ACCG 101 Tutorial Solutions (Week 10) PDF

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ACCG 101 Tutorial Solutions (Week 10)

Chapter 8 1.

Review the chapter for the kinds of questions decision makers require for non-current assets including what non-current assets does the entity need to sustain or expand its future operations and profitability? How much of the entity’s resources should be tied up in non-current assets? Should an entity buy or rent? Students’ answers may vary as long as justification is provided and reasonable.

5.

6.

The effects of the three methods on annual depreciation expense are: (a)

Straight-line – constant amount

(b) (c)

Diminishing-balance – decreasing amount Units-of-production – varying amount.

Capital expenditures are additions and improvements incurred to increase the operating efficiency, productive capacity or the expected useful life of the asset. These expenditures are usually material in amount, incur infrequently and are recorded as debits to the PPE asset affected, whereas expenses are expenditures for the ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. These expenditures usually occur frequently and are recorded as a debit to the Repairs and Maintenance Expense account as incurred and are an expense in the income statement.

PROBLEM SET A 8.3 CupCake Ltd 2015 Jan 1

June 30

June 30

Accumulated Dep’n – Machinery Machinery (Scrapping machinery fully depr’d 31/12/15) Depreciation Expense Accumulated Dep’n – Computer (Update depreciation $49,000 x 1/7x 6/12) Cash Accumulated Depreciation – Computer Gain on Disposal Computer (Sale of computer)

$ 52,000

$ 52,000

3,500 3,500

31,000 24,500 6,500 49,000

1

Calculation of disposal Cost (1/1/12) Accum. Dep’n – Equipment [($49,000 x 1/7 x 3.5yrs)] Carrying amount Cash proceeds Gain on disposal Dec 31

Dec 31

$49,000 24,500 24,500 31,000 $6,500

Depreciation – Truck Accumulated Dep’n – Truck ([($27,000-$3,000) x 1/8] update depr’n) Accumulated Dep’n – Truck (5yrs) Loss on Disposal Truck (Scrapping of truck after 5 years)

3,000 3,000

15,000 12,000 27,000

PROBLEM SET B 8.2 King Ltd

2016

$

(a) 1. April 1

Land

2,400,000 Cash

May 1

$

Depreciation Expense

2,400,000

24,000

Accumulated Dep’n – Equipment

24,000

($720,000 x 1/10 x 4/12)

May 1

Cash

420,000

Accumulated Dep’n – Equipment

312,000

Equipment

720,000

Gain on Disposal

12,000

2

Cost (1/1/12)

$720,000

Accum. Dep’n – Equipment

$312,000

[($720,000 x 1/10 x 4 + $24,000)]

June 1

July 1

Carrying value

408,000

Cash proceeds

420,000

Gain on disposal

$12,000

Cash

1,800,000 Land

500,000

Gain on Disposal

1,300,000

Equipment

2,000,000

Cash

Dec. 31

Depreciation Expense

2,000,000

50,000

Accumulated Dep’n – Equipment

50,000

($500,000 x 1/10- machine to be scrapped)

Dec. 31

Accumulated Dep’n – Equipment

500,000

Equipment

500,000

(Equipment at 31/12/16 is now fully depreciated)

(a) 2. Dec. 31

Depreciation Expense

795,000

Accumulated Dep’n – Buildings

795,000

($31,800,000 x 1/40)

Dec. 31

Depreciation Expense Accumulated Depreciation - Equipment

4,778,000 4,778,000

3

$46,780,000* x 1/10

$4,678,000

$2,000,000 x 1/10 x 6/12

100,000 $4,778,000

*($48,000,000 - $720,000 - $500,000) (a) 3. King Ltd Partial Statement of financial position as at 31 December 2016 Property, Plant and Equipment* Land

$5,500,000

Buildings

$31,800,000

Less: Accumulated depreciation – buildings

15,315,000

Equipment

48,780,000

Less: Accumulated depreciation – equip.

10,040,000

Total property, plant and equipment

16,485,000

38,740,000 $60,725,000

* See T-accounts which follow. Note that in the external reports the total of Property, Plant and Equipment would be a one line item in the statement of financial position and the detailed breakdown above would be disclosed in the notes to the financial statements.

Land 31/12/15 Bal. B/d

3,600,000

1/6/16

Cash

500,000

1/4/16

2,400,000

31/12/16

Bal. c/d

5,500,000

Cash

6,000,000 31/12/16 Bal. b/d

6,000,000

5,500,000

4

Buildings 31/12/15

31,800,000

Accumulated Depreciation – Buildings 31/12/15 31/12/16

Bal. b/d

15,315,000

31/12/16

14,520,000 Dep’n Exp.

15,315,000

795,000 15,315,000

31/12/16

Bal b/d

15,315,000

Equipment 31/12/15 1/7/16

Cash

48,000,000

1/5/16

Cash, etc.

720,000

2,000,000

31/12/16

Accum. Depr.

500,000

-

31/12/16

Bal. c/d

48,780,000

50,000,000 31/12/16 Bal. b/d

50,000,000

48,780,000

Accumulated Depreciation - Equipment 1/5/16

Equipment 312,000

31/12/16 Equipment 500,000

31/12/16 Bal. c/d

10,040,000

31/12/16

6,000,000

1/5/16

Dep’n Exp.

24,000

31/12/16

Dep’n Exp.

50,000

31/12/16

Dep’n Exp.

4,778,000

10,852,000

10,852,000 31/12/16

Bal. b/d

10,040,000

5

PROBLEM SET B 8.7 Winter Ltd Balance date 31 December (a) Year

Accumulated Depreciation 31/12

2012 2013 2014 2015

Calculation MACHINE 1 $108,750 X 10% = $10,875 $108,750 X 10% = $10,875 $108,750 X 10% = $10,875 $108,750 X 10% = $10,875

2013 2014 2015

MACHINE 2 $96,000 x 18.75% = $18,000 $78,000 x 18.75% = $14,625 $63,375 x 18.75% = 11,883 (rounding)

$18,000 32,625 44,508

2013 2014 2015

MACHINE 3 1,000 X $5.00a = $5,000 3,000 x $5.00 = $15,000 4,000 x $5.00 = $20,000

$5,000 20,000 40,000

a

$10,875 21,750 32,625 43,500

$50,000 ÷ 10,000 hours = $5.00 per machine hour

(b) Depreciation expense for Machine 3 in 2015 under:  Straight-line method: ($65,000-$15,000)/5 = $10,000  Diminishing-balance rate (assuming 1.5 straight-line rate) = 1.5 x 1/5 = 30% o 2013 = $65,000 x 30% = $19,500 o 2014 = ($65,000-$19,500) x 30% = $13,650 o 2015 = ($65,000-$19,500-$13.650) x 30% = $9,555  Units-of-production (from answer (a) above for 2015 = $20,000 Depreciation expense in 2015 is highest under Units-of-production method. The higher the expense, the lower the tax payment. So Units-of-production method is the preferred method for tax purposes for Machine 3 in 2015. (c) As a manager whose bonus is linked to profit, I would prefer a depreciation method that resulted in the lowest expense. From (b) above, Diminishing-balance method resulted in the lowest depreciation expense for Machine 3 in 2015. However, it should be noted that diminishing-balance method results in higher depreciation expenses in the earlier years of an asset’s life.

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