, 2020

Date	Entry	Debit ($)	Credit($)
1 July, 2020	Bank	33000
	to Motor Vehicle		28000
	to GST
	to Gain on Sale of Motor Vehicle		2000