Question

The Research & Development Department of Large Mart is currently working on the development of a “study pillow” that allows students to upload study material into their brain whilst sleeping. In order to complete this project, Large Mart has purchased the following items:

A car (which is used to transport students participating in a trial of the study pillow to the laboratory)

A notebook computer (which is used to record the feedback of students participating in the trial)

The car was purchased on credit on 11th May 201x. The cost of the car was $45,000. Large Mart received the car on 20th May but before Large Mart was able to start using the car, a special in car computer system that connects the car to the Large Mart server (called the intersect) was installed for a total cost of $2,000. After installing the special in car computer, Large Mart was able to start using the car on the 25th May. The car was paid on 31th May 201x and Large Mart received an early payment discount of 5% when the payment was made.

Large Mart expects to use the car for a period of 5 years. At the end of its useful life, the car is expected to have a residual value of $1,000. The depreciation method used for the car is the declining balance method of depreciation. Large Mart calculates the declining balance depreciation percentage of this car in the same way it calculates all of its declining balance percentages.

On 1st July 201x, the accounting department of Large Mart decides to revalue the car to its fair value of $49,000.

The notebook computer was purchased on credit (and received) on 1st May 201x. The computer had a list price of $5,000. However, because Large Mart purchases all of its notebook computers from this supplier, Large Mart was able to receive a “volume discount” of 10%. As a result, the supplier only sent Large Mart an invoice for $4,500. Large Mart paid the computer on 5th May after deducting an early payment discount of 5%.

Required:

1)     (0.5 marks) – Provide all journal entries that are necessary in the books of Large Mart to account for the purchase and payment of the notebook computer.

2)     (1 mark) – 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 May 201x AND provide a detailed outline of all required calculations

3)     (1.5 marks) – Provide all journal entries that are necessary in the books of Large Mart to account for the revaluation of the car on 1st July 201x AND provide a detailed outline of all required calculations.

Answer 1

1) Journal entries for purchase and payment of notebok computer:

1st May 201x Notebook computer Dr. 4,500

To Supplier 4,500

(Being notebook computer purchased @5000 less 10% volume discount)

5th May 201x Supplier Dr. 4,500

To Bank 4,275

To Notebook computer 225

(Being payment made and cash discount received)

2) Journal entry for depreciation of car

31st May 201x Depreciation A/c Dr. 448.35

To Accumulated Depreciation on Car 448.35

(Being depreciation for the month of May)

Calculation:

Total cost of asset (car) = Cost of car + cost of intersect - early payment discount

= 45,000 + 2,000 - 2,250 (5% of 45,000)

= 44,750

Rate of Depreciation (R) = 1 – [s/c]^1/n

= 1 - (1,000 / 44,750)^1/5

= 53.24% (approx)

Date asset put to use = 25th May 201x

Depreciation = 44,750 (Amount) * 53.24% (Rate) * 1/12 (For may) * 7/31 (no of days) = 448.35 (approx)

3) Journal entry for revaluation of car

1st July 201x Accumulated depreciation on car A/c Dr. 2,433.89

Car A/c Dr. 1,816.11 (Balancing figure)

To profit on revaluation 4,250 (49,000 - 44,750)

(Being car revauled to its fair value of 49,000)

Accumulated depreciation = Depreciation for may + Depreciation for June

= 448.35 + 1,985.54

= 2,433.89