Empire Company is a manufacturer of smart phones. Its controller resigned in October 2020. An inexperienced assistant accountant has prepared the following income statement for the month of October 2020.

EMPIRE COMPANY
Income Statement
For the Month Ended October 31, 2020
Sales revenue               $795,000   
Less:   Operating expenses                  
Raw materials purchases       $264,600           
Direct labor cost       190,200           
Advertising expense       91,000           
Selling and administrative salaries       77,800           
Rent on factory facilities       61,000           
Depreciation on sales equipment       45,800           
Depreciation on factory equipment       32,500           
Indirect labor cost       28,200           
Utilities expense       11,600           
Insurance expense       8,300        811,000   
Net loss               $(16,000)  

Prior to October 2020, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.

1. Inventory balances at the beginning and end of October were:

October 1
October 31
Raw materials       $19,700       $36,000
Work in process       19,400       14,700
Finished goods       29,900       53,500

2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.

Prepare a correct income statement for October 2020.

Question 2 Gamma Ltd. acquired a tract of land with a building for $600,000. The closing statement indicated that the land’s assessed tax value was $400,000 and the building’s value was $200,000. The land was acquired as a site for Gamma's new office building and immediately after acquisition the building was demolished at a cost of $60,000. Gamma Ltd. constructed a new building, for $900,000 plus the following costs: Building design $ 20,000 Construction foreman salary 40,000 Imputed interest on retained earnings used during construction 30,000 Since Gamma has no debt, and a surplus of cash, all amounts were paid with cash.

a) Calculate the cost of the land. b) Calculate the cost of the building. c) Assume your answer to b) above was $1,000,000. Gamma Ltd. has a December 31 yearend. The building was completed and occupied on September 30, 2020. The estimated useful life of the building is 20 years, the residual value is estimated to be $100,000, and double-declining-balance depreciation is used. Calculate depreciation expense for 2020 and 2021. d) Assume your answer to b) above was $1,000,000. The building was completed and occupied on January 1, 2020. The estimated useful life of the building is 20 years and the residual value is estimated to be $100,000. On January 1, 2020, Gamma received a government grant of $400,000 to assist in the cost of the building. Prepare the journal entries required during 2020 related to the government grant and depreciation of the building. Assume straight-line amortization.

Rooey Ltd, the retailer of Zara clothing, is preparing its end of year financial statements at 31 December 2020. The balance sheet shows only two non-current assets, buildings and equipment. After depreciation entries were completed for the year ending 31 December 2020, the accumulated depreciation of its non-current assets were as follows:

                                                                                                       $

                                 Buildings                                                 24,200,000

                                 Accumulated Depreciation                     (5,000,000)

                                 Equipment                                                7,000,000

                                 Accumulated Depreciation                      (3,800,000)

The company applies the revaluation model to buildings and the cost model to equipment. At 31 December 2020, the following values relating to the assets have been determined:

Required:

1. Prepare the necessary general journal entries in relation to the equipment for the year ended 31 December 2020 and justify in accordance with appropriate accounting standards. Show all workings (narrations are not required).

2. Prepare the necessary general journal entries in relation to the buildings for the year ended 31 December 2020 and justify in accordance with appropriate accounting standards. Show all workings (narrations are not required).

3. Prepare the necessary general journal entries in relation to the buildings for the year ended 31 December 2021 and justify in accordance with appropriate accounting standards. Assume the depreciation for the year is $1,000,000 and the fair value of the buildings at 31 December 2021 was $25,000,000. Show all workings (narrations are not required).

Blossom Company began operations on January 2, 2019. It employs 9 individuals who work 8-hour days and are paid hourly. Each employee earns 10 paid vacation days and 6 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate. Additional information is as follows.

Blossom Company has chosen not to accrue paid sick leave until used, and has chosen to accrue vacation time at expected future rates of pay without discounting. The company used the following projected rates to accrue vacation time.

(a)Prepare journal entries to record transactions related to compensated absences during 2019 and 2020. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,125.)

Barton Enterprises purchased equipment on January 1, 2020, at a cost of €350,000. Barton uses the straight‐line depreciation method, a 5‐year estimated useful life, and no residual value. At the end of 2020, independent appraisers determined that the assets have a fair value of €320,000.

Instructions

a. Prepare the journal entry to record 2020 depreciation using the straight‐line method.

b. Prepare the journal entry to record the revaluation of the equipment.

c. Prepare the journal entry to record 2021 depreciation, assuming no additional revaluation.

additional instructions:

4. Prepare the closing journal entries for a. and b.
5. Suppose that at the end of 2021, after the depreciation is recorded per c., the equipment is re-valued to €180,000. Prepare the journal entry to record the revaluation. Then prepare the closing entries required at the end of 2021.
6. Prepare the depreciation entries for 2020 and 2021, assuming the Cost Model was followed in both years.
7. Assume that the equipment is sold on 1 July 2022 for €170,000.
   1. Calculate depreciation for 2022 under both the cost and fair value models. (Hint: Depreciate only up to the date of disposal.)
   2. Prepare the journal entry for the disposal under the cost model.
   3. Prepare the journal entry for the disposal under the fair value model. Do not revalue the equipment on 1 July 2022 (prior to the disposal).
8. In total (for 2020, 2021, and 2022 taken together), which model resulted in the greatest decrease to total comprehensive income?

Heavy Duty Gym Equipment Pty Ltd sells gym equipment and personal trainer lessons. On 1 June 2020, Heavy Duty Gym Equipment Pty Ltd signs an agreement with Burwood Fitness Club to provide 2 personal training sessions for 10 weeks and 5 items of gym equipment. The contract price amounted to $44,000 (GST inclusive), on credit terms n/30 for the equipment and the personal training lessons. This amount also includes one free service for the equipment to be performed twelve months after the delivery of equipment to Burwood Fitness Club.

The stand-alone price for the 20 personal training sessions is $2,200 (GST inclusive). The personal training sessions lessons will start on 8 June 2020.

The stand-alone price of the equipment is $55,000 (GST inclusive). The twelve-month service fee for the equipment is usually $880 (GST inclusive).

Burwood Fitness Club paid the full amount on 20 June 2020 for the equipment and personal training lessons. The equipment was delivered on 28 June 2020. By 30 June 2020, 7 personal training lessons had been held.

How should Heavy Duty Gym Equipment Pty Ltd allocate the transaction price to the distinct performance obligations in this contract based on IFRS 15/AASB 15 Revenue with Contracts from Customers?            

Depreciation Methods

On January 2, 2018, Skyler, Inc. purchased a laser cutting machine to be used in the fabrication of a part for one of its key products. The machine cost $120,000, and its estimated useful life was four years or 920,000 cuttings, after which it could be sold for $5,000.

Required

a. Calculate each year’s depreciation expense for the machine's useful life under each of the following depreciation methods (round all answers to the nearest dollar):

1. Straight-line.
2. Double-declining balance.
3. Units-of-production. (Assume annual production in cuttings of 200,000; 350,000; 260,000; and 110,000.)

1. Straight-Line

2. Double-declining balance

3. Units of Production

b. Assume that the machine was purchased on July 1, 2018. Calculate each year’s depreciation expense for the machine's useful life under each of the following depreciation methods:

1. Straight-line.
2. Double-declining balance.

1. Straight-Line

2. Double-declining balance (Round answers to the nearest whole number, when appropriate.)

Coronado Company is a manufacturer of smart phones. Its controller resigned in October 2020. An inexperienced assistant accountant has prepared the following income statement for the month of October 2020.

Prepare a correct income statement for October 2020.

Prior to October 2020, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.

1. Inventory balances at the beginning and end of October were:

2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.

The Humpty Doo Rare Earths Mining Company started mining operations on 1 July 2019. In the year to the 30^th June 2020 three areas were explored, Europium, Gadolinium, and Terbium. The following costs were incurred:

Rare earths were discovered at Europium on 17^th January 2020. In April 2020 after a review of the prospects for the Gadolinium site it was decided to abandon operations there. Exploration was still a work in progress at the Terbium site, but no decision had been made about the commercial potential of that site. Development of the Europium site had continued during the year and at 30^th June 2020 $36 million had been incurred. These costs are to be written off on a production basis.

This cost relates to the construction of plant and equipment. It is estimated that there are 150,000 tonnes of rare earth which has a current sale price of $3,500 per tonne. By the 30^th June 2020 15,000 tonnes had been extracted at a production cost of $6 million of which 12,000 tonnes were sold.

Required

Record this first year’s transactions by journal entry using the area of interest method.

The Humpty Doo Rare Earths Mining Company started mining operations on 1 July 2019. In the year to the 30^th June 2020 three areas were explored, Europium, Gadolinium, and Terbium. The following costs were incurred:

Rare earths were discovered at Europium on 17^th January 2020. In April 2020 after a review of the prospects for the Gadolinium site it was decided to abandon operations there. Exploration was still a work in progress at the Terbium site, but no decision had been made about the commercial potential of that site. Development of the Europium site had continued during the year and at 30^th June 2020 $36 million had been incurred. These costs are to be written off on a production basis.

This cost relates to the construction of plant and equipment. It is estimated that there are 150,000 tonnes of rare earth which has a current sale price of $3,500 per tonne. By the 30^th June 2020 15,000 tonnes had been extracted at a production cost of $6 million of which 12,000 tonnes were sold.

Required

Record this first year’s transactions by journal entry using the area of interest method.