22 8 answers VCEAcc 12 - MACMILLAN ACCOUNTING VCE UNITS 1 & 2Chapter 22 Check Your Understanding questions PDF

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22 8 answers VCEAcc 12 - MACMILLAN ACCOUNTING VCE UNITS 1 & 2Chapter 22 Check Your Understanding questions...

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MACMILLAN ACCOUNTING VCE UNITS 1 & 2 Chapter 22 Check Your Understanding questions Check Your Understanding 22.1 1 2

A document should be issued when the asset is purchased, which provides verifiability. No; if a business owner buys an asset, they do not just need to record its cost price. There are a number of different items, with different source documents, that can be combined to determine the cost price of an asset. While the invoice price is the basis of the cost, there are often one-off costs associated with getting the asset into a revenue-earning position; these must be included in the cost of the asset.

3

a b

Fair value is the value given to a non-current asset that represents its estimated value to the business. Fair value does not satisfy verifiability because the value given for fair value is often estimated, so there is no document available.

Check Your Understanding 22.2 1 2 3

Depreciation allocates part of the cost of a non-current asset over its useful life, attempting to match this cost allocation against the revenue the asset contributes to earnings. Depreciation expense = (cost – residual value)/estimated life Carrying value is the value of a non-current asset calculated by deducting accumulated depreciation from cost. It represents that part of the cost of the asset yet to be allocated through depreciation, plus the residual value of the asset.

Check Your Understanding 22.3 1

An asset register records the details of a non-current asset throughout its life in the business. The details kept can vary, but a typical asset register may contain: • • • • • • • •

2

3

original cost of the asset supplier’s name (i.e. where the asset was purchased) registration number or serial number (if applicable) insurance details of the asset (if applicable) estimated residual value estimated useful life depreciation method applied details of depreciation allocated through the assets life.

Asset turnover measures how effective assets are in generating sales. This means that it measures how productive they are; the more productive assets are, the greater the value of sales for the business. Return on assets can change each year because the net profit figure can change. In addition, the value of non-current assets can change; the business can purchase new assets or dispose of old assets; depreciation will lower the value of non-current assets and inventory; accounts receivable balances will change each year. Furthermore, the balance in the bank and the balance of GST can vary from an asset balance to a liability balance.

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Chapter 22 Exercise solutions 1 Depreciation of delivery van a

b c

Depreciation expense = (cost – residual value)/estimated life = (12 000 – 4800)/3 = 7200/3 = $2400 12 000/2400 = 20% per annum on cost The value of accumulated depreciation of the van: • $2400 at 30 June 2024 • $4800 at 30 June 2025

2 Depreciation of computer a

b c d e

Depreciation expense = (cost – residual value)/estimated life = (4000 – 800)/2 = 3200/2 = $1600 4000/1600 = 40% per annum on cost Depreciation – computer $1600 Computer $4000 Accumulated depreciation – computer $1600 The carrying value of the computer as at 31 March 2024: Cost – Accumulated depreciation = 4000 – 1600 = $2400

3 Depreciation of forklifts a

b

The yearly depreciation expense per forklift: Depreciation expense = (cost – residual value)/estimated life = (15 000 – 3000)/4 = 12 000/4 = $3000 The total annual expense for depreciation of forklifts: $3000 per annum × 4 forklifts = $12 000 p.a.

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c

Asset register: Asset:

Forklift

Purchase cost:

New/second-hand:

New

5 years

Estimated residual:

$3 000

Estimated life: Supplier:

Insurance:

Depreciation method:

Straight-line method

Date

Details

October 1 2023 September 30 2024 September 30 2025 September 30 2026

d

Model:

$15 000

Depreciation expense

20% p.a. Accumulated depreciation

Purchase

Carrying value 15 000

Depreciation

3 000

3 000

12 000

Depreciation

3 000

6 000

9 000

Depreciation

3 000

9 000

3 000

Balance sheet extract: UNITED SPORTS WHOLESALERS BALANCE SHEET (EXTRACT) AS AT 30 SEPTEMBER

2024

2025

2026

Non-current assets Forklifts

60 000

60 000

60 000

Accumulated depreciation

12 000

24 000

36 000

48 000

36 000

34 000

4 Depreciation of vehicle – part year a

b

The yearly depreciation rate for the vehicle: 42 000 – $15 000/3 years = $27 000/ 3 = $9000 p.a. 9000/42 000 = 21.5% per annum on cost Balance sheet extract: FIDGET FACTORY BALANCE SHEET (EXTRACT) AS AT 31 DECEMBER

2023

2024

2025

Non-current assets Vehicle Accumulated depreciation

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42 000

42 000

42 000

4 500

13 500

22 500

37 500

28 500

19 500

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Asset register:

c Asset:

Vehicle

Purchase cost:

$42 000

Estimated life:

3 years

Supplier:

Melb Holden

Depreciation method: Date July 1 2023 December 31 2023 December 31 2024 December 31 2025

Model:

Holden Commodore

New/second-hand:

New

Estimated residual:

$15 000

Insurance: Straight-line method

Details

21.5% p.a.

Depreciation expense

Accumulated depreciation

Purchase

Carrying value 42 000

Depreciation

4 500

4 500

37 500

Depreciation

9 000

13 500

28 500

Depreciation

9 000

22 500

19 500

5 Depreciation of shop fittings – part year a

b c

The yearly depreciation expense for the vehicle: Depreciation expense = (cost – residual value)/estimated life = 24 000 / 8 = $3000 p.a. The amount of depreciation to be expensed for the year ended 31 December 2023: 3000 p.a./12 months × 10 months = 250 per month × 10 = $2500 Balance sheet extract: LAVERTON LAUNDRY SUPPLIES BALANCE SHEET (EXTRACT) AS AT 31 DECEMBER

2023

2024

2025

Non-current assets Shop fittings Accumulated depreciation

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24 000

24 000

24 000

2 500

5 500

8 500

21 500

18 500

15 500

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6 Income statement and balance sheet Income statement:

a

CBD SOLAR INCOME STATEMENT FOR THE YEAR ENDED 30 NOVEMBER 2023

$

%

Revenue Cash sales

72 000

Less: Cost of goods sold Cost of sales

24 000

Gross profit

48 000

Less: Other expenses Rent

15 000

Interest on loan

1 200

Advertising

1 100

Assistant’s wages

15 000

Depreciation – office equipment

600

Depreciation – vehicles

7 000

39 900

Net profit

b

8 100

Balance sheet: CBD SOLAR BALANCE SHEET AS AT 30 NOVEMBER 2023

Assets

$

$

Current assets Cash at bank Inventory

Accumulated depreciation

1 200 20 000

$

21 200

Accounts payable

9 400

GST payable

3 600

13 000

Non-current liabilities 6 000 -600

Vehicles

30 000

Accumulated depreciation

-7 000

Loan – NAB

7 000

5 400 Owner’s equity 23 000

49 600

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$

Current liabilities

Non-current assets Office equipment

Equities

Capital Plus: Net profit

29 500 8 100

Less: Drawings

-8 000

29 600 49 600

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7 Income statement and balance sheet Income statement:

a

SORRENTO SHOE STUDIO INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2023

$

%

Revenue Cash sales

96 000

Less: Cost of goods sold Cost of sales

38 000

Gross profit

58 000

Less: Other expenses Telephone

400

Repairs and maintenance

1 700

Cleaning expenses

4 500

Stationery expenses

200

Insurance

3 400

Assistant’s wages

22 000

Depreciation – office equipment

1 800

Interest on loans

5 600

Net profit

b

39 600 18 400

Balance sheet: SORRENTO SHOE STUDIO BALANCE SHEET AS AT 31 DECEMBER 2023

Assets

$

$

Current assets Cash at bank Inventory

Accumulated depreciation Premises

21 500

24 600

$

Loan - EZ Finance

5 600

GST payable

5 080

10 680

Non-current liabilities 9 000 -5 400

Mortgage

55 000

3 600 120 000

148 200

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$

Current liabilities 3 100

Non-current assets Office equipment

Equities

Owner’s equity Capital

74 320

Plus: Net profit Less: Drawings

18 400 -10 200

82 520 148 200

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8 Income statement and balance sheet

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LIBERTY PROSTHETICS & WHEELCHAIRS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2023

$

%

Revenue Cash sales

53 000

Less: Cost of goods sold Cost of sales

21 000

Gross profit

32 000

Less: Inventory loss

1 200

Adjusted gross profit

30 800

Less: Other expenses Telephone

640

Advertising

970

Stationery expenses

650

Vehicle repairs

890

Interest on loan

400

Insurance

1 200

Assistant’s wages

22 550

Depreciation – vehicles

16 000

Depreciation – office equipment

840

Petrol expense

2 780

46 920

Net profit

-16 120 LIBERTY PROSTHETICS & WHEELCHAIRS BALANCE SHEET AS AT 31 DECEMBER 2023

Assets Current assets Inventory

$ 22 000

22 000

Non-current assets Office equipment

$ 1 413

Accounts payable

1 320

GST payable

2 587

$

5 320

5 600

Accumulated depreciation

-2 640

Vehicles

64 000

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Equities Current liabilities Bank overdraft

2 960 Owner’s equity

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Accumulated depreciation

-40 000

24 000

Capital Plus: Net profit Less: Drawings

69 760 -16 120 -10 000

48 960

43 640 48 960

9 Income statement and balance sheet BRIDGEWATER BOAT PARTS INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2023

$

%

Revenue Sales

48 000

Less: Cost of goods sold Cost of sales

16 830

Cartage in

250

17 080

Gross profit

30 920

Less: Other expenses Telephone

580

Advertising

1 400

Stationery expenses

600

Insurance

890

Wages

18 200

Depreciation – equipment

2 480

Depreciation – office furniture

240

Rent

12 000

36 390

Net profit

-5 470 BRIDGEWATER BOAT PARTS BALANCE SHEET AS AT 30 JUNE 2023

Assets

$

Equities

Current assets Inventory Non-current assets

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$

$

Current liabilities 21 500

Bank overdraft

1 200

Accounts payable

9 680

GST payable

1 628

12 508

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Office furniture

2 400

Accumulated depreciation

-960

Equipment Accumulated depreciation

12 400 -7 440

1 440 Owner’s equity 4 960

27 900

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Capital Plus: Net profit

27 362 -5 470

Less: Drawings

-6 500

15 392 27 900

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10 Asset turnover a

b

The asset turnover achieved in the most recent period: Asset turnover = net sales/average total assets = 420 000/310 000 = 135% The increase in the turnover from 115% to 135% suggests that the assets of the business have been more productive; they have generated a higher level of sales.

11 Asset turnover a

Calculations: 2024 Net sales

565 000

566 000

Average total assets

330 000

360 000

171%

157%

Asset turnover

b

2025

The assets of the business are less productive in 2025, compared to 2024. While the net sales of the business have improved, the improvement is less than the increase in average total assets. This means the new assets are not yet operating at a level that will be generating the level of sales expected.

12 Return on assets a

b

The return on assets for the year ended 31 December 2024: Return on assets = net profit/average total assets = 9000/465 000 = 1.94% The return on assets is poor; a business owner could achieve a better return on their investment if they invested in term deposits or property. The owner needs to review how assets are being used and whether they have invested too heavily in unproductive assets.

13 Return on sales and return on assets a

Calculations: Formula

Net sales Net profit Average total assets

2023

2024

2025

140 000

148 000

152 000

30 000

32 000

40 000

335 000

350 000

390 000

Net profit margin Asset turnover

Net profit/Sales Net sales/Average total assets

21% 42%

22% 42%

26% 39%

Return on assets

Net profit/Average total assets

9%

9%

10%

b

i ii

iii

Net profit has improved over the time shown. There has been a 33% increase in profit over the three years with profit increasing 25% between 2024 and 2025 Over the period shown, the business has used its assets less productively to generate sales. The business purchased additional assets in 2025 and these are yet to generate a significant increase in sales. The return on assets has performed better than the asset turnover. So while assets

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have not generated an increasing value of sales, the business has controlled expenses and made a greater proportion of profit for the assets employed.

Case study a

Depreciation expense = (cost – residual value)/estimated life i Depreciation of vehicle = (28 000 – 12 000)/4 = 16 000/4 = $4000 per annum ii Depreciation of office furniture = (6400 – 400)/10 = 6000/10 = $600 per annum

b

Income statement: CAPTAIN SNORES INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2023

$

%

Revenue Cash sales

92 400

Credit sales

51 900

144 300

Less: Cost of goods sold Cost of sales Customs duty Cartage in

72 900 860 2 430

Gross profit

76 190 68 110

Less: Inventory loss

1 250

Adjusted gross profit

66 860

Less: Other expenses Electricity Advertising

980 1 200

Stationery expenses

540

Telephone expenses

1 020

Vehicle expenses

2 200

Depreciation – vehicle

4 000

Depreciation – office furniture Wages Net profit

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600 25 400

35 940 30 920

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c

Balance sheet extracts: CAPTAIN SNORES BALANCE SHEET (EXTRACT) AS AT 31 DECEMBER 2023

Non-current assets Office furniture

6 400

Accumulated depreciation

-1 800

4 600

Delivery vehicle Accumulated depreciation

28 000 -12 000

16 000

CAPTAIN SNORES BALANCE SHEET (EXTRACT) AS AT 31 DECEMBER 2023

Owner’s equity

d

e

f

Capital

82 960

Add: Net profit

32 170

Less: Drawings

-32 000

83 130

Drawings for 2023 are higher than for the previous year; they are also almost the same as the net profit figure. While taking an amount of drawings less than profit is acceptable, the business should re-invest some profit into the business so that funds are available for expansion, replacing assets and unexpected events. The owner would expect to use his vehicle for one more year. It is depreciated at $4000 per year and has a residual value of $12 000. It currently has a carrying value of $16 000, which means one more year of use and depreciation will see the carrying value equal the residual value. In regard to the office furniture, it is depreciated by $600 per annum and its current carrying value is $4600. Its residual value is $400, so a further $4200 needs to be depreciated, which will take another seven years. GST situation at the end of Decembe...